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Houston Industries Inc 1995 Annual Rept & Us Securities & Exchange Commission Form 10-K
	ML20117M366
Person / Time
Site:	South Texas
Issue date:	12/31/1995
From:	Jordan D; HOUSTON INDUSTRIES, INC.
To:	;
Shared Package
ML20117M337	List: ML20117M366; ML20117M374; ML20117M421; ML20117M464; ST-HL-AE-5465, Forwards Current Annual Financial Repts for Licensees for STP;
References
	NUDOCS 9609170410
	Download: ML20117M366 (164)
	v • d • e

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l i TABLE OF CONTENT 5 Financial lligidights 2 Letter to investors 3 [' Ilouston Industries Incorporated ' 7 r llouston Lighting & Power Company 11 94 {. Ilouston Industries Energy, Inc. 19 Condensed Financial Statements of the Company 22 i l Condensed Five-Year Comparison of Selected Financial Data 22 Condensed Statements of Consolidated Income 24 Condensed Statements of Consolidated Retained Earnings 25 Condensed Consolidated Balance Sheets 26 Condensed Statements of Consolidated Cash Flows 28 Independent Auditors

Report 29

) Selected Operating Statistics of IIIAP 30 Directors and OfGeers 31 Investor Information 33 About This Summary Annual Report: In an effort to provide shareholders with more effective Gnancial communications, Ilouston Industries Incorporated provides condensed financial disclosure in this summary annual s(i report. Full financial statements, which are audit-ed, can he found in Appendix A to the 1996 Proxy j Statement, which can be obtained free of charge from lil Investor Senices. Address and contact information can he found on the inside back cover of this report. e

.. - -. ~. -. _.. - - -. ~ .. - -. ~ --1. I FINANCIAL HIGHLIGHT 5 llochloN INnthThlth I N eo fil'o h 4T f D A N D S t inlinI 4 HI F h (DOLL AR$ IN THOUS ANDS. EXCEPT PER SH ARE AMOUNTS) YE AR ENDED DECEMBER 31, % CHANGE 1995 1991 1993 (94-95) i lleveimes 5 3,730,173 $ 3,754.136 $ 4,0s3R25 (1) Operating Expenses 5 2,825,240 $ 2,785,521 $ 3,102,500 1 income froni Continuing Operations $ 397,400 $ 423,965 $ 410,531 (fi) } Earnings Per Common Share from Continuing Operations ' 8 $ 1.60 1.72 1.69 (7) Net income' S 1,105,524 $ 399,261 $ 410,03fi 177 Earnings Per Common Share '* 4.46 1.fi2 1,(io 175 Iteturn on Ascrage Connnon Equity"' 29.1 % 11.9 9 12.6% Diviilends Paitl Per Connnon Share + 5 1.50 1.50 1.50 (At Year End) llook Value Per Coimnon Share +'- 16.61 13.64 12.53 22 Alarket Value Per Connnon Share' 24.25 17.62 $ 23.62 36 hlarlet to lhuik Value Ratio 146 % 1319 1909 Price to Earnings from Continuing Operations Itatio 15.2 10.4 14.1 Total Assets $ 11,819,606 $ 11,403,077 $ 11,351,607 4 1 ong Term Debt *~ $ 3,692,173 $ 3,737,00s $ 3,7(i3,310 (1) Sharehohlers' Equity 5 4,123,563 $ 3,3fi9,21S $ 3.273,997 22 Preferred Stocl+ $ 428,100 $ 518,955 $ 535,590 (18) Capitalization * $ 8,243,836 $ 7.62fi,111 $ 7,575,927 8 Connnon Shares Outstanding (000)"" 248,317 247,053 2(il316 i Number of Connnon Sharehohlers 65,948 65,92a 40,730 Number of Employees 8,891 11,498 11,350 (23) Incense Fresu Continuing Operations Eermings Per 51sare Freen (milhous of dollan) Contimulag Operations 91 64s t.3 10 e $1 ss u2 m snno u2 si n 93 Suni in $i m u4 - 5m o ni su2 95 Swa 93 suon n un m,om,nn a,an. a.,ta n n.. t..rme,,,,~,nm.....,oa aniac,,a a,,ni n,i,,n in om m,a uu,n unm.a..i.nen er cmsmu.mm. n. nee inr Emplopt st<d nown!,i;> l' lam." rHectne J.mnan-1.1991. n duced net inninw I,nt inen asni canuntyrr nunmon slun. ni Tim n tun, on incrage runnnnn nputy for twri im Indes tlw gain on tim sale of tlw compan.n ral le telcusion sul.sidun. Tlw n tuni un au rage nonnum eqmt) escludmg tlw gam was l ui4. (4) includes turn nt matuntics. 2

.....v s.s. f, .J UA F1 A l 1 i i llouston Industries completed the sale of KBLCOM during 1995 and began 1996 by restructuring the company. Against a backdrop of continuous change in the electric utility industry, these developments and actions by management l place llouston Industries in a position to compete in a new and expanding world market for energy. 4 1 a i Earnings Benefit From Cable T.V. Sale I ith tlie close of the KilLCOM sale in 1995, lionston lialustries recorded a one-tiine, l after-tax gain of $70S million, which contributed to consolidated earnings of $1.1 billion, or $4.46 per share, during the year. i i11 achieved earnings from continuing operations of $397 million, or $ 1.60 per share, compared t with $424 million, or $1.72 per share, during 1994. Earnings were redneed by $100 million from the l settlement of lionston Lighting & Power's rate case. In addition,111 recorded an $18 million charge resulting from the recent adoption ofIllinois legislation which affi eted two waste tire-to-energy pro-

4 jects in which lionston ludustries Energv is participating.

Our earnings beneGted from $18 million of after-tax dividend income from the Time Warner securities received as part of the KilLCOM sale and improved sales in lilhP's emnmercial and res-idential markets. During 1995, a munber of developments enhanced the company's financial flexibility and improved our ability to succeed in a dynamic business environment. 3 j

1 l In addition to the gain, the sale of KBLCOM strengthened our balance sheet with the elimina-tion of $619 million of short-term debt and $650 million oflong-tenn debt and other liabilities. We arrived at a settlement that ended the lengthy llouston Lighting & Power rate proceeding which had been occupying company resources and creating uncertainty for over a year. .? As a show of confidence in III's future, our board of directors split Ill's common stock, two ~ shares for one, making it more affordable for small investors who represent the majority of the company's shareholders. At year-end,11ouston Industries Energy was operating a cogeneration facility in the U.S. for a major oil emnpany, had made substantial progress in the deveiopment of a project in India, and had established a portfolio in Argentina of two utility systems and a cogeneration project now imder construction. The 46 percent total return on III's common stock exceeded that of the Dow Jones Utilities, the S&P Electric Group and the S&P 500 in 1995. Our stock has provided sharehoklers with aver-age annual total returns of nearly 15 percent over the last ten years. i I Competitive Restructuring As the pace of change accelerates in the electric utility industry, we see new, distinct lines of business emerging. While the business of operating the electricity distribution network is likely to remain regulated, other aspects of providing electric senice will migrate toward a competitive busi-ness structure. In particular, power generation has begim the move in that direction, and numerous companies are preparing to participate in the unregulated wholesale marketing of electricity. Others plan to offer unregulated, value-added energy senices to retail customers. This change is creating new opportunities for 111 in unregulated energy products and senices. These businesses serve diverse markets, and each requires different expertise and strategie focus. In February 1996, we restructured IIouston Industries to compete in a dynamic and growmg world market for energy services. We fonned five strategic business units, including two which will pursue new, unregulated lines of business. The two unregulated businesses are expected to operate nationwide in wholesale energy mar-keting and the retail marketing of energy products and services. III Energy will continue to develop power projects and acquire electric utility systems, principally in foreign markets. 11L&P's business will be conducted by three strategic business units. We have consolidated all 4

of the functions associated with delivering electricity and providing senice to local utility customers into one business unit. Electric generation will be the second business unit. As one of fbur owners j of the South Texas Project nuclear facility, lilAP's nuclear power organization makes up the third I business unit, which remains unchanged. 1! / Building On Strength l.. l \\ Im confldent these changes and our ace (nnplishments in 1995 will lay the (bundation to carry Ibrward Ill's record of success. The company is stronger financially than it has been in recent times. We have assumed a emupetitive posture and have chosen to pursue exciting new markets. We helieve llouston Industries has important strengths - financial flexibility, competence in l our lleid, the willingness to adapt, and a tradition of senice and value recognized by customers and I ( shareholders. On these strengths, we are building for the future era. l I Don D. Jordan i Chairman & Chief Ibecutive Offleer .N N k y'l

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I 1.. i, i 3H1IllHI 8 ..o i e p flHaH[lai fI2Hg11 1 As a result of the sale of KilLCOM to Time Warner, IIouston Industries can look l to the future from a position of financial strength and flexibility, 1 s i 1 0 { Earnings Benefit From Cable Sale after-tas divideml innume from the Time Warner ouston Indust ries lucor[mrated (lli) report-Inc. securities received as jxut of the KilLCONI { ed 1995 consolidated earnings of $1.1 bil-sale. Earnings were reduced by $100 million from lion, or $4.46 per share, including a $708 million, llouston Lighting & Power Company's (IIIAP) { one-time gain on the sale of its cable television rate settlement and by an $18 million after-tax subsidiary, KilLCONI Incorporated. Ill's consoli-charge taken by llouston Industries Energv, Inc. I dated earnings from continuing operations were (111 Energv) to cover the potential loss associated $397 million, or $1.60 per share, with two waste tire-to-energy projects in which 111 i in addition to the one-time gain, lil's 1995 Energy is participating, as disenssed beknv. ) l ** '. earnings included approximately $18 million of lilAP reported net income after preferred i* dividends of $451 million for 1995, compared 1, with $453 million for 1994. Earnings benefited from llouston's grmving economy and hot sum-um uu-su ninion mer weather but decreased slightly compared to i um sumini.in the previous year due to the effects of IIL&P's I rate senleinent. j sum one-tinie, *m nnthon g.iin on the uk of Knu:oNt j eel E.irnings f rum runtmuing operations. IleSidential and conUnercial electricity sales J 4' 7 4

The sale of KillLONI to Time Warner Inc., formance, but on conditions in the economy, the which closed on July 6,1995, provided 111 with financial markets and the electric utility industry. Time Warner emumon and preferred stock with a On December 9,1995,111 split its common total reconled value at closing of approximately $1 stock, two-for-one. The split lowered the stock billion. These securities include one million shares price from among the highest in the electric utili-of common stock and 11 million shares of non-ty industry to a h vel that is within the median e publicly traded preferred stock which is convert-range of industry stocks and more attractive to a ible to approximately 23 million shares of Time stockbrokers and individual investors. Warner emnmon stock. The stock is expected to provide annual, after-tax dividend income of $37 investor's choice million through Jidy 1999. III also amended its dividend reinvestment As part of the transaction, Time Warner also plan in 1995 to create the Investor's Choice Plan, assumed approximately $650 million of which allows purchase and sale of stock directly KI3ILONI external debt and other liabilities and from the company for a nominal transaction fee. purchased approximately $619 million of in addition to dividend reinvestment, the plan KillLONI intercompany debt, providing cash offers such features as statement-based account-which was used to pay down 11l's short-term debt. ing and stock certificate safekeeping. During its The sale strengthened lil's balance sheet, and first year, the plan attracted 7,(XX) new accounts, the company can look forward to the future from and sharehohlers have placed 189,(XX) stock eer-a position of financial strength and flexibility. tificates in Investor's Choice safekeeping, a senice which provides convenience and security. Investment Performance Ily year-end 1995,46 percent of111 sharehold-Imestors responckxl positively to these devel-ers were participating in dividend reim'estment and opments and to falling interest rates, which have his-reaping the benefits of compounded camings. To torically lxnsted the price of utility stocks. During illustrate, with all dividends reinvested, $1,000 1995, 111 cmmnon stock provided a total return invested in llouston Industries common stock at (stock price appntiation plus dividends) of 46 per-the beginning of 1986 wouhl have grown in value to cent, assuming dividend reinvestment. This exceed- $3,817 by the end of 1995, and wouki have pmsid-ed the 1995 performance of the Standard & Poor's ed an average annual retum of nearly 15 ment. I 500, the S&P Eh etric Group and the Dow Jones Utilities indexes, which provided total returns of 38 va8"* M*** 8=****='*** 3a 888 (19wthn g61995) percent,31 perwnt and 32 percent, respectively. Of course,1995 was an exceptional year for the stock market, and similar results ca mot be expect-ano - ed on a regular basis. Ily comparison, over the past j ) five years,111 luts girovided imestors with an aver. sm 1 age annual total return of 14 percent. Future I results will depend not only on the company's per-M N7 M 89 90 91 92 91 94 95 96 i e

..... r.... .r _l As a result of the sale of KBLCOM to Time Warner, IIouston Industries can look to the future from a position of financial strength and flexibility. Earnings Benefit From Cable Sale after-tas dividend income from the Time Warner ouston Industries Incorporated (Ill) report-Inc. securities received as part of the Kil1LOh! Hed 1995 consolidated earnings of $1.1 bil-sale. Earnings were reduced by $100 million fnnn lion, or $4.46 per share, including a $708 million, Ilouston lighting & Power Company's (IllAP) one-time gain on the sale of its cable television rate settlement and by an $18 million after-tax 5 subsidiary, KIllLOh! Incorporated. Ill's consoli-charge taken by flouston Industries Energy, Inc. dated earnings from continuing operations were (III Energv) to cover the potential loss associated $397 million, or $1f>0 per share. with two waste tire-to-energy pmjects in which III In addition to the one-time gain, lil's 1995 Energv is puticipating as discussed helow. 'd, earnings included approximately $18 million of IIL&P reported net income after preferred dividends of $451 million for 1995, compared 1, with $453 million for 1994. Earnings benefited from lionston's growing economy and hot sum-15 6 su nahon mer weather but decreased slightly compared to 154 su u talmn the previous year due to the effects of IIL&P's M one-time. $708 milhon gain on tlw sale of KHl.Cohl EE Earumgs frnm ountmuing o}wrations: llesidential and conHnercial electricity saIPs I

7 __. _ _ - _ _ _ _- us.ctric ses n,atumuna-sea =n> waste tire-to-energy pnijects to which 111 Energy is

cang a sulxmlinated lender. On March 14,1996, the as l 72 Governor of Illinois signed legislation which s

35 14 1 repealed th" lletail llate Law, passed in 1987 as an y g as It2 incentive for ill Energ and other investors to ss 215 g) develop waste-to-energ' plants in the state. In the as ~,N l t3 7 event the retail rate incentive is not received by 'I nu b klenewl um commm%t un Imlustrul these two projects, inclinling one at Foni lleights increased by 5 percent and 4 percent, respective-in which 111 Energy has an equity interest, the ly. In 1995. Even after adjusting for weather, resi. plants would no longer he economically viable. dential sales rose by 3 percent driven, in part, by the addition of 26,00() ecstomers, the largest one. Fourth-Quarter ilarnings year increase since 1984. For the f(mrth quarter of 1995, Ill's consoli-Commercial kilowatt-hour sales are less weath-dated earnings fnnn continuing operations were er-sensitive than residential sales but received a $4 million, or $.02 per share, compared with $6 Imst fann stning connnercial building activity million, or $.02 per share, for the same period of which contributed to a 3 percent increase in the 1994. Fourth-quarter 1995 earnings benefited number of emnmercial customers senul. Finn fnnn $9 million of alter-tax dividends on the Time industrial kilowatt-hour sales fell 3 percent in Warner securities received as part of the 1995 compared to the previous year due to migra. KilLCOM sale, but were reduced by the $18 mil-tion of some finn service to interruptible senice lion charge taken by 111 Energy, discussed above, and the loss of one large industrial customer to Fourth-quarter 1994 earnings fnnn continuing self-generation, operations reflected a $46 million charge related liigher kilowatt-hour sales were offset by to IllAP's rate settlement. reduced electric rates fnnn IllhP's rate settle-lilAP reported earnings after preferred divi-ment, ellietive January 1,1995. lil AP's carnings dends of $34 million (br the (burth quarter of were also affected by the decision to write down 1995, compared to $18 million (br the same peri- $50 million of its investment in the South Texas ml of 1994. Increased residential and conunercial Project (STP) as pennitted under the rate settle-kilowatt-hour sales helped offset the elli ets o the r ment, and increased operating expenses, including rate settlement on fourth-quarter 1995 earnings, sewrance costs fnnn stalT reductions and increased while earnings for the same period of 1991 reflect-litigation expense. The total impact of the rate set-ed the one-time charge discussed above. tlement on 1995 earnings was $100 million includ-ing the effi et of the STP write-down. Financial Strength Provides Flexibility During its seetmd full year of operation, III Events of 1995, most notably illAP's rate Energy reconled a net loss of $33 million, or $.13 settlement and the sale of Kill,COM, have per share, which included an $18 million after-tax strengthened 111 financially and enabled the com-charge resniting fnnn the adverse impact on two pany to concentrate on its core energy businesses.

The sale of KillLOM to Time Warner Inc., fonnance, but on conditions in the economy, the which closed on July 6,1995, pnnided ill with financial markets and the eh etric utility industry. Time Warner common and preferred stock with a On December 9,1995,111 split its common total reconkxl value at ek> sing of appnnimately $1 stock, two-for-one. The split knveral the stock billion. These securities include c~ million shares price from among the highest in the ek etric utili-of common stock and 11 million shares of non-ty industry to a level that is within the median publicly traded preferred stock which is convert-range of industry stocks and more attractive to ible to approximately 23 million shares of Time stockbrokers and individual investors. Warner common stock. The stock is expected to pnnide annual, after-tax disidend income of.$37 Investor's choice million through July 1999. III also amended its dividend reinvestment As part of the transaction, Time Warner also plan in 1995 to create the Investor's Choice Plan, assumed appnnimately $650 million of which allows purchase and sale of stock directly KillLOM external debt and other liabilities and from the company for a nominal transaction fee. purchased approximately $619 million of In addition to dividend reinvestment, the plan KillLOM intercompany debt, pnniding cash offers such features as statement-based accoimt-which was used to pay down lil's short-term debt. ing and stock certificate safekeeping. During its The sale strengthened Ill's balance sheet, and first year, the plan attracted 7,000 new accounts, the company can look forwanl to the future from and sharehoklers have placed 189,000 stock eer-a position of financial strength and flexibility. tificates in Investor's Choice safekeeping, a senice which pnnides convenience and security. Investment Performance Ilyyear-end 1995,46 percent of 111 sharehold-Investors responded positively to these devel-ers were participating in dividend reimestment and opments and to falling interest rates, which have his-reaping the benefits of compounded earnings. To torically lxosted the price of utility stocks. During illustrate, with all dividends reimvsted, $1,0(0 1995, 111 common stock provided a total return imested in llouston Industries common stock at (stock price appreciation plus dividends) of 46 per-the beginning of 1986 wouhl have gnmu in value to cent, assuming dividend reimestment. This exceed- $3,817 by the end of 1995, and wouki have pnnid-ed the 1995 perfbrmance of the Standard & Poor's ed an average annual return of nearly 15 percent. 500, the S&P Eketric Gnmp and the Dow Jones Utilities indexes, which provided total returns of 38 Va8=* 8'*** 8*****= e se ses usu,An, ugh 1995) percent,31 percent and 32 percent, resp >ctively. 1.. Ofcourse,1995 was an exceptional year for the m,. stock market, and similar results cannot be expect-ed on a regidar basis. Ily comparison, over the past ~ five years,111 has pnnided investors with an aver-mm age annual total return of 14 percent. Future results will depend not only on the compmy's per-86 87 88 89 90 91 92 93 94 9s 96 e

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<c .,,.c U Iu l 7 s s J To inake the transition froin a traditional regulated utility to a highly competitive prosider of energy, I!ouston Lighting & Power is concentrating on service and value. Our ability to meet custainers' needs efficiently will make IIL&P the ener-gy provider of choice in the new era. A Year Of Progress }mwer to lil AP custoiners. Efforts to strengthen llouston Lighting & The settlement gave lilAP the option to Power Company (Ill AP) for the conqrti-write down up to $50 inillion per year ofits invest-tive era continue. 1)nring 1995, the company ment in the South Texas Project (STP) nuclear negotiated a rate settlement, further reduced facility Ibr a five-year period commencing January staffmg and improved effleiency in many areas to I,1995, and to treat that amount as a reasonable enhance its competitive position. The resulting husiness expense in future earnings reviews. In savings are being offset in 1995 and 1996 hy sev-1995, lil AP reconled the full $50 million write-erance costs associated v>ith the staff reduction, down on STP. hut these actions will help lll AP hold down Under another provision of the rate settle-costs in future years. ment, lil AP will amortize its investment in lig-In August 1995, the Public Utility Commission nite resenes associated with a cancelled generat-of 'n xas (PUC) approved a rate settlement that ing plant over seven years. This additional amorti-reduced IllAP's annual hase revenues by $62 mil-zation expense will be apprmimately $22 million lion and ended the uncertainty and expense associ-per year beginning in 1996. ated with the lengthy rate proceeding. The settle-lower rates along with lilAP's ability to ment also passed savings on fuel and purchased aceclerate the write-down of STP and amortize its 1 1

lignite investments will help improve the compa-pricing, which will be phased in over three years ny's long-term competitive position. beginning in 1997, is expected to increase IIIAP's During 1995, STP Units 1 and 2 ranked 15th transmission costs by approximately $3.5 million and loth in the world, respectively, in the total in 1997 and by approximately $35 million per year amount of power generated, despite scheduled by the year 2000. The PUC has indicated that the refueling outages at lx>th units. STP achieved a increased costs will be recoverable only in the capability factor of 87.7 percent during the year context of a ftdl rate proceeding. The rule also I compared with the mer'.ian of 82.7 percent for calls for the establishment of an independent sys-U.S. nuclear facilities. tem operator and for utilities to separately admin-During q, ara:e planned outages, both STP ister the utility wholesale transmission function. imits were refueled in record time, and the refuel-Legishtion has been intnxluced in Washing-ing of Unit 2, completed in just over 26 days, set ton, D.C. to further increase competition in the a world reconl for a four-loop Westinghouse electric utility industry under the direction of the nuclear facility. The previous record was 29 Federal Energy Hegulatory Conunission (FEllC). days, and the median among all U.S. nuclear llowever, individual states currently retain the plants is 55 days. authority to deal with issues hke retail emnpetition Circuit breakers mark the transmission access point from generat-ing facihty to the electric grid. Congress and state legislatures across the nation are considering legislation that would restructure the electric utility industry to bring about increased competition in the power gen-eration sector. In May 1995, the Texas Legislature concluded an extensive review of the Public Utility llegulatory Act (PUllA) by passing legislation that opens the state's wholesale generation market to competition, employs a bidding system to deter-mine how growth in demand will be met and per- [ mits utilities more ficxibility in pricing. l ..s On February 7,1996, the PUC adopted a rule for calculating the price utilities will pay to trans- ..t ~ port wholesale electricity within the state. The j f, price is based 70 percent on a flat rate, or postage stamp methml, and 30 percent on a distance-sen-ff -y y + sitive method. The postage stamp method is a dis-f f y advantage to utilities with compact servi e areas

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and low transmission costs, including IllAP. The $1 e g x - 9 2

and stranded cost ree<wery. The PUC is currently 1 studying these issues and will be submitting its findings to the Texas Irgislature before the 1997 session. Ill continues to work aggressively with Congress, the Texas Legislature and the PUC to ensure that the transition to a more competitive electric industry occurs in a manner that is fair to 7g g. __ ~ # the c<nnpany's shareholders and customers. ~ f.[ Position Among Peers Favorable less than one percent of lilhP's revenue is currently derived fnun wholesale business. c Consequently, the opening of the wholesale mar-ket presents new opportunities and minimal threats for IllhP. While no need for new gener-ating capacity is expected until after the year 2000, HL&P's San Jacinto Steam Electric Station supplies steam to the the state legislation passed in 1995 frees the com. E.1. du Pont de Nemours chemical complex (background). pany to compete for existing wholesale transac-IllAP's San Jacinto Steam Electric Station, tions in Texas. the first utility-owned cogeneration facility in !II AP's electric rates emnpare favorably with Texas, began emnmercial (rperation in June 1995, the rates of other U.S. utilities. The emnpany's on schedule and within budget. The plant repre-1995 system-average rate, an average of the dif-sents a unique alliance with a major industrial cus-ferent rates charged to various customer classes, tomer that considered leasing the lithP system was 5.8 cents per kilowatt-hour, well below the to self-generate. Ill AP built the plant as an effi-national average of 6.9 eents, cient alternative to serve the customer's steam Ill A P's 1995 residential rates, after adjusting needs and produce low-cost electricity for all for inflation, have fallen by abnost 30 percent lil AP customers. since peaking in 19'i3, and households are spend-ing less of their budget on electricity than in any Revenue Retention And Growth year since 1976. A strong Ilouston economy continues to con-Similarly, industrial rates are low. The emn-tnhute to lil AP revenue. In 1995, the city regis-t' pany's 1995 average industrial rate,3.8 cents per tered its best year for employment growth since kilowatt-hour, was very emnpetitive emnpared 1990, adding over 50 000 jobs for a 2.7 percent with other regional utilities, and lilAP has the increase. pricing flexibility to negotiate discounted rates A resiew of business sectors indicates that with customers who have a omnpetitive alternative I f ouston's largest industry, the oil and gas sector, is such as cogeneration. expanding. In exploration and production, tech-s

hegan offering senice in 1995 under two new f flexible pricing options. A new industrial rate, Special Contract Pricing, is based on niarginal costs and allows lilAP to negotiate with large industrial custoiners that have econontical alter. inative sonrees of electric power. An experinnental time-of-use rate, Variable Energy Pricing, is f, available for residential customers and allows thern to shift electrical usage from peak' to "off-peak" time periods and take advantage of pricing differentials. in February 1996, IllAP sought approval for a real-time pricing rate, also hased on marginal e Costs, for coininercial alid industrial custoiners. Ilondy pricing intbrmation will he transmitted to these enstomers one day in advance, allowing them to optimize electrical usage by planning pro-duction or process operations around low-mst e energv penods. An electrified Houston skyline includes Houston industries Plaza. second from right. the hcIlefits of electric cool storage systents, a nology has spurred development of oil and gas cost-efficient solution Ihr large conunercial busi-fields in the Gnif of Niexico, once too deep to drill nesses considering the switch to gas-powered een-economically. Demand Ihr off-shore rigs has tral air conditioning. Since 1990,110 lII AP ens-strengthened, and oil-and gas-ficht senice firms tomers have installed electric cool storage sys-are heginning to see the hellellts. During off-peak hours, electric cool storage thermal tanks cool and store water for air conditioning during warm, high-peak hours. During 1993. the company completed devel-opment of a flve-year strategic marketing plan to MM h, 3** g

s hetter meet the changing needs of_ retail ens-p.

ys tomers in an increasingly competitive environ-p. g ment. The plan resulted in stronger " key account i. / management" of large connnercial and industrial customers, expanded research and market seg- / r Inentation initiatives, aini the development of new / products alul senices to support revenne reten- - j tion and reveinte growth ohjectises. With a renewed focus on profitability, vahle-g added senices and market-based pricing. til AP 1 4

teins, including the systein which cools the new ~ ' " N m. headquarters of 111 and its subsidiaries. lilAP has inaintained a 100 percent success rate in %==._,. = retaining "at-risk" conunercial facilities which ] v-u; a. u hase considered the gas-cooling option. ._4 During 1995, two ruajor energy emnpanies with pipeline facility expansions in the llouston area chose electric-driven coinpressors over gas engine dris es. which will increase 11I A P hase rev-enue by approxiinately $1.5 million per year. A task force working to promote this elce-t rotech nology, annong others, has identilled a inarket potential of an additional 90 megawatts i ~ annong 14 flouston-area pipeline companies that s 9 operate 22 coinpression stations and 225 gas-K g., powered engines. For this effort - convincing pipeline com-panies of the benellts, prosiding techeical assis-h' tance to motor manufacturers and facilities engi- ' r M~, 4 als.- '_ . ~, neers, and creating a utility industry educational A bill payment center at a Houston-area grocery store is one of fonnu - IllAP has earned recognition for mar-

'e than 22s serving HLap customers.

keting innovation from the Electrie Power energy and energy senices, Ill AP is concentrat-Ilescarch Institute as the 1995 End-Use Product ing on senice and value. Employee teams are Champion. lil AP has also begun similar initia-engaged in efficiency initiatives that involve the tives for electrotechnology applications in the redesign of work processes. streamlining senices petrochemical, health care and municipal market and controlling supply costs. segments. For example, by the end of 1995, lith P had in addition to its success in attracting and installed over 225 computerized hill payment ter-retaining revenue in 1995, Ill AP tapped a new minals, principally at area grocery stores, which revenue source flowing from competition in the prmide senices previously available at only (hur-wholesale power market in Texas. The company teen lilAP h> cations. These additional terminals began selling energy dispatch senices to whole-are not only convenient for customers, but have sale electric suppliers, generating approximately allowed the company to phase out an expensive $1 inillion in new revenue. bill-collection process for a savings of approxi-mately $2 million per year. Managing Costs, Adding Value The collections phase-out is part of the senice To make the transition frmn a traditional reg-response and customer billing initiative. In this ulated utility to a highly competitive provider of effort, employee teams restructured the work flow 1 5

- -.. - _ _ ~. - - s j imuhed in the design and constmetion of new expected to extend the life of the gas turbines by electric senice facilities, the execution of senice approximately twenty years. Two additional tur-orders and the billing of customers. The resulting bines at the Wharton plant are undergoing similar changes have consolidated several job functions, modifications due to be completed in 1997. enabling 1,280 emph>yees to do the work presious-Alliances with major suppliers are resulting in ly handkxl by 1,500 emph yees. Supporting this ini-innovative approaches to purchasing and imentory \\ tiative will be mobile data technok>gy that will allow management that reduce supply msts. For example, field persormel to receive customer senice orders a long-term contract for turbine parts, negotiated and transmit meter data back to the company, all with Westinghouse in 1995,is expected to result in from remote h> cations, savings of approximately $1.5 million per year. As a result of an initiative begim in 1993, six twenty-year-ohl gas turbines have been m(xlified at Rewarding Achievement the T.ll. Wharton plant, and the company and its To reward employees who are helping to customers are reaping multiple benellts. During achieve IIL&P's goals, a new Incentive Compensa-1995, the modified turbines operated with a fuel tion Program is being implemented for all non-bar-efficiency that exceeded the manufacturer's per-gaining unit employees. The pmgram establishes a formance guarantee while reducing nitrous oxide closer link between employee pay and the achieve-1 emissions by more than 50 percent. In addition, ment of business results. The first potential payout the operating time between required maintenance in early 1997 will be based on 1996 performance in j inspections has doubled, and the modifications are achieving selected coqmrate goals. Under a supply alliance. HL8.P and Westinghouse personnel jointly plan the material requirements to support the scheduled outage of d P.H. Robinson Power Plant Unit 4. 'H^ .I i 'A .+4 A.. 1)j '!F ~, i ,. g g c ;y \\ g. J k ~ l ~ j .f; ,e i (

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f/ '{ 9 v-3 , // . I. n.... -. I.. NE M V E ..r.,, HL&P mechankal craftsrnen instaH casing in modification of a gas turbine at T.H. Wharton Unit 3. Serving The Community was awarded the Outstanding Philanthropic For (nvr 100 years, seniw has been central to Organization Award by the National Society of the IllAP mission. In that tmdition, the ecunpany Fund llaising Executives, the Outstanding sponsors ongoing prognuns that mobilize IllAP Leadership in Education Award by the Greater stakeholders to prrnide assistance to the community. Ilouston Partnership, and the Founder's Award One such program is SilAllE, which co n-and the James II. Galloway Award for outstand-bines contributions from filAP customers and ing corporate and civic concern for the Greater 111 shareholders to help 12,000 low-income, Ilouston area by the YMCA. elderly and disabled customers pay their electric bills each month. Since its inception in 1983, Satisfaction Builds Loyalty SilAllE has contributed almost $15 million. IIIAP's greatest reward comes from satisfied Through IllAP's vohmteer program, employees customers, and through the years, customers have gave 50,000 hours of personal time in community given the company high ratings. The results of the senice in 1995. In addition, llIAP had the largest 1995 Customer Value Index, an annual survey of corporate bhxxl donor program in the llouston residential customers conducted by an indepen-area. Dming the 1995 heat wave, llIAP dis-dent research firm, show that the tradition contin-tributed 5,000 hox fans to low-income, elderly and nes. IllhP received its highest overall score since disabled customers who had no air conditioning. the index was established in 1993 to measure For these and other cisie activities, IIL&P achievement of seniee goals. 1 7

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3HildiHg ' l .a IH JH12fl2HC2 ~ Since formingin 1993, Ilouston Industries Energylias harnessed the electrie util-ity experience ofIlouston Industries to pursue long-terni growth opportunities in foreign markets, concentrating its resources in Latin America, South Central Asia and Europe. A Changing Global Market changed. Privatization, or the sale of government-At the close of 1995, llouston Industries owini electric utility assets to private investors, Energy, Inc. (Ill Energv) was developing, has exceeded expectations in the quality and num-operating or managing projects on three conti-ber of olTers during 1995. This accelerated activity nents. The company is developing a coke calcining is expected to continue through 1996. plant in India, developing a cogeneration facility In contrast, opportunities to develop " green-and operating electric utility systems in Argentina, field" projects, or those requiring construction of and operating a cogeneration facility under con-new generating capacity, have been delayed in tract for an oil refinery near llouston. countries like China, India and Mexico, where During 1995, competition in the internation-political change and economic conditions have al power market increased substantially. The slowed progress. 8 acceleration of privatization lured several large Ilowever, these opportunities are expected international energy companies and foreign util-to re-emerge during 1996 and 1997, as the gov-ities into the bidding, while many smaller firms, enunents of countries such as India learn that prominent in the 19 sos, found capital unavail-the failure to move forward impedes economic able and exited. development. The mix of available opportunities has also As a result, Ill Energy will continue to focus I l l

l T 9 ~ 4. 1 g E 'I ' )I ',, hl. [ r [ ~' ,? f.. y P*eumes .a, 'L. yn a HI Energy operates $ hell OJ Company's Deer Park togeneration facihty, which supphes steam to Shell's rnanufactunng cornplex (background). resources in latin America. Europe and Asia on partners, the lleddy group of India ami Applied both tyims of opportunities. Industrial Materials Corporation, a U.S. petmleum coke marketer. The consortium has secured New Developments financing for a portion of the debt required to In March 1995, III Energy began connnercial develop the project through the International operation of a 160-megawatt cogeneration facility Finance Corporation, a Worhl llank affiliate, and <mned by Shell Oil Company at Shell's Deer Park the Industrial Development llank of India. This manufacturing complex near llouston. The com-year, shares representing a minority interest in the pany is operating and maintaining the cogenera-project will be sold to the Indian public through tion facihty for Shell under a performance con-an initial public offering. tract based on operating reliability. The power generation facility will sell its net At the end of the year,111 Energy had ach.s electrical output to industrial customers in the reliability factors which exceeded the op'imum per-region. The calcining plant is designed to produce formance calhxl for in the contract. Prior to operat-calcined petroleum coke, used primarily to make ing the Shell facility, III Energy had supenised carbon anodes for aluminum smelters. India is a design and construction of the plant. major producer and consmner of aluminum. 111 Energy is developing and will have a 20 In December 1995, construction of the Ford percent equity interest in the Itain Calcining Ileights waste tire-to-energy project in Ford a Project, a $94 milliou petroleum coke calcining IIcights, Illinois was completed. III Energy has plant and an associated power generation facili-an equity interest in the Foni lleights project and ty in Visakhapatnam in the state of Andhra is a subordinated lender to Ford lleights and Pradesh, India. another waste tire-to-energv project planned in With a 20 penent equity interest in the pro-nearby Fulton. Illinois. The Ford lleights plant ject, III Energy will be joined by two primary was scheduled for conunercial operation in May 2 0

1996. Ilowever, due to repeal of an Illinois law on prior to the III irwestment. March 14,1996, that provided an economic To enhance prafitability, EDELAP negotiated incentive for the development of such facilities, to take over maintenanw of La Plata's street lighting operation of the Ford IIcights plant and develop-system under a contract that has added approxi-inent of the Fulton project have been jeopar-mately $2 million to EDELAP's bottom line. dized. The Fon! Ileights and Fulton investors, In early 1995, lil Energy acquired a Eperwnt .s, including III Energy, are currently involved in lit. interest in a second Argentine ek etric utility system, igation related to the constitutionality of the EDESE, sening 100,000 customers in the Santiago

repeal, del Estero Pnnince in mral North Central Argentina.

