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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 8-K
CURRENT REPORT
Pursuant to Section 13 or 15(d) of
The Securities Exchange Act of 1934
Date of Report: March 10, 1997
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Exact Name of Registrant Commission I.R.S. Employer
as Specified in Its Charter File Number Identification No.
- --------------------------- ----------- ------------------
Hawaiian Electric Industries, Inc. 1-8503 99-0208097
Hawaiian Electric Company, Inc. 1-4955 99-0040500
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State of Hawaii
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(State or other jurisdiction of incorporation)
900 Richards Street, Honolulu, Hawaii 96813
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(Address of principal executive offices and zip code)
Registrant's telephone number, including area code:
(808) 543-5662 - Hawaiian Electric Industries, Inc.
(808) 543-7771 - Hawaiian Electric Company, Inc.
None
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(Former name or former address, if changed since last report.)
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ITEM 5. OTHER EVENTS
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HECO's Annual Report to Shareholder. Portions of HECO's Annual Report
-----------------------------------
to Shareholder are filed herewith as HECO Exhibit 13 and incorporated herein by
this reference.
HELCO Power Situation. For recent developments pertaining to the HELCO
---------------------
power situation, see pages 27 to 29 of the enclosed Annual Report to
Shareholder.
PUC Show Cause Order.
--------------------
On March 10, 1997, the Public Utilities Commission of the State of
Hawaii (PUC) issued a show cause order to Hawaiian Electric Company, Inc. (HECO)
requesting information to assist the PUC in determining if it should reduce
HECO's rates and require HECO to refund any excess earnings to its ratepayers.
In the order, the Commission cites that for 1996 HECO recorded a simple
average return on common equity ("ROACE") of 11.93% and a simple average rate of
return on rate base ("ROR") of 9.70% which exceeded the 11.4% ROACE and the
9.16% ROR determined to be reasonable by the PUC in the utility's last rate
case. The Commission also compared HECO's 1994, 1995 and 1996 actual results of
operations (for ratemaking purposes) with the projected results of operations
that the Commission used in approving electric rates in HECO's last two rate
cases. The Commission stated that those results appeared to indicate that it is
unlikely that the ROR experienced by HECO in 1996 will decrease significantly in
the future and that it is therefore appropriate to examine HECO's rate of
return. HECO has until April 7, 1997 to respond to the order.
The revenues recorded by HECO during 1996 were based on rates approved
in a final PUC decision and order in HECO's 1995 test year rate case. The
amount of 1996 net income represented by the differences between the actual
return on common equity of 11.93% and the 11.4% determined reasonable in
December 1995 by the PUC was less than $2.5 million. The amount of 1996 net
income represented by the difference between the actual rate of return on rate
base of 9.70% and the 9.16% determined reasonable in December 1995 by the PUC
was less than $4.5 million. It would be highly unusual if this show cause order
were to result in a refund to customers based on a retroactive calculation.
By contrast, the refund of $10 million of revenues ordered by the PUC in
December of 1995 related to revenues that had been collected under interim rate
orders in which the PUC clearly stated that revenues collected under the interim
orders were subject to refund.
ITEM 7. FINANCIAL STATEMENTS AND EXHIBITS.
(c) EXHIBITS.
HECO Exhibit 13 Pages 2 to 34 and 36 of HECO's 1996 Annual Report to
Stockholder
SIGNATURE
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)
/s/ Robert F. Mougeot /s/ Ernest T. Shiraki
- --------------------------------- --------------------------------------
Robert F. Mougeot Ernest T. Shiraki
Financial Vice President and Controller
Chief Financial Officer of HEI (Principal Accounting Officer of HECO)
(Principal Financial Officer of HEI)
Date: March 10, 1997 Date: March 10, 1997
1
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HECO Exhibit 13
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SELECTED FINANCIAL DATA
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HAWAIIAN ELECTRIC COMPANY, INC. and Subsidiaries
<TABLE>
<CAPTION>
Years ended December 31 1996 1995 1994 1993 1992
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(in thousands)
<S> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA
Operating revenues ...... $1,071,426 $ 981,990 $ 907,308 $ 874,010 $ 776,929
Operating expenses ...... 962,635 879,268 819,996 795,925 699,890
---------- ---------- ---------- ---------- ----------
Operating income ........ 108,791 102,722 87,312 78,085 77,039
Other income ............ 20,675 16,325 14,793 11,556 9,740
---------- ---------- ---------- ---------- ----------
Income before
interest and other
charges ................ 129,466 119,047 102,105 89,641 86,779
Interest and other
charges ................ 44,253 42,024 36,144 33,515 33,101
---------- ---------- ---------- ---------- ----------
Income before
preferred stock
dividends of HECO ...... 85,213 77,023 65,961 56,126 53,678
Preferred stock
dividends of HECO ...... 3,865 4,126 4,316 4,421 4,525
---------- ---------- ---------- ---------- ----------
Net income for common
stock .................. $ 81,348 $ 72,897 $ 61,645 $ 51,705 $ 49,153
========== ========== ========== ========== ==========
At December 31 1996 1995 1994 1993 1992
- -----------------------------------------------------------------------------------------
(dollars in thousands)
BALANCE SHEET DATA
Utility plant ........... $2,674,419 $2,483,005 $2,293,521 $2,102,534 $1,877,404
Accumulated
depreciation ........... (828,917) (762,770) (702,945) (641,230) (583,031)
---------- ---------- ---------- ---------- ----------
Net utility plant ....... $1,845,502 $1,720,235 $1,590,576 $1,461,304 $1,294,373
========== ========== ========== ========== ==========
Total assets ............ $2,165,546 $2,016,283 $1,889,120 $1,703,276 $1,501,330
========== ========== ========== ========== ==========
Capitalization:/1/
Long-term debt .......... $ 602,226 $ 517,209 $ 489,586 $ 484,736 $ 374,835
Preferred stock
subject to mandatory
redemption ............. 38,955 41,750 44,844 46,730 48,920
Preferred stock not
subject to mandatory
redemption ............. 48,293 48,293 48,293 48,293 36,293
Common stock equity ..... 751,311 696,905 633,901 570,663 499,894
---------- ---------- ---------- ---------- ----------
Total capitalization .... $1,440,785 $1,304,157 $1,216,624 $1,150,422 $ 959,942
========== ========== ========== ========== ==========
CAPITAL STRUCTURE RATIOS (%)/2/
Debt .................... 46.5 45.5 45.5 44.1 45.9
Preferred stock ......... 5.5 6.2 7.0 8.0 7.9
Common stock equity ..... 48.0 48.3 47.5 47.9 46.2
- -----------------------------------------------------------------------------------------
</TABLE>
/1/ Includes amounts due within one year and sinking fund requirements.
/2/ Includes amounts due within one year, short-term borrowings from
nonaffiliates and affiliate, and sinking fund requirements.
NOTE: HEI owns all of HECO's common stock. Therefore, per share data is not
meaningful.
2
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
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The following discussion should be read in conjunction with the consolidated
financial statements and accompanying notes.
Except for historical information contained herein, the matters set forth
in Management's Discussion and Analysis of Financial Condition and Results of
Operations are forward-looking statements that involve certain risks and
uncertainties that could cause actual results to differ materially from those
in the forward-looking statements. Potential risks and uncertainties include,
but are not limited to, such factors as the effect of economic conditions,
product demand and market acceptance risks, the impact of competitive products
and pricing, capacity and supply constraints or difficulties, new technological
developments, governmental and regulatory actions, actual purchases under
agreements, the results of financing efforts and the timing and extent of
changes in interest rates. Investors are also directed to consider other risks
and uncertainties discussed in other periodic reports filed by the Company with
the Securities and Exchange Commission.
RESULTS OF OPERATIONS
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EARNINGS
Net income for common stock for 1996 was $81.3 million compared to $72.9
million for 1995 and $61.6 million for 1994. The 1996 net income represents an
11.2% return on the average amount of common stock equity invested in HECO and
its subsidiaries (collectively, the "Company"), compared to returns of 11.0% in
1995 and 10.2% in 1994.
SALES
Consolidated sales of electricity were 8,991 million kilowatthours (KWH)
for 1996, 8,806 million KWH for 1995, and 8,593 million KWH for 1994. The
increase in KWH sales in 1996 reflects Hawaii's gradual economic recovery. The
increases in KWH sales in 1995 and 1994 reflect the effects of a partial
recovery of Hawaii's economy and warmer weather.
OPERATING REVENUES
Operating revenues were $1,071.4 million in 1996, compared to $982.0
million in 1995 and $907.3 million in 1994. The 1996 increase in operating
revenues of $89.4 million, or 9.1%, was due primarily to higher fuel oil prices
which were passed through to customers, higher KWH sales, rate relief granted
by the PUC, and recovery through rates of Integrated Resource Plan (IRP) costs,
including Demand Side Management (DSM) program costs and shareholder
incentives. The rate schedules of the Company include energy cost adjustment
clauses under which electric rates are adjusted for changes in the weighted
average price paid for fuel oil and certain components of purchased power
costs, and the relative amounts of company-generated power and purchased power.
Operating revenues for 1995 increased by $74.7 million, or 8.2%, over 1994
revenues due primarily to interim rate increases granted by the PUC, higher KWH
sales and higher fuel oil prices, which were passed through to customers.
Operating revenues for 1994 increased by $33.3 million, or 3.8%, over 1993
revenues due primarily to interim rate increases granted by the PUC to HECO and
HELCO and higher KWH sales of electricity. The revenue increase was tempered by
lower fuel oil prices, which cost savings were passed through to customers.
3
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MANAGEMENT'S DISCUSSION AND ANALYSIS, continued
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OPERATING EXPENSES
Total operating expenses were $962.6 million in 1996 compared to $879.3
million in 1995 and $820.0 million in 1994. The increase in 1996 was due
primarily to increases in all categories of operating expenses. The increase in
1995 was due to increases in fuel oil, purchased power, other operation,
depreciation and amortization, taxes other than income taxes and income tax
expenses. The increase in 1994 was due to increases in purchased power, other
operation, maintenance, depreciation and amortization, taxes other than income
taxes and income tax expenses, partially offset by lower fuel oil expense.
Fuel oil expense was $250.5 million in 1996 compared to $207.0 million in
1995 and $186.7 million in 1994. The increase in fuel oil expense in both 1996
and 1995 was due primarily to higher fuel oil prices and higher KWH generated.
The decrease in fuel oil expense in 1994 was due primarily to lower fuel oil
prices and fewer KWH generated. In 1996, the Company paid an average of $24.08
per barrel for fuel oil, compared to $20.47 in 1995 and $18.92 in 1994.
Purchased power expense was $286.1 million in 1996 compared to $276.4
million in 1995 and $271.6 million in 1994. The increase in purchased power
expense in 1996 was due primarily to higher fuel prices and higher KWH
purchased. The increase in purchased power expense in both 1995 and 1994 was
due primarily to an increase in capacity and nonfuel purchased power costs paid
to independent power producers (IPPs), and an increase in the number of KWH
purchased, mostly by HECO. Purchased KWH provided approximately 37.3% of the
total energy net generated and purchased in 1996 compared to 37.5% in 1995 and
1994.
Other operation expense totaled $142.7 million in 1996, an increase of $5.4
million over the 1995 amount. The increase was due primarily to higher IRP
related costs, including full scale DSM program costs. In 1995, other operation
expense totaled $137.3 million, an increase of $15.6 million over the 1994
amount. The increase was due primarily to higher administrative and general
employee benefit costs, which included the expense for postretirement benefits
other than pensions (PBOP) required under Statement of Financial Accounting
Standards (SFAS) No. 106, and the write off of a regulatory asset (i.e.
deferred cost) for the 1994 and 1993 costs of postretirement executive life
insurance. In 1994, other operation expense totaled $121.7 million, an increase
of $15.8 million over the 1993 amount. The increase was due primarily to higher
production, transmission and distribution, and administrative and general
expenses, including higher employee benefit costs and the absence in 1994 of
the one-time reduction to 1993 expenses due to the establishment of a
regulatory asset for vacation earned but not yet taken by employees. HEI
charges for general management, administrative and support services totaled
$2.3 million in 1996, $2.5 million in 1995 and $2.4 million in 1994.
Maintenance expense in 1996 of $52.3 million increased $5.1 million from
1995 due primarily to more underground fault repairs on the transmission and
distribution systems on Oahu and higher production maintenance for HELCO and
MECO. In 1995, maintenance expense totaled $47.2 million, a slight increase
from 1994 primarily due to higher production maintenance expense, partially
offset by lower weather related maintenance on the transmission and
distribution systems. In 1994, maintenance expense totaled $46.4 million, a
4.8% increase from 1993 primarily due to the absence in 1994 of the one-time
reduction to 1993 expenses due to the establishment of a regulatory asset for
vacation earned but not yet taken by employees, and increased maintenance on
the transmission and distribution systems, partially offset by lower production
maintenance expenses.
