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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(MARK ONE)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1997
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
(State or other jurisdiction of incorporation or 74-0694415
organization) (I.R.S. employer identification number)
1111 LOUISIANA
HOUSTON, TEXAS 77002 (713) 207-3000
(Address and zip code of principal executive offices) (Registrant's telephone number, including area code)
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
TITLE OF EACH CLASS NAME OF EACH EXCHANGE ON WHICH REGISTERED
Common Stock, without par value, New York Stock Exchange
and associated rights to purchase preference stock Chicago Stock Exchange
7% Automatic Common Exchange New York Stock Exchange
Securities due July 1, 2000
HL&P Capital Trust I 8.125% Trust
Preferred Securities, Series A New York Stock Exchange
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT: Preferred Stock,
cumulative, no par -- $4 series
COMMISSION FILE NUMBER 1-13265
NORAM ENERGY CORP.
(Exact name of registrant as specified in its charter)
DELAWARE
(State or other jurisdiction of incorporation or 76-0511406
organization) (I.R.S. employer identification number)
1111 LOUISIANA
HOUSTON, TEXAS 77002 (713) 207-3000
(Address and zip code of principal executive offices) (Registrant's telephone number, including area code)
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
TITLE OF EACH CLASS NAME OF EACH EXCHANGE ON WHICH REGISTERED
NorAm Financing I 6 1/4% New York Stock Exchange
Convertible Trust Originated Preferred Securities
6% Convertible Subordinated Debentures due 2012 New York Stock Exchange
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT: None
NORAM ENERGY CORP. MEETS THE CONDITIONS SET FORTH IN GENERAL INSTRUCTION
I(1)(a) AND (b) OF FORM 10-K AND IS THEREFORE FILING THIS FORM 10-K WITH THE
REDUCED DISCLOSURE FORMAT.
Indicate by check mark whether each of the registrants: (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of each of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [X]
The aggregate market value of the voting stock held by non-affiliates of
Houston Industries Incorporated was $7,598,982,925 as of March 2, 1998, using
the definition of beneficial ownership contained in Rule 13d-3 promulgated
pursuant to the Securities Exchange Act of 1934 and excluding shares held by
directors and executive officers. As of March 2, 1998, Houston Industries
Incorporated had 295,698,228 shares of Common Stock outstanding, including
12,138,551 ESOP shares not deemed outstanding for financial statement purposes.
Excluded from the number of shares of Common Stock outstanding are 98,866 shares
held by Houston Industries Incorporated as treasury stock. As of March 2, 1998,
all 1,000 outstanding shares of NorAm Energy Corp.'s Common Stock were held by
Houston Industries Incorporated.
Portions of the definitive proxy statement relating to the 1998 Annual
Meeting of Shareholders of Houston Industries Incorporated, which will be filed
within 120 days of December 31, 1997, are incorporated by reference in Item 10,
Item 11, Item 12 and Item 13 of Part III of this Form 10-K.
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THIS COMBINED ANNUAL REPORT ON FORM 10-K 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.
FORM 10-K FOR THE YEAR ENDED DECEMBER 31, 1997
TABLE OF CONTENTS
PAGE NO.
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PART I
Item 1. Business.................................................... 1
Item 2. Properties.................................................. 22
Item 3. Legal Proceedings........................................... 23
Item 4. Submission of Matters to a Vote of Security Holders......... 24
PART II
Item 5. Market for the Company's Common Equity and Related
Stockholder Matters......................................... 25
Item 6. Selected Financial Data of the Company...................... 26
COMPANY
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations of the Company.......... 28
Item 7A. Quantitative and Qualitative Disclosures About
Market Risk................................................. 50
Item 8. Financial Statements and Supplementary Data of the
Company..................................................... 53
NORAM
Item 7. Management's Narrative Analysis of the Results of
Operations
of NorAm Energy Corp. and Consolidated Subsidiaries......... 101
Item 7A. Quantitative and Qualitative Disclosure About
Market Risk................................................. 50
Item 8. Financial Statements and Supplementary Data of
NorAm....................................................... 109
Item 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure.................................... 141
PART III
Item 10. Directors and Executive Officers of the Company and NorAm... 141
Item 11. Executive Compensation...................................... 141
Item 12. Security Ownership of Certain Beneficial Owners and
Management.................................................. 141
Item 13. Certain Relationships and Related Transactions.............. 141
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form
8-K......................................................... 142
(i)
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PART I
ITEM 1. BUSINESS.
Houston Industries Incorporated (Company) is a diversified international
energy services company. Its Houston Lighting & Power Company division is an
electric utility serving approximately 1.6 million customers in the City of
Houston, Texas, and surrounding areas on the Texas Gulf Coast. NorAm Energy
Corp., the Company's largest subsidiary (NorAm), is a natural gas utility
serving over 2.8 million customers in Arkansas, Louisiana, Minnesota,
Mississippi, Oklahoma and Texas. NorAm, through its subsidiaries, is also a
major interstate natural gas pipeline company and a provider of energy marketing
services.
The Company's other principal subsidiaries include Houston Industries
Energy, Inc. (HI Energy), which participates in the privatization of foreign
generating and distribution facilities and the development and acquisition of
foreign independent power projects, and Houston Industries Power Generation,
Inc. (HIPG), which participates in the acquisition, development and operation of
domestic non-rate regulated power generation facilities.
The Company acquired NorAm in August 1997 in a transaction (Merger)
involving the merger of the Company's former parent corporation, Houston
Industries Incorporated (Former HI), into the Company, and the merger of NorAm's
predecessor corporation (Former NorAm) into a newly formed subsidiary of Former
HI. As a result of the Merger, the Company's operating activities include the
following segments: Electric Operations, Natural Gas Distribution, Interstate
Pipeline, Energy Marketing, International and Corporate. Information regarding
these segments is set forth in "Management's Discussion and Analysis of
Financial Condition and Results of Operations of the Company -- Results of
Operations by Business Segment" and Note 15 to the Company's Consolidated
Financial Statements, which note is incorporated herein by reference. NorAm's
principal operating segments include Natural Gas Distribution, Interstate
Pipeline and Energy Marketing.
The Company, subject to certain limited exceptions, is exempt from
regulation as a public utility holding company pursuant to Section 3(a)(2) of
the Public Utility Holding Company Act of 1935, as amended (1935 Act). For
additional information regarding the Company's status under the 1935 Act, see
"-- Regulation -- Public Utility Holding Company Act."
The Company, incorporated in 1906, is a Texas corporation. NorAm,
incorporated in 1996, is a Delaware corporation. The executive offices of the
Company and NorAm are located at Houston Industries Plaza, 1111 Louisiana,
Houston, Texas 77002 (telephone number: 713-207-3000).
CERTAIN FACTORS AFFECTING THE ENERGY SERVICES INDUSTRY
Various factors are currently affecting the energy services industry,
including increasing levels of competition, legislative and regulatory changes,
stringent environmental regulations, contingencies associated with nuclear plant
ownership, and diversification into businesses outside of traditional
rate-regulated utility operations. The effects of these and other factors on the
business and operations of Company and its subsidiaries are described in
"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."
FORWARD-LOOKING STATEMENTS
Statements contained in this Form 10-K that are not historical facts are
forward-looking statements as defined in the Private Securities Litigation
Reform Act of 1995. Forward-looking statements are based on management's beliefs
as well as assumptions made by and information currently available to
management. Because such statements are based on assumptions as to future
economic performance and are not statements of fact, actual results may differ
materially from those projected. Important factors that could cause future
results to differ include (i) the effects of competition in the electric power
and natural gas industries, (ii) legislative and regulatory changes, (iii)
fluctuations in the weather, (iv) fluctuations in energy commodity
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prices, (v) environmental liabilities, (vi) changes in the economy and (vii)
other factors discussed in this and other filings by the Company and NorAm with
the Securities and Exchange Commission. When used in the Company's or NorAm's
documents or oral presentations, the words "anticipate," "estimate," "expect,"
"intend," "objective," "projection," "forecast," "goal" or similar words are
intended to identify forward-looking statements.
The following sections of this Form 10-K contain forward-looking
statements: "Business -- Electric Operations -- System Capability,"
"Business -- Electric Operations -- Capital Expenditures," "Business -- Electric
Operations -- Fuel," "Business -- Energy Marketing -- Energy Marketing and Risk
Management -- Electric Power Marketing," "Business -- International,"
"Business -- Corporate," "Business -- Regulation" and "Business -- Environmental
Matters" in Item 1 of the Form 10-K; "Legal Proceedings" in Item 3 of this Form
10-K; "Management's Discussion and Analysis of Financial Condition and Results
of Operations of the Company -- Results of Operations by Business
Segment -- Energy Marketing," "Management's Discussion and Analysis of Financial
Condition and Results of Operations of the Company -- Results of Operations by
Business Segment -- Corporate," "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," and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations of the Company -- Liquidity and Capital Resources -- Company
Consolidated Capital Requirements" in Item 7 of this Form 10-K and "Quantitative
and Qualitative Disclosures about Market Risk" in Item 7A of this Form 10-K.
ELECTRIC OPERATIONS
The Company generates, purchases, transmits and distributes electricity to
approximately 1.6 million residential, commercial and industrial customers in a
5,000 square-mile service area on the Texas Gulf Coast, including the City of
Houston, Texas, the nation's fourth largest city. The Company's electric utility
operations are conducted through an unincorporated division of the Company known
as "Houston Lighting & Power Company" or "HL&P" (HL&P). All references in this
Form 10-K to "Electric Operations" refer to the electric utility operations
conducted by HL&P. Electric Operations does not include the development,
acquisition and operation of independent power generation facilities by HIPG.
These activities are discussed in "Corporate" below.
For the year ended December 31, 1997, Electric Operations represented
approximately 62% of the Company's total consolidated revenues and 93% of its
operating income. For additional financial and operating data regarding Electric
Operations, see "Management's Discussion and Analysis of Financial Condition and
Results of Operations of the Company -- Results of Operations by Business
Segment -- Electric Operations" and Note 15 to the Company's Consolidated
Financial Statements, which information is incorporated herein by reference.
All projections and other forward looking data set forth under "Electric
Operations," including projections regarding System Capability and Capital
Expenditures, assume the continued existence of a cost-based regulatory system.
SERVICE AREA
Houston's economy is centered primarily on energy sector industries, such
as oil companies, petrochemical and refining complexes, industrial and
petrochemical construction firms and natural gas distribution and processing
centers. During the year ended December 31, 1997, energy sector industries
accounted for approximately 34% of Electric Operations' industrial electric base
revenues and 8% of its total electric base revenues. Other important sectors of
Houston's economy include the Port of Houston, the Johnson Space Center and the
Texas Medical Center.
The Company is a member of the Electric Reliability Council of Texas, Inc.
(ERCOT) and is interconnected to a transmission grid encompassing most of the
State of Texas.
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ELECTRIC UTILITY ASSETS
All of the electric generating stations and other operating properties used
in the business of Electric Operations are located in the State of Texas.
The Company owns and operates (i)12 electric generating stations with a
combined turbine nameplate rating of 13,554,608 kilowatts (KW) and (ii) 213
major substations having a total installed rated transformer capacity of 59,407
megavolts (Mva). The Company is also one of four co-owners of the South Texas
Project Electric Generating Station (South Texas Project), a nuclear generating
plant consisting of two 1,250 megawatt (MW) nuclear generating units in which
the Company has a 30.8% ownership interest. For additional information regarding
the assets used in Electric Operations' business, see "Properties" in Item 2 of
this Report.
SYSTEM CAPABILITY
The following table sets forth information regarding the system capability
of Electric Operations:
MAXIMUM HOURLY FIRM DEMAND
INSTALLED -------------------------------
NET PURCHASED TOTAL NET % CHANGE RESERVE
CAPABILITY POWER CAPABILITY FROM MARGIN
YEAR (MW) (MW)(1) (MW) DATE MW(2) PRIOR YEAR (%)
---- ---------- --------- ---------- ------- ------ ---------- -------
1993................. 13,679 945 14,624 Aug. 19 11,336 5.1 29.0
1994................. 13,666 720 14,386 Jun. 28 11,126 (1.9) 29.3
1995................. 13,921 445 14,366 Jul. 27 11,452 2.9 25.4
1996................. 13,960 445 14,405 Jul. 23 11,694 2.1 23.2
1997................. 14,040 445 14,485 Aug. 21 12,194 4.3 18.1
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(1) Reflects firm capacity purchased. For additional information on purchased
power commitments, see "-- Fuel -- Purchased Power" below.
(2) Excludes loads on interruptible service tariffs, residential direct load
control and commercial/industrial load cooperative capability. Including
these loads, the maximum hourly demand served in 1997 was 13,407 MW compared
to 12,667 MW in 1996.
Based on present trends, the Company estimates that the maximum hourly firm
demand for electricity in the service area of Electric Operations will grow at a
compound annual rate of approximately 1.6% over the next ten years. Assuming
average weather conditions and including the net effects of demand-side
management programs, the Company projects that the reserve margin of Electric
Operations will decrease to an estimated 15% by 2001. For long-term planning
purposes, the Company intends to maintain the reserve margin for Electric
Operations at approximately 15% in excess of maximum hourly firm demand load
requirements.
Electric Operations experiences significant seasonal variation in its sales
of electricity. Sales during the summer months are higher than sales during
other months of the year due to the reliance on air conditioning in the service
territory of Electric Operations.
CAPITAL EXPENDITURES
The Company has an ongoing program to maintain the existing production,
transmission and distribution facilities of Electric Operations and to expand
its physical plant in response to customer needs. Assuming a target reserve
margin of 15%, the Company does not currently forecast a need for additional
capacity until 2002.
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In 1997, Electric Operations' capital expenditures were approximately $234
million, excluding Allowance for Funds Used During Construction (AFUDC).
Electric Operations' capital program (excluding AFUDC) is currently estimated to
be approximately $331 million in 1998, $343 million in 1999 and $308 million in
2000. These expenditures relate primarily to improvements to Electric
Operations' existing electric generating, distribution and general plant
facilities. For the three-year period ending December 31, 2000, the aggregate
capital program for Electric Operations is estimated to be:
AMOUNT PERCENT OF TOTAL
(MILLIONS) EXPENDITURES
---------- ----------------
Generating facilities...................................... $207 21%
Transmission facilities.................................... 34 4%
Distribution facilities.................................... 443 45%
Substation facilities...................................... 65 7%
General plant facilities................................... 161 16%
Nuclear fuel............................................... 72 7%
---- ---
Total............................................ $982 100%
==== ===
Actual capital expenditures will vary from estimates as a result of
numerous factors, including, but not limited to, changes in the rate of
inflation, availability and relative cost of fuels and purchased power, changes
in environmental laws, regulatory and legislative changes and the effect of
regulatory proceedings. For information regarding expenditures associated with
nuclear fuel costs and environmental programs, see "-- Fuel -- Nuclear Fuel
Supply" and "-- Environmental Matters" below.
Under the Public Utility Regulatory Act of 1995 (PURA) and the integrated
resource planning rules adopted in 1996 by the Public Utility Commission of
Texas (Texas Utility Commission), Texas electric utilities are required to
conduct public solicitations for all resources (e.g., generating capacity,
demand-side management programs, etc.) to satisfy future capacity needs. In May
1998, Electric Operations will file a preliminary integrated resource plan as
required under the rules.
FUEL
Based upon current assumptions regarding fuel (cost and availability),
plant operation schedules, load growth, load management and environmental
protection requirements, the projected future energy mix to be used by Electric
Operations in the generation of electricity is as follows:
ENERGY MIX (%)
--------------------------
ESTIMATED
HISTORICAL ------------
1997 1998 2001
---------- ---- ----
Gas......................................................... 30 30 29
Coal and Lignite............................................ 41 42 43
Nuclear..................................................... 9 8 8
Purchased Power............................................. 20 20 20
--- --- ---
Total............................................. 100 100 100
=== === ===
For information regarding current and historical fuel costs, see
"Management's Discussion and Analysis of Financial Condition and Results of
Operations of the Company -- Results of Operations by Business
Segment -- Electric Operations -- Fuel and Purchased Power Expense" in Item 7 of
this Report, which information is incorporated herein by reference.
Natural Gas Supply. During 1997, Electric Operations purchased
approximately 46% of its natural gas requirements pursuant to long-term
contracts with two suppliers (Midcon Texas Pipeline Company and Tejas Gas
Corporation). Electric Operations purchased an additional 23% of its natural gas
requirements under long-term contracts with other suppliers, and the remaining
31% of natural gas requirements on the spot
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market. Substantially all of Electric Operations' natural gas contracts contain
pricing provisions based on fluctuating spot market prices.
Based on the current market for and availability of natural gas, the
Company believes that Electric Operations will be able to replace the supplies
of natural gas covered under any expiring long-term contracts with (i) gas
purchased on the spot market or (ii) under long-term or short-term contracts.
The average daily gas consumption of Electric Operations during 1997 was 601
billion British thermal units (BBtu) with peak daily consumption of 1,349 BBtu.
Electric Operations' average cost of natural gas was $2.60 per million British
thermal units (MMBtu) in 1997, $2.31 per MMBtu in 1996 and $1.69 per MMBtu in
1995.
Although natural gas has been relatively plentiful in recent years,
available supplies are vulnerable to disruption due to weather conditions,
transportation constraints and other events. As a result of these factors,
supplies of natural gas may become unavailable from time to time, or prices may
increase rapidly in response to temporary supply constraints or other factors.
Coal and Lignite Supply. Electric Operations purchases approximately 80% of
the coal required to operate its four coal-fired units at the W. A. Parish
Electric Generating Station (W. A. Parish) under two long-term contracts from
mines in the Powder River Basin area of Wyoming. The first of these contracts
expires in 2010, and the other expires in 2011. Electric Operations obtains the
remaining coal required to operate these units under short-term contracts. The
majority of the coal purchased for W. A. Parish is currently transported under
an existing long-term rail transportation contract with Burlington Northern
Santa Fe Railroad. In 1997, Electric Operations completed construction of a
10-mile rail line to connect its W. A. Parish coal-handling facilities to Union
Pacific Railroad Company. During 1997 and 1998, Union Pacific Railroad Company
experienced significant delays in completing shipments of materials in and
through the City of Houston. To date, these delays have not had a material
adverse impact on Electric Operations' generation capability or its financial
results of operations. However, delays in rail shipments have reduced Electric
Operations' coal inventories below customary levels.
Electric Operations obtains the lignite used to fuel the two units of its
Limestone Electric Generating Station (Limestone) from a surface mine adjacent
to the plant. The Company owns the mining equipment, facilities and a portion of
the lignite reserves. The lignite reserves currently under lease and contract
are expected to be sufficient to provide substantially all of the lignite
requirements for Limestone through 2013.
Nuclear Fuel Supply. Fuel supply requirements for the South Texas Project
consist of (i) the acquisition of uranium concentrates, (ii) the conversion of
such concentrates into uranium hexafluoride, (iii) the enrichment of uranium
hexafluoride and (iv) the fabrication of nuclear fuel assemblies. The South
Texas Project has contracted for the raw materials and services necessary to
operate the plant through at least the following years:
Uranium..................................................... 2002(1)
Conversion.................................................. 2002
Enrichment.................................................. 2014(2)
Fabrication................................................. 2005
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(1) Contracts provide for over 50% of the uranium concentrates required. The
balance of uranium concentrates requirements is expected to be provided by
future spot and medium-term contracts.
(2) The South Texas Project has suspended its enrichment services contract for
the period between October 2000 and September 2007 pursuant to an option
available under such contract. During this period, the Company understands
that the South Texas Project intends to obtain enrichment services through a
competitive bidding process. At present, the South Texas Project has
obtained competitive bids and is finalizing contracts for enrichment
services through 2004.
Although the Company and the other South Texas Project owners cannot
predict the future availability of uranium and related services, it is not
anticipated, based on current market conditions, that the South Texas Project
will have difficulty in obtaining fuel requirements for its remaining years of
operation. For information
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regarding assessments for spent fuel disposal, decontamination and
decommissioning costs, see Note 4 to the Company's Consolidated Financial
Statements.
Purchased Power. At December 31, 1997, Electric Operations had contracts
covering 445 MW of firm capacity and associated energy. These contracts expire
as follows: 1998 -- 125 MW and 2005 -- 320 MW. Capacity payments under firm
purchased power commitments for the next three years are approximately $22
million per year. For additional information, see "Management's Discussion and
Analysis of Financial Condition and Results of Operations of the
Company -- Results of Operations by Business Segment -- Electric
Operations -- Fuel and Purchased Power Expense" and Note 12(b) to the Company's
Consolidated Financial Statements.
Recovery of Fuel Costs. Texas Utility Commission rules provide for the
recovery of certain fuel and purchased power energy costs through a fixed fuel
factor included in electric rates. For information on recovery of fuel costs,
see "Management's Discussion and Analysis of Financial Condition and Results of
Operations of the Company -- Results of Operations by Business
Segment -- Electric Operations -- Operating Revenues." The Company's two
principal firm capacity contracts (covering 320 MW of firm capacity) contain
provisions allowing Electric Operations to suspend or reduce purchased power
payments in the event that the Texas Utility Commission disallows future
recovery of these costs through Electric Operations' rates for electric service.
COMPETITION AND REGULATORY MATTERS
The electric utility industry historically has been composed of vertically
integrated companies providing electric service on an exclusive basis within
governmentally defined geographic areas. Prices for electric service typically
have been set by governmental authorities under principles designed to provide
the utility with an opportunity to recover its cost of providing electric
service plus a reasonable return on its invested capital. In recent years,
federal legislation as well as legislative and regulatory initiatives in various
states have encouraged competition among electric utility and non-utility owned
power generators. These developments, combined with increasing demand for
lower-priced electricity and technological advances in electric generation, are
accelerating the electric utility industry's movement toward more competition.
These issues, as they affect the Company, including without limitation, the
Company's ability to recover its existing investment in certain electric utility
facilities, are discussed in "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," which section is incorporated herein by reference.
For information regarding regulatory matters affecting Electric Operations,
see "-- Regulation -- Public Utility Holding Company Act",
"-- Regulation -- State and Local Utility Regulations -- Electric Operations,"
"-- Regulation -- Nuclear Regulatory Commission," "-- Environmental Matters"
below, "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" and
Note 3 to the Company's Consolidated Financial Statements.
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OPERATING STATISTICS OF ELECTRIC OPERATIONS
YEAR ENDED DECEMBER 31,
------------------------------------
1997 1996 1995
---------- ---------- ----------
Electric Energy Generated and Purchased (Megawatt-Hours
(MWH)):
Generated -- Net Station Output........................... 56,066,845 55,170,841 53,447,128
Purchased................................................. 14,008,452 12,540,172 10,452,818
Net Interchange........................................... 841 1,486 (1,488)
---------- ---------- ----------
Total.............................................. 70,076,138 67,712,499 63,898,458
Company Use, Lost and Unaccounted for Energy.............. (3,075,143) (3,350,400) (2,822,876)
---------- ---------- ----------
Total Energy Sold.................................. 67,000,995 64,362,099 61,075,582
========== ========== ==========
Electric Sales (MWH):
Residential............................................... 19,365,892 19,048,238 18,103,209
Commercial................................................ 15,474,761 14,640,762 14,233,413
Small Industrial(1)....................................... 11,439,753 11,727,500 11,174,404
Large Industrial(1)....................................... 14,380,499 13,519,845 12,493,029
Street Lighting -- Government and Municipal............... 127,761 119,339 117,253
---------- ---------- ----------
Total Firm Retail Sales............................ 60,788,666 59,055,684 56,121,308
Other Electric Utilities.................................. 190,878 205,463 169,750
---------- ---------- ----------
Total Firm Sales................................... 60,979,544 59,261,147 56,291,058
Interruptible............................................. 4,278,458 4,038,277 4,093,385
Off-System................................................ 1,742,993 1,062,675 691,139
---------- ---------- ----------
Total.............................................. 67,000,995 64,362,099 61,075,582
========== ========== ==========
Number of Customers (End of Period):(2)
Residential............................................... 1,378,658 1,353,631 1,327,168
Commercial................................................ 190,437 185,031 175,998
Small Industrial(1)....................................... 1,526 1,692 1,543
Large Industrial (Including Interruptible)(1)............. 132 126 127
Street Lighting -- Government and Municipal............... 86 83 82
Other Electric Utilities (Including Off-System)........... 20 15 11
---------- ---------- ----------
Total.............................................. 1,570,859 1,540,578 1,504,929
========== ========== ==========
Operating Revenue (Thousands of Dollars):
Residential............................................... $1,662,177 $1,603,591 $1,471,702
Commercial................................................ 1,065,917 986,591 923,223
Small Industrial(1)....................................... 616,419 611,495 564,609
Large Industrial(1)....................................... 529,718 473,451 431,499
Street Lighting -- Government and Municipal............... 24,868 22,125 20,679
---------- ---------- ----------
Total Electric Revenue -- Firm Retail Sales........ 3,899,099 3,697,253 3,411,712
Other Electric Utilities.................................. 11,330 18,841 22,207
---------- ---------- ----------
Total Electric Revenue -- Firm Sales............... 3,910,429 3,716,094 3,433,919
Interruptible............................................. 108,053 97,164 81,707
Off-System................................................ 36,798 25,995 12,250
---------- ---------- ----------
Total Electric Revenue............................. 4,055,280 3,839,253 3,527,876
Miscellaneous Electric Revenues........................... 195,963 185,774 152,421
---------- ---------- ----------
Total.............................................. $4,251,243 $4,025,027 $3,680,297
========== ========== ==========
Installed Net Generating Capability (Kilowatts (KW)) (End of
Period)................................................... 14,040,370 13,960,370 13,921,370
Cost of Fuel (Cents per MMBtu):
Gas....................................................... 259.9 231.3 168.5
Coal...................................................... 201.8 210.8 202.5
Lignite................................................... 108.4 111.1 124.8
Nuclear................................................... 54.2 61.6 58.2
Average............................................ 186.8 181.6 159.3
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(1) For reporting purposes, customers of Electric Operations with an electric
demand in excess of 600 kilovolt-amperes are classified as industrial. Small
industrial customers typically are retail stores, office buildings,
universities and other customers not associated with large industrial
plants.
(2) In 1996, the Company began calculating the number of customers based on the
number of active customers at month-end (as opposed to the number of billing
transactions). This change had the effect of increasing the number of
customers (primarily commercial) reported in 1996 by approximately 4,400.
Prior periods have not been restated.
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NATURAL GAS DISTRIBUTION
NorAm, through its natural gas distribution division (Natural Gas
Distribution), purchases, transports, stores and distributes natural gas and
provides natural gas utility services to over 2.8 million residential,
commercial and industrial customers in six states, including the metropolitan
areas of Minneapolis, Minnesota; Houston, Texas; Little Rock, Arkansas; and
Shreveport, Louisiana.
Financial and operating data regarding Natural Gas Distribution are
discussed in "Management's Discussion and Analysis of Financial Condition and
Results of Operations of the Company -- Results of Operations by Business
Segment -- Natural Gas Distribution," in Note 15 to the Company's Consolidated
Financial Statements, in NorAm's "Management's Narrative Analysis of the Results
of Operations -- Results of Operations by Business Unit -- Natural Gas
Distribution" and in Note 9 to NorAm's Consolidated Financial Statements, which
information is incorporated herein by reference.
LOCAL DISTRIBUTION DIVISIONS
The natural gas utility operations of NorAm are conducted through three of
its unincorporated divisions: Arkla, Entex and Minnegasco.
Arkla. Arkla provides natural gas distribution services in approximately
621 communities in the States of Arkansas, Louisiana, Oklahoma and Texas. The
largest metropolitan areas served by Arkla are Little Rock, Arkansas and
Shreveport, Louisiana. In 1997, approximately 72% of Arkla's total throughput
was composed of retail sales of gas and approximately 28% was attributable to
transportation services. Sales to residential and commercial customers in 1997
accounted for approximately 91% of Arkla's total gas revenues and 64% of natural
gas volumes sold or transported.
Entex. Entex provides natural gas distribution services in approximately
502 communities in the States of Louisiana, Mississippi and Texas. The largest
metropolitan area served by Entex is Houston, Texas. In 1997, approximately 97%
of Entex's total throughput was composed of retail sales of gas and
approximately 3% was attributable to transportation services. Sales to
residential and commercial customers in 1997 accounted for approximately 83% of
Entex's total gas revenues and 81% of natural gas volumes sold.
Minnegasco. Minnegasco provides natural gas distribution services in
approximately 243 communities in the State of Minnesota. The largest
metropolitan area served by Minnegasco is Minneapolis, Minnesota. In 1997,
approximately 98% of Minnegasco's total throughput was composed of retail sales
of gas and approximately 2% was attributable to transportation services. Sales
to residential and commercial customers in 1997 accounted for approximately 89%
of Minnegasco's total gas revenues and 87% of natural gas volumes sold.
The demand for natural gas distribution services is seasonal in nature. In
1997, approximately 67%, 70% and 54%, respectively, of Arkla's, Minnegasco's and
Entex's revenues were reported in the months of January, February, March,
November and December. In each case, these patterns reflect the higher demand
for natural gas for use in heating during winter months.
SUPPLY AND TRANSPORTATION
Arkla. In 1997, Arkla purchased approximately 13% of its natural gas supply
from a NorAm subsidiary, NorAm Energy Services, Inc. (NES), 17% pursuant to
third party contracts and 70% on the spot market. Arkla transports its natural
gas supplies by interstate and intrastate pipelines under long-term contracts
with terms varying from five to sixteen years.
Entex. In 1997, Entex purchased approximately 80% of its natural gas supply
pursuant to term contracts (having terms varying from one to five years) and 20%
on the spot market. During 1997, Entex's major natural gas suppliers were Enron
Corp. (29.4%), Tejas Gas Corporation (29.0%), Cokinos Natural Gas Company Inc.
(9.1%) and Midcon Texas Pipeline Company (7.6%). Entex transports its natural
gas supplies on both interstate and intrastate pipelines under long-term
contracts with terms varying from one to five years.
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Minnegasco. In 1997, Minnegasco purchased approximately 73% of its natural
gas supply pursuant to term contracts (having terms varying from one to ten
years) with 17 different suppliers and 27% on the spot market. Most of the
natural gas volumes under long-term contracts are committed under terms
providing for delivery during the winter heating season, November through March.
During 1997, Minnegasco purchased approximately 50% of its natural gas
requirements from three suppliers, Pan-Alberta Gas Ltd., TransCanada Gas
Services Inc. and NES. Minnegasco transports its natural gas supplies on various
interstate pipelines under long-term contracts with terms varying from five to
ten years.
Each of Arkla and Minnegasco makes use of various leased and owned natural
gas storage facilities to meet peak-day requirements and to manage the daily
changes in demand due to changes in weather. Contracted supplies and storage for
Minnegasco are also supplemented from time to time with stored liquefied natural
gas and propane-air plant production.
Although natural gas supplies have been relatively plentiful in recent
years, available supplies are vulnerable to disruption due to weather
conditions, transportation constraints and other events. As a result of these
factors, supplies of natural gas may become unavailable from time to time or
prices may increase rapidly in response to temporary supply constraints or other
factors.
CAPITAL EXPENDITURES
For information regarding Natural Gas Distribution's historical and
projected capital expenditures, see "Management's Discussion and Analysis of
Financial Condition and Results of Operations of the Company -- Liquidity and
Capital Resources -- Company Consolidated Capital Requirements."
COMPETITION AND REGULATORY MATTERS
For information regarding the impact of competition on Natural Gas
Distribution, 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," which section is incorporated herein by reference.
For information regarding regulatory matters affecting Natural Gas
Distribution, see " -- Regulation -- State and Local Utility
Regulations -- Natural Gas Distribution Operations" and " -- Environmental
Matters" below.
INTERSTATE PIPELINE
NorAm's interstate natural gas pipeline business is conducted through two
wholly-owned subsidiaries of NorAm, NorAm Gas Transmission Company (NGT) and
Mississippi River Transmission Corporation (MRT). The business and operations of
NGT and MRT are collectively referred to in this Form 10-K as "Interstate
Pipeline."
Financial and operating data regarding Interstate Pipeline are discussed in
"Management's Discussion and Analysis of Financial Condition and Results of
Operations of the Company -- Results of Operations by Business
Segment -- Interstate Pipeline," in Note 15 to the Company's Consolidated
Financial Statements and in "Management's Narrative Analysis of the Results of
Operations of NorAm -- Results of Operations by Business Unit -- Interstate
Pipeline" and in Note 9 to NorAm's Consolidated Financial Statements, which
information is incorporated herein by reference.
Interstate Pipeline owns and operates approximately 8,200 miles of
transmission lines and six natural gas storage facilities located across the
following eight states in the south-central United States: Arkansas, Kansas,
Louisiana, Mississippi, Missouri, Oklahoma, Tennessee and Texas. Interstate
Pipeline transports and delivers natural gas on behalf of various shippers
primarily to utilities, industrial customers, and third party pipeline
interconnects.
In 1997, approximately 41% of Interstate Pipeline's total operating
revenues was attributable to services provided by NGT and MRT to Arkla,
approximately 13% of its operating revenues was attributable to services
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provided by MRT to Laclede Gas Company (Laclede), a local distribution company
that provides natural gas utility service to the greater St. Louis metropolitan
area in Illinois and Missouri, and approximately 9% was attributable to gas
marketed by NES to other parties. Interstate Pipeline provides service to Arkla
and Laclede under several long-term firm storage and transportation agreements.
The expiration dates for the service agreements with Laclede range from October
1999 through May 2000. These agreements are currently under negotiation for
renewal. The service agreement with Arkla is for a term of five and one-half
years and is scheduled to expire in March 2002.
The business and operations of Interstate Pipeline are affected by seasonal
changes in the demand for natural gas, the relative price of natural gas in the
Mid-Continent and Gulf Coast Natural Gas supply regions and, to a lesser extent,
general economic conditions.
CAPITAL EXPENDITURES
For information regarding Interstate Pipeline's historical and projected
capital expenditures, see "Management's Discussion and Analysis of Financial
Condition and Results of Operations of the Company -- Liquidity and Capital
Resources -- Company Consolidated Capital Requirements."
COMPETITION AND REGULATORY MATTERS
For information regarding the impact of competition on Interstate
Pipeline's operations, 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," which section is incorporated herein by reference.
Interstate Pipeline is subject to regulation by the Federal Energy
Regulatory Commission (FERC). For information regarding regulatory matters
affecting Interstate Pipeline, see " -- Regulation -- Federal Energy Regulatory
Commission" below.
ENERGY MARKETING
NorAm's Energy Marketing and Gathering division (Energy Marketing) markets
natural gas and electric power and provides price risk management services to
various energy sector customers. In addition, the division provides natural gas
gathering services and retail energy marketing services. The division's energy
marketing and risk management services are conducted by NES. The division's
natural gas gathering operations are conducted by NorAm Field Services Corp.
(NFS), and its retail energy marketing services are conducted by NorAm Energy
Management, Inc. (NEM).
Financial and operating data regarding Energy Marketing are discussed in
"Management's Discussion and Analysis of Financial Condition and Results of
Operations of the Company -- Results of Operations by Business Segment -- Energy
Marketing," in Note 15 to the Company's Consolidated Financial Statements and in
"Management's Narrative Analysis of the Results of Operations of
NorAm -- Results of Operations by Business Unit -- Energy Marketing" and in Note
9 to NorAm's Consolidated Financial Statements, which information is
incorporated herein by reference.
ENERGY MARKETING AND RISK MANAGEMENT
NES, a wholly owned subsidiary of NorAm, supplies, markets and trades
natural gas and electricity. In addition, it offers physical and financial
wholesale energy marketing products and services to a variety of customers,
including natural gas distribution companies, municipalities, power plants,
marketers, aggregators and large volume industrial customers. The operations of
NES are not subject to traditional cost of service rate regulation.
Natural Gas Marketing. NES' natural gas marketing activities consist of
contracting to buy specified volumes of natural gas from suppliers at various
points of receipt to be supplied over a specified period of time; aggregating
natural gas supplies and arranging for their transportation; negotiating the
sale of specific volumes
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of natural gas over a specified period of time; and matching natural gas
receipts and deliveries based on volumes required by customers.
NES purchases natural gas from a variety of suppliers under daily, monthly,
variable load and base load and term contracts that include either market
sensitive or fixed pricing provisions. NES sells natural gas under sales
agreements that have varying terms and conditions intended to match seasonal and
other changes in demand. In 1997, NES sold 958 Bcf of natural gas, substantially
all of which sales were to non-affiliates.
NES also enters into various short-term and long-term firm and
interruptible agreements for natural gas storage in order to offer peak delivery
services to satisfy winter heating and summer electric generating demands. Such
services are also intended to provide an additional level of performance
security and backup services to NES' customers.
NES from time to time arranges for the transportation of the natural gas it
markets from the supplier receipt point to the delivery point requested by the
purchasers. Transportation arrangements are made with affiliated and
non-affiliated interstate and intrastate pipelines through a variety of means,
including short-term and long-term firm and interruptible agreements with
pipelines. NES generally retains title to the natural gas it transports from the
receipt point to the delivery point.
Electric Power Marketing. NES sold over 25 million megawatt-hours of
electric power in 1997 and 2.7 million megawatt-hours of electric power in 1996.
NES sells electric power primarily to electric utilities and other marketing
companies. NES intends to participate in the California power market upon the
deregulation of wholesale and retail electric power sales in such state, which
is anticipated to occur in the spring of 1998. NES will seek to supply natural
gas to, and purchase electricity for resale from, non-regulated power plants in
the California market, including generating plants to be developed, acquired or
operated by HIPG.
Price Risk Management. In 1997, NES invested in personnel, software and
trading systems in order to expand its capacity to trade in fixed-price forward
purchase and sales contracts (involving the physical delivery of energy
commodities), swap agreements, futures and option contracts traded on securities
and commodities exchanges and in the over-the-counter financial markets.
NES uses derivative financial instruments to manage and hedge its
fixed-price purchase and sale commitments, to provide fixed-price commitments as
a service to its customers and suppliers, to reduce its exposure relative to the
volatility of the cash market prices and to protect its investment in storage
inventories. Although NES generally attempts to balance its fixed-price physical
and financial purchase and sale obligations, commodity price exposure often
exists or is created due to the origination of new transactions and the
assessment of, and response to, changing market conditions. NES is accordingly
exposed in such transactions to the risk that fluctuating market prices may
adversely affect its, the Company's and NorAm's financial position or results of
operations. For additional information with respect to the Company's and NorAm's
financial exposure to derivative financial instruments, see Item 7A of this Form
10-K, Note 2 to the Company's Consolidated Financial Statements and Note 2 to
NorAm's Consolidated Financial Statements.
In addition to the risk associated with price movements, credit risk is
also inherent in NES' risk management activities. Credit risk relates to the
risk of loss resulting from the nonperformance of contractual obligations by a
counterparty. NES maintains credit policies intended to minimize overall credit
risk with regard to its counterparties.
The Company has established a Risk Oversight Committee to oversee all
corporate price and credit risks, including NES' risk management and trading
activities. The Risk Oversight Committee's responsibilities include reviewing
the Company's and its subsidiaries' overall risk management strategy and
monitoring risk management activities to ensure compliance with the Company's
risk management limitations, policies and procedures. For additional information
regarding risk management accounting policies, see Note 2 to the Company's
Consolidated Financial Statements and Note 2 to NorAm's Consolidated Financial
Statements.
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NATURAL GAS GATHERING
NFS, a wholly owned subsidiary of NorAm, provides natural gas gathering
services, including related liquids extraction and marketing activities. NFS
operates approximately 4,000 miles of gathering pipelines which collect natural
gas from more than 200 separate systems located in major producing fields in
Arkansas, Louisiana, Oklahoma and Texas. NFS is not subject to traditional
cost-of-service regulation.
RETAIL ENERGY MARKETING
NEM, a wholly owned subsidiary of NorAm, markets natural gas and related
energy services to industrial customers served by large local distribution
companies and connected to interstate and intrastate pipelines offering
unbundled transportation services. Included in NEM's retail marketing operations
are three intrastate pipeline subsidiaries of NorAm that market and deliver
natural gas to large volume customers at market-based rates.
CAPITAL EXPENDITURES
For information regarding Energy Marketing's capital expenditures, see
"Management's Discussion and Analysis of Financial Condition and Results of
Operations of the Company -- Liquidity and Capital Resources -- Company
Consolidated Capital Requirements."
COMPETITION AND REGULATORY MATTERS
For information regarding the impact of competition on Energy Marketing's
operations, 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," which section is incorporated herein by reference.
For information regarding regulatory matters affecting Energy Marketing,
see "-- Regulation -- Federal Energy Regulatory Commission" below.
INTERNATIONAL
The Company's international operations (International) are conducted
through HI Energy, a subsidiary of the Company that participates in the
privatization of foreign generating and distribution facilities and the
development and acquisition of foreign independent power projects. International
includes the international operations of NorAm, which are managed by HI Energy.
As of December 31, 1997, the Company's Consolidated Balance Sheets
reflected $803 million of foreign investments, a substantial portion of which
represent equity investments in foreign utility companies. Financial and
operating data regarding International are discussed in "Management's Discussion
and Analysis of Financial Condition and Results of Operations of the
Company -- Results of Operations by Business Segment -- International" and Notes
5 and 15 to the Company's Consolidated Financial Statements, which information
is incorporated herein by reference. The international operations of NorAm were
not material to NorAm's 1997 results of operations.
For a discussion of certain risks associated with overseas operations, 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 Overseas Operations."
MAJOR FOREIGN INVESTMENTS
Argentina. As of December 31, 1997, approximately 26% of International's
foreign investments were located in Argentina. HI Energy owns, through its
subsidiaries, interests in two Argentine electric distribution companies and a
100% ownership interest in a 160-MW cogeneration facility. The electric
distribution company investments consist of (i) a 63% ownership interest in the
electric utility company serving La Plata, Argentina and (ii) a 90% ownership
interest in an electric utility in north-central Argentina (EDESE).
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A subsidiary of HI Energy had expected to complete development of the
160-MW cogeneration facility in late 1997 at an estimated cost of $100 million.
The commercial operation date for the project has been significantly delayed
because of major damage to the turbine blade during pre-operational testing.
Based on the representations by the project contractor as to the projected
completion date for repairs, it is not anticipated that such delay will have a
material adverse financial impact on HI Energy or the Company.
Brazil. As of December 31, 1997, approximately 52% of International's
foreign investments were located in Brazil. In May 1996, a subsidiary of HI
Energy acquired 11.35% of the common stock of Light -- Servicos de Eletricidade
S.A., a publicly held Brazilian corporation (Light) for $393 million (which
includes the direct costs of the acquisition) in a government-sponsored auction
of 60% of Light's outstanding shares. Light is the operator of an integrated
electric power and distribution system that serves a portion of the state of Rio
de Janeiro, Brazil, including the City of Rio de Janeiro. The winning bidders in
the government-sponsored auction of Light, including a subsidiary of HI Energy,
formed a consortium whose aggregate ownership interest of 50.44% represents a
controlling interest in Light. In November 1997, another subsidiary of HI Energy
purchased approximately $7 million of Light shares (less than 1% of outstanding
Light shares) on the open market.
Colombia. As of December 31, 1997, approximately 20% of International's
foreign investments were located in Colombia. In June 1997, a consortium of
investors which included a subsidiary of HI Energy acquired for $496 million a
56.7% controlling ownership interest in Empresa de Energia del Pacifico
S.A.E.S.P., (EPSA) an electric utility system serving the Valle de Cauca region
of Colombia, including the area surrounding the City of Cali. EPSA was the first
electric distribution system to be privatized by the Colombian government. HI
Energy contributed $152 million of the purchase price for a 28% ownership
interest in EPSA. In addition to its distribution facilities, EPSA owns 850 MW
of electric generation capacity. HI Energy's co-investor in this project is
Electricidad de Caracas, the electric utility serving Caracas, Venezuela.
In February 1997, a subsidiary of NorAm acquired interests in four natural
gas distribution concessions in Colombia. As of December 31, 1997, aggregate
expenditures incurred with respect to these concessions were approximately $3
million. Based on current projections, total additional expenditures for these
systems over the next four years are estimated to be approximately $11 million.
Mexico and India. In January 1998, a subsidiary of NorAm and a local
investor accepted an award of a 30-year concession from the Mexican government
to build, operate and maintain a natural gas distribution system in northeastern
Mexico. Based on current projections, International will invest approximately
$18 million in the project through 2002.
In 1998, a subsidiary of HI Energy, together with various other investors,
expects to complete development of a coke calcining and power generation
facility in India. Based on current projections, it is estimated that
International's total investment in this project through 1998 will be
approximately $11 million.
CAPITAL EXPENDITURES
For information regarding International's capital expenditures, see
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Liquidity and Capital Resources -- Company Consolidated Capital
Requirements."
COMPETITION AND REGULATION
For information regarding the impact of competition on International's
operations, 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," which section is incorporated herein by reference.
For information regarding regulatory matters affecting International, see
"-- Regulation -- Public Utility Holding Company Act -- Regulation of Foreign
Utility Company Investments."
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CORPORATE
Corporate. The Company's corporate business segment (Corporate) includes
(i) the operations of HIPG, which is engaged in the acquisition, development and
operation of domestic non-rate regulated power generation facilities; (ii)
various office buildings and other real estate used in the Company's and its
subsidiaries' business operations; (iii) corporate costs, and (iv) inter-unit
eliminations. Corporate also includes the Company's retail marketing operations,
which offer energy products and services to customers in and outside the
Company's and NorAm's regulated service areas.
HIPG was formed in March 1997 to pursue the acquisition, development and
operation of domestic non-rate regulated power generation facilities. Since its
formation, HIPG has participated in a number of bid processes involving electric
utility generation plants. In November 1997, HIPG was awarded the right to
purchase four generating stations (2,276 MW of generating capacity) located in
southern California for $237 million. The closing of this acquisition is
anticipated to occur in the spring of 1998, subject to the commencement of
operations of the California Independent System Operator and Power Exchange for
the California market.
HIPG is participating in the development of several non-rate regulated
power generation facilities, including among others, (i) a 480 MW gas-fired
power plant located in Boulder City, Nevada (El Dorado Project), which is being
developed jointly by HIPG and the parent company of San Diego Gas & Electric
Co., and (ii) a 100 MW cogeneration plant located in southeast Texas. Upon
completion of construction and subject to the successful negotiation of various
project development agreements, it is expected that the output of these projects
will be sold on the wholesale market. Based on current projections, it is
anticipated that HIPG will spend in connection with these facilities
approximately $59.4 million in 1998 and an additional $26.2 million in 1999.
HIPG intends to evaluate and possibly participate in a wide range of
non-rate regulated power generation projects. In February 1998, HIPG made an
offer, subject to completion of due diligence and the satisfaction of certain
other conditions, to purchase another independent power generation facility. If
HIPG elects to pursue the offer, the project is expected to result in additional
expenditures during 1998 of approximately $43 million.
The Company believes HIPG's efforts to develop or acquire generation assets
will complement the Company's other operations, including the trading and
marketing activities of NES. For example, it is currently anticipated that NES
will supply approximately 50% of the gas requirements of the El Dorado Project
and will purchase approximately 50% of the electric output of the project for
resale and that NES will manage the fuel procurement and power trading and
marketing for the generating assets to be acquired by HIPG in southern
California.
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REGULATION
The Company and NorAm and their respective subsidiaries are subject to
regulation by various federal, state, local and, in the case of HI Energy,
foreign governmental agencies, including those regulations described below.
PUBLIC UTILITY HOLDING COMPANY ACT
Holding Company Status. The Company is both a holding company and an
electric utility as defined in the 1935 Act; however, it is exempt from
regulation as a holding company based upon an order granted in July 1997 by the
Securities and Exchange Commission (SEC) under Section 3(a)(2) of the 1935 Act.
Although NorAm is a natural gas utility company as defined under the 1935 Act,
it is not a holding company within the meaning of the 1935 Act. The Company and
NorAm remain subject to regulation under the 1935 Act with respect to the
acquisition of certain voting securities of other domestic public utility
companies and utility holding companies.
Regulation of Investments in Exempt Wholesale Power Generation
Facilities. Companies, like HIPG, which own facilities used exclusively for the
generation of electricity for sale at wholesale are not deemed electric utility
companies under the 1935 Act, provided certain conditions are met.
Regulation of Foreign Utility Company Investments. Section 33(a)(1) of the
1935 Act exempts foreign utility company affiliates of the Company and NorAm
from regulation as "public utility companies," thereby permitting the Company
and NorAm to invest in foreign utility companies without registration under the
1935 Act as a holding company. The exemption, however, is subject to the SEC's
having received from each state commission having jurisdiction over the retail
rates of any electric or gas utility company affiliated with the Company or
NorAm, a certification to the effect that such commission has the authority and
resources to protect ratepayers subject to its jurisdiction and that such
commission intends to exercise its authority. The Texas Utility Commission and
the state regulatory commissions exercising jurisdiction over NorAm (Arkansas,
Louisiana, Minnesota, Mississippi, Oklahoma and Texas) have provided such a
certification to the SEC subject, however, to the right of such commissions to
revise or withdraw their certifications as to any future acquisition of a
foreign utility company.
Subject to certain limited exceptions, Section 33(f)(1) of the 1935 Act
also prohibits any public utility (such as the Company or NorAm) from issuing
any security for the purpose of financing the acquisition, ownership or
operation of a foreign utility company, or assuming any obligation or liability
with respect to a foreign utility company.
Proposals to Repeal the 1935 Act. Several bills have been introduced in
Congress that would repeal the 1935 Act. Repeal or significant modification to
the 1935 Act could have a significant impact on the Company and the electric
utility industry. At this time, however, the Company is not able to predict the
outcome of bills to repeal the 1935 Act or the outlook for additional
legislation in 1998.
FEDERAL ENERGY REGULATORY COMMISSION
The transportation and sale for resale of natural gas in interstate
commerce is subject to regulation by the Federal Energy Regulatory Commission
(FERC) under the Natural Gas Act (NGA) and, to a lesser extent, the Natural Gas
Policy Act of 1978, as amended (NGPA). Interstate transportation and storage
services by interstate pipelines, and the rates charged for such services, are
regulated by the FERC. The FERC also has jurisdiction over, among other things,
the construction of pipeline and related facilities used in the transportation,
storage and sale of natural gas in interstate commerce, including the extension,
expansion or abandonment of such facilities.
NGT and MRT periodically file applications with the FERC for changes in
their rates and charges designed to allow them to recover their costs of
providing service to customers (to the extent allowed by prevailing market
conditions), including a reasonable rate of return. These rates are normally
allowed to become effective after a suspension period, and in certain cases are
subject to refund under applicable law, until such time as FERC issues an order
on the allowable level of rates. NGT is currently operating under
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rates approved by the FERC and effective in February 1995, and MRT is currently
providing services pursuant to a negotiated rate settlement approved by the FERC
in October 1997.
Historically, NGT and MRT, like most other interstate pipelines, operated
primarily as merchants of natural gas. Commencing in 1985, the FERC issued a
series of orders and regulations that significantly altered the business of
transporting and marketing natural gas by fostering competition. Pursuant to
those Orders, NGT and MRT are now primarily engaged in the transportation and
storage of natural gas and no longer serve a bundled merchant function.
The FERC regulates NES under both the NGA and the Federal Power Act. As a
gas marketer, NES makes sales of natural gas in interstate commerce at wholesale
pursuant to a blanket certificate issued by the FERC, but the FERC does not
otherwise regulate the rates, terms or conditions of these gas sales. NES is
deemed to be a "public utility" under the Federal Power Act, and its wholesale
sales of electricity in interstate commerce are subject to a FERC-filed rate
schedule that authorizes NES to make sales at negotiated, market-based rates.
NES market-based rate tariffs are filed with the FERC. The FERC also imposes
certain restrictions on NES' transactions with Electric Operations, including a
prohibition on the receipt of goods or services on a preferential basis. Similar
restrictions apply to transactions between NES and Electric Operations under
PURA.
STATE AND LOCAL UTILITY REGULATIONS
Electric Operations. The Company conducts its electric utility operations
under a certificate of convenience and necessity granted by the Texas Utility
Commission. The certificate of convenience and necessity covers the present
service area and facilities of Electric Operations. In addition, the Company
holds non-exclusive franchises to provide electric service within the
incorporated municipalities in the service territory of Electric Operations.
None of these franchises expires before 2007.
Under PURA, the Texas Utility Commission has original jurisdiction over
electric rates and services in unincorporated areas of the State of Texas and in
the incorporated municipalities that have relinquished original jurisdiction.
Original jurisdiction over electric rates and services in the remaining
incorporated municipalities served by Electric Operations is exercised by such
municipalities, including the City of Houston, but the Texas Utility Commission
has appellate jurisdiction over electric rates and services within those
incorporated municipalities. For additional information, including information
about current rate proceedings, 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 -- Rate
Proceedings -- Electric Operations" and Note 3 to the Company's Consolidated
Financial Statements.
Natural Gas Distribution Operations. In almost all communities in which
Natural Gas Distribution provides service, NorAm operates under franchises,
certificates or licenses obtained from state and local authorities. The terms of
the franchises, with various expiration dates, typically range from ten to
thirty years. None of Natural Gas Distribution's material franchises expires
before 2005. In most cases, franchises to provide natural gas utility services
are not exclusive.
Substantially all of Natural Gas Distribution's retail sales are subject to
traditional cost-of-service regulation at rates regulated by the relevant state
public service commissions and, in Texas, by municipalities served by Natural
Gas Distribution. None of Natural Gas Distribution's local distribution
companies is currently a party to any pending rate proceeding.
The Oklahoma Corporation Commission recently approved natural gas utility
rules that, if implemented, would require the separation of integrated gas
delivery services, currently provided by natural gas utilities, into individual
components of gas supply, gathering, transmission, distribution and storage
services. The rules would also require gas utilities to buy natural gas through
a competitive bidding process administered by the Oklahoma commission and to set
a time table for implementing retail competition. Final implementation of the
rule is dependent on action by the Oklahoma legislature. The Company and NorAm
are not able at this time to predict the ultimate outcome of this legislation or
the likelihood of adoption of similar proposals by governmental agencies or
legislatures exercising jurisdiction in the service area of Natural Gas
Distribution.
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NUCLEAR REGULATORY COMMISSION
Under the 1954 Atomic Energy Act and the 1974 Energy Reorganization Act,
operation of nuclear plants is extensively regulated by the United States
Nuclear Regulatory Commission (NRC), which has broad power to impose licensing
and safety requirements. In the event of non-compliance, NRC has the authority
to impose fines or shut down nuclear plants, or both, depending upon its
assessment of the severity of the situation, until compliance is achieved.
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. Only 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 low-level waste disposal. 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 December 1998.
The Texas Low-Level Radioactive Waste Disposal Authority (Waste Disposal
Authority) is currently seeking authority to build and operate a low-level waste
disposal facility in Hudspeth County, Texas. A bill that establishes an
interstate compact among Texas, Maine and Vermont has been approved by the U.S.
Senate and is expected to be considered by the House of Representatives in 1998.
Ratification of the compact would limit access to the proposed facility to the
three compact members. Although lack of Congressional action would not prohibit
the Waste Disposal Authority from constructing the site unilaterally, failure to
ratify the compact would result in the loss of contributions from Maine and
Vermont toward the construction of the facility.
The Waste Disposal Authority is authorized to assess a planning and
implementation fee upon waste generators to fund development of the proposed
Texas disposal facility. For the authority's fiscal year commencing in September
1998, the Company's share of this assessment fee is expected to be approximately
$2.5 million. Licensing hearings are currently underway and, subject to receipt
of the license, construction is expected to commence in late 1998. The Waste
Disposal Authority estimates that the Texas site could begin receiving waste in
late 1999. In the event the Barnwell facility stops accepting waste before the
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.
ENVIRONMENTAL MATTERS
The Company and its subsidiaries are subject to a number of federal, state
and local environmental requirements that govern the discharge of emissions into
the air and water and regulate the handling of solid and hazardous waste. The
Company and its subsidiaries have incurred substantial expenditures in the past
to comply with these requirements and anticipate that further expenditures will
be incurred in the future.
Air Quality. A provision of the Federal Clean Air Act (Clean Air Act)
affecting electric power producers is the Acid Rain Program, which is designed
to reduce emissions of sulfur dioxide (SO2) from generating units. The program
requires that after a certain date an electric power producer must have been
granted a regulatory "allowance" for each ton of SO2 emitted from its
facilities. Allowances have been distributed to utilities by the Environmental
Protection Agency (EPA) based on their historical operations. If a utility is
not allocated sufficient allowances to cover its future SO2 emissions, it must
either purchase allowances or reduce its emissions of SO2. The Company believes
it holds sufficient allowances for continued operations of its facilities for
the foreseeable future, including the Phase II (2000 and later) portion of the
Clean Air Act.
Provisions of the Clean Air Act dealing with urban air pollution require
establishing new emission limitations for oxides of nitrogen (NOx) from existing
sources. Initial limitations were established by the Texas Natural Resources
Conservation Commission (TNRCC) applicable to the Company's generating units in
the Houston, Texas area. Implementation of these limitations have been delayed
until 1999. In addition,
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Governor Bush of Texas has proposed that all "grandfathered" emission units
(units constructed prior to permitting requirements) voluntarily secure permits
from the TNRCC and accomplish emission reductions. The Company has voluntarily
committed to seek permits for three such units, and will reduce NOx emissions
from these units accordingly.
Although the Company did not incur additional NOx reduction costs in 1997,
the Company estimates that, based on the new regulations and its voluntary
commitments, it will expend up to $10 million between 1998 and 1999 for NOx
reductions. Current TNRCC analyses indicate that even further NOx reductions
will be required after 1999 to attain the prescribed ozone standard in the
Houston area. However, neither the timing nor the magnitude of possible future
reduction requirements has been identified at this time.
The Ozone Transport Assessment Group (OTAG) was established in 1995. It is
composed of state air directors from 37 states, including some of the states in
which the Company and NorAm have facilities. OTAG is responsible for (i)
evaluation of long-range transport of pollutants related to ozone formation,
which includes NOx, and for (ii) identification of NOx emission reductions
deemed necessary for attainment of the current standard. Based on the results of
the OTAG effort, EPA has issued proposed regulations for State Implementation
Plan (SIP) development to implement NOx reductions in 22 of the 37 states
represented in the OTAG evaluation. The states from which a NOx reduction plan
is proposed to be required by EPA include Missouri and Illinois; however, it is
not anticipated that implementation of these plans would have a material impact
on the Company's or NorAm's facilities.
The Clean Air Act also required a study to determine if additional
regulations are needed to improve visibility in the southwestern United States.
It is not anticipated, however, that this study will require the installation of
additional pollution controls on the Company's and its subsidiaries' generating
units, including the generating units to be acquired by HIPG in the southern
California area, the El Dorado Energy project and HIPG's cogeneration project in
southeast Texas.
The Clean Air Act also requires the EPA to perform a study of the risk to
public health from emissions of toxic air pollutants from power plants, and to
regulate such emissions as necessary. The EPA issued a report to Congress in
February 1998. The report makes no determination as to the need to issue
regulations applicable to the utility industry, but states an intent to make
such a determination at a later but unspecified date. It is, therefore, not
possible to make any determination as to the potential need for additional
controls on emissions from the Company's or NorAm's facilities.
The Company and NorAm have obtained or applied for all necessary permits,
registrations and authorizations necessary for operation of their facilities
under the various federal, state and local statutes regulating the discharge of
pollutants into surface water, and for the handling and disposal of solid
wastes. The expenditures associated with these programs have not been, and are
not expected to be material.
The issue of whether exposure to electric and magnetic fields (EMFs) may
result in adverse health effects or damage to the environment is currently being
debated. EMFs are produced by all devices which carry or use electricity,
including home appliances as well as electric transmission and distribution
lines. Results of studies concerning the effect of EMFs have been inconclusive
and EMFs are not the subject of any regulations affecting the Company or NorAm
or their respective subsidiaries. However, lawsuits have arisen in several
states (including Texas) against electric utilities and others alleging that the
presence or use of electric power transmission and distribution lines has an
adverse effect on health and/or property values.
For a discussion of specific environmental contingencies, projected
expenditures in connection with environmental matters and a quantification of
costs associated with these matters, 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 -- Environmental Expenditures" and Note 8(g) to NorAm's
Consolidated Financial Statements.
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EMPLOYEES
As of December 31, 1997, the Company and its subsidiaries had 12,711
full-time employees. The following table sets forth information about the
Company's and NorAm's employees by business segment as of such date:
Electric Operations......................................... 6,131
Natural Gas Distribution.................................... 5,220
Interstate Pipeline......................................... 600
International............................................... 64
Energy Marketing............................................ 318
Corporate................................................... 378
Total............................................. 12,711
The number of employees of the Company and its subsidiaries who are
represented by unions or other collective bargaining groups include (i) Electric
Operations, 2,696; (ii) Natural Gas Distribution, 1,538; and (iii) Corporate,
12.
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EXECUTIVE OFFICERS OF THE COMPANY(1)
AS OF MARCH 2, 1998
OFFICER
NAME AGE(2) SINCE BUSINESS EXPERIENCE AND POSITIONS 1993-1998
---- ------ ------- --------------------------------------------
Don D. Jordan............... 65 1971 Chairman and Chief Executive Officer and 1997-
Director
Chairman and Chief Executive Officer and 1997
Director -- Former HI
Chairman, Chief Executive Officer and 1996-1997
President and Director -- Former HI
Chairman and Chief Executive Officer and 1993-1996
Director -- Former HI
Chairman, President and Chief Executive 1993
Officer and Director -- Former HI
Chairman and Chief Executive Officer and 1993-1997
Director -- Former HL&P
R. Steve Letbetter.......... 49 1978 President and Chief Operating Officer and 1997-
Director
President and Chief Operating Officer and 1997
Director -- Former HI
Senior Vice President and Director -- Former 1996-1997
HI
Vice President and Director -- Former HI 1995-1996
Vice President -- Former HI 1993-1995
President and Chief Operating 1993-1997
Officer -- Former HL&P
Group Vice President -- Finance and 1993
Regulatory Relations -- Former HL&P
Lee W. Hogan................ 53 1990 Executive Vice President and Director 1997-
Executive Vice President and Director -- 1997
Former HI
Senior Vice President and Director -- Former 1996-1997
HI
Vice President and Director -- Former HI 1995-1996
Vice President -- Former HI 1993-1995
President and Chief Operating Officer -- HI 1993-1997
Energy
Group Vice President -- External Affairs -- 1993
Former HL&P
Hugh Rice Kelly............. 55 1984 Executive Vice President, General Counsel 1997-
and Corporate Secretary
Executive Vice President, General Counsel 1997
and Corporate Secretary -- Former HI
Senior Vice President, General Counsel and 1994-1997
Corporate Secretary -- Former HI
Vice President, General Counsel and 1993-1994
Corporate Secretary -- Former HI
Executive Vice President, General Counsel 1997
and Corporate Secretary -- Former HL&P
Senior Vice President, General Counsel and 1993-1997
Corporate Secretary -- Former HL&P
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OFFICER
NAME AGE(2) SINCE BUSINESS EXPERIENCE AND POSITIONS 1993-1998
---- ------ ------- --------------------------------------------
Stephen W. Naeve............ 50 1988 Executive Vice President and Chief Financial 1997-
Officer
Executive Vice President and Chief Financial 1997
Officer -- Former HI
Senior Vice President and Chief Financial 1996-1997
Officer -- Former HI
Vice President -- Strategic Planning and 1993-1996
Administration -- Former HI
Vice President -- Corporate Planning and 1993
Treasurer -- Former HL&P
Charles M. Oglesby.......... 44 1997 Senior Vice President 1997-
President -- NorAm Trading and 1995-1997
Transportation Group, Inc.
Vice President of Coastal Corporation and 1993-1995
President and Chief Executive Officer of
Coastal Gas Services Company
Bruce Gibson................ 44 1994 Senior Vice President -- Governmental 1997-
Affairs
Senior Vice President -- Governmental 1997
Affairs -- Former HI
Vice President -- Government and Regulatory 1996-1997
Affairs -- Former HI
Vice President -- Government and Regulatory 1996-1997
Affairs -- Former HL&P
Vice President -- Governmental Relations -- 1994-1996
Former HI
President and CEO, Texas Chamber of Commerce 1994
Executive Assistant to the Texas Lt. 1993-1994
Governor
Robert L. Waldrop........... 50 1988 Senior Vice President -- Communications 1997-
Senior Vice President -- Communications -- 1997
Former HI
Senior Vice President -- External Affairs -- 1996-1997
Former HL&P
Senior Vice President -- Marketing and 1996
Customer Service -- Former HL&P
Group Vice President -- External Affairs -- 1993-1996
Former HL&P
Vice President -- Public and Customer 1993
Relations -- Former HL&P
Mary P. Ricciardello........ 42 1993 Vice President and Comptroller 1997-
Vice President and Comptroller -- Former HI 1996-1997
Vice President and Comptroller -- Former 1996-1997
HL&P
Comptroller -- Former HI 1993-1996
Assistant Corporate Secretary and Assistant 1993
Treasurer -- Former HL&P
- - ---------------
(1) Executive officer list includes the Comptroller of the Company and all other
officers of the Company holding the title of Senior Vice President,
Executive Vice President and above. On August 6, 1997, the directors and
officers of Former HI became by operation of the Merger the initial
directors and officers of the Company and will serve in such capacities
until their successors are elected and qualify at the annual meeting of the
shareholders and Board of Directors of the Company on May 6, 1998.
(2) At December 31, 1997.
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ITEM 2. PROPERTIES.
CHARACTER OF OWNERSHIP
The principal properties of the Company, NorAm and their respective
subsidiaries are owned in fee, except that most electric lines and gas mains are
located, pursuant to easements and other rights, in public roads or on land
owned by others.
Substantially all of the real estate, electric distribution system
properties, buildings and franchises owned directly by the Company (excluding
real estate and other properties of subsidiaries of the Company) are subject to
a lien created under a Mortgage and Deed of Trust dated as of November 1, 1944
(as supplemented, Mortgage) between the Company and South Texas Commercial
National Bank of Houston (Chase Bank of Texas, National Association, as
Successor Trustee). The lien of the Mortgage excludes cash, stock in
subsidiaries and certain other assets. Substantially all properties of the
subsidiaries of HI Energy and HIPG that own interests in operating plants are
subject to liens of creditors of the respective subsidiaries.
ELECTRIC OPERATIONS
All of the electric generating stations and other operating properties of
Electric Operations are located in the State of Texas.
Electric Generating Stations. As of December 31, 1997, the Company owned 12
electric generating stations (62 generating units) with a combined turbine
nameplate rating of 13,554,608 KW, including a 30.8% interest in one nuclear
generating station (two units) with a combined turbine nameplate rating of
2,623,676 KW.
Substations. As of December 31, 1997, the Company owned 213 major
substations (with capacities of at least 5 megavolt amperes (Mva)) having a
total installed rated transformer capacity of 59,407 Mva (exclusive of spare
transformers), including a 30.8% interest in one major substation with an
installed rated transformer capacity of 3,080 Mva.
Electric Lines -- Overhead. As of December 31, 1997, the Company owned
25,541 pole miles of overhead distribution lines and 3,567 circuit miles of
overhead transmission lines, including 502 circuit miles operated at 69,000
volts, 2,021 circuit miles operated at 138,000 volts and 1,044 circuit miles
operated at 345,000 volts.
Electric Lines -- Underground. As of December 31, 1997, the Company owned
10,198 circuit miles of underground distribution lines and 12.6 circuit miles of
underground transmission lines, including 4.5 circuit miles operated at 69,000
volts and 8.1 circuit miles operated at 138,000 volts.
For additional information regarding the properties of Electric Operations,
see "Business -- Electric Operations -- Electric Utility Assets" in Item 1 of
this Form 10-K.
NATURAL GAS DISTRIBUTION
NorAm's approximately 55,000 linear miles of gas distribution mains vary in
size from one-half inch to 24 inches in diameter. Generally, in each of the
cities, towns and rural areas served by Natural Gas Distribution, NorAm owns the
underground gas mains and service lines, metering and regulating equipment
located on customers' premises, and the district regulating equipment necessary
for pressure maintenance. With a few exceptions, the measuring stations at which
NorAm receives gas from its suppliers are owned, operated and maintained by
others, and the distribution facilities of NorAm begin at the outlet of the
measuring equipment. These facilities, including odorizing equipment, are
usually located on the land owned by suppliers and district regulator
installations.
INTERSTATE PIPELINE
Interstate Pipeline owns and operates, through NGT and MRT, approximately
8,200 miles of transmission lines and transportation service to various shippers
across eight states in the south-central United States.
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Interstate Pipeline also owns and operates six storage fields with a combined
daily deliverability of approximately 1.2 billion cubic feet (BCF) per day and a
combined working gas capacity of approximately 51.8 BCF. Most of Interstate
Pipeline's storage operations are in north Louisiana and Oklahoma.
ENERGY MARKETING
Energy Marketing owns and operates gathering pipelines which collect gas
from more than 200 separate systems located in major producing fields in
Arkansas, Louisiana, Oklahoma and Texas.
INTERNATIONAL
For information regarding the properties of HI Energy, see
"Business -- International" in Item 1 of this Form 10-K.
OTHER
For information regarding the properties of Corporate (including HIPG), see
"Business -- Corporate" in Item 1 of this Form 10-K.
ITEM 3. LEGAL PROCEEDINGS.
(a) Company and NorAm.
NorAm Merger Lawsuit. In August 1996, a purported NorAm stockholder
filed a lawsuit, Shaw v. NorAm Energy Corp., et al., in the District Court
of Harris County, Texas, against NorAm, certain of its officers and
directors and the Company to enjoin the Merger or to rescind the Merger
and/or to recover damages in the event that the Merger was consummated. In
February 1998, the plaintiffs withdrew their lawsuit and the court issued
an order of non-suit dismissing the litigation.
(b) Company.
Environmental. The Company is a defendant in litigation arising out of
the environmental remediation of a site in Corpus Christi, Texas. The site
was operated by third parties as a metals reclaiming operation. Although
the Company neither operated nor owned the site, certain transformers and
other equipment originally sold by the Company may have been delivered to
the site by third parties. The Company and others have remediated the site
pursuant to a plan approved by appropriate state agencies and a federal
court. To date, the Company has recovered or has commitments to recover
from other responsible parties $2.2 million of the more than $3 million it
has spent on remediation.
In Dumes, et al. v. Company, et al. (filed in December 1991 and
pending in the U.S. District Court for the Southern District of Texas,
Corpus Christi Division), landowners near the Corpus Christi site have
asserted claims that their property has been contaminated as a result of
the remediation effort and are seeking approximately $70 million in
compensatory damages, in addition to punitive damages of $51 million. The
Dumes case is currently scheduled for trial in June 1998. Although the
ultimate outcome of this case cannot be predicted at this time, the Company
does not believe that this case will have a material adverse effect on the
Company's financial condition, liquidity or results of operations.
Notification of PRP Status. In 1992, the EPA (i) identified the
Company, along with several other parties, as "potentially responsible
parties" (PRP) under the Comprehensive Environmental Response, Compensation
and Liability Act (CERCLA) for the costs of cleaning up a site located
adjacent to one of the Company's transmission lines and (ii) issued an
administrative order for the remediation of the site. The Company believes
that the EPA took this action solely on the basis of information indicating
that the Company in the 1950s acquired record title to a portion of the
land on which the site is located. The Company does not believe that it now
or previously has held any ownership interest in the site covered by the
order and has obtained a judgment to that effect from a court in Galveston
County, Texas. Based on this judgment and other defenses that the Company
believes to be meritorious, the Company has elected not to adhere to the
EPA's administrative order, even though the Company understands that other
PRPs
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are proceeding with site remediation. To date, neither the EPA nor any
other PRP has instituted a claim against the Company for any share of the
remediation costs for the site. However, if the Company was determined to
be a responsible party, the Company could be jointly and severally liable
along with the other PRPs for the aggregate remediation costs of the site
(which the Company currently estimates to be approximately $80 million in
the aggregate) and could be assessed substantial fines and damage claims.
Although the ultimate outcome of this matter cannot currently be predicted
at the time, the Company does not believe that this case will have a
material adverse effect on the Company's financial condition, liquidity or
results of operations.
For a description of certain other legal and regulatory proceedings
affecting the Company, see Notes 3, 5 and 12(h) to the Company's
Consolidated Financial Statements, which notes are incorporated herein by
reference.
(c) NorAm.
For a description of certain other legal and regulatory proceedings
affecting NorAm, see Note 12(h) of the Notes to the Company's Consolidated
Financial Statements and Note 8 to NorAm's Consolidated Financial
Statements, which notes are incorporated herein by reference.
Although the ultimate outcome of the foregoing matters cannot
currently be predicted, the Company and NorAm believe that none of these
matters will have a material adverse effect on their respective financial
positions or results of operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
None.
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PART II
ITEM 5. MARKET FOR THE COMPANY'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
The Company's Common Stock, which at March 2, 1998 was held of record by
approximately 89,330 shareholders, is listed on the New York and Chicago Stock
Exchanges (symbol: HOU). All of NorAm's common stock is held by the Company.
The following table sets forth the high and low sales prices of the
Company's Common Stock on the composite tape during the periods indicated, as
reported by The Wall Street Journal, and the dividends declared for such
periods. Dividend payout was $1.50 per share for 1997 and 1996, respectively.
The dividend declared during the fourth quarter of 1997 is payable in March
1998.
MARKET PRICE
-------------- DIVIDEND DECLARED
HIGH LOW PER SHARE
----- ----- -----------------
1997
First Quarter...................................... $0.375
February 25...................................... $23 5/8
March 21......................................... $20 5/8
Second Quarter..................................... $0.375
April 18......................................... $18 7/8
May 6............................................ $23 5/8
Third Quarter...................................... $0.375
August 7......................................... $22 1/8
August 28........................................ $20 1/8
Fourth Quarter..................................... $0.375
December 31...................................... $27 1/4
October 28....................................... $20 3/4
1996
First Quarter...................................... $0.375
January 17....................................... $21 1/2
March 15......................................... $25 5/8
Second Quarter..................................... $0.375
April 19......................................... $20 1/2
June 25.......................................... $24 3/4
Third Quarter...................................... $0.375
September 5...................................... $21 1/8
July 1........................................... $24 3/4
Fourth Quarter..................................... $0.375
December 6....................................... $20 3/4
November 11...................................... $24 1/8
The closing market price of the Company's Common Stock on December 31, 1997
was $26 3/4 per share.
Future dividends will be subject to determination based upon the results of
operations and financial condition of the Company, the Company's future business
prospects, any applicable contractual restrictions and such other factors as the
Company's Board of Directors considers relevant. For information regarding
restrictions on the payment of dividends in the Company's credit agreements, see
Note 8(c) of the Notes to the Company's Consolidated Financial Statements.
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ITEM 6. SELECTED FINANCIAL DATA OF THE COMPANY.
The following table sets forth selected financial data with respect to the
Company's consolidated financial condition and results of consolidated
operations and should be read in conjunction with the Company's Consolidated
Financial Statements and the related notes in Item 8 of this Report. Certain
amounts from prior years have been reclassified to conform with the 1997
presentation. Such reclassifications do not affect earnings. On July 6, 1995,
the Company closed the sale of its cable television operations. The operations
of the Company's former cable television subsidiary (KBLCOM) have been accounted
for as discontinued operations.
YEAR ENDED DECEMBER 31,
-------------------------------------------------------------------
1997(1) 1996 1995 1994 1993
----------- ----------- ----------- ----------- -----------
(THOUSANDS OF DOLLARS, EXCEPT PER SHARE AMOUNTS)
Revenues......................................... $ 6,873,385 $ 4,095,277 $ 3,729,271 $ 3,752,573 $ 4,083,238
----------- ----------- ----------- ----------- -----------
Income from continuing operations before
cumulative effect of change in accounting(2)... $ 421,110 $ 404,944 $ 397,400 $ 423,985 $ 440,531
Gain on sale of cable television subsidiary...... 708,124
Loss from discontinued operations................ (16,524) (24,495)
Cumulative effect of change in accounting(3)..... (8,200)
Preferred Dividends.............................. 162
----------- ----------- ----------- ----------- -----------
Net income(2).................................... $ 420,948 $ 404,944 $ 1,105,524 $ 399,261 $ 416,036
=========== =========== =========== =========== ===========
Earnings per common share(4):
Continuing operations before cumulative effect
of change in accounting(2)................... $ 1.66 $ 1.66 $ 1.60 $ 1.72 $ 1.69
Gain on sale of cable television subsidiary.... 2.86
Loss from discontinued operations.............. (.07) (.09)
Cumulative effect of change in accounting(3)... (.03)
----------- ----------- ----------- ----------- -----------
Basic Earnings per common share(2)............... $ 1.66 $ 1.66 $ 4.46 $ 1.62 $ 1.60
Diluted Earnings per common share(2)............. 1.66 1.66 4.46 1.62 1.60
Cash dividends declared per common share(4)(5)... $ 1.50 $ 1.50 $ 1.50 $ 1.50 $ 1.875
Dividend pay-out ratio from continuing
operations..................................... 96% 89% 94% 87% 89%
Return on average common equity(6)............... 9.7% 10.2% 29.5% 12.0% 12.71%
Ratio of earnings from continuing operations to
fixed charges before cumulative effect of
change in accounting........................... 2.41 2.76 2.71 2.89 2.78
At year-end:
Book value per common share(2)(4).............. $ 17.28 $ 16.41 $ 16.61 $ 13.64 $ 12.53
Market price per common share(4)............... $ 26.75 $ 22.63 $ 24.25 $ 17.82 $ 23.82
Market price as a percent of book value(2)..... 155% 138% 146% 131% 190%
At year-end:
Total assets of continuing operations.......... $18,414,555 $12,287,857 $11,819,606 $10,784,095 $10,867,581
Net assets of discontinued operations.......... 618,982 487,026
----------- ----------- ----------- ----------- -----------
Total assets............................. $18,414,555 $12,287,857 $11,819,606 $11,403,077 $11,354,607
=========== =========== =========== =========== ===========
Long-term obligations including current
maturities -- continuing operations(7)....... $ 5,831,356 $ 3,280,113 $ 3,768,928 $ 3,905,518 $ 3,950,576
Long-term obligations including current
maturities included in net assets of
discontinued operations...................... 504,580 514,964
Capitalization from continuing operations:
Common stock equity............................ 46% 53% 50% 44% 43%
Cumulative preferred stock of HL&P (including
current maturities).......................... 2% 5% 7% 7%
Long-term debt (including current
maturities).................................. 54% 45% 45% 49% 50%
Capital expenditures:
Purchase of NorAm, net of cash acquired........ $ 1,422,672
HL&P electric capital and nuclear fuel
expenditures (excluding AFUDC)(8)............ 234,068 $ 314,934 $ 296,635 $ 412,899 $ 329,016
Natural Gas Distribution....................... 61,078
Interstate Pipeline............................ 16,304
Energy Marketing............................... 14,365
International project expenditures and advances
(excluding capitalized interest)............. 223,807 493,179 49,835 7,087 35,796
HIPG project expenditures...................... 3,324
Corporate (excluding HIPG)..................... 20,247 13,446 4,643 13,562 5,295
Cable television additions and other
cable-related investments -- discontinued.... 47,601 84,071 61,856
Corporate headquarters expenditures (excluding
capitalized interest)(8)..................... 5,308 89,627 44,250 26,034
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(1) Includes the results of NorAm since its August 1997 acquisition, which was
accounted for under the purchase method. See Note 1(b) to the Company's
Consolidated Financial Statements.
(2) The Company adopted Statement of Position (SOP) 93-6, "Employers' Accounting
for Employee Stock Ownership Plans," effective January 1, 1994, which had
the effect of reducing net income while increasing earnings per share. See
Note 10(c) to the Company's Consolidated Financial Statements. SOP 93-6 is
effective only with respect to financial statements for periods after
January 1, 1994, and no restatement was permitted for prior periods.
(3) The 1994 cumulative effect relates to the change in accounting for
postemployment benefits. See also Note 10(e) to the Company's Consolidated
Financial Statements.
(4) All common share data reflect a two-for-one common stock dividend
distribution in December 1995. Year ended December 31, 1993 includes five
quarterly dividends of $.375 per share due to a change in the timing of the
Company's Board of Directors' declaration of dividends. Dividend payout was
$1.50 per share for 1993.
(6) The return on average common equity for 1995 includes the gain on the sale
of the Company's cable television subsidiary. The return on average common
equity excluding the gain was 11.7%.
(7) Includes Cumulative Preferred Stock subject to mandatory redemption and
Company/NorAm obligated mandatorily redeemable preferred securities of
subsidiary trusts holding solely junior subordinated debentures of
Company/NorAm.
(8) During 1995 and 1996, Electric Operations made payments toward the purchase
of its corporate headquarters building. Such payments are not reflected in
the Company's electric capital and nuclear fuel expenditures because they
are affiliate transactions eliminated upon consolidation.
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ITEM 7. 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
the Company's consolidated financial statements and notes contained in Item 8 of
this Form 10-K (Company's Consolidated Financial Statements).
HOUSTON INDUSTRIES INCORPORATED
Houston Industries Incorporated (Company) is a diversified international
energy services company. It operates the nation's tenth largest electric utility
in terms of kilowatt-hour (KWH) sales, and its three natural gas distribution
divisions together form the nation's third largest natural gas distribution
operation in terms of customers served. The Company also invests in
international and domestic electric utility privatizations, gas distribution
projects and the development of unregulated power generation projects. The
Company is also a major interstate natural gas pipeline and energy services
company, providing gas transportation, supply, gathering and storage, and
wholesale natural gas and electric power marketing services.
The Company is exempt from regulation as a public utility holding company
pursuant to Section 3(a)(2) of the Public Utility Holding Company Act of 1935,
as amended (1935 Act), except with respect to the acquisition of certain voting
securities of other domestic public utility companies and utility holding
companies.
CONSOLIDATED RESULTS OF OPERATIONS
On August 6, 1997, the Company completed its acquisition (Merger) of NorAm
Energy Corp. (NorAm), a natural gas gathering, transmission, marketing and
distribution company. The Merger was accounted for as a purchase; accordingly,
the Company's results of operations for 1997 include NorAm's results of
operations beginning on August 6, 1997 (Acquisition Date).
To enhance comparability between reporting periods, certain information
below is presented on a pro forma basis and reflects the acquisition of NorAm as
if it had occurred at the beginning of the 1996 and 1997 reporting periods
presented. Pro forma purchase-related adjustments include amortization of
goodwill and the revaluation on a preliminary basis of the fair value of certain
NorAm assets and liabilities. The pro forma results of operations are not
necessarily indicative of the combined results of operations that actually would
have occurred had the acquisition occurred on such dates. The Company, however,
believes that the presentation of pro forma data provides a more meaningful
comparative standard for assessing changes in the Company's consolidated
financial condition and results of operations during the years ended December
31, 1997 and 1996, since the pro forma presentation combines a full year of
results of the Company and its acquired NorAm operations.
In general, the Company's 1997 results of operations and prior year pro
forma amounts reflect the effects of the acquisition of NorAm, which include (i)
significant increases in amortization attributable to purchase accounting, (ii)
increases in shares outstanding and interest expense, and (iii) the impact of
revenues and operating expenses attributable to the newly acquired NorAm
business units.
28
31
CONSOLIDATED RESULTS OF OPERATIONS
UNAUDITED
ACTUAL PRO FORMA
--------------- ----------------
TWELVE MONTHS TWELVE MONTHS
ENDED ENDED
DECEMBER 31, DECEMBER 31,
--------------- PERCENT ---------------- PERCENT
1997 1996 CHANGE 1997 1996 CHANGE
------ ------ -------- ------- ------ --------
(IN MILLIONS, EXCEPT PER SHARE DATA)
Revenues..................................... $6,873 $4,095 68% $10,210 $8,884 15%
Operating Expenses........................... 5,809 3,105 87% 8,991 7,612 18%
Operating Income............................. 1,065 990 8% 1,219 1,272 (4%)
Other Expenses, Net(1)....................... 437 385 14% 546 595 (8%)
Income Taxes................................. 206 200 3% 234 245 (4%)
Net Income(2)................................ 421 405 4% 439 432 2%
Basic Earnings Per Share..................... 1.66 1.66 1.56 1.48 5%
Diluted Earnings Per Share................... 1.66 1.66 1.56 1.48 5%
- - ---------------
(1) Includes a $121 million unrealized accounting loss incurred in the fourth
quarter of 1997 relating to the Company's 7% Automatic Common Exchange
Securities (ACES). See Note 1(n) to the Company's Consolidated Financial
Statements.
(2) Includes $37 million of interest income attributable to a tax refund in
1997.
ACTUAL
---------------
TWELVE MONTHS
ENDED
DECEMBER 31,
--------------- PERCENT
1996 1995 CHANGE
------ ------ --------
Revenues.................................................... $4,095 $3,729 10%
Operating Expenses.......................................... 3,105 2,824 10%
Operating Income............................................ 990 905 9%
Other Expenses, Net......................................... 385 308 25%
Income Taxes................................................ 200 200
Income from Continuing Operations........................... 405 397 2%
Gain from Discontinued Operations........................... 708
Net Income.................................................. 405 1,105 (63%)
Basic Earnings Per Share.................................... 1.66 1.60 4%
Diluted Earnings Per Share.................................. 1.66 1.60 4%
1997 Compared to 1996 (Actual). The Company's actual consolidated net
income from continuing operations for 1997 was $421 million ($1.66 per share)
compared to $405 million ($1.66 per share) in 1996. Although income increased by
$16 million, the Company's basic and diluted earnings per share remained the
same due to the issuance of approximately 47.8 million additional shares of the
Company's common stock as a portion of the consideration paid in connection with
the Merger. The Company's income from continuing operations reflects net
non-recurring and other after-tax charges amounting to $42 million in 1997 and
$67 million in 1996. Charges in 1997 included a non-cash, unrealized accounting
loss of $79 million on the ACES, which were issued in July 1997, partially
offset by $37 million of interest income related to a refund of federal income
taxes in 1997. For a discussion of the accounting loss in connection with the
ACES, see "-- Certain Factors Affecting Future Earnings of the Company and its
Subsidiaries -- Accounting Treatment of ACES." The non-recurring, after-tax
charges in 1996 included a $62 million charge taken in connection with the
settlement of South Texas Project Electric Generating Station (South Texas
Project) litigation claims and a $5 million loss associated with Houston
Industries Energy, Inc.'s (HI Energy) investment in two tire-to-energy plants in
Illinois.
29
32
After adjusting for non-recurring and other charges in both years, income
from continuing operations for 1997 would have been $463 million ($1.83 per
share) compared to $472 million ($1.93 per share) in 1996. The decrease is due
in part to the additional amortization of certain lignite reserves by the
Company's electric operations division (Electric Operations), the amortization
of goodwill recorded upon the Merger and increased interest expense. The
increase in interest on long-term debt and other interest on the Company's
Statements of Consolidated Income reflect both (i) the $1.4 billion indebtedness
incurred by the Company to fund a portion of the cost of the Merger and (ii) the
consolidation of NorAm's existing indebtedness with that of the Company.
Partially offsetting these effects were increased Electric Operations' sales due
to customer growth, improved results at HI Energy and the additional operating
income generated by the new business units acquired in the Merger.
1997 Compared to 1996 (Pro Forma). The Company's pro forma consolidated
earnings for 1997 were $439 million ($1.56 per share) compared with $432 million
($1.48 per share) in 1996.
Excluding the non-recurring and other charges described above, the
Company's 1997 pro forma income from continuing operations would have been $481
million ($1.71 per share) compared to $499 million ($1.71 per share) in 1996.
This decrease in pro forma earnings, as adjusted for non-recurring and other
charges, is principally the result of (i) hedging-related losses incurred in the
first quarter of 1997 (prior to the Merger) by a subsidiary of NorAm, which
losses are not reflected in the Company's actual results of operations since
they were incurred prior to the Merger, (ii) a weather-related decline in sales
volumes from the natural gas distribution segment, and (iii) increased
administrative and general expenses associated with increased staffing and
marketing in connection with increasing the scope of energy marketing
activities.
Pro forma consolidated net income for 1997 and 1996 exceeds actual
consolidated net income for such years because purchase-related costs were more
than offset on a pro forma basis by NorAm's earnings for the periods prior to
the Acquisition Date. Such earnings were not part of the reported actual
results.
1996 Compared to 1995 (Actual). Consolidated income from continuing
operations was $405 million ($1.66 per share) for 1996, compared to income from
continuing operations of $397 million ($1.60 per share) in 1995. The Company's
1995 net income was $1.1 billion ($4.46 per share) including a one-time
after-tax gain of $708 million ($2.86 per share) recorded upon the sale of the
Company's cable television subsidiary.
The Company's net income includes non-recurring, after-tax charges
amounting to $67 million described above in 1996 and $24 million primarily
related to the write-down of HI Energy's Illinois tire-to-energy plant
investment in 1995. After adjusting for non-recurring gains and charges in both
years, consolidated basic and diluted per share earnings from continuing
operations rose nearly 14% to $1.93 in 1996 from $1.70 in 1995, while income
from continuing operations rose to $472 million in 1996 from $422 million the
previous year. The improvement in earnings resulted from increased sales at
Electric Operations, improved results at HI Energy and a full year of after-tax
dividend income ($37 million in 1996 compared to $18 million in 1995) from the
Company's investment in Time Warner Inc. (Time Warner) securities.
RESULTS OF OPERATIONS BY BUSINESS SEGMENT
In order to reflect the changes in the Company's business resulting from
the acquisition of NorAm, the Company has organized its financial reporting
segments into Electric Operations, Natural Gas Distribution, Interstate
Pipeline, Energy Marketing, International and Corporate. The business and
operations of each of these segments are described below and are shown for
comparative purposes on a pro forma basis.
All business segment data (other than data relating to Electric Operations)
are presented on a pro forma basis as if the acquisition of NorAm had occurred
on January 1 of the period presented. Pro forma results of operations are not
necessarily indicative of the combined results of operations that actually would
have occurred had the acquisition occurred on such date. The Company, however,
believes that the presentation of pro forma data provides a more meaningful
comparative standard for assessing changes in the results of operations of the
business segments, because the pro forma presentation gives retroactive effect
to the purchase-related adjustments, including amortization of goodwill and the
revaluation on a preliminary basis of the fair market value of certain NorAm
assets and liabilities.
30
33
The following table presents operating income on (i) an actual basis for
the year ended December 31, 1997 and (ii) a pro forma basis for each of the
Company's business segments for the years ended December 31, 1997 and 1996.
OPERATING INCOME (LOSS) BY BUSINESS SEGMENT
UNAUDITED
ACTUAL PRO FORMA
YEAR ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31,
------------ ---------------
1997(1) 1997 1996
------------ ------ ------
(IN MILLIONS)
Electric Operations...................................... $ 995 $ 995 $ 997
Natural Gas Distribution................................. 55 153 160
Interstate Pipeline...................................... 32 100 109
Energy Marketing......................................... 16 15 49
International............................................ 20 17 (1)
Corporate................................................ (53) (61) (42)
------ ------ ------
Total Consolidated....................................... $1,065 $1,219 $1,272
====== ====== ======
- - ---------------
(1) Includes NorAm business segments beginning on the Acquisition Date.
ELECTRIC OPERATIONS
Electric Operations 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). Electric
Operations constitutes the Company's largest business segment, representing 82%
of the Company's consolidated pro forma operating income for 1997.
The following table provides summary data, before income taxes, regarding
the actual results of operations of Electric Operations for 1997, 1996 and 1995.
YEAR ENDED
DECEMBER 31,
------------------ PERCENT
1997 1996 CHANGE
------ ------ -------
(IN MILLIONS)
Base Revenues(1).......................................... $2,839 $2,743 3%
Reconcilable Fuel Revenues(2)............................. 1,413 1,282 10%
Fuel and Purchased Power Expense.......................... 1,477 1,347 10%
Operation Expense......................................... 737 640 15%
Maintenance Expense....................................... 228 249 (8%)
Depreciation and Amortization Expense..................... 569 546 4%
Other Operating Expenses.................................. 246 246 --
------ ------
Operating Income.......................................... $ 995 $ 997 --
====== ======
YEAR ENDED
DECEMBER 31,
------------------ PERCENT
1996 1995 CHANGE
------ ------ --------
(IN MILLIONS)
Base Revenues(1).......................................... $2,743 $2,645 4%
Reconcilable Fuel Revenues(2)............................. 1,282 1,035 24%
Fuel and Purchased Power Expense.......................... 1,347 1,113 21%
Operation Expense......................................... 640 616 4%
Maintenance Expense....................................... 249 250 --
Depreciation and Amortization Expense..................... 546 475 15%
Other Operating Expense................................... 246 246 --
------ ------
Operating Income.......................................... $ 997 $ 980 2%
====== ======
31
34
- - ---------------
(1) Includes miscellaneous revenues, certain non-reconcilable fuel revenues and
certain purchased power-related revenues.
(2) Includes revenues collected through a fixed fuel factor net of adjustment
for over/under recovery. See "-- Operating Revenues -- Electric Operations."
OPERATING INCOME -- ELECTRIC OPERATIONS
1997 Compared to 1996. Electric Operations' operating income (before income
taxes) was $995 million in 1997 compared with $997 million the previous year.
The decrease in operating income was due to increases in operations expense and
depreciation and amortization expense, partially offset by increased revenues
from electric sales growth and decreases in maintenance expense, as described
below. Total KWH sales rose 3% during 1997, with increases of 1% in residential
sales, 6% in commercial sales and 2% in firm industrial sales.
1996 Compared to 1995. Electric Operations' operating income (before income
taxes) was $997 million in 1996 compared with $980 million in 1995. Increased
sales resulting from favorable weather and economic conditions helped offset the
effects of the increases in operations expense and depreciation and amortization
expense discussed below. Total KWH sales rose 6% during 1996, with increases of
4% in residential sales, 3% in commercial sales and 7% in firm industrial sales.
OPERATING REVENUES -- ELECTRIC OPERATIONS
1997 Compared to 1996. Electric Operations' 3% increase in base revenues
(which includes electric sales, miscellaneous revenues and certain
non-reconcilable fuel) is primarily the result of newly recorded transmission
revenues. Electric Operations' transmission revenues (which are considered
miscellaneous revenues) in 1997 were $86 million but were offset by related
transmission expenses of $88 million which are included in operation and
maintenance expenses. For information regarding these transmission revenues, see
"-- Certain Factors Affecting Future Earnings of the Company and its
Subsidiaries -- Competition -- Electric Operations -- Competition in Wholesale
Market" below.
Electric Operations' 10% increase in reconcilable fuel revenue resulted
primarily from increased natural gas prices. The Public Utility Commission of
Texas (Texas Utility Commission) provides for recovery of certain fuel and
purchased power costs through a fixed fuel factor included in electric rates.
The fixed fuel factor is established during either a utility's general rate
proceeding or its fuel factor proceeding and is generally effective for a
minimum of six months. Revenues collected through such factor are adjusted
monthly to equal actual fuel costs; therefore, such revenues and expenses have
no effect on earnings unless fuel costs are determined not to be recoverable.
The adjusted over/under recovery of fuel costs is recorded on the Company's
Consolidated Balance Sheets as fuel-related credits or fuel-related debits,
respectively. Fuel costs are reviewed during periodic fuel reconciliation
proceedings, which are required at least every three years. Electric Operations
filed a fuel reconciliation proceeding with the Texas Utility Commission on
January 30, 1998 for the three year period ending July 31, 1997.
In 1997, Electric Operations implemented (i) a $70 million temporary fuel
surcharge (inclusive of interest) effective for the first six months of 1997 and
(ii) a $62 million temporary fuel surcharge (inclusive of interest) effective
for the last six months of 1997. As of December 31, 1997, Electric Operations'
cumulative under-recovery of fuel costs was $172 million, including interest. In
December 1997, the Texas Utility Commission approved the implementation of a
$102 million (inclusive of interest) temporary fuel surcharge which was
implemented by Electric Operations on January 1, 1998, with recovery extending
from 8 months to 16 months depending on the customer class. Electric Operations
requested the surcharge in order to recover its under-recovery of fuel expenses
for the period March 1997 through August 1997.
FUEL AND PURCHASED POWER EXPENSE -- ELECTRIC OPERATIONS
Fuel costs constitute the single largest expense for Electric Operations.
The mix of fuel sources for generation of electricity is determined primarily by
system load and the unit cost of fuel consumed. The average cost of fuel used by
Electric Operations in 1997 was $1.87 per million British Thermal Units
32
35
(MMBtu) ($2.60 for natural gas, $2.02 for coal, $1.08 for lignite and $0.54 for
nuclear). In 1996, the average cost of fuel was $1.82 per MMBtu ($2.31 for
natural gas, $2.11 for coal, $1.11 for lignite and $0.62 for nuclear). Fuel
costs are reconciled to fuel revenues resulting in no effect on earnings unless
fuel costs are determined not to be recoverable.
1997 Compared to 1996. Fuel expenses in 1997 increased by $66 million or 6%
over 1996 expenses. The increase was driven by significant increases in the
average unit cost of natural gas, which rose to $2.60 per MMBtu in 1997 from
$2.31 per MMBtu in 1996. Purchased power expenses also increased in 1997 by $63
million or 20% over 1996 expenses. This change was primarily due to higher
prices paid to qualifying facilities for purchased electric energy principally
as a result of increases in gas prices, energy purchased under Electric
Operations' joint dispatching agreement with the City of San Antonio (See Note
12(c) to the Company's Consolidated Financial Statements), and Electric
Operations participating in the newly deregulated Texas wholesale energy market
in order to buy and sell energy at lower costs to its customers.
1996 Compared to 1995. Fuel expenses in 1996 increased by $146 million or
17% over 1995 expenses. The increase was driven by significant increases in the
average unit cost of natural gas, which rose to $2.31 per MMBtu in 1996 from
$1.69 per MMBtu in 1995. Purchased power expenses also increased in 1996 by $89
million over 1995 expenses. This change was driven primarily by the unit cost
paid for purchased electric energy which rose as a result of the increase in
natural gas prices.
OPERATION AND MAINTENANCE EXPENSES, DEPRECIATION, AMORTIZATION AND
OTHER -- ELECTRIC OPERATIONS
1997 Compared to 1996. Operation and maintenance expense increased $76
million in 1997, including $88 million due to transmission tariffs within the
Electric Reliability Council of Texas (ERCOT). These expenses are largely offset
by $86 million of revenue associated with wholesale transmission services. The
additional expenses do not reflect a significant increase in Electric
Operations' cost of providing transmission service, but only a change in the
pricing and billing of wholesale transmission services among providers in Texas.
In 1997, Electric Operations incurred $17.4 million in work force severance
costs as a result of its efforts to streamline and improve certain business
activities. In 1996, Electric Operations incurred severance costs of $30
million.
Depreciation and amortization expense increased $23 million in 1997
compared to 1996. The increase is primarily due to the additional accelerated
amortization of $16 million over 1996 of Electric Operations' investment in
lignite reserves. In 1996, Electric Operations began amortizing its $153 million
investment in these lignite reserves, which are associated with a canceled
generation project. The lignite reserves will be fully amortized no later than
2002. In each of 1997 and 1996, Electric Operations wrote down its investment in
the South Texas Project by $50 million in addition to ordinary depreciation
associated with the South Texas Project. The additional amortization of the
lignite reserves and the South Texas Project is allowed pursuant to Electric
Operations' most recent rate order. For additional information regarding these
amortizations, see Note 1(f) to the Company's Consolidated Financial Statements.
1996 Compared to 1995. Operations and maintenance expense increased by $23
million or 3% in 1996. This increase is largely attributable to the
implementation of an employee incentive compensation program and an increase in
severance payments paid to former employees. A significant decline in employee
benefits-related expenses partially offset the other increases in operations and
maintenance expense.
In 1995, Electric Operations incurred $15 million in work force severance
as a result of its efforts to streamline and improve certain business activities
as compared to $30 million in 1996.
NATURAL GAS DISTRIBUTION
Domestic natural gas distribution operations (Natural Gas Distribution) are
conducted through the Arkla, Entex and Minnegasco divisions of NorAm and are
included in the Company's actual consolidated results of operations beginning on
the Acquisition Date. These operations consist of natural gas sales to, and
33
36
natural gas transportation for, residential, commercial and certain industrial
customers in six states: Arkansas, Louisiana, Minnesota, Mississippi, Oklahoma
and Texas.
The following table provides summary data regarding the unaudited pro forma
financial results of operations of Natural Gas Distribution, including operating
statistics, for 1997 and 1996. Results of operations data for prior periods are
not presented because the Company had no operations in this segment prior to the
Merger.
UNAUDITED
PRO FORMA
YEAR ENDED
DECEMBER 31,
---------------- PERCENT
1997 1996 CHANGE
------ ------ -------
($ IN MILLIONS)
Operating Revenues........................................ $2,202 $2,113 4%
Operating Expenses:
Natural Gas............................................. 1,441 1,348 7%
Operation and Maintenance............................... 247 250 (1%)
Depreciation and Amortization........................... 123 120 3%
Other Operating Expenses(1)............................. 238 235 1%
------ ------
Total Operating Expenses............................. 2,049 1,953 5%
------ ------
Operating Income.......................................... $ 153 $ 160 (4%)
====== ======
Throughput Data (in Bcf):
Residential and Commercial Sales........................ 326 333 (2%)
Industrial Sales........................................ 59 58 2%
Transportation.......................................... 42 42 --
------ ------
Total Throughput..................................... 427 433 (1%)
====== ======
- - ---------------
(1) Before a $6 million one-time charge incurred in 1996 for early retirement
and severance costs.
1997 Compared to 1996 (Pro Forma). The increase of approximately $89
million (4%) in pro forma Natural Gas Distribution operating revenue for the
year ended December 31, 1997 in comparison to the corresponding period of 1996
is principally due to the increase in purchased gas costs.
