<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 26, 1997
<TABLE>
<CAPTION>
===============================================================================
Exact Name of Registrant Commission I.R.S. Employer
as Specified in Its Charter File Number Identification No.
- --------------------------- ----------- ------------------
<S> <C> <C>
Hawaiian Electric Industries, Inc. 1-8503 99-0208097
===============================================================================
</TABLE>
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 1996 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 26, 1997
2
<PAGE>
<TABLE>
<CAPTION>
SELECTED FINANCIAL DATA
- -----------------------------------------------------------------------------------------------------------------------------------
Hawaiian Electric Industries, Inc.
and subsidiaries
Years ended December 31 1996 1995 1994 1993 1992
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
(dollars in thousands,
except per share amounts)
RESULTS OF OPERATIONS
Revenues.......................... $1,410,572 $1,295,924 $1,188,523 $1,142,170 $1,031,383
Net income (loss)
Continuing operations......... $ 78,658 $ 77,493 $ 73,030 $ 61,684 $ 61,715
Discontinued operations....... -- -- -- (13,025) (73,297)
- -----------------------------------------------------------------------------------------------------------------------------------
$ 78,658 $ 77,493 $ 73,030 $ 48,659 $ (11,582)
===================================================================================================================================
Earnings (loss) per common
share
Continuing operations......... $ 2.60 $ 2.66 $ 2.60 $ 2.38 $ 2.54
Discontinued operations....... -- -- -- (0.50) (3.02)
- -----------------------------------------------------------------------------------------------------------------------------------
$ 2.60 $ 2.66 $ 2.60 $ 1.88 $ (0.48)
===================================================================================================================================
Return on average common
equity........................... 10.5% 11.0% 11.0% 8.2% (2.1)%
===================================================================================================================================
FINANCIAL POSITION *
Total assets...................... $5,935,840 $5,603,745 $5,174,464 $4,521,592 $4,142,768
Deposit liabilities of the
savings bank subsidiary.......... 2,150,370 2,223,755 2,129,310 2,091,583 2,032,869
Securities sold under
agreements to repurchase
of the savings bank
subsidiary.................... 479,742 412,521 123,301 -- 27,223
Advances from Federal Home
Loan Bank
to the savings bank
subsidiary.................... 684,274 501,274 616,374 289,674 194,099
Long-term debt.................... 810,080 758,463 718,240 697,836 582,475
Preferred stock of electric
utility subsidiaries
Subject to mandatory
redemption................... 38,955 41,750 44,844 46,730 48,920
Not subject to mandatory
redemption................... 48,293 48,293 48,293 48,293 36,293
Stockholders' equity.............. 772,852 729,603 682,089 643,028 547,741
COMMON STOCK
Book value per common
share *........................... 25.05 24.51 23.80 23.23 22.12
Market price range per
common share
High.......................... 39.50 39.75 36.50 38.88 44.63
Low........................... 33.25 32.13 29.88 31.00 34.75
December 31................... 36.13 38.75 32.38 35.88 37.25
Dividends per common share........ 2.41 2.37 2.33 2.29 2.25
Dividend payout ratio............. 93% 89% 90% 121% nm
Dividend payout
ratio-continuing operations...... 93% 89% 90% 95% 88%
Market price to book value
per common share *............... 144% 158% 136% 154% 168%
Price earnings ratio **........... 13.9x 14.6x 12.5x 15.1x 14.7x
Common shares outstanding
(thousands)
Weighted average.............. 30,310 29,187 28,137 25,938 24,275
Geographic distribution
of ownership *
State of Hawaii ***....... 5,822 7,591 7,278 6,969 6,663
Other..................... 25,031 22,182 21,377 20,706 18,099
- -----------------------------------------------------------------------------------------------------------------------------------
Total shares
outstanding.......... 30,853 29,773 28,655 27,675 24,762
- -----------------------------------------------------------------------------------------------------------------------------------
Stockholders by geographic
distribution *
State of Hawaii ***........... 22,401 22,177 21,896 22,092 21,305
Other......................... 20,046 19,117 18,830 18,374 16,891
- -----------------------------------------------------------------------------------------------------------------------------------
Total stockholders........ 42,447 41,294 40,726 40,466 38,196
===================================================================================================================================
</TABLE>
nm Not meaningful.
* At December 31.
** Calculated using December 31 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 20, "Discontinued operations" in the "Notes to Consolidated Financial
Statements" for a discussion of the Company's former property and casualty
insurance business. In 1992 and 1993, the Company recorded net losses of
$59.7 million and $15.0 million, respectively, from the discontinued property
and casualty insurance business. In 1992, the Company decided to exit the
nonutility wind energy business because of chronic mechanical problems with its
wind turbines and continuing operating losses. In 1992 and 1993, the Company
recorded a net loss of $13.6 million and a net gain of $2.0 million,
respectively, from the discontinued wind energy business.
25
<PAGE>
<TABLE>
<CAPTION>
SEGMENT FINANCIAL INFORMATION
- -----------------------------------------------------------------------------------------------------------------------------------
Hawaiian Electric Industries, Inc.
and subsidiaries
Years ended December 31 1996 1995 1994
- -----------------------------------------------------------------------------------------------------------------------------------
(in thousands)
<S> <C> <C> <C> <C>
REVENUES
Electric utility............. $1,080,868 77% $ 988,722 $ 913,719
Savings bank................. 271,402 19 254,616 215,525
Other........................ 58,302 4 52,586 59,279
- -----------------------------------------------------------------------------------------------------------------------------------
$1,410,572 100% $1,295,924 $1,188,523
===================================================================================================================================
OPERATING INCOME (LOSS)
Electric utility............. $ 173,613 92% $ 159,043 $ 136,628
Savings bank................. 26,221 14 40,044 42,525
Other........................ (11,588) (6) (11,423) (5,020)
- -----------------------------------------------------------------------------------------------------------------------------------
$ 188,246 100% $ 187,664 $ 174,133
===================================================================================================================================
DEPRECIATION AND
AMORTIZATION OF
PROPERTY, PLANT AND
EQUIPMENT
Electric utility............. $ 73,453 89% $ 67,649 $ 63,779
Savings bank................. 3,990 5 4,094 3,551
Other........................ 4,877 6 4,913 4,926
- -----------------------------------------------------------------------------------------------------------------------------------
$ 82,320 100% $ 76,656 $ 72,256
===================================================================================================================================
CAPITAL EXPENDITURES
Electric utility............. $ 199,902 92% $ 194,891 $ 195,525
Savings bank................. 3,659 2 4,848 11,316
Other........................ 13,763 6 5,086 2,749
- -----------------------------------------------------------------------------------------------------------------------------------
$ 217,324 100% $ 204,825 $ 209,590
===================================================================================================================================
IDENTIFIABLE ASSETS (AT
DECEMBER 31)
Electric utility............. $2,165,546 37% $2,016,283 $1,889,120
Savings bank................. 3,590,687 60 3,413,426 3,115,651
Other........................ 179,607 3 174,036 169,693
- -----------------------------------------------------------------------------------------------------------------------------------
$5,935,840 100% $5,603,745 $5,174,464
===================================================================================================================================
</TABLE>
The principal segments of Hawaiian Electric Industries, Inc. (HEI) 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 wholly owned subsidiary, Young
Brothers, Limited (YB), provides general freight and containerized cargo
transportation among 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 develop and invest in
real estate in Hawaii.
HEI Investment Corp. holds investments primarily in leveraged leases.
HEI Power Corp. (HEIPC) and its wholly owned subsidiaries were formed in 1995
and 1996 to pursue independent power projects and energy services projects in
Asia and the Pacific. In 1995, HEIPC did not develop, construct, own or operate
any power generation facilities. In 1996, an HEIPC subsidiary entered into an
energy conversion agreement for the rehabilitation, operation and maintenance of
two 26.5-megawatt generating units for the Guam Power Authority.
Other also includes amounts for HEI, HEI Diversified, Inc., Pacific Energy
Conservation Services, 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.
Except for historical information contained herein, the matters set forth in
Management's Discussion and Analysis of Financial Condition and Results of
Operations are forward-looking statements that involve certain risks and
uncertainties that could cause actual results to differ materially from those in
the forward-looking statements. Potential risks and uncertainties include, but
are not limited to, such factors as the effect of economic conditions, product
demand and market acceptance risks, the impact of competitive products and
pricing, capacity and supply constraints or difficulties, new technological
developments, governmental and regulatory actions, actual purchases under
agreements, the results of financing efforts and the timing and extent of
changes in interest rates. Investors are also directed to consider other risks
and uncertainties discussed in other periodic reports filed by Hawaiian Electric
Industries, Inc. (HEI) and/or Hawaiian Electric Company, Inc. (HECO) with the
Securities and Exchange Commission.
Results of Operations
---------------------
HEI and its subsidiaries (collectively, the Company) reported net income of
$2.60 per share in 1996, reflecting 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 1996 decreased 2% from 1995, due
primarily to the Federal Deposit Insurance Corporation's (FDIC) one-time
deposit-insurance premium assessment of $8.3 million after taxes paid by
American Savings Bank, F.S.B. (ASB).
Many factors affected HEI's 1996 consolidated results, including Hawaii's
economic environment. For 1996, the state's 1.4% real economic growth (which
excludes the effects of inflation) was the strongest in six years, although low
compared with the 35-year historical norm of about 4%. Tourism, the state's key
industry, continues to lead the economic recovery. Visitor arrivals increased an
estimated 3.5% over 1995, primarily as a result of high growth in eastbound
tourists from Japan and Southeast Asia. This marks the third consecutive year of
positive growth in visitor count. Other positive factors for the Hawaii economy
in 1996 included stable military spending, inflation rates below the national
average and job growth in some sectors, including the services, federal
government and agriculture sectors. These positive trends were offset to some
degree by decreases in total jobs and the average length of stay by visitors.
The total number of jobs declined for the fourth consecutive year due to state
government restructuring and the continued slowness in construction activity.
Looking ahead, Hawaii's economy is expected to continue recovering and grow
moderately for the remainder of the century. Tourism should continue to benefit
from economic growth in Hawaii's primary markets, California and Japan, as well
as growth in other Asia/Pacific markets.
The Company from time to time considers various strategies designed to
enhance its competitive position and to increase its ability to anticipate and
adapt to changes in its businesses. These strategies may include the formation
of new subsidiaries or the acquisition of existing businesses. In 1995 and 1996,
for example, the Company formed new subsidiaries to pursue independent power
projects and energy services 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. Management cannot predict
whether any of these strategies or transactions will be successfully
implemented.
27
<PAGE>
Following is a general discussion of HEI's consolidated results, which should
be read in conjunction with the segment discussions.
<TABLE>
<CAPTION>
CONSOLIDATED
- -------------------------------------------------------------------------------------------------------
% % %
1996 change 1995 change 1994 change
- -------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
(in millions, except per share amounts)
Revenues................................ $1,411 9 $1,296 9 $1,189 4
Operating income........................ 188 -- 188 8 174 10
Net income/1/........................... 78.7 2 77.5 6 73.0 50
Earnings per common share/1/............ 2.60 (2) 2.66 2 2.60 38
As adjusted /2/:
Operating income....................... 202 8 188 8 174 10
Net income............................. 87.0 12 77.5 6 73.0 50
Earnings per common share.............. 2.87 8 2.66 2 2.60 38
Weighted average number of common
shares outstanding..................... 30.3 4 29.2 4 28.1 8
Dividend payout ratio................... 93% 89% 90%
</TABLE>
/1/ 1994 net income and earnings per common share increased 18% and 9%,
respectively, compared to 1993 net income and earnings per common from
continuing operations.
/2/ On September 30, 1996, President Clinton signed into law the Deposit
Insurance Funds Act of 1996, which authorized a one-time deposit-insurance
premium assessment by the FDIC of 65.7 cents per $100 of deposits insured by the
Savings Association Insurance Fund (SAIF) and held as of March 31, 1995. ASB's
assessment was $8.3 million after tax and was accrued in September 1996. The
1996 "as adjusted" amounts exclude the effect of the FDIC special assessment.
. The increase in 1996 net income over 1995 was due to a 12% increase in net
income of the electric utility segment and a decrease in the net loss from the
"other" segment, partly offset by a 36% decrease in the net income of the
savings bank segment due to the FDIC special assessment.
. 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 compared to 1993 net income from continuing
operations was due to improved results of the electric utility and "other"
segments, partly offset by a 2% decrease in net income of the savings bank
segment.
. Shareholder dividends are declared and paid quarterly by HEI as
determined by HEI's Board of Directors. Annual dividends per common share
increased in 1996 to $2.41 from $2.37 in 1995 and $2.33 in 1994. HEI and its
predecessor company, HECO, have paid dividends continuously since 1901.
Dividends per share have been higher each year since 1964. At the indicated
annual dividend rate of $2.44 per share and the closing share price on December
31, 1996 of $36.13, HEI's dividend yield was 6.8%.
Following is a general discussion of revenues, expenses and operating income or
loss by business segment. Segment information is also shown in "Segment
Financial Information" on page 26 and in the "Notes to Consolidated Financial
Statements."
