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, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
-------------- ---------------
-------------------------------
Commission file number 1-3187
HOUSTON INDUSTRIES INCORPORATED
(Exact name of registrant as specified in its charter)
Texas 74-0694415
(State or other jurisdiction of incorporation or organization) (I.R.S. Employer Identification No.)
1111 Louisiana
Houston, Texas 77002
(Address of principal executive offices) (Zip Code)
(713) 207-3000
(Registrant's telephone number, including area code)
-------------------------------
Commission file number 1-13265
NORAM ENERGY CORP.
(Exact name of registrant as specified in its charter)
Delaware 76-0511406
(State or other jurisdiction of incorporation or organization) (I.R.S. Employer Identification No.)
1111 Louisiana
Houston, Texas 77002
(Address of principal executive offices) (Zip Code)
(713) 207-3000
(Registrant's telephone number, including area code)
-----------------------------
NORAM ENERGY CORP. MEETS THE CONDITIONS SET FORTH IN GENERAL INSTRUCTION H(1)(a)
AND (b) OF FORM 10-Q AND IS THEREFORE FILING THIS FORM 10-Q WITH THE REDUCED
DISCLOSURE FORMAT.
Indicate by check mark whether the registrants: (1) have filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrants were required to file such reports), and (2) have been subject to
such filing requirements for the past 90 days. Yes X No
--- ---
As of November 9, 1998, Houston Industries Incorporated had 284,475,688 shares
of common stock outstanding, including 11,751,632 ESOP shares not deemed
outstanding for financial statement purposes and excluding 102,797 shares held
as treasury stock. As of November 9, 1998, all 1,000 shares of NorAm Energy
Corp's common stock were held by Houston Industries Incorporated.
2
THIS COMBINED QUARTERLY REPORT ON FORM 10-Q IS SEPARATELY FILED BY HOUSTON
INDUSTRIES INCORPORATED (COMPANY) AND NORAM ENERGY CORP. (NORAM). INFORMATION
CONTAINED HEREIN RELATING TO NORAM IS FILED BY THE COMPANY AND SEPARATELY BY
NORAM ON ITS OWN BEHALF. NORAM MAKES NO REPRESENTATION AS TO INFORMATION
RELATING TO THE COMPANY (EXCEPT AS IT MAY RELATE TO NORAM AND ITS SUBSIDIARIES),
HOUSTON INDUSTRIES ENERGY, INC., HOUSTON INDUSTRIES POWER GENERATION, INC. OR
ANY OTHER AFFILIATE OR SUBSIDIARY OF THE COMPANY.
HOUSTON INDUSTRIES INCORPORATED
AND NORAM ENERGY CORP.
QUARTERLY REPORT ON FORM 10-Q
FOR THE QUARTER ENDED SEPTEMBER 30, 1998
TABLE OF CONTENTS
Part I. Financial Information Page No.
--------
COMPANY
Item 1. Financial Statements
Statements of Consolidated Income
Three Months and Nine Months Ended
September 30, 1998 and 1997 (unaudited) 1
Consolidated Balance Sheets
September 30, 1998 and December 31, 1997 (unaudited) 2
Statements of Consolidated Cash Flows
Nine Months Ended September 30, 1998 and 1997 (unaudited) 4
Statements of Consolidated Retained Earnings
Three Months and Nine Months Ended
September 30, 1998 and 1997 (unaudited) 5
Notes to Unaudited Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis
of Financial Condition and Results of
Operations of the Company 19
Item 3. Quantitative and Qualitative Disclosures
About Market Risk of the Company 41
NORAM
Item 1. Financial Statements
Statements of Consolidated Income
Three Months and Nine Months Ended
September 30, 1998 and 1997 (unaudited) 42
Consolidated Balance Sheets
September 30, 1998 and December 31, 1997 (unaudited) 43
(i)
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HOUSTON INDUSTRIES INCORPORATED
AND NORAM ENERGY CORP.
QUARTERLY REPORT ON FORM 10-Q
FOR THE QUARTER ENDED SEPTEMBER 30, 1998
TABLE OF CONTENTS - CONTINUED
Page No.
--------
Statements of Consolidated Cash Flows
Nine Months Ended September 30, 1998 and 1997 (unaudited) 45
Consolidated Statements of Stockholder's Equity
Three Months and Nine Months Ended
September 30, 1998 and 1997 (unaudited) 46
Notes to Unaudited Consolidated Financial Statements 47
Item 2. Management's Narrative Analysis of the
Results of Operations of NorAm Energy Corp.
and Consolidated Subsidiaries 51
Item 3. Quantitative and Qualitative Disclosure
About Market Risk of NorAm (omitted pursuant
to General Instruction H(2)(c))
Part II. Other Information
Item 1. Legal Proceedings 61
Item 5. Other Information 61
Item 6. Exhibits and Reports on Form 8-K 62
Signature(s) 63
(ii)
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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,
-------------------------------- --------------------------------
1998 1997 1998 1997
------------- ------------- ------------- -------------
REVENUES:
Electric Operations........................... $ 1,415,832 $ 1,387,262 $ 3,443,694 $ 3,286,816
Natural Gas Distribution...................... 249,004 180,288 1,280,889 180,288
Interstate Pipeline........................... 70,394 39,035 217,891 39,035
Energy Marketing.............................. 1,642,373 551,229 3,730,602 551,229
International................................. 31,813 21,458 228,494 61,386
Other......................................... 214,853 17,132 264,795 20,199
Eliminations ................................. (155,475) (37,853) (322,128) (37,853)
------------- ------------- ------------- -------------
Total...................................... 3,468,794 2,158,551 8,844,237 4,101,100
------------- ------------- ------------- -------------
EXPENSES:
Fuel and cost of gas sold..................... 1,134,356 772,306 3,468,553 1,249,514
Purchased power............................... 970,041 226,952 1,872,557 406,576
Operation and maintenance..................... 472,365 426,253 1,280,044 923,549
Taxes other than income taxes................. 118,872 86,168 298,227 208,507
Depreciation and amortization................. 267,204 184,156 677,838 446,889
------------- ------------- ------------- -------------
Total...................................... 2,962,838 1,695,835 7,597,219 3,235,035
------------- ------------- ------------- -------------
OPERATING INCOME.................................. 505,956 462,716 1,247,018 866,065
------------- ------------- ------------- -------------
OTHER INCOME (EXPENSE):
Unrealized loss on ACES....................... (40,231) (484,009)
Time Warner dividend income................... 10,313 10,313 30,937 31,028
Other- net.................................... 2,691 14,724 16,201 13,631
------------- ------------- ------------- -------------
Total...................................... (27,227) 25,037 (436,871) 44,659
------------- ------------- ------------- -------------
INTEREST AND OTHER CHARGES:
Interest on long-term debt.................... 101,229 91,874 310,584 217,513
Other interest................................ 20,227 18,667 67,620 51,826
Distributions on trust securities ............ 7,248 7,055 21,960 18,728
Allowance for borrowed funds used during
construction.............................. (1,398) (47) (2,967) (1,892)
Preferred dividends of subsidiary............. 33 2,255
------------- ------------- ------------- -------------
Total...................................... 127,306 117,582 397,197 288,430
------------- ------------- ------------- -------------
INCOME BEFORE INCOME TAXES AND PREFERRED
DIVIDENDS....................................... 351,423 370,171 412,950 622,294
INCOME TAXES...................................... 104,066 126,209 152,528 197,249
------------- ------------- ------------- -------------
NET INCOME........................................ 247,357 243,962 260,422 425,045
PREFERRED DIVIDENDS............................... 97 64 292 64
------------- ------------- ------------- -------------
NET INCOME AVAILABLE FOR COMMON STOCK............. $ 247,260 $ 243,898 $ 260,130 $ 424,981
============= ============= ============= =============
BASIC EARNINGS PER COMMON SHARE................... $ .87 $ .93 $ .92 $ 1.74
DILUTED EARNINGS PER COMMON SHARE................. $ .87 $ .92 $ .91 $ 1.74
See Notes to Unaudited Consolidated Financial Statements.
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HOUSTON INDUSTRIES INCORPORATED AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(THOUSANDS OF DOLLARS)
(UNAUDITED)
ASSETS
SEPTEMBER 30, DECEMBER 31,
1998 1997
--------------- ---------------
PROPERTY, PLANT AND EQUIPMENT - AT COST:
Electric plant:
Plant in service............................................................. $ 13,077,006 $ 12,614,000
Construction work in progress................................................ 243,332 224,959
Nuclear fuel................................................................. 263,502 255,567
Plant held for future use.................................................... 48,588 48,631
Gas plant and pipelines:
Natural Gas Distribution..................................................... 1,441,865 1,326,442
Interstate Pipelines......................................................... 1,284,127 1,258,087
Energy Marketing............................................................. 180,755 162,519
Other property.................................................................. 194,403 149,019
--------------- ---------------
Total..................................................................... 16,733,578 16,039,224
Less accumulated depreciation and amortization.................................. 5,341,204 4,770,179
--------------- ---------------
Property, plant and equipment - net.......................................... 11,392,374 11,269,045
--------------- ---------------
CURRENT ASSETS:
Cash and cash equivalents....................................................... 56,303 51,712
Accounts receivable - net....................................................... 1,460,097 962,974
Accrued unbilled revenues....................................................... 159,446 205,860
Time Warner dividends receivable................................................ 10,313 10,313
Fuel stock and petroleum products............................................... 210,395 88,819
Materials and supplies, at average cost......................................... 169,402 156,160
Restricted deposit for bond redemption.......................................... 68,700
Prepayments and other current assets............................................ 79,754 42,169
--------------- ---------------
Total current assets......................................................... 2,214,410 1,518,007
--------------- ---------------
OTHER ASSETS:
Goodwill-net.................................................................... 2,109,554 2,026,395
Investment in Time Warner securities............................................ 990,000 990,000
Equity investments in and advances to foreign and non-rate regulated
affiliates - net............................................................. 912,596 704,102
Deferred plant costs - net...................................................... 542,232 561,569
Deferred debits................................................................. 520,052 510,686
Regulatory tax asset - net...................................................... 415,870 356,509
Unamortized debt expense and premium on reacquired debt......................... 208,393 202,453
Fuel-related debits............................................................. 196,629 197,304
Recoverable project costs - net................................................. 47,720 78,485
--------------- ---------------
Total other assets........................................................... 5,943,046 5,627,503
--------------- ---------------
Total..................................................................... $ 19,549,830 $ 18,414,555
=============== ===============
See Notes to Unaudited 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,
1998 1997
--------------- --------------
CAPITALIZATION:
Common stock equity:
Common stock, no par value................................................... $ 3,135,548 $ 3,112,098
Treasury stock, at cost...................................................... (2,274) (2,066)
Unearned ESOP shares......................................................... (219,863) (229,827)
Retained earnings............................................................ 1,956,048 2,013,055
Cumulative foreign currency translation adjustment........................... (6,022) (821)
Unrealized loss on marketable equity securities.............................. (16,543) (5,634)
--------------- --------------
Total common stock equity................................................ 4,846,894 4,886,805
--------------- --------------
Preference stock, none outstanding
Cumulative preferred stock, no par value, not subject to mandatory
redemption.......................................................................... 9,740 9,740
--------------- --------------
Company/NorAm obligated mandatorily redeemable trust preferred securities of
subsidiary trusts holding solely subordinated debentures of Company/NorAm....... 342,280 362,172
--------------- --------------
Long-term debt:
Automatic common exchange securities (ACES)..................................... 1,657,794 1,173,786
Debentures...................................................................... 966,157 669,291
First mortgage bonds............................................................ 1,864,656 2,495,459
Notes payable................................................................... 522,070 745,889
Pollution control revenue bonds................................................. 581,385 118,000
Other........................................................................... 14,760 15,590
--------------- --------------
Total long-term debt......................................................... 5,606,822 5,218,015
--------------- --------------
Total capitalization..................................................... 10,805,736 10,476,732
--------------- --------------
CURRENT LIABILITIES:
Notes payable................................................................... 1,918,150 2,124,956
Accounts payable................................................................ 1,424,471 879,612
Taxes accrued................................................................... 310,583 240,739
Interest accrued ............................................................... 108,867 109,901
Dividends declared.............................................................. 111,047 110,716
Customer deposits............................................................... 79,196 82,437
Current portion of long-term debt............................................... 612,062 251,169
Other........................................................................... 227,557 193,384
--------------- --------------
Total current liabilities....................................................
4,791,933 3,992,914
--------------- --------------
DEFERRED CREDITS:
Accumulated deferred income taxes............................................... 2,636,737 2,792,781
Benefit obligations............................................................. 461,979 397,586
Unamortized investment tax credit............................................... 333,980 349,072
Fuel-related credits............................................................ 117,000 75,956
Other........................................................................... 402,465 329,514
--------------- --------------
Total deferred credits....................................................... 3,952,161 3,944,909
--------------- --------------
COMMITMENTS AND CONTINGENCIES (NOTE 1 AND NOTE 10)
--------------- --------------
Total..................................................................... $ 19,549,830 $ 18,414,555
=============== ==============
See Notes to Unaudited 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,
------------------------------------
1998 1997
--------------- ---------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income...................................................................... $ 260,422 $ 425,045
Adjustments to reconcile net income to net cash provided by operating
activities:
Depreciation and amortization................................................ 677,838 446,889
Amortization of nuclear fuel................................................. 19,753 21,727
Deferred income taxes........................................................ (155,782) 23,973
Investment tax credit........................................................ (15,092) (14,740)
Unrealized loss on ACES...................................................... 484,009
Contribution of marketable equity securities to charitable trust............. 19,463
Fuel cost under recovery..................................................... (80,331) (168,367)
Changes in other assets and liabilities:
Accounts receivable - net................................................ (591,241) 75,006
Account receivable - IRS................................................. 140,532
Fuel surcharge........................................................... 73,539 101,196
Inventory................................................................ (129,444) 21,260
Other current assets..................................................... (37,801) (13,584)
Accounts payable......................................................... 528,582 (95,054)
Interest and taxes accrued............................................... 58,810 73,724
Other current liabilities................................................ (17,200) 43,590
Other - net.............................................................. (42,515) (13,628)
--------------- ---------------
Net cash provided by operating activities............................ 1,174,079 946,500
--------------- ---------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (including allowance for borrowed funds used during
construction)................................................................ (447,152) (180,472)
Purchase of NorAm Energy Corp., net of cash acquired............................ (1,422,672)
Sale of equity investments in foreign electric system projects.................. 242,744
Equity investment in non-rate regulated foreign electric systems (including (240,377) (215,020)
capitalized interest).......................................................
Non-rate regulated domestic electric power project acquisitions (including
capitalized interest)....................................................... (275,056)
Equity investments in non-rate regulated domestic electric power projects....... (42,439)
Sale of Time Warner securities.................................................. 25,043
Other - net..................................................................... (40,339) (10,484)
--------------- ---------------
Net cash used in investing activities............................... (802,619) (1,803,605)
--------------- ---------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from sale of ACES -net................................................. 1,020,770
Proceeds from sale of Company obligated mandatorily redeemable trust
preferred securities of subsidiary trusts holding solely subordinated
debentures of Company -net................................................... 340,785
Payment of matured bonds........................................................ (76,000) (190,000)
Proceeds from issuance of debentures............................................ 298,514
Restricted deposit for bond redemption.......................................... (68,700)
Proceeds from issuance of pollution control revenue bonds....................... 454,258 115,739
Redemption of preferred stock................................................... (153,628)
Payment of common stock dividends............................................... (316,968) (281,009)
Increase/(decrease) in notes payable - net...................................... (226,836) 144,765
Extinguishment of long-term debt................................................ (402,587) (190,338)
Conversion of convertible securities............................................ (10,399)
Other - net..................................................................... (18,151) 95,427
--------------- ---------------
Net cash provided by (used in) financing activities................. (366,869) 902,511
--------------- ---------------
NET INCREASE IN CASH AND CASH EQUIVALENTS........................................... 4,591 45,406
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD.................................... 51,712 8,001
--------------- ---------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD.......................................... $ 56,303 $ 53,407
=============== ===============
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash Payments:
Interest (net of amounts capitalized)........................................... $ 400,412 $ 274,560
Income taxes.................................................................... 302,474 113,128
See Notes to Unaudited Consolidated Financial Statements.
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HOUSTON INDUSTRIES INCORPORATED AND SUBSIDIARIES
STATEMENTS OF CONSOLIDATED RETAINED EARNINGS
(THOUSANDS OF DOLLARS)
(UNAUDITED)
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
-------------------------------- --------------------------------
1998 1997 1998 1997
--------------- -------------- -------------- --------------
Balance at Beginning of Period..................... $ 1,815,435 $ 2,003,194 $ 2,013,055 $ 1,997,490
Net Income for the Period.......................... 247,357 243,962 260,422 425,045
--------------- -------------- -------------- --------------
Total......................................... 2,062,792 2,247,156 2,273,477 2,422,535
Preferred Stock Dividends.......................... (97) (64) (292) (64)
Common Stock Dividends............................. (106,647) (105,766) (317,137) (281,145)
--------------- -------------- -------------- --------------
Balance at End of Period........................... $ 1,956,048 2,141,326 1,956,048 2,141,326
=============== ============== ============== ==============
See Notes to Unaudited Consolidated Financial Statements.
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9
HOUSTON INDUSTRIES INCORPORATED AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(1) BASIS OF PRESENTATION
The unaudited interim financial statements and notes (Company's Interim
Financial Statements) in this joint Form 10-Q (Form 10-Q) include the accounts
of Houston Industries Incorporated (Company) and its wholly owned and majority
owned subsidiaries including, effective as of August 6, 1997 (Acquisition Date),
the accounts of NorAm Energy Corp. (NorAm) and its wholly owned and majority
owned subsidiaries. For information regarding the Company's acquisition of
NorAm, see Note 1(b) to the Company's Consolidated Financial Statements in the
joint Annual Report on Form 10-K (Form 10-K) of the Company (File No. 1-3187)
and NorAm (File No. 1-13265) for the fiscal year ended December 31, 1997. The
Form 10-K includes the consolidated financial statements of the Company
(Company's 10-K Financial Statements) and the consolidated financial statements
of NorAm (NorAm's 10-K Financial Statements) for the year ended December 31,
1997.
The Company's Interim Financial Statements omit certain information
included in financial statements prepared in accordance with generally accepted
accounting principles and should be read in combination with the Form 10-K as
updated by the joint Quarterly Reports on Form 10-Q of the Company and NorAm for
the quarters ended March 31, 1998 (First Quarter 10-Q) and June 30, 1998 (Second
Quarter 10-Q). For additional information regarding the presentation of interim
period results, see Note 13 to the Company's Interim Financial Statements below.
The following notes to the financial statements in the Form 10-K relate
to material contingencies. These notes, as updated by the notes contained in the
Company's Interim Financial Statements, are incorporated herein by reference:
Company's 10-K Financial Statements: Note 1(c) (Regulatory Assets and Other
Long-Lived Assets), Note 1(n) (Investments in Time Warner Securities), Note
2 (Derivative Financial Instruments (Risk Management)), Note 3 (Rate
Matters), Note 4 (Jointly Owned Electric Utility Plant), Note 5 (Equity
Investments in Foreign Affiliates) and Note 12 (Commitments and
Contingencies).
NorAm's 10-K Financial Statements: Note 1(c) (Regulatory Assets and
Regulation), Note 2 (Derivative Financial Instruments (Risk Management)),
and Note 8 (Commitments and Contingencies).
(2) PRO FORMA COMBINED RESULTS OF OPERATIONS DATA
The Company's results of operations incorporate NorAm's results of
operations for all periods beginning on and after the Acquisition Date. The
following table presents certain unaudited pro forma information for the three
and nine month periods ended September 30, 1997, as if the acquisition of NorAm
had occurred on January 1, 1997.
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10
HOUSTON INDUSTRIES INCORPORATED AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
COMBINED RESULTS OF OPERATIONS
(IN MILLIONS, EXCEPT PER SHARE DATA)
THREE MONTHS ENDED
SEPTEMBER 30,
--------------------------------------------------
1998 1997 1997
ACTUAL ACTUAL PRO FORMA
------------- ------------- -------------
Revenues......................................... $ 3,469 $ 2,159 $ 2,555
Net Income (1)................................... $ 247 $ 244 $ 224
Basic Earnings Per Share (1)..................... $ 0.87 $ 0.93 $ 0.80
Diluted Earnings Per Share (1)................... $ 0.87 $ 0.92 $ 0.80
NINE MONTHS ENDED
SEPTEMBER 30,
--------------------------------------------------
1998 1997 1997
ACTUAL ACTUAL PRO FORMA
------------- ------------- -------------
Revenues......................................... $ 8,844 $ 4,101 $ 7,438
Net Income (1)................................... $ 260 $ 425 $ 441
Basic Earnings Per Share (1)..................... $ 0.92 $ 1.74 $ 1.57
Diluted Earnings Per Share (1)................... $ 0.91 $ 1.74 $ 1.56
- ------------------
(1) Includes a $26 million or $0.09 basic earnings per share and a $314 million
or $1.10 basic earnings per share (after-tax) non-cash unrealized
accounting loss recorded in the three and nine month periods ended
September 30, 1998, respectively, relating to the Company's Automatic
Common Exchange Securities (ACES). For additional information on the
unrealized accounting loss, see Note 6 to the Company's Interim Financial
Statements.
