<PAGE>
================================================================================
FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1995
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
Exact Name of Registrant as Commission I.R.S. Employer
Specified in Its Charter File Number Identification No.
- ------------------------------------- ----------- ------------------
HAWAIIAN ELECTRIC INDUSTRIES, INC. 1-8503 99-0208097
and Principal Subsidiary
HAWAIIAN ELECTRIC COMPANY, INC. 1-4955 99-0040500
STATE OF HAWAII
- --------------------------------------------------------------------------------
(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.
<TABLE>
<CAPTION>
Class of Common Stock Outstanding July 28, 1995
- --------------------------------------------------------------------------------
<S> <C>
Hawaiian Electric Industries, Inc.
(Without Par Value)................... 29,283,840 Shares
Hawaiian Electric Company, Inc.
($6 2/3 Par Value).................... 11,813,147 Shares (not publicly traded)
</TABLE>
================================================================================
<PAGE>
Hawaiian Electric Industries, Inc. and subsidiaries
Hawaiian Electric Company, Inc. and subsidiaries
Form 10-Q--Quarter ended June 30, 1995
INDEX
<TABLE>
<CAPTION>
PAGE NO.
<S> <C>
Glossary of terms...................................................... ii
PART I. FINANCIAL INFORMATION
Item 1. Financial statements
Hawaiian Electric Industries, Inc. and subsidiaries
---------------------------------------------------
Consolidated balance sheets (unaudited) - June 30, 1995
and December 31, 1994...................................... 1
Consolidated statements of income (unaudited) - three and six
months ended June 30, 1995 and 1994........................ 2
Consolidated statements of retained earnings (unaudited) -
three and six months ended June 30, 1995 and 1994.......... 2
Consolidated statements of cash flows (unaudited) - six
months ended June 30, 1995 and 1994........................ 3
Notes to consolidated financial statements (unaudited)....... 4
Hawaiian Electric Company, Inc. and subsidiaries
------------------------------------------------
Consolidated balance sheets (unaudited) - June 30, 1995
and December 31, 1994...................................... 8
Consolidated statements of income (unaudited) - three and six
months ended June 30, 1995 and 1994........................ 9
Consolidated statements of retained earnings (unaudited) -
three and six months ended June 30, 1995 and 1994.......... 9
Consolidated statements of cash flows (unaudited) - six
months ended June 30, 1995 and 1994........................ 10
Notes to consolidated financial statements (unaudited)....... 11
Item 2. Management's discussion and analysis of financial condition
and results of operations.................................. 14
PART II. OTHER INFORMATION
Item 1. Legal proceedings............................................ 23
Item 5. Other information............................................ 23
Item 6. Exhibits and reports on Form 8-K............................. 24
Signatures............................................................. 24
</TABLE>
i
<PAGE>
Hawaiian Electric Industries, Inc. and subsidiaries
Hawaiian Electric Company, Inc. and subsidiaries
Form 10-Q--Quarter ended June 30, 1995
GLOSSARY OF TERMS
<TABLE>
<CAPTION>
TERMS DEFINITIONS
- ----- -----------
<S> <C>
AFUDC Allowance for funds used during construction
ASB American Savings Bank, F.S.B., a wholly owned
subsidiary of HEI Diversified, Inc. and parent
company of American Savings Investment Services
Corp., ASB Service Corporation, AdCommunications,
Inc. and Associated Mortgage, Inc.
BIF Bank Insurance Fund
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, Lalamilo Ventures, Inc., Pacific
Energy Conservation Services, Inc. and HEI Power
Corp. (since its formation in March 1995)
CONSUMER ADVOCATE Division of Consumer Advocacy, Department of
Commerce and Consumer Affairs of the State of Hawaii
FASB Financial Accounting Standards Board
FDIC Federal Deposit Insurance Corporation
HCPC Hilo Coast Processing Company
HECO Hawaiian Electric Company, Inc., a wholly owned
electric utility subsidiary of Hawaiian Electric
Industries, Inc. and parent company of Maui Electric
Company, Limited and Hawaii Electric Light Company,
Inc.
HEI Hawaiian Electric Industries, Inc., parent
company of Hawaiian Electric Company, Inc., HEI
Investment Corp., Malama Pacific Corp., Hawaiian Tug
& Barge Corp., Lalamilo Ventures, Inc., HEI
Diversified, Inc., Pacific Energy Conservation
Services, Inc. and HEI Power Corp. (since its
formation in March 1995)
HEIDI HEI Diversified, Inc., a wholly owned subsidiary
of Hawaiian Electric Industries, Inc. and the parent
company of American Savings Bank, F.S.B.
HEIIC HEI Investment Corp., a wholly owned subsidiary
of Hawaiian Electric Industries, Inc.
HEIPC HEI Power Corp., a wholly owned subsidiary of
Hawaiian Electric Industries, Inc.
</TABLE>
ii
<PAGE>
GLOSSARY OF TERMS, CONTINUED
<TABLE>
<CAPTION>
TERMS DEFINITIONS
- ----- -----------
<S> <C>
HELCO Hawaii Electric Light Company, Inc., a wholly owned
electric utility subsidiary of Hawaiian Electric
Company, Inc.
HIG The Hawaiian Insurance & Guaranty Company, Limited,
an insurance company which was placed in state
rehabilitation proceedings. HEI Diversified, Inc.
was the holder of record of HIG's common stock prior
to August 16, 1994
HTB Hawaiian Tug & Barge Corp., a wholly owned
subsidiary of Hawaiian Electric Industries, Inc. and
parent company of Young Brothers, Limited
KWH Kilowatthour
MECO Maui Electric Company, Limited, a wholly owned
electric utility subsidiary of Hawaiian Electric
Company, Inc.
MPC Malama Pacific Corp., a wholly owned subsidiary of
Hawaiian Electric Industries, Inc. and parent
company of several real estate subsidiaries
MW Megawatt
OTS Office of Thrift Supervision, Department of Treasury
PBOP Postretirement benefits other than pensions
PGV Puna Geothermal Venture
PUC Public Utilities Commission of the State of Hawaii
SAIF Savings Association Insurance Fund
SEC Securities and Exchange Commission
SFAS Statement of Financial Accounting Standards
YB Young Brothers, Limited, a wholly owned subsidiary
of Hawaiian Tug & Barge Corp.
</TABLE>
iii
<PAGE>
PART I - FINANCIAL INFORMATION
------------------------------
ITEM 1. FINANCIAL STATEMENTS
- -----------------------------
Hawaiian Electric Industries, Inc. and subsidiaries
CONSOLIDATED BALANCE SHEETS (UNAUDITED)
(in thousands)
<TABLE>
<CAPTION>
June 30, December 31,
1995 1994
- ------------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
Cash and equivalents....................................... $ 79,435 $ 87,623
Accounts receivable and unbilled revenues, net............. 142,713 130,762
Inventories, at average cost............................... 38,034 43,126
Real estate developments................................... 36,758 33,956
Loans receivable, net...................................... 1,694,335 1,824,055
Marketable securities...................................... 1,341,741 1,099,810
Other investments.......................................... 74,959 77,297
Property, plant and equipment, net of accumulated
depreciation of $794,723 and $747,503.................... 1,743,082 1,677,822
Regulatory assets.......................................... 100,181 95,257
Other...................................................... 62,044 59,301
Goodwill and other intangibles............................. 43,350 45,455
----------- ----------
$ 5,356,632 $5,174,464
=========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Accounts payable........................................... $ 90,738 $ 97,210
Deposit liabilities........................................ 2,163,382 2,129,310
Short-term borrowings...................................... 166,042 136,755
Securities sold under agreements to repurchase............. 278,979 123,301
Advances from Federal Home Loan Bank....................... 528,874 616,374
Long-term debt............................................. 753,084 718,240
Deferred income taxes...................................... 176,849 172,930
Unamortized tax credits.................................... 47,246 45,954
Contributions in aid of construction....................... 181,184 178,635
Other...................................................... 174,194 180,529
----------- ----------
4,560,572 4,399,238
----------- ----------
PREFERRED STOCK OF ELECTRIC UTILITY SUBSIDIARIES
Subject to mandatory redemption............................ 43,290 44,844
Not subject to mandatory redemption........................ 48,293 48,293
----------- ----------
91,583 93,137
----------- ----------
STOCKHOLDERS' EQUITY
Preferred stock, no par value, authorized 10,000
shares; issued: none.................................... -- --
Common stock, no par value, authorized 100,000
shares; issued and outstanding 29,243 shares and
28,655 shares............................................ 566,015 546,254
Retained earnings.......................................... 138,462 135,835
----------- ----------
704,477 682,089
----------- ----------
$ 5,356,632 $5,174,464
=========== ==========
</TABLE>
See accompanying notes to consolidated financial statements.
