-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, FPpjhLV8FwfP+HQlq61g6f2U+dv8H0+HRE1O7/Lh/HjzakhVoR5225Fwrp1qHaXl uFBz5/bGr3uDD14OFptpVQ== 0000898430-97-003421.txt : 19970814 0000898430-97-003421.hdr.sgml : 19970814 ACCESSION NUMBER: 0000898430-97-003421 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 6 CONFORMED PERIOD OF REPORT: 19970630 FILED AS OF DATE: 19970813 SROS: NYSE SROS: PSE FILER: COMPANY DATA: COMPANY CONFORMED NAME: HAWAIIAN ELECTRIC INDUSTRIES INC CENTRAL INDEX KEY: 0000354707 STANDARD INDUSTRIAL CLASSIFICATION: ELECTRIC SERVICES [4911] IRS NUMBER: 990208097 STATE OF INCORPORATION: HI FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 001-08503 FILM NUMBER: 97659744 BUSINESS ADDRESS: STREET 1: 900 RICHARDS ST CITY: HONOLULU STATE: HI ZIP: 96813 BUSINESS PHONE: 8085435662 MAIL ADDRESS: STREET 1: 900 RICHARDS STREET CITY: HONOLULU STATE: HI ZIP: 96813 FILER: COMPANY DATA: COMPANY CONFORMED NAME: HAWAIIAN ELECTRIC CO INC CENTRAL INDEX KEY: 0000046207 STANDARD INDUSTRIAL CLASSIFICATION: ELECTRIC SERVICES [4911] IRS NUMBER: 990040500 STATE OF INCORPORATION: HI FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 001-04955 FILM NUMBER: 97659745 BUSINESS ADDRESS: STREET 1: 900 RICHARDS ST CITY: HONOLULU STATE: HI ZIP: 96813 BUSINESS PHONE: 8085437771 MAIL ADDRESS: STREET 1: 900 RICHARDS STREET CITY: HONOLULU STATE: HI ZIP: 96813 FORMER COMPANY: FORMER CONFORMED NAME: HAWAIIAN ELECTRIC CO LTD DATE OF NAME CHANGE: 19670212 10-Q 1 QUARTERLY REPORT FOR PERIOD ENDED O6/30/97 ================================================================================ UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D. C. 20549 FORM 10-Q [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended June 30, 1997 OR [_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 Exact Name of Registrant as Commission I.R.S. Employer Specified in Its Charter File Number Identification No. - ------------------------------------- ----------- ------------------ HAWAIIAN ELECTRIC INDUSTRIES, INC. 1-8503 99-0208097 and Principal Subsidiary HAWAIIAN ELECTRIC COMPANY, INC. 1-4955 99-0040500 STATE OF HAWAII - -------------------------------------------------------------------------------- (State or other jurisdiction of incorporation or organization) 900 RICHARDS STREET, HONOLULU, HAWAII 96813 - -------------------------------------------------------------------------------- (Address of principal executive offices and zip code) HAWAIIAN ELECTRIC INDUSTRIES, INC. ----- (808) 543-5662 HAWAIIAN ELECTRIC COMPANY, INC. ------- (808) 543-7771 - -------------------------------------------------------------------------------- (Registrant's telephone number, including area code) NONE - -------------------------------------------------------------------------------- (Former name, former address and former fiscal year, if changed since last report) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No --- --- APPLICABLE ONLY TO CORPORATE ISSUERS: Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date.
Class of Common Stock Outstanding August 5, 1997 - ---------------------------------------------------------------------------------------------------- Hawaiian Electric Industries, Inc. (Without Par Value)..... 31,505,960 Shares Hawaiian Electric Company, Inc. ($6 2/3 Par Value)......... 12,805,843 Shares (not publicly traded) ====================================================================================================
Hawaiian Electric Industries, Inc. and subsidiaries Hawaiian Electric Company, Inc. and subsidiaries Form 10-Q - Quarter ended June 30, 1997 INDEX
Page No. Glossary of terms ................................................................... ii PART I. FINANCIAL INFORMATION Item 1. Financial statements Hawaiian Electric Industries, Inc. and subsidiaries --------------------------------------------------- Consolidated balance sheets (unaudited) - June 30, 1997 and December 31, 1996................................... 1 Consolidated statements of income (unaudited) - three and six months ended June 30, 1997 and 1996..................... 2 Consolidated statements of retained earnings (unaudited) - three and six months ended June 30, 1997 and 1996..................... 2 Consolidated statements of cash flows (unaudited) - six months ended June 30, 1997 and 1996............................... 3 Notes to consolidated financial statements (unaudited).................. 4 Hawaiian Electric Company, Inc. and subsidiaries ------------------------------------------------ Consolidated balance sheets (unaudited) - June 30, 1997 and December 31, 1996................................... 10 Consolidated statements of income (unaudited) - three and six months ended June 30, 1997 and 1996..................... 11 Consolidated statements of retained earnings (unaudited) - three and six months ended June 30, 1997 and 1996..................... 11 Consolidated statements of cash flows (unaudited) - six months ended June 30, 1997 and 1996............................... 12 Notes to consolidated financial statements (unaudited)................. 13 Item 2. Management's discussion and analysis of financial condition and results of operations............................................. 19 PART II. OTHER INFORMATION Item 1. Legal proceedings...................................................... 29 Item 5. Other information...................................................... 29 Item 6. Exhibits and reports on Form 8-K....................................... 31 Signatures........................................................................... 32
i Hawaiian Electric Industries, Inc. and subsidiaries Hawaiian Electric Company, Inc. and subsidiaries Form 10-Q - Quarter ended June 30, 1997 GLOSSARY OF TERMS
Terms Definitions - ----- ----------- AFUDC Allowance for funds used during construction ASB American Savings Bank, F.S.B., a wholly owned subsidiary of HEI Diversified, Inc. and parent company of American Savings Investment Services Corp., ASB Service Corporation, AdCommunications, Inc. and American Savings Mortgage Co., Inc. BIF Bank Insurance Fund BLNR Board of Land and Natural Resources of the State of Hawaii CDUP Conservation District Use Permit COMPANY Hawaiian Electric Industries, Inc. and its direct and indirect subsidiaries, including, without limitation, Hawaiian Electric Company, Inc., Maui Electric Company, Limited, Hawaii Electric Light Company, Inc., HECO Capital Trust I, HEI Investment Corp., Malama Pacific Corp. and its subsidiaries, Hawaiian Tug & Barge Corp., Young Brothers, Limited, HEI Diversified, Inc., American Savings Bank, F.S.B. and its subsidiaries, Pacific Energy Conservation Services, Inc., HEI Power Corp. and its subsidiaries, Hycap Management, Inc., HEI Preferred Funding, LP and Hawaiian Electric Industries Capital Trust I CONSUMER ADVOCATE Division of Consumer Advocacy, Department of Commerce and Consumer Affairs of the State of Hawaii D&O Decision and order DOH Department of Health of the State of Hawaii ENSERCH Enserch Development Corporation EPA Environmental Protection Agency - federal FASB Financial Accounting Standards Board FDIC Federal Deposit Insurance Corporation FHLB Federal Home Loan Bank FICO Financing Corporation FUNDS ACT Deposit Insurance Funds Act of 1996 GAAP Generally accepted accounting principles HCPC Hilo Coast Processing Company
ii GLOSSARY OF TERMS, CONTINUED
TERMS DEFINITIONS - ----- ----------- HECO Hawaiian Electric Company, Inc., a wholly owned electric utility subsidiary of Hawaiian Electric Industries, Inc. and parent company of Maui Electric Company, Limited, Hawaii Electric Light Company, Inc. and HECO Capital Trust I HEI Hawaiian Electric Industries, Inc., parent company of Hawaiian Electric Company, Inc., HEI Investment Corp., Malama Pacific Corp., Hawaiian Tug & Barge Corp., HEI Diversified, Inc., Pacific Energy Conservation Services, Inc., HEI Power Corp., Hycap Management, Inc. and Hawaiian Electric Industries Capital Trust I HEIDI HEI Diversified, Inc., a wholly owned subsidiary of Hawaiian Electric Industries, Inc. and the parent company of American Savings Bank, F.S.B. HEIIC HEI Investment Corp., a wholly owned subsidiary of Hawaiian Electric Industries, Inc. HEIPC HEI Power Corp., a wholly owned subsidiary of Hawaiian Electric Industries, Inc., and the parent company of several subsidiaries HELCO Hawaii Electric Light Company, Inc., a wholly owned electric utility subsidiary of Hawaiian Electric Company, Inc. HIG The Hawaiian Insurance & Guaranty Company, Limited, an insurance company which was placed in state rehabilitation proceedings. HEI Diversified, Inc. was the holder of record of HIG's common stock until August 16, 1994 HTB Hawaiian Tug & Barge Corp., a wholly owned subsidiary of Hawaiian Electric Industries, Inc. and parent company of Young Brothers, Limited IPP Independent power producer IRP Integrated resource plan IRR Interest rate risk KCP Kawaihae Cogeneration Partners KWH Kilowatthour MECO Maui Electric Company, Limited, a wholly owned electric utility subsidiary of Hawaiian Electric Company, Inc. MPC Malama Pacific Corp., a wholly owned subsidiary of Hawaiian Electric Industries, Inc. and parent company of several real estate subsidiaries MW Megawatt OTS Office of Thrift Supervision, Department of Treasury PSD PERMIT Prevention of Significant Deterioration/Covered Source permit PUC Public Utilities Commission of the State of Hawaii
iii GLOSSARY OF TERMS, CONTINUED
TERMS DEFINITIONS - -------- ----------- ROACE Return on average common equity ROR Simple average return on rate base SAIF Savings Association Insurance Fund SEC Securities and Exchange Commission SFAS Statement of Financial Accounting Standards SOP Statement of Position YB Young Brothers, Limited, a wholly owned subsidiary of Hawaiian Tug & Barge Corp.
FORWARD-LOOKING INFORMATION This report and other presentations made by HEI and its subsidiaries contain forward-looking statements within the meaning of Section 21E of the Exchange Act. Except for historical information contained herein, the matters set forth are forward-looking statements that involve certain risks and uncertainties that could cause actual results to differ materially from those in the forward- looking statements. Potential risks and uncertainties include, but are not limited to, such factors as the effect of economic conditions; product demand and market acceptance risks; competitive products and pricing; capacity and supply constraints or difficulties; new technological developments; governmental and regulatory actions; actual purchases under agreements; the results of financing efforts; the timing and extent of changes in interest rates; the final purchase price and related adjustments made pursuant to the Bank of America, FSB - - Hawaii operations Purchase and Assumption Agreement; and the results of integration of the Bank of America, FSB - Hawaii operations with the operations of ASB. Investors are also directed to consider other risks and uncertainties discussed in other periodic reports previously and subsequently filed by HEI and/or HECO with the SEC. iv PART I - FINANCIAL INFORMATION - ------------------------------------------------------------------------------- ITEM 1. FINANCIAL STATEMENTS - ----------------------------- Hawaiian Electric Industries, Inc. and subsidiaries CONSOLIDATED BALANCE SHEETS (UNAUDITED)
June 30, December 31, (in thousands) 1997 1996 - ----------------------------------------------------------------------------------------------------------------- ASSETS - ------ Cash and equivalents............................................ $ 129,398 $ 97,417 Accounts receivable and unbilled revenues, net.................. 148,179 150,858 Inventories, at average cost.................................... 47,126 48,745 Real estate developments........................................ 31,549 33,210 Investment and mortgage-backed securities....................... 1,341,021 1,377,591 Other investments............................................... 72,744 72,609 Loans receivable, net........................................... 2,069,618 2,002,028 Property, plant and equipment, net of accumulated depreciation and amortization of $934,434 and $890,055....... 1,966,559 1,941,767 Regulatory assets............................................... 103,964 100,804 Other........................................................... 77,801 73,776 Goodwill and other intangibles.................................. 34,931 37,035 ---------- ---------- $6,022,890 $5,935,840 ========== ========== LIABILITIES AND STOCKHOLDERS' EQUITY - ------------------------------------ LIABILITIES Accounts payable................................................ $ 98,290 $ 107,896 Deposit liabilities............................................. 2,202,687 2,150,370 Short-term borrowings........................................... 130,863 216,543 Securities sold under agreements to repurchase.................. 520,961 479,742 Advances from Federal Home Loan Bank............................ 630,774 684,274 Long-term debt.................................................. 802,650 810,080 Deferred income taxes........................................... 188,980 185,609 Unamortized tax credits......................................... 49,497 48,857 Contributions in aid of construction............................ 196,739 197,805 Other........................................................... 178,551 194,564 --------- ---------- 4,999,992 5,075,740 ---------- ---------- HEI- and HECO-obligated preferred securities of trust subsidiaries directly or indirectly holding solely subordinated debentures of HEI, HEIDI, HECO, MECO and HELCO................................................... 150,000 -- Preferred stock of electric utility subsidiaries Subject to mandatory redemption............................. 36,260 38,955 Not subject to mandatory redemption......................... 48,293 48,293 ---------- ---------- 234,553 87,248 ---------- ---------- STOCKHOLDERS' EQUITY Preferred stock, no par value, authorized 10,000 shares; issued: none............................................... -- -- Common stock, no par value, authorized 100,000 shares; issued and outstanding: 31,412 shares and 30,853 shares............ 636,890 622,945 Retained earnings............................................... 151,455 149,907 ---------- ---------- 788,345 772,852 ---------- ---------- $6,022,890 $5,935,840 ========== ==========
See accompanying notes to consolidated financial statements. 1 Hawaiian Electric Industries, Inc. and subsidiaries CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
Three months ended Six months ended June 30, June 30, (in thousands, except per share amounts and ------------------------------- ------------------------------- ratio of earnings to fixed charges) 1997 1996 1997 1996 - ------------------------------------------------------- -------------------------------------------------------------------- REVENUES Electric utility.................................. $275,324 $264,987 $549,080 $512,824 Savings bank...................................... 69,674 66,278 138,586 132,070 Other............................................. 15,255 15,978 31,780 28,518 -------- -------- -------- -------- 360,253 347,243 719,446 673,412 -------- -------- -------- -------- EXPENSES Electric utility.................................. 234,928 221,612 470,090 430,710 Savings bank...................................... 57,438 56,076 114,065 111,912 Other............................................. 17,717 18,143 35,769 32,643 -------- -------- -------- -------- 310,083 295,831 619,924 575,265 -------- -------- -------- -------- OPERATING INCOME (LOSS) Electric utility.................................. 40,396 43,375 78,990 82,114 Savings bank...................................... 12,236 10,202 24,521 20,158 Other............................................. (2,462) (2,165) (3,989) (4,125) -------- -------- -------- -------- 50,170 51,412 99,522 98,147 -------- -------- -------- -------- Interest expense--electric utility and other...... (15,680) (16,090) (32,145) (32,249) Allowance for borrowed funds used during construction............................ 1,609 1,154 3,136 2,504 Preferred stock dividends of electric utility subsidiaries........................... (1,563) (1,666) (3,134) (3,341) Preferred securities distributions of trust subsidiaries............................. (3,104) -- (4,439) -- Allowance for equity funds used during construction................................... 2,752 2,147 5,425 4,798 -------- -------- -------- -------- INCOME BEFORE INCOME TAXES........................ 34,184 36,957 68,365 69,859 Income taxes...................................... 14,389 15,594 28,907 29,627 -------- -------- -------- -------- NET INCOME........................................ $ 19,795 $ 21,363 $ 39,458 $ 40,232 ======== ======== ======== ======== Earnings per common share......................... $0.63 $0.71 $ 1.27 $ 1.34 ======== ======== ======== ======== Dividends per common share........................ $0.61 $0.60 $ 1.22 $ 1.20 ======== ======== ======== ======== Weighted average number of common shares outstanding............................. 31,237 30,182 31,099 30,033 ======== ======== ======== ======== Ratio of earnings to fixed charges (SEC method) Excluding interest on ASB deposits............. 1.82 1.96 ======== ======== Including interest on ASB deposits............. 1.54 1.57 ======== ========