These and other pro forma results appearing in the 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 acquisition of NorAm
occurred at the beginning of 1997. Purchase related adjustments to results of
operations include amortization of goodwill and the effects on depreciation,
amortization, interest expense and deferred income taxes of the revaluation of
the fair value of certain NorAm assets and liabilities. For information
regarding the recording of the NorAm acquisition under the purchase method of
accounting, see Note 1(b) to the Company's 10-K Financial Statements.
(3) COMPREHENSIVE INCOME
Effective January 1, 1998, the Company adopted Statement of Financial
Accounting Standards (SFAS) No. 130, "Reporting Comprehensive Income."
"Comprehensive income" is defined to include not only net income (loss), but
also all changes in stockholders' equity during a reporting period except
changes resulting from investments by stockholders and distributions to
stockholders. The Company's
7
11
HOUSTON INDUSTRIES INCORPORATED AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
comprehensive income consists of net income, foreign currency translation
adjustments (net of tax) and unrealized gains (losses) on the Company's
investment in marketable equity securities.
For the three months ended September 30, 1998, the Company's total
comprehensive income was $241 million compared to $248 million in the
corresponding period in 1997. For the nine months ended September 30, 1998, the
Company's total comprehensive income was $244 million compared to $429 million
in the corresponding period in 1997.
Under SFAS No. 130, the Company will begin to report and separately
display total comprehensive income and the components that comprise
comprehensive income in the year-end financial statements appearing in the
Company's Annual Report on Form 10-K for the year ending December 31, 1998 and
subsequent annual reports.
(4) FOREIGN CURRENCY ADJUSTMENTS
Assets and liabilities of the Company's international operations, where
the local currency is the functional currency, have been translated into U.S.
dollars using the exchange rate at the balance sheet date. Revenues, expenses,
gains, and losses have been translated using the weighted average exchange rate
for each month prevailing during the periods reported. Cumulative adjustments
resulting from translation have been recorded in stockholders' equity. When the
U.S. dollar is the functional currency, the financial statements of
international operations are remeasured in U.S. dollars using historical
exchange rates for non-monetary accounts and the current rate for all other
accounts. All exchange gains and losses from remeasurement and foreign currency
transactions are included in consolidated net income. Foreign exchange gains and
losses are not material for any period presented. Fluctuations in foreign
currency exchange rates relative to the U.S. dollar can have an impact on the
reported equity earnings of the Company's foreign investments. For additional
information about the Company's equity investments in foreign affiliates, see
Note 5 to the Company's 10-K Financial Statements.
(5) DEPRECIATION
The Company calculates depreciation using the straight-line method. The
Company's depreciation expense for the three and nine month periods ended
September 30, 1998 was $227 million and $559 million, respectively, compared to
$128 million and $334 million for the same periods in 1997. For information
regarding the additional depreciation of electric utility generating assets
under a transition to competition plan implemented in January 1998, see Note
10(a) to the Company's Interim Financial Statements.
(6) INVESTMENT IN TIME WARNER SECURITIES
The Company owns 11 million shares of non-publicly traded Time Warner
convertible preferred stock (TW Preferred). The TW Preferred is convertible into
approximately 22.9 million shares of Time Warner common stock. For additional
information regarding TW Preferred (including its dividend rate, liquidation
preference and voting rights), see Note 1(n) to the Company's 10-K Financial
Statements.
The Company has recorded its $990 million investment in the TW
Preferred under the cost method. Dividends on these securities are recognized as
income at the time they are earned. The Company recorded pre-tax dividend income
with respect to these securities of $10 million in each of the three month
periods ended September 30, 1998 and 1997 and $31 million in each of the nine
month periods ended September 30, 1998 and 1997.
8
12
HOUSTON INDUSTRIES INCORPORATED AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
To monetize its investment in the TW Preferred, the Company sold in
July 1997, 22.9 million of its unsecured 7% ACES. As a result of the issuance of
the ACES, a portion of the increase in the market value above $55.5844 per share
of Time Warner common stock (the security into which the TW Preferred is
convertible) results in unrealized accounting losses to the Company for the
ACES, pending the conversion of the Company's TW Preferred into Time Warner
common stock. For example, prior to the conversion of the TW Preferred into Time
Warner common stock, when the market price of Time Warner common stock increases
above $55.5844, the Company records in Other Income (Expense) an unrealized,
non-cash accounting loss for the ACES equal to (i) the aggregate amount of such
increase as applicable to all ACES 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 ACES)
may not be offset by accounting recognition of the increase in the market value
of the Time Warner common stock that underlies the TW Preferred. Upon conversion
of the TW Preferred, the Company will begin recording unrealized net changes in
the market prices of the Time Warner common stock and the ACES as a component of
common stock equity and other comprehensive income.
As of September 30, 1998, the market price of Time Warner common stock
was $87.563 per share. Accordingly, the Company recognized an increase of $40
million and $484 million during the three and nine month periods ended September
30, 1998, respectively, in the unrealized liability relating to its ACES
indebtedness (which resulted in an after-tax earnings reduction for such periods
of $26 million or $.09 basic earnings per share and $314 million or $1.10 basic
earnings per share, respectively). The Company believes that the cumulative
unrealized loss for the ACES of $605 million is more than economically offset by
the approximately $1 billion unrecorded unrealized gain at September 30, 1998
relating to the increase in the fair value of the Time Warner common stock
underlying the investment in TW Preferred since the date of its acquisition. For
the quarter ended September 30, 1998, there was an increase in the unrecorded
unrealized gain in the fair value of Time Warner common stock underlying the
investment in TW Preferred of $49 million. Any gain related to the increase in
the fair value of Time Warner common stock would be recognized as a component of
net income upon the sale of the TW Preferred or the shares of common stock into
which such TW Preferred is converted.
(7) CAPITAL STOCK
(a) Common Stock.
At September 30, 1998, the Company had 284,471,909 shares of common
stock issued and outstanding (out of a total of 700,000,000 authorized shares).
At December 31, 1997, the Company had 282,875,266 shares of common stock issued
and outstanding. Outstanding common shares excluded (i) shares pledged to secure
a loan to the Company's Employee Stock Ownership Plan (11,674,063 and 12,388,551
at September 30, 1998 and December 31, 1997, respectively) and (ii) treasury
shares (102,544 and 93,459 at September 30, 1998 and December 31, 1997,
respectively).
9
13
HOUSTON INDUSTRIES INCORPORATED AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
The Company has authorized the repurchase of up to $89 million of its
common stock, $361 million of common stock having been previously purchased
pursuant to a repurchase program authorized in 1996. Purchases of the Company's
common stock, which may not be preceded by public announcement, may be made in
open market or privately negotiated transactions from time to time as determined
by management. Such repurchases are subject to market conditions, applicable
legal requirements, available cash and other factors.
(b) Earnings Per Share.
Effective December 31, 1997, the Company adopted SFAS No. 128,
"Earnings per Share" (SFAS No. 128). This statement requires restatement of all
prior period earnings per share (EPS) data presented herein. SFAS No. 128
requires dual presentation of basic and diluted EPS on the face of the
Statements of Consolidated Income and requires a reconciliation of the
numerators and denominators used in the basic and diluted earnings per share
calculations.
The following table presents a reconciliation of the Company's
numerators and denominators of basic and diluted earnings per share
calculations:
10
14
HOUSTON INDUSTRIES INCORPORATED AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
THREE MONTHS ENDED NINE MONTHS ENDED
-------------------------- ---------------------------
SEPTEMBER 30, SEPTEMBER 30,
-------------------------- ---------------------------
1998(1) 1997 1998(2) 1997
--------------------------------------------------------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
Basic EPS Calculation:
Income before preferred dividends....................... $ 247,357 $ 243,962 $ 260,422 $ 425,045
Less: Preferred dividends............................... 97 64 292 64
----------- ---------- ---------- -----------
Net income attributable to common stock................. $ 247,260 $ 243,898 $ 260,130 $ 424,981
=========== ========== ========== ===========
Weighted average shares outstanding..................... 284,344 263,373 283,965 243,769
Basic EPS:
Income before preferred dividends....................... $ 0.870 $ 0.926 $ 0.916 $ 1.743
Less: Preferred dividends............................... -- -- -- --
----------- ---------- ---------- -----------
Net income attributable to common stock................. $ 0.870 $ 0.926 $ 0.916 $ 1.743
=========== ========== ========== ============
Diluted EPS Calculation:
Income before preferred dividends....................... $ 247,357 $ 243,962 $ 260,422 $ 425,045
Plus: Income impact of assumed conversions:
Interest on 6 1/4% convertible debentures............ 14 207 43 207
----------- ---------- ---------- -----------
Income before preferred dividends assuming dilution..... 247,371 244,169 260,465 425,252
Less: Preferred dividends............................... 97 64 292 64
----------- ---------- ---------- -----------
Net income attributable to common stock................. $ 247,274 $ 244,105 $ 260,173 $ 425,188
============ ========== =========== ============
Weighted average shares outstanding..................... 284,344 263,373 283,965 243,769
Plus: Incremental shares from assumed conversions:
Stock options........................................ 165 18 154 21
Restricted stock..................................... 492 369 492 369
6 1/4% convertible debentures........................ 44 946 44 946
------------ ----------- ----------- ------------
Weighted average shares assuming dilution............... 285,045 264,706 284,655 245,105
============ =========== =========== ============
Diluted EPS:
Income before preferred dividends....................... $ 0.867 $ 0.922 $ 0.914 $ 1.735
Less: Preferred dividends............................... -- -- -- --
------------ ----------- ----------- ------------
Net income attributable to common stock................. $ 0.867 $ 0.922 $ 0.914 $ 1.735
============ =========== =========== ============
- -----------------
(1) For the three months ended September 30, 1998, the computation of diluted
EPS excludes purchase options for 379 shares of common stock, because the
exercise prices for such shares (ranging from $30.18 to $35.18 per share)
were greater than the $29.07 per share average market price for the period
and would thus be anti-dilutive if exercised.
(2) For the nine months ended September 30, 1998, the computation of diluted
EPS excludes purchase options for 379 shares of common stock, because the
exercise prices for such shares (ranging from $30.18 to $35.18 per share)
were greater than the $28.28 per share average market price for the period
and would thus be anti-dilutive if exercised.
11
15
HOUSTON INDUSTRIES INCORPORATED AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(c) Preferred Stock.
At September 30, 1998 and December 31, 1997, the Company had 10,000,000
authorized shares of preferred stock, of which 97,397 shares of $4.00 Preferred
Stock were outstanding. 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.
(d) Preference Stock.
At September 30, 1998 and December 31, 1997, the Company had 10,000,000
authorized shares of preference stock. Of the authorized shares of preference
stock, the Company has designated 700,000 shares as Series A Preference Stock,
27,000 shares as Series B Preference Stock and 1,575 shares as Series C
Preference Stock.
At September 30, 1998, the number of shares of Series B Preference
Stock and Series C Preference Stock issued and outstanding was 17,000 and 1,575,
respectively. The shares of Series B and Series C Preference stock are not
deemed outstanding for financial reporting purposes, because the sole holders of
such series are wholly owned financing subsidiaries of the Company (see Notes
7(b) and 8(c) to the Company's 10-K Financial Statements with respect to Series
B Preference Stock and Notes 6(d) and 8(b) to the Company's Interim Financial
Statements in the First Quarter 10-Q with respect to Series C Preference Stock).
The shares of Series A Preference Stock are issuable only pursuant to the
Company's Shareholder Rights Agreement. At September 30, 1998, there were no
shares of Series A Preference Stock outstanding.
(8) COMPANY/NORAM OBLIGATED MANDATORILY REDEEMABLE TRUST PREFERRED SECURITIES
OF SUBSIDIARY TRUSTS HOLDING SOLELY SUBORDINATED DEBENTURES OF THE COMPANY
AND NORAM
For information regarding (i) $250 million of preferred securities and
$100 million of capital securities issued by two statutory business trusts
formed by the Company and (ii) $177.8 million of convertible preferred
securities (of which $1.3 million were outstanding at September 30, 1998),
issued by a statutory business trust formed by NorAm, see Note 9 to the
Company's 10-K Financial Statements. The sole asset of each trust consists of
junior subordinated debentures of the Company or NorAm having interest rates and
maturity dates corresponding to each issue of preferred or capital securities,
and the principal amounts corresponding to the common and preferred or capital
securities issued by such trust.
(9) LONG-TERM DEBT AND SHORT-TERM FINANCING
(a) Consolidated Debt.
The following table summarizes the Company's outstanding consolidated
long-term and short-term indebtedness. At September 30, 1998, approximately $1.8
billion of this debt represents indebtedness of NorAm.
12
16
HOUSTON INDUSTRIES INCORPORATED AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
CONSOLIDATED LONG-TERM DEBT AND SHORT-TERM BORROWINGS
(IN MILLIONS)
SEPTEMBER 30, 1998 DECEMBER 31, 1997
------------------------------- ------------------------------
LONG-TERM CURRENT (1) LONG-TERM CURRENT (1)
Short-Term Borrowings:
Commercial Paper......................... $ 1,465 $ 1,435
Lines of Credit.......................... 150 390
NorAm Receivables Facility............... 300 300
Notes Payable............................ 3
-------------- ------------ ------------ -------------
Total Short-Term Borrowings................ 1,918 2,125
-------------- ------------ ------------ -------------
Long-Term Debt - net:
ACES..................................... $ 1,658 $ 1,174
Debentures(2)(3)......................... 966 669
First Mortgage Bonds(2).................. 1,865 239 2,495
Pollution Control Bonds.................. 581 118 5
NorAm Medium-Term Notes(3)............... 179 182 79
Notes Payable(3)......................... 343 372 565 166
Capital Leases........................... 15 1 15 1
-------------- ------------ ------------ -------------
Total Long-Term Debt....................... 5,607 612 5,218 251
-------------- ------------ ------------ -------------
Total Long-Term and Short-Term Debt...... $ 5,607 $ 2,530 $ 5,218 $ 2,376
============== ============ ============ =============
- --------------
(1) Includes amounts due within one year of the date noted.
(2) Includes unamortized discount related to debentures of approximately $1
million at September 30, 1998 and December 31, 1997 and unamortized discount
related to first mortgage bonds of approximately $11 million and $14 million at
September 30, 1998 and December 31, 1997, respectively.
(3) Includes unamortized premium related to fair value adjustments of
approximately $19 million and $16 million for debentures at September 30, 1998
and December 31, 1997, respectively. The unamortized premium for NorAm long-term
and current medium-term notes was approximately $13 million and $0 at September
30, 1998, respectively, and $17 million and $3 million at December 31, 1997,
respectively. The unamortized premium for long-term and current notes payable
was approximately $4 million each at September 30, 1998 and $14 million and $3
million, respectively, at December 31, 1997.
Consolidated maturities of long-term debt and sinking fund requirements
for the Company (including NorAm) are $156 million for the remainder of 1998.
(b) Financing Developments
Company: At September 30, 1998, a financing subsidiary of the Company
had $1.3 billion in commercial paper borrowings supported by a $1.6 billion
revolving credit facility. As of September 30, 1998, the weighted average
interest rate of these commercial paper borrowings was 5.89%. Proceeds from the
initial issuance of commercial paper under this facility were used to fund a
portion of the acquisition of NorAm. For information regarding this facility,
see Note 8(c) to the Company's 10-K Financial Statements and Note 8(b) to the
Company's Interim Financial Statements in the First Quarter 10-Q.
13
17
HOUSTON INDUSTRIES INCORPORATED AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
At September 30, 1998, another financing subsidiary of the Company had
$150 million in borrowings under a separate credit facility. At September 30,
1998, the weighted average interest rate of these borrowings was 5.89%. Proceeds
under this facility were used to fund a portion of the acquisition of electric
generating plants acquired by Houston Industries Power Generation, Inc. (HIPG,
Inc.) in April 1998. The facility will terminate on December 31, 1998. For
additional information regarding this facility, see Note 8(b) to the Company's
Interim Financial Statements in the First Quarter 10-Q.
The Company meets its short-term financing needs primarily through the
sale of commercial paper supported by a $200 million revolving credit facility.
At September 30, 1998, the Company had no commercial paper or other borrowings
outstanding under this facility. For additional information, see Note 8(d) to
the Company's 10-K Financial Statements.
In September 1998, the Brazos River Authority (BRA) issued on behalf of
the Company $68.7 million aggregate principal amount of pollution control
revenue refunding bonds. The BRA bonds, which bear a coupon rate of 4.90%, will
mature in October 2015. The proceeds of the bond offering were deposited into a
restricted trust account for the redemption in October 1998 of $68.7 million
principal amount of the 7 3/4% BRA Series 1988D pollution control bonds at 102%
of their aggregate principal amount. Because the redemption of the Series 1988D
pollution control bonds occurred subsequent to the third quarter of 1998, the
Company's Interim Financial Statements report both series of bonds to be
outstanding at September 30, 1998.
For information regarding the Company's notice to change (effective in
the fourth quarter of 1998) the method of interest rate determination for $118
million aggregate principal amount of pollution control bonds, see Note 12(b) to
the Company's Interim Financial Statements.
For information regarding (i) the repayment at maturity of $5 million
of floating-rate pollution control revenue bonds and (ii) the redemption of all
outstanding 8.25% Brazos River Authority (BRA Series 1988A pollution control
revenue bonds ($100 million), 8.25% BRA Series 1998B pollution control revenue
bonds ($90 million), and 8.10% BRA Series 1988C pollution control revenue ($100
million) (all of which occurred in the second quarter of 1998), see Note 8(b) to
the Company's Interim Financial Statements in the Second Quarter 10-Q. For
information regarding the issuance of (i) $104.7 million aggregate principal
amount of pollution control revenue bonds by the Matagarda County Navigation
District Number One (MCND), and (ii) $290 million aggregate principal amount of
pollution control revenue refunding bonds by the BRA (all of which occurred in
the first quarter of 1998), see Note 8(c) the Company's Interim Financial
Statements in the First Quarter 10-Q.
NorAm: During the third quarter of 1998, NorAm repurchased $6 million
aggregate principal amount of its 6% convertible subordinated debentures due
2012 at an average purchase price equal to 97.4% of the aggregate principal
amount of the debentures, plus accrued interest. NorAm expects to use the
repurchased debentures to satisfy part of the debentures' sinking fund
requirements in March 1999 and March 2000.
14
18
HOUSTON INDUSTRIES INCORPORATED AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
During the third quarter of 1998, NorAm repaid the following
medium-term notes at maturity:
Series Principal Amount
------------------------------ ------------------
9.07% due July 20, 1998 $ 15.0 million
8.60% due September 1, 1998 3.0 million
8.58% due September 1, 1998 5.0 million
8.64% due September 4, 1998 12.5 million
8.50% due September 14, 1998 0.5 million
8.60% due September 15, 1998 6.0 million
8.43% due September 17, 1998 5.0 million
------------------
Total $ 47.0 million
==================
At September 30, 1998, NorAm had $206 million in commercial paper
borrowings supported by a $350 million revolving credit facility (NorAm Credit
Facility). At such date, the weighted average interest rate of borrowings under
this facility was 5.94%. Under a trade receivables facility that expires in
August 1999, NorAm sells with limited recourse an undivided interest (limited to
a maximum of $300 million) in a designated pool of accounts receivable. The
amount of receivables sold and uncollected at September 30, 1998, was $300
million. The weighted average interest rate at such date was 5.5%. For
additional information regarding NorAm's trade receivables facility, see Note
8(g) to the Company's 10-K Financial Statements.
For information regarding NorAm's issuance in the fourth quarter of
1998 of $500 million aggregate principal amount of debt securities, see Note 12
to the Company's Interim Financial Statements.
For information regarding NorAm's repayment at maturity of $28 million
of its medium-term notes (having an average interest rate of 8.74%) in the
second quarter of 1998, see Note 8(b) to the Company's Interim Financial
Statements in the Second Quarter 10-Q. For information regarding (i) NorAm's
issuance in February 1998 of $300 million principal amount of 6.5% debentures
due February 1, 2008, (ii) NorAm's repayment at maturity of $1 million of its
9.30% medium-term notes in January 1998 and (iii) NorAm's satisfaction of the
$6.5 million sinking fund requirement for its 6% convertible subordinated
debentures due 2012 using debentures purchased in 1996 and 1997 in the first
quarter of 1998, see Note 8(d) to the Company's Interim Financial Statements in
the First Quarter 10-Q.
(10) REGULATORY MATTERS
(a) Transition Plan (Docket No. 18465)
In June 1998, the Public Utility Commission of Texas (Texas Utility
Commission) issued an order approving a transition to competition plan
(Transition Plan) filed by the Company's electric operations division (Electric
Operations) in December 1997. The order also approved the implementation of base
rate credits to residential customers of 4% in 1998 and an additional 2% in
1999. Commercial customers whose monthly billing is 1,000 kva or less receive
base rate credits of 2% in each of 1998 and 1999. The Company implemented the
Transition Plan effective January 1, 1998.
