<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 March 31, 1998
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 May 7, 1998
- ---------------------------------------------------------------------------------------------------------
<S> <C>
Hawaiian Electric Industries, Inc. (Without Par Value)... 32,008,493 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 March 31, 1998
INDEX
<TABLE>
<CAPTION>
PAGE NO.
<S> <C> <C>
Glossary of terms................................................................ ii
PART I. FINANCIAL INFORMATION
Item 1. Financial statements
Hawaiian Electric Industries, Inc. and subsidiaries
---------------------------------------------------
Consolidated balance sheets (unaudited) - March 31, 1998
and December 31, 1997.................................................. 1
Consolidated statements of income (unaudited) - three months
ended March 31, 1998 and 1997.......................................... 2
Consolidated statements of retained earnings (unaudited) - three months
ended March 31, 1998 and 1997.......................................... 2
Consolidated statements of cash flows (unaudited) - three months
ended March 31, 1998 and 1997.......................................... 3
Notes to consolidated financial statements (unaudited).................. 4
Hawaiian Electric Company, Inc. and subsidiaries
------------------------------------------------
Consolidated balance sheets (unaudited) - March 31, 1998
and December 31, 1997.................................................. 9
Consolidated statements of income (unaudited) - three months
ended March 31, 1998 and 1997.......................................... 10
Consolidated statements of retained earnings (unaudited) - three months
ended March 31, 1998 and 1997.......................................... 10
Consolidated statements of cash flows (unaudited) - three months
ended March 31, 1998 and 1997.......................................... 11
Notes to consolidated financial statements (unaudited).................. 12
Item 2. Management's discussion and analysis of financial condition
and results of operations.............................................. 18
Item 3. Quantitative and qualitative disclosures about market risk.............. 27
PART II. OTHER INFORMATION
Item 1. Legal proceedings....................................................... 27
Item 4. Submission of matters to a vote of security holders..................... 27
Item 5. Other information....................................................... 28
Item 6. Exhibits and reports on Form 8-K........................................ 29
Signatures....................................................................... 30
</TABLE>
i
<PAGE>
Hawaiian Electric Industries, Inc. and subsidiaries
Hawaiian Electric Company, Inc. and subsidiaries
Form 10-Q-Quarter ended March 31, 1998
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., American Savings Mortgage Co., Inc. and
ASB Realty Corporation (incorporated on March 27, 1998)
ASBR ASB Realty Corporation
BIF Bank Insurance Fund
BLNR Board of Land and Natural Resources of the State of Hawaii
BOA Bank of America, FSB
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, HEIDI Real Estate
Corp., Pacific Energy Conservation Services, Inc., HEI Power Corp.
and its subsidiaries, Hycap Management, Inc., Hawaiian Electric
Industries Capital Trust I, Hawaiian Electric Industries Capital
Trust II and Hawaiian Electric Industries Capital Trust III
CONSUMER Division of Consumer Advocacy, Department of Commerce and Consumer
ADVOCATE Affairs of the State of Hawaii
D&O Decision and order
DLNR Department of Land and Natural Resources of the State of Hawaii
DOH Department of Health of the State of Hawaii
DSM Demand-side management
ENCOGEN Encogen Hawaii, L.P., an affiliate of Enserch Development
Corporation
ENSERCH Enserch Development Corporation
EPA Environmental Protection Agency - federal
FASB Financial Accounting Standards Board
FDIC Federal Deposit Insurance Corporation
FEDERAL U.S. Government
</TABLE>
ii
<PAGE>
GLOSSARY OF TERMS, CONTINUED
<TABLE>
<CAPTION>
TERMS DEFINITIONS
- ----- -----------
<S> <C>
FHLB Federal Home Loan Bank
FICO Financing Corporation
FUNDS ACT Deposit Insurance Funds Act of 1996
GAAP Generally accepted accounting principles
GPA Guam Power Authority
HCPC Hilo Coast Processing Company, now known as Hilo Coast Power
Company
HECO Hawaiian Electric Company, Inc., a wholly owned electric utility
subsidiary of Hawaiian Electric Industries, Inc. and parent
company of Maui Electric Company, Limited, Hawaii Electric Light
Company, Inc. and HECO Capital Trust I
HEI Hawaiian Electric Industries, Inc., direct 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., Hawaiian Electric Industries Capital Trust I,
Hawaiian Electric Industries Capital Trust II and Hawaiian
Electric Industries Capital Trust III
HEIDI HEI Diversified, Inc., a wholly owned subsidiary of Hawaiian
Electric Industries, Inc. and the parent company of American
Savings Bank, F.S.B. and HEIDI Real Estate Corp.
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 HIGI's common stock
prior to August 16, 1994
HPG HEI Power Corp. Guam, a wholly owned subsidiary of HEI Power Corp.
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
KCP Kawaihae Cogeneration Partners
KWH Kilowatthour
</TABLE>
iii
<PAGE>
GLOSSARY OF TERMS, CONTINUED
<TABLE>
<CAPTION>
TERMS DEFINITIONS
- ----- -----------
<S> <C>
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
REIT Real estate investment trust
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
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 Securities
Exchange Act of 1934. 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 international, national and
local economic conditions, including the condition of the Hawaii tourist and
construction industries and the Hawaii housing market; the effects of weather
and natural disasters; product demand and market acceptance risks; increasing
competition in the electric utility industry; capacity and supply constraints or
difficulties; new technological developments; governmental and regulatory
actions, including decisions in rate cases and on permitting issues; the results
of financing efforts; the timing and extent of changes in interest rates; and
the results of integration of the acquired BoA - Hawaii operations with the
operations of ASB. Investors are also referred to other risks and uncertainties
discussed in other periodic reports filed by HEI and/or HECO in 1998 with the
Securities and Exchange Commission.
iv
<PAGE>
PART I - FINANCIAL INFORMATION
- --------------------------------------------------------------------------------
ITEM 1. FINANCIAL STATEMENTS
- -----------------------------
Hawaiian Electric Industries, Inc. and subsidiaries
CONSOLIDATED BALANCE SHEETS (UNAUDITED)
<TABLE>
<CAPTION>
March 31, December 31,
(in thousands) 1998 1997
- -----------------------------------------------------------------------------------------------------------------
ASSETS
- ------
<S> <C> <C>
Cash and equivalents.......................................................... $ 212,409 $ 254,356
Accounts receivable and unbilled revenues, net................................ 152,455 158,292
Inventories, at average cost.................................................. 36,071 45,412
Real estate developments...................................................... 30,609 30,143
Investment and mortgage-backed securities..................................... 2,012,276 1,971,886
Other investments............................................................. 70,229 73,769
Loans receivable, net......................................................... 3,024,233 3,035,847
Property, plant and equipment, net of accumulated
depreciation and amortization of $999,378 and $974,759..................... 2,028,153 2,019,558
Regulatory assets............................................................. 107,560 104,079
Other......................................................................... 129,171 138,048
Goodwill and other intangibles................................................ 121,547 122,492
---------- ----------
$7,924,713 $7,953,882
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
- ------------------------------------
LIABILITIES
Accounts payable.............................................................. $ 119,115 $ 149,266
Deposit liabilities........................................................... 3,865,483 3,916,600
Short-term borrowings......................................................... 255,467 298,016
Securities sold under agreements to repurchase................................ 424,612 375,366
Advances from Federal Home Loan Bank.......................................... 735,474 736,474
Long-term debt................................................................ 857,952 802,575
Deferred income taxes......................................................... 184,791 186,241
Unamortized tax credits....................................................... 50,740 49,904
Contributions in aid of construction.......................................... 196,568 197,596
Other......................................................................... 181,659 193,100
---------- ----------
6,871,861 6,905,138
---------- ----------
HEI- and HECO-obligated preferred securities of
trust subsidiaries directly or indirectly holding solely HEI
and HEI-guaranteed and HECO and HECO-guaranteed
subordinated debentures.................................................. 150,000 150,000
Preferred stock of electric utility subsidiaries
Subject to mandatory redemption........................................... 33,370 35,770
Not subject to mandatory redemption....................................... 48,293 48,293
---------- ----------
231,663 234,063
---------- ----------
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: 32,001 shares and 31,895 shares.......................... 658,930 654,819
Retained earnings............................................................. 162,259 159,862
---------- ----------
821,189 814,681
---------- ----------
$7,924,713 $7,953,882
========== ==========
</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 March 31,
(in thousands, except per share amounts and -------------------------------
ratio of earnings to fixed charges) 1998 1997
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C>
REVENUES
Electric utility................................................................ $258,262 $273,756
Savings bank.................................................................... 101,827 68,912
Other........................................................................... 15,532 16,525
-------- --------
375,621 359,193
-------- --------
EXPENSES
Electric utility................................................................ 215,701 235,162
Savings bank.................................................................... 85,776 56,627
Other........................................................................... 18,126 18,052
-------- --------
319,603 309,841
-------- --------
OPERATING INCOME (LOSS)
Electric utility................................................................ 42,561 38,594
Savings bank.................................................................... 16,051 12,285
Other........................................................................... (2,594) (1,527)
-------- --------
56,018 49,352
-------- --------
Interest expense-electric utility and other..................................... (18,141) (16,465)
Allowance for borrowed funds used during construction........................... 1,616 1,527
Preferred stock dividends of electric utility subsidiaries...................... (1,508) (1,571)
Preferred securities distributions of trust subsidiaries........................ (3,096) (1,335)
Allowance for equity funds used during construction............................. 2,776 2,673
-------- --------
INCOME BEFORE INCOME TAXES...................................................... 37,665 34,181
Income taxes.................................................................... 15,442 14,518
-------- --------
NET INCOME...................................................................... $ 22,223 $ 19,663
======== ========
Basic earnings per common share................................................. $ 0.70 $ 0.64
======== ========
Diluted earnings per common share............................................... $ 0.69 $ 0.63
======== ========
Dividends per common share...................................................... $ 0.62 $ 0.61
======== ========
Weighted average number of common shares outstanding............................ 31,958 30,960
Effect of dilutive securities-
Stock options and dividend equivalents..................................... 134 81
-------- --------
Adjusted weighted average shares................................................ 32,092 31,041
======== ========
Ratio of earnings to fixed charges (SEC method)
Excluding interest on ASB deposits......................................... 1.86 1.83
======== ========
Including interest on ASB deposits......................................... 1.46 1.55
======== ========
</TABLE>
Hawaiian Electric Industries, Inc. and subsidiaries