Hawaiian Electric Industries, Inc. and subsidiaries CONSOLIDATED STATEMENTS OF RETAINED EARNINGS (UNAUDITED)
Three months ended Six months ended June 30, June 30, ------------------------------- ------------------------------ (in thousands) 1997 1996 1997 1996 - ------------------------------------------------------- ------------------------------------------------------------------ Retained earnings, beginning of period............ $150,697 $145,172 $149,907 $144,216 Net income........................................ 19,795 21,363 39,458 40,232 Common stock dividends............................ (19,037) (18,085) (37,910) (35,998) -------- -------- -------- -------- RETAINED EARNINGS, END OF PERIOD.................. $151,455 $148,450 $151,455 $148,450 ======== ======== ======== ========
See accompanying notes to consolidated financial statements. 2 Hawaiian Electric Industries, Inc. and subsidiaries CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
Six months ended June 30, --------------------------- (in thousands) 1997 1996 - ------------------------------------------------------------------------------------------------------------ CASH FLOWS FROM OPERATING ACTIVITIES Net income.................................................................... $ 39,458 $ 40,232 Adjustments to reconcile net income to net cash provided by operating activities Depreciation and amortization of property, plant and equipment.......... 45,592 41,204 Other amortization...................................................... 7,943 6,481 Deferred income taxes and tax credits, net.............................. 1,676 4,744 Allowance for equity funds used during construction..................... (5,425) (4,798) Changes in assets and liabilities Decrease (increase) in accounts receivable and unbilled revenues, net.............................................................. 2,679 (5,330) Decrease (increase) in inventories................................ 1,619 (9,031) Increase in regulatory assets..................................... (4,456) (1,676) Increase (decrease) in accounts payable........................... (9,606) 2,588 Changes in other assets and liabilities........................... (18,046) (16,366) -------- -------- NET CASH PROVIDED BY OPERATING ACTIVITIES..................................... 61,434 58,048 -------- -------- CASH FLOWS FROM INVESTING ACTIVITIES Loans receivable originated and purchased..................................... (146,280) (308,574) Principal repayments on loans receivable...................................... 73,733 90,691 Proceeds from sale of loans receivable........................................ 2,487 2,092 Held-to-maturity mortgage-backed securities purchased......................... (94,788) (112,581) Principal repayments on held-to-maturity mortgage-backed securities........... 132,712 182,907 Capital expenditures.......................................................... (66,925) (85,540) Contributions in aid of construction.......................................... 2,864 5,984 Other......................................................................... 785 1,164 -------- -------- NET CASH USED IN INVESTING ACTIVITIES......................................... (95,412) (223,857) -------- -------- CASH FLOWS FROM FINANCING ACTIVITIES Net increase in deposit liabilities........................................... 52,317 35,269 Net decrease in short-term borrowings with original maturities of three months or less................................ (84,796) (14,738) Proceeds from other short-term borrowings..................................... 479 608 Repayment of other short-term borrowings...................................... (1,363) (1,318) Proceeds from securities sold under agreements to repurchase.................. 494,500 384,100 Repurchase of securities sold under agreements to repurchase.................. (453,100) (341,000) Proceeds from advances from Federal Home Loan Bank............................ 354,000 323,200 Principal payments on advances from Federal Home Loan Bank.................... (407,500) (297,700) Proceeds from issuance of long-term debt...................................... 7,388 77,242 Repayment of long-term debt................................................... (14,900) (17,400) Proceeds from issuance of HEI- and HECO-obligated preferred securities of trust subsidiaries........................................................... 150,000 -- Redemption of electric utility subsidiaries' preferred stock.................. (2,695) (2,400) Net proceeds from issuance of common stock.................................... 12,294 9,746 Common stock dividends........................................................ (30,600) (25,377) Other......................................................................... (10,065) (4,956) -------- -------- NET CASH PROVIDED BY FINANCING ACTIVITIES..................................... 65,959 125,276 -------- -------- Net increase (decrease) in cash and equivalents............................... 31,981 (40,533) Cash and equivalents, beginning of period..................................... 97,417 130,833 -------- -------- CASH AND EQUIVALENTS, END OF PERIOD........................................... $ 129,398 $ 90,300 ========= =========
See accompanying notes to consolidated financial statements. 3 Hawaiian Electric Industries, Inc. and subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS June 30, 1997 and 1996 (Unaudited) (1) BASIS OF PRESENTATION - ------------------------- The accompanying unaudited consolidated financial statements have been prepared in conformity with generally accepted accounting principles (GAAP) for interim financial information and with the instructions to Securities and Exchange Commission (SEC) Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In preparing the financial statements, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the balance sheet and the reported amounts of revenues and expenses for the period. Actual results could differ significantly from those estimates. The accompanying unaudited consolidated financial statements should be read in conjunction with the consolidated financial statements and the notes thereto incorporated by reference in HEI's Annual Report on SEC Form 10-K for the year ended December 31, 1996 and the consolidated financial statements and the notes thereto in HEI's Quarterly Report on SEC Form 10-Q for the quarter ended March 31, 1997. In the opinion of HEI's management, the accompanying unaudited consolidated financial statements contain all material adjustments required by GAAP to present fairly the Company's financial position as of June 30, 1997 and December 31, 1996, the results of its operations for the three months and six months ended June 30, 1997 and 1996, and its cash flows for the six months ended June 30, 1997 and 1996. All such adjustments are of a normal recurring nature, unless otherwise disclosed in this Form 10-Q or other referenced material. Results of operations for interim periods are not necessarily indicative of results for the full year. (2) ELECTRIC UTILITY SUBSIDIARY - -------------------------------- For Hawaiian Electric Company, Inc.'s consolidated financial information, including its commitments and contingencies, see pages 10 through 18. (3) SAVINGS BANK SUBSIDIARY - ---------------------------- SELECTED CONSOLIDATED FINANCIAL INFORMATION American Savings Bank, F.S.B. and subsidiaries Income statement data
Three months ended Six months ended June 30, June 30, -------------------------------- ---------------------------- (in thousands) 1997 1996 1997 1996 - ----------------------------------------------------------------------------------------------------------------------- Interest income................................. $ 65,834 $ 62,374 $131,034 $124,454 Interest expense................................ 38,662 37,727 76,482 75,265 -------- -------- -------- -------- NET INTEREST INCOME............................. 27,172 24,647 54,552 49,189 Provision for losses............................ (1,603) (471) (2,792) (891) Other income.................................... 3,840 3,904 7,552 7,616 Operating, administrative and general expenses.. (17,173) (17,878) (34,791) (35,756) -------- -------- -------- -------- OPERATING INCOME................................ 12,236 10,202 24,521 20,158 Income taxes.................................... 5,064 4,256 10,250 8,422 -------- -------- -------- -------- NET INCOME...................................... $ 7,172 $ 5,946 $ 14,271 $ 11,736 ======== ======== ======== ========
4 American Savings Bank, F.S.B. and subsidiaries Balance sheet data
June 30, December 31, (in thousands) 1997 1996 - ------------------------------------------------------------------------------ ASSETS Cash and equivalents............................. $ 119,205 $ 93,905 Held-to-maturity investment securities........... 38,902 37,518 Held-to-maturity mortgage-backed securities...... 1,300,906 1,340,073 Loans receivable, net............................ 2,069,618 2,002,028 Other............................................ 79,275 80,128 Goodwill and other intangibles................... 34,931 37,035 ---------- ---------- $3,642,837 $3,590,687 ========== ========== LIABILITIES AND EQUITY Deposit liabilities.............................. $2,202,687 $2,150,370 Securities sold under agreements to repurchase... 520,961 479,742 Advances from Federal Home Loan Bank............. 630,774 684,274 Other............................................ 58,024 54,251 ---------- ---------- 3,412,446 3,368,637 Common stock equity.............................. 230,391 222,050 ---------- ---------- $3,642,837 $3,590,687 ========== ==========
DEPOSIT-INSURANCE PREMIUMS AND REGULATORY DEVELOPMENTS The deposit accounts of ASB and other thrifts are insured by the Savings Association Insurance Fund (SAIF). The deposit accounts of commercial banks are insured by the Bank Insurance Fund (BIF). The SAIF and BIF are administered by the Federal Deposit Insurance Corporation (FDIC). On September 30, 1996, President Clinton signed into law the Deposit Insurance Funds Act of 1996 (Funds Act), which required the FDIC to impose a one-time special assessment on SAIF members in an amount sufficient to increase the SAIF reserve ratio to 1.25% of aggregate insured deposits as of October 1, 1996. In addition, effective January 1, 1997, the Funds Act provided that the assessment base for raising funds to pay interest on obligations issued by the Financing Corporation (FICO) is to be expanded to include the deposits of banks as well as thrifts. The provisions of the Funds Act should enable SAIF institutions to achieve, over time, parity with BIF institutions in the schedules of the premiums to be paid for deposit insurance coverage and to fund FICO interest obligations. The FDIC set the one-time special assessment for SAIF deposits at 65.7 cents per $100 of deposits, to be applied against insured deposits held by SAIF institutions as of March 31, 1995. ASB's special assessment was $8.3 million after tax, and was accrued in September 1996. In December 1996, the FDIC adopted a risk-based assessment schedule for SAIF institutions, effective January 1, 1997, that was identical to the existing base rate schedule for BIF institutions: zero to 27 cents per $100 of deposits. Added to this base rate schedule through 1999 will be the assessment to fund the FICO's interest obligations initially set at 6.5 cents per $100 of deposits for SAIF institutions and 1.3 cents per $100 of deposits for BIF institutions (subject to quarterly adjustment). By law, the FICO rate on BIF-assessable deposits must be one-fifth the rate on SAIF-assessable deposits until the insurance funds are merged or until January 1, 2000, whichever occurs first, at which time the FICO interest obligation for both banks and thrifts should thereafter be identical, at a currently estimated rate of 2.4 cents per $100 of deposits. As a "well-capitalized" thrift, ASB's base deposit-insurance premium effective January 1, 1997 is zero and its assessment for funding FICO interest payments was initially 6.5 cents per $100 of deposits, compared to payments that would have been calculated at 23 cents per $100 of deposits under the premium schedule in effect during the first three quarters of 1996. This resulted in a reduction of approximately $1.8 million in aggregate deposit premiums paid during the first six months of 1997 in comparison to what the premiums would have been if they had been calculated at 23 cents per $100 of deposits. 5 The Funds Act provides that the SAIF and BIF will be merged into the Deposit Insurance Fund by January 1, 1999, but only if no insured depository institution is a thrift on that date. The Funds Act leaves to subsequent legislation, however, the manner in which thrift charters might be eliminated in favor of a bank or some other form of charter. Certain of the legislative proposals advanced to address this issue, if adopted, could have a material adverse effect on the Company. For example, if thrift charters were eliminated and ASB obtains a bank charter, HEI and its subsidiaries might become subject to the restrictions on the permissible activities of a bank holding company. While certain of the proposals that have been advanced would grandfather the activities of existing savings and loan holding companies such as HEI, management cannot predict whether or in what form any of these proposals might ultimately be adopted or the extent to which the business of HEI or ASB might be affected. PURCHASE AND ASSUMPTION AGREEMENT WITH BANK OF AMERICA, FSB On May 26, 1997, ASB entered into a Purchase and Assumption Agreement with Bank of America, FSB (BoA), to assume substantially all of the Hawaii deposit liabilities of BoA and acquire most of its branches and certain of its Hawaii- based loans. Subject to satisfaction of various conditions, including approval of the transaction by the Office of Thrift Supervision (OTS), the transaction could close in late 1997 at the earliest. Based on financial information as of February 28, 1997, management estimates the transaction will increase ASB's assets by approximately $1.7 billion (representing the book value of assets after taking into account an estimated $160 million capital infusion into ASB to meet regulatory capital requirements related to ASB's increase in asset size) and increase ASB's deposit liabilities by approximately $1.6 billion. These estimates are subject to changes resulting from operations prior to closing and to numerous adjustments called for by the Agreement as of the closing date. HEI will fund the approximately $160 million capital infusion into ASB primarily through short-term borrowings that will be repaid over time out of a combination of earnings, proceeds from long-term debt and equity from the HEI Dividend Reinvestment and Stock Purchase Plan. An application to approve the acquisition was filed with the OTS on July 10, 1997, and work necessary to complete the acquisition is proceeding. (4) REAL ESTATE SUBSIDIARY - --------------------------- MPC and its subsidiaries' total real estate project inventory, equity investment in real estate joint ventures and loans and advances to unconsolidated joint ventures or joint venture partners amounted to $45 million and $46 million at June 30, 1997 and December 31, 1996, respectively. The amounts MPC will ultimately realize relative to these real estate investments could differ materially from the recorded amounts as of June 30, 1997. At June 30, 1997, MPC or its subsidiaries had issued (i) guarantees under which they were jointly and severally contingently liable with their joint venture partners for $1.7 million of outstanding loans and (ii) payment guarantees under which MPC or its subsidiaries were severally contingently liable for $4.3 million of outstanding loans and $2.6 million of additional undrawn loan facilities. All such loans are collateralized by real property. At June 30, 1997, HEI had agreed with the lenders of construction loans and loan facilities, of which approximately $6.4 million was outstanding and $5.4 million was undrawn, that it will maintain ownership of l00% of the stock of MPC and