- --------------------------------------------------------------------------------================================================================================
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1994March 31, 1995
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
Exact Name of Registrant as Commission I.R.S. Employer
Specified in Its Charter File Number Identification No.
- ---------------------------------------------------------------- ----------- ------------------
HAWAIIAN ELECTRIC INDUSTRIES, INC. 1-8503 99-0208097
and Principal Subsidiary
HAWAIIAN ELECTRIC COMPANY, INC. 1-4955 99-0040500
STATE OF HAWAII
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(State or other jurisdiction of incorporation or organization)
900 RICHARDS STREET, HONOLULU, HAWAII 96813
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(Address of principal executive offices and zip code)
HAWAIIAN ELECTRIC INDUSTRIES, INC. ----- (808) 543-5662
HAWAIIAN ELECTRIC COMPANY, INC. ------- (808) 543-7771
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(Registrant's telephone number, including area code)
NONE
- --------------------------------------------------------------------------------
(Former name, former address and former fiscal year,
if changed since last report)
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Indicate by check mark whether the registrant (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
------ ----------- -----
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Class of Common Stock Outstanding November 3, 1994
- --------------------------------------------------------------------------------
Hawaiian Electric Industries,
Inc. (Without Par Value)....... 28,452,227 Shares
Hawaiian Electric Company,
Inc. ($6 2/3 Par Value)........ 11,258,290
Class of Common Stock Outstanding May 5, 1995
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Hawaiian Electric Industries, Inc. (Without Par Value)..... 29,008,326 Shares
Hawaiian Electric Company, Inc. ($6 2/3 Par Value)......... 11,813,147 Shares (not publicly traded)
================================================================================
Hawaiian Electric Industries, Inc. and subsidiaries
Hawaiian Electric Company, Inc. and subsidiaries
Form 10-Q--Quarter ended SeptemberMarch 31, 1995
INDEX
Page No.
Glossary of terms........................................................ ii
PART I. FINANCIAL INFORMATION
Item 1. Financial statements
Hawaiian Electric Industries, Inc. and subsidiaries
---------------------------------------------------
Consolidated balance sheets (unaudited) - March 31, 1995
and December 31, 1994...................................... 1
Consolidated statements of income (unaudited) - three months
ended March 31, 1995 and 1994.............................. 2
Consolidated statements of retained earnings (unaudited) -
three months ended March 31, 1995 and 1994................. 2
Consolidated statements of cash flows (unaudited) -
three months ended March 31, 1995 and 1994................. 3
Notes to consolidated financial statements (unaudited)....... 4
Hawaiian Electric Company, Inc. and subsidiaries
------------------------------------------------
Consolidated balance sheets (unaudited) - March 31, 1995
and December 31, 1994...................................... 8
Consolidated statements of income (unaudited) -
three months ended March 31, 1995 and 1994................. 9
Consolidated statements of retained earnings (unaudited) -
three months ended March 31, 1995 and 1994................. 9
Consolidated statements of cash flows (unaudited) -
three months ended March 31, 1995 and 1994................. 10
Notes to consolidated financial statements (unaudited)....... 11
Item 2. Management's discussion and analysis of financial
condition and results of operations........................ 15
PART II. OTHER INFORMATION
Item 1. Legal proceedings............................................ 25
Item 4. Submission of matters to a vote of security holders.......... 25
Item 5. Other information............................................ 26
Item 6. Exhibits and reports on Form 8-K............................. 29
Signatures............................................................... 30 1994
INDEX
Page No.
Glossary of terms................................................................... ii
PART I. FINANCIAL INFORMATION
Item 1. Financial statements
Hawaiian Electric Industries, Inc. and subsidiaries
---------------------------------------------------
Consolidated balance sheets (unaudited) - September 30, 1994
and December 31, 1993............................................... 1
Consolidated statements of income (unaudited) - three and nine months
ended September 30, 1994 and 1993................................... 2
Consolidated statements of retained earnings (unaudited) - three and
nine months ended September 30, 1994 and 1993....................... 3
Consolidated statements of cash flows (unaudited) - nine months
ended September 30, 1994 and 1993................................... 4
Notes to consolidated financial statements (unaudited)............... 6
Hawaiian Electric Company, Inc. and subsidiaries
------------------------------------------------
Consolidated balance sheets (unaudited) - September 30, 1994
and December 31, 1993............................................... 13
Consolidated statements of income (unaudited) - three and nine months
ended September 30, 1994 and 1993................................... 14
Consolidated statements of retained earnings (unaudited) - three and
nine months ended September 30, 1994 and 1993....................... 14
Consolidated statements of cash flows (unaudited) - nine months
ended September 30, 1994 and 1993................................... 15
Notes to consolidated financial statements (unaudited)............... 16
Item 2. Management's discussion and analysis of financial condition
and results of operations........................................... 22
PART II. OTHER INFORMATION
Item 1. Legal proceedings..................................................... 36
Item 5. Other information..................................................... 36
Item 6. Exhibits and reports on Form 8-K...................................... 38
Signatures.......................................................................... 39
i
Hawaiian Electric Industries, Inc. and subsidiaries
Hawaiian Electric Company, Inc. and subsidiaries
Form 10-Q--Quarter ended September 30, 1994March 31, 1995
GLOSSARY OF TERMS
Terms Definitions
- ----- -----------
AFUDC Allowance for funds used during construction
ASB American Savings Bank, F.S.B., a wholly owned subsidiary of
HEI Diversified, Inc. and parent company of American
Savings Investment Services Corp., ASB Service
Corporation, AdCommunications, Inc. and Associated
Mortgage, Inc.
Company Hawaiian Electric Industries, Inc. and its direct and
indirect subsidiaries, including, without limitation,
Hawaiian Electric Company, Inc., Maui Electric Company,
Limited, Hawaii Electric Light Company, Inc., HEI
Investment Corp., Malama Pacific Corp. and its
subsidiaries, Hawaiian Tug & Barge Corp., Young Brothers,
Limited, HEI Diversified, Inc., American Savings Bank,
F.S.B. and its subsidiaries, and Lalamilo Ventures, Inc.,
Pacific Energy Conservation Services, Inc. and HEI Power
Corp. (since its formation in March 1995)
Consumer
Advocate Division of Consumer Advocacy, Department of Commerce and
Consumer Affairs of the State of Hawaii
FASB Financial Accounting Standards Board
HECO Hawaiian Electric Company, Inc., a wholly owned electric
utility subsidiary of Hawaiian Electric Industries, Inc.
and parent company of Maui Electric Company, Limited and
Hawaii Electric Light Company, Inc.
HEI Hawaiian Electric Industries, Inc.,
parent company of Hawaiian Electric Company, Inc., HEI
Investment Corp., Malama Pacific Corp., Hawaiian Tug &
Barge Corp., Lalamilo Ventures, Inc., HEI Diversified,
Inc., Pacific Energy Conservation Services, Inc. and HEI
Diversified, Inc.Power Corp. (since its formation in March 1995)
HEIDI HEI Diversified, Inc., a wholly owned subsidiary of
Hawaiian Electric Industries, Inc., and the parent company
of American Savings Bank, F.S.B., and formely the holder of record of the common
stock of The Hawaiian Insurance & Guaranty Company, Limited
HEIIC HEI Investment Corp., a wholly owned subsidiary of Hawaiian
Electric Industries, Inc.
HEIPC HEI Power Corp., a wholly owned subsidiary of Hawaiian
Electric Industries, Inc.
HELCO Hawaii Electric Light Company, Inc., a wholly owned
electric utility subsidiary of Hawaiian Electric Company,
Inc.
HERS Hawaiian Electric Renewable Systems, Inc., formerly a wholly owned
subsidiary of Hawaiian Electric Industries, Inc. and formerly
parent company of Lalamilo Ventures, Inc.
ii
GLOSSARY OF TERMS, continued
Terms Definitions
- ----- -----------
HIG The Hawaiian Insurance & Guaranty Company, Limited, an
insurance company currently in state rehabilitation
proceedings and formerly parent company of
United National Insurance Company, Ltd., Hawaiian Underwriters
Insurance Co., Ltd., Guardian Life Underwriters, Inc., Guardian
Financial Corporation, and Independent Adjustment, Inc.proceedings. HEI Diversified, Inc. was formerly the holder of
record of HIG's common stock prior to August 16, 1994
HTB Hawaiian Tug & Barge Corp., a wholly owned subsidiary of
Hawaiian Electric Industries, Inc. and parent company of
Young Brothers, Limited
KWH Kilowatthour
MECO Maui Electric Company, Limited, a wholly owned electric
utility subsidiary of Hawaiian Electric Company, Inc.
MPC Malama Pacific Corp., a wholly owned subsidiary of
Hawaiian Electric Industries, Inc. and parent company of
Malama Project-I,
Inc., Malama Waterfront Corp., Malama Property Investment Corp.,
Malama Development Corp., Malama Realty Corp., Malama Elua Corp.,
TMG Service Corp. (formerly Malama Kolu Corp.), Malama Hoaloha
Corp., and Malama Mohala Corp.several real estate subsidiaries
MW Megawatt
OTS Office of Thrift Supervision, Department of Treasury
PBOP Postretirement benefits other than pension
PGV Puna Geothermal VenturesVenture
PUC Public Utilities Commission of the State of Hawaii
SEC Securities and Exchange Commission
SFAS Statement of Financial Accounting Standards
YB Young Brothers, Limited, a wholly owned subsidiary of
Hawaiian Tug & Barge Corp.
iii
PART I - FINANCIAL INFORMATION
- ----------------------------------------------------------------------------------------------PART I - FINANCIAL INFORMATION
- --------------------------------------------------------------------------------
Item 1. Financial statements
- -----------------------------
Hawaiian Electric Industries, Inc. and subsidiaries
Consolidated balance sheets (unaudited)
September 30,
March 31, December 31,
(in thousands) 1995 1994
1993
- -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
Assets
Cash and equivalents.........................................equivalents................................................ $ 84,197107,423 $ 116,26087,623
Accounts receivable and unbilled revenues, net............... 129,900 117,116net...................... 123,975 130,762
Inventories, at average cost................................. 40,726 39,405cost........................................ 35,957 43,126
Real estate developments..................................... 38,978 29,673developments............................................ 36,952 33,956
Loans receivable, net........................................ 1,966,953 1,735,098net............................................... 1,653,878 1,824,055
Marketable securities........................................ 786,894 698,755securities............................................... 1,303,814 1,099,810
Other investments............................................ 77,070 77,106investments................................................... 74,920 77,297
Property, plant and equipment, net........................... 1,632,605 1,542,989net.................................. 1,709,979 1,677,822
Regulatory assets............................................ 84,017 60,699
Other........................................................ 60,026 54,827assets................................................... 97,910 95,257
Other............................................................... 62,656 59,301
Goodwill and other intangibles............................... 46,507 49,664
----------- -----------
$4,947,873 $4,521,592
=========== ===========intangibles...................................... 44,402 45,455
---------- ----------
$5,251,866 $5,174,464
========== ==========
Liabilities and stockholders' equity
Accounts payable.............................................payable.................................................... $ 93,97089,454 $ 88,62897,210
Deposit liabilities.......................................... 2,153,515 2,091,583liabilities................................................. 2,108,813 2,129,310
Short-term borrowings........................................ 116,860 40,416borrowings............................................... 131,227 136,755
Securities sold under agreements to repurchase............... 23,463 --repurchase...................... 200,565 123,301
Advances from Federal Home Loan Bank......................... 521,874 289,674Bank................................ 618,374 616,374
Long-term debt, net.......................................... 713,685 697,836debt...................................................... 742,677 718,240
Deferred income taxes........................................ 174,480 168,329taxes............................................... 175,077 172,930
Unamortized tax credits...................................... 45,385 44,357credits............................................. 46,597 45,954
Contributions in aid of construction......................... 169,061 165,005
Other........................................................ 170,883 197,713construction................................ 178,854 178,635
Other............................................................... 175,758 180,529
---------- ----------
4,183,176 3,783,5414,467,396 4,399,238
---------- ----------
Preferred stock of electric utility subsidiaries
Subject to mandatory redemption.............................. 46,139 46,730redemption..................................... 43,440 44,844
Not subject to mandatory redemption..........................redemption................................. 48,293 48,293
---------- ----------
94,432 95,02391,733 93,137
---------- ----------
Stockholders' equity
Preferred stock, no par value, authorized 10,000 shares;
no shares outstanding.......................................issued: none..................................................... -- --
Common stock, no par value, authorized 100,000 shares; issued
and outstanding 28,40828,955 shares and 27,675 shares................. 538,544 514,71028,655 shares................... 556,025 546,254
Retained earnings............................................ 131,721 128,318earnings................................................... 136,712 135,835
---------- ----------
670,265 643,028692,737 682,089
---------- ----------
$4,947,873 $4,521,592$5,251,866 $5,174,464
========== ==========
See accompanying notes to consolidated financial statements.
1
Hawaiian Electric Industries, Inc. and subsidiaries
Consolidated statements of income (unaudited)
Three months ended Nine months ended
September 30, September 30,March 31,
(in thousands, except per share amounts and ---------------------- --------------------------------------------------
ratio of earnings to fixed charges) 1995 1994
1993 1994 1993
- ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
Revenues
Electric utility............................. $249,664 $235,841 $670,381 $661,788utility..................................................... $232,521 $201,306
Savings bank................................. 54,389 49,752 156,784 149,183
Other........................................ 15,103 13,893 41,589 49,508
--------- --------- --------- ---------
319,156 299,486 868,754 860,479
--------- --------- --------- ---------bank......................................................... 60,717 50,083
Other................................................................ 13,036 13,653
-------- --------
306,274 265,042
-------- --------
Expenses
Electric utility............................. 209,015 204,222 571,591 576,168utility..................................................... 197,108 176,982
Savings bank................................. 43,187 38,048 124,287 117,758
Other........................................ 15,404 16,758 44,967 53,845
--------- --------- --------- ---------
267,606 259,028 740,845 747,771
--------- --------- --------- ---------bank......................................................... 50,492 39,463
Other................................................................ 14,365 15,193
-------- --------
261,965 231,638
-------- --------
Operating income (loss)
Electric utility............................. 40,649 31,619 98,790 85,620utility..................................................... 35,413 24,324
Savings bank................................. 11,202 11,704 32,497 31,425
Other........................................ (301) (2,865) (3,378) (4,337)
--------- --------- --------- ---------
51,550 40,458 127,909 112,708
--------- --------- --------- ---------bank......................................................... 10,225 10,620
Other................................................................ (1,329) (1,540)
-------- --------
44,309 33,404
-------- --------
Interest expense--electric utility and other. (13,916) (12,901) (40,126) (38,863)other......................... (14,952) (13,082)
Allowance for borrowed funds used during construction......................... 1,070 1,056 2,886 2,984construction................ 1,167 871
Preferred stock dividends of electric utility subsidiaries........................ (1,790) (1,628) (5,386) (4,888)subsidiaries........... (1,731) (1,800)
Allowance for equity funds used during construction................................ 2,381 1,915 6,427 5,269
--------- --------- --------- ---------construction.................. 2,367 1,951
-------- --------
Income from continuing operations before income taxes......................... 39,295 28,900 91,710 77,210taxes........................................... 31,160 21,344
Income taxes................................. 16,604 12,812 39,599 32,853
--------- --------- --------- ---------
Income from continuing operations............ 22,691 16,088 52,111 44,357
Income from discontinued operations
(less applicable income taxes of $1,102
in the nine months ended
September 30, 1993)......................... -- -- -- 1,800
--------- --------- --------- ---------taxes......................................................... 13,313 9,556
-------- --------
Net income...................................income........................................................... $ 22,69117,847 $ 16,088 $ 52,111 $ 46,157
========= ========= ========= =========11,788
======== ========
Earnings per common share
Continuing operations..................... $0.80 $0.61 $1.86 $1.75
Discontinued operations................... -- -- -- 0.07
--------- --------- --------- ---------
$0.80 $0.61 $1.86 $1.82
========= ========= ========= =========share............................................ $0.62 $0.42
======== ========
Dividends per common share...................share........................................... $0.59 $0.58
$0.57 $1.74 $1.71
========= ========= ========= ================= ========
Weighted average number of common shares outstanding......................... 28,255 26,247 28,014 25,402
========= ========= ========= =========outstanding................. 28,772 27,768
======== ========
Ratio of earnings to fixed charges (SEC method)
Excluding interest on ASB deposits.......... 2.23 2.21
========= =========deposits.............................. 1.93 1.92
======== ========
Including interest on ASB deposits.......... 1.69 1.61
========= =========deposits.............................. 1.56 1.50
======== ========
Hawaiian Electric Industries, Inc. and subsidiaries
Consolidated statements of retained earnings (unaudited)
Three months ended March 31,
----------------------------
(in thousands) 1995 1994
- ----------------------------------------------------------------------------------------------------
Retained earnings, beginning of period............................... $135,835 $128,318
Net income........................................................... 17,847 11,788
Common stock dividends............................................... (16,970) (16,094)
-------- --------
Retained earnings, end of period..................................... $136,712 $124,012
======== ========
See accompanying notes to consolidated financial statements.
2
Hawaiian Electric Industries, Inc. and subsidiaries
Consolidated statements of retained earningscash flows (unaudited)
Three months ended Nine months ended
September 30, September 30,
------------------- -------------------March 31,
----------------------------
(in thousands) 1995 1994
1993 1994 1993
- ---------------------------------------------------------------------------------------------
Retained earnings, beginning of period............. $125,406 $140,102 $128,318 $138,484
Net income......................................... 22,691 16,088 52,111 46,157
Common stock dividends............................. (16,376) (14,419) (48,708) (42,870)
--------- --------- --------- ---------
Retained earnings, end of period $131,721 $141,771 $131,721 $141,771
========= ========= ========= =========
See accompanying notes to consolidated financial statements.