CONSOLIDATED STATEMENTS OF RETAINED EARNINGS (UNAUDITED)
<TABLE>
<CAPTION>
Three months ended March 31,
-------------------------------
(in thousands) 1998 1997
- -------------------------------------------------------------------------- -------------------------------
<S> <C> <C>
RETAINED EARNINGS, BEGINNING OF PERIOD.......................................... $159,862 $149,907
Net income...................................................................... 22,223 19,663
Common stock dividends.......................................................... (19,826) (18,873)
-------- --------
RETAINED EARNINGS, END OF PERIOD................................................ $162,259 $150,697
======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
2
<PAGE>
Hawaiian Electric Industries, Inc. and subsidiaries
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
<TABLE>
<CAPTION>
Three months ended
March 31,
--------------------------
(in thousands) 1998 1997
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income.................................................................... $ 22,223 $ 19,663
Adjustments to reconcile net income to net cash provided by operating activities
Depreciation and amortization of property, plant and equipment.......... 24,613 22,776
Other amortization...................................................... 4,103 3,624
Deferred income taxes and tax credits, net.............................. (208) 1,183
Allowance for equity funds used during construction..................... (2,776) (2,673)
Changes in assets and liabilities
Decrease (increase) in accounts receivable and unbilled revenues,
net.............................................................. 5,837 (862)
Decrease in inventories........................................... 9,341 1,483
Increase in regulatory assets..................................... (2,991) (2,822)
Increase (decrease) in accounts payable........................... (30,151) 11,005
Changes in other assets and liabilities........................... 1,676 (20,909)
--------- ---------
NET CASH PROVIDED BY OPERATING ACTIVITIES..................................... 31,667 32,468
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES
Loans receivable originated and purchased..................................... (132,555) (70,812)
Principal repayments on loans receivable...................................... 112,990 35,004
Proceeds from sale of loans receivable........................................ 523 517
Held-to-maturity mortgage-backed securities purchased......................... (132,625) (81,028)
Principal repayments on held-to-maturity mortgage-backed securities........... 92,842 68,630
Capital expenditures.......................................................... (32,012) (30,287)
Contributions in aid of construction.......................................... 1,264 1,281
Proceeds from loans returned to Bank of America, FSB.......................... 26,864 --
Other......................................................................... 721 517
--------- ---------
NET CASH USED IN INVESTING ACTIVITIES......................................... (61,988) (76,178)
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase (decrease) in deposit liabilities................................ (52,940) 24,059
Net decrease in short-term borrowings with original maturities of
three months or less....................................................... (42,700) (112,855)
Proceeds from other short-term borrowings..................................... 681 390
Repayment of other short-term borrowings...................................... (530) (988)
Proceeds from securities sold under agreements to repurchase.................. 284,000 280,000
Repurchase of securities sold under agreements to repurchase.................. (235,000) (209,100)
Proceeds from advances from Federal Home Loan Bank............................ 155,000 217,000
Principal payments on advances from Federal Home Loan Bank.................... (156,000) (276,000)
Proceeds from issuance of long-term debt...................................... 112,837 4,821
Repayment of long-term debt................................................... (57,500) (13,000)
Proceeds from issuance of HEI- and HECO-obligated preferred securities of
trust subsidiaries........................................................... -- 150,000
Redemption of electric utility subsidiaries' preferred stock.................. (2,400) (2,695)
Net proceeds from issuance of common stock.................................... 4,332 2,776
Common stock dividends........................................................ (19,826) (15,239)
Other......................................................................... (1,580) (4,223)
--------- ---------
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES........................... (11,626) 44,946
--------- ---------
Net increase (decrease) in cash and equivalents............................... (41,947) 1,236
Cash and equivalents, beginning of period..................................... 254,356 97,417
--------- ---------
CASH AND EQUIVALENTS, END OF PERIOD........................................... $ 212,409 $ 98,653
========= =========
</TABLE>
See accompanying notes to consolidated financial statements.
3
<PAGE>
Hawaiian Electric Industries, Inc. and subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 1998 and 1997
(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 GAAP 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, 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 March 31, 1998 and
December 31, 1997, and the results of its operations and its cash flows for the
three months ended March 31, 1998 and 1997. 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 9 through 16.
(3) SAVINGS BANK SUBSIDIARY
- ----------------------------
SELECTED CONSOLIDATED FINANCIAL INFORMATION
American Savings Bank, F.S.B. and subsidiaries
Income statement data
<TABLE>
<CAPTION>
Three months ended
March 31,
--------------------------------
(in thousands) 1998 1997
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Interest income...................................................... $ 95,271 $ 65,200
Interest expense..................................................... 53,141 37,820
-------- --------
NET INTEREST INCOME.................................................. 42,130 27,380
Provision for loan losses............................................ (2,924) (1,189)
Other income......................................................... 6,556 3,712
Operating, administrative and general expenses....................... (29,711) (17,618)
-------- --------
OPERATING INCOME..................................................... 16,051 12,285
Income taxes......................................................... 6,341 5,186
-------- --------
INCOME BEFORE PREFERRED STOCK DIVIDENDS.............................. 9,710 7,099
Preferred stock dividends............................................ 1,350 --
-------- --------
NET INCOME........................................................... $ 8,360 $ 7,099
======== ========
</TABLE>
4
<PAGE>
American Savings Bank, F.S.B. and subsidiaries
Balance sheet data
<TABLE>
<CAPTION>
March 31, December 31,
(in thousands) 1988 1997
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
Cash and equivalents................................................ $ 200,710 $ 249,607
Held-to-maturity investment securities.............................. 106,783 105,596
Held-to-maturity mortgage-backed securities......................... 1,904,328 1,865,027
Loans receivable, net............................................... 3,024,233 3,035,847
Other............................................................... 156,703 169,843
Goodwill and other intangibles...................................... 121,547 122,492
---------- ----------
$5,514,304 $5,548,412
========== ==========
LIABILITIES AND EQUITY
Deposit liabilities................................................. $3,865,483 $3,916,600
Securities sold under agreements to repurchase...................... 424,612 375,366
Advances from Federal Home Loan Bank................................ 735,474 736,474
Other............................................................... 86,828 124,185
---------- ----------
5,112,397 5,152,625
Preferred stock held by parent...................................... 75,000 75,000
Common stock equity................................................. 326,907 320,787
---------- ----------
$5,514,304 $5,548,412
========== ==========
</TABLE>
ACQUISITION OF MOST OF THE HAWAII OPERATIONS OF BANK OF AMERICA, FSB (BOA)
Effective December 6, 1997, ASB acquired certain loans and other assets and
assumed certain deposits and other liabilities of the Hawaii operations of BoA
pursuant to a Purchase and Assumption Agreement executed by both parties on
May 26, 1997, as amended. ASB used the purchase method of accounting to account
for the transaction. Accordingly, the accompanying financial statements include
the results of operations related to the assets acquired and liabilities assumed
from the acquisition date. The purchase price relative to this transaction was
$1.8 billion, comprised of $1.7 billion estimated fair value of liabilities
assumed and $0.1 billion premium paid on certain transferred deposit
liabilities. In conjunction with this acquisition, the estimated fair value of
tangible and intangible assets acquired, including cash of $0.8 billion,
amounted to $1.8 billion. ASB recorded the excess of the purchase price over the
estimated fair value of the identifiable net assets acquired of $71 million as
goodwill and is amortizing it over 25 years using the straight-line method. ASB
recorded the core deposit premium of approximately $20 million as an intangible
and is amortizing it annually at the greater of the actual attrition rate of the
acquired core deposits or 10% of the original premium amount.
DEPOSIT-INSURANCE PREMIUMS AND REGULATORY DEVELOPMENTS
The Savings Association Insurance Fund (SAIF) insures the deposit accounts of
ASB and other thrifts. The Bank Insurance Fund (BIF) insures the deposit
accounts of commercial banks. The Federal Deposit Insurance Corporation (FDIC)
administers the SAIF and BIF.
In September 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.
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
FICO's interest obligations of 6.48 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-
5
<PAGE>
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 is 6.48 cents per $100 of deposits. ASB's assessment for funding FICO
interest payments is subject to change quarterly.
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 are 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.
(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 $41 million and $40 million at
March 31, 1998 and December 31, 1997, respectively. The amounts MPC will
ultimately realize relative to these real estate investments could differ
materially from the recorded amounts as of March 31, 1998.
At March 31, 1998, MPC or its subsidiaries had issued (i) guarantees under which
they were jointly and severally contingently liable with their joint venture
partners for $2.1 million of outstanding loans and (ii) payment guarantees under
which MPC or its subsidiaries were severally contingently liable for
$3.7 million of outstanding loans and $1.1 million of additional undrawn loan
facilities. All such loans are collateralized by real property. At March 31,
1998, HEI had agreed with the lenders of construction loans and loan facilities,
of which approximately $5.8 million was outstanding and $1.5 million was
undrawn, that it will maintain ownership of 100% 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 HEI AND HEI-GUARANTEED AND HECO AND HECO-
----------------------------------------------------------------------
GUARANTEED SUBORDINATED DEBENTURES
----------------------------------
In February 1997, Hawaiian Electric Industries Capital Trust I, a grantor trust
and wholly owned subsidiary of HEI, issued and sold, in an underwritten
registered public offering, 4 million of its HEI-obligated 8.36% preferred
securities (trust preferred securities), with an aggregate liquidation value of
$100 million. The trust preferred securities have no scheduled maturity and are
not redeemable at the option of the holders, but may be redeemed by Hawaiian
Electric Industries Capital Trust I, in whole or in part, from time to time,
after February 4, 2002.
In March 1997, HECO Capital Trust I, a grantor trust and wholly owned subsidiary
of HECO, issued and sold, in an underwritten registered public offering, 2
million of its HECO-obligated 8.05% Cumulative Quarterly Income Preferred
Securities, Series 1997, with an aggregate liquidation value of $50 million. The
HECO-obligated Cumulative Quarterly Income Preferred Securities must be redeemed
at the maturity of the underlying debt on March 27, 2027, which maturity may be
shortened to a date no earlier than March 27, 2002 or extended to a date no
later than March 27, 2046, and are not redeemable at the option of the holders,
but may be redeemed by HECO Capital Trust I, in whole or in part, from time to
time, after March 27, 2002.
