<PAGE>   1


                UNITED STATES SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549

                                --------------

                                   FORM 10-K

                                --------------

(Mark One)
[X]   ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
      ACT OF 1934 (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 1-7629

                        HOUSTON INDUSTRIES INCORPORATED
             (Exact name of registrant as specified in its charter)

                 TEXAS                                 74-1885573
     (State or other jurisdiction of                 (I.R.S. employer 
     incorporation or organization)               identification number)
                    
                                
            1111 LOUISIANA                  
         HOUSTON, TEXAS 77002                         (713) 207-3000
(Address and zip code of principal             (Registrant's telephone number, 
         executive offices)                         including area code)

         SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:

     TITLE OF EACH CLASS              NAME OF EACH EXCHANGE ON WHICH REGISTERED
     -------------------              -----------------------------------------
Common Stock, without par value,                 New York Stock Exchange
and associated rights to purchase                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 in its charter)

                 TEXAS                                 74-0694415
     (State or other jurisdiction of                 (I.R.S. employer 
     incorporation or organization)               identification number)
                    
            1111 LOUISIANA                  
         HOUSTON, TEXAS 77002                         (713) 207-1111
(Address and zip code of principal             (Registrant's telephone number, 
         executive offices)                         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:  $4 Series; $6.72 Series; $7.52 Series;
$8.12 Series; Variable Term Cumulative Preferred Stock, Series A; Variable Term
Cumulative Preferred Stock, Series B; Variable Term Cumulative Preferred Stock,
Series C; Variable Term Cumulative Preferred Stock, Series D; and $9.375
Series.

    Indicate by check mark whether each of the registrants:  (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.  Yes  [X]   No [  ]

    The aggregate market value of the voting stock held by non-affiliates of
Houston Industries Incorporated was $6,030,611,109 as of March 1, 1996, using
the definition of beneficial ownership contained in Rule 13d-3 promulgated
pursuant to the Securities Exchange Act of 1934 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.

    Portions of the definitive proxy statement relating to the 1996 Annual
Meeting of Shareholders of Houston Industries Incorporated, which will be filed
within 120 days of December 31, 1995, are incorporated by reference in Item 10,
Item 11, Item 12 and Item 13 of Part III 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 Part III of this Form 10-K
or any amendment to this Form 10-K.  [X]


<PAGE>   2
                      HOUSTON INDUSTRIES INCORPORATED AND
                        HOUSTON LIGHTING & POWER COMPANY
                 Form 10-K for the Year Ended December 31, 1995

<TABLE>
<CAPTION>
PART I                                              TABLE OF CONTENTS                                            Page No.
------                                                                                                           --------
<S>             <C>                                                                                              <C>
Item 1.         Business:

                The Company and Its Subsidiaries  . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .      3
                Business of HL&P  . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .      3
                Business of HI Energy . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .     15
                Regulation of the Company . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .     16
                Executive Officers of 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

PART II
-------

Item 5.         Market for the Registrant's Common Equity and Related Stockholder Matters . . . . . . . . . .     23

Item 6.         Selected Financial Data:

                The Company . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .     24
                HL&P  . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .     25

Item 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

PART III
--------

Item 10.        Directors and Executive Officers of the Company and HL&P  . . . . . . . . . . . . . . . . . .     86

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 IV
-------

Item 14.        Exhibits, Financial Statement Schedules and Reports on Form 8-K . . . . . . . . . . . . . . .     99
</TABLE>


                                      2

<PAGE>   3
         THIS COMBINED FORM 10-K IS SEPARATELY FILED BY HOUSTON INDUSTRIES
INCORPORATED (COMPANY) AND HOUSTON LIGHTING & POWER 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. (HI ENERGY) OR TO ANY OTHER AFFILIATE OR SUBSIDIARY OF
THE COMPANY.

                                     PART I
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 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 Warner Inc. (Time Warner) in exchange for Time
Warner securities recorded at approximately $1 billion and the purchase by Time
Warner 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 8 of this Report (Financial Statements).

         As of December 31, 1995, the Company and its subsidiaries had 8,891
full-time employees.

                                BUSINESS OF HL&P

SPECIAL FACTORS

         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 governing
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, 




                                       3
<PAGE>   4
commercial and industrial customers. HL&P is a member of the Electric 
Reliability Council of Texas, Inc. (ERCOT) and is interconnected to a 
transmission grid encompassing most of the state of Texas.

         Although the economy of HL&P's service area encompasses a wide range
of products and services, Houston's economy is still centered primarily on
energy sector industries, 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:

<TABLE>
<CAPTION>
                                                               Maximum Hourly Firm Demand  
                                                          ------------------------------------
          Installed                                                                 % Change
             Net           Purchased       Total Net                                  From          Reserve
          Capability         Power         Capability                                 Prior         Margin
Year         (MW)            (MW)(1)          (MW)          Date        MW (2)        Year           (%)    
----     -----------      ------------    ------------    --------     -------    ------------    ----------
<S>          <C>               <C>           <C>          <C>           <C>           <C>            <C>
1991         13,583            945           14,528       Aug. 21       10,908        (2.2)          33.2
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
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
-------------------                                                                                      
</TABLE>
(1)      Reflects firm capacity purchased.  For additional information on
         purchased power 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 estimated 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 reliance on air conditioning.
See Note 15 to the Financial Statements for a presentation of certain unaudited
quarterly financial information for 1994 and 1995.





                                       4

<PAGE>   5
COMPETITION

         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.

         The electric utility industry historically has been composed of
vertically integrated 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 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 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
small industrial 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 (FERC) to require utilities to provide transmission services to EWGs
and other generators upon request if





                                       5
<PAGE>   6
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 tariffs 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 and 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
Earnings 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 COMPETITION 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 potential impact 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
<PAGE>   7
Commission's review of stranded cost investment issues or the ultimate 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 capital program consists of the
following estimated principal expenditures:


<TABLE>
<CAPTION>
                                                                       Amount           Percent of Total
                                                                     (millions)           Expenditures
                                                                     ----------           ------------
         <S>                                                          <C>                     <C>
         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 . . . . . . . . . . . . . . . . . . .              $  1,016               100%
                                                                       ========               ====

</TABLE>
         Actual capital expenditures will vary from estimates as a result of
numerous factors, including, but not limited to, changes in the rate of
inflation, availability and relative cost of fuels and purchased power, changes
in environmental laws, regulatory and legislative changes and the effect of
regulatory proceedings.  For information regarding expenditures associated with
(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
<PAGE>   8
FUEL

         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:

<TABLE>
<CAPTION>
                                                                                 Energy Mix  (%)                       
                                                             ----------------------------------------------------
                                                             Historical      ------------ Estimated -------------
                                                                1995         1996          1998          2000
                                                             ----------      ----          ----          ----
         <S>                                                    <C>           <C>           <C>          <C>
         Gas  . . . . . . . . . . . . . . . . . .                32            34            39           42
         Coal and Lignite . . . . . . . . . . . .                43            41            42           40
         Nuclear  . . . . . . . . . . . . . . . .                 9             9             7            8
         Purchased Power (cogeneration) . . . . .                16            16            12           10
                                                                ---           ---           ---          ---

                 Total  . . . . . . . . . . . . .               100           100           100          100
                                                                ===           ===           ===          ===
</TABLE>


         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.

         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 Basin area of Wyoming.





                                       8
<PAGE>   9
The first of these contracts expires in 2008, and the other expires in 2010.
HL&P obtains the 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.  Coal is 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 environmental
protection.

         NUCLEAR FUEL.  Supply.  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 assemblies.  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.

(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.

         Spent Fuel Disposal.  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
<PAGE>   10
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 disposal 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 Decommissioning 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 to decontaminate and
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 $2.25
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 and 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
<PAGE>   11
REGULATORY MATTERS

         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 original jurisdiction over
electric rates and services in unincorporated areas of the state of Texas and
in the incorporated municipalities that have relinquished original
jurisdiction.  Original jurisdiction over electric rates and services in the
remaining incorporated municipalities served by 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 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 Quality.  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 (SO2)  from electric
utility generating units. The Acid Rain Program requires that after a certain
date a utility must have been granted a regulatory "allowance" for each ton of
SO2 emitted 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 SO2 emissions, it must either
purchase allowances from other utilities or reduce SO2 emissions from its units
through 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 $40 million may be incurred by HL&P in order
to fully comply with new NOx requirements through 1999.





                                       11
<PAGE>   12
         Additionally, to ensure compliance with these new regulatory programs,
the Clean 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 Quality.  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 Magnetic 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 concerning
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.





                                       12
<PAGE>   13
         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 is currently
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 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
<PAGE>   14
 OPERATING STATISTICS OF HL&P
<TABLE>
<CAPTION>
                                                                         Year Ended December 31,   
                                                         ----------------------------------------------------
                                                                1995              1994             1993     
                                                             ----------        ---------        ----------

 <S>                                                         <C>               <C>              <C>
 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, 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
    Small Industrial (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          341,416
                                                             ----------        ----------      -----------
       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
                                                             ----------        ----------      -----------
       Total . . . . . . . . . . . . . . . . . . . . .        1,504,929         1,473,795        1,448,858
                                                             ==========        ==========      ===========
                                                                                               
 Operating Revenue (Thousands of Dollars):                                                     
    Residential  . . . . . . . . . . . . . . . . . . .       $1,471,702        $1,586,074       $1,578,175
    Commercial . . . . . . . . . . . . . . . . . . . .          923,223         1,029,104          994,461
    Small Industrial (1) . . . . . . . . . . . . . . .          564,609           643,383          650,946
    Large Industrial (1) . . . . . . . . . . . . . . .          431,499           541,188          539,971
    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
    Other Electric Utilities . . . . . . . . . . . . .           22,207            25,669           26,154
                                                             ----------        ----------      -----------
       Total Electric Revenue -- Firm Sales  . . . . .        3,433,919         3,851,320        3,813,965
    Interruptible  . . . . . . . . . . . . . . . . . .           81,707           108,730          135,066
    Off-System . . . . . . . . . . . . . . . . . . . .           12,250            13,691            7,313
                                                             ----------        ----------      -----------
       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        $3,746,085       $4,079,863
                                                             ==========        ==========       ==========
                                                                                               
 Installed Net Generating Capability (KW)                    13,921,370        13,666,000       13,679,000
    (End of Period)  . . . . . . . . . . . . . . . . .                                         
                                                                               
 Cost of Fuel (Cents per MMBtu):                                               
    Gas  . . . . . . . . . . . . . . . . . . . . . . .              168.5             189.8            221.4
    Coal (2) . . . . . . . . . . . . . . . . . . . . .              202.5             159.0            199.6
    Lignite  . . . . . . . . . . . . . . . . . . . . .              124.8             110.8            122.1
    Nuclear  . . . . . . . . . . . . . . . . . . . . .               58.2              57.4             59.6
       Average . . . . . . . . . . . . . . . . . . . .              159.3             153.6            195.2
</TABLE>

 (1)   For  reporting purposes, HL&P  classifies customers with  an electric
       demand  in excess of  600 KVA as industrial.  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


<PAGE>   15
                             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.

          HI Energy's major foreign investments include a 90 percent interest in
an electric utility 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 Energy of approximately $92 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 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 additional information, 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" 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 returns,
HI Energy's operations are subject to greater risks than traditionally have
existed in HL&P's regulated operations.  Such risks include foreign investment
risks, currency fluctuations, expropriation, intense competition for the
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-owned
subsidiaries had 61 full-time employees of whom 14 were represented by a union.





                                       15
<PAGE>   16
                           REGULATION OF THE COMPANY

FEDERAL

         The Company is a holding company 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 with respect to the
acquisition of voting securities of other domestic public utility companies and
utility holding companies.  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 Securities and Exchange Commission (SEC)
under the 1935 Act.

         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 bodies 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 that it intends to exercise its
authority.  The Utility Commission has provided such certification to the SEC
subject, however, to its being revised or withdrawn by the Utility Commission
as to any future acquisition.  In January 1996, the Utility Commission adopted
a rule specifying 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 provide 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
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
<PAGE>   17
                     EXECUTIVE OFFICERS OF THE COMPANY (1)
                              As of March 1, 1996

<TABLE>
<CAPTION>
                                            Officer
       Name                        Age(2)    Since             Business Experience 1991-1996 and Positions                        
       ----                        ------   -------  ---------------------------------------------------------------             
<S>                                  <C>     <C>      <C>                                                      <C>        
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                                                           
                                                                                                                          
Lee 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                               
--------------------                                                                
</TABLE>
(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 qualify.

(2)   At December 31, 1995.





                                       17
<PAGE>   18
                       EXECUTIVE OFFICERS OF HL&P (1)(2)
                              As of March 1, 1996

<TABLE>
<CAPTION>
                                            Officer
       Name                        Age(3)    Since                Business Experience 1991-1996 and Positions           
       ----                        ------   -------   ------------------------------------------------------------------
<S>                                  <C>     <C>      <C>                                                      <C>
Don D. Jordan . . . . . . . . . .    63      1971     Chairman and Chief Executive                             1991-
                                                        Officer and Director                 
                                                                                             
R. Steve Letbetter  . . . . . . .    47      1978     President and Chief Operating Officer  
                                                        and Director                                           1995-
                                                      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                    
                                                      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                     
                                                      Group Vice President - Operations                        1991-1996
                                                                                             
Hugh Rice Kelly . . . . . . . . .    53      1984     Senior Vice President, General                           1991-
                                                        Counsel and Corporate Secretary      
                                                                                             
David M. McClanahan . . . . . . .    46      1986     Executive Vice President and General                     1996-
                                                        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                            
                                                                                             
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-
                                                        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
                                                      Assistant Corporate Secretary                            1991-1993
                                                        and Assistant Treasurer              
-------------------                                                           

</TABLE>




                                       18
<PAGE>   19
(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 qualify.

(2)    For the purposes 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.





                                       19
<PAGE>   20
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 megavolt 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, 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 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 governmental authorities. Under 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
<PAGE>   21
     ITEM 3.  LEGAL PROCEEDINGS.

