<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 8-K
CURRENT REPORT
Pursuant to Section 13 or 15(d) of
The Securities Exchange Act of 1934
Date of Report: February 21, 1996
Exact Name of Registrant Commission I.R.S. Employer
as Specified in Its Charter File Number Identification No.
- --------------------------- ----------- ------------------
Hawaiian Electric Industries, Inc. 1-8503 99-0208097
State of Hawaii
- --------------------------------------------------------------------------------
(State or other jurisdiction of incorporation)
900 Richards Street, Honolulu, Hawaii 96813
- --------------------------------------------------------------------------------
(Address of principal executive offices and zip code)
Registrant's telephone number, including area code: (808) 543-5662
None
- --------------------------------------------------------------------------------
(Former name or former address, if changed since last report.)
<PAGE>
ITEM 7. FINANCIAL STATEMENTS AND EXHIBITS.
(C) EXHIBITS.
HEI Exhibit 13 Pages 25 to 62 of HEI's 1995 Annual Report to Stockholders
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
HAWAIIAN ELECTRIC INDUSTRIES, INC.
(Registrant)
/s/ Robert F. Mougeot
-----------------------------------
Robert F. Mougeot
Financial Vice President and
Chief Financial Officer
(Principal Financial Officer of HEI)
Date: February 21, 1996
2
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<TABLE>
<CAPTION>
HEI EXHIBIT 13
SELECTED FINANCIAL DATA
- -----------------------------------------------------------------------------------------------------------------------------------
Hawaiian Electric Industries, Inc. and subsidiaries
Years ended December 31 1995 1994 1993 1992 1991
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
(dollars in thousands,
except per share amounts)
RESULTS OF OPERATIONS
Revenues..................... $1,295,924 $1,188,523 $1,142,170 $1,031,383 $ 993,242
Net income (loss)
Continuing operations.... $ 77,493 $ 73,030 $ 61,684 $ 61,715 $ 55,620
Discontinued operations.. -- -- (13,025) (73,297) (794)
- -----------------------------------------------------------------------------------------------------------------------------------
$ 77,493 $ 73,030 $ 48,659 $ (11,582) $ 54,826
===================================================================================================================================
Earnings (loss) per common
share
Continuing operations.... $ 2.66 $ 2.60 $ 2.38 $ 2.54 $ 2.43
Discontinued operations.. -- -- (0.50) (3.02) (0.03)
- -----------------------------------------------------------------------------------------------------------------------------------
$ 2.66 $ 2.60 $ 1.88 $ (0.48) $ 2.40
===================================================================================================================================
Return on average common
equity...................... 11.0% 11.0% 8.2% (2.1)% 10.0%
===================================================================================================================================
FINANCIAL POSITION *
Total assets................. $5,603,745 $5,174,464 $4,521,592 $4,142,768 $3,716,872
Deposit liabilities of the
savings bank subsidiary..... 2,223,755 2,129,310 2,091,583 2,032,869 1,615,361
Advances from Federal Home
Loan Bank to the savings
bank subsidiary............. 501,274 616,374 289,674 194,099 258,593
Long-term debt............... 758,463 718,240 697,836 582,475 525,641
Preferred stock of electric
utility subsidiaries
Subject to mandatory
redemption.............. 41,750 44,844 46,730 48,920 50,665
Not subject to mandatory
redemption.............. 48,293 48,293 48,293 36,293 36,293
Stockholders' equity......... 729,603 682,089 643,028 547,741 581,446
COMMON STOCK DATA
Book value per common share * 24.51 23.80 23.23 22.12 24.36
Market price range per
common share
High..................... 39.75 36.50 38.88 44.63 37.88
Low...................... 32.13 29.88 31.00 34.75 29.38
Yearend.................. 38.75 32.38 35.88 37.25 36.75
Dividends per common share... 2.37 2.33 2.29 2.25 2.21
Dividend payout ratio........ 89% 90% 121% nm 92%
Dividend payout
ratio-continuing operations. 89% 90% 95% 88% 91%
Market price to book value
per common share *.......... 158% 136% 154% 168% 151%
Price earnings ratio **...... 14.6x 12.5x 15.1x 14.7x 15.1x
Common shares outstanding
(thousands)
Weighted average......... 29,187 28,137 25,938 24,275 22,882
Geographic distribution
of ownership *
State of Hawaii ***.. 7,591 7,278 6,969 6,663 6,399
Other................ 22,182 21,377 20,706 18,099 17,468
- -----------------------------------------------------------------------------------------------------------------------------------
Total shares
outstanding..... 29,773 28,655 27,675 24,762 23,867
- -----------------------------------------------------------------------------------------------------------------------------------
Stockholders by geographic
distribution *
State of Hawaii ***...... 22,177 21,896 22,092 21,305 20,441
Other.................... 19,117 18,830 18,374 16,891 15,598
- -----------------------------------------------------------------------------------------------------------------------------------
Total stockholders... 41,294 40,726 40,466 38,196 36,039
===================================================================================================================================
</TABLE>
nm Not meaningful.
* At December 31.
** Calculated using yearend market price per common share
divided by earnings per common share from continuing operations.
*** Does not include depository and brokerage accounts which may contain
additional shares beneficially owned by Hawaii stockholders.
See Note 2, "Discontinued operations" in the "Notes to Consolidated Financial
Statements" for a discussion of the Company's former property and casualty
insurance business and wind energy business.
25
<PAGE>
<TABLE>
<CAPTION>
SEGMENT FINANCIAL INFORMATION
- -----------------------------------------------------------------------------------------------------------------------------------
Hawaiian Electric Industries, Inc. and subsidiaries
Years ended December 31 1995 1994 1993
- -----------------------------------------------------------------------------------------------------------------------------------
(in thousands)
<S> <C> <C> <C> <C>
REVENUES
Electric utility............. $ 988,722 76% $ 913,719 $ 879,110
Savings bank................. 254,616 20 215,525 199,734
Other........................ 52,586 4 59,279 63,326
- -----------------------------------------------------------------------------------------------------------------------------------
$1,295,924 100% $1,188,523 $1,142,170
===================================================================================================================================
OPERATING INCOME (LOSS)
Electric utility............. $ 159,043 85% $ 136,628 $ 119,565
Savings bank................. 40,044 21 42,525 44,117
Other........................ (11,423) (6) (5,020) (6,044)
- -----------------------------------------------------------------------------------------------------------------------------------
$ 187,664 100% $ 174,133 $ 157,638
===================================================================================================================================
DEPRECIATION AND AMORTIZATION
OF PROPERTY, PLANT AND
EQUIPMENT
Electric utility............. $ 67,649 88% $ 63,779 $ 55,960
Savings bank................. 4,094 5 3,551 3,167
Other........................ 4,913 7 4,926 5,187
- -----------------------------------------------------------------------------------------------------------------------------------
$ 76,656 100% $ 72,256 $ 64,314
===================================================================================================================================
CAPITAL EXPENDITURES
Electric utility............. $ 194,891 95% $ 195,525 $ 212,916
Savings bank................. 4,848 2 11,316 3,920
Other........................ 5,086 3 2,749 3,822
- -----------------------------------------------------------------------------------------------------------------------------------
$ 204,825 100% $ 209,590 $ 220,658
===================================================================================================================================
IDENTIFIABLE ASSETS (AT
DECEMBER 31)
Electric utility............. $2,016,283 36% $1,889,120 $1,703,276
Savings bank................. 3,413,426 61 3,115,651 2,618,485
Other........................ 174,036 3 169,693 199,831
- -----------------------------------------------------------------------------------------------------------------------------------
$5,603,745 100% $5,174,464 $4,521,592
===================================================================================================================================
</TABLE>
HEIs principal segments are as follows:
ELECTRIC UTILITY
- --------------------------------------------------------------------------------
Hawaiian Electric Company, Inc. and its wholly owned subsidiaries, Hawaii
Electric Light Company, Inc. and Maui Electric Company, Limited, are operating
electric public utilities in the business of generating, purchasing,
transmitting, distributing and selling electric energy, and are regulated by the
Public Utilities Commission of the State of Hawaii (PUC).
SAVINGS BANK
- --------------------------------------------------------------------------------
American Savings Bank, F.S.B. (ASB) is a Federally chartered savings bank
providing a full range of banking services to individual and corporate customers
through its branch system in Hawaii. ASB is subject to examination and
comprehensive regulation by the Department of Treasury, Office of Thrift
Supervision and the Federal Deposit Insurance Corporation, and is also subject
to regulations of the Board of Governors of the Federal Reserve System.
OTHER
- --------------------------------------------------------------------------------
Hawaiian Tug & Barge Corp. provides tugboat and charter barge services in Hawaii
and the Pacific area and, together with its subsidiary, Young Brothers, Limited
(YB), provides general freight and containerized cargo transportation between
the Hawaiian Islands. YB operates as an authorized common carrier that services
all major ports in Hawaii under the Hawaii Water Carrier Act and is regulated by
the PUC.
Malama Pacific Corp. and its wholly owned subsidiaries invest in and develop
real estate in Hawaii.
HEI Investment Corp. holds investments primarily in leveraged leases.
HEI Power Corp. (HEIPC) was formed in 1995 to pursue independent power projects
and energy conservation projects in Asia and the Pacific. In 1995, HEIPC did not
develop, construct, own or operate any power generation facilities.
Other also includes amounts for HEI, HEI Diversified, Inc. and intercompany
eliminations.
26
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
The following discussion should be read in conjunction with the consolidated
financial statements and accompanying notes.
RESULTS OF OPERATIONS
---------------------
Hawaiian Electric Industries, Inc. (HEI) and its subsidiaries (collectively, the
Company) reported net income of $2.66 per share in 1995, due to the results of
its major operating segments-the electric utility and the savings bank--partly
offset by losses in the "other" segment. Earnings per share for 1995 increased
2% over 1994 due to increased electric utility earnings.
Many factors affected HEIs 1995 consolidated results, including Hawaii's
economic environment. Hawaii has experienced negligible growth since 1991 partly
due to the cyclical recessions on the U.S. mainland and in Japan as well as the
effects of the Gulf War and Hurricane Iniki. In 1995, Hawaii's economy
experienced real growth of 0.8%. Tourism, the state's key industry, improved in
1995. Visitor arrivals increased 3% over 1994 as a result of a significant
increase in tourists from Japan and Southeast Asia. Other positive economic
factors in 1995 included a decline in the unemployment rate, inflation rates
below the national average, growth in retail trade and services jobs, and the
continued strong military presence. Economic drags included the continued
decline in the construction industry, the slow real estate market, and the
state's fiscal problems which resulted in reductions in government jobs and
spending.
The Company from time to time considers various strategies designed to enhance
its competitive position and to increase its ability to adapt to and anticipate
changes in its businesses. These strategies may include the formation or
acquisition of new businesses. In 1995, for example, the Company formed a new
subsidiary to pursue independent power projects and energy conservation projects
in Asia and the Pacific. The Company may from time to time be engaged in
preliminary discussions, either internally or with third parties, regarding
potential transactions. No assurances can be given as to whether any of these
strategies will be successfully implemented, whether any potential transaction
will actually occur, or the ultimate effect of any such strategy or transaction
on the Company's financial condition or competitive position.
<TABLE>
<CAPTION>
CONSOLIDATED
% % %
1995 change 1994 change 1993 change
- ----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
(in millions, except per share amounts)
Revenues................................ $1,296 9 $1,189 4 $1,142 11
Operating income........................ 188 8 174 10 158 16
Net income (loss)
Continuing operations.................. $ 77.5 6 $ 73.0 18 $ 61.7 --
Discontinued operations................ -- nm -- nm (13.0) 82
- ----------------------------------------------------------------------------------------------------
$ 77.5 6 $ 73.0 50 $ 48.7 nm
====================================================================================================
Earnings (loss) per common share
Continuing operations.................. $ 2.66 2 $ 2.60 9 $ 2.38 (6)
Discontinued operations................ -- nm -- nm (0.50) 83
- ----------------------------------------------------------------------------------------------------
$ 2.66 2 $ 2.60 38 $ 1.88 nm
====================================================================================================
Weighted average number of common
shares outstanding..................... 29.2 4 28.1 8 25.9 7
Dividend payout ratio................... 89% 90% 121%
nm Not meaningful.
</TABLE>
The following discussion should be read in conjunction with the segment
discussions.
. The increase in 1995 net income over 1994 was due to an increase in net income
of the electric utility segment, partly offset by lower savings bank net income
and an increase in the net loss from the "other" segment.
. The increase in 1994 net income from continuing operations compared to 1993
was due to improved results of the electric utility and the "other" segments,
partly offset by a 2% decrease in net income of the savings bank segment.
27
<PAGE>
. 1993 results include $15.0 million in after-tax losses from the settlement of
a lawsuit involving the Company's former property and casualty insurance
business and $2.0 million in after-tax gain from the reversal of a reserve after
the sale of the Company's former wind energy business.
1993 income from continuing operations was flat when compared to 1992 and
included increases in net income from the savings bank and electric utility
segments, offset by an increase in net loss from the "other" segment.
. Dividends per common share increased in 1995 to $2.37 from $2.33 in 1994 and
$2.29 in 1993. HEI and its predecessor company, Hawaiian Electric Company, Inc.
(HECO), have paid dividends continuously since 1901. Dividends per share have
been higher each year since 1964. However, given HEI's relatively high payout
ratio and the recent reduction in HECO's allowed return on equity, the HEI Board
of Directors will need to evaluate, in the fall of 1996, whether continued
dividend growth can be supported by earnings growth.
Following is a general discussion of revenues, expenses and operating income by
business segment. Segment information is also shown in "Segment Financial
Information" on page 26 and in the "Notes to Consolidated Financial Statements."
ELECTRIC UTILITY
<TABLE>
<CAPTION>
% % %
1995 change 1994 change 1993 change
- ----------------------------------------------------------------------------------------------------
(in millions, except per barrel amounts and number of employees)
<S> <C> <C> <C> <C> <C> <C>
Revenues/1/............................. $ 989 8 $ 914 4 $ 879 13
Expenses
Fuel oil............................... 207 11 187 (12) 213 (5)
Purchased power........................ 276 2 272 5 259 50
Other.................................. 347 9 318 11 287 4
Operating income........................ 159 16 137 14 120 15
Allowance for funds used
during construction................... 15 17 13 21 11 22
Net income.............................. 73 18 62 19 52 5
Return on average common equity......... 11.0% 10.2% 9.7%
Average price per barrel of fuel oil/1/. $20.47 8 $18.93 (10) $21.09 7
Kilowatthour sales...................... 8,806 2 8,593 3 8,325 --
Number of employees (at December 31).... 2,208 -- 2,219 -- 2,226 5
</TABLE>
/1/ The rate schedules of the electric utilities contain energy cost adjustment
clauses under which electric rates are adjusted for changes in the weighted
average price paid for fuel oil and certain components of purchased energy
costs, and the relative amounts of company-generated power and purchased power.
Accordingly, changes in fuel oil and certain components of purchased energy
costs are passed on to customers.
. In 1995, the electric utilities' revenues increased 8% compared to 1994,
primarily due to rate relief granted by the Hawaii Public Utilities Commission
(PUC), higher fuel oil prices and a 2.5% increase in kilowatthour (KWH) sales of
electricity. The KWH sales increase reflects the effects of unusually warm
weather in 1995 and the slight growth in Hawaii's economy. The 9% increase in
other expenses was due to a 10% increase in other operation and maintenance
expenses, a 6% increase in depreciation expense as a result of plant additions
and an 8% increase in taxes, other than income taxes. Other operation and
maintenance expenses in 1995 increased primarily due to higher employee benefits
expenses, which included the expense for postretirement benefits other than
pensions (PBOP) required under Statement of Financial Accounting Standards
(SFAS) No. 106 and the write-off of a regulatory asset (i.e., deferred cost) for
the 1994 and 1993 costs of postretirement executive life insurance. Operating
income for 1995 increased 16% compared to 1994 due in part to rate relief and
higher KWH sales, partly offset by the increased expenses.
. 1994 revenues increased 4% over 1993 primarily due to rate relief and a 3.2%
increase in KWH sales, partly offset by lower fuel oil prices. The KWH sales
increase reflected a partial recovery of Hawaii's economy from a period of
negligible growth and the effects of warmer weather. Fuel oil expense declined
because of lower fuel oil prices and lower company generated KWHs. Purchased
power expense was higher due to an increase in KWHs purchased. The 11% increase
in other expenses was due to a 14% increase in depreciation expense as a result
of plant additions, a 12% increase in other operation and maintenance expenses
and a 6% increase in taxes, other than income taxes. Other operation and
maintenance expenses in 1994 increased partly because 1993 expenses reflected a
one-time reduction of $4 million due to the establishment under SFAS No. 71 of a
regulatory asset for accrued vacation. Operating income for 1994 increased 14%
compared to 1993 due in part to rate relief and higher KWH sales, partly offset
by the increased expenses.