15
19
HOUSTON INDUSTRIES INCORPORATED AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
In order to reduce the Company's exposure to potentially stranded costs
related to generating assets, the Transition Plan permits the Company to
redirect depreciation expenses that the Company otherwise would apply to
transmission, distribution and general plant assets to generation assets. The
redirected depreciation expense was $49 million and $145 million for the quarter
and nine months ended September 30, 1998, respectively. In addition, the
Transition Plan provides that all earnings by Electric Operations above a 9.844%
overall annual rate of return on invested capital will be used to write-down
Electric Operation's investment in generation assets. The $91 million in
additional depreciation recorded in the third quarter of 1998 ($171 million for
the nine months ended September 30, 1998) is an estimate of the amount of
additional depreciation necessary under the earnings cap, given the uncertainty
of weather and the level of revenues and expenses during the remainder of the
year and the level of year end invested capital.
For additional information regarding the Transition Plan, see Note 3(b)
to the Company's 10-K Financial Statements.
Review of the Texas Utility Commission's order in Docket No. 18465 is
currently pending before the Travis County District Court. In August 1998, the
Office of the Attorney General for the State of Texas and a Texas municipality
filed an appeal seeking, among other things, to reverse the portion of the Texas
Utility Commission's order relating to the redirection of depreciation expenses
under the Transition Plan. For information regarding appeals of Texas Utility
Commission decisions, see Note 3(a) to the Company's 10-K Financial Statements.
Because of the number of variables that can affect the ultimate resolution of an
appeal of Commission orders, the Company is not in a position at this time to
predict the outcome of this matter or the ultimate effect that adverse action by
the courts could have on the Company.
(b) Nuclear Insurance
The Company has a 30.8% interest in the South Texas Project Electric
Generating Station (South Texas Project), a nuclear generating plant consisting
of two 1,250 megawatt nuclear generating units.
Effective August 1998, the Nuclear Regulatory Commission increased the
maximum secondary retrospective deferred premium to $88.09 million per reactor
per incident (but not to exceed $10 million in any one year) from $75.5 million
per reactor per incident. The premium is for liability insurance coverage for
nuclear incidents at licensed, operating commercial nuclear power plants. The
change reflects an inflation adjustment required by the Price-Anderson
Amendments Act of 1988. For additional information on nuclear insurance, see
Note 4(c) to the Company's 10-K Financial Statements.
(c) Low-level Radioactive Waste
The 1980 Federal Low-Level Radioactive Waste Policy Act directed states
to assume responsibility for the disposal of low-level nuclear waste generated
within their borders. Under this Act, states may combine with other states and
seek consent from the U.S. Congress for regional compacts to construct and
operate low-level nuclear waste sites. Two sites (the Envirocare facility in
Utah and the Barnwell facility in South Carolina) are currently licensed and
available to the South Texas Project for disposal of all classes of low-level
waste. The South Texas Project has entered into a contract with the operator of
the Barnwell facility to dispose of all of the South Texas Project's low-level
nuclear waste through June 1999.
A bill establishing an interstate compact among Texas, Maine and
Vermont was signed into law on September 20, 1998. The compact limits access to
a Texas waste disposal facility to the three compact members and provides for
contributions from Maine and Vermont toward the construction of such a facility.
In October 1998, the Texas Natural Resource Conservation Commission denied the
application of the Texas Low-Level Radioactive Waste Disposal Authority
(Waste Disposal Authority) to build and operate a low-level waste disposal
facility in Hudspeth County, Texas. In the event the Barnwell facility stops
accepting waste before a Texas site is opened, the South Texas Project would
store its waste in an interim storage facility located at the nuclear plant.
The plant currently has storage capacity for at least five years of low-level
nuclear waste generated by the project.
16
20
HOUSTON INDUSTRIES INCORPORATED AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(11) ACQUISITIONS AND DISPOSITIONS
In July 1998, HIPG, Inc. purchased from Southern California Edison
Company (SCE), a 1500 MW generating plant for $43 million.
(12) SUBSEQUENT EVENTS
(a) Investment in Colombian Distribution Company.
On October 13, 1998, HI Energy and Electricidad de Caracas, SACA, a
Venezuelan electric distribution company (EDC), announced the closing of their
joint acquisition of 65% of the stock of two Colombian electric distribution
companies (collectively, the Corelca system companies). The Corelca system
companies serve approximately 1.2 million customers in the Atlantic coastal
region of Colombia, including the cities of Santa Marta, Barranquilla and
Cartagena. The shares of the Corelca system companies are indirectly held by an
offshore holding company jointly owned by special purpose subsidiaries of EDC
and HI Energy.
The purchase price for the Corelca system companies was approximately
$522 million, excluding transaction costs. The purchase price was funded with
capital contributions from HI Energy and EDC and a $100 million loan obtained by
the holding company from a United States bank. The loan will mature on October
31, 2003. HI Energy funded its capital contributions with a portion of the
proceeds from the sale of Empresa Distribuidora de La Plata S.A. (EDELAP) and
capital contributions from the company. Under the terms of a support agreement,
HI Energy and EDC have agreed, among other things, to repurchase up to $50
million of the loan from the bank to the extent that the bank is unable to
syndicate that portion of the loan to other banks on or prior to June 15, 1999.
(b) Pollution Control Bonds.
In October 1998, the Company delivered its notice to change the
interest rate determination method for (i) the MCND Series 1997 pollution
control revenue refunding bonds due November 2028 ($68 million aggregate
principal amount outstanding) and (ii) the BRA Series 1997 pollution control
revenue refunding bonds due November 2018 ($50 million aggregate principal
amount outstanding). Subject to the satisfaction of certain conditions
precedent, the notice provides that, effective November 24, 1998, the method by
which interest on the bonds is calculated will convert from a floating rate mode
to a long-term fixed rate mode. As set forth in the notice, the long-term
interest rate for the MCND Series 1997 will be 5 1/8% and the long-term interest
rate for the BRA Series 1997 will be 5.05%.
The MCND and BRA Series 1997 bonds, which were issued in January 1997,
are subject to mandatory tender on November 24, 1998 in connection with the
change in the interest rate determination method. The purchase price of the
tendered bonds (100% of their principal amount plus accrued interest) is
expected to be funded with the proceeds from the underwritten remarketing of the
fixed-rate bonds. For additional information regarding the MCND and BRA Series
1997 bonds, see Note 8(f) to the Company's 10-K Financial Statements.
17
21
HOUSTON INDUSTRIES INCORPORATED AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(c) Offering of NorAm Debt Securities.
In November 1998, NorAm sold $500 million aggregate principal amount of
its 6 3/8% Term Enhanced ReMarketable Securities (TERM Notes). The net proceeds
of $514 million from the offering of the TERM Notes and from the sale of the
related option to remarket the TERM Notes (as described below) will be used for
general corporate purposes, including the repayment of (i) $178.5 million of
NorAm's outstanding commercial paper and (ii) a $150 million term loan of NorAm
that matures on November 13, 1998. The TERM Notes are unsecured obligations of
NorAm which bear interest at the annual rate of 6 3/8% through November 1, 2003.
On November 1, 2003, the holders of the TERM Notes are required to tender their
notes at 100% of their principal amount. Concurrent with the offering, NorAm
received proceeds of $18.375 million from the sale of an option to remarket the
notes in 2003. The proceeds received from the sale of the option will be
amortized over the stated term of the securities. If the option is not
exercised, NorAm will repurchase the TERM Notes at 100% of their principal
amount on November 1, 2003. If the option is exercised, the TERM Notes will be
remarketed on a date, selected by NorAm, within the 52-week period beginning
November 1, 2003. During such period and prior to remarketing, the TERM Notes
will bear interest at rates, adjusted weekly, based on an index selected by
NorAm. If the TERM Notes are remarketed, the final maturity date of the TERM
Notes will be November 1, 2013, subject to adjustment, and the effective
interest rate on the remarketed TERM Notes will be 5.66% plus the Company's
applicable credit spread at the time of such remarketing.
(13) 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 operations 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 affecting energy consumption and (iii) the timing of maintenance and
other expenditures and (iv) acquisitions and dispositions of assets and other
interests. 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.
18
22
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS OF THE COMPANY.
The following discussion and analysis should be read in combination
with Management's Discussion and Analysis of Financial Condition and Results of
Operations of the Company in Item 7 of the Form 10-K, Management's Narrative
Analysis of the Results of Operations of NorAm and Consolidated Subsidiaries in
Item 7 of the Form 10-K, the Company's consolidated financial statements and
notes contained in Item 8 of the Form 10-K and Item 1 of this Form 10-Q. The
Company from time to time makes use in its presentations and other
communications of projections, forecasts and other non-historical information.
For a discussion of the qualifications and assumptions underlying the use of
such forward looking information, see Item 5 of this Form 10-Q.
HOUSTON INDUSTRIES INCORPORATED
Houston Industries Incorporated (Company), together with various
divisions and subsidiaries, including NorAm Energy Corp. (NorAm), is a
diversified international energy services company.
The Company's electric operations segment (Electric Operations)
operates the nation's tenth largest electric utility in terms of kilowatt-hour
(KWH) sales; and its natural gas distribution segment (Natural Gas Distribution)
operates the nation's third largest natural gas distribution operation in terms
of customers served. The Company, through its interstate pipeline segment
(Interstate Pipeline), operates two interstate natural gas pipelines. The
Company provides natural gas transportation, supply, gathering and storage, and
wholesale natural gas and electric power trading and marketing services through
its energy marketing segment (Energy Marketing) and invests, through its
international (International) and corporate (Corporate) segments, in foreign
electric and gas utility operations and domestic non-rate regulated power
generation projects.
CONSOLIDATED RESULTS OF OPERATIONS
The Company's actual and pro forma results of operations for the
third quarter and nine month periods ended September 30,1998 and 1997 are
summarized in the following table. The Company's actual results of operations
include results of operations for NorAm for periods on and after August 6, 1997
(Acquisition Date). The Company's pro forma results of operations give effect to
the acquisition of NorAm as if it had occurred as of January 1, 1997. The pro
forma information is not necessarily indicative of the results of operations of
the Company and its business segments that would have occurred had the
acquisition of NorAm occurred at the beginning of such period. In general, the
effects of the acquisition of NorAm include (i) significant increases in
amortization attributable to purchase accounting, (ii) increased shares
outstanding and interest expense and (iii) inclusion of additional revenues and
operating expenses from the newly acquired NorAm business.
19
23
THREE MONTHS ENDED
SEPTEMBER 30,
-------------------------------------------- PERCENT
1998 1997 1997 CHANGE
---------- ---------- ------------ ------------
(ACTUAL) (ACTUAL) (PRO FORMA) (1998 ACTUAL
(IN MILLIONS, EXCEPT PER SHARE DATA) TO 1997
PRO FORMA)
Revenues ......................................... $ 3,469 $ 2,159 $ 2,555 36%
Operating Expenses ............................... 2,963 1,696 2,107 41%
Operating Income ................................. 506 463 449 13%
Other Expenses, Net (1) .......................... 155 93 108 44%
Income Taxes ..................................... 104 126 117 (11%)
Net Income (1) ................................... 247 244 224 10%
Basic Earnings Per Share (1) ..................... 0.87 0.93 0.80 9%
Diluted Earnings Per Share (1) ................... 0.87 0.92 0.80 9%
NINE MONTHS ENDED
SEPTEMBER 30,
-------------------------------------------- PERCENT
1998 1997 1997 CHANGE
---------- ---------- ------------ ------------
(ACTUAL) (ACTUAL) (PRO FORMA) (1998 ACTUAL
(IN MILLIONS, EXCEPT PER SHARE DATA) TO 1997
PRO FORMA)
Revenues ......................................... $ 8,844 $ 4,101 $ 7,438 19%
Operating Expenses ............................... 7,597 3,235 6,422 18%
Operating Income ................................. 1,247 866 1,016 23%
Other Expenses, Net (2) .......................... 834 244 352 137%
Income Taxes ..................................... 153 197 223 (31%)
Net Income (2) ................................... 260 425 441 (41%)
Basic Earnings Per Share (2) ..................... 0.92 1.74 1.57 (41%)
Diluted Earnings Per Share (2) ................... 0.91 1.74 1.56 (42%)
- ------------
(1) Includes a $40 million ($26 million after-tax) or $0.09 basic earnings per
share non-cash unrealized accounting loss recorded in the three month
period ended September 30, 1998, relating to the Company's 7% Automatic
Common Exchange Securities (ACES).
See Note 6 to the Company's Interim Financial Statements.
(2) Includes a $484 million ($314 million after-tax) or $1.10 basic earnings
per share non-cash unrealized accounting loss recorded in the nine month
period ended September 30, 1998, relating to the ACES. (See Note 6 to the
Company's Interim Financial Statements.)
Third Quarter of 1998 Compared to Third Quarter of 1997 (Actual). The
Company had net income of $247 million for the third quarter of 1998 ($0.87
basic earnings per share) compared to net income of $244 million ($0.93 basic
earnings per share) in the comparable period in 1997. The Company's results of
operations for the third quarter of 1998 include a $26 million (after-tax)
non-cash, unrealized accounting loss on the ACES. For information regarding this
accounting loss, see Note 6 to the Company's Interim Financial Statements.
Excluding the ACES accounting loss, the Company would have had
adjusted net income of $273 million ($0.96 basic earnings per share) for the
third quarter of 1998. The increase in third quarter adjusted net income is
primarily attributable to improved earnings from the Company's non-rate
regulated power generation business (reported in the Corporate segment) and its
International segment. Improved results of operations from the Interstate
Pipeline and Energy Marketing segments also contributed to the increase in
adjusted net income. These effects were partially offset by (i) additional
depreciation of Electric Operations' generation assets of $91 million ($78
million over the prior comparable period), (ii) base rate credits resulting from
the Transition Plan (described below), (iii) seasonal-related operating losses
at Natural Gas Distribution, and (iv) increased interest expense primarily
related to the NorAm acquisition.
20
24
Third Quarter of 1998 (Actual) Compared to Third Quarter of 1997 (Pro
Forma). The Company's net income for the third quarter of 1998 was $247 million
($0.87 basic earnings per share) compared to pro forma net income of $224
million ($0.80 basic earnings per share) in the third quarter of 1997. Excluding
the accounting loss attributable to the ACES securities, the Company's adjusted
net income for the third quarter of 1998 would have been $273 million ($0.96
basic earnings per share) compared to $224 million ($0.80 basic earnings per
share) in the third quarter of 1997. The increase in actual net income over pro
forma net income was caused by the same factors discussed above except for the
increase in interest expense and the losses at Natural Gas Distribution which
were comparable between periods (excluding non-recurring items discussed below).
The decrease in income taxes in the third quarter of 1998 reflects the impact of
a reduction in the Company's estimate of tax expense for the year.
Nine Month Period ended September 30, 1998 (Actual) Compared to Nine
Month Period ended September 30, 1997 (Actual). The Company had net income of
$260 million for the nine month period ended September 30, 1998, ($0.92 basic
earnings per share) compared to net income of $425 million ($1.74 basic earnings
per share) for the comparable period in 1997. The Company's results of
operations for the nine month period reflect a $314 million (after-tax)
non-cash, unrealized accounting loss relating to the ACES. Excluding this
accounting loss, the Company would have had adjusted net income of $574 million
($2.02 basic earnings per share). The increase in adjusted net income for the
nine month period is attributable to (i) an $80 million ($0.28 basic earnings
per share) after-tax gain recorded in connection with the sale of an investment
in an Argentine electric utility system, (ii) earnings from the Company's
non-rate regulated power generation business and its International segment, and
(iii) the incremental earnings generated by the business segments acquired in
the NorAm acquisition.
Nine Months ended September 30, 1998 (Actual) Compared to Nine Months
ended September 30, 1997 (Pro Forma). The Company's net income for the nine
month period ended September 30, 1998 was $260 million ($0.92 basic earnings per
share) compared to pro forma net income of $441 million ($1.57 basic earnings
per share) in the first nine months of 1997.
Excluding the accounting loss relating to the ACES, the Company's
adjusted net income for the nine month period ended September 30, 1998, would
have been $574 million ($2.02 basic earnings per share) compared to pro forma
net income of $441 million ($1.57 basic earnings per share) for the comparable
period in 1997. The increase in adjusted net income is due to the $80 million
after-tax gain on the sale of an investment in an Argentine electric utility
system and increased equity earnings at International, and increased earnings of
the Company's non-rate regulated power generation business. These factors were
partially offset by decreased operating income at Natural Gas Distribution due
to warmer weather in 1998 as compared to 1997. The decrease in income taxes in
the nine month period ended September 30, 1998, is primarily attributable to the
tax benefit associated with the unrealized accounting loss related to the ACES.
RESULTS OF OPERATIONS BY BUSINESS SEGMENT
The following table presents operating income on (i) an actual basis
for the three and nine month periods ended September 30, 1998 and 1997 and (ii)
a pro forma basis for the three and nine month periods ended September 30, 1997
(assuming the NorAm acquisition had occurred on January 1, 1997) for each of the
Company's business segments (other than Electric Operations, which is presented
on an actual basis for all reported periods).
21
25
OPERATING INCOME (LOSS) BY BUSINESS SEGMENT
THREE MONTHS ENDED SEPTEMBER 30,
---------------------------------------------
1998 1997 1997
------------- ------------- -------------
(ACTUAL) (ACTUAL) (PRO FORMA)(1)
(IN MILLIONS)
Electric Operations .............................. $ 419 $ 457 $ 457
Natural Gas Distribution ......................... (20) (6) (15)
Interstate Pipeline .............................. 27 14 20
Energy Marketing ................................. 7 5
International .................................... 14 6 6
Corporate ........................................ 59 (13) (19)
------------- ------------- -------------
Total Consolidated ......................... $ 506 $ 463 $ 449
============= ============= =============
NINE MONTHS ENDED SEPTEMBER 30,
---------------------------------------------
1998 1997 1997
------------- ------------- -------------
(ACTUAL) (ACTUAL) (PRO FORMA)(1)
(IN MILLIONS)
Electric Operations .............................. $ 855 $ 883 $ 883
Natural Gas Distribution ......................... 75 (6) 92
Interstate Pipeline .............................. 92 14 81
Energy Marketing ................................. 11 5 4
International .................................... 176 14 12
Corporate ........................................ 38 (44) (56)
------------- ------------- -------------
Total Consolidated ......................... $ 1,247 $ 866 $ 1,016
============= ============= =============
- ------------
(1) Pro forma adjustments give effect to purchase-related adjustments,
including amortization of goodwill and the revaluation of the fair market value
of certain NorAm assets and liabilities since the Acquisition Date.
ELECTRIC OPERATIONS
Electric Operations activities are conducted under the name "Houston
Lighting & Power Company" or "HL&P" (HL&P), an unincorporated division of the
Company. 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).
The following table provides summary data regarding the results of
operations of Electric Operations, including operating statistics, for the three
and nine month periods ended September 30, 1998 and 1997.
22
26
THREE MONTHS ENDED SEPTEMBER 30,
-------------------------------- PERCENT
1998 1997 CHANGE
---------- ---------- --------
(ACTUAL) (ACTUAL)
(IN MILLIONS)
Base Revenues (1) ................................ $ 959 $ 918 4%
Transmission Revenues ............................ 27 19 42%
Reconcilable Fuel Revenues (2) ................... 430 450 (4%)
Operating Expenses:
Fuel ........................................ 361 366 (1%)
Purchased Power ............................. 85 99 (14%)
Operation and Maintenance ................... 265 246 8%
Depreciation and Amortization ............... 209 151 38%
Other Taxes ................................. 77 68 13%
---------- ----------
Operating Income ................................. $ 419 $ 457 (8%)
========== ==========
Electric Sales (MWH):
Residential ................................. 7,971,198 7,191,954 11%
Commercial .................................. 4,860,627 4,593,227 6%
Industrial - Firm ........................... 7,018,296 6,671,742 5%
Municipal & Public Utilities ................ 95,204 81,076 17%
---------- ----------
Total Firm Billed Sales .......................... 19,945,325 18,537,999 8%
========== ==========
Average Cost of Fuel (Cents/MMBtu) ............... 173.4 190.9 (9%)
NINE MONTHS ENDED SEPTEMBER 30,
------------------------------- PERCENT
1998 1997 CHANGE
---------- ---------- -------
(ACTUAL) (ACTUAL)
(IN MILLIONS)
Base Revenues (1) ................................ $ 2,274 $ 2,160 5%
Transmission Revenues ............................ 70 64 9%
Reconcilable Fuel Revenues (2) ................... 1,100 1,062 4%
Operating Expenses:
Fuel ........................................ 856 833 3%
Purchased Power ............................. 291 279 4%
Operation and Maintenance ................... 723 690 5%
Depreciation and Amortization ............... 524 412 27%
Other Taxes ................................. 195 189 3%
---------- ----------
Operating Income ................................. $ 855 $ 883 (3%)
========== ==========
Electric Sales (MWH):
Residential ................................. 16,043,238 14,839,034 8%
Commercial .................................. 12,182,317 11,597,494 5%
Industrial - Firm ........................... 20,160,044 19,377,067 4%
Municipal & Public Utilities ................ 253,113 239,531 6%
---------- ----------
Total Firm Billed Sales .......................... 48,638,712 46,053,126 6%
========== ==========
Average Cost of Fuel (Cents/MMBtu) ............... 176.7 184.2 (4%)
- ------------
(1) Includes miscellaneous revenues, certain non-reconcilable fuel revenues and
certain purchased power-related revenues.