3
Hawaiian Electric Industries, Inc. and subsidiaries
Consolidated statements of cash flows (unaudited)
Nine months ended
September 30,
--------------------------------
(in thousands) 1994 1993
- ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
Cash flows from operating activities
Income from continuing operations................................ $52,111operations........................................... $ 44,35717,847 $ 11,788
Adjustments to reconcile income from continuing operations to
net cash provided by (used in) operating activities
Depreciation and amortization of property, plant and equipment..................................................... 54,353 50,825equipment........ 19,177 18,146
Other amortization............................................. (3,337) (1,297)
Provision for deferredamortization.................................................... (487) (322)
Deferred income taxes and tax credits, net....... 9,652 3,507net............................ 3,208 5,910
Changes in assets and liabilities, net of effects from
acquisitiondisposal of control of joint venture
Increasebusinesses
Decrease in accounts receivable and unbilled revenues, net... (12,784) (10,284)net...... 6,817 9,657
Decrease (increase) in inventories........................... (1,321) 789
Decrease (increase)inventories......................................... 7,169 5,028
Increase in real estate developments.............. (1,351) 2,256
Decrease (increase)developments............................ (879) (9,684)
Increase in securities held for trading........... 29,873 (22,677)trading......................... -- (15,525)
Increase in regulatory assets................................ (1,117) (3,807)
Increaseassets................................... (1,303) (4,892)
Decrease in accounts payable................................. 5,342 10,119payable.................................... (7,756) (957)
Changes in other assets and liabilities...................... (24,200) 11,434
----------liabilities......................... (6,112) (20,379)
--------- 107,221 85,222---------
37,681 (1,230)
Cash flows fromused by discontinued operations.......................... (32,469) 1,063
----------operations........................................ (67) (220)
--------- ---------
Net cash provided by (used in) operating activities........................ 74,752 86,285
----------activities......................... 37,614 (1,450)
--------- ---------
Cash flows from investing activities
Loans receivable originated and purchased........................ (412,704) (364,808)purchased................................... (84,121) (168,999)
Principal repayments on loans receivable......................... 185,408 201,713receivable.................................... 30,096 76,279
Proceeds from sale of loans receivable........................... 1,888 214receivable...................................... 2,413 1,335
"Held-to-maturity" mortgage-backed securities purchased.......... (274,430) (132,796)purchased..................... (9,793) (126,802)
Principal repayments on "held-to-maturity" mortgage-backed securities...................................................... 162,031 191,433
Increase in investments in real estate joint ventures............ (60) (1,701)
Distributions from real estate joint ventures.................... 2,019 8,594securities....... 30,032 75,427
Capital expenditures............................................. (143,035) (159,524)expenditures........................................................ (51,157) (37,909)
Contributions in aid of construction............................. 9,114 15,801
Other............................................................ (4,692) 13,297
---------- -----------construction........................................ 2,173 2,903
Other....................................................................... 140 1,928
--------- ---------
Net cash used in investing activities............................ (474,461) (227,777)
---------- -----------
4
Hawaiian Electric Industries, Inc. and subsidiaries
Consolidated statements of cash flows (unaudited)
(continued)
Nine months ended
September 30,
-------------------------
(in thousands) 1994 1993
- ----------------------------------------------------------------------------------------------------------
activities....................................... (80,217) (175,838)
--------- ---------
Cash flows from financing activities
Net increase (decrease) in deposit liabilities........................................... $ 61,932 $ 12,314liabilities.............................. (20,497) 55,017
Net increase (decrease) in short-term borrowings with
original maturities of three months or less......................................................... 80,119 (31,905)less.............................. (5,259) 75,405
Proceeds from other short-term borrowings..................................... 851 25,461borrowings................................... 252 496
Repayment of other short-term borrowings...................................... (4,526) (45,602)borrowings.................................... (521) (2,333)
Proceeds from securities sold under agreements to repurchase.................. 23,330repurchase................ 98,000 --
Repurchase of securities sold under agreements to repurchase..................repurchase................ (23,636) -- (14,000)
Proceeds from advances from Federal Home Loan Bank............................ 584,200 102,500Bank.......................... 185,500 168,000
Principal payments on advances from Federal Home Loan Bank.................... (352,000) (58,024)Bank.................. (183,500) (81,000)
Proceeds from issuance of long-term debt...................................... 83,274 59,597debt.................................... 36,815 16,018
Repayment of long-term debt................................................... (75,427) (50,774)debt................................................. (12,400) (74,400)
Redemption of electric utility subsidiaries' preferred stock.................. (591) (745)stock................ (1,404) (392)
Net proceeds from issuance of common stock.................................... 10,564 84,693stock.................................. 5,009 3,824
Common stock dividends........................................................ (35,484) (30,435)
Other......................................................................... (8,596) (2,289)dividends...................................................... (12,236) (11,721)
Other....................................................................... (3,720) (9,160)
--------- -----------------
Net cash provided by financing activities..................................... 367,646 50,791activities................................... 62,403 139,754
--------- -----------------
Net decreaseincrease (decrease) in cash and equivalents.......................................... (32,063) (90,701)equivalents............................. 19,800 (37,534)
Cash and equivalents, beginning of period.....................................period................................... 87,623 116,260
156,754
--------- -----------------
Cash and equivalents, end of period...........................................period......................................... $ 84,197107,423 $ 66,05378,726
========= =================
See accompanying notes to consolidated financial statements.
53
Hawaiian Electric Industries, Inc. and subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30,March 31, 1995 and 1994 and 1993
(Unaudited)
- --------------------------------------------------------------------------------
(1) Accounting statement
- -------------------------
In the opinion of HEI's management, the accompanying unaudited consolidated
financial statements contain all material adjustments required by generally
accepted accounting principles to present fairly the Company's financial
position as of September 30, 1994March 31, 1995 and December 31, 1993,1994, and the results of its
operations for the three months and nine months ended September 30, 1994 and
1993, and its cash flows for the ninethree months ended September 30, 1994March 31, 1995 and
1993.1994. All such adjustments are of a normal recurring nature, except as described
below. These consolidated financial statements should be read in conjunction
with the consolidated financial statements and the notes thereto incorporated by
reference in HEI's Annual Report on SEC Form 10-K for the year ended December
31, 1993 and the consolidated financial statements and the notes thereto in
HEI's Quarterly Reports on SEC Form 10-Q for the quarters ended March 31 and
June 30, 1994. The consolidated balance sheet as of December 31, 19931994 was derived
from audited financial statements.
(2) Discontinued operations
- ----------------------------
Hawaiian Electric Renewable Systems, Inc.
- -----------------------------------------
On October 6, 1992, the Board of Directors of HEI ratified management's
September 30, 1992 plan to exit the nonutility wind energy business because of
chronic mechanical problems with its wind turbines and continuing losses from
operations. In March 1993, HEI sold the stock of HERS to The New World Power
Corporation for an amount which was not material. In the first quarter of 1993,
in connection with the sale of HERS, HEI reversed reserves for site restoral and
other HERS' disposal costs that were no longer needed due to the terms of the
sale, resulting in a net gain on disposal of discontinued operations of
$1.8 million.
The Hawaiian Insurance & Guaranty Co., Limited
- ----------------------------------------------
HIG and its subsidiaries (the HIG Group) are property and casualty insurance
companies in the State of Hawaii. HEIDI, a subsidiary of HEI, was the holder of
record of all the common stock of HIG until August 16, 1994, when HEIDI
surrendered the stock of HIG for cancellation.
On December 2, 1992, the Board of Directors of HEI had concluded that it would
not contribute additional capital to HIG and the remaining investment in the HIG
Group was written off in the fourth quarter of 1992. The decision resulted from
an increase in the estimate of policyholder claims from Hurricane Iniki (which
hit the Hawaiian Islands on September 11, 1992). On December 24, 1992, with the
consent of the HIG Group, a formal rehabilitation order (the Rehabilitation
Order) was entered by the First Circuit Court of the State of Hawaii, vesting
full control over the HIG Group in the Insurance Commissioner (the
Rehabilitator/Liquidator) and her deputies.
On April 12, 1993, the Rehabilitator/Liquidator, HIG, United National Insurance
Company, Ltd. and Hawaiian Underwriters Insurance Co., Ltd. filed a complaint
against HEI, HEIDI and certain current and former officers and directors of HEI,
HEIDI and the HIG Group in state court on the island of Kauai. The complaint set
forth several separate counts, including claims to the effect that HEI and/or
HEIDI should be held liable for HIG's obligations based on allegations, among
others, that HIG was held out to be part of an HEI family of companies (and not
as a separate enterprise) and that HEIDI is liable for an assessment levied by
the Rehabilitator/Liquidator. The complaint alleged that certain current and
former officers and directors of HEI, HEIDI and the HIG Group had breached their
fiduciary duties to the HIG Group in numerous respects. The complaint requested
declaratory relief and compensatory, general, special and punitive damages,
together with costs and attorneys' fees.
On July 12, 1993, the Rehabilitator/Liquidator filed a first amended complaint,
which repeated the claims asserted in the original complaint but added the
Hawaii Insurance Guaranty Association (HIGA) as a plaintiff and asserted certain
additional claims.
6
In early 1994, HEI, HEIDI, certain officers and directors, the
Rehabilitator/Liquidator and HIGA signed an agreement to settle the lawsuit,
subject to obtaining necessary court approvals. On April 6, 1994, the court in
which the HIG Group's rehabilitation proceeding is pending approved the
settlement agreement. A stipulation dismissing the suit brought by the
Rehabilitator/Liquidator was filed on July 8, 1994. Under the agreement, the
Company paid $32.0 million into an escrow account. In August 1994, the
$32.0 million plus interest was disbursed to the Rehabilitator/Liquidator, at
which time the release of claims against HEI, its affiliates and their past and
present officers and directors became effective and the common stock of HIG held
by HEIDI was cancelled.
The $32.0 million settlement amount, less income tax benefits and certain
amounts recognized in previously established reserves, resulted in a
$15.0 million after-tax charge to discontinued operations in the fourth quarter
of 1993. HEI is seeking reimbursement for the settlement and defense costs from
certain of its insurance carriers. HEI's claims against its insurance carriers
will require resolution of several insurance coverage and other policy issues
and the outcome of such claims cannot be predicted at this time. One of HEI's
insurance carriers has filed a declaratory relief action in the U.S. District
Court for the District of Hawaii seeking resolution of these issues, and HEI has
filed counterclaims for declaratory relief, breach of contract, tortious breach
of contract and punitive damages. Trial of the case is scheduled for October
1995. Recoveries from HEI's insurance carriers, if any, will be recognized when
realized.
(3) Electric utility subsidiary
- --------------------------------
For Hawaiian Electric Company, Inc.'s consolidated financial information,
including its commitments and contingencies, see pages 138 through 21.
(4)14.
(3) Savings bank subsidiary
- ----------------------------
Selected consolidated financial information
American Savings Bank, F.S.B. and subsidiaries
Income statement data
Three months ended
Nine months ended
September 30, September 30,
-------------------------- --------------------------March 31,
----------------------
(in thousands) 1995 1994
1993 1994 1993
- ----------------------------------------------------------------------------------------------------------------
Income statement data-------------------------------------------------------------------------------
Interest income........................................ $51,833 $46,964 $150,361 $140,950income...................................... $ 57,633 $ 48,098
Interest expense....................................... 26,789 22,351 74,704 70,210
------- -------expense..................................... 32,975 23,146
-------- --------
Net interest income.................................... 25,044 24,613 75,657 70,740income.................................. 24,658 24,952
Provision for losses................................... (248) (516) (732) (987)losses................................. (385) (242)
Other income........................................... 2,556 2,788 6,423 8,233income......................................... 3,084 1,985
Operating, administrative and general expenses......... (16,150) (15,181) (48,851) (46,561)
------- -------expenses....... (17,132) (16,075)
-------- --------
Operating income....................................... 11,202 11,704 32,497 31,425income..................................... 10,225 10,620
Income taxes........................................... 4,669 5,304 13,538 13,360
------- -------taxes......................................... 4,276 4,413
-------- --------
Net income.............................................income........................................... $ 6,5335,949 $ 6,400 $ 18,959 $ 18,065
======= =======6,207
======== ========
74
American Savings Bank, F.S.B. and subsidiaries
Balance sheet data
September 30,March 31, December 31,
(in thousands) 1995 1994
1993
- -----------------------------------------------------------------------------------------------------------------------------------
Balance sheet data--------------------------------------------------------------------------------
Assets
Cash and equivalents.................................................equivalents............................... $ 82,712106,356 $ 77,61076,502
Investment securities................................................ 33,774 68,599securities.............................. 33,012 32,523
Mortgage-backed securities........................................... 742,720 630,156securities......................... 1,270,802 1,067,287
Loans receivable, net................................................ 1,966,953 1,735,098
Other................................................................ 67,461 57,358net.............................. 1,653,878 1,824,055
Other.............................................. 70,872 69,829
Goodwill and other intangibles....................................... 46,507 49,664intangibles..................... 44,402 45,455
---------- -----------
$2,940,127 $2,618,485----------
$3,179,322 $3,115,651
========== ==========
Liabilities and equity
Deposit liabilities.................................................. $2,153,515 $2,091,583liabilities................................ $2,108,813 $2,129,310
Securities sold under agreements to repurchase....................... 23,463 --repurchase..... 200,565 123,301
Advances from Federal Home Loan Bank................................. 521,874 289,674
Other................................................................ 48,038 52,717Bank............... 618,374 616,374
Other.............................................. 53,032 51,078
---------- ----------
2,746,890 2,433,9742,980,784 2,920,063
Common stock equity.................................................. 193,237 184,511equity................................ 198,538 195,588
---------- ----------
$2,940,127 $2,618,485$3,179,322 $3,115,651
========== ==========
8
American Savings Bank, F.S.B. and subsidiaries
Nine months ended
September 30,
-------------------------------
(in thousands) 1994 1993
- -----------------------------------------------------------------------------------------------------------------------------
Cash flow data
Cash flows from operating activities
Net income................................................................................... $ 18,959 $ 18,065
Adjustments to reconcile net income to net cash provided by
operating activities
Decrease (increase) in accounts receivable................................................ (743) 875
Decrease (increase) in other securities held for trading.................................. 40,273 (22,677)
Increase (decrease) in accounts payable................................................... (4,658) 7,271
Changes in other assets and liabilities................................................... (3,776) 6,298
---------- ----------
Net cash provided by operating activities.................................................... 50,055 9,832
--------- ----------
Cash flows from investing activities
Loans receivable originated and purchased.................................................... (412,704) (364,808)
Principal repayments on loans receivable .................................................... 185,408 201,713
Proceeds from sale of loans receivable....................................................... 1,888 214
"Held-to-maturity" mortgage-backed securities purchased...................................... (274,430) (132,796)
Principal repayments on "held-to-maturity" mortgage-backed securities........................ 162,031 191,433
Other........................................................................................ (13,608) 7,007
---------- ----------
Net cash used in investing activities........................................................ (351,415) (97,237)
---------- ----------
Cash flows from financing activities
Net increase in deposit liabilities.......................................................... 61,932 12,314
Proceeds from securities sold under agreements to repurchase................................. 23,330 --
Repurchase of securities sold under agreements to repurchase................................. -- (14,000)
Proceeds from advances from Federal Home Loan Bank........................................... 584,200 102,500
Principal payments on advances from Federal Home Loan Bank................................... (352,000) (58,024)
Common stock dividends....................................................................... (11,000) (10,002)
---------- ----------
Net cash provided by financing activities.................................................... 306,462 32,788
---------- ----------
Net increase (decrease) in cash and equivalents.............................................. 5,102 (54,617)
Cash and equivalents, beginning of period.................................................... 77,610 117,937
----------- ----------
Cash and equivalents, end of period.......................................................... $ 82,712 $ 63,320
=========== ===========
(5)(4) Real estate subsidiary
- ---------------------------
MPC and its subsidiaries' total real estate project inventory, equity investment
in real estate joint ventures and loans and advances to unconsolidated joint
ventures or joint venture partners amounted to $56$52 million and $49$51 million at
September 30,
1994March 31, 1995 and December 31, 1993,1994, respectively. In 1990, Malama Development Corp. (MDC) acquired a 50% general partnership
interest in Baldwin*Malama, a partnership with Baldwin Pacific Properties, Inc.
(BPPI). In May 1993, Baldwin*Malama was reorganized as a limited partnership in
which MDC became the sole general partner and BPPI the sole limited partner.
Beginning in May 1993, in conjunction with the dissolution of the general
partnership and formation of the limited partnership, MDC consolidated the
accounts of Baldwin*Malama. Previously, MDC accounted forMPC's present focus is to
reduce its current investment in Baldwin*Malama underreal estate development assets to increase cash
flow to the equity method.Company by continuing the development and sales of its existing
projects. There are currently no plans to invest in new projects.
At September 30, 1994, MPC or its subsidiaries were directly liable for
$15.8 million of outstanding loans and had additional loan facilities of
$1.4 million. In addition, at September 30, 1994,March 31, 1995, MPC or its subsidiaries had issued (i)guaranties under which
they were jointly and severally contingently liable with their joint venture
partners for $1.9 million of outstanding loans and (ii) payment guaranties under
which MPC or its subsidiaries were severally contingently liable for $6.7$7.8
million of outstanding loans and $7.9$6.4 million of additional undrawn loan
facilities. In total, at September 30, 1994, MPC or its
9
subsidiaries were liable or contingently liable for $24.3 million of outstandingAll such loans and $9.3 million in undrawn loan facilities.are collateralized by real property. At September 30, 1994,March 31,
1995, HEI had agreed with the lenders of construction loans and loan facilities,
of which approximately $14.4$13.7 million was outstanding and $9.3$6.9 million was
undrawn, that it will maintain ownership of l00% of the stock of MPC and that it
intends, subject to good and prudent business practices, to keep MPC financially
sound and responsible to meet its obligations as guarantor.
MPC or its subsidiaries
may enter into additional commitments in connection with the financing of future
phases of development of MPC's projects and HEI may enter into similar
agreements regarding the ownership and financial condition of MPC.
(6)(5) Regulatory Assetsassets
- ----------------------
Regulatory assets at September 30, 1994March 31, 1995 and December 31, 1993 include1994 included the following
deferred costs:
September 30,March 31, December 31,
(in thousands) 1995 1994 1993
- --------------------------------------------------------------------------------
Postretirement benefits other than pensions....... $32,346 $19,210pensions......... $36,160 $36,670
Income taxes...................................... 21,272 16,297taxes........................................ 25,530 23,522
Unamortized debt expense on retired issues.......... 7,352 7,513
Integrated resource planning costs.................. 7,780 7,189
Computer system development costs................... 6,479 6,090
Vacation earned, but not yet taken.................. 6,490 5,972
Preliminary plant costs on suspended project...... 5,634 5,199
Vacation earned, but not yet taken................ 6,290 5,494
Unamortized debt expense on retired issuances..... 7,676 5,435
Integrated resource planning costs................ 6,800 4,661
Other............................................. 3,999 4,403project........ 5,759 5,768
Other............................................... 2,360 2,533
------- -------
$84,017 $60,699$97,910 $95,257
======= =======
(7)5
(6) Interest Expenseexpense
- ---------------------
Interest expense by segment, excluding interest on nonrecourse debt issued in connection
withfrom
leveraged leases, consisted of the following:
Three months ended
Nine months ended
September 30, September 30,March 31,
--------------------
(in thousands) ------------------ -----------------1995 1994 1993 1994 1993
- --------------------------------------------------------------------------------
Interest expense
Savings bank.................... $26,789 $22,351Electric utility........................................ $10,446 $ 74,704 $ 70,210
Electric utility................ 9,600 8,461 27,770 25,276
Other........................... 4,316 4,440 12,356 13,5879,063
Other................................................... 4,506 4,019
------- -------
-------- --------
$40,705 $35,252 $114,830 $109,073
=======14,952 13,082
Savings bank............................................ 32,975 23,146
------- -------
$47,927 $36,228
======= ======== ===============
(8)(7) Cash Flowsflows
- ---------------
Supplemental disclosures of cash flow information
Cash paid (received) for interest net[net of capitalized amounts,amounts] and cash paid (received) for income taxes
werewas as follows:
NineThree months ended
September 30,
---------------------March 31,
--------------------
(in thousands) 1995 1994
1993
- -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
Interest (including interest paid by savings bank, but excluding interest
paid on nonrecourse debt issued in connection withon leveraged leases).............................................. $108,688 $105,457
======== ========............................... $39,546 $34,186
======= =======
Interest on nonrecourse debt on leveraged leases.............................. $ 239 $ 256
======= =======
Income taxes.....................................................taxes.................................................................. $ 31,618(681) $ (5,100)
======== ========4,894
======= =======
Cash paid for interest on nonrecourse debt issued in connection with leveraged
leases amounted to $5,001,000 and $5,007,000 forSupplemental disclosures of noncash activities
In the ninethree months ended September
30, 1994 and 1993, respectively.
10
SUPPLEMENTAL DISCLOSURES OF NONCASH ACTIVITIESMarch 31, 1995, ASB received $223 million in mortgage-
backed securities in exchange for loans.
Common stock dividends reinvested by shareholders in HEI common stock in noncash
transactions amounted to $13,224,000$4,734,000 and $12,435,000$4,373,000 for the ninethree months ended
September 30,March 31, 1995 and 1994, and 1993, respectively.
The allowance for equity funds used during construction, which was capitalized
as part of the cost of electric utility plant, amounted to $6,427,000$2,367,000 and
$5,269,000$1,951,000 for the ninethree months ended September 30,March 31, 1995 and 1994, and 1993, respectively.