28
<PAGE>
. 1993 revenues increased 13% over 1992 due in part to rate relief received in
late 1992, primarily to recover purchased power expenses. KWH sales of
electricity for the year were down 0.1% compared to 1992 primarily because of
cooler weather, a downturn in Hawaii's economy and conservation. Fuel oil
expense was lower despite higher fuel oil prices because fewer KWHs were
generated as purchased power increased. Purchased power expense increased with a
full year of purchases from a major independent power producer. The 4% increase
in other expenses was partly due to a 4% increase in depreciation expense as a
result of plant additions and a 13% increase in taxes, other than income taxes.
Operating income for 1993 increased 15% compared to 1992 due in part to rate
relief, lower management service fees from HEI and the one-time expense
reduction due to the establishment of a regulatory asset for accrued vacation.
COMPETITION
The electric utility industry is becoming increasingly competitive as a result
of various factors including product price, service reliability, new
technologies and government actions. Competition in Hawaii is also affected by
the scarcity of generation sites, various permitting processes and lack of
interconnections to other electric utilities.
The Energy Policy Act of 1992 encourages competition by allowing utilities to
form generation subsidiaries without becoming subject to regulation under the
Public Utility Holding Company Act of 1935. To date, these provisions have not
had a significant impact on HECO and its subsidiaries.
Independent power producers (IPPs) are well established in Hawaii and continue
to actively pursue new projects. Customer self-generation, with or without co-
generation, has made inroads in Hawaii and is a continuing competitive threat.
In response to this threat, HECO has been able to successfully offer economic
alternatives to its customers that, among other things, employ energy efficient
electrotechnologies such as the heat pump water heater.
REGULATION OF ELECTRIC UTILITY RATES
The PUC has broad discretion in its regulation of the rates charged by HEI's
electric utility subsidiaries and in other matters. Any adverse decision and
order (D&O) 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 D&O 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 D&O in a rate case within 10 months from the date of filing a
completed application if the evidentiary hearing is completed (subject to
extension for 30 days if the evidentiary hearing is not completed). There is no
time limit for rendering a final D&O. Interim rate increases are subject to
refund with interest, pending the final outcome of the case. Management cannot
predict with certainty when D&Os in pending or future rate cases will be
rendered or the amount of any interim or final rate increase that may be
granted.
RECENT RATE REQUESTS
HEI's electric utility subsidiaries have requested electric rate increases to
cover rising operating costs, the cost of purchased power and the cost of plant
and equipment, including the cost of new capital projects to maintain and
improve service reliability.
Postretirement benefits other than pensions
- -------------------------------------------
In November 1994, the PUC issued a D&O that authorized full recovery of PBOP
costs, determined pursuant to SFAS No. 106, of the electric utilities and Young
Brothers, Limited (YB), effective January 1, 1995. The D&O also allowed the
recovery, over the next 18 years, of the regulatory assets related to PBOP
costs. The costs of postretirement executive life insurance, however, were
subsequently disallowed for HECO and MECO. See Note 17 in the "Notes to
Consolidated Financial Statements."
Hawaiian Electric Company, Inc.
- -------------------------------
. In July 1993, HECO filed a request to increase rates based on a 1994 test
year. HECO requested an 8.6% increase (as revised) over rates in effect at the
time, or $53.8 million in annual revenues, based on a 12.75% return on average
common equity (ROACE).
In December 1994, HECO received a final D&O authorizing a 6.5%, or $40.5
million, increase in annual revenues, effective January 1, 1995 and based on a
12.15% ROACE. The final D&O, together with the PBOP D&O, resulted in an increase
of $50.5 million in annual revenues.
. In December 1993, HECO filed a request to increase rates based on a 1995 test
year. HECO requested a 4.1% increase (as revised), or $28.2 million in annual
revenues, based on a 13.25% ROACE.
In December 1995, HECO received a final D&O authorizing a 1.3%, or $9.1
million, increase in annual revenues, based on an 11.4% ROACE. The D&O required
a refund to customers because HECO had previously received four interim
increases totaling $18.9 million on an annualized basis, or $9.8 million more
than the amount that was finally approved. The reduced rate relief resulted
primarily from the lower ROACE used by the PUC in the final D&O because interest
rates dropped considerably subsequent to the first interim increase, which was
effective January 1, 1995 and was based on a 12.6% ROACE. The refund
29
<PAGE>
amount of $10 million (representing amounts recovered under interim rates in
excess of final approved rates, with interest) was accrued in December 1995 and
will be returned to customers in the first half of 1996. The D&O also did not
provide revenue to cover costs relating to postretirement executive life
insurance. HECO and its subsidiaries wrote off a regulatory asset relating to
such costs, resulting in a 1995 after-tax charge of $1.1 million.
Hawaii Electric Light Company, Inc. (HELCO)
- -------------------------------------------
. In November 1993, HELCO filed a request to increase rates 13.4%, or $15.8
million in annual revenues, based on a 1994 test year and a 12.4% ROACE (which
was later increased to 13.1%).
In February 1995, HELCO received a final D&O authorizing an 11.8%, or $13.7
million, increase in annual revenues, based on a 12.6% ROACE. The final D&O,
together with the PBOP D&O, resulted in $15.5 million of annual rate relief.
. In March 1995, HELCO filed a request to increase rates based on a 1996 test
year. In January 1996, HELCO revised its requested increase to 7.2%, or $10.3
million in annual revenues, based on a 12.5% ROACE. A hearing on the application
was held in February 1996.
. HELCO plans to file a request to increase rates, based on a 1997 test year.
Maui Electric Company, Limited (MECO)
- -------------------------------------
. In November 1991, MECO filed a request to increase rates. In January 1993,
MECO revised its requested increase to 10%, or $11.4 million in annual revenues,
based on a 13.0% ROACE and a 1993 test year.
In August 1994, MECO received a final D&O authorizing a 7.0%, or $8.1
million, increase in annual revenues, based on a 12.75% ROACE. The final D&O,
together with the PBOP D&O, resulted in $10 million of annual rate relief.
. In February 1995, MECO filed a request to increase rates based on a 1996 test
year. MECO's final requested increase was 3.8%, or $5.0 million in annual
revenues, based on a 11.5% ROACE (which ROACE was agreed upon with the Consumer
Advocate). In January 1996, MECO received an interim D&O authorizing a 2.8%, or
$3.7 million, increase in annual revenues, based on an 11.5% ROACE, effective
February 1, 1996. MECO had proposed an interim increase of $4.0 million.
. MECO plans to file a request to increase rates, based on a 1997 test year.
PROPERTY DAMAGE RESERVE
In March 1995, the PUC opened a generic docket to investigate whether the public
utilities in the State of Hawaii should be allowed to establish property damage
reserves to cover the cost of damage to their facilities and equipment caused by
catastrophic disasters. HECO's overhead transmission and distribution system is
susceptible to wind and earthquake damage, and its underground system is
susceptible to earthquake and flood damage. The overhead and underground
transmission and distribution systems (with the exception of substation
buildings and contents) have a replacement value roughly estimated at
approximately $2 billion and are uninsured because the amount of transmission
and distribution system insurance available is limited and the premiums are
extremely high. Hearings in this docket are scheduled for September 1996.
HELCO POWER SITUATION
In the past few years, HELCO's reserve margin has been relatively low. HELCO
needs additional generating capacity and has been proceeding with plans to
install two 20-megawatt (MW) combustion turbines, followed by an 18-MW heat
steam recovery generator, at which time these units would be converted to a 56-
MW (net) combined-cycle unit. However, installation has been delayed because
HELCO has encountered procedural and other difficulties in obtaining the
necessary Conservation District Use Permit amendment (CDUP) and air permit that
would allow the 56-MW unit to be constructed.
In late 1995, a contested case hearing with respect to the CDUP was conducted
and the hearing officer recommended denial of the CDUP application. The Hawaii
Board of Land and Natural Resources (BLNR) may decide to adopt, modify, or
reject the hearing officer's recommendation. The BLNR is scheduled to make a
decision on HELCO's CDUP application by February 26, 1996. If the BLNR denies
HELCO's CDUP application, this would delay, if not prevent, installation of
HELCO's project at the 15-acre site.
The Hawaii Department of Health (DOH) forwarded HELCO's air permit to the
Environmental Protection Agency (EPA) for its approval. In a November 1995
letter to the DOH, the EPA declined to sign HELCO's air permit. HELCO requested
that the EPA reconsider this decision and the EPA agreed to reconsider based on
additional information supplied by HELCO. In a second letter dated February 6,
1996, the EPA set forth information to be considered by HELCO which it feels may
address HELCO's concerns regarding the emission control technology to be used,
and stated that it would continue discussions with HELCO at a later date. If the
EPA does not sign the permit issued by the DOH, this would delay, if not
prevent, HELCO's project.
Two IPPs have filed separate complaints against HELCO with the PUC, alleging
that they are entitled to power purchase contracts to provide HELCO with
additional capacity which, under HELCO's current estimates of generating
capacity requirements, would be in place of the planned 56-MW addition by HELCO.
In September 1995, HELCO provided proposals to the two IPPs, and further
negotiations have been undertaken. On Janu-
30
<PAGE>
ary 26, 1996, the PUC ordered that the complaint docket filed by one of the IPPs
be reopened. HELCO and the IPP are to seek PUC guidance on negotiation issues if
a contract has not been finalized by March 11, 1996.
If HELCO's negotiations with the IPPs result in a power purchase agreement
and/or if HELCO's combined-cycle unit is not installed, HELCO may be required to
write off a portion of the costs incurred in its efforts to put into service its
combined-cycle unit ($43 million as of December 31, 1995) if such costs
ultimately are not recoverable from customers or others.
In January 1996, the PUC opened a generic docket relating to HELCO's
contingency plan, which had been submitted to the PUC in June 1995. It was
ordered that HELCO submit updated information to the PUC by March 4, 1996 and
address comments by the Consumer Advocate on the June 1995 contingency plan. See
Note 4 in the "Notes to Consolidated Financial Statements."
<TABLE>
<CAPTION>
SAVINGS BANK
1995 % change 1994 % change 1993 % change
- ------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
(in millions)
Revenues....................... $ 255 18 $ 216 8 $ 200 (2)
Net interest income............ 94 (6) 99 4 96 23
Operating income............... 40 (6) 43 (4) 44 41
Net income..................... 23 (6) 25 (2) 25 36
Interest-earning assets
Average balance............... $3,084 14 $2,700 15 $2,356 7
Weighted average yield........ 7.68% 2 7.53% (6) 8.01% (8)
Interest-bearing liabilities
Average balance............... $2,985 14 $2,611 13 $2,306 6
Weighted average rate......... 4.78% 20 3.98% (1) 4.02% (24)
Interest rate spread........... 2.90% (18) 3.55% (11) 3.99% 16
</TABLE>
American Savings Bank, F.S.B. (ASB) earnings depend primarily on net interest
income, the difference between the interest income earned on interest-earning
assets (loans receivable, mortgage-backed securities and investments) and
interest expense incurred on interest-bearing liabilities (deposit liabilities
and borrowings). ASB's loan volumes and yields are affected by market interest
rates, competition, demand for real estate financing, availability of funds and
management's responses to these factors. Other factors affecting ASB's operating
results include income from servicing loans and expenses from operations.
. 1995 net interest income decreased 6% from 1994 due to an 18% decrease in
interest rate spread. Operating and net income decreased due to lower net
interest income, an increased provision for loan losses, higher compensation and
benefits expenses and higher office occupancy expenses, partly offset by higher
other income which included a $2.3 million after-tax gain on the sale of fixed
rate mortgage-backed securities under the one-time reclassification of
securities allowed by the Financial Accounting Standards Board concurrent with
the initial adoption of the implementation guidance for SFAS No. 115.
The demand for mortgage loans has decreased partly due to the slow real estate
market in Hawaii. Also in 1995, ASB's nonaccrual and renegotiated loans
increased $3 million and the allowance for loan losses increased $4 million.
Another unfavorable trend has been the slowdown in deposit growth partly due
to competition from money market and mutual funds. In 1995, there was a 4%
increase in deposits due primarily to interest credited. In 1995, for funding
loans and purchasing mortgage-backed securities, securities sold under
agreements to repurchase became a more significant source of funds as they were
generally less costly than advances from the Federal Home Loan Bank (FHLB) of
Seattle.
The decrease in interest rate spread can also be attributed to the changing
interest rate environment. During 1994 and part of 1995, generally rising
interest rates caused the cost of interest-bearing liabilities to increase.
However, the average yield on interest-earning assets for 1995 increased only 15
basis points compared to 1994 due in part to the lag in the repricing of
interest-earning assets such as adjustable rate loans and mortgage-backed
securities. Further, the flattening of the yield curve also contributed to the
decrease in ASB's interest rate spread.
In 1995, 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 from 5.5% to 6.0% and declined to 5.5% by yearend. As of
February 16, 1996, the federal funds rate was 5.25%.
31
<PAGE>
. 1994 net interest income increased 4% over 1993, despite an 11% decrease in
interest rate spread, due to a $392 million, or 18%, higher average balance of
loans and mortgage-backed securities. Operating and net income declined
slightly due to an increased provision for loan losses, higher compensation
and benefits expenses and higher trading portfolio losses. The decline was
offset in part by interest income on a tax refund from an amended tax return.
In 1994, the federal funds rate increased significantly from 3.0% to 5.5%.
. 1993 net interest income increased 23% over 1992 due to the significantly
lower cost of funds and a higher average balance of loans. The 1993 interest
rate spread increased 16% over 1992. The increase in net interest income was
partially offset by higher administrative and general expenses, including $0.8
million of higher federal insurance premiums for deposits.
OTHER
<TABLE>
<CAPTION>
% % %
1995 change 1994 change 1993 change
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
(in millions)
Revenues..................... $53 (11) $59 (6) $63 27
Operating income (loss)...... (11) (128) (5) 17 (6) nm
nm Not meaningful.
</TABLE>
The "other" business segment includes results of operations from Hawaiian Tug &
Barge Corp. (HTB) and its subsidiary, YB, maritime freight transportation
companies; Malama Pacific Corp. (MPC) and its subsidiaries, real estate
investment and development companies; HEI Investment Corp. (HEIIC), a company
primarily holding investments in leveraged leases; HEIPC, a company formed in
March 1995 to pursue independent power projects and energy conservation projects
in Asia and the Pacific; HEI and HEI Diversified, Inc. (HEIDI), parent
companies; and eliminations of intercompany transactions.
. The freight transportation subsidiaries recorded operating income of $2.6
million in 1995 and $3.6 million in 1994, compared with an operating loss of
$0.1 million in 1993. The operating income decrease in 1995 was due largely to a
$1.0 million increase in maintenance expenses, including the drydocking and
overhaul costs for YB's tugs and barges. The increase in operating results in
1994 was due in part to higher harbor assists and contract tows and a gain on
the sale of a barge. The 1993 operating loss was due in part to lower charter
revenues at HTB, the termination of an oil hauling contract in mid-1992 and
losses on the sale of vessels when HTB exited the heavy fuel-oil shipping
business. HTB and YB have been hampered by Hawaii's decreased construction
activity.
In May 1994, YB filed an application with the PUC to increase rates by
approximately $2.4 million annually. In September 1994, YB filed a stipulated
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.
The increase took effect in December 1994. Also, see the PBOP discussion under
the "Electric utility--Recent rate requests" section.
. MPC's operating loss was $2.6 million in 1995, $1.5 million in 1994 and $0.6
million in 1993. MPC's real estate development activities have been impacted by
the slow real estate market in Hawaii. MPC sold fewer units in 1995 than 1994
and fewer units in 1994 than 1993. Writedowns were taken on the carrying value
of certain real estate projects in 1995, 1994 and 1993. See Note 6 in the "Notes
to Consolidated Financial Statements" for a further discussion on MPC and its
subsidiaries.
. In 1995, HEIIC sold one commercial building to a lessee pursuant to the
provisions of a leveraged lease agreement and recorded a pretax loss of $2.1
million on the sale. In 1993, HEIIC refinanced the nonrecourse debt supporting a
leveraged lease, resulting in additional income, which was largely offset by the
cumulative effect of the 1% federal income tax rate increase. No new investments
are currently planned for HEIIC.
. HEIPC's operating loss was $1.7 million for 1995, its first year of
existence. HEIPC is pursuing independent power projects and marketing its
ability to provide energy products and services in Asia and the Pacific. In
1995, HEIPC signed a "Memorandum of Understanding" with Agusan Power
Corporation, Agusan Del Norte Electric Cooperative, Inc. and the provincial
government of Agusan Del Norte to work toward an agreement to build and operate
a 22-MW hydroelectric plant in the Philippines.
. The HEI and HEIDI corporate operating loss increased $0.7 million in 1995
compared to 1994 due in part to higher legal expenses. The HEI and HEIDI
corporate operating loss increased $1.0 million in 1994 compared to 1993 due in
part to higher employee benefits expense.
DISCONTINUED OPERATIONS
See Note 2 in the "Notes to Consolidated Financial Statements" for a discussion
of the Company's former property and casualty insurance business and wind energy
business.