(2) Includes revenues collected through a fixed fuel factor and surcharge, net
of over/under recovery. See below.
23
27
For the three month and nine month periods ended September 30, 1998,
Electric Operations' operating income decreased $38 million and $28 million,
respectively, below operating income for the same periods of 1997. The decrease
in operating income is due to (i) additional depreciation of the South Texas
Project Electric Generating Station of $91 million and $171 million for the
three month and nine month periods ended September 30, 1998 (which is $78
million and $133 million more than recorded during the same periods in 1997),
(ii) the implementation of transition to competition base rate credits beginning
January 1, 1998 and (iii) increases in operating expenses. These factors were
partially offset by increased sales as a result of unusually hot weather in
1998.
HL&P's earnings are capped at an overall rate of return on a calendar
year basis as part of its transition to competition plan (Transition Plan)
approved by the Public Utility Commission of Texas (Texas Utility Commission) in
June 1998. As a result of this plan, any earnings above the maximum allowed
return cap of 9.844 % on invested capital will be offset by additional
depreciation of HL&P's generation assets. For information regarding the
Transition Plan, see Note 10(a) to the Company's Interim Financial Statements.
Electric Operations' increase in base revenues of $41 million and
$114 million for the three month and nine month periods ended September 30,
1998, respectively, compared to the same periods of 1997, is primarily the
result of unusually hot weather, net of base rate credits implemented under the
Transition Plan. The base rate credits lowered base revenues by $28 million and
$56 million for the three and nine months ended September 30, 1998.
Transmission revenues include revenues collected through a pricing
and billing mechanism implemented by the Texas Utility Commission for wholesale
transmission services within the Electric Reliability Council of Texas (ERCOT).
Electric Operations began recording these revenues and associated expenses in
the second quarter of 1997. For the three and nine month periods ended September
30, 1998, transmission revenues of $27 million and $70 million, respectively,
were offset by transmission expenses of $29 million and $73 million,
respectively. For the three and nine month periods ended September 30, 1997,
transmission revenues of $19 million and $64 million, respectively, were offset
by transmission expenses of $22 million and $66 million, respectively. For
information regarding transmission revenues, see "Management's Discussion and
Analysis of Financial Condition and Results of Operations of the Company --
Certain Factors Affecting Future Earnings of the Company and its
Subsidiaries--Competition--Electric Operations -- Competition in Wholesale
Market" in the Company's Form 10-K.
Fuel revenues include revenues generated by a fixed fuel factor
established by the Texas 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 and 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 Texas Utility Commission
subsequently determines that a utility's fuel costs are not recoverable.
In January 1998, Electric Operations filed a fuel reconciliation for
the three year period ending July 1997 covering approximately $3.5 billion of
eligible fuel expenses. On October 15, 1998, Electric Operations and all other
parties in this proceeding filed with the Texas Utility Commission an Unanimous
Stipulation resolving all fuel reconciliation issues. This case is pending final
approval and is not expected to have a material effect on Electric Operations'
results of operations.
In April 1998, Electric Operations filed a petition to revise the
fixed fuel factor and implement a surcharge for under-collected fuel costs. The
Texas Utility Commission approved implementation of the revised fixed fuel
factor and a fuel surcharge in the amount of $125 million (inclusive of the
previously existing fuel surcharge balance) to be collected over a 12 to 18
month period. The revised fixed fuel factor
24
28
implemented July 1, 1998 is $0.019 compared to $0.017 fixed factor in place
since 1995. As of September 30, 1998, Electric Operations' cumulative
under-recovery of fuel costs was $182 million, including interest. For
information regarding the recovery of fuel costs, see "Business - Electric
Operations - Fuel - Recovery of Fuel Costs" in Item 1 of the Company's Form
10-K.
Fuel and purchased power expenses for the three month and nine month
periods ended September 30, 1998 decreased by $19 million or 4% and increased by
$35 million or 3%, respectively, compared to the same periods in 1997. The three
month period decrease was driven by a decline in the cost of natural gas (from
$2.43 to $2.08 per MMBtu), coal (from $1.98 to $1.82 per MMBtu), and nuclear
fuel (from $0.53 to $0.48 per MMBtu), net of an increase in the production of
electricity. The 3% increase for the nine months ended September 30, 1998 is due
primarily to increased production of electricity, net of an overall decrease in
the average price of fuel and purchased power. See Note 12(c) to the Company's
10-K Financial Statements for information on Electric Operations' joint
dispatching agreement with the City of San Antonio for purchased power.
Operations and maintenance expenses for the three months ended
September 30, 1998, increased $19 million compared to the same period in 1997
due primarily to (i) ERCOT transmission tariffs discussed above, (ii) increased
liabilities associated with benefit plans and (iii) increased franchise taxes
due to higher KWH sales.
For the nine month period ended September 30, 1998, operation and
maintenance expense increased $33 million, due primarily to the items mentioned
above, along with the scheduling of routine plant maintenance and inspection
outages, additional tree-trimming activities and franchise taxes due to higher
KWH sales.
NATURAL GAS DISTRIBUTION
Natural Gas Distribution operations are conducted through the Arkla,
Entex and Minnegasco divisions of NorAm. These operations consist of natural gas
sales to, and natural gas transportation for, residential, commercial and
certain industrial customers in six states: Arkansas, Louisiana, Minnesota,
Mississippi, Oklahoma and Texas.
The following table provides summary data regarding the results of
operations of Natural Gas Distribution, including operating statistics, on an
actual basis for the third quarter and nine month periods ended September 30,
1998 and on a pro forma basis for the third quarter and nine month periods ended
September 30, 1997 (as if the acquisition of NorAm had occurred as of January 1,
1997).
25
29
THREE MONTHS ENDED
SEPTEMBER 30,
------------------------------ PERCENT
1998 1997 CHANGE
------------ ------------ --------
(ACTUAL) (PRO FORMA)
(IN MILLIONS)
Operating Revenues ............................... $ 249 $ 272 (8%)
Operating Expenses:
Natural Gas ................................. 126 145 (13%)
Operation and Maintenance ................... 91 90 1%
Depreciation and Amortization ............... 33 31 6%
Other Operating Expenses .................... 19 21 (10%)
------------ ------------
Total Operating Expenses ................ 269 287 (6%)
------------ ------------
Operating Loss ................................... $ (20) $ (15) (33%)
============ ============
Throughput Data (in Bcf):
Residential and Commercial Sales ............ 31 32 (3%)
Industrial Sales ............................ 14 14 --
Transportation .............................. 9 9 --
------------ ------------
Total Throughput ......................... 54 55 (2%)
============ ============
NINE MONTHS ENDED
SEPTEMBER 30,
-------------------------- PERCENT
1998 1997 CHANGE
------------ ----------- --------
(ACTUAL) (PRO FORMA)
(IN MILLIONS)
Operating Revenues ............................... $ 1,281 $ 1,490 (14%)
Operating Expenses:
Natural Gas ................................. 757 948 (20%)
Operation and Maintenance ................... 282 283 --
Depreciation and Amortization ............... 97 92 5%
Other Operating Expenses .................... 70 75 (7%)
---------- ----------
Total Operating Expenses ................ 1,206 1,398 (14%)
---------- ----------
Operating Income ................................. $ 75 $ 92 (18%)
========== ==========
Throughput Data (in Bcf):
Residential and Commercial Sales ............ 200 220 (9%)
Industrial Sales ............................ 42 42 --
Transportation .............................. 32 31 3%
---------- ----------
Total Throughput ......................... 274 293 (6%)
========== ==========
Natural Gas Distribution's operating loss increased $5 million in the
third quarter of 1998, over its $15 million pro forma operating loss in the same
period of 1997. The third quarter of 1997 included approximately $4 million
non-recurring income recorded in connection with the successful appeal of the
Minnegasco division's 1993 and 1995 rate cases.
Operating income for the nine month period ended September 30, 1998
decreased $17 million compared to pro forma operating income in the same period
of 1997. The $17 million decrease in operating income is due primarily to (i)
milder winter weather in the first three months of 1998, (ii) the impact in 1997
of the Minnegasco division's rate case appeal as discussed above and (iii) lower
demand for natural gas heating in the second and third quarters of 1998. The
decrease in operating income was partially offset by reduced charges at Arkla
associated with the methodology of calculating the price of gas charged to
customers (the Purchased Gas Adjustment).
26
30
Natural Gas Distribution operating revenues decreased $23 million and
$209 million for the third quarter and nine months ended September 30, 1998,
respectively, compared to pro forma operating revenues for the corresponding
periods of 1997 due principally to (i) the weather-related decline in customer
usage and (ii) lower natural gas prices. In addition, the impact in 1997 of the
Minnegasco division's rate case appeal (as discussed above) also resulted in
higher revenues in 1997 compared to 1998.
Operating expenses decreased $18 million and $192 million in the
third quarter and nine months ended September 30, 1998, respectively, compared
to pro forma operating expenses in the same period of 1997 due primarily to the
reduced cost of gas and the Purchased Gas Adjustment.
Demand for natural gas distribution services is seasonal in nature,
reflecting the higher demand for natural gas for use in heating in the winter
months.
INTERSTATE PIPELINE
Interstate Pipeline operations are conducted primarily 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, Kansas, Louisiana, Mississippi, Missouri, 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 following table provides summary data regarding the results of
operations of Interstate Pipeline, including operating statistics, on an actual
basis for the third quarter and nine months ended September 30, 1998 and on a
pro forma basis for third quarter and nine months ended September 30, 1997 (as
if the acquisition of NorAm had occurred as of January 1, 1997).
THREE MONTHS ENDED
SEPTEMBER 30,
------------------------------ PERCENT
1998 1997 CHANGE
------------ ------------ --------
(ACTUAL) (PRO FORMA)
(IN MILLIONS)
Operating Revenues ............................... $ 70 $ 67 4%
Operating Expenses:
Natural Gas ................................. 6 10 (40%)
Operation and Maintenance ................... 20 20 --
Depreciation and Amortization ............... 13 13 --
Other Operating Expenses .................... 4 4 --
---------- ----------
Total Operating Expenses ............... 43 47 (9%)
---------- ----------
Operating Income ................................. $ 27 $ 20 35%
========== ==========
Throughput Data (in million MMBtu):
Natural Gas Sales ............................. 4 4 --
Transportation ................................ 186 205 (9%)
Elimination (1) .......................... (4) (4) --
---------- ----------
Total Throughput ................................. 186 205 (9%)
========== ==========
27
31
NINE MONTHS ENDED
SEPTEMBER 30,
-------------------------- PERCENT
1998 1997 CHANGE
------------ ----------- --------
(ACTUAL) (PRO FORMA)
(IN MILLIONS)
Operating Revenues ............................... $ 218 $ 226 (4%)
Operating Expenses:
Natural Gas ................................. 22 29 (24%)
Operation and Maintenance ................... 60 66 (9%)
Depreciation and Amortization ............... 32 39 (18%)
Other Operating Expenses .................... 12 11 9%
---------- ----------
Total Operating Expenses ............... 126 145 (13%)
---------- ----------
Operating Income ................................. $ 92 $ 81 14%
========== ==========
Throughput Data (in million MMBtu):
Natural Gas Sales ............................. 12 14 (14%)
Transportation ................................ 610 667 (9%)
Elimination (1) .......................... (11) (13) 15%
---------- ----------
Total Throughput ................................. 611 668 (9%)
========== ==========
- ------------
(1) Elimination refers to volumes of natural gas both transported and sold by
Interstate Pipeline and, therefore, excluded from total throughput.
Interstate Pipeline operating income increased $7 million and $11
million in the third quarter and nine months ended September 30, 1998,
respectively, over pro forma operating income for the same periods in 1997. The
increase in operating income for the third quarter of 1998 is primarily due to
improved operating margins and reductions in the cost of natural gas, as
discussed below. The increase in operating income for the nine month period of
1998 is primarily due to $11 million of pre-tax non-recurring items recorded in
1998 for litigation and rate case settlements as well as improved operating
margins and reductions in operating expenses. The increase in operating income
in the nine month period ended September 30, 1998 was offset by $7 million of
non-recurring transportation revenues recorded in the first quarter of 1997, as
discussed below.
Operating revenues for Interstate Pipeline increased $3 million in
the third quarter of 1998, over pro forma operating revenues for the same period
in 1997. This increase in operating revenues is primarily due to a
weather-related demand for natural gas used to fuel electric generation plants
during the summer cooling season.
Operating revenues decreased $8 million in the nine month period
ended September 30, 1998, from pro forma operating revenues for the same period
in 1997. The decrease in revenues is due in part to $7 million of non-recurring
transportation revenues recognized in the first quarter of 1997. These revenues
were recognized following a settlement with the Arkla division of NorAm related
to service provided in several of Arkla's operating jurisdictions. In addition,
the settlement with Arkla resulted in reduced transportation rates, which also
reduced revenues for the period. These decreases were partially offset by (i)
the settlement of outstanding gas purchase contract litigation which resulted in
the recognition of approximately $6 million of revenues in the second quarter of
1998 and (ii) the factors discussed above for the third quarter.
Natural gas expense decreased $4 million and $7 million in the third
quarter and nine months ended September 30, 1998, respectively, when compared to
pro forma natural gas expense in the same periods in 1997 primarily due to lower
gas sales volumes and lower prices for purchased gas.
28
32
Operation and maintenance expense decreased $6 million in the nine
months ended September 30, 1998, respectively, in comparison to pro forma
operation and maintenance expense for the same period in 1997. The decrease was
primarily due to lower costs resulting from cost control initiatives and
decreased maintenance due to milder weather in the first quarter of 1998.
Depreciation expense decreased $7 million in the nine month period
ended September 30, 1998, compared to pro forma depreciation expense in the same
period of 1997 primarily due to a $5 million rate settlement recorded in the
first quarter of 1998. The rate settlement, effective January 1998, provided for
a reduction of MRT's depreciation rates retroactive to July 1996.
ENERGY MARKETING
Energy Marketing includes the operations of NorAm's wholesale energy
trading and marketing business, and retail energy marketing business and natural
gas gathering activities of NorAm (conducted, respectively, by NorAm Energy
Services, Inc. (NES), NorAm Energy Management, Inc. and NorAm Field Services
Corp., three wholly owned subsidiaries of NorAm).
The following table provides summary data regarding the results of
operations of Energy Marketing, including operating statistics, on an actual
basis for the third quarter and nine months ended September 30, 1998 and on a
pro forma basis for the third quarter and nine months ended September 30, 1997
(as if the acquisition of NorAm had occurred as of January 1, 1997).
THREE MONTHS ENDED
SEPTEMBER 30,
----------------------------- PERCENT
1998 1997 CHANGE
------------ ----------- --------
(ACTUAL) (PRO FORMA)
(IN MILLIONS)
Operating Revenues ............................... $ 1,642 $ 842 95%
Operating Expenses:
Natural Gas ................................. 687 587 17%
Purchased Power ............................. 906 220 312%
Operation and Maintenance ................... 36 31 16%
Depreciation and Amortization ............... 4 3 33%
Other Operating Expenses .................... 2 1 100%
---------- ----------
Total Operating Expenses ............... 1,635 842 94%
========== ==========
Operating Income (Loss) .......................... $ 7 $ -- --
========== ==========
Operations Data:
Natural Gas (in Bcf):
Sales ..................................... 364 284 28%
Transportation ............................ 3 5 (40%)
Gathering ................................. 60 60 --
---------- ----------
Total ................................ 427 349 22%
---------- ----------
Electricity:
Wholesale Power Sales (in thousand MWH) ... 22,353 8,099 176%
---------- ----------
29
33
NINE MONTHS ENDED
SEPTEMBER 30,
----------------------------- PERCENT
1998 1997 CHANGE
------------ ----------- --------
(ACTUAL) (PRO FORMA)
(IN MILLIONS)
Operating Revenues ............................... $ 3,731 $ 2,535 47%
Operating Expenses:
Natural Gas ................................. 2,012 2,022 --
Purchased Power ............................. 1,604 429 274%
Operation and Maintenance ................... 89 69 29%
Depreciation and Amortization ............... 10 8 25%
Other Operating Expenses .................... 5 3 67%
---------- ----------
Total Operating Expenses ............... 3,720 2,531 47%
---------- ----------
Operating Income ................................. $ 11 $ 4 175%
========== ==========
Operations Data:
Natural Gas (in Bcf):
Sales ..................................... 1,013 878 15%
Transportation ............................ 16 17 (6%)
Gathering ................................. 175 182 (4%)
---------- ----------
Total ................................ 1,204 1,077 12%
---------- ----------
Electricity:
Wholesale Power Sales (in thousand MWH) ... 52,471 17,660 197%
---------- ----------
Energy Marketing's operating income increased $7 million for both the
three and nine months ended September 30, 1998 over pro forma operating income
for the same periods in 1997. The increase in third quarter operating income
primarily reflects increased margins and sales volumes at NES for the third
quarter of 1998 compared to the same period of 1997. This increase was partially
offset by higher operating expenses as discussed below. Operating income for the
nine months ended September 30, 1997 included $17 million in hedging losses
associated with sales under peaking contracts and losses from the sale of
natural gas held in storage and unhedged in the first quarter of 1997.
Operating revenues for Energy Marketing increased $800 million and
$1.2 billion for the third quarter and nine months ended September 30, 1998,
respectively, when compared to the same periods in 1997 due primarily to
increases in wholesale power sales of $692 million and $1.2 billion in the third
quarter and nine month periods of 1998, respectively. The increases in operating
revenues and wholesale power sales were due to increased trading activity in
1998.
Natural gas expenses increased $100 million for the third quarter of
1998, compared to the same period of 1997. This increase is attributable to
increased gas marketing activities, partially offset by a decrease in the price
of natural gas. In the nine months ended September 30, 1998, natural gas
expenses decreased $10 million when compared to the same period of 1997. This
decrease is due to the reduction in the price of natural gas in 1998 and the
impact of hedging losses in 1997 mentioned above, partially offset by increased
gas marketing activities.
Purchased power expenses increased $686 million and $1.2 billion for
the third quarter and nine months ended September 30, 1998, respectively,
compared to the same periods in 1997 due to increased power marketing
activities.
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Operation and maintenance expenses increased $5 million and $20
million for the third quarter and nine months ended September 30, 1998,
respectively, when compared to 1997 pro forma operation and maintenance expenses
for the same periods in 1997. This increase is largely due to increased staffing
in support of the expanded trading and marketing efforts at NES. The Company
believes that NES' energy trading, marketing and risk management services
complement the development and/or acquisition of non-rate regulated generation
assets in other markets. As a result, the Company has made, and expects to
continue to make, significant investments in developing NES' internal software,
trading and personnel resources. The increase in operation and maintenance
expenses for the nine month period ended September 30, 1998 is also due to a $4
million expense associated with an increase in reserves due to increased counter
party credit and performance risk associated with higher prices and higher
volatility in the electric power market in the second quarter of this year.
To minimize fluctuations in the price of natural gas and
transportation, the Company, primarily through NES, enters into futures
transactions, swaps and options in order to hedge against market price changes
affecting (i) certain commitments to buy, sell and transport natural gas, (ii)
existing gas storage inventory and (iii) certain anticipated transactions, some
of which carry off-balance sheet risk. NES also enters into natural gas
derivatives for trading purposes and electricity derivatives for hedging and
trading purposes. For a discussion about the Company's accounting treatment of
derivative instruments, see Note 2 to the Company's 10-K Financial Statements,
Item 7A (Quantitative and Qualitative Disclosure About Market Risk) in the Form
10-K.
INTERNATIONAL
International includes the results of operations of 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 NorAm. Substantially all of International's operations to date have been in
Central and South America.
Results of operations data for International are presented in the
following table on an actual basis for the third quarter and nine months ended
September 30, 1998, and on a pro forma basis for the third quarter and nine
months ended September 30, 1997, as if the NorAm acquisition had occurred on
January 1, 1997. The primary pro forma adjustment gives effect to project
development costs and other expenditures incurred by NorAm prior to the
Acquisition Date. The adjustment had no effect on operating revenues.