6
<PAGE>
(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>
Three months ended
March 31,
--------------------------
(in thousands) 1998 1997
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C>
Interest (including interest paid by savings bank, but excluding
interest paid on nonrecourse debt on leveraged leases)................ $60,320 $47,604
======= =======
Interest on nonrecourse debt from leveraged leases..................... $ 254 $ 167
======= =======
Income taxes........................................................... $ 1,017 $ 4,822
======= =======
</TABLE>
SUPPLEMENTAL DISCLOSURES OF NONCASH ACTIVITIES
Under the HEI Dividend Reinvestment and Stock Purchase Plan, common stock
dividends reinvested by shareholders in HEI common stock in noncash transactions
amounted to $3.6 million for the three months ended March 31, 1997. Beginning in
March 1998, HEI acquired for cash its common shares in the open market to
satisfy the requirements of the HEI Dividend Reinvestment and Stock Purchase
Plan.
The allowance for equity funds used during construction, which was capitalized
as part of the cost of electric utility plant, amounted to $2.8 million and $2.7
million for the three months ended March 31, 1998 and 1997, respectively.
(7) ACCOUNTING CHANGES
- -----------------------
EARNINGS PER SHARE
In February 1997, the FASB issued SFAS No. 128, "Earnings per Share," which
requires the presentation of "basic" earnings per share, computed by dividing
net income available to common shareholders by the weighted average number of
common shares outstanding for the period, and "diluted" earnings per share,
which reflects the potential dilution that could occur if options or other
contracts to issue common stock were exercised or converted into common stock or
resulted in the issuance of common stock that then shared in the earnings of the
entity. The Company adopted SFAS No. 128 in the fourth quarter of 1997 and has
restated all prior period earnings per share data presented. The adoption of
SFAS No. 128 did not have a material effect on the Company's previously
reported earnings per share information.
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.
The Company adopted SFAS No. 130 in the first quarter of 1998, but has no
material period or accumulated other comprehensive items.
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. The Company adopted SFAS No. 131 in the first quarter of 1998,
with no modification to the Company's reporting segments.
COSTS OF COMPUTER SOFTWARE DEVELOPED OR OBTAINED FOR INTERNAL USE
In March 1998, the AICPA Accounting Standards Executive Committee issued
Statement of Position (SOP) 98-1, "Accounting for the Costs of Computer Software
Developed or Obtained for Internal Use,"
7
<PAGE>
which requires that certain costs, including certain payroll and payroll-related
costs, be capitalized and amortized over the estimated useful life of the
software. The provisions of SOP 98-1 are effective for fiscal years beginning
after December 15, 1998. The Company has not determined when it will adopt SOP
98-1. Management estimates that the adoption of SOP 98-1 will not have a
material effect on the Company's financial condition, results of operations or
liquidity.
COSTS OF START-UP ACTIVITIES
In April 1998, the AICPA Accounting Standards Executive Committee issued SOP 98-
5, "Reporting on the Costs of Start-up Activities," which requires that costs of
start-up activities, including organization costs, be expensed as incurred. The
provisions of SOP 98-5 are effective for fiscal years beginning after December
15, 1998 and earlier application is encouraged. The Company has not determined
when it will adopt SOP 98-5. Management estimates that the adoption of SOP 98-5
will not have a material effect on the Company's financial condition, results of
operations or liquidity.
(8) CONTINGENCIES
- ------------------
ENVIRONMENTAL REGULATION
In early 1995, the DOH initially 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. 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 potentially responsible for the contamination and/or to 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. Certain parties
identified in the December 1995 DOH letter (including HECO, Chevron Products
Company, Shell Oil Products Company, State of Hawaii Department of
Transportation Harbors Division and others) formed a Technical Workgroup to
conduct independent voluntary investigations relative to this issue. Effective
January 30, 1998, the Technical Workgroup and the DOH entered into a voluntary
agreement and scope of work to determine the nature and extent of any
contamination, the responsible parties and appropriate remedial actions.
Because the process for determining appropriate remedial and cleanup action, if
any, is at an early stage, management cannot predict at this time the costs of
further site analysis or future remediation and cleanup requirements, nor can it
estimate when such costs would be incurred. Certain of the costs incurred may be
claimed and covered under insurance policies, but such coverage is not
determinable at this time.
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.
HEI Diversified, Inc. (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 three
director and officer liability insurance carriers. The primary director and
officer liability insurance carrier, whose policy amount is $10 million, 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, with
several of the Court's rulings having been favorable to HEI and HEIDI. Discovery
should be completed by the end of May and trial is scheduled to commence on
July 28, 1998. The issues remaining for trial are primarily whether less than
$10 million of the $32 million settlement should be allocated to settlement of
claims covered by the policy, whether the insurance carrier acted in bad faith
in discharging its responsibilities under the policy and, if so, whether (and in
what amount) punitive damages should be awarded. Recent discussions with the two
excess director and officer liability insurance carriers have resulted in an
agreement in principle on the principal terms of a confidential settlement which
remains subject to the preparation, approval and execution of a definitive
settlement agreement. Recoveries from HEI's insurance carriers, if any, will be
recognized when realized.
8
<PAGE>
Hawaiian Electric Company, Inc. and subsidiaries
CONSOLIDATED BALANCE SHEETS (UNAUDITED)
<TABLE>
<CAPTION>
March 31, December 31,
(in thousands, except par value) 1998 1997
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
Utility plant, at cost
Land............................................................ $ 32,232 $ 32,222
Plant and equipment............................................. 2,585,221 2,559,655
Less accumulated depreciation................................... (926,240) (904,781)
Plant acquisition adjustment, net............................... 549 562
Construction in progress........................................ 208,165 205,447
---------- ----------
NET UTILITY PLANT......................................... 1,899,927 1,893,105
---------- ----------
Current assets
Cash and equivalents............................................ 4,233 1,676
Customer accounts receivable, net............................... 63,944 69,378
Accrued unbilled revenues, net.................................. 45,322 45,980
Other accounts receivable, net.................................. 5,605 4,195
Fuel oil stock, at average cost................................. 16,226 25,058
Materials and supplies, at average cost......................... 18,315 18,975
Prepayments and other........................................... 5,031 3,335
---------- ----------
TOTAL CURRENT ASSETS...................................... 158,676 168,597
---------- ----------
Other assets
Regulatory assets............................................... 105,329 101,809
Other........................................................... 52,476 48,803
---------- ----------
TOTAL OTHER ASSETS........................................ 157,805 150,612
---------- ----------
$2,216,408 $2,212,314
========== ==========
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........................................ 296,189 296,266
Retained earnings............................................... 391,518 387,582
---------- ----------
COMMON STOCK EQUITY....................................... 773,094 769,235
Cumulative preferred stock
Not subject to mandatory redemption.......................... 48,293 48,293
Subject to mandatory redemption.............................. 31,775 33,175
HECO-obligated mandatorily redeemable preferred securities
of trust subsidiary holding solely HECO and HECO-guaranteed
subordinated debentures...................................... 50,000 50,000
Long-term debt, net............................................. 600,498 597,621
---------- ----------
TOTAL CAPITALIZATION...................................... 1,503,660 1,498,324
---------- ----------
Current liabilities
Long-term debt due within one year.............................. 30,000 30,000
Preferred stock sinking fund payments........................... 1,595 2,595
Short-term borrowings - nonaffiliates........................... 104,771 95,181
Short-term borrowings - affiliate............................... -- 400
Accounts payable................................................ 44,334 49,805
Interest and preferred dividends payable........................ 18,449 12,225
Taxes accrued................................................... 49,830 59,952
Other........................................................... 22,192 21,633
---------- ----------
TOTAL CURRENT LIABILITIES................................. 271,171 271,791
---------- ----------
Deferred credits and other liabilities
Deferred income taxes........................................... 126,862 125,509
Unamortized tax credits......................................... 49,547 48,675
Other........................................................... 68,600 70,419
---------- ----------
TOTAL DEFERRED CREDITS AND OTHER LIABILITIES.............. 245,009 244,603
---------- ----------
Contributions in aid of construction............................... 196,568 197,596
---------- ----------
$2,216,408 $2,212,314
========== ==========
</TABLE>
See accompanying notes to HECO's consolidated financial statements.
9
<PAGE>
Hawaiian Electric Company, Inc. and subsidiaries
CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
<TABLE>
<CAPTION>
Three months ended
March 31,
-------------------------------
(in thousands, except for ratio of earnings to fixed charges) 1998 1997
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C>
OPERATING REVENUES................................................... $256,043 $271,597
-------- --------
OPERATING EXPENSES
Fuel oil............................................................. 56,731 69,220
Purchased power...................................................... 66,583 70,751
Other operation...................................................... 36,086 36,911
Maintenance.......................................................... 10,364 12,063
Depreciation and amortization........................................ 21,442 20,497
Taxes, other than income taxes....................................... 24,292 25,637
Income taxes......................................................... 13,002 11,704
-------- --------
228,500 246,783
-------- --------
OPERATING INCOME..................................................... 27,543 24,814
-------- --------
OTHER INCOME
Allowance for equity funds used during construction.................. 2,776 2,673
Other, net........................................................... 2,002 2,071
-------- --------
4,778 4,744
-------- --------
INCOME BEFORE INTEREST AND OTHER CHARGES............................. 32,321 29,558
-------- --------
INTEREST AND OTHER CHARGES
Interest on long-term debt........................................... 10,178 9,859
Amortization of net bond premium and expense......................... 349 327
Other interest charges............................................... 1,634 2,106
Allowance for borrowed funds used during construction................ (1,616) (1,527)
Preferred stock dividends of subsidiaries............................ 638 650
Preferred securities distributions of trust subsidiary............... 1,006 58
-------- --------
12,189 11,473
-------- --------
INCOME BEFORE PREFERRED STOCK DIVIDENDS OF HECO...................... 20,132 18,085
Preferred stock dividends of HECO.................................... 870 921
-------- --------
NET INCOME FOR COMMON STOCK.......................................... $ 19,262 $ 17,164
======== ========
Ratio of earnings to fixed charges (SEC method)...................... 3.19 3.08
======== ========
</TABLE>
Hawaiian Electric Company, Inc. and subsidiaries
CONSOLIDATED STATEMENTS OF RETAINED EARNINGS (UNAUDITED)
<TABLE>
<CAPTION>
Three months ended
March 31,
-------------------------------
(in thousands) 1998 1997
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C>
RETAINED EARNINGS, BEGINNING OF PERIOD............................... $387,582 $367,770
Net income for common stock.......................................... 19,262 17,164
Common stock dividends............................................... (15,326) (15,062)
-------- --------
RETAINED EARNINGS, END OF PERIOD..................................... $391,518 $369,872
======== ========
</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.
