<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
 
                  FOR THE FISCAL YEAR ENDED DECEMBER 31, 1996
 
                                       OR
 
     [ ]    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
                        SECURITIES EXCHANGE ACT OF 1934
 
             FOR THE TRANSITION PERIOD FROM           TO
 
                         COMMISSION FILE NUMBER 1-7629
 
                        HOUSTON INDUSTRIES INCORPORATED
             (Exact name of registrant as specified in its charter)
 
<TABLE>
<S>                                                   <C>
                        TEXAS                                              74-1885573
  (State or other jurisdiction of incorporation or
                    organization)                            (I.R.S. employer identification number)
                   1111 LOUISIANA
                HOUSTON, TEXAS 77002                                     (713) 207-3000
(Address and zip code of principal executive offices) (Registrant's telephone number, including area code)
</TABLE>
 
          SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:
 
<TABLE>
<CAPTION>
                    TITLE OF EACH CLASS                              NAME OF EACH EXCHANGE ON WHICH REGISTERED
                    -------------------                              -----------------------------------------
<C>                                                         <C>
             Common Stock, without par value,                                 New York Stock Exchange
             and associated rights to purchase                                Chicago Stock Exchange
                     preference stock                                          London Stock Exchange
</TABLE>
 
        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)
 
<TABLE>
<S>                                                   <C>
                        TEXAS                                              74-0694415
  (State or other jurisdiction of incorporation or
                    organization)                            (I.R.S. employer identification number)
 
                   1111 LOUISIANA
                HOUSTON, TEXAS 77002                                     (713) 207-1111
(Address and zip code of principal executive offices) (Registrant's telephone number, including area code)
</TABLE>
 
        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 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 $5,752,350,875 as of March 3, 1997, 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 3, 1997, Houston Industries Incorporated had 246,793,389 shares
of Common Stock outstanding, including 13,131,390 ESOP shares not deemed
outstanding for financial statement purposes. Excluded from the number of shares
of Common Stock outstanding are 16,042,027 shares held by the Company as
treasury stock. As of March 1, 1997, 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, 1996, are incorporated by reference in Item 10,
Item 11, Item 12 and Item 13 of Part III of this Form 10-K.
 
     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, 1996

<TABLE>
<CAPTION>

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

                 The Company and Its Subsidiaries..................................................................    3
                 Special Factors...................................................................................    4
                 Business of HL&P..................................................................................    4
                 Business of HI Energy.............................................................................   14
                 Regulation of the Company.........................................................................   15
                 Executive Officers of the Company.................................................................   16
                 Executive Officers of HL&P........................................................................   18

Item 2.          Properties........................................................................................   19

Item 3.          Legal Proceedings.................................................................................   20

Item 4.          Submission of Matters to a Vote of Security Holders...............................................   21

PART II
-------

Item 5.          Market for the Registrant's Common Equity and Related Stockholder Matters.........................   22

Item 6.          Selected Financial Data:

                 The Company.......................................................................................   23
                 HL&P..............................................................................................   24

Item 7.          Management's Discussion and Analysis of Financial
                 Condition and Results of Operations...............................................................   25

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................................................................   79

Item 9.          Changes in and Disagreements with Accountants on Accounting
                 and Financial Disclosure..........................................................................   86

PART III
--------

Item 10.         Directors and Executive Officers of the Company and HL&P..........................................   87

Item 11.         Executive Compensation............................................................................   88

Item 12.         Security Ownership of Certain Beneficial Owners and Management....................................   97

Item 13.         Certain Relationships and Related Transactions....................................................   99

PART IV
-------

Item 14.         Exhibits, Financial Statement Schedules and Reports on Form 8-K...................................  100
</TABLE>


                                       2

<PAGE>   3
         THIS COMBINED ANNUAL REPORT ON 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 ANY OTHER AFFILIATE OR SUBSIDIARY OF THE
COMPANY.


                                   THE MERGER

         On December 17, 1996, the shareholders of the Company and NorAm Energy
Corp. (NorAm) approved an Agreement and Plan of Merger (Merger Agreement)
pursuant to which the Company will merge into HL&P, and NorAm will merge into a
subsidiary of the Company (Merger Sub). NorAm is principally engaged in the
distribution and transmission of natural gas, including the gathering, storage
and marketing of natural gas. Upon consummation of the mergers (collectively,
the Merger), HL&P, the surviving corporation of the Company/HL&P merger, will
be renamed "Houston Industries Incorporated" (Houston) and will continue to
conduct HL&P's electric utility business under HL&P's name. Merger Sub, the
surviving corporation of the NorAm/Merger Sub merger, will be renamed "NorAm
Energy Corp." and will continue to conduct NorAm's natural gas distribution and
transmission business under NorAm's name. As a result of the Merger, NorAm will
become a wholly owned subsidiary of Houston. The Merger Agreement also provides
for alternative merger structures in certain circumstances.

           Consideration for the purchase of NorAm shares will be a combination
of cash and shares of Houston common stock. The transaction is valued at $3.9
billion, consisting of $2.5 billion for NorAm's common stock and equivalents
and $1.4 billion of NorAm debt.

         The closing of the Merger is subject to the satisfaction or waiver of
various conditions precedent, including the obtaining of all required
governmental authorizations and consents. For additional information regarding
the Merger, including the status of governmental authorizations with respect
thereto, see "Management's Discussion and Analysis of Financial Condition and
Results of Operations--The Merger" in Item 7 of this Report and Note 16 of the
Company's Consolidated and HL&P's Financial Statements in Item 8 of this Report
(Financial Statements).

         Unless otherwise stated, the information presented in this Form 10-K
relates solely to the Company and HL&P without giving effect to the Merger.


                                     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. Based on the intrastate
operations of HL&P and the exemptions applicable to affiliates of HI Energy,
the Company is exempt from regulation as a "registered" holding company under
the Public Utility Holding Company Act of 1935 (1935 Act), except with respect
to the acquisition of voting securities of other domestic public utility
companies and utility holding companies. For additional information regarding
the Company's status under the 1935 Act, including the Company's application to
the Securities and Exchange Commission (SEC) for an exemption under Section
3(a)(2) of the 1935 Act in connection with the Merger, see "--Regulation of the
Company--Federal."



                                       3

<PAGE>   4



         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 primarily in the development and acquisition of foreign
independent power projects and the privatization of foreign generating and
distribution facilities. The business and operations of HL&P historically have
accounted for substantially all of the Company's consolidated income from
continuing operations and common stock equity. Following consummation of the
Merger, it is anticipated that HL&P's electric utility operations and business
will continue to account for the predominant portion of the consolidated income
from continuing operations and common stock equity of Houston. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--The Merger" in Item 7 of this Report.

         In connection with the sale of the Company's cable television
subsidiary in 1995, the Company received 1 million shares of Time Warner Inc.
(Time Warner) common stock and 11 million shares of Time Warner convertible
preferred stock, which are recorded on the Company's consolidated balance 
sheet at approximately $1 billion. During 1996, the Company received $41.6
million in dividends attributable to these securities. For information regarding
how the Company accounts for these securities, see Note 1(j) to the Financial
Statements.

         The Company and HL&P's executive offices are located at Houston
Industries Plaza, 1111 Louisiana, Houston, Texas 77002 (Telephone Number
713-207-3000). As of December 31, 1996, the Company and its subsidiaries had
8,100 full-time employees.

                                SPECIAL FACTORS

         HL&P's electric utility operations are subject to a number of risk
factors, 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; stringent
environmental regulations and contingencies associated with the ownership and
operation of a nuclear power plant. The Company's involvement, through HI
Energy, in foreign power projects also entails significant political and
financial uncertainties, including currency exchange rate fluctuations,
political instability and potential expropriation. The effects of these and
other factors on the Company's and HL&P's business and operations are
described elsewhere in this Report. See "--Business of HL&P--Competition,"
"--Business of HI Energy" 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.

                                BUSINESS OF HL&P

SERVICE AREA

         HL&P's service area covers a 5,000 square mile area on the Texas Gulf
Coast, including Houston (the nation's fourth largest city). HL&P serves
approximately 1.5 million residential, commercial and industrial customers.
HL&P is a member of the Electric Reliability Council of Texas, Inc. 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 centered primarily on energy
sector industries, such as oil companies, petrochemical and refining complexes,
industrial and petrochemical construction firms and natural gas distribution
and processing centers. During the year ended December 31, 1996, energy sector
industries accounted for approximately 32 percent of HL&P's industrial electric
base revenues and 8 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.


                                       4

<PAGE>   5




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> 
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
1996          13,960             445           14,405       Jul. 23         11,718         2.6           22.9
</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 1996 was 12,667 megawatts (MW)
         compared to 12,377 MW in 1995.

         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 growth at that rate and average weather conditions
and including the net effects of HL&P's demand-side management programs, HL&P
projects that its reserve margin will decrease to an estimated 15 percent by
2001. For long-term planning purposes, HL&P intends to maintain its reserve
margin 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 to the reliance on air conditioning. See Note 15 to the
Financial Statements for a presentation of certain unaudited quarterly
financial information for 1995 and 1996.

COMPETITION

         The electric utility industry historically has been composed of
vertically integrated companies providing electric service on an exclusive
basis within governmentally-defined geographic areas. Prices for electric
service typically have been set by governmental authorities under principles
designed to provide the utility with an opportunity to recover its cost of
providing electric service plus a reasonable return on its invested capital.
Federal legislation as well as legislative and regulatory initiatives in
various states have encouraged competition among electric utility and
non-utility owned power generators. These developments, combined with
increasing demand for lower-priced electricity and technological advances in
electric generation, are acting to accelerate the electric utility industry's
movement toward more competition.

         For information on competition, including a discussion of stranded
cost issues, 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, which is incorporated
herein by reference.



                                       5

<PAGE>   6



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 percent,
HL&P does not currently forecast a need for additional capacity until 2002.
Under an integrated resource planning rule adopted by the Public Utility
Commission of Texas (Utility Commission) in 1996, Texas electric utilities are
required to conduct public solicitations for generating capacity to satisfy
their future energy needs. The integrated resource plan rules are intended to
complement the development of a competitive wholesale market for electric
power. HL&P is required to file a preliminary integrated resource plan by
January 1998.

         In 1996, HL&P's capital and nuclear fuel expenditures were
approximately $383 million, excluding Allowance for Funds Used During
Construction (AFUDC). HL&P's capital program (excluding AFUDC) is currently
estimated to cost approximately $239 million in 1997, $253 million in 1998 and
$276 million in 1999. HL&P's capital program for the three-year period 1997
through 1999 consists primarily of improvements to its existing electric
generating, distribution, and general plant facilities. For the three-year
period 1997 through 1999, HL&P's projected capital program consists of the
following estimated expenditures:

<TABLE>
<CAPTION>
                                                Amount  Percent of Total
                                              (millions)  Expenditures
                                              ---------   ------------
<S>                                              <C>          <C>
Generating facilities ..................         $104         14%
Transmission facilities ................           39          5%
Distribution facilities ................          378         49%
Substation facilities ..................           48          6%
General plant facilities ...............          128         17%
Nuclear fuel ...........................           71          9%
                                                 ----       ----

     Total .............................         $768        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.

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:



                                       6

<PAGE>   7



<TABLE>
<CAPTION>
                                                                                   Energy Mix  (%)
                                                               Historical     ------------ Estimated -------------
                                                                  1996          1997           1999          2001
                                                               ----------       ----           ----          ----
         <S>                                                      <C>            <C>            <C>           <C>
         Gas.........................................             32             29             33            42
         Coal and Lignite............................             40             42             41            40
         Nuclear.....................................              9              8              8             8
         Purchased Power.............................             19             21             18            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 materially 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--Results of Operations--HL&P--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 1996, HL&P purchased approximately 65
percent of its natural gas requirements pursuant to long-term contracts having
terms of five years or longer. HL&P purchased the remaining 35 percent of its
natural gas requirements in the spot market. In 1996, no individual supplier
provided more than 21 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 1996 was 612 billion British thermal units
(BBtu) with peak daily consumption of 1,361 BBtu. HL&P's average cost of
natural gas was $2.31 per million British thermal units (MMBtu) in 1996, $1.69
per MMBtu in 1995 and $1.90 per MMBtu in 1994.

         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 constraints 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. The first of these contracts
expires in 2010, and the other expires in 2011. HL&P obtains the remaining coal
required to operate these units under short-term contracts. The majority of the
coal purchased is transported to the W. A. Parish coal-handling facilities
under a long-term rail transportation contract. In the second quarter of 1997,
HL&P expects to complete construction of a rail spur connecting these
facilities to another rail transporter. The additional rail spur is expected to
provide a competitive alternative for the transportation of coal not subject to
the existing long-term transportation agreement.

         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 a long-term contract.


                                       7

<PAGE>   8



The lignite reserves currently under lease and contract are expected to provide
substantially all of the lignite requirements for Limestone through 2014.

         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:

<TABLE>
         <S>                                        <C>   
         Uranium.....................................2000 (1)
         Conversion..................................2001
         Enrichment .................................2014 (2)
         Fabrication.................................2005
</TABLE>

(1)      Contracts provide for over 50 percent of the uranium concentrates
         required. The balance of uranium concentrates requirements is expected
         to be provided by future spot and medium-term contracts.

(2)      The South Texas Project has suspended its enrichment services contract
         for the period between October 2000 through September 2006 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 ultimately to take possession of all spent
fuel generated by the South Texas Project. HL&P has been advised that the DOE
currently plans to place the spent fuel in a permanent underground storage
facility. 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. In December 1996, the DOE notified utilities
that it anticipates a delay in assuming its obligation to begin disposing of
spent fuel, and solicited input from the utilities as to how the delay can best
be accommodated. 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 nearly 40 years of spent
fuel disposal for each unit.

         Enrichment Decontamination and Decommissioning Assessment Fees. The
Energy Policy Act of 1992 (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. The South Texas Project's assessment is approximately $2 million per
year (subject to escalation for inflation). HL&P's share of such fees is 30.8
percent. These assessments


                                       8

<PAGE>   9



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 $6.5
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 fuel oil becomes more
economical to use than natural gas.

         PURCHASED POWER. At December 31, 1996, 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. Current Utility Commission rules permit full recovery of costs incurred
under these purchased power contracts through HL&P's rates for electric
service. The two principal firm capacity contracts (covering 320 MW of firm
capacity) 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 or fuel-related debits, respectively. Fuel costs are
reviewed during periodic fuel reconciliation proceedings.

For information regarding the recovery of fuel costs, including a $70 million
temporary fuel surcharge implemented to address an under-recovery of eligible
fuel costs during the period February 1995 through August 1996, see
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Results of Operations--HL&P--Operating Revenues and Sales - HL&P"
in Item 7 of this Report.

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 these franchises expires before 2007.

         Under the Texas Public Utility Regulatory Act (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
the City of Houston, but the Utility Commission has appellate jurisdiction 
over electric rates and services within those incorporated municipalities.

         UTILITY COMMISSION RATE PROCEEDINGS.   Beginning in 1995, HL&P 
implemented a reduction in its base rates under the terms of the settlement of
its 1995 rate case (Docket No. 12065)(Rate Case Settlement). For additional
information regarding terms of the Rate Case Settlement, see "Management's
Discussion and Analysis of Financial Condition and Results of


                                       9

<PAGE>   10



Operations--Certain Factors Affecting Future Earnings of the Company and
HL&P--Rate Matters and 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. Although HL&P did not incur any additional NOx pollution
control costs in 1996, HL&P estimates that, based on current market conditions
and other factors, it could be required to spend $40 million between 1997 and
1999 in order to fully comply with new NOx requirements scheduled to be
implemented in 1999.

         The Ozone Transport Assessment Group (OTAG) was established in 1995.
It is comprised of state air directors from 37 states, including Texas, which
is represented by the TNRCC. OTAG is responsible for evaluating the long-range
transport of pollutants related to ozone formation, which includes NOx, and to
identify levels of NOx emission reductions deemed necessary for attainment of
the standard. The results of OTAG's evaluation are expected in mid-1997. The
EPA has issued an Advanced Notice of Proposed Rulemaking (ANPR) in which the
EPA indicated that it intends to require each state to develop a state
implementation plan to ensure that reductions in ozone-related pollutants will
be achieved. In addition, the EPA has proposed new air quality standards for
ozone and for small particle pollutants. The outcome of either or both of these
and other related rulemakings may affect the magnitude and the timing of future
expenditures necessary for NOx reduction from HL&P facilities. Furthermore, the
ANPR does not contain sufficient details upon which the Company or HL&P can
estimate the potential costs of implementing the proposed rules.

         In both 1995 and 1996, HL&P incurred costs of approximately $3 million
per year in order to comply with requirements under the Clean Air Act mandating
electric utilities to install continuous emission monitoring equipment.
Installation of the new systems was completed in 1996, and, based on existing
regulatory requirements, no additional expenditures are currently projected. To
implement these Clean Air Act programs, an Operating Permit Program has been
established that will be administered in Texas by the TNRCC. Although HL&P is
required to submit applications for affected HL&P facilities to the TNRCC
during 1997, it is not anticipated, based on existing regulatory requirements,
that HL&P will be required to make any significant changes to its current air
quality control requirements. Current air quality related permit programs
administered by the TNRCC impose fees on HL&P of approximately $1 million
annually.


                                       10

<PAGE>   11



         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
timely 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 1996 for commercial
disposal of industrial solid waste was approximately $4.6 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.

         HL&P holds an operating license from the NRC in connection with its
role as project manager of the South Texas Project. For information regarding
the formation of an operating company to replace HL&P as project manager of the
South Texas Project, see Note 2(b) to the Financial Statements.

         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 this
Act, states may combine with other states and seek consent from Congress for
regional compacts to construct and operate low-level nuclear waste sites. The
only facility licensed to receive commercial low-level nuclear waste that is
currently available to the South Texas Project is located in Barnwell, South
Carolina. 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 December 1997.

         The Texas Low-Level Radioactive Waste Disposal Authority (Waste
Disposal Authority) is currently seeking authority to build and operate a
low-level waste disposal facility in Hudspeth County, Texas. A bill that
establishes an interstate compact among Texas, Maine and Vermont 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 1997.

         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 1997 fiscal year, HL&P's share of
this assessment fee is approximately $3.7 million. Subject to


                                       11

<PAGE>   12



licensing of the facility in 1998, the Waste Disposal Authority estimates that
the Texas site (construction of which has not yet begun) could begin receiving
waste in late 1999. In the event the Barnwell facility stops accepting waste
before the Texas site is opened, the South Texas Project would store its waste
in an interim storage facility located at the nuclear plant. The plant
currently has storage capacity for at least five years of low-level nuclear
waste generated by the project.

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, 1996, HL&P had 7,864 full-time employees of whom
3,042 were hourly-paid employees represented by the International Brotherhood
of Electrical Workers under a collective bargaining agreement which expires on
May 25, 1998.


                                       12

<PAGE>   13




OPERATING STATISTICS OF HL&P

<TABLE>
<CAPTION>
                                                                    Year Ended December 31,
                                                         ----------------------------------------------
                                                             1996             1995             1994
                                                         ------------     ------------     ------------
<S>                                                        <C>              <C>              <C> 
Electric Energy Generated and Purchased (Megawatt-
Hours (MWH)):
     Generated -- Net Station Output ..................    55,170,841       53,447,128       53,894,994
     Purchased ........................................    12,540,172       10,452,818       10,107,449
     Net Interchange ..................................         1,486           (1,488)          (1,018)
                                                         ------------     ------------     ------------
         Total ........................................    67,712,499       63,898,458       64,001,425
     Company Use, Lost and Unaccounted for Energy .....    (3,350,400)      (2,822,876)      (2,678,629)
                                                         ------------     ------------     ------------
         Total Energy Sold ............................    64,362,099       61,075,582       61,322,796
                                                         ============     ============     ============

Electric Sales (MWH):
     Residential ......................................    19,048,238       18,103,209       17,194,724
     Commercial .......................................    14,640,762       14,233,413       13,631,381
     Small Industrial (1) .............................    11,727,500       11,174,404       10,940,813
     Large Industrial (1) .............................    13,519,845       12,493,029       13,537,677
     Street Lighting -- Government and Municipal ......       119,339          117,253          116,643
                                                         ------------     ------------     ------------
         Total Firm Retail Sales ......................    59,055,684       56,121,308       55,421,238
     Other Electric Utilities .........................       205,463          169,750          167,286
                                                         ------------     ------------     ------------
         Total Firm Sales .............................    59,261,147       56,291,058       55,588,524
     Interruptible ....................................     4,038,277        4,093,385        5,027,743
     Off-System .......................................     1,062,675          691,139          706,529
                                                         ------------     ------------     ------------
         Total ........................................    64,362,099       61,075,582       61,322,796
                                                         ============     ============     ============

Number of Customers (End of Period): (2)
     Residential ......................................     1,353,631        1,327,168        1,301,074
     Commercial .......................................       185,031          175,998          170,959
     Small Industrial (1) .............................         1,692            1,543            1,525
     Large Industrial (Including Interruptible) (1) ...           126              127              145
     Street Lighting -- Government and Municipal ......            83               82               81
     Other Electric Utilities (Including Off-System) ..            15               11               11
                                                         ------------     ------------     ------------
         Total ........................................     1,540,578        1,504,929        1,473,795
                                                         ============     ============     ============

Operating Revenue (Thousands of Dollars):
     Residential ......................................  $  1,603,591     $  1,471,702     $  1,586,074
     Commercial .......................................       986,591          923,223        1,029,104
     Small Industrial (1) .............................       611,495          564,609          643,383
     Large Industrial (1) .............................       473,451          431,499          541,188
     Street Lighting -- Government and Municipal ......        22,125           20,679           25,902
                                                         ------------     ------------     ------------
         Total Electric Revenue -- Firm Retail Sales ..     3,697,253        3,411,712        3,825,651
     Other Electric Utilities .........................        18,841           22,207           25,669
                                                         ------------     ------------     ------------
         Total Electric Revenue -- Firm Sales .........     3,716,094        3,433,919        3,851,320
     Interruptible ....................................        97,164           81,707          108,730
     Off-System .......................................        25,995           12,250           13,691
                                                         ------------     ------------     ------------
         Total Electric Revenue .......................     3,839,253        3,527,876        3,973,741
     Miscellaneous Electric Revenues ..................       185,774          152,421         (227,656)
                                                         ------------     ------------     ------------
         Total ........................................  $  4,025,027     $  3,680,297     $  3,746,085
                                                         ============     ============     ============

Installed Net Generating Capability (Kilowatts (KW))
     (End of Period) ................................      13,960,370       13,921,370       13,666,000

Cost of Fuel (Cents per MMBtu):
     Gas ............................................           231.3            168.5            189.8
     Coal (3) .......................................           210.8            202.5            159.0
     Lignite ........................................           111.1            124.8            110.8
     Nuclear ........................................            61.6             58.2             57.4
         Average ....................................           181.6            159.3            153.6
</TABLE>

(1)  For reporting purposes, HL&P classifies customers with an electric demand
     in excess of 600 kilovolt-amperes as industrial. Small industrial
     customers typically are retail stores, office buildings, universities and
     other customers not associated with large industrial plants.

(2)  In 1996, HL&P began calculating the number of customers based on the
     number of active customers at month end (as opposed to number of billing
     transactions). This change had the effect of increasing the number of
     customers (primarily commercial) reported in 1996 by approximately 4,400.
     Prior periods have not been restated.

(3)  The cost of coal for 1994 reflects the receipt of approximately $66.1
     million (38.2 cents per MMBtu) related to the sale of certain railroad
     settlement payments. See Note 14 to the Financial Statements.


                                       13

<PAGE>   14



                             BUSINESS OF HI ENERGY

         HI Energy, a subsidiary of the Company formed in 1993, participates
primarily in the development and acquisition of foreign independent power
projects and the privatization of foreign generating and distribution
facilities. As of December 31, 1996, the Company's Consolidated Balance Sheet
included approximately $567 million invested in foreign utility and
non-regulated companies. In 1996, HI Energy reported earnings of approximately
$0.2 million compared to a loss of $33 million in 1995, a year which included
an $18 million after-tax one-time charge to earnings related to an investment
in two waste tire-to-energy projects.

         For additional information regarding HI Energy, see "--Regulation of
the Company--Federal and State Regulation of Foreign Investments" and
"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.

MAJOR FOREIGN INVESTMENTS

         In May 1996, a subsidiary of HI Energy acquired 11.35 percent of the
common stock of Light - Servicos de Eletricidade S.A., a publicly held Brazilian
corporation (Light), for $392 million. Light is the operator of an integrated
electric power and distribution system that serves a portion of the state of Rio
de Janeiro, Brazil, including the city of Rio de Janeiro. HI Energy acquired the
shares as a bidder in the government-sponsored auction of 60 percent of Light's
outstanding shares. Subsequent to the auction, the winning bidders, including a
subsidiary of HI Energy, formed a consortium whose aggregate ownership interest
of 50.44 percent represents a controlling interest in Light.

         HI Energy also owns 49 percent of the capital stock of an electric
utility operating in La Plata, Argentina, which as of December 31, 1996 was
recorded as an equity investment in the amount of $81 million. In 1995, HI
Energy acquired 90 percent of the capital stock of an electric utility in
north-central Argentina for $16 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 of approximately $100 million. In 1998, another
subsidiary of HI Energy, together with various other investors, expects to
complete development of a coke calcining and power generation facility in the
state of Andhra Pradesh, India. The waste gases from the calcining 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 $9 million.

RISKS OF OVERSEAS OPERATIONS

         The financing, development and operation of foreign power projects
entail political and financial uncertainties, including risks associated with
currency exchange rate fluctuations, currency repatriation and convertibility
restrictions, political instability and potential expropriation. The
uncertainty of the legal environment in certain countries in which HI Energy is
or in the future may be operating could make it more difficult for HI Energy to
enforce its rights under agreements relating to its overseas operations. HI
Energy seeks to minimize the risks of its overseas operations in a variety of
ways, including co-investing with local partners and reviewing the potential
return of any investment against related political and other risks.
Notwithstanding these efforts, there can be no assurance that HI Energy's
efforts to minimize overseas operational risks will be successful.



                                       14

<PAGE>   15



                           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. In connection with the Merger, the Company and HL&P
have filed an application with the SEC requesting an order granting Houston an
exemption from regulation as a registered public utility holding company under
Section 3(a)(2) of the 1935 Act. For information regarding the application, see
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--The Merger." Following the Merger, Houston will be the holding
company for NorAm, which is a public utility 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 Federal Energy Regulatory
Commission of intrasystem transactions. Several bills have been introduced in
Congress which would repeal the 1935 Act. 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.

