<PAGE>
================================================================================
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1994
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
Exact Name of Registrant as Commission I.R.S. Employer
Specified in Its Charter File Number Identification No.
- ------------------------------------- ----------- ------------------
HAWAIIAN ELECTRIC INDUSTRIES, INC. 1-8503 99-0208097
and Principal Subsidiary
HAWAIIAN ELECTRIC COMPANY, INC. 1-4955 99-0040500
STATE OF HAWAII
- -------------------------------------------------------------------------------
(State or other jurisdiction of incorporation or organization)
900 RICHARDS STREET, HONOLULU, HAWAII 96813
- -------------------------------------------------------------------------------
(Address of principal executive offices and zip code)
HAWAIIAN ELECTRIC INDUSTRIES, INC. ----- (808) 543-5662
HAWAIIAN ELECTRIC COMPANY, INC. ------- (808) 543-7771
- -------------------------------------------------------------------------------
(Registrant's telephone number, including area code)
NONE
- -------------------------------------------------------------------------------
(Former name, former address and former fiscal year,
if changed since last report)
================================================================================
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes x No
------ ------
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Class of Common Stock Outstanding August 1, 1994
- --------------------- --------------------------
Hawaiian Electric Industries, Inc.
(Without Par Value) ............................ 28,205,469 Shares
Hawaiian Electric Company, Inc.
($6 2/3 Par Value) ............................. 11,258,290 Shares (not
publicly traded)
================================================================================
<PAGE>
Hawaiian Electric Industries, Inc. and subsidiaries
Hawaiian Electric Company, Inc. and subsidiaries
Form 10-Q--Quarter ended June 30, 1994
INDEX
<TABLE>
<CAPTION>
Page No.
<S> <C>
Glossary of terms ..................................................... ii
PART I. FINANCIAL INFORMATION
Item 1. Financial statements
Hawaiian Electric Industries, Inc. and subsidiaries
---------------------------------------------------
Consolidated balance sheets (unaudited) - June 30, 1994
and December 31, 1993 ................................... 1
Consolidated statements of income (unaudited) - three
and six months ended June 30, 1994 and 1993 .............. 2
Consolidated statements of retained earnings
(unaudited) - three and six months ended
June 30, 1994 and 1993 ................................... 3
Consolidated statements of cash flows (unaudited) - six
months ended June 30, 1994 and 1993 ....................... 4
Notes to consolidated financial statements (unaudited)...... 5
Hawaiian Electric Company, Inc. and subsidiaries
------------------------------------------------
Consolidated balance sheets (unaudited) - June 30, 1994
and December 31, 1993 ..................................... 12
Consolidated statements of income (unaudited) - three
and six months ended June 30, 1994 and 1993 ............... 13
Consolidated statements of retained earnings (unaudited) -
three and six months ended June 30, 1994 and 1993 ......... 13
Consolidated statements of cash flows (unaudited) -
six months ended June 30, 1994 and 1993 ................... 14
Notes to consolidated financial statements (unaudited) ..... 15
Item 2. Management's discussion and analysis of financial
condition and results of operations ....................... 21
PART II. OTHER INFORMATION
Item 1. Legal proceedings ........................................... 36
Item 5. Other information ........................................... 36
Item 6. Exhibits and reports on Form 8-K ............................ 38
Signatures ............................................................. 39
</TABLE>
i
<PAGE>
Hawaiian Electric Industries, Inc. and subsidiaries
Hawaiian Electric Company, Inc. and subsidiaries
Form 10-Q--Quarter ended June 30, 1994
GLOSSARY OF TERMS
<TABLE>
<CAPTION>
Terms Definitions
- ----- -----------
<C> <S>
AFUDC Allowance for funds used during construction
ASB American Savings Bank, F.S.B., a wholly owned subsidiary
of HEI Diversified, Inc. and parent company of American
Savings Investment Services Corp., ASB Service
Corporation, AdCommunications, Inc. and Associated
Mortgage, Inc.
Company Hawaiian Electric Industries, Inc. and its direct and
indirect subsidiaries, including, without limitation,
Hawaiian Electric Company, Inc., Maui Electric Company,
Limited, Hawaii Electric Light Company, Inc., HEI
Investment Corp., Malama Pacific Corp. and its
subsidiaries, Hawaiian Tug & Barge Corp., Young
Brothers, Limited, HEI Diversified, Inc., American
Savings Bank, F.S.B. and its subsidiaries, and Lalamilo
Ventures, Inc.
Consumer Advocate Division of Consumer Advocacy, Department
of Commerce and Consumer Affairs of the State of Hawaii
FASB Financial Accounting Standards Board
HECO Hawaiian Electric Company, Inc., a wholly owned electric
utility subsidiary of Hawaiian Electric Industries,
Inc. and parent company of Maui Electric Company,
Limited and Hawaii Electric Light Company, Inc.
HEI Hawaiian Electric Industries, Inc., parent company of
Hawaiian Electric Company, Inc., HEI Investment Corp.,
Malama Pacific Corp., Hawaiian Tug & Barge Corp.,
Lalamilo Ventures, Inc. and HEI Diversified, Inc.
HEIDI HEI Diversified, Inc., a wholly owned subsidiary of
Hawaiian Electric Industries, Inc., the parent company
of American Savings Bank, F.S.B., and the holder of
record of the common stock of The Hawaiian Insurance &
Guaranty Company, Limited, which is currently in state
rehabilitation proceedings
HEIIC HEI Investment Corp., a wholly owned
subsidiary of Hawaiian Electric Industries, Inc.
HELCO Hawaii Electric Light Company, Inc., a wholly owned
electric utility subsidiary of Hawaiian Electric
Company, Inc.
HERS Hawaiian Electric Renewable Systems, Inc., formerly a
wholly owned subsidiary of Hawaiian Electric
Industries, Inc. and formerly parent company of
Lalamilo Ventures, Inc.
</TABLE>
ii
<PAGE>
GLOSSARY OF TERMS, continued
<TABLE>
<CAPTION>
Terms Definitions
- ----- -----------
<C> <S>
HIG The Hawaiian Insurance & Guaranty Company, Limited,
currently in state rehabilitation proceedings and
parent company of United National Insurance Company,
Ltd., Hawaiian Underwriters Insurance Co., Ltd.,
Guardian Life Underwriters, Inc., Guardian Financial
Corporation, and Independent Adjustment, Inc. HEI
Diversified, Inc. is the holder of record of HIG's
common stock
HTB Hawaiian Tug & Barge Corp., a wholly owned subsidiary of
Hawaiian Electric Industries, Inc. and parent company
of Young Brothers, Limited
MECO Maui Electric Company, Limited, a wholly owned electric
utility subsidiary of Hawaiian Electric Company, Inc.
MPC Malama Pacific Corp., a wholly owned subsidiary of
Hawaiian Electric Industries, Inc. and parent company
of Malama Project-I, Inc., ML Holdings, Ltd., Malama
Waterfront Corp., Malama Property Investment Corp.,
Malama Development Corp., Malama Makakilo Corp., Malama
Realty Corp., Malama Elua Corp., Malama Kolu Corp.,
Malama Hoaloha Corp., and Malama Mohala Corp.
MW Megawatt
OTS Office of Thrift Supervision, Department of Treasury
PGV Puna Geothermal Ventures
PUC Public Utilities Commission of the State of Hawaii
SEC Securities and Exchange Commission
SFAS Statement of Financial Accounting Standards
YB Young Brothers, Limited, a wholly owned subsidiary of
Hawaiian Tug & Barge Corp.
</TABLE>
iii
<PAGE>
PART I - FINANCIAL INFORMATION
- -------------------------------------------------------------------------------
Item 1. Financial statements
- -----------------------------
Hawaiian Electric Industries, Inc. and subsidiaries
Consolidated balance sheets (unaudited)
- ----------------------------------------
<TABLE>
<CAPTION>
June 30, December 31,
(in thousands) 1994 1993
- -------------------------------------------------------------------------------
<S> <C> <C>
Assets
- ------
Cash and equivalents .............................. $ 103,815 $ 116,260
Accounts receivable and unbilled revenues, net .... 118,959 117,116
Inventories, at average cost ...................... 42,791 39,405
Real estate developments .......................... 39,731 29,673
Loans receivable, net ............................. 1,907,149 1,735,098
Marketable securities ............................. 794,306 698,755
Other investments ................................. 75,450 77,106
Property, plant and equipment, net ................ 1,596,406 1,542,989
Regulatory assets ................................. 82,213 62,077
Other ............................................. 57,246 53,449
Goodwill and other intangibles .................... 47,560 49,664
---------- ----------
$4,865,626 $4,521,592
========== ==========
Liabilities and stockholders' equity
- ------------------------------------
Accounts payable .................................. $ 97,560 $ 88,628
Deposit liabilities ............................... 2,142,360 2,091,583
Short-term borrowings ............................. 157,020 40,416
Advances from Federal Home Loan Bank .............. 509,374 289,674
Long-term debt, net ............................... 661,936 697,836
Deferred income taxes ............................. 171,757 168,329
Unamortized tax credits ........................... 45,151 44,357
Contributions in aid of construction .............. 168,504 165,005
Other ............................................. 161,002 197,713
---------- ----------
4,114,664 3,783,541
---------- ----------
Preferred stock of electric utility subsidiaries
- ------------------------------------------------
Subject to mandatory redemption ................... 46,234 46,730
Not subject to mandatory redemption ............... 48,293 48,293
---------- ----------
94,527 95,023
---------- ----------
Stockholders' equity
- --------------------
Preferred stock, no par value, authorized
10,000 shares; no shares outstanding ............ -- --
Common stock, no par value, authorized 100,000
shares; outstanding 28,168 shares
and 27,675 shares ............................... 531,029 514,710
Retained earnings ................................. 125,406 128,318
---------- ----------
656,435 643,028
---------- ----------
$4,865,626 $4,521,592
========== ==========
</TABLE>
See accompanying notes to consolidated financial statements.
1
<PAGE>
Hawaiian Electric Industries, Inc. and subsidiaries
Consolidated statements of income (unaudited)
- ----------------------------------------------
<TABLE>
<CAPTION>
Three months ended Six months ended
June 30, June 30,
(in thousands, except per share amounts and ------------------ ----------------------
ratio of earnings to fixed charges) 1994 1993 1994 1993
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Revenues
- --------
Electric utility ........................................ $219,411 $219,301 $420,717 $425,947
Savings bank ............................................ 52,311 50,168 102,395 99,431
Other ................................................... 12,834 12,176 26,486 35,615
-------- -------- -------- --------
284,556 281,645 549,598 560,993
-------- -------- -------- --------
Expenses
- --------
Electric utility ........................................ 185,594 185,017 362,576 371,946
Savings bank ............................................ 41,636 40,035 81,100 79,710
Other ................................................... 14,371 12,674 29,563 37,087
-------- -------- -------- --------
241,601 237,726 473,239 488,743
-------- -------- -------- --------
Operating income (loss)
- ----------------------
Electric utility ........................................ 33,817 34,284 58,141 54,001
Savings bank ............................................ 10,675 10,133 21,295 19,721
Other ................................................... (1,537) (498) (3,077) (1,472)
-------- -------- -------- --------
42,955 43,919 76,359 72,250
-------- -------- -------- --------
Interest expense--electric utility and other ............ (13,128) (13,201) (26,210) (25,962)
Allowance for borrowed funds used
during construction ................................... 945 1,009 1,816 1,928
Preferred stock dividends of electric
utility subsidiaries .................................. (1,796) (1,628) (3,596) (3,260)
Allowance for equity funds used during
construction .......................................... 2,095 1,795 4,046 3,354
-------- -------- -------- --------
Income from continuing operations
before income taxes ................................... 31,071 31,894 52,415 48,310
Income taxes ........................................... 13,439 12,917 22,995 20,041
-------- -------- -------- --------
Income from continuing operations ...................... 17,632 18,977 29,420 28,269
Income from discontinued operations
(less applicable income taxes of $1,102
in the six months ended June 30, 1993) ................ -- -- -- 1,800
-------- -------- -------- --------
Net income ............................................. $17,632 $18,977 $29,420 $ 30,069
======== ======== ======== ========
Earnings per common share
Continuing operations ................................ $0.63 $0.76 $1.05 $1.13
Discontinued operations .............................. -- -- -- 0.07
-------- -------- -------- --------
$0.63 $0.76 $1.05 $1.20
======== ======== ======== ========
Dividends per common share ............................. $0.58 $0.57 $1.16 $1.14
======== ======== ======== ========
Weighted average number of common
shares outstanding .................................... 28,013 25,084 27,892 24,973
======== ======== ======== ========
Ratio of earnings to fixed charges
(SEC method)
Excluding interest on ASB deposits.................... 2.10 2.13
======== ========
Including interest on ASB deposits ................... 1.61 1.57
======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
2
<PAGE>
Hawaiian Electric Industries, Inc. and subsidiaries
Consolidated statements of retained earnings (unaudited)
<TABLE>
<CAPTION>
Three months ended Six months ended
June 30, June 30,
-------------------- -------------------
(in thousands) 1994 1993 1994 1993
- -------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Retained earnings, beginning of period.... $124,012 $135,411 $128,318 $138,484
Net income................................ 17,632 18,977 29,420 30,069
Common stock dividends.................... (16,238) (14,286) (32,332) (28,451)
-------- -------- -------- --------
Retained earnings, end of period.......... $125,406 $140,102 $125,406 $140,102
======== ======== ======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
3
<PAGE>
Hawaiian Electric Industries, Inc. and subsidiaries
Consolidated statements of cash flows (unaudited)
<TABLE>
<CAPTION>
Six months ended
June 30,
----------------------
(in thousands) 1994 1993
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Cash flows from operating activities
Income from continuing operations....................................................... $ 29,420 $ 28,269
Adjustments to reconcile income from continuing operations to
net cash provided by (used in) operating activities
Depreciation and amortization of property, plant and equipment.................... 36,189 34,107
Other amortization................................................................ (2,589) (206)
Provision for deferred income taxes and tax credits, net.......................... 6,275 2,331
Changes in assets and liabilities, net of effects from acquisition of
control of joint venture
Increase in accounts receivable and unbilled revenues, net.................. (1,843) (5,432)
Increase in inventories..................................................... (3,386) (6,412)
Increase in real estate developments........................................ (2,104) (535)
Increase in securities held for trading..................................... (15,958) (24,270)
Increase in regulatory assets............................................... (3,831) (3,489)
Increase in accounts payable................................................ 8,932 10,206
Changes in other assets and liabilities..................................... (21,015) 7,078
--------- ---------
30,090 41,647
Cash flows from discontinued operations................................................. (32,377) 1,235
--------- ---------
Net cash provided by (used in) operating activities..................................... (2,287) 42,882
--------- ---------
Cash flows from investing activities
Loans receivable originated and purchased............................................... (305,498) (217,144)
Principal repayments on loans receivable................................................ 136,008 126,064
Proceeds from sale of loans receivable.................................................. 1,888 214
"Held-to-maturity" mortgage-backed securities purchased................................. (202,176) (72,018)
Principal repayments on "held-to-maturity" mortgage-backed securities................... 125,486 123,161
Increase in investments in real estate joint ventures................................... (60) (1,686)
Distributions from real estate joint ventures........................................... 2,015 8,182
Capital expenditures.................................................................... (89,377) (105,693)
Contributions in aid of construction.................................................... 6,849 12,465
Other................................................................................... (1,494) (325)
--------- ---------
Net cash used in investing activities................................................... (326,359) (126,780)
--------- ---------
Cash flows from financing activities
Net increase in deposit liabilities..................................................... 50,777 106,970
Net increase in short-term borrowings with original maturities of
three months or less................................................................. 118,910 56,844
Proceeds from other short-term borrowings............................................... 637 133
Repayment of other short-term borrowings................................................ (2,941) (43,222)
Proceeds from advances from Federal Home Loan Bank...................................... 386,700 --
Principal payments on advances from Federal Home Loan Bank.............................. (167,000) (14,025)
Proceeds from issuance of long-term debt................................................ 31,542 50,422
Repayment of long-term debt............................................................. (75,427) (51,211)
Redemption of electric utility subsidiaries' preferred stock............................ (496) (650)
Net proceeds from issuance of common stock.............................................. 7,562 8,667
Common stock dividends.................................................................. (23,563) (20,230)
Other................................................................................... (10,500) 1,520
--------- ---------
Net cash provided by financing activities............................................... 316,201 95,218
--------- ---------
Net increase (decrease) in cash and equivalents......................................... (12,445) 11,320
Cash and equivalents, beginning of period............................................... 116,260 156,754
--------- ---------
Cash and equivalents, end of period..................................................... $ 103,815 $ 168,074
========= =========
</TABLE>
See accompanying notes to consolidated financial statements.
