-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: keymaster@town.hall.org Originator-Key-Asymmetric: MFkwCgYEVQgBAQICAgADSwAwSAJBALeWW4xDV4i7+b6+UyPn5RtObb1cJ7VkACDq pKb9/DClgTKIm08lCfoilvi9Wl4SODbR1+1waHhiGmeZO8OdgLUCAwEAAQ== MIC-Info: RSA-MD5,RSA, lhuxkAzlu2G1Gw1gc4qvzf11Z/USKmNuo0aOmIexiPcwQs1aP4VHo40uNiTEXIW9 rh3Y4Wr7VHA+gM/NEVHc+g== 0000898430-94-000566.txt : 19940811 0000898430-94-000566.hdr.sgml : 19940811 ACCESSION NUMBER: 0000898430-94-000566 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 19940630 FILED AS OF DATE: 19940810 FILER: COMPANY DATA: COMPANY CONFORMED NAME: HAWAIIAN ELECTRIC INDUSTRIES INC CENTRAL INDEX KEY: 0000354707 STANDARD INDUSTRIAL CLASSIFICATION: 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: 94542655 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: 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: 94542656 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 FORM 10-Q ================================================================================ 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, 1994 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 1, 1994 - --------------------- -------------------------- Hawaiian Electric Industries, Inc. (Without Par Value) ............................ 28,205,469 Shares Hawaiian Electric Company, Inc. ($6 2/3 Par Value) ............................. 11,258,290 Shares (not publicly traded) ================================================================================ Hawaiian Electric Industries, Inc. and subsidiaries Hawaiian Electric Company, Inc. and subsidiaries Form 10-Q--Quarter ended June 30, 1994 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, 1994 and December 31, 1993 ................................... 1 Consolidated statements of income (unaudited) - three and six months ended June 30, 1994 and 1993 .............. 2 Consolidated statements of retained earnings (unaudited) - three and six months ended June 30, 1994 and 1993 ................................... 3 Consolidated statements of cash flows (unaudited) - six months ended June 30, 1994 and 1993 ....................... 4 Notes to consolidated financial statements (unaudited)...... 5 Hawaiian Electric Company, Inc. and subsidiaries ------------------------------------------------ Consolidated balance sheets (unaudited) - June 30, 1994 and December 31, 1993 ..................................... 12 Consolidated statements of income (unaudited) - three and six months ended June 30, 1994 and 1993 ............... 13 Consolidated statements of retained earnings (unaudited) - three and six months ended June 30, 1994 and 1993 ......... 13 Consolidated statements of cash flows (unaudited) - six months ended June 30, 1994 and 1993 ................... 14 Notes to consolidated financial statements (unaudited) ..... 15 Item 2. Management's discussion and analysis of financial condition and results of operations ....................... 21 PART II. OTHER INFORMATION Item 1. Legal proceedings ........................................... 36 Item 5. Other information ........................................... 36 Item 6. Exhibits and reports on Form 8-K ............................ 38 Signatures ............................................................. 39
i Hawaiian Electric Industries, Inc. and subsidiaries Hawaiian Electric Company, Inc. and subsidiaries Form 10-Q--Quarter ended June 30, 1994 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 Associated Mortgage, Inc. Company Hawaiian Electric Industries, Inc. and its direct and indirect subsidiaries, including, without limitation, Hawaiian Electric Company, Inc., Maui Electric Company, Limited, Hawaii Electric Light Company, Inc., HEI Investment Corp., Malama Pacific Corp. and its subsidiaries, Hawaiian Tug & Barge Corp., Young Brothers, Limited, HEI Diversified, Inc., American Savings Bank, F.S.B. and its subsidiaries, and Lalamilo Ventures, Inc. Consumer Advocate Division of Consumer Advocacy, Department of Commerce and Consumer Affairs of the State of Hawaii FASB Financial Accounting Standards Board HECO Hawaiian Electric Company, Inc., a wholly owned electric utility subsidiary of Hawaiian Electric Industries, Inc. and parent company of Maui Electric Company, Limited and Hawaii Electric Light Company, Inc. HEI Hawaiian Electric Industries, Inc., parent company of Hawaiian Electric Company, Inc., HEI Investment Corp., Malama Pacific Corp., Hawaiian Tug & Barge Corp., Lalamilo Ventures, Inc. and HEI Diversified, Inc. HEIDI HEI Diversified, Inc., a wholly owned subsidiary of Hawaiian Electric Industries, Inc., the parent company of American Savings Bank, F.S.B., and the holder of record of the common stock of The Hawaiian Insurance & Guaranty Company, Limited, which is currently in state rehabilitation proceedings HEIIC HEI Investment Corp., a wholly owned subsidiary of Hawaiian Electric Industries, Inc. HELCO Hawaii Electric Light Company, Inc., a wholly owned electric utility subsidiary of Hawaiian Electric Company, Inc. HERS Hawaiian Electric Renewable Systems, Inc., formerly a wholly owned subsidiary of Hawaiian Electric Industries, Inc. and formerly parent company of Lalamilo Ventures, Inc.
ii GLOSSARY OF TERMS, continued
Terms Definitions - ----- ----------- HIG The Hawaiian Insurance & Guaranty Company, Limited, currently in state rehabilitation proceedings and parent company of United National Insurance Company, Ltd., Hawaiian Underwriters Insurance Co., Ltd., Guardian Life Underwriters, Inc., Guardian Financial Corporation, and Independent Adjustment, Inc. HEI Diversified, Inc. is the holder of record of HIG's common stock HTB Hawaiian Tug & Barge Corp., a wholly owned subsidiary of Hawaiian Electric Industries, Inc. and parent company of Young Brothers, Limited 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 Malama Project-I, Inc., ML Holdings, Ltd., Malama Waterfront Corp., Malama Property Investment Corp., Malama Development Corp., Malama Makakilo Corp., Malama Realty Corp., Malama Elua Corp., Malama Kolu Corp., Malama Hoaloha Corp., and Malama Mohala Corp. MW Megawatt OTS Office of Thrift Supervision, Department of Treasury PGV Puna Geothermal Ventures PUC Public Utilities Commission of the State of Hawaii SEC Securities and Exchange Commission SFAS Statement of Financial Accounting Standards YB Young Brothers, Limited, a wholly owned subsidiary of Hawaiian Tug & Barge Corp.
iii PART I - FINANCIAL INFORMATION - ------------------------------------------------------------------------------- Item 1. Financial statements - ----------------------------- Hawaiian Electric Industries, Inc. and subsidiaries Consolidated balance sheets (unaudited) - ----------------------------------------
June 30, December 31, (in thousands) 1994 1993 - ------------------------------------------------------------------------------- Assets - ------ Cash and equivalents .............................. $ 103,815 $ 116,260 Accounts receivable and unbilled revenues, net .... 118,959 117,116 Inventories, at average cost ...................... 42,791 39,405 Real estate developments .......................... 39,731 29,673 Loans receivable, net ............................. 1,907,149 1,735,098 Marketable securities ............................. 794,306 698,755 Other investments ................................. 75,450 77,106 Property, plant and equipment, net ................ 1,596,406 1,542,989 Regulatory assets ................................. 82,213 62,077 Other ............................................. 57,246 53,449 Goodwill and other intangibles .................... 47,560 49,664 ---------- ---------- $4,865,626 $4,521,592 ========== ========== Liabilities and stockholders' equity - ------------------------------------ Accounts payable .................................. $ 97,560 $ 88,628 Deposit liabilities ............................... 2,142,360 2,091,583 Short-term borrowings ............................. 157,020 40,416 Advances from Federal Home Loan Bank .............. 509,374 289,674 Long-term debt, net ............................... 661,936 697,836 Deferred income taxes ............................. 171,757 168,329 Unamortized tax credits ........................... 45,151 44,357 Contributions in aid of construction .............. 168,504 165,005 Other ............................................. 161,002 197,713 ---------- ---------- 4,114,664 3,783,541 ---------- ---------- Preferred stock of electric utility subsidiaries - ------------------------------------------------ Subject to mandatory redemption ................... 46,234 46,730 Not subject to mandatory redemption ............... 48,293 48,293 ---------- ---------- 94,527 95,023 ---------- ---------- Stockholders' equity - -------------------- Preferred stock, no par value, authorized 10,000 shares; no shares outstanding ............ -- -- Common stock, no par value, authorized 100,000 shares; outstanding 28,168 shares and 27,675 shares ............................... 531,029 514,710 Retained earnings ................................. 125,406 128,318 ---------- ---------- 656,435 643,028 ---------- ---------- $4,865,626 $4,521,592 ========== ==========
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) 1994 1993 1994 1993 - --------------------------------------------------------------------------------------------------------------- Revenues - -------- Electric utility ........................................ $219,411 $219,301 $420,717 $425,947 Savings bank ............................................ 52,311 50,168 102,395 99,431 Other ................................................... 12,834 12,176 26,486 35,615 -------- -------- -------- -------- 284,556 281,645 549,598 560,993 -------- -------- -------- -------- Expenses - -------- Electric utility ........................................ 185,594 185,017 362,576 371,946 Savings bank ............................................ 41,636 40,035 81,100 79,710 Other ................................................... 14,371 12,674 29,563 37,087 -------- -------- -------- -------- 241,601 237,726 473,239 488,743 -------- -------- -------- -------- Operating income (loss) - ---------------------- Electric utility ........................................ 33,817 34,284 58,141 54,001 Savings bank ............................................ 10,675 10,133 21,295 19,721 Other ................................................... (1,537) (498) (3,077) (1,472) -------- -------- -------- -------- 42,955 43,919 76,359 72,250 -------- -------- -------- -------- Interest expense--electric utility and other ............ (13,128) (13,201) (26,210) (25,962) Allowance for borrowed funds used during construction ................................... 945 1,009 1,816 1,928 Preferred stock dividends of electric utility subsidiaries .................................. (1,796) (1,628) (3,596) (3,260) Allowance for equity funds used during construction .......................................... 2,095 1,795 4,046 3,354 -------- -------- -------- -------- Income from continuing operations before income taxes ................................... 31,071 31,894 52,415 48,310 Income taxes ........................................... 13,439 12,917 22,995 20,041 -------- -------- -------- -------- Income from continuing operations ...................... 17,632 18,977 29,420 28,269 Income from discontinued operations (less applicable income taxes of $1,102 in the six months ended June 30, 1993) ................ -- -- -- 1,800 -------- -------- -------- -------- Net income ............................................. $17,632 $18,977 $29,420 $ 30,069 ======== ======== ======== ======== Earnings per common share Continuing operations ................................ $0.63 $0.76 $1.05 $1.13 Discontinued operations .............................. -- -- -- 0.07 -------- -------- -------- -------- $0.63 $0.76 $1.05 $1.20 ======== ======== ======== ======== Dividends per common share ............................. $0.58 $0.57 $1.16 $1.14 ======== ======== ======== ======== Weighted average number of common shares outstanding .................................... 28,013 25,084 27,892 24,973 ======== ======== ======== ======== Ratio of earnings to fixed charges (SEC method) Excluding interest on ASB deposits.................... 2.10 2.13 ======== ======== Including interest on ASB deposits ................... 1.61 1.57 ======== ========
See accompanying notes to consolidated financial statements. 2 Hawaiian Electric Industries, Inc. and subsidiaries Consolidated statements of retained earnings (unaudited)
Three months ended Six months ended June 30, June 30, -------------------- ------------------- (in thousands) 1994 1993 1994 1993 - ------------------------------------------------------------------------------------- Retained earnings, beginning of period.... $124,012 $135,411 $128,318 $138,484 Net income................................ 17,632 18,977 29,420 30,069 Common stock dividends.................... (16,238) (14,286) (32,332) (28,451) -------- -------- -------- -------- Retained earnings, end of period.......... $125,406 $140,102 $125,406 $140,102 ======== ======== ======== ========
See accompanying notes to consolidated financial statements. 3 Hawaiian Electric Industries, Inc. and subsidiaries Consolidated statements of cash flows (unaudited)
Six months ended June 30, ---------------------- (in thousands) 1994 1993 - ------------------------------------------------------------------------------------------------------------------ Cash flows from operating activities Income from continuing operations....................................................... $ 29,420 $ 28,269 Adjustments to reconcile income from continuing operations to net cash provided by (used in) operating activities Depreciation and amortization of property, plant and equipment.................... 36,189 34,107 Other amortization................................................................ (2,589) (206) Provision for deferred income taxes and tax credits, net.......................... 6,275 2,331 Changes in assets and liabilities, net of effects from acquisition of control of joint venture Increase in accounts receivable and unbilled revenues, net.................. (1,843) (5,432) Increase in inventories..................................................... (3,386) (6,412) Increase in real estate developments........................................ (2,104) (535) Increase in securities held for trading..................................... (15,958) (24,270) Increase in regulatory assets............................................... (3,831) (3,489) Increase in accounts payable................................................ 8,932 10,206 Changes in other assets and liabilities..................................... (21,015) 7,078 --------- --------- 30,090 41,647 Cash flows from discontinued operations................................................. (32,377) 1,235 --------- --------- Net cash provided by (used in) operating activities..................................... (2,287) 42,882 --------- --------- Cash flows from investing activities Loans receivable originated and purchased............................................... (305,498) (217,144) Principal repayments on loans receivable................................................ 136,008 126,064 Proceeds from sale of loans receivable.................................................. 1,888 214 "Held-to-maturity" mortgage-backed securities purchased................................. (202,176) (72,018) Principal repayments on "held-to-maturity" mortgage-backed securities................... 125,486 123,161 Increase in investments in real estate joint ventures................................... (60) (1,686) Distributions from real estate joint ventures........................................... 2,015 8,182 Capital expenditures.................................................................... (89,377) (105,693) Contributions in aid of construction.................................................... 6,849 12,465 Other................................................................................... (1,494) (325) --------- --------- Net cash used in investing activities................................................... (326,359) (126,780) --------- --------- Cash flows from financing activities Net increase in deposit liabilities..................................................... 50,777 106,970 Net increase in short-term borrowings with original maturities of three months or less................................................................. 118,910 56,844 Proceeds from other short-term borrowings............................................... 637 133 Repayment of other short-term borrowings................................................ (2,941) (43,222) Proceeds from advances from Federal Home Loan Bank...................................... 386,700 -- Principal payments on advances from Federal Home Loan Bank.............................. (167,000) (14,025) Proceeds from issuance of long-term debt................................................ 31,542 50,422 Repayment of long-term debt............................................................. (75,427) (51,211) Redemption of electric utility subsidiaries' preferred stock............................ (496) (650) Net proceeds from issuance of common stock.............................................. 7,562 8,667 Common stock dividends.................................................................. (23,563) (20,230) Other................................................................................... (10,500) 1,520 --------- --------- Net cash provided by financing activities............................................... 316,201 95,218 --------- --------- Net increase (decrease) in cash and equivalents......................................... (12,445) 11,320 Cash and equivalents, beginning of period............................................... 116,260 156,754 --------- --------- Cash and equivalents, end of period..................................................... $ 103,815 $ 168,074 ========= =========
