<PAGE>
================================================================================
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1997
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
Exact Name of Registrant as Commission I.R.S. Employer
Specified in Its Charter File Number Identification No.
- ------------------------------------- ----------- ------------------
HAWAIIAN ELECTRIC INDUSTRIES, INC. 1-8503 99-0208097
and Principal Subsidiary
HAWAIIAN ELECTRIC COMPANY, INC. 1-4955 99-0040500
STATE OF HAWAII
- --------------------------------------------------------------------------------
(State or other jurisdiction of incorporation or organization)
900 RICHARDS STREET, HONOLULU, HAWAII 96813
- --------------------------------------------------------------------------------
(Address of principal executive offices and zip code)
HAWAIIAN ELECTRIC INDUSTRIES, INC. ----- (808) 543-5662
HAWAIIAN ELECTRIC COMPANY, INC. ------- (808) 543-7771
- --------------------------------------------------------------------------------
(Registrant's telephone number, including area code)
NONE
- --------------------------------------------------------------------------------
(Former name, former address and former fiscal year, if changed since last
report)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes x No
--- ---
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
<TABLE>
<CAPTION>
Class of Common Stock Outstanding August 5, 1997
- ----------------------------------------------------------------------------------------------------
<S> <C>
Hawaiian Electric Industries, Inc. (Without Par Value)..... 31,505,960 Shares
Hawaiian Electric Company, Inc. ($6 2/3 Par Value)......... 12,805,843 Shares (not publicly traded)
====================================================================================================
</TABLE>
<PAGE>
Hawaiian Electric Industries, Inc. and subsidiaries
Hawaiian Electric Company, Inc. and subsidiaries
Form 10-Q - Quarter ended June 30, 1997
INDEX
<TABLE>
<CAPTION>
Page No.
<S> <C>
Glossary of terms ................................................................... ii
PART I. FINANCIAL INFORMATION
Item 1. Financial statements
Hawaiian Electric Industries, Inc. and subsidiaries
---------------------------------------------------
Consolidated balance sheets (unaudited) -
June 30, 1997 and December 31, 1996................................... 1
Consolidated statements of income (unaudited) -
three and six months ended June 30, 1997 and 1996..................... 2
Consolidated statements of retained earnings (unaudited) -
three and six months ended June 30, 1997 and 1996..................... 2
Consolidated statements of cash flows (unaudited) -
six months ended June 30, 1997 and 1996............................... 3
Notes to consolidated financial statements (unaudited).................. 4
Hawaiian Electric Company, Inc. and subsidiaries
------------------------------------------------
Consolidated balance sheets (unaudited) -
June 30, 1997 and December 31, 1996................................... 10
Consolidated statements of income (unaudited) -
three and six months ended June 30, 1997 and 1996..................... 11
Consolidated statements of retained earnings (unaudited) -
three and six months ended June 30, 1997 and 1996..................... 11
Consolidated statements of cash flows (unaudited) -
six months ended June 30, 1997 and 1996............................... 12
Notes to consolidated financial statements (unaudited)................. 13
Item 2. Management's discussion and analysis of financial condition
and results of operations............................................. 19
PART II. OTHER INFORMATION
Item 1. Legal proceedings...................................................... 29
Item 5. Other information...................................................... 29
Item 6. Exhibits and reports on Form 8-K....................................... 31
Signatures........................................................................... 32
</TABLE>
i
<PAGE>
Hawaiian Electric Industries, Inc. and subsidiaries
Hawaiian Electric Company, Inc. and subsidiaries
Form 10-Q - Quarter ended June 30, 1997
GLOSSARY OF TERMS
<TABLE>
<CAPTION>
Terms Definitions
- ----- -----------
<S> <C>
AFUDC Allowance for funds used during construction
ASB American Savings Bank, F.S.B., a wholly owned subsidiary of HEI Diversified, Inc.
and parent company of American Savings Investment Services Corp., ASB Service
Corporation, AdCommunications, Inc. and American Savings Mortgage Co., Inc.
BIF Bank Insurance Fund
BLNR Board of Land and Natural Resources of the State of Hawaii
CDUP Conservation District Use Permit
COMPANY Hawaiian Electric Industries, Inc. and its direct and indirect subsidiaries,
including, without limitation, Hawaiian Electric Company, Inc., Maui Electric
Company, Limited, Hawaii Electric Light Company, Inc., HECO Capital Trust I, HEI
Investment Corp., Malama Pacific Corp. and its subsidiaries, Hawaiian Tug & Barge
Corp., Young Brothers, Limited, HEI Diversified, Inc., American Savings Bank,
F.S.B. and its subsidiaries, Pacific Energy Conservation Services, Inc., HEI Power
Corp. and its subsidiaries, Hycap Management, Inc., HEI Preferred Funding, LP and
Hawaiian Electric Industries Capital Trust I
CONSUMER
ADVOCATE Division of Consumer Advocacy, Department of Commerce and Consumer Affairs of the
State of Hawaii
D&O Decision and order
DOH Department of Health of the State of Hawaii
ENSERCH Enserch Development Corporation
EPA Environmental Protection Agency - federal
FASB Financial Accounting Standards Board
FDIC Federal Deposit Insurance Corporation
FHLB Federal Home Loan Bank
FICO Financing Corporation
FUNDS ACT Deposit Insurance Funds Act of 1996
GAAP Generally accepted accounting principles
HCPC Hilo Coast Processing Company
</TABLE>
ii
<PAGE>
GLOSSARY OF TERMS, CONTINUED
<TABLE>
<CAPTION>
TERMS DEFINITIONS
- ----- -----------
<S> <C>
HECO Hawaiian Electric Company, Inc., a wholly owned electric utility subsidiary of
Hawaiian Electric Industries, Inc. and parent company of Maui Electric Company,
Limited, Hawaii Electric Light Company, Inc. and HECO Capital Trust I
HEI Hawaiian Electric Industries, Inc., parent company of Hawaiian Electric Company,
Inc., HEI Investment Corp., Malama Pacific Corp., Hawaiian Tug & Barge Corp., HEI
Diversified, Inc., Pacific Energy Conservation Services, Inc., HEI Power Corp.,
Hycap Management, Inc. and Hawaiian Electric Industries Capital Trust I
HEIDI HEI Diversified, Inc., a wholly owned subsidiary of Hawaiian Electric Industries,
Inc. and the parent company of American Savings Bank, F.S.B.
HEIIC HEI Investment Corp., a wholly owned subsidiary of Hawaiian Electric Industries, Inc.
HEIPC HEI Power Corp., a wholly owned subsidiary of Hawaiian Electric Industries, Inc.,
and the parent company of several subsidiaries
HELCO Hawaii Electric Light Company, Inc., a wholly owned electric utility subsidiary of
Hawaiian Electric Company, Inc.
HIG The Hawaiian Insurance & Guaranty Company, Limited, an insurance company which was
placed in state rehabilitation proceedings. HEI Diversified, Inc. was the holder of
record of HIG's common stock until August 16, 1994
HTB Hawaiian Tug & Barge Corp., a wholly owned subsidiary of Hawaiian Electric
Industries, Inc. and parent company of Young Brothers, Limited
IPP Independent power producer
IRP Integrated resource plan
IRR Interest rate risk
KCP Kawaihae Cogeneration Partners
KWH Kilowatthour
MECO Maui Electric Company, Limited, a wholly owned electric utility subsidiary of
Hawaiian Electric Company, Inc.
MPC Malama Pacific Corp., a wholly owned subsidiary of Hawaiian Electric Industries,
Inc. and parent company of several real estate subsidiaries
MW Megawatt
OTS Office of Thrift Supervision, Department of Treasury
PSD PERMIT Prevention of Significant Deterioration/Covered Source permit
PUC Public Utilities Commission of the State of Hawaii
</TABLE>
iii
<PAGE>
GLOSSARY OF TERMS, CONTINUED
<TABLE>
<CAPTION>
TERMS DEFINITIONS
- -------- -----------
<S> <C>
ROACE Return on average common equity
ROR Simple average return on rate base
SAIF Savings Association Insurance Fund
SEC Securities and Exchange Commission
SFAS Statement of Financial Accounting Standards
SOP Statement of Position
YB Young Brothers, Limited, a wholly owned subsidiary of Hawaiian Tug & Barge Corp.
</TABLE>
FORWARD-LOOKING INFORMATION
This report and other presentations made by HEI and its subsidiaries contain
forward-looking statements within the meaning of Section 21E of the Exchange
Act. Except for historical information contained herein, the matters set forth
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; 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; the timing and extent of changes in interest rates; the final
purchase price and related adjustments made pursuant to the Bank of America, FSB
- - Hawaii operations Purchase and Assumption Agreement; and the results of
integration of the Bank of America, FSB - Hawaii operations with the operations
of ASB. Investors are also directed to consider other risks and uncertainties
discussed in other periodic reports previously and subsequently filed by HEI
and/or HECO with the SEC.
iv
<PAGE>
PART I - FINANCIAL INFORMATION
- -------------------------------------------------------------------------------
ITEM 1. FINANCIAL STATEMENTS
- -----------------------------
Hawaiian Electric Industries, Inc. and subsidiaries
CONSOLIDATED BALANCE SHEETS (UNAUDITED)
<TABLE>
<CAPTION>
June 30, December 31,
(in thousands) 1997 1996
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
- ------
Cash and equivalents............................................ $ 129,398 $ 97,417
Accounts receivable and unbilled revenues, net.................. 148,179 150,858
Inventories, at average cost.................................... 47,126 48,745
Real estate developments........................................ 31,549 33,210
Investment and mortgage-backed securities....................... 1,341,021 1,377,591
Other investments............................................... 72,744 72,609
Loans receivable, net........................................... 2,069,618 2,002,028
Property, plant and equipment, net of accumulated
depreciation and amortization of $934,434 and $890,055....... 1,966,559 1,941,767
Regulatory assets............................................... 103,964 100,804
Other........................................................... 77,801 73,776
Goodwill and other intangibles.................................. 34,931 37,035
---------- ----------
$6,022,890 $5,935,840
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
- ------------------------------------
LIABILITIES
Accounts payable................................................ $ 98,290 $ 107,896
Deposit liabilities............................................. 2,202,687 2,150,370
Short-term borrowings........................................... 130,863 216,543
Securities sold under agreements to repurchase.................. 520,961 479,742
Advances from Federal Home Loan Bank............................ 630,774 684,274
Long-term debt.................................................. 802,650 810,080
Deferred income taxes........................................... 188,980 185,609
Unamortized tax credits......................................... 49,497 48,857
Contributions in aid of construction............................ 196,739 197,805
Other........................................................... 178,551 194,564
--------- ----------
4,999,992 5,075,740
---------- ----------
HEI- and HECO-obligated preferred securities of trust
subsidiaries directly or indirectly holding solely
subordinated debentures of HEI, HEIDI, HECO, MECO
and HELCO................................................... 150,000 --
Preferred stock of electric utility subsidiaries
Subject to mandatory redemption............................. 36,260 38,955
Not subject to mandatory redemption......................... 48,293 48,293
---------- ----------
234,553 87,248
---------- ----------
STOCKHOLDERS' EQUITY
Preferred stock, no par value, authorized 10,000 shares;
issued: none............................................... -- --
Common stock, no par value, authorized 100,000 shares; issued
and outstanding: 31,412 shares and 30,853 shares............ 636,890 622,945
Retained earnings............................................... 151,455 149,907
---------- ----------
788,345 772,852
---------- ----------
$6,022,890 $5,935,840
========== ==========
</TABLE>
See accompanying notes to consolidated financial statements.