4
<PAGE>
Hawaiian Electric Industries, Inc. and subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 1994 and 1993
(Unaudited)
_______________________________________________________________________________
(1) Accounting statement
- -------------------------
In the opinion of HEI's management, the accompanying unaudited consolidated
financial statements contain all material adjustments required by generally
accepted accounting principles to present fairly the Company's financial
position as of June 30, 1994 and December 31, 1993, the results of its
operations for the three months and six months ended June 30, 1994 and 1993, and
its cash flows for the six months ended June 30, 1994 and 1993. All such
adjustments are of a normal recurring nature, except as described below. These
consolidated financial statements should be read in conjunction with the
consolidated financial statements and the notes thereto incorporated by
reference in HEI's Annual Report on SEC Form 10-K for the year ended December
31, 1993 and the consolidated financial statements and the notes thereto in
HEI's Quarterly Report on SEC Form 10-Q for the quarter ended March 31, 1994.
The consolidated balance sheet as of December 31, 1993 was derived from audited
financial statements.
(2) Discontinued operations
- ----------------------------
Hawaiian Electric Renewable Systems, Inc.
- -----------------------------------------
On October 6, 1992, the Board of Directors of HEI ratified management's
September 30, 1992 plan to exit the nonutility wind energy business because of
chronic mechanical problems with its wind turbines and continuing losses from
operations. In March 1993, HEI sold the stock of HERS to The New World Power
Corporation for an amount which was not material. In the first quarter of 1993,
in connection with the sale of HERS, HEI reversed reserves for site restoral and
other HERS' disposal costs that were no longer needed due to the terms of the
sale, resulting in a net gain on disposal of discontinued operations of
$1.8 million.
The Hawaiian Insurance & Guaranty Co., Limited
- ----------------------------------------------
HIG and its subsidiaries (the HIG Group) are property and casualty insurance
companies in the State of Hawaii. HEIDI, a subsidiary of HEI, is the holder of
record of all the common stock of HIG. On December 2, 1992, the Board of
Directors of HEI concluded that it would not contribute additional capital to
HIG and the remaining investment in the HIG Group was written off in the fourth
quarter of 1992. The decision resulted from an increase in the estimate of
policyholder claims from Hurricane Iniki (which hit the Hawaiian Islands on
September 11, 1992).
On December 24, 1992, with the consent of the HIG Group, a formal rehabilitation
order (the Rehabilitation Order) was entered by the First Circuit Court of the
State of Hawaii, vesting full control over the HIG Group in the Insurance
Commissioner (the Rehabilitator/Liquidator) and her deputies.
On April 12, 1993, the Rehabilitator/Liquidator, HIG, United National Insurance
Company, Ltd. and Hawaiian Underwriters Insurance Co., Ltd. filed a complaint
against HEI, HEIDI and certain current and former officers and directors of HEI,
HEIDI and the HIG Group in state court on the island of Kauai. The complaint set
forth several separate counts, including claims to the effect that HEI and/or
HEIDI should be held liable for HIG's obligations based on allegations, among
others, that HIG was held out to be part of an HEI family of companies (and not
as a separate enterprise) and that HEIDI is liable for an assessment levied by
the Rehabilitator/Liquidator. The complaint alleged that certain current and
former officers and directors of HEI, HEIDI and the HIG Group had breached their
fiduciary duties to the HIG Group in numerous respects. The complaint requested
declaratory relief and compensatory, general, special and punitive damages,
together with costs and attorneys' fees.
On July 12, 1993, the Rehabilitator/Liquidator filed a first amended complaint,
which repeated the claims asserted in the original complaint but added the
Hawaii Insurance Guaranty Association (HIGA) as a plaintiff and asserted certain
additional claims.
5
<PAGE>
In early 1994, HEI, HEIDI, certain officers and directors, the
Rehabilitator/Liquidator and HIGA signed an agreement to settle the lawsuit,
subject to obtaining necessary court approvals. On April 6, 1994, the court in
which the HIG Group's rehabilitation proceeding is pending approved the
settlement agreement. A stipulation dismissing the suit brought by the
Rehabilitator/Liquidator was filed on July 8, 1994. Under the agreement, the
Company has paid $32.0 million into an escrow account, which account is expected
to be disbursed in August 1994 to the Rehabilitator/Liquidator, at which time
the release of claims against HEI, its affiliates and their past and present
officers and directors will become effective and the common stock of HIG held by
HEIDI will be cancelled.
The $32.0 million settlement amount, less income tax benefits and certain
amounts recognized in previously established reserves, resulted in a
$15.0 million after-tax charge to discontinued operations in the fourth quarter
of 1993. HEI is seeking reimbursement from certain of its insurance carriers.
HEI's claims against its insurance carriers will require resolution of several
insurance coverage and other policy issues and the outcome of such claims cannot
be predicted at this time. One of HEI's insurance carriers has filed a
declaratory relief action in the U.S. District Court for the District of Hawaii
seeking resolution of these issues. Recoveries from HEI's insurance carriers, if
any, will be recognized when realized.
(3) Electric utility subsidiary
- --------------------------------
For Hawaiian Electric Company, Inc.'s consolidated financial information,
including its commitments and contingencies, see pages 12 through 20.
(4) Savings bank subsidiary
- ----------------------------
Selected consolidated financial information
American Savings Bank, F.S.B. and subsidiaries
<TABLE>
<CAPTION>
Three months ended Six months ended
June 30, June 30,
-------------------- ---------------------
(in thousands) 1994 1993 1994 1993
- ------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Income statement data
Interest income........................... $ 50,429 $ 47,599 $ 98,528 $ 93,986
Interest expense.......................... 24,768 23,938 47,915 47,859
-------- -------- -------- --------
Net interest income....................... 25,661 23,661 50,613 46,127
Provision for losses...................... (242) (249) (484) (471)
Other income.............................. 1,882 2,569 3,867 5,445
Operating, administrative and
general expenses.......................... (16,626) (15,848) (32,701) (31,380)
-------- -------- -------- --------
Operating income.......................... 10,675 10,133 21,295 19,721
Income taxes.............................. 4,457 4,136 8,869 8,056
-------- -------- -------- --------
Net income................................ $ 6,218 $ 5,997 $ 12,426 $ 11,665
======== ======== ======== ========
</TABLE>
6
<PAGE>
American Savings Bank, F.S.B. and subsidiaries
<TABLE>
<CAPTION>
June 30, December 31,
(in thousands) 1994 1993
- ----------------------------------------------------------------------------------------
<S> <C> <C>
Balance sheet data
Assets
Cash and equivalents................................... $ 99,286 $ 77,610
Investment securities.................................. 75,017 68,599
Mortgage-backed securities............................. 706,845 630,156
Loans receivable, net.................................. 1,907,149 1,735,098
Other.................................................. 60,052 57,358
Goodwill and other intangibles......................... 47,560 49,664
---------- ----------
$2,895,909 $2,618,485
========== ==========
Liabilities and equity
Deposit liabilities.................................... $2,142,360 $2,091,583
Advances from Federal Home Loan Bank................... 509,374 289,674
Other.................................................. 54,200 52,717
---------- ----------
2,705,934 2,433,974
Common stock equity.................................... 189,975 184,511
---------- ----------
$2,895,909 $2,618,485
========== ==========
</TABLE>
<TABLE>
<CAPTION>
Six months ended
June 30,
-------------------------------
(in thousands) 1994 1993
- ----------------------------------------------------------------------------------------
<S> <C> <C>
Cash flow data
Cash flows from operating activities
Net income............................................. $ 12,426 $ 11,665
Adjustments to reconcile net income to net cash
provided by operating activities
Decrease (increase) in accounts receivable........... (1,275) 230
Increase in other securities held for trading........ (3,514) (24,270)
Increase (decrease) in accounts payable.............. (564) 8,718
Changes in other assets and liabilities.............. 812 7,237
---------- ----------
Net cash provided by operating activities.............. 7,885 3,580
---------- ----------
Cash flows from investing activities
Loans receivable originated and purchased.............. (305,498) (217,144)
Principal repayments on loans receivable............... 136,008 126,064
Proceeds from sale of loans receivable................. 1,888 214
"Held-to-maturity" mortgage-backed securities purchased (202,176) (72,018)
Principal repayments on "held-to-maturity"
mortgage-backed securities............................ 125,486 123,161
Other.................................................. (4,876) (1,701)
---------- ----------
Net cash used in investing activities.................. (249,168) (41,424)
---------- ----------
Cash flows from financing activities
Net increase in deposit liabilities.................... 50,777 106,970
Proceeds from advances from Federal Home Loan Bank..... 386,700 --
Principal payments on advances from Federal Home
Loan Bank............................................. (167,000) (14,025)
Common stock dividends................................. (7,518) (6,644)
---------- ----------
Net cash provided by financing activities.............. 262,959 86,301
---------- ----------
Net increase in cash and equivalents................... 21,676 48,457
Cash and equivalents, beginning of period.............. 77,610 117,937
---------- ----------
Cash and equivalents, end of period.................... $ 99,286 $ 166,394
========== ==========
</TABLE>
7
<PAGE>
(5) Real estate subsidiary
- ---------------------------
MPC and its subsidiaries' total real estate project inventory, equity investment
in real estate joint ventures and loans to unconsolidated joint ventures or
joint venture partners amounted to $56 million and $49 million at June 30, 1994
and December 31, 1993, respectively.
In 1990, Malama Development Corp. (MDC) acquired a 50% general partnership
interest in Baldwin*Malama, a partnership with Baldwin Pacific Properties, Inc.
(BPPI). In May 1993, Baldwin*Malama was reorganized as a limited partnership in
which MDC became the sole general partner and BPPI the sole limited partner.
Beginning in May 1993, in conjunction with the dissolution of the general
partnership and formation of the limited partnership, MDC consolidated the
accounts of Baldwin*Malama. Previously, MDC accounted for its investment in
Baldwin*Malama under the equity method.
At June 30, 1994, MPC or its subsidiaries were directly liable for $17.1 million
of outstanding loans and had additional loan facilities of $1.6 million. In
addition, at June 30, 1994, MPC or its subsidiaries had issued (i) guaranties
under which they were jointly and severally contingently liable with their joint
venture partners for $1.9 million of outstanding loans and (ii) payment
guaranties under which MPC or its subsidiaries were severally contingently
liable for $4.1 million of outstanding loans and $10.5 million of additional
undrawn loan facilities. In total, at June 30, 1994, MPC or its subsidiaries
were liable or contingently liable for $23.1 million of outstanding loans and
$12.1 million in undrawn loan facilities. At June 30, 1994, HEI had agreed with
the lenders of construction loans and loan facilities, of which approximately
$13.3 million was outstanding and $12.1 million was undrawn, that it will
maintain ownership of l00% of the stock of MPC and that it intends, subject to
good and prudent business practices, to keep MPC financially sound and
responsible to meet its obligations as guarantor. MPC or its subsidiaries may
enter into additional commitments in connection with the financing of future
phases of development of MPC's projects and HEI may enter into similar
agreements regarding the ownership and financial condition of MPC.
(6) Regulatory assets
- ----------------------
Regulatory assets at June 30, 1994 and December 31, 1993 include the following
deferred costs:
<TABLE>
<CAPTION>
June 30, December 31,
(in thousands) 1994 1993
- ---------------------------------------------------------------------------------------
<S> <C> <C>
Postretirement benefits other than pensions .......... $28,018 $19,210
Income taxes ......................................... 19,486 16,297
Preliminary plant costs on suspended project ......... 6,947 6,577
Vacation earned, but not yet taken ................... 6,368 5,494
Unamortized debt expense on retired issuances ........ 7,839 5,435
Integrated resource planning costs ................... 6,335 4,661
Other ................................................ 7,220 4,403
------- -------
$82,213 $62,077
======= =======
</TABLE>
8
<PAGE>
(7) Interest expense
- ---------------------
Interest expense, excluding interest on nonrecourse debt from leveraged leases,
consisted of the following:
<TABLE>
<CAPTION>
Three months ended Six months ended
June 30, June 30,
------------------ ------------------
(in thousands) 1994 1993 1994 1993
- -----------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Interest expense
Savings bank...................... $24,768 $23,938 $47,915 $47,859
Electric utility.................. 9,107 8,680 18,170 16,815
Other............................. 4,021 4,521 8,040 9,147
------- ------- ------- -------
$37,896 $37,139 $74,125 $73,821
======= ======= ======= =======
</TABLE>
(8) Cash flows
- ---------------
Supplemental disclosures of cash flow information
Cash paid for interest, net of capitalized amounts, and cash paid (received) for
income taxes were as follows:
<TABLE>
<CAPTION>
Six months ended
June 30,
-------------------
(in thousands) 1994 1993
- ------------------------------------------------------------------------------
<S> <C> <C>
Interest (including interest paid by savings bank,
but excluding interest paid on nonrecourse debt from
leveraged leases)....................................... $72,815 $73,145
======= =======
Income taxes............................................ $16,224 $(10,522)
======= ========
</TABLE>
Cash paid for interest on nonrecourse debt on leveraged leases amounted to
$4,754,000 and $4,744,000 for the six months ended June 30, 1994 and 1993,
respectively.
Supplemental disclosures of noncash activities
Common stock dividends reinvested by shareholders in HEI common stock in noncash
transactions amounted to $8,769,000 and $8,221,000 for the six months ended
June 30, 1994 and 1993, respectively.