See accompanying notes to consolidated financial statements. 4 Hawaiian Electric Industries, Inc. and subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS June 30, 1994 and 1993 (Unaudited) _______________________________________________________________________________ (1) Accounting statement - ------------------------- In the opinion of HEI's management, the accompanying unaudited consolidated financial statements contain all material adjustments required by generally accepted accounting principles to present fairly the Company's financial position as of June 30, 1994 and December 31, 1993, the results of its operations for the three months and six months ended June 30, 1994 and 1993, and its cash flows for the six months ended June 30, 1994 and 1993. All such adjustments are of a normal recurring nature, except as described below. These 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, 1993 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, 1994. The consolidated balance sheet as of December 31, 1993 was derived from audited financial statements. (2) Discontinued operations - ---------------------------- Hawaiian Electric Renewable Systems, Inc. - ----------------------------------------- On October 6, 1992, the Board of Directors of HEI ratified management's September 30, 1992 plan to exit the nonutility wind energy business because of chronic mechanical problems with its wind turbines and continuing losses from operations. In March 1993, HEI sold the stock of HERS to The New World Power Corporation for an amount which was not material. In the first quarter of 1993, in connection with the sale of HERS, HEI reversed reserves for site restoral and other HERS' disposal costs that were no longer needed due to the terms of the sale, resulting in a net gain on disposal of discontinued operations of $1.8 million. The Hawaiian Insurance & Guaranty Co., Limited - ---------------------------------------------- HIG and its subsidiaries (the HIG Group) are property and casualty insurance companies in the State of Hawaii. HEIDI, a subsidiary of HEI, is the holder of record of all the common stock of HIG. On December 2, 1992, the Board of Directors of HEI concluded that it would not contribute additional capital to HIG and the remaining investment in the HIG Group was written off in the fourth quarter of 1992. The decision resulted from an increase in the estimate of policyholder claims from Hurricane Iniki (which hit the Hawaiian Islands on September 11, 1992). On December 24, 1992, with the consent of the HIG Group, a formal rehabilitation order (the Rehabilitation Order) was entered by the First Circuit Court of the State of Hawaii, vesting full control over the HIG Group in the Insurance Commissioner (the Rehabilitator/Liquidator) and her deputies. On April 12, 1993, the Rehabilitator/Liquidator, HIG, United National Insurance Company, Ltd. and Hawaiian Underwriters Insurance Co., Ltd. filed a complaint against HEI, HEIDI and certain current and former officers and directors of HEI, HEIDI and the HIG Group in state court on the island of Kauai. The complaint set forth several separate counts, including claims to the effect that HEI and/or HEIDI should be held liable for HIG's obligations based on allegations, among others, that HIG was held out to be part of an HEI family of companies (and not as a separate enterprise) and that HEIDI is liable for an assessment levied by the Rehabilitator/Liquidator. The complaint alleged that certain current and former officers and directors of HEI, HEIDI and the HIG Group had breached their fiduciary duties to the HIG Group in numerous respects. The complaint requested declaratory relief and compensatory, general, special and punitive damages, together with costs and attorneys' fees. On July 12, 1993, the Rehabilitator/Liquidator filed a first amended complaint, which repeated the claims asserted in the original complaint but added the Hawaii Insurance Guaranty Association (HIGA) as a plaintiff and asserted certain additional claims. 5 In early 1994, HEI, HEIDI, certain officers and directors, the Rehabilitator/Liquidator and HIGA signed an agreement to settle the lawsuit, subject to obtaining necessary court approvals. On April 6, 1994, the court in which the HIG Group's rehabilitation proceeding is pending approved the settlement agreement. A stipulation dismissing the suit brought by the Rehabilitator/Liquidator was filed on July 8, 1994. Under the agreement, the Company has paid $32.0 million into an escrow account, which account is expected to be disbursed in August 1994 to the Rehabilitator/Liquidator, at which time the release of claims against HEI, its affiliates and their past and present officers and directors will become effective and the common stock of HIG held by HEIDI will be cancelled. The $32.0 million settlement amount, less income tax benefits and certain amounts recognized in previously established reserves, resulted in a $15.0 million after-tax charge to discontinued operations in the fourth quarter of 1993. HEI is seeking reimbursement from certain of its insurance carriers. HEI's claims against its insurance carriers will require resolution of several insurance coverage and other policy issues and the outcome of such claims cannot be predicted at this time. One of HEI's insurance carriers has filed a declaratory relief action in the U.S. District Court for the District of Hawaii seeking resolution of these issues. Recoveries from HEI's insurance carriers, if any, will be recognized when realized. (3) Electric utility subsidiary - -------------------------------- For Hawaiian Electric Company, Inc.'s consolidated financial information, including its commitments and contingencies, see pages 12 through 20. (4) Savings bank subsidiary - ---------------------------- Selected consolidated financial information American Savings Bank, F.S.B. and subsidiaries
Three months ended Six months ended June 30, June 30, -------------------- --------------------- (in thousands) 1994 1993 1994 1993 - ------------------------------------------------------------------------------------------ Income statement data Interest income........................... $ 50,429 $ 47,599 $ 98,528 $ 93,986 Interest expense.......................... 24,768 23,938 47,915 47,859 -------- -------- -------- -------- Net interest income....................... 25,661 23,661 50,613 46,127 Provision for losses...................... (242) (249) (484) (471) Other income.............................. 1,882 2,569 3,867 5,445 Operating, administrative and general expenses.......................... (16,626) (15,848) (32,701) (31,380) -------- -------- -------- -------- Operating income.......................... 10,675 10,133 21,295 19,721 Income taxes.............................. 4,457 4,136 8,869 8,056 -------- -------- -------- -------- Net income................................ $ 6,218 $ 5,997 $ 12,426 $ 11,665 ======== ======== ======== ========
6 American Savings Bank, F.S.B. and subsidiaries
June 30, December 31, (in thousands) 1994 1993 - ---------------------------------------------------------------------------------------- Balance sheet data Assets Cash and equivalents................................... $ 99,286 $ 77,610 Investment securities.................................. 75,017 68,599 Mortgage-backed securities............................. 706,845 630,156 Loans receivable, net.................................. 1,907,149 1,735,098 Other.................................................. 60,052 57,358 Goodwill and other intangibles......................... 47,560 49,664 ---------- ---------- $2,895,909 $2,618,485 ========== ========== Liabilities and equity Deposit liabilities.................................... $2,142,360 $2,091,583 Advances from Federal Home Loan Bank................... 509,374 289,674 Other.................................................. 54,200 52,717 ---------- ---------- 2,705,934 2,433,974 Common stock equity.................................... 189,975 184,511 ---------- ---------- $2,895,909 $2,618,485 ========== ==========
Six months ended June 30, ------------------------------- (in thousands) 1994 1993 - ---------------------------------------------------------------------------------------- Cash flow data Cash flows from operating activities Net income............................................. $ 12,426 $ 11,665 Adjustments to reconcile net income to net cash provided by operating activities Decrease (increase) in accounts receivable........... (1,275) 230 Increase in other securities held for trading........ (3,514) (24,270) Increase (decrease) in accounts payable.............. (564) 8,718 Changes in other assets and liabilities.............. 812 7,237 ---------- ---------- Net cash provided by operating activities.............. 7,885 3,580 ---------- ---------- Cash flows from investing activities Loans receivable originated and purchased.............. (305,498) (217,144) Principal repayments on loans receivable............... 136,008 126,064 Proceeds from sale of loans receivable................. 1,888 214 "Held-to-maturity" mortgage-backed securities purchased (202,176) (72,018) Principal repayments on "held-to-maturity" mortgage-backed securities............................ 125,486 123,161 Other.................................................. (4,876) (1,701) ---------- ---------- Net cash used in investing activities.................. (249,168) (41,424) ---------- ---------- Cash flows from financing activities Net increase in deposit liabilities.................... 50,777 106,970 Proceeds from advances from Federal Home Loan Bank..... 386,700 -- Principal payments on advances from Federal Home Loan Bank............................................. (167,000) (14,025) Common stock dividends................................. (7,518) (6,644) ---------- ---------- Net cash provided by financing activities.............. 262,959 86,301 ---------- ---------- Net increase in cash and equivalents................... 21,676 48,457 Cash and equivalents, beginning of period.............. 77,610 117,937 ---------- ---------- Cash and equivalents, end of period.................... $ 99,286 $ 166,394 ========== ==========
7 (5) Real estate subsidiary - --------------------------- MPC and its subsidiaries' total real estate project inventory, equity investment in real estate joint ventures and loans to unconsolidated joint ventures or joint venture partners amounted to $56 million and $49 million at June 30, 1994 and December 31, 1993, respectively. In 1990, Malama Development Corp. (MDC) acquired a 50% general partnership interest in Baldwin*Malama, a partnership with Baldwin Pacific Properties, Inc. (BPPI). In May 1993, Baldwin*Malama was reorganized as a limited partnership in which MDC became the sole general partner and BPPI the sole limited partner. Beginning in May 1993, in conjunction with the dissolution of the general partnership and formation of the limited partnership, MDC consolidated the accounts of Baldwin*Malama. Previously, MDC accounted for its investment in Baldwin*Malama under the equity method. At June 30, 1994, MPC or its subsidiaries were directly liable for $17.1 million of outstanding loans and had additional loan facilities of $1.6 million. In addition, at June 30, 1994, MPC or its subsidiaries had issued (i) guaranties under which they were jointly and severally contingently liable with their joint venture partners for $1.9 million of outstanding loans and (ii) payment guaranties under which MPC or its subsidiaries were severally contingently liable for $4.1 million of outstanding loans and $10.5 million of additional undrawn loan facilities. In total, at June 30, 1994, MPC or its subsidiaries were liable or contingently liable for $23.1 million of outstanding loans and $12.1 million in undrawn loan facilities. At June 30, 1994, HEI had agreed with the lenders of construction loans and loan facilities, of which approximately $13.3 million was outstanding and $12.1 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. MPC or its subsidiaries may enter into additional commitments in connection with the financing of future phases of development of MPC's projects and HEI may enter into similar agreements regarding the ownership and financial condition of MPC. (6) Regulatory assets - ---------------------- Regulatory assets at June 30, 1994 and December 31, 1993 include the following deferred costs:
June 30, December 31, (in thousands) 1994 1993 - --------------------------------------------------------------------------------------- Postretirement benefits other than pensions .......... $28,018 $19,210 Income taxes ......................................... 19,486 16,297 Preliminary plant costs on suspended project ......... 6,947 6,577 Vacation earned, but not yet taken ................... 6,368 5,494 Unamortized debt expense on retired issuances ........ 7,839 5,435 Integrated resource planning costs ................... 6,335 4,661 Other ................................................ 7,220 4,403 ------- ------- $82,213 $62,077 ======= =======
8 (7) Interest expense - --------------------- Interest expense, excluding interest on nonrecourse debt from leveraged leases, consisted of the following:
Three months ended Six months ended June 30, June 30, ------------------ ------------------ (in thousands) 1994 1993 1994 1993 - ----------------------------------------------------------------------------- Interest expense Savings bank...................... $24,768 $23,938 $47,915 $47,859 Electric utility.................. 9,107 8,680 18,170 16,815 Other............................. 4,021 4,521 8,040 9,147 ------- ------- ------- ------- $37,896 $37,139 $74,125 $73,821 ======= ======= ======= =======
(8) Cash flows - --------------- Supplemental disclosures of cash flow information Cash paid for interest, net of capitalized amounts, and cash paid (received) for income taxes were as follows:
Six months ended June 30, ------------------- (in thousands) 1994 1993 - ------------------------------------------------------------------------------ Interest (including interest paid by savings bank, but excluding interest paid on nonrecourse debt from leveraged leases)....................................... $72,815 $73,145 ======= ======= Income taxes............................................ $16,224 $(10,522) ======= ========