1
<PAGE>
Hawaiian Electric Industries, Inc. and subsidiaries
CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
<TABLE>
<CAPTION>
Three months ended Six months ended
June 30, June 30,
(in thousands, except per share amounts and ------------------------------- -------------------------------
ratio of earnings to fixed charges) 1997 1996 1997 1996
- ------------------------------------------------------- --------------------------------------------------------------------
<S> <C> <C> <C> <C>
REVENUES
Electric utility.................................. $275,324 $264,987 $549,080 $512,824
Savings bank...................................... 69,674 66,278 138,586 132,070
Other............................................. 15,255 15,978 31,780 28,518
-------- -------- -------- --------
360,253 347,243 719,446 673,412
-------- -------- -------- --------
EXPENSES
Electric utility.................................. 234,928 221,612 470,090 430,710
Savings bank...................................... 57,438 56,076 114,065 111,912
Other............................................. 17,717 18,143 35,769 32,643
-------- -------- -------- --------
310,083 295,831 619,924 575,265
-------- -------- -------- --------
OPERATING INCOME (LOSS)
Electric utility.................................. 40,396 43,375 78,990 82,114
Savings bank...................................... 12,236 10,202 24,521 20,158
Other............................................. (2,462) (2,165) (3,989) (4,125)
-------- -------- -------- --------
50,170 51,412 99,522 98,147
-------- -------- -------- --------
Interest expense--electric utility and other...... (15,680) (16,090) (32,145) (32,249)
Allowance for borrowed funds used
during construction............................ 1,609 1,154 3,136 2,504
Preferred stock dividends of electric
utility subsidiaries........................... (1,563) (1,666) (3,134) (3,341)
Preferred securities distributions of
trust subsidiaries............................. (3,104) -- (4,439) --
Allowance for equity funds used during
construction................................... 2,752 2,147 5,425 4,798
-------- -------- -------- --------
INCOME BEFORE INCOME TAXES........................ 34,184 36,957 68,365 69,859
Income taxes...................................... 14,389 15,594 28,907 29,627
-------- -------- -------- --------
NET INCOME........................................ $ 19,795 $ 21,363 $ 39,458 $ 40,232
======== ======== ======== ========
Earnings per common share......................... $0.63 $0.71 $ 1.27 $ 1.34
======== ======== ======== ========
Dividends per common share........................ $0.61 $0.60 $ 1.22 $ 1.20
======== ======== ======== ========
Weighted average number of common
shares outstanding............................. 31,237 30,182 31,099 30,033
======== ======== ======== ========
Ratio of earnings to fixed charges (SEC method)
Excluding interest on ASB deposits............. 1.82 1.96
======== ========
Including interest on ASB deposits............. 1.54 1.57
======== ========
</TABLE>
Hawaiian Electric Industries, Inc. and subsidiaries
CONSOLIDATED STATEMENTS OF RETAINED EARNINGS (UNAUDITED)
<TABLE>
<CAPTION>
Three months ended Six months ended
June 30, June 30,
------------------------------- ------------------------------
(in thousands) 1997 1996 1997 1996
- ------------------------------------------------------- ------------------------------------------------------------------
<S> <C> <C> <C> <C>
Retained earnings, beginning of period............ $150,697 $145,172 $149,907 $144,216
Net income........................................ 19,795 21,363 39,458 40,232
Common stock dividends............................ (19,037) (18,085) (37,910) (35,998)
-------- -------- -------- --------
RETAINED EARNINGS, END OF PERIOD.................. $151,455 $148,450 $151,455 $148,450
======== ======== ======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
2
<PAGE>
Hawaiian Electric Industries, Inc. and subsidiaries
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
<TABLE>
<CAPTION>
Six months ended June 30,
---------------------------
(in thousands) 1997 1996
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income.................................................................... $ 39,458 $ 40,232
Adjustments to reconcile net income to net cash provided by operating
activities
Depreciation and amortization of property, plant and equipment.......... 45,592 41,204
Other amortization...................................................... 7,943 6,481
Deferred income taxes and tax credits, net.............................. 1,676 4,744
Allowance for equity funds used during construction..................... (5,425) (4,798)
Changes in assets and liabilities
Decrease (increase) in accounts receivable and unbilled revenues,
net.............................................................. 2,679 (5,330)
Decrease (increase) in inventories................................ 1,619 (9,031)
Increase in regulatory assets..................................... (4,456) (1,676)
Increase (decrease) in accounts payable........................... (9,606) 2,588
Changes in other assets and liabilities........................... (18,046) (16,366)
-------- --------
NET CASH PROVIDED BY OPERATING ACTIVITIES..................................... 61,434 58,048
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES
Loans receivable originated and purchased..................................... (146,280) (308,574)
Principal repayments on loans receivable...................................... 73,733 90,691
Proceeds from sale of loans receivable........................................ 2,487 2,092
Held-to-maturity mortgage-backed securities purchased......................... (94,788) (112,581)
Principal repayments on held-to-maturity mortgage-backed securities........... 132,712 182,907
Capital expenditures.......................................................... (66,925) (85,540)
Contributions in aid of construction.......................................... 2,864 5,984
Other......................................................................... 785 1,164
-------- --------
NET CASH USED IN INVESTING ACTIVITIES......................................... (95,412) (223,857)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase in deposit liabilities........................................... 52,317 35,269
Net decrease in short-term borrowings with
original maturities of three months or less................................ (84,796) (14,738)
Proceeds from other short-term borrowings..................................... 479 608
Repayment of other short-term borrowings...................................... (1,363) (1,318)
Proceeds from securities sold under agreements to repurchase.................. 494,500 384,100
Repurchase of securities sold under agreements to repurchase.................. (453,100) (341,000)
Proceeds from advances from Federal Home Loan Bank............................ 354,000 323,200
Principal payments on advances from Federal Home Loan Bank.................... (407,500) (297,700)
Proceeds from issuance of long-term debt...................................... 7,388 77,242
Repayment of long-term debt................................................... (14,900) (17,400)
Proceeds from issuance of HEI- and HECO-obligated preferred securities of
trust subsidiaries........................................................... 150,000 --
Redemption of electric utility subsidiaries' preferred stock.................. (2,695) (2,400)
Net proceeds from issuance of common stock.................................... 12,294 9,746
Common stock dividends........................................................ (30,600) (25,377)
Other......................................................................... (10,065) (4,956)
-------- --------
NET CASH PROVIDED BY FINANCING ACTIVITIES..................................... 65,959 125,276
-------- --------
Net increase (decrease) in cash and equivalents............................... 31,981 (40,533)
Cash and equivalents, beginning of period..................................... 97,417 130,833
-------- --------
CASH AND EQUIVALENTS, END OF PERIOD........................................... $ 129,398 $ 90,300
========= =========
</TABLE>
See accompanying notes to consolidated financial statements.
3
<PAGE>
Hawaiian Electric Industries, Inc. and subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 1997 and 1996
(Unaudited)
(1) BASIS OF PRESENTATION
- -------------------------
The accompanying unaudited consolidated financial statements have been prepared
in conformity with generally accepted accounting principles (GAAP) for interim
financial information and with the instructions to Securities and Exchange
Commission (SEC) Form 10-Q and Article 10 of Regulation S-X. Accordingly,
they do not include all of the information and footnotes required by generally
accepted accounting principles for complete financial statements. In preparing
the financial statements, management is required to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the balance sheet
and the reported amounts of revenues and expenses for the period. Actual results
could differ significantly from those estimates. The accompanying unaudited
consolidated financial statements should be read in conjunction with the
consolidated financial statements and the notes thereto incorporated by
reference in HEI's Annual Report on SEC Form 10-K for the year ended December
31, 1996 and the consolidated financial statements and the notes thereto in
HEI's Quarterly Report on SEC Form 10-Q for the quarter ended March 31, 1997.
In the opinion of HEI's management, the accompanying unaudited consolidated
financial statements contain all material adjustments required by GAAP to
present fairly the Company's financial position as of June 30, 1997 and December
31, 1996, the results of its operations for the three months and six months
ended June 30, 1997 and 1996, and its cash flows for the six months ended
June 30, 1997 and 1996. All such adjustments are of a normal recurring nature,
unless otherwise disclosed in this Form 10-Q or other referenced material.
Results of operations for interim periods are not necessarily indicative of
results for the full year.
(2) ELECTRIC UTILITY SUBSIDIARY
- --------------------------------
For Hawaiian Electric Company, Inc.'s consolidated financial information,
including its commitments and contingencies, see pages 10 through 18.
(3) SAVINGS BANK SUBSIDIARY
- ----------------------------
SELECTED CONSOLIDATED FINANCIAL INFORMATION
American Savings Bank, F.S.B. and subsidiaries
Income statement data
<TABLE>
<CAPTION>
Three months ended Six months ended
June 30, June 30,
-------------------------------- ----------------------------
(in thousands) 1997 1996 1997 1996
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Interest income................................. $ 65,834 $ 62,374 $131,034 $124,454
Interest expense................................ 38,662 37,727 76,482 75,265
-------- -------- -------- --------
NET INTEREST INCOME............................. 27,172 24,647 54,552 49,189
Provision for losses............................ (1,603) (471) (2,792) (891)
Other income.................................... 3,840 3,904 7,552 7,616
Operating, administrative and general expenses.. (17,173) (17,878) (34,791) (35,756)
-------- -------- -------- --------
OPERATING INCOME................................ 12,236 10,202 24,521 20,158
Income taxes.................................... 5,064 4,256 10,250 8,422
-------- -------- -------- --------
NET INCOME...................................... $ 7,172 $ 5,946 $ 14,271 $ 11,736
======== ======== ======== ========
</TABLE>
4
<PAGE>
American Savings Bank, F.S.B. and subsidiaries
Balance sheet data
<TABLE>
<CAPTION>
June 30, December 31,
(in thousands) 1997 1996
- ------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
Cash and equivalents............................. $ 119,205 $ 93,905
Held-to-maturity investment securities........... 38,902 37,518
Held-to-maturity mortgage-backed securities...... 1,300,906 1,340,073
Loans receivable, net............................ 2,069,618 2,002,028
Other............................................ 79,275 80,128
Goodwill and other intangibles................... 34,931 37,035
---------- ----------
$3,642,837 $3,590,687
========== ==========
LIABILITIES AND EQUITY
Deposit liabilities.............................. $2,202,687 $2,150,370
Securities sold under agreements to repurchase... 520,961 479,742
Advances from Federal Home Loan Bank............. 630,774 684,274
Other............................................ 58,024 54,251
---------- ----------
3,412,446 3,368,637
Common stock equity.............................. 230,391 222,050
---------- ----------
$3,642,837 $3,590,687
========== ==========
</TABLE>
DEPOSIT-INSURANCE PREMIUMS AND REGULATORY DEVELOPMENTS
The deposit accounts of ASB and other thrifts are insured by the Savings
Association Insurance Fund (SAIF). The deposit accounts of commercial banks are
insured by the Bank Insurance Fund (BIF). The SAIF and BIF are administered by
the Federal Deposit Insurance Corporation (FDIC).
On September 30, 1996, President Clinton signed into law the Deposit Insurance
Funds Act of 1996 (Funds Act), which required the FDIC to impose a one-time
special assessment on SAIF members in an amount sufficient to increase the SAIF
reserve ratio to 1.25% of aggregate insured deposits as of October 1, 1996. In
addition, effective January 1, 1997, the Funds Act provided that the assessment
base for raising funds to pay interest on obligations issued by the Financing
Corporation (FICO) is to be expanded to include the deposits of banks as well as
thrifts. The provisions of the Funds Act should enable SAIF institutions to
achieve, over time, parity with BIF institutions in the schedules of the
premiums to be paid for deposit insurance coverage and to fund FICO interest
obligations.
The FDIC set the one-time special assessment for SAIF deposits at 65.7 cents per
$100 of deposits, to be applied against insured deposits held by SAIF
institutions as of March 31, 1995. ASB's special assessment was $8.3 million
after tax, and was accrued in September 1996. In December 1996, the FDIC adopted
a risk-based assessment schedule for SAIF institutions, effective January 1,
1997, that was identical to the existing base rate schedule for BIF
institutions: zero to 27 cents per $100 of deposits. Added to this base rate
schedule through 1999 will be the assessment to fund the FICO's interest
obligations initially set at 6.5 cents per $100 of deposits for SAIF
institutions and 1.3 cents per $100 of deposits for BIF institutions (subject to
quarterly adjustment). By law, the FICO rate on BIF-assessable deposits must be
one-fifth the rate on SAIF-assessable deposits until the insurance funds are
merged or until January 1, 2000, whichever occurs first, at which time the FICO
interest obligation for both banks and thrifts should thereafter be identical,
at a currently estimated rate of 2.4 cents per $100 of deposits.
As a "well-capitalized" thrift, ASB's base deposit-insurance premium effective
January 1, 1997 is zero and its assessment for funding FICO interest payments
was initially 6.5 cents per $100 of deposits, compared to payments that would
have been calculated at 23 cents per $100 of deposits under the premium schedule
in effect during the first three quarters of 1996. This resulted in a reduction
of approximately $1.8 million in aggregate deposit premiums paid during the
first six months of 1997 in comparison to what the premiums would have been if
they had been calculated at 23 cents per $100 of deposits.
5
<PAGE>
The Funds Act provides that the SAIF and BIF will be merged into the Deposit
Insurance Fund by January 1, 1999, but only if no insured depository institution
is a thrift on that date. The Funds Act leaves to subsequent legislation,
however, the manner in which thrift charters might be eliminated in favor of a
bank or some other form of charter. Certain of the legislative proposals
advanced to address this issue, if adopted, could have a material adverse effect
on the Company. For example, if thrift charters were eliminated and ASB obtains
a bank charter, HEI and its subsidiaries might become subject to the
restrictions on the permissible activities of a bank holding company. While
certain of the proposals that have been advanced would grandfather the
activities of existing savings and loan holding companies such as HEI,
management cannot predict whether or in what form any of these proposals might
ultimately be adopted or the extent to which the business of HEI or ASB might be
affected.
PURCHASE AND ASSUMPTION AGREEMENT WITH BANK OF AMERICA, FSB
On May 26, 1997, ASB entered into a Purchase and Assumption Agreement with Bank
of America, FSB (BoA), to assume substantially all of the Hawaii deposit
liabilities of BoA and acquire most of its branches and certain of its Hawaii-
based loans. Subject to satisfaction of various conditions, including approval
of the transaction by the Office of Thrift Supervision (OTS), the transaction
could close in late 1997 at the earliest. Based on financial information as of
February 28, 1997, management estimates the transaction will increase ASB's
assets by approximately $1.7 billion (representing the book value of assets
after taking into account an estimated $160 million capital infusion into ASB to
meet regulatory capital requirements related to ASB's increase in asset size)
and increase ASB's deposit liabilities by approximately $1.6 billion. These
estimates are subject to changes resulting from operations prior to closing and
to numerous adjustments called for by the Agreement as of the closing date. HEI
will fund the approximately $160 million capital infusion into ASB primarily
through short-term borrowings that will be repaid over time out of a combination
of earnings, proceeds from long-term debt and equity from the HEI Dividend
Reinvestment and Stock Purchase Plan. An application to approve the acquisition
was filed with the OTS on July 10, 1997, and work necessary to complete the
acquisition is proceeding.
(4) REAL ESTATE SUBSIDIARY
- ---------------------------
MPC and its subsidiaries' total real estate project inventory, equity investment
in real estate joint ventures and loans and advances to unconsolidated joint
ventures or joint venture partners amounted to $45 million and $46 million at
June 30, 1997 and December 31, 1996, respectively. The amounts MPC will
ultimately realize relative to these real estate investments could differ
materially from the recorded amounts as of June 30, 1997.
At June 30, 1997, MPC or its subsidiaries had issued (i) guarantees under which
they were jointly and severally contingently liable with their joint venture
partners for $1.7 million of outstanding loans and (ii) payment guarantees under
which MPC or its subsidiaries were severally contingently liable for
$4.3 million of outstanding loans and $2.6 million of additional undrawn loan
facilities. All such loans are collateralized by real property. At June 30,
1997, HEI had agreed with the lenders of construction loans and loan facilities,
of which approximately $6.4 million was outstanding and $5.4 million was
undrawn, that it will maintain ownership of l00% of the stock of MPC and that it
intends, subject to good and prudent business practices, to keep MPC financially
sound and responsible to meet its obligations as guarantor.