that it intends, subject to good and prudent business practices, to keep MPC financially sound and responsible to meet its obligations as guarantor. (5) HEI- AND HECO-OBLIGATED PREFERRED SECURITIES OF TRUST SUBSIDIARIES DIRECTLY - -------------------------------------------------------------------------------- OR INDIRECTLY HOLDING SOLELY SUBORDINATED DEBENTURES OF HEI, HEIDI, HECO, ------------------------------------------------------------------------- MECO and HELCO -------------- In February 1997, Hawaiian Electric Industries Capital Trust I (the Trust), a grantor trust, issued and sold, in an underwritten registered public offering, 4 million of its 8.36% Company-obligated preferred securities (trust preferred securities), representing undivided preferred beneficial ownership interests in the assets of the Trust. HEI owns 100% of the common securities of the Trust. The Trust utilized the proceeds from the issuance of the trust preferred securities ($100 million) and the trust common securities ($3.2 million) to purchase all the limited partner interests in HEI Preferred Funding, LP (the Partnership). Hycap Management, Inc. (Hycap), a wholly owned subsidiary of HEI, is the sole general partner of the Partnership. Substantially all of the proceeds from the sale of the limited partner interests and the general partner interest were used by the Partnership to purchase 8.36% junior subordinated debentures of HEI and HEIDI due in 2017 in the aggregate principal amount of $120.1 million. The limited partner interests in the Partnership are the sole assets of the Trust. HEI and HEIDI's junior subordinated debentures represent substantially all of the assets of the Partnership. In connection with 6 these transactions, HEI issued subordinated guarantees relating to the performance of certain obligations by the Trust, the Partnership and HEIDI. The debentures issued by HEI and HEIDI to the Partnership, the interests in the Partnership, HEI's investment in Hycap and the common securities of the Trust owned by HEI have been eliminated in the Company's consolidated balance sheet as of June 30, 1997. In March 1997, HECO Capital Trust I, a grantor trust, issued and sold, in an underwritten registered public offering, 2 million of its 8.05% Cumulative Quarterly Income Preferred Securities with an aggregate liquidation value of $50 million. See note (2) in HECO's "Notes to consolidated financial statements." (6) CASH FLOWS - --------------- SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION Cash paid for interest (net of capitalized amounts) and income taxes was as follows:
Six months ended June 30, --------------------------- (in thousands) 1997 1996 - ------------------------------------------------------------------------------- Interest (including interest paid by savings bank, but excluding interest paid on nonrecourse debt on leveraged leases)....................................... $106,341 $105,068 ======== ======== Interest on nonrecourse debt from leveraged leases........................................ $ 3,801 $ 4,142 ======== ======== Income taxes................................... $ 30,846 $ 21,397 ======== ========
SUPPLEMENTAL DISCLOSURES OF NONCASH ACTIVITIES Common stock dividends reinvested by shareholders in HEI common stock in noncash transactions amounted to $7.3 million and $10.6 million for the six months ended June 30, 1997 and 1996, respectively. The allowance for equity funds used during construction, which was capitalized as part of the cost of electric utility plant, amounted to $5.4 million and $4.8 million for the six months ended June 30, 1997 and 1996, respectively. (7) ACCOUNTING CHANGES - ----------------------- ENVIRONMENTAL REMEDIATION LIABILITIES In October 1996, the American Institute of Certified Public Accountants issued Statement of Position (SOP) 96-1, "Environmental Remediation Liabilities." The provisions of the SOP are consistent with the Company's current policies and, accordingly, adoption of the SOP on January 1, 1997 did not have a material effect on the Company's financial condition, results of operations or liquidity. EARNINGS PER SHARE In February 1997, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards (SFAS) No. 128, "Earnings Per Share." SFAS No. 128 requires the presentation of "Basic" earnings per share, representing income available to common shareholders divided by the weighted average number of common shares outstanding for the period, and "Diluted" earnings per share, which is similar to the current presentation of fully diluted earnings per share. SFAS No. 128 is effective for both interim and annual periods ending after December 15, 1997. The Company will adopt SFAS No. 128 in the fourth quarter of 1997. SFAS No. 128 requires restatement of all prior period earnings per share data presented. Management does not expect adoption of SFAS No. 128 will have a material effect on the Company's previously reported earnings per share, financial condition, results of operations or liquidity. 7 CAPITAL STRUCTURE In February 1997, the FASB issued SFAS No. 129, "Disclosure of Information about Capital Structure," which lists required disclosures about capital structure that had been included in a number of previously existing statements and opinions. SFAS No. 129 is effective for periods ending after December 15, 1997. The Company will adopt the provisions of SFAS No. 129 in the fourth quarter of 1997. Management does not expect adoption of SFAS No. 129 will have a material effect on the Company's financial condition, results of operations or liquidity. COMPREHENSIVE INCOME In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive Income," which establishes standards for the reporting and display of comprehensive income and its components in a full set of general-purpose financial statements. SFAS No. 130 is effective for fiscal years beginning after December 15, 1997. The Company will adopt the provisions of SFAS No. 130 on January 1, 1998. SFAS No. 130 requires reclassification of financial statements for earlier periods provided for comparative purposes. Management does not expect adoption of SFAS No. 130 will have a material effect on the Company's financial statements, financial condition, results of operations or liquidity. SEGMENTS OF AN ENTERPRISE AND RELATED INFORMATION In June 1997, the FASB issued SFAS No. 131, "Disclosures about Segments of an Enterprise and Related Information," which establishes standards for the way that public business enterprises report information about operating segments in annual financial statements and requires that those enterprises report selected information about operating segments in interim financial reports issued to shareholders. SFAS No. 131 is effective for periods beginning after December 15, 1997. The Company will adopt the provisions of SFAS No. 131 on January 1, 1998. SFAS No. 131 requires restatement of comparative information presented for earlier periods. Management does not expect adoption of SFAS No. 131 will have a material effect on the Company's reporting segments, financial condition, results of operations or liquidity. (8) CONTINGENCIES - ------------------ ENVIRONMENTAL REGULATION By letters in January and February 1995, the Department of Health of the State of Hawaii (DOH) advised HECO, HTB, YB and others that it was conducting an investigation to determine the nature and extent of actual or potential releases of hazardous substances, oil, pollutants or contaminants at or near Honolulu Harbor and requested information regarding past hazardous substances and oil spills that may have occurred. HECO, HTB and YB provided responses to the DOH letters. The DOH issued letters in December 1995, indicating that it had identified a number of parties, including HECO, HTB and YB, who appear to be either potentially responsible for the contamination and/or operate their facilities upon contaminated land. The DOH met with these identified parties in January 1996 to inform them of its findings and to establish the framework to determine remedial and cleanup requirements. A Technical Workgroup (comprised of certain of the parties identified in the December 1995 DOH letter, including HECO, Chevron U.S.A. Inc., Shell Oil Products Company and others) was formed to conduct independent voluntary investigations relative to this issue. The Technical Workgroup has been negotiating with the DOH a voluntary agreement and scope of work to determine the nature and extent of any contamination, the responsible parties, appropriate remedial action and incentives for the Technical Workgroup to participate in the investigation. Because the process for determining the nature and extent of any contamination, the responsible parties and the appropriate remedial and cleanup action, if any, is at an early stage, management cannot predict at this time the extent to which the costs of further site analysis or future remediation and cleanup requirements will be borne by HECO, HTB or YB, nor can it estimate when any such costs would be incurred. Certain of such costs if incurred by HECO, HTB or YB may be claimed and covered under insurance policies, but such coverage is not determinable at this time. 8 THE HAWAIIAN INSURANCE & GUARANTY COMPANY, LIMITED The Hawaiian Insurance & Guaranty Company, Limited (HIG) and its subsidiaries (collectively, the HIG Group) were property and casualty insurance companies. HEIDI was the holder of record of all the common stock of HIG until August 16, 1994. In December 1992, due to a significant increase in the estimate of policyholder claims from Hurricane Iniki, the HEI Board of Directors concluded it would not contribute additional capital to HIG and the remaining investment in the HIG Group was written off. On December 24, 1992, a formal rehabilitation order vested full control over the HIG Group in the Insurance Commissioner of the State of Hawaii (the Rehabilitator) and her deputies. A lawsuit stemming from this situation was settled in 1994, with the Company making a settlement payment of $32 million to the Rehabilitator. HEI and HEIDI are seeking reimbursement for the settlement and defense costs from their insurance carriers. One of the insurance carriers filed a declaratory relief action in the U.S. District Court for Hawaii seeking resolution of insurance coverage and other policy issues, and HEI and HEIDI filed counterclaims. The U.S. District Court has acted on several motions for partial summary judgment filed by HEI, HEIDI and the insurance carrier. The remaining issues are scheduled for trial on July 28, 1998. Recoveries from HEI's insurance carriers, if any, will be recognized when realized. In December 1994, five insurance agencies, which had served as insurance agents for the HIG Group, filed a complaint against HEI, HEIDI and others. The complaint set forth several causes of action, including breach of contract and piercing the corporate veil. The plaintiffs asked for relief from the defendants, including compensatory damages for lost commissions, business and profits, and punitive damages. In 1995, the court granted defendants' motion for summary judgment dismissing all claims. Judgment has been entered and plaintiffs have appealed. In the opinion of management, losses, if any, resulting from the ultimate outcome of the lawsuit will not have a material adverse effect on the Company's financial condition, results of operations or liquidity. 9 Hawaiian Electric Company, Inc. and subsidiaries CONSOLIDATED BALANCE SHEETS (UNAUDITED)
June 30, December 31, (in thousands, except par value) 1997 1996 - -------------------------------------------------------------------------------------------------------------------- ASSETS Utility plant, at cost Land............................................................ $ 29,948 $ 29,897 Plant and equipment............................................. 2,498,159 2,446,073 Less accumulated depreciation and amortization.................. (868,771) (828,917) Plant acquisition adjustment, net............................... 588 614 Construction in progress........................................ 204,527 197,835 ---------- ---------- NET UTILITY PLANT......................................... 1,864,451 1,845,502 ---------- ---------- Current assets Cash and equivalents............................................ 1,480 823 Customer accounts receivable, net............................... 72,308 76,578 Accrued unbilled revenues, net.................................. 43,581 43,726 Other accounts receivable, net.................................. 3,944 4,179 Fuel oil stock, at average cost................................. 25,957 28,490 Materials and supplies, at average cost......................... 19,661 18,942 Prepayments and other........................................... 3,846 3,676 ---------- ---------- TOTAL CURRENT ASSETS...................................... 170,777 176,414 ---------- ---------- Other assets Regulatory assets............................................... 101,617 98,380 Other........................................................... 49,846 45,250 ---------- ---------- TOTAL OTHER ASSETS........................................ 151,463 143,630 ---------- ---------- $2,186,691 $2,165,546 ========== ========== CAPITALIZATION AND LIABILITIES Capitalization Common stock, $6 2/3 par value, authorized 50,000 shares; outstanding 12,806 shares..................... $ 85,387 $ 85,387 Premium on capital stock........................................ 296,295 298,154 Retained earnings............................................... 375,114 367,770 ---------- ---------- COMMON STOCK EQUITY....................................... 756,796 751,311 Cumulative preferred stock Not subject to mandatory redemption.......................... 48,293 48,293 Subject to mandatory redemption.............................. 34,565 36,160 HECO-obligated mandatorily redeemable preferred securities of trust subsidiary holding solely subordinated debentures of HECO, MECO and HELCO...................................... 50,000 -- Long-term debt, net............................................. 596,696 589,226 ---------- ---------- TOTAL CAPITALIZATION...................................... 1,486,350 1,424,990 ---------- ---------- Current liabilities Long-term debt due within one year.............................. -- 13,000 Preferred stock sinking fund payments........................... 1,695 2,795 Short-term borrowings - nonaffiliates........................... 120,024 125,920 Short-term borrowings - affiliate............................... 5,900 -- Accounts payable................................................ 53,228 66,062 Interest and preferred dividends payable........................ 10,484 11,034 Taxes accrued................................................... 47,984 55,586 Other........................................................... 19,281 24,843 ---------- ---------- TOTAL CURRENT LIABILITIES................................. 258,596 299,240 ---------- ---------- Deferred credits and other liabilities Deferred income taxes........................................... 119,452 119,613 Unamortized tax credits......................................... 48,298 47,634 Other........................................................... 77,256 76,264 ---------- ---------- TOTAL DEFERRED CREDITS AND OTHER LIABILITIES.............. 245,006 243,511 ---------- ---------- Contributions in aid of construction............................... 196,739 197,805 ---------- ---------- $2,186,691 $2,165,546 ========== ==========
See accompanying notes to HECO's consolidated financial statements. 10 Hawaiian Electric Company, Inc. and subsidiaries CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