Depreciation and amortization expense was up 8.6% in 1996 to $73.5 million,
up 6.1% in 1995 to $67.6 million and up 14.0% in 1994 to $63.8 million. In all
years, the increases reflect depreciation of the Company's additions to plant
in service
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MANAGEMENT'S DISCUSSION AND ANALYSIS, continued
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in the previous year. Major additions to plant in service in 1995 included
HECO's Waiau-Campbell Industrial Park 138-kilovolt line and MECO's Maalaea-
Naalae 69-kilovolt line. Additions to plant in service in 1994 consisted
primarily of transmission and distribution projects. Major additions to plant
in service in 1993 included HECO's Waiau-Makalapa 138-kilovolt line and MECO's
18-megawatt heat recovery unit and 20-megawatt combustion turbine unit at
Maalaea.
Taxes, other than income taxes, increased by 9.1% in 1996 to $101.4
million, by 8.2% in 1995 to $93.0 million and by 6.4% in 1994 to $85.9 million.
These taxes consist primarily of taxes based on revenues, and the increases in
these taxes reflect the corresponding increases in each year's operating
revenues. In 1994, the increase also reflects an increase in the PUC fee rate
from 0.25% to 0.5%, as a result of legislation by the Hawaii State Legislature.
OPERATING INCOME
Operating income for 1996 increased 5.9% compared to 1995 due in part to
higher KWH sales, rate increases and DSM program related shareholder
incentives, partly offset by increased expenses. Operating income for 1995 and
1994 increased 17.6% and 11.8%, respectively, compared to the prior year due in
part to rate increases and higher KWH sales, partly offset by increased
expenses.
OTHER INCOME
Other income for 1996 totaled $20.7 million, compared to $16.3 million for
1995 and $14.8 million for 1994. The increase in 1996 was due primarily to
higher Allowance for Equity Funds Used During Construction (AFUDC-Equity),
reflecting higher average levels of construction in progress during the year,
and interest income on deferred IRP costs. The increase in 1995 and 1994 was
due primarily to higher AFUDC-Equity.
INTEREST AND OTHER CHARGES
Interest and other charges for 1996 totaled $44.3 million, compared to
$42.0 million for 1995 and $36.1 million for 1994. Interest on long-term debt
increased by $2.6 million in 1996, by $2.7 million in 1995 and by $4.3 million
in 1994. The increase in 1996 was due to interest on drawdowns of tax-exempt
special purpose revenue bond proceeds during 1996, and the full year's interest
on the drawdowns of revenue bond proceeds in 1995. The 1996 increase in
interest on long-term debt was partially offset by lower medium-term note
interest resulting from the retirement of HECO's 5.15% medium-term note of $20
million and MECO's 5.15% medium-term note of $10 million in December 1996.
The increase in interest on long-term debt in 1995 was due to interest on
drawdowns of tax-exempt special purpose revenue bond proceeds during 1995 and
the full year's interest on the drawdowns of revenue bond proceeds. The 1995
increase in interest on long-term debt was partially offset by lower interest
on first mortgage bonds resulting from the early redemptions in February 1995
of HECO's 4.55% Series N mortgage bonds of $11 million, and lower medium-term
note interest resulting from the retirement of HELCO's 4.85% medium-term note
of $10 million in December 1995.
The increase in interest on long-term debt in 1994 was due to interest on
drawdowns of tax-exempt special purpose revenue bond proceeds during 1994 and
the full year's interest on the drawdowns of revenue bond proceeds and the sale
of medium-term notes in 1993. The 1994 increase in interest on long-term debt
was partially offset by lower interest for first mortgage bonds resulting from
the early redemptions in March 1994 of HECO's 9.125% Series X mortgage bonds of
$20 million, HELCO's 8.5% to 10.75% Series I, L, M and N mortgage bonds
totaling
5
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MANAGEMENT'S DISCUSSION AND ANALYSIS, continued
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$12.5 million and MECO's 8.75% to 10.75% Series I, J, K, L and M mortgage bonds
totaling $15.5 million.
Other interest charges of $9.5 million for 1996 were $.5 million higher
than for 1995 due to higher interest on short-term borrowings as a result of
higher borrowing levels during the year, partially offset by lower interest
rates. Other interest charges of $9.0 million for 1995 were $4.3 million higher
than for 1994 due to higher interest on short-term borrowings as a result of
higher borrowing levels during the year and higher interest rates. Other
interest charges of $4.8 million for 1994 were $2.7 million lower than for 1993
due to lower interest on short-term borrowings as a result of lower borrowing
levels during the year, partially offset by higher interest rates.
COMPETITION
The electric utility industry is becoming increasingly competitive
nationally as a result of various factors including product price, service
reliability, new technologies and government actions. Competition in the
generation sector in Hawaii is moderated, however, by the scarcity of
generation sites, various permitting processes and lack of interconnections to
other electric utilities.
IPPs are well established in Hawaii and continue to actively pursue new
projects. Customer self-generation, with or without co-generation, has made
inroads in Hawaii and is a continuing competitive factor. HECO has been able to
compete successfully in this environment by offering customers economic
alternatives that, among other things, employ energy efficient
electrotechnologies such as the heat pump water heater.
On December 30, 1996, the PUC instituted a proceeding to identify and
examine the issues surrounding electric competition and to determine the impact
of competition on the electric utility infrastructure in Hawaii. This is
similar to what commissions in other jurisdictions have done. In its order, the
PUC recognizes that Hawaii's stand-alone island energy systems are different
from the interconnected systems of the contiguous states, but also recognizes
the need to determine how to respond in Hawaii to changes occurring in the
industry. The PUC set forth a preliminary enumeration of the issues, including
feasible forms of competition, the regulatory compact, public interest
benefits, long-term integrated resource planning, appropriate treatment of
potential stranded costs, and the identification of the objectives and the
establishment of a time frame for the introduction of competition in the
electric utility industry. The identified parties to the proceeding are the
Consumer Advocate, HECO, MECO, HELCO and the Kauai Electric Division of
Citizens Utilities Company. Requests to intervene and/or participate in the
proceeding have been submitted to the PUC by 15 organizations, including IPPs,
government agencies and others. The PUC has not set a procedural schedule for
the proceeding, but has indicated that the parties in the docket should use the
collaborative process to compile information, create a discussion forum, and
narrow the issues to be considered in connection with any restructuring of the
electric industry in response to emerging competition.
REGULATION OF ELECTRIC UTILITY RATES
The PUC has broad discretion in its regulation of the rates charged by the
Company and in other matters. Any adverse decision and order (D&O) by the PUC
concerning the level or method of determining electric utility rates, the
authorized returns on equity or other matters, or any prolonged delay in
rendering a D&O in a rate or other proceeding, could have a material adverse
effect on the Company's financial condition and results of operations. Upon a
showing of probable entitlement, the PUC is required to issue an interim D&O in
a rate case
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MANAGEMENT'S DISCUSSION AND ANALYSIS, continued
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within 10 months from the date of filing a completed application if the
evidentiary hearing is completed (subject to extension for 30 days if the
evidentiary hearing is not completed). There is no time limit for rendering a
final D&O. Interim rate increases are subject to refund with interest, pending
the final outcome of the case.
Management cannot predict with certainty when D&Os in pending or future
rate cases will be rendered or the amount of any interim or final rate increase
that may be granted.
RECENT RATE REQUESTS
HECO and its subsidiaries have requested electric rate increases to cover
rising operating costs, the cost of purchased power and the cost of plant and
equipment, including the cost of new capital projects to maintain and improve
service reliability.
Postretirement benefits other than pensions
In November 1994, the PUC issued a D&O that authorized full recovery of
PBOP costs, determined pursuant to SFAS No. 106, effective January 1, 1995. The
D&O also allowed the recovery, over the following 18 years, of the regulatory
assets related to PBOP costs. The costs of postretirement executive life
insurance, however, were subsequently disallowed. See Note 10 in the "Notes to
Consolidated Financial Statements."
HECO
In July 1993, HECO filed a request to increase rates based on a 1994 test
year. HECO requested an 8.6% increase (as revised) over rates in effect at the
time, or $53.8 million in annual revenues, based on a 12.75% return on average
common equity (ROACE). In December 1994, HECO received a final D&O authorizing
a 6.5%, or $40.5 million, increase in annual revenues, effective January 1,
1995 and based on a 12.15% ROACE. The final D&O, together with the PBOP D&O,
resulted in a $50.5 million annual rate increase.
In December 1993, HECO filed a request to increase rates based on a 1995
test year. HECO requested a 4.1% increase (as revised), or $28.2 million in
annual revenues, based on a 13.25% ROACE. In December 1995, HECO received a
final D&O authorizing a 1.3%, or $9.1 million, increase in annual revenues,
based on an 11.4% ROACE. The D&O required a refund to customers because HECO
had previously received four interim increases totaling $18.9 million on an
annualized basis, or $9.8 million more than the amount that was finally
approved. The reduction in rate increase resulted primarily from the lower
ROACE used by the PUC in the final D&O because of declining interest rates
subsequent to the first interim increase, which had been effective January 1,
1995 and had been based on a 12.6% ROACE. The refund amount of $10 million
(representing amounts received under interim rates in excess of final approved
rates, with interest thereon) was accrued in December 1995, and returned to
customers in the first half of 1996. The D&O also did not provide revenue to
cover costs relating to postretirement executive life insurance. HECO and its
subsidiaries wrote off a regulatory asset relating to such costs, resulting in
a 1995 after tax charge of $1.1 million.
HELCO
In November 1993, HELCO filed a request to increase rates 13.4%, or $15.8
million in annual revenues, based on a 1994 test year and a 12.4% ROACE (which
was later increased to 13.1%). In February 1995, HELCO received a final D&O
authorizing an 11.8%, or $13.7 million, increase in annual revenues, based on a
7
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MANAGEMENT'S DISCUSSION AND ANALYSIS, continued
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12.6% ROACE. The final D&O, together with the PBOP D&O, resulted in a $15.5
million annual rate increase.
In March 1995, HELCO filed a request to increase rates based on a 1996 test
year. In February 1996, HELCO revised its requested increase to 6.2%, or $8.9
million in annual revenues, based on a 12.5% ROACE. In March 1996, HELCO
received an interim D&O authorizing a 4.8%, or $6.8 million, increase in annual
revenues, based on an 11.65% ROACE, effective March 4, 1996. A final order is
pending.
MECO
In November 1991, MECO filed a request to increase rates. In January 1993,
MECO revised its requested increase to 10.0%, or $11.4 million in annual
revenues, based on a 13.0% ROACE and a 1993 test year. In August 1994, MECO
received a final D&O authorizing a 7.0%, or $8.1 million, increase in annual
revenues, based on a 12.75% ROACE. The final D&O, together with the PBOP D&O,
resulted in a $10.0 million annual rate increase.
In February 1995, MECO filed a request to increase rates based on a 1996
test year. MECO's final requested increase was 3.8%, or $5.0 million in annual
revenues, based on an 11.5% ROACE. In January 1996, MECO received an interim
D&O authorizing an increase of 2.8%, or $3.7 million in annual revenues, based
on an 11.5% ROACE, effective February 1, 1996. A final order is pending.
In May 1996, MECO filed a request to increase rates based on a 1997 test
year, primarily to recover the costs related to its new generating unit M17.
MECO requested an increase of 13.0%, or $18.9 million in annual revenues, over
rates in effect at the time of filing, based on a 12.9% ROACE. On November 7,
1996, MECO filed a motion with the PUC to approve an agreement between MECO and
the Consumer Advocate which would close the MECO 1997 rate case and would
provide MECO with an increase in annual revenues of $1.5 million over revenues
at currently effective rates, based on an 11.65% ROACE. The stipulated increase
will not become effective unless and until the PUC approves the stipulation.
The primary reason for the agreement between MECO and the Consumer Advocate was
a delay in the expected in-service date for MECO's generating unit M17, from
the second half of 1997 to the first half of 1998, which resulted from delays
in obtaining the necessary air quality Prevention of Significant Deterioration
(PSD) permit from the Department of Health of the State of Hawaii (DOH) and the
U.S. Environmental Protection Agency (EPA). MECO anticipates that it will
obtain in 1997 the PSD permit necessary to place generating unit M17 in service
in 1998, in which event it is likely that MECO will file a request to increase
rates based on a 1998 test year.