(5) HEI- AND HECO-OBLIGATED PREFERRED SECURITIES OF TRUST SUBSIDIARIES DIRECTLY
- --------------------------------------------------------------------------------
OR INDIRECTLY HOLDING SOLELY SUBORDINATED DEBENTURES OF HEI, HEIDI, HECO,
-------------------------------------------------------------------------
MECO and HELCO
--------------
In February 1997, Hawaiian Electric Industries Capital Trust I (the Trust), a
grantor trust, issued and sold, in an underwritten registered public offering,
4 million of its 8.36% Company-obligated preferred securities (trust preferred
securities), representing undivided preferred beneficial ownership interests in
the assets of the Trust. HEI owns 100% of the common securities of the Trust.
The Trust utilized the proceeds from the issuance of the trust preferred
securities ($100 million) and the trust common securities ($3.2 million) to
purchase all the limited partner interests in HEI Preferred Funding, LP (the
Partnership). Hycap Management, Inc. (Hycap), a wholly owned subsidiary of HEI,
is the sole general partner of the Partnership. Substantially all of the
proceeds from the sale of the limited partner interests and the general partner
interest were used by the Partnership to purchase 8.36% junior subordinated
debentures of HEI and HEIDI due in 2017 in the aggregate principal amount of
$120.1 million. The limited partner interests in the Partnership are the sole
assets of the Trust. HEI and HEIDI's junior subordinated debentures represent
substantially all of the assets of the Partnership. In connection with
6
<PAGE>
these transactions, HEI issued subordinated guarantees relating to the
performance of certain obligations by the Trust, the Partnership and HEIDI. The
debentures issued by HEI and HEIDI to the Partnership, the interests in the
Partnership, HEI's investment in Hycap and the common securities of the Trust
owned by HEI have been eliminated in the Company's consolidated balance sheet as
of June 30, 1997.
In March 1997, HECO Capital Trust I, a grantor trust, issued and sold, in an
underwritten registered public offering, 2 million of its 8.05% Cumulative
Quarterly Income Preferred Securities with an aggregate liquidation value of $50
million. See note (2) in HECO's "Notes to consolidated financial statements."
(6) CASH FLOWS
- ---------------
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash paid for interest (net of capitalized amounts) and income taxes was as
follows:
<TABLE>
<CAPTION>
Six months ended
June 30,
---------------------------
(in thousands) 1997 1996
- -------------------------------------------------------------------------------
<S> <C> <C>
Interest (including interest paid by
savings bank, but excluding interest
paid on nonrecourse debt on leveraged
leases)....................................... $106,341 $105,068
======== ========
Interest on nonrecourse debt from leveraged
leases........................................ $ 3,801 $ 4,142
======== ========
Income taxes................................... $ 30,846 $ 21,397
======== ========
</TABLE>
SUPPLEMENTAL DISCLOSURES OF NONCASH ACTIVITIES
Common stock dividends reinvested by shareholders in HEI common stock in noncash
transactions amounted to $7.3 million and $10.6 million for the six months ended
June 30, 1997 and 1996, respectively.
The allowance for equity funds used during construction, which was capitalized
as part of the cost of electric utility plant, amounted to $5.4 million and
$4.8 million for the six months ended June 30, 1997 and 1996, respectively.
(7) ACCOUNTING CHANGES
- -----------------------
ENVIRONMENTAL REMEDIATION LIABILITIES
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.
EARNINGS PER SHARE
In February 1997, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (SFAS) No. 128, "Earnings Per
Share." SFAS No. 128 requires the presentation of "Basic" earnings per share,
representing income available to common shareholders divided by the weighted
average number of common shares outstanding for the period, and "Diluted"
earnings per share, which is similar to the current presentation of fully
diluted earnings per share. SFAS No. 128 is effective for both interim and
annual periods ending after December 15, 1997. The Company will adopt SFAS
No. 128 in the fourth quarter of 1997. SFAS No. 128 requires restatement of all
prior period earnings per share data presented. Management does not expect
adoption of SFAS No. 128 will have a material effect on the Company's previously
reported earnings per share, financial condition, results of operations or
liquidity.
7
<PAGE>
CAPITAL STRUCTURE
In February 1997, the FASB issued SFAS No. 129, "Disclosure of Information about
Capital Structure," which lists required disclosures about capital structure
that had been included in a number of previously existing statements and
opinions. SFAS No. 129 is effective for periods ending after December 15, 1997.
The Company will adopt the provisions of SFAS No. 129 in the fourth quarter of
1997. Management does not expect adoption of SFAS No. 129 will have a material
effect on the Company's financial condition, results of operations or liquidity.
COMPREHENSIVE INCOME
In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive Income,"
which establishes standards for the reporting and display of comprehensive
income and its components in a full set of general-purpose financial statements.
SFAS No. 130 is effective for fiscal years beginning after December 15, 1997.
The Company will adopt the provisions of SFAS No. 130 on January 1, 1998. SFAS
No. 130 requires reclassification of financial statements for earlier periods
provided for comparative purposes. Management does not expect adoption of SFAS
No. 130 will have a material effect on the Company's financial statements,
financial condition, results of operations or liquidity.
SEGMENTS OF AN ENTERPRISE AND RELATED INFORMATION
In June 1997, the FASB issued SFAS No. 131, "Disclosures about Segments of an
Enterprise and Related Information," which establishes standards for the way
that public business enterprises report information about operating segments in
annual financial statements and requires that those enterprises report selected
information about operating segments in interim financial reports issued to
shareholders. SFAS No. 131 is effective for periods beginning after December 15,
1997. The Company will adopt the provisions of SFAS No. 131 on January 1, 1998.
SFAS No. 131 requires restatement of comparative information presented for
earlier periods. Management does not expect adoption of SFAS No. 131 will have a
material effect on the Company's reporting segments, financial condition,
results of operations or liquidity.
(8) CONTINGENCIES
- ------------------
ENVIRONMENTAL REGULATION
By letters in January and February 1995, the Department of Health of the State
of Hawaii (DOH) advised HECO, HTB, YB and others that it was conducting an
investigation to determine the nature and extent of actual or potential releases
of hazardous substances, oil, pollutants or contaminants at or near Honolulu
Harbor and requested information regarding past hazardous substances and oil
spills that may have occurred. HECO, HTB and YB provided responses to the DOH
letters. The DOH issued letters in December 1995, indicating that it had
identified a number of parties, including HECO, HTB and YB, who appear to be
either potentially responsible for the contamination and/or operate their
facilities upon contaminated land. The DOH met with these identified parties in
January 1996 to inform them of its findings and to establish the framework to
determine remedial and cleanup requirements. A Technical Workgroup (comprised of
certain of the parties identified in the December 1995 DOH letter, including
HECO, Chevron U.S.A. Inc., Shell Oil Products Company and others) was formed to
conduct independent voluntary investigations relative to this issue. The
Technical Workgroup has been negotiating with the DOH a voluntary agreement and
scope of work to determine the nature and extent of any contamination, the
responsible parties, appropriate remedial action and incentives for the
Technical Workgroup to participate in the investigation.
Because the process for determining the nature and extent of any contamination,
the responsible parties and the appropriate remedial and cleanup action, if any,
is at an early stage, management cannot predict at this time the extent to which
the costs of further site analysis or future remediation and cleanup
requirements will be borne by HECO, HTB or YB, nor can it estimate when any such
costs would be incurred. Certain of such costs if incurred by HECO, HTB or YB
may be claimed and covered under insurance policies, but such coverage is not
determinable at this time.
8
<PAGE>
THE HAWAIIAN INSURANCE & GUARANTY COMPANY, LIMITED
The Hawaiian Insurance & Guaranty Company, Limited (HIG) and its subsidiaries
(collectively, the HIG Group) were property and casualty insurance companies.
HEIDI was the holder of record of all the common stock of HIG until August 16,
1994. In December 1992, due to a significant increase in the estimate of
policyholder claims from Hurricane Iniki, the HEI Board of Directors concluded
it would not contribute additional capital to HIG and the remaining investment
in the HIG Group was written off. On December 24, 1992, a formal rehabilitation
order vested full control over the HIG Group in the Insurance Commissioner of
the State of Hawaii (the Rehabilitator) and her deputies.
A lawsuit stemming from this situation was settled in 1994, with the Company
making a settlement payment of $32 million to the Rehabilitator. HEI and HEIDI
are seeking reimbursement for the settlement and defense costs from their
insurance carriers. One of the insurance carriers filed a declaratory relief
action in the U.S. District Court for Hawaii seeking resolution of insurance
coverage and other policy issues, and HEI and HEIDI filed counterclaims. The
U.S. District Court has acted on several motions for partial summary judgment
filed by HEI, HEIDI and the insurance carrier. The remaining issues are
scheduled for trial on July 28, 1998. Recoveries from HEI's insurance carriers,
if any, will be recognized when realized.
In December 1994, five insurance agencies, which had served as insurance agents
for the HIG Group, filed a complaint against HEI, HEIDI and others. The
complaint set forth several causes of action, including breach of contract and
piercing the corporate veil. The plaintiffs asked for relief from the
defendants, including compensatory damages for lost commissions, business and
profits, and punitive damages. In 1995, the court granted defendants' motion for
summary judgment dismissing all claims. Judgment has been entered and plaintiffs
have appealed. In the opinion of management, losses, if any, resulting from the
ultimate outcome of the lawsuit will not have a material adverse effect on the
Company's financial condition, results of operations or liquidity.
9
<PAGE>
Hawaiian Electric Company, Inc. and subsidiaries
CONSOLIDATED BALANCE SHEETS (UNAUDITED)
<TABLE>
<CAPTION>
June 30, December 31,
(in thousands, except par value) 1997 1996
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
Utility plant, at cost
Land............................................................ $ 29,948 $ 29,897
Plant and equipment............................................. 2,498,159 2,446,073
Less accumulated depreciation and amortization.................. (868,771) (828,917)
Plant acquisition adjustment, net............................... 588 614
Construction in progress........................................ 204,527 197,835
---------- ----------
NET UTILITY PLANT......................................... 1,864,451 1,845,502
---------- ----------
Current assets
Cash and equivalents............................................ 1,480 823
Customer accounts receivable, net............................... 72,308 76,578
Accrued unbilled revenues, net.................................. 43,581 43,726
Other accounts receivable, net.................................. 3,944 4,179
Fuel oil stock, at average cost................................. 25,957 28,490
Materials and supplies, at average cost......................... 19,661 18,942
Prepayments and other........................................... 3,846 3,676
---------- ----------
TOTAL CURRENT ASSETS...................................... 170,777 176,414
---------- ----------
Other assets
Regulatory assets............................................... 101,617 98,380
Other........................................................... 49,846 45,250
---------- ----------
TOTAL OTHER ASSETS........................................ 151,463 143,630
---------- ----------
$2,186,691 $2,165,546
========== ==========
CAPITALIZATION AND LIABILITIES
Capitalization
Common stock, $6 2/3 par value, authorized
50,000 shares; outstanding 12,806 shares..................... $ 85,387 $ 85,387
Premium on capital stock........................................ 296,295 298,154
Retained earnings............................................... 375,114 367,770
---------- ----------
COMMON STOCK EQUITY....................................... 756,796 751,311
Cumulative preferred stock
Not subject to mandatory redemption.......................... 48,293 48,293
Subject to mandatory redemption.............................. 34,565 36,160
HECO-obligated mandatorily redeemable preferred securities of
trust subsidiary holding solely subordinated debentures
of HECO, MECO and HELCO...................................... 50,000 --
Long-term debt, net............................................. 596,696 589,226
---------- ----------
TOTAL CAPITALIZATION...................................... 1,486,350 1,424,990
---------- ----------
Current liabilities
Long-term debt due within one year.............................. -- 13,000
Preferred stock sinking fund payments........................... 1,695 2,795
Short-term borrowings - nonaffiliates........................... 120,024 125,920
Short-term borrowings - affiliate............................... 5,900 --
Accounts payable................................................ 53,228 66,062
Interest and preferred dividends payable........................ 10,484 11,034
Taxes accrued................................................... 47,984 55,586
Other........................................................... 19,281 24,843
---------- ----------
TOTAL CURRENT LIABILITIES................................. 258,596 299,240
---------- ----------
Deferred credits and other liabilities
Deferred income taxes........................................... 119,452 119,613
Unamortized tax credits......................................... 48,298 47,634
Other........................................................... 77,256 76,264
---------- ----------
TOTAL DEFERRED CREDITS AND OTHER LIABILITIES.............. 245,006 243,511
---------- ----------
Contributions in aid of construction............................... 196,739 197,805
---------- ----------
$2,186,691 $2,165,546
========== ==========
</TABLE>
See accompanying notes to HECO's consolidated financial statements.