10
<PAGE>
Hawaiian Electric Company, Inc. and subsidiaries
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
<TABLE>
<CAPTION>
Three months ended
March 31,
-------------------------------
(in thousands) 1998 1997
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Income before preferred stock dividends of HECO...................... $ 20,132 $ 18,085
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......................................... 21,442 20,497
Other amortization............................................. 1,873 2,502
Deferred income taxes.......................................... 1,353 (274)
Tax credits, net............................................... 1,276 739
Allowance for equity funds used during construction............ (2,776) (2,673)
Changes in assets and liabilities
Decrease (increase) in accounts receivable................ 4,024 (1,600)
Decrease in accrued unbilled revenues..................... 658 2,040
Decrease in fuel oil stock................................ 8,832 1,383
Decrease in materials and supplies........................ 660 129
Increase in regulatory assets............................. (2,991) (2,822)
Increase (decrease) in accounts payable................... (5,471) 1,327
Increase in interest and preferred dividends payable...... 6,224 5,277
Changes in other assets and liabilities................... (19,587) (17,057)
-------- --------
NET CASH PROVIDED BY OPERATING ACTIVITIES............................ 35,649 27,553
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES
Capital expenditures................................................. (27,081) (28,144)
Contributions in aid of construction................................. 1,264 1,281
Payments on notes receivable......................................... 376 1,191
-------- --------
NET CASH USED IN INVESTING ACTIVITIES................................ (25,441) (25,672)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES
Common stock dividends............................................... (15,326) (15,062)
Preferred stock dividends............................................ (870) (921)
Proceeds from issuance of HECO-obligated mandatorily redeemable
preferred securities of trust subsidiary............................ -- 50,000
Proceeds from issuance of long-term debt............................. 60,337 4,821
Repayment of long-term debt.......................................... (57,500) (13,000)
Redemption of preferred stock........................................ (2,400) (2,695)
Net increase (decrease) in short-term borrowings from nonaffiliates
and affiliate with original maturities of three months or less.... 9,190 (18,555)
Other................................................................ (1,082) (3,984)
-------- --------
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES.................. (7,651) 604
-------- --------
Net increase in cash and equivalents................................. 2,557 2,485
Cash and equivalents, beginning of period............................ 1,676 823
-------- --------
CASH AND EQUIVALENTS, END OF PERIOD.................................. $ 4,233 $ 3,308
======== ========
</TABLE>
See accompanying notes to HECO's consolidated financial statements.
11
<PAGE>
Hawaiian Electric Company, Inc. and subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 1998 and 1997
(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 GAAP 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, 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 March
31, 1998 and December 31, 1997, and the results of their operations and their
cash flows for the three months ended March 31, 1998 and 1997. 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 HECO AND HECO-GUARANTEED SUBORDINATED DEBENTURES
--------------------------------------------------------------------------
In March 1997, HECO Capital Trust I (Trust), a grantor trust and a wholly owned
subsidiary of HECO, sold (i) in a public offering, 2 million of its HECO-
Obligated 8.05% Cumulative Quarterly Income Preferred Securities, Series 1997
(trust preferred securities) with an aggregate liquidation preference of $50
million and (ii) to HECO, common securities with a liquidation preference of
approximately $1.55 million. Proceeds from the sale of the trust preferred
securities and the common securities were used by the Trust to purchase 8.05%
Junior Subordinated Deferrable Interest Debentures, Series 1997 (junior
deferrable debentures) issued by HECO in the principal amount of $31.55 million
and issued by each of MECO and HELCO in the respective principal amounts of $10
million. The junior deferrable debentures, which bear interest at 8.05% and
mature on March 27, 2027, together with the subsidiary guarantees (pursuant to
which the obligations of MECO and HELCO under their respective debentures are
fully and unconditionally guaranteed by HECO), are the sole assets of the Trust.
Contractual arrangements entered into by HECO in connection with the issuance of
the trust preferred securities, considered together, constitute a full and
unconditional guarantee by HECO, on a subordinated basis, of the periodic
distributions due on the trust preferred securities and of amounts due upon the
redemption thereof or upon liquidation of the Trust. The junior deferrable
debentures and the common securities of the Trust have been eliminated in HECO's
consolidated balance sheet as of March 31, 1998 and December 31, 1997. The
trust preferred securities are subject to mandatory redemption upon redemption
of the junior deferrable debentures. The junior deferrable debentures are
redeemable only (i) at the option of HECO, MECO and HELCO, respectively, in
whole or in part, on or after March 27, 2002 or (ii) at the option of HECO, in
whole, upon the occurrence of a "Special Event" (relating to certain changes in
laws or regulations).
12
<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>
Three months ended
March 31,
----------------------------
(in thousands) 1998 1997
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Interest............................................................. $4,951 $6,244
====== ======
Income taxes......................................................... $ 296 $ 306
====== ======
</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 $2.8 million and $2.7
million for the three months ended March 31, 1998 and 1997, respectively.
(4) COMMITMENTS AND CONTINGENCIES
- ----------------------------------
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 PUC approved expenditures for CT-4, which HELCO had planned
to install in late 1994.
The timing of 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
Department of Health of the State of Hawaii (DOH) and the U.S. Environmental
Protection Agency (EPA) a Prevention of Significant Deterioration/Covered Source
permit (PSD permit) for the Keahole power plant site. Subject to satisfactory
resolution of the CDUP amendment and PSD permit matters, HELCO's current plan
contemplates that CT-4 and CT-5 will be the next generating units added to its
system. Current plans are for ST-7 to be deferred to approximately 2006 unless
the Encogen facility (described below) is not placed in service as planned.
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. An amended order to the same
effect was issued on August 18, 1997. Final judgments have been entered as to
all of the consolidated cases. Appeals with respect to the final judgments for
certain of the cases have been filed with the Hawaii Supreme Court. Motions
filed with the Third Circuit Court to stay the effectiveness of the judgments
pending resolution of the appeals were denied in April 1998. Nonhearing motions
for stay of final judgment pending resolution of the appeals were filed with the
Hawaii Supreme Court, which has not yet ruled on the motions. Management
believes that HELCO will ultimately prevail with regard to any appeals and that
the final judgments of the Third Circuit Court will be upheld.
PSD PERMIT. In November 1995, the EPA declined to sign HELCO's PSD permit for
- ----------
the combined-cycle unit. In October 1997, the EPA approved a revised draft
permit and the DOH issued a final PSD permit. Nine appeals from the issuance of
the permit have been filed with the Environmental Appeals Board of the EPA. All
briefing in the case has been completed. Based on the proceedings to date,
management believes that HELCO will ultimately prevail in the appeals.
13
<PAGE>
DECLARATORY JUDGMENT ACTIONS. In February 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.
Discovery is ongoing and the parties are seeking to set a trial date.
In March 1998, an individual filed a complaint for declaratory judgment against
HELCO, BLNR and Department of Land and Natural Resources of the State of Hawaii
(DLNR). The complaint basically alleges a violation of her constitutional due
process rights because the issue of which, if any, land use conditions apply to
HELCO's use of the Keahole site was determined administratively by DLNR (through
a letter issued to HELCO in January 1998) rather than being decided by BLNR in a
contested case. Also filed with the complaint was a motion to stay enforcement
of the DLNR letter. A hearing on that motion was held in April 1998. No decision
has been issued.
In May 1998, Waimana Enterprises, whose subsidiary is a partner in Kawaihae
Cogeneration Partners (KCP), filed a lawsuit in the Third Circuit Court, asking
for a declaration that the January 1998 DLNR letter is void and seeking an
injunction to prevent HELCO from further construction until the Court or BLNR,
at a public hearing, determines what conditions and limitations apply and
HELCO's compliance therewith.
HELCO intends to vigorously defend against the claims raised and management
believes the allegations are without merit.
IPP COMPLAINTS. Two independent power producers (IPPs), 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 claimed
would be a substitute for HELCO's planned 56-MW combined-cycle unit at Keahole.
Under HELCO's current estimate of generating capacity requirements, there is a
near-term need for capacity in addition to the capacity which might be provided
by either of the proposed IPP units.
In September 1995, the PUC allowed HELCO to continue to pursue construction of
and commit expenditures for the second combustion turbine (CT-5) and the steam
recovery generator (ST-7) for its planned combined-cycle unit, stating in its
order that "no part of the project may be included in HELCO's rate base unless
and until the project is in fact installed, and is used and useful for utility
purposes." 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
IPP's) should be the one that can be most expeditiously put into service at
"allowable cost."
Enserch complaint. In January 1998, HELCO filed with the PUC an application
-----------------
for approval of a power purchase agreement for a 60-MW facility and an
interconnection agreement with Encogen, an Enserch affiliate, dated
October 22, 1997. The agreements were entered into following a settlement
agreement between Enserch and HELCO and are subject to PUC approval. The
parties to the proceeding include HELCO, Encogen and the Consumer Advocate.
Motions to intervene filed by KCP, HCPC and one other IPP were denied by
the PUC. KCP filed an appeal with the First Circuit Court, challenging the
denial of its intervention. No schedule has yet been established for this
proceeding.
KCP complaint. In January 1996, the PUC ordered HELCO to continue in good
-------------
faith to negotiate a power purchase agreement with KCP. In May 1997, KCP
filed a motion for unspecified "sanctions" against HELCO for allegedly
failing to negotiate in good faith. In June 1997, KCP filed a motion asking
the PUC to designate KCP's facility as the next generating unit on the
HELCO system and to determine the "allowable cost" which would be payable
by HELCO to KCP. HELCO filed memoranda in opposition to KCP's motions. An
evidentiary hearing was held in August 1997 and both parties filed briefs
in September 1997. KCP has filed two motions, which HELCO has opposed, to
supplement the record for recent developments, including the application
filed with the PUC to approve HELCO's agreement with Encogen. Action by the
PUC is pending.
14
<PAGE>
HCPC complaint. In April 1997, Hilo Coast Processing Company, now known as
--------------
Hilo Coast Power 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. The PUC converted the HCPC
complaint into a purchased power contract negotiation proceeding. HCPC
submitted a new proposal in the proceeding in February 1998. An evidentiary
hearing limited to certain avoided cost issues was held in April 1998. A
schedule was established for submission of briefs beginning in May 1998.
Management cannot determine at this time whether the negotiations with KCP and
HCPC and related PUC proceedings will result in the execution and/or PUC
approval of a power purchase agreement or impact management's plans with regard
to installation of HELCO's combined-cycle unit at the Keahole power plant site.