Property damage reserve
In March 1995, the PUC opened a generic docket to investigate whether the
public utilities in the State of Hawaii should be allowed to establish property
damage reserves to cover the cost of damage to their facilities and equipment
caused by catastrophic disasters. The Company's overhead transmission and
distribution systems are susceptible to wind and earthquake damage, and their
underground systems are susceptible to earthquake and flood damage. The
overhead and underground transmission and distribution systems (with the
exception of substation buildings and contents) have a replacement value
roughly estimated at approximately $2 billion and are uninsured because the
amount of transmission and distribution system insurance available is limited
and the premiums are extremely high.
HELCO POWER SITUATION
See Note 11 in the "Notes to Consolidated Financial Statements."
8
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MANAGEMENT'S DISCUSSION AND ANALYSIS, continued
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EFFECTS OF INFLATION
Inflation, as measured by the U.S. Consumer Price Index, averaged 2.9% in
1996, 2.8% in 1995, and 2.6% in 1994. Although the rate of inflation over the
past three years has been relatively low compared with the late 1970's and
early 1980's, inflation continues to have an impact on the Company's
operations.
Inflation increases operating costs and the replacement cost of assets. The
Company has significant physical assets and replaces assets at costs which are
much higher than those historically incurred, and requests rate relief as
necessary to maintain adequate earnings. In the past, the PUC has generally
approved rate relief to cover the effects of inflation. In 1996, 1995 and 1994,
the Company received rate increases, in part to cover increases in operating
expenses and construction costs due to inflation.
ACCOUNTING FOR THE EFFECTS OF CERTAIN TYPES OF REGULATION
In accordance with SFAS No. 71, "Accounting for the Effects of Certain
Types of Regulation," the Company's financial statements reflect assets and
costs based on current cost-based rate-making regulations. Management believes
HECO and its subsidiaries' operations currently satisfy the SFAS No. 71
criteria. However, if events or circumstances should change so that those
criteria are no longer satisfied, management believes that a material adverse
effect on the Company's results of operations, financial position, and/or
liquidity would result. See Note 6 in the "Notes to Consolidated Financial
Statements" for further discussion.
ENVIRONMENTAL MATTERS
HECO and its subsidiaries are subject to environmental laws and regulations
which could potentially impact the Company in terms of operating existing
facilities, constructing and operating new facilities and ensuring the proper
cleanup and disposal of hazardous waste and toxic substances. Management
believes that the recovery through rates of most, if not all, of any costs
incurred by HECO and its subsidiaries in complying with these environmental
requirements would be allowed by the PUC. However, as with other costs reviewed
by the PUC in the rate-making process, these costs may not be fully allowed by
the PUC for rate-making purposes. Based on information available to the
Company, management is not aware of any contingent liabilities relating to
environmental matters that would have a material adverse effect on the Company.
For a discussion of an ongoing environmental investigation related to
Honolulu Harbor, see Note 11 in the "Notes to Consolidated Financial
Statements."
ELECTRIC AND MAGNETIC FIELDS
Research is ongoing about the potential adverse health effects from
exposure to electric and magnetic fields (EMF). However, the scientific
community has not yet reached a consensus on the nature of any health effects.
HECO and its subsidiaries are participating in utility industry funded studies
on the subject and are taking steps to reduce EMF, where prudent, in the design
of new transmission and distribution facilities. The Company cannot predict the
impact, if any, the EMF issue may have on the Company in the future.
ACCOUNTING CHANGE
See Note 1 in the "Notes to Consolidated Financial Statements."
LIQUIDITY AND CAPITAL RESOURCES
-------------------------------------------------------------------------------
The Company believes that its ability to generate cash, both internally
from operations and externally from debt and equity issues, is adequate to
maintain sufficient liquidity to fund its construction programs and to cover
debt and other cash requirements in the foreseeable future.
9
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS, continued
-------------------------------------------------------------------------------
Capital expenditures requiring the use of cash, as shown on the
"Consolidated Statements of Cash Flows," totaled approximately $188.2 million
in 1996, of which $84.0 million was attributable to HECO, $35.5 million to
HELCO and $68.7 million to MECO. Approximately 66% of the total 1996 capital
expenditures was for transmission and distribution projects, including MECO's
Maalaea-Lahaina 69 kilovolt line and HECO's Iwilei substation and approximately
34% was for generation and general plant projects, including MECO's Maalaea
combustion turbine and Lanai and Molokai generation expansion and HELCO's
Keahole combustion turbines. Cash contributions in aid of construction received
in 1996 totaled $9.7 million.
In 1996, the Company's investing activities used $177.2 million in cash,
primarily for capital expenditures. Proceeds from the issuance of long-term debt
of $114.9 million provided most of the cash for capital expenditures. Cash
provided from financing activities also included HECO's cash sale of common
stock of $30.0 million to HEI. Financing activities used cash for common and
preferred dividends of $60.9 million and a decrease in short-term borrowings of
$12.8 million. Operating activities provided $142.8 million toward cash
requirements of financing activities and capital expenditures.
The Companies' consolidated requirements for funds in the years 1997
through 2001, including net capital expenditures, long-term debt retirements
and sinking fund requirements, are currently estimated to total $768 million.
HECO's consolidated internal sources, after payment of common stock and
preferred stock dividends, are currently expected to provide approximately 75%
of the $768 million in total requirements, with debt and equity financing
providing the remaining requirements. As of December 31, 1996, an additional
$45 million of revenue bonds was authorized by the Hawaii legislature for
issuance prior to the end of 1997, and an additional $150 million was
authorized for issuance prior to the end of 1999. HECO currently estimates that
it will require approximately $23 million in new common equity, in addition to
retained earnings, over the five-year period 1997 through 2001. The PUC must
approve issuances of long-term securities for HECO, HELCO and MECO.
Capital expenditures include the costs of projects which are required to
meet expected load growth, to improve reliability and to replace and upgrade
existing equipment. Net capital expenditures, for the five-year period 1997
through 2001, are currently estimated to total $711 million. Approximately 65%
of forecast gross capital expenditures, including AFUDC and capital
expenditures funded by third-party cash contributions in aid of construction,
is for transmission and distribution projects, with the remaining 35% primarily
for generation projects. At December 31, 1996, purchase commitments other than
those related to fuel and power purchase contracts amounted to approximately
$47 million, including amounts for construction projects. See Note 11 in the
"Notes to Consolidated Financial Statements" for a discussion of fuel and power
purchase commitments.
For 1997, net capital expenditures are estimated to be $118 million, and
gross capital expenditures are estimated to be $153 million, of which
approximately 63% is for transmission and distribution projects. An estimated
$36 million is planned for new generation projects. Drawdowns of proceeds from
the sale of tax-exempt special purpose revenue bonds, the sale of Cumulative
Quarterly Income Preferred Securities of HECO Capital Trust I and the
generation of funds from internal sources are expected to provide the cash
needed for the net capital expenditures.
Capital expenditure estimates and the timing of construction projects are
reviewed periodically by management and may change significantly as a result of
many considerations, including changes in economic conditions, changes in
forecasts of KWH sales and peak load, the availability of purchased power, the
availability of generating sites and transmission and distribution corridors,
the ability to obtain adequate and timely rate relief, escalation in
construction costs, DSM programs and requirements of environmental and other
regulatory and permitting authorities.
10
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS, continued
-------------------------------------------------------------------------------
As of February 12, 1997, Standard & Poor's (S&P), Moody's Investors Service
(Moody's) and Duff & Phelps Credit Rating Co. (D&P) rated HECO's securities as
follows:
S&P Moody's D&P
-------------------------------------------------------------------------------
First mortgage bonds....................... BBB+ A3 A
Revenue bonds ............................. BBB+ Baa1 A-
Cumulative preferred stock ................ BBB baa1 BBB+
Other unsecured debt ...................... BBB+ Baa1 A-
Commercial paper .......................... A-2 P-2 Duff 1-
-------------------------------------------------------------------------------
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.
The Company's management cannot predict with certainty future rating agency
actions or their effects on the future cost of capital to the Company.
11
<PAGE>
CONSOLIDATED STATEMENTS OF INCOME
- ------------------------------------------------------------------------
HAWAIIAN ELECTRIC COMPANY, INC. and Subsidiaries
<TABLE>
<CAPTION>
Years ended December 31 1996 1995 1994
- --------------------------------------------------------------------------------
(in thousands)
<S> <C> <C> <C>
OPERATING REVENUES ........................... $1,071,426 $981,990 $907,308
---------- -------- --------
OPERATING EXPENSES:
Fuel oil ..................................... 250,544 207,001 186,717
Purchased power .............................. 286,077 276,364 271,636
Other operation .............................. 142,699 137,349 121,740
Maintenance .................................. 52,305 47,225 46,427
Depreciation and amortization ................ 73,453 67,649 63,779
Taxes, other than income taxes ............... 101,387 92,961 85,877
Income taxes ................................. 56,170 50,719 43,820
---------- -------- --------
962,635 879,268 819,996
---------- -------- --------
OPERATING INCOME ............................. 108,791 102,722 87,312
---------- -------- --------
OTHER INCOME:
Allowance for equity funds used during
construction ............................... 11,741 10,202 9,064
Other, net ................................... 8,934 6,123 5,729
---------- -------- --------
20,675 16,325 14,793
---------- -------- --------
INCOME BEFORE INTEREST AND OTHER CHARGES ..... 129,466 119,047 102,105
---------- -------- --------
INTEREST AND OTHER CHARGES:
Interest on long-term debt ................... 36,645 34,088 31,369
Amortization of net bond premium and
expense .................................... 1,302 1,273 1,208
Other interest charges ....................... 9,504 9,016 4,763
Allowance for borrowed funds used during
construction ............................... (5,862) (5,112) (4,043)
Preferred stock dividends of subsidiaries .... 2,664 2,759 2,847
---------- -------- --------
44,253 42,024 36,144
---------- -------- --------
INCOME BEFORE PREFERRED STOCK DIVIDENDS
OF HECO .................................... 85,213 77,023 65,961
Preferred stock dividends of HECO ............ 3,865 4,126 4,316
---------- -------- --------
NET INCOME FOR COMMON STOCK .................. $ 81,348 $ 72,897 $ 61,645
========== ======== ========
</TABLE>
CONSOLIDATED STATEMENTS OF RETAINED EARNINGS
- ------------------------------------------------------------------------
HAWAIIAN ELECTRIC COMPANY, INC. and Subsidiaries
<TABLE>
<CAPTION>
Years ended December 31 1996 1995 1994
- --------------------------------------------------------------------------------
(in thousands)
<S> <C> <C> <C>
RETAINED EARNINGS, BEGINNING OF YEAR ......... $343,425 $308,535 $275,401
Net income for common stock .................. 81,348 72,897 61,645
Common stock dividends ....................... (57,003) (38,007) (28,511)
-------- -------- --------
RETAINED EARNINGS, END OF YEAR ............... $367,770 $343,425 $308,535
======== ======== ========
</TABLE>
See accompanying "Notes to Consolidated Financial Statements."
12
<PAGE>
CONSOLIDATED BALANCE SHEETS
- --------------------------------------------------------------------------------
HAWAIIAN ELECTRIC COMPANY, INC. and Subsidiaries
<TABLE>
<CAPTION>
December 31 1996 1995
- --------------------------------------------------------------------------------
(in thousands)
<S> <C> <C>
ASSETS
UTILITY PLANT, AT COST:
Land ............................................. $ 29,897 $ 27,578
Plant and equipment .............................. 2,446,073 2,263,300
Less accumulated depreciation .................... (828,917) (762,770)
Plant acquisition adjustment, net ................ 614 667
Construction in progress ......................... 197,835 191,460
---------- ----------
NET UTILITY PLANT ........................... 1,845,502 1,720,235
---------- ----------
CURRENT ASSETS:
Cash and equivalents ............................. 823 20
Customer accounts receivable, net ................ 76,578 67,698
Accrued unbilled revenues, net ................... 43,726 43,695
Other accounts receivable, net ................... 4,179 5,355
Fuel oil stock, at average cost .................. 28,490 13,469
Materials and supplies, at average cost .......... 18,942 20,538
Prepayments and other ............................ 3,676 2,297
---------- ----------
TOTAL CURRENT ASSETS ........................ 176,414 153,072
---------- ----------
OTHER ASSETS:
Regulatory assets ................................ 98,380 97,114
Unamortized debt expense ......................... 12,466 10,022
Long-term receivable and other ................... 32,784 35,840
---------- ----------
TOTAL OTHER ASSETS .......................... 143,630 142,976
---------- ----------
$2,165,546 $2,016,283
========== ==========
CAPITALIZATION AND LIABILITIES
CAPITALIZATION (see Consolidated Statements of Capitalization):
Common stock equity .............................. $ 751,311 $ 696,905
Cumulative preferred stock:
Not subject to mandatory redemption ............ 48,293 48,293
Subject to mandatory redemption ................ 36,160 39,955
Long-term debt, net .............................. 589,226 487,306
---------- ----------
TOTAL CAPITALIZATION ........................ 1,424,990 1,272,459
---------- ----------
CURRENT LIABILITIES:
Long-term debt due within one year ............... 13,000 29,903
Preferred stock sinking fund payments ............ 2,795 1,795
Short-term borrowings-nonaffiliates .............. 125,920 131,753
Short-term borrowings-affiliate .................. -- 7,000
Accounts payable ................................. 66,062 48,691
Interest and preferred dividends payable ......... 11,034 9,954
Taxes accrued .................................... 55,586 42,968
Other ............................................ 24,843 37,573
---------- ----------
TOTAL CURRENT LIABILITIES ................... 299,240 309,637
---------- ----------
DEFERRED CREDITS AND OTHER LIABILITIES:
Deferred income taxes ............................ 119,613 116,963
Unamortized tax credits .......................... 47,634 45,935
Other ............................................ 76,264 79,435
---------- ----------
TOTAL DEFERRED CREDITS AND OTHER LIABILITIES. 243,511 242,333
---------- ----------
CONTRIBUTIONS IN AID OF CONSTRUCTION ............. 197,805 191,854
---------- ----------
$2,165,546 $2,016,283
========== ==========
</TABLE>
See accompanying "Notes to Consolidated Financial Statements."