Pro forma operating income was $153 million in 1997 compared with $160
million (before a one-time charge of $6 million for early retirement and
severance) in 1996. The decrease of approximately $7 million (4%) in 1997 pro
forma operating income was principally due to decreased Minnegasco customer
usage due to warmer weather and customer conservation, decreased Arkla customer
usage due to warmer weather (primarily in the first quarter of 1997) and Arkla's
charges associated with the applicable state regulatory commission's methodology
of calculating the price of gas charged to customers (the purchased gas
adjustment) primarily in Louisiana. Partially offsetting the decrease is an
increase in Minnegasco's performance based rate incentive recoveries and
customer growth and increased revenues from Entex due to rate relief granted in
1996 and fully reflected in 1997.
The $93 million (7%) increase in gas purchased costs in 1997 compared to
1996 primarily reflects the increase in Natural Gas Distribution's average cost
of gas in 1997 (consistent with the overall increase in the market price of gas)
along with the purchased gas adjustment described above.
INTERSTATE PIPELINE
Interstate natural gas pipeline operations (Interstate Pipeline) are
conducted through NorAm Gas Transmission Company (NGT) and Mississippi River
Transmission Corporation (MRT), two wholly owned subsidiaries of NorAm. The NGT
system consists of approximately 6,200 miles of natural gas transmission lines
located in portions of Arkansas, Kansas, Louisiana, Mississippi, Missouri,
Oklahoma, Tennessee and Texas. The MRT system consists of approximately 2,000
miles of pipeline serving principally the greater
34
37
St. Louis metropolitan area in Illinois and Missouri. The results of operations
of Interstate Pipeline are included in the Company's actual consolidated results
of operations beginning on the Acquisition Date.
The following table provides summary data regarding the unaudited pro forma
results of operations of Interstate Pipeline including operating statistics for
1997 and 1996. Results of operations data for prior periods are not presented
because the Company had no operations in this segment prior to the Merger.
UNAUDITED
PRO FORMA
YEAR ENDED
DECEMBER 31,
---------------- PERCENT
1997 1996 CHANGE
------ ------ -------
($ IN MILLIONS)
Operating Revenues.......................................... $295 $347 (15%)
Operating Expenses:
Natural Gas............................................... 42 76 (45%)
Operation and Maintenance................................. 45 49 (8%)
Depreciation and Amortization............................. 46 45 2%
Other Operating Expenses(1)............................... 62 68 (9%)
---- ----
Total Operating Expenses.......................... 195 238 (18%)
---- ----
Operating Income............................................ $100 $109 (9%)
==== ====
Throughput Data (in million MMBtu):
Natural Gas Sales........................................... 18 33 (45%)
Transportation.............................................. 911 952 (4%)
Elimination(2)......................................... (17) (31) 45%
---- ----
Total Throughput............................................ 912 954 (4%)
==== ====
- - ---------------
(1) Before a $17 million one-time charge incurred in 1996 for early retirement
and severance costs.
(2) Elimination of volumes both transported and sold.
1997 Compared to 1996 (Pro Forma). Pro forma operating revenues for
Interstate Pipeline decreased by $52 million (15%) for the year ended December
31, 1997 in comparison to the corresponding period of 1996. The decrease in
revenues primarily reflects a decline in natural gas sales revenue resulting
from the expiration in 1996 of an unbundled natural gas sales contract between
Interstate Pipeline and Arkla. Natural gas sales to Natural Gas Distribution
were $60 million in 1996 and none in 1997. It is anticipated that substantially
all future revenues for Interstate Pipeline will be from natural gas
transportation only.
Pro forma operating income was $100 million in 1997 compared to $109
million (before a one-time charge of $17 million for early retirement and
severance) in 1996. This decrease of approximately $9 million (9%) in Interstate
Pipeline's pro forma operating income between 1997 and 1996 results primarily
from three factors: (i) a 6% decrease in transportation revenues, (ii) a 43%
decrease in natural gas sales revenue (as described above) and (iii) lower
demand for natural gas transportation as a result of lower natural gas
consumption (primarily weather-related) in the eastern markets served by the
segment. These factors were offset partially by an approximately 18% decline in
operating expenses primarily due to decreases in gas purchased.
The decline in transportation revenues are largely attributable to price
differentials between the average spot price for Mid-continent natural gas
(Interstate Pipeline's primary supply area) and Gulf Coast natural gas in 1997.
When prices of Gulf Coast gas decrease significantly relative to Mid-continent
gas, downward pressure on transportation prices occurs when selling in west to
east markets like those of NGT. This competitive pressure, in turn, results in a
decline in average transportation rates under contracts that contain
market-sensitive pricing provisions.
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38
The $34 million (45%) decrease in gas purchased costs in 1997 compared to
1996 is largely attributable to the expiration of long-term supply contracts
entered into prior to unbundling, as discussed above. Other operating expenses
decreased $4 million (9%) in 1997 compared to 1996 primarily due to the
elimination of non-recurring costs combined with cost reductions related to the
1996 early retirement and severance program and reductions in costs allocated
from NorAm.
During 1997, Interstate Pipeline's largest unaffiliated customer was a
natural gas utility that serves the greater St. Louis metropolitan area.
Revenues from this customer are generated pursuant to several long-term firm
transportation and storage contracts that currently are scheduled to expire at
various dates between October 1999 and May 2000. Interstate Pipeline is
currently negotiating with the natural gas utility to renew these agreements.
ENERGY MARKETING
Energy marketing and gathering business (Energy Marketing) includes the
operations of the Company's wholesale and selected retail energy marketing
businesses and natural gas gathering activities conducted, respectively, by
NorAm Energy Services, Inc. (NES), NorAm Energy Management, Inc. (NEM) and NorAm
Field Services Corp. (NFS), three wholly owned subsidiaries of NorAm.
The following table provides summary data regarding the unaudited pro forma
results of operations of Energy Marketing, including operating statistics for
1997 and 1996. Results of operations data for prior periods are not presented
because the Company had no operations in this segment prior to the Merger.
UNAUDITED PRO FORMA
YEAR ENDED
DECEMBER 31
------------------- PERCENT
1997 1996 CHANGE
------- ------- -------
(IN MILLIONS)
Operating Revenues...................................... $3,589 $2,645 36%
Operating Expenses:
Natural Gas and Purchased Power, net.................. 3,477 2,489 40%
Operation and Maintenance............................. 46 68 (32%)
Depreciation and Amortization......................... 11 10 10%
Other Operating Expenses.............................. 40 29 38%
------ ------
Total Operating Expenses...................... 3,574 2,596 38%
------ ------
Operating Income........................................ $ 15 $ 49 (69%)
====== ======
Operations Data:
Natural Gas (in Bcf):
Sales.............................................. 1,185 1,076 10%
Transportation..................................... 24 26 (8%)
Gathering.......................................... 242 231 5%
------ ------
Total......................................... 1,451 1,333 9%
====== ======
Electricity (in thousand MWH):
Wholesale Power Sales.............................. 24,997 2,776 800%
====== ======
1997 Compared to 1996 (Pro Forma). Pro forma operating revenues for Energy
Marketing increased by $944 million (36%) for 1997 in comparison to 1996 due to
increased natural gas and electricity trading volumes. Increased volumes in 1997
had minimal effect on operating income due to low operating margins in both
periods.
Pro forma operating income for 1997 was $15 million compared to $49 million
in 1996. This decrease of approximately $34 million (69%) was primarily
attributed to: (i) hedging losses associated with anticipated first quarter 1997
sales under peaking contracts and (ii) losses from the sale of natural gas held
in storage and
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39
unhedged in the first quarter of 1997 totaling $17 million. In addition, other
operating expenses increased $11 million largely due to increased staffing and
marketing activities made in support of the increased sales and expanded
marketing efforts. Partially offsetting these unfavorable impacts were increased
margins from natural gas gathering activities.
Natural gas and purchased power expense increased $988 million (40%) in
1997 compared to 1996 primarily due to increased gas and electricity marketing
activities but also included hedging losses and losses from the sale of natural
gas, as discussed above.
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 Company's accounting treatment of derivative instruments,
see Note 2 to the Company's Consolidated Financial Statements and "Quantitative
and Qualitative Disclosures About Market Risk" in Item 7A of this report.
The Company believes that NES' energy marketing and risk management
services have the potential of complementing the Company's strategy of
developing and/or acquiring unregulated 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.
INTERNATIONAL
The Company's international business segment (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 of the international operations of NorAm. Substantially all of
the Company's International operations to date have been in Central and South
America.
Results of operations data for International are presented in the following
table on an unaudited pro forma basis as if the Merger had occurred as of
January 1, 1997 and 1996, as applicable. The primary pro forma adjustment made
to this segment in connection with the Merger is to give effect to the
development costs and other expenditures incurred by certain NorAm subsidiaries
on international projects prior to the Acquisition Date. The adjustment had no
effect on operating revenues. Results of operations for International for the
years ended December 31, 1996 and 1995 are presented on an actual basis as the
related NorAm operations for such years were immaterial.
UNAUDITED
PRO FORMA ACTUAL
YEAR ENDED YEAR ENDED
------------ PERCENT ------------ PERCENT
1997 1996 CHANGE 1996 1995 CHANGE
---- ---- ------- ---- ---- -------
(IN (IN
MILLIONS) MILLIONS)
Operating Revenues............................. $92 $62 48% $62 $ 47 32%
Operating Expenses:(1)
Fuel......................................... 21 19 11% 19 18 6%
Operation and Maintenance.................... 50 42 19% 39 76 (49%)
Depreciation and Amortization................ 4 2 100% 2 1 100%
--- --- --- ----
Total Operating Expenses............. 75 63 19% 60 95 (37%)
--- --- --- ----
Operating Income (Loss)........................ $17 $(1) $ 2 $(48)
=== === === ====
- - ---------------
(1) International operating expenses are included in other operating expenses on
the Company's Consolidated Statements of Income. The above detail is
provided for informational purposes only.
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1997 Compared to 1996 (Pro Forma). Pro forma operating income for 1997 was
$17 million compared to an operating loss of approximately $1 million for the
same period in 1996. The first quarter of 1996 includes an $8 million pre-tax
non-recurring charge related to the write-off of a portion of HI Energy's
investment in two tire-to-energy plants in 1996. Excluding non-recurring
charges, International would have had operating income in 1996 of $7 million.
The increase in 1997 operating income is due to increased equity earnings of $32
million partially offset by higher operation expenses resulting from increased
corporate and project development costs. Equity earnings increased primarily due
to investments in Brazil and Colombia. Light Servicos de Eletricidade S.A.
(Light) reported enhanced results in 1997 and a full year of operations compared
to only eight months in 1996. HI Energy's investment in EPSA, a Colombian
electric utility, in which HI Energy acquired a 28% interest in June 1997, also
contributed to the increase in equity income.
Excluding after-tax nonrecurring charges of $5 million for 1996,
International's pro forma net income was $23 million and $3 million for 1997 and
1996, respectively. Generally, HI Energy's net income exceeds its operating
income because of tax benefits and because equity income is reflected net of
tax. However, in 1996 net income did not exceed operating income primarily due
to lower equity earnings in 1996.
1996 Compared to 1995 (Actual). Operating income for the year ended
December 31, 1996 was $2 million compared to an operating loss of $48 million
for the same period in 1995. The increase is primarily due to (i) equity
earnings of approximately $16 million from Light which was acquired in May 1996,
(ii) a $20 million reduction in non-recurring charges associated with the
investment in two tire-to-energy plants (included in operation and maintenance
expenses) and (iii) reduced project development costs (included in operation and
maintenance expenses). International's actual net income in 1996 was $.2 million
compared to a loss of $33 million in 1995.
International intends to evaluate and consider a wide array of potential
business strategies, including possible acquisitions, restructurings,
reorganizations and/or dispositions of currently owned properties or
investments. Pursuit of any of the above strategies, or any combination thereof
could have a significant impact on the business operations and financial
condition of International.
For additional information about the accounting treatment of certain of HI
Energy's foreign investments, see Note 5 to the Company's Consolidated Financial
Statements.
CORPORATE
Corporate. The Company's corporate and other business segment (Corporate)
includes the operations of HI Power Generation, Inc. (HIPG), which is engaged in
the acquisition, development, and operation of domestic non-rate regulated power
generation facilities, the Company's unregulated retail electric services
business, certain real estate holdings of the Company, corporate costs and
inter-unit eliminations.
In 1997, Corporate's pro forma operating loss of $61 million which reflects
an increase of $19 million when compared to 1996. The increase in pro forma
operating losses was primarily due to (i) losses associated with the Company's
non-regulated utility services business; (ii) consumer services business; (iii)
unregulated retail electric services business; and (iv) expenses related to the
development of domestic power generation projects.
HIPG. HIPG was formed in March 1997 to pursue the acquisition of domestic
electric generation assets as well as the development of new domestic non-rate
regulated power generation facilities. The Company has invested approximately $3
million in HIPG development activities since its formation. HIPG currently has
entered into commitments associated with various generation projects amounting
to $338 million, including certain commitments that remain subject to due
diligence and other conditions. The Company currently expects to finance these
commitments primarily with the proceeds from bank borrowings obtained by one or
more subsidiaries of the Company. The Company expects that HIPG will continue to
participate as a bidder in future sales of generating assets. Depending on the
timing and success of HIPG's future bidding efforts resulting expenditures could
be substantial.
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CERTAIN FACTORS AFFECTING FUTURE EARNINGS
OF THE COMPANY AND ITS SUBSIDIARIES
Earnings for the past three years are not necessarily indicative of future
earnings and results. The level of future earnings depends on numerous factors
including (i) the Company's ability to successfully integrate the operations of
NorAm into the Company's operations; (ii) the future growth in the Company and
its subsidiaries' energy sales; (iii) weather; (iv) the success of the Company's
and its subsidiaries' entry into non-rate regulated businesses such as energy
marketing and international and domestic power projects; (v) the Company's and
its subsidiaries' ability to respond to rapid changes in a competitive
environment and in the legislative and regulatory framework under which it has
traditionally operated; (vi) rates of economic growth in the Company's and its
subsidiaries' service areas; (vii) the ability of the Company and its
subsidiaries to control costs and to maintain pricing structures that are both
attractive to customers and profitable; (viii) the outcome of future rate
proceedings; and (ix) future legislative initiatives.
In order to adapt to the increasingly competitive environment in which the
Company and its subsidiaries operate, the Company intends to evaluate and
consider a wide array of potential business strategies. These may include
business combinations or acquisitions involving other utility or non-utility
businesses or properties, internal restructuring, and reorganizations or
dispositions of currently owned properties or currently operating business
units. Pursuit of any of the above strategies, or any combination thereof, may
significantly affect the business operations and financial condition of the
Company.
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.
In 1997, the Texas legislature considered but did not pass legislation
intended to address various issues concerning the restructuring of the electric
utility industry, including proposals that would permit Texas retail electric
customers to choose their own electric suppliers beginning on December 31, 2001.
The legislative proposals included provisions relating to full stranded cost
recovery; rate reductions; rate freezes; the unbundling of generation
operations, transmission and distribution and customer service operations;
securitization of regulatory assets; and consumer protections. Although the
Company and certain other parties (including the Texas Utility Commission)
supported the bill, it was not enacted prior to the expiration of the
legislative session.
In October 1997, the Company presented a proposed transition to competition
plan intended to address certain aspects of the proposals contained in the
legislation formerly pending before the Texas legislature. By mid-December 1997,
negotiations resulted in a settlement agreement (Settlement Agreement) among the
Company and representatives of the state's consumer and industrial groups, the
staffs of the City of Houston, the Texas Utility Commission and others that was
presented to the Texas Utility Commission, where it is currently under
consideration.
Under the terms of the proposal, residential customers will receive a 4%
credit to the base cost of electricity in 1998, increasing to 6% in 1999. Small
and mid-sized businesses will receive a 2% credit to their base costs beginning
in 1998. The combined effect of these reductions is expected to be a $166
million decrease in base revenues over a two year period. In addition, the
Company (over the next two years) will be permitted to mitigate its potentially
stranded costs by (i) redirecting to production property all of its current
depreciation expenses that would otherwise be credited to accumulated
depreciation for transmission and distribution property, and (ii) applying any
and all earnings above a rate of return cap of 9.95% to additional depreciation
of production property. The Company estimates that redirected depreciation over
the two-year period of 1998 and 1999 will be approximately $364 million. As part
of the Settlement Agreement, the Company will support proposed legislation in
the 1999 Texas legislative session that includes provisions providing for retail
customer choice effective December 31, 2001 and other provisions consistent with
those in the 1997 proposed legislation.
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The Settlement Agreement is currently under consideration by the Texas
Utility Commission, the City of Houston and other cities served by HL&P. In
December 1997, the Texas Utility Commission approved the petition filed by the
Company to implement the requested base rate credits on a temporary basis
beginning January 1, 1998, pending final Texas Utility Commission consideration.
The approval also included the accounting order necessary to permit the Company
to begin redirecting depreciation from its transmission and distribution
facilities to production property on a temporary basis pending final Texas
Utility Commission consideration. A procedural schedule has been developed by
the Texas Utility Commission whereby a final decision regarding the Settlement
Agreement would be reached by the end of March 1998.
Although the Company believes that the proposal has strong support from
many groups active in the debate over deregulation of the electric industry, it
is not in a position at this time to predict whether the proposal will be
adopted, and if adopted, what form it ultimately may take.
COMPETITION -- ELECTRIC OPERATIONS
Due to changing government regulations, technological developments and the
availability of alternative energy sources, the U.S. electric utility industry
has become increasingly competitive.
Long-Term Trends in Electric Utility Industry. Based on a strategic review
of the Company's business and of ongoing developments in the electric utility
and related industries regarding competition, regulation and consolidation, the
Company's management believes that the pace of change affecting the electric
utility industry is likely to accelerate, albeit on a state-by-state basis. As
of December 31, 1997, 16 states are considering legislative proposals to
restructure electricity markets. The Company's management also believes the
businesses of electricity and natural gas are converging and consolidating and
these trends will alter the structure and business practices of companies
serving these markets in the future. In particular, the Company's management has
observed a trend toward performance based ratemaking for regulated transmission
and distribution operations. This trend should provide incentives for electric
utilities to become more efficient.
Competition in Wholesale Market. The Energy Policy Act of 1992 and the
Texas Public Utility Regulatory Act of 1995 (PURA) both contain provisions
intended to facilitate the development of a wholesale energy market. Although
HL&P's wholesale sales traditionally have accounted for less than 1% of its
total revenues, the expansion of competition in the wholesale electric market is
significant in that it has increased the range of nonutility competitors, such
as exempt wholesale generators (EWGs) and power marketers, in the Texas electric
market as well as resulted in fundamental changes in the operation of the state
transmission grid.
In February 1996, the Texas Utility Commission adopted rules granting
third-party users of transmission systems open access to such systems at rates,
terms and conditions comparable to those available to utilities owning such
transmission assets. Under the Texas Utility Commission order implementing the
rule, HL&P was required to separate, on an operational basis, its wholesale
power marketing operations from the operations of the transmission grid and, for
purposes of transmission pricing, to disclose each of its separate costs of
generation, transmission and distribution.
In January 1997, the Texas Utility Commission approved interim transmission
cost of service rates under the new transmission access pricing rules. The
associated 1997 revenue was $86 million offset by transmission expenses of $88
million.
In August 1996, the Texas Utility Commission approved the creation of an
Independent System Operator (ISO) to manage the electric grid of the Electric
Reliability Council of Texas (ERCOT). The ISO is a key component of implementing
the Texas Utility Commission's overall strategy to create a competitive
wholesale market. The ISO is responsible for ensuring that all power producers
and traders have fair access to the ERCOT electric transmission system. The
ERCOT ISO plan is the first ISO proposal to be implemented in the U.S. The ISO
is governed by an equal number of representatives from each of six wholesale
market groups: investor owned utilities, municipally owned utilities, electric
cooperatives and river authorities, transmission dependent utilities,
independent power producers and power marketers.
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Competition in Retail Market. The Company has agreed pursuant to the
Settlement Agreement to support legislation in 1999 that is intended to permit
Texas retail electric customers to choose their own suppliers beginning on
December 31, 2000.
In January 1997, the Texas Utility Commission delivered a report to the
Texas legislature on the scope of competition in Texas electric markets and the
impact of competition and industry restructuring on customers in both
competitive and non-competitive markets (including legislative recommendations
to promote the public interest in such markets). In its report, the Texas
Utility Commission recommended that the Texas legislature enact legislation to
implement retail competition in Texas but recommended against any legislation
that would introduce broad-based retail competition before 2000. The Texas
Utility Commission is currently updating this report for the 1999 legislative
session.
For information about the Company's proposed transition to competition
plan, see "-- Certain Factors Affecting Future Earnings of the Company and its
Subsidiaries -- Rate Proceedings -- Electric Operations."
Stranded Costs. As the U.S. electric utility industry continues its
transition to a more competitive environment, a substantial amount of fixed
costs previously approved for recovery under traditional utility regulatory
practices (including regulatory assets and liabilities) may become "stranded,"
i.e., unrecoverable at competitive market prices. The issue of stranded costs
could be particularly significant with respect to fixed costs incurred in
connection with the past construction of generation plants, such as nuclear
power plants, which would not command the same price for their output as they
have in a regulated environment.
In January 1997, the Texas Utility Commission delivered a report to the
Texas legislature on stranded investments in the electric utility industry in
Texas. The report estimated that the total amount of stranded costs for all
Texas utilities could be as high as $21 billion, based on one set of
assumptions, and alternatively projected that such costs could be minimal or
non-existent, based on another set of assumptions. Electric Operations'
estimated stranded costs as set forth in the Texas Utility Commission report,
calculated based on various sets of assumptions provided by the Texas Utility
Commission, ranged from non-existent to $6 billion. The broad range of estimates
illustrates the inherent uncertainty in calculating these costs. The Texas
Utility Commission is currently updating this report for the 1999 legislative
session.
Regulatory Assets and Liabilities. Electric Operations applies the
accounting policies established in SFAS No. 71, "Accounting for the Effects of
Certain Types of Regulation" (SFAS No. 71). In general, SFAS No. 71 permits a
company with cost-based rates to defer certain costs that would otherwise be
expensed to the extent that the utility is recovering or expects to recover such
costs in rates charged to customers. If, as a result of changes in regulation or
competition, Electric Operations' ability to recover these assets and/or
liabilities would not be assured, then pursuant to SFAS No. 101, "Accounting for
Discontinuation of Application of SFAS No. 71 (SFAS No. 101) and SFAS No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
be Disposed of" (SFAS No. 121), Electric Operations would be required to write
off or write down such net regulatory assets to the extent that they ultimately
were determined not to be recoverable. For further information concerning
regulatory assets or the Company's balance sheet and discussion of the
accounting for regulatory assets and liabilities, see Note 1(c) to the Company's
Consolidated Financial Statements.
COMPETITION -- OTHER OPERATIONS
Natural Gas Distribution competes primarily with alternate energy sources
such as electricity and other fuel sources as well as with providers of energy
conservation products. In addition, as a result of federal regulatory changes
affecting interstate pipelines, it has become possible for other natural gas
suppliers and distributors to bypass Natural Gas Distribution's facilities and
market, sell and/or transport natural gas directly to small commercial and/or
large volume customers.
Interstate Pipeline competes with other interstate and intrastate pipelines
in the transportation and storage of natural gas. The principal elements of
competition among pipelines are rates, terms of service, and flexibility and
reliability of service. Interstate Pipeline competes indirectly with other forms
of energy available to its customers, including electricity, coal and fuel oils.
The primary competitive factor is price. Changes in
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the availability of energy and pipeline capacity, the level of business
activity, conservation and governmental regulations, the capability to convert
to alternative fuels, and other factors, including weather, affect the demand
for natural gas in areas served by Interstate Pipeline and the level of
competition for transport and storage services.
Energy Marketing competes for sales in its gas marketing business with
other natural gas merchants, producers and pipelines based on its ability to
aggregate supplies at competitive prices from different sources and locations
and to utilize efficiently transportation from third-party pipelines. Energy
Marketing also competes against other energy marketers on the basis of its
relative financial position and access to credit sources. This competitive
factor reflects the tendency of energy customers, natural gas suppliers and
natural gas transporters to seek financial guarantees and other assurances that
their energy contracts will be satisfied. As pricing information becomes
increasingly available in the energy marketing business and as deregulation in
the electricity markets continues to accelerate, the Company anticipates that
Energy Marketing will experience greater competition and downward pressure on
per-unit profit margins in the energy marketing industry.
Competition for acquisition of international and domestic non-rate
regulated power projects is intense. HI Energy and HIPG compete against a number
of other participants in the non-utility power generation industry, some of
which have greater financial resources and have been engaged in non-utility
power projects for periods longer than the Company and have accumulated greater
portfolios of projects. Competitive factors relevant to the non-utility power
industry include financial resources, access to non-recourse funding and
regulatory factors.
FLUCTUATIONS IN COMMODITY PRICES AND DERIVATIVE INSTRUMENTS
For information regarding the Company's exposure to risk as a result of
fluctuations in commodity prices and derivative instruments, see Item 7A of this
Report.
ACCOUNTING TREATMENT OF ACES
The Company accounts for its investment in Time Warner Convertible
Preferred Stock (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.
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 accounting loss equal to the
aggregate amount of such increase as applicable to all ACES multiplied by
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 price 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.
As of December 31, 1997, the market price of Time Warner common stock was
$62.00 per share. Accordingly, the Company recognized an increase of $121
million in the unrealized liability relating to its ACES indebtedness (which
resulted in an after tax earnings reduction of $79 million or $.31 per share).
The Company believes that this unrealized loss for the ACES is more than
economically hedged by the approximately $430 million unrecorded unrealized gain
at December 31, 1997 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. Any gain related to the increase in the fair value of Time
Warner Common Stock would be recognized upon the sale of the TW Preferred or the
shares of common stock into which such TW Preferred is converted. As of February
28, 1998, the price of Time Warner common stock was $67.50 per share which would
have resulted in the Company recognizing an additional increase of $104 million
in the unrealized
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liability represented by its indebtedness under the ACES. The related unrecorded
unrealized gain as of February 28, 1998 would have been computed as an
additional $126 million.
IMPACT OF THE YEAR 2000 ISSUE AND OTHER SYSTEM IMPLEMENTATION ISSUES
The Company is currently evaluating its computer and software requirements
in light of changes in the electric utility and energy services industries and
the acquisition of NorAm and resulting expansions of the Company into energy
trading activities.
In September 1997, the Company entered into an agreement with SAP America,
Inc. (SAP) to license SAP's proprietary R/3 enterprise software. The licensed
software includes finance and accounting, human resources, materials management
and service delivery components. Based on the current timetable for completion
of the SAP implementation and integration project (Project), the Company
estimates that the third-party cost (including software license fees, fees for
consulting and other services and hardware acquisition costs) plus internal
costs of the Project will be approximately $130 million. It is currently
projected that these costs would be incurred over a three-year period. All
business process reengineering costs associated with the Project will be
expensed by the Company when incurred. It is anticipated that the implementation
of SAP will negate the need to modify many of the Company's computer systems to
accommodate the year 2000. The Company is also considering installing a new
customer information system; expenditures for the installation of such a system
have not been determined but could be significant.
The Company is also evaluating various alternatives intended to permit its
existing computer programs (those not anticipated to be replaced by SAP) to
accommodate the year 2000 and beyond. Based on current internal cost and
productivity studies as well as bids recently solicited from various computer
software contractors, the Company estimates that the cost of resolving the year
2000 issue for its current operations (other than those anticipated to be
replaced by SAP) will range between $20 million to $25 million.
The costs of becoming year 2000 compliant and the dates by which the
Company plans to complete the year 2000 modifications are based on management's
estimates, which were derived utilizing numerous assumptions regarding future
events, including the continued availability of certain resources, third party
modification plans and other factors. However, there can be no guarantee that
these cost or time estimates will be achieved, and actual results could differ
materially. Specific factors that might cause such material differences include,
but are not limited to, the availability of personnel trained in this area and
the ability to locate and correct all relevant computer codes.
RISKS OF OVERSEAS OPERATIONS
As of December 31, 1997, the Company's Consolidated Balance Sheets
reflected $803 million of foreign investments, a substantial portion of which
represent equity investments in foreign utility companies.
Foreign power projects entail certain political and financial risks,
distinct from those associated with domestic power projects. Such risks include
(i) expropriation, (ii) political instability, (iii) currency exchange rate
fluctuations and repatriation restrictions and (iv) regulatory and legal
uncertainties. Although HI Energy seeks to minimize these risks in a variety of
ways, including co-investing with local partners, financing investments with
nonrecourse debt and reviewing the potential return of any investment against
related political and other risks, there can be no assurance that HI Energy's
efforts to minimize overseas operational risks will be successful.
As of December 31, 1997, HI Energy held a 11.35% ownership interest in
Light. Equity earnings from Light constitute a substantial portion of
International's operating income. In December 1997, Light experienced numerous
power outages in its service territory during a period of record peaks in
electrical demand. The Brazilian electricity service regulatory agency (ANEEL)
in February 1998 assessed against Light a $1.2 million penalty because of these
outages. Light has protested the assessment of the fines.
In February 1998, HI Energy and certain of its Argentine subsidiaries
initiated an arbitration proceeding before the International Centre for
Settlement of Investment Disputes against the Republic of Argentina, relating to
alleged violations by the Province of Santiago del Estero and others of certain
provisions of the
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concession contract held by EDESE. HI Energy and its subsidiaries are seeking
recovery of damages in an amount to be determined, but estimated to be no less
than $10 million.
ENVIRONMENTAL EXPENDITURES
The Federal Clean Air Act (Clean Air Act) and other federal and state laws
and regulations have required, and will continue to require, the Company to make
significant expenditures in order to comply with environmental standards.
Clean Air Act Expenditures. In 1996, the Company incurred costs of
approximately $1 million and less than $1 million in 1997, in order to comply
with requirements applicable to Electric Operations under the Clean Air Act,
which requirements mandate that electric utilities install continuous emission
monitoring equipment. Installation of the new systems was completed in 1996,
and, based on existing regulatory requirements, the Company forecasts no
additional significant expenditures for the installation of continuous emissions
monitoring systems for 1998.
The Clean Air Act also requires establishing new emission limitations for
oxides of nitrogen (NOx). However, implementation of these limitations has been
delayed until 1999. The Company did not incur NOx reduction costs in 1997 but it
estimates that it will expend up to $10 million between 1998 and 1999 for NOx
reductions. Current Texas Natural Resource Conservation Commission evaluations
indicate NOx reductions will be required subsequent to 1999, however the
magnitude and timing of such reductions have not been established.
Expenditures Associated with Planned HIPG Acquisitions. The California
South Coast Air Quality Management District updated the Air Quality Management
Plan for attainment of the federal ozone standard in 1997. The plan included
provisions for future year reductions in NOx emissions. Various emission
reduction initiatives and emission credit purchases are being evaluated in
association with the proposed acquisitions of generation assets by HIPG in
California. The estimated capital expenditures associated with such reductions
and/or purchases have not yet been determined.
EPA Proceedings. In 1992, the EPA (i) identified the Company, along with
several other parties, as "potentially responsible parties" (PRP) under the
Comprehensive Environmental Response, Compensation and Liability Act for the
costs of cleaning up a site located adjacent to one of the Company's
transmission lines and (ii) issued an administrative order for the remediation
of the site. The Company believes that the EPA took this action solely on the
basis of information indicating that the Company in the 1950s acquired record
title to a portion of the land on which the site is located. The Company does
not believe that it now or previously held any ownership interest in the site
covered by the order and has obtained a judgment to that effect from a court in
Galveston County, Texas. Based on this judgment and other defenses that the
Company believes to be meritorious the Company has elected not to adhere to the
EPA's administrative order, even though the Company understands that other PRPs
are proceeding with site remediation. To date, neither the EPA nor any other PRP
has instituted a claim against the Company for any share of the remediation
costs for the site. However, if the Company was determined to be a responsible
party, the Company could be found to be jointly and severally liable along with
the other PRPs, for the aggregate remediation costs of the site (which the
Company estimates to be approximately $80 million in the aggregate) and could be
subjected to substantial fines and damage claims. Although the ultimate outcome
of this proceeding cannot be predicted at this time, the Company does not
believe that this case will have a material adverse effect on the Company's
financial condition, liquidity or results of operations.
Litigation Involving Site Remediation. The Company is a defendant in
litigation arising out of the environmental remediation of a site in Corpus
Christi, Texas. The site was operated by third parties as a metals reclaiming
operation. Although the Company neither operated nor owned the site, certain
transformers and other equipment originally sold by the Company may have been
delivered to the site by third parties. The Company and others have remediated
the site pursuant to a plan approved by appropriate state agencies and a federal
court. To date, the Company has recovered, or has commitments to recover from
other responsible parties $2.2 million of the more than $3 million it has spent
on remediation.
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In Dumes, et al. v. Company, et al. (filed in December 1991 and pending in
the U.S. District Court for the Southern District of Texas, Corpus Christi
Division), landowners near the Corpus Christi site have asserted claims that
their property has been contaminated as a result of the remediation effort and
are seeking approximately $70 million in compensatory damages, in addition to
punitive damages of $51 million. The Dumes case is currently scheduled for trial
in June 1998. Although the ultimate outcome of this case cannot be predicted at
this time, the Company does not believe that this case will have a material
adverse effect on the Company's financial condition, liquidity or results of
operations.
Manufactured Gas Plant Sites. NorAm and its predecessors operated a
manufactured gas plant (MGP) adjacent to the Mississippi River in Minnesota
formerly known as Minneapolis Gas Works (FMGW) until 1960. NorAm has completed
remediation of the main site other than ongoing water monitoring and treatment.
There are six other former MGP sites in the Minnesota service territory.
Remediation has been completed on one site. Of the remaining five sites, NorAm
believes that two were neither owned nor operated by NorAm; two were owned by
NorAm at one time but were operated by others and are currently owned by others;
and one site was previously operated by NorAm but was owned by others. NorAm
believes it has no liability with respect to the sites it neither owned nor
operated.
At December 31, 1997, NorAm had estimated a range of $15 million to $77
million for possible remediation of the Minnesota sites. The low end of the
range was determined based on only those sites presently owned or known to have
been operated by NorAm, assuming use of NorAm's proposed remediation methods.
The upper end of the range was determined based on the sites once owned by
NorAm, whether or not operated by NorAm. The cost estimates for the FMGW site
are based on studies of that site. The remediation costs for other sites are
based on industry average costs for remediation of sites of similar size. The
actual remediation costs will be dependent upon the number of sites remediated,
the participation of other potentially responsible parties, if any, and the
remediation methods used.
In its 1995 rate case, NorAm's Minnegasco division was allowed to recover
approximately $7 million annually for remediation costs. Such costs are subject
to a true-up mechanism whereby any over or under recovered amounts, net of
certain insurance recoveries, plus carrying charges, would be deferred for
recovery or refund in the next rate case. At December 31, 1997 and 1996,
Minnegasco had recorded a liability of $20.6 million and $35.9 million,
respectively, to cover the cost of future remediation. In addition, at December
31, 1997, Minnegasco had receivables from insurance settlements of $2.9 million.
These insurance settlements will be collected through 1999. Minnegasco expects
that approximately half of its accrual as of December 31, 1997 will be expended
within the next five years. The remainder will be expended on an ongoing basis
for an estimated 40 years. In accordance with the provisions of SFAS No. 71, a
regulatory asset has been recorded equal to the liability accrued. Minnegasco is
continuing to pursue recovery of at least a portion of these costs from
insurers. Minnegasco believes the difference between any cash expenditures for
these costs and the amount recovered in rates during any year will not be
material to the Company's or NorAm's overall cash requirements, results of
operations or cash flows.
Issues relating to the identification and remediation of MGPs are common in
the utility industry. NorAm has received notices from the EPA and others
regarding its status as a potentially responsible party for other sites. The
Company and NorAm have not been able to quantify a range of environmental
expenditures for potential remediation expenditures with respect to other MGP
sites.
Mercury Contamination. Like other natural gas pipelines, NorAm's pipeline
operations have in the past employed elemental mercury in meters used on its
pipelines. Although the mercury has now been removed from the meters, it is
possible that small amounts of mercury have been spilled at some of those sites
in the course of normal maintenance and replacement operations and that such
spills have contaminated the immediate area around the meters with elemental
mercury. Such contamination has been found by NorAm at some sites in the past,
and NorAm has conducted remediation at sites found to be contaminated. Although
NorAm is not aware of additional specific sites, it is possible that other
contaminated sites exist and that remediation costs will be incurred for such
sites. Although the total amount of such costs cannot be known at this time,
based on experience by NorAm and others in the natural gas industry to date and
on the current
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regulations regarding remediation of such sites, the Company and NorAm believe
that the cost of any remediation of such sites will not be material to the
Company or NorAm's financial position, results of operation or cash flows.
Other. From time to time the Company and/or its subsidiaries have received
notice from regulatory authorities or others that they are considered to be
potentially responsible parties in connection with sites found to require
remediation due to the presence of environmental contaminants. In addition, the
Company has been named as a defendant in litigation related to such sites and in
recent years has been named, along with numerous others, as a defendant in
several lawsuits filed by a large number of individuals who claim injury due to
exposure to asbestos while working at sites along the Texas Gulf Coast. Most of
these claimants have been workers who participated in construction of various
industrial facilities, including power plants, and some of the claimants have
worked at locations owned by the Company. The Company anticipates that
additional claims like those received may be asserted in the future and intends
to continue its practice of vigorously contesting claims which it does not
consider to have merit. Although their ultimate outcome cannot be predicted at
this time, the Company does not believe, based on its experience to date, that
these matters, either individually or in the aggregate, will have a material
adverse effect on the Company's financial position, results of operation or cash
flows.
There exists the possibility that additional legislation related to global
climate change, electromagnetic fields and other environmental and health issues
may be enacted. Compliance with such legislation could significantly affect the
Company and its subsidiaries. The precise impact of new legislation, if any,
will depend on the form of the legislation and the subsequent development and
implementation of applicable regulations.
OTHER CONTINGENCIES
For a description of certain other legal and regulatory proceedings
affecting the Company and its subsidiaries, see Notes 3, 4, 5 and 12 to the
Company's Consolidated Financial Statements, which notes are incorporated herein
by reference.
LIQUIDITY AND CAPITAL RESOURCES
COMPANY CONSOLIDATED CAPITAL REQUIREMENTS
The liquidity and capital requirements of the Company and its subsidiaries
are affected primarily by capital programs and debt service requirements. The
capital requirements for 1997 were, and as estimated for 1998 through 2000 are,
as follows:
MILLIONS OF DOLLARS
--------------------------------
1997 1998 1999 2000
---- ------ ---- ------
Electric capital and nuclear fuel (excluding
Allowance for funds used during construction)
(AFUDC).......................................... $234 $ 331 $343 $ 308
Natural Gas Distribution(1)........................ 61 138 146 150
Interstate Pipeline(1)............................. 16 73 17 17
Energy Marketing(1)................................ 14 8 7 8
International project expenditures (excluding
capitalized
interest)(2)..................................... 224 8 2 4
Corporate (excluding HIPG)......................... 20 13 16 12
HIPG project expenditures (excluding capitalized
interest)(2)..................................... 3 311 26
Maturities of long-term debt, preferred stock and
minimum capital lease payments................... 282 233 380 1,430
---- ------ ---- ------
Total(3)........................................... $854 $1,115 $937 $1,929
==== ====== ==== ======
- - ---------------
(1) The 1997 capital expenditures for Natural Gas Distribution, Interstate
Pipeline and Energy Marketing are reported on an actual basis and reflect
expenditures only for the period from the effective date of the
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Merger, August 6, 1997, through December 31, 1997. On a pro forma basis
after giving effect to the Merger on January 1, 1997, the capital
expenditures for these business segments would have been: Natural Gas
Distribution ($131 million), Interstate Pipeline ($26 million) and Energy
Marketing ($24 million).
(2) Expenditures in the table reflect only expenditures made or to be made under
existing contractual commitments entered into by International and HIPG.
International and HIPG capital requirements are expected to be met through
advances from the Company, the proceeds of project financings and the
proceeds of borrowings at the Company's financial subsidiaries. Additional
capital expenditures are dependent upon the nature and extent of future
project commitments (some of which may be substantial). Expenditures for
1998 include a $237 million commitment by HIPG to purchase four power plants
from Southern California Edison, which commitment was entered into in the
fourth quarter of 1997.
(3) Expenditures in the table do not reflect expenditures associated with the
Year 2000 issue and other system integration issues. For a discussion of
these expenditures, see "-- Certain Factors Affecting Future Earnings of the
Company and its Subsidiaries -- Impact of Year 2000 Issue and Other System
Implementation Issues."
The foregoing estimates are forward looking statements and are based on
numerous assumptions, some of which may prove to be incorrect. Actual liquidity
and capital requirements will also vary because of changes in governmental
regulations, the resolution of various litigation and other contingencies and
changes in economic conditions.
The Company and its subsidiaries generated $1.1 billion in cash flow from
operations in 1997. Substantially all of the Company's and its subsidiaries'
cash flow resulted from $421 million of income from continuing operations and
$652 million of non-cash depreciation and amortization expense. The Company used
this cash flow to reinvest in its existing businesses, to meet its dividend
requirements and to contribute to the financing of business expansion.
Overall, the Company's cash flow from operating activities in 1997 exceeded
its cash flow from non-acquisition investing activities by $787 million. With
respect to acquisition activities, the Company invested $1.4 billion of cash in
the acquisition of NorAm and $235 million of cash in non-rate regulated electric
power project expenditures in 1997.
In the first quarter of 1997, the Company repaid at maturity $40 million
aggregate principal amount of its 5 1/4% first mortgage bonds and $150 million
aggregate principal amount of its 7 5/8% first mortgage bonds.
In April 1997, the Company redeemed all remaining 257,000 shares of its
$9.375 cumulative preferred stock pursuant to mandatory sinking fund
requirements at a cost of $25.7 million, plus accrued dividends. For additional
information, see Note 7(a) to the Company's Consolidated Financial Statements.
In June 1997, the Company purchased $57.6 million aggregate principal
amount of its 9.15% first mortgage bonds due 2021 for a total price of $69.6
million, plus accrued interest. In November 1997, the Company repaid at maturity
$35 million aggregate principal amount of its 6 3/4% first mortgage bonds.
In the fourth quarter of 1997, NorAm purchased $101.4 million aggregate
principal amount of its 10% Debentures due 2019 at an average price of 111.976%
plus accrued interest. In December 1997, NorAm repaid at maturity $52 million
aggregate principal amount of its medium term notes.
COMPANY CONSOLIDATED SOURCES OF CAPITAL RESOURCES AND LIQUIDITY
In 1997, two Delaware business trusts established by the Company issued
capital securities and preferred securities aggregating $350 million. The trusts
sold securities to the public ($100 million of 8.257% capital securities and
$250 million of 8.125% preferred securities) and used the proceeds to purchase
subordinated debentures from the Company. The Company used the proceeds from the
sale of the subordinated debentures for general corporate purposes, including
the repayment of short-term debt and the redemption of three series
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of cumulative preferred stock having an aggregate liquidation value of $125
million. For further discussion, see Note 9(a) to the Company's Consolidated
Financial Statements.
In 1997, the Company sold in open market transactions 550,000 shares of
Time Warner common stock for approximately $25 million and transferred the
remaining 450,000 shares of its Time Warner common stock (having a market value
of $21.9 million) to Houston Industries Incorporated Foundation, a charitable
foundation not included in the Company's consolidated results, which was formed
to fund certain charitable activities in communities where the Company conducts
its business.
In April 1997, a subsidiary of HI Energy borrowed $162.5 million under a
$167.5 million five-year term loan facility. The proceeds of the loan, net of a
$17.5 million debt reserve account established for the benefit of the lenders,
were used to refinance a portion of the acquisition costs of Light.
In July 1997, the Company issued $1.052 billion aggregate face amount of
ACES. The Company used the proceeds from the sale of ACES for general corporate
purposes, including the retirement of then outstanding commercial paper. For
additional information regarding the ACES, see Note 8(e) to the Company's
Consolidated Financial Statements.
In August 1997, FinanceCo, a limited partnership subsidiary of the Company,
entered into a five-year, $1.6 billion revolving credit facility (FinanceCo
Facility). At December 31, 1997, the FinanceCo Facility supported $1.4 billion
in commercial paper borrowings having a weighted average interest rate of 6.15%.
Proceeds from the initial issuances of commercial paper by FinanceCo were used
to fund the cash portion of the consideration paid to stockholders of NorAm
under the terms of the Merger. For additional information regarding the
FinanceCo Facility, see Note 8(c) to the Company's Consolidated Financial
Statements.
At December 31, 1997, the Company, exclusive of NorAm and other
subsidiaries, had a revolving credit facility of $200 million with no borrowings
outstanding. In addition, at December 31, 1997, the Company had shelf
registration statements providing for the future issuance, subject to market and
other conditions, of $230 million aggregate liquidation value of its preferred
stock and $580 million aggregate principal amount of its debt securities.
At December 31, 1997, NorAm had (i) a $400 million revolving credit
facility under which loans of $340 million were outstanding, (ii) uncommitted
lines of credit under which loans of $50 million were outstanding, (iii) a trade
receivables facility of $300 million under which receivables of $300 million had
been sold and (iv) a shelf registration statement, filed with the Securities and
Exchange Commission in November 1997, providing for the future issuance of debt
securities of up to $500 million (NorAm Shelf Registration). For information
regarding the Company's maturing long-term debt (including NorAm's long-term
debt), see Note 8 to the Company's Consolidated Financial Statements.
In January 1998, pollution control revenue bonds aggregating $104.7 million
were issued on behalf of the Company by the Matagorda County Navigation District
Number One (MCND). Proceeds from the issuance 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, pursuant to the NorAm Shelf Registration, NorAm issued
$300 million 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 of
its 10% debentures and the repayment of $53 million aggregate principal amount
of NorAm debt that matured in December 1997 and January 1998.
In February 1998, pollution control revenue bonds aggregating $290 million
were issued on behalf of the Company by the Brazos River Authority (BRA).
Proceeds from the issuance will be used to redeem, at 102% of the aggregate
principal amount, pollution control revenue bonds aggregating $290 million.
The Company owns 11 million shares of non-publicly traded TW Preferred. The
TW Preferred, which is entitled to cumulative annual dividends of $3.75 per
share until July 6, 1999, is currently convertible at the option of the Company
into 22.9 million shares of Time Warner common stock. The Company's ability to
transfer, sell or pledge the shares of TW Preferred is not restricted pursuant
to the terms of the ACES. The
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Company reviews its investment in Time Warner on a regular basis and does not
expect to maintain its investment in Time Warner indefinitely. For additional
information regarding the Company's investment in Time Warner securities, see
Notes 1(n) and 8(e) to the Company's Consolidated Financial Statements.
The Company has consolidated its financing activities in order to provide a
coordinated, cost-effective method of meeting short- and long-term capital
requirements. As part of the consolidated financing program, the Company has
established a "money fund" through which its subsidiaries can borrow or invest
on a short-term basis. The funding requirements of individual subsidiaries are
aggregated and borrowing or investing is based on the net cash position. In
1997, net funding requirements under the money fund were met with commercial
paper.
Although 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, the Company may, when it deems necessary,
supplement its available cash resources by seeking funds in the equity or debt
markets.
NEW ACCOUNTING ISSUES
In February 1997, the Financial Accounting Standards Board (FASB) issued
SFAS No. 128, "Earnings per Share" (SFAS No. 128) which is required to be
implemented for financial statements issued for fiscal years ending after
December 15, 1997. In 1997, the Company adopted SFAS No. 128 and retroactively
restated prior periods. For further discussion, see Note 1(j) to the Company's
Consolidated Financial Statements.
The FASB recently issued SFAS No. 130, "Reporting Comprehensive Income"
(SFAS No. 130), 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) effective for
financial statements issued for fiscal periods beginning after December 15,
1997. SFAS No. 130 requires that all items that meet the definition of a
component of comprehensive income be reported in a financial statement for the
period in which they are recognized and the total amount of comprehensive income
be prominently displayed in that same financial statement. Comprehensive income
is defined as the change in equity of a business enterprise during a period from
transactions and other events and circumstances from non-owner sources.
Currently, the Company does not have any material items which require reporting
of comprehensive income. SFAS No. 131 requires that companies report financial
and descriptive information about reportable operating segments in financial
statements. Segments are to be defined based upon 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
postretirement benefit plans. The Company will adopt SFAS No. 130, SFAS No. 131
and SFAS No. 132 in 1998.
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ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The following discussion of the Company and its subsidiaries' exposure to
various market risks contains "forward looking statements" that involve risks
and uncertainties. These projected results have been prepared utilizing certain
assumptions considered reasonable in the circumstances and in light of
information currently available to the Company and its subsidiaries.
Nevertheless, because of the inherent unpredictability of interest rates, equity
market prices and energy commodity prices as well as other factors, actual
results could differ materially from those projected in such forward-looking
information. For a description of the Company's significant accounting policies
associated with these activities, see Notes 1 and 2 to the Company's
Consolidated Financial Statements and Notes 1 and 2 to NorAm's Consolidated
Financial Statements.
INTEREST RATE RISK
The Company and its subsidiaries have long-term debt, Company/NorAm
obligated mandatorily redeemable securities of subsidiary trusts holding solely
subordinated debentures of the Company/NorAm (Trust Securities), securities held
in the Company's nuclear decommissioning trust, short-term credit lines and
facilities, certain lease obligations and interest rate swaps which subject the
Company and certain of its subsidiaries to the risk of loss associated with
movements in market interest rates.
At December 31, 1997, the Company and certain of its subsidiaries had
fixed-rate long-term debt (excluding ACES) and Trust Securities aggregating $4.2
billion in principal amount and having a fair value of $4.4 billion. These
instruments are fixed-rate and, therefore, do not expose the Company and its
subsidiaries to the risk of earnings loss due to changes in market interest
rates (see Notes 8 and 9 to the Company's Consolidated Financial Statements).
However, the fair value of these instruments would increase by approximately
$247.5 million if interest rates were to decline by 10% from their levels at
December 31, 1997. In general, such an increase in fair value would impact
earnings and cash flows only if the Company and its subsidiaries were to
reacquire all or a portion of these instruments in the open market prior to
their maturity.
The Company and certain of its subsidiaries' floating-rate obligations
aggregated $2.6 billion at December 31, 1997 (see Note 8 to the Company's
Consolidated Financial Statements), inclusive of (i) amounts borrowed under
short-term and long-term credit lines and facilities of the Company and its
subsidiaries, (ii) borrowings underlying NorAm's receivables facility and (iii)
amounts subject to a master leasing agreement under which lease payments vary
depending on short-term interest rates, which expose the Company and its
subsidiaries to the risk of increased interest and lease expense in the event of
increases in short-term interest rates. If the floating rates were to increase
by 10% from December 31, 1997 levels, the Company's consolidated interest
expense and expense under operating leases would increase by a total of
approximately $1.4 million each month in which such increase continued.
As discussed in Notes 1, 4 and 13 to the Company's Consolidated Financial
Statements, the Company contributes $14.8 million per year to a trust
established to fund the Company's share of the decommissioning costs for the
South Texas Project. The securities held by the trust for decommissioning costs
had an estimated fair value of $92.9 million as of December 31, 1997, of which
approximately 50 percent were fixed-rate debt securities that subject the
Company to risk of loss of fair value with movements in market interest rates.
If interest rates were to increase by 10% from their levels at December 31,
1997, the decrease in fair value of the fixed-rate debt securities would not be
material to the Company. In addition, the risk of an economic loss is mitigated
as a result of the Company's regulated status. Any unrealized gains or losses
are accounted for in accordance with SFAS No. 71 as a regulatory asset/liability
because the Company believes that its future contributions which are currently
recovered through the rate making process will be adjusted for these gains and
losses.
Certain subsidiaries of the Company have entered into interest rate swaps
for the purpose of decreasing the amount of debt subject to interest rate
fluctuations. At December 31, 1997, these interest rate swaps had an aggregate
notional amount of $281.1 million, which the Company could terminate at a cost
of $2.4 million (see Notes 2 and 13 to the Company's Consolidated Financial
Statements). An increase of 10% in the December 31, 1997 level of interest rates
would not increase the cost of termination of the swaps by a material
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amount to the Company. Swap termination costs would impact the Company and its
subsidiaries' earnings and cash flows only if all or a portion of the swap
instruments were terminated prior to their expiration.
EQUITY MARKET RISK
The Company holds an investment in TW Preferred which is convertible into
Time Warner common stock as described in "Management's Discussion and Analysis
of Financial Condition and Results of Operations -- Certain Factors Affecting
Future Earnings of the Company and its Subsidiaries -- Accounting Treatment of
ACES" in Item 7 of this Form 10-K. As a result, the Company is exposed to losses
in the fair value of this security. For purposes of analyzing market risk in
this Item 7A, the Company assumed that the TW Preferred was converted into Time
Warner common stock. In addition, NorAm's investment in the common stock of
Itron, Inc. (Itron) exposes the Company and NorAm to losses in the fair value of
Itron Common Stock. A 10% decline in the per share price of Itron and Time
Warner common stock from the December 31, 1997 levels would result in a loss of
approximately $2.7 million and $142.0 million, respectively, in fair value.
The Company and its subsidiaries' ability to realize gains and losses
related to TW Preferred and Itron is limited by the following: (i) the TW
Preferred is not publicly traded and its sale is subject to certain limitations
and (ii) the market for the common stock of Itron is fairly illiquid.
The ACES expose the Company to accounting losses as the accounting for the
ACES requires the Company to record in Other Income (Expense) an unrealized
accounting loss equal to (i) the aggregate amount of the increase in the market
price of Time Warner common stock above $55.5844 as applicable to all ACES
multiplied by (ii) 0.8264. Prior to the conversion of the TW Preferred into Time
Warner common stock, such loss would effect earnings. After conversion such loss
would be recognized as an adjustment to common stock equity. See further
discussion of the accounting for the ACES in Notes 1 and 8 to the Company's
Consolidated Financial Statements. An increase of 15% in the price of the Time
Warner common stock above its December 31, 1997 market value of $62.00 per
share, would result in the recognition of an additional unrealized accounting
loss (net of tax) of approximately $114.4 million. The Company believes that
this additional unrealized loss for the ACES would be 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.
As discussed above under "Interest Rate Risk," the Company contributes to a
trust established to fund the Company's share of the decommissioning costs for
the South Texas Project which held debt and equity securities in approximately
equal proportions as of December 31, 1997. The equity securities expose the
Company to losses in fair value. If the market prices of the individual equity
securities were to decrease by 10% from their levels at December 31, 1997, the
resulting loss in fair value of these securities would not be material to the
Company. Currently, the risk of an economic loss is mitigated as a result of the
Company's regulated status as discussed above under "Interest Rate Risk."
ENERGY COMMODITY PRICE RISK
As further described in Note 2 to the Company's Consolidated Financial
Statements, certain of the Company's subsidiaries utilize a variety of
derivative financial instruments (Derivatives), including swaps and
exchange-traded futures and options, as part of the Company's overall risk
management strategies and for trading purposes. To reduce the risk from the
adverse effect of market fluctuations in the price of electric power, natural
gas and related transportation, NorAm and certain of its subsidiaries enter into
futures transactions, swaps and options (Energy Derivatives) in order to hedge
certain natural gas in storage, as well as certain expected purchases, sales and
transportation of natural gas and electric power (a portion of which are firm
commitments at the inception of the hedge). The Company's policies prohibit the
use of leveraged financial instruments. In addition, a subsidiary of NorAm
maintains a portfolio of Energy Derivatives for trading purposes (Trading
Derivatives).
The Company uses a sensitivity analysis method for determining the market
risk of its Energy Derivatives, except for its Trading Derivatives, for which it
uses a value-at-risk method.
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With respect to the Energy Derivatives (other than for trading purposes)
held by subsidiaries of NorAm as of December 31, 1997, a decrease of 10% in the
market price of natural gas from the December 31, 1997 levels would decrease the
fair value of these instruments by approximately $7.0 million.
The above analysis of the Energy Derivatives utilized for risk management
purposes does not include the favorable impact that the same hypothetical price
movement would have on the Company and its subsidiaries' physical purchases and
sales of natural gas and electric power. The portfolio of Energy Derivatives
held for risk management purposes approximates the notional quantity of the
expected or committed transaction volume of physical commodities with commodity
price risk for the same time periods. Furthermore, the Energy Derivative
portfolio is managed to complement the physical transaction portfolio, reducing
overall risks within limits. Therefore, the adverse impact to the fair value of
the portfolio of Energy Derivatives held for risk management purposes associated
with the hypothetical changes in commodity prices referenced above would be
offset by a favorable impact on the underlying hedged physical transactions,
assuming (i) the Energy Derivatives are not closed out in advance of their
expected term, (ii) the Energy Derivatives continue to function effectively as
hedges of the underlying risk, and (iii) as applicable, anticipated transactions
occur as expected.
The disclosure with respect to the Energy Derivatives relies on the
assumption that the contracts will exist parallel to the underlying physical
transactions. If the underlying transactions or positions are liquidated prior
to the maturity of the Energy Derivatives, a loss on the financial instruments
may occur, or the options might be worthless as determined by the prevailing
market value on their termination or maturity date, whichever comes first.
With respect to the Trading Derivatives held by a subsidiary of NorAm,
consisting of natural gas and electric power swaps, options and exchange-traded
futures, this subsidiary is exposed to losses in fair value due to price
movement. During the year ended December 31, 1997, the highest, lowest and
average quarterly value-at-risk in the Trading Derivative portfolio was less
than $5.0 million at a 95-percent confidence level and for a holding period of
one business day. The Company uses the variance/covariance method for
calculating the value-at-risk and includes the delta approximation for options
positions.
The Company has established a Corporate Risk Oversight Committee that
oversees all corporate price and credit risk, including derivative trading
activities discussed above. The committee's duties are to establish the
Company's policies and to monitor and ensure compliance with risk management
limitations, policies and procedures.
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ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA OF THE COMPANY.
HOUSTON INDUSTRIES INCORPORATED AND SUBSIDIARIES
STATEMENTS OF CONSOLIDATED INCOME
(THOUSANDS OF DOLLARS)
YEAR ENDED DECEMBER 31,
--------------------------------------
1997 1996 1995
---------- ---------- ----------
Revenues:
Electric Operations.................................. $4,251,243 $4,025,027 $3,680,297
Natural Gas Distribution............................. 892,569
Interstate Pipeline.................................. 108,333
Energy Marketing..................................... 1,604,999
International........................................ 92,028 62,059 46,789
Other................................................ 47,851 8,191 2,185
Eliminations......................................... (123,638)
---------- ---------- ----------
Total........................................ 6,873,385 4,095,277 3,729,271
---------- ---------- ----------
Expenses:
Electric and natural gas utilities:
Fuel and cost of gas sold......................... 2,819,512 1,024,945 879,148
Purchased power................................... 698,823 322,263 233,494
Operation and maintenance......................... 1,205,993 888,699 866,170
Taxes other than income taxes..................... 296,668 246,288 245,890
Depreciation and amortization........................ 651,875 550,038 478,034
Other operating expenses............................. 136,014 72,578 121,085
---------- ---------- ----------
Total........................................ 5,808,885 3,104,811 2,823,821
---------- ---------- ----------
Operating Income....................................... 1,064,500 990,466 905,450
---------- ---------- ----------
Other Income (Expense):
Unrealized loss on ACES.............................. (121,402)
Litigation settlements............................... (95,000)
Time Warner dividend income.......................... 41,340 41,610 20,132
Interest income...................................... 6,636 6,246 9,774
Interest income -- IRS refund........................ 56,269
Other -- net......................................... 3,711 (8,268) (12,061)
---------- ---------- ----------
Total........................................ (13,446) (55,412) 17,845
---------- ---------- ----------
Interest and Other Charges:
Interest on long-term debt........................... 320,845 276,242 279,491
Other interest....................................... 77,112 33,738 21,586
Distribution on trust securities..................... 26,230
Allowance for borrowed funds used during
construction...................................... (2,872) (2,598) (4,692)
Preferred dividends of subsidiary.................... 2,255 22,563 29,955
---------- ---------- ----------
Total........................................ 423,570 329,945 326,340
---------- ---------- ----------
Income from Continuing Operations Before Income
Taxes................................................ 627,484 605,109 596,955
Income Taxes........................................... 206,374 200,165 199,555
---------- ---------- ----------
Income from Continuing Operations...................... 421,110 404,944 397,400
Discontinued Operations (Net of Income Taxes):
Gain on sale of cable television subsidiary.......... 708,124
Preferred Dividends.................................... 162
---------- ---------- ----------
Net Income............................................. $ 420,948 $ 404,944 $1,105,524
========== ========== ==========
(continued on next page)
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HOUSTON INDUSTRIES INCORPORATED AND SUBSIDIARIES
STATEMENTS OF CONSOLIDATED INCOME
(CONTINUED)
YEAR ENDED DECEMBER 31,
--------------------------------------
1997 1996 1995
---------- ---------- ----------
Basic Earnings Per Common Share:
Continuing Operations................................ $ 1.66 $ 1.66 $ 1.60
Discontinued Operations:
Gain on sale of cable television subsidiary....... 2.86
---------- ---------- ----------
Basic Earnings Per Common Share........................ $ 1.66 $ 1.66 $ 4.46
========== ========== ==========
Diluted Earnings Per Common Share:
Continuing Operations................................ $ 1.66 $ 1.66 $ 1.60
Discontinued Operations:
Gain on sale of cable television subsidiary....... 2.86
---------- ---------- ----------
Diluted Earnings Per Common Share...................... $ 1.66 $ 1.66 $ 4.46
========== ========== ==========
See Notes to the Company's Consolidated Financial Statements.
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HOUSTON INDUSTRIES INCORPORATED AND SUBSIDIARIES
STATEMENTS OF CONSOLIDATED RETAINED EARNINGS
(THOUSANDS OF DOLLARS, EXCEPT PER SHARE AMOUNTS)
YEAR ENDED DECEMBER 31,
------------------------------------
1997 1996 1995
---------- ---------- ----------
Balance at Beginning of Year............................... $1,997,490 $1,953,672 $1,221,221
Add -- Net Income.......................................... 420,948 404,944 1,105,524
---------- ---------- ----------
Total............................................ 2,418,438 2,358,616 2,326,745
Common Stock Dividends:
1997, $1.50; 1996, $1.50; 1995, $1.50 (per share)..... (405,383) (361,126) (371,760)
Stock Dividend Distribution................................ (1,313)
---------- ---------- ----------
Balance at End of Year..................................... $2,013,055 $1,997,490 $1,953,672
========== ========== ==========
See Notes to the Company's Consolidated Financial Statements.
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HOUSTON INDUSTRIES INCORPORATED AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(THOUSANDS OF DOLLARS)
ASSETS
DECEMBER 31,
--------------------------
1997 1996
----------- -----------
Property, Plant and Equipment -- At Cost:
Electric plant:
Plant in service....................................... $12,614,000 $12,387,375
Construction work in progress.......................... 224,959 251,497
Nuclear fuel........................................... 255,567 241,001
Plant held for future use.............................. 48,631 48,631
Gas plant and pipelines:
Natural gas distribution............................... 1,326,442
Interstate pipelines................................... 1,258,087
Energy marketing....................................... 162,519
Other property............................................ 149,019 86,969
----------- -----------
Total............................................. 16,039,224 13,015,473
Less accumulated depreciation and amortization............ 4,770,179 4,259,050
----------- -----------
Property, plant and equipment -- net.............. 11,269,045 8,756,423
----------- -----------
Current Assets:
Cash and cash equivalents................................. 51,712 8,001
Accounts receivable -- net................................ 962,974 36,277
Accrued unbilled revenues................................. 205,860 77,853
Time Warner dividends receivable.......................... 10,313 10,313
Fuel stock and petroleum products......................... 88,819 61,795
Materials and supplies, at average cost................... 156,160 130,380
Prepayments and other current assets...................... 42,169 19,301
----------- -----------
Total current assets.............................. 1,518,007 343,920
----------- -----------
Other Assets:
Goodwill -- net........................................... 2,026,395
Investment in Time Warner securities...................... 990,000 1,027,500
Deferred plant costs -- net............................... 561,569 587,352
Fuel-related debits....................................... 197,304 84,435
Deferred debits........................................... 510,686 306,473
Unamortized debt expense and premium on reacquired debt... 202,453 153,823
Regulatory tax asset -- net............................... 356,509 362,310
Recoverable project costs -- net.......................... 78,485 163,630
Equity investments in foreign and non-rate regulated
affiliates -- net...................................... 704,102 501,991
----------- -----------
Total other assets................................ 5,627,503 3,187,514
----------- -----------
Total........................................... $18,414,555 $12,287,857
=========== ===========
See Notes to the Company's Consolidated Financial Statements.
56
59
HOUSTON INDUSTRIES INCORPORATED AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(THOUSANDS OF DOLLARS)
CAPITALIZATION AND LIABILITIES
DECEMBER 31,
--------------------------
1997 1996
----------- -----------
Capitalization (statements on following pages):
Common stock equity....................................... $ 4,886,805 $ 3,827,961
Preference stock, none outstanding........................
Cumulative preferred stock, not subject to mandatory
redemption............................................. 9,740 135,179
Company/NorAm obligated mandatorily redeemable preferred
securities of subsidiary trusts holding solely junior
subordinated debentures of Company/NorAm............... 362,172
Long-term debt............................................ 5,218,015 3,025,650
----------- -----------
Total capitalization.............................. 10,476,732 6,988,790
----------- -----------
Current Liabilities:
Notes payable............................................. 2,124,956 1,337,872
Accounts payable.......................................... 879,612 157,682
Taxes accrued............................................. 240,739 191,011
Interest accrued.......................................... 109,901 67,707
Dividends declared........................................ 110,716 92,515
Customer deposits......................................... 82,437 53,633
Current portion of long-term debt and preferred stock..... 251,169 254,463
Other..................................................... 193,384 89,238
----------- -----------
Total current liabilities......................... 3,992,914 2,244,121
----------- -----------
Deferred Credits:
Accumulated deferred income taxes......................... 2,792,781 2,265,031
Benefit liabilities....................................... 397,586 249,875
Unamortized investment tax credit......................... 349,072 373,749
Fuel-related credits...................................... 75,956 74,639
Other..................................................... 329,514 91,652
----------- -----------
Total deferred credits............................ 3,944,909 3,054,946
----------- -----------
Commitments and Contingencies (Note 12)
Total......................................... $18,414,555 $12,287,857
=========== ===========
See Notes to the Company's Consolidated Financial Statements
57
60
HOUSTON INDUSTRIES INCORPORATED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CAPITALIZATION
(THOUSANDS OF DOLLARS)
DECEMBER 31,
-------------------------
1997 1996
----------- ----------
Common Stock Equity:
Common stock, no par; authorized, 700,000,000 shares;
issued, 295,357,276 and 262,748,447 shares at December
31, 1997 and 1996, respectively........................ $ 3,112,098 $2,447,117
Foreign currency translation loss......................... (821) (363)
Treasury stock, at cost; 93,459 and 16,042,027 shares at
December 31, 1997 and 1996, respectively............... (2,066) (361,196)
Unearned ESOP shares, 12,388,551 and 13,370,939 shares at
December 31, 1997 and 1996, respectively............... (229,827) (251,350)
Retained earnings......................................... 2,013,055 1,997,490
Unrealized loss on marketable equity securities........... (5,634) (3,737)
----------- ----------
Total common stock equity......................... 4,886,805 3,827,961
----------- ----------
Preference Stock, no par; authorized, 10,000,000 shares;
none outstanding..........................................
Cumulative Preferred Stock, no par; authorized, 10,000,000
shares; outstanding, 97,397 and 1,604,397 shares at
December 31, 1997 and 1996, respectively (entitled upon
involuntary liquidation to $100 per share):
Not subject to mandatory redemption:
$4.00 series, 97,397 shares............................ 9,740 9,740
$6.72 series, 250,000 shares........................... 25,115
$7.52 series, 500,000 shares........................... 50,226
$8.12 series, 500,000 shares........................... 50,098
----------- ----------
Total............................................. 9,740 135,179
----------- ----------
Subject to mandatory redemption:
$9.375 series, 257,000 shares at December 31, 1996..... 25,700
Current redemptions.................................... (25,700)
----------- ----------
Total.............................................
----------- ----------
Total cumulative preferred stock.................. 9,740 135,179
----------- ----------
Company/NorAm obligated mandatorily redeemable preferred
securities of subsidiary trusts holding solely junior
subordinated debentures of Company/NorAm:
8.125% Trust Preferred Securities, Series A............ 250,000
8.257% Trust Capital Securities, Series B.............. 100,000
6 1/4% Convertible Trust Originated Preferred
Securities............................................ 21,730
Unamortized Issuance Costs............................. (9,558)
----------- ----------
Total Company/NorAm obligated mandatorily
redeemable preferred securities of subsidiary
trusts holding solely junior subordinated
debentures of Company/NorAm-net................. 362,172
----------- ----------
Long-Term Debt:
7% Automatic common exchange securities, due 2000......... 1,173,786
----------- ----------
(continued on next page)
58
61
HOUSTON INDUSTRIES INCORPORATED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CAPITALIZATION -- (CONTINUED)
(THOUSANDS OF DOLLARS)
DECEMBER 31,
-------------------------
1997 1996
----------- ----------
Debentures:
9 3/8% series, due 2001................................ $ 250,000 $ 250,000
7 7/8% series, due 2002................................ 100,000 100,000
8.9% series, due 2006.................................. 165,055
6% convertible subordinated, due 2012.................. 107,180
10% series, due 2019................................... 47,773
Unamortized discount................................... (717) (902)
----------- ----------
Total debentures.................................. 669,291 349,098
----------- ----------
First Mortgage Bonds:
5 1/4% series, due 1997................................ 40,000
7 5/8% series, due 1997................................ 150,000
6 3/4% series, due 1997................................ 35,000
9.15% series, due 2021................................. 102,442 160,000
8 3/4% series, due 2022................................ 62,275 62,275
7 3/4% series, due 2023................................ 250,000 250,000
7 1/2% series, due 2023................................ 200,000 200,000
4.90% pollution control series, due 2003............... 16,600 16,600
7% pollution control series, due 2008.................. 19,200 19,200
6 3/8% pollution control series, due 2012.............. 33,470 33,470
6 3/8% pollution control series, due 2012.............. 12,100 12,100
8 1/4% pollution control series, due 2015.............. 90,000 90,000
5.80% pollution control series, due 2015............... 91,945 91,945
7 3/4% pollution control series, due 2015.............. 68,700 68,700
5.80% pollution control series, due 2015............... 58,905 58,905
7 7/8% pollution control series, due 2016.............. 68,000
6.70% pollution control series, due 2017............... 43,820 43,820
5.60% pollution control series, due 2017............... 83,565 83,565
7 7/8% pollution control series, due 2018.............. 50,000
7.20% pollution control series, due 2018............... 75,000 75,000
7.20% pollution control series, due 2018............... 100,000 100,000
7 7/8% pollution control series, due 2019.............. 29,685 29,685
7.70% pollution control series, due 2019............... 75,000 75,000
8 1/4% pollution control series, due 2019.............. 100,000 100,000
8.10% pollution control series, due 2019............... 100,000 100,000
7 5/8% pollution control series, due 2019.............. 100,000 100,000
7 1/8% pollution control series, due 2019.............. 100,000 100,000
7.60% pollution control series, due 2019............... 70,315 70,315
6.70% pollution control series, due 2027............... 56,095 56,095
Medium-term notes, series A, 9.80%-9.85%, due 1999..... 170,500 170,500
Medium-term notes, series C, 6.10%, due 2000........... 150,000 150,000
Medium-term notes, series B, 8.15%, due 2002........... 100,000 100,000
Medium-term notes, series C, 6.50%, due 2003........... 150,000 150,000
Unamortized discount................................... (14,158) (15,134)
----------- ----------
Total first mortgage bonds........................ 2,495,459 2,895,041
----------- ----------
(continued on next page)
59
62
HOUSTON INDUSTRIES INCORPORATED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CAPITALIZATION -- (CONTINUED)
(THOUSANDS OF DOLLARS)
DECEMBER 31,
-------------------------
1997 1996
----------- ----------
Pollution Control Revenue Bonds:
Gulf Coast 1980-T series, floating rate, due 1998......... $ 5,000 $ 5,000
1997 pollution control series, variable rate revenue due
2028................................................... 68,000
1997 pollution control series, variable rate revenue due
2018................................................... 50,000
----------- ----------
Total pollution control revenue bonds............. 123,000 5,000
----------- ----------
Medium-Term Notes:
Series A, 9.30%-9.39%, due 1998-2000...................... 24,838
Series B, 8.43%-9.23%, due 1998-2001...................... 236,367
----------- ----------
Total medium-term notes........................... 261,205
----------- ----------
Capitalized lease obligations, discount rates of 5.2%-11.7%,
due 1998-2018............................................. 16,166 4,418
Notes payable............................................... 730,277 856
----------- ----------
Subtotal............................................... 746,443 5,274
----------- ----------
Total............................................. 5,469,184 3,254,413
Current maturities................................ (251,169) (228,763)
----------- ----------
Total long-term debt.............................. 5,218,015 3,025,650
----------- ----------
Total capitalization......................... $10,476,732 $6,988,790
=========== ==========
See Notes to the Company's Consolidated Financial Statements.
60
63
HOUSTON INDUSTRIES INCORPORATED AND SUBSIDIARIES
STATEMENTS OF CONSOLIDATED CASH FLOWS
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
(THOUSANDS OF DOLLARS)
YEAR ENDED DECEMBER 31,
-----------------------------------
1997 1996 1995
----------- --------- ---------
Cash Flows from Operating Activities:
Income from continuing operations...................... $ 421,110 $ 404,944 $ 397,400
Adjustments to reconcile income from continuing
operations to net cash provided by operating
activities:
Depreciation and amortization....................... 651,875 550,038 478,034
Amortization of nuclear fuel........................ 28,237 33,875 28,545
Deferred income taxes............................... 35,523 54,098 78,382
Investment tax credit............................... (19,777) (18,404) (19,427)
Unrealized loss on ACES............................. 121,402
Contribution of marketable equity securities to
charitable trust.................................. 19,463
Fuel (refund)/surcharge............................. 128,864 (189,571)
Fuel cost over (under) recovery..................... (212,683) (137,362) 76,970
Net cash provided by discontinued cable television
operations........................................ 16,391
Changes in other assets and liabilities, net of the
effects of the acquisition:
Accounts receivable -- net........................ (436,580) (15,478) (46,299)
Inventory......................................... 55,111 21,624 13,901
Other current assets.............................. 6,966 (306) (14,900)
Accounts payable.................................. 191,840 21,674 (23,217)
Interest and taxes accrued........................ 18,425 4,413 11,088
Other current liabilities......................... 2,985 (4,135) (9,215)
Other -- net...................................... 97,998 (661) 46,813
----------- --------- ---------
Net cash provided by operating activities...... 1,110,759 914,320 844,895
----------- --------- ---------
Cash Flows from Investing Activities:
Capital expenditures (including allowance for borrowed
funds used during construction)..................... (328,724) (317,532) (301,327)
Purchase of NorAm net of cash acquired................. (1,422,672)
Non-rate regulated electric power project expenditures
(including capitalized interest).................... (234,852) (495,379) (49,835)
Settlement of subsidiary debt in connection with sale
of cable television subsidiary...................... 619,345
Sale of investment in Time Warner common stock......... 25,043
Corporate headquarters expenditures (including
capitalized interest)............................... (6,543) (96,469)
Net cash used in discontinued cable television
operations.......................................... (47,601)
Other -- net........................................... (20,248) (13,446) (4,643)
----------- --------- ---------
Net cash provided by (used in) investing
activities................................... (1,981,453) (832,900) 119,470
----------- --------- ---------
(continued on next page)
61
64
HOUSTON INDUSTRIES INCORPORATED AND SUBSIDIARIES
STATEMENTS OF CONSOLIDATED CASH FLOWS -- (CONTINUED)
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
(THOUSANDS OF DOLLARS)
YEAR ENDED DECEMBER 31,
-----------------------------------
1997 1996 1995
----------- --------- ---------
Cash Flows from Financing Activities:
Proceeds from sale of ACES -- net...................... $ 1,020,777
Proceeds from sale of Company obligated mandatorily
redeemable preferred securities of subsidiary trusts
holding solely junior subordinated debentures of
Company -- net...................................... 340,785
Purchase of treasury stock............................. $(361,196)
Proceeds from issuance of pollution control bonds...... 115,739
Proceeds from first mortgage bonds..................... $ 142,972
Payment of matured debt................................ (277,000) (150,000)
Payment of common stock dividends...................... (405,288) (361,126) (371,731)
Redemption of preferred stock.......................... (153,628) (271,400) (91,400)
Increase (decrease) in notes payable-net............... 587,791 1,331,572 (416,991)
Extinguishment of long-term debt....................... (303,893) (285,263) (195,224)
Redemption of convertible securities................... (9,504)
Net cash used in discontinued cable television
operations.......................................... (40,798)
Other -- net........................................... (1,374) 12,215 10,143
----------- --------- ---------
Net cash provided by (used in) financing
activities................................... 914,405 (85,198) (963,029)
----------- --------- ---------
Net Increase (Decrease) in Cash and Cash Equivalents..... 43,711 (3,778) 1,336
Cash and Cash Equivalents at Beginning of Year........... 8,001 11,779 10,443
----------- --------- ---------
Cash and Cash Equivalents at End of Year................. $ 51,712 $ 8,001 $ 11,779
=========== ========= =========
Supplemental Disclosure of Cash Flow Information:
Cash Payments:
Interest (net of amounts capitalized).................. $ 437,952 $ 311,792 $ 342,551
Income taxes........................................... 171,539 139,898 104,228
The aggregate consideration paid to Former NorAm stockholders in connection with
the Merger consisted of $1.4 billion in cash and 47.8 million shares of the
Company's common stock valued at approximately $1.0 billion. The overall
transaction was valued at $4.0 billion consisting of $2.4 billion for Former
NorAm's common stock and common stock equivalents and $1.6 billion of Former
NorAm debt.
See Notes to the Company's Consolidated Financial Statements.
62
65
HOUSTON INDUSTRIES INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE YEARS ENDED DECEMBER 31, 1997
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(a) Nature of Operations.
The Company (defined below), together with its subsidiaries, is a
diversified international energy services company. The Company is both an
electric utility company and a utility holding company. The Company's wholly
owned subsidiary, NorAm, operates in various phases of the natural gas industry,
including distribution, transmission, marketing and gathering.
(b) NorAm Acquisition.
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" (Company), and NorAm Energy Corp., a
natural gas gathering, transmission, marketing and distribution company (Former
NorAm) merged with and into a subsidiary of the Company, HI Merger, Inc., which
was renamed "NorAm Energy Corp." (NorAm). Effective upon the mergers
(collectively, the Merger), each outstanding share of common stock of Former HI
was converted into one share of common stock (including associated preference
stock purchase rights) of the Company, and each outstanding share of common
stock of Former NorAm was converted into the right to receive $16.3051 cash or
0.74963 shares of common stock of the Company. The aggregate consideration paid
to Former NorAm stockholders in connection with the Merger consisted of $1.4
billion in cash and 47.8 million shares of the Company's common stock valued at
approximately $1.0 billion. The overall transaction was valued at $4.0 billion
consisting of $2.4 billion for Former NorAm's common stock and common stock
equivalents and $1.6 billion of Former NorAm debt ($1.3 billion of which was
long-term debt).
The Company has recorded the acquisition of NorAm under the purchase method
of accounting with assets and liabilities of NorAm reflected at their estimated
fair values as of the Acquisition Date. The Company has recorded the $2.0
billion excess of the acquisition cost over the fair value of the net assets
acquired as goodwill and is amortizing this amount over 40 years. On a
preliminary basis, the Company's fair value adjustments included increases in
property, plant and equipment, long-term debt, unrecognized pension and
postretirement benefits liabilities and related deferred taxes. The Company
expects to finalize these fair value adjustments during 1998; however, it is not
anticipated that any additional adjustments will be material.
The Company's results of operations incorporate NorAm's results of
operations only for the period beginning on the Acquisition Date. The following
table presents certain unaudited pro forma information for the years ended
December 31, 1997 and 1996, as if the Merger had occurred on January 1, 1997 and
1996, respectively.
PRO FORMA COMBINED RESULTS OF OPERATIONS
(IN MILLIONS, EXCEPT PER SHARE DATA)
YEAR ENDED DECEMBER 31,
--------------------------------------------------
1997 1996
----------------------- -----------------------
AS AS
REPORTED PRO FORMA REPORTED PRO FORMA
-------- ----------- -------- -----------
(UNAUDITED) (UNAUDITED)
Revenues................................ $6,873 $10,210 $4,095 $8,884
Net Income Available for Common Stock... $ 421 $ 439 $ 405 $ 432
Basic Earnings Per Share................ $ 1.66 $ 1.56 $ 1.66 $ 1.48
Diluted Earnings Per Share.............. $ 1.66 $ 1.56 $ 1.66 $ 1.48
63
66
HOUSTON INDUSTRIES INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
These and other pro forma results appearing in this Form 10-K are based on
assumptions deemed appropriate by the Company's management, have been prepared
for informational purposes only and are not necessarily indicative of the
combined results that would have resulted had the Merger occurred at the
beginning of the 1996 and 1997 reporting periods presented. 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, on a preliminary basis, of the fair value of certain
NorAm assets and liabilities.
As a result of the Merger, the Company has organized its financial
reporting into the following segments: Electric Operations, Natural Gas
Distribution, Interstate Pipeline, Energy Marketing, International and
Corporate. For segment information, see Note 15.
(c) Regulatory Assets and Other Long-Lived Assets.
The Company and certain subsidiaries of NorAm apply the accounting policies
established in SFAS No. 71, "Accounting for the Effects of Certain Types of
Regulation," to the accounts of Electric Operations, Natural Gas Distribution
and the Interstate Pipeline operations of MRT. In general, SFAS No. 71 permits a
company with cost-based rates to defer certain costs that would otherwise be
expensed to the extent that the rate regulated company is recovering or expects
to recover such costs in rates charged to its customers.
The following is a list of regulatory assets and liabilities reflected on
the Company's Consolidated Balance Sheet as of December 31, 1997, detailed by
Electric Operations and other segments.
ELECTRIC TOTAL
OPERATIONS OTHER COMPANY
---------- ----- -------
(MILLIONS OF DOLLARS)
Deferred plant costs -- net............................. $ 562 $ 562
Recoverable project costs -- net........................ 78 78
Regulatory tax asset -- net............................. 357 357
Unamortized loss on reacquired debt..................... 127 127
Deferred debits......................................... 71 $48 119
Accumulated deferred income taxes -- regulatory tax
asset................................................. (99) (99)
------ --- ------
Total......................................... $1,096 $48 $1,144
====== === ======
If, as a result of changes in regulation or competition, the Company and
NorAm's ability to recover these assets and/or liabilities would not be assured,
then pursuant to SFAS No. 101, "Accounting for the Discontinuation of
Application of SFAS No. 71" and SFAS No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to Be Disposed Of," the Company and
NorAm would be required to write off or write down such net regulatory assets to
the extent that they ultimately were determined not to be recoverable.
Effective January 1, 1996, the Company and NorAm adopted SFAS No. 121. SFAS
No. 121 requires that long-lived assets and certain identifiable intangibles to
be held and used or disposed of by an entity be reviewed for impairment whenever
events or changes in circumstances indicate that the carrying amount of an asset
may not be recoverable. Adoption of the standard did not result in a write-down
of the carrying amount of any asset on the books of the Company or NorAm.
In July 1997, the Emerging Issues Task Force (EITF) of the FASB reached a
consensus on Issue No. 97-4, "Deregulation of the Pricing of
Electricity -- Issues Related to the Application of FASB Statements No. 71,
Accounting for the Effects of Certain Types of Regulation, and No. 101,
Regulated Enterprises -- Accounting for the Discontinuation of Application of
FASB Statement No. 71" (EITF 97-4). EITF 97-4 concluded that the application of
SFAS No. 71 to a segment which is subject to a deregulation
64
67
HOUSTON INDUSTRIES INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
plan should cease when the legislation and enabling rate order contain
sufficient detail for the utility to reasonably determine what the transition
plan will entail. In addition, EITF 97-4 requires the regulatory assets and
liabilities to be allocated to the applicable portion of the electric utility
from which the source of the regulated cash flows will be derived. On June 2,
1997, the Texas legislature adjourned without having adopted or taken any formal
action with respect to various proposals concerning the restructuring of the
Texas electric utility industry, including proposals related to retail electric
competition and stranded cost recovery. At this time, the Company cannot predict
what, if any, action the Texas legislature may take in the next legislative
session (scheduled to commence in 1999) with respect to any of these proposals
or the ultimate form in which such proposals may be adopted, if at all. Although
the Company has determined that no impairment loss or write-offs of regulatory
assets need be recognized for applicable assets of continuing operations as of
December 31, 1997, this conclusion may change in the future (i) as competition
influences wholesale and retail pricing in the electric utility industry, (ii)
depending on regulatory action, if any and (iii) depending on legislation, if
any, that is passed.
(d) Principles of Consolidation.
The consolidated financial statements include the accounts of the Company
and its wholly owned and majority owned subsidiaries including, effective as of
the Acquisition Date, the accounts of NorAm and its wholly owned and majority
owned subsidiaries.
Investments in entities in which the Company or its subsidiaries have an
ownership interest between 20% and 50% or are able to exercise significant
influence are accounted for using the equity method. For additional information
regarding investments recorded using the equity method or the cost method of
accounting, see Note 5.
All significant intercompany transactions and balances are eliminated in
consolidation.
(e) Property, Plant and Equipment and Goodwill.
Property, plant and equipment are stated at original cost of the acquirer.
Repair and maintenance costs are expensed as incurred. Depreciation is computed
using the straight-line method.
Goodwill is being amortized on a straight-line basis over 40 years. The
Company will periodically compare the carrying value of its goodwill to the
anticipated undiscounted future operating income from the businesses whose
acquisition gave rise to the goodwill and as of yet no impairment is indicated
or expected.
(f) Depreciation and Amortization Expense.
The Company's 1997 depreciation and amortization expenses included $50
million of additional depreciation in connection with the South Texas Project
and $21.6 million for goodwill amortization associated with the acquisition of
NorAm. For additional information regarding the amortization of goodwill in
connection with the Merger, see Note 1(b) above. The amortization expenses
recorded in connection with the South Texas Project are being made pursuant to
the terms of the Company's most recent rate case settlement (1995 Rate Case
Settlement), which permits the Company to write down up to $50 million per year
of its investment in the South Texas Project through December 31, 1999. These
write-downs are treated under the settlement as reasonable and necessary
expenses for purposes of any future earnings reviews or other proceedings. In
each of 1997, 1996 and 1995, the Company recorded the maximum $50 million
pre-tax write-down permitted under the 1995 Rate Case Settlement.
In 1996 and 1997, the Company, as permitted by the 1995 Rate Case
Settlement, also amortized $50 million and $66 million (pre-tax), respectively,
of its $153 million investment in certain lignite reserves associated with a
canceled generating station. The Company's remaining investment in the canceled
65
68
HOUSTON INDUSTRIES INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
generating station and certain lignite reserves ($78 million at December 31,
1997) will be amortized fully no later than December 31, 2000.
The Company's consolidated depreciation expense for 1997 was $475 million
compared to $410 million for 1996 and $399 million for 1995.
(g) Deferred Plant Costs.
Under a "deferred accounting" plan authorized by the Texas Utility
Commission, Electric Operations was permitted for regulatory purposes to accrue
carrying costs in the form of allowance for funds used during construction on
its investment in the South Texas Project and to defer and capitalize
depreciation and other operating costs on its investment after commercial
operation until such costs were reflected in rates. In addition, the Texas
Utility Commission authorized Electric Operations under a "qualified phase-in
plan" to capitalize allowable costs (including return) deferred for future
recovery as deferred charges.
In 1991, Electric Operations ceased all cost deferrals related to the South
Texas Project and began amortizing such amounts on a straight-line basis. The
accumulated deferrals for "deferred accounting" are being amortized over the
estimated depreciable life of the South Texas Project. The accumulated deferrals
for the "qualified phase-in plan" are being amortized over a ten-year phase-in
period that commenced in 1991. The amortization of all deferred plant costs
(which totaled $25.8 million for each of the years 1997, 1996 and 1995) is
included on the Company's Statements of Consolidated Income as depreciation and
amortization expense.
(h) Fuel Stock.
Gas inventory (primarily using the average cost method) was $71.7 million
and $19.6 million at December 31, 1997 and 1996, respectively. Coal, lignite,
and oil inventory balances (using last-in, first-out) were $7.5 million, $6.4
million and $3.3 million, respectively, at December 31, 1997 and $27.3 million,
$11.8 million and $3.0 million, respectively, at December 31, 1996.
(i) Revenues.
The Company records electricity sales under the full accrual method,
whereby unbilled electricity sales are estimated and recorded each month.
NorAm's rate-regulated divisions/subsidiaries bill customers on a monthly cycle
billing basis. Revenues are recorded on an accrual basis, including an estimate
for gas delivered but unbilled at the end of each accounting period.
International revenues include electricity sales of a majority owned foreign
electric utility, which are also recorded under the full accrual method, and
equity income (net of foreign taxes) in unconsolidated investments of HI Energy.
Included in other revenues are management fees and other sales and services,
which are recorded when earned.
Revenue eliminations of $124 million represent intersegment sales of
natural gas and transportation services. For the five month period ended
December 31, 1997, Interstate Pipeline had intersegment revenues of $59 million
from Natural Gas Distribution and Energy Marketing. For the same period, Energy
Marketing had intersegment sales of $61 million to Interstate Pipeline and
Natural Gas Distribution. The remaining intercompany revenue balances were
between Corporate and other segments.
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HOUSTON INDUSTRIES INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(j) Earnings Per Common Share.
In February 1997, the FASB issued SFAS No. 128, "Earnings per Share", which
is required to be implemented for fiscal years ending after December 15, 1997.
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.
Following is a reconciliation of the Company's numerators and denominators
of basic and diluted earnings per share calculations:
FOR THE YEAR ENDED
----------------------------------------
1997 1996 1995
---------- ---------- ------------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
Basic EPS Calculation:
Income from continuing operations...................... $421,110 $404,944 $ 397,400
Gain on sale of cable television subsidiary............ 708,124
Less: Preferred dividends.............................. 162
-------- -------- ----------
Net income available for common stock.................. $420,948 $404,944 $1,105,524
======== ======== ==========
Weighted average shares outstanding.................... 253,599 244,443 247,706
Basic EPS:
Income from continuing operations...................... $ 1.66 $ 1.66 $ 1.60
Gain on sale of cable television subsidiary............ 2.86
Less: Preferred dividends.............................. .00
-------- -------- ----------
Net income available for common stock.................. $ 1.66 $ 1.66 $ 4.46
======== ======== ==========
Diluted EPS Calculation:
Income from continuing operations...................... $421,110 $404,944 $ 397,400
Plus: Income impact of assumed conversions
Interest on 6 1/4% convertible debentures........... 668
-------- -------- ----------
Income from continuing operations assuming dilution.... 421,778 404,944 397,400
Gain on sale of cable television subsidiary............ 708,124
Less: Preferred dividends.............................. 162
-------- -------- ----------
Net income available for common stock assuming
dilution............................................ $421,616 $404,944 $1,105,524
======== ======== ==========
Weighted average shares outstanding.................... 253,599 244,443 247,706
Plus: Incremental shares from assumed conversions:
Stock options....................................... 89 33 21
6 1/4% convertible debentures....................... 510
-------- -------- ----------
Weighted average shares assuming dilution.............. 254,198 244,476 247,727
======== ======== ==========
Diluted EPS:
Income from continuing operations...................... $ 1.66 $ 1.66 $ 1.60
Gain on sale of cable television subsidiary............ 2.86
Less: Preferred dividends.............................. .00
-------- -------- ----------
Net income available for common stock.................. $ 1.66 $ 1.66 $ 4.46
======== ======== ==========
Options to purchase 405,684 shares of common stock at prices ranging from
$22.09 to $35.18 per share were outstanding during 1997 but were not included in
the computation of diluted EPS because, during the
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HOUSTON INDUSTRIES INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
reporting period, the options' exercise prices were greater than the average
market price of the common shares of $21.875 and would thus be anti-dilutive if
conversion were assumed.
(k) Statements of Consolidated Cash Flows.
For purposes of reporting cash flows, cash equivalents are considered to be
short-term, highly liquid investments readily convertible to cash.
(l) Derivative Financial Instruments (Risk Management).
For information regarding the Company's accounting for derivative financial
instruments associated with its subsidiaries' natural gas, electric power and
transportation risk management activities, see Note 2.
(m) Income Taxes.
The Company and its subsidiaries file a consolidated federal income tax
return. The Company follows a policy of comprehensive interperiod income tax
allocation. Investment tax credits were deferred and are being amortized over
the estimated lives of the related property. For additional information
regarding income taxes, see Note 11.
(n) Investments 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 redeemable after
July 6, 2000, has an aggregate liquidation preference of $100 per share (plus
accrued and unpaid dividends), is entitled to annual dividends of $3.75 per
share until July 6, 1999, is currently convertible by the Company and after July
6, 1999 is exchangeable by Time Warner into approximately 22.9 million shares of
Time Warner common stock. Each share of preferred stock is entitled to two votes
(voting together with the holders of the Time Warner common stock as a single
class).
The Company has recorded its investment in these securities at a value of
$990 million on the Company's Consolidated Balance Sheets. Investment in the TW
Preferred is accounted for 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 the Time Warner securities of $41.3
million, $41.6 million and $20.1 million in 1997, 1996 and 1995, respectively.
To monetize its investment in the TW Preferred, the Company sold in July
1997, 22.9 million of its unsecured 7% ACES. For additional information about
the offering of ACES, see Note 8(e). 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 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.
As of December 31, 1997, the market price of Time Warner common stock was
$62.00 per share. Accordingly, the Company recognized an increase of $121
million in the unrealized liability relating to its ACES indebtedness (which
resulted in an after-tax earnings reduction of $79 million or $.31 per share).
The
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HOUSTON INDUSTRIES INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Company believes that this unrealized loss for the ACES is more than
economically hedged by the approximately $430 million unrecorded unrealized gain
at December 31, 1997 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. As of February 28, 1998, the price of Time Warner common stock
was $67.50 per share which would have resulted in the Company recognizing an
additional increase of $104 million in the unrealized liability represented by
its indebtedness under the ACES. The related unrecorded unrealized gain as of
February 28, 1998 would have been computed as an additional $126 million.
(o) Investment in Other Debt and Equity Securities.
The securities held in the Company's nuclear decommissioning trust are
classified as "available-for-sale" and, in accordance with SFAS No. 115,
"Accounting for Certain Investments in Debt and Equity Securities," (SFAS No.
115) are reported at estimated fair value of $92.9 million as of December 31,
1997 and $67 million as of December 31, 1996 on the Company's Consolidated
Balance Sheets under deferred debits. The liability for nuclear decommissioning
is reported on the Company's Consolidated Balance Sheets under deferred credits.
Any unrealized gains or losses are accounted for in accordance with SFAS No. 71
as a regulatory asset/liability and reported on the Company's Consolidated
Balance Sheets as a deferred debit/ credit.
The Company, through its subsidiary, NorAm, holds certain equity securities
classified as "available-for-sale" and in accordance with SFAS No. 115 reports
such investments at estimated fair values on the Company's Consolidated Balance
Sheets as deferred debits and any unrealized gain or loss, net of tax, as a
separate component of stockholders' equity. At December 31, 1997, the unrealized
loss relating to these equity securities was approximately $5.6 million, net of
tax.
(p) Discontinued Operations.
In July 1995, the Company sold KBLCOM, its cable television subsidiary. The
Company's 1995 earnings include a one-time after-tax gain of $708 million
related to the sale, which includes the net loss for discontinued operations of
KBLCOM through the date of sale (July 6, 1995).
(q) Reclassifications and Use of Estimates.
Certain amounts from the previous years have been reclassified to conform
to the 1997 presentation of financial statements. Such reclassifications do not
affect earnings.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
(r) Other.
For information regarding executive incentive compensation, pensions and
other benefits, see Note 10.
(2) DERIVATIVE FINANCIAL INSTRUMENTS (RISK MANAGEMENT)
(a) Trading Activities.
The Company, through NES, a subsidiary of NorAm, offers price risk
management services primarily in the natural gas and electric industries. NES
provides these services through, and by utilizing, a variety of derivative
financial instruments, including fixed-price swap agreements, variable-price
swap agreements,
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HOUSTON INDUSTRIES INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
exchange-traded energy futures and option contracts, and swaps and options
traded in the over-the-counter financial markets. Fixed-price swap agreements
require payments to, or receipts of payments from, counterparties based on the
differential between a fixed and variable price for the commodity.
Variable-price swap agreements require payments to, or receipts of payments
from, counterparties based on the differential between either industry pricing
publications or exchange quotations.
Certain trading transactions qualify for hedge accounting and accordingly
unrealized gains and losses associated with these transactions are deferred. For
trading transactions that do not qualify for hedge accounting, NES uses
mark-to-market accounting. Accordingly, such financial instruments are recorded
at fair value with realized and unrealized gains (losses) recorded as a
component of operating revenues in the Company's Consolidated Statements of
Income. The recognized, unrealized balance is recorded as a deferred debit on
the Company's Consolidated Balance Sheets.
The notional quantities and maximum terms of derivative financial
instruments held for trading purposes at December 31, 1997 are presented below
(volumes in billions of British thermal units equivalent (Bbtue)):
VOLUME-FIXED
VOLUME-FIXED PRICE MAXIMUM
PRICE PAYOR RECEIVER TERM (YEARS)
------------ ------------ ------------
Natural gas...................................... 85,701 64,890 4
Electricity...................................... 40,511 42,976 1
In addition to the fixed-price notional volumes above, NES also has
variable-price swap agreements, as discussed above, totaling 101,465 Bbtue.
Notional amounts reflect the volume of transactions but do not represent the
amounts exchanged by the parties to the financial instruments. Accordingly,
notional amounts do not accurately measure the Company's exposure to market or
credit risks.
The estimated fair value of derivative financial instruments held for
trading purposes at December 31, 1997 are presented below (dollars in millions):
AVERAGE FAIR
FAIR VALUE VALUE(A)
--------------------- ---------------------
ASSETS LIABILITIES ASSETS LIABILITIES
------ ----------- ------ -----------
Natural gas.................................. $46 $39 $56 $48
Electricity.................................. $ 6 $ 6 $ 3 $ 2
- - ---------------
(a) Computed using the ending balance of each month.
Substantially all of the fair value shown in the table above at December
31, 1997 has been recognized in income. The fair value as of and for the year
ended December 31, 1997 was estimated using quoted prices where available and
considering the liquidity of the market for the derivative financial
instruments. The prices are subject to significant changes based on changing
market conditions. The derivative financial instruments included in the NES
trading portfolio as of and for the year ended December 31, 1996 were
immaterial.
The weighted-average term of the trading portfolio, based on volumes, is
less than one year. The maximum and average terms disclosed herein are not
indicative of likely future cash flows as these positions may be changed by new
transactions in the trading portfolio at any time in response to changing market
conditions, market liquidity and the Company's risk management portfolio needs
and strategies. Terms regarding cash settlements of these contracts vary with
respect to the actual timing of cash receipts and payments.
70
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HOUSTON INDUSTRIES INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(b) Non-Trading Activities.
To reduce the risk from market fluctuations in the price of electric power,
natural gas and related transportation, NorAm and certain of its subsidiaries
enter into futures transactions, swaps and options (Energy Derivatives) in order
to hedge certain natural gas in storage, as well as certain expected purchases,
sales and transportation of natural gas and electric power (a portion of which
are firm commitments at the inception of the hedge). Energy Derivatives are also
utilized to fix the price of compressor fuel or other future operational gas
requirements, although usage to date for this purpose has not been material.
Usage of electricity derivative financial instruments by the Company and its
subsidiaries for purposes other than trading is immaterial.
Certain subsidiaries of the Company also utilize interest-rate derivatives
(principally interest-rate swaps) in order to adjust the portion of its overall
borrowings which are subject to interest-rate risk, and also utilize such
derivatives to effectively fix the interest rate on debt expected to be issued
for refunding purposes.
For transactions involving either Energy Derivatives or interest-rate
derivatives, hedge accounting is applied only if the derivative (i) reduces the
price risk of the underlying hedged item and (ii) is designated as a hedge at
its inception. Additionally, the derivatives must be expected to result in
financial impacts which are inversely correlated to those of the item(s) to be
hedged. This correlation (a measure of hedge effectiveness) is measured both at
the inception of the hedge and on an ongoing basis, with an acceptable level of
a correlation of at least 80% for hedge designation. If and when correlation
ceases to exist at an acceptable level, hedge accounting ceases and
mark-to-market accounting is applied.
In the case of interest-rate swaps associated with existing obligations,
cash flows and expenses associated with the interest-rate derivative
transactions are matched with the cash flows and interest expense of the
obligation being hedged, resulting in an adjustment to the effective interest
rate. When interest rate swaps are utilized to effectively fix the interest rate
for an anticipated debt issuance, changes in the market value of the
interest-rate derivatives are deferred and recognized as an adjustment to the
effective interest rate on the newly issued debt.
Unrealized changes in the market value of Energy Derivatives utilized as
hedges are not generally recognized in the Company's Consolidated Statements of
Income until the underlying hedged transaction occurs. Once it becomes probable
that an anticipated transaction will not occur, deferred gains and losses are
recognized. In general, the financial impact of transactions involving these
Energy Derivatives is included in the Company's Statement of Consolidated Income
under the captions (i) fuel expenses, in the case of natural gas transactions,
and (ii) purchased power, in the case of electric power transactions. Cash flows
resulting from these transactions in Energy Derivatives are included in the
Company's Statements of Consolidated Cash Flows in the same category as the item
being hedged.
