<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 September 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 November 3, 1994
- --------------------------------------------------------------------------------
Hawaiian Electric Industries,
Inc. (Without Par Value)....... 28,452,227 Shares
Hawaiian Electric Company,
Inc. ($6 2/3 Par Value)........ 11,258,290 Shares (not
publicly traded)
<PAGE>
Hawaiian Electric Industries, Inc. and subsidiaries
Hawaiian Electric Company, Inc. and subsidiaries
Form 10-Q--Quarter ended September 30, 1994
<TABLE>
<CAPTION>
INDEX
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) - September 30, 1994
and December 31, 1993............................................... 1
Consolidated statements of income (unaudited) - three and nine months
ended September 30, 1994 and 1993................................... 2
Consolidated statements of retained earnings (unaudited) - three and
nine months ended September 30, 1994 and 1993....................... 3
Consolidated statements of cash flows (unaudited) - nine months
ended September 30, 1994 and 1993................................... 4
Notes to consolidated financial statements (unaudited)............... 6
Hawaiian Electric Company, Inc. and subsidiaries
------------------------------------------------
Consolidated balance sheets (unaudited) - September 30, 1994
and December 31, 1993............................................... 13
Consolidated statements of income (unaudited) - three and nine months
ended September 30, 1994 and 1993................................... 14
Consolidated statements of retained earnings (unaudited) - three and
nine months ended September 30, 1994 and 1993....................... 14
Consolidated statements of cash flows (unaudited) - nine months
ended September 30, 1994 and 1993................................... 15
Notes to consolidated financial statements (unaudited)............... 16
Item 2. Management's discussion and analysis of financial condition
and results of operations........................................... 22
PART II. OTHER INFORMATION
Item 1. Legal proceedings..................................................... 36
Item 5. Other information..................................................... 36
Item 6. Exhibits and reports on Form 8-K...................................... 38
Signatures.......................................................................... 39
</TABLE>
i
<PAGE>
Hawaiian Electric Industries, Inc. and subsidiaries
Hawaiian Electric Company, Inc. and subsidiaries
Form 10-Q--Quarter ended September 30, 1994
GLOSSARY OF TERMS
Terms Definitions
- ----- -----------
AFUDC Allowance for funds used during construction
ASB American Savings Bank, F.S.B., a wholly owned subsidiary of HEI
Diversified, Inc. and parent company of American Savings
Investment 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 formely the holder of record of the common
stock of The Hawaiian Insurance & Guaranty Company, Limited
HEIIC HEI Investment Corp., a wholly owned subsidiary of Hawaiian
Electric Industries, Inc.
HELCO Hawaii Electric Light Company, Inc., a wholly owned electric
utility subsidiary of Hawaiian Electric Company, Inc.
HERS Hawaiian Electric Renewable Systems, Inc., formerly a wholly owned
subsidiary of Hawaiian Electric Industries, Inc. and formerly
parent company of Lalamilo Ventures, Inc.
ii
<PAGE>
GLOSSARY OF TERMS, continued
Terms Definitions
- ----- -----------
HIG The Hawaiian Insurance & Guaranty Company, Limited, currently in
state rehabilitation proceedings and formerly parent company of
United National Insurance Company, Ltd., Hawaiian Underwriters
Insurance Co., Ltd., Guardian Life Underwriters, Inc., Guardian
Financial Corporation, and Independent Adjustment, Inc. HEI
Diversified, Inc. was formerly 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
KWH Kilowatthour
MECO Maui Electric Company, Limited, a wholly owned electric utility
subsidiary of Hawaiian Electric Company, Inc.
MPC Malama Pacific Corp., a wholly owned subsidiary of Hawaiian
Electric Industries, Inc. and parent company of Malama Project-I,
Inc., Malama Waterfront Corp., Malama Property Investment Corp.,
Malama Development Corp., Malama Realty Corp., Malama Elua Corp.,
TMG Service Corp. (formerly Malama Kolu Corp.), Malama Hoaloha
Corp., and Malama Mohala Corp.
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.
iii
<PAGE>
<TABLE>
<CAPTION>
PART I - FINANCIAL INFORMATION
- ----------------------------------------------------------------------------------------------
Item 1. Financial statements
- -----------------------------
Hawaiian Electric Industries, Inc. and subsidiaries
Consolidated balance sheets (unaudited)
September 30, December 31,
(in thousands) 1994 1993
- ----------------------------------------------------------------------------------------------
<S> <C> <C>
Assets
Cash and equivalents......................................... $ 84,197 $ 116,260
Accounts receivable and unbilled revenues, net............... 129,900 117,116
Inventories, at average cost................................. 40,726 39,405
Real estate developments..................................... 38,978 29,673
Loans receivable, net........................................ 1,966,953 1,735,098
Marketable securities........................................ 786,894 698,755
Other investments............................................ 77,070 77,106
Property, plant and equipment, net........................... 1,632,605 1,542,989
Regulatory assets............................................ 84,017 60,699
Other........................................................ 60,026 54,827
Goodwill and other intangibles............................... 46,507 49,664
----------- -----------
$4,947,873 $4,521,592
=========== ===========
Liabilities and stockholders' equity
Accounts payable............................................. $ 93,970 $ 88,628
Deposit liabilities.......................................... 2,153,515 2,091,583
Short-term borrowings........................................ 116,860 40,416
Securities sold under agreements to repurchase............... 23,463 --
Advances from Federal Home Loan Bank......................... 521,874 289,674
Long-term debt, net.......................................... 713,685 697,836
Deferred income taxes........................................ 174,480 168,329
Unamortized tax credits...................................... 45,385 44,357
Contributions in aid of construction......................... 169,061 165,005
Other........................................................ 170,883 197,713
---------- ----------
4,183,176 3,783,541
---------- ----------
Preferred stock of electric utility subsidiaries
Subject to mandatory redemption.............................. 46,139 46,730
Not subject to mandatory redemption.......................... 48,293 48,293
---------- ----------
94,432 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 28,408 shares and 27,675 shares................. 538,544 514,710
Retained earnings............................................ 131,721 128,318
---------- ----------
670,265 643,028
---------- ----------
$4,947,873 $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 Nine months ended
September 30, September 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............................. $249,664 $235,841 $670,381 $661,788
Savings bank................................. 54,389 49,752 156,784 149,183
Other........................................ 15,103 13,893 41,589 49,508
--------- --------- --------- ---------
319,156 299,486 868,754 860,479
--------- --------- --------- ---------
Expenses
Electric utility............................. 209,015 204,222 571,591 576,168
Savings bank................................. 43,187 38,048 124,287 117,758
Other........................................ 15,404 16,758 44,967 53,845
--------- --------- --------- ---------
267,606 259,028 740,845 747,771
--------- --------- --------- ---------
Operating income (loss)
Electric utility............................. 40,649 31,619 98,790 85,620
Savings bank................................. 11,202 11,704 32,497 31,425
Other........................................ (301) (2,865) (3,378) (4,337)
--------- --------- --------- ---------
51,550 40,458 127,909 112,708
--------- --------- --------- ---------
Interest expense--electric utility and other. (13,916) (12,901) (40,126) (38,863)
Allowance for borrowed funds used
during construction......................... 1,070 1,056 2,886 2,984
Preferred stock dividends of electric
utility subsidiaries........................ (1,790) (1,628) (5,386) (4,888)
Allowance for equity funds used during
construction................................ 2,381 1,915 6,427 5,269
--------- --------- --------- ---------
Income from continuing operations
before income taxes......................... 39,295 28,900 91,710 77,210
Income taxes................................. 16,604 12,812 39,599 32,853
--------- --------- --------- ---------
Income from continuing operations............ 22,691 16,088 52,111 44,357
Income from discontinued operations
(less applicable income taxes of $1,102
in the nine months ended
September 30, 1993)......................... -- -- -- 1,800
--------- --------- --------- ---------
Net income................................... $ 22,691 $ 16,088 $ 52,111 $ 46,157
========= ========= ========= =========
Earnings per common share
Continuing operations..................... $0.80 $0.61 $1.86 $1.75
Discontinued operations................... -- -- -- 0.07
--------- --------- --------- ---------
$0.80 $0.61 $1.86 $1.82
========= ========= ========= =========
Dividends per common share................... $0.58 $0.57 $1.74 $1.71
========= ========= ========= =========
Weighted average number of common
shares outstanding......................... 28,255 26,247 28,014 25,402
========= ========= ========= =========
Ratio of earnings to fixed charges
(SEC method)
Excluding interest on ASB deposits.......... 2.23 2.21
========= =========
Including interest on ASB deposits.......... 1.69 1.61
========= =========
</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 Nine months ended
September 30, September 30,
------------------- -------------------
(in thousands) 1994 1993 1994 1993
- ---------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Retained earnings, beginning of period............. $125,406 $140,102 $128,318 $138,484
Net income......................................... 22,691 16,088 52,111 46,157
Common stock dividends............................. (16,376) (14,419) (48,708) (42,870)
--------- --------- --------- ---------
Retained earnings, end of period $131,721 $141,771 $131,721 $141,771
========= ========= ========= =========
</TABLE>
See accompanying notes to consolidated financial statements.