<TABLE>
<CAPTION>
ELECTRIC UTILITY
- -------------------------------------------------------------------------------------------------------
% % %
1996 change 1995 change 1994 change
- -------------------------------------------------------------------------------------------------------
(in millions, except per barrel amounts and number of employees)
<S> <C> <C> <C> <C> <C> <C>
Revenues /1/............................ $1,081 9 $ 989 8 $ 914 4
Expenses
Fuel oil............................... 251 21 207 11 187 (12)
Purchased power........................ 286 4 276 2 272 5
Other.................................. 370 7 347 9 318 11
Operating income........................ 174 9 159 16 137 14
Allowance for funds used
during construction............... 18 15 15 17 13 21
Net income.............................. 81 12 73 18 62 19
Return on average common equity......... 11.2% 11.0% 10.2%
Average price per barrel of
fuel oil /1/........................... $24.08 18 $20.47 8 $18.92 (10)
Kilowatthour sales...................... 8,991 2 8,806 2 8,593 3
Number of employees (at December 31).... 2,152 (3) 2,208 -- 2,219 --
</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 prices and certain components of purchased
energy costs are passed on to customers.
28
<PAGE>
. In 1996, the electric utilities' revenues increased 9% compared to 1995,
primarily due to higher fuel oil prices which are passed on to customers, a 2.1%
increase in kilowatthour (KWH) sales of electricity, rate increases granted by
the Public Utilities Commission of the State of Hawaii (PUC) and the recovery of
integrated resource planning costs, including demand-side management (DSM)
program costs and shareholder incentives. The KWH sales increase is partly due
to the effects of the 1.4% real growth in Hawaii's economy. Fuel oil expense
increased 21% because of higher fuel oil prices and more KWHs being generated.
Purchased power expense was higher partly due to an increase in the number of
KWHs purchased and higher fuel prices. The 7% increase in other expenses was due
to a 6% increase in other operation and maintenance expenses, a 9% increase in
depreciation expense as a result of plant additions and a 9% increase in taxes,
other than income taxes resulting from increased revenues. Other operation
expenses in 1996 increased primarily due to higher integrated resource planning
related costs. Maintenance expenses increased partly due to more underground
fault repairs and tower maintenance on Oahu and higher production maintenance on
Hawaii and Maui. Operating income for 1996 increased 9% compared to 1995 due in
part to higher KWH sales, rate increases and DSM program related shareholder
incentives, partly offset by increased expenses.
. 1995 revenues increased 8% compared to 1994 primarily due to rate
increases, higher fuel oil prices and a 2.5% increase in KWH sales, which
reflected the effects of unusually warm weather 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) and the write-off of a
regulatory asset for postretirement executive life insurance costs. Operating
income for 1995 increased 16% compared to 1994 due in part to rate increases and
higher KWH sales, partly offset by the increased expenses.
. 1994 revenues increased 4% over 1993 primarily due to rate increases and a
3.2% increase in KWH sales, partly offset by lower fuel oil prices. The KWH
sales increase reflected the effects of warmer weather and the partial recovery
of Hawaii's economy. Fuel oil expense declined because of lower fuel oil prices
and less KWHs generated. 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 of a regulatory asset for accrued vacation. Operating income for
1994 increased 14% compared to 1993 due in part to rate increases and higher KWH
sales, partly offset by the increased expenses.
COMPETITION
The electric utility industry is becoming increasingly competitive nationally as
a result of various factors including product price, service reliability, new
technologies and government actions. Competition in the generation sector in
Hawaii is moderated, however, by the scarcity of generation sites, various
permitting processes and lack of interconnections to other electric utilities.
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 factor. HECO has been able to compete successfully in this
environment by offering customers economic alternatives that, among other
things, employ energy efficient electrotechnologies such as the heat pump water
heater.
On December 30, 1996, the PUC instituted a proceeding to identify and
examine the issues surrounding electric competition and to determine the impact
of competition on the electric utility infrastructure in Hawaii. This is similar
to what commissions in other jurisdictions have done. In its order, the PUC
recognizes that Hawaii's stand-alone island energy systems are different from
the interconnected systems of the contiguous states, but also recognizes the
need to determine how to respond in Hawaii to changes occurring in the industry.
The PUC set forth a preliminary enumeration of the issues, including feasible
forms of competition, the regulatory compact, public interest benefits, long-
term integrated resource planning, appropriate treatment of potential stranded
costs, and the identification of the objectives and the establishment of a time
frame for the introduction of competition in the electric utility industry. The
identified parties to the proceeding are the Consumer Advocate, HECO, Maui
Electric Company, Limited (MECO), Hawaii Electric Light Company, Inc. (HELCO)
and the Kauai Electric Division of Citizens Utilities Company. Requests to
intervene and/or participate in the proceeding have been submitted to the PUC by
15 organizations, including IPPs, government agencies and others. The PUC has
not set a procedural schedule for the proceeding, but has indicated that the
parties in the docket should use the collaborative process to compile
information, create a discussion forum, and narrow the issues to be considered
in connection with any restructuring of the electric industry in response to
emerging competition.
29
<PAGE>
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 Statement of Financial Accounting Standards
(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 following
18 years, of the regulatory assets related to PBOP costs. The costs of
postretirement executive life insurance, however, were subsequently disallowed.
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 a
$50.5 million annual rate increase.
. 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 reduction in rate increase
resulted primarily from the lower ROACE used by the PUC in the final D&O because
of declining interest rates subsequent to the first interim increase, which had
been effective January 1, 1995 and had been based on a 12.6% ROACE. The refund
amount of $10 million (representing amounts received under interim rates in
excess of final approved rates, with interest thereon) was accrued in December
1995 and 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.
- -----------------------------------
. 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 a $15.5 million annual rate increase.
. In March 1995, HELCO filed a request to increase rates based on a 1996 test
year. In February 1996, HELCO revised its requested increase to 6.2%, or
$8.9 million in annual revenues, based on a 12.5% ROACE. In March 1996, HELCO
received an interim D&O authorizing a 4.8%, or $6.8 million, increase in annual
revenues, based on an 11.65% ROACE, effective March 4, 1996. A final order is
pending.
Maui Electric Company, Limited
- ------------------------------
. 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 a $10 million annual rate increase.
. 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 an 11.5% ROACE. In January 1996, MECO received an interim D&O
authorizing an increase of 2.8%, or $3.7 million, in annual revenues, based on
an 11.5% ROACE, effective February 1, 1996. A final order is pending.
. In May 1996, MECO filed a request to increase rates based on a 1997 test
year, primarily to recover the costs related to its new generating unit M17.
MECO requested an increase of 13%, or $18.9 million in annual revenues, over
rates in effect at the time
30
<PAGE>
of filing, based on a 12.9% ROACE. On November 7, 1996, MECO filed a motion with
the PUC to approve an agreement between MECO and the Consumer Advocate which
would close the MECO 1997 rate case and would provide MECO with an increase in
annual revenues of $1.5 million over revenues at currently effective rates,
based on an 11.65% ROACE. The stipulated increase will not become effective
unless and until the PUC approves the stipulation. The primary reason for the
agreement between MECO and the Consumer Advocate was a delay in the expected in-
service date for MECO's generating unit M17, from the second half of 1997 to the
first half of 1998, which resulted from delays in obtaining the necessary air
quality Prevention of Significant Deterioration/Covered Source (PSD) permit from
the Department of Health of the State of Hawaii (DOH) and the U. S.
Environmental Protection Agency (EPA). MECO anticipates that it will obtain in
1997 the PSD permit necessary to place generating unit M17 in service in 1998,
in which event it is likely that MECO will file a request to increase rates
based on a 1998 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. The electric utility subsidiaries' overhead transmission
and distribution systems are susceptible to wind and earthquake damage, and
their underground systems are 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 $2 billion and are uninsured because the amount of transmission and
distribution system insurance available is limited and the premiums are
extremely high.
HELCO POWER SITUATION
See Note 3 in the "Notes to Consolidated Financial Statements."
<TABLE>
<CAPTION>
SAVINGS BANK
- ---------------------------------------------------------------------------------------------------
1996 % change 1995 % change 1994 % change
- ---------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
(in millions)
Revenues....................... $ 271 7 $ 255 18 $ 216 8
Net interest income............ 102 9 94 (6) 99 4
Operating income............... 26 (35) 40 (6) 43 (4)
Net income..................... 15 (36) 23 (6) 25 (2)
As adjusted /1/:
Operating income.............. 40 -- 40 (6) 43 (4)
Net income.................... 23 -- 23 (6) 25 (2)
Interest-earning assets
Average balance............... $3,354 9 $3,084 14 $2,700 15
Weighted average yield........ 7.62% (1) 7.68% 2 7.53% (6)
Interest-bearing liabilities
Average balance............... $3,233 8 $2,985 14 $2,611 13
Weighted average rate......... 4.75% (1) 4.78% 20 3.98% (1)
Interest rate spread........... 2.87% (1) 2.90% (18) 3.55% (11)
</TABLE>
/1/ The 1996 "as adjusted" amounts exclude the effect of the FDIC special
assessment of $8.3 million after tax. The assessment resulted in a reduction of
ASB's deposit-insurance premiums from 23 cents to 6.48 cents per $100 of
deposits, effective January 1, 1997. With the reduction in deposit-insurance
premiums, management expects that ASB's annual after-tax savings will amount to
approximately $2 million, beginning January 1, 1997 (based on deposit
liabilities as of December 31, 1996). In anticipation of the assessment, HEI
infused $9 million of additional equity capital into ASB in September 1996. As
of December 31, 1996, ASB was "well-capitalized" - the highest of five
capitalization categories established by regulators.
Earnings of ASB 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.
. ASB's 1996 revenues increased 7% over 1995 due to a 9% higher average
balance of interest-earning assets, partly offset by lower yields on mortgage-
backed securities. 1996 net interest income increased 9% over 1995 due to a 22%
higher net average balance of interest-earning assets, partly offset by a
slightly lower interest rate spread the difference between the weighted average
yield on interest-earning assets and the weighted average rate on interest-
bearing liabilities. One of the primary factors contributing to the decrease in
ASB's interest rate spread was the flattening of the yield curve beginning in
1995. Excluding the effects of the FDIC special assessment, operating and net
income
31
<PAGE>
were flat compared to 1995 due to higher net interest income, offset by an
increased provision for loan losses, higher compensation and benefits expenses
and higher other income in 1995, which included a $2.3 million after-tax gain on
the sale of mortgage-backed securities.
In 1996, the federal funds rate, which is the rate charged by banks for
overnight loans to each other and which has a significant influence on loan and
deposit rates, decreased from 5.5% to 5.25%.
Loans receivable increased a net 19% in 1996, partly due to the relatively
low mortgage rates. However, higher unemployment and other factors contributed
to increased delinquencies. In 1996, ASB's nonaccrual and renegotiated loans
increased by $22 million to $50 million, and the allowance for loan losses
increased by $6 million to $19 million. ASB's ratio of net charge-offs to
average loans outstanding, however, still remained relatively low at 0.07%
compared to the average for all U.S. thrifts at 0.33%.
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 borrowings, payments of interest and principal on outstanding
loans receivable and mortgage-backed securities, and other sources. In recent
years, advances from the Federal Home Loan Bank (FHLB) of Seattle and securities
sold under agreements to repurchase have become more significant sources of
funds as the demand for deposits decreased due in part to increased competition
from money market and mutual funds. Deposits decreased by $73 million, or 3%, in
1996. Using sources of funds with a higher cost than deposits, such as advances
from the FHLB, puts downward pressure on ASB's net interest income.
. 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. In 1995,
there was a 4% increase in deposits due primarily to interest credited, as
deposit growth slowed, partly due to competition from money market and mutual
funds.
In 1995, the federal funds rate increased from 5.5% to 6.0% and declined to
5.5% by yearend.
. Despite an 11% decrease in interest rate spread, 1994 net interest income
increased 4% over 1993 due to an 18% higher average balance of loans and
mortgage-backed securities. In 1994, the federal funds rate increased
significantly from 3.0% to 5.5% and contributed to the tightening of ASB's
spread. 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.
<TABLE>
<CAPTION>
OTHER
- -----------------------------------------------------------------------------------------------------------------------------------
% % %
1996 change 1995 change 1994 change
- -----------------------------------------------------------------------------------------------------------------------------------
(in millions)
<S> <C> <C> <C> <C> <C> <C>
Revenues..................... $ 58 11 $ 53 (11) $ 59 (6)
Operating loss............... (12) (1) (11) (128) (5) 17
</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
development and investment companies; HEI Investment Corp. (HEIIC), a company
primarily holding investments in leveraged leases; HEI Power Corp. (HEIPC) and
its subsidiaries, companies formed to pursue independent power projects and
energy services projects in Asia and the Pacific; Pacific Energy Conservation
Services, Inc. (PECS), a contract services company providing limited services to
an affiliate; HEI and HEI Diversified, Inc. (HEIDI), holding companies; and
eliminations of intercompany transactions.
. The freight transportation subsidiaries recorded operating income of
$3.0 million in 1996, $2.6 million in 1995 and $3.6 million in 1994. HTB and YB
continue to be negatively impacted by the slow economic activity on the neighbor
islands and the slow construction industry. 1996 operating income was higher
than 1995 due largely to lower drydocking and overhaul expenses. 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.
In December 1994, the PUC approved a stipulated agreement between YB and
the Consumer Advocate to increase rates by $2.1 million annually, or 6%,
effective in that month. In December 1996, the PUC approved a stipulated
agreement between YB and the Consumer Advocate to increase rates by $1.4 million
annually, or 3.9%, effective in that month. YB plans to file for a general rate
increase in the first quarter of 1997. Also, see the PBOP discussion under the
"Electric utility--recent rate requests" section.