THREE MONTHS ENDED
SEPTEMBER 30,
----------------------------- PERCENT
1998 1997 CHANGE
---------- ---------- --------
(ACTUAL) (PRO FORMA)
(IN MILLIONS)
Operating Revenues ............................ $ 32 $ 21 52%
Operating Expenses:
Fuel ........................................ 5 4 25%
Operation and Maintenance ................... 12 10 20%
Depreciation and Amortization ............... 1 1 --
---------- ----------
Total Operating Expenses ................ 18 15 20%
---------- ----------
Operating Income .............................. $ 14 $ 6 133%
========== ==========
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NINE MONTHS ENDED SEPTEMBER 30,
------------------------------- PERCENT
1998 1997 CHANGE
---------- ---------- --------
(ACTUAL) (PRO FORMA)
(IN MILLIONS)
Operating Revenues ............................... $ 229 $ 61 275%
Operating Expenses:
Fuel ........................................... 15 16 (6%)
Operation and Maintenance ...................... 35 32 9%
Depreciation and Amortization .................. 3 1 200%
---------- ----------
Total Operating Expenses ................... 53 49 8%
---------- ----------
Operating Income ................................. $ 176 $ 12 1,367%
========== ==========
International's operating income increased $8 million and $164
million for the third quarter and nine months ended September 30, 1998,
respectively, compared to pro forma operating income for the same periods in
1997. The increase in operating income in the nine month period is due primarily
to the $138 million pre-tax gain on the sale of International's 63 percent
interest in Empresa Distribuidora de La Plata S.A. (EDELAP). Excluding the sale
of its investment in EDELAP, International's operating income for the nine
months ended September 30, 1998 would have been $38 million (compared to $12
million on a pro forma basis in the prior period). The increases in operating
income for the third quarter and nine month period ended September 30, 1998
reflect increased equity earnings from International's investments. HI Energy's
1998 acquisitions, which include equity interests in three distribution systems
in El Salvador and two distribution systems in Colombia have contributed to
these increases.
For information regarding recent acquisitions and dispositions by
International, see Note 12(a) to the Company's Interim Financial Statements and
Note 10(a) to the Company's Interim Financial Statements in the Second Quarter
10-Q. For information regarding foreign currency matters, see Note 4 to the
Company's Interim Financial Statements and "--Certain Factors Affecting Future
Earnings of the Company and its Subsidiaries - Risks of International
Operations." For information regarding International's investment strategies,
see "Management's Discussion and Analysis of Financial Condition and Results
of Operations of the Company -- Results of Operations by Business Segment --
International" in the Form 10-K.
CORPORATE
General. The Company's corporate and other business segment
(Corporate) includes corporate costs, certain of the Company's real estate
holdings and inter-unit eliminations. In addition, Corporate includes the
results of operations of (i) Houston Industries Power Generation, Inc. (HIPG,
Inc.), a wholly owned subsidiary of the Company, which is engaged in the
acquisition, development and operation of domestic non-rate regulated power
generation facilities, and (ii) the Company's consumer and retail customer
services operations. The Company's consumer and retail customer services
operations provide energy products and services to a variety of industrial and
commercial and residential customers, including energy efficiency services and
air-conditioning services.
In the third quarter of 1998, Corporate had operating income of $59
million compared to a pro forma operating loss of $19 million for the comparable
period in 1997. Corporate's operating income for the nine month period ended
September 30, 1998, was $38 million compared to a pro forma operating loss of
$56 million for the same period in 1997. The increases are primarily due to
earnings from HIPG, Inc.'s investment in non-rate regulated generating assets
and related trading and marketing activities. Also contributing to the increase
for the nine month period ended September 30, 1998 are the capitalization of
previously expensed development costs and non-recurring costs associated with
the 1997 irrevocable contribution of 450,000 shares of Time Warner common stock
(having a market value of $21.9 million and a book value of $19.5 million) to a
charitable foundation established by the Company.
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HIPG, Inc. HIPG, Inc. participates in the domestic independent power
markets through the acquisition of existing power plants and the development of
new power plants (greenfield projects). HIPG, Inc.'s business strategy is to
develop a commercial generation portfolio that complements the Company's other
operations, including the electric and natural gas trading and marketing
operations of NES.
In April 1998, HIPG, Inc. acquired four natural gas-fired, electric
generating plants (2,276 MW) from Southern California Edison Company (SCE) for
approximately $230 million. In July 1998, HIPG, Inc. acquired another generating
plant (1,500 MW) from SCE for approximately $43 million. All of the plants are
located in southern California. Certain units of the plants have been designated
as "must-run facilities" under California's Independent System Operator's (ISO)
electric restructuring law. These units operate, in part, under agreements that
allow the ISO to call upon them to provide voltage support, congestion
management and ancillary services. NES, an affiliate of HIPG, Inc., is acting as
the plants' exclusive power marketer and supplier of natural gas. In accordance
with the provisions of the asset sale agreements, HIPG, Inc. was required to
contract with SCE to operate and maintain the plants with existing plant
employees through April 2000. HIPG, Inc. however exercises management authority
over the plants' operations. HIPG, Inc. financed the purchase price of these
generating plants with intercompany advances. The funds for such advances were
obtained by a financing subsidiary of the Company under a $150 million bridge
loan and from the issuance of commercial paper at a financing subsidiary. For
information regarding the bridge loan, see Note 8(b) to the Company's First
Quarter 10-Q and Note 8(b) to the Company's Interim Financial Statements.
HIPG, Inc., through its subsidiaries, is currently developing the
following power projects: a 480 MW gas-fired merchant plant located in Boulder
City, Nevada (El Dorado Project) and a 100 MW cogeneration plant located in
Orange, Texas (Sabine Cogeneration Project). HIPG, Inc. owns a 50% interest in
each of these projects. Construction of the El Dorado Project began in April
1998, and construction of the Sabine Cogeneration Project began in November
1998. The projected completion date for the El Dorado Project and the Sabine
Cogeneration Project is the fourth quarter of 1999. In October 1998, the El
Dorado Project obtained a $158 million non-recourse loan representing
approximately 60% of the estimated total project cost. As of September 30, 1998,
capitalized costs for these projects under construction or under development
were approximately $46 million.
For information regarding expenditures made or to be made by HIPG,
Inc. under existing commitments, see "Management's Discussion and Analysis of
Financial Condition and Results of Operations of the Company -- Results of
Operations by Business Segment - Corporate" in the Company's Interim Financial
Statements in the First Quarter 10-Q.
The Company expects that HIPG, Inc. will continue to participate
actively in non-rate regulated power projects, including "greenfield" projects,
competitive auctions, and other acquisitions of generation assets. The amount of
expenditures associated with these activities is dependent upon the nature and
extent of future project commitments; however, some of these expenditures could
be substantial. HIPG, Inc. intends to finance a portion of its non-rate
regulated power projects through the proceeds from project financings
(financings where lenders limit their recourse for the payment of amounts loaned
to a project's revenues, equity investment and physical assets), and through
equity investment and loans from the Company.
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The successful completion of "greenfield" and other non-rate
regulated power projects is dependent upon a number of factors, which include,
among other things, risks associated with failures of siting, financing,
construction, permitting, governmental approvals, termination of power sales
contracts (if any) as a result of a failure to meet certain construction
milestones and the uncertainties arising from the gradual deregulation of HIPG
Inc.'s markets. Many of the facilities being acquired or developed by HIPG, Inc.
are "merchant plants" without a dedicated offtake customer and such facilities
are sensitive to market and regulatory factors and other considerations.
CERTAIN FACTORS AFFECTING FUTURE EARNINGS
OF THE COMPANY AND ITS SUBSIDIARIES
For information on developments, factors and trends that may have an
impact on the Company's future earnings, reference is made to Item 7 of the Form
10-K, "Management's Discussion and Analysis of Financial Condition and Results
of Operations of the Company--Certain Factors Affecting Future Earnings of the
Company and its Subsidiaries."
RATE PROCEEDINGS -- ELECTRIC OPERATIONS
The Texas Utility Commission has jurisdiction (or, in some cases,
appellate jurisdiction) over the electric rates of Electric Operations and, as
such, monitors Electric Operations' earnings to ensure that Electric Operations
is not earning in excess of a reasonable rate of return. For information
regarding the Transition Plan and the pending appeal, of the Texas Utility
Commission's order implementing the Transition Plan, see Note 10(a) to the
Company's Interim Financial Statements.
ACCOUNTING TREATMENT OF ACES
The Company accounts for its investment in TW Preferred under the
cost method. As a result of the Company's issuance of the ACES, certain
increases in the market value of Time Warner common stock (the security into
which the TW Preferred is convertible) could result in an accounting loss to the
Company, pending the conversion of the Company's TW Preferred into Time Warner
common stock. For additional information regarding the accounting treatment of
the TW Preferred, see Note 6 to the Company's Interim Financial Statements.
RISKS OF INTERNATIONAL OPERATIONS
HI Energy's international operations are subject to various risks
incidental to operating in emerging market countries. These risks include
political risks, such as governmental instability, and economic risks, such as
fluctuations in currency exchange rates, restrictions on the repatriation of
foreign earnings and/or restrictions on the conversion of local currency
earnings into U.S. dollars. HI Energy's international operations are also highly
capital intensive and thus, dependent to a significant extent on the continued
availability of bank financing and other sources of capital on commercially
acceptable terms.
The devaluation of a country's local currency can generally be
expected to result in an increase in the inflation rates of that country. The
long-term concession contracts under which HI Energy's foreign electric
distribution companies operate contain mechanisms for adjusting electricity
tariffs (Adjustments) to reflect changes in operating costs resulting from
inflation; however, these Adjustments are made only at specified intervals or,
in certain cases, on an interim basis upon application to the local regulatory
authorities. None of these Adjustments are indexed to the U.S. dollar or other
non-local currencies.
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Assuming that a devaluation in local currency will be reflected in an
increase in the local rate of inflation and assuming that an adjustment to
tariff rates is made promptly to reflect such increase, the Company believes
that the results of operations of its foreign electric distribution companies
should be protected, at least in part, from the effects of fluctuations in
currency exchange rates. If, however, there was a significant delay in the
implementation of the tariff adjustments or the economic impact of the
devaluation was not completely reflected in increased inflation rates, a
devaluation of local currencies could have an adverse impact on the results of
operations of these companies, and to the extent of the Company's ownership
interests in such companies, the Company's consolidated earnings. Depending on
the length of such delays and the severity of such devaluation, such impact
could be material.
HI Energy owns approximately 11.7% of the stock of Light -- Servicos
de Eletricidade S.A. (Light) and, through its investment in Light, an
approximate 8.8% indirect interest in the stock of Metropolitana Eletricidade de
Sao Paulo S.A. (Metropolitana). Light and Metropolitana are each Brazilian
corporations. Light provides electric distribution services to the city of Rio
de Janeiro and surrounding areas, and Metropolitana provides electric
distribution services to the metropolitan area of Sao Paulo, Brazil. The Company
accounts for its investment in Light under the equity method of accounting and
records its proportionate share, based on stock ownership, in the net income of
Light and its affiliates (including Metropolitana) as part of the Company's
consolidated net income.
At September 30, 1998, Light and Metropolitana had incurred,
respectively, $2.1 billion and $1.1 billion in U.S. and other non-local currency
denominated bank debt. In the event of a devaluation of the Brazilian real, the
Company believes that Light and Metropolitana would record a charge to their
quarterly earnings equal to the increase in the liability resulting from such
devaluation. This charge to earnings would be in addition to whatever other
economic impact on Light and Metropolitana might result from such devaluation.
Because the Company uses the Brazilian real as the functional currency in which
it reports Light's equity earnings, the resulting decrease in Light's earnings
would also be reflected in the Company's consolidated earnings to the extent of
the Company's 11.7% ownership interest in Light.
Although certain of HI Energy's other foreign electric distribution
companies have incurred U.S. dollar and other non-local currency indebtedness
(approximately $73 million at September 30, 1998), the Company believes, based
on the current amount of such indebtedness and the relative size of these equity
investments to the Company's overall results of operations, that a devaluation
of these currencies would not have a material adverse impact on the Company's
consolidated earnings.
Based on information provided by Light, the Company estimates that
approximately $980 million of Light's U.S. and non-local currency denominated
bank debt will mature in the second quarter of 1999 (of which $875 million
represents short-term U.S. dollar indebtedness incurred in connection with
Light's acquisition of Metropolitana). The Company further estimates that
approximately $595 million of Metropolitana's U.S. and non-local currency
denominated bank debt will mature in the second quarter of 1999 (of which $580
million represents short-term U.S. dollar denominated debt incurred to refinance
Metropolitana's previously existing debt). In addition, approximately $130
million of Light's, and approximately $180 million of Metropolitana's U.S.
dollar denominated commercial paper indebtedness, will mature in the first half
of 1999. The ability of Light and Metropolitana to repay or refinance these debt
obligations at maturity is dependent on many factors, including local and
international economic conditions prevailing at the time such debt matures.
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If current international and local economic conditions continue or
deteriorate, it is possible that Light, Metropolitana and the other foreign
electric distribution companies might encounter difficulties in refinancing
their debt on terms and conditions that are commercially acceptable to them and
their shareholders. In such circumstances, it is possible that lenders might
seek to require, among other things, higher borrowing rates, additional equity
contributions and/or increased levels of credit support from such shareholders,
or that the availability or terms of refinancing such debt might otherwise be
adversely affected.
IMPACT OF YEAR 2000 COMPUTER SOFTWARE ISSUES
Year 2000 Problem. At midnight on December 31, 1999, unless the
proper modifications have been made, the program logic in many of the world's
computer systems will start to produce erroneous results because, among other
things, the systems will incorrectly read the date "01/01/00" as being January 1
of the year 1900 or another incorrect date. In addition, certain systems may
fail to detect that the year 2000 is a leap year. Problems can also arise
earlier than January 1, 2000, as dates in the next millennium are entered into
non-compliant year 2000 programs.
Company's Plan to Address Year 2000 Problem. In 1997, the Company
initiated a corporate wide year 2000 project to address mainframe application
systems, information technology (IT) related equipment, system software,
user-developed applications, building controls, and non-IT embedded systems such
as process controls for energy production and delivery. Incorporated into this
project were NorAm and other Company subsidiary mainframe applications,
infrastructures, embedded systems and user-developed applications that will not
be migrated into existing or planned Company systems prior to the year 2000. The
evaluation of year 2000 issues included significant customers, key vendors,
service suppliers and other parties material to the Company's operations. In the
course of this evaluation, the Company has sought written assurances from such
third parties as to their state of year 2000 readiness.
Company's State of Readiness. Work has been prioritized in accordance
with business risk. The highest priority has been assigned to activities that
would disrupt the physical delivery of energy; next are activities that would
impact back office activities such as customer service and billing; and finally,
the lowest priority has been assigned to activities that would cause
inconvenience or productivity loss in normal business operations (e.g. air
conditioning systems and elevators). All business units have completed an
analysis of critical systems and equipment that control the production and
delivery of energy, as well as corporate, departmental and personal systems and
equipment.
Costs to Address Year 2000 Problem. Based on current internal
studies, as well as recently solicited bids from various computer software
vendors, the Company estimates that the total direct cost of resolving the year
2000 issue will be between $35 and $40 million. This estimate includes
approximately $6 million related to salaries and expenses of existing employees
and approximately $3 million in hardware purchases that the company expects to
capitalize. In addition, the $35 to $40 million estimate includes approximately
$2 million spent prior to 1998 and approximately $4 million expended through the
end of the third quarter of 1998. The majority of the costs related to resolving
the year 2000 issue are expected to be expended in 1999. The Company expects to
fund these expenditures through internal capital resources.
In September 1997, the Company entered into an agreement with SAP
America, Inc. (SAP) to license SAP proprietary R/3 enterprise software. The
licensed software includes finance, human resources, materials management,
service delivery, and customer care components. The Company's decision to
license this software and purchase related computer hardware is part of its
response to changes in the electric utility and energy services industries as
well as changes in the Company's businesses and operations resulting from the
acquisition of NorAm and the Company's expansion into the energy trading and
marketing business. Although it is anticipated that the implementation of the
SAP system will have the incidental effect of negating the need to modify many
of the Company's computer systems to accommodate the year 2000
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problem, the Company does not deem the costs of the SAP system as directly
related to its year 2000 compliance program. The estimated cost of implementing
the SAP system is approximately $182 million, inclusive of internal costs. For
additional information, see "Management's Discussion and Analysis of Financial
Condition and Results of Operations of the Company -- Certain Factors Affecting
Future Earnings of the Company and Its Subsidiaries -- Impact of the Year 2000
Issue and Other System Implementation Issues" in Item 7 of the Form 10-K.
Risks and Contingency Plans. The major applications which pose the
greatest year 2000 risks for the Company if the year 2000 Project is not
successful are the electric transmission and distribution automation system; the
time in use, demand and recorder metering system for commercial and industrial
customers; and the power billing system. The potential problems related to these
systems are electric service interruptions to customers, interrupted revenue
data gathering and poor customer relations resulting from delayed billing,
respectively.
In order to assist in preparing for and mitigating the foregoing
scenarios, the Company intends to complete all Year 2000 remediation and testing
activity by the end of the third quarter of 1999. In addition, the Company has
initiated Year 2000 communications with significant customers, key vendors,
service suppliers and other parties material to the Company's operations and is
diligently monitoring the progress of such third parties' Year 2000 projects.
Notwithstanding the foregoing, the Company cautions that (i) the nature of
testing is such that it cannot comprehensively address all future combinations
of dates and events and (ii) it is impossible for the Company to assess with
precision or certainty the compliance of third parties with Year 2000
remediation efforts. For these reasons, the Company intends to revise and expand
its various disaster recovery, business continuation and emergency operations
plans to address specific Year 2000 contingencies (including those discussed
above) and alternatives in the event that Year 2000 failures of automatic
systems and equipment occur. This contingency planning is still in the
preliminary phase, however, final Year 2000 specific plans are scheduled to be
completed prior to mid-year 1999. Due to the speculative and uncertain nature of
contingency planning, there can be no assurance that such plans actually will be
sufficient to reduce the risk of material impacts on the Company's operations
due to Year 2000 issues.
Forward Looking Statements. The estimated costs of the Company's year
2000 project, the timetable for becoming year 2000 ready, as well as the
implementation of the SAP system constitute "forward looking statements" as
defined in the Private Securities Litigation Reform Act of 1995 (see Item 5 of
this Form 10-Q). Investors are cautioned that such estimates are based on
numerous assumptions by management, including assumptions regarding the
continued availability of certain resources, the accuracy of representations
made by third parties concerning their year 2000 readiness status, and other
factors. The estimated year 2000 project costs also do not give effect to any
future corporate acquisitions or divestitures made by the Company or its
subsidiaries.
LIQUIDITY AND CAPITAL RESOURCES
COMPANY CONSOLIDATED SOURCES OF CAPITAL RESOURCES AND LIQUIDITY
Company. For the nine month period ended September 30, 1998, the
Company's net cash provided by operating activities increased $228 million over
the same period in 1997. The increase in net cash from operating activities is
due primarily to (i) incremental cash flow provided by the business segments
purchased in the NorAm acquisition and (ii) increased sales at Electric
Operations due to unusually hot weather during the second and third quarter of
1998.
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Net cash used in investing activities decreased $1 billion for the
nine month period ended September 30, 1998, compared to the same period in 1997.
The decline reflects the purchase price expended in 1997 for the NorAm
acquisition. Investing activities for the nine month period ended September 30,
1998, included (i) the acquisition of non-rate regulated power generation
projects and related project expenditures, (ii) the acquisition of investments
in foreign electric distribution systems and (iii) the sale of an Argentine
electric distribution company.
Net cash used in financing activities for the nine month period ended
September 30, 1998, reflected a $367 million outflow compared to an inflow of
$903 million in the same period in 1997. The cash inflow in 1997 included $1
billion in proceeds from the issuance of ACES and the proceeds from the issuance
of $1.4 billion in commercial paper borrowings used to finance a portion of the
cost of the NorAm acquisition. The proceeds from the ACES were used to retire $1
billion of commercial paper borrowings.
At September 30, 1998, the Company, exclusive of subsidiaries, had a
revolving credit facility of $200 million used to support the issuance of up to
$200 million of commercial paper. There were no commercial paper borrowings and
no loans outstanding under this facility at September 30, 1998. In addition, at
September 30, 1998, 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.
In January 1998, pollution control revenue refunding bonds
aggregating $104.7 million, with $29.7 million bearing an interest rate of 5.25%
and $75 million bearing an interest rate of 5.15%, were issued on behalf of the
Company by the Matagorda County Navigation District Number One. The bonds will
mature in 2029. Proceeds from the issuances were used in February 1998 to
redeem, at 102% of the aggregate principal amount, pollution control revenue
bonds aggregating $104.7 million.
In February 1998, pollution control revenue refunding bonds
aggregating $290 million were issued on behalf of the Company by the Brazos
River Authority (BRA). The bonds bear an interest rate of 5 1/8% and mature in
May 2019 ($200 million) and November 2020 ($90 million). Proceeds from the
issuances were used in May 1998 to redeem, at 102% of the aggregate principal
amount, pollution control revenue bonds aggregating $290 million.