10
<PAGE>
Hawaiian Electric Company, Inc. and subsidiaries
CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
<TABLE>
<CAPTION>
Three months ended Six months ended
June 30, June 30,
(in thousands, except for ratio of earnings -------------------------- --------------------------
to fixed charges) 1997 1996 1997 1996
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
OPERATING REVENUES................................ $272,972 $262,807 $544,569 $508,751
-------- -------- -------- --------
OPERATING EXPENSES
Fuel oil.......................................... 65,112 61,665 134,332 115,287
Purchased power................................... 72,473 69,798 143,224 137,605
Other operation................................... 36,536 35,978 73,447 69,569
Maintenance....................................... 14,351 11,448 26,414 23,393
Depreciation and amortization..................... 20,506 18,338 41,003 36,681
Taxes, other than income taxes.................... 25,818 24,312 51,455 48,020
Income taxes...................................... 12,073 13,660 23,777 25,893
-------- -------- -------- --------
246,869 235,199 493,652 456,448
-------- -------- -------- --------
OPERATING INCOME.................................. 26,103 27,608 50,917 52,303
-------- -------- -------- --------
OTHER INCOME
Allowance for equity funds used
during construction............................ 2,752 2,147 5,425 4,798
Other, net........................................ 2,189 2,165 4,260 4,016
-------- -------- -------- --------
4,941 4,312 9,685 8,814
-------- -------- -------- --------
INCOME BEFORE INTEREST AND OTHER CHARGES.......... 31,044 31,920 60,602 61,117
-------- -------- -------- --------
INTEREST AND OTHER CHARGES
Interest on long-term debt........................ 9,851 8,735 19,710 17,263
Amortization of net bond premium and expense...... 321 320 648 635
Other interest charges............................ 1,789 2,465 3,895 4,955
Allowance for borrowed funds used
during construction............................ (1,609) (1,154) (3,136) (2,504)
Preferred stock dividends of subsidiaries......... 650 702 1,300 1,404
Preferred securities distributions of
trust subsidiary............................... 1,014 -- 1,072 --
-------- -------- -------- --------
12,016 11,068 23,489 21,753
-------- -------- -------- --------
INCOME BEFORE PREFERRED STOCK DIVIDENDS
OF HECO........................................ 19,028 20,852 37,113 39,364
Preferred stock dividends of HECO................. 913 964 1,834 1,937
-------- -------- -------- --------
NET INCOME FOR COMMON STOCK....................... $ 18,115 $ 19,888 $ 35,279 $ 37,427
======== ======== ======== ========
Ratio of earnings to fixed charges
(SEC method)................................... 3.08 3.46
======== ========
</TABLE>
Hawaiian Electric Company, Inc. and subsidiaries
CONSOLIDATED STATEMENTS OF RETAINED EARNINGS (UNAUDITED)
<TABLE>
<CAPTION>
Three months ended Six months ended
June 30, June 30,
-------------------------- --------------------------
(in thousands) 1997 1996 1997 1996
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
RETAINED EARNINGS, BEGINNING OF PERIOD............ $369,872 $349,910 $367,770 $343,425
Net income for common stock....................... 18,115 19,888 35,279 37,427
Common stock dividends............................ (12,873) (13,154) (27,935) (24,208)
-------- -------- -------- --------
RETAINED EARNINGS, END OF PERIOD.................. $375,114 $356,644 $375,114 $356,644
======== ======== ======== ========
</TABLE>
HEI owns all the common stock of HECO. Therefore, per share data with respect to
shares of common stock of HECO are not meaningful.
See accompanying notes to HECO's consolidated financial statements.
11
<PAGE>
Hawaiian Electric Company, Inc. and subsidiaries
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
<TABLE>
<CAPTION>
Six months ended
June 30,
-------------------------------
(in thousands) 1997 1996
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Income before preferred stock dividends of HECO...................... $ 37,113 $ 39,364
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......................................... 41,003 36,681
Other amortization............................................. 5,924 4,574
Deferred income taxes.......................................... (162) 1,302
Tax credits, net............................................... 1,474 1,840
Allowance for equity funds used during construction............ (5,425) (4,798)
Changes in assets and liabilities
Decrease (increase) in accounts receivable................ 4,505 (8,164)
Decrease in accrued unbilled revenues..................... 145 3,698
Decrease (increase) in fuel oil stock..................... 2,533 (10,278)
Decrease (increase) in materials and supplies............. (719) 1,349
Increase in regulatory assets............................. (4,456) (1,676)
Increase (decrease) in accounts payable................... (12,834) 3,361
Increase (decrease) in interest and preferred dividends (550) 561
payable..................................................
Changes in other assets and liabilities................... (23,507) (21,899)
-------- --------
NET CASH PROVIDED BY OPERATING ACTIVITIES............................ 45,044 45,915
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES
Capital expenditures................................................. (56,377) (79,820)
Contributions in aid of construction................................. 2,864 5,984
Payments on (issuance of) notes receivable........................... 1,553 (391)
-------- --------
NET CASH USED IN INVESTING ACTIVITIES................................ (51,960) (74,227)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES
Common stock dividends............................................... (27,935) (24,208)
Preferred stock dividends............................................ (1,834) (1,937)
Proceeds from issuance of HECO-obligated mandatorily redeemable
preferred securities of trust subsidiary............................ 50,000 --
Proceeds from issuance of long-term debt............................. 7,388 67,242
Repayment of long-term debt.......................................... (13,000) --
Redemption of preferred stock........................................ (2,695) (2,400)
Net increase (decrease) in short-term borrowings from nonaffiliates
and affiliate with original maturities of three months or less.... 4 (5,145)
Other................................................................ (4,355) (3,295)
-------- --------
NET CASH PROVIDED BY FINANCING ACTIVITIES............................ 7,573 30,257
-------- --------
Net increase in cash and equivalents................................. 657 1,945
Cash and equivalents, beginning of period............................ 823 20
-------- --------
CASH AND EQUIVALENTS, END OF PERIOD.................................. $ 1,480 $ 1,965
======== ========
</TABLE>
See accompanying notes to HECO's consolidated financial statements.
12
<PAGE>
Hawaiian Electric Company, Inc. and subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 1997 and 1996
(Unaudited)
(1) BASIS OF PRESENTATION
- --------------------------
The accompanying unaudited consolidated financial statements have been prepared
in conformity with GAAP for interim financial information and with the
instructions to SEC Form 10-Q and Article 10 of Regulation S-X. Accordingly,
they do not include all of the information and footnotes required by generally
accepted accounting principles for complete financial statements. In preparing
the financial statements, management is required to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the balance sheet
and the reported amounts of revenues and expenses for the period. Actual results
could differ significantly from those estimates. The accompanying unaudited
consolidated financial statements should be read in conjunction with the
consolidated financial statements and the notes thereto incorporated by
reference in HECO's Annual Report on SEC Form 10-K for the year ended
December 31, 1996 and the consolidated financial statements and the notes
thereto in HECO's Quarterly Report on SEC Form 10-Q for the quarter ended
March 31, 1997.
In the opinion of HECO's management, the accompanying unaudited consolidated
financial statements contain all material adjustments required by GAAP to
present fairly the financial position of HECO and its subsidiaries as of June
30, 1997 and December 31, 1996, the results of their operations for the three
months and six months ended June 30, 1997 and 1996, and their cash flows for the
six months ended June 30, 1997 and 1996. All such adjustments are of a normal
recurring nature, unless otherwise disclosed in this Form 10-Q or other
referenced material. Results of operations for interim periods are not
necessarily indicative of results for the full year.
(2) HECO-OBLIGATED MANDATORILY REDEEMABLE PREFERRED SECURITIES OF TRUST
- ------------------------------------------------------------------------
SUBSIDIARY HOLDING SOLELY SUBORDINATED DEBENTURES OF HECO, MECO and HELCO
-------------------------------------------------------------------------
In March 1997, HECO Capital Trust I, a grantor trust, issued and sold, in an
underwritten registered public offering, 2 million of its trust preferred
securities, with an aggregate liquidation value of $50 million. The trust
preferred securities are HECO-Obligated 8.05% Cumulative Quarterly Income
Preferred Securities, Series 1997, of HECO Capital Trust I, a wholly owned
subsidiary of HECO holding solely 8.05% Junior Subordinated Deferrable Interest
Debentures, Series 1997 (junior deferrable debentures) of HECO and its wholly
owned subsidiaries, MECO and HELCO. HECO Capital Trust I common securities are
wholly owned by HECO and have an aggregate liquidation value of approximately
$2 million. Proceeds from the offering of the trust preferred securities and the
issuance of the common securities were used by HECO Capital Trust I to purchase
the junior deferrable debentures with a face value of approximately $52 million
and a maturity date of March 27, 2027. In connection with these transactions,
HECO issued subordinated guarantees relating to the performance of obligations
by HECO Capital Trust I, MECO and HELCO. HECO's obligations under the
agreements related to the issuances of such securities (back-up undertakings),
considered together, effectively constitute a full and unconditional guarantee
by HECO, on a subordinated basis, of amounts due on the trust preferred
securities. The sole assets of HECO Capital Trust I are the junior deferrable
debentures and HECO's subordinated guarantees of the obligations of MECO and
HELCO. The junior deferrable debentures issued by HECO, MECO and HELCO to HECO
Capital Trust I and the common securities of HECO Capital Trust I owned by HECO
have been eliminated in HECO's consolidated balance sheet as of June 30, 1997.
13
<PAGE>
(3) Cash flows
- ---------------
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash paid for interest (net of capitalized amounts) and income taxes was as
follows:
<TABLE>
<CAPTION>
Six months ended
June 30,
---------------------------------------
(in thousands) 1997 1996
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Interest............................................................. $21,703 $19,788
======= =======
Income taxes......................................................... $22,245 $20,853
======= =======
</TABLE>
SUPPLEMENTAL DISCLOSURE OF NONCASH ACTIVITIES
The allowance for equity funds used during construction, which was capitalized
as part of the cost of electric utility plant, amounted to $5.4 million and
$4.8 million for the six months ended June 30, 1997 and 1996, respectively.
(4) COMMITMENTS AND CONTINGENCIES
- ----------------------------------
INTERIM RATE INCREASES
Amounts recovered under interim rates in excess of final approved rates are
subject to refund with interest. At June 30, 1997, there were no revenue amounts
recognized under interim rate increases and subject to refund.
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-megawatt (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 Public Utilities Commission of the State of
Hawaii (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 a Conservation District Use
Permit (CDUP) amendment and (b) obtaining from the DOH and the U.S.
Environmental Protection Agency (EPA) an air quality Prevention of Significant
Deterioration/Covered Source permit (PSD permit) for the Keahole power plant
site.
CDUP AMENDMENT. On July 10, 1997, the Third Circuit Court of the State of
- --------------
Hawaii issued its Amended Findings of Fact, Conclusions of Law, Decision and
Order on HELCO's appeal of an order of the BLNR, along with other civil cases
relating to HELCO's application for a CDUP amendment. This decision allows
HELCO to use its Keahole property as requested in its application. Various
opposing parties have filed motions for reconsideration and/or motions to alter
or amend the Court's order, all of which are pending. A hearing on these motions
was held on August 4, 1997 and the Court took the motions under advisement. Once
these motions are resolved, the Court's amended decision will constitute a final
judgment subject to appeal. If an appeal were to be taken, management believes
that HELCO would ultimately prevail and that the amended 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. HELCO then proposed to reduce net
nitrogen oxide emission increases resulting from the addition of the combined-
cycle unit 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
14
<PAGE>
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. In July 1997, HELCO submitted a revised netting proposal
at the request of the DOH and EPA. Based on the proceedings to date, management
believes that HELCO will obtain the required PSD permit.
DECLARATORY JUDGMENT 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 has filed its answer and intends to
vigorously defend against the claims raised. Discovery has commenced and is
ongoing.
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 any 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."
KCP COMPLAINT. On January 26, 1996, the PUC ordered HELCO to continue in good
- ---------------
faith to negotiate a power purchase agreement with KCP. Status reports were
filed with the PUC in March 1996. On December 12, 1996, KCP filed directly with
the PUC a new proposal pursuant to which it would construct a facility and have
HELCO operate and manage the facility. Although the new proposal had not been
submitted to or negotiated with HELCO, KCP asked the PUC to compel HELCO to
enter into the agreement. On December 19, 1996, HELCO filed a Motion to Dismiss
or to extend the time for responding. 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
directed 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.
KCP and HELCO filed their written reports on April 24 and 25, 1997,
respectively. In addition, on May 1, 1997, KCP filed a motion for unspecified
"sanctions" against HELCO for allegedly failing to negotiate in good faith, and
on June 23, 1997, KCP filed a Motion for the Calculation of Allowable Cost,
asking the PUC to designate KCP's facility as the next generating unit on the
HELCO system and to determine the "allowable cost," calculated as of April 28,
1997 (the date the Environmental Appeals Board dismissed the appeal filed with
regard to KCPOs air permit), which would be payable by HELCO to KCP. HELCO filed
memoranda in opposition to KCP's motions on May 12, 1997 and June 30, 1997. An
evidentiary hearing requested by KCP and arguments on the motions are scheduled
for August 25, 1997.
ENSERCH COMPLAINT. On June 2, 1997, HELCO filed a motion with the PUC for
- -----------------
approval of a settlement agreement reached with Enserch regarding a power
purchase agreement. The motion asked for: (1) approval of a settlement reached
on avoided cost issues, and (2) a finding that it is prudent for
15
<PAGE>
HELCO to enter into the power purchase and interconnection agreements with
Enserch, while continuing to pursue the installation of its own combustion
turbines (CT-4 and CT-5) at Keahole. The parallel pursuit of both projects is
intended to enable HELCO to maximize the opportunity to add generation as
quickly as possible, to address the possibility of delays in either project, and
to meet both HELCO's immediate need for additional generation and its further
need in the 1999 time frame. On August 7, 1997, the PUC issued an Order in which
it (a) approved the Settlement Agreement insofar as it settled issues concerning
the terms and conditions of the power purchase and interconnection agreements
(the "Agreements") between HELCO and Enserch, (b) directed HELCO and Enserch to
submit for the PUC's review and approval executed copies of the Agreements,
(c) stated that avoided costs will be determined in accordance with the
Settlement Agreement and (d) denied HELCO's request for the PUC to determine in
the Enserch docket that it is prudent for HELCO to enter into the Agreements
while continuing to pursue installation of CT-4 and CT-5. On the last point, the
PUC stated that it had not made, and was unable to make, a decision as to which
generation unit should follow the next unit. Thus, although the PUC acknowledged
that the Settlement Agreement was conditional on it determining that it was
prudent for HELCO to pursue CT-4 and CT-5 in parallel with the Enserch
agreement, the PUC stated its belief that this would unreasonably tie its hands
and was outside the Enserch docket. The PUC thus concluded that it would require
HELCO to execute the Agreements and submit them for PUC approval notwithstanding
the PUC's refusal to make the prudency determination.
HCPC COMPLAINT. On April 1, 1997, Hilo Coast Processing Company (HCPC) filed a
- ---------------
complaint against HELCO with the PUC, requesting an immediate hearing on HCPC's
offer for a new 20-year power purchase contract for its existing facility, which
is proposed to be expanded from 22 MW to 32 MW. HCPC's existing power purchase
agreement is scheduled to terminate at the end of 1999. On May 27, 1997, HELCO
filed its response to HCPC's complaint. The PUC has converted the complaint to a
purchased power contract negotiation proceeding. A stipulated pre-hearing order
was approved by the PUC on June 23, 1997. Pursuant to the schedule therein, the
parties filed direct testimonies and information requests in July 1997, and an
evidentiary hearing is scheduled for November 4, 1997.