. MPC's consolidated operating loss was $1.8 million in 1996, $2.6 million
in 1995 and $1.5 million in 1994. In 1996, an MPC subsidiary sold land in
downtown Honolulu to a developer for
32
<PAGE>
a pretax gain of $1.1 million. Other real estate development activities continue
to be negatively impacted by the slow real estate market in Hawaii. MPC and its
subsidiaries sold fewer units in 1996 than 1995 and fewer units in 1995 than
1994. Adjustments were made to reduce the carrying value of certain real estate
projects in 1996, 1995 and 1994. It is expected that the Hawaii real estate
market will not rebound in the near term. MPC and its subsidiaries' present
focus is to reduce their current investment in real estate development assets
and increase cash flow by continuing the development and sales of existing
projects and land. See Note 5 in the "Notes to Consolidated Financial
Statements" for a further discussion of MPC and its subsidiaries.
. HEIIC recorded operating income of $0.1 million in 1996, compared to an
operating loss of $0.8 million in 1995 and operating income of $1.2 million in
1994. 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. No new investments are currently planned for HEIIC.
. HEIPC was formed in March 1995 and its subsidiaries have been and will be
formed from time to time to pursue independent power projects and energy
services projects in Asia and the Pacific. HEIPC's consolidated operating loss
was $2.6 million in 1996 and $1.7 million in 1995.
. HEI's, HEIDI's and PECS' operating loss was $10.4 million in 1996, an
increase of $1.5 million compared to 1995 due to higher expenses such as
compensation, benefits and depreciation. HEI's and HEIDI's operating loss
increased $0.7 million in 1995 compared to 1994, due in part to higher legal
expenses.
DISCONTINUED OPERATIONS
- --------------------------------------------------------------------------------
See Note 20 in the "Notes to Consolidated Financial Statements" for a discussion
of the Company's former property and casualty insurance 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-making 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, financial
position or liquidity may result. See Note 8 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 and YB in complying with these environmental requirements would
be allowed by the PUC. 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. Also, see Note 22 in
the "Notes to Consolidated Financial Statements."
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 prudent, 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 2.9% in 1996,
2.8% in 1995 and 2.6% in 1994. 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 increases to maintain
adequate earnings. In the past, the PUC has generally approved rate increases to
cover the effects of inflation. In 1996, 1995 and 1994, the electric utilities
received rate increases, 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."
33
<PAGE>
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 $5.9 billion and $5.6 billion at December 31,
1996 and 1995, respectively. Asset growth in 1996 stemmed from growth in ASB's
loan portfolio and the electric utilities' capital expenditures.
The consolidated capital structure of HEI was as follows:
<TABLE>
<CAPTION>
December 31 1996 1995
- --------------------------------------------------------------------------------
(in millions)
<S> <C> <C> <C> <C>
Short-term borrowings................... $ 217 11% $ 182 10%
Long-term debt.......................... 810 43 758 43
Preferred stock of electric utility
subsidiaries........................... 87 5 90 5
Common stock equity..................... 773 41 730 42
- --------------------------------------------------------------------------------
$1,887 100% $1,760 100%
================================================================================
</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.
As of February 12, 1997, 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:
<TABLE>
<CAPTION>
S&P Moody's Duff & Phelps
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
HEI
- ---
Medium-term notes....................... BBB Baa2 BBB+
Commercial paper........................ A-2 P-2 Duff 2
Company-obligated trust preferred
securities /1/......................... BBB- baa3 BBB
HECO
- ----
First mortgage bonds.................... BBB+ A3 A
Revenue bonds and medium-term 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.
/1/ Issued subsequent to December 31, 1996.
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.
Operating activities provided net cash of $158 million in 1996, $213
million in 1995 and $130 million in 1994. Investing activities used net cash of
$408 million in 1996, $481 million in 1995 and $713 million in 1994. In 1996,
net cash used for investing activities were primarily for capital expenditures
and the origination and purchase of loans, net of repayments. Financing
activities provided net cash of $216 million in 1996, $312 million in 1995 and
$554 million in 1994. In 1996, a significant amount of cash came from the net
increase in advances from the FHLB of Seattle, securities sold under agreements
to repurchase and long-term debt.
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 its cash obligations. See Note 18 in the "Notes to Consolidated
Financial Statements."
Total HEI consolidated financing requirements for 1997 through 2001,
including net capital expenditures (which exclude the allowance for funds used
during construction and capital expenditures funded by third-party cash
contributions in aid of construction), long-term debt retirements (excluding
repayments of advances from the FHLB of Seattle and securities sold under
agreements to repurchase) and sinking fund requirements, are currently estimated
to total $1.0 billion. Of this amount, approximately $0.8 billion is for net
capital expenditures (mostly relating to the electric utilities' net capital
expenditures described below). HEI's consolidated internal sources, after the
payment of HEI dividends, are expected to provide approximately 66% of the
consolidated financing requirements, with debt and equity financing providing
the remaining requirements. Over the five-year period 1997 through 2001, HEI
currently estimates that, in addition to retained earnings and the proceeds from
the sale of the Trust Preferred Securities in February 1997, it will require not
more than $157 million in additional equity, which is expected to be provided
principally
34
<PAGE>
by the HEI Dividend Reinvestment and Stock Purchase Plan and the Hawaiian
Electric Industries Retirement Savings Plan. The additional equity will be used
primarily to reduce HEI's overall borrowing level and to fund the common equity
requirements of its subsidiaries, such as the electric utilities' common equity
requirements related to their capital expenditure programs. Additional equity in
excess of the $157 million described above, and additional debt financing, may
be required to fund activities not included in the 1997-2001 forecast, such as
the development of additional independent power projects and energy services
projects by HEIPC and its subsidiaries in Asia and the Pacific.
In February 1997, $100 million of 8.36% Company-obligated trust preferred
securities were issued by Hawaiian Electric Industries Capital Trust I, a
Delaware statutory business trust of which HEI owns all the common securities.
See Note 11 in the "Notes to Consolidated Financial Statements" for further
discussion.
Following is a discussion of the liquidity and capital resources of HEI's
largest segments.
ELECTRIC UTILITY
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
HECO's consolidated capital structure was as follows:
December 31 1996 1995
- --------------------------------------------------------------------------------
(in millions)
<S> <C> <C> <C> <C>
Short-term borrowings from
nonaffiliates and affiliate............ $ 126 8% $ 139 10%
Long-term debt.......................... 602 38 517 36
Preferred stock
Subject to mandatory redemption........ 39 3 42 3
Not subject to mandatory redemption.... 48 3 48 3
Common stock equity..................... 751 48 697 48
- --------------------------------------------------------------------------------
$1,566 100% $1,443 100%
================================================================================
</TABLE>
In 1996, the electric utilities' investing activities used $177 million in cash,
primarily for capital expenditures. Financing activities included HECO's cash
sale of common stock of $30 million to HEI and net increases in long-term debt
of $85 million. Financing activities also used cash for common and preferred
stock dividends of $61 million and a decrease in short-term borrowings of
$13 million. Operating activities provided $143 million toward cash requirements
of financing activities and capital expenditures.
The electric utilities' consolidated financing requirements for 1997
through 2001, including net capital expenditures, long-term debt retirements and
sinking fund requirements, are currently estimated to total $768 million. HECO's
consolidated internal sources, after the payment of common stock and preferred
stock dividends, are currently expected to provide approximately 75% of the
consolidated financing requirements, with debt and equity financing providing
the remaining requirements. As of December 31, 1996, an additional $45 million
of revenue bonds was 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, and an additional $150 million was authorized
for issuance prior to the end of 1999. HECO currently estimates that it will
require approximately $23 million in new common equity, in addition to retained
earnings, over the five-year period 1997 through 2001. The PUC must approve
issuances of long-term securities by 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 1997
through 2001 are currently estimated to total $711 million. Approximately 65% of
forecast 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 35% primarily for generation projects. See Note 3
in the "Notes to Consolidated Financial Statements" for a discussion of purchase
commitments, including commitments for fuel contracts, power purchase agreements
and construction projects.
For 1997, electric utility net capital expenditures are estimated to be
$118 million and gross capital expenditures are estimated to be $153 million.
Approximately 63% of forecast gross capital expenditures is for transmission and
distribution projects. An estimated $36 million is planned for new generation
projects. Drawdowns of proceeds from the sales of tax-exempt special purpose
revenue bonds, sales of preferred securities, 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 increases, escalation in
construction costs, demand-side management programs and requirements of
environmental and other regulatory and permitting authorities.
35
<PAGE>
<TABLE>
<CAPTION>
SAVINGS BANK
- --------------------------------------------------------------------------------------
December 31 1996 1995
- --------------------------------------------------------------------------------------
$ % change $ % change
- --------------------------------------------------------------------------------------
(in millions)
<S> <C> <C> <C> <C>
Assets.................................. $3,591 5 $3,413 10
Loans receivable, net................... 2,002 19 1,688 (7)
Mortgage-backed securities.............. 1,340 (7) 1,445 35
Deposit liabilities..................... 2,150 (3) 2,224 4
Securities sold under agreements to
repurchase............................. 480 16 413 235
Advances from FHLB...................... 684 37 501 (19)
</TABLE>
As of September 30, 1996, ASB was the fourth largest financial institution in
the state based on total assets of $3.6 billion and the third largest financial
institution based on deposits of $2.2 billion. In 1996, ASB's total assets
increased primarily due to the origination and purchase of loans totaling
$491 million, partly offset by repayments of $169 million.
At December 31, 1996, loans which do not accrue interest totaled $47
million or 2.3% of net loans outstanding, compared to $27 million or 1.6% at
December 31, 1995. At December 31, 1996, there were 19 properties acquired in
settlement of loans valued at $2.6 million.
For 1996, cash used by investing activities was $220 million, due largely
to the origination and purchase of loans, partly offset by principal repayments.
Cash provided by financing activities included a net increase of $183 million in
advances from the FHLB of Seattle and $68 million in securities sold under
agreements to repurchase, partly offset by a decrease of $73 million in deposit
liabilities.
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, 1996.
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, 1996, 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 5.3% (3.0%) and a risk-based capital ratio
of 12.2% (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, 1996, ASB would not have been required to
hold additional capital if the rule adding the IRR component had been
implemented.
FDIC 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, 1996, ASB was "well-capitalized" (ratio requirements noted in
parenthesis) with a leverage ratio of 5.3% (5.0%), a Tier-1 risk-based ratio of
11.4% (6.0%) and a total risk-based ratio of 12.2% (10.0%).
Significant interstate banking legislation has been enacted at both the
federal and state levels. Under the federal Riegle-Neal Interstate Banking and
Branching Efficiency Act of 1994, a bank holding company may acquire control of
a bank in any state, subject to certain restrictions. Under Hawaii law which
takes effect on June 1, 1997, a bank chartered under Hawaii law may merge with
an out-of-state bank and convert all branches of both banks into branches of a
single bank, subject to certain restrictions. Although the federal and Hawaii
laws apply only to banks, such legislation may nonetheless affect the
competitive balance among banks, thrifts and other financial institutions and
the level of competition among financial institutions doing business in Hawaii.
With the enactment of federal legislation in 1996 to recapitalize the SAIF
and to reallocate the repayment burden on bonds issued to recapitalize the
SAIF's predecessor, it appears that legislation addressing the merger of the
Bank Insurance Fund and the SAIF, thrift rechartering and financial
modernization will remain a priority for the U.S. Congress. Bills are now
pending, or expected to be introduced in Congress, that will contain proposals
for altering the structure, regulation and competitive relationships of the
nation's financial institutions. Some of these bills would abolish the thrift
charter, requiring savings associations to convert to banks, subject to certain
grandfathering and transition provisions. For a discussion of the unfavorable
disparity in the deposit insurance assessment rates and Financing Corporation
assessment rates that ASB and other thrifts have paid in relation to the rates
that most commercial banks have paid, and certain legislation affecting
financial institutions, see Note 4 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, 1996 and 1995, 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, 1996. 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, 1996 and 1995, and the
results of their operations and their cash flows for each of the years in the
three-year period ended December 31, 1996 in conformity with generally accepted
accounting principles.