The allowance for equity funds used during construction, which was capitalized
as part of the cost of electric utility plant, amounted to $4,046,000 and
$3,354,000 for the six months ended June 30, 1994 and 1993, respectively.
In March 1994, MDC's Baldwin*Malama partnership closed on an option to purchase
approximately 147 acres of land on the island of Maui from BPPI. Of the total
land purchase price of $9.9 million, Baldwin*Malama issued mortgage notes
payable of $8.0 million in noncash consideration.
9
<PAGE>
(9) 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. Medical, dental and vision benefits are provided to eligible
employees of HEI and HECO and its subsidiaries upon their retirement, with
contributions by retirees toward costs based on their years of service and
retirement date. Medical and vision benefits are provided to eligible bargaining
unit employees of YB upon their retirement at no cost. Employees are eligible
for these benefits if, upon retirement, they participate in one of the Company's
defined benefit pension plans. Currently, no funding has been provided for these
benefits. Through December 31, 1992, the cost of postretirement benefits other
than pensions had not been recognized until paid (i.e., the pay-as-you-go
method). Accordingly, no provision had been made for future benefits to existing
or retired employees.
Effective January 1, 1993, the Company adopted Statement of Financial Accounting
Standards (SFAS) No. 106, "Employers' Accounting for Postretirement Benefits
Other Than Pensions," which requires accrual, during the years that an employee
renders the necessary service, of the expected cost of providing postretirement
benefits other than pensions to that employee and the employee's beneficiaries
and covered dependents. The transition obligation is being recognized on a
delayed basis over 20 years.
In February 1992, the PUC opened a generic docket to determine whether SFAS
No. 106 should be adopted for rate-making purposes. On July 15, 1993, the PUC
issued an interim decision and order in the generic docket, amending an earlier
interim decision and order to state that it is probable that its final decision
will allow, for rate-making purposes, the full costs of postretirement benefits
other than pensions calculated on the basis of SFAS No. 106. Upon request of
HECO and its subsidiaries, on January 11, 1994, the PUC issued another interim
decision and order which stated that it has "determined that it will allow each
utility to calculate, for ratemaking purposes, the full costs of postretirement
benefits other than pensions on an accrual basis, rather than the current pay-
as-you-go basis." The PUC further stated that it has not yet decided whether to
adopt SFAS No. 106 in its entirety or with modifications, but it reaffirmed that
"(1) it is probable that the final decision and order in these dockets will
allow, for ratemaking purposes, the full costs of postretirement benefits other
than pensions calculated on the basis of SFAS [No.] 106; and (2) it is probable
that the difference between the costs of postretirement benefits other than
pensions determined under SFAS [No.] 106 and the current pay-as-you-go method
from January 1, 1993, through the effective date of the postretirement benefits
step increases . . . will be recovered ratably through future rates over a
period not extending beyond 2013."
Beginning in the second quarter of 1993 and based upon the interim decisions and
orders, HECO and its subsidiaries and YB recognized regulatory assets and
deferred for financial reporting purposes the difference between the costs of
postretirement benefits other than pensions determined under SFAS No. 106 and
such costs under the pay-as-you-go method. Approximately $4.9 million of the
regulatory assets established in the second quarter of 1993 related to
postretirement benefits expensed in the first quarter of 1993. If the regulatory
assets had been established commencing January 1, 1993, the second quarter of
1993 operating income and net income would have been lower by approximately
$4.9 million and $3.1 million, respectively. The regulatory assets for
postretirement benefits other than pensions totaled $28.0 million as of June 30,
1994.
If the PUC in its final decision and order does not fully adopt SFAS No. 106 for
rate-making purposes and if under current accounting guidelines it is concluded
that recognition of regulatory assets with respect to the difference between the
accrual and the PUC-approved methods would be inappropriate, then the net
earnings of the Company would be adversely affected by SFAS No. 106 in 1994 and
future years. Management cannot predict with certainty when the final decision
in the generic docket will be rendered.
10
<PAGE>
(10) Accounting changes in 1994
- --------------------------------
Postemployment benefits
In November 1992, the Financial Accounting Standards Board (FASB) issued
SFAS No. 112, "Employers' Accounting for Postemployment Benefits." This
statement requires employers to recognize the obligation to provide
postemployment benefits in accordance with SFAS No. 43, "Accounting for
Compensated Absences," if the obligation is attributable to employees' services
already rendered, employees' rights to those benefits accumulate or vest,
payment of the benefits is probable, and the amount of the benefits can be
reasonably estimated. The Company adopted the provisions of SFAS No. 112 on
January 1, 1994. The implementation of SFAS No. 112 did not have a material
effect on the Company's consolidated financial condition or the results of
operations for the six months ended June 30, 1994.
Accounting for certain investments in debt and equity securities
In May 1993, the FASB issued SFAS No. 115, "Accounting for Certain Investments
in Debt and Equity Securities." This statement requires that investments in
equity securities that have readily determinable fair values and investments in
debt securities be classified in three categories and accounted for as
follows:
. Debt securities that the enterprise has the positive intent and ability
to hold to maturity are classified as held-to-maturity securities and
reported at amortized cost.
. Debt and equity securities that are bought and held principally for the
purpose of selling them in the near term are classified as trading
securities and reported at fair value, with unrealized gains and losses
included in earnings.
. Debt and equity securities not classified as either held-to-maturity
securities or trading securities are classified as available-for-sale
securities and reported at fair value, with unrealized gains and losses
excluded from earnings and reported in a separate component of
stockholders' equity.
The Company adopted the provisions of SFAS No. 115 on January 1, 1994. As of
June 30, 1994 and December 31, 1993, marketable securities consisted of trading
securities, stock in the Federal Home Loan Bank of Seattle and mortgage-backed
securities. All marketable securities other than the trading securities are
classified as held-to-maturity securities. The implementation of SFAS No. 115
did not have a material effect on the Company's consolidated financial condition
or the results of operations for the six months ended June 30, 1994.
11
<PAGE>
Hawaiian Electric Company, Inc. and subsidiaries
Consolidated balance sheets (unaudited)
<TABLE>
<CAPTION>
June 30, December 31,
(in thousands, except par value) 1994 1993
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Assets
Utility plant, at cost
Property, plant and equipment....................................... $2,038,502 $1,976,192
Construction in progress............................................ 149,279 126,342
Less--accumulated depreciation...................................... (673,028) (641,230)
------------ ------------
Net utility plant................................................ 1,514,753 1,461,304
------------ ------------
Current assets
Cash and equivalents................................................ 3,828 1,922
Customer accounts receivable, net................................... 57,465 55,614
Accrued unbilled revenues, net...................................... 33,936 34,735
Other accounts receivable, net...................................... 6,568 8,398
Fuel oil stock, at average cost..................................... 22,708 18,188
Materials and supplies, at average cost............................. 18,929 20,239
Prepayments and other............................................... 3,174 2,715
------------ ------------
Total current assets............................................. 146,608 141,811
------------ ------------
Other assets
Regulatory assets................................................... 80,179 60,612
Other............................................................... 41,049 39,549
------------ ------------
Total other assets............................................... 121,228 100,161
------------ ------------
$1,782,589 $1,703,276
============ ============
Capitalization and liabilities
Capitalization
Common stock, $6 2/3 par value, authorized
50,000 shares; outstanding 11,258 shares........................... $ 75,065 $ 75,065
Premium on capital stock............................................ 220,185 220,197
Retained earnings................................................... 288,612 275,401
------------ ------------
Common stock equity.............................................. 583,862 570,663
Cumulative preferred stock
Not subject to mandatory redemption............................... 48,293 48,293
Subject to mandatory redemption................................... 43,910 45,410
Long-term debt, net................................................. 457,349 436,776
------------ ------------
Total capitalization............................................. 1,133,414 1,101,142
------------ ------------
Current liabilities
Long-term debt due within one year.................................. 10,933 47,960
Preferred stock sinking fund requirements........................... 2,324 1,320
Short-term borrowings - nonaffiliates............................... 114,738 28,928
Short-term borrowings - affiliate................................... -- 12,000
Accounts payable.................................................... 51,571 41,808
Interest and preferred dividends payable............................ 11,084 10,332
Income taxes payable................................................ 5,710 6,232
Other taxes accrued................................................. 27,766 36,959
Other............................................................... 20,997 31,036
------------ ------------
Total current liabilities........................................ 245,123 216,575
------------ ------------
Deferred credits and other liabilities
Deferred income taxes............................................... 109,197 107,449
Unamortized tax credits............................................. 44,199 43,348
Other............................................................... 82,152 69,757
------------ ------------
Total deferred credits and other liabilities..................... 235,548 220,554
------------ ------------
Contributions in aid of construction.................................. 168,504 165,005
------------ ------------
$1,782,589 $1,703,276
============ ============
See accompanying notes to HECO's consolidated financial statements.
</TABLE>
12
<PAGE>
Hawaiian Electric Company, Inc. and subsidiaries
Consolidated statements of income (unaudited)
<TABLE>
<CAPTION>
Three months ended Six months ended
June 30, June 30,
(in thousands, except for ratio of earnings ----------------------- -----------------------
to fixed charges) 1994 1993 1994 1993
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Operating revenues ...................................... $217,884 $218,158 $417,982 $423,718
Operating expenses
Fuel oil ................................................ 41,462 53,286 80,080 104,820
Purchased power ......................................... 69,294 65,954 132,280 125,669
Other operation ......................................... 28,383 19,937 58,094 50,776
Maintenance ............................................. 10,537 10,790 21,279 21,480
Depreciation ............................................ 15,976 15,053 32,093 29,963
Taxes, other than income taxes .......................... 19,821 19,926 38,559 39,104
Income taxes ............................................ 10,776 10,350 17,830 15,339
-------- -------- -------- --------
196,249 195,296 380,215 387,151
-------- -------- -------- --------
Operating income ........................................ 21,635 22,862 37,767 36,567
-------- -------- -------- --------
Other income
Allowance for equity funds used during construction ..... 2,095 1,795 4,046 3,354
Other, net .............................................. 1,416 1,107 2,601 2,153
-------- -------- -------- --------
3,511 2,902 6,647 5,507
-------- -------- -------- --------
Income before interest and other charges ................ 25,146 25,764 44,414 42,074
-------- -------- -------- --------
Interest and other charges
Interest on long-term debt ............................. 7,518 6,850 15,530 13,739
Amortization of net bond premium and expense ........... 290 181 537 355
Other interest charges .................................. 1,299 1,649 2,103 2,721
Allowance for borrowed funds used
during construction ................................... (945) (1,009) (1,816) (1,928)
Preferred stock dividends of subsidiaries ............... 714 519 1,430 1,041
-------- --------- -------- --------
8,876 8,190 17,784 15,928
-------- --------- -------- --------
Income before preferred stock dividends
of HECO ............................................... 16,270 17,574 26,630 26,146
Preferred stock dividends of HECO ....................... 1,082 1,109 2,166 2,219
-------- --------- -------- --------
Net income for common stock ............................. $ 15,188 $ 16,465 $ 24,464 $ 23,927
======== ========= ======== ========
Ratio of earnings to fixed charges (SEC method) 3.03 3.08
======== ========
</TABLE>
Hawaiian Electric Company, Inc. and subsidiaries
Consolidated statements of retained earnings (unaudited)
<TABLE>
<CAPTION>
Three months ended Six months ended
June 30, June 30,
---------------------- -----------------------
(in thousands) 1994 1993 1994 1993
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Retained earnings, beginning of period ................. $274,754 $250,396 $275,401 $249,583
Net income for common stock ............................ 15,188 16,465 24,464 23,927
Common stock dividends ................................. (1,330) (3,731) (11,253) (10,380)
-------- -------- -------- --------
Retained earnings, end of period ....................... $288,612 $263,130 $288,612 $263,130
======== ======== ======== ========
</TABLE>
See accompanying notes to HECO's consolidated financial statements.
13
<PAGE>
Hawaiian Electric Company, Inc. and subsidiaries
Consolidated statements of cash flows (unaudited)
<TABLE>
<CAPTION>
Six months ended
June 30,
-------------------------
(in thousands) 1994 1993
- ------------------------------------------------------------------------------------
<S> <C> <C>
Cash flows from operating activities
Income before preferred stock dividends of HECO .......... $26,630 $ 26,146
Adjustments to reconcile income before preferred stock
dividends of HECO to net cash provided by
operating activities
Depreciation and amortization of property,
plant and equipment ................................. 32,093 29,963
Other amortization ................................... 753 402
Provision for deferred income taxes .................. 1,752 (2,437)
Tax credits, net ..................................... 1,702 2,052
Allowance for equity funds used during construction .. (4,046) (3,354)
Increase in accounts receivable ...................... (21) (7,984)
Decrease in accrued unbilled revenues ................ 799 2,094
Increase in fuel oil stock ........................... (4,520) (4,992)
Decrease (increase) in materials and supplies ........ 1,310 (1,350)
Increase in regulatory assets ........................ (3,831) (3,489)
Increase in accounts payable ......................... 9,763 2,521
Increase (decrease) in interest and preferred
dividends payable ................................... 752 (285)
Decrease in income taxes payable and other taxes
accrued ............................................. (9,715) (3,431)
Changes in other assets and liabilities .............. (10,057) (13,134)
------- ----------
Net cash provided by operating activities ................ 43,364 22,722
------- ----------
Cash flows from investing activities
Capital expenditures ..................................... (85,225) (103,827)
Contributions in aid of construction ..................... 6,849 12,465
------- ----------
Net cash used in investing activities .................... (78,376) (91,362)
------- ----------
Cash flows from financing activities
Common stock dividends .................................. (11,253) (10,380)
Preferred stock dividends ............................... (2,166) (2,219)
Proceeds from issuance of long-term debt ................ 31,542 13,353
Repayment of long-term debt ............................. (48,027) (46,875)
Redemption of preferred stock ........................... (496) (650)
Net increase in short-term borrowings from nonaffiliates
and affiliate with original maturities of three months
or less ................................................ 73,810 81,993
Other ................................................... (6,492) 2,591
------- ----------
Net cash provided by financing activities ............... 36,918 37,813
------- ----------
Net increase (decrease) in cash and equivalents ......... 1,906 (30,827)
Cash and equivalents, beginning of period ............... 1,922 30,883
------- ----------
Cash and equivalents, end of period ..................... $ 3,828 $ 56
======= ==========
</TABLE>
See accompanying notes to HECO's consolidated financial statements.
14
<PAGE>
Hawaiian Electric Company, Inc. and subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 1994 and 1993
(Unaudited)
- -------------------------------------------------------------------------------
(1) Accounting statement
- -------------------------
In the opinion of HECOOs management, the accompanying unaudited consolidated
financial statements contain all material adjustments required by generally
accepted accounting principles to present fairly the financial position of HECO
and its subsidiaries as of June 30, 1994 and December 31, 1993, the results of
its operations for the three months and six months ended June 30, 1994 and 1993,
and its cash flows for the six months ended June 30, 1994 and 1993. All such
adjustments are of a normal recurring nature. These consolidated financial
statements should be read in conjunction with the consolidated financial
statements and the notes thereto incorporated by reference in HECO's Annual
Report on SEC Form 10-K for the year ended December 31, 1993 and the
consolidated financial statements and the notes thereto in HECO's Quarterly
Report on SEC Form 10-Q for the quarter ended March 31, 1994. The consolidated
balance sheet as of December 31, 1993 was derived from audited financial
statements.