ACCOUNTING FOR THE EFFECTS OF CERTAIN TYPES OF REGULATION
In accordance with SFAS No. 71, "Accounting for the Effects of Certain Types of
Regulation," the Company's financial statements reflect assets and costs of HECO
and its subsidiaries and YB based on current cost-based rate-mak-
32
<PAGE>
ing regulations. Management believes HECO and its subsidiaries' and YB's
operations currently satisfy the SFAS No. 71 criteria. However, if events or
circumstances should change so that those criteria are no longer satisfied,
management believes that a material adverse effect on the Company's results of
operations and financial position may result. See Note 9 in the "Notes to
Consolidated Financial Statements" for further discussion.
ENVIRONMENTAL MATTERS
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, these costs may not be fully allowed by the PUC for rate-
making purposes. Based on information available to the Company, management is
not aware of any contingent liabilities relating to environmental matters that
would have a material adverse effect on 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 taking 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 in the future.
EFFECTS OF INFLATION
Inflation, as measured by the U.S. Consumer Price Index, averaged 2.8% in 1995,
2.6% in 1994 and 3.0% in 1993. Although the rate of inflation over the past
three years has been relatively low compared with the late 1970's and early
1980's, inflation continues to have an impact on HEI's operations.
Inflation increases operating costs and the replacement cost of assets.
Subsidiaries with significant physical assets, such as the electric utilities,
replace assets at much higher costs and must request rate relief to maintain
adequate earnings. In the past, the PUC has generally approved rate relief to
cover the effects of inflation. In 1993, 1994 and 1995, the electric utilities
received rate relief, in part to cover increases in operating expenses and
construction costs due to inflation.
ACCOUNTING CHANGES
See Note 1 in the "Notes to Consolidated Financial Statements."
LIQUIDITY AND CAPITAL RESOURCES
-------------------------------
CONSOLIDATED
The Company believes that its ability to generate cash, both internally from
operations and externally from debt and equity issues, is adequate to maintain
sufficient liquidity to fund its construction programs and to cover debt and
other cash requirements in the foreseeable future.
The Company's total assets were $5.6 billion and $5.2 billion at December 31,
1995 and 1994, respectively. Asset growth in 1995 stemmed from growth in ASB's
mortgage-backed securities portfolio and capital expenditures by the electric
utilities.
The consolidated capital structure of HEI was as follows:
<TABLE>
<CAPTION>
December 31 1995 1994
- ------------------------------------------------------------------------
(in millions)
<S> <C> <C> <C> <C>
Short-term borrowings................... $ 182 10% $ 137 8%
Long-term debt.......................... 758 43 718 44
Preferred stock of electric utility 90 5 93 6
subsidiaries...........................
Common stock equity..................... 730 42 682 42
- ------------------------------------------------------------------------
$1,760 100% $1,630 100%
========================================================================
</TABLE>
ASB's deposit liabilities, securities sold under agreements to repurchase and
advances from the FHLB of Seattle are not included in the table above. HEI plans
to maintain its debt and equity structure close to the levels at December 31,
1995 and 1994.
As of February 16, 1996, the Standard & Poor's (S&P), Moody's Investors
Service (Moody's) and Duff & Phelps Credit Rating Co.'s (Duff & Phelps) ratings
of HEI's and HECO's securities were as follows:
33
<PAGE>
<TABLE>
<CAPTION>
Duff &
S&P Moodys Phelps
- --------------------------------------------------------
<S> <C> <C> <C>
HEI
- ---
Medium-term notes............ BBB Baa2 BBB+
Commercial paper............. A-2 P-2 Duff 2
HECO
- ----
First mortgage bonds......... BBB+ A3 A
Unsecured notes.............. BBB+ Baa1 A-
Cumulative preferred stock... BBB baa1 BBB+
Commercial paper............. A-2 P-2 Duff 1-
</TABLE>
The above ratings are not recommendations to buy, sell or hold any securities,
and such ratings may be subject to revision or withdrawal at any time by the
rating agencies.
Neither HEI nor HECO management can predict with certainty future rating agency
actions or their effects on the future cost of capital to HEI or HECO.
At December 31, 1995, $148 million of a $250 million registered medium-term
note program was available for offering by HEI.
Operating activities provided net cash of $213 million in 1995, $130 million
in 1994 and $139 million in 1993. Investing activities such as capital
expenditures and the origination and/or purchase of loans and mortgage-backed
securities accounted for a significant portion of the net cash used of $481
million in 1995, $713 million in 1994 and $352 million in 1993. Financing
activities provided net cash of $312 million in 1995, $554 million in 1994 and
$172 million in 1993. In 1995, a significant amount of cash came from the net
increase in securities sold under agreements to repurchase.
A portion of net assets of HECO and ASB are not available for transfer to HEI
in the form of dividends, loans or advances without regulatory approval.
However, such restrictions are not expected to significantly affect the
operations of HEI, its ability to pay dividends on its common stock or its
ability to meet other cash obligations. See Note 18 in the "Notes to
Consolidated Financial Statements."
Total HEI consolidated financing requirements for 1996 through 2000 (excluding
any financing requirements HEIPC may have), including net capital expenditures,
debt retirements (excluding repayments of advances from FHLB of Seattle and
securities sold under agreements to repurchase) and sinking fund requirements,
are currently estimated to total $1.1 billion. Of this amount, approximately
$0.8 billion are for net capital expenditures (mostly relating to the electric
utilities' net capital expenditures described below). HEI consolidated internal
sources, after the payment of HEI dividends, are expected to provide
approximately 57% of the consolidated financing requirements, with debt and
equity financing providing the remaining requirements. Over the five-year period
1996 through 2000, HEI estimates that it will require approximately $172 million
in common equity, in addition to 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. The additional equity
will be used to fund the electric utilities' common equity requirements related
to their capital expenditure programs and to reduce HEI's overall borrowing
level. Additional common equity in excess of the $172 million described above,
and additional debt financing, may be required for the development of
independent power projects by HEIPC in Asia and the Pacific.
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:
<TABLE>
<CAPTION>
December 31 1995 1994
- ------------------------------------------------------------------------
(in millions)
<S> <C> <C> <C> <C>
Short-term borrowings from $ 139 10% $ 118 9%
nonaffiliates and affiliate............
Long-term debt.......................... 517 36 489 37
Preferred stock
Subject to mandatory redemption........ 42 3 45 3
Not subject to mandatory redemption.... 48 3 48 4
Common stock equity..................... 697 48 634 47
- ------------------------------------------------------------------------
$1,443 100% $1,334 100%
========================================================================
</TABLE>
34
<PAGE>
In 1995, the electric utilities used $185 million in cash for capital
expenditures. Operations provided $138 million in cash and $10 million of cash
came from third-party contributions in aid of construction. Financing activities
provided cash of $32 million primarily from HECO's sale of common stock of $28
million to HEI and net increases in long-term debt of $28 million and short-term
borrowings of $21 million, partly offset by common and preferred stock
dividends.
The electric utilities' consolidated financing requirements for 1996 through
2000, including net capital expenditures, debt retirements and sinking fund
requirements, are estimated to total $829 million. HECO's consolidated internal
sources, after the payment of common and preferred stock dividends, are
currently expected to provide approximately 66% of the total $829 million
requirements, with debt and equity financing providing the remaining
requirements. As of December 31, 1995, $170 million of revenue bonds had been
authorized by the Hawaii Legislature for issuance by the Department of Budget
and Finance of the State of Hawaii on behalf of HECO, HELCO and MECO prior to
the end of 1997. HECO currently estimates that it will require approximately $54
million in common equity, in addition to retained earnings, over the five-year
period 1996 through 2000. The PUC must approve issuances of long-term debt and
equity for HECO, HELCO and MECO.
Capital expenditures include the costs of projects which are required to meet
expected load growth, to improve reliability and to replace and upgrade existing
equipment. Net capital expenditures for the five-year period 1996 through 2000
are currently estimated to total $747 million. Approximately 62% of gross
capital expenditures, including the allowance for funds used during construction
and capital expenditures funded by third-party cash contributions in aid of
construction, is for transmission and distribution projects, with the remaining
38% primarily for generation projects. At December 31, 1995, purchase
commitments, other than fuel and power purchase contracts, amounted to
approximately $75 million, including amounts for construction projects. Also see
Note 4 in the "Notes to Consolidated Financial Statements" for a discussion of
fuel and power purchase commitments.
For 1996, electric utility net capital expenditures are estimated to be $154
million and gross capital expenditures are estimated to be $189 million, of
which approximately 58% is for transmission and distribution projects. An
estimated $55 million is planned for new generation projects. Drawdowns of
proceeds from the sale of tax-exempt special purpose revenue bonds, sales of
preferred stock, sales of common stock to HEI 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 KWH sales and peak load, the availability of purchased power, the
availability of generating sites and transmission and distribution corridors,
the ability to obtain adequate and timely rate relief, escalation in
construction costs, demand-side management programs and requirements of
environmental and other regulatory and permitting authorities.
SAVINGS BANK
<TABLE>
<CAPTION>
December 31 1995 1994
- ---------------------------------------------------------------------------------
$ % change $ % change
- ---------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
(in millions)
Assets.................................. $3,413 10 $3,116 19
Loans receivable, net................... 1,688 (7) 1,824 5
Mortgage-backed securities.............. 1,445 35 1,067 69
Deposit liabilities..................... 2,224 4 2,129 2
Securities sold under agreements to 413 235 123 nm
repurchase.............................
Advances from FHLB...................... 501 (19) 616 113
nm Not meaningful.
</TABLE>
35
<PAGE>
As of September 30, 1995, ASB was the fourth largest financial institution in
the state based on total assets of $3.3 billion and the third largest financial
institution based on deposits of $2.2 billion. In 1995, ASB's total assets
increased primarily due to the origination and/or purchase of loans receivable
and mortgage-backed securities totaling $628 million, partly offset by
repayments of $329 million. The decrease in loans receivable and the increase in
mortgage-backed securities in 1995 was primarily due to the securitization of
$409 million of loans.
At December 31, 1995, loans which do not accrue interest totaled $27 million
or 1.6% of net loans outstanding, compared to $24 million or 1.3% at December
31, 1994. At the end of 1995, there were nine properties acquired in settlement
of loans valued at $2.7 million.
For 1995, cash used by investing activities was $296 million, due largely to
the origination and/or purchase of loans receivable and mortgage-backed
securities, partly offset by principal repayments. Cash provided by financing
activities included a net increase of $288 million in securities sold under
agreements to repurchase and $94 million in deposit liabilities, partly offset
by a decrease of $115 million in advances from the FHLB of Seattle.
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 receipt of interest and principal on outstanding loans
receivable and mortgage-backed securities, borrowings from the FHLB of Seattle,
securities sold under agreements to repurchase and other sources. In recent
years, advances from the FHLB of Seattle and securities sold under agreements to
repurchase have become more significant sources of funds as the demand for
deposits has decreased. Using these higher cost sources of funds 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 December 31, 1995.
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 growth. As of December 31, 1995, ASB was in compliance with the OTS minimum
capital requirements (noted in parenthesis) with a tangible capital ratio of
5.2% (1.5%), a core capital ratio of 5.4% (3.0%) and a risk-based capital ratio
of 12.9% (8.0%).
The OTS has adopted a rule adding an interest rate risk (IRR) component to the
existing risk-based capital requirement. Institutions with an "above normal"
level of IRR exposure will be required to deduct an amount from total capital
and may be required to hold additional capital. Although the rule became
effective January 1, 1994, the OTS has provided a waiver of the IRR capital
deduction until it can finalize an appeals process for institutions subject to
such deductions. As of December 31, 1995, ASB would not have been required to
deduct an amount from total capital or to hold additional capital if the rule
adding the IRR component had been implemented.
Federal Deposit Insurance Corporation regulations restrict the ability of
financial institutions that are not "well-capitalized" to offer interest rates
on deposits that are significantly higher than the rates offered by competing
institutions. As of December 31, 1995, ASB was "well-capitalized" (ratio
requirements noted in parenthesis) with a leverage ratio of 5.4% (5.0%), a
Tier-1 risk-based ratio of 12.2% (6.0%) and a total risk-based ratio of
12.9% (10%).
On September 29, 1994, the Reigle-Neal Interstate Banking and Branching
Efficiency Act of 1994 (Interstate Banking Act) was signed into law. Beginning
in September 1995, and subject to certain limits, adequately capitalized and
adequately managed bank holding companies were permitted to acquire control of
banks in any state, thereby creating a uniform system of interstate banking in
the U.S. Also, subject to certain limitations, the Interstate Banking Act will
permit interstate branching by U.S. banks, marking a major departure from
previous law. Although the Interstate Banking Act applies 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.
For a discussion of the unfavorable disparity in the deposit insurance
assessment rates that ASB and other thrifts pay in relation to the rates that
most commercial banks pay and certain proposed legislation affecting financial
institutions, see Note 5 in the "Notes to Consolidated Financial Statements."
36
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Stockholders
Hawaiian Electric Industries, Inc.:
We have audited the accompanying consolidated balance sheets of Hawaiian
Electric Industries, Inc. and subsidiaries as of December 31, 1995 and 1994, and
the related consolidated statements of income, retained earnings and cash flows
for each of the years in the three-year period ended December 31, 1995. These
consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Hawaiian Electric
Industries, Inc. and subsidiaries as of December 31, 1995 and 1994, and the
results of their operations and their cash flows for each of the years in the
three-year period ended December 31, 1995 in conformity with generally accepted
accounting principles.
/s/ KPMG Peat Marwick LLP
Honolulu, Hawaii
January 25, 1996
37
<PAGE>
CONSOLIDATED STATEMENTS OF INCOME
- --------------------------------------------------------------------------------
Hawaiian Electric Industries, Inc. and subsidiaries
<TABLE>
<CAPTION>
Years ended December 31 1995 1994 1993
- ---------------------------------------------------------------------------------
(in thousands, except per share amounts)
<S> <C> <C> <C>
REVENUES
Electric utility........................ $ 988,722 $ 913,719 $ 879,110
Savings bank............................ 254,616 215,525 199,734
Other................................... 52,586 59,279 63,326
- ---------------------------------------------------------------------------------
1,295,924 1,188,523 1,142,170
- ---------------------------------------------------------------------------------
EXPENSES
Electric utility........................ 829,679 777,091 759,545
Savings bank............................ 214,572 173,000 155,617
Other................................... 64,009 64,299 69,370
- ---------------------------------------------------------------------------------
1,108,260 1,014,390 984,532
- ---------------------------------------------------------------------------------
OPERATING INCOME (LOSS)
Electric utility........................ 159,043 136,628 119,565
Savings bank............................ 40,044 42,525 44,117
Other................................... (11,423) (5,020) (6,044)
- ---------------------------------------------------------------------------------
187,664 174,133 157,638
- ---------------------------------------------------------------------------------
Interest expense--electric utility and
other.................................. (62,860) (54,028) (53,192)
Allowance for borrowed funds used
during construction.................... 5,112 4,043 3,869
Preferred stock dividends of electric
utility subsidiaries................... (6,885) (7,163) (6,518)
Allowance for equity funds used during
construction........................... 10,202 9,064 6,973
- ---------------------------------------------------------------------------------
INCOME FROM CONTINUING OPERATIONS
BEFORE INCOME TAXES.................... 133,233 126,049 108,770
Income taxes............................ 55,740 53,019 47,086
- ---------------------------------------------------------------------------------
INCOME FROM CONTINUING OPERATIONS....... 77,493 73,030 61,684
LOSS ON DISPOSAL OF DISCONTINUED
OPERATIONS, NET OF INCOME TAX
BENEFITS............................... -- -- (13,025)
- ---------------------------------------------------------------------------------
NET INCOME.............................. $ 77,493 $ 73,030 $ 48,659
=================================================================================
EARNINGS (LOSS) PER COMMON SHARE
CONTINUING OPERATIONS............... $2.66 $2.60 $2.38
DISCONTINUED OPERATIONS............. -- -- (0.50)
- ---------------------------------------------------------------------------------
$2.66 $2.60 $1.88
=================================================================================
DIVIDENDS PER COMMON SHARE.............. $2.37 $2.33 $2.29
=================================================================================
WEIGHTED AVERAGE NUMBER OF COMMON
SHARES OUTSTANDING..................... 29,187 28,137 25,938
=================================================================================
</TABLE>
CONSOLIDATED STATEMENTS OF RETAINED EARNINGS
- --------------------------------------------------------------------------------
Hawaiian Electric Industries, Inc. and subsidiaries
<TABLE>
<CAPTION>
Years ended December 31 1995 1994 1993
- ---------------------------------------------------------------------------------
(in thousands)
<S> <C> <C> <C>
RETAINED EARNINGS, BEGINNING OF YEAR.... $ 135,835 $ 128,318 $ 138,484
Net income.............................. 77,493 73,030 48,659
Common stock dividends.................. (69,112) (65,513) (58,825)
- ---------------------------------------------------------------------------------
RETAINED EARNINGS, END OF YEAR.......... $ 144,216 $ 135,835 $ 128,318
=================================================================================
</TABLE>
See accompanying "Notes to Consolidated Financial Statements."