/s/ KPMG Peat Marwick LLP
Honolulu, Hawaii
January 24, 1997,
except as to the thirteenth paragraph
of Note 3 and Note 11, which are
as of February 5, 1997
37
<PAGE>
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF INCOME
- ---------------------------------------------------------------------------------
Hawaiian Electric Industries, Inc. and subsidiaries
Years ended December 31 1996 1995 1994
- ---------------------------------------------------------------------------------
<S> <C> <C> <C>
(in thousands, except per share amounts)
REVENUES
Electric utility........................ $1,080,868 $ 988,722 $ 913,719
Savings bank............................ 271,402 254,616 215,525
Other................................... 58,302 52,586 59,279
- ---------------------------------------------------------------------------------
1,410,572 1,295,924 1,188,523
- ---------------------------------------------------------------------------------
EXPENSES
Electric utility........................ 907,255 829,679 777,091
Savings bank............................ 231,346 214,572 173,000
FDIC special assessment.............. 13,835 -- --
Other................................... 69,890 64,009 64,299
- ---------------------------------------------------------------------------------
1,222,326 1,108,260 1,014,390
- ---------------------------------------------------------------------------------
OPERATING INCOME (LOSS)
Electric utility........................ 173,613 159,043 136,628
Savings bank............................ 26,221 40,044 42,525
Other................................... (11,588) (11,423) (5,020)
- ---------------------------------------------------------------------------------
188,246 187,664 174,133
- ---------------------------------------------------------------------------------
Interest expense--electric utility and
other.................................. (65,832) (62,860) (54,028)
Allowance for borrowed funds used
during construction.................... 5,862 5,112 4,043
Preferred stock dividends of electric
utility subsidiaries................... (6,529) (6,885) (7,163)
Allowance for equity funds used during
construction........................... 11,741 10,202 9,064
- ---------------------------------------------------------------------------------
INCOME BEFORE INCOME TAXES.............. 133,488 133,233 126,049
Income taxes............................ 54,830 55,740 53,019
- ---------------------------------------------------------------------------------
NET INCOME.............................. $ 78,658 $ 77,493 $ 73,030
=================================================================================
EARNINGS PER COMMON SHARE............... $2.60 $2.66 $2.60
=================================================================================
DIVIDENDS PER COMMON SHARE.............. $2.41 $2.37 $2.33
=================================================================================
WEIGHTED AVERAGE NUMBER OF COMMON
SHARES OUTSTANDING..................... 30,310 29,187 28,137
=================================================================================
</TABLE>
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF RETAINED EARNINGS
- ---------------------------------------------------------------------------------
Hawaiian Electric Industries, Inc. and subsidiaries
Years ended December 31 1996 1995 1994
- ---------------------------------------------------------------------------------
<S> <C> <C> <C>
(in thousands)
RETAINED EARNINGS, BEGINNING OF YEAR.... $ 144,216 $ 135,835 $ 128,318
Net income.............................. 78,658 77,493 73,030
Common stock dividends.................. (72,967) (69,112) (65,513)
- ---------------------------------------------------------------------------------
RETAINED EARNINGS, END OF YEAR.......... $ 149,907 $ 144,216 $ 135,835
=================================================================================
See accompanying "Notes to Consolidated Financial Statements."
</TABLE>
38
<PAGE>
<TABLE>
<CAPTION>
CONSOLIDATED BALANCE SHEETS
- ----------------------------------------------------------------------------------------------
Hawaiian Electric Industries, Inc. and subsidiaries
December 31 1996 1995
- ----------------------------------------------------------------------------------------------
(in thousands)
<S> <C> <C> <C> <C>
ASSETS
Cash and equivalents..................... $ 97,417 $ 130,833
Accounts receivable and unbilled
revenues, net........................... 150,858 142,505
Inventories, at average cost............. 48,745 35,258
Real estate developments................. 33,210 35,023
Investment and mortgage-backed
securities (estimated
market value $1,367,328 and
$1,485,091)............................. 1,377,591 1,479,552
Other investments........................ 72,609 74,325
Loans receivable, net.................... 2,002,028 1,687,801
Property, plant and equipment, net
Land................................ $ 39,790 $ 37,471
Plant and equipment................. 2,587,697 2,391,013
Construction in progress............ 204,335 195,258
---------- ----------
2,831,822 2,623,742
Less-accumulated depreciation....... (890,055) 1,941,767 (815,547) 1,808,195
---------- ----------
Regulatory assets........................ 100,804 99,693
Other.................................... 73,776 69,315
Goodwill and other intangibles........... 37,035 41,245
- ----------------------------------------------------------------------------------------------
$5,935,840 $5,603,745
==============================================================================================
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES
Accounts payable......................... $ 107,896 $ 94,806
Deposit liabilities...................... 2,150,370 2,223,755
Short-term borrowings.................... 216,543 181,825
Securities sold under agreements to
repurchase.............................. 479,742 412,521
Advances from Federal Home Loan Bank..... 684,274 501,274
Long-term debt........................... 810,080 758,463
Deferred income taxes.................... 185,609 182,101
Unamortized tax credits.................. 48,857 46,965
Contributions in aid of construction..... 197,805 191,854
Other.................................... 194,564 190,535
- ----------------------------------------------------------------------------------------------
5,075,740 4,784,099
- ----------------------------------------------------------------------------------------------
PREFERRED STOCK OF ELECTRIC UTILITY
SUBSIDIARIES
Subject to mandatory redemption.......... 38,955 41,750
Not subject to mandatory redemption...... 48,293 48,293
- ----------------------------------------------------------------------------------------------
87,248 90,043
- ----------------------------------------------------------------------------------------------
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:
30,853 shares and 29,773 shares......... 622,945 585,387
Retained earnings........................ 149,907 144,216
- ----------------------------------------------------------------------------------------------
772,852 729,603
- ----------------------------------------------------------------------------------------------
$5,935,840 $5,603,745
==============================================================================================
</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 1996 1995 1994
- --------------------------------------------------------------------------------------
(in thousands)
CASH FLOWS FROM OPERATING ACTIVITIES
<S> <C> <C> <C>
Net income...................................... $ 78,658 $ 77,493 $ 73,030
Adjustments to reconcile net income to
net cash provided by operating activities
Depreciation and amortization of
property, plant and equipment................ 82,320 76,656 72,256
Other amortization............................ 12,474 8,213 (660)
Deferred income taxes and tax
credits, net................................. 6,142 12,660 9,161
Allowance for equity funds used
during construction.......................... (11,741) (10,202) (9,064)
Changes in assets and liabilities,
net of effects from disposal of businesses
Increase in accounts receivable and
unbilled revenues, net.................... (8,353) (11,743) (13,646)
Decrease (increase) in inventories......... (13,487) 7,868 (3,721)
Decrease in other securities held for
trading................................... -- 49,505 45,396
Increase in regulatory assets.............. (418) (4,247) (9,885)
Increase (decrease) in accounts payable.... 13,090 (2,404) 8,582
Changes in other assets and liabilities.... (268) 8,806 (8,506)
- --------------------------------------------------------------------------------------
158,417 212,605 162,943
Cash used by discontinued operations............ -- -- (32,623)
- --------------------------------------------------------------------------------------
NET CASH PROVIDED BY OPERATING ACTIVITIES....... 158,417 212,605 130,320
- --------------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES
Loans receivable originated and purchased....... (490,852) (427,518) (515,070)
Principal repayments on loans receivable........ 169,160 145,522 225,002
Proceeds from sale of loans receivable.......... 2,414 6,769 2,138
Held-to-maturity mortgage-backed securities
purchased...................................... (208,857) (200,943) (421,649)
Principal repayments on held-to-maturity
mortgage-backed securities..................... 309,384 183,702 187,967
Held-to-maturity investment securities
purchased...................................... -- (39,458) (7,575)
Proceeds from maturity of investment securities. -- 39,600 --
Capital expenditures............................ (205,583) (194,623) (200,526)
Contributions in aid of construction............ 9,674 10,417 15,112
Other........................................... 6,717 (4,962) 1,880
- --------------------------------------------------------------------------------------
NET CASH USED IN INVESTING ACTIVITIES........... (407,943) (481,494) (712,721)
- --------------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase (decrease) in deposit liabilities.. (73,385) 94,445 37,727
Net increase in short-term borrowings with
original maturities of three months or less.... 36,374 46,531 101,688
Proceeds from other short-term borrowings....... 1,466 1,098 1,008
Repayment of other short-term borrowings........ (3,122) (2,559) (6,357)
Proceeds from securities sold under agreements
to repurchase................................. 714,100 557,000 145,669
Repurchase of securities sold under agreements
to repurchase................................. (646,000) (269,339) (23,330)
Proceeds from advances from Federal Home Loan
Bank.......................................... 810,560 585,721 998,200
Principal payments on advances from Federal
Home Loan Bank................................ (627,560) (700,821) (671,500)
Proceeds from issuance of long-term debt........ 124,886 78,544 87,814
Repayment of long-term debt..................... (73,400) (38,400) (75,427)
Redemption of electric utility subsidiaries'
preferred stock............................... (2,795) (3,094) (1,886)
Net proceeds from issuance of common stock...... 19,818 19,322 13,602
Common stock dividends.......................... (55,288) (49,415) (47,676)
Other........................................... (9,544) (6,934) (5,768)
- --------------------------------------------------------------------------------------
NET CASH PROVIDED BY FINANCING ACTIVITIES....... 216,110 312,099 553,764
- --------------------------------------------------------------------------------------
Net increase (decrease) in cash and equivalents. (33,416) 43,210 (28,637)
Cash and equivalents, beginning of year......... 130,833 87,623 116,260
- --------------------------------------------------------------------------------------
CASH AND EQUIVALENTS, END OF YEAR............... $ 97,417 $ 130,833 $ 87,623
======================================================================================
</TABLE>
See accompanying "Notes to Consolidated Financial Statements."
40
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1 . SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
- --------------------------------------------------------------------------------
GENERAL
- --------------------------------------------------------------------------------
Hawaiian Electric Industries, Inc. (HEI) is a holding company with subsidiaries
engaged in electric utility, savings bank, freight transportation, real estate
development and other businesses, primarily in the State of Hawaii, and also
engaged in the pursuit of independent power projects and energy services
projects in Asia and the Pacific.
BASIS OF PRESENTATION. The consolidated financial statements have been prepared
in conformity with generally accepted accounting principles (GAAP). In preparing
the consolidated financial statements, management is required to make estimates
and assumptions that affect the reported amounts of assets and liabilities, the
disclosure of contingent assets and liabilities and the reported amounts of
revenues and expenses. 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 impairment losses on 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
HEI 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), which in turn is the parent company of
several subsidiaries; Hawaiian Tug & Barge Corp. (HTB), parent company of Young
Brothers, Limited (YB); Malama Pacific Corp. (MPC), parent company of several
real estate subsidiaries; HEI Investment Corp. (HEIIC); Pacific Energy
Conservation Services, Inc.; and HEI Power Corp. (HEIPC), parent company of
several subsidiaries.
All significant intercompany accounts and transactions have been eliminated in
consolidation.
PUBLIC UTILITIES 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. 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.
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 sales 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.
41
<PAGE>
POSTRETIREMENT 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 1996 and 1995, these postretirement benefits were charged
primarily to expense and electric utility plant. In 1994, these postretirement
benefits were charged primarily to regulatory assets and expense. See Note 17.
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
1996 and 1995 and 3.9% in 1994.
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 the 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.
In October 1996, the American Institute of Certified Public Accountants
issued Statement of Position (SOP) 96-1, "Environmental Remediation
Liabilities." The provisions of the SOP are consistent with the Company's
current policies and, accordingly, adoption of the SOP on January 1, 1997 did
not have a material effect on the Company's financial condition, results of
operations or liquidity.
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.
ACCOUNTING CHANGES.
LONG-LIVED ASSETS. In March 1995, the Financial Accounting Standards Board
(FASB) issued SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets
and for Long-Lived Assets to Be Disposed Of." 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 (undiscounted and without
interest) 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, results of operations or
liquidity.
TRANSFERS AND SERVICING OF FINANCIAL ASSETS AND EXTINGUISHMENTS OF LIABILITIES.
In June 1996, the FASB issued SFAS No. 125, "Accounting for Transfers and
Servicing of Financial Assets and Extinguishments of Liabilities," which
provides accounting and reporting standards based on the consistent application
of a financial-components approach that focuses on control. Under that approach,
after a transfer of financial assets, an entity recognizes the financial and
servicing assets it controls and the liabilities it has incurred, derecognizes
financial assets when control has been surrendered, and derecognizes liabilities
when extinguished. SFAS No. 125 provides consistent standards for distinguishing
between transfers of financial assets that are sales and transfers that are
secured borrowings. SFAS No. 125 amends or supersedes various statements,
including SFAS No. 122. SFAS No. 125 is effective for transfers and servicing of
financial assets and extinguishments of liabilities occurring after
December 31, 1996, and is to be applied
42
<PAGE>
prospectively. The Company adopted the provisions of SFAS No. 125 on January 1,
1997. The adoption of SFAS No. 125 did not have a material effect on the
Company's financial condition, results of operations or liquidity.
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 employee compensation, but does not
require an entity to apply the new method for purposes of preparing its basic
financial statements. For an entity not applying the new method for purposes of
preparing its basic financial statements, SFAS No. 123 requires footnote
disclosure of pro forma net income and earnings per share information for
employee stock option grants made in 1995 and future years as if the fair value
based method had been applied. The Company adopted the provisions of SFAS No.
123 on January 1, 1996, and has elected to continue to apply the provisions of
Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to
Employees," and provide the pro forma disclosures required by SFAS No. 123. See
Note 16.
RECLASSIFICATIONS. Certain reclassifications have been made to prior years'
consolidated financial statements to conform to the 1996 presentation.
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.
SAVINGS BANK
- --------------------------------------------------------------------------------
LOANS RECEIVABLE. Loans receivable are stated at cost less an 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, results of
operations or liquidity. The 1994 financial statements have not been restated.
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.
For the remaining loans receivable portfolio (smaller-balance homogeneous
loans), ASB provides valuation allowances for estimated losses on loans
receivable. Several factors are collectively weighed in determining the adequacy
of the valuation 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, 1996.
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.
43
<PAGE>
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.
2 . SEGMENT FINANCIAL INFORMATION
- --------------------------------------------------------------------------------
Segment financial information on page 26 is incorporated herein by reference.