'Ihe armaining 10 pertent is own x1 by the system's Building On Argentine Operations empk res. Since assuming control. III Energy has 3 During 1995, III Energy added a greenfield begim impnning the system's operations and techni-project to its growing Argentine operations. The cal perfonnanm, applying many of the pmetiws that company was selected to develop a cogeneration have been sucmssful at EDELAP. plant which will supply approximately 300 metric Other Argentine provinces, including the tons of steam per hour to the General Manuel Provinces of Buenos Aires, Santa Fe and Mendoza, Savio Steel Mill k>cated near San Nicolas, north-are expected to follow Santiago del Estero in pri-west of Buenos Aires. The 160-megawatt facility vatizing electric infrastructure. will sell eh etricity to the Argentine electric grid. The nroiect is under construction and sched-HI Energy currently has projects under management or in devel. a J opment in three locations in Argentina. uled to begin commercial operation in the fourth quarter of 1997. III Energy is already pnniding operations and maintenance senices at an existing power plant at the mill. The EDELAP distribution system and Dique generating plant, in which III Energy hohls a 17 percent indirect ownership interest, was llouston Industries' first foreign acquisition. The system serves 240,000 customers in the industrial city of La Plata, Argentina. Since assuming management of operations in delfste 1993, III Energy and its Argentine partner, Techint San N. CompaMa Tecnica InternaNoo 1 S.A.C.I., have m NOS AIRES applied their operating experience and kical busi-N ness knowkxlge to tnmsfonn the system into a pmf-f[ itable company pnniding reliable ehrtric senice. Non-technical energy losses in 1995 were reduced to 4.6 percent, mmpared to losses of 20 penent 2 1

COC300000 FIOAOCIAL 5TATEM0070 OF THQ CCMPAOY The financial information presented on pages 22 through 28 regarding llouston Industries incorimrated and its subsidiaries is condensed and shouhl be read in conjunction with the emnpany's and lil Al"s complete Financial Statements (including notes) as well as Alanagement's Discussion on! Analysis of Financial Comlition and liesults of Operations, which are presented in Appendix A to the 1996 ' a tement. Imestors may also request, with-a out charge, the company's and IllAl"s Annual lleport on For r the year ended December 31,1995 by writing or calling III Investor Senices. Address and contact i m he found on the inside back cover of this report. CONDENSED FIWE VEAR COMPARSSON OF \\- SELECTED FINANCIAL DATA IloesToN INocsTairs INconron4Trn ann Sussmi Auers The following table sets forth selected financial data with respect to the company's consolidated financial condi-tion and results of consolidated operations and shouhl he read in conjunction with the companfs Consolidated and lilAP's Financial Statements and the related notes in Appendix A of the 1996 Proxy Statement. On July 6, 1995, the company closed the sale ofits cable television operations The operations of Kill.COh! hae been accounted for as disc <mtinued operations. (T40USAND5 OF DOLLAR 5. EXCEPT PER 5 HARE AMOUNTS) YEAR ENDFD DECEMBER 31, 1995 1991 1993 1992 1991 llevenues $ 3,730,173 $ 3,754,136 $ 4,0S3,655 $ 3,657,932 $ 3,707.605 Income from continuing operations before cumulative effect of change in accounting" $ 397,400 $ 423,9S5 $ 410,531 $ 370,031 $ 4%1,275 Inss from discontinued operations (16,524) (24,495) (29.514) (67,521) Gain on sale of cable television subsidiary 708,124 Cumulative effect of change in accounting * (8,200) 91,180 Net income'" $ 1,105,524 $ 399,261 $ 416,036 $ 431,667 $ 416,754 Earnings per common share *- Continuing operations before cumulative effi et of change in accounting" 1.60 $ 1.72 $ 1.69 $ 1.43 $ 1.88 Gain on sale of cable television subsidiary 2.86 Discontinued operations (.07) ( 09) (.]1) (.26) Cumulative effiet of change in accounting * (.03) .36 Earnings per common share'" 4.46 $ 1.62 $ 1.60 $ 1.6s $ 1.62 Cash dividends declared per common share" 1.50 $ 1.50 $ !.875 $ 1.19 $ 1.4s Dividend payout ratio from continuing operations 94 % 879 699 1019 79 9 Ileturn on average emnmon equitv* 29.1 % 11.99 12.69 1349 12 79 Ilatio of earnings from continuing operations to fixed charges before cumulative efli et of change in accounting 2.71 2.89 2 Th 2.29 2.55 At year-end: ik>ok value per common share '"' 16.61 $ 13.64 $ 12.53 $ 126s $ 12.4% a hf arket price per common share

24.25 $

17.62 $ 23.82 $ 22.91 $ 22.13 hlarket price as a percent oflxxik value* 146 % 1319-1909 1819 1779 2 2

YEAR ENDED DECEMBER 31, 1995 1994 1993 1992 1991 At year-end: Total assets of continuing operations $ 11,819,606 $ 10,784,095 $ 10,867,58) $ 11,075,897 $ 10,820,562 Net assets of discontinued operations 618,982-487,026 231,252 170,718 Total assets $ 11,819,606 $ 11,403,077 $ 11,354,607 $ 11,307,149 $ 10,991,280 leng-term obligations including current maturities - continuing operations * $ 3,768,928 $ 3,905,518 $ 3,950,576 $ 4,244,077 $ 4,488,628 j. Iong-term obligations including current maturities included in net assets of discontinued operations 504,580 514,964 740,453 813,203 Capitalization from continuing operations: Common stock equity 50 % 44 % 43% 42% 41 % Cumulative preferred stock oflilAP (including current maturities) 5% 7% 7% 7% 6% long-term debt (including current maturities) 45 % 49% 50% 51% 53 % Capital expenditures: Electric capital and nuclear fuel expenditures (excluding AFUDC)'7) $ 296,635 $ 412,899 $ 329,016 $ 337,082 $ 365,486 Cable television additions and other ubla-related investments - discontinued 47,601 84,071 61,856 45,233 26,624 Corporate headquarters expenditures (excluding capitalized interest)m 89,627 44,250 - 26,034 Non-regulated electric power project expenditures and advances 38,278 7,087 35,796 1,625 HL&P selected data: llatio of earnings to fixed charges before cumulative effect of change in accounting 3.75 3.80 3.40 2.73 2.97 Ilatio of carnings to fixed charges and preferred dividend requirements before cumulative effect of change in accounting 3.20 3.20 2.90 2.34 2.53 Percent of capital expenditures financed internally from operatjons 110 % 216 % 158 % - 137% 126 % . (1) The mmpany adopted Statement of Position (SOP) 93 6," Employers' Accounting for Empkwee Stock Ownership Plans," effective January 1, 1994, which had the effect of reducing net incume while increasing earnings per share. See also Notes Ifg) and 9th) to the Financial Statements in Appendix A of the Proxy Statement. SOP 93-6 is effective only with respect to Gnancial statements for periods after January 1,1994. and no restatement was perinitted for prior periods.~ (2) The 1994 cumulative elTect relates to the change in aconmting for postemphwment benents. See also Note 9(d) to the Financial Statements in Appendix A of the Proxy Statement. The 1992 cumulative efTect relates to the change in acmunting for revenues. (3) All common share data reded a two-for.one cun.mtm stock dividend distribution in December 1995. (4) Year emled December 31,1993 includes (ke quarterly dividends of S.375 per share due to a < hange in the timing of the mmpany's Board of Directors' detlaration of dwidends. Disidend payout was $1.50 per share for 1993. See also Note 5(b) to the Financial Statements in Appendix A of the Proxy Statement. (5) The return on aserage common equity for 1995 includes the gain on the sale of the company's cable TV subsidiary. The return on average com-mon equity escludmg the gain was 11.64. (6) Includes Cumulative Preferred stock subject to mandatory re demption. 8 (7) During 1995, llLAP made a payment toward the purchase of an ownership interest in the corporate headquarters buildmg. Such payment is not renected in the company's electric capital and nuclear fuel espenditures as it is an affidiate transaction eliminated upon conmlidation. t aa

COOOOOOOO OTCTOM00TO OF COOOOLI@AT00 IOCOMO Ilousros INnusTairs INeonronann ann sensinianirs (THOUSANDS oF DOLLARS, ExCEPT PER SHARE AMOUNT 5) YE AR ENDED DECEMBER 31, 1995 1994 1993 Revenues: Electric utility $ 3,680,297 $ 3,746,085 $ 4,079,863 Other 49,876 8,051 3,792 'li>tal 3,730,173 3,754,136 4,083,655 ,s. Expenses: Electric utility: Fuel 879,148 860,936 1,063,050 Purchased power 233,494 408,963 515,502 Operation and maintenance 866,170 828,748 898,535 Tases other than income taxes 245,890 251,421 211,295 Depreciation and amortization 478,034 399,341 386,893 Other operating expenses 122,504 36,112 27,234 Total 2,825,240 2,785,521 3,102,509 Operating income 904,933 968,615 981,146 Other income (Expense): Allowance for other funds used during construction 7,760 4,115 3,512 Time Warner disidend income 20,132 Interest income 9,774 6,628 33,357 Other - net (19,304) (6,350) 1,678 Total 18,362 4,393 38,547 Interest and Other Charges: Interest on long-term debt 279,491 265,494 304,462 Other interest 21,586 25,076 15,145 Allowance for lorrowed funds used during construction (4,692) (5,554) (3,781) Preferred disidends of subsidiary 29,955 33,583 34,473 Total 326,340 318,599 350,299 income from Continuing Operations Before income Taxes and Cumulative Effect of Change in Accounting 596,955 654,409 669,394 income Tzxes 199,555 230,424 228,863 income from Continuing Operations Before Cumulative Effect of Change in Accounting 397,400 423,985 440,531 Discontinued Operations (Net of income Taxes): Gain on sale of cable telesision subsidiary 708.124 loss from discontinued cable telesision operations (16,524) (24,495) Income Before Cumulative Effect of Change in Accounting 1,105,524 407,461 416.036 Cumulative Effect of Change in Accounting for f Postemployment Benefits (Net of income Taxes of $4,415) (8,200) Net income $ 1,105,524 $ 399,261 $ 416,036 1 Earnings Per Common Share: Continuing Operations Before Cumulative Effect of Change in Accounting 5 1.60 1.72 1.69 Discontinued Operations: Gain on sale of cable telesision snbsidiary 2.86 Iass from discontinued cable telesision operations (.07) (.09) Cuinulative Effvt of Change in Accounting for Postemployment Benefits (.03) Earnings Per Commo,i Share 4,46 1.62 1.60 Weighted Average Common Shares Outstanding (000) 247,706 245,707 260,008 See Notes to Consolidated Financial Statements in Appendix A of the Proxy Statement. a4

COOOOOOOO OTATOMCOTO OF COOOOLIGA700 CETAICOD GAGOIOGD floestow Isorsinits IsconronanD AND SOB 51Dl4 HIES (THOUSAND5 OF DOLLARS, EXCEPT PER SHARE AMOUNTS) YEAR ENDED DECEMs!t 31, 1995 1994 1993 llalance at fleginning of Year $ 1,221,221 $ 1,191,230 $ 1,254,584 Add - Net income 1,105,524 399,261 416,036 Total 2,326,745 1,590,491 1,670,620 .p* Cominon Stock Dividends: 1995, $1.50; 1994, $l.50: 1993, $1.875 (per sliare) (371,760) (369,270) (487,927) Stock Dividend Distribution (1.313) Tax lienefit of ESOP Dividends 8,939 Hedernption of IllhP Preferred Stock (402) llalance at End of Year $ 1,953,672 $ 1,221,221 $ 1,191,230 See Notes to Consolidated Financial Statements in Appendix A of tlie Proxy Statement. 4 2 5

COCOOOOOD COOOOLISATE@ OALAOCO OHEETO IloUsToN ] N DUSTHIE S INCoR roR AT E D A N D S U B 51DI A RIE S (THOUSANDS OF DOLLARS) DECEMBER 31, 1995 1994 ASSETS Property, Plant and Equipment-At Cost: Electric plant: 1 Prmluction 5 7,423,891 $ 7,221,142

s Transmission 927,027 876,159 Distribution 2,711,482 2,628,450 General 1,027,090 1,017,319 Construction work in progress 320,040 333,180 Nuclear fuel 217,604 212,795 Plant held for future use 48,631 201,741 Electric plant acquisition adjustments 3,166 Other property 105,624 85,529 Total 12,781,389 12,579,481 less accumulated depreciation and amortization 3,916,540 3,527,598 Property, plant and equipinent - net 8,864,849 9,051,883 Current Assets:

Cash and cash equivalents 11,779 10,443 Special deposits 433 10 Accounts receivable - net 39,635 13,981 Accrued unbilled revenues 59,017 38,372 ' lime Warner dividends receivable 10,313 Fuel stock 59,699 56,711 Materials and supplies, at average cost 138,007 148,007 Prepayments 18,562 14,39S Total current assets 337,445 281,922 Other Assets: Investment in Time Warner securities 1,027,875 Net assets of discontinued cable television operations 618,0s2 Deferred plant costs - net 613,134 638,917 Deferred debits 317,215 271,454 Unamortized debt expense and premium on reacquired debt 161,788 161,885 liegulatory tax asset - net 228,587 235,463 Recoverable project costs - net 232,775 9S,954 Equity investments in and advances to foreign and non-regulated affiliates - net 35,938 43,617 Total other assets 2,617,312 2,069,272 Total $ 11,819,606 $ 11,403,077 See Notes to Consolidated Financial Statements in Appendix A of the Proxy Statement. ~ ae

COCOEC00@ COCOOLIOA700 DALAOCE CHODTS IloosToN IN orsT ru ts I N eon PoH AT E' D A N D SU B51DI A HIE S (THOU$ ANDS OF DOLLAlt$) D E C E M 8 E., 31, 1995 1994 CAPITAllZATION AND LIABILITIES Capitalization: Common stock equity: Common stock, no par; authorized,400,000,000 shares: 2 issued,262,672,468 and 262,593,326 shares at / December 31,1995 and 1994, nespectively 5 2,441,790 $ 2,437,638 Unearned ESOP shares, 14,355,758 and 15,540,626 shares at December 31,1995 and 1994, respectis ely (268,405) (289,611) lletained earnings 1,953,672 1,221,221 Unrealized loss on investment in Time Warner emmnon securities (3,494) Total emnmon stock equity 4,123,563 3,369,24S Preference stock, no par; authorized, 10,000,000 shares; none outstanding Cumulative preiened stock of subsidiary: Not subject to mandatory redemption 351,345 351,345 Subject to mandatory redemption 51,055 121,910 Total cumulative preferred stock 402,400 473,255 long-term debt 3,338,422 3,734,133 Total capitalization 7,864,385 7,576,636 Current Liabilities: Notes payable 6,300 423,291 Accounts payable 136,008 159,225 Taxes accrued 174,925 169,690 Interest accrued 79,380 73,527 Dividends declared 98,502 9S,469 Accrued liabilities to municipahties 20,773 21,307 Customer deposits 61,582 64,905 Current portion oflong-term debt and preferred stock 379,451 49,475 Other 58,664 64,026 Total current liabilities 1,015,585 1,123,915 Deferred Credits: Accumulated deferred income taxes 2,067,246 1,763,230 Unamortized investment tax credit 392,153 411,5SO Fuel-related credits 122,063 242,912 Other 358,174 284,804 Total deferred credits 2,939,636 2,702,526 Cemmitments and Contingencies Total 5 11,819,506 $ 11,403,077 See Notes to Consolidated Financial Statements in Appendix A of the Proxy Statement. t 2 7

CCCD000EB D T A T O IWB O D T O @F COOOOLIOA703 CAOH FLOWS IOCODA00 (00CQEAGG) 10 CA5H AG@ CADH UQGIWALUC70 lloUbToN IN D U sT RIF S INCoH PoH 4T F n A N D S UllslDf A HIE 8 (THOUSANDS OF DOLLARS) YE AR ENDED DECEMBER 31, 1995 1994 1993 Cash Flows from Operating Activities: Income from continuing operations 5 397,400 $ 423,985 $ 440,531 Adjustments to reconcile income from continuing operations to net cash r prmided by operating actisities: Depreciation and amortization 478,034 399,341 386,893 Amortization of nuclear fuel 28,545 21,561 2,101 Deferred inemne taxes 78,382 85,547 194,711 Investment tax enslits (19,427) (19,416) (19,797) Allowance for other funds used during construction (7,760) (4,115) (3,512) Fuel refund (189,571) Fuel cost over (under) recovery '/6,970 277,940 (91,663) llegulatory tax asset - net 6,876 11,300 (69,337) Net cash prmided by (used in) discontinued cable telesision operations 16,391 19,349 (1,073) Changes in other assets and liabilities: Accounts receivable - net (46,299) (19,295) 302,268 Inventory 7,012 14.273 13,868 Other current assets (14,900) 14,710 (15,138) Accounts payable (23,217) (45,081) (7,962) Interest and taxes accrued 11,088 (17,979) (16,689) Other current liabilities (9,215) (5,102) 41,430 Other - net 49,129 48,254 52,609 Net cash provided by operating activities 839,438 1,205,272 1,209,040 Cash Flows from Investing Activities: Electric capital and nuclear fuel expenditures (including allowance for lorrowed funds used during construction) (301,327; (418,453) (332,797) Non-regulated electric power project expenditures and advances (38,278) (7,087) (35,796) Settlement of subsidiary debt in connection with sale of cable telesision subsidiary 619,345 Corporate headquarters expenditures (including capitalized interest) (96,469) (46,829) (26,034) Net cash used in discontinued cable television operations (47,601) (84,071) (61,856) Other - net (10,743) (13,562) (5,295) Net cash provided by (used in) investing activities 124,927 (570,002) (461,778) Cash Flows from Financing Activities: Proceeds from common stock $ 52,638 Proceeds from first inortgage bonds $ 142,972 840,427 4 Payment of matured first mortgage bonds $ (19,500) (136,000) Payment of common stock dividends (371,731) (368,790) (389,933) Iledemption of preferred stock (91,400) (20,000) (40,000) Increase (decrease) in notes pavable (416,991) (168,094) 27,136 Extinguishment oflong-term d' bt (195,224) (995,7511 e Net cash used in discontinued cable television operations (40,798) (68,184) (225,489) Other - net 10,143 4,857 65,277 Net cash used in fmancing activities (963,029) (639,711) (801,695) S Net Increase (Decrease) in Cash and Cash Equivalents 1,336 (4,441) (54,433) Cash and Cash Equivalents at Beginning of Year 10,443 14,8s4 69,317 Cash and Cash Equivalents at End of Year 5 11,779 10,443 14,884 Supplemental Disclosure of Cash Flow Information: Cash Payments: ~ Interest (net of amounts capitalized) $ 342,551 $ 366,548 $ 397,911 Income taxes 104,228 174,657 123,975 l l See Notes to Consolidated Financial Statements in Appendix A of the Prmy Statement. l l ae

ICCCPOCOOCT ACOI7000' OOPOOT llouston Industries Incorporated: We have audited the consolidaied balance sheets and the consolidated statements of capitalization of Ilouston Industries incorporated and subsidiaries as of December 31,1995 and 1994 and the related statements of consoli-dated inc<nne, consolidated retained earnings, and consolidated cash flows for each of the three years in the period ended December 31,1995. Such consolidated financial statements and our report thereon dated February 29, 1996 (N1 arch 26,1996 as to Note 4 regarding the purported repeal of the Illinois lietail llate Law), expressing an f* unqualified opinion and including an explanatory paragraph regarding the changes in methods of accounting in 1994 for the Employee Stock Ownership Plan and postemployment benefits (which are not included herein) are included in Appendix A to the Proxy Statement for the 1996 Annual hlecting of Sharehoklers. The accompanying condensed consolidated financial statements are the responsibility of the company's management. Our responsibil-ity is to express an opinion on such condensed consolidated financial statements in relation to the complete con-sohdated financial statements. In our opinion, the information set forth in the accompanying condensed consolidated balance sheets as of December 31,1995 and 1994, and the related condensed statements of consolidated income, consolidated retained earnings and consolidated cash flows for each of the three years in the period ended December 31,1995, is fairly stated in all material respects in relation to the basic consolidated financial statements from which it has been derived. &l LLb DELOITTE & TOUCllE LLP O Ilouston, Texas February 29,1996 h i 2 9

DOLOCTED OPEQATICO OTAT10 TICS OF MLOP lloe5 ton I N D ti s T H I E S INColt roH ATE D A N D S U B %lDl4 RIE S YE AR ENDED DFCEMBER 31, 1995 1994 1993 Electric Energy Generated and Purchased (MWH): Generated - Net Station Output 53,447,128 53,894,994 52,939,551 Purchased 10,452,818 10,107,449 11,113,971 Net Interchange (1,488) (1,018) (282) Total 63,898,458 64,001,425 64,053,240 Company Use, lest and Unaccounted for Energy (2,822,876) (2,678Ji29) (2,903,750) Total Energy Sold 61,075,582 61,322,79(i 61,149,460 Electric Sales (MWH): llesidential 18,103,209 17,194,724 16,953/i67 Commercial 14,233,413 13fi31,3Sl 13,083,391 1ndustrial 23,667,433 24,478,490 24fi86,782 Street I,ighting - Government and hiunicipal 117,253 116,643 112,914 Total Firm lletail Sales 56,121,308 55,421,238 54,836,754 Other Electric Utilities 169,750 167,286 223,2(M Total Firm Sales 56,291,058 55,588,524 55,059,958 Interruptible 4,093,385 5,027,743 5,748,086 Off-System 691,139 706,529 341,41(i Total 61,075,582 61,322,796 61,149,460 Number of Customers (End of Period): llesidential 1,327,168 1,301,074 1,278,774 Commercial 175,998 170,959 1(i8,284 Industrial (including Interruptible) 1,670 1fiTO 1,706 Street lj hting-Government and Municipal 82 81 82 g Other Electrie Utilities (including Off-System) 11 11 12 Total 1,504,929 1,473,795 1,448,858 Operating Revenue (Thousands of Dollars): Hesidential 5 1,471,702 $ 1,5Sfi,074 $ 1,578,175 Commercial 923,223 1,029.104 994,461 Industrial 996,108 1,184,571 1,190,917 Street lj hting - Government and Municipal 20,679 25.902 24,258 g Total Electric llevenue - Firm Hetail Sales 3,411,712 3.825fi31 3,787,811 Other Electric Utilities 22,207 25,669 2(i,154 Total Electric Hevenue - Firm Sales 3,433,919 3,851,320 3,813,965 Interruptible 81,707 10s,730 135,066 Off-system 12,250 13,691 7,3 '3 Total Eh etric Hevenue 3,527,876 3,9 5,741 3,956,344 Miscellaneous Electric Hevenues 152,421 (227,656) 123,519 3 Total $ 3,680,297 $ 3,746,085 $ 4,079,863 1 installed Net Generating Capability (KW)(End of Period) 13,921,370 13,666fH)0 13 fit 9,000 Cost of Fuel (Cents per Million 8tu): Gas 168.5 189.8 221.4 Coal ' 202.5 159.0 199.fi ljgnite 124.8 110.8 122.1 Nuclear 58.7 57.4 59.6 Average 159.5 153.6 195.2 (li The nnt of cual for IW4 nhts the nwipt of alynnimately $fi6 I milh,m n lated to the ule of certain railm,ul nettlement payments. See Note 14 to the Fin,mrial % aten,entsin Appemhs A nithe Pnay 5tatement. 3 0

Bd@@ST@C IQDOSTQlEO I C C C G3 P @ Q A T E D DIRECTORS Atilton Carroll Linnet F. Deily lloward W. Ilorne Alexander F. Schilt, 45, Chainnan, President 50, Clutirman, Chief 69, Vice Chainnan of Ph.D. and Chief Executive Executive Officer and Cuslunan & Wakefield of 55, Fonner Chancellor. Officer ofInstnunent President of First Texas, Inc., lionston, University of flouston Products, Inc., llouston, Interstate Bank of Texas, Texas, director since 1978. System, llouston, Texas, Texas, director since N.A., lionston, Texas, director since 1992. 2

1992, director since 1993.

Don D. Jordan / 63, Chainnan and Chief Kenneth L. Schnitzer, Sr. John T. Cater Joseph Al. IIendrie, Executive Offleer of the 66, Chainnan of the 60, Chainnan, Chief Ph.D.* Company, llouston, Board of Schnitzer Executive Officer md 71, Consulting Engineer, Texas, director since Enterprises, Inc., Director of River Oaks Hellport, New York, 1977. Ilouston, Texas, director Trust Company, llouston, director since 1985. since 19S3. Texas, director since H. Steve Lethetter 1983. Lee W. Ilogan 48, President and Chief Jack T. Trotter 51, President and Chief Operating Officer of 69, Private Investor, Hohert J. Cruikshank Operating Officer of Ilouston Lighting & llouston, Texas, director 65, Private Investor and Ilouston Industries Power Company and since 1955. Hetired Senior Partner Energy, Inc. and Senior Senior Vice President of with Deloitte & Touche, Vice President of the the Company, director Hertram Wolfe, Ph.D. Ilouston, Texas, director Company, director since since 1995. 68, Hetired Vice since 1993. 1995. President and General hianager, General Electrie, Nuclear San Jose, California, director since 1993.

Dr. llendrie is expected to retire from the Board of Directors at the 1996 Annual hlecting of Shareholders.

OFFICERS Don D. Jordan Stephen W. Naeve Alaiy P. Hieciardello Ilichard H. Dauphin 63, Chainnan and Chief 48, Senior Vice President 40, Vice President and 42, Assistant Corporate Executise Officer and Chief Financial Comptroller Secretary Officer lee W.Ilogan llufus S. Scott Gretchen 11. Denum 51, Senior Vice President William A. Cn>pper 52, Deputy General 41, Assistant Corporate 56, Vice President and Counsel and Assistant Secretary llugh Rice Kelly Treasurer Corporate Secretary ( 53, Senior Vice Linda Geiger President, General Susan D. Fabre Christian Schley 36, Assistant Treasurer Counsel and Corporate 40, Vice President - 47, Associate General Secretary limnan Resources Counsel and Assistant Hobert E. Smith Corporate Secretary 51, Assistant Corporate H. Steve lethetter H. Hruce Gibson Secretary 48, Senior Vice President 42, Vice President - Govenunent and Hegulatory Affairs 3 9 m

MS90 TOC LIGNTsCG Q PowaQ C G sW P A C y OFFICERS Don D. Jordan Jack D. Greenwade Susan D. Fabre Afany P. Ricciardello 63, Chairman and Chief 56, Senior Vice President 40, Vice President - 40, Vice President and Executive OHicer and Assistant to the Iluman Resources Comptroller President H. Steve Lethetter B. Bruce Gibson Thomas R. Standish 48, President and Chief Ilugh Rice Kelly 42, Vice President - 46, Vice President - Operating Officer 53, Senior Vice President, Government and Special Projects f General Counsel and Regulatory Affairs William T. Cottle Corporate Secretary David G. Tees 50, Executive Vice John F. Groth 51, Vice President - President and General Robert L. Waldrop 58, Vice President - Energy Production hianager - Nuclear 49, Senior Vice President - Nuclear Generation hlarketing and Customer Rufus S. Scott David AI. AleClanahan Senice Lawrence B. Ilorrigan, Jr. 52, Deputy General -16, Executive Vice 61, Vice President - Counsel and Assistant President and General L. G. Brackeen Purchasing and Support Corporate Secretary hianager - Energy 62, Vice President - Fuel Senices Delivery and Customer and Energy hianagement Christian Schley Senices - Joseph B. AleColdrick 47, Associate General James S. Brian 42, Vice President - Counsel and Assistant Stephen C. Schaeffer 48, Vice President - Regulatory and Financial Corporate Secretary 48, Executive Vice Finance and Analysis and Treasurer President - Shared Administration Richard B. Dauphin Senices and Finance and Ken W. Nabors 42, Assistant Corporate Regulatory Affairs Ted II. Cloninger 52, Vice President - Secretary 49, Vice President - Finance and Nuclear Engineering Administration Gretchen II. Denum

41. Assistant Corporate Secretary HousTom smousvases u n s a c y, sec.

OFFICERS Don D. Jordan Edward A. Alonto hiare Kilbride 63, Chairman of the 55, Vice President - 43, Assistant Board Business Development, Corporate Secretary The Americas Lee W. Ilogan Richard B. Dauphin I 51, President and Chiet' Ilugh Rice Kelly 42, Assistant operating Officer 33, Corporate Secretary Corporate Secretary Ancel D. Aladdox William A. Cropper 55 Vice President - 56, Assistant Treasurer Business Development, Europe and Asia sa

INWE57OR I N F O R IN A T I O N llouston Industries is committed to each common and preferred stock Senices at the address of the corpo-providing investors with a full series. rate offices, or call using the folkiw-range of high-quality services and Shareholders may obtain infonnation ing telephone numbers: information. on electronic bank deposit of quarter-In llouston: (713) 207-3060 [ Annual Meeting ly dividends on common stock by Toll Free: 1-800-231-6406 8 The annual meeting of sharehoklers writing or calling Investor Senices. Other Materials will be held at the llouston investor's Choice A copy of the Proxy Statement, the Industries Plaza Auditorium,1111 The Investor's Choice Plan is a com. annual report to the Securities and louisiana Street, llouston, Texas at prehensive senice plan for corporate Exchange Commission on Fonn 10-K, 9:00 a.m., Central Time, on imestors. It features: other mqwrate publications, and Wednesday hiay 22,1996. All hold-

Direct Purchase and Sale of111 sideo and audio materials are avail-ers of common shares are encour-Common Stock from 111 - cash pur-able on request. A!! materials may be aged to attend and participate, chases from $50 per investment up requestal in writing or by calling the A formal notice of the meeting will to $120,000 annually and sales are numbers listed under " Investor be mailed to shareholders in April, available through the plan at a nomi-Assistance",

accompanied by a proxy statement, nal fee. Financial Information which describes the items of business

Heinvestment - dividends and Prospettive investors, analysts and to be considered, and a proxy card, interest on eligible securities can be representatives of IInancial institu-which may be used to vote on nomi-fully or partially reinvestal in 111 tions requiring infonnation regarding nees for director and other matters common stock.

Ilouston ludustries shouki contact to be decided at the meeting.

Statement-Hased Aucunting -

the Financial & Public Relations Transfer Agent, Registrar And electronie ntordkeeping, periodic Department at (713) 207-3122 or Dividend Disbursing Agent account statements and stock eertifi-(713) 207-3121. lhe llouston Industries Investor cate safekeeping prmide a convenient Stock Listing Senices Department serves as trans-alternative to stock eertificates. I f ouston Industries common stock is fer agent, registrar and dividend dis. Certificates are available on request, traded under the symbol IIOU on the bursing agent for 111 common stock Interested imestors w ho are New York, Chicago and landon and for ilLAP preferred stock and not already registerN] hohlers may Stock Exchanges. first mortgage bonds. lutume participants in Investor's Auditors Dividend Payments Choice by making an initial invest-Deloitte & Touche 1.LP, Common stock dividends generally ment through the Plan of at least flouston, Texas are paid on klarch 10, June 10, $250. Corporate Offices September 10 and December 10 to investor Assistance llouston Industries Incorporated I holders of remrd on February 16, investor Senices representatives are 1Ii1 famislana Street i hiay 16, August 16 and November 16, available during nonnal business llouston, Texas 77002 respatively. Disidends are subject to hours to provide assistance related to P. O. Box 4567 declaration by the Board of 111 mmmon stock, Ill AP preferred Ilouston, Texas 77210 Directors, which establishes the stock. IllAP first mortgage bonds Telephone: (713) 207-3000 amount of each quarterly disidend to and enrollment in the III Investor's FAX: (713) 207-0206 he paid on mmmon stock and fixes Choin. Plan.

h um.d rep.it a pnnini on em>kwl py-r the record date and payment date for investors may write to luvestor

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lf Houston Industnes __fL incorporated P.O. Ilox 4567 Houston, Texas 77210 i t h 's

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UNITED STATES SECURITIES AND EXCHANGE COMMISSION i Washington, D.C. 20549 l i l FORM IO-K (Mark One) [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF TIIE SECURITIES EXCIIANGE ACT OF l 1931 (FEE REQUIRED) For the fiscal year ended December 31,1995 OR [] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 (NO FEE REQUIRED) For the transition period from to Commission File Number 17629 HOUSTON INDUSTRIES INCORPORATED (Exact name of registrant as specified in its chaner) TEXAS 7&l885573 (State or other jurisdiction of incorporation or organization) (1.R.S. employer identification number) till Louisiana Ilouston, 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 exchance on which recistered i Common Stock, without par value, New York Stock Exchange and associated rights to purchase Chicago Stock Exchange preference stock London Stock Exchange Securities registered pursuant to Section 12(g) of the Act: None Commission File Number 1-3187 HOUSTON LIGHTING & POWER COMPANY (Exact name of registrant as specified m its charter) TEXAS 74-0694415 (State or other jurisdiction of incorporation or organization) (I.R.S. employer identification number) 1111 Louisiana ifouston, Texas 77002 (713) 207-1111 (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: None Securities registered pursuant to Section 12(g) of the Act: Title of Each Class Preferred stock, cumulative. no par: 54 Series; $6.72 Series; $7.52 Senes; $8.12 Senes; variable Term Cumulative Preferred Stock, Series A; Variable Term Curautative Preferred Stock, Senes B; Variable Term Cumulative Preferred Stock, Series C; Variable Term Cumulative Preferred Stock, Series D; and 59.375 Series. Indicate by check mark whether each of the registrants: (1) has filed all repons 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 repons), and (2) has been subject to such filing requirements for the past 90 days. Yes [./ ) No[ ] ne aggregate market value of the voting stock held by non affiliates of Houston Industries incorporated was 56.030.611,109 as of March 1,1996. using the definition of beneficial ownership contained in Rule 13d-3 promulgated pursuant to the Securities Exchange Act of l934 and excluding shares held by directors and executive officers. As of March 1,1996, Houston Industries Incorporated had 262,742,947 shares of Common Stock outstanding, including 14,253.044 ESOP shares not deemed outstanding for financial statement purposes. As of March 1,1996, all outstanding shares of Houston Lighting & Power Company's common stock were held, directly or indirectly, by Houston Industries Incorporated. Ponions of the definitive proxy statement relating to the 1996 Annual Meeting of Shareholders of Houston Industries Incorporated, which will be filed ,cithin 120 days of December 31,1995, are incorporated by reference in Item 10, item 11, item 12 and item 13 of Part !!! of this form. 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 Pan !!! of this Form 10 K or any araendmerst to this Form 10-K. [ / )

I HOUSTON INDUSTRIES INCORPORATED AND HOUSTON LIGHTING & POWER COMPANY Form 10-K for the Year Ended December 31,1995 PARTl TABLE OF CONTENTS Paae No. Item 1. Business: l The Company and its Subsidiaries 3 Business of HL&P 3 Business of HI Energy 15 Regulation of the Camoany 16 Executive Officers o the Company.. 17 Executive Officers of HL&P.. 18 Item 2. Properties 20 item 3. Legal Proceedings. 21 Item 4. Submission of Matters to a Vote of Security Holders 22 PART11 Item 5. Market for the Registrant's Common Equity and Related Stockholder Matters 23 Item 6. Selected Financial Data: The Company 24 I HL&P. 25 L ltem 7. Management's Discussion and Analysis of Financial ' Condition and Results of Operations.. 26 Item 8. Financial Statements and Supplementary Data: Consolidated Financial Statements.. 41 HL&P Financial Statements. 50 Notes to Consolidated Financial Statements. 57 Notes to HL&P Financial Statements 78 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure. 85 i PART lli Item 10. Directors and Executive Officers of the Company and HL&P 86 1 Item 11. Executive Compensation. 88 Item 12. Security Ownership of Certain Beneficial Owners and Management. 96 Item 13. Certain Relationships and Related Transactions...... 98 PART ly item 14 Exhibits, Financial Statement Schedules and Reports on Form 8-K.... 99 2

l 1 This combined Fcrm 10 K is sapmt2ly fil;d by Hauston Industrire Incarp:rsted (Company) and Houston Lighting & Powar Company (HL&P). Information contained herein - relating to HL&P is filed by the Company and separately by HL&P on its own behalf. HL&P makes no representation as to information relating to the Company (except as it may relate to HL&P), Houston Industries Energy, Inc. (H1 Energy) or to any other affiliate or subsidiary _ _. 1 of the Company. o Item 1. Business. THE COMPANY AND ITS SUBSIDIARIES The Company, incorporated in Texas in 1976, is a holding company operating principally in the electric utility business. For a description of the Company's status under the Public Utility Holding Company Act of 1935 (1935 Act), see " Regulation of the Company." HL&P, incorporated in Texas in 1906, is the principal _ subsidiary of the Company and is engaged in the generation, transmission, distribution and sale of electric energy. HI Energy, a subsidiary of the Company formed in 1993, participates in domestic and foreign power generation. projects and invests in the privatization of foreign electric utilities. The business and operations of i HL&P account for substantially all of the Company's income from continuing operations and common stock equity. For information regarding the reorganization of the Company's operations -into strategic business units, see " Management's Discussion and Analysis of Financial Condition and Results of Operations-Certain Factors Affecting Future Earnings of the Company and' HL&P-Response to Competition"in item 7 of this Report. In July 1995, the Company sold its cable television subsidiary, KBLCOM Incorporated (KBLCOM), to Time Wamer Inc. (Time Wamer) in exchange for Time Warner securities recorded at approximately $1 billion and the purchase by Time Wamer of intercompany debt for cash. For information regarding the sale of KBLCOM, see Note 13 of the Company's Consolidated and HL&P's Financial Statements in item 0 of this Report (Financial Statements). As of December 31,b995, the Company and its subsidiaries had 8,891 full-time employees BUSINESS OF HL&P

Special Factors l

n 7 ' HL&P's business and operations are subject to a number of factors affecting the electric utility industry in general, including increasing levels of competition; legislative and regulatory changes in the basic rules goveming electric utility operations and the uncertainties associated with such changes; new technologies; and environmental and nuclear plant contingencies. The effects of these and other factors on HL&P's business and operations are described elsewhere in this Report. See " Competition" and " Regulation of the Company" below and " Management's Discussion and Analysis of Financial Condition and Results of Operations-Certain Factors Affecting Future Earnings of the Company and HL&P"in item 7 of this Report. Service Area HL&P's service area covers a 5,000 square mile area on the Texas Gulf Coast, including Houston (the nation's fourth largest city). HL&P serves approximately 1.5 million residential, commercial and industrial customers.' HL&P is a member of the Electric Reliability Council of 3

... -. _ _ ~. - -. - -. -. - - -. -. - - - -.. -. r Texas, Inc. (ERCOT) and is interconnected to a transmission grid encompassing most of the state of Texas. fAlthough the economy of HL&P's service area encompasses a Side range of products and services, Houston's economy is still centered primarily on energy sector indust' ries, such as. oil firms, petrochemical and refining complexes, industrial and petrochemical construction firms and natural gas distribution and processing centers. During the year ended December 31,1995, energy sector industries accounted for approximately 35 percent of HL&P's industrial electric base revenues and 9 percent 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. System Capability and Load ' The following table sets forth information with respect to HL&P's system capability and load: I Maximum Houriv Firm Demand Installed % Change Net Purchased Total Net From. Reserve Capability Power Capability Prior Margin : Ygat (MW) (MW)(1) (MW) Date M W (2) Year (%)- l 1991 13,583 945 14,528 Aug.21 10,908 (2.2) 33.2. l 1992 13,583 945 14,528 ' Jul. 30 10,783 (1.1) 34.7 1993 13,679 945 14,624 Aug.19 11,397 5.7 28.3 l 1994 13,666 720 14,386 Jun.28 11.245-(1.3) 27.9 1995-13,921 445 14,366 Jul. 27 11,419 1.5 25.8 Reflects. firm capacity purchased. For additional information..on. purchased power (1) r commitments, see " Fuel-Purchased Power" below. (2) Does not include interruptible load. Including interruptible demand, the maximum hourly demand served in 1995 was 12,377 megawatts (MW) compared to 12,009 MW in 1994. Based on present trends, HL&P expects maximum hourly firm demand for electricity to grow at a compound annual rate of approximately 1.5 percent over the next ten years. Assuming average weather conditions and including the net effects of HL&P's demand-side management - (DSM) programs, HL&P projects that its reserve margins will decrease from an e'stimated 25.5 percent in 1996 to an estimated 17.4 percent in 2000. For long-term planning purposes, HL&P intends to maintain reserve margins at approximately 15 percent in excess of maximum hourly firm demand load requirements. HL&P 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, in large part, to the j reliance on air conditioning. See Note 15 to the Financial Statements for a presentation of certain unaudited quarterly financial information for 1994 and 1995. l 4

Csmpetitisn Competition in the electric utility industry is affected by a number of variables, including price, reliability of service, the cost of energy alternatives and the impact of governmental - regulations. l The electric utility industry historically has been composed of vertically integrated i companies that have largely been the exclusive provider of electric service within a governmentally-defined geographic area. Prices for that service have been set by governmental authorities under principles designed to provide the utility with an opportunity to recover its cost of providing electric I service plus a reasonable return on its invested capital. Federal legislation, such as the Public Utility Regulatory Policy Act of 1978 (PURPA) and the Energy Policy Act of 1992 (Energy Policy i Act), 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, technological advances in electric generation and relatively low natural gas prices, are acting to accelerate the electric utility industry's movement toward more competition. Wholesale Market and Transmission Access. The adoption of PURPA contributed to the development of new non-utility sources of electric generation by freeing cogenerators (facilities which produce electric energy along with thermal energy used for industrial processes, usually the generation of steam) from most of the regulatory constraints applicable to traditional utilities, such as state rate regulation and federal regulation under the Federal Power Act and the 1935 Act. Since 1978 cogeneration projects representing over 5,000 MW in generating capability (which is equal to approximately one-third of HL&P's current total peak generating capability) have been built in the Houston area. As a consequence of this development, HL&P estimates that it has lost approximately 2,500 MW in customer load to self-generation resulting from such projects. It is anticipated that HL&P's industrial customers may continue to consider additional self-generation projects in the future. In 1995, approximately 9 percent of HL&P's total base revenues were derived from large industrial customers owning industrial or other facilities. An additional 15 percent of such revenues was derived from smallindustrial customers (including retail stores, office buildings and other customers not associated with large industrial plants). For information regarding electricity purchased by HL&P from PURPA-qualified facilities, see " Fuel-Purchased Power" below. The Energy Policy Act created another category of non-utility generators, exempt wholesale generators (EWGs). Like cogenerators, EWGs are permitted to sell electric energy at wholesale, but unlike cogenerators, EWGs may generate electricity without regard to the simultaneous production of thermal energy. The most significant benefit of EWG status is that ownership of one or more EWGs does not trigger regulation under the 1935 Act. Although the Energy Policy Act permits exempt public utility holding companies to form EWGs, the Energy Policy Act imposes significant limitations on the ability of utilities to purchase power in their own service territories from an affiliated EWG. The Energy Policy Act also authorizes the Federal Energy Regulatory Commission (8 ERC) to require utilities to provide transmission services to EWGs and other generators upon request if 5