         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 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 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 defendent 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 Southern 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
<PAGE>   22
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 Internal Revenue Service (IRS) in connection with an IRS
audit of the Company's 1983 and 1984 federal income tax returns.  In November
1991, the Company filed a refund suit in the U.S. Court of Federal Claims
seeking the return 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 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 partial judgment 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 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.

ITEM 4.  SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.

         There were no matters submitted to a vote of security holders of the
Company or HL&P during the fourth quarter of 1995.





                                       22
<PAGE>   23
                                    PART II


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 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.

<TABLE>
<CAPTION>
                                                        Market Price                                  
                                                 --------------------------          Dividend Declared
                                                   High              Low                  Per Share      
                                                 --------         --------           --------------------
<S>                                              <C>              <C>                      <C>
1995
First Quarter                                                                              $0.375
     January 3                                                    $17 11/16
     February 3                                  $20 1/2

Second Quarter                                                                             $0.375
     April 3                                                      $18 15/16
     June 5                                      $21 7/8

Third Quarter                                                                              $0.375
     September 1                                                  $21 1/16
     September 28                                $22 3/4

Fourth Quarter                                                                             $0.375
     October 2                                                    $22 1/16
     December 29                                 $24 1/2

1994
First Quarter                                                                              $0.375
     January 3                                   $23 7/8
     March 31                                                     $17 3/8

Second Quarter                                                                             $0.375
     April 21                                    $18 5/8
     May 10                                                       $15

Third Quarter                                                                              $0.375
     July 1                                                       $16 1/4
     August 2                                    $18 5/16

Fourth Quarter                                                                             $0.375
     November 23                                                  $16
     December 15                                 $18 1/4
</TABLE>

On December 31, 1995, the consolidated book value of the Company's Common Stock
was $16.61 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 1/4 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
<PAGE>   24
ITEM 6.  SELECTED FINANCIAL DATA OF THE COMPANY.

          The following table sets forth selected financial data with respect to
the Company's consolidated financial condition and results of consolidated
operations and should be read in conjunction with the Financial Statements and
the related notes in Item 8 of this Report.  On July 6, 1995, the Company closed
the sale of its cable television operations.  The operations of KBLCOM have been
accounted for as discontinued operations.

<TABLE>
<CAPTION>
                                                                         Year Ended December 31,
                                                       ------------------------------------------------------------------------
                                                           1995          1994             1993          1992         1991      
                                                       -----------    -----------    -----------   -----------    -----------  
                                                                 (Thousands of Dollars, except per share amounts)              
<S>                                                    <C>            <C>            <C>           <C>            <C>          
Revenues  . . . . . . . . . . . . . . . . . . . .      $ 3,730,173    $ 3,754,136    $ 4,083,655   $ 3,857,932    $ 3,707,605  
                                                       -----------    -----------    -----------   -----------    -----------  
Income from continuing operations before                                                                                       
   cumulative effect of change in                                                                                              
   accounting (1)   . . . . . . . . . . . . . . .      $   397,400    $   423,985    $   440,531   $   370,031    $   484,275  
Loss from discontinued operations . . . . . . . .                         (16,524)       (24,495)      (29,544)       (67,521) 
Gain on sale of cable television subsidiary . . .          708,124                                                             
Cumulative effect of change in accounting (2) . .                          (8,200)                      94,180                 
                                                       -----------    -----------    -----------   -----------    -----------  
Net income (1)  . . . . . . . . . . . . . . . . .      $ 1,105,524    $   399,261    $   416,036   $   434,667    $   416,754  
                                                       ===========    ===========    ===========   ===========    ===========  
Earnings per common share (3):                                                                                                 
   Continuing operations before cumulative                                                                                     
   effect of change in accounting (1) . . . . . .      $      1.60    $      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                                                                                              
   accounting (2) . . . . . . . . . . . . . . . .                            (.03)                         .36                 
                                                       -----------    -----------    -----------   -----------    -----------  
Earnings per common share (1) . . . . . . . . . .      $      4.46    $      1.62    $      1.60   $      1.68    $      1.62  
                                                       ===========    ===========    ===========   ===========    ===========  
Cash dividends declared per common                                                                                             
   share (3)(4)   . . . . . . . . . . . . . . . .      $      1.50    $      1.50    $     1.875   $      1.49    $      1.48  
Dividend pay-out ratio from continuing                                                                                         
   operations   . . . . . . . . . . . . . . . . .              94%            87%            89%          104%            79%  
Return on average common equity (5) . . . . . . .            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:                                                                                                                   
   Book 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%  
                                                                                                                               
--------------------------------------------------     ----------------------------------------------------------------------  
At year-end:                                                                                                                   
   Total assets of continuing operations  . . . .      $11,819,606    $10,784,095    $10,867,581   $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  
                                                       ===========    ===========    ===========   ===========    ===========  
                                                                                                                               
   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 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   . . . .                                                                              
      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         7,087       35,796            1,625                 
-----------------------------------------------------------------------------------------------------------------------------      
</TABLE>

        
(1) The Company adopted Statement of Position (SOP) 93-6, "Employers'
    Accounting for Employee Stock Ownership Plans," effective January 1, 1994,
    which had the effect of reducing net income while increasing earnings per
    share.  See 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 permitted for 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
<PAGE>   25
ITEM 6.  SELECTED FINANCIAL DATA OF HL&P.

 The following table sets forth selected financial data with respect to HL&P's
financial condition and  results of operations and should be read in
conjunction with the Financial Statements.


<TABLE>
<CAPTION>
                                                                         Year Ended December 31,
                                              ------------------------------------------------------------------------
                                                 1995            1994           1993          1992         1991       
                                              ---------       -----------  -----------    -----------     -----------  
                                                                           (Thousands of Dollars)
<S>                                            <C>            <C>            <C>          <C>             <C>
Revenues  . . . . . . . . . . . . . . . .     $ 3,680,297    $ 3,746,085   $ 4,079,863    $ 3,826,841     $ 3,674,543
                                              -----------    -----------   -----------    -----------     -----------
Income after preferred dividends but
   before cumulative effect of change
   in accounting    . . . . . . . . . . .     $   450,977    $   461,381   $   449,750    $   375,955     $   472,712
Cumulative effect of change in
   accounting (1)   . . . . . . . . . . .                         (8,200)                      94,180                
                                              -----------    -----------   -----------    -----------     -----------
Income after preferred dividends  . . . .     $   450,977    $   453,181   $   449,750    $   470,135     $   472,712
                                              ===========    ===========   ===========    ===========     ===========
Return on average common
   equity   . . . . . . . . . . . . . . .           11.8%          12.0%         12.3%          13.3%           13.8%
Ratio of earnings to fixed charges
   before cumulative effect of change
   in accounting  . . . . . . . . . . . .            3.75           3.80          3.40           2.73            2.97
Ratio of earnings to fixed charges and
   preferred dividend requirements
   before cumulative effect of change
   in accounting  . . . . . . . . . . . .            3.20           3.20          2.90           2.34            2.53

---------------------------------------------------------------------------------------------------------------------
At 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:
      Common stock equity . . . . . . . .             52%            51%           50%            47%             44%
      Cumulative preferred stock  . . . .     
         (including current maturities) .              6%             7%            7%             7%              6%
      Long-term debt (including current                                                                                   
         maturities)  . . . . . . . . . .             42%            42%           43%            46%             50%

---------------------------------------------------------------------------------------------------------------------

Capital and nuclear fuel expenditures
   (excluding AFUDC) (3)  . . . . . . . .     $   391,550    $   412,899   $   329,016    $   337,082     $   365,486
Percent of capital expenditures
   financed internally from
   operations   . . . . . . . . . . . . .            110%           216%          158%           137%            126%
---------------------------------------------------------------------------------------------------------------------
</TABLE>


(1)  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 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 headquarters building.





                                       25
<PAGE>   26
   ITEM 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:

<TABLE>
<CAPTION>
                                                                   Year Ended December 31,         
                                                              -------------------------------       Percent          
                                                                  1995                1994          Change  
                                                              ------------       -------------     ----------
                                                                     (Thousands of Dollars)
         <S>                                                 <C>                <C>                   <C>
         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

</TABLE>
<TABLE>
<CAPTION>
                                                                   Year Ended December 31,         
                                                              -------------------------------       Percent          
                                                                  1994                1993          Change  
                                                              ------------       -------------     ----------
                                                                     (Thousands of Dollars)
          <S>                                                 <C>                <C>                   <C>
         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)

</TABLE>
  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
<PAGE>   27
  EARNINGS - THE COMPANY

         1995 Compared 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 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 earnings
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 is the
result of a repeal by the state of Illinois of an operating subsidy benefiting
the projects.  For additional information 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 $.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 Warner Inc. (Time Warner)
securities received by the Company upon the sale of its cable television
subsidiary.
        
         The Company had other revenues of $50 million in 1995 compared to $8
million in 1994.  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 expenses 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.

         1994 Compared 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 earnings
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 $.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
<PAGE>   28
         HL&P contributed $1.73 to the 1993 consolidated earnings per share
from continuing operations on income of $449.8 million after preferred
dividends.  The remaining loss of $.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

         Summary of selected financial data for HL&P is set forth below:

<TABLE>
<CAPTION>
                                                                   Year Ended December 31,      
                                                              -----------------------------       Percent         
                                                                 1995               1994           Change
                                                              ------------      ------------       ------
                                                                           (Thousands of Dollars)
         <S>                                                    <C>               <C>                 <C>
         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           -

</TABLE>
<TABLE>
<CAPTION>
                                                                   Year Ended December 31,      
                                                              -----------------------------       Percent         
                                                                 1994               1993           Change
                                                              ------------      ------------       ------
                                                                        (Thousands of Dollars)
         <S>                                                    <C>               <C>                 <C>
         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 
 </TABLE>
        -----------------                                          

         (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 Compared to 1994.  HL&P's 1995  earnings were $451 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 stemming 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 ($33 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
<PAGE>   29
         For additional information regarding the Rate Case Settlement, 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 Compared 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

         1995 Compared 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 Compared 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 $46 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
<PAGE>   30
($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 Compared 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 additional
information 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 Compared 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 Compared 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 Compared 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
<PAGE>   31
                   CERTAIN FACTORS AFFECTING FUTURE EARNINGS
                            OF THE COMPANY AND HL&P

         Earnings for the past three years are not necessarily indicative of
future earnings 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.

         Under the Rate Case Settlement, HL&P has the option to write down up
to $50 million per year of its investment in the South Texas Project through
December 31, 1999.  In 1995, HL&P wrote down the maximum $50 million 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 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 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 additional
information, see Notes 3 and 11 to the Financial Statements.

COMPETITION

         Due to changing government regulations, technological developments and
the availability of alternative 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
alternative choices for customers meeting their power needs.

         Wholesale Competition.  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





                                       31
<PAGE>   32
have accounted for less than 1% of its total revenues, HL&P believes that the
Energy Policy Act could encourage the development of additional independent
power projects within its service area.

         New Transmission Access Rule.  In February 1996, the Utility
Commission adopted a new 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.

         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
actual impact 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 until late 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 govern transmission service provided under the new transmission
access rule when it is implemented.  It is anticipated that the rule
establishing such Standard Terms and Conditions will be effective in April
1996.  The Utility Commission is specifying the 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 govern





                                       32
<PAGE>   33
the action of the independent system operator selected to assure
non-discriminatory operation of the transmission grid.  Final implementation of
the various Utility Commission's rules is expected to occur in January 1997.
The Utility Commission is also expected to revisit this rulemaking in order to
ensure compliance with transmission rules to be adopted by FERC.

         Retail Wheeling and Stranded Costs.  Although federal law 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 significant with respect to fixed costs incurred in connection
with the past construction of generation plants, such 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 alternative 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 alternative 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 international
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
<PAGE>   34
         During 1995, HI Energy had a consolidated loss of approximately $33
million or $.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 ($31 million to be
expended in connection with the construction of HI Energy's cogeneration
project in San Nicolas, 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
earnings, the Company believes that such investments (although subject to
greater risks) may offer long-term opportunities for growth greater 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) $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 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
Governor 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 Retail Rate Law violated
the Illinois 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 earnings.
        
INVESTMENT IN TIME WARNER SECURITIES

         In connection with the sale of the Company's cable television
subsidiary, the Company received 1 million shares of Time Warner common stock
and 11 million shares of non-publicly 




                                       34
<PAGE>   35

traded Time Warner convertible preferred stock.  The 11 million shares of Time
Warner convertible  preferred stock are convertible by the Company into
approximately 22.9 million shares of Time Warner 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 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 a separate component of shareholders' equity.  The
Company's investment in the Time Warner convertible preferred stock is accounted
for under the cost method.

         As with any investment, the value of the Company's investment will
fluctuate over time in response to general market conditions or economic and
regulatory developments affecting Time Warner.

         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 description of certain restrictions on the Company's
ability to sell its Time Warner securities), see Note 13 to the Financial
Statements.











                                       35
<PAGE>   36
                        LIQUIDITY AND CAPITAL RESOURCES

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:

<TABLE>
<CAPTION>
                                                                                  Millions of Dollars           
                                                                         -------------------------------------
                                                                          1995      1996       1997      1998 
                                                                         ------    ------     ------    ------

<S>                                                                       <C>       <C>        <C>       <C>
Electric capital and nuclear fuel (excluding Allowance
   for Funds Used During Construction) (AFUDC) (1)  . . . . . .           $ 297     $ 387      $ 301     $ 328
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 capital lease payments   . . . . . . . . . . . .              49       379        252         66
Discontinued operations:
   Cable television additions and other cable-related
     investments  . . . . . . . . . . . . . . . . . . . . . . .              48
   Maturities of long-term debt   . . . . . . . . . . . . . . .              41                                
                                                                          -----     -----      -----     -----
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . .           $ 563     $ 805      $ 608     $ 394
--------------                                                            =====     =====      =====     =====

</TABLE>
(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.

         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 governmental 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





                                       36
<PAGE>   37

for borrowed funds used during construction) and expenses associated with
structural 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 Requirements.  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.

         Capital Program.  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 capital leases.  These expenditures
are anticipated to be $179 million in 1996, $252 million in 1997 and $66
million in 1998.