In September 1998, pollution control revenue refunding bonds
aggregating $68.7 million were issued on behalf of the Company by the BRA. The
bonds bear an interest rate of 4.90% and mature in October 2015. Proceeds from
the issuance were used in October 1998 to redeem, at 102% of the aggregate
principal amount, pollution control revenue bonds aggregating $68.7 million.
In the first quarter of 1999, $170.5 million of the Company's
medium-term notes, series A, 9.8%-9.85%, will mature. The Company expects to
fund these debt repayments with cash generated by operations, borrowings under
other facilities and/or other capital sources.
For information about the Company's issuance of a notice to change
the method of determining the interest rate on $118 million of outstanding
pollution control revenue refunding bonds issued on behalf of the Company, see
Note 12(b) to the Company's Interim Financial Statements.
NorAm. In February 1998, NorAm issued $300 million principal amount
of 6.5% debentures due February 1, 2008. The proceeds from the sale of the
debentures were used to repay short-term indebtedness of NorAm, including the
indebtedness incurred in connection with the purchase of $101.4 million
aggregate principal amount of its 10% debentures and the repayment of $53
million aggregate principal amount of NorAm debt that matured in December 1997
and January 1998.
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In the first quarter of 1998, NorAm repaid at maturity $1 million of
its 9.3% medium-term notes and satisfied the $6.5 million sinking fund
requirement for its 6% convertible subordinated debentures due March 2012 using
debentures purchased in 1996 and 1997. In the second quarter of 1998, NorAm
repaid at maturity $28 million of medium-term notes carrying an average interest
rate of 8.74%. In the third quarter of 1998, NorAm repaid at maturity $47
million of medium-term notes carrying an average interest rate of 8.74%. For
information regarding these repayments, see Note 9(b) to the Company's Interim
Financial Statements. During the third quarter of 1998, NorAm purchased $6
million aggregate principal amount of its 6% convertible subordinated debentures
due 2012 at an average purchase price of 97.4% of the aggregate principal amount
plus accrued interest. The purchased debentures are expected to be used to
partially satisfy March 1999 and March 2000 sinking fund requirements.
In March 1998, NorAm replaced its $400 million revolving credit
facility with a five-year $350 million revolving credit facility which supports
NorAm's issuance of up to $350 million of commercial paper. Borrowings under the
NorAm credit facility are unsecured. At September 30, 1998, NorAm had $205.6
million of outstanding commercial paper. At September 30, 1998, NorAm also had a
$300 million trade receivables facility under which receivables of $300 million
had been sold.
In November 1998, NorAm sold $500 million aggregate principal amount
of its 6 3/8% Term Enhanced Remarketable Securities (TERM Notes). The net
proceeds from the offering and from the related sale of an option to remarket
the TERM Notes will be used for general corporate purposes, including the
repayment of (i) a $178.5 million aggregate principal amount of NorAm's
commercial paper and (ii) a $150 million term loan of NorAm, which matures in
the fourth quarter of 1998. For additional information regarding the TERM Notes
offering, see Note 12(c) to the Company's Interim Financial Statements.
Financing Subsidiaries. At September 30, 1998, Houston Industries
FinanceCo LP's (FinanceCo) $1.6 billion revolving credit facility supported $1.3
billion in commercial paper borrowings having a weighted average interest rate
of 5.89%. Proceeds from the initial issuances of commercial paper by FinanceCo
in 1997 were used to fund the cash portion of the consideration paid to
stockholders of the former NorAm Energy Corp. For additional information
regarding the FinanceCo Facility, see Note 8(c) to the Company's 10-K
Consolidated Financial Statements.
In March 1998, FinanceCo II, a limited partnership subsidiary of the
Company, entered into a $150 million credit facility under which it had borrowed
$150 million at September 30, 1998. Proceeds from borrowings under the facility
were used to fund a portion of HIPG, Inc.'s April 1998 purchase of four electric
generation plants. In August 1998, this facility's termination date was extended
to December 31, 1998. For additional information regarding the facility, see
Note 8(b) to the Company's Interim Financial Statements in the First Quarter
10-Q.
General. The Company has established a "money fund" through which its
subsidiaries can borrow or invest on a short-term basis. The funding
requirements of individual subsidiaries are aggregated, and borrowing or
investing is based on the net cash position. The money fund's net funding
requirements are generally met with commercial paper issued by a financing
subsidiary.
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.
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NEW ACCOUNTING ISSUES
For calendar year 1998, the Company and NorAm will adopt SFAS No. 131,
"Disclosures about Segments of an Enterprise and Related Information" (SFAS No.
131) and SFAS No. 132, "Employers' Disclosures about Pensions and Other
Postretirement Benefits" (SFAS No. 132). SFAS No. 131 requires that companies
report in their financial statements financial and descriptive information about
reportable operating segments defined by reference to the way in which
management reviews its operations in order to assess performance and allocate
its resources. SFAS No. 132 revises employers' disclosures about pension and
other post-retirement benefit plans.
In 2000, the Company and NorAm expect to adopt SFAS No. 133, "Accounting
for Derivative Instruments and Hedging Activities" (SFAS No. 133). SFAS No. 133
establishes accounting and reporting standards for derivative instruments,
including certain derivative instruments embedded in other contracts,
(collectively referred to as derivatives) and for hedging activities. The
Company is in the process of determining the effect of adoption of SFAS No. 133.
For information regarding the Company's adoption, effective January 1,
1998, of SFAS No. 130, "Reporting Comprehensive Income," see Note 3 to the
Company's Interim Financial Statements.
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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK OF THE
COMPANY
The Company and its subsidiaries have financial instruments that
involve various market risks and uncertainties. For information regarding the
Company's exposure to risks associated with interest rates, equity market prices
and energy commodity prices see Item 7A in the Form 10-K.
In the third quarter and nine months ended September 30, 1998, the
Company recorded an additional $26 million and $314 million, respectively,
unrealized loss (net of tax) related to the ACES. For further discussion of this
loss, see Note 6 to the Company's Interim Financial Statements. The Company
believes that this additional unrealized loss for the ACES is more than
economically hedged by the unrecorded unrealized gain relating to the increase
in the fair value of the Time Warner common stock underlying the investment in
TW Preferred since the date of its acquisition. An increase of 10% in the price
of the Time Warner common stock above its September 30, 1998 market value of
$87.563 per share would result in the recognition of an additional unrealized
accounting loss (net of tax) of approximately $108 million.
The Company's risk associated with interest rates, equity market prices
(other than those related to ACES) and energy commodity prices have not
materially changed from the market risks faced by the Company at December 31,
1997.
For a discussion of the impact of fluctuations in currency exchange
rates on the Company's equity investments, see "Management's Discussion and
Analysis of Financial Condition and Results of Operations of the Company -
Certain Factors Affecting Future Earnings of the Company and its Subsidiaries -
Risks of International Operations."
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ITEM 1. FINANCIAL STATEMENTS.
NORAM ENERGY CORP. AND SUBSIDIARIES
STATEMENTS OF CONSOLIDATED INCOME
(THOUSANDS OF DOLLARS)
(UNAUDITED)
CURRENT CURRENT CURRENT FORMER FORMER
NORAM NORAM NORAM NORAM NORAM
----------- ----------- ----------- ----------- -----------
THREE MONTHS NINE MONTHS TWO MONTHS ONE MONTH SEVEN MONTHS
ENDED ENDED ENDED ENDED ENDED
SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30, JULY 31, JULY 31,
1998 1998 1997 1997 1997
----------- ----------- ----------- ----------- -----------
REVENUES: ................................. $ 1,930,463 $ 5,072,969 $ 749,412 $ 396,868 $ 3,337,048
EXPENSES:
Natural gas and purchased power, net ... 1,676,274 4,202,962 528,669 334,176 2,700,400
Operation and maintenance .............. 159,430 460,725 159,554 52,696 306,309
Depreciation and amortization .......... 53,240 144,305 31,798 12,456 84,901
Taxes other than income taxes .......... 24,865 86,734 17,767 8,419 73,142
Merger transaction costs ............... 843 15,918 17,256
----------- ----------- ----------- ----------- -----------
1,913,809 4,894,726 738,631 423,665 3,182,008
----------- ----------- ----------- ----------- -----------
Operating Income .......................... 16,654 178,243 10,781 (26,797) 155,040
OTHER INCOME (EXPENSE):
Interest expense, net .................. (25,736) (78,115) (18,471) (10,665) (78,660)
Distributions on trust securities ...... (106) (533) (903) (6,317)
Other - net ............................ 1,049 5,585 258 1,115 7,210
----------- ----------- ----------- ----------- -----------
(24,793) (73,063) (18,213) (10,453) (77,767)
----------- ----------- ----------- ----------- -----------
Income (loss) Before Income Taxes ......... (8,139) 105,180 (7,432) (37,250) 77,273
Income Tax Expense (Benefit) .............. (1,104) 53,759 (786) (14,013) 31,398
----------- ----------- ----------- ----------- -----------
Income Before Extraordinary Item .......... (7,035) 51,421 (6,646) (23,237) 45,875
Extraordinary gain on early retirement of
debt, less taxes ....................... 237
----------- ----------- ----------- ----------- -----------
Net Income (loss) ......................... $ (7,035) $ 51,421 $ (6,646) $ (23,237) $ 46,112
=========== =========== =========== =========== ===========
See Notes to NorAm's Unaudited Consolidated Financial Statements.
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NORAM ENERGY CORP. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(THOUSANDS OF DOLLARS)
(UNAUDITED)
ASSETS
SEPTEMBER 30, DECEMBER 31,
1998 1997
------------ ------------
PROPERTY, PLANT AND EQUIPMENT
Natural Gas Distribution ............................. $ 1,441,865 $ 1,326,442
Interstate Pipeline .................................. 1,284,127 1,258,087
Energy Marketing ..................................... 180,755 162,519
Other ................................................ 13,487 14,972
------------ ------------
Total ............................................ 2,920,234 2,762,020
Less accumulated depreciation and amortization ....... 160,936 59,531
------------ ------------
Property, plant and equipment - net .................. 2,759,298 2,702,489
------------ ------------
CURRENT ASSETS
Cash and cash equivalents ............................ 22,411 35,682
Accounts and notes receivable, principally customer .. 1,452,782 969,248
Accounts receivable - affiliated companies ........... 48,409 10,161
Income tax receivable ................................ 50,202 7,292
Gas in underground storage ........................... 102,516 63,702
Materials and supplies ............................... 41,822 29,611
Gas purchased in advance of delivery ................. 6,200 6,200
Fuel stock and petroleum products .................... 65,416 345
Other current assets ................................. 51,037 16,749
------------ ------------
Total current assets ............................. 1,840,795 1,138,990
------------ ------------
OTHER ASSETS
Goodwill, net ........................................ 2,060,712 2,026,395
Prepaid pension asset ................................ 71,357 92,064
Investment in marketable equity securities ........... 9,954 27,046
Regulatory asset for environmental costs ............. 20,736 21,745
Gas purchased in advance of delivery ................. 21,582 29,048
Deferred debits, net ................................. 86,692 93,010
------------ ------------
Total other assets ............................... 2,271,033 2,289,308
------------ ------------
TOTAL ASSETS ............................................. $ 6,871,126 $ 6,130,787
============ ============
See Notes to NorAm's Unaudited Consolidated Financial Statements
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NORAM ENERGY CORP. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(THOUSANDS OF DOLLARS)
(UNAUDITED)
LIABILITIES AND STOCKHOLDER'S EQUITY
September 30, December 31,
1998 1997
----------- -----------
STOCKHOLDER'S EQUITY:
Common stock ................................................... $ 1 $ 1
Paid-in capital ................................................ 2,463,831 2,463,831
Retained earnings .............................................. 72,268 20,847
Unrealized loss on marketable equity securities, net of tax .... (16,543) (5,634)
----------- -----------
Total stockholder's equity ................................. 2,519,557 2,479,045
----------- -----------
NORAM-OBLIGATED MANDATORILY REDEEMABLE CONVERTIBLE TRUST PREFERRED
SECURITIES OF SUBSIDIARY TRUST HOLDING SOLELY
SUBORDINATED DEBENTURES OF NORAM, NET .......................... 1,253 21,290
LONG-TERM DEBT, LESS CURRENT MATURITIES ............................ 999,211 916,703
CURRENT LIABILITIES:
Current maturities of long-term debt ........................... 354,962 232,145
Notes payable to banks ......................................... 205,600 390,000
Notes payable to parent ........................................ 22,100
Receivables facility ........................................... 300,000 300,000
Accounts payable, principally trade ............................ 1,201,686 668,269
Accounts payable - affiliated companies ........................ 141,368
Interest payable ............................................... 19,743 27,273
General taxes .................................................. 43,267 41,315
Customer deposits .............................................. 35,529 36,626
Other current liabilities ...................................... 132,351 133,278
----------- -----------
Total current liabilities .................................. 2,434,506 1,851,006
----------- -----------
DEFERRED CREDITS AND OTHER LIABILITIES:
Accumulated deferred income taxes .............................. 502,116 488,299
Estimated environmental remediation costs ...................... 20,736 21,745
Payable under capacity lease agreement ......................... 41,000 41,000
Benefit obligations ............................................ 194,968 182,687
Estimated obligations under indemnification provisions of sale
Agreements ..................................................... 6,581 11,391
Other .......................................................... 151,198 117,621
----------- -----------
Total deferred credits and other liabilities ............... 916,599 862,743
----------- -----------
Commitments and Contingencies
Total Liabilities and Stockholder's Equity ......................... $ 6,871,126 $ 6,130,787
=========== ===========
See Notes to NorAm's Unaudited Consolidated Financial Statements
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NORAM ENERGY CORP. AND SUBSIDIARIES
STATEMENTS OF CONSOLIDATED CASH FLOWS
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
(THOUSANDS OF DOLLARS)
(UNAUDITED)
CURRENT CURRENT FORMER
NORAM NORAM NORAM
------------ ------------ ------------
NINE MONTHS TWO MONTHS SEVEN MONTHS
ENDED ENDED ENDED
SEPTEMBER 30, SEPTEMBER 30, JULY 31,
1998 1997 1997
------------ ------------ ------------
Cash Flows from Operating Activities:
Net income ............................................................... $ 51,421 $ (6,646) $ 46,112
Adjustments to reconcile net income to net cash provided by
(used in) operating activities:
Depreciation and amortization ........................................ 144,305 31,798 84,901
Deferred income taxes ................................................ 19,339 8,748 14,589
Extraordinary (gain), less taxes ..................................... (237)
Changes in other assets and liabilities, net of the effects of the
acquisition:
Accounts and notes receivable-net ................................. (521,782) 11,805 313,586
Inventories ....................................................... (116,942) (30,749) 9,980
Other current assets .............................................. (18,056) (8,812) (1,128)
Accounts payable .................................................. 652,629 (63,621) (224,590)
Interest and taxes accrued ........................................ (55,780) (16,378) (19,996)
Other current liabilities ......................................... (34,844) 10,100 (22,633)
Other - net ....................................................... 72,028 (1,674) (1,312)
------------ ------------ ------------
Net cash provided by (used in) operating activities ........... 192,318 (65,429) 199,272
------------ ------------ ------------
Cash Flows from Investing Activities:
Purchase of NorAm, net cash acquired ..................................... (1,422,672)
Capital expenditures ..................................................... (184,301) (28,740) (88,638)
Other - net .............................................................. 4,032 (275) (6,424)
------------ ------------ ------------
Net cash used in investing activities ......................... (180,269) (1,451,687) (95,062)
------------ ------------ ------------
Cash Flows from Financing Activities:
Cash portion of capital contribution from Houston Industries ............. 1,426,067
Retirements and reacquisitions of long-term debt ......................... (76,000) (488) (230,667)
Issuance of bank term loan, due 1998 ..................................... 150,000
Proceeds from sale of debentures ......................................... 298,514
Increase (decrease) in notes payable ..................................... (216,931) 107,500 (42,500)
Increase in receivables facility ......................................... 19,000 41,000
Common and preferred stock dividends ..................................... (19,281)
Conversion of convertible securities ..................................... (10,399)
Other-net ................................................................ (20,504) (13,103) (27,348)
------------ ------------ ------------
Net cash provided by (used in) financing activities ........... (25,320) 1,538,976 (128,796)
------------ ------------ ------------
Net Increase (Decrease) in Cash and Cash Equivalents ......................... (13,271) 21,860 (24,586)
Cash and Cash Equivalents at Beginning of the Period ......................... 35,682 27,981
------------ ------------ ------------
Cash and Cash Equivalents at End of the Period ............................... $ 22,411 $ 21,860 $ 3,395
============ ============ ============
Supplemental Disclosure of Cash Flow Information:
Interest (net of amounts capitalized) .................................... $ 43,783 $ 25,600 $ 67,100
Income taxes, net ........................................................ (17,265) 13,000 20,900
Notes to NorAm's Unaudited Consolidated Financial Statements.
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NORAM ENERGY CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDER'S EQUITY
(THOUSANDS OF DOLLARS)
(UNAUDITED)
UNREALIZED
GAIN (LOSS)
RETAINED ON MARKETABLE
COMMON STOCK(1) PAID-IN EARNINGS SECURITIES
------------ ------------ ------------ ------------ ------------ ------------
SHARES AMOUNT CAPITAL (DEFICIT) NET OF TAX TOTAL
------------ ------------ ------------ ------------ ------------ ------------
FORMER NORAM:
Balance at January 1, 1997 ............. 137,908,173 $ 86,193 $ 1,001,053 $ (286,703) $ 5 $ 800,548
Net Income ............................. 46,112 46,112
CASH DIVIDENDS:
Common stock - $0.07 per share ......... (19,281) (19,281)
Change in Market Value of Marketable 5,874 5,874
Equity Securities, net of tax .......
Conversion of NorAm-Obligated
Mandatorily Redeemable Convertible
Trust Preferred Securities of
Subsidiary Trust Holding Solely
Subordinated Debentures of NorAm to
Common Stock ......................... 11,428,262 7,143 131,425 138,568
Other Issuances ........................ 347,527 216 5,796 6,012
------------ ------------ ------------ ------------ ------------ ------------
BALANCE AT JULY 31, 1997 ............... 149,683,962 93,552 1,138,274 (259,872) 5,879 977,833
------------ ------------ ------------ ------------ ------------ ------------
CURRENT NORAM (POST MERGER):
ADJUSTMENTS DUE TO MERGER:
Eliminate Former NorAm Balances ........ (149,683,962) (93,552) (1,138,274) 259,872 (5,879) (977,833)
Capital Contribution from Parent ....... 1,000 1 2,460,233 2,460,234
Net Income ............................. (6,646) (6,646)
Change in Market Value of Marketable
Equity Securities, net of tax ........ 3,809 3,809
------------ ------------ ------------ ------------ ------------ ------------
BALANCE AT SEPTEMBER 30, 1997 .......... 1,000 1 2,460,233 (6,646) 3,809 2,457,397
------------ ------------ ------------ ------------ ------------ ------------
Capital contribution from Parent ....... 3,598 3,598
Net Income ............................. 27,493 27,493
Change in Market Value of Marketable
Equity Securities, net of tax ........ (9,443) (9,443)
------------ ------------ ------------ ------------ ------------ ------------
BALANCE AT DECEMBER 31, 1997 ........... 1,000 1 2,463,831 20,847 (5,634) 2,479,045
------------ ------------ ------------ ------------ ------------ ------------
Net Income ............................. 51,421 51,421
Change in Market Value of Marketable
Equity Securities, net of tax ....... (10,909) (10,909)
------------ ------------ ------------ ------------- ------------ ------------
BALANCE AT SEPTEMBER 30, 1998 .......... 1,000 $ 1 $ 2,463,831 $ 72,268 $ (16,543) $ 2,519,557
------------ ------------ ------------ ------------- ------------ ------------
(1) $.625 par, authorized 250,000,000 shares. On the Acquisition Date, NorAm's
pre-merger common stock was canceled and replaced with 1,000 shares of
common stock (all of which are owned by Houston Industries).
See Notes to NorAm's Unaudited Consolidated Financial Statements.
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NORAM ENERGY CORP. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(1) BASIS OF PRESENTATION
On August 6, 1997 (Acquisition Date), Houston Industries Incorporated
(Former HI) merged with and into Houston Lighting & Power Company, which was
renamed "Houston Industries Incorporated" (Houston Industries), and NorAm Energy
Corp. (Former NorAm) merged with and into a subsidiary of Houston Industries, 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 NorAm was converted into the right to receive $16.3051 cash or 0.74963
shares of common stock of Houston Industries. For more information regarding the
Merger, see Note 2 below.
The unaudited interim financial statements and notes (NorAm's Interim
Financial Statements) in this Form 10-Q (Form 10-Q) include the accounts of
NorAm and its wholly owned subsidiaries. NorAm's Interim Financial Statements
omit certain information included in financial statements prepared in accordance
with generally accepted accounting principles and should be read in combination
with the joint Annual Report on Form 10-K (Form 10-K) of Houston Industries
(File No. 1-3187) and NorAm (File No. 1-13265) for the year ended December 31,
1997. The Form 10-K includes the consolidated financial statements of Houston
Industries (Houston Industries' 10-K Financial Statements) and the Consolidated
Financial Statements of NorAm (NorAm's 10-K Financial Statements) for the year
ended December 31, 1997. For additional information regarding the presentation
of interim period results, see Note 6 below.