In March 1994, MDC'sMalama Development Corp.'s Baldwin*Malama partnership closed on
an option to purchase approximately 147 acres of land on the island of Maui from
BPPI.Baldwin Pacific Properties, Inc. Of the total land purchase price of $9.9
million, Baldwin*Malama issued mortgage notes payable of $8.0 million in noncash
consideration.
(9) POSTRETIREMENT BENEFITS OTHER THAN PENSIONS(8) Accounting change
- ------------------------------------------------
The Company provides various postretirement benefits other than pensions to
eligible employees upon retirement. Health and life insurance benefits are
provided to eligible employees of HEI, HECO and its subsidiaries, and YB upon
their retirement. Medical, dental and vision benefits are provided to eligible
employees of HEI and HECO and its subsidiaries upon their retirement, with
contributions by retirees toward costs based on their years of service and
retirement date. Medical and vision benefits are provided to eligible bargaining
unit employees of YB upon their retirement at no cost. Employees are eligible
for these benefits if, upon retirement, they participate in one of----------------------
In March 1995, the Company's
defined benefit pension plans. Currently, no funding has been provided for these
benefits. Through December 31, 1992, the cost of postretirement benefits other
than pensions had not been recognized until paid (i.e., the pay-as-you-go
method). Accordingly, no provision had been made for future benefits to existing
or retired employees.
Effective January 1, 1993, the Company adoptedFinancial Accounting Standards Board (FASB) issued Statement
of Financial Accounting Standards (SFAS) No. 106, "Employers' Accounting121, "Accounting for Postretirement Benefits
Other Than Pensions,the Impairment
of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of." whichSFAS No. 121
requires accrual, duringthat long-lived assets and certain identifiable intangibles held and
used by an entity be reviewed for impairment whenever events or changes in
circumstances indicate that the years thatcarrying amount of an employee
rendersasset may not be
recoverable. If the necessary service,sum of the expected costfuture cash flows (undiscounted and
without interest charges) is less than the carrying amount of providing postretirement
benefits other than pensions tothe asset, an
impairment loss is recognized. Measurement of that employee andloss would be based on the
employee's beneficiaries
and covered dependents. The transition obligation is being recognized on a
delayed basis over 20 years.
In February 1992,fair value of the PUC opened a generic docket to determine whetherasset.
6
Generally, SFAS No. 106 should121 requires that long-lived assets and certain identifiable
intangibles to be adopteddisposed of be reported at the lower of carrying amount or
fair value less cost to sell.
SFAS No. 121 also requires that a rate-regulated enterprise recognize an
impairment for rate-making purposes. On July 15, 1993, the PUC
issued an interim decision and order inamount of costs excluded when a regulator excludes all or
part of a cost from the generic docket, amending an earlier
interim decision and order to state that it is probable that its final decision
will allow, for rate-making purposes, the full costs of postretirement benefits
other than pensions calculated on the basisenterprise's rate base.
The provisions of SFAS No. 106. Upon request of
HECO and its subsidiaries, on121 must be adopted by the Company no later than
January 11, 1994, the PUC issued another interim
decision and order which stated that it1, 1996. The Company has "determined thatnot determined when it will allow each
utility to calculate, for ratemaking purposes, the full costs of postretirement
benefits other than pensions on an accrual basis, rather than the current pay-
as-you-go basis." The PUC further stated that it has not yet decided whether to
adopt SFAS No. 106 in its entirety or with modifications, but it reaffirmed that
"(1) it is probable that the final decision and order in these dockets will
allow, for ratemaking purposes, the full costs of postretirement benefits other
than pensions calculated on the basis of SFAS [No.] 106; and (2) it is probable
that the difference between the costs of postretirement benefits other than
pensions determined under SFAS [No.] 106 and the current pay-as-you-go method
from January 1, 1993, through the effective date of the postretirement benefits
step increases . . . will be recovered ratably through future rates over a
period not extending beyond 2013."
Beginning in the second quarter of 1993 and based upon the interim decisions and
orders, HECO and its subsidiaries and YB recognized regulatory assets and
deferred for financial reporting purposes the difference between the costs of
postretirement benefits other than pensions determined under SFAS No. 106 and
such costs under the pay-as-you-go method. The regulatory assets for
postretirement benefits other than pensions totaled $32.3 million as of
September 30, 1994.
If the PUC in its final decision and order does not fully adopt SFAS No. 106 for
rate-making purposes and if under current accounting guidelines it is concluded
that recognition of regulatory assets with respect to the difference between the
accrual and the PUC-approved methods would be inappropriate, then the net
earnings of the Company would be adversely affected by SFAS No. 106 in 1994 and
future years. Management cannot predict with certainty when the final decision
in the generic docket will be rendered.
11
(10) Accounting changes in 1994
- --------------------------------
Postemployment benefits
In November 1992, the Financial Accounting Standards Board (FASB) issued SFAS
No. 112, "Employers' Accounting for Postemployment Benefits." This statement
requires employers to recognize the obligation to provide postemployment
benefits in accordance with SFAS No. 43, "Accounting for Compensated Absences,"
if the obligation is attributable to employees' services already rendered,
employees' rights to those benefits accumulate or vest, payment of the benefits
is probable, and the amount of the benefits can be reasonably estimated. The
Company adopted the
provisions of SFAS No. 112 on January 1, 1994. The
implementation121 nor the impact of the adoption of SFAS No. 112 did121 on its
financial statements.
(9) Discontinued operations
- ----------------------------
The Hawaiian Insurance & Guaranty Co., Limited
- ----------------------------------------------
The Hawaiian Insurance & Guaranty Company, Limited (HIG) and its subsidiaries
(collectively, the HIG Group) are property and casualty insurance companies.
HEIDI was the holder of record of all the common stock of HIG until August 16,
1994. In December 1992, due to a significant increase in the estimate of
policyholder claims from Hurricane Iniki, the HEI Board of Directors had
concluded that it would not contribute additional capital to HIG and the
remaining investment in the HIG Group was written off. On December 24, 1992, a
formal rehabilitation order vested full control over the HIG Group in the
Insurance Commissioner (the Rehabilitator) and her deputies.
On April 12, 1993, the Rehabilitator, the HIG Group and others filed a complaint
against HEI, HEIDI and others. The complaint, which was subsequently amended,
set forth several separate counts, including claims to the effect that HEI
and/or HEIDI should be held liable for HIG's obligations and claims that
directors and officers of HEI, HEIDI and the HIG Group were responsible for the
losses suffered by the HIG Group. In 1994, HEI, HEIDI, the named directors and
officers, the Rehabilitator and others signed an agreement to settle the
lawsuit. In August 1994, $32 million was disbursed to the Rehabilitator, at
which time a release of claims against HEI, its affiliates and their past and
present officers and directors became effective.
The $32.0 million settlement amount, less income tax benefits and certain
amounts recognized in previously established reserves, resulted in a $15.0
million after-tax charge to discontinued operations in 1993. HEI and HEIDI are
seeking reimbursement for the settlement and defense costs from its insurance
carriers. One of the insurance carriers has filed a declaratory relief action
seeking resolution of insurance coverage and other policy issues, and HEI and
HEIDI have filed counterclaims. Trial is scheduled for October 1995, but may be
postponed. Recoveries from HEI's insurance carriers, if any, will be recognized
when realized.
In December 1994, five insurance agencies, which had served as insurance agents
for the HIG Group, filed a complaint against HEI, HEIDI and others. The
complaint sets forth several causes of action, including breach of contract and
piercing the corporate veil. The plaintiffs ask for relief from the defendants,
including compensatory damages for lost commissions, lost business and lost
profits in an amount to be proven at trial and punitive damages. In the opinion
of management, losses, if any, resulting from the ultimate outcome of the
lawsuit will not have a material adverse effect on the Company's consolidated financial
condition or the results of operationsoperations.
In April 1995, it was announced by the state insurance commissioner that Vesta
Fire Insurance Corp. of Birmingham, Alabama, agreed to buy HIG for $35 million
in cash. The sale is subject, among other things, to approval by the nine
months ended September 30, 1994.
Accounting for certain investments in debt and equity securities
In May 1993, the FASB issued SFAS No. 115, "Accounting for Certain Investments
in Debt and Equity Securities." This statement requires that investments in
equity securities that have readily determinable fair values and investments in
debt securities be classified in three categories and accounted for as follows:
. Debt securities that the enterprise has the positive intent and ability to
hold to maturity are classified as held-to-maturity securities and reported
at amortized cost.
. Debt and equity securities that are bought and held principally for the
purpose of selling them in the near term are classified as trading
securities and reported at fair value, with unrealized gains and losses
included in earnings.
. Debt and equity securities not classified as either held-to-maturity
securities or trading securities are classified as available-for-sale
securities and reported at fair value, with unrealized gains and losses
excluded from earnings and reported in a separate component of
stockholders' equity.
The Company adopted the provisions of SFAS No. 115 on January 1, 1994. As of
September 30, 1994 and December 31, 1993, marketable securities consisted of
trading securities, stock in the Federal Home Loan Bank of Seattle and mortgage-
backed securities. All marketable securities other than the trading securities
are classified as held-to-maturity securities. The implementation of SFAS No.
115 did not have a material effect on the Company's consolidated financial
condition or the results of operations for the nine months ended September 30,
1994.
12state
Circuit Court, which is supervising HIG's rehabilitation.
7
Hawaiian Electric Company, Inc. and subsidiaries
Consolidated balance sheets (unaudited)
September 30,March 31, December 31,
(in thousands, except par value) 1995 1994
1993
- ------------------------------------------------------------------------------------------------------------------------------------------------------------------------
Assets
Utility plant, at cost
Property, plant and equipment.................. $2,090,908 $1,976,192equipment..................... $2,155,660 $2,129,274
Construction in progress....................... 143,353 126,342progress.......................... 186,147 164,247
Less--accumulated depreciation................. (688,937) (641,230)depreciation.................... (720,664) (702,945)
---------- ----------
Net utility plant........................ 1,545,324 1,461,304plant........................... 1,621,143 1,590,576
---------- ----------
Current assets
Cash and equivalents........................... 880 1,922equivalents.............................. 77 10,694
Customer accounts receivable, net.............. 61,790 55,614net................. 57,639 60,406
Accrued unbilled revenues, net................. 41,219 34,735net.................... 35,642 38,435
Other accounts receivable, net................. 7,139 8,398net.................... 7,867 10,302
Fuel oil stock, at average cost................ 20,359 18,188cost................... 13,719 21,966
Materials and supplies, at average cost........ 19,186 20,239cost........... 21,187 20,108
Prepayments and other.......................... 3,091 2,715other............................. 2,163 2,028
---------- ----------
Total current assets..................... 153,664 141,811assets........................ 138,294 163,939
---------- ----------
Other assets
Regulatory assets.............................. 81,693 59,234
Other.......................................... 42,712 40,927assets................................. 95,215 92,524
Other............................................. 40,796 42,081
---------- ----------
Total other assets....................... 124,405 100,161assets.......................... 136,011 134,605
---------- ----------
$1,823,393 $1,703,276$1,895,448 $1,889,120
========== ==========
Capitalization and liabilities
Capitalization
Common stock, $6 2/3 par value, authorized
50,000 shares; outstanding 11,258 shares....11,813 shares....... $ 75,06578,766 $ 75,06578,766
Premium on capital stock....................... 220,243 220,197stock.......................... 246,629 246,600
Retained earnings.............................. 300,346 275,401earnings................................. 315,408 308,535
---------- ----------
Common stock equity...................... 595,654 570,663equity......................... 640,803 633,901
Cumulative preferred stock
Not subject to mandatory redemption.........redemption............ 48,293 48,293
Subject to mandatory redemption............. 43,915 45,410redemption................ 41,070 42,470
Long-term debt, net............................ 474,097 436,776net............................... 505,520 468,653
---------- ----------
Total capitalization..................... 1,161,959 1,101,142capitalization........................ 1,235,686 1,193,317
---------- ----------
Current liabilities
Long-term debt due within one year............. 10,933 47,960year................ 9,903 20,933
Preferred stock sinking fund requirements...... 2,224 1,320requirements......... 2,370 2,374
Short-term borrowings - nonaffiliates.......... 109,047 28,928nonaffiliates............. 105,467 117,866
Short-term borrowings - affiliate.............. 3,800 12,000affiliate................. 800 --
Accounts payable............................... 48,842 41,808payable.................................. 45,724 54,662
Interest and preferred dividends payable....... 12,888 10,332payable.......... 10,898 8,575
Income taxes payable........................... 5,032 6,232payable.............................. 12,116 3,300
Other taxes accrued............................ 32,922 36,959
Other.......................................... 26,409 31,036accrued............................... 24,777 39,666
Other............................................. 27,846 30,111
---------- ----------
Total current liabilities................ 252,097 216,575liabilities................... 239,901 277,487
---------- ----------
Deferred credits
and other liabilities
Deferred income taxes.......................... 109,416 107,449taxes............................. 108,832 108,362
Unamortized tax credits........................ 44,464 43,348
Other.......................................... 86,396 69,757credits........................... 45,597 44,939
Other............................................. 86,578 86,380
---------- ----------
Total deferred credits and other
liabilities............................. 240,276 220,554credits...................... 241,007 239,681
---------- ----------
Contributions in aid of construction.............. 169,061 165,005construction................. 178,854 178,635
---------- ----------
$1,823,393 $1,703,276$1,895,448 $1,889,120
========== ==========
See accompanying notes to HECO's consolidated financial statements.
138
Hawaiian Electric Company, Inc. and subsidiaries
Consolidated statements of income (unaudited)
Three months ended
Nine months endedMarch 31,
----------------------
(in thousands, except for September 30, September 30,
ratio of earnings ------------------------ ------------------------
to fixed charges) 1995 1994
1993 1994 1993
- -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
Operating revenues................ $247,844 $234,484 $665,826 $658,202
-------- --------revenues................................................ $231,176 $200,098
-------- --------
Operating expenses
Fuel oil.......................... 53,329 59,393 133,409 164,213oil.......................................................... 48,477 38,618
Purchased power................... 73,514 69,094 205,794 194,763power................................................... 63,853 62,986
Other operation................... 31,205 28,094 89,299 78,870
Maintenance....................... 11,654 11,589 32,933 33,069
Depreciation...................... 16,017 14,594 48,110 44,557operation................................................... 34,183 29,711
Maintenance....................................................... 11,222 10,742
Depreciation...................................................... 16,982 16,117
Taxes, other than income taxes............................ 23,031 21,399 61,590 60,503taxes.................................... 22,079 18,738
Income taxes...................... 13,386 9,944 31,216 25,283taxes...................................................... 11,174 7,054
-------- --------
-------- --------
222,136 214,107 602,351 601,258
-------- --------207,970 183,966
-------- --------
Operating income.................. 25,708 20,377 63,475 56,944
-------- --------income.................................................. 23,206 16,132
-------- --------
Other income
Allowance for equity funds used during construction......... 2,381 1,915 6,427 5,269construction............... 2,367 1,951
Other, net........................ 1,559 1,289 4,160 3,442net........................................................ 1,237 1,185
-------- --------
-------- --------
3,940 3,204 10,587 8,711
-------- --------3,604 3,136
-------- --------
Income before interest and other charges.................... 29,648 23,581 74,062 65,655
-------- --------charges.......................... 26,810 19,268
-------- --------
Interest and other charges
Interest on long-term debt........ 7,838 6,414 23,368 20,153debt........................................ 8,078 8,012
Amortization of net bond premium and expense.............. 294 194 831 549expense...................... 314 247
Other interest charges............ 1,468 1,853 3,571 4,574charges............................................ 2,054 804
Allowance for borrowed funds used during construction... (1,070) (1,056) (2,886) (2,984)construction............. (1,167) (871)
Preferred stock dividends of subsidiaries.................. 707 519 2,137 1,560subsidiaries......................... 692 716
-------- --------
-------- --------
9,237 7,924 27,021 23,852
-------- --------9,971 8,908
-------- --------
Income before preferred stock dividends of HECO......... 20,411 15,657 47,041 41,803HECO................... 16,839 10,360
Preferred stock dividends of HECO.......................... 1,083 1,109 3,249 3,328
-------- --------HECO................................. 1,039 1,084
-------- --------
Net income for common stock.......stock....................................... $ 19,32815,800 $ 14,548 $ 43,792 $ 38,475
======== ========9,276
======== ========
Ratio of earnings to fixed charges (SEC method)............. 3.36 3.25................... 3.27 2.58
======== ========
========
Hawaiian Electric Company, Inc. and subsidiaries
Consolidated statements of retained earnings (unaudited)
Three months ended
Nine months ended
September 30, September 30,
-------------------------- -------------------------March 31,
----------------------
(in thousands) 1995 1994
1993 1994 1993
- ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
Retained earnings, beginning of period.............. $288,612 $263,130period............................ $308,535 $275,401 $249,583
Net income for common stock....... 19,328 14,548 43,792 38,475stock....................................... 15,800 9,276
Common stock dividends............ (7,594) (8,233) (18,847) (18,613)
-------- --------dividends............................................ (8,927) (9,923)
-------- --------
Retained earnings, end of period........................... $300,346 $269,445 $300,346 $269,445
======== ========period.................................. $315,408 $274,754
======== ========
See accompanying notes to HECO's consolidated financial statements.
149
Hawaiian Electric Company, Inc. and subsidiaries
Consolidated statements of cash flows (unaudited)
NineThree months ended
September 30,
--------------------------March 31,
----------------------
(in thousands) 1995 1994
1993
- --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
Cash flows from operating activities
Income before preferred stock dividends of HECO........HECO........................... $ 47,04116,839 $ 41,80310,360
Adjustments to reconcile income before preferred stock dividends of
HECO to net cash provided by operating activities
Depreciation and amortization of property,
plant and equipment........................... 48,110 44,557equipment.............................................. 16,982 16,117
Other amortization............................... 1,200 571
Provision for deferredamortization.................................................. 750 1,527
Deferred income taxes.............. 1,962 (1,694)taxes............................................... 470 1,211
Tax credits, net................................. 2,393 3,190net.................................................... 1,076 851
Allowance for equity funds used during construction.................................... (6,427) (5,269)
Increaseconstruction................. (2,367) (1,951)
Decrease in accounts receivable.................. (4,917) (11,052)
Increasereceivable..................................... 5,202 7,414
Decrease in accrued unbilled revenues............ (6,484) (908)revenues............................... 2,793 3,736
Decrease (increase) in fuel oil stock............ (2,171) 2,705stock.......................................... 8,247 4,346
Decrease (increase) in materials and supplies.... 1,053 (1,726)supplies....................... (1,079) 843
Increase in regulatory assets.................... (2,494) (3,807)
Increase (decrease)assets....................................... (1,303) (4,892)
Decrease in accounts payable.......... 7,034 (3,789)payable........................................ (8,938) (3,083)
Increase in interest and preferred dividends payable......................................... 2,556 1,291
Increase (decrease) in income taxes payable
and other taxes accrued......................... (5,237) 1,991payable................ 2,323 2,434
Changes in other assets and liabilities.......... (7,637) (15,267)
--------- ---------liabilities............................. (5,796) (20,540)
-------- --------
Net cash provided by operating activities.............. 75,982 52,596
--------- ---------activities................................. 35,199 18,373
-------- --------
Cash flows from investing activities
Capital expenditures................................... (131,225) (154,246)expenditures...................................................... (47,319) (36,701)
Contributions in aid of construction................... 9,114 15,801
--------- ---------construction...................................... 2,173 2,903
-------- --------
Net cash used in investing activities.................. (122,111) (138,445)
--------- ---------activities..................................... (45,146) (33,798)
-------- --------
Cash flows from financing activities
Common stock dividends................................. (18,847) (18,613)dividends.................................................... (8,927) (9,923)
Preferred stock dividends.............................. (3,249) (3,328)dividends................................................. (1,039) (1,084)
Proceeds from issuance of long-term debt............... 48,274 22,597debt.................................. 36,815 16,018
Repayment of long-term debt............................ (48,027) (46,874)debt............................................... (11,000) (48,000)
Redemption of preferred stock.......................... (591) (745)stock............................................. (1,404) (392)
Net increase (decrease) in short-term borrowings from nonaffiliates
and affiliate with original maturities of three months or less................... 71,919 77,843
Proceeds from other short-term borrowings.............. -- 25,259
Other.................................................. (4,392) (1,040)
--------- ---------less......... (11,599) 63,805
Other..................................................................... (3,516) (6,337)
-------- --------
Net cash provided by (used in) financing activities.............. 45,087 55,099
--------- ---------activities....................... (670) 14,087
-------- --------
Net decrease in cash and equivalents................... (1,042) (30,750)equivalents...................................... (10,617) (1,338)
Cash and equivalents, beginning of period..............period................................. 10,694 1,922
30,883
--------- ----------------- --------
Cash and equivalents, end of period....................period....................................... $ 88077 $ 133
========= =========584
======== ========
See accompanying notes to HECO's consolidated financial statements.