         Environmental Expenditures.  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 until it becomes certain that additional expenditures
for NOx emission reductions will 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 





                                       37
<PAGE>   38
remediation costs (which HL&P estimates to be approximately $80 million) and 
could be subjected to substantial fines 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 Company and HL&P.  The impact of the new
legislation, if any, will depend on the subsequent development and
implementation of applicable regulations.

COMPANY--SOURCES OF CAPITAL RESOURCES AND LIQUIDITY

      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 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 external 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 internally from operations.  HL&P has registered with the SEC $230
million aggregate liquidation 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
<PAGE>   39
issued as another source of capital for HL&P.  Proceeds from any sale of these
securities are 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.

      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 approximately $75.9 million in cash and
cash equivalents invested in short-term investments.

      HL&P continued to reduce its financing costs by retiring higher-cost
bonds in 1995.  In 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 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 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 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
adopted in 1996.  This conclusion, however, may change in the future as
competition influences wholesale and retail pricing in the electric utility
industry.

      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 stock-based
compensation. Companies that choose not to adopt the 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, the 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 decommissioning costs





                                       39
<PAGE>   40
for nuclear generating facilities recorded on the financial statements of
electric utilities.  In response 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 on the Company's and HL&P's financial condition or results of
operations.

      The Company and HL&P's financial statements include additional
disclosures required as a 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 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.





                                       40
<PAGE>   41
ITEM 8.  FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.

                HOUSTON INDUSTRIES INCORPORATED AND SUBSIDIARIES

                       STATEMENTS OF CONSOLIDATED INCOME
                             (THOUSANDS OF DOLLARS)

<TABLE>
<CAPTION>
                                                                              Year Ended December 31,       
                                                                --------------------------------------------------
                                                                    1995               1994                1993   
                                                                -----------        -----------         -----------
<S>                                                             <C>                <C>                 <C>
REVENUES:
    Electric utility  . . . . . . . . . . . . . . . . . .       $ 3,680,297        $ 3,746,085         $ 4,079,863
    Other   . . . . . . . . . . . . . . . . . . . . . . .            49,876              8,051               3,792
                                                                -----------        -----------         -----------       
              Total . . . . . . . . . . . . . . . . . . .         3,730,173          3,754,136           4,083,655
                                                                -----------        -----------         -----------       

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
       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 . . . . . . . . . . . . . . . . . . . . .         2,825,240          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 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:
    Interest on long-term debt  . . . . . . . . . . . . .           279,491            265,494             304,462
    Other interest  . . . . . . . . . . . . . . . . . . .            21,586             25,076              15,145
    Allowance for borrowed funds used during
      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 CONTINUING OPERATIONS BEFORE INCOME TAXES 
    AND CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING . . . .           596,955            654,409             669,394

INCOME TAXES  . . . . . . . . . . . . . . . . . . . . . .           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 television subsidiary   . . . .           708,124
    Loss from discontinued cable television
       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
    POSTEMPLOYMENT BENEFITS (NET OF INCOME
    TAXES OF $4,415)  . . . . . . . . . . . . . . . . . .                               (8,200)                   
                                                                -----------        -----------         -----------
NET INCOME  . . . . . . . . . . . . . . . . . . . . . . .       $ 1,105,524        $   399,261         $   416,036
                                                                ===========        ===========         ===========

</TABLE>
                            (continued on next page)





                                       41
<PAGE>   42
                HOUSTON INDUSTRIES INCORPORATED AND SUBSIDIARIES

                       STATEMENTS OF CONSOLIDATED INCOME

                                  (CONTINUED)


<TABLE>
<CAPTION>
                                                                              Year Ended December 31,       
                                                                -------------------------------------------------
                                                                    1995               1994                1993   
                                                                -----------        -----------         -----------
                                                                                    (Restated)          (Restated)
<S>                                                             <C>                <C>                 <C>
EARNINGS PER COMMON SHARE:

    CONTINUING OPERATIONS BEFORE CUMULATIVE
         EFFECT OF CHANGE IN ACCOUNTING . . . . . . . . . .     $      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  . . . . . . . . . . .                               (.03)                   
                                                                -----------        -----------         -----------

EARNINGS PER COMMON SHARE . . . . . . . . . . . . . . . . .     $      4.46        $      1.62         $      1.60
                                                                ===========        ===========         ===========

WEIGHTED AVERAGE COMMON SHARES
    OUTSTANDING (000)   . . . . . . . . . . . . . . . . . .         247,706            245,707             260,008

</TABLE>

                See Notes to Consolidated Financial Statements.





                                      42
<PAGE>   43
                HOUSTON INDUSTRIES INCORPORATED AND SUBSIDIARIES

                  STATEMENTS OF CONSOLIDATED RETAINED EARNINGS
                (THOUSANDS OF DOLLARS, EXCEPT PER SHARE AMOUNTS)


<TABLE>
<CAPTION>
                                                                           Year Ended December 31,       
                                                                ------------------------------------------------
                                                                   1995               1994               1993    
                                                                -----------        -----------        -----------

<S>                                                          <C>               <C>                    <C>
Balance at Beginning 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

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

Redemption of HL&P Preferred Stock  . . . . . . . . . . . .                                                  (402)
                                                                -----------        -----------        ----------- 

Balance at End of Year  . . . . . . . . . . . . . . . . . .     $ 1,953,672        $ 1,221,221        $ 1,191,230
                                                                ===========        ===========        ===========

</TABLE>

                See Notes to Consolidated Financial Statements.




                                       
                                      43
<PAGE>   44
                HOUSTON INDUSTRIES INCORPORATED AND SUBSIDIARIES

                          CONSOLIDATED BALANCE SHEETS
                             (THOUSANDS OF DOLLARS)

                                     ASSETS


<TABLE>
<CAPTION>
                                                                                             December 31,       
                                                                                      ---------------------------
                                                                                         1995              1994    
                                                                                      -----------       -----------
<S>                                                                                   <C>               <C>
PROPERTY, 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
     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 equipment - 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
  Time Warner dividends receivable  . . . . . . . . . . . . . . . . . . . . . . .          10,313
  Fuel stock  . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .          59,699            56,711
  Materials and supplies, at average cost   . . . . . . . . . . . . . . . . . . .         138,007           148,007
  Prepayments   . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .          18,562            14,398
                                                                                      -----------       -----------
            Total current assets  . . . . . . . . . . . . . . . . . . . . . . . .         337,445           281,922
                                                                                      -----------       -----------

OTHER ASSETS:
  Investment in Time Warner securities  . . . . . . . . . . . . . . . . . . . . .       1,027,875
  Net assets of discontinued cable television operations  . . . . . . . . . . . .                           618,982
  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
  Regulatory tax asset - net  . . . . . . . . . . . . . . . . . . . . . . . . . .         228,587           235,463
  Recoverable project costs - net   . . . . . . . . . . . . . . . . . . . . . . .         232,775            98,954
  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
                                                                                      ===========       ===========

</TABLE>

                See Notes to Consolidated Financial Statements.





                                       44
<PAGE>   45
                HOUSTON INDUSTRIES INCORPORATED AND SUBSIDIARIES

                          CONSOLIDATED BALANCE SHEETS
                             (THOUSANDS OF DOLLARS)

                         CAPITALIZATION AND LIABILITIES


<TABLE>
<CAPTION>
                                                                                              December 31,       
                                                                                      -----------------------------
                                                                                         1995               1994    
                                                                                      -----------        -----------
<S>                                                                                   <C>               <C>
CAPITALIZATION (STATEMENTS ON FOLLOWING PAGES):
  Common stock equity   . . . . . . . . . . . . . . . . . . . . . . . . . . . . .     $ 4,123,563       $ 3,369,248
                                                                                      -----------       -----------

  Preference stock, no par; 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   . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .           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            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 . . . . . . . . . . . . . . . . . . . . . . .       1,015,585         1,123,915
                                                                                      -----------       -----------

DEFERRED CREDITS:
  Accumulated deferred income taxes   . . . . . . . . . . . . . . . . . . . . . .       2,067,246         1,763,230
  Unamortized investment 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
                                                                                      ===========       ===========  
</TABLE>

                See Notes to Consolidated Financial Statements.





                                       45
<PAGE>   46
                HOUSTON INDUSTRIES INCORPORATED AND SUBSIDIARIES

                   CONSOLIDATED STATEMENTS OF CAPITALIZATION
                             (THOUSANDS OF DOLLARS)


<TABLE>
<CAPTION>
                                                                                               December 31,       
                                                                                     ------------------------------
                                                                                        1995                1994    
                                                                                     -----------         -----------
<S>                                                                                  <C>                <C> 
COMMON 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
     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
  December 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
         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 DEBT:
  Debentures:
         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
         Unamortized discount . . . . . . . . . . . . . . . . . . . . . . . . . .         (1,087)            (1,271)
                                                                                     -----------        ----------- 
             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
         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
         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

</TABLE>
                            (continued on next page)





                                       46
<PAGE>   47
                HOUSTON INDUSTRIES INCORPORATED AND SUBSIDIARIES

                   CONSOLIDATED STATEMENTS OF CAPITALIZATION
                             (THOUSANDS OF DOLLARS)

                                  (CONTINUED)


<TABLE>
<CAPTION>
                                                                                              December 31,       
                                                                                     -------------------------------
                                                                                        1995                1994    
                                                                                     -----------         -----------
<S>                                                                                  <C>                <C>
         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  . . . . . . . . . . . . . .           68,000             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
         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
                                                                                     -----------        -----------

  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 A1 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
                                                                                     -----------        -----------

  Unamortized premium (discount) - net  . . . . . . . . . . . . . . . . . . . .          (16,456)           (12,253)
  Capitalized lease obligations, discount rates of
    5.2%-11.7%, due 1996-2018   . . . . . . . . . . . . . . . . . . . . . . . .            8,560             12,403
  Notes payable   . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .              981              1,129
                                                                                     -----------        -----------
            Subtotal  . . . . . . . . . . . . . . . . . . . . . . . . . . . . .           (6,915)             1,279
                                                                                     -----------        -----------
              Total   . . . . . . . . . . . . . . . . . . . . . . . . . . . . .        3,143,260          3,189,179
                                                                                     -----------        -----------

                Total   . . . . . . . . . . . . . . . . . . . . . . . . . . . .        3,692,173          3,737,908
                Current maturities  . . . . . . . . . . . . . . . . . . . . . .         (353,751)            (3,775)
                                                                                     -----------        -----------
                Total long-term debt                                                   3,338,422          3,734,133
                                                                                     -----------        -----------

                  Total capitalization  . . . . . . . . . . . . . . . . . . . .      $ 7,864,385        $ 7,576,636
                                                                                     ===========        ===========

</TABLE>

                See Notes to Consolidated Financial Statements.





                                       47
<PAGE>   48
                HOUSTON INDUSTRIES INCORPORATED AND SUBSIDIARIES

                     STATEMENTS OF CONSOLIDATED CASH FLOWS

                INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
                             (THOUSANDS OF DOLLARS)


<TABLE>
<CAPTION>
                                                                              Year Ended December 31,      
                                                                    ----------------------------------------------
                                                                        1995              1994              1993   
                                                                    -----------       -----------       -----------
<S>                                                                 <C>              <C>                <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
  Income from continuing operations   . . . . . . . . . . . . .     $   397,400       $   423,985       $   440,531

  Adjustments to reconcile income from continuing
         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
      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 - net  . . . . . . . . . . . . . . .           6,876            11,300           (69,337)
      Net cash provided by (used in) discontinued
         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)
         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 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)
  Settlement 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)
  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)
                                                                    -----------       -----------       ----------- 
</TABLE>


                           (continued on next page)





                                       48
<PAGE>   49
                HOUSTON INDUSTRIES INCORPORATED AND SUBSIDIARIES

                     STATEMENTS OF CONSOLIDATED CASH FLOWS

                INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
                             (THOUSANDS OF DOLLARS)

                                  (CONTINUED)


<TABLE>
<CAPTION>
                                                                                Year Ended December 31,      
                                                                    ----------------------------------------------
                                                                        1995              1994              1993   
                                                                    -----------       -----------       -----------
<S>                                                                 <C>               <C>               <C>
CASH FLOWS FROM FINANCING ACTIVITIES:
  Proceeds from common stock  . . . . . . . . . . . . . . . . .                                         $    52,638
  Proceeds from first mortgage bonds  . . . . . . . . . . . . .     $   142,972                             840,427
  Payment of matured first mortgage bonds   . . . . . . . . . .                       $   (19,500)         (136,000)
  Payment of common stock dividends   . . . . . . . . . . . . .        (371,731)         (368,790)         (389,933)
  Redemption 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  . . . . . . . . . . . . . .        (195,224)                           (995,751)
  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 financing activities   . . . . . . . . .        (963,029)         (639,711)         (801,695)
                                                                    -----------       -----------       ----------- 

NET INCREASE (DECREASE) IN CASH AND CASH
  EQUIVALENTS   . . . . . . . . . . . . . . . . . . . . . . . .           1,336            (4,441)          (54,433)


CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR  . . . . . . . .          10,443            14,884            69,317
                                                                    -----------       -----------       -----------

CASH AND CASH EQUIVALENTS AT END OF YEAR  . . . . . . . . . . .     $    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

</TABLE>



                See Notes to Consolidated Financial Statements.