FEDERAL AND STATE REGULATION OF FOREIGN INVESTMENTS

         Section 33(a)(1) of the 1935 Act exempts foreign utility company
affiliates of the Company from regulation as "public utility companies,"
thereby permitting the Company to invest in foreign utility companies without
registration under the 1935 Act as a holding company. The exemption, however,
is dependent upon the SEC's receiving from each state commission having
jurisdiction over the retail rates of any U.S. utility company that is
associated or affiliated with the foreign utility company, a certification to
the effect that such commission has the authority and resources to protect
ratepayers subject to its jurisdiction and that such commission intends to
exercise its authority.

         The Utility Commission has provided such a certification to the SEC
subject, however, to the right of the Utility Commission to revise or withdraw
the certification as to any future acquisition. The Company is required to
notify the Utility Commission in the event that its aggregate investment in
foreign exempt wholesale generators (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 foreign investments exceed 5
percent of consolidated retained earnings during the previous four quarters.

         Subject to certain limited exceptions, Section 33(f)(1) of the 1935
Act prohibits any public utility (such as HL&P or, after the Merger, Houston)
from issuing any security for the purpose of financing the acquisition,
ownership or operation of a foreign utility company, or assuming any obligation
or liability with respect to a foreign utility company.


                                       15

<PAGE>   16



                     EXECUTIVE OFFICERS OF THE COMPANY (1)
                              As of March 3, 1997

<TABLE>
<CAPTION>
                                             Officer
               Name                   Age(2)  Since     Business Experience 1992-1997 and Positions(3)
              ------                  -----  -------   ------------------------------------------------------------------
<S>                                     <C>   <C>      <C>                                                      <C>  
Don D. Jordan......................     64    1976     Chairman and Chief Executive Officer                     1997-
                                                         and Director
                                                       Chairman, Chief Executive Officer and                    1996-1997
                                                         President and Director
                                                       Chairman and Chief Executive                             1993-1996
                                                         Officer and Director
                                                       Chairman, President and Chief                            1992-1993
                                                         Executive Officer and Director
                                                       Chairman and Chief Executive                             1992-
                                                         Officer and Director - HL&P

R. Steve Letbetter.................      48    1978    President and Chief Operating Officer                    1997-
                                                         and Director
                                                       Senior Vice President and Director                       1996-1997
                                                       Vice President and Director                              1995-1996
                                                       Vice President                                           1993-1995
                                                       President and Chief                                      1993-
                                                         Operating Officer - HL&P
                                                       Group Vice President - Finance                           1992-1993
                                                         and Regulatory Relations - HL&P

Lee W. Hogan.......................      52    1990    Executive Vice President and Director                    1997-
                                                       Senior Vice President and Director                       1996-1997
                                                       Vice President and Director                              1995-1996
                                                       Vice President                                           1993-1995
                                                       President and Chief Operating                            1993-1997
                                                         Officer - HI Energy
                                                       Group Vice President -                                   1992-1993
                                                         External Affairs - HL&P

Hugh Rice Kelly....................     54    1984     Executive Vice President, General                        1997-
                                                         Counsel and Corporate Secretary
                                                       Senior Vice President, General                           1994-1997
                                                         Counsel and Corporate Secretary
                                                       Vice President, General Counsel                          1992-1994
                                                         and Corporate Secretary
                                                       Executive Vice President, General                        1997-
                                                         Counsel and Corporate Secretary
                                                          - HL&P
                                                       Senior Vice President, General                           1992-1997
                                                         Counsel and Corporate Secretary
                                                          - HL&P

Stephen W. Naeve...................      49    1988    Executive Vice President and Chief                       1997-
                                                         Financial Officer
                                                       Senior Vice President and Chief                          1996-1997
                                                         Financial Officer
                                                       Vice President - Strategic Planning                      1993-1996
                                                         and Administration
                                                       Vice President - Corporate Planning                      1992-1993
                                                         and Treasurer - HL&P

Charles R. Crisp...................      49    1996    Senior Vice President                                    1997-
                                                       Executive Vice President and General                     1996-
                                                         Manager - Energy Production
                                                         and Director - HL&P
                                                       President and Director, Tejas Gas                        1992-1996
                                                         Corporation
</TABLE>



                                       16

<PAGE>   17

<TABLE>
<S>                                     <C>   <C>      <C>                                                      <C>  
B. Bruce Gibson....................      43    1994    Senior Vice President - Governmental Affairs             1997-
                                                       Vice President - Government and                          1996-1997
                                                         Regulatory Affairs
                                                       Vice President - Government and                          1996-
                                                         Regulatory Affairs - HL&P
                                                       Vice President - Governmental Relations                  1994-1996
                                                       President and CEO, Texas Chamber of                      1994
                                                         Commerce
                                                       Executive Assistant to the Texas                         1992-1994
                                                         Lt. Governor

Robert L. Waldrop..................      49    1988    Senior Vice President - Communications                   1997-
                                                       Senior Vice President - External Affairs - HL&P          1996-
                                                       Senior Vice President - Marketing and                    1996
                                                          Customer Service - HL&P
                                                       Group Vice President - External Affairs - HL&P           1993-1996
                                                       Vice President - Public and Customer                     1992-1993
                                                         Relations - HL&P

Mary P. Ricciardello...............      41    1993    Vice President and Comptroller                           1996-
                                                       Vice President and Comptroller                           1996-
                                                         - HL&P
                                                       Comptroller                                              1993-1996
                                                       Assistant Corporate Secretary                            1992-1993
                                                         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 9, 1997 and until
       their successors qualify.

(2)    At December 31, 1996.

(3)    In 1997, the Board of Directors of the Company appointed certain 
       divisional officers of the Company. Pursuant to those appointments, the 
       following Executive Officers of the Company and/or HL&P also hold the 
       following divisional officer titles within the Company:

          Charles R. Crisp         President & Chief Operating Officer, HII
                                   Power Generation Group

          Lee. W. Hogan            President & Chief Operating Officer, HI
                                   Retail Energy Group

          David M. McClanahan      President & Chief Operating Officer, HL&P
                                   Division, HI Retail Energy Group

          Stephen C. Shaeffer      Executive Vice President, Retail Energy
                                   Regulation, HI Retail Energy Group


                                       17

<PAGE>   18



                       EXECUTIVE OFFICERS OF HL&P (1)(2)
                              As of March 3, 1997

<TABLE>
<CAPTION>
                                               Officer
               Name                   Age(3)    Since  Business Experience 1992-1997 and Positions
              -----                  -------   ------- ---------------------------------------------------------------------
<S>                                    <C>      <C>    <C>                                                         <C>  
Don D. Jordan......................    64       1971   Chairman and Chief Executive                                1992-
                                                         Officer and Director

R. Steve Letbetter.................    48       1978   President and Chief Operating Officer                       1995-
                                                         and Director
                                                       President and Chief Operating Officer                       1993-1995
                                                       Group Vice President - Finance                              1992-1993
                                                         and Regulatory Relations

William T. Cottle..................    51       1993   Executive Vice President and General                        1996-
                                                         Manager - Nuclear and Director
                                                       Group Vice President - Nuclear                              1993-1996
                                                       Vice President - Operations -                               1992-1993
                                                         Grand Gulf Nuclear Station,
                                                         Entergy Operations, Inc.

Charles R. Crisp...................    49       1996   Executive Vice President and General                        1996-
                                                         Manager - Energy Production
                                                         and Director
                                                       President and Director, Tejas Gas                           1992-1996
                                                         Corporation

Jack D. Greenwade..................    57      1982    Senior Vice President and Assistant                         1996-
                                                         to the President and Director
                                                       Group Vice President - Operations                           1992-1996

Hugh Rice Kelly....................    54      1984    Senior Vice President, General                              1992-
                                                         Counsel and Corporate Secretary

David M. McClanahan................    47      1986    Executive Vice President and General                        1996-
                                                         Manager - Energy Delivery and
                                                         Customer Service and Director
                                                       Group Vice President - Finance                              1993-1996
                                                         and Regulatory Relations
                                                       Senior Vice President and Chief                             1992-1993
                                                          Financial Officer - KBLCOM

Stephen C. Schaeffer...............    49     1989     Executive Vice President - Shared                           1996-
                                                         Services and Financial and
                                                         Regulatory Affairs and Director
                                                       Senior Vice President - Treasurer -                         1993-1996
                                                         HI Energy
                                                       Group Vice President - Administration                       1992-1993
                                                         and Support

Robert L. Waldrop..................    49     1988     Senior Vice President - External Affairs                    1996-
                                                         And Director
                                                       Senior Vice President - Marketing and                       1996
                                                         Customer Service
                                                       Group Vice President - External Affairs                     1993-1996
                                                       Vice President - Public and                                 1992-1993
                                                         Customer Relations

Mary P. Ricciardello...............    41     1993     Vice President and Comptroller                              1996-
                                                       Comptroller - Company                                       1993-1996
                                                       Assistant Corporate Secretary                               1992-1993
                                                         and Assistant Treasurer
</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 9, 1997 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, 1996.



                                      18

<PAGE>   19



ITEM 2.  PROPERTIES.

         The Company considers its property and the property of its
subsidiaries to be well maintained, in good operating condition and suitable
for their intended purposes.

HL&P

         All of HL&P's electric generating stations and all of the other
operating properties of HL&P are located in the state of Texas.

         ELECTRIC GENERATING STATIONS. As of December 31, 1996, HL&P owned 12
electric generating stations (62 generating units) with a combined turbine
nameplate rating of 13,544,608 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, 1996, HL&P owned 212 major substations
(with capacities of at least 5 megavolt amperes (Mva)) having a total installed
rated transformer capacity of 54,307 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, 1996, HL&P operated
25,003 pole miles of overhead distribution lines and 3,606 circuit miles of
overhead transmission lines, including 474 circuit miles operated at 69,000
volts, 2,035 circuit miles operated at 138,000 volts and 1,097 circuit miles
operated at 345,000 volts.

         ELECTRIC LINES--UNDERGROUND. As of December 31, 1996, HL&P operated
9,636 circuit miles of underground distribution lines and 12.6 circuit miles of
underground transmission lines, including 4.5 circuit miles operated at 69,000
volts and 8.1 circuit miles operated at 138,000 volts.

         GENERAL PROPERTIES. HL&P owns various properties, which include a
47-story headquarters office building, 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--Business of HI Energy" in Item 1 of this Report
and Note 4 to the Financial Statements.



                                      19

<PAGE>   20



ITEM 3.  LEGAL PROCEEDINGS.

              NORAM MERGER LAWSUIT. In August 1996, a purported NorAm
              shareholder filed a lawsuit, Shaw v. NorAm Energy Corp., et al.,
              in the District Court of Harris County, Texas, against NorAm,
              certain of its officers and directors and the Company to enjoin
              the Merger or to rescind the Merger and/or to recover damages in
              the event that the Merger is consummated. The complaint alleges,
              among other things, that the consideration for the Merger is
              inadequate, that NorAm's Board of Directors breached its fiduciary
              duties and that the Company aided and abetted such breaches of
              fiduciary duties. In addition, the plaintiff seeks certification
              as a class action. The Company believes that the claims are
              without merit.

              ENVIRONMENTAL. HL&P is a defendant in litigation arising out of
              the environmental remediation of a site in Corpus Christi, Texas.
              The site was operated by third parties as a metals reclaiming
              operation. Although HL&P neither operated nor owned the site,
              certain transformers and other equipment originally sold by HL&P
              may have been delivered to the site by third parties, and HL&P and
              others have remediated the site pursuant to a plan approved by
              appropriate state agencies and a federal court. To date, HL&P has
              recovered from other responsible parties $1.4 million of the more
              than $3 million it has spent on remediation. 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 are seeking
              approximately $70 million in compensatory damages, in
              addition to punitive damages of $51 million. The Dumes case is
              currently subject to a stay due to the bankruptcy of two
              co-defendants. 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, liquidity or results of
              operations.

              The EPA has identified HL&P as a "potentially responsible party"
              (PRP) 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 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 PRP 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 (estimated
              to be approximately $80 million in the aggregate) and could be
              subjected to substantial fines and damage claims.

         For a description of certain other legal and regulatory proceedings 
affecting the Company and HL&P, reference is made to the information set forth
in Notes 2(b), 3, 10 and 11(c) to the Financial Statements, which notes are 
incorporated herein by reference.



                                      20

<PAGE>   21



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

         At a special meeting of the Company's shareholders held on December
17, 1996, the shareholders of the Company approved the Merger Agreement. As
part of the approval of the Merger Agreement, T. Milton Honea, Robert C. Hanna,
O. Holcombe Crosswell and Joseph M. Grant were elected directors of Houston
effective upon the consummation of the Merger.

The number of votes cast for, cast against or withheld, as well as the number
of abstentions and broker non-votes recorded, with respect to the proposal to
approve the Merger Agreement are as follows:

<TABLE>
<S>                                                         <C>        
Votes in favor of the Proposal:                             196,946,951

Votes against the Proposal (or withheld):                     1,459,637

Abstentions:                                                  1,276,532

Broker non-votes:                                                  None
</TABLE>


                                      21

<PAGE>   22



                                    PART II


ITEM 5.  MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER 
         MATTERS.

         The Company's Common Stock, which at March 3, 1997 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 currently
held, directly or indirectly, by the Company. Following the Merger, each share
of the Company's Common Stock, including associated preference rights,
automatically will be converted into one share of Houston Common Stock (and one
associated Houston preference right).

         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 1996 and 1995. The dividend declared during the fourth quarter of
1996 is payable in March 1997.


<TABLE>
<CAPTION>
                                                          Market Price                  
                                                     ----------------------             Dividend Declared
                                                     High               Low                  Per Share
                                                     ----               ---                  ---------
<S>                                                <C>               <C>                       <C>
1996
First Quarter                                                                                  $0.375
      January 17                                   $25 5/8
      March 29                                                       $21 5/8

Second Quarter                                                                                 $0.375
      April 19                                                       $20 1/2
      June 28                                      $24 3/4

Third Quarter                                                                                  $0.375
      July 1                                       $24 3/4
      September 5                                                    $21 1/8

Fourth Quarter                                                                                 $0.375
      November 11                                  $24 1/8
      December 6                                                     $20 3/4

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
</TABLE>

         The closing market price of the Company's Common Stock on December 31,
1996 was $22 5/8 per share.

         Future dividends will be subject to determination based upon the
results of operations and financial condition of the Company, the Company's
future business prospects, any applicable contractual restrictions and such
other factors as the Company's Board of Directors considers relevant. For
information regarding restrictions on the payment of dividends as contained in
the credit facility expected to be entered into in connection with the Merger,
see "Management's Discussion and Analysis of Financial Condition and Results of
Operations--Liquidity and Capital Resources--Company--Sources of Capital
Resources and Liquidity--The Merger" in Item 7 of this Report.


                                      22
<PAGE>   23



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. Certain amounts from prior years
have been reclassified to conform with the 1996 presentation. Such
reclassifications do not affect earnings. 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,
                                                  ------------------------------------------------------------------------------
                                                      1996            1995            1994             1993             1992
                                                  ------------    ------------    ------------     ------------     ------------
                                                                   (Thousands of Dollars, except per share amounts)

<S>                                               <C>             <C>             <C>              <C>              <C>         
Revenues (1) .................................... $  4,095,277    $  3,729,271    $  3,752,573     $  4,083,238     $  3,857,932
                                                  ------------    ------------    ------------     ------------     ------------
Income from continuing operations before
    cumulative effect of change in
    accounting (2) .............................. $    404,944    $    397,400    $    423,985     $    440,531     $    370,031
Gain on sale of cable television subsidiary .....                      708,124                                                  
Loss from discontinued operations ...............                                      (16,524)         (24,495)         (29,544)
Cumulative effect of change in accounting (3) ...                                       (8,200)                           94,180
                                                  ------------    ------------    ------------     ------------     ------------
Net income (2) .................................. $    404,944    $  1,105,524    $    399,261     $    416,036     $    434,667
                                                  ============    ============    ============     ============     ============
Earnings per common share (4):
    Continuing operations before cumulative
       effect of change in accounting (2) ....... $       1.66    $       1.60    $       1.72     $       1.69     $       1.43
    Gain on sale of cable television subsidiary .                         2.86                                                  
    Loss from discontinued operations ...........                                         (.07)            (.09)            (.11)
    Cumulative effect of change in
       accounting (3) ...........................                                         (.03)                              .36
                                                  ------------    ------------    ------------     ------------     ------------
Earnings per common share (2) ................... $       1.66    $       4.46    $       1.62     $       1.60     $       1.68
                                                  ============    ============    ============     ============     ============
Cash dividends declared per common
    share (4)(5) ................................ $       1.50    $       1.50    $       1.50     $      1.875     $       1.49
Dividend pay-out ratio from continuing
    operations ..................................           89%             94%             87%              89%             104%
Return on average common equity (6)(7) ..........         10.2%           29.5%           12.0%            12.7%            13.3%
Ratio of earnings from continuing
    operations to fixed charges before
    cumulative effect of change in accounting ...         2.76            2.71            2.89             2.78             2.29

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

At year-end:
    Book value per common share (2)(4) .......... $      16.41    $      16.61    $      13.64     $      12.53     $      12.68
    Market price per common share (4) ........... $      22.63    $      24.25    $      17.82     $      23.82     $      22.94
    Market price as a percent of book value (2) .          138%            146%            131%             190%             181%

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

At year-end:
    Total assets of continuing operations ....... $ 12,287,857    $ 11,819,606    $ 10,784,095     $ 10,867,581     $ 11,075,897
    Net assets of discontinued operations .......                                      618,982          487,026          231,252
                                                  ------------    ------------    ------------     ------------     ------------
       Total assets ............................. $ 12,287,857    $ 11,819,606    $ 11,403,077     $ 11,354,607     $ 11,307,149
                                                  ============    ============    ============     ============     ============

    Long-term obligations including current
       maturities - continuing operations (8) ... $  3,280,113    $  3,768,928    $  3,905,518     $  3,950,576     $  4,244,077
    Long-term obligations including current
       maturities included in net assets of
       discontinued operations ..................                                      504,580          514,964          740,453

    Capitalization from continuing operations:
       Common stock equity ......................           53%             50%             44%              43%              42%
       Cumulative preferred stock of HL&P
          (including current maturities) ........            2%              5%              7%               7%               7%
       Long-term debt (including current
          maturities) ...........................           45%             45%             49%              50%              51%

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

Capital expenditures:
    HL&P electric capital and nuclear fuel
       expenditures (excluding AFUDC) (9) ....... $    314,934    $    296,635    $    412,899     $    329,016     $    337,082
   Non-regulated electric power project
     expenditures and advances (excluding
     capitalized interest) ......................      493,179          49,835           7,087           35,796            1,625
    Cable television additions and other
       cable-related investments - discontinued .                       47,601          84,071           61,856           45,233
    Corporate headquarters expenditures
       (excluding capitalized interest) (9) .....        5,308          89,627          44,250           26,034                 


-----------------------------------------------------------------------------------------------------------------------------------
</TABLE>


(1)  Reflects a reclassification of HI Energy's equity income from Other-Income
     Expense) to Revenues.

(2)  The Company adopted Statement of Position (SOP) 93-6, "Employers' 
     Accounting for Employee Stock Ownership Plans," effective January 1, 1994,
     which had the effect of reducing net income while increasing earnings per
     share. See Note 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.

(3)  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.

(4) All common share data reflect a two-for-one common stock dividend
     distribution in December 1995.

(5)  Year ended December 31, 1993 includes five quarterly dividends of $.375
     per share due to a change in the timing of the Company's Board of
     Directors' declaration of dividends. Dividend payout was $1.50 per share
     for 1993.

(6)  The return on average common equity for 1995 includes the gain on the sale
     of the Company's cable television subsidiary. The return on average common
     equity excluding the gain was 11.7%.

(7)  The calculation of return on average common equity has been changed from a
     13-month average to a beginning plus ending balance formula. Prior years
     have been restated for consistent presentation.

(8)  Includes Cumulative Preferred Stock subject to mandatory redemption.

(9)  During 1995 and 1996, HL&P made payments toward the purchase of its
     corporate headquarters building. Such payments are not reflected in the
     Company's electric capital and nuclear fuel expenditures because they are
     affiliate transactions eliminated upon consolidation.


                                      23

<PAGE>   24



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,
                                              -----------------------------------------------------------------------------
                                                  1996             1995            1994            1993            1992
                                              ------------     ------------    ------------    ------------    ------------
                                                                           (Thousands of Dollars)
<S>                                           <C>              <C>             <C>             <C>             <C>         
Revenues ..................................   $  4,025,027     $  3,680,297    $  3,746,085    $  4,079,863    $  3,826,841
                                              ------------     ------------    ------------    ------------    ------------
Income after preferred dividends but
    before cumulative effect of change
    in accounting .........................   $    406,855     $    450,977    $    461,381    $    449,750    $    375,955
Cumulative effect of change in
    accounting (1) ........................                                          (8,200)                         94,180
                                              ------------     ------------    ------------    ------------    ------------
Income after preferred dividends ..........   $    406,855     $    450,977    $    453,181    $    449,750    $    470,135
                                              ============     ============    ============    ============    ============
Return on average common
    equity ................................           10.5%            11.8%           12.0%           12.3%           13.3%
Ratio of earnings to fixed charges
    before cumulative effect of change
    in accounting .........................           3.71             3.75            3.80            3.40            2.73
Ratio of earnings to fixed charges and
    preferred dividend requirements
    before cumulative effect of change
    in accounting .........................           3.24             3.20            3.20            2.90            2.34

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

At year-end:
    Total assets ..........................   $ 10,596,232     $ 10,665,259    $ 10,850,981    $ 10,753,616    $ 10,790,052
    Long-term obligations including
       current maturities (2) .............   $  2,931,015     $  3,220,015    $  3,356,789    $  3,402,032    $  3,796,719
    Capitalization:
       Common stock equity ................             56%              52%             51%             50%             47%
       Cumulative preferred stock
          (including current maturities) ..              2%               6%              7%              7%              7%
       Long-term debt (including current
          maturities) .....................             42%              42%             42%             43%             46%

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

Capital and nuclear fuel expenditures
    (excluding AFUDC) (3) .................   $    382,992     $    391,550    $    412,899    $    329,016    $    337,082
Percent of capital expenditures
    financed internally from
    operations ............................            140%             110%            216%            158%            137%
------------------------------------------------------------------------------------------------------------------------------
</TABLE>

(1)    The 1994 cumulative effect relates to the change in accounting for
       postemployment benefits. 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 and 1996 expenditures include payments toward the purchase of HL&P's
       corporate headquarters building.

                                      24

<PAGE>   25



ITEM 7.         MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND 
                RESULTS OF OPERATIONS.

         The following discussion and analysis should be read in combination
with the financial statements and notes contained in Item 8 of this Form 10-K.
Statements contained in this Form 10- K that are not historical facts are
forward-looking statements as defined in the Private Securities Litigation
Reform Act of 1995. Such statements are expectations as to future economic
performance and are not statements of fact. Actual results might differ
materially from those projected in these statements. Important factors that
could cause future results to differ include the effects of competition,
legislative and regulatory changes, fluctuations in the weather and changes in
the economy as well as other factors discussed in this and other filings by
Houston Industries Incorporated (Company) and Houston Lighting & Power Company
(HL&P) with the Securities and Exchange Commission (SEC). When used in the
Company's and HL&P's documents or oral presentations, the words "anticipate,"
"estimate," "expect," "objective," "projection," "forecast," "goal" or similar
words are intended to identify forward-looking statements.

                                   THE MERGER

         On December 17, 1996, the shareholders of the Company and NorAm Energy
Corp. (NorAm) approved an Agreement and Plan of Merger (Merger Agreement)
pursuant to which the Company will merge into HL&P, and NorAm will merge into a
subsidiary of the Company (Merger Sub). Upon consummation of the mergers
(collectively, the Merger), HL&P, the surviving corporation of the Company/HL&P
merger, will be renamed "Houston Industries Incorporated" (Houston) and Merger
Sub, the surviving corporation of the NorAm/Merger Sub merger, will be renamed
"NorAm Energy Corp." and will become a wholly owned subsidiary of Houston.

         NorAm is principally engaged in the distribution and transmission of
natural gas, including the gathering, storage and marketing of natural gas.
Through its Entex, Arkla and Minnegasco distribution divisions, NorAm is the
nation's third-largest natural gas utility in terms of customers served, with
over 2.7 million customers in six states. NorAm operates interstate gas
pipeline facilities through NorAm Gas Transmission Company and Mississippi
River Transmission Corporation. It also owns natural gas gathering assets in
Oklahoma, Louisiana, Arkansas and Texas and is engaged in various other
energy-related businesses, including natural gas and electric wholesale
trading, gas storage, wholesale electric services and providing unregulated
retail energy services to industrial and large commercial customers.

         The acquisition of NorAm is expected to add 2.1 million customers to
Houston's customer base (net of NorAm customers who are already in HL&P's
service territory) and to increase the combined companies' domestic retail
customer base to approximately 3.6 million customers in six states. In
addition, the Company and HL&P expect to benefit from NorAm's gas and electric
wholesale trading organization and, by combining the expertise of the NorAm
trading organization with HL&P's electric power expertise, develop a wholesale
energy trading and risk management business. NorAm's international strategy,
which emphasizes investments in the gas transmission and distribution
businesses, should complement the Company's existing international operations,
which are currently focused on power plant development and acquisition of
electric distribution systems.

         Unless otherwise stated, the information presented in this Form 10-K
relates solely to the Company and HL&P without giving effect to the Merger.

         Merger Consideration. Under the Merger Agreement, each share of common
stock of the Company, including each associated preference stock right,
outstanding immediately prior to the effective time of the Merger (other than
shares owned by the Company or HL&P, which will be canceled) will be converted
automatically into one share of Houston common stock, and each


                                       25

<PAGE>   26



outstanding share of common stock of NorAm will be converted into the right to
receive cash or Houston common stock. The cash consideration for each NorAm
share will be $16.00 in cash (subject to increase if the Merger closes after
May 11, 1997). If the closing does not occur by May 11, 1997, the cash
consideration (but not the stock consideration) will increase thereafter by two
percent per quarter until the consummation of the Merger. The increase, if any,
will be calculated pro rata on a daily basis for the period from May 11, 1997
until consummation. The Merger Agreement contains provisions generally designed
to result in 50 percent of the outstanding shares of NorAm common stock being
converted into stock consideration and 50 percent being converted into cash
consideration.

         The number of shares of Houston common stock issued per share of NorAm
common stock will be not less than 0.6154 shares nor more than 0.7529 shares
(the actual number of shares will depend upon the average closing price of
Houston common stock (Average Price of HI Common Stock) on the New York Stock
Exchange for each of the first 20 consecutive trading days in the period
commencing 25 trading days prior to the closing date of the Merger). Depending
on the Average Price of HI Common Stock prior to the closing of the Merger and
assuming that 50 percent of the NorAm shares of common stock are converted into
shares of Houston common stock, it is estimated that the total number of shares
of Houston common stock issued and outstanding immediately after the Merger
would increase by a range of 47 million to 58 million shares.