3
<PAGE>
Hawaiian Electric Industries, Inc. and subsidiaries
Consolidated statements of cash flows (unaudited)
<TABLE>
<CAPTION>
Nine months ended
September 30,
--------------------------------
(in thousands) 1994 1993
- ------------------------------------------------------------------------------------------------
<S> <C> <C>
Cash flows from operating activities
Income from continuing operations................................ $52,111 $ 44,357
Adjustments to reconcile income from continuing operations to
net cash provided by (used in) operating activities
Depreciation and amortization of property, plant and
equipment..................................................... 54,353 50,825
Other amortization............................................. (3,337) (1,297)
Provision for deferred income taxes and tax credits, net....... 9,652 3,507
Changes in assets and liabilities, net of effects from
acquisition of control of joint venture
Increase in accounts receivable and unbilled revenues, net... (12,784) (10,284)
Decrease (increase) in inventories........................... (1,321) 789
Decrease (increase) in real estate developments.............. (1,351) 2,256
Decrease (increase) in securities held for trading........... 29,873 (22,677)
Increase in regulatory assets................................ (1,117) (3,807)
Increase in accounts payable................................. 5,342 10,119
Changes in other assets and liabilities...................... (24,200) 11,434
---------- ---------
107,221 85,222
Cash flows from discontinued operations.......................... (32,469) 1,063
---------- ---------
Net cash provided by operating activities........................ 74,752 86,285
---------- ---------
Cash flows from investing activities
Loans receivable originated and purchased........................ (412,704) (364,808)
Principal repayments on loans receivable......................... 185,408 201,713
Proceeds from sale of loans receivable........................... 1,888 214
"Held-to-maturity" mortgage-backed securities purchased.......... (274,430) (132,796)
Principal repayments on "held-to-maturity" mortgage-backed
securities...................................................... 162,031 191,433
Increase in investments in real estate joint ventures............ (60) (1,701)
Distributions from real estate joint ventures.................... 2,019 8,594
Capital expenditures............................................. (143,035) (159,524)
Contributions in aid of construction............................. 9,114 15,801
Other............................................................ (4,692) 13,297
---------- -----------
Net cash used in investing activities............................ (474,461) (227,777)
---------- -----------
</TABLE>
4
<PAGE>
Hawaiian Electric Industries, Inc. and subsidiaries
Consolidated statements of cash flows (unaudited)
(continued)
<TABLE>
<CAPTION>
Nine months ended
September 30,
-------------------------
(in thousands) 1994 1993
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C>
Cash flows from financing activities
Net increase in deposit liabilities........................................... $ 61,932 $ 12,314
Net increase (decrease) in short-term borrowings with original maturities of
three months or less......................................................... 80,119 (31,905)
Proceeds from other short-term borrowings..................................... 851 25,461
Repayment of other short-term borrowings...................................... (4,526) (45,602)
Proceeds from securities sold under agreements to repurchase.................. 23,330 --
Repurchase of securities sold under agreements to repurchase.................. -- (14,000)
Proceeds from advances from Federal Home Loan Bank............................ 584,200 102,500
Principal payments on advances from Federal Home Loan Bank.................... (352,000) (58,024)
Proceeds from issuance of long-term debt...................................... 83,274 59,597
Repayment of long-term debt................................................... (75,427) (50,774)
Redemption of electric utility subsidiaries' preferred stock.................. (591) (745)
Net proceeds from issuance of common stock.................................... 10,564 84,693
Common stock dividends........................................................ (35,484) (30,435)
Other......................................................................... (8,596) (2,289)
--------- --------
Net cash provided by financing activities..................................... 367,646 50,791
--------- --------
Net decrease in cash and equivalents.......................................... (32,063) (90,701)
Cash and equivalents, beginning of period..................................... 116,260 156,754
--------- --------
Cash and equivalents, end of period........................................... $ 84,197 $ 66,053
========= ========
</TABLE>
See accompanying notes to consolidated financial statements.
5
<PAGE>
Hawaiian Electric Industries, Inc. and subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 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 September 30, 1994 and December 31, 1993, the results of its
operations for the three months and nine months ended September 30, 1994 and
1993, and its cash flows for the nine months ended September 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 Reports on SEC Form 10-Q for the quarters ended March 31 and
June 30, 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, was the holder of
record of all the common stock of HIG until August 16, 1994, when HEIDI
surrendered the stock of HIG for cancellation.
On December 2, 1992, the Board of Directors of HEI had concluded that it would
not contribute additional capital to HIG and the remaining investment in the HIG
Group was written off in the fourth quarter of 1992. The decision resulted from
an increase in the estimate of policyholder claims from Hurricane Iniki (which
hit the Hawaiian Islands on September 11, 1992). On December 24, 1992, with the
consent of the HIG Group, a formal rehabilitation order (the Rehabilitation
Order) was entered by the First Circuit Court of the State of Hawaii, vesting
full control over the HIG Group in the Insurance Commissioner (the
Rehabilitator/Liquidator) and her deputies.
On April 12, 1993, the Rehabilitator/Liquidator, HIG, United National Insurance
Company, Ltd. and Hawaiian Underwriters Insurance Co., Ltd. filed a complaint
against HEI, HEIDI and certain current and former officers and directors of HEI,
HEIDI and the HIG Group in state court on the island of Kauai. The complaint set
forth several separate counts, including claims to the effect that HEI and/or
HEIDI should be held liable for HIG's obligations based on allegations, among
others, that HIG was held out to be part of an HEI family of companies (and not
as a separate enterprise) and that HEIDI is liable for an assessment levied by
the Rehabilitator/Liquidator. The complaint alleged that certain current and
former officers and directors of HEI, HEIDI and the HIG Group had breached their
fiduciary duties to the HIG Group in numerous respects. The complaint requested
declaratory relief and compensatory, general, special and punitive damages,
together with costs and attorneys' fees.
On July 12, 1993, the Rehabilitator/Liquidator filed a first amended complaint,
which repeated the claims asserted in the original complaint but added the
Hawaii Insurance Guaranty Association (HIGA) as a plaintiff and asserted certain
additional claims.
6
<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 paid $32.0 million into an escrow account. In August 1994, the
$32.0 million plus interest was disbursed to the Rehabilitator/Liquidator, at
which time the release of claims against HEI, its affiliates and their past and
present officers and directors became effective and the common stock of HIG held
by HEIDI was cancelled.
The $32.0 million settlement amount, less income tax benefits and certain
amounts recognized in previously established reserves, resulted in a
$15.0 million after-tax charge to discontinued operations in the fourth quarter
of 1993. HEI is seeking reimbursement for the settlement and defense costs from
certain of its insurance carriers. HEI's claims against its insurance carriers
will require resolution of several insurance coverage and other policy issues
and the outcome of such claims cannot be predicted at this time. One of HEI's
insurance carriers has filed a declaratory relief action in the U.S. District
Court for the District of Hawaii seeking resolution of these issues, and HEI has
filed counterclaims for declaratory relief, breach of contract, tortious breach
of contract and punitive damages. Trial of the case is scheduled for October
1995. Recoveries from HEI's insurance carriers, if any, will be recognized when
realized.
(3) Electric utility subsidiary
- --------------------------------
For Hawaiian Electric Company, Inc.'s consolidated financial information,
including its commitments and contingencies, see pages 13 through 21.
(4) Savings bank subsidiary
- ----------------------------
Selected consolidated financial information
American Savings Bank, F.S.B. and subsidiaries
<TABLE>
<CAPTION>
Three months ended Nine months ended
September 30, September 30,
-------------------------- --------------------------
(in thousands) 1994 1993 1994 1993
- ----------------------------------------------------------------------------------------------------------------
Income statement data
<S> <C> <C> <C> <C>
Interest income........................................ $51,833 $46,964 $150,361 $140,950
Interest expense....................................... 26,789 22,351 74,704 70,210
------- ------- -------- --------
Net interest income.................................... 25,044 24,613 75,657 70,740
Provision for losses................................... (248) (516) (732) (987)
Other income........................................... 2,556 2,788 6,423 8,233
Operating, administrative and general expenses......... (16,150) (15,181) (48,851) (46,561)
------- ------- -------- --------
Operating income....................................... 11,202 11,704 32,497 31,425
Income taxes........................................... 4,669 5,304 13,538 13,360
------- ------- -------- --------
Net income............................................. $ 6,533 $ 6,400 $ 18,959 $ 18,065
======= ======= ======== ========
</TABLE>
7
<PAGE>
American Savings Bank, F.S.B. and subsidiaries
<TABLE>
<CAPTION>
September 30, December 31,
(in thousands) 1994 1993
- -----------------------------------------------------------------------------------------------------------------------------------
Balance sheet data
<S> <C> <C>
Assets
Cash and equivalents................................................. $ 82,712 $ 77,610
Investment securities................................................ 33,774 68,599
Mortgage-backed securities........................................... 742,720 630,156
Loans receivable, net................................................ 1,966,953 1,735,098
Other................................................................ 67,461 57,358
Goodwill and other intangibles....................................... 46,507 49,664
---------- -----------
$2,940,127 $2,618,485
========== ==========
Liabilities and equity
Deposit liabilities.................................................. $2,153,515 $2,091,583
Securities sold under agreements to repurchase....................... 23,463 --
Advances from Federal Home Loan Bank................................. 521,874 289,674
Other................................................................ 48,038 52,717
---------- ----------
2,746,890 2,433,974
Common stock equity.................................................. 193,237 184,511
---------- ----------
$2,940,127 $2,618,485
========== ==========
</TABLE>
8
<PAGE>
American Savings Bank, F.S.B. and subsidiaries
<TABLE>
<CAPTION>
Nine months ended
September 30,
-------------------------------
(in thousands) 1994 1993
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Cash flow data
Cash flows from operating activities
Net income................................................................................... $ 18,959 $ 18,065
Adjustments to reconcile net income to net cash provided by
operating activities
Decrease (increase) in accounts receivable................................................ (743) 875
Decrease (increase) in other securities held for trading.................................. 40,273 (22,677)
Increase (decrease) in accounts payable................................................... (4,658) 7,271
Changes in other assets and liabilities................................................... (3,776) 6,298
---------- ----------
Net cash provided by operating activities.................................................... 50,055 9,832
--------- ----------
Cash flows from investing activities
Loans receivable originated and purchased.................................................... (412,704) (364,808)
Principal repayments on loans receivable .................................................... 185,408 201,713
Proceeds from sale of loans receivable....................................................... 1,888 214
"Held-to-maturity" mortgage-backed securities purchased...................................... (274,430) (132,796)
Principal repayments on "held-to-maturity" mortgage-backed securities........................ 162,031 191,433
Other........................................................................................ (13,608) 7,007
---------- ----------
Net cash used in investing activities........................................................ (351,415) (97,237)
---------- ----------
Cash flows from financing activities
Net increase in deposit liabilities.......................................................... 61,932 12,314
Proceeds from securities sold under agreements to repurchase................................. 23,330 --
Repurchase of securities sold under agreements to repurchase................................. -- (14,000)
Proceeds from advances from Federal Home Loan Bank........................................... 584,200 102,500
Principal payments on advances from Federal Home Loan Bank................................... (352,000) (58,024)
Common stock dividends....................................................................... (11,000) (10,002)
---------- ----------
Net cash provided by financing activities.................................................... 306,462 32,788
---------- ----------
Net increase (decrease) in cash and equivalents.............................................. 5,102 (54,617)
Cash and equivalents, beginning of period.................................................... 77,610 117,937
----------- ----------
Cash and equivalents, end of period.......................................................... $ 82,712 $ 63,320
=========== ===========
</TABLE>
(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 September 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 September 30, 1994, MPC or its subsidiaries were directly liable for
$15.8 million of outstanding loans and had additional loan facilities of
$1.4 million. In addition, at September 30, 1994, MPC or its subsidiaries had
issued (i)guaranties under which they were jointly and severally contingently
liable with their joint venture partners for $1.9 million of outstanding loans
and (ii) payment guaranties under which MPC or its subsidiaries were severally
contingently liable for $6.7 million of outstanding loans and $7.9 million of
additional undrawn loan facilities. In total, at September 30, 1994, MPC or its
9
<PAGE>
subsidiaries were liable or contingently liable for $24.3 million of outstanding
loans and $9.3 million in undrawn loan facilities. At September 30, 1994, HEI
had agreed with the lenders of construction loans and loan facilities, of which
approximately $14.4 million was outstanding and $9.3 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 September 30, 1994 and December 31, 1993 include the
following deferred costs:
<TABLE>
<CAPTION>
September 30, December 31,
(in thousands) 1994 1993
- --------------------------------------------------------------------------------
<S> <C> <C>
Postretirement benefits other than pensions....... $32,346 $19,210
Income taxes...................................... 21,272 16,297
Preliminary plant costs on suspended project...... 5,634 5,199
Vacation earned, but not yet taken................ 6,290 5,494
Unamortized debt expense on retired issuances..... 7,676 5,435
Integrated resource planning costs................ 6,800 4,661
Other............................................. 3,999 4,403
------- -------
$84,017 $60,699
======= =======
</TABLE>
(7) Interest Expense
- ---------------------
Interest expense, excluding interest on nonrecourse debt issued in connection
with leveraged leases, consisted of the following:
<TABLE>
<CAPTION>
Three months ended Nine months ended
September 30, September 30,
(in thousands) ------------------ -----------------
1994 1993 1994 1993
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Interest expense
Savings bank.................... $26,789 $22,351 $ 74,704 $ 70,210
Electric utility................ 9,600 8,461 27,770 25,276
Other........................... 4,316 4,440 12,356 13,587
------- ------- -------- --------
$40,705 $35,252 $114,830 $109,073
======= ======= ======== ========
</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>
Nine months ended
September 30,
---------------------
(in thousands) 1994 1993
- ------------------------------------------------------------------------------------------
<S> <C> <C>
Interest (including interest paid by savings bank, but excluding
interest paid on nonrecourse debt issued in connection with
leveraged leases).............................................. $108,688 $105,457
======== ========
Income taxes..................................................... $ 31,618 $ (5,100)
======== ========
</TABLE>
Cash paid for interest on nonrecourse debt issued in connection with leveraged
leases amounted to $5,001,000 and $5,007,000 for the nine months ended September
30, 1994 and 1993, respectively.