                                                            49
<PAGE>   50
                        HOUSTON LIGHTING & POWER COMPANY

                              STATEMENTS OF INCOME
                             (THOUSANDS OF DOLLARS)


<TABLE>
<CAPTION>
                                                                              Year Ended December 31,       
                                                                --------------------------------------------------
                                                                    1995               1994                1993   
                                                                -----------        -----------        ------------
<S>                                                             <C>               <C>                <C>
OPERATING REVENUES  . . . . . . . . . . . . . . . . . . .       $ 3,680,297        $ 3,746,085        $ 4,079,863
                                                                -----------        -----------        ------------
                                                                                                       
OPERATING 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
    Other taxes   . . . . . . . . . . . . . . . . . . . .           245,890            251,421            211,295
                                                                -----------        -----------        -----------
                Total                                             2,945,633          3,003,203          3,313,577
                                                                -----------        -----------        -----------                
                                                                                                       
OPERATING INCOME  . . . . . . . . . . . . . . . . . . . .           734,664            742,882            766,286
                                                                -----------        -----------        -----------
OTHER INCOME (EXPENSE):                                                                                
    Allowance for other funds used during                                                              
         construction . . . . . . . . . . . . . . . . . .             7,760              4,115              3,512
    Interest income   . . . . . . . . . . . . . . . . . .            12,218             10,000              3,296
    Other - net   . . . . . . . . . . . . . . . . . . . .           (25,901)           (12,561)            (4,286)
                                                                -----------        -----------        ----------- 
          Total                                                      (5,923)             1,554              2,522
                                                                -----------        -----------        -----------
                                                                                                       
INCOME BEFORE INTEREST CHARGES  . . . . . . . . . . . . .           728,741            744,436            768,808
                                                                -----------        -----------        -----------
INTEREST CHARGES:                                                                                      
    Interest on long-term debt  . . . . . . . . . . . . .           244,384            246,533            276,049
    Other interest  . . . . . . . . . . . . . . . . . . .             8,117              8,493             12,317
    Allowance for borrowed funds used during                                                           
         construction . . . . . . . . . . . . . . . . . .            (4,692)            (5,554)            (3,781)
                                                                -----------        -----------        ----------- 
            Total                                                   247,809            249,472            284,585
                                                                -----------        -----------        -----------
                                                                                                       
INCOME BEFORE CUMULATIVE EFFECT OF CHANGE
    IN ACCOUNTING   . . . . . . . . . . . . . . . . . . . .         480,932            494,964            484,223

CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING FOR
    POSTEMPLOYMENT BENEFITS (NET OF INCOME
    TAXES OF $4,415)  . . . . . . . . . . . . . . . . . . .                             (8,200)                  
                                                                -----------        -----------        -----------

NET INCOME  . . . . . . . . . . . . . . . . . . . . . . . .         480,932            486,764            484,223

DIVIDENDS ON PREFERRED STOCK  . . . . . . . . . . . . . . .          29,955             33,583             34,473
                                                                -----------        -----------        -----------

INCOME AFTER PREFERRED DIVIDENDS  . . . . . . . . . . . . .     $   450,977        $   453,181        $   449,750
                                                                ===========        ===========        ===========

</TABLE>

                       See Notes to Financial Statements.





                                       50
<PAGE>   51
                        HOUSTON LIGHTING & POWER COMPANY

                        STATEMENTS OF RETAINED EARNINGS
                             (THOUSANDS OF DOLLARS)


<TABLE>
<CAPTION>
                                                                             Year Ended December 31,       
                                                                -------------------------------------------------
                                                                   1995               1994               1993    
                                                                -----------        -----------        -----------
<S>                                                             <C>                 <C>               <C>
Balance at Beginning of Year  . . . . . . . . . . . . . . .     $ 2,153,109        $ 2,028,924        $ 1,922,558

Add - Net Income  . . . . . . . . . . . . . . . . . . . . .         480,932            486,764            484,223

Redemption of Preferred Stock . . . . . . . . . . . . . . .                                                  (402)
                                                                -----------        -----------        ----------- 
      Total . . . . . . . . . . . . . . . . . . . . . . . .       2,634,041          2,515,688          2,406,379
                                                                -----------        -----------        -----------
Deduct - Cash Dividends:
   Preferred:
      $4.00 Series                                                      389                390                390
      $6.72 Series                                                    1,680              1,680              1,680
      $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
      Series C - 1992                                                 2,823              2,040              1,672
      Series D - 1992                                                 2,747              2,075              1,615
      $8.50 Series                                                    1,417              4,108              6,517
      $9.375 Series                                                   8,433             12,047             12,047

   Common                                                           454,000            328,996            342,982
                                                                -----------        -----------        -----------

      Total . . . . . . . . . . . . . . . . . . . . . . . .         483,955            362,579            377,455
                                                                -----------        -----------        -----------

Balance at End of Year  . . . . . . . . . . . . . . . . . .     $ 2,150,086        $ 2,153,109        $ 2,028,924
                                                                ===========        ===========        ===========

</TABLE>

                                        See Notes to Financial Statements.





                                                            51
<PAGE>   52
                        HOUSTON LIGHTING & POWER COMPANY

                                 BALANCE SHEETS
                             (THOUSANDS OF DOLLARS)

                                     ASSETS


<TABLE>
<CAPTION>
                                                                                                December 31,       
                                                                                      -------------------------------
                                                                                         1995               1994     
                                                                                      -----------        ------------


<S>                                                                                <C>                 <C>
PROPERTY, 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
     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
                                                                                      -----------       -----------
         Total  . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .      12,675,765        12,493,952
  Less accumulated depreciation and amortization  . . . . . . . . . . . . . . . .       3,906,139         3,517,923
                                                                                      -----------       -----------
         Property, plant and equipment - net  . . . . . . . . . . . . . . . . . .       8,769,626         8,976,029
                                                                                      -----------       -----------

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
  Materials and supplies, at average cost   . . . . . . . . . . . . . . . . . . .         137,584           147,922
  Prepayments   . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .          11,876             9,665
                                                                                      -----------       -----------
      Total current assets                                                                371,163           501,656
                                                                                      -----------       -----------

OTHER ASSETS:
  Deferred plant costs - net  . . . . . . . . . . . . . . . . . . . . . . . . . .         613,134           638,917
  Deferred debits   . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .         290,012           241,611
  Unamortized debt expense and premium on reacquired debt   . . . . . . . . . . .         159,962           158,351
  Regulatory tax asset - net  . . . . . . . . . . . . . . . . . . . . . . . . . .         228,587           235,463
  Recoverable project costs - net   . . . . . . . . . . . . . . . . . . . . . . .         232,775            98,954
                                                                                      -----------       -----------
      Total other assets  . . . . . . . . . . . . . . . . . . . . . . . . . . . .       1,524,470         1,373,296
                                                                                      -----------       -----------

        Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .     $10,665,259       $10,850,981
                                                                                      ===========       ===========
</TABLE>

                       See Notes to Financial Statements.





                                       52
<PAGE>   53
                        HOUSTON LIGHTING & POWER COMPANY

                                 BALANCE SHEETS
                             (THOUSANDS OF DOLLARS)

                         CAPITALIZATION AND LIABILITIES


<TABLE>
<CAPTION>
                                                                                              December 31,       
                                                                                      ----------------------------
                                                                                         1995              1994    
                                                                                      -----------       -----------
<S>                                                                                   <C>               <C>
CAPITALIZATION (STATEMENTS ON FOLLOWING PAGES):
  Common stock equity   . . . . . . . . . . . . . . . . . . . . . . . . . . . . .     $ 3,826,013       $ 3,829,036
  Cumulative preferred stock:
     Not subject to mandatory redemption  . . . . . . . . . . . . . . . . . . . .         351,345           351,345
     Subject to mandatory redemption  . . . . . . . . . . . . . . . . . . . . . .          51,055           121,910
  Long-term debt  . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .       2,989,509         3,185,404
                                                                                      -----------       -----------

Total capitalization  . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .       7,217,922         7,487,695
                                                                                      -----------       -----------
CURRENT LIABILITIES:
  Accounts payable  . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .         119,032           148,042
  Accounts payable to affiliated companies  . . . . . . . . . . . . . . . . . . .           6,982            10,936
  Taxes accrued   . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .         192,673           181,043
  Interest accrued  . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .          70,823            64,732
  Accrued liabilities to municipalities   . . . . . . . . . . . . . . . . . . . .          20,773            21,307
  Customer deposits   . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .          61,582            64,905
  Current portion of long-term debt and preferred stock   . . . . . . . . . . . .         179,451            49,475
  Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .          54,149            59,912
                                                                                      -----------       -----------
      Total current liabilities . . . . . . . . . . . . . . . . . . . . . . . . .         705,465           600,352
                                                                                      -----------       -----------
DEFERRED CREDITS:
  Accumulated deferred federal income taxes   . . . . . . . . . . . . . . . . . .       1,947,488         1,876,300
  Unamortized investment tax credit   . . . . . . . . . . . . . . . . . . . . . .         392,153           411,580
  Fuel-related credits  . . . . . . . . . . . . . . . . . . . . . . . . . . . . .         122,063           242,912
  Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .         280,168           232,142
                                                                                      -----------       -----------
      Total deferred credits  . . . . . . . . . . . . . . . . . . . . . . . . . .       2,741,872         2,762,934
                                                                                      -----------       -----------
COMMITMENTS AND CONTINGENCIES

          Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .     $10,665,259       $10,850,981
                                                                                      ===========       ===========
</TABLE>                                                                       


                       See Notes to Financial Statements.





                                       53
<PAGE>   54
                        HOUSTON LIGHTING & POWER COMPANY

                          STATEMENTS OF CAPITALIZATION
                             (THOUSANDS OF DOLLARS)

<TABLE>
<CAPTION>
                                                                                           December 31,                   
                                                                                     ----------------------------
                                                                                        1995               1994    
                                                                                    -----------        -----------
<S>                                                                                  <C>                 <C>
COMMON STOCK EQUITY:
  Common stock, Class A; no par; authorized and outstanding,
     1,000 shares, voting   . . . . . . . . . . . . . . . . . . . . . . . . . .      $ 1,524,949         $ 1,524,949
  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
                                                                                     -----------         -----------
CUMULATIVE PREFERRED STOCK, no par; authorized, 10,000,000
  shares; outstanding, 4,318,397 and 5,232,397 shares at
  December 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
         $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
         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 DEBT:
     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
         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
         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
         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  . . . . . . . . . . . . . .          68,000               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

</TABLE>
                           (continued on next page)





                                       54
<PAGE>   55
                        HOUSTON LIGHTING & POWER COMPANY

                          STATEMENTS OF CAPITALIZATION
                             (THOUSANDS OF DOLLARS)

                                  (CONTINUED)


<TABLE>
<CAPTION>
                                                                                             December 31,       
                                                                                     -----------------------------
                                                                                        1995                1994    
                                                                                     -----------         -----------
<S>                                                                                  <C>                 <C>
            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
                                                                                     -----------         -----------
  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 A1 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
                                                                                     -----------         -----------
  Unamortized premium (discount) - net  . . . . . . . . . . . . . . . . . . . .          (16,456)            (12,253)
  Capitalized lease obligations, discount rates of
    5.2%-11.7%, due 1996-2018   . . . . . . . . . . . . . . . . . . . . . . . .            8,560              12,403
  Notes payable   . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .              981               1,129
                                                                                     -----------         -----------
           Subtotal . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .           (6,915)              1,279
                                                                                     -----------         -----------
             Total  . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .        3,143,260           3,189,179
             Current maturities . . . . . . . . . . . . . . . . . . . . . . . .         (153,751)             (3,775)
                                                                                     -----------         ----------- 
             Total long-term debt . . . . . . . . . . . . . . . . . . . . . . .        2,989,509           3,185,404
                                                                                     -----------         -----------            
               Total capitalization   . . . . . . . . . . . . . . . . . . . . .      $ 7,217,922         $ 7,487,695
                                                                                     ===========         ===========
</TABLE>
                       See Notes to Financial Statements.





                                       55
<PAGE>   56
                        HOUSTON LIGHTING & POWER COMPANY

                            STATEMENTS OF CASH FLOWS

                INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
                             (THOUSANDS OF DOLLARS)


<TABLE>
<CAPTION>
                                                                               Year Ended December 31,      
                                                                    -----------------------------------------------
                                                                        1995              1994              1993   
                                                                    -----------       -----------       -----------
<S>                                                                 <C>               <C>               <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
  Net income  . . . . . . . . . . . . . . . . . . . . . . . . .     $   480,932       $   486,764       $   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
      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)
      Cumulative effect of change in accounting
         for postemployment benefits  . . . . . . . . . . . . .                             8,200
      Regulatory tax asset - net  . . . . . . . . . . . . . . .           6,876            11,300           (69,337)
      Changes in other assets and liabilities:
         Accounts receivable - net  . . . . . . . . . . . . . .         (34,239)          (17,827)          170,784
         Materials and supplies   . . . . . . . . . . . . . . .          10,338            12,449             3,850
         Fuel stock   . . . . . . . . . . . . . . . . . . . . .          (2,988)            1,874             9,979
         Accounts payable   . . . . . . . . . . . . . . . . . .         (32,964)          (40,054)          (11,854)
         Interest and taxes accrued . . . . . . . . . . . . . .          17,721            (6,980)          (20,035)
         Other current liabilities  . . . . . . . . . . . . . .          (7,816)           (4,936)           18,040
         Other - net  . . . . . . . . . . . . . . . . . . . . .          (5,239)           20,270            63,721
                                                                    -----------       -----------       -----------
      Net cash provided by operating activities   . . . . . . .         867,690         1,226,911         1,136,400
                                                                    -----------       -----------       -----------

CASH FLOWS FROM INVESTING ACTIVITIES:
  Capital and nuclear fuel expenditures
      (including allowance for borrowed funds
      used during construction)   . . . . . . . . . . . . . . .        (396,242)         (418,453)         (332,797)
  Other - net   . . . . . . . . . . . . . . . . . . . . . . . .         (10,618)          (15,822)          (13,067)
                                                                    -----------       -----------       ----------- 
      Net cash used in investing activities   . . . . . . . . .        (406,860)         (434,275)         (345,864)
                                                                    -----------       -----------       ----------- 

CASH FLOWS FROM FINANCING ACTIVITIES:
  Proceeds from first mortgage bonds  . . . . . . . . . . . . .         142,972                             840,427
  Payment of matured bonds  . . . . . . . . . . . . . . . . . .                           (19,500)         (136,000)
  Payment of dividends  . . . . . . . . . . . . . . . . . . . .        (485,793)         (363,083)         (378,528)
  Increase (decrease) in notes payable  . . . . . . . . . . . .                          (171,100)           31,660
  Decrease in notes payable to affiliated company   . . . . . .                                            (120,001)
  Redemption of preferred stock   . . . . . . . . . . . . . . .         (91,400)          (20,000)          (40,000)
  Extinguishment of long-term debt  . . . . . . . . . . . . . .        (195,224)                           (995,751)
  Other - net   . . . . . . . . . . . . . . . . . . . . . . . .           8,599             4,501            15,817
                                                                    -----------       -----------       -----------
      Net cash used in financing activities   . . . . . . . . .        (620,846)         (569,182)         (782,376)
                                                                    -----------       -----------       ----------- 

NET INCREASE (DECREASE) IN CASH AND
  CASH EQUIVALENTS  . . . . . . . . . . . . . . . . . . . . . .        (160,016)          223,454             8,160

CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR  . . . . . . . .         235,867            12,413             4,253
                                                                    -----------       -----------       -----------

CASH AND CASH EQUIVALENTS AT END OF YEAR  . . . . . . . . . . .     $    75,851       $   235,867       $    12,413
                                                                    ===========       ===========       ===========

SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
-------------------------------------------------

Cash Payments:
  Interest (net of amounts capitalized)   . . . . . . . . . . .     $   247,672       $   251,245       $   296,201
  Income taxes  . . . . . . . . . . . . . . . . . . . . . . . .         157,400           196,655           127,713

</TABLE>

                       See Notes to Financial Statements.