38
<PAGE>
<TABLE>
<CAPTION>
CONSOLIDATED BALANCE SHEETS
- ----------------------------------------------------------------------------------------------
Hawaiian Electric Industries, Inc. and subsidiaries
December 31 1995 1994
- ----------------------------------------------------------------------------------------------
(in thousands)
<S> <C> <C> <C> <C>
ASSETS
Cash and equivalents.................... $ 130,833 $ 87,623
Accounts receivable and unbilled
revenues, net.......................... 142,505 130,762
Inventories, at average cost............ 35,258 43,126
Real estate developments................ 35,023 33,956
Marketable securities (estimated market
value $1,485,091 and $1,051,673)....... 1,479,552 1,099,810
Other investments....................... 74,325 77,297
Loans receivable, net................... 1,687,801 1,824,055
Property, plant and equipment, net
Land................................... $ 37,471 $ 33,861
Plant and equipment.................... 2,391,013 2,220,213
Construction in progress............... 195,258 171,251
---------- ----------
2,623,742 2,425,325
Less--accumulated depreciation......... (815,547) 1,808,195 (747,503) 1,677,822
---------- ----------
Regulatory assets....................... 99,693 95,257
Other................................... 69,315 59,301
Goodwill and other intangibles.......... 41,245 45,455
- ----------------------------------------------------------------------------------------------
$5,603,745 $5,174,464
==============================================================================================
LIABILITIES AND STOCKHOLDERS' EQUITY
Accounts payable........................ $ 94,806 $ 97,210
Deposit liabilities..................... 2,223,755 2,129,310
Short-term borrowings................... 181,825 136,755
Securities sold under agreements to
repurchase............................. 412,521 123,301
Advances from Federal Home Loan Bank.... 501,274 616,374
Long-term debt.......................... 758,463 718,240
Deferred income taxes................... 182,101 172,930
Unamortized tax credits................. 46,965 45,954
Contributions in aid of construction.... 191,854 178,635
Other................................... 190,535 180,529
- ----------------------------------------------------------------------------------------------
4,784,099 4,399,238
- ----------------------------------------------------------------------------------------------
PREFERRED STOCK OF ELECTRIC UTILITY
SUBSIDIARIES
Subject to mandatory redemption......... 41,750 44,844
Not subject to mandatory redemption..... 48,293 48,293
- ----------------------------------------------------------------------------------------------
90,043 93,137
- ----------------------------------------------------------------------------------------------
STOCKHOLDERS' EQUITY
Preferred stock, no par value,
authorized 10,000 shares; issued: none -- --
Common stock, no par value, authorized
100,000 shares; issued and
outstanding: 29,773 shares and
28,655 shares.......................... 585,387 546,254
Retained earnings....................... 144,216 135,835
- ----------------------------------------------------------------------------------------------
729,603 682,089
- ----------------------------------------------------------------------------------------------
$5,603,745 $5,174,464
==============================================================================================
</TABLE>
See accompanying "Notes to Consolidated Financial Statements."
39
<PAGE>
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF CASH FLOWS
- -----------------------------------------------------------------------------
Hawaiian Electric Industries, Inc. and subsidiaries
Years ended December 31 1995 1994 1993
- -----------------------------------------------------------------------------
(in thousands)
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Income from continuing operations....... $ 77,493 $ 73,030 $ 61,684
Adjustments to reconcile income from
continuing operations to net cash
provided by operating activities
Depreciation and amortization of
property, plant and equipment.... 76,656 72,256 64,314
Other amortization................ 8,213 (660) (88)
Deferred income taxes and tax
credits, net..................... 12,660 9,161 3,164
Changes in assets and liabilities,
net of effects from disposal of
businesses and acquisition of
control of joint venture
Decrease (increase) in
accounts receivable and
unbilled revenues, net..... (11,743) (13,646) 1,108
Decrease (increase) in
inventories................ 7,868 (3,721) (453)
Decrease (increase) in
other securities held for
trading.................... 49,505 45,396 (22,359)
Increase in regulatory
assets..................... (4,247) (9,885) (9,606)
Increase (decrease) in
accounts payable........... (2,404) 8,582 6,248
Changes in other assets and
liabilities................ (1,396) (17,570) 35,401
- -------------------------------------------------------------------------------
212,605 162,943 139,413
Cash used by discontinued operations.... -- (32,623) (92)
- -------------------------------------------------------------------------------
NET CASH PROVIDED BY OPERATING
ACTIVITIES............................. 212,605 130,320 139,321
- -------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES
Loans receivable originated and
purchased.............................. (427,518) (515,070) (557,009)
Principal repayments on loans receivable 145,522 225,002 288,932
Proceeds from sale of loans receivable.. 6,769 2,138 633
Held-to-maturity mortgage-backed
securities purchased................... (200,943) (421,649) (190,517)
Principal repayments on
held-to-maturity mortgage-backed
securities............................. 183,702 187,967 269,816
Held-to-maturity investment securities
purchased.............................. (39,458) -- --
Proceeds from maturity of investment
securities............................. 39,600 -- 15,000
Capital expenditures.................... (194,623) (200,526) (213,685)
Contributions in aid of construction.... 10,417 15,112 20,158
Other................................... (4,962) (5,695) 14,980
- -----------------------------------------------------------------------------
NET CASH USED IN INVESTING ACTIVITIES... (481,494) (712,721) (351,692)
- -----------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase in deposit liabilities..... 94,445 37,727 58,714
Net increase (decrease) in short-term
borrowings with original maturities of
three months or less................... 46,531 101,688 (93,247)
Proceeds from other short-term
borrowings............................. 1,098 1,008 25,622
Repayment of other short-term borrowings (2,559) (6,357) (72,707)
Proceeds from securities sold under
agreements to repurchase............... 557,000 145,669 --
Repurchase of securities sold under
agreements to repurchase............... (269,339) (23,330) (27,000)
Proceeds from advances from Federal
Home Loan Bank......................... 585,721 998,200 194,692
Principal payments on advances from
Federal Home Loan Bank................. (700,821) (671,500) (99,117)
Proceeds from issuance of long-term debt 78,544 87,814 193,788
Repayment of long-term debt............. (38,400) (75,427) (70,801)
Proceeds from issuance of electric
utility subsidiaries' preferred stock.. -- -- 12,000
Redemption of electric utility
subsidiaries' preferred stock.......... (3,094) (1,886) (2,190)
Net proceeds from issuance of common
stock.................................. 19,322 13,602 88,658
Common stock dividends.................. (49,415) (47,676) (42,012)
Other................................... (6,934) (5,768) 5,477
- -----------------------------------------------------------------------------
NET CASH PROVIDED BY FINANCING
ACTIVITIES............................. 312,099 553,764 171,877
- -----------------------------------------------------------------------------
Net increase (decrease) in cash and
equivalents............................ 43,210 (28,637) (40,494)
Cash and equivalents, beginning of year. 87,623 116,260 156,754
- -----------------------------------------------------------------------------
CASH AND EQUIVALENTS, END OF YEAR....... $ 130,833 $ 87,623 $116,260
=============================================================================
</TABLE>
See accompanying "Notes to Consolidated Financial Statements."
40
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1 . SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
- --------------------------------------------------------------------------------
GENERAL
- --------------------------------------------------------------------------------
BASIS OF PRESENTATION. The financial statements have been prepared in
conformity with generally accepted accounting principles (GAAP). In preparing
the financial statements, management is required to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the balance sheet
and the reported amounts of revenues and expenses for the period. Actual results
could differ significantly from those estimates.
Material estimates that are particularly susceptible to significant change
relate to the determination of regulatory assets, the allowance for loan losses,
the provision for costs in excess of net realizable values of real estate
projects and the amounts reported for pension and other postretirement benefit
obligations. Management believes that such estimates have been appropriately
established in accordance with GAAP.
CONSOLIDATION. The consolidated financial statements include the accounts of
Hawaiian Electric Industries, Inc. (HEI), a holding company, and its direct and
indirect wholly owned subsidiaries (collectively, the Company). HEI's
subsidiaries are Hawaiian Electric Company, Inc. (HECO), parent company of
Hawaii Electric Light Company, Inc. (HELCO) and Maui Electric Company, Limited
(MECO); HEI Diversified, Inc. (HEIDI), parent company of American Savings Bank,
F.S.B. (ASB); Hawaiian Tug & Barge Corp. (HTB), parent company of Young
Brothers, Limited (YB); Lalamilo Ventures, Inc.; Malama Pacific Corp. (MPC),
parent company of several real estate subsidiaries; HEI Investment Corp.
(HEIIC); Pacific Energy Conservation Services, Inc. (an inactive company); and
HEI Power Corp. (HEIPC).
All significant intercompany accounts and transactions have been eliminated in
consolidation.
PUBLIC UTILITY COMMISSION REGULATION. The electric utility subsidiaries and YB
are regulated by the Public Utilities Commission of the State of Hawaii (PUC)
and account for the effects of regulation under Statement of Financial
Accounting Standards (SFAS) No. 71, "Accounting for the Effects of Certain Types
of Regulation." As a result, the actions of regulators can affect the timing of
recognition of revenues, expenses, assets and liabilities.
INVESTMENTS.
DEBT AND EQUITY SECURITIES. In May 1993, the Financial Accounting Standards
Board (FASB) issued SFAS No. 115, "Accounting for Certain Investments in Debt
and Equity Securities." The Company adopted the provisions of SFAS No. 115
effective January 1, 1994, and the implementation of SFAS No. 115 did not have a
material effect on the Company's financial condition or results of operations.
Debt securities that the Company has the positive intent and ability to hold
to maturity are classified as held-to-maturity securities and reported at
amortized cost.
Equity securities (with readily determinable fair values) and debt 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, if any, included in earnings.
Equity securities (with readily determinable fair values) and debt 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, if any, excluded from earnings and reported in a
separate component of stockholders' equity.
OTHER INVESTMENTS. Investments in joint ventures and other investments for
which the Company has the ability to exercise significant influence over the
operating and financing policies of the enterprise are accounted for under the
equity method.
41
<PAGE>
For held-to-maturity investments, available-for-sale investments and other
investments described above, declines in value determined to be other than
temporary are reflected in net income and result in the establishment of a new
cost basis for the investment. The specific identification method is used in
determining realized gains and losses on the sale of securities.
PROPERTY, PLANT AND EQUIPMENT. Property, plant and equipment are stated at
cost. The cost of plant constructed by the electric utility subsidiaries
includes applicable engineering, supervision, administrative and general
expenses, and an allowance for the cost of funds used during the construction
period. Upon the ordinary retirement or sale of electric utility plant, no gain
or loss is recognized. The cost of the plant retired or sold and the cost of
removal (net of salvage obtained) are charged to accumulated depreciation.
POSTRETIREMENT AND POSTEMPLOYMENT BENEFITS. Pension costs are charged primarily
to expense and electric utility plant. The Company's policy is to fund pension
costs in amounts consistent with the requirements of the Employee Retirement
Income Security Act of 1974. Certain health care and/or life insurance
benefits are provided to eligible retired employees and the employees'
beneficiaries and covered dependents. In 1995, these postretirement benefits
were charged primarily to expense and electric utility plant. In 1994 and 1993,
these postretirement benefits were charged primarily to regulatory assets and
expense. See Note 17.
In November 1992, the FASB issued SFAS No. 112, "Employer's 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 implementation of SFAS No. 112 did not have a
material effect on the Company's financial condition or results of operations.
DEPRECIATION. Depreciation of plant and equipment is computed primarily using
the straight-line method over the estimated useful lives of the assets. The
electric utility subsidiaries' composite annual depreciation rate was 3.8% in
1995 and 3.9% in 1994 and 1993.
ENVIRONMENTAL EXPENDITURES. The Company is subject to numerous federal and state
statutes and governmental regulations pertaining to water quality, air quality
and other environmental factors. In general, environmental contamination
treatment costs are charged to expense, unless it is probable such costs will be
recovered through rates authorized by the PUC. Also, environmental costs are
capitalized if: the costs extend the life, increase the capacity, or improve the
safety or efficiency of property owned; the costs mitigate or prevent
environmental contamination that has yet to occur and that otherwise may result
from future operations; or the costs are incurred in preparing property for
sale. Liabilities are recorded when environmental assessments and/or remedial
efforts are probable, and the cost can be reasonably estimated. Corresponding
regulatory assets are recorded when it is probable that such costs would be
allowed by the PUC as reasonable and necessary costs of service to be recovered
in future rates.
INCOME TAXES. Deferred income tax assets and liabilities are established for the
temporary differences between the financial reporting basis and the tax basis of
the Company's assets and liabilities at enacted tax rates expected to be in
effect when such deferred tax assets or liabilities are realized or settled.
Federal and state tax credits are deferred and amortized over the estimated
useful lives of the properties which qualified for the credits.
EARNINGS PER COMMON SHARE. Earnings per common share are based upon the weighted
average number of shares of common stock outstanding. The dilutive effect of
stock options is not material.
CASH FLOWS. The Company considers cash on hand, deposits in banks, deposits
with the Federal Home Loan Bank (FHLB) of Seattle, money market accounts,
certificates of deposit, short-term commercial paper and reverse repurchase
agreements with original maturities of three months or less to be cash and
equivalents.
42
<PAGE>
RECLASSIFICATIONS. Certain reclassifications have been made to prior years'
consolidated financial statements to conform to the 1995 presentation.
ACCOUNTING CHANGES -- 1996 IMPLEMENTATION.
LONG-LIVED ASSETS. 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 changes in circumstances indicate that the carrying amount of an asset
may not be recoverable. If the sum of the expected future cash flows derived
from an asset is less than the carrying amount of the asset, an impairment loss
is recognized. Measurement of that loss is based on the fair value of the asset.
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 impairment loss for the amount of costs excluded by a
regulator from the enterprise's rate base. The Company adopted the provisions of
SFAS No. 121 on January 1, 1996. The adoption of SFAS No. 121 did not have a
material effect on the Company's financial condition or results of operations.
MORTGAGE SERVICING RIGHTS. In May 1995, the FASB issued SFAS No. 122,
"Accounting for Mortgage Servicing Rights". SFAS No. 122 requires that a
mortgage banking enterprise (as defined) that acquires mortgage servicing rights
through either the purchase or origination of mortgage loans and sells or
securitizes those loans with servicing rights retained should allocate the total
cost of the mortgage loans to the mortgage servicing rights and the loans based
on their relative fair values, if it is practicable to estimate those fair
values. ASB adopted the provisions of SFAS No. 122 on January 1, 1996. The
adoption of SFAS No. 122 did not have a material effect on the Company's
financial condition or results of operations.
STOCK-BASED COMPENSATION. In October 1995, the FASB issued SFAS No. 123,
"Accounting for Stock-Based Compensation." SFAS No. 123 establishes a fair value
based method of accounting for stock-based compensation, but does not require an
entity to adopt the new method for purposes of preparing its basic financial
statements. For entities not adopting the new method, SFAS No. 123 requires
footnote disclosure of proforma net income and earnings per share information as
if the fair value based method had been adopted. The disclosure requirements of
SFAS No. 123 are effective for financial statements for fiscal years beginning
after December 15, 1995. The Company will comply with the disclosure
requirements of SFAS No. 123 in its financial statements for 1996.
ELECTRIC UTILITY
- --------------------------------------------------------------------------------
CONTRIBUTIONS IN AID OF CONSTRUCTION. The electric utility subsidiaries receive
contributions from customers for special construction requirements. As directed
by the PUC, the contributions are amortized on a straight-line basis over 30
years, which approximates the estimated useful lives of the facilities for which
the contributions were received. This amortization is an offset against
depreciation expense.
ELECTRIC UTILITY REVENUES. Electric utility revenues are based on rates
authorized by the PUC and include revenues applicable to electric energy
consumed in the accounting period but not yet billed to the customers. Revenue
amounts recorded under PUC approved interim rate adjustments are subject to
refund, with interest, pending final authorization by the PUC.
The rate schedules of the electric utility subsidiaries include energy cost
adjustment clauses under which electric rates are adjusted for changes in the
weighted average price paid for fuel oil and certain components of purchased
power, and the relative amounts of company-generated power and purchased power.
43
<PAGE>
SAVINGS BANK
- --------------------------------------------------------------------------------
LOANS RECEIVABLE. Loans receivable are stated at cost less the allowance for
loan losses, loan origination and commitment fees and purchase premiums and
discounts. Interest on loans is credited to income as it is earned.
Any discount on loans is accreted or premium amortized over the estimated life
of the loan using the level-yield method.
ALLOWANCE FOR LOAN LOSSES. ASB adopted the provisions of SFAS No. 114,
"Accounting by Creditors for Impairment of a Loan", as amended by SFAS No. 118,
"Accounting by Creditors for Impairment of a Loan--Income Recognition and
Disclosure", on January 1, 1995. SFAS Nos. 114 and 118 address the accounting
treatment of certain impaired loans. The adoption of these statements did not
have a material effect on the Company's financial condition or results of
operations.