At December 31, 1997, subsidiaries of NorAm were fixed-price payors and
fixed-price receivers in Energy Derivatives covering 38,754 Bbtu and 7,647 Bbtu
of natural gas, respectively. Also, at December 31, 1997 subsidiaries of NorAm
were parties to variable-priced Energy Derivatives totaling 3,630 Bbtu of
natural gas. The weighted average maturity of these instruments is less than one
year.
The notional amount is intended to be indicative of the Company and its
subsidiaries' level of activity in such derivatives, although the amounts at
risk are significantly smaller because, in view of the price movement
correlation required for hedge accounting, changes in the market value of these
derivatives generally are offset by changes in the value associated with the
underlying physical transactions or in other derivatives. When Energy
Derivatives are closed out in advance of the underlying commitment or
anticipated transaction, however, the market value changes may not offset due to
the fact that price movement correlation ceases to exist when the positions are
closed as further discussed below. Under such circumstances, gains (losses) are
deferred and recognized as a component of income when the underlying hedged item
is recognized in income.
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HOUSTON INDUSTRIES INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The average maturity discussed above and the fair value discussed in Note
13 are not necessarily indicative of likely future cash flows as these positions
may be changed by new transactions in the trading portfolio at any time in
response to changing market conditions, market liquidity and the Company's risk
management portfolio needs and strategies. Terms regarding cash settlements of
these contracts vary with respect to the actual timing of cash receipts and
payments.
(c) Trading and Non-trading -- General Policy.
In addition to the risk associated with price movements, credit risk is
also inherent in the Company and its subsidiaries' risk management activities.
Credit risk relates to the risk of loss resulting from non-performance of
contractual obligations by a counterparty. While, as yet, the Company and its
subsidiaries have experienced no significant losses due to the credit risk
associated with these arrangements, the Company has off-balance sheet risk to
the extent that the counterparties to these transactions may fail to perform as
required by the terms of each such contract. In order to minimize this risk, the
Company and/or its subsidiaries, as the case may be, enter into such contracts
primarily with those counterparties with a minimum Standard & Poor's or Moody's
rating of BBB- or Baa3, respectively. For long-term arrangements, the Company
and its subsidiaries periodically review the financial condition of such firms
in addition to monitoring the effectiveness of these financial contracts in
achieving the Company's objectives. Should the counterparties to these
arrangements fail to perform, the Company would seek to compel performance at
law or otherwise, or obtain compensatory damages in lieu thereof. The Company
might be forced to acquire alternative hedging arrangements or be required to
honor the underlying commitment at then current market prices. In such event,
the Company might incur additional loss to the extent of amounts, if any,
already paid to the counterparties. In view of its criteria for selecting
counterparties, its process for monitoring the financial strength of these
counterparties and its experience to date in successfully completing these
transactions, the Company believes that the risk of incurring a significant
financial statement loss due to the non-performance of counterparties to these
transactions is minimal.
The Company's policies prohibit the use of leveraged financial instruments.
The Company has established a Risk Oversight Committee to oversee all
corporate price and credit risk, including NES' risk management and trading
activities. The Risk Oversight Committee's responsibilities include reviewing
the Company and its subsidiaries' overall risk management strategy and
monitoring risk management activities to ensure compliance with the Company's
risk management limitations, policies and procedures.
(3) RATE MATTERS
(a) Electric Proceedings.
The Texas Utility Commission has original (or in some cases appellate)
jurisdiction over Electric Operations' electric rates and services. Texas
Utility Commission orders may be appealed to a District Court in Travis County,
and from that court's decision an appeal may be taken to the Court of Appeals
for the 3rd District at Austin (Austin Court of Appeals). Discretionary review
by the Supreme Court of Texas may be sought from decisions of the Austin Court
of Appeals. In the event that the courts ultimately reverse actions of the Texas
Utility Commission, such matters are remanded to the Texas Utility Commission
for action in light of the courts' orders.
(b) Transition and Price Reduction Plan.
In 1997, the Texas legislature considered but did not pass legislation
intended to address various issues concerning the restructuring of the electric
utility industry, including proposals that would permit Texas retail electric
customers to choose their own electric suppliers beginning on December 31, 2001.
The legislative proposals included provisions relating to full stranded cost
recovery; rate reductions; rate freezes; the
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HOUSTON INDUSTRIES INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
unbundling of generation operations, transmission and distribution and customer
service operations; securitization of regulatory assets; and consumer
protections. Although the Company and certain other parties (including the Texas
Utility Commission) supported the bill, it was not enacted prior to the
expiration of the legislative session.
In October 1997, the Company announced a proposed transition to competition
plan intended to address certain aspects of the proposals contained in the
legislation formerly pending before the Texas legislature. By mid December 1997,
negotiations resulted in a settlement agreement (Settlement Agreement) executed
by the Company, the staffs of the Texas Utility Commission and the City of
Houston, representatives of the state's principal consumer and industrial groups
and others. The Settlement Agreement was subsequently filed with the Texas
Utility Commission, where it is currently under consideration.
Under the terms of the Settlement Agreement, residential customers will
receive a 4% credit to the base cost of electricity in 1998, increasing to 6% in
1999. Small and mid-sized businesses will receive a 2% credit to their base
costs beginning in 1998. The combined effect of these reductions is expected to
decrease base revenues by $166 million over a two year period. In addition, the
Company (over the next two years) will be permitted, as a way to assist the
Company in mitigating its potentially stranded costs, to (i) redirect to
production property all of its current depreciation expenses that would
otherwise be credited to accumulated depreciation for transmission and
distribution property, and (ii) apply any and all earnings above a rate of
return cap of 9.95% to increase the depreciation of production property. The
Company estimates that redirected depreciation over the two-year period of 1998
and 1999 will be approximately $364 million. As part of the Settlement
Agreement, the Company agreed to support proposed legislation in the 1999 Texas
legislative session that includes provisions providing for retail customer
choice effective December 31, 2001 and other provisions consistent with those in
the 1997 proposed legislation.
The Settlement Agreement is currently under consideration by the Texas
Utility Commission, the City of Houston and other cities served by HL&P. In
December 1997, the Texas Utility Commission approved the petition filed by the
Company to implement the requested base rate credits on a temporary basis
beginning January 1, 1998, and pending final Texas Utility Commission
consideration. The approval also included the accounting order necessary to
permit the Company to begin redirecting depreciation from its transmission and
distribution facilities to production property on a temporary basis pending
final Texas Utility Commission consideration. A procedural schedule has been
developed by the Texas Utility Commission whereby a final decision regarding the
Settlement Agreement would be reached by the end of March 1998.
(c) 1995 Rate Case.
In August 1995, the Texas Utility Commission unanimously approved a
settlement resolving the Company's most recent rate case (Docket No. 12065) as
well as a separate proceeding (Docket No. 13126) regarding the prudence of
operation of the South Texas Project.
See Note 1(f) regarding additional depreciation and amortization that is
permitted under the 1995 Rate Case Settlement with respect to the South Texas
Project and the Company's investment in certain lignite reserves associated with
a canceled generating station.
(d) Docket No. 6668.
In September 1997, the Company received a judgment dismissing all
outstanding appeals of the Texas Utility Commission's order in Docket No. 6668,
an inquiry into the prudence of the planning and construction of the South Texas
Project. In that order, the Texas Utility Commission had determined that $375.5
million of the Company's $2.8 billion investment in the South Texas Project had
been imprudently incurred. That ruling was incorporated into Electric
Operations' 1988 and 1991 rate cases. As a result of this judgment, all
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HOUSTON INDUSTRIES INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
outstanding appeals of prior rate cases involving the Company have now been
dismissed and the orders granted in such cases are now final.
(4) JOINTLY OWNED ELECTRIC UTILITY PLANT
(a) Investment in South Texas Project.
The Company has a 30.8% interest in the South Texas Project, which consists
of two 1,250 MW nuclear generating units, and bears a corresponding 30.8% share
of capital and operating costs associated with the project. As of December 31,
1997, the Company's investment in the South Texas Project was $1.8 billion (net
of $714 million accumulated depreciation). The Company's investment in nuclear
fuel (including AFUDC) was $51 million (net of $205 million amortization) as of
such date.
Effective November 1997, the Company and the other three owners of the
South Texas Project completed the transfer of the Company's responsibilities for
operation of the South Texas Project to a new Texas non-profit corporation
formed by the four owners and known as the STP Nuclear Operating Company
(STPNOC). STPNOC was formed exclusively for the purpose of operating the South
Texas Project, and the Company's officers and employees who had been responsible
for day-to-day operation and management of the South Texas Project were
transferred to the operating company in October, 1997 and the related employee
benefit obligations were transferred in December, 1997. The operating company is
managed by a board of directors composed of one director from each of the four
owners, along with the chief executive officer of STPNOC. Formation of STPNOC
did not affect the underlying ownership of the South Texas Project, which
continues as a tenancy in common among the four owners, with each owner
retaining its undivided ownership interest in the two nuclear-fueled generating
units and the electrical output from those units. The four owners continue to
provide overall oversight of the operations of the South Texas Project through
an owners' committee composed of representatives of each of the owners and
through the board of directors of STPNOC.
(b) 1996 Settlement of South Texas Project Litigation.
In 1996, the Company recorded an aggregate $95 million ($62 million net of
tax) charge in connection with various settlements of lawsuits filed by
co-owners of the South Texas Project. The formation of STPNOC by the four
co-owners (including the Company) of the South Texas Project was contemplated by
these settlements. For information about the execution of an operations
agreement with the City of San Antonio in connection with one of these
settlements, see Note 12(c).
(c) Nuclear Insurance.
The Company and the other owners of the South Texas Project maintain
nuclear property and nuclear liability insurance coverage as required by law and
periodically review available limits and coverage for additional protection. The
owners of the South Texas Project currently maintain $2.75 billion in property
damage insurance coverage, which is above the legally required minimum, but is
less than the total amount of insurance currently available for such losses.
This coverage consists of $500 million in primary property damage insurance and
excess property insurance in the amount of $2.25 billion. With respect to excess
property insurance, the Company and the other owners of the South Texas Project
are subject to assessments, the maximum aggregate assessment under current
policies being $11.5 million during any one policy year. The application of the
proceeds of such property insurance is subject to the priorities established by
the Nuclear Regulatory Commission (NRC) regulations relating to the safety of
licensed reactors and decontamination operations.
Pursuant to the Price Anderson Act (Act), the maximum liability to the
public of owners of nuclear power plants, such as the South Texas Project, was
$8.72 billion as of December 1997. Owners are required under the Act to insure
their liability for nuclear incidents and protective evacuations by maintaining
the
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HOUSTON INDUSTRIES INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
maximum amount of financial protection available from private sources and by
maintaining secondary financial protection through an industry retrospective
rating plan. The assessment of deferred premiums provided by the plan for each
nuclear incident is up to $79.3 million per reactor, subject to indexing for
inflation, a possible 5% surcharge (but no more than $10 million per reactor per
incident in any one year) and a 3% state premium tax. The Company and the other
owners of the South Texas Project currently maintain the required nuclear
liability insurance and participate in the industry retrospective rating plan.
There can be no assurance that all potential losses or liabilities will be
insurable, or that the amount of insurance will be sufficient to cover them. Any
substantial losses not covered by insurance would have a material effect on the
Company's financial condition and results of operations.
(d) Nuclear Decommissioning.
The Company contributes $14.8 million per year to a trust established to
fund its share of the decommissioning costs for the South Texas Project. For a
discussion of securities held in the Company's nuclear decommissioning trust,
see Note 1(o). In May 1994, an outside consultant estimated the Company's
portion of decommissioning costs to be approximately $318 million (1994
dollars). The consultant's calculation of decommissioning costs for financial
planning purposes used the DECON methodology (prompt removal/dismantling), one
of the three alternatives acceptable to the NRC, and assumed deactivation of
Units Nos. 1 and 2 upon the expiration of their 40-year operating licenses.
While the current and projected funding levels currently exceed minimum NRC
requirements, no assurance can be given that the amounts held in trust will be
adequate to cover the actual decommissioning costs of the South Texas Project.
Such costs may vary because of changes in the assumed date of decommissioning,
changes in regulatory and accounting requirements, changes in technology and
changes in costs of labor, materials and equipment.
(e) Assessment Fees for Spent Fuel Disposal and Enrichment and Decommission
By contract, the United States Department of Energy (DOE) has committed
itself ultimately to take possession of all spent fuel generated by the South
Texas Project. The DOE contract currently requires payment of a spent fuel
disposal fee on nuclear plant-generated electricity of one mill (one-tenth of a
cent) per net KWH sold. This fee is subject to adjustment to ensure full cost
recovery by the DOE. The Energy Policy Act also includes a provision that
assesses a fee upon domestic utilities that purchased nuclear fuel enrichment
services from the DOE before October 24, 1992. The South Texas Project's
assessment is approximately $2 million per year (subject to escalation for
inflation). The Company has a remaining estimated liability of $5.5 million for
such assessments.
(5) EQUITY INVESTMENTS IN FOREIGN AFFILIATES
HI Energy, a wholly owned subsidiary of the Company formed in 1993,
participates primarily in the development and acquisition of foreign independent
power projects and the privatization of foreign generating and distribution
companies.
The Company accounts for affiliate investments of its subsidiaries under
the equity method of accounting where: (i) the subsidiary's ownership interest
in the affiliate ranges from 20% to 50%, (ii) the ownership interest is less
than 20% but the subsidiary exercises significant influence over operating and
financial policies of such affiliate or (iii) the subsidiary's ownership
interest in the affiliate exceeds 50% but the subsidiary does not exercise
control over the affiliate. The Company's proportionate share of the equity in
net income in these affiliates for the years ended December 31, 1997, 1996 and
1995 was $48.6 million, $17 million and $.5 million, respectively, which amounts
are included on the Company's Statements of Consolidated Income in
Revenues -- International.
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HOUSTON INDUSTRIES INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The Company's and its subsidiaries' equity investments in foreign and
non-regulated affiliates at December 31, 1997 and 1996 were $704 million and
$502 million, respectively.
(a) Acquisitions.
In May 1996, a subsidiary of HI Energy acquired 11.35% of the common stock
of Light, a publicly held Brazilian corporation, for $393 million which includes
the direct costs of the acquisition. Light is the operator under a 30-year
concession agreement of an integrated electric power and distribution system
that serves a portion of the state of Rio de Janeiro, Brazil, including the city
of Rio de Janeiro. The winning bidders in the government-sponsored auction of
Light, including a subsidiary of HI Energy, formed a consortium whose aggregate
ownership interest of 50.44% represents a controlling interest in Light.
In June 1997, a consortium of investors which included a subsidiary of HI
Energy, acquired for $496 million a 56.7% controlling ownership interest in
Empresa de Energia del Pacifico S.A.E.S.P. (EPSA), an electric utility system
serving the Valle de Cauca region of Colombia, including the area surrounding
the city of Cali. HI Energy contributed $152 million of the purchase price for a
28% ownership interest in EPSA. In addition to its distribution facilities, EPSA
owns 850 MW of electric generation capacity.
In May 1997, HI Energy increased its indirect ownership interest in Empresa
de la Plata S.A. (EDELAP), an Argentina electric utility, from 48% to 63%. The
purchase price of the additional interest was $28 million. HI Energy has
recorded its investment in EDELAP using the equity method because of the
significance of the participatory rights held by a minority shareholder.
HI Energy has accounted for these transactions under purchase accounting
and has recorded its investments and its interest in the affiliates' earnings
after the acquisition dates using the equity method. The purchase prices were
allocated on the basis of the estimated fair market values of the assets
acquired and the liabilities assumed as of the dates of acquisition. The
differences between the amounts paid and the underlying fair values of the net
assets acquired are being amortized as a component of earnings attributable to
unconsolidated affiliates over the estimated lives of the projects ranging from
30 to 40 years. Purchase price adjustments to fixed assets are being amortized
over the underlying assets' estimated useful lives.
(b) Valuation Allowance.
HI Energy is an investor in two waste tire-to-energy projects in the State
of Illinois. The projects had been developed by HI Energy in reliance upon a
state subsidy intended to encourage development of energy project facilities for
the disposal of solid waste. In March 1996, the State of Illinois repealed the
subsidy. As a result of the loss of the subsidy, the Company recorded (i) a $28
million valuation allowance effective in the fourth quarter of 1995 (resulting
in an $18 million after-tax charge in that year) and (ii) an additional $8
million valuation allowance in the first quarter of 1996 (resulting in a $5
million after-tax charge in that year). At the time of the Illinois
legislature's actions, construction work on one of the waste-to-energy projects
had been substantially completed.
The valuation allowance reflects the combined amounts lent to the projects
on a subordinated basis by HI Energy. HI Energy also is a party to two separate
note purchase agreements committing it, under certain circumstances, to lend up
to an additional $16 million. The Company has entered into a support agreement
to enable HI Energy to honor its obligation under these note purchase
agreements. In the Company's opinion, it is unlikely that additional loans would
be required to be made under the note purchase agreements relating to the
facility for which construction had been substantially completed (Ford Heights
Project). In March 1996, a subsidiary of HI Energy purchased from a senior
lending bank all notes relating to the project for which construction had not
yet commenced (Fulton Project) (approximately $4.1 million). As a consequence,
HI Energy has discretion over when, if ever, the construction activities for the
Fulton project will
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HOUSTON INDUSTRIES INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
resume and, in turn, control over future obligations of HI Energy to acquire
additional subordinated notes for the Fulton project.
The Company and HI Energy are defendants in various lawsuits filed in
connection with the Ford Heights Project. CGE Ford Heights, L.L.C., (CGE Ford
Heights) the owner of the project, has filed for reorganization under Chapter 11
of the Federal Bankruptcy Code. In October 1997, CGE Ford Heights filed a
lawsuit against First Trust National Association, HI Energy and Zurn Industries,
Inc. (Zurn). CGE Ford Heights is seeking a determination of the funding
obligations of HI Energy and Zurn. In addition, the trustee for the holders of
the bonds issued to finance the project has filed suit against the Company, HI
Energy and Zurn. The trustee alleges that the Company and HI Energy are
obligated to contribute to CGE Ford Heights approximately $15 million in the
form of subordinated debt obligations. The Company and HI Energy are vigorously
contesting the matter. The Company does not believe that the litigation will
have a material adverse impact on the Company's or HI Energy's financial
statements.
(6) COMMON STOCK
At December 31, 1997, the Company had 282,875,266 shares of common stock
issued and outstanding (out of a total of 700,000,000 authorized shares). At
December 31, 1996, the number of shares of outstanding common stock of Former HI
was 233,335,481.
Outstanding common shares excluded (i) shares pledged to secure a loan to
the Company's Employee Stock Ownership Plan (12,388,551 and 13,370,939 at
December 31, 1997 and 1996, respectively) and (ii) treasury shares (93,459 and
16,042,027 at December 31, 1997 and 1996, respectively). Treasury shares at
December 31, 1996 represent shares purchased under a common stock repurchase
program prior to the Merger. In connection with the Merger, these treasury
shares were canceled and retired in August 1997. At December 31, 1997, the
Company held 93,459 shares, which shares were received from holders of Company
stock options, who surrendered shares of Company stock as partial payment for
the exercise price of their stock options.
In 1997, the Company paid four regular quarterly dividends aggregating
$1.50 per share on its common stock pursuant to dividend declarations made in
December 1996, March 1997, June 1997 and September 1997. In December 1997, the
Company declared its regular quarterly dividend of $0.375 per share to be paid
in March 1998. For information regarding certain restrictions on payments of
dividends, see Note 8(c).
(7) PREFERRED AND PREFERENCE STOCK
(a) Preferred Stock.
At December 31, 1997, the Company had 10,000,000 authorized shares of
preferred stock, of which 97,397 shares were outstanding. As of such date, the
Company's only outstanding series of preferred stock was its $4.00 Preferred
Stock. The $4.00 Preferred Stock pays an annual dividend of $4.00 per share, is
redeemable at $105 per share and has a liquidation price of $100 per share.
In April 1997, the Company redeemed all remaining 257,000 shares of its
$9.375 cumulative preferred stock pursuant to mandatory sinking fund
requirements at a cost of $25.7 million, plus accrued dividends. In February
1997, the Company redeemed the following three series of its cumulative
preferred stock at the redemption prices, plus accrued dividends, indicated:
NUMBER OF REDEMPTION PRICE
SERIES SHARES PER SHARE
------ --------- ----------------
$6.72.................................................... 250,000 $102.51
$7.52.................................................... 500,000 $102.35
$8.12.................................................... 500,000 $102.25
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HOUSTON INDUSTRIES INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(b) Preference Stock.
At December 31, 1997, the Company had 10,000,000 authorized shares of
preference stock, of which 700,000 shares are classified as Series A Preference
Stock and 27,000 shares are classified as Series B Preference Stock. As of
December 31, 1997, there were no shares of Series A Preference Stock issued and
outstanding (such shares being issuable in accordance with the Company's
Shareholder Rights Agreement upon the occurrence of certain events). The number
of shares of Series B Preference Stock issued and outstanding as of December 31,
1997 was 17,000. The sole holder of the Series B Preference Stock is a wholly
owned financing subsidiary of the Company. See Note 8(c).
Each share of common stock of the Company includes one associated
preference stock purchase right (Company Right). Under certain circumstances,
each Company Right entitles the registered holder to purchase from the Company a
unit consisting of one-thousandth of a share (Fractional Share) of Series A
Preference Stock, without par value (Series A Preference Stock), at a purchase
price of $42.50 per Fractional Share, subject to adjustments. The shareholder
rights plan was adopted by the shareholders of Former HI in August 1990 and was
assumed by the Company, with certain amendments, effective upon the Merger.
(8) LONG-TERM DEBT AND SHORT-TERM FINANCING
(a) Consolidated Debt.
The Company's consolidated long-term and short-term debt outstanding is
summarized in the following table. Of the amount of long-term and short-term
debt outstanding as of December 31, 1997, $1.8 billion represents debt of NorAm
which was assumed and adjusted to fair market value as of the Acquisition Date.
CONSOLIDATED LONG-TERM DEBT AND SHORT-TERM BORROWINGS
(IN MILLIONS)
DECEMBER 31, 1997 DECEMBER 31, 1996
-------------------- --------------------
LONG-TERM CURRENT LONG-TERM CURRENT
--------- ------- --------- -------
Short-Term Borrowings:
Commercial Paper........................ $1,435 $1,338
Lines of Credit......................... 390
NorAm Receivables Facility.............. 300
------ ------
Total Short-Term Borrowings............... 2,125 1,338
------ ------
Long-Term Debt -net:
ACES.................................... $1,174
Debentures(1)(2)........................ 669 $ 349
First Mortgage Bonds(1)................. 2,495 2,670 225
Pollution Control Bonds................. 118 5 5
NorAm Medium-Term Notes(2).............. 182 79
Notes Payable(2)........................ 565 166 1
Capital Leases.......................... 15 1 1 4
------ ------ ------ ------
Total Long-Term Debt...................... 5,218 251 3,026 229
------ ------ ------ ------
Total Long-Term and Short-Term Debt..... $5,218 $2,376 $3,026 $1,567
====== ====== ====== ======
- - ---------------
(1) Includes unamortized discount related to debentures of approximately $1
million at December 31, 1997 and 1996 and unamortized discount related to
first mortgage bonds of approximately $14 million and $15 million at
December 31, 1997 and 1996, respectively.
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HOUSTON INDUSTRIES INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(2) Includes unamortized premium related to fair value adjustments of
approximately $15.8 million for Debentures at December 31, 1997. The
unamortized premium for NorAm long-term and current medium-term notes at
December 31, 1997 was approximately $16.7 million and $2.8 million,
respectively. The unamortized premium for long-term and current notes
payable was approximately $13.7 million and $3.3 million, respectively, at
December 31, 1997. See Note 1(b).
Consolidated maturities of long-term debt and sinking fund requirements for
the Company (including NorAm) are approximately $251 million in 1998, $378
million in 1999, $1.430 billion in 2000, $401 million in 2001 and $207 million
in 2002.
(b) First Mortgage Bonds.
As of December 31, 1997, the Company had an aggregate of $2.5 billion
principal amount of its first mortgage bonds issued and outstanding.
In the first quarter of 1997, the Company repaid at maturity $40 million
aggregate principal amount of its 5 1/4% first mortgage bonds and $150 million
aggregate principal amount of its 7 5/8% first mortgage bonds. In June 1997, the
Company purchased $57.6 million aggregate principal amount of its 9.15% first
mortgage bonds due 2021 for a total purchase price of $69.6 million, plus
accrued interest. In November 1997, the Company repaid at maturity $35 million
aggregate principal amount of its 6 3/4% first mortgage bonds.
Sinking or improvement fund requirements of the Company's first mortgage
bonds outstanding will be approximately $28.3 million for each of the years 1998
through 2002. Such requirements may be satisfied by certification of property
additions at 100% of the requirements. Sinking or improvement fund requirements
for 1997 and prior years have been satisfied by certification of property
additions.
The Company has agreed to expend an amount each year for replacements and
improvements in respect of its depreciable mortgaged utility property equal to
$1,450,000 plus 2 1/2% of net additions to such mortgaged property made after
March 31, 1948 and before July 1 of the preceding year. Such requirement may be
met with cash, first mortgage bonds, gross property additions or expenditures
for repairs or replacements, or by taking credit for property additions at 100%
of the requirements. With respect to first mortgage bonds of a series subject to
special redemption, the Company has the option to use deposited cash to redeem
first mortgage bonds of such series at the applicable special redemption price.
The replacement fund requirement to be satisfied in 1998 is approximately $310.3
million.
The amount of the first mortgage bonds that may be issued by the Company is
unlimited as to issuance, but limited by property, earnings and other provisions
of the Mortgage and Deed of Trust dated as of November 1, 1944, between the
Company and South Texas Commercial National Bank of Houston (Chase Bank of
Texas, National Association, as Successor Trustee) and the supplemental
indentures thereto. Substantially all properties used in the conduct of the
business and operations of Electric Operations are subject to liens securing the
long-term debt under the mortgage.
(c) FinanceCo Credit Facility.
In August 1997, a limited partnership special purpose subsidiary of the
Company (FinanceCo) established a five-year, $1.644 billion revolving credit
facility with a consortium of commercial banks (FinanceCo Facility). The
FinanceCo Facility supported $1.435 billion in commercial paper borrowings by
FinanceCo at December 31, 1997 recorded as notes payable on the Consolidated
Balance Sheet. The weighted average interest rate of these borrowings at
December 31, 1997 was 6.15%. Proceeds from the initial issuances of commercial
paper were used to purchase newly issued shares of Series B Preference Stock of
the Company. The Company, in turn, used the proceeds from such stock issuance to
fund the cash portion of the consideration paid to Former NorAm stockholders
under the terms of the Merger.
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HOUSTON INDUSTRIES INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Borrowings under the FinanceCo Facility bear interest at a rate based upon
the London interbank offered rate (LIBOR) plus a margin, a base rate or at a
rate determined through a bidding process. The FinanceCo Facility may be used
(i) to support the issuance of commercial paper or other short-term indebtedness
of FinanceCo, (ii) subject to certain limitations, to finance repurchases of
Company common stock and (iii) subject to certain limitations, to provide funds
for general purposes of FinanceCo, including the making of intercompany loans
to, or securing letters of credit for the benefit of, FinanceCo's affiliates.
The FinanceCo Facility requires the Company to maintain a ratio of
consolidated indebtedness for borrowed money to consolidated capitalization (as
defined) that does not exceed 0.62:1.00 from January 1, 1998 through December
31, 1998 and 0.60:1.00 from January 1, 1999 until termination of the FinanceCo
Facility. The FinanceCo Facility also contains restrictions applicable to the
Company and certain of its subsidiaries with respect to, among other things, (i)
liens, (ii) consolidations, mergers and dispositions of assets, (iii) dividends
and repurchases of common stock, (iv) certain types of investments and (v)
certain changes in its business. The FinanceCo Facility contains customary
covenants and default provisions applicable to FinanceCo and its subsidiaries,
including limitations on, among other things, additional indebtedness (other
than certain permitted indebtedness), liens and certain investments or loans.
Subject to certain conditions and limitations, the Company is required to
make cash payments from time to time to FinanceCo from excess cash flow (as
defined in the FinanceCo Facility) to the extent necessary to enable FinanceCo
to meet its financial obligations. At December 31, 1997, commercial paper
supported by the FinanceCo Facility was secured by pledges of (i) the shares of
common stock of NorAm held by the Company, (ii) all of the limited and general
partner interests of FinanceCo and all of the Company's interest in the general
partner of FinanceCo, (iii) the capital stock of HI Energy, (iv) the Series B
Preference Stock and (v) certain intercompany notes held by FinanceCo. The
obligations under the FinanceCo Facility are not secured by the utility assets
of the Company or NorAm or by the Company's investment in Time Warner
securities.
The Company's outstanding commercial paper balance at December 31, 1996 was
$1.3 billion. The weighted average interest rate at December 31, 1996 was 5.90%.
(d) Company Bank Facility.
The Company meets its short-term financing needs primarily through sales of
commercial paper supported by a $200 million revolving credit facility.
Borrowings under the facility are unsecured and a facility fee is paid. At
December 31, 1997, there was no outstanding commercial paper and there were no
outstanding borrowings under the bank facility.
(e) ACES.
The Company owns 11 million shares of non-publicly traded TW Preferred. See
Note 1(n). To monetize its investment in these securities, the Company sold in
July 1997, 22,909,040 of its unsecured 7% ACES having a face amount of $45.9375
per security.
At maturity, the principal amount of the ACES will be mandatorily
exchangeable by the Company into either (i) a number of shares of common stock
of Time Warner based on an exchange rate or (ii) cash having an equal value.
Subject to adjustments that may result from certain dilution events, the
exchange rate for each ACES is determined as follows: (i) 0.8264 shares of Time
Warner common stock if the price of Time Warner common stock at maturity
(Maturity Price) is at least $55.5844 per share, (ii) a fractional share of Time
Warner common stock such that the fractional share will have a value equal to
$45.9375 if the Maturity Price is less than $55.5844 but greater than $45.9375
and (iii) one share of Time Warner common stock if the Maturity Price is not
more than $45.9375.
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HOUSTON INDUSTRIES INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Prior to maturity, the Company has the option of redeeming the ACES if (i)
changes in federal tax regulations require recognition of a taxable gain on the
Company's TW Preferred and (ii) the Company could defer such gain by redeeming
the ACES. The redemption price is 105% of the closing sales price of the ACES as
determined over a period prior to the redemption notice. The redemption price
may be paid in cash or in shares of Time Warner common stock or a combination of
the two.
The Company used the net proceeds of the sale of the ACES (approximately
$1.021 billion) to retire in 1997 an equivalent amount of the Company's then
outstanding commercial paper.
For information regarding the Company's accounting treatment of the ACES,
including certain accounting losses that may result upon increases in the price
of Time Warner common stock, see Note 1(n).
(f) Pollution Control Revenue Refunding Bonds.
In January 1997, the Brazos River Authority (BRA) and the Matagorda County
Navigation District Number One (MCND) issued, on behalf of the Company, $118
million aggregate principal amount of pollution control revenue bonds. The BRA
and MCND bonds will mature in 2018 and 2028, respectively. The proceeds from the
sale of these securities were used to redeem all outstanding 7 7/8% BRA Series
1986A pollution control revenue bonds ($50 million) and 7 7/8% MCND Series 1986A
pollution control revenue bonds ($68 million) at a redemption price of 102% of
the aggregate principal amount of each series. In 1997, the bonds bore interest
at a floating rate. The weighted average interest rate at December 31, 1997 was
5.01%. Subject to certain conditions, the Company may change the method of
determining the interest rate on the bonds from a daily to a weekly, commercial
paper or long-term interest rate. The bonds are subject to a mandatory tender
for purchase upon certain events, including changes in the method of determining
interest rates on the bonds. When a daily or weekly rate is in effect for the
bonds, holders of the bonds of such issue have the option to have their bonds
purchased at 100% of their principal amount plus accrued interest to the date of
the purchase. Bonds tendered prior to maturity may be remarketed. Although it is
anticipated that all bonds tendered will be purchased with proceeds from the
subsequent offer and sale of the tendered bonds, the Company has entered into
standby purchase agreements with commercial banks to provide approximately $120
million for the purchase of tendered bonds in the event such proceeds are not
available. Facility fees are payable in connection with these facilities.
(g) NorAm Bank Facilities.
In 1997, NorAm met its short-term financing needs primarily through a bank
facility, bank lines of credit and a receivables facility. NorAm's principal
short-term credit facility (NorAm Credit Facility) of $400 million expires in
December 1998. Unsecured borrowings under the NorAm Credit Facility at December
31, 1997 aggregated $340 million and had a weighted average interest rate of
6.30%. A facility fee of .14% per annum is payable on the $400 million
commitment. In addition, NorAm had $50 million of outstanding loans under
uncommitted lines of credit at December 31, 1997 having a weighted average
interest rate of 6.82%.
Under a trade receivables facility (Receivables Facility) which 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 was $300 million at December 31,
1997. The weighted average interest rate at December 31, 1997 was approximately
5.65%. Certain of NorAm's remaining receivables serve as collateral for
receivables sold and represent the maximum exposure to NorAm should all
receivables sold prove ultimately uncollectible. NorAm has retained servicing
responsibility under the Receivables Facility for which it is paid a servicing
fee. Beginning in 1997 and pursuant to SFAS No. 125, "Accounting for Transfers
and Servicing of Financial Assets and Extinguishment of Liabilities", NorAm
accounts for amounts transferred pursuant to the Receivables Facility as
collateralized borrowings. As a result,
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HOUSTON INDUSTRIES INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
these receivables are recorded as assets on the Company's December 31, 1997
Consolidated Balance Sheet and amounts received by NorAm pursuant to this
facility are recorded as notes payable.
In May 1997, NorAm obtained an unsecured, 18-month bank term loan in the
amount of $150 million (included in Notes Payable). The term loan carries a
LIBOR-based floating interest rate. Proceeds from the term loan were used to
refund a portion of NorAm's 9.875% Notes which matured in April 1997. NorAm has
entered into two interest rate swaps, each with a term of 19 months, having an
aggregate notional amount of $150 million which, as of December 31, 1997,
effectively fixed the interest rate on borrowings under the term loan agreement
at approximately 6.775%.
(h) NorAm Long-Term Debt.
At December 31, 1997, NorAm has issued and outstanding $116 million
aggregate principal amount ($107 million after Merger fair value adjustments) of
its 6% Convertible Subordinated Debentures due 2012 (Subordinated Debentures).
The holders of the Subordinated Debentures receive interest quarterly and have
the right at any time on or before the maturity date thereof to convert each
Subordinated Debenture into 0.65 shares of Company common stock and $14.24 in
cash. NorAm is required to make annual sinking fund payments of $6.5 million on
the Subordinated Debentures beginning on March 15, 1997 and on each succeeding
March 15 up to and including March 15, 2011. NorAm (i) may credit against the
sinking fund requirements any Subordinated Debentures redeemed by NorAm and
Subordinated Debentures which have been converted at the option of the holder
and (ii) may deliver purchased Subordinated Debentures in satisfaction of the
sinking fund requirements. Since the Acquisition Date, Subordinated Debentures
aggregating $27,250 were converted.
In the fourth quarter of 1997, NorAm purchased $101.4 million aggregate
principal amount of its 10% Debentures due 2019 at an average price of 111.98%
plus accrued interest. Because NorAm's debt was stated at fair market value as
of the date of the acquisition, the loss on the reacquisition of these
debentures was not material. In December 1997, NorAm repaid at maturity $52
million aggregate principal amount of its medium-term notes.
(i) Restrictions on NorAm's Stockholders' Equity and Debt.
Under the provisions of NorAm's revolving credit facility or certain other
NorAm financial arrangements, NorAm's total debt is limited to 72% of its total
capitalization and NorAm is required to maintain a minimum level of
stockholders' equity. In addition, NorAm's total debt would be limited to $2.055
billion if its ratio of total debt to total capitalization increased to 60%. The
minimum level of stockholders' equity was initially set at $700 million at
December 31, 1995, increasing annually thereafter by (1) 50% of positive
consolidated net income and (2) 50% of the proceeds from any incremental equity
offering made after June 30, 1996. At December 31, 1997, these provisions did
not significantly restrict NorAm's ability to issue debt or to pay dividends.
(j) HI Energy Notes Payable.
In 1996, a subsidiary of HI Energy entered into a $167.5 million loan
agreement in order to refinance a portion of the acquisition costs of Light. The
full proceeds of the loan, net of a $17.5 million debt reserve account
established for the benefit of the lenders, was funded in April 1997. The loan
(included in Notes Payable) is secured by, among other things, a pledge of the
shares of Light and of a subsidiary of HI Energy that is the indirect holder of
the shares of Light.
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HOUSTON INDUSTRIES INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(9) TRUST SECURITIES
(a) Company.
In February 1997, two Delaware statutory business trusts (HI Trusts)
established by the Company issued (i) $250 million of preferred securities and
(ii) $100 million of capital securities, respectively. The preferred securities
have a distribution rate of 8.125% payable quarterly in arrears, a stated
liquidation amount of $25 per preferred security and must be redeemed by March
2046. The capital securities have a distribution rate of 8.257% payable
quarterly in arrears, a stated liquidation amount of $1,000 per capital security
and must be redeemed by February 2037.
The HI Trusts sold the preferred and capital securities to the public and
used the proceeds to purchase $350 million aggregate principal amount of
subordinated debentures (Debentures) from the Company having interest rates
corresponding to the distribution rates of the securities and maturity dates
corresponding to the mandatory redemption dates of the securities. The HI Trusts
are accounted for as wholly owned consolidated subsidiaries of the Company. The
Debentures are the HI Trusts' sole assets. Proceeds from the sale of the
Debentures were used by the Company for general corporate purposes, including
the repayment of short-term debt and the redemption of three series of the
Company's outstanding cumulative preferred stock at the following redemption
prices, plus accrued dividends:
NUMBER OF REDEMPTION PRICE
SERIES SHARES PER SHARE
------ --------- ----------------
$6.72................................................... 250,000 $102.51
$7.52................................................... 500,000 $102.35
$8.12................................................... 500,000 $102.25
The Company has fully and unconditionally guaranteed, on a subordinated
basis, each Trust's obligations, including the payment of distributions and all
other payments due with respect to the respective preferred and capital
securities.
The preferred and capital securities are mandatorily redeemable upon the
repayment of the related Debentures at their stated maturity or earlier
redemption.
Subject to certain limitations, the Company has the option of deferring
payments of interest on the Debentures held by the HI Trusts. If and for as long
as payments on the Debentures have been deferred, or an event of default under
the indenture relating thereto has occurred and is continuing, the Company may
not pay dividends on its capital stock. As of December 31, 1997, no interest
payments on the Debentures had been deferred.
(b) NorAm.
In June 1996, a Delaware statutory business trust (NorAm Trust) established
by NorAm issued $172.5 million of convertible preferred securities and sold
approximately $5.3 million of NorAm Trust common securities (106,720 securities,
representing 100% of the NorAm Trust's common equity) to NorAm . The convertible
preferred securities have a distribution rate of 6.25% payable quarterly in
arrears, a stated liquidation amount of $50 per convertible preferred security
and must be redeemed by 2026. The NorAm Trust sold the convertible preferred
securities to the public and used the proceeds, in addition to the common stock
proceeds, to purchase $177.8 million of 6.25% Convertible Junior Subordinated
Debentures from NorAm having an interest rate corresponding to the distribution
rate of the convertible preferred securities and a maturity date corresponding
to the mandatory redemption date of the convertible preferred securities. The
NorAm Trust is accounted for as a wholly owned consolidated subsidiary of NorAm.
The junior subordinated debentures are the sole assets of the NorAm Trust. NorAm
has fully and unconditionally guaranteed, on a subordinated basis, the NorAm
Trust's obligations, including the payment of distributions and all other
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86
HOUSTON INDUSTRIES INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
payments, with respect to the convertible preferred securities. The convertible
preferred securities are mandatorily redeemable upon the repayment of the
related junior subordinated debentures at their stated maturity or earlier
redemption. Following the Merger, each convertible preferred security is
convertible at the option of the holder into $33.62 of cash and 1.55 shares of
Company common stock. Since the Acquisition Date, convertible preferred
securities aggregating $14.1 million were converted, leaving $16.4 million
principal amount (unamortized fair value of $21.3 million, net of issuance
costs) of convertible preferred securities outstanding at December 31, 1997.
(10) STOCK-BASED INCENTIVE COMPENSATION PLANS AND RETIREMENT PLANS
(a) Incentive Compensation Plans.
The Company has Long-Term Incentive Compensation plans (LICP) and other
incentive compensation plans that provide for the issuance of stock-based
incentives (including performance-based stock compensation and restricted
shares, stock options and stock appreciation rights) to key employees of the
Company, including officers. As of December 31, 1997, 96 current and former
employees participated in the plans. A maximum of approximately 9 million shares
of common stock may be issued under these plans. Under the LICP, beginning one
year after the grant date, the options become exercisable in one-third
increments each year. Performance-based stock compensation issued and restricted
shares granted were 704,865 in 1997, 69,905 in 1996, and 49,792 in 1995.
Stock option activity for the years 1995 through 1997 is summarized below:
WEIGHTED
AVERAGE
NUMBER PRICE AT DATE OF
OF SHARES GRANT OR EXERCISE
--------- -----------------
Outstanding at December 31, 1994....................... 302,578 $ 22.7025
Options Granted...................................... 133,324 $ 17.8277
Options Canceled..................................... (24,560)
Outstanding at December 31, 1995....................... 411,342 $ 21.1414
Options Granted...................................... 101,798 $ 24.375
Options Exercised.................................... (574) $ 17.75
Options Withheld for Taxes........................... (90)
Options Canceled..................................... (13,824)
Outstanding at December 31, 1996....................... 498,652 $ 21.7796
Options Granted...................................... 382,954 $ 21.0673
Options Converted at Acquisition(1).................. 622,504 $ 12.9002
Options Exercised(1)................................. (281,053) $ 9.2063
Options Withheld for Taxes........................... (72)
Options Canceled..................................... (148,418)
Outstanding at December 31, 1997....................... 1,074,567 $ 19.0728
Exercisable at:
December 31, 1997.................................... 645,304 $ 7.00-35.18
December 31, 1996.................................... 280,270 $17.75-23.25
December 31, 1995.................................... 181,924 $21.75-23.25
- - ---------------
(1) Effective upon the Merger, each holder of an unexpired NorAm stock option,
whether or not then exercisable, was entitled to elect to either (i) have
all or any portion of their NorAm stock options canceled and "cashed out" or
(ii) have all or any portion of their NorAm stock options converted to the
Company's stock options. There were 622,504 NorAm stock options converted
into the Company's stock
84
87
HOUSTON INDUSTRIES INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
options at the Acquisition Date. Options exercised during 1997 included
approximately 277,000 shares related to NorAm stock options which were
converted at the Merger.
Effective January 1, 1996, the Company adopted SFAS No. 123, "Accounting
for Stock-Based Compensation." (SFAS No. 123) In accordance with SFAS No. 123,
the Company will continue to apply the existing rules contained in Accounting
Principles Opinion No. 25, "Accounting for Stock Issued to Employees," and
disclose the required pro forma effect on net income and earnings per share of
the fair value based method of accounting for stock compensation as required by
SFAS No. 123.
The following pro forma summary of the Company's consolidated results of
operations have been prepared as if the fair value based method of accounting
for employee stock compensation as required by SFAS No. 123 had been applied:
1997 1996 1995
-------- -------- ----------
(THOUSANDS OF DOLLARS,
EXCEPT PER SHARE DATA)
Net Income as reported............................ $420,948 $404,944 $1,105,524
SFAS No. 123 effect............................... (2,374) (1,098) (244)
-------- -------- ----------
Pro forma Net Income.............................. $418,574 $403,846 $1,105,280
======== ======== ==========
Basic and Diluted Earnings per Common Share As
reported........................................ $ 1.66 $ 1.66 $ 4.46
$ 1.65 $ 1.66 $ 4.46
The fair value of options granted during 1995, 1996 and 1997 were
calculated using the Black-Scholes model. The significant assumptions
incorporated in the Black-Scholes model in estimating the fair value of the
options include (i) an interest rate of 7.78% for 1995 and 5.65% for 1996 and an
interest rate of 6.58% for 1997 that represents the interest rate on a U.S.
Treasury security with a maturity date corresponding with the option term, (ii)
an option term of ten years, (iii) volatility of 19.647% for 1995, 15.713% for
1996 and a volatility of 22.06% for 1997 calculated using daily stock prices for
the period prior to the grant date, and (iv) expected common dividends of $1.50
per share representing annualized dividends at the date of grant.
(b) Pension.
The Company has a noncontributory retirement plan which covers the
employees of the Company and its subsidiaries other than NorAm. NorAm has two
noncontributory retirement plans: (i) the plan which covers the employees of
NorAm other than Minnegasco employees and (ii) the plan which covers Minnegasco
employees. The plans provide retirement benefits based on years of service and
compensation. The Company and NorAm's funding policy is to contribute amounts
annually in accordance with applicable regulations in order to achieve adequate
funding of projected benefit obligations. The assets of the plans consist
principally of common stocks and high-quality, interest-bearing obligations.
85
88
HOUSTON INDUSTRIES INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Net pension cost for the Company attributable to continuing operations
includes the following components:
YEAR ENDED DECEMBER 31,
---------------------------------
1997 1996 1995
--------- -------- --------
(THOUSAND OF DOLLARS)
Service cost -- benefits earned during the
period........................................... $ 26,848 $ 24,392 $ 22,852
Interest cost on projected benefit obligation...... 67,640 51,560 49,317
Actual (return) loss on plan assets................ (100,390) (75,326) (96,004)
Net amortization and deferrals..................... 14,025 17,514 50,889
--------- -------- --------
Net pension cost......................... 8,123 18,140 27,054
Transfer of obligation to STPNOC................... (6,077)
SFAS No. 88 -- curtailment expense................. 12,947 12,698 7,096
--------- -------- --------
Total pension cost....................... $ 14,993 $ 30,838 $ 34,150
========= ======== ========
The funded status of the Company's retirement plans was as follows:
DECEMBER 31,
----------------------
1997 1996
---------- --------
(THOUSANDS OF DOLLARS)
Actuarial present value of:
Vested benefit obligation................................. $ 948,017 $542,714
========== ========
Accumulated benefit obligation............................ $1,017,190 $578,786
========== ========
Plan assets at fair value(1)................................ $1,304,023 $675,401
Projected benefit obligation(1)............................. 1,246,582 756,597
---------- --------
Assets in excess of (less than) projected benefit
obligation................................................ 57,441 (81,196)
Unrecognized transitional asset............................. (9,008) (11,502)
Unrecognized prior service cost............................. 14,735 31,154
Unrecognized net loss....................................... 8,750 19,405
---------- --------
(Accrued) prepaid pension cost......................... $ 71,918 $(42,139)
========== ========
- - ---------------
(1) Includes transfer of approximately $40 million of assets and related
liabilities of plans related to STPNOC. See Note 4(a).
The projected benefit obligation was determined using an assumed discount
rate of 7.25% in 1997 and in 1996. A long-term annual rate of compensation
increase ranging from 4% to 6% was assumed for both the Company and NorAm plans
in 1997 and 1996. The assumed long-term rate of return on plan assets was 9.5%
in 1997 and 1996 (10% for the NorAm plans in 1997). The transitional asset at
January 1, 1986, is being recognized over approximately 17 years, and the prior
service cost is being recognized over approximately 15 years for the Company's
plan. The unrecognized transitional asset, prior service cost and net (gain) or
loss related to the NorAm plans were recognized at the Acquisition Date.
In 1995, the Company offered eligible employees (excluding officers) of the
Company and HI Energy, who were 55 years of age or older and had at least 10
years of service as of July 31, 1995, an incentive program to retire early. For
employees electing early retirement, the program added five years of service
credit and five years in age up to 35 years of service and age 65, respectively,
in determining an employee's pension. Each participating employee (under age 62)
would also receive a supplemental benefit to age 62. During July 1995, the early
retirement incentive was accepted by approximately 300 employees.
86
89
HOUSTON INDUSTRIES INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Pension benefits and supplemental benefits (if applicable) are being paid
out from the Houston Industries Incorporated Retirement Trust. Based on the
projected costs associated with the program, the Company increased its
retirement plan and supplemental benefits in 1995 by approximately $28 million
and $5 million, respectively. Pursuant to SFAS No. 71, the Company deferred the
costs associated with the increases in its benefit obligations and amortized the
costs through the period ending December 31, 1997. In 1997, 1996 and 1995, the
Company amortized $12.9 million, $12.7 million and $7.1 million, respectively,
of those costs as a curtailment under SFAS No. 88, "Employers' Accounting for
Settlements and Curtailments of Defined Benefit Pension Plans and for
Termination Benefits," with regards to the Company's early retirement program.
(c) Savings Plan.
The Company has an employee savings plan that qualifies as cash or deferred
arrangements under Section 401(k) of the Internal Revenue Code of 1986, as
amended (IRC). Under the plan, participating employees may contribute a portion
of their compensation, pretax or after-tax, up to a maximum of 16% of
compensation limited by an annual deferral limit ($9,500 for calendar year 1997)
prescribed by IRC Section 402(g) and the IRC Section 415 annual additions
limits. The Company matches 70% of the first 6% of each employee's compensation
contributed, subject to a vesting schedule which entitles the employee to a
percentage of the matching contributions depending on years of service.
Substantially all of the Company's match is invested in the Company's common
stock.
In October 1990, the Company amended its savings plan to add a leveraged
Employee Stock Ownership Plan (ESOP) component. The Company may use ESOP shares
to satisfy its obligation to make matching contributions under the savings plan.
Debt service on the ESOP loan is paid using all dividends on shares in the ESOP,
interest earnings on funds held in the ESOP and cash contributions by the
Company. Shares of the Company's common stock are released from the encumbrance
of the ESOP loan based on the proportion of debt service paid during the period.
The Company adopted Statement of Position (SOP) 93-6, effective January 1,
1994, which requires that the Company recognize benefit expense for the ESOP
equal to the fair value of the ESOP shares committed to be released. In
accordance with SOP 93-6, the Company credits to unearned ESOP shares the
original purchase price of ESOP shares committed to be released to plan
participants with the difference between the fair value of the shares and the
original purchase price recorded to common stock. Dividends on allocated ESOP
shares are recorded as a reduction to retained earnings; dividends on
unallocated ESOP shares are recorded as a reduction of debt or accrued interest
on the ESOP loan.
The Company's savings plan benefit expense attributable to continuing
operations was $18.4 million, $16.0 million, and $18.9 million in 1997, 1996 and
1995, respectively. Savings plan benefit expense attributable to discontinued
operations was not material.
The ESOP shares were as follows:
DECEMBER 31,
----------------------------
1997 1996
------------ ------------
Allocated shares transferred/distributed from the
Savings Plan(1)....................................... 1,920,406 580,132
Allocated shares........................................ 4,453,227 4,811,113
Unearned shares......................................... 12,388,551 13,370,939
------------ ------------
Total Original ESOP shares......................... 18,762,184 18,762,184
============ ============
Fair value of unearned ESOP shares...................... $331,393,739 $302,517,495
- - ---------------
(1) 1,102,203 allocated shares transferred are related to shares transferred to
STPNOC in December, 1997.
87
90
HOUSTON INDUSTRIES INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NorAm has an employee savings plan (NorAm Savings Plan) which covers
substantially all employees other than Minnegasco employees. Under the terms of
the NorAm Savings Plan, employees may contribute up to 12% of total
compensation, which contributions up to 6% are matched by the Company. The
Minnegasco employees are covered by a savings plan, the terms of which are
somewhat similar to the NorAm Savings Plan. Employer contributions related to
the NorAm and Minnegasco Savings Plan of $3.7 million have been expensed since
the Acquisition Date.
(d) Postretirement Benefits.
The Company and NorAm record the liability for post-retirement benefit
plans other than pensions (primarily health care) under SFAS No. 106,
"Employer's Accounting for Postretirement Benefits Other Than Pensions" (SFAS
No. 106). The Company is amortizing over a 22 year period approximately $213
million to cover the "transition cost" of adopting SFAS No. 106 (i.e., the
Company's liability for postretirement benefits payable with respect to employee
service years accrued prior to the adoption of SFAS No. 106). The unrecognized
transitional asset and net (gain) loss related to the NorAm plans were
recognized at the Acquisition Date.
As provided in the Rate Case Settlement, the Company is required to fund
during each year in an irrevocable external trust approximately $22 million of
postretirement benefit costs which are included in Electric Operations' rates.
In December 1995, the Company commenced funding by contributing a total of $15.1
million to three Voluntary Employees' Beneficiary Association trusts and one
Section 401(h) account of the retirement plan. This contribution represented the
amount of postretirement benefits included in Electric Operations' rates (which
included the Company's interest in the South Texas Project costs) less the
estimated pay-as-you-go amounts for 1995 plus interest as if the contributions
had been made on a monthly basis during the year. Beginning in 1996, the Company
funded postretirement benefits costs on a monthly basis for the amount included
in Electric Operations' rates. Minnegasco is required to fund postretirement
benefit costs for the amount included in its rates. The Company and NorAm,
excluding Electric Operations and Minnegasco, will continue funding their
postretirement benefits on a pay-as-you-go basis. The net postretirement benefit
cost for the Company and its subsidiaries includes the following components:
YEAR ENDED DECEMBER 31,
---------------------------
1997 1996 1995
------- ------- -------
(THOUSANDS OF DOLLARS)
Service cost -- benefits earned during the period....... $ 8,927 $ 8,242 $ 9,093
Interest cost on accumulated benefit obligation......... 14,176 12,265 11,143
Actual return on plan assets............................ (5,063) (2,342)
Net amortization and deferrals.......................... 4,732 5,983 6,061
------- ------- -------
Net postretirement benefit cost......................... $22,772 $24,148 $26,297
======= ======= =======
88
91
HOUSTON INDUSTRIES INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The funded status of the Company's and its subsidiaries' postretirement
benefit costs were as follows:
DECEMBER 31,
----------------------
1997 1996
--------- ---------
(THOUSANDS OF DOLLARS)
Accumulated benefit obligation:
Retirees.................................................. $ 220,436 $ 107,642
Fully eligible active plan participants................... 22,150 16,340
Other active plan participants............................ 26,945 26,090
--------- ---------
Total............................................. 269,531 150,072
Plan assets at fair market value............................ 56,340 38,493
--------- ---------
Assets (less than) accumulated benefit obligation........... (213,191) (111,579)
Unrecognized transitional obligation........................ 155,107 173,954
Unrecognized net gain....................................... (96,463) (99,417)
--------- ---------
(Accrued) postretirement benefit cost....................... $(154,547) $ (37,042)
========= =========
The assumed health care cost trend rates used in measuring the accumulated
postretirement benefit obligation in 1997 are as follows:
Medical -- under 65......................................... 6.6%
Medical -- 65 and over...................................... 7.3%
Dental...................................................... 6.0%
The assumed health care rates gradually decline to 5.4% for both medical
categories and 3.7% for dental by 2001. The accumulated postretirement benefit
obligation was determined using an assumed discount rate of 7.25% for 1997 and
1996.
If the healthcare cost trend rate assumptions were increased by 1%, the
accumulated postretirement benefit obligation as of December 31, 1997 would be
increased by approximately 8%. The annual effect of the 1% increase on the total
of the service and interest costs would be an increase of approximately 11%.
The discount rate used in determining the accumulated postretirement
benefit obligation for the NorAm plan was 7.25% in 1997. The cost of covered
health care benefits (for those participants entitled to a defined benefit as a
result of having retired prior to July 1, 1992) is assumed to increase by 8.5%
per year initially and then increase at a decreasing rate to an annual and
continuing increase of 4.5% by 2006. Based on these assumptions, a one
percentage point increase in the assumed health care cost trend rate would
increase the total of the service plus interest costs (before any deferral for
regulatory reasons) and the accumulated postretirement benefit obligation
related to the NorAm plan at December 31, 1997 by 9.2% and 10.8%, respectively.
(e) Postemployment Benefits.
Effective January 1, 1994, the Company adopted SFAS No. 112, "Employer's
Accounting for Postemployment Benefits," which requires the recognition of a
liability for benefits, not previously accounted for on the accrual basis,
provided to former or inactive employees, their beneficiaries and covered
dependents, after employment but before retirement (primarily health care and
life insurance benefits for participants in the long-term disability plan). Net
postemployment benefit costs were not material in 1997, 1996 and 1995.
89
92
HOUSTON INDUSTRIES INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(11) INCOME TAXES
The Company records income taxes under SFAS No. 109, "Accounting for Income
Taxes," (SFAS No. 109) which, among other things, (i) requires the liability
method be used in computing deferred taxes on all temporary differences between
book and tax bases of assets other than nondeductible goodwill; (ii) requires
that deferred tax liabilities and assets be adjusted for an enacted change in
tax laws or rates; and (iii) prohibits net-of-tax accounting and reporting. SFAS
No. 109 requires that regulated enterprises recognize such adjustments as
regulatory assets or liabilities if it is probable that such amounts will be
recovered from or returned to customers in future rates.
The Company's current and deferred components of income tax expense from
continuing operations are as follows:
YEAR ENDED DECEMBER 31,
--------------------------------
1997 1996 1995
-------- -------- --------
(THOUSANDS OF DOLLARS)
Current............................................ $199,011 $150,658 $141,076
Deferred........................................... 7,363 49,507 58,479
-------- -------- --------
Income taxes for continuing operations............. $206,374 $200,165 $199,555
======== ======== ========
The Company's effective income tax rates are lower than statutory corporate
rates for each year as follows:
YEAR ENDED DECEMBER 31,
--------------------------------
1997 1996 1995
-------- -------- --------
(THOUSANDS OF DOLLARS)
Income from continuing operations before income
taxes............................................ $627,484 $605,109 $596,955
Preferred dividends of subsidiary.................. 2,255 22,563 29,955
-------- -------- --------
Total.................................... 629,739 627,672 626,910
Statutory rate..................................... 35% 35% 35%
-------- -------- --------
Income taxes at statutory rate..................... 220,409 219,685 219,419
-------- -------- --------
Net reduction (addition) in taxes resulting from:
Amortization of investment tax credit............ 19,777 18,404 19,427
Excess deferred taxes............................ 5,570 4,331 4,384
Difference between book and tax depreciation for
which deferred taxes have not been
normalized.................................. (27,466) (22,638) (15,211)
Equity dividend exclusion........................ 5,075 10,194 4,932
Equity income -- foreign affiliates.............. 17,011 5,936
Goodwill......................................... (7,242)
Other -- net..................................... 1,310 3,293 6,332
-------- -------- --------
Total.................................... 14,035 19,520 19,864
-------- -------- --------
Income taxes....................................... $206,374 $200,165 $199,555
======== ======== ========
Effective rate..................................... 32.8% 31.9% 31.8%
90
93
HOUSTON INDUSTRIES INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Following are the Company's tax effects of temporary differences
attributable to continuing operations resulting in deferred tax assets and
liabilities:
DECEMBER 31,
------------------------
1997 1996
---------- ----------
(THOUSANDS OF DOLLARS)
Deferred Tax Assets:
Alternative minimum tax credit carryforwards.............. $ 60,669 $ 19,014
Employee benefits......................................... 145,794 68,078
Internal Revenue Service (IRS) audit assessment........... 74,966
Disallowed plant cost -- net.............................. 22,378 23,237
ACES...................................................... 42,491
State operating loss carryforwards........................ 29,515
Deferred state income taxes............................... 14,460
Other..................................................... 69,235 26,061
Valuation allowance....................................... (6,353)
---------- ----------
Total deferred tax assets -- net....................... 378,189 211,356
---------- ----------
Deferred Tax Liabilities:
Depreciation.............................................. 2,115,717 1,450,894
Deferred plant costs -- net............................... 186,472 194,243
Regulatory assets -- net.................................. 356,509 362,310
Capitalized taxes, employee benefits and removal costs.... 46,584 108,530
Gain on sale of cable television subsidiary............... 222,942 228,449
Deferred state income taxes............................... 70,000
Deferred gas costs........................................ 34,113
Other..................................................... 138,633 131,961
---------- ----------
Total deferred tax liabilities......................... 3,170,970 2,476,387
---------- ----------
Accumulated deferred income taxes -- net.......... $2,792,781 $2,265,031
========== ==========
Tax Refund Case. In July 1990, Former HI paid approximately $104.5 million
to the Internal Revenue Service (IRS) following an IRS audit of Former HI's 1983
and 1984 federal income tax returns. In November 1991, Former HI filed a refund
suit in the U.S. Court of Federal Claims seeking the return of $52.1 million of
tax and $36.3 million of accrued interest, plus interest on both of those
amounts accruing after July 1990. The major contested issue in the refund case
involved the IRS allegation that certain amounts related to the over-recovery of
fuel costs should have been included as taxable income in 1983 and 1984 even
though the Company had an obligation to refund the over-recoveries to its
ratepayers.
In September 1997, the United States Court of Appeals for the Federal
Circuit upheld a lower court ruling that the Company (as successor corporation
to Former HI) was due a refund of federal income taxes assessed on fuel
over-recoveries during 1983 and 1984 that subsequently were refunded to HL&P's
customers.
In February 1998, the Company received a refund of approximately $142
million in taxes and interest paid by Former HI in July 1990, including interest
accrued since 1990 in the amount of approximately $57 million. After giving
effect to the Company's deferred recognition of the 1990 tax payment and payment
of federal income taxes due on the accrued interest on the refund, the refund
had the effect of increasing the Company's earnings in the fourth quarter of
1997 by $37 million (after-tax).
Tax Attribute Carryforwards. At December 31, 1997, NorAm has approximately
$439 million of state net operating losses available to offset future state
taxable income through the year 2012. Based on the Company's assessment of its
ability to use such loss carryforwards in future tax years, a valuation
allowance of
91
94
HOUSTON INDUSTRIES INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
$6.4 million was recorded at the Acquisition Date. In addition, NorAm has
approximately $58 million of federal alternative minimum tax credits which are
available to reduce future federal income taxes payable, if any, over an
indefinite period (although not below the tentative minimum tax otherwise due in
any year), and approximately $2.6 million of state alternative minimum tax
credits which are available to reduce future state income taxes payable, if any,
through the year 2001.
(12) COMMITMENTS AND CONTINGENCIES
(a) Commitments.
The Company has various commitments for capital expenditures, fuel,
purchased power, cooling water and operating leases. Commitments in connection
with Electric Operations' capital program are generally revocable by the
Company, subject to reimbursement to manufacturers for expenditures incurred or
other cancellation penalties. The Company's and its subsidiaries' other
commitments have various quantity requirements and durations. However, if these
requirements could not be met, various alternatives are available to mitigate
the cost associated with the contracts' commitments.
(b) Fuel and Purchased Power.
The Company is a party to several long-term coal, lignite and natural gas
contracts which have various quantity requirements and durations. Minimum
payment obligations for coal and transportation agreements are approximately
$200 million in 1998, $203 million in 1999 and $177 million in 2000.
Additionally, minimum payment obligations for lignite mining and lease
agreements are approximately $9 million for 1998, $9 million for 1999 and $10
million for 2000. Minimum payment obligations for both natural gas purchase and
storage contracts associated with Electric Operations are approximately $9
million annually in 1998, 1999 and 2000.
The Company also has commitments to purchase firm capacity from
cogenerators of approximately $22 million in both 1998 and 1999. Texas Utility
Commission rules currently allow recovery of these costs through Electric
Operations' base rates for electric service and additionally authorize the
Company to charge or credit customers through a purchased power cost recovery
factor for any variation in actual purchased power costs from the cost utilized
to determine its base rates. In the event that the Texas Utility Commission, at
some future date, does not allow recovery through rates of any amount of
purchased power payments, the two principal firm capacity contracts contain
provisions allowing the Company to suspend or reduce payments and seek repayment
for amounts disallowed.
(c) Operations Agreement with City of San Antonio.
As part of the settlement with the City of San Antonio, the Company entered
into a 10-year joint operations agreement under which the Company and the City
of San Antonio, acting through the City Public Service Board of San Antonio
(CPS), share savings resulting from the joint dispatching of their respective
generating assets in order to take advantage of each system's lower cost
resources. Under the terms of the joint operations agreement entered into
between CPS and Electric Operations, the Company has guaranteed CPS minimum
annual savings of $10 million and a minimum cumulative savings of $150 million
over the 10-year term of the agreement. Based on current forecasts and other
assumptions regarding the combined operation of the two generating systems, the
Company anticipates that the savings resulting from joint operations will equal
or exceed the minimum savings guaranteed under the joint operating agreement. In
1996, savings generated for CPS' account for a partial year of joint operations
were approximately $14 million. In 1997, savings generated for CPS' account for
a full year of operation were approximately $22 million.
(d) Transportation Agreement.
NorAm had an agreement (the ANR Agreement) with ANR Pipeline Company (ANR)
which contemplated a transfer to ANR of an interest in certain of NorAm's
pipeline and related assets, representing
92
95
HOUSTON INDUSTRIES INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
capacity of 250 Mmcf/day, and pursuant to which ANR had advanced $125 million to
the Company. The ANR Agreement has been restructured and, after refunds of $84
million through December 31, 1997, NorAm currently retains $41 million (recorded
as a liability) in exchange for ANR's or its affiliates' use of 130 Mmcf/ day of
capacity in certain of NorAm's transportation facilities. The level of
transportation will decline to 100 Mmcf/day in the year 2003 with a refund of $5
million to ANR and the ANR Agreement will terminate in 2005 with a refund of the
remaining balance.
(e) Lease Commitments.
The following table sets forth certain information concerning NorAm's
obligations under operating leases:
Minimum Lease Commitments at December 31, 1997(1)
(MILLIONS OF DOLLARS)
---------------------
1998....................................................... $ 24
1999....................................................... 19
2000....................................................... 16
2001....................................................... 15
2002....................................................... 9
2003 and beyond............................................ 22
----
Total............................................ $105
====
- - ---------------
(1) Principally consisting of rental agreements for building space and data
processing equipment and vehicles (including major work equipment).
NorAm has a master leasing agreement which provides for the lease of
vehicles, construction equipment, office furniture, data processing equipment
and other property. For accounting purposes, the lease is treated as an
operating lease. At December 31, 1997, NorAm had leased assets with a value of
approximately $58.1 million under this lease with a basic term of one year.
NorAm does not expect to lease additional property under this lease agreement.
Lease payments related to NorAm's master leasing agreement are included in
the preceding table for only their basic term. Total rental expense for all
leases since the Acquisition Date was approximately $15 million in 1997.
(f) Letters of Credit.
At December 31, 1997, NorAm had letters of credit incidental with its
ordinary business operations totaling approximately $42 million under which
NorAm is obligated to reimburse drawings, if any.
(g) Indemnity Provisions.
At December 31, 1997, NorAm has $11.4 million accounting reserve on the
Company's Consolidated Balance Sheet in Other Deferred Credits for possible
indemnity claims asserted in connection with its disposition of NorAm's former
subsidiaries or divisions, including the sale of (i) Louisiana Intrastate Gas
Corporation, a former NorAm subsidiary engaged in the intrastate pipeline and
liquids extraction business; (ii) Arkla Exploration Company, a former NorAm
subsidiary engaged in oil and gas exploration and production activities; and
(iii) Dyco Petroleum Company, a former NorAm subsidiary engaged in oil and gas
exploration and production.
93
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HOUSTON INDUSTRIES INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(h) Other.
Electric Operations' service area is heavily dependent on oil, gas, refined
products, petrochemicals and related businesses. Significant adverse events
affecting these industries would negatively affect the revenues of the Company.
The Company and NorAm are involved in legal, tax and regulatory proceedings
before various courts, regulatory commissions and governmental agencies
regarding matters arising in the ordinary course of business, some of which
involve substantial amounts. The Company's management regularly analyzes current
information and, as necessary, provides accruals for probable liabilities on the
eventual disposition of these matters. The Company's management believes that
the effect on the Company's and NorAm's respective financial statements, if any,
from the disposition of these matters will not be material.
In February 1996, the cities of Wharton, Galveston and Pasadena filed suit,
for themselves and a proposed class, against the Company and Houston Industries
Finance Inc. (formerly a wholly owned subsidiary of the Company) citing
underpayment of municipal franchise fees. The plaintiffs claim, among other
things, that from 1957 to the present, franchise fees should have been paid on
sales taxes collected by HL&P on non-electric receipts as well as electric
sales. Plaintiffs advance their claims notwithstanding their failure to notice
such claims over the previous four decades. Because all of the franchise
ordinances affecting HL&P expressly impose fees only on electric sales, the
Company regards plaintiffs' allegations as spurious and is vigorously contesting
the matter. The plaintiffs' pleadings assert that their damages exceed $250
million. No trial date is currently set. Although the Company believes the
claims to be without merit, the Company cannot at this time estimate a range of
possible loss, if any, from the lawsuit, nor can any assurance be given as to
its ultimate outcome
The Company is a party to litigation (other than that specifically noted)
which arises in the normal course of business. Management regularly analyzes
current information and, as necessary, provides accruals for probable
liabilities on the eventual disposition of these matters. Management believes
that the effect on the Company's financial statements, if any, from the
disposition of these matters will not be material.
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HOUSTON INDUSTRIES INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(13) ESTIMATED FAIR VALUE OF FINANCIAL INSTRUMENTS
DECEMBER 31,
-------------------------------------------------
1997 1996
----------------------- -----------------------
CARRYING FAIR CARRYING FAIR
AMOUNT VALUE AMOUNT VALUE
---------- ---------- ---------- ----------
(THOUSANDS OF DOLLARS)
Financial Assets:
Company:
Investment in Time Warner securities....... $ 990,000 $1,420,360 $1,027,500 $1,027,500
NorAm:
Energy derivatives......................... 9,399 13,060
Financial Liabilities:
Company:
First mortgage bonds....................... 2,495,459 2,651,260 2,895,041 3,045,833
Debentures................................. 349,283 379,490 349,098 380,455
ACES....................................... 1,173,786 1,307,247 -- --
Cumulative preferred stock (subject to
mandatory redemption).................... -- -- 25,700 25,957
Trust preferred and capital securities..... 340,882 366,220 -- --
NorAm:
Long-term debt............................. 1,148,848 1,147,344
Trust preferred securities................. 21,290 24,569
Interest rate swaps........................ -- 755
HI Energy:
Interest rate swaps........................ -- 1,679 -- --
The fair values of cash and short-term investments, investment in the
Company's nuclear decommissioning trust, short-term and other notes payable,
floating rate debt of HI Energy, and floating rate pollution control revenue
bonds are estimated to be equivalent to carrying amounts. The remaining fair
values have been determined using quoted market prices of the same or similar
securities when available or other estimation techniques.
(14) UNAUDITED QUARTERLY INFORMATION
The following unaudited quarterly financial information includes, in the
opinion of management, all adjustments (which comprise only normal recurring
accruals) necessary for a fair presentation. Quarterly results are not
necessarily indicative of a full year's operations because of seasonality and
other factors, including rate increases and variations in operating expense
patterns. Results of operations of the newly acquired NorAm businesses are
included beginning on the Acquisition Date.
YEAR ENDED DECEMBER 31, 1997
---------------------------------------------------
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER
--------- ----------- ----------- -----------
(THOUSANDS OF DOLLARS, EXCEPT PER SHARE AMOUNTS)
Revenues......................................... $878,101 $1,064,448 $2,158,551 $2,772,285
Operating Income................................. 156,216 247,172 462,716 198,396
Net Income....................................... 59,620 121,463 243,898 (4,033)
Basic Earnings (loss) per common share(a)........ .26 .52 .93 (.01)
Diluted earnings (loss) per common share(a)...... .26 .52 .93 (.01)
95
98
HOUSTON INDUSTRIES INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
YEAR ENDED DECEMBER 31, 1996
---------------------------------------------------
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER
--------- ----------- ----------- -----------
(THOUSANDS OF DOLLARS, EXCEPT PER SHARE AMOUNTS)
Revenues......................................... $823,507 $1,113,763 $1,251,025 $ 906,982
Operating Income................................. 137,139 286,280 441,069 125,978
Net income (loss)................................ (16,740) 145,334 240,024 36,326
Basic Earnings (loss) per common share(a)........ (.07) .58 .98 .15
Diluted earnings (loss) per common share(a)...... (.07) .58 .98 .15
- - ---------------
(a) Quarterly earnings per common share are based on the weighted average number
of shares outstanding during the quarter, and the sum of the quarters may
not equal annual earnings per common share.
96
99
(15) REPORTABLE SEGMENTS
Upon the acquisition of NorAm, the Company organized its business into the
following segments: Electric Operations, Natural Gas Distribution, Interstate
Pipeline, Energy Marketing, International and Corporate segments. Consistent
with the purchase accounting treatment of the Merger, financial information for
the Natural Gas Distribution, Interstate Pipeline and Energy Marketing segments
are presented only for periods beginning on the Acquisition Date. In 1996 and
1995, the Company's Electric Operations accounted for in excess of 90% of the
Company's total revenues, income and identifiable assets and as such, the
required segment information for those periods is provided on the face of the
Company's consolidated financial statements and in the related notes thereto.
The Company has presented the following summary of financial information by
business segment for 1997 and has included supplemental comparative information
for 1996.
YEAR ENDED DECEMBER 31,
---------------------------
1997(1) 1996
------------ -----------
Revenues:
Electric Operations....................................... $ 4,251,243 $ 4,025,027
Natural Gas Distribution.................................. 892,569
Interstate Pipeline....................................... 108,333
Energy Marketing.......................................... 1,604,999
International............................................. 92,028 62,059
Corporate and Other....................................... 47,851 8,191
Eliminations.............................................. (123,638)
------------ -----------
Total Revenues..................................... $ 6,873,385 $ 4,095,277
============ ===========
Operating Income (Loss):
Electric Operations....................................... $ 994,938 $ 997,147
Natural Gas Distribution.................................. 54,502
Interstate Pipeline....................................... 31,978
Energy Marketing.......................................... 16,407
International............................................. 19,510 2,339
Corporate and Other....................................... (52,835) (9,020)
------------ -----------
Total Operating Income............................. 1,064,500 990,466
------------ -----------
Other income (expenses)..................................... (13,446) (55,412)
Interest and Other Charges.................................. 423,570 329,945
------------ -----------
Income from Continuing Operations Before Tax................ $ 627,484 $ 605,109
============ ===========
Depreciation and Amortization:
Electric Operations....................................... $ 568,541 $ 545,685
Natural Gas Distribution.................................. 51,883
Interstate Pipeline....................................... 19,088
Energy Marketing.......................................... 4,448
International............................................. 3,470 1,648
Corporate and Other....................................... 4,445 2,705
------------ -----------
Total Depreciation and Amortization................ $ 651,875 $ 550,038
============ ===========
Identifiable Assets:
Electric Operations....................................... $ 10,540,849 $10,596,232
Natural Gas Distribution.................................. 3,047,195
Interstate Pipeline....................................... 3,055,610
Energy Marketing.......................................... 1,267,867
International............................................. 869,485 607,103
Corporate and Other....................................... 12,837,302 5,771,648
Eliminations.............................................. (13,203,753) (4,687,126)
------------ -----------
Total Identifiable Assets.......................... $ 18,414,555 $12,287,857
============ ===========
Capital Expenditures:
Electric Operations....................................... $ 236,977 $ 317,532
Natural Gas Distribution.................................. 61,078
Interstate Pipeline....................................... 16,304
Energy Marketing.......................................... 14,365
International............................................. 231,528 495,379
Corporate and Other....................................... 23,572 19,989
------------ -----------
Total Capital Expenditures......................... $ 583,824 $ 832,900
============ ===========
- - ---------------
(1) New categories for segments in 1997 result from the NorAm Merger. See Note
1(b).
97
100
(16) SUBSEQUENT EVENTS
In January 1998, the MCND issued on behalf of the Company $104.7 million
aggregate principal amount of pollution control revenue refunding bonds with
$29.7 million at 5.25% and $75 million at 5.15%. The MCND bonds will mature in
2029. The Company used the proceeds from the sale of these securities to redeem
all outstanding 7 7/8% MCND Series 1989A pollution control revenue bonds ($29.7
million) and 7.70% MCND Series 1989B pollution control revenue bonds ($75
million) at a redemption price of 102% of the aggregate principal amount of each
series.
In February 1998, the BRA issued on behalf of the Company $290 million
aggregate principal amount of pollution control revenue refunding bonds. The BRA
bonds will mature in May 2019 ($200 million at 5 1/8%) and November 2020 ($90
million at 5 1/8%). The Company will use the proceeds from the sale of these
securities to redeem all the outstanding 8.25% BRA 1988A Series pollution
control revenue bonds ($100 million), the 8.25% BRA 1988B Series pollution
control revenue bonds ($90 million), and the 8.10% BRA 1988C Series pollution
control revenue bonds ($100 million) at a redemption price of 102% of the
aggregate principal amount of each series.
In February 1998, NorAm issued $300 million principal amount of 6.5%
debentures due February 1, 2008. The debentures are not redeemable prior to
maturity and are not subject to any sinking fund requirements. 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 1997 purchase of $101
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. In connection with the issuance of the 6.5% debentures
NorAm received approximately $1 million upon unwinding a $300 million treasury
rate lock agreement, which was tied to the interest rate on 10-year treasury
bonds. The rate lock agreement was executed in January 1998, and proceeds from
the unwind will be amortized over the 10 year life of NorAm's 6.5% debentures.
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101
INDEPENDENT AUDITORS' REPORT
Houston Industries Incorporated:
We have audited the accompanying consolidated balance sheets and the
consolidated statements of capitalization of Houston Industries Incorporated and
its subsidiaries (Company) as of December 31, 1997 and 1996, and the related
statements of consolidated income, consolidated retained earnings and
consolidated cash flows for each of the three years in the period ended December
31, 1997. Our audits also included the Company's financial statement schedule
listed in Item 14(a)(3). These financial statements and the financial statement
schedule are the responsibility of the Company's management. Our responsibility
is to express an opinion on these financial statements and the financial
statement schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in
all material respects, the financial position of Houston Industries Incorporated
and its subsidiaries at December 31, 1997 and 1996, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 1997 in conformity with generally accepted accounting principles.
Also, in our opinion, such financial statement schedule, when considered in
relation to the basic consolidated financial statements taken as a whole,
presents fairly in all material respects the information set forth therein.
DELOITTE & TOUCHE LLP
Houston, Texas
February 20, 1998
99
102
NORAM ENERGY CORP.
AND SUBSIDIARY COMPANIES
100
103
ITEM 7. MANAGEMENT'S NARRATIVE ANALYSIS OF THE RESULTS OF OPERATIONS OF NORAM
ENERGY CORP. AND CONSOLIDATED SUBSIDIARIES.
The following narrative and analysis should be read in combination with
NorAm's consolidated financial statements and notes (NorAm's Consolidated
Financial Statements) contained in Item 8 of the Form 10-K of NorAm.
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 90% of NorAm's total revenues,
income or loss and identifiable assets during 1997. 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 1(b) to NorAm's
Consolidated Financial Statements.
NorAm meets the conditions specified in General Instruction I to Form 10-K
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 Combined Annual Report the information called for by Item 4
(submission of matters to a vote of security holders), Item 10 (directors and
executive officers), Item 11 (executive compensation), Item 12 (security
ownership of certain beneficial owners and management) and Item 13 (related
party transactions) of Form 10-K. In lieu of the information called for by Item
6 (selected financial data) and Item 7 (management's discussion and analysis of
financial condition and results of operations) of Form 10-K, NorAm has included
the following Management's Narrative Analysis of the Results of Operations to
explain material changes in the amount of revenue and expense items of NorAm
between 1997 and 1996. Reference is hereby made to Item 1 (business), Item 2
(properties), Item 3 (legal proceedings), Item 5 (NorAm common stock), Item 7A
(market risk disclosure) and Item 9 (changes in and disagreements with
accountants) of this Combined Annual Report for additional information regarding
NorAm required by the reduced disclosure format of General Instruction I to Form
10-K.
CONSOLIDATED RESULTS OF OPERATIONS
Seasonality and Other Factors. NorAm's results of operations are seasonal
due to seasonal 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 -- Electric
Operations -- Regulatory Assets"; " -- Competition -- Other Operations";
"-- Impact of the Year 2000 Issue and Other System Implementation Issues";
"-- Environmental Expenditures -- Manufactured Gas Plant Sites"; and
"-- Environmental Expenditures -- Mercury Contamination" in Item 7 of Houston
Industries' Form 10-K.
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
101
104
Date. NorAm's financial statements for periods subsequent to the Acquisition
Date are not comparable to prior periods because of the following purchase
accounting adjustments:
1. The impact ($21.6 million) of the amortization of newly-recognized
goodwill;
2. The amortization (to interest expense) of the revaluation of
long-term debt ($9.8 million);
3. The removal of the amortization (to operating expense) previously
associated with the pension and post-retirement obligations ($2.1
million); and
4. The deferred income tax expense ($4.9 million) associated with
these adjustments.
Interest expense and related debt incurred by Houston Industries to fund the
cash portion of the purchase consideration has not been pushed down to NorAm and
its subsidiaries.
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: (i) an actual basis for NorAm for 1997 and 1996 and
(ii) a pro forma basis for 1997 and 1996 as if the Merger had taken place at the
beginning of each 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.
1997 Compared to 1996 (Pro Forma). NorAm had pro forma operating revenues
of $5.9 billion in 1997 compared to $4.8 billion in 1996. Pro forma operating
expenses for 1997 were $5.6 billion compared to $4.5 billion for 1996. Pro forma
operating income for 1997 decreased $59.0 million (19%) in comparison to 1996
(before a one time charge of $22.3 million for early retirement and severance in
1996). This decrease is principally the result of (i) hedging-related losses of
approximately $17.4 million incurred in the first quarter of 1997 (prior to the
Merger) by a subsidiary of NorAm, (ii) a weather-related decline in sales
volumes of approximately $18.0 million from Natural Gas Distribution, and (iii)
increased administrative and general expense of approximately $10.0 million
associated with increased staffing and marketing in connection with increasing
the scope of energy marketing activities. For a more detailed comparative
discussion regarding pro forma operating revenue and expense items, see "Results
of Operations By Business Unit" below.
1997 Compared to 1996 (Actual). NorAm had actual operating revenues of $5.9
billion in 1997 compared to $4.8 billion in 1996. Actual operating expenses for
1997 were $5.6 billion compared to $4.5 billion for 1996. The increase in
operating revenues and expenses was caused primarily by increases in trading
activities in NorAm's Energy Marketing business unit. The decrease in operating
income was caused by the same factors referenced in the discussion of pro forma
operating income.
During the first quarter of 1996, NorAm instituted a reorganization plan
affecting its NorAm Gas Transmission Company (NGT) and Mississippi River
Transmission Corporation (MRT) subsidiaries, pursuant to which a total of
approximately 275 positions were eliminated, resulting in expense for severance
payments and enhanced retirement benefits. Also during the first quarter of
1996, (1) NorAm's Entex division instituted an early retirement program which
was accepted by approximately 100 employees and (2) NorAm's Minnegasco division
reorganized certain functions, resulting in the elimination of approximately 25
positions. Collectively, these programs resulted in a non-recurring pre-tax
charge of approximately $22.3 million (approximately $13.4 million after tax),
which pre-tax amount is reported in the accompanying Statements of Consolidated
Income as "Early retirement and severance".
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105
The following table sets forth selected financial and operating data on an
actual and pro forma basis for the year ended December 31, 1997 and 1996,
followed by a discussion of significant variances in period-to-period results:
SELECTED FINANCIAL RESULTS:
ACTUAL(1) PRO FORMA(2)
YEAR ENDED DECEMBER 31, YEAR ENDED DECEMBER 31,
------------------------ ------------------------
1997 1996 1997 1996 % CHANGE
---------- ---------- ---------- ---------- --------
UNAUDITED
(THOUSANDS OF DOLLARS)
Operating Revenues:
Natural Gas Distribution.............. $2,202,301 $2,113,589 $2,202,301 $2,113,589 4%
Interstate Pipeline................... 295,044 346,762 295,044 346,762 (15%)
Energy Marketing...................... 3,589,118 2,645,106 3,589,118 2,645,106 36%
Corporate and Other................... 81,694 55,403 81,694 55,403 47%
Elimination of Inter-unit
Revenues(5)......................... (309,767) (372,398) (309,767) (372,398) (17%)
---------- ---------- ---------- ----------
5,858,390 4,788,462 5,858,390 4,788,462 (22%)
---------- ---------- ---------- ----------
Operating Income (loss):
Natural Gas Distribution.............. 166,435 183,972 152,463 160,020 (5%)
Interstate Pipeline................... 108,708 124,417 99,927 109,362 (9%)
Energy Marketing...................... 19,288 55,693 15,295 48,848 (69%)
Corporate and Other................... (30,235) (27,272) (22,613) (14,204) 59%
---------- ---------- ---------- ----------
264,196 336,810 245,072 304,026 (19%)
Merger Transaction Costs(3)............. 18,400
Early Retirement and Severance(4)....... 22,344 22,344 (100%)
---------- ---------- ---------- ----------
Consolidated............................ 245,796 314,466 245,072 281,682 (13%)
Interest Expense, Net................... 126,150 132,557 112,482 109,128 3%
Distributions on Subsidiary Trust
Securities............................ 6,596 5,842 1,479 1,110 33%
Other (Income) and Deductions........... (9,453) 14,577 (9,453) 14,577 (165%)
Income Tax Expense...................... 55,781 66,352 72,261 79,973 (10%)
Extraordinary (Gain) Loss, Less Taxes... (237) 4,280 -- -- --
---------- ---------- ---------- ----------
Net Income............................ $ 66,959 $ 90,858 $ 68,303 $ 76,894 (11%)
========== ========== ========== ==========
- - ---------------
(1) Actual results for 1997 combine Former NorAm's results for the seven months
ended July 31, 1997 with Current NorAm's results for the five months ended
December 31, 1997.
(2) Pro forma results reflect purchase accounting adjustments as if the Merger
had occurred on January 1, 1996 and 1997, as applicable. Adjustments for
goodwill have been allocated to the respective business units.
(3) For expenses associated with the completion of the business combination
with Houston Industries, see Note 1(o) to NorAm's Financial Statements.
(4) Expenses associated with an early retirement and severance plan, see Note
1(n) to NorAm's Financial Statements.
(5) Elimination of operating revenues derived from sales to affiliated business
units.
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RESULTS OF OPERATIONS BY BUSINESS UNIT
NATURAL GAS DISTRIBUTION
NorAm's domestic natural gas distribution operations (Natural Gas
Distribution) are conducted through its Arkla, Entex and Minnegasco divisions.
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 unaudited pro forma
financial results of operations of Natural Gas Distribution, including operating
statistics, for 1997 and 1996.
UNAUDITED
PRO FORMA
YEAR ENDED
DECEMBER 31,
---------------- PERCENT
1997 1996 CHANGE
------ ------ -------
($ IN MILLIONS)
Operating Revenues........................................ $2,202 $2,113 4%
Operating Expenses:
Natural Gas............................................. 1,441 1,348 7%
Operation and Maintenance............................... 247 250 (1%)
Depreciation and Amortization........................... 123 120 3%
Other Operating Expenses(1)............................. 238 235 1%
------ ------
Total Operating Expenses.................................. 2,049 1,953 5%
------ ------
Operating Income........................................ $ 153 $ 160 (4%)
====== ======
Throughput Data (in Bcf):
Residential and Commercial Sales........................ 326 333 (2%)
Industrial Sales........................................ 59 58 2%
Transportation.......................................... 42 42 --
------ ------
Total Throughput..................................... 427 433 (1%)
====== ======
- - ---------------
(1) Before a $6 million one-time charge incurred in 1996 for early retirement
and severance costs.
1997 Compared to 1996 (Pro Forma). The increase of approximately $89
million (4%) in pro forma Natural Gas Distribution operating revenue for the
year ended December 31, 1997 in comparison to the corresponding period of 1996
is principally due to the increase in purchased gas costs.
Pro forma operating income was $153 million in 1997 compared with $160
million (before a one-time charge of $6 million for early retirement and
severance) in 1996. The decrease of approximately $7 million (4%) in 1997 pro
forma operating income was principally due to decreased Minnegasco customer
usage due to warmer weather and customer conservation, decreased Arkla customer
usage due to warmer weather (primarily in the first quarter of 1997) and Arkla's
charges associated with the applicable state regulatory commission's methodology
of calculating the price of gas charged to customers (the purchased gas
adjustment) primarily in Louisiana. Partially offsetting the decrease is an
increase in Minnegasco's performance based rate incentive recoveries and
customer growth and increased revenues from Entex due to rate relief granted in
1996 and fully reflected in 1997.
The $93 million (7%) increase in gas purchased costs in 1997 compared to
1996 primarily reflects the increase in Natural Gas Distribution's average cost
of gas in 1997 (consistent with the overall increase in the market price of gas)
along with the purchased gas adjustment described above.
INTERSTATE PIPELINE
NorAm's interstate natural gas pipeline operations (Interstate Pipeline)
are conducted through NorAm Gas Transmission Company (NGT) and Mississippi River
Transmission Corporation (MRT), two wholly
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owned subsidiaries of NorAm. The NGT system consists of approximately 6,200
miles of natural gas transmission lines located in portions of Arkansas, Kansas,
Louisiana, Mississippi, Missouri, Oklahoma, Tennessee and Texas. The MRT system
consists of approximately 2,000 miles of pipeline serving principally the
greater St. Louis area in Missouri and Illinois.
The following table provides summary data regarding the unaudited pro forma
results of operations of Interstate Pipeline including operating statistics for
1997 and 1996.
UNAUDITED
PRO FORMA
YEAR ENDED
DECEMBER 31,
---------------- PERCENT
1997 1996 CHANGE
------ ------ -------
($ IN MILLIONS)
Operating Revenues.......................................... $295 $347 (15%)
Operating Expenses:
Natural Gas............................................... 42 76 (45%)
Operation and Maintenance................................. 45 49 (8%)
Depreciation and Amortization............................. 46 45 2%
Other Operating Expenses(1)............................... 62 68 (9%)
---- ----
Total Operating Expenses.......................... 195 238 (18%)
---- ----
Operating Income............................................ $100 $109 (9%)
==== ====
Throughput Data (in million MMBtu):
Natural Gas Sales........................................... 18 33 (45%)
Transportation.............................................. 911 952 (4%)
Elimination(2)......................................... (17) (31) 45%
---- ----
Total Throughput............................................ 912 954 (4%)
==== ====
- - ---------------
(1) Before a $17 million one-time charge incurred in 1996 for early retirement
and severance costs.
(2) Elimination of volumes both transported and sold.
1997 Compared to 1996 (Pro Forma). Pro forma operating revenues for
Interstate Pipeline decreased by $52 million (15%) for the year ended December
31, 1997 in comparison to the corresponding period of 1996. The decrease in
revenues primarily reflects a decline in natural gas sales revenue resulting
from the expiration in 1996 of an unbundled natural gas sales contract between
Interstate Pipeline and Arkla. Natural gas sales to Natural Gas Distribution
were $60 million in 1996 and none in 1997. It is anticipated that substantially
all future revenues for Interstate Pipeline will be from natural gas
transportation only.
Pro forma operating income was $100 million in 1997 compared to $109
million (before a one-time charge of $17 million for early retirement and
severance) in 1996. This decrease of approximately $9 million (9%) in Interstate
Pipeline's pro forma operating income between 1997 and 1996 results primarily
from three factors: (i) a 6% decrease in transportation revenues, (ii) a 43%
decrease in natural gas sales revenue (as described above) and (iii) lower
demand for natural gas transportation as a result of lower natural gas
consumption (primarily weather-related) in the eastern markets served by
Interstate Pipeline. These factors were offset partially by an approximately 18%
decline in operating expenses primarily due to decreases in gas purchased.
The decline in transportation revenues are largely attributable to price
differentials between the average spot price for Mid-continent natural gas
(Interstate Pipeline's primary supply area) and Gulf Coast natural gas in 1997.
When prices of Gulf Coast gas decrease significantly relative to Mid-continent
gas, downward pressure on transportation prices occurs when selling in west to
east markets like those of NGT. This competitive pressure, in turn, results in a
decline in average transportation rates under contracts that contain
market-sensitive pricing provisions.
105
108
The $34 million (45%) decrease in gas purchased costs in 1997 compared to
1996 is largely attributable to the expiration of long-term supply contracts
entered into prior to unbundling, as discussed above. Other operating expenses
decreased $4 million (9%) in 1997 compared to 1996 primarily due to the
elimination of non-recurring costs combined with cost reductions related to the
1996 early retirement and severance program and reductions in costs allocated
from NorAm.
During 1997, Interstate Pipeline's largest unaffiliated customer was a
natural gas utility that serves the greater St. Louis metropolitan area.
Revenues from this customer are generated pursuant to several long-term firm
transportation and storage contracts that currently are scheduled to expire at
various dates between October 1999 and May 2000. Interstate Pipeline is
currently negotiating with the natural gas utility to renew these agreements.
ENERGY MARKETING
NorAm's energy marketing and gathering business (Energy Marketing) includes
the operations of NorAm's wholesale and retail energy marketing businesses and
natural gas gathering activities (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 unaudited pro forma
results of operations of Energy Marketing, including operating statistics for
1997 and 1996.
UNAUDITED PRO FORMA
YEAR ENDED
DECEMBER 31
-------------------- PERCENT
1997 1996 CHANGE
-------- -------- -------
(IN MILLIONS)
Operating Revenues....................................... $3,589 $2,645 36%
Operating Expenses:
Natural Gas and Purchased Power, net................... 3,477 2,489 40%
Operation and Maintenance.............................. 46 68 (32%)
Depreciation and Amortization.......................... 11 10 10%
Other Operating Expenses............................... 40 29 38%
------ ------
Total Operating Expenses....................... 3,574 2,596 38%
------ ------
Operating Income......................................... $ 15 $ 49 (69%)
====== ======
Operations Data:
Natural Gas (in Bcf):
Sales............................................... 1,185 1,076 10%
Transportation...................................... 24 26 (8%)
Gathering........................................... 242 231 5%
------ ------
Total.......................................... 1,451 1,333 9%
====== ======
Electricity:
Wholesale Power Sales (in thousand MWH)............. 24,997 2,776 800%
====== ======
1997 Compared to 1996 (Pro Forma). Pro forma operating revenues for Energy
Marketing increased by $944 million (36%) for 1997 in comparison to 1996 due to
increased natural gas and electricity trading volumes. Increased volumes in 1997
had minimal effect on operating income due to low operating margins in both
periods.
Pro forma operating income for 1997 was $15 million compared to $49 million
in 1996. This decrease of approximately $34 million (69%) was primarily
attributed to: (i) hedging losses associated with anticipated first quarter 1997
sales under peaking contracts and (ii) losses from the sale of natural gas held
in storage and unhedged in the first quarter of 1997 totaling $17 million. In
addition, other operating expenses increased
106
109
$11 million largely due to increased staffing and marketing activities made in
support of the increased sales and expanded marketing efforts. Partially
offsetting these unfavorable impacts were increased margins from natural gas
gathering activities.
Natural gas and purchased power expense increased $988 million (40%) in
1997 compared to 1996 primarily due to increased gas and electricity marketing
activities but also included hedging losses and losses from the sale of natural
gas, as discussed above.
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 NorAm's accounting treatment of derivative instruments, see
Note 2 to NorAm's Consolidated Financial Statements and Quantitative and
Qualitative Disclosure About Market Risk in Item 7A of this report.
NorAm believes that NES' energy marketing and risk management services have
the potential of complementing Houston Industries' strategy of developing and/or
acquiring unregulated 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.
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.
While pro forma operating revenues for Corporate increased $26.3 million
(47%) from 1996 to 1997, pro forma operating loss increased by $8.4 million
(59%). The increased revenues and operating loss were principally due to 1997
increased activities and development costs associated with NorAm's utility
services and consumer services businesses.
NON-OPERATING INCOME AND EXPENSE
The $3.4 million increase in Interest Expense, Net on a pro forma basis for
the year ended December 31, 1997 in comparison to the corresponding period of
1996 reflects the impact of the inclusion in 1997 results of $15 million of
expense associated with NorAm's receivables facility, for which the
corresponding costs in 1996 ($10 million) are included with Other (Income) and
Deductions; see Note 4(a) to NorAm's Consolidated Financial Statements. Apart
from the impact of this reclassification, the $11.3 million decrease in interest
expense in 1997 reflected $5.4 million and $5.9 million of reduction due to a
decrease in the average interest rate and a decrease in the average level of
debt, respectively.
After adjusting for the costs associated with NorAm's receivables facility
as described above, there was a favorable variance of $14 million in other
(income) and deductions on a pro forma basis from the year ended December 31,
1996 to the corresponding period of 1997. A portion of this favorable variance
was due to the close-out of certain interest rate swaps; see Note 4(b) to
NorAm's Consolidated Financial Statements.
The net favorable variance of $7.7 million in pro forma income tax expense
from the year ended December 31, 1996 to the corresponding period of 1997 is
primarily due to decreased 1997 pre-tax income.
Reference is made to Note 4 of NorAm's Consolidated Financial Statements
for a discussion of NorAm's short and long-term debt.
107
110
NEW ACCOUNTING ISSUES
Reference is made to "Management's Discussion and Analysis of Financial
Condition and Results of Operations of the Company -- New Accounting Issues" in
Item 7 of the Form 10-K of Houston Industries, which has been jointly filed with
the NorAm Form 10-K, for a discussion of certain new accounting issues.
108
111
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA OF NORAM.
NORAM ENERGY CORP. AND SUBSIDIARIES
STATEMENTS OF CONSOLIDATED INCOME
(THOUSANDS OF DOLLARS)
CURRENT NORAM FORMER NORAM
------------- ----------------------------------------------
FIVE MONTHS SEVEN MONTHS TWELVE MONTHS TWELVE MONTHS
ENDED ENDED ENDED ENDED
DECEMBER 31, JULY 31, DECEMBER 31, DECEMBER 31,
1997 1997 1996 1995
------------- ------------ ------------- -------------
Operating Revenues................... $2,521,342 $3,337,048 $4,788,462 $2,964,679
---------- ---------- ---------- ----------
Operating Expenses
Natural gas and purchased power,
net............................. 2,041,504 2,636,340 3,571,411 1,857,166
Operation and maintenance.......... 259,315 370,369 621,279 564,790
Depreciation and amortization...... 78,207 84,901 142,362 147,109
Taxes other than income taxes...... 50,416 73,142 116,600 108,309
Merger transaction costs........... 1,144 17,256 -- --
Early retirement and severance..... -- -- 22,344 --
---------- ---------- ---------- ----------
2,430,586 3,182,008 4,473,996 2,677,374
---------- ---------- ---------- ----------
Operating Income..................... 90,756 155,040 314,466 287,305
---------- ---------- ---------- ----------
Other (Income) and Deductions
Interest expense, net.............. 47,490 78,660 132,557 157,959
Dividend requirement on preferred
securities of subsidiary
trust........................... 279 6,317 5,842 --
Other, net......................... (2,243) (7,210) 3,078 (1,333)
Loss on sale of accounts
receivable...................... -- -- 11,499 9,771
---------- ---------- ---------- ----------
45,526 77,767 152,976 166,397
---------- ---------- ---------- ----------
Income Before Income Taxes........... 45,230 77,273 161,490 120,908
Income Tax Expense................... 24,383 31,398 66,352 55,379
---------- ---------- ---------- ----------
Income Before Extraordinary Item..... 20,847 45,875 95,138 65,529
Extraordinary gain(loss) on early
retirement of debt, less taxes..... -- 237 (4,280) (52)
---------- ---------- ---------- ----------
Net Income........................... 20,847 46,112 90,858 65,477
Preferred dividend requirement....... -- -- 3,597 7,800
---------- ---------- ---------- ----------
Earnings Available to Common Stock... $ 20,847 $ 46,112 $ 87,261 $ 57,677
========== ========== ========== ==========
See Notes to NorAm's Consolidated Financial Statements.