                                       56
<PAGE>   57
                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 additional information 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 REGULATION.  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:

<TABLE>
<CAPTION>
                                                                                      December 31, 1995
                                                                                       -----------------
                                                                                      (Millions of Dollars)

         <S>                                                                                 <C>
         Deferred plant costs - net . . . . . . . . . . . . . . . . . . . . . . .             $613
         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)
</TABLE>

         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.

  (C)    ELECTRIC PLANT.  HL&P capitalizes at cost all additions to electric
         plant, betterments to existing property and replacements of units of
         property.  Cost includes the original cost of contracted 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
<PAGE>   58
         plant.  AFUDC represents the estimated debt 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)    EARNINGS 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 EQUITY SECURITIES.  The Company owns one
         million shares of Time Warner common stock and 11 million shares of
         non-publicly traded Time Warner convertible





                                       58
<PAGE>   59

         preferred stock.  The Company has recorded its investment in these
         securities at a combined fair value of approximately $1 billion on the
         Company's Consolidated Balance Sheet.  Investment in the Time Warner
         common stock is considered an "available-for-sale" 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.

  (L)    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 utility business.  HL&P is engaged in the
         generation, transmission, distribution and sale of electric 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 and 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.

(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 percent interest
         in the project and bears a corresponding share of capital and
         operating costs associated with the project.  As of December 31, 1995,
         HL&P's investment in the South Texas 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)    REGULATORY PROCEEDINGS AND LITIGATION.  Between June 1993 and February
         1995, the South 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."





                                       59
<PAGE>   60
         In February 1994, the City of Austin (Austin), one of the four
         co-owners 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 earnings 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 $2.75 billion in property damage insurance
         coverage which is above the legally required minimum, but is less than
         the total amount of insurance currently available for such losses.
         This coverage consists of $500 million in primary property damage
         insurance and excess property insurance in the amount of $2.25
         billion.  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
<PAGE>   61
         assessment of deferred premiums provided by the plan for each nuclear
         incident 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 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 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.





                                       61
<PAGE>   62
            The after-tax effects in 1995 of the Rate Case Settlement are as
follows:

<TABLE>
<CAPTION>
                                                                                      Year Ended
                                                                                   December 31, 1995
                                                                                   -----------------
                                                                                 (Millions of Dollars)
            <S>                                                                          <C>
            Reduction in base revenues  . . . . . . . . . . . . . . . . . . .            $  52
            South Texas Project write-down  . . . . . . . . . . . . . . . . .               33
            One-time write-off of mine-related costs  . . . . . . . . . . . .                6
            Other expenses  . . . . . . . . . . . . . . . . . . . . . . . . .                9
                                                                                          ----
                      Total Rate Case Settlement effect on net income . . . .             $100
                                                                                          ====
</TABLE>

         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 which is included in the Company's Statements of Consolidated
         Income and HL&P's Statements of Income in depreciation and
         amortization expense.  In 1995, HL&P also began accruing its 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).

         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 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 mine-related costs that were not
         previously recorded and were not recoverable under the terms of the
         Rate Case Settlement.  Issues concerning the prudence of expenditures
         related to Malakoff were deferred until a subsequent rate case.

         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 not included in rate
         base and, as a result, no return on investment is being earned during
         the 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.

         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 revenues, an amount
         which HL&P agreed as a part of the Rate Case Settlement was not
         recoverable from ratepayers.

  (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 final in 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 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
         concerns (i) the treatment as "plant held for future use" of certain
         costs associated with the Malakoff





                                       62
<PAGE>   63
         generating station and (ii) the treatment by HL&P of certain tax
         savings associated with federal income tax deductions for expenses not
         included in cost of service for ratemaking purposes.  The appeal is
         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)    FOREIGN INVESTMENTS.  Houston Argentina S.A. (Houston Argentina), 
         a subsidiary of HI Energy, owns a 32.5 percent interest in
         Compania de Inversiones en Electricidad S.A. (COINELEC), an Argentine
         holding company which acquired a 51 percent interest in Empresa
         Distribuidora de La Plata S.A. (EDELAP), an electric 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 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.

         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 Nicolas, Argentina and approximately $5
         million in a coke calcining project being developed in the state of
         Andhra Pradesh, India.  These projects had no earnings 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 International 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.





                                       63
<PAGE>   64
  (C)    ILLINOIS 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 $400,000 equity interest (20 percent) in Ford
         Heights. 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 Illinois 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-energy projects
         to meet their debt obligations is dependent upon the projects
         continuing to receive 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 March 26, 1996, 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 Purchase 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 ($.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.
         As of December 31, 1995, 29 current and former employees participated
         in the plans.  A maximum of five million shares of common stock may be
         issued under the LICP.  Beginning one





                                       64

<PAGE>   65
         year after the grant date, the options become exercisable in one-third
         increments each year.  The options expire ten years from the grant
         date.
        
         Performance-based restricted shares issued were 49,792; 100,524; and
         146,564 for 1995, 1994 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):
<TABLE>
<CAPTION>
                                                                                            Option Price at
                                                                         Number              Date of Grant
                                                                        of Shares             or Exercise  
                                                                       ----------            --------------
<S>                                                                    <C>                   <C>               
  Non-statutory stock options:

  Outstanding at December 31, 1992  . . . . . . . . . . . .             131,742
      Options Granted   . . . . . . . . . . . . . . . . . .             131,552               $23.125
      Options Exercised . . . . . . . . . . . . . . . . . .              (1,324)              $21.75
      Options Withheld for Taxes  . . . . . . . . . . . . .                 (34)
      Options Canceled  . . . . . . . . . . . . . . . . . .             (10,038)

  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

</TABLE>

  (D) SHAREHOLDER RIGHTS 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 rights, 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.  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.

      When the rights become exercisable, each right will entitle the holder to
      receive, in lieu of the 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





                                       65
<PAGE>   66
      securities or debt of the Company) having a current market price (as
      defined in the plan) equal 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:

<TABLE>
<CAPTION>
                                                                                Redemption
         Series                                                               Price Per Share
         ------                                                               ---------------
         <S>                                                                       <C>        
         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:                                   
         $9.375 (b) . . . . . . . . . . . . . . . . . . . . . . . . . . . .          ---
</TABLE>

  (a)    Rates for Variable Term Preferred Stock as of December 31, 1995 were
         as follows:

<TABLE>
<CAPTION>
                     Series                              Rate 
                     ------                             ------
              <S>                                       <C>
              Variable Term Preferred A                 4.59%
              Variable Term Preferred B                 4.48%
              Variable Term Preferred C                 4.49%
              Variable Term Preferred D                 4.67%
</TABLE>

  (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 $100 per share. In 1994, HL&P redeemed 200,000
  shares of its $8.50 cumulative preferred stock at $100 per share.  Annual
  mandatory redemptions of HL&P's preferred stock are $25.7 million in 1996,
  1997 and 1998.





                                       66
<PAGE>   67
  (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 2/3 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 1/2 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 mortgage 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 Trust 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 supplemental
         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 provide for interest at rates generally less
         than the prime rate.  The Company's weighted average 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





                                       67
<PAGE>   68
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:

<TABLE>
<CAPTION>
                                                                                    Year Ended December 31,               
                                                                             ----------------------------------------    
                                                                               1995            1994           1993      
                                                                            ----------      ----------     ----------   
                                                                                         (Thousands of Dollars)             
         <S>                                                                 <C>             <C>             <C>            
         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 . . . . . . . . . . . . . . . . . .       $ 32,699        $ 21,934        $ 36,549       
                                                                             ========        ========        ========       
  </TABLE>                                                
         The funded status of the Company's retirement plans attributable to
         continuing operations was as follows: 
                                                                               
<TABLE>
<CAPTION> 
                                                                                            December 31,                   
                                                                                   --------------------------------        
                                                                                       1995                1994            
                                                                                   ------------        ------------        
                                                                                         (Thousands of Dollars)            
         <S>                                                                          <C>                 <C>               
         Actuarial present value of:                                                                                        
             Vested benefit obligation . . . . . . . . . . . . . . . . . . . .         $ 504,655           $ 439,668        
                                                                                       =========           =========        
                                                                                                                           
             Accumulated benefit obligation  . . . . . . . . . . . . . . . . .         $ 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)       
         Unrecognized prior service cost   . . . . . . . . . . . . . . . . . .            46,627              21,456         
         Unrecognized net loss   . . . . . . . . . . . . . . . . . . . . . . .            22,522              71,191        
                                                                                      ----------         -----------
         Accrued pension cost  . . . . . . . . . . . . . . . . . . . . . . . .        $  (53,951)        $   (58,874) 
                                                                                      ==========         ===========         
</TABLE>        

         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 for 1994.  The assumed long-term rate of return on
         plan assets was 9.5 percent in 1995 and 1994.  The transitional asset
         at January 1, 1986, is being recognized over approximately 17 years,
         and the prior service cost is being recognized over approximately 15
         years.
        




                                                            68
<PAGE>   69

         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 costs 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.
        
  (b)    SAVINGS PLAN.  The Company has an employee savings plan that qualifies
         as cash or deferred arrangements under Section 401(k) of the Internal
         Revenue Code of 1986, as amended (IRC).  Under the plan, participating
         employees may contribute a portion of their compensation, pre-tax or
         after-tax, up to a maximum of 16 percent of compensation limited by an
         annual deferral limit ($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 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 earnings 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 benefit 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 earnings; 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 and 1993, respectively.  Savings plan benefit expense
         attributable to discontinued operations was not material.

         The ESOP shares (after restatement for the two-for-one stock dividend
         distribution) were as follows:
        




                                       69
<PAGE>   70
<TABLE>
<CAPTION>
                                                                                          December 31,                        
                                                                            ---------------------------------------
                                                                                1995                     1994      
                                                                            -------------             ------------
         <S>                                                                  <C>                     <C>           

         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
                                                                             =============            =============
         Fair value of unallocated ESOP shares   . . . . . . . .              $348,127,132             $276,817,401

</TABLE>
  (c)    POSTRETIREMENT 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-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:


<TABLE>
<CAPTION>
                                                                                        Year Ended December 31,      
                                                                                 -----------------------------------
                                                                                    1995           1994          1993   
                                                                                 ----------     ----------    ----------
                                                                                        (Thousands of Dollars)
                                                                                                          
  <S>                                                                             <C>            <C>            <C>
         Service cost - benefits earned during the period  . . . . . . .          $   9,093      $   9,131      $   9,453
         Interest cost on accumulated benefit obligation   . . . . . . .             11,143         10,265         18,354
         Actual return on plan assets  . . . . . . . . . . . . . . . . .                 --             --             --
         Net amortization and deferrals  . . . . . . . . . . . . . . . .              6,061          7,868          9,773
                                                                                  ---------      ---------      ---------
         Net postretirement benefit cost   . . . . . . . . . . . . . . .          $  26,297      $  27,264      $  37,580
                                                                                  =========      =========      =========
</TABLE>




                                       70
<PAGE>   71
         The funded status of the Company's postretirement benefit costs was as
         follows:

<TABLE>
<CAPTION>
                                                                                         December 31,         
                                                                               -------------------------------
                                                                                   1995               1994    
                                                                               -------------      ------------
                                                                                    (Thousands of Dollars)
                                                                                                             
<S>                                                                              <C>               <C>
  Accumulated benefit obligation:
       Retirees . . . . . . . . . . . . . . . . . . . . . . . . . . . . .        $ (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   . . . . . . . . . . . . . . . . .        $  (40,028)       $  (42,434)
                                                                                 ==========        ========== 

</TABLE>
         The assumed health care cost trend rates used in measuring the
         accumulated postretirement benefit obligation in 1995 are as follows:

<TABLE>
                 <S>                                       <C>
                 Medical - under 65                        8.1%
                 Medical - 65 and over                     9.0%
                 Dental                                    8.0%
</TABLE>

  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.

  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 1
  percent increase on the total of the service and interest costs would be an
  increase of approximately 11 percent.

(d)      POSTEMPLOYMENT 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 accounting and reporting.  SFAS No. 109
         requires that regulated enterprises recognize such adjustments as
         regulatory assets or liabilities if it is probable that such amounts
         will be recovered from or returned to customers in future rates.