Management cannot determine at this time whether the negotiations with the IPPs
and related PUC proceedings will result in execution and/or PUC approval of a
power purchase agreement.
COSTS INCURRED. As of June 30, 1997, HELCO's costs incurred in its efforts to
- --------------
put into service its combined-cycle unit amounted to $51.9 million, including
approximately $26.8 million for equipment and material purchases, approximately
$10.7 million for planning, engineering, permitting, site development and other
costs and approximately $14.4 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, began the
implementation of its energy-efficiency demand-side management programs,
refurbished CT-1 to increase its capacity back to its nameplate rating of
11.5 MW, and have received permits and are preparing for the installation in
1997 of four dispersed diesel units. 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 and April 1997 to update the PUC on its
contingency plan and its implementation.
ENVIRONMENTAL REGULATION
See note (8), "Contingencies," in HEI's "Notes to consolidated financial
statements."
PUC SHOW CAUSE ORDER FOR HECO
On March 10, 1997, the PUC issued a show cause order to 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.
16
<PAGE>
In the order, the PUC cites that for 1996 HECO recorded a return on average
common equity (ROACE) of 11.93% and a simple average rate of return on rate base
(ROR) of 9.70% which exceeded the 11.40% ROACE and the 9.16% ROR determined to
be reasonable by the PUC in the utility's last rate case. The PUC also compared
HECO's 1994, 1995 and 1996 actual results of operations (for ratemaking
purposes) with the projected results of operations that the PUC used in
approving electric rates in HECO's last two rate cases. The PUC 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.
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 difference between the actual ROR 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, which was ordered by the PUC in December 1995
and refunded in the first half of 1996, 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.
On April 7, 1997, HECO filed its response to the PUC's order. HECO indicated the
reported RORs for 1995 and 1996 were higher than the return used to determine
the 1995 test year revenue requirements primarily due to the impact in 1995 of
higher kilowatthour sales because of warmer than normal weather, and the impact
in 1996 of higher kilowatthour sales because of normal expected sales growth,
increased military sales and warmer than normal weather. In its April 7, 1997
response, HECO also reported that its pro forma results for 1997 project a ROR
(for ratemaking purposes) of 9.39%. HECO indicated that the return it expects to
earn in 1997 is within the "zone of reasonableness" and should not be deemed
excessive. Among other things, HECO explained that the weighted average cost of
capital in 1997 should be higher than the 9.16% found to be reasonable in HECO's
1995 test year rate case, because a higher ROACE is appropriate under 1997
market conditions. HECO also pointed out that it is not compensated in those
years when its actual results fall below returns that were found to be
reasonable in the most recent rate case. The Consumer Advocate served
information requests on HECO in July 1997, and plans to file a final Statement
of Position in August 1997. Management cannot predict what future PUC action may
be taken in this proceeding.
(5) ACCOUNTING CHANGES
- -----------------------
ENVIRONMENTAL REMEDIATION LIABILITIES
In October 1996, the American Institute of Certified Public Accountants issued
SOP 96-1, "Environmental Remediation Liabilities." The provisions of the SOP are
consistent with HECO and its subsidiaries' current policies and, accordingly,
adoption of the SOP on January 1, 1997 did not have a material effect on HECO's
consolidated financial condition, results of operations or liquidity.
CAPITAL STRUCTURE
In February 1997, the FASB issued SFAS No. 129, "Disclosure of Information about
Capital Structure," which lists required disclosures about capital structure
that had been included in a number of previously existing statements and
opinions. SFAS No. 129 is effective for periods ending after December 15, 1997.
HECO and its subsidiaries' will adopt the provisions of SFAS No. 129 in the
fourth quarter of 1997. Management does not expect adoption of SFAS No. 129
will have a material effect on HECO's consolidated financial condition, results
of operations or liquidity.
COMPREHENSIVE INCOME
In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive Income,"
which establishes standards for the reporting and display of comprehensive
income and its components in a full set of general-purpose financial statements.
SFAS No. 130 is effective for fiscal years beginning after December 15, 1997.
HECO and its subsidiaries will adopt the provisions of SFAS No. 130 on January
1, 1998. SFAS No. 130 requires reclassification of financial statements for
earlier periods provided for comparative purposes. Management does not expect
adoption of SFAS No. 130 will have a material effect on HECO's consolidated
financial statements, financial condition, results of operations or liquidity.
17
<PAGE>
(6) SUMMARIZED FINANCIAL INFORMATION
- -------------------------------------
Summarized financial information for HECO's subsidiaries, HELCO and MECO, is as
follows:
<TABLE>
<CAPTION>
Balance sheet data
HELCO MECO
--------------------------------------- ------------------------------
June 30, December 31, June 30, December 31,
(in thousands) 1997 1996 1997 1996
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Current assets............................ $ 28,820 $ 26,345 $ 29,202 $ 30,701
Noncurrent assets......................... 397,472 390,464 371,679 366,489
-------- -------- -------- --------
$426,292 $416,809 $400,881 $397,190
======== ======== ======== ========
Common stock equity....................... $142,099 $143,212 $147,624 $147,573
Cumulative preferred stock
Not subject to mandatory redemption... 10,000 10,000 8,000 8,000
Subject to mandatory redemption....... 7,200 7,200 5,765 5,960
Current liabilities....................... 73,465 73,650 34,938 41,700
Noncurrent liabilities.................... 193,528 182,747 204,554 193,957
-------- -------- -------- --------
$426,292 $416,809 $400,881 $397,190
======== ======== ======== ========
</TABLE>
<TABLE>
<CAPTION>
HELCO MECO
--------------------------------------------------------- ---------------------------------------------------
Three months ended Six months ended Three months ended Six months ended
June 30, June 30, June 30, June 30,
--------------------------------------------------------- ---------------------------------------------------
(in thousands) 1997 1996 1997 1996 1997 1996 1997 1996
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Operating
revenues....... $39,025 $37,481 $79,363 $72,670 $38,281 $35,416 $76,260 $68,211
Operating
income......... 4,496 4,768 7,839 7,457 3,709 3,695 8,138 7,625
Net income for
common stock... 3,782 3,023 6,518 5,162 2,553 3,105 5,848 6,272
</TABLE>
To the extent HECO has not provided separate financial statements and other
disclosures concerning MECO and HELCO, management has concluded that such
financial statements and other information is not material to holders of
securities issued by MECO or HELCO which have been fully and unconditionally
guaranteed by HECO.
(7) RECONCILIATION OF ELECTRIC UTILITY OPERATING INCOME PER HEI AND HECO
- --------------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF INCOME
---------------------------------
<TABLE>
<CAPTION>
Three months ended Six months ended
June 30, June 30,
-------------------------------------- ------------------
(in thousands) 1997 1996 1997 1996
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Operating income from regulated and nonregulated
activities before income taxes (per HEI consolidated
statements of income)................................. $ 40,396 $ 43,375 $ 78,990 $ 82,114
Deduct:
Income taxes on regulated activities.................. (12,073) (13,660) (23,777) (25,893)
Revenues from nonregulated activities................. (2,352) (2,180) (4,511) (4,073)
Add:
Expenses from nonregulated activities................. 132 73 215 155
-------- -------- -------- --------
Operating income from regulated activities after
income taxes (per HECO consolidated statements of $ 26,103 $ 27,608 $ 50,917 $ 52,303
income)...............................................
======== ======== ======== ========
</TABLE>
18
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
- --------------------------------------------------------------------------------
OF OPERATIONS
- -------------
The following discussion should be read in conjunction with the consolidated
financial statements and accompanying notes.
RESULTS OF OPERATIONS
HEI Consolidated
- ----------------
<TABLE>
<CAPTION>
Three months ended
June 30,
--------------------------
(in thousands, except % Primary reason(s) for
per share amounts) 1997 1996 change significant change*
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Revenues.................. $360,253 $347,243 4 Increases for electric utility and
savings bank segments
Operating income.......... 50,170 51,412 (2) Decreases for the electric utility and
"other" segments, partly offset by
increase for the savings bank segment
Net income................ 19,795 21,363 (7) Lower operating income and higher
preferred securities distributions (due
to the issuance of HEI- and
HECO-obligated preferred securities of
trust subsidiaries)
Earnings per common share. $ 0.63 $ 0.71 (11) See explanation for "net income," and
an increase in shares outstanding
Weighted average number
of common shares
outstanding.............. 31,237 30,182 3 Issuances under the Dividend
Reinvestment and Stock Purchase Plan
and other plans
</TABLE>
<TABLE>
<CAPTION>
Six months ended
June 30,
----------------------------
(in thousands, except % Primary reason(s) for
per share amounts) 1997 1996 change significant change*
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Revenues.................. $719,446 $673,412 7 Increases for all segments
Operating income.......... 99,522 98,147 1 Increase for the savings bank
segment, partly offset by decrease
for the electric utility segment
Net income................ 39,458 40,232 (2) Higher operating income, more than
offset by higher preferred securities
distributions (due to the issuance of
HEI- and HECO-obligated preferred
securities of trust subsidiaries)
Earnings per common share. 1.27 1.34 (5) See explanation for "net income," and
an increase in shares outstanding
Weighted average number
of common shares
outstanding.............. 31,099 30,033 4 Issuances under the Dividend
Reinvestment and Stock Purchase Plan
and other plans
</TABLE>
* Also see segment discussions which follow.
19
<PAGE>
Following is a general discussion of the results of operations by business
segment.
ELECTRIC UTILITY
- ----------------
<TABLE>
<CAPTION>
Three months ended
June 30,
----------------------------
(in thousands, except per % Primary reason(s) for
barrel amounts) 1997 1996 change significant change
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Revenues.................. $275,324 $264,987 4 Recovery through rates of higher fuel
prices ($7 million) and IRP related
costs ($5 million, including
demand-side management program costs,
lost margins and shareholder
incentives), partly offset by a 1.7%
decrease in KWH sales ($4 million)
Expenses
Fuel oil................. 65,112 61,665 6 Higher fuel oil prices, partly offset
by less KWHs generated
Purchased power.......... 72,473 69,798 4 Higher fuel prices, higher IPP
capacity and nonfuel charges and more
KWHs purchased
Other.................... 97,343 90,149 8 Higher maintenance expense,
depreciation expense, other operation
expense (due to higher IRP related
costs) and revenue taxes
Operating income.......... 40,396 43,375 (7) Higher revenues more than offset by
higher expenses
Net income................ 18,115 19,888 (9) Lower operating income, higher
interest expense (due to higher
average borrowings) and preferred
securities distributions (due to the
issuance of HECO-obligated preferred
securities of trust subsidiary),
partly offset by higher AFUDC
Fuel oil price per barrel. 25.86 23.11 12
</TABLE>
20
<PAGE>
<TABLE>
<CAPTION>
Six months ended
June 30,
----------------------------
(in thousands, except per % Primary reason(s) for
barrel amounts) 1997 1996 change significant change
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Revenues.................. $549,080 $512,824 7 Recovery through rates of higher fuel
prices ($26 million) and IRP related
costs ($8 million, including
demand-side management program costs,
lost margins and shareholder
incentives) and higher rates ($2
million), partly offset by a 0.5%
decrease in KWH sales ($2 million)
Expenses
Fuel oil................. 134,332 115,287 17 Higher fuel oil prices, partly offset
by less KWHs generated
Purchased power.......... 143,224 137,605 4 Higher fuel prices and higher IPP
capacity and nonfuel charges
Other.................... 192,534 177,818 8 Higher depreciation expense, other
operation expense (due to higher IRP
related costs), maintenance expense
and revenue taxes
Operating income.......... 78,990 82,114 (4) Higher revenues more than offset by
higher expenses
Net income................ 35,279 37,427 (6) Lower operating income, higher
interest expense (due to higher
average borrowings) and preferred
securities distributions (due to the
issuance of HECO-obligated preferred
securities of trust subsidiary),
partly offset by higher AFUDC
Fuel oil price per barrel. 26.98 22.83 18
</TABLE>
Electric utility operating income decreased 7% and 4% during the second quarter
and first six months of 1997, respectively, compared to the same periods in 1996
as a result of lower kilowatthour (KWH) sales and higher expenses. KWH sales in
the second quarter and first six months of 1997 decreased 1.7% and 0.5%,
respectively, from the same periods in 1996, partly due to cooler weather and
the soft tourist industry. Higher maintenance expense from higher plant
overhaul costs and higher depreciation expense from plant additions also
contributed to the decline in operating income. Electric utility net income
decreased 9% and 6% during the second quarter and first six months of 1997,
respectively, compared to the same periods in 1996 as a result of lower
operating income and higher interest expense and preferred securities
distributions, partly offset by higher allowance for funds used during
construction (AFUDC).
REGULATION OF ELECTRIC UTILITY RATES
The PUC has broad discretion in its regulation of the rates charged by HEI's
electric utility subsidiaries and in other matters. Any adverse decision and
order (D&O) by the PUC concerning the level or method of determining electric
utility rates, the authorized returns on equity or other matters, or any
prolonged delay in rendering a D&O in a rate or other proceeding, could have a
material adverse effect on the Company's financial condition and results of
operations. Upon a showing of probable entitlement, the PUC is required to issue
an interim D&O in a rate case within 10 months from the date of filing a
completed application if the evidentiary hearing is completed (subject to
extension for 30 days if the evidentiary hearing is not completed). There is no
time limit for rendering a final D&O. Interim rate
21
<PAGE>
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 will be granted.
Recent rate requests
- --------------------
HEI's electric utility subsidiaries initiate PUC proceedings from time to time
to request 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. Two of three
previously reported rate proceedings were resolved by final D&Os issued in
April 1997 and the third awaits PUC action on a stipulation that would close
that proceeding.
Hawaii Electric Light Company, Inc.
- -----------------------------------
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. In April 1997,
HELCO received a final D&O which made permanent the $6.8 million interim
increase.