COSTS INCURRED. As of March 31, 1998, HELCO's costs incurred in its efforts to
- --------------
put into service its Keahole combined-cycle unit amounted to $57.7 million,
including approximately $26.5 million for equipment and material purchases,
approximately $13.2 million for planning, engineering, permitting, site
development and other costs and approximately $18.0 million as an allowance for
funds used during construction. Of the total costs incurred, approximately $0.8
million is for ST-7.
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. Actions under the plan have helped HELCO maintain its
reserve margin and reduce the risk of near-term 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 has filed update
reports with the PUC on the 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
In March 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. The PUC noted 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 9.16% ROR determined to be reasonable by the PUC in the
utility's last rate case. HECO filed a motion to close the proceeding in March
1998, based on the fact that the actual returns for 1997--a 10.26% ROACE and a
8.75% ROR--were below the returns the PUC found to be fair and reasonable in the
last rate proceeding. The Consumer Advocate has filed with the PUC a statement
that it does not oppose HECO's request to close the proceedings. Management
cannot predict what future PUC action, if any, may be taken in this proceeding.
HECO POWER OUTAGE
On April 9, 1991, HECO experienced a power outage that affected all customers on
the island of Oahu. The PUC initiated an investigation of the April 9, 1991
outage and consolidated it with a pending investigation of an outage that
occurred in 1988. Power Technologies, Inc., an independent consultant hired by
HECO with the approval of the PUC, investigated the 1991 outage. HECO is
implementing certain of Power Technologies, Inc.'s recommendations and provides
the PUC with summaries of its progress on those recommendations. Management
cannot predict the timing and outcome of any PUC decision and order (D&O) that
may be issued, if any, with respect to the outages.
15
<PAGE>
(5) ACCOUNTING CHANGES
- -----------------------
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.
HECO and its subsidiaries adopted SFAS No. 130 in the first quarter of 1998, but
have no material period or accumulated other comprehensive income items.
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. Consolidated HECO adopted SFAS No. 131 in the first quarter of
1998, with no modification to its reporting segment.
COSTS OF COMPUTER SOFTWARE DEVELOPED OR OBTAINED FOR INTERNAL USE
In March 1998, the AICPA Accounting Standards Executive Committee issued
Statement of Position 98-1, "Accounting for the Costs of Computer Software
Developed or Obtained for Internal Use," which requires that certain costs,
including certain payroll and payroll-related costs, be capitalized and
amortized over the estimated useful life of the software. The provisions of SOP
98-1 are effective for fiscal years beginning after December 15, 1998 and
earlier application is encouraged. HECO and its subsidiaries have not
determined when they will adopt SOP 98-1. Management estimates that the adoption
of SOP 98-1 will not have a material effect on consolidated HECO's financial
condition, results of operations or liquidity.
COSTS OF START-UP ACTIVITIES
In April 1998, the AICPA Accounting Standards Executive Committee issued SOP 98-
5, "Reporting on the Costs of Start-up Activities," which requires that costs of
start-up activities, including organization costs, be expensed as incurred. The
provisions of SOP 98-5 are effective for fiscal years beginning after December
15, 1998. HECO and its subsidiaries have not determined when they will adopt SOP
98-5. Management estimates that the adoption of SOP 98-5 will not have a
material effect on consolidated HECO's financial condition, results of
operations or liquidity.
16
<PAGE>
(6) SUMMARIZED FINANCIAL INFORMATION
- -------------------------------------
Summarized financial information for HECO's subsidiaries, HELCO and MECO, is as
follows:
BALANCE SHEET DATA
<TABLE>
<CAPTION>
HELCO MECO
-------------------------------- -----------------------------
March 31, December 31, March 31, December 31,
(in thousands) 1998 1997 1998 1997
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Current assets............................ $ 27,071 $ 28,631 $ 32,584 $ 31,994
Noncurrent assets......................... 406,259 403,981 376,721 374,766
-------- -------- -------- --------
$433,330 $432,612 $409,305 $406,760
======== ======== ======== ========
Common stock equity....................... $145,196 $144,761 $151,145 $150,129
Cumulative preferred stock
Not subject to mandatory redemption... 10,000 10,000 8,000 8,000
Subject to mandatory redemption....... 7,000 7,000 5,575 5,575
Current liabilities....................... 61,853 63,500 25,107 24,454
Noncurrent liabilities.................... 209,281 207,351 219,478 218,602
-------- -------- -------- --------
$433,330 $432,612 $409,305 $406,760
======== ======== ======== ========
</TABLE>
INCOME STATEMENT DATA
<TABLE>
<CAPTION>
HELCO MECO
----------------------------- -----------------------------
Three months ended Three months ended
March 31, March 31,
----------------------------- -----------------------------
(in thousands) 1998 1997 1998 1997
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Operating revenues........................ $38,775 $40,338 $35,730 $37,979
Operating income.......................... 4,566 3,343 4,701 4,429
Net income for common stock............... 3,751 2,736 3,584 3,295
</TABLE>
(7) RECONCILIATION OF ELECTRIC UTILITY OPERATING INCOME PER HEI AND HECO
- --------------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF INCOME
---------------------------------
<TABLE>
<CAPTION>
Three months ended
March 31,
-----------------------------
(in thousands) 1998 1997
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C>
Operating income from regulated and nonregulated activities before
income taxes (per HEI consolidated statements of income).............. $ 42,561 $ 38,594
Deduct:
Income taxes on regulated activities.................................. (13,002) (11,704)
Revenues from nonregulated activities................................. (2,219) (2,159)
Add:
Expenses from nonregulated activities................................. 203 83
-------- --------
Operating income from regulated activities after income taxes (per
HECO consolidated statements of income)............................... $ 27,543 $ 24,814
======== ========
</TABLE>
17
<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
March 31,
(in thousands, except per ------------------- % Primary reason(s) for significant
share amounts) 1998 1997 change change*
- ------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Revenues..................... $375,621 $359,193 5 Increase for the savings bank
segment resulting from the
December 1997 acquisition of
most of BoA's Hawaii operations,
partly offset by decreases for
the electric utility and "other"
segments
Operating income............. 56,018 49,352 14 Increases for the savings bank
and electric utility segments,
partly offset by a decrease for
the "other" segment
Net income................... 22,223 19,663 13 Higher operating income, partly
offset by higher preferred
securities distributions and
higher interest expense due to
higher borrowings to finance the
infusion of capital into ASB for
the acquisition of most of BoA's
Hawaii operations
Basic earnings
per common share.......... $ 0.70 $ 0.64 9 See explanation for "net
Diluted earnings income," partly offset by an
per common share.......... $ 0.69 $ 0.63 10 increase in shares outstanding
Weighted average number of
common shares outstanding... 31,958 30,960 3 Issuances under the Dividend
Reinvestment and Stock Purchase
Plan and other plans**
</TABLE>
* Also see segment discussions which follow.
** Beginning in March 1998, HEI purchased its common shares in the open market
to satisfy the requirements of the HEI Dividend Reinvestment and Stock
Purchase Plan and the Hawaiian Electric Industries Retirement Savings Plan.
18
<PAGE>
Following is a general discussion of the results of operations by business
segment.
ELECTRIC UTILITY
- ----------------
<TABLE>
<CAPTION>
Three months ended
March 31,
(in thousands, except per -------------------------- % Primary reason(s) for significant
barrel amounts) 1998 1997 change change
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Revenues................. $258,262 $273,756 (6) Lower fuel prices ($18 million),
partly offset by the recovery of
higher integrated resource planning
costs ($2 million, including
demand-side management program costs,
lost margins and shareholder
incentives)
Expenses
Fuel oil................ 56,731 69,220 (18) Lower fuel oil prices
Purchased power......... 66,583 70,751 (6) Lower fuel prices
Other................... 92,387 95,191 (3) Lower other operation and maintenance
expenses and taxes, other than income
taxes, partly offset by higher
depreciation expense
Operating income......... 42,561 38,594 10 Decrease in revenues more than offset
by the decrease in expenses
Net income............... 19,262 17,164 12 Higher operating income, partly
offset by higher preferred securities
distributions
Kilowatthour sales
(millions).............. 2,127 2,124 --
Fuel oil price per barrel $23.59 $28.12 (16)
</TABLE>
Kilowatthour (KWH) sales in the first quarter of 1998 increased 0.1% from the
same quarter in 1997, partly due to an increase in the number of customers.
However, Hawaii's slow economy and cooler weather dampened KWH sales. Electric
utility operating income increased 10% primarily due to lower other operation
and maintenance expenses resulting from the timing of such expenses and cost
containment efforts.
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 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 increases are subject to refund with interest, pending
the final outcome of the case. Management cannot predict with certainty when
D&Os in pending or future rate cases will be rendered or the amount of any
interim or final rate increase that may be granted.
19
<PAGE>
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.
Hawaii Electric Light Company, Inc.
- -----------------------------------
In March 1998, HELCO filed a request to increase rates 11.5%, or $17.3 million
in annual revenues, based on a 1999 test year and a 12.5% return on average
common equity (ROACE), primarily to recover costs relating to two power
generation projects--an agreement to buy power from Encogenis 60-megawatt
plant in Hamakua and the cost of adding generating units at HELCO's Keahole
power plant. Under HELCO's request, the portion of the rate increase related to
Encogenis generators would not go into effect until the facilities are completed
and providing electric service to customers.
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. 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,
$0.2 million more annually than the interim increase and based on an 11.5%
ROACE.
In May 1996, MECO filed a request to increase rates 13%, or $18.9 million in
annual revenues, based on a 1997 test year and a 12.9% ROACE, primarily to
recover the costs related to the anticipated 1997 addition of new generating
unit M17. In November 1996, MECO filed a motion with the PUC to approve a
stipulation between MECO and the Consumer Advocate which would provide MECO with
an increase in annual revenues of $1.5 million, based on an 11.65% ROACE. In May
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 until late 1998 because of delays in obtaining the necessary Prevention
of Significant Deterioration/Covered Source (PSD) permit from the Department of
Health of the State of Hawaii/U.S. Environmental Protection Agency (EPA). In
December 1997, MECO received a final D&O authorizing no additional increase in
annual revenues, based on an 11.12% ROACE.
In January 1998, MECO received a PSD permit for generating unit M17 and filed a
request to increase rates 15.3%, or $22.4 million in annual revenues, based on a
12.75% ROACE and a 1999 test year, primarily to recover the costs related to the
anticipated addition of unit M17 in late 1998. In February 1998, Kawaihae
Cogeneration Partners (KCP) filed a petition with the EPA's Environmental
Appeals Board (EAB) to review the air permit issued to MECO for units M17 and
M19, staying construction. In April 1998, the Department of Health of the State
of Hawaii (DOH) submitted their brief to the EAB responding to issues raised in
KCP's petition and requesting that the petition be denied. On May 1, 1998, EPA
Region IX filed their response to the KCP petition, indicating their continued
concurrence with the permit issued to MECO and requesting that the KCP petition
be denied. An EAB ruling is pending.