FERC finds that such transmission would be in the public interest and would not unreasonably impair the continued reliability of affected electric systems. In March 1995, the FERC issued a Notice of Proposed Rulemaking proposing to require all public utilities owning or controlling transmission facilities to file open-access tanffs and to take transmission and ancillary services for-their own wholesale needs under such tariffs. Because HL&P conducts its operations entirely within the state of Texas, it does not believe that the proposed FERC rule will be applicable to its transmission system operations. ] In 1995, the Texas legislature reenacted the Texas Public Utility Regulatory Act (PURA), the basic statute governing the regulation of electric utilities in Texas. The reenacted version of PURA includes provisions intended, among other things, to establish a regulatory system for competitive wholesale electric sales in the state of Texas (including authorization for EWGs ::,nd power marketers to engage in such sales without regulation as electric utilities). In 1995, HL&P's wholesale sales accounted for less than 1 percent of its total 1995 revenues. In February 1996, the Public Utility Commission of Texas (Utility Commission) adopted a new transmission access and pricing rule requiring that utilities offer third parties open access to utility-owned transmission systems at rates and on terms and conditions comparable to those available to transmission-owning utilities. To ensure comparability, the Utility Commission is requiring utilities to functionally unbundle their wholesale power marketing operations, from the operation of the transmission grid. The rule requires that utilities separately disclose their costs of generation, transmission and distribution for purposes of transmission pricing. The rule also implements a transmission pricing methodology by which all transmission loads are assessed a facilities charge for transmission usage. For a discussion of the rule and its financial impact on HL&P, see " Management's Discussion and Analysis of Financial Condition and Results of Operations-Certain Factors Affecting Future Eamings of the Company and HL&P--Competition" ~ in Item 7 of this Report. Retail Competition. Although neither federal nor Texas law currently permits retail sales by unregulated entities, such as cogenerators or EWGs, HL&P anticipates that cogenerators and EWGs will continue to exert pressure to obtain access to the electric transmission and distribution systems of regulated utilities for the purpose of making retail sales to customers of regulated utilities. Utility Commission Reports on Competitinn and Stranded Investment. By January 1997, the Utility Commission is required to deliver 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 further legislative recommendations to promote the public interest in such markets). In preparing its reports, the Utility Commission has initiated projects to consider issues relating to the scope of competition in the electric utility industry and to address the potentialimpact of " stranded cost investment." In this connection, the Utility Commission has indicated that it will require each Texas electric utility to file in June 1996 a calculation of its total stranded investment exposure. As of March 1996, the Utility Commission has not finalized the methodology or assumptions to be used for calculating stranded cost investments. HL&P is not able to predict either the outcome of the Utility 6

Commission's review of stranded cost investment issues or the ultimata impact of such review on HL&P's results of operations. For additional information on competition in the electric utility industry, stranded cost issues and the Company and HL&P's continuing efforts to respond to competition (including a recent reorganization of the Company's and HL&P's operations into strategic business units), see " Management's Discussion and Analysis of Financial Condition and Results of Operations-Certain Factors Affecting Future Earnings of the Company and HL&P-Competition" in item 7 of this Report and Note 1(b) to the Financial Statements. Capital Program HL&P has an ongoing program to maintain its existing production, transmission and distribution facilities and to expand its physical plant in response to customer needs. Assuming a target reserve margin of 15%, HL&P does not currently forecast a need for additional capacity until the year 2002. Thereafter, HL&P intends to satisfy its additional needs through the construction of new facilities at existing HL&P plant sites, the development of cogeneration projects or purchased power. Under an integrated resource planning rule required to be adopted by the Utility Commission no later than the fall of 1996, it is expected that Texas utilities will be required to conduct public solicitations for generating capacity to satisfy their future energy needs. In 1995, HL&P's capital and nuclear fuel expenditures were approximately $392 million, excluding Allowance for Funds Used During Construction (AFUDC). HL&P's capital program (excluding AFUDC) is currently estimated to cost approximately $387 million in 1996, $301 million in 1997 and $328 million in 1998. HL&P's capital program for the three-year period 1996 through 1998 consists primarily of improvements to its existing electric generating, transmission and distribution facilities. For the three-year period 1996 through 1998, HL&P's projected c:,pital program consists of the following estimated principal expenditures: Amount Percent of Total (millions) Exoenditures Generating facilities. 271 26 % Transmission facilities 37 4% Distribution facilities... 348 34 % Substation facilities 68 7% General plant facilities 230 23 % Nuclear fuel 62 6% Total S 1016 ,1_QQ% 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 environmentallaws, regulatory and legislative changes and the effect of regulatory proceedings. For information regarding expenditures associated with (i) HL&P's share of nuclear fuel costs and (ii) environmental programs, see " Fuel-Nuclear Fuel-Supply" and " Regulatory Matters-Environmental Quality" below. 7

1 Fuel i Based upon various assumptions relating to the cost and availability of fuels, plant operation -~ schedules, load growth, load management and environmental protection requirements, HL&P's estimate of its future energy mix is as follows: Enerav Mix (%) Historical Estimated - 1995 M 1998 2QQQ . Gas,...................... 32 34 39 42 Coal and lignite............. 43 41 42 40 Nuclear............ 9 9 7 8 Purchased Power (cogeneration). E E R E j l Total.. g g g g_ i There can be no assurance that the various assumptions upon which the estimates set forth in the table above are based will prove to be correct. Accordingly, HL&P's actual energy mix in future years may vary from the percentages shown in the table. For information regarding HL&P's fuel costs, see " Management's Discussion and Analysis of Financial Condition and Results of Operations-Fuel and Purchased Power Expense-HL&P"in item 7 of this Report and Note 11(b) to the Financial Statements. Natural Gas Supply. During 1995, HL&P purchased approximately 71 percent of its natural gas requirements pursuant to long-term contracts having terms of five years or longer. HL&P purchased the remaining 29 percent of its natural gas requirements in the spot market. In 1995, no individual supplier provided more than 24 percent of HL&P's total natural gas requirements. Substantially all of HL&P's natural gas supply contracts contain pricing provisions based on fluctuating spot market prices. Based on the current market for, and availability of, natural gas, HL&P believes that it will be able to replace the supplies of natural gas covered under its present long-term contracts with gas purchased in the spot market or under short-term contracts as such long-term contracts expire. HL&P's average daily gas consumption during 1995 was 602 billion British Thermal Units (BBtu) with peak daily consumption of 1,328 BBtu. HL&P's average cost of natural gas in 1995 was $1.69 per million British thermal units (MMBtu), $1.90 per MMBtu in 1994 and $2.21 per MMBtu in 1993. Although natural gas has been relatively plentiful in recent years, supplies available to HL&P and other consumers are vulnerable to disruption due to weather conditions, transportation disruptions, price changes 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 disruptions or other factors. j Coal and Lignite Supply. HL&P purchases approximately three-fourths 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 Gasin area of Wyoming. ^ 0

Th3 first of th:s3 contracts expires in 2008. and the oth:r expires in 2010. HL&P obtains th2 remaining coal required to operate these units under short-term contracts. Based on current market conditions, HL&P believes that it will be able to enter into new coal contracts with other suppliers as such long-term contracts expire. Coalis transported to the W. A. Parish coal-handling facilities under long-term and short-term rail transportation contracts. HL&P obtains the lignite used to fuel the two units of the Limestone Electric Generating Station (Limestone) from a surface mine adjacent to the plant. HL&P owns the mining equipment, facilities and a portion of the lignite leases at the mine, which is operated under long-term contract. The lignite reserves currently under lease and contract are expected to provide substantially all of the fuel requirements for Limestone through 2015. The mining of coal / lignite reserves is subject to federal and state requirements with respect to the development and operation of coal mines, and to state and federal regulations relating to land reclamation and environrnental protection. Nuclear Fuel. Supolv HL&P is the project manager (and one of four co-owners) of the South Texas Project Electric Generating Station (South Texas Project). The supply of fuel for nuclear generating facilities involves the acquisition of uranium concentrates, conversion of such concentrates into uranium hexafluoride, enrichment of the uranium hexafluoride and fabrication of nuclear fuel assembiies. The South Texas Project fuel requirements are procured in common by the South Texas Project owners. HL&P and the other South Texas Project owners have on-hand or have contracted for the raw materials and services they expect to need for operation of the South Texas Project units through the years shown in the following table: Uranium. . 2000 (1) Conversion. 2000 (1) Enrichment 2014 (2) Fabrication.. 2005 (1) Contracts provide for up to 50 percent of the uranium concentrates required and up to 100 percent of the conversion services required. The balance of uranium concentrates requirements (and any conversion services not purchased under existing contracts) is expected to be provided by future spot and medium-term contracts. j (2) The South Texas Project has suspended its enrichment services contract for the period between October 2000 through September 2005 pursuant to an option available under such contract. During this period, the South Texas Project intends to obtain such services through a competitive bidding process. Although HL&P and the other South Texas Project owners cannot predict the future availability of uranium and related services, they do not anticipate, based on current market conditions, difficulty in obtaining requirements for the remaining years of the South Texas Project's operations. Soent Fuel Disoosal. By contract, the United States Department of Energy (DOE) has committed itself to ultimately taking possession of all spent fuel generated by the South Texas 9

1 Project. HL&P has been advised that the DOE plans to place the spent fuel in a permanent underground storage facility (located near Yucca, Nevada). The DOE contract currently requires payment of a spent fuel dispost fee on nuclear plant-generated electricity of one mill (one-tenth of a cent) per net kilowatt-hour (KWH) sold. This fee is subject to adjustment to ensure full cost recovery by the DOE Although the DOE's efforts to arrange long-term disposal have been unsuccessful to date, the South Texas Project is designed to have sufficient on-site storage facilities to accommodate over 40 years of spent fuel disposal for each unit. Enrichment Decontamination and Decommissionino Assessment Fees. The Energy Policy Act includes a provision that assesses a fee upon domestic utilities that purchased nuclear fuel enrichment services from the DOE before October 24,1992. This fee covers a portion of the cost j to decontaminate aad decommission facilities providing for such enrichment services. In 1995, the South Texas Project assessment was approximately $1.9 million and will be approximately $2 million in 1996 and each year thereafter (subject to escalation for inflation). HL&P's share of such fees is 30.8 percent. These assessments will continue until the earlier of October 24,2007, or when 52.25 billion (adjusted for inflation) has been collected from domestic utilities with nuclear generating units. HL&P has a remaining estimated liability of $7 million for such assessments. Oil Supply. HL&P maintains limited fuel oil stocks to satisfy fuel needs in emergency situations. In addition, certain of HL&P's gas-fired generating plants are designed to operate on fuel oil if oil becomes more economical to use than gas. Purchased Power. At December 31,1995, HL&P had contracts covering 445 MW'of firm capacity and associated energy. These contracts expire as follows: 1998 - 125 MW ano 2005 - 320 MW. Capacity payments under HL&P's firm purchased power commitments for the next three years are approximately $22 million per year. The two principal firm capacity contracts contain provisions allowing HL&P to suspend or reduce purchased power payments in the event that the Utility Commission disallows future recovery of these costs through HL&P's rates for electric service. Recovery of Fuel Costs. Utility Commission rules provide for the recovery of certain fuel and purchased power energy 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 a fuel factor proceeding and is to be generally effective for a minimum of six months. In any event, a reconciliation of the fuel revenues and the fuel costs is required every three years. HL&P can request a revision to its fuel factor in April and October of each year. Fuel revenues accrued pursuant to such factor are adjusted monthly to equal fuel expenses; 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 HL&P's balance sheets as fuel-related credits and fuel costs are reviewed during periodic fuel reconciliation proceedings. For additional information regarding the recovery of fuel costs, see " Management's Discussion and Analysis of Financial Condition and Results of Operations-HL&P-Operating Revenues and Sales-HL&P"in item 7 of this Report. 10

R::gulstory Mitt 2rs Rates and Services. HL&P operates under a certificate of convenience and necessity granted by the Utility Commission which covers HL&P's present service area and facilities. In addition, HL&P holds franchises to provide electric service within the incorporated municipalities in its service territory. None of such franchises expires before 2007. Under PURA, the Utility Commission has originaljurisdiction 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 HL&P is exercised by such municipalities, including Houston, but the Utility Commission has appellate jurisdiction over electric rates and services within those incorporated municipalities. Utility Commission Rate Proceedings. During 1995, HL&P implemented under the terms of a settlement of its 1995 rate case (Docket No.12065) a reduction in its base rates (Rate Case Settlement). For a more detailed description of the terms of the Rate Case Settlement, see " Management's Discussion and Analysis of Financial Condition and Results of Operations-Certain Factors Affecting Future Earnings of the Company and HL&P-Rate Matters and Other Contingencies"in Item 7 of this Report and Note 3(a) to the Financial Statements. Environmental Quality. HL&P is subject to a number of federal, state and local i environmental requirements that govern its discharge of emissions into the air and water and regulate its handling of solid and hazardous waste. HL&P has incurred substantial expenditures in the past to comply with these requirements and anticipates that further expenditures will be incurred in the future. Most of the environmental requirements applicable to HL&P are implemented by the Texas Natural Resource Conservation Commission (TNRCC), which shares regulatory jurisdiction with the United States Environmental Protection Agency (EPA). Air Qualitv. A major provision of the Federal Clean Air Act (Clean Air Act) affecting electric utilities, like HL&P, is the Acid Rain Program, which is designed to reduce emissions of sulfur dioxide (SO ) from electric utility generating units. The Acid Rain Program requires that after a 2 certain date a utility must have been granted a regulatory " allowance" for each ton of SO emitted 2 from its facilities. Allowances have been distributed to utilities by the EPA based on their historic operations. If a utility is not allocated sufficient allowances to cover its future SO, emissions, it must either purchase allowances from other utilities or reduce SO emissions from its units through 2 the installation of additional controls and equipment. HL&P believes that it has been allocated a sufficient number of emission allowances for it to continue operating its existing facilities for the foreseeable future. Provisions of the Clean Air Act dealing with urban air pollution require establishing new emission limitations for nitrogen oxides (NOx) from existing sources. Initial limitations were finalized in 1993, but the implementation of these emission reductions has been delayed by the EPA and TNRCC until 1999. The cost of modifications to HL&P in 1995 was approximately $1 million. Up to an additional S40 million may be incurred by HL&P in order to fully comply with new NOx requirements through 1999. 11

Additionally, to cnsure compliance with these new regulatory programs, ths Clran Air Act requires electric utilities to install continuous emission monitoring equipment, which cost HL&P approximately $3 million in 1995 and is expected to cost an additional $1 million in 1996. To implement these new Clean Air Act programs, a new Operating Permit Program was established that will be administered in Texas by the TNRCC Among other requirements, the Operating Permit Program is funded by fees imposed by the TNRCC. The annual cost of these fees to HL&P is approximately $1 million. Water Qualitv. The Federal Clean Water Act governs the discharge of pollutants into surface waters and is administered jointly in Texas by the TNRCC and the EPA. HL&P has obtained permits from both the TNRCC and the EPA for all of its facilities that require such permits and anticipates obtaining renewal of such permits as they expire. Solid and Hazardous Waste. HL&P's handling and disposal of solid waste is also subject to regulation by the TNRCC. HL&P's cost in 1995 for commercial disposal of industrial solid waste was approximately $2.3 million. Electric and Maonetic Fields. 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 conceming the effect of EMFs have been inconclusive and EMFs are not the subject of any federal, state or local regulations affecting HL&P. 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. Federal Regulation of Nuclear Power. 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, the 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. Low-Level Radioactive Waste Disposal. 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 the Act, states may combine with other states and seek consent from Congress for regional compacts to construct and operate low-level nuclear waste sites. As of March 1,1996, there existed in the United States only two facilities licensed to receive commercial low-level nuclear waste. Only one such facility, located in Barnwell, South Carolina, is currently available to the South Texas Project. The South Texas Project has entered into a contract with the operator of the Barnwell facility to dispose of all of its low-level nuclear waste through September 1997. 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 12

is curr:ntly pending before Congress. 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.- HL&P expects that the measure will be considered by Congress in mid-1996. The Waste Disposal Authority is authorized to assess a planning and implementation fee to waste generators to fund development of the proposed Texas disposal facility. For the authority's 1995 fiscal year, HL&P's share of this assessment fee was approximately $1.3 million. Assuming Congress ultimately approves the proposed compact, HL&P estimates that its share of these fees for 1996 will be approximately $1.2 million. Subject to licensing of the facility in 1996, the Waste Disposal Authority estimates that the Texas site (construction of which has not yet begun) could begin receiving waste in late 1997. 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 I storage facility located at the nuclear plant. The plant currently has storage capacity for a minimum of five years of low-level nuclear waste generated by the project. Nuclear Insurance and Nuclear Decommissioning For information concerning nuclear insurance and nuclear decommissioning, see Notes 2(c) and 2(d) to the Financial Statements. Labor Matters As of December 31,1995, HL&P had 8,641 full-time employees of whom 3,420 were hourly-paid employees represented by the International Brotherhood of Electrical Workers under a collective bargaining agreement which expires on May 25,1998. 13 i j I

A ,ea,, m Oper: ting Stati: tics cf HL&P Year Ended December 31. 1995 1994 1993 Electric Energy Generated and Purchased (MWH): Generated - Net Station Output. 53,447,128 53,894.994 52.939.551 4 Purchased. 10.452.818 10,107,449 11.113.971 Net Interchange (1.488) (1 018) (282) 63,898,458 64,001,425 64,053,240 Total Company Use. Lost and Unaccounted for Energy .,(2.822.876) (2 678.629) (2.903.780) Total Energy Sold 61.075.582 - 61.322 796 61.149.460 Electric Sales (MWH): Residential. 18,103.209 17,194,724 16,953,667 Commercial 14,233,413 13,631,381 13.083,391 SmallIndustrial(1). 11.174,404 10,940,813 11,038,653 Large Industrial (1). 12.493,029 13.537,677 13,648.129 Street Lighting - Government and Municipal 117.253 116.643 112.914 Total Firm Retail Sales. 56,121.308 55,421,238 54.836,754 Other Electric Utilities 169.750 167.286 - 223.204 Total Firm Sales 56,291,058 55,588,524 55.059,958 Interruptible 4,093,385 5,027,743 5,748,086 Off-System... 691.139 706.529 341.41E Total 61.075.582 61.322.796 61.149.460 Number of Customers (End of Period): Residential. 1,327,168 1,301.074 1.278,774 Commercial 175,998 170,959 168,284 Small Industrial (1)... 1,543 1,525 1.568 Large Industrial (Including interruptible) (1). 127 145 138 Street Lighting - Government and Municipal. 82 81 82 Other Electric Utilities (including Off-System) 11 11 12 l Total 1.504.929 1 473.795 1.448.858 1 Operating Revenue (Thousands of Dollars): Residential... $1.471,702 $1,586.074 $1,578,175 4 i Commercial 923,223 1,029,104 994.461 i Small Industrial (1),, 564,609 643,383 650.946 Large Industrial (1). 431.499 541,188 539,971 i Street Lighting - Government and Municipal 20.679 25.902 24.258 Total Electric Revenue - Firm Retail Sales. 3,411,712 3,825,651 3,787,811 3 Other Electric Utilities 22 207 25.66g 26.154 ^ Total Electric Revenue - Firm Sales 3.433,919 3.851,320 3.813.965 Interruptible 81.707 108,730 135.066 l Off-System. 12.250 13.691 7 313 j Total Electric Revenue. 3.527.876 3.973,741 3.956.344 Miscellaneous Electric Revenues. 152.421 (227.656) 123.519-Total $3.680.297 53.746.085 $4.079.863 4 Installed Net Generating Capability (KW) (End of Period). 13,921,370 13,666.000 13,679,000 i i Cost of Fuel (Cents per MMBtu): Gas 168,5 189.8 221.4 i Coal (2) 202.5 159.0 199.6 124.8 110.8 122.1 Lignite Nuclear 58.2 57.4 59.6 Average.... 159.3 153.6 195.2 (1) For reporting purposes, HL&P classifies customers with an electric demand in excess of 600 KVA as industrial. j Small industrial customers typically are retail stores, office buildings, universities and other customers not associated with large industrial plants. (2) The cost of coal for 1994 reflects the receipt of approximately $66.1 million related to the sale of certain railroad settlement payments. See Note 14 to the Financial Statements. 14 i

BUSINESS OF HI ENERGY The Company formed Hi Energy in 1993 to seek investment opportunities in domestic and foreign power generation projects and the privatization of foreign electric utilities. i HI Energy's major foreign investments include a 90 percent interest in an electric utility i operating in north-central Argentina (acquired in 1995 for $15.7 million), and a 17 percent indirect interest in an electric utility operating in La Plata, Argentina (for which HI Energy's share of the purchase price in 1992 was $37.4 million). In late 1997, a subsidiary of HI Energy expects to complete development of a 160 MW cogeneration facility in Argentina at an estimated cost to HI a Energy of approximately 592 million. In 1998, a subsidiary of HI Energy, together with various other investors, expects to complete development of a petroleum coke calcination facility in the state of Andhra Pradesh, India. The waste gases from this facility will be used to generate electricity for sale to industrial customers and a local utility. Assuming the project is completed on schedule, HI Energy's estimated share of the cost of this project is approximately $8 million. HI { Energy also owns an indirect interest in two waste tire-to-energy projects located in the state of Illinois (in which it has made investments and advances totaling approximately $28 million). For the year ended December 31, 1995, HI Energy had a consolidated net loss of I approximately $33 million. The net loss includes an $18 million after-tax charge to earnings resulting from the adverse impact of legislation adopted by the state of Illinois on the operations of the two HI Energy waste tire-to-energy projects located in that state. For additionalinformation, see " Management's Discussion and Analysis of Financial Condition and Results of Operations-Certain Factors Affecting Future Earnings of the Company and HL&P-HI Energy" l in item 7 of this Report and Notes 1(a) and 4 to the Financial Statements. Although HI Energy seeks to improve long-term shareholder retums, HI Energy's operations are subject to greater risks than traditionally have existed in HL&P's regulated operations. Such riske include foreign 1 investment risks, currency fluctuations, expropriation, intense competition for tnc identification and development of projects and the risk of adverse legislation or regulatory action. As of December 31,1995, HI Energy and its U.S. majority-owried subsidiaries had 61 full-time employees of whom 14 were represented by a union. 8 1 15 a

I REGULATION OF THE COMPANY Federaf .The Company is a holding comoany as defined in the 1935 Act; however, based upon the intrastate operations of HL&P and the exemptions applicable to the affiliates of HI Energy, the Company is exempt from regulation as a " registered" holding company under the 1935 Act except 1 with respect to the acquisition of voting securities of other domestic public utility companies and utility holding cunpanies. The Company has no present intention of entering into any transaction, which would cause it to become a registered holding company subject to regulation by the i Securities and Exchange Commission (SEC) under the 1935 Act. i in June 1995, the SEC issued a comprehensive report on the regulation of utility holding companies in which it recommended repeal of the 1935 Act, subject to a minimum one-year transition period and legislation that would provide for access by state commissions to the books and records of holding companies and their affiliates and oversight by the FERC of intrasystem transactions. At least one bill has since been introduced in Congress which would implement most of the SEC's recommendations. Repeal or significant modification of the 1935 Act could have a significant effect on the electric utility industry. State The Company is not subject to regulation by the Utility Commission under PURA or by the incorporated municipalities served by HL&P. Those regulatory Lodies do, however, have authority to review accounts, records and contracts relating to transactions by HL&P with the Company and its other subsidiaries. The exemption for foreign utility affiliates of the Company from regulation under the 1935 Act as "public utility companies"is dependent upon certification by the Utility Commission to the SEC to the effect that it has the authority to protect HL&P's ratepayers from any adverse consequences of the Company's investment in foreign utilities and th&t it intends to exercise its authority. The Utility Commission has provided such cer+ification to the SEC subject, however, to ) its being revised or withdrawn by the Utility Commise.;on as to any future acquisition. In January 1996, the Utility Commission adopted a rule specifyi1g the procedures for granting certification to the SEC regarding foreign utility investments and establishing reporting requirements for exempt holding companies.(like the Company) intended to prov de the Utility Commission with information relevant to its granting or maintaining the certification. Among other things, the Company is now required to notify the Utility Commission in the event that its aggregate investment in foreign EWGs j and utility companies exceeds 30 percent of the Company's consolidated net worth or if the Company's operating losses attributable to its direct or indirect investments exceeds 5 percent of consolidated retained earnings during the previous four quarters. 16

EXECUTIVE OFFICERS OF THE COMPANY (1) As of March 1,1996 Officer Name Age (2) Since. Business Exoerience 1991-1996 and Positions Don D. Jordan......... 63 1976 Chairman and Chief Executive 1993-Officer and Director Chairman, President and Chief 1991-1993 Executive Officer and Director Chairman and Chief Executive 1991-Officer and Director - HL&P Hugh Rice Kelly.. 53 1984 Senior Vice President, General 1994-Counsel and Corporate Secretary Vice President, General Counsel 1991-1994 and Corporate Secretary Senior Vice President, General 1991-Counsel and Corporate Secretary - HL&P Lsa W. Hogan 51 1990 Senior Vice President and Director 1996-Vice President and Director 1995-1996 Vice President 1993-1995 President and Chief Operating 1993-Officer - HI Energy Group Vice President - 1991-1993 External Affairs - HL&P R. Steve Letbetter.. 47 1978 Senior Vice President and Director 1996-Vice President and Director 1995-1996~ Vice President 1993-1995 President and Chief 1993-Operating Officer HL&P Group Vice President - Finance 1991-1993 and Regulatory Relations - HL&P Stephen W. Naeve 48 1988 Senior Vice President and Chief 1996-Financial Officer Vice President - Strategic Planning 1993-1996 and Administration Vice President - Corporate Planning 1991-1993 and Treasurer - HL&P Mary P. Ricciardello. 40 1993 Vice President and Comptroller 1996-Vice President and Comptroller 1996- - HL&P Comptroller 1993-1996 Assistant Corporate Secretary 1991-1993 and Assistant Treasurer-HL&P (1) All of the officers have been elected to serve until the annual meeting of the Board of Directors scheduled to occur on May 22,1996 and until their successors quality. (2) At December 31,1995. 17

_-._-.-.___.___.____.m.._. EXECUTIVE OFFICERS OF HL&P (1)(2) As of March 1,1996 Officer Name - Aae(3) Since ' Business Exoerience 1991-1996 and Positions Don D. Jordan. 63 1971 Chairman and Chief Executive. 1991- . Officer and Director R. Steve Letbetter...... 47 1978 President and Chief Operating Officer 1995-and Director President and Chief Operating Officer 1993-1995 ' Group Vice President - Finance 1991-1993 and Regulatory Relations William T. Cottle 50 1993 Executive Vice President and General 1996-Manager - Nuclear l Group Vice President - Nuclear 1993-1996 Vice President - Operations - 1991-1993 Grand Gulf Nuclear Station, Entergy Operations, Inc. ] Jack D. Greenwade..... 56 1982 Senior Vice President and Assistant 1996-to the President 1 Group Vice President - Operations 1991-1996 Hugh Rice Kelly 53 1984 Senior Vice President, General 1991-Counsel and Corpuraie Secretary David M. McClanahan. 46 1986 Executive Vice President nd General 1996-o Manager - Energy Delivery and Customer Services Group Vice President - Finance 1993-1996 and Regulatory Relations Senior Vice President and Chief 1991-1993 ' Financial Officer - KBLCOM ' Vice President, Finance and 1991 Administration - KBLCOM Vice President and Comptroller 1991 - Company l Stephen C. Schaeffer 48 1989 Executive Vice President - Shared 1996-Services and Financial and Regulatory Affairs Senior Vice President - Treasurer - 1993-1996 HI Energy Group Vice President - Administration 1992-1993 and Support Vice President - Regulatory Relations '1991-1992 Robert L. Waldrop. 48 1988 Senior Vice President - Marketing and 1996-i Customer Services Group Vice President - External Affairs 1993-1996 Vice President - Public and 1992-1993 Customer Relations Vice President - Public Affairs 1991-1992 Mary P. Ricciardello 40 1993 Vice President and Comptroller 1996-Vice President and Comptroller 1996- - Company Comptroller - Company 1993-1996 l Assistant Corporate Secretary 1991-1993 and Assistant Treasurer 18 l

(1) All of th3 offic;rs hava bern elseted to serve until th3 annual mesting of ths Board of Directors schsduisd to occur on May 22,1996 and until their successors quality. -(2) For the purpose.s of the requirements of this Report, the HL&P officers listed may also be deemed to ~ be executive officers of the Company. (3) At December 31,1995.. ) l i f f i 4 19

Item 2. Properties. The Company considers its property and the property of its subsidiaries to be well maintained,in good operating condition and suitable for their intended purposes. HL&P All of HL&P's electric generating stations and all of the other operating properties of HL&P are located in the state of Texas. Electric Generating Stations. As of December 31, 1995, HL&P owned 12 electric generating stations (62 generating units) with a combined turbine nameplate rating of 13,544,608 kilowatts (KW), including a 30.8 percent interest in one nuclear generating station (two units) with a combined turbine nameplate rating of 2,623,676 KW. Substations. As of December 31, 1995, HL&P owned 203 major substations (with capacities of at least 10 megavoit amperes (Mva)) having a total installed rated transformer capacity of 55,320 Mva (exclusive of spare transformers), including a 30.8 percent interest in one major substation with an installed rated transformer capacity of 3,080 Mva. Electric Lines-Overhead. As of December 31,1995, HL&P operated 24,385 pole miles of overhead distribution lines and 3,597 circuit miles of overhead transmission lines, including 567 circuit miles operated at 69,000 volts,1,999 circuit miles operated at 138,000 volts and 1,031 circuit miles operated at 345,000 volts. Electric Lines-Underground. As of December 31,1995, HL&P operated 9,098 circuit miles of underground distribution lines and 12.6 circuit miles of underground transmission lines, j including 8.1 circuit miles operated at 138,000 volts and 4.5 circuit miles operated at 69,000 volts. General Properties. HL&P owns various properties, including division offices, service centers, telecommunications equipment and other facilities used for general purposes. Title. The electric generating plants and other important units of property of HL&P are situated on lands owned in fee by HL&P Transmission lines and distribution systems have been i constructed in part on or across privately owned land pursuant to easements or on streets and highways and across waterways pursuant to authority granted by municipal and county permits, and by permits issued by state and federal govemmental authorities. Unde' the laws of the state of Texas, HL&P has the right of eminent domain pursuant to which it may secure or perfect rights-of-way over private property, if necessary. Mortgage. HL&P's mortgage, which secures first mortgage bonds issued by HL&P and collateralizes certain other securities issued on behalf of HL&P, constitutes a direct first lien on substantially all of HL&P's properties. The terms of the mortgage contain significant restrictions on the ability of HL&P to pledge, sell or otherwise dispose of its assets. HI Energy For information with respect to property owned directly or indirectly by HI Energy, see " Business of HI Energy"in item 1 of this Report and Note 4 to the Financial Statements. 20

It m 3. Lsgtl Prccadings. The following is a description of certain legal and regulatory proceedings affecting the Company and its subsidiaries. Rate Matters. In August 1995, the Utility Commission approved a settlement of HL&P's 1995 rate case (Docket No.12065) as well as a separate proceeding (Docket No.13126) regarding the prudence of operation of the South Texas Project. For information regarding this settlement, including the status of appeals of other Utility Commission orders affecting HL&P, see Note 3 to the Financial Statements, which note is incorporated herein by reference. South Texas Project Litigation. For information concerning lawsuits and related matters filed against HL&P by the City of Austin and the City of San Antonio with respect to outages at the 1 South Texas Project occurring in 1993 and early 1994 and arbitration claims asserted against HL&P by the City of San Antonio with respect to the construction of the South Texas Project, see Note 2(b) to the Financial Statements, which note is incorporated herein by reference. In April 1994, two former employees of HL&P filed a class action and shareholder derivative suit on behalf of all shareholders of the Company. This lawsuit (Pace and Fuentez v. Houston Industries Incorporated) alleges various acts of mismanagement against certain officers and directors of the Company and HL&P in connection with the operation of the South Texas Project, and seeks unspecified actual and punitive damages for the benefit of shareholders of the Company. The Company and HL&P believe that the suit is without merit. The lawsuit is pending i in the 133rd District Court of Harris County, Texas. HL&P and the other owners of the South Texas Project filed suit in 1990 against Westinghouse Electric Corporation (Westinghouse) in the 23rd District Court of Matagorda County, Texas, alleging breach of warranty and misrepresentation in connection with the steam generators supplied by Westinghouse for the South Texas Project. In December'1995, HL&P and the other South Texas Project owners settled their lawsuit against Westinghouse. Although the terms of the settlement do not allow disclosure of its specific terms, the Company believes the litigation was settled on terms that provided satisfactory consideration to HL&P. Environmental. HL&P 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 HL&P neither operated nor owned the site, certain transformers and other equipment originally sold by HL&P may have been delivered to the site by third parties, and HL&P and others have remediated the site pursuant to a plan approved by appropriate state agencies and a federal court. In Dumes, et al. v. HL&P, et al., (pending in the U.S. District Court for the Southem District of Texas, Corpus Christi Division), landowners near the site have asserted claims that their property has been contaminated as a result of the remediation effort and have asserted claims of approximately $70 million in damages, together with punitive damages totaling $51 million. Although the ultimate outcome of this case cannot be predicted at this time, the Company and HL&P do not believe that this case will have a material adverse effect on the Company's or HL&P's financial condition or results of operations. The EPA has identified HL&P as a potentially responsible party under the Comprehensive Environmental Response, Compensation, and Liability Act for the costs of cleaning up a site located adjacent to one of HL&P's transmission lines. In October 1992, the EPA issued an Administrative Order to HL&P and several other companies purporting to require them to manage 21

f the remediation of the site. HL&P believes that the EPA took this action solely on the basis of information indicating that HL&P in the 1950s acquired record title to a portion of the land on which the site is located. HL&P does not believe that it now nor previously has had any ownership interest in the land in question and has obtained a judgment from a court in Galveston County, Texas, to that effect. Accordingly, HL&P has not complied with this order, even though HL&P understands that other responsible parties are proceeding with site remediation. To date, neither the EPA nor any other potentially responsible party has instituted a claim against HL&P for any share of the remediation costs, but under current law if HL&P is determined to be a responsible party, HL&P could be found to be jointly and severally liable for the remediation costs (which HL&P estimates to be approximately $80 million in the aggregate) and could be subjected to substantial fines and damage claims. IRS Refund Lawsuit. In July 1990, the Company paid approximately $104.5 million to the Intemal Revenue Service (IRS)in connection with an IRS audit of the Company's 1983 and 1984 i federalincome tax retums. In November 1991, the Company filed a refund suit in the U.S. Court of Federal Claims seeking the retum of $52.1 million of tax, $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's allegation that certain amounts related to the over-recovery of fuel l costs should have been included as taxable income in 1983 and 1984 even though HL&P had an obligation to refund the over-recoveries to its ratepayers. In October 1994, the Court granted the Company's Motion for Partial Summary Judgment on the fuel cost over-recovery issue, and in February 1995, entered partialjudgment in favor of the Company. The government has appealed this decision. If the government does not prevail on appeal, the Company would be entitled to a refund of overpaid tax, interest paid on the overpaid tax through July 1990 and interest on both of j those amounts from July 1990. If the government prevails on appeal, the Company's ultimate ) financial exposure should be immaterial because of offsetting tax deductions to which the Company is entitled for the year the over-recovery was refunded to ratepayers. l Item 4. Submission of Matters to a Vote of Security Holders. l There were no matters submitted to a vote of security holders of the Company or HL&P l during the fourth quarter of 1995. 1 1 1 I l 1 1 22 l l

PARTll Item 5. Market for the Registrant's Common Equity and Related Stockholder Matters. The Company's Common Stock, which at March 1,1996 was held of record by approximately 66,000 shareholders, is listed on the New York, Chicago and London Stock i Exchanges (symbol: HOU). All of HL&P's common stock is directly or indirectly 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, in each case as adjusted to give effect to the two-for-one stock split effected by a stock distribution in December 1995 Dividend payout was $1.50 per share for 1995 and 1994. The dividend declared during the fourth quarter of 1995 is payable in March 1996. Market Price Dividend Declared j Hiah Low Per Share 1995 First Quarter 50.375 January 3 $17"'a February 3 $20% Second Quarter $0.375 April 3 $18'N June 5 $21% Third Quarter 50.375 l September 1 $21% September 28 $22% i Fourth Quarter 50.375 October 2 $22% l December 29 $24% j 1994 First Quarter $0.375 January 3- $23% March 31 $17% l Second Quarter $0.375 April 21 $18% j May 10 $15 Third Quarter 50.375 July 1 $16% August 2 $18% 1 l Fourth Quarter $0.375 November 23 $16 December 15 $18% On December 31,1995, the consolidated book value of the Company's Common Stock was $16.61 i per share. The closing market price of the Company's Common Stock on December 29,1995 (the last business day of the year) was $24% per share. There are no contractual limitations on the payment of dividends on the Company's Common Stock or on the common stock of the Company's subsidiaries. \\ 23 b

1 Item 6. SI1ected Firanc1&1 D:ts af tb3 Company. l The following table sets forth selected financial date with respect to the Company's consolidated financial condition and results of consolidated operations and should be read in conjunction w e.h the Financia) Statements and the related notes in Item 8 of this Report. On July 6, 1995, the Company closed tne sale of its cable television operations. The operations of EDLCOM have been accounted for as discontirued operat2ons. Year Ended Dareeber 31. e 1995 1994 1993 le92 1991 ~ (Thousands of Dollars, except per share amounts) Revsnues f 3.730.173 $ 3.754.136 f 4.093.f55 $ 3.957.912 $ 3.707.f05 Income from continuing operations before cumulative effect of change in cecounting (1) 397,400 423,985 440,531 $ 370,031 3 484,275 Loss from discontinued operations.... (16,524) (24,495) (29,544) (67,521) Cain on sale of cable television. subsidiary. 708,124 i Cumulative effect of change in accounting (2). '9.2001 94.190 Net income (1) .(3):

' 105.524 g,,,;gg,g;g 415. tM S 434.<'7 s

41c 754 Earnings per common share Continuing operations before cumulative effect of change in accounting (1). 3.60 1.72 1.69 1.43 1.88 Gain on sale of cable television subsidiary 2.86 Discontinued operations (.07) (.09) (.11) (.26) Cumulative effect of change in i accounting (2) t.03) .3g Earnings per common share (1) 4 46 f ' (2 f 1fS ! 1 'e 1 (2 Cash dividends declared per common 1.50 1.50 1.875 1.49 1.48 share (3) (4) Dividend pay-out ratio from continuing 94% 87% 89% 104% 79% operations Return on average common equity 15). 29.1% 11.9% 12.8% 13.4% 12.7% Ratio of earnings from continuing operations to fixed charges before cumulative effect of change in accounting 2.71 2.89 2.78 2.29 2.55 At year-end took value per common share (1) (3 ) 16.61 13.64 12.53 12.68 12.48 Market price per common share (3) 24.25 17.82 23.82 22.94 22.13 Market price as a percent of book value (1) 146% 131% 190% 181% 177% 1 i At year-end Total assets of continuing operations $11,819,606 $10,784,095 $10,867,581 $11,075,897 $10,820,562 i Net assets of discontinued operations 618.992 407.02.1 231.252 170.719 Total assets S11.e19.666 "'.403.077 !!'.354.607 $11.307.149 r10.091.290 Long term obligations including current maturities - continuing operations (6) $ 3,768,928 $ 3,905,518 $ 3,950,576 $ 4,244,077 $ 4,488,628 Long-term obligations including current maturities included in net assets of discontinued operations 504,580 514,964 740,453 813,203 Capitalization from continuing operations: Common stock equity 50% 44% 43% 42% 41% Cumulative preferred stock of HL&P (including current maturaties) 5% 7% 7% 7% 6% Long-term debt (including current maturities) 45% 49% 50% 51% 53% Capital expenditures: Electric capital and nuclear fuel expenditures (excluding AFUDC) (7) 296,635 412,899 329,016 $ 337,082 $ 365,486 Cable television additions and other cable-related investments - discontinued 47,601 84,071 61,856 45,233 26,624 Corporate headquarters expenditures (excluding capitalized interest) (7) 89,627 44,250 26,034 Non-regulated electric power project expenditures and advances 38,278 7,c87 35,796 1,625 (1) The Company adopted Statement of Position (SOP) 93 6, ' Employers' Accounting for Employee 5tock Ownership Plans," ef f ective January 1, 1994, which had the effect of reducing net income while increasing earnings per share. See also Notes 1(g) and 9 (b) to the Financial Statements. SOP 93-6 is effective only with respect to financial statements for periods after January 1, 1994, and no restatement was pennitted f or prior periods. (2) The 1994 cumulative effect relates to the change in accounting for postemployment benefits. See also Note 9(d) to the Financial Statements. The 1992 cumulative effect relates to the change in accounting for revenues. (3) All common share data reflect a two-for-one common stock dividend distribution in December 1995. (4) 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. See also Note 5(b) to the Financial Statements. (5) 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 11.6%. (6) Includes Cumulative Preferred Stock subject to mandatory redemption. (7) During 1995, HL&P made a payment toward the purchase of an ownership interest in the corporate headquarters building. Such payment is not reflected in the Company's electric capital and nuclear fuel expenditures as it is an affiliate transaction eliminated upon consolidation. 24

+

tes'6.

sz1sctcd'Fintacial Date of NL&P. ~ The following table sets forth selected financial data with respect to HL&P's financial condition and results .f operations and should be read in conjunction with the Fanancial Statements, i Year Ended December 31. I 1995 1994 1993 1992 1991 (Thousands of Dollars) tevenues $ 3.680.297 $ 3.746.08s S 4.079.es3 $ 3 e26.e41 s 3.674.s43

ncoms after preferred dividends but before cumulative effect of change in' accounting 450,977 $

461,381 $ 449,750 $ 375,955 ?umulative effect of change in ~ 472,712 accounting (1) fe.2001 94.1s0

ncome after preferred dividends.....