Considering current information and events regarding the borrowers ability to
repay their obligations, ASB deems a loan impaired when it is probable that ASB
will be unable to collect all amounts due according to the contractual terms of
the loan agreement. When a loan is deemed impaired, the amount of the impairment
is measured based on the present value of expected future cash flows discounted
at the loan's effective interest rate or, if the loan is considered to be
collateral dependent, based on the fair value of the collateral. Impairment
losses are included in the allowance for loan losses through a charge to the
provision for loan losses. Prior periods have not been restated.
For the remaining loans receivable portfolio (smaller-balance homogeneous
loans), ASB provides valuation allowances for estimated losses on loans
receivable at levels considered adequate to provide for potential losses.
Several factors are collectively weighed in determining the adequacy of the
allowance, including management's review of the existing risks in the loan
portfolio, prevailing economic conditions and the historical loss experience.
Actual losses could differ materially from estimates as of December 31, 1995.
ASB uses either the cash or cost recovery method to record cash receipts on
impaired loans that are not accruing interest. For smaller-balance homogeneous
loans, ASB generally ceases the accrual of interest on a loan that is more than
90 days past due or when there is reasonable doubt as to the loan's
collectibility. Subsequent recognition of interest income for such loans is
generally on the cash method.
REAL ESTATE ACQUIRED IN SETTLEMENT OF LOANS. Real estate acquired in settlement
of loans is recorded at the lower of cost or fair value less estimated selling
expenses.
LOAN ORIGINATION AND COMMITMENT FEES. Loan origination fees (net of direct loan
origination costs) are deferred and recognized as an adjustment of yield over
the life of the loan. Nonrefundable commitment fees (net of direct loan
origination costs, if applicable) for commitments to originate or purchase loans
are deferred and, if the commitment is exercised, recognized as an adjustment of
yield over the life of the loan. If the commitment expires unexercised,
nonrefundable commitment fees are recognized as income upon expiration of the
commitment.
AMORTIZATION OF GOODWILL AND CORE DEPOSIT INTANGIBLES. Goodwill is being
amortized on a straight-line basis over 25 years. Core deposit intangibles are
being amortized each year at the greater of the actual attrition rate of such
deposit base or 10% of the original value. Subsequent to its acquisition, ASB
evaluates whether later events or changes in circumstances indicate the
remaining estimated useful life of an intangible asset may warrant revision or
that the remaining balance of an intangible asset may not be recoverable. When
factors indicate that an intangible asset should be evaluated for possible
impairment, ASB will use an estimate of undiscounted future cash flows over the
remaining useful life of the asset in measuring whether the intangible asset is
recoverable.
44
<PAGE>
2 . DISCONTINUED OPERATIONS
- --------------------------------------------------------------------------------
HAWAIIAN ELECTRIC RENEWABLE SYSTEMS, INC.
- --------------------------------------------------------------------------------
In 1992, the HEI Board of Directors ratified management's plan to exit the
nonutility wind energy business because of chronic mechanical problems with its
wind turbines and continuing operating losses. In 1993, in connection with the
sale of Hawaiian Electric Renewable Systems, Inc. (HERS) for an amount which was
not material, HEI reversed reserves for HERS' disposal costs that were no longer
needed due to the terms of the sale, resulting in a gain on disposal of $2.0
million (net of $1.2 million of income taxes).
THE HAWAIIAN INSURANCE & GUARANTY COMPANY, 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 concluded
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 of
the State of Hawaii (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 that directors and
officers of HEI, HEIDI and the HIG Group were responsible for the losses
suffered by the HIG Group and claims that HEI and/or HEIDI should be held liable
for HIG's obligations. The lawsuit was settled in 1994 and $32 million was
disbursed to the Rehabilitator. In exchange, all the plaintiffs released their
claims against HEI, its affiliates and their past and present officers and
directors.
The $32 million settlement amount, less income tax benefits and certain
amounts recognized in previously established reserves, resulted in a $15 million
after-tax charge to discontinued operations in 1993. HEI and HEIDI are seeking
reimbursement for the settlement and defense costs from their insurance
carriers. One of the insurance carriers filed a declaratory relief action in the
U.S. District Court for Hawaii seeking resolution of insurance coverage and
other policy issues, and HEI and HEIDI filed counterclaims. On December 15,
1995, the judge ruled on motions for partial summary judgment that had been
argued in June 1995. The District Court found that HEI and HEIDI did not breach
their insurance contract and that the settlement they entered into was
reasonable. Among the issues left for consideration by the Court include
plaintiff's defense of allocation. A trial date has not yet been set. Recoveries
from HEI's insurance carriers, if any, will be recognized when realized.
3 . SEGMENT FINANCIAL INFORMATION
- --------------------------------------------------------------------------------
Segment financial information on page 26 is incorporated herein by reference.
45
<PAGE>
4 . ELECTRIC UTILITY SUBSIDIARY
- --------------------------------------------------------------------------------
Hawaiian Electric Company, Inc. and subsidiaries
Selected consolidated financial information
<TABLE>
<CAPTION>
INCOME STATEMENT DATA
Years ended December 31 1995 1994 1993
- -------------------------------------------------------------------------------
(in thousands)
<S> <C> <C> <C>
REVENUES
Operating revenues...................... $981,990 $907,308 $874,010
Other--nonregulated..................... 6,732 6,411 5,100
- -------------------------------------------------------------------------------
988,722 913,719 879,110
- -------------------------------------------------------------------------------
EXPENSES
Fuel oil................................ 207,001 186,717 213,285
Purchased power......................... 276,364 271,636 258,723
Other operation......................... 137,349 121,740 105,957
Maintenance............................. 47,225 46,427 44,281
Depreciation and amortization........... 67,649 63,779 55,960
Taxes, other than income taxes.......... 92,961 85,877 80,712
Other--nonregulated..................... 1,130 915 627
- -------------------------------------------------------------------------------
829,679 777,091 759,545
- -------------------------------------------------------------------------------
Operating income from regulated and
nonregulated activities................ 159,043 136,628 119,565
Allowance for equity funds used during
construction........................... 10,202 9,064 6,973
Interest and other charges.............. (47,136) (40,187) (37,384)
Allowance for borrowed funds used
during construction.................... 5,112 4,043 3,869
- -------------------------------------------------------------------------------
Income before income taxes and
preferred stock dividends of HECO...... 127,221 109,548 93,023
Income taxes............................ 50,198 43,587 36,897
- -------------------------------------------------------------------------------
Income before preferred stock dividends
of HECO................................ 77,023 65,961 56,126
Preferred stock dividends of HECO....... 4,126 4,316 4,421
- -------------------------------------------------------------------------------
Net income for common stock............. $ 72,897 $ 61,645 $ 51,705
===============================================================================
</TABLE>
BALANCE SHEET DATA
<TABLE>
<CAPTION>
December 31 1995 1994
- -------------------------------------------------------------------------------
(dollars in thousands)
<S> <C> <C>
ASSETS
Utility plant, at cost
Property, plant and equipment................... $2,291,545 $2,129,274
Less accumulated depreciation................... (762,770) (702,945)
Construction in progress........................ 191,460 164,247
- -------------------------------------------------------------------------------
Net utility plant................................. 1,720,235 1,590,576
Accounts receivable, net.......................... 73,053 70,708
Unbilled revenues, net............................ 43,695 38,435
Regulatory assets................................. 97,114 92,524
Other............................................. 82,186 96,877
- -------------------------------------------------------------------------------
$2,016,283 $1,889,120
===============================================================================
CAPITALIZATION AND LIABILITIES
Common stock equity............................... $ 696,905 $ 633,901
Cumulative preferred stock
Not subject to mandatory redemption,
dividend rates of 4.25-8.875%.................. 48,293 48,293
Subject to mandatory redemption,
dividend rates of 7.68-13.75%.................. 41,750 44,844
Long-term debt.................................... 517,209 489,586
- -------------------------------------------------------------------------------
Total capitalization.............................. 1,304,157 1,216,624
Short-term borrowings from
nonaffiliates and affiliate...................... 138,753 117,866
Deferred income taxes............................. 116,963 108,362
Unamortized tax credits........................... 45,935 44,939
Contributions in aid of construction.............. 191,854 178,635
Other............................................. 218,621 222,694
- -------------------------------------------------------------------------------
$2,016,283 $1,889,120
===============================================================================
</TABLE>
46
<PAGE>
CUMULATIVE PREFERRED STOCK. Certain cumulative preferred shares of HECO and its
subsidiaries are redeemable at the option of the respective company at a premium
or par. The remaining cumulative preferred shares are subject to mandatory
sinking fund provisions at par and optional redemption provisions at a premium.
The total sinking fund requirements on preferred stock subject to mandatory
redemption for 1996 through 2000 are $2 million in each year from 1996 to 1999
and $3 million in 2000.
INDEBTEDNESS. See Notes 10 and 11.
MAJOR CUSTOMERS. The electric utility subsidiaries derived 10% of their
operating revenues from the sale of electricity to various federal government
agencies. These revenues amounted to $97 million in 1995, $89 million in 1994
and $91 million in 1993.
COMMITMENTS AND CONTINGENCIES.
FUEL CONTRACTS AND OTHER PURCHASE COMMITMENTS. HECO and its subsidiaries have
contractual agreements to purchase minimum amounts of 0.5% sulfur and 2.0%
sulfur residual fuel oils and 0.4% sulfur diesel fuel through 1997 at prices
which are tied to the market prices of petroleum products in Singapore, Los
Angeles and the U.S. Pacific Northwest, respectively. Based on the average price
per barrel prevailing as of January 1, 1996, the estimated amount of required
purchases for 1996 is $203 million. The actual amount of purchases in 1996 could
vary substantially from this estimate as a result of changes in market prices
and other factors. HECO and its subsidiaries purchased $194 million, $186
million and $205 million of fuel under these or prior contractual agreements in
1995, 1994 and 1993, respectively. New contracts to replace expiring ones are
expected to be entered into in the normal course of business.
At December 31, 1995, HECO and its subsidiaries had purchase commitments,
other than fuel and power purchase contracts, amounting to approximately $75
million.
POWER PURCHASE AGREEMENTS. At December 31, 1995, HECO and its subsidiaries had
power purchase agreements for 469 megawatts (MW) of firm capacity, representing
approximately 22% of the total of their generating capabilities and purchased
power firm capacities. 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 $109 million in each of 1996 and 1997, $106 million in 1998, $109
million in 1999, $102 million in 2000 and $2.0 billion thereafter.
In general, payments under the power purchase agreements for 469 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 payment 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 clause in their rate schedules. HECO and its subsidiaries do not
operate nor participate in the operation of any of the facilities that provide
power under the agreements. Title to the facilities does not pass to HECO nor
its subsidiaries upon expiration of the agreements, and the agreements do not
contain bargain purchase options with respect to the facilities.
INTERIM RATE INCREASES. Amounts recovered under interim rates in excess of
final approved rates are subject to refund with interest. In December 1995, HECO
received final PUC authorization approving an increase in annual revenues of
$9.1 million ($10 million less than the interim increases), effective January 1,
1995, and HECO recorded a refund of $10 million, which will be returned to
customers in the first half of 1996. At December 31, 1995, other previously
recorded revenue amounts recognized under interim rate increases and subject to
refund were not significant.
47
<PAGE>
HELCO POWER SITUATION. In the past few years, HELCO's reserve margin has been
relatively low. HELCO needs additional generating capacity and has been
proceeding with plans to install two 20-MW combustion turbines, followed by an
18-MW heat steam recovery generator, at which time these units would be
converted to a 56-MW (net) combined-cycle unit. However, installation has been
delayed because HELCO has encountered procedural and other difficulties in
obtaining the necessary Conservation District Use Permit amendment (CDUP) and
air permit that would allow the 56-MW unit to be constructed.
In late 1995, a contested case hearing with respect to the CDUP was conducted
and the hearing officer recommended denial of the CDUP application. The Hawaii
Board of Land and Natural Resources (BLNR) may decide to adopt, modify, or
reject the hearing officer's recommendation. The BLNR is scheduled to make a
decision on HELCO's CDUP application by February 26, 1996. If the BLNR denies
HELCO's CDUP application, this would delay, if not prevent, installation of
HELCO's project at the 15-acre site.
The Hawaii Department of Health (DOH) forwarded HELCO's air permit to the
Environmental Protection Agency (EPA) for its approval. In a November 1995
letter to the DOH, the EPA declined to sign HELCO's air permit. HELCO requested
that the EPA reconsider this decision and the EPA agreed to reconsider based on
additional information supplied by HELCO. If the EPA does not sign the permit
issued by the DOH, this would delay, if not prevent, HELCO's project.
Two independent power producers (IPPs) have filed separate complaints against
HELCO with the PUC, alleging that they are entitled to power purchase contracts
to provide HELCO with additional capacity which, under HELCO's current estimates
of generating capacity requirements, would be in place of the planned 56-MW
addition by HELCO. In September 1995, HELCO provided proposals to the two IPPs,
and further negotiations have been undertaken.
If HELCO's negotiations with the IPPs result in a power purchase agreement
and/or if HELCO's combined-cycle unit is not installed, HELCO may be required to
write off a portion of the costs incurred in its efforts to put into service its
combined-cycle unit ($43 million as of December 31, 1995) if such costs
ultimately are not recoverable from customers or others. The $43 million
includes equipment purchases, planning and engineering costs and an allowance
for funds used during construction. Management cannot determine at this time
whether the negotiations with the IPPs will result in a power purchase agreement
or the amount of incurred costs, if any, that may not be recoverable from
customers or others.
HECO POWER OUTAGE. On April 9, 1991, HECO experienced a power outage that
affected all customers on the island of Oahu. Approximately 1,500 pending claims
involving personal injury or economic loss, such as lost profits, because of the
outage will be disposed of on a case by case basis and are not expected to have
a material adverse effect on the Company's financial condition or results of
operations.
Seven direct or indirect business customers 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
outage. The judge in the case ruled that the case would not be certified as a
class action. In January 1996, the case was dismissed pursuant to an immaterial
cash settlement.
In April 1991, the PUC initiated an investigation of the April 9, 1991 outage,
which was consolidated with a pending investigation of an outage that occurred
in 1988. Management cannot predict the timing and outcome of any PUC decision
and order that may be issued, if any, with respect to the outages.
MANAGEMENT SERVICES FEES. HEI charges to HECO and its subsidiaries for general
management and administrative services totaled $2.5 million, $2.4 million and
$2.3 million in 1995, 1994 and 1993, respectively. HEI charges to HECO for data
processing services totaled $3.5 million, $3.6 million and $3.6 million in 1995,
1994 and 1993, respectively.
48
<PAGE>
5 . SAVINGS BANK SUBSIDIARY
- --------------------------------------------------------------------------------
American Savings Bank, F.S.B. and subsidiaries
Selected consolidated financial information
<TABLE>
<CAPTION>
INCOME STATEMENT DATA
Years ended December 31 1995 1994 1993
- -------------------------------------------------------------------------------
(in thousands)
<S> <C> <C> <C>
Interest income......................... $236,694 $ 203,373 $ 188,619
Interest expense........................ 142,705 103,906 92,701
- -------------------------------------------------------------------------------
Net interest income..................... 93,989 99,467 95,918
Provision for loan losses............... (4,887) (3,983) (779)
Other income............................ 17,922 12,152 11,115
Operating, administrative and general
expenses............................... (66,980) (65,111) (62,137)
- -------------------------------------------------------------------------------
Operating income........................ 40,044 42,525 44,117
Income taxes............................ 16,765 17,760 18,835
- -------------------------------------------------------------------------------
Net income.............................. $ 23,279 $ 24,765 $ 25,282
===============================================================================
</TABLE>
BALANCE SHEET DATA
<TABLE>
<CAPTION>
December 31 1995 1994
- -------------------------------------------------------------------------------
(in thousands)
<S> <C> <C>
ASSETS
Cash and equivalents................................ $ 129,678 $ 76,502
Held-to-maturity investment securities.............. 34,720 32,523
Held-to-maturity mortgage-backed securities......... 1,444,832 1,067,287
Loans receivable, net............................... 1,687,801 1,824,055
Other............................................... 75,150 69,829
Goodwill and other intangibles...................... 41,245 45,455
- -------------------------------------------------------------------------------
$3,413,426 $3,115,651
===============================================================================
LIABILITIES AND EQUITY
Deposit liabilities................................. $2,223,755 $2,129,310
Securities sold under agreements to repurchase...... 412,521 123,301
Advances from Federal Home Loan Bank................ 501,274 616,374
Other............................................... 57,973 51,078
- -------------------------------------------------------------------------------
3,195,523 2,920,063
Common stock equity................................. 217,903 195,588
- -------------------------------------------------------------------------------
$3,413,426 $3,115,651
===============================================================================
</TABLE>
INVESTMENT AND MORTGAGE-BACKED SECURITIES. The carrying value and estimated
market value of investment and mortgage-backed securities were summarized as
follow:
<TABLE>
<CAPTION>
December 31 1995 1994
- ----------------------------------------------------------------------------------------------------------------------------------
Gross Gross Estimated Gross Gross Estimated
Carrying unrealized unrealized market Carrying unrealized unrealized market
value gains losses value value gains losses value
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
(in thousands)
Investment securities--
Stock in FHLB
of Seattle............ $ 34,720 $ -- $ -- $ 34,720 $ 32,523 $ -- $ -- $ 32,523
Mortgage-backed
securities:
Private-issue....... 744,200 3,947 (4,978) 743,169 707,260 243 (28,858) 678,645
FHLMC............... 143,514 2,617 (118) 146,013 75,546 1,899 (1,331) 76,114
GNMA................ 74,436 1,367 (585) 75,218 78,693 185 (6,285) 72,593
FNMA................ 482,682 6,938 (3,649) 485,971 205,788 557 (14,547) 191,798
- ----------------------------------------------------------------------------------------------------------------------------------
1,444,832 14,869 (9,330) 1,450,371 1,067,287 2,884 (51,021) 1,019,150
- ----------------------------------------------------------------------------------------------------------------------------------
$1,479,552 $14,869 $(9,330) $1,485,091 $1,099,810 $2,884 $(51,021) $1,051,673
==================================================================================================================================
</TABLE>
ASB has private-issue mortgage-backed securities and mortgage-backed securities
purchased from the Federal Home Loan Mortgage Corporation (FHLMC), Government
National Mortgage Association (GNMA) and Federal National Mortgage Association
(FNMA). All such mortgage-backed securities as of December 31, 1995 are
classified as held-to-maturity securities.