         The Merger is valued at $3.9 billion, consisting of $2.5 billion for
NorAm's common stock and equivalents and $1.4 billion of NorAm debt. The
Company intends to finance the cash portion of the Merger consideration through
bank borrowings and will account for the Merger as a purchase. For additional
information regarding the financing of the Merger, see "--Liquidity and Capital
Resources--Company--Sources of Capital Resources and Liquidity--The Merger"
below.

         Regulatory Approvals and Consents. The closing of the Merger is
subject to the satisfaction or waiver of various conditions contained in the
Merger Agreement, including the obtaining of all required governmental
consents. As of March 1, 1997, approvals have been received from all state
regulatory commissions and municipalities whose prior approval was required.

         In February 1997, the Federal Energy Regulatory Commission (FERC)
initiated a jurisdictional inquiry to determine whether its prior approval of
the Merger is required under Section 203 of the Federal Power Act of 1935
(Federal Power Act). FERC directed NorAm Energy Services, Inc. (NES), a
subsidiary of NorAm engaged in the power marketing business, to set forth its
views as to whether such prior approval may be required because of NES'
jurisdictional status as a power marketer. In the alternative, FERC invited NES
to submit an application for approval of the Merger under Section 203 of the
Federal Power Act. The Company believes that FERC approval is not
required for the Merger and that application of FERC jurisdiction to a
transaction of this nature would be unprecedented. In March 1997, NES filed a
response with FERC stating NES' view that FERC does not have jurisdiction over
the Merger and requesting that FERC promptly issue an order ruling on the basis
of its jurisdiction. NES noted, however, that it was considering, based on the
possibility of an expedited review of the Merger under guidelines recently
issued by FERC, the possibility of filing an application under Section 203 of
the Federal Power Act for approval of the Merger.

         The Company and HL&P have filed an application with the SEC requesting
an order granting Houston an exemption from regulation as a registered public
utility holding company under Section 3(a)(2) of the Public Utility Holding
Company Act of 1935 (1935 Act). If the order is not granted and HL&P determines
that upon consummation of the Merger Houston would not be an exempt public
utility holding company under Section 3(a)(2) of the 1935 Act, the Merger
Agreement provides that NorAm and the Company would both be merged into HL&P,
with HL&P being the surviving corporation and being renamed "Houston Industries
Incorporated ". The primary difference resulting


                                      26

<PAGE>   27



from this alternative merger structure is that NorAm would not be a wholly
owned subsidiary of Houston and all of the regulated utility assets of HL&P and
NorAm would be held within the same corporation. Under such circumstances, no
public utility holding company would exist.


                                       27

<PAGE>   28



                             RESULTS OF OPERATIONS

                        HOUSTON INDUSTRIES INCORPORATED

        A summary of selected consolidated financial data for the Company and
its subsidiaries is set forth below:

<TABLE>
<CAPTION>
                                          Year Ended December 31,                
                                          -----------------------         Percent
                                             1996         1995            Change 
                                          ----------   ----------         ------ 
                                           (Thousands of Dollars)                
<S>                                       <C>          <C>                  <C>  
Revenues ...............................  $4,095,277   $3,729,271           10   
Operating Expenses .....................   3,104,811    2,823,821           10   
Operating Income .......................     990,466      905,450            9   
Interest and Other Charges .............     329,945      326,340            1   
Income Taxes ...........................     200,165      199,555           --   
Income from Continuing Operations ......     404,944      397,400            2   
Gain from Discontinued Operations ......                  708,124           --   
Net Income .............................     404,944    1,105,524          (63)  
                                                                                 
<CAPTION>                                                                        
                                          Year Ended December 31,                
                                          -----------------------         Percent
                                             1995         1994            Change 
                                          ----------   ----------         ------ 
                                           (Thousands of Dollars)                
<S>                                       <C>           <C>                 <C>  
Revenues ...............................  $ 3,729,271   $ 3,752,573         (1)  
Operating Expenses .....................    2,823,821     2,785,521          1   
Operating Income .......................      905,450       967,052         (6)  
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>
-----------------

All common stock data included in Item 7 of this Report reflect the Company's
two-for-one common stock dividend distribution in December 1995. In July 1995,
the Company sold KBLCOM Incorporated (KBLCOM), its cable television subsidiary.
The operations of KBLCOM are reflected as discontinued operations. For
additional information, see Notes 5(a) and 13 to the Company's Consolidated and
HL&P's Financial Statements in Item 8 of this Report (Financial Statements).

EARNINGS - THE COMPANY

         1996 Compared to 1995. Consolidated earnings from continuing
operations were $405 million, or $1.66 per share, for 1996, compared to
earnings of $397 million, or $1.60 per share, in 1995. The Company's 1995 net
income was $1.1 billion, or $4.46 per share, including 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 Company's earnings include non-recurring, after-tax charges
amounting to $67 million in 1996 and $24 million in 1995. The non-recurring
charges in 1996 included a $62 million after-tax


                                      28

<PAGE>   29



charge associated with HL&P's settlement of litigation relating to the South
Texas Electric Generating Station (South Texas Project) and $5 million
associated with the write down of an additional portion of Houston Industries
Energy, Inc.'s (HI Energy) investment in two suspended waste tire-to-energy
plants in Illinois. After adjusting for non-recurring gains and charges in both
years, consolidated earnings from continuing operations per share rose nearly 14
percent to $1.93 in 1996 from $1.70 in 1995, while income from continuing
operations rose to $472 million in 1996 from $422 million the previous year. The
improvement in earnings resulted from increased sales at HL&P, improved results
at HI Energy and a full year of after-tax dividend income ($37 million in 1996
compared to $18 million in 1995) from the Company's investment in Time Warner
Inc. (Time Warner) securities.

         HL&P's 1996 contribution to net income of the Company was $407 million
after dividends on preferred stock as compared to $451 million in 1995. HI
Energy reported 1996 earnings of approximately $0.2 million compared to a loss
of $33 million in 1995.

         Other revenues of the Company increased from $49 million in 1995 to
$70 million in 1996 due primarily to equity earnings from a Brazilian electric
utility in which HI Energy acquired an 11.35 percent interest in May of 1996.
Other operating expenses were $73 million and $121 million in 1996 and 1995,
respectively. The decline is primarily attributed to reduced HI Energy
expenses, including a $21 million reduction in nonrecurring charges related to
the previously discussed Illinois projects and reduced project development
costs.
        
         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
benefited significantly from 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 was 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, HI Energy sustained
a net loss of $33 million or $.13 per share. The net loss included an $18
million after-tax charge to earnings resulting from the establishment of a
valuation allowance reflecting the impairment of the ability of the two waste
tire- to-energy projects to repay $28 million in subordinated debt advanced to
the projects by HI Energy. This impairment is a result of the repeal by the
State of Illinois of an operating subsidy benefiting the projects, see Note
4(c) to the Financial Statements. Earnings for 1995 included after-tax dividend
income of approximately $18 million related to Time Warner securities.

         The Company had other revenues of $49 million in 1995 compared to $6
million in 1994. Other revenues are principally from electric sales and
operating revenues from HI Energy. The increase in other revenues was primarily
due to revenues from Edese S.A. (Edese), a foreign electric utility operating
company in which HI Energy acquired a 90 percent ownership interest in 1995.
Other operating expenses for the Company were $121 million for 1995 compared to
$36 million in 1994. The increase is principally due to increased HI Energy
operating expenses for Edese, the $18 million after-tax charge to earnings
relating to the waste tire-to-energy projects and increased project development
costs.




                                      29

<PAGE>   30



                                      HL&P

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

<TABLE>
<CAPTION>
                                     Year Ended December 31,    
                                    -------------------------           Percent
                                       1996           1995              Change
                                    ----------    -----------           ------
                                      (Thousands of Dollars)

<S>                                 <C>           <C>                     <C>
Base Revenues (1) ................. $ 2,743,375   $ 2,645,303              4
Reconcilable Fuel Revenues (2) ....   1,281,652     1,034,994             24
Operating Expenses (3) ............   3,292,699     2,945,633             12
Operating Income (3) ..............     732,328       734,664             --
Other Income (Expense) ............     (70,879)       (5,923)            --
Interest Charges ..................     232,031       247,809             (6)
Income After Preferred Dividends ..     406,855       450,977            (10)

<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)
Other Income (Expense) ............      (5,923)        1,554             --
Interest Charges ..................     247,809       249,472             (1)
Income After Preferred Dividends ..     450,977       453,181             --
</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

         1996 Compared to 1995. HL&P's net earnings after preferred dividends
were $407 million for 1996 compared with $451 million the previous year. The
decrease was due to a $62 million (after-tax) one-time charge associated with
the settlement of litigation claims related to the South Texas Project, and the
$33 million (after-tax) amortization of HL&P's investment in certain lignite
reserves. Increased sales resulting from favorable weather and economic
conditions helped offset the effects discussed above. Total kilowatt-hour (KWH)
sales rose 6 percent during 1996, with increases of 4 percent in the
residential class, 3 percent in commercial and 7 percent in industrial sales.

         1995 Compared to 1994. HL&P's 1995 earnings were $451 million, a
decline of $2 million from 1994. Earnings for 1995 benefited from 5 percent
growth in residential and 4 percent growth in commercial KWH sales resulting
from continued customer growth and warmer summer weather in 1995. However, the
revenue improvements were offset by (i) reduced electric rates stemming from
the settlement of HL&P's most recent 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 as


                                      30

<PAGE>   31



permitted under the Rate Case Settlement and (iii) increased non-routine
operating expenses partially associated with staff severance costs and
litigation. HL&P's earnings for 1994 reflected a one-time after-tax charge of
$46 million in the fourth quarter also related to the Rate Case Settlement.

OPERATING REVENUES AND SALES - HL&P

         1996 Compared to 1995. The base revenue increase is primarily the
result of sales growth in 1996 and, to a lesser degree, the impact of weather.

         The increase of 24 percent in reconcilable fuel revenues resulted
primarily from increased natural gas prices. 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 its 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 or fuel-related debits, respectively. Fuel costs are
reviewed during periodic fuel reconciliation proceedings, which are required at
least every three years.

         At December 31, 1996, HL&P's cumulative under-recovery of fuel costs
was $84 million. In October 1996, HL&P filed with the Utility Commission a
request to implement a temporary fuel surcharge over a six-month period to
address a material under-recovery in eligible fuel costs during the period
February 1995 through August 1996. This proceeding (Docket No. 16486) was
settled and became effective on January 1, 1997. According to the terms of the
settlement, the amount to be recovered by HL&P through the surcharge is
approximately $70 million, inclusive of interest through June 30, 1997.

         1995 Compared to 1994. The $28 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
discussion of firm capacity costs.

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 1996 was $1.82 per million British Thermal Units (MMBtu) ($2.31 for natural
gas, $2.11 for coal, $ 1.11 for lignite and $0.62 for nuclear). In 1995, the
average cost of fuel was $1.59 per MMBtu ($1.69 for natural gas, $2.03 for
coal, $1.25 for lignite and $0.58 for nuclear).

         1996 Compared to 1995. Fuel expenses in 1996 increased by $146 million
or 17 percent over 1995 expenses. The increase was driven by significant
increases in the average unit cost of natural gas, which rose to $2.31 in 1996
from $1.69 per MMBtu in 1995. Purchased power expenses also increased in 1996
by $89 million over 1995 expenses. This change was driven by an increase in
both the amount of KWH purchased by HL&P and the unit cost paid.

         1995 Compared to 1994. Fuel expense increased in 1995 by 2 percent, or
$18 million when compared to 1994, primarily due to the receipt in 1994 of $66
million from the sale of receivables


                                       31

<PAGE>   32



received by HL&P as a result of a litigation settlement. 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
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 in 1995 as
compared to 1994 resulting primarily from the expiration of certain purchased
power contracts.

OPERATION AND MAINTENANCE EXPENSES, DEPRECIATION, AMORTIZATION AND OTHER  - HL&P

         1996 Compared to 1995. Operations and maintenance expense increased by
$23 million or 3 percent in 1996. This increase is largely attributable to the
implementation of an employee incentive program and an increase in severance
payments paid to employees, as described below. A significant decline in
employee benefits-related expenses partially offset the other increases in
operations and maintenance expense.

         In 1995, HL&P incurred $15 million in work force severance costs as a
result of its efforts to streamline and improve certain business activities. In
1996, HL&P incurred additional severance costs of $30 million. These severance
costs reflect total staff reductions of 1,164 employees over the two-year
period.

         Depreciation and amortization expense increased $71 million in 1996
compared to 1995. The increase is due to the accelerated amortization of $50
million ($33 million after-tax) of HL&P's investment in certain lignite
reserves. In 1996, HL&P began amortizing its $153 million investment in these
lignite reserves, which are associated with a cancelled generation project. The
lignite reserves will be fully amortized no later than 2002. The 1996 increase
in depreciation and amortization expense also included a full year of
amortization for HL&P's 1995 early retirement program and increased
depreciation expense related to electric plant in service. In 1996, HL&P
continued to write down its investment in the South Texas Project at a rate of
approximately $50 million per year. This amortization is in addition to
ordinary depreciation associated with the South Texas Project. The accelerated
amortization of the lignite reserves and the South Texas Project is pursuant to
HL&P's most recent rate order.

         For additional information regarding these amortizations, see Note
3(a) to the Financial Statements.

         1995 Compared to 1994. 1995 operation and maintenance expenses
increased $37 million over 1994 expenses. Substantially all of the increase
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 the $50 million amortization recorded on the South Texas Project. See
Note 3(a) to the Financial Statements. Other taxes decreased $6 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 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 are not recoverable under the Rate Case Settlement.

                   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. The level of future earnings depends on numerous
factors ranging from growth in energy sales, weather, HI Energy's future
results of operations, competition, legislative and other regulatory


                                       32

<PAGE>   33



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. Future
earnings will also be affected by the impact of the acquisition of NorAm and
its integration into the Company's consolidated operations.

RATE MATTERS AND CONTINGENCIES

         The Utility Commission has jurisdiction (or in some cases appellate
jurisdiction) over HL&P's electric rates and as such monitors HL&P's earnings
to ensure that HL&P is not earning in excess of its permitted rate of return.

         Subject to certain changes in existing regulation or legislation, HL&P
is precluded under the terms of its Rate Case Settlement from seeking any
increase in its rates until December 31, 1997. For information regarding the
terms of the settlement, see Note 3 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 regarding such matters, see Notes 3(a) 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 sources of power supply available to HL&P and
alternatives available to traditional customers of HL&P to meet their power
needs.

         Long-Term Trends in Industry. Based on a strategic review of the
Company and HL&P's business and of ongoing developments in the electric utility
and related industries regarding competition, regulation and consolidation, the
Company's management believes that the pace of change affecting the electric
utility industry is likely to accelerate, albeit in a state-by-state fashion.
The Company's management also believes that the businesses of electricity and
natural gas are converging and consolidating and that these trends will alter
the structure and business practices of companies serving these markets in the
future. In particular, the Company's management has observed a trend toward
performance-based rate making for regulated distribution and transmission
operations. This trend should increase the pressure on electric utilities to
become more efficient operators.
        
         In order to adapt to the increasingly competitive environment in which
HL&P operates, the Company and HL&P intend to evaluate and consider a wide
array of potential business strategies. These may include business combinations
or acquisitions involving other utility or non-utility businesses or
properties, internal restructuring, and reorganizations or dispositions of
currently owned properties or currently operating business units. In addition,
the Company and HL&P may engage in new business ventures, such as electric
power marketing, which arise from competitive and regulatory changes in the
utility industry. Pursuit of any of the above strategies, or any combination
thereof, may significantly affect the business operations and financial
condition of the Company. For a discussion of the expected impact of the Merger
on the Company's and HL&P's competitive position, see "--The Merger" above.

         Competition in Wholesale Market. The Energy Policy Act of 1992 and the
Texas Public Utility Regulatory Act (PURA) both contain provisions intended to
facilitate the development of a wholesale energy market. Although HL&P's
wholesale sales traditionally have accounted for less than 1 percent of its
total revenues, the expansion of competition in the wholesale electric market


                                       33

<PAGE>   34



is significant in that it has increased the range of non-utility competitors,
such as exempt wholesale generators (EWGs) and power marketers, in the Texas
electric market as well as resulted in fundamental changes in the operation of
the state transmission grid.

         In February 1996, the Utility Commission adopted rules granting
third-party users of transmission systems open access to such systems at rates,
terms and conditions comparable to those available to utilities owning such
transmission assets. Under the Utility Commission order implementing the rule,
HL&P was required to separate, on an operational basis, its wholesale power
marketing operations from the operations of the transmission grid and, for
purposes of transmission pricing, to disclose each of its separate costs of
generation, transmission and distribution.

         In January 1997, the Utility Commission approved interim transmission
cost of service rates under the new transmission access pricing rules. Although
the actual impact on HL&P of the new pricing rules will not be known until
final approval of the rates (which is not expected to occur until April 1997),
HL&P estimates that the final rates will result in increased transmission costs
of between $22 and $25 million per year. To mitigate any cost increases to
utilities and/or their customers, the Utility Commission will phase in the
increased transmission costs in 10 percent increments during the three-year
period beginning with the implementation of the rule. At the end of the
phase-in 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. In 1997, HL&P expects to
pay increased transmission costs under the rule of between $2.2 and $2.5
million. In addition, based on rate substitution provisions contained in HL&P's
existing transportation contracts, HL&P expects that its rights to receive
contractual payments for transmission wheeling, which in 1996 amounted to $9.4
million, will be terminated.

         The Company believes that the transmission access pricing rules
discriminate against utilities, like HL&P, that have low cost transmission
facilities and operate in compact service territories. Under the rules, HL&P and
similarly situated utilities are expected to pay more in transmission fees than
they will receive in fees, while utilities with high cost transmission
facilities operating in spread-out service territories will receive more in
transmission fees than they pay out. HL&P and other interested parties have
petitioned the Utility Commission to amend the transmission pricing rules to,
among other things, simplify transmission pricing and eliminate cross- subsidies
inherent in the current rules. In March 1997, HL&P also filed a lawsuit alleging
that the Utility Commission's transmission pricing rules are unlawful because
they violate state statutory law, the Texas and U.S. Constitutions and, in
adopting the rules, the Utility Commission failed to comply with the notice,
comment and reasoned justification requirements of the Texas Governmental Code.
HL&P has asked the court to (a) declare invalid the portion of the rules that
created a transmission subsidy for some transmission providers and a deficit for
HL&P and others and (b) remand the rulemaking to the Utility Commission for
further proceedings. No assurance, however, can be given to the ultimate outcome
of this lawsuit.

         In August 1996, the Utility Commission approved the creation of an
independent system operator (ISO) to manage the state's electric grid. The ISO
is a key component of implementing the Utility Commission's overall strategy to
create a competitive wholesale market. The ISO is responsible for ensuring that
all power producers and traders have fair access to the Texas electric
transmission system. The Texas ISO plan is the first ISO proposal to be
implemented in the U.S. The ISO is governed by an equal number of
representatives from each of six wholesale market groups: investor owned
utilities, municipally owned utilities, electric cooperatives and river
authorities, transmission dependent utilities, independent power producers and
power marketers.

         Competition from Self-Generation. HL&P estimates that since 1978,
cogeneration projects representing approximately one-third of HL&P's current
total peak generating capability have been built in the Houston area and that,
as a result, HL&P has lost approximately 2,500 megawatts (MW) in customer load
to self-generation. HL&P has implemented flexible pricing to respond to the
threat


                                       34

<PAGE>   35



of competition in situations where large industrial customers have an
alternative to buying power from HL&P, primarily by constructing their own
generating facilities. Under a tariff option approved by the Utility Commission
in 1995, HL&P can price its industrial rate to new or expanding loads within a
range between 6 percent above its marginal cost and its full embedded cost
rate. HL&P determines the size of the discount based on its assessment of the
customer's alternative power price. While flexible tariff structures may help
HL&P increase or retain sales to industrial customers (and reduce costs that
would otherwise be borne by other customers), such tariffs generally result in
sales at lower margins. The future effect of self-generation facilities cannot
currently be determined but may be adverse.

         Competition in Retail Market. Although neither federal nor Texas law
currently permits retail sales by unregulated entities such as cogenerators or
EWGs, HL&P anticipates that cogenerators, EWGs and other interests 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.

         In January 1997, the Utility Commission delivered a report to the
Texas legislature on the scope of competition in Texas electric markets and the
impact of competition and industry restructuring on customers in both
competitive and non-competitive markets (including legislative recommendations
to promote the public interest in such markets). In its report, the Utility
Commission recommended that the Texas legislature enact legislation to
implement retail competition in Texas but recommended against any legislation
that would introduce broad-based retail competition before 2000.

         Stranded Costs. As the U.S. electric utility industry continues its
transition to a more competitive environment, a substantial amount of fixed
costs previously approved for recovery under traditional utility regulatory
practices (including regulatory assets and liabilities) may become "stranded,"
i.e., unrecoverable at competitive market prices. The issue of stranded costs
could be particularly significant with respect to fixed costs incurred in
connection with the past construction of generation plants, such as nuclear
power plants which, because of their high fixed costs, would not command the
same price for their output as they have in a regulated environment.

         In January 1997, the Utility Commission delivered a report to the
Texas legislature on stranded investments in the electric industry in Texas.
The report estimated that the total amount of stranded costs for all Texas
utilities could be as high as $21 billion, based on one set of assumptions, and
alternatively projected that such costs could be minimal or non-existent, based
on another set of assumptions. The broad range of estimates illustrates the
inherent uncertainty in calculating these costs.

         The Utility Commission has identified five possible mechanisms for
recovering stranded costs, including (i) access charges to all transmission and
distribution customers; (ii) exit fees to be charged to large wholesale or
industrial customers switching to an alternate supplier; (iii) writing down
over-valued generation assets and writing up transmission and distribution
assets; (iv) accelerating depreciation of generation assets while decelerating
depreciation of transmission and distribution assets; and (v) freezing rates at
current levels and applying any additional earnings from efficiency gains,
decreases in fuel prices, or service area growth against the stranded costs
allocated to customers. The Utility Commission, whose mandate under PURA with
respect to stranded cost issues was limited to preparing the report, has
requested that the legislature provide it further direction on these matters.

HI ENERGY

         HI Energy participates primarily in the development and acquisition of
foreign independent power projects and the privatization of foreign generating
and distribution facilities. At December 31,


                                       35

<PAGE>   36



1996, HI Energy's investments in these projects amounted to approximately $567
million. In May 1996, HI Energy purchased for $45 million an additional interest
in an Argentine utility. In May 1996, HI Energy also purchased for $392 million
an 11.35 percent ownership interest in Light Servicos de Eletricidade S.A.
(Light), an integrated electric power and distribution system that serves a
portion of the state of Rio de Janeiro, Brazil, including the City of Rio de
Janeiro.

         During 1996, HI Energy satisfied its cash requirements primarily
through equity contributions and intercompany borrowings from the Company. As
of December 31, 1996, the balance of such intercompany borrowings was
approximately $162 million. Following the Merger, Houston will become subject
to limitations under the 1935 Act and applicable state regulations concerning
the financing, directly or indirectly, of foreign utility company and EWG
investments by a public utility. HI Energy intends to fund future cash
requirements for foreign investments through non-recourse borrowings, dividends
from its investments, equity contributions and permitted intercompany
borrowings.

         For additional information regarding HI Energy, see "--Results of
Operations--Earnings--The Company " above and the discussion of non-regulated
electric power project expenditures and advances contained in "--Liquidity and
Capital Resources--Overview " below and Note 4 to the Financial Statements.


                        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 1996 were, and as estimated for 1997
through 1999 are, as follows:

<TABLE>
<CAPTION>
                                                               Millions of Dollars
                                                         ---------------------------------
                                                          1996     1997     1998     1999
                                                         ------   ------   ------   ------
<S>                                                      <C>      <C>      <C>      <C>
Electric capital and nuclear fuel (excluding Allowance
    for Funds Used During Construction) (AFUDC) (1) .... $  315   $  239   $  253   $  276
Non-regulated electric power project expenditures
    and advances (excluding capitalized interest) (2) ..    493       42
Maturities of long-term debt, preferred stock
    and minimum capital lease payments .................    379      254        5      171
                                                         ------   ------   ------   ------
Total .................................................. $1,187   $  535   $  258   $  447
                                                         ======   ======   ======   ======
</TABLE>
--------------

(1)      During 1996, HL&P made a payment toward the purchase of its corporate
         headquarters building. Such payment is not reflected in the Company's
         electric capital and nuclear fuel expenditures because it is an
         intercompany transaction eliminated upon consolidation.

(2)      Expenditures in the table reflect only expenditures made or to be made
         under existing contractual 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. Expenditures for 1996 include
         a $392 million investment in Light, a Brazilian electric utility.

         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


                                       36

<PAGE>   37



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 common and
HL&P's preferred stock dividends, and interest and principal payments on debt.
In 1996, net cash provided by operating activities totaled $914 million.
Investing activities resulted in a net outflow of $833 million, primarily due
to construction and nuclear fuel expenditures, and additional investments in
non-regulated foreign electric power projects. Financing activities for 1996
resulted in a net cash outflow of $85 million primarily due to open market
purchases of common stock of the Company, the extinguishment of long-term debt,
redemption of preferred stock and payment of common stock dividends offset by
additional commercial paper borrowings.

         During 1996, the Company purchased 16,042,027 shares of its common
stock for an aggregate purchase price (including commissions) of $361 million.
The purchases were financed with short-term borrowings. For additional
information on the Company's stock repurchase program, see Note 5(c) to the
Financial Statements.

         In the fourth quarter of 1996, the Company repaid at maturity $200
million of its 7 1/4% debentures. The retirement was funded using proceeds from
short-term borrowings.

HL&P CAPITAL REQUIREMENTS

         Cash Requirements. HL&P's cash requirements stem primarily from
operating expenses, capital expenditures, payment of common and preferred stock
dividends, interest and principal payments on debt, and redemptions of
preferred stock. In 1996, HL&P's net cash provided by operating activities
totaled approximately $917 million, and net cash used in HL&P's investing
activities totaled $395 million, including allowance for borrowed funds used
during construction. HL&P's financing activities for 1996 resulted in a net
cash outflow of $597 million. Included in these activities were the payment of
dividends, the extinguishment of long-term debt, the redemption of preferred
stock and the payment of matured bonds. For information with respect to these
matters, see Notes 6 and 7(b) to the Financial Statements.

         Capital Program. In 1996, HL&P's capital and nuclear fuel expenditures
(excluding AFUDC) totaled approximately $383 million with estimated
expenditures for 1997, 1998 and 1999 totaling $239 million, $253 million and
$276 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 $430 million for repayment of maturing long-term debt, preferred
stock subject to mandatory redemption and capital leases. These expenditures
are anticipated to be $254 million in 1997, $5 million in 1998 and $171 million
in 1999.