1510
Hawaiian Electric Company, Inc. and subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30,March 31, 1995 and 1994 and 1993
(Unaudited)
- --------------------------------------------------------------------------------
(1) Accounting statement
- -------------------------
In the opinion of HECO's management, the accompanying unaudited consolidated
financial statements contain all material adjustments required by generally
accepted accounting principles to present fairly the financial position of HECO
and its subsidiaries as of September 30, 1994March 31, 1995 and December 31, 1993,1994, and the results
of itstheir operations and their cash flows for the three months ended March 31,
1995 and nine months ended September 30, 1994
and 1993, and its cash flows for the nine months ended September 30, 1994 and
1993.1994. All such adjustments are of a normal recurring nature. These
consolidated financial statements should be read in conjunction with the
consolidated financial statements and the notes thereto incorporated by
reference in HECO's Annual Report on SEC Form 10-K for the year ended December
31, 1993 and the
consolidated financial statements and the notes thereto in HECO's Quarterly
Report on SEC Form 10-Q for the quarters ended March 31 and June 30, 1994. The consolidated balance sheet as of December 31, 19931994 was derived
from audited financial statements.
(2) Regulatory assets
- ----------------------
Regulatory assets at September 30, 1994March 31, 1995 and December 31, 19931994 include the following
deferred costs:
September 30,March 31, December 31,
(in thousands) 1995 1994 1993
- --------------------------------------------------------------------------------
Postretirement benefits other than pensions......... $30,120 $17,866$33,559 $34,032
Income taxes........................................ 21,174 16,17625,436 23,427
Unamortized debt expense on retired issues.......... 7,352 7,513
Integrated resource planning costs.................. 7,780 7,189
Computer system development costs................... 6,479 6,090
Vacation earned, but not yet taken.................. 6,490 5,972
Preliminary plant costs on suspended project........ 5,634 5,199
Vacation earned, but not yet taken.................. 6,290 5,494
Unamortized debt expense on retired issuances....... 7,676 5,435
Integrated resource planning costs.................. 6,800 4,6615,759 5,768
Other............................................... 3,999 4,4032,360 2,533
------- -------
$81,693 $59,234$95,215 $92,524
======= =======
(3) Cash flows
- ---------------
Supplemental disclosures of cash flow information
Cash paid for interest (net of capitalized amounts) and income taxes was as
follows:
NineThree months ended
September 30,
---------------------March 31,
-------------------
(in thousands) 1995 1994 1993
- --------------------------------------------------------------------------------
Interest.............................................. $22,556 $22,215
========= =========Interest................................................. $ 6,038 $ 6,149
======= =======
Income taxes.......................................... $26,005 $26,913
========= =========taxes............................................. $ 582 $ 2,470
======= =======
Supplemental disclosure of noncash activities
The allowance for equity funds used during construction, which was capitalized
as part of the cost of electric utility plant, amounted to $6,427,000$2,367,000 and
$5,269,000$1,951,000 for the ninethree months ended September 30,March 31, 1995 and 1994, and 1993, respectively.
1611
(4) Commitments and contingencies
- ----------------------------------
Power purchase agreements.
At March 31, 1995, HECO and its subsidiaries had power purchase agreements for
465 megawatts (MW) of firm capacity, representing approximately 22% of the total
of their generating capability and firm purchased capacity. Rate recovery is
allowed for energy and firm capacity payments under these agreements. Assuming
that each of the agreements remains in place and the minimum availability
criteria in the power purchase agreements are met, aggregate minimum fixed
capacity charges are expected to be approximately $107 million in 1995, $109
million in each of 1996 and 1997, $106 million in 1998, $109 million in 1999 and
an aggregate of $2.1 billion thereafter.
In general, payments under the major power purchase agreements for 465 MW of firm
capacity are based upon available capacity and energy. Payments for capacity
generally are not required if the contracted capacity is not available, and
payments are reduced, under certain conditions, if available capacity drops
below contracted levels. In general, the payment rates for capacity have been
predetermined for the terms of the agreements. The energy chargespayment will vary over
the terms of the agreements and HECO and its subsidiaries may pass on changes in
the fuel component of the energy charges to customers through the energy cost
adjustment clausesclause in its rate schedules. HECO's 1994 test year interim decision and order also allows
differences between the actual non-fuel purchased power costs HECO incurs and
the amount collected from customers to be passed on through a purchased power
non-fuel clause. HECO and its subsidiaries do not
operate nor participate in the operation of any of the facilities that provide
power under the major
agreements. Title to the facilities does not pass to HECO andnor
its subsidiaries upon expiration of the agreements, and the agreements do not
contain bargain purchase options with respect to the facilities.
As of September 30, 1994, HECO and its subsidiaries hadHELCO has a power purchase agreementsagreement with HCPC for 473 megawatts (MW)18 MW of firm capacity representing approximately
22% of the total of their generating capabilitiescapacity. On
December 12, 1994, HCPC filed a Chapter 11 bankruptcy petition and purchased power firm
capacities. Rate recovery is allowed for energy and firm capacity payments under
these agreements. Assuming that each of the agreements, except for the
agreements with Hilo Coast Processing Company (which issued a written notice of
termination indicatingadvised HELCO
that it would cease power productionoperating its plant in March 1997)December 1994. By stipulation, HELCO
obtained a temporary restraining order (TRO) and, Hamakua Sugar Company (which ceased power production in October 1994), remains
in placelater, extensions of such
order, requiring HCPC to continue operations of the HCPC facility through May
31, 1995, with HELCO to pay an additional amount for the entire contract periodpower HCPC supplies
(which was increased to 20 MW under the TRO). On January 5, 1995, HELCO and HCPC
entered into an agreement in principle, subject to the minimum availability criterianegotiation and execution
of a definitive agreement, to amend the existing power purchase agreement
through December 1999. The definitive agreement, which was executed in the form
of a number of separate agreements on March 24, 1995, is not effective until it
is approved by the bankruptcy court (or the bankruptcy proceeding is dismissed
by the bankruptcy court) and is subject to cancellation by HELCO if not approved
by the PUC within 180 days of its execution. If the definitive agreement becomes
effective, HCPC has indicated that it can increase its power purchase agreementsexport capability
to HELCO to 22 MW.
HELCO reliability investigation. In July 1991, following service interruptions
and rolling blackouts on the island of Hawaii, the PUC initiated an
investigation into the reliability of HELCO's system and held hearings. Further
hearings were held in July 1992 following additional service interruptions and
rolling blackouts. In its October 1992 decision approving a rate increase for
HELCO, the PUC stated that it may formulate minimum reliability standards for
HELCO, use the standards to assess HELCO's system reliability, and re-examine
the approved rate increase to see whether any adjustments are met, aggregate minimum fixed capacity charges
areappropriate. In
the opinion of management, any adjustment by the PUC to its October 1992 rate
increase resulting from the reliability investigation is not expected to be between $99 million and $107 million annually from 1994
through 2015, between $50 million and $77 million annually from 2016 through
2022 and $4 million annually from 2023 through 2028.
HECO disputed certain amounts (primarily energy charges) billed each month under
its power purchase agreements with Kalaeloa Partners, L.P. (Kalaeloa) and AES
Barbers Point, Inc. (AES-BP). The Kalaeloa and AES-BP power purchase agreements
contain provisions whereby either party to the agreement may cause the dispute
to be submitted to binding arbitration.
Kalaeloa requested that its dispute with HECO be arbitrated, and the arbitration
proceedings were completed in August 1994. The arbitrators' decision did not have a
material adverse effect on HECO's consolidatedthe Company's financial condition or results of
operations.
Discussions between HECO and AES-BPHELCO is proceeding with plans to resolve their disputed billing amountsinstall two 20-MW combustion turbines in 1996,
followed by an 18-MW heat steam recovery generator in 1997. However, two
independent power producers have been held. Disputed amounts billed by AES-BP through September 1994, for
which HECO has withheld payment, totaled approximately $2.1 million. HECO has
not recognized any portioneach filed with the PUC separate complaints
against HELCO, alleging that they are entitled to a power purchase contract to
provide all or part of the withheld amounts as an expense or liabilitycapacity. HELCO has also encountered procedural and
other difficulties in its financial statements. Approximately $1.4 million ofobtaining the amounts withheld, if
ultimately paid, are expectednecessary air permit and Conservation
District Use Permit (CDUP) which would allow the combined-cycle unit to be
includedconstructed. As a result of these permitting delays, HELCO's unit installation
schedule has been adversely impacted and HELCO is exploring other alternatives
to meet projected energy needs, including any viable, timely and cost-effective
unaffiliated nonutility generation alternative as well as mitigation measures to
ensure reliable service until HELCO's combined cycle unit is permitted and in
HECO's energy cost adjustment
clause or purchased power non-fuel clause and passed through to customers. Based
on the information available, HECO'sservice. Until additional generation is in place, management believes that there
is a significant risk of capacity shortages on the ultimate
outcomeisland of Hawaii that could
result in rolling blackouts within the AES-BP dispute will not have a material adverse effect on HECO's
consolidated financial condition or results of operations.
As of September 30, 1994, HELCO's firm power purchase agreements included an
amended power purchase agreement with Hamakua Sugar Company (Hamakua), a power
purchase agreement with Puna Geothermal Ventures (PGV) and a power purchase
agreement with Hilo Coast Processing Company (HCPC). Under the amended power
purchase agreement, Hamakua, which is in a Chapter 11 bankruptcy proceeding,
agreed to supply HELCO with 8 MW of firm capacity during its final sugar cane
harvest. Hamakua ceased operations in October 1994. PGV, an independent
geothermal power producer which had experienced substantial delays in commencing
commercial operations, passed an acceptance test in June 1993 and became a firm
capacity source for 25 MW. Due to problems with one of its wells, PGV was
producing only about 16 MW as of June 30, 1994. The problems with the well were
corrected, and prior to September 30, 1994, PGV had returned to 25 MW of output.
In March 1994, HCPC, which currently provides 18 MW of firm capacity, issued a
written notice of termination to HELCO indicating that it would cease producing
power in March 1997. HELCO, in turn, issued a written notice of its preliminary
intent to purchase the HCPC facility, subject to a number of conditions. HELCO
and HCPC are currently in negotiations regarding the potential purchase. As
permitted under the power purchase agreement, HCPC has asked that the issue of
the fair market value of the facilities be determined through
17next year.
12
binding arbitration. HELCO has the right, but not the obligation, to purchase
the facilities for fair market value.
HECO power outageoutage.
On April 9, 1991, HECO experienced a power outage that affected all customers on
the island of Oahu. The PUC initiated an investigation of the outage, by its
order dated April 16, 1991. This investigationwhich was
consolidated with a pending investigation of an outage that occurred in 1988.
The PUC held a hearing on the
April 9, 1991 outage in May 1991. Further proceedings have not been scheduled at
this time. Recommendations were made to HECO by Power Technologies, Inc. (PTI), an independent consultant hired by HECO with the
approval of the PUC, investigated the outage. HECO is implementing certain of
PTI's recommendations and HECO
filed its comments onis either studying or disagrees with certain of the
PTI recommendations with the PUC in November 1993.other recommendations. Management cannot predict the timing and outcome of any
PUC decision and order, to be
issued, if any, by the PUC with respect to the outages.outages or PTI's
recommendations.
HECO's PUC-approved tariff rule states that HECO "willis not be liable for interruptioninterruptions or
insufficiency of supply or any loss, cost, damage or expense of
any nature whatsoever, occasioned thereby if caused by accident, storm, fire,
strikes, riots, war or anywhen the cause was not within [HECO's]HECO's control through the
exercise of reasonable diligence and care." Under the rule, customers had 30
days from the date of the power outage to file claims. Nevertheless, HECO received 3,063
customer claims, which totaled approximately $7.8 million. Ofmillion, within the 3,063time limit
to file claims as a result of the April 9, 1991 outage. 1,530 of these claims
are for property damage. Asdamage and most have been settled, with no admission of
September 30, 1994, HECO had settledliability, or closed 1,342as of these property damage claims and had settlement offers
outstanding with respect toMarch 31, 1995. None of the remaining 188 claims. The settlement offers are
being made for purposes of settlement and compromise only, and without any
admission by HECO of liability for the outage. Not covered in the settlements
or the settlement offers areother 1,533 claims, involving allegedwhich
generally involve personal injury or economic losses,loss, such as lost profits.
On April 19, 1991, sevenprofits, has
been settled.
Seven direct or indirect business customers on the island of
Oahuhave filed a lawsuit against HECO on
behalf of themselves and an alleged class, claiming $75 million in compensatory
damages and additional unspecified amounts for punitive damages because of the
April 9, 1991 outage. The lawsuit was
dismissed without prejudice in April 1993 and subsequently refiled by the
plaintiffs. HECO has filed an answer which denies the principal
allegations in the complaint, sets forth affirmative defenses, and asserts that the suit shouldcomplaint. The class has not be maintained as a class action. Discovery proceedings have been initiated.
In March 1994, HECO filed a motion for an order denying class certification of
the lawsuit and the plaintiffs responded with a cross-motion for class
certification. Both motions were denied without prejudice.certified. Trial has been
set for January 22, 1996.
In 1991, HECO has recorded a liability of $1 million for the total amount of
expected defense costs and settlements with respect to the outage. In the
opinion of management, losses (if any) in excess of the amount for which
provision has been made, net of estimated insurance recoveries, resulting from
the ultimate outcome of the lawsuit and claims related to the April 9, 1991 outage
will not have a material adverse effect on the CompanyCompany.
(5) Accounting change
- ----------------------
In March 1995, the FASB issued SFAS No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to Be Disposed Of." SFAS No. 121
requires that long-lived assets and certain identifiable intangibles held and
used by an entity be reviewed for impairment whenever events or consolidated HECO.
HELCO reliability investigation
In July 1991, following service interruptionschanges in
circumstances indicate that the carrying amount of an asset may not be
recoverable. If the sum of the expected future cash flows (undiscounted and
rolling blackouts institutedwithout interest charges) is less than the carrying amount of the asset, an
impairment loss is recognized. Measurement of that loss would be based on the
islandfair value of Hawaii, the PUC issuedasset.
Generally, SFAS No. 121 requires that long-lived assets and certain identifiable
intangibles to be disposed of be reported at the lower of carrying amount or
fair value less cost to sell.
SFAS No. 121 also requires that a rate-regulated enterprise recognize an
order calling for an investigation
into the reliability of HELCO's system.
An evidentiary hearing was held in September 1991 and public hearings were held
in October 1991. In light of approximately 20 subsequent incidents of rolling
blackouts and service interruptions resulting from insufficient generation
margin, further evidentiary hearings were held in July 1992. With the input from
an independent consultant (if one is retained) and the parties to the
proceedings, the PUC may formulate minimum reliability standards for HELCO, use
the standards to assess HELCO's system reliability, and re-examine the rate
increase approved in October 1992 to see whether any adjustments are
appropriate. In the opinion of management, any adjustment by the PUC to its
October 1992 rate increase resulting from the reliability investigation would
not have a material adverse effect on the Company's or HECO's consolidated
financial condition or results of operations.
Subsequent to the hearings in this matter, HELCO's generation margin improved
with the addition of a 20-MW combustion turbine in August 1992 and PGV's
commencement of commercial operations.
18
HELCO is proceeding with plans to install two 20-MW combustion turbines at
Keahole on the island of Hawaii in 1995, followed by an 18-MW heat steam
recovery generator in 1997, at which time these units will be converted to a
combined-cycle unit, subject in each case to obtaining necessary permits and
approvals. The PUC has issued a decision and order approving commitment of
expendituresimpairment for the first 20-MW combustion turbine. Evidentiary hearings on the
other portionsamount of the unit were held in July 1994. Further, Kawaihae
Cogeneration Partners and Enserch Development Corp. have each filed with the PUC
separate complaints against HELCO, alleging that, rather than having HELCO build
the combined cycle unit, they are entitled tocosts excluded when a power purchase contract to
provideregulator excludes all or
part of a cost from the capacity. An evidentiary hearing inenterprise's rate base.
The provisions of SFAS No. 121 must be adopted by HECO and its subsidiaries no
later than January 1, 1996. HECO and its subsidiaries have not determined when
they will adopt the Kawaihae
Cogeneration Partners docket was held in June 1994. The evidentiary hearing inprovisions of SFAS No. 121 nor the Enserch Development Corp. docket is scheduled for December 1994.
HELCO has encountered procedural and other difficulties in obtaining the
necessary air permit and Conservation District Use Permit (CDUP) which would
allow the combined cycle unit to be constructed at the Keahole site. With
respect to the air permit, a public hearing was held on September 12, 1994 and
the DOH plans to hold a second public hearing before taking action on the permit
application. While it is anticipated that the air permit will be issued, a delay
in the schedulingimpact of the second hearing and the issuanceadoption of
the permit could
adversely impact HELCO's unit installation schedule. With respect to the CDUP,
difficulties included intervenors filing for a contested case hearing which was
not held. The Board of Land and Natural Resources (BLNR) addressed the CDUP at
its MaySFAS No. 121 on HECO's consolidated financial statements.
13
1994 meeting. The BLNR was unable to obtain the necessary votes to
either approve or deny the permit. It is HELCO's position that it became
entitled to the CDUP by operation of law as the BLNR failed to act on HELCO's
application by the May 18, 1994 deadline. The results of the BLNR meeting were
challenged in the Third Circuit Court, and on June 24, 1994, the court granted a
motion to stay the effectiveness of the CDUP. HELCO intends to continue to
litigate the appeal of the results of the BLNR meeting. A hearing in the Third
Circuit case was held on October 31, 1994, and it is anticipated that a decision
in the case will be issued shortly. If the case is not resolved expeditiously,
the stay is likely to adversely impact HELCO's unit installation schedule. To
address the contingency that the air permit or CDUP might be significantly
delayed or ultimately denied, HELCO is exploring other alternatives to meet
projected energy needs, including any viable, timely and cost-effective
nonutility generation alternative. However, in the event of a significant delay
or denial of the air permit or CDUP, management believes that there may be more
rolling blackouts before the required additional generation could be completed
or any alternative solution could be implemented.