13
<PAGE>
CONSOLIDATED STATEMENTS OF CAPITALIZATION
- --------------------------------------------------------------------------------
HAWAIIAN ELECTRIC COMPANY, INC. and Subsidiaries
<TABLE>
<CAPTION>
December 31 1996 1995
- --------------------------------------------------------------------------------
(dollars in thousands, except per share amounts)
<S> <C> <C>
COMMON STOCK EQUITY:
Common stock of $6 2/3 par value.
Authorized: 50,000,000 shares. Outstanding:
1996, 12,805,843 shares and 1995, 12,302,657 shares... $ 85,387 $ 82,031
Premium on capital stock ............................... 298,154 271,449
Retained earnings ...................................... 367,770 343,425
--------- ---------
COMMON STOCK EQUITY 751,311 696,905
--------- ---------
CUMULATIVE PREFERRED STOCK:
Authorized: 5,000,000 shares of $20 par value and
7,000,000 shares of $100 par value. Outstanding:
1996, 1,764,207 shares and 1995, 1,792,157
shares.
SHARES
OUTSTANDING
PAR DECEMBER 31,
SERIES VALUE 1996
- --------------------------------------------
SERIES NOT SUBJECT TO MANDATORY REDEMPTION:
C-4 1/4% $ 20 (HECO) ........ 150,000 ........ 3,000 3,000
D-5% 20 (HECO) ........ 50,000 ........ 1,000 1,000
E-5% 20 (HECO) ........ 150,000 ........ 3,000 3,000
H-5 1/4% 20 (HECO) ........ 250,000 ........ 5,000 5,000
I-5% 20 (HECO) ........ 89,657 ........ 1,793 1,793
J-4 3/4% 20 (HECO) ........ 250,000 ........ 5,000 5,000
K-4.65% 20 (HECO) ........ 175,000 ........ 3,500 3,500
M-8.05% 100 (HECO) ........ 80,000 ........ 8,000 8,000
A-8 7/8% 100 (HELCO) ....... 30,000 ........ 3,000 3,000
G-7 5/8% 100 (HELCO) ....... 70,000 ........ 7,000 7,000
A-8% 100 (MECO) ........ 20,000 ........ 2,000 2,000
B-8 7/8% 100 (MECO) ........ 10,000 ........ 1,000 1,000
H-7 5/8% 100 (MECO) ........ 50,000 ........ 5,000 5,000
--------- --------- ---------
1,374,657 48,293 48,293
========= --------- ---------
SERIES SUBJECT TO MANDATORY REDEMPTION:
Q-7.68% $100 (HECO) ........ 84,000 ........ 8,400 8,800
R-8.75% 100 (HECO) ........ 170,000 ........ 17,000 19,000
C-9 1/4% 100 (HELCO) ....... 2,000 ........ 200 400
D-12 3/4% 100 (HELCO) ....... 5,500 ........ 550 600
E-12.25% 100 (HELCO) ....... 6,500 ........ 650 700
F-8.5% 100 (HELCO) ....... 60,000 ........ 6,000 6,000
D-8 3/4% 100 (MECO) ........ 9,550 ........ 955 1,050
F-13 3/4% 100 (MECO) ........ 2,000 ........ 200 200
G-8.5% 100 (MECO) ........ 50,000 ........ 5,000 5,000
--------- --------- ---------
389,550 ........ 38,955 41,750
=========
Less sinking fund payments due within one year ..... 2,795 1,795
--------- ---------
36,160 39,955
--------- ---------
CUMULATIVE PREFERRED STOCK .................... 84,453 88,248
--------- ---------
</TABLE>
See accompanying "Notes to Consolidated Financial Statements." (continued)
14
<PAGE>
CONSOLIDATED STATEMENTS OF CAPITALIZATION, continued
- --------------------------------------------------------------------------------
HAWAIIAN ELECTRIC COMPANY, INC. and Subsidiaries
<TABLE>
<CAPTION>
December 31 1996 1995
- --------------------------------------------------------------------------------
(in thousands)
<S> <C> <C>
LONG-TERM DEBT:
First mortgage bonds:
HECO: 5.75%, due 1997 ............................. $ 13,000 $ 13,000
7 5/8%, due 2002 ............................ 10,000 10,000
HELCO: 7 3/4-7 7/8%, due 2002 through 2003 ......... 5,000 5,000
MECO: 7 3/4-7 7/8%, due 2002 through 2003 ......... 7,000 7,000
---------- ----------
Total first mortgage bonds ..................... 35,000 35,000
---------- ----------
Obligations to the State of Hawaii for the repayment
of Special Purpose Revenue Bonds:
HECO, 5 7/8%, series 1996B, due 2026 ............... 14,000 --
HELCO, 5 7/8%, series 1996B, due 2026 .............. 1,000 --
MECO, 5 7/8%, series 1996B, due 2026 ............... 35,000 --
HECO, 6.20%, series 1996A, due 2026 ................ 48,000 --
HELCO, 6.20%, series 1996A, due 2026 ............... 7,000 --
MECO, 6.20%, series 1996A, due 2026 ................ 20,000 --
HECO, 6.60%, series 1995A, due 2025 ................ 40,000 40,000
HELCO, 6.60%, series 1995A, due 2025 ............... 5,000 5,000
MECO, 6.60%, series 1995A, due 2025 ................ 2,000 2,000
HECO, 5.45%, series 1993, due 2023 ................. 50,000 50,000
HELCO, 5.45%, series 1993, due 2023 ................ 20,000 20,000
MECO, 5.45%, series 1993, due 2023 ................. 30,000 30,000
HECO, 6.55%, series 1992, due 2022 ................. 40,000 40,000
HELCO, 6.55%, series 1992, due 2022 ................ 12,000 12,000
MECO, 6.55%, series 1992, due 2022 ................. 8,000 8,000
HECO, 7 3/8%, series 1990C, due 2020 ............... 25,000 25,000
HELCO, 7 3/8%, series 1990C, due 2020 .............. 10,000 10,000
MECO, 7 3/8%, series 1990C, due 2020 ............... 20,000 20,000
HECO, 7.60%, series 1990B, due 2020 ................ 21,000 21,000
HELCO, 7.60%, series 1990B, due 2020 ............... 4,000 4,000
HECO, 7.35%, series 1990A, due 2020 ................ 16,000 16,000
HELCO, 7.35%, series 1990A, due 2020 ............... 3,000 3,000
MECO, 7.35%, series 1990A, due 2020 ................ 1,000 1,000
HECO, 7 5/8%, series 1988, due 2018 ................ 30,000 30,000
HELCO, 7 5/8%, series 1988, due 2018 ............... 11,000 11,000
MECO, 7 5/8%, series 1988, due 2018 ............... 9,000 9,000
HECO, 6 7/8%, refunding series 1987, due 2012 ...... 42,580 42,580
HELCO, 6 7/8%, refunding series 1987, due 2012 ..... 7,200 7,200
MECO, 6 7/8%, refunding series 1987, due 2012 ...... 7,720 7,720
HELCO, 7.20%, series 1984, due 2014 ................ 11,400 11,400
---------- ----------
550,900 425,900
Less funds on deposit with trustees ................ 9,132 943
---------- ----------
Total obligations to the State of Hawaii ...... 541,768 424,957
---------- ----------
Other long-term debt - unsecured:
HECO, 5.15% note, paid in 1996 ..................... -- 20,000
HECO, 5.83% note, due in 1998 ...................... 30,000 30,000
MECO, 5.15% note, paid in 1996 ..................... -- 10,000
---------- ----------
Total other long-term debt - unsecured ........ 30,000 60,000
---------- ----------
Total long-term debt .......................... 606,768 519,957
Less unamortized discount ............................ 4,542 2,748
Less amounts due within one year, net of discount .... 13,000 29,903
---------- ----------
LONG-TERM DEBT, NET............................... 589,226 487,306
---------- ----------
TOTAL CAPITALIZATION............................ $1,424,990 $1,272,459
========== ==========
</TABLE>
See accompanying "Notes to Consolidated Financial Statements."
15
<PAGE>
CONSOLIDATED STATEMENTS OF CASH FLOWS
- --------------------------------------------------------------------------------
HAWAIIAN ELECTRIC COMPANY, INC. and Subsidiaries
<TABLE>
<CAPTION>
Years ended December 31 1996 1995 1994
- ---------------------------------------------------------------------------------------
(in thousands)
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Income before preferred stock dividends of
HECO .......................................... $ 85,213 $ 77,023 $ 65,961
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 ......................... 73,453 67,649 63,779
Other amortization ............................ 9,198 9,389 4,521
Deferred income taxes ......................... 2,690 9,767 855
Tax credits, net .............................. 3,346 2,698 3,271
Allowance for equity funds used during
construction ................................ (11,741) (10,202) (9,064)
Changes in assets and liabilities:
Increase in accounts receivable ............. (7,704) (2,345) (6,696)
Increase in accrued unbilled revenues ....... (31) (5,260) (3,700)
Decrease (increase) in fuel oil stock ....... (15,021) 8,497 (3,778)
Decrease (increase) in materials and
supplies .................................. 1,596 (430) 131
Increase in regulatory assets ............... (418) (4,247) (9,885)
Increase (decrease) in accounts
payable ................................... 17,371 (5,971) 12,854
Increase (decrease) in interest and
preferred dividends payable ................ 1,080 1,379 (1,757)
Other ........................................ (16,257) (9,711) (14,170)
--------- --------- ---------
NET CASH PROVIDED BY OPERATING ACTIVITIES ........ 142,775 138,236 102,322
--------- --------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures ............................. (188,161) (184,689) (186,461)
Contributions in aid of construction ............. 9,674 10,417 15,112
Payments on (issuance of) notes receivable ....... 1,256 (6,825) --
--------- --------- ---------
NET CASH USED IN INVESTING ACTIVITIES ............ (177,231) (181,097) (171,349)
--------- --------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase (decrease) in short-term
borrowings from nonaffiliates and
affiliate with original maturities
of three months or less ........................ (12,833) 20,887 76,938
Proceeds from issuance of long-term debt ......... 114,886 48,544 52,814
Repayment of long-term debt ...................... (30,000) (21,000) (48,027)
Redemption of preferred stock .................... (2,795) (3,094) (1,886)
Preferred stock dividends ........................ (3,865) (4,126) (4,316)
Proceeds from issuance of common stock ........... 30,000 28,000 30,000
Common stock dividends ........................... (57,003) (38,007) (28,511)
Other ............................................ (3,131) 983 787
--------- --------- ---------
NET CASH PROVIDED BY FINANCING ACTIVITIES ........ 35,259 32,187 77,799
--------- --------- ---------
Net increase (decrease) in cash and equivalents .. 803 (10,674) 8,772
CASH AND EQUIVALENTS, BEGINNING OF YEAR .......... 20 10,694 1,922
--------- --------- ---------
CASH AND EQUIVALENTS, END OF YEAR ................ $ 823 $ 20 $ 10,694
========= ========= =========
</TABLE>
See accompanying "Notes to Consolidated Financial Statements."