Three months ended Six months ended June 30, June 30, (in thousands, except for ratio of earnings -------------------------- -------------------------- to fixed charges) 1997 1996 1997 1996 - ------------------------------------------------------------------------------------------------------------------------- OPERATING REVENUES................................ $272,972 $262,807 $544,569 $508,751 -------- -------- -------- -------- OPERATING EXPENSES Fuel oil.......................................... 65,112 61,665 134,332 115,287 Purchased power................................... 72,473 69,798 143,224 137,605 Other operation................................... 36,536 35,978 73,447 69,569 Maintenance....................................... 14,351 11,448 26,414 23,393 Depreciation and amortization..................... 20,506 18,338 41,003 36,681 Taxes, other than income taxes.................... 25,818 24,312 51,455 48,020 Income taxes...................................... 12,073 13,660 23,777 25,893 -------- -------- -------- -------- 246,869 235,199 493,652 456,448 -------- -------- -------- -------- OPERATING INCOME.................................. 26,103 27,608 50,917 52,303 -------- -------- -------- -------- OTHER INCOME Allowance for equity funds used during construction............................ 2,752 2,147 5,425 4,798 Other, net........................................ 2,189 2,165 4,260 4,016 -------- -------- -------- -------- 4,941 4,312 9,685 8,814 -------- -------- -------- -------- INCOME BEFORE INTEREST AND OTHER CHARGES.......... 31,044 31,920 60,602 61,117 -------- -------- -------- -------- INTEREST AND OTHER CHARGES Interest on long-term debt........................ 9,851 8,735 19,710 17,263 Amortization of net bond premium and expense...... 321 320 648 635 Other interest charges............................ 1,789 2,465 3,895 4,955 Allowance for borrowed funds used during construction............................ (1,609) (1,154) (3,136) (2,504) Preferred stock dividends of subsidiaries......... 650 702 1,300 1,404 Preferred securities distributions of trust subsidiary............................... 1,014 -- 1,072 -- -------- -------- -------- -------- 12,016 11,068 23,489 21,753 -------- -------- -------- -------- INCOME BEFORE PREFERRED STOCK DIVIDENDS OF HECO........................................ 19,028 20,852 37,113 39,364 Preferred stock dividends of HECO................. 913 964 1,834 1,937 -------- -------- -------- -------- NET INCOME FOR COMMON STOCK....................... $ 18,115 $ 19,888 $ 35,279 $ 37,427 ======== ======== ======== ======== Ratio of earnings to fixed charges (SEC method)................................... 3.08 3.46 ======== ========
Hawaiian Electric Company, Inc. and subsidiaries CONSOLIDATED STATEMENTS OF RETAINED EARNINGS (UNAUDITED)
Three months ended Six months ended June 30, June 30, -------------------------- -------------------------- (in thousands) 1997 1996 1997 1996 - ------------------------------------------------------------------------------------------------------------------------- RETAINED EARNINGS, BEGINNING OF PERIOD............ $369,872 $349,910 $367,770 $343,425 Net income for common stock....................... 18,115 19,888 35,279 37,427 Common stock dividends............................ (12,873) (13,154) (27,935) (24,208) -------- -------- -------- -------- RETAINED EARNINGS, END OF PERIOD.................. $375,114 $356,644 $375,114 $356,644 ======== ======== ======== ========
HEI owns all the common stock of HECO. Therefore, per share data with respect to shares of common stock of HECO are not meaningful. See accompanying notes to HECO's consolidated financial statements. 11 Hawaiian Electric Company, Inc. and subsidiaries CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
Six months ended June 30, ------------------------------- (in thousands) 1997 1996 - ------------------------------------------------------------------------------------------------------------- CASH FLOWS FROM OPERATING ACTIVITIES Income before preferred stock dividends of HECO...................... $ 37,113 $ 39,364 Adjustments to reconcile income before preferred stock dividends of HECO to net cash provided by operating activities Depreciation and amortization of property, plant and equipment......................................... 41,003 36,681 Other amortization............................................. 5,924 4,574 Deferred income taxes.......................................... (162) 1,302 Tax credits, net............................................... 1,474 1,840 Allowance for equity funds used during construction............ (5,425) (4,798) Changes in assets and liabilities Decrease (increase) in accounts receivable................ 4,505 (8,164) Decrease in accrued unbilled revenues..................... 145 3,698 Decrease (increase) in fuel oil stock..................... 2,533 (10,278) Decrease (increase) in materials and supplies............. (719) 1,349 Increase in regulatory assets............................. (4,456) (1,676) Increase (decrease) in accounts payable................... (12,834) 3,361 Increase (decrease) in interest and preferred dividends (550) 561 payable.................................................. Changes in other assets and liabilities................... (23,507) (21,899) -------- -------- NET CASH PROVIDED BY OPERATING ACTIVITIES............................ 45,044 45,915 -------- -------- CASH FLOWS FROM INVESTING ACTIVITIES Capital expenditures................................................. (56,377) (79,820) Contributions in aid of construction................................. 2,864 5,984 Payments on (issuance of) notes receivable........................... 1,553 (391) -------- -------- NET CASH USED IN INVESTING ACTIVITIES................................ (51,960) (74,227) -------- -------- CASH FLOWS FROM FINANCING ACTIVITIES Common stock dividends............................................... (27,935) (24,208) Preferred stock dividends............................................ (1,834) (1,937) Proceeds from issuance of HECO-obligated mandatorily redeemable preferred securities of trust subsidiary............................ 50,000 -- Proceeds from issuance of long-term debt............................. 7,388 67,242 Repayment of long-term debt.......................................... (13,000) -- Redemption of preferred stock........................................ (2,695) (2,400) Net increase (decrease) in short-term borrowings from nonaffiliates and affiliate with original maturities of three months or less.... 4 (5,145) Other................................................................ (4,355) (3,295) -------- -------- NET CASH PROVIDED BY FINANCING ACTIVITIES............................ 7,573 30,257 -------- -------- Net increase in cash and equivalents................................. 657 1,945 Cash and equivalents, beginning of period............................ 823 20 -------- -------- CASH AND EQUIVALENTS, END OF PERIOD.................................. $ 1,480 $ 1,965 ======== ========
See accompanying notes to HECO's consolidated financial statements. 12 Hawaiian Electric Company, Inc. and subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS June 30, 1997 and 1996 (Unaudited) (1) BASIS OF PRESENTATION - -------------------------- The accompanying unaudited consolidated financial statements have been prepared in conformity with GAAP for interim financial information and with the instructions to SEC Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In preparing the financial statements, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the balance sheet and the reported amounts of revenues and expenses for the period. Actual results could differ significantly from those estimates. The accompanying unaudited consolidated financial statements should be read in conjunction with the consolidated financial statements and the notes thereto incorporated by reference in HECO's Annual Report on SEC Form 10-K for the year ended December 31, 1996 and the consolidated financial statements and the notes thereto in HECO's Quarterly Report on SEC Form 10-Q for the quarter ended March 31, 1997. In the opinion of HECO's management, the accompanying unaudited consolidated financial statements contain all material adjustments required by GAAP to present fairly the financial position of HECO and its subsidiaries as of June 30, 1997 and December 31, 1996, the results of their operations for the three months and six months ended June 30, 1997 and 1996, and their cash flows for the six months ended June 30, 1997 and 1996. All such adjustments are of a normal recurring nature, unless otherwise disclosed in this Form 10-Q or other referenced material. Results of operations for interim periods are not necessarily indicative of results for the full year. (2) HECO-OBLIGATED MANDATORILY REDEEMABLE PREFERRED SECURITIES OF TRUST - ------------------------------------------------------------------------ SUBSIDIARY HOLDING SOLELY SUBORDINATED DEBENTURES OF HECO, MECO and HELCO ------------------------------------------------------------------------- In March 1997, HECO Capital Trust I, a grantor trust, issued and sold, in an underwritten registered public offering, 2 million of its trust preferred securities, with an aggregate liquidation value of $50 million. The trust preferred securities are HECO-Obligated 8.05% Cumulative Quarterly Income Preferred Securities, Series 1997, of HECO Capital Trust I, a wholly owned subsidiary of HECO holding solely 8.05% Junior Subordinated Deferrable Interest Debentures, Series 1997 (junior deferrable debentures) of HECO and its wholly owned subsidiaries, MECO and HELCO. HECO Capital Trust I common securities are wholly owned by HECO and have an aggregate liquidation value of approximately $2 million. Proceeds from the offering of the trust preferred securities and the issuance of the common securities were used by HECO Capital Trust I to purchase the junior deferrable debentures with a face value of approximately $52 million and a maturity date of March 27, 2027. In connection with these transactions, HECO issued subordinated guarantees relating to the performance of obligations by HECO Capital Trust I, MECO and HELCO. HECO's obligations under the agreements related to the issuances of such securities (back-up undertakings), considered together, effectively constitute a full and unconditional guarantee by HECO, on a subordinated basis, of amounts due on the trust preferred securities. The sole assets of HECO Capital Trust I are the junior deferrable debentures and HECO's subordinated guarantees of the obligations of MECO and HELCO. The junior deferrable debentures issued by HECO, MECO and HELCO to HECO Capital Trust I and the common securities of HECO Capital Trust I owned by HECO have been eliminated in HECO's consolidated balance sheet as of June 30, 1997. 13 (3) Cash flows - --------------- SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION Cash paid for interest (net of capitalized amounts) and income taxes was as follows:
Six months ended June 30, --------------------------------------- (in thousands) 1997 1996 - ------------------------------------------------------------------------------------------------------------ Interest............................................................. $21,703 $19,788 ======= ======= Income taxes......................................................... $22,245 $20,853 ======= =======
SUPPLEMENTAL DISCLOSURE OF NONCASH ACTIVITIES The allowance for equity funds used during construction, which was capitalized as part of the cost of electric utility plant, amounted to $5.4 million and $4.8 million for the six months ended June 30, 1997 and 1996, respectively. (4) COMMITMENTS AND CONTINGENCIES - ---------------------------------- INTERIM RATE INCREASES Amounts recovered under interim rates in excess of final approved rates are subject to refund with interest. At June 30, 1997, there were no revenue amounts recognized under interim rate increases and subject to refund. HELCO POWER SITUATION BACKGROUND. In 1991, HELCO identified the need, beginning in 1994, for - ---------- additional generation to provide for forecast load growth while maintaining a satisfactory generation reserve margin, to address uncertainties about future deliveries of power from existing firm power producers and to permit the retirement of older generating units. Accordingly, HELCO proceeded with plans to install at its Keahole power plant site two 20-megawatt (MW) combustion turbines (CT-4 and CT-5), followed by an 18-MW heat steam recovery generator (ST-7), at which time these units would be converted to a 56-MW (net) combined- cycle unit. In January 1994, the Public Utilities Commission of the State of Hawaii (PUC) approved expenditures for CT-4, which HELCO had planned to install in late 1994. Despite HELCO's best efforts to install this additional generation, the schedule for the installation of HELCO's phased combined-cycle unit at the Keahole power plant site has been revised due to delays in (a) obtaining approval from the Hawaii Board of Land and Natural Resources (BLNR) of a Conservation District Use Permit (CDUP) amendment and (b) obtaining from the DOH and the U.S. Environmental Protection Agency (EPA) an air quality Prevention of Significant Deterioration/Covered Source permit (PSD permit) for the Keahole power plant site. CDUP AMENDMENT. On July 10, 1997, the Third Circuit Court of the State of - -------------- Hawaii issued its Amended Findings of Fact, Conclusions of Law, Decision and Order on HELCO's appeal of an order of the BLNR, along with other civil cases relating to HELCO's application for a CDUP amendment. This decision allows HELCO to use its Keahole property as requested in its application. Various opposing parties have filed motions for reconsideration and/or motions to alter or amend the Court's order, all of which are pending. A hearing on these motions was held on August 4, 1997 and the Court took the motions under advisement. Once these motions are resolved, the Court's amended decision will constitute a final judgment subject to appeal. If an appeal were to be taken, management believes that HELCO would ultimately prevail and that the amended decision would be upheld. PSD PERMIT. In a November 1995 letter to the DOH, the EPA declined to sign - ---------- HELCO's PSD permit for the combined-cycle unit on the basis that a different emission control technology should be used. HELCO then proposed to reduce net nitrogen oxide emission increases resulting from the addition of the combined- cycle unit by retiring and/or reducing the use of certain existing Keahole diesel units. The EPA stated that it found the netting proposal procedurally and substantively acceptable, and that if emission increases were kept below significance levels, it would not require the use of any particular 14 emission control technology. In December 1996, the DOH proposed a revised draft air permit which reflected HELCO's netting proposal and was acceptable to HELCO. A public hearing relating to the modifications in the revised draft permit was held on March 3, 1997. In July 1997, HELCO submitted a revised netting proposal at the request of the DOH and EPA. Based on the proceedings to date, management believes that HELCO will obtain the required PSD permit. DECLARATORY JUDGMENT ACTION. On February 5, 1997, the Keahole Defense Coalition - --------------------------- and three individuals filed a lawsuit in the Third Circuit Court of the State of Hawaii against HELCO, the director of the DOH, and the BLNR, seeking declaratory rulings that, with regard to the Keahole project, one or more of the defendants had violated, or could not allow the plant to operate without violating, the State Clean Air Act, the State Noise Pollution Act, conditions of HELCO's conditional use permit, covenants of HELCO's land patent and Hawaii administrative rules regarding standard conditions applicable to land permits. While management believes the allegations are without merit, it is too early to predict the outcome of this lawsuit. HELCO has filed its answer and intends to vigorously defend against the claims raised. Discovery has commenced and is ongoing. IPP COMPLAINTS. Two independent power producers (IPPs), Kawaihae Cogeneration - -------------- Partners (KCP) and Enserch Development Corporation (Enserch), filed separate complaints against HELCO with the PUC in 1993 and 1994, respectively, alleging that they are entitled to power purchase contracts to provide HELCO with additional capacity which they claim would be a substitute for HELCO's planned 56-MW combined-cycle unit at Keahole. Under HELCO's current estimate of generating capacity requirements, there is a near-term need for capacity in addition to the capacity which might be provided by any of the proposed IPP units. In September 1995, the PUC allowed HELCO to continue to pursue construction of and commit expenditures for the second combustion turbine (CT-5) and the steam recovery generator (ST-7) for its planned combined-cycle unit, stating in its order that "no part of the project may be included in HELCO's rate base unless and until the project is in fact installed, and is used and useful for utility purposes." In view of permitting delays and the need for power, the PUC also ordered HELCO to continue negotiating with the IPPs and directed that the facility to be built (i.e., either HELCO's or one of the IPPs') should be the one that can be most expeditiously put into service at "allowable cost." KCP COMPLAINT. On January 26, 1996, the PUC ordered HELCO to continue in good - --------------- faith to negotiate a power purchase agreement with KCP. Status reports were filed with the PUC in March 1996. On December 12, 1996, KCP filed directly with the PUC a new proposal pursuant to which it would construct a facility and have HELCO operate and manage the facility. Although the new proposal