(2) Regulatory assets
- ----------------------
Regulatory assets at June 30, 1994 and December 31, 1993 include the following
deferred costs:
<TABLE>
<CAPTION>
June 30, December 31,
(in thousands) 1994 1993
- --------------------------------------------------------------------------------------
<S> <C> <C>
Postretirement benefits other than pensions ............. $26,083 $17,866
Income taxes ............................................ 19,387 16,176
Preliminary plant costs on suspended project ............ 6,947 6,577
Vacation earned, but not yet taken ...................... 6,368 5,494
Unamortized debt expense on retired issuances ........... 7,839 5,435
Integrated resource planning costs ...................... 6,335 4,661
Other ................................................... 7,220 4,403
------- -------
$80,179 $60,612
======= =======
</TABLE>
(3) Cash flows
- ---------------
Supplemental disclosures of cash flow information
Cash paid for interest (net of capitalized amounts) and income taxes was as
follows:
<TABLE>
<CAPTION>
Six months ended
June 30,
----------------------
(in thousands) 1994 1993
- ---------------------------------------------------------------------------------
<S> <C> <C>
Interest ................................................ $17,331 $16,323
======= =======
Income taxes ............................................ $12,868 $14,586
======= =======
</TABLE>
Supplemental disclosure of noncash activities
The allowance for equity funds used during construction, which was capitalized
as part of the cost of electric utility plant, amounted to $4,046,000 and
$3,354,000 for the six months ended June 30, 1994 and 1993, respectively.
15
<PAGE>
(4) Commitments and contingencies
- ----------------------------------
Power purchase agreements
In general, payments under the major power purchase agreements 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 charges 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 energy cost adjustment clauses in its rate
schedules. HECO and its subsidiaries do not operate nor participate in the
operation of any of the facilities that provide power under the major
agreements. Title to the facilities does not pass to HECO and its subsidiaries
upon expiration of the agreements, and the agreements do not contain bargain
purchase options with respect to the facilities.
As of June 30, 1994, HECO and its subsidiaries had power purchase agreements for
473 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, except for the agreement with
Hilo Coast Processing Company, remains in place for the entire contract period
and the minimum availability criteria in the power purchase agreements are met,
aggregate minimum fixed capacity charges are expected to be between $99 million
and $107 million annually from 1994 through 2015, between $50 million and
$77 million annually from 2016 through 2022 and $4 million annually from 2023
through 2028.
HECO is disputing certain amounts (primarily energy charges) billed each month
under its power purchase agreements with Kalaeloa Partners, L.P. (Kalaeloa) and
AES Barbers Point, Inc. (AES-BP) and has withheld payment of some of the
disputed amounts pending resolution. Disputed amounts billed by Kalaeloa and
AES-BP through June 30, 1994 for which HECO has withheld payment totaled
approximately $2.3 million and $1.9 million, respectively. Approximately
$1.2 million of the total amounts withheld, if ultimately paid, are expected to
be includable in HECO's energy cost adjustment clause and passed through to
customers.
HECO has not recognized any portion of the withheld amounts as an expense or
liability in its financial statements. Discussions between HECO and Kalaeloa,
and HECO and AES-BP to resolve the disputed billing amounts have been held. In
the event the parties are unable to settle the disputes, both the Kalaeloa and
AES-BP power purchase agreements contain provisions whereby either party to the
agreement may cause the dispute to be submitted to binding arbitration. Kalaeloa
requested that its dispute with HECO be arbitrated and the arbitration
proceeding hearings were held in early July 1994. Under the agreement, the
arbitrators are to render their decision before the end of August 1994. Based on
information currently available, HECO's management believes that the ultimate
outcome of these disputes will not have a material adverse effect on HECO's
consolidated financial condition and results of operations.
HELCO's firm power purchase agreements include an amended power purchase
agreement with Hamakua Sugar Company (Hamakua), a power purchase agreement with
Puna Geothermal Ventures (PGV) and a power purchase agreement with Hilo Coast
Processing Company (HCPC). Hamakua is in a Chapter 11 bankruptcy proceeding and
is now conducting a final sugar cane harvest which is expected to end around the
first week of October 1994. During the harvest, Hamakua has agreed to supply
HELCO with 8 MW of firm capacity under an amendment to HELCO's existing power
purchase agreement. PGV, an independent geothermal power producer which had
experienced substantial delays in commencing commercial operations, passed an
acceptance test in June 1993 and became a firm capacity source for 25 MW.
However, due to problems with one of its wells, PGV was producing only about
16 MW as of June 30, 1994. In March 1994, HCPC, which currently provides 18 MW
of firm capacity, issued a written notice of termination to HELCO indicating
that it would cease producing power in March 1997. HELCO, in turn, issued a
written notice of its preliminary intent to purchase the HCPC facility, subject
to a number of conditions. Under the terms of the power purchase agreement,
HELCO has the option to purchase the facility. HELCO and HCPC will negotiate the
"fair market value" of the plant assuming transfer to a party other than HELCO.
If the parties cannot agree on the "fair market value," the issue may be
submitted to arbitration. Once the fair market value is determined, HELCO may
elect whether to proceed with the purchase.
16
<PAGE>
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 outage by its
order dated April 16, 1991. This investigation was consolidated with a pending
investigation of an outage that occurred in 1988. The PUC held a hearing on the
April 9, 1991 outage in May 1991. Further proceedings have not been scheduled at
this time. Recommendations were made to HECO by Power Technologies, Inc., an
independent consultant hired by HECO, and HECO has responded to those
recommendations. Management cannot predict the timing and outcome of any
decision and order to be issued, if any, by the PUC with respect to the outages.
HECO's PUC-approved tariff rule states that HECO "will not be liable for
interruption or insufficiency of supply or any loss, cost, damage or expense of
any nature whatsoever, occasioned thereby if caused by accident, storm, fire,
strikes, riots, war or any cause not within [HECO's] control through the
exercise of reasonable diligence and care." Under the rule, customers had 30
days from the date of the power outage to file claims. HECO received 3,063
customer claims which totaled approximately $7.8 million. Of the 3,063 claims,
1,530 are for property damage. As of June 30, 1994, HECO had settled or closed
1,322 of these property damage claims, had settlement offers outstanding with
respect to approximately 173 more of these claims and anticipates making
settlement offers with respect to the 35 remaining property claims upon receipt
and review of appropriate supporting documentation. The settlement offers are
being made for purposes of settlement and compromise only, and without any
admission by HECO of liability for the outage. Not covered in the settlement
offers and requests for documentation are 1,533 claims involving alleged
personal injury or economic losses, such as lost profits.
On April 19, 1991, seven direct or indirect business customers on the island of
Oahu filed a lawsuit against HECO on behalf of themselves and an alleged class,
claiming $75 million in compensatory damages and additional unspecified amounts
for punitive damages because of the April 9, 1991 outage. The lawsuit was
dismissed without prejudice in March 1993 and subsequently refiled by the
plaintiffs. HECO has filed an answer which denies the principal allegations in
the complaint, sets forth affirmative defenses, and asserts that the suit should
not be maintained as a class action. Discovery proceedings have been initiated.
In March 1994, HECO filed a motion for an order denying class certification of
the lawsuit and the plaintiffs responded with a cross-motion for class
certification. Both motions were denied without prejudice. Trial has been set
for January 22, 1996.
HECO has recorded a liability of $1 million for the total amount of expected
defense costs and settlements with respect to the outage. In the opinion of
management, losses (if any) in excess of the amount for which provision has been
made, net of estimated insurance recoveries, resulting from the ultimate outcome
of the lawsuit and claims related to the April 9, 1991 outage will not have a
material adverse effect on the Company or consolidated HECO.
HELCO reliability investigation
In July 1991, following service interruptions and rolling blackouts instituted
on the island of Hawaii, the PUC issued an order calling for an investigation
into the reliability of HELCO's system.
An evidentiary hearing was held in September 1991 and public hearings were held
in October 1991. In light of approximately 20 subsequent incidents of rolling
blackouts and service interruptions resulting from insufficient generation
margin, further evidentiary hearings were held in July 1992. With the input from
an independent consultant and the parties to the proceedings, the PUC may
formulate minimum reliability standards for HELCO, use the standards to assess
HELCO's system reliability, and re-examine the rate increase approved in October
1992 to see whether any adjustments are appropriate. In the opinion of
management, the PUC's adjustment to its October 1992 rate increase, if any,
resulting from the reliability investigation will not have a material adverse
effect on the Company's or HECO's consolidated financial condition or results of
operations.
HELCO's generation margin has improved with the addition of a 20-MW combustion
turbine in August 1992, PGV's commencement of commercial operations and
Hamakua's temporary return to commercial operation.
HELCO is proceeding with plans to install two 20-MW combustion turbines in 1995,
followed by an 18-MW heat steam recovery generator in 1997, at which time these
units will be converted to a combined-cycle unit, subject in each case to
obtaining necessary permits and approvals. The PUC has issued a decision and
order approving expenditures for the first 20-MW combustion turbine. Evidentiary
hearings
17
<PAGE>
on the other portions of the unit were held in July 1994. HELCO has
encountered procedural and other difficulties in obtaining the necessary
Conservation District Use Permit (CDUP) which would allow the combined cycle
unit to be constructed at the Keahole site. Such difficulties included
intervenors filing for a contested case hearing which has not been held.
Further, Kawaihae Cogeneration Partners and Enserch Development Corp. have each
filed with the PUC separate complaints against HELCO, alleging that, rather than
having HELCO build the combined cycle unit, they are entitled to a power
purchase contract to provide the capacity. The Board of Land and Natural
Resources (BLNR) addressed the CDUP at its May 13, 1994 meeting. The BLNR was
unable to obtain the necessary votes to either approve or deny the permit. It is
HELCO's position that it became entitled to the CDUP by operation of law as the
BLNR failed to act on HELCO's application by the May 18, 1994 deadline. The
results of the BLNR meeting were challenged in the Third Circuit Court, and on
June 24, 1994, the court granted a motion to stay the effectiveness of the CDUP.
HELCO intends to appeal the granting of that motion and will continue to
litigate the appeal of the results of the BLNR meeting. If not resolved
expeditiously, the stay is likely to adversely impact HELCO's unit installation
schedule. If the CDUP were further delayed or ultimately denied, HELCO would
explore other available alternatives to meet projected energy needs. However, in
the event of a further delay or denial of the CDUP, management believes that
there may be rolling blackouts before required additional generation could be
completed or any alternative solution could be implemented.
(5) Summarized financial information
- -------------------------------------
Summarized financial information for HECO's consolidated subsidiaries, HELCO and
MECO, is as follows:
<TABLE>
<CAPTION>
HELCO MECO
------------------------- -----------------------
June 30, December 31, June 30, December 31,
(in thousands) 1994 1993 1994 1993
- ----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Balance sheet data
Noncurrent assets........................ $315,858 $297,847 $259,185 $252,680
Current assets........................... 24,382 22,161 23,578 31,465
-------- -------- -------- --------
$340,240 $320,008 $282,763 $284,145
======== ======== ======== ========
Common stock equity...................... $104,241 $102,438 $100,171 $97,569
Cumulative preferred stock
Not subject to mandatory redemption.. 10,000 10,000 8,000 8,000
Subject to mandatory redemption...... 8,000 8,100 7,135 7,135
Noncurrent liabilities................... 169,618 156,855 140,435 136,414
Current liabilities...................... 48,381 42,615 27,022 35,027
-------- -------- -------- --------
$340,240 $320,008 $282,763 $284,145
======== ======== ======== ========
</TABLE>
<TABLE>
<CAPTION>
HELCO MECO
---------------------------------------- ---------------------------------------
Three months ended Six months ended Three months ended Six months ended
June 30, June 30, June 30, June 30,
------------------ ------------------ ------------------ -----------------
(in thousands) 1994 1993 1994 1993 1994 1993 1994 1993
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Income statement data
Operating
revenues *............. $30,667 $27,438 $59,618 $54,017 $29,298 $28,184 $56,659 $54,193
Operating
income * .............. 2,921 3,572 5,324 5,845 4,049 3,753 7,677 5,904
Net income for
common stock .......... 2,182 1,916 3,535 2,725 2,496 3,119 4,444 4,465
</TABLE>
* Based on the format of HECO's consolidated statements of income.
18
<PAGE>
(6) Reconciliation of electric utility operating income per HEI and HECO
- -------------------------------------------------------------------------
consolidated statements of income
- ---------------------------------
<TABLE>
<CAPTION>
Three months ended Six months ended
June 30, June 30,
-------------------- --------------------
(in thousands) 1994 1993 1994 1993
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Operating income from regulated and nonregulated
activities before income taxes
(per HEI consolidated statements of income)................. $ 33,817 $ 34,284 $ 58,141 $ 54,001
Deduct:
Income taxes on regulated activities.......................... (10,776) (10,350) (17,830) (15,339)
Revenues from nonregulated activities......................... (1,527) (1,143) (2,735) (2,229)
Add:
Expenses from nonregulated activities......................... 121 71 191 134
-------- -------- -------- --------
Operating income from regulated activities after income
taxes (per HECO consolidated statements of income)........... $ 21,635 $ 22,862 $ 37,767 $ 36,567
======== ======== ======== ========
</TABLE>
(7) Postretirement benefits other than pension
- -----------------------------------------------
HECO and its subsidiaries provide medical, dental, vision, life insurance and
other benefits to eligible employees upon their retirement, with contributions
by retirees toward costs based on their years of service and retirement date.
Employees are eligible for these benefits if, upon retirement, they participate
in one of the Company's defined benefit pension plans. Currently, no funding has
been provided for these benefits. Through December 31, 1992, the cost of these
benefits had not been recognized until paid. Accordingly, no provision was made
for future benefits to existing or retired employees.
Effective January 1, 1993, HECO and its subsidiaries adopted SFAS No. 106,
"Employers' Accounting for Postretirement Benefits Other Than Pensions," which
requires accrual, during the years that an employee renders the necessary
service, of the expected cost of providing postretirement benefits other than
pensions to that employee and the employee's beneficiaries and covered
dependents. The transition obligation is being recognized on a delayed basis
over 20 years.