         Environmental Expenditures. The Federal Clean Air Act (Clean Air Act)
has required, and will continue to require, HL&P to increase its environmental
expenditures. It is estimated that requirements under the Clean Air Act for
modifications to existing facilities to reduce emissions of nitrogen oxides
(NOx) may result in expenditures of $40 million through 1999. No significant
expenditure is currently planned for the installation of continuous emissions
monitoring systems for 1997; however, approximately $1 million was incurred for
this equipment in 1996.


                                       37

<PAGE>   38



         The Environmental Protection Agency (EPA) identified HL&P as a
"potentially responsible party" (PRP) 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 PRP
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.

         There exists the possibility that additional legislation related to
global climate change, electromagnetic fields and other environmental and
health issues may be enacted. Compliance with such legislation could
significantly affect the Company and HL&P. The precise impact of new
legislation, if any, will depend on the form of the legislation and the
subsequent development and implementation of applicable regulations.

COMPANY--SOURCES OF CAPITAL RESOURCES AND LIQUIDITY

       As of December 31, 1996, the Company had approximately $1.1 billion of
commercial paper outstanding, supported by two bank credit facilities
aggregating $1.5 billion (exclusive of bank credit facilities of subsidiaries).
Rates paid by the Company on its short-term borrowings are generally lower than
the prime rate.

       The Merger. The cash portion of the Merger consideration (estimated to
be approximately $1.25 billion) is expected to be funded through bank
borrowings under new bank credit facilities (Bank Facilities) to be arranged by
a newly-formed finance subsidiary of Houston (Borrower) with a group of
commercial banks. As of the date hereof, the structure, terms and provisions of
the Bank Facilities are being negotiated with prospective lenders and have not
yet been finalized.

       The Bank Facilities are expected to bear interest at a rate based upon
either the London Interbank Offered Rate plus a margin or a base rate plus a
margin or at a rate determined through a bidding process.

       The borrowings may be secured by liens on or first priority security
interests in assets, which may include (i) the shares of common stock of NorAm
held by Houston or its affiliates after the Merger, (ii) the shares of common
and preferred stock of Time Warner currently owned by the Company, (iii) the
capital stock of subsidiaries of the Borrower and (iv) intercompany notes
evidencing any loans made by the Borrower to Houston or its direct or indirect
subsidiaries. The obligations under the Bank Facilities will not be secured by
the utility properties of HL&P or NorAm.

       In order to provide liquidity to the Borrower to meet its financial
obligations, Houston may issue to the Borrower a new series of
preference stock of Houston and/or enter into a support agreement under which
it would agree to make cash contributions or advances to the Borrower from
excess cash flow (with calculations, definitions and payment mechanics to be
agreed upon). Houston may also agree to certain covenants, including certain
limitations on the payment of dividends on or the repurchase of Houston common
stock. The net proceeds of any disposition or monetization of the Time Warner
stock may be used to prepay borrowings under the Bank Facilities, subject to a
corresponding release by the banks of their security interest in the Time Warner
stock to the extent of any such prepayment.


                                       38

<PAGE>   39



       The Bank Facilities are also expected to contain customary covenants and
default provisions applicable to the Borrower and its subsidiaries, including
limitations on the ability of the Borrower and its subsidiaries to, among other
things, incur additional indebtedness (other than certain permitted
indebtedness), create liens and make investments or loans.

       Other Sources of Capital. The Company has registered with the SEC 10
million shares of its common stock and $250 million principal amount of its
debt securities, all of which securities remain unissued. Subject to market
conditions, such securities could be sold to raise additional capital for the
Company prior to the Merger. 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. In connection with the Merger, the Company has registered with
the SEC 315 million shares of common stock for issuance upon the consummation
of the Merger.

       The Company owns 1 million shares of common stock and 11 million shares
of non-publicly traded convertible preferred stock of Time Warner. The Time
Warner preferred stock, which is entitled to cumulative annual dividends of
$3.75 per share until July 6, 1999, is currently convertible at the option of
the Company into 22.9 million shares of Time Warner common stock. The Company
reviews its investment in Time Warner on a regular basis and does not expect to
maintain its investment in Time Warner indefinitely. For additional information
regarding the Company's investment in Time Warner securities, see Notes 1(j)
and 13 to the Financial Statements.

       Money Fund. 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 1996, 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 1997, net funding requirements of the Company and HL&P are
expected to be met with a combination of commercial paper and bank borrowings.

HL&P--SOURCES OF CAPITAL RESOURCES AND LIQUIDITY

       HL&P expects to finance its 1997 through 1999 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 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. HL&P's existing registration statements will remain in effect
after the Merger.

       In 1996, HL&P's interim financing requirements were met with the
issuance of commercial paper. At December 31, 1996, HL&P had a commercial paper
program supported by a bank line of credit of $400 million. A temporary $346
million increase in the amount of the facility was in effect


                                       39

<PAGE>   40



during a portion of the first quarter of 1997. At December 31, 1996, HL&P had
approximately $235 million of commercial paper outstanding.

       In the fourth quarter of 1996, HL&P redeemed at 100 percent of their
liquidation value plus accrued dividends all four series of its variable term
preferred stock having an aggregate liquidation price of $220 million. The
redemption was funded using proceeds from short-term borrowings. In the first
quarter of 1997, HL&P repaid at maturity $40 million aggregate principal amount
of its 5 1/4% series first mortgage bonds and $150 million of its 7 5/8% series
first mortgage bonds. HL&P is required to redeem the remaining $25.7 million of
its $9.375 series preferred stock in April 1997. In January 1997, pollution
control revenue bonds aggregating $118 million were issued on behalf of HL&P by
the Brazos River Authority ($50 million) and the Matagorda County Navigation
District Number One ($68 million). The new bonds bear a floating interest rate,
and mature in 2018 and 2028, respectively. Proceeds from these issuances were
used to redeem, at 102% of their aggregate principal amount, pollution control
revenue bonds aggregating $118 million.

       In February 1997, two Delaware business trusts established by HL&P
issued capital securities and preferred securities aggregating $350 million.
The trusts sold securities to the public ($100 million 8.257% capital
securities and $250 million 8.125% preferred securities) and used the proceeds
to purchase subordinated debentures from HL&P. Proceeds from the sale of the
subordinated debentures were used by HL&P for general corporate purposes,
including the repayment of short-term debt and the redemption of three series
of cumulative preferred stock having an aggregate liquidation value of $125
million. For information regarding these securities, see Note 17(b) to the
Financial Statements.

                             NEW ACCOUNTING ISSUES

       The staff of the SEC has questioned certain current accounting practices
of the electric utility industry regarding the recognition, measurement and
classification of decommissioning costs for nuclear generating facilities
recorded on the financial statements of electric utilities. In response to
these questions, the Financial Accounting Standards Board (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 Statements of
Financial Accounting Standards (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.



                                       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,
                                                   -----------------------------------------
                                                       1996           1995           1994
                                                   -----------    -----------    -----------
<S>                                                <C>            <C>            <C>        
REVENUES:
     Electric utility ............................ $ 4,025,027    $ 3,680,297    $ 3,746,085
     Other .......................................      70,250         48,974          6,488
                                                   -----------    -----------    -----------
              Total ..............................   4,095,277      3,729,271      3,752,573
                                                   -----------    -----------    -----------

EXPENSES:
     Electric utility:
         Fuel ....................................   1,024,945        879,148        860,936
         Purchased power .........................     322,263        233,494        408,963
         Operation and maintenance ...............     888,699        866,170        828,748
         Taxes other than income taxes ...........     246,288        245,890        251,421
     Depreciation and amortization ...............     550,038        478,034        399,341
     Other operating expenses ....................      72,578        121,085         36,112
                                                   -----------    -----------    -----------
              Total ..............................   3,104,811      2,823,821      2,785,521
                                                   -----------    -----------    -----------

OPERATING INCOME .................................     990,466        905,450        967,052
                                                   -----------    -----------    -----------

OTHER INCOME (EXPENSE):
     Litigation settlements ......................     (95,000)
     Allowance for other funds used during
         construction ............................       4,124          7,760          4,115
     Time Warner dividend income .................      41,610         20,132
     Interest income .............................       6,246          9,774          6,628
     Other - net .................................     (12,392)       (19,821)        (4,787)
                                                   -----------    -----------    -----------
              Total ..............................     (55,412)        17,845          5,956
                                                   -----------    -----------    -----------

INTEREST AND OTHER CHARGES:
     Interest on long-term debt ..................     276,242        279,491        265,494
     Other interest ..............................      33,738         21,586         25,076
     Allowance for borrowed funds used during
         construction ............................      (2,598)        (4,692)        (5,554)
     Preferred dividends of subsidiary ...........      22,563         29,955         33,583
                                                   -----------    -----------    -----------
              Total ..............................     329,945        326,340        318,599
                                                   -----------    -----------    -----------

INCOME FROM CONTINUING OPERATIONS BEFORE
     INCOME TAXES AND CUMULATIVE EFFECT OF
     CHANGE IN ACCOUNTING ........................     605,109        596,955        654,409

INCOME TAXES .....................................     200,165        199,555        230,424
                                                   -----------    -----------    -----------

INCOME FROM CONTINUING OPERATIONS BEFORE
     CUMULATIVE EFFECT OF CHANGE
     IN ACCOUNTING ...............................     404,944        397,400        423,985

DISCONTINUED OPERATIONS (NET OF INCOME TAXES):
     Gain on sale of cable television subsidiary .                    708,124
     Loss from discontinued cable television
         operations ..............................                                   (16,524)
                                                   -----------    -----------    -----------

INCOME BEFORE CUMULATIVE EFFECT OF CHANGE
     IN ACCOUNTING ...............................     404,944      1,105,524        407,461

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

NET INCOME ....................................... $   404,944    $ 1,105,524    $   399,261
                                                   ===========    ===========    ===========
</TABLE>

                            (continued on next page)


                                       41

<PAGE>   42




                HOUSTON INDUSTRIES INCORPORATED AND SUBSIDIARIES

                       STATEMENTS OF CONSOLIDATED INCOME

                                  (CONTINUED)


<TABLE>
<CAPTION>
                                                          Year Ended December 31,
                                                   -------------------------------------
                                                      1996         1995         1994
                                                   -----------  -----------  -----------
<S>                                                <C>          <C>          <C>        
EARNINGS PER COMMON SHARE:

     CONTINUING OPERATIONS BEFORE CUMULATIVE
         EFFECT OF CHANGE IN ACCOUNTING .......... $      1.66  $      1.60  $      1.72

     DISCONTINUED OPERATIONS:
         Gain on sale of cable television
              subsidiary .........................                     2.86
         Loss from discontinued cable television
              operations .........................                                  (.07)
     CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING
         FOR POSTEMPLOYMENT BENEFITS .............                                  (.03)
                                                   -----------  -----------  -----------

EARNINGS PER COMMON SHARE ........................ $      1.66  $      4.46  $      1.62
                                                   ===========  ===========  ===========


WEIGHTED AVERAGE COMMON SHARES
     OUTSTANDING (000) ...........................     244,443      247,706      245,707
</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,
                                             -----------------------------------------
                                                1996           1995           1994
                                             -----------    -----------    -----------
<S>                                          <C>            <C>            <C>        
Balance at Beginning of Year ............... $ 1,953,672    $ 1,221,221    $ 1,191,230

Add - Net Income ...........................     404,944      1,105,524        399,261
                                             -----------    -----------    -----------

         Total .............................   2,358,616      2,326,745      1,590,491
Common Stock Dividends:
     1996, $1.50; 1995, $1.50; 1994, $1.50
     (per share) ...........................    (361,126)      (371,760)      (369,270)

Stock Dividend Distribution ................                     (1,313)
                                             -----------    -----------    -----------

Balance at End of Year ..................... $ 1,997,490    $ 1,953,672    $ 1,221,221
                                             ===========    ===========    ===========
</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,
                                                              -------------------------
                                                                 1996           1995
                                                              -----------   -----------
<S>                                                           <C>           <C>        
PROPERTY, PLANT AND EQUIPMENT - AT COST:
    Electric plant:
       Production ........................................... $ 7,495,244   $ 7,423,891
       Transmission .........................................     934,086       927,027
       Distribution .........................................   2,818,636     2,711,482
       General ..............................................   1,139,409     1,027,090
       Construction work in progress ........................     251,497       320,040
       Nuclear fuel .........................................     241,001       217,604
       Plant held for future use ............................      48,631        48,631
    Other property ..........................................      86,969       105,624
                                                              -----------   -----------
          Total .............................................  13,015,473    12,781,389

    Less accumulated depreciation and amortization ..........   4,259,050     3,916,540
                                                              -----------   -----------
          Property, plant and equipment - net ...............   8,756,423     8,864,849
                                                              -----------   -----------

CURRENT ASSETS:
    Cash and cash equivalents ...............................       8,001        11,779
    Special deposits ........................................          10           433
    Accounts receivable - net ...............................      36,277        39,635
    Accrued unbilled revenues ...............................      77,853        59,017
       Time Warner dividends receivable .....................      10,313        10,313
    Fuel stock ..............................................      61,795        59,699
    Materials and supplies, at average cost .................     130,380       138,007
    Prepayments .............................................      19,291        18,562
                                                              -----------   -----------
          Total current assets ..............................     343,920       337,445
                                                              -----------   -----------

OTHER ASSETS:
    Investment in Time Warner securities ....................   1,027,500     1,027,875
    Deferred plant costs - net ..............................     587,352       613,134
    Fuel-related debits .....................................      84,435
    Deferred debits .........................................     306,473       311,758
    Unamortized debt expense and premium on reacquired debt .     153,823       161,788
    Regulatory tax asset - net ..............................     362,310       228,587
    Recoverable project costs - net .........................     163,630       232,775
    Equity investments in and advances to foreign and
       non-regulated affiliates - net .......................     501,991        41,395
                                                              -----------   -----------
          Total other assets ................................   3,187,514     2,617,312
                                                              -----------   -----------

          Total ............................................. $12,287,857   $11,819,606
                                                              ===========   ===========
</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,
                                                               -------------------------
                                                                  1996           1995
                                                               -----------   -----------
<S>                                                            <C>           <C>        
CAPITALIZATION (STATEMENTS ON FOLLOWING PAGES):
    Common stock equity ...................................... $ 3,827,961   $ 4,123,563
                                                               -----------   -----------

    Preference stock, no par; authorized, 10,000,000 shares;
       none outstanding

    Cumulative preferred stock of subsidiary:
       Not subject to mandatory redemption ...................     135,179       351,345
       Subject to mandatory redemption .......................                    51,055
                                                               -----------   -----------
          Total cumulative preferred stock ...................     135,179       402,400
                                                               -----------   -----------

    Long-term debt ...........................................   3,025,650     3,338,422
                                                               -----------   -----------

              Total capitalization ...........................   6,988,790     7,864,385
                                                               -----------   -----------

CURRENT LIABILITIES:
    Notes payable ............................................   1,337,872         6,300
    Accounts payable .........................................     157,682       136,008
    Taxes accrued ............................................     191,011       174,925
    Interest accrued .........................................      67,707        79,380
    Dividends declared .......................................      92,515        98,502
    Accrued liabilities to municipalities ....................      23,228        20,773
    Customer deposits ........................................      53,633        61,582
    Current portion of long-term debt and preferred stock ....     254,463       379,451
    Other ....................................................      66,010        58,664
                                                               -----------   -----------
              Total current liabilities ......................   2,244,121     1,015,585
                                                               -----------   -----------

DEFERRED CREDITS:
    Accumulated deferred income taxes ........................   2,265,031     2,067,246
    Unamortized investment tax credit ........................     373,749       392,153
    Fuel-related credits .....................................      74,639       122,063
    Other ....................................................     341,527       358,174
                                                               -----------   -----------

              Total deferred credits .........................   3,054,946     2,939,636
                                                               -----------   -----------

COMMITMENTS AND CONTINGENCIES

                 Total ....................................... $12,287,857   $11,819,606
                                                               ===========   ===========
</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,
                                                                                  --------------------------
                                                                                     1996           1995
                                                                                  -----------    -----------
<S>                                                                               <C>            <C>        
COMMON STOCK EQUITY:
    Common stock, no par; authorized, 400,000,000 shares;
       issued, 262,748,447 and 262,672,468 shares at
       December 31, 1996 and 1995, respectively ................................. $ 2,446,754    $ 2,441,790
    Treasury Stock, at cost; 16,042,027 and 0 shares at
       December 31, 1996 and 1995, respectively .................................    (361,196)
    Unearned ESOP shares, 13,370,939 and 14,355,758 shares at
       December 31, 1996 and 1995, respectively .................................    (251,350)      (268,405)
    Retained earnings ...........................................................   1,997,490      1,953,672
    Unrealized loss on investment in Time Warner common
       stock ....................................................................      (3,737)        (3,494)
                                                                                  -----------    -----------
                    Total common stock equity ...................................   3,827,961      4,123,563
                                                                                  -----------    -----------

CUMULATIVE PREFERRED STOCK, no par; authorized, 10,000,000 shares; outstanding,
    1,604,397 and 4,318,397 shares at December 31, 1996 and 1995, 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
          Series B - 1992,  500,000 shares ......................................                     49,104
          Series C - 1992,  600,000 shares ......................................                     58,984
          Series D - 1992,  600,000 shares ......................................                     58,984
                                                                                  -----------    -----------
                 Total ..........................................................     135,179        351,345
                                                                                  -----------    -----------
       Subject to mandatory redemption:
          $9.375 series, 257,000 and 771,000 shares at
              December 31, 1996 and 1995, respectively ..........................      25,700         76,755
       Current redemptions ......................................................     (25,700)       (25,700)
                                                                                  -----------    -----------
                 Total ..........................................................                     51,055
                                                                                  -----------    -----------
                    Total cumulative preferred stock ............................     135,179        402,400
                                                                                  -----------    -----------

LONG-TERM DEBT:
    Debentures:
          7 1/4% series, due 1996 ...............................................                    200,000
          9 3/8% series, due 2001 ...............................................     250,000        250,000
          7 7/8% series, due 2002 ...............................................     100,000        100,000
          Unamortized discount ..................................................        (902)        (1,087)
                                                                                  -----------    -----------
                 Total debentures ...............................................     349,098        548,913
                                                                                  -----------    -----------

    Houston Lighting & Power Company:
       First mortgage bonds:
          5 1/4% series, due 1996 ...............................................                     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
          7 1/4% series, due 2001 ...............................................                     50,000
          9.15 % series, due 2021 ...............................................     160,000        160,000
          8 3/4% series, due 2022 ...............................................      62,275         62,275
          7 3/4% series, due 2023 ...............................................     250,000        250,000
          7 1/2% series, due 2023 ...............................................     200,000        200,000
</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,        
                                                                   -------------------------- 
                                                                      1996           1995     
                                                                   -----------    ----------- 
<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         91,945 
   7 3/4% pollution control series, due 2015 ...................        68,700         68,700 
   5.80 % pollution control series, due 2015 ...................        58,905         58,905 
   7 7/8% pollution control series, due 2016 ...................        68,000         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 ......       170,500        180,500 
   Medium-term notes series B, 8 5/8%, due 1996 ................                      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 ...........................     2,910,175      3,145,175 
                                                                   -----------    ----------- 
                                                                                              
   Pollution control revenue bonds:                                                           
       Gulf Coast 1980-T series, floating rate, due 1998 .......         5,000          5,000 
                                                                   -----------    ----------- 
          Total pollution control revenue bonds ................         5,000          5,000 
                                                                   -----------    ----------- 
                                                                                              
Unamortized premium (discount) - net ...........................       (15,134)       (16,456)
Capitalized lease obligations, discount rates of                                              
   5.2%-11.7%, due 1996-2018 ...................................         4,418          8,560 
Notes payable ..................................................           856            981 
                                                                   -----------    ----------- 
          Subtotal .............................................        (9,860)        (6,915)
                                                                   -----------    ----------- 
             Total .............................................     2,905,315      3,143,260 
                                                                   -----------    ----------- 
                                                                                              
                 Total .........................................     3,254,413      3,692,173 
                 Current maturities ............................      (228,763)      (353,751)
                                                                   -----------    ----------- 
                 Total long-term debt ..........................     3,025,650      3,338,422 
                                                                   -----------    ----------- 
                                                                                              
                     Total capitalization ......................   $ 6,988,790    $ 7,864,385 
                                                                   ===========    =========== 
</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,
                                                          -----------------------------------------
                                                             1996            1995          1994
                                                          -----------    -----------    -----------
<S>                                                       <C>            <C>            <C>        
CASH FLOWS FROM OPERATING ACTIVITIES:
     Income from continuing operations .................. $   404,944    $   397,400    $   423,985
     Adjustments to reconcile income from continuing
         operations to net cash provided by
         operating activities:
         Depreciation and amortization ..................     550,038        478,034        399,341
         Amortization of nuclear fuel ...................      33,875         28,545         21,561
         Deferred income taxes ..........................      54,098         78,382         85,547
         Investment tax credit ..........................     (18,404)       (19,427)       (19,416)
         Allowance for other funds used during
              construction ..............................      (4,124)        (7,760)        (4,115)
         Fuel refund ....................................                   (189,571)
         Fuel cost over (under) recovery ................    (137,362)        76,970        277,940
         Regulatory tax asset - net .....................      10,096          6,876         11,300
         Net cash provided by discontinued
              cable television operations ...............                     16,391         19,349
         Changes in other assets and liabilities:
              Accounts receivable - net .................     (15,478)       (46,299)       (19,295)
              Inventory .................................      21,624         13,901         22,428
              Other current assets ......................        (306)       (14,900)        14,710
              Accounts payable ..........................      21,674        (23,217)       (45,081)
              Interest and taxes accrued ................       4,413         11,088        (17,979)
              Other current liabilities .................      (4,135)        (9,215)        (5,102)
              Other - net ...............................      (6,633)        47,697         40,099
                                                          -----------    -----------    -----------

              Net cash provided by operating activities .     914,320        844,895      1,205,272
                                                          -----------    -----------    -----------

CASH FLOWS FROM INVESTING ACTIVITIES:
     Electric capital and nuclear fuel expenditures
         (including allowance for borrowed funds
         used during construction) ......................    (317,532)      (301,327)      (418,453)
     Non-regulated electric power project expenditures
         and advances ...................................    (495,379)       (49,835)        (7,087)
     Settlement of subsidiary debt in connection with
         sale of cable television subsidiary ............                    619,345
     Corporate headquarters expenditures (including
         capitalized interest) ..........................      (6,543)       (96,469)       (46,829)
     Net cash used in discontinued cable television
         operations .....................................                    (47,601)       (84,071)
     Other - net ........................................     (13,446)        (4,643)       (13,562)
                                                          -----------    -----------    -----------

              Net cash provided by (used in) investing
                  activities ............................    (832,900)       119,470       (570,002)
                                                          -----------    -----------    -----------
</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,
                                                      -----------------------------------------
                                                         1996            1995           1994
                                                      -----------    -----------    -----------
<S>                                                   <C>            <C>            <C>        
CASH FLOWS FROM FINANCING ACTIVITIES:
     Purchase of treasury stock ..................... $  (361,196)
     Proceeds from first mortgage bonds .............                $   142,972
     Payment of matured bonds .......................    (150,000)                  $   (19,500)
     Payment of common stock dividends ..............    (361,126)      (371,731)      (368,790)
     Redemption of preferred stock ..................    (271,400)       (91,400)       (20,000)
     Increase (decrease) in notes payable-net .......   1,331,572       (416,991)      (168,094)
     Extinguishment of long-term debt ...............    (285,263)      (195,224)
     Net cash used in discontinued cable television
         operations .................................                    (40,798)       (68,184)
     Other - net ....................................      12,215         10,143          4,857
                                                      -----------    -----------    -----------

         Net cash used in financing activities ......     (85,198)      (963,029)      (639,711)
                                                      -----------    -----------    -----------

NET INCREASE (DECREASE) IN CASH AND CASH
     EQUIVALENTS ....................................      (3,778)         1,336         (4,441)


CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR ......      11,779         10,443         14,884
                                                      -----------    -----------    -----------

CASH AND CASH EQUIVALENTS AT END OF YEAR ............ $     8,001    $    11,779    $    10,443
                                                      ===========    ===========    ===========

SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:

Cash Payments:
     Interest (net of amounts capitalized) .......... $   311,792    $   342,551    $   366,548
     Income taxes ...................................     139,898        104,228        174,657
</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,
                                                -----------------------------------------
                                                   1996           1995           1994
                                                -----------    -----------    -----------
<S>                                             <C>            <C>            <C>        
OPERATING REVENUES ............................ $ 4,025,027    $ 3,680,297    $ 3,746,085
                                                -----------    -----------    -----------

OPERATING EXPENSES:
     Fuel .....................................   1,024,945        879,148        860,936
     Purchased power ..........................     322,263        233,494        408,963
     Operation ................................     640,152        615,924        580,892
     Maintenance ..............................     248,547        250,246        247,856
     Depreciation and amortization ............     545,685        475,124        398,142
     Federal income taxes .....................     264,819        245,807        254,993
     Other taxes ..............................     246,288        245,890        251,421
                                                -----------    -----------    -----------
              Total ...........................   3,292,699      2,945,633      3,003,203
                                                -----------    -----------    -----------

OPERATING INCOME ..............................     732,328        734,664        742,882
                                                -----------    -----------    -----------

OTHER INCOME (EXPENSE):
     Litigation settlements (net of tax) ......     (61,750)
     Allowance for other funds used during
         construction .........................       4,124          7,760          4,115
     Interest income ..........................       6,998         12,218         10,000
     Other - net ..............................     (20,251)       (25,901)       (12,561)
                                                -----------    -----------    -----------
              Total ...........................     (70,879)        (5,923)         1,554
                                                -----------    -----------    -----------

INCOME BEFORE INTEREST CHARGES ................     661,449        728,741        744,436
                                                -----------    -----------    -----------

INTEREST CHARGES:
     Interest on long-term debt ...............     221,865        244,384        246,533
     Other interest ...........................      12,764          8,117          8,493
     Allowance for borrowed funds used during
         construction .........................      (2,598)        (4,692)        (5,554)
                                                -----------    -----------    -----------
              Total ...........................     232,031        247,809        249,472
                                                -----------    -----------    -----------

INCOME BEFORE CUMULATIVE EFFECT OF CHANGE
     IN ACCOUNTING ............................     429,418        480,932        494,964

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

NET INCOME ....................................     429,418        480,932        486,764

DIVIDENDS ON PREFERRED STOCK ..................      22,563         29,955         33,583
                                                -----------    -----------    -----------

INCOME AFTER PREFERRED DIVIDENDS .............. $   406,855    $   450,977    $   453,181
                                                ===========    ===========    ===========
</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,
                               ------------------------------------
                                  1996         1995         1994
                               ----------   ----------   ----------
<S>                            <C>          <C>          <C>       
Balance at Beginning of Year . $2,150,086   $2,153,109   $2,028,924

Add - Net Income .............    429,418      480,932      486,764
                               ----------   ----------   ----------
Total ........................  2,579,504    2,634,041    2,515,688
                               ----------   ----------   ----------

Deduct - Cash Dividends:
     Preferred:
         $4.00 Series ........        389          389          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 .....      2,030        2,324        1,740
         Series B - 1992 .....      2,066        2,322        1,683
         Series C - 1992 .....      2,648        2,823        2,040
         Series D - 1992 .....      2,316        2,747        2,075
         $8.50 Series ........                   1,417        4,108
         $9.375 Series .......      3,614        8,433       12,047

     Common ..................    329,000      454,000      328,996
                               ----------   ----------   ----------

         Total ...............    351,563      483,955      362,579
                               ----------   ----------   ----------

Balance at End of Year ....... $2,227,941   $2,150,086   $2,153,109
                               ==========   ==========   ==========
</TABLE>


                       See Notes to Financial Statements.