had not been submitted to or negotiated with HELCO, KCP asked the PUC to compel HELCO to enter into the agreement. On December 19, 1996, HELCO filed a Motion to Dismiss or to extend the time for responding. On March 10, 1997, the PUC denied KCP's motion to compel HELCO to enter into KCP's proposed agreement, noting that KCP's proposal was in the nature of a lease of a generating facility, rather than a power purchase agreement within the purview of the Public Utility Regulatory Policies Act of 1978. The PUC Order also confirmed the importance of placing the next generating unit on line as quickly as possible to meet the recognized generation shortfall on the island of Hawaii, and directed KCP and HELCO to resume negotiations aimed at finalizing a power purchase agreement. The Order directed HELCO and KCP to submit to the PUC, within 45 days of the Order, either a finalized power purchase agreement or a written report on the matters preventing an agreement, including specific positions on each disputed issue, as to which the parties may request a hearing or submit to the PUC for resolution. KCP and HELCO filed their written reports on April 24 and 25, 1997, respectively. In addition, on May 1, 1997, KCP filed a motion for unspecified "sanctions" against HELCO for allegedly failing to negotiate in good faith, and on June 23, 1997, KCP filed a Motion for the Calculation of Allowable Cost, asking the PUC to designate KCP's facility as the next generating unit on the HELCO system and to determine the "allowable cost," calculated as of April 28, 1997 (the date the Environmental Appeals Board dismissed the appeal filed with regard to KCPOs air permit), which would be payable by HELCO to KCP. HELCO filed memoranda in opposition to KCP's motions on May 12, 1997 and June 30, 1997. An evidentiary hearing requested by KCP and arguments on the motions are scheduled for August 25, 1997. ENSERCH COMPLAINT. On June 2, 1997, HELCO filed a motion with the PUC for - ----------------- approval of a settlement agreement reached with Enserch regarding a power purchase agreement. The motion asked for: (1) approval of a settlement reached on avoided cost issues, and (2) a finding that it is prudent for 15 HELCO to enter into the power purchase and interconnection agreements with Enserch, while continuing to pursue the installation of its own combustion turbines (CT-4 and CT-5) at Keahole. The parallel pursuit of both projects is intended to enable HELCO to maximize the opportunity to add generation as quickly as possible, to address the possibility of delays in either project, and to meet both HELCO's immediate need for additional generation and its further need in the 1999 time frame. On August 7, 1997, the PUC issued an Order in which it (a) approved the Settlement Agreement insofar as it settled issues concerning the terms and conditions of the power purchase and interconnection agreements (the "Agreements") between HELCO and Enserch, (b) directed HELCO and Enserch to submit for the PUC's review and approval executed copies of the Agreements, (c) stated that avoided costs will be determined in accordance with the Settlement Agreement and (d) denied HELCO's request for the PUC to determine in the Enserch docket that it is prudent for HELCO to enter into the Agreements while continuing to pursue installation of CT-4 and CT-5. On the last point, the PUC stated that it had not made, and was unable to make, a decision as to which generation unit should follow the next unit. Thus, although the PUC acknowledged that the Settlement Agreement was conditional on it determining that it was prudent for HELCO to pursue CT-4 and CT-5 in parallel with the Enserch agreement, the PUC stated its belief that this would unreasonably tie its hands and was outside the Enserch docket. The PUC thus concluded that it would require HELCO to execute the Agreements and submit them for PUC approval notwithstanding the PUC's refusal to make the prudency determination. HCPC COMPLAINT. On April 1, 1997, Hilo Coast Processing Company (HCPC) filed a - --------------- complaint against HELCO with the PUC, requesting an immediate hearing on HCPC's offer for a new 20-year power purchase contract for its existing facility, which is proposed to be expanded from 22 MW to 32 MW. HCPC's existing power purchase agreement is scheduled to terminate at the end of 1999. On May 27, 1997, HELCO filed its response to HCPC's complaint. The PUC has converted the complaint to a purchased power contract negotiation proceeding. A stipulated pre-hearing order was approved by the PUC on June 23, 1997. Pursuant to the schedule therein, the parties filed direct testimonies and information requests in July 1997, and an evidentiary hearing is scheduled for November 4, 1997. Management cannot determine at this time whether the negotiations with the IPPs and related PUC proceedings will result in execution and/or PUC approval of a power purchase agreement. COSTS INCURRED. As of June 30, 1997, HELCO's costs incurred in its efforts to - -------------- put into service its combined-cycle unit amounted to $51.9 million, including approximately $26.8 million for equipment and material purchases, approximately $10.7 million for planning, engineering, permitting, site development and other costs and approximately $14.4 million as an allowance for funds used during construction. CONTINGENCY PLANNING. In June 1995, HELCO filed with the PUC its generation - -------------------- resource contingency plan detailing alternatives and mitigation measures to address possible further delays in obtaining the permits necessary to construct its combined-cycle unit. HELCO arranged for additional firm capacity to be provided by its existing firm power producers, obtained contracts shifting loads to off-peak hours, deferred generation unit retirements, began the implementation of its energy-efficiency demand-side management programs, refurbished CT-1 to increase its capacity back to its nameplate rating of 11.5 MW, and have received permits and are preparing for the installation in 1997 of four dispersed diesel units. These measures have helped HELCO maintain its reserve margin and reduce the risk of capacity shortages. In January 1996, the PUC opened a proceeding to evaluate HELCO's contingency resource plan and HELCO's efforts to insure system reliability. HELCO filed reports in March and October 1996 and April 1997 to update the PUC on its contingency plan and its implementation. ENVIRONMENTAL REGULATION See note (8), "Contingencies," in HEI's "Notes to consolidated financial statements." PUC SHOW CAUSE ORDER FOR HECO On March 10, 1997, the PUC issued a show cause order to HECO requesting information to assist the PUC in determining if it should reduce HECO's rates and require HECO to refund any excess earnings to its ratepayers. 16 In the order, the PUC cites that for 1996 HECO recorded a return on average common equity (ROACE) of 11.93% and a simple average rate of return on rate base (ROR) of 9.70% which exceeded the 11.40% ROACE and the 9.16% ROR determined to be reasonable by the PUC in the utility's last rate case. The PUC also compared HECO's 1994, 1995 and 1996 actual results of operations (for ratemaking purposes) with the projected results of operations that the PUC used in approving electric rates in HECO's last two rate cases. The PUC stated that those results appeared to indicate that it is unlikely that the ROR experienced by HECO in 1996 will decrease significantly in the future and that it is therefore appropriate to examine HECO's rate of return. The revenues recorded by HECO during 1996 were based on rates approved in a final PUC decision and order in HECO's 1995 test year rate case. The amount of 1996 net income represented by the difference between the actual ROR of 9.70% and the 9.16% determined reasonable in December 1995 by the PUC was less than $4.5 million. It would be highly unusual if this show cause order were to result in a refund to customers based on a retroactive calculation. By contrast, the refund of $10 million of revenues, which was ordered by the PUC in December 1995 and refunded in the first half of 1996, related to revenues that had been collected under interim rate orders in which the PUC clearly stated that revenues collected under the interim orders were subject to refund. On April 7, 1997, HECO filed its response to the PUC's order. HECO indicated the reported RORs for 1995 and 1996 were higher than the return used to determine the 1995 test year revenue requirements primarily due to the impact in 1995 of higher kilowatthour sales because of warmer than normal weather, and the impact in 1996 of higher kilowatthour sales because of normal expected sales growth, increased military sales and warmer than normal weather. In its April 7, 1997 response, HECO also reported that its pro forma results for 1997 project a ROR (for ratemaking purposes) of 9.39%. HECO indicated that the return it expects to earn in 1997 is within the "zone of reasonableness" and should not be deemed excessive. Among other things, HECO explained that the weighted average cost of capital in 1997 should be higher than the 9.16% found to be reasonable in HECO's 1995 test year rate case, because a higher ROACE is appropriate under 1997 market conditions. HECO also pointed out that it is not compensated in those years when its actual results fall below returns that were found to be reasonable in the most recent rate case. The Consumer Advocate served information requests on HECO in July 1997, and plans to file a final Statement of Position in August 1997. Management cannot predict what future PUC action may be taken in this proceeding. (5) ACCOUNTING CHANGES - ----------------------- ENVIRONMENTAL REMEDIATION LIABILITIES In October 1996, the American Institute of Certified Public Accountants issued SOP 96-1, "Environmental Remediation Liabilities." The provisions of the SOP are consistent with HECO and its subsidiaries' current policies and, accordingly, adoption of the SOP on January 1, 1997 did not have a material effect on HECO's consolidated financial condition, results of operations or liquidity. CAPITAL STRUCTURE In February 1997, the FASB issued SFAS No. 129, "Disclosure of Information about Capital Structure," which lists required disclosures about capital structure that had been included in a number of previously existing statements and opinions. SFAS No. 129 is effective for periods ending after December 15, 1997. HECO and its subsidiaries' will adopt the provisions of SFAS No. 129 in the fourth quarter of 1997. Management does not expect adoption of SFAS No. 129 will have a material effect on HECO's consolidated financial condition, results of operations or liquidity. COMPREHENSIVE INCOME In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive Income," which establishes standards for the reporting and display of comprehensive income and its components in a full set of general-purpose financial statements. SFAS No. 130 is effective for fiscal years beginning after December 15, 1997. HECO and its subsidiaries will adopt the provisions of SFAS No. 130 on January 1, 1998. SFAS No. 130 requires reclassification of financial statements for earlier periods provided for comparative purposes. Management does not expect adoption of SFAS No. 130 will have a material effect on HECO's consolidated financial statements, financial condition, results of operations or liquidity. 17 (6) SUMMARIZED FINANCIAL INFORMATION - ------------------------------------- Summarized financial information for HECO's subsidiaries, HELCO and MECO, is as follows:
Balance sheet data HELCO MECO --------------------------------------- ------------------------------ June 30, December 31, June 30, December 31, (in thousands) 1997 1996 1997 1996 - -------------------------------------------------------------------------------------------------------------------- Current assets............................ $ 28,820 $ 26,345 $ 29,202 $ 30,701 Noncurrent assets......................... 397,472 390,464 371,679 366,489 -------- -------- -------- -------- $426,292 $416,809 $400,881 $397,190 ======== ======== ======== ======== Common stock equity....................... $142,099 $143,212 $147,624 $147,573 Cumulative preferred stock Not subject to mandatory redemption... 10,000 10,000 8,000 8,000 Subject to mandatory redemption....... 7,200 7,200 5,765 5,960 Current liabilities....................... 73,465 73,650 34,938 41,700 Noncurrent liabilities.................... 193,528 182,747 204,554 193,957 -------- -------- -------- -------- $426,292 $416,809 $400,881 $397,190 ======== ======== ======== ========
HELCO MECO --------------------------------------------------------- --------------------------------------------------- Three months ended Six months ended Three months ended Six months ended June 30, June 30, June 30, June 30, --------------------------------------------------------- --------------------------------------------------- (in thousands) 1997 1996 1997 1996 1997 1996 1997 1996 - ---------------------------------------------------------------------------------------------------------------------------------- Operating revenues....... $39,025 $37,481 $79,363 $72,670 $38,281 $35,416 $76,260 $68,211 Operating income......... 4,496 4,768 7,839 7,457 3,709 3,695 8,138 7,625 Net income for common stock... 3,782 3,023 6,518 5,162 2,553 3,105 5,848 6,272
To the extent HECO has not provided separate financial statements and other disclosures concerning MECO and HELCO, management has concluded that such financial statements and other information is not material to holders of securities issued by MECO or HELCO which have been fully and unconditionally guaranteed by HECO. (7) RECONCILIATION OF ELECTRIC UTILITY OPERATING INCOME PER HEI AND HECO - -------------------------------------------------------------------------- CONSOLIDATED STATEMENTS OF INCOME ---------------------------------
Three months ended Six months ended June 30, June 30, -------------------------------------- ------------------ (in thousands) 1997 1996 1997 1996 - ----------------------------------------------------------------------------------------------------------------------------- Operating income from regulated and nonregulated activities before income taxes (per HEI consolidated statements of income)................................. $ 40,396 $ 43,375 $ 78,990 $ 82,114 Deduct: Income taxes on regulated activities.................. (12,073) (13,660) (23,777) (25,893) Revenues from nonregulated activities................. (2,352) (2,180) (4,511) (4,073) Add: Expenses from nonregulated activities................. 132 73 215 155 -------- -------- -------- -------- Operating income from regulated activities after income taxes (per HECO consolidated statements of $ 26,103 $ 27,608 $ 50,917 $ 52,303 income)............................................... ======== ======== ======== ========
18 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 - ----------------
Three months ended June 30, -------------------------- (in thousands, except % Primary reason(s) for per share amounts) 1997 1996 change significant change* - --------------------------------------------------------------------------------------------------------------- Revenues.................. $360,253 $347,243 4 Increases for electric utility and savings bank segments Operating income.......... 50,170 51,412 (2) Decreases for the electric utility and "other" segments, partly offset by increase for the savings bank segment Net income................ 19,795 21,363 (7) Lower operating income and higher preferred securities distributions (due to the issuance of HEI- and HECO-obligated preferred securities of trust subsidiaries) Earnings per common share. $ 0.63 $ 0.71 (11) See explanation for "net income," and an increase in shares outstanding Weighted average number of common shares outstanding.............. 31,237 30,182 3 Issuances under the Dividend Reinvestment and Stock Purchase Plan and other plans
Six months ended June 30, ---------------------------- (in thousands, except % Primary reason(s) for per share amounts) 1997 1996 change significant change* - ------------------------------------------------------------------------------------------------------------- Revenues.................. $719,446 $673,412 7 Increases for all segments Operating income.......... 99,522 98,147 1 Increase for the savings bank segment, partly offset by decrease for the electric utility segment Net income................ 39,458 40,232 (2) Higher operating income, more than offset by higher preferred securities distributions (due to the issuance of HEI- and HECO-obligated preferred securities of trust subsidiaries) Earnings per common share. 1.27 1.34 (5) See explanation for "net income," and an increase in shares outstanding Weighted average number of common shares outstanding.............. 31,099 30,033 4 Issuances under the Dividend Reinvestment and Stock Purchase Plan and other plans