CONTINGENCIES
See note (4) in HECO's "Notes to consolidated financial statements."
20
<PAGE>
SAVINGS BANK
- ------------
<TABLE>
<CAPTION>
Three months ended
March 31,
--------------------------- %
(in thousands) 1998 1997 change Primary reason(s) for significant change
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Revenues............... $101,827 $68,912 48 Higher interest income as a result of
the higher average interest-earning
assets balance due to the acquisition of
most of the Hawaii operations of BoA,
partly offset by the lower weighted
average yields on these assets
Operating income....... 16,051 12,285 31 Higher net interest income due to the
acquisition, partly offset by an
increase in the provision for loan
losses and higher compensation and
employee benefit expenses
Net income............. 8,360 7,099 18 Higher operating income, partly offset
by higher taxes and preferred stock
dividends
Interest rate spread... 3.21% 2.97% 8 5 basis points decrease in the weighted
average yield on interest-earning assets
more than offset by a 29 basis points
decrease in the weighted average rate on
interest-bearing liabilities
</TABLE>
ASB's net income for the first quarter of 1998 reflects the first full quarter
of earnings after the acquisition of most of the Hawaii operations of BoA.
Partly offsetting the higher results compared to the first quarter of 1997 was
an after-tax increase of $1 million in ASB's loan loss provision.
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-increased 8%. Comparing first quarter 1998 to the same period in
1997, 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. In December
1997, ASB was able to grow significantly through the assumption of $1.7 billion
of BoA's Hawaii deposits. There was an outflow of deposits of $80 million in the
first quarter of 1998, partly offset by $28 million of interest credited to
accounts. ASB also derives funds from borrowings, payments of interest and
principal on outstanding loans receivable and mortgage-backed securities, and
other sources. In recent years, advances from the Federal Home Loan Bank (FHLB)
of Seattle and securities sold under agreements to repurchase have become more
significant sources of funds as the demand for deposits decreased due in part to
increased competition from money market and mutual funds. Using sources of funds
with a higher cost than deposits, such as advances from the FHLB, puts downward
pressure on ASB's interest rate spread and net interest income.
In the slow Hawaii economy, ASB has seen a rise in nonaccrual loans and loan
loss reserves. During the first quarter of 1998, ASB added $2.9 million to its
allowance for loan losses - 146% more than the additions made in the same
quarter last year. As of March 31, 1998, ASB's allowance for loan losses was
1.07% of average loans outstanding. Charge-offs, however, remain low compared to
mainland thrifts. Annualized charge-offs were 11 basis points of average loans
outstanding, compared to 33 basis points for all U.S. thrifts for the nine
months ended September 1997.
21
<PAGE>
The following table presents the changes in the allowance for loan losses for
the quarters indicated.
<TABLE>
<CAPTION>
Quarters ended
March 31,
---------------------------
(in thousands) 1998 1997
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C>
Allowance for loan losses, beginning of quarter........................ $29,950 $19,205
Additions to provisions for losses..................................... 2,924 1,189
Allowance for losses on loans returned to BoA.......................... (98) --
Net charge-offs........................................................ (579) (520)
------- -------
Allowance for loan losses, end of quarter.............................. $32,197 $19,874
======= =======
</TABLE>
On March 27, 1998, ASB formed a wholly-owned operating subsidiary, ASB Realty
Corporation (ASBR). In March 1998, ASBR accepted the subscription for all of its
common stock by ASB in exchange for approximately $1.7 billion in participation
interests in mortgage loans and mortgage-backed and mortgage-related securities.
In the second quarter of 1998, ASBR will sell 1,000 shares of its nonvoting
preferred stock to ASB. ASBR will elect to be taxed as a real estate investment
trust (REIT). ASBR's objective will be to acquire, hold, finance and manage
qualifying REIT assets.
OTHER
- -----
<TABLE>
<CAPTION>
Three months ended
March 31,
-------------------------- %
(in thousands) 1998 1997 change Primary reason(s) for significant change
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Revenues........ $15,532 $16,525 (6) MPC's lower unit sales, partly offset by
the freight transportation subsidiaries'
higher general freight revenues and
HEIPC's higher revenues
Operating loss.. (2,594) (1,527) (70) MPC's lower unit sales and higher
expenses at HEIPC and corporate HEI
</TABLE>
The "other" business segment includes results of operations from Hawaiian Tug &
Barge Corp. (HTB) and its subsidiary, YB, maritime freight transportation
companies; Malama Pacific Corp. (MPC) and its subsidiaries, real estate
development and investment companies; HEI Investment Corp. (HEIIC), a company
primarily holding investments in leveraged leases; HEI Power Corp. (HEIPC) and
its subsidiaries, companies formed to pursue independent power projects in Asia
and the Pacific; Pacific Energy Conservation Services, Inc., a contract services
company primarily providing limited services to an affiliate; Hawaiian Electric
Industries Capital Trust I, HEI Preferred Funding, LP and Hycap Management,
Inc., companies formed primarily for the purpose of effecting the issuance of
8.36% Trust Originated Preferred Securities; HEI and HEI Diversified, Inc.
(HEIDI), holding companies; and eliminations of intercompany transactions.
FREIGHT TRANSPORTATION
The freight transportation subsidiaries recorded operating income of
$0.7 million and $0.4 million in the first quarters of 1998 and 1997,
respectively. The higher operating income for the 1998 quarter is due to higher
general freight revenues and lower expenses resulting from a PUC approved
sailing schedule change. The freight transportation subsidiaries, however,
continue to be negatively impacted by the slow economic activity on the neighbor
islands and the slow construction industry in Hawaii.
In March 1997, YB filed a request with the PUC for a general rate increase of
8.2%. In September 1997, the PUC approved YB's request to change its sailing
schedule which resulted in a reduction in YB's requested rate increase from 8.2%
to 5.7%. In October 1997, YB received a final decision and order authorizing a
4.7%, or $1.7 million increase in annual revenues, based on a ROACE of 14.1%.
22
<PAGE>
REAL ESTATE
MPC recorded operating losses of $0.4 million and $0.3 million in the first
quarters of 1998 and 1997, respectively. The slow real estate market in Hawaii
has negatively impacted MPC's real estate development activities. 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 and integrated energy services projects
in Asia and the Pacific. HEIPC's consolidated operating loss in the first
quarter of 1998 was $0.6 million, compared with $0.3 million for the same period
in 1997. The increase in the first quarter loss was due to increased business
development expenses, partly offset by operating income from the energy
conversion agreement described below.
In September 1996, HEI Power Corp. Guam (HPG), entered into a 20-year energy
conversion agreement with the Guam Power Authority (GPA), pursuant to which HPG
has repaired and is operating and maintaining two oil-fired 25-megawatt (net)
units on GPA property at Tanguisson, Guam. In November 1996, HPG assumed
operational control of the Tanguisson facility. HPG's total cost to repair the
two units was $15 million. The GPA project site is contaminated with oil from
spills occurring prior to HPG's assuming operational control. HPG has agreed to
manage the operation and maintenance of GPA's waste oil recovery system at the
project site consistent with GPA's oil recovery plan as approved by the EPA.
GPA, however, has agreed to indemnify and hold HPG harmless from any pre-
existing environmental liability.
Management's initial plans were to invest approximately $25 million to $30
million in HEIPC. In December 1997, management changed its plans and currently
expects to invest a total of approximately $75 million in HEIPC through the year
2000.
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.
FUTURE ENVIRONMENTAL REGULATION
On July 16, 1997, the EPA adopted national ambient air quality standards (NAAQS)
for certain particulate matter and the ozone. The new standards will not require
local pollution controls until 2004 for the ozone and 2005 for particulate
matter, with no compliance determinations until 2007 and 2008, respectively, and
with possible extensions. The eventual impact of these new standards on the
Company and consolidated HECO is not known at this time.
YEAR 2000 READINESS
HEI and its subsidiaries are aware of the Year 2000 date issues associated with
the practice of encoding only the last two digits of four digit years in
computer-based systems. Year 2000 date issues, if not properly addressed, could
result in computer errors that might result in a disruption of business
operations. To properly address these issues, the management at each subsidiary
has developed Year 2000 programs and projects and have management teams in place
that are actively assessing, renovating, validating and implementing Year 2000
ready systems. Both of HEI's major business segments, HECO and its subsidiaries
and ASB and its subsidiaries, are in the process of replacing the majority of
their business-critical applications with integrated application suites that are
warranted to be Year 2000 ready. Although Year 2000 readiness was a requirement,
these application replacements were primarily driven by business needs.
Management estimates that the incremental cost to renovate other applications
and test replacement applications and systems to become Year 2000 ready will not
have a material effect on the Company's financial condition, results of
operations or liquidity. No assurance can be given that the Company will
successfully avoid all problems with the Year 2000 issue.
23
<PAGE>
ACCOUNTING CHANGES
- ------------------
See note (7) and note (5) in HEI's and HECO's "Notes to consolidated financial
statements," respectively.
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 investments and to cover debt and other cash requirements in the
foreseeable future.
The consolidated capital structure of HEI was as follows:
<TABLE>
<CAPTION>
(in millions) March 31, 1998 December 31, 1997
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Short-term borrowings......................... $ 255 12% $ 298 14%
Long-term debt................................ 858 39 802 37
HEI- and HECO-obligated preferred
securities of trust subsidiaries........... 150 7 150 7
Preferred stock of electric utility
subsidiaries................................. 82 4 84 4
Common stock equity........................... 821 38 815 38
------ --- ------ ---
$2,166 100% $2,149 100%
====== === ====== ===
</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 three months of 1998, net cash provided by operating activities
was $32 million. Net cash used in investing activities was $62 million, largely
due to ASB's loan originations and mortgage-backed securities purchased, net of
repayments, and consolidated HECO's capital expenditures, partly offset by cash
received from BoA for loans returned after the acquisition primarily due to
delinquency. Net cash used in financing activities was $12 million as a result
of several factors, including net decreases in deposit liabilities, short-term
borrowings and advances from FHLB and the payment of common stock dividends,
partly offset by net increases in securities sold under agreements to repurchase
and long-term debt.