10
<PAGE>
SUPPLEMENTAL DISCLOSURES OF NONCASH ACTIVITIES
Common stock dividends reinvested by shareholders in HEI common stock in noncash
transactions amounted to $13,224,000 and $12,435,000 for the nine months ended
September 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 $6,427,000 and
$5,269,000 for the nine months ended September 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) 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. The regulatory assets for
postretirement benefits other than pensions totaled $32.3 million as of
September 30, 1994.
If the PUC in its final decision and order does not fully adopt SFAS No. 106 for
rate-making purposes and if under current accounting guidelines it is concluded
that recognition of regulatory assets with respect to the difference between the
accrual and the PUC-approved methods would be inappropriate, then the net
earnings of the Company would be adversely affected by SFAS No. 106 in 1994 and
future years. Management cannot predict with certainty when the final decision
in the generic docket will be rendered.
11
<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 nine
months ended September 30, 1994.
Accounting for certain investments in debt and equity securities
In May 1993, the FASB issued SFAS No. 115, "Accounting for Certain Investments
in Debt and Equity Securities." This statement requires that investments in
equity securities that have readily determinable fair values and investments in
debt securities be classified in three categories and accounted for as follows:
. Debt securities that the enterprise has the positive intent and ability to
hold to maturity are classified as held-to-maturity securities and reported
at amortized cost.
. Debt and equity securities that are bought and held principally for the
purpose of selling them in the near term are classified as trading
securities and reported at fair value, with unrealized gains and losses
included in earnings.
. Debt and equity securities not classified as either held-to-maturity
securities or trading securities are classified as available-for-sale
securities and reported at fair value, with unrealized gains and losses
excluded from earnings and reported in a separate component of
stockholders' equity.
The Company adopted the provisions of SFAS No. 115 on January 1, 1994. As of
September 30, 1994 and December 31, 1993, marketable securities consisted of
trading securities, stock in the Federal Home Loan Bank of Seattle and mortgage-
backed securities. All marketable securities other than the trading securities
are classified as held-to-maturity securities. The implementation of SFAS No.
115 did not have a material effect on the Company's consolidated financial
condition or the results of operations for the nine months ended September 30,
1994.
12
<PAGE>
Hawaiian Electric Company, Inc. and subsidiaries
Consolidated balance sheets (unaudited)
<TABLE>
<CAPTION>
September 30, December 31,
(in thousands, except par value) 1994 1993
- ----------------------------------------------------------------------------------
<S> <C> <C>
Assets
Utility plant, at cost
Property, plant and equipment.................. $2,090,908 $1,976,192
Construction in progress....................... 143,353 126,342
Less--accumulated depreciation................. (688,937) (641,230)
---------- ----------
Net utility plant........................ 1,545,324 1,461,304
---------- ----------
Current assets
Cash and equivalents........................... 880 1,922
Customer accounts receivable, net.............. 61,790 55,614
Accrued unbilled revenues, net................. 41,219 34,735
Other accounts receivable, net................. 7,139 8,398
Fuel oil stock, at average cost................ 20,359 18,188
Materials and supplies, at average cost........ 19,186 20,239
Prepayments and other.......................... 3,091 2,715
---------- ----------
Total current assets..................... 153,664 141,811
---------- ----------
Other assets
Regulatory assets.............................. 81,693 59,234
Other.......................................... 42,712 40,927
---------- ----------
Total other assets....................... 124,405 100,161
---------- ----------
$1,823,393 $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....................... 220,243 220,197
Retained earnings.............................. 300,346 275,401
---------- ----------
Common stock equity...................... 595,654 570,663
Cumulative preferred stock
Not subject to mandatory redemption......... 48,293 48,293
Subject to mandatory redemption............. 43,915 45,410
Long-term debt, net............................ 474,097 436,776
---------- ----------
Total capitalization..................... 1,161,959 1,101,142
---------- ----------
Current liabilities
Long-term debt due within one year............. 10,933 47,960
Preferred stock sinking fund requirements...... 2,224 1,320
Short-term borrowings - nonaffiliates.......... 109,047 28,928
Short-term borrowings - affiliate.............. 3,800 12,000
Accounts payable............................... 48,842 41,808
Interest and preferred dividends payable....... 12,888 10,332
Income taxes payable........................... 5,032 6,232
Other taxes accrued............................ 32,922 36,959
Other.......................................... 26,409 31,036
---------- ----------
Total current liabilities................ 252,097 216,575
---------- ----------
Deferred credits and other liabilities
Deferred income taxes.......................... 109,416 107,449
Unamortized tax credits........................ 44,464 43,348
Other.......................................... 86,396 69,757
---------- ----------
Total deferred credits and other
liabilities............................. 240,276 220,554
---------- ----------
Contributions in aid of construction.............. 169,061 165,005
---------- ----------
$1,823,393 $1,703,276
========== ==========
</TABLE>
See accompanying notes to HECO's consolidated financial statements.
13
<PAGE>
Hawaiian Electric Company, Inc. and subsidiaries
Consolidated statements of income (unaudited)
<TABLE>
<CAPTION>
Three months ended Nine months ended
(in thousands, except for September 30, September 30,
ratio of earnings ------------------------ ------------------------
to fixed charges) 1994 1993 1994 1993
- ----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Operating revenues................ $247,844 $234,484 $665,826 $658,202
-------- -------- -------- --------
Operating expenses
Fuel oil.......................... 53,329 59,393 133,409 164,213
Purchased power................... 73,514 69,094 205,794 194,763
Other operation................... 31,205 28,094 89,299 78,870
Maintenance....................... 11,654 11,589 32,933 33,069
Depreciation...................... 16,017 14,594 48,110 44,557
Taxes, other than income
taxes............................ 23,031 21,399 61,590 60,503
Income taxes...................... 13,386 9,944 31,216 25,283
-------- -------- -------- --------
222,136 214,107 602,351 601,258
-------- -------- -------- --------
Operating income.................. 25,708 20,377 63,475 56,944
-------- -------- -------- --------
Other income
Allowance for equity funds
used during construction......... 2,381 1,915 6,427 5,269
Other, net........................ 1,559 1,289 4,160 3,442
-------- -------- -------- --------
3,940 3,204 10,587 8,711
-------- -------- -------- --------
Income before interest and
other charges.................... 29,648 23,581 74,062 65,655
-------- -------- -------- --------
Interest and other charges
Interest on long-term debt........ 7,838 6,414 23,368 20,153
Amortization of net bond
premium and expense.............. 294 194 831 549
Other interest charges............ 1,468 1,853 3,571 4,574
Allowance for borrowed
funds used during construction... (1,070) (1,056) (2,886) (2,984)
Preferred stock dividends
of subsidiaries.................. 707 519 2,137 1,560
-------- -------- -------- --------
9,237 7,924 27,021 23,852
-------- -------- -------- --------
Income before preferred
stock dividends of HECO......... 20,411 15,657 47,041 41,803
Preferred stock dividends
of HECO.......................... 1,083 1,109 3,249 3,328
-------- -------- -------- --------
Net income for common stock....... $ 19,328 $ 14,548 $ 43,792 $ 38,475
======== ======== ======== ========
Ratio of earnings to fixed
charges (SEC method)............. 3.36 3.25
======== ========
</TABLE>
Hawaiian Electric Company, Inc. and subsidiaries
Consolidated statements of retained earnings (unaudited)
<TABLE>
<CAPTION>
Three months ended Nine months ended
September 30, September 30,
-------------------------- -------------------------
(in thousands) 1994 1993 1994 1993
- ------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Retained earnings,
beginning of period.............. $288,612 $263,130 $275,401 $249,583
Net income for common stock....... 19,328 14,548 43,792 38,475
Common stock dividends............ (7,594) (8,233) (18,847) (18,613)
-------- -------- -------- --------
Retained earnings, end of
period........................... $300,346 $269,445 $300,346 $269,445
======== ======== ======== ========
</TABLE>
See accompanying notes to HECO's consolidated financial statements.