* Also see segment discussions which follow. 19 Following is a general discussion of the results of operations by business segment. ELECTRIC UTILITY - ----------------
Three months ended June 30, ---------------------------- (in thousands, except per % Primary reason(s) for barrel amounts) 1997 1996 change significant change - ------------------------------------------------------------------------------------------------------------- Revenues.................. $275,324 $264,987 4 Recovery through rates of higher fuel prices ($7 million) and IRP related costs ($5 million, including demand-side management program costs, lost margins and shareholder incentives), partly offset by a 1.7% decrease in KWH sales ($4 million) Expenses Fuel oil................. 65,112 61,665 6 Higher fuel oil prices, partly offset by less KWHs generated Purchased power.......... 72,473 69,798 4 Higher fuel prices, higher IPP capacity and nonfuel charges and more KWHs purchased Other.................... 97,343 90,149 8 Higher maintenance expense, depreciation expense, other operation expense (due to higher IRP related costs) and revenue taxes Operating income.......... 40,396 43,375 (7) Higher revenues more than offset by higher expenses Net income................ 18,115 19,888 (9) Lower operating income, higher interest expense (due to higher average borrowings) and preferred securities distributions (due to the issuance of HECO-obligated preferred securities of trust subsidiary), partly offset by higher AFUDC Fuel oil price per barrel. 25.86 23.11 12
20
Six months ended June 30, ---------------------------- (in thousands, except per % Primary reason(s) for barrel amounts) 1997 1996 change significant change - ------------------------------------------------------------------------------------------------------------- Revenues.................. $549,080 $512,824 7 Recovery through rates of higher fuel prices ($26 million) and IRP related costs ($8 million, including demand-side management program costs, lost margins and shareholder incentives) and higher rates ($2 million), partly offset by a 0.5% decrease in KWH sales ($2 million) Expenses Fuel oil................. 134,332 115,287 17 Higher fuel oil prices, partly offset by less KWHs generated Purchased power.......... 143,224 137,605 4 Higher fuel prices and higher IPP capacity and nonfuel charges Other.................... 192,534 177,818 8 Higher depreciation expense, other operation expense (due to higher IRP related costs), maintenance expense and revenue taxes Operating income.......... 78,990 82,114 (4) Higher revenues more than offset by higher expenses Net income................ 35,279 37,427 (6) Lower operating income, higher interest expense (due to higher average borrowings) and preferred securities distributions (due to the issuance of HECO-obligated preferred securities of trust subsidiary), partly offset by higher AFUDC Fuel oil price per barrel. 26.98 22.83 18
Electric utility operating income decreased 7% and 4% during the second quarter and first six months of 1997, respectively, compared to the same periods in 1996 as a result of lower kilowatthour (KWH) sales and higher expenses. KWH sales in the second quarter and first six months of 1997 decreased 1.7% and 0.5%, respectively, from the same periods in 1996, partly due to cooler weather and the soft tourist industry. Higher maintenance expense from higher plant overhaul costs and higher depreciation expense from plant additions also contributed to the decline in operating income. Electric utility net income decreased 9% and 6% during the second quarter and first six months of 1997, respectively, compared to the same periods in 1996 as a result of lower operating income and higher interest expense and preferred securities distributions, partly offset by higher allowance for funds used during construction (AFUDC). REGULATION OF ELECTRIC UTILITY RATES The PUC has broad discretion in its regulation of the rates charged by HEI's electric utility subsidiaries and in other matters. Any adverse decision and order (D&O) by the PUC concerning the level or method of determining electric utility rates, the authorized returns on equity or other matters, or any prolonged delay in rendering a D&O in a rate or other proceeding, could have a material adverse effect on the Company's financial condition and results of operations. Upon a showing of probable entitlement, the PUC is required to issue an interim D&O in a rate case within 10 months from the date of filing a completed application if the evidentiary hearing is completed (subject to extension for 30 days if the evidentiary hearing is not completed). There is no time limit for rendering a final D&O. Interim rate 21 increases are subject to refund with interest, pending the final outcome of the case. Management cannot predict with certainty when D&Os in pending or future rate cases will be rendered or the amount of any interim or final rate increase that will be granted. Recent rate requests - -------------------- HEI's electric utility subsidiaries initiate PUC proceedings from time to time to request electric rate increases to cover rising operating costs, the cost of purchased power and the cost of plant and equipment, including the cost of new capital projects to maintain and improve service reliability. Two of three previously reported rate proceedings were resolved by final D&Os issued in April 1997 and the third awaits PUC action on a stipulation that would close that proceeding. Hawaii Electric Light Company, Inc. - ----------------------------------- In March 1995, HELCO filed a request to increase rates based on a 1996 test year. In February 1996, HELCO revised its requested increase to 6.2%, or $8.9 million in annual revenues, based on a 12.5% ROACE. In March 1996, HELCO received an interim D&O authorizing a 4.8%, or $6.8 million, increase in annual revenues, based on an 11.65% ROACE, effective March 4, 1996. In April 1997, HELCO received a final D&O which made permanent the $6.8 million interim increase. Maui Electric Company, Limited - ------------------------------ . In February 1995, MECO filed a request to increase rates based on a 1996 test year. MECO's final requested increase was 3.8%, or $5.0 million in annual revenues, based on an 11.5% ROACE. The Consumer Advocate stipulated to the proposed ROACE. In January 1996, MECO received an interim D&O authorizing an increase of 2.8%, or $3.7 million in annual revenues, based on an 11.5% ROACE, effective February 1, 1996. In April 1997, MECO received a final D&O authorizing a 2.9%, or $3.9 million increase in annual revenues, based on a ROACE of 11.5%, or a $0.2 million increase in annual revenues over the $3.7 million increase allowed in the interim order. . In May 1996, MECO filed a request to increase rates based on a 1997 test year, primarily to recover the costs related to the anticipated 1997 addition of new generating unit M17. MECO requested an increase of 13%, or $18.9 million in annual revenues over rates in effect at the time of filing, based on a 12.9% ROACE. On November 7, 1996, MECO filed a motion with the PUC to approve a stipulation between MECO and the Consumer Advocate which would close the MECO 1997 rate case and would provide MECO with an increase in annual revenues of $1.5 million over revenues at rates effective at that time, based on an 11.65% ROACE. The stipulation stated that the increase would be effective January 1, 1997, but it has not and will not become effective unless and until the PUC approves the stipulation. On May 23, 1997, the stipulated increase was revised to $1.3 million after considering the final decision in the 1996 test year case. The primary reason for the stipulation was a delay in the expected in-service date for MECO's generating unit M17, from the second half of 1997 to the first half of 1998, which resulted from delays in obtaining the necessary PSD permit from the DOH/EPA. MECO now anticipates that it will obtain the PSD permit necessary to place M17 in service in late 1998, in which event it is likely that MECO will file a request to increase rates based on a 1999 test year. CONTINGENCIES See note (4) in HECO's "Notes to consolidated financial statements" for a discussion of contingencies, including interim rate increases, the HELCO power situation, environmental regulation and the PUC show cause order for HECO. 22 SAVINGS BANK - ------------
Three months ended June 30, ----------------------------- % Primary reason(s) for (in thousands) 1997 1996 change significant change - ---------------------------------------------------------------------------------------------------------------- Revenues.................. $69,674 $66,278 5 Higher interest income as a result of the higher average loans receivable balance and higher weighted average yield on interest-earning assets, partly offset by the lower average mortgage-backed securities balance Operating income*......... 12,236 10,202 20 Higher net interest income and a reduction in deposit-insurance premiums, partly offset by an increase in the provision for loan losses Net income*............... 7,172 5,946 21 Higher operating income Interest rate spread...... 2.96% 2.79% 3 basis points increase in the weighted average yield on interest-earning assets and a 14 basis points decrease in the weighted average rate on interest-bearing liabilities
Six months ended June 30, ----------------------------- % Primary reason(s) for (in thousands) 1997 1996 change significant change - -------------------------------------------------------------------------------------------------------------- Revenues.................. $138,586 $132,070 5 Higher interest income as a result of the higher average loans receivable balance, partly offset by the lower average mortgage-backed securities balance and lower weighted average yields on interest-earning assets Operating income*......... 24,521 20,158 22 Higher net interest income and a reduction in deposit-insurance premiums, partly offset by an increase in the provision for loan losses and higher compensation and employee benefit expenses Net income*............... 14,271 11,736 22 Higher operating income Interest rate spread...... 2.97% 2.82% 2 basis points decrease in the weighted average yield on interest-earning assets, offset by a 17 basis points decrease in the weighted average rate on interest-bearing liabilities
* On September 30, 1996, President Clinton signed into law the Deposit Insurance Funds Act of 1996, which authorized a one-time deposit-insurance premium assessment by the FDIC. ASB's assessment was $8.3 million after-tax and was accrued in September 1996. After the one-time assessment, ASB's deposit- insurance premiums (including assessments to pay interest on the FICO bond) were initially reduced from 23 cents to 6.5 cents per $100 of deposits, effective January 1, 1997. As a result of the 23 reduction in deposit-insurance premiums, ASB's pretax and after-tax savings were approximately $0.9 million and $0.5 million, respectively, for the second quarter of 1997, and approximately $1.8 million and $1.1 million, respectively, for the first six months of 1997. See note (3) in HEI's "Notes to consolidated financial statements" for additional information. Several factors contributed to the increase in ASB's interest rate spread--the difference between the weighted average yield on interest-earning assets and the weighted average rate on interest-bearing liabilities. One of the primary factors was the decrease in rates paid on ASB's deposits commencing in September 1996. Comparing the first six months of 1997 to the same period in 1996, the weighted average rate on interest-bearing liabilities decreased more than the weighted average yield on interest-earning assets decreased. Deposits traditionally have been the principal source of ASB's funds for use in lending, meeting liquidity requirements and making investments. Deposits increased by $52 million in the first six months of 1997, including $35 million of interest credited to accounts. ASB also derives funds from receipt of interest and principal on outstanding loans receivable and mortgage-backed securities, borrowings from the Federal Home Loan Bank (FHLB) of Seattle, securities sold under agreements to repurchase and other sources. In recent years, securities sold under agreements to repurchase and advances from the FHLB of Seattle have become more significant sources of funds as the demand for deposits decreased. Using sources of funds with a higher cost than deposits, such as securities sold under agreements to repurchase, puts downward pressure on ASB's net interest income. In January 1996, the federal funds rate, which is the rate charged by banks for overnight loans to each other and which has a significant influence on deposit and loans receivable rates, decreased from 5.5% to 5.25%. In March 1997, the federal funds rate increased 25 basis points to 5.5%. PURCHASE AND ASSUMPTION AGREEMENT WITH BANK OF AMERICA, FSB See note (3) in HEI's "Notes to consolidated financial statements" for a discussion of ASB's Purchase and Assumption Agreement with Bank of America, FSB. OTHER - -----
Three months ended June 30, ----------------------------- % Primary reason(s) for (in thousands) 1997 1996 change significant change - ----------------------------------------------------------------------------------------------------------------- Revenues.................. $15,255 $15,978 (5) Real estate subsidiary sale of land in downtown Honolulu to a developer for a residential condominium in second quarter 1996, partly offset by freight transportation subsidiaries' higher general freight and interstate revenue in second quarter 1997 Operating loss............ (2,462) (2,165) (14) Real estate subsidiary sale of land in second quarter 1996, partly offset by lower holding company administrative and general expenses in second quarter 1997
24
Six months ended June 30, ----------------------------- % Primary reason(s) for (in thousands) 1997 1996 change significant change - ---------------------------------------------------------------------------------------------------------------- Revenues.................. $31,780 $28,518 11 Freight transportation subsidiaries' higher interstate revenues and HEIIC's higher investment income, partly offset by real estate subsidiary sale of land in 1996 Operating loss............ (3,989) (4,125) 3 Lower holding company administrative and general expenses and HEIIC's higher investment income, partly offset by real estate subsidiary sale of land in 1996