450.977 3 453.iel s 449.750 470.13s s 472.712 toturn on average common equity 11.8% 12.0% 22.3% 13.3% 13.8% tatio of earnings to fixed charges before cumulative effect of change in accounting 3.75 3.80 3,40 2.73 2.97 .atio of earnings to fixed charges and preferred dividend requirements l bafore cumulative effect of change-in accounting 3.20 3.20 2.90 2.34 2.53 i st year-end Total assets $10,665,259 $10,850,981 $10,753,616 $10,790,052. $10,620,642 ) Long-term obligations including current maturities (2) $ 3,220,015 $ 3,356,789 $ 3,402.032 $ 3,796,719 - $ 4,150,454 Capitalization: 1 Common stock equity 52% 51% 50% 47% 44% Cumulative preferred stock (including current maturities) 6% 7% 7% 7% Long term debt (including current 6% maturities) 42% 42% 43% 46% 50%

apital and nuclear fuel expenditures (excluding AFUDC) (3) 391,550 $

412,899 $ 329,016 $ 337,082 365,486 sorcent of capital expenditures financed internally from operations 110% 216% 158% 137% 126% l I (1) The 1994 cumulative effect relates to the change in accounting for postemployment benefits. See also Note j 9(d) to the Financial Statements. The 1992 cumulative effect relates to the change in accounting for i revenues from a cycle billing to a full accrual method effective January 1, 1992. '2) Includes Cumulative preferred Stock subject to mandatory redemption. 3) 1995 expenditures include a-payment toward the purchase of an ownership interest in the corporate j headquarters building. ] i i 25

.~ ltem 7. Management's Discussion and Analysis of Financial Condition and Results of Operations. RESULTS OF OPERATIONS ~ ' ~ ' HOUSTON INDUSTRIES INCORPORATED (COMPANY) ...A summary of selected consolidated financial data for the Company and its subsidiaries is set forth below: Year Ended December 31. Percent 1995 1994 Chance (Thousands of Dollars) Revenues.. $ 3,730,173 $ 3,754,136 (1) Operating Expenses. 2,825,240 2,785,521 1 Operating Income 904,933 968,615 (7) Interest and Other Charges......... 326,340 318,599 2 Income Taxes..... 199,555 230,424 (13) Income from Continuing Operations.. 397,400 423,985 (6) Gain /(Loss) from Discontinued Operations. 708,124 (16,524) Net income. 1,105,524 399,261 177 Year Ended December 31. Percent 1994 1993 Chance (Thousands of Dollars) Revenues........ $ 3,754,136 $ 4,083,655 (8) Operating Expenses........... 2,785,521 3,102,509 (10) Operating income... 968,615 981,146 (1) Interest and Other Charges.... 318,599 350,299 (9) Income Taxes 230,424 228,863 1 income from Continuing Operations. 423,985 440,531 (4) Loss from Discontinued Operations. (16,524) (24,495) (33) Net Income... 399,261 416,036 (4) All common stock data included in this section reflect the two-for-one stock split in the form of a stock distribution effected on December 9,1995. See Note 5(a) to the Company's Consolidated and Houston Lighting & Power Company's (HL&P) Financial Statements in item 8 of this Report (Financial Statements), in July 1995, the Company sold KBLCOM Incorporated, its cable television subsidiary (KBLCOM). The operations of KBLCOM are reflected as discontinued operations. See Note 13 to the Financial Statements. 26

I Earnings - The Company 1995 Comoared to 1994 Consolidated earnings per share were $4.46 for 1995, an increase of $2.84 per share from 1994. The Company's 1995 earnings were significantly affected y by a one-time after-tax gain of $708 million or $2.86 per share recorded upon the sale of the Company's cable television subsidiary. The gain is reflected in discontinued operations on the Company's Statements of Consolidated income. The Company's 1995 consolidated eamings per share from continuing operations were $1.60 per share, compared to $1.72 per share in 1994. HL&P contributed $1.82 per share in 1995 (reflecting net income of $451 million after dividends on preferred stock). In 1995, Houston industries Energy, Inc. (HI Energy) sustained a net loss of $33 million or $.13 per share. The net loss includes an $18 million after-tax charge to earnings resulting from the establishment of a valuation allowance reflecting the impairment of the ability of two waste tire-to-energy projects to repay $28 million in subordinated debt advanced to the projects by HI Energy, This impairment in the result of a repeal by the state of Illinois of an operating subsidy benefiting the projects. For tdditionalinformation regarding this charge and HI Energy's commitments under certain circumstances to make additional subordinated loans to these projects, see Note 4(c) to the Financial Statements. The remaining 5.09 per share loss was primarily due to corporate overhead costs and financing expenses at the parent company. Earnings for 1995 included after-tax dividend income of approximately $18 million related to Time Wamer Inc. (Time Wamer) securities received by the Company upon the sale of its cable television subsidiary. ) The Company had other revenues of $5) million in 1995 compared to $8 million in 1994. i Other revenues are principally from electric sales and operating revenues from HI Energy. The increase is primarily due to revenues from a foreign electric utility operating company acquired in 1995 by HI Energy. Other operating expensen for the Company were $123 million for 1995 compared to $36 million in 1994. Other operating expenses primarily include HI Energy operating expenses and corporate overhead costs at the parent company. The increase is principally due to increased HI Energy operating expenses for the foreign electric utility operating company, the $18 million after-tax charge to earnings described above and increased project development costs. For additional information regarding HI Energy's activities and investments, see Note 4 to the Financial Statements. I 1994 Comoared to 1993. Consolidated earnings per share from continuing operations were $1.72 for 1994, compared to $1.69 per share in 1993. Effective January 1,1994, the Company adopted Statement of Position (SOP) 93-6, " Employers' Accounting for Employee Stock Ownership Plans," which had the effect of reducing 1994 net income by $12.8 million while increasing.eamings per share by $.05. The increase in earnings per share occurred because SOP 93-6 required a reduction in the number of weighted average common shares outstanding for the period ended December 31, 1994 by the number of shares not yet allocated to plan participants in the Company's Employee Stock Ownership Plan (ESOP). For a further discussion of the effects of the adoption of SOP 93-6, see Notes 1(g) and 9(b) to the Financial Statements. HL&P contributed $1.88 per share in 1994 (reflecting income before cumulative effect of a change in accounting and after dividends on preferred stock of $461.4 million). In 1994, HI Energy sustained a net loss of $.03 per share. The remaining net loss of S.13 per share was primarily due to corporate overhead costs and financing expenses at the parent company partially offset by the effects of the adoption of SOP 93-6, as discussed above. 27

HL&P contributed 51.73 to the 1993 consolidated earnings per share from continuing operations on income of $449.8 million after preferred dividends. The remaining loss of S.04 per share resulted from corporate overhead costs and financing expenses at the parent company and a combined loss of the Company's other subsidiaries. HL&P I Summary of selected financial data for HL&P is set forth below: Year Ended December 31. Percent 1995 1994 Chance (Thousands of Dollars) Base Revenues (1) $2,645,303 $2,673,146 (1) Reconcilable Fuel Revenues (2) 1,034,994 1,072,939 (4) Operating Expenses (3). 2,945,633 3,003,203 (2) Operating income (3) 734,664 742,882 (1) Interest Charges 247,809 249,472 (1) Income After Preferred Dividends 450,977 453,181 Year Ended December 31. Percent 1994 1993 Chanae (Thousands of Dollars) Base Revenues (1)..... $2,673,146 $2,755,057 (3) Reconcilable Fuel Revenues (2) 1,072,939 1,324,806 (19) Operating Expenses (3)........... 3,003,203 3,313,577 (9) Operating income (3) 742,882 766,286 (3) Interest Charges... 249,472 284,585 (12) Income After Preferred Dividends... 453,181 449,750 1 (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 and Sales - HL&P"in this section for further discussion. (3) includes income taxes. Earnings - HL&P 1995 Comoared to 1994. HL&P's 1995 earnings were S451 million, a-decline of $2.2 million from 1994. Earnings for 1995 benefited from 5% growth in residential and 4% growth in commercial kilowatt-hour (KWH) sales resulting from continued customer growth and hotter summer weather in 1995. However, the revenue improvements were offset by (i) reduced electric rates stem ning from the settlement of Docket No.12065, HL&P's 1995 rate case (Rate Case Settlement), (ii) HL&P's decision to write down $50 million (533 million after-tax) of its investment in the South Texas Project Electric Generating Station (South Texas Project) as permitted under the Rate Case Settlement, and (iii) increased non-routine operating expenses in part associated with staff severance costs and litigation. HL&P's earnings for 1994 reflect a one-time, after-tax charge of $46 million in the fourth quarter also related to the Rate Case Settlement. 28

For cdditional information r:g:rding ths Rata Case Sctilement, see "Certain Factors Affecting Future Earnings of the Company and HL&P-Rate Matters and Other Contingencies," below, and Note 3(a) to the Financial Statements. 1994 Comoared to 1993. HL&P's 1994 earnings were $453.2 million, an increase of $3.4 million from 1993. The increase in HL&P's 1994 earnings resulted primarily from (i) increased residential and commercial KWH sales of 1 percent and 4 percent, respectively, (ii) lower operating costs associated with reductions in production plant maintenance and employee benefits, and (iii) reduced interest expenses. The increase in 1994 earnings was partially offset by (i) the one-time after-tax charge of $46 million discussed above and (ii) the recognition of an $8.2 million after-tax charge for postemployment benefit costs incurred as a result of the adoption of Statement of Financial Accounting Standards (SFAS) No.112, " Employer's Accounting for Postemployment Benefits." Earnings for 1993 included approximately $21 million (after-tax) in franchise tax refunds. Operating Revenues and Sales - HL&P 4 1995 Comoared to 1994. The $27.8 million decline in 1995 base revenues was primarily due to (i) decreased base rates resulting from the Rate Case Settlement, (ii) decreased firm industrial KWH sales and (iii) a reduction of revenues associated with recovery of certain firm capacity purchased power costs included in base rates. See Note 11(b) to the Financial Statements for a discussion of firm capacity costs. Firm industrial KWH sales declined 3 percent in 1995. Contributing to this decrease were a decline in sales to the chemical and refining industries, primarily due to the loss of a large industrial customer to self-generation, and the expiration of an economic development rate which caused some customers to make greater use of interruptible service or switch to alternative rates. Firm industrial sales exclude electricity sold at a reduced rate under agreements which allow HL&P to interrupt service under some circumstances. Reconcilable fuel revenues are revenues that are collected through a fixed fuel factor. The Public Utility Commission of 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 fuel factor proceeding and is generally effective for a minimum of six months. Revenues collected through such factor are adjusted monthly to equal expenses; 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 HL&P's balance sheets as fuel-related credits. Fuel costs are reviewed during periodic fuel reconciliation proceedings, which are required at least every three years. 1994 Comoared to 1993.1994 operating revenues declined 8.2 percent, or $333 million, primarily due to a decrease in reconcilable fuel revenues and the one-time, after-tax S46 million charge relating to the Rate Case Settlement discussed above.1994 residential and commercial KWH sales increased by 1 percent and 4 percent, respectively, while firm industrial sales remained relatively unchanged. Fuel and Purchased Power Expense - HL&P Fuel costs constitute the single largest expense for HL&P. 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 HL&P in 1995 was $1.59 per million British Thermal Unit (MMBtu) 29

($1.69 for natural gas, $2.03 for coal, $1.25 for lignite and $0.58 for nuclear). In 1994, the average cost of fuel was $1.54 ($1.90 for natural gas, $1.59 for coal, $1.11 for lignite and $0.57 for nuclear). 1995 Comoared to 1994. 1995 fuel expense increased by 2 percent, or $18.2 million, primarily due to the receipt in 1994 of $66.1 million from the sale of receivables associated with a settlement resolving claims that HL&P had been overcharged for the cost of coal transportation. For additionalinformation on this transaction, see Note 14 to the Financial Statements. Excluding the effects of such transaction,1995 fuel expense declined by 5.2 percent from 1994. This decline was attributable to (i) a general decline in the unit cost of natural gas and (ii) the increased use of nuclear generation (which has a per unit fuel cost that is substantially lower than HL&P's other fuel sources). Purchased power expense decreased $175 million resulting primarily from the expiration of certain purchased power contracts. 1994 Comoared to 1993. The 19 percent, or $202 million, decrease in 1994 fuel expense was primarily due to (i) decreases in both the usage and per unit cost of natural gas, and decreases in the unit cost of all other fuels used in 1994 and (ii) the $66.1 million reduction discussed above. The $107 million decrease in purchased power costs was due to the expiration in 1994 of a purchased power agreement. Operation and Maintenance Expenses, Depreciation, Amortization, and Other - HL&P 1995 Comoared to 1994. Operation and maintenance expenses for 1995 increased $35 million and $2.4 million, respectively, compared to 1994. Substantially all of the increase in operation expense resulted from (i) employee severance expenses, (ii) other employee benefits adjustments and (iii) certain litigation expenses. Depreciation and amortization expense for 1995 increased $77 million compared to 1994, primarily due to amortization recorded pursuant to the Rate Case Settlement, see Note 3(a) to the Financial Statements. Other taxes decreased $5.5 million for 1995 compared to 1994, primarily due to decreased state gross receipts obligations attributable to base and fuel refunds. Other-net expense for 1995 increased $13.3 million compared to 1994 primarily as a result of a one-time, pre-tax charge of $9 million incurred in connection with mine-related costs which were not previously recorded and are not recoverable under the Rate Case Settlement. During 1995, HL&P incurred $15 million in work force severance costs as a result of its efforts to streamline and improve certain business activities. These severance costs reflect a staff reduction of approximately 570 employees. Although these costs have the short-term effect of putting downward pressure on earnings, HL&P expects that these costs will be recovered from future savings in employee-related costs. HL&P estimates that it saved approximately $6 million in labor and benefit costs in 1995 as a result of these work force reductions. 1994 Comoared to 1993. Operation and maintenance expenses for 1994 decreased $28 million and $41.8 million, respectively, compared to 1993. These decreases were due primarily to lower employee benefits expenses and production plant maintenance costs. Depreciation and amortization expense in 1994 increased by $12.4 million compared to 1993, primarily due to an increase in depreciable property and the commencement of the amortization of previously deferred demand side management expenditures. Other taxes increased $40.1 million in 1994 primarily due to the effect of (i) franchise tax refunds of $32.7 million received in 1993 and (ii) a $6.1 million increase in property taxes in 1994. 30

CERTAIN FACTORS AFFECTING FUTURE EARNINGS OF THE COMPANY AND HL&P Earnings for the past three years are not necessarily indicative of future eamings and results of operations. The level of future earnings depends on numerous factors ranging from growth in energy sales, weather, HI Energy's future results of operations, competition, regulatory changes, the rate of economic growth in HL&P's service area, and the ability of the Company and HL&P to control costs and maintain a pricing structure that is both attractive to customers and profitable to the Company and HL&P. Rate Matters and Other Contingencies In August 1995, the Utility Commission unanimously approved the Rate Case Settlement. Subject to certain changes in existing regulation or legislation, the Rate Case Settlement precludes HL&P from seeking rate increases through December 31,1997. J Under the Rate Case Settlement, HL&P has the option to write down up to $50 million per 1 year of its investment in the South Texas Project through December 31,1999. In 1995, HL&P wrote down the maximum $50 milhon annual ($33 million after-tax) amount. Additionally, pursuant to the Rate Case Settlement, HL&P was permitted, and in January 1996, commenced amortization of its investment in certain lignite reserves (associated with the now canceled Malakoff generation project) at a rate of approximately $22 million per year. As a result of this additional amortization, all of HL&P's remaining investment in the Malakoff project will be fully amortized no later than December 31,2002. In addition, accruals for nuclear decommissioning expenses increased by $9 million per year beginning in 1995. For details of the terms of the Rate Case Settlement (as well l as the status of pending litigation involving other Utility Commission orders), see Note 3 to the Financial Statements. HL&P is a party to litigation and an arbitration proceeding involving certain of the owners of the South Texas Project. For information regarding that litigation and such proceeding (including i settlement discussions with the City of San Antonio), see Note 2(b) to the Financial Statements. The Company and HL&P are involved in other legal, tax and regulatory proceedings before various courts, regulatory agencies and governmental authorities,'some of which may involve substantial amounts. For additionalinformation, see Notes 3 and 11 to the Financial Statements. Competition Due to changing govemment regulations, technological developments and the availability of attemative energy sources, the U.S. electric utility industry has become increasingly competitive. Such competition affects HL&P's business both in terms of source of power supply available to HL&P and attemative choices for customers meeting their power needs. Wholesale ComDetition. Under the Energy Policy Act of 1992 (Energy Policy Act), exempt wholesale generators are permitted to produce and sell electric energy at wholesale without becoming subject to regulation under the Public Utility Holding Company Act of 1935 (1935 Act). In addition, the Energy Policy Act expands the authority of the Federal Energy Regulatory Commission (FERC) to grant exempt wholesale generators access to the transmission networks of utilities in order to sell electricity to other utilities. Although HL&P's wholesale sales traditionally have accounted for less than 1% of its total revenues, HL&P believes that the Energy Policy Act could encourage the development of additionalindependent power projects within its service area. 31

New Transmission Access Rule. In February 1996, the Utility Commission adopted a new l transmission access and pricing rule granting third-party users of transmission systems open access to such systems at rates, terms and conditions comparable to those available to the transmission-owning utilities. The rule also implements a transmission pricing methodology by which all transmission users will be assessed a facilities charge for transmission usage. The Utility Commission is also requiring utilities (i) to operationally separate or " functionally unbundle" their wholesale power marketing operations from the operation of the transmission grid and (ii) to separately disclose their costs of generation, transmission and distribution for purposes of transmission pricing. The facilities' charge to be paid by transmission users has two components: a statewide " postage stamp" component and a distance sensitive component. For the statewide postage stamp component, transmission users will pay an amount based upon their share of the total peak demand on the Electric Reliability Council of Texas, Inc. (ERCOT) system multiplied by 70% of the total ERCOT transmission cost of service. For the distance sensitive component, transmission users will pay to each affected transmission owner an amount based upon the user's relative impact on all transmission owners' systems multiplied by 30% of the total ERCOT transmission cost of service. Statewide postage stamp revenues will be apportioned to each transmission owner based on the ratio of its transmission cost of service to the total ERCOT transmission cost of service. As noted above, transmission owners will receive distance sensitive revenues based upon the relative impact on their systems of all ERCOT transmission users. Since the method for apportioning costs among transmission users is different from the method for apportioning revenues among transmission owners, the impact on any particular utility that both owns transmission facilities and uses the transmission systems of others can vary. Generally speaking, the new transmission access rule is less favorable to utilities with compact service areas and more favorable to utilities. with broader service areas. 1 Because HL&P has a compact service area and its transmission cost per megawatt is less than the statewide average, HL&P estimates that it could incur increased transmission costs of $35 million per year under the new rule. The actualimpact on HL&P, however, will not be known until the Utility Commission approves total ERCOT transmission cost of service, which is not expected to occur untillate 1996. To mitigate any cost increases to utilities and/or their customers, the Utility Commission will phase-in the increased transmission costs in 10% increments during the three-year period beginning with the implementation of the rule. At the end of the three-year period, the Utility Commission expects that each transmission-owning utility will have either adjusted its cost structures or requested a change in rates to account for such increased transmission cost. The new transmission access rule is one of several related regulatory proceedings now underway at the Utility Commission. In one such proceeding the Utility Commission is evaluating programs for Standard Terms and Conditions which will govem transmission service provided under the new transmMon access rule when it is implemented, it is anticipated that the rule establishing such E d Terms and Conditions will be effective in April 1996. The Utility Commission is spedy% me components of a rate filing package, which should be adopted in March 1996, and utilities will file specific transmission and ancillary service tariffs in May 1996. Finally, the Utility Commission intends to adopt in the third quarter of 1996 rules that would govem the action of the independent system operator selected to assure non-discriminatory operation of the transmission grid. Finalimplementation of the various Utility Commission's rules is expected 32

to occur in January 1997. Tha Utility Commission is also expect:d to revisit this rulemaking in order to ensure compliance with transmission rules to be adopted by FERC. Retail Wheelino and Stranded Costs. Although federallaw currently does not provide for transmission access to retail customers, retail wheeling initiatives are evolving and becoming prominent issues in several states. 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 signific t with respect to fixed costs incurred in connection with the past construction of generation plant: - 5 as nuclear power plants which, because of their high fixed costs, would not command the same price for their output as they have in a regulated environment. The Utility Commission has initiated projects to consider issues relating to the scope of competition in the electric utility industry and stranded investment in connection with the preparation of their 1997 reports to the Texas legislature. For a description of HL&P's principal regulatory assets and liabilities, see Note 1(b) to the Financial Statements. Response to Competition in February 1996, the Company announced its intent to form two new strategic business units (in addition to HI Energy) to focus on nonregulated energy marketing and energy services nationwide. In 1996, HL&P took steps to reorganize its operations into three strategic business units in order to better position itself to respond to the deregulation of the electric utility industry. The three strategic business units will consist of Energy Production (fossil-fueled electric generation), Energy Delivery and Customer Services (transmission and distribution of electricity and engineering, as well as marketing and other customer services) and the South Texas Project. HL&P has implemented flexible pricing to respond to the threat of competition in situations where large industrial customers have a viable source of altemative generation. Under a new tariff option approved by the Utility Commission in 1995, HL&P may negotiate a competitive rate with industrial customers who have an altemative to taking power from HL&P (as a result, for example, of cogeneration). Under the approved tariff, HL&P can price its industrial rate within a range between 6% above its marginal cost to its full embedded cost rate. While flexible tariff structures may help HL&P increase or retain sales to industrial customers (and reduces costs that would otherwise be borne by other customers), such tariffs result in sales at lower margins over cost. HI Energy The Company, through its subsidiary HI Energy, is focusing on international and domestic cogeneration, the international power market and the privatization of generating and distribution facilities in the intemational market. At December 31,1995, HI Energy's investments in these projects amounted to approximately $93 million. Subject to HI Energy's ability to identify other attractive investment opportunities, future capital expenditures in connection with HI Energy's international and domestic operations could be substantial. In October 1995, the Company and another Texas utility made an offer to purchase an English regional electricity company for a total price equal to approximately $2.7 billion. The offer was withdrawn after a competing bidder made a higher bid for the target company. 33

During 1995, Hi Energy had a consolidated loss of approximately 533 million or S.13 per share. The loss included an $18 million after-tax charge to earnings as described in more detail below. Based on existing commitments entered into by HI Energy, the Company estimates that Hi Energy's capital expenditures for 1996 will be approximately $34 million (531 million to be expended in connection with the construction of HI Energy's cogeneration project in San Nicolds, Argentina, and $3 million in connection with HI Energy's investment in a coke calcining project in the state of Andhra Pradesh, India). Additional capital expenditures (which could be substantial) are dependent upon the nature and extent of future project commitments entered into by HI Energy. During 1995, HI Energy satisfied its cash requirements primarily through intercompany borrowings from the Company. As of December 31,1995, the balance of such intercompany borrowings was $53.4 million. Although in the near term. HI Energy's investments are unlikely to have a positive effect on eamings, the Company believes that such investments (although subject to greater risks) may offer long-term opportunities for growth areater than those that exist in HL&P's regulated operations. HI Energy is a subordinated lender to two waste tire-to-energy projects being developed by CGE Ford Heights, L.L.C. (Ford Heights) and CGE Fulton, L.L.C. (Fulton), respectively, located in the state of Illinois. HI Energy also owns a $400,000 (20 percent) equity interest in Ford Heights. As of March 26,1996, HI Energy had lent on a subordinated basis approximately $17.5 million (including unpaid interest) to the Ford Heights project and $10.8 million to the Fulton project. These amounts are recorded on the Company's Consolidated Balance Sheets in equity investments in and advances to foreign and non-regulated affiliates-net. HI Energy also is party to two separate Note Purchase Agreements committing it, under certain circumstances, to acquire up to (i) 53 million in aggregate principal amount of additional subordinated notes from the Ford Heights project and (ii) $17 million in aggregate principal amount of additional subordinated notes from the Fulton project. The Company has entered into a support agreement under which it has agreed to provide additional funds to HI Energy to enable it to honor its obligations under the two j Note Purchase Agreements. The two waste tire-to-energy projects were being developed in reliance on the terms of the Illinois Retail Rate Law, enacted in 1987, to encourage development of energy production facilities for the disposal of solid waste by providing an operating subsidy to qualifying projects. In March 1996, the Govemor of the state of Illinois signed legislation which purports to repeal the Retail Rate Law. Following the action of the Governor, the projects filed a lawsuit against the Illinois Commerce Commission and an Illinois utility alleging, among other things, that the repeal of the j Retail Rate Law violated the lilinois Constitution. On March 26,1996 the Ford Heights project filed a voluntary petition seeking protection under the federal bankruptcy laws. The ability of the two waste tire-to-energy projects to meet their debt obligations is dependent upon the projects continuing to receive the operating subsidy provided under the Retail Rate Law. As a result, the Company has recorded a valuation allowance of $28 million with respect to its advances to these two projects, resulting in an after-tax charge to earnings of $18 million. The Company is unable to predict the ultimate effect of these developments on HI Energy's remaining funding commitments under the Note Purchase Agreements; however, in the Company's opinion, it is unlikely that the majority of the additional unfunded subordinated debt provided for in the Fulton Note Purchase . Agreement would be required to be funded unless construction activities with respect to the Fulton project are recommenced at some future date. If HI Energy becomes obligated to advance additional funds under the Note Purchase Agreements, the Company may be required to increase the amount of the valuation allowance, which would result in additional charges to eamings. 34

_ _ _ _ _ _.__.___ _ _ _. _ _ _._ =_ _ _ ? i invsetmsnt in Tima Warnst Sscuritiss 4 In connection with the sale of the Company's cable television subsidiary, the Company j received 1 million shares of Time Warner common stock and 11 million shares of non-publicly i traded Time Warner convertible preferred stock. The 11 million shares of Time Wamer convertible preferred stock are convertible by the Company into approximately 22.9 million shares of Time Wamer common stock. The Company has recorded these securities at a combined fair value of approximately $1 billion on the Company's Consolidated Balance Sheets. The Company excludes j unrealized net changes in the fair value of Time Warner common stock (exclusive of dividends and ] write downs) from eamings and, until realized, reports such changes as a net amount in a separate component of shareholders' equity. The Company's investment in the Time Warner convertible preferred stock is accounted for under the cost method. 3 J As with any investment, the value of the Company's investment will fluctuate over time in i response to general market conditions or economic and regulatory developments affecting Time Warner. 4' Based on current dividend rates, the Company expects to receive through July 1999 after-tax dividend income of approximately $37 million per year from its Time Warner securities. While the Company has no specific plans to dispose of these securities and is restricted in certain circumstances from doing so, it does not expect to maintain its substantial investment in Time Warner indefinitely. For a description of the Company's investment in Time Warner (including a i description of certain restrictions on the Company's ability to sell its Time Warner securities), see 4 Note 13 to the Financial Statements. ) i i e i I 4 1 1 t 35

i l LIQUIDITY AND CAPITAL RESOURCES 1 l l l Overview 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 1995 were, and as estimated for 1996 through 1998, are as follows: Millions of Dollars 1995 1996 1997 1998 Electric capital and nuclear fuel (excluding Allowance for Funds Used During Construction) (AFUDC) (1) $297 $387 $301 5328 Corporate headquarters expenditures (excluding ) capitalized interest) (1) 90 5 Non-regulated electric power project expenditures and advances (2). 38 34 55 Maturities of long-term debt, preferred stock and minimum capitallease payments.. 49 379 252 66 Discontinued operations: Cable television additions and other cable-related investments 48 Maturities of long-term debt 41 Total.. $_553 $305 3103 3394 0 (1) Renovation costs of new corporate headquarters building include costs of structural improvements and renovations. During 1995, HL&P made a payment toward the purchase of an ownership interest in the new corporate headquarters building. Such payment is not reflected in the Company's electric capital and nuclear fuel expenditures as it is an affiliate transaction eliminated upon consolidation. (2) Expenditures in table reflect only expenditures made or to be made under existing commitments entered into by HI Energy. Additional capital expenditures are dependent upon the nature and extent of future project commitments (some of which may be substantial) entered into by HI Energy. j The foregoing estimates 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 govemmental regulations, the resolution of various litigation and other contingencies and changes in economic conditions. Company Consolidated Capital Requirements The cash requirements of the Company and its subsidiaries stem primarily from operating expenses, capital expenditures, payment of dividends on its common stock, payment of dividends on HL&P's preferred stock and interest and principal payments on debt. In 1995, net cash provided by operating activities totaled $839.4 million. Net cash provided by investing activities totaled $124.9 million, primarily due to the settlement of subsidiary debt related to the sale of KBLCOM of $619.3 million partially offset by electric capital expenditures of $301.3 million (including allowance for borrowed funds used during construction) and expenses associated with structural 36

improvements and renovation of a new corporate headquarters of $96.5 million (including capitalized interest). Net cash used in discontinued cable television investing activities for 1995 totaled approximately $48 million, primarily due to property additions and other cable-related investments. Financing activities for 1995 resulted in a net cash outflow of $963 million. HL&P Capital Requirements Cash Recuirements. HL&P's cash requirements stem primarily from operating expenses, capital expenditures, payment of dividends on its common stock, payment of dividends on its preferred stock and interest and principal payments on debt. In 1995, HL&P's net cash provided by operating activities totaled approximately $867.7 million, and net cash used in HL&P's investing activities totaled $406.9 million, including allowance for borrowed funds used during construction. HL&P's financing activities for 1995 resulted in a net cash outflow of $620.8 million. Included in these activities were the payment of dividends, the extinguishment of long-term debt, the redemption of preferred stock and the issuance of collateralizing first mortgage bonds. For information with respect to these matters, see Notes 6 and 7(b) to the Financial Statements. Caoital Proaram. In 1995 HL&P's capital and nuclear fuel expenditures (excluding AFUDC) totaled approximately $392 million with estimated expenditures for 1996,1997 and 1998 totaling $387 million, $301 million and $328 million, respectively. HL&P's capital programs for the next three years, which are expected to relate to costs for production, transmission, distribution and general plant, are subject to periodic review and may be revised at any time due to changes in load forecasts, regulatory and environmental standards and other factors. During the next three years, it is anticipated that HL&P will require approximately $497 million for repayment of maturing long-term debt, preferred stock subject to mandatory redemption and capitalleases. These expenditures are anticipated to be $179 million in 1996, $252 million in 1997 and $66 million in 1998. i Environmental Exoenditures. The Federal Clean Air Act (Clean Air Act)'has required, and will continue to require, HL&P to increase its environmental expenditures. In 1995, modifying HL&P's existing facilities to reduce emissions of nitrogen oxides (NOx) cost approximately $1 million. The date for installation of additional controls has been delayed by the United States Environmental Protection Agency (EPA) and the Texas Natural Resource Conservation Commission untilit becomes certain that additional expenditures for NOx emission reductions will i be required under the provisions of the Clean Air Act. However, up to an additional $40 million may be incurred by HL&P in order to fully comply with new NOx requirements through 1999. In addition, it is anticipated that approximately $1 million in 1996 will be expended to install continuous emission monitoring equipment; approximately $3 million was incurred for this equipment in 1995. The EPA identified HL&P as a potentially responsible party under the Comprehensive Environmental Response, Compensation, and Liability Act for the costs of cleaning up a site located adjacent to one of HL&P's transmission lines. HL&P believes that the EPA took this action solely on the basis of information indicating that HL&P in the 1950s acquired record title to a portion of the land on which the site is located. HL&P does not believe that it now nor previously has had any ownership interest in the land in question and has obtained a judgment from a court in Galveston County, Texas, to that effect. Accordingly, HL&P has not complied with this order, even though HL&P understands that other responsible parties are proceeding with site remediation. To date, neither the EPA nor any other potentially responsible party has instituted a claim against HL&P for any share of the remediation costs, but under current law if HL&P is determined to be a responsible party, HL&P could be found to be jointly and severally liable for the remediation costs 37

~ - - - - - ~.-- (which HL&P estimates to be approximately $80 million) and could be subjected to substantial fines i and damage claims. Compliance with possible additional legislation related to global climate change, electromagnetic fields and other environmental and health issues could significantly affect the l Company and HL&P. The impact of the new legislation, if any, will depend on the subsequent j development and implementation of applicable regulations. j Company-Sources of Capital Resources and Liquidity I The Company has registered with the Securities and Exchange Commission (SEC) ten million shares of its Common Stock and $250 million principal amount of its debt securities, all of which securities remain unissued and, subject to market conditions, could be sold to raise additional capital for the Company. Proceeds from the sale of these securities can be used for general corporate purposes, including, but not limited to, the redemption, repayment or retirement of I outstanding indebtedness of the Company or the advance or contribution of funds to one or more of the Company's subsidiaries to be used for their general corporate purposes, including, without limitation, the redemption, repayment or retirement of indebtedness or preferred stock. 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 conducted by the Company based on the net cash position, in 1995, net funding requirements under the " money fund" were met with borrowings under the Company's commercial paper program, except that HL&P's short-term borrowing requirements were generally met with HL&P's commercial paper program. In 1996, net funding requirements ) of the Company and HL&P are expected to be met with a combination of commercial paper and bank borrowings. As of December 31,1995, the Company had a bank credit facility of $1.1 billion (exclusive of bank credit facilities of subsidiaries), which was used to support its commercial paper program. At December 31,1995, the Company had approximately $6.3 million of commercial paper outstanding. Rates paid by the Company on its short-term borrowings are generally lower than the prime rate. In the fourth quarter of 1996, the Company will be required to redeem $200 million of its 7-1/4% debentures. Based on current market conditions, the Company expects to fund this redemption requirement using proceeds from short-term borrowings or other extemal sources. Subject to the nature and extent of future project commitments, it is anticipated that HI Energy's 1996 capital requirements will be satisfied primarily through intercompany borrowings from the Company. HI Energy intends that any third party borrowings it incurs will be non-recourse to the Company, HL&P or HI Energy. HL&P--Sources of Capital Resources and Liquidity HL&P expects to finance its 1996 through 1998 capital program with funds generated intemally from operations. HL&P has registered with the SEC $230 million aggregate liouidation value of its preferred stock and $580 million aggregate principal amount of its debt securities that may be issued as first mortgage bonds. Subject to market conditions, these securities could be 38

j issu:d as anothzr source of capital for HL&P. Proc:rds from any sale of th se securitics cra expected to be used for general corporate purposes including the purchase, redemption (to the extent permitted by the terms of the outstanding securities), repayment or retirement of outstanding indebtedness or preferred stock of HL&P. 1 In 1995, HL&P's interim financing requirements were met with commercial paper. HL&P has a commercial paper program supported by a bank line of credit of $400 million. HL&P had no commercial paper outstanding at December 31, 1995. At December 31, 1995, HL&P had i ~ approximately $75.9 million in cash and cash equivalents invested in short-term investments. i HL&P continued to reduce its financing costs by retiring higher-cost bonds in 1995. In j addition, HL&P accelerated in 1995 the sinking fund requirements of certain shares of its preferred stock. As a result of these efforts, the composite interest rate on long-term debt decreased from 8.32 percent at December 31,1993 to 8.19 percent at December 31,1995. During the same period, the composite dividend rate on preferred stock increased from 6.23 percent to 6.43 percent. In 1996, HL&P will be required to redeem $150 million of its first mortgage bonds and $26 million of its preferred stock. For additional information, see Notes 6 and 7(b) to the Financial Statements. HL&P intends to satisfy these redemption obligations using funds internally generated i from operations. NEW ACCOUNTING ISSUES In 1995, the Financial Accounting Standards Board (FASB) issued SFAS No.121, (" Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of "), which imposes stricter standards for assessing asset impairments than previously imposed by generally accepted accounting principles. SFAS No.121 is effective for years beginning after i December 15,1995. Beginning in 1996, the Company and HL&P (and other companies subject to SFAS No.121) must review certain assets for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable, if an impairment is found to exist, the impairment loss to be recognized is the amount by which the ,l carrying amount exceeds the fair value. The Company and HL&P believe that, based on current conditions, SFAS No.121 will have no material effect on their respective results of operations when j adopted in 1996. This conclusion, however, may change in the future as competition influences wholesale and retail pricing in the electric utility industry, j in October 1995, the FASB issued SFAS No.123, " Accounting for Stock-Based Compensation." Effective for fiscal years beginning after December 15,1995, SFAS No.123 does ~ not rescind the existing accounting for employee stock-based arrangements but encourages (although it does not require) recognizing the fair value based method of accounting for j stock-based compensation. Companies that choose not to adopt tiie new rules will continue to apply the existing accounting rules contained in Accounting Principles Board (APB) Opinion No. 25, " Accounting for Stock issued to Employees"; however, SFAS No.123 requires disclosure of pro forma net income and earnings per share that would have been reported under the " fair value" recognition provisions of SFAS No.123. The Company and HL&P have reviewed the provisions of SFAS No.123, and based on current assumptions, th,e calculated " fair value" does not result in -a material difference in 1995 recorded compensation cost. The Company and HL&P will continue to account for stock-based compensation under APB Opinion No. 25 and disclose the pro forma information required under SFAS No.123. The staff of the SEC has questioned certain of the current accounting practices of the electric utility industry regarding the recognition, measurement and classification of decomminioning costs 39