                                       51

<PAGE>   52



                        HOUSTON LIGHTING & POWER COMPANY

                                 BALANCE SHEETS
                             (THOUSANDS OF DOLLARS)

                                     ASSETS


<TABLE>
<CAPTION>
                                                                     December 31,
                                                              -------------------------
                                                                 1996           1995
                                                              -----------   -----------
<S>                                                           <C>           <C>        
PROPERTY, PLANT AND EQUIPMENT - AT COST:
    Electric plant:
       Production ........................................... $ 7,495,244   $ 7,423,891
       Transmission .........................................     934,086       927,027
       Distribution .........................................   2,818,636     2,711,482
       General ..............................................   1,139,409     1,027,090
       Construction work in progress ........................     251,497       320,040
       Nuclear fuel .........................................     241,001       217,604
       Plant held for future use ............................      48,631        48,631
                                                              -----------   -----------
          Total .............................................  12,928,504    12,675,765
    Less accumulated depreciation and amortization ..........   4,252,745     3,906,139
                                                              -----------   -----------
          Property, plant and equipment - net ...............   8,675,759     8,769,626
                                                              -----------   -----------

CURRENT ASSETS:
    Cash and cash equivalents ...............................         643        75,851
    Special deposits ........................................          10           433
    Accounts receivable - affiliated companies ..............       1,493         2,845
    Accounts receivable - others ............................      16,996        23,858
    Accrued unbilled revenues ...............................      77,853        59,017
    Fuel stock ..............................................      61,795        59,699
    Materials and supplies, at average cost .................     130,281       137,584
    Prepayments .............................................      10,770        11,876
                                                              -----------   -----------
          Total current assets ..............................     299,841       371,163
                                                              -----------   -----------

OTHER ASSETS:
    Deferred plant costs - net ..............................     587,352       613,134
    Fuel-related debits .....................................      84,435
    Deferred debits .........................................     270,381       290,012
    Unamortized debt expense and premium on reacquired debt .     152,524       159,962
    Regulatory tax asset - net ..............................     362,310       228,587
    Recoverable project costs - net .........................     163,630       232,775
                                                              -----------   -----------
          Total other assets ................................   1,620,632     1,524,470
                                                              -----------   -----------

              Total ......................................... $10,596,232   $10,665,259
                                                              ===========   ===========
</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,
                                                            -------------------------
                                                               1996           1995
                                                            -----------   -----------
<S>                                                         <C>           <C>        
CAPITALIZATION (STATEMENTS ON FOLLOWING PAGES):
    Common stock equity ................................... $ 3,903,868   $ 3,826,013
    Cumulative preferred stock:
       Not subject to mandatory redemption ................     135,179       351,345
       Subject to mandatory redemption ....................                    51,055
    Long-term debt ........................................   2,676,552     2,989,509
                                                            -----------   -----------

          Total capitalization ............................   6,715,599     7,217,922
                                                            -----------   -----------

CURRENT LIABILITIES:
    Notes payable .........................................     234,665
    Notes payable to affiliated companies .................      19,600
    Accounts payable ......................................     142,439       119,032
    Accounts payable to affiliated companies ..............       5,744         6,982
    Taxes accrued .........................................     196,444       192,673
    Interest accrued ......................................      60,234        70,823
    Accrued liabilities to municipalities .................      23,228        20,773
    Customer deposits .....................................      53,633        61,582
    Current portion of long-term debt and preferred stock .     254,463       179,451
    Other .................................................      62,046        54,149
                                                            -----------   -----------

          Total current liabilities .......................   1,052,496       705,465
                                                            -----------   -----------

DEFERRED CREDITS:
    Accumulated deferred federal income taxes .............   2,124,567     1,947,488
    Unamortized investment tax credit .....................     373,749       392,153
    Fuel-related credits ..................................      74,639       122,063
    Other .................................................     255,182       280,168
                                                            -----------   -----------

          Total deferred credits ..........................   2,828,137     2,741,872
                                                            -----------   -----------

COMMITMENTS AND CONTINGENCIES

                 Total .................................... $10,596,232   $10,665,259
                                                            ===========   ===========
</TABLE>


                       See Notes to Financial Statements.


                                       53

<PAGE>   54



                        HOUSTON LIGHTING & POWER COMPANY

                          STATEMENTS OF CAPITALIZATION
                             (THOUSANDS OF DOLLARS)

<TABLE>
<CAPTION>
                                                                                         December 31,
                                                                                  --------------------------
                                                                                     1996           1995
                                                                                  -----------    -----------
<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 ...........................................................   2,227,941      2,150,086
                                                                                  -----------    -----------
                    Total common stock equity ...................................   3,903,868      3,826,013
                                                                                  -----------    -----------

CUMULATIVE PREFERRED STOCK, no par; authorized, 10,000,000 shares; outstanding,
    1,604,397 and 4,318,397 shares at December 31, 1996 and 1995, 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
          Series B - 1992,  500,000 shares ......................................                     49,104
          Series C - 1992,  600,000 shares ......................................                     58,984
          Series D - 1992,  600,000 shares ......................................                     58,984
                                                                                  -----------    -----------
                 Total ..........................................................     135,179        351,345
                                                                                  -----------    -----------
       Subject to mandatory redemption:
          $9.375 series, 257,000 and 771,000 shares at
              December 31, 1996 and 1995, respectively ..........................      25,700         76,755
       Current redemptions ......................................................     (25,700)       (25,700)
                                                                                  -----------    -----------
                 Total ..........................................................                     51,055
                                                                                  -----------    -----------
                    Total cumulative preferred stock ............................     135,179        402,400
                                                                                  -----------    -----------

LONG-TERM DEBT:
       First mortgage bonds:
          5 1/4% series, due 1996 ...............................................                     40,000
          5 1/4% series, due 1997 ...............................................      40,000         40,000
          6 3/4% series, due 1997 ...............................................      35,000         35,000
          7 5/8% series, due 1997 ...............................................     150,000        150,000
          6 3/4% series, due 1998 ...............................................                     35,000
          7 1/4% series, due 2001 ...............................................                     50,000
          9.15 % series, due 2021 ...............................................     160,000        160,000
          8 3/4% series, due 2022 ...............................................      62,275         62,275
          7 3/4% series, due 2023 ...............................................     250,000        250,000
          7 1/2% series, due 2023 ...............................................     200,000        200,000
          4.90 % pollution control series, due 2003 .............................      16,600         16,600
          7    % pollution control series, due 2008 .............................      19,200         19,200
          6 3/8% pollution control series, due 2012 .............................      33,470         33,470
          6 3/8% pollution control series, due 2012 .............................      12,100         12,100
          5.80 % pollution control series, due 2015 .............................      91,945         91,945
          7 3/4% pollution control series, due 2015 .............................      68,700         68,700
          8 1/4% pollution control series, due 2015 .............................      90,000         90,000
          5.80 % pollution control series, due 2015 .............................      58,905         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,
                                                             --------------------------
                                                                1996            1995
                                                             -----------    -----------

<S>                                                          <C>            <C>        
    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 7/8% pollution control series, due 2019 ..............      29,685         29,685
    7.60 % pollution control series, due 2019 ..............      70,315         70,315
    7 1/8% pollution control series, due 2019 ..............     100,000        100,000
    7 5/8% pollution control series, due 2019 ..............     100,000        100,000
    6.70 % pollution control series, due 2027 ..............      56,095         56,095
    Medium-term notes series A, 9.80%-9.85%, due 1996-1999 .     170,500        180,500
    Medium-term notes series B, 8 5/8%, due 1996 ...........                    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 .......................   2,910,175      3,145,175
                                                             -----------    -----------

Pollution control revenue bonds:
    Gulf Coast 1980-T series, floating rate, due 1998 ......       5,000          5,000
                                                             -----------    -----------
          Total pollution control revenue bonds ............       5,000          5,000
                                                             -----------    -----------

Unamortized premium (discount) - net .......................     (15,134)       (16,456)
Capitalized lease obligations, discount rates of
    5.2%-11.7%, due 1996-2018 ..............................       4,418          8,560
Notes payable ..............................................         856            981
                                                             -----------    -----------
          Subtotal .........................................      (9,860)        (6,915)
                                                             -----------    -----------

              Total ........................................   2,905,315      3,143,260
              Current maturities ...........................    (228,763)      (153,751)
                                                             -----------    -----------
              Total long-term debt .........................   2,676,552      2,989,509
                                                             -----------    -----------

                  Total capitalization ..................... $ 6,715,599    $ 7,217,922
                                                             ===========    ===========
</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,
                                                                             -----------------------------------------
                                                                                1996           1995           1994
                                                                             -----------    -----------    -----------
<S>                                                                          <C>            <C>            <C>        
CASH FLOWS FROM OPERATING ACTIVITIES:
     Net income ............................................................ $   429,418    $   480,932    $   486,764

     Adjustments to reconcile net income to net cash provided by operating
              activities:
         Depreciation and amortization .....................................     545,685        475,124        398,142
         Amortization of nuclear fuel ......................................      33,875         28,545         21,561
         Deferred federal income taxes .....................................      33,261         71,188         81,739
         Investment tax credits ............................................     (18,404)       (19,427)       (19,416)
         Allowance for other funds used during
              construction .................................................      (4,124)        (7,760)        (4,115)
         Fuel refund .......................................................                   (189,571)
         Fuel cost over (under) recovery ...................................    (137,362)        76,970        277,940
         Cumulative effect of change in accounting
              for postemployment benefits ..................................                                     8,200
         Regulatory tax asset - net ........................................      10,096          6,876         11,300
         Changes in other assets and liabilities:
              Accounts receivable - net ....................................     (10,622)       (34,239)       (17,827)
              Materials and supplies .......................................      23,397         17,227         20,604
              Fuel stock ...................................................      (2,096)        (2,988)         1,874
              Accounts payable .............................................      22,169        (32,964)       (40,054)
              Interest and taxes accrued ...................................      (6,818)        17,721         (6,980)
              Other current liabilities ....................................       4,502         (7,816)        (4,936)
              Other - net ..................................................      (6,331)       (12,128)        12,115
                                                                             -----------    -----------    -----------
         Net cash provided by operating activities .........................     916,646        867,690      1,226,911
                                                                             -----------    -----------    -----------

CASH FLOWS FROM INVESTING ACTIVITIES:
     Capital and nuclear fuel expenditures
         (including allowance for borrowed funds
         used during construction) .........................................    (385,590)      (396,242)      (418,453)
     Other - net ...........................................................      (9,100)       (10,618)       (15,822)
                                                                             -----------    -----------    -----------
         Net cash used in investing activities .............................    (394,690)      (406,860)      (434,275)
                                                                             -----------    -----------    -----------

CASH FLOWS FROM FINANCING ACTIVITIES:
     Proceeds from first mortgage bonds ....................................                    142,972
     Payment of matured bonds ..............................................    (150,000)                      (19,500)
     Payment of dividends ..................................................    (353,663)      (485,793)      (363,083)
     Increase (decrease) in notes payable - net ............................     234,665                      (171,100)
     Increase in notes payable to affiliated company .......................      19,600
     Redemption of preferred stock .........................................    (271,400)       (91,400)       (20,000)
     Extinguishment of long-term debt ......................................     (85,263)      (195,224)
     Other - net ...........................................................       8,897          8,599          4,501
                                                                             -----------    -----------    -----------
         Net cash used in financing activities .............................    (597,164)      (620,846)      (569,182)
                                                                             -----------    -----------    -----------

NET INCREASE (DECREASE) IN CASH AND
     CASH EQUIVALENTS ......................................................     (75,208)      (160,016)       223,454
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR .............................      75,851        235,867         12,413
                                                                             -----------    -----------    -----------

CASH AND CASH EQUIVALENTS AT END OF YEAR ................................... $       643    $    75,851    $   235,867
                                                                             ===========    ===========    ===========

SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:

Cash Payments:
     Interest (net of amounts capitalized) ................................. $   234,003    $   250,951    $   253,918
     Income taxes ..........................................................     201,986        157,400        196,655
</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, 1996


(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, 1996
                                                     -----------------
                                                   (Millions of Dollars)
<S>                                                      <C>  
Deferred plant costs - net ............................. $ 587
Malakoff and Trinity mine investments ..................   164
Regulatory tax asset - net .............................   362
Unamortized loss on reacquired debt ....................   116
Deferred debits ........................................   102
Unamortized investment tax credit ......................  (374)
Accumulated deferred income taxes-regulatory tax asset .  (101)
</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 Nos. 71, 101 (Accounting for the
              Discontinuation of Application of SFAS No. 71) and 121 (Accounting
              for the Impairment of Long- Lived Assets and for Long-Lived Assets
              to be Disposed of) 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.



                                       57

<PAGE>   58



       (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.
              AFUDC represents the estimated debt and equity cost of funds used
              to finance construction. Customer payments for construction
              reduce additions to electric plant.
        
              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 1994 through 1996.

       (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 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 all
              deferred plant costs (which totaled $25.8 million for each of the
              years 1996, 1995 and 1994) 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. Other revenues include electricity sales of
              a majority owned foreign electric utility, which are also
              recorded under the full accrual method and the Company's equity 
              income in unconsolidated investments of HI Energy. Also included
              in other revenues are 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 were deferred and are being 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.

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


                                       58

<PAGE>   59



              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 Company's Consolidated
              Balance Sheets. 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 estimated fair value of $67
              million as of December 31, 1996 and $44.5 million as of December
              31, 1995 on the Company's Consolidated and HL&P's Balance Sheets
              under deferred debits. The liability for nuclear decommissioning
              is reported on the Company's Consolidated and HL&P's Balance
              Sheets under deferred credits. Any unrealized gains or losses are
              accounted for in accordance with SFAS No. 71 as a regulatory
              asset/liability and reported on the Company's Consolidated and
              HL&P's Balance Sheets as a deferred debit.

       (k)    FUEL STOCK. Gas inventory (at average cost) was $19.6 million at
              December 31, 1996. Coal, lignite, and oil inventory balances
              (using last-in, first-out) were $27.3 million, $11.8 million and
              $3.0 million, respectively.

       (l)    DEPRECIATION. The Company and HL&P compute depreciation using the
              straight-line method. The Company's depreciation expense for 1996
              was $360 million compared to $349 million and $338 million for
              1995 and 1994, respectively. HL&P's depreciation expense for 1996
              was $358 million compared to $347 million and $338 million for
              1995 and 1994, respectively.

       (m)    RECLASSIFICATION. Certain amounts from the previous years have
              been reclassified to conform to the 1996 presentation of
              financial statements. Such reclassifications do not affect
              earnings.

       (n)    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. For a
              description of the Merger, see Note 16 to the Financial
              Statements.

       (o)    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.

       (p)    LONG-LIVED ASSETS. Effective January 1, 1996, the Company and
              HL&P adopted SFAS No. 121. SFAS No. 121 requires that long-lived
              assets and certain identifiable intangibles to be held and used
              or disposed of by an entity be reviewed for impairment whenever
              events or changes in circumstances indicate that the carrying
              amount of an asset may not be recoverable. The Company and HL&P
              have determined that no impairment loss need be recognized for
              applicable assets of continuing operations as of December 31,
              1996. This conclusion, however, may change in the future as
              competition influences wholesale and retail pricing in the
              electric utility industry.



                                      59

<PAGE>   60



(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 MW 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, 1996, HL&P's investment in the South Texas Project
              was $2.0 billion (net of $503 million accumulated depreciation).
              HL&P's investment in nuclear fuel (including AFUDC) was $65
              million (net of $176 million amortization) as of such date.

       (b)    REGULATORY PROCEEDINGS AND LITIGATION. All litigation and
              arbitration claims formerly pending between HL&P and the other
              co-owners of the South Texas Project have been settled and
              dismissed with prejudice.

              On April 30, 1996, HL&P and the City of Austin (Austin), one of
              the four co-owners of the South Texas Project, agreed to settle a
              lawsuit in which Austin had alleged that outages occurring at the
              South Texas Project between early 1993 and early 1994 were due to
              HL&P's failure to perform certain obligations it owed Austin
              under a Participation Agreement relating to the project. Under
              the settlement, HL&P agreed to pay Austin $20 million in cash to
              resolve all pending disputes between HL&P and Austin, and Austin
              agreed to support the formation of a new operating company to
              assume HL&P's role as project manager for the South Texas
              Project. The Company and HL&P have recorded the $20 million ($13
              million net of tax) payment to Austin on the Company's Statements
              of Consolidated Income and HL&P's Statements of Income as
              litigation settlements expense.

              In July 1996, HL&P and the City of San Antonio, acting through
              the City Public Service Board of San Antonio (CPS), entered into
              a settlement agreement providing, among other things, for (i) the
              dismissal with prejudice of all pending arbitration claims and
              lawsuits between HL&P and CPS relating to the South Texas
              Project, (ii) a cash payment by HL&P to CPS of $75 million, (iii)
              an agreement to support formation of a new operating company to
              replace HL&P as project manager for the South Texas Project and
              (iv) the execution of a 10-year joint operations agreement under
              which HL&P and CPS will share savings resulting from the joint
              dispatching of their respective generating assets in order to
              take advantage of each system's lower cost resources. Under the
              terms of the joint operations agreement entered into between CPS
              and HL&P, HL&P guarantees CPS minimum annual savings of $10
              million and a minimum cumulative savings of $150 million over the
              ten-year term of the agreement. Based on current forecasts and
              other assumptions regarding the combined operation of the two
              generating systems, HL&P anticipates that the savings resulting
              from joint operations will equal or exceed the minimum savings
              guaranteed under the joint operating agreement. In 1996, savings
              generated for CPS' account for a partial year of joint operations
              were approximately $14 million.

              The operating company (OPCO) which is being formed to replace
              HL&P as project manager of the South Texas Project will be a
              Texas non-profit corporation.  Regulatory and governmental
              approvals are being sought for the implementation of OPCO. Once
              this process is completed, HL&P's employees working at the South
              Texas Project will become employees of OPCO and OPCO will assume
              responsibility for managing the South Texas Project. Oversight
              will be provided by an Owners' Committee and OPCO's board of
              directors, under the direction of directors appointed by each of
              the co-owners.
        
              In 1996, the capability factor at the South Texas Project
              improved to 93.9 percent from 87.7 percent in 1995 (the 1995
              median capability factor for U.S. nuclear facilities was 75.9
              percent).

         
                                       60

<PAGE>   61



              In 1996, the Nuclear Regulatory Commission (NRC) graded the South
              Texas Project "superior" in the areas of maintenance and support
              and "good" in areas of operations and engineering in the NRC's
              most recent Systematic Assessment of Licensees Performance.
              Between June 1993 and February 1995, the South Texas Project had
              been listed on the NRC's "watch list" of plants with weaknesses
              that warrant increased NRC regulatory attention.

       (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 1996),
              HL&P and the other owners of the South Texas Project are subject
              to assessments, the maximum aggregate assessment under current
              policies being $14.8 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 of owners of nuclear power plants, such as the
              South Texas Project, was $8.92 billion as of December 1996.
              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 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 currently exceed
              minimum NRC requirements, no assurance can be given that the
              amounts held in trust will be adequate to cover the actual
              decommissioning costs of the South Texas Project. Such costs may
              vary because of changes in the assumed date of decommissioning,
              changes in regulatory and accounting requirements, changes in
              technology and changes in costs of labor, materials and
              equipment.

(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



                                      61

<PAGE>   62



              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.

       (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.

              The Rate Case Settlement gives HL&P the option to write down up
              to $50 million per year of its investment in the South Texas
              Project through December 31, 1999, which write-downs will be
              treated under the terms of the Rate Case Settlement as reasonable
              and necessary expenses for purposes of reviews of HL&P's earnings
              and any rate review proceeding initiated against HL&P. In both
              1995 and 1996, HL&P recorded a $50 million pre-tax write down of
              its investment in the South Texas Project as amortization
              expense. In 1996, HL&P also amortized $50 million (pre-tax) of
              its $153 million investment in certain lignite reserves
              associated with a canceled generating station. In accordance with
              the settlement, HL&P's remaining investment in the canceled
              generating station and certain lignite reserves ($164 million 
              at December 31, 1996) will be amortized fully no later than 
              December 31, 2002.

       (b)    RATE CASE APPEALS. The only HL&P rate order currently under
              appeal is Docket No. 6668 (the Utility Commission's inquiry into
              the prudence of the planning and construction of the South Texas
              Project). 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.

              In June 1996, the Supreme Court of Texas unanimously upheld the
              decision of the Utility Commission in Docket No. 8425 (HL&P's
              1988 rate case) to include in HL&P's rate base $93 million in
              construction costs relating to the canceled generating station.
              The Supreme Court also affirmed the Utility Commission's decision
              granting deferred accounting treatment for Unit No. 2 of the
              South Texas Project and the calculation of HL&P's federal income
              tax expenses without taking into account deductions for expenses
              paid by the Company's shareholders. As a result of this decision,
              HL&P's 1988 rate case has now become final.

(4)           INVESTMENTS OF HI ENERGY

       (a)    GENERAL.  HI Energy, a wholly owned subsidiary of the Company 
              formed in 1993, participates primarily in the development and
              acquisition of foreign independent power projects and the
              privatization of foreign generating and distribution companies.
              The Company generally accounts for affiliate investments of HI
              Energy under the equity method of accounting where: (i) HI
              Energy's ownership interest in the affiliate ranges from 20
              percent to 50 percent or (ii) HI Energy exercises significant
              influence over operating and financial policies of such
              affiliate. The Company's proportionate share of the equity in net
              income/(loss) in these affiliates for the years ended December 31,
              1996, 1995 and 1994 was $17.0 million, $0.5 million and $(1.6)
              million, respectively. These amounts are included on the
              Company's Statement of Consolidated Income as "Other Revenues."
              The Company's equity investments in and advances to foreign and
              non-regulated affiliates at December 31, 1996 and 1995 were $502
              million and $41 million, respectively.



                                      62

<PAGE>   63



       (b)    FOREIGN INVESTMENTS.   In May 1996, a subsidiary of HI Energy 
              acquired 11.35 percent of the common shares of Light, a publicly
              held Brazilian corporation, for $392 million. Light is the
              operator under a 30-year concession agreement of an integrated
              electric power and distribution system that serves a portion of
              the state of Rio de Janeiro, Brazil, including the city of Rio de
              Janeiro. HI Energy acquired the shares as a bidder in the
              government-sponsored auction of 60 percent of Light's outstanding
              shares. Subsequent to the auction, the winning bidders, including
              a subsidiary of HI Energy, formed a consortium whose aggregate
              ownership interest of 50.44 percent represents a controlling
              interest in Light.

              The Company has accounted for this transaction under purchase
              accounting and has recorded its investment and its interest in
              Light's operations after June 1, 1996, using the equity method.
              The purchase price was allocated on the basis of the estimated
              fair market value of the assets acquired and the liabilities
              assumed as of the date of acquisition. 

              A subsidiary of HI Energy has entered into a $167.5 million loan
              agreement in order to refinance a portion of the acquisition
              costs of Light. The full proceeds of the loan, net of a $17.5
              million debt reserve account to be established for the benefit of
              the lenders, will not be funded until the satisfaction of various
              conditions precedent, including the obtaining of political risk
              insurance. The loan is non-recourse to the Company and HL&P. The
              loan is secured by, among other things, a pledge of the shares of
              Light and a subsidiary of HI Energy that is the indirect holder
              of the shares of Light.

              In addition to the investment in Brazil, HI Energy had total
              equity investments in and advances to affiliates in Argentina of 
              $81 million and $36 million at December 31, 1996 and 1995,
              respectively, representing a 49 percent interest in the capital
              stock of an electric utility operating in the Province of Buenos
              Aires. In addition, HI Energy owns a 90 percent ownership
              interest in an Argentine electric utility distribution system and
              is constructing a 160 MW cogeneration facility in San Nicolas,
              Argentina. HI Energy's investment in these projects was
              approximately $68 million and $22 million at December 31, 1996 and
              1995, respectively.

              HI Energy also owns a 36 percent interest in a coke calcining and
              power generation facility in India with an investment of
              approximately $8 million and $5 million at December 31, 1996 and
              December 31, 1995, respectively.

       (c)    VALUATION ALLOWANCE. In 1995, the Company recorded a $28 million
              valuation allowance (resulting in an $18 million after-tax charge
              in that year) with respect to two waste tire-to-energy projects
              that were being developed in reliance on the terms of a state
              subsidy intended to encourage development of energy production
              facilities for the disposal of solid waste. In March 1996, the
              subsidy was repealed. In 1996, the Company recorded an additional
              valuation allowance of $7 million with respect to these projects,
              which resulted in a $5 million after-tax charge to 1996 earnings.

              The valuation allowance reflects the combined amounts lent to the
              projects on a subordinated basis by HI Energy. HI Energy also is
              a party to two separate note purchase agreements committing it,
              under certain circumstances, to lend up to an additional $16
              million. The Company has entered into a support agreement to
              enable HI Energy to honor its obligation under these note
              purchase agreements. In the Company's opinion, it is unlikely
              that additional loans would be required to be made under the note
              purchase agreements, unless construction activities with respect
              to these projects were recommenced at some future date. In March
              1996, a subsidiary of HI Energy purchased from a senior lending
              bank all notes relating to one of the projects

         
           
                                       63

<PAGE>   64
              (approximately $4.1 million). As a consequence, HI Energy has
              discretion over when, if ever, the construction activities for
              this project will reconvene and in turn control over future
              obligations of HI Energy to acquire additional subordinated notes
              for this project.

(5)           COMMON STOCK

       (a)    DISTRIBUTION AND DIVIDENDS. 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 the
              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.