The "Other" business segment includes results of operations from HTB and its subsidiary, YB, which are maritime freight transportation companies; HEIIC, which is a company primarily holding investments in leveraged leases; MPC and its subsidiaries, which are real estate development and investment companies; HEIPC and its subsidiaries, which are companies formed to pursue independent power projects in Asia and the Pacific; Pacific Energy Conservation Services, Inc., a contract services company providing limited services to an affiliate; HEI and HEIDI, which are holding companies; and eliminations of intercompany transactions. FREIGHT TRANSPORTATION The freight transportation subsidiaries recorded operating income of $0.4 million and $0.8 million in the second quarter and first half of 1997, respectively, compared with $0.5 million and $0.9 million in the same periods of 1996. The freight transportation subsidiaries continue to be negatively impacted by the slow economic activity on Oahu's neighbor islands and the slow construction industry in Hawaii. In December 1996, the PUC approved a stipulated agreement between YB and the Consumer Advocate to increase rates by $1.4 million annually, or 3.9%, effective in that month. In March 1997, YB filed a request with the PUC for a general rate increase based on a 1997 test year. YB requested an increase of 8.2%, or $2.9 million in annual revenues, based on a 14.99% ROACE. On April 11, 1997, the PUC suspended the request until October 10, 1997. REAL ESTATE MPC recorded operating losses of $0.3 million and $0.6 million in the second quarter and first half of 1997, respectively, compared with operating incomes of $0.7 million and $0.4 million in the same periods of 1996. MPC's results in the first half of 1996 were favorably impacted by its sale in April 1996 of land in downtown Honolulu to a developer for a pretax gain of $1.1 million. MPC's real estate development activities have been negatively impacted by the slow real estate market in Hawaii. It is expected that Hawaii's real estate market will not rebound in the near term. MPC's present focus is to reduce its current investment in real estate development assets and increase cash flow by continuing the development and sales of its existing projects. There are currently no plans to invest in new projects. For further information on MPC, see note (4) in HEI's "Notes to consolidated financial statements." OTHER HEIPC was formed in 1995 and its subsidiaries have been and will be formed from time to time to pursue independent power projects in Asia and the Pacific. HEIP's consolidated operating losses were $0.8 million and $1.1 million in the second quarter and first half of 1997, respectively, compared with $0.5 million and $1.0 million in the same periods of 1996. In September 1996, HEI Power Corp. Guam (HPG), entered into an energy conversion agreement with the Guam Power Authority, pursuant to which HPG will repair, operate and maintain for approximately 20 years two oil-fired 25-MW (net) units on Guam Power Authority property at Tanguisson, Guam. On October 30, 1996, HEI filed with the SEC a "Notification of Foreign Utility Company Status" on Form U- 57. On November 11, 1996, HPG assumed operational control of the Tanguisson facility. 25 HPG's total cost to repair the two units is expected to be approximately $14 million, approximately 80% of which HPG is seeking to fund through nonrecourse financing. Repair of the facility is expected to be complete in August 1997 and payments by the Guam Power Authority under the agreement commenced in January 1997. While the Guam Power Authority project site is contaminated with oils from pre-existing spills, Guam Power Authority has agreed to indemnify and hold HPG harmless from any resulting liability. CONTINGENCIES - ------------- See note (8) in HEI's "Notes to consolidated financial statements" for a discussion of contingencies, including environmental regulation and The Hawaiian Insurance & Guaranty Company, Limited. ACCOUNTING CHANGES - ------------------ See note (7) in HEI's "Notes to consolidated financial statements" for a discussion of SOP 96-1, "Environmental Remediation Liabilities"; SFAS No. 128, "Earnings Per Share"; SFAS No. 129, "Disclosure of Information about Capital Structure"; SFAS No. 130, "Reporting Comprehensive Income"; and SFAS No. 131, "Disclosures about Segments of an Enterprise and Related Information." FINANCIAL CONDITION LIQUIDITY AND CAPITAL RESOURCES - ------------------------------- The Company and HECO and its subsidiaries believe that their ability to generate cash, both internally from operations and externally from debt and equity issues, is adequate to maintain sufficient liquidity to fund their construction programs and to cover debt retirements and other cash requirements in the foreseeable future. The consolidated capital structure of HEI was as follows:
(in millions) June 30, 1997 December 31, 1996 - -------------------------------------------------------------------------------------------------------------------- Short-term borrowings......................... $ 131 7% $ 217 11% Long-term debt................................ 802 41 810 43 HEI- and HECO-obligated preferred securities of trust subsidiaries............. 150 8 -- -- Preferred stock of electric utility subsidiaries................................. 85 4 87 5 Common stock equity........................... 788 40 773 41 ------ ------ ------ ------ $1,956 100% $1,887 100% ====== ====== ====== ======
ASB's deposit liabilities, securities sold under agreements to repurchase and advances from FHLB are not included in the table above. For the first six months of 1997, net cash provided by operating activities was $61 million. Net cash used in investing activities was $95 million, largely due to ASB's loan originations, net of repayments, and consolidated HECO's capital expenditures, partly offset by the net decrease in ASB's mortgage-backed securities. Net cash provided by financing activities was $66 million as a result of several factors, including the issuance of HEI- and HECO-obligated preferred securities of trust subsidiaries and net increases in deposit liabilities and securities sold under agreements to repurchase, partly offset by net decreases in short-term borrowings and advances from FHLB, and by common stock dividends. See note (5) in HEI's "Notes to consolidated financial statements" and note (2) in HECO's "Notes to consolidated financial statements" for a discussion of HEI- and HECO-obligated preferred securities of trust subsidiaries. Proceeds related to the issuance of these securities were used by HEI and HEIDI primarily to repay short-term borrowings and to make loans to affiliates, and proceeds to HECO, MECO and HELCO were used primarily to repay short-term borrowings incurred to finance capital expenditures. Total HEI consolidated financing requirements for 1997 through 2001, including net capital expenditures (which exclude AFUDC and capital expenditures funded by third-party cash contributions in aid of construction), long-term debt retirements (excluding repayments of advances from the FHLB of Seattle and securities sold under agreements to repurchase) and sinking fund requirements, are currently estimated to total $1.0 billion. Of this amount, approximately $0.8 billion is for net capital expenditures 26 (mostly relating to the electric utilities' net capital expenditures described below). HEI's consolidated internal sources, after the payment of HEI dividends, are expected to provide approximately 61% of the consolidated financing requirements (which include approximately $160 million of new capital to be infused into ASB upon the acquisition of Bank of America, FSB's Hawaii operations), with debt and equity financing providing the remaining requirements. Over the five-year period 1997 through 2001, HEI currently estimates that, in addition to retained earnings and the proceeds from the sale of the HEI- and HECO-obligated preferred securities of trust subsidiaries, it will require not more than $158 million in additional equity, which is expected to be provided principally by the HEI Dividend Reinvestment and Stock Purchase Plan and the Hawaiian Electric Industries Retirement Savings Plan. The additional equity will be used primarily to reduce HEI's overall borrowing level and to fund the common equity requirements of its subsidiaries. Additional equity in excess of the $158 million described above, and additional debt financing, may be required to fund activities not included in the 1997-2001 forecast, such as the development of additional independent power projects by HEIPC and its subsidiaries in Asia and the Pacific. Following is a discussion of the liquidity and capital resources of HEI's largest segments, including HECO and its subsidiaries. ELECTRIC UTILITY HECO's consolidated capital structure was as follows:
(in millions) June 30, 1997 December 31, 1996 - ------------------------------------------------------------------------------------------------------------------------ Short-term borrowings from nonaffiliates and affiliate............................ $ 126 8% $ 126 8% Long-term debt............................ 596 37 602 38 HECO-obligated preferred securities of trust subsidiary......................... 50 3 -- -- Preferred stock........................... 85 5 87 6 Common stock equity....................... 757 47 751 48 ------ ------ ------ ------ $1,614 100% $1,566 100% ====== ====== ====== ======
Operating activities provided $45 million in net cash during the first six months of 1997. Investing activities used net cash of $52 million primarily for capital expenditures. Financing activities provided net cash of $8 million, including $50 million of proceeds from the sale of the HECO-obligated preferred securities of trust subsidiary, mostly offset by net decreases in long-term debt and preferred stock and the payment of common and preferred dividends. The electric utilities' consolidated financing requirements for 1997 through 2001, including net capital expenditures, long-term debt retirements and sinking fund requirements, are estimated to total $768 million. HECO's consolidated internal sources, after the payment of common and preferred stock dividends, are currently expected to provide approximately 75% of the consolidated financing requirements, with debt and equity financing providing the remaining requirements. As of June 30, 1997, an additional $45 million of revenue bonds was authorized by the Hawaii Legislature for issuance by the Department of Budget and Finance of the State of Hawaii on behalf of HECO and HELCO prior to the end of 1997, and an additional $150 million was authorized for issuance on behalf of HECO and MECO prior to the end of 1999. HECO currently estimates that it will require approximately $23 million in new common equity, in addition to retained earnings, over the five-year period 1997 through 2001. The PUC must approve issuances of long-term securities by HECO, HELCO and MECO. Capital expenditures include the costs of projects which are required to meet expected load growth, to improve reliability and to replace and upgrade existing equipment. Net capital expenditures for the five-year period 1997 through 2001 are currently estimated to total $711 million. Approximately 65% of gross capital expenditures, including AFUDC and capital expenditures funded by third- party cash contributions in aid of construction, is for transmission and distribution projects, with the remaining 35% primarily for generation projects. For 1997, electric utility net capital expenditures are estimated to be $118 million. Gross capital expenditures are estimated to be $153 million, comprised of approximately $96 million for transmission and distribution projects, approximately $36 million for new generation projects and approximately 27 $21 million for general plant and existing generation projects. In addition to the proceeds from the issuance of the HECO-obligated preferred securities of trust subsidiary received in March 1997, drawdowns of proceeds from the sales of tax-exempt special purpose revenue bonds and the generation of funds from internal sources are expected to provide the cash needed to finance capital expenditures (including the repayment of short-term borrowings incurred for that purpose). Capital expenditure estimates and the timing of construction projects are reviewed periodically by management and may change significantly as a result of many considerations, including changes in economic conditions, changes in forecasts of KWH sales and peak load, the availability of purchased power, the availability of generating sites and transmission and distribution corridors, the ability to obtain adequate and timely rate increases, escalation in construction costs, demand-side management programs and requirements of environmental and other regulatory and permitting authorities. SAVINGS BANK
% (in millions) June 30, 1997 December 31, 1996 change - -------------------------------------------------------------------------------------------------------------- Assets........................................... $3,643 $3,591 1 Mortgage-backed securities....................... 1,301 1,340 (3) Loans receivable, net............................ 2,070 2,002 3 Deposit liabilities.............................. 2,203 2,150 2 Securities sold under agreements to repurchase... 521 480 9 Advances from Federal Home Loan Bank............. 631 684 (8)
As of March 31, 1997, ASB was the fourth largest financial institution in the state based on total assets of $3.6 billion and the third largest financial institution based on deposits of $2.2 billion. For the first six months of 1997, net cash provided by ASB's operating activities was $24 million. Net cash used in ASB's investing activities was $32 million, due largely to the origination of loans receivable, partly offset by principal repayments and a net decrease in mortgage-backed securities. Net cash provided by financing activities was $34 million as a result of net increases of $41 million in securities sold under agreements to repurchase and $52 million in deposit liabilities, partly offset by a net decrease of $54 million in advances from the FHLB of Seattle and common stock dividends of $6 million. Minimum liquidity levels are currently governed by the regulations adopted by the OTS. ASB was in compliance with OTS liquidity requirements as of June 30, 1997. ASB believes that a satisfactory regulatory capital position provides a basis for public confidence, affords protection to depositors, helps to ensure continued access to capital markets on favorable terms and provides a foundation for growth. As of June 30, 1997, ASB was in compliance with the OTS minimum capital requirements (noted in parenthesis) with a tangible capital ratio of 5.40% (1.5%), a core capital ratio of 5.48% (3.0%) and a risk-based capital ratio of 12.56% (8.0%). The OTS has adopted a rule adding an interest rate risk (IRR) component to the existing risk-based capital requirement. Institutions with an "above normal" level of IRR exposure will be required to deduct an amount from total capital and may be required to hold additional capital. Although the rule became effective January 1, 1994, the OTS has provided a waiver of the IRR capital deduction until it can finalize an appeals process for institutions subject to such deductions. As of June 30, 1997, ASB would not have been required to hold additional capital if the rule adding the IRR component had been implemented. FDIC regulations restrict the ability of financial institutions that are not well-capitalized to offer interest rates on deposits that are significantly higher than the rates offered by competing institutions. As of June 30, 1997, ASB was well-capitalized (ratio requirements noted in parenthesis) with a leverage ratio of 5.48% (5.0%), a Tier-1 risk-based ratio of 11.68% (6.0%) and a total risk-based ratio of 12.56% (10.0%). Significant interstate banking legislation has been enacted at both the federal and state levels. Under the federal Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994, a bank holding company may acquire control of a bank in any state, subject to certain restrictions. Under Hawaii law, effective June 1, 1997, a bank chartered under Hawaii law may merge with an out-of-state bank and convert all 28 branches of both banks into branches of a single bank, subject to certain restrictions. Although the federal and Hawaii laws apply only to banks, such legislation may nonetheless affect the competitive balance among banks, thrifts and other financial institutions and the level of competition among financial institutions doing business in Hawaii. With the enactment of federal legislation in 1996 to recapitalize the SAIF and to reallocate the repayment burden on bonds issued to recapitalize the SAIF's predecessor, it appears that legislation addressing the merger of the BIF and the SAIF, thrift rechartering and financial modernization will remain a priority for the U.S. Congress. Bills are now pending, or expected to be introduced in Congress, that will contain proposals for altering the structure, regulation and competitive relationships of the nation's financial institutions. Some of these bills would abolish the thrift charter, requiring savings associations to convert to banks, subject to certain grandfathering and transition provisions. For a discussion of the unfavorable disparity in the deposit insurance assessment rates and FICO assessment rates that ASB and other thrifts have paid in relation to the rates that most commercial banks have paid, and certain legislation affecting financial institutions, see note (3) in HEI's "Notes to consolidated financial statements." PART II - OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS - -------------------------- There are no significant developments in pending legal proceedings except as set forth in HEI's and HECO's "Notes to consolidated financial statements," management's discussion and analysis of financial condition and results of operations and Item 5, "Other information." ITEM 5. OTHER INFORMATION - -------------------------- A. Environmental matters Water quality control - --------------------- Due to a leak in the fuel transfer system, approximately 100 gallons of bunker fuel oil were released to a HELCO Shipman facility drainage well system in November 1996. The release was reported to state and county agencies in December 1996. Although the fuel oil was removed from the well system and the well system was steam cleaned, oil continues to seep back into the well system from behind the retaining walls. Removal of this residual oil continues and HELCO has filed a status report with the DOH. In March 1997, HELCO received a letter from the DOH concurring with the ongoing cleanup approach. The DOH stated that more aggressive cleanup measures should be considered if oil seepage into the drainage wells worsens. HELCO's cleanup and visual monitoring efforts