The following notes to NorAm's Form 10-K Financial Statements relate to
material contingencies. These notes, as updated by the notes contained in
NorAm's Interim Financial Statements, are incorporated herein by reference and
include the following:
Note 1(c) (Regulatory Assets and Regulation), Note 2 (Derivative
Financial Instruments (Risk Management)) and Note 8 (Commitments and
Contingencies).
(2) 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 Houston Industries common stock valued at approximately $1.0 billion.
The overall transaction was valued at $4.0 billion consisting of $2.4 billion
paid for Former NorAm's common stock and common stock equivalents and $1.6
billion of Former NorAm's debt ($1.3 billion of which was long-term debt).
The Merger was recorded under the purchase method of accounting with
assets and liabilities of NorAm reflected at their estimated fair values as of
the Acquisition Date, resulting in a "new basis" of accounting. In NorAm's
Interim Financial Statements, periods which reflect the new basis of accounting
are labeled as "Current NorAm" and periods which do not reflect the new basis of
accounting are labeled as "Former NorAm."
NorAm's Consolidated Balance Sheets for periods after the Acquisition
Date reflect adjustments associated with Houston Industries' assignment of the
purchase price to certain assets of NorAm, principally
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consisting of (1) the revaluation of certain property, plant and equipment and
long-term debt to their estimated fair market value, (2) the recognition of
certain pension and postretirement benefit obligations previously being
recognized through amortization, (3) the recognition of goodwill as described
above, (4) the elimination of NorAm's historical goodwill, (5) the elimination
of NorAm's historical stockholders' equity balances and accumulated depreciation
and amortization as of the Acquisition Date and (6) the recognition of the
associated deferred income tax effects. In addition, NorAm's pre-merger common
stock was canceled and replaced with 1,000 shares of common stock (all of which
are owned by Houston Industries), rendering presentation of per share data no
longer meaningful. Houston Industries' debt to fund the cash portion of the
purchase consideration has not been allocated or "pushed down" to NorAm and is
not reflected on NorAm's Interim Financial Statements.
NorAm's Statements of Consolidated Income for periods after the
Acquisition Date are principally affected by (1) the amortization (over 40
years) of the newly-recognized goodwill, partially offset by the elimination of
the amortization of NorAm's historical goodwill, (2) the amortization (to
interest expense) of the revaluation of long-term debt, (3) the removal of the
amortization (to operating expense) previously associated with the pension and
postretirement obligations as described above and (4) the deferred income tax
expense associated with these adjustments. Interest expense on Houston
Industries' debt which was used to fund the cash portion of the acquisition has
not been allocated or "pushed down" to NorAm and is not reflected on NorAm's
Interim Financial Statements. For these reasons, among others, certain financial
information for periods before and after the Acquisition Date is not comparable.
If the Merger had occurred on January 1, 1997, NorAm's unaudited pro
forma net loss for the third quarter of 1997 would have been $22 million and
NorAm's unaudited pro forma net loss for the first nine months of 1997 would
have been $39 million. Pro forma results are based on assumptions deemed
appropriate by NorAm's management, have been prepared for informational purposes
only and are not necessarily indicative of the results which would have resulted
had the Merger actually taken place on the date indicated.
(3) COMPREHENSIVE INCOME
Effective January 1, 1998, the Company adopted Statement of Financial
Accounting Standards (SFAS) No. 130, "Reporting Comprehensive Income" (SFAS No.
130). "Comprehensive income" is defined to include all changes in stockholders'
equity during a reporting period except changes resulting from investments by
stockholders and distributions to stockholders. NorAm's comprehensive income
consists of net income (loss) and unrealized gains or losses on NorAm's
investment in marketable equity securities.
For the three months ended September 30, 1998, NorAm's total
comprehensive loss was $13 million compared to $34 million in the corresponding
period in 1997. For the nine months ended September 30, 1998, NorAm's total
comprehensive income was $41 million compared to $43 million in the
corresponding period in 1997.
Under SFAS No. 130, NorAm will begin to report and separately display
total comprehensive income and the components that comprise comprehensive income
in the year-end financial statements appearing in NorAm's Annual Report on 10-K
for the year ending 1998 and subsequent annual reports.
(4) DEPRECIATION
NorAm calculates depreciation using the straight-line method. NorAm's
depreciation expense for the third quarter and nine months ended September 30,
1998 was $40 million and $103 million, respectively.
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(5) LONG-TERM DEBT AND SHORT-TERM FINANCINGS
During the third quarter of 1998, NorAm repurchased $6 million
aggregate principal amount of its 6% convertible subordinated debentures due
2012 at an average purchase price equal to 97.4% of the aggregate principal
amount of the debentures, plus accrued interest. NorAm expects to use the
repurchased debentures to satisfy part of the debentures' sinking fund
requirements in March 1999 and March 2000.
Series Principal Amount
----------------------------- ------------------
9.07% due July 20, 1998 $ 15.0 million
8.60% due September 1, 1998 3.0 million
8.58% due September 1, 1998 5.0 million
8.64% due September 4, 1998 12.5 million
8.50% due September 14, 1998 0.5 million
8.60% due September 15, 1998 6.0 million
8.43% due September 17, 1998 5.0 million
------------------
Total $ 47.0 million
==================
At September 30, 1998, NorAm had $206 million in commercial paper
borrowings supported by a $350 million revolving credit facility (NorAm Credit
Facility). At such date, the weighted average interest rate of borrowings under
this facility was 5.94%. Under a trade receivables facility that expires in
August 1999, NorAm sells with limited recourse an undivided interest (limited to
a maximum of $300 million) in a designated pool of accounts receivable. The
amount of receivables sold and uncollected at September 30, 1998, was $300
million. The weighted average interest rate at such date was 5.5%. For
additional information regarding NorAm's trade receivables facility, see Note
4(a) to NorAm's 10-K Financial Statements.
For information regarding NorAm's issuance in the fourth quarter of
1998 of $500 million aggregate principal amount of debt securities, see Note
7.
For information regarding NorAm's repayment at maturity of $28 million
of its medium-term notes (having an average interest rate of 8.74%), see Note 5
to NorAm's Interim Financial Statements in the Second Quarter 10-Q. For
information regarding (i) NorAm's issuance in February 1998 of $300 million
principal amount of 6.5% debentures due February 1, 2008, (ii) NorAm's repayment
at maturity of $1 million of its 9.30% medium-term notes and (iii) NorAm's
satisfaction of the $6.5 million sinking fund requirement for its 6% convertible
subordinated debentures due 2012 using debentures purchased in 1996 and 1997,
see Note 5 to NorAm's Interim Financial Statements in the First Quarter 10-Q.
(6) NORAM OBLIGATED MANDATORILY REDEEMABLE TRUST SECURITIES OF SUBSIDIARY
TRUSTS HOLDING SOLELY SUBORDINATED DEBENTURES OF NORAM.
For information regarding $177.8 million of convertible preferred
securities issued by a statutory business trust formed by Former NorAm, of which
$1.3 million were outstanding at September 30, 1998, see Note 5 to NorAm's Form
10-K Financial Statements. The sole asset of the trust consists of junior
subordinated debentures of NorAm having interest rates and maturity dates
corresponding to the preferred securities, and the principal amount
corresponding to the common and preferred securities issued by the trust.
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(7) SUBSEQUENT EVENTS
In November 1998, NorAm sold $500 million aggregate principal amount of
its 6 3/8% Term Enhanced ReMarketable Securities (TERM Notes). The net proceeds
of $514 million from the offering of the TERM Notes and from the sale of the
related option to remarket the TERM notes (as described below) will be used for
general corporate purposes, including the repayment of (i) $178.5 million of
NorAm's outstanding commercial paper and (ii) a $150 million term loan of NorAm
that matures on November 13, 1998. The TERM Notes are unsecured obligations of
NorAm which bear interest at the annual rate of 6 3/8% through November 1, 2003.
On November 1, 2003, the holders of the TERM Notes are required to tender their
notes at 100% of their principal amount. Concurrent with the offering, NorAm
received proceeds of $18.375 million from the sale of an option to remarket the
notes in 2003. The proceeds received from the sale of the option will be
amortized over the stated term of the securities. If the option is not
exercised, NorAm will repurchase the TERM Notes at 100% of their principal
amount on November 1, 2003. If the option is exercised, the TERM Notes will be
remarketed on a date, selected by NorAm, within the 52-week period beginning
November 1, 2003. During such period and prior to remarketing, the TERM Notes
will bear interest at rates, adjusted weekly, based on index selected by NorAm.
If the TERM Notes are remarketed, the final maturity date of the TERM Notes will
be November 1, 2013, subject to adjustment, and the effective interest rate on
the remarketed TERM Notes will be 5.66% plus the Company's applicable credit
spread at the time of such remarketing.
(8) INTERIM PERIOD RESULTS: RECLASSIFICATIONS
NorAm's 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 operations 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 Merger, (ii) seasonal temperature variation
affecting 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 NorAm's presentation of financial statements in the
current year. Such reclassifications do not affect earnings.
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ITEM 2. MANAGEMENT'S NARRATIVE ANALYSIS OF THE RESULTS OF OPERATIONS OF NORAM
ENERGY CORP. AND CONSOLIDATED SUBSIDIARIES.
NorAm Energy Corp. (NorAm) meets the conditions specified in General
Instruction H to Form 10-Q and is thereby permitted to use the reduced
disclosure format for wholly owned subsidiaries of reporting companies
specified therein. Accordingly, NorAm has omitted from this Form 10-Q the
information called for by Item 3 (Quantitative and Qualitative Disclosures
about Market Risk) of Part I and the following Part II items of Form 10-Q: Item
2 (Changes in Securities and Use of Proceeds), Item 3 (Defaults Upon Senior
Securities), and Item 4 (Submission of Matters to a Vote of Security Holders).
In lieu of the information called for by Item 2 (Management's Discussion and
Analysis of Financial Condition and Results of Operations) of Form 10-Q, NorAm
has included the following Management's Narrative Analysis of the Results of
Operations of NorAm Energy Corp. and Consolidated Subsidiaries to explain
material changes in the amount of revenue and expense items of NorAm between
the third quarter and first nine months of 1998 and the third quarter and first
nine months of 1997, respectively. Reference is made to Management's Narrative
Analysis of the Results of Operations of NorAm and consolidated subsidiaries in
Item 7 of the Form 10-K, NorAm's consolidated financial statements and notes
contained in Item 8 of the Form 10-K and NorAm's Interim Financial Statements
contained in this Form 10-Q. For a discussion of the qualifications and
assumptions underlying the use of forward looking information, see Item 5 of
this Form 10-Q.
NORAM ENERGY CORP.
NorAm conducts operations primarily in the natural gas industry,
including gathering, transmission, marketing, storage and distribution.
Collectively, these operations accounted for in excess of 95% of NorAm's total
revenues, income or loss and identifiable assets in the third quarter and first
nine months of 1998. Accordingly, NorAm is not required to report on a
"segment" basis, although NorAm is organized into, and the following business
description focuses on, the operating units described below. NorAm also makes
sales of electricity, non-energy sales and provides certain non-energy
services, primarily to retail gas distribution customers. In recognition of the
manner in which NorAm manages its portfolio of businesses, NorAm has segregated
its results of operations into: Natural Gas Distribution, Interstate Pipeline,
Energy Marketing and Corporate.
On August 6, 1997 (Acquisition Date), NorAm became a wholly owned
subsidiary of Houston Industries Incorporated (Houston Industries) in a
transaction involving the merger (Merger) of NorAm Energy Corp. (Former NorAm)
with and into a subsidiary of Houston Industries. For additional information
regarding Houston Industries' acquisition of NorAm, see Note 2 to NorAm's
Interim Financial Statements.
CONSOLIDATED RESULTS OF OPERATIONS
Seasonality and Other Factors. NorAm's results of operations are
seasonal due to fluctuations in the demand for and, to a lesser extent, the
price of natural gas. NorAm's results of operations are also affected by, among
other things, the actions of various federal and state governmental authorities
having jurisdiction over rates charged by NorAm and its subsidiaries,
competition in NorAm's various business operations, debt service costs and
income tax expense. For a discussion of certain other factors that may affect
NorAm's future earnings see "Management's Discussion and Analysis of Financial
Condition and Results of Operations of the Company - Certain Factors Affecting
Future Earnings of the Company and its Subsidiaries - Competition - Other
Operations, - Impact of the Year 2000 Issue and Other System Implementation
Issues, and - Environmental Expenditures" in the Form 10-K.
51
55
Accounting Impact of the Merger. The Merger created a new basis of
accounting for NorAm, resulting in new carrying values for certain of NorAm's
assets, liabilities and equity commencing upon the Acquisition Date. NorAm's
Statements of Consolidated Income for periods after the Acquisition Date are
principally affected by (1) the amortization (over 40 years) of the
newly-recognized goodwill, partially offset by the elimination of the
amortization of NorAm's historical goodwill, (2) the amortization (to interest
expense) of the revaluation of long-term debt, (3) the removal of the
amortization (to operating expense) previously associated with the pension and
post-retirement obligations and (4) the deferred income tax expense associated
with these adjustments. Interest expense on Houston Industries' debt which was
used to fund the cash portion of the acquisition has not been allocated or
"pushed down" to NorAm and is not reflected on NorAm's Interim Financial
Statements. For these reasons, among others, certain financial information for
periods before and after the Acquisition Date is not comparable.
Because results of operations and other financial information for
periods before and after the Acquisition Date are not comparable, NorAm is
presenting certain financial data on an actual basis and on a pro forma basis
as if the Merger had taken place at the beginning of the period presented.
These results do not necessarily reflect the results which would have been
obtained if the Merger had actually occurred on the dates indicated or the
results that may be expected in the future.
The following table sets forth selected financial and operating data
on an actual basis for the third quarters and nine months ended September 30,
1998 and 1997 and on a pro forma basis for the third quarter and nine months
ended September 30, 1997, followed by a discussion of significant variances in
period-to-period results:
SELECTED FINANCIAL RESULTS:
THREE MONTHS ENDED SEPTEMBER 30,
--------------------------------------------------- ----------------
1998 1997 1997 PERCENTAGE
(ACTUAL) (ACTUAL) (1) (PRO FORMA) (2) CHANGE
------------ ------------ --------------- ----------------
(THOUSANDS OF DOLLARS) (1998 ACTUAL TO
OPERATING REVENUES: ........................ 1997 PRO FORMA)
Natural Gas Distribution ................ $ 249,004 $ 272,201 $ 272,201 (9%)
Interstate Pipeline ..................... 70,394 67,651 67,651 4%
Energy Marketing ........................ 1,642,374 842,034 842,034 95%
Corporate and Other ..................... 24,047 22,087 22,087 9%
Elimination of Intersegment Revenue(3) .. (55,356) (57,693) (57,693) 4%
------------ ------------ ------------
$ 1,930,463 $ 1,146,280 $ 1,146,280 68%
============ ============ ============
Operating Income (Loss):
Natural Gas Distribution ................ (20,324) (12,735) (15,000) (35%)
Interstate Pipeline ..................... 27,421 21,090 19,747 39%
Energy Marketing ........................ 7,439 769
Corporate and Other ..................... 2,118 (8,379) (7,185) 129%
------------ ------------ ------------
16,654 745 (2,438)
Merger Transaction Costs (4) .............. 16,761 843 (100%)
------------ ------------ ------------
Consolidated ............................... 16,654 (16,016) (3,281) 608%
Interest Expense, Net ...................... 25,736 29,136 26,376 (2%)
Distributions on Subsidiary Trust Securities 106 903 903 (88%)
Other (Income) and Deductions .............. (1,049) (1,373) (1,373) 24%
Income Tax Expense (Benefit) ............... (1,104) (14,799) (7,099) 84%
============ ============ ============
Net Income (Loss) ....................... $ (7,035) $ (29,883) $ (22,088) 68%
============ ============ ============
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NINE MONTHS ENDED SEPTEMBER 30,
--------------------------------------------------- ---------------
1998 1997 1997 PERCENTAGE
(ACTUAL) (ACTUAL) (1) (PRO FORMA) (2) CHANGE
------------ ------------ --------------- ---------------
(THOUSANDS OF DOLLARS) (1998 ACTUAL TO
OPERATING REVENUES: ........................ 1997 PRO FORMA)
Natural Gas Distribution ..................... $ 1,280,889 $ 1,490,020 $ 1,490,020 (14%)
Interstate Pipeline .......................... 217,891 225,746 225,746 (3%)
Energy Marketing ............................. 3,730,602 2,535,348 2,535,348 47%
Corporate and Other .......................... 59,773 57,517 57,517 4%
Elimination of Intersegment Revenues(3) ...... (216,186) (222,171) (222,171) 3%
------------ ------------ ------------
$ 5,072,969 $ 4,086,460 $ 4,086,460 24%
============ ============ ============
OPERATING INCOME (LOSS):
Natural Gas Distribution ..................... 75,124 105,695 92,000 (18%)
Interstate Pipeline .......................... 92,343 90,467 81,000 14%
Energy Marketing ............................. 10,834 7,982 4,000 171%
Corporate and Other .......................... (58) (20,224) (15,362) 100%
------------ ------------ ------------
178,243 183,920 161,638 10%
Merger Transaction Costs(4) ..................... 18,099 843 (100%)
------------ ------------ ------------
Consolidated .................................... 178,243 165,821 160,795
Interest Expense, Net ........................... 78,115 97,131 77,817 0%
Distributions on Subsidiary Trust Securities .... 533 6,317 6,317 (92%)
Other (Income) and Deductions ................... (5,585) (7,468) (7,467) 25%
Income Tax Expense .............................. 53,759 30,612 45,805 17%
------------ ------------ ------------
Income Before Extraordinary Item ................ 51,421 39,229 38,323 34%
Extraordinary Item .............................. 237 237 (100%)
------------ ------------ ------------
Net Income ...................................... $ 51,421 $ 39,466 $ 38,560 33%
============ ============ ============
(1) 1997 (Actual) includes two months of Current NorAm and seven months of
Former NorAm.
(2) Pro forma results reflect purchase accounting adjustments as if the Merger
had occurred on January 1, 1997. Adjustments for goodwill have been
allocated to the respective business units.
(3) Elimination of operating revenues derived from sales to affiliated business
units.
(4) Expenses associated with completion of the business combination with
Houston Industries. See Note 2 of the accompanying Notes to Consolidated
Financial Statements.
Third Quarter of 1998 Compared to Third Quarter of 1997 (Actual).
NorAm had a consolidated net loss of $7 million for the third quarter of 1998
compared to a net loss of $30 million in the same period in 1997. The net loss
for the third quarter of 1997 included $17 million of expenses associated with
completion of the acquisition of NorAm by Houston Industries. Excluding these
costs, earnings for the third quarter of 1998 increased $13 million compared to
the same period of 1997. The increase in earnings is primarily attributable to
increased operating income at Interstate Pipeline and Energy Marketing and
reduced expenses at Corporate, partially offset by the purchase accounting
effects of the Merger, including the amortization of goodwill and adjustments
to interest expense and decreased operating income at Natural Gas Distribution.
Third Quarter of 1998 Actual Compared to Third Quarter of 1997 (Pro
Forma). NorAm had a consolidated net loss of $7 million for the third quarter
of 1998 compared to a pro forma consolidated net loss of $22 million in the
same period in 1997. The increase in earnings is primarily attributable to
increased operating income at Interstate Pipeline and Energy Marketing and
reduced expenses at Corporate, partially offset by decreased operating income
at Natural Gas Distribution, as described below.
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57
Nine Months Ended September 30, 1998 Compared to Nine Months Ended
September 30, 1997 (Actual). NorAm had consolidated net income of $51 million
for the nine months ended September 30, 1998 compared to net income of $39
million in the same period in 1997. The increase in earnings is primarily
attributable to increased operating income at Interstate Pipeline and Energy
Marketing and reduced expenses at Corporate, partially offset by the purchase
accounting effects of the Merger, including the amortization of goodwill and
adjustments to interest expense and decreased operating income at Natural Gas
Distribution, as described below.
Nine Months Ended September 30, 1998 Actual Compared to 1997 Pro
Forma. NorAm had consolidated net income of $51 million for the nine months
ended September 30, 1998 compared to pro forma net income of $39 million in the
nine months ended September 30, 1997. The increase in earnings is primarily
attributable to increased operating income at Interstate Pipeline and Energy
Marketing and reduced expenses at Corporate, partially offset by decreased
operating income at Natural Gas Distribution, as described below.
RESULTS OF OPERATIONS BY BUSINESS UNIT
NATURAL GAS DISTRIBUTION
Natural Gas Distribution operations are conducted through the Arkla,
Entex and Minnegasco divisions of NorAm. These operations consist of natural
gas sales to, and natural gas transportation for, residential, commercial and
certain industrial customers in six states: Arkansas, Louisiana, Minnesota,
Mississippi, Oklahoma and Texas.