109
112
NORAM ENERGY CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(DOLLARS IN THOUSANDS)
UNREALIZED
COMMON STOCK(1) PREFERRED STOCK(2) RETAINED INVESTMENT
----------------------- ---------------------- PAID-IN EARNINGS GAIN (LOSS)
SHARES AMOUNT SHARES AMOUNT CAPITAL (DEFICIT) NET OF TAX TOTAL
------------ -------- ---------- --------- ----------- --------- ----------- ----------
FORMER NORAM:
Balance at January 1,
1995.................... 122,530,248 $ 76,581 2,600,000 $ 130,000 $ 868,289 $(360,079) $ 2,586 $ 717,377
Net Income................ 65,477 65,477
Cash Dividends:
Preferred stock -- $3.00
per share............. (7,800) (7,800)
Common stock -- $0.28
per share............. (34,538) (34,538)
Change in Market Value of
Marketable Equity
Securities, net of
tax..................... 12,730 12,730
Issuance of Common stock
under Direct Stock
Purchase Plan........... 1,610,148 1,006 8,795 9,801
Other Issuances........... 663,297 415 3,801 4,216
------------ -------- ---------- --------- ----------- --------- ------- ----------
Balance at December 31,
1995.................... 124,803,693 78,002 2,600,000 130,000 880,885 (336,940) 15,316 767,263
------------ -------- ---------- --------- ----------- --------- ------- ----------
Net Income................ 90,858 90,858
Cash Dividends:
Preferred stock -- $1.50
per share............. (3,900) (3,900)
Common stock -- $0.28
per share............. (36,721) (36,721)
Change in Market Value of
Marketable Equity
Securities, net of
tax..................... (15,311) (15,311)
Conversion to Subordinated
Debentures.............. (2,600,000) (130,000) (130,000)
Issuance of Common Stock
under Direct Stock
Purchase Plan........... 937,193 586 9,668 10,254
Public Issuance of Common
Stock................... 11,500,000 7,188 101,775 108,963
Other Issuances........... 667,287 417 8,725 9,142
------------ -------- ---------- --------- ----------- --------- ------- ----------
Balance at December 31,
1996.................... 137,908,173 86,193 -- -- 1,001,053 (286,703) 5 800,548
------------ -------- ---------- --------- ----------- --------- ------- ----------
Net Income................ 46,112 46,112
Cash Dividends:
Common stock -- $0.14
per share............. (19,281) (19,281)
Change in Market Value of
Marketable Equity
Securities, net of
tax..................... 5,874 5,874
Conversion of
NorAm-Obligated
Mandatorily Redeemable
Convertible 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 2,463,831 2,463,832
Net Income................ 20,847 20,847
Change in Market Value of
Marketable Equity
Securities, net of
tax..................... (5,634) (5,634)
------------ -------- ---------- --------- ----------- --------- ------- ----------
Balance at December 31,
1997.................... 1,000 $ 1 -- $ -- $ 2,463,831 $ 20,847 $(5,634) $2,479,045
============ ======== ========== ========= =========== ========= ======= ==========
- - ---------------
(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 Note 1(b).
(2) $3.00 Convertible exchangeable preferred stock, Series A ($50 liquidation
preference), cumulative, non-voting; authorized 10,000,000 shares. On the
Acquisition Date, NorAm's pre-merger preferred stock was canceled.
See Notes to NorAm's Consolidated Financial Statements.
110
113
NORAM ENERGY CORP. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(THOUSANDS OF DOLLARS)
ASSETS
CURRENT NORAM FORMER NORAM
------------- ------------
DECEMBER 31, DECEMBER 31,
1997 1996
------------- ------------
Property, Plant and Equipment
Natural gas distribution.................................. $1,326,442 $2,158,013
Interstate pipeline....................................... 1,258,087 1,685,959
Energy marketing.......................................... 162,519 252,509
Other..................................................... 14,972 20,150
---------- ----------
Total............................................. 2,762,020 4,116,631
Less accumulated depreciation and amortization............ 59,531 1,675,576
---------- ----------
Property, plant and equipment -- net...................... 2,702,489 2,441,055
---------- ----------
Current Assets
Cash and cash equivalents................................. 35,682 27,981
Accounts and notes receivable, principally customer....... 969,248 696,982
Accounts receivable from parent........................... 10,161
Deferred income taxes..................................... 8,309 10,495
Gas in underground storage................................ 63,702 70,651
Materials and supplies.................................... 29,611 30,595
Gas purchased in advance of delivery...................... 6,200 6,200
Other current assets...................................... 24,386 15,423
---------- ----------
Total current assets.............................. 1,147,299 858,327
---------- ----------
Other Assets
Goodwill, net............................................. 2,026,395 466,938
Prepaid pension asset..................................... 92,064 45,390
Investment in marketable equity securities................ 27,046 26,670
Regulatory asset for environmental costs.................. 21,745 39,152
Gas purchased in advance of delivery...................... 29,048 34,895
Deferred debits, net...................................... 23,954 32,200
---------- ----------
Total other assets................................ 2,220,252 645,245
---------- ----------
Deferred Charges, net....................................... 69,056 72,850
---------- ----------
Total Assets................................................ $6,139,096 $4,017,477
========== ==========
See Notes to NorAm's Consolidated Financial Statements
111
114
NORAM ENERGY CORP. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS -- (CONTINUED)
(THOUSANDS OF DOLLARS)
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT NORAM FORMER NORAM
------------- ------------
DECEMBER 31, DECEMBER 31,
1997 1996
------------- ------------
Stockholders' Equity:
Common stock.............................................. $ 1 $ 86,193
Paid-in capital........................................... 2,463,831 1,001,053
Retained earnings (deficit)............................... 20,847 (286,703)
Unrealized gain (loss) on marketable equity securities,
net of tax............................................. (5,634) 5
---------- ----------
Total............................................. 2,479,045 800,548
---------- ----------
NorAm-Obligated Mandatorily Redeemable Convertible Preferred
Securities of Subsidiary Trust Holding Solely Junior
Subordinated Debentures of NorAm, net..................... 21,290 167,768
Long-Term Debt, less Current Maturities..................... 916,703 1,054,221
Current Liabilities:
Current maturities of long-term debt...................... 232,145 277,000
Notes payable to banks.................................... 390,000 115,000
Notes payable to parent................................... 22,100
Receivables facility...................................... 300,000
Accounts payable, principally trade....................... 668,269 762,164
Income taxes payable...................................... 11,684
Interest payable.......................................... 27,273 31,928
General taxes............................................. 41,315 51,082
Customer deposits......................................... 36,626 35,711
Other current liabilities................................. 133,278 113,628
---------- ----------
Total current liabilities......................... 1,851,006 1,398,197
---------- ----------
Deferred Credits and Other Liabilities:
Accumulated deferred income taxes......................... 483,039 320,506
Estimated environmental remediation costs................. 21,745 39,152
Payable under capacity lease agreement.................... 41,000 41,000
Benefit liabilities....................................... 182,687 90,544
Estimated obligations under indemnification provisions of
sale agreements........................................ 11,391 29,098
Refundable excess deferred income taxes................... 13,569 17,946
Other..................................................... 117,621 58,497
---------- ----------
Total............................................. 871,052 596,743
---------- ----------
Commitments and Contingencies (Note 8)
Total Liabilities and Stockholders' Equity.................. $6,139,096 $4,017,477
========== ==========
See Notes to NorAm's Consolidated Financial Statements
112
115
NORAM ENERGY CORP. AND SUBSIDIARIES
STATEMENTS OF CONSOLIDATED CASH FLOWS
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
(THOUSANDS OF DOLLARS)
CURRENT NORAM FORMER NORAM
------------- --------------------------------------------
FIVE MONTHS SEVEN MONTHS TWELVE MONTHS TWELVE MONTHS
ENDED ENDED ENDED ENDED
DECEMBER 31, JULY 31, DECEMBER 31, DECEMBER 31,
1997 1997 1996 1995
------------- ------------ ------------- -------------
Cash Flows from Operating Activities:
Net income.................................... $ 20,847 $ 46,112 $ 90,858 $ 65,477
Adjustments to reconcile net income to net
cash provided by (used in) operating
activities:
Depreciation and amortization.............. 78,207 84,901 142,362 147,109
Deferred income taxes...................... 36,770 14,589 28,809 34,883
Early retirement and severance, less cash
costs.................................... 12,941
Extraordinary (gain)loss, less taxes....... (237) 4,280 52
Utilization of tax loss carryforwards...... (2,405) (19,797)
Changes in other assets and liabilities,
net of the effects of the acquisition:
Accounts and notes receivable-net........ (361,285) 313,586 (353,703) (119,933)
Inventories.............................. (2,250) 9,980 (14,895) 25,112
Deferred gas costs....................... 8,655 (7,715) 12,788 (19,831)
Other current assets..................... (1,298) (1,128) 10,935 10,661
Accounts payable......................... 148,071 (224,590) 266,446 162,595
Interest and taxes accrued............... (13,402) (19,996) 4,712 19,597
Other current liabilities................ 42,284 (22,633) 10,483 5,151
Recoveries under gas contract disputes... 2,600 5,500 10,900 24,200
Other-net................................ 10,557 903 3,642 3,633
---------- --------- --------- ---------
Net cash provided by (used in)
operating activities................ (30,244) 199,272 228,153 338,909
---------- --------- --------- ---------
Cash Flows from Investing Activities:
Purchase of Former NorAm, net of cash
acquired................................... (1,422,672)
Capital expenditures.......................... (93,414) (88,638) (172,200) (173,600)
Cash surrender value of life insurance........ 12,276
Other, net.................................... (1,079) (6,424) (4,957) (4,403)
---------- --------- --------- ---------
Net cash used in investing
activities.......................... (1,517,165) (95,062) (177,157) (165,727)
========== ========= ========= =========
(continued
on next page)
113
116
NORAM ENERGY CORP. AND SUBSIDIARIES
STATEMENTS OF CONSOLIDATED CASH FLOWS
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
(THOUSANDS OF DOLLARS)
(CONTINUED)
CURRENT NORAM FORMER NORAM
------------- --------------------------------------------
FIVE MONTHS SEVEN MONTHS TWELVE MONTHS TWELVE MONTHS
ENDED ENDED ENDED ENDED
DECEMBER 31, JULY 31, DECEMBER 31, DECEMBER 31,
1997 1997 1996 1995
------------- ------------ ------------- -------------
Cash Flows from Financing Activities:
Cash portion of capital contribution from
Houston Industries......................... $1,426,067
Proceeds from issuance of 7 1/2% notes........ $ 200,000
Retirements and reacquisitions of long-term
debt....................................... (165,808) $(230,667) $(396,733) (335,352)
Proceeds from bank term loan.................. 150,000 150,000
Public issuance of common stock............... 108,963
Public issuance of convertible preferred
securities by
subsidiary trust........................... 167,756
Other debt borrowings (repayments)............ 317,500 (42,500) 105,000 (100,000)
Return of advance received under contingent
sales agreement............................ (50,000)
Increase in receivables facility.............. 24,000 41,000
Issuance of common stock under direct stock
purchase plan, net......................... 10,254 9,801
Common and preferred stock dividends.......... (19,281) (40,621) (42,338)
Redemption of convertible securities.......... (9,504)
Increase (decrease) in overdrafts............. (9,164) (27,348) 9,055 (9,614)
---------- --------- --------- ---------
Net cash provided by (used in)
financing activities................ 1,583,091 (128,796) (36,326) (177,503)
---------- --------- --------- ---------
Net Increase (Decrease) in Cash and Cash
Equivalents................................... 35,682 (24,586) 14,670 (4,321)
Cash and Cash Equivalents at Beginning of the
Period........................................ 27,981 13,311 17,632
---------- --------- --------- ---------
Cash and Cash Equivalents at End of the
Period........................................ $ 35,682 $ 3,395 $ 27,981 $ 13,311
========== ========= ========= =========
Supplemental Disclosure of Cash Flow
Information:
Cash Payments:
Interest (net of amounts capitalized)......... $ 55,951 $ 67,100 $ 140,751 $ 154,866
Income taxes, net............................. 714 20,900 29,657 19,970
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 for Former
NorAm's common stock and common stock equivalents and $1.6 billion of Former
NorAm debt. A significant portion ($139 million) of NorAm obligated mandatorily
redeemable convertible preferred securities of subsidiary trust holding solely
subordinated debentures of NorAm was converted to NorAm Common Stock in non-cash
transactions prior to the Merger; see Note 5.
See Notes to NorAm's Consolidated Financial Statements.
114
117
NORAM ENERGY CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE YEARS ENDED DECEMBER 31, 1997
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(a) Nature of Operations.
NorAm Energy Corp. (NorAm), a Delaware corporation, is a wholly owned
subsidiary of Houston Industries defined below. NorAm is principally engaged in
the natural gas industry, including gathering, transmission, marketing, storage
and distribution. Collectively, these operations accounted for in excess of 90%
of NorAm's total revenues, income or loss and identifiable assets during 1997.
NorAm's natural gas distribution operations (Natural Gas Distribution) are
conducted by three of its unincorporated divisions: Entex, Minnegasco and Arkla.
NorAm's interstate pipeline operations (Interstate Pipeline) are conducted by
its wholly owned subsidiaries, NorAm Gas Transmission Company (NGT) and
Mississippi River Transmission Corporation (MRT). NorAm's energy marketing
activities are conducted primarily by NorAm Energy Services, Inc. (NES) and
NorAm Energy Management, Inc. (NEM) and its gathering activities are conducted
by NorAm Field Services Corp. (NFS) (collectively Energy Marketing). NorAm's
principal operations are located in Arkansas, Louisiana, Minnesota, Mississippi,
Missouri and Texas.
As of December 31, 1997, all shares of NorAm's common stock were pledged as
collateral under a $1.64 billion loan arrangement entered into by a subsidiary
of Houston Industries in connection with the Merger (defined below). Under the
provisions of this facility, Houston Industries may become obligated to pledge
additional stock of subsidiaries of NorAm if such subsidiaries should become
"significant subsidiaries" (as defined under the facility) of Houston
Industries.
(b) Merger With Houston Industries Incorporated.
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 HI was converted into one share of common stock (including associated
preference stock purchase rights) of Houston Industries, and each outstanding
share of common stock of Former NorAm was converted into the right to receive
$16.3051 cash or 0.74963 shares of common stock of Houston Industries. 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 for Former
NorAm's common stock and common stock equivalents and $1.6 billion of Former
NorAm debt ($1.3 billion of which was long-term debt).
The 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
consolidated financial statements (NorAm's Consolidated 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 "Former
NorAm". Former NorAm's Statement of Consolidated Income for the seven months
ended July 31, 1997 include certain adjustments from August 1, 1997 to the
Acquisition Date for pre-merger transactions.
NorAm's Consolidated Balance Sheets for periods after the Acquisition Date
reflect adjustments associated with Houston Industries' assignment of the
purchase price, principally 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
115
118
NORAM ENERGY CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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 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 preceding 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
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 and 1996, NorAm's unaudited
pro forma net income for 1997 and 1996 would have been $68.3 million and $76.9
million, respectively. 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.
(c) Regulatory Assets and Regulation.
In general, NorAm's interstate pipelines are subject to regulation by the
Federal Energy Regulatory Commission, while its natural gas distribution
operations are subject to regulation at the state or municipal level.
Historically, all of NorAm's rate-regulated businesses have followed the
accounting guidance contained in Statement of Financial Accounting Standards
(SFAS) No. 71, "Accounting for the Effects of Certain Types of Regulation" .
NorAm discontinued application of SFAS No. 71 to NGT in 1992. As a result of the
continued application of SFAS No. 71 to MRT and the natural gas distribution
operations, NorAm's financial statements contain assets and liabilities which
would not be recognized by unregulated entities.
At December 31, 1997 approximately $48 million in regulatory assets are
reflected on NorAm's Consolidated Balance Sheet as deferred debits. These assets
represent probable future revenue to NorAm associated with certain incurred
costs as these costs are recovered through the rate making process. These costs
are being recovered through rates over varying periods up to 40 years.
(d) Principles of Consolidation.
NorAm's Consolidated Financial Statements include the accounts of NorAm and
its wholly owned subsidiaries (NorAm). All significant intercompany transactions
and balances are eliminated in consolidation.
(e) Property, Plant and Equipment.
Property, plant and equipment have been revalued to estimated fair market
value as of the Acquisition Date in accordance with the purchase method of
accounting, and depreciated or amortized on a straight-line basis over their
estimated useful lives; see Note 1(b) above. Prior to the Acquisition Date, such
assets were carried at cost. Additions to and betterments of utility property
are charged to property accounts at cost, while the costs of maintenance,
repairs and minor replacements are charged to expense as incurred. Upon normal
retirement of units of utility property, plant and equipment, the cost of such
property, together with cost of removal less salvage, is charged to accumulated
depreciation.
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NORAM ENERGY CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(f) Depreciation and Amortization Expense.
Goodwill, none of which is being recovered in regulated service rates, is
amortized on a straight-line basis over 40 years. Approximately $29.9 million of
goodwill was amortized during 1997. Of this amount, $21.6 million represents
amortization related to the Merger and incurred during the period from the
Acquisition Date through December 31, 1997. Goodwill amortization for 1996 was
approximately $14.2 million. NorAm periodically compares the carrying value of
its goodwill to the anticipated undiscounted future operating income from the
businesses whose acquisition gave rise to the goodwill and, as yet, no
impairment is indicated or expected. For additional information regarding the
amortization of goodwill in connection with the Merger, see Note 1(b) above.
(g) Fuel Stock and Other Inventories.
Inventories principally follow the average cost method. Gas inventory (at
average cost) was $63.7 million and $70.7 million at December 31, 1997 and 1996,
respectively. All non-utility inventories held for resale are valued at the
lower of cost or market.
(h) Revenues.
NorAm's rate-regulated divisions/subsidiaries bill customers on a monthly
cycle billing basis. Revenues are recorded on an accrual basis, including an
estimate for gas delivered but unbilled at the end of each accounting period.
(i) Statements of Consolidated Cash Flows.
For purposes of reporting cash flows, cash equivalents are considered to be
short-term, highly liquid investments readily convertible into cash.
(j) Derivative Financial Instruments (Risk Management).
For information regarding NorAm's accounting for derivative financial
instruments associated with natural gas, electric power and transportation risk
management activities, see Note 2.
(k) Income Taxes.
Houston Industries files a consolidated federal income tax return, in which
NorAm and its subsidiaries are included (as of the Acquisition Date). Houston
Industries follows a policy of comprehensive interperiod income tax allocation.
For additional information regarding income taxes, see Note 7.
(l) Investments in Marketable Equity Securities.
A subsidiary of NorAm holds certain equity securities classified as
"available-for-sale" and, in accordance with SFAS No. 115, "Accounting for
Certain Investments in Debt and Equity Securities," reports such investments at
estimated fair value with any unrealized gain or loss, net of tax, as a separate
component of stockholders' equity. At December 31, 1997, NorAm's unrealized loss
relating to these marketable equity securities was approximately $5.6 million,
net of tax of $3.0 million.
(m) Reclassifications and Use of Estimates.
Certain amounts from the previous years have been reclassified to conform
to the 1997 presentation of financial statements. Such reclassifications do not
affect earnings.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and
117
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NORAM ENERGY CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.
(n) Early Retirement and Severance.
During the first quarter of 1996, NorAm instituted several early retirement
and reorganization plans, pursuant to which a total of approximately 400
positions were eliminated resulting in expense for severance payments and
enhanced retirement benefits reported as a non-recurring pre-tax charge of
approximately $22.3 million (approximately $13.4 million after tax).
(o) Merger Transaction Costs.
"Merger transaction costs" include expenses associated with completion of
the business combination with Houston Industries (see Note 1(b)), principally
consisting of investment banking and legal fees.
(p) Allowance for Doubtful Accounts.
Accounts and notes receivable, principally customer as presented on NorAm's
Consolidated Balance Sheets are net of an allowance for doubtful accounts of
$15.3 million and $13.0 million at December 31, 1997 and 1996, respectively.
(q) Accounts Payable.
Certain of NorAm's cash balances reflect credit balances to the extent that
checks written have not yet been presented for payment. Such balances included
in accounts payable, principally trade on the NorAm Consolidated Balance Sheets
were approximately $17.0 million and $53.5 million at December 31, 1997 and
1996, respectively.
(2) DERIVATIVE FINANCIAL INSTRUMENTS (RISK MANAGEMENT)
(a) Trading Activities.
NorAm, through NES, offers price risk management services primarily in the
natural gas and electric industries. NES provides these services through, and by
utilizing, a variety of derivative financial instruments, including fixed-price
swap agreements, variable-price swap agreements, exchange-traded energy futures
and option contracts, and swaps and options traded in the over-the-counter
financial markets. Fixed-price swap agreements require payments to, or receipts
of payments from, counterparties based on the differential between a fixed and
variable price for the commodity. Variable-price swap agreements require
payments to, or receipts of payments from, counterparties based on the
differential between either industry pricing publications or exchange
quotations.
Certain trading transactions qualify for hedge accounting and accordingly
unrealized gains and losses associated with these transactions are deferred. For
trading transactions that do not qualify for hedge accounting, NES uses
mark-to-market accounting. Accordingly, such financial instruments are recorded
at fair value with realized and unrealized gains (losses) recorded as a
component of revenues in NorAm's Statements of Consolidated Income. The
recognized, unrealized balance is recorded as a deferred debit on NorAm's
Consolidated Balance Sheets.
118
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NORAM ENERGY CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The notional quantities and maximum terms of derivative financial
instruments held for trading purposes at December 31, 1997 are presented below
(volumes in billions of British thermal units equivalent (Bbtue)):
VOLUME-FIXED VOLUME-FIXED MAXIMUM
PRICE PAYOR PRICE RECEIVER TERM (YEARS)
------------ -------------- ------------
Natural gas.................................. 85,701 64,890 4
Electricity.................................. 40,511 42,976 1
In addition to the fixed-price notional volumes above, NES also has
variable-price swap agreements, as discussed above, totaling 101,465 Bbtue.
Notional amounts reflect the volume of transactions but do not represent the
amounts exchanged by the parties to the financial instruments. Accordingly,
notional amounts do not accurately measure NorAm's exposure to market or credit
risks.
The estimated fair value of derivative financial instruments held for
trading purposes at December 31, 1997 are presented below (dollars in millions):
FAIR VALUE AVERAGE FAIR VALUE(A)
--------------------- -----------------------
ASSETS LIABILITIES ASSETS LIABILITIES
------ ----------- ------ -----------
Natural gas.................................. $46 $39 $56 $48
Electricity.................................. $ 6 $ 6 $ 3 $ 2
- - ---------------
(a) Computed using the ending balance of each month.
Substantially all of the fair value shown in the table above at December
31, 1997 has been recognized in income. The fair value as of and for the year
ended December 31, 1997 was estimated using quoted prices where available and
considering the liquidity of the market for the derivative financial
instruments. The prices are subject to significant changes based on changing
market conditions. The derivative financial instruments included in the NES
trading portfolio as of and for the year ended December 31, 1996 were
immaterial.
The weighted-average term of the trading portfolio, based on volumes, is
less than one year. The maximum and average terms disclosed herein are not
indicative of likely future cash flows as these positions may be changed by new
transactions in the trading portfolio at any time in response to changing market
conditions, market liquidity and NorAm's risk management portfolio needs and
strategies. Terms regarding cash settlements of these contracts vary with
respect to the actual timing of cash receipts and payments.
(b) Non-Trading Activities.
To reduce the risk from market fluctuations in the price of electric power,
natural gas and related transportation, NorAm and certain of its subsidiaries
enter into futures transactions, swaps and options (Energy Derivatives) in order
to hedge certain natural gas in storage, as well as certain expected purchases,
sales and transportation of natural gas and electric power (a portion of which
are firm commitments at the inception of the hedge). Energy Derivatives are also
utilized to fix the price of compressor fuel or other future operational gas
requirements, although usage to date for this purpose has not been material.
Usage of electricity derivative financial instruments by NorAm and its
subsidiaries for purposes other than trading is immaterial.
NorAm also utilizes interest-rate derivatives (principally interest-rate
swaps) in order to adjust the portion of its overall borrowings which are
subject to interest-rate risk, and also utilizes such derivatives to effectively
fix the interest rate on debt expected to be issued for refunding purposes.
For transactions involving either Energy Derivatives or interest-rate
derivatives, hedge accounting is applied only if the derivative (i) reduces the
price risk of the underlying hedged item and (ii) is designated as a hedge at
its inception. Additionally, the derivatives must be expected to result in
financial impacts which are
119
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NORAM ENERGY CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
inversely correlated to those of the item(s) to be hedged. This correlation (a
measure of hedge effectiveness) is measured both at the inception of the hedge
and on an ongoing basis, with an acceptable level of correlation of 80% for
hedge designation. If and when correlation ceases to exist at an acceptable
level, hedge accounting ceases and mark-to-market accounting is applied.
In the case of interest-rate swaps associated with existing obligations,
cash flows and expenses associated with the interest-rate derivative
transactions are matched with the cash flows and interest expense of the
obligation being hedged, resulting in an adjustment to the effective interest
rate. When interest rate swaps are utilized to effectively fix the interest rate
for an anticipated debt issuance, changes in the market value of the
interest-rate derivatives are deferred and recognized as an adjustment to the
effective interest rate on the newly issued debt.
Unrealized changes in the market value of Energy Derivatives utilized as
hedges are not generally recognized in NorAm's Statements of Consolidated Income
until the underlying hedged transaction occurs. Once it becomes probable that an
anticipated transaction will not occur, deferred gains and losses are
recognized. In general, the financial impact of transactions involving these
Energy Derivatives is included in NorAm's Statements of Consolidated Income
under the caption natural gas and purchased power, net. Cash flows resulting
from these transactions in Energy Derivatives are included in NorAm's Statements
of Consolidated Cash Flows in the same category as the item being hedged.
At December 31, 1997, subsidiaries of NorAm were fixed-price payors and
fixed-price receivers in Energy Derivatives covering 38,754 Bbtu and 7,647 Bbtu
of natural gas, respectively. At December 31, 1996, subsidiaries of NorAm were
fixed-price payors and fixed-price receivers in Energy Derivatives covering
approximately 150,300 Bbtu and 66,500 Bbtu of natural gas, respectively. Also,
at December 31, 1997, subsidiaries of NorAm were parties to variable-priced
Energy Derivatives totaling 3,630 Bbtu of natural gas. The weighted average
maturity of these instruments at December 31, 1997 and 1996, respectively, is
less than one year.
NorAm has entered into options with various third parties which principally
serve to limit the year-to-year escalation from January 1998 to April 1999 in
the purchase price of gas which NorAm is committed to deliver to a distribution
affiliate. These options, which covered 9,800 Bbtu and 2,400 Bbtu at December
31, 1997 and 1996, respectively, expired in January 1998 unexercised. NorAm
previously established a reserve equal to its projected maximum exposure to
losses during the term of this commitment and, accordingly, no impact on
earnings is expected.
The notional amount is intended to be indicative of NorAm and its
subsidiaries' level of activity in such derivatives, although the amounts at
risk are significantly smaller because, in view of the price movement
correlation required for hedge accounting, changes in the market value of these
derivatives generally are offset by changes in the value associated with the
underlying physical transactions or in other derivatives. When Energy
Derivatives are closed out in advance of the underlying commitment or
anticipated transaction, however, the market value changes may not offset due to
the fact that price movement correlation ceases to exist when the positions are
closed as further discussed below. Under such circumstances gains (losses) are
deferred and recognized as a component of income when the underlying hedged item
is recognized in income.
The average maturity discussed above and the fair value discussed in Note
10 are not necessarily indicative of likely future cash flows as these positions
may be changed by new transactions in the trading portfolio at any time in
response to changing market conditions, market liquidity and NorAm's risk
management portfolio needs and strategies. Terms regarding cash settlements of
these contracts vary with respect to the actual timing of cash receipts and
payments.
(c) Trading and Non-trading -- General Policy.
In addition to the risk associated with price movements, credit risk is
also inherent in NorAm and its subsidiaries' risk management activities. Credit
risk relates to the risk of loss resulting from non performance
120
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NORAM ENERGY CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
of contractual obligations by a counterparty. While, as yet, NorAm and its
subsidiaries have experienced no significant losses due to the credit risk
associated with these arrangements, NorAm has off-balance sheet risk to the
extent that the counterparties to these transactions may fail to perform as
required by the terms of each such contract. In order to minimize this risk,
NorAm and/or its subsidiaries, as the case may be, enter into such contracts
primarily with those counterparties with a minimum Standard & Poor's or Moody's
rating of BBB- or Baa3, respectively. For long-term arrangements, NorAm and its
subsidiaries periodically review the financial condition of such firms in
addition to monitoring the effectiveness of these financial contracts in
achieving NorAm's objectives. Should the counterparties to these arrangements
fail to perform, NorAm would seek to compel performance at law or otherwise, or
obtain compensatory damages in lieu thereof. NorAm might be forced to acquire
alternative hedging arrangements or be required to honor the underlying
commitment at then-current market prices. In such event, NorAm might incur
additional loss to the extent of amounts, if any, already paid to the
counterparties. In view of its criteria for selecting counterparties, its
process for monitoring the financial strength of these counterparties and its
experience to date in successfully completing these transactions, NorAm believes
that the risk of incurring a significant financial statement loss due to the
non-performance of counterparties to these transactions is minimal.
NorAm's policies prohibit the use of leveraged financial instruments.
Houston Industries has established a Risk Oversight Committee that oversees
all price and credit risk, including NES's risk management and trading
activities. The Risk Oversight Committee's responsibilities include reviewing
NorAm's overall risk management strategy and monitoring risk management
activities to ensure compliance with Houston Industries' risk management
limitations, policies and procedures.
(3) CAPITAL STOCK
(a) Earnings Per Share.
As a result of the Merger, NorAm is no longer required to present earnings
per share (EPS) data as its common shares (all of which are owned by Houston
Industries) are not publicly held. EPS data for 1996 and 1995 has not been
included because NorAm believes it is no longer meaningful.
(b) Equity Transactions Prior to the Merger.
In June 1996, NorAm issued 11,500,000 shares of NorAm common stock to the
public at a price of $9.875 per share, yielding net cash proceeds of
approximately $109 million. The net proceeds from the offering principally were
used to retire debt as described in Note 4(b).
(c) Direct Stock Purchase Plan and Dividend Reinvestment Plan.
The Direct Stock Purchase Plan and Dividend Reinvestment Plan were
suspended and canceled in connection with the Merger.
(4) LONG-TERM AND SHORT-TERM FINANCING
(a) Short-Term Financing.
In 1997 and 1996, NorAm met its short-term financing needs primarily
through a bank facility, bank lines of credit and a receivables facility.
NorAm's principal short-term credit facility (NorAm Credit Facility) of $400
million expires in December 1998. Borrowings under the NorAm Credit Facility are
unsecured. The weighted average interest rate at December 31, 1997 and 1996 was
6.3%. NorAm pays a facility fee on the $400 million facility of .14% per annum
which is subject to increase based on NorAm's debt rating. Borrowings under the
credit facility at December 31, 1997 and 1996 were $340 million and $115
million, respectively. In addition, NorAm had $50 million of outstanding loans
under uncommitted lines of credit at December 31, 1997 having a weighted average
interest rate of 6.82%.
121
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NORAM ENERGY CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Under a trade receivables facility (Receivables Facility) which 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 was $300 million and $235 million at
December 31, 1997 and 1996, respectively. The weighted average interest rate at
December 31, 1997 and 1996 was 5.65% and 5.41%, respectively. Certain of NorAm's
remaining receivables serve as collateral for receivables sold and represent the
maximum exposure to NorAm should all receivables sold prove ultimately
uncollectible. NorAm has retained servicing responsibility under the Receivables
Facility for which it is paid a servicing fee. Beginning in 1997 and pursuant to
SFAS No. 125, "Accounting for Transfers and Servicing of Financial Assets and
Extinguishment of Liabilities", NorAm accounts for amounts transferred pursuant
to the Receivables Facility as collateralized borrowings. As a result, these
receivables are recorded as assets on NorAm's December 31, 1997 Consolidated
Balance Sheet and amounts received by NorAm pursuant to this facility are
recorded as a current liability under the caption Receivables facility. In 1996,
pursuant to SFAS No. 77, "Reporting by Transferors for Transfers of Receivables
with Recourse", the receivables sold were deducted from "Accounts and notes
receivable, principally customers" in the accompanying Consolidated Balance
Sheet. Additionally, amounts reported in 1996 and 1995 in NorAm's Statements of
Consolidated Income as "Loss on sale of accounts receivables" are recorded as
interest expense in NorAm's 1997 Statement of Consolidated Income.
(b) Long-Term Debt.
NorAm's consolidated long-term debt outstanding, which is summarized in the
following table, is noncallable and without sinking fund requirements except as
noted. Carrying amounts and amounts due in one year reflect $46.3 million and
$6.1 million, respectively, for fair value adjustments recorded in connection
with the Merger.
CURRENT NORAM
DECEMBER 31, 1997
------------------------------------------------
CARRYING AMOUNTS
----------------------
EFFECTIVE PRINCIPAL NON-CURRENT CURRENT
RATE AMOUNT PORTION PORTION
--------- --------- ----------- -------
(MILLIONS OF DOLLARS)
Medium-term notes, Series A and B due
through 2001, weighted average rate of
8.90% at December 31, 1997.............. 8.23% $ 241.6 $182.4 $ 78.8
Bank Term Loan due 1998................... 6.54% 150.0 153.3
8.875% Series due 1999.................... 8.54% 200.0 207.8
7.5% Series due 2000...................... 7.32% 200.0 205.0
8.9% Series due 2006...................... 7.82% 145.1 165.1
6% Convertible Subordinated Debentures due
2012.................................... 6.51% 116.3 107.2
10% Series due 2019(1).................... 8.95% 42.8 47.8
Other..................................... 4.10% 0.6 1.4
-------- ------ ------
$1,096.4 $916.7 $232.1
======== ====== ======
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NORAM ENERGY CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
FORMER NORAM
DECEMBER 31, 1996
----------------------
CARRYING AMOUNTS
----------------------
NON-CURRENT CURRENT
PORTION PORTION
----------- -------
(MILLIONS OF DOLLARS)
Medium-term notes, Series A and B due through 2001, weighted
average rate of 8.96% at December 31, 1996................ $ 241.6 $ 52.0
9.875% Series due 1997...................................... 225.0
8.875% Series due 1999...................................... 200.0
7.5% Series due 2000........................................ 200.0
8.9% Series due 2006........................................ 145.1
6% Convertible Subordinated Debentures due 2012............. 122.7
10% Series due 2019(1)...................................... 144.2
Other....................................................... 0.6
-------- ------
$1,054.2 $277.0
======== ======
- - ---------------
(1) In the fourth quarter of 1997 NorAm purchased $101.4 million aggregate
principal amount of its 10% Debentures due 2019 at an average price of
111.98% plus accrued interest. Because NorAm's debt was stated at fair
market value as of the Acquisition Date, the loss on the reacquisition of
these debentures was not material.
Consolidated maturities of long-term debt and sinking fund requirements for
NorAm are approximately $232 million for 1998, $201 million in 1999, $222
million in 2000, $144 million in 2001 and $0 in 2002.
NorAm's retirements and reacquisitions of long-term debt are summarized in
the following table. In cases where premiums were paid or discounts were
realized in association with these reacquisitions and retirements, such amounts
are reported in NorAm's Statements of Consolidated Income as "Extraordinary gain
(loss) on early retirement of debt, less taxes" and are net of taxes of $0.1
million, ($2.5) million and ($0.03) million in 1997, 1996 and 1995,
respectively. For retirements and reacquisitions after the Acquisition Date,
gains or losses on early retirement are immaterial since the carrying amounts
reflect the fair value adjustments described above.
YEAR ENDED DECEMBER 31,
---------------------------
1997(1) 1996 1995
------- ------ ------
(MILLIONS OF DOLLARS)
Reacquisition of 8% Series due 1997...................... $150.0
Reacquisition of 9.875% Debentures due 2018.............. $ 7.4 5.7
Reacquisition of 10% Debentures due 2019................. $101.4 15.0
Reacquisition of 6% Convertible Subordinated Debentures
due 2012(2)............................................ 5.8 7.2
Retirement, at maturity, of Medium Term Notes(3)......... 52.0 118.8 1.0
Retirement of Bank Term Loan due 2000.................... 150.0
Retirement of 9.45% Series due 1995...................... 150.0
Retirement of 9.875% Notes due 1997...................... 225.0
Retirement of 9.875% Debentures due 2018................. 109.0
Retirement of Note Payable to Gas Supplier............... 13.6
Net (gain) loss on reacquisition of debt, less taxes..... (0.2) 4.3 0.1
------ ------ ------
$384.0 $396.7 $335.4
====== ====== ======
- - ---------------
(1) Excludes the conversion of 6% Convertible Subordinated Debentures due 2012
in the amount of approximately $1.0 million.
(2) These reacquired debentures may be credited against sinking fund
requirements.
(3) Weighted average interest rate of 9.25%, 9.06% and 9.0% in 1997, 1996 and
1995, respectively.
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NORAM ENERGY CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
In June 1996, NorAm exercised its right to exchange the $130 million
principal amount of its $3.00 Convertible Exchangeable Preferred Stock, Series A
for its 6% Convertible Subordinated Debentures due 2012 (Subordinated
Debentures). The holders of the Subordinated Debentures receive interest
quarterly and have the right at any time on or before the maturity date thereof
to convert each Subordinated Debenture into 0.65 shares of common stock of
Houston Industries and $14.24 in cash. The Subordinated Debentures are callable
beginning in 1999 at redemption prices beginning at 105.0% and declining to par
in November 2009. NorAm is required to make annual sinking fund payments of $6.5
million on the Subordinated Debentures which began on March 15, 1997 and will
continue on each succeeding March 15 up to and including March 15, 2011. NorAm
(i) may credit against the sinking fund requirements any Subordinated Debentures
redeemed by NorAm and Subordinated Debentures which have been converted at the
option of the holder and (ii) may deliver purchased Subordinated Debentures in
satisfaction of the sinking fund requirements. NorAm satisfied its 1997 sinking
fund requirement of $6.5 million by delivering a portion of the $7.2 million
principal amount of Subordinated Debentures purchased in 1996.
In May 1997, NorAm obtained an unsecured, 18-month bank term loan in the
amount of $150 million. The term loan carries a LIBOR-based floating interest
rate. Proceeds from the term loan were used to refund a portion of NorAm's
9.875% Notes which matured in April 1997. NorAm has entered into two interest
rate swaps, each with a term of 19 months, having an aggregate notional amount
of $150 million which effectively fixed the interest rate on borrowings under
the term loan agreement at approximately 6.775%.
At December 31, 1996 NorAm had a portfolio of six interest rate swaps with
a total notional amount of $300 million. Five of these swaps were terminated
during 1997 representing a total notional amount of $250 million. The remaining
$50 million was terminated in January 1998.
(c) Restrictions on Stockholders' Equity and Debt.
Under the provisions of NorAm's revolving credit facility or certain other
NorAm financial arrangements, NorAm's total debt is limited to 72% of its total
capitalization and NorAm is required to maintain a minimum level of
stockholders' equity. In addition, NorAm's total debt would be limited to $2.055
billion if its ratio of total debt to total capitalization increased to 60%. The
minimum level of stockholders' equity was initially set at $700 million at
December 31, 1995, increasing annually thereafter by (1) 50% of positive
consolidated net income and (2) 50% of the proceeds from any incremental equity
offering made after June 30, 1996. At December 31, 1997, these provisions did
not significantly restrict NorAm's ability to issue debt or to pay dividends.
(5) TRUST SECURITIES
In June 1996, a Delaware statutory business trust (NorAm Trust) established
by NorAm issued in a public offering $172.5 million of convertible preferred
securities and sold approximately $5.3 million of NorAm Trust common stock
(106,720 shares, representing 100% of the NorAm Trusts common equity) to NorAm.
The convertible preferred securities have a distribution rate of 6.25% payable
quarterly in arrears, a stated liquidation amount of $50 per convertible
preferred security and must be redeemed by 2026. The proceeds from the sale of
the preferred and common securities were used by NorAm Trust to purchase $177.8
million of 6.25% Convertible Junior Subordinated Debentures from NorAm having an
interest rate corresponding to the distribution rate of the convertible
preferred securities and a maturity date corresponding to the mandatory
redemption date of the convertible preferred securities. Under existing law,
interest payments made by NorAm for the junior subordinated debentures are
deductible for federal income tax purposes. NorAm has the right at any time and
from time to time to defer interest payments on the junior subordinated
debentures for successive periods not to exceed 20 consecutive quarters for each
such extension period. In such case, (1) quarterly distributions on the junior
subordinated debentures would also be deferred
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NORAM ENERGY CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
and (2) NorAm has agreed to not declare or pay any dividend on any common or
preferred stock, except in certain instances.
The NorAm Trust is accounted for as a wholly owned consolidated subsidiary
of NorAm. The junior subordinated debentures are the sole assets of the NorAm
Trust. NorAm has fully and unconditionally guaranteed, on a subordinated basis,
NorAm Trust's obligations, including the payment of distributions and all other
payments, with respect to the convertible preferred securities. The convertible
preferred securities are mandatorily redeemable upon the repayment of the
related junior subordinated debentures at their stated maturity or earlier
redemption. Following the Merger, each convertible preferred security is
convertible at the option of the holder into $33.62 of cash and 1.55 shares of
Houston Industries common stock. In 1997, convertible preferred securities
aggregating $156.1 million were converted, leaving $16.4 million principal
amount (unamortized fair value of $21.3 million, net of issuance costs) of
convertible preferred securities outstanding at December 31, 1997.
Utilizing, in large part, the proceeds from the offerings previously
discussed, in June 1996, NorAm (1) retired the $109.0 million principal amount
then outstanding of its 9.875% Debentures due 2018 at a price equal to 105.93%
of face value, recognizing an extraordinary pre-tax loss of approximately $6.5
million (approximately $3.9 million after tax) and (2) retired its $150 million
bank term loan due 2000 at face value.
(6) STOCK-BASED INCENTIVE COMPENSATION PLANS AND EMPLOYEE BENEFIT PLANS
(a) Incentive Compensation Plans.
Prior to the Merger, NorAm had several incentive compensation plans which
provide for the issuance of stock-based incentives (including restricted shares,
stock options and stock appreciation rights) to directors and key employees of
NorAm, including officers. The charge to earnings in 1997, 1996 and 1995 related
to the incentive compensation plans was $1.4 million, $4.4 million and $0.5
million, respectively. All stock options granted under such plans were either
converted into similar Houston Industries options or "cashed out" prior to the
Merger. All restricted stock and substantially all stock appreciation rights
were "cashed out" with the Merger. NorAm granted 463,856 shares of restricted
stock in 1996 with a weighted average fair value at the grant date of $11.86. At
December 31, 1996, there were 77,371 stock appreciation rights outstanding. As
of the Acquisition Date, less than 1,000 stock appreciation rights were
outstanding. The following is certain information relating to options issued
pursuant to NorAm's incentive compensation plans.
WEIGHTED-AVERAGE
NUMBER EXERCISE PRICE
OF SHARES PER SHARE
--------- ----------------
Outstanding at December 31, 1994........................ 650,938 $12.89
Options Granted(2)...................................... 546,550 $ 5.54
Options Forfeited/Expired............................... (164,469) $14.05
Outstanding at December 31, 1995........................ 1,033,019 $ 8.82
Options Granted(2)...................................... 579,749 $ 8.69
Options Exercised....................................... (28,019) $ 6.44
Options Forfeited/Expired............................... (76,821) $11.99
125
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NORAM ENERGY CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
WEIGHTED-AVERAGE
NUMBER EXERCISE PRICE
OF SHARES PER SHARE
--------- ----------------
Outstanding at December 31, 1996........................ 1,507,928 $ 8.65
Options Exercised....................................... (147,092) $ 6.47
Options Forfeited/Expired............................... (10,682) $12.42
Options Cashed Out Upon Merger.......................... (521,857)
Options Converted at Acquisition(1)..................... (828,297)
Outstanding at December 31, 1997........................ 0
Exercisable at:
December 31, 1997..................................... 0
December 31, 1996..................................... 911,660 $ 9.48
December 31, 1995..................................... 431,615 $16.14
- - ---------------
(1) Effective upon the Merger, each holder of an unexpired NorAm stock option,
whether or not then exercisable, was entitled to elect to either (i) have
all or any portion of their NorAm stock options canceled and "cashed out" or
(ii) have all or any portion of their NorAm stock options converted to the
Houston Industries stock options. There were 828,297 NorAm stock options
converted into 622,504 Houston Industries stock options at the Acquisition
Date.
(2) The weighted average grant date fair value of the options granted in 1995
and 1996 was $1.64 and $2.39, respectively.
In October 1995, the Financial Accounting Standards Board issued SFAS No.
123, "Accounting for Stock-Based Compensation" (SFAS No. 123). SFAS No. 123
provides for the disclosure of certain information concerning the "fair value"
of securities issued pursuant to stock-based employee compensation plans, and
gives NorAm the option of calculating and recording compensation expense
utilizing either (1) SFAS No. 123's "fair value" methodology which measures
compensation expense as the "fair value" of all securities at the date on which
they are granted to the employee or (2) the provisions of Accounting Principles
Board Opinion No. 25, "Accounting for Stock Issued to Employees" (APB No. 25)
which, in general, do not require the recording of compensation expense for
options and stock appreciation rights issued pursuant to plans structured
similarly to those of NorAm. NorAm elected to continue to apply the provisions
of APB No. 25 for the purpose of computing compensation expense associated with
the relevant plan, although certain additional required disclosure has been made
in accordance with the provisions of SFAS No. 123.
The "fair value" as applied to restricted stock represents the quoted NYSE
closing market price of the shares on the grant date. The term "fair value" as
applied to stock options granted in 1996 and 1995 is a statistical calculation
made utilizing a methodology generally referred to as the Black-Scholes option
pricing model (BS model). The BS model yields a value for each option which is
dependent on a number of variables which are inputs to the relevant
calculations. For the purposes of determining the "fair value" of stock options
in the preceding table, NorAm assumed (i) a risk free interest rate (based on
U.S. Treasury strips with a remaining term of five years) of 5.24% to 7.84%,
(ii) an expected option life (duration) of five years, (iii) an expected
volatility of 31.6% to 36.4% and (iv) an expected dividend yield of 3.4%. To the
extent that actual conditions during the post-grant, pre-exercise period differ
from these assumptions, the actual value of the options to the employee will
differ from the calculated "fair value" at grant date (see above regarding the
effect of the Merger). Had compensation cost been determined in accordance with
the provisions of SFAS No. 123, the impact on NorAm's earnings for 1995 and 1996
would have been immaterial.
126
129
NORAM ENERGY CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(b) Employee Benefit Plans.
NorAm has two qualified pension plans (the Qualified Plans) which cover
substantially all employees: (1) the plan which covers NorAm's employees other
than Minnegasco employees and (2) the plan which covers Minnegasco employees.
The Qualified Plans provide benefits based on the participants' years of service
and highest average compensation. The funding policy for the Qualified Plans is
to contribute at least the minimum amount required to be funded as determined by
NorAm's consulting actuaries. Plan assets are made up of marketable equity and
high-grade fixed income securities.
In addition to the Qualified Plans, NorAm maintains certain non-qualified
plans which principally consist of (1) a retirement restoration plan which
allows participants to retain the benefit to which they would have been entitled
under the Qualified Plans except for the federally mandated limits on such
benefits or on the level of salary on which such benefits may be calculated and
(2) certain supplemental benefit plans which, in the past, were entered into
with individual employees or with small groups of employees. Participants in
these non-qualified plans are general creditors of NorAm with respect to these
benefits, as these plans are not funded by NorAm in advance of the cash payment
of benefits. Expense of approximately $3.1 million, $2.0 million and $2.1
million associated with these non-qualified plans was recorded during 1997,
1996, and 1995, respectively.
Net Pension cost (qualified plans only) for NorAm includes the following
components:
FORMER NORAM
CURRENT NORAM --------------------------------------------
------------- TWELVE TWELVE
FIVE MONTHS SEVEN MONTHS MONTHS MONTHS
ENDED ENDED ENDED ENDED
DECEMBER 31, JULY 31, DECEMBER 31, DECEMBER 31,
1997 1997 1996 1995
------------- ------------ ------------ ------------
(THOUSANDS OF DOLLARS)
Service cost -- benefits earned during
the period.......................... $ 5,095 $ 7,220 $ 11,817 $ 9,900
Interest cost on projected benefit
obligation.......................... 15,014 20,313 29,946 27,097
Actual return on plan assets.......... (1,851) (90,148) (41,800) (36,909)
Amortization and deferrals (a)........ (22,004) 63,498 (641) (1,388)
-------- -------- -------- --------
Net pension cost (credit)............. $ (3,746) $ 883 $ (678) $ (1,300)
======== ======== ======== ========
127
130
NORAM ENERGY CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Following is the funded status of NorAm's pension plans.
CURRENT NORAM FORMER NORAM
------------------------- -------------------------
DECEMBER 31,
-----------------------------------------------------
1997 1996
------------------------- -------------------------
QUALIFIED NON-QUALIFIED QUALIFIED NON-QUALIFIED
PLANS PLANS PLANS PLANS
--------- ------------- --------- -------------
(THOUSANDS OF DOLLARS)
Net assets available for benefits............. $569,718 -- $500,452 --
-------- -------- -------- --------
Actuarial present value of accumulated plan
benefits:
Vested (assuming immediate separation)...... 401,468 $ 34,578 325,461 $ 30,554
Non-vested.................................. 36,359 973 30,096 1,663
-------- -------- -------- --------
Accumulated benefit obligation.............. 437,827 35,551 355,557 32,217
Additional amount related to projected pay
increases................................ 75,420 746 79,933 712
-------- -------- -------- --------
Total projected benefit
obligation........................ 513,247 36,297 435,490 32,929
-------- -------- -------- --------
Funded status................................. 56,471 (36,297) 64,962 (32,929)
Unrecognized transition obligation at January
1(a)........................................ -- -- (8,290) --
Unrecognized prior service costs(a)........... -- -- (2,222) 5,004
Unrecognized net loss (gain) from past
experience different from that assumed and
effects of changes in actuarial
assumptions(a).............................. 35,593 646 (9,060) (1,506)
-------- -------- -------- --------
(Accrued) prepaid pension cost.............. $ 92,064 $(35,651) $ 45,390 $(29,431)
======== ======== ======== ========
- - ---------------
(a) The unrecognized transition obligation, unrecognized prior service costs and
net actuarial gain were recognized on the Acquisition Date pursuant to the
purchase method of accounting for the Merger. Amortization and deferrals
after the Acquisition Date represents deferral of net loss from past
experience identified after the Acquisition Date. For further discussion of
the accounting for the Merger; see Note 1(b).
The assumed rate of increase in future compensation levels utilized in the
above calculations was 4.5% in 1997 and 4% in 1996. The expected long-term rate
of return on fund assets utilized in the above calculations was 10% for 1997 and
1996. The weighted average discount rate was 7.5% for 1997 and 1995 and 7.25%
for 1996.
NorAm has an employee savings plan (the ESP) which covers substantially all
employees other than Minnegasco employees. Under the terms of the ESP, employees
may contribute up to 12% of total compensation, of which contributions up to 6%
are matched by NorAm. Employer contributions to the ESP of $9.3 million, $8.9
million and $8.9 million were expensed during 1997, 1996 and 1995, respectively.
The Minnegasco employees are covered by various thrift and profit sharing plans,
the terms of which vary from plan to plan. Expense of approximately $1.5
million, $1.4 million and $1.4 million related to these plans was recorded
during 1997, 1996, and 1995, respectively.
NorAm records the liability for post-retirement benefit plans other than
pensions (primarily health care) under SFAS No. 106, "Employers' Accounting for
Postretirement Benefits Other than Pensions". NorAm provides these benefits
under a defined benefit plan for all eligible former employees who retired prior
to July 1, 1992, and under a defined contribution plan for all others. A
substantial number of NorAm's employees may become eligible for postretirement
benefits if they are participating in such plans when they reach normal
retirement age. As of December 31, 1997, NorAm had contributed a total of $4.5
million to an
128
131
NORAM ENERGY CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
external fund (associated with Minnegasco employees) to provide for these
benefits. NorAm currently expects that it will fund these benefits utilizing
external funding techniques for additional employees in the future.
The net postretirement benefit cost includes the following components:
CURRENT NORAM FORMER NORAM
------------- ----------------------------------------------
FIVE MONTHS SEVEN MONTHS TWELVE MONTHS TWELVE MONTHS
ENDED ENDED ENDED ENDED
DECEMBER 31, JULY 31, DECEMBER 31, DECEMBER 31,
1997 1997 1996 1995
------------- ------------ ------------- -------------
(THOUSANDS OF DOLLARS)
Service cost....................... $ 115 $ 164 $ 306 $ 291
Interest cost on accumulated
benefit obligation............... 3,561 4,948 9,234 10,183
Actual (return) loss on plan
assets........................... (143) 142 (108)
Amortization of transition
obligation on a straight line
basis over 20 years(a)........... 3,886 6,662 6,663
Amortization of actuarial
loss(a).......................... 70 (249) 1,321
Deferral of asset loss............. (11) (195)
------ ------ ------- -------
Net periodic cost.................. $3,603 $8,880 $17,415 $16,942
====== ====== ======= =======
Following is the funded status of NorAm's postretirement benefit plans:
CURRENT NORAM FORMER NORAM
------------- ------------
DECEMBER 31,
-----------------------------
1997 1996
------------- ------------
(THOUSANDS OF DOLLARS)
Accumulated postretirement benefit obligation
Retirees............................................. $110,579 $ 121,183
Fully-eligible active plan participants.............. 3,349 3,711
Other active plan participants....................... 4,544 4,487
-------- ---------
Total........................................ 118,472 129,381
Fair value of plan assets............................ 4,502 3,051
-------- ---------
Total........................................ 113,970 126,330
Unrecognized transition obligation(a)................ (106,599)
Unrecognized net actuarial (gain) loss............... (1,563) 14,292
-------- ---------
Accrued postretirement benefit cost.................. $112,407 $ 34,023
======== =========
- - ---------------
(a) The unrecognized transition obligation and unrecognized prior service costs
were recognized on the Acquisition Date pursuant to the purchase method of
accounting for the Merger. Amortization after the Acquisition Date
represents amortization of unrecognized actuarial loss incurred after the
Acquisition Date. For further discussion of the accounting for the Merger,
see Note 1(b).
The weighted average discount rate used in determining the accumulated
benefit obligation for postretirement benefits was 7.25% for 1997, 7.5% for 1996
and 7.25% for 1995. The cost of covered health care benefits (for those
participants entitled to a defined benefit as a result of having retired prior
to July 1, 1992) is assumed to increase by 8.5% per year initially and then
increase at a decreasing rate to an annual and continuing increase of 4.5% by
2006. Based on these assumptions, a one percentage point increase in the assumed
health care cost trend rate would increase the annual net periodic
postretirement benefit cost (before
129
132
NORAM ENERGY CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
any deferral for regulatory reasons) and the accumulated benefit obligation at
December 31, 1997 by approximately 9.2% and 10.8%, respectively.
(7) INCOME TAXES
Prior to the Acquisition Date, NorAm and its subsidiaries filed a
consolidated federal income tax return. Such returns have been audited and
settled through the year 1986. Subsequent to the Acquisition Date, Houston
Industries files a consolidated federal income tax return, in which NorAm and
its subsidiaries are included. Investment tax credits are generally deferred and
amortized over the lives of the related assets. The unamortized investment tax
credit in deferred credits on the accompanying Consolidated Balance Sheets was
$5.2 million and $4.5 million for 1997 and 1996, respectively.
Following are the components of NorAm's income tax provision:
CURRENT NORAM FORMER NORAM
------------- ----------------------------------------------
FIVE MONTHS SEVEN MONTHS TWELVE MONTHS TWELVE MONTHS
ENDED ENDED ENDED ENDED
DECEMBER 31, JULY 31, DECEMBER 31, DECEMBER 31,
1997 1997 1996 1995
------------- ------------ ------------- -------------
(THOUSANDS OF DOLLARS)
Federal
Current........................... $(12,005) $16,339 $33,654 $18,760
Deferred.......................... 36,673 12,795 25,760 24,377
Investment tax credit............. (262) (363) (636) (639)
State
Current........................... 536 833 4,525 2,375
Deferred.......................... (559) 1,794 3,049 10,506
-------- ------- ------- -------
Income tax expense.................. $ 24,383 $31,398 $66,352 $55,379
======== ======= ======= =======
The provision for income taxes differs from the amount computed by applying
the statutory federal income tax rate of 35% to income from continuing
operations. The reasons for this difference are as follows:
CURRENT NORAM FORMER NORAM
------------- ----------------------------------------------
FIVE MONTHS SEVEN MONTHS TWELVE MONTHS TWELVE MONTHS
ENDED ENDED ENDED ENDED
DECEMBER 31, JULY 31, DECEMBER 31, DECEMBER 31,
1997 1997 1996 1995
------------- ------------ -------------- --------------
(THOUSANDS OF DOLLARS)
Income before income taxes............... $45,230 $77,273 $161,490 $120,908
Statutory rate........................... 35% 35% 35% 35%
------- ------- -------- --------
Income taxes at statutory rate........... 15,831 27,046 56,522 42,318
------- ------- -------- --------
Increase (decrease) in tax resulting
from:
State income taxes, net of federal
income tax benefit(1)............... (9) 1,708 4,923 8,373
Investment tax credit.................. (262) (363) (636) (639)
Research and experimentation credit.... (188) (375)
Adjustment to prior year accruals...... 106 (34) 301 510
Goodwill amortization.................. 7,242 2,430 4,163 4,163
Other, net............................. 1,475 611 1,267 1,029
------- ------- -------- --------
Provision for income taxes............... $24,383 $31,398 $ 66,352 $ 55,379
======= ======= ======== ========
- - ---------------
(1) Calculation of the accrual for state income taxes at the end of each year
requires that NorAm estimate the manner in which its income for that year
will be allocated and/or apportioned among the various
130
133
NORAM ENERGY CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
states in which it conducts business, which states have widely differing tax
rules and rates. These allocation/apportionment factors change from year to
year and the amount of taxes ultimately payable may differ from that
estimated as a part of the accrual process. For these reasons, the amount of
state income tax expense may vary significantly from year-to-year, even in
the absence of significant changes to state income tax valuation allowances
or changes in individual state income tax rates.
The tax effects of temporary differences that gave rise to significant
portions of the deferred tax assets and liabilities as of December 31, 1997 and
1996, were as follows:
CURRENT FORMER
NORAM NORAM
-------- --------
DECEMBER 31,
--------------------
1997 1996
-------- --------
(THOUSANDS OF
DOLLARS)
Deferred Tax Assets:
Employee benefit accruals................................. $ 53,277 $ 27,282
Inventory revaluation and capitalization.................. 466 552
Gas purchase contract accruals............................ 8,267 15,495
Regulatory obligations.................................... 7,469
Indemnifications and other reserves....................... 3,497 9,332
Deferred state income taxes............................... 14,460 13,799
Other..................................................... 53,546 29,295
State operating loss carryforwards........................ 29,515 28,517
Alternative minimum tax credit carryforwards.............. 60,669 76,089
Valuation allowance....................................... (6,353) (6,761)
-------- --------
Total deferred tax assets -- net.................. 217,344 201,069
-------- --------
Deferred Tax Liabilities:
Property, plant and equipment, principally due to
depreciation methods and lives......................... 558,758 458,506
Deferred gas costs........................................ 34,113 25,043
Employee benefit accruals................................. 5,807
Deferred state income taxes............................... 70,000
Regulatory obligations.................................... 6,690
Other..................................................... 22,513 21,724
-------- --------
Total deferred tax liabilities.................... 692,074 511,080
-------- --------
Net deferred tax liabilities...................... $474,730 $310,011
======== ========
At December 31, 1997, NorAm has approximately $439 million of state net
operating losses available to offset future state taxable income through the
year 2012. In addition, NorAm has approximately $58 million of federal
alternative minimum tax credits which are available to reduce future federal
income taxes payable, if any, over an indefinite period (although not below the
tentative minimum tax otherwise due in any year), and approximately $2.6 million
of state alternative minimum tax credits which are available to reduce future
state income taxes payable, if any, through the year 2001. The change in the
valuation allowance during 1997 was a net reduction of $0.4 million, resulting
from a reassessment of NorAm's ability to use state net operating loss
carryforwards and state alternative minimum tax credit carryforwards in future
tax years, offset by expiring state net operating losses for which valuation
allowances had been provided in prior years.
131
134
NORAM ENERGY CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(8) COMMITMENTS AND CONTINGENCIES
(a) Lease Commitments.
The following table sets forth certain information concerning NorAm's
obligations under operating leases:
Minimum Lease Commitments at December 31, 1997(1)
(MILLIONS OF DOLLARS)
---------------------
1998....................................................... $ 24
1999....................................................... 19
2000....................................................... 16
2001....................................................... 15
2002....................................................... 9
2003 and beyond............................................ 22
----
Total............................................ $105
====
- - ---------------
(1) Principally consisting of rental agreements for building space and data
processing equipment and vehicles (including major work equipment).
NorAm has a master leasing agreement which provides for the lease of
vehicles, construction equipment, office furniture, data processing equipment
and other property. For accounting purposes, the lease is treated as an
operating lease. At December 31, 1997, NorAm had leased assets with a value of
approximately $58.1 million under this lease with a basic term of one year.
NorAm does not expect to lease additional property under this lease agreement.
Lease payments related to NorAm's leasing agreements are included in the
preceding table for only their basic term. Total rental expense for all leases
was $24.0 million, $33.4 million and $48.9 million in 1997, 1996 and 1995,
respectively.
(b) Letters of Credit.
At December 31, 1997, NorAm had letters of credit incidental to its
ordinary business operations totaling approximately $42 million under which
NorAm is obligated to reimburse drawings, if any.
(c) Indemnity Provisions.
At December 31, 1997, NorAm has an $11.4 million accounting reserve on its
Consolidated Balance Sheets in "Estimated obligations under indemnification
provisions of sale agreements" for possible indemnity claims asserted in
connection with its disposition of former subsidiaries or divisions, including
the sale of (i) Louisiana Intrastate Gas Corporation, a former subsidiary
engaged in the intrastate pipeline and liquids extraction business (1992); (ii)
Arkla Exploration Company, a former subsidiary engaged in oil and gas
exploration and production activities (June 1991); and (iii) Dyco Petroleum
Company, a former subsidiary engaged in oil and gas exploration and production
(1991).
(d) Sale of Receivables.
Certain of NorAm's receivables are collateral for receivables which have
been sold pursuant to the terms of NorAm's receivables facility, see
"Receivables Facility" included in Note 4(a).
132
135
NORAM ENERGY CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(e) Gas Purchase Claims.
In conjunction with settlements of "take-or-pay" claims, NorAm has prepaid
for certain volumes of gas, which prepayments have been recorded at their net
realizable value and, to the extent that NorAm is unable to realize at least the
carrying amount as the gas is delivered and sold, NorAm's earnings will be
reduced, although such reduction is not expected to be material. In addition to
these prepayments, NorAm is a party to a number of agreements which require it
to either purchase or sell gas in the future at prices which may differ from
then prevailing market prices or which require it to deliver gas at a point
other than the expected receipt point for volumes to be purchased. To the extent
that NorAm expects that these commitments will result in losses over the
contract term, NorAm has established reserves equal to such expected losses.
(f) Transportation Agreement.
NorAm had an agreement (ANR Agreement) with ANR Pipeline Company (ANR)
which contemplated a transfer to ANR of an interest in certain of NorAm's
pipeline and related assets, representing capacity of 250 Mmcf/day, and pursuant
to which ANR had advanced $125 million to NorAm. The ANR Agreement has been
restructured and, after refunds of $50 million and $34 million in 1995 and 1993,
respectively, NorAm currently retains $41 million (recorded as a liability) in
exchange for ANR's or its affiliates' use of 130 Mmcf/ day of capacity in
certain of NorAm's transportation facilities. The level of transportation will
decline to 100 Mmcf/day in the year 2003 with a refund of $5 million to ANR and
the ANR Agreement will terminate in 2005 with a refund of the remaining balance.
(g) Environmental Matters.
To the extent that potential environmental remediation costs are quantified
within a range, NorAm establishes reserves equal to the most likely level of
costs within the range and adjusts such accruals as better information becomes
available. In determining the amount of the liability, future costs are not
discounted to their present value and the liability is not offset by expected
insurance recoveries. If justified by circumstances within NorAm's business
subject to SFAS No. 71, corresponding regulatory assets are recorded in
anticipation of recovery through the rate making process.
Manufactured Gas Plant Sites. NorAm and its predecessors operated a
manufactured gas plant (MGP) adjacent to the Mississippi River in Minnesota
formerly known as Minneapolis Gas Works (FMGW) until 1960. NorAm has completed
remediation of the main site other than ongoing water monitoring and treatment.
There are six other former MGP sites in the Minnesota service territory.
Remediation has been completed on one site. Of the remaining five sites, NorAm
believes that two were neither owned nor operated by NorAm; two were owned by
NorAm at one time but were operated by others and are currently owned by others;
and one site was previously operated by NorAm but was owned by others. NorAm
believes it has no liability with respect to the sites it neither owned nor
operated.
At December 31, 1997, NorAm had estimated a range of $15 million to $77
million for possible remediation of the Minnesota sites. The low end of the
range was determined based on only those sites presently owned or known to have
been operated by NorAm, assuming use of NorAm's proposed remediation methods.
The upper end of the range was determined based on the sites once owned by
NorAm, whether or not operated by NorAm. The cost estimates for the FMGW site
are based on studies of that site. The remediation costs for other sites are
based on industry average costs for remediation of sites of similar size. The
actual remediation costs will be dependent upon the number of sites remediated,
the participation of other potentially responsible parties, if any, and the
remediation methods used.
In its 1995 rate case, NorAm's Minnegasco division was allowed to recover
approximately $7 million annually for remediation costs. Such costs are subject
to a true-up mechanism whereby any over or under recovered amounts, net of
certain insurance recoveries, plus carrying charges, would be deferred for
recovery
133
136
NORAM ENERGY CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
or refund in the next rate case. At December 31, 1997 and 1996, Minnegasco had
recorded a liability of $20.6 million and $35.9 million, respectively, to cover
the cost of future remediation. In addition, at December 31, 1997, Minnegasco
had receivables from insurance settlements of $2.9 million. These insurance
settlements will be collected through 1999. Minnegasco expects that
approximately half of its accrual as of December 31, 1997 will be expended
within the next five years. The remainder will be expended on an ongoing basis
for an estimated 40 years. In accordance with the provisions of SFAS No. 71, a
regulatory asset has been recorded equal to the liability accrued. Minnegasco is
continuing to pursue recovery of at least a portion of these costs from
insurers. Minnegasco believes the difference between any cash expenditures for
these costs and the amount recovered in rates during any year will not be
material to NorAm's overall cash requirements, results of operations or cash
flows.
At December 31, 1997 and 1996, NorAm had recorded an accrual of $3.3
million (with a maximum estimated exposure of approximately $18 million) and an
offsetting regulatory asset for environmental matters in connection with a
former fire training facility and a landfill for which future remediation may be
required. This accrual is in addition to the accrual for MGP sites as previously
discussed.
Issues relating to the identification and remediation of MGPs are common in
the natural gas distribution industry. NorAm has received notices from the EPA
and others regarding its status as a potentially responsible party for other
sites. Based on current information, NorAm has not been able to quantify a range
of environmental expenditures for potential remediation expenditures with
respect to other MGP sites.
Mercury Contamination. Like other natural gas pipelines, NorAm's pipeline
operations have in the past employed elemental mercury in meters used on its
pipelines. Although the mercury has now been removed from the meters, it is
possible that small amounts of mercury have been spilled at some of those sites
in the course of normal maintenance and replacement operations and that such
spills have contaminated the immediate area around the meters with elemental
mercury. Such contamination has been found by NorAm at some sites in the past,
and NorAm has conducted remediation at sites found to be contaminated. Although
NorAm is not aware of additional specific sites, it is possible that other
contaminated sites exist and that remediation costs will be incurred for such
sites. Although the total amount of such costs cannot be known at this time,
based on experience by NorAm and others in the natural gas industry to date and
on the current regulations regarding remediation of such sites, NorAm believes
that the cost of any remediation of such sites will not be material to NorAm's
financial position, results of operation or cash flows.
Potentially Responsible Party Notifications. From time to time NorAm and
its subsidiaries have been notified that they are potentially responsible
parties with respect to properties which environmental authorities have
determined warrant remediation under state or federal environmental laws and
regulations. In October 1994 the United States Environmental Protection Agency
issued such a notice with respect to a landfill site in West Memphis, Arkansas,
and in December 1995, the Louisiana Department of Environmental Quality advised
that one of NorAm subsidiaries had been identified as a potentially responsible
party with respect to a hazardous waste site in Shreveport, Louisiana.
Considering the information currently known about such sites and the involvement
of NorAm or its subsidiaries in activities at these sites, NorAm does not
believe that these matters will have a material adverse effect on NorAm's
financial position, results of operation or cash flows.
(h) Other
NorAm Merger Lawsuit. In August 1996, a purported NorAm stockholder filed a
lawsuit, Shaw v. NorAm Energy Corp., et al., in the District Court of Harris
County, Texas, against NorAm, certain of its officers and directors and the
Company to enjoin the Merger or to rescind the Merger and/or to recover damages
in the event that the Merger was consummated. In February 1998, the plaintiffs
withdrew their lawsuit and the court issued an order of non-suit dismissing the
litigation.
134
137
NORAM ENERGY CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NorAm is a party to litigation (other than that specifically noted) which
arises in the normal course of business. Management regularly analyzes current
information and, as necessary, provides accruals for probable liabilities on the
eventual disposition of these matters. Management believes that the effect on
NorAm's financial statements, if any, from the disposition of these matters will
not be material.
135
138
NORAM ENERGY CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(9) BUSINESS UNITS REPORTING
Because NorAm's operations in the natural gas industry account for in
excess of 90% of NorAm's total revenues, income or loss and identifiable assets
during 1997, NorAm is not required to report on a "segment" basis. However, in
recognition of the manner in which NorAm manages its portfolio of businesses now
that it is a wholly owned subsidiary of Houston Industries, NorAm has presented
for supplemental comparative purposes the following summary of financial
information by business unit:
CURRENT NORAM FORMER NORAM
------------- --------------------------------------
FIVE MONTHS SEVEN MONTHS TWELVE MONTHS
ENDED ENDED ENDED
DECEMBER 31, JULY 31, DECEMBER 31,
1997 1997 1996
------------- ---------------------- -------------
(THOUSANDS OF DOLLARS) (UNAUDITED)
Revenues:
Natural Gas Distribution...................... $ 892,569 $1,309,732 $ 2,113,589
Interstate Pipeline........................... 108,333 186,711 346,762
Energy Marketing.............................. 1,604,999 1,984,119 2,645,106
Corporate..................................... 39,079 42,615 55,403
Eliminations(1)............................... (123,638) (186,129) (372,398)
----------- ---------- -----------
Total Revenues........................ $ 2,521,342 $3,337,048 $ 4,788,462
=========== ========== ===========
Operating Income:
Natural Gas Distribution...................... $ 54,502 $ 111,933 $ 178,141
Interstate Pipeline........................... 31,978 76,730 107,904
Energy Marketing.............................. 16,407 2,881 55,693
Corporate..................................... (12,131) (36,504) (27,272)
----------- ---------- -----------
Total Operating Income................ 90,756 155,040 314,466
Other Income (Expense).......................... 2,243 7,210 (14,577)
Interest and Other Charges.................... 47,769 84,977 138,399
----------- ---------- -----------
Income Before Income Taxes.................... $ 45,230 $ 77,273 $ 161,490
=========== ========== ===========
Depreciation and Amortization:
Natural Gas Distribution...................... $ 51,883 $ 56,626 $ 94,853
Interstate Pipeline........................... 19,088 17,229 29,172
Energy Marketing.............................. 4,448 2,115 2,931
Corporate..................................... 2,788 8,931 15,406
----------- ---------- -----------
Total Depreciation and Amortization... $ 78,207 $ 84,901 $ 142,362
=========== ========== ===========
Identifiable Assets:
Natural Gas Distribution...................... $ 3,047,195 $ 1,920,601
Interstate Pipeline........................... 3,055,610 2,151,092
Energy Marketing.............................. 1,267,867 778,348
Corporate..................................... 4,517,953 4,580,845
Eliminations.................................. (5,749,529) (5,413,409)
----------- -----------
Total Identifiable Assets(2).......... $ 6,139,096 $ 4,017,477
=========== ===========
Capital Expenditures:
Natural Gas Distribution...................... $ 61,078 $ 69,422 $ 116,400
Interstate Pipeline........................... 16,304 9,619 39,900
Energy Marketing.............................. 14,365 9,637 12,300
Corporate..................................... 1,667 (40) 3,600
----------- ---------- -----------
Total Capital Expenditures............ $ 93,414 $ 88,638 $ 172,200
=========== ========== ===========
- - ---------------
(1) Elimination of operating revenues derived from sales to affiliated business
units.
(2) As of the Acquisition Date, NorAm's assets and liabilities are reflected at
their estimated fair market value; see Note 1(b).
136
139
NORAM ENERGY CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(10) ESTIMATED FAIR VALUE OF FINANCIAL INSTRUMENTS
CURRENT NORAM FORMER NORAM
----------------------- -----------------------
DECEMBER 31,
--------------------------------------------------
1997 1996
----------------------- -----------------------
CARRYING FAIR CARRYING FAIR
AMOUNT VALUE AMOUNT VALUE
---------- ---------- ---------- ----------
(THOUSANDS OF DOLLARS)
Financial Assets of NorAm:
Interest rate swaps........................ $ 6,700
Energy Derivatives(1)...................... $ 9,399 $ 13,060 $ 800 9,800
Financial Liabilities of NorAm:
Long-term debt............................. 1,148,848 1,147,344 1,331,200 1,389,500
Trust preferred securities................. 21,290 24,569 167,800 219,100
Interest rate swaps........................ 755
- - ---------------
(1) At December 31, 1996, NorAm had deferred losses of approximately $11.9
million associated with expected sales under "peaking" contracts with
certain customers which, in effect, give the customer a "call" on certain
volumes of gas. All such losses were recognized in January 1997 when the
anticipated transactions were scheduled to occur.
The fair values of cash and short-term investments, marketable equity
securities, short-term and other notes payable are estimated to be equivalent to
carrying amounts. The remaining fair values have been determined using quoted
market prices of the same or similar securities when available or other
estimation techniques.
(11) UNAUDITED QUARTERLY INFORMATION
The following unaudited quarterly financial information includes, in the
opinion of management, all adjustments (which comprise only normal recurring
accruals) necessary for a fair presentation. Quarterly results are not
necessarily indicative of a full year's operations because of seasonality and
other factors, including rate increases and variations in operating expense
patterns.
The merger in 1997 was recorded under the purchase method of accounting,
resulting in new carrying values for certain of NorAm's assets, liabilities and
equity based on preliminary analysis. The new basis is reflected in NorAm's
Consolidated Financial Statements beginning with the Acquisition Date. For
additional information; see Note 1(b).
YEAR ENDED DECEMBER 31, 1997
--------------------------------------------------------------------
FORMER NORAM CURRENT NORAM
------------------------------------- ---------------------------
ONE MONTH TWO MONTHS
ENDED ENDED
FIRST SECOND JULY 31, SEPTEMBER 30, FOURTH
QUARTER QUARTER 1997 1997 QUARTER
---------- ---------- --------- ------------- ----------
(THOUSANDS OF DOLLARS) (THOUSANDS OF DOLLARS)
Operating Revenues............... $1,924,182 $1,015,998 $396,868 $749,412 $1,771,930
Operating Income (loss).......... 145,221 36,616 (26,797) 10,781 79,975
Income (loss) before
extraordinary item............. 68,410 702 (23,237) (6,646) 27,493
Extraordinary item, less
taxes(1)....................... 237 -- -- -- --
Net income (loss)(3)............. $ 68,647 $ 702 $(23,237) $ (6,646) $ 27,493
137
140
NORAM ENERGY CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
FORMER NORAM
YEAR ENDED DECEMBER 31, 1996
------------------------------------------------
FIRST SECOND THIRD FOURTH
QUARTER(2) QUARTER QUARTER QUARTER
---------- -------- -------- ----------
(THOUSANDS OF DOLLARS)
Operating revenues............................... $1,417,663 $891,325 $899,283 $1,580,191
Operating income................................. 146,582 39,673 18,634 109,577
Income (loss) before extraordinary item.......... 61,197 2,335 (8,183) 39,789
Extraordinary Item, less taxes(1)................ (278) (4,455) 477 (24)
Net income (loss)(3)............................. $ 60,919 ($ 2,120) ($ 7,706) $ 39,765
- - ---------------
(1) Net gain (loss) on early retirement of debt, less taxes.
(2) Includes a pre-tax charge of $22.3 million associated with early retirement
and severance costs.
(3) Before preferred dividend requirement.
(12) SUBSEQUENT EVENTS
In February 1998, NorAm issued $300 million principal amount of 6.5%
debentures due February 1, 2008. The debentures are not redeemable prior to
maturity and are not subject to any sinking fund requirements. 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 1997 purchase of $101
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. In connection with the issuance of the 6.5% debentures
NorAm received approximately $1 million upon unwinding a $300 million treasury
rate lock agreement, which was tied to the interest rate on 10-year treasury
bonds. The rate lock agreement was executed in January 1998, and proceeds from
the unwind will be amortized over the 10 year life of NorAm's 6.5% debentures.
138
141
INDEPENDENT AUDITORS' REPORT
NorAm Energy Corp.:
We have audited the accompanying consolidated balance sheet of NorAm Energy
Corp. and its subsidiaries (NorAm) as of December 31, 1997, and the related
statements of consolidated income, consolidated stockholders' equity and
consolidated cash flows for the five months ended December 31, 1997 and the
seven months ended July 31, 1997. Our audit also included the Company's
financial statement schedule listed in Item 14(a)(4) for the year ended December
31, 1997. These financial statements and the financial statement schedule are
the responsibility of NorAm's management. Our responsibility is to express an
opinion on these financial statements and the financial statement schedule based
on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in
all material respects, the financial position of NorAm Energy Corp. and its
subsidiaries at December 31, 1997, and the results of their operations and their
cash flows for the five months ended December 31, 1997 and the seven months
ended July 31, 1997 in conformity with generally accepted accounting principles.
Also, in our opinion, such financial statement schedule, when considered in
relation to the basic consolidated financial statements taken as a whole,
presents fairly in all material respects the information set forth therein.
DELOITTE & TOUCHE LLP
Houston, Texas
February 20, 1998
139
142
REPORT OF INDEPENDENT ACCOUNTANTS
NorAm Energy Corp.
We have audited the consolidated financial statements and financial
statement schedule of NorAm Energy Corp. and Subsidiaries (NorAm) as of December
31, 1996 and for the two years in the period ended December 31, 1996 as listed
in Item 14(a)(2) and Item 14(a)(4) of this Form 10-K. These financial statements
and the financial statement schedule are the responsibility of NorAm's
management. Our responsibility is to express an opinion on these financial
statements and the financial statement schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of NorAm Energy
Corp. and Subsidiaries as of December 31, 1996 and the consolidated results of
their operations and their cash flows for each of the two years in the period
ended December 31, 1996, in conformity with general accepted accounting
principles. In addition, in our opinion, the financial statement schedule
referred to above, when considered in relation to the basic financial statements
taken as a whole, presents fairly, in all material respects, the information
required to be included therein.
COOPERS & LYBRAND L.L.P.
Houston, Texas
March 25, 1997
140
143
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY AND NORAM.
(a) The Company. The information called for by Item 10, to the extent not
set forth under Item 1 "Business -- Executive Officers of the Company", is or
will be set forth in the definitive proxy statement relating to the Company's
1998 annual meeting of shareholders pursuant to the Commission's Regulation 14A.
Such definitive proxy statement relates to a meeting of shareholders involving
the election of directors and the portions thereof called for by Item 10 are
incorporated herein by reference pursuant to Instruction G to Form 10-K.
(b) NorAm. The information called for by Item 10 with respect to NorAm is
omitted pursuant to Instruction I(2)(a) to Form 10-K (Omission of Information by
Certain Wholly-Owned Subsidiaries).
ITEM 11. EXECUTIVE COMPENSATION.
(a) The Company. The information called for by Item 11 is or will be set
forth in the definitive proxy statement relating to the Company's 1998 annual
meeting of shareholders pursuant to the Commission's Regulation 14A. Such
definitive proxy statement relates to a meeting of shareholders involving the
election of directors and the portions thereof called for by Item 11 are
incorporated herein by reference pursuant to Instruction G to Form 10-K.
(b) NorAm. The information called for by Item 11 with respect to NorAm is
omitted pursuant to Instruction I(2)(a) to Form 10-K (Omission of Information by
Certain Wholly-Owned Subsidiaries).
ITEM 12.SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
(a) The Company. The information called for by Item 12 is or will be set
forth in the definitive proxy statement relating to the Company's 1998 annual
meeting of shareholders pursuant to the Commission's Regulation 14A. Such
definitive proxy statement relates to a meeting of shareholders involving the
election of directors and the portions thereof called for by Item 12 are
incorporated herein by reference pursuant to Instruction G to Form 10-K.
(b) NorAm. The information called for by Item 12 with respect to NorAm is
omitted pursuant to Instruction I(2)(a) to Form 10-K (Omission of Information by
Certain Wholly-Owned Subsidiaries).
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
(a) The Company. The information called for by Item 13 is or will be set
forth in the definitive proxy statement relating to the Company's 1998 annual
meeting of shareholders pursuant to the Commission's Regulation 14A. Such
definitive proxy statement relates to a meeting of shareholders involving the
election of directors and the portions thereof called for by Item 13 are
incorporated herein by reference pursuant to Instruction G to Form 10-K.
(b) NorAm. The information called for by Item 13 with respect to NorAm is
omitted pursuant to Instruction I(2)(a) to Form 10-K (Omission of Information by
Certain Wholly-Owned Subsidiaries).
141
144
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.
PAGE
----
(a)(1) Company Financial Statements.
Statements of Consolidated Income for the Three Years Ended
December 31, 1997......................................... 53
Statements of Consolidated Retained Earnings for the Three
Years Ended December 31, 1997............................. 55
Consolidated Balance Sheets at December 31, 1997 and 1996... 56
Consolidated Statements of Capitalization at December 31,
1997 and 1996............................................. 58
Statements of Consolidated Cash Flows for the Three Years
Ended December 31, 1997................................... 61
Notes to Consolidated Financial Statements.................. 63
Independent Auditors' Report -- Company..................... 99
(a)(2) NorAm Financial Statements.
Statements of Consolidated Income for the Five Months Ended
December 31, 1997, the Seven Months Ended July 31, 1997
and the Two Years Ended December 31, 1996................. 109
Consolidated Statements of Stockholders' Equity for the Five
Months Ended December 31, 1997, the Seven Months Ended
July 31, 1997 and the Two Years Ended December 31, 1996... 110
Consolidated Balance Sheets at December 31, 1997 and 1996... 111
Statements of Consolidated Cash Flows for the Five Months
Ended December 31, 1997, the Seven Months Ended July 31,
1997 and the Two Years Ended December 31, 1996............ 113
Notes to Consolidated Financial Statements.................. 115
Independent Auditors' Reports -- NorAm...................... 139
(a)(3) Company Financial Statement Schedules For The Three Years Ended
December 31, 1997.
THE COMPANY:
II -- Reserves.............................................. 143
(a)(4) NorAm Financial Statement Schedules For The Three Years Ended
December 31, 1997.
NORAM:
II -- Reserves.............................................. 144
The following schedules are omitted for each of the Company and NorAm
because of the absence of the conditions under which they are required or
because the required information is included in the financial statements:
I, III, IV and V.
(a)(5) Exhibits........................................ 148
See Index of Exhibits for the Company (page 148) and NorAm (page 159),
which indexes also include the management contracts or compensatory plans or
arrangements required to be filed as exhibits to this Form 10-K by Item
601(10)(iii) of Regulation S-K.
(b) Reports on Form 8-K.
COMPANY: None
NORAM: None
142
145
HOUSTON INDUSTRIES INCORPORATED
SCHEDULE II -- RESERVES
FOR THE THREE YEARS ENDED DECEMBER 31, 1997
(THOUSANDS OF DOLLARS)
COL. A COL. B COL. C COL. D COL. E
------ ---------- ------------------ ---------- ----------
ADDITIONS
------------------
BALANCE AT CHARGED CHARGED DEDUCTIONS BALANCE AT
BEGINNING TO TO OTHER FROM END
DESCRIPTION OF PERIOD INCOME ACCOUNTS RESERVES OF PERIOD
----------- ---------- ------- -------- ---------- ----------
Year Ended December 31, 1997:
Accumulated provisions deducted from
related assets on balance sheet:
Uncollectible accounts................. $ 5,625 $15,404 $ 5,685 $15,344
Uncollectible advances................. $ 33,159 33,159 0
Reserves other than those deducted from
assets on balance sheet:
Property insurance..................... 70 2,187 5,824 (3,567)
Injuries and damages................... 1,128 5,215 3,162 3,181
Non-regulated project contingencies.... 2,296 516 1,780
Year Ended December 31, 1996:
Accumulated provisions deducted from
related assets on balance sheet:
Uncollectible advances................. 27,412 5,015 732 33,159
Reserves other than those deducted from
assets on balance sheet:
Property insurance..................... (2,117) 2,187 70
Injuries and damages................... 1,523 3,156 3,551 1,128
Non-regulated project contingencies.... 2,929 (633) 2,296
Year Ended December 31, 1995:
Accumulated provisions deducted from
related assets on balance sheet:
Uncollectible advances................. 27,412 27,412
Net assets of discontinued cable
television operations................ 282,958 282,958
Reserves other than those deducted from
assets on balance sheet:
Property insurance..................... (3,468) 2,187 836 (2,117)
Injuries and damages................... 2,241 2,327 3,045 1,523
- - ---------------
Notes:
(a) Deductions from reserves represent losses or expenses for which the
respective reserves were created. In the case of the uncollectible
accounts reserve, such deductions are net of recoveries of amounts
previously written off.
(b) Charged to other account represents the provision for uncollectible
accounts acquired in the August 1997 merger with NorAm.
143
146
NORAM ENERGY CORP. AND SUBSIDIARIES
SCHEDULE II -- RESERVES
FOR THE THREE YEARS ENDED DECEMBER 31, 1997
(THOUSANDS OF DOLLARS)
COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E
-------- ---------- ------------------ ---------- ----------
ADDITIONS
------------------
BALANCE AT CHARGED CHARGED DEDUCTIONS BALANCE AT
BEGINNING TO TO OTHER FROM END
DESCRIPTION OF PERIOD INCOME ACCOUNTS RESERVES OF PERIOD
----------- ---------- ------- -------- ---------- ----------
Reserves which are deducted in the balance
sheet from assets to which they apply:
(a) Allowance for Doubtful Accounts
Receivable
Year ended December 31, 1997............ $13,023 $13,245 $2,383 $13,307 $15,344
Year ended December 31, 1996............ $11,117 $12,364 $3,189 $13,647 $13,023
Year ended December 31, 1995............ $12,604 $10,315 $ (470) $11,332 $11,117
(b) Deferred Tax Assets Valuation Allowance
Year ended December 31, 1997............ $ 6,761 $ 2,539 $ 2,947 $ 6,353
Year ended December 31, 1996............ $ 6,188 $ 573 $ 6,761
Year ended December 31, 1995............ $ 5,974 $ 214 $ 6,188
- - ---------------
Notes:
(a) Deductions from reserves represent losses or expenses for which the
respective reserves were created. In the case of the uncollectible
accounts reserve, such deductions are net of recoveries of amounts
previously written off.
144
147
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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, in the City of Houston
and State of Texas, on the 23rd day of March, 1998.
HOUSTON INDUSTRIES INCORPORATED
(Registrant)
By: /s/ DON D. JORDAN
----------------------------------
Don D. Jordan
Chairman and Chief Executive
Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities indicated on March 23, 1998.
SIGNATURE TITLE
--------- -----
/s/ DON D. JORDAN Chairman and Chief Executive
- - ----------------------------------------------------- Officer and Director
(Don D. Jordan) (Principal Executive Officer)
/s/ STEPHEN W. NAEVE Executive Vice President and
- - ----------------------------------------------------- Chief Financial Officer
(Stephen W. Naeve) (Principal Financial Officer)
/s/ MARY P. RICCIARDELLO Vice President and Comptroller
- - ----------------------------------------------------- (Principal Accounting Officer)
(Mary P. Ricciardello)
/s/ JAMES A. BAKER Director
- - -----------------------------------------------------
(James A. Baker)
/s/ RICHARD E. BALZHISER Director
- - -----------------------------------------------------
(Richard E. Balzhiser)
/s/ MILTON CARROLL Director
- - -----------------------------------------------------
(Milton Carroll)
/s/ JOHN T. CATER Director
- - -----------------------------------------------------
(John T. Cater)
/s/ O. HOLCOMBE CROSSWELL Director
- - -----------------------------------------------------
(O. Holcombe Crosswell)
/s/ ROBERT J. CRUIKSHANK Director
- - -----------------------------------------------------
(Robert J. Cruikshank)
/s/ LINNET F. DEILY Director
- - -----------------------------------------------------
(Linnet F. Deily)
/s/ JOSEPH M. GRANT Director
- - -----------------------------------------------------
(Joseph M. Grant)
145
148
SIGNATURE TITLE
--------- -----
/s/ ROBERT C. HANNA Director
- - -----------------------------------------------------
(Robert C. Hanna)
/s/ LEE W. HOGAN Director
- - -----------------------------------------------------
(Lee W. Hogan)
/s/ T. MILTON HONEA Director
- - -----------------------------------------------------
(T. Milton Honea)
/s/ R. STEVE LETBETTER Director
- - -----------------------------------------------------
(R. Steve Letbetter)
/s/ ALEXANDER F. SCHILT Director
- - -----------------------------------------------------
(Alexander F. Schilt)
/s/ BERTRAM WOLFE Director
- - -----------------------------------------------------
(Bertram Wolfe)
146
149
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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, in the City of Houston
and State of Texas, on the 23rd day of March, 1998.
NORAM ENERGY CORP.
(Registrant)
By: /s/ DON D. JORDAN
----------------------------------
Don D. Jordan
Chairman and Chief Executive
Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities indicated on March 23, 1998.
SIGNATURE TITLE
--------- -----
/s/ DON D. JORDAN Chairman and Chief Executive Officer
- - ----------------------------------------------------- (Principal Executive Officer and
(Don D. Jordan) Principal Financial Officer)
/s/ MARY P. RICCIARDELLO Vice President and Comptroller
- - ----------------------------------------------------- (Principal Accounting Officer)
(Mary P. Ricciardello)
/s/ STEPHEN W. NAEVE Sole Director
- - -----------------------------------------------------
(Stephen W. Naeve
147
150
HOUSTON INDUSTRIES INCORPORATED
NORAM ENERGY CORP.
EXHIBITS TO THE COMBINED ANNUAL REPORT ON FORM 10-K
FOR FISCAL YEAR ENDED DECEMBER 31, 1997
INDEX OF EXHIBITS
Exhibits not incorporated by reference to a prior filing are designated by
a cross(+); all exhibits not so designated are incorporated herein by reference
to a prior filing as indicated. Exhibits designated by an asterisk (*) are
management contracts or compensatory plans or arrangements required to be filed
as exhibits to this Form 10-K by Item 601(10)(iii) of Regulation S-K.
(A) HOUSTON INDUSTRIES INCORPORATED
REPORT OR SEC FILE OR
EXHIBIT REGISTRATION REGISTRATION EXHIBIT
NUMBER DESCRIPTION STATEMENT NUMBER REFERENCE
------- ----------- ------------ ------------ ---------
2(a)(1) Agreement and Plan of Merger Former HI's Form 8-K 1-7629 2
among the Company, Former dated August 11, 1996
HL&P, HI Merger, Inc. and
Former NorAm dated August 11,
1996
2(a)(2) Amendment to Agreement and Registration Statement 333-11329 2(c)
Plan of Merger among the on Form S-4
Company, Former HL&P, HI
Merger, Inc. and Former NorAm
dated August 11, 1996
+3(a) Restated Articles of
Incorporation of the Company,
restated as of September 1997
+3(b) Amended and Restated Bylaws of
the Company, as of December
1996
4(a)(1) Mortgage and Deed of Trust Form S-7 of Former 2-59748 2(b)
dated November 1, 1944 between HL&P filed on August
the Company and Chase Bank of 25, 1977
Texas, National Association
(formerly, South Texas
Commercial National Bank of
Houston), as Trustee, as
amended and supplemented by 20
Supplemental Indentures
thereto
4(a)(2) Twenty-First through Fiftieth Former HL&P's Form 1-3187 4(a)(2)
Supplemental Indentures to 10-K for year ended
Exhibit 4(a)(1) December 31, 1989
4(a)(3) Fifty-First Supplemental Former HL&P's Form 1-3187 4(a)
Indenture to Exhibit 4(a)(1) 10-Q for quarter ended
dated as of March 25, 1991 June 30, 1991
4(a)(4) Fifty-Second through Former HL&P's Form 1-3187 4
Fifty-Fifth Supplemental 10-Q for quarter ended
Indentures to Exhibit 4(a)(1) March 31, 1992
each dated as of March 1, 1992
148
151
REPORT OR SEC FILE OR
EXHIBIT REGISTRATION REGISTRATION EXHIBIT
NUMBER DESCRIPTION STATEMENT NUMBER REFERENCE
------- ----------- ------------ ------------ ---------
4(a)(5) Fifty-Sixth and Fifty-Seventh Former HL&P's Form 1-3187 4
Supplemental Indentures to 10-Q for quarter ended
Exhibit 4(a)(1) each dated as September 30, 1992
of October 1, 1992
4(a)(6) Fifty-Eighth and Fifty-Ninth Former HL&P's Form 1-3187 4
Supplemental Indenture to 10-Q for quarter ended
Exhibit 4(a)(1) each dated as March 31, 1993
of March 1, 1993
4(a)(7) Sixtieth Supplemental Former HL&P's Form 1-3187 4
Indenture to Exhibit 4(a)(1) 10-Q for quarter ended
dated as of July 1, 1993 June 30, 1993
4(a)(8) Sixty-First through Former HL&P's Form 1-3187 4
Sixty-Third Supplemental 10-K for year ended
Indentures to Exhibit 4(a)(1) December 31, 1993
each dated as of December 1,
1993
4(a)(9) Sixty-Fourth and Sixty-Fifth Former HL&P's Form 1-3187 4(a)(9)
Supplemental Indentures to 10-K for year ended
Exhibit 4(a)(1) each dated as December 31, 1995
of July 1, 1995
4(a)(10) Junior Subordinated Trust Former HL&P's Form 8-K 1-3187 4.1
Debenture Indenture between dated February 4, 1997
the Company and The Bank of
New York, as Trustee, dated as
of February 1, 1997
4(a)(11) Supplemental Indenture No. 1 Former HL&P's Form 8-K 1-3187 4.2-A
to Junior Subordinated dated February 4, 1997
Indenture, dated as of
February 1, 1997, providing
for issuance of the Company's
8.125% Junior Subordinated
Deferrable Interest
Debentures, Series A due March
31, 2046, including form of
8.125% junior subordinated
interest debenture, Series A
4(a)(12) Supplemental Indenture No. 2 Former HL&P's Form 8-K 1-3187 4.2-B
to Junior Subordinated dated February 4, 1997
Indenture, dated as of
February 1, 1997, providing
for issuance of 8.257% Junior
Subordinated Deferrable
Interest Debentures, Series B
(due February 1, 2037)
including form of junior
subordinated interest
debenture, Series B
4(a)(13) Amended and Restated Trust Former HL&P's Form 8-K 1-3187 4.3-A
Agreement, dated as of dated February 4, 1997
February 4, 1997, of HL&P
Capital Trust I, including
form of Preferred Security and
Agreement as to Expenses and
Liabilities
149
152
REPORT OR SEC FILE OR
EXHIBIT REGISTRATION REGISTRATION EXHIBIT
NUMBER DESCRIPTION STATEMENT NUMBER REFERENCE
------- ----------- ------------ ------------ ---------
4(a)(14) Amended and Restated Trust Former HL&P's Form 8-K 1-3187 4.3-B
Agreement, dated as of dated February 4, 1997
February 4, 1997, of HL&P
Capital Trust II, including
form of Capital Security of
HL&P Capital Trust II and
Agreement as to Expenses and
Liabilities
4(a)(15) Guarantee Agreement relating Former HL&P's Form 8-K 1-3187 4.6-A
to Capital Trust I dated as of dated February 4, 1997
February 4, 1997
4(a)(16) Guarantee Agreement relating Former HL&P's Form 8-K 1-3187 4.6-B
to Capital Trust II dated as dated February 4, 1997
of February 4, 1997
4(a)(17) Form of Indenture governing 7% Former HI's Form 10-Q 1-7629 4
Automatic Common Exchange for the quarter ended
Securities due July 1, 2000 June 30, 1997
between the Company and the
First National Bank of
Chicago, as Trustee
4(b)(1) Rights Agreement, dated July Former HI's Form 8-K 1-7629 4(a)(1)
11, 1990, between the Company dated July 11, 1990
and Texas Commerce Bank
National Association, as
Rights Agent (Rights Agent),
which includes form of
Statement of Resolution
Establishing Series of Shares
designated Series A Preference
Stock and form of Rights
Certificate
4(b)(2) Agreement and Appointment of Form 8-K dated July 1-7629 4(a)(2)
Agent, dated as of July 11, 11, 1990
1990, between the Company and
the Rights Agent
4(b)(3) Form of Amended and Restated Registration Statement 333-11329 4(b)(1)
Rights Agreement to be on Form S-4
executed upon the closing of
the Merger, including form of
Statement of Resolution
Establishing Series Shares
Designated Series A Preference
Stock and form of Rights
Agreement
4(c) Indenture, dated as of April Former HI's Form 10-Q 1-7629 4(b)
1, 1991, between the Company for the quarter ended
and NationsBank of Texas, June 30, 1991
National Association, as
Trustee
150
153
REPORT OR SEC FILE OR
EXHIBIT REGISTRATION REGISTRATION EXHIBIT
NUMBER DESCRIPTION STATEMENT NUMBER REFERENCE
------- ----------- ------------ ------------ ---------
4(d) Credit Agreement, dated as of Former HI's Form 10-Q 1-7629 10(f)
August 6, 1997, by and among for the quarter ended
Houston Industries FinanceCo June 30, 1997
LP, the Company, Chase
Manhattan Bank and the other
banks named therein
+4(d)(1) First Amendment to Exhibit
4(d) dated as of December 27,
1997
+4(d)(2) Second Amendment to Exhibit
4(d) dated as of February 27,
1998
Pursuant to Item 601(b)(4)(iii)(A) of Regulation S-K, the Company has not
filed as exhibits to this Form 10-K certain long-term debt instruments,
including indentures, under which the total amount of securities authorized do
not exceed 10 percent of the total assets of the Company and its subsidiaries on
a consolidated basis. The Company hereby agrees to furnish a copy of any such
instrument to the SEC upon request.