              In 1996, the Company paid four regular quarterly dividends
              aggregating $1.50 per share on its common stock pursuant to
              dividend declarations made in December 1995, March 1996, June
              1996, and September 1996. In December 1996, the Company declared
              its regular quarterly dividend of $0.375 per share to be paid in
              March 1997. Dividends paid have been included in common stock
              dividends on the Company's Statements of Consolidated Cash Flows.
              Dividends declared are included in common stock dividends on the
              Company's Statements of Consolidated Retained Earnings.

       (b)    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, 1996, 27 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 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 69,905, 49,792
              and 100,524 for 1996, 1995 and 1994, respectively. Stock option
              activity for the years 1994 through 1996 is summarized below:
<TABLE>
<CAPTION>

                                                           Option Price at
                                              Number        Date of Grant
                                              of Shares      or Exercise
                                              ---------      -----------

<S>                                           <C>             <C>     
Outstanding at December 31, 1993 .........    251,898         $  23.25
    Options Granted ......................    131,452
    Options Canceled .....................    (80,772)

Outstanding at December 31, 1994 .........    302,578
    Options Granted ......................    133,324         $  17.75; $21.25
    Options Canceled .....................    (24,560)

Outstanding at December 31, 1995 .........    411,342
    Options Granted ......................    101,798         $  24.375
    Options Exercised ....................       (574)        $  17.75
    Options Withheld for Taxes ...........        (90)
    Options Canceled .....................    (13,824)

Outstanding at December 31, 1996              498,652

Exercisable at:
    December 31, 1996 ....................    280,270         $  17.75-23.25
    December 31, 1995 ....................    181,924         $  21.75-23.25
    December 31, 1994 ....................    107,664         $  21.75-23.125
</TABLE>


                                      64



<PAGE>   65
              Effective January 1, 1996, the Company and HL&P adopted SFAS No.
              123, "Accounting for Stock- Based Compensation." In accordance
              with SFAS No. 123, the Company and HL&P will continue to apply
              the existing rules contained in Accounting Principles Board
              Opinion No. 25, "Accounting for Stock Issued to Employees," and
              disclose the required pro forma effect on net income and earnings
              per share of the fair value based method of accounting for stock
              compensation as required by SFAS No. 123.

              The following pro forma summary of the Company's consolidated
              results of operations have been prepared as if the fair value
              based method of accounting for employee stock compensation as
              required by SFAS No. 123 had been applied:

<TABLE>
<CAPTION>
                                                     Year Ended December 31,
                                                  ----------------------------- 
                                                     1996               1995
                                                  -----------       ----------- 
                                                      (Thousands of Dollars)
<S>                                               <C>               <C>        
Net income as reported                            $   404,944       $ 1,105,524
SFAS 123 adjustment                                    (1,098)             (244)
                                                  -----------       ----------- 
Pro forma net income                              $   403,846       $ 1,105,280
                                                  ===========       ===========

Earnings per Common Share          As Reported       $      1.66       $   4.46
                                   Pro forma         $      1.65       $   4.46
</TABLE>

       (c)    REPURCHASE PROGRAM. The Company repurchased a total of 16,042,027
              shares of common stock in 1996 for an aggregate purchase price of
              approximately $361 million. The Company's Board of Directors has
              authorized additional stock purchases of approximately $89
              million. Additional repurchases of common stock are subject to
              the discretion of management, market conditions, applicable legal
              requirements, available cash and other factors.

       (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 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


                                      65
<PAGE>   66



              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.

(6)           PREFERRED STOCK OF HL&P

              The following table sets forth, at December 31, 1996, the per
              share redemption prices of HL&P's outstanding cumulative
              preferred stock. The per share redemption prices do not include
              accrued dividends upon 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

Subject to Mandatory Redemption:
$9.375 (a) .......................................            --
</TABLE>
-------------------

              (a)   HL&P is required to redeem all remaining 257,000
                    outstanding shares of $9.375 cumulative preferred stock at
                    $100 per share (plus accrued dividends) in April 1997.

              In 1996, HL&P redeemed 514,000 of its $9.375 cumulative preferred
              stock at $100 per share. The redemption included 257,000 shares
              in satisfaction of mandatory sinking fund requirements and an
              additional 257,000 shares as an optional redemption. In 1996,
              HL&P redeemed all issued and outstanding shares of its Variable
              Term Preferred Stock at a redemption price of $100 per share plus
              accrued dividends as follows:
<TABLE>
<CAPTION>

                                   Number of              Redemption
             Series                 Shares                   Date
             ------                 ------                ---------
            <S>                     <C>                    <C>   
               A                    500,000                12/11/96
               B                    500,000                12/18/96
               C                    600,000                12/26/96
               D                    600,000                12/27/96
</TABLE>

              For information with respect to the redemption in 1997 of three
              series of preferred stock and the related issuances of trust
              securities, see Note 17(b). 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.

(7)           LONG-TERM DEBT

       (a)    COMPANY. In December 1996, the Company repaid at maturity $200
              million aggregate principal amount of its outstanding 7 1/4%
              debentures using short-term borrowings under its existing credit
              facilities. Consolidated annual maturities of long-term debt and
              minimum capital lease payments

         
                                       66

<PAGE>   67



              for the Company are approximately $254 million in 1997, $5
              million in 1998, $171 million in 1999, $150 million in 2000 and
              $250 million in 2001.

       (b)    HL&P. Sinking or improvement fund requirements of HL&P's first
              mortgage bonds outstanding will be approximately $37 million for
              each of the years 1997 through 2001. Of such requirements,
              approximately $35 million for each of the years 1997 through 2001
              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 1996
              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 1997 is approximately $305 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 January 1996, HL&P repaid upon maturity $100 million principal
              amount of its Collateralized Medium-Term Notes Series B and $10
              million principal amount of its Collateralized Medium-Term Notes
              Series A, plus accrued interest on the two issues. In April 1996,
              HL&P repaid upon maturity $40 million principal amount of its 5
              1/4% first mortgage bonds plus accrued interest. In May 1996,
              HL&P redeemed $50 million of its 7 1/4% first mortgage bonds due
              February 1, 2001 at a redemption price of 100.42%, plus accrued
              interest, and $35 million of its 6 3/4% first mortgage bonds due
              April 1, 1998 at a redemption price of 100.15%, plus accrued
              interest. HL&P's annual maturities of long-term debt and the
              present value of minimum capital lease payments are approximately
              $228 million in 1997, $5 million in 1998, $171 million in 1999,
              $150 million in 2000, and $0.1 million in 2001.

(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 $1.9 billion at December 31, 1996 and $1.5 billion at
              December 31, 1995, under which borrowings are classified as
              short-term indebtedness. 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 years
              ended December 31, 1996 and 1995 were 5.67% and 6.33%,
              respectively. Outstanding commercial paper of the Company and its
              subsidiaries was $1.3 billion at December 31, 1996 and $6 million
              at December 31, 1995. Facility fees are required on the credit
              facilities.


         
                                       67

<PAGE>   68



(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,
                                                             -----------------------
                                                          1996        1995        1994
                                                        --------    --------    --------
                                                             (Thousands of Dollars)

<S>                                                     <C>         <C>         <C>
Service cost - benefits earned during the period ....   $ 24,392    $ 22,852    $ 21,977
Interest cost on projected benefit obligation .......     51,560      49,317      46,091
Actual (return) loss on plan assets .................    (75,326)    (96,004)      5,357
Net amortization and deferrals ......................     17,514      50,889     (51,491)
                                                        --------    --------    --------
      Net pension cost ..............................     18,140      27,054      21,934
SFAS No. 88 - curtailment expense ...................     12,871       5,645
                                                        --------    --------    -------- 
      Total pension cost ............................   $ 31,011    $ 32,699    $ 21,934
                                                        ========    ========    ========
</TABLE>

              The funded status of the Company's retirement plans attributable
              to continuing operations was as follows:
<TABLE>
<CAPTION>

                                                     December 31,
                                                  -----------------
                                                  1996         1995
                                                  ----         ----
                                                (Thousands of Dollars)
<S>                                             <C>          <C>      
Actuarial present value of:
    Vested benefit obligation ...............   $ 542,714    $ 504,655
                                                =========    =========

    Accumulated benefit obligation ..........   $ 578,786    $ 541,278
                                                =========    =========

Plan assets at fair value ...................   $ 675,401    $ 595,192
Projected benefit obligation ................     756,597      704,871
                                                ---------    ---------
Assets less than projected benefit obligation     (81,196)    (109,679)
Unrecognized transitional asset .............     (11,502)     (13,421)
Unrecognized prior service cost .............      31,154       46,627
Unrecognized net loss .......................      19,405       22,522
                                                ---------    ---------
Accrued pension cost ........................   $ (42,139)   $ (53,951)
                                                =========    =========
</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 7.25 percent in 1996 and 7.5 percent in 1995. A
              long-term annual rate of compensation increase ranging from 4
              percent to 6 percent was assumed for both 1996 and 1995. The
              assumed long-term rate of return on plan assets was 9.5 percent
              in 1996 and 1995. 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.

              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,


                                      68

<PAGE>   69



              1995, an incentive program to retire early. For employees
              electing early retirement, the program added five years of
              service credit and five years in age up to 35 years of service
              and age 65, respectively, in determining an employee's pension.
              Each participating employee (under age 62) would also receive a
              supplemental benefit to age 62. During July 1995, the early
              retirement incentive was accepted by approximately 300 employees.

              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 in 1995 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 1996 and 1995, the Company and HL&P amortized $12.9 million
              and $5.6 million, respectively, of those costs as a curtailment
              under SFAS No. 88, "Employers' Accounting for Settlements and
              Curtailments of Defined Benefit Pension Plans and for Termination
              Benefits," with regards to the Company's 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, pretax or after-tax, up to a maximum of 16 percent
              of compensation limited by an annual deferral limit ($9,500 for
              calendar year 1996) 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 Employee Stock Ownership Plan (ESOP) component. The
              Company may use ESOP shares to satisfy its obligation to make
              matching contributions under the savings plan. Debt service on
              the ESOP loan is paid using all dividends on shares in the ESOP,
              interest earnings on funds held in the ESOP and cash
              contributions by the Company. Shares of the Company's common
              stock are released from the encumbrance of the ESOP loan based on
              the proportion of debt service paid during the period.

              The Company adopted Statement of Position (SOP) 93-6, effective
              January 1, 1994, which requires that the Company recognize
              benefit expense for the ESOP equal to the fair value of the ESOP
              shares committed to be released. In accordance with SOP 93-6, the
              Company credits to unearned ESOP shares the original purchase
              price of ESOP shares committed to be released to plan
              participants with the difference between the fair value of the
              shares and the original purchase price recorded to common stock.
              Dividends on allocated ESOP shares are recorded as a reduction to
              retained earnings; dividends on unallocated ESOP shares are
              recorded as a reduction of debt or accrued interest on the ESOP
              loan. 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 $16.0 million, $18.9 million and $17.0
              million in 1996, 1995 and 1994, respectively. HL&P's portion of
              the savings plan benefit expense was $15.3 million, $18.3 million
              and $16.5 million in 1996, 1995 and 1994, respectively. Savings
              plan benefit expense attributable to discontinued operations was
              not material.


         
                                       69

<PAGE>   70



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

                                                           December 31,
                                                  ------------------------------
                                                      1996              1995
                                                  ------------      ------------
<S>                                               <C>               <C>      
Allocated shares ...........................         5,391,245         4,406,426
Unearned shares ............................        13,370,939        14,355,758
                                                  ------------      ------------
    Total ESOP shares ......................        18,762,184        18,762,184
                                                  ============      ============

Fair value of unearned ESOP shares .........      $302,517,495      $348,127,132
</TABLE>

       (c)    POSTRETIREMENT BENEFITS. The Company and HL&P record the
              liability for post-retirement benefit plans other than pensions
              (primarily healthcare) under SFAS No. 106, "Employer's Accounting
              for Postretirement Benefits Other Than Pensions." 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 postretirement 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 trusts and one Section 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.
              Beginning in 1996, HL&P funded postretirement benefits costs on a
              monthly basis for 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,
                                                               -----------------------------------
                                                                1996         1995            1994
                                                               ------       ------          ------
                                                                     (Thousands of Dollars)
<S>                                                          <C>            <C>           <C>     
Service cost - benefits earned during the period ......      $  8,242       $  9,093      $  9,131
Interest cost on accumulated benefit obligation .......        12,265         11,143        10,265
Actual return on plan assets ..........................        (2,342)
Net amortization and deferrals ........................         5,983          6,061         7,868
                                                             --------       --------      --------
Net postretirement benefit cost .......................      $ 24,148       $ 26,297      $ 27,264
                                                             ========       ========      ========
</TABLE>



                                      70

<PAGE>   71



              The funded status of the Company's postretirement benefit costs
was as follows:

<TABLE>
<CAPTION>

                                                             December 31,
                                                      -------------------------
                                                         1996            1995
                                                      ---------       ---------
                                                       (Thousands of Dollars)
<S>                                                  <C>             <C>       
 Accumulated benefit obligation:

     Retirees ...................................     $(107,642)      $(127,653)
     Fully eligible active plan participants ....       (16,340)        (13,307)
     Other active plan participants .............       (26,090)        (27,492)
                                                      ---------       ---------
            Total ...............................      (150,072)       (168,452)
 Plan assets at fair market value ...............        38,493          18,310
                                                      ---------       ---------
 Assets less than accumulated benefit obligation       (111,579)       (150,142)
 Unrecognized transitional obligation ...........       173,954         183,727
 Unrecognized net gain ..........................       (99,417)        (73,613)
                                                      ---------       ---------
 Accrued postretirement benefit cost ............     $ (37,042)      $ (40,028)
                                                      =========       =========
</TABLE>

              The assumed health care cost trend rates used in measuring the
              accumulated postretirement benefit obligation in 1996 are as
              follows:

                         Medical - under 65              7.3%
                         Medical - 65 and over           8.1%
                         Dental                          7.0%

              The assumed healthcare rates gradually decline to 5.4 percent for
              both medical categories and 3.7 percent for dental by 2001. The
              accumulated postretirement benefit obligation was determined
              using an assumed discount rate of 7.25 percent for 1996 and 7.5
              percent for 1995.

              If the healthcare cost trend rate assumptions were increased by 1
              percent, the accumulated postretirement benefit obligation as of
              December 31, 1996 would be increased by approximately 8 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 are 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



              The Company's current and deferred components of income tax
              expense from continuing operations are as follows:
<TABLE>
<CAPTION>

                                                                 Year Ended December 31,
                                                             --------------------------------
                                                             1996           1995         1994
                                                             ----           ----         ----
                                                                  (Thousands of Dollars)
<S>                                                        <C>           <C>           <C>     
Current ...............................................    $150,658      $141,076      $153,440
Deferred ..............................................      49,507        58,479        76,984
                                                           --------      --------      --------
Income taxes for continuing operations before
    cumulative effect of change in accounting .........    $200,165      $199,555      $230,424
                                                           ========      ========      ========
</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,
                                                     ----------------------------------------
                                                        1996            1995          1994
                                                     -----------     ----------     ---------
                                                               (Thousands of Dollars)
<S>                                                   <C>            <C>            <C>                  
Income from continuing operations before
    income taxes and cumulative effect of
    change in accounting .........................    $ 605,109      $ 596,955      $ 654,409
Preferred dividends of subsidiary ................       22,563         29,955         33,583
                                                      ---------      ---------      ---------
      Total ......................................      627,672        626,910        687,992
Statutory rate ...................................           35%            35%            35%
                                                      ---------      ---------      ---------
Income taxes at statutory rate ...................      219,685        219,419        240,797
                                                      ---------      ---------      ---------
Net reduction in taxes resulting from:
   AFUDC - other included in income ..............        1,443          2,716          1,440
   Amortization of investment tax credit .........       18,404         19,427         19,416
   Excess deferred taxes .........................        4,331          4,384          3,537
   Difference between book and tax
      depreciation for which deferred
      taxes have not been normalized .............      (22,638)       (15,211)       (15,455)
   Equity dividend exclusion .....................       10,194          4,932
   Equity income - foreign affiliates ............        5,936
   Other - net ...................................        1,850          3,616          1,435
                                                      ---------      ---------      ---------
      Total ......................................       19,520         19,864         10,373
                                                      ---------      ---------      ---------
Income taxes before cumulative effect of
    change in accounting .........................    $ 200,165      $ 199,555      $ 230,424
                                                      =========      =========      =========

Effective rate ...................................         31.9%          31.8%          33.5%
</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,
                                                              ------------------------
                                                                 1996           1995
                                                              ----------    ----------
                                                               (Thousands of Dollars)
<S>                                                           <C>           <C>       
Deferred Tax Assets:
    Alternative minimum tax ..............................    $   19,014    $   46,516
    Internal Revenue Service (IRS) audit assessment ......        74,966        74,966
    Disallowed plant cost - net ..........................        23,237        22,687
    Other ................................................        94,139        96,628
                                                              ----------    ----------
        Total deferred tax assets - net ..................       211,356       240,797
                                                              ----------    ----------

Deferred Tax Liabilities:
    Depreciation .........................................     1,450,894     1,391,573
    Deferred plant costs - net ...........................       194,243       200,028
    Regulatory assets - net ..............................       362,310       228,587
    Capitalized taxes, employee benefits and removal costs       108,530       110,065
    Gain on sale of cable television subsidiary ..........       228,449       227,515
    Other ................................................       131,961       150,275
                                                              ----------    ----------
        Total deferred tax liabilities ...................    $2,476,387    $2,308,043
                                                              ----------    ----------
               Accumulated deferred income taxes - net ...    $2,265,031    $2,067,246
                                                              ==========    ==========
</TABLE>

              See Note 13 for income taxes related to discontinued operations.

              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 and
              $36.3 million of accrued interest, plus interest on both of those
              amounts accruing after July 1990. The major contested issue in the
              refund case involved the IRS'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
              October 1996 entered final 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.

(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 cancelation
              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 $194
              million in 1997, $200 million in 1998 and $204 million in 1999.
              Additionally, minimum payment obligations for lignite mining and
              lease agreements are approximately $8 million for 1997, $9
              million for 1998 and $9 million for 1999. Collectively, the fixed
              price gas supply contracts, which expire in 1997, could amount to
              9 percent of HL&P's annual natural gas requirements for 1997.
              Minimum payment obligations for both natural gas purchase and
              storage contracts are approximately $38 million in 1997, $9
              million in 1998 and $9 million in 1999.

              HL&P also has commitments to purchase firm capacity from
              cogenerators of approximately $22 million in each of the years
              1997 through 1999. 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


                                      73

<PAGE>   74



              provisions allowing HL&P to suspend or reduce payments and seek
              repayment for amounts disallowed.

       (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. 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.

              In February 1996, the cities of Wharton, Galveston and Pasadena
              filed suit, for themselves and a proposed class, against HL&P and
              Houston Industries Finance Inc., (formerly a wholly-owned
              subsidiary of the Company), citing underpayment of municipal
              franchise fees. The principal claim contends that, from 1957 to
              the present, franchise fees should have been paid on sales taxes
              collected by HL&P and on non-electric receipts as well as on
              electric sales. Plaintiffs advance such assertion notwithstanding
              that no such claim had been noticed over the previous four
              decades. Because all of the franchise ordinances affecting HL&P
              expressly impose fees only on electric sales, the Company regards
              plaintiffs' allegations as spurious and is aggressively contesting
              the matter. With regard to damages, the pleadings make no specific
              dollar claim, although one plaintiff-sponsored witness claims to
              have calculated damages of $220 million on the theory that
              franchise fees are owed on all sales taxes and receipts, electric
              or otherwise. The class action aspects of this case are currently
              under a stay order by the Texas Supreme Court pending its review
              of the class action certifications of the lower courts. The
              Company and HL&P cannot estimate a range of possible loss, if any,
              from this lawsuit, nor can any assurance be given as to its
              ultimate outcome. The case is pending in the District Court of
              Harris County, Texas.
  
(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,
                                                    ----------------------------------------------------
                                                             1996                        1995
                                                    ----------------------     -------------------------
                                                     CARRYING        FAIR         CARRYING        FAIR
                                                      AMOUNT         VALUE         AMOUNT         VALUE
                                                      ------         -----         ------         -----
                                                                   (THOUSANDS OF DOLLARS)
<S>                                                 <C>           <C>           <C>           <C>       
Financial assets:
   Cash and short-term investments .............    $    8,001    $    8,001    $   11,779    $   11,779
   Investment in Time Warner securities ........     1,027,500     1,027,500     1,027,875     1,027,875
   Investments held by HL&P's nuclear
     decommissioning trust .....................        67,229        67,229        44,540        44,540
Financial liabilities:
   Short-term notes payable ....................     1,337,872     1,337,872         6,300         6,300
   Cumulative preferred stock of
     subsidiary (subject to mandatory
     redemption) ...............................        25,700        25,957        76,755        79,250
   Debentures ..................................       349,098       380,455       548,913       599,575
   Long-term debt of subsidiaries:
       Electric:
          First mortgage bonds .................     2,895,041     3,045,833     3,128,719     3,397,295
          Pollution control revenue bonds ......         5,000         5,000         5,000         5,000
          Other notes payable ..................           856           856           981           981
</TABLE>

              The fair values of cash and short-term investments, investment in
              equity securities and short-term and other notes payable 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 and pollution control revenue bonds issued


                                      74

<PAGE>   75



              on behalf of HL&P are estimated using rates currently available
              for securities with similar terms and remaining maturities.

(13)          CABLE TELEVISION--DISCONTINUED OPERATIONS

              The Company's 1995 earnings include a one-time, after-tax gain of
              $708 million related to the sale of the Company's cable
              television subsidiary to Time Warner in July 1995. 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.

              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). 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 the
              outstanding Time Warner voting securities (including any person
              who becomes such a holder after giving effect to the sale).

              Dividends on the Time Warner securities are recognized as income
              at the time they are earned. The Company recorded pre-tax
              dividend income of $41.6 million and $20.1 million in 1996 and
              1995, respectively.

              Operating results from discontinued operations for the years
              ended December 31, 1995 and 1994 were as follows:

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



                                      75

<PAGE>   76



              (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.

(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,  1995
                                                                   ------------------------------------------------------
                                                                     First         Second         Third          Fourth
                                                                    Quarter       Quarter        Quarter         Quarter
                                                                   ------------------------------------------------------
                                                                      (Thousands of Dollars, except per share amounts)

<S>                                                             <C>            <C>            <C>             <C>        
               Revenues (a) ................................    $   755,668    $   989,397    $ 1,184,311     $   799,895
               Operating income (a) ........................        115,581        283,571        421,904          84,394
               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 (b):
                   Income from continuing operations .......    $       .10    $       .54    $       .95     $       .02
                   Net income ..............................            .46            .54           3.44             .02

</TABLE>

<TABLE>
<CAPTION>
                                                                              Year Ended  December 31,  1996
                                                                -----------------------------------------------------
                                                                  First          Second         Third          Fourth
                                                                 Quarter         Quarter       Quarter        Quarter
                                                                -----------------------------------------------------
                                                                   (Thousands of Dollars, except per share amounts)

<S>                                                             <C>            <C>           <C>           <C>       
               Revenues (a) ................................    $  823,507     $1,113,719    $1,252,090    $  905,961
               Operating income (a) ........................       137,139        286,926       441,699       124,702
               Net income (loss) ...........................       (16,740)       145,334       240,024        36,326
               Earnings (loss) per common share (b) ........    $     (.07)    $      .58    $      .98    $      .15
</TABLE>

----------

              (a) Reflects a reclassification of HI Energy's equity income from
                  Other Income (Expense) to Revenues.

              (b) 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).


                                      76

<PAGE>   77



     (16)     NORAM MERGER

              On December 17, 1996, the shareholders of the Company and NorAm
              approved the Merger Agreement under which the Company will merge
              into HL&P, and NorAm will merge into a subsidiary of the Company.
              Upon consummation of the Merger, HL&P, the surviving corporation
              of the Company/HL&P merger, will be renamed "Houston Industries
              Incorporated" (Houston) and will continue to conduct HL&P's
              electric utility business under HL&P's name. Merger Sub, the
              surviving corporation of the NorAm/Merger Sub merger, will be
              renamed "NorAm Energy Corp." and will continue to conduct NorAm's
              natural gas distribution and transmission business under NorAm's
              name. As a result of the Merger, NorAm will become a wholly owned
              subsidiary of Houston.

              The closing of the Merger is subject to the satisfaction or
              waiver of various conditions precedent contained in the Merger
              Agreement, including the obtaining of all required governmental
              authorizations and consents.

              Consideration for the purchase of NorAm shares will be a
              combination of cash and shares of Houston common stock. The
              transaction is valued at $3.9 billion, consisting of $2.5 billion
              for NorAm's common stock and equivalents and $1.4 billion of
              NorAm debt. If the closing does not occur by May 11, 1997, the
              cash consideration (but not the stock consideration) will
              increase thereafter by two percent per quarter until the
              consummation of the Merger. The increase, if any, will be
              calculated pro rata on a daily basis for the period from May 11,
              1997, until consummation. The Merger Agreement contains
              provisions generally designed to result in 50 percent of the
              outstanding shares of NorAm common stock being converted into
              stock consideration and 50 percent being converted into cash
              consideration.

              The Company intends to finance the cash portion of the Merger
              consideration (estimated to be approximately $1.25 billion)
              through bank borrowings under new bank credit facilities to be
              arranged by a newly formed subsidiary of Houston with a group of
              commercial banks. As of the date hereof, the term, structure and
              provisions of these facilities are being negotiated with
              potential lenders and have not been finalized.

              The Company and HL&P will account for the Merger as a purchase
              and, following consummation of the Merger, will include the
              results of operation of NorAm in Houston's consolidated statement
              of income.

              Unless otherwise stated, the information presented in the
              Financial Statements and Notes in this Form 10-K relates solely
              to the Company and HL&P without giving effect to the Merger.

(17)          SUBSEQUENT EVENTS

     (a)      POLLUTION CONTROL BONDS.  In January 1997, pollution control 
              bonds aggregating $118 million were issued on behalf of HL&P by
              the Brazos River Authority (BRA) and the Matagorda County
              Navigation District Number One (MCND). Proceeds of $50 million
              from the BRA Series 1997 bonds, maturing 2018, were used to
              redeem, at 102% of the aggregate principal amount, the BRA Series
              1986A pollution control revenue bonds issued in November 1986.
              Proceeds of $68 million from the MCND Series 1997 bonds, maturing
              2028, were used to redeem, at 102% of the aggregate principal
              amount, the MCND Series 1986A pollution control revenue bonds
              issued in November 1986. The new bonds initially will bear
              interest at a floating rate. Bond tenders are permitted. Proceeds
              from the remarketing of tendered bonds are expected to be
              available to pay for tendered bonds. However, liquidity
              facilities aggregating approximately $120 million have been


                                      77

<PAGE>   78



              established with banks for the purchase of tendered bonds in the
              event such proceeds are not available. Facility fees are payable
              in connection with the liquidity facilities.