3 . ELECTRIC UTILITY SUBSIDIARY
- --------------------------------------------------------------------------------
Hawaiian Electric Company, Inc. and subsidiaries
Selected consolidated financial information
INCOME STATEMENT DATA
<TABLE>
<CAPTION>
Years ended December 31 1996 1995 1994
- -----------------------------------------------------------------------------
(in thousands)
<S> <C> <C> <C>
REVENUES
Operating revenues...................... $1,071,426 $981,990 $907,308
Other--nonregulated..................... 9,442 6,732 6,411
- -----------------------------------------------------------------------------
1,080,868 988,722 913,719
- -----------------------------------------------------------------------------
EXPENSES
Fuel oil................................ 250,544 207,001 186,717
Purchased power......................... 286,077 276,364 271,636
Other operation......................... 142,699 137,349 121,740
Maintenance............................. 52,305 47,225 46,427
Depreciation and amortization........... 73,453 67,649 63,779
Taxes, other than income taxes.......... 101,387 92,961 85,877
Other--nonregulated..................... 790 1,130 915
- -----------------------------------------------------------------------------
907,255 829,679 777,091
- -----------------------------------------------------------------------------
Operating income from regulated and
nonregulated activities................ 173,613 159,043 136,628
Allowance for equity funds used during
construction........................... 11,741 10,202 9,064
Interest and other charges.............. (50,115) (47,136) (40,187)
Allowance for borrowed funds used
during construction.................... 5,862 5,112 4,043
- -----------------------------------------------------------------------------
Income before income taxes and
preferred stock dividends of HECO...... 141,101 127,221 109,548
Income taxes............................ 55,888 50,198 43,587
- -----------------------------------------------------------------------------
Income before preferred stock dividends
of HECO................................ 85,213 77,023 65,961
Preferred stock dividends of HECO....... 3,865 4,126 4,316
- -----------------------------------------------------------------------------
Net income for common stock............. $ 81,348 $ 72,897 $ 61,645
=============================================================================
</TABLE>
44
<PAGE>
<TABLE>
<CAPTION>
BALANCE SHEET DATA
December 31 1996 1995
- -------------------------------------------------------------------
(dollars in thousands)
<S> <C> <C>
ASSETS
Utility plant, at cost
Property, plant and equipment......... $2,476,584 $2,291,545
Less accumulated depreciation......... (828,917) (762,770)
Construction in progress.............. 197,835 191,460
- -------------------------------------------------------------------
Net utility plant....................... 1,845,502 1,720,235
Accounts receivable, net................ 80,757 73,053
Unbilled revenues, net.................. 43,726 43,695
Regulatory assets....................... 98,380 97,114
Other................................... 97,181 82,186
- -------------------------------------------------------------------
$2,165,546 $2,016,283
===================================================================
CAPITALIZATION AND LIABILITIES
Common stock equity..................... $ 751,311 $ 696,905
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%......... 38,955 41,750
Long-term debt.......................... 602,226 517,209
- -------------------------------------------------------------------
Total capitalization.................... 1,440,785 1,304,157
Short-term borrowings from
nonaffiliates and affiliate............ 125,920 138,753
Deferred income taxes................... 119,613 116,963
Unamortized tax credits................. 47,634 45,935
Contributions in aid of construction.... 197,805 191,854
Other................................... 233,789 218,621
- -------------------------------------------------------------------
$2,165,546 $2,016,283
===================================================================
</TABLE>
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 1997 through 2001 are $3 million in 1997, $2 million in each of
the years 1998 and 1999 and $3 million in each of the years 2000 and 2001.
MAJOR CUSTOMERS. The electric utility subsidiaries derive approximately 10% of
their operating revenues from the sale of electricity to various federal
government agencies. These revenues amounted to $108 million in 1996,
$97 million in 1995 and $89 million in 1994.
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, 1997, the estimated amount of required
purchases for 1997 is $254 million. The actual amount of purchases in 1997 could
vary substantially from this estimate as a result of changes in market prices
and other factors. HECO and its subsidiaries purchased $261 million, $194
million and $186 million of fuel under these or prior contractual agreements in
1996, 1995 and 1994, respectively. New contracts to replace expiring ones are
expected to be entered into in the normal course of business.
At December 31, 1996, HECO and its subsidiaries had purchase commitments,
other than fuel and power purchase contracts, amounting to approximately $47
million.
45
<PAGE>
POWER PURCHASE AGREEMENTS. At December 31, 1996, HECO and its subsidiaries had
power purchase agreements for 474 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 1997, $106 million in 1998, $109 million in 1999, $102 million
each in 2000 and 2001 and a total of $2.0 billion in 2002 through 2028.
In general, payments under the power purchase agreements for 474 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. At December 31, 1996, amounts recognized under interim
rate increases and subject to refund amounted to $8.5 million.
HECO POWER OUTAGE. On April 9, 1991, HECO experienced a power outage that
affected all customers on the island of Oahu. The PUC initiated an
investigation of the April 9, 1991 outage, which was consolidated with a pending
investigation of an outage that occurred in 1988. Power Technologies, Inc.
(PTI), an independent consultant hired by HECO with the approval of the PUC,
investigated the 1991 outage. HECO is implementing certain of PTI'S
recommendations and provides the PUC with a quarterly summary of its progress on
those recommendations. Management cannot predict the timing and outcome of any
PUC D&O that may be issued, if any, with respect to the outages.
HELCO POWER SITUATION.
BACKGROUND. In 1991, HELCO identified the need, beginning in 1994, for
- ----------
additional generation to provide for forecast load growth while maintaining a
satisfactory generation reserve margin, to address uncertainties about future
deliveries of power from existing firm power producers and to permit the
retirement of older generating units. Accordingly, HELCO proceeded with plans to
install at its Keahole power plant site two 20-MW combustion turbines (CT-4 and
CT-5), followed by an 18-MW heat steam recovery generator (ST-7), at which time
these units would be converted to a 56-MW (net) combined-cycle unit. In January
1994, the PUC approved expenditures for CT-4, which HELCO had planned to install
in late 1994.
Despite HELCO's best efforts to install this additional generation, the
schedule for the installation of HELCO's phased combined-cycle unit at the
Keahole power plant site has been revised due to delays in (a) obtaining
approval from the Hawaii Board of Land and Natural Resources (BLNR) of the
Conservation District Use Permit (CDUP) amendment and (b) obtaining from the
Department of Health of the State of Hawaii (DOH) and the U. S. Environmental
Protection Agency (EPA) the air quality Prevention of Significant
Deterioration/Covered Source (PSD) permit for the Keahole power plant site.
CDUP AMENDMENT. On January 3, 1997, the Third Circuit Court of the State of
- --------------
Hawaii issued a decision on HELCO's appeal of an order of the BLNR. The decision
in effect allows HELCO to use its Keahole property as requested in its
application for the CDUP amendment. Entry of final judgment on all unresolved
issues is pending. While this decision is subject to appeal upon entry of final
judgment, management believes that HELCO would ultimately prevail and the
decision would be upheld.
PSD PERMIT. In a November 1995 letter to the DOH, the EPA declined to sign
- ----------
HELCO's PSD permit for the combined-cycle unit on the basis that a different
emission control technology should be used. After HELCO proposed to the DOH to
reduce net nitrogen oxide emission increases by retiring and/or reducing the use
of certain existing Keahole diesel units, the EPA stated that it found the
netting proposal procedurally and substantively acceptable, and that if emission
increases were kept below significance levels, it would not require the use of
any particular emission control technology. In December 1996, The DOH proposed a
revised draft air permit which reflected HELCO's netting proposal and was
acceptable to HELCO. A public hearing relating to the modifications in the
revised draft permit is scheduled for March 3, 1997. Management believes that
HELCO will obtain the required PSD permit.
46
<PAGE>
On February 5, 1997, the Keahole Defense Coalition and three individuals
filed a lawsuit in the Third Circuit Court of the State of Hawaii against HELCO,
the director of the DOH, and the BLNR, seeking declaratory rulings that, with
regard to the Keahole project, one or more of the defendants had violated, or
could not allow the plant to operate without violating, the State Clean Air Act,
the State Noise Pollution Act, conditions of HELCO's conditional use permit,
covenants of HELCO's land patent and Hawaii administrative rules regarding
standard conditions applicable to land permits. Management cannot predict the
outcome of this lawsuit.
IPP COMPLAINTS. Two independent power producers (IPPs), Kawaihae Cogeneration
- --------------
Partners (KCP) and Enserch Development Corporation (Enserch), filed separate
complaints against HELCO with the PUC in 1993 and 1994, respectively, 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 a substitute for HELCO's planned 56-MW combined-
cycle unit at Keahole.
In September 1995, the PUC allowed HELCO to continue to pursue construction
of and commit expenditures for the second combustion turbine (CT-5) and the
steam recovery generator (ST-7) for its planned combined-cycle unit, stating in
its order that "no part of the project may be included in HELCO's rate base
unless and until the project is in fact installed, and is used and useful for
utility purposes." In view of permitting delays and the need for power, the PUC
also ordered HELCO to continue negotiating with the IPPs and directed that the
facility to be built (i.e., either HELCO's or one of the IPP's) should be the
one that can be most expeditiously put into service at "allowable cost."
On January 26, 1996, the PUC ordered HELCO to continue in good faith to
negotiate a power purchase agreement with KCP. Status reports were filed with
the PUC in March 1996. On December 12, 1996, KCP filed directly with the PUC a
new proposal pursuant to which it would construct a facility and have HELCO
operate and manage the facility. Although the new proposal had not been
submitted to or negotiated with HELCO, KCP asked the PUC to compel HELCO to
enter into the agreement. On December 19, 1996, HELCO filed a Motion to Dismiss
or to extend the time for responding. The PUC has not yet acted on that motion.
On October 4, 1996, the PUC issued its decision and order that, among other
things, required HELCO and Enserch to continue to negotiate on an expeditious
basis and, within 75 days, to submit to the PUC either a finalized power
purchase agreement or reports on matters that are preventing the finalization of
an agreement. The parties were not able to finalize a power purchase agreement
within the 75 days and, accordingly, filed status reports with the PUC in
December 1996 and January 1997. Negotiations are ongoing.
Management cannot determine at this time whether the negotiations with the
IPPs and related PUC proceedings will result in a power purchase agreement.
COSTS INCURRED. As of December 31, 1996, HELCO's costs incurred in its efforts
- --------------
to put into service its combined-cycle unit amounted to $49.2 million, including
approximately $26.8 million for equipment and material purchases, approximately
$10.3 million for planning, engineering, permitting, site development and other
costs and approximately $12.1 million as an allowance for funds used during
construction.
CONTINGENCY PLANNING. In June 1995, HELCO filed with the PUC its generation
- --------------------
resource contingency plan detailing alternatives and mitigation measures to
address possible further delays in obtaining the permits necessary to construct
its combined-cycle unit. HELCO arranged for additional firm capacity to be
provided by its existing firm power producers, obtained contracts shifting loads
to off-peak hours, deferred generation unit retirements and, in January 1996,
began the implementation of its energy-efficiency demand-side management
programs. These measures have helped HELCO maintain its reserve margin and
reduce the risk of capacity shortages.
In January 1996, the PUC opened a proceeding to evaluate HELCO's
contingency resource plan and HELCO's efforts to insure system reliability.
HELCO filed reports in March and October 1996 to update the PUC on its
contingency plan and its implementation.
ENVIRONMENTAL REGULATION. See Note 22, "Contingencies."
MANAGEMENT SERVICES FEES. HEI's charges to HECO and its subsidiaries for
general management and administrative services totaled $2.3 million, $2.5
million and $2.4 million in 1996, 1995 and 1994, respectively. HEI's charges to
HECO for data processing services totaled $3.1 million, $3.5 million and
$3.6 million in 1996, 1995 and 1994, respectively.
47
<PAGE>
4 . SAVINGS BANK SUBSIDIARY
- -------------------------------------------------------------------------------
American Savings Bank, F.S.B. and subsidiaries
Selected consolidated financial information
<TABLE>
<CAPTION>
INCOME STATEMENT DATA
Years ended December 31 1996 1995 1994
- -------------------------------------------------------------------------------
(in thousands)
<S> <C> <C> <C>
Interest income......................... $255,714 $ 236,694 $ 203,373
Interest expense........................ 153,664 142,705 103,906
- -------------------------------------------------------------------------------
Net interest income..................... 102,050 93,989 99,467
Provision for loan losses............... (7,631) (4,887) (3,983)
Other income............................ 15,688 17,922 12,152
Operating, administrative and general
expenses............................... (83,886) (66,980) (65,111)
- -------------------------------------------------------------------------------
Operating income........................ 26,221 40,044 42,525
Income taxes............................ 11,253 16,765 17,760
- -------------------------------------------------------------------------------
Net income.............................. $ 14,968 $ 23,279 $ 24,765
===============================================================================
</TABLE>
<TABLE>
<CAPTION>
BALANCE SHEET DATA
December 31 1996 1995
- -------------------------------------------------------------------------------
(in thousands)
<S> <C> <C>
ASSETS
Cash and equivalents.............................. $ 93,905 $ 129,678
Held-to-maturity investment securities............ 37,518 34,720
Held-to-maturity mortgage-backed securities....... 1,340,073 1,444,832
Loans receivable, net............................. 2,002,028 1,687,801
Other............................................. 80,128 75,150
Goodwill and other intangibles.................... 37,035 41,245
- -------------------------------------------------------------------------------
$3,590,687 $3,413,426
===============================================================================
LIABILITIES AND EQUITY
Deposit liabilities............................... $2,150,370 $2,223,755
Securities sold under agreements to repurchase.... 479,742 412,521
Advances from Federal Home Loan Bank.............. 684,274 501,274
Other............................................. 54,251 57,973
- -------------------------------------------------------------------------------
3,368,637 3,195,523
Common stock equity............................... 222,050 217,903
- -------------------------------------------------------------------------------
$3,590,687 $3,413,426
===============================================================================
</TABLE>
DEPOSIT-INSURANCE PREMIUMS AND REGULATORY DEVELOPMENTS. 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).