Cash paid for interest on nonrecourse debt on leveraged leases amounted to $4,754,000 and $4,744,000 for the six months ended June 30, 1994 and 1993, respectively. Supplemental disclosures of noncash activities Common stock dividends reinvested by shareholders in HEI common stock in noncash transactions amounted to $8,769,000 and $8,221,000 for the six months ended June 30, 1994 and 1993, respectively. The allowance for equity funds used during construction, which was capitalized as part of the cost of electric utility plant, amounted to $4,046,000 and $3,354,000 for the six months ended June 30, 1994 and 1993, respectively. In March 1994, MDC's Baldwin*Malama partnership closed on an option to purchase approximately 147 acres of land on the island of Maui from BPPI. Of the total land purchase price of $9.9 million, Baldwin*Malama issued mortgage notes payable of $8.0 million in noncash consideration. 9 (9) Postretirement benefits other than pensions - ------------------------------------------------ The Company provides various postretirement benefits other than pensions to eligible employees upon retirement. Health and life insurance benefits are provided to eligible employees of HEI, HECO and its subsidiaries, and YB upon their retirement. Medical, dental and vision benefits are provided to eligible employees of HEI and HECO and its subsidiaries upon their retirement, with contributions by retirees toward costs based on their years of service and retirement date. Medical and vision benefits are provided to eligible bargaining unit employees of YB upon their retirement at no cost. Employees are eligible for these benefits if, upon retirement, they participate in one of the Company's defined benefit pension plans. Currently, no funding has been provided for these benefits. Through December 31, 1992, the cost of postretirement benefits other than pensions had not been recognized until paid (i.e., the pay-as-you-go method). Accordingly, no provision had been made for future benefits to existing or retired employees. Effective January 1, 1993, the Company adopted Statement of Financial Accounting Standards (SFAS) No. 106, "Employers' Accounting for Postretirement Benefits Other Than Pensions," which requires accrual, during the years that an employee renders the necessary service, of the expected cost of providing postretirement benefits other than pensions to that employee and the employee's beneficiaries and covered dependents. The transition obligation is being recognized on a delayed basis over 20 years. In February 1992, the PUC opened a generic docket to determine whether SFAS No. 106 should be adopted for rate-making purposes. On July 15, 1993, the PUC issued an interim decision and order in the generic docket, amending an earlier interim decision and order to state that it is probable that its final decision will allow, for rate-making purposes, the full costs of postretirement benefits other than pensions calculated on the basis of SFAS No. 106. Upon request of HECO and its subsidiaries, on January 11, 1994, the PUC issued another interim decision and order which stated that it has "determined that it will allow each utility to calculate, for ratemaking purposes, the full costs of postretirement benefits other than pensions on an accrual basis, rather than the current pay- as-you-go basis." The PUC further stated that it has not yet decided whether to adopt SFAS No. 106 in its entirety or with modifications, but it reaffirmed that "(1) it is probable that the final decision and order in these dockets will allow, for ratemaking purposes, the full costs of postretirement benefits other than pensions calculated on the basis of SFAS [No.] 106; and (2) it is probable that the difference between the costs of postretirement benefits other than pensions determined under SFAS [No.] 106 and the current pay-as-you-go method from January 1, 1993, through the effective date of the postretirement benefits step increases . . . will be recovered ratably through future rates over a period not extending beyond 2013." Beginning in the second quarter of 1993 and based upon the interim decisions and orders, HECO and its subsidiaries and YB recognized regulatory assets and deferred for financial reporting purposes the difference between the costs of postretirement benefits other than pensions determined under SFAS No. 106 and such costs under the pay-as-you-go method. Approximately $4.9 million of the regulatory assets established in the second quarter of 1993 related to postretirement benefits expensed in the first quarter of 1993. If the regulatory assets had been established commencing January 1, 1993, the second quarter of 1993 operating income and net income would have been lower by approximately $4.9 million and $3.1 million, respectively. The regulatory assets for postretirement benefits other than pensions totaled $28.0 million as of June 30, 1994. If the PUC in its final decision and order does not fully adopt SFAS No. 106 for rate-making purposes and if under current accounting guidelines it is concluded that recognition of regulatory assets with respect to the difference between the accrual and the PUC-approved methods would be inappropriate, then the net earnings of the Company would be adversely affected by SFAS No. 106 in 1994 and future years. Management cannot predict with certainty when the final decision in the generic docket will be rendered. 10 (10) Accounting changes in 1994 - -------------------------------- Postemployment benefits In November 1992, the Financial Accounting Standards Board (FASB) issued SFAS No. 112, "Employers' Accounting for Postemployment Benefits." This statement requires employers to recognize the obligation to provide postemployment benefits in accordance with SFAS No. 43, "Accounting for Compensated Absences," if the obligation is attributable to employees' services already rendered, employees' rights to those benefits accumulate or vest, payment of the benefits is probable, and the amount of the benefits can be reasonably estimated. The Company adopted the provisions of SFAS No. 112 on January 1, 1994. The implementation of SFAS No. 112 did not have a material effect on the Company's consolidated financial condition or the results of operations for the six months ended June 30, 1994. Accounting for certain investments in debt and equity securities In May 1993, the FASB issued SFAS No. 115, "Accounting for Certain Investments in Debt and Equity Securities." This statement requires that investments in equity securities that have readily determinable fair values and investments in debt securities be classified in three categories and accounted for as follows: . Debt securities that the enterprise has the positive intent and ability to hold to maturity are classified as held-to-maturity securities and reported at amortized cost. . Debt and equity securities that are bought and held principally for the purpose of selling them in the near term are classified as trading securities and reported at fair value, with unrealized gains and losses included in earnings. . Debt and equity securities not classified as either held-to-maturity securities or trading securities are classified as available-for-sale securities and reported at fair value, with unrealized gains and losses excluded from earnings and reported in a separate component of stockholders' equity. The Company adopted the provisions of SFAS No. 115 on January 1, 1994. As of June 30, 1994 and December 31, 1993, marketable securities consisted of trading securities, stock in the Federal Home Loan Bank of Seattle and mortgage-backed securities. All marketable securities other than the trading securities are classified as held-to-maturity securities. The implementation of SFAS No. 115 did not have a material effect on the Company's consolidated financial condition or the results of operations for the six months ended June 30, 1994. 11 Hawaiian Electric Company, Inc. and subsidiaries Consolidated balance sheets (unaudited)
June 30, December 31, (in thousands, except par value) 1994 1993 - --------------------------------------------------------------------------------------------------------------- Assets Utility plant, at cost Property, plant and equipment....................................... $2,038,502 $1,976,192 Construction in progress............................................ 149,279 126,342 Less--accumulated depreciation...................................... (673,028) (641,230) ------------ ------------ Net utility plant................................................ 1,514,753 1,461,304 ------------ ------------ Current assets Cash and equivalents................................................ 3,828 1,922 Customer accounts receivable, net................................... 57,465 55,614 Accrued unbilled revenues, net...................................... 33,936 34,735 Other accounts receivable, net...................................... 6,568 8,398 Fuel oil stock, at average cost..................................... 22,708 18,188 Materials and supplies, at average cost............................. 18,929 20,239 Prepayments and other............................................... 3,174 2,715 ------------ ------------ Total current assets............................................. 146,608 141,811 ------------ ------------ Other assets Regulatory assets................................................... 80,179 60,612 Other............................................................... 41,049 39,549 ------------ ------------ Total other assets............................................... 121,228 100,161 ------------ ------------ $1,782,589 $1,703,276 ============ ============ Capitalization and liabilities Capitalization Common stock, $6 2/3 par value, authorized 50,000 shares; outstanding 11,258 shares........................... $ 75,065 $ 75,065 Premium on capital stock............................................ 220,185 220,197 Retained earnings................................................... 288,612 275,401 ------------ ------------ Common stock equity.............................................. 583,862 570,663 Cumulative preferred stock Not subject to mandatory redemption............................... 48,293 48,293 Subject to mandatory redemption................................... 43,910 45,410 Long-term debt, net................................................. 457,349 436,776 ------------ ------------ Total capitalization............................................. 1,133,414 1,101,142 ------------ ------------ Current liabilities Long-term debt due within one year.................................. 10,933 47,960 Preferred stock sinking fund requirements........................... 2,324 1,320 Short-term borrowings - nonaffiliates............................... 114,738 28,928 Short-term borrowings - affiliate................................... -- 12,000 Accounts payable.................................................... 51,571 41,808 Interest and preferred dividends payable............................ 11,084 10,332 Income taxes payable................................................ 5,710 6,232 Other taxes accrued................................................. 27,766 36,959 Other............................................................... 20,997 31,036 ------------ ------------ Total current liabilities........................................ 245,123 216,575 ------------ ------------ Deferred credits and other liabilities Deferred income taxes............................................... 109,197 107,449 Unamortized tax credits............................................. 44,199 43,348 Other............................................................... 82,152 69,757 ------------ ------------ Total deferred credits and other liabilities..................... 235,548 220,554 ------------ ------------ Contributions in aid of construction.................................. 168,504 165,005 ------------ ------------ $1,782,589 $1,703,276 ============ ============ See accompanying notes to HECO's consolidated financial statements.
12 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) 1994 1993 1994 1993 - ---------------------------------------------------------------------------------------------------------------- Operating revenues ...................................... $217,884 $218,158 $417,982 $423,718 Operating expenses Fuel oil ................................................ 41,462 53,286 80,080 104,820 Purchased power ......................................... 69,294 65,954 132,280 125,669 Other operation ......................................... 28,383 19,937 58,094 50,776 Maintenance ............................................. 10,537 10,790 21,279 21,480 Depreciation ............................................ 15,976 15,053 32,093 29,963 Taxes, other than income taxes .......................... 19,821 19,926 38,559 39,104 Income taxes ............................................ 10,776 10,350 17,830 15,339 -------- -------- -------- -------- 196,249 195,296 380,215 387,151 -------- -------- -------- -------- Operating income ........................................ 21,635 22,862 37,767 36,567 -------- -------- -------- -------- Other income Allowance for equity funds used during construction ..... 2,095 1,795 4,046 3,354 Other, net .............................................. 1,416 1,107 2,601 2,153 -------- -------- -------- -------- 3,511 2,902 6,647 5,507 -------- -------- -------- -------- Income before interest and other charges ................ 25,146 25,764 44,414 42,074 -------- -------- -------- -------- Interest and other charges Interest on long-term debt ............................. 7,518 6,850 15,530 13,739 Amortization of net bond premium and expense ........... 290 181 537 355 Other interest charges .................................. 1,299 1,649 2,103 2,721 Allowance for borrowed funds used during construction ................................... (945) (1,009) (1,816) (1,928) Preferred stock dividends of subsidiaries ............... 714 519 1,430 1,041 -------- --------- -------- -------- 8,876 8,190 17,784 15,928 -------- --------- -------- -------- Income before preferred stock dividends of HECO ............................................... 16,270 17,574 26,630 26,146 Preferred stock dividends of HECO ....................... 1,082 1,109 2,166 2,219 -------- --------- -------- -------- Net income for common stock ............................. $ 15,188 $ 16,465 $ 24,464 $ 23,927 ======== ========= ======== ======== Ratio of earnings to fixed charges (SEC method) 3.03 3.08 ======== ========
Hawaiian Electric Company, Inc. and subsidiaries Consolidated statements of retained earnings (unaudited)
Three months ended Six months ended June 30, June 30, ---------------------- ----------------------- (in thousands) 1994 1993 1994 1993 - ---------------------------------------------------------------------------------------------------------------- Retained earnings, beginning of period ................. $274,754 $250,396 $275,401 $249,583 Net income for common stock ............................ 15,188 16,465 24,464 23,927 Common stock dividends ................................. (1,330) (3,731) (11,253) (10,380) -------- -------- -------- -------- Retained earnings, end of period ....................... $288,612 $263,130 $288,612 $263,130 ======== ======== ======== ========
See accompanying notes to HECO's consolidated financial statements. 13 Hawaiian Electric Company, Inc. and subsidiaries Consolidated statements of cash flows (unaudited)
Six months ended June 30, ------------------------- (in thousands) 1994 1993 - ------------------------------------------------------------------------------------ Cash flows from operating activities Income before preferred stock dividends of HECO .......... $26,630 $ 26,146 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 ................................. 32,093 29,963 Other amortization ................................... 753 402 Provision for deferred income taxes .................. 1,752 (2,437) Tax credits, net ..................................... 1,702 2,052 Allowance for equity funds used during construction .. (4,046) (3,354) Increase in accounts receivable ...................... (21) (7,984) Decrease in accrued unbilled revenues ................ 799 2,094 Increase in fuel oil stock ........................... (4,520) (4,992) Decrease (increase) in materials and supplies ........ 1,310 (1,350) Increase in regulatory assets ........................ (3,831) (3,489) Increase in accounts payable ......................... 9,763 2,521 Increase (decrease) in interest and preferred dividends payable ................................... 752 (285) Decrease in income taxes payable and other taxes accrued ............................................. (9,715) (3,431) Changes in other assets and liabilities .............. (10,057) (13,134) ------- ---------- Net cash provided by operating activities ................ 43,364 22,722 ------- ---------- Cash flows from investing activities Capital expenditures ..................................... (85,225) (103,827) Contributions in aid of construction ..................... 6,849 12,465 ------- ---------- Net cash used in investing activities .................... (78,376) (91,362) ------- ---------- Cash flows from financing activities Common stock dividends .................................. (11,253) (10,380) Preferred stock dividends ............................... (2,166) (2,219) Proceeds from issuance of long-term debt ................ 31,542 13,353 Repayment of long-term debt ............................. (48,027) (46,875) Redemption of preferred stock ........................... (496) (650) Net increase in short-term borrowings from nonaffiliates and affiliate with original maturities of three months or less ................................................ 73,810 81,993 Other ................................................... (6,492) 2,591 ------- ---------- Net cash provided by financing activities ............... 36,918 37,813 ------- ---------- Net increase (decrease) in cash and equivalents ......... 1,906 (30,827) Cash and equivalents, beginning of period ............... 1,922 30,883 ------- ---------- Cash and equivalents, end of period ..................... $ 3,828 $ 56 ======= ==========