1 for nuclear g:ntrating facilities recorded on the financial statements of electric utilities. In responso l to these questions, the FASB initiated a project entitled " Accounting for Certain Liabilities Related to Closure or Removal of Long-Lived Assets." Throughout 1995, the FASB reviewed the accounting for closure or removal obligations, including decommissioning of nuclear facilities. In February 1996, FASB issued an Exposure Draft communicating the results of this project. The Exposure Draft outlines the following: (i) the requirement of recognition of a liability based on the present value of the estimated future cash outflows that will be required to satisfy the closure or removal obligations, using a risk free interest rate (U.S. Treasury securities), (ii) an equal amount capitalized as part of the costs of the related long-lived asset, depreciated over the life of the asset, and (iii) recognition of a regulatory asset or liability under SFAS No. 71," Accounting for the Effects of Certain Types of Regulation", for differences in expenses recognized under this statement and amounts charged to customers in rate-regulated entities. HL&P believes that, while the proposed standard would also significantly increase disclosure requirements, it would have minimal impact i on the Company's and HL&P's financial condition or results of operations. j l The Company and HL&P's financial statements include additional disclosures required as a j result of the adoption of the SOP 94-6 " Disclosure of Certain Significant Risks and Uncertainties". This SOP, which is effective for financial statements issued for fiscal years ending after December 15, 1995, requires financial statement disclosure for (i) the nature of operations, (ii) use of i estimates in the preparation of financial statements, and, if specified disclosure criteria are met, (iii) certain significant estimates and (iv) current vulnerability due to certain concentrations. l l l l l i l I 1 l l 1 i 40 l

It:3 8. Financial Statemento cnd SupplcOcntcry Dsta. HOUSTON INDUSTRIES INCORPORATED AND SUBSIDIARIES STATEMENTS OF CONSOLIDATED INCOME (Thousands of Dollars) Year Ended December 31. 1995 1994 1993 Rcvenuest Electric utility $ 3,680,297 S 3,746,085 $ 4,079,863 i Other 49.876 e.051 3.792 Total 3.730.173 3.754.136 4.083.655 1 Expenses: 1 Electric utility: { Fuel 879,148 860,936 1,063,050 Purchased power 233,494 408,963 515,502 Operation and maintenance 866,170 828,748 898,535 Taxes other than income taxes 245,890 251,421 211,295 Depreciation and amortization 478,034 399,341 386,893 Other operating expenses 122.504 36.112 27.234 Total 2.925.240-2.785.521 3.102.509 Operating Income 904.933 968.615 991.146 i Other Income (Expense) : ) Allowance for other funds used during i construction 7,760 4,115 3,512 j Tine Warner dividend income 20,132 Interest income 9,774 6,628 33,357 Other - net (19.304) (6.350) 1.678 Total 18.362 4.393 38.547 Interest and Other Charges i Interest on long-term debt 279,491 265,494 304,462 Other interest 21,586 25,076 15,145 l Allowance for borrowed funds used during I construction (4,692) (5,554) (3,781) Preferred dividends of subsidiary 29.955 33.583 34.473 Total 326.340 318.599 350.299 Income from pontinuing Operations Before Income Taxes and Cumulative Effect of Change in Accounting 596,955 654,409 669,394 I Income Taxes 199.555 230.424 220.863 Income from Continuing Operations 'sefore cumulative Effect of Change in Accounting 397,400 423,985 440,531 Discontinued Operations (Not of Income Taxes): Gain on sale of cable television subsidiary 708,124 Loss from discontinued cable television operations (16.524) (24.495) Income Defore Cumulative Effect of Change in Accounting 1,105,524 407,461 416,036 Oumulative Effect of Change in Accounting for Postemployment Benefits (net of income taxes of $4,415) (8.200) N t Income $ 1.105.524 399.261 S 416.036 (continued on next page) 41

-. _ _.. _ _ _. _ = _, ~. HOUSTON INDUSTRIES INCORPORATED AND SUISIDIARIES STATEMENTS OF CONSOLIDATED INCOME (Continued) Year Ended December 31. I 1995 1994 1993 (Restated) (Restated)- Earnings Per Common Sharat Continuing Operations Before Cumulative Effect of Change in Accounting S 1.60 1.72 1,69 Discontinued Operations: Gain on sale of cable television subsidiary 2.86 Loss from discontinued cable television operations (.07) (.09) Cumulative Effect of Change in Accounting for Postemployment Benefits f.03) Ecrnings Per Common Share S 4.46 S 1.62 S 1.60 Wrighted Average Common Shares outstanding (000) 247,706 245,707 260,008 See Notes to Consolidated Financial Statements. f I 1 d2

... _. =, HOUSTON INDUSTRIliS INCORPORATED AND SUBSIDIARIES STATEMENTS OF CONSOLIDATED RETAINED EARNINGS (Thousands of Dollars, except per share amounts) Year Ended December 31. ~~ ~~ 1995 1994 1993 Balance at Beginning of Year $ 1,221,221 $ 1,191,230 $ 1,254,584 <.) ~l Add - Net Income 1.105.524 199.261 416.036 e' Total. 2,326,745 1,590,491 1,670,620 l Common Stock Dividends: 1995, $1.50; 1994, $1.50; 1993, $1.875 (per share) (371,760) (369,270) (487,927) Stock Dividend Distribution. (1,313) Tax Benefit of ESOP Dividends 8,939 Rsdemption of HL&P Preferred Stock (402) Bslance at End of Year $ 1.953.672 $ 1.221.221 S 1.191.230 See Notes to Consolidated Financial Statements. i o 43

l HOUSTON INDUSTRIES INCORPORATED AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (Thousands of Dollars) ASSETS December 31. 1995 1994 l 4 Prep;rty, Plant and Equipment - At Cost Electric plant: Production $ 7,423,891 $ 7,221,142 Transmission 927,027 876.159 Distribution 2,711,482 2,628,450 Gtneral 1,027,090 1,017,319 Construction work in progress 320,040 333,180 Nuclear fuel 217,604 212,795 Plant held for future use 48,631 201,741 Electric plant acquisition adjustments 3,166 Other property 105.624 85.529 Total 12,781,389 12,579,481 Lass accumulated depreciation and amortization 3.916.540 3.527.598 Property, plant and equipment - net 8.864.849 9.051.883 Currcnt Assets: Cash and cash equivalents 11,779 10,443 Spacial deposits 433 10 Accounts receivable - net 39,635 13,981 Accrued unbilled revenues 59,017 38,372 Tima Warner dividends receivable 10,313' 59,699 56,711 Fuel stock Materials and supplies, at average cost 138,007 148,007 Prepayments 18.562 14.398 Total current assets. 337.445 281.922 Oth r Assets: Investment in Time Warner securities 1,027,875 Net assets of discontinued cable television operations 618,982 Deferred plant costs - net 613,134 638,917 Daferred debits 317,215 271,454 Unimortized debt expense and pre.mium on reacquired debt 161,788 161,885 Regulatory tax asset - net 228,587 235,463 Recoverable project costs - net 232,775 98,954 Equity investments in and advances to foreign and 35.938 43.617 non-regulated affiliates - net 2.617.312 2.069.272 Total other assets. Total S11.819.606 S11.403.077 l See Notes to Consolidated Financial Statements. I i 4 i 44

HOUSTON INDUSTRIES INCORPORATED AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (Thousands of Dollars) i CAPITALIZATION AND LIABILITIES December 31. 1995 1994 C pitalization (statements on followitg pages): Common stock equity $ 4.123.563 $ 3.369.248 Preference stock, no part authorized, 10,000,000 shares; none outstanding ' Cumulative preferred stock of subsidiary: Not subject to mandatory redemption 351,345 351,345 Subject to mandatory redemption 51.055 121.910 Total cumulative preferred stock 402.400 473.255 Long-term debt 3.338.422 3.734.133 Total capitalization. 7.864.385 7.576.636 Current Liabilities: Notes payable i 6,300 423,291 Accounts payable 136,008 159,225 Taxes accrued 174,925 169,690 Interest accrued 79,300 73,527 Dividends declared 98,502 98,469 Accrued liabilities to municipalities 20,773. 21,307 Customer deposits 61,582 64,905 Current portion of long-term debt and preferred stock 379,451 49,475 Other 58.664 64.026 Total current liabilities 1.035.585 1.123.915 i 1 D:ferred Credits: Accumulated deferred income taxes 2,067,246 1,763,230 Unamortized inv2stment tax credit 392,153 411,580 Fuel-related credits 122,063 242,912 Other 358.174 284.804 Total deferred credits 2.939.636 2.702.526 Commitments and Contingencies Total $11.819.606 $11.403.077 See Notes to Consolidated Financial Statements. I l 45 l

1 i i HOUSTON INDUSTRIES INCORPORATED AND SUBSIDIARIES l CONSOLIDATED STATEMENTS OF CAPITALIZATION (Thousands of Dollars) December 31, 1995 1994 C4sunon Stock Equity: Common stock, no par; authorized, 400,000,000 shares: issued, 262,672,468 and 262,593,326 shares at December 31, 1995 and 1994, respectively $ 2,441,790 $ 2,437,638 Unearned ESOP shares, 14,355,758 and 15,540,626 shares at December 31, 1995 and 1994, respectively (268,405) (289,611) Retained earnings 1,953,672 1,221,221 Unrealized loss on investment in Time Warner common j securities (3.494) Total common stock equity 4.123.563 3.369.248 Cumulative Preferred Stock, no par; authorized, 10,000,000 shares; outstanding, 4,318,397 and 5,232,397 shares at Dscember 31, 1995 and 1994, respectively (entitled upon involuntary liquidation to $100 per share): Houston Lighting & Power Company: Not subject to mandatory redemption: $4.00 series, 97,397 shares 9,740 9,740 $6.72 series, 250,000 shares 25,115 25,115 $7.52 series, 500,000 shares 50,226 50,226 $8.12 series, 500,000 shares 50,098 50,098 Series A - 1992, 500,000 shares 49,094 49,094 Series B - 1992, 500,000 shares 49,104 49,104 Series C - 1992, 600,000 shares 58,984 58,984 58.984 58.984 L Series D*-

1992, 600,000 shares Total 351.345 351.345 Subject to mandatory redemption:

$8.50 series, 400,000 shares at December 31, 1994 39,799 $9.375 series, 771,000 and 1,285,000 shares at December 31, 1995 and 1994, respectively. 76,755 127,811 Current redemptions (25.700) (45.700) Total 51.055 121.112 Total cumulative preferred stock ~ 402.400 473.255 Long-Term Debt: Dabentures: 7 1/4% series, due 1996 200,000 200,000 9 3/8% series, due 2001 250,000 250,000 7 7/8% series, due 2002 100,000 100,000 (1.087) (1.271) Unamortized discount Total debentures 548.913 548.729 Houston Lighting & Power Company: First mortgage bonds: 5 1/4% series, due 1996 40,000 40,000 5 1/4% series, due 1997 40,000 40,000 7 5/8% series, due 1997 150,000 150,000 6 3/4% series, due 1997 35,000 35,000 j 6 3/4% series, due 1998 35,000 35,000 7 1/4% series, due 2001 50,000 50,000 9.15 % series, due 2021 160,000 3"O,000 l 8 3/4% series, due 2022 62,275 100,000 7 3/4% series, due 2023 250,000 250,000 7 1/2% series, due 2023 200,000 200,000 (continued on next page) 46

HOUSTON INDUSTRIES INCORPORATED AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CAPITALIZATION (Thousands of Dollars) l i (Continued) December 31. 1995 1994 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 7 3/4% pollution control series, due 2015 68,700 68,700 5.80 % pollution control series, due 2015 58,905 7 7/8% pollution control series, due 2016 60,000 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 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 l 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 1996-1999 180,500 180,500 Medium-term notes series.B, 8 5/8%, due 1996 100,000 100,000 Medium-term notes series C, 6.10 %,, due 2000 150,000 150,000 l 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 Total first mortgage bonds. 3.145.175 3.032.050 Pollution control revenue bonds: Gulf Coast 1980-T series, floating rate, due 1998 5,000 5,000 Brazos River 1985 A2 series, 9 3/4%, due 2005 4,265 Brazos River 1985 Al series, 9 7/8%, due 2015 87,680 Matagorda County 1985 series, 10%, due 2015 58.905 Total pollution control revenue bonds 5.000 155.e50 l Unomortized premium (discount) - net (16,456) (12,253) l Capitalized lease obligations, discount rates of 5,2%-11.7%, due.1996-2018 8,560 12,403 Motes payable 981 1.129 l Subtotal (6.915) 1.279 Total 3.143.260 3.109.179 Total 3,692,173 3,737,909 Current maturities (353.751) (3.775) Total long-term debt 3.338.422 3.734.133 Total capitalization $ 7.964.395 $ 7.576.636 See Notes to Consolidated Financial Statements. i 47 \\ \\

1 1 HOUSTON INDUSTRIES INCORPORATED AND SUBSIDIARIES j STATEMENTS OF CONSOLIDATED CASH FLOWS Increase (Decrease) in Cash and Cash Equivalents (Thousands of Dollars) l Year Ended December 33% 1995 1994 1993 Ccch Flows from Operating Activities: Income from continuing operations 397,400 423,985 440,531 Adjustments to reconcile income from continuing i operations to net cash provided by operating activities: Depreciation and amortization 478,034 399,341 386,893-Amortization of nuclear fuel.. 28,545 21,561 2,101 Deferred income taxes 78,382 85,547 194,711 j Investment tax credits. (19,427) (19,416) (19,797) Allowance for other funds used during construction (7,760) (4,115) (3,512) Fuel refund (189,571) Fuel cost over (under) recovery 76,970 277,940 (91,863) Regulatory tax asset - ne t 6,876 11,300 (69,337) Net cash provided by (used in).. discontinued t cable television operations 16,391 19,349 (1,073) Changes in other assets and liabilities: Accounts receivable - net (46,299) (19,295) 302,268 Inventory 7,012 14,273 13,868 other current assets (14.900) 14,710 (15,138) Accounts payable (23,217) (45,081) (7,962) i Interest and taxes accrued 11,088 (17,979) (16,689) Other current liabilities (9,215) (5,102) 41,430 Other - net 49.129 48.254 52.609 Net cash provided by operating activities 839.438 1.205.272 1.209.040 ~ C :h F1ows from Investing Activities: Electric capital and nuclear fuel expenditures I (including allowance for borrowed funds used during construction) (301,327) (418,453) (332,797) Non-regulated electric power project expenditures and advances (38,278) (7,087) (35,796) Sattlement of subsidiary debt in connection with sale of cable television subsidiary 619,345 Corporate headquarters expenditures (including - capitalized interest) (96,469) (46,829) (26,034) Nat cash used in discontinued cable television operations (47,601) (84,071) (61,856) Other - net (10.743) (13.562) (5.295) Net cash provided by (used in) investing activities 124.927 (570.002) (461.778) i (continued on next page) 48

HOUSTON INDUSTRIES INCORPORATED AND SUBSIDIARIES i STATEMENTS OF CONSOLIDATED CASH FLOWS j Increase (Decrease) in cash and Cash Equivalents (Thousands of Dollars) (Continued) 1 I Year Ended December 31. 1995 1994 1993 Ca-h Flows from Financing Activities: Proceeds from common stock 52,638 Proceeds from first mortgage bonds 142,972 840,427 Psyment of matured first mortgage bonds (19,500) (136,000) Payment of common stock dividends (371,731) (368,790) (389,933) Rademption of preferred stock (91,400) (20,000) (40,000) Increase (decrease) in notes payable (416,991) (168,094) 27,136 Extinguishment of long-term debt j (195,224) (995,751) Hat cash used in discontinued cable television operations (40,798) (68,184) (225,489) Other - net 10.143 4.957 65.277 Net cash used in financing activities (963.029) (639.711) (801.695) N:t Increase (Decrease) in Cash and Cash Equivalents 1,336 (4,441) (54,433) Cash and Cash Equivalents at Beginning of Year 10.443 14.884 69.317 Csch cnd Cash Equivalents at End of Year 11.779 10.443 14 984 Sunniamental Disclosure of cash Flow Informatient Cash Payments: Interest (net of amounts capitalized) 342,551 366,548 397,911 Income taxes 104,228 174,657 123,975 See Notes to, Consolidated Financial Statements. 49

1 HOUSTON LIGHTING & POWER COMPANY i S TATEMENTS OF INCOME (Thousands of Dollars) Year Ended December 31. 1995 1994 1993 Op: rating Revenues 9 3.680.297 $ 3.746.085 S 4.079.863 Op3 rating Expenses: Fuel 879,148 860,936 1,063,050 Purchased power 233,494 408,963 515,502 Operation 615,924 580,892 608,912 Maintenance 250,246 247,856 289,623 Depreciation and amortization 475,124 398,142 385,731 Federal income taxes 245,807 254,993 239,464 245.890 251.421 211.295 Other taxes Total 2.945.633 3.003.203 3.313.577 ( 734.664 742.882 766.286 Op3 rating Income ' Other Income (Expense): Allowance for-other funds used during construction 7,760 4,115 3,512 Interest income 12,218 10,000 3,296 (25.901) (12.561) (4.286) 4 Other - net 7 Total f5.923) 1.554 2.522 4 Income Before Interest Charges 728.741 744.436 768.808 Interest Charges: + Interest on long-term debt 244,384 246,533 276,049 8,117 0,493 12,317 l Other interest Allowance for borrowed funds used during (4.692) (5.554) (3.781) construction 4 247.809 249.472 284.585 Total Income Before Cumulative Effect of Change 480,932 494,964 484,223 in Accounting Cumulative Effect of Change in Accounting for Postemployment Benefits (net of income (8.200) taxes of $4,415) i i 480,932 486,764 484,223 Nat Income 29.955 33.583 34.473 Dividends on Preferred Stock Income After Preferred Dividends S 450.977 453.181 449.750 See Notes to Financial Statements. 4 l l l I a i 50

l 3 i HOUSTON LIGHTING & POWER COMPANY STATEMENTS OF RETAINED EARNINGS I (Thousands of Dollars) i I a ~ Year Ended December 31. 1995 1994 1993 Balance at Beginning of Year $ 2,153,109 $ 2,028,924 $ 1,922,558 Add - Net Income 480,932 486,764 484,223 Rsdemption of Preferred Stock. (402) I l Total. 2.634.041 2.515.688 __ 2.406.379 l Daduct - Cash Dividends: Preferred: $4.00 Series 389 390 390 $6.72 Series 1,680 1,680 1,680 i $7.52 Series 3,760 3,760 3,760 $8.12 Series 4,060 4,060 4,060 Series A - 1992............. 2,324 1,740 1,366 Series B - 1992 2,322 1,683 1,366 l Series C - 1992 2,823 2,040 1,672 Series D - 1992. 2,747 2,075 1,615 1 $8.50 Series 1,417 4,108 6,517 'l $9.375 Series. 8,433 12,047 12,047 .l Common 454.000 328.996 342.982 j j i \\ l Total. 483.955 362.579 377.455 i l $ 2.150.086 $ 2.153.109 $ 2.028.924 i Balance at End of Year See Notes to Financial Statements. l l i l { i I i l l l r J 4 l 51 i I w

~ HOUSTON LIGHTING & POWER COMPANY BALANCE SHEETS (Thousands of Dollars) ASSETS December 31. 1995 1994 5 Prcperty, Plant and Equipment .At. Cost Electric plant: Production S 7,423,891 $ 7,221,142 i Transmission 927,027 876,159 Distribution 2,711,482 2,628,450 General 1,027,090 1,017,319 Construction work in progress 320,040 333,180 4 Nuclear fuel 217,604 212,795 Plant held for future use 48,631 201,741 Electric plant acquisition adjustments 3.166 Total 12,675,765 12,493,952 Lass accumulated depreciation and amortization 3.906.139 '3.517.923 Property, plant and equipment - net B.769.626 9.976.029 Current Assets: Cash and cash equivalents 75,851 235,867 Special deposits 433 10 Accounts receivable:. Affiliated companies 2,845 4,213 Others 23,858 8,896 Accrued unbilled revenues 59,017 38,372 Fuel stock 59,699 56,711 j H terials and supplies, at average cost 137,584 147,922 2 Prepayments 11.976 9.665 d Total current assets 371.163 501.656 Oth3r Assets: 613,134 638,917 D3ferred plant costs - net Daferred debits 290,012 241,611 Unamortized debt expense and premium on reacquired debt 159,962 158,351 Rsgulatory tax asset - net 228,587 235,463 Recoverable project costs - net 232.775 99.954 Total other assets 1.524.470 1.373.296 l $10.665.259 $10.850.981 Total See Notes to Financial Statements. 52

HOUSTON LIGHTING & POWER COMPANY BALANCE SHEETS 1 (Thousands of Dollars) CAPITALIZATION AND LIABILITIES December 31. 1995 1994 C:pitalization (statements on following pages): $ 3,826,013 $ 3,829,036 Common stock equity Cumulative preferred stock: j 351,345 351,345 Not subject to mandatory redemption 51,055 121,910 i Subject to mandatory redemption 2.999.509 3.185.404 j Long-term debt 7.217.922 7.487.695 Total capitalization currcnt Liabilities: 119,032 148,042 Accounts payable Accounts payable to affiliated companies 6,982 10,936 Texes accrued 192,673 181,043 Interest accrued 70,823 64,732 Accrued liabilities to municipalities 20,773 21,307 61,582 64,905 Customer deposits 179,451 49,475 Current portion of long-term debt and preferred stock 54.149 59.912 other 705.465 600.352 Total current liabilities Deferred Credits: 1,947,488 1,876,300 Accumulated deferred federal income taxes Unamortized investment tax credit 392,153-411,580 Fuel-related credits 122,063 242,912 280.168 232.142 i Other 2.741.872 2.762.934 Total deferred cre'dits.. Commitments and Contingencies $10.665.259 $10.850.981 Total See Notes to Financial Statements. i l l 53

HOUSTON LIGHTING & POWER COMPANY l STATEMENTS OF CAPITALIZATION (Thousands of Dollars) ~ ~ December 31. 1995 1994 Conunon Stock '2quity: Common stock, Class A; no par; authorized and outstanding, $ 1,524,949 $ 1,524,949 1,000 shares, voting Common stock, Class B; no par; authorized and outstanding, 100 shares, non-voting 150,978 150,978 Retained earnings 2.150.086 2.153.109 Total common stock equity 3.826.013 3.829.036 i Cumulative Preferred Stock, no par; authorized, 10,000,000 shares; outstanding, 4,318,397 and 5,232,397 shares at i Dacember 31, 1995 and 1994,-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 25,115 50,226 50,226 $7.52 series, 500,000 shares $8.12 series, 500,000 shares 50,098. 50,098 Series A - 1992, 500,000 shares 49,094 49,094 Series B - 1992, 500,000 shares 49,104 49,104 i Series C - 1992, 600,000 shares 58,984 58,984 Series D - 1992, 600,000 shares 58.984 58.984 Total 351.345 351.345 Subject to mandatory redemption: $8.50 series, 400,000 shares at December 31, 1994 39,799 $9.375 series, 771,000 and 1,285,000 shares at December 31, 1995 and 1994, respectively.. 76,755 127,811 Current redemptions (25.700) (45.700) Total 51.055 121.910 Total cumulative preferred stock 402.400 473.255 Long-Term' Debts' First mortgage bonds: 40,000 40,000 5 1/4% series, due 1996 40,000 40,000 5 1/4% series, due 1997 ' 7 5/8% series, due 1997 150,000 150,000 6 3/4% series, due 1997 35,000 35,000 6 3/4%' series, due 1998 35,000 35,000 7 1/4% series, due 2001 50,000 50,000 9.15 % series, due 2021 160,000 160,000 62,275 100,000 8 3/4% series, due 2022 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 19,200 19,200 7 % pollution control series, due 2008 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 68,700 68,700 7 3/4% pollution control series, due 2015 58,905 5.80 % pollution control series, due 2015 7 7/8% pollution control series, due 2016 68,000 60,000 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 50,000 7.20 % pollution control series, due 2018 75,000 75,000 100,000 100,000 7.20 % pollution control series, due 2018 (continued on next page) 1 54

_.m ~._.. _ I 1 HOUSTON LIGHTING & POWER COMPANY STATEMENTS OF CAPITALIZATION l (Thousands of Dollars) (Continued) December 31. 1995 1994 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 1996-1999 180,500 180,500 Medium-term notes series B, 8 5/8%, due 1996 100,000 100,000 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 Total first mortgage bonds 3.145.175 3.032.050 i Pollution control revenue bonds: i Gulf Coast 1980-T series, floating rate, due 1998 5,000 5,000 Brazos River 1985 A2 series, 9 3/4%,'due 2005 4,265 Brazos River 1985 Al series, 9 7/8%, due 2015 87,680 Matagorda' County 1985 series, 10%, due 2015 58.905 Total pollution control revenue bonds 5.000 155.850 Unimortized premium (discount) - net (16,456) (12,253) Capitalized lease obligations, discount rates of 5.2%-11.7%, due 1996-2018 8,560 12,403 i Notes payable 981 1.129 l Subtotal-f6.915) 1.279 Total...................... 3,143,260 3,189,179 Current maturities (153.751) f3.775) Total long-term debt 2.989.509 3.185.404 Total capitalization $ 7.217.922 $ 7.487.695 See Notes to Financial Statements. l l l i l l l 55

- ~_ HOUSTON LIGHTING & POWER COMPANY STATEMENTS OF CASH FLOWS Increase (Decrease) in Cash and Cash Equivalents .(Thousands of Dollars) Year Ended December 31. 1995 1994 1993 2cch Flows from Operating Activities: Net income 480,932 S 486,764 S 484,223 Adjustments to reconcile net income to net cash provided by operating activities: . Depreciation and amortization 475,124 398,142 385,731 Amortization of nuclear fuel 28,545 21,561 2,101 Deferred federal income taxes 71,188 81,739 214,369 (19,427) (19,416) (19,797) Investment tax credits Allowance for other funds used during construction (7,760) (4,115) (3,512) Fuel refund (189,571) 76,970 277,940 (91,863) Fuel cost over (under) recovery Cumulative effect of change in accounting for postemployment benefits 8,200 6,876 11,300 (69,337) Regulatory tax asset - net Changes in other assets and liabilities: Accounts receivable - net (34,239) (17,827) 170,784 Materials and supplies 10,338 12,449 3,850 Puel stock (2,988) 1,874 9,979 Accounts payable (32,964) (40,054) (11,854) 17,721 (6,980) (20,035) Interest and taxes accrued (7,816) (4,936) 18,040 Other current liabilities Other - net (5.239) 20.270 63.721 Net cash provided by operating activities 867.690 1.226.911 1.136.400 Cach Flows from Investing Activities: Capital and nuclear fuel expenditures (including allowance for borrowed funds used during construction) (396,242) (418,453) (332,797) (10.618) (15.822) (13.067) Other - net Net cash used in investing activities (406.8601 (434.275) (345.864) 4 Cash Flows from Financing Activities: Proceeds from first mortgage bonds 142,972 840,427 Payment of matured bonds (19,500) (136,000) (485,793) (363,083) (378,528) Payment of dividends (171,100) 31,660 Increase (decrease) in notes payable Dacrease.in notes payable to affiliated company (120,001) Rsdemption of preferred stock (91,400) (20,000) (40,000) Extinguishment of long-term debt (195,224) (995,751) 8.599 4.501 15.817 Other - net Net cash used in financing activities (620.846) (569.182) (782.376) 'N:t Increase (Decrease) in Cash and (160,016) 223,454 8,160 Cash Equivalents Cash and Cash Equivalents at Beginning of Year 235.867 12.413 '.253 Cash and Cash Equivalents at End of Year S 75.851 235.867 12.413 Sunnlamental Diselemure of cash Flow Informatient Cash Payments: Interest (net of amounts capitalized) S 247,672 S 251,245 S 296,201 Income taxes 157,400 196,655 127,713 See Notes to Financial Statements. 56

HOUSTON INDUSTRIES INCORPORATED AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS For the Three Years Ended December 31,1995 (1) Summary of Significant Accounting Policies (a) Principles of Consolidation. The consolidated financial statements include the accounts of the Company and its wholly owned and majority-owned subsidiaries. Certain investments in joint ventures or other entities in which the Company or its subsidiaries have a 50 percent or less interest are recorded using the equity method or the cost method. For additionalinformation regarding investments and advances, see Notes 1(j) and 4. All significant intercompany transactions and balances are eliminated in consolidation. (b) System of Accounts and Effects of Reaulation. HL&P, the principal subsidiary of the Company, maintains its accounting records in accordance with the FERC Uniform System of Accounts. HL&P's accounting practices are subject to regulation by the Utility Commission, which has adopted the FERC Uniform System of Accounts. As a result of its regulated status, HL&P follows the accounting policies set forth in SFAS No. 71, " Accounting for the Effects of Certain Types of Regulation," which allows a utility with cost-based rates to defer certain costs in concert with rate recovery that would otherwise be expensed. In accordance with this statement, HL&P has deferred certain costs pursuant to rate actions of the Utility Commission and is recovering or expects to recover such costs in electric rates charged to customers. The regulatory assets are included in other assets on the Company's Consolidated and HL&P's Balance Sheets.. The regulatory liabilities are included in deferred credits on the Company's Consolidated and HL&P's Balance Sheets. The following is a list of significant regulatory assets and liabilities reflected on the Company's Consolidated and HL&P's Balance Sheets: y December 31.1995 (Millions of Dollars) Deferred plant costs - net.. 5613 Malakoff investment.. 233 Regulatory tax asset - net..... 229 Unamortized loss on reacquired debt 121 Deferred debits...... 137 Unamortized investment tax credit (392) Accumulated deferred income taxes - regulatory tax asset (80) If as a result of changes in regulation or competition, HL&P's ability to recover these assets and/or liabilities would not be assured, then pursuant to SFAS No. 71 and to the extent that such regulatory assets or liabilities ultimately were determined not to be recoverable, HL&P would be required to write off or write down such assets or liabilities. l (c) Electric Plant. HL&P capitalizes at cost all additions to electric plant, betterments to existing j property and replacements of units of property. Cost includes the original cost of contracted j services, direct labor and material, indirect charges for engineering supervision and similar overhead items and AFUDC. Customer payments for construction reduce additions to electric 57

plant. AFUDC represents the estimat d d:bt and equity costs of capital funds not already included in rates necessary to finance the construction of new regulated facilities. HL&P computes depreciation using the straight-line method. The depreciation provision as a percentage of the depreciable cost of plant was 3.2 percent for 1995,3.2 percent for 1994 and 3.1 percent for 1993. (d) Deferred Plant Costs. Under a " deferred accounting" plan authorized by the Utility Commission, HL&P was permitted for regulatory purposes to accrue carrying costs in the form of AFUDC on its investment in the South Texas Project and defer and capitalize depreciation and other operating costs on its investment after commercial operation and until such costs were reflected in rates. In addition, the Utility Commission authorized HL&P under a " qualified phase-in plan" to capitalize allowable costs (including return) deferred for future recovery as deferred charges. In 1991, HL&P 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 these deferrals (which totaled $25.8 million for each of the years 1995,1994 and 1993)is included on the Company's Statements of Consolidated Income and HL&P's Statements of income as depreciation and amortization expense. (e) Revenues. HL&P records electricity sales under the full accrual method, whereby unbilled electricity sales are estimated and recorded each month in order to better match revenues with expenses. Other revenues include electricity sales of a foreign electric utility, which are also recorded under the full accrual method. Other revenues also include management fees and other sales and services, which are recorded when earned. (f) 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 are deferred and amortized over the estimated lives of the related property. (g) Earninos Per Common Share. Earnings per common share for the Company are computed by dividing net income by the weighted average number of shares outstanding during the respective period. All earnings per common share amounts reflect the two-for-one common stock split effected in the form of a stock distribution on December 9,1995. The Company adopted SOP 93-6 effective January 1,1994. Pursuant to the adoption of SOP 93-6, the number of weighted average common shares outstanding reflects a reduction for ESOP shares not yet committed for release to savings plan participants (unallocated shares). In accordance with SOP 93-6, earnings per common share for periods prior to January 1,1994 have not been restated. (h) 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. (i) Discontinued Operations. In July 1995, the Company sold KBLCOM, its cable television subsidiary. The operations of KBLCOM are reflected as discontinued operations for all periods presented. See Note 13. (J) Investments in Debt and Eouity Securities. The Company owns one million shares of Time Warner common stock and 11 million shares of non-publicly traded Time Warner convertible preferred stock. The Company has recorded its investment in these securities at a combined fair 58

v:!un of approximat;ly $1 billion on th3 Comp:ny's Consolidated Balance Shrst. Inv stm:nt in the Tima W:m:r common stock is considered an "available-for-sals" equity security under SFAS No.115," Accounting for Certain investments in Debt and Equity Securities." Consequently, the Company excludes unrealized net changes in the fair value of Time Warner common stock (exclusive of dividends and write downs) from earnings and, until realized, reports such changes as a net amount in the shareholders' equity section of the balance sheet. Investment in the Time Warner convertible preferred stock (which is not subject to the requirements of SFAS No.115, since it is a non-publicly traded equity security) is accounted for under the cost method. The securities held in the Company's nuclear decommissioning trust are classified as "available-for-sale" and, in accordance with SFAS No.115, are reported at fair value which at December 31, 1995 approximates cost ($44.5 million as of December 31,1995) on the Company's Consolidated and HL&P's Balance Sheets under deferred debits and 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 and HL&P's Balance Sheets as a deferred debit. (k) Fuel Stock. Gas inventory (at average cost) was $12.1 million at December 31,1995. Coal, lignite, and oil inventory balances recorded at last-in, first-out, were $22.2 million, $12.1 million, and $13.3 million. respectively. (1) Reclassification. Certain amounts from the previous years have been reclassified to conform to the 1995 presentation of financial statements. Such reclassifications do not affect earnings. (m) Nature of Operations. The Company is a holding company operating principally in the electric l utility business. HL&P is engaged in the generation, transmission, distribution and sale of electric l energy. HL&P's service area covers a 5,000 square mile area in the Texas Gulf Coast, including Houston. Another subsidiary of the Company, HI Energy, participates in domestic and foreign power generation projects and invests in the privatization of foreign electric utilities. The business - snd operations of HL&P account for substantially all of the Company's income from continuing operations and common stock equity. (n) Use of Estimates. 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. l (2) Jointly-Owned Nuclear Plant (a) HL&P Investment. HL&P is the project manager (and one of four co-owners) of the South Texas Project, which consists of two 1,250 megawatt nuclear generating units. HL&P has a 30.8 g percent interest in the project and bears a corresponding share of capital and operating costs 1 associated with the project. As of December 31,1995, HL&P's investment in the South Texas l Project and in nuclear fuel, including AFUDC, was $2.0 billion (net of $439 million plant accumulated depreciation) and $75.1 million (net of $142 million nuclear fuel amortization), respectively. (b) Reculatory Proceedinas and Litiaation. Between June 1993 and February 1995, the South i Texas Project was listed on the United States Nuclear Regulatory Commission's (NRC)" watch list" of plants with weaknesses that warrant increased NRC regulatory attention. In February 1995, the NRC removed the South Texas Project from its " watch list." t 59

In Fcbruary 1994, th3 City of Austin (Austin), ons of tha four co-owntrs of the South Texas Project, filed suit against HL&P (Austin Litigation). Trial of that suit, which began in March 1996 is pending in the 11th District Court of Harris County, Texas. Austin alleges that the outages at the South Texas Project from early 1993 to early 1994 were due to HL&P's failure to perform obligations it owed to Austin under the Participation Agreement among the four co-owners of the South Texas Project (Participation Agreement). Austin also asserts that HL&P breached certain undertakings voluntarily assumed by HL&P on behalf of the co-owners under the terms of the NRC Operating Licenses and Technical Specifications relating to the South Texas Project. Under amended pleadings in the Austin Litigation, Austin claims it suffered damages of at least $120 million due to increased operating and maintenance costs, the cost of replacement power and lost profits on wholesale transactions that did not occur. Although HL&P and the Company do not believe there is merit to Austin's claims, no assurance can be given as to the ultimate outcome of this matter. in May 1994, the City of San Antonio (San Antonio), another co-owner of the South Texas Project, intervened in the litigation filed by Austin against HL&P and asserted claims similar to those asserted by Austin. Although San Antonio has not specified the damages sought in its complaint, expert reports filed in the litigation have indicated that San Antonio's claims may be in excess of $228 million. On February 29,1996, San Antonio announced that it was taking a nonsuit on its claims in the Austin Litigation in order to pursue settlement discussions with HL&P concerning those claims, as well as separate claims for unspecified damages previously asserted by San Antonio against HL&P with respect to the construction of the South Texas Project, which construction claims are the subject of a request for arbitration under the Participation Agreement. In order to preserve its litigation claims pending the outcome of settlement negotiations, San Antonio refiled its lawsuit in the 152nd District Court of Harris County, Texas. While neither the Company nor HL&P believes there is merit to San Antonio's claims either in the pending litigation or in the arbitration proceeding, there can be no assurance as to the ultimate outcome of those matters, nor can there be an assurance as to the ultimate outcome of the settlement discussions. If a settlement is reached, it is possible, among other things, that such resolution could require in the near term a charge to eamings from continuing operations, but it is not anticipated that any such resolution would be material to the Company's or HL&P's financial position, liquidity or ability to meet their respective cash requirements stemming from operating, capital expenditures and financing activities. (c) Nuclear Insurance. HL&P 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 52.75 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. Under the excess property insurance (which became effective in November 1995), HL&P and the other owners of the South Texas Project are subject to assessments, the maximum aggregate assessment under current policies being $25.8 million during any one policy year. The application of the proceeds of such property insurance is subject to the priorities established by the 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 for owners of nuclear power plants, such as the South Texas Project, was $8.92 billion as of December 1995. Owners are required under the Act to insure their liability for nuclear incidents and protective evacuations by maintaining the maximum amount of financial protection available from private sources and by maintaining secondary financial protection through an industry retrospective rating plan. The 60

ass ssm:nt of dzfarred pramiums provid:d by thn plan for each nuclsar incid:nt is up to $75.5- . million per reactor subject to indexing for inflation, a possible 5 percent surcharge (but no more than $10 million per reactor per incident in any one year) and a 3 percent state premium tax. HL&P 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 HL&P's and the Company's financial condition and results of operations. (d) Nuclear Decommissioning. In accordance with the Rate Case Settlement HL&P contributes $14.8 million per year to a trust established to fund HL&P's 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(j). In May 1994, an outside consultant estimated HL&P'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 Unit Nos.1 and 2 upon the expiration of their 40-year-operating licenses. While the current and projected funding levels presently 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. -(3) Rate Matters The Utility Commission has original (or in some cases appellate) jurisdiction over.HL&P's electric rates and services. In 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 j 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 Utility Commission, such matters are remanded to the Utility Commission for action in light of the courts' orders. On remand, the Utility Commission's action could range from granting rate relief substantially equal to the rates previously approved ? to reducing the revenues to which HL&P was entitled during the time the applicable rates were 7 in effect, which could require a refund to customers of amounts collected pursuant to such rates. (a). 1995 Rate Case. In August 1995, the Utility Commission unanimously approved the Rate Case Settlement, which resolved HL&P's 1995 rate case (Docket No.12065) as well as a separate proceeding (Docket No.13126) regarding the prudence of operation of the South Texas Project. Subject to certain changes in existing regulation or legislation, the Rate Case Settlement precludes HL&P from seeking rate increases until after December 31,1997. HL&P began recording the effects of the Rate Case Settlement in the first quarter of 1995. The Rate Case Settlement reduced HL&P's earnings for 1995 by approximately $100 million. 4. 61