                                       71
<PAGE>   72
In 1993, the corporate tax rate applicable to the Company and HL&P increased
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), were recognized as a component of income tax expense
in 1993.  The effect on the Company's deferred taxes, primarily attributable to
discontinued operations, 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: 

<TABLE>
<CAPTION>
                                                                           Year Ended December 31,       
                                                                  -------------------------------------------
                                                                     1995            1994            1993    
                                                                  -----------     -----------    ------------
                                                                               (Thousands of Dollars)
<S>                                                                <C>             <C>             <C>
  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       $ 230,424       $ 228,863
                                                                   =========       =========       =========
</TABLE>

  The Company's effective income tax rates are lower than statutory corporate
rates for each year as follows:

<TABLE>
<CAPTION>
                                                                             Year Ended December 31,         
                                                                 ----------------------------------------------
                                                                    1995              1994            1993     
                                                                 -----------      ------------    -------------
                                                                           (Thousands of Dollars)
<S>                                                                <C>              <C>              <C>
  Income from continuing operations before
      income taxes and cumulative effect of
      change in accounting  . . . . . . . . . . . . . . . .        $ 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)
                                                                   ---------        ---------        ---------
        Total   . . . . . . . . . . . . . . . . . . . . . .           19,864           10,373           17,490
                                                                   ---------        ---------        ---------
  Income taxes before cumulative effect of
      change in accounting  . . . . . . . . . . . . . . . .        $ 199,555        $ 230,424        $ 228,863
                                                                   =========        =========        =========

  Effective rate  . . . . . . . . . . . . . . . . . . . . .            31.8%            33.5%            32.5%
</TABLE>

                                     72
<PAGE>   73
         Following are the Company's tax effects of temporary differences
         attributable to continuing operations resulting in deferred tax assets
         and liabilities:
<TABLE>
<CAPTION>
                                                                                                                          
                                                                                              December 31,          
                                                                                  ---------------------------------
                                                                                       1995                1994    
                                                                                  --------------      -------------
                                                                                         (Thousands of Dollars)
  <S>                                                                               <C>                <C>
  Deferred Tax Assets:
      Alternative minimum tax   . . . . . . . . . . . . . . . . . . . . . . .       $   46,516         $   66,707
      IRS 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
      Other     . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .          150,275            121,235
                                                                                    ----------         ----------
           Total deferred tax liabilities . . . . . . . . . . . . . . . . . .        2,308,043          2,012,139
                                                                                    ----------         ----------

                 Accumulated deferred income taxes - net  . . . . . . . . . .       $2,067,246         $1,763,230
                                                                                    ==========         ==========
</TABLE>

  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 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 quantity requirements and durations.
         However, if these requirements could not be met, various alternatives
         are available to mitigate the cost associated with the contracts'
         commitments.

  (b)    FUEL AND PURCHASED POWER.   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 $57 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
<PAGE>   74
  (c)    OTHER.  HL&P's service area is heavily dependent on oil, gas, refined
         products, petrochemicals and related businesses.  Significant adverse
         events affecting these industries would negatively affect the
         revenues of the Company and HL&P.  For information 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 business, some of which involve substantial amounts.

(12)     ESTIMATED FAIR VALUE OF FINANCIAL INSTRUMENTS

         The carrying amount and estimated fair value of the Company's
financial instruments are as follows:

<TABLE>
<CAPTION>
                                                                               December 31,                             
                                                        ----------------------------------------------------------
                                                                    1995                          1994              
                                                        ----------------------------      -------------------------
                                                          Carrying         Fair           Carrying        Fair
                                                            Amount         Value            Amount        Value    
                                                        ------------   -------------     -----------  -------------
                                                                        (Thousands of Dollars)      
<S>                                                     <C>             <C>             <C>            <C>
  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

  Financial liabilities:
      Short-term notes payable  . . . . . . . . . .            6,300           6,300         423,291        423,291
      Cumulative preferred stock of
        subsidiary (subject to mandatory
        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
</TABLE>

  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 earnings 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
<PAGE>   75
As consideration for the sale of KBLCOM, the Company received 1 million shares
of Time Warner common stock and 11 million shares of non-publicly traded
convertible preferred stock.  Time Warner 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
external debt and other liabilities.  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 Warner 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:

<TABLE>
<CAPTION>
                                                                                 Year Ended December 31,          
                                                                    ----------------------------------------------
                                                                        1995            1994              1993    
                                                                    ------------    ------------      ------------
                                                                              (Thousands of Dollars)
  <S>                                                                <C>                <C>             <C>
  Revenues    . . . . . . . . . . . . . . . . . . . . . . . . .       $ 143,925         $255,772         $244,067
  Operating expenses (a)  . . . . . . . . . . . . . . . . . . .          86,938          156,084          148,325
                                                                      ---------         --------         --------
  Gross operating margin (a)  . . . . . . . . . . . . . . . . .          56,987           99,688           95,742
  Depreciation, amortization, interest and other  . . . . . . .          81,409          128,023          117,982
  Income taxes (benefit)  . . . . . . . . . . . . . . . . . . .          (4,997)         (11,811)           2,255
  Deferred loss (b)   . . . . . . . . . . . . . . . . . . . . .          19,425                                  
                                                                      ---------         --------         --------
  Loss from discontinued operations (c)   . . . . . . . . . . .       $       0         $(16,524)        $(24,495)
                                                                      =========         ========         ========
</TABLE>

  (a)    Exclusive of depreciation and amortization.

  (b)    The net loss for discontinued operations of KBLCOM through the date of
         sale (July 6, 1995) 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.

  (c)    Loss from discontinued operations of KBLCOM excludes the effects of
         corporate overhead charges and includes interest expense relating to
         the amount of intercompany debt that Time Warner purchased from the
         Company.


                                     75
<PAGE>   76
         Net assets of discontinued operations were as follows:

<TABLE>
<CAPTION>
                                                                    December 31, 1994                        
                                                                    -----------------                        
                                                                  (Thousands of Dollars)                       
<S>                                                                   <C>                   
         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                        
            Other assets  . . . . . . . . . . . . . . . . . . .           43,625                        
                                                                      ----------                        
               Total assets . . . . . . . . . . . . . . . . . .        1,510,052                        
                                                                                                        
         Less:                                                                                          
            Cable television debt . . . . . . . . . . . . . . .         (504,580)                        
            Accumulated deferred income taxes . . . . . . . . .         (316,241)                        
            Other liabilities . . . . . . . . . . . . . . . . .          (70,249)                        
                                                                      ----------                        
               Net assets . . . . . . . . . . . . . . . . . . .       $  618,982                         
                                                                      ==========                         
</TABLE>

(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 settlement.  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 retained 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
  patterns.

<TABLE>
<CAPTION>
                                                                                  Year Ended December 31, 1994            
                                                                    ----------------------------------------------------------
                                                                       First           Second           Third          Fourth
                                                                       Quarter        Quarter          Quarter        Quarter 
                                                                    ----------------------------------------------------------
                                                                          (Thousands of Dollars, except per share amounts)
<S>                                                                   <C>            <C>             <C>             <C>
               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
</TABLE>


                                       76
<PAGE>   77
<TABLE>
<CAPTION>
                                                                                                                          
                                                                      Year Ended December 31, 1995        
                                                       ---------------------------------------------------------
                                                        First          Second            Third         Fourth        
                                                        Quarter        Quarter          Quarter        Quarter        
                                                       ---------------------------------------------------------
                                                           (Thousands of Dollars, except per share amounts)
<S>                                                    <C>             <C>            <C>              <C>
Revenues     . . . . . . . . . . . . . . . . . . . .   $755,238        $989,843       $1,184,938       $800,154
Operating income   . . . . . . . . . . . . . . . . .    115,151         283,789          421,903         84,090
Income from continuing operations  . . . . . . . . .     23,849         133,260          235,861          4,430
Gain (loss) on sale of cable television                                                                        
    subsidiary . . . . . . . . . . . . . . . . . . .     90,607                          618,088           (571)
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 
</TABLE>                                                                       

     (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).

     (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
                earnings by $.03 per share.



                                     77
<PAGE>   78
                        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 herein 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 Financial Instruments and (14) Railroad Settlement
Payments.

(1)      SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

  (g)    EARNINGS PER COMMON SHARE.  All issued and outstanding Class A voting
         common stock of HL&P is held by the Company and all issued 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 borrowing rates for commercial paper for the years ended
         December 31, 1995 and 1994 were 6.21% and 3.71%, respectively.  HL&P
         had no commercial paper outstanding at December 31, 1995 and 1994.
         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:

<TABLE>
<CAPTION>
                                                                             Year Ended December 31,      
                                                                    ---------------------------------------
                                                                       1995            1994          1993   
                                                                    -----------    -----------   -----------
                                                                               (Thousands of Dollars)
  <S>                                                                 <C>            <C>           <C>
  Service cost - benefits earned during the period  . . . . . .       $ 22,264       $  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   . . . . . . . . . . . . .          5,645                             
                                                                      --------       ---------     --------- 
         Total pension cost . . . . . . . . . . . . . . . . . .       $ 31,726       $  21,124      $ 35,239
                                                                      ========       =========      ========
</TABLE>


                                       78
<PAGE>   79
  The funded status of HL&P's retirement plan was as follows:

<TABLE>
<CAPTION>
                                                                                   December 31,          
                                                                          ----------------------------------
                                                                              1995                  1994    
                                                                          ------------          ------------
                                                                                 (Thousands of Dollars)
<S>                                                                         <C>                   <C>
  Actuarial present value of:
       Vested benefit obligation  . . . . . . . . . . . . . . .             $ 493,006             $ 429,279
                                                                            =========             =========

       Accumulated benefit obligation . . . . . . . . . . . . .             $ 528,467             $ 460,760
                                                                            =========             =========

  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  . . . . . . . . . . . . . . . . . . . .             $ (53,673)            $ (58,379)
                                                                            =========             ========= 
</TABLE>

  (c)    POSTRETIREMENT BENEFITS.  The net postretirement benefit cost for HL&P
         includes the following components:
<TABLE>
<CAPTION>
                                                                             Year Ended December 31,  
                                                                     ---------------------------------------
                                                                        1995          1994          1993    
                                                                     ----------    ----------    -----------
                                                                               (Thousands of Dollars)
  <S>                                                                 <C>           <C>            <C>
  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   . . . . . . . . . . . . . .       $ 25,466     $  26,607      $  37,089
                                                                      ========     =========      =========
</TABLE>

  The funded status of HL&P's postretirement benefit costs was as follows:

<TABLE>
<CAPTION>
                                                                                          December 31,        
                                                                               -------------------------------
                                                                                    1995              1994    
                                                                               --------------    -------------
                                                                                       (Thousands of Dollars)
<S>                                                                               <C>               <C>
  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 . . . . . . . . . . . . . . . . . . .         $  (38,546)       $ (41,593)
                                                                                  ==========        ========= 
</TABLE>

(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
<PAGE>   80
  $8.0 million, were recognized as a component of income tax expense in 1993.
  The effect on HL&P's deferred taxes as a result of the change in the new law
  was $4.5 million in 1993.

  HL&P's current and deferred components of income tax expense are as follows:

<TABLE>
<CAPTION>
                                                                                  Year Ended December 31,      
                                                                        -------------------------------------------
                                                                            1995           1994            1993    
                                                                        ------------   ------------    ------------
                                                                                 (Thousands of Dollars)
  <S>                                                                      <C>            <C>             <C>
  Current   . . . . . . . . . . . . . . . . . . . . . . . . . . . .        $ 188,104      $ 184,669       $ 115,745
  Deferred  . . . . . . . . . . . . . . . . . . . . . . . . . . . .           57,703         70,324         123,719
                                                                           ---------      ---------       ---------
  Federal income tax expense  . . . . . . . . . . . . . . . . . . .          245,807        254,993         239,464
  Federal income taxes charged to other income  . . . . . . . . . .             (851)          (836)         (2,993)
                                                                           ---------      ---------       --------- 
  Income taxes before cumulative effect of change
         in accounting  . . . . . . . . . . . . . . . . . . . . . .        $ 244,956      $ 254,157       $ 236,471
                                                                           =========      =========       =========
</TABLE>

  HL&P's effective income tax rates are lower than statutory corporate rates
for each year as follows:
<TABLE>
<CAPTION>
                                                                                 Year Ended December 31,      
                                                                        -------------------------------------------
                                                                            1995            1994           1993    
                                                                        ------------   -------------   ------------
                                                                                 (Thousands of Dollars)
  <S>                                                                      <C>           <C>              <C>
  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:
    AFUDC - other included in income  . . . . . . . . . . . . . . . .          2,716          1,440           1,229
    Amortization of investment tax credit   . . . . . . . . . . . . .         19,427         19,416          19,797
    Difference between book and tax depreciation for
      which deferred taxes have not been normalized   . . . . . . . .        (15,211)       (15,455)        (12,976)
    Excess deferred taxes   . . . . . . . . . . . . . . . . . . . . .          4,384          3,537           9,625
    Other - net   . . . . . . . . . . . . . . . . . . . . . . . . . .         (2,211)          (903)         (1,903)
                                                                           ---------      ---------       ---------
       Total  . . . . . . . . . . . . . . . . . . . . . . . . . . . .          9,105          8,035          15,772
                                                                           ---------      ---------       ---------
  Income taxes before cumulative effect of change
       in accounting  . . . . . . . . . . . . . . . . . . . . . . . .      $ 244,956      $ 254,157       $ 236,471
                                                                           =========      =========       =========
  Effective rate  . . . . . . . . . . . . . . . . . . . . . . . . . .          33.7%          33.9%           32.8%
</TABLE>


                                     80
<PAGE>   81
Following are HL&P's tax effects of temporary differences resulting in
deferred tax assets and liabilities:

<TABLE>
<CAPTION>
                                                                                             December 31,          
                                                                                   --------------------------------
                                                                                       1995               1994     
                                                                                   -------------      -------------
                                                                                         (Thousands of Dollars)
  <S>                                                                                <C>                <C>
  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            132,183
                                                                                     -----------        -----------
  Deferred Tax Liabilities:
        Depreciation  . . . . . . . . . . . . . . . . . . . . . . . . . . . .          1,391,277          1,335,265
        Regulatory assets - net . . . . . . . . . . . . . . . . . . . . . . .            228,587            235,463
        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
                                                                                      ==========         ==========
</TABLE>

(12)     ESTIMATED FAIR VALUE OF FINANCIAL INSTRUMENTS

  The carrying amount and estimated fair value of HL&P's cash and short-term
  investments was $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 million in 1994.
  See Note 1(j).


                                       81
<PAGE>   82

  (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
  patterns.