REPORT OR SEC FILE OR
EXHIBIT REGISTRATION REGISTRATION EXHIBIT
NUMBER DESCRIPTION STATEMENT NUMBER REFERENCE
------- ----------- ------------ ------------ ---------
*10(a) Executive Benefit Plan of Former HI's Form 10-Q 1-7629 10(a)(1)
the Company and First and for the quarter ended 10(a)(2)
Second Amendments thereto March 31, 1987 and
effective as of June 1, 10(a)(3)
1982, July 1, 1984, and May
7, 1986, respectively
*10(b)(1) Executive Incentive Former HI's Form 10-K 1-7629 10(b)
Compensation Plan of the for the year ended
Company effective as of December 31, 1991
January 1, 1982
*10(b)(2) First Amendment to Exhibit Former HI's Form 10-Q 1-7629 10(a)
10(b)(1) effective as of for the quarter ended
March 30, 1992 March 31, 1992
*10(b)(3) Second Amendment to Exhibit Former HI's Form 10-K 1-7629 10(b)
10(b)(1) effective as of for the year ended
November 4, 1992 December 31, 1992
*10(b)(4) Third Amendment to Exhibit Former HI's Form 10-K 1-7629 10(b)(4)
10(b)(1) effective as of for the year ended
September 7, 1994 December 31, 1994
+*10(b)(5) Fourth Amendment to Exhibit
10(b)(1) effective as of
August 6, 1997
*10(c)(1) Executive Incentive Former HI's Form 10-Q 1-7629 10(b)(1)
Compensation Plan of the for the quarter ended
Company effective as of March 31, 1987
January 1, 1985
151
154
REPORT OR SEC FILE OR
EXHIBIT REGISTRATION REGISTRATION EXHIBIT
NUMBER DESCRIPTION STATEMENT NUMBER REFERENCE
------- ----------- ------------ ------------ ---------
*10(c)(2) First Amendment to Exhibit Former HI's Form 10-K 1-7629 10(b)(3)
10(c)(1) effective as of for the year ended
January 1, 1985 December 31, 1988
*10(c)(3) Second Amendment to Exhibit Former HI's Form 10-K 1-7629 10(c)(3)
10(c)(1) effective as of for the year ended
January 1, 1985 December 31, 1991
*10(c)(4) Third Amendment to Exhibit Former HI's Form 10-Q 1-7629 10(b)
10(c)(1) effective as of for the quarter ended
March 30, 1992 March 31, 1992
*10(c)(5) Fourth Amendment to Exhibit Former HI's Form 10-K 1-7629 10(c)(5)
10(c)(1) effective as of for the year ended
November 4, 1992 December 31, 1992
*10(c)(6) Fifth Amendment to Exhibit Former HI's Form 10-K 1-7629 10(c)(6)
10(c)(1) effective as of for the year ended
September 7, 1994 December 31, 1994
+*10(c)(7) Sixth Amendment to Exhibit
10(c)(1) effective as of
August 6, 1997
*10(d) Executive Incentive Former HI's Form 10-Q 1-7629 10(b)(2)
Compensation Plan of HL&P for the quarter ended
effective as of January 1, March 31, 1987
1985
*10(e)(1) Executive Incentive Former HI's Form 10-Q 1-7629 10(b)
Compensation Plan of the for the quarter ended
Company effective as of June 30, 1989
January 1, 1989
*10(e)(2) First Amendment to Exhibit Former HI's 10-K for 1-7629 10(e)(2)
10(e)(1) effective as of the year ended
January 1, 1989 December 31, 1991
*10(e)(3) Second Amendment to Exhibit Former HI's Form 10-Q 1-7629 10(c)
10(e)(1) effective as of for the quarter ended
March 30, 1992 March 31, 1992
*10(e)(4) Third Amendment to Exhibit Former HI's Form 10-K 1-7629 10(c)(4)
10(e)(1) effective as of for the year ended
November 4, 1992 December 31, 1992
*10(e)(5) Fourth Amendment to Exhibit Former HI's Form 10-K 1-7629 10(e)(5)
10(e)(1) effective as of for the year ended
September 7, 1994 December 31, 1994
*10(f)(1) Executive Incentive Former HI's Form 10-K 1-7629 10(b)
Compensation Plan of the for the year ended
Company effective as of December 31, 1990
January 1, 1991
152
155
REPORT OR SEC FILE OR
EXHIBIT REGISTRATION REGISTRATION EXHIBIT
NUMBER DESCRIPTION STATEMENT NUMBER REFERENCE
------- ----------- ------------ ------------ ---------
*10(f)(2) First Amendment to Exhibit Former HI's Form 10-K 1-7629 10(f)(2)
10(f)(1) effective as of for the year ended
January 1, 1991 December 31, 1991
*10(f)(3) Second Amendment to Exhibit Former HI's Form 10-Q 1-7629 10(d)
10(f)(1) effective as of for the quarter ended
March 30, 1992 March 31, 1992
*10(f)(4) Third Amendment to Exhibit Former HI's Form 10-K 1-7629 10(f)(4)
10(f)(1) effective as of for the year ended
November 4, 1992 December 31, 1992
*10(f)(5) Fourth Amendment to Exhibit Former HI's Form 10-K 1-7629 10(f)(5)
10(f)(1) effective as of for the year ended
January 1, 1993 December 31, 1992
*10(f)(6) Fifth Amendment to Exhibit Former HI's Form 10-K 1-7629 10(f)(6)
10(f)(1) effective in part, for the year ended
January 1, 1995 and in part, December 31, 1994
September 7, 1994
*10(f)(7) Sixth Amendment to Exhibit Former HI's Form 10-Q 1-7629 10(a)
10(f)(1) effective as of for the quarter ended
August 1, 1995 June 30, 1995
*10(f)(8) Seventh Amendment to Exhibit Former HI's Form 10-Q 1-7629 10(a)
10(f)(1) effective as of for the quarter ended
January 1, 1996 June 30, 1996
*10(f)(9) Eighth Amendment to Exhibit Former HI's Form 10-Q 1-7629 10(a)
10(f)(1) effective as of for the quarter ended
January 1, 1997 June 30, 1997
+*10(f)(10) Ninth Amendment to Exhibit
10(f)(1) effective in part,
January 1, 1997, and in
part, January 1, 1998
*10(g) Benefit Restoration Plan of Former HI's Form 10-Q 1-7629 10(c)
the Company, effective as of for the quarter ended
June 1, 1985 March 31, 1987
*10(h) Benefit Restoration Plan of Former HI's Form 10-K 1-7629 10(g)(2)
the Company as amended and for the year ended
restated effective as of December 31, 1991
January 1, 1988
*10(i)(1) Benefit Restoration Plan of Former HI's Form 10-K 1-7629 10(g)(3)
the Company, as amended and for the year ended
restated effective as of December 31, 1991
July 1, 1991
153
156
REPORT OR SEC FILE OR
EXHIBIT REGISTRATION REGISTRATION EXHIBIT
NUMBER DESCRIPTION STATEMENT NUMBER REFERENCE
------- ----------- ------------ ------------ ---------
+*10(i)(2) First Amendment to Exhibit
10(i)(1) effective in part,
August 6, 1997, and in part,
September 3, 1997 and in
part, October 1, 1997
*10(j)(1) Deferred Compensation Plan Former HI's Form 10-Q 1-7629 10(d)
of the Company effective as for the quarter ended
of September 1, 1985 March 31, 1987
*10(j)(2) First Amendment to Exhibit Former HI's Form 10-K 1-7629 10(d)(2)
10(j)(1) effective as of for the year ended
September 1, 1985 December 31, 1990
*10(j)(3) Second Amendment to Exhibit Former HI's Form 10-Q 1-7629 10(e)
10(j)(1) effective as of for the quarter ended
March 30, 1992 March 31, 1992
*10(j)(4) Third Amendment to Exhibit Former HI's Form 10-K 1-7629 10(h)(4)
10(j)(1) effective as of for the year ended
June 2, 1993 December 31, 1993
*10(j)(5) Fourth Amendment to Exhibit Former HI's Form 10-K 1-7629 10(h)(5)
10(j)(1) effective as of for the year ended
September 7, 1994 December 31, 1994
*10(j)(6) Fifth Amendment to Exhibit Former HI's Form 10-Q 1-7629 10(d)
10(j)(1) effective as of for the quarter ended
August 1, 1995 June 30, 1995
*10(j)(7) Sixth Amendment to Exhibit Former HI's Form 10-Q 1-7629 10(b)
10(j)(1) effective as of for the quarter ended
December 1, 1995 June 30, 1995
*10(j)(8) Seventh Amendment to Exhibit Former HI's Form 10-Q 1-7629 10(b)
10(j)(1) effective as of for the quarter ended
January 1, 1997 June 30, 1997
+*10(j)(9) Eighth Amendment to Exhibit
10(j)(1) effective as of
September 1, 1997
+*10(j)(10) Ninth Amendment to Exhibit
10(j)(1) effective as of
September 3, 1997
*10(k)(1) Deferred Compensation Plan Former HI's Form 10-Q 1-7629 10(a)
of the Company effective as for the quarter ended
of January 1, 1989 June 30, 1989
*10(k)(2) First Amendment to Exhibit Former HI's Form 10-K 1-7629 10(e)(3)
10(k)(1) effective as of for the year ended
January 1, 1989 December 31, 1989
154
157
REPORT OR SEC FILE OR
EXHIBIT REGISTRATION REGISTRATION EXHIBIT
NUMBER DESCRIPTION STATEMENT NUMBER REFERENCE
------- ----------- ------------ ------------ ---------
*10(k)(3) Second Amendment to Exhibit Former HI's Form 10-Q 1-7629 10(f)
10(k)(1) effective as of for the quarter ended
March 30, 1992 March 31, 1992
*10(k)(4) Third Amendment to Exhibit Former HI's Form 10-K 1-7629 10(i)(4)
10(k)(1) effective as of for the year ended
June 2, 1993 December 31, 1993
*10(k)(5) Fourth Amendment to Exhibit Former HI's Form 10-K 1-7629 10(i)(5)
10(k)(1) effective as of for the year ended
September 7, 1994 December 31, 1994
*10(k)(6) Fifth Amendment to Exhibit Former HI's Form 10-Q 1-7629 10(c)
10(k)(1) effective as of for the quarter ended
August 1, 1995 June 30, 1995
*10(k)(7) Sixth Amendment to Exhibit Former HI's Form 10-Q 1-7629 10(c)
10(k)(1) effective as of for the quarter ended
December 1, 1995 June 30, 1995
*10(k)(8) Seventh Amendment to Exhibit Former HI's Form 10-Q 1-7629 10(c)
10(k)(1) effective as of for the quarter ended
January 1, 1997 June 30, 1997
+*10(k)(9) Eighth Amendment to Exhibit
10(k)(1) effective as in
part October 1, 1997 and in
part January 1, 1998
+*10(k)(10) Ninth Amendment to Exhibit
10(k)(1) effective as of
September 3, 1997
*10(l)(1) Deferred Compensation Plan Former HI's Form 10-K 1-7629 10(d)(3)
of the Company effective as for the year ended
of January 1, 1991 December 31, 1990
*10(l)(2) First Amendment to Exhibit Former HI's Form 10-K 1-7629 10(j)(2)
10(l)(1) effective as of for the year ended
January 1, 1991 December 31, 1991
*10(l)(3) Second Amendment to Exhibit Former HI's Form 10-Q 1-7629 10(g)
10(l)(1) effective as of for the quarter ended
March 30, 1992 March 31, 1992
*10(l)(4) Third Amendment to Exhibit Former HI's Form 10-K 1-7629 10(j)(4)
10(l)(1) effective as of for the year ended
June 2, 1993 December 31, 1993
*10(l)(5) Fourth Amendment to Exhibit Former HI's Form 10-K 1-7629 10(j)(5)
10(l)(1) effective as of for the year ended
December 1, 1993 December 31, 1993
155
158
REPORT OR SEC FILE OR
EXHIBIT REGISTRATION REGISTRATION EXHIBIT
NUMBER DESCRIPTION STATEMENT NUMBER REFERENCE
------- ----------- ------------ ------------ ---------
*10(l)(6) Fifth Amendment to Exhibit Former HI's Form 10-K 1-7629 10(j)(6)
10(l)(1) effective as of for the year ended
September 7, 1994 December 31, 1994
*10(l)(7) Sixth Amendment to Exhibit Former HI's Form 10-Q 1-7629 10(b)
10(l)(1) effective as of for the quarter ended
August 1, 1995 June 30, 1995
*10(l)(8) Seventh Amendment to Exhibit Former HI's Form 10-Q 1-7629 10(d)
10(l)(1) effective as of for the quarter ended
December 1, 1995 June 30, 1996
*10(l)(9) Eighth Amendment to Exhibit Former HI's Form 10-Q 1-7629 10(d)
10(l)(1) effective as of for the quarter ended
January 1, 1997 June 30, 1997
+*10(l)(10) Ninth Amendment to Exhibit
10(l)(1) effective in part
August 6, 1997, in part
October 1, 1997 and in part
January 1, 1998
+*10(l)(11) Tenth Amendment to Exhibit
10(l)(1) effective as of
September 3, 1997
*10(m)(1) Long-Term Incentive Former HI's Form 10-Q 1-7629 10(c)
Compensation Plan of the for the quarter ended
Company effective as of June 30, 1989
January 1, 1989
*10(m)(2) First Amendment to Exhibit Former HI's Form 10-K 1-7629 10(f)(2)
10(m)(1) effective as of for the year ended
January 1, 1990 December 31, 1989
*10(m)(3) Second Amendment to Exhibit Former HI's Form 10-K 1-7629 10(k)(3)
10(m)(1) effective as of for the year ended
December 22, 1992 December 31, 1992
+*10(m)(4) Third Amendment to Exhibit
10(m)(1) effective as of
August 6, 1997
*10(n) Form of stock option Former HI's Form 10-Q 1-7629 10(h)
agreement for nonqualified for the quarter ended
stock options granted under March 31, 1992
the Company's 1989 Long-Term
Incentive Compensation Plan
*10(o) Forms of restricted stock Former HI's Form 10-Q 1-7629 10(i)
agreement for restricted for the quarter ended
stock granted under the March 31, 1992
Company's 1989 Long-Term
Incentive Compensation Plan
156
159
REPORT OR SEC FILE OR
EXHIBIT REGISTRATION REGISTRATION EXHIBIT
NUMBER DESCRIPTION STATEMENT NUMBER REFERENCE
------- ----------- ------------ ------------ ---------
*10(p)(1) 1994 Long-Term Incentive Former HI's Form 10-K 1-7629 10(n)(1)
Compensation Plan of the for the year ended
Company effective as of December 31, 1993
January 1, 1994
*10(p)(2) Form of stock option Former HI's Form 10-K 1-7629 10(n)(2)
agreement for non-qualified for the year ended
stock options granted under December 31, 1993
the Company's 1994 Long-Term
Incentive Compensation Plan
*10(p)(3) First Amendment to Exhibit Former HI's Form 10-Q 1-7629 10(e)
10(p)(1) effective as of May for the quarter ended
9, 1997 June 30, 1997
+*10(p)(4) Second Amendment to Exhibit
10(p)(1) effective as of
August 6, 1997
*10(q)(1) Savings Restoration Plan of Former HI's Form 10-K 1-7629 10(f)
the Company effective as of for the year ended
January 1, 1991 December 31, 1990
*10(q)(2) First Amendment to Exhibit Former HI's Form 10-K 1-7629 10(l)(2)
10(q)(1) effective as of for the year ended
January 1, 1992 December 31, 1991
+*10(q)(3) Second Amendment to Exhibit
10(q)(1) effective in part,
August 6, 1997, and in part,
October 1, 1997
*10(r) Director Benefits Plan, Former HI's Form 10-K 1-7629 10(m)
effective as of January 1, for the year ended
1992 December 31, 1991
*10(s)(1) Executive Life Insurance Former HI's Form 10-K 1-7629 10(q)
Plan of the Company for the year ended
effective as of January 1, December 31, 1993
1994
*10(s)(2) First Amendment to Exhibit Former HI's Form 10-Q 1-7629 10
10(s)(1) effective as of for the quarter ended
January 1, 1994 June 30, 1995
+*10(s)(3) Second Amendment to Exhibit
10(s)(1) effective as of
August 6, 1997
*10(t) Employment and Supplemental Former HI's Form 10-Q 1-7629 10(f)
Benefits Agreement between for the quarter ended
HL&P and Hugh Rice Kelly March 31, 1987
157
160
REPORT OR SEC FILE OR
EXHIBIT REGISTRATION REGISTRATION EXHIBIT
NUMBER DESCRIPTION STATEMENT NUMBER REFERENCE
------- ----------- ------------ ------------ ---------
10(u)(1) Houston Industries Former HI's Form 10-K 1-7629 10(s)(4)
Incorporated Savings Trust for the year ended
between the Company and The December 31, 1995
Northern Trust Company, as
Trustee (as amended and
restated effective July 1,
1995)
10(u)(2) Note Purchase Agreement Former HI's Form 10-K 1-7629 10(j)(3)
between the Company and the for the year ended
ESOP Trustee, dated as of December 31, 1990
October 5, 1990
10(v)(1) Stockholder's Agreement Schedule 13-D dated 5-19351 2
dated as of July 6, 1995 July 6, 1995
between the Company and Time
Warner Inc.
10(v)(2) Registration Rights Schedule 13-D dated 5-19351 3
Agreement dated as of July July 6, 1995
6, 1995 between the Company
and Time Warner Inc.
10(v)(3) Amendment to Exhibits Former HI's Form 10-K 1-7629 10(x)(4)
10(v)(1) and 10(v)(2) dated for the year ended
November 18, 1996 December 31, 1996
10(v)(4) Certificate of Voting Schedule 13-D dated 5-19351 4
Powers, Designations, July 6, 1995
Preferences and Relative
Participating, Optional or
Other Special Rights, and
Qualifications, Limitations
or Restrictions Thereof of
Series D Convertible
Preferred Stock of Time
Warner Inc.
*10(w) Houston Industries Former HI's Form 10-K 1-7629 10(7)
Incorporated Executive for the year ended
Deferred Compensation Trust, December 31, 1995
effective as of December 19,
1995
*10(x) Supplemental Pension Registration Statement 333-11329 10(aa)
Agreement, dated July 17, on Form S-4
1996, between the Company
and Lee W. Hogan
*10(y) Consulting Agreement, dated Former HI's Form 10-K 1-7629 10(bb)
January 14, 1997, between for the year ended
the Company and Milton December 31, 1996
Carroll
*10(z)(1) Employment Agreement, dated Former HI's Form 10-K 1-7629 10(cc)
February 25, 1997, between for the year ended
the Company and Don D. December 31, 1996
Jordan
+*10(z)(2) Amended and Restated
Employment Agreement, dated
November 7, 1997, between
the Company and Don D.
Jordan
158
161
REPORT OR SEC FILE OR
EXHIBIT REGISTRATION REGISTRATION EXHIBIT
NUMBER DESCRIPTION STATEMENT NUMBER REFERENCE
------- ----------- ------------ ------------ ---------
+*10(aa)(1) Executive Severance Benefits
Plan of the Company and
Summary Plan Description
effective as of September 3,
1997
+*10(aa)(2) Form of Severance
Agreements, dated September
3, 1997, between the Company
and each of the following
executive officers: Lee W.
Hogan, Hugh Rice Kelly, R.
Steve Letbetter, and Stephen
W. Naeve
+12 Computation of Ratios of
Earnings to Fixed Charges
+21 Subsidiaries of the Company
+23 Consent of Deloitte & Touche
LLP
+27 Financial Data Schedule
(B) NORAM ENERGY CORP.
REPORT OR SEC FILE OR
EXHIBIT REGISTRATION REGISTRATION EXHIBIT
NUMBER DESCRIPTION STATEMENT NUMBER REFERENCE
- - ------- ----------- ------------ ------------ ---------
2(a)(1) Agreement and Plan of Merger Former HI's Form 8-K 1-7629 2
among the Company, Former HL&P, dated August 11, 1996
HI Merger, Inc. and Former
NorAm dated August 11, 1996
2(b)(2) Amendment to Agreement and Plan Registration Statement 333-11329 2(c)
of Merger among the Company, on Form S-4
Former HL&P, HI Merger, Inc.
and Former NorAm dated August
11, 1996
+3(a)(1) Certificate of Incorporation of
NorAm
+3(a)(2) Certificate of Merger merging
NorAm Energy Corp. with and
into HI Merger, Inc. dated
August 6, 1997
+3(b) Bylaws of NorAm
4(a)(1) Indenture, dated as of December Former NorAm's Form 1-13265 4.14
1, 1986, between NorAm and 10-K for the year
Citibank, N.A., as Trustee ended December 31,
1986
+4(a)(2) First Supplemental Indenture to
Exhibit 4(a)(1) dated as of
September 30, 1988
159
162
REPORT OR SEC FILE OR
EXHIBIT REGISTRATION REGISTRATION EXHIBIT
NUMBER DESCRIPTION STATEMENT NUMBER REFERENCE
- - ------- ----------- ------------ ------------ ---------
+4(a)(3) Second Supplemental Indenture
to Exhibit 4(a)(1) dated as of
November 15, 1989
+4(a)(4) Third Supplemental Indenture to
Exhibit 4(a)(1) dated as of
August 6, 1997
4(b)(1) Indenture, dated as of March Former NorAm's 33-14586 4.20
31, 1987, between NorAm and Registration Statement
Chase Manhattan Bank, N.A., as on Form S-3
Trustee, authorizing 6%
Convertible Subordinated
Debentures due 2012
+4(b)(2) Supplemental Indenture to
Exhibit 4(b)(1) dated as of
August 6, 1997
4(c)(1) Indenture, dated as of April Former NorAm's 33-23375 4.1
15, 1990, between NorAm and Registration Statement
Citibank, N.A. as Trustee on Form S-3
+4(c)(2) Supplemental Indenture to
Exhibit 4(c)(1) dated as of
August 6, 1997
4(d)(1) Form of Indenture between NorAm Former NorAm's 33-64001 4.8
and The Bank of New York as Registration Statement
Trustee on Form S-3
4(d)(2) Form of First Supplemental Former NorAm's Form 1-13265 4.01
Indenture to Exhibit 4(d)(1) 8-K dated as of June
10, 1996
+4(d)(3) Second Supplemental Indenture
to Exhibit 4(d)(1) dated as of
August 6, 1997
4(e) Indenture between NorAm and Registration Statement 333-41017 4.1
Chase Bank of Texas, National on Form S-3
Association, dated as of
December 1, 1997
There have not been filed as exhibits to this Form 10-K certain long-term
debt instruments, including indentures, under which the total amount of
securities do not exceed 10 percent of the total assets of NorAm. NorAm hereby
agrees to furnish a copy of any such instrument to the SEC upon request.
SEC FILE
REPORT OR OR
EXHIBIT REGISTRATION REGISTRATION EXHIBIT
NUMBER DESCRIPTION STATEMENT NUMBER REFERENCE
- - ------- ----------- ------------ ------------ ---------
10(a) Service Agreement by and between Former NorAm Form 10-K 1-13265 10.20
Mississippi River Transmission for the year ended
Corporation and Laclede Gas December 31, 1989
Company dated August 22, 1989
+12 Computation of Ratios of Earnings
to Fixed Charges
+23(a) Consent of Deloitte & Touche LLP
+23(b) Consent of Coopers & Lybrand
L.L.P.
+27 Financial Data Schedule
160
1
EXHIBIT 3a
RESTATED ARTICLES OF INCORPORATION
OF
HOUSTON INDUSTRIES INCORPORATED
Houston Industries Incorporated, a Texas corporation (hereinafter referred
to as the "Company" or the "Corporation"), pursuant to the provisions of
Article 4.07 of the Texas Business Corporation Act, hereby adopts the following
Restated Articles of Incorporation which accurately copy the articles of
incorporation and all amendments thereto that are in effect to date and such
Restated Articles of Incorporation contain no change in any provision thereof.
The articles of incorporation and all amendments thereto that are in effect
to date are hereby superseded by the following Restated Articles of
Incorporation which accurately copy the entire text thereof:
ARTICLE I
The name of this corporation is "Houston Industries Incorporated."
ARTICLE II
The purposes for which the Company is formed are: the generation,
manufacture, purchase, transportation, distribution, supply and sale of
electric current, light, heat and power to the public; the production,
manufacture and purchase of gas and the transportation, distribution, sale and
supply of gas to the public; the purchase, generation, manufacture,
transportation, distribution and sale of steam to the public; the generation,
manufacture, purchase, transportation, distribution, supply and sale of any
other form or source of light, heat, energy or power; the manufacture,
production, purchase and sale of machinery and equipment and goods, wares and
merchandise of every description; the acquiring, holding, development and
utilization of patent rights, licenses, trademarks and trade names relative to
or useful in connection with any business of the Company; to engage in any
lawful act or activity for which corporations may be organized under the Texas
Business Corporation Act; and the doing of all such things as may be necessary
or convenient in carrying out the foregoing purposes, having and exercising all
the powers conferred by the laws of Texas upon corporations formed for such
purposes.
The objects and purposes specified in the foregoing clauses shall, except
as otherwise expressed, be in nowise limited or restricted by reference to, or
inference from, the terms of any
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other clauses in these Articles of Incorporation, but each such object and
purpose shall be regarded as an independent object and purpose.
ARTICLE III
The post office address of the registered office of the Company is 1111
Louisiana, Houston, Texas 77002 and the name of its registered agent at such
address is Hugh Rice Kelly.
ARTICLE IV
The period of duration of the Company is perpetual.
ARTICLE V
The number of directors of the corporation shall be such number as
determined from time to time by a majority of the board of directors, but shall
not be less than three. The directors of the Company shall be divided into
three classes, designated Class I, Class II and Class III, each class to be as
nearly equal as possible. The initial terms of office of the directors of
Class I shall expire at the annual meeting of shareholders in 1997, of Class II
shall expire at the annual meeting of shareholders in 1998 and of Class III
shall expire at the annual meeting of shareholders in 1999. At each annual
meeting the number of directors equal to the number constituting the class
whose term expires at the time of such meeting shall be elected to hold office
until the third succeeding annual meeting.
The number of directors currently constituting the board of directors is
fifteen. The persons whose names and addresses are set forth below are now
serving as directors of the corporation, and they are divided into the classes
specified below:
Name Address
---- -------
CLASS I
Robert J. Cruikshank . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Houston, Texas
Linnet F. Deily . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Houston, Texas
Lee W. Hogan . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Houston, Texas
T. Milton Honea . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Houston, Texas
Alexander F. Schilt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Houston, Texas
CLASS II
Milton Carroll . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Houston, Texas
John T. Cater . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Houston, Texas
Robert C. Hanna . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Houston, Texas
R. Steve Letbetter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Houston, Texas
Bertram Wolfe . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Houston, Texas
CLASS III
James A. Baker, III . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Houston, Texas
Richard E. Balzhiser . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Houston, Texas
O. Holcombe Crosswell . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Houston, Texas
Joseph M. Grant . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Houston, Texas
Don D. Jordan . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Houston, Texas
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ARTICLE VI
The number of shares of the total authorized capital stock of the Company
is 720,000,000 shares, of which 10,000,000 shares are classified as Preferred
Stock, without par value, 10,000,000 shares are classified as Preference Stock,
without par value, and the balance of 700,000,000 shares are classified as
Common Stock, without par value.
The descriptions of the different classes of capital stock of the Company
and the preferences, designations, relative rights, privileges and powers, and
the restrictions, limitations and qualifications thereof, of said classes of
stock are as follows:
DIVISION A -- PREFERRED STOCK
1. Series and Limits of Variations between Series. The Preferred Stock
may be divided into and issued in one or more series from time to time as
herein provided, each series to be so designated as to distinguish the shares
thereof from the shares of all other series and classes. The authorized number
of shares of any such series, the designation of such series and the terms and
characteristics thereof (in those respects in which the shares of one series
may vary from the shares of other series as herein provided) shall be fixed or,
if any such terms and characteristics shall vary from time to time, the method
by which such terms and characteristics shall be determined shall be
established at any time prior to the issuance thereof by resolution or
resolutions of the Board of Directors of the Company. All shares of each
series shall be alike in every particular. The Preferred Stock of all series
shall be of the same class and of equal rank and shall be identical in all
respects, except that there may be variations in the following particulars:
(a) The rate at which dividends are to accrue on the shares of such
series or, if such rate shall vary from time to time, the method by which
such variable rate shall be determined, hereinafter referred to as the
"fixed dividend rate";
(b) The periods of time during which dividends shall accrue and the
dates on which accrued dividends shall become payable on the shares of such
series;
(c) The terms and conditions on which the shares of such series may be
redeemed, and the amount payable in respect of the shares of such series in
case of the redemption thereof at the option of the Company (the amount so
fixed being hereinafter referred to as the "fixed redemption price"), and
the amount payable in respect of the shares of such series in case of
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the redemption thereof for any sinking fund of such series, which amounts
in respect of any series may, but need not, vary according to the time or
circumstances of such action;
(d) The amount payable in respect of the shares of such series in case
of liquidation, dissolution or winding up of the Company, or reduction or
decrease of its capital stock resulting in any distributions of its assets
to its Common Stockholders (the amount so fixed being hereinafter referred
to as the "fixed liquidation price"), and the amount payable, if any, in
addition to the fixed liquidation price for each series in case such
liquidation, dissolution, winding up, reduction or decrease be voluntary
(the amount so fixed being hereinafter referred to as the "fixed
liquidation premium"), which amounts in respect of any series may, but need
not, vary according to the time or circumstances of such action;
(e) Any requirement as to any sinking fund or purchase fund for, or the
redemption, purchase or other retirement by the Company of, the shares of
such series; and
(f) The right, if any, to exchange or convert the shares of such series
into shares of any other series of the Preferred Stock or, to the extent
permitted by law, into shares of any other class of stock of the Company,
and the rate or basis, time, manner and conditions of exchange or
conversion or the method by which the same shall be determined.
2. Dividends. Out of the assets of the Company available for dividends,
the holders of the Preferred Stock of each series shall be entitled to receive,
if and when declared payable by the Board of Directors, dividends in lawful
money of the United States of America at, but not exceeding, the fixed dividend
rate for such series, payable quarterly on January 1, April 1, July 1 and
October 1 in each year, or at such intervals and on such dates as otherwise are
expressly set forth in the resolution of the Board of Directors creating such
series or, if such intervals and dividend payment dates shall vary from time to
time for such series, such resolution shall set forth the method by which such
intervals and such dates shall be determined, before any dividends (other than
a dividend payable in Common Stock of the Company) shall be paid upon or set
apart for any shares of capital stock ranking junior to the Preferred Stock in
respect of dividends or liquidation rights (referred to in this Division A as
"stock ranking junior to the Preferred Stock"), and such dividends on the
Preferred Stock shall be cumulative, so that, if in any past dividend period or
periods full dividends upon each series of the outstanding Preferred Stock at
the fixed dividend rate or rates therefor shall not have been paid, the
deficiency (without interest) shall be paid or declared and set apart for
payment before any dividend shall be paid upon or set apart for any stock
ranking junior to the Preferred Stock. Dividends on all shares of the
Preferred Stock of each series shall commence to accrue and be cumulative from
the date of issue of such shares. Any dividends paid on the Preferred Stock in
an amount less than full cumulative dividends in arrears upon all Preferred
Stock outstanding shall, if more than one series be outstanding, be divided
between the different series in proportion to the aggregate amounts which would
be distributable to the Preferred Stock of each series if full cumulative
dividends were simultaneously declared and paid thereon without regard to the
applicable dividend payment dates.
3. Preference on Liquidation, etc. In the event of any liquidation,
dissolution, or winding up of the Company, or reduction or decrease of its
capital stock resulting in a distribution of assets to its Common Stockholders
other than by way of dividends out of the net profits or out of the surplus of
the Company, the holders of the Preferred Stock of each series shall be
entitled to
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receive, for each share thereof, the fixed liquidation price for such series,
plus, in case such liquidation, dissolution, winding up, reduction or decrease
shall have been voluntary, the fixed liquidation premium for such series, if
any, together in all cases with all dividends accrued or in arrears thereon,
before any distribution of the assets shall be made to the holders of any stock
ranking junior to the Preferred Stock; but the holders of the Preferred Stock
shall be entitled to no further participation in such distribution. If upon
any such liquidation, dissolution, winding up, reduction or decrease, the
assets distributable among the holders of the Preferred Stock shall be
insufficient to permit the payment of the full preferential amounts aforesaid,
then the entire assets of the Company to be distributed shall be distributed
among the holders of each series of the Preferred Stock then outstanding,
ratably in proportion to the full preferential amounts to which they are
respectively entitled. As used in this Division A, the expression "dividends
accrued or in arrears" means, in respect of each share of the Preferred Stock
of any series, that amount which shall be equal to simple interest upon the sum
of one hundred dollars ($100) at an annual rate equal to the percentage that
the fixed dividend rate for such series is of one hundred dollars ($100), from
the date from which cumulative dividends thereon commence to accrue to the date
as of which the computation is to be made, less the aggregate amount (without
interest thereon) of all dividends theretofore paid (or deemed to have been
paid) or declared and set apart for payment in respect thereof. Nothing in
this Section 3 shall be deemed to prevent the purchase or redemption of
Preferred Stock in any manner permitted by Section 4 of this Division A.
Neither shall anything in this Section 3 be deemed to prevent the purchase or
redemption by the Company of shares of its stock ranking junior to the
Preferred Stock if the requirements of Section 4 of this Division A shall be
complied with, and no such purchase or redemption in compliance with such
requirements shall be deemed to be a reduction or decrease of capital stock
resulting in a distribution of assets to its Common Stockholders within the
meaning of this Section 3 whether or not shares of Common Stock so redeemed or
purchased shall be retired. A consolidation or merger of the Company or a sale
or transfer of substantially all of its assets as an entirety shall not be
regarded as a "liquidation, dissolution, or winding up of the Company, or
reduction or decrease of its capital stock resulting in a distribution of
assets to its Common Stockholders other than by way of dividends out of the net
profits or out of the surplus of the Company" within the meaning of Section 3.
4. Redemption and Repurchase. The Company may at any time or from time to
time, by resolution of the Board of Directors, redeem the whole or any part of
the Preferred Stock, or of any series thereof, at the redemption price fixed
for such stock plus the amount of any dividends accrued or in arrears thereon
to the date of such redemption. If less than all of one series of Preferred
Stock is to be redeemed, the shares to be redeemed shall be selected ratably or
by lot, as prescribed by resolution of the Board of Directors. Notice of such
redemption shall be mailed to each holder of redeemable shares being called not
less than twenty (20) nor more than fifty (50) days before the date fixed for
redemption at his address as it appears on the stock transfer books of the
Company, with postage thereon prepaid. Such notice of redemption of such
shares shall set forth the series or portion thereof to be redeemed, the date
fixed for redemption, the redemption price, and the place at which the
stockholders may obtain payment of the redemption price upon surrender of their
respective share certificates. From and after the date fixed in any such
notice as the date of redemption, unless default shall be made by the Company
in providing funds sufficient for such redemption at the time and place
specified for the payment thereof pursuant to said notice, all dividends on the
shares called for redemption shall cease to accrue, and all rights
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of the holders of such shares as stockholders of the Company, except only the
right to receive the redemption funds to which they are entitled, shall cease
and determine.
The Company may, on or prior to the date fixed for any redemption, deposit
with any bank or trust company in the State of Texas, or any bank or trust
company in the United States duly appointed and acting as a transfer agent of
the Company, as a trust fund, a sum sufficient to redeem the shares called for
redemption, with irrevocable instructions and authority to such bank or trust
company to give or complete the notice of redemption thereof and to pay, on or
after the date fixed for such redemption, to the respective holders of shares,
as evidenced by a list of holders of such shares certified by the Company by
its President or a Vice President and by its Secretary or an Assistant
Secretary, the redemption price upon the surrender of their respective share
certificates. Thereafter, from and after the date fixed for redemption, such
shares shall be deemed to have been redeemed, and such deposit shall be deemed
to constitute full payment of such shares to their holders, and all rights with
respect to the holders of such shares shall cease and determine except the
right to receive from the bank or trust company payment of the redemption price
of such shares, without interest, upon the surrender of their respective
certificates therefor, and any right to convert such shares which may exist.
In case the holders of such shares shall not, within six (6) years after such
deposit, claim the amount deposited for redemption thereof, such bank or trust
company shall upon demand pay over to the Company the balance of such amount so
deposited, together with any interest accrued thereon, which shall become the
property of the Company, and such bank or trust company shall thereupon be
relieved of all responsibility to the holders thereof.
The Company, except as hereinafter provided, may also from time to time
purchase shares of Preferred Stock, in any amounts and of any series, at not
exceeding the price at which the same may be redeemed, so long as full
cumulative dividends on all series of the Preferred Stock have been paid, or
declared and a sum sufficient for the payment thereof set apart, for all past
quarterly dividend periods. If the Company shall be in default in the payment
of any dividends on the Preferred Stock, as set out above, it shall not
purchase or otherwise acquire for value any shares of Preferred Stock except in
accordance with an offer made to all holders thereof, and shall not purchase or
otherwise acquire for value any shares of stock ranking junior to the Preferred
Stock.
Shares of Preferred Stock of the Company redeemed or purchased by the
Company shall be restored to the status of authorized but unissued shares of
Preferred Stock without designation, and may from time to time be reissued as
provided in Section 1 of this Division A. All such redemptions and purchases
of Preferred Stock of the Company shall be effected in accordance with the laws
of the State of Texas governing redemption or purchase of redeemable shares.
5. Restrictions on Certain Corporate Action. So long as any shares of any
series of the Preferred Stock shall remain outstanding, the Company shall not,
without the authorization of the holders of not less than two-thirds of the
issued and outstanding shares of Preferred Stock, voting as a class at a
meeting called for the purpose of approving such action:
(a) Create, authorize or issue any class of stock ranking prior to the
Preferred Stock in respect to dividends or liquidation rights (other than
stock issuable upon conversion of obligations or securities, or upon the
exercise of warrants, rights or options to purchase, authorized pursuant to
(b) below);
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(b) Create, authorize or issue any obligation or security convertible
into, or any warrants, rights or options to purchase or subscribe to, any
stock ranking prior to the Preferred Stock in respect to dividends or
liquidation rights;
(c) Alter, amend or repeal the provisions hereof relative to the
Preferred Stock, or any series thereof, which would change the express
terms and provisions of such stock in any manner prejudicial to the holders
thereof, including any change in the provisions of Sections 5 and 6 of this
Division A; provided, however, that if such prejudicial change appertains
to outstanding shares of one or more, but not all, of such series, then for
the purposes of this Section 5 such change shall be deemed to be authorized
if holders of two-thirds of the shares prejudicially affected shall vote
favorably with respect thereto; or
(d) Issue additional shares of Preferred Stock, or issue any shares of
any stock ranking on a parity with the Preferred Stock as to dividends or
liquidation rights, unless
(1) the par value and/or the capital represented by shares without
par value of the Company's stock ranking junior to the Preferred Stock
to be outstanding immediately after such issuance (plus, if the Company
so elects, its surplus as shown by its books to the extent that
distribution of such surplus to the holders of such junior stock is
prohibited while such additional shares are outstanding) shall be at
least equal to the fixed liquidation price of its Preferred Stock of
all series and of any other stock ranking on a parity with or in
priority to the Preferred Stock as to dividends or liquidation rights
to be outstanding immediately after the issuance of such additional
shares; and
(2) for a period of twelve (12) consecutive calendar months within
the fifteen (15) calendar months immediately preceding the issuance of
such additional shares or the contracting for the issuance and sale
thereof, (i) the net earnings of the Company available for dividends,
as determined in accordance with sound accounting practice, are at
least two and one-half (2 1/2) times the annual dividend requirements
on all Preferred Stock of all series and all other stock ranking on a
parity with or in priority to the Preferred Stock as to dividends or
liquidation rights to be outstanding immediately after the issuance of
such additional shares; and (ii) the earnings of the Company available
(after taxes and depreciation) for interest, amortization and
dividends, as determined in accordance with sound accounting practice,
are at least one and one-half (1 1/2) times the aggregate of the annual
interest requirements on its indebtedness and the annual dividend
requirements on all Preferred Stock of all series and all other stock
ranking on a parity with or in priority to the Preferred Stock as to
dividends or liquidation rights to be outstanding immediately after the
issuance of such additional shares.
6. Voting Rights. The holders of the Preferred Stock shall not be
entitled to vote except (a) as provided in the preceding Section 5, or (b) as
may from time to time be mandatorily provided by the laws of Texas, or (c) for
the election of one-third of the Board of Directors when and as dividends on
any of the outstanding Preferred Stock shall be in arrears in an amount
equivalent to the aggregate dividends required to be paid on such Preferred
Stock in any period of twelve (12) months, and thereafter (i) until no
dividends on any Preferred Stock shall be in arrears or (ii) until dividends on
any of the outstanding Preferred Stock shall be in arrears in an amount
equivalent to the aggregate dividends required to be paid on such Preferred
Stock in any period
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of twenty-four (24) months, whichever event shall first occur, or (d) for the
election of the smallest number of directors necessary to constitute a majority
of the full Board of Directors when and as dividends on any of the outstanding
Preferred Stock shall be in arrears in an amount equivalent to the aggregate
dividends required to be paid on such Preferred Stock in any period of
twenty-four (24) months, and thereafter until no dividends on any Preferred
Stock shall be in arrears.
During the continuance of any right of the holders of Preferred Stock to
elect members of the Board of Director, as above provided, the remaining
members of the Board of Directors shall be elected by the holders of such other
stock ranking junior to the Preferred Stock as may be entitled to vote
therefor. At all meetings of stockholders held for the purpose of electing
directors, during a period when the Preferred Stockholders shall have a right
to elect members of the Board of Directors, a majority of the then issued and
outstanding Preferred Stock as a class and of the stock ranking junior to the
Preferred Stock entitled to vote as a class for the election of directors shall
constitute a quorum of those classes, respectively, for the purpose of such
meetings, and lack of a quorum as to any of such classes at any such meeting
shall not interfere with the holding of such meeting and the election of its
allotted number of directors by the class having a quorum present, in which
event such class shall specifically designate each director to be succeeded by
those directors who it elects.
The terms of office of all persons who may be directors of the Company at
any time when a right to elect members of the Board of Directors shall accrue
to the holders of the Preferred Stock shall terminate upon the election of
their successors. Such election may be held at a special meeting of all
stockholders of the Company to be convened at any time after the accrual of
such a right, upon notice similar to that provided in the Bylaws of the Company
for the calling of the annual meeting of stockholders, at the request in
writing of the holders of record of at least 5% of the number of shares of
Preferred Stock of all series then outstanding. In default of the calling of
said meeting by a proper officer of the Company within five days after the
making of such request, such meeting may be called, on like notice, by any
holder of record of Preferred Stock for which purpose any such holder of
Preferred Stock shall have access to the stock books of the Company. If such
special meeting be not called prior to the next annual meeting after the
accrual of such a right to the holders of Preferred Stock, then at such annual
meeting (unless prior thereto all dividend defaults on the Preferred Stock
shall have been made good) the holders of the Preferred Stock and the holders
of the stock ranking junior to the Preferred Stock entitled to vote as a class
for the election of directors, voting as separate classes as provided in the
preceding paragraph, shall have the right to elect the number of directors to
which they are respectively entitled.
Whenever, by reason of the resignation, death or removal of any director or
directors or any increase in the number of directors, at any time while the
holders of the Preferred Stock are entitled to elect members of the Board of
Directors, the number of directors in office who have been elected by either
the holders of Preferred Stock as a class or the holders of any stock ranking
junior to the Preferred Stock entitled to vote as a class shall become less
than the total number subject to such election by such respective classes, the
vacancy or vacancies so resulting may be filled by the vote of such respective
classes of stockholders, in the manner provided in the second paragraph of this
Section 6, at a meeting thereof called for the purpose, upon notice similar to
that provided in the Bylaws for calling the annual meeting of stockholders,
either by the holder or
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holders of record of at least 5% of the outstanding shares of the class
entitled to vote thereat or in such other manner as may be provided in the
Bylaws for the calling of a special meeting of stockholders. Pending such
action, any vacancy may be filled by the affirmative vote of a majority of the
directors at the time in office who were elected by the class of stockholders
entitled to fill such vacancy, although such directors shall be less than a
quorum of the Board of Directors, at a meeting called by any such director in
the manner provided in the Bylaws for the calling of special meetings of the
Board of Directors. At any time while the holders of the Preferred Stock are
entitled to elect members of the Board of Directors a director elected by the
holders of the Preferred Stock of stock ranking junior to the Preferred Stock
entitled to vote as a class (or a director elected to fill a vacancy) shall be
subject to removal by the vote (and only by such vote) of the holders of a
majority of the Preferred Stock or such other stock ranking junior to the
Preferred Stock entitled to vote as a class for the election of directors, as
the case may be, at the time outstanding, at a special meeting of such class of
stockholders called for the purpose, upon notice similar to that provided in
the Bylaws for calling the annual meeting of stockholders, by the holders of at
least 5% of the outstanding shares of such class.
Upon termination at any time of a right of the holders of the Preferred
Stock to elect members of the Board of Directors, the term of office of all
directors elected by vote of the holders of the Preferred Stock as a class (or
elected by such directors to fill a vacancy) shall end upon the election and
qualification of their successors. Such election may be held at a special
meeting of holders of all capital stock of the Company then entitled to vote
for the election of directors convened, upon notice similar to that provided in
the Bylaws for calling the annual meeting of stockholders, at the request of
the holders of at least 2% of the total number of shares of all such capital
stock then outstanding, or, if such special meeting is not called prior to the
next annual meeting, at such annual meeting. In default of the calling of said
meeting by a proper officer of the Company within five days after the making of
such request, such meeting may be called on like notice by any holder of record
of any such capital stock, for which purpose any such holder shall have access
to the stock books of the Company.
DIVISION B -- SERIES OF PREFERRED STOCK
$4 PREFERRED STOCK
1. 97,397 shares of authorized stock classified as Preferred Stock as
provided in Division A of this Article VI shall constitute the first series of
Preferred Stock and are designated as $4 Preferred Stock; the fixed dividend on
the shares of such series is Four Dollars ($4) per share per annum, and such
dividends are cumulative from March 3, 1944, the initial date of issuance
thereof, with the first quarterly dividend payable on May 1, 1944 in respect of
the period from the date of the initial issuance of such shares to said May 1,
1944, the quarterly dividend payment dates being February 1, May 1, August 1
and November 1 in each year; the fixed redemption price on the shares of such
series is $107 per share on or prior to February 1, 1954 and $105 per share
thereafter; the fixed liquidation price on the shares of such series is $100
per share. The $4 Preferred Stock has no exchange or conversion rights or
fixed liquidation premium.
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DIVISION C -- PREFERENCE STOCK
The shares of Preference Stock may be divided into and issued in one or
more series, the relative rights and preferences of which series may vary in
any and all respects. The Board of Directors of the Company is hereby vested
with the authority to establish series of Preference Stock by fixing and
determining all the relative rights and preferences of the shares of any series
so established, to the extent not provided for in these Articles of
Incorporation or any amendment hereto, and with the authority to increase or
decrease the number of shares within each such series; provided, however, that
the relative rights and preferences of any series of Preference Stock must rank
junior to the relative rights and preferences of the Preferred Stock; and,
provided further, that the Board of Directors may not decrease the number of
shares within a series of Preference Stock below the number of shares within
such series that is then issued. The authority of the Board of Directors with
respect to such series of Preference Stock shall include, but not be limited
to, determination of the following:
(1) the distinctive designation and number of shares of that series;
(2) the rate of dividend (or the method of calculation thereof) payable
with respect to shares of that series, the dates, terms and other conditions
upon which such dividends shall be payable, and the relative rights of priority
of such dividends to dividends payable on any other class or series of capital
stock of the Company; provided, however, that the relative rights of priority
of that series must rank junior to the relative rights of priority of Preferred
Stock;
(3) the nature of the dividend payable with respect to shares of that
series as cumulative, noncumulative or partially cumulative, and if cumulative
or partially cumulative, from which date or dates and under what circumstances;
(4) whether shares of that series shall be subject to redemption, and,
if made subject to redemption, the times, prices, rates, adjustments and other
terms and conditions of such redemption (including the manner of selecting
shares of that series for redemption if fewer than all shares of such series
are to be redeemed);
(5) the rights of the holders of shares of that series in the event of
voluntary or involuntary liquidation, dissolution or winding up of the Company
(which rights may be different if such action is voluntary than if it is
involuntary), including the relative rights of priority in such event as to the
rights of the holders of any other class or series of capital stock of the
Company; provided, however, that the relative rights of priority of that series
must rank junior to the relative rights of priority of Preferred Stock;
(6) the terms, amounts and other conditions of any sinking or similar
purchase or other fund provided for the purchase or redemption of shares of
that series;
(7) whether shares of that series shall be convertible into or
exchangeable for shares of capital stock or other securities of the Company or
of any other corporation or entity, and, if provision be made for conversion or
exchange, the times, prices, rates, adjustments, and other terms and conditions
of such conversion or exchange;
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(8) the extent, if any, to which the holders of shares of that series
shall be entitled (in addition to any voting rights provided by law) to vote as
a class or otherwise with respect to the election of directors or otherwise;
(9) the restrictions and conditions, if any, upon the issue or reissue
of any additional Preference Stock ranking on a parity with or prior to shares
of that series as to dividends or upon liquidation, dissolution or winding up;
(10) any other repurchase obligations of the Company, subject to any
limitations of applicable law; and
(11) any other designations, preferences, limitations or relative
rights of shares of that series.
Any of the designations, preferences, limitations or relative rights (including
the voting rights) of any series of Preference Stock may be dependent on facts
ascertainable outside these Articles of Incorporation.
Shares of any series of Preference Stock shall have no voting rights
except as required by law or as provided in the relative rights and preferences
of such series.
SERIES A PREFERENCE STOCK
1. Designation and Amount. There shall be a series of Preference
Stock that shall be designated as "Series A Preference Stock," and the number
of shares constituting such series shall be 700,000. Such number of shares may
be increased or decreased by resolution of the Board of Directors; provided,
however, that no decrease shall reduce the number of shares of Series A
Preference Stock to less than the number of shares then issued and outstanding
plus the number of shares issuable upon exercise of outstanding rights, options
or warrants or upon conversion of outstanding securities issued by the
Corporation.
2. Dividends and Distributions.
(A) Subject to the prior and superior rights of the holders of (i) any
shares of any series of Preference Stock ranking prior and superior to the
shares of Series A Preference Stock with respect to dividends and (ii) any
shares of Preferred Stock, the holders of shares of Series A Preference Stock,
in preference to the holders of shares of any class or series of stock of the
Corporation ranking junior to the Series A Preference Stock, shall be entitled
to receive, when, as and if declared by the Board of Directors out of assets of
the Corporation legally available for the purpose, quarterly dividends payable
in cash on the first day of January, April, July and October in each year (each
such date being referred to herein as a "Quarterly Dividend Payment Date"),
commencing on the first Quarterly Dividend Payment Date after the first
issuance of a share or fraction of a share of Series A Preference Stock, in an
amount per share (rounded to the nearest cent) equal to the greater of (a)
$2.00 or (b) the Adjustment Number (as defined below) times the aggregate per
share amount of all cash dividends, and the Adjustment Number times the
aggregate per share amount (payable in kind) of all non-cash dividends or other
distributions other than a dividend payable in shares of Common Stock or a
subdivision of the outstanding shares of
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12
Common Stock (by reclassification or otherwise), declared on the Common Stock,
without par value, of the Corporation (the "Common Stock") since the
immediately preceding Quarterly Dividend Payment Date, or, with respect to the
first Quarterly Dividend Payment Date, since the first issuance of any share or
fraction of a share of Series A Preference Stock. The "Adjustment Number"
shall initially be 1000. In the event the Corporation shall at any time after
the effectiveness of the merger of Houston Industries Incorporated with and
into the Corporation (the "Effective Date") (i) declare any dividend on Common
Stock payable in shares of Common Stock, (ii) subdivide the outstanding Common
Stock or (iii) combine the outstanding Common Stock into a smaller number of
shares, then in each such case the Adjustment Number in effect immediately
prior to such event shall be adjusted by multiplying such Adjustment Number by
a fraction the numerator of which is the number of shares of Common Stock
outstanding immediately after such event and the denominator of which is the
number of shares of Common Stock that were outstanding immediately prior to
such event.
(B) The Corporation shall declare a dividend or distribution on
the Series A Preference Stock as provided in paragraph (A) above immediately
after it declares a dividend or distribution on the Common Stock (other than a
dividend payable in shares of Common Stock); provided that, in the event no
dividend or distribution shall have been declared on the Common Stock during
the period between any Quarterly Dividend Payment Date and the next subsequent
Quarterly Dividend Payment Date, a dividend of $2.00 per share on the Series A
Preference Stock shall nevertheless be payable on such subsequent Quarterly
Dividend Payment Date.
(C) Dividends shall begin to accrue and be cumulative on outstanding
shares of Series A Preference Stock from the Quarterly Dividend Payment Date
next preceding the date of issue of such shares of Series A Preference Stock,
unless the date of issue of such shares is prior to the record date for the
first Quarterly Dividend Payment Date, in which case dividends on such shares
shall begin to accrue from the date of issue of such shares, or unless the date
of issue is a Quarterly Dividend Payment Date or is a date after the record
date for the determination of holders of shares of Series A Preference Stock
entitled to receive a quarterly dividend and before such Quarterly Dividend
Payment Date, in either of which events such dividends shall begin to accrue
and be cumulative from such Quarterly Dividend Payment Date. Accrued but
unpaid dividends shall not bear interest. Dividends paid on the shares of
Series A Preference Stock in an amount less than the total amount of such
dividends at the time accrued and payable on such shares shall be allocated pro
rata on a share-by-share basis among all such shares at the time outstanding.
The Board of Directors may fix a record date for the determination of holders
of shares of Series A Preference Stock entitled to receive payment of a
dividend or distribution declared thereon.
3. Voting Rights. The holders of shares of Series A Preference Stock
shall have the following voting rights:
(A) Each share of Series A Preference Stock shall entitle the holder
thereof to a number of votes equal to the Adjustment Number on all matters
submitted to a vote of the shareholders of the Corporation.
(B) Except as otherwise provided herein, in the Restated Articles
of Incorporation or by law, the holders of shares of Series A Preference Stock,
the holders of shares of any other
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13
class or series entitled to vote with the Common Stock and the holders of
shares of Common Stock shall vote together as one class on all matters
submitted to a vote of shareholders of the Corporation.
(C)(i) If at any time dividends on any Series A Preference Stock shall
be in arrears in an amount equal to six quarterly dividends thereon, the
occurrence of such contingency shall mark the beginning of a period (herein
called a "default period") that shall extend until such time when all accrued
and unpaid dividends for all previous quarterly dividend periods and for the
current quarterly dividend period on all shares of Series A Preference Stock
then outstanding shall have been declared and paid or set apart for payment.
During each default period, (1) the number of Directors shall be increased by
two, effective as of the time of election of such Directors as herein provided,
and (2) the holders of Preference Stock (including holders of the Series A
Preference Stock) upon which these or like voting rights have been conferred
and are exercisable (the "Voting Preference Stock") with dividends in arrears
in an amount equal to six quarterly dividends thereon, voting as a class,
irrespective of series, shall have the right to elect such two Directors.
(ii) During any default period, such voting right of the holders
of Series A Preference Stock may be exercised initially at a special meeting
called pursuant to subparagraph (iii) of this Section 3(C) or at any annual
meeting of shareholders, and thereafter at annual meetings of shareholders,
provided that such voting right shall not be exercised unless the holders of at
least one-third in number of the shares of Voting Preference Stock outstanding
shall be present in person or by proxy. The absence of a quorum of the holders
of Common Stock shall not affect the exercise by the holders of Voting
Preference Stock of such voting right.
(iii) Unless the holders of Voting Preference Stock shall, during an
existing default period, have previously exercised their right to elect
Directors, the Board of Directors may order, or any shareholder or shareholders
owning in the aggregate not less than ten percent of the total number of shares
of Voting Preference Stock outstanding, irrespective of series, may request,
the calling of a special meeting of the holders of Voting Preference Stock,
which meeting shall thereupon be called by the Chairman of the Board, the
President, a Vice President or the Secretary of the Corporation. Notice of
such meeting and of any annual meeting at which holders of Voting Preference
Stock are entitled to vote pursuant to this paragraph (C)(iii) shall be given
to each holder of record of Voting Preference Stock by mailing a copy of such
notice to him at his last address as the same appears on the books of the
Corporation. Such meeting shall be called for a time not earlier than 20 days
and not later than 60 days after such order or request or, in default of the
calling of such meeting within 60 days after such order or request, such
meeting may be called on similar notice by any shareholder or shareholders
owning in the aggregate not less than ten percent of the total number of shares
of Voting Preference Stock outstanding. Notwithstanding the provisions of this
paragraph (C)(iii), no such special meeting shall be called during the period
within 60 days immediately preceding the date fixed for the next annual meeting
of the shareholders.
(iv) In any default period, after the holders of Voting Preference
Stock shall have exercised their right to elect Directors voting as a class,
(x) the Directors so elected by the holders of Voting Preference Stock shall
continue in office until their successors shall have been elected by such
holders or until the expiration of the default period, and (y) any vacancy in
the Board of
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14
Directors may be filled by vote of a majority of the remaining Directors
theretofore elected by the holders of the class or classes of stock which
elected the Director whose office shall have become vacant. References in this
paragraph (C) to Directors elected by the holders of a particular class or
classes of stock shall include Directors elected by such Directors to fill
vacancies as provided in clause (y) of the foregoing sentence.
(v) Immediately upon the expiration of a default period, (x) the
right of the holders of Voting Preference Stock as a class to elect Directors
shall cease, (y) the term of any Directors elected by the holders of Voting
Preference Stock as a class shall terminate and (z) the number of Directors
shall be such number as may be provided for in the Restated Articles of
Incorporation or Bylaws irrespective of any increase made pursuant to the
provisions of paragraph (C) of this Section 3 (such number being subject,
however, to change thereafter in any manner provided by law or in the Restated
Articles of Incorporation or Bylaws). Any vacancies in the Board of Directors
effected by the provisions of clauses (y) and (z) in the preceding sentence may
be filled by a majority of the remaining Directors.
(D) Except as set forth herein, holders of Series A Preference Stock
shall have no special voting rights and their consent shall not be required
(except to the extent they are entitled to vote with holders of Common Stock as
set forth herein) for taking any corporate action.
4. Certain Restrictions.
(A) Whenever quarterly dividends or other dividends or distributions
payable on the Series A Preference Stock as provided in Section 2 are in
arrears, thereafter and until all accrued and unpaid dividends and
distributions, whether or not declared, on shares of Series A Preference Stock
outstanding shall have been paid in full, the Corporation shall not
(i) declare or pay dividends on, make any other distributions on,
or redeem or purchase or otherwise acquire for consideration any shares of
stock ranking junior (either as to dividends or upon liquidation,
dissolution or winding up) to the Series A Preference Stock;
(ii) declare or pay dividends on or make any other distributions
on any shares of stock ranking on a parity (either as to dividends or upon
liquidation, dissolution or winding up) with the Series A Preference Stock,
except dividends paid ratably on the Series A Preference Stock and all such
parity stock on which dividends are payable or in arrears in proportion to
the total amounts to which the holders of all such shares are then
entitled; or
(iii) redeem or purchase or otherwise acquire for consideration any
shares of Series A Preference Stock, or any shares of stock ranking on a
parity with the Series A Preference Stock, except in accordance with a
purchase offer made in writing or by publication (as determined by the
Board of Directors) to all holders of Series A Preference Stock, or to all
such holders and the holders of any such shares ranking on a parity
therewith, upon such terms as the Board of Directors, after consideration
of the respective annual dividend rates and other relative rights and
preferences of the respective series and classes, shall determine in good
faith will result in fair and equitable treatment among the respective
series or classes.
Page 14 of 26
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(B) The Corporation shall not permit any subsidiary of the
Corporation to purchase or otherwise acquire for consideration any shares of
stock of the Corporation unless the Corporation could, under paragraph (A) of
this Section 4, purchase or otherwise acquire such shares at such time and in
such manner.
5. Reacquired Shares. Any shares of Series A Preference Stock
purchased or otherwise acquired by the Corporation in any manner whatsoever
shall be retired and canceled promptly after the acquisition thereof. All such
shares shall upon their cancellation become authorized but unissued shares of
Preference Stock and may be reissued as part of a new series of Preference
Stock to be created by resolution or resolutions of the Board of Directors,
subject to any conditions and restrictions on issuance set forth herein.
6. Liquidation, Dissolution or Winding Up. (A) Upon any
liquidation (voluntary or otherwise), dissolution or winding up of the
Corporation, no distribution shall be made to the holders of shares of stock
ranking junior (either as to dividends or upon liquidation, dissolution or
winding up) to the Series A Preference Stock unless, prior thereto, the holders
of shares of Series A Preference Stock shall have received $1000 per share,
plus an amount equal to accrued and unpaid dividends and distributions thereon,
whether or not declared, to the date of such payment (the "Series A Liquidation
Preference"). Following the payment of the full amount of the Series A
Liquidation Preference, no additional distributions shall be made to the
holders of shares of Series A Preference Stock unless, prior thereto, the
holders of shares of Common Stock shall have received an amount per share (the
"Common Adjustment") equal to the quotient obtained by dividing (i) the Series
A Liquidation Preference by (ii) the Adjustment Number. Following the payment
of the full amount of the Series A Liquidation Preference and the Common
Adjustment in respect of all outstanding shares of Series A Preference Stock
and Common Stock, respectively, holders of Series A Preference Stock and
holders of shares of Common Stock shall, subject to the prior rights of all
other series of Preference Stock, if any, ranking prior thereto, receive their
ratable and proportionate share of the remaining assets to be distributed in
the ratio of the Adjustment Number to 1 with respect to such Series A
Preference Stock and Common Stock, on a per share basis, respectively.
(B) In the event, however, that there are not sufficient assets
available to permit payment in full of the Series A Liquidation Preference and
the liquidation preferences of all other series of Preference Stock, if any,
that rank on a parity with the Series A Preference Stock, then such remaining
assets shall be distributed ratably to the holders of such parity shares in
proportion to their respective liquidation preferences. In the event, however,
that there are not sufficient assets available to permit payment in full of the
Common Adjustment, then such remaining assets shall be distributed ratably to
the holders of Common Stock.
(C) Neither the merger or consolidation of the Corporation into or with
another corporation nor the merger or consolidation of any other corporation
into or with the Corporation shall be deemed to be a liquidation, dissolution
or winding up of the Corporation within the meaning of this Section 6, but the
sale, lease or conveyance all or substantially all of the Corporation's assets
shall be deemed to be a liquidation, dissolution or winding up of the
Corporation within the meaning of this Section 6.
Page 15 of 26
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7. Consolidation, Merger, etc. In case the Corporation shall enter
into any consolidation, merger, combination, share exchange or other
transaction in which the shares of Common Stock are exchanged for or changed
into other stock or securities, cash and/or any other property, then in any
such case each share of Series A Preference Stock shall at the same time be
similarly exchanged or changed in an amount per share equal to the Adjustment
Number times the aggregate amount of stock, securities, cash and/or any other
property (payable in kind), as the case may be, into which or for which each
share of Common Stock is changed or exchanged.
8. Redemption. (A) The Corporation, at its option, may redeem shares
of the Series A Preference Stock in whole at any time and in part from time to
time, at a redemption price equal to the Adjustment Number times the current
per share market price (as such term is hereinafter defined) of the Common
Stock on the date of the mailing of the notice of redemption, together with
unpaid accumulated dividends to the date of such redemption. The "current per
share market price" on any date shall be deemed to be the average of the
closing price per share of such Common Stock for the ten consecutive Trading
Days (as such term is hereinafter defined) immediately prior to such date;
provided, however, that in the event that the current per share market price of
the Common Stock is determined during a period following the announcement of
(A) a dividend or distribution on the Common Stock other than a regular
quarterly cash dividend or (B) any subdivision, combination or reclassification
of such Common Stock and the ex-dividend date for such dividend or
distribution, or the record date for such subdivision, combination or
reclassification, shall not have occurred prior to the commencement of such ten
Trading Day period, then, and in each such case, the current per share market
price shall be properly adjusted to take into account ex-dividend trading. The
closing price for each day shall be the last sales price, regular way, or, in
case no such sale takes place on such day, the average of the closing bid and
asked prices, regular way, in either case as reported in the principal
transaction reporting system with respect to securities listed or admitted to
trading on the New York Stock Exchange, or, if the Common Stock is not listed
or admitted to trading on the New York Stock Exchange, on the principal
national securities exchange on which the Common Stock is listed or admitted to
trading, or, if the Common Stock is not listed or admitted to trading on any
national securities exchange but sales price information is reported for such
security, as reported by the National Association of Securities Dealers, Inc.
Automated Quotations System ("Nasdaq") or such other self-regulatory
organization or registered securities information processor (as such terms are
used under the Securities Exchange Act of 1934, as amended) that then reports
information concerning the Common Stock, or, if sales price information is not
so reported, the average of the high bid and low asked prices in the
over-the-counter market on such day, as reported by Nasdaq or such other
entity, or, if on any such date the Common Stock is not quoted by any such
entity, the average of the closing bid and asked prices as furnished by a
professional market maker making a market in the Common Stock selected by the
Board of Directors of the Corporation. If on any such date no such market
maker is making a market in the Common Stock, the fair value of the Common
Stock on such date as determined in good faith by the Board of Directors of the
Corporation shall be used. The term "Trading Day" shall mean a day on which
the principal national securities exchange on which the Common Stock is listed
or admitted to trading is open for the transaction of business, or, if the
Common Stock is not listed or admitted to trading on any national securities
exchange but is quoted by Nasdaq, a day on which Nasdaq reports trades, or, if
the Common Stock is not so quoted, a Monday, Tuesday, Wednesday, Thursday or
Friday on which banking institutions in the State of Texas are not authorized
or obligated by law or executive order to close.
Page 16 of 26
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(B) In the event that fewer than all the outstanding shares of the
Series A Preference Stock are to be redeemed, the number of shares to be
redeemed shall be determined by the Board of Directors and the shares to be
redeemed shall be determined by lot or pro rata as may be determined by the
Board of Directors or by any other method that may be determined by the Board
of Directors in its sole discretion to be equitable.
(C) Notice of any such redemption shall be given by mailing to the
holders of the shares of Series A Preference Stock to be redeemed a notice of
such redemption, first class postage prepaid, not later than the twentieth day
and not earlier than the sixtieth day before the date fixed for redemption, at
their last address as the same shall appear upon the books of the Corporation.
Each such notice shall state: (i) the redemption date; (ii) the number of
shares to be redeemed and, if fewer than all the shares held by such holder are
to be redeemed, the number of such shares to be redeemed from such holder;
(iii) the redemption price; (iv) the place or places where certificates for
such shares are to be surrendered for payment of the redemption price; and (v)
that dividends on the shares to be redeemed will cease to accrue on the close
of business on such redemption date. Any notice that is mailed in the manner
herein provided shall be conclusively presumed to have been duly given, whether
or not the shareholder received such notice, and failure duly to give such
notice by mail, or any defect in such notice, to any holder of Series A
Preference Stock shall not affect the validity of the proceedings for the
redemption of any other shares of Series A Preference Stock that are to be
redeemed. On or after the date fixed for redemption as stated in such notice,
each holder of the shares called for redemption shall surrender the certificate
evidencing such shares to the Corporation at the place designated in such
notice and shall thereupon be entitled to receive payment of the redemption
price. If fewer than all the shares represented by any such surrendered
certificate are redeemed, a new certificate shall be issued representing the
unredeemed shares.
(D) The shares of Series A Preference Stock shall not be subject to the
operation of any purchase, retirement or sinking fund.
9. Ranking. The Series A Preference Stock shall rank junior to all
series of the Corporation's Preferred Stock and to all other series of the
Corporation's Preference Stock (other than any such series of Preference Stock
the terms of which shall provide otherwise) in respect to dividend and
liquidation rights and shall rank senior to the Common Stock as to such
matters.
10. Amendment. At any time that any shares of Series A Preference
Stock are outstanding, the Restated Articles of Incorporation of the
Corporation shall not be amended in any manner which would materially alter or
change the powers, preferences or special rights of the Series A Preference
Stock so as to affect them adversely without the affirmative vote of the
holders of two-thirds or more of the outstanding shares of Series A Preference
Stock, voting separately as a class.
11. Fractional Shares. Series A Preference Stock may be issued in
fractions of a share that shall entitle the holder, in proportion to such
holder's fractional shares, to exercise voting rights, receive dividends,
participate in distributions and to have the benefit of all other rights of
holders of Series A Preference Stock.
Page 17 of 26
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SERIES B PREFERENCE STOCK
1. Designation and Amount. There shall be a series of Preference
Stock that shall be designated as "Series B Preference Stock," and the number
of shares constituting such series shall be 27,000. Such number of shares may
be increased or decreased by resolution of the Board of Directors; provided,
however, that no decrease shall reduce the number of shares of Series B
Preference Stock to less than the number of shares then issued and outstanding
plus the number of shares issuable upon exercise of outstanding rights, options
or warrants or upon conversion of outstanding securities issued by the
Corporation.
2. Certain Defined Terms.
Capitalized terms not otherwise defined herein shall have the
respective meanings ascribed to them in that certain Credit Agreement (the
"Credit Agreement") to be entered into among Houston Industries FinanceCo LP, a
Delaware limited partnership to be the Borrower thereunder, Houston Industries
Incorporated, a Texas corporation, the Banks parties thereto, and The Chase
Manhattan Bank, as in effect at the time of the initial funding thereunder, and
as such terms may be amended in the Credit Agreement to the extent approved by
the affirmative vote of the holders of two-thirds or more of the outstanding
shares of Series B Preference Stock, voting separately as a class. In
addition, the following terms are used herein as defined below:
(i) "Computed Dividend Portion" means, within any Dividend
Interval Period, an amount equal to the interest expense accrued on the
indebtedness for borrowed money of the Borrower from the prior Dividend
Payment Date to the Determination Date for the current Dividend Interval
Period.
(ii) "Determination Date" means the date occurring five Business
Days prior to a Dividend Declaration Date.
(iii) "Dividend" means the dividend on the Series B Preference
Stock declared by the Corporation's Board of Directors with respect to a
Dividend Interval Period.
(iv) "Dividend Declaration Amount" means, as of any
Determination Date, the Preliminary Dividend Amount, less the sum of (a)
the Interest Reconciliation Amount, (b) the Support Agreement
Reconciliation Amount, and (c) the Other Sources Reconciliation Amount.
The Dividend Declaration Amount may be greater than or less than the
Preliminary Dividend Amount.
(v) "Dividend Declaration Date" means the date on which
Dividends on the Series B Preference Stock are declared during a Dividend
Interval Period by the Corporation's Board of Directors.
(vi) "Dividend Interval Period" means the period beginning on a
Dividend Payment Date and extending to the next Dividend Payment Date.
(vii) "Dividend Payment Date" means the date occurring five
Business Days after a Dividend Declaration Date.
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(viii) "Interest Reconciliation Amount" means an amount equal to
(a) the Preliminary Dividend Amount computed for the prior Dividend
Interval Period, less (b) the actual interest expense accrued on the
indebtedness for borrowed money of the Borrower during such period.
(ix) "Other Sources Reconciliation Amount" means the sum of (a)
to the extent applied to pay interest on the indebtedness for borrowed
money of the Borrower or available in cash on the current Determination
Date therefor, the amount of income or cash proceeds received by the
Borrower from sources other than pursuant to the Support Agreement
(including, without limitation, interest received on loans to Affiliates),
and (b) the cash proceeds of new borrowings under the Credit Agreement that
are utilized to pay interest on outstanding borrowings thereunder, from the
Determination Date occurring in the Prior Dividend Interval Period to the
Determination Date occurring in the current Dividend Interval Period.
(x) "Preliminary Dividend Amount" means the sum of the Computed
Dividend Portion and the Projected Dividend Portion.
(xi) "Projected Dividend Portion" means, within any Dividend
Interval Period, an amount equal to the projected interest expense that
will be accrued on the indebtedness for borrowed money of the Borrower from
the Determination Date for such Dividend Interval Period to the Dividend
Payment Date.
(xii) "Support Agreement Reconciliation Amount" means the amount
of cash payments made pursuant to the Support Agreement by the Corporation
to the Borrower from the Determination Date occurring in the immediately
prior Dividend Interval Period to the Determination Date occurring in the
current Dividend Interval Period.
3. Dividends and Distributions.
(A) Subject to the prior and superior rights of the holders of
(i) any shares of any series of Preference Stock ranking prior and superior to
the shares of Series B Preference Stock with respect to dividends and (ii) any
shares of Preferred Stock, the holders of shares of Series B Preference Stock,
in preference to the holders of shares of any class or series of stock of the
Corporation ranking junior to the Series B Preference Stock, shall be entitled
to receive the amounts set forth below, when, as and if declared by the Board
of Directors in the manner described below out of assets of the Corporation
legally available for the purpose:
(a) On every regularly scheduled meeting of the
Corporation's Board of Directors while any shares of Series B Preference
Stock remain outstanding, the Board of Directors shall declare an aggregate
Dividend equal to the lesser of (i) the Dividend Declaration Amount or (ii)
the Excess Cash Flow projected to be available as of the applicable
Dividend Payment Date with respect to the then current Dividend Interval
Period.
(b) If, with respect to any Dividend Interval Period, the
aggregate Dividend declared by the Corporation's Board of Directors is less
than the Dividend Declaration Amount for such Dividend Interval Period
because the Excess Cash Flow projected to be available as of the applicable
Dividend Payment Date is less than the Dividend Declaration
Page 19 of 26
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Amount, the amount of such deficiency shall be added to the Dividend
Declaration Amount computed for the next Dividend Interval Period and such
aggregate amount shall become the Dividend Declaration Amount for such
period. The Dividend for such succeeding Dividend Interval Period shall
equal the Dividend Declaration Amount unless such amount would exceed the
Excess Cash Flow projected to be available as of the applicable Dividend
Payment Date, in which case the Dividend shall be the amount of the
projected Excess Cash Flow.
(c) The aggregate Dividends paid on the shares of Series B
Preference Stock in accordance with this Section 3(A) shall be allocated pro
rata on a share-by-share basis among all such shares at the time outstanding.
(B) Accrued but unpaid dividends shall not bear interest. The
Board of Directors may fix a record date for the determination of holders of
shares of Series B Preference Stock entitled to receive payment of a dividend
or distribution declared thereon.
4. Voting Rights. Except as otherwise required by law or the
Restated Articles of Incorporation of the Corporation or as otherwise provided
herein, the holders of shares of Series B Preference Stock shall have no voting
rights.
5. Certain Restrictions. At any time when dividends or distributions
payable on the Series B Preference Stock as provided in Section 3 are in
arrears, thereafter and until all accrued and unpaid dividends and
distributions, whether or not declared, on shares of Series B Preference Stock
outstanding shall have been paid in full, the Corporation shall not:
(i) declare dividends on, or redeem or purchase or otherwise
acquire for consideration any shares of stock ranking junior (either as to
dividends or upon liquidation, dissolution or winding up) to the Series B
Preference Stock; or
(ii) declare dividends on any shares of stock ranking on a
parity (either as to dividends or upon liquidation, dissolution or winding
up) with the Series B Preference Stock, except dividends declared ratably
on the Series B Preference Stock and all such parity stock on which
dividends are payable or in arrears in proportion to the total amounts to
which the holders of all such shares are then entitled.
6. Reacquired Shares. Any shares of Series B Preference Stock
purchased or otherwise acquired by the Corporation in any manner whatsoever
shall be retired and canceled promptly after the acquisition thereof. All such
shares shall upon their cancellation become authorized but unissued shares of
Preference Stock and may be reissued as part of a new series of Preference
Stock to be created by resolution or resolutions of the Board of Directors,
subject to any conditions and restrictions on issuance set forth herein.
7. Liquidation, Dissolution or Winding Up.
(A) Upon any liquidation (voluntary or otherwise), dissolution or
winding up of the Corporation, no distribution shall be made to the holders of
shares of stock ranking junior (either as to dividends or upon liquidation,
dissolution or winding up) to the Series B Preference Stock unless, prior
thereto, the holders of shares of Series B Preference Stock shall have received
Page 20 of 26
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$100,000 per share, plus an amount equal to accrued and unpaid dividends and
distributions thereon, whether or not declared, to the date of such payment
(the "Series B Liquidation Preference"). Following the payment of the full
amount of the Series B Liquidation Preference, no additional distributions
shall be made to the holders of Series B Preference Stock.
(B) In the event that there are not sufficient assets available to
permit payment in full of the Series B Liquidation Preference and the
liquidation preferences of all other series of Preference Stock, if any, that
rank on a parity with the Series B Preference Stock, then such remaining assets
shall be distributed ratably to the holders of such parity shares in proportion
to their respective liquidation preferences.
(C) Neither the merger or consolidation of the Corporation into or
with another corporation nor the merger or consolidation of any other
corporation into or with the Corporation shall be deemed to be a liquidation,
dissolution or winding up of the Corporation within the meaning of this Section
7, but the sale, lease or conveyance of all or substantially all of the
Corporation's assets shall be deemed to be a liquidation, dissolution or
winding up of the Corporation within the meaning of this Section 7.
8. Redemption.
(A) The Corporation, at its option, may redeem shares of the Series B
Preference Stock in whole at any time and in part from time to time, at a
redemption price equal to $100,000 per share, plus, in the event all
outstanding shares of the Series B Preference Shares are to be redeemed, unpaid
accumulated dividends to the date of redemption.
(B) In the event that fewer than all the outstanding shares of the
Series B Preference Stock are to be redeemed, (i) the number of shares to be
redeemed shall be determined by the Board of Directors and the shares to be
redeemed shall be determined by lot or pro rata as may be determined by the
Board of Directors or by any other method that may be determined by the Board
of Directors in its sole discretion to be equitable.
(C) Except to the extent notice is waived in accordance with
applicable law, notice of any such redemption shall be given by mailing to the
holders of the shares of Series B Preference Stock to be redeemed a notice of
such redemption, first class postage prepaid, not later than the twentieth day
and not earlier than the sixtieth day before the date fixed for redemption, at
their last address as the same shall appear upon the books of the Corporation.
Each such notice shall state: (i) the redemption date; (ii) the number of
shares to be redeemed and, if fewer than all the shares held by such holder are
to be redeemed, the number of such shares to be redeemed from such holder;
(iii) the redemption price; (iv) the place or places where certificates for
such shares are to be surrendered for payment of the redemption price; and (v)
that dividends on the shares to be redeemed will cease to accrue on the close
of business on such redemption date. Any notice that is mailed in the manner
herein provided shall be conclusively presumed to have been duly given, whether
or not the shareholder received such notice, and failure duly to give such
notice by mail, or any defect in such notice, to any holder of Series B
Preference Stock shall not affect the validity of the proceedings for the
redemption of any other shares of Series B Preference Stock that are to be
redeemed. On or after the date fixed for redemption as stated in such notice,
each holder of the shares called for redemption shall surrender the certificate
evidencing such shares
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22
to the Corporation at the place designated in such notice and shall thereupon
be entitled to receive payment of the redemption price. If fewer than all the
shares represented by any such surrendered certificate are redeemed, a new
certificate shall be issued representing the unredeemed shares.
(D) The shares of Series B Preference Stock shall not be subject to
the operation of any purchase, retirement or sinking fund.
9. Ranking. The Series B Preference Stock shall rank junior to all
series of the Corporation's Preferred Stock and pari passu with all other
series of the Corporation's Preference Stock (other than any such series of
Preference Stock the terms of which shall provide otherwise) in respect to
dividend and liquidation rights and shall rank senior to the Common Stock as to
such matters.
10. Amendment. At any time that any shares of Series B Preference
Stock are outstanding, the Restated Articles of Incorporation of the
Corporation shall not be amended in any manner which would materially alter or
change the powers, preferences or special rights of the Series B Preference
Stock so as to affect them adversely without the affirmative vote of the
holders of two-thirds or more of the outstanding shares of Series B Preference
Stock, voting separately as a class.
11. Fractional Shares. Series B Preference Stock may be issued in
fractions of a share that shall entitle the holder, in proportion to such
holder's fractional shares, to exercise any voting rights, receive dividends,
participate in distributions and to have the benefit of all other rights of
holders of Series B Preference Stock.
DIVISION D -- COMMON STOCK
1. Dividends. Dividends may be paid on the Common Stock, as the Board of
Directors shall from time to time determine, out of any assets of the Company
available for such dividends after full cumulative dividends on all outstanding
shares of capital stock of all series ranking senior to the Common Stock in
respect of dividends and liquidation rights (referred to in this Division D as
"stock ranking senior to the Common Stock") have been paid, or declared and a
sum sufficient for the payment thereof set apart, for all past quarterly
dividend periods, and after or concurrently with making payment of or provision
for dividends on the stock ranking senior to the Common Stock for the then
current quarterly dividend period.
2. Distribution of Assets. In the event of any liquidation, dissolution
or winding up of the Company, or any reduction or decrease of its capital stock
resulting in a distribution of assets to the holders of its Common Stock, after
there shall have been paid to or set aside for the holders of the stock ranking
senior to the Common Stock the full preferential amounts to which they are
respectively entitled, the holders of the Common Stock shall be entitled to
receive, pro rata, all of the remaining assets of the Company available for
distribution to its stockholders. The Board of Directors, by vote of a
majority of the members thereof, may distribute in kind to the holders of the
Common Stock such remaining assets of the Company, or may sell, transfer or
otherwise dispose of all or any of the remaining property and assets of the
Company to any other corporation or other purchaser and receive payment
therefor wholly or partly in cash or property,
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and/or in stock of any such corporation, and/or in obligations of such
corporation or other purchaser, and may sell all or any part of the
consideration received therefor and distribute the same or the proceeds thereof
to the holders of the Common Stock.
3. Voting Rights. Subject to the voting rights expressly conferred under
prescribed conditions upon the stock ranking senior to the Common Stock, the
holders of the Common Stock shall exclusively possess full voting power for the
election of directors and for all other purposes.
DIVISION E -- PROVISIONS APPLICABLE TO ALL CLASSES OF STOCK
1. Preemptive Rights. No holder of any stock of the Company shall be
entitled as of right to purchase or subscribe for any part of any unissued or
treasury stock of the Company, or of any additional stock of any class, to be
issued by reason of any increase of the authorized capital stock of the
Company, or to be issued from any unissued or additionally authorized stock, or
of bonds, certificates of indebtedness, debentures or other securities
convertible into stock of the Company, but any such unissued or treasury stock,
or any such additional authorized issue of new stock or securities convertible
into stock, may be issued and disposed of by the Board of Directors to such
persons, firms, corporations or associations, and upon such terms as the Board
of Directors may, in its discretion, determine, without offering to the
stockholders then of record, or any class of stockholders, any thereof, on the
same terms or any terms.
2. Votes Per Share. Any stockholder of the Company having the right to
vote at any meeting of the stockholders or of any class or series thereof,
shall be entitled to one vote for each share of stock held by him, provided
that no holder of Common Stock of the Company shall be entitled to cumulate his
votes for the election of one or more directors or for any other purpose.
ARTICLE VII
The Company has heretofore complied with the requirements of law as to the
initial minimum capital requirements without which it could not commence
business under the Texas Business Corporation Act.
ARTICLE VIII
The power to alter, amend or repeal the Bylaws of the Company, or to adopt
new Bylaws, is hereby delegated to the Board of Directors of the Company.
ARTICLE IX
A director of the Company shall not be liable to the Company or its
shareholders for monetary damages for any act or omission in the director's
capacity as a director, except that this Article IX does not eliminate or limit
the liability of a director for:
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(a) a breach of a director's duty of loyalty to the Company or its
shareholders;
(b) an act or omission not in good faith or that involves intentional
misconduct or a knowing violation of the law;
(c) a transaction from which a director received an improper benefit,
whether or not the benefit resulted from an action taken within the scope
of the directors' office;
(d) an act or omission for which the liability of a director is
expressly provided for by statute; or
(e) an act related to an unlawful stock repurchase or payment of a
dividend.
If the Texas Miscellaneous Corporation Laws Act or the Texas Business
Corporation Act is amended, after approval of the foregoing paragraph by the
shareholder or shareholders of the Company entitled to vote thereon, to
authorize action further eliminating or limiting the personal liability of
directors, then the liability of a director of the Company shall be eliminated
or limited to the fullest extent permitted by such statutes, as so amended.
Any repeal or modification of the foregoing paragraph shall not adversely
affect any right or protection of a director of the Company existing at the
time of such repeal or modification.
ARTICLE X
To the extent permitted by applicable law and except as expressly
provided in the relative rights and preferences of any series of Preference
Stock, the vote of stockholders required for approval of any action that is
recommended to stockholders by the Board of Directors and for which applicable
law requires a stockholder vote, including without limitation (1) any such plan
of merger, consolidation or exchange, (2) any such disposition of assets, (3)
any such dissolution of the Company, and (4) any such amendment of these
Articles of Incorporation, shall, if a greater vote of stockholders is provided
for by the Texas Business Corporation Act or other applicable law, instead be
the affirmative vote of the holders of a majority of the outstanding shares
entitled to vote thereon, unless any class or series of shares is entitled to
vote as a class thereon, in which event the vote required shall be the
affirmative vote of the holders of a majority of the outstanding shares within
each class or series of shares entitled to vote thereon as a class and at least
a majority of the outstanding shares otherwise entitled to vote thereon;
provided, however, that the voting rights of the holders of Preferred Stock are
not affected by this ARTICLE X. The foregoing shall not apply to any action or
stockholder vote authorized or required by any addition, amendment or
modification to applicable law that becomes effective after November 30, 1996
if
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and to the extent a bylaw adopted by the Board of Directors or the stockholders
so provides. Any repeal, amendment or modification of any such bylaw so
adopted shall require the same vote of stockholders as would be required to
approve the action or vote subject to such bylaw had the first sentence of this
Article X not applied to such action or vote.
HOUSTON INDUSTRIES INCORPORATED
/s/ HUGH RICE KELLY
-----------------------------------------
Hugh Rice Kelly
Executive Vice President, General Counsel
and Corporate Secretary
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CERTIFICATION
I certify that I am the duly elected and acting Executive Vice President,
General Counsel and Corporate Secretary of HOUSTON INDUSTRIES INCORPORATED, a
Texas corporation, and that the foregoing is a true and correct copy of the
Restated Articles of Incorporation of such Company as amended, supplemented and
in force as of the date hereof.
IN WITNESS WHEREOF, I have executed and sealed this Certification, this
eleventh day of September, 1997.
/s/ HUGH RICE KELLY
-----------------------------------------
Hugh Rice Kelly
Executive Vice President, General Counsel
and Corporate Secretary
[SEAL]
Page 26 of 26
1
EXHIBIT 3b
AMENDED AND RESTATED BYLAWS
OF
HOUSTON INDUSTRIES INCORPORATED
Adopted and Amended by Resolution of the Board of Directors on
December 4, 1996
ARTICLE I
CAPITAL STOCK
Section 1. Share Ownership. Shares for the capital stock of the
Company may be certificated or uncertificated. Owners of shares of the capital
stock of the Company shall be recorded in the share transfer records of the
Company and ownership of such shares shall be evidenced by a certificate or
book entry notation in the share transfer records of the Company. Any
certificates representing such shares shall be signed by the Chairman of the
Board, if there is one, the Chief Executive Officer, if there is one, the
President or a Vice President and either the Secretary or an Assistant
Secretary and shall be sealed with the seal of the Company, which signatures
and seal may be facsimiles. In case any officer who has signed or whose
facsimile signature has been placed upon such certificate shall have ceased to
be such officer before such certificate is issued, it may be issued by the
Company with the same effect as if he were such officer at the date of its
issuance.
Section 2. Shareholders of Record. The Board of Directors of the
Company may appoint one or more transfer agents or registrars of any class of
stock of the Company. The Company may be its own transfer agent if so
appointed by the Board of Directors. The Company shall be entitled to treat
the holder of record of any shares of the Company as the owner thereof for all
purposes, and shall not be bound to recognize any equitable or other claim to,
or interest in, such shares or any rights deriving from such shares, on the
part of any other person, including (but without limitation) a purchaser,
assignee or transferee, unless and until such other person becomes the holder
of record of such shares, whether or not the Company shall have either actual
or constructive notice of the interest of such other person.
Section 3. Transfer of Shares. The shares of the capital stock of
the Company shall be transferable in the share transfer records of the Company
by the holder of record thereof, or his duly authorized attorney or legal
representative. All certificates representing shares surrendered for transfer,
properly endorsed, shall be canceled and new certificates for a like number of
shares shall be issued therefor. In the case of lost, stolen, destroyed or
mutilated certificates representing shares
2
for which the Company has been requested to issue new certificates, new
certificates or other evidence of such new shares may be issued upon such
conditions as may be required by the Board of Directors or the Secretary for
the protection of the Company and any transfer agent or registrar.
Uncertificated shares shall be transferred in the share transfer records of the
Company upon the written instruction originated by the appropriate person to
transfer the shares.
Section 4. Shareholders of Record and Fixing of Record Date. For the
purpose of determining shareholders entitled to notice of or to vote at any
meeting of shareholders or any adjournment thereof, or entitled to receive a
distribution by the Company (other than a distribution involving a purchase or
redemption by the Company of any of its own shares) or a share dividend, or in
order to make a determination of shareholders for any other proper purpose
(other than determining shareholders entitled to consent to action by
shareholders proposed to be taken without a meeting of shareholders), the Board
of Directors may provide that the share transfer records shall be closed for a
stated period of not more than sixty days, and in the case of a meeting of
shareholders not less than ten days, immediately preceding the meeting, or it
may fix in advance a record date for any such determination of shareholders,
such date to be not more than sixty days, and in the case of a meeting of
shareholders not less than ten days, prior to the date on which the particular
action requiring such determination of shareholders is to be taken. If the
share transfer records are not closed and no record date is fixed for the
determination of shareholders entitled to notice of or to vote at a meeting of
shareholders, or shareholders entitled to receive a distribution (other than a
distribution involving a purchase or redemption by the Company of any of its
own shares) or a share dividend, the date on which notice of the meeting is
mailed or the date on which the resolution of the Board of Directors declaring
such distribution or share dividend is adopted, as the case may be, shall be
the record date for such determination of shareholders. When a determination
of shareholders entitled to vote at any meeting of shareholders has been made
as herein provided, such determination shall apply to any adjournment thereof
except where the determination has been made through the closing of the share
transfer records and the stated period of closing has expired.
ARTICLE II
MEETINGS OF SHAREHOLDERS
Section 1. Place of Meetings. All meetings of shareholders shall be
held at the registered office of the Company, in the City of Houston, Texas, or
at such other place within or without the State of Texas as may be designated
by the Board of Directors or officer calling the meeting.
Section 2. Annual Meeting. The annual meeting of the shareholders
shall be held on such date and at such time as shall be designated from time to
time by the Board of Directors or as may otherwise be stated in the notice of
the meeting. Failure to designate a time for the annual meeting or to hold the
annual meeting at the designated time shall not work a dissolution of the
Company.
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Section 3. Special Meetings. Special meetings of the shareholders
may be called by the Chairman of the Board, if there is one, the Chief
Executive Officer, if there is one, the President, the Secretary, the Board of
Directors, the holders of not less than one-tenth of all of the shares
outstanding and entitled to vote at such meeting or such other persons as may
be authorized in the Articles of Incorporation of the Company.
Section 4. Notice of Meeting. Written or printed notice of all
meetings stating the place, day and hour of the meeting and, in case of a
special meeting, the purpose or purposes for which the meeting is called, shall
be delivered not less than ten nor more than sixty days before the date of the
meeting, either personally or by mail, by or at the direction of the Chairman
of the Board, if there is one, the Chief Executive Officer, if there is one,
the President, the Secretary or the officer or person calling the meeting to
each shareholder of record entitled to vote at such meetings . If mailed, such
notice shall be deemed to be delivered when deposited in the United States mail
addressed to the shareholder at his address as it appears on the share transfer
records of the Company, with postage thereon prepaid.
Any notice required to be given to any shareholder, under any
provision of the Texas Business Corporation Act, as amended (TBCA), the
Articles of Incorporation of the Company or these Bylaws, need not be given to
a shareholder if notice of two consecutive annual meetings and all notices of
meetings held during the period between those annual meetings, if any, or all
(but in no event less than two) payments (if sent by first class mail) of
distributions or interest on securities during a 12-month period have been
mailed to that person, addressed at his address as shown on the share transfer
records of the Company, and have been returned undeliverable. Any action or
meeting taken or held without notice to such person shall have the same force
and effect as if the notice had been duly given. If such a person delivers to
the Company a written notice setting forth his then current address, the
requirement that notice be given to that person shall be reinstated.
Section 5. Voting List. The officer or agent having charge of the
share transfer records for shares of the Company shall make, at least ten days
before each meeting of shareholders, a complete list of the shareholders
entitled to vote at such meeting or any adjournment thereof, arranged in
alphabetical order, with the address of and the number of shares held by each,
which list, for a period of ten days prior to such meeting, shall be kept on
file at the registered office of the Company and shall be subject to inspection
by any shareholder at any time during usual business hours. Such list shall
also be produced and kept open at the time and place of the meeting and shall
be subject to the inspection of any shareholder during the whole time of the
meeting. The original share transfer records shall be prima facie evidence as
to who are the shareholders entitled to examine such list or to vote at any
meeting of shareholders. Failure to comply with any requirements of this
Section 5 shall not affect the validity of any action taken at such meeting.
Section 6. Voting; Proxies. Except as otherwise provided in the
Articles of Incorporation of the Company or as otherwise provided in the TBCA,
each holder of shares of capital stock of the Company entitled to vote shall be
entitled to one vote for each share standing in his name on the records of the
Company, either in person or by proxy executed in writing by him or by his duly
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authorized attorney-in-fact. A proxy shall be revocable unless expressly
provided therein to be irrevocable and the proxy is coupled with an interest.
At each election of directors, every holder of shares of the Company entitled
to vote shall have the right to vote, in person or by proxy, the number of
shares owned by him for as many persons as there are directors to be elected,
and for whose election he has a right to vote, but in no event shall he be
permitted to cumulate his votes for one or more directors.
Section 7. Quorum and Vote of Shareholders. Except as otherwise
provided by law, the Articles of Incorporation of the Company or these Bylaws,
the holders of a majority of shares entitled to vote, represented in person or
by proxy, shall constitute a quorum at a meeting of shareholders, but, if a
quorum is not represented, a majority in interest of those represented may
adjourn the meeting from time to time. Directors shall be elected by a
plurality of the votes cast by the holders of shares entitled to vote in the
election of directors at a meeting of shareholders at which a quorum is
present. With respect to each matter other than the election of directors as
to which no other voting requirement is specified by law, the Articles of
Incorporation of the Company or in this Section 7 or in Article VII of these
Bylaws, the affirmative vote of the holders of a majority of the shares
entitled to vote on that matter and represented in person or by proxy at a
meeting at which a quorum is present shall be the act of the shareholders.
With respect to a matter submitted to a vote of the shareholders as to which a
shareholder approval requirement is applicable under the shareholder approval
policy of the New York Stock Exchange, Rule 16b-3 under the Securities Exchange
Act of 1934, as amended (Exchange Act), or any provision of the Internal
Revenue Code, in each case for which no higher voting requirement is specified
by law, the Articles of Incorporation of the Company or these Bylaws, the
affirmative vote of the holders of a majority of the shares entitled to vote
on, and voted for or against, that matter at a meeting at which a quorum is
present shall be the act of the shareholders, provided that approval of such
matter shall also be conditioned on any more restrictive requirement of such
shareholder approval policy, Rule 16b- 3 or Internal Revenue Code provision, as
applicable, being satisfied. With respect to the approval of independent
public accountants (if submitted for a vote of the shareholders), the
affirmative vote of the holders of a majority of the shares entitled to vote
on, and voted for or against, that matter at a meeting of shareholders at which
a quorum is present shall be the act of the shareholders.
Section 8. Presiding Officer and Conduct of Meetings. The Chairman
of the Board, if there is one, or in his absence, the Chief Executive Officer,
if there is one, or in his absence, the President shall preside at all meetings
of the shareholders or, if such officers are not present at a meeting, by such
other person as the Board of Directors shall designate or if no such person is
designated by the Board of Directors, the most senior officer of the Company
present at the meeting. The Secretary of the Company, if present, shall act as
secretary of each meeting of shareholders; if he is not present at a meeting,
then such person as may be designated by the presiding officer shall act as
secretary of the meeting. Meetings of shareholders shall follow reasonable and
fair procedure. Subject to the foregoing, the conduct of any meeting of
shareholders and the determination of procedure and rules shall be within the
absolute discretion of the officer presiding at such meeting (Chairman of the
Meeting), and there shall be no appeal from any ruling of the Chairman of the
Meeting with respect to procedure or rules. Accordingly, in any meeting of
shareholders or part thereof, the Chairman of
Page 4 of 20
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the Meeting shall have the sole power to determine appropriate rules or to
dispense with theretofore prevailing rules. Without limiting the foregoing,
the following rules shall apply:
(a) If disorder should arise which prevents continuation of
the legitimate business of meeting, the Chairman of the Meeting may
announce the adjournment of the meeting; and upon so doing, the
meeting shall be immediately adjourned.
(b) The Chairman of the Meeting may ask or require that
anyone not a bona fide shareholder or proxy leave the meeting.
(c) A resolution or motion shall be considered for vote only
if proposed by a shareholder or a duly authorized proxy, and seconded
by an individual who is a shareholder or a duly authorized proxy,
other than the individual who proposed the resolution or motion,
subject to compliance with any other requirements concerning such
proposed resolution or motion contained in these Bylaws. The Chairman
of the Meeting may propose any motion for vote.
(d) The order of business at all meetings of shareholders
shall be determined by the Chairman of the Meeting.
(e) The Chairman of the Meeting may impose any reasonable
limits with respect to participation in the meeting by shareholders,
including, but not limited to, limits on the amount of time taken up
by the remarks or questions of any shareholder, limits on the number
of questions per shareholder and limits as to the subject matter and
timing of questions and remarks by shareholders.
(f) Before any meeting of shareholders, the Board of
Directors may appoint three persons other than nominees for office to
act as inspectors of election at the meeting or its adjournment. If
no inspectors of election are so appointed, the Chairman of the
Meeting may, and on the request of any shareholder or a shareholder's
proxy shall, appoint inspectors of election at the meeting of the
shareholders and the number of such inspectors shall be three. If any
person appointed as inspector fails to appear or fails or refuses to
act, the Chairman of the Meeting may, and upon the request of any
shareholder or a shareholder's proxy shall, appoint a person to fill
such vacancy.
The duties of the inspectors shall be to:
(i) determine the number of shares outstanding and
the voting power of each, the shares represented at the
meeting, the existence of a quorum, and the authenticity,
validity and effect of proxies and ballots;
(ii) receive votes or ballots;
Page 5 of 20
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(iii) hear and determine all challenges and
questions in any way arising in connection with the vote;
(iv) count and tabulate all votes;
(v) report to the Board of Directors the results
based on the information assembled by the inspectors; and
(vi) do any other acts that may be proper to conduct
the election or vote with fairness to all shareholders.
Notwithstanding the foregoing, the final certification of the
results of the election or other matter acted upon at a
meeting of shareholders shall be made by the Board of
Directors.
All determinations of the Chairman of the Meeting shall be conclusive
unless a matter is determined otherwise upon motion duly adopted by the
affirmative vote of the holders of at least 80% of the voting power of the
shares of capital stock of the Company entitled to vote in the election of
directors held by shareholders present in person or represented by proxy at
such meeting.
ARTICLE III
DIRECTORS
Section 1. Classification of Board of Directors; Qualifications. The
business and affairs of the Company shall be managed by the Board of Directors.
Each director elected by the holders of Preferred Stock pursuant to
Section 6 of Division A of Article VI of the Articles of Incorporation of the
Company (or elected by such directors to fill a vacancy) shall serve for a term
ending upon the earlier of the election of his successor or the termination at
any time of a right of the holders of Preferred Stock to elect members of the
Board of Directors.
At each annual election, the directors chosen to succeed those whose
terms then expire shall be of the same class as the directors they succeed,
unless, by reason of any intervening changes in the authorized number of
directors, the Board of Directors shall designate one or more directorships
whose term then expires as directorships of another class in order more nearly
to achieve equality of number of directors among the classes.
Notwithstanding the rule that the three classes shall be as nearly
equal in number of directors as possible, in the event of any change in the
authorized number of directors, each director then continuing to serve as such
shall nevertheless continue as a director of the class of which he is a
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member until the expiration of his current term, or his prior death,
resignation, disqualification or removal. If any newly created directorship
may, consistent with the rule that the three classes shall be as nearly equal
in number of directors as possible, be allocated to any of the three classes,
the Board of Directors shall allocate it to that available class whose term of
office is due to expire at the earliest date following such allocation. No
decrease in the number of directors constituting the Board of Directors shall
shorten the term of any incumbent director.
No person shall be eligible to serve as a director of the Company
subsequent to the annual meeting of shareholders occurring on or after the
first day of the month immediately following the month of such person's
seventieth birthday. No person shall be eligible to stand for reelection at
the annual meeting of shareholders on or immediately following the tenth
anniversary of such person's initial election or appointment to the Board of
Directors. Any vacancy on the Board of Directors resulting from any director
being rendered ineligible to serve as a director of the Company by the
immediately preceding two sentences shall be filled by the shareholders
entitled to vote thereon at such annual meeting of shareholders. Any director
chosen to succeed a director who is so rendered ineligible to serve as a
director of the Company shall be of the same class as the director he succeeds.
Notwithstanding the rule that a director may not stand for reelection at the
annual meeting of shareholders on or immediately following the tenth
anniversary of such person's initial election or appointment to the Board of
Directors, an incumbent director may nevertheless continue as a director until
the expiration of his current term, or his prior death, resignation,
disqualification or removal; provided, however, that no person serving as a
director as of April 1, 1992 shall be affected by such term limitation
provision, nor shall such term limitation provision apply to directors who are
also employees of the Company or its corporate affiliates.
The above notwithstanding, each director shall serve until his
successor shall have been duly elected and qualified, unless he shall resign,
become disqualified, disabled or shall otherwise be removed.
No person shall be eligible for election or reelection or to continue
to serve as a member of the Board of Directors who is an officer, director,
agent, representative, partner, employee, or nominee of, or otherwise acting at
the direction of, or acting in concert with, (a) a "public-utility company"
(other than any direct or indirect subsidiary of the Company) as such term is
defined in Section 2(a)(5) of the Public Utility Holding Company Act of 1935,
as in effect on May 1, 1996 (35 Act), or (b) an "affiliate" (as defined in
either Section 2(a)(11) of the 35 Act or in Rule 405 under the Securities Act
of 1933, as amended) of any such "public-utility company" specified in clause
(a) immediately preceding.
Section 2. Newly Created Directorships and Vacancies. Newly created
directorships resulting from any increase in the number of directors may be
filled by the affirmative vote of a majority of the directors then in office
for a term of office continuing only until the next election of one or more
directors by the shareholders entitled to vote thereon, or may be filled by
election at an annual or special meeting of the shareholders called for that
purpose; provided, however, that the Board of Directors shall not fill more
than two such directorships during the period between two
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successive annual meetings of shareholders. Except as provided in Section 1 of
this Article III, any vacancies on the Board of Directors resulting from death,
resignation, disqualification, removal or other cause may be filled by the
affirmative vote of a majority of the remaining directors then in office, even
though less than a quorum of the Board of Directors, or may be filled by
election at an annual or special meeting of the shareholders called for that
purpose. Any director elected to fill any such vacancy shall hold office for
the remainder of the full term of the director whose departure from the Board
of Directors created the vacancy and until such newly elected director's
successor shall have been duly elected and qualified.
Notwithstanding the foregoing paragraph of this Section 2, whenever
holders of outstanding shares of Preference Stock are entitled to elect members
of the Board of Directors pursuant to the provisions of Section 6 of Division A
of Article VI of the Articles of Incorporation of the Company, any vacancy or
vacancies resulting by reason of the death, resignation, disqualification or
removal of any director or directors or any increase in the number of directors
shall be filled in accordance with the provisions of such section.
Section 3. Nomination of Directors. Nominations for the election of
directors may be made by the Board of Directors or by any shareholder
(Nominator) entitled to vote in the election of directors. Such nominations,
other than those made by the Board of Directors, shall be made in writing
pursuant to timely notice delivered to or mailed and received by the Secretary
of the Company as set forth in this Section 3. To be timely in connection with
an annual meeting of shareholders, a Nominator's notice, setting forth the name
and address of the person to be nominated, shall be delivered to or mailed and
received at the principal executive offices of the Company not less than ninety
days nor more than 180 days prior to the date on which the immediately
preceding year's annual meeting of shareholders was held. To be timely in
connection with any election of a director at a special meeting of the
shareholders, a Nominator's notice, setting forth the name of the person to be
nominated, shall be delivered to or mailed and received at the principal
executive offices of the Company not less than forty days nor more than sixty
days prior to the date of such meeting; provided, however, that in the event
that less than forty-seven days' notice or prior public disclosure of the date
of the special meeting of the shareholders is given or made to the
shareholders, the Nominator's notice to be timely must be so received not later
than the close of business on the seventh day following the day on which such
notice of date of the meeting was mailed or such public disclosure was made. At
such time, the Nominator shall also submit written evidence, reasonably
satisfactory to the Secretary of the Company, that the Nominator is a
shareholder of the Company and shall identify in writing (a) the name and
address of the Nominator, (b) the number of shares of each class of capital
stock of the Company owned beneficially by the Nominator, (c) the name and
address of each of the persons with whom the Nominator is acting in concert,
(d) the number of shares of capital stock beneficially owned by each such
person with whom the Nominator is acting in concert, and (e) a description of
all arrangements or understandings between the Nominator and each nominee and
any other persons with whom the Nominator is acting in concert pursuant to
which the nomination or nominations are to be made. At such time, the
Nominator shall also submit in writing (i) the information with respect to each
such proposed nominee that would be required to be provided in a proxy
statement prepared in accordance with Regulation 14A under the Exchange Act
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and (ii) a notarized affidavit executed by each such proposed nominee to the
effect that, if elected as a member of the Board of Directors, he will serve
and that he is eligible for election as a member of the Board of Directors.