1
<PAGE>
Hawaiian Electric Industries, Inc. and subsidiaries
CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
<TABLE>
<CAPTION>
Three months ended Six months ended
June 30, June 30,
(in thousands, except per share amounts and ------------------------ --------------------------
ratio of earnings to fixed charges) 1995 1994 1995 1994
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
REVENUES
Electric utility............................................... $244,506 $219,411 $477,027 $420,717
Savings bank................................................... 61,605 52,311 122,322 102,395
Other.......................................................... 13,786 12,834 26,822 26,486
-------- -------- -------- --------
319,897 284,556 626,171 549,598
-------- -------- -------- --------
EXPENSES
Electric utility............................................... 206,207 185,594 403,315 362,576
Savings bank................................................... 51,762 41,636 102,254 81,100
Other.......................................................... 15,858 14,371 30,223 29,563
-------- -------- -------- --------
273,827 241,601 535,792 473,239
-------- -------- -------- --------
OPERATING INCOME (LOSS)
Electric utility............................................... 38,299 33,817 73,712 58,141
Savings bank................................................... 9,843 10,675 20,068 21,295
Other.......................................................... (2,072) (1,537) (3,401) (3,077)
-------- -------- -------- --------
46,070 42,955 90,379 76,359
-------- -------- -------- --------
Interest expense--electric utility and other................... (15,515) (13,128) (30,467) (26,210)
Allowance for borrowed funds used
during construction.......................................... 1,338 945 2,505 1,816
Preferred stock dividends of electric
utility subsidiaries......................................... (1,726) (1,796) (3,457) (3,596)
Allowance for equity funds used during
construction................................................. 2,618 2,095 4,985 4,046
-------- -------- -------- --------
INCOME BEFORE INCOME TAXES..................................... 32,785 31,071 63,945 52,415
Income taxes................................................... 13,905 13,439 27,218 22,995
-------- -------- -------- --------
NET INCOME..................................................... $ 18,880 $ 17,632 $ 36,727 $ 29,420
======== ======== ======== ========
WEIGHTED AVERAGE NUMBER OF COMMON
SHARES OUTSTANDING........................................... 29,063 28,013 28,919 27,892
======== ======== ======== ========
EARNINGS PER COMMON SHARE...................................... $0.65 $0.63 $1.27 $1.05
======== ======== ======== ========
DIVIDENDS PER COMMON SHARE..................................... $0.59 $0.58 $1.18 $1.16
======== ======== ======== ========
RATIO OF EARNINGS TO FIXED CHARGES
(SEC METHOD)
EXCLUDING INTEREST ON ASB DEPOSITS........................... 1.93 2.10
======== ========
INCLUDING INTEREST ON ASB DEPOSITS........................... 1.56 1.61
======== ========
</TABLE>
Hawaiian Electric Industries, Inc. and subsidiaries
CONSOLIDATED STATEMENTS OF RETAINED EARNINGS (UNAUDITED)
<TABLE>
<CAPTION>
Three months ended Six months ended
June 30, June 30,
------------------------ --------------------------
(in thousands) 1995 1994 1995 1994
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
RETAINED EARNINGS, BEGINNING OF PERIOD.......................... $136,712 $124,012 $135,835 $128,318
Net income...................................................... 18,880 17,632 36,727 29,420
Common stock dividends.......................................... (17,130) (16,238) (34,100) (32,332)
-------- -------- -------- --------
RETAINED EARNINGS, END OF PERIOD................................ $138,462 $125,406 $138,462 $125,406
======== ======== ======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
2
<PAGE>
Hawaiian Electric Industries, Inc. and subsidiaries
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
<TABLE>
<CAPTION>
Six months ended
June 30,
------------------------------
(in thousands) 1995 1994
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Income from continuing operations................................................................ $ 36,727 $ 29,420
Adjustments to reconcile income from continuing operations to
net cash provided by (used in) operating activities
Depreciation and amortization of property, plant and equipment............................. 38,429 36,189
Other amortization......................................................................... 776 (506)
Deferred income taxes and tax credits, net................................................. 6,074 6,275
Changes in assets and liabilities, net of effects from disposal of businesses
Increase in accounts receivable and unbilled revenues, net............................. (11,850) (1,843)
Decrease (increase) in inventories..................................................... 5,092 (3,386)
Increase in real estate developments................................................... (685) (2,104)
Increase in securities held for trading................................................ -- (15,958)
Increase in regulatory assets.......................................................... (2,394) (6,486)
Increase (decrease) in accounts payable................................................ (6,472) 8,932
Changes in other assets and liabilities................................................ (14,138) (19,000)
--------- ---------
51,559 31,533
Cash used by discontinued operations............................................................. -- (32,377)
--------- ---------
NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES.............................................. 51,559 (844)
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES
Loans receivable originated and purchased........................................................ (158,696) (305,498)
Principal repayments on loans receivable......................................................... 64,061 136,008
Proceeds from sale of loans receivable........................................................... 3,582 1,888
"Held-to-maturity" mortgage-backed securities purchased.......................................... (79,566) (202,176)
Principal repayments on "held-to-maturity" mortgage-backed securities............................ 63,084 125,486
Capital expenditures............................................................................. (102,892) (90,820)
Contributions in aid of construction............................................................. 6,414 6,849
Other............................................................................................ 1,066 461
--------- ---------
NET CASH USED IN INVESTING ACTIVITIES............................................................ (202,947) (327,802)
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase in deposit liabilities.............................................................. 34,072 50,777
Net increase in short-term borrowings with original maturities of
three months or less.......................................................................... 30,135 118,910
Proceeds from other short-term borrowings........................................................ 745 637
Repayment of other short-term borrowings......................................................... (1,593) (2,941)
Proceeds from securities sold under agreements to repurchase..................................... 326,500 --
Repurchase of securities sold under agreements to repurchase..................................... (172,339) --
Proceeds from advances from Federal Home Loan Bank............................................... 251,200 386,700
Principal payments on advances from Federal Home Loan Bank....................................... (338,700) (167,000)
Proceeds from issuance of long-term debt......................................................... 48,213 31,542
Repayment of long-term debt...................................................................... (13,400) (75,427)
Redemption of electric utility subsidiaries' preferred stock..................................... (1,554) (496)
Net proceeds from issuance of common stock....................................................... 10,112 7,562
Common stock dividends........................................................................... (24,510) (23,563)
Other............................................................................................ (5,681) (10,500)
--------- ---------
NET CASH PROVIDED BY FINANCING ACTIVITIES........................................................ 143,200 316,201
--------- ---------
Net decrease in cash and equivalents............................................................. (8,188) (12,445)
Cash and equivalents, beginning of period........................................................ 87,623 116,260
--------- ---------
CASH AND EQUIVALENTS, END OF PERIOD.............................................................. $ 79,435 $ 103,815
========= =========
</TABLE>
See accompanying notes to consolidated financial statements.
3
<PAGE>
Hawaiian Electric Industries, Inc. and subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 1995 and 1994
(Unaudited)
- --------------------------------------------------------------------------------
(1) BASIS OF PRESENTATION
- --------------------------
The accompanying unaudited consolidated financial statements have been prepared
in accordance with generally accepted accounting principles for interim
financial information and with the instructions to Form 10-Q and Article 10 of
Regulation S-X. Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements. The accompanying unaudited 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, 1994 and the
consolidated financial statements and the notes thereto in HEI's Quarterly
Report on SEC Form 10-Q for the quarter ended March 31, 1995.
In the opinion of HEI's management, the accompanying unaudited consolidated
financial statements contain all material adjustments to present fairly the
Company's financial position as of June 30, 1995 and December 31, 1994, and the
results of its operations for the three months and six months ended June 30,
1995 and 1994, and its cash flows for the six months ended June 30, 1995 and
1994. All such adjustments are of a normal recurring nature, unless otherwise
disclosed in this Form 10-Q or other referenced material. Results of operations
for interim periods are not necessarily indicative of results for future interim
periods or the full year.
(2) ELECTRIC UTILITY SUBSIDIARY
- --------------------------------
For Hawaiian Electric Company, Inc.'s consolidated financial information,
including its commitments and contingencies, see pages 8 through 14.
(3) SAVINGS BANK SUBSIDIARY
- -----------------------------
SELECTED CONSOLIDATED FINANCIAL INFORMATION
American Savings Bank, F.S.B. and subsidiaries
Income statement data
<TABLE>
<CAPTION>
Three months ended Six months ended
June 30, June 30,
-------------------- ------------------------
(in thousands) 1995 1994 1995 1994
- ---------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Interest income................ $ 57,928 $ 50,429 $115,561 $ 98,528
Interest expense............... 34,999 24,768 67,974 47,915
-------- -------- -------- --------
NET INTEREST INCOME............ 22,929 25,661 47,587 50,613
Provision for losses........... (240) (242) (625) (484)
Other income................... 3,677 1,882 6,761 3,867
Operating, administrative
and general expenses.......... (16,523) (16,626) (33,655) (32,701)
-------- -------- -------- --------
OPERATING INCOME............... 9,843 10,675 20,068 21,295
Income taxes................... 4,139 4,457 8,415 8,869
-------- -------- -------- --------
NET INCOME.................... $ 5,704 $ 6,218 $ 11,653 $ 12,426
======== ======== ======== ========
</TABLE>
4
<PAGE>
American Savings Bank, F.S.B. and subsidiaries
Balance sheet data
<TABLE>
<CAPTION>
June 30, December 31,
(in thousands) 1995 1994
- ------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
Cash and equivalents......................... $ 78,151 $ 76,502
Investment securities........................ 33,506 32,523
Mortgage-backed securities................... 1,308,235 1,067,287
Loans receivable, net........................ 1,694,335 1,824,055
Other........................................ 72,001 69,829
Goodwill and other intangibles............... 43,350 45,455
---------- ----------
$3,229,578 $3,115,651
========== ==========
LIABILITIES AND EQUITY
Deposit liabilities.......................... $2,163,382 $2,129,310
Securities sold under agreements to
repurchase.................................. 278,979 123,301
Advances from Federal Home Loan Bank......... 528,874 616,374
Other........................................ 57,134 51,078
---------- ----------
3,028,369 2,920,063
Common stock equity.......................... 201,209 195,588
---------- ----------
$3,229,578 $3,115,651
========== ==========
</TABLE>
(4) REAL ESTATE SUBSIDIARY
- ---------------------------
MPC and its subsidiaries' total real estate project inventory, equity investment
in real estate joint ventures and loans and advances to unconsolidated joint
ventures or joint venture partners amounted to $51 million at June 30, 1995 and
December 31, 1994. MPC's present focus is to reduce its current investment in
real estate development assets and increase cash flow by continuing the
development and sales of its existing projects. There are currently no plans to
invest in new projects.
At June 30, 1995, MPC or its subsidiaries had issued (i) guaranties under which
they were jointly and severally contingently liable with their joint venture
partners for $1.9 million of outstanding loans and (ii) payment guaranties under
which MPC or its subsidiaries were severally contingently liable for $7.4
million of outstanding loans and $5.6 million of additional undrawn loan
facilities. All such loans are collateralized by real property. At June 30,
1995, HEI had agreed with the lenders of construction loans and loan facilities,
of which approximately $12.7 million was outstanding and $5.8 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.