In February 1992, the PUC opened a generic docket to determine whether SFAS
No. 106 should be adopted for rate-making purposes. On July 15, 1993, the PUC
issued an interim decision and order in the generic docket, amending an earlier
interim decision and order to state that it is probable that its final decision
will allow, for rate-making purposes, the full costs of postretirement benefits
other than pensions calculated on the basis of SFAS No. 106. Upon request of
HECO and its subsidiaries, on January 11, 1994, the PUC issued another interim
decision and order which stated that it has "determined that it will allow each
utility to calculate, for ratemaking purposes, the full costs of postretirement
benefits other than pensions on an accrual basis, rather than the current pay-
as-you-go basis." The PUC further stated that it has not yet decided whether to
adopt SFAS No. 106 in its entirety or with modifications, but it reaffirmed that
"(1) it is probable that the final decision and order in these dockets will
allow, for ratemaking purposes, the full costs of postretirement benefits other
than pensions calculated on the basis of SFAS [No.] 106; and (2) it is probable
that the difference between the costs of postretirement benefits other than
pensions determined under SFAS [No.] 106 and the current pay-as-you-go method
from January 1, 1993, through the effective date of the postretirement benefits
step increases . . . will be recovered ratably through future rates over a
period not extending beyond 2013."
Beginning in the second quarter of 1993 and based upon these interim decisions
and orders, HECO and its subsidiaries recognized regulatory assets and deferred
for financial reporting purposes the difference between the costs of
postretirement benefits other than pensions determined under SFAS No. 106 and
such costs under the pay-as-you-go method. Approximately $4.7 million of the
regulatory assets established in the second quarter of 1993 related to
postretirement benefits expensed in the first quarter
19
<PAGE>
of 1993. If the regulatory assets had been established commencing January 1,
1993, the second quarter 1993 operating income (per HEI consolidated statement
of income) and net income would have been lower by approximately $4.7 million
and $2.9 million, respectively. The regulatory assets for postretirement
benefits other than pensions totaled $26.1 million as of June 30, 1994.
If the PUC in its final decision and order does not fully adopt SFAS No. 106 for
rate-making purposes and if under current accounting guidelines it is concluded
that recognition of regulatory assets with respect to the difference between the
accrual and the PUC approved methods would be inappropriate, then the net
earnings of consolidated HECO would be adversely affected by SFAS No. 106 in
1994 and future years. Management cannot predict with certainty when the final
decision in the generic docket will be rendered.
(8) Accounting change in 1994
- ------------------------------
Postemployment benefits
In November 1992, the FASB issued SFAS No. 112, "Employers' Accounting for
Postemployment Benefits." This statement requires employers to recognize the
obligation to provide postemployment benefits in accordance with SFAS No. 43,
"Accounting for Compensated Absences," if the obligation is attributable to
employees' services already rendered, employees' rights to those benefits
accumulate or vest, payment of the benefits is probable, and the amount of the
benefits can be reasonably estimated. HECO and its subsidiaries adopted the
provisions of SFAS No. 112 on January 1, 1994. The implementation of SFAS No.
112 did not have a material effect on consolidated HECO's financial condition or
the results of operations for the six months ended June 30, 1994. As of June 30,
1994, the regulatory asset established by HECO and its subsidiaries for
postemployment benefits totaled approximately $0.7 million.
20
<PAGE>
Item 2. Management's discussion and analysis of financial condition and results
- -------------------------------------------------------------------------------
of operations
-------------
The following discussion should be read in conjunction with the consolidated
financial statements and accompanying notes.
RESULTS OF OPERATIONS
Consolidated
- ------------
<TABLE>
<CAPTION>
Three months ended
June 30,
------------------
(in thousands, except per % Primary reason(s) for significant
share amounts) 1994 1993 change change*
- ---------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Revenues....................... $284,556 $281,645 1 Increases at the savings bank and
"other" segments
Operating income............... 42,955 43,919 (2) Decreases at the electric utility and
"other" segments, partly offset by
the increase at the savings bank segment
Net income..................... 17,632 18,977 (7) Lower operating income and higher
income taxes
Earnings per common share...... 0.63 0.76 (17) See above explanation and 12% increase
in the weighted average number of
common shares outstanding
Weighted average number
of common shares
outstanding.................. 28,013 25,084 12 Public offering of 2.0 million shares
of common stock completed in
August 1993 and shares issued
through the HEI dividend
reinvestment and stock purchase plan
</TABLE>
* Also see segment discussions which follow.
21
<PAGE>
<TABLE>
<CAPTION>
Six months ended
June 30,
-----------------
(in thousands, except % Primary reason(s) for significant
per share amounts) 1994 1993 change change*
- -----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Revenues............. $549,598 $560,993 (2) Decreases at the electric utility and
"other" segments, partly offset by the
increase at the savings bank segment
Operating income..... 76,359 72,250 6 Increases at the electric utility and
savings bank segments, partly offset
by the decrease for the "other" segment
Income from
continuing
operations......... $ 29,420 $ 28,269 4 Higher operating income, partly offset
by higher income taxes
Income from
discontinued
operations......... -- 1,800 (100) Reversal of a reserve for the disposal
-------- -------- of HERS after the sale of HERS in
March 1993
Net income........... $ 29,420 $ 30,069 (2)
======== ========
Earnings per
common share
Continuing
operations..... $1.05 $1.13 (7) See above explanation and 12% increase
in the weighted average number of common
shares outstanding
Discontinued
operations..... -- 0.07 (100) See above
------- -------
$1.05 $1.20 (13)
======= =======
Weighted average
number of common
shares outstanding. 27,892 24,973 12 Public offering of 2.0 million shares
of common stock completed in
August 1993 and shares issued through
the HEI dividend reinvestment and
stock purchase plan
</TABLE>
* Also see segment discussions which follow.
For the quarter ended June 30, 1994, HEI reported net income of
$17.6 million, or $0.63 per share, compared to $19.0 million, or $0.76 per
share, in the same period of 1993. Net income decreased due to lower earnings at
the electric utility and "other" segments. Net income for the second quarter of
1993 was higher than for the second quarter of 1994 primarily due to two
nonrecurring accounting adjustments in the second quarter of 1993 resulting from
the establishment of (a) a $6.0 million regulatory asset for vacation earned but
not yet taken by employees of the electric utility subsidiaries and (b) a $9.7
million regulatory asset for postretirement benefits other than pensions for
employees of the electric utility subsidiaries and YB, of which $4.9 million
related to postretirement benefits expensed in the first quarter of 1993.
Excluding the "vacation" adjustment and the adjustment related to postretirement
benefits expensed in the first quarter of 1993, net income for the second
quarter of 1994 would have reflected an increase of approximately 33% over the
second quarter of 1993.
22
<PAGE>
For the six months ended June 30, 1994, HEI reported net income of $29.4
million, or $1.05 per share, compared to $30.1 million, or $1.20 per share, in
the same period of 1993. The first half of 1993 results included the reversal of
a reserve for the disposal of HERS after the sale of HERS in March 1993.
Excluding the "vacation" adjustment, income from continuing operations for the
first half of 1994 would have reflected an increase of approximately 13% over
the first half of 1993 due to higher earnings at the savings bank and the
electric utility companies.
Dividends are paid by HEI as and when declared at the discretion of HEI's
Board of Directors. HEI and its predecessor company, HECO, have paid dividends
continuously since 1901. Dividends per share have been higher each year for the
past 30 years. Although dividends per share growth is a major goal for the
Company, HEI must balance short-term and long-term goals. Over the next few
years HEI's management intends to recommend to HEI's Board of Directors to
moderate dividend growth until its payout ratio returns to a more acceptable
level.
Following is a general discussion of revenues, expenses and operating income by
business segment.
Electric utility
<TABLE>
<CAPTION>
Three months ended
June 30,
(in thousands, ------------------
except per % Primary reason(s) for significant
barrel amounts) 1994 1993 change change
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Revenues.......... $219,411 $219,301 0 Higher rate relief for HECO and
MECO and a 0.2% increase in KWH
sales, partly offset by lower
fuel oil prices which are
passed on to customers
Expenses
Fuel oil........ 41,462 53,286 (22) Lower fuel oil prices and KWHs
generated
Purchased power. 69,294 65,954 5 Higher KWHs purchased
Other........... 74,838 65,777 14 1993 amount reflects reduced
expenses due to establishment of
regulatory assets for vacation
earned but not yet taken by
employees and for the additional
SFAS No. 106 costs of
postretirement benefits other than
pensions retroactive to January 1,
1993
Operating income.. 33,817 34,284 (1) 1993 income includes nonrecurring
adjustments previously described
of approximately $8.9 million in
the second quarter of 1993; 1994
income reflects higher rate relief
for HECO and MECO
Net income........ 15,188 16,465 (8) Lower operating income and higher
income taxes
Fuel oil price
per barrel...... 17.52 21.27 (18)
</TABLE>
23
<PAGE>
<TABLE>
<CAPTION>
Six months ended
June 30,
-----------------
(in thousands, except % Primary reason(s) for significant
per barrel amounts) 1994 1993 change change
- -----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Revenues................. $420,717 $425,947 (1) Lower fuel oil prices which are passed on to
customers, partly offset by higher rate
relief for HECO and MECO and a 2.1% increase
in KWH sales
Expenses
Fuel oil............... 80,080 104,820 (24) Lower fuel oil prices and KWHs generated
Purchased power........ 132,280 125,669 5 Higher KWHs purchased
Other.................. 150,216 141,457 6 1993 amount reflects reduced expenses due to
establishment of a regulatory asset for
vacation earned but not yet taken by employees
Operating income......... 58,141 54,001 8 1994 income reflects higher rate relief for
HECO and MECO and is higher than 1993 income
in spite of the effect of the "vacation"
adjustment in the first half of 1993
Net income............... 24,464 23,927 2 Higher operating income, partially offset by
higher interest expense and higher income
taxes
Fuel oil price
per barrel............. 16.93 21.22 (20)
</TABLE>
Operating income for the electric utility segment was down 1% for the three
months ended June 30, 1994 from operating income for the same period of 1993,
primarily due to two nonrecurring accounting adjustments in the second quarter
of 1993 resulting from the establishment of regulatory assets. In the second
quarter of 1993, HECO and its subsidiaries established a regulatory asset for
vacation earned but not yet taken by its employees. For rate-making purposes,
vacation pay is being recovered in rates on a pay-as-you-go basis. The
recognition of the regulatory asset increased operating income by $4.4 million
and net income by $2.7 million, or $0.11 per HEI common share, for the quarter
ended June 30, 1993. In the second quarter of 1993, HECO and its subsidiaries
also established a regulatory asset for postretirement benefits other than
pensions that had been expensed in the first quarter of 1993. The regulatory
asset established as of June 30, 1993 amounted to approximately $9.1 million.
Approximately $4.7 million of the regulatory asset related to postretirement
benefits expensed in the first quarter of 1993 and resulted in an increase in
net income of approximately $2.9 million, or $0.12 per HEI common share, for the
second quarter of 1993. See "Postretirement benefits other than pensions."
Excluding these two nonrecurring accounting adjustments, the electric utility
segment's operating income and net income for the second quarter of 1994 was up
33% and 39%, respectively, over the second quarter of 1993 due to 1993 and 1994
rate relief and a 0.2% increase in kilowatthour sales.
Operating income and net income for the electric utility segment was up 8% and
2%, respectively, for the six months ended June 30, 1994. Excluding the
"vacation" adjustment, operating income and net income for the electric utility
segment was up 15% and 13% for the six months ended June 30, 1994, primarily due
to rate relief for HECO and MECO and a 2.1% increase in kilowatthour sales.
In 1993, HEI infused $45 million of common stock equity into HECO. Also in 1993,
HECO infused $12 million into HELCO and $6 million into MECO. The infusions were
made to support the electric
24
<PAGE>
utilities' capital expenditure programs. As anticipated, HECO and its
subsidiaries were not able to earn an adequate return on that new equity during
the first quarter of 1994. At the start of the second quarter, however, the PUC
granted an interim rate increase that recognizes the increased investment in
capital facilities on the island of Oahu. See "Pending rate requests" below.
Continued regulatory support from the PUC is important to the future operating
results of the electric utility companies.
Competition
The electric utility industry in general has become increasingly more
competitive as a result of such factors as regulatory and technological
developments. The level of competition is affected by various factors including
price, reliability of service, new technologies and governmental regulations.
Also affecting the level of competition in Hawaii are the scarcity of generation
sites and lack of interconnections.
The Energy Policy Act of 1992 encourages competition by allowing both utilities
and nonutilities to form generation subsidiaries without becoming subject to
regulation under the Public Utility Holding Company Act of 1935. In addition to
independent power producers, a new kind of competitor--the energy service
company--is seeking customers in government and private business and promising
to help them reduce utility bills. On Oahu, one of these companies worked with a
large military housing project, installing energy-efficient air-conditioning,
water heating and other equipment that decreased the facility's electric
consumption by one-third.
In response to competition, HECO and its subsidiaries are taking certain actions
to heighten their focus on providing reliable electric service at reasonable
costs, as well as to offer customers new choices regarding the services
provided.
Regulation of electric utility rates
The PUC has broad discretion in its regulation of the rates charged by HEI's
electric utility subsidiaries. Any adverse decision by the PUC concerning the
level or method of determining electric utility rates, the authorized returns on
equity or other matters or any prolonged delay in rendering a decision in a rate
proceeding could have a material adverse effect on the Company's financial
condition and results of operations. Upon a showing of probable entitlement, the
PUC is required to issue an interim decision in a rate case within 10 months
from the date of filing a complete application if the evidentiary hearing is
completed (subject to extension for 30 days if the evidentiary hearing is not
completed), but there is no limitation on the time within which the PUC must
render a final decision.
Pending rate requests
In July 1993, HECO applied to the PUC for permission to increase electric rates,
based on a 1994 test year and a 12.6% return on average common equity (which was
later increased to 12.75%). In December 1993, HECO applied to the PUC for
permission to increase electric rates, based on a 1995 test year and a 12.3%
return on average common equity. Both requests combined represent an increase of
16.7% over rates in effect at the time of the filings, or approximately
$106 million in annual revenues. The requested increases are needed to cover
rising operating costs including the costs related to the change in the method
of accounting for postretirement benefits other than pensions, to cover the cost
of new capital projects to maintain and improve service reliability, to cover
additional expenses associated with proposed changes in depreciation rates and
methods and to establish a self-insured property damage reserve for transmission
and distribution property in the event of catastrophic disasters. On March 31,
1994, HECO received an interim decision and order from the PUC on its rate
increase application based on a 1994 test year, authorizing increases of
$36.9 million in annual revenues, or approximately 5.9%, to become effective in
several steps in 1994, and based on a 12.0% return on average common equity.
An increase of $34.2 million in annual revenues was effective April 1, 1994, for
which HECO had proposed interim rate relief of approximately $39.9 million.
Another interim increase of approximately $1.4 million in annual revenues for
nonbargaining unit wage increases became effective May 1, 1994. Interim rate
increases are subject to refund with interest, pending the final outcome of the
case. Evidentiary hearings for the 1995 test year application are scheduled for
November 1994.