<TABLE>
<CAPTION>
                                                                                              Income After
                                                                              Operating         Preferred
             Quarter Ended                                 Revenues             Income          Dividends
           -----------------                               ----------------------------------------------
                                                                      (Thousands of Dollars)
  1994
  ----
  <S>                                                    <C>                  <C>               <C>    
  March 31  . . . . . . . . . . . . . . . . . . .         $  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  . . . . . . . . . . . . . . . . . . .         $  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
</TABLE>

(16)     PRINCIPAL AFFILIATE TRANSACTIONS

<TABLE>
<CAPTION>
                                                                                Year Ended December 31,        
   Affiliated                                                         ---------------------------------------------
    Company                              Description                     1995             1994             1993    
   ----------                -----------------------------------      -----------     ------------     ------------
                                                                                 (Thousands of Dollars)
  <S>                        <C>                                         <C>             <C>              <C>
  Houston                    Dividends                                   $ 454,000       $ 328,996        $ 342,982
  Industries                 Service Fees (a)                               26,582          26,913           21,864
                             Money Fund Income (b)                          10,837           6,025            2,748
</TABLE>
  (a)  Included in Operating Expenses.
  (b)  Included in Other Income (Expense).



                                                            82
<PAGE>   83
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 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 believe that our audits provide a reasonable basis
for our opinion.

         In our opinion, such consolidated financial statements present fairly,
in all material respects, the financial position of 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 opinion, such financial statement schedule, when considered in
relation to the basic consolidated financial statements taken as a whole,
presents fairly in all material respects the information set forth therein.

         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)



                                       83
<PAGE>   84
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
<PAGE>   85
ITEM 9.  CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.


None.


                                     85
<PAGE>   86
                                    PART III

ITEM 10.         DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY AND HL&P.

         (a)     The Company

         The information called for by Item 10, to the extent not set forth
under Item 1 "Business-Executive Officers of The Company", is or will be set
forth in the definitive proxy statement relating to the Company's 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 incorporated herein by reference.

         Each member of the board of directors of HL&P currently is also a
member of the board of 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.

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  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
<PAGE>   87
Upton, New York, having previously served 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 Bancshares, 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
<PAGE>   88
         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.

(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 order by the Office of
         Thrift 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 Southern District of Texas.  The federal government 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 trial in 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 shareholders pursuant to the Commission's
Regulation 14A.  Such definitive proxy statement relates to a meeting of
shareholders involving the election of directors and the portions
thereof called for by Item 11 (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
<PAGE>   89
         (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
<TABLE>
<CAPTION>
                                                                                                        
                                                                            Long-Term                   
                                                                           Compensation                 
                                                                       -----------------------            
                                                                         Awards       Payouts 
                                                Annual Compensation     ----------    ---------
                                              -----------------------   Securities                        
          Name and                                        Other Annual  Underlying       LTIP         All Other
     Principal Position     Year    Salary(1)  Bonus(1)  Compensation  Options(#)(2)   Payouts(3)  Compensation(4)   
--------------------------  -----  ----------  --------  ------------- -------------   ----------  ---------------
<S>                         <C>    <C>         <C>       <C>              <C>       <C>             <C>
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
   Chief Executive Officer  1993    829,500     386,775           0       25,930      762,962         647,491
   of the Company and
   HL&P

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
   HL&P and Senior Vice
   President of the Company

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
   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        2,010       82,025          18,254
   Manager - Energy
   Delivery and Customer
   Services of HL&P 
</TABLE>

--------------------

(1)   The amounts shown include salary and bonus earned as well as earned 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).

(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
<PAGE>   90
      certain performance goals for the 1992-1994 performance cycle, plus
      dividend equivalent accruals during the performance period.

(4)   The amounts shown include (i) Company contributions 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 federal long-term rate
      provided under Section 1274(d) of the Internal Revenue Code, as follows:
      Mr. Jordan 1993 - $590,339; 1994 - $660,117; and 1995 - $694,713; Mr.
      Letbetter 1993 - $25,890; 1994 - $25,526; 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.

(5)   Mr. Cottle commenced employment with HL&P in April 1993.



                                     90
<PAGE>   91
STOCK OPTION GRANTS.  The following table contains information concerning
grants during 1995 of stock options under the Company's long-term incentive
compensation plan to the Named Officers.  The information has been adjusted to
reflect the Company's 1995 Stock Split.

                             OPTION GRANTS IN 1995

<TABLE>
<CAPTION>
                                                                                                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)  
----                              --------------  --------------  ------------  ----------- -------------
<S>                                    <C>            <C>            <C>         <C>            <C>
Don D. Jordan . . . . . . . .          36,316         27.2%          $17.75      01/02/05       $69,000
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
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
</TABLE>

-------------------                                                            

(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 or indirect beneficial owner of 30
      percent or more of the Company's outstanding voting securities; (ii) the
      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 corporation's outstanding voting securities 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 Stock for the one-year period
      prior to grant date); risk-free interest rate of 7.78 percent (interest
      rate on a U.S. Treasury security with a maturity date corresponding to
      that of the option term); option 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
<PAGE>   92
STOCK OPTION VALUES.  The following table sets forth information on the
unexercised options to 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

<TABLE>
<CAPTION>
                                             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        
----                                 ----------------------------------  -----------------------------

<S>                                        <C>                              <C>        
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
</TABLE>

-------------------                                              

(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 Officers, information concerning 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 percent on
subsidiary or business unit performance.  The Company consolidated goal is
achieving a certain level of total shareholder return in relation to a group of
other companies.  The subsidiary or business unit goals are achieving certain
cash flow performance 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 and Kelly is based on the success of HI Energy, in closing
certain 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 performance shares will occur without regard 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
<PAGE>   93
                    LONG-TERM INCENTIVE PLAN AWARDS IN 1995

<TABLE>
<CAPTION>
                                                            ESTIMATED FUTURE PAYOUTS UNDER
                                                 Performance            NON-STOCK PRICE-BASED PLANS(1)   
                                                  or Other            ----------------------------------
                                                Period Until      Threshold        Target          Maximum
                                   Number       Maturation or      Number          Number          Number
Name                              of Shares        Payout         of Shares       of Shares      of Shares
----                              ---------   ----------------    ---------       ---------      ---------
<S>                                <C>            <C>              <C>              <C>             <C>
Don D. Jordan . . . . . . . .      32,812         12/31/97         16,406           32,812          49,218
R. Steve Letbetter  . . . . .      10,160         12/31/97          5,080           10,160          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
</TABLE>

------------------

(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

<TABLE>
<CAPTION>
     
      Final Average  
        Annual                    Estimated Annual Pension Based on Years of Service  (1)
     Compensation               ------------------------------------------------------------
       At Age 65         15 Years        20 Years        25 Years          30 Years        35 or More Years
      -----------       ----------      -----------      ---------         ---------       ----------------
     <S>                <C>             <C>              <C>               <C>             <C>
     $    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
          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          385,669          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
        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
</TABLE>

--------------------                                                 

(1)      The qualified pension plan limits compensation in accordance with
         Section 401(a)(17) of the Internal Revenue Code and also limits
         benefits in accordance with Section 415 of the Internal 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
<PAGE>   94
         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.

         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 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
<PAGE>   95
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 provisions of the
Designated Plans or when required by the Company's benefits committee.  The
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 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 federal law.

         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 terminated by the Company
or any subsidiary 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 control.  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
($235,000), 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
<PAGE>   96
Mr. McClanahan would be compensated for the difference between the cable
television subsidiary benefits and the Company benefits he would have received
if he had been an employee of the Company during his period of employment with
the subsidiary.  Such amounts will be paid to Mr. McClanahan at such time
benefits are due to him under the terms of the Company's pension and
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 all 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-Term Corporate Bond Index plus two percentage points.

         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 the 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 election of
directors and the portions thereof called for by Item 12 are incorporated
herein by reference pursuant to Instruction G to Form 10-K.



                                     96
<PAGE>   97
      (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 HL&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.

<TABLE>
<CAPTION>
        Name                                                  Shares of Common Stock Beneficially Owned
---------------------                                         -----------------------------------------
<S>                                                                           <C>      
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)
Howard W. Horne . . . . . . . . . . . . . . . . . . . .                        12,871  (5)
Don D. Jordan . . . . . . . . . . . . . . . . . . . . .                       222,969  (2)(3)(6)
Hugh Rice Kelly . . . . . . . . . . . . . . . . . . . .                        61,975  (2)(3)(5)
R. Steve Letbetter  . . . . . . . . . . . . . . . . . .                        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)
</TABLE>

-------------------

(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
<PAGE>   98
(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.

(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.    CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.

      (a)   The Company

      The information called for by Item 13 is or will be set forth in the
definitive proxy statement relating to the Company's 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 13 are incorporated
herein by reference pursuant to Instruction 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
<PAGE>   99
                                    PART IV

ITEM 14.  EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.

<TABLE>
<CAPTION>
(a)(1)  FINANCIAL STATEMENTS.                                                                              PAGE
<S>                                                                                                        <C>
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                                              
    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
HL&P Statements of Capitalization at December 31, 1995 and 1994 . . . . . . . . . . . . . . . . . .         54
HL&P Statements of Cash Flows for the Three Years                                                      
    Ended December 31, 1995   . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .         56
Notes to Consolidated Financial Statements  . . . . . . . . . . . . . . . . . . . . . . . . . . . .         57
Notes to HL&P's Financial Statements  . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .         78
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:
VIII -- Reserves  . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .        100  

HL&P:
VIII -- Reserves  . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .        101 

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:

I, II, III, IV, V, VI, VII, IX,  X, XI, XII and XIII.

(a)(3)   EXHIBITS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .        104  
</TABLE>

See Index of Exhibits on page 104, which also includes the management contracts
or compensatory plans or arrangements required to be filed as exhibits to this
Form 10-K by Item 601(10)(iii) of Regulation S-K.

(b)  REPORTS ON FORM 8-K.  None



                                     99
<PAGE>   100
                HOUSTON INDUSTRIES INCORPORATED AND SUBSIDIARIES
                            SCHEDULE VIII - RESERVES

                  FOR THE THREE YEARS ENDED DECEMBER 31, 1995
                             (THOUSANDS OF DOLLARS)


<TABLE>
<CAPTION>
===================================================================================================================
            Col. A                              Col. B            Col. C                Col. D            Col. E  
-------------------------------------------------------------------------------------------------------------------

                                                                    Additions         
                                                             ------------------------
                                             Balance at       Charged      Charged       Deductions      Balance at
                                             Beginning          to         to Other        from             End
Description                                  of Period        Income       Accounts       Reserves        of Period
                                                                                                                
-------------------------------------------------------------------------------------------------------------------
<S>                                           <C>           <C>             <C>            <C>             <C>
Year Ended December 31, 1995:
   Accumulated provisions deducted
      from related assets on
      balance sheet:
        Uncollectible advances . . . . . .                   $   27,412                                    $    27,412
        Net assets of discontinued cable
          televisions operations . . . . .    $   282,958                                  $   282,958
   Reserves other than those
      deducted from assets on
      balance sheet:
        Property insurance . . . . . . . .         (3,468)        2,187                            836          (2,117)
        Injuries and damages . . . . . . .          2,241         2,327                          3,045           1,523

Year Ended December 31, 1994:
   Accumulated provisions deducted from
      related assets on balance sheet:
        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

Year Ended December 31, 1993:
   Accumulated provisions deducted
      from related assets on balance
      sheet:
        Uncollectible accounts  . . . . .     $     7,194                                  $     7,194
        Net assets of discontinued
        cable television operations . . .         205,739    $   43,004    $     91              5,434     $   243,400
   Reserves other than those
      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
</TABLE>

-----------------

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 reflect 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 1993, Houston
      Industries Finance sold the receivables back to the respective
      subsidiaries and ceased operations.  HL&P is now selling its accounts
      receivable and most of its accrued unbilled revenues to a third party.



                                     100
<PAGE>   101
                        HOUSTON LIGHTING & POWER COMPANY
                            SCHEDULE VIII - RESERVES

                  FOR THE THREE YEARS ENDED DECEMBER 31, 1995
                             (THOUSANDS OF DOLLARS)

<TABLE>
<CAPTION>
=====================================================================================================================
            Col. A                              Col. B            Col. C                Col. D        Col. E  
---------------------------------------------------------------------------------------------------------------------

                                                                    Additions         
                                                             ------------------------
                                              Balance at       Charged      Charged       Deductions       Balance at
                                              Beginning          to         to Other         from             End
          Description                         of Period        Income       Accounts       Reserves        of Period
                                                                                                                
---------------------------------------------------------------------------------------------------------------------

<S>                                         <C>             <C>             <C>           <C>             <C>
Year Ended December 31, 1995:
   Reserves other than those
      deducted from assets on
      balance sheet:
        Property insurance  . . . . . . .   $    (3,468)    $     2,187                    $     836      $    (2,117)
        Injuries and damages  . . . . . .         2,241           2,327                        3,045            1,523

Year Ended December 31, 1994:
   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

Year Ended December 31, 1993:
   Reserves other than those
      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

</TABLE>

_______________

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.



                                     101
<PAGE>   102
                                   SIGNATURES

         PURSUANT TO THE REQUIREMENTS OF SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934, THE REGISTRANT HAS DULY CAUSED THIS REPORT TO BE SIGNED
ON ITS BEHALF BY THE UNDERSIGNED, THEREUNTO DULY AUTHORIZED, IN THE CITY OF
HOUSTON AND STATE OF TEXAS, ON THE 28TH DAY OF MARCH, 1996.

                                HOUSTON INDUSTRIES INCORPORATED (Registrant)


                                    By                DON D. JORDAN 
                                        ----------------------------------------
                                                     (Don D. Jordan,
                                           Chairman and Chief Executive Officer)

         PURSUANT TO THE REQUIREMENTS OF THE SECURITIES EXCHANGE ACT OF 1934,
THIS REPORT HAS BEEN SIGNED BELOW BY THE FOLLOWING PERSONS ON BEHALF OF THE
REGISTRANT AND IN THE CAPACITIES INDICATED ON MARCH 28, 1996.