See accompanying notes to HECO's consolidated financial statements. 14 Hawaiian Electric Company, Inc. and subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS June 30, 1994 and 1993 (Unaudited) - ------------------------------------------------------------------------------- (1) Accounting statement - ------------------------- In the opinion of HECOOs management, the accompanying unaudited consolidated financial statements contain all material adjustments required by generally accepted accounting principles to present fairly the financial position of HECO and its subsidiaries as of June 30, 1994 and December 31, 1993, the results of its operations for the three months and six months ended June 30, 1994 and 1993, and its cash flows for the six months ended June 30, 1994 and 1993. All such adjustments are of a normal recurring nature. These 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, 1993 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, 1994. The consolidated balance sheet as of December 31, 1993 was derived from audited financial statements. (2) Regulatory assets - ---------------------- Regulatory assets at June 30, 1994 and December 31, 1993 include the following deferred costs:
June 30, December 31, (in thousands) 1994 1993 - -------------------------------------------------------------------------------------- Postretirement benefits other than pensions ............. $26,083 $17,866 Income taxes ............................................ 19,387 16,176 Preliminary plant costs on suspended project ............ 6,947 6,577 Vacation earned, but not yet taken ...................... 6,368 5,494 Unamortized debt expense on retired issuances ........... 7,839 5,435 Integrated resource planning costs ...................... 6,335 4,661 Other ................................................... 7,220 4,403 ------- ------- $80,179 $60,612 ======= =======
(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) 1994 1993 - --------------------------------------------------------------------------------- Interest ................................................ $17,331 $16,323 ======= ======= Income taxes ............................................ $12,868 $14,586 ======= =======
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 $4,046,000 and $3,354,000 for the six months ended June 30, 1994 and 1993, respectively. 15 (4) Commitments and contingencies - ---------------------------------- Power purchase agreements In general, payments under the major power purchase agreements are based upon available capacity and energy. Payments for capacity generally are not required if the contracted capacity is not available, and payments are reduced, under certain conditions, if available capacity drops below contracted levels. In general, the payment rates for capacity have been predetermined for the terms of the agreements. The energy charges will vary over the terms of the agreements and HECO and its subsidiaries may pass on changes in the fuel component of the energy charges to customers through energy cost adjustment clauses in its rate schedules. HECO and its subsidiaries do not operate nor participate in the operation of any of the facilities that provide power under the major agreements. Title to the facilities does not pass to HECO and its subsidiaries upon expiration of the agreements, and the agreements do not contain bargain purchase options with respect to the facilities. As of June 30, 1994, HECO and its subsidiaries had power purchase agreements for 473 megawatts (MW) of firm capacity representing approximately 22% of the total of their generating capabilities and purchased power firm capacities. Rate recovery is allowed for energy and firm capacity payments under these agreements. Assuming that each of the agreements, except for the agreement with Hilo Coast Processing Company, remains in place for the entire contract period and the minimum availability criteria in the power purchase agreements are met, aggregate minimum fixed capacity charges are expected to be between $99 million and $107 million annually from 1994 through 2015, between $50 million and $77 million annually from 2016 through 2022 and $4 million annually from 2023 through 2028. HECO is disputing certain amounts (primarily energy charges) billed each month under its power purchase agreements with Kalaeloa Partners, L.P. (Kalaeloa) and AES Barbers Point, Inc. (AES-BP) and has withheld payment of some of the disputed amounts pending resolution. Disputed amounts billed by Kalaeloa and AES-BP through June 30, 1994 for which HECO has withheld payment totaled approximately $2.3 million and $1.9 million, respectively. Approximately $1.2 million of the total amounts withheld, if ultimately paid, are expected to be includable in HECO's energy cost adjustment clause and passed through to customers. HECO has not recognized any portion of the withheld amounts as an expense or liability in its financial statements. Discussions between HECO and Kalaeloa, and HECO and AES-BP to resolve the disputed billing amounts have been held. In the event the parties are unable to settle the disputes, both the Kalaeloa and AES-BP power purchase agreements contain provisions whereby either party to the agreement may cause the dispute to be submitted to binding arbitration. Kalaeloa requested that its dispute with HECO be arbitrated and the arbitration proceeding hearings were held in early July 1994. Under the agreement, the arbitrators are to render their decision before the end of August 1994. Based on information currently available, HECO's management believes that the ultimate outcome of these disputes will not have a material adverse effect on HECO's consolidated financial condition and results of operations. HELCO's firm power purchase agreements include an amended power purchase agreement with Hamakua Sugar Company (Hamakua), a power purchase agreement with Puna Geothermal Ventures (PGV) and a power purchase agreement with Hilo Coast Processing Company (HCPC). Hamakua is in a Chapter 11 bankruptcy proceeding and is now conducting a final sugar cane harvest which is expected to end around the first week of October 1994. During the harvest, Hamakua has agreed to supply HELCO with 8 MW of firm capacity under an amendment to HELCO's existing power purchase agreement. PGV, an independent geothermal power producer which had experienced substantial delays in commencing commercial operations, passed an acceptance test in June 1993 and became a firm capacity source for 25 MW. However, due to problems with one of its wells, PGV was producing only about 16 MW as of June 30, 1994. In March 1994, HCPC, which currently provides 18 MW of firm capacity, issued a written notice of termination to HELCO indicating that it would cease producing power in March 1997. HELCO, in turn, issued a written notice of its preliminary intent to purchase the HCPC facility, subject to a number of conditions. Under the terms of the power purchase agreement, HELCO has the option to purchase the facility. HELCO and HCPC will negotiate the "fair market value" of the plant assuming transfer to a party other than HELCO. If the parties cannot agree on the "fair market value," the issue may be submitted to arbitration. Once the fair market value is determined, HELCO may elect whether to proceed with the purchase. 16 HECO power outage On April 9, 1991, HECO experienced a power outage that affected all customers on the island of Oahu. The PUC initiated an investigation of the outage by its order dated April 16, 1991. This investigation was consolidated with a pending investigation of an outage that occurred in 1988. The PUC held a hearing on the April 9, 1991 outage in May 1991. Further proceedings have not been scheduled at this time. Recommendations were made to HECO by Power Technologies, Inc., an independent consultant hired by HECO, and HECO has responded to those recommendations. Management cannot predict the timing and outcome of any decision and order to be issued, if any, by the PUC with respect to the outages. HECO's PUC-approved tariff rule states that HECO "will not be liable for interruption or insufficiency of supply or any loss, cost, damage or expense of any nature whatsoever, occasioned thereby if caused by accident, storm, fire, strikes, riots, war or any cause not within [HECO's] control through the exercise of reasonable diligence and care." Under the rule, customers had 30 days from the date of the power outage to file claims. HECO received 3,063 customer claims which totaled approximately $7.8 million. Of the 3,063 claims, 1,530 are for property damage. As of June 30, 1994, HECO had settled or closed 1,322 of these property damage claims, had settlement offers outstanding with respect to approximately 173 more of these claims and anticipates making settlement offers with respect to the 35 remaining property claims upon receipt and review of appropriate supporting documentation. The settlement offers are being made for purposes of settlement and compromise only, and without any admission by HECO of liability for the outage. Not covered in the settlement offers and requests for documentation are 1,533 claims involving alleged personal injury or economic losses, such as lost profits. On April 19, 1991, seven direct or indirect business customers on the island of Oahu filed a lawsuit against HECO on behalf of themselves and an alleged class, claiming $75 million in compensatory damages and additional unspecified amounts for punitive damages because of the April 9, 1991 outage. The lawsuit was dismissed without prejudice in March 1993 and subsequently refiled by the plaintiffs. HECO has filed an answer which denies the principal allegations in the complaint, sets forth affirmative defenses, and asserts that the suit should not be maintained as a class action. Discovery proceedings have been initiated. In March 1994, HECO filed a motion for an order denying class certification of the lawsuit and the plaintiffs responded with a cross-motion for class certification. Both motions were denied without prejudice. Trial has been set for January 22, 1996. HECO has recorded a liability of $1 million for the total amount of expected defense costs and settlements with respect to the outage. In the opinion of management, losses (if any) in excess of the amount for which provision has been made, net of estimated insurance recoveries, resulting from the ultimate outcome of the lawsuit and claims related to the April 9, 1991 outage will not have a material adverse effect on the Company or consolidated HECO. HELCO reliability investigation In July 1991, following service interruptions and rolling blackouts instituted on the island of Hawaii, the PUC issued an order calling for an investigation into the reliability of HELCO's system. An evidentiary hearing was held in September 1991 and public hearings were held in October 1991. In light of approximately 20 subsequent incidents of rolling blackouts and service interruptions resulting from insufficient generation margin, further evidentiary hearings were held in July 1992. With the input from an independent consultant and the parties to the proceedings, the PUC may formulate minimum reliability standards for HELCO, use the standards to assess HELCO's system reliability, and re-examine the rate increase approved in October 1992 to see whether any adjustments are appropriate. In the opinion of management, the PUC's adjustment to its October 1992 rate increase, if any, resulting from the reliability investigation will not have a material adverse effect on the Company's or HECO's consolidated financial condition or results of operations. HELCO's generation margin has improved with the addition of a 20-MW combustion turbine in August 1992, PGV's commencement of commercial operations and Hamakua's temporary return to commercial operation. HELCO is proceeding with plans to install two 20-MW combustion turbines in 1995, followed by an 18-MW heat steam recovery generator in 1997, at which time these units will be converted to a combined-cycle unit, subject in each case to obtaining necessary permits and approvals. The PUC has issued a decision and order approving expenditures for the first 20-MW combustion turbine. Evidentiary hearings 17 on the other portions of the unit were held in July 1994. HELCO has encountered procedural and other difficulties in obtaining the necessary Conservation District Use Permit (CDUP) which would allow the combined cycle unit to be constructed at the Keahole site. Such difficulties included intervenors filing for a contested case hearing which has not been held. Further, Kawaihae Cogeneration Partners and Enserch Development Corp. have each filed with the PUC separate complaints against HELCO, alleging that, rather than having HELCO build the combined cycle unit, they are entitled to a power purchase contract to provide the capacity. The Board of Land and Natural Resources (BLNR) addressed the CDUP at its May 13, 1994 meeting. The BLNR was unable to obtain the necessary votes to either approve or deny the permit. It is HELCO's position that it became entitled to the CDUP by operation of law as the BLNR failed to act on HELCO's application by the May 18, 1994 deadline. The results of the BLNR meeting were challenged in the Third Circuit Court, and on June 24, 1994, the court granted a motion to stay the effectiveness of the CDUP. HELCO intends to appeal the granting of that motion and will continue to litigate the appeal of the results of the BLNR meeting. If not resolved expeditiously, the stay is likely to adversely impact HELCO's unit installation schedule. If the CDUP were further delayed or ultimately denied, HELCO would explore other available alternatives to meet projected energy needs. However, in the event of a further delay or denial of the CDUP, management believes that there may be rolling blackouts before required additional generation could be completed or any alternative solution could be implemented. (5) Summarized financial information - ------------------------------------- Summarized financial information for HECO's consolidated subsidiaries, HELCO and MECO, is as follows:
HELCO MECO ------------------------- ----------------------- June 30, December 31, June 30, December 31, (in thousands) 1994 1993 1994 1993 - ---------------------------------------------------------------------------------------------------- Balance sheet data Noncurrent assets........................ $315,858 $297,847 $259,185 $252,680 Current assets........................... 24,382 22,161 23,578 31,465 -------- -------- -------- -------- $340,240 $320,008 $282,763 $284,145 ======== ======== ======== ======== Common stock equity...................... $104,241 $102,438 $100,171 $97,569 Cumulative preferred stock Not subject to mandatory redemption.. 10,000 10,000 8,000 8,000 Subject to mandatory redemption...... 8,000 8,100 7,135 7,135 Noncurrent liabilities................... 169,618 156,855 140,435 136,414 Current liabilities...................... 48,381 42,615 27,022 35,027 -------- -------- -------- -------- $340,240 $320,008 $282,763 $284,145 ======== ======== ======== ========
HELCO MECO ---------------------------------------- --------------------------------------- Three months ended Six months ended Three months ended Six months ended June 30, June 30, June 30, June 30, ------------------ ------------------ ------------------ ----------------- (in thousands) 1994 1993 1994 1993 1994 1993 1994 1993 - -------------------------------------------------------------------------------------------------------------- Income statement data Operating revenues *............. $30,667 $27,438 $59,618 $54,017 $29,298 $28,184 $56,659 $54,193 Operating income * .............. 2,921 3,572 5,324 5,845 4,049 3,753 7,677 5,904 Net income for common stock .......... 2,182 1,916 3,535 2,725 2,496 3,119 4,444 4,465