(5) CASH FLOWS
- ---------------
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash paid for interest (net of capitalized amounts) and income taxes was as
follows:
<TABLE>
<CAPTION>
Six months ended
June 30,
-----------------
(in thousands) 1995 1994
- ------------------------------------------------------------
<S> <C> <C>
Interest (including interest paid
by savings bank, but excluding interest
paid on nonrecourse debt from leveraged
leases)................................ $92,457 $72,815
======= =======
Interest on nonrecourse debt from
leveraged leases....................... $ 4,534 $ 4,754
======= =======
Income taxes............................. $19,809 $16,224
======= =======
</TABLE>
5
<PAGE>
SUPPLEMENTAL DISCLOSURES OF NONCASH ACTIVITIES
In the six months ended June 30, 1995, ASB received $223 million in mortgage-
backed securities in exchange for loans.
Common stock dividends reinvested by shareholders in HEI common stock in noncash
transactions amounted to $9.6 million and $8.8 million for the six months ended
June 30, 1995 and 1994, respectively.
The allowance for equity funds used during construction, which was capitalized
primarily as part of the cost of electric utility plant, amounted to $5.0
million and $4.0 million for the six months ended June 30, 1995 and 1994,
respectively.
In March 1994, Malama Development Corp.'s Baldwin*Malama partnership closed on
an option to purchase approximately 147 acres of land on the island of Maui from
Baldwin Pacific Properties, Inc. Of the total land purchase price of $9.9
million, Baldwin*Malama issued mortgage notes payable of $8.0 million in noncash
consideration.
(6) ACCOUNTING CHANGES
- -----------------------
LONG-LIVED ASSETS
In March 1995, the FASB issued SFAS No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to Be Disposed Of." SFAS No. 121
requires that long-lived assets and certain identifiable intangibles held and
used by an entity be reviewed for impairment whenever events or changes in
circumstances indicate that the carrying amount of an asset may not be
recoverable. If the sum of the expected future cash flows is less than the
carrying amount of the asset, an impairment loss is recognized. Measurement of
that loss would be based on the fair value of the asset.
Generally, SFAS No. 121 requires that long-lived assets and certain identifiable
intangibles to be disposed of be reported at the lower of carrying amount or
fair value less cost to sell.
SFAS No. 121 also requires that a rate-regulated enterprise recognize an
impairment for the amount of costs excluded when a regulator excludes all or
part of a cost from the enterprise's rate base.
The provisions of SFAS No. 121 must be adopted by the Company no later than
January 1, 1996. The Company has not determined when it will adopt the
provisions of SFAS No. 121 nor the impact of the adoption of SFAS No. 121 on its
consolidated financial condition or results of operations.
MORTGAGE SERVICING RIGHTS
In May 1995, the FASB issued SFAS No. 122, "Accounting for Mortgage Servicing
Rights." SFAS No. 122 requires that a mortgage banking enterprise (as defined)
that acquires mortgage servicing rights through either the purchase or
origination of mortgage loans and sells or securitizes those loans with
servicing rights retained should allocate the total cost of the mortgage loans
to the mortgage servicing rights and the loans based on their relative fair
values if it is practicable to estimate those fair values. The provisions of
SFAS No. 122 will be adopted by ASB on January 1, 1996. If SFAS No. 122 were
adopted on January 1, 1995, it would not have had a material effect on the
Company's consolidated financial condition or results of operations.
6
<PAGE>
(7) DISCONTINUED OPERATIONS
- ----------------------------
THE HAWAIIAN INSURANCE & GUARANTY CO., LIMITED
HIG and its subsidiaries (collectively, the HIG Group) are property and casualty
insurance companies. HEIDI was the holder of record of all the common stock of
HIG until August 16, 1994. In December 1992, due to a significant increase in
the estimate of policyholder claims from Hurricane Iniki, the HEI Board of
Directors concluded it would not contribute additional capital to HIG and the
remaining investment in the HIG Group was written off. On December 24, 1992, a
formal rehabilitation order vested full control over the HIG Group in the
Insurance Commissioner (the Rehabilitator) and her deputies.
On April 12, 1993, the Rehabilitator, the HIG Group and others filed a complaint
against HEI, HEIDI and others. The complaint, which was subsequently amended,
set forth several separate counts, including claims that directors and officers
of HEI, HEIDI and the HIG Group were responsible for the losses suffered by the
HIG Group and claims that HEI and/or HEIDI should be held liable for HIG's
obligations. The lawsuit was settled in 1994 and in August 1994, $32 million was
disbursed to the Rehabilitator. In exchange, all the plaintiffs released their
claims against HEI, its affiliates and their past and present officers and
directors.
The $32 million settlement amount, less income tax benefits and certain amounts
recognized in previously established reserves, resulted in a $15 million after-
tax charge to discontinued operations in 1993. HEI and HEIDI are seeking
reimbursement for the settlement and defense costs from its insurance carriers.
One of the insurance carriers has filed a declaratory relief action seeking
resolution of insurance coverage and other policy issues, and HEI and HEIDI have
filed counterclaims. Trial was scheduled for October 1995, but will be
postponed. Recoveries from HEI's insurance carriers, if any, will be recognized
when realized.
In December 1994, five insurance agencies, which had served as insurance agents
for the HIG Group, filed a complaint against HEI, HEIDI and others. The
complaint set forth several causes of action, including breach of contract and
piercing the corporate veil. The plaintiffs ask for relief from the defendants,
including compensatory damages for lost commissions, lost business and lost
profits in an amount to be proven at trial and punitive damages. In the opinion
of management, losses, if any, resulting from the ultimate outcome of the
lawsuit will not have a material adverse effect on the Company's financial
condition or results of operations.
7
<PAGE>
Hawaiian Electric Company, Inc. and subsidiaries
CONSOLIDATED BALANCE SHEETS (UNAUDITED)
<TABLE>
<CAPTION>
June 30, December 31,
(in thousands, except par value) 1995 1994
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
Utility plant, at cost
Property, plant and equipment.............................................................. $ 2,202,753 $2,129,274
Construction in progress................................................................... 187,998 164,247
Less--accumulated depreciation............................................................. (737,533) (702,945)
------------ ----------
NET UTILITY PLANT.................................................................... 1,653,218 1,590,576
------------ ----------
Current assets
Cash and equivalents....................................................................... 439 10,694
Customer accounts receivable, net.......................................................... 66,789 60,406
Accrued unbilled revenues, net............................................................. 38,735 38,435
Other accounts receivable, net............................................................. 11,660 10,302
Fuel oil stock, at average cost............................................................ 16,685 21,966
Materials and supplies, at average cost.................................................... 20,180 20,108
Prepayments and other...................................................................... 2,434 2,028
------------ ----------
TOTAL CURRENT ASSETS................................................................. 156,922 163,939
------------ ----------
Other assets
Regulatory assets.......................................................................... 97,525 92,524
Other...................................................................................... 40,492 42,081
------------ ----------
TOTAL OTHER ASSETS................................................................... 138,017 134,605
------------ ----------
$ 1,948,157 $1,889,120
============ ==========
CAPITALIZATION AND LIABILITIES
Capitalization
Common stock, $6 2/3 par value, authorized
50,000 shares; outstanding 11,813 shares................................................ $ 78,766 $ 78,766
Premium on capital stock................................................................... 246,660 246,600
Retained earnings.......................................................................... 325,048 308,535
------------ ----------
COMMON STOCK EQUITY.................................................................. 650,474 633,901
Cumulative preferred stock
Not subject to mandatory redemption..................................................... 48,293 48,293
Subject to mandatory redemption......................................................... 41,070 42,470
Long-term debt, net........................................................................ 516,927 468,653
------------ ----------
TOTAL CAPITALIZATION................................................................. 1,256,764 1,193,317
------------ ----------
Current liabilities
Long-term debt due within one year......................................................... 9,903 20,933
Preferred stock sinking fund requirements.................................................. 2,220 2,374
Short-term borrowings - nonaffiliates...................................................... 124,315 117,866
Short-term borrowings - affiliate.......................................................... 14,450 --
Accounts payable........................................................................... 47,017 54,662
Interest and preferred dividends payable................................................... 9,741 8,575
Income taxes payable....................................................................... 2,851 3,300
Other taxes accrued........................................................................ 32,637 39,666
Other...................................................................................... 27,554 30,111
------------ ----------
TOTAL CURRENT LIABILITIES............................................................ 270,688 277,487
------------ ----------
Deferred credits and other liabilities
Deferred income taxes...................................................................... 110,197 108,362
Unamortized tax credits.................................................................... 46,277 44,939
Other...................................................................................... 83,047 86,380
------------ ----------
TOTAL DEFERRED CREDITS AND OTHER LIABILITIES......................................... 239,521 239,681
------------ ----------
Contributions in aid of construction.......................................................... 181,184 178,635
------------ ----------
$ 1,948,157 $1,889,120
============ ==========
</TABLE>
See accompanying notes to HECO's consolidated financial statements.