Maui Electric Company, Limited
- ------------------------------
. 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. The Consumer Advocate stipulated to the
proposed 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. In April 1997, MECO received a final D&O authorizing
a 2.9%, or $3.9 million increase in annual revenues, based on a ROACE of 11.5%,
or a $0.2 million increase in annual revenues over the $3.7 million increase
allowed in the interim order.
. In May 1996, MECO filed a request to increase rates based on a 1997 test
year, primarily to recover the costs related to the anticipated 1997 addition of
new generating unit M17. MECO requested an increase of 13%, 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 a
stipulation 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 rates effective at that time, based on an 11.65%
ROACE. The stipulation stated that the increase would be effective January 1,
1997, but it has not and will not become effective unless and until the PUC
approves the stipulation. On May 23, 1997, the stipulated increase was revised
to $1.3 million after considering the final decision in the 1996 test year case.
The primary reason for the stipulation 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 PSD permit
from the DOH/EPA. MECO now anticipates that it will obtain the PSD permit
necessary to place M17 in service in late 1998, in which event it is likely that
MECO will file a request to increase rates based on a 1999 test year.
CONTINGENCIES
See note (4) in HECO's "Notes to consolidated financial statements" for a
discussion of contingencies, including interim rate increases, the HELCO power
situation, environmental regulation and the PUC show cause order for HECO.
22
<PAGE>
SAVINGS BANK
- ------------
<TABLE>
<CAPTION>
Three months ended
June 30,
-----------------------------
% Primary reason(s) for
(in thousands) 1997 1996 change significant change
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Revenues.................. $69,674 $66,278 5 Higher interest income as a result of
the higher average loans receivable
balance and higher weighted average
yield on interest-earning assets,
partly offset by the lower average
mortgage-backed securities balance
Operating income*......... 12,236 10,202 20 Higher net interest income and a
reduction in deposit-insurance
premiums, partly offset by an increase
in the provision for loan losses
Net income*............... 7,172 5,946 21 Higher operating income
Interest rate spread...... 2.96% 2.79% 3 basis points increase in the weighted
average yield on interest-earning
assets and a 14 basis points decrease
in the weighted average rate on
interest-bearing liabilities
</TABLE>
<TABLE>
<CAPTION>
Six months ended
June 30,
-----------------------------
% Primary reason(s) for
(in thousands) 1997 1996 change significant change
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Revenues.................. $138,586 $132,070 5 Higher interest income as a result of
the higher average loans receivable
balance, partly offset by the lower
average mortgage-backed securities
balance and lower weighted average
yields on interest-earning assets
Operating income*......... 24,521 20,158 22 Higher net interest income and a
reduction in deposit-insurance
premiums, partly offset by an
increase in the provision for loan
losses and higher compensation and
employee benefit expenses
Net income*............... 14,271 11,736 22 Higher operating income
Interest rate spread...... 2.97% 2.82% 2 basis points decrease in the
weighted average yield on
interest-earning assets, offset by a
17 basis points decrease in the
weighted average rate on
interest-bearing liabilities
</TABLE>
* On September 30, 1996, President Clinton signed into law the Deposit Insurance
Funds Act of 1996, which authorized a one-time deposit-insurance premium
assessment by the FDIC. ASB's assessment was $8.3 million after-tax and was
accrued in September 1996. After the one-time assessment, ASB's deposit-
insurance premiums (including assessments to pay interest on the FICO bond)
were initially reduced from 23 cents to 6.5 cents per $100 of deposits,
effective January 1, 1997. As a result of the
23
<PAGE>
reduction in deposit-insurance premiums, ASB's pretax and after-tax savings
were approximately $0.9 million and $0.5 million, respectively, for the second
quarter of 1997, and approximately $1.8 million and $1.1 million, respectively,
for the first six months of 1997. See note (3) in HEI's "Notes to consolidated
financial statements" for additional information.
Several factors contributed to the increase in ASB's interest rate spread--the
difference between the weighted average yield on interest-earning assets and the
weighted average rate on interest-bearing liabilities. One of the primary
factors was the decrease in rates paid on ASB's deposits commencing in September
1996. Comparing the first six months of 1997 to the same period in 1996, the
weighted average rate on interest-bearing liabilities decreased more than the
weighted average yield on interest-earning assets decreased.
Deposits traditionally have been the principal source of ASB's funds for use in
lending, meeting liquidity requirements and making investments. Deposits
increased by $52 million in the first six months of 1997, including $35 million
of interest credited to accounts. ASB also derives funds from receipt of
interest and principal on outstanding loans receivable and mortgage-backed
securities, borrowings from the Federal Home Loan Bank (FHLB) of Seattle,
securities sold under agreements to repurchase and other sources. In recent
years, securities sold under agreements to repurchase and advances from the FHLB
of Seattle have become more significant sources of funds as the demand for
deposits decreased. Using sources of funds with a higher cost than deposits,
such as securities sold under agreements to repurchase, puts downward pressure
on ASB's net interest income.
In January 1996, the federal funds rate, which is the rate charged by banks for
overnight loans to each other and which has a significant influence on deposit
and loans receivable rates, decreased from 5.5% to 5.25%. In March 1997, the
federal funds rate increased 25 basis points to 5.5%.
PURCHASE AND ASSUMPTION AGREEMENT WITH BANK OF AMERICA, FSB
See note (3) in HEI's "Notes to consolidated financial statements" for a
discussion of ASB's Purchase and Assumption Agreement with Bank of America, FSB.
OTHER
- -----
<TABLE>
<CAPTION>
Three months ended
June 30,
-----------------------------
% Primary reason(s) for
(in thousands) 1997 1996 change significant change
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Revenues.................. $15,255 $15,978 (5) Real estate subsidiary sale of land in
downtown Honolulu to a developer for a
residential condominium in second
quarter 1996, partly offset by freight
transportation subsidiaries' higher
general freight and interstate revenue
in second quarter 1997
Operating loss............ (2,462) (2,165) (14) Real estate subsidiary sale of land in
second quarter 1996, partly offset by
lower holding company administrative
and general expenses in second quarter
1997
</TABLE>
24
<PAGE>
<TABLE>
<CAPTION>
Six months ended
June 30,
-----------------------------
% Primary reason(s) for
(in thousands) 1997 1996 change significant change
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Revenues.................. $31,780 $28,518 11 Freight transportation subsidiaries'
higher interstate revenues and HEIIC's
higher investment income, partly offset
by real estate subsidiary sale of land
in 1996
Operating loss............ (3,989) (4,125) 3 Lower holding company administrative
and general expenses and HEIIC's higher
investment income, partly offset by
real estate subsidiary sale of land in
1996
</TABLE>
The "Other" business segment includes results of operations from HTB and its
subsidiary, YB, which are maritime freight transportation companies; HEIIC,
which is a company primarily holding investments in leveraged leases; MPC and
its subsidiaries, which are real estate development and investment companies;
HEIPC and its subsidiaries, which are companies formed to pursue independent
power projects in Asia and the Pacific; Pacific Energy Conservation Services,
Inc., a contract services company providing limited services to an affiliate;
HEI and HEIDI, which are holding companies; and eliminations of intercompany
transactions.
FREIGHT TRANSPORTATION
The freight transportation subsidiaries recorded operating income of
$0.4 million and $0.8 million in the second quarter and first half of 1997,
respectively, compared with $0.5 million and $0.9 million in the same periods of
1996. The freight transportation subsidiaries continue to be negatively impacted
by the slow economic activity on Oahu's neighbor islands and the slow
construction industry in Hawaii.
In December 1996, the PUC approved a stipulated agreement between YB and the
Consumer Advocate to increase rates by $1.4 million annually, or 3.9%, effective
in that month. In March 1997, YB filed a request with the PUC for a general
rate increase based on a 1997 test year. YB requested an increase of 8.2%, or
$2.9 million in annual revenues, based on a 14.99% ROACE. On April 11, 1997, the
PUC suspended the request until October 10, 1997.
REAL ESTATE
MPC recorded operating losses of $0.3 million and $0.6 million in the second
quarter and first half of 1997, respectively, compared with operating incomes of
$0.7 million and $0.4 million in the same periods of 1996. MPC's results in the
first half of 1996 were favorably impacted by its sale in April 1996 of land in
downtown Honolulu to a developer for a pretax gain of $1.1 million. MPC's real
estate development activities have been negatively impacted by the slow real
estate market in Hawaii. It is expected that Hawaii's real estate market will
not rebound in the near term. MPC's present focus is to reduce its current
investment in real estate development assets and increase cash flow by
continuing the development and sales of its existing projects. There are
currently no plans to invest in new projects. For further information on MPC,
see note (4) in HEI's "Notes to consolidated financial statements."
OTHER
HEIPC was formed in 1995 and its subsidiaries have been and will be formed from
time to time to pursue independent power projects in Asia and the Pacific.
HEIP's consolidated operating losses were $0.8 million and $1.1 million in the
second quarter and first half of 1997, respectively, compared with $0.5 million
and $1.0 million in the same periods of 1996.
In September 1996, HEI Power Corp. Guam (HPG), entered into an energy conversion
agreement with the Guam Power Authority, pursuant to which HPG will repair,
operate and maintain for approximately 20 years two oil-fired 25-MW (net) units
on Guam Power Authority property at Tanguisson, Guam. On October 30, 1996, HEI
filed with the SEC a "Notification of Foreign Utility Company Status" on Form U-
57. On November 11, 1996, HPG assumed operational control of the Tanguisson
facility.
25
<PAGE>
HPG's total cost to repair the two units is expected to be approximately $14
million, approximately 80% of which HPG is seeking to fund through nonrecourse
financing. Repair of the facility is expected to be complete in August 1997 and
payments by the Guam Power Authority under the agreement commenced in January
1997. While the Guam Power Authority project site is contaminated with oils from
pre-existing spills, Guam Power Authority has agreed to indemnify and hold HPG
harmless from any resulting liability.
CONTINGENCIES
- -------------
See note (8) in HEI's "Notes to consolidated financial statements" for a
discussion of contingencies, including environmental regulation and The Hawaiian
Insurance & Guaranty Company, Limited.
ACCOUNTING CHANGES
- ------------------
See note (7) in HEI's "Notes to consolidated financial statements" for a
discussion of SOP 96-1, "Environmental Remediation Liabilities"; SFAS No. 128,
"Earnings Per Share"; SFAS No. 129, "Disclosure of Information about Capital
Structure"; SFAS No. 130, "Reporting Comprehensive Income"; and SFAS No. 131,
"Disclosures about Segments of an Enterprise and Related Information."
FINANCIAL CONDITION
LIQUIDITY AND CAPITAL RESOURCES
- -------------------------------
The Company and HECO and its subsidiaries believe that their ability to generate
cash, both internally from operations and externally from debt and equity
issues, is adequate to maintain sufficient liquidity to fund their construction
programs and to cover debt retirements and other cash requirements in the
foreseeable future.
The consolidated capital structure of HEI was as follows:
<TABLE>
<CAPTION>
(in millions) June 30, 1997 December 31, 1996
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Short-term borrowings......................... $ 131 7% $ 217 11%
Long-term debt................................ 802 41 810 43
HEI- and HECO-obligated preferred
securities of trust subsidiaries............. 150 8 -- --
Preferred stock of electric utility
subsidiaries................................. 85 4 87 5
Common stock equity........................... 788 40 773 41
------ ------ ------ ------
$1,956 100% $1,887 100%
====== ====== ====== ======
</TABLE>
ASB's deposit liabilities, securities sold under agreements to repurchase and
advances from FHLB are not included in the table above.
For the first six months of 1997, net cash provided by operating activities was
$61 million. Net cash used in investing activities was $95 million, largely due
to ASB's loan originations, net of repayments, and consolidated HECO's capital
expenditures, partly offset by the net decrease in ASB's mortgage-backed
securities. Net cash provided by financing activities was $66 million as a
result of several factors, including the issuance of HEI- and HECO-obligated
preferred securities of trust subsidiaries and net increases in deposit
liabilities and securities sold under agreements to repurchase, partly offset by
net decreases in short-term borrowings and advances from FHLB, and by common
stock dividends.
See note (5) in HEI's "Notes to consolidated financial statements" and note (2)
in HECO's "Notes to consolidated financial statements" for a discussion of HEI-
and HECO-obligated preferred securities of trust subsidiaries. Proceeds related
to the issuance of these securities were used by HEI and HEIDI primarily to
repay short-term borrowings and to make loans to affiliates, and proceeds to
HECO, MECO and HELCO were used primarily to repay short-term borrowings incurred
to finance capital expenditures.
Total HEI consolidated financing requirements for 1997 through 2001, including
net capital expenditures (which exclude AFUDC and capital expenditures funded by
third-party cash contributions in aid of construction), long-term debt
retirements (excluding repayments of advances from the FHLB of Seattle and
securities sold under agreements to repurchase) and sinking fund requirements,
are currently estimated to total $1.0 billion. Of this amount, approximately
$0.8 billion is for net capital expenditures
26
<PAGE>
(mostly relating to the electric utilities' net capital expenditures described
below). HEI's consolidated internal sources, after the payment of HEI dividends,
are expected to provide approximately 61% of the consolidated financing
requirements (which include approximately $160 million of new capital to be
infused into ASB upon the acquisition of Bank of America, FSB's Hawaii
operations), with debt and equity financing providing the remaining
requirements. Over the five-year period 1997 through 2001, HEI currently
estimates that, in addition to retained earnings and the proceeds from the sale
of the HEI- and HECO-obligated preferred securities of trust subsidiaries, it
will require not more than $158 million in additional equity, which is expected
to be provided principally by the HEI Dividend Reinvestment and Stock Purchase
Plan and the Hawaiian Electric Industries Retirement Savings Plan. The
additional equity will be used primarily to reduce HEI's overall borrowing level
and to fund the common equity requirements of its subsidiaries. Additional
equity in excess of the $158 million described above, and additional debt
financing, may be required to fund activities not included in the 1997-2001
forecast, such as the development of additional independent power projects by
HEIPC and its subsidiaries in Asia and the Pacific.