Contractual maturities are not presented for ASB's mortgage-backed securities
held for investment because these securities are not due at a single maturity
date.
The weighted average interest rate for mortgage-backed securities at December
31, 1995 and 1994 was 6.87% and 6.21%, respectively.
Mortgage-backed securities with a carrying value of approximately $711 million
and $862 million at December 31, 1995 and 1994, respectively, were pledged as
collateral to secure public funds, deposits with the Federal Reserve Bank of San
Francisco and advances from the FHLB of Seattle. At December 31, 1995 and 1994,
mortgage-backed securities sold under agreements to repurchase had a carrying
value of $442 million and $137 million, respectively.
49
<PAGE>
ASB did not sell mortgage-backed securities or other securities held for
investment in 1995, 1994 or 1993.
In November 1995, the FASB issued a special report, "A Guide to Implementation
of Statement 115 on Accounting for Certain Investments in Debt and Equity
Securities." In connection with the guidance provided in the special report, the
FASB indicated that an enterprise may reassess the appropriateness of the
classifications of all securities held at that time and account for any
resulting reclassifications at fair value in accordance with the requirements of
SFAS No. 115. Such reclassifications were required to occur no later than
December 31, 1995. The guidance indicated that reclassifications from the held-
to-maturity category that resulted from this one-time reassessment would not
call into question the intent of an enterprise to hold other debt securities to
maturity in the future. In accordance with the implementation guidance
provided in the special report, ASB transferred approximately $50 million of
mortgage-backed securities previously classified as held-to-maturity securities
to trading account securities on November 28, 1995.
In 1995, proceeds from the sale of trading account securities (transferred
from mortgage-backed securities classified as held-to-maturity) were
approximately $53 million, resulting in a net gain of $3.9 million. In 1994 and
1993, proceeds from the sale of trading securities were approximately $59
million and $30 million, respectively, resulting in a net loss of $2.0 million
and a net gain of $0.1 million, respectively.
LOANS RECEIVABLE. Loans receivable consisted of the following:
<TABLE>
<CAPTION>
December 31 1995 1994
- -------------------------------------------------------------------
(in thousands)
<S> <C> <C>
Real estate loans
Conventional.......................... $1,474,232 $1,636,282
Construction and development.......... 21,285 32,074
Troubled debt restructurings.......... 15,982 16,151
- -------------------------------------------------------------------
1,511,499 1,684,507
Loans secured by savings deposits....... 15,688 15,378
Consumer loans.......................... 170,743 144,505
Commercial loans........................ 34,666 27,981
- -------------------------------------------------------------------
1,732,596 1,872,371
Undisbursed portion of loans in process. (16,597) (18,312)
Deferred fees and discounts, including
net purchase accounting discounts...... (15,282) (21,211)
Allowance for loan losses............... (12,916) (8,793)
- -------------------------------------------------------------------
$1,687,801 $1,824,055
===================================================================
</TABLE>
At December 31, 1995 and 1994, the weighted average interest rate for loans
receivable was 8.23% and 7.73%, respectively.
At December 31, 1995, impaired loans were $17 million and consisted of $14
million of income property loans and $3 million of residential real estate loans
(one to four units). The average recorded investment in impaired loans during
1995 was $18 million.
At December 31, 1995 and 1994, nonaccrual and renegotiated loans were $28
million and $25 million, respectively.
ASB services real estate loans ($697 million, $327 million and $178 million at
December 31, 1995, 1994 and 1993, respectively) which are not included in the
accompanying consolidated financial statements. Fees earned for servicing loans
are reported as income when the related mortgage loan payments are collected.
Loan servicing costs are charged to expense as incurred.
Mortgage loan commitments of approximately $31 million are not reflected in
the consolidated balance sheet as of December 31, 1995. Of such commitments, $8
million were for variable-rate mortgage loans and $23 million were for fixed-
rate mortgage loans.
ALLOWANCE FOR LOAN LOSSES. For 1995, 1994 and 1993, net charge-offs amounted to
$0.8 million, $0.5 million and $0.6 million, respectively. For 1995, 1994 and
1993, the ratio of net charge-offs to average loans outstanding was 0.04%,
0.03%, and 0.04%, respectively. At December 31, 1995 and 1994, the allowance for
loan losses for impaired loans was $1.7 million and $2.0 million, respectively.
For 1995, net charge-offs for impaired loans (included in net charge-offs above)
amounted to $0.4 million.
REAL ESTATE ACQUIRED IN SETTLEMENT OF LOANS. At December 31, 1995 and 1994, ASB
had real estate acquired in settlement of loans of $2.7 million and $0.8
million, respectively.
50
<PAGE>
DEPOSIT LIABILITIES. Deposit liabilities consisted of the following:
<TABLE>
<CAPTION>
December 31 1995 1994
- ---------------------------------------------------------------------------
Weighted Weighted
average average
rate Amount rate Amount
- ---------------------------------------------------------------------------
<S> <C> <C> <C> <C>
(dollars in thousands)
Commercial checking...... --% $ 22,535 --% $ 18,444
Other checking........... 1.88 253,669 2.39 250,350
Passbook................. 3.49 919,211 3.49 1,112,230
Money market............. 3.71 64,783 3.51 70,860
Term certificates........ 5.86 963,557 5.08 677,426
- ---------------------------------------------------------------------------
4.30% $2,223,755 3.84% $2,129,310
===========================================================================
</TABLE>
At December 31, 1995 and 1994, deposit accounts of $100,000 or more totaled $457
million and $407 million, respectively.
The approximate scheduled maturities of term certificates outstanding at
December 31, 1995 for 1996 through 2000 were $771 million in 1996, $91 million
in 1997, $15 million in 1998, $18 million in 1999 and $14 million in 2000.
Interest expense on savings deposits by type of deposit was as follows:
<TABLE>
<CAPTION>
Years ended December 31 1995 1994 1993
- ----------------------------------------------------------
(in thousands)
<S> <C> <C> <C>
Interest-bearing checking... $ 5,535 $ 5,997 $ 6,679
Passbook.................... 34,039 42,624 42,021
Money market................ 2,287 2,670 3,758
Term certificates........... 47,435 25,218 25,193
- ----------------------------------------------------------
$89,296 $76,509 $77,651
==========================================================
</TABLE>
SECURITIES SOLD UNDER AGREEMENTS TO REPURCHASE. At December 31, 1995,
securities sold under agreements to repurchase consisted of mortgage-backed
securities sold under fixed-coupon agreements. The FHLMC, GNMA and FNMA
mortgage-backed securities are book-entry securities and were delivered by
appropriate entry into the counterparties' accounts at the Federal Reserve
System. The remaining securities underlying the agreements were delivered to the
brokers/dealers who arranged the transactions. The carrying value of securities
underlying the agreements remained in ASB's asset accounts and the obligation to
repurchase securities sold is reflected as a liability in the consolidated
balance sheet. At December 31, 1995 and 1994, approximately $413 million and
$123 million, respectively, of agreements to repurchase identical securities
were outstanding. At December 31, 1995 and 1994, the weighted average rate on
securities sold under agreements to repurchase was 5.84% and 6.22%,
respectively, and the weighted average remaining days to maturity was 164 days
and 118 days, respectively. During 1995, 1994 and 1993, securities sold under
agreements to repurchase averaged $277 million, $21 million and $20 million,
respectively, and the maximum amount outstanding at any month-end was $413
million, $123 million and $27 million, respectively.
At December 31, 1995, securities sold under agreements to repurchase were
summarized as follows:
<TABLE>
<CAPTION>
Collateralized by
mortgage-backed securities
--------------------------
Weighted Carrying value,
Repurchase average including acc- Market
Maturity liability rate rued interest value
- -------------------------------------------------------------------------------
(dollars in thousands)
<S> <C> <C> <C> <C>
30 to 90 days $ 53,595 5.78% $ 58,491 $ 57,259
Over 90 days 358,926 5.85 385,882 381,075
- -------------------------------------------------------------------------------
$412,521 5.84% $444,373 $438,334
===============================================================================
</TABLE>
ADVANCES FROM FEDERAL HOME LOAN BANK. Advances from the FHLB of Seattle,
secured by mortgage-backed securities and stock in the FHLB of Seattle, were
summarized as follows:
<TABLE>
<CAPTION>
December 31 1995 1994
- -------------------------------------------------------------------------------
Weighted Weighted
average rate Amount average rate Amount
- -------------------------------------------------------------------------------
(dollars in thousands)
<S> <C> <C> <C> <C>
Due in
1995..................... na na 6.39% $337,822
1996..................... 6.81% $206,060 6.56 116,060
1997..................... 5.77 94,800 5.77 94,800
1998..................... 4.96 36,393 4.96 36,392
1999..................... 4.98 20,300 4.98 20,300
2000..................... 5.27 15,400 4.98 11,000
Thereafter............... 7.44 128,321 na na
- -------------------------------------------------------------------------------
6.52% $501,274 6.17% $616,374
===============================================================================
</TABLE>
na Not applicable.
As a member of the FHLB system, ASB is required to own a specific number of
shares of capital stock of the FHLB of Seattle and is required to maintain cash
and investments in U.S. Government and other qualifying securities in an amount
equal to 5% of the amount of its savings accounts and other obligations due
within one year.
51
<PAGE>
COMMON STOCK EQUITY. As of December 31, 1995, ASB was in compliance with the
minimum capital requirements under the Office of Thrift Supervision regulations.
MANAGEMENT SERVICES FEES. HEI expenses allocated to the savings bank segment
for general management and administrative services totaled $0.8 million in each
year from 1993 to 1995.
PROPOSED LEGISLATION AFFECTING FINANCIAL INSTITUTIONS. The deposit accounts of
ASB and other thrifts are insured by the Savings Association Insurance Fund
(SAIF). The deposit accounts of commercial banks are insured by the Bank
Insurance Fund (BIF). The SAIF and BIF are administered by the Federal Deposit
Insurance Corporation (FDIC). In order to capitalize these funds, thrifts and
banks have in the past paid costs of insurance ranging from 23 cents to 31 cents
per $100 of deposits. However, under existing law these assessment rates drop
when the SAIF and BIF individually reach a designated 1.25% reserve ratio. The
BIF reached the designated reserve ratio in 1995, but the SAIF is unlikely to do
so at present insurance rates for several years. Effective in January 1996,
well-capitalized banks pay only the legally required annual minimum of $2,000
for BIF insurance. For all other BIF institutions, the FDIC deposit insurance
assessment rates range from 3 to 27 cents per $100 of deposits. While the FDIC
reduced the deposit assessments paid by banks, it maintained the 23 to 31 cents
per $100 of deposits assessment for thrifts, depending on their risk
classification. This disparity places ASB and other thrifts at a disadvantage in
competing with commercial banks.
There have been a number of legislative proposals to address this situation,
including making a one-time or phased-in assessment of thrifts to permit
capitalization of the SAIF up to required levels, followed by a merger of the
two funds; eliminating or reducing the disparity in the assessment rates paid by
banks or thrifts if the SAIF is recapitalized through the assessment; and
merging bank and thrift charters. Certain of these proposals, if adopted, could
have a material adverse effect on the Company. For example, if a one-time
assessment of 85 cents for every $100 of deposits is imposed, it is estimated
that ASB would be assessed approximately $18 million on a pretax basis ($11
million after-tax), based on ASB's deposit liabilities as of March 31, 1995. If
thrift and bank charters are merged, HEI and its other subsidiaries might become
subject to the restrictions on the permissible activities of a bank holding
company. While certain of the proposals under consideration would grandfather
the activities of existing savings and loan holding companies, management cannot
predict whether or in what form any of these proposals might ultimately be
adopted or the extent to which the business of the Company might be affected.
6 . REAL ESTATE SUBSIDIARY
- --------------------------------------------------------------------------------
MPC engages in real estate development activities, both directly and through
joint ventures. MPC's real estate development investments in residential
projects are targeted for Hawaii's owner-occupant market. MPC's subsidiaries are
currently involved in the active development of five residential projects on the
islands of Oahu, Maui and Hawaii.
Residential development generally requires a long lead time to obtain
necessary zoning changes, building permits and other required approvals. MPC's
projects are subject to the usual risks of real estate development, including
fluctuations in interest rates, the receipt of timely and appropriate state and
local zoning and other necessary approvals, possible cost overruns and
construction delays, adverse changes in general commerce and local market
conditions, compliance with applicable environmental and other regulations, and
potential competition from other new projects and resales of existing
residences.
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 totaled $50 million and
$51 million at December 31, 1995 and 1994, respectively. MPC's real estate
development investments are recorded at the lower of cost or management's best
estimates of the amounts expected to be realized upon disposition of the
underlying assets. The amounts MPC will ultimately realize could differ
materially from the recorded amounts.
RELATED PARTY TRANSACTIONS. Two joint ventures involve partnerships in which a
director of HEI has significant interests. Another joint venture involves a
corporate partner in which the family of an HEI officer has a significant
interest. Investments in joint ventures with related parties totaled $13 million
at December 31, 1995 and 1994.
52
<PAGE>
COMMITMENTS AND CONTINGENCIES. At December 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 $2.0 million of
outstanding loans and $0.3 million of additional undrawn loan facilities and
(ii) payment guaranties under which MPC or its subsidiaries were severally
contingently liable for $5.6 million of outstanding loans and $4.6 million of
additional undrawn loan facilities. All such loans are collateralized by real
property. At December 31, 1995, HEI had agreed with the lenders of construction
loans and loan facilities, of which approximately $10.3 million was outstanding
and $5.7 million was undrawn, that it will maintain ownership of 100% 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.
7 . OTHER INVESTMENTS
- --------------------------------------------------------------------------------
Other investments, which have no ready market, consisted of the following:
<TABLE>
<CAPTION>
December 31 1995 1994
- ------------------------------------------------------------
(in thousands)
<S> <C> <C>
Leveraged leases (see Note 8)........... $53,379 $54,372
Real estate joint venture interests..... 12,666 15,259
Other................................... 8,280 7,666
- ------------------------------------------------------------
$74,325 $77,297
============================================================
</TABLE>
Realized gains and losses from the sale and writedown of other investments were
not material in 1995, 1994 or 1993.
8 . INVESTMENT IN LEVERAGED LEASES
- --------------------------------------------------------------------------------
HEIIC owns commercial buildings which are subject to several leveraged lease
agreements entered into in 1987. The initial lease terms expire in 2009 and
2010, after which the lessees have options to renew the leases at fixed rentals
for additional periods of up to 28 years. The buildings revert back to HEIIC at
the end of the last renewal term if not purchased by the lessees.
HEIIC also has a 15% ownership interest in an 818-MW coal-fired generating
unit, which is subject to a leveraged lease agreement entered into in 1985 and
expiring in 2013. The lessee has options to renew the lease at fixed rentals for
at least 8.5 additional years, and thereafter at fair market rentals.
In 1995, HEIIC sold one commercial building to a lessee pursuant to the
provisions of the leveraged lease agreement and recorded a net loss of $1.3
million on the sale.
In 1993, HEIIC refinanced approximately $13 million of nonrecourse debt
supporting one of the leveraged leases, reducing the interest rate from 16.75%
to 8.68%. As a result of the refinancing, 1993 net income increased by $1.1
million and an additional $7.5 million of net income from the leveraged lease
will be recognized over the remaining life of the lease.