16
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
HAWAIIAN ELECTRIC COMPANY, INC. and Subsidiaries
- --------------------------------------------------------------------------------
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
- --------------------------------------------------------------------------------
GENERAL
Hawaiian Electric Company, Inc. is engaged in the business of generating,
purchasing, transmitting, distributing and selling electric energy on the island
of Oahu, and through its two subsidiaries, on the islands of Hawaii, Maui, Lanai
and Molokai in the State of Hawaii.
BASIS OF PRESENTATION
The consolidated financial statements have been prepared in conformity with
generally accepted accounting principles (GAAP). In preparing the consolidated
financial statements, management is required to make estimates and assumptions
that affect the reported amounts of assets and liabilities, the disclosure of
contingent assets and liabilities and the reported amounts of revenues and
expenses. Actual results could differ significantly from those estimates.
Material estimates that are particularly susceptible to significant change
relate to the determination of regulatory assets and the amounts reported for
pension and other postretirement benefit obligations. Management believes that
such estimates have been appropriately established in accordance with GAAP.
CONSOLIDATION
The consolidated financial statements include the accounts of Hawaiian
Electric Company, Inc. (HECO) and its wholly owned subsidiaries (collectively,
the "Company"), Maui Electric Company, Limited (MECO) and Hawaii Electric Light
Company, Inc. (HELCO). HECO is a wholly owned subsidiary of Hawaiian Electric
Industries, Inc. (HEI).
All significant intercompany accounts and transactions have been eliminated
in consolidation.
PUBLIC UTILITIES COMMISSION REGULATION
The Company is regulated by the Public Utilities Commission of the State of
Hawaii (PUC) and accounts for the effects of regulation under Statement of
Financial Accounting Standards (SFAS) No. 71, "Accounting for the Effects of
Certain Types of Regulation." As a result, the actions of regulators can affect
the timing of recognition of revenues, expenses, assets and liabilities.
PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment are stated at cost. The cost of plant
constructed by the Company includes applicable engineering, supervision,
administrative and general expenses, and an allowance for the cost of funds used
during the construction period. Upon the ordinary retirement or sale of plant,
no gain or loss is recognized. The cost of the plant retired or sold and the
cost of removal (net of salvage obtained) are charged to accumulated
depreciation.
CONTRIBUTIONS IN AID OF CONSTRUCTION
The Company receives contributions from customers for special construction
requirements. As directed by the PUC, the contributions are amortized on a
straight-line basis over 30 years, which approximates the estimated useful lives
of the facilities for which the contributions were received. This amortization
is an offset against depreciation expense.
17
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, continued
- --------------------------------------------------------------------------------
HAWAIIAN ELECTRIC COMPANY, INC. and Subsidiaries
- --------------------------------------------------------------------------------
REVENUES
Revenues are based on rates authorized by the PUC and include revenues
applicable to electric energy consumed in the accounting period but not yet
billed to the customers. Revenue amounts recorded under PUC approved interim
rate adjustments are subject to refund, with interest, pending final
authorization by the PUC.
The rate schedules of the Company include energy cost adjustment clauses
under which electric rates are adjusted for changes in the weighted average
price paid for fuel oil and certain components of purchased power, and the
relative amounts of company-generated power and purchased power.
POSTRETIREMENT BENEFITS
Pension costs are charged primarily to expense and plant accounts. The
Company's policy is to fund pension costs in amounts consistent with the
requirements of the Employee Retirement Income Security Act of 1974. Certain
postretirement health care and/or life insurance benefits are provided to
eligible retired employees and the employees' beneficiaries and covered
dependents. In 1996 and 1995, these postretirement benefits were charged
primarily to expense and plant. In 1994, these postretirement benefits were
charged primarily to regulatory assets and expense. See Note 10.
DEPRECIATION
Depreciation of plant and equipment is computed primarily using the
straight-line method over the estimated useful lives of the assets. The
Company's utility plant has service lives ranging from 30 to 45 years for
production plant, from 26 to 50 years for transmission and distribution plant
and from 10 to 45 years for general plant. The composite annual depreciation
rate was 3.8% in 1996 and 1995 and 3.9% in 1994.
PREMIUM, DISCOUNT AND EXPENSE
The expenses of issuing long-term debt securities and the premiums or
discounts at which they were sold are amortized against income over the terms of
the respective securities.
ALLOWANCE FOR FUNDS USED DURING CONSTRUCTION
Allowance for funds used during construction (AFUDC) is an accounting
practice whereby the costs of debt and equity funds used to finance plant
construction are transferred from the income statement to construction in
progress on the balance sheet. This procedure removes the effect of the costs
of financing construction activity from the income statement and treats such
costs in the same manner as construction labor and material costs.
The weighted average gross-of-tax AFUDC rate was 9.2% in 1996 and 9.4% in
1995 and 1994, and reflected quarterly compounding.
INCOME TAXES
HECO and its subsidiaries are included in the consolidated income tax
returns of HECO's parent, HEI. Income tax expense has been computed for
financial statement purposes as if HECO and its subsidiaries filed separate
consolidated HECO income tax returns.
Deferred income tax assets and liabilities are established for the temporary
differences between the financial reporting basis and the tax basis of the
Company's assets and liabilities at enacted tax rates expected to be in effect
when such deferred tax assets or liabilities are realized or settled.
18
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, continued
- --------------------------------------------------------------------------------
HAWAIIAN ELECTRIC COMPANY, INC. and Subsidiaries
- --------------------------------------------------------------------------------
Federal and state tax credits are deferred and amortized over the estimated
useful lives of the properties which qualified for the credits.
CASH FLOWS
The Company considers cash on hand, deposits in banks, money market
accounts, certificates of deposit, short-term commercial paper and reverse
repurchase agreements with original maturities of three months or less to be
cash and equivalents.
ENVIRONMENTAL EXPENDITURES
The Company is subject to numerous federal and state statutes and
governmental regulations pertaining to water quality, air quality and other
environmental factors. In general, environmental contamination treatment costs
are charged to expense, unless it is probable such costs will be recovered
through rates authorized by the PUC. Also, environmental costs are capitalized
if: the costs extend the life, increase the capacity, or improve the safety or
efficiency of property owned; the costs mitigate or prevent environmental
contamination that has yet to occur and that otherwise may result from future
operations; or the costs are incurred in preparing property for sale.
Liabilities are recorded when environ-mental assessments and/or remedial efforts
are probable, and the cost can be reasonably estimated. Corresponding
regulatory assets are recorded when it is probable that such costs would be
allowed by the PUC as reasonable and necessary costs of service to be recovered
in future rates.
In October 1996, the American Institute of Certified Public Accountants
issued Statement of Position (SOP) 96-1, "Environmental Remediation
Liabilities." The provisions of the SOP are consistent with the Company's
current policies and, accordingly, adoption of the SOP on January 1, 1997 did
not have a material effect on the Company's financial condition, results of
operations or liquidity.
ACCOUNTING CHANGE - 1996 IMPLEMENTATION
In March 1995, the Financial Accounting Standards Board (FASB) issued SFAS
No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to Be Disposed Of." SFAS No. 121 requires that long-lived assets and
certain identifiable intangibles held and used by an entity be reviewed for
impairment whenever events or changes in circumstances indicate that the
carrying amount of an asset may not be recoverable. If the sum of the expected
future cash flows derived from an asset (undiscounted and without interest) is
less than the carrying amount of the asset, an impairment loss is recognized.
Measurement of that loss is based on the fair value of the asset. Generally,
SFAS No. 121 requires that long-lived assets and certain identifiable
intangibles to be disposed of be reported at the lower of carrying amount or
fair value less cost to sell. SFAS No. 121 also requires that a rate-regulated
enterprise recognize an impairment loss for the amount of costs excluded by a
regulator from the enterprise's rate base. The Company adopted the provisions
of SFAS No. 121 on January 1, 1996. The adoption of SFAS No. 121 did not have a
material effect on the Company's financial condition, results of operations, or
liquidity.
19
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, continued
- --------------------------------------------------------------------------------
HAWAIIAN ELECTRIC COMPANY, INC. and Subsidiaries
- --------------------------------------------------------------------------------
2. CUMULATIVE PREFERRED STOCK
- --------------------------------------------------------------------------------
The following series of cumulative preferred stock are redeemable only at
the option of the respective company and are subject to voluntary liquidation
provisions as follows:
Voluntary
liquidation Redemption
price price
December 31, December 31,
Series 1996 1996
- --------------------------------------------------------------------------------
C, D, E, H, J and K (HECO) ....................... $ 20.00 $ 21.00
I (HECO) ......................................... 20.00 20.00
M (HECO) ......................................... 100.00 101.00
A (HELCO) ........................................ 101.00 101.00
A and B (MECO) ................................... 101.00 101.00
- --------------------------------------------------------------------------------
The following series of cumulative preferred stock are subject to mandatory
sinking fund, voluntary liquidation and optional redemption provisions as
indicated below:
Voluntary Optional
Annual sinking fund provision liquidation redemption
----------------------------- price price
Number of shares Commencement December 31, December 31,
------------------
Series Minimum Maximum date 1996 1996
- --------------------------------------------------------------------------------
Q (HECO).......... 4,000 4,000 1/15/93 $100.00 $111.12
R (HECO).......... 10,000 20,000 1/15/95 100.00 105.25
C (HELCO)......... 1,000 2,000 10/15/85 101.00 101.00
D (HELCO)......... 500 500 10/15/88 105.32 105.32
E (HELCO)......... 500 500 10/15/90 105.86 105.86
F (HELCO)......... 10,000 20,000 1/15/00 100.00 104.86
D (MECO).......... 950 1,900 7/15/89 101.00 101.00
F (MECO).......... 1,000 2,000 10/15/92 102.89 102.89
G (MECO).......... 8,333 16,667 1/15/00 100.00 104.46
- --------------------------------------------------------------------------------
Shares redeemed under the annual sinking fund provisions are redeemable at
par value of $100.
Under optional redemption provisions, shares are redeemable at the option of
the respective company at redemption prices shown above (except that prior to
specific dates, no shares of certain series of preferred stock may be redeemed).
In the event of voluntary liquidation, preferred shareholders would be entitled,
insofar as the assets of the Company would permit, to the liquidation prices
shown above.
The total sinking fund payments on preferred stock subject to mandatory
redemption are expected to amount to $2,795,000 in 1997, $1,795,000 in 1998,
$1,595,000 in 1999, $3,428,300 in 2000 and 2001 and a total of $25,913,400
thereafter.
HECO is obligated to make dividend, redemption and liquidation payments on
the preferred stock of either of its subsidiaries if the respective subsidiary
is unable to make such payments, provided that such obligation is subordinated
to any obligation to make payments on HECO's own preferred stock.
20
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, continued
- --------------------------------------------------------------------------------
HAWAIIAN ELECTRIC COMPANY, INC. and Subsidiaries
- --------------------------------------------------------------------------------
3. COMMON STOCK
- --------------------------------------------------------------------------------
In 1996, 1995 and 1994 HECO issued 503,186, 489,510 and 554,857 shares of
common stock to its parent, HEI, for $30 million, $28 million and $30 million,
respectively.
4. LONG-TERM DEBT
- --------------------------------------------------------------------------------
The first mortgage bonds are secured by separate indentures which purport to
be liens on substantially all of the real and personal property now owned or
hereafter acquired by the respective companies.
The funds on deposit with trustees represent the undrawn proceeds from the
issuance of the special purpose revenue bonds and earn interest at market rates.
These funds are available only to pay for certain authorized construction
projects and certain expenses related to the bonds.
At December 31, 1996, the aggregate payments of principal required on long-
term debt during the next five years are $13,000,000 in 1997, $30,000,000 in
1998 and nil in 1999, 2000 and 2001.
In May 1996, the Department of Budget and Finance of the State of Hawaii
issued tax-exempt special purpose revenue bonds in the principal amount of $75
million with a maturity of 30 years and a fixed coupon interest rate of 6.20%,
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 6.375%.
In December 1996, the Department of Budget and Finance of the State of
Hawaii issued tax-exempt special purpose revenue bonds in the principal amount
of $50 million with a maturity of 30 years and a fixed coupon interest rate of 5
7/8%, 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 5.9%.
5. SHORT-TERM BORROWINGS
- --------------------------------------------------------------------------------
Short-term borrowings from nonaffiliates at December 31, 1996 and 1995 had a
weighted average interest rate of 5.7% and 6.1%, respectively, and consisted
entirely of commercial paper.
The Company maintained bank lines of credit which totaled approximately $170
million and $145 million at December 31, 1996 and 1995, respectively. In
January 1997 the Company decreased its bank lines of credit to $140 million.