* Based on the format of HECO's consolidated statements of income. 18 (6) 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) 1994 1993 1994 1993 - ---------------------------------------------------------------------------------------------------------------- Operating income from regulated and nonregulated activities before income taxes (per HEI consolidated statements of income)................. $ 33,817 $ 34,284 $ 58,141 $ 54,001 Deduct: Income taxes on regulated activities.......................... (10,776) (10,350) (17,830) (15,339) Revenues from nonregulated activities......................... (1,527) (1,143) (2,735) (2,229) Add: Expenses from nonregulated activities......................... 121 71 191 134 -------- -------- -------- -------- Operating income from regulated activities after income taxes (per HECO consolidated statements of income)........... $ 21,635 $ 22,862 $ 37,767 $ 36,567 ======== ======== ======== ========
(7) Postretirement benefits other than pension - ----------------------------------------------- HECO and its subsidiaries provide medical, dental, vision, life insurance and other benefits to eligible employees upon their retirement, with contributions by retirees toward costs based on their years of service and retirement date. Employees are eligible for these benefits if, upon retirement, they participate in one of the Company's defined benefit pension plans. Currently, no funding has been provided for these benefits. Through December 31, 1992, the cost of these benefits had not been recognized until paid. Accordingly, no provision was made for future benefits to existing or retired employees. Effective January 1, 1993, HECO and its subsidiaries adopted SFAS No. 106, "Employers' Accounting for Postretirement Benefits Other Than Pensions," which requires accrual, during the years that an employee renders the necessary service, of the expected cost of providing postretirement benefits other than pensions to that employee and the employee's beneficiaries and covered dependents. The transition obligation is being recognized on a delayed basis over 20 years. In February 1992, the PUC opened a generic docket to determine whether SFAS No. 106 should be adopted for rate-making purposes. On July 15, 1993, the PUC issued an interim decision and order in the generic docket, amending an earlier interim decision and order to state that it is probable that its final decision will allow, for rate-making purposes, the full costs of postretirement benefits other than pensions calculated on the basis of SFAS No. 106. Upon request of HECO and its subsidiaries, on January 11, 1994, the PUC issued another interim decision and order which stated that it has "determined that it will allow each utility to calculate, for ratemaking purposes, the full costs of postretirement benefits other than pensions on an accrual basis, rather than the current pay- as-you-go basis." The PUC further stated that it has not yet decided whether to adopt SFAS No. 106 in its entirety or with modifications, but it reaffirmed that "(1) it is probable that the final decision and order in these dockets will allow, for ratemaking purposes, the full costs of postretirement benefits other than pensions calculated on the basis of SFAS [No.] 106; and (2) it is probable that the difference between the costs of postretirement benefits other than pensions determined under SFAS [No.] 106 and the current pay-as-you-go method from January 1, 1993, through the effective date of the postretirement benefits step increases . . . will be recovered ratably through future rates over a period not extending beyond 2013." Beginning in the second quarter of 1993 and based upon these interim decisions and orders, HECO and its subsidiaries recognized regulatory assets and deferred for financial reporting purposes the difference between the costs of postretirement benefits other than pensions determined under SFAS No. 106 and such costs under the pay-as-you-go method. Approximately $4.7 million of the regulatory assets established in the second quarter of 1993 related to postretirement benefits expensed in the first quarter 19 of 1993. If the regulatory assets had been established commencing January 1, 1993, the second quarter 1993 operating income (per HEI consolidated statement of income) and net income would have been lower by approximately $4.7 million and $2.9 million, respectively. The regulatory assets for postretirement benefits other than pensions totaled $26.1 million as of June 30, 1994. If the PUC in its final decision and order does not fully adopt SFAS No. 106 for rate-making purposes and if under current accounting guidelines it is concluded that recognition of regulatory assets with respect to the difference between the accrual and the PUC approved methods would be inappropriate, then the net earnings of consolidated HECO would be adversely affected by SFAS No. 106 in 1994 and future years. Management cannot predict with certainty when the final decision in the generic docket will be rendered. (8) Accounting change in 1994 - ------------------------------ Postemployment benefits In November 1992, the FASB issued SFAS No. 112, "Employers' Accounting for Postemployment Benefits." This statement requires employers to recognize the obligation to provide postemployment benefits in accordance with SFAS No. 43, "Accounting for Compensated Absences," if the obligation is attributable to employees' services already rendered, employees' rights to those benefits accumulate or vest, payment of the benefits is probable, and the amount of the benefits can be reasonably estimated. HECO and its subsidiaries adopted the provisions of SFAS No. 112 on January 1, 1994. The implementation of SFAS No. 112 did not have a material effect on consolidated HECO's financial condition or the results of operations for the six months ended June 30, 1994. As of June 30, 1994, the regulatory asset established by HECO and its subsidiaries for postemployment benefits totaled approximately $0.7 million. 20 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 Consolidated - ------------
Three months ended June 30, ------------------ (in thousands, except per % Primary reason(s) for significant share amounts) 1994 1993 change change* - --------------------------------------------------------------------------------------------------- Revenues....................... $284,556 $281,645 1 Increases at the savings bank and "other" segments Operating income............... 42,955 43,919 (2) Decreases at the electric utility and "other" segments, partly offset by the increase at the savings bank segment Net income..................... 17,632 18,977 (7) Lower operating income and higher income taxes Earnings per common share...... 0.63 0.76 (17) See above explanation and 12% increase in the weighted average number of common shares outstanding Weighted average number of common shares outstanding.................. 28,013 25,084 12 Public offering of 2.0 million shares of common stock completed in August 1993 and shares issued through the HEI dividend reinvestment and stock purchase plan
* Also see segment discussions which follow. 21
Six months ended June 30, ----------------- (in thousands, except % Primary reason(s) for significant per share amounts) 1994 1993 change change* - ----------------------------------------------------------------------------------------- Revenues............. $549,598 $560,993 (2) Decreases at the electric utility and "other" segments, partly offset by the increase at the savings bank segment Operating income..... 76,359 72,250 6 Increases at the electric utility and savings bank segments, partly offset by the decrease for the "other" segment Income from continuing operations......... $ 29,420 $ 28,269 4 Higher operating income, partly offset by higher income taxes Income from discontinued operations......... -- 1,800 (100) Reversal of a reserve for the disposal -------- -------- of HERS after the sale of HERS in March 1993 Net income........... $ 29,420 $ 30,069 (2) ======== ======== Earnings per common share Continuing operations..... $1.05 $1.13 (7) See above explanation and 12% increase in the weighted average number of common shares outstanding Discontinued operations..... -- 0.07 (100) See above ------- ------- $1.05 $1.20 (13) ======= ======= Weighted average number of common shares outstanding. 27,892 24,973 12 Public offering of 2.0 million shares of common stock completed in August 1993 and shares issued through the HEI dividend reinvestment and stock purchase plan
* Also see segment discussions which follow. For the quarter ended June 30, 1994, HEI reported net income of $17.6 million, or $0.63 per share, compared to $19.0 million, or $0.76 per share, in the same period of 1993. Net income decreased due to lower earnings at the electric utility and "other" segments. Net income for the second quarter of 1993 was higher than for the second quarter of 1994 primarily due to two nonrecurring accounting adjustments in the second quarter of 1993 resulting from the establishment of (a) a $6.0 million regulatory asset for vacation earned but not yet taken by employees of the electric utility subsidiaries and (b) a $9.7 million regulatory asset for postretirement benefits other than pensions for employees of the electric utility subsidiaries and YB, of which $4.9 million related to postretirement benefits expensed in the first quarter of 1993. Excluding the "vacation" adjustment and the adjustment related to postretirement benefits expensed in the first quarter of 1993, net income for the second quarter of 1994 would have reflected an increase of approximately 33% over the second quarter of 1993. 22 For the six months ended June 30, 1994, HEI reported net income of $29.4 million, or $1.05 per share, compared to $30.1 million, or $1.20 per share, in the same period of 1993. The first half of 1993 results included the reversal of a reserve for the disposal of HERS after the sale of HERS in March 1993. Excluding the "vacation" adjustment, income from continuing operations for the first half of 1994 would have reflected an increase of approximately 13% over the first half of 1993 due to higher earnings at the savings bank and the electric utility companies. Dividends are paid by HEI as and when declared at the discretion of HEI's Board of Directors. HEI and its predecessor company, HECO, have paid dividends continuously since 1901. Dividends per share have been higher each year for the past 30 years. Although dividends per share growth is a major goal for the Company, HEI must balance short-term and long-term goals. Over the next few years HEI's management intends to recommend to HEI's Board of Directors to moderate dividend growth until its payout ratio returns to a more acceptable level. Following is a general discussion of revenues, expenses and operating income by business segment. Electric utility
Three months ended June 30, (in thousands, ------------------ except per % Primary reason(s) for significant barrel amounts) 1994 1993 change change - -------------------------------------------------------------------------------- Revenues.......... $219,411 $219,301 0 Higher rate relief for HECO and MECO and a 0.2% increase in KWH sales, partly offset by lower fuel oil prices which are passed on to customers Expenses Fuel oil........ 41,462 53,286 (22) Lower fuel oil prices and KWHs generated Purchased power. 69,294 65,954 5 Higher KWHs purchased Other........... 74,838 65,777 14 1993 amount reflects reduced expenses due to establishment of regulatory assets for vacation earned but not yet taken by employees and for the additional SFAS No. 106 costs of postretirement benefits other than pensions retroactive to January 1, 1993 Operating income.. 33,817 34,284 (1) 1993 income includes nonrecurring adjustments previously described of approximately $8.9 million in the second quarter of 1993; 1994 income reflects higher rate relief for HECO and MECO Net income........ 15,188 16,465 (8) Lower operating income and higher income taxes Fuel oil price per barrel...... 17.52 21.27 (18)
23
Six months ended June 30, ----------------- (in thousands, except % Primary reason(s) for significant per barrel amounts) 1994 1993 change change - ----------------------------------------------------------------------------------------------------- Revenues................. $420,717 $425,947 (1) Lower fuel oil prices which are passed on to customers, partly offset by higher rate relief for HECO and MECO and a 2.1% increase in KWH sales Expenses Fuel oil............... 80,080 104,820 (24) Lower fuel oil prices and KWHs generated Purchased power........ 132,280 125,669 5 Higher KWHs purchased Other.................. 150,216 141,457 6 1993 amount reflects reduced expenses due to establishment of a regulatory asset for vacation earned but not yet taken by employees Operating income......... 58,141 54,001 8 1994 income reflects higher rate relief for HECO and MECO and is higher than 1993 income in spite of the effect of the "vacation" adjustment in the first half of 1993 Net income............... 24,464 23,927 2 Higher operating income, partially offset by higher interest expense and higher income taxes Fuel oil price per barrel............. 16.93 21.22 (20)
Operating income for the electric utility segment was down 1% for the three months ended June 30, 1994 from operating income for the same period of 1993, primarily due to two nonrecurring accounting adjustments in the second quarter of 1993 resulting from the establishment of regulatory assets. In the second quarter of 1993, HECO and its subsidiaries established a regulatory asset for vacation earned but not yet taken by its employees. For rate-making purposes, vacation pay is being recovered in rates on a pay-as-you-go basis. The recognition of the regulatory asset increased operating income by $4.4 million and net income by $2.7 million, or $0.11 per HEI common share, for the quarter ended June 30, 1993. In the second quarter of 1993, HECO and its subsidiaries also established a regulatory asset for postretirement benefits other than pensions that had been expensed in the first quarter of 1993. The regulatory asset established as of June 30, 1993 amounted to approximately $9.1 million. Approximately $4.7 million of the regulatory asset related to postretirement benefits expensed in the first quarter of 1993 and resulted in an increase in net income of approximately $2.9 million, or $0.12 per HEI common share, for the second quarter of 1993. See "Postretirement benefits other than pensions." Excluding these two nonrecurring accounting adjustments, the electric utility segment's operating income and net income for the second quarter of 1994 was up 33% and 39%, respectively, over the second quarter of 1993 due to 1993 and 1994 rate relief and a 0.2% increase in kilowatthour sales. Operating income and net income for the electric utility segment was up 8% and 2%, respectively, for the six months ended June 30, 1994. Excluding the "vacation" adjustment, operating income and net income for the electric utility segment was up 15% and 13% for the six months ended June 30, 1994, primarily due to rate relief for HECO and MECO and a 2.1% increase in kilowatthour sales. In 1993, HEI infused $45 million of common stock equity into HECO. Also in 1993, HECO infused $12 million into HELCO and $6 million into MECO. The infusions were made to support the electric 24 utilities' capital expenditure programs. As anticipated, HECO and its subsidiaries were not able to earn an adequate return on that new equity during the first quarter of 1994. At the start of the second quarter, however, the PUC granted an interim rate increase that recognizes the increased investment in capital facilities on the island of Oahu. See "Pending rate requests" below. Continued regulatory support from the PUC is important to the future operating results of the electric utility companies. Competition The electric utility industry in general has become increasingly more competitive as a result of such factors as regulatory and technological developments. The level of competition is affected by various factors including price, reliability of service, new technologies and governmental regulations. Also affecting the level of competition in Hawaii are the scarcity of generation sites and lack of interconnections. The Energy Policy Act of 1992 encourages competition by allowing both utilities and nonutilities to form generation subsidiaries without becoming subject to regulation under the Public Utility Holding Company Act of 1935. In addition to independent power producers, a new kind of competitor--the energy service company--is seeking customers in government and private