8
<PAGE>
Hawaiian Electric Company, Inc. and subsidiaries
CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
<TABLE>
<CAPTION>
Three months ended Six months ended
June 30, June 30,
(in thousands, except for ratio of earnings ------------------------ --------------------------
to fixed charges) 1995 1994 1995 1994
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
OPERATING REVENUES............................................ $242,646 $217,884 $473,822 $417,982
-------- -------- -------- --------
OPERATING EXPENSES
Fuel oil...................................................... 48,816 41,462 97,293 80,080
Purchased power............................................... 70,890 69,294 134,743 132,280
Other operation............................................... 34,212 28,383 68,395 58,094
Maintenance................................................... 12,411 10,537 23,633 21,279
Depreciation and amortization................................. 17,028 15,976 34,010 32,093
Taxes, other than income taxes................................ 22,688 19,821 44,767 38,559
Income taxes.................................................. 12,096 10,776 23,270 17,830
-------- -------- -------- --------
218,141 196,249 426,111 380,215
-------- -------- -------- --------
OPERATING INCOME.............................................. 24,505 21,635 47,711 37,767
-------- -------- -------- --------
OTHER INCOME
Allowance for equity funds used during construction........... 2,618 2,095 4,985 4,046
Other, net.................................................... 1,710 1,416 2,947 2,601
-------- -------- -------- --------
4,328 3,511 7,932 6,647
-------- -------- -------- --------
INCOME BEFORE INTEREST AND OTHER CHARGES...................... 28,833 25,146 55,643 44,414
-------- -------- -------- --------
INTEREST AND OTHER CHARGES
Interest on long-term debt.................................... 8,587 7,518 16,665 15,530
Amortization of net bond premium and expense.................. 320 290 634 537
Other interest charges........................................ 1,998 1,299 4,052 2,103
Allowance for borrowed funds used
during construction........................................ (1,338) (945) (2,505) (1,816)
Preferred stock dividends of subsidiaries..................... 692 714 1,384 1,430
-------- -------- -------- --------
10,259 8,876 20,230 17,784
-------- -------- -------- --------
INCOME BEFORE PREFERRED STOCK DIVIDENDS OF HECO............... 18,574 16,270 35,413 26,630
Preferred stock dividends of HECO............................. 1,034 1,082 2,073 2,166
-------- -------- -------- --------
NET INCOME FOR COMMON STOCK................................... $ 17,540 $ 15,188 $ 33,340 $ 24,464
======== ======== ======== ========
RATIO OF EARNINGS TO FIXED CHARGES
(SEC METHOD)............................................... 3.34 3.03
======== ========
</TABLE>
Hawaiian Electric Company, Inc. and subsidiaries
CONSOLIDATED STATEMENTS OF RETAINED EARNINGS (UNAUDITED)
<TABLE>
<CAPTION>
Three months ended Six months ended
June 30, June 30,
------------------------ -------------------------
(in thousands) 1995 1994 1995 1994
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
RETAINED EARNINGS, BEGINNING OF PERIOD.......................... $315,408 $274,754 $308,535 $275,401
Net income for common stock..................................... 17,540 15,188 33,340 24,464
Common stock dividends.......................................... (7,900) (1,330) (16,827) (11,253)
-------- -------- -------- --------
RETAINED EARNINGS, END OF PERIOD................................ $325,048 $288,612 $325,048 $288,612
======== ======== ======== ========
</TABLE>
HEI owns all the common stock of HECO. Therefore, per share data with respect to
shares of common stock of HECO are not meaningful.
See accompanying notes to HECO's consolidated financial statements.
9
<PAGE>
Hawaiian Electric Company, Inc. and subsidiaries
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
<TABLE>
<CAPTION>
Six months ended
June 30,
------------------------
(in thousands) 1995 1994
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Income before preferred stock dividends of HECO................................. $ 35,413 $ 26,630
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............ 34,010 32,093
Other amortization........................................................ 2,816 2,836
Deferred income taxes..................................................... 1,837 1,752
Tax credits, net.......................................................... 2,174 1,702
Allowance for equity funds used during construction....................... (4,985) (4,046)
Changes in assets and liabilities
Increase in accounts receivable........................................... (7,741) (21)
Decrease (increase) in accrued unbilled revenues.......................... (300) 799
Decrease (increase) in fuel oil stock..................................... 5,281 (4,520)
Decrease (increase) in materials and supplies............................. (72) 1,310
Increase in regulatory assets............................................. (2,394) (6,486)
Increase (decrease) in accounts payable................................... (7,645) 9,763
Increase in interest and preferred dividends payable...................... 1,166 752
Changes in other assets and liabilities................................... (14,012) (17,757)
-------- --------
NET CASH PROVIDED BY OPERATING ACTIVITIES....................................... 45,548 44,807
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES
Capital expenditures............................................................ (95,741) (86,668)
Contributions in aid of construction............................................ 6,414 6,849
-------- --------
NET CASH USED IN INVESTING ACTIVITIES........................................... (89,327) (79,819)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES
Common stock dividends.......................................................... (16,827) (11,253)
Preferred stock dividends....................................................... (2,073) (2,166)
Proceeds from issuance of long-term debt........................................ 48,213 31,542
Repayment of long-term debt..................................................... (11,000) (48,027)
Redemption of preferred stock................................................... (1,554) (496)
Net increase in short-term borrowings from nonaffiliates
and affiliate with original maturities of three months or less................. 20,899 73,810
Other........................................................................... (4,134) (6,492)
-------- --------
NET CASH PROVIDED BY FINANCING ACTIVITIES....................................... 33,524 36,918
-------- --------
Net increase (decrease) in cash and equivalents................................. (10,255) 1,906
Cash and equivalents, beginning of period....................................... 10,694 1,922
-------- --------
CASH AND EQUIVALENTS, END OF PERIOD............................................. $ 439 $ 3,828
======== =========
</TABLE>
See accompanying notes to HECO's consolidated financial statements.
10
<PAGE>
Hawaiian Electric Company, Inc. and subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 1995 and 1994
(Unaudited)
- --------------------------------------------------------------------------------
(1) BASIS OF PRESENTATION
- --------------------------
The accompanying unaudited consolidated financial statements have been prepared
in accordance with generally accepted accounting principles for interim
financial information and with the instructions to Form 10-Q and Article 10 of
Regulation S-X. Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements. The accompanying unaudited 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, 1994 and the
consolidated financial statements and the notes thereto in HECO's Quarterly
Report on SEC Form 10-Q for the quarter ended March 31, 1995.
In the opinion of HECO's management, the accompanying unaudited consolidated
financial statements contain all material adjustments to present fairly the
financial position of HECO and its subsidiaries as of June 30, 1995 and December
31, 1994, and the results of their operations for the three months and six
months ended June 30, 1995 and 1994, and their cash flows for the six months
ended June 30, 1995 and 1994. All such adjustments are of a normal recurring
nature, unless otherwise disclosed in this Form 10-Q or other referenced
material. Results of operations for interim periods are not necessarily
indicative of results for future interim periods or the full year.
(2) CASH FLOWS
- ---------------
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash paid for interest (net of capitalized amounts) and income taxes was as
follows:
<TABLE>
<CAPTION>
Six months ended
June 30,
-----------------
(in thousands) 1995 1994
- ------------------------------------------------------------
<S> <C> <C>
Interest................................. $17,332 $17,331
======= =======
Income taxes............................. $19,174 $12,868
======= =======
</TABLE>
SUPPLEMENTAL DISCLOSURE OF NONCASH ACTIVITIES
The allowance for equity funds used during construction, which was capitalized
primarily as part of the cost of electric utility plant, amounted to $5.0
million and $4.0 million for the six months ended June 30, 1995 and 1994,
respectively.
(3) COMMITMENTS AND CONTINGENCIES
- ----------------------------------
HELCO POWER SITUATION
HELCO has a power purchase agreement with Hilo Coast Processing Company (HCPC),
currently for 22 MW of firm capacity. On December 12, 1994, at a time when the
HCPC contract was for delivery of 18 MW, HCPC filed a Chapter 11 bankruptcy
petition and advised HELCO that it would cease operating its plant in December
1994. By stipulation, HELCO obtained a temporary restraining order (TRO) and,
later, extensions of such order, requiring HCPC to continue operations of the
HCPC facility through July 14, 1995, with HELCO to pay an additional amount for
the power HCPC supplies (which was increased to 20 MW, then as of June 1, 1995,
to 22 MW under the TRO). On January 5, 1995, HELCO and HCPC entered into an
agreement in principle, subject to the negotiation and execution of a definitive
agreement, to amend the existing power purchase agreement through December 1999.
Extensions of the
11
<PAGE>
TRO incorporated the terms of the agreement in principle. The definitive
agreement, which was executed in the form of a number of separate agreements on
March 24, 1995, is not effective until it is approved by the bankruptcy court
(or the bankruptcy proceeding is dismissed by the bankruptcy court), and is
subject to cancellation by HELCO if not approved by the PUC within 180 days of
its execution. On July 17, 1995, the bankruptcy court approved the agreements
and the dismissal of HCPC from bankruptcy, subject to completion of collateral
agreements between HCPC and the state. The effective date of the amended and
restated power purchase agreement is pending completion of those agreements and
issuance of the final order from the court.
HELCO is proceeding with plans to install two 20-MW combustion turbines in 1996,
followed by an 18-MW heat steam recovery generator in 1997, at which time these
units will be converted to a 56-MW (net) combined-cycle unit, subject in each
case to obtaining necessary permits. The PUC approved the expenditure of funds
for the first unit and a request for approval of the second unit is pending
before the PUC. Expenditures for the first unit were approximately $25 million
as of June 30, 1995. HELCO's total investment in this project was approximately
$39 million as of June 30, 1995. HELCO has encountered procedural and other
difficulties in obtaining the necessary air permit and Conservation District Use
Permit which would allow the combined-cycle unit to be constructed. Although
progress is being made in obtaining both permits, HELCO's unit installation
schedule has been adversely impacted as a result of the permitting delays.
In June 1995, HELCO filed with the PUC its contingency plan detailing
alternatives to meet the island of Hawaii's projected energy needs and HELCO is
actively working to implement viable, timely and cost-effective alternatives.
Until the margin between the forecasted load and capacity reaches an acceptable
level, management believes that there is a risk of capacity shortages on the
island that could result in rolling blackouts within the next year.
Two independent power producers (IPPs) have filed with the PUC separate
complaints against HELCO, alleging that they are entitled to a power purchase
contract to provide HELCO with additional capacity. On July 31, 1995, the PUC
issued a decision and order in the docket involving one of the IPPs, Kawaihae
Cogeneration Partners (KCP). In the order, the PUC stated its position on
various issues impacting HELCO's avoided cost calculations (several of which
were contrary to HELCO's recommendations) and ordered HELCO to negotiate with
KCP toward a power purchase agreement and to report to the PUC within 60 days of
the order if agreement is not reached by that time. HELCO plans to file a motion
for reconsideration and/or clarification of the PUC's order. Meanwhile, HELCO
plans to negotiate with both independent power producers within the time frame
ordered by the PUC. Whether these negotiations will result in a purchased power
contract and whether any such contract will have any impact on the $39 million
incurred by HELCO in attempting to install the combined-cycle unit, cannot be
determined at this time.
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, which was
consolidated with a pending investigation of an outage that occurred in 1988.
Power Technologies, Inc. (PTI), an independent consultant hired by HECO with the
approval of the PUC, investigated the outage. HECO is implementing certain of
PTI's recommendations and is either studying or disagrees with certain of the
other recommendations. Management cannot predict the timing and outcome of any
PUC decision and order, if any, with respect to the outages or PTI's
recommendations.