Within thirty days (or such shorter time period that may exist prior to the
date of the meeting) after the Nominator has submitted the aforesaid items to
the Secretary of the Company, the Secretary of the Company shall determine
whether the evidence of the Nominator's status as a shareholder submitted by
the Nominator is reasonably satisfactory and shall notify the Nominator in
writing of his determination. The failure of the Secretary of the Company to
find such evidence reasonably satisfactory, or the failure of the Nominator to
submit the requisite information in the form or within the time indicated,
shall make the person to be nominated ineligible for nomination at the meeting
at which such person is proposed to be nominated. The presiding person at each
meeting of shareholders shall, if the facts warrant, determine and declare to
the meeting that a nomination was not made in accordance with the procedures
prescribed by these Bylaws, and if he should so determine, he shall so declare
to the meeting and the defective nomination shall be disregarded. Beneficial
ownership shall be determined in accordance with Rule 13d-3 under the Exchange
Act.
Section 4. Place of Meetings and Meetings by Telephone. Meetings of
the Board of Directors may be held either within or without the State of Texas,
at whatever place is specified by the officer calling the meeting. Meetings of
the Board of Directors may also be held by means of conference telephone or
similar communications equipment by means of which all persons participating in
the meeting can hear each other. Participation in such a meeting by means of
conference telephone or similar communications equipment shall constitute
presence in person at such meeting, except where a director participates in a
meeting for the express purpose of objecting to the transaction of any business
on the ground that the meeting is not lawfully called or convened. In the
absence of specific designation by the officer calling the meeting, the
meetings shall be held at the principal office of the Company.
Section 5. Regular Meetings. The Board of Directors shall meet each
year immediately following the annual meeting of the shareholders for the
transaction of such business as may properly be brought before the meeting.
The Board of Directors shall also meet regularly at such other times as shall
be designated by the Board of Directors. No notice of any kind to either
existing or newly elected members of the Board of Directors for such annual or
regular meetings shall be necessary.
Section 6. Special Meetings. Special meetings of the Board of
Directors may be held at any time upon the call of the Chairman of the Board,
if there is one, the Chief Executive Officer, if there is one, the President or
the Secretary of the Company or a majority of the directors then in office.
Notice shall be sent by mail, facsimile or telegram to the last known address
of the director at least two days before the meeting, or oral notice may be
substituted for such written notice if received not later than the day
preceding such meeting. Notice of the time, place and purpose of such meeting
may be waived in writing before or after such meeting, and shall be equivalent
to the giving of notice. Attendance of a director at such meeting shall also
constitute a waiver of notice thereof, except where he attends for the express
purpose of objecting to the transaction of any business on the ground that the
meeting is not lawfully called or convened. Except as otherwise provided by
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these Bylaws, neither the business to be transacted at, nor the purpose of, any
regular or special meeting of the Board of Directors need be specified in the
notice or waiver of notice of such meeting.
Section 7. Quorum and Voting. Except as otherwise provided by law,
the Articles of Incorporation of the Company or these Bylaws, a majority of the
number of directors fixed in the manner provided in these Bylaws as from time
to time amended shall constitute a quorum for the transaction of business.
Except as otherwise provided by law, the Articles of Incorporation of the
Company or these Bylaws, the affirmative vote of a majority of the directors
present at any meeting at which there is a quorum shall be the act of the Board
of Directors. Any regular or special directors' meeting may be adjourned from
time to time by those present, whether a quorum is present or not.
Section 8. Compensation. Directors shall receive such compensation
for their services as shall be determined by the Board of Directors.
Section 9. Removal. No director of the Company shall be removed from
his office as a director by vote or other action of the shareholders or
otherwise except (a) with cause, as defined below, by the affirmative vote of
the holders of at least a majority of the voting power of all outstanding
shares of capital stock of the Company entitled to vote in the election of
directors, voting together as a single class, or (b) without cause by (i) the
affirmative vote of at least 80% of all directors then in office at any regular
or special meeting of the Board of Directors called for that purpose or (ii)
the affirmative vote of the holders of at least 80% of the voting power of all
outstanding shares of capital stock of the Company entitled to vote in the
election of directors, voting together as a single class.
Except as may otherwise be provided by law, cause for removal of a
director shall be construed to exist only if: (a) the director whose removal
is proposed has been convicted, or where a director is granted immunity to
testify where another has been convicted, of a felony by a court of competent
jurisdiction and such conviction is no longer subject to direct appeal; (b)
such director has been found by the affirmative vote of at least 80% of all
directors then in office at any regular or special meeting of the Board of
Directors called for that purpose or by a court of competent jurisdiction to
have been negligent or guilty of misconduct in the performance of his duties to
the Company in a matter of substantial importance to the Company; or (c) such
director has been adjudicated by a court of competent jurisdiction to be
mentally incompetent, which mental incompetency directly affects his ability as
a director of the Company.
Notwithstanding the first paragraph of this Section 9, whenever
holders of outstanding shares of Preference Stock are entitled to elect members
of the Board of Directors pursuant to the provisions of Section 6 of Division A
of Article VI of the Articles of Incorporation of the Company, any director of
the Company may be removed in accordance with the provisions of such section.
No proposal by a shareholder to remove a director of the Company,
regardless of whether such director was elected by holders of outstanding
shares of Preference Stock (or elected by such
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directors to fill a vacancy), shall be voted upon at a meeting of the
shareholders unless such shareholder shall have delivered or mailed in a timely
manner (as set forth in this Section 9) and in writing to the Secretary of the
Company (a) notice of such proposal, (b) a statement of the grounds, if any, on
which such director is proposed to be removed, (c) evidence, reasonably
satisfactory to the Secretary of the Company, of such shareholder's status as
such and of the number of shares of each class of the capital stock of the
Company beneficially owned by such shareholder, (d) a list of the names and
addresses of other beneficial owners of shares of the capital stock of the
Company, if any, with whom such shareholder is acting in concert, and of the
number of shares of each class of the capital stock of the Company beneficially
owned by each such beneficial owner, and (e) an opinion of counsel, which
counsel and the form and substance of which opinion shall be reasonably
satisfactory to the Board of Directors of the Company (excluding the director
proposed to be removed), to the effect that, if adopted at a duly called
special or annual meeting of the shareholders of the Company by the required
vote as set forth in the first paragraph of this Section 9, such removal would
not be in conflict with the laws of the State of Texas, the Articles of
Incorporation of the Company or these Bylaws. To be timely in connection with
an annual meeting of shareholders, a shareholder's notice and other aforesaid
items shall be delivered to or mailed and received at the principal executive
offices of the Company not less than ninety nor more than 180 days prior to the
date on which the immediately preceding year's annual meeting of shareholders
was held. To be timely in connection with the removal of any director at a
special meeting of the shareholders, a shareholder's notice and other aforesaid
items shall be delivered to or mailed and received at the principal executive
offices of the Company not less than forty days nor more than sixty days prior
to the date of such meeting; provided, however, that in the event that less
than forty-seven days' notice or prior public disclosure of the date of the
special meeting of shareholders is given or made to the shareholders, the
shareholder's notice and other aforesaid items to be timely must be so received
not later than the close of business on the seventh day following the day on
which such notice of date of the meeting was mailed or such public disclosure
was made. Within thirty days (or such shorter period that may exist prior to
the date of the meeting) after such shareholder shall have delivered the
aforesaid items to the Secretary of the Company, the Secretary and the Board of
Directors of the Company shall respectively determine whether the items to be
ruled upon by them are reasonably satisfactory and shall notify such
shareholder in writing of their respective determinations. If such shareholder
fails to submit a required item in the form or within the time indicated, or if
the Secretary or the Board of Directors of the Company determines that the
items to be ruled upon by them are not reasonably satisfactory, then such
proposal by such shareholder may not be voted upon by the shareholders of the
Company at such meeting of shareholders. The presiding person at each meeting
of shareholders shall, if the facts warrant, determine and declare to the
meeting that a proposal to remove a director of the Company was not made in
accordance with the procedures prescribed by these Bylaws, and if he should so
determine, he shall so declare to the meeting and the defective proposal shall
be disregarded. Beneficial ownership shall be determined as specified in
accordance with Rule 13d-3 under the Exchange Act.
Section 10. Executive and Other Committees. The Board of Directors,
by resolution or resolutions adopted by a majority of the full Board of
Directors, may designate one or more members of the Board of Directors to
constitute an Executive Committee, and one or more other committees,
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which shall in each case be comprised of such number of directors as the Board
of Directors may determine from time to time. Subject to such restrictions as
may be contained in the Company's Articles of Incorporation or that may be
imposed by the TBCA, any such committee shall have and may exercise such powers
and authority of the Board of Directors in the management of the business and
affairs of the Company as the Board of Directors may determine by resolution
and specify in the respective resolutions appointing them, or as permitted by
applicable law, including, without limitation, the power and authority to (a)
authorize a distribution, (b) authorize the issuance of shares of the Company
and (c) exercise the authority of the Board of Directors vested in it pursuant
to Article 2.13 of the TBCA or such successor statute as may be in effect from
time to time. Each duly-authorized action taken with respect to a given matter
by any such duly-appointed committee of the Board of Directors shall have the
same force and effect as the action of the full Board of Directors and shall
constitute for all purposes the action of the full Board of Directors with
respect to such matter.
The designation of any such committee and the delegation thereto of
authority shall not operate to relieve the Board of Directors, or any member
thereof, of any responsibility imposed upon it or him by law, nor shall such
committee function where action of the Board of Directors cannot be delegated
to a committee thereof under applicable law. The Board of Directors shall have
the power at any time to change the membership of any such committee and to
fill vacancies in it. A majority of the members of any such committee shall
constitute a quorum. The Board of Directors shall name a chairman at the time
it designates members to a committee. Each such committee shall appoint such
subcommittees and assistants as it may deem necessary. Except as otherwise
provided by the Board of Directors, meetings of any committee shall be
conducted in accordance with the provisions of Sections 4 and 6 of this Article
III as the same shall from time to time be amended. Any member of any such
committee elected or appointed by the Board of Directors may be removed by the
Board of Directors whenever in its judgment the best interests of the Company
will be served thereby, but such removal shall be without prejudice to the
contract rights, if any, of the person so removed. Election or appointment of
a member of a committee shall not of itself create contract rights.
ARTICLE IV
OFFICERS
Section 1. Officers. The officers of the Company shall consist of a
President and a Secretary and such other officers and agents as the Board of
Directors may from time to time elect or appoint, which may include, without
limitation, a Chairman of the Board, a Chief Executive Officer, one or more
Vice Presidents (whose seniority and titles, including Executive Vice
Presidents, Senior Vice Presidents and such assistant or subordinate Vice
Presidents, may be specified by the Board of Directors), a Treasurer, one or
more Assistant Treasurers, and one or more Assistant Secretaries. Each officer
shall hold office until his successor shall have been duly elected and shall
qualify or until his death or until he shall resign or shall have been removed
in the manner hereinafter provided.
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Any two or more offices may be held by the same person. Except for the
Chairman of the Board, if any, no officer need be a director.
Section 2. Vacancies; Removal. Whenever any vacancies shall occur in
any office by death, resignation, increase in the number of offices of the
Company, or otherwise, the officer so elected shall hold office until his
successor is chosen and qualified. The Board of Directors may at any time
remove any officer of the Company, whenever in its judgment the best interests
of the Company will be served thereby, but such removal shall be without
prejudice to the contract rights, if any, of the person so removed. Election
or appointment of an officer or agent shall not of itself create contract
rights.
Section 3. Powers and Duties of Officers. The officers of the
Company shall have such powers and duties as generally pertain to their offices
as well as such powers and duties as from time to time shall be conferred by
the Board of Directors.
ARTICLE V
INDEMNIFICATION
Section 1. General. The Company shall indemnify and hold harmless
the Indemnitee (as this and all other capitalized words are defined in this
Article or in Article 2.02-1 of the TBCA), to the fullest extent permitted, or
not prohibited, by the TBCA or other applicable law as the same exists or may
hereafter be amended (but in the case of any such amendment, with respect to
Matters occurring before such amendment, only to the extent that such amendment
permits the Company to provide broader indemnification rights than said law
permitted the Company to provide prior to such amendment). The provisions set
forth below in this Article are provided as means of furtherance and
implementation of, and not in limitation on, the obligation expressed in this
Section 1.
Section 2. Advancement or Reimbursement of Expenses. The rights of
the Indemnitee provided under Section 1 of this Article shall include, but not
be limited to, the right to be indemnified and to have Expenses advanced
(including the payment of expenses before final disposition of a Proceeding) in
all Proceedings to the fullest extent permitted, or not prohibited, by the TBCA
or other applicable law. If the Indemnitee is not wholly successful, on the
merits or otherwise, in a Proceeding, but is successful, on the merits or
otherwise, as to any Matter in such Proceeding, the Company shall indemnify the
Indemnitee against all Expenses actually and reasonably incurred by him or on
his behalf relating to each Matter. The termination of any Matter in a
Proceeding by dismissal, with or without prejudice, shall be deemed to be a
successful result as to such Matter. In addition, to the extent the Indemnitee
is, by reason of his Corporate Status, a witness or otherwise participates in
any Proceeding at a time when he is not named a defendant or respondent in the
Proceeding, he shall be indemnified against all Expenses actually and
reasonably incurred by him or on his behalf in connection therewith. The
Indemnitee shall be advanced
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Expenses, within ten days after any request for such advancement, to the
fullest extent permitted, or not prohibited, by Article 2.02-1 of the TBCA;
provided that the Indemnitee has provided to the Company all affirmations,
acknowledgments, representations and undertakings that may be required of the
Indemnitee by Article 2.02-1 of the TBCA.
Section 3. Determination of Request. Upon written request to the
Company by an Indemnitee for indemnification pursuant to these Bylaws, a
determination, if required by applicable law, with respect to an Indemnitee's
entitlement thereto shall be made in accordance with Article 2.02-1 of the
TBCA; provided, however, that notwithstanding the foregoing, if a Change in
Control shall have occurred, such determination shall be made by Special Legal
Counsel selected by the Indemnitee, unless the Indemnitee shall request that
such determination be made in accordance with Article 2.02-1F (1) or (2). The
Company shall pay any and all reasonable fees and expenses of Special Legal
Counsel incurred in connection with any such determination. If a Change in
Control shall have occurred, the Indemnitee shall be presumed (except as
otherwise expressly provided in this Article) to be entitled to
indemnification under this Article upon submission of a request to the Company
for indemnification, and thereafter the Company shall have the burden of proof
in overcoming that presumption in reaching a determination contrary to that
presumption. The presumption shall be used by Special Legal Counsel, or such
other person or persons determining entitlement to indemnification, as a basis
for a determination of entitlement to indemnification unless the Company
provides information sufficient to overcome such presumption by clear and
convincing evidence or the investigation, review and analysis of Special Legal
Counsel or such other person or persons convinces him or them by clear and
convincing evidence that the presumption should not apply.
Section 4. Effect of Certain Proceedings. The termination of any
Proceeding or of any Matter therein, by judgment, order, settlement or
conviction, or upon a plea of nolo contendere or its equivalent, shall not
(except as otherwise expressly provided in this Article) of itself adversely
affect the right of the Indemnitee to indemnification or create a presumption
that (a) the Indemnitee did not conduct himself in good faith and in a manner
which he reasonably believed, in the case of conduct in his official capacity
as a director of the Company, to be in the best interests of the Company, or,
in all other cases, that at least his conduct was not opposed to the Company's
best interests, or (b) with respect to any criminal Proceeding, that the
Indemnitee had reasonable cause to believe that his conduct was unlawful.
Section 5. Expenses of Enforcement of Article. In the event that an
Indemnitee, pursuant to this Article, seeks a judicial adjudication to enforce
his rights under, or to recover damages for breach of, rights created under or
pursuant to this Article, the Indemnitee shall be entitled to recover from the
Company, and shall be indemnified by the Company against, any and all Expenses
actually and reasonably incurred by him in such judicial adjudication but only
if he prevails therein. If it shall be determined in said judicial
adjudication that the Indemnitee is entitled to receive part but not all of the
indemnification or advancement of Expenses sought, the Expenses incurred by
Indemnitee in connection with such judicial adjudication shall be reasonably
prorated in good faith by counsel for the Indemnitee. Notwithstanding the
foregoing, if a Change in Control shall have occurred,
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Indemnitee shall be entitled to indemnification under this Section regardless
of whether indemnitee ultimately prevails in such judicial adjudication.
Section 6. Nonexclusive Rights. The rights of indemnification and to
receive advancement of Expenses as provided by this Article shall not be deemed
exclusive of any other rights to which the Indemnitee may at any time be
entitled under applicable law, the Articles of Incorporation of the Company,
these Bylaws, agreement, insurance, arrangement, a vote of shareholders or a
resolution of directors, or otherwise. No amendment, alteration or repeal of
this Article or any provision thereof shall be effective as to any Indemnitee
for acts, events and circumstances that occurred, in whole or in part, before
such amendment, alteration or repeal. The provisions of this Article shall
continue as to an Indemnitee whose Corporate Status has ceased and shall inure
to the benefit of his heirs, executors and administrators.
Section 7. Invalidity. If any provision or provisions of this
Article shall be held to be invalid, illegal or unenforceable for any reason
whatsoever, the validity, legality and enforceability of the remaining
provisions shall not in any way be affected or impaired thereby; and, to the
fullest extent possible, the provisions of this Article shall be construed so
as to give effect to the intent manifested by the provision held invalid,
illegal or unenforceable.
Section 8. Definitions. For purposes of this Article:
"Change of Control" means a change in control of the Company
occurring after the date of adoption of these Bylaws in any of the
following circumstances: (a) there shall have occurred an event
required to be reported in response to Item 6(e) of Schedule 14A of
Regulation 14A (or in response to any similar item on any similar
schedule or form) promulgated under the Exchange Act, whether or not
the Company is then subject to such reporting requirement; (b) any
"person" (as such term is used in Section 13(d) and 14(d) of the
Exchange Act), other than a trustee or other fiduciary holding
securities under an employee benefit plan of the Company or a
corporation or other entity owned directly or indirectly by the
shareholders of the Company in substantially the same proportions as
their ownership of stock of the Company, shall have become the
"beneficial owner" (as defined in Rule 13d-3 under the Exchange Act),
directly or indirectly, of securities of the Company representing 30%
or more of the combined voting power of the Company's then outstanding
voting securities without prior approval of at least two-thirds of the
members of the Board of Directors in office immediately prior to such
person attaining such percentage interest; (c) the Company is a party
to a merger, consolidation, share exchange, sale of assets or other
reorganization, or a proxy contest, as a consequence of which members
of the Board of Directors in office immediately prior to such
transaction or event constitute less than a majority of the Board of
Directors thereafter; (d) during any fifteen month period, individuals
who at the beginning of such period constituted the Board of Directors
(including for this purpose any new director whose election or
nomination for election by the Company's shareholders was approved by
a vote of at least two- thirds of the directors then still in office
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who were directors at the beginning of such period) cease for any
reason to constitute at least a majority of the Board of Directors.
"Corporate Status" means the status of a person who is or was
a director, officer, partner, venturer, proprietor, trustee, employee
(including an employee acting in his Designated Professional
Capacity), or agent or similar functionary of the Company or of any
other foreign or domestic corporation, partnership, joint venture,
sole proprietorship, trust, employee benefit plan or other enterprise
which such person is or was serving in such capacity at the request of
the Company. The Company hereby acknowledges that unless and until
the Company provides the Indemnitee with written notice to the
contrary, the Indemnitee's service as a director, officer, partner,
venturer, proprietor, trustee, employee, agent or similar functionary
of an Affiliate of the Company shall be conclusively presumed to be at
the Company's request. An Affiliate of the Company shall be deemed to
be (a) any foreign or domestic corporation in which the Company owns
or controls, directly or indirectly, 5% or more of the shares entitled
to be voted in the election of directors of such corporation; (b) any
foreign or domestic partnership, joint venture, proprietorship or
other enterprise in which the Company owns or controls, directly or
indirectly, 5% or more of the revenue interests in such partnership,
joint venture, proprietorship or other enterprise; or (c) any trust or
employee benefit plan the beneficiaries of which include the Company,
any Affiliate of the Company as defined in the foregoing clauses (a)
and (b) or any of the directors, officers, partners, venturers,
proprietors, employees, agents or similar functionaries of the Company
or of such Affiliates of the Company.
"Expenses" shall include all reasonable attorneys' fees,
retainers, court costs, transcript costs, fees of experts, witness
fees, travel expenses, duplicating costs, printing and binding costs,
telephone charges, postage, delivery service fees, and all other
disbursements or expenses of the types customarily incurred in
connection with prosecuting, defending, preparing to prosecute or
defend, investigating, or being or preparing to be a witness in a
Proceeding.
"Indemnitee" includes any person who is, or is threatened to
be made, a witness in or a party to any Proceeding as described in
Section 1 or 2 of this Article by reason of his Corporate Status.
"Matter" is a claim, a material issue, or a substantial
request for relief.
"Proceeding" includes any threatened, pending or completed
action, suit, arbitration, alternate dispute resolution proceeding,
investigation, administrative hearing and any other proceeding,
whether civil, criminal, administrative, investigative or other, any
appeal in such action, suit, arbitration, proceeding or hearing, or
any inquiry or investigation, whether conducted by or on behalf of the
Company, a subsidiary of the Company or any other party, formal or
informal, that the Indemnitee in good faith believes might lead to the
institution
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of any such action, suit, arbitration, proceeding, investigation or
hearing, except one initiated by an Indemnitee pursuant to Section 5
of this Article.
"Special Legal Counsel" means a law firm, or member of a law
firm, that is experienced in matters of corporation law and neither
presently is, nor in the five years previous to his selection or
appointment has been, retained to represent: (a) the Company or the
Indemnitee in any matter material to either such party; (b) any other
party to the Proceeding giving rise to a claim for indemnification
hereunder; or (c) the beneficial owner, directly or indirectly, of
securities of the Company representing 30% or more of the combined
voting power of the Company's then outstanding voting securities.
Notwithstanding the foregoing, the term "Special Legal Counsel" shall
not include any person who, under the applicable standards of
professional conduct then prevailing, would have a conflict of
interest in representing either the Company or the Indemnitee in an
action to determine the Indemnitee's rights to indemnification under
these Bylaws.
For the purposes of this Article, an employee acting in his
"Designated Professional Capacity" shall include, but not be limited
to, a physician, nurse, psychologist or therapist, registered
surveyor, registered engineer, registered architect, attorney,
certified public accountant or other person who renders such
professional services within the course and scope of his employment,
who is licensed by appropriate regulatory authorities to practice such
profession and who, while acting in the course of such employment,
committed or is alleged to have committed any negligent acts, errors
or omissions in rendering such professional services at the request of
the Company or pursuant to his employment (including, without
limitation, rendering written or oral opinions to third parties).
Section 9. Notice. Any communication required or permitted to the
Company under this Article shall be addressed to the Secretary of the Company
and any such communication to the Indemnitee shall be addressed to his home
address unless he specifies otherwise and shall be personally delivered or
delivered by overnight mail or courier delivery.
Section 10. Insurance and Self-Insurance Arrangements. The Company
may procure or maintain insurance or other similar arrangements, at its
expense, to protect itself and any Indemnitee against any expense, liability or
loss asserted against or incurred by such person, incurred by him in such a
capacity or arising out of his Corporate Status as such a person, whether or
not the Company would have the power to indemnify such person against such
expense or liability. In considering the cost and availability of such
insurance, the Company (through the exercise of the business judgment of its
directors and officers) may, from time to time, purchase insurance which
provides for any and all of (a) deductibles, (b) limits on payments required to
be made by the insurer, or (c) coverage which may not be as comprehensive as
that previously included in insurance purchased by the Company. The purchase
of insurance with deductibles, limits on payments and coverage exclusions will
be deemed to be in the best interest of the Company but may not be in the best
interest of certain of the persons covered thereby. As to the Company,
purchasing insurance with deductibles, limits on payments, and coverage
exclusions is similar to the Company's practice of self-insurance in other
Page 17 of 20
18
areas. In order to protect the Indemnitees who would otherwise be more fully
or entirely covered under such policies, the Company shall indemnify and hold
each of them harmless as provided in Section 1 or 2 of this Article, without
regard to whether the Company would otherwise be entitled to indemnify such
officer or director under the other provisions of this Article, or under any
law, agreement, vote of shareholders or directors or other arrangement, to the
extent (i) of such deductibles, (ii) of amounts exceeding payments required to
be made by an insurer or (iii) that prior policies of officer's and director's
liability insurance held by the Company or its predecessors would have provided
for payment to such officer or director. Notwithstanding the foregoing
provision of this Section, no Indemnitee shall be entitled to indemnification
for the results of such person's conduct that is intentionally adverse to the
interests of the Company. This Section is authorized by Section 2.02-1(R) of
the TBCA as in effect on May 1, 1996, and further is intended to establish an
arrangement of self-insurance pursuant to that section.
ARTICLE VI
MISCELLANEOUS PROVISIONS
Section 1. Offices. The principal office of the Company shall be
located in Houston, Texas, unless and until changed by resolution of the Board
of Directors. The Company may also have offices at such other places as the
Board of Directors may designate from time to time, or as the business of the
Company may require. The principal office and registered office may be, but
need not be, the same.
Section 2. Resignations. Any director or officer may resign at any
time. Such resignations shall be made in writing and shall take effect at the
time specified therein, or, if no time be specified, at the time of its receipt
by the Chairman of the Board, if there is one, the Chief Executive Officer, if
there is one, the President or the Secretary. The acceptance of a resignation
shall not be necessary to make it effective, unless expressly so provided in
the resignation.
Section 3. Seal. The seal of the Company shall be circular in form,
with the name "HOUSTON INDUSTRIES INCORPORATED."
Section 4. Separability. If one or more of the provisions of these
Bylaws shall be held to be invalid, illegal or unenforceable, such invalidity,
illegality or unenforceability shall not affect any other provision hereof and
these Bylaws shall be construed as if such invalid, illegal or unenforceable
provision or provisions had never been contained herein.
Page 18 of 20
19
ARTICLE VII
AMENDMENT OF BYLAWS
Section 1. Vote Requirements. The Board of Directors shall have the
power to alter, amend or repeal the Bylaws or adopt new Bylaws by the
affirmative vote of at least 80% of all directors then in office at any regular
or special meeting of the Board of Directors, subject to repeal or change by
the affirmative vote of the holders of at least 80% of the voting power of all
the shares of the Company entitled to vote in the election of directors, voting
together as a single class.
Section 2. Shareholder Proposals. No proposal by a shareholder made
pursuant to Section 1 of this Article VII may be voted upon at a meeting of
shareholders unless such shareholder shall have delivered or mailed in a timely
manner (as set forth in this Section 2) and in writing to the Secretary of the
Company (a) notice of such proposal and the text of the proposed alteration,
amendment or repeal, (b) evidence reasonably satisfactory to the Secretary of
the Company, of such shareholder's status as such and of the number of shares
of each class of capital stock of the Company of which such shareholder is the
beneficial owner, (c) a list of the names and addresses of other beneficial
owners of shares of the capital stock of the Company, if any, with whom such
shareholder is acting in concert, and the number of shares of each class of
capital stock of the Company beneficially owned by each such beneficial owner
and (d) an opinion of counsel, which counsel and the form and substance of
which opinion shall be reasonably satisfactory to the Board of Directors of the
Company, to the effect that the Bylaws (if any) resulting from the adoption of
such proposal would not be in conflict with the Articles of Incorporation of
the Company or the laws of the State of Texas. To be timely in connection with
an annual meeting of shareholders, a shareholder's notice and other aforesaid
items shall be delivered to or mailed and received at the principal executive
offices of the Company not less than ninety nor more than 180 days prior to the
date on which the immediately preceding year's annual meeting of shareholders
was held. To be timely in connection with the voting on any such proposal at a
special meeting of the shareholders, a shareholder's notice and other aforesaid
items shall be delivered to or mailed and received at the principal executive
offices of the Company not less than forty days nor more than sixty days prior
to the date of such meeting; provided, however, that in the event that less
than forty-seven days' notice or prior public disclosure of the date of the
special meeting of the shareholders is given or made to the shareholders, the
shareholder's notice and other aforesaid items to be timely must be so received
not later than the close of business on the seventh day following the day on
which such notice of date of the meeting was mailed or such public disclosure
was made. Within thirty days (or such shorter period that may exist prior to
the date of the meeting) after such shareholder shall have submitted the
aforesaid items, the Secretary and the Board of Directors of the Company shall
respectively determine whether the items to be ruled upon by them are
reasonably satisfactory and shall notify such shareholder in writing of their
respective determinations. If such shareholder fails to submit a required item
in the form or within the time indicated, or if the Secretary or the Board of
Directors of the Company determines that the items to be ruled upon by them are
not reasonably satisfactory, then such proposal by such shareholder may not be
voted upon by the shareholders of the Company at such meeting of shareholders.
The presiding person at each meeting of shareholders shall, if the facts
warrant,
Page 19 of 20
20
determine and declare to the meeting that a proposal made pursuant to Section 1
of this Article VII was not made in accordance with the procedures prescribed
by these Bylaws, and if he should so determine, he shall so declare to the
meeting and the defective proposal shall be disregarded. Beneficial ownership
shall be determined in accordance with Rule 13d-3 under the Exchange Act.
Page 20 of 20
1
EXHIBIT 4(d)(1)
EXECUTION COPY
AMENDMENT, dated as of December 23, 1997 (this "Amendment"),
to the Credit Agreement dated as of August 6, 1997 (as the same may be amended,
supplemented or otherwise modified from time to time, the "Credit Agreement"),
among: (i) HOUSTON INDUSTRIES FINANCECO LP, a Delaware limited partnership (the
"Borrower"); (ii) HOUSTON INDUSTRIES INCORPORATED, a Texas corporation; (iii)
the several banks and other financial institutions from time to time parties
thereto (collectively, the "Banks," and each individually, a "Bank"); (iv)
CHASE SECURITIES INC., as Arranger (in such capacity, the "Arranger"); and (v)
THE CHASE MANHATTAN BANK, as Administrative Agent (in such capacity, the
"Agent").
W I T N E S S E T H :
WHEREAS, pursuant to the Credit Agreement, the Banks have
agreed to make certain loans and other extensions of credit to the Borrower;
and
WHEREAS, the Borrower has requested, and, upon this Amendment
becoming effective, the Majority Banks have agreed, that certain provisions of
the Credit Agreement be amended in the manner provided for in this Amendment;
NOW, THEREFORE, the parties hereto hereby agree as follows:
SECTION 1. DEFINITIONS.
1.1 Defined Terms. Unless otherwise defined herein and
except as set forth in this Amendment, terms defined in the Credit Agreement
are used herein as therein defined.
SECTION 2. AMENDMENTS TO CREDIT AGREEMENT.
2.1 Amendment to Section 1.1 of the Credit Agreement.
Section 1.1 of the Credit Agreement is hereby amended by adding thereto the
following definition in its appropriate alphabetical order:
"Project Finance Entity" means any entity established or used
primarily to acquire and/or hold assets (the "Project Finance Assets")
so long as HII or a Subsidiary of HII (i) owns at least a portion of
the outstanding shares of Capital Stock or other ownership interests
having ordinary voting power to elect directors or other managers of
such entity and (ii) has or will have a role in managing such Project
Finance Assets.
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2.2 Amendment to Section 8.4(g)(v) of the Credit
Agreement. Section 8.4(g)(v) of the Credit Agreement is hereby amended by
deleting said Section in its entirety and substituting in lieu thereof the
following:
"at any time (x) at which no Default or Event of Default has occurred
and is continuing, (y) that Projected Available Cash exceeds Projected
Borrower Debt Service for the fiscal quarter of HII then in effect and
(z) that the long-term senior secured debt rating then in effect for
HII is at least BBB by S&P or Baa2 by Moody's, HII may make HII
Investments in any domestic Subsidiary of HII or any Project Finance
Entity so long as such Subsidiary or Project Finance Entity (i) is a
Subsidiary or Project Finance Entity domiciled and organized in the
United States, having all or substantially all of its assets and
operations located in the United States and (ii) is (A) directly or
indirectly engaged in one or more businesses which are primarily
related to the normal conduct of the domestic utility business of HL&P
or NorAm in accordance with normal industry standards as generally in
effect at such time or (B) formed for the purpose of providing or
obtaining financing for a Subsidiary or a Project Finance Entity of
the type described in clause (A); provided that the requirement of
clause (y) would be satisfied after giving effect to (1) such HII
Investment and (2) any sources of cash available or reasonably
expected by HII at the time of the proposed investment to be available
during the fiscal quarter of HII then in effect; and"
SECTION 3. MISCELLANEOUS.
3.1 Effectiveness. This Amendment shall become effective
on the date upon which the Agent shall have received counterparts of this
Amendment, duly executed and delivered by the Borrower, HII, the Agent and the
Majority Banks.
3.2 Representations and Warranties. After giving effect
to the amendments contained herein, each of the Borrower and HII hereby
confirm, reaffirm and restate the representations and warranties set forth in
Article VII of the Credit Agreement; provided that each reference in such
Article VII to "this Agreement" shall be deemed to be a reference both to this
Amendment and to the Credit Agreement as amended by this Amendment.
3.3 Payment of Expenses. The Borrower agrees to pay or
reimburse the Agent for all of its out-of- pocket costs and reasonable expenses
incurred in connection with this Amendment, any other documents prepared in
connection herewith and the transactions contemplated hereby, including,
without limitation, the reasonable fees and disbursements of counsel to the
Agent.
3.4 Continuing Effect; No Other Amendments. Except as
expressly amended hereby, all of the terms and provisions of the Credit
Agreement and the other Loan Documents are and shall remain in full force and
effect. The amendments contained herein shall not constitute an amendment or
waiver of any other provision of the Credit Agreement or the other Loan
Documents or for any purpose except as expressly set forth herein.
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3
3.5 Counterparts. This Amendment may be executed in any
number of counterparts by the parties hereto, each of which counterparts when
so executed shall be an original, but all the counterparts shall together
constitute one and the same instrument.
3.6 GOVERNING LAW. THIS AMENDMENT SHALL BE GOVERNED
BY, AND CONSTRUED AND INTERPRETED IN ACCORDANCE WITH, THE LAWS OF THE STATE OF
NEW YORK.
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IN WITNESS WHEREOF, the parties hereto have caused this
Amendment to be executed and delivered by their respective duly authorized
officers as of the date first above written.
HOUSTON INDUSTRIES
FINANCECO LP
By: HOUSTON INDUSTRIES
FINANCECO GP, LLC,
its General Partner
By:/s/M. Keller C.
-------------------------------------------
Title: Treasurer
HOUSTON INDUSTRIES
INCORPORATED
By:/s/Stephen W. Naeve
-------------------------------------------
Title: Executive Vice President and Chief
Financial Officer
THE CHASE MANHATTAN BANK, as
Agent and as a Bank
By:
-------------------------------------------
Title:
BANKBOSTON, N.A.
By:
-------------------------------------------
Title:
-4-
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BANK OF MONTREAL
By:
-------------------------------------------
Title:
THE BANK OF NEW YORK
By:
-------------------------------------------
Title:
THE BANK OF NOVA SCOTIA
By:/s/ F.C.H. Ashby
-------------------------------------------
F.C.H. Ashby
Title: Senior Manager Loan Operations
THE BANK OF TOKYO-MITSUBISHI,
LTD., HOUSTON AGENCY
By:
-------------------------------------------
Title:
BARCLAYS BANK PLC
By:
-------------------------------------------
Title:
-5-
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CAISSE NATIONALE DE CREDIT
AGRICOLE
By:
-------------------------------------------
Title:
CIBC INC.
By:
-------------------------------------------
Title:
CITIBANK, N.A.
By:
-------------------------------------------
Title:
COMERICA BANK
By:
-------------------------------------------
Title:
-6-
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COMMERZBANK
AKTIENGESELLSCHAFT,
ATLANTA AGENCY
By:/s/D. Suttles
-------------------------------------------
Title: Vice President
By:/s/P. Mahoney
-------------------------------------------
Title: Assistant Treasurer
CREDIT LYONNAIS
NEW YORK BRANCH
By:
-------------------------------------------
Title:
CREDIT SUISSE FIRST BOSTON
By:
-------------------------------------------
Title:
By:
-------------------------------------------
Title:
THE DAI-ICHI KANGYO BANK,
LIMITED
By:
-------------------------------------------
Title:
-7-
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FIRST UNION NATIONAL BANK
By:
-------------------------------------------
Title:
FLEET NATIONAL BANK
By:
-------------------------------------------
Title:
THE FUJI BANK, LIMITED -
HOUSTON AGENCY
By:/s/David Kelley
-------------------------------------------
Title: Senior Vice President
THE INDUSTRIAL BANK OF JAPAN,
LIMITED, NEW YORK BRANCH
By:
-------------------------------------------
Title:
THE LONG-TERM CREDIT BANK OF
JAPAN, LTD.
By:
-------------------------------------------
Title:
-8-
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MELLON BANK, N.A.
By:
-------------------------------------------
Title:
MORGAN GUARANTY TRUST
COMPANY OF NEW YORK
By:
-------------------------------------------
Title:
NATIONSBANK OF TEXAS, N.A.
By:
-------------------------------------------
Title:
THE NORTHERN TRUST COMPANY
By:
-------------------------------------------
Title:
ROYAL BANK OF CANADA
By:/s/Tom J. Oberaigner
-------------------------------------------
Tom J. Oberaigner
Title: Manager
-9-
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THE SAKURA BANK, LIMITED
By:
-------------------------------------------
Title:
SOCIETE GENERALE,
SOUTHWEST AGENCY
By:
-------------------------------------------
Title:
THE SUMITOMO BANK, LIMITED
By:
-------------------------------------------
Title:
THE TOKAI BANK, LTD.
By:
-------------------------------------------
Title:
TORONTO DOMINION (TEXAS), INC.
By:
-------------------------------------------
Title:
-10-
11
UNION BANK OF SWITZERLAND,
NEW YORK BRANCH
By:
-------------------------------------------
Title:
By:
-------------------------------------------
Title:
WACHOVIA BANK OF GEORGIA, N.A.
By:
-------------------------------------------
Title:
WESTDEUTSCHE LANDESBANK
GIROZENTRALE, NEW YORK
By:
-------------------------------------------
Title:
By:
-------------------------------------------
Title:
THE YASUDA TRUST AND BANKING
COMPANY LIMITED
NEW YORK BRANCH
By:/s/R.M. Laudenschlager
-------------------------------------------
Rohn Laudenschlager
Title: Senior Vice President
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EXHIBIT 4(d)2
[Execution Copy]
SECOND AMENDMENT TO CREDIT AGREEMENT
THIS SECOND AMENDMENT, dated as of February 27, 1998 (this
"Amendment"), to the Credit Agreement dated as of August 6, 1997 (as amended by
the First Amendment to the Credit Agreement dated as of December 23, 1997 and as
the same may be amended, supplemented or otherwise modified from time to time,
the "Credit Agreement"), is made and entered into among: (i) HOUSTON INDUSTRIES
FINANCECO LP, a Delaware limited partnership (the "Borrower"); (ii) HOUSTON
INDUSTRIES INCORPORATED, a Texas corporation ("HII"); (iii) the several banks
and other financial institutions from time to time parties thereto
(collectively, the "Banks," and each individually; a "Bank"); (iv) CHASE
SECURITIES INC., as Arranger (in such capacity, the "Arranger"); and (v) THE
CHASE MANHATTAN BANK, as Administrative Agent (in such capacity, the "Agent").
W I T N E S S E T H:
WHEREAS, pursuant to the Credit Agreement, the Banks have agreed
to make certain loans and other extensions of credit to the Borrower; and
WHEREAS, the Borrower has requested that certain provisions of the
Credit Agreement be amended and certain of the collateral pledged under the HII
Pledge and Collateral Agency Agreement and the Pledge and Collateral Agency
Agreement be released in the manner provided for in this Amendment, and that the
Pledge and Collateral Agency Agreement be terminated;
NOW, THEREFORE, the parties hereto hereby agree as follows:
SECTION 1. DEFINITIONS.
1.1 Defined Terms. Unless otherwise defined herein and except as
set forth in this Amendment, terms defined in the Credit Agreement are used
herein as therein defined.
SECTION 2. AMENDMENTS TO THE CREDIT AGREEMENT.
2.1 Amendment to Section 1.1 of the Credit Agreement. Section 1.1
of the Credit Agreement is hereby amended by (i) deleting therefrom the
definition of "HII Aggregate Investment Amount" in its entirety, (ii) deleting
from clause (ii) in the definition of "Intercompany Indebtedness" on page 13 the
phrase "HII Pledged Subsidiary" and substituting in lieu thereof the phrase
"Subsidiary of HII" and (iii) deleting from the definition of "Money Fund" the
words "; provided that at all times any Person conducting the operations of the
Money Fund, or owning and controlling the bank or investment accounts
thereunder, shall be an HII Pledged Subsidiary". As so amended, the definition
of "Intercompany Indebtedness" shall read in its entirety as follows:
2
"Intercompany Indebtedness" means (i) any
Indebtedness constituting Money Fund Advances or Money Fund
Obligations, (ii) any Indebtedness for Borrowed Money owed by
the Borrower to HII or to any Subsidiary of HII the proceeds
of which are applied upon the receipt thereof to repayment of
Loans or commercial paper supported by this Agreement and
(iii) any Indebtedness constituting an advance by HII to the
Borrower pursuant to the Support Agreement.
2.2 Amendment to Sections 4.3(b)(i) and (ii) of the Credit
Agreement. Section 4.3(b)(i) and Section 4.3(b)(ii) of the Credit Agreement are
hereby amended by deleting those Sections in their entirety and substituting in
lieu thereof the following:
"(i) [Intentionally Omitted.]
(ii) [Intentionally Omitted.]"
2.3 Amendment to Section 4.3(b)(iv) of the Credit Agreement.
Section 4.3(b)(iv) of the Credit Agreement is hereby amended by deleting the
first sentence thereof.
2.4 Amendment to Section 7.9 of the Credit Agreement. Section 7.9
of the Credit Agreement is hereby amended so that such Section shall read in its
entirety as follows:
"SECTION 7.9. Investment Company Act; PUHC Act of
1935. Neither HII nor any Subsidiary of HII is (i) required to
register as an "investment company" under the Investment
Company Act of 1940, as amended, or (ii) subject to regulation
as a public utility holding company under PUHCA except Section
9(a)(2) thereof relating to the acquisition of securities of
other public utility companies or public utility holding
companies."
2.5 Amendment to Section 8.2(g) of the Credit Agreement. Section
8.2(g) of the Credit Agreement is hereby amended by deleting that Section in its
entirety.
2.6 Amendment to Section 8.4(a) of the Credit Agreement. Section
8.4(a) of the Credit Agreement is hereby amended by deleting from the first
sentence thereof the phrase "HI Energy or".
2.7 Amendment to Section 8.4(c) of the Credit Agreement. Section
8.4(c) of the Credit Agreement is hereby amended by deleting therefrom (i) the
designation "(i)" at the beginning of the first paragraph thereof, (ii) the
words ", subject to Section 8.4(c)(ii)," occurring in the first paragraph after
the phrase "provided, however, that" and (iii) paragraph (ii) in its entirety.
2.8 Amendment to Section 8.4.(e)(iv) of the Credit Agreement.
Section 8.4(e)(iv) of the Credit Agreement is hereby amended by deleting,
beginning in the fifth line thereof, the words ", so long as the Commitments are
permanently reduced to the extent required pursuant to Section 4.3(b) on the
date of any such repurchase", so that such Section shall read in its entirety as
follows:
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"(iv) at any time (x) at which no Default or Event
of Default has occurred and is continuing, (y) that Projected
Available Cash exceeds Projected Borrower Debt Service for the
fiscal quarter of HII then in effect and (z) that the long-term
senior secured debt rating in effect for HII is at least BBB by
S&P or Baa2 by Moody's, HII shall be permitted to repurchase its
outstanding common stock; provided that the requirements set forth
in clauses (x) and (y) above would be satisfied after giving
effect to (1) such repurchases and (2) any sources of cash
available or reasonably expected by HII at the time of the
proposed repurchase to be available during the fiscal quarter of
HII then in effect; and provided further that during the period
from the Closing Date through September 30, 1997, Projected
Available Cash shall be deemed to exceed Projected Borrower Debt
Service."
2.9 Amendment to Section 8.4.(g)(i) of the Credit Agreement.
Section 8.4(g)(i) of the Credit Agreement is hereby amended by (i) deleting in
the fifth line and the eighth line thereof the words "HII Pledged Subsidiaries"
and substituting in lieu thereof in each place the words "Subsidiaries of HII"
and (ii) deleting in the proviso thereof the words "(A) the Commitments shall be
permanently reduced to the extent required pursuant to Section 4.3(b)(ii) on the
date of the consummation of such HII Investment and (B)", so that such Section
shall read in its entirety as follows:
"(i) at any time (x) at which no Default or Event of
Default has occurred and is continuing, (y) that Projected
Available Cash exceeds Projected Borrower Debt Service for the
fiscal quarter of HII then in effect and (z) that the
long-term senior secured debt rating in effect for HII is at
least BBB by S&P or Baa2 by Moody's, HII shall be permitted to
make direct or indirect HII Investments in Subsidiaries of
HII, and HII Investments constituting purchases or
acquisitions of assets, securities or Capital Stock that
result, upon consummation thereof, in such assets, securities
or Capital Stock being owned by or becoming Subsidiaries of
HII (it being understood that the foregoing shall not apply to
any investments, acquisitions, loans, advances or Guarantees
made by any Subsidiary in accordance with this clause (i) and
the other applicable provisions of this Agreement); provided
that the requirements set forth in clauses (x) and (y) above
would be satisfied after giving effect to (1) such HII
Investments and (2) any sources of cash available or
reasonably expected by HII at the time of the proposed
investment to be available during the fiscal quarter of HII
then in effect;"
2.10 Amendment to Section 8.4.(g)(vi) of the Credit Agreement.
Section 8.4(g)(vi) of the Credit Agreement is hereby amended by deleting from
the fourth line thereof the words "HII Pledged", so that such Section shall read
in its entirety as follows:
"(vi) at any time at which no Default or Event of
Default has occurred and is continuing, HII may make HII
Investments (i) to fund operating expenses of Subsidiaries
existing at the time of such HII Investment and (ii) in any
Wholly-Owned domestic Subsidiary of HII so long as such
Subsidiary is created, and continues, to engage in, and all or
substantially all of the operations and assets of such
Subsidiary are involved in the conduct of, the business of
holding assets, providing services or conducting operations
that,
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4
prior to such creation or such HII Investment, were held,
provided or conducted, as the case may be, by HL&P or NorAm in
the ordinary course of their respective utility businesses."
2.11 Amendment to Section 11.6(c) of the Credit Agreement. Section
11.6(c) of the Credit Agreement is hereby amended by deleting the word
"applicable" immediately before the word "Borrower" in the last sentence of such
Section.
SECTION 3. CONSENT TO RELEASE OF CERTAIN COLLATERAL UNDER THE HII
PLEDGE AND COLLATERAL AGENCY AGREEMENT AND THE PLEDGE AND COLLATERAL AGENCY
AGREEMENT AND THE TERMINATION OF THE PLEDGE AND COLLATERAL AGENCY AGREEMENT.
3.1 Release and Termination. The parties hereto hereby consent to
the release of all of the common stock of NorAm Energy Corp. (formerly known as
HI Merger, Inc.) and all of the member interests of Houston Industries FinanceCo
GP, LLC (which interests are represented by common shares) and any Proceeds (as
defined in the HII Pledge and Collateral Agency Agreement) therefrom pledged
pursuant to the HII Pledge and Collateral Agency Agreement from the liens
created thereby. The parties hereto hereby also consent to the release of all of
the common stock of Houston Industries Energy, Inc. and Houston Industries
Energy II, Inc. and any Proceeds (as defined in the Pledge and Collateral Agency
Agreement) therefrom pledged pursuant to the Pledge and Collateral Agency
Agreement from the liens created thereby and to the termination of the Pledge
and Collateral Agency Agreement.
3.2 Form of Amendments. In order to effect the release of the
collateral and the termination of the Pledge and Collateral Agency Agreement
described in Section 3.1 hereof, the parties hereto hereby approve the form,
terms and provisions of the form of amendments to the HII Pledge and Collateral
Agency Agreement and the Pledge and Collateral Agency Agreement attached hereto
as Exhibit A and Exhibit B, respectively.
SECTION 4. MISCELLANEOUS.
4.1 Effectiveness. This Amendment shall become effective on the
date upon which the Agent shall have received counterparts of this Amendment,
duly executed and delivered by the Borrower, HII, the Agent and the Majority
Banks (except with respect to the consents, releases of Collateral and
amendments described in Section 3 hereof, which, to become effective, shall also
require execution and delivery of counterparts of this Amendment by the
Supermajority Banks, rather than merely the Majority Banks, and the expiration
of five Business Days after written notice of the proposed release of the
Collateral and termination described in Section 3 hereof is given to the persons
and in the manner so specified in Section 21(a)(ii) of each of (i) the HII
Pledge and Collateral Agency Agreement and (ii) the Pledge and Collateral Agency
Agreement).
4.2 Representations and Warranties. After giving effect to the
amendments contained herein, each of the Borrower and HII hereby confirm,
reaffirm and restate the representations and warranties set forth in Article VII
of the Credit Agreement; provided that each reference in such Article VII to
"this Agreement" shall be deemed to be a reference both to this
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5
Amendment and to the Credit Agreement as previously amended and as amended by
this Amendment. On the date hereof, no Default or Event of Default has occurred
or is continuing.
4.3 Payment of Expenses. The Borrower agrees to pay or reimburse
the Agent for all of its out-of-pocket costs and reasonable expenses incurred in
connection with this Amendment, any other documents prepared in connection
herewith and the transactions contemplated hereby, including, without
limitation, the reasonable fees and disbursements of counsel to the Agent.
4.4 Continuing Effect; No Other Amendments. Except as expressly
amended hereby, all of the terms and provisions of the Credit Agreement and the
other Loan Documents (as may have been previously amended) are and shall remain
in full force and effect. The amendments contained herein shall not constitute
an amendment or waiver of any other provision of the Credit Agreement or the
other Loan Documents or for any purpose except as expressly set forth herein.
4.5 Counterparts. This Amendment may be executed in any number of
counterparts by the parties hereto, each of which counterparts when so executed
shall be an original, but all the counterparts shall together constitute one and
the same instrument.
4.6 GOVERNING LAW. THIS AMENDMENT SHALL BE GOVERNED BY, AND
CONSTRUED AND INTERPRETED IN ACCORDANCE WITH, THE LAWS OF THE STATE OF NEW YORK.
IN WITNESS WHEREOF, the parties hereto have caused this Amendment
to be executed and delivered by their respective duly authorized officers as of
the date first above written.
HOUSTON INDUSTRIES
FINANCECO LP
By: HOUSTON INDUSTRIES
FINANCECO GP, LLC,
its General Partner
By:
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Title:
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HOUSTON INDUSTRIES INCORPORATED
By:
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Title:
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THE CHASE MANHATTAN BANK, as
Agent and as a Bank
By:
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Title:
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BANKBOSTON, N.A.
By:
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Title:
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BANK OF MONTREAL
By:
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Title:
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THE BANK OF NEW YORK
By:
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Title:
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THE BANK OF NOVA SCOTIA
By:
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Title:
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THE BANK OF TOKYO-MITSUBISHI
LTD., HOUSTON AGENCY
By:
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Title:
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BARCLAYS BANK PLC
By:
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Title:
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CAISSE NATIONALE DE CREDIT
AGRICOLE
By:
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Title:
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CIBC INC.
By:
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Title:
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CITIBANK, N.A.
By:
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Title:
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COMERICA BANK
By:
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Title:
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COMMERZBANK
AKTIENGESELLSCHAFT,
ATLANTA AGENCY
By:
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Title:
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By:
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Title:
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CREDIT LYONNAIS
NEW YORK BRANCH
By:
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Title:
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CREDIT SUISSE FIRST BOSTON
By:
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Title:
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By:
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Title:
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THE DAI-ICHI KANGYO BANK,
LIMITED
By:
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Title:
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FIRST UNION NATIONAL BANK
By:
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Title:
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9
FLEET NATIONAL BANK
By:
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Title:
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THE FUJI BANK, LIMITED -
HOUSTON AGENCY
By:
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Title:
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THE INDUSTRIAL BANK OF JAPAN,
LIMITED, NEW YORK BRANCH
By:
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Title:
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THE LONG-TERM CREDIT BANK OF
JAPAN, LTD.
By:
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Title:
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MELLON BANK, N.A.
By:
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Title:
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MORGAN GUARANTY TRUST
COMPANY OF NEW YORK
By:
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Title:
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NATIONSBANK OF TEXAS, N.A.
By:
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Title:
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THE NORTHERN TRUST COMPANY
By:
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Title:
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ROYAL BANK OF CANADA
By:
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Title:
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THE SAKURA BANK, LIMITED
By:
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Title:
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SOCIETE GENERALE,
SOUTHWEST AGENCY
By:
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Title:
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THE SUMITOMO BANK, LIMITED
By:
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Title:
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THE TOKAI BANK, LTD.
By:
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Title:
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TORONTO DOMINION (TEXAS), INC.
By:
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Title:
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UNION BANK OF SWITZERLAND,
NEW YORK BRANCH
By:
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Title:
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By:
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Title:
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WACHOVIA BANK OF GEORGIA, N.A.
By:
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Title:
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WESTDEUTSCHE LANDESBANK
GIROZENTRALE, NEW YORK
BRANCH
By:
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Title:
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By:
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Title:
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THE YASUDA TRUST AND BANKING
COMPANY LIMITED
NEW YORK BRANCH
By:
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Title:
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EXHIBIT A
FORM OF FIRST AMENDMENT TO HII PLEDGE
AND COLLATERAL AGENCY AGREEMENT
THIS FIRST AMENDMENT, dated as of February 27, 1998 (this
"Amendment"), to Pledge and Collateral Agency Agreement, dated as of August 6,
1997, as the same may be amended, supplemented or otherwise modified from time
to time (the "HII Pledge and Collateral Agency Agreement"), is made and entered
into among HOUSTON INDUSTRIES INCORPORATED, a Texas corporation (the "Pledgor"),
THE CHASE MANHATTAN BANK, as Collateral Agent for the Secured Parties (in such
capacity, the "Collateral Agent"), and THE CHASE MANHATTAN BANK, as Bank Agent.
W I T N E S S E T H
WHEREAS, pursuant to the Credit Agreement, the Banks have
severally agreed to make extensions of credit to the Borrower upon the terms and
subject to the conditions set forth therein; and
WHEREAS, it was a condition precedent to the obligation of the
Banks to make their respective extensions of credit to the Borrower under the
Credit Agreement that the Pledgor shall have executed and delivered the HII
Pledge and Collateral Agency Agreement to the Collateral Agent for the ratable
benefit of the Secured Parties; and
WHEREAS, the Supermajority Banks have adopted an amendment to
the Credit Agreement that, among other things, approves the form of this
Amendment and the release of the Collateral contemplated hereby.
NOW THEREFORE, the Collateral Agent hereby enters into this
Amendment to provide as follows:
SECTION 1. DEFINITIONS. Unless otherwise defined herein, terms
defined in the HII Pledge and Collateral Agency Agreement and used herein shall
have the meanings given to them in the HII Pledge and Collateral Agency
Agreement.
A-1
13
SECTION 2. AMENDMENTS TO THE HII PLEDGE AND COLLATERAL AGENCY
AGREEMENT. The HII Pledge and Collateral Agency Agreement is hereby amended in
the following particulars only:
All of the common stock of NorAm Energy Corp. (formerly known
as HI Merger, Inc.) and member interests of Houston Industries FinanceCo GP, LLC
(which member interests are represented by common shares) and any Proceeds
therefrom pledged pursuant to the HII Pledge and Collateral Agency Agreement are
hereby released from the Liens created by the HII Pledge and Collateral Agency
Agreement and shall no longer constitute Collateral or Pledged Stock thereunder.
Schedule 1 to the HII Pledge and Collateral Agency Agreement is hereby amended
to read in its entirety as set forth in Annex A to this Amendment. The
Collateral Agent hereby agrees to promptly return the Collateral released
pursuant to this Amendment to the Pledgor and to execute and deliver to the
Pledgor such documents as the Pledgor shall reasonably request to evidence such
release and termination of Liens.
SECTION 3. MISCELLANEOUS.
3.1 Effectiveness. This Amendment shall become effective on
the later of (i) the date upon which the Collateral Agent shall have duly
executed and delivered this Amendment to the Pledgor and (ii) the date upon
which Section 3 of the Second Amendment to the Credit Agreement dated as of
February 27, 1998 shall have become effective in accordance with its terms.
3.2 Payment of Expenses. The Pledgor agrees to pay or
reimburse the Collateral Agent for all of its out-of-pocket costs and reasonable
expenses incurred in connection with this Amendment, any other documents
prepared in connection herewith and the transactions contemplated hereby,
including, without limitation, the reasonable fees and disbursements of counsel
to the Collateral Agent.
3.3 Continuing Effect; No Other Amendments. Except as
expressly amended hereby, all of the terms and provisions of the HII Pledge and
Collateral Agency Agreement are and shall remain in full force and effect. The
amendments contained herein shall not constitute an amendment or waiver of any
other provision of the HII Pledge and Collateral Agency Agreement for any
purpose except as expressly set forth herein.
3.4 GOVERNING LAW. THIS AMENDMENT SHALL BE GOVERNED BY, AND
CONSTRUED AND INTERPRETED IN ACCORDANCE WITH, THE LAWS OF THE STATE OF NEW YORK.
A-2
14
IN WITNESS WHEREOF, each of the undersigned has caused this
Amendment to be executed and delivered by its duly authorized officer as of the
date first above written.
HOUSTON INDUSTRIES INCORPORATED
By:
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Title:
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THE CHASE MANHATTAN BANK, as
Collateral Agent and as Bank Agent
By:
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Title:
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A-3
15
ANNEX A
SCHEDULE 1
TO PLEDGE AND COLLATERAL
AGENCY AGREEMENT
DESCRIPTION OF PLEDGED STOCK
Stock Certificate
Issuer Claim of Stock No. No. of Shares
- - --------------------- --------------------------------- -------------------- -------------------
Houston Industries All limited partnership Uncertificated/N/A 99% limited partner
FinanceCo LP interests in Houston interests
Industries FinanceCo LP,
including all rights of
the Pledgor under the Limited
Partnership Agreement of Houston
Industries FinanceCo LP dated
July 25, 1997, as amended from
time to time
A-4
16
EXHIBIT B
FORM OF TERMINATING AMENDMENT TO PLEDGE
AND COLLATERAL AGENCY AGREEMENT
THIS TERMINATING AMENDMENT, dated as of February 27, 1998
(this "Terminating Amendment"), to Pledge and Collateral Agency Agreement, dated
as of August 6, 1997 (the "Pledge and Collateral Agency Agreement"), is made and
entered into among HOUSTON INDUSTRIES INCORPORATED, a Texas corporation ("HII"),
HOUSTON INDUSTRIES ENERGY, INC., a Delaware corporation ("HI Energy" and
together with HII, the "Pledgors"), THE CHASE MANHATTAN BANK, as Collateral
Agent for the Secured Parties (in such capacity, the "Collateral Agent"), and
THE CHASE MANHATTAN BANK, as Bank Agent.
W I T N E S S E T H
WHEREAS, pursuant to the Credit Agreement, the Banks have
severally agreed to make extensions of credit to the Borrower upon the terms and
subject to the conditions set forth therein; and
WHEREAS, it was a condition precedent to the obligation of the
Banks to make their respective extensions of credit to the Borrower under the
Credit Agreement that the Pledgors shall have executed and delivered the Pledge
and Collateral Agency Agreement to the Collateral Agent for the ratable benefit
of the Secured Parties; and
WHEREAS, the Supermajority Banks have adopted an amendment to
the Credit Agreement that, among other things, approves the form of this
Terminating Amendment, the termination of the Pledge and Collateral Agency
Agreement and the release of the Collateral contemplated hereby.
NOW THEREFORE, the Collateral Agent hereby enters into this
Terminating Amendment to provide as follows:
SECTION 1. DEFINITIONS. Unless otherwise defined herein, terms
defined in the Pledge and Collateral Agency Agreement and used herein shall have
the meanings given to them in the Pledge and Collateral Agency Agreement.
B-1
17
SECTION 2. AMENDMENTS TO THE PLEDGE AND COLLATERAL AGENCY
AGREEMENT. The Pledge and Collateral Agency Agreement is hereby amended in the
following particulars only:
The Pledge and Collateral Agency Agreement is hereby
terminated and all of the common stock of Houston Industries Energy, Inc. and
Houston Industries Energy II, Inc. and any Proceeds therefrom pledged pursuant
to the Pledge and Collateral Agency Agreement are hereby released from the Liens
created by the Pledge and Collateral Agency Agreement. The Collateral Agent
hereby agrees to promptly return the Collateral released pursuant to this
Terminating Amendment to the Pledgors and to execute and deliver to the Pledgors
such documents as the Pledgors shall reasonably request to evidence such release
and termination of Liens and the termination of the Pledge and Collateral Agency
Agreement.
SECTION 3. MISCELLANEOUS.
3.1 Effectiveness. This Terminating Amendment shall become
effective on the later of (i) the date upon which the Collateral Agent shall
have duly executed and delivered this Terminating Amendment to the Pledgors and
(ii) the date upon which Section 3 of the Second Amendment to the Credit
Agreement dated as of February 27, 1998 shall have become effective in
accordance with its terms.
3.2 Payment of Expenses. HII agrees to pay or reimburse the
Collateral Agent for all of its out-of-pocket costs and reasonable expenses
incurred in connection with this Terminating Amendment, any other documents
prepared in connection herewith and the transactions contemplated hereby,
including, without limitation, the reasonable fees and disbursements of counsel
to the Collateral Agent.
3.3 GOVERNING LAW. THIS AMENDMENT SHALL BE GOVERNED BY, AND
CONSTRUED AND INTERPRETED IN ACCORDANCE WITH, THE LAWS OF THE STATE OF NEW YORK.
B-2
18
IN WITNESS WHEREOF, each of the undersigned has caused this
Terminating Amendment to be executed and delivered by its duly authorized
officer as of the date first above written.
HOUSTON INDUSTRIES INCORPORATED
By:
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Title:
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HOUSTON INDUSTRIES ENERGY, INC.
By:
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Title:
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THE CHASE MANHATTAN BANK, as
Collateral Agent and as Bank Agent
By:
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Title:
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B-3
1
EXHIBIT 10b5
HOUSTON INDUSTRIES INCORPORATED
EXECUTIVE INCENTIVE COMPENSATION PLAN
(As Established Effective January 1, 1982)
Fourth Amendment
Houston Industries Incorporated, a Texas corporation (the
"Company"), having adopted the Houston Lighting & Power Company Executive
Incentive Compensation Plan, as established effective January 1, 1982 (the
"Plan"), and having reserved the right under Section 13 thereof to amend the
Plan, does hereby amend the first paragraph of the Plan, effective August 6,
1997, to read as follows:
"Houston Lighting & Power Company, a Texas corporation, and
any successor thereto (the "Company"), hereby establishes and adopts
the following Executive Incentive Compensation Plan (the "Plan"):"
IN WITNESS WHEREOF, the Company has caused these presents to be
executed by its duly authorized officers in a number of copies, all of which
shall constitute one and the same instrument, which may be sufficiently
evidenced by any executed copy hereof, this 26th day of February 1998, but
effective as of August 6, 1997.
HOUSTON INDUSTRIES INCORPORATED
By /s/ LEE W. HOGAN
--------------------------------------
Name: Lee W. Hogan
---------------------------------
Title: Executive Vice President
--------------------------------
ATTEST:
/s/ RICHARD B. DAUPHIN
- - -----------------------------
1
EXHIBIT 10c7
HOUSTON INDUSTRIES INCORPORATED
EXECUTIVE INCENTIVE COMPENSATION PLAN
(As Established Effective January 1, 1985)
Sixth Amendment
Houston Industries Incorporated, a Texas corporation (the
"Company"), having amended and restated the Houston Industries Incorporated
Executive Incentive Compensation Plan, effective January 1, 1985 (the "Plan"),
and having reserved the right under Section 18 thereof to amend the Plan, does
hereby amend the definition of "Company" in Section 2 of the Plan, effective
August 6, 1997, to read as follows:
"F. 'Company': Houston Industries Incorporated, any
successor thereto, and/or any subsidiaries adopting the Plan with
approval of the Board of Directors."
IN WITNESS WHEREOF, the Company has caused these presents to
be executed by its duly authorized officers in a number of copies, all of which
shall constitute one and the same instrument, which may be sufficiently
evidenced by any executed copy hereof, this 26th day of February, 1998, but
effective as of August 6, 1997.
HOUSTON INDUSTRIES INCORPORATED
By /s/ LEE W. HOGAN
-----------------------------------
Name: Lee W. Hogan
------------------------------
Title: Executive Vice President
-----------------------------
ATTEST:
/s/ RICHARD B. DAUPHIN
- - -----------------------------
1
EXHIBIT 10f10
HOUSTON INDUSTRIES INCORPORATED
EXECUTIVE INCENTIVE COMPENSATION PLAN
(As Amended and Restated Effective January 1, 1991)
Ninth Amendment
Houston Industries Incorporated, a Texas corporation (the
"Company"), having amended and restated the Houston Industries Incorporated
Executive Incentive Compensation Plan, effective January 1, 1991, and as
thereafter amended (the "Plan"), and having reserved the right under Paragraph
18 thereof to amend the Plan, does hereby amend the Plan, effective as of the
dates specified, as follows:
1. Paragraph 8 of the Plan is hereby amended, effective
as of January 1, 1998, by striking the first sentence and inserting the
following in lieu thereof:
"The Incentive Compensation Fund for any Plan Year shall be
limited to the sum of the Maximum Annual Incentive Award Opportunities
and Maximum Long-Term Incentive Award Opportunities for all
Participants for that Plan Year, unless the Committee makes a specific
determination pursuant to Paragraph 3D. hereinabove."
2. The first sentence of Paragraph 10B. of the Plan is
hereby amended in its entirety, effective January 1, 1998, to read as follows:
"B. Payment of Vested Portion of Annual Award. A
Participant who has been granted an Annual Award for a Plan Year must
have been continually employed with an Employer through December 31 of
such Plan Year in order to be eligible for payment of such Annual
Award; provided, however, that if (i) a Participant's Agreement
specifies that his Annual Award contains a vested portion and (ii) the
Participant terminates employment during the Plan Year by reason of
death, disability or retirement, but after completion of no less than
ninety days of continuous service with an Employer, the Participant
shall be eligible to receive a prorated Annual Award which shall be
calculated as a fraction multiplied by the vested portion of the
Participants' target Annual Award for the Plan Year, where the
numerator is the number of days of completed continuous service with
an Employer during the Plan Year (excluding days during which a
Participant is on an unpaid leave of absence) and the denominator is
the total number of days in the Plan Year."
2
3. Paragraph 2S. of the Plan is hereby amended,
effective as of January 1, 1997, to read as follows:
"S. 'Participant': An employee who is selected to
participate in the Plan; provided, however, that from and after
January 1, 1997, no individual employed at the South Texas Nuclear
Project shall be eligible to become a Participant."
IN WITNESS WHEREOF, Houston Industries Incorporated has caused
these presents to be executed by its duly authorized officers in a number of
copies, all of which shall constitute one and the same instrument, which may be
sufficiently evidenced by any executed copy hereof, this 26th day of February,
1998, but effective as of the dates specified herein.
HOUSTON INDUSTRIES INCORPORATED
By /s/ LEE W. HOGAN
-----------------------------------
Name: Lee W. Hogan
------------------------------
Title: Executive Vice President
-----------------------------
ATTEST:
/s/ RICHARD B. DAUPHIN
- - ---------------------------------
Assistant Corporate Secretary
-2-
1
EXHIBIT 10i2
HOUSTON INDUSTRIES INCORPORATED
BENEFIT RESTORATION PLAN
(As Amended and Restated Effective July 1, 1991)
First Amendment
Houston Industries Incorporated, a Texas corporation (the
"Company"), having amended and restated the Houston Industries Incorporated
Benefit Restoration Plan, effective July 1, 1991 (the "Plan"), and having
reserved the right under Section 8 thereof to amend the Plan, does hereby amend
the Plan, effective as of the dates specified herein as follows:
1. Paragraph 4 of the Plan is hereby amended, effective
September 3, 1997, by adding the following to the end thereof:
"If any Restoration Participant who has entered into a Severance
Agreement, as defined in the Houston Industries Incorporated Executive
Severance Benefits Plan, effective as of September 3, 1997,
experiences a termination giving rise to a right to benefits under his
Severance Agreement and complies with the conditions set forth in his
Severance Agreement for the receipt of benefits thereunder, then such
Restoration Participant's Retirement Plan Restoration Benefit under
this section shall be calculated as if (a) the Restoration Participant
were fully vested in the Retirement Plan and (b) the Restoration
Participant had remained in the service of the Company or its
Affiliates, as defined in his Severance Agreement, throughout the
three-year period following the Change of Control, as defined in his
Severance Agreement, or such other period as provided in the
Restoration Participant's Severance Agreement."
2. Paragraph 5 of the Plan is hereby amended, effective
September 3, 1997, by adding the following to the end thereof:
"If any Supplemental Participant who has entered into a Severance
Agreement with Company experiences a termination giving rise to a
right to benefits under his Severance Agreement and complies with the
conditions set forth in his Severance Agreement for the receipt of
benefits thereunder, then such Supplemental Participant's Supplemental
Retirement Benefit under this section shall be calculated as if (a)
the Supplemental Participant were fully vested in the Retirement Plan
and (b) the Supplemental Participant had remained in the service of
the Company or its Affiliates, as defined in his Severance Agreement,
throughout the three-year period following the Change of Control, as
defined in his Severance Agreement, or such other period as provided
in the Supplemental Participant's Severance Agreement."
2
3. Paragraph 11.c. of the Plan is hereby amended,
effective August 6, 1997, to read as follows:
"c. 'Company' shall mean Houston Industries Incorporated,
any successor thereto, and/or any subsidiaries adopting the Plan with
approval of the Board of Directors."
4. A new paragraph 14 shall be added to the Plan,
effective October 1, 1997, which shall read as follows:
"14. OPCO as Successor Employer. Effective on or about
October 1, 1997, STP Nuclear Operating Company, a Texas nonprofit
corporation ("OPCO" herein), assumed the responsibilities of Houston
Lighting & Power Company ("HL&P herein), a division of the Company, as
project manager of the South Texas Project. In connection therewith,
OPCO employed substantially all of the former employees of HL&P
stationed at the South Texas Project who have been engaged in the
operation and management of the South Texas Project as employees of
HL&P ("OPCO Employees"). Section 8.6.4 of that certain South Texas
Project Transition Agreement between the Company and the remaining
owners of the South Texas Project, dated effective November 17, 1997,
provides that OPCO shall assume any and all liabilities for providing
benefits under this Plan to the former HL&P employees who became OPCO
Employees. In furtherance thereof, the liabilities for benefits
accrued under this Plan as of September 30, 1997 with respect to OPCO
Employees have been transferred from the books and records of the
Company to the books and records of OPCO. Accordingly, from and after
October 1, 1997, the Company shall have no further obligation with
respect to such benefits, if any, accrued under this Plan on behalf of
OPCO Employees and the OPCO Employees shall look solely to the OPCO
Plan and OPCO for the payment of such benefits."
IN WITNESS WHEREOF, Houston Industries Incorporated has caused
these presents to be executed by its duly authorized officers in a number of
copies, all of which shall constitute one and the same instrument, which may be
sufficiently evidenced by any executed copy hereof, this 26th day of February,
1998, but effective as of the dates specified herein.
HOUSTON INDUSTRIES INCORPORATED
By /s/ LEE W. HOGAN
-----------------------------------
Name: Lee W. Hogan
------------------------------
Title: Executive Vice President
-----------------------------
ATTEST:
/s/ RICHARD B. DAUPHIN
- - ------------------------------
Assistant Corporate Secretary
-2-
1
EXHIBIT 10j9
HOUSTON INDUSTRIES INCORPORATED
DEFERRED COMPENSATION PLAN
(As Established Effective September 1, 1985)
Eighth Amendment
Houston Industries Incorporated, a Texas corporation (the
"Company"), having established the Houston Industries Incorporated Deferred
Compensation Plan, effective September 1, 1985 and as amended (the "Plan"), and
having reserved the right under Section 7.1 thereof to amend the Plan, does
hereby amend Section 1.2 (n) the Plan, effective as of October 1, 1997, by
inserting the following to the end thereof:
"From and after October 1, 1997, employment with STP Nuclear Operating
Company shall be deemed to constitute 'Employment' with an Employer
hereunder for all purposes except any such Employee shall not be
eligible to make any additional deferrals of Compensation under the
Plan."
IN WITNESS WHEREOF, Houston Industries Incorporated has caused
these presents to be executed by its duly authorized officers in a number of
copies, all of which shall constitute one and the same instrument, which may be
sufficiently evidenced by any executed copy hereof, this 13th day of November,
1997, but effective as of the date stated herein.
HOUSTON INDUSTRIES INCORPORATED
By /s/ LEE W. HOGAN
---------------------------------
ATTEST:
/s/ RICHARD B. DAUPHIN
- - ------------------------------
1
EXHIBIT 10j10
HOUSTON INDUSTRIES INCORPORATED
DEFERRED COMPENSATION PLAN
(As Established September 1, 1985)
Ninth Amendment
Houston Industries Incorporated, a Texas corporation (the
"Company"), having established the Houston Industries Incorporated Deferred
Compensation Plan, effective September 1, 1985, and as thereafter amended (the
"Plan"), and having reserved the right under Section 7.1 thereof to amend the
Plan, does hereby amend the Plan, effective as of September 3, 1997 as follows:
1. Sections 5.2(a), 5.2(b), and 5.2(c) of the Plan are
hereby amended by adding the following sentence at the end of each section:
"Notwithstanding the foregoing, if there is a conflict between the
provisions of this section and the terms of the Participant's
Severance Agreement (as described in Section 5.4), the terms of the
Severance Agreement shall control."
2. Section 5.4 of the Plan is hereby amended by
inserting the following paragraph at the end thereof which shall read as
follows:
"However, if any Participant who has entered into a Severance
Agreement, as defined in the Houston Industries Incorporated Executive
Severance Benefits Plan, effective as of September 3, 1997,
experiences a termination giving rise to a right to benefits under his
Severance Agreement and complies with the conditions set forth in his
Severance Agreement for the receipt of benefits thereunder, then such
Participant shall be treated as if his termination did not occur until
after his Early Retirement Date, and the provisions of Section 5.1(c)
shall apply."
2
IN WITNESS WHEREOF, Houston Industries Incorporated has caused
these presents to be executed by its duly authorized officers in a number of
copies, all of which shall constitute one and the same instrument, which may be
sufficiently evidenced by any executed copy hereof, this 26th day of February,
1998, but effective as of the date specified herein.
HOUSTON INDUSTRIES INCORPORATED
By /s/ LEE W. HOGAN
-----------------------------------
Name: Lee W. Hogan
------------------------------
Title: Executive Vice President
-----------------------------
ATTEST:
/s/ RICHARD B. DAUPHIN
- - --------------------------------
Assistant Corporate Secretary
-2-
1
EXHIBIT 10k9
HOUSTON INDUSTRIES INCORPORATED
DEFERRED COMPENSATION PLAN
(As Amended and Restated Effective January 1, 1989)
Eighth Amendment
Houston Industries Incorporated, a Texas corporation (the
"Company"), having established the Houston Industries Incorporated Deferred
Compensation Plan, as amended and restated effective January 1, 1989 and as
thereafter amended (the "Plan"), and having reserved the right under Section
7.1 thereof to amend the Plan, does hereby amend the Plan, effective as of the
dates specified therein as follows:
1. Section 1.2(o) of the Plan is hereby amended,
effective October 1, 1997, by adding the following to the end thereof:
"From and after October 1, 1997, employment with STP Nuclear Operating
Company shall be deemed to constitute 'Employment' with an Employer
hereunder for all purposes except any such Employee shall not be
eligible to make any additional deferrals of Compensation under the
Plan."
2. Section 5.1(b) of the Plan is hereby amended,
effective January 1, 1998, by striking the last sentence and inserting the
following in lieu thereof:
"For purposes of determining a benefit payable in the form of fifteen
(15) installment payments under this Section 5.1(b), the Interest
Crediting Rate shall be the greater of (i) the Interest Crediting Rate
in effect for the Plan Year in which an Employee Participant attains
age sixty-five (65) or a Director Participant attains age seventy (70)
or (ii) the Interest Crediting Rate in effect for the Plan Year
immediately prior to which an Employee Participant attains age
sixty-five (65) or a Director Participant attains age seventy (70).
This Interest Crediting Rate will constitute the applicable Interest
Crediting Rate for all years thereafter in which the Normal Retirement
Distribution is paid or payable."
IN WITNESS WHEREOF, Houston Industries Incorporated has caused
these presents to be executed by its duly authorized officer in a number of
copies, all of which shall constitute one
2
and the same instrument, which may be sufficiently evidenced by any executed
copy hereof, this 13th day of November, 1997, but effective as of the dates
stated herein.
HOUSTON INDUSTRIES INCORPORATED
By /s/ LEE W. HOGAN
--------------------------------
ATTEST:
/s/ RICHARD B. DAUPHIN
- - -------------------------------
1
EXHIBIT 10k10
HOUSTON INDUSTRIES INCORPORATED
DEFERRED COMPENSATION PLAN
(As Amended and Restated Effective January 1, 1989)
Ninth Amendment
Houston Industries Incorporated, a Texas corporation (the
"Company"), having amended and restated the Houston Industries Incorporated
Deferred Compensation Plan, effective January 1, 1989, and as thereafter
amended (the "Plan"), and having reserved the right under Section 7.1 thereof
to amend the Plan, does hereby amend the Plan, effective as of September 3,
1997, as follows:
1. Sections 5.2(a), 5.2(b), and 5.2(c) of the Plan are
hereby amended, by adding the following sentence at the end of each section:
"Notwithstanding the foregoing, if there is a conflict between the
provisions of this section and the terms of the Participant's
Severance Agreement (as further described in Section 5.4), the terms
of the Severance Agreement shall control."
2. Section 5.4 of the Plan is hereby amended by
inserting the following paragraph at the end thereof which shall read as
follows:
"If any Participant who has entered into a Severance
Agreement, as defined in the Houston Industries Incorporated Executive
Severance Benefits Plan, effective as of September 3, 1997,
experiences a termination giving rise to a right to benefits under his
Severance Agreement and complies with the conditions set forth in his
Severance Agreement for the receipt of benefits thereunder, then such
Participant shall be treated as if his termination did not occur until
after his Early Retirement Date, and the provisions of Section 5.1(d)
shall apply."
2
IN WITNESS WHEREOF, Houston Industries Incorporated has caused
these presents to be executed by its duly authorized officers in a number of
copies, all of which shall constitute one and the same instrument, which may be
sufficiently evidenced by any executed copy hereof, this 26th day of February,
1998, but effective as of the date specified herein.
HOUSTON INDUSTRIES INCORPORATED
By /s/ LEE W. HOGAN
-----------------------------------
Name: Lee W. Hogan
------------------------------
Title: Executive Vice President
-----------------------------
ATTEST:
/s/ RICHARD B. DAUPHIN
- - ----------------------------------
Assistant Corporate Secretary
-2-
1
EXHIBIT 10l10
HOUSTON INDUSTRIES INCORPORATED
DEFERRED COMPENSATION PLAN
(As Amended and Restated Effective January 1, 1991)
Ninth Amendment
Houston Industries Incorporated, a Texas corporation (the
"Company"), having established the Houston Industries Incorporated Deferred
Compensation Plan, as amended and restated effective January 1, 1991 and as
thereafter amended (the "Plan"), and having reserved the right under Section
7.1 thereof to amend the Plan, does hereby amend the Plan, effective as of the
dates stated therein as follows:
1. Section 1.2(o) of the Plan is hereby amended, effective
October 1, 1997, by adding the following to the end thereof:
"From and after October 1, 1997, employment with STP Nuclear Operating
Company shall be deemed to constitute 'Employment' with an Employer
hereunder for all purposes except any such Employee shall not be
eligible to make any additional deferrals of Compensation under the
Plan."
2. Section 3.2 of the Plan is hereby amended, effective August 6,
1997, by inserting the following immediately following the second sentence
thereto:
"Notwithstanding the foregoing, effective as of August 6, 1997, any
former Director of NorAm Energy Corp. who as of such date was a
Director of the Company will be immediately eligible to participate
under the Plan."
3. Section 5.1(b) of the Plan is hereby amended, effective
January 1, 1998, by striking the last sentence and inserting the following in
lieu thereof:
"For purposes of determining a benefit payable in the form of fifteen
(15) installment payments under this Section 5.1(b), the Interest
Crediting Rate shall be the greater of (i) the Interest Crediting Rate
in effect for the Plan Year in which an Employee Participant attains
age sixty-five (65) or a Director Participant attains age seventy (70)
or (ii) the Interest Crediting Rate in effect for the Plan Year
immediately prior to which an Employee Participant attains age
sixty-five (65) or a Director Participant
2
attains age seventy (70). With respect to deferrals made after
January 1, 1998, the Interest Crediting Rate shall be the Interest
Crediting Rate in effect for the Plan Year immediately prior to which
an Employee Participant attains age sixty-five (65) or a Director
Participant attains age seventy (70). This Interest Crediting Rate
will constitute the applicable Interest Crediting Rate for all years
thereafter in which the Normal Retirement Distribution is paid or
payable."
IN WITNESS WHEREOF, Houston Industries Incorporated has caused
these presents to be executed by its duly authorized officer in a number of
copies, all of which shall constitute one and the same instrument, which may be
sufficiently evidenced by any executed copy hereof, this 13th day of November,
1997, but effective as of the dates stated herein.
HOUSTON INDUSTRIES INCORPORATED
By /s/ LEE W. HOGAN
---------------------------------
ATTEST:
/s/ RICHARD B. DAUPHIN
- - ---------------------------------
1
EXHIBIT 10l11
HOUSTON INDUSTRIES INCORPORATED
DEFERRED COMPENSATION PLAN
(As Amended and Restated Effective January 1, 1991)
Tenth Amendment
Houston Industries Incorporated, a Texas corporation (the
"Company"), having amended and restated the Houston Industries Incorporated
Deferred Compensation Plan, effective January 1, 1991, and as thereafter
amended (the "Plan"), and having reserved the right under Section 7.1 thereof
to amend the Plan, does hereby amend the Plan, effective as of September 3,
1997, as follows:
1. Sections 5.2(a), 5.2(b), and 5.2(c) of the Plan are
hereby amended, by adding the following sentence at the end of each section:
"Notwithstanding the foregoing, if there is a conflict between the
provisions of this section and the terms of the Participant's
Severance Agreement (as further described in Section 5.4), the terms
of the Severance Agreement shall control."
2. Section 5.4 of the Plan is hereby amended, by
inserting the following paragraph at the end thereof which shall read as
follows:
"If any Participant who has entered into a Severance
Agreement, as defined in the Houston Industries Incorporated Executive
Severance Benefits Plan, effective as of September 3, 1997,
experiences a termination giving rise to a right to benefits under his
Severance Agreement and complies with the conditions set forth in his
Severance Agreement for the receipt of benefits thereunder, then such
Participant shall be treated as if his termination did not occur until
after his Early Retirement Date, and the provisions of Section 5.1(d)
shall apply."
2
IN WITNESS WHEREOF, Houston Industries Incorporated has caused
these presents to be executed by its duly authorized officers in a number of
copies, all of which shall constitute one and the same instrument, which may be
sufficiently evidenced by any executed copy hereof, this 26th day of February,
1998, but effective as of the date specified herein.
HOUSTON INDUSTRIES INCORPORATED
By /s/ LEE W. HOGAN
-----------------------------------
Name: Lee W. Hogan
------------------------------
Title: Executive Vice President
-----------------------------
ATTEST:
/s/ RICHARD B. DAUPHIN
- - -----------------------------------
Assistant Corporate Secretary
-2-
1
EXHIBIT 10m4
HOUSTON INDUSTRIES INCORPORATED
LONG-TERM INCENTIVE COMPENSATION PLAN
Third Amendment
Houston Industries Incorporated, a Texas corporation (the
"Company"), having established the Houston Industries Incorporated Long-Term
Incentive Compensation Plan, effective January 1, 1989, and as thereafter
amended (the "Plan"), and having reserved the right under Section 12.1 thereof
to amend the Plan, does hereby amend Section 2.1(e) of the Plan, effective
August 6, 1997, in its entirety to read as follows:
"(e) 'Company' means Houston Industries Incorporated, a
Texas corporation, and any successor thereto."
IN WITNESS WHEREOF, the Company has caused these presents to
be executed by its duly authorized officers in a number of copies, all of which
shall constitute one and the same instrument, which may be sufficiently
evidenced by any executed copy hereof, this 26th day of February, 1998, but
effective as of August 6, 1997.
HOUSTON INDUSTRIES INCORPORATED
By /s/ LEE W. HOGAN
---------------------------------
Name: Lee W. Hogan
----------------------------
Title: Executive Vice President
---------------------------
ATTEST:
/s/ RICHARD B. DAUPHIN
- - ---------------------------------
Assistant Corporate Secretary
1
EXHIBIT 10p4
1994 HOUSTON INDUSTRIES INCORPORATED
LONG-TERM INCENTIVE COMPENSATION PLAN
Second Amendment
Houston Industries Incorporated, a Texas corporation (the
"Company"), having established the 1994 Houston Industries Incorporated
Long-Term Incentive Compensation Plan, effective January 1, 1994, and as
thereafter amended, (the "Plan"), and having reserved the right under Section
12.1 thereof to amend the Plan, does hereby amend Section 2.1(e) of the Plan,
effective August 6, 1997, in its entirety to read as follows:
"(e) 'Company' means Houston Industries Incorporated, a
Texas corporation, and any successor thereto."
IN WITNESS WHEREOF, the Company has caused these presents to
be executed by its duly authorized officers in a number of copies, all of which
shall constitute one and the same instrument, which may be sufficiently
evidenced by any executed copy hereof, this 26th day of February, 1998, but
effective as of August 6, 1997.
HOUSTON INDUSTRIES INCORPORATED
By /s/ LEE W. HOGAN
---------------------------------
Name: Lee W. Hogan
----------------------------
Title: Executive Vice President
---------------------------
ATTEST:
/s/ RICHARD B. DAUPHIN
- - ---------------------------------
Assistant Corporate Secretary
1
EXHIBIT 10q3
HOUSTON INDUSTRIES INCORPORATED
SAVINGS RESTORATION PLAN
(Effective January 1, 1991)
Second Amendment
Houston Industries Incorporated, a Texas corporation (the
"Company"), having established the Houston Industries Incorporated Savings
Restoration Plan, effective January 1, 1991, and as thereafter amended (the
"Plan"), and having reserved the right to amend the Plan under Section 6.2
thereof, does hereby amend the Plan, effective as of the dates specified
therein as follows:
1. Section 1.3 of the Plan is hereby amended, effective
August 6, 1997, by inserting the following sentence at the end thereof:
"For purposes of this Plan, the term "Company" shall include Houston
Industries Incorporated, any successor thereto, and/or any Affiliate
adopting this Plan with approval of the Board of Directors."
2. A new Section 6.3 is hereby added to Article XI of
the Plan, effective October 1, 1997, to read as follows:
"6.3 OPCO as Successor Employer. Effective on or about
October 1, 1997, STP Nuclear Operating Company, a Texas nonprofit
corporation ("OPCO" herein), assumed the responsibilities of Houston
Lighting & Power Company ("HL&P" herein), a division of the Company,
as project manager of the South Texas Project. In connection
therewith, OPCO employed substantially all of the former employees of
HL&P stationed at the South Texas Project who have been engaged in the
operation and management of the South Texas Project as employees of
HL&P ("OPCO Employees"). Section 8.6.4 of that certain South Texas
Project Transition Agreement between the Company and the remaining
owners of the South Texas Project, dated effective November 17, 1997,
provides that OPCO shall assume any and all liabilities for providing
benefits under this Plan to the former HL&P employees who became OPCO
Employees. In furtherance thereof, the liabilities for
2
benefits accrued under this Plan as of September 30, 1997 with respect
to OPCO Employees have been transferred from the books and records of
the Company to the books and records of OPCO. Accordingly, from and
after October 1, 1997, the Company shall have no further obligation
with respect to such benefits, if any, accrued under this Plan on
behalf of OPCO Employees and the OPCO Employees shall look solely to
the OPCO Plan and OPCO for the payment of such benefits."
IN WITNESS WHEREOF, Houston Industries Incorporated has caused
these presents to be executed by its duly authorized officers in a number of
copies, all of which shall constitute one and the same instrument, which may be
sufficiently evidenced by any executed copy hereof, this 26th day of February,
1998, but effective as of the dates specified herein.
HOUSTON INDUSTRIES INCORPORATED
By /s/ LEE W. HOGAN
---------------------------------
Name: Lee W. Hogan
----------------------------
Title: Executive Vice President
---------------------------
ATTEST:
/s/ RICHARD B. DAUPHIN
- - ---------------------------------
Assistant Corporate Secretary
1
EXHIBIT 10s3
HOUSTON INDUSTRIES INCORPORATED
EXECUTIVE LIFE INSURANCE PLAN
(Effective January 1, 1994)
Second Amendment
Houston Industries Incorporated, a Texas corporation, (the
"Company"), having established the Houston Industries Incorporated Executive
Life Insurance Plan, effective January 1, 1994 (the "Plan"), and having
reserved the right under Section 6.1 thereof to amend the Plan does hereby
amend the Plan, effective August 6, 1997, as follows:
1. Section 2.6 of the Plan is hereby amended in its
entirety to read as follows:
"2.6 'Company' shall mean Houston Industries
Incorporated, a Texas corporation, and any successor thereto."
2. Section 2.9 of the Plan is hereby amended in its
entirety to read as follows:
"2.9 'Eligible Employee' shall mean an individual who is
employed by the Company or one of its wholly owned subsidiaries on or
after the Effective Date who is not on the payroll of NorAm Energy
Corp. or any of its divisions or subsidiaries and who (a) is (i) an
officer of the Company or one of its wholly owned subsidiaries at the
level of Vice President or above or (ii) a key executive of the
Company or one of its wholly owned subsidiaries and has been
designated by the Committee to participate in the Plan and (b) has
submitted to the Insurer a properly completed application for life
insurance under this Plan and such application has been approved by
the Insurer. In addition to those individuals described above, all
Directors of the Company on or after the Effective Date who are not
otherwise eligible as Employees of the Company shall automatically
participate in this Plan."
2
IN WITNESS WHEREOF, the Company has caused these presents to
be executed by its duly authorized officers in a number of copies, all of which
shall constitute one and the same instrument, which may be sufficiently
evidenced by any executed copy hereof, this 26th day of February, 1998, but
effective as of August 6, 1997.
HOUSTON INDUSTRIES INCORPORATED
By /s/ LEE W. HOGAN
----------------------------------
Name: Lee W. Hogan
-----------------------------
Title: Executive Vice President
----------------------------
ATTEST:
/s/ RICHARD B. DAUPHIN
- - ----------------------------------
-2-
1
AMENDED AND RESTATED
EMPLOYMENT AGREEMENT
FOR
DON D. JORDAN
2
AMENDED AND RESTATED
EMPLOYMENT AGREEMENT
FOR
DON D. JORDAN
I N D E X
Page
----
1. CERTAIN DEFINITIONS......................................................................................1
Accrued Obligations......................................................................................1
Affiliated Companies.....................................................................................1
Annual Base Salary.......................................................................................1
Base Amount..............................................................................................1
Base Employment Period...................................................................................2
Beneficiary..............................................................................................2
Board....................................................................................................2
Cause....................................................................................................2
Change of Control or CIC.................................................................................2
CIC Agreement............................................................................................4
CIC Resolution Date......................................................................................4
Code.....................................................................................................4
Consulting Period........................................................................................4
Date of Termination......................................................................................4
Deferred Compensation Plan...............................................................................5
Disability...............................................................................................5
Disability Effective Date................................................................................5
Effective Date...........................................................................................5
EICP.....................................................................................................5
Employment Period........................................................................................5
Good Reason..............................................................................................5
LICP.....................................................................................................6
Notice of Termination....................................................................................6
Other Benefits...........................................................................................6
Performance Shares.......................................................................................6
Retirement...............................................................................................6
SERP.....................................................................................................6
Spouse...................................................................................................6
Stock....................................................................................................6
(i)
3
Page
----
Stock Award..............................................................................................6
Supplemental Retirement Benefit..........................................................................6
Target Bonus.............................................................................................6
Vested Shares............................................................................................6
Welfare Benefit Continuation.............................................................................6
Without Cause............................................................................................7
Without Good Reason......................................................................................7
2. EMPLOYMENT PERIOD........................................................................................7
3. TERMS OF EMPLOYMENT......................................................................................7
A. Position and Duties.............................................................................7
B. Compensation....................................................................................8
4. TERMINATION OF EMPLOYMENT...............................................................................11
A. Death or Disability............................................................................11
B. Cause..........................................................................................12
C. Good Reason....................................................................................12
D. Notice of Termination........................................................12
E. Expiration of Employment Period................................................................12
5. OBLIGATIONS OF THE COMPANY UPON TERMINATION OF
EMPLOYMENT...........................................................................................12
A. For Cause or Without Good Reason...............................................................12
B. Otherwise, Upon CIC or While the Company is a Party to a CIC
Agreement...................................................................................12
C. Otherwise, Before a CIC and When the Company is not a Party to a
CIC Agreement...............................................................................13
D. Salary Continuation Plan.......................................................................17
E. Office.........................................................................................17
6. CONSULTING PERIOD AND DUTIES............................................................................17
7. NON-EXCLUSIVITY OF RIGHTS...............................................................................18
(ii)
4
Page
----
8. SET-OFF; MITIGATION; LEGAL FEES; EXPENSES; OBLIGATIONS
PENDING DISPUTE RESOLUTION ..........................................................................18
A. Set-Off and Mitigation.........................................................................18
B. Legal Fees and Expenses........................................................................18
C. Obligations Pending Dispute Resolution.........................................................19
9. CERTAIN ADDITIONAL PAYMENTS BY THE COMPANY..............................................................20
10. CONFIDENTIAL INFORMATION................................................................................22
11. SUCCESSORS..............................................................................................22
12. SOURCE OF PAYMENTS......................................................................................23
13. EFFECT OF PRIOR AGREEMENTS..............................................................................23
14. CONSOLIDATION, MERGER OR SALE OF ASSETS.................................................................23
15. MISCELLANEOUS...........................................................................................23
16. DEFERRED COMPENSATION PLAN AND SERP PAYMENTS............................................................24
(iii)
5
AMENDED AND RESTATED
EMPLOYMENT AGREEMENT
THIS AMENDED AND RESTATED EMPLOYMENT AGREEMENT (the
"Agreement") is entered into by and between HOUSTON INDUSTRIES INCORPORATED, a
Texas corporation (said corporation, together with its successors and assigns
permitted under this Agreement, hereinafter referred to as the "Company"), and
DON D. JORDAN (the "Executive"), this 7th day of November, 1997.
W I T N E S S E T H:
WHEREAS, on February 25, 1997, the Company and the Executive
entered into an Amended and Restated Employment Agreement (the "Prior
Agreement") under which the Executive would be employed by the Company through
June 1, 1999; and
WHEREAS, the parties to said Prior Agreement desire to
completely amend and restate said Prior Agreement to provide for the extended
employment of the Executive in the event that, on June 1, 1999, the Company is a
party to a binding agreement to effect a Change of Control; and
WHEREAS, Section 15(A) of the Prior Agreement contemplates the
amendment of the Prior Agreement with the mutual consent of the parties and the
parties desire to amend and restate the Prior Agreement;
NOW, THEREFORE, in consideration of the mutual covenants and
agreements herein contained, the parties hereto agree that the Prior Agreement
shall be amended and restated in its entirety to read as follows:
1. CERTAIN DEFINITIONS:
"ACCRUED OBLIGATIONS" shall have the meaning set forth in
Section 5(C)(i)(a).
"AFFILIATED COMPANIES" shall mean and include any company
controlled by, controlling or under common control with the Company within the
meaning of Section 414 of the Code.
"ANNUAL BASE SALARY" shall mean the salary of the Executive
provided for in Section 3(B)(i), as adjusted and in effect from time to time.
"BASE AMOUNT" shall mean the sum of the Executive's Annual
Base Salary plus Target Bonus plus the Fair Market Value (within the meaning of
the LICP) of the Performance Shares, determined as of the time of a CIC or at
the time of any other event entitling the Executive or his Beneficiary to
benefits under Section 5(B)(i).
6
"BASE EMPLOYMENT PERIOD" shall mean the period commencing on
the Effective Date and ending on June 1, 1999.
"BENEFICIARY" shall mean the person or persons, trustee or
trustees of a trust, partnership, corporation, limited liability partnership,
limited liability company or other entity named, in a writing filed with the
Company, to receive any compensation or benefit payable hereunder following the
Executive's death or, in the event no such person or entity is named or survives
the Executive, his estate. In the event of the Executive's death or a judicial
determination of his incompetence, reference in this Agreement to the Executive
shall be deemed, where appropriate, to refer to his Beneficiary, estate or other
legal representative.
"BOARD" shall mean the Board of Directors of the Company.
"CAUSE" shall mean (i) repeated violations by the Executive of
the Executive's obligations under Section 3(A) (other than as a result of
incapacity due to physical or mental illness) which are demonstrably willful and
deliberate on the Executive's part, which are committed in bad faith or without
reasonable belief that such violations are in the best interests of the Company
and which are not remedied in a reasonable period of time after receipt of
written notice from the Company specifying such violations or (ii) the
conviction of the Executive of a felony involving moral turpitude.
A "CHANGE OF CONTROL" or "CIC" shall be deemed to have
occurred upon the occurrence of any of the following events:
(a) 30% OWNERSHIP CHANGE: Any Person makes an acquisition of
Outstanding Voting Stock and is, immediately thereafter, the beneficial
owner of 30% or more of the then Outstanding Voting Stock, unless such
acquisition is made directly from the Company in a transaction approved
by a majority of the Incumbent Directors; or any group is formed that
is the beneficial owner of 30% or more of the Outstanding Voting Stock;
or
(b) BOARD MAJORITY CHANGE: Individuals who are Incumbent
Directors cease for any reason to constitute a majority of the members
of the Board; or
(c) MAJOR MERGERS AND ACQUISITIONS: Consummation of a Business
Combination unless, immediately following such Business Combination,
(i) all or substantially all of the individuals and entities that were
the beneficial owners of the Outstanding Voting Stock immediately prior
to such Business Combination beneficially own, directly or indirectly,
more than 70% of the then outstanding shares of voting stock of the
parent corporation resulting from such Business Combination in
substantially the same relative proportions as their ownership,
immediately prior to such Business Combination, of the Outstanding
Voting Stock, (ii) if the Business Combination involves the issuance or
payment by the Company of consideration to another entity or its
shareholders, the total fair market value of such consideration plus
the principal amount of the consolidated long-term debt of the entity
or business
-2-
7
being acquired (in each case, determined as of the date of consummation
of such Business Combination by a majority of the Incumbent Directors)
does not exceed 50% of the sum of the fair market value of the
Outstanding Voting Stock plus the principal amount of the Company's
consolidated long-term debt (in each case, determined immediately prior
to such consummation by a majority of the Incumbent Directors), (iii)
no Person (other than any corporation resulting from such Business
Combination) beneficially owns, directly or indirectly, 30% or more of
the then outstanding shares of voting stock of the parent corporation
resulting from such Business Combination and (iv) a majority of the
members of the board of directors of the parent corporation resulting
from such Business Combination were Incumbent Directors of the Company
immediately prior to consummation of such Business Combination; or
(d) MAJOR ASSET DISPOSITIONS: Consummation of a Major Asset
Disposition unless, immediately following such Major Asset Disposition,
(i) individuals and entities that were beneficial owners of the
Outstanding Voting Stock immediately prior to such Major Asset
Disposition beneficially own, directly or indirectly, more than 70% of
the then outstanding shares of voting stock of the Company (if it
continues to exist) and of the entity that acquires the largest portion
of such assets (or the entity, if any, that owns a majority of the
outstanding voting stock of such acquiring entity) and (ii) a majority
of the members of the board of directors of the Company (if it
continues to exist) and of the entity that acquires the largest portion
of such assets (or the entity, if any, that owns a majority of the
outstanding voting stock of such acquiring entity) were Incumbent
Directors of the Company immediately prior to consummation of such
Major Asset Disposition.