On September 30, 1996, President Clinton signed into law the Deposit Insurance
Funds Act of 1996 (Funds Act), which required the FDIC to impose a one-time
special assessment on SAIF members in an amount sufficient to increase the SAIF
reserve ratio to 1.25% of aggregate insured deposits as of October 1, 1996. In
addition, effective January 1, 1997, the Funds Act provided that the assessment
base for raising funds to pay interest on obligations issued by the Financing
Corporation (FICO) is to be expanded to include the deposits of banks as well as
thrifts. The provisions of the Funds Act should enable SAIF institutions to
achieve, over time, parity with BIF institutions in the schedules of the
premiums to be paid for deposit insurance coverage and to fund FICO interest
obligations.
In October 1996, the FDIC set the one-time special assessment for SAIF
deposits at 65.7 cents per $100 of deposits, to be applied against insured
deposits held by SAIF institutions as of March 31, 1995. ASB's special
assessment
48
<PAGE>
was $8.3 million after tax, and was accrued in September 1996. In December 1996,
the FDIC adopted a risk-based assessment schedule for SAIF institutions,
effective January 1, 1997, that was identical to the existing base rate schedule
for BIF institutions: zero to 27 cents per $100 of deposits. Added to this base
rate schedule through 1999 will be the assessment to fund the FICO's interest
obligations of 6.48 cents per $100 of deposits for SAIF institutions and 1.3
cents per $100 of deposits for BIF institutions (subject to quarterly
adjustment). By law, the FICO rate on BIF-assessable deposits must be one-fifth
the rate on SAIF-assessable deposits until the insurance funds are merged or
until January 1, 2000, whichever occurs first, at which time the FICO interest
obligation for both banks and thrifts should thereafter be identical, at a
currently estimated rate of 2.4 cents per $100 of deposits.
As a "well-capitalized" thrift, ASB's base deposit insurance premium effective
January 1, 1997 is zero and its assessment for funding FICO interest payments is
6.48 cents per $100 of deposits, compared to its payments through the third
quarter of 1996 calculated at 23 cents per $100 of deposits.
The Funds Act provides that the SAIF and BIF will be merged into the Deposit
Insurance Fund by January 1, 1999, but only if no insured depository institution
is a thrift on that date. The Funds Act leaves to subsequent legislation,
however, the manner in which thrift charters might be eliminated in favor of a
bank or some other form of charter. Certain of the legislative proposals
advanced to address this issue, if adopted, could have a material adverse effect
on the Company. For example, if thrift charters are eliminated and ASB obtains a
bank charter, HEI and its subsidiaries might become subject to the restrictions
on the permissible activities of a bank holding company. While certain of the
proposals that have been advanced would grandfather the activities of existing
savings and loan holding companies such as HEI, management cannot predict
whether or in what form any of these proposals might ultimately be adopted or
the extent to which the business of HEI or ASB might be affected.
INVESTMENT AND MORTGAGE-BACKED SECURITIES. The carrying value and estimated
market value of investment and mortgage-backed securities were summarized as
follows:
<TABLE>
<CAPTION>
December 31 1996 1995
- -----------------------------------------------------------------------------------------------------------------------------------
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........... $ 37,518 $ -- $ -- $ 37,518 $ 34,720 $ -- $ -- $ 34,720
Mortgage-backed
securities:
Private-issue..... 605,477 4,004 (5,320) 604,161 744,200 3,947 (4,978) 743,169
FHLMC............. 134,720 920 (476) 135,164 143,514 2,617 (118) 146,013
GNMA.............. 64,732 990 (1,201) 64,521 74,436 1,367 (585) 75,218
FNMA.............. 535,144 3,028 (12,208) 525,964 482,682 6,938 (3,649) 485,971
- -----------------------------------------------------------------------------------------------------------------------------------
1,340,073 8,942 (19,205) 1,329,810 1,444,832 14,869 (9,330) 1,450,371
- -----------------------------------------------------------------------------------------------------------------------------------
$1,377,591 $8,942 $(19,205) $1,367,328 $1,479,552 $14,869 $(9,330) $1,485,091
===================================================================================================================================
</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, 1996 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, 1996 and 1995 was 6.98% and 6.87%, respectively.
Mortgage-backed securities with a carrying value of approximately $818 million
and $711 million at December 31, 1996 and 1995, 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, 1996 and 1995,
mortgage-backed securities sold under agreements to repurchase had a carrying
value of $523 million and $442 million, respectively.
ASB did not sell mortgage-backed securities or other securities held for
investment in 1996, 1995 or 1994.
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
49
<PAGE>
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 1996, there were no proceeds from the sale of trading account securities.
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, proceeds from the
sale of trading securities were approximately $59 million resulting in a net
loss of $2.0 million.
LOANS RECEIVABLE. Loans receivable consisted of the following:
<TABLE>
<CAPTION>
December 31 1996 1995
- -------------------------------------------------------------------
(in thousands)
<S> <C> <C>
Real estate loans
Conventional.......................... $1,800,365 $1,495,955
Construction and development.......... 29,964 29,650
- -------------------------------------------------------------------
1,830,329 1,525,605
Loans secured by savings deposits....... 15,441 15,688
Consumer loans.......................... 192,315 170,743
Commercial loans........................ 18,548 20,560
- -------------------------------------------------------------------
2,056,633 1,732,596
Undisbursed portion of loans in process. (17,618) (16,597)
Deferred fees and discounts, including
net purchase accounting discounts...... (17,782) (15,282)
Allowance for loan losses............... (19,205) (12,916)
- -------------------------------------------------------------------
$2,002,028 $1,687,801
===================================================================
</TABLE>
At December 31, 1996 and 1995, the weighted average interest rate for loans
receivable was 8.10% and 8.23%, respectively.
At December 31, 1996, loans with an amortized cost of approximately $131.3
million were pledged as collateral to secure advances from the FHLB of Seattle.
At December 31, 1996, impaired loans were $33 million and consisted of
$20 million of income property loans and $13 million of residential real estate
loans for properties of one to four units. At December 31, 1995, impaired loans
approximated $17 million, of which $14 million related to income property loans
and $3 million related to residential loans. The average balances of impaired
loans during 1996 and 1995 were $20 million and $18 million, respectively.
At December 31, 1996 and 1995, nonaccrual and renegotiated loans were
$50 million and $28 million, respectively.
ASB services real estate loans ($626 million, $697 million and $327 million at
December 31, 1996, 1995 and 1994, 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 $22 million are not reflected in
the consolidated balance sheet as of December 31, 1996. Of such commitments,
$5 million were for variable-rate mortgage loans and $17 million were for fixed-
rate mortgage loans.
ALLOWANCE FOR LOAN LOSSES. For 1996, 1995 and 1994, net charge-offs amounted to
$1.3 million, $0.8 million and $0.5 million, respectively. For 1996, 1995 and
1994, the ratio of net charge-offs to average loans outstanding was 0.07%, 0.04%
and 0.03%, respectively. At December 31, 1996 and 1995, the allowance for loan
losses for impaired loans was $4.8 million and $1.7 million, respectively. For
1996, there were no net charge-offs for impaired loans.
REAL ESTATE ACQUIRED IN SETTLEMENT OF LOANS. At December 31, 1996 and 1995, ASB
had real estate acquired in settlement of loans of $2.6 million and $2.7
million, respectively.
DEPOSIT LIABILITIES. Deposit liabilities consisted of the following:
<TABLE>
<CAPTION>
December 31 1996 1995
- ---------------------------------------------------------------------------
Weighted Weighted
average average
rate Amount rate Amount
- ---------------------------------------------------------------------------
(dollars in thousands)
<S> <C> <C> <C> <C>
Commercial checking...... -- % $ 25,436 -- % $ 22,535
Other checking........... 1.39 253,263 1.88 253,669
Passbook................. 2.98 913,616 3.49 919,211
Money market............. 3.67 65,026 3.71 64,783
Term certificates........ 5.42 893,029 5.86 963,557
- ---------------------------------------------------------------------------
3.79% $2,150,370 4.30% $2,223,755
===========================================================================
</TABLE>
At December 31, 1996 and 1995, deposit accounts of $100,000 or more totaled
$468 million and $457 million, respectively.
The approximate amounts of term certificates outstanding at December 31, 1996
with scheduled maturities for 1997 through 2001 were $517 million in 1997,
$273 million in 1998, $25 million in 1999, $14 million in 2000 and $7 million in
2001.
50
<PAGE>
Interest expense on savings deposits by type of deposit was as follows:
<TABLE>
<CAPTION>
Years ended December 31 1996 1995 1994
- ----------------------------------------------------------
(in thousands)
<S> <C> <C> <C>
Interest-bearing checking... $ 4,337 $ 5,535 $ 5,997
Passbook.................... 31,401 34,039 42,624
Money market................ 2,296 2,287 2,670
Term certificates........... 53,130 47,435 25,218
- ----------------------------------------------------------
$91,164 $89,296 $76,509
==========================================================
</TABLE>
SECURITIES SOLD UNDER AGREEMENTS TO REPURCHASE. At December 31, 1996,
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, 1996 and 1995, approximately $480 million and
$413 million, respectively, of agreements to repurchase identical securities
were outstanding. At December 31, 1996 and 1995, the weighted average rate on
securities sold under agreements to repurchase was 5.50% and 5.84%,
respectively, and the weighted average remaining days to maturity was 92 days
and 164 days, respectively. During 1996, 1995 and 1994, securities sold under
agreements to repurchase averaged $463 million, $277 million and $21 million,
respectively, and the maximum amount outstanding at any month-end was
$480 million, $413 million and $123 million, respectively.
At December 31, 1996, securities sold under agreements to repurchase were
summarized as follows:
<TABLE>
<CAPTION>
Collateralized by
mortgage-backed securities
-------------------------------
Weighted Carrying value,
Repurchase average including Market
Maturity liability rate accrued interest value
- --------------------------------------------------------------------------------
(dollars in thousands)
<S> <C> <C> <C> <C>
1 to 29 days $113,708 5.37% $123,391 $120,291
30 to 90 days 96,624 5.52 107,807 103,253
Over 90 days 269,410 5.55 294,323 288,055
- --------------------------------------------------------------------------------
$479,742 5.50% $525,521 $511,599
================================================================================
</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 1996 1995
- -------------------------------------------------------------------------------
Weighted Weighted
average rate Amount average rate Amount
- -------------------------------------------------------------------------------
(dollars in thousands)
<S> <C> <C> <C> <C>
Due in
1996..................... na na 6.81% $206,060
1997..................... 5.98% $227,300 5.77 94,800
1998..................... 5.69 105,093 4.96 36,393
1999..................... 5.54 32,800 4.98 20,300
2000..................... 5.90 28,260 5.27 15,400
2001..................... 6.97 65,000 6.97 15,000
Thereafter............... 7.22 225,821 7.50 113,321
- -------------------------------------------------------------------------------
6.42% $684,274 6.52% $501,274
===============================================================================
na Not applicable.
</TABLE>
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.
COMMON STOCK EQUITY. As of December 31, 1996, ASB was in compliance with the
minimum capital requirements under the Office of Thrift Supervision Regulations.
MANAGEMENT SERVICES FEES. HEI'S expenses allocated to the savings bank segment
for general management and administrative services totaled $0.8 million in each
year from 1994 through 1996.
5 . 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 four 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
51
<PAGE>
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 $46 million and
$50 million at December 31, 1996 and 1995, respectively. The amounts MPC will
ultimately realize relative to these real estate investments could differ
materially from the recorded amounts as of December 31, 1996.
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 $12 million
and $13 million, respectively, at December 31, 1996 and 1995.
COMMITMENTS AND CONTINGENCIES. At December 31, 1996, MPC or its subsidiaries
had issued (i) guarantees under which they were jointly and severally
contingently liable with their joint venture partners for $2.1 million of
outstanding loans and (ii) payment guarantees under which MPC or its
subsidiaries were severally contingently liable for $5.8 million of outstanding
loans and $3.2 million of additional undrawn loan facilities. All such loans are
collateralized by real property. At December 31, 1996, HEI had agreed with the
lenders of construction loans and loan facilities, of which approximately
$8.8 million was outstanding and $3.9 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 as guarantor.
6 . OTHER INVESTMENTS
- --------------------------------------------------------------------------------
Other investments, which have no ready market, consisted of the following:
<TABLE>
<CAPTION>
December 31 1996 1995
- ------------------------------------------------------------
(in thousands)
<S> <C> <C>
Leveraged leases (see Note 7)........... $54,869 $53,379
Real estate joint venture interests..... 12,032 12,666
Other................................... 5,708 8,280
- ------------------------------------------------------------
$72,609 $74,325
============================================================
</TABLE>
Realized gains and losses from the sale and writedown of other investments were
not material in 1996, 1995 or 1994.
7 . 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.