As a result of the April 9, 1991 outage, HECO received 3,063 customer claims,
which totaled approximately $7.8 million, within the time limit to file claims.
1,530 of these claims are for property damage and most have been settled, with
no admission of liability, or closed. None of the other 1,533 claims, which
generally involve personal injury or economic loss, such as lost profits, has
been settled. HECO's PUC-approved tariff states that HECO is not liable for
interruptions or insufficiency of supply when the cause was beyond HECO's
control through the exercise of reasonable diligence and care.
Seven direct or indirect business customers have 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. HECO has filed an answer which denies the principal
allegations in the complaint. The class has not been certified. Trial has been
set for January 1996.
In 1991, HECO 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 1991 outage
will not have a material adverse effect on the Company.
12
<PAGE>
(4) ACCOUNTING CHANGE
- ----------------------
In March 1995, the FASB issued SFAS No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to Be Disposed Of." SFAS No. 121
requires that long-lived assets and certain identifiable intangibles held and
used by an entity be reviewed for impairment whenever events or changes in
circumstances indicate that the carrying amount of an asset may not be
recoverable. If the sum of the expected future cash flows is less than the
carrying amount of the asset, an impairment loss is recognized. Measurement of
that loss would be based on the fair value of the asset.
Generally, SFAS No. 121 requires that long-lived assets and certain identifiable
intangibles to be disposed of be reported at the lower of carrying amount or
fair value less cost to sell.
SFAS No. 121 also requires that a rate-regulated enterprise recognize an
impairment for the amount of costs excluded when a regulator excludes all or
part of a cost from the enterprise's rate base.
The provisions of SFAS No. 121 must be adopted by HECO and its subsidiaries no
later than January 1, 1996. HECO and its subsidiaries have not determined when
they will adopt the provisions of SFAS No. 121 nor the impact of the adoption of
SFAS No. 121 on HECO's consolidated financial condition or results of
operations.
(5) SUMMARIZED FINANCIAL INFORMATION
- -------------------------------------
Summarized financial information for HECO's consolidated subsidiaries, HELCO and
MECO, is as follows:
<TABLE>
<CAPTION>
BALANCE SHEET DATA
HELCO MECO
------------------------------------- ---------------------------------
June 30, December 31, June 30, December 31,
(in thousands) 1995 1994 1995 1994
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Current assets.................................. $ 25,392 $ 25,151 $ 25,371 $ 29,204
Noncurrent assets............................... 349,113 335,725 286,399 272,019
-------- -------- -------- --------
$374,505 $360,876 $311,770 $301,223
======== ======== ======== ========
Common stock equity............................. $124,020 $120,908 $110,805 $108,313
Cumulative preferred stock
Not subject to mandatory redemption......... 10,000 10,000 8,000 8,000
Subject to mandatory redemption............. 7,800 7,800 6,545 6,545
Current liabilities............................. 62,482 59,787 39,679 34,197
Noncurrent liabilities.......................... 170,203 162,381 146,741 144,168
-------- -------- -------- --------
$374,505 $360,876 $311,770 $301,223
======== ======== ======== ========
<CAPTION>
INCOME STATEMENT DATA
HELCO MECO
-------------------------------------------- ---------------------------------------------
Three months ended Six months ended Three months ended Six months ended
June 30, June 30, June 30, June 30,
--------------------- --------------------- ---------------------- ---------------------
(in thousands) 1995 1994 1995 1994 1995 1994 1995 1994
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Operating
revenues............. $33,551 $30,667 $66,246 $59,618 $31,448 $29,298 $61,241 $56,659
Operating
income............... 3,933 2,921 7,356 5,324 4,147 4,049 7,890 7,677
Net income for
common stock......... 3,111 2,182 5,659 3,535 2,810 2,496 5,099 4,444
</TABLE>
13
<PAGE>
(6) RECONCILIATION OF ELECTRIC UTILITY OPERATING INCOME PER HEI AND HECO
- --------------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF INCOME
---------------------------------
<TABLE>
<CAPTION>
Three months ended Six months ended
June 30, June 30,
------------------------ ----------------------
(in thousands) 1995 1994 1995 1994
- -----------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Operating income from
regulated and
nonregulated
activities before
income taxes (per HEI
consolidated
statements of income)............ $ 38,299 $ 33,817 $ 73,712 $ 58,141
Deduct:
Income taxes on regulated
activities.................... (12,096) (10,776) (23,270) (17,830)
Revenues from
nonregulated activities....... (1,860) (1,527) (3,205) (2,735)
Add:
Expenses from
nonregulated activities....... 162 121 474 191
-------- -------- -------- --------
Operating income from
regulated activities
after income taxes
(per HECO consolidated
statements of income)............ $ 24,505 $ 21,635 $ 47,711 $ 37,767
======== ======== ======== ========
</TABLE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
- -------------------------------------------------------------------------------
OF OPERATIONS
- -------------
The following discussion should be read in conjunction with the consolidated
financial statements and accompanying notes.
RESULTS OF OPERATIONS
<TABLE>
<CAPTION>
CONSOLIDATED
- ------------
Three months ended
June 30,
(in thousands, except per ---------------------- % Primary reason(s) for
share amounts) 1995 1994 change significant change*
- -------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Revenues....................... $319,897 $284,556 12 Increase for all
segments
Operating income............... 46,070 42,955 7 Increase for the
electric utility
segment
Net income..................... 18,880 17,632 7 Higher operating
income and lower
effective tax
rate, partly
offset by higher
interest expense
due to higher
average
borrowings
Earnings per common
share........................ 0.65 0.63 3 See explanation
for "net income,"
partly offset by
an increase in
shares outstanding
Weighted average number
of common shares
outstanding.................. 29,063 28,013 4 Issuances under
the Dividend
Reinvestment and
Stock Purchase
Plan and other
plans
</TABLE>
* Also see segment discussions which follow.
14
<PAGE>
<TABLE>
<CAPTION>
Six months ended
June 30,
(in thousands, except per ---------------------- % Primary reason(s) for
share amounts) 1995 1994 change significant change*
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Revenues..................... $626,171 $549,598 14 Increase for all segments
Operating income............. 90,379 76,359 18 Increase for the electric utility segment
Net income................... 36,727 29,420 25 Higher operating income and lower effective tax rate, partly
offset by higher interest expense due to higher average
borrowings
Earnings per common share.... 1.27 1.05 21 See explanation for "net income," partly offset by an
increase in shares outstanding
Weighted average number
of common shares
outstanding.................. 28,919 27,892 4 Issuances under the Dividend Reinvestment and Stock Purchase
Plan and other plans
</TABLE>
* Also see segment discussions which follow.
Following is a general discussion of revenues, expenses and operating income by
business segment.
<TABLE>
<CAPTION>
ELECTRIC UTILITY
- ----------------
Three months ended
June 30,
(in thousands, except per ---------------------- % Primary reason(s) for
barrel amounts) 1995 1994 change significant change
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Revenues..................... $244,506 $219,411 11 Higher rate relief ($10 million), higher fuel oil prices
($10 million) which are passed on to customers and a 3.0%
increase in KWH sales ($5 million)
Expenses
Fuel oil.................. 48,816 41,462 18 Higher fuel oil prices
Purchased power........... 70,890 69,294 2 More KWHs purchased
Other..................... 86,501 74,838 16 Higher other operation and maintenance expense including
the increase in postretirement benefits other than pensions
(PBOP) expense, depreciation expense and taxes, other than
income taxes
Operating income............. 38,299 33,817 13 Higher rate relief and a 3.0% increase in KWH sales, partly
offset by higher expenses
Net income................... 17,540 15,188 15 Higher operating income and higher AFUDC, partly offset by
higher interest expense
Fuel oil price per barrel.... 20.56 17.52 17
</TABLE>
15
<PAGE>
<TABLE>
<CAPTION>
Six months ended
June 30,
(in thousands, except per ---------------------- % Primary reason(s) for
barrel amounts) 1995 1994 change significant change
- ------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Revenues....................... $477,027 $420,717 13 Higher rate
relief ($30
million), higher
fuel oil prices
($20 million)
which are passed
on to customers
and a 2.1%
increase in KWH
sales ($10
million) due
primarily to an
increase in load
and warmer weather
Expenses
Fuel oil.................... 97,293 80,080 21 Higher fuel oil
prices and more
KWHs generated
Purchased power............. 134,743 132,280 2 Higher purchased
energy prices
Other....................... 171,279 150,216 14 Higher other
operation and
maintenance
expense including
the increase in
PBOP expense,
depreciation
expense and
taxes, other than
income taxes
Operating income............... 73,712 58,141 27 Higher rate
relief and a 2.1%
increase in KWH
sales, partly
offset by higher
expenses
Net income..................... 33,340 24,464 36 Higher operating
income and higher
AFUDC, partly
offset by higher
interest expense
Fuel oil price per barrel...... 20.19 16.93 19
</TABLE>
There have been a number of rate changes for HECO and its subsidiaries in 1994
and 1995. Among the most significant increases were HECO's interim rate
increases and the rate increase for PBOP. HECO received interim rate relief on
April 1, 1994 for test year 1994. HECO's first quarter 1994 results did not
include interim rate relief. For test year 1995, HECO received interim rate
relief on January 1, 1995. The PUC's decision allowing recovery of PBOP costs
was also effective on January 1, 1995. Thus, consolidated revenues for the first
half of 1995 included approximately $30 million more rate relief than the first
half of 1994.
MAJOR CUSTOMERS
Approximately 10% of consolidated operating revenues of HECO and its
subsidiaries represents the sale of electricity to various federal government
agencies in 1994. One of HECO's large customers, the Naval Base at Barbers
Point, Oahu, is expected to be closed within the next few years. However, HECO
anticipates that the base closure will result in little, if any, loss in
aggregate KWH sales, as the Navy will continue to occupy portions of Barbers
Point and much of the surplus facilities and land currently not utilized by the
Navy will probably be occupied by state agencies.
The Navy is currently conducting preliminary self-/co-generation feasibility
studies for the Pearl Harbor Naval Base and the Marine Corps Base Hawaii. The
studies were initiated to investigate cost reduction opportunities and provide
the Navy with information for use in evaluating HECO proposals for a long-term
exclusive service contract. HECO is working with the Navy to develop a long-term
service arrangement that is beneficial to both parties.