     (b)      TRUST SECURITIES.  In February 1997, two Delaware statutory 
              business trusts established by HL&P issued (i) $100 million of
              capital securities having a distribution rate of 8.257% and
              maturing February 1, 2037 and (ii) $250 million of preferred
              securities having a distribution rate of 8.125% and maturing
              March 31, 2046. For financial reporting purposes, the trusts will
              be treated as subsidiaries of HL&P. The trusts sold securities to
              the public and used the proceeds to purchase subordinated
              debentures from HL&P having the same amounts, rates and maturity
              dates as the securities issued by the trusts. The subordinated
              debentures purchased by the trusts constitute substantially all
              the assets of the trusts. Proceeds from the sale of the
              debentures were used by HL&P for general corporate purposes,
              including the repayment of short-term debt and the redemption of
              three series of HL&P's outstanding cumulative preferred stock at
              the following redemption prices, plus accrued dividends:
<TABLE>
<CAPTION>

                               Number of      Redemption Price
              Series            Shares           Per Share
              ------            ------           ---------
              <S>               <C>              <C> 
              $ 6.72            250,000          $  102.51
              $ 7.52            500,000          $  102.35
              $ 8.12            500,000          $  102.25
</TABLE>

              Subject to certain limitations, HL&P has the option of
              deferring payment of interest on the subordinated debentures
              held by the trust. If and for so long as payments on HL&P's
              subordinated debentures have been deferred, or HL&P has
              defaulted on the indenture relating thereto, HL&P may not pay
              dividends on its capital stock.




                                      78

<PAGE>   79




                        HOUSTON LIGHTING & POWER COMPANY

                         NOTES TO FINANCIAL STATEMENTS

                  FOR THE THREE YEARS ENDED DECEMBER 31, 1996


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, (14) Railroad Settlement 
Payments, (16) NorAm Merger and (17) Subsequent Events.

(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, 1996, HL&P did not have
            any affiliate investments (considered to be cash equivalents). At
            December 31, 1995 and 1994, HL&P had affiliate investments of $75.5
            million and $227.6 million, respectively.

(8)         SHORT-TERM FINANCING

            In 1996 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, 1996 and
            1995, which limited total short-term borrowings and provided for
            interest at rates generally less than the prime rate. A temporary
            $346 million increase in the amount of the facility was in effect
            during a portion of the first quarter of 1997. HL&P's weighted
            average short-term borrowing rates for commercial paper for the
            years ended December 31, 1996 and 1995 were 5.52% and 6.21%,
            respectively. HL&P had approximately $234.7 million of commercial
            paper outstanding at December 31, 1996 and no commercial paper
            outstanding at December 31, 1995. 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>
                                                                       December 31,
                                                           ----------------------------------
                                                             1996          1995        1994
                                                           --------     ---------    --------
                                                                  (Thousands of Dollars)
<S>                                                        <C>          <C>          <C>
Service cost - benefits earned during the period ......    $ 23,583     $ 22,264     $ 21,335
Interest cost on projected benefit obligation .........      50,268       48,144       45,064
Actual (return) loss on plan assets ...................     (73,089)     (93,023)       4,737
Net amortization and deferrals ........................      16,677       48,696      (50,012)
                                                           --------     --------     --------
      Net pension cost ................................      17,439       26,081       21,124
SFAS No. 88 - curtailment expense .....................      12,871        5,645
                                                           --------     --------     --------
      Total pension cost ..............................    $ 30,310     $ 31,726     $ 21,124
                                                           ========     ========     ========
</TABLE>


                                      79

<PAGE>   80



            The funded status of HL&P's retirement plan was as follows:
<TABLE>
<CAPTION>
                                                       December 31,
                                                 -----------------------
                                                   1996          1995
                                                 ---------     ---------
                                                 (Thousands of Dollars)
<S>                                              <C>           <C>      
Actuarial present value of:
    Vested benefit obligation ...................$ 528,608     $ 493,006
                                                 =========     =========

    Accumulated benefit obligation ..............$ 563,398     $ 528,467
                                                 =========     =========

Plan assets at fair value .......................$ 658,285     $ 581,194
Projected benefit obligation ....................  735,727       687,420
                                                 ---------     ---------
Assets less than projected benefit obligation ...  (77,442)     (106,226)
Unrecognized transitional asset .................  (11,348)      (13,252)
Unrecognized prior service cost .................   31,006        46,462
Unrecognized net loss ...........................   15,247        19,343
                                                 ---------     ---------
Accrued pension cost ............................$ (42,537)    $ (53,673)
                                                 =========     =========
</TABLE>

     (c)    POSTRETIREMENT BENEFITS.  The net postretirement benefit cost for 
            HL&P includes the following components:
<TABLE>
<CAPTION>

                                                                    December 31,
                                                          ---------------------------------
                                                            1996       1995          1994
                                                          --------   --------      --------
                                                               (Thousands of Dollars)

<S>                                                       <C>        <C>           <C>     
Service cost - benefits earned during the period ....     $  7,922   $  8,779      $  8,904
Interest cost on projected benefit obligation .......       11,860     10,794         9,946
Actual return on plan assets ........................       (2,342)        --            --
Net amortization and deferrals ......................        5,766      5,893         7,757
                                                          --------   --------      --------
Net postretirement benefit cost .....................     $ 23,206   $ 25,466      $ 26,607
                                                          ========   ========      ========
</TABLE>

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

                                                             December 31,
                                                             ------------
                                                           1996        1995
                                                           ----        ----
                                                        (Thousands of Dollars)
<S>                                                     <C>          <C>       
Accumulated benefit obligation:
    Retirees ......................................     $(105,638)   $(125,925)
    Fully eligible active plan participants .......       (13,468)     (10,532)
    Other active plan participants ................       (25,169)     (26,515)
                                                        ---------    ---------
        Total .....................................      (144,275)    (162,972)
Plan assets at fair market value ..................        38,493       18,310
                                                        ---------    ---------
Assets less than accumulated benefit obligation ...      (105,782)    (144,662)
Unrecognized transitional obligation ..............       171,909      181,567
Unrecognized net gain .............................      (100,880)     (75,451)
                                                        ---------    ---------
Accrued postretirement benefit cost ...............     $ (34,753)   $ (38,546)
                                                        =========    =========
</TABLE>



                                      80

<PAGE>   81



 (10)       INCOME TAXES

            HL&P's current and deferred components of income tax expense are as
            follows:
<TABLE>
<CAPTION>
                                                                 Year Ended December 31,
                                                      -----------------------------------------
                                                        1996           1995             1994
                                                      ---------       ---------       ---------
                                                               (Thousands of Dollars)

<S>                                                   <C>             <C>             <C>      
Current ............................................  $ 242,695       $ 188,104       $ 184,669
Deferred ...........................................     22,124          57,703          70,324
                                                      ---------       ---------       ---------
Federal income tax expense .........................    264,819         245,807         254,993
Federal income taxes charged to other income (a) ...    (32,410)           (851)           (836)
                                                      ---------       ---------       ---------
Income taxes before cumulative effect of change
       in accounting ...............................  $ 232,409       $ 244,956       $ 254,157
                                                      =========       =========       =========
</TABLE>


            (a)  The tax effect of litigation settlements of $33,250 is
                 included for the year ended December 31, 1996.

            The following table sets forth the reconciliation of HL&P's
            statutory income tax rate to the effective income tax rate:
<TABLE>
<CAPTION>

                                                                   Year Ended December 31,
                                                        -------------------------------------------
                                                           1996            1995             1994
                                                        ---------        ---------        ---------
                                                                   (Thousands of Dollars)
<S>                                                     <C>              <C>              <C>      
Income before income taxes, preferred dividends
  and cumulative effect of change in accounting ......  $ 661,827        $ 725,888        $ 749,121
Statutory rate .......................................         35%              35%              35%
                                                        ---------        ---------        ---------
Income taxes at statutory rate .......................    231,639          254,061          262,192
                                                        ---------        ---------        ---------
Net reduction in taxes resulting from:
  AFUDC - other included in income ...................      1,443            2,716            1,440
  Amortization of investment tax credit ..............     18,404           19,427           19,416
  Difference between book and tax depreciation for
    which deferred taxes have not been normalized ....    (22,638)         (15,211)         (15,455)
  Excess deferred taxes ..............................      4,331            4,384            3,537
  Other - net ........................................     (2,310)          (2,211)            (903)
                                                        ---------        ---------        ---------
     Total ...........................................       (770)           9,105            8,035
                                                        ---------        ---------        ---------
Income taxes before cumulative effect  of change
     in accounting ...................................  $ 232,409        $ 244,956        $ 254,157
                                                        =========        =========        =========

Effective rate .......................................       35.1%            33.7%            33.9%
</TABLE>



                                      81

<PAGE>   82



            The following table sets forth HL&P's tax effects of temporary
            differences resulting in deferred tax assets and liabilities:
<TABLE>
<CAPTION>

                                                                        December 31,
                                                                 --------------------------
                                                                   1996             1995
                                                                 ----------      ----------
                                                                   (Thousands of Dollars)
<S>                                                              <C>             <C>       
Deferred Tax Assets:
     IRS audit assessment ...................................    $   48,513      $   48,513
     Disallowed plant cost - net ............................        23,237          22,687
     Other ..................................................        49,628          59,558
                                                                 ----------      ----------
           Total deferred tax assets ........................       121,378         130,758
                                                                 ----------      ----------

Deferred Tax Liabilities:
     Depreciation ...........................................     1,450,434       1,391,277
     Regulatory assets - net ................................       362,310         228,587
     Deferred plant costs - net .............................       194,243         200,028
     Capitalized taxes, employee benefits and removal costs .       108,638         110,177
     Other ..................................................       130,320         148,177
                                                                 ----------      ----------
           Total deferred tax liabilities ...................     2,245,945       2,078,246
                                                                 ----------      ----------

     Accumulated deferred income taxes - net ................    $2,124,567      $1,947,488
                                                                 ==========      ==========
</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 $643 thousand for 1996 and $75.9 million
            for 1995.

(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 (Loss)
                                                       Operating     After Preferred
        Quarter Ended             Revenues              Income          Dividends
        -------------             --------              ------          ---------
                                                          (Thousands of Dollars)
          1995
          ----

<S>                              <C>                 <C>              <C>       
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

          1996
          ----

March 31 .....................   $  811,965          $  119,654       $  (10,187)
June 30 ......................    1,099,971             210,880          144,327
September 30 .................    1,230,298             304,400          239,989
December 31 ..................      882,793              97,394           32,726

</TABLE>


                                      82

<PAGE>   83




(18)        PRINCIPAL AFFILIATE TRANSACTIONS
<TABLE>
<CAPTION>

                                                                                Year Ended December 31,
Affiliated                                                           ---------------------------------------------
Company                                Description                      1996             1995              1994
---------                  -----------------------------------       -----------     ------------      --------
                                                                               (Thousands of Dollars)
<S>                                                                   <C>           <C>               <C>     
 Houston                         Dividends                            $329,000      $454,000          $328,996
 Industries
 (Delaware)
 Incorporated

 Houston                         Service Fees (a)                      36,785        26,582             26,913
 Industries                      Money Fund Income (b)                  2,013        10,837              6,025
 Incorporated

 Houston                         Purchase of Corporate
 Industries                      Headquarters (c)                    $ 68,058      $ 94,915
 Building, Inc. 
                                 Corporate Headquarters
                                 Operating Expenses (a)                 3,025           416
</TABLE>

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

(a)  Included in Operating Expenses.
(b)  Included in Other Income (Expense).
(c)  Included in Electric Plant in Service.



                                      83
<PAGE>   84



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, 1996 and 1995, 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, 1996. Our audits also included the Company's financial statement
schedule listed in Item 14(a)(2). These financial statements and the financial
statement schedule are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements and the
financial statement schedule based on our audits.

         We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.

         In our opinion, such consolidated financial statements present fairly,
in all material respects, the financial position of the Company and its
subsidiaries at December 31, 1996 and 1995, and the results of their operations
and their cash flows for each of the three years in the period ended December
31, 1996 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 21, 1997



                                      84

<PAGE>   85



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,
1996 and 1995, and the related statements of income, retained earnings and cash
flows for each of the three years in the period ended December 31, 1996. Our
audits also included the financial statement schedule of HL&P listed in Item
14(a)(2). These financial statements and the financial statement schedule are
the responsibility of HL&P's management. Our responsibility is to express an
opinion on these financial statements and the financial statement schedule
based on our audits.

         We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.

         In our opinion, such financial statements present fairly, in all
material respects, the financial position of HL&P at December 31, 1996 and
1995, and the results of its operations and its cash flows for each of the
three years in the period ended December 31, 1996 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 21, 1997



                                      85

<PAGE>   86



ITEM 9.  CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND 
         FINANCIAL DISCLOSURE.


None.



                                      86

<PAGE>   87



                                    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 1997 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.

         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.

CHARLES R. CRISP, age 49, has been a director since 1996. Mr. Crisp is Senior
Vice President of the Company, having served in that capacity since January
1997, and Executive Vice President and General Manager-Energy Production of
HL&P, having served in that capacity since September 1996. Prior to joining 
HL&P, Mr. Crisp served as President, Chief Operating Officer and Director of 
Tejas Gas Corporation from November 1988 to September 1996. In January 1997,
Mr. Crisp was appointed President and Chief Operating Officer of the HI Power
Generation Division, a newly created division of the Company.

WILLIAM T. COTTLE, age 51, has been a director since 1996. Mr. Cottle is
Executive Vice President and General Manager - Nuclear for HL&P, having served
in that capacity since February 1996. From April 1993 through February 1996, he
served as Group Vice President - Nuclear of HL&P. Prior to joining HL&P, Mr.
Cottle served as Vice President, Operations, Grand Gulf Nuclear Station, 
Entergy Operations, Inc. from March 1987 through April 1993. In January 1997,
Mr. Cottle was appointed Executive Vice President and General Manager of the
Nuclear (STP) Division, a newly created division of the Company.

JACK D. GREENWADE, age 57, has been a director since 1996. Mr. Greenwade is
Senior Vice President and Assistant to the President of HL&P, having served in
that capacity since February 1996. From 1990 through February 1996, he served
as Group Vice President - Operations of HL&P.

LEE W. HOGAN, age 52, has been a director since 1995. Mr. Hogan is Executive
Vice President of the Company, having served in that capacity since January
1997. Previously, he served as Senior Vice President of the Company, having 
served in that capacity since February 1996 and as Vice President of the Company
and as Chief Operating Officer of HI Energy, having served in those capacities
since 1993. From 1990 to 1993 he served as Group Vice President - External
Affairs for HL&P. In January 1997, Mr. Hogan was appointed President and Chief
Executive Officer of the HI Retail Energy Group, a newly created division of
the Company.

DON D. JORDAN, age 64, has been a director 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 an advisory director of Texas Commerce Bank 
National Association and a director of BJ Services Company, Inc.

HUGH RICE KELLY, age 54, has been a director since 1996. Mr. Kelly is
Executive Vice President, General Counsel and Corporate Secretary of the
Company and HL&P, having served in those capacities since


                                      87

<PAGE>   88



January 1997. He previously served as Senior Vice President, General Counsel and
Corporate Secretary of HL&P from 1984 through 1997, as Senior Vice President,
General Counsel and Corporate Secretary of the Company from 1994 through January
1997 and as Vice President, General Counsel and Corporate Secretary of the
Company from 1984 through 1994.

R. STEVE LETBETTER, age 48, has been a director since 1995. Mr. Letbetter is
President and Chief Operating Officer of the Company, having served in that
capacity since January 1997 and 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 and also served as a Senior Vice President of
the Company from 1993 to January 1997.

DAVID M. MCCLANAHAN, age 47, has been a director since 1996. He is Executive
Vice President and General Manager - Energy Delivery and Customer Service of
HL&P, having served in that capacity since February 1996. He has previously
served as Group Vice President - Finance and Regulatory Relations of HL&P from
1993 through February 1996 and as Senior Vice President and Chief Financial
Officer of KBLCOM from 1991 through 1993. In January 1997, Mr. McClanahan was
appointed President and Chief Operating Officer of the Houston Lighting & Power
Division, a newly created division of the Company.

STEPHEN W. NAEVE, age 49, has been a director since 1996. He is Executive Vice
President and Chief Financial Officer of the Company, having served in that
capacity since January 1997. He previously served as Senior Vice President and
Chief Financial Officer of the Company from February 1996 through January 1997,
Vice President, Strategic Planning and Administration of the Company from 1993
through February 1996 and as Vice President, Corporate Planning and Treasurer
of HL&P from 1990 through 1993.

STEPHEN C. SCHAEFFER, age 49, has been a director since 1996. He is Executive
Vice President Shared Services and Finance and Regulatory Affairs of HL&P,
having served in that capacity since February 1996. He previously served as
Senior Vice President - Analysis and Finance and Treasurer of HI Energy from
June 1994 through February 1996, Senior Vice President - Planning and Operations
and Treasurer of HI Energy from June 1993 through June 1994, Group Vice
President - Administration and Support of HL&P from 1992 through 1993 and Vice
President - Regulatory Relations of HL&P from 1989 through 1992. In January
1997, Mr. Schaeffer was appointed Executive Vice President-Retail Energy
Regulation of the HI Retail Energy Group, a newly created division of the 
Company.


ROBERT L. WALDROP, age 49, has been a director since 1996. He is Senior Vice
President Communications of the Company, having served in that capacity since
January 1997 and Senior Vice President - External Affairs of HL&P, having
served in that capacity since May 1996. He previously served as Senior Vice
President -- Marketing and Customer Service of HL&P from February to May 1996,
Group Vice President - External Affairs of HL&P from 1993 through February 1996,
Vice President - Public and Customer Relations of HL&P from 1992 to 1993 and
Vice President - Public Affairs of HL&P from 1990 to 1992.

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 1997 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, 1994, 1995 and 1996, 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
that served as executive officers during 1996 (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(#)  Payouts(2)  Compensation(3)
     ------------------               ----      ---------     --------    ------------     ----------  ----------  ---------------

<S>                                   <C>     <C>           <C>           <C>                         <C>           <C>       
 Don D. Jordan                        1996    $  962,292    $1,050,000    $   13,300        27,985    $  767,440    $  819,105
     Chairman and                     1995       884,500       907,226         3,969        36,316       407,437       734,023
     Chief Executive Officer          1994       859,500       734,873       114,648        27,726       550,567       717,261
     of the Company and HL&P

 R. Steve Letbetter                   1996       416,000       330,750           228         7,815       138,831        45,151
     President and Chief              1995       363,500       285,750           190         9,746        84,201        47,242
     Operating Officer of             1994       321,000       246,525        31,133         6,366       117,607        43,818
     the Company and HL&P

 Hugh Rice Kelly                      1996       344,833       209,400           705         5,563       176,311        37,495
     Executive Vice President,        1995       334,000       195,773           637         7,414       100,925        44,245
     General Counsel and              1994       323,500       190,820        42,147         5,470       145,107        50,546
     Corporate Secretary
     of the Company and 
     of HL&P

 William T. Cottle                    1996       269,000       164,400           450         4,299       121,217        18,547
     Executive Vice                   1995       254,500       157,200           401         5,566             0        16,711
     President and General            1994       241,000       129,675           337         4,044             0        13,126
     Manager - Nuclear of HL&P

 David M. McClanahan                  1996       263,017       143,518           361         4,153        67,221        26,297
     Executive Vice                   1995       238,100       151,860           317         5,028        35,806        23,162
     President and General            1994       208,100       129,398        12,195         3,322        41,512        23,376
     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 for 1996 represent the dollar value of shares of the
       Company's Common Stock paid out in 1996 under the Company's 1989
       long-term incentive compensation plan (LICP) based on the achievement of
       certain performance goals for the 1993-1995 performance cycle, plus
       dividend equivalent accruals during the performance period.



                                      89

<PAGE>   90



(3)    The amounts shown for 1996 include (i) Company contributions to the 
       Company's savings plan and accruals under its savings restoration plan
       on behalf of the Named Officers, as follows: Mr. Jordan, $19,416; Mr.
       Letbetter, $29,474; Mr. Kelly, $14,289; Mr. Cottle, $17,900; and Mr.
       McClanahan, $15,830; (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, $19,100; Mr. Letbetter, $327; Mr. Kelly, $1,012; Mr. Cottle,
       $647; and Mr. McClanahan, $519; 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, $780,589; Mr. Letbetter, $15,350; Mr. Kelly, $22,194; Mr.
       Cottle, none; and Mr. McClanahan, $9,948.




                                      90

<PAGE>   91
STOCK OPTION GRANTS. The following table contains information concerning grants
of stock options during 1996 under the Company's 1994 LICP to the Named 
Officers.

                             OPTION GRANTS IN 1996
<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>       <C>    
Don D. Jordan...................         27,985          27.49%        $24.375      01/01/06        $67,724
R. Steve Letbetter..............          7,815           7.68%         24.375      01/01/06         18,912
Hugh Rice Kelly.................          5,563           5.46%         24.375      01/01/06         13,462
William T. Cottle...............          4,299           4.22%         24.375      01/01/06         10,404
David M. McClanahan.............          4,153           4.08%         24.375      01/01/06         10,050
</TABLE>

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

(1)    The nonstatutory options for shares of the Company's Common Stock 
       included in the table were granted on January 2, 1996, 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 LICP, 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 based on the
       following assumptions: volatility of 15.713 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 5.65 percent (interest
       rate on a U.S. Treasury security with a maturity date corresponding to
       that of the option term); option price of $24.375 (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.

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, 1996. No options were exercised by the Named Officers during
1996.



                                      91

<PAGE>   92

                          1996 YEAR-END OPTION VALUES
<TABLE>
<CAPTION>

                                               Number of Securities
                                                   Underlying                   Value of Unexercised
                                               Unexercised Options             In-the-Money Options at
                                               at December 31, 1996             December 31, 1996 (1)
                                          ----------------------------         ------------------------
                                                 Exercisable/                       Exercisable/
Name                                             Unexercisable                      Unexercisable
----                                      ----------------------------         ------------------------

<S>                                          <C>            <C>                <C>            <C>     
Don D. Jordan.......................         82,900    /    61,437             $77,289    /   $114,998
R. Steve Letbetter..................         16,070    /    16,435              18,670    /     30,866
Hugh Rice Kelly.....................         16,694    /    12,329              15,743    /     23,475
William T. Cottle...................          4,552    /     9,357               8,816    /     17,623
David M. McClanahan.................          8,038    /     8,613               9,565    /     15,922

</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 31, 1996.

LONG-TERM INCENTIVE COMPENSATION.  The following table sets forth, for each of
the Named Officers, information concerning awards made during 1996 for the
1996-1998 performance cycle under the Company's 1994 LICP. 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 a Company consolidated goal 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 improving
competitive position through a combination of cost reduction and revenue growth.
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 internal rates of return. If a change in control of the Company occurs
before the end of a performance cycle, the payout of awards for performance
shares will occur without regard to achievement of the performance goals. See
Note 1 to the Option Grants in 1996 table for information regarding the
definition of a change in control under the LICP.

                   LONG-TERM INCENTIVE PLAN AWARDS IN 1996
<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....................    27,359          12/31/98         13,680            27,359          41,039
R. Steve Letbetter...............     8,187          12/31/98          4,094             8,187          12,281
Hugh Rice Kelly..................     5,827          12/31/98          2,914             5,827           8,741
William T. Cottle................     4,504          12/31/98          2,252             4,504           6,756
David M. McClanahan..............     4,351          12/31/98          2,176             4,351           6,527
</TABLE>


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

(1) The table does not reflect dividend equivalent accruals during the
    performance period.



                                      92

<PAGE>   93



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           ------------------------------------------------------------                  Greater than 
 At Age 65               15                  20                   25                 30             or equal to 35 
 ---------            --------            --------             --------          ----------         ---------------
 <S>                  <C>                 <C>                  <C>               <C>                  <C>     
$  300,000            $ 85,480            $113,973             $142,467          $  170,960           $  199,453
   400,000             114,580             152,773              190,967             229,160              267,353
   500,000             143,680             191,573              239,467             287,360              335,253
   600,000             172,780             230,373              287,967             345,560              403,153
   700,000             201,880             269,173              336,467             403,760              471,053
   800,000             230,980             307,973              384,967             461,960              538,953
   900,000             260,080             346,773              433,467             520,160              606,853
 1,000,000             289,180             385,573              481,967             578,360              674,753
 1,200,000             347,380             463,173              578,967             694,760              810,553
 1,400,000             405,580             540,773              675,967             811,160              946,353
 1,600,000             463,780             618,373              772,967             927,560            1,082,153
 1,800,000             521,980             695,973              869,967           1,043,960            1,217,953
 2,000,000             580,180             773,573              966,967           1,160,360            1,353,753
</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.

         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 includes only the amounts shown in the "Salary" and "Bonus"
columns of the Summary Compensation Table. At December 31, 1996, the credited
years of service for the following persons are: 35 years for Mr. Jordan; 23
years for Mr. Letbetter; 22 years for Mr. Kelly, 10 of which result from a
supplemental agreement; 4 years for Mr. Cottle; and 22 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


                                      93

<PAGE>   94

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.
This benefit plan is no longer being offered to new officers.

         The Company has 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. 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 four times
current salary for Mr. Letbetter; two times current salary for Messrs. Kelly,
Cottle and McClanahan;and thirty million dollars for Mr. Jordan. The plan also
provides that the Company may make payments to the covered individuals to
compensate for tax consequences of 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 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 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 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 plan 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.

         In February 1997, the Company entered into an amended and restated
employment agreement (Agreement) with Mr. Jordan extending his employment for 
two years beyond his normal retirement

  
                                       94

<PAGE>   95



date (June 1, 1997). The restated agreement replaces an original agreement
entered in 1994 which provided for benefits in the event of termination of
employment following a change of control and for extension of Mr. Jordan's
employment until he reaches age 67 if he remained employed by the Company at
age 65. The agreement, as restated, provides for the employment of Mr. Jordan
at his present position with the Company during the two and one-half year
period commencing January 8, 1997 and ending June 1, 1999 (Employment Period).
During the Employment Period, Mr. Jordan will receive benefits including (i)
base salary in an amount not less than his salary in effect on January 8, 1997,
(ii) annual bonus awards based on amounts payable under the Company's executive
incentive compensation plan (EICP) and LICP, and (iii) participation in other
employee benefit plans and programs on generally the same basis as other peer
executives, except that Mr. Jordan will not receive any LICP Award for
performance cycles commencing in 1998 and 1999 but will instead receive an
award of 300,000 restricted shares of Common Stock.  The award of restricted
shares of Common Stock is implemented through bookkeeping entry until
applicable vesting conditions are satisfied, at which time shares of Common
Stock will be delivered out of shares held in the Company's treasury, together
with accumulated dividends.
        