(5)
(6) Summarized financial information
- -------------------------------------
Summarized financial information for HECO's consolidated subsidiaries, HELCO and
MECO, is as follows:
HELCO MECO
----------------------------- ------------------------------------------------------ --------------------------
March 31, December 31, March 31, December 31,
(in thousands) September 30, December 31, September 30, December 31,1995 1994 19931995 1994
1993
------------------------------------------------------------- ----------------------------------------------------------------------------------------------------------
Balance sheet data
Current assets................................ $ 22,777 $ 25,151 $ 25,260 $ 29,204
Noncurrent assets............... $323,010 $297,847 $266,858 $252,680
Current assets.................. 24,483 22,161 25,411 31,465assets............................. 342,898 335,725 275,748 272,019
-------- -------- -------- --------
$347,493 $320,008 $292,269 $284,145$365,675 $360,876 $301,008 $301,223
======== ======== ======== ========
Common stock equity............. $105,495 $102,438 $101,738 $ 97,569equity........................... $122,180 $120,908 $109,132 $108,313
Cumulative preferred stock
Not subject to mandatory redemption....... 10,000 10,000 8,000 8,000
Subject to mandatory redemption................. 8,100 8,100 7,040 7,135redemption........... 7,800 7,800 6,545 6,545
Current liabilities........................... 56,704 59,787 29,980 34,197
Noncurrent liabilities.......... 171,275 156,855 142,276 136,414
Current liabilities............. 52,623 42,615 33,215 35,027liabilities........................ 168,991 162,381 147,351 144,168
-------- -------- -------- --------
$347,493 $320,008 $292,269 $284,145$365,675 $360,876 $301,008 $301,223
======== ======== ======== ========
19
HELCO MECO
--------------------------------------------- ---------------------------------------------------------------------- --------------------------
Three months ended Nine months ended Three months ended
Nine months ended
September 30, September 30, September 30, September 30,
-------------------- ------------------- -------------------- --------------------March 31, March 31,
-------------------------- --------------------------
(in thousands) 1995 1994 19931995 1994
1993 1994 1993 1994 1993
- ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
Income statement data
Operating revenues *.................... $34,383 $29,834 $94,001 $83,851 $31,955 $30,807 $88,614 $85,000revenues............................ $32,695 $28,951 $29,793 $27,361
Operating income *...................... 3,227 2,295 8,551 8,140 4,228 3,922 11,905 9,826income.............................. 3,423 2,403 3,743 3,628
Net income for common stock.................. 2,327 1,060 5,862 3,785 2,798 3,093 7,242 7,558stock................... 2,548 1,353 2,289 1,948
* Based on the format of HECO's consolidated statements of income.
(6)(7) Reconciliation of electric utility operating income per HEI and HECO
--------------------------------------------------------------------
consolidated statements of income
---------------------------------
Three months ended
Nine months ended
September 30, September 30,
----------------------March 31,
---------------------
(in thousands) 1995 1994
1993 1994 1993
- ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
Operating income from regulated and nonregulated activities before
income taxes (per HEI consolidated statements of income)............... $ 40,649 $ 31,619 $ 98,790 $ 85,620................. $35,413 $24,324
Deduct:
Income taxes on regulated activities.......................... (13,386) (9,944) (31,216) (25,283)activities..................................... (11,174) (7,054)
Revenues from nonregulated activities.......................... (1,820) (1,357) (4,555) (3,586)activities.................................... (1,345) (1,208)
Add:
Expenses from nonregulated activities.......................... 265 59 456 193
-------- -------- -------- --------activities.................................... 312 70
------- -------
Operating income from regulated activities after income taxes (per
HECO consolidated statements of income)............................. $ 25,708 $ 20,377 $ 63,475 $ 56,944
======== ======== ======== ========.................................. $23,206 $16,132
======= =======
(7) Postretirement benefits other than pensions
- ------------------------------------------------
HECO and its subsidiaries provide medical, dental, vision, life insurance and
other benefits to eligible employees upon their retirement, with contributions
by retirees toward costs based on their years of service and retirement date.
Employees are eligible for these benefits if, upon retirement, they participate
in one of the Company's defined benefit pension plans. Currently, no funding has
been provided for these benefits. Through December 31, 1992, the cost of these
benefits had not been recognized until paid. Accordingly, no provision was made
for future benefits to existing or retired employees.
Effective January 1, 1993, HECO and its subsidiaries adopted SFAS No. 106,
"Employers' Accounting for Postretirement Benefits Other Than Pensions," which
requires accrual, during the years that an employee renders the necessary
service, of the expected cost of providing postretirement benefits other than
pensions to that employee and the employee's beneficiaries and covered
dependents. The transition obligation is being recognized on a delayed basis
over 20 years.
In February 1992, the PUC opened a generic docket to determine whether SFAS No.
106 should be adopted for rate-making purposes. On July 15, 1993, the PUC issued
an interim decision and order in the generic docket, amending an earlier interim
decision and order to state that it is probable that its final decision will
allow, for rate-making purposes, the full costs of postretirement benefits other
than pensions calculated on the basis of SFAS No. 106. Upon request of HECO and
its subsidiaries, on January 11, 1994, the PUC issued another interim decision
and order which stated that it has
20
"determined that it will allow each utility to calculate, for ratemaking
purposes, the full costs of postretirement benefits other than pensions on an
accrual basis, rather than the current pay-as-you-go basis." The PUC further
stated that it has not yet decided whether to adopt SFAS No. 106 in its entirety
or with modifications, but it reaffirmed that "(1) it is probable that the final
decision and order in these dockets will allow, for ratemaking purposes, the
full costs of postretirement benefits other than pensions calculated on the
basis of SFAS [No.] 106; and (2) it is probable that the difference between the
costs of postretirement benefits other than pensions determined under SFAS [No.]
106 and the current pay-as-you-go method from January 1, 1993, through the
effective date of the postretirement benefits step increases . . . will be
recovered ratably through future rates over a period not extending beyond 2013."
Beginning in the second quarter of 1993 and based upon these interim decisions
and orders, HECO and its subsidiaries recognized regulatory assets and deferred
for financial reporting purposes the difference between the costs of
postretirement benefits other than pensions determined under SFAS No. 106 and
such costs under the pay-as-you-go method. The regulatory assets for
postretirement benefits other than pensions totaled $30.1 million as of
September 30, 1994.
If the PUC in its final decision and order does not fully adopt SFAS No. 106
for rate-making purposes and if under current accounting guidelines it is
concluded that recognition of regulatory assets with respect to the difference
between the accrual and the PUC approved methods would be inappropriate, then
the net earnings of consolidated HECO would be adversely affected by SFAS No.
106 in 1994 and future years. Management cannot predict with certainty when the
final decision in the generic docket will be rendered.
(8) Accounting change in 1994
- ------------------------------
Postemployment benefits
In November 1992, the FASB issued SFAS No. 112, "Employers' Accounting for
Postemployment Benefits." This statement requires employers to recognize the
obligation to provide postemployment benefits in accordance with SFAS No. 43,
"Accounting for Compensated Absences," if the obligation is attributable to
employees' services already rendered, employees' rights to those benefits
accumulate or vest, payment of the benefits is probable, and the amount of the
benefits can be reasonably estimated. HECO and its subsidiaries adopted the
provisions of SFAS No. 112 on January 1, 1994. The implementation of SFAS No.
112 did not have a material effect on consolidated HECO's financial condition or
the results of operations for the nine months ended September 30, 1994.
2114
Item 2. Management's discussion and analysis of financial condition and
results
- --------------------------------------------------------------------------------------------------------------------------------------------------------
results of operations
- ----------------------------------
The following discussion should be read in conjunction with the consolidated
financial statements and accompanying notes.
RESULTS OF OPERATIONS
Consolidated
- ------------
Three months ended
September 30,
------------------March 31,
(in thousands, except per ---------------------- % Primary reason(s) for significant
share amounts) 1995 1994 1993 change change*
- -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
Revenues.................... $319,156 $299,486 7Revenues............................ $306,274 $265,042 16 Increases at the electric utility,
savings bank and "other" segments
Operating income............ 51,550 40,458 27 Increases atfor the electric utility and
"other"savings bank segments
Operating income.................... 44,309 33,404 33 Increase for the electric utility segment
Net income.................. 22,691 16,088 41income.......................... 17,847 11,788 51 Higher operating income and lower effective
tax rate, partly offset by higher interest
expense due to higher borrowings
Earnings per common share... 0.80 0.61 31 Higher net income as explainedshare........... $0.62 $0.42 48 See above partially offset by an 8%
increase in the weighted average
number of common shares outstanding
Weighted average number
of common shares outstanding.. 28,255 26,247 8 Public offering of 2.0 million shares
of common stock completed in August
1993 and shares issued through the HEI
dividend reinvestment and stock
purchase plan
* Also see segment discussions which follow.
22
Nine months ended
September 30,
-----------------
(in thousands, except per % Primary reason(s) for significant
share amounts) 1994 1993 change change*
- -------------------------------------------------------------------------------------------
Revenues.................... $868,754 $860,479 1 Increases at the electric utility
and savings bank segments, partly
offset by the decrease at the
"other" segment
Operating income............ 127,909 112,708 13 Increases at the electric utility,
savings bank and "other" segments
Income from continuing
operations................. 52,111 44,357 17 Higher operating income, partly
offset by higher interest expense
Income from discontinued
operations................. -- 1,800 (100) Reversal of a reserve for the
------- ------- disposal of HERS after the sale of
HERS in March 1993
Net income.................. $ 52,111 $ 46,157
======== ========
Earnings per common share
Continuing operations....... $ 1.86 $ 1.75 6 Increase in income from continuing
operations discussed above,
partially offset by a 10% increase
in the weighted average number of
common shares outstanding
Discontinued operations..... -- 0.07 (100) See explanation above
--------- --------
$1.86 $ 1.82 2
========= ========
Weighted average number of
common shares outstanding.. 28,014 25,402 10 Public offering of 2.0 million shares
of common stock completed in August
1993 and shares issued through the
HEI dividend reinvestment and stock
purchase planoutstanding...... 28,772 27,768 4
* Also see segment discussions which follow.
For the quarterthree months ended September 30, 1994,March 31, 1995, HEI reported net income of $22.7$17.8
million, or $0.80$0.62 per share, compared to $16.1$11.8 million, or $0.61$0.42 per share, infor
the same period of 1993.1994. Net income increased due to improved results from all
segments.
For the nine months ended September 30, 1994, HEI reported net income of $52.1
million, or $1.86 per share, compared to $46.2 million, or $1.82 per share, in
the same period of 1993. The nine months ended September 30, 1993 results
included the reversal of a reserve for the disposal of HERS after the sale of
HERS in March 1993. Excluding a nonrecurring adjustment in 1993 for vacation
earned but not yet taken by employees of the
electric utility subsidiaries,
income from continuing operations for the first nine months of 1994 would have
reflected an increase of approximately 25% over the first nine months of 1993
due to improved results from all segments.
23segment.
15
Shareholder dividends are declared and paid by HEI at the discretion of HEI's
Board of Directors. On October 18, 1994, HEI's Board of Directors increased the
quarterly cash dividend by 1 cent to $0.59 per share for the fourth quarter of
1994. HEI and its predecessor company, HECO, have paid dividends continuously
since 1901. Dividends per share have been higher each year since 1964. Although
the Company's long-term goal is to have dividend growth keep pace with
inflation, management believes that the current payout ratio (94% for the nine
months ended September 30, 1994) is too high. Management believes that a payout
ratio of 80% or less is more appropriate and, in the future, hopes to grow
earnings faster than dividends to reduce the payout ratio. One of the keys to
improved earnings (and a corresponding reduction in the dividend payout ratio)
is continued regulatory support as evidenced by timely rate case decisions.
Another key to long-term growth in earnings is growth and expansion of the
Company. Thus, management is looking at opportunities to grow the Company in
Hawaii and in the Pacific Basin.
Following is a general discussion of revenues, expenses and operating income by
business segment.
Electric utility
- ----------------
Three months ended
September 30,
------------------March 31,
(in thousands, except per ---------------------- % Primary reason(s) for significant
barrelshare amounts) 1995 1994 1993 change changechange*
- -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
Revenues.................... $249,664 $235,841 6Revenues............................ $232,521 $201,306 16 Rate relief, for HECO and HELCO and
a 4.7% increase in KWH sales, partly
offset by lowerhigher fuel oil prices which
are passed on to customers and a 1.2%
increase in KWH sales
Expenses
Fuel oil.................. 53,329 59,393 (10) Loweroil.......................... 48,477 38,618 26 Higher fuel oil prices and more KWHs
generated
Purchased power................... 63,853 62,986 1
Other............................. 84,778 75,378 12 Higher other operation and maintenance expense
including the increase in postretirement
benefits other than pensions (PBOP) expense,
depreciation expense and taxes, other than
income taxes
Operating income.................... 35,413 24,324 46 Rate relief and a 1.2% increase in KWH sales,
partly offset by higher KWHs generated
Purchased power........... 73,514 69,094 6 Higher KWHs purchased
Other..................... 82,172 75,735 8 Higher other operation and depreciation
expense and higher "taxes, other than
income taxes"
Operating income............ 40,649 31,619 29 Rate relief for HECO and HELCO and a
4.7% increase in KWH salesexpenses
Net income.................. 19,328 14,548 33income.......................... 15,800 9,276 70 Higher operating income, partly offset
by higher interest expense
and higher
income taxes
FuelAverage fuel oil price
per barrel... 20.10 22.96 (12)barrel.......................... 19.82 16.33 21
24
Nine months ended
September 30,
-----------------
(in thousands, except per % Primary reason(s) for significant
barrel amounts) 1994 1993 change change
- ---------------------------------------------------------------------------------------------
Revenues.................... $670,381 $661,788 1 Rate relief and a 3.0% increase in
KWH sales, partly offset by lower
fuel oil prices which are passed
on to customers
Expenses
Fuel oil.................. 133,409 164,213 (19) Lower fuel oil prices, partially
offset by higher KWHs generated
Purchased power........... 205,794 194,763 6 Higher KWHs purchased
Other..................... 232,388 217,192 7 Higher other operation and
depreciation expense and a one-time
reduction to 1993 expense due to the
establishment of a regulatory asset
for vacation earned but not yet taken
by employees
Operating income............ 98,790 85,620 15 Rate relief for HECO, HELCO and
MECO and a 3.0% increase in KWH sales
Net income.................. 43,792 38,475 14 Higher operating income, partially
offset by higher interest expense
and higher income taxes
Fuel oil price per barrel... 18.07 21.81 (17)
For the three months ended September 30, 1994, operating income and net income for the electric utility segment was up 29% and 33%, respectively, from
comparable 1993 amounts,46% for the three
months ended March 31, 1995 compared to the same period last year. The increase
in operating income was primarily due primarily to 1994timely rate relief, partly offset by
higher expenses.
HECO received interim rate relief on January 1 for 1995 and a 4.7%
increase in kilowatthour sales due primarily to Hawaii's improving economy and
warmer weather.
For the nine months ended September 30, 1994, operating income and net incomePUC's decision
allowing recovery of PBOP costs was effective on January 1, 1995. Results for
the electric utility segment was up by 15%first quarter of 1994 did not include interim rate relief for HECO. When
compared with the first quarter of 1994, the revenues of HECO and 14%, respectively. Excluding
the "vacation" adjustment, operating income and net incomeits
subsidiaries for the electric
utility segment were up 21% and 22%, respectively, for the nine months ended
September 30, 1994, due primarily to interimfirst quarter of 1995 benefited from approximately $20
million of rate relief, including rate relief in 1994 for HECOafter the first quarter
and
HELCO and the full effect of 1993 interim rate relief for MECO, and a 3.0%
increase in kilowatthour sales.
In 1993, HEI invested an additional $45 million in HECO. Also in 1993, HECO
invested an additional $12 million in HELCO and $6 million in MECO. The
infusions were made to support the electric utilities' capital expenditure
programs. As anticipated, HECO and its subsidiaries were not able to earn an
adequate return on that new equity during the first quarter of 1994. In April
1994 and August 1994, however, the PUC granted HECO and HELCO, respectively,
interim rate increases that recognize their increased investment in capital
facilities. See "Pending rate requests" below. Continued regulatory support from
the PUC is important to the future operating results of the electric utility
companies.
25
effective January 1, 1995.
Competition
The electric utility industry in general has become increasingly more
competitive as a result of such factors asdue to
regulatory and technological developments. The level of competitionCompetition is affected by various factors
including price, reliability of service, alternate energy sources, new
technologies and governmental regulations. Also affecting the level of competitionCompetition in Hawaii is also
affected by the scarcity of generation sites and lack of interconnections.interconnections with
other utility systems.
The Energy Policy Act of 1992 encourages competition by allowing both utilities
and nonutilities to form generation subsidiaries without becoming subject to
regulation under the Public Utility Holding Company Act of 1935. To date, HECO
and its subsidiaries have not faced competition from any entity under this
authority. However, management cannot predict the future impact, if any, of the
Energy Policy Act of 1992 on the Company.
On the demand-side, a new kind of competitor--the energy service company--is
seeking customers in government and private business and promising to help them
reduce utility bills. On Oahu, one of these
16
companies worked with a large military housing project installingduring 1992 to install
energy-efficient air-conditioning, water
heating and other equipment that decreased the facility's electricelectricity consumption
by one-third. In August 1994,To promote energy conservation in Hawaii and the Pacific Basin,
HEI formed a new nonutility energy service company, Pacific Energy Conservation
Services, Inc. (PECS) to promote energy conservation in Hawaii and the Pacific Basin.August 1994. PECS is considering potential projects to install,
finance, operate and maintain energy conservation equipment, while sharing a
percentage of the saved energy costs withcurrently developing its clients.business
plan.
In response to increased competition, HECO and its subsidiaries are taking certain actionslooking at
strategies to heightenenhance their focus on providingcompetitive position, including increasing efforts
to provide reliable electric service at a reasonable costs, to offercost, offering customers
new choices regarding the services provided and to
promotepromoting conservation and new
technologies like electric vehicles.
Major customers
Approximately 10% of consolidated operating revenues of HECO and its
subsidiaries was derived from the sale of electricity to various federal
government agencies in 1994. One of HECO's largest customers, the Naval Base at
Barbers Point, Oahu, is expected to be closed within the next few years.
However, HECO does not anticipate that the base closure will result in much of a
loss, if any, in aggregate KWH sales as the Navy will continue to occupy
portions of Barbers Point and much of the surplus facilities currently not
utilized by the Navy will probably be occupied by state agencies.
The military has been directed to study mandatory bidding for power contracts
for two locations--Pearl Harbor and a Marine Corps installation on Oahu. If the
Navy and Marine Corps require bidding for power contracts, HECO intends to
submit bids.
On March 8, 1994, President Clinton signed an Executive Order which mandates
that each federal agency develop and implement a program with the intent of
reducing energy consumption by 30% by the year 2005 to the extent that these
measures are cost-effective. The 30% reductions will be measured relative to the
agency's 1985 energy use. HECO is working with various Department of Defense
installations to implement demand-side management programs which will help them
achieve their energy reduction objectives. It is expected that several
Department of Defense installations will sign a Basic Ordering Agreement under
which HECO may implement the energy conservation projects. Neither HEI nor HECO
management can predict with certainty the impact of President Clinton's
Executive Order on the Company's or HECO and subsidiaries' future results of
operations.
Regulation of electric utility rates
The PUC has broad discretion in its regulation of the rates charged by HEI's
electric utility subsidiaries.subsidiaries and in other matters. Any adverse decision by the
PUC concerning the level or method of determining electric utility rates, the
authorized returns on equity or other matters, or any prolonged delay in
rendering a decision in a rate or other proceeding, could have a material
adverse effect on the Company's financial condition and results of operations.
Upon a showing of probable entitlement, the PUC is required to issue an interim
decision in a rate case within 10 months from the date of filing a completecompleted
application if the evidentiary hearing is completed (subject to extension for 30
days if the evidentiary hearing is not completed), but there. There is no limitation on the time within which the PUC must
renderlimit for
rendering a final decision. PendingInterim rate increases are subject to refund with
interest, pending the final outcome of the case.