16
<PAGE>
On March 8, 1994, President Clinton signed an Executive Order which mandates
that each federal agency develop and implement a program with the intent of
reducing energy consumption by 30% by the year 2005 to the extent that these
measures are cost-effective. The 30% reductions will be measured relative to the
agency's 1985 energy use. HECO is working with various Department of Defense
installations to implement demand-side management programs which will help them
achieve their energy reduction objectives. Some Department of Defense
installations may sign a Basic Ordering Agreement with HECO under which HECO
would finance and install energy conservation projects for the Department of
Defense. Neither HEI nor HECO management can predict with certainty the impact
of President Clinton's Executive Order on the Company's or HECO and
subsidiaries' future results of operations.
REGULATION OF ELECTRIC UTILITY RATES
The PUC has broad discretion in its regulation of the rates charged by HEI's
electric utility subsidiaries and in other matters. Any adverse decision by the
PUC concerning the level or method of determining electric utility rates, the
authorized returns on equity or other matters, or any prolonged delay in
rendering a decision in a rate or other proceeding, could have a material
adverse effect on the Company's financial condition and results of operations.
Upon a showing of probable entitlement, the PUC is required to issue an interim
decision in a rate case within 10 months from the date of filing a completed
application if the evidentiary hearing is completed (subject to extension for 30
days if the evidentiary hearing is not completed). There is no time limit for
rendering a final decision. Interim rate increases are subject to refund with
interest, pending the final outcome of the case.
Pending rate requests
- ---------------------
. In December 1993, HECO applied to the PUC for permission to increase electric
rates, based on a 1995 test year. The requested increase, as subsequently
revised, represented an increase of approximately $28.2 million in annual
revenues over revenues from permanent rates in effect at the time of the revised
filing, and was based on a 13.25% return on average common equity. The revised
requested increase was needed to cover rising operating costs and costs of new
capital projects to maintain and improve service reliability. In December 1994,
HECO received an interim decision and order authorizing an increase of $13.2
million, or 1.9%, in annual revenues, based on a 12.6% return on average common
equity. Approximately $10.6 million and $1.4 million of the interim increase
took effect on January 1, 1995 and May 1, 1995, respectively.
. In March 1995, HELCO applied to the PUC for permission to increase electric
rates to provide $27 million in additional annual revenues (excluding the effect
of the potential imposition on HELCO of real property taxes), which represents
an 18.7% increase over current rates, based on a 1996 test year and a 13.5%
return on average common equity.
. In February 1995, MECO applied to the PUC for permission to increase electric
rates to provide $23 million in annual revenues, which represents a 17.4%
increase over current rates, based on a 1996 test year and a 13.5% return on
average common equity.
Management cannot predict with certainty when decisions in pending or future
rate cases will be rendered or the amount of any interim or final rate increase
that will be granted.
Self Insured Property Damage Reserve
- ------------------------------------
In March 1995, the PUC opened a generic docket to investigate whether the public
utilities in the State of Hawaii should be allowed to establish self-insured
property damage reserves to cover the cost of damage to their facilities and
equipment caused by catastrophic natural disasters. HECO's overhead transmission
and distribution system is susceptible to wind damage, and its underground
system is susceptible to earthquake and flood damage. The overhead and
underground transmission and distribution systems have a replacement value in
excess of $1 billion and are uninsured because the amount of transmission and
distribution system insurance available is limited and the premiums are
extremely high. Hearings on this docket are scheduled for August 1996.
17
<PAGE>
SAVINGS BANK
- ------------
<TABLE>
<CAPTION>
Three months ended
June 30,
-------------------- %
(in thousands) 1995 1994 change Primary reason(s) for significant change
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Revenues...................... $ 61,605 $ 52,311 18 Higher interest income as a result of higher average
mortgage-backed securities balance and yield, partly offset by
lower average loans receivable balance
Operating income.............. 9,843 10,675 (8) Lower net interest income due to lower interest rate spread
Net income.................... 5,704 6,218 (8) Lower operating income
Interest rate spread.......... 2.88% 3.76% 5 basis points increase in the weighted average yield on
interest-earning assets and 93 basis points increase in the
weighted average rate on interest-bearing liabilities
<CAPTION>
Six months ended
June 30,
-------------------- %
(in thousands) 1995 1994 change Primary reason(s) for significant change
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Revenues...................... $122,322 $102,395 19 Higher interest income as a result of higher average
mortgage-backed securities balance and yield
Operating income.............. 20,068 21,295 (6) Lower net interest income due to lower interest rate spread and
higher compensation and employee benefits expenses
Net income.................... 11,653 12,426 (6) Lower operating income
Interest rate spread.......... 2.98% 3.79% 4 basis points increase in the weighted average yield on
interest-earning assets and 85 basis points increase in the
weighted average rate on interest-bearing liabilities
</TABLE>
In 1994, the federal funds rate, which is the rate charged by banks for
overnight loans to each other and which has a significant influence on consumer
rates, increased 250 basis points to 5.5%. In the first six months of 1995, the
federal funds rate increased 50 basis points to 6.0%. In July 1995, the federal
funds rate dropped 25 basis points to 5.75%.
The demand for mortgage loans has decreased due to the slow real estate market
in Hawaii.
Another trend has been the outflow of deposits partly due to competition from
money market funds. In the first six months of 1995, there was a savings outflow
of $4 million, offset by interest credited of $38 million. In 1994, for funding
loans and purchasing mortgage-backed securities, ASB turned to higher cost
advances from the Federal Home Loan Bank and securities sold under agreements to
repurchase. The use of higher cost sources of funds puts downward pressure on
ASB's interest rate spread.
18
<PAGE>
The decrease in interest rate spread can also be attributed to the changing
interest rate environment. During 1994 and the first half of 1995, rising
interest rates caused the cost of interest-bearing liabilities to increase.
However, the average yield on interest-earning assets for 1994 decreased 48
basis points compared to 1993 due in part to 1993's refinancings and the lag in
the repricing of adjustable loans and mortgage-backed securities. The average
yield for the first half of 1995 increased only 4 basis points over the first
half of 1994 as the repricing of interest-earning assets lagged the repricing of
interest-bearing liabilities. In the future, ASB's cost of interest-bearing
liabilities may further increase, which may result in a decreased interest rate
spread and lower net interest income. If interest rates stabilize, however,
ASB's spread is expected to improve as adjustable-rate mortgages reprice to
market levels.
OTHER
- -----
<TABLE>
<CAPTION>
Three months ended
June 30,
-------------------- %
(in thousands) 1995 1994 change Primary reason(s) for significant change
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Revenues..................... $13,786 $12,834 7 Freight transportation subsidiaries' higher general freight
revenues (due to YB's 6% rate increase effective December 15,
1994 and 2.66% rate increase effective January 1, 1995 to
recover PBOP costs) and higher interstate revenues and contract
tows
Operating loss............... (2,072) (1,537) (35) Real estate activity losses and the start-up costs of HEIPC
<CAPTION>
Six months ended
June 30,
-------------------- %
(in thousands) 1995 1994 change Primary reason(s) for significant change
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Revenues..................... $26,822 $26,486 1 Freight transportation subsidiaries' higher general freight
revenues (due to YB's 6% rate increase effective December 15,
1994 and 2.66% rate increase effective January 1, 1995 to
recover PBOP costs) and higher interstate revenues and contract
tows, partly offset by MPC's lower unit sales (22 units closed
in 1995 vs. 41 units in 1994)
Operating loss............... (3,401) (3,077) (11) Real estate activity losses and the startup costs of HEIPC
</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;
PECS, which is an energy service company with no operations to date; HEIPC,
which is a company formed in March 1995 to pursue independent power projects in
Asia and the Pacific and which may also pursue energy conservation projects in
place of PECS; HEI and HEIDI, which are holding companies; and eliminations of
intercompany transactions.
REAL ESTATE
In 1994 and the first six months of 1995, MPC's real estate development
activities were adversely impacted by economic conditions. The real estate
market experienced slowdowns due to the weakness in Hawaii's economy. It is not
expected that there will be significant growth in Hawaii's economy or a rebound
in Hawaii's real estate market in the near term, although mortgage interest
rates recently declined. MPC's present focus is to reduce its current investment
in real estate development assets and increase cash flow by continuing the
development and sales of its existing projects. There are currently
19
<PAGE>
no plans to invest in new projects. For further information on MPC, see note (4)
in HEI's "Notes to consolidated financial statements."
OTHER
In 1995, HEIPC and its joint venture partners submitted bids on two foreign
independent power projects. To date, the bids have not been awarded. It is
anticipated that future independent power projects will be financed largely with
project debt.
DISCONTINUED OPERATIONS
- -----------------------
See note (7) in HEI's "Notes to consolidated financial statements" for
information on the discontinued operations of HIG.
ACCOUNTING CHANGES
- ------------------
For discussions of SFAS No. 121 "Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to Be Disposed Of," see note (6) in HEI's
"Notes to consolidated financial statements" and note (4) in HECO's "Notes to
consolidated financial statements." For a discussion of SFAS No. 122,
"Accounting for Mortgage Servicing Rights," see note (6) in HEI's "Notes to
consolidated financial statements."
FINANCIAL CONDITION
LIQUIDITY AND CAPITAL RESOURCES
- -------------------------------
The Company and consolidated HECO believe that their ability to generate cash,
both internally from operations and externally from debt and equity issues, is
adequate to maintain sufficient liquidity to fund their construction programs
and to cover debt retirements and other cash requirements in the foreseeable
future.
The consolidated capital structure of HEI was as follows:
<TABLE>
<CAPTION>
(in millions) June 30, 1995 December 31, 1994
- ------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Short-term borrowings.......... $ 166 10% $ 137 8%
Long-term debt................. 753 44 718 44
Preferred stock of electric
utility subsidiaries.......... 92 5 93 6
Common stock equity............ 704 41 682 42
------ --- ------ ---
$1,715 100% $1,630 100%
====== === ====== ===
</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.