33 aft:;r-tax cffsets in 1995 of ths Rata Cass Scttismant Era as follows: Year Ended December 31.1995 (Millions of Dollars) Reduction in base revenues.................... $ 52 - South Texas Project write-down 33 One-time write-off of mine-related costs............. 6 Other expenses 9 l Total Rate Case Settlement effect on net income. gg j The Rate Case Settlement gives HL&P the option to write down up to $50 million ($33 million after-tax) per year of its investment in the South Texas Project through December 31,1999. The parties to the Rate Case Settlement agreed that any such write-down will be treated as a - reasonable and necessary expense during routine reviews of HL&P's earnings and any rate review proceeding initiated against HL&P. In accordance with the Rate Case Settlement, HL&P recorded a $50 million pre-tax write-down in 1995 of its investment in the South Texas Project 4 which is included in the Company's Statements of Consolidated income and HL&P's Statements l of Income in depreciation and amortization expense. In 1995, HL&P also began accruing its j share of decommissioning expense for the South Texas Project at an annual rate of $14.8 million - (a $9 million per year increase over 1994). j i As required by the Rate Case Settlement HL&P will begin in 1996 to amortize its $153 million investment in certain lignite reserves associated with the canceled Malakoff project. These l amortizations will equal approximately $22 million per year. As a result of this additional amortization, HL&P's remaining investment in Malakoff ($233 million at December 31,1995) will be fully amortized no later than December 31,2002. During the second quarter of 1995, HL&P recorded a one-time pre-tax charge of $9 million incurred in connection with certain Malakoff i mine-related costs that were not previously recorded and were not recoverable under the terms of the Rate Case Settlement.- Issues conceming the prudence of expenditures related to Malakoff were deferred until a subsequent rate case. j In Docket No. 8425, the Utility Commission allowed recovery of certain costs associated with Malakoff by allowing HL&P to amortize these costs over ten years. Such recoverable costs are. f not included in rate base and, as a result, no retum on investment is being eamed during the - l recovery period. The $28 million unamortized balance of these costs at December 31,1995 is included in the $233 million discussed above and is to be amortized over the following 54 months. l l In anticipation of the Rate Case Settlement, the Company.and HL&P recorded in the fourth quarter of 1994 a one-time, pre-tax charge of approximately $70 million to reconcilable fuel j revenues, an amount which HL&P agreed as a part of the Rate Case Settlement was not recoverable from ratepayers. l (b) Rate Case Appeals Pursuant to the Rate Case Settlement, HL&P and the other parties to that settlement have dismissed their pending appeals of previous Utility Commission orders. As a result of that action or subsequent judicial action, the Utility Commission's orders have become finalin Docket No. 9850 (involving HL&P's 1991 rate case) and in Docket Nos. 8230 and 9010 ) (involving deferred accounting). Two appeals of other orders, by parties who did not join in the Rate Case Settlement, remain pending: review of Docket No. 8425 (HL&P's 1988 rate case), and v review of Docket No. 6668 (the Utility Commission's inquiry into the prudence of the planning and construction of the South Texas Project). The appeal from the order in Docket No. 8425 concems (i) the treatment as " plant held for future use" of certain costs associated with the Malakoff l 62 l 1 c.-- ,1

generating station and (ii) thn treatment by HL&P of cartnin tax savings associat:d with f:d:ral incoma tax d: ductions for expenses not includ:d in cost of service for ratemaking purposes. The appealis currently pending before the Texas Supreme Court. Review of the Utility Commission's order in Docket No. 6668 is pending before a Travis County district court. In that order the Utility Commission determined that $375.5 million of HL&P's $2.8 billion investment in the South Texas Project had been imprudently incurred. That ruling was incorporated into HL&P's 1988 and 1991 rate cases. Unless the order is modified or reversed on appeal, the amount found imprudent by the Utility Commission will be sustained. (4) Investments in Foreign and Non-Regulated Entities (a) General. HI Energy sustained net losses of $33 million, $6 million and $2 million in 1995,1994 and 1993, respectively. Development costs for 1995 were approximately $14 million. The majority of costs in 1994 and 1993 were related to project development activities. (b) Forelan investments. Houston Argentina S.A. (Houston Argentina), a subsidiary of HI Energy, owns a 32.5 percent interest in Compa6ia de inversiones en El6ctricidad S.A. (COINELEC), an Argentine holding company which acquired a 51 percent interest in Empresa Distribuidora de La Plata S.A. (EDELAP), an e.lectric utility company operating in La Plata, Argentina and surrounding regions. Houston Argentina's share of the purchase price was approximately $37.4 million. Such investment was in the form of (i) a capital contribution of $27.6 million to COINELEC and (ii) a loan to COINELEC in the aggregate principal amount of $9.8 million. HI Energy has also entered into support agreements with two financial institutions pursuant to which HI Energy has agreed to make additional cash contributions or subordinated loans to COINELEC or pay COINELEC's lenders up to a maximum aggregate of $6.6 million in the event of a default by COINELEC of its commitments to such financial institutions. Subsequent to the acquisition, the generating assets u of EDELAP were transferred to Central Dique S.A., an Argentine Corporation,51 percent of the stock of which is owned by COINELEC. HI Energy's portion of EDELAP and Central Dique S.A. earnings was approximately $1 million in both 1995 and 1994. d In January 1995, HI Energy acquired for $15.7 million a 90 percent ownership interest in an electric utility operating company located in a rural province in the north central part of Argentina. The utility system serves approximately 116,000 customers in an area of 136,000 square kilometers. HI Energy's share of net losses from this investment for 1995 was $3.6 million substantially all of which was due to non-recurring severance costs. In 1995, HI Energy invested approximately $7 million in a cogeneration project being developed in San Nicolss, Argentina and approximately $5 million in a coke calcining project being developed in the state of Andhra Pradesh, India. These projects had no eamings impact in 1995. HI Energy estimates that its commitment in 1996 for the Argentine cogeneration project will be approximately $31 million and that its share of the 1996 commitment for the coke calcining project will be approximately $3 million. HI Energy has entered into a support agreement in favor of the Intemational Finance Corporation (IFC) under the terms of which HI Energy has agreed to provide one of its subsidiaries (HIE Rain), which is an investor in the coke calcining project, with sufficient funds to meet certain funding obligations of HIE Rain under agreements with the IFC. The maximum aggregate funding commitment of HI Energy under this support agreement is approximately $18 million, of which approximately $16 million is to support contingent obligations of HIE Rain and the balance of which is additional equity to be contributed to the coke calcining project. ,a i I 63 l

(c) lilinois Waste Tire-to-Energy Projects. HI Energy is a subordinated lender to two waste tire-to-energy projects being developed by Ford Heights and Fulton, respectively, located in the state of Illinois. HI Energy also owns a S400,000 equity interest (20 percent)in Ford He!ghts. Both projects were being developed in reliance on the terms of the Illinois Retail Rate Law, enacted in 1987, to encourage development of energy production facilities for the disposal of solid waste by providing an operating subsidy to qualifying projects. In March 1996, the Governor of lilinois signed into law legislation which purports to repeal the subsidy provided to most of such energy production facilities, including the two waste tire-to-energy projects in which HI Energy has invested. A lawsuit has been filed on behalf of the Ford Heights and Fulton projects challenging, among other things, the constitutionality of the repeal and its retroactive application to the two waste tire-to-energy projects. On March 26,1996 the Ford Heights project filed a voluntary petition seeking protection under the federal bankruptcy laws. The ability of the two waste tire-to-i energy projects to meet their debt obligations is dependent upon the projects continuing to receive i the operating subsidy under the Retail Rate Law. The terms of the public bonds issued by the Ford Heights and Fulton projects are non-recourse to the Company and HI Energy. In response to the actions taken by the state of Illinois, the Company has established a valuation - allowance of $28 million ($18 million after-tax), which amount reflects the combined amounts lent on a subordinated basis to the Ford Heights and Fulton projects. In addition to amounts funded through December 31,1995, HI Energy also is party to two separate Note Purchase Agreements committing it, under certain circumstances, to acquire up to (i) $3 million in aggregate principal amount of additional subordinated notes from the Ford Heights project and (ii) $17 million in aggregate principal amount of additional subordinated notes from the Fulton project. The Company has entered into a support agreement under which it has agreed to provide additional funds to HI Energy to enable it to honor its obligations under the two Note Purchase Agreements. The Company is unable to predict the ultimate effect of these developments on HI Energy's remaining funding commitments under these Note Purchase Agreements; however, in the Company's opinion it is unlikely that the majority of the additional unfunded subordinated debt provided for in the Fulton Note Purchase Agreement would be required to be funded unless construction activities with respect to the Fulton project are recommenced at some future date. If HI Energy becomes obligated to advance additional funds under the Note Purchat,e Agreements, the Company could be required to increase the amount of the valuation allowance, which would result in additional charges to earnings. (5) Common Stock (a) Stock Distribution. The Company effected a two-for-one stock split in the form of a common stock distribution on December 9,1995. All prior periods have been restated for consistency to reflect the stock distribution in terms of number of common shares outstanding and the per share amounts for earnings, dividends and market price. The nominal consideration established by the Board of Directors for the common stock distributed (5.01 per share) is reflected as a deduction from retained earnings in the Company's Statements of Consolidated Retained Earnings. (b) Dividends. The timing of the Company's Board of Directors' declaration of dividends changed resulting in five quarterly dividend declarations in 1993. All dividends declared in 1993 have been included in 1993 common stock dividends on the Company's Statements of Consolidated Retained Earnings. The Company paid four regular quarterly dividends in 1993 aggregating $1.50 per share, after restatement for the two-for-one stock split, on its common stock shares. (c) Long-Term Incentive Compensation Plans. The Company has Long-Term Incentive Compensation Plans (LICP) providing for the issuance of stock incentives (including performance-based restricted shares and stock options) to key employees of the Company, including officers. 64

l As of Decamber 31,1995,29 current and formsr cmployDcs psrticipated in ths plans. A miximum of fiva million shtrzs of common stock may be issued under the LICP. Bsginning onn ' j year after the grant date, the options become exercisable in one-third increments each year. The j options expire ten years from the grant date. ' Performance-based restricted shares issued were 49,792; 100,524; and 146,564 for 1995,1994 l-and 1993, respectively. Stock option activity for the years 1993 through 1995 is summarized below (as adjusted for the Company's two-for-one stock distribution): ' Option Price at I Number Date of Grant 2 i-of Shares or Exercise I Non-statutory stock options: Outstanding at December 31,1992........... 131,742 l Options Granted...................... 131,552 $23.125 i Options Exercised..................... (1,324) $21,75 i Options Withheld for Taxes.............. (34) Options Canceled..... (10,038) i Outstanding at December 31,1993 251,898 Options Granted.......... 131,452 $23.25 Options Exercised..................... Options Withheld for Taxes.............. Options Canceled........ (80,772) Outstanding at December 31,1994. 302,578 Options Granted... 133,324 $17.75: $21.25 Options Exercised.................... Options Withheld for Taxes.............. Options Canceled........... (24,560) Outstanding at December 31,1995......... 411,342 Exercisable at: December 31,1995................ 181,924 $21.75-$23.25 December 31,1994................... 107,672 $21.75-$23.125 (d) Shareholder Riahts Plan. In July 1990, the Company adopted a shareholder rights plan and declared a dividend of one right for each outstanding share of the Company's common stock (including shares of common stock issued in the Company's 1995 two-for-one stock split). The righls, which under certain circumstances entitle their holders to purchase one two-hundredth of a share of Series A Preference Stock for an exercise price of $42.50, will expire on July 11,2000. 3 The rights will become exercisable only if a person or entity acquires 20 percent or more of the Company's outstanding common stock or if a person or entity commences a tender offer or exchange offer for 20 percent or more of the outstanding common stock. At any time after the occurrence of such events, the Company may exchange unexercised rights at an exchange ratio of one share of common stock. or equity securities of the Company of equivalent value, per right. The rights are redeemable by the Company for $.01 per right at any time prior to the date the rights become exercisable. 65

When the rights becom3 cxcrcis;bla, ecch right will entitle ths hold:r to receiva, in li:u of tha right to purchase Series A Preference Stock, upon the exercise of such right, a number of shares of the Company's common stock (or under certain circumstances cash, property, other equity i secunties or debt of the Company) having a current market price (as defined in the plan) equal j to twice the exercise price of the right, except pursuant to an offer for all outstanding shares of common stock which a majority of the independent directors of the Company determines to be a price which is in the best interests of the Company and its shareholders (Permitted Offer). In the event that the Company is a party to a merger or other business combination (other than a merger that follows a Permitted Offer), rights holders will be entitled to receive, upon the exercise of a right, a number of shares of common stock of the acquiring company having a current market price (as defined in the plan) equal to twice the exercise price of the right. (e) Investor's Choice Plan. The Company has registered four million shares of its common stock under the Securities Act of 1933 for sale through the Company's investor's Choice Plan, a dividend reinvestment and stock purchase plan. The plan is designed to provide investors with a way to buy common stock directly from the Company and/or to arrange for reinvestment of cash dividends in the Company's common stock. (6) Preferred Stock of HL&P At December 31,1995, HL&P's cumulative preferred stock could be redeemed at the following per share prices, plus any unpaid accrued dividends to the date of redemption: Redemption Series Price Per Share Not Subject to Mandatory Redemption: $4.00 $105.00 $6.72. 102.51 $7.52. 102.35 $8.12 102.25 Variable Term Preferred A (a) 100.00 Variable Term Preferred B (a) 100.00 Variable Term Preferred C (a) 100.00 Variable Term Preferred D (a) 100.00 Subject to Mandatory Redemption: 59.375 (b) (a) Rates for Variable Term Preferred Stock as of December 31,1995 were as follows: Series Rate Variable Term Preferred A 4.59 % Variable Term Preferred B 4.48% Variable Term Preferred C 4.49% Variable Term Preferred D 4.67 % (b) HL&P is required to redeem 257,000 shares annually. In 1995, HL&P redeemed 514,000 shares of its $9.375 cumulative preferred stock at $100 per share and the remaining 400,000 shares of its $8.50 cumulative preferred stock at S100 per share. In 1994, HL&P redeemed 200,000 shares of its 58.50 cumulative preferred stock at $100 66

~ m per shar3. Annual mandatory redimptions of HL&P's preferred stock ars $25.7 million in 1996, 1997 and 1998. 4 (7) Long-Term Debt (a) Company. Consolidated annual maturities of long-term debt and minimum capital lease payments for the Company are approximately $354 million in 1996, $226 million in 1997,$40 million in 1998, $171 million in 1999 and $150 million in 2000. (b) HL&P. Sinking or improvement fund requirements of HL&P's first mortgage bonds outstanding will be approximately $40 million for each of the years 1996 through 2000. Of such requirements, approximately $37 million for each of the years 1996 through 2000 may be satisfied by certification of property additions at 100 percent of the requirements, and the remainder through certification of such property additions at 166% percent of the requirements. Sinking or improvement fund requirements for 1995 and prior years have been satisfied by certification of property additions. HL&P 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% percent 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 percent of the requirements. With respect to first mortgage bonds of a series subject to special redemption, HL&P has the option to use deposited cash to redeem first mor1 gage bonds of such series at the applicable special redemption price. The replacement fund requirement to be satisfied in 1996 is approximately $296 million. The amount of HL&P's first mortgage bonds is unlimited as to issuance, but limited by property, earnings and other provisions of the Mortgage and Deed of Dust dated as of November 1,1944, between HL&P and South Texas Commercial National Bank of Houston (Texas Commerce Bank National Association, as Successor Trustee) and the suppiemental indentures thereto. Substantially all properties of HL&P are subject to liens securing HL&P's long-term debt under the mortgage. In 1995, HL&P repurchased from a third party $37.7 million aggregate principal amount of its 8 3/4% first mortgage bonds due 2022. The total purchase price for those bonds was $42.2 million. In July 1995, HL&P caused to be issued $150.9 million aggregate principal amount of revenue refunding bonds collaterized by a like amount of HL&P first mortgage bonds. The new bonds bear interest at 5.8% variable at HL&P's option after a five-year, no-call period, and mature in 2015. Proceeds from this issue were used to redeem $150.9 million of pollution control revenue bonds (bearing a weighted average interest rate of 9.9%) at 102% of the aggregate principal amount. HL&P's annual maturities of long-term debt and minimum capital lease payments are approximately $154 million in 1996, $226 million in 1997, $40 million in 1998, $171 million in 1999 and $150 million in 2000. (8) Short-Term Financing The interim financing requirements of the Company and its subsidiaries are met through short-term bank loans, the issuance of commercial paper and short-term advances from the Company. The Company and its subsidiaries had bank credit facilities aggregating $1.5 billion at December 31,1995 and $1 billion at December 31,1994, under which borrowings are classified as short-term indebtedness, in the first quarter of 1996, the Company reduced its borrowing capacity under these facilities to $1.15 billion. These bank facilities limit total short-term borrowings and 67

provide for int:rcst at ratts gen: rally less than tha prima rata. Tha Company's w ighttd avarags short term borrowing rates for commercial paper for the year ended December 31,1995 and 1994 were 6.33% and 4.35%, respectively. Outstanding commercial paper was $6 million at December 31,1995 and $423 million at December 31,1994. Facility fees are required on the credit facilities. (9). Retirement Plans (a). Pension. The Company has a noncontributory retirement plan covering substantially all employees. The plan provides retirement benefits based on years of service and compensation. The Company'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 plan consist principally of common stocks and high quality, interest-bearing obligations. , Net pension cost for the Company attributable to continuing operations includes the following components: Year Ended December 31. 1995 1994 1993 (Thousands of Dollars) Service cost - benefits earned during the period. $ 22,852 $ 21,977 $ 25,282 Interest cost on projected benefit obligation...... 49,317 46,091 51,062 Actual (return) loss on plan assets.............. (96,004) 5,357 (39,237) Net amortization and deferrals....... 50.889 (51.491) (558) Net pension cost.......... 27,054 21,934 36,549 - SFAS No. 88 - curtailment expense............ 5.645 Total pension cost................

Q2fg,

$ 21.934 Mgg The funded status of the Company's retirement plans attributable to continuing operations was as follows: December 31. 1995 1994 (Thousands of Dollars) Actuarial present value of: Vested benefit obligation $ 504.655 $ 439.668 Accumulated benefit obligation. S 541.278 $ 471.987 Plan assets at fair value.... $ 595,192 $ 496,365 Projected benefit obligation.. 704.871 632.546 Assets less than projected benefit obligation. (109,679) (136,181) Unrecognized transitional asset (13,421) (15,340) i Unrecognized prior service cost 46,627 21,456 i Unrecognized net loss 22.522 71.191 $ (53.951) $ (58.874) Accrued pension cost Net pension cost and funding attributable to discontinued operations was not material. The projected benefit obligation was determined using an assumed discount rate of 7.5 percent in 1995 and 8 percent in 1994. A long-term rate of compensation increase ranging from 4 percent to 6 percent was assumed for 1995 and ranging from 4.5 percent to 6.5 percent was assumed 68

for 1994. Th2 essum;d long-t:rm r;.ta of retum on plan assits was 9.5 percent in 1995 and 1994. Th3 trcnsitional cssat at J:nuary 1,1986, is being recognized ov:r approximately 17 years, and the prior service cost is being recognized over approximately 15 years. In 1995, the Company offered eligible employees (excluding officers) of the Company, HL&P 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 would add 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. 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, HL&P increased its retirement plan and supplemental benefits by approximately $28 million and $5 million, respectively. Pursuant to SFAS No. 71, HL&P deferred the costs associated with the increases in these benefit obligations and is amortizing the ecsts through the period ending December 31,1997. In 1995, the Company and HL&P amortized $5.6 million 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 and HL&P's early retirement program. 1 (b) Savinas 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, pre-tax 4 or after-tax, up to a maximum of 16 percent of compensation limited by an annual deferrallimit ($9,240 for calendar year 1995) prescribed by IRC Section 402(g) and the IRC Section 415 annual additions limits. The Company matches 70 percent of the first 6 percent 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 j 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 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 eamings on funds held in the ESOP and cash contributions by the Company. Shares of the Company's common stock are released from encumbrance of the ESOP loan based on the proportion of debt service paid during the period. The Company adopted SOP 93-6, effective January 1,1994, which requires that the Company recognize benafit expense for the ESOP equal to 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 eamings; dividends on unallocated ESOP shares are recorded as a reduction of debt or accrued interest on the ESOP loan. SOP 93-6 is effective only with respect to financial statements for periods after January 1,1994. The Company's savings plan benefit expense attributable to continuing operations was $18.9 million, $17.0 million and $17.3 million in 1995,1994 and 1993, respectively. HL&P's portion of the savings plan benefit expense was $18.3 million, $16.5 million and $15.9 million in 1995,1994 69

i l and 1993, rcspectivsly. - Savings plin benefit expensa attnbutabla to discontinued operations was not material. The ESOP shares (after restatement for the two-for-one stock dividend distribution) were as folloWs: December 31. 1995 1994 Allocated shares '......................... 4,093,834 3,151,086 Unallocated shares.. 14.355.758 15.540.626-Total ESOP shares,.................... 18.449.592 18.691.712 1 Fair value of unallocated ESOP shares '....... $348,127,132 $276,817,401 (c) Postratirement Benefits. Effective January 1,1993, the Company and HL&P adopted SFAS No.106, " Employer's Accounting for Postretirement Benefits Other Than Pensions," which requires that companies recognize the liability for postretirement benefit plans other than pensions (primarily _ health care). In accordance with SFAS No.106, the Company. and HL&P are amortizing over a 22 year period approximately $213 million ($211 million for HL&P) to cover the " transition cost" of adopting SFAS No.' 106 (i.e., the Company and HL&P's liability for post-3 retirement benefits payable with respect to employee service years accrued prior to the adoption of SFAS No.106). As provided in the Rate Case Settlement, HL&P is required to fund during each year in an irrevocable external trust approximately $22 million of postretirement benefit costs which are included in rates. In December 1995, HL&P commenced funding by contributing a total of $15.1 - million to three Voluntary Employees' Beneficiary Association (VEBA) trusts and one 401(h) account of the retirement plan. This contribution represented the amount of postretirement benefits included in HL&P's rates (which included HL&P'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. HL&P intends to fund, on a monthly basis beginning in 1996, the amount included in its rates. The Company, excluding HL&P, will continue funding its postretirement benefits on a pay-as-you-go basis. The net postretirement benefit cost for the Company includes the following components: Year Ended December 31. 1995 1994 1993 (Thousands of Dollars) Service ' cost - benefits earned during the period..... $ 9,093 $ 9,131 $ 9,453 i Interest cost on accumulated benefit obligation..... 11,143 10,265 18,354 l Actual return on plan assets..................... Net amortization and deferrals............ ,_l'j$1 7.868 9.773 Net postretirement benefit cost....... $ 26.297 $ 27.264 5 37.580 70

Th3 fund:d status of th3 Comp;ny's postr:tir:m:nt ben fit costs was cs follows: December 31. 1995 1994 Accumulated benefit obligation:. Retirees S (127,653) $ (98,828) Fully eligible active plan participants (13,307) (22,251) Other active plan participants. (27.492) (23.378) Total (168,452) (144,457) Plan assets at fair market value. 18.310 Assets less than accumulated benefit obligation (150,142) (144,457) Unrecognized transitional obligation 183,727 193,500 Unrecognized net gain (73.613) (91.477) Accrued postretirement benefit cost. S (40.028) $ (42.434) The assumed health care cost trend rates used in measuring the accumulated postretirement benefit obligation in 1995 are as follows: Medical - under 65 8.1% Medical-65 and over 9.0% Dental 8.0% The assumed health care rates gradually decline to 5.4 percent for both medical categories and 3.7 percent for dental by the year 2001. The accumulated postretirement benefit obligation was determined using an assumed discount rate of 7.5 percent for 1995 and 8 percent for 1994. j If the health care cost trend rate assumptions were increased by 1 percent, the accumulated postretirement benefit obligation as of December 31,1995 would be increased by approximately 7 percent. The annual effect of the i percent increase on the total of the service and interest costs would be an increase of approximately 11 percent. (d) Postemolovment Benefits. Effective January 1,1994, the Company and HL&P 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). As required by SFAS No.112, the Company and HL&P expensed the transition obligation (liability from prior years) upon adoption and recorded a one-time, after-tax charge to income of $8.2 million in the first quarter of 1994. Ongoing charges to income were not material. (10) Income Taxes The Company and HL&P record income taxes under SFAS No.109, " Accounting for Income Taxes," 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 accountiag 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. 71

In 1993, tha corporata t*x rata cpplicabl2 to th3 Company and HL&P increas:d from 34% to 35%. The effects of the new law, which decreased the Company's net income by $14.3 million (approximately half of which was attributed to discontinued operations), vct e recognized as a component of income tax expense in 1993. The effect on the Company's deferred taxes, primarily attributable to discontinued cpecations, as a result of the change in the new law, was an increase of $10.9 million in 1993. The Company's current and deferred components of income tax expense from continuing operations are as follows: Year Ended December 31. 1995 1994 1993 (Thousands of Dollars) Current $ 119,435 $ 144,604 $ 109,078 Deferred 80.120 85.820 119.785 income taxes for continuing operations before cumulative effect of change in accounting $ 199.555 },23,0,4.2d $ 228.863 02 The Company's effective income tax rates are lower than statutory corporate rates for each year as follows: Year Ended December 31. 1995 1994 1993 (Thousands of Dollars) Income from continuing operations before income taxes and cumulative effect of change in accounting......... S 596,955 $ 654,409 $ 669,394 Preferred dividends of subsidiary... 29.955 33.583 34.473 Total.. 626,910 687,992 703,867 Statutory rate 35 % 35 % 35% Income taxes at statutory rate 219.419 240.797 246.353 Net reduction in taxes resulting from: AFUDC - other included in income.... 2,716 1,440 1,229 Amortization of investment tax credit...... 19,427 19,416 19,797 Excess deferred taxes................ 4,384 3,537 9,625 Difference between book and tax depreciation for which deferred taxes have not been normalized.. (15,211) (15,455) (12,976) Equity dividend exclusion.. 4,932 Other - net 3.616 1.435 (185) l Total 19.864 10.373 17.490 income taxes before cumulative effect of I change in accounting. $ 199.555 5 230.424 } 228.863 Effective rate 31.8 % 33.5 % 32.5 % 72

Following cra th] Company's tax eff: cts of t:mporary diff:renc;s attributabl3 to continuing operations resulting in d3f;rr:d tax ass ts and liabilities: December 31: 1995 1994 (Thousands of Dollars) Deferred Tax Assets: Alternative minimum tax S 46,516 5 66,707 lHS audit assessment 74,966 74,966 Disallowed plant cost - net 22,687 23,496 Other 96.628 83.740 Total deferred tax assets - net. 240.797 248.909 Deferred Tax Liabilities: Depreciation 1,391,573 1,336,035 Deferred plant costs - net... 200,028 207,746 Regulatory assets - net. 228,587 235,463 Capitalized taxes, employee benefits and removal costs.. 110,065 111,660 Gain on sale of cable television subsidiary 227,515 j Other 150.275 121.235 l Total deferred tax liabilities 2.308.043 2.012.139 Accumulated deferred income taxes - net $2.067.246 $1.763.230 See Note 13 for income taxes related to discontinued operations. (11) Commitments and Contingencies (a) HL&P Commitments. HL&P has various commitments for capital expenditures, fuel, purchased j power, cooling water and operating leases. Commitments in connection with HL&P's capital program are generally revocable by HL&P subject to reimbursement to manufacturers for expenditures incurred or other cancellation penalties. HL&P's other commitments have various ,I 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) Evel and Purchased PoweI. HL&P 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 $175 million in 1996, $178 million in 1997 and $184 million in 1998. Additionally, minimum payment obligations for lignite mining and lease agreements are approximately $5 million for 1996, $8 million for 1997 and $9 million for 1998. Collectively, the fixed price gas supply contracts, which expire in 1997, could amount to 11 percent of HL&P's annual natural gas requirements for 1996 and 7 percent for 1997. Minimum payment obligations for both natural gas purchase and storage contracts are approximately 557 million in 1996, $38 million in 1997 and $9 million in 1998. HL&P also has commitments to purchase firm capacity from cogenerators of approximately $22 million in each of the years 1996 through 1998. Utility Commission rules currently allow recovery of these costs through HL&P's base rates for electric service and additionally authorize HL&P 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 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 HL&P to suspend or reduce payments and seek repayment for amounts disallowed. 73

(c) Other. HL&P's s;rvic] arsa is huvily depend:nt on oil, gas, rafinrd products, petroch:micals and related businesses. Significant adverse events affecting these industries would negatively affect the revenues of the Company and HL&P. Forinformation regarding contingencies relating to the South Texas Project, see Note 2 above. The Company and HL&P are involved in legal, tax and regulatory proceedings before various courts, regulatory commissions and governmental agencies regarding matters arising in the ordinary course of busiriess, some of which involve substantial amounts. (12) Estimated Fair Value of FinancialInstruments The carrying amount and estimated fair value of the Company's financial instruments are as follows: December 31. 1995 1994 Carrying Fair Carrying Fair Amount Value Amount Value (Thousands of Dollars) Financial assets: Cash and short-term investments 11,779 $ 11,779 $ 10,443 $ 10,443 investment in Time Warner securities 1,027,875 1,027,875 Financialliabilities: Short-term notes payable. 6,300 6,300 423,291 423,291 Cumulative preferred stock of subsidiary (subject to mandatory i redemption) 76,755 79.250 167,610 173,355 Debentures. 348,914 396,903 548,729 549,532 Long-term debt of subsidiaries: Electric: First mortgage bonds 2,979,293 3,247,139 3,020,400 2,980,028 Pollution control revenue bonds 4,426 5,000 155,247 163,736 Other notes payable.. 981 981 1,129 1,129 Discontinued operations: Senior bank debt... 364,000 364,000 ) Senior and senior subordinated notes 140,580 154,654 The fair values of cash and short-term investments, investment in equity securities, short-term and other notes payable and bank debt are estimated to be equivalent to the carrying amounts. The fair values of the Company's debentures, HL&P's cumulative preferred stock subject to mandatory redemption, HL&P's first mortgage bonds, pollution control revenue bonds issued on behalf of HL&P and senior subordinated notes are estimated using rates currently available for securities with similar terms and remaining maturities. (13) Cable Television-Discontinued Operations in July 1995, the Company completed the sale of KBLCOM, its cable television subsidiary, to Time Warner. The Company's 1995 eamings include a one-time, after-tax gain on the sale of $708 million. Effective January 1,1995, the operations of KBLCOM were accounted for as discontinued and prior periods were restated for consistency in reflecting KBLCOM as a discontinued operation. 74

As consid;rttion for tha stle of KBLCOM, th3 Comp ny rsceived 1 million shtr:s of Tima Wrm;r common stock and 11 million shares of non-publicly traded conysrtibia preferred stock. Tima Wamer also purchased from the Company for cash approximately $619 million (after post closing adjustments) of KBLCOM's intercompany indebtedness and assumed approximately $650 million of KBLCOM's extemal debt and otherliabilities. The convertible preferred stock has an aggregate liquidation preference (redeemable after July 6,2000) of $100 per share (plus accrued and unpaid dividends), is entitled to cumulative annual dividends of $3.75 per share until July 6,1999, is currently convertible by the Company and after four years 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). Under the terms of the sale, the Company may make up to four demands for registration of its shares of Time Warner common stock. Subject to certain exceptions, the terms of the sale prohibit the Company from acquiring additional shares of Time Warner securities or selling shares of Time Warner securities to any holder of more than 5 percent of certain classes of Time Warner voting securities. Dividends on the Time Wamer securities are recognized as income at the time they are earned. In 1995, the Company recorded pre-tax dividend income of $20.1 million. Operating results from discontinued operations for years ended December 31,1995,1994 and 1993 were as follows: Year Ended December 31. 1995 1994 1993 (Thousands of Dollars) $ 143,925 $ 255,772 $ 244,067 Revenues.......... 86 938 156.084 148.325 Operating expenses (a) 56,987 99,688 95,742 Gross operating margin (a).... Depreciation;-amortization, interest and other..... 81,409 128,023 117,982 income taxes (benefit)....................... (4,997) (11,811) 2,255 19.425 0 $ (16.524) $ (24.495) J Deferred ioss (b).................. Loss from discontinued operations (c)...... (a) Exclusive of depreciation and amortization. The net loss for discontinued operations of KBLCOM through the date of sale (July 6,1995) f (b) ^ was deferred by the Company. Upon closing of the sale, the deferred loss was included as an adjustment to the gain on sale of cable television subsidiary on the Company's ) Statements of Consolidated income. Loss from discontinued operations of KBLCOM excludes the effects of corporate overhead (c) charges and includes interest expense relating to the amount of intercompany debt that Time Warner purchased from the Company. e-75

NLt as sts of discontinurd operations wara as follows: December 31.1994 l (Thousands of Dollars) i Assets: Cable television property, net of accumulated depreciation of $161,402... $ 276,624 Equity in cable television partnerships...... 160,363 Intangible assets..................... 1,029,440 i Other assets............... 43.625 Total a ss ets........................ 1,510,052 Less: ) Cable television debt.................. -(504,580) Accumulated deferred income taxes....... (316,241) i D.her liabilities........................ (70.249) j Net assets....................... M 14) Railroad Settlement Payments in July 1994, HL&P contributed to a wholly owned subsidiary the right of HL&P to receive certain receivables relating to a litigation sett'ement. This subsidiary transferred the receivables to _a trust, which in turn sold certificates evidencing a senior interest in the trust to a commercial bank. for $66.1 million. The subsidiary retaired a subordinate interest in the trust. HL&P recorded the transaction as a $66.1 million reduction to reconcilable fuel expense in July 1994. The reduction to reconcilable fuel expense had no effect on earnings. 15) 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 pattems. Year Ended December 31.1994 First Second Third Fourth Quader Quader Quader Quader (Thousands of Dollars, except per share amounts) 1 Revenues................ $ 824,133 $1,006,617 $1,152,667 $ 770,719 Operating income. 145,497 292,886 451,839 78,393 income from continuing operations (b) 41,599 134,308 242,239 5,839 Income (loss) from discontinued operations.. (7,501) (7,583) (6,271) 4,831 Net income........... 25,898 126,725 235,968 10,670 Earnings per common share (a): Income from continuing operations (b).... .17 .55 .98 $ .02 Net income.... .11 .52 .96 .04 76 i

l l l Year Ended December 31.1995 t First Second Third Fourth Quader Quader Quader Quader l (Thousands of Dollars, except per share amounts) Revenues..................,....... $ 755,238 $ 989,843 $1,184,938 $ 800,154 Operating income. 115,151 283,789 421,903 84,090 l Income from continuing operations......... 23,849 133,260 235,861 4,430 l Gain (loss) on sale of cable television ' subsidiary 90,607 618.088 (571) j Net income........... 114,456 133,260 853,949 3,859 Earnings per common share (a): Income from continuing operations...... .10 .54 .95 $ .02 Net income...................... .46 .54 3.44 .02 I (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. See Note 5(a). t (b) Information for the first quarter of 1994 is before the cumulative effect of a change in accounting for postemployment benefits of $8.2 million which reduced eamings by $.03 per share. l l 77 i

HOUSTON LIGHTING & POWER COMPANY NOTES TO FINANCIAL STATEMENTS - For the Three Years Ended December 31,1995 Except as modified below, the Notes to the Company's Consolidated Financial Statements are incorporated htr;in by reference insofar as they relate to HL&P: (1) Summary of Significant Accounting Policies, (2) Jointly-Owned Nuclear Plant, (3) Rate Matters, (6) Preferred Stock of HL&P, (7) Long-Term Debt, (9) Retirement Plans, (10) Income Taxes, (11) Commitments and Contingencies, (12) Estimated Fair Value of FinancialInstruments and (14) Railroad Settlement Payments. (1) Summary of Significant Accounting Policies (g) Earninos Per Common Share. Allissued and outstanding Class A voting common stock of HL&P is held by the Company and allissued and outstanding Class B non-voting common stock of HL&P is held by Houston industries (Delaware) incorporated, a wholly owned subsidiary of the Company. Accordingly, earnings per share are not computed. (h) Statements of Cash Flows. At December 31,1995, HL&P had affiliate investments (considered to be cash equivalents) of $75.5 million. At December 31,1994, HL&P had affiliate investments of $227.6 million.' At December 31,1993, HL&P did not have any investments with affiliated companies. (8) Short-Term Financing in 1994 and 1995, the interim financing requirements of HL&P were primarily met through the issuance of commercial paper. HL&P had bank credit facilities of $400 million at December 31, 1995 and 1994, which limited total short-term borrowings and provided for interest at rates generally less than the prime rate. HL&P's weighted average short-term borrowir g rates for commercial paper for the years ended December 31,1995 and 1994 were 6.21% ana 3.71%, respectively. HL&P had no commercial paper outstanding at December 31,1995 and 1994. l Facility fees are required on HL&P's bank credit facility. (9) Retirement Plans (a) Pension. Net pension cost for HL&P includes the following components: Year Ended December 31. 1995 1994 1993 (Thousands of Dollars) Service cost - benefits eamed during the period.. S 22,264 S 21,335 $ 24,640 Interest cost on projected benefit obligation 48,144 45,064 49,950 Actual (return) loss on plan assets. (93,023) 4,737 (38,668) Net amortization and deferrals. 48.696 (50.012) (683) Net pension cost. 26,081 21,124 35,239 SFAS No. 88 - curtailment expense , _ 1 64_5 Total pension cost S 31.726 S 21.124 5 35.239 l 78

The funded stttus of HL&P's r;tirzmint plIn wts cs follows: December 31. 1995 1994 (Thousands of Dollars) Actuarial present value of: Vested benefit obligation....... M $ 429.279 Accumulated benefit obligation.............. $ 528.467 $ 460.760 0 Plan assets at fair value..................... - $ 581,194 $ 486,100 Projected benefit obligation.................. 687.420 617.690 Assets less than projected benefit obligation..... (106,226) (131,590) Unrecognized transitional asset.. (13,252) (15,157) Unrecognized prior service cost... .46,462 21,275 Unrecognized net loss.................... 19.343 67.093 Accrued pension cost....................... 1,gjfG,) M (c) Postretirement Benefits. The net postretirement benefit cost for HL&P includes the following components: Year Ended December 31. 1995 1994 1993 (Thousands of Dollars) Service cost - benefits earned during the period.... $ 8,779 $ 8,904 $ 9,297 Interest cost on projected benefit obligation....... 10,794 9,946 18,134 Actual return on plan assets................... Net amortization and deferrals................. 5.893 7.757 9.658 Net postretirement benefit cost................. gjjdig 12f28291 1.21202 The funded status of HL&P's postretirement benefit costs was as follows: December 31. 1995 1994 (Thousands of Dollars) Accumulated benefit obligation: Retirees..................... $ (125,925) $ (97,200), Fully eligible active plan participants................. (10,532) (20,126) Other active plan participants........,............ (26.515) (22.706) Total.... (162,972) (140,032) Plan assets at fair market value 18 310 Assets less than accumulated benefit obligation......... (144,662) (140,032) Unrecognized transitional obligation.................. 181,567 191,225 Unrecognized net gain........................... (75.451) (92.786) Accrued postretirement benefit cost...... S (38.546) $ (41.593) (10) Income Taxes During 1993, federal tax legislation was enacted that changed the income tax consequences for HL&P. A net regulatory asset and the related deferred income tax liability of $71.3 million were recorded by HL&P in 1993. The effects of the new law, which decreased HL&P's net income by 79

58.0 million, w ra r cogniz:d Es a compontnt of incoma trx 6xpensa in 1993. Tha effset on HL&P's deferred taxes as a result of the change in the new law was 54.5 million in 1993. - HL&P's current and deferred components of income tax expense are as follows: - ~ Year Ended December 31. 1995 1994 1993 (Thousands of Dollars) i C urrent..................