continue. In April 1997, HECO, on behalf of HELCO, notified the DOH that it became aware that industrial oily wastewater was discharging into HELCO's Waimea facility's dry well system in noncompliance with the facility's Underground Injection Control permit. In May 1997, a written incident report was submitted to the DOH, the discharge of oily wastewater was ceased and the DOH issued a notice of apparent violation. Clean-up efforts will be undertaken in the near future. The DOH is considering enforcement action to be taken. Air quality control - ------------------- The DOH has met with MECO representatives to review all outstanding air regulatory compliance issues which occurred at MECO during 1988 through 1996. The affected MECO facilities include Maalaea, Palaau, Lanai City and Miki Basin generation sites. MECO is continuing discussions with the DOH to finalize settlement of the outstanding issues. B. "Reciprocal beneficiaries" lawsuit In the 1997 session, the Hawaii State Legislature passed a law creating the status of "reciprocal beneficiaries" for people who are ineligible to marry. The bill gave examples of reciprocal beneficiaries as "a widowed mother and her unmarried son, or two individuals who are of the same gender." In July 1997, several Hawaii companies, including HEI and certain of its subsidiaries, filed a lawsuit in federal 29 court challenging Hawaii's new reciprocal beneficiaries law. The Company is seeking clarification of whether federal law overrides provisions of the new state law which makes reciprocal beneficiaries eligible for benefits such as medical insurance that are offered to employees and their families. The Company believes that federal law overrides state law in this area and that it is illegal for a state to mandate who is eligible for health care benefits. Federal law leaves it to each employer to decide eligibility. C. YB labor negotiations YB has a collective bargaining agreement covering the period of July 1, 1993 through June 30, 1996 with the International Longshoremen's and Warehousemen's Union, Hawaii Division, Local 142 (ILWU). This agreement is being extended while collective bargaining negotiations continue. The agreement covers all regularly scheduled employees including freight clerks, stevedores, maintenance personnel, documentation clerks and customer service representatives. The agreement excludes professional employees, supervisory employees, guards and other clerical personnel. In July 1997, the union members voted to give the union leaders the authority to initiate a strike after giving management 72 hours notice. In August 1997, YB reached a tentative settlement with the ILWU. The provisions of the settlement will be sent to union members to ratify. D. Ratio of earnings to fixed charges The following tables set forth the ratio of earnings to fixed charges for HEI and its subsidiaries for the periods indicated: RATIO OF EARNINGS TO FIXED CHARGES EXCLUDING INTEREST ON ASB DEPOSITS
Six months Years Ended December 31, ended ------------------------------------------------------------------------------------------- June 30, 1997 1996 1995 1994 1993 1992 - ------------------- --------------- -------------- ------------- -------------- --------------- 1.82 1.87 1.94 2.22 2.25 2.08 =================== =============== ============== ============= ============== ===============
RATIO OF EARNINGS TO FIXED CHARGES INCLUDING INTEREST ON ASB DEPOSITS
Six months Years Ended December 31, ended ------------------------------------------------------------------------------------------- June 30, 1997 1996 1995 1994 1993 1992 - ------------------- --------------- -------------- ------------- -------------- --------------- 1.54 1.53 1.57 1.69 1.65 1.50 =================== =============== ============== ============= ============== ===============
For purposes of calculating the ratio of earnings to fixed charges, "earnings" represent the sum of (i) pretax income from continuing operations (excluding undistributed net income or net loss from less than fifty-percent-owned persons) and (ii) fixed charges (as hereinafter defined, but excluding capitalized interest). "Fixed charges" are calculated both excluding and including interest on ASB's deposits during the applicable periods and represent the sum of (i) interest, whether capitalized or expensed, incurred by HEI and its subsidiaries plus their proportionate share of interest on debt to outsiders incurred by fifty-percent-owned persons, but excluding interest on nonrecourse debt from leveraged leases which is not included in interest expense in HEI's consolidated statements of income, (ii) amortization of debt expense and discount or premium related to any indebtedness, whether capitalized or expensed, (iii) the interest factor in rental expense, (iv) the preferred stock dividend requirements of HEI's subsidiaries, increased to an amount representing the pretax earnings required to cover such dividend requirements and (v) the preferred securities distribution requirements of the trust subsidiaries. 30 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
Six months Years Ended December 31, ended ------------------------------------------------------------------------------------------- June 30, 1997 1996 1995 1994 1993 1992 - ------------------- --------------- -------------- ------------- -------------- --------------- 3.08 3.58 3.46 3.47 3.25 3.03 =================== =============== ============== ============= ============== ===============
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, six months ended June 30, 1997 and 1996 HECO Hawaiian Electric Company, Inc. and subsidiaries Exhibit 12.2 Computation of ratio of earnings to fixed charges, six months ended June 30, 1997 and 1996 HEI Hawaiian Electric Industries, Inc. and subsidiaries Exhibit 27.1 Financial Data Schedule June 30, 1997 and six months ended June 30, 1997 HECO Hawaiian Electric Company, Inc. and subsidiaries Exhibit 27.2 Financial Data Schedule June 30, 1997 and six months ended June 30, 1997 HEI Seventh Amendment to Trust Agreement, made and entered into on June 13, Exhibit 99.1 1997, Between Fidelity Management Trust Company and HEI for the Hawaiian Electric Industries Retirement Savings Plan for incorporation by reference in the Registration Statement on Form S-8 (Regis. No. 333-02103)
31 (B) REPORTS ON FORM 8-K During the quarter, HEI and/or HECO filed Current Reports, Forms 8-K, with the SEC as follows:
Dated Registrant/s Items reported - ---------------------------------------------------------------------------------------------------- March 27, 1997 HEI, HECO Item 5, HECO Capital Trust I issued and sold 2,000,000 of its 8.05% Cumulative Quarterly Income Preferred Securities; Item 7, final form of documents delivered in connection with the offer and sale of the securities May 26, 1997 HEI Item 5, News release: Hawaiian Electric Industries bank subsidiary makes in-market acquisition May 30, 1997 HEI, HECO Item 5, Purchase and Assumption Agreement between Bank of America, FSB and ASB; regulation of electric utility rates - Maui Electric Company, Limited; and update of Hawaii Electric Light Company, Inc. power situation
SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrants have duly caused this report to be signed on their behalf by the undersigned, thereunto duly authorized. The signature of the undersigned companies shall be deemed to relate only to matters having reference to such companies and any subsidiaries thereof. HAWAIIAN ELECTRIC INDUSTRIES, INC. HAWAIIAN ELECTRIC COMPANY, INC. (Registrant) (Registrant) By /s/ Robert F. Mougeot By /s/ Paul Oyer ---------------------- ----------------- Robert F. Mougeot Paul A. Oyer Financial Vice President and Financial Vice President and Chief Financial Officer Treasurer (Principal Financial Officer of HEI) (Principal Financial Officer of HECO) Date: August 11, 1997 Date: August 11, 1997 32 EX-12.1 2 COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES HEI Exhibit 12.1 ---------------- Hawaiian Electric Industries, Inc. and subsidiaries COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES (unaudited)
Six months ended June 30, -------------------------------------------------------------------------- (dollars in thousands) 1997 (1) 1997 (2) 1996 (1) 1996 (2) - ----------------------------------------------------------------------------------------------------------------------- FIXED CHARGES Total interest charges The Company (3)........................... $ 67,775 $108,663 $ 60,805 $108,145 Proportionate share of fifty-percent- owned persons............................ 309 309 372 372 Interest component of rentals................ 1,481 1,481 2,052 2,052 Pretax preferred stock dividend requirements of subsidiaries............................. 5,261 5,261 5,613 5,613 Preferred securities distribution requirements of trust subsidiaries.......... 4,439 4,439 -- -- -------- -------- -------- -------- TOTAL FIXED CHARGES.......................... $ 79,265 $120,153 $ 68,842 $116,182 ======== ======== ======== ======== EARNINGS Pretax income................................ $ 68,365 $ 68,365 $ 69,859 $ 69,859 Fixed charges, as shown...................... 79,265 120,153 68,842 116,182 Interest capitalized The Company............................... (3,172) (3,172) (3,135) (3,135) Proportionate share of fifty-percent- owned persons............................ (302) (302) (372) (372) -------- -------- -------- -------- P/E EARNINGS AVAILABLE FOR FIXED CHARGES..... $144,156 $185,044 $135,194 $182,534 ======== ======== ======== ======== RATIO OF EARNINGS TO FIXED CHARGES........... 1.82 1.54 1.96 1.57 ======== ======== ======== ======== (1) Excluding interest on ASB deposits. (2) Including interest on ASB deposits. (3) Total interest charges exclude interest on nonrecourse debt from leveraged leases which is not included in interest expense in HEI's consolidated statements of income.
EX-12.2 3 COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES HECO Exhibit 12.2 ----------------- Hawaiian Electric Company, Inc. and subsidiaries COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES (unaudited)
Six months ended June 30, ------------------------------------- (dollars in thousands) 1997 1996 - ------------------------------------------------------------------------------------------------------------ FIXED CHARGES Total interest charges.............................................. $24,253 $22,853 Interest component of rentals....................................... 356 352 Pretax preferred stock dividend requirements of subsidiaries........ 2,085 2,293 Preferred securities distribution requirements of trust subsidiary.. 1,072 -- ------- ------- TOTAL FIXED CHARGES................................................. $27,766 $25,498 ======= ======= EARNINGS Income before preferred stock dividends of HECO..................... $37,113 $39,364 Income taxes (see note below)....................................... 23,813 25,795 Fixed charges, as shown............................................. 27,766 25,498 AFUDC for borrowed funds............................................ (3,136) (2,504) ------- ------- EARNINGS AVAILABLE FOR FIXED CHARGES................................ $85,556 $88,153 ======= ======= RATIO OF EARNINGS TO FIXED CHARGES.................................. 3.08 3.46 ======= ======= Note: Income taxes is comprised of the following Expense relating to operating income from regulated activities..... $23,777 $25,893 Expense (benefit) relating to income (loss) from nonregulated activities........................................................ 36 (98) ------- ------- $23,813 $25,795 ======= =======
EX-27.1 4 FINANCIAL DATA SCHEDULE [HAWAIIAN ELECTRIC INDUST.]
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM HAWAIIAN ELECTRIC INDUSTRIES, INC. AND SUBSIDIARIES' CONSOLIDATED BALANCE SHEET AS OF JUNE 30, 1997 AND CONSOLIDATED STATEMENT OF INCOME FOR THE SIX MONTHS ENDED JUNE 30, 1997 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000 0000354707 HAWAIIAN ELECTRIC INDUSTRIES, INC. 6-MOS DEC-31-1997 JAN-01-1997 JUN-30-1997 129,398 1,341,021 148,179 0 47,126 0 2,900,993 934,434 6,022,890 0 802,650 86,260 148,293 636,890 151,455 6,022,890 0 719,446 0 619,924 (988) 0 32,145 68,365 28,907 39,458 0 0 0 39,458 1.27 1.27
EX-27.2 5 FINANCIAL DATA SCHEDULE [HAWAIIAN ELECTRIC CO.]
UT THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM HAWAIIAN ELECTRIC COMPANY, INC. AND SUBSIDIARIES' CONSOLIDATED BALANCE SHEET AS OF JUNE 30, 1997 AND CONSOLIDATED STATEMENT OF INCOME AND CASH FLOWS FOR THE SIX MONTHS ENDED JUNE 30, 1997 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 0000046207 HAWAIIAN ELECTRIC COMPANY, INC. 1,000 6-MOS DEC-31-1997 JAN-01-1997 JUN-30-1997 PER-BOOK 1,864,451 0 170,777 12,050 139,413 2,186,691 85,387 296,295 375,114 756,796 84,565 48,293 596,696 5,900 0 120,024 0 1,695 0 0 572,722 2,186,691 544,569 23,777 469,875 493,652 50,917 9,685 60,602 23,489 37,113 1,834 35,279 27,935 40,802 45,044 0 0
EX-99.1 6 SEVENTH AMENDMENT TO TRUST AGREEMENT HEI Exhibit 99.1 SEVENTH AMENDMENT TO TRUST AGREEMENT BETWEEN FIDELITY MANAGEMENT TRUST COMPANY AND HAWAIIAN ELECTRIC INDUSTRIES, INC. THIS SEVENTH AMENDMENT TO TRUST AGREEMENT is made and entered into June 13, 1997, by and between Fidelity Management Trust Company (the "Trustee") and Hawaiian Electric Industries, Inc. (the "Sponsor"); WITNESSETH: WHEREAS, the Trustee and the Sponsor heretofore entered into a Trust Agreement dated November 28, 1988, and amended December 22, 1989, January 1, 1994, March 15, 1994, February 1, 1996, April 1, 1996 and April 1, 1997 (the "Trust Agreement"), for the Hawaiian Electric Industries Retirement Savings Plan (the "Plan"); and WHEREAS, the Trustee and the Sponsor wish to further amend said Trust Agreement as provided for in Section 13 thereunder; NOW THEREFORE, in consideration of the above premises, the Trustee and the Sponsor hereby amend the Trust Agreement by: (1) Amending and restating Schedule "B" as attached. (2) Amending and restating Section 15(b) as follows: (b) The Trustee is not a party to the Plan, and in the event of any conflict between the provisions of the Plan and the provisions of this Agreement, the provisions of this Agreement will control with respect to the rights and obligations of the Trustee. IN WITNESS WHEREOF, the Trustee and the Sponsor have caused this Seventh Amendment to be executed by their duly authorized officers effective as of the day and year first above written. HAWAIIAN ELECTRIC FIDELITY MANAGEMENT TRUST COMPANY INDUSTRIES, INC. BY: HAWAIIAN ELECTRIC INDUSTRIES, INC. PENSION INVESTMENT COMMITTEE By: /s/ Constance H. Lau By: /s/ Cheryl Gladstone 6/20/97 ---------------------------------- ------------------------------ Constance H. Lau Date Vice President Date Secretary & Member By: /s/ Peter C. Lewis 6/5/97 ---------------------------------- Peter C. Lewis Date Member SCHEDULE "B" FEE SCHEDULE ------------ Recordkeeping Fees - ------------------ * Annual Participation Fee Fees will be billed quarterly and are (See below) subject to a $7,500.00** per year or $22.00 per participant per year minimum fee, whichever is greater. * Plan Establishment Fee $2,500.00 * Loan Fee Establishment fee of $35.00 per loan account; annual fee of $15.00 per loan account. * Plan Sponsor Workstation (PSW): $1,000 per PSW per year for up to two PSW's. A third PSW is $2,500 per year and each additional PSW is $1,500 per year. There is a $5.00 charge per hour per PSW for on-line usage (no charge if accessed via another internet service provider). * Other Fees: extraordinary expenses resulting from large numbers of simultaneous manual transactions or from errors not caused by Fidelity. ** This fee will be imposed pro rata for each calendar quarter, or any part -------- thereof, that it remains necessary to keep a participant's account(s) as part of the Plan's records, e.g. vested, deferred, forfeiture, top-heavy and terminated participants who must remain on file through the calendar year-end for 1099R reporting. Trustee Fees - ------------ * To the extent that assets are invested in Fidelity Mutual Funds, 0.0125% per calendar quarter of the assets in the Trust as of the calendar quarter's last valuation date, but no less than $2,500.00 (Note: The Trustee reserves the right to review migration into Non-Fidelity Mutual Funds for potential impact on recordkeeping fees.) HAWAIIAN ELECTRIC FIDELITY MANAGEMENT TRUST COMPANY INDUSTRIES, INC. BY: HAWAIIAN ELECTRIC INDUSTRIES, INC. PENSION INVESTMENT COMMITTEE By: /s/ Constance H. Lau By: /s/ Cheryl Gladstone 6/20/97 ---------------------------------- ------------------------------ Constance H. Lau Date Vice President Date Secretary & Member By: /s/ Peter C. Lewis 6/5/97 ---------------------------------- Peter C. Lewis Date Member -----END PRIVACY-ENHANCED MESSAGE-----