For purposes of the foregoing,
(1) the term "Person" means an individual, entity or
group;
(2) the term "group" is used as it is defined for purposes of
Section 13(d)(3) of the Securities Exchange Act of 1934 (the "Exchange
Act");
(3) the term "beneficial owner" is used as it is defined for
purposes of Rule 13d-3 under the Exchange Act;
(4) the term "Outstanding Voting Stock" means outstanding
voting securities of the Company entitled to vote generally in the
election of directors; and any specified percentage or portion of the
Outstanding Voting Stock (or of other voting stock) shall be determined
based on the combined voting power of such securities;
(5) the term "Incumbent Director" means a director of the
Company (x) who was a director of the Company on September 1, 1997 or
(y) who becomes a director subsequent to such date and whose election,
or nomination for election by
-3-
8
the Company's shareholders, was approved by a vote of a majority of the
Incumbent Directors at the time of such election or nomination, except
that any such director shall not be deemed an Incumbent Director if his
or her initial assumption of office occurs as a result of an actual or
threatened election contest or other actual or threatened solicitation
of proxies by or on behalf of a Person other than the Board;
(6) the term "election contest" is used as it is defined for
purposes of Rule 14a-11 under the Exchange Act;
(7) the term "Business Combination" means (x) a merger or
consolidation involving the Company or its stock or (y) an acquisition
by the Company, directly or through one or more subsidiaries, of
another entity or its stock or assets;
(8) the term "parent corporation resulting from a Business
Combination" means the Company if its stock is not acquired or
converted in the Business Combination and otherwise means the entity
which as a result of such Business Combination owns the Company or all
or substantially all the Company's assets either directly or through
one or more subsidiaries; and
(9) the term "Major Asset Disposition" means the sale or other
disposition in one transaction or a series of related transactions of
70% or more of the assets of the Company and its subsidiaries on a
consolidated basis; and any specified percentage or portion of the
assets of the Company shall be based on fair market value, as
determined by a majority of the Incumbent Directors.
"CIC AGREEMENT" shall mean a binding agreement to effect a
CIC.
"CIC RESOLUTION DATE" shall mean the date that a CIC occurs
or, if earlier, the date that a CIC Agreement that was in effect on June 1, 1999
is terminated.
"CODE" shall mean the Internal Revenue Code of 1986, as in
effect on the Effective Date and as thereafter amended.
"CONSULTING PERIOD" shall mean the period commencing on the
first day following the last day of the Employment Period and ending on the
365th day following the last day of the Employment Period.
"DATE OF TERMINATION" shall mean (a) if the Executive's
employment is terminated by the Company for Cause, or by the Executive for Good
Reason, the date of receipt of the Notice of Termination or any later date
specified therein, as the case may be, (b) if the Executive's employment is
terminated by the Company other than for Cause or Disability, the date on which
the Company notifies the Executive of such termination, (c) if the Executive's
employment is terminated by reason of death, Retirement or Disability, the date
of death or Retirement of the Executive or the Disability Effective Date, as the
case may be, and (d) if the Executive's employment is terminated by reason of
the expiration of the Employment Period, the last day of the Employment Period.
-4-
9
"DEFERRED COMPENSATION PLAN" shall mean each of the Deferred
Compensation Plan (amended restated effective January 1, 1991), the Deferred
Compensation Plan (amended and restated effective January 1, 1989) and the
Deferred Compensation Plan (amended and restated effective September 1, 1985),
each of which is sponsored by the Company, as in effect from time to time.
"DISABILITY" shall mean the absence of the Executive from the
Executive's duties with the Company on a full-time basis for 180 consecutive
business days as a result of incapacity due to mental or physical illness which
is determined to be total and permanent by a physician selected by the Company
or its insurers and acceptable to the Executive or the Executive's legal
representative, such agreement as to acceptability by the Executive not to be
withheld unreasonably.
"DISABILITY EFFECTIVE DATE" shall mean the date so described
in Section 4(A).
"EFFECTIVE DATE" shall mean January 8, 1997.
"EICP" shall mean the Company's Executive Incentive
Compensation Plan, as in effect from time to time, or any similar successor plan
adopted by the Company.
"EMPLOYMENT PERIOD" shall mean the Base Employment Period
unless (a) a CIC occurs on or before June 1, 1999, in which case the Employment
Period shall end on the CIC Resolution Date, or (b) the Company is a party to a
CIC Agreement on June 1, 1999, in which case the Employment Period shall
continue through, and end on, the CIC Resolution Date.
"GOOD REASON" shall mean:
(a) the assignment to the Executive of any duties inconsistent
in any respect with the Executive's position (including status,
offices, titles and reporting requirements), authority, duties or
responsibilities as contemplated by Section 3(A), or any other action
by the Company which results in a diminution in such position,
authority, duties or responsibilities, excluding for this purpose an
isolated, insubstantial and inadvertent action not taken in bad faith
and which is remedied by the Company promptly after receipt of notice
thereof given by the Executive;
(b) any failure by the Company to comply with any of the
provisions of Section 3(B), other than an isolated, insubstantial and
inadvertent failure not occurring in bad faith and which is remedied by
the Company promptly after receipt of notice thereof given by the
Executive;
(c) the Company's requiring the Executive to be based at any
office or location other than that described in Section 3(A)(i) or the
Company's failure to provide the residence required by Section 3(A)(i);
(d) any purported termination by the Company of the
Executive's employment otherwise than as expressly permitted by this
Agreement; or
-5-
10
(e) any failure by the Company to comply with and satisfy
Section 11(C), provided that the successor described in Section 11(C)
has received at least ten days' prior written notice from the Company
or the Executive of the requirements of Section 11(C).
"LICP" shall mean the Company's Long-Term Incentive
Compensation Plan, as in effect from time to time, or any similar successor plan
adopted by the Company.
"NOTICE OF TERMINATION" shall mean a written notice that (a)
indicates the specific termination provision in this Agreement relied upon, (b)
to the extent applicable, sets forth in reasonable detail the facts and
circumstances claimed to provide a basis for termination of the Executive's
employment under the provision so indicated and (c) if the Date of Termination
is other than the date of receipt of such notice, specifies the termination date
(which date shall be not more than 15 days after the giving of such notice
except in the case of a Disability Effective Date).
"OTHER BENEFITS" shall mean the amounts so described in
Section 5(C)(i)(e).
"PERFORMANCE SHARES" shall mean the shares of Stock so
described in Section 3(B)(ii).
"RETIREMENT" shall mean the retirement of the Executive with
the express consent of the Board.
"SERP" shall mean the Benefit Restoration Plan of the Company.
"SPOUSE" shall mean the person who is legally married to the
Executive.
"STOCK" shall have the meaning ascribed thereto in Section
3(B)(ii).
"STOCK AWARD" shall mean the award made to the Executive
pursuant to Section 3(B)(ii).
"SUPPLEMENTAL RETIREMENT BENEFIT" shall mean the benefit so
described in Section 5(C)(i)(c).
"TARGET BONUS" shall mean the Executive's target incentive
opportunity under the EICP in effect for the year with respect to which the
Target Bonus is being determined or, if no such plan is then in effect, for the
last year in which such a plan was in effect, expressed as a dollar amount based
upon the Executive's Annual Base Salary for the year of such determination.
"VESTED SHARES" shall mean the shares of Stock so described in
Section 3(B)(ii).
"WELFARE BENEFIT CONTINUATION" shall mean the continuation of
benefits so described in Section 5(C)(i)(d).
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11
"WITHOUT CAUSE" shall mean without Cause and for reasons other
than death, Disability or Retirement.
"WITHOUT GOOD REASON" shall mean without Good Reason and for
reasons other than death, Disability or Retirement.
2. EMPLOYMENT PERIOD: The Company hereby agrees to continue the
Executive in its employ, and the Executive hereby agrees to remain in the employ
of the Company, in accordance with the terms and provisions of this Agreement,
for the Employment Period.
3. TERMS OF EMPLOYMENT:
A. POSITION AND DUTIES: During the Employment Period:
(i) The Executive shall be employed as the Chairman of the
Board and Chief Executive Officer of the Company and shall be
responsible for the general management of the affairs of the Company.
The Executive, in carrying out his duties under this Agreement, shall
report only to the Board. The Executive's position (including status,
offices, titles and reporting requirements), authority, duties and
responsibilities shall be at least commensurate in all material
respects with the most significant of those held by, exercised by or
assigned to the Executive at the Effective Date. The Executive's
services shall be performed at the location where the Executive was
employed immediately preceding the Effective Date or any office which
is the headquarters of the Company and is less than 50 miles from such
location. It is hereby agreed and understood that the Executive may be
required by the Company to move his business office (within the 50-mile
limit set forth above) but not his principle place of residence. In the
event that the Company requires the Executive to move his main office
outside of Harris County, the Company shall provide, at no expense to
the Executive, an apartment or townhome in the new location which is
commensurate with the Executive's standard of living.
(ii) Excluding any periods of vacation and sick leave to which
the Executive is entitled, the Executive agrees to devote reasonable
attention and time during normal business hours to the business and
affairs of the Company and, to the extent necessary to discharge the
responsibilities assigned to the Executive hereunder, to use the
Executive's reasonable best efforts to perform faithfully and
efficiently such responsibilities. It shall not be a violation of this
Agreement for the Executive to (a) serve on corporate, civic or
charitable boards or committees, (b) deliver lectures, fulfill speaking
engagements or teach at educational institutions and (c) manage
personal investments, so long as such activities do not significantly
interfere with the performance of the Executive's responsibilities as
an employee of the Company in accordance with this Agreement. It is
expressly understood and agreed that to the extent that any such
activities have been conducted by the Executive prior to the Effective
Date, the continued conduct of such activities (or the conduct of
activities similar in nature and scope thereto) subsequent to the
Effective
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Date shall not thereafter be deemed to interfere with the performance
of the Executive's responsibilities to the Company.
B. COMPENSATION:
(i) Annual Base Salary: During the Employment Period, the
Executive shall receive an Annual Base Salary at a monthly rate at
least equal to the monthly base salary paid to the Executive by the
Company at the Effective Date. Annual Base Salary shall not be reduced.
(ii) Stock Award: The Executive has been granted, subject to
the terms and conditions herein set forth, an award (the "Stock Award")
with respect to 300,000 shares of Common Stock, without par value, of
the Company ("Stock"), effective as of the Effective Date. The Stock
Award shall be implemented by a credit to a bookkeeping account
maintained by the Company evidencing the accrual in favor of the
Executive of the unfunded right to receive shares of Stock of the
Company, subject to the following terms and conditions:
(a) Executive shall not have any rights as a
stockholder in respect of the Stock Award, and the rights of
Executive in respect of the shares of Stock deliverable
thereunder may not be sold, assigned, transferred, pledged or
otherwise encumbered, from the Effective Date unless and until
the Executive is registered as the holder of such Stock on the
records of the Company following the vesting of the
Executive's rights with respect to such Stock Award as
provided herein.
(b) The Executive's right to 150,000 shares of Stock
(the "Vested Shares") shall vest on June 1, 1999, provided
that the Executive has remained in the continuous employment
of the Company during the Base Employment Period. If, during
the Base Employment Period, the Company terminates the
Executive's employment for Cause or the Executive terminates
employment Without Good Reason, the Executive shall forfeit
all right to receive the Vested Shares as of the Date of
Termination. If, during the Base Employment Period, the
Company terminates the Executive's employment Without Cause,
or the Executive terminates employment for Good Reason, or the
Executive's employment terminates by reason of death,
Disability, Retirement or the occurrence of a CIC, the
Executive's right to receive the Vested Shares shall vest as
of the Date of Termination.
(c) The Executive's right to 150,000 shares of Stock
(the "Performance Shares") shall generally be subject to
achievement of certain performance goals as described in this
paragraph (c);
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provided, however, that (1) if, during the Base Employment
Period, the Company terminates the Executive's employment
Without Cause or the Executive terminates employment for Good
Reason or the Executive's employment terminates by reason of
the occurrence of a CIC, the Executive's right to the
Performance Shares shall vest as of the Date of Termination,
(2) if, during the Base Employment Period, the Company
terminates the Executive's employment for Cause or the
Executive voluntarily terminates employment Without Good
Reason, the Executive shall forfeit all right to the
Performance Shares as of the Date of Termination, and (3) if,
during calendar year 1997, the Executive's employment
terminates by reason of death, Disability or Retirement, the
Executive shall forfeit all right to Performance Shares as of
the Date of Termination.
If, during the period commencing January 1,
1998 and ending May 31, 1999, the Executive's employment
terminates by reason of death, Disability or Retirement, (x)
the Committee (within the meaning of the LICP) will determine
the degree to which the performance goals applicable to the
Executive for the LICP performance cycle commencing in 1997
are expected to be achieved through the end of the year of
termination of employment and the number (if any) of
Performance Shares to which the Executive would be entitled
based upon that level of performance if the Performance Shares
had been the Executive's restricted stock award under the LICP
for the 1997 LICP performance cycle (without regard to the
potential for any award of "Opportunity Shares" under the
LICP), (y) effective as of the Date of Termination, the
Executive's right to receive a portion of the number of
Performance Shares determined under part (x) of this sentence
shall vest in the same proportion as the number of days
elapsed from and including January 1, 1997 through and
including the Date of Termination bears to 881 (the number of
days from and including January 1, 1997 through and including
May 31, 1999), and (z) effective as of the Date of
Termination, the Executive shall forfeit all right to receive
the remaining Performance Shares.
Upon Executive's completion of the Base
Employment Period without termination of employment, (1) the
Committee (within the meaning of the LICP) will determine the
degree to which the performance goals applicable to the
Executive for the LICP performance cycle commencing in 1997
are expected to be achieved through the end of that
performance cycle and (2) effective as of June 1, 1999, the
Executive shall have a vested right to receive the number (if
any) of Performance Shares to which the Executive would be
entitled, based upon the level of performance determined
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under part (1) of this sentence, if the Performance Shares had
been the Executive's restricted stock award for the 1997 LICP
performance cycle (without regard to the potential for any
award of "Opportunity Shares" under the LICP).
The determinations of the Committee under
this Section 3(B)(ii)(c) shall be final and binding on all
parties.
(d) Shares of Stock shall be registered in the name
of the Executive and certificates representing such shares of
Stock shall be delivered to the Executive as soon as
practicable following the date on which Executive's right to
receive such shares vests. Unless the Company determines
otherwise, shares of Stock delivered to the Executive shall
consist of shares of Stock theretofore held by the Company in
its treasury or by a subsidiary of the Company.
(e) Dividends shall not be paid to the Executive with
respect to any share of Stock prior to the date that such
share is registered in the name of the Executive on the books
of the Company; provided, however, that an amount equal to the
total amount of dividends payable with respect to such share
from the Effective Date through the date that such share is
delivered to the Executive (taking into account any
adjustments pursuant to the following paragraph (f)) shall be
paid to the Executive in cash on the date that the share of
Stock is registered in the name of the Executive on the books
of the Company.
(f) The issuance of Stock pursuant to the Stock Award
made hereunder shall be subject to the provisions of Sections
13.1, 13.2 and 13.3 of the LICP as though the Stock Award had
been granted as a Stock Incentive thereunder. The Company
shall make all appropriate adjustments with respect to the
Stock Award under Section 13.3 of the LICP on a basis no less
favorable to the Executive than corresponding adjustments made
with respect to any comparable award or incentive under the
LICP or any other incentive plan of the Company in which peer
executives participate. Notwithstanding any provision of this
Section 3(B)(ii), the Performance Shares shall not in any
respect be deemed an award under the LICP.
(iii) Benefit and Bonus Plans: During the Employment Period,
except as otherwise set forth in this paragraph (iii), the Executive
shall be entitled to participate in all incentive, savings and
retirement plans, practices, policies and programs applicable generally
to other peer executives of the Company and its Affiliated Companies.
The Executive and/or the Executive's family, as the case may be, shall
be eligible for participation in and shall receive all benefits under
welfare benefit
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plans, practices, policies and programs provided by the Company and its
Affiliated Companies (including, without limitation, medical,
prescription, dental, disability, the Executive salary continuance,
employee life, group life, accidental death and travel accident
insurance plans and programs) to the extent applicable generally to
other peer executives of the Company and its Affiliated Companies.
Notwithstanding the foregoing:
(a) The Executive shall not be granted awards under
the Company's Long-Term Incentive Compensation Plan for
performance cycles commencing in 1998 or 1999; and
(b) The Executive shall be entitled to receive a
separate monthly supplemental retirement benefit from the
Company equal to the excess, if any, of (1) the benefit
payable under the Retirement Plan and the SERP based on the
benefit accrual formulas and actuarial assumptions in effect
at the Effective Date over (2) the Executive's actual benefit
(paid or payable) under the Retirement Plan and the SERP. Any
such benefit shall commence at the same time and be payable in
the same form as the amounts paid under the Retirement Plan
and the SERP.
(iv) Expenses: During the Employment Period, the Executive
shall be entitled to receive prompt reimbursement for all reasonable
expenses incurred by the Executive in accordance with the policies,
practices and procedures of the Company and its Affiliated Companies to
the extent applicable generally to other peer executives of the Company
and its Affiliated Companies.
(v) Vacation and Fringe Benefits: During the Employment
Period, the Executive shall be entitled to paid vacation and fringe
benefits in accordance with the plans, practices, programs and policies
of the Company and its Affiliated Companies to the extent applicable
generally to other peer executives of the Company and its Affiliated
Companies.
(vi) Other Perquisites: During the Employment Period, the
Executive shall continue to be provided with such perquisites as were
provided to the Executive on the Effective Date of this Agreement. Such
perquisites shall be reviewed annually by the Compensation Committee of
the Board.
4. TERMINATION OF EMPLOYMENT:
A. DEATH OR DISABILITY: The Executive's employment shall terminate
automatically upon the Executive's death during the Employment Period. If the
Company determines in good faith that the Disability of the Executive has
occurred during the Employment Period, it may give to the Executive written
notice in accordance with Section 15(B) of its intention to terminate the
Executive's employment. In such event, the Executive's employment with the
Company shall
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terminate effective on the 30th day after receipt of such notice by the
Executive (the "Disability Effective Date"), provided that, within the 30 days
after such receipt, the Executive shall not have returned to full-time
performance of the Executive's duties.
B. CAUSE: The Company may terminate the Executive's employment during
the Employment Period for Cause.
C. GOOD REASON: The Executive's employment may be terminated during the
Employment Period by the Executive for Good Reason. For purposes of this Section
4(C), any good faith determination of Good Reason made by the Executive shall be
conclusive.
D. NOTICE OF TERMINATION: Any termination by the Company for Cause, or
by the Executive for Good Reason, shall be communicated by Notice of Termination
to the other party hereto given in accordance with Section 15(B). The failure by
the Executive or the Company to set forth in the Notice of Termination any fact
or circumstance which contributes to a showing of Good Reason or Cause shall not
waive any right of the Executive or the Company hereunder or preclude the
Executive or the Company from asserting such fact or circumstance in enforcing
the Executive's or the Company's rights hereunder.
E. EXPIRATION OF EMPLOYMENT PERIOD: The Executive's employment shall
terminate automatically upon the expiration of the Employment Period.
5. OBLIGATIONS OF THE COMPANY UPON TERMINATION OF EMPLOYMENT:
A. FOR CAUSE OR WITHOUT GOOD REASON: If, at any time during the
Employment Period, the Company terminates the Executive's employment for Cause
or the Executive terminates his employment Without Good Reason, this Agreement
shall terminate without further obligations to the Executive other than (i) the
obligation to pay to the Executive the Annual Base Salary through the Date of
Termination plus the amount of any compensation previously deferred by the
Executive, in each case to the extent theretofore unpaid, (ii) the timely
provision of Other Benefits without regard to the installment payment
commencement date required by Section 5(C)(i)(e), and (iii) fulfillment of the
requirements of Section 3(B)(iii)(b), Sections 5(D) and (E) (to the extent
applicable) and Section 16. Accordingly, the Executive shall forfeit all right
to the Stock in accordance with Section 3(B)(ii) and the Executive shall have no
right to receive the dividend-related payment described in Section 3(B)(ii)
(unless such termination occurs on or after June 1, 1999, in which case the
Stock and dividend-related payment shall be paid to the Executive as provided in
Section 3(B)(ii)). Any unpaid but due Annual Base Salary shall be paid to the
Executive in a lump sum in cash within 30 days of the Date of Termination under
this paragraph.
B. OTHERWISE, UPON A CIC OR WHILE THE COMPANY IS A PARTY TO A CIC
AGREEMENT:
(i) Without Cause, For Good Reason or Upon a CIC: If:
(a) during the Employment Period and while the
Company is a party to a CIC Agreement, the Company terminates
the
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employment of the Executive Without Cause or the Executive
terminates his employment for Good Reason, or
(b) the Executive's employment automatically
terminates upon the expiration of the Employment Period due to
the occurrence of a CIC,
the Company shall (I) pay the Executive, within 30 days after the Date
of Termination, an amount equal to the Executive's Base Amount
multiplied by 2.99 and (II) timely deliver to the Executive all shares
of Stock to which the Executive has a vested right pursuant to Section
3(B)(ii) that were not previously paid thereunder, if any, together
with a cash amount equal to all dividends that were payable with
respect to such shares of Stock from the Effective Date through the
date of delivery as provided in Section 3(B)(ii) (unless such dividends
were previously paid thereunder). Upon such payment and delivery of
Stock, this Agreement shall terminate without further obligations to
the Executive other than (x) the obligation to pay to the Executive the
Annual Base Salary through the Date of Termination to the extent
theretofore unpaid, (y) the timely payment or provision of the Welfare
Benefit Continuation and Other Benefits in accordance with Section
5(C)(i), and (z) fulfillment of the requirements of Section
3(B)(iii)(b), Section 5(D) and (E) and Section 16. Any unpaid but due
Annual Base Salary shall be paid to the Executive in a lump sum in cash
within 30 days of the Date of Termination under this paragraph.
(ii) Death, Disability or Retirement: If, during the
Employment Period and at a time when the Company is a party to a CIC
Agreement, the Executive's employment is terminated by reason of the
Executive's death, Disability or Retirement, the Executive or the
Executive's Beneficiary shall be entitled to the payments and benefits
that would be payable to or in respect of the Executive upon the
occurrence of the corresponding event described in Section 5(C)(ii) or
(iii). In addition, upon the subsequent occurrence of a CIC resulting
from the CIC Agreement that was pending at the time of the Executive's
death, Disability or Retirement, the Executive or the Executive's
Beneficiary shall be entitled to the payments and benefits that would
have been payable to or in respect of the Executive upon the occurrence
of the events described in Section 5(B)(i), offset by the amount of any
lump-sum cash payment made to the Executive or the Executive's
Beneficiary pursuant to the foregoing provisions of this Section
5(B)(ii), and the Company shall have no further obligations to or in
respect of the Executive under this Agreement. To the extent that a
payment or benefit that would be payable upon the occurrence of a CIC
under this Section 5(B)(ii) is or was paid or payable pursuant to this
Section 5(B)(ii) due to the Executive's death, Disability or
Retirement, no duplicate payment or benefit shall be paid.
C. OTHERWISE, BEFORE A CIC AND WHEN THE COMPANY IS NOT A PARTY TO A CIC
AGREEMENT: If, during the Employment Period, prior to the occurrence of a CIC
and at a time when
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the Company is not a party to a CIC Agreement, the employment of the Executive
terminates (except for Cause or Without Good Reason, which are addressed in
Section 5(A)), the obligations of the Company shall be as set forth below:
(i) For Good Reason or Without Cause: If, at a time described
in this Section 5(C), the Executive terminates his employment for Good
Reason or the Company terminates the Executive's employment Without
Cause, then:
(a) the Company shall pay to the Executive in a lump
sum in cash (or common stock of the Company with respect to
certain payments under the LICP), within 30 days after the
Date of Termination, determined without any reduction for the
present value of such lump-sum payment, the aggregate of:
(I) the Annual Base Salary payable to the
Executive for the remainder of the Base Employment
Period, as if there had been no termination of
employment;
(II) all bonuses payable to the Executive
for the remainder of the Base Employment Period, as
if there had been no termination of employment
(including, but not by way of limitation, all bonuses
awarded to the Executive under the EICP and the LICP
and all bonuses that would have been awarded to the
Executive under the EICP and LICP during the
remainder of the Base Employment Period), assuming,
for purposes of determining the amount of any bonus,
(x) that bonus awards continued to be granted at the
levels most recently granted to the Executive prior
to the Date of Termination (unless a reduction in the
level of any bonus award was the basis for a
termination for Good Reason, in which case reference
shall be made to the level in effect prior to such
reduction) and (y) that any applicable performance
objectives were met at the "target" level; and
(III) any accrued vacation pay;
in each case to the extent not theretofore paid (the sum of
the amounts described in clauses (I) - (III) above shall be
referred to herein as the "Accrued Obligations");
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(b) the benefits accrued up to the Date of
Termination under the Retirement Plan and the SERP or any
successor plan thereto shall commence thereunder in such form
and at such time as elected by the Executive in accordance
with the terms of said Plans, subject to the requirements of
Section 16;
(c) the Company shall pay a separate monthly
supplemental retirement benefit equal to the excess, if any,
of (I) the benefit payable under the Retirement Plan and the
SERP or any other successor supplemental and/or excess
retirement plan of the Company and its Affiliated Companies
providing benefits for the Executive which the Executive would
receive if the Executive's employment continued at the
compensation level provided for in Section 3(B) for the
remainder of the Base Employment Period, assuming for this
purpose that (x) all accrued benefits are fully vested and (y)
benefit accrual formulas and actuarial assumptions are no less
advantageous to the Executive than those in effect at the
Effective Date, over (II) the Executive's actual benefit (paid
or payable), if any, under the Retirement Plan and the SERP
(the amount of such benefit calculated under this Section
5(C)(i)(c), which shall commence at the same time and be
payable in the same form as the amounts described in Section
5(C)(i)(b), shall be referred to herein as the "Supplemental
Retirement Benefit");
(d) for the remainder of the Base Employment Period,
or such longer period as any plan, program, practice or policy
may provide, the Company shall continue benefits to the
Executive and/or the Executive's family at least equal to
those which would have been provided to them in accordance
with the welfare benefit plans, programs, practices and
policies described in Section 3(B)(iii) if the Executive's
employment had not been terminated; provided, however, that if
the Executive becomes reemployed with another employer and is
eligible to receive medical or other welfare benefits under
another employer provided plan, the medical and other welfare
benefits described herein shall be secondary to those provided
under such other plan during such applicable period of
eligibility (such continuation of such benefits for the
applicable period herein set forth shall be referred to herein
as "Welfare Benefit Continuation");
(e) to the extent not theretofore paid or provided,
the Company shall timely pay or provide to the Executive
and/or the Executive's family any other amounts or benefits
required to be paid or provided or which the Executive and/or
the Executive's family is eligible to receive pursuant to this
Agreement and under any plan, program, policy or practice or
contract or agreement of the Company
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and its Affiliated Companies as in effect and applicable
generally to other peer executives and their families (such
other amounts and benefits, payable as described in this
paragraph, shall be referred to herein as the "Other
Benefits"); provided, however, that the Company and the Board
hereby agree to cause the Deferred Compensation Plan to be
administered or amended so that any and all amounts of salary
and/or bonus theretofore deferred by the Executive and held
under the Deferred Compensation Plan with instructions from
the Executive to pay in 15 annual installments shall be paid
in said 15 installments commencing on the later of June 1,
2000 or the first anniversary of the Executive's Termination
Date, notwithstanding any provision of the Deferred
Compensation Plan to the contrary; and
(f) the Company shall pay to the Executive in a lump
sum in cash, within 30 days after the Date of Termination, the
amount it would have contributed as an employer contribution
to the tax-qualified Savings Plan of the Company for the
remainder of the Base Employment Period, had the Executive
contributed at the maximum rate during said period and had the
terms of said Savings Plan as in effect on the Effective Date
remained unchanged during said remainder of the Base
Employment Period;
(g) the Company shall timely deliver to the Executive
all shares of Stock to which he has a vested right pursuant to
Section 3(B)(ii), together with a cash amount equal to all
dividends that were payable with respect to such shares of
Stock from the Effective Date through the date of delivery as
provided in Section 3(B)(ii); and
(h) the Company shall fulfill the requirements of
Section 5(D) and (E) and Section 16.
(ii) By Reason of Death or Disability: If, at a time described
in this Section 5(C), the Executive's employment is terminated by
reason of the Executive's death or Disability, this Agreement shall
terminate without further obligations to or in respect of the Executive
under this Agreement, other than for (a) payment of Accrued Obligations
(which shall be paid to the Executive or the Executive's Beneficiary in
a lump sum in cash (or common stock of the Company with respect to
certain payments under the LICP) within 30 days of the Date of
Termination), (b) the timely payment or provision of the Welfare
Benefit Continuation and Other Benefits in accordance with Section
5(C)(i), (c) the timely delivery of all shares of Stock to which the
Executive has a vested right pursuant to Section 3(B)(ii), together
with a cash amount equal to all dividends that were payable with
respect to such shares of Stock from the Effective Date through the
date of delivery as provided in
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Section 3(B)(ii), and (d) fulfillment of the requirements of Section
3(B)(iii)(b), Section 5(D) and (E) (to the extent applicable), and
Section 16.
(iii) Retirement: If, at a time described in this Section
5(C), the Executive terminates his employment with the Company by
reason of Retirement, he shall be entitled to receive under this
Agreement, in addition to all other benefits otherwise due from the
Company upon Retirement, the prompt payment of all benefits due under
Section 5(C)(i) had the Executive terminated employment for Good Reason
as described therein; provided, however, that Executive's rights with
respect to the Performance Shares shall be governed by the applicable
provisions of Section 3(B)(ii). Furthermore, the Executive shall be
entitled, for the remainder of the Base Employment Period, to the
prompt reimbursement of all expenses incurred for civic or industry
activities undertaken on behalf of the Company which are of a similar
nature and scope to those expenses reimbursable by the Company to the
Executive on the Effective Date. In this connection, the Executive
shall also be afforded reasonable use of any Company aircraft.
D. SALARY CONTINUATION PLAN: Upon a termination of employment during or
at the end of the Employment Period for any reason, the Company hereby agrees
that the Executive shall be fully vested in the benefit provided under the
Salary Continuation Plan, as in effect on the Effective Date, and that the
benefit payable thereunder shall be based on his Annual Base Salary as provided
in Section 3(B)(i).
E. OFFICE: Upon a termination of employment during or at the end of the
Employment Period for any reason other than death or for Cause, the Company
shall provide the Executive with suitable executive office space and secretarial
help at an acceptable location outside the premises of any Company location.
Such office and secretary shall be provided the Executive until such time as
mutually agreed by the parties to be no longer necessary.
6. CONSULTING PERIOD AND DUTIES: The Company and the Executive agree
that, upon the Executive's continuous employment through the end of the
Employment Period, the Company shall retain the services of the Executive as a
consultant during the Consulting Period in accordance with the terms and
provisions of this Agreement. During the Consulting Period, the Executive shall
provide such consultation and advice in connection with the Company's business
as the Company may reasonably request; provided, however, that the Executive
shall have no obligation to devote more than 40 hours per month to such
consultation. In consideration of the Executive's agreement to make himself
available to provide the consulting services described herein, the Company and
the Board hereby agree to cause the Deferred Compensation Plan to be
administered or amended, upon Executive's completion of the Employment Period,
so that any and all amounts of salary and/or bonus theretofore deferred by the
Executive and held under the Deferred Compensation Plan of the Company with
instructions from the Executive to pay in 15 annual installments shall commence
on the later of June 1, 2000 or the first anniversary of the last day of the
Employment Period, notwithstanding any provision of the Deferred Compensation
Plan to the contrary. Should the Executive refuse to provide such consulting
services at any time during the Consulting Period for any reason not beyond the
control of the Executive, such installments shall
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immediately commence upon the expiration of 60 days following the Executive's
receipt of written notice from the Company of his failure to fulfill his
obligations hereunder during which the Executive does not cure such failure.
7. NON-EXCLUSIVITY OF RIGHTS: Except as provided in Section 5, nothing
in this Agreement shall prevent or limit the Executive's continuing or further
participation in any plan, program, policy or practice provided by the Company
or any of its Affiliated Companies and for which the Executive may qualify, nor
shall anything herein limit or otherwise affect such rights as the Executive may
have under any contract or agreement with the Company or any of its Affiliated
Companies. Amounts which are vested benefits or which the Executive is otherwise
entitled to receive under any plan, policy, practice or program of or any
contract or agreement with the Company or any of its Affiliated Companies at or
subsequent to the Date of Termination shall be payable in accordance with such
plan, policy, practice or program or contract or agreement except as explicitly
modified by this Agreement.
8. SET-OFF; MITIGATION; LEGAL FEES; EXPENSES; OBLIGATIONS PENDING
DISPUTE RESOLUTION:
A. SET-OFF AND MITIGATION: The Company's obligation to make the
payments provided for in this Agreement and otherwise to perform its obligations
hereunder shall not be affected by any set-off, counterclaim, recoupment,
defense or other claim, right or action which the Company may have against the
Executive or others. In no event shall the Executive be obligated to seek other
employment or take any other action by way of mitigation of the amounts payable
to the Executive under any of the provisions of this Agreement and, except as
provided in Section 5(C)(i)(d), such amounts shall not be reduced whether or not
the Executive obtains other employment.
B. LEGAL FEES AND EXPENSES: It is the intent of the Company that the
Executive not be required to incur legal fees and the related expenses
associated with the interpretation, enforcement or defense of the Executive's
rights under this Agreement by litigation or otherwise because the cost and
expense thereof would detract from the benefits intended to be extended to the
Executive hereunder. Accordingly, if it should appear to the Executive that the
Company has failed to comply with any of its obligations under this Agreement or
in the event that the Company or any other person takes or threatens to take any
action to declare this Agreement void or unenforceable, or institutes any
litigation or other action or proceeding designed to deny, or to recover from,
the Executive the benefits provided or intended to be provided to the Executive
hereunder, the Company irrevocably authorizes the Executive from time to time to
retain counsel of the Executive's choice, at the expense of the Company as
hereafter provided, to advise and represent the Executive in connection with any
such interpretation, enforcement or defense, including without limitation the
initiation or defense of any litigation or other legal action, whether by or
against the Company or any director, officer, stockholder or other person
affiliated with the Company, in any jurisdiction. Notwithstanding any existing
or prior attorney-client relationship between the Company and such counsel, the
Company irrevocably consents to the Executive entering into an attorney-client
relationship with such counsel, and in that connection the Company and the
Executive agree that a confidential relationship will exist between the
Executive and such counsel. Without respect to whether the Executive prevails,
in whole or in part, in connection with any of the foregoing, the
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Company will pay and be solely financially responsible for any and all
attorneys' fees and related expenses incurred by the Executive in connection
with any of the foregoing except to the extent that a final judgment no longer
subject to appeal finds that a claim or defense asserted by the Executive was
frivolous. (In such a case, the portion of such fees and expenses incurred by
the Executive as a result of such frivolous claim or defense shall become the
Executive's sole responsibility and any funds advanced by the Company or by a
Trust created to secure such payment shall be repaid.) The Company agrees to pay
promptly as incurred, to the full extent permitted by law, all legal fees and
expenses which the Executive incurs as described above, plus in each case
interest on any delayed payment at the applicable Federal rate provided for in
Section 7872(f)(2)(A) of the Code.
In addition and to the extent not already provided by the
terms of any insurance policy owned by the Company, the Company hereby agrees to
pay promptly as incurred, to the full extent permitted by law, all legal fees
and expenses which the Executive may reasonably incur as a result of any
litigation or other legal action filed against the Executive or his estate
arising out of, or in any way connected with or resulting from, actions taken or
omitted to be taken by the Executive during his employment with the Company.
In the event a CIC occurs, the performance of the Company's
obligations under this Section 8 will be funded by amounts deposited or to be
deposited in trust pursuant to certain trust agreements to which the Company
will be a party providing that the fees and expenses of counsel selected from
time to time by the Executive pursuant to this Section 8 will be paid, or
reimbursed to the Executive if paid by the Executive, either in accordance with
the terms of such trust agreements, or, if not so provided, on a regular,
periodic basis upon presentation by the Executive to the trustee of a statement
or statements prepared by such counsel in accordance with its customary
practices. In order to be eligible for payment of expenses directly from the
Company, Executive must first exhaust all rights to payment under the trust
agreements contemplated immediately above. The pendency of a claim by the
Company that a claim or defense of the Executive is frivolous or otherwise
lacking merit shall not excuse the Company (or the trustee of a Trust
contemplated by this Section 8) from making periodic payments of legal fees and
expenses until a final judgment is rendered as hereinabove provided. Any failure
by the Company to satisfy any of its obligations under this Section 8 will not
limit the rights of the Executive hereunder. Subject to the foregoing, the
Executive will have the status of a general unsecured creditor of the Company
and will have no right to, or security interest in, any assets of the Company or
any Affiliate.
C. OBLIGATIONS PENDING DISPUTE RESOLUTION: If there shall be any
dispute between the Company and the Executive regarding (i) in the event of any
termination of the Executive's employment by the Company, whether such
termination was for Cause, or (ii) in the event of any termination of employment
by the Executive, whether Good Reason existed, then, unless and until there is a
final, nonappealable judgment by a court of competent jurisdiction declaring
that such termination was for Cause or that the determination by the Executive
of the existence of Good Reason was not made in good faith, the Company shall
pay all amounts, and provide all benefits, to the Executive and/or the
Executive's family or other beneficiaries, as the case may be, that the Company
would be required to pay or provide pursuant to this Agreement as though such
termination were by the Company without Cause or by the Executive with Good
Reason; provided, however, that the Company shall not be required to pay any
disputed amounts pursuant to this
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paragraph except upon receipt of an undertaking by or on behalf of the Executive
to repay all such amounts to which the Executive is ultimately adjudged by such
court not to be entitled.
9. CERTAIN ADDITIONAL PAYMENTS BY THE COMPANY: Anything in this
Agreement to the contrary notwithstanding, in the event it shall be determined
that any payment or distribution by the Company to or for the benefit of the
Executive (whether paid or payable or distributed or distributable pursuant to
the terms of this Agreement or otherwise, but determined without regard to any
additional payments required under this Section 9 (a "Payment")) would be
subject to the excise tax imposed by Section 4999 of the Code or any interest or
penalties incurred by the Executive with respect to such excise tax (such excise
tax, together with any such interest and penalties, are hereinafter collectively
referred to as the "Excise Tax"), then Executive shall be entitled to receive an
additional payment (a "Gross-Up Payment") in an amount such that after payment
(whether through withholding at the source or otherwise) by the Executive of all
taxes (including any interest or penalties imposed with respect to such taxes),
including, without limitation, any income taxes (and any interest and penalties
imposed with respect thereto), employment taxes and Excise Tax imposed upon the
Gross-Up Payment, the Executive retains an amount of the Gross-Up Payment equal
to the Excise Tax imposed upon the Payments.
Subject to the provisions of this Section 9, all
determinations required to be made under this Section 9, including whether and
when a Gross-Up Payment is required and the amount of such Gross-Up Payment and
the assumptions to be utilized in arriving at such determination, shall be made
by Deloitte & Touche (the "Accounting Firm") which shall provide detailed
supporting calculations both to the Company and the Executive within 15 business
days of the receipt of notice from the Executive that there has been a Payment,
or such earlier time as is requested by the Company. In the event that the
Accounting Firm is serving as accountant or auditor for the individual, entity
or group effecting the CIC, the Executive shall appoint another nationally
recognized accounting firm to make the determinations required hereunder (which
accounting firm shall then be referred to as the Accounting Firm hereunder). All
fees and expenses of the Accounting Firm shall be borne solely by the Company.
Any Gross-Up Payment, as determined pursuant to this Section 9, shall be paid by
the Company to the Executive within five days of the receipt of the Accounting
Firm's determination. If the Accounting Firm determines that no Excise Tax is
payable by the Executive, it shall furnish the Executive with a written opinion
that failure to report the Excise Tax on the Executive's applicable federal
income tax return would not result in the imposition of negligence or similar
penalty. Any determination by the Accounting Firm shall be binding upon the
Company and the Executive. As a result of the uncertainty in the application of
Section 4999 of the Code at the time of the initial determination by the
Accounting Firm hereunder, it is possible that Gross-Up Payments which will not
have been made by the Company should have been made ("Underpayment"), consistent
with the calculations required to be made hereunder. In the event that the
Company exhausts its remedies pursuant to the following provisions of this
Section 9 and the Executive thereafter is required to make a payment of any
Excise Tax, the Accounting Firm shall determine the amount of the Underpayment
that has occurred and any such Underpayment shall be promptly paid by the
Company to or for the benefit of the Executive.
The Executive shall notify the Company in writing of any claim
by the Internal Revenue Service that, if successful, would require the payment
by the Company of the Gross-Up
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Payment. Such notification shall be given as soon as practicable but no later
than ten business days after the Executive is informed in writing of such claim
and shall apprise the Company of the nature of such claim and the date on which
such claim is requested to be paid. The Executive shall not pay such claim prior
to the expiration of the 30-day period following the date on which it gives such
notice to the Company (or such shorter period ending on the date that any
payment of taxes with respect to such claim is due). If the Company notifies the
Executive in writing prior to the expiration of such period that it desires to
contest such claim, the Executive shall:
(a) give the Company any information reasonably requested by
the Company relating to such claim;
(b) take such action in connection with contesting such claim
as the Company shall reasonably request in writing from time to time,
including, without limitation, accepting legal representation with
respect to such claim by an attorney reasonably selected by the
Company;
(c) cooperate with the Company in good faith in order to
effectively contest such claim; and
(d) permit the Company to participate in any proceedings
relating to such claim;
provided, however, that the Company shall bear and pay directly all costs and
expenses (including additional interest and penalties) incurred in connection
with such contest and shall indemnify and hold the Executive harmless, on an
after-tax basis, for any Excise Tax, employment tax or income tax (including
interest and penalties with respect thereto) imposed as a result of such
representation and payment of costs and expenses. Without limitation of the
foregoing provisions of this Section 9, the Company shall control all
proceedings taken in connection with such contest and, at its sole option, may
pursue or forgo any and all administrative appeals, proceedings, hearings and
conferences with the taxing authority in respect of such claim and may, at its
sole option, either direct the Executive to pay the tax claimed and sue for a
refund or contest the claim in any permissible manner, and the Executive agrees
to prosecute such contest to a determination before any administrative tribunal,
in a court of initial jurisdiction and in one or more appellate courts, as the
Company shall determine; provided, however, that if the Company directs the
Executive to pay such claim and sue for a refund, the Company shall advance the
amount of such payment to the Executive, on an interest-free basis and shall
indemnify and hold the Executive harmless, on an after-tax basis, from any
Excise Tax, employment tax or income tax (including interest or penalties with
respect thereto) imposed with respect to such advance or with respect to any
imputed income with respect to such advance; and further provided that any
extension of the statute of limitations relating to payment of taxes for the
taxable year of the Executive with respect to which such contested amount is
claimed to be due is limited solely to such contested amount. Furthermore, the
Company's control of the contest shall be limited to issues with respect to
which a Gross-Up Payment would be payable hereunder and the Executive shall be
entitled to settle or contest, as the case may be, any other issue raised by the
Internal Revenue Service or any other taxing authority.
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If, after the receipt by the Executive of an amount advanced
by the Company pursuant to the foregoing provisions of this Section 9, the
Executive becomes entitled to receive any refund with respect to such claim, the
Executive shall (subject to the Company complying with the requirements of this
Section 9) promptly pay to the Company the amount of such refund (together with
any interest paid or credited thereon after taxes applicable thereto). If, after
the receipt by the Executive of an amount advanced by the Company pursuant to
the foregoing provisions of this Section 9, a determination is made that the
Executive shall not be entitled to any refund with respect to such claim and the
Company does not notify the Executive in writing of its intent to contest such
denial of refund prior to the expiration of 30 days after such determination,
then such advance shall be forgiven and shall not be required to be repaid and
the amount of such advance shall offset, to the extent thereof, the amount of
Gross-Up Payment required to be paid.
If the Company is obligated to provide the Executive with
Welfare Benefit Continuation and the amount of such benefits or the value of
such benefit coverage (including without limitation any insurance premiums paid
by the Company to provide such benefits) is subject to any income, employment or
similar tax imposed by federal, state or local law, or any interest or penalties
with respect to such tax (such tax or taxes, together with any such interest and
penalties, being hereafter collectively referred to as the "Income Tax") because
such benefits cannot be provided under a nondiscriminatory health plan described
in Section 105 of the Code or for any other reason, the Company will pay to the
Executive an additional payment or payments (collectively, an "Income Tax
Payment"). The Income Tax Payment will be in an amount such that, after payment
by the Executive of all taxes (including any interest or penalties imposed with
respect to such taxes), the Executive retains an amount of the Income Tax
Payment equal to the Income Tax imposed with respect to such Welfare Benefits
Continuation.
10. CONFIDENTIAL INFORMATION: The Executive shall hold in a fiduciary
capacity for the benefit of the Company all secret or confidential information,
knowledge or data relating to the Company or any of its Affiliated Companies,
and their respective businesses, which shall have been obtained by the Executive
during the Executive's employment by the Company or any of its Affiliated
Companies and which shall not be or become public knowledge (other than by acts
by the Executive or representatives of the Executive in violation of this
Agreement). After termination of the Executive's employment with the Company,
the Executive shall not, without the prior written consent of the Company or as
may otherwise be required by law or legal process, communicate or divulge any
such information, knowledge or data to anyone other than the Company and those
designated by it. In no event shall an asserted violation of the provisions of
this Section 10 constitute a basis for deferring or withholding any amounts
otherwise payable to the Executive under this Agreement.
11. SUCCESSORS:
A. This Agreement is personal to the Executive and without the prior
written consent of the Company shall not be assignable by the Executive
otherwise than by will or the laws of descent and distribution. This Agreement
shall inure to the benefit of and be enforceable by the Executive's legal
representatives.
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B. This Agreement shall inure to the benefit of and be binding upon the
Company and its successors and assigns.
C. The Company will require any successor (whether direct or indirect,
by purchase, merger, consolidation or otherwise) to all or substantially all of
the business and/or assets of the Company to assume expressly and agree to
perform this Agreement in the same manner and to the same extent that the
Company would be required to perform it if no such succession had taken place.
As used in this Agreement, "Company" shall mean the Company as hereinbefore
defined and any successor to its business and/or assets as aforesaid which
assumes and agrees to perform this Agreement by operation of law, or otherwise.
12. SOURCE OF PAYMENTS: All payments provided in this Agreement shall,
unless the plan or program pursuant to which they are made provide otherwise, be
paid in cash from the general funds of the Company, and no special or separate
funds shall be established and no other segregation of assets shall be made to
assure payment. The Executive shall have no right, title or interest whatever in
or to any investments which the Company may make to aid the Company in meeting
its obligations hereunder. Nothing contained in this Agreement, and no action
taken pursuant to this provision, shall create or be construed to create a trust
of any kind, or a fiduciary relationship, between the Company and the Executive
or any other person. To the extent that any person acquires a right to receive
payments from the Company hereunder, such right shall be no greater than the
right of an unsecured creditor of the Company.
13. EFFECT OF PRIOR AGREEMENTS: This Agreement contains the entire
understanding between the parties hereto and supersedes any prior employment
agreement between the Company or any predecessor of the Company and the
Executive, except that this Agreement shall not affect or operate to reduce (a)
any benefit or compensation inuring to the Executive of a kind elsewhere
provided and not expressly provided or modified in this Agreement or (b) the
agreements of the Company set forth in that certain letter to the Executive from
John T. Cater, as Chairman of the Compensation Committee of the Board, dated
November 28, 1995, regarding the Executive's service with the World Energy
Council. Specifically, but not by way of limitation, this Agreement supersedes
and replaces that certain amended and restated Employment Agreement between the
parties, dated February 25, 1997.
14. CONSOLIDATION, MERGER OR SALE OF ASSETS: Nothing in this Agreement
shall preclude the Company from consolidating or merging into or with, or
transferring all or substantially all of its assets to, another corporation
which assumes this Agreement and all obligations and undertakings of the Company
hereunder; provided that no such action shall diminish the Executive's rights
hereunder, including, without limitation, rights under Section 4(C). Upon such a
consolidation, merger or transfer of assets and assumption, the term "Company"
as used herein shall mean such other corporation.
15. MISCELLANEOUS:
A. This Agreement shall be governed by and construed in accordance with
the laws of the State of Texas, without reference to principles of conflict of
laws. The captions of this
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Agreement are not part of the provisions hereof and shall have no force or
effect. This Agreement may not be amended or modified otherwise than by a
written agreement executed by the parties hereto or their respective successors
and legal representatives.
B. All notices and other communications hereunder shall be in writing
and shall be given by hand delivery to the other party or by registered or
certified-mail, return receipt requested, postage prepaid, addressed as follows:
If to the Executive: Don D. Jordan
5 Stayton Circle
Houston, Texas 77024
If to the Company: Houston Industries Incorporated
P.O. Box 4567
Houston, Texas 77210
ATTENTION: Mr. Hugh Rice Kelly
Vice President, General Counsel
and Secretary
or to such other address as either party shall have furnished to the other in
writing in accordance herewith. Notice and communications shall be effective
when actually received by the addressee.
C. The invalidity or unenforceability of any provision of this
Agreement shall not affect the validity or enforceability of any other provision
of this Agreement.
D. The Company may withhold from any amounts payable under this
Agreement such Federal, state or local taxes as shall be required to be withheld
pursuant to any applicable law or regulation.
E. The Executive's or the Company's failure to insist upon strict
compliance with any provision hereof or any other provision of this Agreement or
the failure to assert any right the Executive or the Company may have hereunder,
including, without limitation, the right of the Executive to terminate
employment for Good Reason pursuant to Section 4(C), shall not be deemed to be a
waiver of such provision or right or any other provision or right of this
Agreement.
F. The headings of paragraphs herein are included solely for
convenience and reference and shall not control the meaning or interpretation of
any of the provisions of this Agreement.
16. DEFERRED COMPENSATION PLAN AND SERP PAYMENTS: Notwithstanding any
provision herein or any provision of the Deferred Compensation Plan of the
Company to the contrary, the Company and the Board hereby agree to cause the
Deferred Compensation Plan to be administered so that any and all amounts of
salary and/or bonus theretofore deferred by the Executive and held under the
Deferred Compensation Plan with instructions from the Executive to
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pay in 15 annual installments (a) shall be paid in said 15 installments, (b)
shall remain in said Plan earning interest at the rate prescribed therein until
installment distributions commence, (c) shall commence at the time provided
herein (or, if not provided for herein, at the time provided in said Plan) and
(d) shall not be commuted and paid in a lump sum. Notwithstanding any provision
of this Agreement or any provision of the SERP to the contrary, the Company and
the Board hereby agree to cause the SERP to be administered so that no benefit
payable to or on behalf of the Executive under the SERP may be commuted and paid
in a lump sum.
IN WITNESS WHEREOF, the Executive has hereunto set the
Executive's hand and, pursuant to the authorization from its Board of Directors,
the Company has caused these presents to be executed in its name and on its
behalf, all on the day and year first above written, but effective as of the
Effective Date.
HOUSTON INDUSTRIES INCORPORATED
By
------------------------------------------
Robert J. Cruikshank, Chairman of the
Compensation Committee of the
Board of Directors
EXECUTIVE
--------------------------------------------
Don D. Jordan
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EXHIBIT 10aa1
HOUSTON INDUSTRIES INCORPORATED
EXECUTIVE SEVERANCE BENEFITS PLAN
AND SUMMARY PLAN DESCRIPTION
(Effective as of September 3, 1997)
2
HOUSTON INDUSTRIES INCORPORATED
EXECUTIVE SEVERANCE BENEFITS PLAN
AND SUMMARY PLAN DESCRIPTION
(Effective as of September 3, 1997)
RECITALS
WHEREAS, Houston Industries Incorporated entered into
Severance Agreements with 15 of its executive officers effective as of
September 3, 1997, each of which obligates HI to provide certain payments and
benefits to the Executive named in the agreement upon an eligible termination
of employment; and
WHEREAS, a plan, fund or program maintained by an employer, to
the extent that it is maintained for the purpose of providing unemployment
benefits, is an employee benefit plan subject to ERISA; and
WHEREAS, the Severance Agreements are maintained by HI to
provide unemployment benefits to the covered Executives; and
WHEREAS, ERISA requires that every employee benefit plan be
maintained pursuant to a written instrument that provides for one or more named
fiduciaries who have authority to control and manage the operation of the plan,
and further requires that an employee benefit plan establish and maintain a
reasonable claims procedure which meets certain minimum regulatory
requirements;
NOW, THEREFORE, HI hereby establishes the Houston Industries
Incorporated Executive Severance Benefits Plan to identify the fiduciaries
responsible for the operation of the Severance Agreements and to establish a
claims procedure for the Severance Agreements as contemplated by ERISA, which
Plan shall read as follows, effective as of September 3, 1997:
ARTICLE I
DEFINITIONS
As used in this Plan, the following words and phrases shall
have the following meanings unless the context clearly requires a different
meaning:
"COMMITTEE" means the Compensation Committee of the Board of
Directors of HI or such other person or entity as may be appointed
from time to time by the Board of Directors of HI to serve as the Plan
administrator.
"EXECUTIVE" means any of Charles R. Crisp, Waters S. Davis,
Susan D. Fabre, B. Bruce Gibson, Lee W. Hogan, Don D. Jordan, Hugh
Rice Kelly, R. Steve
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Letbetter, David M. McClanahan, Edward A. Monto, Stephen W. Naeve, IV,
Joe Bob Perkins, Mary P. Ricciardello, Stephen C. Schaeffer, Rufus S.
Scott, Robert L. Waldrop.
"ERISA" means Public Law No. 93-406, the Employee Retirement
Income Security Act of 1974, as amended from time to time.
"HI" means Houston Industries Incorporated, a Texas
corporation, and its successors and assigns.
"INITIAL CLAIMS FIDUCIARY" or "ICF" means that person,
committee, or other entity appointed by the Committee to perform the
acts and serve in the capacity hereinafter set forth in the Plan.
"PLAN" means the Houston Industries Incorporated Executive
Severance Benefits Plan, as established effective as of September 3,
1997 and set forth herein, and as hereafter amended from time to time,
including the Severance Agreements collectively attached hereto as
Appendix 1 and incorporated herein by reference. All references
herein to the "Plan" shall expressly include references to each of the
Severance Agreements.
"PLAN DOCUMENT" means the body of the Plan without Appendix 1.
"SEVERANCE AGREEMENT" means a Severance Agreement between an
Executive (except for Don D. Jordan) and HI dated as of September 3,
1997, a copy of each of which is attached hereto as part of Appendix
1, and shall also mean the Amended and Restated Employment Agreement
For Don D. Jordan, effective as of January 8, 1997, a copy of which is
attached hereto as part of Appendix 1.
"TRUST" means the trust agreement which HI intends to enter
into, as contemplated in Section 5 (or, in the case of Don D. Jordan,
Section 8B) of the Severance Agreements, to provide the primary source
of funding for any obligation of HI to pay legal fees and expenses
under the Severance Agreements.
"TRUSTEE" means the trustee of the Trust.
Words used in this Plan in the singular shall include the
plural and in the plural the singular, and the gender of words shall be
construed to include whichever may be appropriate.
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ARTICLE II
RELATIONSHIP AMONG PLAN DOCUMENT,
SEVERANCE AGREEMENTS AND TRUST
Each Severance Agreement is intended to form an integral part
of this Plan. The administration of the Severance Agreements shall be governed
by the terms and provisions set forth in this Plan Document. The
responsibility for administering the Plan, including the interpretation and
enforcement of the terms of the Severance Agreements, shall be vested in the
Committee and the ICF, and their respective agents, as more fully hereinafter
set forth. The eligibility of each Executive for benefits under this Plan, and
the amount and duration of such benefits, shall be governed by the terms and
provisions of the Executive's Severance Agreement and the claims procedures set
forth in Article III of this Plan Document.
The Trust is the trust agreement which HI intends to establish
to serve as the primary funding vehicle for the payment of certain legal fees
and expenses contemplated by Section 5 of the Severance Agreements.
ARTICLE III
CLAIMS FOR BENEFITS
3.1 PRESENTING CLAIMS FOR BENEFITS OTHER THAN LEGAL FEES AND
EXPENSES: Any claim for the payment of a benefit under a Severance Agreement,
other than a payment pursuant to Section 5 (or, in the case of Don D. Jordan,
pursuant to Section 8B) of his Severance Agreement (relating to certain legal
fees and expenses), shall be submitted in writing by the Executive to the ICF
and shall describe in reasonable detail the basis for the Executive's claim.
The Executive shall provide such additional information to the ICF as the ICF
may reasonably request for the evaluation of the Executive's claim for
benefits. The ICF shall notify the Executive of the benefits determination
within a reasonable time after receipt of the claim, such time not to exceed 90
days unless special circumstances require an extension of time for processing
the claim. If such an extension is required, written notice of the extension
shall be furnished to the Executive prior to the end of the initial 90-day
period. In no event shall such an extension exceed a period of 90 days from
the end of the initial period. The extension notice shall indicate the special
circumstances requiring an extension of time, and the date by which a final
decision is expected to be rendered.
Notice of a claim denial, in whole or in part, shall be set
forth in a manner calculated to be understood by the Executive and shall
contain the following:
(a) the specific reason or reasons for the denial; and
(b) specific reference to the pertinent Plan provisions
on which the denial is based; and
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(c) a description of any additional material or
information necessary for the Executive to perfect the claim and an
explanation of why such material or information is necessary; and
(d) an explanation of the Plan's claims review procedure.
Executives shall be given timely written notice of the time limits set forth
herein for determinations on claims, appeals of claim denial and decisions on
appeal. If notice of a claims determination is not provided within the
applicable time frame described above, the claim shall be deemed denied and the
Executive may appeal the denial as set forth in Section 3.3.
3.2 PRESENTING CLAIMS FOR LEGAL FEES AND EXPENSES: Section 5 (or,
in the case of Don D. Jordan, Section 8B) of each Severance Agreement contains
provisions relating to the payment of certain legal fees and expenses
("Expenses") on behalf of the Executive. The Trust is the primary funding
vehicle for the payment of Expenses.
(a) APPROVAL AND PAYMENT FROM THE TRUST: If HI has
established the Trust, an Executive must seek approval and payment of
Expenses under the procedures specified in the Trust prior to seeking
payment from HI as provided for in paragraph (b) below.
(b) SUBMISSION OF CLAIM TO HI: If (i) HI has not
established the Trust, or (ii) an Executive follows the procedures set
forth in the Trust but does not receive payment of his Expenses under
the Trust, in whole or in part, then the Executive may seek payment of
unpaid Expenses from HI by providing a written claim to the ICF,
including copies of all correspondence between the Trustee and the
Executive pursuant to the terms of the Trust. The Executive shall
also provide such additional information as the ICF may reasonably
request for the evaluation of the Executive's claim for Expenses.
The ICF shall notify the Executive of its
determination within a reasonable time after receipt of the claim,
such time not to exceed 90 days unless special circumstances require
an extension of time for processing the claim. If such an extension
is required, written notice of the extension shall be furnished to the
Executive prior to the end of the initial 90-day period. In no event
shall such an extension exceed a period of 90 days from the end of the
initial period. The extension notice shall indicate the special
circumstances requiring an extension of time, and the date by which a
final decision is expected to be rendered. Notice of a claim denial,
in whole or in part, shall be set forth in a manner calculated to be
understood by the Executive and shall contain the following:
(i) the specific reason or reasons for the
denial; and
(ii) specific reference to the pertinent
provisions of the Plan on which the denial is based; and
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(iii) a description of any additional material or
information necessary for the Executive to perfect the claim
and an explanation of why such material or information is
necessary; and
(iv) an explanation of the Plan's claims review
procedure.
Executives shall be given timely written notice of the time limits set
forth herein for determinations on claims, appeal of claim denial and
decisions on appeal. If notice of a claim determination is not
provided within the applicable time frame described above, the claim
shall be deemed denied and the Executive may appeal the denial as set
forth in Section 3.3.
3.3 CLAIMS REVIEW PROCEDURE: If a claim for benefits under
Section 3.1 or 3.2(b) above shall result in a denial of the benefit applied
for, either in whole or in part, an Executive shall have the right, to be
exercised by written application filed with the Committee within 60 days after
receipt of notice of the denial of his application or, if no such notice has
been given, within 60 days after the application is deemed denied under Section
3.1 or 3.2(b), to request the review of his application and of his entitlement
to the benefit applied for. Such request for review may contain such
additional information and comments as the Executive may wish to present. At
any stage in the appeals process, the Executive or his designated
representative may review pertinent documents, including copies of the Plan
document and information relating to the Executive's entitlement to such
benefit, and submit issues and comments in writing.
The Committee shall render a decision no later than the date
of its first meeting following receipt of the request for review, except that a
decision may be rendered no later than the second such meeting if the request
is received within 30 days of the first meeting. The Executive may request a
formal hearing before the Committee which the Committee may grant at its
discretion. Notwithstanding the foregoing, under special circumstances which
require an extension of time for rendering a decision (including but not
limited to the need to hold a hearing), the decision may be rendered not later
than 180 days after the receipt of the request for review. If such an
extension is required, the Executive will be advised in writing before the
extension begins. The Committee will provide written notice of its final
determination. The notice will include specific reasons for the decision, be
written in a manner calculated to be understood by the Executive and make
specific reference to the Plan provisions on which it is based. If a decision
on an appeal is not provided within any applicable time frame described above,
the claim shall be deemed denied on appeal.
No action at law or in equity shall be brought by or in
respect of an Executive to recover any benefits under this Plan or the
Executive's Severance Agreement prior to exhausting the administrative process
of appeal available under this Section 3.3.
3.4 DISPUTED BENEFITS: If any dispute still exists between an
Executive and the Committee after a review of the claim or in the event any
uncertainty shall develop as to the person to whom payment of any benefit
hereunder shall be made, the Committee may withhold the payment of all or any
part of the benefits payable hereunder to the Executive until such dispute has
been resolved by a court of competent jurisdiction or settled by the parties
involved.
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ARTICLE IV
ADMINISTRATION OF THE PLAN
4.1 PLAN ADMINISTRATOR: The Committee shall be the primary
fiduciary with respect to the operation and administration of this Plan and
shall serve as Plan administrator and named fiduciary for purposes of ERISA
Section 402(a)(i).
4.2 POWERS AND DUTIES OF FIDUCIARY: In fulfillment of their
respective duties hereunder, the Committee and the ICF shall enforce this Plan
in accordance with its terms. The Committee and, to the extent of its duties
and authority under Sections 3.1 and 3.2(b), the ICF shall have all powers
necessary for the accomplishment of that purpose, including but not limited to
the following powers:
(a) to employ such agents and assistants, such counsel
(who may be of counsel to HI) and such clerical, administrative,
medical, accounting, and investment services as the Committee or ICF
may require in carrying out the provisions of the Plan; and
(b) to authorize a delegate to make payment or to execute
or deliver any instrument on their behalf; and
(c) to decide all questions of eligibility and determine
the amount, manner, and time of payment of any benefits hereunder; and
(d) to authorize a delegate to prescribe forms and
procedures to be followed in filing applications for benefits and for
other occurrences in the administration of the Plan; and
(e) to prepare and distribute information explaining the
Plan; and
(f) to interpret and construe all terms, provisions,
conditions, and limitations of the Plan and to reconcile any
inconsistency or supply any omitted detail that may appear in the Plan
in its discretion; and
(g) to make and enforce such rules and regulations for
the administration of the Plan as are not inconsistent with the terms
set forth herein; and
(h) in addition to all other powers herein granted, and
in general consistent with the provisions of the Plan, all other
rights and powers reasonably necessary to supervise and control the
administration of this Plan.
The Committee or ICF may employ any individual(s) or
entity(ies) to furnish administrative services to the Plan and delegate any of
its powers and duties hereunder to such individuals or entities, including but
not limited to the power and duty to make determinations of eligibility. The
Committee and the ICF also may, generally or specifically, delegate to any
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employee, division or department of HI any of its powers and duties hereunder,
which delegation shall be evidenced in writing.
4.3 INFORMATION FROM HI: HI shall supply full and timely
information to the Committee and the ICF as they may require in administration
of the Plan.
ARTICLE V
AMENDMENT AND TERMINATION OF THE PLAN
HI shall have the right to amend or terminate this Plan
Document in whole or in part at any time. Amendment or termination of the Plan
Document shall be made by a written instrument of equal formality as this Plan
Document, authorized by a resolution of the Board of Directors of HI and
executed by an authorized officer of HI.
ARTICLE VI
ERISA INFORMATION
The following information is provided to comply with certain
requirements of ERISA:
(a) PLAN SPONSOR: The Plan sponsor is Houston Industries
Incorporated, P.O. Box 4567, Houston, Texas 77210; (713) 207-3000.
(b) EMPLOYER IDENTIFICATION NUMBER OF PLAN SPONSOR:
74-1885573.
(c) PLAN NUMBER: 905
(d) PLAN YEAR: The plan year for reporting to
governmental agencies and employees shall be the calendar year.
(e) PLAN ADMINISTRATOR: The Compensation Committee, Board
of Directors of Houston Industries Incorporated, 1111 Louisiana,
Houston, Texas 77002; (713) 207-7133.
(f) AGENT FOR SERVICE OF LEGAL PROCESS: The Compensation
Committee, Board of Directors of Houston Industries Incorporated, 1111
Louisiana, Houston, Texas 77002, is the agent for service of legal
process.
(g) SOURCE OF BENEFITS: Payments under this Plan shall
be made from the general assets of HI except to the extent that
benefits are payable under the Trust as described in Section 3.2(a).
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(h) EMPLOYEE RIGHTS: Each Executive has a right to
information about the Plan, such as how it operates and an explanation
of the benefits to which Executives will be entitled under the terms
of the Plan.
This Summary Plan Description is designed to give Executives
an explanation of how the Plan operates. The Plan is administered in
accordance with the Plan (which is the same as this Summary Plan Description or
Plan Document and its Appendices) as well as applicable laws, such as ERISA.
Each Executive has the right to examine, without charge and upon proper
request, all Plan documents, and copies of all documents filed by the Plan with
the U.S. Department of Labor, such as annual reports. Copies of all Plan
documents and other Plan information may be obtained by written request to the
Plan Administrator. The Plan Administrator may make a reasonable charge for
any copies requested.
Every effort will be made to provide any requested document or
report within 30 days after it is requested. An Executive will be notified if
more time is needed to comply with a request. Financial penalties may be
imposed upon the Plan Administrator if any materials which an Executive has
properly requested are not received within 30 days of a request (unless the
materials were not sent because of matters beyond the control of the Plan
Administrator).
Certain Plan information is made available to Executives
automatically, so that no special request need be made, such as this Summary
Plan Description.
ERISA imposes obligations upon the persons who are responsible
for the operation of an employee benefit plan. The people who operate the
Plan, who are referred to as Plan "fiduciaries," have a duty to do so prudently
and in the interest of Executives and their beneficiaries. Fiduciaries who
violate ERISA may be removed and required to make good any losses they may have
caused to the Plan.
The law protects an Executive from being terminated,
disciplined or discriminated against for attempting to obtain benefits which
may be due or for exercising his or her rights under ERISA.
Occasionally, a benefit claim will be denied. When this
happens, an Executive is entitled to a written explanation of the reason for
denial, plus an explanation of his or her right to request an administrative
review of the denied claim. The procedure for appeal of denied benefits is
outlined in Article III of this Plan Document.
If an Executive has any questions about his or her ERISA
rights, he or she should contact the Plan Administrator, HI's local benefits
office or the nearest area office of the U.S. Labor-Management Service
Administration, Department of Labor.
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ARTICLE VII
MISCELLANEOUS PROVISIONS
7.1 NO EMPLOYMENT GUARANTEED: Nothing contained in this Plan
shall be construed as a contract of employment between HI and any Executive, or
as a right for any Executive to be continued in the employment of HI, or as a
limitation of the right of HI to discharge any of the Executives with or
without cause.
7.2 GOVERNING LAW: This Plan shall be construed, administered,
and governed in all respects under applicable federal law, and to the extent
that federal law is inapplicable, under the laws of the State of Texas. If any
provision of this Plan shall be held by a court of competent jurisdiction to be
invalid or unenforceable, the remaining provisions hereof shall continue to be
fully effective.
7.3 INVALIDITY OF PARTICULAR PROVISIONS: In the event any
provision of this Plan shall be held illegal or invalid for any reason, said
illegality or invalidity shall not affect the remaining provisions of this
Plan, and this Plan shall be construed and enforced as if said illegal or
invalid provisions had never been a part of this Plan.
7.4 PAYMENTS DUE MINORS AND INCOMPETENTS: If the Committee
determines that any person to whom a payment is due hereunder is a minor or
incompetent by reason of physical or mental disability, the Committee shall
have power to cause the payments becoming due such person to be made to another
for the benefit of such minor or incompetent without the Committee being
responsible to see to the application of such payment. Payments made pursuant
to such power shall operate as a complete discharge of the Plan, Committee, the
ICF and HI to the extent of such payments.
IN WITNESS WHEREOF, Houston Industries Incorporated has
executed these presents as evidenced by the signature of its officers affixed
hereto, in a number of copies, all of which shall constitute but one and the
same instrument, which may be sufficiently evidenced by any executed copy
hereof, this 21st day of November, 1997, but effective as of September 3, 1997.
HOUSTON INDUSTRIES INCORPORATED
By /s/ R. S. LETBETTER
----------------------------------
Name: R. S. Letbetter
-----------------------------
Title: President and
Chief Operating Officer
----------------------------
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EXHIBIT 10aa2
FORM OF SEVERANCE AGREEMENT
THIS SEVERANCE AGREEMENT ("Agreement") is made and effective
as of the 3rd day of September, 1997, by and between HOUSTON INDUSTRIES
INCORPORATED, a Texas corporation having its principal place of business in
Houston, Harris County, Texas, and ________________________, an individual
currently residing in _____________ County, Texas ("Executive"). All terms
defined in Section 1 shall, throughout this Agreement, have the meanings given
therein.
1. DEFINITIONS:
"AFFILIATE" means any company controlled by, controlling or
under common control with the Company within the meaning of Section 414 of the
Internal Revenue Code of 1986, as amended (the "Code").
"BOARD" means the board of directors of the Company.
"CAUSE" means Executive's (a) gross negligence in the
performance of Executive's duties, (b) intentional and continued failure to
perform Executive's duties, (c) intentional engagement in conduct which is
materially injurious to the Company or its Affiliates (monetarily or otherwise)
or (d) conviction of a felony or a misdemeanor involving moral turpitude. For
this purpose, an act or failure to act on the part of Executive will be deemed
"intentional" only if done or omitted to be done by Executive not in good faith
and without reasonable belief that his/her action or omission was in the best
interest of the Company, and no act or failure to act on the part of Executive
will be deemed "intentional" if it was due primarily to an error in judgment or
negligence.
"CHANGE IN EMPLOYMENT" shall mean any one or more of the
following:
(a) a significant reduction in the duties or
responsibilities of Executive from those applicable to him/her
immediately prior to the date on which a Change of Control occurs (or,
in the case of an Anticipatory Change in Employment, immediately prior
to the date of the Binding CIC Agreement);
(b) a reduction in Executive's total remuneration
(including salary, bonus, qualified retirement benefits, nonqualified
benefits, welfare benefits and any other employee benefits) from that
provided to Executive immediately prior to the date on which a Change
of Control occurs (or, in the case of an Anticipatory Change in
Employment, immediately prior to the date of the Binding CIC
Agreement); provided, however, that a contemporaneous diminution of or
reduction in qualified retirement benefits and/or welfare benefits
which is of general application and which uniformly and
contemporaneously reduces or diminishes the benefits of all covered
employees by the same percentage shall be ignored and not be
considered a reduction in total remuneration for purposes of this
paragraph (b);
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(c) a change in the location of Executive's principal
place of employment with the Company by more than 35 miles from the
location where Executive was principally employed immediately prior to
the date on which a Change of Control occurs (or, in the case of an
Anticipatory Change in Employment, immediately prior to the date of
the Binding CIC Agreement); or
(d) a failure by the Company to provide directors and
officers liability insurance covering Executive comparable to that
provided to Executive immediately prior to the date on which a Change
of Control occurs (or, in the case of an Anticipatory Change in
Employment, immediately prior to the date of the Binding CIC
Agreement).
A "CHANGE OF CONTROL" or "CIC" shall be deemed to have
occurred upon the occurrence of any of the following events:
(a) 30% OWNERSHIP CHANGE: Any Person makes an
acquisition of Outstanding Voting Stock and is, immediately
thereafter, the beneficial owner of 30% or more of the then
Outstanding Voting Stock, unless such acquisition is made directly
from the Company in a transaction approved by a majority of the
Incumbent Directors; or any group is formed that is the beneficial
owner of 30% or more of the Outstanding Voting Stock; or
(b) BOARD MAJORITY CHANGE: Individuals who are Incumbent
Directors cease for any reason to constitute a majority of the members
of the Board; or
(c) MAJOR MERGERS AND ACQUISITIONS: Consummation of a
Business Combination unless, immediately following such Business
Combination, (i) all or substantially all of the individuals and
entities that were the beneficial owners of the Outstanding Voting
Stock immediately prior to such Business Combination beneficially own,
directly or indirectly, more than 70% of the then outstanding shares
of voting stock of the parent corporation resulting from such Business
Combination in substantially the same relative proportions as their
ownership, immediately prior to such Business Combination, of the
Outstanding Voting Stock, (ii) if the Business Combination involves
the issuance or payment by the Company of consideration to another
entity or its shareholders, the total fair market value of such
consideration plus the principal amount of the consolidated long-term
debt of the entity or business being acquired (in each case,
determined as of the date of consummation of such Business Combination
by a majority of the Incumbent Directors) does not exceed 50% of the
sum of the fair market value of the Outstanding Voting Stock plus the
principal amount of the Company's consolidated long-term debt (in each
case, determined immediately prior to such consummation by a majority
of the Incumbent Directors), (iii) no Person (other than any
corporation resulting from such Business Combination) beneficially
owns, directly or indirectly, 30% or more of the then outstanding
shares of voting stock of the parent corporation resulting from such
Business Combination and (iv) a majority of the members of the board
of directors
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of the parent corporation resulting from such Business Combination
were Incumbent Directors of the Company immediately prior to
consummation of such Business Combination; or
(d) MAJOR ASSET DISPOSITIONS: Consummation of a Major
Asset Disposition unless, immediately following such Major Asset
Disposition, (i) individuals and entities that were beneficial owners
of the Outstanding Voting Stock immediately prior to such Major Asset
Disposition beneficially own, directly or indirectly, more than 70% of
the then outstanding shares of voting stock of the Company (if it
continues to exist) and of the entity that acquires the largest
portion of such assets (or the entity, if any, that owns a majority of
the outstanding voting stock of such acquiring entity) and (ii) a
majority of the members of the board of directors of the Company (if
it continues to exist) and of the entity that acquires the largest
portion of such assets (or the entity, if any, that owns a majority of
the outstanding voting stock of such acquiring entity) were Incumbent
Directors of the Company immediately prior to consummation of such
Major Asset Disposition.
For purposes of the foregoing,
(1) the term "Person" means an individual, entity or
group;
(2) the term "group" is used as it is defined for
purposes of Section 13(d)(3) of the Securities Exchange Act of 1934
(the "Exchange Act");
(3) the term "beneficial owner" is used as it is defined
for purposes of Rule 13d-3 under the Exchange Act;
(4) the term "Outstanding Voting Stock" means outstanding
voting securities of the Company entitled to vote generally in the
election of directors; and any specified percentage or portion of the
Outstanding Voting Stock (or of other voting stock) shall be
determined based on the combined voting power of such securities;
(5) the term "Incumbent Director" means a director of the
Company (x) who was a director of the Company on September 1, 1997 or
(y) who becomes a director subsequent to such date and whose election,
or nomination for election by the Company's shareholders, was approved
by a vote of a majority of the Incumbent Directors at the time of such
election or nomination, except that any such director shall not be
deemed an Incumbent Director if his or her initial assumption of
office occurs as a result of an actual or threatened election contest
or other actual or threatened solicitation of proxies by or on behalf
of a Person other than the Board;
(6) the term "election contest" is used as it is defined
for purposes of Rule 14a-11 under the Exchange Act;
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(7) the term "Business Combination" means (x) a merger or
consolidation involving the Company or its stock or (y) an acquisition
by the Company, directly or through one or more subsidiaries, of
another entity or its stock or assets;
(8) the term "parent corporation resulting from a
Business Combination" means the Company if its stock is not acquired
or converted in the Business Combination and otherwise means the
entity which as a result of such Business Combination owns the Company
or all or substantially all the Company's assets either directly or
through one or more subsidiaries; and
(9) the term "Major Asset Disposition" means the sale or
other disposition in one transaction or a series of related
transactions of 70% or more of the assets of the Company and its
subsidiaries on a consolidated basis; and any specified percentage or
portion of the assets of the Company shall be based on fair market
value, as determined by a majority of the Incumbent Directors.
"COMPANY" means Houston Industries Incorporated and any
successor thereto.
"COMPENSATION" means the sum of Executive's annual salary plus
Target Bonus plus Restricted Stock Award, determined immediately prior to (a)
the date on which a Change of Control occurs (or, in the case of an
Anticipatory Change in Employment, immediately prior to the date of the Binding
CIC Agreement) or (b) the time of his Covered Termination, whichever is
greater.
"COVERED TERMINATION" means any termination of Executive's
employment with the Company or any Affiliate thereof, within three years after
the date upon which a Change of Control occurs, which:
(a) results from a resignation by Executive during a
Covered Termination Window; or
(b) does not result from any of (i) death, (ii)
disability entitling Executive to benefits under the Company's
long-term disability plan, (iii) termination on or after age 65, (iv)
termination for Cause or (v) resignation by Executive (except as
described in (a) above).
For this purpose, should a Change in Employment occur (x) after the execution
of a binding agreement to effect a Change of Control (a "Binding CIC
Agreement") and (y) in preparation for or in contemplation of the Change of
Control (an "Anticipatory Change in Employment"), the Change in Employment
shall be treated as if it occurred immediately after the Change of Control.
Any Change in Employment occurring as described in part (x) of the preceding
sentence shall be presumed to satisfy part (y) and be an Anticipatory Change in
Employment unless the Company shall disprove such presumption through clear and
convincing evidence.
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"COVERED TERMINATION WINDOW" means the 61-day period
commencing on the date the Executive is subjected to a Change in Employment or,
if later, the date that the Executive becomes aware that he/she has been
subjected to a Change in Employment.
"RESTRICTED STOCK AWARD" means a cash amount equal to the
maximum amount (stated as a percentage of salary) granted to Executive as a
Restricted Stock Award under the Company's Long Term Incentive Compensation
Plan (or any successor plan) in the applicable calendar year.
"SEVERANCE AMOUNT" means an amount equal to Executive's
Compensation multiplied by 3.
"TARGET BONUS" means Executive's target incentive opportunity
under the Houston Industries Incorporated Executive Incentive Compensation Plan
(or any successor plan) in effect for the year with respect to which the Target
Bonus is being determined or, if no such plan is then in effect, for the last
year in which such a plan was in effect, expressed as a dollar amount based
upon Executive's annual salary for the year of such determination.
"WAIVER AND RELEASE" means a legal document, in the form
attached hereto as Exhibit A or such other form as may be prescribed by the
Company, but which form may not be altered, amended or modified after execution
of a Binding CIC Agreement without the consent of the Executive, in which
Executive, in exchange for severance benefits described in Section 2, among
other things, releases the Company, the Affiliates, their directors, officers,
employees and agents, their employee benefit plans and the fiduciaries and
agents of said plans from liability and damages in any way related to
Executive's employment with or separation from the Company or any of its
Affiliates.
"WELFARE BENEFIT COVERAGE" shall mean each of life insurance,
medical, dental and vision benefits.
2. SEVERANCE BENEFITS: If Executive (a) experiences a Covered
Termination, (b) executes and returns to the Company a Waiver and Release
within a time period prescribed by the Company following the date of
Executive's Covered Termination, and (c) does not revoke such Waiver and
Release within seven days after the date of execution, then Executive shall be
entitled to receive, as additional compensation for services rendered to the
Company (including its Affiliates), the following severance benefits:
(a) CASH LUMP SUM: A lump-sum cash payment in an amount
equal to Executive's Severance Amount, which shall be made within 15
days after expiration of the seven-day Waiver and Release revocation
period.
(b) WELFARE BENEFIT COVERAGES: If, at any time during
the 36-month period following the date of Covered Termination,
Executive is not eligible as a retiree of the Company or its
Affiliates for any Welfare Benefit Coverage, Executive shall be
entitled to obtain such Welfare Benefit Coverage for himself/herself
and,
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where applicable, his/her eligible dependents, while ineligible during
such period, provided that Executive pays the premiums required of
active employees from time to time for such Welfare Benefit Coverage.
Such entitlement shall apply only to those Welfare Benefit Coverages
that the Company has in effect from time to time for active employees.
Notwithstanding the foregoing, if any Welfare Benefit Coverage to
which the Executive is entitled under this paragraph cannot be
continued during a period when Executive is not an employee of the
Company, the Company shall pay to Executive a lump-sum cash payment in
an amount equal to the economic value of such benefit as determined by
Deloitte & Touche. Executive's right to any Welfare Benefit Coverage
as a retiree shall be governed by the applicable plan document in
effect from time to time and shall not be affected by this Agreement.
(c) OUTPLACEMENT: Reimbursement for fees, up to a
maximum amount equal to 15% of Executive's annual base salary as of
the date of his Covered Termination, incurred for outplacement
services within twelve months of the date of Executive's Covered
Termination in connection with Executive's efforts to obtain new
employment.
(d) COMPANY VEHICLE: The option to purchase Executive's
company vehicle, within 30 days following Executive's Covered
Termination, for an amount equal to its depreciated book value as of
the date of Executive's Covered Termination.
(e) BENEFITS RESTORATION PLAN: Benefits (including
"Retirement Plan Restoration Benefits" and "Supplemental Retirement
Benefits"), pursuant to the Benefit Restoration Plan(s) sponsored by
the Company in which Executive is a participant, in an amount not less
than the amount that Executive would have been entitled to receive
pursuant to the underlying qualified retirement plan (a) if Executive
were fully vested in the underlying qualified retirement plan benefits
and (b) had Executive remained in the service of the Company or its
Affiliates throughout the three-year period following the Change of
Control. The Company agrees to amend the Benefit Restoration Plan(s)
to the extent necessary to provide for the payment of these benefits,
which shall be offset by, and not in addition to, any benefit actually
payable pursuant to the qualified retirement plan.
(f) FINANCIAL PLANNING: Continued access, for the
remainder of the calendar year in which the Covered Termination occurs
or for 60 days (if greater), to the financial planning services
available to executive employees at the time of the Change of Control
to which the Covered Termination relates.
3. DEFERRED COMPENSATION PLAN ADMINISTRATION: Notwithstanding
any provision herein or any provision of any Deferred Compensation Plan of the
Company to the contrary, the Company and the Board hereby agree to amend the
Company's Deferred Compensation Plans upon the occurrence of a Change of
Control so that any and all amounts of salary and/or bonus deferred by
Executive and held under the Deferred Compensation Plans shall, upon a Covered
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Termination, remain in said plans earning interest at the rate prescribed
therein until paid to or for the benefit of the Executive at such time and in
such form as was irrevocably elected in writing by Executive.
4. CERTAIN ADDITIONAL PAYMENTS: Anything in this Agreement to
the contrary notwithstanding, in the event it shall be determined that any
payment or distribution by the Company to or for the benefit of Executive
(whether paid or payable or distributed or distributable pursuant to the terms
of this Agreement or otherwise, but determined without regard to any additional
payments required under this Section 4 (a "Payment")) would be subject to the
excise tax imposed by Section 4999 of the Code or any interest or penalties
incurred by Executive with respect to such excise tax (such excise tax,
together with any such interest and penalties, are hereinafter collectively
referred to as the "Excise Tax"), then Executive shall be entitled to receive
an additional payment (a "Gross-Up Payment") in an amount such that after
payment (whether through withholding at the source or otherwise) by Executive
of all taxes (including any interest or penalties imposed with respect to such
taxes), including, without limitation, any income taxes (and any interest and
penalties imposed with respect thereto), employment taxes and Excise Tax
imposed upon the Gross-Up Payment, Executive retains an amount of the Gross-Up
Payment equal to the Excise Tax imposed upon the Payments.
Subject to the provisions of this Section 4, all
determinations required to be made under this Section 4, including whether and
when a Gross-Up Payment is required and the amount of such Gross-Up Payment and
the assumptions to be utilized in arriving at such determination, shall be made
by Deloitte & Touche (the "Accounting Firm") which shall provide detailed
supporting calculations both to the Company and Executive within 15 business
days of the receipt of notice from Executive that there has been a Payment, or
such earlier time as is requested by the Company. In the event that the
Accounting Firm is serving as accountant or auditor for the individual, entity
or group effecting the Change of Control, the Executive shall appoint another
nationally recognized accounting firm to make the determinations required
hereunder (which accounting firm shall then be referred to as the Accounting
Firm hereunder). All fees and expenses of the Accounting Firm shall be borne
solely by the Company. Any Gross-Up Payment, as determined pursuant to this
Section 4, shall be paid by the Company to Executive within five days of the
receipt of the Accounting Firm's determination. If the Accounting Firm
determines that no Excise Tax is payable by Executive, it shall furnish
Executive with a written opinion that failure to report the Excise Tax on
Executive's applicable federal income tax return would not result in the
imposition of negligence or similar penalty. Any determination by the
Accounting Firm shall be binding upon the Company and Executive. As a result
of the uncertainty in the application of Section 4999 of the Code at the time
of the initial determination by the Accounting Firm hereunder, it is possible
that Gross-Up Payments which will not have been made by the Company should have
been made ("Underpayment"), consistent with the calculations required to be
made hereunder. In the event that the Company exhausts its remedies pursuant
to the following provisions of this Section 4 and the Executive thereafter is
required to make a payment of any Excise Tax, the Accounting Firm shall
determine the amount of the Underpayment that has occurred and any such
Underpayment shall be promptly paid by the Company to or for the benefit of
Executive.
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Executive shall notify the Company in writing of any claim by
the Internal Revenue Service that, if successful, would require the payment by
the Company of the Gross-Up Payment. Such notification shall be given as soon
as practicable but no later than ten business days after Executive is informed
in writing of such claim and shall apprise the Company of the nature of such
claim and the date on which such claim is requested to be paid. Executive
shall not pay such claim prior to the expiration of the 30-day period following
the date on which it gives such notice to the Company (or such shorter period
ending on the date that any payment of taxes with respect to such claim is
due). If the Company notifies Executive in writing prior to the expiration of
such period that it desires to contest such claim, Executive shall:
(a) give the Company any information reasonably requested
by the Company relating to such claim;
(b) take such action in connection with contesting such
claim as the Company shall reasonably request in writing from time to
time, including, without limitation, accepting legal representation
with respect to such claim by an attorney reasonably selected by the
Company;
(c) cooperate with the Company in good faith in order to
effectively contest such claim; and
(d) permit the Company to participate in any proceedings
relating to such claim;
provided, however, that the Company shall bear and pay directly all costs and
expenses (including additional interest and penalties) incurred in connection
with such contest and shall indemnify and hold Executive harmless, on an
after-tax basis, for any Excise Tax, employment tax or income tax (including
interest and penalties with respect thereto) imposed as a result of such
representation and payment of costs and expenses. Without limitation of the
foregoing provisions of this Section 4, the Company shall control all
proceedings taken in connection with such contest and, at its sole option, may
pursue or forgo any and all administrative appeals, proceedings, hearings and
conferences with the taxing authority in respect of such claim and may, at its
sole option, either direct Executive to pay the tax claimed and sue for a
refund or contest the claim in any permissible manner, and Executive agrees to
prosecute such contest to a determination before any administrative tribunal,
in a court of initial jurisdiction and in one or more appellate courts, as the
Company shall determine; provided, however, that if the Company directs
Executive to pay such claim and sue for a refund, the Company shall advance the
amount of such payment to Executive, on an interest-free basis and shall
indemnify and hold Executive harmless, on an after-tax basis, from any Excise
Tax, employment tax or income tax (including interest or penalties with respect
thereto) imposed with respect to such advance or with respect to any imputed
income with respect to such advance; and further provided that any extension of
the statute of limitations relating to payment of taxes for the taxable year of
Executive with respect to which such contested amount is claimed to be due is
limited solely to such contested amount. Furthermore, the Company's control of
the contest shall be limited to issues with respect to which a Gross-Up Payment
would be payable hereunder and
-8-
9
Executive shall be entitled to settle or contest, as the case may be, any other
issue raised by the Internal Revenue Service or any other taxing authority.
If, after the receipt by Executive of an amount advanced by
the Company pursuant to the foregoing provisions of this Section 4, Executive
becomes entitled to receive any refund with respect to such claim, Executive
shall (subject to the Company complying with the requirements of this Section
4) promptly pay to the Company the amount of such refund (together with any
interest paid or credited thereon after taxes applicable thereto). If, after
the receipt by Executive of an amount advanced by the Company pursuant to the
foregoing provisions of this Section 4, a determination is made that Executive
shall not be entitled to any refund with respect to such claim and the Company
does not notify Executive in writing of its intent to contest such denial of
refund prior to the expiration of 30 days after such determination, then such
advance shall be forgiven and shall not be required to be repaid and the amount
of such advance shall offset, to the extent thereof, the amount of Gross-Up
Payment required to be paid.
If the Company is obligated to provide the Executive with one
or more Welfare Benefit Coverages (or a payment in lieu thereof) pursuant to
Section 2(b), and the amount of such benefits or the value of such benefit
coverage (or the payment in lieu thereof) (including without limitation any
insurance premiums paid by the Company to provide such benefits) is subject to
any income, employment or similar tax imposed by federal, state or local law,
or any interest or penalties with respect to such tax (such tax or taxes,
together with any such interest and penalties, being hereafter collectively
referred to as the "Income Tax") because such benefits cannot be provided under
a nondiscriminatory health plan described in Section 105 of the Code or for any
other reason, the Company will pay to the Executive an additional payment or
payments (collectively, an "Income Tax Payment"). The Income Tax Payment will
be in an amount such that, after payment by the Executive of all taxes
(including any interest or penalties imposed with respect to such taxes), the
Executive retains an amount of the Income Tax Payment equal to the Income Tax
imposed with respect to such welfare benefits or such welfare benefit coverage.
5. LEGAL FEES AND EXPENSES: It is the intent of the Company that
Executive not be required to incur legal fees and the related expenses
associated with the interpretation, enforcement or defense of Executive's
rights under this Agreement by litigation or otherwise because the cost and
expense thereof would detract from the benefits intended to be extended to
Executive hereunder. Accordingly, if it should appear to Executive that the
Company has failed to comply with any of its obligations under this Agreement
or in the event that the Company or any other person takes or threatens to take
any action to declare this Agreement void or unenforceable, or institutes any
litigation or other action or proceeding designed to deny, or to recover from,
the Executive the benefits provided or intended to be provided to Executive
hereunder, the Company irrevocably authorizes the Executive from time to time
to retain counsel of Executive's choice, at the expense of the Company as
hereafter provided, to advise and represent Executive in connection with any
such interpretation, enforcement or defense, including without limitation the
initiation or defense of any litigation or other legal action, whether by or
against the Company or any director, officer, stockholder or other person
affiliated with the Company, in any jurisdiction. Notwithstanding any existing
or prior attorney-client relationship between the Company and such counsel, the
Company irrevocably consents to Executive entering into an attorney-client
relationship with such counsel, and
-9-
10
in that connection the Company and Executive agree that a confidential
relationship will exist between Executive and such counsel. Without respect to
whether Executive prevails, in whole or in part, in connection with any of the
foregoing, the Company will pay and be solely financially responsible for any
and all attorneys' fees and related expenses incurred by Executive in
connection with any of the foregoing except to the extent that a final judgment
no longer subject to appeal finds that a claim or defense asserted by Executive
was frivolous. In such a case, the portion of such fees and expenses incurred
by Executive as a result of such frivolous claim or defense shall become
Executive's sole responsibility and any funds advanced by the Company or by a
Trust created to secure such payment shall be repaid.
In the event a Change of Control occurs, the performance of
the Company's obligations under this Section 5 will be funded by amounts
deposited or to be deposited in trust pursuant to certain trust agreements to
which the Company will be a party providing that the fees and expenses of
counsel selected from time to time by Executive pursuant to this Section 5 will
be paid, or reimbursed to Executive if paid by Executive, either in accordance
with the terms of such trust agreements, or, if not so provided, on a regular,
periodic basis upon presentation by Executive to the trustee of a statement or
statements prepared by such counsel in accordance with its customary practices.
In order to be eligible for payment of expenses directly from the Company,
Executive must first exhaust all rights to payment under the trust agreements
contemplated immediately above. The pendency of a claim by the Company that a
claim or defense of Executive is frivolous or otherwise lacking merit shall not
excuse the Company (or the trustee of a Trust contemplated by this Section 5)
from making periodic payments of legal fees and expenses until a final judgment
is rendered as hereinabove provided. Any failure by the Company to satisfy any
of its obligations under this Section 5 will not limit the rights of Executive
hereunder. Subject to the foregoing, Executive will have the status of a
general unsecured creditor of the Company and will have no right to, or
security interest in, any assets of the Company or any Affiliate.
6. NOTICES: For purposes of this Agreement, notices and all
other communications provided for herein shall be in writing and shall be
deemed to have been duly given when personally delivered or when mailed by
United States registered or certified mail, return receipt requested, postage
prepaid, addressed as follows:
If to Company: Houston Industries Incorporated
P.O. Box 4567
Houston, Texas 77210
ATTENTION: Chairman of the Board
If to Executive:
---------------------------------
---------------------------------
---------------------------------
or to such other address as either party may furnish to the other in writing
in accordance herewith, except that notices of changes of address shall be
effective only upon receipt.
-10-
11
7. APPLICABLE LAW: The validity, interpretation, construction
and performance of this Agreement will be governed by and construed in
accordance with the substantive laws of the State of Texas, including the Texas
statute of limitations, but without giving effect to the principles of conflict
of laws of such State.
8. SEVERABILITY: If a court of competent jurisdiction determines
that any provision of this Agreement is invalid or unenforceable, then the
invalidity or unenforceability of that provision shall not affect the validity
or enforceability of any other provision of this Agreement and all other
provisions shall remain in full force and effect.
9. WITHHOLDING OF TAXES: The Company may withhold from any
benefits payable under this Agreement all federal, state, city or other taxes
as may be required pursuant to any law or governmental regulation or ruling.
10. NO EMPLOYMENT AGREEMENT: Nothing in this Agreement shall give
Executive any rights to (or impose any obligations for) continued employment by
the Company or any Affiliate thereof or successor thereto, nor shall it give
the Company any rights (or impose any obligations) with respect to continued
performance of duties by Executive for the Company or any Affiliate thereof or
successor thereto.
11. NO ASSIGNMENT; SUCCESSORS: Executive's right to receive
payments or benefits hereunder shall not be assignable or transferable, whether
by pledge, creation or a security interest or otherwise, whether voluntary,
involuntary, by operation of law or otherwise, other than a transfer by will or
by the laws of descent or distribution, and in the event of any attempted
assignment or transfer contrary to this Section 11 the Company shall have no
liability to pay any amount so attempted to be assigned or transferred. This
Agreement shall inure to the benefit of and be enforceable by Executive's
personal or legal representatives, executors, administrators, successors,
heirs, distributees, devisees and legatees.
This Agreement shall be binding upon and inure to the benefit
of the Company, its successors and assigns (including, without limitation, any
company into or with which the Company may merge or consolidate). The Company
agrees that it will not effect the sale or other disposition of all or
substantially all of its assets unless either (a) the person or entity
acquiring such assets or a substantial portion thereof shall expressly assume
by an instrument in writing all duties and obligations of the Company hereunder
or (b) the Company shall provide, through the establishment of a separate
reserve therefor, for the payment in full of all amounts which are or may
reasonably be expected to become payable to Executive hereunder.
12. PAYMENT OBLIGATIONS ABSOLUTE: Except for the requirement of
the Executive to execute and return to the Company a Waiver and Release in
accordance with Section 2, the Company's obligation to pay (or cause one of its
Affiliates to pay) Executive the amounts and to make the arrangements provided
herein shall be absolute and unconditional and shall not be affected by any
circumstances, including, without limitation, any set-off, counter-claim,
recoupment, defense or other right which the Company (including its Affiliates)
may have against him/her or anyone else. All amounts payable by the Company
(including its Affiliates hereunder) shall be paid without
-11-
12
notice or demand. Executive shall not be obligated to sign an agreement not to
compete with the Company or to seek other employment in mitigation of the
amounts payable or arrangements made under any provision of this Agreement, and
the obtaining of any other employment shall in no event effect any reduction of
the Company's obligations to make (or cause to be made) the payments and
arrangements required to be made under this Agreement.
13. NUMBER AND GENDER: Wherever appropriate herein, words used in
the singular shall include the plural and the plural shall include the
singular. The masculine gender where appearing herein shall be deemed to
include the feminine gender.
14. TERM: The effective date of the Agreement is September 3,
1997. The term of this Agreement shall be for a period of three years after
such effective date.
15. EXTENSION: The Board or the Executive Committee of the
Company may, at any time prior to the expiration hereof, extend the term hereof
for a period of up to three years from the date on which such extension is
approved, without any further action on the part of Executive or the Company.
IN WITNESS WHEREOF, the parties have caused this Agreement to
be executed and delivered this _____ day of November, 1997, but effective as of
the day and year first above written.
HOUSTON INDUSTRIES INCORPORATED
By
----------------------------------------
Don D. Jordan,
Chairman and Chief Executive Officer
EXECUTIVE
------------------------------------------
-12-
1
EXHIBIT 12
HOUSTON INDUSTRIES INCORPORATED AND SUBSIDIARIES
COMPUTATION OF RATIOS OF EARNINGS TO FIXED CHARGES
(THOUSANDS OF DOLLARS)
TWELVE MONTHS ENDED DECEMBER 31,
--------------------------------------------------------------
1997 1996 1995 1994 1993
---------- -------- -------- ---------- ----------
Fixed Charges as Defined:
(1) Interest on Long-Term
Debt..................... $ 320,845 $276,242 $279,491 $ 265,494 $ 304,462
(2) Other Interest........... 77,112 33,738 21,586 25,076 15,145
(3) Capitalized Interest..... 7,721
(4) Distribution on Trust
Securities............... 26,230
(5) Preferred Dividends
Factor of Subsidiary..... 3,360 33,619 44,933 51,718 52,399
(6) Interest Component of
Rentals Charged to
Operating Expense ....... 5,692 942 3,102 3,951 4,449
---------- -------- -------- ---------- ----------
(7) Total Fixed Charges...... $ 440,960 $344,541 $349,112 $ 346,239 $ 376,455
========== ======== ======== ========== ==========
Earnings as Defined:
(8) Income from Continuing
Operations............... $ 421,110 $404,944 $397,400 $ 423,985 $ 440,531
(9) Income Taxes for
Continuing Operations.... 206,374 200,165 199,555 230,424 228,863
(10) Fixed Charges (line 7)... 440,960 344,541 349,112 346,239 376,455
(11) Capitalized Interest
(Line 3)................. (7,721)
---------- -------- -------- ---------- ----------
(12) Income from Continuing
Operations Before Income
Taxes and Fixed
Charges.................. $1,060,723 $949,650 $946,067 $1,000,648 $1,045,849
========== ======== ======== ========== ==========
Preferred Dividends Factor of
Subsidiary:
(13) Preferred Stock Dividends
of Subsidiary............ $ 2,255 $ 22,563 $ 29,955 $ 33,583 $ 34,473
(14) Ratio of Pre-Tax Income
from Continuing
Operations to Income from
Continuing Operations
(line 8 plus line 9
divided, (line 8)........ 1.49 1.49 1.50 1.54 1.52
---------- -------- -------- ---------- ----------
(15) Preferred Dividends
Factor of Subsidiary
(line 14 times line 13)
......................... $ 3,360 $ 33,619 $ 44,933 $ 51,718 $ 52,399
========== ======== ======== ========== ==========
Ratio of Earnings from
Continuing Operations to Fixed
Charges Before Cumulative
Effect of Change in Accounting
(line 12 divided by line 7)... 2.41 2.76 2.71 2.89 2.78
1
EXHIBIT 21
SIGNIFICANT SUBSIDIARIES OF
HOUSTON INDUSTRIES INCORPORATED
NorAm Energy Corp., a Delaware corporation and a wholly owned subsidiary of
Houston Industries Incorporated
- - ---------------
(1) Pursuant to Item 601(b)(21) of Regulation SK, registrant has omitted the
names of subsidiaries, which considered in the aggregate as a single
subsidiary, would not constitute a "significant subsidiary" (as defined
under Rule 1-02(w) of Regulation S-X) as of December 31, 1997
(2) NorAm Energy Corp. also conducts business under the names of its three
unincorporated divisions: Arkla, Entex and Minnegasco
1
EXHIBIT 23(a)
CONSENT OF INDEPENDENT AUDITORS
HOUSTON INDUSTRIES INCORPORATED:
We consent to the incorporation by reference in Houston Industries
Incorporated's (i) Registration Statement on Form S-4 No. 333-11329, (ii)
Registration Statements on Form S-3 Nos. 33-46368, 33-54228, 333-20069,
333-32353, 333-33301, and 333-33303, (iii) Post-Effective Amendment No. 1 to
Registration Statement No. 33-51417 on Form S-3, (iv) Registration Statements on
Form S-8 Nos. 333-32413, and 333-32585 and (v) Post-Effective Amendment No. 1 to
Registration No. 333-11329-99 on Form S-8 of our report dated February 20, 1998
(relating to the consolidated financial statements of Houston Industries
Incorporated) appearing on this Combined Annual Report on Form 10-K of Houston
Industries Incorporated and NorAm Energy Corp. for the year ended December 31,
1997.