<TABLE>
<CAPTION>
                  SIGNATURE                                       TITLE                             
                  ---------                                       -----                             
<S>                                                   <C>                                           


                DON D. JORDAN                         Chairman and Chief Executive
---------------------------------------------             Officer and Director
               (Don D. Jordan)                        (Principal Executive Officer)



              STEPHEN W. NAEVE                            Senior Vice President
---------------------------------------------          and Chief Financial Officer
             (Stephen W. Naeve)                       (Principal Financial Officer)


            MARY P. RICCIARDELLO                     Vice President and Comptroller
---------------------------------------------        (Principal Accounting Officer)
           (Mary P. Ricciardello)


               MILTON CARROLL

---------------------------------------------                 Director
              (Milton Carroll)


                JOHN T. CATER
---------------------------------------------                 Director
               (John T. Cater)


            ROBERT J. CRUIKSHANK
---------------------------------------------                 Director
           (Robert J. Cruikshank)


               LINNET F. DEILY
 ---------------------------------------------                Director
              (Linnet F. Deily)


              JOSEPH M. HENDRIE
---------------------------------------------                 Director
             (Joseph M. Hendrie)


                LEE W. HOGAN
---------------------------------------------                 Director
               (Lee W. Hogan)


               HOWARD W. HORNE          
---------------------------------------------                 Director
              (Howard W. Horne)


               R. S. LETBETTER
---------------------------------------------                 Director
              (R. S. Letbetter)


              ALEXANDER SCHILT
---------------------------------------------                 Director
             (Alexander Schilt)


          KENNETH L. SCHNITZER, SR.
---------------------------------------------                 Director
         (Kenneth L. Schnitzer, Sr.)


               JACK T. TROTTER
---------------------------------------------                 Director
              (Jack T. Trotter)


                BERTRAM WOLFE
--------------------------------------------                  Director
               (Bertram Wolfe)
</TABLE>

                                     102
<PAGE>   103

                                   SIGNATURES

         PURSUANT TO THE REQUIREMENTS OF SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934, THE REGISTRANT HAS DULY CAUSED THIS REPORT TO BE SIGNED
ON ITS BEHALF BY THE UNDERSIGNED, THEREUNTO DULY AUTHORIZED, IN THE CITY OF
HOUSTON AND STATE OF TEXAS, ON THE 28TH DAY OF MARCH, 1996.  THE SIGNATURE OF
HOUSTON LIGHTING & POWER COMPANY 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 Chief Executive Officer)
                                                                    

         PURSUANT TO THE REQUIREMENTS OF THE SECURITIES EXCHANGE ACT OF 1934,
THIS REPORT HAS BEEN SIGNED BELOW BY THE FOLLOWING PERSONS ON BEHALF OF THE
REGISTRANT AND IN THE CAPACITIES INDICATED ON MARCH 28, 1996.  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.

<TABLE>
<CAPTION>
                  SIGNATURE                                       TITLE                             
                  ---------                                       -----                           
<S>                                                <C>                                            
                                                    Chairman and Chief Executive
                DON D. JORDAN                           Officer and Director
-------------------------------------------         (Principal Executive Officer and
               (Don D. Jordan)                        Principal Financial Officer)  
                                                                                    


                                                    Vice President and Comptroller
            MARY P. RICCIARDELLO                    (Principal Accounting Officer)
-------------------------------------------
           (Mary P. Ricciardello)


               MILTON CARROLL
-------------------------------------------                     Director
              (Milton Carroll)


                JOHN T. CATER
-------------------------------------------                     Director
               (John T. Cater)


            ROBERT J. CRUIKSHANK
-------------------------------------------                     Director
           (Robert J. Cruikshank)


               LINNET F. DEILY
-------------------------------------------                     Director
              (Linnet F. Deily)


              JOSEPH M. HENDRIE
-------------------------------------------                     Director
             (Joseph M. Hendrie)


                LEE W. HOGAN
-------------------------------------------                     Director
               (Lee W. Hogan)


               HOWARD W. HORNE
-------------------------------------------                     Director
              (Howard W. Horne)


               R. S. LETBETTER
-------------------------------------------                     Director
              (R. S. Letbetter)


              ALEXANDER SCHILT
-------------------------------------------                     Director
             (Alexander Schilt)


          KENNETH L. SCHNITZER, SR.
-------------------------------------------                     Director
         (Kenneth L. Schnitzer, Sr.)


               JACK T. TROTTER
-------------------------------------------                     Director
              (Jack T. Trotter)


                BERTRAM WOLFE
-------------------------------------------                     Director
               (Bertram Wolfe)
</TABLE>

                                     103

<PAGE>   104
                        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

<TABLE>
<CAPTION>
                                                   Report or                   SEC File or
 Exhibit                                          Registration                 Registration         Exhibit
 Number               Description                   Statement                     Number            Reference
---------        ---------------------          ------------------             ------------         ---------
<S>            <C>                              <C>                            <C>                    <C>
 2(a)          Articles of Merger of            Form 10-Q for the              1-7629                 2
               Houston Industries               quarter ended
               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 Deed of             Form S-7 of HL&P               2-59748                2(b)
               Trust dated November             filed on August
               1, 1944 between HL&P             25, 1977
               and South Texas
               Commercial National
               Bank of Houston
               (Texas Commerce
               Bank National Associ-
               ation, as successor
               trustee), as Trustee, as
               amended and supple-
               mented by 20
               Supplemental Inden-
               tures thereto

</TABLE>

<PAGE>   105
<TABLE>
<S>            <C>                              <C>                            <C>                  <C>
4(a)(2)        Twenty-First through             HL&P's Form 10-K               1-3187               4(a)(2)
               Fiftieth Supplemental            for the year ended
               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)
               mental Indenture dated           for the quarter
               March 25, 1991 to                ended June 30,
               HL&P Mortgage and                1991
               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

4(a)(5)        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
               Deed of Trust

4(a)(6)        Fifty-Eighth and Fifty-          HL&P's Form 10-Q               1-3187               4
               Ninth Supplemental               for the quarter
               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
</TABLE>

<PAGE>   106
<TABLE>
<S>            <C>                              <C>                            <C>           <C>
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

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

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
               Company, Time Warner
               and TW KBLCOM
               Acquisition Corp.

</TABLE>
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.


<PAGE>   107
<TABLE>
<S>            <C>                              <C>                            <C>                  <C>
*10(a)         Executive Benefit Plan           Form 10-Q for the              1-7629               10(a)(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)

*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)
</TABLE>

<PAGE>   108
<TABLE>
<S>            <C>                              <C>                            <C>                  <C>
*10(c)(5)      Fourth Amendment to              Form 10-K for                  1-7629               10(c)(5)
               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)                 year ended
               (effective as of                 December 31, 1994
               September 7, 1994)

*10(d)         Executive Incentive              Form 10-Q 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)

</TABLE>

<PAGE>   109
<TABLE>
<S>            <C>                              <C>                            <C>                  <C>
*10(f)(2)      First Amendment to               Form 10-K for the              1-7629               10(f)(2)
               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, 1988)

*10(g)(3)      Benefit Restoration              Form 10-K for                  1-7629               10(g)(3)
               Plan of the Company,             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)
               Plan of the Company              quarter ended
               (effective as of                 March 31, 1987
               September 1, 1985)
</TABLE>

<PAGE>   110

<TABLE>
<S>            <C>                              <C>                           <C>                <C>
*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)                 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)

</TABLE>

<PAGE>   111
<TABLE>
<S>            <C>                              <C>                            <C>                  <C>
*10(i)(6)      Fifth Amendment to               Form 10-Q for the              1-7629               10(c)
               Exhibit 10(i)(1)                 quarter ended
                                                June 30, 1995

*10(j)(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)

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

*10(j)(3)      Second Amendment to              Form 10-Q for the              1-7629               10(g)
               Exhibit 10(j)(1)                 quarter ended
               (effective as of                 March 31, 1992
               March 30, 1992)

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

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

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

*10(j)(7)      Sixth Amendment to               Form 10-Q for                  1-7629               10(b)
               Exhibit 10(j)(1)                 the quarter ended
                                                June 30, 1995

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

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

</TABLE>

<PAGE>   112
<TABLE>
<S>            <C>                              <C>                            <C>                  <C>
*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(l)         Form of stock option             Form 10-Q for the              1-7629               10(h)
               agreement for nonqual-           quarter ended
               ified stock options              March 31, 1992
               granted under the
               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

</TABLE>

<PAGE>   113
<TABLE>
<S>            <C>                              <C>                            <C>               <C>
*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
               Agreement as to KBLCOM
               Incorporated Effective
               as of June 30, 1995

+10(s)(4)      Houston Industries
               Incorporated Savings
               Trust between the Company
               and The Northern Trust
               Company, as Trustee.  (As
               Amended and Restated
               Effective July 1, 1995)

</TABLE>

<PAGE>   114
<TABLE>
<S>            <C>                              <C>                            <C>               <C>
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,
               1995.


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)
               ment between the                 year ended
               Company and the ESOP             December 31, 1991
               Trustee, dated as of
               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

</TABLE>

<PAGE>   115
<TABLE>
<S>            <C>                              <C>                            <C>                  <C>
*10(w)         Form of Severance                Form 10-K for the              1-7629               10(w)
               Agreements dated                 year ended
               December 22, 1994                December 31, 1994
               between the Com-
               pany and 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)
               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
               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.

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 Warner 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

</TABLE>

<PAGE>   116
<TABLE>
<S>            <C>                          
+11            Computation of
               Earnings Per Common
               Share - and Common
               Equivalent Share

+12            Computation of Ratios
               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

</TABLE>

<PAGE>   117
(b) Houston Lighting & Power Company

<TABLE>
<CAPTION>
                                                   Report or                   SEC File or
 Exhibit                                          Registration                 Registration         Exhibit
 Number             Description                     Statement                     Number            Reference
---------      ---------------------            ------------------             ------------         ---------
<S>            <C>                              <C>                            <C>                  <C>
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
               October 8, 1993

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

3(b)           Amended and Restated             Form 10-K for the              1-3187               3(b)
               Bylaws of HL&P (as               year ended
               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
               Commercial National
               Bank of Houston (Texas
               Commerce Bank National
               Association, as
               successor trustee),
               as Trustee, as amended
               and supplemented
               by 20 Supplemental
               Indentures thereto

4(a)(2)        Twenty-First through             Form 10-K for the              1-3187               4(a)(2)
               Fiftieth Supplemental            year ended
               Indentures to HL&P               December 31, 1989
               Mortgage and Deed of
               Trust

4(a)(3)        Fifty-First Supple-              Form 10-Q for the              1-3187               4(a)
               mental Indenture                 quarter ended
               dated March 25, 1991             June 30, 1991
               to HL&P Mortgage
               and Deed of Trust

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

</TABLE>

<PAGE>   118
<TABLE>
<S>            <C>                              <C>                            <C>                  <C>
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-Q 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
               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

</TABLE>

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.

<TABLE>
<S>            <C>                              <C>                            <C>                  <C>
*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

</TABLE>

<PAGE>   119
<TABLE>
<S>            <C>                              <C>                            <C>                  <C>
*10(b)(2)      First Amendment to               The Company'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)
               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
               January 1, 1985)                 December 31, 1988

*10(c)(3)      Second Amendment to              The Company's                  1-7629                10(c)(3)
               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)
               Exhibit 10(c)(1)                 Form 10-Q for the
               (effective as of                 quarter ended
               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)
               Exhibit 10(c)(1)                 Form 10-K for the
               (effective as of                 year ended
               September 7, 1994)               December 31, 1994

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

*10(e)(1)      Executive Incentive              The Company's                  1-7629                10(b)
               Compensation Plan                Form 10-Q for the
               of the Company                   quarter ended
               (effective as of                 June 30, 1989
               January 1, 1989)

</TABLE>

<PAGE>   120
<TABLE>
<S>            <C>                              <C>                            <C>                  <C>
*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, 1992

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

*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

</TABLE>

<PAGE>   121
<TABLE>
<S>            <C>                              <C>                            <C>               <C>
*10(g)(1)      Benefit Restoration              The Company's                  1-7629            10(c)
               Plan of the Company              Form 10-Q for the
               (effective as of                 quarter ended
               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
               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-Q for the
               (effective as of                 quarter ended
               September 1, 1985)               March 31, 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

</TABLE>

<PAGE>   122
<TABLE>
<S>            <C>                              <C>                            <C>                  <C>
*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

*10(j)(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

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

*10(j)(3)      Second Amendment to              The Company's                  1-7629               10(g)
               Exhibit 10(j)(1)                 Form 10-Q for the
               (effective as of                 quarter ended
               March 30, 1992)                  March 31, 1992

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

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

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

*10(j)(7)      Sixth Amendment to               The Company's                  1-7629               10(b)
               Exhibit 10(j)(1)                 Form 10-Q for the
                                                quarter ended
                                                June 30, 1995
</TABLE>

<PAGE>   123
<TABLE>
<S>            <C>                              <C>                            <C>                  <C>
*10(k)(1)      Long-Term Incentive              The Company's                  1-7629               10(c)
               Compensation Plan of             Form 10-Q for the
               the Company                      quarter ended
               (effective as of                 June 30, 1989
               January 1, 1989)

*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)
               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

*10(n)(2)      Form of Stock Option             The Company's                  1-7629               10(n)(2)
               Agreement for                    Form 10-K for the
               Nonqualified Stock               year ended
               Options Granted                  December 31, 1993
               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

*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
</TABLE>

<PAGE>   124
<TABLE>
<S>            <C>                              <C>                            <C>                 <C>
*10(p)         Director Benefits                The Company's                  1-7629              10(m)
               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

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
</TABLE>

<PAGE>   125
<TABLE>
<S>            <C>                              <C>                            <C>                  <C>
10(s)(6)       First Amendment to               The Company's                  1-7629                10(b)
               Exhibit 10(s)(5)                 Form 10-Q for the
                                                quarter ended
                                                March 31, 1995

10(s)(7)       Note Purchase Agreement          The Company's                  1-7629                10(j)(3)
               between the Company              Form 10-K for the
               and the ESOP Trustee,            year ended
               dated as of                      December 31, 1990
               October 5, 1990

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

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

*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
               and the following
               executive officers:
               Hugh Rice Kelly,
               R. Steve Letbetter,
               William T. Cottle and
               David M. McClanahan

*10(v)         Houston Industries               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

+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

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