Following is a discussion of the liquidity and capital resources of HEI's
largest segments, including HECO and its subsidiaries.
ELECTRIC UTILITY
HECO's consolidated capital structure was as follows:
<TABLE>
<CAPTION>
(in millions) June 30, 1997 December 31, 1996
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Short-term borrowings from nonaffiliates
and affiliate............................ $ 126 8% $ 126 8%
Long-term debt............................ 596 37 602 38
HECO-obligated preferred securities of
trust subsidiary......................... 50 3 -- --
Preferred stock........................... 85 5 87 6
Common stock equity....................... 757 47 751 48
------ ------ ------ ------
$1,614 100% $1,566 100%
====== ====== ====== ======
</TABLE>
Operating activities provided $45 million in net cash during the first six
months of 1997. Investing activities used net cash of $52 million primarily for
capital expenditures. Financing activities provided net cash of $8 million,
including $50 million of proceeds from the sale of the HECO-obligated preferred
securities of trust subsidiary, mostly offset by net decreases in long-term debt
and preferred stock and the payment of common and preferred dividends.
The electric utilities' consolidated financing requirements for 1997 through
2001, including net capital expenditures, long-term debt retirements and sinking
fund requirements, are estimated to total $768 million. HECO's consolidated
internal sources, after the payment of common and preferred stock dividends, are
currently expected to provide approximately 75% of the consolidated financing
requirements, with debt and equity financing providing the remaining
requirements. As of June 30, 1997, an additional $45 million of revenue bonds
was authorized by the Hawaii Legislature for issuance by the Department of
Budget and Finance of the State of Hawaii on behalf of HECO and HELCO prior to
the end of 1997, and an additional $150 million was authorized for issuance on
behalf of HECO and MECO prior to the end of 1999. HECO currently estimates that
it will require approximately $23 million in new common equity, in addition to
retained earnings, over the five-year period 1997 through 2001. The PUC must
approve issuances of long-term securities by HECO, HELCO and MECO.
Capital expenditures include the costs of projects which are required to meet
expected load growth, to improve reliability and to replace and upgrade existing
equipment. Net capital expenditures for the five-year period 1997 through 2001
are currently estimated to total $711 million. Approximately 65% of 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.
For 1997, electric utility net capital expenditures are estimated to be
$118 million. Gross capital expenditures are estimated to be $153 million,
comprised of approximately $96 million for transmission and distribution
projects, approximately $36 million for new generation projects and
approximately
27
<PAGE>
$21 million for general plant and existing generation projects. In
addition to the proceeds from the issuance of the HECO-obligated preferred
securities of trust subsidiary received in March 1997, drawdowns of proceeds
from the sales of tax-exempt special purpose revenue bonds and the generation of
funds from internal sources are expected to provide the cash needed to finance
capital expenditures (including the repayment of short-term borrowings incurred
for that purpose).
Capital expenditure estimates and the timing of construction projects are
reviewed periodically by management and may change significantly as a result of
many considerations, including changes in economic conditions, changes in
forecasts of KWH sales and peak load, the availability of purchased power, the
availability of generating sites and transmission and distribution corridors,
the ability to obtain adequate and timely rate increases, escalation in
construction costs, demand-side management programs and requirements of
environmental and other regulatory and permitting authorities.
SAVINGS BANK
<TABLE>
<CAPTION>
%
(in millions) June 30, 1997 December 31, 1996 change
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Assets........................................... $3,643 $3,591 1
Mortgage-backed securities....................... 1,301 1,340 (3)
Loans receivable, net............................ 2,070 2,002 3
Deposit liabilities.............................. 2,203 2,150 2
Securities sold under agreements to repurchase... 521 480 9
Advances from Federal Home Loan Bank............. 631 684 (8)
</TABLE>
As of March 31, 1997, ASB was the fourth largest financial institution in the
state based on total assets of $3.6 billion and the third largest financial
institution based on deposits of $2.2 billion.
For the first six months of 1997, net cash provided by ASB's operating
activities was $24 million. Net cash used in ASB's investing activities was
$32 million, due largely to the origination of loans receivable, partly offset
by principal repayments and a net decrease in mortgage-backed securities. Net
cash provided by financing activities was $34 million as a result of net
increases of $41 million in securities sold under agreements to repurchase and
$52 million in deposit liabilities, partly offset by a net decrease of
$54 million in advances from the FHLB of Seattle and common stock dividends of
$6 million.
Minimum liquidity levels are currently governed by the regulations adopted by
the OTS. ASB was in compliance with OTS liquidity requirements as of June 30,
1997.
ASB believes that a satisfactory regulatory capital position provides a basis
for public confidence, affords protection to depositors, helps to ensure
continued access to capital markets on favorable terms and provides a foundation
for growth. As of June 30, 1997, ASB was in compliance with the OTS minimum
capital requirements (noted in parenthesis) with a tangible capital ratio of
5.40% (1.5%), a core capital ratio of 5.48% (3.0%) and a risk-based capital
ratio of 12.56% (8.0%).
The OTS has adopted a rule adding an interest rate risk (IRR) component to the
existing risk-based capital requirement. Institutions with an "above normal"
level of IRR exposure will be required to deduct an amount from total capital
and may be required to hold additional capital. Although the rule became
effective January 1, 1994, the OTS has provided a waiver of the IRR capital
deduction until it can finalize an appeals process for institutions subject to
such deductions. As of June 30, 1997, ASB would not have been required to hold
additional capital if the rule adding the IRR component had been implemented.
FDIC regulations restrict the ability of financial institutions that are not
well-capitalized to offer interest rates on deposits that are significantly
higher than the rates offered by competing institutions. As of June 30, 1997,
ASB was well-capitalized (ratio requirements noted in parenthesis) with a
leverage ratio of 5.48% (5.0%), a Tier-1 risk-based ratio of 11.68% (6.0%) and a
total risk-based ratio of 12.56% (10.0%).
Significant interstate banking legislation has been enacted at both the federal
and state levels. Under the federal Riegle-Neal Interstate Banking and Branching
Efficiency Act of 1994, a bank holding company may acquire control of a bank in
any state, subject to certain restrictions. Under Hawaii law, effective June 1,
1997, a bank chartered under Hawaii law may merge with an out-of-state bank and
convert all
28
<PAGE>
branches of both banks into branches of a single bank, subject to certain
restrictions. Although the federal and Hawaii laws apply only to banks, such
legislation may nonetheless affect the competitive balance among banks, thrifts
and other financial institutions and the level of competition among financial
institutions doing business in Hawaii.
With the enactment of federal legislation in 1996 to recapitalize the SAIF and
to reallocate the repayment burden on bonds issued to recapitalize the SAIF's
predecessor, it appears that legislation addressing the merger of the BIF and
the SAIF, thrift rechartering and financial modernization will remain a priority
for the U.S. Congress. Bills are now pending, or expected to be introduced in
Congress, that will contain proposals for altering the structure, regulation and
competitive relationships of the nation's financial institutions. Some of these
bills would abolish the thrift charter, requiring savings associations to
convert to banks, subject to certain grandfathering and transition provisions.
For a discussion of the unfavorable disparity in the deposit insurance
assessment rates and FICO assessment rates that ASB and other thrifts have paid
in relation to the rates that most commercial banks have paid, and certain
legislation affecting financial institutions, see note (3) in HEI's "Notes to
consolidated financial statements."
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
- --------------------------
There are no significant developments in pending legal proceedings except as set
forth in HEI's and HECO's "Notes to consolidated financial statements,"
management's discussion and analysis of financial condition and results of
operations and Item 5, "Other information."
ITEM 5. OTHER INFORMATION
- --------------------------
A. Environmental matters
Water quality control
- ---------------------
Due to a leak in the fuel transfer system, approximately 100 gallons of bunker
fuel oil were released to a HELCO Shipman facility drainage well system in
November 1996. The release was reported to state and county agencies in December
1996. Although the fuel oil was removed from the well system and the well system
was steam cleaned, oil continues to seep back into the well system from behind
the retaining walls. Removal of this residual oil continues and HELCO has filed
a status report with the DOH. In March 1997, HELCO received a letter from the
DOH concurring with the ongoing cleanup approach. The DOH stated that more
aggressive cleanup measures should be considered if oil seepage into the
drainage wells worsens. HELCO's cleanup and visual monitoring efforts continue.
In April 1997, HECO, on behalf of HELCO, notified the DOH that it became aware
that industrial oily wastewater was discharging into HELCO's Waimea facility's
dry well system in noncompliance with the facility's Underground Injection
Control permit. In May 1997, a written incident report was submitted to the DOH,
the discharge of oily wastewater was ceased and the DOH issued a notice of
apparent violation. Clean-up efforts will be undertaken in the near future. The
DOH is considering enforcement action to be taken.
Air quality control
- -------------------
The DOH has met with MECO representatives to review all outstanding air
regulatory compliance issues which occurred at MECO during 1988 through 1996.
The affected MECO facilities include Maalaea, Palaau, Lanai City and Miki Basin
generation sites. MECO is continuing discussions with the DOH to finalize
settlement of the outstanding issues.
B. "Reciprocal beneficiaries" lawsuit
In the 1997 session, the Hawaii State Legislature passed a law creating the
status of "reciprocal beneficiaries" for people who are ineligible to marry. The
bill gave examples of reciprocal beneficiaries as "a widowed mother and her
unmarried son, or two individuals who are of the same gender." In July 1997,
several Hawaii companies, including HEI and certain of its subsidiaries, filed a
lawsuit in federal
29
<PAGE>
court challenging Hawaii's new reciprocal beneficiaries law. The Company is
seeking clarification of whether federal law overrides provisions of the new
state law which makes reciprocal beneficiaries eligible for benefits such as
medical insurance that are offered to employees and their families. The Company
believes that federal law overrides state law in this area and that it is
illegal for a state to mandate who is eligible for health care benefits. Federal
law leaves it to each employer to decide eligibility.
C. YB labor negotiations
YB has a collective bargaining agreement covering the period of July 1, 1993
through June 30, 1996 with the International Longshoremen's and Warehousemen's
Union, Hawaii Division, Local 142 (ILWU). This agreement is being extended
while collective bargaining negotiations continue. The agreement covers all
regularly scheduled employees including freight clerks, stevedores, maintenance
personnel, documentation clerks and customer service representatives. The
agreement excludes professional employees, supervisory employees, guards and
other clerical personnel.
In July 1997, the union members voted to give the union leaders the authority to
initiate a strike after giving management 72 hours notice. In August 1997, YB
reached a tentative settlement with the ILWU. The provisions of the settlement
will be sent to union members to ratify.
D. Ratio of earnings to fixed charges
The following tables set forth the ratio of earnings to fixed charges for HEI
and its subsidiaries for the periods indicated:
RATIO OF EARNINGS TO FIXED CHARGES EXCLUDING INTEREST ON ASB DEPOSITS
<TABLE>
<CAPTION>
Six months Years Ended December 31,
ended -------------------------------------------------------------------------------------------
June 30, 1997 1996 1995 1994 1993 1992
- ------------------- --------------- -------------- ------------- -------------- ---------------
<S> <C> <C> <C> <C> <C>
1.82 1.87 1.94 2.22 2.25 2.08
=================== =============== ============== ============= ============== ===============
</TABLE>
RATIO OF EARNINGS TO FIXED CHARGES INCLUDING INTEREST ON ASB DEPOSITS
<TABLE>
<CAPTION>
Six months Years Ended December 31,
ended -------------------------------------------------------------------------------------------
June 30, 1997 1996 1995 1994 1993 1992
- ------------------- --------------- -------------- ------------- -------------- ---------------
<S> <C> <C> <C> <C> <C>
1.54 1.53 1.57 1.69 1.65 1.50
=================== =============== ============== ============= ============== ===============
</TABLE>
For purposes of calculating the ratio of earnings to fixed charges, "earnings"
represent the sum of (i) pretax income from continuing operations (excluding
undistributed net income or net loss from less than fifty-percent-owned persons)
and (ii) fixed charges (as hereinafter defined, but excluding capitalized
interest). "Fixed charges" are calculated both excluding and including interest
on ASB's deposits during the applicable periods and represent the sum of (i)
interest, whether capitalized or expensed, incurred by HEI and its subsidiaries
plus their proportionate share of interest on debt to outsiders incurred by
fifty-percent-owned persons, but excluding interest on nonrecourse debt from
leveraged leases which is not included in interest expense in HEI's consolidated
statements of income, (ii) amortization of debt expense and discount or premium
related to any indebtedness, whether capitalized or expensed, (iii) the interest
factor in rental expense, (iv) the preferred stock dividend requirements of
HEI's subsidiaries, increased to an amount representing the pretax earnings
required to cover such dividend requirements and (v) the preferred securities
distribution requirements of the trust subsidiaries.