The following table provides summary data regarding the results of
operations of Natural Gas Distribution, including operating statistics, on an
actual basis for the third quarter and nine month periods ended September 30,
1998 and on a pro forma basis for the third quarter and nine month periods
ended September 30, 1997 (as if the acquisition of NorAm by Houston Industries
had occurred as of January 1, 1997).
THREE MONTHS ENDED
SEPTEMBER 30,
-------------------------- PERCENT
1998 1997 CHANGE
---------- ---------- ----------
(ACTUAL) (PRO FORMA)
(IN MILLIONS)
Operating Revenues .................................... $ 249 $ 272 (8%)
Operating Expenses:
Natural Gas ...................................... 126 145 (13%)
Operation and Maintenance ........................ 91 90 1%
Depreciation and Amortization .................... 33 31 6%
Other Operating Expenses ......................... 19 21 (10%)
---------- ----------
Total Operating Expenses ..................... 269 287 (6%)
---------- ----------
Operating Loss ........................................ $ (20) $ (15) (33%)
========== ==========
Throughput Data (in Bcf):
Residential and Commercial Sales ................. 31 32 (3%)
Industrial Sales ................................. 14 14 --
Transportation ................................... 9 9 --
---------- ----------
Total Throughput .............................. 54 55 (2%)
========== ==========
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58
NINE MONTHS ENDED
SEPTEMBER 30,
------------------------- PERCENT
1998 1997 CHANGE
---------- ---------- ----------
(ACTUAL) (PRO FORMA)
(IN MILLIONS)
Operating Revenues .................................... $ 1,281 $ 1,490 (14%)
Operating Expenses:
Natural Gas ...................................... 757 948 (20%)
Operation and Maintenance ........................ 282 283 --
Depreciation and Amortization .................... 97 92 5%
Other Operating Expenses ......................... 70 75 (7%)
---------- ----------
Total Operating Expenses ..................... 1,206 1,398 (14%)
---------- ----------
Operating Income ...................................... $ 75 $ 92 (18%)
========== ==========
Throughput Data (in Bcf):
Residential and Commercial Sales ................. 200 220 (9%)
Industrial Sales ................................. 42 42 --
Transportation ................................... 32 31 3%
---------- ----------
Total Throughput .............................. 274 293 (6%)
========== ==========
Natural Gas Distribution's operating loss increased $5 million in the
third quarter of 1998, over its $15 million pro forma operating loss in the
same period of 1997. The third quarter of 1997 included approximately $4
million non-recurring income recorded in connection with the successful appeal
of the Minnegasco division's 1993 and 1995 rate cases.
Operating income for the nine month period ended September 30, 1998
decreased $17 million compared to pro forma operating income in the same period
of 1997. The $17 million decrease in operating income is due primarily to (i)
milder winter weather in the first three months of 1998, (ii) the impact in
1997 of the Minnegasco division's rate case appeal as discussed above and (iii)
lower demand for natural gas heating in the second and third quarters of 1998.
The decrease in operating income was partially offset by reduced charges at
Arkla associated with the methodology of calculating the price of gas charged
to customers (the Purchased Gas Adjustment).
Natural Gas Distribution operating revenues decreased $23 million and
$209 million for the third quarter and nine months ended September 30, 1998,
respectively, compared to pro forma operating revenues for the corresponding
periods of 1997 due principally to (i) the weather-related factors decline in
customer usage and (ii) lower natural gas prices. In addition, the impact in
1997 of the Minnegasco division's rate case appeal (as discussed above) also
resulted in higher revenues in 1997 compared to 1998.
Operating expenses decreased $18 million and $192 million in the third
quarter and nine months ended September 30, 1998, respectively, compared to pro
forma operating expenses in the same period of 1997 due primarily to the
reduced cost of gas and the Purchased Gas Adjustment.
Demand for natural gas distribution services is seasonal in nature,
reflecting the higher demand for natural gas for use in heating in the winter
months.
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INTERSTATE PIPELINE
Interstate Pipeline operations are conducted primarily 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, Kansas, Louisiana, Mississippi, Missouri, 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 following table provides summary data regarding the results of
operations of Interstate Pipeline, including operating statistics, on an actual
basis for the third quarter and nine months ended September 30, 1998 and on a
pro forma basis for third quarter and nine months ended September 30, 1997 (as
if the acquisition of NorAm by Houston Industries had occurred as of January 1,
1997).
THREE MONTHS ENDED
SEPTEMBER 30,
-------------------------- PERCENT
1998 1997 CHANGE
---------- ---------- -----------
(ACTUAL) (PRO FORMA)
(IN MILLIONS)
Operating Revenues ..................................... $ 70 $ 67 4%
Operating Expenses:
Natural Gas ....................................... 6 10 (40%)
Operation and Maintenance ......................... 20 20 --
Depreciation and Amortization ..................... 13 13 --
Other Operating Expenses .......................... 4 4 --
---------- ----------
Total Operating Expenses ..................... 43 47 (9%)
---------- ----------
Operating Income ....................................... $ 27 $ 20 35%
========== ==========
Throughput Data (in million MMBtu):
Natural Gas Sales .................................. 4 4 --
Transportation ...................................... 186 205 (9%)
Elimination (1) ................................ (4) (4) --
---------- ----------
Total Throughput ....................................... 186 205 (9%)
========== ==========
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60
NINE MONTHS ENDED
SEPTEMBER 30,
-------------------------- PERCENT
1998 1997 CHANGE
---------- ---------- ----------
(ACTUAL) (PRO FORMA)
(IN MILLIONS)
Operating Revenues .................................... $ 218 $ 226 (4%)
Operating Expenses:
Natural Gas ...................................... 22 29 (24%)
Operation and Maintenance ........................ 60 66 (9%)
Depreciation and Amortization .................... 32 39 (18%)
Other Operating Expenses ......................... 12 11 9%
---------- ----------
Total Operating Expenses .................... 126 145 (13%)
---------- ----------
Operating Income ...................................... $ 92 $ 81 14%
========== ==========
Throughput Data (in million MMBtu):
Natural Gas Sales .................................. 12 14 (14%)
Transportation ..................................... 610 667 (9%)
Elimination (1) ............................... (11) (13) 15%
---------- ----------
Total Throughput ...................................... 611 668 (9%)
========== ==========
- -------------
(1) ELIMINATION REFERS TO VOLUMES OF NATURAL GAS BOTH TRANSPORTED AND SOLD BY
INTERSTATE PIPELINE AND, THEREFORE, EXCLUDED FROM TOTAL THROUGHPUT.
Interstate Pipeline operating income increased $7 million and $11
million in the third quarter and nine months ended September 30, 1998,
respectively, over pro forma operating income for the same periods in 1997.
The increase in operating income for the third quarter of 1998 is primarily due
to improved operating margins and reductions in the cost of natural gas, as
discussed below. The increase in operating income for the nine month period of
1998 is primarily due to $11 million of pre-tax non-recurring items recorded in
1998 for litigation and rate case settlements as well as improved operating
margins and reductions in operating expenses. The increase in operating income
in the nine month period ended September 30, 1998 was offset by $7 million of
non-recurring transportation revenues recorded in the first quarter of 1997, as
discussed below.
Operating revenues for Interstate Pipeline increased $3 million in the
third quarter of 1998, over pro forma operating revenues for the same period in
1997. This increase in operating revenues is primarily due to a weather-
related demand for natural gas used to fuel electric generation plants during
the summer cooling season.
Operating revenues decreased $8 million in the nine month period ended
September 30, 1998, from pro forma operating revenues for the same period in
1997. The decrease in revenues is due in part to $7 million of non-recurring
transportation revenues recognized in the first quarter of 1997. These
revenues were recognized following a settlement with the Arkla division of
NorAm related to service provided in several of Arkla's operating
jurisdictions. In addition, the settlement with Arkla resulted in reduced
transportation rates, which also reduced revenues for the period. These
decreases were partially offset by (i) the settlement of outstanding gas
purchase contract litigation which resulted in the recognition of approximately
$6 million of revenues in the second quarter of 1998 and (ii) the factors
discussed above for the third quarter.
Natural gas expense decreased $4 million and $7 million in the third
quarter and nine months ended September 30, 1998, respectively, when compared
to pro forma natural gas expense in the same periods in 1997 primarily due to
lower gas sales volumes and lower prices for purchased gas.
57
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Operation and maintenance expense decreased $6 million in the nine
months ended September 30, 1998, respectively, in comparison to pro forma
operation and maintenance expense for the same period in 1997. The decrease
was primarily due to lower costs resulting from cost control initiatives and
decreased maintenance due to milder weather in the first quarter of 1998.
Depreciation expense decreased $7 million in the nine month period
ended September 30, 1998, compared to pro forma depreciation expense in the
same period of 1997 primarily due to a $5 million rate settlement recorded in
the first quarter of 1998. The rate settlement, effective January 1998,
provided for a reduction of MRT's depreciation rates retroactive to July 1996.
ENERGY MARKETING
Energy Marketing includes the operations of NorAm's wholesale energy
trading and marketing business, and retail energy marketing business and
natural gas gathering activities of NorAm (conducted, respectively, by NorAm
Energy Services, Inc. (NES), NorAm Energy Management, Inc. and NorAm Field
Services Corp., three wholly owned subsidiaries of NorAm).
The following table provides summary data regarding the results of
operations of Energy Marketing, including operating statistics, on an actual
basis for the third quarter and nine months ended September 30, 1998 and on a
pro forma basis for the third quarter and nine months ended September 30, 1997
(as if the acquisition of NorAm by Houston Industries had occurred as of
January 1, 1997).
THREE MONTHS ENDED
SEPTEMBER 30,
------------------------- PERCENT
1998 1997 CHANGE
---------- ---------- ----------
(ACTUAL) (PRO FORMA)
(IN MILLIONS)
Operating Revenues ...................................... $ 1,642 $ 842 95%
Operating Expenses:
Natural Gas ........................................ 687 587 17%
Purchased Power .................................... 906 220 312%
Operation and Maintenance .......................... 36 31 16%
Depreciation and Amortization ...................... 4 3 33%
Other Operating Expenses ........................... 2 1 100%
---------- ----------
Total Operating Expenses ...................... 1,635 842 94%
---------- ----------
Operating Income (Loss) ................................. $ 7 $ -- --
========== ==========
Operations Data:
Natural Gas (in Bcf):
Sales ............................................ 364 284 28%
Transportation ................................... 3 5 (40%)
Gathering ........................................ 60 60 --
---------- ----------
Total ....................................... 427 349 22%
---------- ----------
Electricity:
Wholesale Power Sales (in thousand MWH) .......... 22,353 8,099 176%
========== ==========
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NINE MONTHS ENDED
SEPTEMBER 30,
------------------------- PERCENT
1998 1997 CHANGE
---------- ---------- ----------
(ACTUAL) (PRO FORMA)
(IN MILLIONS)
Operating Revenues ...................................... $ 3,731 $ 2,535 47%
Operating Expenses:
Natural Gas ........................................ 2,012 2,022 --
Purchased Power .................................... 1,604 429 274%
Operation and Maintenance .......................... 89 69 29%
Depreciation and Amortization ...................... 10 8 25%
Other Operating Expenses ........................... 5 3 67%
---------- ----------
Total Operating Expenses ...................... 3,720 2,531 47%
---------- ----------
Operating Income ........................................ $ 11 $ 4 175%
========== ==========
Operations Data:
Natural Gas (in Bcf):
Sales ............................................ 1,013 878 15%
Transportation ................................... 16 17 (6%)
Gathering ........................................ 175 182 (4%)
---------- ----------
Total ....................................... 1,204 1,077 12%
========== ==========
Electricity:
Wholesale Power Sales (in thousand MWH) .......... 52,471 17,660 197%
========== ==========
Energy Marketing's operating income increased $7 million for both the
three and nine months ended September 30, 1998 over pro forma operating income
for the same periods in 1997. The increase in third quarter operating income
primarily reflects increased margins and sales volumes at NES for the third
quarter of 1998 compared to the same period of 1997. This increase was
partially offset by higher operating expenses as discussed below. Operating
income for the nine months ended September 30, 1997 included $17 million in
hedging losses associated with sales under peaking contracts and losses from
the sale of natural gas held in storage and unhedged in the first quarter of
1997.
Operating revenues for Energy Marketing increased $800 million and
$1.2 billion for the third quarter and nine months ended September 30, 1998,
respectively, when compared to the same periods in 1997 due primarily to
increases in wholesale power sales of $692 million and $1.2 billion in the
third quarter and nine month periods of 1998, respectively. The increases in
operating revenues and wholesale power sales were due to increased trading
activity in 1998.
Natural gas expenses increased $100 million for the third quarter of
1998, compared to the same period of 1997. This increase is attributable to
increased gas marketing activities, partially offset by a decrease in the price
of natural gas. In the nine months ended September 30, 1998, natural gas
expenses decreased $10 million when compared to the same period of 1997. This
decrease is due to the reduction in the price of natural gas in 1998 and the
impact of hedging losses in 1997 mentioned above, partially offset by increased
gas marketing activities.
Purchased power expenses increased $686 million and $1.2 billion for
the third quarter and nine months ended September 30, 1998, respectively,
compared to the same periods in 1997 due to increased power marketing
activities.
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63
Operation and maintenance expenses increased $5 million and $20
million for the third quarter and nine months ended September 30, 1998,
respectively, when compared to 1997 pro forma operation and maintenance
expenses for the same periods in 1997. This increase is largely due to
increased staffing in support of the expanded trading and marketing efforts at
NES. NorAm believes that NES' energy trading, marketing and risk management
services complement the development and/or acquisition of non-rate regulated
generation assets in other markets. As a result, NorAm has made, and expects
to continue to make, significant investments in developing NES' internal
software, trading and personnel resources. The increase in operation and
maintenance expenses for the nine month period ended September 30, 1998 is also
due to a $4 million expense associated with an increase in reserves due to
increased counter party credit and performance risk associated with higher
prices and higher volatility in the electric power market in the second quarter
of this year.
To minimize fluctuations in the price of natural gas and
transportation, NorAm, primarily through NES, enters into futures transactions,
swaps and options in order to hedge against market price changes affecting (i)
certain commitments to buy, sell and transport natural gas, (ii) existing gas
storage inventory and (iii) certain anticipated transactions, some of which
carry off-balance sheet risk. NES also enters into natural gas derivatives for
trading purposes and electricity derivatives for hedging and trading purposes.
For a discussion about the NorAm's treatment of derivative instruments, see
Note 2 to the NorAm's 10-K Financial Statements, Item 7A (Quantitative and
Qualitative Disclosure About Market Risk) in the Form 10-K, and Item 3
(Quantitative and Qualitative Disclosures About Market Risk) in this Form 10-Q.
CORPORATE
NorAm's corporate and other business (Corporate) includes the
operations of NorAm's unregulated retail services business, international
operations, certain real estate investments, corporate costs and elimination of
transactions between affiliated business units.
Corporate operating loss decreased $10 million and $20 million,
respectively, in the third quarter and nine months ended September 30, 1998
compared to the same periods of 1997. The decreases are primarily attributable
to reduced corporate expenses as a result of the Merger.
For information about the impact of year 2000 software issues, see
"Management's Discussion and Analysis and Financial Condition of Resulting
Operations - Certain Factors Affecting Future Earnings of the Company and its
Subsidiaries - Impact of Year 2000 Computer Software Issues." Based on current
internal studies, as well as recently solicited bids from various software
vendors, NorAm estimates that the total direct cost of resolving the year 2000
issue will be between $4.5 million and $5.5 million, of which $2.8 million has
already been expended.
NEW ACCOUNTING ISSUES
Reference is made to "Management's Discussion and Analysis of
Financial Condition and Results of Operations of NorAm's - New Accounting
Issues" in Item 2 (Houston Industries) in the Form 10-Q for a discussion of
certain new accounting issues.
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64
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
For a description of legal proceedings affecting the Company
and its subsidiaries, including NorAm, see (i) Part I, Item 3,
of the Company's Form 10-K, Notes 3, 5 and 12 to the Company's
Financial Statements in the Form 10-K and Note 8 to NorAm's
Financial Statements in the Form 10-K, (ii) Part II, Item 1,
of the First Quarter 10-Q, (iii) Part II, Item 1, of the
Second Quarter 10-Q and (iv) Note 10(a) to the Company's
Interim Financial Statements.
ITEM 5. OTHER INFORMATION.
Forward Looking Statements. From time to time, the Company and
NorAm may make statements regarding their assumptions,
projections, expectations, intentions, or beliefs about future
events. These statements and other statements that are not
historical facts are intended as "forward-looking statements"
under the Private Securities Litigation Reform Act of 1995.
The Company and NorAm caution that assumptions, projections,
expectations, intentions, or beliefs about future events may
and often do vary materially from actual results and the
differences between assumptions, projections, expectations,
intentions or beliefs and actual results can be material.
Accordingly, there can be no assurance actual results will not
differ materially from those expressed or implied by the
forward looking statements.
The following are some of the factors that could cause actual
results to differ from those expressed or implied in forward
looking statements: (i) state and federal legislative and
regulatory initiatives that affect cost and investment
recovery, have an impact on rate restructures and affect the
speed and degree to which competition enters the electric and
natural gas industries; (ii) industrial, commercial and
residential growth in service territories of the Company and
NorAm; (iv) the weather and other natural phenomena; (v) the
timing and extent of changes in commodity prices and interest
rates; (vi) changes in environmental and other laws and
regulations to which the Company, NorAm and their respective
subsidiaries are subject or other external factors over which
the Company and NorAm have no control; (vii) the results of
financing efforts; (viii) growth in opportunities for the
Company's and NorAm's subsidiaries and diversified operations;
(ix) risks incidental to the Company's overseas operations
(including the effects of fluctuations in foreign currency
exchange rates); (x) the effect of the Company's and NorAm's
accounting policies; and (xi) other factors discussed in this
and other filings by the Company and NorAm with the Securities
and Exchange Commission (SEC).
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.
Shareholder Proposals. In September 1998, the Board of
Directors of the Company amended the provisions of the
Company's bylaws that relate to certain resolutions or motions
proposed by the Company's shareholders. Under the amendments,
a resolution or motion proposed by a shareholder will be
considered for vote of the shareholders only if it meets the
criteria of Article II, Section 9 (Proper Business Annual
Meeting of Shareholders), or Article II,
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Section 10 (Proper Business - Special Meeting of
Shareholders), as the case may be. For additional information,
reference is made to the Company's Amended and Restated Bylaws
filed as exhibit 3 to this Form 10-Q.
Under applicable SEC regulations, the persons named in the
proxies solicited by the Company's Board of Directors may
exercise discretionary voting authority with respect to any
shareholder proposal (other than certain proposals submitted
for inclusion in a proxy statement) that are received on and
after February 10, 1999.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits.
Company:
Exhibit 3 - Amended and Restated Bylaws (adopted on September
2, 1998).
Exhibit 12 - Ratio of Earnings to Fixed Charges and Preferred
Dividends.
Exhibit 27 - Financial Data Schedule (included in electronic
filing only).
Exhibit 99(a) - Notes 1(c), 1(n), 2, 3, 4, 5 and 12 to the
Company's Financial Statements included on pages 64 through
65, 68 through 77 and 92 through 94 of the Form 10-K.
NorAm:
Exhibit 12 - Ratio of Earnings to Fixed Charges and Preferred
Dividends
Exhibit 27 - Financial Data Schedule (included in electronic
filing only) .
Exhibit 99(a) - Notes 1(c), 2 and 8 to the NorAm Financial
Statements included on pages 116 through 121 and pages 132
through 135 of the Form 10-K.
(b) Reports on Form 8-K.
Company:
Form 8-K (Item 5 Other Events) dated October 13, 1998, and
filed on October 21, 1998
NorAm:
Form 8-K (Item 5 Other Events) dated November 5, 1998, and
filed on November 10, 1998
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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
--------------------------------
Vice President and Comptroller
(Principal Accounting Officer)
Date: November 12, 1998
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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.
NORAM ENERGY CORP.
(Registrant)
/s/ Mary P. Ricciardello
------------------------------
Vice President and Comptroller
(Principal Accounting Officer)
Date: November 12, 1998
68
INDEX TO EXHIBITS
EXHIBITS DESCRIPTION
COMPANY:
Exhibit 3 - Amended and Restated Bylaws (adopted on September 2, 1998).
Exhibit 12 - Ratio of Earnings to Fixed Charges and Preferred Dividends.
Exhibit 27 - Financial Data Schedule (included in electronic filing only).
Exhibit 99(a) - Notes 1(c), 1(n), 2, 3, 4, 5 and 12 to the Company's Financial
Statements included on pages 72 through 77 and 92 through 94
of the Form 10-K.
NORAM:
Exhibit 12 - Ratio of Earnings to Fixed Charges and Preferred Dividends
Exhibit 27 - Financial Data Schedule (included in electronic filing only).
Exhibit 99(a) - Notes 1(c), 2 and 8 to the NorAm Financial Statements included
on pages 116 through 121 and pages 132 through 135 of the
Form 10-K.