Recent rate requests
Postretirement benefits other than pensions
- -------------------------------------------
In November 1994, the PUC issued a decision and order in a generic docket opened
in February 1992 with respect to the accounting and rate-making treatment of the
costs of PBOP. The decision and order authorized full recovery of PBOP costs
determined pursuant to SFAS No. 106, effective January 1, 1995. The decision and
order also allowed the recovery of the regulatory assets related to PBOP costs,
over the next 18 years. These regulatory assets were established by HECO, HELCO,
MECO and YB for PBOP costs accrued from January 1, 1993 through December 31,
1994 and amounted to $36.2 million for the four companies at March 31, 1995.
This order will result in additional annual revenues of approximately $10.0
million, $1.8 million, $1.9 million and $1.0 million for HECO, HELCO, MECO and
YB, respectively, to cover the annual increase in PBOP expense.
17
Hawaiian Electric Company, Inc.
- -------------------------------
. In July 1993, HECO applied to the PUC for permission to increase electric
rates, based on a 1994 test year and a 12.6% return on average common equity
(which was later increased to 12.75%). The increase requested, as subsequently
revised, represented an increase of 8.6% over rates in effect at the time of the
revised filing, or $53.8 million in additional annual revenues. The revised
requested increase was needed to cover rising operating costs (including PBOP
costs discussed above) and to cover the cost of new capital projects to maintain
and improve service reliability. In December 1994, HECO received from the PUC a
final decision and order based on a 12.15% return on average common equity and
authorizing a $40.5 million, or 6.5%, increase in annual revenues, effective
January 1, 1995. The order granted HECO an additional increase of approximately
$3.5 million in annual revenues, over interim increases that took effect in
April, May and November 1994. The final decision and order, together with the
PBOP decision and order, resulted in $50.5 million of annual rate relief.
. In December 1993, HECO applied to the PUC for permission to increase electric
rates, based on a 1995 test year and a 12.3% return on average common equity
(which was later increased to 13.0%13.25%). Both
requests combined representThe requested increase, as subsequently
revised (to reflect the final decision and order in the 1994 test year case and
the PBOP decision and order), represented an increase of 16.7%approximately $28.2
million in additional annual revenues, over permanent rates in effect at the
time of the filings, or $106 million in additional annual revenues.revised filing. The revised requested increases areincrease was needed to cover
rising operating costs including theand costs related to the change in the method of accounting for postretirement
benefits other than pensions (which is part of a separate generic docket), to
cover the cost of new capital projects to maintain and improve
service reliability, to cover additional expenses associated with proposed changes in
depreciation rates and methods and to establish a self-insured property damage
reserve for transmission and distribution property in the event of catastrophic
disasters. On March 31,reliability. In December 1994, HECO received an interim decision and
order fromauthorizing an increase of $13.2 million, or 1.9%, in annual revenues.
Approximately $10.6 million of the PUC on its rateinterim increase applicationtook effect January 1, 1995,
which was the beginning of the test year. The balance is effective in steps in
May and November 1995. The interim order was based on a 1994 test year, authorizing
increases of $36.9 million in annual revenues, or 5.9%, to become effective in
several steps in 1994, and based on a 12.0%12.6% return on average
common equity.
An
increase of $34.2 million in annual revenues was effective April 1, 1994, for
which HECO had proposed interim rate relief of $39.9 million. Additional
interim increases of $1.4 million and $1.3 million in annual revenues became
effective May 1, 1994 and November 1, 1994, respectively. Interim rate increases
are subject to refund with interest, pending the final outcome of the case.
Evidentiary hearings for the 1995 test year application are scheduled for
November 1994.Hawaii Electric Light Company, Inc.
- -----------------------------------
. In November 1993, HELCO applied to the PUC for permission to increase electric
rates to provide $15.8 million in additional annual revenues, or a 13.4%
increase over present rates.the rates then in effect. The requested increase iswas based on a
1994 test year and a 12.4% return on average common equity (which was later
increased to 13.1%). The increase iswas needed to cover plant and equipment costs,
operating costs necessary to maintain and improve 26
service and provide reliable
power for its customers and thePBOP costs related to
the change in the method of accounting for postretirement benefits other than
pensions (which is part of a separate generic docket). On August 8, 1994,discussed above. In February 1995, HELCO received an interima final
decision and order from the PUC on its rateauthorizing a $13.7 million, or 11.8%, increase
applicationin annual revenues, based on a 1994 test year, authorizing an increase of $13.6 million
in annual revenues, or approximately 11.7%. The increase is based on a 12.4%12.6% return on average common equity. $13.2The order
granted HELCO an additional increase of approximately $0.1 million in annual
revenues, over interim increases that took effect in August and November 1994.
The final decision and order, together with the PBOP decision and order,
resulted in $15.5 million of annual rate relief.
. In March 1995, HELCO applied to the PUC for permission to increase became effectiveelectric
rates to provide $27 million in additional annual revenues, or an 18.7% increase
over current rates, based on August 9, 1994a 1996 test year and $0.4 million of the increase became effectivea 13.5% return on November 1, 1994. Interim increases are subject to refund with interest, pending
the final outcome of the case. In June 1994, HELCO filed a notice of intent to
file an application for a general rate increase using a 1995 test year. The
increase is expected to be required primarily to cover investments in new
generating units.average
common equity.
Maui Electric Company, Limited
- ------------------------------
. In November 1991, MECO filed a request to increase rates by $18.3 million
annually, or 17% above the rates in effect at the time of the filing.
Evidentiary hearings were held inrates. In January 1993,
and, at the conclusion of the
hearings, MECO adjustedrevised its final raterequested increase request to $11.4 million annually, or 10% aboveover the
rates then in effect, to become effective in several
steps in 1993, and reflectingbased on a 13.0% return on average common equity of 13.0%. The
decrease in the requested rate increase resulted primarily from a reduced cost
of capital, lower administrative and general expenses and other revisions to
MECO's estimated revenue requirements for the 1993 test year used in the rate
case.equity. Most of
the proposed increase reflected the costs of adding a 58-MW combined-cycle
generating unit on Maui in three phases and thePBOP costs related to
the change in the method of accounting for postretirement benefits other than
pensions.discussed above. In 1993,
MECO received four interim decisions which authorized step increases totaling $8.2 million in annual revenues, or 7.2%, based on a 12.75%
return on average common equity. Onincreases. In August 5, 1994, MECO received the
final decision and order from the PUC regarding its rate increase request. It granted
angranting a total increase of $8.1 million
in annual revenues, or approximately 7.0%, based on a 12.75% return on average
common equity. The difference in revenue increases
provided byThat action, together with the interim and finalPBOP decision and ordersorder, resulted
in $10 million of approximately
$0.3 million was refunded to customers together with interest. The primary
reason for the difference between the $11.4 million requested and the
$8.1 million granted is approximately $2 million relatedannual rate relief.
. In February 1995, MECO applied to the changePUC for permission to increase electric
rates to provide $23 million in the
method of accounting for postretirement benefits other than pensions, which is
part ofannual revenues, or a separate generic docket. MECO's total rate17.4% increase will be adjusted
to reflect the PUC's decision in this separate generic docket.over
current rates, based on a 1996 test year and a 13.5% return on average common
equity.
Management cannot predict with certainty when decisions in thepending or future
rate cases will be rendered or the amount of any interim or final rate increase
that will be granted.
Postretirement benefits other than pensions
HECO, HELCO and MECO are parties to18
Self-Insured Property Damage Reserve
- ------------------------------------
In March 1995, the PUC opened a generic docket opened byto investigate whether the PUCpublic
utilities in February 1992 to determine whether SFAS No. 106, "Employers' Accounting for
Postretirement Benefits Other Than Pensions,"the State of Hawaii should be adopted for rate-making
purposes. For a discussion of the accounting for postretirement benefits other
than pensions, see note (7) in HECO's "Notesallowed to consolidated financial
statements."
PUC review of the relationship between HEI and its subsidiaries
To address community concerns, HECO proposed by letter dated January 25, 1993,
that the PUC initiate a review of the relationship between HEI and HECO and the
effects of that relationship on the operations of HECO. By an order dated
January 26, 1993, the PUC initiated such a reviewestablish self-insured
property damage reserves to determine whether the HEI-
HECO relationship, HEI's diversified activities, and HEI's policies, operations
and practices have resulted in or are having any negative effects on HECO, its
electric utility subsidiaries and ratepayers. It is anticipated that the review
may result in recommendations to the Company and/or the PUC. In May 1994, a
consultant, Dennis Thomas and Associates, was selected by the PUC to perform the
review. The review is in progress and is expected to be completed by yearend.
HECO purchased power billing disputes
HECO disputed certain amounts billed each month under its power purchase
agreements with Kalaeloa Partners, L.P. and AES Barbers Point, Inc. The dispute
with Kalaeloa Partners, L.P. was submitted to arbitration and the arbitrators'
decision did not have a material effect on HECO's consolidated financial
condition or results of operations. See "Power purchase agreements" under note
(4) in HECO's "Notes to consolidated financial statements" for a further
discussion of this matter.
27
HECO power outage
On April 9, 1991, HECO experienced a power outage that affected all customers on
the island of Oahu. See "HECO power outage" under note (4) in HECO's "Notes to
consolidated financial statements" for a discussion of HECO's contingent
liabilities related to the outage.
HELCO reliability investigation and generation margin
The PUC initiated an investigation into the reliability of HELCO's system in
July 1991. See "HELCO reliability investigation" under note (4) in HECO's "Notes
to consolidated financial statements" for a discussion of this matter. Also see
Part II, Item 5, "Other information, nonutility generation," for a further
discussion of two of HELCO's purchased power suppliers.
Waiau-CIP transmission lines
In 1993, the PUC held hearings concerning Part 2 of the proposed Waiau-Campbell
Industrial Park (CIP) 138-kilovolt transmission lines. These lines will be part
of a second transmission corridor in West Oahu, running approximately 15 miles
between CIP and HECO's Waiau power plant. The new lines are needed (1) to
increase system reliability by locating the new lines in a separate corridor
from the existing lines, (2) to provide additional transmission capacity to meet
expected load growth and (3) to provide transmission capacity for existing and
new power generation projects planned for West Oahu. HECO experienced community
opposition over the proposed placement of portions of these lines based in part
on the potential effects of the lines on aesthetics and the concern of some that
the electric and magnetic fields (EMF) from the power lines may have adverse
health effects. HECO witnesses addressed EMF, the route selection process (which
involved extensive public input), as well as engineering and related subjects.
One proposal by those who oppose the route of the overhead lines is to place
Part 2 of the Waiau-CIP lines underground. HECO estimated that this proposal
would cost approximately $100 million more thancover the cost of damage to their facilities and
equipment caused by catastrophic natural disasters. HECO's overhead lines. In
April 1994, the PUC issuedtransmission
and distribution system is susceptible to wind damage, and its underground
system is susceptible to earthquake and flood damage. The overhead and
underground transmission and distribution systems have a decision which permits HECO to construct the lines
above ground. While the PUC recognized the concernsreplacement value in
excess of aesthetics$1 billion and EMF, it
felt that neither concern was sufficient to justify the added cost of
undergrounding the lines. In May 1994, appeals to the state Supreme Court were
filed by the intervenors in the PUC proceeding requesting the Court to overturn
the PUC's ruling that allows HECO to construct the lines above ground. No stay
of the PUC order has been entered. Management cannot predict with certainty the
final outcome of this appeal or the impact the final outcome may have on the
cost of the lines or on system reliability.
Undergrounding of utility lines
There is a proposal before the Honolulu City Council for the mandatory
undergrounding of utility lines "whenever possible," except in some remote
areas. HECO opposes the proposal in its current formare uninsured because the resulting
costs would place a burdenamount of transmission and
distribution system insurance available is limited and the premiums are
extremely high. Hearings on customers. Management believes the cost of
undergrounding utility lines would be recoverable in rates. However, management
cannot predict with certainty the ultimate outcome of such proposals or the
impact of such proposals on HECO or the Company.
28
this docket have not yet been scheduled.
Savings bank
- ------------
Three months ended
September 30,
--------------------March 31,
---------------------- %
(in thousands) 1995 1994 1993 change Primary reason(s) for significant change
====================================================================================================================================change*
- --------------------------------------------------------------------------------------------------------------------------------
Revenues................. $54,389 $49,752 9Revenues.......................... $60,717 $50,083 21 Higher interest income as a result of higher
average loans and mortgage-backed securities balances, partly
offset by lower average investments balance
and lower overall yield
on
interest-earning assets
Operating income......... 11,202 11,704income.................. 10,225 10,620 (4) HigherLower net interest income and higher
administrative and general expenses
more than offset higher net
interestNet income........................ 5,949 6,207 (4) Lower operating income
Net income............... 6,533 6,400 2 Lower income taxes due to third quarter 1993 recognition of the effect
of the 1% federal tax rate increase (retroactive to January 1, 1993)
Interest rate spread..... 3.51% 4.05% 39spread.............. 3.10% 3.83% 3 basis points decreaseincrease in the weighted
average yield on interest-earning assets and 1576
basis points increase in the weighted average rate
on interest-bearing liabilities
Nine months ended
September 30,
------------------- %
(in thousands) 1994 1993 change Primary reason(s) for significant change
====================================================================================================================================
Revenues.................. $156,784 $149,183 5 Higher average loans and mortgage-backed securities balances, partly
offset by lower average investments balance and lower overall yield
on interest-earning assets
Operating income.......... 32,497 31,425 3 Higher net interest income due to higher net average earning assets
balance, partly offset by higher administrative and general expenses
and losses from trading securities portfolio
Net income................ 18,959 18,065 5 Higher operating income, partly offset by higher income taxes
Interest rate spread...... 3.67% 3.87% 38 basis points decrease in the weighted average yield on
interest-earning assets, offset by 18 basis points decrease in the
weighted average rate on interest-bearing liabilities
29
The savings bank segment posted a 4% decrease in operating income decreased by 4% for the quarter overin
comparison with the same period last year as a result ofyear. The lower operating income is due to
higher administrative and general expenses for compensation and employee benefits. In spite of a lower interest rate spread for the quarter compared to the third quarter of 1993, ASB
managed to increase net interest income by increasing interest-earning assets.spread. ASB's
interest rate spread--the difference between the weighted average yield on
interest-earning assets and the weighted average rate on interest-bearing
liabilities--decreased to 3.51%3.10% in the quarter from 4.05%3.83% in the comparable
period of 1993.1994. For the thirdfirst quarter of 1994,1995, the average loansmortgage-backed
securities balance was up $351$475 million and the average balance for advances from Federal Home Loan Bank
and other borrowings was up $300 million from levels in the third quarter of
1993.
This interest rate spread decrease for the third quarter of 1994 can be
attributed to the changing interest rate environment. During 1993, falling
interest rates resulted in improved interest rate spreads as interest-bearing
liabilities repriced downward at a faster pace than interest-earning assets.
During 1994, rising interest rates have increased rates on interest-bearing
deposits slightly. However, yields on interest-earning assets have continued a
downward trend as a result of the prior year's refinancing and repricing of
loans and mortgage-backed securities.
Operating income for the nine months ended September 30, 1994 increased by 3%
compared to the same period last year due to higher loans and mortgage-backed
securities balances. The average loans balance was up
$327 million and the
average balance for advances from Federal Home Loan Bank and other borrowings
was up $206$463 million from levels in the first nine monthsquarter of 1993. ASB's
interest rate spread decreased to 3.67%, compared to 3.87% for the first nine
months of 1993.
During1994.
In 1994, the federal funds rate increased 1.75%. The federal funds rate, which is the rate charged by banks for
overnight loans to each other and which has a significant influence on consumer
rates, increased 2.5% to 5.5%. In the first quarter of 1995, the federal funds
rate increased 0.5% to 6.0%.
The demand for mortgage loans has decreased partly due to the rising interest
rates and the slow real estate market in Hawaii. Also, the recent recession and
slow real estate market contributed to a trend of increased loan delinquencies.
In 1994, nonaccrual and renegotiated loans increased $17 million and the
allowance for loan losses increased $3 million. Management expects a reversal in
the trend in increased delinquencies to follow improvements in Hawaii's economy
and real estate market. Management however, cannot predict with certainty when
such improvements will occur.
Another trend has been the outflow of deposits partly due to competition from
money market funds. In the first quarter of 1995, there was 4.75% asa savings outflow of
September 30,
1994.$38 million, partly offset by interest credited of $18 million. For funding
loans and purchasing mortgage-backed securities, ASB has turned to higher cost
advances from the Federal Home Loan Bank and securities sold under agreements to
repurchase. The yields on U.S. Treasury bonds increased as a resultuse of the higher short-term
interest rates. Mortgage and other loan rates are affected by key treasury
rates. Financial institutions incurring higher costscost sources of funds can react by
raising theputs downward pressure on
ASB's interest rate on new loansspread.
The decrease in interest rate spread can also be attributed to the changing
interest rate environment. During 1994 and setting higher repricingthe first quarter of 1995, rising
interest rates on
adjustable rate loans.
The rate increases caused the cost of interest-bearing liabilities to increase
slightly during the third quarter of 1994.increase.
However, yields on interest-earning assets have not increased as higher interest rates can take about threein 1994 decreased 48 basis points due
19
in part to twelve months to impact portfolio yields through loan originations1993's refinancings and the lag in the repricing of adjustable rate loans.loans
and mortgage-backed securities. Yields in the first quarter of 1995 increased
only 3 basis points as the repricing of interest-earning assets lagged the
repricing of interest-bearing liabilities. In the future, ASB's cost of
interest-bearing liabilities may further increase, which may result in a
decreased interest rate spread and lower net interest income. For the three and nine months ended September 30, 1994,If interest rates
stabilize, however, ASB's securities held
for trading experienced a $0.1 million and $1.9 million decrease, respectively,
in value which was chargedspread is expected to earnings. The decreases were primarily dueimprove as adjustable-rate
mortgages reprice to the
higher yields on U.S. Treasury bonds resulting in lower market values in fixed
income securities. In response to the increasing interest rate environment,
management decided to liquidate ASB's portfolio of securities held for trading
and the liquidation was completed in October 1994.
ASB's policy generally is to place mortgage loans on a nonaccrual status (i.e.,
interest accrual is suspended) when the loan becomes more than 90 days past due
or on an earlier basis when there is a reasonable doubt as to its
collectibility. Loans on nonaccrual status amounted to $22.4 million (1.11% of
total loans) at September 30, 1994 compared to $5.7 million (0.32% of total
loans) at December 31, 1993. The increase is primarily due to three commercial
real estate loans with principal balances totaling $11.8 million that were
restructured to defer monthly contractual principal and interest payments for
three to six months. Based on the current collectibility evaluations for these
loans, no specific allowance for loan losses is considered necessary.
30
levels.
Other
- -----
Three months ended
September 30,March 31,
---------------------- %
(in thousands) 1995 1994 1993 change Primary reason(s) for significant change
===============================================================================================================================change*
- --------------------------------------------------------------------------------------------------------------------------------
Revenues............... $15,103 $13,893 9 HEIIC - Third quarter 1993 cumulative effect ofRevenues........................... $13,036 $13,653 (5) MPC's lower unit sales, partly offset by the
1% federal
income tax increase on leveraged lease income
Operating loss......... (301) (2,865) 89 HTB - Higher harbor assistsfreight transportation subsidiaries' higher
general freight revenues, interstate revenues
and contract tows
Operating loss..................... (1,329) (1,540) 14 Freight transportation subsidiaries' higher
revenues and a 1994 gain
on sale of barge
HEIIC - Third quarter 1993 cumulative effect of the 1% federal
income tax increase on leveraged lease income
Nine months ended
September 30,
---------------- %
(in thousands) 1994 1993 change Primary reason(s) for significant change
==================================================================================================================================
Revenues................ $41,589 $49,508 (16) MPC - Bulk sale of land for $10 million of proceeds and immaterial
gain in the first quarter of 1993
Operating loss.......... (3,378) (4,337) 22 HTB - Higher harbor assists and contract tows and 1994 gain and
1993 loss on sale of bargeslower maintenance expense
The "Other" business segment includes results of operations from HTB and its
subsidiary, YB, which are maritime freight transportation companies; HEIIC,
which is a company primarily holding investments in leveraged leases; MPC and
its subsidiaries, which are real estate investment and development companies;
PECS, which is an energy service company with no operations to date; HEIPC,
which is a company formed in March 1995 to pursue independent power projects in
Asia, beginning with the Philippines; HEI and HEIDI, which are holding
companies; and eliminations of intercompany transactions.