HEI estimates its consolidated requirements for funds for 1998 through 2002,
including net capital expenditures (which exclude the allowance for funds used
during construction 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, to total $819 million.
Of this amount, approximately $665 million is for net capital expenditures
(mostly relating to the electric utilities' net capital expenditures described
below). HEI estimates that its consolidated internal sources, after the payment
of HEI dividends, will provide approximately 80% of the consolidated
requirements, with debt financing providing the remaining requirements.
Additional debt and equity financing may be required to fund activities not
included in the 1998-2002 forecast, such as the investment in and/or the
development of additional power companies and/or projects in the Asia Pacific
region, or to fund changes in requirements, such as increases in the amount of
or acceleration of capital expenditures of the electric utilities.
Following is a discussion of the liquidity and capital resources of HEI's
largest segments.
24
<PAGE>
ELECTRIC UTILITY
HECO's consolidated capital structure was as follows:
<TABLE>
<CAPTION>
(in millions) March 31, 1998 December 31, 1997
- -------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Short-term borrowings from
nonaffiliates and affiliate...... $ 105 6% $ 96 6%
Long-term debt.................... 630 39 628 39
HECO-obligated preferred
securities of trust subsidiary... 50 3 50 3
Preferred stock................... 82 5 84 5
Common stock equity............... 773 47 769 47
------ --- ------ ---
$1,640 100% $1,627 100%
====== === ====== ===
</TABLE>
Operating activities provided $36 million in net cash during the first three
months of 1998. Investing activities used net cash of $25 million, primarily for
capital expenditures. Financing activities used net cash of $8 million,
including $16 million for the payment of common and preferred dividends, partly
offset by the net increase in short-term borrowings.
The electric utilities estimate their consolidated requirements for funds for
1998 through 2002, including net capital expenditures, long-term debt
retirements and sinking fund requirements, to total $644 million. HECO
estimates that its consolidated internal sources, after the payment of common
stock and preferred stock dividends, will provide approximately 85% of the
consolidated requirements, with debt and equity financing providing the
remaining requirements. As of March 31, 1998, $51 million of proceeds from
previous sales by the Department of Budget and Finance of the State of Hawaii of
special purpose revenue bonds on behalf of HECO, MECO and HELCO remain undrawn
and an additional $88 million of special purpose revenue bonds were authorized
by the Hawaii Legislature for issuance by the Department of Budget and Finance
of the State of Hawaii on behalf of HECO and MECO prior to the end of 1999. HECO
estimates that it will require approximately $15 million in new common equity,
in addition to retained earnings, over the five-year period 1998 through 2002.
The PUC must approve issuances of long-term securities by HECO, HELCO and MECO.
Capital expenditures include the costs of projects that are required to meet
expected load growth, to improve reliability and to replace and upgrade existing
equipment. The electric utilities estimate that net capital expenditures for the
five-year period 1998 through 2002 will total $592 million. Approximately 72% of
forecast gross capital expenditures, which includes the allowance for funds used
during construction and capital expenditures funded by third-party cash
contributions in aid of construction, is for transmission and distribution
projects, with the remaining 28% primarily for generation projects.
For 1998, electric utility net capital expenditures are estimated to be
$151 million. Gross capital expenditures are estimated to be $184 million,
comprised of approximately $121 million for transmission and distribution
projects, approximately $39 million for new generation projects and
approximately $24 million for general plant and existing generation projects.
Cash needed for the net capital expenditures is expected to be provided by
drawdowns of proceeds from previous and future sales of tax-exempt special
purpose revenue bonds, the generation of funds from internal sources and sales
of common stock to HEI.
Management periodically reviews capital expenditure estimates and the timing of
construction projects. These estimates 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, DSM programs and requirements of environmental and other
regulatory and permitting authorities.
25
<PAGE>
SAVINGS BANK
<TABLE>
<CAPTION>
March 31, December 31, %
(in millions) 1998 1997 change
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Total assets..................................... $5,514 $5,548 (1)
Mortgage-backed securities....................... 1,904 1,865 2
Loans receivable, net............................ 3,024 3,036 --
Deposit liabilities.............................. 3,865 3,917 (1)
Securities sold under agreements to repurchase... 425 375 13
Advances from Federal Home Loan Bank............. 735 736 --
</TABLE>
As of December 31, 1997, ASB was the third largest financial institution in the
state based on total assets of $5.5 billion and based on deposits of
$3.9 billion.
For the first three months of 1998, net cash used in ASB's operating activities
was $0.1 million. Net cash used in ASB's investing activities was $35 million,
due largely to the origination of loans receivable and mortgage-backed
securities purchased, partly offset by principal repayments and the cash
received from BoA for loans returned after the acquisition primarily due to
delinquency. Net cash used by financing activities was $14 million largely due
to a net decrease of $53 million in deposit liabilities and $4 million in common
and preferred stock dividends, partly offset by a net increase of $49 million in
securities sold under agreements to repurchase.
Minimum liquidity levels are currently governed by the regulations adopted by
the OTS. ASB was in compliance with OTS liquidity requirements as of March 31,
1998.
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 March 31, 1998, ASB was in compliance with the OTS minimum
capital requirements (noted in parentheses) with a tangible capital ratio of
5.2% (1.5%), a core capital ratio of 5.2% (3.0%) and a risk-based capital ratio
of 12.3% (8.0%).
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 March 31, 1998,
ASB was "well-capitalized" (ratio requirements noted in parentheses) with a
leverage ratio of 5.2% (5.0%), a Tier-1 risk-based ratio of 11.4% (6.0%) and a
total risk-based ratio of 12.3% (10.0%).
The federal and state governments have enacted significant interstate banking
legislation. 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 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.
For a discussion of the unfavorable disparity in the deposit insurance
assessment rates and Financing Corporation 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."
26
<PAGE>
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
- ------------------------------------------------------------------
The Company's results are impacted by its, primarily ASB's, ability to manage
interest rate risk. For quantitative and qualitative information about the
Company's market risks, see pages 37 to 39 of HEI's 1997 Annual Report to
Stockholders.
U.S. Treasury yields at March 31, 1998 and December 31, 1997 were as follows:
<TABLE>
<CAPTION>
(%) March 31, 1998 December 31, 1997
--- -------------- -----------------
<S> <C> <C>
3 month 5.11 5.34
3 year 5.58 5.66
5 year 5.62 5.71
7 year 5.70 5.76
10 year 5.65 5.74
20 year 6.00 6.01
30 year 5.93 5.92
</TABLE>
As interest rates (as measured by U.S. Treasury yields) have declined only
slightly from December 31, 1997 to March 31, 1998, management does not believe
there has been a material change in the Company's quantitative disclosures of
its interest-sensitive assets, liabilities and off-balance sheet items.
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 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
- ------------------------------------------------------------
HEI
The Annual Meeting of Stockholders of HEI was held on April 28, 1998. Proxies
for the meeting were solicited pursuant to Regulation 14A under the Securities
Exchange Act of 1934. As of February 18, 1998, the record date for the Annual
Meeting, there were 31,977,844 shares of common stock issued and outstanding and
entitled to vote. There was no solicitation in opposition to the management
nominees to the Board of Directors as listed in the proxy statement for the
meeting and such nominees were elected to the Board of Directors.
The results of the voting for the Class II director-nominees and the independent
auditor are as follows:
<TABLE>
<CAPTION>
Shares of Common stock
------------------------------------------------------------------------------------
Broker
For Withheld Against Abstain nonvotes
---------- -------- ------- ------- --------
<S> <C> <C> <C> <C> <C>
Election of Class II Directors
Victor Hao Li, S.J.D. 28,891,607 463,445 --
T. Michael May 28,893,299 461,753 --
Diane J. Plotts 28,855,163 499,889 --
Kelvin H. Taketa 28,871,591 483,461 --
Jeffrey N. Watanabe 28,610,640 744,412 --
Election of KPMG
Peat Marwick LLP
as independent auditor 29,034,762 109,147 211,143 --
</TABLE>
27
<PAGE>
Based on the recommendation of the Nominating Committee, the Board of Directors
voted not to fill, at this time, the position vacated by Director Edwin L.
Carter, who reached the mandatory retirement age of 72 as specified by Board
resolution. Therefore, the size of the Board was decreased from 13 to 12
immediately following Mr. Carter's retirement on April 28, 1998. Class III
Directors-Don E. Carroll, Richard Henderson, Bill D. Mills and Oswald K.
Stender-continue in office with terms ending at the 1999 Annual Meeting. Class I
Directors-Robert F. Clarke, A. Maurice Myers and James K. Scott-continue in
office with terms ending at the 2000 Annual Meeting.
HECO
The Annual Meeting of the Sole Stockholder of HECO was conducted by written
consent effective April 28, 1998. Except for Edwin L. Carter, the incumbent
members of the Board of Directors of HECO were re-elected. The incumbent members
continuing in office are Robert F. Clarke, Richard Henderson, T. Michael May,
Paul A. Oyer, Diane J. Plotts, Anne M. Takabuki and Paul C. Yuen. In addition,
KPMG Peat Marwick LLP was elected independent auditor of HECO for the fiscal
year 1998.
ITEM 5. OTHER INFORMATION
- --------------------------
A. 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>
Three months Years Ended December 31,
ended -------------------------------------------------------------------------------------------
March 31, 1998 1997 1996 1995 1994 1993
- ------------------- --------------- -------------- ------------- -------------- ---------------
<S> <C> <C> <C> <C> <C>
1.86 1.82 1.87 1.94 2.22 2.25
=================== =============== ============== ============= ============== ===============
</TABLE>
RATIO OF EARNINGS TO FIXED CHARGES INCLUDING INTEREST ON ASB DEPOSITS
<TABLE>
<CAPTION>
Three months Years Ended December 31,
ended -------------------------------------------------------------------------------------------
March 31, 1998 1997 1996 1995 1994 1993
- ------------------- --------------- -------------- ------------- -------------- ---------------
<S> <C> <C> <C> <C> <C>
1.46 1.53 1.53 1.57 1.69 1.65
=================== =============== ============== ============= ============== ===============
</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 trust subsidiaries.