30
<PAGE>
The following table sets forth the ratio of earnings to fixed charges for HECO
and its subsidiaries for the periods indicated:
RATIO OF EARNINGS TO FIXED CHARGES
<TABLE>
<CAPTION>
Six months Years Ended December 31,
ended -------------------------------------------------------------------------------------------
June 30, 1997 1996 1995 1994 1993 1992
- ------------------- --------------- -------------- ------------- -------------- ---------------
<S> <C> <C> <C> <C> <C>
3.08 3.58 3.46 3.47 3.25 3.03
=================== =============== ============== ============= ============== ===============
</TABLE>
For purposes of calculating the ratio of earnings to fixed charges, "earnings"
represent the sum of (i) pretax income before preferred stock dividends of HECO
and (ii) fixed charges (as hereinafter defined, but excluding the allowance for
borrowed funds used during construction). "Fixed charges" represent the sum of
(i) interest, whether capitalized or expensed, incurred by HECO and its
subsidiaries, (ii) amortization of debt expense and discount or premium related
to any indebtedness, whether capitalized or expensed, (iii) the interest factor
in rental expense, (iv) the preferred stock dividend requirements of HELCO and
MECO, increased to an amount representing the pretax earnings required to cover
such dividend requirements and (v) the preferred securities distribution
requirements of the trust subsidiary.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
- -----------------------------------------
(A) EXHIBITS
<TABLE>
<CAPTION>
<S> <C>
HEI Hawaiian Electric Industries, Inc. and subsidiaries
Exhibit 12.1 Computation of ratio of earnings to fixed charges, six months ended
June 30, 1997 and 1996
HECO Hawaiian Electric Company, Inc. and subsidiaries
Exhibit 12.2 Computation of ratio of earnings to fixed charges, six months ended
June 30, 1997 and 1996
HEI Hawaiian Electric Industries, Inc. and subsidiaries
Exhibit 27.1 Financial Data Schedule
June 30, 1997 and six months ended June 30, 1997
HECO Hawaiian Electric Company, Inc. and subsidiaries
Exhibit 27.2 Financial Data Schedule
June 30, 1997 and six months ended June 30, 1997
HEI Seventh Amendment to Trust Agreement, made and entered into on June 13,
Exhibit 99.1 1997, Between Fidelity Management Trust Company and HEI for the Hawaiian
Electric Industries Retirement Savings Plan for incorporation by reference
in the Registration Statement on Form S-8 (Regis. No. 333-02103)
</TABLE>
31
<PAGE>
(B) REPORTS ON FORM 8-K
During the quarter, HEI and/or HECO filed Current Reports, Forms 8-K, with the
SEC as follows:
<TABLE>
<CAPTION>
Dated Registrant/s Items reported
- ----------------------------------------------------------------------------------------------------
<S> <C> <C>
March 27, 1997 HEI, HECO Item 5, HECO Capital Trust I issued and sold 2,000,000
of its 8.05% Cumulative Quarterly Income Preferred
Securities; Item 7, final form of documents delivered in
connection with the offer and sale of the securities
May 26, 1997 HEI Item 5, News release: Hawaiian Electric Industries bank
subsidiary makes in-market acquisition
May 30, 1997 HEI, HECO Item 5, Purchase and Assumption Agreement between Bank
of America, FSB and ASB; regulation of electric utility
rates - Maui Electric Company, Limited; and update of
Hawaii Electric Light Company, Inc. power situation
</TABLE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrants have duly caused this report to be signed on their behalf by the
undersigned, thereunto duly authorized. The signature of the undersigned
companies shall be deemed to relate only to matters having reference to such
companies and any subsidiaries thereof.
HAWAIIAN ELECTRIC INDUSTRIES, INC. HAWAIIAN ELECTRIC COMPANY, INC.
(Registrant) (Registrant)
By /s/ Robert F. Mougeot By /s/ Paul Oyer
---------------------- -----------------
Robert F. Mougeot Paul A. Oyer
Financial Vice President and Financial Vice President and
Chief Financial Officer Treasurer
(Principal Financial Officer of HEI) (Principal Financial Officer of HECO)
Date: August 11, 1997 Date: August 11, 1997
32
<PAGE>
HEI Exhibit 12.1
----------------
Hawaiian Electric Industries, Inc. and subsidiaries
COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES
(unaudited)
<TABLE>
<CAPTION>
Six months ended June 30,
--------------------------------------------------------------------------
(dollars in thousands) 1997 (1) 1997 (2) 1996 (1) 1996 (2)
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
FIXED CHARGES
Total interest charges
The Company (3)........................... $ 67,775 $108,663 $ 60,805 $108,145
Proportionate share of fifty-percent-
owned persons............................ 309 309 372 372
Interest component of rentals................ 1,481 1,481 2,052 2,052
Pretax preferred stock dividend requirements
of subsidiaries............................. 5,261 5,261 5,613 5,613
Preferred securities distribution
requirements of trust subsidiaries.......... 4,439 4,439 -- --
-------- -------- -------- --------
TOTAL FIXED CHARGES.......................... $ 79,265 $120,153 $ 68,842 $116,182
======== ======== ======== ========
EARNINGS
Pretax income................................ $ 68,365 $ 68,365 $ 69,859 $ 69,859
Fixed charges, as shown...................... 79,265 120,153 68,842 116,182
Interest capitalized
The Company............................... (3,172) (3,172) (3,135) (3,135)
Proportionate share of fifty-percent-
owned persons............................ (302) (302) (372) (372)
-------- -------- -------- --------
P/E EARNINGS AVAILABLE FOR FIXED CHARGES..... $144,156 $185,044 $135,194 $182,534
======== ======== ======== ========
RATIO OF EARNINGS TO FIXED CHARGES........... 1.82 1.54 1.96 1.57
======== ======== ======== ========
(1) Excluding interest on ASB deposits.
(2) Including interest on ASB deposits.
(3) Total interest charges exclude interest on nonrecourse debt from leveraged
leases which is not included in interest expense in HEI's consolidated
statements of income.
</TABLE>
<PAGE>
HECO Exhibit 12.2
-----------------
Hawaiian Electric Company, Inc. and subsidiaries
COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES
(unaudited)
<TABLE>
<CAPTION>
Six months ended
June 30,
-------------------------------------
(dollars in thousands) 1997 1996
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C>
FIXED CHARGES
Total interest charges.............................................. $24,253 $22,853
Interest component of rentals....................................... 356 352
Pretax preferred stock dividend requirements of subsidiaries........ 2,085 2,293
Preferred securities distribution requirements of trust subsidiary.. 1,072 --
------- -------
TOTAL FIXED CHARGES................................................. $27,766 $25,498
======= =======
EARNINGS
Income before preferred stock dividends of HECO..................... $37,113 $39,364
Income taxes (see note below)....................................... 23,813 25,795
Fixed charges, as shown............................................. 27,766 25,498
AFUDC for borrowed funds............................................ (3,136) (2,504)
------- -------
EARNINGS AVAILABLE FOR FIXED CHARGES................................ $85,556 $88,153
======= =======
RATIO OF EARNINGS TO FIXED CHARGES.................................. 3.08 3.46
======= =======
Note:
Income taxes is comprised of the following
Expense relating to operating income from regulated activities..... $23,777 $25,893
Expense (benefit) relating to income (loss) from nonregulated
activities........................................................ 36 (98)
------- -------
$23,813 $25,795
======= =======
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM HAWAIIAN
ELECTRIC INDUSTRIES, INC. AND SUBSIDIARIES' CONSOLIDATED BALANCE SHEET AS OF
JUNE 30, 1997 AND CONSOLIDATED STATEMENT OF INCOME FOR THE SIX MONTHS ENDED JUNE
30, 1997 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<CIK> 0000354707
<NAME> HAWAIIAN ELECTRIC INDUSTRIES, INC.
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> JUN-30-1997
<CASH> 129,398
<SECURITIES> 1,341,021
<RECEIVABLES> 148,179
<ALLOWANCES> 0
<INVENTORY> 47,126
<CURRENT-ASSETS> 0
<PP&E> 2,900,993
<DEPRECIATION> 934,434
<TOTAL-ASSETS> 6,022,890
<CURRENT-LIABILITIES> 0
<BONDS> 802,650
86,260
148,293
<COMMON> 636,890
<OTHER-SE> 151,455
<TOTAL-LIABILITY-AND-EQUITY> 6,022,890
<SALES> 0
<TOTAL-REVENUES> 719,446
<CGS> 0
<TOTAL-COSTS> 619,924
<OTHER-EXPENSES> (988)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 32,145
<INCOME-PRETAX> 68,365
<INCOME-TAX> 28,907
<INCOME-CONTINUING> 39,458
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 39,458
<EPS-PRIMARY> 1.27
<EPS-DILUTED> 1.27
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> UT
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM HAWAIIAN
ELECTRIC COMPANY, INC. AND SUBSIDIARIES' CONSOLIDATED BALANCE SHEET AS OF JUNE
30, 1997 AND CONSOLIDATED STATEMENT OF INCOME AND CASH FLOWS FOR THE SIX MONTHS
ENDED JUNE 30, 1997 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<CIK> 0000046207
<NAME> HAWAIIAN ELECTRIC COMPANY, INC.
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> JUN-30-1997
<BOOK-VALUE> PER-BOOK
<TOTAL-NET-UTILITY-PLANT> 1,864,451
<OTHER-PROPERTY-AND-INVEST> 0
<TOTAL-CURRENT-ASSETS> 170,777
<TOTAL-DEFERRED-CHARGES> 12,050
<OTHER-ASSETS> 139,413
<TOTAL-ASSETS> 2,186,691
<COMMON> 85,387
<CAPITAL-SURPLUS-PAID-IN> 296,295
<RETAINED-EARNINGS> 375,114
<TOTAL-COMMON-STOCKHOLDERS-EQ> 756,796
84,565
48,293
<LONG-TERM-DEBT-NET> 596,696
<SHORT-TERM-NOTES> 5,900
<LONG-TERM-NOTES-PAYABLE> 0
<COMMERCIAL-PAPER-OBLIGATIONS> 120,024
<LONG-TERM-DEBT-CURRENT-PORT> 0
1,695
<CAPITAL-LEASE-OBLIGATIONS> 0
<LEASES-CURRENT> 0
<OTHER-ITEMS-CAPITAL-AND-LIAB> 572,722
<TOT-CAPITALIZATION-AND-LIAB> 2,186,691
<GROSS-OPERATING-REVENUE> 544,569
<INCOME-TAX-EXPENSE> 23,777
<OTHER-OPERATING-EXPENSES> 469,875
<TOTAL-OPERATING-EXPENSES> 493,652
<OPERATING-INCOME-LOSS> 50,917
<OTHER-INCOME-NET> 9,685
<INCOME-BEFORE-INTEREST-EXPEN> 60,602
<TOTAL-INTEREST-EXPENSE> 23,489
<NET-INCOME> 37,113
1,834
<EARNINGS-AVAILABLE-FOR-COMM> 35,279
<COMMON-STOCK-DIVIDENDS> 27,935
<TOTAL-INTEREST-ON-BONDS> 40,802
<CASH-FLOW-OPERATIONS> 45,044
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
<PAGE>
HEI Exhibit 99.1
SEVENTH AMENDMENT TO TRUST AGREEMENT BETWEEN
FIDELITY MANAGEMENT TRUST COMPANY AND
HAWAIIAN ELECTRIC INDUSTRIES, INC.
THIS SEVENTH AMENDMENT TO TRUST AGREEMENT is made and entered into June 13,
1997, by and between Fidelity Management Trust Company (the "Trustee") and
Hawaiian Electric Industries, Inc. (the "Sponsor");
WITNESSETH:
WHEREAS, the Trustee and the Sponsor heretofore entered into a Trust
Agreement dated November 28, 1988, and amended December 22, 1989, January 1,
1994, March 15, 1994, February 1, 1996, April 1, 1996 and April 1, 1997 (the
"Trust Agreement"), for the Hawaiian Electric Industries Retirement Savings Plan
(the "Plan"); and
WHEREAS, the Trustee and the Sponsor wish to further amend said Trust
Agreement as provided for in Section 13 thereunder;
NOW THEREFORE, in consideration of the above premises, the Trustee and the
Sponsor hereby amend the Trust Agreement by:
(1) Amending and restating Schedule "B" as attached.
(2) Amending and restating Section 15(b) as follows:
(b) The Trustee is not a party to the Plan, and in the event of any
conflict between the provisions of the Plan and the provisions of this
Agreement, the provisions of this Agreement will control with respect
to the rights and obligations of the Trustee.
IN WITNESS WHEREOF, the Trustee and the Sponsor have caused this Seventh
Amendment to be executed by their duly authorized officers effective as of the
day and year first above written.
HAWAIIAN ELECTRIC FIDELITY MANAGEMENT TRUST COMPANY
INDUSTRIES, INC.
BY: HAWAIIAN ELECTRIC
INDUSTRIES, INC. PENSION
INVESTMENT COMMITTEE
By: /s/ Constance H. Lau By: /s/ Cheryl Gladstone 6/20/97
---------------------------------- ------------------------------
Constance H. Lau Date Vice President Date
Secretary & Member
By: /s/ Peter C. Lewis 6/5/97
----------------------------------
Peter C. Lewis Date
Member
<PAGE>
SCHEDULE "B"
FEE SCHEDULE
------------
Recordkeeping Fees
- ------------------
* Annual Participation Fee Fees will be billed quarterly and are
(See below) subject to a $7,500.00** per year or $22.00
per participant per year minimum fee,
whichever is greater.
* Plan Establishment Fee $2,500.00
* Loan Fee Establishment fee of $35.00 per loan account;
annual fee of $15.00 per loan account.
* Plan Sponsor Workstation (PSW): $1,000 per PSW per year for up to two PSW's.
A third PSW is $2,500 per year and each
additional PSW is $1,500 per year. There is a
$5.00 charge per hour per PSW for on-line
usage (no charge if accessed via another
internet service provider).
* Other Fees: extraordinary expenses resulting from large numbers of
simultaneous manual transactions or from errors not caused by Fidelity.
** This fee will be imposed pro rata for each calendar quarter, or any part
--------
thereof, that it remains necessary to keep a participant's account(s) as part of
the Plan's records, e.g. vested, deferred, forfeiture, top-heavy and terminated
participants who must remain on file through the calendar year-end for 1099R
reporting.
Trustee Fees
- ------------
* To the extent that assets are invested in Fidelity Mutual Funds, 0.0125% per
calendar quarter of the assets in the Trust as of the calendar quarter's last
valuation date, but no less than $2,500.00
(Note: The Trustee reserves the right to review migration into Non-Fidelity
Mutual Funds for potential impact on recordkeeping fees.)
HAWAIIAN ELECTRIC FIDELITY MANAGEMENT TRUST COMPANY
INDUSTRIES, INC.
BY: HAWAIIAN ELECTRIC
INDUSTRIES, INC. PENSION
INVESTMENT COMMITTEE
By: /s/ Constance H. Lau By: /s/ Cheryl Gladstone 6/20/97
---------------------------------- ------------------------------
Constance H. Lau Date Vice President Date
Secretary & Member
By: /s/ Peter C. Lewis 6/5/97
----------------------------------
Peter C. Lewis Date
Member