As of August 1, 1995, Standard & Poor's (S&P), Moody's Investors Service's
(Moody's) and Duff & Phelps Credit Rating Co.'s (Duff & Phelps) ratings of HEI's
and HECO's securities were as follows:
<TABLE>
<CAPTION>
S&P Moody's Duff & Phelps
- -------------------------------------------------------------------------
<S> <C> <C> <C>
HEI
- ---
Medium-term notes.................. BBB Baa2 BBB+
Commercial paper................... A-2 P-2 Duff 2
Outlook............................ Positive n/a n/a
HECO
- ----
First mortgage bonds............... BBB+ A3 A
Unsecured notes.................... BBB+ Baa1 A-
Cumulative preferred stock......... BBB baa1 BBB+
Commercial paper................... A-2 P-2 Duff 1-
Outlook............................ Positive n/a n/a
</TABLE>
n/a Not applicable.
The above ratings are not recommendations to buy, sell or hold any securities,
and such ratings may be subject to revision or withdrawal at any time by the
rating agencies.
20
<PAGE>
In May 1995, S&P raised HECO's unsecured notes rating to "BBB+" from the
previous rating of "BBB." S&P announced that it had redefined and codified its
criteria for distinguishing senior and junior issues of a corporate borrower and
changed the ratings of issues of about 50 entities. S&P said the rating changes
in no way reflect any reassessment of the issuers' fundamental credit quality.
In June 1995, S&P revised its rating outlook on HEI's and HECO's ratings to
"positive" from "stable." In a press release, S&P said "[t]he outlook change
reflects several positive trends, including diminishing construction
expenditures in nearby years, continuing regulatory support, improved
reliability, higher sales volumes, and signs of a modest recovery in Hawaii's
economy, as well as expectations for gradual financial improvement."
Neither HEI nor HECO management can predict with certainty future rating agency
actions or their effects on the future cost of capital to HEI or HECO.
For the first six months of 1995, net cash provided by operating activities was
$52 million. Net cash used in investing activities was $203 million, largely due
to ASB's loan originations and consolidated HECO's capital expenditures. Net
cash provided by financing activities was $143 million, due primarily to a net
increase in securities sold under agreements to repurchase, long-term debt,
deposit liabilities and short-term borrowings, partly offset by a net decrease
in advances from Federal Home Loan Bank and by common stock dividends.
Following is a discussion of the liquidity and capital resources of HEI's
largest segments.
ELECTRIC UTILITY
- ----------------
HECO's consolidated capital structure was as follows:
<TABLE>
<CAPTION>
(in millions) June 30, 1995 December 31, 1994
- ---------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Short-term borrowings from
nonaffiliates and affiliate...... $ 139 10% $ 118 9%
Long-term debt.................... 527 37 489 37
Preferred stock................... 92 7 93 7
Common stock equity............... 650 46 634 47
------ --- ------ ---
$1,408 100% $1,334 100%
====== === ====== ===
</TABLE>
Operating activities provided $46 million in net cash during the first six
months of 1995. Investing activities used cash of $89 million for capital
expenditures net of contributions in aid of construction. Financing activities
provided cash of $34 million primarily from net increases in long-term debt and
short-term borrowings, offset by common and preferred dividends.
In January 1995, the Department of Budget and Finance of the State of Hawaii
issued tax-exempt special purpose revenue bonds in the principal amount of $47
million, with a maturity of 30 years and a fixed coupon interest rate of 6.60%,
and loaned the proceeds from the sale to HECO, HELCO and MECO. The bonds were
issued at a discount, resulting in a yield of approximately 6.75%. As of June
30, 1995, an additional $170 million of revenue bonds had been authorized by the
Hawaii Legislature for issuance prior to the end of 1997.
SAVINGS BANK
- ------------
<TABLE>
<CAPTION>
June 30, December 31, %
(in millions) 1995 1994 change
- -------------------------------------------------------------------------------------
<S> <C> <C> <C>
Assets......................................... $3,230 $3,116 4
Loans receivable............................... 1,694 1,824 (7)
Mortgage-backed securities..................... 1,308 1,067 23
Deposit liabilities............................ 2,163 2,129 2
Securities sold under agreements to repurchase. 279 123 127
Advances from Federal Home Loan Bank........... 529 616 (14)
</TABLE>
At March 31, 1995, ASB was the fourth largest financial institution in the state
based on total assets of $3.2 billion and the third largest financial
institution based on deposits of $2.1 billion. The 23% increase in mortgage-
backed securities in the first six months of 1995 was primarily due to the
securitization of $223 million of loans receivable. Under OTS rules, these
securitized loans (i.e., Federal National Mortgage Association mortgage-backed
securities) require less capital than loans receivable. Thus, ASB has
securitized loans to support its recent growth.
21
<PAGE>
For the first six months of 1995, cash used in ASB's investing activities was
$110 million, due largely to the origination of loans receivable and purchase of
mortgage-backed securities, partly offset by principal repayments. Cash provided
by financing activities was $94 million as a result of a net increase of $154
million in securities sold under agreements to repurchase and a $34 million
increase in deposit liabilities, partly offset by a net decrease of $88 million
in advances from the Federal Home Loan Bank of Seattle and by common stock
dividends of $7 million.
As of June 30, 1995, ASB was in full compliance with the OTS minimum capital
requirements (noted in parenthesis) with a tangible capital ratio of 5.0%
(1.5%), a core capital ratio 5.2% (3.0%) and a risk-based capital ratio 11.9%
(8.0%).
The OTS has adopted a rule adding an interest rate risk (IRR) component to the
existing risk-based capital requirement effective January 1, 1994. The OTS,
however, provided a waiver of the IRR capital deduction until it can finalize an
appeals process. Institutions with an "above normal" level of IRR exposure will
be required to deduct an amount from total capital and may be required to hold
additional capital. As of June 30, 1995, ASB would have been required to deduct
$9.1 million from total capital, but not required to hold additional capital
because ASB's risk-based capital ratio, adjusted for the IRR component, would
have been 11.3%, still meeting capital requirements and "well-capitalized"
levels.
Federal Deposit Insurance Corporation regulations restrict the ability of
financial institutions that are not "well-capitalized" to offer interest rates
on deposits that are significantly higher than the rates offered by competing
institutions. As of June 30, 1995, ASB was "well-capitalized" (ratio
requirements noted in parenthesis) with a leverage ratio 5.2% (5.0%), a Tier-1
risk-based ratio 11.4% (6.0%) and a total risk-based ratio 11.9% (10%).
PROPOSED LEGISLATION AFFECTING FINANCIAL INSTITUTIONS
The deposit accounts of ASB and other thrifts are insured by the Savings
Association Insurance Fund (SAIF) administered by the Federal Deposit Insurance
Corporation (FDIC). The deposit accounts of commercial banks are insured by the
Bank Insurance Fund (BIF) administered by the FDIC. In order to capitalize
these funds, thrifts and banks have been paying costs of insurance ranging from
23 cents on every $100 of deposits, for the healthiest of institutions, to 31
cents per $100 of deposits for the riskiest of these institutions. However,
under existing law these assessment rates are to drop when the SAIF and BIF
reach a required 1.25% reserve ratio. It is reported that the BIF has or soon
will reach the required reserve level, but that the SAIF will not do so at
present insurance rates for several years. Accordingly, in the absence of
congressional or regulatory action, it is probable that the deposit insurance
rate that most commercial banks will be paying will be reduced to between 4
cents-5 cents per $100 of deposits, whereas ASB and other thrifts will continue
to pay at the rate of 23 cents or more per $100 of deposits. If such a disparity
in rates is permitted to exist, ASB will be at a disadvantage in competing with
commercial banks.
There have been a number of legislative proposals to address this situation,
including making a one-time or phased-in assessment of thrifts to permit
capitalization of SAIF up to required levels, followed by a merger of the two
funds; eliminating or reducing the disparity in the insurance rates paid by
banks or thrifts if the SAIF is recapitalized through the assessment; and
merging bank and thrift charters. Certain of these proposals, if adopted, could
have a material adverse effect on the Company. For example, if a one-time
assessment of 85 cents for every $100 of deposits is imposed, it is estimated
that ASB would be assessed approximately $18 million on a pre-tax basis ($11
million after tax), based on ASB's deposit liabilities as of June 30, 1995. If
thrift and bank charters are merged, HEI and its other subsidiaries might become
subject to the restrictions on the permissible activities of a bank holding
company. This could result in a need to divest ASB, unless HEI's ownership of
ASB is "grandfathered" (i.e., allowed) since industrial companies were
encouraged by the federal government to purchase thrifts at one time.
Discussions on these proposals are still in a preliminary stage. Management
cannot predict which of these proposals, if any, might ultimately be adopted.
22
<PAGE>
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
- --------------------------
There are no significant 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
- --------------------------
A. Puna Geothermal Venture (PGV)
HELCO has a power purchase agreement with PGV for 25 MW of firm capacity. HELCO
is currently negotiating with PGV for an additional 5 MW of firm capacity,
projected to be available in 1996.
B. Ratio of earnings to fixed charges
The following tables set forth the ratio of earnings to fixed charges for HEI
and its subsidiaries for the periods indicated:
RATIO OF EARNINGS TO FIXED CHARGES EXCLUDING INTEREST ON ASB DEPOSITS
<TABLE>
<CAPTION>
Six months Years Ended December 31,
ended ---------------------------------------------------
June 30, 1995 1994 1993 1992 1991 1990
- ------------- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
1.93 2.22 2.25 2.08 1.99 1.76
==== ==== ==== ==== ==== ====
</TABLE>
RATIO OF EARNINGS TO FIXED CHARGES INCLUDING INTEREST ON ASB DEPOSITS
<TABLE>
<CAPTION>
Six months Years Ended December 31,
ended ---------------------------------------------------
June 30, 1995 1994 1993 1992 1991 1990
- ------------- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
1.56 1.69 1.65 1.50 1.46 1.39
==== ==== ==== ==== ==== ====
</TABLE>
For purposes of calculating the ratio of earnings to fixed charges, "earnings"
represent the sum of (i) pretax income from continuing operations (excluding
undistributed net income or net loss from less than fifty-percent-owned persons)
and (ii) fixed charges (as hereinafter defined, but excluding capitalized
interest). "Fixed charges" are calculated both excluding and including interest
on ASB's deposits during the applicable periods and represent the sum of (i)
interest, whether capitalized or expensed, incurred by HEI and its subsidiaries
plus their proportionate share of interest on debt to outsiders incurred by
fifty-percent-owned persons, but excluding interest on nonrecourse debt from
leveraged leases which is not included in interest expense in HEI's consolidated
statements of income, (ii) amortization of debt expense and discount or premium
related to any indebtedness, whether capitalized or expensed, (iii) the interest
factor in rental expense and (iv) the preferred stock dividend requirements of
HEI's subsidiaries, increased to an amount representing the pretax earnings
required to cover such dividend requirements.