14
<PAGE>
Hawaiian Electric Company, Inc. and subsidiaries
Consolidated statements of cash flows (unaudited)
<TABLE>
<CAPTION>
Nine months ended
September 30,
--------------------------
(in thousands) 1994 1993
- -----------------------------------------------------------------------------------
<S> <C> <C>
Cash flows from operating activities
Income before preferred stock dividends of HECO........ $ 47,041 $ 41,803
Adjustments to reconcile income before preferred
stock dividends of HECO to net cash provided by
operating activities
Depreciation and amortization of property,
plant and equipment........................... 48,110 44,557
Other amortization............................... 1,200 571
Provision for deferred income taxes.............. 1,962 (1,694)
Tax credits, net................................. 2,393 3,190
Allowance for equity funds used during
construction.................................... (6,427) (5,269)
Increase in accounts receivable.................. (4,917) (11,052)
Increase in accrued unbilled revenues............ (6,484) (908)
Decrease (increase) in fuel oil stock............ (2,171) 2,705
Decrease (increase) in materials and supplies.... 1,053 (1,726)
Increase in regulatory assets.................... (2,494) (3,807)
Increase (decrease) in accounts payable.......... 7,034 (3,789)
Increase in interest and preferred dividends
payable......................................... 2,556 1,291
Increase (decrease) in income taxes payable
and other taxes accrued......................... (5,237) 1,991
Changes in other assets and liabilities.......... (7,637) (15,267)
--------- ---------
Net cash provided by operating activities.............. 75,982 52,596
--------- ---------
Cash flows from investing activities
Capital expenditures................................... (131,225) (154,246)
Contributions in aid of construction................... 9,114 15,801
--------- ---------
Net cash used in investing activities.................. (122,111) (138,445)
--------- ---------
Cash flows from financing activities
Common stock dividends................................. (18,847) (18,613)
Preferred stock dividends.............................. (3,249) (3,328)
Proceeds from issuance of long-term debt............... 48,274 22,597
Repayment of long-term debt............................ (48,027) (46,874)
Redemption of preferred stock.......................... (591) (745)
Net increase in short-term borrowings from
nonaffiliates and affiliate with original
maturities of three months or less................... 71,919 77,843
Proceeds from other short-term borrowings.............. -- 25,259
Other.................................................. (4,392) (1,040)
--------- ---------
Net cash provided by financing activities.............. 45,087 55,099
--------- ---------
Net decrease in cash and equivalents................... (1,042) (30,750)
Cash and equivalents, beginning of period.............. 1,922 30,883
--------- ---------
Cash and equivalents, end of period.................... $ 880 $ 133
========= =========
</TABLE>
See accompanying notes to HECO's consolidated financial statements.
15
<PAGE>
Hawaiian Electric Company, Inc. and subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 1994 and 1993
(Unaudited)
- --------------------------------------------------------------------------------
(1) Accounting statement
- -------------------------
In the opinion of HECO's management, the accompanying unaudited consolidated
financial statements contain all material adjustments required by generally
accepted accounting principles to present fairly the financial position of HECO
and its subsidiaries as of September 30, 1994 and December 31, 1993, the results
of its operations for the three months and nine months ended September 30, 1994
and 1993, and its cash flows for the nine months ended September 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 quarters ended March 31 and June 30, 1994. The
consolidated balance sheet as of December 31, 1993 was derived from audited
financial statements.
(2) Regulatory assets
- ----------------------
Regulatory assets at September 30, 1994 and December 31, 1993 include the
following deferred costs:
<TABLE>
<CAPTION>
September 30, December 31,
(in thousands) 1994 1993
- --------------------------------------------------------------------------------
<S> <C> <C>
Postretirement benefits other than pensions......... $30,120 $17,866
Income taxes........................................ 21,174 16,176
Preliminary plant costs on suspended project........ 5,634 5,199
Vacation earned, but not yet taken.................. 6,290 5,494
Unamortized debt expense on retired issuances....... 7,676 5,435
Integrated resource planning costs.................. 6,800 4,661
Other............................................... 3,999 4,403
------- -------
$81,693 $59,234
======= =======
</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>
Nine months ended
September 30,
---------------------
(in thousands) 1994 1993
- --------------------------------------------------------------------------------
<S> <C> <C>
Interest.............................................. $22,556 $22,215
========= =========
Income taxes.......................................... $26,005 $26,913
========= =========
</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 $6,427,000 and
$5,269,000 for the nine months ended September 30, 1994 and 1993, respectively.
16
<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's 1994 test year interim decision and order also allows
differences between the actual non-fuel purchased power costs HECO incurs and
the amount collected from customers to be passed on through a purchased power
non-fuel clause. HECO and its subsidiaries do not operate nor participate in the
operation of any of the facilities that provide power under the major
agreements. Title to the facilities does not pass to HECO and its subsidiaries
upon expiration of the agreements, and the agreements do not contain bargain
purchase options with respect to the facilities.
As of September 30, 1994, HECO and its subsidiaries 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
agreements with Hilo Coast Processing Company (which issued a written notice of
termination indicating that it would cease power production in March 1997) and
Hamakua Sugar Company (which ceased power production in October 1994), 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 disputed certain amounts (primarily energy charges) billed each month under
its power purchase agreements with Kalaeloa Partners, L.P. (Kalaeloa) and AES
Barbers Point, Inc. (AES-BP). The Kalaeloa and AES-BP power purchase agreements
contain provisions whereby either party to the agreement may cause the dispute
to be submitted to binding arbitration.
Kalaeloa requested that its dispute with HECO be arbitrated, and the arbitration
proceedings were completed in August 1994. The arbitrators' decision did not
have a material effect on HECO's consolidated financial condition or results of
operations.
Discussions between HECO and AES-BP to resolve their disputed billing amounts
have been held. Disputed amounts billed by AES-BP through September 1994, for
which HECO has withheld payment, totaled approximately $2.1 million. HECO has
not recognized any portion of the withheld amounts as an expense or liability in
its financial statements. Approximately $1.4 million of the amounts withheld, if
ultimately paid, are expected to be included in HECO's energy cost adjustment
clause or purchased power non-fuel clause and passed through to customers. Based
on the information available, HECO's management believes that the ultimate
outcome of the AES-BP dispute will not have a material adverse effect on HECO's
consolidated financial condition or results of operations.
As of September 30, 1994, HELCO's firm power purchase agreements included an
amended power purchase agreement with Hamakua Sugar Company (Hamakua), a power
purchase agreement with Puna Geothermal Ventures (PGV) and a power purchase
agreement with Hilo Coast Processing Company (HCPC). Under the amended power
purchase agreement, Hamakua, which is in a Chapter 11 bankruptcy proceeding,
agreed to supply HELCO with 8 MW of firm capacity during its final sugar cane
harvest. Hamakua ceased operations in October 1994. PGV, an independent
geothermal power producer which had experienced substantial delays in commencing
commercial operations, passed an acceptance test in June 1993 and became a firm
capacity source for 25 MW. Due to problems with one of its wells, PGV was
producing only about 16 MW as of June 30, 1994. The problems with the well were
corrected, and prior to September 30, 1994, PGV had returned to 25 MW of output.
In March 1994, HCPC, which currently provides 18 MW of firm capacity, issued a
written notice of termination to HELCO indicating that it would cease producing
power in March 1997. HELCO, in turn, issued a written notice of its preliminary
intent to purchase the HCPC facility, subject to a number of conditions. HELCO
and HCPC are currently in negotiations regarding the potential purchase. As
permitted under the power purchase agreement, HCPC has asked that the issue of
the fair market value of the facilities be determined through
17
<PAGE>
binding arbitration. HELCO has the right, but not the obligation, to purchase
the facilities for fair market value.
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 with the approval of the PUC, and HECO
filed its comments on the PTI recommendations with the PUC in November 1993.
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 September 30, 1994, HECO had settled or
closed 1,342 of these property damage claims and had settlement offers
outstanding with respect to the remaining 188 claims. The settlement offers are
being made for purposes of settlement and compromise only, and without any
admission by HECO of liability for the outage. Not covered in the settlements
or the settlement offers 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 April 1993 and subsequently refiled by the
plaintiffs. HECO has filed an answer which denies the principal allegations in
the complaint, sets forth affirmative defenses, and asserts that the suit 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 (if one is retained) and the parties to the
proceedings, the PUC may formulate minimum reliability standards for HELCO, use
the standards to assess HELCO's system reliability, and re-examine the rate
increase approved in October 1992 to see whether any adjustments are
appropriate. In the opinion of management, any adjustment by the PUC to its
October 1992 rate increase resulting from the reliability investigation would
not have a material adverse effect on the Company's or HECO's consolidated
financial condition or results of operations.
Subsequent to the hearings in this matter, HELCO's generation margin improved
with the addition of a 20-MW combustion turbine in August 1992 and PGV's
commencement of commercial operations.
18
<PAGE>
HELCO is proceeding with plans to install two 20-MW combustion turbines at
Keahole on the island of Hawaii in 1995, followed by an 18-MW heat steam
recovery generator in 1997, at which time these units will be converted to a
combined-cycle unit, subject in each case to obtaining necessary permits and
approvals. The PUC has issued a decision and order approving commitment of
expenditures for the first 20-MW combustion turbine. Evidentiary hearings on the
other portions of the unit were held in July 1994. Further, Kawaihae
Cogeneration Partners and Enserch Development Corp. have each filed with the PUC
separate complaints against HELCO, alleging that, rather than having HELCO build
the combined cycle unit, they are entitled to a power purchase contract to
provide all or part of the capacity. An evidentiary hearing in the Kawaihae
Cogeneration Partners docket was held in June 1994. The evidentiary hearing in
the Enserch Development Corp. docket is scheduled for December 1994.