HEIIC's net investment in leveraged leases was as follows:
<TABLE>
<CAPTION>
December 31 1996 1995
- ---------------------------------------------------------------
(in thousands)
<S> <C> <C>
Rentals receivable, net of principal
and interest on nonrecourse debt....... $ 54,763 $ 57,732
Estimated residual value of leased
assets................................. 33,062 33,062
Less unearned income.................... (32,956) (37,415)
- ---------------------------------------------------------------
Investment in leveraged leases.......... 54,869 53,379
Less deferred income taxes arising from
leveraged leases....................... (45,592) (44,952)
- ---------------------------------------------------------------
$ 9,277 $ 8,427
===============================================================
</TABLE>
8 . 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. An
enterprise's operations or a portion of its 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. When an
enterprise's operations or a portion of its operations cease to meet the
criteria, it 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
52
<PAGE>
should change so that the criteria are no longer satisfied, management believes
that a material adverse effect on the Company's results of operations, financial
position or liquidity may result.
Regulatory assets at December 31, 1996 and 1995 included the following
deferred costs:
<TABLE>
<CAPTION>
December 31 1996 1995
- -------------------------------------------------------------
(in thousands)
<S> <C> <C>
Income taxes............................ $ 41,023 $31,772
Postretirement benefits other than
pensions............................... 30,981 32,917
Integrated resource planning costs...... 7,354 9,425
Vacation earned, but not yet taken...... 6,392 6,236
Unamortized debt expense on retired
issuances.............................. 6,207 6,860
Preliminary plant costs on suspended
project................................ 5,759 5,759
Other................................... 3,088 6,724
- -------------------------------------------------------------
$100,804 $99,693
=============================================================
</TABLE>
In 1995, HECO applied to the PUC for recovery of the preliminary plant costs on
a suspended project.
9 . SHORT-TERM BORROWINGS
- --------------------------------------------------------------------------------
Short-term borrowings at December 31, 1996 and 1995 had a weighted average
interest rate of 5.9% and 6.2%, respectively, and consisted of commercial paper
and bank loans.
At December 31, 1996 and 1995, HEI maintained bank lines of credit which
totaled $90 million and $55 million, respectively, and HECO maintained bank
lines of credit which totaled $170 million and $145 million, respectively. In
January 1997, HECO decreased its bank lines of credits to $140 million. The HEI
and HECO lines of credit support the issuance of commercial paper. There were no
borrowings under any line of credit during 1996 or 1995.
10 . LONG-TERM DEBT
- --------------------------------------------------------------------------------
Long-term debt consisted of the following:
<TABLE>
<CAPTION>
December 31 1996 1995
- ---------------------------------------------------------------
(dollars in thousands)
<S> <C> <C>
First mortgage bonds
5.75%, due in 1997.................... $ 13,000 $ 13,000
7.63-7.88%, due in various years
through 2003........................ 22,000 22,000
- ---------------------------------------------------------------
35,000 35,000
- ---------------------------------------------------------------
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 47,000
6.20% series 1996A, due 2026.......... 75,000 --
5.88% series 1996B, due 2026.......... 50,000 --
- ---------------------------------------------------------------
550,900 425,900
Less funds on deposit with trustees..... (9,132) (943)
Less unamortized discount............... (4,542) (2,748)
- ---------------------------------------------------------------
537,226 422,209
- ---------------------------------------------------------------
Promissory notes
4.85-5.83%, due in various years
through 1998......................... 30,000 60,000
6.26-7.59%, due in various years
through 2006......................... 127,000 143,000
8.20-9.85%, due in various years
through 2011......................... 37,900 55,300
Variable rate (5.95% at December 31,
1996), due 1999...................... 35,000 35,000
Variable rate (9.75% at December 31,
1996), due 2001...................... 7,954 7,954
- ---------------------------------------------------------------
237,854 301,254
- ---------------------------------------------------------------
$810,080 $758,463
===============================================================
</TABLE>
53
<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, 1996, the aggregate principal payments required on long-term
debt for 1997 through 2001 are $65 million in 1997, $32 million in 1998,
$42 million in 1999, $12 million in 2000 and $32 million in 2001.
11. SUBSEQUENT EVENT
- --------------------------------------------------------------------------------
ISSUANCE OF COMPANY-OBLIGATED TRUST PREFERRED SECURITIES. In February 1997,
Hawaiian Electric Industries Capital Trust I (the Trust), a grantor trust,
issued and sold, in an underwritten registered public offering, 4 million 8.36%
Company-obligated preferred securities (trust preferred securities),
representing preferred undivided beneficial ownership interests in the assets of
the Trust. HEI owns 100% of the common securities of the Trust. The Trust
utilized the proceeds from the issuance of the trust preferred securities
($100 million) to purchase the limited partner interests in HEI Preferred
Funding, LP (the Partnership). Substantially all of the proceeds from the sale
of the limited partner interests were used by the Partnership to purchase 8.36%
junior subordinated debentures of HEI and HEIDI due in 2017. Hycap Management,
Inc. (Hycap), a wholly owned subsidiary of HEI, is the sole general partner of
the Partnership. The limited partner interests in the Partnership are the sole
assets of the trust. HEI and HEIDI's junior subordinated debentures represent
substantially all the assets of the Partnership. In connection with these
transactions, HEI issued subordinated guarantees relating to the performance of
certain obligations by the Trust, the Partnership and HEIDI. HEI's obligations
under the agreements related to the issuances of such securities, taken
together, constitute a full and unconditional guarantee on a subordinated basis
by HEI of the Trust's obligations relating to the trust preferred securities.
The debentures issued by HEI and HEIDI to the Partnership, the interests in the
Partnership, HEI's investment in Hycap and the common securities of the Trust
owned by HEI will be eliminated in the Company's consolidated balance sheets.
The securities will be described in the Company's consolidated balance sheets as
"Company-obligated trust preferred securities."
12. COMMON STOCK
- --------------------------------------------------------------------------------
Changes to common stock were as follows:
<TABLE>
<CAPTION>
1996 1995 1994
- ------------------------------------------------------------------------------------------------
Common Common Common
Shares stock Shares stock Shares stock
- ------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
(in thousands)
Balance, January 1............. 29,773 $585,387 28,655 $546,254 27,675 $514,710
Issuance of common stock
Dividend reinvestment and
stock purchase plan........ 822 28,718 786 27,892 869 28,087
Retirement savings and
other plans................ 258 9,161 332 11,324 111 3,605
Expenses and other............. -- (321) -- (83) -- (148)
- ------------------------------------------------------------------------------------------------
Balance, December 31........... 30,853 $622,945 29,773 $585,387 28,655 $546,254
================================================================================================
</TABLE>
54
<PAGE>
At December 31, 1996, the Company had reserved a total of 8.8 million shares of
common stock for future issuance under the HEI Dividend Reinvestment and Stock
Purchase Plan, the Hawaiian Electric Industries Retirement Savings Plan, the
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 1996 1995 1994
- ---------------------------------------------------------------------------
(in thousands)
<S> <C> <C> <C>
Electric utility........................ $ 47,451 $ 44,377 $ 37,340
Other................................... 18,381 18,483 16,688
- ---------------------------------------------------------------------------
65,832 62,860 54,028
Savings bank............................ 153,664 142,705 103,906
- ---------------------------------------------------------------------------
$219,496 $205,565 $157,934
===========================================================================
</TABLE>
14. INCOME TAXES
- --------------------------------------------------------------------------------
The components of income taxes were as follows:
<TABLE>
<CAPTION>
Years ended December 31 1996 1995 1994
- ---------------------------------------------------------------------------
(in thousands)
<S> <C> <C> <C>
Federal
Current............................... $ 49,022 $ 39,187 $ 40,798
Deferred.............................. 2,020 8,352 4,665
Deferred tax credits, net............. (98) (34) (278)
- ---------------------------------------------------------------------------
50,944 47,505 45,185
- ---------------------------------------------------------------------------
State
Current............................... (334) 3,893 3,060
Deferred.............................. 582 1,596 1,218
Deferred tax credits, net............. 3,638 2,746 3,556
- ---------------------------------------------------------------------------
3,886 8,235 7,834
- ---------------------------------------------------------------------------
$ 54,830 $ 55,740 $ 53,019
===========================================================================
</TABLE>
A reconciliation of the amount of income taxes 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 1996 1995 1994
- ------------------------------------------------------------------------
(in thousands)
<S> <C> <C> <C>
Amount at the federal statutory income
tax rate............................... $46,721 $ 46,632 $ 44,117
State income taxes, net of effect on
federal income taxes................... 2,525 5,353 5,092
Preferred stock dividends of electric
utility subsidiaries................... 2,285 2,410 2,507
Other, net.............................. 3,299 1,345 1,303
- ------------------------------------------------------------------------
$54,830 $ 55,740 $ 53,019
========================================================================
</TABLE>
The tax effects of temporary differences which give rise to deferred tax assets
and liabilities were as follows:
<TABLE>
<CAPTION>
December 31 1996 1995
- ------------------------------------------------------------------------
(in thousands)
<S> <C> <C>
Deferred tax assets
Property, plant and equipment........ $ 10,283 $ 8,670
Contributions in aid of construction
and customer advances............... 55,305 53,709
Other................................ 31,239 31,816
- ------------------------------------------------------------------------
96,827 94,195
- ------------------------------------------------------------------------
Deferred tax liabilities
Property, plant and equipment........ 175,823 171,205
Leveraged leases..................... 45,592 44,952
Regulatory assets.................... 15,984 11,966
Other................................ 45,037 48,173
- ------------------------------------------------------------------------
282,436 276,296
- ------------------------------------------------------------------------
Net deferred income tax liability....... $185,609 $182,101
========================================================================
</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, 1996 or 1995.
55
<PAGE>
15. CASH FLOWS
- --------------------------------------------------------------------------------
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION. In 1996, 1995 and 1994, 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 $214 million, $196 million and
$154 million, respectively. In 1996, 1995 and 1994, cash paid for interest on
nonrecourse debt on leveraged leases amounted to $8 million, $9 million and $9
million, respectively.
In 1996, 1995 and 1994, cash paid for income taxes amounted to $40 million,
$44 million and $47 million, respectively.
SUPPLEMENTAL DISCLOSURES OF NONCASH ACTIVITIES. In 1995, ASB received
$409 million in mortgage-backed securities in exchange for loans and 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 $18 million, $20 million and $18 million in
1996, 1995 and 1994, respectively.
The estimated fair value of noncash contributions in aid of construction
received by the electric utility subsidiaries in 1996, 1995 and 1994 amounted to
$5 million, $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 $12 million, $10
million and $9 million in 1996, 1995 and 1994, 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
2,650,000 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 the nonqualified stock options, the
exercise price of each option generally equals the market price of the Company's
stock on or near the date of grant. Options generally become exercisable in
installments of 25% each year for four years, and expire, if not exercised ten
years from the date of the grant. Certain options include dividend equivalents
over the four-year vesting period.
The Company applies the provisions of Accounting Principles Board Opinion No.
25, "Accounting for Stock Issued to Employees," and related interpretations, in
accounting for stock-based compensation awards. The compensation cost that has
been charged against income for the nonqualified stock options and dividend
equivalents amounted to $0.7 million for each of 1996, 1995 and 1994. As of
January 1, 1996, the Company adopted the disclosure-only option under SFAS No.
123, "Accounting for Stock-Based Compensation." If the accounting provisions of
SFAS No. 123 had been adopted, the effect on 1995 and 1996 net income would have
been immaterial. Further, based on current and anticipated use of stock-based
compensation, it is expected that the impact of SFAS No. 123's accounting
provisions would not be material in any future period.
Information about the Company's stock option plan was summarized as follows:
<TABLE>
<CAPTION>
1996 1995 1994
- ---------------------------------------------------------------------------------------------------------
Weighted- Weighted- Weighted-
average average average
exercise exercise exercise
Shares price Shares price Shares price
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Outstanding, January 1 553,083 $36.30 568,333 $36.46 463,458 $37.20
Granted 80,000 35.83 141,000 32.83 111,500 33.28
Exercised (20,208) 33.58 (150,250) 33.72 -- --
Forfeited or expired (2,000) 38.27 (6,000) 34.64 (6,625) 34.27
- ---------------------------------------------------------------------------------------------------------
Outstanding, December 31 610,875 $36.32 553,083 $36.30 568,333 $36.46
=========================================================================================================
Options exercisable, December 31 377,625 $37.45 303,458 $38.02 327,958 $37.25
=========================================================================================================
</TABLE>
56
<PAGE>
Weighted average fair values and assumptions used were as follows:
<TABLE>
<CAPTION>
1996 1995
- -------------------------------------------------------------------
<S> <C> <C>
Weighted-average fair
value of options granted
during the year (at grant date) $8.40 $6.03
Weighted-average assumptions
used to estimate fair value
Risk-free interest rate 6.3% 6.7%
Expected life 4.5 years 4.5 years
Expected volatility 12.0% 13.7%
Expected dividend yield 6.6% 6.4%
</TABLE>
At December 31, 1996, unexercised stock options have exercise prices ranging
from $32.72 to $41.00 per common share, and a weighted-average remaining
contractual life of 6.8 years.
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 1996 1995
- ---------------------------------------------------------------
(in thousands)
<S> <C> <C>
Accumulated benefit obligation
Vested................................ $398,167 $372,967
Nonvested............................. 43,397 40,271
- ---------------------------------------------------------------
$441,564 $413,238
===============================================================
Projected benefit obligation............ $548,144 $515,280
Plan assets at fair value, primarily
equity securities and fixed income
investments............................ 569,935 505,404
- ---------------------------------------------------------------
Projected benefit obligation in excess
of (less than) plan assets............. (21,791) 9,876
Unrecognized prior service cost......... (4,422) (3,158)
Unrecognized net gain................... 41,645 9,708
Unrecognized net transition obligation.. (15,009) (17,510)
Adjustment required to recognize
minimum liability...................... 1,029 984
- ---------------------------------------------------------------
Accrued (prepaid) pension liability..... $ 1,452 $ (100)
===============================================================
</TABLE>
Plans with an accumulated benefit obligation exceeding plan assets at fair value
were not material. For all pension plans at December 31, 1996 and 1995, the
assumed discount rate used to measure the projected benefit obligation was 7%.