28
<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>
Three months Years Ended December 31,
ended -------------------------------------------------------------------------------------------
March 31, 1998 1997 1996 1995 1994 1993
- ------------------- --------------- -------------- ------------- -------------- ---------------
<S> <C> <C> <C> <C> <C>
3.19 3.26 3.58 3.46 3.47 3.25
=================== =============== ============== ============= ============== ===============
</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
HEI Hawaiian Electric Industries, Inc. and subsidiaries
Exhibit 12.1 Computation of ratio of earnings to fixed charges, three
months ended
March 31, 1998 and 1997
HECO Hawaiian Electric Company, Inc. and subsidiaries
Exhibit 12.2 Computation of ratio of earnings to fixed charges, three
months ended
March 31, 1998 and 1997
HEI Hawaiian Electric Industries, Inc. and subsidiaries
Exhibit 27.1 Financial Data Schedule
March 31, 1998 and three months ended March 31, 1998
HEI Hawaiian Electric Industries, Inc. and subsidiaries
Exhibit 27.1(a) Restated Financial Data Schedule
March 31, 1997 and three months ended March 31, 1997
HECO Hawaiian Electric Company, Inc. and subsidiaries
Exhibit 27.2 Financial Data Schedule
March 31, 1998 and three months ended March 31, 1998
(B) REPORTS ON FORM 8-K
On January 30, 1998, HEI filed a Form 8-K/A, dated December 6, 1997, under Item
7, which included financial statements and pro forma financial information
relating to ASB's acquisition of most of the Hawaii operations of BoA. On
March 2, 1998, HEI and HECO filed a Form 8-K, dated February 27, 1998, under
Item 7, which included portions of HEI's 1997 Annual Report to Stockholders and
HECO's 1997 Annual Report to Stockholder. On March 11, 1998, HEI and HECO filed
a Form 8-K, dated March 2, 1998, under Item 5, which updated the following: "PUC
show cause order for HECO," "HELCO power situation," "Property damage reserve"
and "Competition."
29
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrants have duly caused this report to be signed on their behalf by the
undersigned, thereunto duly authorized. The signature of the undersigned
companies shall be deemed to relate only to matters having reference to such
companies and any subsidiaries thereof.
HAWAIIAN ELECTRIC INDUSTRIES, INC. HAWAIIAN ELECTRIC COMPANY, INC.
(Registrant) (Registrant)
By /s/ Robert F. Mougeot By /s/ Paul Oyer
---------------------- --------------
Robert F. Mougeot Paul A. Oyer
Financial Vice President and Financial Vice President and
Chief Financial Officer Treasurer
(Principal Financial Officer of HEI) (Principal Financial Officer of HECO)
Date: May 12, 1998 Date: May 12, 1998
30
<PAGE>
HEI Exhibit 12.1
----------------
Hawaiian Electric Industries, Inc. and subsidiaries
COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES
(unaudited)
<TABLE>
<CAPTION>
Three months ended Three months ended
March 31, March 31,
---------------------------- -----------------------------
(dollars in thousands) 1998 (1) 1998 (2) 1997 (1) 1997 (2)
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
FIXED CHARGES
Total interest charges
The Company (3)........................... $ 35,223 $ 71,327 $ 34,199 $ 54,302
Proportionate share of fifty-percent-
owned person............................. 115 115 163 163
Interest component of rentals................ 832 832 759 759
Pretax preferred stock dividend requirements
of subsidiaries............................. 2,489 2,489 2,645 2,645
Preferred securities distributions of
trust subsidiaries........................ 3,096 3,096 1,335 1,335
-------- -------- -------- --------
TOTAL FIXED CHARGES.......................... $ 41,755 $ 77,859 $ 39,101 $ 59,204
======== ======== ======== ========
EARNINGS
Pretax income................................ $ 37,665 $ 37,665 $ 34,181 $ 34,181
Fixed charges, as shown...................... 41,755 77,859 39,101 59,204
Interest capitalized
The Company............................... (1,661) (1,661) (1,544) (1,544)
Proportionate share of fifty-percent
owned persons............................ (16) (16) (156) (156)
-------- -------- -------- --------
EARNINGS AVAILABLE FOR FIXED CHARGES......... $ 77,743 $113,847 $ 71,582 $ 91,685
======== ======== ======== ========
RATIO OF EARNINGS TO FIXED CHARGES........... 1.86 1.46 1.83 1.55
======== ======== ======== ========
</TABLE>
(1) Excluding interest on ASB deposits.
(2) Including interest on ASB deposits.
(4) Interest on nonrecourse debt from leveraged leases is not included in total
interest charges nor in interest expense in HEI's consolidated statements
of income.
<PAGE>
HECO Exhibit 12.2
-----------------
Hawaiian Electric Company, Inc. and subsidiaries
COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES
(unaudited)
<TABLE>
<CAPTION>
Three months ended
March 31,
------------------------------
(dollars in thousands) 1998 1997
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C>
FIXED CHARGES
Total interest charges.............................................. $12,161 $12,292
Interest component of rentals....................................... 179 184
Pretax preferred stock dividend requirements of subsidiaries........ 1,020 1,057
Preferred securities distributions of trust subsidiary.............. 1,006 58
------- -------
TOTAL FIXED CHARGES................................................. $14,366 $13,591
======= =======
EARNINGS
Income before preferred stock dividends of HECO..................... $20,132 $18,085
Income taxes (see note below)....................................... 13,016 11,709
Fixed charges, as shown............................................. 14,366 13,591
AFUDC for borrowed funds............................................ (1,616) (1,527)
------- -------
EARNINGS AVAILABLE FOR FIXED CHARGES................................ $45,898 $41,858
======= =======
RATIO OF EARNINGS TO FIXED CHARGES.................................. 3.19 3.08
======= =======
Note:
Income taxes is comprised of the following
Income tax expense relating to operating income from
regulated activities............................................ $13,002 $11,704
Income tax expense relating to income from
nonregulated activities......................................... 14 5
------- -------
$13,016 $11,709
======= =======
</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
MARCH 31, 1998 AND CONSOLIDATED STATEMENT OF INCOME FOR THE THREE MONTHS ENDED
MARCH 31, 1998 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
</LEGEND>
<CIK> 0000354707
<NAME> HAWAIIAN ELECTRIC INDUSTRIES, INC.
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> MAR-31-1998
<CASH> 212,409
<SECURITIES> 2,012,276
<RECEIVABLES> 152,455
<ALLOWANCES> 0
<INVENTORY> 36,071
<CURRENT-ASSETS> 0
<PP&E> 3,027,531
<DEPRECIATION> 999,378
<TOTAL-ASSETS> 7,924,713
<CURRENT-LIABILITIES> 0
<BONDS> 857,952
83,370
148,293
<COMMON> 658,930
<OTHER-SE> 162,259
<TOTAL-LIABILITY-AND-EQUITY> 7,924,713
<SALES> 0
<TOTAL-REVENUES> 375,621
<CGS> 0
<TOTAL-COSTS> 319,603
<OTHER-EXPENSES> 212
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 18,141
<INCOME-PRETAX> 37,665
<INCOME-TAX> 15,442
<INCOME-CONTINUING> 22,223
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 22,223
<EPS-PRIMARY> 0.70<F1>
<EPS-DILUTED> 0.69
<FN>
<F1> REPRESENTS BASIC EPS
</FN>
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS RESTATED SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM
HAWAIIAN ELECTRIC INDUSTRIES, INC. AND SUBSIDIARIES' CONSOLIDATED BALANCE SHEET
AS OF MARCH 31, 1997 AND CONSOLIDATED STATEMENT OF INCOME FOR THE THREE MONTHS
ENDED MARCH 31, 1997 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<RESTATED>
<CIK> 0000354707
<NAME> HAWAIIAN ELECTRIC INDUSTRIES, INC.
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> MAR-31-1997
<CASH> 98,653
<SECURITIES> 1,391,167
<RECEIVABLES> 151,720
<ALLOWANCES> 0
<INVENTORY> 47,262
<CURRENT-ASSETS> 0
<PP&E> 2,864,398
<DEPRECIATION> 912,580
<TOTAL-ASSETS> 6,000,625
<CURRENT-LIABILITIES> 0
<BONDS> 801,941
86,260
148,293
<COMMON> 628,260
<OTHER-SE> 150,697
<TOTAL-LIABILITY-AND-EQUITY> 6,000,625
<SALES> 0
<TOTAL-REVENUES> 359,193
<CGS> 0
<TOTAL-COSTS> 309,841
<OTHER-EXPENSES> (1,294)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 16,465
<INCOME-PRETAX> 34,181
<INCOME-TAX> 14,518
<INCOME-CONTINUING> 19,663
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 19,663
<EPS-PRIMARY> 0.64<F1>
<EPS-DILUTED> 0.63
<FN>
<F1>Represents Basic EPS
</FN>
</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 MARCH
31, 1998 AND CONSOLIDATED STATEMENT OF INCOME AND CASH FLOWS FOR THE THREE
MONTHS ENDED MARCH 31, 1998 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> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> MAR-31-1998
<BOOK-VALUE> PER-BOOK
<TOTAL-NET-UTILITY-PLANT> 1,899,927
<OTHER-PROPERTY-AND-INVEST> 0
<TOTAL-CURRENT-ASSETS> 158,676
<TOTAL-DEFERRED-CHARGES> 14,601
<OTHER-ASSETS> 143,204
<TOTAL-ASSETS> 2,216,408
<COMMON> 85,387
<CAPITAL-SURPLUS-PAID-IN> 296,189
<RETAINED-EARNINGS> 391,518
<TOTAL-COMMON-STOCKHOLDERS-EQ> 773,094
81,775
48,293
<LONG-TERM-DEBT-NET> 600,498
<SHORT-TERM-NOTES> 0
<LONG-TERM-NOTES-PAYABLE> 0
<COMMERCIAL-PAPER-OBLIGATIONS> 104,771
<LONG-TERM-DEBT-CURRENT-PORT> 30,000
1,595
<CAPITAL-LEASE-OBLIGATIONS> 0
<LEASES-CURRENT> 0
<OTHER-ITEMS-CAPITAL-AND-LIAB> 576,382
<TOT-CAPITALIZATION-AND-LIAB> 2,216,408
<GROSS-OPERATING-REVENUE> 256,043
<INCOME-TAX-EXPENSE> 13,002
<OTHER-OPERATING-EXPENSES> 215,498
<TOTAL-OPERATING-EXPENSES> 228,500
<OPERATING-INCOME-LOSS> 27,543
<OTHER-INCOME-NET> 4,778
<INCOME-BEFORE-INTEREST-EXPEN> 32,321
<TOTAL-INTEREST-EXPENSE> 12,189
<NET-INCOME> 20,132
870
<EARNINGS-AVAILABLE-FOR-COMM> 19,262
<COMMON-STOCK-DIVIDENDS> 15,326
<TOTAL-INTEREST-ON-BONDS> 42,590
<CASH-FLOW-OPERATIONS> 35,649
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