business and promising to help them reduce utility bills. On Oahu, one of these companies worked with a large military housing project, installing energy-efficient air-conditioning, water heating and other equipment that decreased the facility's electric consumption by one-third. In response to competition, HECO and its subsidiaries are taking certain actions to heighten their focus on providing reliable electric service at reasonable costs, as well as to offer customers new choices regarding the services provided. Regulation of electric utility rates The PUC has broad discretion in its regulation of the rates charged by HEI's electric utility subsidiaries. Any adverse decision by the PUC concerning the level or method of determining electric utility rates, the authorized returns on equity or other matters or any prolonged delay in rendering a decision in a rate proceeding could have a material adverse effect on the Company's financial condition and results of operations. Upon a showing of probable entitlement, the PUC is required to issue an interim decision in a rate case within 10 months from the date of filing a complete application if the evidentiary hearing is completed (subject to extension for 30 days if the evidentiary hearing is not completed), but there is no limitation on the time within which the PUC must render a final decision. Pending rate requests In July 1993, HECO applied to the PUC for permission to increase electric rates, based on a 1994 test year and a 12.6% return on average common equity (which was later increased to 12.75%). In December 1993, HECO applied to the PUC for permission to increase electric rates, based on a 1995 test year and a 12.3% return on average common equity. Both requests combined represent an increase of 16.7% over rates in effect at the time of the filings, or approximately $106 million in annual revenues. The requested increases are needed to cover rising operating costs including the costs related to the change in the method of accounting for postretirement benefits other than pensions, to cover the cost of new capital projects to maintain and improve service reliability, to cover additional expenses associated with proposed changes in depreciation rates and methods and to establish a self-insured property damage reserve for transmission and distribution property in the event of catastrophic disasters. On March 31, 1994, HECO received an interim decision and order from the PUC on its rate increase application based on a 1994 test year, authorizing increases of $36.9 million in annual revenues, or approximately 5.9%, to become effective in several steps in 1994, and based on a 12.0% return on average common equity. An increase of $34.2 million in annual revenues was effective April 1, 1994, for which HECO had proposed interim rate relief of approximately $39.9 million. Another interim increase of approximately $1.4 million in annual revenues for nonbargaining unit wage increases became effective May 1, 1994. Interim rate increases are subject to refund with interest, pending the final outcome of the case. Evidentiary hearings for the 1995 test year application are scheduled for November 1994. In November 1993, HELCO applied to the PUC for permission to increase electric rates to provide approximately $15.8 million in annual revenues, or a 13.4% increase over present rates. The requested increase is based on a 1994 test year and a 12.4% return on average common equity (which was later increased to 13.1%). The increase is needed to cover plant, equipment, operating costs necessary to maintain and improve service and provide reliable power for its customers and the costs related to the 25 change in the method of accounting for postretirement benefits other than pensions. On August 8, 1994, HELCO received an interim decision and order from the PUC on its rate increase application based on a 1994 test year, authorizing an increase of $13.6 million in annual revenues, or approximately 11.7%. The increase will become effective in steps in 1994 and is based on a 12.4% return on average common equity. The first part of the increase, $13.2 million, will be effective on August 9, 1994. Interim increases are subject to refund with interest, pending the final outcome of the case. In June 1994, HELCO filed a notice of intent to file an application for a general rate increase using a 1995 test year. The increase is expected to be required primarily to cover investments in new generating units. In November 1991, MECO filed a request to increase rates by approximately $18.3 million annually, or approximately 17% above the rates in effect at the time of the filing. Evidentiary hearings were held in January 1993 and, at the conclusion of the hearings, MECO adjusted its final rate increase request to approximately $11.4 million annually, or approximately 10% above the rates then in effect, to become effective in several steps in 1993, and reflecting a return on average common equity of 13.0%. The decrease in the requested rate increase resulted primarily from a reduced cost of capital, lower administrative and general expenses and other revisions to MECO's estimated revenue requirements for the 1993 test year used in the rate case. Most of the proposed increase reflected the costs of adding a 58-MW combined-cycle generating unit on Maui in three phases and the costs related to the change in the method of accounting for postretirement benefits other than pensions. In 1993, MECO received four interim decisions which authorized step increases totaling $8.2 million in annual revenues, or 7.2%, based on a 12.75% return on average common equity. On August 5, 1994, MECO received the final decision and order from the PUC regarding its rate increase request. It granted an increase of $8.1 million in annual revenues, or approximately 7.0%, based on a 12.75% return on average common equity. The difference between the interim and final decision and orders of less than $0.2 million will be refunded to ratepayers together with interest. The primary reason for the difference between the $11.4 million requested and the $8.1 million granted is the costs related to the change in the method of accounting for postretirement benefits other than pensions of approximately $2.0 million, which is part of a separate generic docket. MECO's total rate increase will be adjusted to reflect the PUC's decision in this separate generic docket. Management cannot predict with certainty when decisions in the rate cases will be rendered or the amount of any interim or final rate increase that will be granted. Postretirement benefits other than pensions HECO, HELCO and MECO are parties to a generic docket opened by the PUC in February 1992 to determine whether SFAS No. 106, "Employers' Accounting for Postretirement Benefits Other Than Pensions," should be adopted for rate-making purposes. For a discussion of accounting for postretirement benefits other than pensions, see note (7) in HECO's "Notes to consolidated financial statements." PUC review of the relationship between HEI and its subsidiaries To address community concerns, HECO proposed by letter dated January 25, 1993, that the PUC initiate a review of the relationship between HEI and HECO and the effects of that relationship on the operations of HECO. By an order dated January 26, 1993, the PUC initiated such a review to determine whether the HEI- HECO relationship, HEI's diversified activities, and HEI's policies, operations and practices have resulted in or are having any negative effects on HECO and its electric utility subsidiaries. It is anticipated that the review may result in recommendations to the Company and/or the PUC. In May 1994, a consultant, Dennis Thomas and Associates, was selected by the PUC to perform the review. The review is in progress and is expected to be completed by yearend. HECO purchased power billing disputes HECO is disputing certain amounts billed each month under its power purchase agreements with Kalaeloa Partners, L.P. and AES Barbers Point, Inc. and has withheld payment of some of the disputed amounts pending resolution. The dispute with Kalaeloa Partners, L.P. has been submitted to arbitration and a decision is expected in August 1994. See "Power purchase agreements" under note (4) in HECO's "Notes to consolidated financial statements" for a further discussion of this matter. 26 HECO power outage On April 9, 1991, HECO experienced a power outage that affected all customers on the island of Oahu. See "HECO power outage" under note (4) in HECO's "Notes to consolidated financial statements" for a discussion of HECO's contingent liabilities related to the outage. HELCO reliability investigation and generation margin The PUC initiated an investigation into the reliability of HELCO's system in July 1991. See "HELCO reliability investigation" under note (4) in HECO's "Notes to consolidated financial statements" for a discussion of this matter. Also see Part II, Item 5, "Other information, Nonutility generation," for a further discussion of two of HELCO's purchased power suppliers. Waiau-CIP transmission lines In 1993, the PUC held hearings concerning Part 2 of the proposed Waiau-Campbell Industrial Park (CIP) 138-kilovolt transmission lines. These lines will be part of a second transmission corridor in West Oahu, running approximately 15 miles between CIP and HECO's Waiau power plant. The new lines are needed (1) to increase system reliability by locating the new lines in a separate corridor from the existing lines, (2) to provide additional transmission capacity to meet expected load growth and (3) to provide transmission capacity for existing and new power generation projects planned for West Oahu. HECO experienced community opposition over the proposed placement of portions of these lines based in part on the potential effects of the lines on aesthetics and the concern of some that the electric and magnetic fields (EMF) from the power lines may have adverse health effects. HECO witnesses addressed EMF, the route selection process (which involved extensive public input), as well as engineering and related subjects. One proposal by those who oppose the route of the overhead lines is to place Part 2 of the Waiau-CIP lines underground. HECO estimated that this proposal would cost approximately $100 million more than the cost of overhead lines. In April 1994, the PUC issued a decision on Part 2 of the Waiau-CIP lines which permits HECO to construct the lines above ground. While the PUC recognized the concerns of aesthetics and EMF, it felt that neither concern was sufficient to justify the added cost of undergrounding the lines. In May 1994, the state Supreme Court was asked to overturn the PUC's ruling that allows HECO to construct the lines above ground. No stay of the PUC order has been entered. Management cannot predict with certainty the final outcome of this appeal or the impact the final outcome may have on the cost of the lines or on system reliability. Undergrounding of utility lines There is a proposal before the Honolulu City Council for the mandatory undergrounding of utility lines "whenever possible," except in some remote areas. HECO opposes the proposal in its current form because the resulting costs would place a burden on customers. Management believes the cost of undergrounding utility lines would be recoverable in rates. However, management cannot predict with certainty the ultimate outcome of such proposals or the impact of such proposals on HECO or the Company. 27 Savings bank
Three months ended June 30, ------------------- % (in thousands) 1994 1993 change Primary reason(s) for significant change - ------------------------------------------------------------------------------------------------------------------------------------ Revenues ............... $ 52,311 $50,168 4 Higher average loans and mortgage-backed securities balances, partly offset by lower average investments balance and lower overall yield on interest-earning assets Operating income ........ 10,675 10,133 5 Higher net interest income due to higher net average earning assets balance, partly offset by higher administrative and general expenses and losses from trading securities portfolio Net income ............... 6,218 5,997 4 Higher operating income, partly offset by higher income taxes Interest rate spread ..... 3.76% 3.83% 35 basis points decrease in the weighted average yield on interest-earning assets, partly offset by 28 basis points decrease in the weighted average rate on interest-bearing liabilities Three months ended June 30, ------------------ % (in thousands) 1994 1993 change Primary reason(s) for significant change - ------------------------------------------------------------------------------------------------------------------------------------ Revenues.................. $102,395 $99,431 3 Higher average loans and mortgage-backed securities balances, partly offset by lower average investments balance and lower overall yield on interest-earning assets Operating income.......... 21,295 19,721 8 Higher net interest income due to higher net average earning assets balance, partly offset by higher administrative and general expenses and losses from trading securities portfolio Net income................ 12,426 11,665 7 Higher operating income, partly offset by higher income taxes Interest rate spread...... 3.79% 3.79% 35 basis points decrease in the weighted average yield on interest-earning assets, offset by 35 basis points decrease in the weighted average rate on interest-bearing liabilities
The savings bank segment posted a 5% increase in operating income for the quarter over the same period last year. The improved performance is primarily a result of higher loans and mortgage-backed securities balances, partly offset by a lower interest rate spread. ASB's interest rate spread--the 28 difference between the weighted average yield on interest-earning assets and the weighted average rate on interest-bearing liabilities--decreased to 3.76% in the quarter from 3.83% in the comparable period of 1993. For the second quarter of 1994, the average loans balance was up $341 million and the average balance for advances from Federal Home Loan Bank and other borrowings was up $216 million from levels in the second quarter of 1993. This interest rate spread decrease for the second quarter of 1994 can be attributed to the changing interest rate environment. During 1993, falling interest rates resulted in improved interest rate spreads as interest-bearing liabilities repriced downward at a faster pace than interest-earning assets. During 1994, rising interest rates have not significantly increased rates on interest-bearing liabilities. However, yields on interest-earning assets have continued a downward trend as a result of the prior year's refinancing and repricing of loans and mortgage-backed securities. Operating income for the six months ended June 30, 1994 increased by 8% compared to the same period last year due to higher loans and mortgage-backed securities balances. The average loans balance was up $317 million and the average balance for advances from Federal Home Loan Bank and other borrowings was up $166 million from levels in the first six months of 1993. ASB's interest rate spread was 3.79%, unchanged compared to the first half of 1993. During 1994, the federal funds rate increased 1.25%. The federal funds rate, which is the rate charged by banks for overnight loans to each other and which has a significant influence on consumer rates, was 4.25% as of June 30, 1994. The yields on U.S. Treasury bonds increased as a result of the higher short-term interest rates. Mortgage and other loan rates are affected by key Treasury rates. Financial institutions incurring higher costs of funds can react by raising the interest rate on new loans and setting higher repricing rates on adjustable rate loans. The rate increases did not significantly impact ASB's net interest income during the first half of 1994. Higher interest rates on mortgage loans can take about three to twelve months to impact portfolio yields through loan originations and repricing of adjustable rate loans. Cost of interest-bearing liabilities remained relatively stable during the first half of 1994. However, in the future, ASB's cost of interest-bearing liabilities may increase, which may result in a decreased interest rate spread and lower net interest income than there otherwise would have been. For the three and six months ended June 30, 1994, ASB's securities held for trading experienced a $0.9 million and $1.8 million decrease, respectively, in value which was charged to earnings. The decreases were primarily due to the higher yields on U.S. Treasury bonds resulting in lower market values in fixed income securities. In response to the increasing interest rate environment, management has decided to reduce ASB's portfolio of securities held for trading by liquidating one of its two trading accounts, consisting of approximately $23 million intermediate-term (three year to five year) securities as of June 30, 1994. ASB will retain its other trading account which consists of approximately $26 million of short-term securities as of June 30, 1994. Management cannot predict future changes in bond yields or their impact on the value of ASB's portfolio of securities held for trading. Other - -----