HELCO has encountered procedural and other difficulties in obtaining the
necessary air permit and Conservation District Use Permit (CDUP) which would
allow the combined cycle unit to be constructed at the Keahole site. With
respect to the air permit, a public hearing was held on September 12, 1994 and
the DOH plans to hold a second public hearing before taking action on the permit
application. While it is anticipated that the air permit will be issued, a delay
in the scheduling of the second hearing and the issuance of the permit could
adversely impact HELCO's unit installation schedule. With respect to the CDUP,
difficulties included intervenors filing for a contested case hearing which was
not held. The Board of Land and Natural Resources (BLNR) addressed the CDUP at
its 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 continue to
litigate the appeal of the results of the BLNR meeting. A hearing in the Third
Circuit case was held on October 31, 1994, and it is anticipated that a decision
in the case will be issued shortly. If the case is not resolved expeditiously,
the stay is likely to adversely impact HELCO's unit installation schedule. To
address the contingency that the air permit or CDUP might be significantly
delayed or ultimately denied, HELCO is exploring other alternatives to meet
projected energy needs, including any viable, timely and cost-effective
nonutility generation alternative. However, in the event of a significant delay
or denial of the air permit or CDUP, management believes that there may be more
rolling blackouts before the required additional generation could be completed
or any alternative solution could be implemented.
(5) Summarized financial information
- -------------------------------------
Summarized financial information for HECO's consolidated subsidiaries, HELCO and
MECO, is as follows:
<TABLE>
<CAPTION>
HELCO MECO
----------------------------- ----------------------------
(in thousands) September 30, December 31, September 30, December 31,
1994 1993 1994 1993
------------------------------------------------------------
<S> <C> <C> <C> <C>
Balance sheet data
Noncurrent assets............... $323,010 $297,847 $266,858 $252,680
Current assets.................. 24,483 22,161 25,411 31,465
-------- -------- -------- --------
$347,493 $320,008 $292,269 $284,145
======== ======== ======== ========
Common stock equity............. $105,495 $102,438 $101,738 $ 97,569
Cumulative preferred stock
Not subject to
mandatory redemption....... 10,000 10,000 8,000 8,000
Subject to mandatory
redemption................. 8,100 8,100 7,040 7,135
Noncurrent liabilities.......... 171,275 156,855 142,276 136,414
Current liabilities............. 52,623 42,615 33,215 35,027
-------- -------- -------- --------
$347,493 $320,008 $292,269 $284,145
======== ======== ======== ========
</TABLE>
19
<PAGE>
<TABLE>
<CAPTION>
HELCO MECO
--------------------------------------------- --------------------------------------------
Three months ended Nine months ended Three months ended Nine months ended
September 30, September 30, September 30, September 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 *.................... $34,383 $29,834 $94,001 $83,851 $31,955 $30,807 $88,614 $85,000
Operating
income *...................... 3,227 2,295 8,551 8,140 4,228 3,922 11,905 9,826
Net income for
common stock.................. 2,327 1,060 5,862 3,785 2,798 3,093 7,242 7,558
</TABLE>
* Based on the format of HECO's consolidated statements of income.
(6) Reconciliation of electric utility operating income per HEI and HECO
--------------------------------------------------------------------
consolidated statements of income
---------------------------------
<TABLE>
<CAPTION>
Three months ended Nine months ended
September 30, September 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)............... $ 40,649 $ 31,619 $ 98,790 $ 85,620
Deduct:
Income taxes on regulated
activities.......................... (13,386) (9,944) (31,216) (25,283)
Revenues from nonregulated
activities.......................... (1,820) (1,357) (4,555) (3,586)
Add:
Expenses from nonregulated
activities.......................... 265 59 456 193
-------- -------- -------- --------
Operating income from regulated
activities after income taxes (per
HECO consolidated statements of
income)............................. $ 25,708 $ 20,377 $ 63,475 $ 56,944
======== ======== ======== ========
</TABLE>
(7) Postretirement benefits other than pensions
- ------------------------------------------------
HECO and its subsidiaries provide medical, dental, vision, life insurance and
other benefits to eligible employees upon their retirement, with contributions
by retirees toward costs based on their years of service and retirement date.
Employees are eligible for these benefits if, upon retirement, they participate
in one of the Company's defined benefit pension plans. Currently, no funding has
been provided for these benefits. Through December 31, 1992, the cost of these
benefits had not been recognized until paid. Accordingly, no provision was made
for future benefits to existing or retired employees.
Effective January 1, 1993, HECO and its subsidiaries adopted SFAS No. 106,
"Employers' Accounting for Postretirement Benefits Other Than Pensions," which
requires accrual, during the years that an employee renders the necessary
service, of the expected cost of providing postretirement benefits other than
pensions to that employee and the employee's beneficiaries and covered
dependents. The transition obligation is being recognized on a delayed basis
over 20 years.
In February 1992, the PUC opened a generic docket to determine whether SFAS No.
106 should be adopted for rate-making purposes. On July 15, 1993, the PUC issued
an interim decision and order in the generic docket, amending an earlier interim
decision and order to state that it is probable that its final decision will
allow, for rate-making purposes, the full costs of postretirement benefits other
than pensions calculated on the basis of SFAS No. 106. Upon request of HECO and
its subsidiaries, on January 11, 1994, the PUC issued another interim decision
and order which stated that it has
20
<PAGE>
"determined that it will allow each utility to calculate, for ratemaking
purposes, the full costs of postretirement benefits other than pensions on an
accrual basis, rather than the current pay-as-you-go basis." The PUC further
stated that it has not yet decided whether to adopt SFAS No. 106 in its entirety
or with modifications, but it reaffirmed that "(1) it is probable that the final
decision and order in these dockets will allow, for ratemaking purposes, the
full costs of postretirement benefits other than pensions calculated on the
basis of SFAS [No.] 106; and (2) it is probable that the difference between the
costs of postretirement benefits other than pensions determined under SFAS [No.]
106 and the current pay-as-you-go method from January 1, 1993, through the
effective date of the postretirement benefits step increases . . . will be
recovered ratably through future rates over a period not extending beyond 2013."
Beginning in the second quarter of 1993 and based upon these interim decisions
and orders, HECO and its subsidiaries recognized regulatory assets and deferred
for financial reporting purposes the difference between the costs of
postretirement benefits other than pensions determined under SFAS No. 106 and
such costs under the pay-as-you-go method. The regulatory assets for
postretirement benefits other than pensions totaled $30.1 million as of
September 30, 1994.
If the PUC in its final decision and order does not fully adopt SFAS No. 106
for rate-making purposes and if under current accounting guidelines it is
concluded that recognition of regulatory assets with respect to the difference
between the accrual and the PUC approved methods would be inappropriate, then
the net earnings of consolidated HECO would be adversely affected by SFAS No.
106 in 1994 and future years. Management cannot predict with certainty when the
final decision in the generic docket will be rendered.
(8) Accounting change in 1994
- ------------------------------
Postemployment benefits
In November 1992, the FASB issued SFAS No. 112, "Employers' Accounting for
Postemployment Benefits." This statement requires employers to recognize the
obligation to provide postemployment benefits in accordance with SFAS No. 43,
"Accounting for Compensated Absences," if the obligation is attributable to
employees' services already rendered, employees' rights to those benefits
accumulate or vest, payment of the benefits is probable, and the amount of the
benefits can be reasonably estimated. HECO and its subsidiaries adopted the
provisions of SFAS No. 112 on January 1, 1994. The implementation of SFAS No.
112 did not have a material effect on consolidated HECO's financial condition or
the results of operations for the nine months ended September 30, 1994.
21
<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.
<TABLE>
<CAPTION>
RESULTS OF OPERATIONS
Consolidated
- ------------
Three months ended
September 30,
------------------
(in thousands, except per % Primary reason(s) for significant
share amounts) 1994 1993 change change*
- -----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Revenues.................... $319,156 $299,486 7 Increases at the electric utility,
savings bank and "other" segments
Operating income............ 51,550 40,458 27 Increases at the electric utility
and "other" segments
Net income.................. 22,691 16,088 41 Higher operating income and lower
effective tax rate, partly offset by
higher interest expense
Earnings per common share... 0.80 0.61 31 Higher net income as explained
above, partially offset by an 8%
increase in the weighted average
number of common shares outstanding
Weighted average number of
common shares outstanding.. 28,255 26,247 8 Public offering of 2.0 million shares
of common stock completed in August
1993 and shares issued through the HEI
dividend reinvestment and stock
purchase plan
</TABLE>
* Also see segment discussions which follow.
22
<PAGE>
<TABLE>
<CAPTION>
Nine months ended
September 30,
-----------------
(in thousands, except per % Primary reason(s) for significant
share amounts) 1994 1993 change change*
- -------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Revenues.................... $868,754 $860,479 1 Increases at the electric utility
and savings bank segments, partly
offset by the decrease at the
"other" segment
Operating income............ 127,909 112,708 13 Increases at the electric utility,
savings bank and "other" segments
Income from continuing
operations................. 52,111 44,357 17 Higher operating income, partly
offset by higher interest expense
Income from discontinued
operations................. -- 1,800 (100) Reversal of a reserve for the
------- ------- disposal of HERS after the sale of
HERS in March 1993
Net income.................. $ 52,111 $ 46,157
======== ========
Earnings per common share
Continuing operations....... $ 1.86 $ 1.75 6 Increase in income from continuing
operations discussed above,
partially offset by a 10% increase
in the weighted average number of
common shares outstanding
Discontinued operations..... -- 0.07 (100) See explanation above
--------- --------
$1.86 $ 1.82 2
========= ========
Weighted average number of
common shares outstanding.. 28,014 25,402 10 Public offering of 2.0 million shares
of common stock completed in August
1993 and shares issued through the
HEI dividend reinvestment and stock
purchase plan
</TABLE>
* Also see segment discussions which follow.
For the quarter ended September 30, 1994, HEI reported net income of $22.7
million, or $0.80 per share, compared to $16.1 million, or $0.61 per share, in
the same period of 1993. Net income increased due to improved results from all
segments.
For the nine months ended September 30, 1994, HEI reported net income of $52.1
million, or $1.86 per share, compared to $46.2 million, or $1.82 per share, in
the same period of 1993. The nine months ended September 30, 1993 results
included the reversal of a reserve for the disposal of HERS after the sale of
HERS in March 1993. Excluding a nonrecurring adjustment in 1993 for vacation
earned but not yet taken by employees of the electric utility subsidiaries,
income from continuing operations for the first nine months of 1994 would have
reflected an increase of approximately 25% over the first nine months of 1993
due to improved results from all segments.