HEIIC's net investment in leveraged leases was as follows:
<TABLE>
<CAPTION>
December 31 1995 1994
- ---------------------------------------------------------------
(in thousands)
<S> <C> <C>
Rentals receivable, net of principal
and interest on nonrecourse debt....... $ 57,732 $ 61,994
Estimated residual value of leased
assets................................. 33,062 35,266
Less unearned income.................... (37,415) (42,888)
- ---------------------------------------------------------------
Investment in leveraged leases.......... 53,379 54,372
Less deferred income taxes arising from
leveraged leases....................... (44,952) (46,277)
- ---------------------------------------------------------------
$ 8,427 $ 8,095
===============================================================
</TABLE>
9 . REGULATORY ASSETS
- --------------------------------------------------------------------------------
In accordance with SFAS No. 71, "Accounting for the Effects of Certain Types of
Regulation," the Company's financial statements reflect assets and costs of HECO
and its subsidiaries and YB based on current cost-based rate-making regulations.
Continued accounting under SFAS No. 71 requires that certain criteria be met. A
utility's operations or portion of operations can cease to meet the criteria for
various reasons, including a change in the method of regulation or a change in
the competitive environment for regulated services. A utility whose operations
or portion of operations cease to meet these criteria should discontinue
application of SFAS No. 71 and write off any regulatory assets and liabilities
for those operations that no longer meet the requirements of SFAS No. 71.
Management believes HECO and its subsidiaries' and YB's operations currently
satisfy the SFAS No. 71 criteria. However, if events or circumstances should
change so that the criteria are no longer satis-
53
<PAGE>
fied, management believes that a material adverse effect on the Company's
results of operations and financial position may result.
Regulatory assets at December 31, 1995 and 1994 included the following
deferred costs:
<TABLE>
<CAPTION>
December 31 1995 1994
- ------------------------------------------------------------
(in thousands)
<S> <C> <C>
Postretirement benefits other than
pensions............................... $32,917 $36,670
Income taxes............................ 31,772 23,522
Integrated resource planning costs...... 9,425 7,189
Unamortized debt expense on retired
issuances.............................. 6,860 7,513
Vacation earned, but not yet taken...... 6,236 5,972
Preliminary plant costs on suspended
project................................ 5,759 5,768
Computer system development costs....... 4,602 6,090
Other................................... 2,122 2,533
- ------------------------------------------------------------
$99,693 $95,257
============================================================
</TABLE>
In 1995, HECO applied to the PUC for recovery of the preliminary plant costs on
a suspended project.
10 . SHORT-TERM BORROWINGS
- --------------------------------------------------------------------------------
Short-term borrowings at December 31, 1995 and 1994 had a weighted average
interest rate of 6.2% and 6.5%, respectively, and consisted of commercial paper
and bank loans.
At December 31, 1995 and 1994, HEI maintained bank lines of credit which
totaled $55 million and $50 million, respectively, and HECO maintained bank
lines of credit which totaled $145 million and $125 million, respectively. The
HEI and HECO lines of credit support the issuance of commercial paper. There
were no borrowings under any line of credit during 1995 or 1994.
11 . LONG-TERM DEBT
- --------------------------------------------------------------------------------
Long-term debt consisted of the following:
<TABLE>
<CAPTION>
December 31 1995 1994
- ---------------------------------------------------------------
(dollars in thousands)
<S> <C> <C>
First mortgage bonds
4.55-5.75%, due in various years
through 1997.......................... $ 13,000 $ 24,000
7.63-7.88%, due in various years
through 2003.......................... 22,000 22,000
- ---------------------------------------------------------------
35,000 46,000
- ---------------------------------------------------------------
Obligations to the State of Hawaii for
the repayment of special purpose
revenue bonds issued on behalf of
electric utility subsidiaries
6.88% refunding series 1987, due 2012.. 57,500 57,500
7.20% series 1984, due 2014............ 11,400 11,400
7.63% series 1988, due 2018............ 50,000 50,000
7.35-7.60% series 1990, due 2020....... 100,000 100,000
6.55% series 1992, due 2022............ 60,000 60,000
5.45% series 1993, due 2023............ 100,000 100,000
6.60% series 1995A, due 2025........... 47,000 --
- ---------------------------------------------------------------
425,900 378,900
Less funds on deposit with trustees.... (943) (3,391)
Less unamortized discount.............. (2,748) (1,923)
- ---------------------------------------------------------------
422,209 373,586
- ---------------------------------------------------------------
Promissory notes
4.85-5.83%, due in various years
through 1998.......................... 60,000 70,000
6.26-7.59%, due in various years
through 2005.......................... 143,000 113,000
8.20-9.90%, due in various years
through 2011.......................... 55,300 72,700
Variable rate (6.32% at December 31,
1995), due 1999....................... 35,000 35,000
Variable rate (10.25% at December 31,
1995), due 2001....................... 7,954 7,954
- ---------------------------------------------------------------
301,254 298,654
- ---------------------------------------------------------------
$758,463 $718,240
===============================================================
</TABLE>
54
<PAGE>
The first mortgage bonds are secured by separate indentures which purport to be
liens on substantially all of the real and personal property now owned or
hereafter acquired by the respective electric utility subsidiaries.
At December 31, 1995, the aggregate principal payments required on long-term
debt for 1996 through 2000 are $73 million in 1996, $65 million in 1997, $32
million in 1998, $42 million in 1999 and $12 million in 2000.
12 . COMMON STOCK
- --------------------------------------------------------------------------------
Changes to common stock were as follows:
<TABLE>
<CAPTION>
1995 1994 1993
- ------------------------------------------------------------------------------------------------
Common Common Common
Shares stock Shares stock Shares stock
- ------------------------------------------------------------------------------------------------
(in thousands)
<S> <C> <C> <C> <C> <C> <C>
Balance, beginning of year...... 28,655 $546,254 27,675 $514,710 24,762 $409,257
Issuance of common stock
Public offering............... -- -- -- -- 2,000 74,500
Dividend reinvestment and
stock purchase plan.......... 786 27,892 869 28,087 758 28,013
HEI retirement savings and
other plans.................. 332 11,324 111 3,605 155 5,637
Expenses and other.............. -- (83) -- (148) -- (2,697)
- ------------------------------------------------------------------------------------------------
Balance, end of year............ 29,773 $585,387 28,655 $546,254 27,675 $514,710
================================================================================================
</TABLE>
At December 31, 1995, the Company had reserved a total of 3.4 million shares of
common stock for future issuance under the Dividend Reinvestment and Stock
Purchase Plan, Hawaiian Electric Industries Retirement Savings Plan, 1987 Stock
Option and Incentive Plan and other plans.
13 . INTEREST EXPENSE
- --------------------------------------------------------------------------------
Interest expense by segment (including amounts capitalized as allowance for
borrowed funds used during construction and excluding interest on nonrecourse
debt on leveraged leases) was as follows:
<TABLE>
<CAPTION>
Years ended December 31 1995 1994 1993
- -----------------------------------------------------------
(in thousands)
<S> <C> <C> <C>
Electric utility.......... $ 44,377 $ 37,340 $ 35,287
Other..................... 18,483 16,688 17,905
- -----------------------------------------------------------
62,860 54,028 53,192
Savings bank.............. 142,705 103,906 92,701
- -----------------------------------------------------------
$205,565 $157,934 $145,893
===========================================================
</TABLE>
14 . INCOME TAXES
- --------------------------------------------------------------------------------
The Company adopted the provisions of SFAS No. 109, "Accounting for Income
Taxes," on January 1, 1993. The resulting change in the method of accounting for
income taxes had no material effect on net income for 1993 primarily due to the
regulated nature of the electric utility subsidiaries and YB. For these PUC
regulated subsidiaries, the net increase in deferred income taxes payable
arising from the adoption of SFAS No. 109 is recoverable through future rates
and has been recorded as a regulatory asset. In 1993, additional income tax
expense of $1.8 million was recognized under SFAS No. 109 as a result of the 1%
increase in the maximum corporate income tax rate enacted by the Omnibus Budget
Reconciliation Act of 1993.
Total income tax expense (benefit) included the following components:
<TABLE>
<CAPTION>
Years ended December 31 1995 1994 1993
- --------------------------------------------------------
(in thousands)
<S> <C> <C> <C>
Continuing operations..... $55,740 $53,019 $47,086
Discontinued operations... -- -- (7,982)
- --------------------------------------------------------
$55,740 $53,019 $39,104
========================================================
</TABLE>
55
<PAGE>
The components of income taxes attributable to income from continuing operations
were as follows:
<TABLE>
<CAPTION>
Years ended December 31 1995 1994 1993
- ------------------------------------------------------------
(in thousands)
<S> <C> <C> <C>
Federal
Current.................... $39,187 $40,798 $40,537
Deferred................... 8,352 4,665 (152)
Deferred tax credits, net.. (34) (278) 50
- ------------------------------------------------------------
47,505 45,185 40,435
- ------------------------------------------------------------
State
Current.................... 3,893 3,060 3,385
Deferred................... 1,596 1,218 (475)
Deferred tax credits, net.. 2,746 3,556 3,741
- ------------------------------------------------------------
8,235 7,834 6,651
- ------------------------------------------------------------
$55,740 $53,019 $47,086
============================================================
</TABLE>
A reconciliation of the amount of income taxes attributable to income from
continuing operations computed at the federal statutory rate of 35% to the
amount provided in the Company's consolidated statements of income was as
follows:
<TABLE>
<CAPTION>
Years ended December 31 1995 1994 1993
- ------------------------------------------------------------------------
(in thousands)
<S> <C> <C> <C>
Amount at the federal statutory income
tax rate............................... $46,632 $44,117 $38,070
State income taxes, net of effect on
federal income taxes................... 5,353 5,092 4,323
Preferred stock dividends of electric
utility subsidiaries................... 2,410 2,507 2,281
Other, net.............................. 1,345 1,303 2,412
- ------------------------------------------------------------------------
$55,740 $53,019 $47,086
========================================================================
</TABLE>
The tax effects of temporary differences which give rise to deferred tax assets
and liabilities were as follows:
<TABLE>
<CAPTION>
December 31 1995 1994
- ------------------------------------------------------------------------
(in thousands)
<S> <C> <C>
Deferred tax assets
Property, plant and equipment.................... $ 8,670 $ 7,424
Contributions in aid of construction and
customer advances............................... 53,709 52,892
Other............................................ 31,816 29,947
- ------------------------------------------------------------------------
94,195 90,263
- ------------------------------------------------------------------------
Deferred tax liabilities
Property, plant and equipment.................... 171,205 165,835
Leveraged leases................................. 44,952 46,277
Regulatory asset................................. 11,966 8,897
Other............................................ 48,173 42,184
- ------------------------------------------------------------------------
276,296 263,193
- ------------------------------------------------------------------------
Deferred income taxes............................. $182,101 $172,930
========================================================================
</TABLE>
In assessing the realizability of deferred tax assets, management considers
whether it is more likely than not that some portion or all of the deferred tax
assets will not be realized. The ultimate realization of deferred tax assets is
dependent upon the generation of future taxable income during the periods in
which those temporary differences become deductible. Management considers the
scheduled reversal of deferred tax liabilities, projected future taxable income,
and tax planning strategies in making this assessment.
Based upon the level of historical taxable income and projections for future
taxable income over the periods which the deferred tax assets are deductible,
management believes it is more likely than not the Company will realize the
benefits of these deductible differences. There was no valuation allowance
provided for deferred tax assets at December 31, 1995 or 1994.
15 . CASH FLOWS
- --------------------------------------------------------------------------------
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION. In 1995, 1994 and 1993, cash
paid for interest (including interest paid by the savings bank, but excluding
interest paid on nonrecourse debt on leveraged leases), net of capitalized
amounts which were not material, amounted to $196 million, $154 million and $142
million, respectively. In 1995, 1994 and 1993, cash paid for interest on
nonrecourse debt on leveraged leases amounted to $9 million, $9 million and $10
million, respectively.
In 1995, 1994 and 1993, cash paid for income taxes amounted to $44 million,
$47 million and $6 million, respectively. In 1993, tax benefits were realized
from the discontinued operations of the HIG Group.
SUPPLEMENTAL DISCLOSURES OF NONCASH ACTIVITIES. ASB received $409 million and
$203 million in mortgage-backed securities in exchange for loans in 1995 and
1994, respectively. In 1995, ASB transferred $50 million of mortgage-backed
securities from held-to-maturity securities to trading account securities.
Common stock dividends reinvested by shareholders in HEI common stock in
noncash transactions amounted to $20 million, $18 million and $17 million in
1995, 1994 and 1993, respectively.
56
<PAGE>
Effective in 1993, HECO recognized the estimated fair value of noncash
contributions in aid of construction received in 1993 and prior years, which
increased both plant and contributions in aid of construction by $26 million.
The estimated fair value of noncash contributions in aid of construction
received in 1995 and 1994 amounted to $11 million and $6 million, respectively.
The allowance for equity funds used during construction, which was capitalized
as part of the cost of electric utility plant, amounted to $10 million, $9
million and $7 million in 1995, 1994 and 1993, respectively.
In 1994, a consolidated real estate joint venture, in which the Company has a
controlling interest, closed on an option to purchase approximately 147 acres of
land. Of the total land purchase price of $10 million, the joint venture issued
mortgage notes payable of $8 million in noncash consideration.
16 . STOCK OPTION AND INCENTIVE PLAN
- --------------------------------------------------------------------------------
Under the 1987 Stock Option and Incentive Plan, as amended, an aggregate of
1,250,000 shares of common stock may be issued to officers and key employees as
incentive stock options, nonqualified stock options, restricted stock, stock
appreciation rights, stock payments or dividend equivalents.
Only nonqualified stock options have been granted to date. For these options,
the purchase price of common stock was based on the market value of the common
stock on or near the date of grant. Options may be exercised as determined by
the Compensation Committee of the Board of Directors, but in no event after 10
years from the date of grant in the case of nonqualified stock options.
Nonqualified stock option transactions were as follows:
<TABLE>
<CAPTION>
1995 1994 1993
- ----------------------------------------------------------------------------
<S> <C> <C> <C>
Options outstanding, beginning of year.. 568,333 463,458 359,000
Granted................................. 141,000 111,500 123,000
Exercised............................... (150,250) -- (18,542)
Canceled................................ (6,000) (6,625) --
- ----------------------------------------------------------------------------
Options outstanding, end of year........ 553,083 568,333 463,458
============================================================================
Options exercisable, December 31........ 303,458 327,958 235,458
============================================================================
Price range for options
Exercised
High.................................. $38 $-- $36
Low................................... 30 -- 30
Outstanding, December 31
High.................................. 41 41 41
Low................................... 33 30 30
============================================================================
</TABLE>
17 . RETIREMENT BENEFITS
- --------------------------------------------------------------------------------
PENSIONS. The Company has several defined benefit pension plans which cover
substantially all employees. In general, benefits are based on the employees'
years of service and base compensation.
The funded status of the pension plans and the amounts recognized in the
consolidated financial statements were as follows:
<TABLE>
<CAPTION>
December 31 1995 1994
- ---------------------------------------------------------------
(in thousands)
<S> <C> <C>
Accumulated benefit obligation
Vested................................. $372,967 $308,888
Nonvested.............................. 40,271 32,948
- ---------------------------------------------------------------
$413,238 $341,836
===============================================================
Projected benefit obligation............ $515,280 $420,512
Plan assets at fair value, primarily
equity securities and fixed income
investments............................ 505,404 400,956
- ---------------------------------------------------------------
Projected benefit obligation in excess
of plan assets......................... 9,876 19,556
Unrecognized prior service cost......... (3,158) (3,600)
Unrecognized net gain................... 9,708 6,844
Unrecognized net transition obligation.. (17,510) (19,878)
Adjustment required to recognize
minimum liability...................... 984 1,251
- ---------------------------------------------------------------
Accrued (prepaid) pension liability..... $ (100) $ 4,173
===============================================================
</TABLE>
57
<PAGE>
Plans with an accumulated benefit obligation exceeding plan assets at fair value
were not material. For all pension plans, at December 31, 1995 and 1994, the
assumed discount rate used to measure the projected benefit obligation was 7%
and 8%, respectively.
Net periodic pension cost included the following components:
<TABLE>
<CAPTION>
Years ended December 31 1995 1994 1993
- ----------------------------------------------------------------------------
(in thousands)
<S> <C> <C> <C>
Service cost--benefits earned during
the period............................. $ 14,805 $ 16,834 $ 11,423
Interest cost on projected benefit
obligation............................. 32,929 30,067 27,350
Actual loss (return) on plan assets..... (105,674) 11,520 (56,710)
Amortization and deferral, net.......... 70,692 (39,001) 35,607
- ----------------------------------------------------------------------------
$ 12,752 $ 19,420 $ 17,670
============================================================================
</TABLE>
Of these net periodic pension costs, $9 million, $14 million and $12 million
were expensed in 1995, 1994 and 1993, respectively, and the remaining amounts
were charged primarily to electric utility plant.
For 1995, 1994 and 1993, the expected long-term rate of return on assets was
9%, 8% and 8%, respectively, and the assumed rate of increase in future
compensation levels was 5%.
For most of the plans, the transition obligation (the projected benefit
obligation in excess of plan assets at January 1, 1987) is being amortized
ratably over 16 years beginning in 1987.