Freight transportation
The freight transportation subsidiaries recorded operating income of $1.7$0.9
million in the thirdfirst quarter of 19941995 compared to $0.4with $0.2 million in the thirdfirst
quarter of 1993. Improved results1994. The increase in the third quarteroperating income was a result of 1994 were primarily
due to higher harbor assistsgeneral
freight revenues, interstate revenues and contract tows, and a $0.2 million gain onlower maintenance
expense. Revenue tons transported and tug operating hours for the salefirst quarter
of a barge. The freight transportation subsidiaries recorded operating
income1995 were both 6% higher than the first quarter of $2.6 million in the nine months ended September 30, 1994 compared to
$0.8 million in the nine months ended September 30, 1993 as a result of higher
harbor assists and contract tows and a 1994 gain and 1993 loss on the sales of
barges.1994.
In May 1994, YB filed an application with the PUC to increase rates by
approximately $2.4 million annually. OnIn September 26, 1994, YB filed a stipulationstipulated
agreement with the PUC indicating YB and the Consumer Advocate had agreed to
stipulate to a 6% general rate increase, or approximately $2.0 million annually, effective upon PUC approval. YB is presently awaiting a decision from
the PUC.
31
YB is a party to a generic docket opened by the PUCannually.
The increase took effect in February 1992 to
determine whether SFAS No. 106, "Employers' Accounting for Postretirement
Benefits Other Than Pensions," should be adopted for rate-making purposes. For a
discussion of accounting for postretirement benefits other than pensions, see
note (9) in HEI's "Notes to consolidated financial statements."December 1994.
Real estate
In 19931994 and the first ninethree months of 1994,1995, MPC's real estate development
activities were adversely impacted by economic conditions. In the third quarter
of 1994, MPC recorded an operating loss of $0.1 million compared to an operating
loss of $0.2 million in the same period last year due in part to prior year
writedowns for the carrying value of aThe real estate
investment, partially offset
by lower unit salesmarket experienced slowdowns due to the weakness in the third quarterHawaii's economy and lack of
1994.consumer confidence. For the ninethree months ended September 30, 1994,March 31, 1995, MPC recorded an
operating loss of $0.2 million compared to an operating loss of $0.5 million$25,000 in the
same period last year. MPC continuesyear primarily due to be hampered by a slowlower unit sales.
MPC's present focus is to reduce its current investment in real estate
market.
In March 1994, MDC's Baldwin*Malama partnership closed on an option to purchase
approximately 147 acres of land for future development on the island of Maui
from BPPI at a purchase price of $9.9 million. The land is currently approved
for a development of 685 single-family and multi-family units. Baldwin*Malama is
seekingassets to increase cash flow to the densityCompany by continuing the
development and sales of the development.its existing projects. There are currently no plans to
invest in new projects.
For further information on MPC, see note (5)(4) in HEI's "Notes to consolidated
financial statements."
Income taxes
- ------------
The effective tax rates20
Other
In 1995, HEIPC and its joint venture partners submitted a bid on income from continuing operations for the three
months ended September 30, 1994 and 1993 were 42% and 44%, respectively. The
decreasean independent
power project in the effective tax rate was due in partPhilippines. HEIPC also has an option to the recognitionjoin a group which
has submitted a bid on another independent power project in the third quarter of 1993Philippines. The
results of the effectbidding processes are expected to be received by July 31, 1995.
Both projects are expected to be financed largely with debt, collateralized by
the assets of the 1% federal income tax rate increase
(retroactiveunderlying project. HEIPC's equity investment in the two
projects is not expected to January 1, 1993). The effective tax rate on income from
continuing operations for the nine months ended September 30, 1994 and 1993 was
43%.exceed $35 million.
Discontinued operations
- -----------------------
HERS
For a discussion of the discontinued operations of HERS, seeSee note (2) in HEI's
"Notes to consolidated financial statements."
HIG
For a discussion of the discontinued operations of HIG, see note (2) in HEI's
"Notes to consolidated financial statements."
Accounting changes
- ------------------
Postemployment benefits
For discussions of accounting for postemployment benefits, see note (10)(9) in HEI's "Notes to consolidated financial statements" and note (8) in HECO's "Notes
to consolidated financial statements."for
information on the discontinued operations of HIG.
Accounting for the effects of certain investmentstypes of regulation
- ---------------------------------------------------------
The electric utility companies and YB follow the accounting prescribed by SFAS
No. 71, "Accounting for the Effects of Certain Types of Regulation." SFAS No. 71
provides guidance in debt and equity securities
For a discussion of accountingpreparing financial statements for certain investmentsmost public utilities.
Under SFAS No. 71, if regulation provides assurance that incurred costs will be
recovered in debt and equity
securities, see note (10) in HEI's "Notes to consolidated financial statements."
Future accounting changes
- -------------------------
Accounting by creditors for impairment of a loan
In May 1993, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards (SFAS) No. 114, "Accounting by Creditors for
Impairment of a Loan." This statement requires that certain impaired loansfuture, those costs must be measured based oncapitalized rather than expensed.
If the present value of expected future cash flows discounted at
the loan's effective interest rate or, as a practical expedient, at the loan's
observable market price or the fair value of the collateral if the loan is
collateral dependent. The provisionscontinued application of SFAS No. 114 must71 would no longer be adopted by ASB no
later than January 1, 1995. If SFAS No. 114 had been adopted on January 1, 1994,
it would not have hadappropriate--due
to increased competition or regulatory, legislative or judicial actions or
otherwise--the financial effects, including a material effect on the Company's consolidated financial
condition or the resultswrite-off of operations for the nine months ended September 30,
1994.
32
all regulatory
assets, could be material.
Environmental matters
- ---------------------
HEI and its subsidiaries are subject to numerous laws and regulations which are
designed to protect the environment, and include air and water quality controls,
hazardous waste and toxic substance controls and the Federal Oil Pollution Act
of 1990. HEI's electric utility subsidiaries are exempt from certain
environmental requirements applicable on the U.S. mainland. For example, the
electric utility subsidiaries are exempt from the acid rain provisions of the
1990 Clean Air Act Amendments.amendments. However, HEI and its subsidiaries are subject to
environmental laws and regulations which could potentially impact the Company in
terms of operating existing facilities, constructing and operating new
facilities and ensuring the proper cleanup and disposal of hazardous waste and
toxic substances. Management believes that the recovery through rates of most,
if not all, of any costs incurred by HECO and its subsidiaries in complying with
these environmental requirements would be allowed by the PUC. However, as with
other costs reviewed by the PUC in the rate-making process, costs incurred by
HECO and its subsidiaries in complying with these environmental requirements may
not be fully allowed by the PUC for rate-making purposes. Based on information
available to the Company, to date, management is not aware of any contingent liabilities
relating to environmental matters that couldwould have a material adverse effect uponon
the Company.
Electric and magnetic fields
- ----------------------------
Research is ongoing about the potential adverse health effects from exposure to
electric and magnetic fields (EMF). However, the scientific community has not
yet reached a consensus on the nature of any health effects. HECO and its
subsidiaries are participating in utility industry funded studies on the subject
and are considering possible steps to reduce EMF, where feasible, in the design
of new transmission and distribution facilities. The Company cannot predict the
impact, if any, the EMF issue may have on the Company orin the future.
Accounting changes
- ------------------
For discussions of SFAS No. 121 "Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to Be Disposed Of," see note (8) in HEI's
"Notes to consolidated HECO.financial statements" and note (5) in HECO's "Notes to
consolidated financial statements."
21
FINANCIAL CONDITION
Liquidity and capital resources
- -------------------------------
The Company and consolidated HECO believe that their ability to generate cash,
both internally from operations and externally from debt and equity issues, is
adequate to maintain sufficient liquidity to fund HECO and its subsidiaries'their construction programs
and to cover debt retirements and to meet other cash requirements in the foreseeable
future.
The consolidated capital structure of HEI was as follows:
(in millions) September 30, 1994March 31, 1995 December 31, 19931994
- -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
Short-term borrowings......................................borrowings................................ $ 117 7%131 8% $ 40 3%137 8%
Long-term debt, net........................................ 714debt....................................... 742 45 698 47718 44
Preferred stock of electric utility subsidiaries........... 94 6 95subsidiaries..... 92 5 93 6
Common stock equity........................................ 670equity.................................. 693 42 643 44682 42
------ --- ----------- ---
$1,595$1,658 100% $1,476$1,630 100%
====== === ====== ===
ASB's deposit liabilities, securities sold under agreements to repurchase and
advances from the Federal Home Loan Bank are not included in the table above.
For the first ninethree months of 1994,1995, net cash provided by operating activities
was $75$38 million. Net cash used in investing activities was $474$80 million, largely
due to an increase in ASB's loans receivableloan originations and investments in mortgage-backed
securities and the electric utility companies'consolidated HECO's capital expenditures. Net
cash provided by financing activities was $368$62 million, due primarily to a net
increase in advancessecurities sold under agreements to ASB from the Federal Home Loan Bank, short-term
borrowings of the electric utilitiesrepurchase and ASB'sin long-term
debt, partly offset by common stock dividends and a net decrease in deposit
liabilities.
In August 1994, HEI issued $35 million of variable rate medium-term notes with
an initial interest rate of 5.45% and maturing in August 1999.
Pursuant to the settlement agreement discussed in note (2) in HEI's "Notes to
consolidated financial statements," in April 1994, $32 million was deposited in
an escrow account. In August 1994, the $32 million plus interest was disbursed
to the Rehabilitator/Liquidator of the HIG Group. The $32 million was funded
out of available cash and short-term borrowings.
Total HEI consolidated financing requirements for the years 19941995 through 1998,1999, including
net capital expenditures, debt retirements (excluding repayments from Advances
from Federal Home Loan Bank and repurchases of securities sold under agreements
to repurchase) and sinking fund requirements, are currently estimated to total
$1.4$1.1 billion. Of this amount, approximately $0.9$0.8 billion are for net capital
expenditures (mostly relating to the electric utility companies' net capital
expenditures described below). HEI'sHEI consolidated internal sources, after the
payment of HEI dividends, are expected to provide approximately 42%56% of the
consolidated financing requirements, with debt and equity financing providing
the remaining 33
requirements. Over the five-year period 19941995 through 1998,1999, HEI
estimates that it will require approximately $225$161 million in common equity,
other than retained earnings, which is expected to be provided principally by
HEI's Dividend Reinvestment and Stock Purchase Plan and the Hawaiian Electric
Industries Retirement Savings Plan and public offerings of common stock.
HEI was planning to issue approximately one million additional common shares in
a public offering in either late 1994 or early 1995 for a capital infusion into
the electric utility companies. However, the near-term capital needs of the
electric utility companies are moderating, so no underwritten public offering of
common stock is anticipated in the near-term.Plan.
Following is a discussion of the liquidity and capital resources of HEI's
largest segments.
Electric utility
HECO's consolidated capital structure was as follows:
(in millions) September 30, 1994March 31, 1995 December 31, 19931994
- ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
Short-term borrowings from nonaffiliates
and affiliate.................................affiliate.................................... $ 113106 8% $ 118 9%
$ 41 3%
Long-term debt, net............................ 485debt..................................... 515 38 485 41489 37
Preferred stock................................ 94stock.................................... 92 7 95 893 7
Common stock equity............................ 596 46 570 48equity................................ 641 47 634 47
------ --- ------ ---
$1,288$1,354 100% $1,191$1,334 100%
====== === ====== ===
In 1994, HECO and its subsidiaries redeemed $48 million of first mortgage bonds
prior to the bonds' scheduled maturity dates. The first mortgage bonds redeemed
had original maturity dates between April 2001 and December 2016 and interest
rates between 8.5% and 10.75%. During the first nine months of 1994, HECO and
its subsidiaries have also drawn $48 million of the proceeds from the sale of
special purpose revenue bonds.
Operating activities provided $76$35 million in net cash during the first ninethree
months of 1994.1995. Investing activities used cash of $122$45 million for capital
expenditures net of contributions in aid of construction. Financing activities
provided $45used cash of $1 million in net cash primarily from increased short-term borrowings.for the repayment of debt and payment of
common and preferred dividends, offset by issuances of long-term debt.
22
The electric utility's consolidated financing requirements for the years 19941995 through
1998,1999, including net capital expenditures, debt retirements and sinking fund
payment requirements, are estimated to total $1.0 billion.$850 million. HECO's consolidated internal
sources, after the payment of common stock and preferred stock dividends, are
currently expected to provide approximately 50%60% of the total $1.0 billion in$850 million
requirements, with debt and equity financing providing the remaining
requirements. HECO currently estimates that it will require approximately $100$60
million in common equity, other than retained earnings, over the five-year
period 19941995 through 1998.1999. The PUC must approve issuances of long-
termlong-term debt and
equity for HECO, HELCO and MECO.
Capital expenditures include the costs of projects which are required to meet
expected load growth, andto improve reliability and projects to replace and upgrade existing
equipment. Net capital expenditures (i.e.,for the five-year period 1995 through 1999
are currently estimated to total $750 million. Approximately 70% of gross
capital expenditures, net ofincluding AFUDC and capital expenditures funded by third
party cash contributions in aid of construction) for the five-year period
1994 through 1998 are currently estimated to total $0.9 billion. Approximately
70% of gross capital expendituresconstruction, is for transmission and
distribution projects withand the remaining 30% is primarily for generation
projects.
For 1994,1995, electric utility net capital expenditures net of cash contributions in aid
of construction and excluding AFUDC are now estimated to be $180$170 million and gross
capital expenditures are estimated to be $205 million, of which approximately
two-thirds65% is for transmission and distribution projects. An estimated $40 million is
planned for new generation units. Drawdowns of proceeds from the sale of tax-exempttax-
exempt special purpose revenue bonds, sales of common stock to HEI, sales of
preferred stock and the generation of funds from internal sources are expected
to provide the cash needed for the net capital expenditures.
Capital expenditure estimates and the timing of construction projects are
reviewed periodically by management and may change significantly as a result of
many considerations, including changes in economic conditions, changes in
forecasts of kilowatthour sales and peak load, the availability of alternate
energy and purchased power, sources, the availability of generating sites and
transmission and distribution line corridors, the ability to obtain adequateadequacy and timelytimeliness of
rate relief, escalation in construction
34
costs, demand-side management programs
and requirements of environmental and other regulatory and permitting
authorities.
At SeptemberIn January 1995, the Department of Budget and Finance of the State of Hawaii
issued tax-exempt special purpose revenue bonds in the principal amount of $47
million, with a maturity of 30 1994, $8 millionyears and a fixed coupon interest rate of 6.60%,
and loaned the proceeds from the sale to HECO, HELCO and MECO. The bonds were
issued at a discount, resulting in a yield of special
purpose revenue bonds in prior years were available to be drawn andapproximately 6.75%. As of March
31, 1995, an additional $47 million and $170 million of revenue bonds werehad been authorized by the
Hawaii legislatureLegislature for issuance prior to the end of 1995 and 1997, respectively.
SAVINGS BANK1997.
Savings bank
September 30,March 31, December 31, %
(in millions) 1995 1994 1993 change
- -----------------------------------------------------------------------------------------------------------------------------------------------------------------------
Assets....................... $2,940 $2,618 12Assets.............................................. $3,179 $3,116 2
Loans receivable............. 1,967 1,735 13receivable.................................... 1,654 1,824 (9)
Mortgage-backed securities... 743 630 18securities.......................... 1,271 1,067 19
Deposit liabilities.......... 2,154 2,092 3liabilities................................. 2,109 2,129 (1)
Securities sold under agreements to repurchase...... 201 123 63
Advances from Federal Home Loan Bank................ 618 616 --
At December 31, 1993,1994, ASB was the secondfourth largest savings bankfinancial institution in the
state based on total assets of $2.6$3.1 billion and the third largest financial
institution based on deposits of $2.1 billion. Since December 31, 1988, ASB's loans and
deposits have more than doubled. Loans and deposits continue to grow, although
at a slower pace thanThe 19% increase in mortgage-
backed securities in the past.first quarter of 1995 was primarily due to the
securitization of $223 million of loans receivable. Under OTS rules, these
securitized loans (i.e., Federal National Mortgage Association mortgage-backed
securities) require less capital than loans receivable. Thus, ASB has
securitized loans to support its recent growth.
For the first ninethree months of 1994,1995, cash used by ASB's investing activities was
$351$33 million, due largely to the origination of loans receivable and purchase of mortgage-backedmortgage-
backed securities, partly offset by principal repayments. Cash provided by
financing activities includedwas $53 million as a result of a net increase of
$232 million in advances from
the Federal Home Loan Bank, $62 million in deposit liabilities and $2323
$74 million in securities sold under agreements to repurchase, partly offset by
a $20 million decrease in deposit liabilities and by common stock dividends of
$11$3 million.
Deposits traditionally have been the principal source of ASB's funds for use in
lending, meeting liquidity requirements and making investments. ASB also derives
funds from the receipt of interest and principal on outstanding loans receivable and
mortgage-backed securities, borrowings from the Federal Home Loan Bank of
Seattle, securities sold under agreements to repurchase and other sources.
Recently, advances from the Federal Home Loan Bank and securities sold under
agreements to repurchase have become more significant sources of funds as the
demand for deposits has decreased. The advances and securities sold under
agreements to repurchase are higher cost sources of funds than deposits and
their use puts downward pressure on ASB's net interest income.
Minimum liquidity levels are currently governed by the regulations adopted by
the Office of Thrift Supervision (OTS). ASB was in compliance with OTS liquidity
requirements as of September 30, 1994.March 31, 1995.
OTS regulations require each savings association to have regulatory capital at
least sufficient to meet three requirements: tangible capital and core
(leverage) capital of 1.5% and 3.0%, respectively, of adjusted total assets; and
a risk-based capital standard equal to 8.0% of risk-adjusted assets. As of September 30,
1994,March
31, 1995, ASB was in full compliance with the minimum capital requirements with
a tangible capital ratio of 5.0%, a core capital ratio of 5.3%5.2% and a risk-based
capital ratio of $160.9 million, $44.5 million in excess of the minimum requirement.11.9%.
The OTS has adopted a new rule adding an interest rate risk (IRR) component to the
existing risk-based capital requirement. The regulation isbecame effective January
1, 1994; however, the requirement that thrifts incorporate IRR into their risk-
based capital calculations, based on the lowest OTS IRR Exposure Reports for the
three prior quarter-ends, was to be effective September 30, 1994. The OTS has
provided a waiver of the interest rate riskIRR capital deduction until it can finalize an appeals
process and anticipates a new effective date of March 31,
1995.process. Institutions with an "above normal" level of IRR exposure may be
required to hold additional capital. "Above normal" IRR is defined as any
percentage decline in market value of an institution's portfolio equity in
excess of 2% of the market value of its assets, which would result from an
immediate 200 basis point change in interest rates. The OTS regulation will
require a savings association with an "above normal" level of IRR exposure to
deduct from total capital an amount equal to one-half of the "above normal" IRR
times the market value of its assets in meeting its existing 8% risk-based
capital requirement. Based on the lowest IRR reported as of the three prior
quarter-ends, ASB would not have been required to hold additionaldeduct $5.8 million from total
capital at March 31, 1995 if the new rule had been in effect at that time. As of
March 31, 1995, ASB's risk-based capital ratio, adjusted for the IRR component,
would have been 11.5%, still meeting capital requirements and "well-capitalized"
levels.