23
<PAGE>
Shareholder dividends are declared and paid by HEI at the discretion of HEI's
Board of Directors. On October 18, 1994, HEI's Board of Directors increased the
quarterly cash dividend by 1 cent to $0.59 per share for the fourth quarter of
1994. HEI and its predecessor company, HECO, have paid dividends continuously
since 1901. Dividends per share have been higher each year since 1964. Although
the Company's long-term goal is to have dividend growth keep pace with
inflation, management believes that the current payout ratio (94% for the nine
months ended September 30, 1994) is too high. Management believes that a payout
ratio of 80% or less is more appropriate and, in the future, hopes to grow
earnings faster than dividends to reduce the payout ratio. One of the keys to
improved earnings (and a corresponding reduction in the dividend payout ratio)
is continued regulatory support as evidenced by timely rate case decisions.
Another key to long-term growth in earnings is growth and expansion of the
Company. Thus, management is looking at opportunities to grow the Company in
Hawaii and in the Pacific Basin.
Following is a general discussion of revenues, expenses and operating income by
business segment.
Electric utility
- ----------------
<TABLE>
<CAPTION>
Three months ended
September 30,
------------------
(in thousands, except per % Primary reason(s) for significant
barrel amounts) 1994 1993 change change
- -----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Revenues.................... $249,664 $235,841 6 Rate relief for HECO and HELCO and
a 4.7% increase in KWH sales, partly
offset by lower fuel oil prices which
are passed on to customers
Expenses
Fuel oil.................. 53,329 59,393 (10) Lower fuel oil prices, partly offset
by higher KWHs generated
Purchased power........... 73,514 69,094 6 Higher KWHs purchased
Other..................... 82,172 75,735 8 Higher other operation and depreciation
expense and higher "taxes, other than
income taxes"
Operating income............ 40,649 31,619 29 Rate relief for HECO and HELCO and a
4.7% increase in KWH sales
Net income.................. 19,328 14,548 33 Higher operating income, partly offset
by higher interest expense and higher
income taxes
Fuel oil price per barrel... 20.10 22.96 (12)
</TABLE>
24
<PAGE>
<TABLE>
<CAPTION>
Nine months ended
September 30,
-----------------
(in thousands, except per % Primary reason(s) for significant
barrel amounts) 1994 1993 change change
- ---------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Revenues.................... $670,381 $661,788 1 Rate relief and a 3.0% increase in
KWH sales, partly offset by lower
fuel oil prices which are passed
on to customers
Expenses
Fuel oil.................. 133,409 164,213 (19) Lower fuel oil prices, partially
offset by higher KWHs generated
Purchased power........... 205,794 194,763 6 Higher KWHs purchased
Other..................... 232,388 217,192 7 Higher other operation and
depreciation expense and a one-time
reduction to 1993 expense due to the
establishment of a regulatory asset
for vacation earned but not yet taken
by employees
Operating income............ 98,790 85,620 15 Rate relief for HECO, HELCO and
MECO and a 3.0% increase in KWH sales
Net income.................. 43,792 38,475 14 Higher operating income, partially
offset by higher interest expense
and higher income taxes
Fuel oil price per barrel... 18.07 21.81 (17)
</TABLE>
For the three months ended September 30, 1994, operating income and net income
for the electric utility segment was up 29% and 33%, respectively, from
comparable 1993 amounts, due primarily to 1994 interim rate relief and a 4.7%
increase in kilowatthour sales due primarily to Hawaii's improving economy and
warmer weather.
For the nine months ended September 30, 1994, operating income and net income
for the electric utility segment was up by 15% and 14%, respectively. Excluding
the "vacation" adjustment, operating income and net income for the electric
utility segment were up 21% and 22%, respectively, for the nine months ended
September 30, 1994, due primarily to interim rate relief in 1994 for HECO and
HELCO and the full effect of 1993 interim rate relief for MECO, and a 3.0%
increase in kilowatthour sales.
In 1993, HEI invested an additional $45 million in HECO. Also in 1993, HECO
invested an additional $12 million in HELCO and $6 million in MECO. The
infusions were made to support the electric utilities' capital expenditure
programs. As anticipated, HECO and its subsidiaries were not able to earn an
adequate return on that new equity during the first quarter of 1994. In April
1994 and August 1994, however, the PUC granted HECO and HELCO, respectively,
interim rate increases that recognize their increased investment in capital
facilities. See "Pending rate requests" below. Continued regulatory support from
the PUC is important to the future operating results of the electric utility
companies.
25
<PAGE>
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 is 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.
On the demand-side, a new kind of competitor--the energy service company--is
seeking customers in government and private business and promising to help them
reduce utility bills. On Oahu, one of these 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 August 1994, HEI formed a new nonutility energy service company, Pacific
Energy Conservation Services, Inc. (PECS) to promote energy conservation in
Hawaii and the Pacific Basin. PECS is considering potential projects to install,
finance, operate and maintain energy conservation equipment, while sharing a
percentage of the saved energy costs with its clients.
In response to competition, HECO and its subsidiaries are taking certain actions
to heighten their focus on providing reliable electric service at reasonable
costs, to offer customers new choices regarding the services provided and to
promote new technologies like electric vehicles.
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 (which was later increased to 13.0%). Both
requests combined represent an increase of 16.7% over rates in effect at the
time of the filings, or $106 million in additional 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 (which is part of a separate generic docket), to
cover the cost of new capital projects to maintain and improve service
reliability, to cover additional expenses associated with proposed changes in
depreciation rates and methods and to establish a self-insured property damage
reserve for transmission and distribution property in the event of catastrophic
disasters. On March 31, 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 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 $39.9 million. Additional
interim increases of $1.4 million and $1.3 million in annual revenues became
effective May 1, 1994 and November 1, 1994, respectively. Interim rate increases
are subject to refund with interest, pending the final outcome of the case.
Evidentiary hearings for the 1995 test year application are scheduled for
November 1994.
In November 1993, HELCO applied to the PUC for permission to increase electric
rates to provide $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
26
<PAGE>
service and provide reliable power for its customers and the costs related to
the change in the method of accounting for postretirement benefits other than
pensions (which is part of a separate generic docket). On August 8, 1994, 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 is based on a 12.4%
return on average common equity. $13.2 million of the increase became effective
on August 9, 1994 and $0.4 million of the increase became effective on
November 1, 1994. Interim increases are subject to refund with interest, pending
the final outcome of the case. In June 1994, HELCO filed a notice of intent to
file an application for a general rate increase using a 1995 test year. The
increase is expected to be required primarily to cover investments in new
generating units.
In November 1991, MECO filed a request to increase rates by $18.3 million
annually, or 17% above the rates in effect at the time of the filing.
Evidentiary hearings were held in January 1993 and, at the conclusion of the
hearings, MECO adjusted its final rate increase request to $11.4 million
annually, or 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 in revenue increases
provided by the interim and final decision and orders of approximately
$0.3 million was refunded to customers together with interest. The primary
reason for the difference between the $11.4 million requested and the
$8.1 million granted is approximately $2 million related to the change in the
method of accounting for postretirement benefits other than pensions, 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 the 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, its
electric utility subsidiaries and ratepayers. It is anticipated that the review
may result in recommendations to the Company and/or the PUC. In May 1994, a
consultant, Dennis Thomas and Associates, was selected by the PUC to perform the
review. The review is in progress and is expected to be completed by yearend.
HECO purchased power billing disputes
HECO disputed certain amounts billed each month under its power purchase
agreements with Kalaeloa Partners, L.P. and AES Barbers Point, Inc. The dispute
with Kalaeloa Partners, L.P. was submitted to arbitration and the arbitrators'
decision did not have a material effect on HECO's consolidated financial
condition or results of operations. See "Power purchase agreements" under note
(4) in HECO's "Notes to consolidated financial statements" for a further
discussion of this matter.
27
<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 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, appeals to the state Supreme Court were
filed by the intervenors in the PUC proceeding requesting the Court to overturn
the PUC's ruling that allows HECO to construct the lines above ground. No stay
of the PUC order has been entered. Management cannot predict with certainty the
final outcome of this appeal or the impact the final outcome may have on the
cost of the lines or on system reliability.
Undergrounding of utility lines
There is a proposal before the Honolulu City Council for the mandatory
undergrounding of utility lines "whenever possible," except in some remote
areas. HECO opposes the proposal in its current 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.
28
<PAGE>
Savings bank
<TABLE>
<CAPTION>
Three months ended
September 30,
-------------------- %
(in thousands) 1994 1993 change Primary reason(s) for significant change
====================================================================================================================================
<S> <C> <C> <C> <C>
Revenues................. $54,389 $49,752 9 Higher average loans and mortgage-backed securities balances, partly
offset by lower average investments balance and lower overall yield on
interest-earning assets
Operating income......... 11,202 11,704 (4) Higher administrative and general expenses more than offset higher net
interest income
Net income............... 6,533 6,400 2 Lower income taxes due to third quarter 1993 recognition of the effect
of the 1% federal tax rate increase (retroactive to January 1, 1993)
Interest rate spread..... 3.51% 4.05% 39 basis points decrease in the weighted average yield on
interest-earning assets and 15 basis points increase in the weighted
average rate on interest-bearing liabilities
</TABLE>
<TABLE>
<CAPTION>
Nine months ended
September 30,
------------------- %
(in thousands) 1994 1993 change Primary reason(s) for significant change
====================================================================================================================================
<S> <C> <C> <C> <C>
Revenues.................. $156,784 $149,183 5 Higher average loans and mortgage-backed securities balances, partly
offset by lower average investments balance and lower overall yield
on interest-earning assets
Operating income.......... 32,497 31,425 3 Higher net interest income due to higher net average earning assets
balance, partly offset by higher administrative and general expenses
and losses from trading securities portfolio
Net income................ 18,959 18,065 5 Higher operating income, partly offset by higher income taxes
Interest rate spread...... 3.67% 3.87% 38 basis points decrease in the weighted average yield on
interest-earning assets, offset by 18 basis points decrease in the
weighted average rate on interest-bearing liabilities
</TABLE>
29
<PAGE>
The savings bank segment posted a 4% decrease in operating income for the
quarter over the same period last year as a result of higher administrative and
general expenses for compensation and employee benefits. In spite of a lower
interest rate spread for the quarter compared to the third quarter of 1993, ASB
managed to increase net interest income by increasing interest-earning assets.