$.188,104 - $ 184,669

$ 115,745 ' Deferre d..................................... 57.703 70.324 123.719 Federal income tax expense...................... 245,807 254,993 239,464 Federalincome taxes charged to other income....... (851) (836) (2.993) income taxes before cumulative effect of change in a'ccounting........................... 12n2)$ 1.L%,152. ILE.dZ.1 .HL&P's effective income tax rates are lower than statutory corporate rates for each year as follows: Year Ended December 31. 1995 1994 1993 i (Thousands of Dollars) t income before income taxes, preferred dividends [ and cumulative effect of change in accounting........ $ 725,888 $ 749,121 $ 720,694 Statutory rate.................................. 35% 35% 35% Income taxes at statutory rate..................... 254.061 262 192 252.243 Net reduction in taxes resulting from: l AFUDC - other included in income.................. 2,716. 1,440-1,229 l Amortization of investment tax credit............... 19,427 - 19,416 19,797 Difference between book and tax depreciation for - l which deferred taxes have not been normalized...... (15,211) (15,455) J (12,976) l Excess deferred taxes......................... 4,384 3,537 9,625 . Other - net.............. (2.211) (903) (1 903) [ Total.............. 9.105 8.035 15.772 i income taxes before cumulative effect of change I in accounting................................ ),1gggg gjg,13Z, S 236.471 [ t Effective rate................................. 33.7 % .33.9% 32.8% i J i 80

Following cra HL&P's tax cff; cts of t:mporcry diffsrences r;sulting in d;ftrr;d trx assets cnd li bilitiss: 2 December 31. 1995 1994 (Thousands of Dollars) Deferred Tax Assets: IRS audit assessment. $ 48,513 $ 48,513 Disallowed plant cost - net 22,687 23,496 Other.......... 59.558 60.174 Total deferred tax assets............... 130.758 132.182 Deferred Tax Liabilities: Depreciation...... 1,391,277 1,335,265 Regulatory assets - net. 228,587 235,463 1 1 Deferred plant costs - net................ 200,028 207,746 Capitalized taxes, employee benefits and removal costs... 110,177 111,681 Other.......... 148.177 118.328 Total deferred tax liabilities 2.078.246 .2.008.483 Accumulated deferred income taxes - net $1.947.488 $1.876.300 i (12) Estimated Fair Value of FinancialInstruments I { The carrying amount and estimated fair value of HL&P's cash and short-term investments was 4 $75.9 million for 1995 and $235.9 million for 1994. The carrying amount and estimated fair value of investments in HL&P Nuclear Decommissioning Trust was $44.5 million in 1995 and $25.1 i million in 1994. See Note 1(j). 4 4 1 i i 1 5 i II 4 4 81

.A p+ 4h m -e4m4 + (15) UnnuditId Quartirly Information The following unaudited quarterly financialinformation 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 I and other factors, including rate increases and variations in operating expense patterns. Income After Operating Preferred Quarter Ended Revenues income Dividends (Thousands of Dollars) 19.9.4 M a rch 31......... S 821,581 $ 122,879 $ 41,686 June 30... 1,004,906 216,842 142,478 ) September 30... 1,150,946 320,859 251,092 December 31 768,652 82,302 17,925 1995 March 31 S 746,166 $ 104,566 $ 33,909 June 30 978,225 217,419 141,873 September 30........... 1,171,789 308,258 241,159 December 31............... 784,117 104,421 34,036 (16) Principal Affiliate Transactions 1 Affiliated Year Ended December 31. Comoany Descriotion 1995 1994 199{ (Thousands of Dollars) i Houston Dividends S 454,000 $ 328,996 $ 342,982 i industries Service Fees (a) 26,582 26,913 21,864 i Money Fund income (b) 10,837 6,025 2,748 (a) Included in Operating Expenses. (b) Included in Other income (Expense). 82

1 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 as of . December 31,1995 and 1994, 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 31,1995. Our audits also included the Company's financial statement schedule listed . in item 14(a)(2). These financial statements and financial statement schedule are the responsibility 1 of the Company's management. Our responsibility is to express an opinion on these financial statements and 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 beheve 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 the Company and its subsidiaries at December 31,1995 and 1994, and the results of their operations and their cash flows for each of the three years in the period ended December 31,1995 in conformity with generally accepted accounting principles. Also, in our 1 opinion, such financial statement schedule, when considered in relation to the basic consolidated j financial statements taken as a whole, presents fairly in all material respects the information set i forth therein. n As discussed in Notes 9(b) and 9(d), respectively, to the consolidated financial statements, the Company changed its method of accounting in 1994 for (i) the Employee Stock Ownership Plan to conform with. AICPA Statement of Position 93-6 and (ii) postemployment benefits to conform with Statement of Financial Accounting Standards No.112. DELOITTE & TOUCHE LLP Houston, Texas February 29,1996 (March 26,1996 as to Note 4) l 83

INDEPENDENT AUDITORS' REPORT Houston Lighting & Power Company: ' We have audited the accompanying balance sheets and the statements of capitalization of Houston Lighting & Power Company (HL&P) as of December 31,1995 and 1994, and the related statements of income, retained earnings and cash flows for each of the three years in the period ended December 31,1995. Our audits also included the financial statement schedule of HL&P listed in item 14(a)(2). These financial statements and financial statement schedule are the responsibility of HL&P's management. Our responsibility is to express an opinion on these financial statements and 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 financial statements present fairly, in all material respects, the financial position of HL&P at December 31,1995 and 1994, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 1995 in conformity with generally accepted accounting principles. Also, in our opinion, such financial statement schedule, when considered in relation to the basic financial statements taken as a whole, presents fairly in all material respects the information set forth therein. As discussed in Note 9(d) to the financial statements, HL&P changed its method of accounting for postemployment benefits to conform with Statement of Financial Accounting Standards No.112 in 1994. DELOITTE & TOUCHE LLP Houston, Texas February 29,1996 84

It2m 9. Ch:ngIs in and Di Igr;;msnts with Accountants on Accounting and Financial Disclosure. None. F w i 1 i r i 1 I I l l 85 l 1 l l i

PART lil item 10. Directors and Executive Officers of the Company and HL&P. (a) The Company l 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 1996 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) HL&P The information set forth under item 1. " Business-Executive Officers of HL&P" is j incorporated herein by reference. Each member of the board of directors of HL&P currently is also a member of the board of l directors of the Company. Each member of the board of directors of HL&P is elected annually for a one-year term. The HL&P annual shareholder's meeting, at which the Company elects members to the HL&P board of directors, is expected to occur on May 22,1996. Information is set forth below with respect to the business experience for the last five years of each person who currently serves as a member of the board of directors of HL&P, certain other directorships held by each such person and certain other information. Unless otherwise indicated, each person has had the. same principal occupation for at least five years. Milton Carroll, age 45, has been a director since 1992. Mr. Carroll is Chairman, President and Chief Executive Officer of instrument Products Inc., an oil field supply manufacturing company, in Houston, Texas. He is a director of PanEnergy Corp., the Federal Reserve Bank of Dallas and Blue Cross Blue Shield of Texas, i John T. Cater, age 60, has been a director since 1983. Mr. Cater is Chairman, Chief Executive Officer and a director of River Oaks Trust Company in Houston, Texas. He also serves as President and a director of Compass Bank-Houston. Until his retirement in 1990, Mr. Cater served as President, Chief Operating Officer and a director of MCorp, a Texas bank holding company. He j served as a director of MCorp until July 1994. Robert J. Cruikshank, age 65, has been a director since 1993. Mr. Cruikshank is primarily engaged in managing his personal investments in Houston, Texas. Prior to his retirement in 1993, he was a Senior Partner in the accounting firm of Deloitte & Touche. Mr. Cruikshank serves as a director of MAXXAM inc., Kaiser Aluminum Corporation, Compass Bank - Houston and Texas Biotechnology Corporation. Linnet F. Deily, age 50, has been a director since 1993. Ms. Deily is Chairman, Chief Executive Officer and President of First Interstate Bank of Texas, N.A. She has served as Chairman since 1992, Chief Executive Officer since 1991 and President since 1988. (1) Joseph M. Hendrie, Ph.D., age 71, has been a director since 1985. Dr. Hendrie is a Consulting Engineer in Bellport, New York, and a Senior Scientist at the Brookhaven National Laboratory in 86

Upton, Nr.w York. having previously servad as Chairman and Commissioner of the U.S. Nuclear Regulatory Commission and as President of the American Nuclear Society. He is also a director of Entergy Operations, Inc. of Jackson, Mississippi. (2) Lee W. Hogan, age 51, has been a director since 1995. Mr. Hogan is President and Chief Operating Officer of Houston Industries Energy, Inc., the nonregulated power business subsidiary of the Company, having served in that capacity since 1993. From 1990 to 1993 he served as Group Vice President - External Affairs for HL&P. Mr. Hogan is also a Senior Vice President of the Company. Howard W. Horne, age 69, has been a director since 1978. Mr. Horne is Vice-Chairman of Cushman & Wakefield of Texas, Inc., a subsidiary of a national real estate brokerage firm. Until 1990, he was Chairman of the Board of The Horne Company, a Houston realty firm. Don D. Jordan, age 63, has been a director of the Company since 1977 and of HL&P since 1974. Mr. Jordan is Chairman and Chief Executive Officer of the Company and Chairman and Chief Executive Officer of HL&P. He also serves as a director of Texas Commerce Baneshares, Inc. and BJ Services Company, Inc. R. Steve Letbetter, age 47, has been a director since 1995. Mr. Letbetter is President and Chief Operating Officer of HL&P, having served in that capacity since 1993. He has served in various positions as an officer of HL&P since 1978, most recently as Group Vice President - Finance and Regulatory Relations since 1988. He is also a Senior Vice President of the Company. Mr. Letbetter is a director of Charter Bancshares Inc., a Texas bank holding company. Alexander F. Schilt, Ph.D., age 55, has been a director since 1992. Dr. Schilt served as Chancellor of the University of Houston System through August 1995. Prior to 1990, he was President of Eastern Washington University in Cheney and Spokane, Washington. Kenneth L. Schnitzer, Sr., age 66, has been a director since 1983. Mr. Schnitzer is Chairman of the Board of Schnitzer Enterprises Inc., a Houston commercial real estate development company, having previously served as a director of American Building Maintenance Industries Incorporated and Weingarten Realty,Inc. (3) Jack T. Trotter, age 69, has been a director since 1985. Mr. Trotter is primarily engaged in managing his personal investments in Houston, Texas. He also serves as a director of First Interstate Bank of Texas, N.A. and Howell Corporation and as a director and Trust Manager of Weingarten Realty investors. Bertram Wolfe, Ph.D., age 68, has been a director since 1993. Prior to his retirement in 1992, Dr. Wolfe was Vice President and General Manager of General Electric Company's nuclear energy business in San Jose, California. From 1992 to 1995, he was on the nuclear advisory committee of Pennsylvania Power & Light and was a member of the international advisory committee of Concord Industries. Dr. Wolfe serves on the boards of directors of URENCO Inc. and URENCO investments, Inc. (1) First Interstate Bank of Texas, N. A., and certain of its affiliates participate in various credit facilities with HL&P, the Company and certain of HL&P's affiliates and other entities in which the Company has an ownership interest. Under these agreements, First Interstate and certain of its affiliates have 87

maximum aggregate loans and loan commitments of approximately $35.5 million, as of December 31, 1995. (2) Dr. Hendrie is expected to retire as a director of the Company and HL&P at the May 22,1996 annual shareholders' meetings, j (3) During 1995, HL&P and certain of its affiliates leased office space in buildings owned or controlled by affiliates of Mr. Schnitzer. HL&P and certain of its affiliates paid a total of approximately $283,000 to affiliates of Mr. Schnitzer during 1995. HL&P believes such payments are comparable to those that would have been made to other non-affiliated firms for comparable facilities and services. In 1994 Mr. Schnitzer consented to the entry of an crder by the Office of Thnft Supervision (OTS) whereunder he may not hold office in, or participate in the conduct of the affairs of, any federally regulated depository institution without the prior approval of the OTS and, if applicable, any other appropriate federal banking agency. The order arose out of Mr. Schnitzer's prior service as a director of BancPLUS Savings and Loan Association (BancPLUS), a Houston, Texas-based thrift that was taken over by federal regulators in 1989. Mr. Schnitzer consented to the order to avoid the time and expense of defending an OTS administrative proceeding, without admitting whether there were any grounds for such a proceeding. In August 1995, Mr. Schnitzer and three other individuals were named as defendants in a criminal proceeding based on two 1986 real estate transactions involving BancPLUS. The matter is pending in the United States District Court for the Southem District of Texas. The federal govemment has alleged that the four defendants caused BancPLUS to enter into a land swap and to falsely report the swap as two separate and independent transactions. In 1987, following a default on notes secured by the parcel that BancPLUS had sold and discovery that the person who controlled the defaulting party had misrepresented his relationship with the seller of the other parcel, BancPLUS reported the transaction as a possible land swap to federal regulators and reversed a previously reported profit from the sale transaction in its financial statements. There is no allegation that Mr. Schnitzer (or any other director or officer of BancPLUS) profited or attempted to profit personally from the transaction. Mr. Schnitzer and his counsel have advised the Company that the charges against him are without any basis in fact and will be vigorously defended. The case has been scheduled for trialin July 1996. Item 11. Executive Compensation. (a) The Company The information called for by item 11, with respect to the Company, is or will be set forth in the definitive proxy statement relating to the Company's 1996 annual meeting of s.hareholders 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 (excluding any information required by paragraphs (i), (k) and (l) of item 402 of Regulation S-K) are incorporated herein by reference pursuant to Instruction G to Form 10-K. 88

(b) HL&P Summary Compensation Table. The following table shows, for the years ended December 31, 1993,1994 and 1995, the annual, long-term and certain other compensation paid by the Company and its subsidiaries to the chief executive officer and the other four most highly compensated executive officers of HL&P (Named Officers).

SUMMARY

COMPENSATION TABLE Long-Term comoensation Awards Pavouts Annual Comoensation Securities Name and Other Annual Underlying LTIP All Other Princioal Position Yttilg Salarv(i) Bonus (1) Comoensation Ootions(#1(2) Pavouts(3) Comoensation(4) Don D. Jordan.. 1995 $884,500 $ 907,226 $ 3,969 36,316 $ 407,437 $734,023 Chairman and 1994 859.500 734,873 114,648 27,726 550,567 717,261 i l Chief Executive Officer 1993 829,500 386,775 0 25,930 762,962 647,491 of the Company and j HL&P i l R Steve Letbetter., 1995 363,500 285,750 190 9,746 84,201 47,242 President and Chief 1994 321,000 246,525 31,133 6,366 117,607 43,818 Operating Officer of 1993 271,000 109,335 0 4,256 212,362 42,562 l HL&P and Senior Vice President of the Company 1 Hugh Rice Kelly, 1995 334,000 195,773 637 7,414 100,925 44,245 Senior Vice President, 1994 323,500 190,820 42,147 5,470 145,107 50,546 General Counsel and 1993 310,500 94,446 0 5,242 285,078 58,218 j Corporate Secretary of the Company and HL&P William T Cottle (5).,,, 1995 254,500 157,200 401 5,566 0 16,711 Executive Vice 1994 241,000 129,675 337 4,044 0 13,126 President and General 1993 174,470 60,000 0 0 0 0 Manager - Nuclear HL&P David M. McClanahan 1995 238,100 151,860 317 5,028 35,806 23,162 Executive Vice 1994 208,100 129,398 12,195 3,322 41,512 23,376 President and General 1993 178,100 57,351 0 ?010 82,025 18,254 Manager Energy Delivery and Customer Services of HL&P (1) The amounts shown include salary and bonus earned as well as eamed but deferred by the Named Officers. (2) The amounts shown have been adjusted to reflect the Company's two-for-one stock split effected by a stock distribution on December 9,1995 (1995 Stock Split). A (3) The amounts shown for 1995 represent the dollar value of shares of the Company's Common Stock paid out in 1995 under the Company's long-term incentive compensation plan based on the achievement of 89

c,ertain performance goals for the 1992-1994 performance cycle, plus dividend equivalent accruals during the performance penod. (4) The amounts shown include (i) Company contnbutions to the Company's savings plan and accruals under its savings restoration plan for the years shown on behalf of the Named Officers, as follows: Mr. Jordan 1993 - $57,152; 1994 - $52,344; and 1995 - $33,610; Mr. Letbetter 1993 - $16,672; 1994 - $18,074; and 1995 - $ 25,621; Mr. Kelly 1993 - $19,569; 1994 - $17,554; and 1995 - $18,892; Mr. Cottle 1994 - $12,642; and 1995 - $16.135; and Mr. McClanahan 1993 - $7,724; 1994 - $10,547; and 1995 - $14.076; (ii) the term portion of the premiums paid by the Company under split-dollar life insurance policies purchased in 1994 in connection with the Company's executive life insurance plan, as follows: Mr. Jordan 1994 - $4,800 and 1995 - $5,700; Mr. Letbetter 1994 - $218 and 1995 - $272; Mr. Kelly 1994 - $801 and 1995 - $915; Mr. Cottle 1994 - $484 and 1995 - $576; and Mr. McClanahan 1994 - $328 and 1995 - $456; and (iii) the portion of accrued interest on amounts of compensation deferred under the Company's deferred compensation plan and executive incentive compensation plan that exceeds 120 percent of the applicable federallong-term rate provided under Section 1274(d) of the Intemal Revenue Code, as follows: Mr. Jerdan 1993 -$590,339; 1994 - $660,117; and 1995,$694,713; Mr. Letbetter 1993 - $25,890; 1994 - L25,526; and 1995 - $21,349; Mr. Kelly 1993 - $38,649; 1994 - $32,191; and 1995 - $24,438; Mr. Cottle (none for 1993,1994 and 1995); and Mr. McClanahan 1993 - $10.530; 1994 - $12,501; and 1995 - $8,630. The Company owns and is the beneficiary under certain life insurance policies which are currently anticipated to provide benefits sufficient to cover the accrued interest on deferred amounts referenced in (iii) of this footnote. l (5) Mr. Cottle commenced employment with HL&P in April 1993. 4 90

l ) Stock Option Grants. The following table contains information concerning grants during 1995 of ~ tock options under the Company's long-term incentive compensation plan to the Named Officers. s The information has been adjusted to reflect the Company's 1995 Stock Split. OPTION GRANTS IN 1995 Grant Date Individual Grants Value % of Total Number of Options Securities Granted to Exercise Grant Underlying Employees or Base Date Options in Fiscal Price Per Expiration Present Name Granted (#)(1) Year Share Date Value(2) Don D. Jordan 36,316 27.2 % $17.75 01/02/05 569,000 R. Steve Letbetter 9,746 7.3% 17.75 01/02/05 18,517 Hugh Rice Kelly 7,414 5.6% 17.75 01/02/05 14.087 i William T. Cottle. 5,566 4.2% 17.75 01/02/05 10,575 David M, McClanahan 5,028 3.8% 17.75 01/02/05 9,553 (1) The nonstatutory options for shares of the Company's Common Stock included in the table were granted on January 3,1995, have a ten-year term and generally become exercisable annually in one-third increments commencing one year after date of grant, so long as employment with the Company or its subsidiaries continues. A change in control of the Company would result in all options becoming immediately exercisable. For the purposes of the Company's long-term incentive compensation plan, a " change in control" generally is deemed to have occurred if (i) any person or group becomes the direct o' indirect beneficial owner of 30 percent or more of the Company's outstanding voting securities; (ii) the r ' majority of the Board changes as a result of, or in connection with, certain transactions; (iii) as a result of the Company merging or consolidating with another corporation, less than 70 percent of the surviving 4 corporation's outstanding voting 'secunties is owned by the former shareholders of the Company (excluding any party to such a transaction or any affiliates of any such party); (iv) a tender offer or exchange offer is made and consummated for the ownership of 30 percent or more of the Company's outstanding voting securities; or (v) the Company transfers all or substantially all of its assets to another corporation that is not wholly-owned by the Company. (2) The values are based on the Black-Scholes option pricing model adjusted for the payment of dividends. The calculations were made based on the following assumptions: volatility of 19.65 percent (based on daily closing prices of the Company's Common Stok for the one-year period prior to grant date); risk-free interest rate of 7.78 percent (interest rne on a U.S. Treasury secunty with a maturity date corresponding to that of the option term); opt;on price of $17.75 (fair market value of the underlying stock on the date of grant); current dividend rate of $1.50 per share per year; and option term equal to the full ten-year period until the stated expiration date. No reduction has been made in the valuations on account of non-transferability of the options or vesting or forfeiture provisions. Valuations would change if different assumptions were made. Option values are dependent on general market conditions and the performance of the Company's Common Stock. There can be no assurance that the values in this table will be realized. 91

i l Stock Option Values. The following table sets forth information on the unexercised options to t purchase Common Stock held by each of the Named Officers as of December 31,1995. No . options were exercised by the Named Officers during 1995. 1995 YEAR-END OPTION VALUES i Number of Securities Underlying Value of Unexercised Unexercised Options In-the-Money Options at at December 31.1995 December 31.1995 (1) Exercisable / Exercisable / Name Unexercisable Unexercisable Don D. Jordan. 52,908 / 63,444 $97,946 / $268,228 R. Steve Letbetter...... 9,282 / 15,408 16,700 / 70,151 Hugh Rice Kelly 10,652 / 12,808 19,755 / 54,604 William T. Cottle 1,348 / 8,262 1,432 / 39,392 David M. McClanahan... 4,586 / 7,912 8,247 / 36,144 (1) Based on the average of the high and low sales prices of the Company's Common Stock on the New York Stock Exchange Composite Tape, as reported in The Wall Street Journal for December 29, 1995. Long-Term incentive Compensation. The following table sets forth, for, each of the Named j Officers, information conceming awards made during 1995 for the 1995-1997 performance cycle under the Company's long-term incentive compensation plan, as adjusted for the 1995 Stock Split. The amounts shown represent potential payouts of awards of shares of Common Stock based on the achievement of performance goals over a three-year performance cycle. The performance goals include Company consolidated goals and subsidiary or business unit goals, weighted 25 percent on consolidated performance and 75 pecent on subsidiary or business unit performance. The Corcoany consolidated goal is achieving a cartain level of total shareholder return in relation to a group of other companies. The subsidiary or business unit goals are achieving certain cash flow perfom'ance in relation to a group of other companies and achieving a competitive price target for electric utility services by the year 2000 while maintaining an adequate return on equity. An additional goal applicable to Messrs. Jordan ard Kelly is based on the success of HI Energy, in closing r,ertain transactions and its achievement of specified rates of return. If a change in control of the Company occurs before the end of a performance cycle, the payouts of awards for performa1ce shares will occur without reprd to achievement of the performance goals. See Note 1 to the Option Grants in 1995 table for information regarding the definition of a change in control under the Company's long-term incentive compensation plan. 92

- - = - - LONG-TERM INCENTIVE PLAN AWARDS IN 1995 1 Performance Estimated Future Payouts Under or Other Non Stock Price-Based Plans (1) Period Until Threshold Target Maximum Number Maturation or Number Number Number Name of Shares Pavout ,QLShares of Shares of Shares Don D. Jordan........ 32,812 12/31/97 16,406 32,812 49,218 R. Steve Letbetter 10,160 12/31/97 5,080 10,100 15,240 Hugh Rice Kelly.... 7,730 12/31/97 3,866 7,730 11,596 William T. Cottle.... 5,802 12/31/97 2,902 5,802 8,704 David M. McClanahan... 5,242 12/31/97 2,622 5,242 7,864 (1) The table does not reflect dividend equivalent accruals during the performance period. Retirement Plans, Related Benefits And Other Agreements. The following table shows the estimated annual benefit payable under the Company's retirement plan, benefit restoration plan and, in certain cases, supplemental agreements, to officers in various compensation classifications upon retirement at age 65 after the indicated periods of service, determined on a single-life annuity basis. The benefits listed in the table are not subject to any deduction for Social Security or other offsetting amounts. PENSION PLAN TABLE Final Average Annual Compensation Estimated Annual Pension Based on Years of Sen/ ice (1) At Aae 65 15 Years 20 Years 25 Years 30 Years 35 or More Years $ 300,000 $ 85,901 $114,535 $143,169 $171,803 $200,436 400,000 115,001 153,335 191,669 230,003 268,336 500,000 144,101 192,135 240,169 288,203 336,236 1 600,000 173,201 230,935 288,669 346,403 404,136 700,000 202,301 269,735 337,169 404,603 472,036 800,000 231,401 308,535 385,639 462,803 539,936 900,000 260,501 347,335 434,169 521,003 607,836 1,000,000 289,601 386,135 482,669 579,203 675,736 1,200,000 347,801 463,735 579,669 695,603 811,536 1,400,000 406,001 541,335 676,669 812,003 947,336 1,600,000 464,201 618,935 773,669 928,403 1,083,136 I 1,800,000 522,401 695,535 870,669 1,044,803 1,218,936 2,000,000 580,601 774,135 967,669 1,161,203 1,354,736 (1) The qualified pension plan limits compensation in accordance with Section 401(a)(17) of the Internal l Revenue Code and also limits benefits in accordance with Section 415 of the Intemal Revenue Code. Pension benefits based on compensation above the qualified plan limit or in excess of the limit on annual benefits are provided through the benefit restoration plan. 93

For the purpose of the pension table above, final average annual compensation means the average of covered compensation for 36 consecutive months out of the 120 consecutive months immediately preceding retirement in which the participant's covered compensation was the highest. Covered compensation only includes the amounts shown in the " Salary" and " Bonus" columns of the Summary Compensation Table. At December 31,1995, the credited years of service for the following persons are: 35 years for Mr. Jordan; 22 years for Mr. Letbetter; 21 years for Mr. Kelly, 10 of which result from a supplemental agreement 3 years for Mr. Cottle; and 21 years for Mr. McClanahan. 1 The Company maintains an executive benefits plan that provides certain salary continuation, disability and death benefits to key officers of the Company and certain of its subsidiaries, including HL&P. The Named Officers participate in this plan pursuant to individual agreements that generally provide for (i) a salary continuation benefit of 100 percent of the officer's current salary for twelve months after death during active employment and then 50 percent of salary for nine years or until the deceased officer would have attained age 65, if later, and (ii) if the officer retires after attainment i of age 65, an annual post-retirement death benefit of 50 percent of the officer's preretirement annual salary payable for six years. The Company has established an executive life insurance plan providing split-dollar life insurance in the form of a death benefit for certain officers of the Company and its subsidiaries and members of the Company's Board of Directors who are not officers of the Company or its subsidiaries. The death benefit coverage varies but in each case is based on coverage (either single life or second to die) that is available for the same amount of premium that could purchase coverage equal to two times current salary for Messrs. Kelly, Cottle and McClanahan; four times current salary for Mr. Letbetter; ten million dollars for Mr. Jordan; and six times the annual retainer for the Company's non-employee directors (except in the case of Mr. Trotter, who has a separate agreement providing for similar coverage, as described below under " Compensation of Directors"). The plan also provides that the Company may make payments to the covered individuals designed to compensate for tax consequences with respect to imputed income that they must recognize for federal income tax purposes based on the term portion of the annual premiums, if a covered executive retires at age 65 or at an earlier age under circumstances approved for this purpose by the Board of Directors, rights under the plan vest so that coverage is continued based on the same death benefit in effect at the time of retirement. Upon death, the Company will receive the balance of the insurance proceeds payable in excess of the specified death benefit which by design is expected to be at least sufficient to cover the Company's cumulative outlays to pay premiums and the after-tax cost to the Company of the tax reimbursement payments. There is no arrangement or understanding under which any covered individuals will receive or be allocated any interest in any cash surrender value under the policy. The Company and its subsidiaries HL&P and HI Energy have entered into a trust agreement with an independent trustee establishing a " rabbi trust" for the purpose of funding benefits payable to participants (which include each of the Named Officers) under the Company's deferred compensation plans, executive incentive compensation plans, benefits restoration plan and savings restoration plan (Designated Plans). The trust is a grantor trust, irrevocable except in the event of 94

an unfavorable ruling by the Internal Revenue Service as to the tax status of the trust or certain changes in tax law. It is currently funded with a nominal amount of cash. The Company, HL&P and HI Energy are required to make future contributions to the grantor trust when required by the I provisions of the Designated Plans or when required by the Company's benefits committee; The l benefits committee consists of officers of the Company designated by the board of directors and has general responsibility for funding decisions and selection of investment managers for the Company's retirement plans and other administrative matters in connection with other employee benefit plans of the Company. If there is a change in' control (defined in a manner generally the same as the comparable definition in the Company's long-term incentive compensation plan), the Company, HL&P and HI Energy are required to fully fund the grantor trust, within 15 days following the change in control, with an amount equal to the entire benefit which each participant would be j entitled under the Designated Plans as of the date of the change in control (calculated on the basis of the present value of the projected future benefits payable under the Designated Plans). The assets of the grantor trust are required to be held separate and apart from the other funds of the Company and its subsidiaries, but remain subject to claims of general creditors under applicable state and federallaw. The Company entered into an employment agreement in 1994 with Mr. Jordan which provides for benefits in the event of termination of employment following a change in control of the Company and for a two year extension of employment if the covered executive is employed by the Company at age 65 without there having occurred a change in control. The Company also entered into severance agreements in 1994 with certain executive officers, including Messrs. Letbetter, Kelly, Cottle and McClanahan, that' provide for the payment of certain benefits in the event that, within three years following a change in control of the Company, the officer's employment is ter'minated by the Company or any sutisidiary or successor to the Company for reasons other than cause or disability or by the officer following certain changes in job responsibilities, job location or compensation and benefits from those applicable to him immediately prior to such change in centrol. For the purposes of these agreements, the meaning of a change in control generally is the same as provided in the Company's long-term incentive compensation plan which is described in Note 1 to the Option Grants in 1995 table. All benefits payable under these agreements would be payments by the Company and not HL&P. HL&P and Mr. Cottle entered into an employment agreement in 1993 that continues indefinitely, subject to termination by either party on 30 days' notice (Employment Period). The agreement generally provides for employment of Mr. Cottle as a group vice president - nuclear or in such other executive capacities as may be determined from time to time, a minimum annual base salary (5235,000), bonuses and participation in those employee benefit plans and programs available to similarly situated employees during the Employment Period. In addition, if the Employment Period terminates after April 5,2003, Mr. Cottle will be eligible for supplemental pension, disability or death benefits determined as if his employment had commenced ten years prior to the initial date of the Employment Period. The Company and Mr. McClanahan entered into a benefits agreement in 1991 which provided for the treatment of his employee benefits while he served as an officer of the Company's cable television subsidiary from 1991 to 1993 (sold in July 1995). The agreement provided that 95

Mr. McClanahan would be compensated for the difference between the cable televisio benefits and the Company benefits he would have received if he had been an employee o Company during his period of employment with the subsidiary. Such amounts will be paid to McClanahan at such time benefits are due to him under the terms of the Company's pension a savings plans. Compensation Of Directors. Each non-employee director of the Company receives an annual retainer fee of $20,000, a fee of $1,000 for each Company and HL&P board meeting attended and a fee of $700 for each Company and HL&P committee meeting attended. Directors may defer or a part of their annual retainer fees and meeting fees under the Company's deferred compensation plan. The deferred compensation plan currently provides for accrual of interest on deferred director compensation at a rate equal to the average annual yield on Moody's Long-T l Corporate Bond Index plus two percentage points. i Non-employee directors of the Company participate in a director benefits plan pursuant to which a director who serves at least one full year will receive an annual benefit in cash equal to t annual retainer payable in the year the director terminates service. Benefits under this plan will be payable to a director, commencing the January following the later of the director's termination of service or attainment of age 65, for a period equal to the number of full years of service of the director. Non-employee directors of the Company may also participate in the Company's executive life insurance plan described above under " Retirement Plans, Related Benefits and Other Agreements," providing split-dollar life insurance with a death benefit equal to six times the director's annual retainer.with coverage continuing after termination of service as a director. This plan also permits the Company to provide for a tax reimbursement payment to make the directors whole for any imputed income recognized with respect to the term portion of the annual insurance premiums. Upon death, the Company will receive the balance of the insurance proceeds payable in excess of the specified death benefit which, by design, is expected to be at least sufficient to cover the Company's cumulative outlays to pay premiums and the after-tax cost to the Company of the tax reimbursement payments. Mr. Trotter, who does not participate in this plan, has a separate agreement with the Company providing for payment in the event of his death of a lump sum equal to eight times his final annual retainer, which, because it is subject to taxation at distribution, approximates on an after-tax basis the amount of the death benefit that would have been payable had he participated in the executive life insurance plan. 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 1996 annual meeting of shareholders pursuant to the Commission's Regulation 14A. Such definitive proxy statement relates to a meeting of shareholders involving the clection of directors and the portions thereof called for by item 12 are incorporated herein by reference pursuant to Instruction G to Form 10-K. 96

(b) HL&P-As of the date of this Report, the Company owned all 1.000 authorized, issued and outstanding shares of HL&P's Class A voting common stock, without par value. The following table sets forth information as of March 1,1996, with respect to the beneficial ownership of shares of the Company's Common Stock by each current director, the chief executive officer and the other four most highly compensated executive officers of tiL&P and, as a group, by such persons and other executive officers of HL&P. No person or member of the group listed owns any equity securities of HL&P or any other subsidiary of the Company. Unless otherwise indicated, each person or member of the group listed has sole voting and sole investment power with respect to the shares of Common Stock listed. No ownership shown in the table represents 1 percent or more of the outstanding shares of Common Stock. Name Shares of Common Stock Beneficially Owned Milton Carroll...... 2,400 John T. Cater.. 2,000 (1) William T. Cottle.. 11,790 (2)(3) Robert J. Cruikshank. 2,000 Linnet F. Deily.. 2,000 (4) Joseph M. Hendrie 967 (4)(5) Lee W. Hogan. 26,513 (2)(3)(5) Huward W. Horne. 12,871 (5) Don D. Jord an...................... 222,969 (2)(3)(6) Hugh Rice Ke lly....................... 61,975 (2)(3)(5) R. Steve Letoetter..................... 51,707 (2)(3)(5) David M. McClanahan..... 24.242 (2)(3)(5) Alexander F. Schilt 800 Kenneth L. Schnitzer, Sr. 9,300 Jack T. Trotter..... 2,000 Bertram Wolfe..... 220 All of the above and other executive officers as a group (20 persons)... 542,464 (2)(3)(5) (1) Mr. Cater disclaims beneficial ownership of these shares, which are owned by his adult children. (2) includes shares held under the Company's savings plan, as to which the participant has sole voting power (subject to such power being exercised by the plan's trustee in the same proportion as directed shares in the savings plan are voted in the event the participant does not exercise voting power). The shares held under the plan are reported as of December 31,1995. 97

(3) The ownership shown in the table includes shares which may be acquired within 60 days on exercise of outstanding stock options granted under the Company's long-term incentive compensation plan by each of the persons and group, as follows: Mr. Cottle - 4,552 shares; Mr. Hogan - 7,668 shares; Mr. Jordan - 82,900 shares; Mr. Kelly - 16,694 shares; Mr. Letbetter - 16,070 shares; Mr. McClanahan - 8,038 shares; and the group - 161,784 shares. (4) Voting power and investment power with respect to the shares listed for Ms. Deily and for Dr. Hendrie are shared with the individual's spouse.

Tg (5) includes shares held under the Company's dividend reinvestment and stock purchase plan as of December 31,1995.