The following table sets forth the ratio of earnings to fixed charges for HECO
and its subsidiaries for the periods indicated:
RATIO OF EARNINGS TO FIXED CHARGES
<TABLE>
<CAPTION>
Six months Years Ended December 31,
ended ---------------------------------------------------
June 30, 1995 1994 1993 1992 1991 1990
- ------------- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
3.34 3.47 3.25 3.03 2.82 2.99
==== ==== ==== ==== ==== ====
</TABLE>
23
<PAGE>
For purposes of calculating the ratio of earnings to fixed charges, "earnings"
represent the sum of (i) pretax income before preferred stock dividends of HECO
and (ii) fixed charges (as hereinafter defined, but excluding the allowance for
borrowed funds used during construction). "Fixed charges" represent the sum of
(i) interest, whether capitalized or expensed, incurred by HECO and its
subsidiaries, (ii) amortization of debt expense and discount or premium related
to any indebtedness, whether capitalized or expensed, (iii) the interest factor
in rental expense and (iv) the preferred stock dividend requirements of HELCO
and MECO, increased to an amount representing the pretax earnings required to
cover such dividend requirements.
<TABLE>
<CAPTION>
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
- -----------------------------------------
(a) EXHIBITS
<S> <C>
HEI Hawaiian Electric Industries, Inc. and
Exhibit 12(a) subsidiaries, Computation of ratio of earnings
to fixed charges, six months ended June 30, 1995
and 1994
HECO Hawaiian Electric Company, Inc. and
Exhibit 12(b) subsidiaries, Computation of ratio of earnings
to fixed charges, six months ended June 30, 1995
and 1994
HEI Hawaiian Electric Industries, Inc. and
Exhibit 27(a) subsidiaries, Financial Data Schedule,
June 30, 1995 and six months ended June 30, 1995
HECO Hawaiian Electric Company, Inc. and
Exhibit 27(b) subsidiaries, Financial Data Schedule,
June 30, 1995 and six months ended June 30, 1995
</TABLE>
(b) REPORTS ON FORM 8-K
During the quarter, no Current Report, Form 8-K, was filed with the SEC.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrants have duly caused this report to be signed on their behalf by the
undersigned, thereunto duly authorized. The signature of the undersigned
companies shall be deemed to relate only to matters having reference to such
companies and any subsidiaries thereof.
HAWAIIAN ELECTRIC INDUSTRIES, INC. HAWAIIAN ELECTRIC COMPANY, INC.
(Registrant) (Registrant)
By /s/ Robert F. Mougeot By /s/ Paul Oyer
----------------------------------- -----------------------------------
Robert F. Mougeot Paul Oyer
Financial Vice President and Financial Vice President and
Chief Financial Officer Treasurer
(Principal Financial Officer of HEI) (Principal Financial Officer of HECO)
Date: August 2, 1995 Date: August 2, 1995
24
<PAGE>
HEI Exhibit 12(a)
-----------------
Hawaiian Electric Industries, Inc. and subsidiaries
COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES
(unaudited)
<TABLE>
<CAPTION>
Six months ended June 30,
--------------------------------------------
(dollars in thousands) 1995 (1) 1995 (2) 1994 (1) 1994 (2)
- ---------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
FIXED CHARGES
Total interest charges
The Company (3)...................... $ 56,505 $ 99,038 $ 37,341 $ 74,508
Proportionate share of fifty-percent-
owned persons....................... 461 461 171 171
Interest component of rentals........... 1,939 1,939 1,812 1,812
Pretax preferred stock dividend
requirements of subsidiaries........... 5,799 5,799 6,101 6,101
-------- -------- -------- --------
TOTAL FIXED CHARGES..................... $ 64,704 $107,237 $ 45,425 $ 82,592
======== ======== ======== ========
EARNINGS
Pretax income........................... $ 63,945 $ 63,945 $ 52,415 $ 52,415
Fixed charges, as shown................. 64,704 107,237 45,425 82,592
Interest capitalized
The Company.......................... (3,102) (3,102) (2,199) (2,199)
Proportionate share of fifty-percent-
owned persons....................... (461) (461) (171) (171)
-------- -------- -------- --------
EARNINGS AVAILABLE FOR FIXED CHARGES.... $125,086 $167,619 $ 95,470 $132,637
======== ======== ======== ========
RATIO OF EARNINGS TO FIXED CHARGES...... 1.93 1.56 2.10 1.61
======== ======== ======== ========
</TABLE>
(1) Excluding interest on ASB deposits.
(2) Including interest on ASB deposits.
(3) Total interest charges exclude interest on nonrecourse debt from leveraged
leases which is not included in interest expense in HEI's consolidated
statement of income.
<PAGE>
HECO Exhibit 12(b)
------------------
Hawaiian Electric Company, Inc. and subsidiaries
COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES
(unaudited)
<TABLE>
<CAPTION>
Six months ended
June 30,
-----------------
(dollars in thousands) 1995 1994
- -------------------------------------------------------------
<S> <C> <C>
FIXED CHARGES
Total interest charges................... $21,351 $18,170
Interest component of rentals............ 330 425
Pretax preferred stock dividend
requirements of subsidiaries............ 2,252 2,336
------- -------
TOTAL FIXED CHARGES...................... $23,933 $20,931
======= =======
EARNINGS
Income before preferred stock dividends
of HECO................................. $35,413 $26,630
Income taxes (see note below)............ 23,054 17,773
Fixed charges, as shown.................. 23,933 20,931
AFUDC for borrowed funds................. (2,505) (1,816)
------- -------
EARNINGS AVAILABLE FOR FIXED CHARGES..... $79,895 $63,518
======= =======
RATIO OF EARNINGS TO FIXED CHARGES....... 3.34 3.03
======= =======
Note:
Income taxes are comprised of the
following:
Expense relating to operating
income for regulated purposes.......... $23,270 $17,830
Benefit relating to nonoperating
loss................................... (216) (57)
------- -------
$23,054 $17,773
======= =======
</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
June 30, 1995 and consolidated statement of income for the six months ended June
30, 1995 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> 6-MOS
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-START> JAN-01-1995
<PERIOD-END> JUN-30-1995
<CASH> 79,435
<SECURITIES> 1,341,741
<RECEIVABLES> 142,713
<ALLOWANCES> 0
<INVENTORY> 38,034
<CURRENT-ASSETS> 0
<PP&E> 2,537,805
<DEPRECIATION> 794,723
<TOTAL-ASSETS> 5,356,632
<CURRENT-LIABILITIES> 0
<BONDS> 753,084
<COMMON> 566,015
43,290
48,293
<OTHER-SE> 138,462
<TOTAL-LIABILITY-AND-EQUITY> 5,356,632
<SALES> 0
<TOTAL-REVENUES> 626,171
<CGS> 0
<TOTAL-COSTS> 535,792
<OTHER-EXPENSES> (4,033)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 30,467
<INCOME-PRETAX> 63,945
<INCOME-TAX> 27,218
<INCOME-CONTINUING> 36,727
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 36,727
<EPS-PRIMARY> 1.27
<EPS-DILUTED> 1.27
</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 JUNE
30, 1995 AND CONSOLIDATED STATEMENT OF INCOME AND CONSOLIDATED STATEMENT OF CASH
FLOWS FOR THE SIX MONTHS ENDED JUNE 30, 1995 AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<CIK> 0000046207
<NAME> HAWAIIAN ELECTRIC CO., INC.
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-START> JAN-01-1995
<PERIOD-END> JUN-30-1995
<BOOK-VALUE> PER-BOOK
<TOTAL-NET-UTILITY-PLANT> 1,653,218
<OTHER-PROPERTY-AND-INVEST> 0
<TOTAL-CURRENT-ASSETS> 156,922
<TOTAL-DEFERRED-CHARGES> 10,315
<OTHER-ASSETS> 127,702
<TOTAL-ASSETS> 1,948,157
<COMMON> 78,766
<CAPITAL-SURPLUS-PAID-IN> 246,660
<RETAINED-EARNINGS> 325,048
<TOTAL-COMMON-STOCKHOLDERS-EQ> 650,474
41,070
48,293
<LONG-TERM-DEBT-NET> 516,927
<SHORT-TERM-NOTES> 14,450
<LONG-TERM-NOTES-PAYABLE> 0
<COMMERCIAL-PAPER-OBLIGATIONS> 124,315
<LONG-TERM-DEBT-CURRENT-PORT> 9,903
2,220
<CAPITAL-LEASE-OBLIGATIONS> 0
<LEASES-CURRENT> 0
<OTHER-ITEMS-CAPITAL-AND-LIAB> 540,505
<TOT-CAPITALIZATION-AND-LIAB> 1,948,157
<GROSS-OPERATING-REVENUE> 473,822
<INCOME-TAX-EXPENSE> 23,270
<OTHER-OPERATING-EXPENSES> 402,841
<TOTAL-OPERATING-EXPENSES> 426,111
<OPERATING-INCOME-LOSS> 47,711
<OTHER-INCOME-NET> 7,932
<INCOME-BEFORE-INTEREST-EXPEN> 55,643
<TOTAL-INTEREST-EXPENSE> 20,230
<NET-INCOME> 35,413
2,073
<EARNINGS-AVAILABLE-FOR-COMM> 33,340
<COMMON-STOCK-DIVIDENDS> 16,827
<TOTAL-INTEREST-ON-BONDS> 35,978
<CASH-FLOW-OPERATIONS> 45,548
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