In November 1993, HELCO applied to the PUC for permission to increase electric
rates to provide approximately $15.8 million in annual revenues, or a 13.4%
increase over present rates. The requested increase is based on a 1994 test year
and a 12.4% return on average common equity (which was later increased to
13.1%). The increase is needed to cover plant, equipment, operating costs
necessary to maintain and improve service and provide reliable power for its
customers and the costs related to the
25
<PAGE>
change in the method of accounting for postretirement benefits other than
pensions. On August 8, 1994, HELCO received an interim decision and order from
the PUC on its rate increase application based on a 1994 test year, authorizing
an increase of $13.6 million in annual revenues, or approximately 11.7%. The
increase will become effective in steps in 1994 and is based on a 12.4% return
on average common equity. The first part of the increase, $13.2 million, will be
effective on August 9, 1994. Interim increases are subject to refund with
interest, pending the final outcome of the case. In June 1994, HELCO filed a
notice of intent to file an application for a general rate increase using a 1995
test year. The increase is expected to be required primarily to cover
investments in new generating units.
In November 1991, MECO filed a request to increase rates by approximately
$18.3 million annually, or approximately 17% above the rates in effect at the
time of the filing. Evidentiary hearings were held in January 1993 and, at the
conclusion of the hearings, MECO adjusted its final rate increase request to
approximately $11.4 million annually, or approximately 10% above the rates then
in effect, to become effective in several steps in 1993, and reflecting a return
on average common equity of 13.0%. The decrease in the requested rate increase
resulted primarily from a reduced cost of capital, lower administrative and
general expenses and other revisions to MECO's estimated revenue requirements
for the 1993 test year used in the rate case. Most of the proposed increase
reflected the costs of adding a 58-MW combined-cycle generating unit on Maui in
three phases and the costs related to the change in the method of accounting for
postretirement benefits other than pensions. In 1993, MECO received four interim
decisions which authorized step increases totaling $8.2 million in annual
revenues, or 7.2%, based on a 12.75% return on average common equity. On August
5, 1994, MECO received the final decision and order from the PUC regarding its
rate increase request. It granted an increase of $8.1 million in annual
revenues, or approximately 7.0%, based on a 12.75% return on average common
equity. The difference between the interim and final decision and orders of less
than $0.2 million will be refunded to ratepayers together with interest. The
primary reason for the difference between the $11.4 million requested and the
$8.1 million granted is the costs related to the change in the method of
accounting for postretirement benefits other than pensions of approximately $2.0
million, which is part of a separate generic docket. MECO's total rate increase
will be adjusted to reflect the PUC's decision in this separate generic docket.
Management cannot predict with certainty when decisions in the rate cases will
be rendered or the amount of any interim or final rate increase that will be
granted.
Postretirement benefits other than pensions
HECO, HELCO and MECO are parties to a generic docket opened by the PUC in
February 1992 to determine whether SFAS No. 106, "Employers' Accounting for
Postretirement Benefits Other Than Pensions," should be adopted for rate-making
purposes. For a discussion of accounting for postretirement benefits other than
pensions, see note (7) in HECO's "Notes to consolidated financial statements."
PUC review of the relationship between HEI and its subsidiaries
To address community concerns, HECO proposed by letter dated January 25, 1993,
that the PUC initiate a review of the relationship between HEI and HECO and the
effects of that relationship on the operations of HECO. By an order dated
January 26, 1993, the PUC initiated such a review to determine whether the HEI-
HECO relationship, HEI's diversified activities, and HEI's policies, operations
and practices have resulted in or are having any negative effects on HECO and
its electric utility subsidiaries. It is anticipated that the review may result
in recommendations to the Company and/or the PUC. In May 1994, a consultant,
Dennis Thomas and Associates, was selected by the PUC to perform the review. The
review is in progress and is expected to be completed by yearend.
HECO purchased power billing disputes
HECO is disputing certain amounts billed each month under its power purchase
agreements with Kalaeloa Partners, L.P. and AES Barbers Point, Inc. and has
withheld payment of some of the disputed amounts pending resolution. The dispute
with Kalaeloa Partners, L.P. has been submitted to arbitration and a decision is
expected in August 1994. See "Power purchase agreements" under note (4) in
HECO's "Notes to consolidated financial statements" for a further discussion of
this matter.
26
<PAGE>
HECO power outage
On April 9, 1991, HECO experienced a power outage that affected all customers on
the island of Oahu. See "HECO power outage" under note (4) in HECO's "Notes to
consolidated financial statements" for a discussion of HECO's contingent
liabilities related to the outage.
HELCO reliability investigation and generation margin
The PUC initiated an investigation into the reliability of HELCO's system in
July 1991. See "HELCO reliability investigation" under note (4) in HECO's "Notes
to consolidated financial statements" for a discussion of this matter. Also see
Part II, Item 5, "Other information, Nonutility generation," for a further
discussion of two of HELCO's purchased power suppliers.
Waiau-CIP transmission lines
In 1993, the PUC held hearings concerning Part 2 of the proposed Waiau-Campbell
Industrial Park (CIP) 138-kilovolt transmission lines. These lines will be part
of a second transmission corridor in West Oahu, running approximately 15 miles
between CIP and HECO's Waiau power plant. The new lines are needed (1) to
increase system reliability by locating the new lines in a separate corridor
from the existing lines, (2) to provide additional transmission capacity to meet
expected load growth and (3) to provide transmission capacity for existing and
new power generation projects planned for West Oahu. HECO experienced community
opposition over the proposed placement of portions of these lines based in part
on the potential effects of the lines on aesthetics and the concern of some that
the electric and magnetic fields (EMF) from the power lines may have adverse
health effects. HECO witnesses addressed EMF, the route selection process (which
involved extensive public input), as well as engineering and related subjects.
One proposal by those who oppose the route of the overhead lines is to place
Part 2 of the Waiau-CIP lines underground. HECO estimated that this proposal
would cost approximately $100 million more than the cost of overhead lines. In
April 1994, the PUC issued a decision on Part 2 of the Waiau-CIP lines which
permits HECO to construct the lines above ground. While the PUC recognized the
concerns of aesthetics and EMF, it felt that neither concern was sufficient to
justify the added cost of undergrounding the lines. In May 1994, the state
Supreme Court was asked to overturn the PUC's ruling that allows HECO to
construct the lines above ground. No stay of the PUC order has been entered.
Management cannot predict with certainty the final outcome of this appeal or the
impact the final outcome may have on the cost of the lines or on system
reliability.
Undergrounding of utility lines
There is a proposal before the Honolulu City Council for the mandatory
undergrounding of utility lines "whenever possible," except in some remote
areas. HECO opposes the proposal in its current form because the resulting
costs would place a burden on customers. Management believes the cost of
undergrounding utility lines would be recoverable in rates. However, management
cannot predict with certainty the ultimate outcome of such proposals or the
impact of such proposals on HECO or the Company.
27
<PAGE>
Savings bank
<TABLE>
<CAPTION>
Three months ended
June 30,
-------------------
%
(in thousands) 1994 1993 change Primary reason(s) for significant change
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Revenues ............... $ 52,311 $50,168 4 Higher average loans and mortgage-backed securities balances, partly
offset by lower average investments balance and lower overall yield on
interest-earning assets
Operating income ........ 10,675 10,133 5 Higher net interest income due to higher net average earning assets
balance, partly offset by higher administrative and general expenses and
losses from trading securities portfolio
Net income ............... 6,218 5,997 4 Higher operating income, partly offset by higher income taxes
Interest rate spread ..... 3.76% 3.83% 35 basis points decrease in the weighted average yield on
interest-earning assets, partly offset by 28 basis points decrease in the
weighted average rate on interest-bearing liabilities
Three months ended
June 30,
------------------ %
(in thousands) 1994 1993 change Primary reason(s) for significant change
- ------------------------------------------------------------------------------------------------------------------------------------
Revenues.................. $102,395 $99,431 3 Higher average loans and mortgage-backed securities balances, partly
offset by lower average investments balance and lower overall yield on
interest-earning assets
Operating income.......... 21,295 19,721 8 Higher net interest income due to higher net average earning assets
balance, partly offset by higher administrative and general expenses and
losses from trading securities portfolio
Net income................ 12,426 11,665 7 Higher operating income, partly offset by higher income taxes
Interest rate spread...... 3.79% 3.79% 35 basis points decrease in the weighted average yield on
interest-earning assets, offset by 35 basis points decrease in the
weighted average rate on interest-bearing liabilities
</TABLE>
The savings bank segment posted a 5% increase in operating income for the
quarter over the same period last year. The improved performance is primarily a
result of higher loans and mortgage-backed securities balances, partly offset by
a lower interest rate spread. ASB's interest rate spread--the
28
<PAGE>
difference between the weighted average yield on interest-earning assets and the
weighted average rate on interest-bearing liabilities--decreased to 3.76% in
the quarter from 3.83% in the comparable period of 1993. For the second quarter
of 1994, the average loans balance was up $341 million and the average balance
for advances from Federal Home Loan Bank and other borrowings was up $216
million from levels in the second quarter of 1993.
This interest rate spread decrease for the second quarter of 1994 can be
attributed to the changing interest rate environment. During 1993, falling
interest rates resulted in improved interest rate spreads as interest-bearing
liabilities repriced downward at a faster pace than interest-earning assets.
During 1994, rising interest rates have not significantly increased rates on
interest-bearing liabilities. However, yields on interest-earning assets have
continued a downward trend as a result of the prior year's refinancing and
repricing of loans and mortgage-backed securities.
Operating income for the six months ended June 30, 1994 increased by 8% compared
to the same period last year due to higher loans and mortgage-backed securities
balances. The average loans balance was up $317 million and the average balance
for advances from Federal Home Loan Bank and other borrowings was up $166
million from levels in the first six months of 1993. ASB's interest rate spread
was 3.79%, unchanged compared to the first half of 1993.
During 1994, the federal funds rate increased 1.25%. The federal funds rate,
which is the rate charged by banks for overnight loans to each other and which
has a significant influence on consumer rates, was 4.25% as of June 30, 1994.
The yields on U.S. Treasury bonds increased as a result of the higher short-term
interest rates. Mortgage and other loan rates are affected by key Treasury
rates. Financial institutions incurring higher costs of funds can react by
raising the interest rate on new loans and setting higher repricing rates on
adjustable rate loans.
The rate increases did not significantly impact ASB's net interest income during
the first half of 1994. Higher interest rates on mortgage loans can take about
three to twelve months to impact portfolio yields through loan originations and
repricing of adjustable rate loans. Cost of interest-bearing liabilities
remained relatively stable during the first half of 1994. However, in the
future, ASB's cost of interest-bearing liabilities may increase, which may
result in a decreased interest rate spread and lower net interest income than
there otherwise would have been.
For the three and six months ended June 30, 1994, ASB's securities held for
trading experienced a $0.9 million and $1.8 million decrease, respectively, in
value which was charged to earnings. The decreases were primarily due to the
higher yields on U.S. Treasury bonds resulting in lower market values in fixed
income securities. In response to the increasing interest rate environment,
management has decided to reduce ASB's portfolio of securities held for trading
by liquidating one of its two trading accounts, consisting of approximately
$23 million intermediate-term (three year to five year) securities as of
June 30, 1994. ASB will retain its other trading account which consists of
approximately $26 million of short-term securities as of June 30, 1994.
Management cannot predict future changes in bond yields or their impact on the
value of ASB's portfolio of securities held for trading.
Other
- -----
<TABLE>
<CAPTION>
Three months ended
June 30,
------------------ %
(in thousands) 1994 1993 change Primary reason(s) for significant change
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Revenues ........... $12,833 $12,176 5
Operating loss ..... (1,537) (498) NM MPC - lower unit sales in 1994 and higher administrative and general expense
HEI, HEIIC - higher administrative and general expense
</TABLE>
NM Not meaningful.
29
<PAGE>
<TABLE>
<CAPTION>
Six months ended
June 30,
---------------- %
(in thousands) 1994 1993 change Primary reason(s) for significant change
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Revenues ........... $26,486 $35,615 (26) MPC - Bulk sale of land for $10 million of proceeds and immaterial gain in
the first quarter of 1993
HEIIC - Gain on leveraged lease refinancing in the first quarter of 1993
Operating loss ..... (3,077) (1,472) NM HEIIC - Gain on leveraged lease refinancing in 1993
Offset by:
HTB - loss on sale of oil barge in the second quarter of 1993
</TABLE>
NM Not meaningful.
The "Other" business segment includes results of operations
from HTB and its subsidiary, YB, which are maritime freight transportation
companies; HEIIC, which is a company primarily holding investments in leveraged
leases; MPC and its subsidiaries, which are real estate investment and
development companies; HEI and HEIDI, which are parent companies; and
eliminations of intercompany transactions.
Freight transportation
The freight transportation subsidiaries recorded operating income of
$0.7 million in the second quarter of 1994 compared to $0.6 million in the
second quarter of 1993. Operating income in the second quarter of 1993 included
a loss on the sale of an oil barge, partially offset by a nonrecurring
accounting adjustment in the second quarter of 1993 resulting from the
establishment of a $0.6 million regulatory asset for postretirement benefits
other than pensions, of which approximately $0.2 million related to
postretirement benefits expensed in the first quarter of 1993. The freight
transportation subsidiaries recorded operating income of $0.9 million in the six
months ended June 30, 1994 compared to $0.4 million in the six months ended June
30, 1993. Operating income in the first half of 1993 included a loss on the sale
of an oil barge. HTB and YB have been negatively impacted by the slow economy,
the slowing in Hawaii's construction activity and HTB's exiting the business of
shipping of heavy fuel oil at the end of 1993 due to concerns about the
potential unlimited liability for oil spills under the Federal Oil Pollution Act
of 1990.
In May 1994, YB filed an application with the PUC to increase rates by
approximately $2.4 million annually. The application was suspended by the PUC on
June 17, 1994 for a period of six months to and including December 30, 1994.
Hearings are expected to be held in November 1994.
YB is a party to a generic docket opened by the PUC in February 1992 to
determine whether SFAS No. 106, "Employers' Accounting for Postretirement
Benefits Other Than Pensions," should be adopted for rate-making purposes. For a
discussion of accounting for postretirement benefits other than pensions, see
note (9) in HEI's "Notes to consolidated financial statements."
Real estate
In 1993 and the first six months of 1994, MPC's real estate development
activities were adversely impacted by economic conditions. In the second quarter
of 1994, MPC recorded an operating loss of $0.1 million compared to an operating
income of $0.3 million in the same period last year due in part to lower unit
sales and higher administrative and general expenses in the second quarter of
1994. For the six months ended June 30, 1994, MPC recorded an operating loss of
$0.1 million compared to an operating loss of $0.3 million in the same period
last year.
30
<PAGE>
In March 1994, MDC's Baldwin*Malama partnership closed on a option to purchase
approximately 147 acres of land for future development on the island of Maui
from BPPI at a purchase price of $9.9 million. The land is currently approved
for a development of 685 single-family and multi-family units. Baldwin*Malama is
seeking to increase the density of the development.
For further information on MPC, see note (5) in HEI's "Notes to consolidated
financial statements."
Investments in leverage leases
In 1993, HEIIC refinanced the nonrecourse debt supporting a leveraged lease,
resulting in a cumulative adjustment to operating income of approximately
$1 million in the first half of 1993.