(6) Voting power and investment power with respect to 1,152 of the shares listed are shared with Mr. Jordan's spouse. Item 13. C'ertain Relationships and Related Transactions. (a) The Company The information called for by itern 13 is or will be set forth in the definitive proxy statement relating to the Company's 1996 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 a'id the portions thereof called for by item 13 are incorporated herein by reference pursuant to nstruction G to Form 10-K. (b) HL&P- [ The information set forth in Notes 1 and 3 to item 10(b) above is incorporated herein by ~ reference. 98

a ,PART IV i ltem 14. Exhibits, Financial Statement Schedules and Reports on Form 8 K. (a)(1) Financial Statements. ~~ ~ Page Statements of Consolidated Income for the Three Years Ended December 31,1995. 41 - Statements of Consolidated Retained Earnings for the Three Years Ended December 31,1995... 43 ._ Consolidated Balance. Sheets at December 31,1995 and 1994 44 - Consolidated Statements of Capitalization at December 31,1995 and 1994. 46 Statements of Consolidated Cash Flows for the Three Years i Ended December 31,1995 48 'HL&P Statements of Income for the Three Years Ended December 31,1995 50 HL&P Statements of Retained Earnings for the Three Years Ended December 31,1995 51 HL&P Balance Sheets at December 31,1995 and 1994 52 i HL&P Statements of Capitalization at December 31,1995 and 1994. 54 i HL&P Statements of Cash Flows for the Three Years Ended December 31,1995 56 Notes to Consolidated Financial Statements. 57 4 Notes to HL&P's Financial Statements 78 j Independent Auditors' Report - The Company 83 { Independent Auditors' Report - HL&P, 84 (a)(2) Financial Statement Schedules For The Three Years Ended December 31,1995. ' The Company: i Vill -- Reserves 100 3 l HL&P: Vill - Reserves.. 101 j The following schedules are omitted because of the absence of the conditions under which they are required or because the required information is included in the financial statements: 1 I, ll, lil, IV, V, VI, Vil, IX, X, XI, Xil and XIll. j (a)(3) Exhibits 104 1 See index of Exhibits on page 104, which also includes the management contracts or compensatory j plans or arrangements required to be filed as exhibits to this Form 10-K by item 601(10)(iii) of 1 Regulation S-K. l (b) Reports on Form 8 K. None I i 1 t I 99

m m - -_-m. NOUSTON INDUSTRIES INCORPORATED AND SUBSIDIARIES SCHEDULE VIII

RESERVES For the Three Years Ended December 31, 1995 (Thousands of Dollars) e.............................................................................................................

col-A col. E 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 Yaar Ended December 31, 1995: Accumulated provisions deducted from related assets on balance sheet: Uncollectible advances 27,412 27,412 Net assets of discontinued cable televisions operations 282,958 282,958 Reserves other than those deducted f rom assets oss balance sheets Property insurance (3,468) 2,187 836 (2,117) Injuries and $ tages 2,241 2,327 3,045 1,523 Ystr Ended December,, 1994s Accumulated provisions deducted from related assets on balance sheets Net assets of discontinued cable television operations. 243,400 $ 44,319 $ 1,799 6,560 282,958 Reserves other than those deducted from assets on balance sheet: Property insurance........ (2,891) 2,187 2,764 (3,468) Injuries and damages 2,891 3,099 3,749 2,241 Y3cr Ended December 31, 1993: Accumulated provisions deducted from related assets on balance sheet Unco 11ectible accounts 7,194 7,194 Net assets of (.iscontinued cable television operations 205,739 43,004 91 5,434 243,400 Reserves other than those j deducted from assets on balance sheet: Property insurance (2,821) 2,187 2,257 (2.891) Injuries and damages 3,911 4,685 5,705 2,891 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) The uncollectible advances ref. lect the combined amounts lent by HI Energy on a subordinated basis to the Ford heights and Fulton Projects as of December 31, 1995. If the two projects no longer receive or qualify to receive the operating subsidy provided by the Illinois Retail Rate Law, the Projects would be unable to repay such amounts. '(C) During 1992, Houston Industries Finance purchased accounts receivable of HL&P and of certain KBLCOM subsidiaries. In January *,993, Houston Industries Finance sold the receivables back to the respective j subsidiaries and ceased operations. ML&P is now selling its accounts receivable and most of its accrued unbilled revenues to a third party. i 1 100

HOUSTON LIGHTING & Pow 3A COMPANY SCHEDULE VIII - RESERVES For the Three Years Ended December 31, 1995 (Thousands of Dollars) I e ~ j ~.............................................................................................................. w ce1. A col. B col. c cel. D col. E " ' ~ ~ Idditions Balance at Charged Charged Deductions Balance at Beginning to to Dther from End ' ' Description of Period Income Accounts Reserves of Period Year Ended December 31, 1995: Reserves other than those deducted from assets on l balance sheets 1 Property insurance (3,468) $ 2,187 836 (2,117) l injuries and damages 2,241 2,327 3,045 1,523 Year Ended December 31, 1994: Reserves other than those deducted from assets on balance sheet: (2,891) $ 2,187 2,764 (3,468) j Property insurance Injuries and damages 2,891 3,099 3,749 2,241 ] Year Ended December 31, 1993: Reserves other than those deducted from assets on balance sheet Property insurance S (2,821) $ 2,187 2,257 (2,891) Injuries and damages 3,911 4,685 5,705 2,891 Notes: (A) Deductions from reserves represent losses or expenses for which the respective reserves were created. (B) HL&P has no reserves for uncollectible accounts due to sales of accounts receivable, l 101

SIGNATURES Pursuant to the requirements of Section 13 or IS(d) of the Securities Exchange Act of 19M, 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 28th day of March,1996. HOUSTON INDUSTRIES INCORPORATED (assinrano By DON D. JORDAN (Don D. Jordan. Chairman and Chuf Execuuve ofrxer) 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 28,1996, sinnature Ihls DON D. JORDAN Chairman and Chief Executive Officer and Director (*"P*""' (Prireipal Executive Officer) STEPHEN W. NAEVE Senior Vice President and Chief Financial Officer '3"8'"'" * ' "**") (Principal Financial Officer) MARY P. RICCIARDELLO Vice President and Comptroller (unty r. p.sciareenoi (Principal Accounting Officer) MILTON CARROLL Director (uuson carrwis JOHN T. CATER Director pann T. caer, ROBERT J. CRUIKSHANK ' Director caseen J. crumanank) LINNET F. DEILY h 80f (unnes F. Deuy) JOSEPH M. HENDRIE Director poispa u.neesrm) LEE W. HOGAN Director (ue w. nasan) HOWARD W. HORNE Director (Howare w. norne) i R. S. LETBETTER i Director (n. s. ue=ner> i ALEXANDER SCHILT Director wenanser scna,, KENNETH L. SCHNITZER, SR. Director <x na in t scanneer, sr.) JACK T. TROTTER Director unct T. Tramer, BERTRAM WOLFE Director (senram were, 102

SIGNATURES Pursuant to the reguirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly c used th's report to be signed on sts behalf by the undersigned, thereunto dulv authorized in the City of Houston and State o'f Texas, on the 28th day of March,1996. The signature of Houston Lighting & Power Compa, ny shall be deemed to relate only to matters having reference to such company and any subsidiaries thereof. HOUSTON LIGHTING & POWER COMPANY (Registrant) By DON D. JORDAN (Don D. Jordan. Chairman and Cruef Execuuve Officer) Pursuant to the requirements of the Securities Exchange Act of 1934 this re persons on behalf of the registrant and in the capacities indicated on March 38,1996. port has been signed below by the following The signature of each of the undersigned shall be deemed to relate only to matters having reference to Houston Lighting & Power Company and any subsidiaries thereof, simature nele DON D. JORDAN Chairman and Chief Executive Officer and Director (D " D J 'd*") (Principal Executive Officer and Principal Financial Officer) MARY P. RICCIARDELLO Vice President and Comptroller j (Mary P. Ricciardello) (Principal Accounting Officer) MILTON CARROLL ) (Milton Carroll) Director JOHN T. CATER (John T. Cater) Director ROBERT J. CRUlKSHANK (Robert J. Cruikshank) D rector I i LINNET F. DEILY (unnet F, Dedy) Director [ JOSEPH M. HENDRIE (Joseph M. Hendric) Director LEE W. HOOAN '4 ; ~ (Lee w. Hogan) Director HOWARD W. HORNE (Howard W. Horne) DirCClor i R.S.LETBETTER (R. 5. Letbetter) Director ALEXANDER SCHILT (Alexander Schilt) Director KENNETH L SCHNITZER. SR. (Kenneth L Schniuer. Sr.) Director JACK T. TROTTER (Jack T. Trotter) Director BERTRAM WOLFE (Bertram Wolfe) Director 103

HOUSTON INDUSTRIES INCORPORATED HOUSTON LIGHTING & POWER COMPANY-Exhibits to the Annual Report on Form 10-K For the Fiscal Year Ended December 31,1995 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 Re;)istration Registration , Exhibit l Number Descriotion Statement Number Reference 2(a)- Articles of Merger of Form 10-Q for the 1-7629 2 i Houston Industries - quarter ended I Finance, Inc. with the June 30,1993 Company, effective . June 8,1993 3(a) Restated Articles of. Form 10-Q for 1-7629 3-Incorporation of the the quarter ended Company (Restated as June 30,1993 of May 1993) ' +3(b) Amended and Restated Bylaws of the Company (as of March 11,1996) 4(a)(1). Mortgage and Daed of Form S-7 of HL&P 2-59748 ~2(b) Trust dated November filed on August 1,1944 betwet.n HL&P 25,1977 and South Texas Commercial National Bank of Houston j (Texas Commerce Bank National Associ-ation, as successor trustee), as Trustee, as amended and supple-mented by 20 SupplementalInden-tures thereto 104 e.. m. ... < ~... .,,..m ,r

4(c)(2) Tw::nty-First through HL&P's Form 10-K 1-3187 4(a)(2) 1 Fiftieth Supplemental for the year ended i Indentures to HL&P December 31,1989 Mortgage and Deed of Trust 4(a)(3) Fifty-First Supple-HL&P's Form 10-Q 1-3187 4(a) mentalindenture dated for the quarter March 25,1991 to ended June 30, HL&P Mortgage and 1991 Deed of Trust 4(a)(4) Fifty-Second through HL&P's Form 10-Q 1-3187 4 Fifty-Fifth Supplemental for the quarter indentures, each dated ended March 31, March 1,1992, to HL&P 1992 Mortgage and Deed of Trust 2 4(a)(I) Fifty-Sixth and Fifty-HL&P's Form 10-Q 1-3187 4 Seventh Supplemental for the quarter Indentures, each dated ended September 30, October 1,1992, to 1992 ) HL&P Mortgage and i Deed of Trust 4(a)(6) Fifty-Eighth and Fifty-HL&P's Form 10-Q 1-3187 4 ) Ninth Supplemental for the quarter l Indenture, each dated ended March 31,1993 as of March 1,1993 to HL&P Mortgage and Deed of Trust 4(a)(7) Sixtieth Supplemental HL&P's Form 10-Q 1-3187 4 indenture dated as for the quarter July 1,1993 to HL&P ended June 30,1993 Mortgage and Deed of Trust 4(a)(8) Sixty-First through HL&P's Form 10-K 1-3187 4(a)(8) Sixty-Third Supplemental for the year ended Indentures to HL&P December 31,1993 Mortgage and Deed of Trust i 105

~- . ~ _. 4(a)(9) Sixty-Fourth and Sixty-HL&P's Form 10-K 1-3187 4(a)(9) Fifth Supplemental for the year ended indentures, each dated December 31,1995 as of July 1 1995,.to - HL&P Mortgage and Deed of Trust 4(b)(1) Rights Agreement dated Form 8-K dated 1-7629 4(a)(1) July 11,1990 between July 11,1990 the Company 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 Appoint-Form 8-K dated 1-7629 4(a)(2) ment of Agent dated July 11,1990 as of July 11,1990 between the Company and the Rights Agent i 4(c) Indenture dated as of Form 10-Q for 1-7629 4(b) April 1,1991 between the quarter ended the Company and June 30,1991 NationsBank of Texas, National Association, as Trustee j 4(d) Agreement and Plan Form 8-K dated 1-7629 2(a) of Merger dated as of January 26,1995 January 26,1995 among KBLCOM, the i Company, Time Warner and TW KBLCOM Acquisition Corp. 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, 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. 106

j

10(a)

Ex:cutiva B::n:; fit Plan Form 10-Q for tha 1-7829 10(c)(1) of the Company and First quarter ended 10(a)(2) and Second Amendments March 31,1987 and thereto (effective as 10(a)(3) of June 2,1982, July 1,.. 1984, May 7,1986, respectively)

10(b)(1)

Executive incentive Form 10-K for the 1-7629 10(b) Compensation Plan of year ended the Company (effective December 31,1991 as of January 1,1982)

10(b)(2)

First Amendment to Form 10-Q for the 1-7629 10(a) Exhibit 10(b)(1) quarter ended (effective as of March 31,1992 March 30,1992)

10(b)(3)

Second Amendment to Form 10-K for the 1-7629 10(b)(3) Exhibit 10(b)(1) year ended (effective as of December 31,1992 November 4,1992)

10(b)(4)

Third Amendment to Form 10-K for the 1-7629 10(b)(4) Exhibit 10(b)(1) year ended (effective as of December 31,1994 September 7,1994) )

10(c)(1)

Executive incentive Form 10-Q for the 1-7629 10(b)(1) Compensation Plan quarter ended of the Company March 31,1987 (effective as of January 1,1985)

10(c)(2)

First Amendment to Form 10-K for the 1-7629 10(b)(3) Exhibit 10(c)(1) year ended (effective as of December 31,1988 January 1,1985)

10(c)(3)

Second Amendment to Form 10-K for 1-7629 10(c)(3) Exhibit 10(c)(1) the year ended (effective as of December 31,1991 January 1,1985) j

10(c)(4)

Third Amendment to Form 10-Q for the 1-7629 10(b) Exhibit 10(c)(1) quarter ended (effective as of March 31,1992 March 30,1992) 107

10(c)(5)

Fourth Amendment to Form 10-K for 1-7629 10(c)(5) i Exhibit 10(c)(1) the year ended (effective as of December 31,1992 November 4,1992)

10(c)(6)

Fifth Amendment to Form 10-K for the 1-7629 10(c)(6) Exhibit 10(c)(1) the year ended (effective as of December 31,1994 September 7,1994)

10(d)

Executive incentive Form 10-0 for the 1-7629 10(b)(2) Compensation Plan of quarter ended HL&P (effective as March 31,1987 of January 1,1985)

10(e)(1)

Executive incentive Form 10-Q for the 1-7629 10(b) Compensation Plan quarter ended of the Company June 30,1989 (effective as of January 1,1989)

10(e)(2)

First Amendment to Form 10-K for the 1-7629 10(e)(2) - Exhibit 10(e)(1) year ended (effective as of December 31,1991 January 1,1989) (

10(e)(3)

Second Amendment to Form 10-Q for the 1-7629 10(c) Exhibit 10(e)(1) quarter ended (effective as of March 31,1992 March 30,1992)

10(e)(4)

Third Amendment to Form 10-K for 1-7629 10(c)(4) Exhibit 10(e)(1) the year ended (effective as of December 31,1992 November 4,1992)

10(e)(5)

Fourth Amendment to Form 10-K for the 1-7629 10(e)(5) Exhibit 10(e)(1) year ended December (effective as of 31,1994 September 7,1994)

10(f)(1)

Executive incentive Form 10-K for the 1-7629 10(b) Compensation Plan of year ended the Company (effec-December 31,1990 tive as of January 1, 1991) l l l 108

I

10(f)(2)

First Amsndmsnt to Form 10-K for the 1-7629 10(f)(2) l Exhibit 10(f)(1) year ended (effective as of December 31,1991 January 1,1991)-

10(f)(3)

Second Amendment to Form 10-Q for the 1-7629 10(d) Exhibit 10(f)(1) quarter ended (effective as of March 31,1992 January 1,1991)

10(f)(4)

Third Amendment to Form 10-K for 1-7629 10(f)(4) Exhibit 10(f)(1). the year ended (effective as of December 31,1992 November 4,1992)

10(f)(5)

Fourth Amendment to Form 10-K for 1-7629 10(f)(5) Exhibit 10(f)(1) the year ended (effective as of December 31,1992 January 1,1993)

10(f)(6)

Fifth Amendment to Form 10-K for 1-7629 10(f)(6) Exhibit 10(f)(1) the year ended (effective as of December 31,1994 September 7,1994)

10(f)(7)

Sixth Amendment to Form 10-Q for 1-7629 10(a) Exhibit 10(f)(1) the quarter ended June 30,1995

10(g)(1)

Benefit Restoration Form 10-Q for the 1-7629 10(c) Plan of the Company quarter ended (effective as of March 31,1987 June 1,1985)

10(g)(2)

Benefit Restoration Form 10-K for 1-7629 10(g)(2) Plan of the Company the year ended as amended and re-December 31,1991 stated (effective as of January 1,1968)

10(g)(3)

Benefit Restorat on Form 10-K for 1-7629 10(g)(3) Plan of the Cortpany, the year ended as amended and re-December 31,1991 stated (effective as of July 1,1991)

10(h)(1)

Deferred Compensation Form 10-Q for the 1-7629 10(d) i Plan of the Company quarter ended (effective as of March 31,1987 September 1,1985) 109

= -

10(h)(2)

First Amendment to Form 10-K for the 1-7629 10(d)(2) Exhibit 10(h)(1) year ended (effective as of December 31,1990 September 1,1985)

10(h)(3)

Second Amendment to Form 10-Q for the 1-7629 10(e) Exhibit 10(h)(1) quarter ended (effective as of March 31,1992 March 30,1992)

10(h)(4)

Third Amendment to Form 10-K for the 1-7629 10(h)(4) Exhibit 10(h)(1) year ended (effective as of December 31,1993 June 2,1993)

10(h)(5)

Fourth Amendment to Form 10-K for the 1-7629 10(h)(5) Exhibit 10(h)(1) year ended (effective as of December 31,1994 September 7,1994)

10(h)(6)

Fifth Amendment to - Form 10-Q for the 1-7629 10(d) Exhibit 10(h)(1) the quarter ended June 30,1995

10(i)(1)

Deferred Compensation Form 10-Q for the 1-7629 10(a) Plan of the Company quarter ended (effective as of June 30,.1989 January 1,1989)

10(i)(2)

First Amendment to Form 10-K for the 1-7629 10(e)(3) Exhibit 10(i)(1) year ended (effective as of December 31,1989 January 1,1989)

10(i)(3)

Second Amendment to Form 10-Q for the 1-7629 10(f) Exhibit 10(i)(1) quarter ended (effective as of March 31,1992 March 30,1992)

10(i)(4)

Third Amendment to Form 10-K for the 1-7629 10(i)(4) Exhibit 10(i)(1) year ended (effective as of December 31,1993 June 2,1993)

10(i)(5)

Fourth Amendment to Form 10-K for the 1-7629 10(i)(5) Exhibit 10(i)(1) year ended (effective as of December 31,1994 September 7,1994) 110

^

10(i)(6)

Fifth Amsndment to Form 10-Q for the 1-7629 10(c) Exhibit 10(i)(1) quarter ended June 30,1995

100)(1);

Deferred Compensation Form 10-K for the 1-7629 10(d)(3) Plan of the Company year ended (effective as of December 31,1990 January 1,1991)

100)(2)

First Amendment to . Form 10-K for the 1-7629 100)(2) Exhibit 100)(1) year ended (effective as of December 31,1991 January 1,1991) i l

100)(3)

Second Amendment to Form 10-Q for the 1-7629 10(g) j Exhibit 100)(1) quarter ended i (effective as of March 31,1992 March 30,1992) l

100)(4)

Third Amendment to Form 10-K for the 1-7629 100)(4) ) Exhibit 100)(1) year ended (effective as of December 31,1993 June 2,1993)

100)(5)

Fourth Amendment to Form 10-K for the 1-7629 100)(5) l Exhibit 100)(1) year ended (effective as of December 31,1993 December 1,1993) i i-

100)(6)

Fifth Amendment to Form 10-K for the 1-7629 100)(6) Exhibit 100)(1) year ended (effective as of December 31,1994 September 7,1994) i

100)(7)

Sixth Amendment to Form 10-Q for 1-7629 10(b) Exhibit 100)(1) the quarter ended l June 30,1995 I

10(k)(1)

Long-Term Incentive Form 10-Q for the 1-7629 10(c) Compensation Plan of quarter ended I the Company (effec-June 30,1989 tive as of January 1, 1989) I

10(k)(2)

First Amendment to Form 10-K for the 1-7629 10(f)(2) Exhibit 10(k)(1) year ended i (effective as of December 31,1989 January 1,1990) ) 111

10(k)(3)

Second Amendment to Form 10-K for the 1-7629 10(k)(3) Exhibit 10(k)(1) year ended (effective as of December 31,1992 December 22,1992)

10(1)

Form of stock option Form 10-Q for the 1-7629 10(h) j agreement for nonqual-quarter ended ified stock options March 31,1992 granted under the I Company's 1989 Long-Term incentive Compensation Plan

10(m)

Forms of restricted Form 10-Q for the 1-7629 10(i) stock agreement for quarter ended restricted stock March 31,1992 granted under the Company's 1989 Long-Term Incentive Compensation Plan

10(n)(1) -

1994 Long-Term incentive Form 10-K for the 1-7629 10(n)(1) Compensation Plan of year ended the Company (effective December 31,1993 as of January 1,1994)

10(n)(2)

Form of stock option Form 10-K for the 1-7629 10(n)(2) agreement for non-year ended qualified stock options December 31,1993 granted under the Company's 1994 Long-Term incentive Com-pensation Plan

10(o)(1)

Savings Restoration Form 10-K for the 1-7629 10(f) Plan of the Company year ended (effective as of December 31,1990 January 1,1991)

10(o)(2)

First Amendment to Form 10-K for the 1-7629 10(l)(2) Exhibit 10(o)(1) year ended (effective as of December 31,1991 January 1,1991)

10(p)

Director Benefits Form 10-K for the 1-7629 10(m) Plan, effective as year ended of January 1,1992 December 31,1991 112

10(q)(1)

Executive Life Form 10-K for the 1-7629 10(q) Insurance Plan of year ended the Company December 31,1993 (effective as of January 1,1994)

10(q)(2)

First Amendment to Form 10-Q for the 1-7629 10 Exhibit 10(q)(1) quarter ended June 30,1995

10(r)

Employment and Form 10-Q for the 1-7629 10(f) Supplemental Benefits quarter ended Agreement between March 31,1987 HL&P and Hugh Rice Kelly 10(s)(1) Houston Industries Form 10-Q for the 1-7629 10 Master Savings Trust, quarter ended as Amended and March 31,1994 Restated Effective January 1,1994, between the Company and Texas Commerce Bank National Association 10(s)(2) First Amendment to Form 10-Q for the 1-7629 10(a) Exhibit 10(s)(1) quarter ended ~ March 31,1995 10(s)(3) Termination of Houston Form 10-Q for the 1-7629 10(a) Industries Incorporated quarter ended Savings Plan and Trust September 30,1995 j Agreement as to KBLCOM Incorporated Effective as of June 30,1995 i +10(s)(4) Houston Industries incorporated Savings Trust between the Company and The Northem Trust Company, as Trustee. (As Amended and Restated Effective July 1,1995) 113

10(s)(5) ESOP Trust Agreement Form 10-K for the 1-7629 10(j)(2) between the Company year ended and State Street Bank December 31,1990 _..and Trust Company, as ESOP Trustee, dated October 5,1990 10(s)(6) First Amendment to Form 10-Q for the 1-7629 10(b) Exhibit 10(s)(5) between quarter ended the Company and The March 31,1995 Northern Trust Company, as successor Trustee, effective as of May 1, i 1995. i l 10(s)(7) Note Purchase Agree-Form 10-K for the 1-7629 10(j)(3) ment between the year ended Company and the ESOP December 31,1990 Trustee, dated as of October 5,1990 10(s)(8) Stock Purchase Agree-Form 10-K for the 1-7629 10(j)(4) l ment between the year ended Company and the ESOP December 31,1991 Trustee, dated as of I October 5,1990

10(t)

Agreement dated June 6, Form 10-Q'for the 1-7629 10(a) 1994 between the quarter ended Company and June 30,1994 Don D. Jordan

10(u)

Agreement dated June 6, Form 10-Q for the 1-7629 10(b) 1994 between the quarter ended Company and June 30,1994 Don D. Sykora

10(v)

Letter Agreement between Form 10-K for the 1-7629 10(v) the Company and year ended Jack Trotter December 31,1994 114

10(w)

Form of Ssv:rance Form 10-K for tha 1 7629 10(w) Agreements dated year ended December 22,1994 December 31,1994 between the Com-pany arid each of the following' executive officers: Hugh Rice Kelly, R. Steve Letbetter, David M. McClanahan, Lee W. Hogan and William T. Cottle

10(x)

Employment Agreement Form 10-K for the 1-3187 10(t) i dated April 5,1993 year ended between HL&P and December 31,1994 William T. Cottle 10(y)(1) Stockholder's Agreement Schedule 13-D 5-19351 2 dated as of July 6, dated July 6, 1995 between the 1995 Company and Time l Warner Inc. 10(y)(2) Registration Rights Schedule 13-D 5-19351 3 Agreement dated as of dated July 6, July 6,1995 between 1995 the Company and Time Warner Inc. I 10(y)(3) Certificate of Voting Schedule 13-D 5-19351 4 Powers, Designations, dated July 6, Preferences and 1995 Relative Participating, Optional or Other Special rights, and Qualifications, Limitations or Restrictions Thereof of Series D. Convertible Preferred Stock of Time Wamer Inc. +*10(z) Houston Industries incorporated Executive Deferred Compensation Trust, effective as of December 19,1995 +*10(aa) Agreement dated June 14, 1991 between the Company and David M. McClanahan 115

_ - ~ ~.... -. _. ... - ~ -. +11 Computation of Earnings Per Common ~ Share - and Common i Equivalent Share +12 Computation of Ratios i of Earnings to Fixed Charges +21 Subsidiaries of the Company +23 Consent of Deloitte & Touche LLP +27 Financial Data Schedule +99 Second Amendment to Houston Industries Energy, Inc. Long-Term Project incentive Compensation Plan effective December 6, 1995 116

l (b) Houston Lighting & Powsr Company 4 i Report or SEC File or Exhibit Registration Registration Exhibit 4 Number Descriotion Statement Number Reference 2 Articles of Merger of Form 10-Q for the 1-3187 2 Utility Fuels, Inc. quarter ended with HL&P, effective September 30,1993 i October 8,1993 4 l 3(a) Restated Articles of Form 10-Q for 1-3187 3 Incorporation of HL&P . the quarter ended dated May 11,1993 June 30,1993 A L 3(b) - Amended and Restated Form 10-K for the 1-3187 3(b) Bylaws of HL&P (as year ended 3 of February 1,1995) December 31,1994 4(a)(1) Mortgage and Deed of Form S-7 filed on 2-59748 2(b) Trust dated November August 25,1977 1,1944 between HL&P and South Texas i Commercial National j Bank of Houston (Texas { Commerce Bank National Association, as i successor trustee), 1 as Trustee, as amended and supplemented by 20 Supplemental indentures thereto j 4(a)(2) Twenty-First through Form 10-K for the 1-3187 4(a)(2) j Fiftieth Supplemental year ended i indentures to HL&P December 31,1989 i Mortgage and Deed of j Trust 1 ] 4(a)(3) Fifty-First Supple-Form 10-Q for the 1-3187 4(a) mentalindenture. quarter ended 3 i i dated March 25,1991 June 30,1991 i to HL&P Mortgage j and Deed of Trust i j 4(a)(4) Fifty-Second through Form 10-Q for the 1-3187 4 Fifty-Fifth Supple-quarter ended mental Indentures, March 31,1992 each dated March 1, 1992, to HL&P Mortgage and Deed of Trust 117

4(a)(5) Fifty-Sixth and Fifty-Form 10-Q for the 1-3187 4 Seventh Supplemental quarter ended Indentures, each September 30,1992 ~ dated October 1, 1992 'to HL&P Mortgage and Deed of Trust 4(a)(6) Fifty-Eighth and Fifty-Form 10-Q for the 1-3187 4 Ninth Supplemental quarter ended indentures, each March 31,1993 dated March 1, 1993, to HL&P Mortgage and Deed of Trust 4(a)(7) Sixtieth Supplemental Form 10-0 for the 1-3187 4 Indenture dated as of quarter ended July 1,1993 to HL&P June 30,1993 Mortgage and Deed of Trust 4(a)(8) Sixty-First through HL&P's Form 10-K 1-3187 4(a)(8) Sixty-Third Supplemental for the year ended indentures to HL&P December 31,1993 Mortgage and Deed of i Trust +4(a)(9) Sixty-Fourth and Sixty-Fifth Supplemental indentures, each dated as of July 1,1995, to HL&P Mortgage and Deed of Trust 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 HL&P. HL&P hereby agrees to furnish a copy of any such instrument to the SEC upon request.

10(a)

Executive Benefit Plan The Company's 1-7629 10(a)(1) of the Company and Form 10-Q for the 10(a)(2) First and Second quarter ended and Amendments thereto March 31,1987 10(a)(3) (effective as of June 2,1982, July 1, 1984, May 7,1986, respectively)

10(b)(1)

Executive incentive The Company's 1-7629 10(b) Compensation Plan of Form 10-K for the the Company (effective year ended as of January 1,1982) December 31,1991 118

10(b)(2)

First Amendm::nt to Tha Comp:ny's 1-7629 10(a) Exhibit 10(b)(1) Form 10-Q for the (effective as of quarter ended March 30,1992) March 31,1992

10(b)(3)-

Second Amendment to The Company's 1-7629 10(b)(3) Exhibit 10(b)(1) Form 10-K for the (effective as of year ended November 4,1992) December 31,1992

10(b)(4)

Third Amendment to The Company's 1-7629 10(b)(4) Exhibit 10(b)(1) Form 10-K for the (effective as of year ended September 7,1994) December 31,1994

10(c)(1)

Executive incentive The Company's 1-7629 10(b)(1) i Compensation Plan Form 10-Q for the of the Company quarter ended (effective as of March 31,1987 January 1,1985)

10(c)(2)

First Amendment to The Company's 1-7629 10(b)(3) Exhibit 10(c)(1) Form 10-K for the (effective as of year ended i January 1,1985) December 31,1988

10(c)(3)

Second Amendment to The Company's 1-7629 10(c)(3) j Exhibit 10(c)(1) Form 10-K for the (effective as of year ended January 1,1985) December 31,1991

10(c)(4)

Third Amendment to The Company's 1-7629 10(b) l Exhibit 10(c)(1) Form 10-Q for the (effective as of quarter ended j March 30,1992) March 31,1992

10(c)(5)

Fourth Amendment to The Company's 1-7629 10(c)(5) Exhibit 10(c)(1) Form 10-K for the (effective as of year ended November 4,1992) December 31,1992

10(c)(6)

Fifth Amendment to The Company's 1-7629 10(c)(6) 1 Exhibit 10(c)(1) Form 10-K for the (effective as of year ended 2 September 7,1994) December 31,1994 j

10(d)

Executive incentive The Company's 1-7629 10(b)(2) Compensation Plan of Form 10-0 for the 4 HL&P (effective as quarter ended j of January 1,1985) March 31,1987

10(e)(1)

Executive incentive The Company's 1-7629 10(b) j 2 Compensation Plan Form 10-Q for the of the Company quarter ended (effective as of June 30,1989 I January 1,1989) 119 1

4

10(e)(2)

First Amendment to The Company's 1-7629 10(e)(2) Exhibit 10(e)(1) Form 10 K for the (effective as of year ended January 1,1989) December 31,1991

10(e)(3)

Second Amendment to The Company's 1-7629 .10(c) Exhibit 10(e)(1) Form 10-Q for the (effective as of quarter ended March 30,1992) March 31,1,992

10(e)(4)

Third Amendment to The Company's 1-7629 10(c)(4) Exhibit 10(e)(1) Form 10-K for the (effective as of year ended November 4,1992) December 31,1992

10(e)(5)

Fourth Amendment to The Company's 1-7629 10(e)(5) Exhibit 10(e)(1) Form 10-K for the (effective as of year ended September 7,1994) December 31,1994

10(f)(1)

Executive incentive The Company's 1-7629 10(b) Compensation Plan Form 10-K for the of the Company year ended (effective as of. December 31,1990 January 1,1991)

10(f)(2)

First Amendment to The Company's 1-7629 10(f)(2) Exhibit 10(f)(1) Form 10-K for the (effective as of year ended January 1,1991) December 31,1991

10(f)(3)

Second Amendment to The Company's 1-7629 10(d)

Exhibit 10(f)(1) Form 10-Q for the (effective as of quarter ended January 1,1991) March 31,1992

10(f)(4)

Third Amendment to The Company's 1-7629 10(f)(4) Exhibit 10(f)(1) Form 10-K for the (effective as of year ended November 4,1992) December 31,1992

10(f)(5)

Fourth Amendment to The Company's 1-7629 10(f)(5) Exhibit 10(f)(1) Form 10 K for the (effective as of year ended January 1,1993) December 31,1992

10(f)(6)

Fifth Amendment to The Company's .-7629 10(f)(6) Exhibit 10(f)(1) Form 10 K for the (effective as of year ended September 7,1994) December 31,1994 l

10(f)(7)

Sixth Amendment to The Company's 1-7629 10(a) Exhibit 10(f)(1) Form 10-Q for the quarter ended June 30,1995 120

10(g)(1)

Bensfit Restoration ' Th3 Company's 1-7629 10(c) Plan of the Company Form 10-Q for the (effective as of quarter ended j June 1,1985) March 31,1987

10(g)(2)

Benefit Restoration The Company's 1-7629 10(g)(2) Plan of the Company Form 10-K for the J as amended and year ended restated (effective December 31,1991 as of January 1,1988)

10(g)(3)

Benefit Restoration The Company's 1-7629 10(g)(3) Plan of the Company Form 10-K for the as amended and year ended restated (effective December 31,1991 ) as of July 1,1991)

10(h)(1)

Deferred Compensation The Company's 1-7629 10(d) Plan of the Company Form 10-0 for the (effective as of quarter ended September 1,1985) Maren 3 i,1987

10(h)(2)

First Amendment to The Company's 1-7629 10(d)(2) Exhibit 10(h)(1) Form 10-K for the (effective as of year ended September 1,1985) December 31,1990

10(h)(3)

Second Amendment to The Company's 1-7629 10(e) Exhibit 10(h)(1) Form 10-Q for the (effective as of quarter ended March 30,1992) March 31,1992

10(h)(4)

Third Amendment to The Company's 1-7629 10(h)(4) Exhibit 10(h)(1) Form 10-K for the (effective as of year ended June 2,1993) December 31,1993

10(h)(5)

Fourth Amendment to The Company's 1-7629 10(h)(5) Exhibit 10(h)(1) Form 10-K for effective as of the year ended September 7,1994 December 31,1994

10(h)(6)

Fifth Amendment to The Company's 1-7629 10(d) Exhibit 10(h)(1) Form 10-Q for the quarter ended June 30,1995

10(i)(1)

Deferred Compensation The Company's 1-7629 10(a) Plan of the Company Form 10-Q for the (effective as of quarter ended January 1,1989) June 30,1989

10(i)(2)

First Amendment to The Company's 1-7629 10(e)(3) Exhibit 10(i)(1) Form 10-K for the (effective as of year ended January 1,1989) December 31,1989 121

10(i)(3)

Second Amendment to The Company's 1-7629 10(f) Exhibit 10(i)(1) Form 10-Q for the (effective as of quarter ended March 30,1992) March 31,1992

10(i)(4)

Third Amendment to The Company's 1-7629 10(i)(4) Exhibit 10(i)(1) Form 10-K for the (effective as of year ended June 2,1993) December 31,1993

10(i)(5)

Fourth Amendment to The Company's 1-7629 10(i)(5) Exhibit 10(i)(1) Form 10-K for (effective as of the year ended September 7,1994) December 31,1994

10(i)(6)

Fifth Amendment to The Company's 1-7629 10(c) Exhibit 10(i)(1) Form 10-Q for the quarter ended June 30,1995

100)(1)

Deferred Compensation The Company's 1-7629 10(d)(3) Plan of the Company Form 10-K for the (effective as of year ended January 1,1991) December 31,1990

100)(2)

First Amendment to The Company's 1-7629 100)(2) Exhibit 100)(1) Form 10-K for the (effective as of year ended January 1,1991) December 31,1991

100)(3)

Second Amendment to The Company's 1-7629 10(g) Exhibit 100)(1) Form 10-Q for the (effective as of quarter ended March 30,1992) March 31,1992

100)(4)

Third Amendment to The Company's 1-7629 100)(4) Exhibit 100)(1) Form 10-K for the (effective as of year ended June 2,1993) December 31,1993

100)(5)

Fourth Amendment to The Company's 1-7629 100)(5) Exhibit 100)(1) Form 10-K for the (effective as of year ended December 1,1993) December 31,1993

100)(6)

Fifth Amendment to The Company's 1-7629 100)(6) Exhibit 100)(1) Form 10-K for (effective as of the year ended September 7,1994) December 31,1994

100)(7)

Sixth Amendment to The Company's 1-7629 10(b) Exhibit 100)(1) Form 10-Q for the quarter ended June 30,1995 122

10(k)(1) long-Term incsntive The Company's 1-7629 10(c)

Compensation Plan of Form 10-0 for the the Company quarter ended (effective as of June 30,1989 t __. January 1,1989) l

10(k)(2)

First Amendment to The Company's 1-7629 10(f)(2) Exhibit 10(k)(1) Form 10-K for the (effective as of year ended January 1,1990) December 31,1989

10(k)(3)

Second Amendment to The Company's 1-7629 10(k)(3) i Exhibit 10(k)(1) Form 10-K for the (effective as of year ended ) December 22,1992) December 31,1992

10(l)

Form of stock option The Company's 1-7629 10(h) agreement for nonqual-Form 10-Q for the ified stock options quarter ended granted under the March 31,1992 Company's 1989 Long-Term Incentive Compensation Plan

10(m)

Forms of restricted The Company's 1-7629 10(i) stock agreement for Form 10-Q for the restricted stock quarter ended granted under the March 31,1992 Company's 1989 Long Term incentive Compensation Plan

10(n)(1) 1994 Long-Term Incentive The Company's 1-7629 10(n)(1)

Compensation Plan of Form 10-K for the the Company (effective year ended as of January 1,1994) December 31,1993 1

10(n)(2)

Form of Stock Option The Company's 1-7629 10(n)(2) Agreement for Form 10-K for tho Nonqualified Stock year ended Options Granted December 31,1'393 under the Company's 1994 Long-Term Incentive Compen-sation Plan

10(o)(1)

Savings Restoration The Company's 1-7629 10(f) Plan of the Company Form 10-K for the (effective as of year ended January 1,1991) December 31,1990 i

10(o)(2)

First Amendment to The Company's 1-7629 10(l)(2) Exhibit 10(o)(1) Form 10-K for the ] (effective as of year ended - January 1,1991) December 31,1991 123

I

10(p)

Director Benefits The Company's 1-7629 10(m) l Plan, effective as Form 10-K for the of January 1,1992 year ended December 31,1991

10(q)

Executive Life The Company's 1-7629 10(q) Insurance Plan of Form 10-K for the the Company (effective year ended as of January 1,1994) December 31,1993

10(q)(1)

First Amendment to The Company's 1-7629 10(e) Exhibit 10(q) Form 10-Q for the quarter ended June 30,1995

10(r)

Employment and The Company's 1-7629 10(f) Supplemental Benefits Form 10-Q for the Agreement between HL&P quarter ended and Hugh Rice Kelly March 31,1987 10(s)(1) The Company's Master The Company's 1-7629 10 Savings Trust, as Form 10-Q for the Amended and Restated quarter ended effective as of March 31,1994 January 1,1994, between the Company ) and Texas Commerce Bank National Association 1 10(s)(2) First Amendment to The Company's 1-7629 10(a) Exhibit 10(s)(1) Form 10-Q for the quarter ended March 31,1995 10(s)(3) Termination of Houston The Company's 1-7629 10(a) Industries Incorporated Form 10-Q for the Savings Plan and Trust quarter ended Agreement as to September 30,1995 KBLCOM incorporated Effective as of June 30, 1995 10(s)(4) Houston Industries The Company's Form 1-7629 10(s)(4) Incorporated Savings 10-K for the year Trust (As Amended and ended December 31, Restated Effective 1995 July 1,1995) 10(s)(5) ESOP Trust Agreement The Company's 1-7629 10(j)(2) between Houston Form 10-K for the Industries and State year ended Street Bank and Trust December 31,1990 Company, as ESOP Trustee, dated October 5,1990 124

10(s)(6) First Amsndmnnt to - Th2 Company's 1-7629 10(b) Exhibit 10(s)(5) Form 10-Q for the quader ended 3_ March 31,1995 10(s)(7) Note Purchase Agreement The Company's 1-7629 10(j)(3) l between the Company Form 10-K for the and the ESOP Trustee, year ended dated as of December 31,1990 October 5,1990 l 10(s)(8) Stock Purchase The Company's 1-7629 10(j)(4) Agreement between - Form 10-K for the the Company and the year ended ESOP Trustee, dated as December 31,1991 of October 9,1990 1

10(t)

Employment Agreement Form 10-K for the 1-3187 10(t) i dated April 5,1993 year ended e between HL&P and December 31,1994 j William T. Cottle 2 l

10(u)

Form of Severance Form 10-K for the 1-3187 10(u) Agreements dated year ended December 22,1994 December 31,1994 between the Company i and the following executive officers: Hugh Rice Kelly, R. Steve Letbetter, William T. Cottle and i David M. McClanahan

10(v)

Houston Inoustries The Company's Form 1-7629 10(z) incorporated Executive 10-K for the year ended Deferred Compensation December 31,1995 Trust, effective as of December 19,1995

10(y)

Agreement dated June The Company's 1-7629 10(aa) } 14,1991 between the Form 10-K for the Company and David M. year ended McClanahan December 31,1995 1{ l +12 Computation of Ratios of Earnings to Fixed Charges and Ratios of Earnings to Fixed Charges and Preferred Dividends +23 Consent of Deloitte & Touche LLP +27 Financial Data Schedule 125 -,}}

ML20117M366

Text

SUMMARY

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