The lines of credit support the issuance of commercial paper. There were no
borrowings against any line of credit during 1996 and 1995.
6. REGULATORY ASSETS
- --------------------------------------------------------------------------------
In accordance with SFAS No. 71, "Accounting for the Effects of Certain Types
of Regulation," the Company's financial statements reflect assets and costs
based on current cost-based rate-making regulations. Continued accounting under
SFAS No. 71 requires that certain criteria be met. A utility's operations or a
portion of its operations can cease to meet the criteria for various reasons,
including a change in the method of regulation or a change in the competitive
environment for regulated services. A utility whose operations or portion of
operations cease to meet these criteria should discontinue application of SFAS
No. 71 and write off any regulatory assets and liabilities for those operations
that no longer meet the requirements of SFAS No. 71. Management believes the
Company's operations currently satisfy the SFAS No. 71 criteria. However, if
events or circumstances
21
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, continued
- --------------------------------------------------------------------------------
HAWAIIAN ELECTRIC COMPANY, INC. and Subsidiaries
- --------------------------------------------------------------------------------
should change so that the criteria are no longer satisfied, management believes
that a material adverse effect on the Company's results of operations, financial
condition and/or liquidity would result.
Regulatory assets at December 31, 1996 and 1995 included the following
deferred costs:
December 31 1996 1995
- --------------------------------------------------------------------------------
(in thousands)
Income taxes................................................ $40,944 $31,684
Postretirement benefits other than pensions................. 28,636 30,426
Integrated resource planning costs.......................... 7,354 9,425
Vacation earned, but not yet taken.......................... 6,392 6,236
Unamortized debt expense on retired issuances............... 6,207 6,860
Preliminary plant costs on suspended project................ 5,759 5,759
Computer system development costs........................... 1,665 4,602
Other....................................................... 1,423 2,122
------- -------
$98,380 $97,114
======= =======
In 1995, the Company applied to the PUC for recovery of the preliminary
plant costs on suspended project.
7. INCOME TAXES
- --------------------------------------------------------------------------------
The components of income taxes charged to operating expenses were as
follows:
Years ended December 31 1996 1995 1994
- -------------------------------------------------------------------------------
(in thousands)
Federal:
Current....................................... $46,491 $35,553 $37,422
Deferred...................................... 3,625 9,761 2,133
Deferred tax credits, net..................... (1,796) (1,702) (1,922)
------- ------- -------
48,320 43,612 37,633
------- ------- -------
State:
Current........................................ 3,688 2,751 2,359
Deferred....................................... 741 1,658 315
Deferred tax credits, net...................... 3,421 2,698 3,513
------- ------- -------
7,850 7,107 6,187
------- ------- -------
Total............................................. $56,170 $50,719 $43,820
======= ======= =======
Income tax benefits related to nonoperating activities, included in "Other,
net" on the consolidated statements of income, amounted to $282,000, $521,000
and $232,000 for 1996, 1995 and 1994, respectively.
A reconciliation between income taxes charged to operating expenses and the
amount of income taxes computed at the federal statutory rate of 35% on income
before income taxes and preferred stock dividends follows:
Years ended December 31 1996 1995 1994
- -------------------------------------------------------------------------------
(in thousands)
Amount at the federal statutory income tax rate.. $50,416 $45,675 $39,420
State income taxes on operating income, net of
effect on federal income taxes................. 5,102 4,620 4,022
Other............................................ 652 424 378
------- ------- -------
Income taxes charged to operating expenses....... $56,170 $50,719 $43,820
======= ======= =======
22
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, continued
- --------------------------------------------------------------------------------
HAWAIIAN ELECTRIC COMPANY, INC. and Subsidiaries
- --------------------------------------------------------------------------------
The tax effects of temporary differences which give rise to deferred tax
assets and liabilities were as follows:
<TABLE>
<CAPTION>
December 31 1996 1995
- -----------------------------------------------------------------------------------------
(in thousands)
<S> <C> <C>
Deferred tax assets:
Property, plant and equipment............................... $ 9,217 $ 8,019
Contributions in aid of construction and customer advances.. 55,305 53,709
Other....................................................... 12,357 12,690
-------- --------
76,879 74,418
-------- --------
Deferred tax liabilities:
Property, plant and equipment............................... 163,458 160,531
Regulatory assets........................................... 15,878 12,322
Other....................................................... 17,156 18,528
-------- --------
196,492 191,381
-------- --------
Net deferred income tax liability............................. $119,613 $116,963
======== ========
</TABLE>
In assessing the realizability of deferred tax assets, management considers
whether it is more likely than not that some portion or all of the deferred tax
assets will not be realized. The ultimate realization of deferred tax assets is
dependent upon the generation of future taxable income during the periods in
which those temporary differences become deductible. Management considers the
scheduled reversal of deferred tax liabilities, projected future taxable income,
and tax planning strategies in making this assessment.
Based upon the level of historical taxable income and projections for future
taxable income over the periods which the deferred tax assets are deductible,
management believes it is more likely than not the Company will realize the
benefits of these deductible differences. There was no valuation allowance
provided for deferred tax assets as of December 31, 1996 and 1995.
8. CASH FLOWS
- --------------------------------------------------------------------------------
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash paid during 1996, 1995 and 1994 for interest (net of AFUDC-Debt) and
income taxes was as follows:
Years ended December 31 1996 1995 1994
- --------------------------------------------------------------------------------
(in thousands)
Interest............................................ $40,235 $36,161 $35,001
======= ======= =======
Income taxes........................................ $44,296 $43,148 $40,849
======= ======= =======
SUPPLEMENTAL DISCLOSURES OF NONCASH ACTIVITIES
The allowance for equity funds used during construction, which was charged
primarily to construction in progress, amounted to $11,741,000, $10,202,000 and
$9,064,000 in 1996, 1995 and 1994, respectively.
The estimated fair value of noncash contributions in aid of construction
amounted to $4,680,000, $10,552,000 and $5,556,000 in 1996, 1995 and 1994,
respectively.
23
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, continued
- --------------------------------------------------------------------------------
HAWAIIAN ELECTRIC COMPANY, INC. and Subsidiaries
- --------------------------------------------------------------------------------
9. MAJOR CUSTOMERS
- --------------------------------------------------------------------------------
HECO and its subsidiaries derived approximately 10% of their operating
revenues from the sale of electricity to various federal government agencies in
1996, 1995 and 1994. These revenues amounted to $107,606,000 in 1996,
$97,175,000 in 1995 and $89,479,000 in 1994.
10. POSTRETIREMENT BENEFITS
- --------------------------------------------------------------------------------
PENSIONS
HECO and its subsidiaries participate in several of HEI's defined benefit
pension plans which cover substantially all employees of HECO and its
subsidiaries. Benefits are based on the employees' years of service and base
compensation.
The funded status of HECO and its subsidiaries' portion of the HEI pension
plans and the amounts recognized in the consolidated financial statements were
as follows:
<TABLE>
<CAPTION>
December 31 1996 1995
- ----------------------------------------------------------------------------------------
(in thousands)
<S> <C> <C>
Accumulated benefit obligation:
Vested.................................................... $364,663 $343,452
Nonvested................................................. 39,533 36,838
-------- --------
$404,196 $380,290
======== ========
Projected benefit obligation................................ $500,519 $473,398
Plan assets at fair value, primarily equity securities
and fixed income investments.............................. 528,932 471,840
-------- --------
Projected benefit obligation in excess of (less than) plan
assets.................................................... (28,413) 1,558
Unrecognized prior service cost............................. (252) (177)
Unrecognized net gain....................................... 43,748 14,235
Unrecognized net transition obligation...................... (14,586) (16,878)
Adjustment required to recognize minimum liability.......... 276 405
-------- --------
Accrued (prepaid) pension liability......................... $ 773 $ (857)
======== ========
</TABLE>
Plans with an accumulated benefit obligation exceeding plan assets at fair
value were not material. For all pension plans, at December 31, 1996 and 1995,
the assumed discount rate used to measure the projected benefit obligation was
7%.
Net periodic pension cost included the following components:
<TABLE>
<CAPTION>
Years ended December 31 1996 1995 1994
- ---------------------------------------------------------------------------------------
(in thousands)
<S> <C> <C> <C>
Service cost-benefits earned during the period.. $ 16,386 $ 12,701 $ 14,469
Interest cost on projected benefit obligation... 32,274 30,369 27,803
Actual loss (return) on plan assets............. (65,002) (99,313) 10,775
Amortization and deferral, net.................. 29,662 66,253 (37,154)
-------- -------- --------
Net periodic pension cost....................... $ 13,320 $ 10,010 $ 15,893
======== ======== ========
</TABLE>
Of these net periodic pension costs, $8,968,000, $6,686,000 and $10,801,000
were expensed in 1996, 1995 and 1994, respectively, and the remaining amounts
were charged primarily to electric utility plant.
24
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, continued
- --------------------------------------------------------------------------------
HAWAIIAN ELECTRIC COMPANY, INC. and Subsidiaries
- --------------------------------------------------------------------------------
The expected long-term rate of return on assets was 9% for 1996 and 1995 and
8% for l994. The assumed rate of increase in future compensation levels was 5%
for 1996, 1995 and 1994.
The transition obligation (the projected benefit obligation in excess of
plan assets at January 1, 1987) is being amortized ratably over 16 years
beginning in 1987.
POSTRETIREMENT BENEFITS OTHER THAN PENSIONS
The Company provides various postretirement benefits other than pensions to
eligible employees upon retirement. Health and life insurance benefits are
provided to eligible employees upon their retirement. Health benefits are
provided with contributions by retirees toward costs based on their years of
service and retirement date. Employees are eligible for these benefits if, upon
retirement, they participate in one of the Company's defined benefit pension
plans. The Company began funding some of these benefits in December 1994.
In February 1992, the PUC opened a generic docket to determine whether SFAS
No. 106, "Employers' Accounting for Postretirement Benefits Other Than
Pensions," should be adopted for rate-making purposes. Effective January 1,
1993, the Company adopted the provisions of SFAS No. 106. In November 1994, the
PUC issued a decision and order (D&O) authorizing recovery of the full cost of
postretirement benefits other than pensions effective January 1, 1995. The
companies were required to fund the recovered SFAS No. 106 costs. The
regulatory asset established from January 1, 1993 through December 31, 1994 for
postretirement benefits other than pensions is being amortized ratably over 18
years beginning in 1995 for rate-making and financial reporting purposes. In
December 1995, however, the PUC issued a D&O in a rate case proceeding which did
not provide revenue to cover the Company's costs relating to postretirement
executive life insurance and the Company wrote off the regulatory asset relating
to such costs, resulting in a 1995 after-tax charge of $1.l million.
The funded status of the postretirement benefit plans and the amounts
recognized in the consolidated financial statements were as follows:
December 31 1996 1995
- --------------------------------------------------------------------------------
(in thousands)
Accumulated postretirement benefit obligation:
Retirees.............................................. $ 62,559 $ 61,243
Fully eligible active plan participants............... 48,436 43,895
Other active plan participants........................ 59,586 54,692
-------- ---------
170,581 159,830
Plan assets at fair value, primarily equity securities
and fixed income investments.......................... 38,595 23,357
-------- ---------
Accumulated postretirement benefit obligation in
excess of plan assets................................. 131,986 136,473
Unrecognized net gain................................... 14 3,013
Unrecognized net transition obligation.................. (99,986) (106,492)
-------- ---------
Accrued postretirement benefits liability............... $ 32,014 $ 32,994
======== =========
At December 31, 1996 and 1995, the assumed discount rate used to measure the
accumulated postretirement benefit obligation was 7%.
25
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, continued
- --------------------------------------------------------------------------------
HAWAIIAN ELECTRIC COMPANY, INC. and Subsidiaries
- --------------------------------------------------------------------------------
Net periodic postretirement benefit cost included the following components:
Years ended December 31 1996 1995 1994
- --------------------------------------------------------------------------------
(in thousands)
Service cost.............................. $ 5,677 $ 4,878 $ 4,642
Interest cost............................. 11,228 10,836 9,284
Actual return on plan assets.............. (3,078) (937) --
Amortization and deferral, net............ 6,660 6,605 6,264
------- ------- -------
Net periodic postretirement benefit cost.. $20,487 $21,382 $20,190
======= ======= =======
Of the net periodic postretirement benefit costs, $2,573,000 was expensed in
1994, and the remaining amounts were charged primarily to regulatory assets, and
also to electric utility plant and other accounts. In 1996 and 1995,
$14,664,000 and $15,351,000 were expensed, respectively, and the remaining
amounts were charged primarily to electric utility plant.