The federal banking regulators have also proposed a similar regulation which may
result in a more stringent capital requirement for IRR than the current OTS
rule. Such a regulation could result in more stringent capital requirements for
ASB and other thrifts because the Financial Institutions Reform, Recovery, and
Enforcement Act of 1989 requires that the capital standards for thrifts be no
less stringent than those applicable to national banks. The impact of the
proposed federal banking regulation on ASB cannot be predicted at this time.
Federal Deposit Insurance Corporation Improvement Actregulations restrict the ability of
1991 established a
statutory framework for closer monitoring of insured depositoryfinancial institutions in
orderthat are not "well-capitalized" to ensure "prompt corrective action"offer interest rates
on deposits that are significantly higher than the rates offered by regulators as an institution's
capital position declines. The OTS rules for prompt corrective action,
effective on December 19, 1992, define the capital measures for five capital
categories (well-capitalized, adequately capitalized, under-capitalized,
significantly under-capitalized and critically under-capitalized), and provide
for progressively more stringent restrictions and supervision as capital levels
decline.competing
institutions. To be classified as "well-capitalized,"a "well-capitalized" institution not subject to these
interest rate restrictions, an institution must have a "leverage ratio" of 5%5.0%,
a "Tier-
35
1"Tier-1 risk-based ratio" of 6% and, a "total risk-based ratio" of 10%. and not be
in a "troubled condition." As of September
30, 1994,March 31, 1995, ASB believes that based on OTS capital standards it would have been
classified aswas "well-capitalized" with
a leverage ratio of 5.3%5.2%, a Tier-1 risk-based ratio of 11.4% and a total risk-
based ratio of 10.7% and a total risk-based ratio of 11.1%11.9%.
ASB believes that a satisfactory regulatory capital position provides a basis
for public confidence, affords protection to depositors, helps to ensure
continued access to capital markets on favorable terms and provides a foundation
for anticipated growth.
On September 29, 1994, the Reigle-Neal Interstate Banking and Branching
Efficiency Act of 1994 (Interstate Banking Act) was signed into law. The
Interstate Banking Act will create a uniform system of interstate banking in the
U.S. Also, subject to certain limitations, it will permit interstate branching
by U.S. banks, marking a major departure from previous law. Although the
Interstate Banking Act applies
24
only to banks, it could nonetheless affect the competitive balance among banks,
thrifts and other financial institutions and the level of competition among
financial institutions doing business in Hawaii.
PART II - OTHER INFORMATION
- --------------------------------------------------------------------------------================================================================================
Item 1. Legal proceedings
- --------------------------
There are no materialsignificant developments except as set forth in HEI's and HECO's
"Notes to consolidated financial statements," management's discussion and
analysis of financial condition and results of operations and Item 5, "Other
information."
Item 4. Submission of matters to a vote of security holders
- ------------------------------------------------------------
HEI
The Annual Meeting of Stockholders of HEI was held on April 25, 1995. Proxies
for the meeting were solicited pursuant to Regulation 14A under the Securities
Exchange Act of 1934. As of February 15, 1995, the record date for the Annual
Meeting, there were 28,762,655 shares of common stock issued and outstanding and
entitled to vote. There was no solicitation in opposition to the management
nominees to the Board of Directors as listed in the proxy statement for the
meeting and such nominees were elected to the Board of Directors.
The results of the election of the single Class I director-nominee, the Class II
director-nominees and independent auditor are as follows:
Common stock
--------------------------------------------------------------------
Broker
For Withheld Against Abstain nonvotes
----------- ------------ ------------ ---------- ----------
Election of Class I Director:
James K. Scott 23,736,127 451,963 1,405,005
Election of Class II Directors:
Victor Hao Li 23,764,049 424,041 1,405,005
Diane J. Plotts 23,783,072 405,018 1,405,005
Kelvin H. Taketa 23,727,402 460,688 1,405,005
Jeffrey N. Watanabe 23,608,436 579,654 1,405,005
Harwood D. Williamson 23,779,673 408,417 1,405,005
Election of KPMG Peat
Marwick LLP as auditor: 23,793,343 157,658 237,089 1,405,005
Class III Directors--Edwin L. Carter, Richard Henderson, Ben F. Kaito, Bill D.
Mills and Oswald K. Stender--continue in office with terms ending at the 1996
Annual Meeting. Class I Directors--Robert F. Clarke, John D. Field, A. Maurice
Myers and Ruth M. Ono--continue in office with terms ending at the 1997 Annual
Meeting.
HECO
The Annual Meeting of the Sole Stockholder of HECO was conducted by written
consent effective April 25, 1995. The incumbent members of the Board of
Directors of HECO were re-elected. The incumbent members continuing in office
are Robert F. Clarke, Richard Henderson, Ben F. Kaito, Mildred D. Kosaki, Paul
A. Oyer, Diane J. Plotts, Harwood D. Williamson and Paul C. Yuen. In addition,
KPMG Peat Marwick LLP was elected auditor of HECO for the fiscal year 1995.
25
Item 5. Other information
- --------------------------
Nonutility generation
- ---------------------
A. HECO's President and chief executive officer's retirement
In May 1995, HECO announced the retirement of Harwood D. (Dan) Williamson, 63
years old, president and chief executive officer, effective September 1, 1995.
Mr. Williamson will be succeeded by T. Michael May, 48 years old, currently
Senior Vice President of HECO.
B. Puna Geothermal VenturesVenture (PGV)
PGV began supplying test energy to HELCO on April 22, 1993. As of June 27, 1993,
PGV had successfully completed the 100-hour acceptance test demonstrating its
ability to provide HELCO with the full 25 MW required in itshas a power purchase agreement (PPA). Therefore, aswith PGV for 25 MW of that date,firm capacity. PGV,
commencedan independent geothermal power producer which experienced substantial delays in
commencing commercial operations, and HELCO's obligation to make firm capacity payments commenced. As ofpassed an acceptance test in June 30,
1994, due to problems1993.
Although a problem with one of its wells PGV was producing approximately 16
MW. Prior to September 30,reduced production during 1994, PGV had corrected the problems and returnedis
now considered to be a firm capacity source for 25 MW of output.
On April 13, 1993,MW. HELCO filed suit against
PGV in the Third Circuit Court1993 for penalties and other relief (including general, incidental and consequential
damages and prejudgment interest) related to PGV's failure to provide
power to HELCO as ofby October 3, 1991. The lawsuit does not specifyOn March 7, 1995, HELCO and PGV executed a
Settlement Agreement, which became effective on May 6, 1995. As to the amount sought.
Penalties were accumulated until June 27, 1993 when PGV commenced commercial
operations. As of June 27, 1993, the accumulated penalties amounted to
approximately $7.5 million. PGV has filed an answer and counterclaim and
contends that any penalties should be excused under the force majeure provisionspart of
the PPA, onsettlement agreement dealing with penalties, PGV agreed to pay $5.5 million
to HELCO, including $3.2 million previously withheld by HELCO, and $2.3 million
in the theory that delays were attributableform of supplemental energy deliveries to circumstances beyond
PGV's control.HELCO over approximately a
three-year period. HELCO has recognized energy and capacity purchased from PGV as
expenses, but has withheld certain of such firm capacity and energy payments to
PGV. Amounts withheld for June 1993 through September 1994 totaled approximately
$3.4 million. HELCO continues to reserve its right to offset accumulated damages
and costs, including penalties, against any future energy and capacity payments
due to PGV. HELCO has not yet recognized any income for accumulated penalty amounts.
B. Hilo Coast Processing Company (HCPC)the $5.5 million
settlement amount. The portion of the settlement that HELCO haswill pass on to
customers is subject to review by the PUC. HELCO informed the PUC on April 11,
1995 that it intended to pass on $0.8 million ($3.2 million less HELCO's out-of-
pocket costs) of the settlement to ratepayers by means of a PPA with HCPC for 18 MWtemporary reduction
in rates from June 1, 1995 to August 31, 1995, and to reduce energy cost
adjustment charges to ratepayers in the amount of firm capacity. On July 31,$2.3 million over approximatly
three years.
C. Integrated Resource Planning
As a result of a proceeding initiated in January 1990, the PUC issued an order
in March 1992 C.
Brewer and Company publicly announced(as revised in May 1992) requiring that Mauna Kea Agribusiness, whichthe energy utilities in
Hawaii develop integrated resource plans (IRPs). The goal of integrated resource
planning is the primary supplieridentification of sugar cane processedthe demand-side and supply-side resources and
the integration of these resources for meeting near- and long-term consumer
energy needs in an efficient and reliable manner at the lowest reasonable cost.
In the first phase of the IRP proceeding, the PUC adopted a "framework", which
establishes both the process for developing IRPs and guidelines for the
development of such plans. The PUC's framework directs that each plan cover a
20-year planning horizon with a five-year program implementation schedule and
states that the planning cycle will be repeated every three years. Under the
framework, the PUC may approve, reject or require modifications of the
utilities' IRPs.
The framework also states that utilities are entitled to recover all appropriate
and reasonable integrated resource planning and implementation costs, including
the costs of planning and implementing demand-side management (DSM) programs.
Under appropriate circumstances, the utilities may recover net lost revenues
resulting from DSM programs and earn shareholder incentives.
In July 1993, HECO filed with the PUC its 20-year (1994-2013) IRP for the island
of Oahu, together with a five-year (1994-1998) implementation schedule. HELCO
filed its plan in October 1993. MECO filed its plan in December 1993. The
utilities have modified their IRPs during the IRP proceedings. The utilities
have characterized their proposed IRPs as planning strategies, rather than fixed
courses of action, and the resources ultimately added to their systems may
differ from those included in the 20-year plan. Under the IRP framework, the
utilities are required to submit annual evaluations of their plans (including a
revised five-year program implementation schedule) and to submit new plans on a
three-year cycle.
In March 1995 the PUC approved HECO's IRP, as modified. Individual demand-side
management programs must still be approved by HCPC, would begin convertingthe PUC. HECO has proposed five
full-scale energy efficiency programs. These programs include air conditioning,
lighting, refrigeration and industrial motor uses for existing
commercial/industrial customers; a similar program for new commercial/industrial
customers in the new construction market; a program to do custom-tailored energy
efficiency programs for commercial/industrial customers; and residential water
heating programs for existing customers and the new construction market.
Management cannot predict with certainty, until completion and approval of
26
the proposed full-scale energy efficiency programs what effect, if any, these
programs will have on HECO.
The IRPs for MECO and HELCO will require PUC approval prior to implementation.
Management cannot predict the outcome of the proceedings or the impact of any
IRP ultimately approved on MECO and HELCO.
D. PUC review of the relationship between HEI and its acreagesubsidiaries
To address community concerns, HECO proposed by letter dated January 25, 1993,
that the PUC initiate a review of the relationship between HEI and HECO and the
effects of that relationship on the operations of HECO. By an order dated
January 26, 1993, the PUC initiated such a review to macadamia nuts, eucalyptus treesdetermine whether the HEI-
HECO relationship, HEI's diversified activities, and other diversified crops as of
November 1, 1992,HEI's policies, operations
and would discontinue harvesting sugar canepractices have resulted in late 1994.
Subsequently,or are having any negative effects on March 25,HECO, its
electric utility subsidiaries and ratepayers. In May 1994, HCPCa consultant, Dennis
Thomas and Associates, was selected by the PUC to perform the review. In early
1995, Dennis Thomas and Associates issued a written notice to HELCO
indicating its intent to cease supplying power to HELCO pursuantreport to the PPA as
of March 26, 1997. As allowed under the PPA, on April 22, 1994, HELCO informed
HCPC in writing of its preliminary intent to purchase the HCPC facilities,
subject to a number of conditions. HELCO and HCPC are currently in negotiations
regarding this potential purchase. As permitted under the PPA, HCPCPUC. The report
concluded that "on balance, diversification has asked
that the issuenot hurt electric ratepayers."
Other major findings of the fair market valuestudy were that no utility assets have been used to
fund HEI's nonutility investments or operations, HEI has not denied needed
capital to the electric utilities and management processes within the electric
utilities operate without interference from HEI. The report also made several
recommendations, including initiating more ongoing communication between HEI and
the PUC on diversification issues and any changes in HEI's diversification
policy, providing the PUC with annual reports on compliance with the original
conditions mandated by the PUC when HEI was formed, having a HECO Board of
Directors with a majority of members who are not also directors of HEI and
adoption of a policy statement by HECO's Board of Directors documenting its
commitment to public service obligations. In April 1995, HEI and HECO submitted
their response to the facilities be determined through
binding arbitration. HELCO would have the right, but not the obligation, to
purchase the facilities for fair market value. Also see note (4) to HECO's
"Notes to consolidated financial statements."
36
PUC.
E. Ratio of earnings to fixed charges
- ----------------------------------
The following tables set forth the ratio of earnings to fixed charges for HEI
and its subsidiaries for the periods indicated:
Ratio of earnings to fixed charges excluding interest on ASB deposits
Years Ended December 31,
Nine--------------------------------------------
Three months
---------------------------------------------------------
ended
September 30,March 31, 1995 1994 1993 1992 1991 1990
1989
- --------------------------- ---- ---- ---- ---- ----
2.231.93 2.22 2.25 2.08 1.99 1.76 1.99
==== ==== ==== ==== ==== ====
Ratio of earnings to fixed charges including interest on ASB deposits
Years Ended December 31,
Nine--------------------------------------------
Three months
---------------------------------------------------------
ended
September 30,March 31, 1995 1994 1993 1992 1991 1990
1989
- --------------------------- ---- ---- ---- ---- ----
1.56 1.69 1.65 1.50 1.46 1.39 1.55
==== ==== ==== ==== ==== ====
For purposes of calculating the ratio of earnings to fixed charges, "earnings"
represent the sum of (i) pretax income from continuing operations (excluding
undistributed net income or net loss from less than fifty-percent-owned persons)
and (ii) fixed charges (as hereinafter defined, but excluding capitalized
interest). "Fixed charges" are calculated both excluding and including interest
on ASB's deposits during the applicable periods and represent the sum of (i)
interest, whether capitalized or expensed, incurred by HEI and its subsidiaries
plus their proportionate share of interest on debt to outsiders incurred by
fifty-percent-owned persons, but excluding interest on nonrecourse debt issued
in connection withfrom
leveraged leases which is not included in interest expense in HEI's consolidated
statements of income,
27
(ii) amortization of debt expense and discount or premium related to any
indebtedness, whether capitalized or expensed, (iii) the interest factor in
rental expense and (iv) the preferred stock dividend requirements of HEI's
subsidiaries, increased to an amount representing the pretax earnings required
to cover such dividend requirements.
The following table sets forth the ratio of earnings to fixed charges for HECO
and its subsidiaries for the periods indicated:
Ratio of earnings to fixed charges
Years Ended December 31,
Nine--------------------------------------------
Three months
---------------------------------------------------------
ended
September 30,March 31, 1995 1994 1993 1992 1991 1990
1989
- -------------------------------- ---- ---- ---- ---- ----
3.363.27 3.47 3.25 3.03 2.82 2.99 3.26
==== ==== ==== ==== ==== ====
For purposes of calculating the ratio of earnings to fixed charges, "earnings"
represent the sum of (i) pretax income before preferred stock dividends of HECO
and (ii) fixed charges (as hereinafter defined, but excluding the allowance for
borrowed funds used during construction). "Fixed charges" represent the sum of
(i) interest, whether capitalized or expensed, incurred by HECO and its
subsidiaries, 37
(ii) amortization of debt expense and discount or premium related
to any indebtedness, whether capitalized or expensed, (iii) the interest factor
in rental expense and (iv) the preferred stock dividend requirements of HELCO
and MECO, increased to an amount representing the pretax earnings required to
cover such dividend requirements.
28
Item 6. Exhibits and reports on Form 8-K
- -----------------------------------------
(a) Exhibits
HECO Hawaiian Electric Company, Inc. and subsidiaries Amended and
Exhibit 10 restated power purchase agreement between Hilo Coast Processing
Company and Hawaii Electric Light Company, Inc. dated March 24,
1995
HEI Hawaiian Electric Industries, Inc. and subsidiaries
Exhibit 11(a) Computation of earnings per share of common stock, three months
ended March 31, 1995 and subsidiaries
Exhibit 11(a) Computation of earnings per share of common stock,
three and nine months ended September 30, 1994 and 1993
HECO Hawaiian Electric Company, Inc. and subsidiaries
Exhibit 11(b) Computation of earnings per share of common stock
HEI Hawaiian Electric Industries, Inc. and subsidiaries
Exhibit 12(a) Computation of ratio of earnings to fixed charges,
nine months ended September 30, 1994 and 1993
HECO Hawaiian Electric Company, Inc. and subsidiaries
Exhibit 12(b) Computation of ratio of earnings to fixed charges,
nine months ended September 30, 1994 and 1993
HEI Hawaiian Electric Industries, Inc. and subsidiaries
Exhibit 27(a) Financial data schedule, September 30, 1994 and
nine months ended September 30, 1994
HECO Hawaiian Electric Company, Inc. and subsidiaries
Exhibit 27(b) Financial data schedule, September 30, 1994 and
nine months ended September 30, 1994
HECO Hawaiian Electric Company, Inc. and subsidiaries Computation of
Exhibit 11(b) earnings per share of common stock
HEI Hawaiian Electric Industries, Inc. and subsidiaries Computation
Exhibit 12(a) of ratio of earnings to fixed charges, three months ended March
31, 1995 and 1994
HECO Hawaiian Electric Company, Inc. and subsidiaries Computation
Exhibit 12(b) of ratio of earnings to fixed charges, three months ended March
31, 1995 and 1994
HEI Hawaiian Electric Industries, Inc. and subsidiaries Financial
Exhibit 27(a) Data Schedule March 31, 1995 and three months ended March 31,
1995
HECO Hawaiian Electric Company, Inc. and subsidiaries Financial Data
Exhibit 27(b) Schedule March 31, 1995 and three months ended March 31, 1995
(b) Reports on Form 8-K
During the quarter, noHEI and HECO filed a Current Report, Form 8-K, was filed with the SEC.
38SEC
under "Item 5. Other Events" and "Item 7. Financial Statements and Exhibits" as
follows:
Dated Registrant/s Items reported
- -------------------------------------------------------------------------------------------------------
December 29, 1994 HEI, HECO News releases: HEI utility subsidiary receives rate relief
and HEI utility subsidiary receives 1995 interim rate order;
Rating agency actions
29
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrants have duly caused this report to be signed on their behalf by the
undersigned, thereunto duly authorized. The signature of the undersigned
companies shall be deemed to relate only to matters having reference to such
companies and any subsidiaries thereof.
HAWAIIAN ELECTRIC INDUSTRIES, INC. HAWAIIAN ELECTRIC COMPANY, INC.
(Registrant) (Registrant)
By /s/ Robert F. Mougeot By /s/ Ernest T. ShirakiPaul Oyer
------------------------------ -----------------------------------------------------------
Robert F. Mougeot Ernest T. ShirakiPaul A. Oyer
Financial Vice President and ControllerFinancial Vice President and
Chief Financial Officer Treasurer
(Principal AccountingFinancial Officer (Principal Financial Officer
of HEI) Officer of HECO)
Date: November 7, 1994May 8, 1995 Date: November 7, 1994
39May 8, 1995
30