DELOITTE & TOUCHE LLP
HOUSTON, TEXAS
MARCH 23, 1998
OPUR1
0000048732
HOUSTON INDUSTRIES INCORPORATED
1,000
12-MOS
DEC-31-1997
DEC-31-1997
PER-BOOK
9,748,871
3,214,276
1,518,007
3,933,401
0
18,414,555
2,873,750
0
2,013,055
4,886,805
0
9,740
5,564,597
0
690,000
1,434,956
251,169
0
15,590
1,157
5,560,541
18,414,555
6,873,385
206,374
5,808,885
5,808,885
1,064,500
(13,446)
1,051,054
423,570
421,110
162
420,948
405,383
286,671
1,110,759
1.66
1.66
1
EXHIBIT 3a1
CERTIFICATE OF INCORPORATION
OF
HI MERGER, INC.
FIRST: The name of the Company is HI Merger, Inc.
(hereinafter the "Company").
SECOND: The address of the registered office of the Company
in the State of Delaware is Corporation Trust Center, 1209 Orange Street, City
of Wilmington, County of New Castle, Zip Code 19801, and the name of the
registered agent of the Company at such address is The Corporation Trust
Company.
THIRD: The purpose of the Company is to engage in any lawful
act or activity for which corporations may be organized under the General
Corporation Law of the State of Delaware as set forth in Title 8 of the
Delaware Code (the "DGCL").
FOURTH: The total number of shares of all classes of stock
which the Company shall have authority to issue is 1,000 shares of common
stock, par value $0.01 per share ("Common Stock"). Except as otherwise
provided by law, the shares of Common Stock may be issued for such
consideration and for such corporate purposes as the Board of Directors of the
Company (the "Board of Directors") may from time to time determine.
In the event of voluntary or involuntary liquidation,
distribution or sale of assets, dissolution or winding-up of the Company, the
holders of the Common Stock shall be entitled to receive all the assets of the
Company, tangible and intangible, of whatever kind available for distribution
to stockholders, ratably in proportion to the number of shares of Common Stock
held by each.
Each holder of Common Stock shall have one vote in respect of
each share of Common Stock held by such holder on each matter voted upon by the
stockholders.
FIFTH: The name and address of the incorporator is
Timothy S. Taylor
3000 One Shell Plaza
910 Louisiana
Houston, Texas 77002.
-1-
2
SIXTH: The powers of the incorporator are to terminate upon
the filing of the Certificate of Incorporation with the office of the Secretary
of State of the State of Delaware. The person whose name and mailing address
are set out immediately below is to serve as the sole director of the Company
until the first annual meeting of stockholders or until his successor is
elected and qualify:
Name Address
---- -------
Stephen W. Naeve 1111 Louisiana Street
Houston, Texas 77002
SEVENTH: The following provisions are inserted for the
management of the business and the conduct of the affairs of the Company, and
for further definition, limitation and regulation of the powers of the Company
and of its directors and stockholders:
(a) The business and affairs of the Company shall be
managed by or under the direction of the Board of Directors except as
otherwise provided by law.
(b) The Board of Directors shall have concurrent power
with the stockholders to make, alter, amend, change, add to or repeal
the Bylaws of the Company (the "Bylaws").
(c) The number of directors of the Company shall be as
from time to time fixed by, or in the manner provided in, the Bylaws.
Election of directors need not be by written ballot unless the Bylaws
so provide.
(d) In addition to the powers and authority hereinbefore
or by statute expressly conferred upon them, the directors are hereby
authorized to exercise all such powers and do all such acts and things
as may be exercised or done by the Company, subject, nevertheless, to
the provisions of the statutes of Delaware, this Certificate of
Incorporation and any Bylaws adopted by the stockholders; provided,
however, that no Bylaws thereafter adopted by the stockholders shall
invalidate any prior act of the directors which would have been valid
if such Bylaws had not been adopted.
EIGHTH: Meetings of the stockholders may be held within or
without the State of Delaware, as the Bylaws may provide. The books of the
Company may be kept (subject to any provision contained in the statutes)
outside the State of Delaware at such place or places as may be designated from
time to time by the Board of Directors or in the Bylaws.
NINTH: A director of the Company shall not be personally
liable to the Company or its stockholders for monetary damages for breach of
fiduciary duty as a director, except for liability (a) for any breach of the
director's duty of loyalty to the Company or its stockholder or stockholders,
(b) for acts or omissions not in good faith or which involve intentional
misconduct
-2-
3
or a knowing violation of law, (c) under Section 174 of the DGCL, as the same
exists or hereafter may be amended, or (d) for any transaction from which the
director derived an improper personal benefit. If the DGCL is amended after
the date of filing of this Certificate of Incorporation to authorize the
further elimination or limitation of the liability of directors, then the
liability of a director of the Company, in addition to the limitation on
personal liability provided herein, shall be limited to the fullest extent
permitted by the amended DGCL. Any repeal or modification of this Article
NINTH by the stockholders of the Company shall be prospective only, and shall
not adversely affect any limitation on the personal liability of a director of
the Company existing at the time of such repeal or modification.
TENTH: The Company reserves the right to amend, alter, change
or repeal any provision contained in this Certificate of Incorporation, in the
manner now or hereafter prescribed by the laws of the State of Delaware. All
rights herein conferred are granted subject to this reservation.
I, the undersigned, being the incorporator hereinbefore named,
for the purpose of forming a corporation under the laws of the State of
Delaware, do make, file and record this Certificate of Incorporation, do
certify that the facts herein stated are true and accordingly, have hereunto
set my hand this 9th day of August, 1996.
/s/ TIMOTHY S. TAYLOR
-------------------------
Timothy S. Taylor
-3-
1
EXHIBIT 3a2
CERTIFICATE OF MERGER
merging
NORAM ENERGY CORP.
(a Delaware corporation)
with and into
HI MERGER, INC.
(a Delaware corporation)
Pursuant to Section 251 of the Delaware General Corporation Law (the
"DGCL"), HI Merger, Inc., a Delaware corporation (the "Company" or the
"Surviving Corporation"), does hereby certify:
FIRST: That the name and state of incorporation of each of the constituent
corporations are as follows:
Name State of Incorporation
---- ----------------------
HI Merger, Inc. Delaware
NorAm Energy Corp. Delaware
SECOND: That an Agreement and Plan of Merger pursuant to which NorAm Energy
Corp. will be merged with and into the Company (the "Merger") has been
approved, adopted, certified, executed and acknowledged by each of the
constituent corporations in accordance with the provisions of Section
251 of the DGCL.
THIRD: That the surviving corporation of the Merger is HI Merger, Inc., a
Delaware Corporation.
FOURTH: That the Certificate of Incorporation of the Company immediately prior
to the effective time of the Merger shall be amended as follows, and
as so amended, such Certificate of Incorporation shall be the
Certificate of Incorporation of the Surviving Corporation until such
time as it may be amended in accordance with applicable law. Article
FIRST of such Certificate of Incorporation shall be amended so that
the full text of such altered article is as follows:
"FIRST: The name of the Company is NorAm Energy Corp. (hereinafter the
"Company")."
2
FIFTH: That the executed Agreement and Plan of Merger is on file at an office
of the Surviving Corporation at Houston Industries Plaza, 1111
Louisiana Street, Houston, Texas 77002.
SIXTH: That a copy of the Agreement and Plan of Merger will be furnished by
the Surviving Corporation, on request and without cost, to any
stockholder of either constituent corporation.
SEVENTH: That pursuant to Section 103(d) of the DGCL, this Certificate of
Merger and the Merger shall become effective immediately upon filing
of this Certificate of Merger with the Secretary of State of the
State of Delaware.
IN WITNESS WHEREOF, HI Merger, Inc., has caused this Certificate of
Merger to be executed on its behalf on this sixth day of August, 1997.
HI MERGER, INC.
By: /s/ STEPHEN W. NAEVE
--------------------------------
Name: Stephen W. Naeve
Title: President
2
1
EXHIBIT 3b
BYLAWS
OF
NORAM ENERGY CORP.
(formerly known as HI Merger, Inc., hereinafter called the "Company")
ARTICLE I
CAPITAL STOCK
Section 1.1. Certificates Representing Shares. The shares of stock of
the Company shall be represented by certificates of stock, signed in the name
of the Company (a) by the Chairman of the Board, the President or a Vice
President and (b) by the Treasurer or an Assistant Treasurer, or the Secretary
or an Assistant Secretary, of the Company, certifying the number of shares of
stock in the Company owned by the holder named in the certificate. Any or all
of the signatures of such officers on the certificate may be facsimiles. In
case any officer who has signed or whose facsimile signature has been placed
upon a certificate shall have ceased to be such officer before such certificate
is issued, it may be issued by the Company with the same effect as if he were
such officer at the date of its issuance.
Section 1.2. Lost, Stolen or Destroyed Certificates. The Board of
Directors of the Company (the "Board of Directors") may direct a new
certificate to be issued in place of any certificate theretofore issued by the
Company alleged to have been lost, stolen or destroyed, upon the receipt of an
affidavit of the fact by the person claiming the certificate of stock to be
lost, stolen or destroyed. When authorizing such issuance of a new
certificate, the Board of Directors may, in its discretion and as a condition
precedent to the issuance thereof, require the owner of such lost, stolen or
destroyed certificate, or his legal representative, to give the Company a bond
sufficient to indemnify it against any claim that may be made against the
alleged loss, theft or destruction of any such certificate or the issuance of
such new certificate.
Section 1.3. Transfers of Stock. Stock of the Company shall be
transferable in the manner prescribed by law and in these Bylaws. Transfers of
stock shall be made on the books of the Company only by the person named in the
certificate or by his attorney lawfully constituted in writing and upon the
surrender of the certificate therefor, which shall be cancelled before a new
certificate shall be issued.
Section 1.4. Beneficial Owners. The Company shall be entitled to
recognize the exclusive right of a person registered on its books as the owner
of shares to receive dividends, and to vote
2
as such owner, and to hold liable for calls and assessments a person registered
on its books as the owner of shares, and shall not be bound to recognize any
equitable or other claim to or interest in such share or shares on the part of
any other person, whether or not it shall have express or other notice thereof,
except as otherwise provided by law.
Section 1.5. Dividends. Dividends upon the capital stock of the
Company, subject to the provisions of the Certificate of Incorporation of the
Company, as amended from time to time (the "Certificate of Incorporation"), if
any, may be declared by the Board of Directors at any regular or special
meeting, and may be paid in cash, in property or in shares of capital stock of
the Company. Before payment of any dividend, there may be set aside out of any
funds of the Company available for dividends such sum or sums as the Board of
Directors from time to time, in its absolute discretion, deems proper as a
reserve or reserves to meet contingencies, or for equalizing dividends, or for
repairing or maintaining any property of the Company, or for any proper
purpose, and the Board of Directors may modify or abolish any such reserve.
ARTICLE II
STOCKHOLDERS
Section 2.1. Place of Meetings. Meetings of the stockholders for the
election of directors or for any other purpose shall be held at such time and
place, either within or without the State of Delaware, as shall be designated
from time to time by the Board of Directors and stated in the notice of the
meeting or in a duly executed waiver of notice thereof.
Section 2.2. Annual Meetings. The annual meetings of the stockholders
shall be held on such date and at such time as shall be designated from time to
time by the Board of Directors and stated in the notice of the meeting, at
which meetings the stockholders shall elect by a plurality vote a Board of
Directors and transact such other business as may properly be brought before
the meeting.
Section 2.3. Special Meetings. Unless otherwise prescribed by law or
by the Certificate of Incorporation, special meetings of the stockholders, for
any purpose or purposes, may be called at any time by the Board of Directors,
the Chairman of the Board, the President or the Secretary of the Company and
shall be called by any such officer at the request in writing of a majority of
the Board of Directors or at the request in writing of stockholders owning a
majority of the capital stock of the Company issued and outstanding and
entitled to vote. Such request shall state the purpose or purposes of the
proposed meeting.
Section 2.4. Notice of Meetings. Whenever stockholders are required
or permitted to take any action at a meeting, a written notice of the meeting
shall be given which shall state the place, date and hour of the meeting, and,
in the case of a special meeting, the purpose or purposes for
-2-
3
which the meeting is called. Unless otherwise provided by law, the Certificate
of Incorporation or these Bylaws, the written notice of any meeting shall be
given not less than ten nor more than sixty days before the date of the meeting
to each stockholder entitled to vote at such meeting. If mailed, such notice
shall be deemed to be given when deposited in the mail, postage prepaid,
directed to the stockholder at his address as it appears on the records of the
Company.
Section 2.5. Record Date. The Board of Directors may fix a date, not
less than ten nor more than sixty days preceding the date of any meeting of the
stockholders, as a record date for determination of stockholders entitled to
notice of, or to vote at, such meeting. The Board of Directors shall not close
the books of the Company against transfers of shares during the whole or any
part of such period.
Section 2.6. Quorum. Except as otherwise provided by law, by the
Certificate of Incorporation, or by these Bylaws, the presence in person or by
proxy of the holders of a majority of the outstanding shares of stock of the
Company entitled to vote thereat, shall be necessary and sufficient to
constitute a quorum at all meetings of the stockholders for the transaction of
business. In the absence of a quorum, the stockholders so present may, by
majority vote, adjourn the meeting from time to time in the manner provided in
Section 2.9 of this Article II until a quorum shall attend. Shares of its own
stock belonging to the Company or to another corporation, if a majority of the
shares entitled to vote in the election of directors of such other corporation
is held, directly or indirectly, by the Company, shall neither be entitled to
vote nor be counted for quorum purposes; provided, however, that the foregoing
shall not limit the right of the Company or any such other corporation to vote
stock, including but not limited to its own stock, held by it in a fiduciary
capacity.
Section 2.7. Organization. Meetings of stockholders shall be presided
over by the Chairman of the Board, if any, or in his absence by the President,
or in the absence of the foregoing persons by a chairman designated by the
Board of Directors, or in the absence of such designation by a chairman chosen
at the meeting. The Secretary shall keep the records of the meeting, but in
his absence the chairman of the meeting may appoint any person to act as
secretary of the meeting.
Section 2.8. Voting; Proxies. Except as otherwise provided by the
Certificate of Incorporation, each stockholder entitled to vote at any meeting
of stockholders shall be entitled to one vote for each share of stock held by
him which has voting power upon the matter in question. Each stockholder
entitled to vote at a meeting of stockholders may authorize another person or
persons to act for him by proxy, but no such proxy shall be voted or acted upon
after three years from its date, unless the proxy provides for a longer period.
A duly executed proxy shall be irrevocable if it states that it is irrevocable
and if, and only as long as, it is coupled with an interest sufficient in law
to support an irrevocable power. A stockholder may revoke any proxy which is
not irrevocable by attending the meeting and voting in person or by filing an
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instrument in writing revoking the proxy or another duly executed proxy bearing
a later date with the Secretary. Voting at meetings of stockholders need not
be by written ballot and need not be conducted by inspectors of election unless
so determined by the holders of shares of stock having a majority of the votes
which could be cast by the holders of all outstanding shares of stock entitled
to vote thereon which are present in person or by proxy at such meeting. At
all meetings of stockholders for the election of directors, a plurality of the
votes cast shall be sufficient to elect. All other elections and questions
shall, unless otherwise provided by law, the Certificate of Incorporation or
these Bylaws, be decided by the vote of the holders of shares of stock having a
majority of the votes which could be cast by the holders of all shares of stock
entitled to vote thereon which are present in person or represented by proxy at
the meeting.
Section 2.9. Adjournments. Any meetings of stockholders, annual or
special, may adjourn from time to time to reconvene at the same or some other
place, and notice need not be given of any such adjourned meeting if the time
and place thereof are announced at the meeting at which the adjournment is
taken. At the adjourned meeting the Company may transact any business which
might have been transacted at the original meeting. If the adjournment is for
more than thirty days, or if after the adjournment a new record date is fixed
for the adjourned meeting, a notice of the adjourned meeting shall be given to
each stockholder of record entitled to vote at the meeting.
Section 2.10. List of Stockholders Entitled to Vote. The officer of
the Company who has charge of the stock ledger of the Company shall prepare and
make, at least ten days before every meeting of stockholders, a complete list
of the stockholders entitled to vote at the meeting, arranged in alphabetical
order and showing the address of each stockholder and the number of shares
registered in the name of each stockholder. Such list shall be open to the
examination of any stockholder, for any purpose germane to the meeting, during
ordinary business hours, for a period of at least ten days prior to the
meeting, either at a place within the city where the meeting is to be held,
which place shall be specified in the notice of the meeting, or, if not so
specified, at the place where the meeting is to be held. The list shall also
be produced and kept at the time and place of the meeting during the whole time
thereof, and may be inspected by any stockholder of the Company who is present.
Section 2.11. Stock Ledger. The stock ledger of the Company shall be
the only evidence as to which stockholders are entitled (a) to vote in person
or by proxy at any meeting of stockholders, or (b) to examine either the stock
ledger, the list required by Section 2.10 of this Article II or the books of
the Company.
Section 2.12. Action by Consent of Stockholders in Lieu of Meeting.
Unless otherwise restricted by the Certificate of Incorporation, any action
required or permitted to be taken at any annual or special meeting of the
stockholders of the Company may be taken without a meeting, without prior
notice and without a vote, if a consent in writing, setting forth the action so
taken,
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shall be signed by the holders of outstanding stock having not less than the
minimum number of votes that would be necessary to authorize or take such
action at a meeting at which all shares entitled to vote thereon were present
and voted. Prompt notice of the taking of the corporate action without a
meeting by less than unanimous written consent shall be given to those
stockholders who have not consented in writing.
ARTICLE III
DIRECTORS
Section 3.1. Number and Tenure. The business and affairs of the
Company shall be managed by the Board of Directors. The number of directors
constituting the whole Board of Directors shall be fixed by the affirmative
vote of a majority of the members at any time constituting the Board of
Directors, and such number may be increased or decreased from time to time by
resolution by the Board of Directors; provided, however, that no such decrease
shall have the effect of shortening the term of any incumbent director. Except
as provided in Section 3.2 of this Article III, directors shall be elected by a
plurality of the votes cast at annual meetings of the stockholders, and each
director so elected shall hold office for the full term to which he shall have
been elected and until his successor is duly elected and qualified, or until
his earlier death, resignation or removal. Any director may resign at any time
upon notice to the Company. A director need not be a stockholder of the
Company or a resident of the State of Delaware.
Section 3.2. Vacancies. Any newly created directorship or any vacancy
occurring in the Board of Directors for any cause may be filled by an
affirmative vote of a majority of the remaining directors then in office,
though less than a quorum, or by a plurality of votes cast at a meeting of
stockholders, and each director so elected shall hold office for the remainder
of the full term in which the new directorship was created or the vacancy
occurred and until such director's successor is duly elected and qualified, or
until his earlier death, resignation or removal.
Section 3.3. Regular Meetings. Regular meetings of the Board of
Directors may be held at such places within or without the State of Delaware
and at such times as the Board of Directors may from time to time determine,
and if so determined, notices thereof need not be given.
Section 3.4. Special Meetings. Special meetings of the Board of
Directors may be held at any time, whenever called by the Chairman of the
Board, the President or a majority of directors then in office, at such place
or places within or without the State of Delaware as may be stated in the
notice of the meeting. Notice of the time and place of a special meeting must
be given by the person or persons calling such meeting at least twenty-four
hours before the special meeting.
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Section 3.5. Meetings by Conference Telephone. Unless otherwise
restricted by the Certificate of Incorporation or these Bylaws, members of the
Board of Directors of the Company, or any committee designated by the Board of
Directors, may participate in a meeting of the Board of Directors or such
committee by means of conference telephone or similar communications equipment
by means of which all persons participating in the meeting can hear each other,
and participation in a meeting pursuant to this Section 3.5 shall constitute
presence in person at such meeting.
Section 3.6. Quorum; Vote Required for Action. Except as may be
otherwise specifically provided by law, the Certificate of Incorporation or
these Bylaws, at all meetings of the Board of Directors a majority of the whole
Board of Directors shall constitute a quorum for the transaction of business.
The vote of a majority of the directors present at any meeting of the Board of
Directors at which there is a quorum present shall be the act of the Board of
Directors. If a quorum shall not be present at any meeting of the Board of
Directors, the directors present thereat may adjourn the meeting from time to
time, without notice other than announcement at the meeting, until a quorum
shall be present.
Section 3.7. Organization. Meetings of the Board of Directors shall
be presided over by the Chairman of the Board, if any, or in his absence by the
President, or in their absences by a chairman chosen at the meeting. The
Secretary shall act as secretary of the meeting, but in his absence the
chairman of the meeting may appoint any person to act as secretary of the
meeting.
Section 3.8. Actions of the Board by Consent in Lieu of Meeting.
Unless otherwise restricted by the Certificate of Incorporation or these
Bylaws, any action required or permitted to be taken at any meeting of the
Board of Directors or of any committee thereof may be taken without a meeting,
if all the members of the Board of Directors or committee, as the case may be,
consent thereto in writing, and the writing or writings are filed with the
minutes of proceedings of the Board of Directors or such committee.
Section 3.9. Committees. The Board of Directors may, by resolution
passed by a majority of the whole Board of Directors, designate one or more
committees, each committee to consist of one or more of the directors of the
Company. The Board of Directors may designate one or more of the directors of
the Company. The Board of Directors may designate one or more directors as
alternate members of any committee, who may replace any absent or disqualified
member at any meeting of the committee. In the absence or disqualification of
a member of the committee, and in the absence of a designation by the Board of
Directors of an alternate member to replace the absent or disqualified member,
the member or members thereof present at any meeting and not disqualified from
voting, whether or not he or they constitute a quorum, may unanimously appoint
another member of the Board of Directors to act at the meeting in place of any
absent or disqualified member. Any committee, to the extent permitted by law
and to the extent provided in the resolution of the Board of Directors
establishing such committee, shall have
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and may exercise all the powers and authority of the Board of Directors in the
management of the business and affairs of the Company, and may authorize the
seal of the Company to be affixed to all papers which may require it. Each
committee shall keep regular minutes and report to the Board of Directors when
required.
The designation of any such committee and the delegation thereto of
authority shall not operate to relieve the Board of Directors, or any member
thereof, of any responsibility imposed upon it or him by law, nor shall such
committee function where action of the Board of Directors is required under
applicable law. The Board of Directors shall have the power at any time to
change the membership of any such committee and to fill vacancies in it. A
majority of the members of any such committee shall constitute a quorum. Each
such committee may elect a chairman and appoint such subcommittees and
assistants as it may deem necessary. Except as otherwise provided by the Board
of Directors, meetings of any committee shall be conducted in the same manner
as the Board of Directors conducts its business pursuant to this Article III as
the same shall from time to time be amended. Any member of any such committee
elected or appointed by the Board of Directors may be removed by the Board of
Directors whenever in its judgment the best interests of the Company will be
served thereby, but such removal shall be without prejudice to the contract
rights, if any, of the person so removed. Election or appointment of a member
of a committee shall not of itself create contract rights.
Section 3.10. Compensation and Reimbursement of Expenses. The
directors shall receive such compensation for their services as shall be
determined by the Board of Directors and may be paid their expenses, if any, of
attendance at each meeting of the Board of Directors. No such reimbursement
shall preclude any director from serving the Company in any other capacity and
receiving compensation therefor. Members of special or standing committees may
be allowed like reimbursement for attending committee meetings.
ARTICLE IV
OFFICERS
Section 4.1. General. The offices of the Company shall consist of a
Chairman of the Board, a President, a Secretary and a Treasurer, each of whom
shall be elected by the Board of Directors. Such other officers or agents,
including one or more Vice Presidents, Assistant Secretaries and Assistant
Treasurers, as may be deemed necessary, may be elected or appointed by the
Board of Directors. Any number of offices may be held by the same person,
unless otherwise prohibited by law, the Certificate of Incorporation or these
Bylaws. The officers of the Company need not be stockholders of the Company
nor, except in the case of the Chairman of the Board, need such officers be
directors of the Company. Each officer shall hold office until the first
meeting of the Board of Directors after the annual meeting of stockholders next
succeeding his election, and until his successor is elected and qualified or
until his earlier death, resignation
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or removal. Any officer may resign at any time upon written notice to the
Company. The Board of Directors may remove any officer with or without
prejudice to the contractual rights of such officer, if any, with the Company.
Election or appointment of an officer or an agent shall not of itself create
contractual rights. Any vacancy occurring in any office of the Company by
death, resignation, removal or otherwise may be filled for the unexpired
portion of the term by the Board of Directors at any regular or special
meeting.
Section 4.2. Powers and Duties. The officers of the Company shall
have such powers and duties as generally pertain to their offices, except as
modified herein or by the Board of Directors, as well as such powers and duties
as from time to time may be conferred by the Board of Directors. The Chairman
of the Board shall be the Chief Executive Officer and shall preside at meetings
of the Board of Directors and at meetings of the stockholders. The President
shall have the general supervision over the business, affairs and property of
the Company. The Secretary shall record all proceedings at meetings and
actions in writing of stockholders, directors and committees of directors, and
shall exercise such additional authority and perform such additional duties as
the Board of Directors may assign.
Section 4.3. Voting Securities Owned by the Company. Powers of
attorney, proxies, waivers of notice of meeting, consents and other instruments
relating to securities owned by the Company may be executed in the name and on
behalf of the Company by the Chairman of the Board, the President or any Vice
President and any such officer may, in the name of and on behalf of the
Company, take all such action as any such officer may deem advisable to vote in
person or by proxy at any meeting of security holders of any corporation in
which the Company may own securities and at any such meeting shall possess and
may exercise any and all rights and powers incident to the ownership of such
securities and which, as the owner thereof, the Company might have exercised
and possessed if present. The Board of Directors may, by resolution, from time
to time, confer like powers upon any other person or persons.
ARTICLE V
INDEMNIFICATION
Section 5.1. Right to Indemnification. The Company shall indemnify
and hold harmless each Indemnitee (as this and all other capitalized words are
defined in Section 5.13 of this Article) to the fullest extent permitted by
applicable law as it presently exists or may hereafter be amended. The rights
of an Indemnitee provided under the preceding sentence shall include, but not
be limited to, the right to be indemnified to the fullest extent permitted by
Section 145(b) of the DGCL in Proceedings by or in the right of the Company and
to the fullest extent permitted by Section 145(a) of the DGCL in all other
Proceedings.
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Section 5.2. Expenses. If an Indemnitee is, by reason of his
Corporate Status, a witness in or is a party to any Proceeding, and is
successful on the merits or otherwise, he shall be indemnified against all
Expenses actually and reasonably incurred by him or on his behalf in connection
therewith. If the Indemnitee is a party to and is not wholly successful in
such Proceeding but is successful, on the merits or otherwise, as to any Matter
in such Proceeding, the Company shall indemnify the Indemnitee against all
Expenses actually and reasonably incurred by him or on his behalf relating to
each such Matter. The termination of any Matter in such a Proceeding by
dismissal, with or without prejudice, shall be deemed to be a successful result
as to such Matter.
Section 5.3. Request for Indemnification. To obtain indemnification,
an Indemnitee shall submit to the Secretary a written request with such
information as is reasonably available to the Indemnitee regarding the basis
for such claim for indemnification. The Secretary shall promptly advise the
Board of Directors of such request. An Indemnitee shall be advanced Expenses,
within ten days after requesting them, to the fullest extent permitted by
Section 145(e) of the DGCL.
Section 5.4. Determination of Indemnification. The Indemnitee's
entitlement to indemnification shall be determined in accordance with Section
145(d) of the DGCL. If entitlement to indemnification is to be determined by
Independent Counsel, the Company shall furnish notice to the Indemnitee within
ten days after receipt of the request for indemnification, specifying the
identity and address of the Independent Counsel. The Indemnitee may, within
fourteen days after receipt of such written notice of selection, deliver to the
Company a written objection to such selection. Such objection may be asserted
only on the ground that the Independent Counsel so selected does not meet the
requirements of Independent Counsel and the objection shall set forth with
particularity the factual basis of such assertion. If there is an objection to
the selection of Independent Counsel, either the Company or the Indemnitee may
petition the Court of Chancery of the State of Delaware or any other court of
competent jurisdiction for a determination that the objection is without a
reasonable basis and/or for the appointment of Independent Counsel selected by
such court.
Except in the event that the determination of entitlement to
indemnification is to be made by Independent Counsel, if the person or persons
authorized under this Section 5.4 to determine entitlement to indemnification
shall not have made and furnished to the Indemnitee in writing a determination
of whether the Indemnitee is entitled to indemnification within thirty days
after receipt by the Company of the Indemnitee's request therefor, a
determination of entitlement to indemnification shall be deemed to have been
made, and the Indemnitee shall be entitled to such indemnification unless the
Indemnitee knowingly misrepresented a material fact in connection with the
request for indemnification or such indemnification is prohibited by law. The
termination of any Proceeding or of any Matter therein, by judgment, order,
settlement or conviction, or upon a plea of nolo contendere or its equivalent,
shall not (except as otherwise expressly provided in this Article) of itself
adversely affect the right of Indemnitee to indemnification or create a
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presumption that Indemnitee did not act in good faith and in a manner which he
reasonably believed to be in or not opposed to the best interests of the
Company, or with respect to any criminal Proceeding, that Indemnitee had
reasonable cause to believe that his conduct was unlawful.
Section 5.5. Payments to Independent Counsel. The Company shall pay
any and all reasonable fees and expenses of Independent Counsel incurred acting
pursuant to this Article and in any proceeding to which it is a party or
witness in respect of its investigation and written report and shall pay all
reasonable fees and expenses incident to the procedures in which such
Independent Counsel was selected or appointed. No Independent Counsel may
serve if a timely objection has been made to his selection until a court has
determined that such objection is without a reasonable basis.
Section 5.6. Right to Bring Suit. In the event that (a) a
determination is made pursuant to Section 5.4 of this Article V that the
Indemnitee is not entitled to indemnification under this Article, (b)
advancement of Expenses is not timely made pursuant to Section 5.3 of this
Article V, (c) Independent Counsel has not made and delivered a written opinion
determining the request for indemnification (i) within ninety days after being
appointed by the court, or (ii) within ninety days after objections to his
selection have been overruled by the court, or (iii) within ninety days after
the time for the Company or the Indemnitee to object to his selection, or (d)
payment of indemnification is not made within five days after a determination
of entitlement to indemnification, the Indemnitee shall be entitled to an
adjudication in an appropriate court of the State of Delaware, or in any other
court of competent jurisdiction, of his entitlement to such indemnification or
advancement of Expenses. In the event that a determination shall have been
made that the Indemnitee is not entitled to indemnification, any judicial
proceeding or arbitration commenced pursuant to this Section 5.6 shall be
conducted in all respects as a de novo trial on the merits and Indemnitee shall
not be prejudiced by reason of that adverse determination. If a determination
shall have been made or deemed to have been made that the Indemnitee is
entitled to indemnification, the Company shall be bound by such determination
in any judicial proceeding commenced pursuant to this Section 5.6, or
otherwise, unless the Indemnitee knowingly misrepresented a material fact in
connection with the request for indemnification, or such indemnification is
prohibited by law.
The Company shall be precluded from asserting in any judicial
proceeding commenced pursuant to this Section 5.6 that the procedures and
presumptions of this Article are not valid, binding and enforceable and shall
stipulate in any such court that the Company is bound by all provisions of this
Article. In the event that the Indemnitee, pursuant to this Section 5.6, seeks
a judicial adjudication to enforce his rights under, or to recover damages for
breach of, this Article, the Indemnitee shall be entitled to recover from the
Company, and shall be indemnified by the Company against, any and all Expenses
actually and reasonably incurred by him in such judicial adjudication, but only
if he prevails therein. If it shall be determined in such judicial
adjudication
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that the Indemnitee is entitled to receive part but not all of the
indemnification or advancement of Expenses sought, the Expenses incurred by the
Indemnitee in connection with such judicial adjudication or arbitration shall
be appropriately prorated.
Section 5.7. Non-Exclusivity of Rights. The rights to receive
indemnification and advancement of Expenses as provided by this Article shall
not be deemed exclusive of any other rights to which an Indemnitee may at any
time be entitled under applicable law, the Certificate of Incorporation, the
Bylaws, any agreement, a vote of stockholders or disinterested directors, or
otherwise.
Section 5.8. Other Indemnification. The Company's obligation, if any,
to indemnify any Indemnitee who was or is serving at its request as a director,
officer, employee, agent or fiduciary of another corporation, partnership,
joint venture, trust, employee benefit plan or other enterprise or nonprofit
entity shall be reduced by any amount such Indemnitee may collect as
indemnification from such other corporation, partnership, joint venture, trust,
employee benefit plan or other enterprise or nonprofit entity.
Section 5.9. Amendment or Repeal. No amendment, alteration or repeal
of this Article or any provision thereof shall be effective as to any
Indemnitee for acts, omissions, events and circumstances that occurred, in
whole or in part, before such amendment, alteration or repeal.
Section 5.10. Survival of Rights. The provisions of this Article
shall continue as to an Indemnitee whose Corporate Status has ceased and shall
inure to the benefit of his heirs, executors and administrators.
Section 5.11. Insurance. The Company may maintain insurance, at its
expense, to protect itself and any director, officer, employee or agent of the
Company or another corporation, partnership, joint venture, trust or other
enterprise against any such expense, liability or loss, whether or not the
Company would have the power to indemnify such person against such expense,
liability or loss under applicable law.
Section 5.12. Indemnity Agreements. The Company may enter into
indemnity agreements with the persons who are members of its Board of Directors
from time to time, and with such officers, employees and agents as the Board of
Directors may designate, such indemnity agreements to provide in substance that
the Company will indemnify such persons to the full extent contemplated by this
Article.
Section 5.13. Definitions. For purposes of this Article:
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"Corporate Status" describes the status of a person who is or
was a director, officer, employee, agent or fiduciary of the Company
or of any other corporation, partnership, joint venture, trust,
employee benefit plan or other enterprise or nonprofit entity which
such person is or was serving at the request of the Company.
"DGCL" means the General Corporation Law of the State of
Delaware as set forth in Title 8 of the Delaware Code.
"Expenses" shall include all reasonable attorneys' fees,
retainers, court costs, transcript costs, fees of experts, witness
fees, travel expenses, duplicating costs, printing and binding costs,
telephone charges, postage, delivery service fees and all other
disbursements or expenses of the types customarily incurred in
connection with prosecuting, defending, preparing to prosecute or
defend, investigating, or being or preparing to be a witness in a
Proceeding.
"Indemnitee" includes any person who was or is made, or is
threatened to be made a party or is otherwise involved in any
Proceeding by reason of his Corporate Status.
" Independent Counsel" means a law firm, or member of a law
firm, that is experienced in matters of corporation law and neither
presently is, nor in the five years previous to his selection or
appointment has been, retained to represent: (a) the Company or
Indemnitee in any matter material to either such party; or (b) any
other party to the Proceeding giving rise to a claim for
indemnification hereunder.
"Matter" is a claim, a material issue or a substantial request
for relief.
"Proceeding" includes any action, suit, arbitration, alternate
dispute resolution proceeding, investigation, administrative hearing
or any other proceeding, whether civil, criminal, administrative, or
investigative, except one initiated by an Indemnitee pursuant to
Section 5.6 of this Article to enforce his rights under this Article.
Section 5.14. Communications. Any communication required or permitted
to be made to the Company shall be addressed to the Secretary and any such
communication to an Indemnitee shall be addressed to his home address unless he
specifies otherwise.
Section 5.15. Legality. If any provision or provisions of this
Article shall be held to be invalid, illegal or unenforceable for any reason
whatsoever, the validity, legality and enforceability of the remaining
provisions shall not in any way be affected or impaired thereby; and, to the
fullest extent possible, the provisions of this Article shall be construed so
as to give effect to the intent manifested by the provision held invalid,
illegal or unenforceable.
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ARTICLE VI
MISCELLANEOUS
Section 6.1 Disbursements. All checks or demands for money and notes
of the Company shall be signed by such officer or officers or such other person
or persons as the Board of Directors may from time to time designate.
Section 6.2. Fiscal Year. The fiscal year of the Company shall be
fixed by resolution of the Board of Directors.
Section 6.3. Corporate Seal. The Corporate Seal shall have inscribed
thereon the name of the Company, the year of its organization and the words
"Corporate Seal, Delaware." The seal may be used by causing it or a facsimile
thereof to be impressed or affixed or otherwise reproduced.
Section 6.4. Interested Directors. No contract or transaction between
the Company and one or more of its directors or officers, or between the
Company and any other corporation, partnership, association or other
organization in which one or more of its directors or officers are directors or
officers, or have a financial interest, shall be void or voidable solely for
this reason, or solely because the director or officer is present at or
participates in the meeting of the Board of Directors or committee thereof
which authorized the contract or transaction, or solely because his or their
votes are counted for such purpose, if: (a) the material facts as to his or
their relationship or interest and as to the contract or transaction are
disclosed or are known to the Board of Directors or the committee, and the
Board of Directors or committee in good faith authorizes the contract or
transaction by the affirmative vote of a majority of the disinterested
directors, even though the disinterested directors be less than a quorum; or
(b) the material facts as to his or their relationship or interest and as to
the contract or transaction are disclosed or are known to the stockholders
entitled to vote thereon, and the contract or transaction is specifically
approved in good faith by vote of the stockholders; or (c) the contract or
transaction is fair as to the Company as of the time it is authorized, approved
or ratified, by the Board of Directors, a committee thereof or the
stockholders. Common or interested directors may be counted in determining the
presence of a quorum at a meeting of the Board of Directors or of a committee
which authorizes the contract or transaction. Any director of the Company may
vote upon any contract or other transaction between the Company and any
subsidiary or affiliated corporation without regard to the fact that he is also
a director of such subsidiary or affiliated corporation.
Section 6.5. Amendments. These Bylaws may be altered, amended or
repealed, in whole or in part, or new Bylaws may be adopted, by the
stockholders or by the Board of Directors; provided, however, that notice of
such alteration, amendment, repeal or adoption of new Bylaws be contained in
the notice of such meeting of stockholders or Board of Directors, as the case
may
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be. All such alterations, amendments, repeals or adoptions must be approved by
either the holders of a majority of the outstanding capital stock entitled to
vote thereon or by a majority of the Board of Directors then in office.
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EXHIBIT 4(a)(2)
================================================================================
ARKLA, INC.
TO
CITIBANK, N.A., Trustee
-------------------------
FIRST SUPPLEMENTAL INDENTURE
Dated as of September 30, 1988
-------------------------
SUPPLEMENTING AND AMENDING THE
INDENTURE DATED AS OF DECEMBER 1, 1986
================================================================================
2
FIRST SUPPLEMENTAL INDENTURE, dated as of September 20, 1988 between
ARKLA, INC., a corporation duly organized and existing under the laws of the
State of Delaware (herein called the "Company"), having its principal office at
525 Milam Street, Shreveport, Louisiana 71101 and at 400 East Capitol Street,
Little Rock, Arkansas 72202, and CITIBANK, N.A., a national banking
association, as Trustee (herein called the "Trustee"),
R E C I T A L S
WHEREAS, to provide for its lawful corporate purposes the Company has
duly authorized the issue from time to time of its debentures, notes or other
evidences of unsecured indebtedness, which are to be issued in one or more
series (the "Securities"); the Company has heretofore made, executed and
delivered to the Trustee its Indenture dated as of December 1, 1986 (herein
called the "Original Indenture"); and
WHEREAS, by virtue of the provisions of Article Three of the Original
Indenture, the Company is empowered to deliver Securities of any series
executed by the Company to the Trustee for authentication, and the Trustee is
thereupon empowered in the manner set forth in such Article Three to
authenticate and deliver said Securities to or upon the written order of the
Company without any further action by the Company; and
WHEREAS, it is deemed desirable to supplement and amend such
procedures for authentication and delivery of Securities to those set forth in
Article Three of the Original Indenture as supplemented and amended by this
First Supplemental Indenture (the Original Indenture, as so supplemented and
amended by this First Supplemental Indenture being referred to herein as the
"Indenture"); and
WHEREAS, the Board of Directors of the Company has determined that it
is desirable to add an additional covenant of the Company to Article Ten of the
Original Indenture for the benefit of the Holders of all series of Securities
in which the Company will covenant and agree not to issue any additional
mortgage bonds under its Indenture of Mortgage and Deed of Trust dated as of
September 1, 1953, as supplemented or the Indenture of Mortgage and Deed of
Trust of Entex, Inc. dated as of June 30, 1970, as supplemented and assumed by
the Company upon the merger of Entex, Inc. with and into the Company on
February 2, 1988; and
3
WHEREAS, Section 901 of Article Nine of the original Indenture
provides that under certain conditions the Company and Trustee, may, without
the consent of the Holders of Securities, from time to time and at any time,
enter into and indenture or indentures supplemental thereto, inter alia; and
WHEREAS, all the requirements prescribed by law and by the Certificate
of Incorporation of the Company have been fully complied with and all
conditions and requirements necessary to authorize the execution,
acknowledgment and delivery of this First Supplemental Indenture and duly and
legally effect the modifications and alterations of the original Indenture
provided for in this First Supplemental Indenture, and to make the original
Indenture as supplemented and amended by this First Supplemental Indenture, a
valid, binding and legal instrument for the benefit of the Holders of
Securities, have been complied with;
NOW, THEREFORE, THIS FIRST SUPPLEMENTAL INDENTURE WITNESSETH that for
and in consideration of the premises and the acceptances or purchases of the
Securities by the Holders thereof, the Company and the Trustee mutually
covenant and agree for the equal and proportionate benefit of all Holders of
the Securities or of series thereof, as follows:
ARTICLE I
MODIFICATION OF THE ORIGINAL INDENTURE
Section 1.1 Supplement and Amendment to Article Three of the
Original Indenture. Article Three of the Original Indenture is modified by
supplementing and amending the third paragraph of Section 303 of the Original
Indenture to read in its entirety as follows:
"At any time and from time to time after the execution and
delivery of this Indenture, the Company may deliver Securities of any
series executed by the Company to the Trustee for authentication,
together with a Company order for the authentication and delivery of
such Securities, and the Trustee in accordance with the Company order
shall authenticate and deliver such Securities; provided, however,
that, with respect to Securities of a series constituting a
medium-term note program, the Trustee shall authenticate and deliver
Securities of such series for original issue from time
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to time in the aggregate principal amount established for such series
pursuant to such procedures acceptable to the Trustee and to
recipients thereof as may be specified from time to time by a Company
Order. The maturity date, original issue date, interest rate and any
other terms of the Securities of such series shall be determined by or
pursuant to such Company Order and procedures. If provided for in
such procedures, such Company Order may authorize authentication and
delivery pursuant to oral instructions from the Company or its duly
authorized agent, which instructions shall be promptly confirmed in
writing; provided, further, notwithstanding the provisions of Section
201 and of this paragraph, if all Securities of a series are not to be
originally issued at one time, it shall not be necessary to deliver
the Board Resolution otherwise required pursuant to Section 201, or
the Company Order otherwise required pursuant to this paragraph at or
prior to the time of authentication of each Security of such series if
such documents are delivered at or prior to the time of authentication
upon original issuance of the first Security of such series. If the
form or terms of the Securities of the series have been established in
or pursuant to one or more Board Resolutions as permitted by Sections
201 and 301, in authenticating such Securities, and accepting the
additional responsibilities under this Indenture in relation to such
Securities, the Trustee shall be entitled to receive, and (subject to
Section 601) shall be fully protected in relying upon an Opinion of
Counsel stating:
(a) if the form or forms of such Securities have
been established by the Board or pursuant to a Board
Resolution as permitted by Section 201, that such form or
forms have been established in conformity with the provisions
of this Indenture;
(b) if the terms of such Securities have been
established by or pursuant to a Board Resolution as permitted
by Section 301, that such terms have been established in
conformity with the provisions of this Indenture; and
(c) that such Securities, when authenticated and
delivered by the Trustee and issued by the Company in the
manner and subject to any conditions
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specified in such opinion of Counsel, will constitute valid
and legally binding obligations of the Company enforceable
against the Company, subject to bankruptcy, insolvency,
reorganization and other laws of general applicability
relating to or affecting the enforcement of creditors' rights
and to general equity principals.
If such form or terms have been so established the Trustee shall not
be required to authenticate such Securities if the issue of such
Securities pursuant to this Indenture will affect the Trustee's own
rights, duties, or immunities under the Securities and this Indenture
or otherwise in a manner which is not reasonably acceptable to the
Trustee."
Section 1.2 Supplement to Article Ten of the Original Indenture.
Article Ten of the Original Indenture is modified (i) by changing the title of
Section 1007 of the Original Indenture to "Restrictions on Liens; Mortgage
Bonds," (ii) by inserting "Part A" before the first paragraph of such Section
1007, and (iii) by adding a new and additional paragraph to Section 1007 of the
Original Indenture to the end of such Section 1007, which additional paragraph
shall read in its entirety as follows:
"Part B.
So long as any of the securities remain outstanding, the
Company will not issue any additional mortgage bonds under the
Indenture of Mortgage and Deed of Trust of Arkla, Inc. dated as
September 1, 1953, as supplemented, or the Indenture of Mortgage and
Deed of Trust of Entex, Inc. dated as of June 30, 1970, as
supplemented, assumed by the Company upon the merger of Entex, Inc.
with and into the Company on February 2, 1988 (together the "Mortgage
Indentures") or have outstanding mortgage bonds under the Mortgage
Indentures in excess of the aggregate principal amount thereof
outstanding on September 30, 1988 or extend the stated maturities or
sinking fund redemption dates (beyond their original stated dates) of
outstanding mortgage bonds under the Mortgage Indentures; provided,
however, that the Company may issue mortgage bonds under the Mortgage
Indentures upon registration of transfer or exchange of mortgage bonds
under the Mortgage Indentures
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or in replacement of mutilated, destroyed, lost or stolen mortgage
bonds or in respect of the unredeemed portion of any series of
mortgage bonds under the Mortgage Indentures partially called for
redemption, in each case as provided in the Mortgage Indentures."
Except for the foregoing addition to Section 1007 of the Original Indenture,
such Section 1007 shall remain in full force and effect.
ARTICLE 2
PARTICULAR REPRESENTATIONS AND COVENANTS
OF THE COMPANY
Section 2.1 Authority of the Issuer. The Company is duly
authorized under the laws of the State of Delaware and all other applicable
laws to execute and deliver this First Supplemental Indenture, and all
corporate action on its part required for the execution and delivery of this
First Supplemental Indenture has been duly and effectively taken.
Section 2.2 Truth of Recitals and Statements. The Company
warrants that the recitals of fact and statements contained in this First
Supplemental Indenture are true and correct, and that the recitals of fact and
statements contained in all certificates and other documents furnished
thereunder will be true and correct.
ARTICLE 3
CONCERNING THE TRUSTEE
Section 3.1 Acceptance of Trusts. The Trustee accepts the trusts
hereunder and agrees to perform the same, but only upon the terms and
conditions set forth in the Original Indenture and in this First Supplemental
Indenture, to all of which the Issuer and the respective Holders of Securities
at any time outstanding agree by their acceptance thereof.
Section 3.2 No Responsibility of Trustee for Recitals, etc. The
recitals and statements contained in this First Supplemental Indenture shall be
taken as the recitals and statements of the Company, and the Trustee assumes no
responsibility for the correctness of the same. The Trustee
-5-
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makes no representations as to the validity or sufficiency of this First
Supplemental Indenture.
ARTICLE 4
MISCELLANEOUS PROVISIONS
Section 4.1 Relation to the Indenture. The provisions of this
First Supplemental Indenture shall become effective immediately upon the
execution and delivery hereof. This First Supplemental Indenture is executed
as and shall constitute an indenture supplemental to the Original Indenture.
All the terms and provisions herein contained shall form a part of the
Indenture for all purposes as fully and with the same effect as if all such
terms and provisions had been set forth in the Original Indenture and each and
every term and condition contained in the Original Indenture shall apply to
this First Supplemental Indenture with the same force and effect as if the same
were in this First Supplemental Indenture set forth in full, with such
omissions, variations and modifications thereof as may be appropriate to make
each such term and condition conform to this First Supplemental Indenture. The
Original Indenture is hereby ratified and confirmed and shall remain and
continue in full force and effect in accordance with the terms and provisions
thereof, as supplemented and amended by this First Supplemental Indenture and
the Original Indenture and this First Supplemental Indenture shall be read,
taken and construed together as one instrument. This First Supplemental
Indenture shall be governed by and construed in accordance with the laws of the
State of New York.
Section 4.2 Trust Indenture Act. If any provision of this First
Supplemental Indenture limits, qualifies or conflicts with any other provision
of this First Supplemental Indenture or any provision of the Original Indenture
which is required to be included by any of the provisions of Sections 310 to
317 inclusive of the Trust Indenture Act of 1939, such required provision shall
control.
Section 4.3 Meaning of Terms. Any term used in this First
Supplemental Indenture which is defined in the Original Indenture shall have
the meaning specified in the Original Indenture, unless the context shall
otherwise require.
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Section 4.4 Counterparts. This First Supplemental Indenture may
be executed in several counterparts, each of which shall be deemed to be an
original, but all of which together shall constitute one instrument.
IN WITNESS WHEREOF, the parties have caused this First Supplemental
Indenture to be duly executed, and their respective corporate seals to be
hereunto affixed and attested, all as of the day and year first above written.
ARKLA, INC.
By: /s/ WILLIAM H. KELLY
--------------------------------
William H. Kelly
Senior Vice President &
Chief Financial Officer
Attest:
/s/ B. D. KLINE
- - --------------------------------
B. D. Kline
Vice President - Finance,
Secretary & Treasurer
(CORPORATE SEAL)
CITIBANK, N.A., as Trustee
By: /s/ P. DEFELICE
--------------------------------
Name: P. DeFelice
Title: Vice President
Attest:
/s/ LAWRENCE OLSEN
- - --------------------------------
Name: Lawrence Olsen
Title: Trust Officer
(CORPORATE SEAL)
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STATE OF LOUISIANA Section
Section
PARISH OF CADDO Section
On this 14thday of October, 1988 before me personally came WILLIAM H.
KELLY, to me known, who, being by me duly sworn, did depose and say that he is
Senior Vice President & Chief Financial Officer of ARKLA, INC., one of the
corporations described in and which executed the foregoing instrument; that he
knows the corporate seal of said corporation; that the seal affixed to said
instrument is such corporate seal; that it was so affixed by authority of the
Board of Directors of said corporation, and that he signed his name thereto by
like authority.
IN WITNESS WHEREOF, I have hereunto set my hand and affixed my
official seal the day and year in this certificate first above written.
(NOTARIAL SEAL) LOIS S. ALEXANDER
--------------------------------
Notary Public
Commission Expires:
-------------
LOIS S. ALEXANDER
Notary Public
Caddo Parish, Louisiana
MY COMMISSION IS PERMANENT
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STATE OF NEW YORK Section
Section
COUNTY OF NEW YORK Section
On this 17th day of October , 1988, before me personally came
P. DeFelice, to me known, who, being by me duly sworn, did depose and say that
he is Vice President of CITIBANK, N.A., one of the corporations described in
and which executed the foregoing instrument; that he knows the corporate seal
of said corporation; that the seal affixed to the said instrument is such
corporate seal; that it was so affixed by authority of the Board of Directors
of said corporation, and that he signed his name thereto by like authority.
IN WITNESS WHEREOF, I have hereunto set my hand and affixed my
official seal the day and year in this certificate first above written.
(NOTARIAL SEAL) JANETTE C. AUSTIN
--------------------------------
Notary Public
Commission Expires:
-------------
JANETTE C. AUSTIN
Notary Public, State of New York
No. 24-4932390
Qualified in Kings County
Certificate Filed in New York County
Commission Expires Aug. 3, 1989
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EXHIBIT 4a3
================================================================================
ARKLA, INC.
TO
CITIBANK, N.A., Trustee
---------------
SECOND SUPPLEMENTAL INDENTURE
Dated as of November 15, 1989
---------------
SUPPLEMENTING AND AMENDING THE
INDENTURE DATED AS OF DECEMBER 1, 1986
================================================================================
2
SECOND SUPPLEMENTAL INDENTURE, dated as of November 15, 1989,
between ARKLA, INC., a corporation duly organized and existing under the laws
of the State of Delaware (herein called the "Company"), having its principal
office at 525 Milam Street, Shreveport, Louisiana 71101 and at 400 East Capitol
Street, Little Rock, Arkansas 72202, and CITIBANK, N.A., a national banking
association, as Trustee (herein called the "Trustee").
R E C I T A L S
WHEREAS, to provide for its lawful corporate purposes the Company has
duly authorized the issue from time to time of its debentures, notes or other
evidences of unsecured indebtedness, which are to be issued in one or more
series (the "Securities"); the Company has heretofore made, executed and
delivered to the Trustee its Indenture dated as of December 1, 1986 and its
First Supplemental Indenture, dated as of September 30, 1988, (collectively,
the "Indenture"); and
WHEREAS, the Board of Directors of the Company has determined that it
is desirable to add an additional covenant of the Company to Article Ten of the
Indenture solely for the benefit of the Holders of each series of Securities
which provides that such series will have the benefit of such covenant in which
the Company will covenant and agree that each Holder of the Securities shall
have the right, at such Holder's option, to require the Company to purchase all
or any part of such Holder's Securities, at the option of such Holder, on a
specified date if certain events occur and certain conditions specified in this
Supplemental Indenture are met; and
WHEREAS, Section 901 of Article Nine of the Original Indenture
provides that under certain conditions the Company and Trustee, may, without
the consent of the Holders of Securities, from time to time and at any time,
enter into an indenture or indentures supplemental thereto, inter alia, (a) to
add to the covenants of the Company for the benefit of the Holders of all or
any series of Securities (and if such covenants are to be for the benefit of
less than all series of Securities, stating that such covenants are expressly
being included solely for the benefit of such series) or to surrender any right
or power herein conferred upon the Company; or (b) to add any additional Events
of Default; and
WHEREAS, all the requirements prescribed by law and by the Certificate
of Incorporation of the Company have been fully complied with and all
conditions and requirements necessary to authorize the execution,
acknowledgment and delivery of this Second Supplemental Indenture and duly and
legally effect the modifications and alterations of the Indenture provided for
in this Second Supplemental Indenture, and to make the Indenture as
supplemented and amended by this Second Supplemental Indenture, a valid,
binding and legal instrument for the benefit of the Holders of Securities, have
been complied with;
3
NOW, THEREFORE, THIS SECOND SUPPLEMENTAL INDENTURE WITNESSETH that for
and in consideration of the premises and the acceptances or purchases of the
Securities by the Holders thereof, the Company and the Trustee mutually
covenant and agree for the equal and proportionate benefit of all Holders of
the Securities or of series thereof, as follows:
ARTICLE I
MODIFICATION OF THE INDENTURE
SECTION 1.1 SUPPLEMENT TO ARTICLE TEN OF THE INDENTURE. Article Ten
of the Indenture is modified by adding a new and additional Section to the
Indenture, which additional Section shall read in its entirety as follows:
SECTION 1013. Put Right of Holders Upon a Designated Event and a
Rating Decline.
If the terms of any series of Securities provides that such series
shall have the benefit of the following covenant, the Company hereby
agrees as follows:
In the event that there occurs at any time prior to any date
specified in the terms of such series both (a) a Designated Event (as
hereinafter defined) with respect to the Company and (b) a Rating
Decline (as hereinafter defined), each Holder of the Securities shall
have the right, at such Holder's option, to require the Company to
purchase all or any part of such Holder's Securities on the date
("Repurchase Date") that is 100 days after the last to occur of public
notice of the Designated Event and the Rating Decline, at 100% of the
principal amount thereof, plus accrued interest to the Repurchase
Date.
On or before the twenty-eighth day after the last to occur of
public notice of the occurrence of a Designated Event and the Rating
Decline, the Company is obligated to notify the Trustee of such
events, and promptly thereafter to mail, or cause to be mailed,
first-class, postage prepaid, to all Holders of the Securities, at the
address of record of such Holder, a notice regarding the Designated
Event, the Rating Decline and the repurchase right. The notice shall
state the Repurchase Date, the date by which the repurchase right must
be exercised, the applicable price for such Securities and the
procedure which the Holder must follow to exercise this right. To
exercise this right, the Holder of such Securities must deliver at
least ten days prior to the Repurchase Date written notice to the
Company (or an agent designated by the Company for such purpose and
notified to the Trustee and the Holders)
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of the Holder's exercise of such right, the name in which the
Securities were registered, and the principal amount to be
repurchased, together with the Securities with respect to which the
right is being exercised, duly endorsed for transfer to the Company.
Such written notice shall be irrevocable. Securities repurchased
pursuant to this section shall be delivered to the Trustee and
cancelled as provided in Section 309 of the Indenture.
As used herein, a "Designated Event" shall be deemed to have
occurred at such a time as (i) a "person" or "group" (within the
meaning of Section 13 (d) (3) of the Securities Exchange Act of 1934,
as amended (the 1934 Act")) becomes the "beneficial owner" (as defined
in Rule 13d-3 under the 1934 Act) of more than 30% of the total voting
power of all classes of stock then outstanding of the Company normally
entitled to vote in elections of directors ("Voting Stock"); or (ii)
during any period of two consecutive years, individuals who at the
beginning of such period constituted the Company's Board of Directors
(together with any new director whose election by the Company's Board
of Directors or whose nomination for election by the Company's
shareholders was approved by a vote of at least two-thirds of the
directors then still in office who either were directors at the
beginning of such period or whose election or nomination for election
was previously so approved) cease for any reason to constitute a
majority of the directors then in office; or (iii) the Company
consolidates with or merges into another corporation or conveys,
transfers or leases all or substantially all of its assets to any
person, or any corporation consolidates with or merges into the
Company, in either event pursuant to a transaction in which Voting
Stock of the Company is changed into or exchanged for cash, securities
or other property, provided that such transaction (a) between the
Company and its Subsidiaries or between Subsidiaries or (b) involving
the exchange of the Company's Voting Stock as consideration in the
acquisition of another business or businesses (without change or
exchange of the Company's outstanding Voting Stock into or for cash,
securities or other property) shall be excluded from the operation of
this clause (iii); or (iv) the Company, one or more employee benefit
plans ("Employee Benefit Plans") as defined in Section 3(3) of the
Employee Retirement Income Security Act of 1974, as amended,
maintained by the Company or any Subsidiary thereof, or any Subsidiary
purchases or otherwise acquires, directly or indirectly, beneficial
ownership of Voting Stock of the Company if, after giving effect to
such purchase or acquisition, the Company (together with such Employee
Benefit Plans and such Subsidiaries) acquires 20% or more of the
Company's Voting Stock within any 12-month period; or (v) on any date
(a
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"Calculation Date") the Company makes any distribution or
distributions of cash, property or securities (other than regular
dividends, and distributions of capital stock of the Company) to
holders of Voting Stock of the Company or the Company, any Employee
Benefit Plans or any Subsidiary purchases or otherwise acquires
beneficial ownership of Voting Stock of the Company and the sum of the
fair market value of such distribution or purchase, plus the fair
market value of all other such distributions and purchases which have
occurred during the preceding 12-month period, is at least 20% of the
fair market value of the outstanding Voting Stock of the Company. The
percentage in clause (v) above is calculated on such Calculation Date
by determining the percentage of the fair market value of the
Company's outstanding Voting Stock as of such Calculation Date which
is represented by the fair market value of the distributions and
purchases which have occurred on such date and adding to that
percentage all of the percentages which have been similarly calculated
on the Calculation Dates of all such distributions and purchases
during the preceding 12-month period.
As used herein, a "Rating Decline" shall be deemed to have
occurred if on any date within the 90-day period following public
notice of the occurrence of a Designated Event (which period shall be
extended so long as the rating of the Securities is under publicly
announced consideration for possible downgrade by a Rating Agency (as
hereinafter defined) (i) in the event the Securities are rated by one
or both Rating Agencies on the Rating Date (as hereinafter defined) as
Investment Grade (as hereinafter defined), the rating of the
Securities by such Rating Agency or Rating Agencies shall fall below
Investment Grade, or (ii) in the event the Securities are rated by
both Rating Agencies on the Rating Date below Investment Grade, the
rating of the Securities by either Rating Agency shall be at least one
Full Rating Category (as hereinafter defined) below the rating of the
Securities by such Rating Agency on the Rating Date.
As used herein, "Rating Agency" shall mean Standard & Poor's
Corporation and its successors ("S&P"), and Moody's Investors Service,
Inc. and its successors ("Moody's"), or if S&P or Moody's or both
shall not make a rating on the Securities publicly available, a
nationally recognized statistical rating agency or agencies, as the
case may be, selected by the Company which shall be substituted for
S&P or Moody's or both, as the case may be; "Investment Grade" shall
mean BBB- or higher by S&P or Baa3 or higher by Moody's or the
equivalent of such ratings by S&P or Moody's or by any other Rating
Agency selected as provided above, and "Rating Date" shall mean the
date which
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is 121 days prior to public notice of the occurrence of a Designated
Event.
As used herein, the term "Full Rating Category" shall mean (i)
with respect to S&P, any of the following categories: BB, B, CCC, CC
and C, (ii) with respect to Moody's, any of the following categories:
Ba, B, Caa, Ca and C and (iii) with respect to any other Rating
Agency, the equivalent of any such category of S&P or Moody's used by
such other Rating Agency. In determining whether the rating of the
Securities has decreased by the equivalent of one Full Rating
Category, gradation within Full Rating Categories (+ and - for S&P; 1,
2, and 3 for Moody's; or the equivalent gradation for another Rating
Agency) shall be taken into account (e.g., with respect to S&P, a
decline in a rating from BB+ to BB-, or from BB to B+, will constitute
a decrease of less than one Full Rating Category).
Default in the performance or breach of this covenant with
respect to Securities of any series entitled to the benefits of this
covenant shall be an Event of Default with respect to all series of
Securities entitled to the benefits of this covenant pursuant to
Section 501(7) of the Indenture following the continuance of such
default or breach for a period of 90 days after the date on which
written notice specifying such failure, stating that such notice is a
"Notice of Default" hereunder and demanding that the Company remedy
the same shall have been given to the Company by the Trustee, or to
the Company and the Trustee by the Holders of not less than 25% in
aggregate principal amount of all series of Securities entitled to the
benefits of this covenant at the time Outstanding.
The Company may omit in any particular instance to comply with
any term, provision or condition set forth in this covenant, with
respect to the Securities of any series entitled to the benefits of
this covenant if before the time for such compliance the Holders of at
least 66 2/3% in aggregate principal amount of the Outstanding
Securities of such series shall, by Act of such Holders, either waive
such compliance in such instance or generally waive compliance with
such term, provision or condition, but no such waiver shall extend to
or affect such term, provision or condition except to the extent so
expressly waived, and, until such waiver shall become effective, the
obligations of the Company and the duties of the Trustee in respect of
any such term, provision or condition shall remain in full force and
effect.
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ARTICLE II
PARTICULAR REPRESENTATIONS AND COVENANTS
OF THE COMPANY
SECTION 2.1 AUTHORITY OF THE ISSUER. The Company is duly authorized
under the laws of the State of Delaware and all other applicable laws to
execute and deliver this Second Supplemental Indenture, and all corporate
action on its part required for the execution and delivery of this Second
Supplemental Indenture has been, duly and effectively taken.
SECTION 2.2 TRUTH OF RECITALS AND STATEMENTS. The Company warrants
that the recitals of fact and statements contained in this Second Supplemental
Indenture are true and correct, and that the recitals of fact and statements
contained in all certificates and other documents furnished thereunder will be
true and correct.
ARTICLE III
CONCERNING THE TRUSTEE
SECTION 3.1 ACCEPTANCE OF TRUSTS. The Trustee accepts the trusts
hereunder and agrees to perform the same, but only upon the terms and
conditions set forth in the Indenture and in this Second Supplemental
Indenture, to all of which the Issuer and the respective Holders of Securities
at any time outstanding agree by their acceptance thereof.
SECTION 3.2 NO RESPONSIBILITY OF TRUSTEE FOR RECITALS, ETC. The
recitals and statements contained in this Second Supplemental Indenture shall
be taken as the recitals and statements of the Company, and the Trustee assumes
no responsibility for the correctness of the same. The Trustee makes no
representations as to the validity or sufficiency of this second Supplemental
Indenture.
ARTICLE IV
MISCELLANEOUS PROVISIONS
SECTION 4.1 RELATION TO THE INDENTURE. The provisions of this second
Supplemental Indenture shall become effective immediately upon the execution
and delivery hereof. This Second Supplemental Indenture is executed as and
shall constitute an indenture supplemental to the Indenture. All the terms and
provisions herein contained shall form a part of the indenture for all purposes
as fully and with the same effect as if all such terms and provisions had been
set forth in the Indenture and each and every term and condition contained in
the Indenture shall apply to this Second Supplemental Indenture with the same
force and effect as if the same were in this
-6-
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Second Supplemental Indenture set forth in full, with such omissions,
variations and modifications thereof as may be appropriate to make each such
term and condition conform to this Second Supplemental Indenture. The
Indenture is hereby ratified and confirmed and shall remain and continue in
full force and effect in accordance with the terms and provisions thereof, as
supplemented and amended by this Second Supplemental Indenture and the
Indenture and this Second Supplemental Indenture shall be read, taken and
construed together as one instrument. This Second Supplemental Indenture shall
be governed by and construed in accordance with the laws of the State of New
York.
SECTION 4.2 TRUST INDENTURE ACT. If any provision of this Second
Supplemental Indenture limits, qualifies or conflicts with any other provision
of this Second Supplemental Indenture or any provision of the Indenture which
is required to be included by any of the provisions of Sections 310 to 317
inclusive of the Trust Indenture Act of 1939, such required provision shall
control.
SECTION 4.3 MEANING OF TERMS. Any term used in this Second
Supplemental Indenture which is defined in the Indenture shall have the meaning
specified in the Indenture, unless the context shall otherwise require.
SECTION 4.4 COUNTERPARTS. This Second Supplemental Indenture may be
executed in several counterparts, each of which shall be deemed to be an
original, but all of which together shall constitute one instrument.
IN WITNESS WHEREOF, the parties have caused this Second Supplemental
Indenture to be duly executed, and their respective corporate seals to be
hereunto affixed and attested, all as of the day and year first above written.
Attest: ARKLA, INC.
/s/ B. D. KLINE /s/ JIM WILHITE
- - -------------------------- ------------------------------------
B. D. Kline Name: Jim Wilhite
Vice President-Finance, Title: Vice Chairman of the Board
Secretary and Treasurer
Attest: CITIBANK, N.A., as Trustee
PAM C. REBUCCI /s/ P. DEFELICE
- - -------------------------- ------------------------------------
Name: Pam C. Rebucci Name: P. DeFelice
Title: Trust Officer Title: Vice President
(CORPORATE SEAL)
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STATE OF LOUISIANA
PARISH OF CADDO
On this 21 day of November, 1989 before me personally came Jim
Wilhite, to me known, who, being by me duly sworn, did depose and say that he
is Vice Chairman of ARKLA, INC., one of the corporations described in and which
executed the foregoing instrument; that he knows the corporate seal of said
corporation; that the seal affixed to said instrument is such corporate seal;
that it was so affixed by authority of the Board of Directors of said
corporation, and that he signed his name thereto by like authority.
IN WITNESS WHEREOF, I have hereunto set my hand and affixed my
official seal the day and year in this certificate first above written.
(NOTARIAL SEAL) LOIS S. ALEXANDER
---------------------------------
Notary Public
Commission Expires:
--------------
-8-
10
STATE OF NEW YORK
COUNTY OF NEW YORK
On this 22 day of November, 1989 before me personally came P.
DeFelice, to me known, who, being by me duly sworn, did depose and say that he
is Vice President of CITIBANK, N.A., one of the corporations described in and
which executed the foregoing instrument; that he knows the corporate seal of
said corporation; that the seal affixed to said instrument is such corporate
seal; that it was so affixed by authority of the Board of Directors of said
corporation, and that he signed his name thereto by like authority.
IN WITNESS WHEREOF, I have hereunto set my hand and affixed my
official seal the day and year in this certificate first above written.
(NOTARIAL SEAL) ENZO L. CARBOCCI
---------------------------------
Notary Public
Commission Expires:
--------------
ENZO . CARBOCCI
Notary Public, State of New York
No. 43-5605595
Qualified in Richmond County
Certificate Filed in New York County
Term Expires March 30, 1990
-9-
1
EXHIBIT 4a4
THIRD SUPPLEMENTAL INDENTURE
This Third Supplemental Indenture, dated as of August 6, 1997 (this
"Third Supplemental Indenture"), among Houston Lighting & Power Company, a
Texas corporation ("HL&P"), HI Merger, Inc., a Delaware corporation ("HI
Merger"), NorAm Energy Corp., a Delaware corporation and successor in interest
to Arkla, Inc. (the "Company"), and Citibank, N.A., as Trustee (the "Trustee"),
supplements the Indenture dated as of December 1, 1986 (the "Indenture")
between the Company and the Trustee, as supplemented by the First Supplemental
Indenture, dated as of September 30, 1988 (the "First Supplemental Indenture"),
between the Company and the Trustee, and the Second Supplemental Indenture,
dated as of November 15, 1989 (the "Second Supplemental Indenture"), between
the Company and the Trustee.
RECITALS
WHEREAS, pursuant to an Agreement and Plan of Merger dated as
of August 11, 1996, as amended by the Amendment to Agreement and Plan of Merger
dated as of October 23, 1996 (the "Merger Agreement"), among Houston Industries
Incorporated, a Texas corporation ("HI"), HL&P, HI Merger and the Company, HI
will be merged with and into HL&P, with HL&P to be the surviving corporation
and renamed "Houston Industries Incorporated" ("Houston"), and the Company will
be merged with and into HI Merger (the "NorAm Merger"), with HI Merger to be
the surviving corporation and renamed "NorAm Energy Corp.," as a result of
which each outstanding share of NorAm Common Stock will be converted into
either cash or shares of common stock, no par value, of Houston ("Houston
Common Stock"), as set forth in the Merger Agreement;
WHEREAS, in connection with the NorAm Merger, HL&P, the
Company and HI Merger have duly determined to make, execute and deliver to the
Trustee this Third Supplemental Indenture in order to reflect the results of
the NorAm Merger as required by the Indenture, as supplemented by the First
Supplemental Indenture and the Second Supplemental Indenture;
WHEREAS, pursuant to Section 801 of the Indenture, HI Merger,
as the surviving corporation of the NorAm Merger, is required to expressly
assume, by an indenture supplemental to the Indenture, the due and punctual
payment of the principal of (and premium, if any) and interest on all the
Securities and the performance of every covenant of the Indenture, as
supplemented by the First Supplemental Indenture and the Second Supplemental
Indenture, on the part of the Company to be performed or observed.
WHEREAS, Section 901 of the Indenture provides that under
certain conditions the Company and the Trustee, without the consent of the
Holders of Securities, at any time and from time to time, may enter into an
indenture supplemental to the Indenture,
2
inter alia, to evidence the succession of another corporation to the Company
and the assumption by any such successor of the covenants of the Company under
the Indenture, as supplemented by the First Supplemental Indenture and the
Second Supplemental Indenture, and in the Securities.
NOW, THEREFORE, THIS THIRD SUPPLEMENTAL INDENTURE WITNESSETH:
In consideration of the premises and other good and valuable
consideration, the receipt and sufficiency of which are hereby acknowledged,
and to comply with Sections 801 and 901 of the Indenture, the parties hereto
hereby agree, for the equal and proportionate benefit of the respective Holders
from time to time of the Securities, as follows:
Section 1. Defined Terms. Capitalized terms used and not
otherwise defined herein have the respective meanings assigned to such terms in
the Indenture, as supplemented by the First Supplemental Indenture and the
Second Supplemental Indenture.
Section 2. Succession by Merger.
(1) As of the effective time of the NorAm Merger, HI Merger shall
become the successor to the Company for all purposes of the Indenture and HI
Merger hereby expressly assumes the due and punctual payment of the principal
of (and premium, if any) and interest on all the Securities and the performance
of every covenant of the Indenture, as supplemented by the First Supplemental
Indenture and the Second Supplemental Indenture and by this Third Supplemental
Indenture, on the part of the Company to be performed or observed.
(2) Concurrently with the execution and delivery of this
Supplemental Indenture, the Company has delivered to the Trustee an Officers'
Certificate and an Opinion of Counsel as required by Sections 102 and 801 of
the Indenture.
Section 3. Ratification. The Indenture as hereby supplemented
is in all respects ratified and confirmed by each of the parties hereto, and
all of the rights and powers created thereby or thereunder shall be and remain
in full force and effect.
Section 4. Governing Law. The laws of the State of New York
shall govern this Third Supplemental Indenture without regard to principles of
conflict of laws.
Section 5. Successors. All agreements of the parties hereto in
this Third Supplemental Indenture shall bind their respective successors.
Section 6. Multiple Counterparts. The parties hereto may sign
multiple counterparts of this Third Supplemental Indenture. Each signed
counterpart shall be deemed an original, but all of them together represent the
same agreement.
-2-
3
IN WITNESS WHEREOF, the undersigned have caused this Third
Supplemental Indenture to be executed by its duly authorized officer as of the
date first above written.
HOUSTON LIGHTING & POWER COMPANY
By: /s/ HUGH RICE KELLY
---------------------------------
Name: Hugh Rice Kelly
Title: Executive Vice President,
General Counsel and
Corporate Secretary
Attest:
By: /s/ RUFUS S. SCOTT
---------------------------------
Name: Rufus S. Scott
Title: Assistant Corporate Secretary
HI MERGER, INC.
By: STEPHEN W. NAEVE
---------------------------------
Name: Stephen W. Naeve
Title: President
Attest:
By: /s/ RICHARD B. DAUPHIN
---------------------------------
Name: Richard B. Dauphin
Title: Assistant Corporate Secretary
-3-
4
NORAM ENERGY CORP.
By: /s/ T. MILTON HONEA
---------------------------------
Name: T. Milton Honea
Title: President
Attest:
By: /s/ HUBERT GENTRY, JR.
---------------------------------
Name: Hubert Gentry, Jr.
Title: Secretary
CITIBANK, N.A.
as Trustee
By: /s/ CAROL NG
---------------------------------
Name: Carol Ng
Title: Vice President
Attest:
By: /s/ ARTHUR W. ASLANIAN
---------------------------------
Name: Arthur W. Aslanian
Title: Vice President
-4-
1
EXHIBIT 4b2
SUPPLEMENTAL INDENTURE
This Supplemental Indenture, dated as of August 6, 1997 (this
"Supplemental Indenture"), among Houston Lighting & Power Company, a Texas
corporation ("HL&P"), HI Merger, Inc., a Delaware corporation ("HI Merger"),
NorAm Energy Corp., a Delaware corporation and successor in interest to Arkla,
Inc. (the "Company"), and The Chase Manhattan Bank (National Association), as
Trustee (the "Trustee"), supplements the Indenture dated as of March 1, 1987
(the "Indenture") between the Company and the Trustee under which the Company's
6% Convertible Subordinated Debentures due 2012 (the "Debentures") were issued
and are outstanding.
RECITALS
WHEREAS, pursuant to the terms of the Indenture the Debentures
were convertible into shares of common stock, par value $.625 per share ("NorAm
Common Stock"), of the Company prior to the Effective Time (as defined below);
WHEREAS, pursuant to an Agreement and Plan of Merger dated as
of August 11, 1996 , as amended by the Amendment to Agreement and Plan of
Merger dated as of October 23, 1996 (the "Merger Agreement"), among Houston
Industries Incorporated, a Texas corporation ("HI"), HL&P, HI Merger and the
Company, HI will be merged with and into HL&P, with HL&P to be the surviving
corporation and renamed "Houston Industries Incorporated" ("Houston"), and the
Company will be merged with and into HI Merger (the "NorAm Merger"), with HI
Merger to be the surviving corporation and renamed "NorAm Energy Corp.," as a
result of which each outstanding share of NorAm Common Stock will be converted
into either cash or shares of common stock, no par value, of Houston ("Houston
Common Stock"), as set forth in the Merger Agreement. The cash amount per
share of NorAm Common Stock will be $16.00 plus two percent (simple interest)
per quarter from May 11, 1997 until the closing of the NorAm Merger (the "Cash
Consideration"). The number of shares of Houston Common Stock issued per share
of NorAm Common Stock will be not less than 0.6154 shares nor more than 0.7529
shares (the "Stock Consideration"). The actual number will depend upon the
average closing price of HI common stock on the New York Stock Exchange during
a 20-trading-day period commencing 25 trading days prior to the closing date of
the NorAm Merger. The Merger Agreement contains certain provisions generally
designed to result in 50% of the outstanding shares of NorAm Common Stock being
converted into the Cash Consideration and 50% of the outstanding shares of
NorAm Common Stock being converted into the Stock Consideration;
WHEREAS, in connection with the NorAm Merger, HL&P, the
Company and HI Merger have duly determined to make, execute and deliver to the
Trustee this Supplemental Indenture in order to reflect the results of the
NorAm Merger as required by the Indenture;
2
WHEREAS, pursuant to Section 801 of the Indenture, HI Merger,
as the surviving corporation of the NorAm Merger, is required to expressly
assume, by an indenture supplemental to the Indenture, the due and punctual
payment of the principal of (and premium, if any) and interest on all the
Debentures and the performance of every covenant of the Indenture on the part
of the Company to be performed or observed and to provide for the conversion
rights of Holders of Debentures in accordance with Section 1306 of the
Indenture;
WHEREAS, Section 1306 of the Indenture requires that, as a
result of the NorAm Merger, a Holder of a Debenture shall have the right to
convert the Debenture into the consideration receivable upon the NorAm Merger
by a holder of shares of NorAm Common Stock into which the Debenture could have
been converted immediately prior to the NorAm Merger;
WHEREAS, Section 2.2(f) of the Merger Agreement provides that
following the effective time of the NorAm Merger (the "Effective Time"), each
outstanding Debenture will be convertible into the amount of Stock
Consideration (and cash in lieu of fractional shares of Houston Common Stock)
and Cash Consideration which the Holder thereof would have had the right to
receive after the Effective Time if such Debenture had been converted
immediately prior to the Effective Time and the Holder thereof had made the
Stock Election (as defined in the Merger Agreement) and received the Stock
Consideration with respect to 50% of the shares of NorAm Common Stock issuable
upon such conversion of the Holder's Debentures and made the Cash Election (as
defined in the Merger Agreement) and received the Cash Consideration with
respect to the remaining 50% of such NorAm Common Stock; and
WHEREAS, Section 901 of the Indenture provides that under
certain conditions the Company and the Trustee, without the consent of the
Holders of Debentures, from time to time and at any time, may enter into an
indenture supplemental to the Indenture, inter alia, to evidence the succession
of another corporation to the Company and the assumption by any such successor
of the covenants of the Company under the Indenture and in the Debentures;
NOW, THEREFORE, THIS SUPPLEMENTAL INDENTURE WITNESSETH:
In consideration of the premises and other good and valuable
consideration, the receipt and sufficiency of which are hereby acknowledged,
and to comply with Sections 801, 901 and 1306 of the Indenture, the parties
hereto hereby agree, for the equal and proportionate benefit of the respective
Holders from time to time of the Debentures, as follows:
Section 1. Defined Terms. Capitalized terms used and not otherwise
defined herein have the respective meanings assigned to such terms in the
Indenture.
-2-
3
Section 2. Succession by Merger.
(1) As of the Effective Time, HI Merger shall become the successor
to the Company for all purposes of the Indenture and HI Merger hereby expressly
assumes the due and punctual payment of the principal of (and premium, if any)
and interest on all the Debentures and the performance of every covenant of the
Indenture, as supplemented by this Supplemental Indenture, on the part of the
Company to be performed or observed.
(2) Concurrently with the execution and delivery of this
Supplemental Indenture, the Company has delivered to the Trustee an Officers'
Certificate and an Opinion of Counsel as required by Section 801(3) of the
Indenture.
Section 3. Conversion Privilege. The Holder of each Debenture
outstanding as of the Effective Time (and each subsequent Holder) shall have
the right from and after the Effective Time to convert such Debenture only into
the amount, subject to the adjustments provided for in Article Thirteen of the
Indenture, of Stock Consideration (and cash in lieu of fractional shares of
Houston Common Stock) and Cash Consideration which the Holder thereof would
have had the right to receive after the Effective Time if such Debenture had
been converted immediately prior to the Effective Time and the Holder thereof
had made the Stock Election (as defined in the Merger Agreement) and received
the Stock Consideration with respect to 50% of the shares of NorAm Common Stock
issuable upon such conversion of the Holder's Debentures and made the Cash
Election (as defined in the Merger Agreement) and received the Cash
Consideration with respect to the remaining 50% of such NorAm Common Stock.
Section 4. Additional Covenants of Houston. HL&P hereby (i)
agrees to (A) reserve and keep available out of its authorized but unissued
capital stock, solely for the purpose of issuance upon the conversion of
Debentures as provided in this Supplemental Indenture and the Indenture, a
number of shares of Houston Common Stock sufficient to issue the Stock
Consideration upon the conversion of all outstanding Debentures and (B) issue
and cause to be delivered in accordance with this Supplemental Indenture, the
Indenture and the Company's instructions, the Stock Consideration and the Cash
Consideration upon conversion of any Debenture and (ii) warrants that all
shares of Houston Common Stock that may be issued upon the conversion of any
Debenture, when so issued, shall be duly authorized, validly issued, fully paid
and nonassessable.
Section 5. Ratification. The Indenture as hereby supplemented
is in all respects ratified and confirmed by each of the parties hereto, and
all of the rights and powers created thereby or thereunder shall be and remain
in full force and effect.
Section 6. Governing Law. The laws of the State of New York
shall govern this Supplemental Indenture without regard to principles of
conflict of laws.
Section 7. Successors. All agreements of the parties hereto in
this Supplemental Indenture shall bind their respective successors.
-3-
4
Section 8. Multiple Counterparts. The parties hereto may sign
multiple counterparts of this Supplemental Indenture. Each signed counterpart
shall be deemed an original, but all of them together represent the same
agreement.
-4-
5
IN WITNESS WHEREOF, the undersigned have caused this Supplemental
Indenture to be executed by its duly authorized officer as of the date first
above written.
HOUSTON LIGHTING & POWER COMPANY
By: /s/ HUGH RICE KELLY
-----------------------------------
Name: Hugh Rice Kelly
Title: Executive Vice President,
General Counsel
and Corporate Secretary
Attest:
By: /s/ RUFUS S. SCOTT
-----------------------------------
Name: Rufus S. Scott
Title: Assistant Corporate Secretary
HI MERGER, INC.
By: STEPHEN W. NAEVE
-----------------------------------
Name: Stephen W. Naeve
Title: President
Attest:
By: /s/ RICHARD B. DAUPHIN
-----------------------------------
Name: Richard B. Dauphin
Title: Assistant Corporate Secretary
NORAM ENERGY CORP.
By: /s/ T. MILTON HONEA
-----------------------------------
Name: T. Milton Honea
Title: President
Attest:
By: /s/ HUBERT GENTRY, JR.
-----------------------------------
Name: Hubert Gentry, Jr.
Title: Secretary
CHASE MANHATTAN BANK
(National Association), Trustee
By: /s/ R. J. HALLERAN
-----------------------------------
Name: R. J. Halleran
Title: Second Vice President
Attest:
By: /s/ JOHN T. NEEDHAM, JR.
-----------------------------------
Name: John T. Needham, Jr.
Title: Trust Officer
-5-
1
EXHIBIT 4c2
SUPPLEMENTAL INDENTURE
This Supplemental Indenture, dated as of August 6, 1997 (this
"Supplemental Indenture"), among Houston Lighting & Power Company, a Texas
corporation ("HL&P"), HI Merger, Inc., a Delaware corporation ("HI Merger"),
NorAm Energy Corp., a Delaware corporation and successor in interest to Arkla,
Inc. (the "Company"), and Citibank, N.A., as Trustee (the "Trustee"),
supplements the Indenture dated as of April 15, 1990 (the "Indenture") between
the Company and the Trustee.
RECITALS
WHEREAS, pursuant to an Agreement and Plan of Merger dated as
of August 11, 1996, as amended by the Amendment to Agreement and Plan of Merger
dated as of October 23, 1996 (the "Merger Agreement"), among Houston Industries
Incorporated, a Texas corporation ("HI"), HL&P, HI Merger and the Company, HI
will be merged with and into HL&P, with HL&P to be the surviving corporation
and renamed "Houston Industries Incorporated" ("Houston"), and the Company will
be merged with and into HI Merger (the "NorAm Merger"), with HI Merger to be
the surviving corporation and renamed "NorAm Energy Corp.," as a result of
which each outstanding share of NorAm Common Stock will be converted into
either cash or shares of common stock, no par value, of Houston ("Houston
Common Stock"), as set forth in the Merger Agreement;
WHEREAS, in connection with the NorAm Merger, HL&P, the
Company and HI Merger have duly determined to make, execute and deliver to the
Trustee this Supplemental Indenture in order to reflect the results of the
NorAm Merger as required by the Indenture;
WHEREAS, pursuant to Section 8.01 of the Indenture, HI Merger,
as the surviving corporation of the NorAm Merger, is required to expressly
assume, by an indenture supplemental to the Indenture, the due and punctual
payment of the principal of (and premium, if any) and interest on all the
Securities and the performance of every covenant of the Indenture on the part
of the Company to be performed or observed; and
WHEREAS, Section 9.01 of the Indenture provides that under
certain conditions the Company and the Trustee, without the consent of the
Holders of Securities, from time to time and at any time, may enter into an
indenture supplemental to the Indenture, inter alia, to evidence the succession
of another corporation to the Company and the assumption by any such successor
of the covenants of the Company under the Indenture, and in the Securities;
2
NOW, THEREFORE, THIS SUPPLEMENTAL INDENTURE WITNESSETH:
In consideration of the premises and other good and valuable
consideration, the receipt and sufficiency of which are hereby acknowledged,
and to comply with Sections 8.01 and 9.01 of the Indenture, the parties hereto
hereby agree, for the equal and proportionate benefit of the respective Holders
from time to time of the Securities, as follows:
Section 1. Defined Terms. Capitalized terms used and not otherwise
defined herein have the respective meanings assigned to such terms in the
Indenture.
Section 2. Succession by Merger.
(1) As of the effective time of the NorAm Merger, HI Merger shall
become the successor to the Company for all purposes of the Indenture and HI
Merger hereby expressly assumes the due and punctual payment of the principal
of (and premium, if any) and interest on all the Securities and the performance
of every covenant of the Indenture, as supplemented by this Supplemental
Indenture, on the part of the Company to be performed or observed.
(2) Concurrently with the execution and delivery of this
Supplemental Indenture, the Company has delivered to the Trustee an Officers'
Certificate and an Opinion of Counsel as required by Sections 1.02 and 8.01 of
the Indenture.
Section 3. Ratification. The Indenture, as hereby supplemented is
in all respects ratified and confirmed by each of the parties hereto, and all
of the rights and powers created thereby or thereunder shall be and remain in
full force and effect.
Section 4. Governing Law. The laws of the State of New York shall
govern this Supplemental Indenture without regard to principles of conflict of
laws.
Section 5. Successors. All agreements of the parties hereto in
this Supplemental Indenture shall bind their respective successors.
Section 6. Multiple Counterparts. The parties hereto may sign
multiple counterparts of this Supplemental Indenture. Each signed counterpart
shall be deemed an original, but all of them together represent the same
agreement.
-2-
3
IN WITNESS WHEREOF, the undersigned have caused this Supplemental
Indenture to be executed by its duly authorized officer as of the date first
above written.
HOUSTON LIGHTING & POWER COMPANY
By: /s/ HUGH RICE KELLY
-----------------------------------
Name: Hugh Rice Kelly
Title: Executive Vice President,
General Counsel
and Corporate Secretary
Attest:
By: /s/ RUFUS S. SCOTT
-----------------------------------
Name: Rufus S. Scott
Title: Assistant Corporate Secretary
HI MERGER, INC.
By: STEPHEN W. NAEVE
-----------------------------------
Name: Stephen W. Naeve
Title: President
Attest:
By: /s/ RICHARD B. DAUPHIN
-----------------------------------
Name: Richard B. Dauphin
Title: Assistant Corporate Secretary
-3-
4
NORAM ENERGY CORP.
By: /s/ T. MILTON HONEA
-----------------------------------
Name: T. Milton Honea
Title: President
Attest:
By: /s/ HUBERT GENTRY, JR.
-----------------------------------
Name: Hubert Gentry, Jr.
Title: Secretary
CITIBANK, N.A.
as Trustee
By: /s/ CAROL NG
-----------------------------------
Name: Carol Ng
Title: Vice President
Attest:
By: /s/ ARTHUR W. ASLANIAN
-----------------------------------
Name: Arthur W. Aslanian
Title: Vice President
-4-
1
EXHIBIT 4d3
SECOND SUPPLEMENTAL INDENTURE
This Second Supplemental Indenture, dated as of August 6, 1997 (this
"Second Supplemental Indenture"), among Houston Lighting & Power Company, a
Texas corporation ("HL&P"), HI Merger, Inc., a Delaware corporation ("HI
Merger"), NorAm Energy Corp., a Delaware corporation (the "Company"), and The
Bank of New York, as Trustee (the "Trustee"), supplements the Indenture dated
as of June 15, 1996 (the "Indenture") between the Company and the Trustee, as
supplemented by the First Supplemental Indenture dated as of June 15, 1996
("First Supplemental Indenture") between the Company and the Trustee under
which the Company's 6 1/4% Convertible Junior Subordinated Debentures (the
"Debentures") were issued and are outstanding.
RECITALS
WHEREAS, pursuant to the terms of the Indenture the Debentures
were convertible into shares of common stock, par value $.625 per share ("NorAm
Common Stock"), of the Company prior to the Effective Time (as defined below);
WHEREAS, pursuant to an Agreement and Plan of Merger dated as
of August 11, 1996, as amended by the Amendment to Agreement and Plan of Merger
dated as of October 23, 1996 (the "Merger Agreement"), among Houston Industries
Incorporated, a Texas corporation ("HI"), HL&P, HI Merger and the Company, HI
will be merged with and into HL&P, with HL&P to be the surviving corporation
and renamed "Houston Industries Incorporated" ("Houston"), and the Company will
be merged with and into HI Merger (the "NorAm Merger"), with HI Merger to be
the surviving corporation and renamed "NorAm Energy Corp.," as a result of
which each outstanding share of NorAm Common Stock will be converted into
either cash or shares of common stock, no par value, of Houston ("Houston
Common Stock"), as set forth in the Merger Agreement. The cash amount per
share of NorAm Common Stock will be $16.00 plus two percent (simple interest)
per quarter from May 11, 1997 until the closing of the NorAm Merger (the "Cash
Consideration"). The number of shares of Houston Common Stock issued per share
of NorAm Common Stock will be not less than 0.6154 shares nor more than 0.7529
shares (the "Stock Consideration"). The actual number will depend upon the
average closing price of HI common stock on the New York Stock Exchange during
a 20-trading-day period commencing 25 trading days prior to the closing date of
the NorAm Merger. The Merger Agreement contains certain provisions generally
designed to result in 50% of the outstanding shares of NorAm Common Stock being
converted into the Cash Consideration and 50% of the outstanding shares of
NorAm Common Stock being converted into the Stock Consideration;
WHEREAS, in connection with the NorAm Merger, HL&P, the
Company and HI Merger have duly determined to make, execute and deliver to the
Trustee this Second Supplemental Indenture in order to reflect the results of
the NorAm Merger as required by the Indenture;
2
WHEREAS, pursuant to Section 10.1 of the Indenture, HI Merger,
as the surviving corporation of the NorAm Merger, is required to expressly
assume, by an indenture supplemental to the Indenture, the due and punctual
payment of the principal of (and premium, if any) and interest on all the
Debentures in accordance with the terms of the Debentures, according to their
tenor and the due and punctual performance of all covenants and conditions of
the Indenture on the part of the Company to be performed or observed and to
provide for the conversion rights of Holders of Debentures in accordance with
Section 7.4 of the First Supplemental Indenture;
WHEREAS, Section 7.4 of the First Supplemental Indenture
requires that, as a result of the NorAm Merger, a Holder of a Debenture shall
have the right to convert the Debenture into the consideration receivable upon
the NorAm Merger by a holder of shares of NorAm Common Stock into which the
Debenture could have been converted immediately prior to the NorAm Merger;
WHEREAS, Section 2.2(f) of the Merger Agreement provides that
following the effective time of the NorAm Merger (the "Effective Time"), each
outstanding Debenture will be convertible into the amount of Stock
Consideration (and cash in lieu of fractional shares of Houston Common Stock)
and Cash Consideration which the Holder thereof would have had the right to
receive after the Effective Time if such Debenture had been converted
immediately prior to the Effective Time and the Holder thereof had made the
Stock Election (as defined in the Merger Agreement) and received the Stock
Consideration with respect to 50% of the shares of NorAm Common Stock issuable
upon such conversion of the Holder's Debentures and made the Cash Election (as
defined in the Merger Agreement) and received the Cash Consideration with
respect to the remaining 50% of such NorAm Common Stock; and
WHEREAS, Section 9.1 of the indenture provides that under
certain conditions the Company and the Trustee, without the consent of the
Holders of Debentures, from time to time and at any time, may enter into an
indenture supplemental to the Indenture, inter alia, to evidence the succession
of another corporation to the Company and the assumption by any such successor
of the covenants of the Company under the Indenture, as supplemented by the
First Supplemental Indenture, and in the Debentures;
NOW, THEREFORE, THIS SECOND SUPPLEMENTAL INDENTURE WITNESSETH:
In consideration of the premises and other good and valuable
consideration, the receipt and sufficiency of which are hereby acknowledged,
and to comply with Sections 9.1 and 10.1 of the Indenture and Section 7.4 of
the First Supplemental Indenture, the parties hereto hereby agree, for the
equal and proportionate benefit of the respective Holders from time to time of
the Debentures, as follows:
Section 1. Defined Terms. Capitalized terms used and not otherwise
defined herein have the respective meanings assigned to such terms in the
Indenture and the First Supplemental Indenture.
-2-
3
Section 2. Succession by Merger.
(1) As of the Effective Time, HI Merger shall become the successor
to the Company for all purposes of the Indenture, as supplemented by the First
Supplemental Indenture and HI Merger hereby expressly assumes the due and
punctual payment of the principal of (and premium, if any) and interest on all
the Debentures and the performance of every covenant of the Indenture, as
supplemented by the First Supplemental Indenture and by this Second
Supplemental Indenture, on the part of the Company to be performed or observed.
(2) Concurrently with the execution and delivery of this Second
Supplemental Indenture, the Company has delivered to the Trustee an Officers'
Certificate and an Opinion of Counsel as required by Sections 9.5 and 13.7 of
the Indenture.
Section 3. Conversion Privilege. The Holder of each Debenture
outstanding as of the Effective Time (and each subsequent Holder) shall have
the right from and after the Effective Time to convert such Debenture only into
the amount, subject to the adjustments provided for in Article Seven of the
First Supplemental Indenture, of Stock Consideration (and cash in lieu of
fractional shares of Houston Common Stock) and Cash Consideration which the
Holder thereof would have had the right to receive after the Effective Time if
such Debenture had been converted immediately prior to the Effective Time and
the Holder thereof had made the Stock Election (as defined in the Merger
Agreement) and received the Stock Consideration with respect to 50% of the
shares of NorAm Common Stock issuable upon such conversion of the Holder's
Debentures and made the Cash Election (as defined in the Merger Agreement) and
received the Cash Consideration with respect to the remaining 50% of such NorAm
Common Stock.
Section 4. Additional Covenants of Houston. HL&P hereby (i) agrees
to (A) reserve and keep available out of its authorized but unissued capital
stock, solely for the purpose of issuance upon the conversion of Debentures as
provided in this Second Supplemental Indenture and the First Supplemental
Indenture, a number of shares of Houston Common Stock sufficient to issue the
Stock Consideration upon the conversion of all outstanding Debentures and (B)
issue and cause to be delivered in accordance with this Second Supplemental
Indenture, the First Supplemental Indenture and the Company's instructions, the
Stock Consideration and the Cash Consideration upon conversion of any Debenture
and (ii) warrants that all shares of Houston Common Stock that may be issued
upon the conversion of any Debenture, when so issued, shall be duly authorized,
validly issued, fully paid and nonassessable.
Section 5. Ratification. The Indenture, as supplemented by the
First Supplemental Indenture, and as hereby supplemented is in all respects
ratified and confirmed by each of the parties hereto, and all of the rights and
powers created thereby or thereunder shall be and remain in full force and
effect.
Section 6. Governing Law. The laws of the State of New York shall
govern this Second Supplemental Indenture without regard to principles of
conflict of laws.
-3-
4
Section 7. Successors. All agreements of the parties hereto in
this Second Supplemental Indenture shall bind their respective successors.
Section 8. Multiple Counterparts. The parties hereto may sign
multiple counterparts of this Second Supplemental Indenture. Each signed
counterpart shall be deemed an original, but all of them together represent the
same agreement.
-4-
5
IN WITNESS WHEREOF, the undersigned have caused this Second
Supplemental Indenture to be executed by its duly authorized officer as of the
date first above written.
HOUSTON LIGHTING & POWER COMPANY
By: /s/ HUGH RICE KELLY
---------------------------------
Name: Hugh Rice Kelly
Title: Executive Vice President,
General Counsel
and Corporate Secretary
Attest:
By: /s/ RUFUS S. SCOTT
---------------------------------
Name: Rufus S. Scott
Title: Assistant Corporate Secretary
HI MERGER, INC.
By: STEPHEN W. NAEVE
---------------------------------
Name: Stephen W. Naeve
Title: President
Attest:
By: /s/ RICHARD B. DAUPHIN
---------------------------------
Name: Richard B. Dauphin
Title: Assistant Corporate Secretary
-5-
6
NORAM ENERGY CORP.
By: /s/ T. MILTON HONEA
---------------------------------
Name: T. Milton Honea
Title: President
Attest:
By: /s/ HUBERT GENTRY, JR.
---------------------------------
Name: Hubert Gentry, Jr.
Title: Secretary
THE BANK OF NEW YORK
Trustee
By: /s/ PAUL J. SCHMALZEL
---------------------------------
Name: Paul J. Schmalzel
Title: Assistant Vice President
Attest:
By: /s/ VIVIAN GEORGES
---------------------------------
Name: Vivian Georges
Title: Assistant Vice President
-6-
1
EXHIBIT 12
NORAM ENERGY CORP. AND SUBSIDIARIES
COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES
(IN THOUSANDS OF DOLLARS)
1997(A) 1996 1995 1994 1993
-------- -------- -------- -------- --------
Income from Continuing Operations....... $ 66,722 $ 95,138 $ 65,529 $ 51,291 $ 39,935
Income Taxes for Continuing
Operations............................ 55,781 66,352 55,379 34,372 46,481
Non-Utility Interest Capitalized........ 0 0 0 0 0
-------- -------- -------- -------- --------
122,503 161,490 120,908 85,663 86,416
-------- -------- -------- -------- --------
Fixed Charges:
Interest.............................. 126,912 130,592 155,584 167,384 169,857
Amortization of Debt Discount and
Expense............................ 3,086 3,582 3,483 3,312 3,421
Portion of Rents Considered to
Represent an Interest Factor....... 7,988 10,083 16,215 11,292 10,402
-------- -------- -------- -------- --------
Total Fixed Charges........... 137,986 144,257 175,282 181,988 183,680
-------- -------- -------- -------- --------
Earnings................................ $260,489 $305,747 $296,190 $267,651 $270,096
======== ======== ======== ======== ========
Ratio of Earnings to Fixed Charges...... 1.89 2.12 1.69 1.47 1.47
======== ======== ======== ======== ========
- - ---------------
(A) 1997 amounts combine NorAm's pre-Merger amounts for the seven months ended
July 31, 1997 with NorAm's post-merger amounts for the five months ended
December 31, 1997, including purchase accounting adjustments reflecting a
new basis of accounting.
1
EXHIBIT 23(a)
CONSENT OF INDEPENDENT AUDITORS
NORAM ENERGY CORP.:
We consent to the incorporation by reference in NorAm Energy Corp.'s
Registration Statement on Form S-3 No. 333-41017 of our report dated February
20, 1998 (relating to the consolidated financial statements of NorAm Energy
Corp. as of and for the five months ended December 31, 1997 and for the seven
months ended July 31, 1997) appearing in this Combined Annual Report on Form
10-K of Houston Industries Incorporated and NorAm Energy Corp. for the year
ended December 31, 1997.
DELOITTE & TOUCHE LLP
HOUSTON, TEXAS
MARCH 23, 1998
1
EXHIBIT 23(b)
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the incorporation by reference in the registration statement
of NorAm Energy Corp. on Form S-3 (File No. 333-41017), of our report dated
March 25, 1997, on our audits of the consolidated financial statements and
financial statement schedule of NorAm Energy Corp. and Subsidiaries as of
December 31, 1996, and for the years ended December 31, 1996 and 1995, which
report is included in this Annual Report on Form 10-K.
COOPERS & LYBRAND L.L.P.
Houston, Texas
March 23, 1998
OPUR1
0000007314
NORAM ENERGY CORP.
1,000
12-MOS
DEC-31-1997
DEC-31-1997
PER-BOOK
2,702,489
2,220,252
1,147,299
69,056
0
6,139,096
1
2,463,831
20,847
2,479,045
0
0
937,993
0
712,100
0
232,145
0
0
0
1,777,813
6,139,096
5,858,390
55,781
5,612,594
5,612,594
245,796
9,453
255,249
132,746
66,959
0
66,959
0
10,070
156,573
0
0