Net periodic pension cost included the following components:
<TABLE>
<CAPTION>
Years ended December 31 1996 1995 1994
- ----------------------------------------------------------------------------
(in thousands)
<S> <C> <C> <C>
Service cost--benefits earned during $ 19,227 $ 14,805 $ 16,834
the period.............................
Interest cost on projected benefit 35,265 32,929 30,067
obligation.............................
Actual loss (return) on plan assets..... (69,640) (105,674) 11,520
Amortization and deferral, net.......... 32,312 70,692 (39,001)
- ----------------------------------------------------------------------------
$ 17,164 $ 12,752 $ 19,420
============================================================================
</TABLE>
Of these net periodic pension costs, $13 million, $9 million and $14 million
were expensed in 1996, 1995 and 1994, respectively, and the remaining amounts
were charged primarily to electric utility plant.
The expected long-term rate of return on assets was 9% for 1996 and 1995 and
8% for 1994. The assumed rate of increase in future compensation levels was 5%
for 1996, 1995 and 1994.
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
57
<PAGE>
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 1996 1995
- ----------------------------------------------------------------
(in thousands)
<S> <C> <C>
Accumulated postretirement benefit
obligation
Retirees.............................. $ 66,249 $ 64,460
Fully eligible active plan
participants......................... 50,757 45,873
Other active plan participants........ 64,709 59,456
- -----------------------------------------------------------------
181,715 169,789
Plan assets at fair value, primarily
equity securities and fixed
income investments.................... 41,295 24,994
- -----------------------------------------------------------------
Accumulated postretirement benefit
obligation in excess of plan assets... 140,420 144,795
Unrecognized net gain................... 19 3,457
Unrecognized net transition obligation.. (105,259) (112,101)
- -----------------------------------------------------------------
Accrued postretirement benefit liability $ 35,180 $ 36,151
=================================================================
</TABLE>
At December 31, 1996 and 1995, the assumed discount rate used to measure the
accumulated postretirement benefit obligation was 7%.
Net periodic postretirement benefit cost included the following components:
<TABLE>
<CAPTION>
Years ended December 31 1996 1995 1994
- -----------------------------------------------------------------
(in thousands)
<S> <C> <C> <C>
Service cost..................... $ 6,139 $ 5,283 $ 5,269
Interest cost.................... 11,944 11,539 10,066
Actual return on plan assets..... (3,271) (997) --
Amortization and deferral, net... 7,019 6,959 6,734
- -----------------------------------------------------------------
$21,831 $22,784 $22,069
=================================================================
</TABLE>
Of the net periodic postretirement benefit costs, $16 million, $17 million and
$3 million were expensed in 1996, 1995 and 1994, respectively, and the remaining
amounts were charged primarily to electric utility plant in 1996 and 1995 and to
regulatory assets, electric utility plant and other accounts in 1994.
For 1996 and 1995, the expected long-term rate of return on assets for trusts
which were not subject to income taxes was 9%. At December 31, 1996 and 1995,
trusts holding plan assets with a fair value of $2.7 million and $6.1 million,
respectively, 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 1996 and 1995.
For 1996, 1995 and 1994, the assumed rate of increase in future compensation
levels was 5%.
At December 31, 1996, the assumed health care trend rates for 1997 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, 1996 by approximately $25 million and the service and interest
costs for 1996 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, 1996, net assets (assets less liabilities) of approximately
$593 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, 1996, 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 U. S., and approximately 70% of
the portfolio was collateralized by real estate in California. At December 31,
1996, substantially all private-issue mortgage-backed securities were rated
investment grade by various securities rating agencies.
58
<PAGE>
20 . DISCONTINUED OPERATIONS
- --------------------------------------------------------------------------------
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. In 1995 and 1996,
the District Court ruled on several motions and cross-motions. Some parts of the
decisions were favorable to HEI and HEIDI, and others were unfavorable. A trial
date has been set for November 18, 1997. Recoveries from HEI's insurance
carriers, if any, will be recognized when realized.
21 . 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.
INVESTMENT AND MORTGAGE-BACKED SECURITIES. Fair value is based on quoted market
prices or dealer quotes.
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
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.
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. Current dealer quotes for
securities sold under agreements to repurchase with similar terms and remaining
maturities are used to estimate fair value.
59
<PAGE>
ADVANCES FROM FEDERAL HOME LOAN BANK AND LONG-TERM DEBT. Fair value is
estimated based on 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 1996 1995
- -------------------------------------------------------------------------------------------------------------------
Carrying Estimated Carrying Estimated
amount fair value amount fair value
- -------------------------------------------------------------------------------------------------------------------
(in thousands)
<S> <C> <C> <C> <C>
FINANCIAL ASSETS
Cash and equivalents....................... $ 97,417 $ 97,417 $ 130,833 $ 130,833
Investment and mortgage-backed securities.. 1,377,591 1,367,328 1,479,552 1,485,091
Other investments for which it is not
practicable to estimate
fair value /1/.......................... 5,708 na 8,280 na
Loans receivable, net...................... 2,002,028 2,054,036 1,687,801 1,757,840
FINANCIAL LIABILITIES
Deposit liabilities....................... 2,150,370 2,148,561 2,223,755 2,228,938
Short-term borrowings..................... 216,543 216,543 181,825 181,825
Securities sold under
agreements to repurchase................ 479,742 476,338 412,521 408,046
Advances from Federal Home
Loan Bank................................. 684,274 688,597 501,274 511,289
Long-term debt............................ 810,080 819,935 758,463 773,212
PREFERRED STOCK OF ELECTRIC UTILITY
SUBSIDIARIES SUBJECT TO MANDATORY
REDEMPTION................................ 38,955 41,086 41,750 43,737
OFF-BALANCE SHEET
Commitments to extend credit /2/
Financial guarantees written /3/
- --------------------------------------------------------------------------------
</TABLE>
/1/ At December 31, 1996 and 1995, 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 $4.9 million and $5.0
million at December 31, 1996 and 1995, respectively. At December 31, 1995,
the total assets reported by this company were $50 million and the common
stockholders' equity was $48 million. For 1995, revenues were $1.3 million,
net realized and unrealized gain on investments was $1.2 million and net
income was $0.3 million.
/2/ At December 31, 1996 and 1995, 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, 1996 and 1995, MPC or its subsidiaries had issued guarantees
of loans with outstanding balances of $7.9 million and $7.6 million,
respectively. All such loans are collateralized by real property. These
guarantees 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 guarantees.
na Not available.
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.
60
<PAGE>
22. CONTINGENCIES
- --------------------------------------------------------------------------------
ENVIRONMENTAL REGULATION. By letters in January and February 1995, the DOH
advised HECO, HTB, YB and others that it was conducting an investigation to
determine the nature and extent of actual or potential releases of hazardous
substances, oil, pollutants or contaminants at or near Honolulu Harbor and
requested information regarding past hazardous substances and oil spills that
may have occurred. HECO, HTB and YB provided responses to the DOH letters. The
DOH issued letters in December 1995, indicating that it had identified a number
of parties, including HECO, HTB and YB, who appear to be either potentially
responsible for the contamination and/or operate their facilities upon
contaminated land. The DOH met with these identified parties in January 1996 to
inform them of its findings and to establish the framework to determine remedial
and cleanup requirements. A Technical Workgroup (comprised of certain of the
parties identified in the December 1995 DOH letter, including HECO, Chevron
U.S.A. Inc., Shell Oil Products Company and others) was formed to conduct
independent voluntary investigations relative to this issue.
Because the process for determining appropriate remedial and cleanup action,
if any, is at an early stage, management cannot predict at this time the costs
of further site analysis or future remediation and cleanup requirements, nor can
it estimate when such costs would be incurred. Certain of the costs incurred may
be claimed and covered under insurance policies, but such coverage is not
determinable at this time.
23. QUARTERLY INFORMATION (UNAUDITED)
- --------------------------------------------------------------------------------
Selected quarterly information was as follows:
<TABLE>
<CAPTION>
Quarter ended Year Ended
- ---------------------------------------------------------------------------------
1996 Mar. 31 Jun. 30 Sep. 30 Dec. 31 Dec. 31
- ----------------------------------------------------------------------------------------------
(in thousands, except per
share amounts)
<S> <C> <C> <C> <C> <C>
Revenues........................ $326,169 $347,243 $368,158 $369,002 $1,410,572
Operating income................ 46,735 51,412 44,743/1/ 45,356 188,246/1/
Net income...................... 18,869 21,363 17,372/1/ 21,054 78,658/1/
Earnings per common share /3/... 0.63 0.71 0.57/1/ 0.69 2.60/1/
Dividends per common share...... 0.60 0.60 0.60 0.61 2.41
Market price per common share /4/
High.......................... 39.50 35.50 36.00 37.50 39.50
Low........................... 34.63 33.25 34.00 33.88 33.25
<CAPTION>
1995
- --------------------------------------------------------------------------------------------
(in thousands, except per
share amounts)
<S> <C> <C> <C> <C> <C>
Revenues........................ $306,274 $319,897 $ 336,881 $332,872/2/ $1,295,924
Operating income................ 44,309 46,070 56,675 40,610/2/ 187,664
Net income...................... 17,847 18,880 25,151 15,615/2/ 77,493
Earnings per common share /3/... 0.62 0.65 0.86 0.53/2/ 2.66
Dividends per common share...... 0.59 0.59 0.59 0.60 2.37
Market price per common share /4/
High.......................... 34.88 36.75 38.38 39.75 39.75
Low........................... 32.13 33.38 34.75 37.50 32.13
- ----------------------------------------------------------------------------------------------
</TABLE>
/1/ Amounts reported for the quarter ended September 30, 1996 and the year ended
December 31, 1996 include the effect of the FDIC special assessment of
$13.8 million pretax and $8.3 million after tax.
/2/ 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.
/3/ The quarterly earnings per common share are based upon the weighted average
number of shares of common stock outstanding in each quarter.
/4/ 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>
<TABLE>
<CAPTION>
Directors
---------
<S> <C> <C>
Robert F. Clarke, 54 (1) T. Michael May, 50 James K. Scott, Ed.D., 45 (4)
President and Chief Executive Officer President and Chief Executive Officer President
Hawaiian Electric Industries, Inc. Hawaiian Electric Company, Inc. Punahou School
1989 1995 (private education)
1995
Don E. Carroll, 55 (2, 3) Bill D. Mills, 45 (3)
President and Chief Executive Officer Chairman of the Board and Chief Oswald K. Stender, 65 (3, 4)
Oceanic Cablevision Executive Officer Trustee
(cable television broadcasting) Bill Mills Development and Investment Kamehameha Schools/Bishop Estate
1996 Company, Inc. (charitable trust)
(real estate development) 1993
Edwin L. Carter, 71 (1, 3) 1993
Retired President and Kelvin H. Taketa, 42 (2)
Chief Executive Officer A. Maurice Myers, 56 (3, 4) Vice President and Director-
Bishop Trust Company, Ltd. President and Chief Executive Officer Asia Pacific Region
(financial services) Yellow Corporation The Nature Conservancy
1985 (transportation services) (nonprofit international conservation agency)
1991 1993
John D. Field, 71 (2)*
Retired Vice President-Regulatory Affairs Ruth M. Ono, Ph.D., 61 (2) Jeffrey N. Watanabe, 54 (1, 4)
GTE Service Corporation Vice President Partner
(telecommunications services) The Queen's Health Systems Watanabe, Ing & Kawashima
1986 (hospital and health care services) (private law firm)
1987 1987
Richard Henderson, 68 (1)
President Diane J. Plotts, 61 (1, 2) COMMITTEES OF THE BOARD OF DIRECTORS
HSC, Inc. General Partner ------------------------------------
(real estate investment and development) Mideast and China Trading Company (1) EXECUTIVE:
1981 (real estate development) Richard Henderson, Chairman
1987 (2) AUDIT:
Victor Hao Li, S.J.D., 55 (2) Diane J. Plotts, Chairman
Co-chairman (3) COMPENSATION:
Asia Pacific Consulting Group Edwin L. Carter, Chairman
(international business consultant) (4) NOMINATING:
1988 Jeffrey N. Watanabe, Chairman
Year denotes year of election to the board of directors
*Retired December 31, 1996
Information as of February 12, 1997
Officers
--------
Hawaiian Electric Industries, Inc.
Robert F. Clarke, 54 Charles F. Wall, 57 Betty Ann M. Splinter, 51
President and Chief Executive Officer Vice President and Secretary
1987 Corporate Information Officer 1974
1990
T. Michael May, 50
Senior Vice President Andrew I. T. Chang, 57 Molly M. Egged, 46
1992 Vice President - Government Relations Assistant Secretary
1985 1980
Robert F. Mougeot, 54
Financial Vice President and Constance H. Lau, 44
Chief Financial Officer Treasurer
1988 1984
Peter C. Lewis, 62 Curtis Y. Harada, 41
Vice President - Administration Controller
1968 1989
Year denotes year of employment by the company
Information as of February 12, 1997
</TABLE>
62