ASB's interest rate spread--the difference between the weighted average yield on
interest-earning assets and the weighted average rate on interest-bearing
liabilities--decreased to 3.51% in the quarter from 4.05% in the comparable
period of 1993. For the third quarter of 1994, the average loans balance was up
$351 million and the average balance for advances from Federal Home Loan Bank
and other borrowings was up $300 million from levels in the third quarter of
1993.
This interest rate spread decrease for the third quarter of 1994 can be
attributed to the changing interest rate environment. During 1993, falling
interest rates resulted in improved interest rate spreads as interest-bearing
liabilities repriced downward at a faster pace than interest-earning assets.
During 1994, rising interest rates have increased rates on interest-bearing
deposits slightly. However, yields on interest-earning assets have continued a
downward trend as a result of the prior year's refinancing and repricing of
loans and mortgage-backed securities.
Operating income for the nine months ended September 30, 1994 increased by 3%
compared to the same period last year due to higher loans and mortgage-backed
securities balances. The average loans balance was up $327 million and the
average balance for advances from Federal Home Loan Bank and other borrowings
was up $206 million from levels in the first nine months of 1993. ASB's
interest rate spread decreased to 3.67%, compared to 3.87% for the first nine
months of 1993.
During 1994, the federal funds rate increased 1.75%. The federal funds rate,
which is the rate charged by banks for overnight loans to each other and which
has a significant influence on consumer rates, was 4.75% as of September 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 caused the cost of interest-bearing liabilities to increase
slightly during the third quarter of 1994. However, yields on interest-earning
assets have not increased as higher interest rates can take about three to
twelve months to impact portfolio yields through loan originations and repricing
of adjustable rate loans. In the future, ASB's cost of interest-bearing
liabilities may further increase, which may result in a decreased interest rate
spread and lower net interest income.
For the three and nine months ended September 30, 1994, ASB's securities held
for trading experienced a $0.1 million and $1.9 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 decided to liquidate ASB's portfolio of securities held for trading
and the liquidation was completed in October 1994.
ASB's policy generally is to place mortgage loans on a nonaccrual status (i.e.,
interest accrual is suspended) when the loan becomes more than 90 days past due
or on an earlier basis when there is a reasonable doubt as to its
collectibility. Loans on nonaccrual status amounted to $22.4 million (1.11% of
total loans) at September 30, 1994 compared to $5.7 million (0.32% of total
loans) at December 31, 1993. The increase is primarily due to three commercial
real estate loans with principal balances totaling $11.8 million that were
restructured to defer monthly contractual principal and interest payments for
three to six months. Based on the current collectibility evaluations for these
loans, no specific allowance for loan losses is considered necessary.
30
<PAGE>
Other
- -----
<TABLE>
<CAPTION>
Three months ended
September 30,
---------------------- %
(in thousands) 1994 1993 change Primary reason(s) for significant change
===============================================================================================================================
<S> <C> <C> <C> <C>
Revenues............... $15,103 $13,893 9 HEIIC - Third quarter 1993 cumulative effect of the 1% federal
income tax increase on leveraged lease income
Operating loss......... (301) (2,865) 89 HTB - Higher harbor assists and contract tows and a 1994 gain
on sale of barge
HEIIC - Third quarter 1993 cumulative effect of the 1% federal
income tax increase on leveraged lease income
</TABLE>
<TABLE>
<CAPTION>
Nine months ended
September 30,
---------------- %
(in thousands) 1994 1993 change Primary reason(s) for significant change
==================================================================================================================================
<S> <C> <C> <C> <C>
Revenues................ $41,589 $49,508 (16) MPC - Bulk sale of land for $10 million of proceeds and immaterial
gain in the first quarter of 1993
Operating loss.......... (3,378) (4,337) 22 HTB - Higher harbor assists and contract tows and 1994 gain and
1993 loss on sale of barges
</TABLE>
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 holding companies; and eliminations of intercompany
transactions.
Freight transportation
The freight transportation subsidiaries recorded operating income of $1.7
million in the third quarter of 1994 compared to $0.4 million in the third
quarter of 1993. Improved results in the third quarter of 1994 were primarily
due to higher harbor assists and contract tows and a $0.2 million gain on the
sale of a barge. The freight transportation subsidiaries recorded operating
income of $2.6 million in the nine months ended September 30, 1994 compared to
$0.8 million in the nine months ended September 30, 1993 as a result of higher
harbor assists and contract tows and a 1994 gain and 1993 loss on the sales of
barges.
In May 1994, YB filed an application with the PUC to increase rates by
approximately $2.4 million annually. On September 26, 1994, YB filed a
stipulation agreement with the PUC indicating YB and the Consumer Advocate had
agreed to stipulate to a 6% general rate increase, or approximately $2.0 million
annually, effective upon PUC approval. YB is presently awaiting a decision from
the PUC.
31
<PAGE>
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 nine months of 1994, MPC's real estate development
activities were adversely impacted by economic conditions. In the third quarter
of 1994, MPC recorded an operating loss of $0.1 million compared to an operating
loss of $0.2 million in the same period last year due in part to prior year
writedowns for the carrying value of a real estate investment, partially offset
by lower unit sales in the third quarter of 1994. For the nine months ended
September 30, 1994, MPC recorded an operating loss of $0.2 million compared to
an operating loss of $0.5 million in the same period last year. MPC continues to
be hampered by a slow real estate market.
In March 1994, MDC's Baldwin*Malama partnership closed on an option to purchase
approximately 147 acres of land for future development on the island of Maui
from BPPI at a purchase price of $9.9 million. The land is currently approved
for a development of 685 single-family and multi-family units. Baldwin*Malama is
seeking to increase the density of the development.
For further information on MPC, see note (5) in HEI's "Notes to consolidated
financial statements."
Income taxes
- ------------
The effective tax rates on income from continuing operations for the three
months ended September 30, 1994 and 1993 were 42% and 44%, respectively. The
decrease in the effective tax rate was due in part to the recognition in the
third quarter of 1993 of the effect of the 1% federal income tax rate increase
(retroactive to January 1, 1993). The effective tax rate on income from
continuing operations for the nine months ended September 30, 1994 and 1993 was
43%.
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 had been 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 nine months ended September 30,
1994.
32
<PAGE>
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 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 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) September 30, 1994 December 31, 1993
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Short-term borrowings...................................... $ 117 7% $ 40 3%
Long-term debt, net........................................ 714 45 698 47
Preferred stock of electric utility subsidiaries........... 94 6 95 6
Common stock equity........................................ 670 42 643 44
------ --- ----- ---
$1,595 100% $1,476 100%
====== === ====== ===
</TABLE>
ASB's deposit liabilities, securities sold under agreements to repurchase and
advances from the Federal Home Loan Bank are not included in the table above.
For the first nine months of 1994, net cash provided by operating activities was
$75 million. Net cash used in investing activities was $474 million, largely due
to an increase in ASB's loans receivable and investments in mortgage-backed
securities and the electric utility companies' capital expenditures. Net cash
provided by financing activities was $368 million, due primarily to a net
increase in advances to ASB from the Federal Home Loan Bank, short-term
borrowings of the electric utilities and ASB's deposit liabilities.
In August 1994, HEI issued $35 million of variable rate medium-term notes with
an initial interest rate of 5.45% and maturing in August 1999.
Pursuant to the settlement agreement discussed in note (2) in HEI's "Notes to
consolidated financial statements," in April 1994, $32 million was deposited in
an escrow account. In August 1994, the $32 million plus interest was disbursed
to the Rehabilitator/Liquidator of the HIG Group. The $32 million was funded
out of available cash and short-term borrowings.
Total HEI consolidated financing requirements for the years 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
33
<PAGE>
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 was planning to issue approximately one million additional common shares in
a public offering in either late 1994 or early 1995 for a capital infusion into
the electric utility companies. However, the near-term capital needs of the
electric utility companies are moderating, so no underwritten public offering of
common stock is anticipated in the near-term.
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) September 30, 1994 December 31, 1993
- ---------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Short-term borrowings from nonaffiliates
and affiliate................................. $ 113 9% $ 41 3%
Long-term debt, net............................ 485 38 485 41
Preferred stock................................ 94 7 95 8
Common stock equity............................ 596 46 570 48
------ --- ------ ---
$1,288 100% $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 nine months of 1994, HECO and
its subsidiaries have also drawn $48 million of the proceeds from the sale of
special purpose revenue bonds.
Operating activities provided $76 million in net cash during the first nine
months of 1994. Investing activities used cash of $122 million for capital
expenditures net of contributions in aid of construction. Financing activities
provided $45 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 now estimated to be $180
million and gross capital expenditures are estimated to be $205 million, of
which approximately two-thirds is for transmission and distribution projects.
Drawdowns of proceeds from the sale of tax-exempt special purpose revenue bonds,
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
34
<PAGE>
costs, demand-side management programs and requirements of environmental and
other regulatory and permitting authorities.
At September 30, 1994, $8 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>
September 30, December 31, %
(in millions) 1994 1993 change
- ---------------------------------------------------------------------------
<S> <C> <C> <C>
Assets....................... $2,940 $2,618 12
Loans receivable............. 1,967 1,735 13
Mortgage-backed securities... 743 630 18
Deposit liabilities.......... 2,154 2,092 3
</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 nine months of 1994, cash used by investing activities was $351
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 $232 million in advances from
the Federal Home Loan Bank, $62 million in deposit liabilities and $23 million
in securities sold under agreements to repurchase, offset by common stock
dividends of $11 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 September 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 September 30,
1994, ASB was in full compliance with the minimum capital requirements with a
tangible capital ratio of 5.0%, a core capital ratio of 5.3% and risk-based
capital of $160.9 million, $44.5 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, was to be effective September 30, 1994. The OTS
provided a waiver of the interest rate risk capital deduction until it can
finalize an appeals process and anticipates a new effective date of March 31,
1995. Institutions with an "above normal" level of IRR exposure may be required
to hold additional capital. "Above normal" IRR is defined as any percentage
decline in market value of an institution's portfolio equity in excess of 2% of
the market value of its assets, which would result from an immediate 200 basis
point change in interest rates. The OTS regulation will require a savings
association with an "above normal" level of IRR exposure to deduct from total
capital an amount equal to one-half of the "above normal" IRR times the market
value of its assets in meeting its existing 8% risk-based capital requirement.
Based on the lowest IRR reported as of the three prior quarter-ends, ASB would
not have been required to hold additional capital if the new rule had been in
effect at that time.