         Mr. Jordan's right to 150,000 of the restricted shares of Common Stock
(Vested Shares) shall vest on June 1, 1999 if he has remained in the continuous
employment of the Company during the Employment Period. If, during the
Employment Period, the Company terminates Mr. Jordan's employment for Cause (as
defined in the Agreement) or he voluntarily terminates employment without Good
Reason (as defined in the Agreement), Mr. Jordan will forfeit all rights to the
Vested Shares as of the date of termination. If, during the Employment Period,
the Company terminates Mr. Jordan's employment without Cause, he terminates
employment for Good Reason, or Mr. Jordan's employment terminates by reason of
death, Disability (as defined in the Agreement) or retirement with consent of
the Company, his right to the Vested Shares will vest as of the date of
termination.

         Mr. Jordan's right to an additional 150,000 restricted shares of
Common Stock (Performance Shares) is generally subject to vesting provisions
based on achievement of certain performance goals (the same performance goals
that are applicable to Mr. Jordan's restricted stock award under the LICP for
the 1997 performance cycle); provided that (1) if, during the Employment
Period, the Company terminates Mr. Jordan's employment without Cause or he
terminates employment for Good Reason, Mr. Jordan's right to the Performance
Shares will vest as of the date of termination, (2) if, during the Employment
Period, the Company terminates Mr. Jordan's employment for Cause or he
voluntarily terminates employment without Good Reason, Mr. Jordan will forfeit
all right to the Performance Shares as of the date of termination, and (3) if,
prior to the end of the Employment Period and during calendar year 1997, Mr.
Jordan terminates employment by reason of death, Disability or retirement with
the consent of the Company, he will forfeit all right to the Performance Shares
as of the date of termination. If Mr. Jordan terminates employment prior to the
end of the Employment Period and during calendar year 1998 or 1999, he will have
a vested right to a portion of the Performance Shares, based on the Compensation
Committee's determination of the extent to which the performance goals for the
1997 LICP performance cycle are, based on information then available, expected
to be achieved and prorated based on time elapsed in the performance cycle.
Upon Mr. Jordan's completion of the Employment Period without termination of
employment, he will have a vested right to all or a portion of the Performance
Shares, based on the Compensation Committee's determination of the extent to
which the performance goals for the 1997 LICP performance cycle are, based on
information then available, expected to be achieved.

         The restated agreement provides that Mr. Jordan has the right to
receive payments of salary and bonus previously deferred under the Company's
deferred compensation plan in fifteen annual installments and that the Company
may not exercise any right it otherwise has to make payment in a lump sum. In
addition, the agreement provides for an extension of the commencement date of
the


                                      95

<PAGE>   96



deferred payments under the deferred compensation plan from June 1, 1999 until
June 1, 2000 in consideration of Mr. Jordan's agreement to make himself
available for up to 40 hours per month as a consultant from June 2, 1999, until
June 1, 2000.

         Upon the Company's termination of Mr. Jordan without Cause or his
termination of employment for Good Reason following a Change of Control (as
defined below), the Company will pay Mr. Jordan a cash payment equal to 2.99
times Mr. Jordan's base amount (generally, his average taxable compensation
received from the Company for the five calendar years prior to the Change of
Control) under Internal Revenue Code (Code) Section 280G, in addition to
fulfillment of certain other obligations generally applicable upon termination
of employment, and any unvested portion of the 300,000 restricted shares of
Common Stock will vest. To the extent that payments made to Mr. Jordan upon a
Change of Control would result in the application of an excise tax (and related
loss of deduction to the Company) under the Code, such payments will be reduced
as necessary to avoid this result. In the event that an overpayment is made,
such payment will be recharacterized as a loan that Mr. Jordan is obligated to
repay with interest in order to avoid the excise tax and lost deduction.
Generally, a Change of Control will be deemed to occur under the Agreement if
(i) an individual, entity or group acquires beneficial ownership of 30 percent
or more of the Company's Common Stock, (ii) the individuals constituting the
Board of Directors of the Company on January 1, 1997, including their designated
successors (Incumbent Board) cease to constitute a majority of the Board or
(iii) a merger or other business combination to which the Company is a party is
consummated unless (1) the Company's stockholders prior to the business
combination own more than 70 percent of the resulting parent entity, (2) there
is not a 30 percent stockholder of the resulting parent entity except to the
extent such ownership existed prior to the business combination and (3) a
majority of the board of the resulting parent entity after the transaction were
members of the Incumbent Board at the time of the initial agreement or board
action providing for the business combination.

         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 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.



                                      96

<PAGE>   97

COMPENSATION OF DIRECTORS. The directors of HL&P do not receive any separate 
compensation for their service on the HL&P board of directors.

ITEM 12.     SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.

       (a)   The Company

       The information called for by Item 12 with respect to the Company is or
will be set forth in the definitive proxy statement relating to the Company's
1997 annual meeting of shareholders pursuant to the Commission's Regulation
14A. Such definitive proxy statement relates to a meeting of shareholders
involving the election of directors and the portions thereof called for by Item
12 are incorporated herein by reference pursuant to Instruction G to Form 10-K.

       (b)   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.




                                      97

<PAGE>   98



       The following table sets forth information as of March 1, 1997, with
respect to the beneficial ownership of shares of the Company's Common Stock by
each current director, the Named Officers 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>   
 William T. Cottle ...........................         19,445(1)(2)
 Charles Crisp ...............................              0
 Jack Greenwade ..............................         52,906(1)(2)(3)
 Lee W. Hogan ................................         31,719(1)(2)(3)
 Don D. Jordan ...............................        279,905(1)(2)(4)
 Hugh Rice Kelly .............................         73,992(1)(2)(3)
 R. Steve Letbetter ..........................         66,911(1)(2)(3)
 David M. McClanahan .........................         32,696(1)(2)(3)
 Stephen W. Naeve ............................         32,658(1)(2)
 Stephen C. Schaeffer ........................         39,855(1)(2)
 Robert L. Waldrop ...........................         25,998(1)(2)(5)

 All of the above and other executive officers
      as a group (12 persons) ................        668,912(1)(2)(3)
</TABLE>

--------------
(1)      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, 1996.

(2)      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
         Named Officers and the group, as follows: Mr. Cottle - 9,187 shares;
         Mr. Jordan - 113,574 shares; Mr. Kelly - 22,842 shares; Mr. Letbetter
         - 24,047 shares; Mr. McClanahan - 12,206 shares; and the group
         -234,106 shares.

(3)      Includes shares held under the Company's Investor's Choice dividend
         reinvestment and stock purchase plan as of December 31, 1996.

(4)      Voting power and investment power with respect to 1,152 of the shares 
         listed are shared with Mr. Jordan's spouse.

(5)      Mr. Waldrop disclaims beneficial ownership of 126 of the shares 
         listed, which are owned by his wife.






                                      98

<PAGE>   99



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

       As of March 16, 1997 Mr. Crisp, one of HL&P's directors, was indebted 
to HL&P in the amount of $300,000. The indebtedness arose from a cash payment 
to Mr. Crisp in 1996 in connection with his acceptance of employment with 
HL&P. The terms of the loan provide that it does not bear interest and that 
one-half of the principal will be forgiven six months after Mr. Crisp's 
initial employment date of September 23, 1996 and the balance twelve months 
after such date, except in the event of his voluntary termination of employment.


  
                                       99

<PAGE>   100
                                    PART IV

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

(a)(1)  FINANCIAL STATEMENTS.                                         
<TABLE>
<CAPTION>
                                                                            PAGE
                                                                            ----
<S>                                                                          <C>
Statements of Consolidated Income for the Three Years Ended               
     December 31, 1996....................................................   41
Statements of Consolidated Retained Earnings for the Three Years          
     Ended December 31, 1996..............................................   43
Consolidated Balance Sheets at December 31, 1996 and 1995.................   44
Consolidated Statements of Capitalization at December 31, 1996 and 1995...   46
Statements of Consolidated Cash Flows for the Three Years                 
     Ended December 31, 1996..............................................   48
HL&P Statements of Income for the Three Years Ended December 31, 1996.....   50
HL&P Statements of Retained Earnings for the Three Years                  
     Ended December 31, 1996..............................................   51
HL&P Balance Sheets at December 31, 1996 and 1995.........................   52
HL&P Statements of Capitalization at December 31, 1996 and 1995...........   54
HL&P Statements of Cash Flows for the Three Years                         
     Ended December 31, 1996..............................................   56
Notes to Consolidated Financial Statements................................   57
Notes to HL&P's Financial Statements......................................   79
Independent Auditors' Report - The Company................................   84
Independent Auditors' Report - HL&P.......................................   85

(a)(2)  FINANCIAL STATEMENT SCHEDULES FOR THE THREE YEARS ENDED DECEMBER 31, 1996.

THE COMPANY:
II -- Reserves............................................................  101

HL&P:
II -- Reserves............................................................  102

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, III, IV and V.
(a)(3)   EXHIBITS.........................................................  105
</TABLE>

See Index of Exhibits on page 105, 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.
Form 8-K of the Company and HL&P dated August 11, 1996. 
Form 8-K of HL&P dated February 4, 1997. 
Form 8-K of the Company and HL&P dated February 5, 1997.


                                      100
<PAGE>   101
                HOUSTON INDUSTRIES INCORPORATED AND SUBSIDIARIES
                             SCHEDULE II - RESERVES

                  FOR THE THREE YEARS ENDED DECEMBER 31, 1996
                             (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, 1996:
    Accumulated provisions deducted
       from related assets on
       balance sheet:
          Uncollectible advances ............    $  27,412     $   5,015     $     732                    $  33,159
    Reserves other than those
       deducted from assets on
       balance sheet:
          Property insurance ................       (2,117)        2,187                                         70
          Injuries and damages ..............        1,523         3,156                     $   3,551        1,128
          Non-regulated project contingencies                      2,929          (633)                       2,296

Year Ended December 31, 1995:
    Accumulated provisions deducted from
       related assets on balance sheet:
          Uncollectible advances ............                  $  27,412                                  $  27,412
          Net assets of discontinued
              cable television operations ...    $ 282,958                                   $ 282,958
    Reserves other than those
       deducted from assets on
       balance sheet:
          Property insurance ................       (3,468)        2,187                           836       (2,117)
          Injuries and damages ..............        2,241         2,327                         3,045        1,523

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
</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, 1996. 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.




                                      101

<PAGE>   102



                        HOUSTON LIGHTING & POWER COMPANY
                             SCHEDULE II - RESERVES

                  FOR THE THREE YEARS ENDED DECEMBER 31, 1996
                             (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, 1996:
    Reserves other than those
       deducted from assets on
       balance sheet:
          Property insurance .................  $ (2,117)       $ 2,187                                     $    70
          Injuries and damages ...............     1,523          3,156                      $ 3,551          1,128

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
                                              
</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.



    
                                      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 20TH DAY OF MARCH, 1997.

                                   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 20, 1997.

           SIGNATURE                                     TITLE
           ---------                                     -----
                                                                               
         DON D. JORDAN                          Chairman and Chief Executive 
-------------------------------                     Officer and Director     
        (Don D. Jordan)                        (Principal Executive Officer) 
                                                                             
                                                                             
                                                                             
        STEPHEN W. NAEVE                          Executive 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)                                                  
                                                                             
                                                                             
         JAMES A. BAKER                                                      
-------------------------------                           Director           
        (James A. Baker)                                                     
                                                                             
                                                                             
      RICHARD E. BALZHISER                                                   
-------------------------------                           Director           
     (Richard E. Balzhiser)                                                  
                                                                             
                                                                             
         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)                                                     
                                                                             
                                                                             
          LEE W. HOGAN                                                       
-------------------------------                           Director           
         (Lee W. Hogan)                                                      
                                                                             
                                                                             
        HOWARD W. HORNE                                                      
-------------------------------                           Director           
       (Howard W. Horne)                                                     
                                                                             
                                                                             
       R. STEVE LETBETTER                                                    
-------------------------------                           Director           
      (R. Steve Letbetter)                                                   
                                                                             
                                                                             
      ALEXANDER F. SCHILT                                                    
-------------------------------                           Director           
     (Alexander F. Schilt)                                                   
                                                                             
                                                                             
        JACK T. TROTTER                                                      
-------------------------------                           Director           
       (Jack T. Trotter)                                                     
                                                                             
                                                                             
         BERTRAM WOLFE                                                       
-------------------------------                                              
        (Bertram Wolfe)                                   Director           
                                                                             
                                      103                                    
                                                                             
                                                                             
                                                           

<PAGE>   104

                                  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 20TH DAY OF MARCH, 1997. 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 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 20, 1997. 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.

           SIGNATURE                                     TITLE
           ---------                                     -----




         DON D. JORDAN                         Chairman and Chief Executive   
-------------------------------                    Officer and Director       
        (Don D. Jordan)                      (Principal Executive Officer and 
                                               Principal Financial Officer)   
                                                                              
                                                                              
      MARY P. RICCIARDELLO                    Vice President and Comptroller  
-------------------------------               (Principal Accounting Officer)  
     (Mary P. Ricciardello)                                                   
                                                                              
                                                                              
                                                                              
        CHARLES R. CRISP                                                      
-------------------------------                          Director             
       (Charles R. Crisp)                                                     
                                                                              
                                                                              
                                                                              
       WILLIAM T. COTTLE                                                      
-------------------------------                          Director             
      (William T. Cottle)                                                     
                                                                              
                                                                              
                                                                              
       JACK D. GREENWADE                                                      
-------------------------------                          Director             
      (Jack D. Greenwade)                                                     
                                                                              
                                                                              
                                                                              
          LEE W. HOGAN                                                        
-------------------------------                          Director             
         (Lee W. Hogan)                                                       
                                                                              
                                                                              
                                                                              
        HUGH RICE KELLY                                                       
-------------------------------                          Director             
       (Hugh Rice Kelly)                                                      
                                                                              
                                                                              
                                                                              
       R. STEVE LETBETTER                                                     
-------------------------------                          Director             
      (R. Steve Letbetter)                                                    
                                                                              
                                                                              
                                                                              
      DAVID M. MCCLANAHAN                                                     
-------------------------------                          Director             
     (David M. McClanahan)                                                    
                                                                              
                                                                              
                                                                              
        STEPHEN W. NAEVE                                                      
-------------------------------                          Director             
       (Stephen W. Naeve)                                                     
                                                                              
                                                                              
                                                                              
      STEPHEN C. SCHAEFFER                                                    
-------------------------------                          Director             
     (Stephen C. Schaeffer)                                                   
                                                                              
                                                                              
                                                                              
       ROBERT L. WALDROP                                                      
-------------------------------                          Director             
      (Robert L. Waldrop)                                                     
                                                                              
                                                                              
                                                                              
                                      104

<PAGE>   105



                        HOUSTON INDUSTRIES INCORPORATED
                        HOUSTON LIGHTING & POWER COMPANY

                   EXHIBITS TO THE ANNUAL REPORT ON FORM 10-K
                  FOR THE FISCAL YEAR ENDED DECEMBER 31, 1996

                               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)            Agreement and Plan of             Form 8-K for the                1-7629                2
                Merger among the                  quarter dated
                Company, HL&P, HI                 August 11, 1996
                Merger, Inc. and
                NorAm dated August 11,
                1996

2(b)            Amendment to                      Registration Statement          333-11329             2(c)
                Agreement and Plan                on Form S-4
                of Merger among the
                Company, HL&P, HI
                Merger, Inc. and NorAm
                dated August 11, 1996

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              Form 10-Q for the               1-7629                3
                Bylaws of the Company             quarter ended
                (as of May 22, 1996)              June 30, 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>


                                      105

<PAGE>   106
<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
                Deed of Trust

4(a)(4)         Fifty-Second through              HL&P's Form 10-Q                1-3187                4
                Fifty-Fifth Supplemental          for the quarter
                Indentures, each dated            ended March 31,
                March 1, 1992, to HL&P            1992
                Mortgage and Deed of
                Trust

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>


                                      106

<PAGE>   107

<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(b)(3)         Form of Amended and               Registration                    333-11329             4(b)(1)
                Restated Rights Agree-            Statement on
                ment to be executed               Form 4
                upon the closing of the
                Merger, including form
                of Statement of Resolu-
                tion Establishing Series
                Shares Designated
                Series A Preference
                Stock and Form of Rights
                Agreement

4(c)(1)         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
</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.



                                      107

<PAGE>   108

<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 1, 1982, July 1,
                1984, and 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>


                                      108

<PAGE>   109

<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)                  the 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)

*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)

</TABLE>


                                      109

<PAGE>   110

<TABLE>

*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
                March 30, 1982)

<S>             <C>                               <C>                             <C>                   <C>
*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 in part as             December 31, 1994  
                of January 1, 1995 
                and in part as of                                     
                September 7, 1994)

*10(f)(7)       Sixth Amendment to                Form 10-Q for                   1-7629                10(a)
                Exhibit 10(f)(1)                  the quarter ended
                (effective as of                  June 30, 1995
                August 1, 1995)

*10(f)(8)       Seventh Amendment to              Form 10-Q for the               1-7629                10(a)
                Exhibit 10(f)(1) (effective       quarter ended June 30,
                as of January 1, 1996)            1996

*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)

*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)

</TABLE>


                                      110

<PAGE>   111

<TABLE>



<S>             <C>                               <C>                             <C>                   <C>
*10(h)(3)       Second Amendment to               Form 10-Q for the               1-7629                10(e)
                Exhibit 10(h)(1)                  quarter ended
                (effective as of                  March 31, 1992
                March 30, 1992)

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

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

*10(h)(6)       Fifth Amendment to                Form 10-Q for the               1-7629                10(d)
                Exhibit 10(h)(1)                  the quarter ended
                (effective as of                  June 30, 1995
                August 1, 1995)

*10(h)(7)       Sixth Amendment to                Form 10-Q for the               1-7629                10(b)
                Exhibit 10(h)(1)                  quarter ended
                (effective as of                  June 30, 1995
                December 1, 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>


                                      111

<PAGE>   112

<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
                (effective as of                  June 30, 1995
                August 1, 1995)

*10(i)(7)       Sixth Amendment to                Form 10-Q for the               1-7629                10(c)
                Exhibit 10(i)(1)                  quarter ended
                (effective December 1,            June 30, 1995
                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
                (effective as of                  June 30, 1995
                August 1, 1995)

*10(j)(8)       Seventh Amendment to              Form 10-Q for the               1-7629                10(d)
                Exhibit 10(j)(1)                  quarter ended
                (effective as of                  June 30, 1996
                December 1, 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)

</TABLE>


                                      112

<PAGE>   113

<TABLE>



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

*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, 1992)

</TABLE>


                                      113

<PAGE>   114
<TABLE>



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

*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
                (effective as of                  June 30, 1995
                January 1, 1994)

*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-K for year              1-7629                10(s)(4)
                Incorporated Savings              ended December 31,
                Trust between the                 1995
                Company and
                The Northern Trust
                Company, as Trustee.  (As
                Amended and Restated
                Effective July 1, 1995)

10(s)(2)        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(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>


                                      114

<PAGE>   115

<TABLE>


<S>             <C>                               <C>                             <C>                   <C>
*10(w)          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(x)(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(x)(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(x)(3)       Amendment to Exhibits
                10(x)(1) and 10(x)(2)
                dated November 18,
                1996.

10(x)(4)        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(y)          Houston Industries                Form 10-K for the               1-7629                10(7)
                Incorporated Executive            year ended
                Deferred Compensation             December 31, 1995
                Trust, effective as of
                December 19, 1995

*10(z)          Agreement dated                   Form 10-K for the               1-7629                10(aa)
                June 14, 1991 between             year ended
                the Company and                   December 31, 1995
                David M. McClanahan

*10(aa)         Supplemental Pension              Registration Statement          333-11329             10(aa)
                Agreement dated                   on Form S-4
                July 17, 1996, between
                the Company and
                Lee W. Hogan

</TABLE>


                                      115

<PAGE>   116

<TABLE>

<S>             <C>                               <C>                             <C>                   <C>
*+10(bb)        Consulting Agreement
                dated January 14, 1997,
                between the Company
                and Milton Carroll

*+10(cc)        Employment Agreement
                dated February 25, 1997,
                between the Company
                and Don D. Jordan

+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
</TABLE>



                                      116

<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(a)            Agreement and Plan of             Form 8-K                        1-3187                2
                Merger among the                  dated
                Company, HL&P, HI                 August 11, 1996
                Merger, Inc. and
                NorAm dated
                August 11, 1996

2(b)            Amendment to                      Registration Statement          333-11329             2(c)
                Agreement and Plan                on Form S-4
                of Merger among
                the Company, HL&P,
                HI Merger, Inc. and
                NorAm dated
                August 11, 1996

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)            Articles of                       Registration                    333-11329             3(b)
                Amendment to                      Statement on
                Exhibit 3(a) dated                Form S-4
                August 9, 1996

+3(c)           Articles of
                Amendment of HL&P
                dated as of December 3,
                1996

3(d)            Amended and Restated              Form 10-Q for the               1-3187                3
                Bylaws of HL&P (as                quarter ended
                of June 5, 1996)                  June 30, 1996

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

</TABLE>


                                      117

<PAGE>   118
<TABLE>



<S>             <C>                               <C>                             <C>                   <C>
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

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                  HL&P's Form 10-K                1-3187                4(a)(9)
                Sixty-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(a)(10)        Junior Subordinated               HL&P Form 8-K                   1-3187                4.1
                Trust Debenture                   dated February 4,
                Indenture between                 1997
                HL&P and The Bank
                of New York, as
                Trustee dated as of
                February 1, 1997

</TABLE>


                                      118

<PAGE>   119
<TABLE>



<S>             <C>                               <C>                             <C>                   <C>
4(a)(11)        Supplemental Indenture            HL&P Form 8-K                   1-3187                4.2A
                No. 1 to Junior Subordin-         dated February 4,
                ated Indenture dated as           1997
                of February 1, 1997,
                providing for the issuance
                of HL&P's  8.125% Junior
                Subordinated Deferrable
                Interest Debentures,
                Series A due March 31,
                2046, including form of
                8.125% junior
                subordinated interest
                debenture, Series A

4(a)(12)        Supplemental Indenture            HL&P Form 8-K                   1-3187                4.1
                to Junior Subordinated            dated February 4,
                Indenture dated as of             1997
                February 1, 1997,
                providing for the
                issuance of 8.257%
                Junior Subordinated
                Deferrable Interest
                Debentures, Series B
                (due February 1, 2037)
                including form of junior
                subordinated interest
                debenture, Series B

4(a)(13)        Amended and Restated              HL&P Form 8-K                   1-3187                4.5-A
                Trust Agreement                   dated February 4,
                dated as of February 4,           1997
                1997 of HL&P Capital
                Trust 1, including
                form of Preferred
                Security

4(a)(14)        Amended and Restated              HL&P Form 8-K                   1-3187                4.5-B
                Trust Agreement                   dated February 4,
                dated as of February 4,           1997
                1997 of HL&P Capital
                Trust II, including form
                of Capital Security of
                HL&P Capital Trust II

4(a)(15)        Guarantee Agreement               HL&P Form 8-K                   1-3187                4.8-A
                relating to Capital               dated February 4,
                Trust I, including                1997
                Agreement as to
                Expenses and
                Liabilities

4(a)(16)        Guarantee Agreement               HL&P Form 8-K                   1-3187                4.8-B
                relating to Capital               dated February 4,
                Trust II, including               1997
                Agreement as to
                Expenses and
                Liabilities

</TABLE>


                                      119

<PAGE>   120


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 1, 1982, July 1,
                1984, and 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

*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
</TABLE>



                                      120

<PAGE>   121

<TABLE>


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

*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
                March 30, 1992)                   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

</TABLE>


                                      121

<PAGE>   122

<TABLE>

<S>             <C>                               <C>                             <C>                   <C>
*10(f)(6)       Fifth Amendment to                The Company's                   1-7629                10(f)(6)
                Exhibit 10(f)(1)                  Form 10-K for the
                (effective in part as             year ended
                of January 1, 1995                December 31, 1994
                and in part, as of
                September 7, 1994) 


*10(f)(7)       Sixth Amendment to                The Company's                   1-7629                10(a)
                Exhibit 10(f)(1)                  Form 10-Q for the
                (effective as of                  quarter ended
                August 1, 1995)                   June 30, 1995

*10(f)(8)       Seventh Amendment                 The Company's                   1-7629                10(c)
                to Exhibit 10(f)(1)               Form 10-Q for
                (effective as of                  the quarter ended
                January 1, 1996)                  June 30, 1996

*10(g)(1)       Benefit Restoration               The Company                     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

</TABLE>


                                      122

<PAGE>   123

<TABLE>


<S>             <C>                               <C>                             <C>                   <C>
*10(h)(6)       Fifth Amendment to                The Company's                   1-7629                10(d)
                Exhibit 10(h)(1)                  Form 10-Q for
                (effective as of                  the quarter ended
                August 1, 1995)                   June 30, 1995

*10(h)(7)       Sixth Amendment to                The Company's                   1-7629                10(b)
                Exhibit 10(h)(1)                  Form 10-Q for the
                (effective as of                  quarter ended
                December 1, 1995)                 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

*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
                (effective as of                  the quarter ended
                August 1, 1995)                   June 30, 1995

*10(i)(7)       Sixth Amendment to                The Company's                   1-7629                10(c)
                Exhibit 10(i)(1)                  Form 10-Q for
                (effective as of                  the quarter ended
                December 1, 1995)                 June 30, 1996

*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
</TABLE>


                                      123

<PAGE>   124

<TABLE>


<S>             <C>                               <C>                             <C>                   <C>
*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
                (effective as of                  quarter ended
                August 1, 1995)                   June 30, 1995

*10(j)(8)       Seventh Amendment                 The Company's                   1-7629                10(d)
                to Exhibit 10(j)(i)               Form 10-Q for the
                (effective as of                  quarter ended
                December 1, 1995)                 June 30, 1996

*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

</TABLE>


                                      124

<PAGE>   125

<TABLE>


<S>             <C>                               <C>                             <C>                   <C>
*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, 1992)                  December 31, 1991

*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)(1)       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)(2)       First Amendment to                The Company's                   1-7629                10(e)
                Exhibit 10(q)                     Form 10-Q for the
                (effective as of                  quarter ended
                January 1, 1994)                  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)        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)(2)        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
</TABLE>



                                      125

<PAGE>   126


<TABLE>

<S>             <C>                               <C>                             <C>                   <C>
*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)          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(v)          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

*10(w)          Employment Agreement              Form 10-Q for                   1-3187                10
                dated September 16,               the quarter ended
                1996 between HL&P                 September 30, 1996
                and Charles R. Crisp

+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
</TABLE>




                                      126