For 1996, the expected long-term rate of return on assets for trusts which
were not subject to federal income taxes was 9%. At December 31, 1996 and 1995,
trusts holding plan assets with a fair value of $2.3 million and $5.9 million,
respectively, were subject to income taxes at a rate of 45%. The after-tax
expected long-term rate of return on these plan assets was 6% for 1996 and 1995.
For 1996, 1995 and 1994, the assumed rate of increase in future compensation
levels was 5%.
At December 31, 1996, the assumed health care trend rates for 1997 and
future years were as follows: medical, 6.5%; dental, 5.0% and vision, 4.0%. The
health care cost trend rate assumption can have a significant effect on the
amounts reported. For example, a 1% increase in the trend rate for health care
costs would have increased the accumulated postretirement benefit obligation at
December 31, 1996 by approximately $23.1 million and the service and interest
costs for 1996 by approximately $2.5 million.
The transition obligation (the accumulated postretirement benefit obligation
at January 1, 1993) is being amortized ratably over 20 years beginning in 1993.
11. COMMITMENTS AND CONTINGENCIES
- --------------------------------------------------------------------------------
INTERIM RATE INCREASES
At December 31, 1996, amounts recognized under interim rate increases and
subject to refund amounted to $8.5 million.
FUEL CONTRACTS AND OTHER PURCHASE COMMITMENTS
HECO and its subsidiaries have contractual agreements to purchase minimum
amounts of 0.5% sulfur and 2.0% sulfur residual fuel oils and 0.4% sulfur diesel
fuel through 1997 at prices which are tied to the market prices of petroleum
products in Singapore, Los Angeles and the U.S. Pacific Northwest, respectively.
Based on the average price per barrel prevailing as of January 1, 1997, the
estimated amount of required purchases for 1997 is $254 million. The actual
amount of purchases in 1997 could vary substantially from this estimate as a
result of changes in market prices and other factors. HECO and its subsidiaries
purchased $261 million, $194 million and $186 million of fuel under these or
prior contractual agreements in 1996, 1995 and 1994, respectively. New
contracts to replace expiring ones are expected to be entered into in the normal
course of business.
26
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, continued
- --------------------------------------------------------------------------------
HAWAIIAN ELECTRIC COMPANY, INC. and Subsidiaries
- --------------------------------------------------------------------------------
At December 31, 1996, the Company had purchase commitments, other than fuel
and power purchase contracts, amounting to approximately $47 million.
POWER PURCHASE AGREEMENTS
As of December 31, 1996, the Company had power purchase agreements for
474 megawatts (MW) of firm capacity, representing approximately 22% of their
total generating capabilities and purchased power firm capacities. Rate
recovery is allowed for energy and firm capacity payments under these
agreements. Assuming that each of the agreements remains in place and the
minimum availability criteria in the power purchase agreements are met,
aggregate minimum fixed capacity charges are expected to be approximately $109
million in 1997, $106 million in 1998, $109 million in 1999, $102 million each
in 2000 and 2001 and a total of $2.0 billion in 2002 through 2028.
In general, payments under the power purchase agreements for 474 MW of firm
capacity are based upon available capacity and energy. Payments for capacity
generally are not required if the contracted capacity is not available, and
payments are reduced, under certain conditions, if available capacity drops
below contracted levels. In general, the payment rates for capacity have been
pre-determined for the terms of the agreements. The energy payment will vary
over the terms of the agreements and the Company may pass on changes in the fuel
component of the energy charges to customers through energy cost adjustment
clauses in its rate schedules. The Company does not operate nor participate in
the operation of any of the facilities that provide power under the agreements.
Title to the facilities does not pass to the Company upon expiration of the
agreements, and the agreements do not contain bargain purchase options with
respect to the facilities.
HECO POWER OUTAGE
On April 9, 1991, HECO experienced a power outage that affected all
customers on the island of Oahu. The PUC initiated an investigation of the
April 9, 1991 outage, which was consolidated with a pending investigation of an
outage that occurred in 1988. Power Technologies, Inc. (PTI), an independent
consultant hired by HECO with the approval of the PUC, investigated the 1991
outage. HECO is implementing certain of PTI's recommendations and provides the
PUC with a quarterly summary of its progress on those recommendations.
Management cannot predict the timing and outcome of any PUC D&O that may be
issued, if any, with respect to the outages.
HELCO POWER SITUATION
BACKGROUND. In 1991, HELCO identified the need, beginning in 1994, for
additional generation to provide for forecast load growth while maintaining a
satisfactory generation reserve margin, to address uncertainties about future
deliveries of power from existing firm power producers and to permit the
retirement of older generating units. Accordingly, HELCO proceeded with plans
to install at its Keahole power plant site two 20-MW combustion turbines (CT-4
and CT-5), followed by an 18-MW heat steam recovery generator (ST-7), at which
time these units would be converted to a 56-MW (net) combined-cycle unit. In
January 1994, the PUC approved expenditures for CT-4, which HELCO had planned to
install in late 1994.
Despite HELCO's best efforts to install this additional generation, the
schedule for the installation of HELCO's phased combined-cycle unit at the
Keahole power plant site has been revised due to delays in (a) obtaining
approval from the Hawaii Board of Land and Natural Resources (BLNR) of the
Conservation District Use Permit (CDUP) amendment and (b) obtaining from the
Department of Health of the
27
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, continued
- --------------------------------------------------------------------------------
HAWAIIAN ELECTRIC COMPANY, INC. and Subsidiaries
- --------------------------------------------------------------------------------
State of Hawaii (DOH) and the U.S. Environmental Protection Agency (EPA) the air
quality Prevention of Significant Deterioration/Covered Source (PSD) permit for
the Keahole power plant site.
CDUP AMENDMENT. On January 3, 1997, the Third Circuit Court of the State of
Hawaii issued a decision on HELCO's appeal of an order of the BLNR. The
decision in effect allows HELCO to use its Keahole property as requested in its
application for the CDUP amendment. Entry of final judgment on all unresolved
issues is pending. While this decision is subject to appeal upon entry of
final judgment, management believes that HELCO would ultimately prevail and the
decision would be upheld.
PSD PERMIT. In a November 1995 letter to the DOH, the EPA declined to sign
HELCO's PSD permit for the combined-cycle unit on the basis that a different
emission control technology should be used. After HELCO proposed to the DOH to
reduce net nitrogen oxide emission increases by retiring and/or reducing the use
of certain existing Keahole diesel units, the EPA stated that it found the
netting proposal procedurally and substantively acceptable, and that if emission
increases were kept below significance levels, it would not require the use of
any particular emission control technology. In December 1996, the DOH proposed a
revised draft air permit which reflected HELCO's netting proposal and was
acceptable to HELCO. A public hearing relating to the modifications in the
revised draft permit was held on March 3, 1997. Management believes that HELCO
will obtain the required PSD permit.
DECLARATORY JUDGEMENT ACTION. On February 5, 1997, the Keahole Defense
Coalition and three individuals filed a lawsuit in the Third Circuit Court of
the State of Hawaii against HELCO, the director of the DOH, and the BLNR,
seeking declaratory rulings that, with regard to the Keahole project, one or
more of the defendants had violated, or could not allow the plant to operate
without violating, the State Clean Air Act, the State Noise Pollution Act,
conditions of HELCO's conditional use permit, covenants of HELCO's land patent
and Hawaii administrative rules regarding standard conditions applicable to land
permits. While management believes the allegations are without merit, it is too
early to predict the outcome of this lawsuit. HELCO intends to vigorously defend
against the claims raised.
IPP COMPLAINTS. Two independent power producers (IPPs), Kawaihae
Cogeneration Partners (KCP) and Enserch Development Corporation (Enserch), filed
separate complaints against HELCO with the PUC in 1993 and 1994, respectively,
alleging that they are entitled to power purchase contracts to provide HELCO
with additional capacity which they claim would be a substitute for HELCO's
planned 56-MW combined-cycle unit at Keahole. Under HELCO's current estimate of
generating capacity requirements, there is a near term need for capacity in
addition to the capacity which might be provided by either of the proposed IPP
units.
In September 1995, the PUC allowed HELCO to continue to pursue construction
of and commit expenditures for the second combustion turbine (CT-5) and the
steam recovery generator (ST-7)for its planned combined-cycle unit, stating in
its order that "no part of the project may be included in HELCO's rate base
unless and until the project is in fact installed, and is used and useful for
utility purposes." In view of permitting delays and the need for power, the PUC
also ordered HELCO to continue negotiating with the IPPs and directed that the
facility to be built (i.e., either HELCO's or one of the IPPs') should be the
one that can be most expeditiously put into service at "allowable cost."
On January 26, 1996, the PUC ordered HELCO to continue in good faith to
negotiate a power purchase agreement with KCP. Status reports were filed with
the PUC in March 1996. On December 12, 1996, KCP filed directly with the PUC a
new proposal pursuant to which it would construct a facility and have HELCO
operate and manage the facility. Although the new proposal had not been
submitted to or negotiated with HELCO, KCP asked the PUC to compel HELCO to
enter into the
28
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, continued
- --------------------------------------------------------------------------------
HAWAIIAN ELECTRIC COMPANY, INC. and Subsidiaries
- --------------------------------------------------------------------------------
agreement. On December 19, 1996, HELCO filed a Motion to Dismiss or to extend
the time for responding. On March 10, 1997, the PUC denied KCP's motion to
compel HELCO to enter into KCP's proposed agreement, noting that KCP's proposal
was in the nature of a lease of a generating facility, rather than a power
purchase agreement within the purview of the Public Utility Regulatory Policies
Act of 1978. The PUC Order also confirmed the importance of placing the next
generating unit on line as quickly as possible to meet the recognized generation
shortfall on the island of Hawaii, and directed KCP and HELCO to resume
negotiations aimed at finalizing a power purchase agreement. The Order directs
HELCO and KCP to submit to the PUC, within 45 days of the Order, either a
finalized power purchase agreement or a written report on the matters preventing
an agreement, including specific positions on each disputed issue, as to which
the parties may request a hearing or submit to the PUC for resolution.
On October 4, 1996, the PUC issued its D&O that, among other things,
required HELCO and Enserch to continue to negotiate on an expeditious basis and,
within 75 days, to submit to the PUC either a finalized power purchase agreement
or reports on matters that are preventing the finalization of an agreement. The
parties were not able to finalize a power purchase agreement within the 75 days
and, accordingly, filed status reports with the PUC in December 1996 and January
1997. Negotiations are ongoing.
Management cannot determine at this time whether the negotiations with the
IPPs and related PUC proceedings will result in a power purchase agreement.
COSTS INCURRED. As of December 31, 1996, HELCO's costs incurred in its
efforts to put into service its combined-cycle unit amounted to $49.2 million,
including approximately $26.8 million for equipment and material purchases,
approximately $10.3 million for planning, engineering, permitting, site
development and other costs and approximately $12.1 million as an allowance for
funds used during construction.
CONTINGENCY PLANNING. In June 1995, HELCO filed with the PUC its generation
resource contingency plan detailing alternatives and mitigation measures to
address possible further delays in obtaining the permits necessary to construct
its combined-cycle unit. HELCO arranged for additional firm capacity to be
provided by its existing firm power producers, obtained contracts shifting loads
to off-peak hours, deferred generation unit retirements and, in January 1996,
began the implementation of its energy-efficiency DSM programs. These
measures have helped HELCO maintain its reserve margin and reduce the risk of
capacity shortages.
In January 1996, the PUC opened a proceeding to evaluate HELCO's contingency
resource plan and HELCO's efforts to insure system reliability. HELCO filed
reports in March and October 1996 to update the PUC on its contingency plan and
its implementation.
ENVIRONMENTAL REGULATION
By letters in January and February 1995, the DOH advised HECO and others
that it was conducting an investigation to determine the nature and extent of
actual or potential releases of hazardous substances, oil, pollutants or
contaminants at or near Honolulu Harbor and requested information regarding past
hazardous substances and oil spills that may have occurred. HECO provided
responses to the DOH letters. The DOH issued letters in December 1995,
indicating that it had identified a number of parties, including HECO, who
appear to be either potentially responsible for the contamination and/or operate
their facilities upon contaminated land. The DOH met with these identified
parties in January 1996 to inform them of its findings and to establish the
framework to determine remedial and cleanup requirements. A Technical Workgroup
(comprised of certain of the parties identified in the December 1995 DOH letter,
including HECO, Chevron U.S.A. Inc., Shell Oil Products Company and others) was
formed to conduct independent voluntary investigations relative to this issue.