Income taxes
- ------------
The effective tax rates on income from continuing operations for the three
months ended June 30, 1994 and 1993 were 43% and 40%, respectively. The
effective tax rates on income from continuing operations for the six months
ended June 30, 1994 and 1993 were 44% and 41%, respectively. The increases in
1994 are due in part to the 1% federal income tax rate increase (retroactive to
January 1, 1993, but recorded beginning in the third quarter of 1993) and higher
preferred stock dividends at the electric utility subsidiaries, which dividends
are not deductible for tax purposes.
Discontinued operations
- -----------------------
HERS
For a discussion of the discontinued operations of HERS, see note (2) in HEI's
"Notes to consolidated financial statements."
HIG
For a discussion of the discontinued operations of HIG, see note (2) in HEI's
"Notes to consolidated financial statements."
Accounting changes
- ------------------
Postemployment benefits
For discussions of accounting for postemployment benefits, see note (10) in
HEI's "Notes to consolidated financial statements" and note (8) in HECO's
"Notes to consolidated financial statements."
Accounting for certain investments in debt and equity securities
For a discussion of accounting for certain investments in debt and equity
securities, see note (10) in HEI's "Notes to consolidated financial
statements."
Future accounting changes
- -------------------------
Accounting by creditors for impairment of a loan
In May 1993, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards (SFAS) No. 114, "Accounting by Creditors for
Impairment of a Loan." This statement requires that certain impaired loans be
measured based on the present value of expected future cash flows discounted at
the loan's effective interest rate or, as a practical expedient, at the loan's
observable market price or the fair value of the collateral if the loan is
collateral dependent. The provisions of SFAS No. 114 must be adopted by ASB no
later than January 1, 1995. If SFAS No. 114 were adopted on January 1, 1994, it
would not have had a material effect on the Company's consolidated financial
condition or the results of operations for the six months ended June 30, 1994.
Environmental matters
- ---------------------
HEI and its subsidiaries are subject to numerous laws and regulations which are
designed to protect the environment, and include air and water quality controls,
hazardous waste and toxic substance controls and the Federal Oil Pollution Act
of 1990. HEI's electric utility subsidiaries are exempt from certain
environmental requirements applicable on the U.S. mainland. For example, the
electric utility subsidiaries are exempt from the acid rain provisions of the
1990 Clean Air Act Amendments. However, HEI and its subsidiaries are subject to
environmental laws and regulations which could potentially impact the Company in
terms of operating existing facilities, constructing and operating new
facilities and ensuring the proper cleanup and disposal of hazardous waste and
toxic substances. Management
31
<PAGE>
believes that the recovery through rates of most, if not all, of any costs
incurred by HECO and its subsidiaries in complying with these environmental
requirements would be allowed by the PUC. However, as with other costs reviewed
by the PUC in the rate-making process, costs incurred by HECO and its
subsidiaries in complying with these environmental requirements may not be fully
allowed by the PUC for rate-making purposes. Based on information available to
the Company to date, management is not aware of any contingent liabilities
relating to environmental matters that could have a material adverse effect upon
the Company or consolidated HECO.
FINANCIAL CONDITION
Liquidity and capital resources
- -------------------------------
The Company and consolidated HECO believe that their ability to generate cash,
both internally from operations and externally from debt and equity issues, is
adequate to maintain sufficient liquidity to fund HECO and its subsidiaries'
construction programs, to cover debt retirements and to meet other cash
requirements in the foreseeable future.
The consolidated capital structure of HEI was as follows:
<TABLE>
<CAPTION>
(in millions) June 30, 1994 December 31, 1993
- ---------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Short-term borrowings .............................. $ 157 10% $ 40 3%
Long-term debt, net ............................... 662 42 698 47
Preferred stock of electric utility subsidiaries ... 95 6 95 6
Common stock equity ............................... 656 42 643 44
------ --- ------ ---
$1,570 100% $1,476 100%
====== === ====== ===
</TABLE>
ASB's deposit liabilities and advances from the Federal Home Loan Bank are not
included in the table above.
In October 1993, Standard & Poor's Corporation (S&P) completed its review of the
U.S. investor-owned electric utility industry and concluded that more stringent
financial risk standards are appropriate to counter mounting business risk.
Under the October 1993 guidelines, S&P rated HECO's business position as
"average." In July 1994, S&P divided the electric utilities it rates into seven
categories of business position, up from the three categories ("above average,"
"average" and "below average") set forth in October 1993. The old "average"
category was broken up into "high average," "average" and "low average." S&P
rated HECO's business position as "low average." The business position is used
by S&P to develop credit ratings under S&P's risk-adjusted financial ratio
guidelines, which were issued in October 1993.
In June 1994, Duff & Phelps Credit Rating Co. (D&P) reaffirmed HEI's and HECO's
debt ratings for notes and bonds, but lowered HEI's commercial paper rating to a
"Duff 2" from the previous rating of "Duff 1-." HECO's commercial paper rating
remains unchanged at "Duff 1-." As of July 20, 1994, HEI and HECO's S&P,
Moody's Investors Service (Moody's) and D&P's security ratings were as follows:
<TABLE>
<CAPTION>
S&P 1 Moody's 2 D&P 3
- -------------------------------------------------------------
<S> <C> <C> <C>
HEI
Medium-term notes BBB Baa2 BBB+
Commercial paper A-2 P-2 Duff 2
Outlook Negative N/A N/A
HECO
First mortgage bonds BBB+ A3 A
Unsecured notes BBB Baa1 A-
Cumulative preferred stock BBB baa1 BBB+
Commercial paper A-2 P-2 Duff 1-
Outlook Negative N/A N/A
</TABLE>
N/A Not applicable.
32
<PAGE>
1 S&P. Debt rated BBB or BBB+ is regarded as having an adequate capacity to pay
---
interest and repay principal. Whereas it normally exhibits adequate
protection parameters, adverse economic conditions or changing circumstances
are more likely to lead to a weakened capacity to pay interest and repay
principal for debt in this category than in higher rated categories.
The ratings may be modified by the addition of a plus or minus sign to show
relative standing within the major categories.
A commercial paper rating is a current assessment of the likelihood of timely
payment of debt having an original maturity of no more than 365 days.
Commercial paper rated A-2 indicates that capacity for timely payment on
issues is satisfactory.
2 Moody's. Bonds which are rated Baa2 or Baa1 are considered as medium grade
-------
obligations, i.e., they are neither highly protected nor poorly secured.
Interest payment and principal security appear adequate for the present but
certain protective elements may be lacking or may be characteristically
unreliable over any great length of time. Such bonds lack outstanding
investment characteristics and in fact have speculative characteristics as
well.
Bonds which are rated A3 possess many favorable investment attributes and are
to be considered as upper medium grade obligations. Factors giving security
to principal and interest are considered adequate but elements may be present
which suggest a susceptibility to impairment sometime in the future .
Preferred stock rated baa1 is considered to be a medium grade preferred
stock, neither highly protected nor poorly secured. Earnings and asset
protection appear adequate at present but may be questionable over a great
length of time.
Numeric modifiers are added to debt and preferred stock ratings. Numeric
modifier 1 indicates that the security ranks in the higher end of its generic
rating category and numeric modifier 2 indicates a mid-range ranking.
Commercial paper rated P-2 is considered to have a strong ability for
repayment of senior short-term obligations. This will normally be evidenced
by the following characteristics: a) leading market positions in well-
established industries, b) high rates of return on funds employed,
c) conservative capitalization structure with moderate reliance on debt and
ample asset protection, d) broad margins in earnings coverage of fixed
financial charges and high internal cash generation and e) well established
access to a range of financial markets and assured sources of alternate
liquidity. Earnings trends and coverage ratios, while sound, may be more
subject to variation. Capitalization characteristics, while still
appropriate, may be more affected by external conditions. Ample alternate
liquidity is maintained.
3 Duff & Phelps. Debt rated BBB+ is regarded as having below average protection
-------------
factors, but still considered sufficient for prudent investment. There may be
considerable variability in risk during economic cycles.
Debt rated A or A- is considered to have protection factors that are average
but adequate. However, risk factors are more variable and greater in periods
of economic stress.
Commercial paper rated Duff 1- indicates a high certainty of timely payment.
Liquidity factors are strong and supported by good fundamental protection
factors. Risk factors are very small. Commercial paper rated Duff 2 indicates
good certainty of timely payment. Liquidity factors and company fundamentals
are sound. Although ongoing funding needs may enlarge total financing
requirements, access to capital markets is good. Risk factors are small.
Each security rating listed above is not a recommendation to buy, sell or hold
securities. Each rating may be subject to revision or withdrawal at any time by
the assigning rating organization and should be evaluated independently of any
other rating.
Neither HEI nor HECO management can predict with certainty future rating agency
actions or their effects on the future cost of capital of HEI or HECO.
For the first six months of 1994, net cash used in operating activities was
$2 million. Net cash used in investing activities was $326 million, largely due
to an increase in ASB's loans receivable and mortgage-backed securities and
consolidated HECO's capital expenditures. Net cash provided by financing
activities was $316 million, due primarily to a net increase in advances from
the Federal Home Loan Bank, short-term borrowings and deposit liabilities,
partly offset by net repayments of long-term debt and common stock dividends.
Pursuant to the settlement agreement discussed in note (2) in HEI's "Notes to
consolidated financial statements," in April 1994, $32 million was deposited in
an escrow account for future distribution to the Insurance Commissioner as
Rehabilitator/Liquidator of the HIG Group in return for a final dismissal of the
lawsuit against HEI, HEIDI and certain officers and directors and a release of
claims against HEI, its
33
<PAGE>
affiliates and their past and present officers and directors. The escrow deposit
was funded out of available cash and short-term borrowings.
Total HEI consolidated financing requirements for the years 1994 through 1998,
including net capital expenditures, debt retirements and sinking fund
requirements, are currently estimated to total $1.4 billion. Of this amount,
approximately $0.9 billion are for net capital expenditures (mostly relating to
the electric utility companies' net capital expenditures described below). HEI's
consolidated internal sources, after the payment of HEI dividends, are expected
to provide approximately 42% of the consolidated financing requirements, with
debt and equity financing providing the remaining requirements. Over the five-
year period 1994 through 1998, HEI estimates that it will require approximately
$225 million in common equity, other than retained earnings, which is expected
to be provided principally by HEI's Dividend Reinvestment and Stock Purchase
Plan, the Hawaiian Electric Industries Retirement Savings Plan and public
offerings of common stock.
HEI anticipates issuing approximately one million additional common shares in a
public offering in either late 1994 or early 1995.
Following is a discussion of the liquidity and capital resources of HEI's
largest segments.
Electric utility
HECO's consolidated capital structure was as follows:
<TABLE>
<CAPTION>
(in millions) June 30, 1994 December 31, 1993
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Short-term borrowings from nonaffiliates
and affiliate ...................................... $ 115 9% $ 41 3%
Long-term debt, net .................................. 468 37 485 41
Preferred stock ...................................... 95 8 95 8
Common stock equity ................................. 584 46 570 48
------ --- ------ ---
$1,262 100% $1,191 100%
====== === ====== ===
</TABLE>
In 1994, HECO and its subsidiaries redeemed $48 million of first mortgage bonds
prior to the bonds' scheduled maturity dates. The first mortgage bonds redeemed
had original maturity dates between April 2001 and December 2016 and interest
rates between 8.5% and 10.75%. During the first six months of 1994, HECO and its
subsidiaries had also drawn $32 million of the proceeds from the sale of special
purpose revenue bonds.
Operating activities provided $43 million in net cash during the first six
months of 1994. Investing activities used cash of $78 million for capital
expenditures net of contributions in aid of construction. Financing activities
provided $37 million in net cash primarily from increased short-term borrowings.
The electric utility's consolidated financing requirements for the years 1994
through 1998, including net capital expenditures, debt retirements and sinking
fund payment requirements, are estimated to total $1.0 billion. HECO's
consolidated internal sources, after the payment of common stock and preferred
stock dividends, are currently expected to provide approximately 50% of the
total $1.0 billion in requirements, with debt and equity financing providing the
remaining requirements. HECO currently estimates that it will require
approximately $100 million in common equity, other than retained earnings, over
the five-year period 1994 through 1998. The PUC must approve issuances of long-
term debt and equity for HECO, HELCO and MECO.
Capital expenditures include projects which are required to meet expected load
growth and improve reliability, and projects to replace and upgrade existing
equipment. Net capital expenditures (i.e., capital expenditures net of AFUDC and
third party cash contributions in aid of construction) for the five-year period
1994 through 1998 are currently estimated to total $0.9 billion. Approximately
70% of gross capital expenditures is for transmission and distribution projects,
with the remaining 30% primarily for generation projects.
For 1994, electric utility net capital expenditures are estimated to be
$205 million and gross capital expenditures are estimated to be $240 million, of
which approximately 65% is for transmission and distribution projects. An
estimated $45 million of gross capital expenditures is planned for new
generation projects. Drawdowns of proceeds from the sale of tax-exempt special
purpose revenue bonds,
34
<PAGE>
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 kilowatthour sales and peak load, the availability of alternate
energy and purchased power sources, the availability of generating sites and
transmission and distribution corridors, the ability to obtain adequate and
timely rate relief, escalation in construction costs, demand-side management
programs and requirements of environmental and other regulatory and permitting
authorities.
At June 30, 1994, approximately $24.7 million of the proceeds from the sale of
special purpose revenue bonds in prior years were available to be drawn and an
additional $47 million and $170 million of revenue bonds were authorized by the
Hawaii legislature for issuance prior to the end of 1995 and 1997, respectively.
Savings bank
<TABLE>
<CAPTION>
June 30, December 31, %
(in millions) 1994 1993 change
- -------------------------------------------------------------------------------
<S> <C> <C> <C>
Assets ........................ $2,896 $2,618 11
Loans receivable .............. 1,907 1,735 10
Mortgage-backed securities .... 707 630 12
Deposit liabilities ........... 2,142 2,092 2
</TABLE>
At December 31, 1993, ASB was the second largest savings bank in the state based
on total assets of $2.6 billion. Since December 31, 1988, ASB's loans and
deposits have more than doubled. Loans and deposits continue to grow, although
at a slower pace than in the past.
For the first six months of 1994, cash used by investing activities was
$249 million, due largely to the origination of loans receivable and purchase of
mortgage-backed securities, offset by principal repayments. Cash provided by
financing activities included a net increase of $220 million in advances from
the Federal Home Loan Bank and $51 million in deposit liabilities, offset by
common stock dividends of $8 million.
Deposits traditionally have been the principal source of ASB's funds for use in
lending, meeting liquidity requirements and making investments. ASB also derives
funds from the receipt of interest and principal on outstanding loans and
mortgage-backed securities, borrowings from the Federal Home Loan Bank of
Seattle, securities sold under agreements to repurchase and other sources.
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 June 30, 1994.