POSTRETIREMENT BENEFITS OTHER THAN PENSIONS. 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.
Health benefits are provided with contributions by retirees toward costs based
on their years of service and retirement date. Generally, employees are eligible
for these benefits if, upon retirement, they participate in one of the Company's
defined benefit pension plans. The Company began funding some of these benefits
in December 1994.
In February 1992, the PUC opened a generic docket to determine whether SFAS
No. 106, "Employers' Accounting for Postretirement Benefits Other Than
Pensions," should be adopted for rate-making purposes. Effective January 1,
1993, the Company adopted the provisions of SFAS No. 106. In November 1994, the
PUC issued a decision and order authorizing recovery of the full cost of
postretirement benefits other than pensions effective January 1, 1995. HECO,
HELCO, MECO and YB were required to fund the recovered SFAS No. 106 costs. The
regulatory asset established from January 1, 1993 through December 31, 1994 for
postretirement benefits other than pensions is being amortized ratably over 18
years beginning in 1995 for rate-making and financial reporting purposes. In
December 1995, however, the PUC issued a decision and order which did not
provide revenue to cover HECO's costs relating to postretirement executive life
insurance and HECO and its subsidiaries wrote off the regulatory asset relating
to such costs, resulting in a 1995 after-tax charge of $1.1 million.
The funded status of the postretirement benefit plans and the amounts
recognized in the consolidated financial statements were as follows:
<TABLE>
<CAPTION>
December 31 1995 1994
- -------------------------------------------------------------------
(in thousands)
<S> <C> <C>
Accumulated postretirement benefit obligation
Retirees................................ $ 64,460 $ 61,932
Fully eligible active plan participants. 45,873 36,287
Other active plan participants.......... 59,456 49,427
- -------------------------------------------------------------------
169,789 147,646
Plan assets at fair value, primarily
fixed income investments................. 24,994 2,833
- -------------------------------------------------------------------
Accumulated postretirement benefit
obligation in excess of plan assets...... 144,795 144,813
Unrecognized net gain..................... 3,457 8,423
Unrecognized net transition obligation.... (112,101) (118,701)
- -------------------------------------------------------------------
Accrued postretirement benefits
liability................................ $ 36,151 $ 34,535
===================================================================
</TABLE>
At December 31, 1995 and 1994, the assumed discount rate used to measure the
accumulated postretirement benefit obligation was 7% and 8%, respectively.
58
<PAGE>
Net periodic postretirement benefit cost included the following components:
<TABLE>
<CAPTION>
Years ended December 31 1995 1994 1993
- ----------------------------------------------------------------
(in thousands)
<S> <C> <C> <C>
Service cost..................... $ 5,283 $ 5,269 $ 5,712
Interest cost.................... 11,539 10,066 11,216
Actual return on plan assets..... (997) -- --
Amortization and deferral, net... 6,959 6,734 6,733
- ----------------------------------------------------------------
$22,784 $22,069 $23,661
================================================================
</TABLE>
Of the net periodic postretirement benefit costs, $17 million, $3 million and $3
million were expensed in 1995, 1994 and 1993, respectively, and the remaining
amounts were charged primarily to electric utility plant in 1995 and to
regulatory assets, electric utility plant and other accounts in 1994 and 1993.
In 1995, the electric utilities and YB began recovering most of the costs of
postretirement benefits other than pensions from customers.
For 1995, the expected long-term rate of return on assets for trusts which
were not subject to income taxes was 9%. At December 31, 1995, trusts holding
plan assets with a fair value of $6.1 million were subject to income taxes at a
rate of 45%. The after-tax expected long-term rate of return on these plan
assets was 6% for 1995. For 1995, 1994 and 1993, the assumed rate of increase
in future compensation levels was 5%.
At December 31, 1995, the assumed health care trend rates for 1996 and future
years were as follows: medical, 6.5%; dental, 5.0%; and vision, 4.0%. The health
care cost trend rate assumption can have a significant effect on the amounts
reported. For example, a 1% increase in the trend rate for health care costs
would have increased the accumulated postretirement benefit obligation at
December 31, 1995 by approximately $23 million and the service and interest
costs for 1995 by approximately $3 million.
The transition obligation (the accumulated postretirement benefit obligation
at January 1, 1993) is being amortized ratably over 20 years beginning in 1993.
18 . REGULATORY RESTRICTIONS ON NET ASSETS
- --------------------------------------------------------------------------------
At December 31, 1995, net assets (assets less liabilities) of approximately $545
million were not available for transfer to HEI from its subsidiaries in the form
of dividends, loans or advances without regulatory approval. However, HEI
expects that the regulatory restrictions will not materially affect the
operations of the Company nor its ability to pay dividends on its common stock.
19 . SIGNIFICANT GROUP CONCENTRATIONS OF CREDIT RISK
- --------------------------------------------------------------------------------
Substantially all of the Company's business activity is with customers located
in the State of Hawaii. Most of the financial instruments reflected on the
consolidated balance sheets are based in the State of Hawaii, except for the
mortgage-backed securities. Substantially all real estate loans receivable are
secured by real estate in Hawaii. ASB's policy is to require mortgage insurance
on all real estate loans with a loan to appraisal ratio in excess of 80%.
At December 31, 1995, ASB's private-issue mortgage-backed securities
represented whole or participating interests in pools of first mortgage loans
collateralized by real estate in the continental United States, and
approximately 70% of the portfolio was collateralized by real estate in
California. At December 31, 1995, substantially all private-issue mortgage-
backed securities were rated investment grade by various securities rating
agencies.
20 . FAIR VALUE OF FINANCIAL INSTRUMENTS
- --------------------------------------------------------------------------------
The following methods and assumptions were used to estimate the fair value of
each applicable class of financial instruments for which it is practicable to
estimate that value:
CASH AND EQUIVALENTS. The carrying amount approximates fair value because of
the short maturity of these instruments.
LOANS RECEIVABLE. For certain homogeneous categories of loans, such as some
residential mortgages, credit card receivables, and other consumer loans, fair
value is estimated using the quoted market prices for securities backed by
59
<PAGE>
similar loans, adjusted for differences in loan characteristics. The fair value
of other types of loans is estimated by discounting the future cash flows using
the current rates at which similar loans would be made to borrowers with similar
credit ratings and for similar remaining maturities.
MARKETABLE SECURITIES. Fair value is based on quoted market prices or dealer
quotes.
DEPOSIT LIABILITIES. Under SFAS No. 107, "Disclosures about Fair Value of
Financial Instruments," the fair value of demand deposits, savings accounts, and
certain money market deposits is the amount payable on demand at the reporting
date. The fair value of fixed-maturity certificates of deposit is estimated
using the rates currently offered for deposits of similar remaining maturities.
SHORT-TERM BORROWINGS. The carrying amount approximates fair value because of
the short maturity of these instruments.
SECURITIES SOLD UNDER AGREEMENTS TO REPURCHASE. Dealer quotes currently
available to ASB for securities sold under agreements to repurchase with similar
terms and remaining maturities are used to estimate fair value.
ADVANCES FROM FEDERAL HOME LOAN BANK AND LONG-TERM DEBT. Fair value is
estimated based on the quoted market prices for the same or similar issues or on
the current rates offered for debt of the same or similar remaining maturities.
PREFERRED STOCK OF ELECTRIC UTILITY SUBSIDIARIES SUBJECT TO MANDATORY
REDEMPTION. There are no quoted market prices for the electric utility
subsidiaries' preferred stocks. Fair value is estimated based on quoted market
prices for similar issues of preferred stock.
The estimated fair values of certain of the Company's financial instruments
were as follows:
<TABLE>
<CAPTION>
December 31 1995 1994
- -----------------------------------------------------------------------------------------------------------------
Carrying Estimated Carrying Estimated
amount fair value amount fair value
- -----------------------------------------------------------------------------------------------------------------
(in thousands)
<S> <C> <C> <C> <C>
FINANCIAL ASSETS
Cash and equivalents..................................... $ 130,833 $ 130,833 $ 87,623 $ 87,623
Loans receivable, net.................................... 1,687,801 1,757,840 1,824,055 1,756,650
Marketable securities.................................... 1,479,552 1,485,091 1,099,810 1,051,673
Other investments for which it is not practicable to
estimate fair value /1/................................. 8,280 na 7,666 na
FINANCIAL LIABILITIES
Deposit liabilities..................................... 2,223,755 2,228,938 2,129,310 2,111,481
Short-term borrowings................................... 181,825 181,825 136,755 136,755
Securities sold under agreements to repurchase.......... 412,521 408,046 123,301 121,064
Advances from Federal Home Loan Bank.................... 501,274 511,289 616,374 605,271
Long-term debt.......................................... 758,463 773,212 718,240 682,956
PREFERRED STOCK OF ELECTRIC UTILITY SUBSIDIARIES SUBJECT
TO MANDATORY REDEMPTION................................. 41,750 43,737 44,844 46,478
OFF-BALANCE SHEET
Commitments to extend credit /2/
Financial guaranties written /3/
- -----------------------------------------------------------------------------------------------------------------
</TABLE>
/1/ At December 31, 1995 and 1994, the other investments for which it is not
practicable to estimate fair value consists primarily of an investment
representing approximately 10% of the issued common stock of an untraded
company; that investment had a carrying value of $5.0 million and $5.2
million at December 31, 1995 and 1994, respectively. At December 31, 1994,
the total assets reported by this company were $54 million and the common
stockholders' equity was $51 million. For 1994, revenues were $1.2 million,
net realized and unrealized loss on investments was $4.5 million and net
loss was $2.8 million.
/2/ At December 31, 1995 and 1994, neither the commitment fees received on
commitments to extend credit nor the fair value thereof were significant to
the consolidated financial statements of the Company.
/3/ At December 31, 1995 and 1994, MPC or its subsidiaries had issued
guaranties of loans with outstanding balances of $7.6 million and $9.1
million, respectively. All such loans are collateralized by real property.
These guaranties relate to borrowings from third parties which bear
interest at rates ranging from prime plus 1.0% to prime plus 2.0%. It is
not practicable to estimate the fair value of these guaranties.
na Not available.
60
<PAGE>
LIMITATIONS. Fair value estimates are made at a specific point in time, based
on relevant market information and information about the financial instrument.
These estimates do not reflect any premium or discount that could result from
offering for sale at one time the Company's entire holdings of a particular
financial instrument. Because no market exists for a significant portion of the
Company's financial instruments, fair value estimates cannot be determined with
precision. Changes in assumptions could significantly affect the estimates.
Fair value estimates are provided for certain existing on- and off-balance
sheet financial instruments without attempting to estimate the value of
anticipated future business and the value of assets and liabilities that are not
considered financial instruments. In addition, the tax ramifications related to
the realization of the unrealized gains and losses can have a significant effect
on fair value estimates and have not been considered.
21 . QUARTERLY INFORMATION (UNAUDITED)
- --------------------------------------------------------------------------------
Selected quarterly information was as follows:
<TABLE>
<CAPTION>
Quarter ended
- ----------------------------------------------------------------------------------------------- YEAR ENDED
1995 Mar. 31 Jun. 30 Sep. 30 Dec. 31 DEC. 31
- ------------------------------------------------------------------------------------------------------------
(in thousands, except per share amounts)
<S> <C> <C> <C> <C> <C>
Revenues...................................... $306,274 $319,897 $336,881 $332,872 /1/ $1,295,924
Operating income.............................. 44,309 46,070 56,675 40,610 /1/ 187,664
Net income.................................... 17,847 18,880 25,151 15,615 /1/ 77,493
Earnings per common share /2/................. 0.62 0.65 0.86 0.53 /1/ 2.66
Dividends per common share.................... 0.59 0.59 0.59 0.60 2.37
Market price per common share /3/
High......................................... 34.88 36.75 38.38 39.75 39.75
Low.......................................... 32.13 33.38 34.75 37.50 32.13
1994
- ------------------------------------------------------------------------------------------------------------
(in thousands, except per share amounts)
Revenues...................................... $265,042 $284,556 $319,156 $319,769 $1,188,523
Operating income.............................. 33,404 42,955 51,550 46,224 174,133
Net income.................................... 11,788 17,632 22,691 20,919 73,030
Earnings per common share /2/................. 0.42 0.63 0.80 0.73 2.60
Dividends per common share.................... 0.58 0.58 0.58 0.59 2.33
Market price per common share /3/
High......................................... 36.50 34.63 33.88 32.88 36.50
Low.......................................... 32.00 30.25 30.00 29.88 29.88
- ------------------------------------------------------------------------------------------------------------
</TABLE>
/1/ Amounts reported for the quarter ended December 31, 1995 include the
effect of HECO's accrual for a $10 million refund to customers for the
amounts recovered under interim rates in 1995 in excess of final approved
rates, with interest.
/2/ The quarterly earnings per common share are based upon the weighted average
number of shares of common stock outstanding in each quarter.
/3/ Market prices shown are as reported on the NYSE Composite Tape. The common
stock of HEI is traded on the New York and Pacific Stock Exchanges under
the symbol HE.
61
<PAGE>
DIRECTORS
- ---------
Robert F. Clarke, 53 (1)
President and Chief Executive Officer
Hawaiian Electric Industries, Inc.
1989
Don E. Carroll, 54 (2)
President and Chief Executive Officer
Oceanic Cablevision
(cable television broadcasting)
1996
Edwin L. Carter, 70 (1, 3)
Retired President and Chief Executive Officer
Bishop Trust Company, Ltd.
(financial services)
1985
John D. Field, 70 (2)
Retired Vice President-Regulatory Affairs
GTE Service Corporation
(telecommunications services)
1986
Richard Henderson, 67 (1,3)
President
HSC, Inc.
(real estate investment and development)
1981
Victor Hao Li, S.J.D., 54 (2)
Co-chairman
Asia Pacific Consulting Group
(international business consultant)
1988
T. Michael May, 48
President and Chief Executive Officer
Hawaiian Electric Company, Inc.
1995
Bill D. Mills, 44 (3)
Chairman of the Board and Chief Executive Officer
Bill Mills Development and Investment Company, Inc.
(real estate development)
1988
A. Maurice Myers, 55 (4)
Retired President and Chief Operating Officer
America West Airlines, Inc.
(commercial air transportation services)
1991
Ruth M. Ono, Ph.D., 60 (2)
Vice President
The Queen's Health Systems
(hospital and health care services)
1987
Diane J. Plotts, 60 (1, 2)
General Partner
Mideast and China Trading Company
(real estate development)
1987
James K. Scott, Ed.D., 44 (4)
President
Punahou School
(private education)
1995
Oswald K. Stender, 64 (3, 4)
Trustee
Kamehameha Schools/Bishop Estate
(charitable trust)
1993
Kelvin H. Taketa, 41 (2)
Vice President and Director-Asia Pacific Region
The Nature Conservancy
(nonprofit international conservation agency)
1993
Jeffrey N. Watanabe, 53 (1, 3, 4)
Partner
Watanabe, Ing & Kawashima
(private law firm)
1987
COMMITTEES OF THE BOARD OF DIRECTORS
- ------------------------------------
(1) EXECUTIVE:
Richard Henderson, Chairman
(2) AUDIT:
Diane J. Plotts, Chairman
(3) COMPENSATION:
Edwin L. Carter, Chairman
(4) NOMINATING:
Jeffrey N. Watanabe, Chairman
SUBSIDIARY OUTSIDE DIRECTORS
- ----------------------------
Gladys C. Baisa, 55
Executive Director
Maui Economic Opportunity, Inc.
(nonprofit human services agency)
Maui Electric Company, Limited
1995
Jorge G. Camara, M.D., 45
Camara Eye Clinic
(ophthalmology)
American Savings Bank, F.S.B.
1990
Louise K.Y. Ing, 44
Partner
Alston Hunt Floyd & Ing
(private law firm)
American Savings Bank, F.S.B.
1994
Tom C. Kiely, 45
The Kiely Co., Inc.
(marketing consultants)
American Savings Bank, F.S.B.
1994
Mildred D. Kosaki, 71
Specialist in education research
Hawaiian Electric Company, Inc.
1973
Sanford J. Langa, 66
Partner
Langa, Breen & Associates
(private law firm)
Maui Electric Company, Limited
1961
B. Martin Luna, 57
Partner
Carlsmith, Ball, Wichman, Case & Ichiki
(private law firm)
Maui Electric Company, Limited
1978
Denzil W. Rose, 70
Retired President and General Manager
Hawaii Motors, Inc.
(automobile dealership)
Hawaii Electric Light Company, Inc.
1960
Anne M. Takabuki, 39
Vice President and General Counsel
Wailea Resort Company, Ltd.
(resort and commercial development)
Maui Electric Company, Limited
1993
Donald K. Yamada, 64
President
Yamada Diversified Corporation
(construction and trucking services)
Hawaii Electric Light Company, Inc.
1985
Paul C. Yuen, Ph.D., 67
Dean, College of Engineering
University of Hawaii-Manoa
(higher education)
Hawaiian Electric Company, Inc.
1993
Year denotes year of appointment or election to the board of directors
62