Because the process for determining appropriate remedial and cleanup action,
if any, is at an early stage, management cannot predict at this time the costs
of further site analysis or future remediation and cleanup requirements, nor can
it estimate when such costs would be incurred. Certain of the costs incurred
may be claimed and covered under insurance policies, but such coverage is not
determinable at this time.
29
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, continued
- --------------------------------------------------------------------------------
HAWAIIAN ELECTRIC COMPANY, INC. and Subsidiaries
- --------------------------------------------------------------------------------
12. REGULATORY RESTRICTIONS ON DISTRIBUTIONS TO PARENT
- --------------------------------------------------------------------------------
At December 31, 1996, net assets (assets less liabilities) of approximately
$371 million were not available for transfer to HEI in the form of dividends,
loans or advances without regulatory approval.
13. RELATED-PARTY TRANSACTIONS
- --------------------------------------------------------------------------------
HEI charged HECO and its subsidiaries for general management and
administrative services totaling $2,254,000, $2,469,000 and $2,417,000 in 1996,
1995 and 1994, respectively. The amounts charged by HEI to its subsidiaries are
allocated primarily on the basis of actual labor hours.
HEI also charged HECO for data processing services totaling $3,094,000,
$3,461,000 and $3,554,000 in 1996, 1995 and 1994, respectively.
HECO's borrowings from HEI totaled nil and $7,000,000 at December 31, 1996
and 1995, respectively. The interest charged on short-term borrowings from HEI
is computed based on HECO's short-term borrowing interest rate. Interest
charged by HEI to HECO totaled $289,000, $621,000 and $77,000 in 1996, 1995 and
1994, respectively.
14. SIGNIFICANT GROUP CONCENTRATIONS OF CREDIT RISK
- --------------------------------------------------------------------------------
HECO and its subsidiaries are regulated operating electric public utilities
engaged in the generation, purchase, transmission, distribution and sale of
electricity on the islands of Oahu, Hawaii, Maui, Lanai and Molokai in the State
of Hawaii. HECO and its subsidiaries provide the only electric public utility
service on the islands they serve. HECO and its subsidiaries grant credit to
customers, all of whom reside or conduct business in the State of Hawaii.
15. FAIR VALUE OF FINANCIAL INSTRUMENTS
- --------------------------------------------------------------------------------
The following methods and assumptions were used to estimate the fair value
of each applicable class of financial instruments for which it is practicable to
estimate that value:
CASH AND EQUIVALENTS. The carrying amount approximates fair value because
of the short maturity of these instruments.
NOTES RECEIVABLE. Fair value is estimated by discounting future cash
flows using rates offered by local lending institutions for loans of similar
terms to companies with comparable credit risk.
SHORT-TERM BORROWINGS. The carrying amount approximates fair value
because of the short maturity of these instruments.
LONG-TERM DEBT. Fair value is estimated based on quoted market prices for
the same or similar issues of debt.
CUMULATIVE PREFERRED STOCK SUBJECT TO MANDATORY REDEMPTION. There are no
quoted market prices for the Company's preferred stocks. Fair value is
estimated based on quoted market prices for similar issues of preferred stock.
30
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, continued
- --------------------------------------------------------------------------------
HAWAIIAN ELECTRIC COMPANY, INC. and Subsidiaries
- --------------------------------------------------------------------------------
The estimated fair values of the Company's financial instruments were as
follows:
<TABLE>
<CAPTION>
December 31 1996 1995
- -------------------------------------------------------------------------------
Estimated Estimated
Carrying fair Carrying fair
amount value amount value
- -------------------------------------------------------------------------------
(in thousands)
<S> <C> <C> <C> <C>
FINANCIAL ASSETS:
Cash and equivalents................ $ 823 $ 823 $ 20 $ 20
Notes receivable.................... 5,569 5,500 6,825 6,760
FINANCIAL LIABILITIES:
Short-term borrowings from
nonaffiliates and affiliate......... 125,920 125,920 138,753 138,753
Long-term debt, net, including
amounts due within one year....... 602,226 612,192 517,209 529,132
CUMULATIVE PREFERRED STOCK SUBJECT
TO MANDATORY REDEMPTION, INCLUDING
SINKING FUND REQUIREMENTS........... 38,955 41,086 41,750 43,737
- -------------------------------------------------------------------------------
</TABLE>
LIMITATIONS. Fair value estimates are made at a specific point in time,
based on relevant market information and information about the financial
instrument. These estimates do not reflect any premium or discount that could
result from offering for sale at one time the Company's entire holdings of a
particular financial instrument. Because no market exists for a significant
portion of the Company's financial instruments, fair value estimates cannot be
determined with precision. Changes in assumptions could significantly affect
the estimates.
Fair value estimates are based on existing financial instruments without
attempting to estimate the value of anticipated future business and the value of
assets and liabilities that are not considered financial instruments. In
addition, the tax ramifications related to the realization of the unrealized
gains and losses can have a significant effect on fair value estimates and have
not been considered.
31
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, continued
- --------------------------------------------------------------------------------
HAWAIIAN ELECTRIC COMPANY, INC. and Subsidiaries
- --------------------------------------------------------------------------------
16. SUMMARIZED FINANCIAL INFORMATION
- --------------------------------------------------------------------------------
Summarized financial information for HECO's consolidated subsidiaries, HELCO
and MECO, was as follows:
HAWAII ELECTRIC LIGHT COMPANY, INC.
December 31 1996 1995
- -------------------------------------------------------------------------------
(in thousands)
BALANCE SHEET DATA
Current assets......................................... $ 26,345 $ 23,485
Noncurrent assets...................................... 390,464 368,785
-------- --------
$416,809 $392,270
======== ========
Common stock equity.................................... $143,212 $136,929
Cumulative preferred stock:
Not subject to mandatory redemption.................. 10,000 10,000
Subject to mandatory redemption, net of sinking fund
payments due within one year....................... 7,200 7,500
Current liabilities.................................... 73,650 64,234
Noncurrent liabilities................................. 182,747 173,607
-------- --------
$416,809 $392,270
======== ========
Years ended December 31 1996 1995 1994
- -----------------------------------------------------------------------------
(in thousands)
INCOME STATEMENT DATA
Operating revenues............................. $153,202 $135,730 $128,706
Operating income............................... 15,984 15,959 11,821
Net income for common stock.................... 14,673 13,109 8,420
- -------------------------------------------------------------------------------
MAUI ELECTRIC COMPANY, LIMITED
December 31 1996 1995
- -------------------------------------------------------------------------------
(in thousands)
BALANCE SHEET DATA
Current assets.......................................... $ 30,701 $ 27,161
Noncurrent assets....................................... 366,489 306,191
-------- --------
$397,190 $333,352
======== ========
Common stock equity..................................... $147,573 $126,458
Cumulative preferred stock:
Not subject to mandatory redemption................... 8,000 8,000
Subject to mandatory redemption, net of sinking fund
payments due within one year........................ 5,960 6,055
Current liabilities..................................... 41,700 57,551
Noncurrent liabilities.................................. 193,957 135,288
-------- --------
$397,190 $333,352
======== ========
Years ended December 31 1996 1995 1994
- --------------------------------------------------------------------------------
(in thousands)
INCOME STATEMENT DATA
Operating revenues............................... $145,776 $128,707 $120,966
Operating income.................................. 17,124 16,575 16,251
Net income for common stock....................... 14,744 11,798 10,196
- --------------------------------------------------------------------------------
32
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, continued
- --------------------------------------------------------------------------------
HAWAIIAN ELECTRIC COMPANY, INC. and Subsidiaries
- --------------------------------------------------------------------------------
17. CONSOLIDATED QUARTERLY FINANCIAL INFORMATION (unaudited)
- --------------------------------------------------------------------------------
Selected quarterly consolidated financial information for 1996 and 1995 was
as follows:
<TABLE>
<CAPTION>
Quarter ended
- ---------------------------------------------------------------------------- Year ended 1996
1996 March 31 June 30 Sept. 30 Dec. 31 Dec. 31
- -------------------------------------------------------------------------------------------------------
(in thousands)
<S> <C> <C> <C> <C> <C>
Operating revenues..... $245,944 $262,807 $282,395 $280,280 $1,071,426
Operating income....... 24,695 27,608 31,802 24,686 108,791
Net income for common
stock................ 17,539 19,888 23,839 20,082 81,348
- -------------------------------------------------------------------------------------------------------
1995
- -------------------------------------------------------------------------------------------------------
(in thousands)
Operating revenues..... $231,176 $242,646 $260,123 $248,045/1/ $981,990
Operating income....... 23,206 24,505 32,264 22,747/1/ 102,722
Net income for common
stock................ 15,800 17,540 24,819 14,738/1/ 72,897
- -------------------------------------------------------------------------------------------------------
</TABLE>
/1/Includes the effect of HECO's accrual for a $10 million refund to customers
for the amounts recovered under interim rates in 1995 in excess of final
approved rates, with interest.
33
<PAGE>
INDEPENDENT AUDITORS' REPORT
- --------------------------------------------------------------------------------
To the Board of Directors
and Stockholder
Hawaiian Electric Company, Inc.:
We have audited the accompanying consolidated balance sheets and consolidated
statements of capitalization of Hawaiian Electric Company, Inc. (a wholly owned
subsidiary of Hawaiian Electric Industries, Inc.) and subsidiaries as of
December 31, 1996 and 1995, and the related consolidated statements of income,
retained earnings and cash flows for each of the years in the three-year period
ended December 31, 1996. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Hawaiian
Electric Company, Inc. and subsidiaries as of December 31, 1996 and 1995, and
the results of their operations and their cash flows for each of the years in
the three-year period ended December 31, 1996 in conformity with generally
accepted accounting principles.
/s/ KPMG Peat Marwick LLP
Honolulu, Hawaii
January 24, 1997
except as to the tenth, eleventh
and fourteenth paragraphs
of Note 11, which are as of
March 10, 1997
34
<PAGE>
DIRECTORS AND OFFICERS
- --------------------------------------------------------------------------------
HAWAIIAN ELECTRIC COMPANY, INC.
DIRECTORS
ROBERT F. CLARKE, 54, 1990 DIANE J. PLOTTS, 61, 1991 (1)
RICHARD HENDERSON, 68, 1970 T. MICHAEL MAY, 50, 1995
EDWIN L. CARTER, 71, 1996 (1) PAUL C. YUEN, 68, 1993 (1)
PAUL A. OYER, 56, 1985
(1) Audit committee member. Note: Year indicates first elected or
----
appointed. All directors serve one
year terms.
OFFICERS
ROBERT F. CLARKE THOMAS L. JOAQUIN
Chairman of the Board Vice President-Power Supply
T. MICHAEL MAY RICHARD L. O'CONNELL
President and Chief Executive Officer Vice President-Customer Operations
JACKIE MAHI ERICKSON PAUL A. OYER
Vice President-General Counsel and Financial Vice President and
Government Relations Treasurer
CHARLES M. FREEDMAN ERNEST T. SHIRAKI
Vice President-Corporate Excellence Controller
EDWARD Y. HIRATA MOLLY M. EGGED
Vice President-Regulatory Affairs Secretary
THOMAS J. JEZIERNY MARVIN A. HAWTHORNE
Vice President-Energy Delivery Assistant Treasurer
HAWAII ELECTRIC LIGHT COMPANY, INC.
DIRECTORS
T. MICHAEL MAY DENZIL W. ROSE
RICHARD HENDERSON DONALD K. YAMADA
WARREN H. W. LEE
OFFICERS
T. MICHAEL MAY MICHAEL F. H. CHANG
Chairman of the Board Assistant Treasurer
WARREN H. W. LEE PAUL N. FUJIOKA
President Assistant Treasurer
PAUL A. OYER MARVIN A. HAWTHORNE
Financial Vice President and Treasurer Assistant Treasurer
EDWARD Y. HIRATA DEORNA L. IKEDA
Vice President Assistant Treasurer
MOLLY M. EGGED WILLIAM J. STORMONT
Secretary Assistant Secretary
MAUI ELECTRIC COMPANY, LIMITED
DIRECTORS
T. MICHAEL MAY SANFORD J. LANGA
GLADYS C. BAISA B. MARTIN LUNA
WILLIAM A. BONNET ANNE M. TAKABUKI
OFFICERS
T. MICHAEL MAY MARVIN A. HAWTHORNE
Chairman of the Board Assistant Treasurer
WILLIAM A. BONNET DUANE T. HAYASHI
President Assistant Treasurer
PAUL A. OYER STANLEY T. NAKAMOTO
Financial Vice President and Treasurer Assistant Treasurer
EDWARD Y. HIRATA MICHAEL E. KAM
Vice President Assistant Treasurer
MOLLY M. EGGED EILEEN S. WACHI
Secretary Assistant Secretary
36