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-
35
<PAGE>
1 risk-based ratio" of 6% and a "total risk-based ratio" of 10%. As of September
30, 1994, ASB believes that based on OTS capital standards it would have been
classified as "well-capitalized" with a leverage ratio of 5.3%, a Tier-1 risk-
based ratio of 10.7% and a total risk-based ratio of 11.1%.
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
- --------------------------
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. Prior to September 30, 1994, PGV had corrected the problems and returned to
25 MW of output.
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 through September 1994 totaled approximately
$3.4 million. HELCO continues to reserve its right to offset accumulated damages
and costs, including penalties, against any future energy and capacity payments
due to PGV. HELCO has not 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. As permitted under the PPA, HCPC has asked
that the issue of the fair market value of the facilities be determined through
binding arbitration. HELCO would have the right, but not the obligation, to
purchase the facilities for fair market value. Also see note (4) to HECO's
"Notes to consolidated financial statements."
36
<PAGE>
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>
Years Ended December 31,
Nine months ---------------------------------------------------------
ended
September 30,
1994 1993 1992 1991 1990 1989
- ------------- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
2.23 2.25 2.08 1.99 1.76 1.99
==== ==== ==== ==== ==== ====
</TABLE>
Ratio of earnings to fixed charges including interest on ASB deposits
<TABLE>
<CAPTION>
Years Ended December 31,
Nine months ---------------------------------------------------------
ended
September 30,
1994 1993 1992 1991 1990 1989
- ------------- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
1.69 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 issued
in connection with 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.
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>
Years Ended December 31,
Nine months ---------------------------------------------------------
ended
September 30, 1994 1993 1992 1991 1990 1989
- ------------------ ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
3.36 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,
37
<PAGE>
(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>
<CAPTION>
<S> <C>
HEI Hawaiian Electric Industries, Inc. and subsidiaries
Exhibit 11(a) Computation of earnings per share of common stock,
three and nine months ended September 30, 1994 and 1993
HECO Hawaiian Electric Company, Inc. and subsidiaries
Exhibit 11(b) Computation of earnings per share of common stock
HEI Hawaiian Electric Industries, Inc. and subsidiaries
Exhibit 12(a) Computation of ratio of earnings to fixed charges,
nine months ended September 30, 1994 and 1993
HECO Hawaiian Electric Company, Inc. and subsidiaries
Exhibit 12(b) Computation of ratio of earnings to fixed charges,
nine months ended September 30, 1994 and 1993
HEI Hawaiian Electric Industries, Inc. and subsidiaries
Exhibit 27(a) Financial data schedule, September 30, 1994 and
nine months ended September 30, 1994
HECO Hawaiian Electric Company, Inc. and subsidiaries
Exhibit 27(b) Financial data schedule, September 30, 1994 and
nine months ended September 30, 1994
</TABLE>
(b) Reports on Form 8-K
During the quarter, no Current Report, Form 8-K, was filed with the SEC.
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/ Ernest T. Shiraki
------------------------------ ---------------------------
Robert F. Mougeot Ernest T. Shiraki
Financial Vice President and Controller
Chief Financial Officer (Principal Accounting
(Principal Financial Officer of HEI) Officer of HECO)
Date: November 7, 1994 Date: November 7, 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 Nine months ended
September 30, September 30,
------------------------ ----------------------
(in thousands, except for per share data) 1994 1993 1994 1993
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Income from continuing operations............... $22,691 $16,088 $52,111 $44,357
Income from discontinued operations............. -- -- -- 1,800
------- ------- ------- -------
Net income...................................... $22,691 $16,088 $52,111 $46,157
======= ======= ======= =======
Average number of common shares outstanding..... 28,255 26,247 28,014 25,402
======= ======= ======= =======
Earnings per common share:
Continuing operations.......................... $ 0.80 $ 0.61 $ 1.86 $ 1.75
Discontinued operations........................ -- -- -- 0.07
------- ------- ------- -------
$ 0.80 $ 0.61 $ 1.86 $ 1.82
======= ======= ======= =======
</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>
Nine months ended September 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)............................ $ 58,970 $115,432 $ 49,573 $108,989
Proportionate share of fifty-percent-
owned persons............................ 302 302 454 454
Interest component of rentals................. 2,824 2,824 2,954 2,954
Pretax preferred stock dividend requirements
of subsidiaries............................. 9,095 9,095 8,149 8,149
-------- --------- -------- --------
Total fixed charges........................... $ 71,191 $127,653 $ 61,130 $120,546
======== ========= ======== ========
Earnings
Pretax income from continuing operations...... $ 91,710 $ 91,710 $ 77,210 $ 77,210
Fixed charges, as shown....................... 71,191 127,653 61,130 120,546
Interest capitalized
The Company................................ (3,488) (3,488) (2,993) (2,993)
Proportionate share of fifty-percent-
owned persons............................ (302) (302) (298) (298)
-------- --------- -------- --------
Earnings available for fixed charges......... $159,111 $215,573 $135,049 $194,465
======== ========= ======== ========
Ratio of earnings to fixed charges........... 2.23 1.69 2.21 1.61
======== ========= ======== ========
</TABLE>
(1) Excluding interest on ASB deposits.
(2) Including interest on ASB deposits.
(3) Total interest charges exclude interest on nonrecourse debt issued in
connection with 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>
Nine months ended
September 30,
----------------------
(dollars in thousands) 1994 1993
- -------------------------------------------------------------------------------------------
<S> <C> <C>
Fixed charges
Total interest charges........................................... $ 27,770 $25,276
Interest component of rentals.................................... 622 761
Pretax preferred stock dividend requirements of subsidiaries..... 3,491 2,468
-------- -------
Total fixed charges.............................................. $ 31,883 $28,505
======== =======
Earnings
Income before preferred stock dividends of HECO.................. $ 47,041 $41,803
Income taxes (see note below).................................... 31,155 25,234
Fixed charges, as shown.......................................... 31,883 28,505
AFUDC for borrowed funds......................................... (2,886) (2,984)
-------- -------
Earnings available for fixed charges............................. $107,193 $92,558
======== =======
Ratio of earnings to fixed charges............................... 3.36 3.25
======== =======
Note:
Income taxes is comprised of the following:
Expense relating to operating income from regulated activities. $ 31,216 $25,283
Benefit relating to loss from nonregulated activities.......... (61) (49)
-------- -------
$ 31,155 $25,234
======== =======
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from Hawaiian
Electric Industries, Inc. and subsidiaries' consolidated balance sheet as of
September 30, 1994 and consolidated statement of income for the nine months
ended September 30, 1994 and is qualified in its entirety by reference to such
financial statements.
</LEGEND>
<CIK> 0000046207
<NAME> HAWAIIAN ELECTRIC CO. INC.
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1994
<PERIOD-START> JAN-01-1994
<PERIOD-END> SEP-30-1994
<CASH> 84,197
<SECURITIES> 786,894
<RECEIVABLES> 132,194
<ALLOWANCES> (2,294)
<INVENTORY> 40,726
<CURRENT-ASSETS> 0
<PP&E> 2,364,080
<DEPRECIATION> (731,475)
<TOTAL-ASSETS> 4,947,873
<CURRENT-LIABILITIES> 0
<BONDS> 713,685
<COMMON> 538,544
46,139
48,293
<OTHER-SE> 131,721
<TOTAL-LIABILITY-AND-EQUITY> 4,947,873
<SALES> 0
<TOTAL-REVENUES> 868,754
<CGS> 0
<TOTAL-COSTS> 740,845
<OTHER-EXPENSES> (3,927)
<LOSS-PROVISION> 2,263
<INTEREST-EXPENSE> 40,126
<INCOME-PRETAX> 91,710
<INCOME-TAX> 39,599
<INCOME-CONTINUING> 52,111
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 52,111
<EPS-PRIMARY> 1.86
<EPS-DILUTED> 1.86
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> UT
<LEGEND>
This schedule contains summary financial information extracted from Hawaiian
Electric Company, Inc. and subsidiaries' consolidated balance sheet as of
September 30, 1994 and consolidated statement of income and consolidated
statement of cash flows for the nine months ended September 30, 1994 and is
qualified in its entirety by reference to such financial statements.
</LEGEND>
<CIK> 0000354707
<NAME> HAWAIIAN ELECTRIC INDUSTRIES INC.
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1994
<PERIOD-START> JAN-01-1994
<PERIOD-END> SEP-30-1994
<BOOK-VALUE> PER-BOOK
<TOTAL-NET-UTILITY-PLANT> 1,545,324
<OTHER-PROPERTY-AND-INVEST> 0
<TOTAL-CURRENT-ASSETS> 153,664
<TOTAL-DEFERRED-CHARGES> 9,872
<OTHER-ASSETS> 114,533
<TOTAL-ASSETS> 1,823,393
<COMMON> 75,065
<CAPITAL-SURPLUS-PAID-IN> 220,243
<RETAINED-EARNINGS> 300,346
<TOTAL-COMMON-STOCKHOLDERS-EQ> 595,654
43,915
48,293
<LONG-TERM-DEBT-NET> 474,097
<SHORT-TERM-NOTES> 3,800
<LONG-TERM-NOTES-PAYABLE> 0
<COMMERCIAL-PAPER-OBLIGATIONS> 109,047
<LONG-TERM-DEBT-CURRENT-PORT> 10,933
2,224
<CAPITAL-LEASE-OBLIGATIONS> 0
<LEASES-CURRENT> 0
<OTHER-ITEMS-CAPITAL-AND-LIAB> 535,430
<TOT-CAPITALIZATION-AND-LIAB> 1,823,393
<GROSS-OPERATING-REVENUE> 665,826
<INCOME-TAX-EXPENSE> 31,216
<OTHER-OPERATING-EXPENSES> 571,135
<TOTAL-OPERATING-EXPENSES> 602,351
<OPERATING-INCOME-LOSS> 63,475
<OTHER-INCOME-NET> 10,587
<INCOME-BEFORE-INTEREST-EXPEN> 74,062
<TOTAL-INTEREST-EXPENSE> 27,021
<NET-INCOME> 47,041
3,249
<EARNINGS-AVAILABLE-FOR-COMM> 43,792
<COMMON-STOCK-DIVIDENDS> 18,847
<TOTAL-INTEREST-ON-BONDS> 32,831
<CASH-FLOW-OPERATIONS> 75,982
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