OTS regulations require each savings association to have regulatory capital at
least sufficient to meet three requirements: tangible capital and core
(leverage) capital of 1.5% and 3.0%, respectively, of adjusted total assets; and
risk-based capital equal to 8.0% of risk-adjusted assets. As of June 30, 1994,
ASB was in full compliance with the minimum capital requirements with a tangible
capital ratio of 4.95%, a core capital ratio of 5.30% and risk-based capital of
$157.6 million, $44.0 million in excess of the minimum requirement.
The OTS has adopted a new rule adding an interest rate risk (IRR) component to
the existing risk-based capital requirement. The regulation is effective January
1, 1994; however, the requirement that thrifts incorporate IRR into their risk-
based capital calculations, based on the lowest OTS IRR Exposure Reports for the
three prior quarter-ends, is effective September 30, 1994. Institutions with an
"above normal" level of IRR exposure may be required to hold additional
capital. "Above normal" IRR is defined as any percentage decline in market
value of an institution's portfolio equity in excess of 2% of the market value
of its assets, which would result from an immediate 200 basis point change in
interest rates. The OTS regulation will require a savings association with an
"above normal" level of IRR exposure to deduct from total capital one-half of
the "above normal" IRR times the market value of its assets in meeting its
existing 8% risk-based capital requirement. Based on the lowest IRR reported as
of the three prior quarter-ends, ASB would not have been required to hold
additional capital if the new rule had been in effect at that time.
35
<PAGE>
The Federal Deposit Insurance Corporation Improvement Act of 1991 established a
statutory framework for closer monitoring of insured depository institutions in
order to ensure "prompt corrective action" by regulators as an institution's
capital position declines. The OTS rules for prompt corrective action,
effective on December 19, 1992, define the capital measures for five capital
categories (well-capitalized, adequately capitalized, under-capitalized,
significantly under-capitalized and critically under-capitalized), and provide
for progressively more stringent restrictions and supervision as capital levels
decline. To be classified as "well-capitalized," an institution must have a
"leverage ratio" of 5%, a "Tier-1 risk-based ratio" of 6% and a "total risk-
based ratio" of 10%. As of June 30 1994, ASB believes that based on OTS capital
standards it would have been classified as "well-capitalized" with a leverage
ratio of 5.30%, a Tier-1 risk-based ratio of 10.71% and a total risk-based ratio
of 11.1%.
The OTS is currently considering proposed regulations which will increase
capital requirements. One of the proposed regulations includes increasing core
capital requirements to either 4% or 5% for many savings associations. Under the
proposed regulation, ASB believes it would be required to comply with a 4%
requirement. As of June 30, 1994, ASB would have been in compliance with the
proposed 4% requirement with a core capital ratio of 5.30%.
ASB believes that a satisfactory regulatory capital position provides a basis
for public confidence, affords protection to depositors, helps to ensure
continued access to capital markets on favorable terms and provides a foundation
for anticipated growth.
PART II - OTHER INFORMATION
- --------------------------------------------------------------------------------
Item 1. Legal proceedings
- --------------------------
There are no material developments except as set forth in HEI's and HECO's
"Notes to consolidated financial statements," management's discussion and
analysis of financial condition and results of operations and Item 5, "Other
information."
Item 5. Other information
- --------------------------
HEI senior management changes
- -----------------------------
The positions of group vice president at HEI has been eliminated with the
June 30, 1994 retirement of Edward J. Blackburn, HEI group vice president for
diversified companies. Effective July 1, 1994, Harwood D. Williamson is no
longer HEI group vice president for utility companies, but he continues as a
member of the board of directors of HEI and as president and chief executive
officer of HECO.
Nonutility generation
- ---------------------
A. Puna Geothermal Ventures (PGV)
PGV began supplying test energy to HELCO on April 22, 1993. As of June 27, 1993,
PGV had successfully completed the 100-hour acceptance test demonstrating its
ability to provide HELCO with the full 25 MW required in its power purchase
agreement (PPA). Therefore, as of that date, PGV commenced commercial operations
and HELCO's obligation to make firm capacity payments commenced. As of June 30,
1994, due to problems with one of its wells, PGV was producing approximately 16
MW. PGV anticipates that it will correct the problems and return to 25 MW output
during August 1994.
On April 13, 1993, HELCO filed suit against PGV in the Third Circuit Court for
penalties and other relief (including general, incidental and consequential
damages and prejudgment interest) related to PGV's failure to provide power to
HELCO as of October 3, 1991. The lawsuit does not specify the amount sought.
Penalties were accumulated until June 27, 1993 when PGV commenced commercial
operations. As of June 27, 1993, the accumulated penalties amounted to
approximately $7.5 million. PGV has filed an answer and counterclaim and
contends that any penalties should be excused under the force majeure provisions
of the PPA, on the theory that delays were attributable to circumstances beyond
PGV's control. HELCO has recognized energy and capacity purchased from PGV as
expenses, but has withheld certain of such firm capacity and energy payments to
PGV. Amounts withheld for June 1993
36
<PAGE>
through June 1994 totaled approximately $3.4 million. HELCO continues to reserve
its right to offset accumulated damages and costs, including penalties, against
any future energy and capacity payments due to PGV. HELCO has not recognized any
income for accumulated penalty amounts.
B. Hilo Coast Processing Company (HCPC)
HELCO has a PPA with HCPC for 18 MW of firm capacity. On July 31, 1992,
C. Brewer and Company publicly announced that Mauna Kea Agribusiness, which is
the primary supplier of sugar cane processed by HCPC, would begin converting its
acreage to macadamia nuts, eucalyptus trees and other diversified crops as of
November 1, 1992, and would discontinue harvesting sugar cane in late 1994.
Subsequently, on March 25, 1994, HCPC issued a written notice to HELCO
indicating its intent to cease supplying power to HELCO pursuant to the PPA as
of March 26, 1997. As allowed under the PPA, on April 22, 1994, HELCO informed
HCPC in writing of its preliminary intent to purchase the HCPC facilities,
subject to a number of conditions. HELCO and HCPC are currently in negotiations
regarding this potential purchase. Also see note (4) to HECO's "Notes to
consolidated financial statements."
Ratio of earnings to fixed charges
- ----------------------------------
The following tables set forth the ratio of earnings to fixed charges for HEI
and its subsidiaries for the periods indicated:
Ratio of earnings to fixed charges excluding interest on ASB deposits
<TABLE>
<CAPTION>
Six months Years Ended December 31,
ended ----------------------------------------------------
June 30, 1994 1993 1992 1991 1990 1989
- ------------- ------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C>
2.10 2.25 2.08 1.99 1.76 1.99
===== ====== ====== ====== ====== ======
</TABLE>
Ratio of earnings to fixed charges including interest on ASB deposits
<TABLE>
<CAPTION>
Six months Years Ended December 31,
ended ----------------------------------------------------
June 30, 1994 1993 1992 1991 1990 1989
- -------------- ------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C>
1.61 1.65 1.50 1.46 1.39 1.55
==== ====== ====== ====== ====== ======
</TABLE>
For purposes of calculating the ratio of earnings to fixed charges, "earnings"
represent the sum of (i) pretax income from continuing operations (excluding
undistributed net income or net loss from less than fifty-percent-owned persons)
and (ii) fixed charges (as hereinafter defined, but excluding capitalized
interest). "Fixed charges" are calculated both excluding and including interest
on ASB's deposits during the applicable periods and represent the sum of (i)
interest, whether capitalized or expensed, incurred by HEI and its subsidiaries
plus their proportionate share of interest on debt to outsiders incurred by
fifty-percent-owned persons, but excluding interest on nonrecourse debt from
leveraged leases which is not included in interest expense in HEI's consolidated
statements of income, (ii) amortization of debt expense and discount or premium
related to any indebtedness, whether capitalized or expensed, (iii) the interest
factor in rental expense and (iv) the preferred stock dividend requirements of
HEI's subsidiaries, increased to an amount representing the pretax earnings
required to cover such dividend requirements.
37
<PAGE>
The following table sets forth the ratio of earnings to fixed charges for HECO
and its subsidiaries for the periods indicated:
Ratio of earnings to fixed charges
<TABLE>
<CAPTION>
Six months Years Ended December 31,
ended -------------------------------------------------------
June 30, 1994 1993 1992 1991 1990 1989
- ------------- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
3.03 3.25 3.03 2.82 2.99 3.26
==== ==== ==== ==== ==== ====
</TABLE>
For purposes of calculating the ratio of earnings to fixed charges, "earnings"
represent the sum of (i) pretax income before preferred stock dividends of HECO
and (ii) fixed charges (as hereinafter defined, but excluding the allowance for
borrowed funds used during construction). "Fixed charges" represent the sum of
(i) interest, whether capitalized or expensed, incurred by HECO and its
subsidiaries, (ii) amortization of debt expense and discount or premium related
to any indebtedness, whether capitalized or expensed, (iii) the interest factor
in rental expense and (iv) the preferred stock dividend requirements of HELCO
and MECO, increased to an amount representing the pretax earnings required to
cover such dividend requirements.
Item 6. Exhibits and reports on Form 8-K
- -----------------------------------------
(a) Exhibits
<TABLE>
<S> <C>
HEI Hawaiian Electric Industries, Inc. and subsidiaries
Exhibit 11(a) Computation of earnings per share of common stock, three and
six months ended June 30, 1994 and 1993
HECO Hawaiian Electric Company, Inc. and subsidiaries
Exhibit 11(b) Computation of earnings per share of common stock
HEI Hawaiian Electric Industries, Inc. and subsidiaries
Exhibit 12(a) Computation of ratio of earnings to fixed charges,
six months ended June 30, 1994 and 1993
HECO Hawaiian Electric Company, Inc. and subsidiaries
Exhibit 12(b) Computation of ratio of earnings to fixed charges,
six months ended June 30, 1994 and 1993
</TABLE>
(b) Reports on Form 8-K
During the quarter, HEI filed a Current Report, Form 8-K, with the SEC under
"Item 5. Other Events" as follows:
Dated Registrant Items reported
- ----------------------------------------------------------------------------
April 6, 1994 HEI HEI receives state court approval of
lawsuit settlement
38
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrants have duly caused this report to be signed on their behalf by the
undersigned, thereunto duly authorized. The signature of the undersigned
companies shall be deemed to relate only to matters having reference to such
companies and any subsidiaries thereof.
HAWAIIAN ELECTRIC INDUSTRIES, INC. HAWAIIAN ELECTRIC COMPANY, INC.
(Registrant) (Registrant)
By /s/ Robert F. Mougeot By /s/ Paul Oyer
------------------------ ----------------
Robert F. Mougeot Paul A. Oyer
Financial Vice President and Financial Vice President and
Chief Financial Officer Treasurer
(Principal Financial Officer of (Principal Financial Officer of
HEI) HECO)
Date: August 8, 1994 Date: August 8, 1994
39
<PAGE>
HEI Exhibit 11(a)
Hawaiian Electric Industries, Inc. and subsidiaries
COMPUTATION OF EARNINGS PER SHARE OF COMMON STOCK
(unaudited)
<TABLE>
<CAPTION>
Three months ended Six months ended
June 30, June 30,
------------------ -----------------
(in thousands, except for per share data) 1994 1993 1994 1993
- --------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Income from continuing operations....................... $17,632 $18,977 $29,420 $28,269
Income from discontinued operations..................... -- -- -- 1,800
------- ------- ------- -------
Net income.............................................. $17,632 $18,977 $29,420 $30,069
======= ======= ======= =======
Average number of common shares outstanding............. 28,013 25,084 27,892 24,973
======= ======= ======= =======
Earnings per common share:
Continuing operations................................. $ 0.63 $ 0.76 $ 1.05 $ 1.13
Discontinued operations............................... -- -- -- 0.07
------- ------- ------- -------
$0.63 $ 0.76 $ 1.05 $ 1.20
======= ======= ======= =======
</TABLE>
<PAGE>
HECO Exhibit 11(b)
Hawaiian Electric Company, Inc. and subsidiaries
COMPUTATION OF EARNINGS PER SHARE OF COMMON STOCK
(unaudited)
Hawaiian Electric Industries, Inc. owns all of the outstanding common stock of
Hawaiian Electric Company, Inc. (HECO). Therefore, per share data with respect
to shares of common stock of HECO are not meaningful.
<PAGE>
HEI Exhibit 12(a)
Hawaiian Electric Industries, Inc. and subsidiaries
COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES
(unaudited)
<TABLE>
<CAPTION>
Six months ended June 30,
---------------------------------------------
(dollars in thousands) 1994 (1) 1994 (2) 1993 (1) 1993 (2)
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Fixed charges
Total interest charges
The Company (3)......................................... $ 37,341 $ 74,508 $ 33,078 $ 73,828
Proportionate share of fifty-percent-owned persons...... 171 171 382 382
Interest component of rentals.............................. 1,812 1,812 1,979 1,979
Pretax preferred stock dividend requirements of
subsidiaries.............................................. 6,101 6,101 5,332 5,332
-------- -------- -------- --------
Total fixed charges........................................ $ 45,425 $ 82,592 $ 40,771 $ 81,521
======== ======== ======== ========
Earnings
Pretax income from continuing operations................... $ 52,415 $ 52,415 $ 48,310 $ 48,310
Fixed charges, as shown.................................... 45,425 82,592 40,771 81,521
Interest capitalized
The Company............................................. (2,199) (2,199) (1,935) (1,935)
Proportionate share of fifty-percent-owned persons...... (171) (171) (179) (179)
-------- -------- -------- --------
Earnings available for fixed charges....................... $ 95,470 $132,637 $ 86,967 $127,717
======== ======== ======== ========
Ratio of earnings to fixed charges......................... 2.10 1.61 2.13 1.57
======== ======== ======== ========
</TABLE>
(1) Excluding interest on ASB deposits.
(2) Including interest on ASB deposits.
(3) Total interest charges exclude interest on nonrecourse debt from
leveraged leases which is not included in interest expense in HEI's
consolidated statement of income.
<PAGE>
HECO Exhibit 12(b)
Hawaiian Electric Company, Inc. and subsidiaries
COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES
(unaudited)
<TABLE>
<CAPTION>
Six months ended
June 30,
------------------
(dollars in thousands) 1994 1993
- --------------------------------------------------------------------------------------
<S> <C> <C>
Fixed charges
Total interest charges............................................. $18,170 $16,815
Interest component of rentals...................................... 425 534
Pretax preferred stock dividend requirements of subsidiaries....... 2,336 1,626
------- -------
Total fixed charges................................................ $20,931 $18,975
======= =======
Earnings
Income before preferred stock dividends of HECO.................... $26,630 $26,146
Income taxes (see note below)...................................... 17,773 15,280
Fixed charges, as shown............................................ 20,931 18,975
AFUDC for borrowed funds........................................... (1,816) (1,928)
------- -------
Earnings available for fixed charges............................... $63,518 $58,473
======= =======
Ratio of earnings to fixed charges................................. 3.03 3.08
======= =======
Note:
Income taxes is comprised of the following:
Expense relating to operating income from regulated activities... $17,830 $15,339
Benefit relating to loss from nonregulated activities............ (57) (59)
------- -------
$17,773 $15,280
======= =======
</TABLE>