Three months ended June 30, ------------------ % (in thousands) 1994 1993 change Primary reason(s) for significant change - ------------------------------------------------------------------------------------------------------------------------------------ Revenues ........... $12,833 $12,176 5 Operating loss ..... (1,537) (498) NM MPC - lower unit sales in 1994 and higher administrative and general expense HEI, HEIIC - higher administrative and general expense
NM Not meaningful. 29
Six months ended June 30, ---------------- % (in thousands) 1994 1993 change Primary reason(s) for significant change - ------------------------------------------------------------------------------------------------------------------------------------ Revenues ........... $26,486 $35,615 (26) MPC - Bulk sale of land for $10 million of proceeds and immaterial gain in the first quarter of 1993 HEIIC - Gain on leveraged lease refinancing in the first quarter of 1993 Operating loss ..... (3,077) (1,472) NM HEIIC - Gain on leveraged lease refinancing in 1993 Offset by: HTB - loss on sale of oil barge in the second quarter of 1993
NM Not meaningful. The "Other" business segment includes results of operations from HTB and its subsidiary, YB, which are maritime freight transportation companies; HEIIC, which is a company primarily holding investments in leveraged leases; MPC and its subsidiaries, which are real estate investment and development companies; HEI and HEIDI, which are parent companies; and eliminations of intercompany transactions. Freight transportation The freight transportation subsidiaries recorded operating income of $0.7 million in the second quarter of 1994 compared to $0.6 million in the second quarter of 1993. Operating income in the second quarter of 1993 included a loss on the sale of an oil barge, partially offset by a nonrecurring accounting adjustment in the second quarter of 1993 resulting from the establishment of a $0.6 million regulatory asset for postretirement benefits other than pensions, of which approximately $0.2 million related to postretirement benefits expensed in the first quarter of 1993. The freight transportation subsidiaries recorded operating income of $0.9 million in the six months ended June 30, 1994 compared to $0.4 million in the six months ended June 30, 1993. Operating income in the first half of 1993 included a loss on the sale of an oil barge. HTB and YB have been negatively impacted by the slow economy, the slowing in Hawaii's construction activity and HTB's exiting the business of shipping of heavy fuel oil at the end of 1993 due to concerns about the potential unlimited liability for oil spills under the Federal Oil Pollution Act of 1990. In May 1994, YB filed an application with the PUC to increase rates by approximately $2.4 million annually. The application was suspended by the PUC on June 17, 1994 for a period of six months to and including December 30, 1994. Hearings are expected to be held in November 1994. YB is a party to a generic docket opened by the PUC in February 1992 to determine whether SFAS No. 106, "Employers' Accounting for Postretirement Benefits Other Than Pensions," should be adopted for rate-making purposes. For a discussion of accounting for postretirement benefits other than pensions, see note (9) in HEI's "Notes to consolidated financial statements." Real estate In 1993 and the first six months of 1994, MPC's real estate development activities were adversely impacted by economic conditions. In the second quarter of 1994, MPC recorded an operating loss of $0.1 million compared to an operating income of $0.3 million in the same period last year due in part to lower unit sales and higher administrative and general expenses in the second quarter of 1994. For the six months ended June 30, 1994, MPC recorded an operating loss of $0.1 million compared to an operating loss of $0.3 million in the same period last year. 30 In March 1994, MDC's Baldwin*Malama partnership closed on a option to purchase approximately 147 acres of land for future development on the island of Maui from BPPI at a purchase price of $9.9 million. The land is currently approved for a development of 685 single-family and multi-family units. Baldwin*Malama is seeking to increase the density of the development. For further information on MPC, see note (5) in HEI's "Notes to consolidated financial statements." Investments in leverage leases In 1993, HEIIC refinanced the nonrecourse debt supporting a leveraged lease, resulting in a cumulative adjustment to operating income of approximately $1 million in the first half of 1993. Income taxes - ------------ The effective tax rates on income from continuing operations for the three months ended June 30, 1994 and 1993 were 43% and 40%, respectively. The effective tax rates on income from continuing operations for the six months ended June 30, 1994 and 1993 were 44% and 41%, respectively. The increases in 1994 are due in part to the 1% federal income tax rate increase (retroactive to January 1, 1993, but recorded beginning in the third quarter of 1993) and higher preferred stock dividends at the electric utility subsidiaries, which dividends are not deductible for tax purposes. Discontinued operations - ----------------------- HERS For a discussion of the discontinued operations of HERS, see note (2) in HEI's "Notes to consolidated financial statements." HIG For a discussion of the discontinued operations of HIG, see note (2) in HEI's "Notes to consolidated financial statements." Accounting changes - ------------------ Postemployment benefits For discussions of accounting for postemployment benefits, see note (10) in HEI's "Notes to consolidated financial statements" and note (8) in HECO's "Notes to consolidated financial statements." Accounting for certain investments in debt and equity securities For a discussion of accounting for certain investments in debt and equity securities, see note (10) in HEI's "Notes to consolidated financial statements." Future accounting changes - ------------------------- Accounting by creditors for impairment of a loan In May 1993, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards (SFAS) No. 114, "Accounting by Creditors for Impairment of a Loan." This statement requires that certain impaired loans be measured based on the present value of expected future cash flows discounted at the loan's effective interest rate or, as a practical expedient, at the loan's observable market price or the fair value of the collateral if the loan is collateral dependent. The provisions of SFAS No. 114 must be adopted by ASB no later than January 1, 1995. If SFAS No. 114 were adopted on January 1, 1994, it would not have had a material effect on the Company's consolidated financial condition or the results of operations for the six months ended June 30, 1994. Environmental matters - --------------------- HEI and its subsidiaries are subject to numerous laws and regulations which are designed to protect the environment, and include air and water quality controls, hazardous waste and toxic substance controls and the Federal Oil Pollution Act of 1990. HEI's electric utility subsidiaries are exempt from certain environmental requirements applicable on the U.S. mainland. For example, the electric utility subsidiaries are exempt from the acid rain provisions of the 1990 Clean Air Act Amendments. However, HEI and its subsidiaries are subject to environmental laws and regulations which could potentially impact the Company in terms of operating existing facilities, constructing and operating new facilities and ensuring the proper cleanup and disposal of hazardous waste and toxic substances. Management 31 believes that the recovery through rates of most, if not all, of any costs incurred by HECO and its subsidiaries in complying with these environmental requirements would be allowed by the PUC. However, as with other costs reviewed by the PUC in the rate-making process, costs incurred by HECO and its subsidiaries in complying with these environmental requirements may not be fully allowed by the PUC for rate-making purposes. Based on information available to the Company to date, management is not aware of any contingent liabilities relating to environmental matters that could have a material adverse effect upon the Company or consolidated HECO. FINANCIAL CONDITION Liquidity and capital resources - ------------------------------- The Company and consolidated HECO believe that their ability to generate cash, both internally from operations and externally from debt and equity issues, is adequate to maintain sufficient liquidity to fund HECO and its subsidiaries' construction programs, to cover debt retirements and to meet other cash requirements in the foreseeable future. The consolidated capital structure of HEI was as follows:
(in millions) June 30, 1994 December 31, 1993 - --------------------------------------------------------------------------------------------------- Short-term borrowings .............................. $ 157 10% $ 40 3% Long-term debt, net ............................... 662 42 698 47 Preferred stock of electric utility subsidiaries ... 95 6 95 6 Common stock equity ............................... 656 42 643 44 ------ --- ------ --- $1,570 100% $1,476 100% ====== === ====== ===
ASB's deposit liabilities and advances from the Federal Home Loan Bank are not included in the table above. In October 1993, Standard & Poor's Corporation (S&P) completed its review of the U.S. investor-owned electric utility industry and concluded that more stringent financial risk standards are appropriate to counter mounting business risk. Under the October 1993 guidelines, S&P rated HECO's business position as "average." In July 1994, S&P divided the electric utilities it rates into seven categories of business position, up from the three categories ("above average," "average" and "below average") set forth in October 1993. The old "average" category was broken up into "high average," "average" and "low average." S&P rated HECO's business position as "low average." The business position is used by S&P to develop credit ratings under S&P's risk-adjusted financial ratio guidelines, which were issued in October 1993. In June 1994, Duff & Phelps Credit Rating Co. (D&P) reaffirmed HEI's and HECO's debt ratings for notes and bonds, but lowered HEI's commercial paper rating to a "Duff 2" from the previous rating of "Duff 1-." HECO's commercial paper rating remains unchanged at "Duff 1-." As of July 20, 1994, HEI and HECO's S&P, Moody's Investors Service (Moody's) and D&P's security ratings were as follows:
S&P 1 Moody's 2 D&P 3 - ------------------------------------------------------------- HEI Medium-term notes BBB Baa2 BBB+ Commercial paper A-2 P-2 Duff 2 Outlook Negative N/A N/A HECO First mortgage bonds BBB+ A3 A Unsecured notes BBB Baa1 A- Cumulative preferred stock BBB baa1 BBB+ Commercial paper A-2 P-2 Duff 1- Outlook Negative N/A N/A
N/A Not applicable. 32 1 S&P. Debt rated BBB or BBB+ is regarded as having an adequate capacity to pay --- interest and repay principal. Whereas it normally exhibits adequate protection parameters, adverse economic conditions or changing circumstances are more likely to lead to a weakened capacity to pay interest and repay principal for debt in this category than in higher rated categories. The ratings may be modified by the addition of a plus or minus sign to show relative standing within the major categories. A commercial paper rating is a current assessment of the likelihood of timely payment of debt having an original maturity of no more than 365 days. Commercial paper rated A-2 indicates that capacity for timely payment on issues is satisfactory. 2 Moody's. Bonds which are rated Baa2 or Baa1 are considered as medium grade ------- obligations, i.e., they are neither highly protected nor poorly secured. Interest payment and principal security appear adequate for the present but certain protective elements may be lacking or may be characteristically unreliable over any great length of time. Such bonds lack outstanding investment characteristics and in fact have speculative characteristics as well. Bonds which are rated A3 possess many favorable investment attributes and are to be considered as upper medium grade obligations. Factors giving security to principal and interest are considered adequate but elements may be present which suggest a susceptibility to impairment sometime in the future . Preferred stock rated baa1 is considered to be a medium grade preferred stock, neither highly protected nor poorly secured. Earnings and asset protection appear adequate at present but may be questionable over a great length of time. Numeric modifiers are added to debt and preferred stock ratings. Numeric modifier 1 indicates that the security ranks in the higher end of its generic rating category and numeric modifier 2 indicates a mid-range ranking. Commercial paper rated P-2 is considered to have a strong ability for repayment of senior short-term obligations. This will normally be evidenced by the following characteristics: a) leading market positions in well- established industries, b) high rates of return on funds employed, c) conservative capitalization structure with moderate reliance on debt and ample asset protection, d) broad margins in earnings coverage of fixed financial charges and high internal cash generation and e) well established access to a range of financial markets and assured sources of alternate liquidity. Earnings trends and coverage ratios, while sound, may be more subject to variation. Capitalization characteristics, while still appropriate, may be more affected by external conditions. Ample alternate liquidity is maintained. 3 Duff & Phelps. Debt rated BBB+ is regarded as having below average protection ------------- factors, but still considered sufficient for prudent investment. There may be considerable variability in risk during economic cycles. Debt rated A or A- is considered to have protection factors that are average but adequate. However, risk factors are more variable and greater in periods of economic stress. Commercial paper rated Duff 1- indicates a high certainty of timely payment. Liquidity factors are strong and supported by good fundamental protection factors. Risk factors are very small. Commercial paper rated Duff 2 indicates good certainty of timely payment. Liquidity factors and company fundamentals are sound. Although ongoing funding needs may enlarge total financing requirements, access to capital markets is good. Risk factors are small. Each security rating listed above is not a recommendation to buy, sell or hold securities. Each rating may be subject to revision or withdrawal at any time by the assigning rating organization and should be evaluated independently of any other rating. Neither HEI nor HECO management can predict with certainty future rating agency actions or their effects on the future cost of capital of HEI or HECO. For the first six months of 1994, net cash used in operating activities was $2 million. Net cash used in investing activities was $326 million, largely due to an increase in ASB's loans receivable and mortgage-backed securities and consolidated HECO's capital expenditures. Net cash provided by financing activities was $316 million, due primarily to a net increase in advances from the Federal Home Loan Bank, short-term borrowings and deposit liabilities, partly offset by net repayments of long-term debt and common stock dividends. Pursuant to the settlement agreement discussed in note (2) in HEI's "Notes to consolidated financial statements," in April 1994, $32 million was deposited in an escrow account for future distribution to the Insurance Commissioner as Rehabilitator/Liquidator of the HIG Group in return for a final dismissal of the lawsuit against HEI, HEIDI and certain officers and directors and a release of claims against HEI, its 33 affiliates and their past and present officers and directors. The escrow deposit was funded out of available cash and short-term borrowings. Total HEI consolidated financing requirements for the years 1994 through 1998, including net capital expenditures, debt retirements and sinking fund requirements, are currently estimated to total $1.4 billion. Of this amount, approximately $0.9 billion are for net capital expenditures (mostly relating to the electric utility companies' net capital expenditures described below). HEI's consolidated internal sources, after the payment of HEI dividends, are expected to provide approximately 42% of the consolidated financing requirements, with debt and equity financing providing the remaining requirements. Over the five- year period 1994 through 1998, HEI estimates that it will require approximately $225 million in common equity, other than retained earnings, which is expected to be provided principally by HEI's Dividend Reinvestment and Stock Purchase Plan, the Hawaiian Electric Industries Retirement Savings Plan and public offerings of common stock. HEI anticipates issuing approximately one million additional common shares in a public offering in either late 1994 or early 1995. Following is a discussion of the liquidity and capital resources of HEI's largest segments. Electric utility HECO's consolidated capital structure was as follows:
(in millions) June 30, 1994 December 31, 1993 - ------------------------------------------------------------------------------------------------------------------- Short-term borrowings from nonaffiliates and affiliate ...................................... $ 115 9% $ 41 3% Long-term debt, net .................................. 468 37 485 41 Preferred stock ...................................... 95 8 95 8 Common stock equity ................................. 584 46 570 48 ------ --- ------ --- $1,262 100% $1,191 100% ====== === ====== ===
In 1994, HECO and its subsidiaries redeemed $48 million of first mortgage bonds prior to the bonds' scheduled maturity dates. The first mortgage bonds redeemed had original maturity dates between April 2001 and December 2016 and interest rates between 8.5% and 10.75%. During the first six months of 1994, HECO and its subsidiaries had also drawn $32 million of the proceeds from the sale of special purpose revenue bonds. Operating activities provided $43 million in net cash during the first six months of 1994. Investing activities used cash of $78 million for capital expenditures net of contributions in aid of construction. Financing activities provided $37 million in net cash primarily from increased short-term borrowings. The electric utility's consolidated financing requirements for the years 1994 through 1998, including net capital expenditures, debt retirements and sinking fund payment requirements, are estimated to total $1.0 billion. HECO's consolidated internal sources, after the payment of common stock and preferred stock dividends, are currently expected to provide approximately 50% of the total $1.0 billion in requirements, with debt and equity financing providing the remaining requirements. HECO currently estimates that it will require approximately $100 million in common equity, other than retained earnings, over the five-year period 1994 through 1998. The PUC must approve issuances of long- term debt and equity for HECO, HELCO and MECO. Capital expenditures include projects which are required to meet expected load growth and improve reliability, and projects to replace and upgrade existing equipment. Net capital expenditures (i.e., capital expenditures net of AFUDC and third party cash contributions in aid of construction) for the five-year period 1994 through 1998 are currently estimated to total $0.9 billion. Approximately 70% of gross capital expenditures is for transmission and distribution projects, with the remaining 30% primarily for generation projects. For 1994, electric utility net capital expenditures are estimated to be $205 million and gross capital expenditures are estimated to be $240 million, of which approximately 65% is for transmission and distribution projects. An estimated $45 million of gross capital expenditures is planned for new generation projects. Drawdowns of proceeds from the sale of tax-exempt special purpose revenue bonds, 34 sales of common stock to HEI and the generation of funds from internal sources are expected to provide the cash needed for the net capital expenditures. Capital expenditure estimates and the timing of construction projects are reviewed periodically by management and may change significantly as a result of many considerations, including changes in economic conditions, changes in forecasts of kilowatthour sales and peak load, the availability of alternate energy and purchased power sources, the availability of generating sites and transmission and distribution corridors, the ability to obtain adequate and timely rate relief, escalation in construction costs, demand-side management programs and requirements of environmental and other regulatory and permitting authorities. At June 30, 1994, approximately $24.7 million of the proceeds from the sale of special purpose revenue bonds in prior years were available to be drawn and an additional $47 million and $170 million of revenue bonds were authorized by the Hawaii legislature for issuance prior to the end of 1995 and 1997, respectively. Savings bank
June 30, December 31, % (in millions) 1994 1993 change - ------------------------------------------------------------------------------- Assets ........................ $2,896 $2,618 11 Loans receivable .............. 1,907 1,735 10 Mortgage-backed securities .... 707 630 12 Deposit liabilities ........... 2,142 2,092 2
At December 31, 1993, ASB was the second largest savings bank in the state based on total assets of $2.6 billion. Since December 31, 1988, ASB's loans and deposits have more than doubled. Loans and deposits continue to grow, although at a slower pace than in the past. For the first six months of 1994, cash used by investing activities was $249 million, due largely to the origination of loans receivable and purchase of mortgage-backed securities, offset by principal repayments. Cash provided by financing activities included a net increase of $220 million in advances from the Federal Home Loan Bank and $51 million in deposit liabilities, offset by common stock dividends of $8 million. Deposits traditionally have been the principal source of ASB's funds for use in lending, meeting liquidity requirements and making investments. ASB also derives funds from the receipt of interest and principal on outstanding loans and mortgage-backed securities, borrowings from the Federal Home Loan Bank of Seattle, securities sold under agreements to repurchase and other sources. Minimum liquidity levels are currently governed by the regulations adopted by the Office of Thrift Supervision (OTS). ASB was in compliance with OTS liquidity requirements as of June 30, 1994. OTS regulations require each savings association to have regulatory capital at least sufficient to meet three requirements: tangible capital and core (leverage) capital of 1.5% and 3.0%, respectively, of adjusted total assets; and risk-based capital equal to 8.0% of risk-adjusted assets. As of June 30, 1994, ASB was in full compliance with the minimum capital requirements with a tangible capital ratio of 4.95%, a core capital ratio of 5.30% and risk-based capital of $157.6 million, $44.0 million in excess of the minimum requirement. The OTS has adopted a new rule adding an interest rate risk (IRR) component to the existing risk-based capital requirement. The regulation is effective January 1, 1994; however, the requirement that thrifts incorporate IRR into their risk- based capital calculations, based on the lowest OTS IRR Exposure Reports for the three prior quarter-ends, is effective September 30, 1994. Institutions with an "above normal" level of IRR exposure may be required to hold additional capital. "Above normal" IRR is defined as any percentage decline in market value of an institution's portfolio equity in excess of 2% of the market value of its assets, which would result from an immediate 200 basis point change in interest rates. The OTS regulation will require a savings association with an "above normal" level of IRR exposure to deduct from total capital one-half of the "above normal" IRR times the market value of its assets in meeting its existing 8% risk-based capital requirement. Based on the lowest IRR reported as of the three prior quarter-ends, ASB would not have been required to hold additional capital if the new rule had been in effect at that time. 35 The Federal Deposit Insurance Corporation Improvement Act of 1991 established a statutory framework for closer monitoring of insured depository institutions in order to ensure "prompt corrective action" by regulators as an institution's capital position declines. The OTS rules for prompt corrective action, effective on December 19, 1992, define the capital measures for five capital categories (well-capitalized, adequately capitalized, under-capitalized, significantly under-capitalized and critically under-capitalized), and provide for progressively more stringent restrictions and supervision as capital levels decline. To be classified as "well-capitalized," an institution must have a "leverage ratio" of 5%, a "Tier-1 risk-based ratio" of 6% and a "total risk- based ratio" of 10%. As of June 30 1994, ASB believes that based on OTS capital standards it would have been classified as "well-capitalized" with a leverage ratio of 5.30%, a Tier-1 risk-based ratio of 10.71% and a total risk-based ratio of 11.1%. The OTS is currently considering proposed regulations which will increase capital requirements. One of the proposed regulations includes increasing core capital requirements to either 4% or 5% for many savings associations. Under the proposed regulation, ASB believes it would be required to comply with a 4% requirement. As of June 30, 1994, ASB would have been in compliance with the proposed 4% requirement with a core capital ratio of 5.30%. 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 anticipated growth. PART II - OTHER INFORMATION - -------------------------------------------------------------------------------- Item 1. Legal proceedings - -------------------------- There are no material developments except as set forth in HEI's and HECO's "Notes to consolidated financial statements," management's discussion and analysis of financial condition and results of operations and Item 5, "Other information." Item 5. Other information - -------------------------- HEI senior management changes - ----------------------------- The positions of group vice president at HEI has been eliminated with the June 30, 1994 retirement of Edward J. Blackburn, HEI group vice president for diversified companies. Effective July 1, 1994, Harwood D. Williamson is no longer HEI group vice president for utility companies, but he continues as a member of the board of directors of HEI and as president and chief executive officer of HECO. Nonutility generation - --------------------- A. Puna Geothermal Ventures (PGV) PGV began supplying test energy to HELCO on April 22, 1993. As of June 27, 1993, PGV had successfully completed the 100-hour acceptance test demonstrating its ability to provide HELCO with the full 25 MW required in its power purchase agreement (PPA). Therefore, as of that date, PGV commenced commercial operations and HELCO's obligation to make firm capacity payments commenced. As of June 30, 1994, due to problems with one of its wells, PGV was producing approximately 16 MW. PGV anticipates that it will correct the problems and return to 25 MW output during August 1994. On April 13, 1993, HELCO filed suit against PGV in the Third Circuit Court for penalties and other relief (including general, incidental and consequential damages and prejudgment interest) related to PGV's failure to provide power to HELCO as of October 3, 1991. The lawsuit does not specify the amount sought. Penalties were accumulated until June 27, 1993 when PGV commenced commercial operations. As of June 27, 1993, the accumulated penalties amounted to approximately $7.5 million. PGV has filed an answer and counterclaim and contends that any penalties should be excused under the force majeure provisions of the PPA, on the theory that delays were attributable to circumstances beyond PGV's control. HELCO has recognized energy and capacity purchased from PGV as expenses, but has withheld certain of such firm capacity and energy payments to PGV. Amounts withheld for June 1993 36 through June 1994 totaled approximately $3.4 million. HELCO continues to reserve its right to offset accumulated damages and costs, including penalties, against any future energy and capacity payments due to PGV. HELCO has not recognized any income for accumulated penalty amounts. B. Hilo Coast Processing Company (HCPC) HELCO has a PPA with HCPC for 18 MW of firm capacity. On July 31, 1992, C. Brewer and Company publicly announced that Mauna Kea Agribusiness, which is the primary supplier of sugar cane processed by HCPC, would begin converting its acreage to macadamia nuts, eucalyptus trees and other diversified crops as of November 1, 1992, and would discontinue harvesting sugar cane in late 1994. Subsequently, on March 25, 1994, HCPC issued a written notice to HELCO indicating its intent to cease supplying power to HELCO pursuant to the PPA as of March 26, 1997. As allowed under the PPA, on April 22, 1994, HELCO informed HCPC in writing of its preliminary intent to purchase the HCPC facilities, subject to a number of conditions. HELCO and HCPC are currently in negotiations regarding this potential purchase. Also see note (4) to HECO's "Notes to consolidated financial statements." 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, 1994 1993 1992 1991 1990 1989 - ------------- ------ ------ ------ ------ ------ 2.10 2.25 2.08 1.99 1.76 1.99 ===== ====== ====== ====== ====== ======
Ratio of earnings to fixed charges including interest on ASB deposits
Six months Years Ended December 31, ended ---------------------------------------------------- June 30, 1994 1993 1992 1991 1990 1989 - -------------- ------ ------ ------ ------ ------ 1.61 1.65 1.50 1.46 1.39 1.55 ==== ====== ====== ====== ====== ======
For purposes of calculating the ratio of earnings to fixed charges, "earnings" represent the sum of (i) pretax income from continuing operations (excluding undistributed net income or net loss from less than fifty-percent-owned persons) and (ii) fixed charges (as hereinafter defined, but excluding capitalized interest). "Fixed charges" are calculated both excluding and including interest on ASB's deposits during the applicable periods and represent the sum of (i) interest, whether capitalized or expensed, incurred by HEI and its subsidiaries plus their proportionate share of interest on debt to outsiders incurred by fifty-percent-owned persons, but excluding interest on nonrecourse debt from leveraged leases which is not included in interest expense in HEI's consolidated statements of income, (ii) amortization of debt expense and discount or premium related to any indebtedness, whether capitalized or expensed, (iii) the interest factor in rental expense and (iv) the preferred stock dividend requirements of HEI's subsidiaries, increased to an amount representing the pretax earnings required to cover such dividend requirements. 37 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, 1994 1993 1992 1991 1990 1989 - ------------- ---- ---- ---- ---- ---- 3.03 3.25 3.03 2.82 2.99 3.26 ==== ==== ==== ==== ==== ====
For purposes of calculating the ratio of earnings to fixed charges, "earnings" represent the sum of (i) pretax income before preferred stock dividends of HECO and (ii) fixed charges (as hereinafter defined, but excluding the allowance for borrowed funds used during construction). "Fixed charges" represent the sum of (i) interest, whether capitalized or expensed, incurred by HECO and its subsidiaries, (ii) amortization of debt expense and discount or premium related to any indebtedness, whether capitalized or expensed, (iii) the interest factor in rental expense and (iv) the preferred stock dividend requirements of HELCO and MECO, increased to an amount representing the pretax earnings required to cover such dividend requirements. Item 6. Exhibits and reports on Form 8-K - ----------------------------------------- (a) Exhibits HEI Hawaiian Electric Industries, Inc. and subsidiaries Exhibit 11(a) Computation of earnings per share of common stock, three and six months ended June 30, 1994 and 1993 HECO Hawaiian Electric Company, Inc. and subsidiaries Exhibit 11(b) Computation of earnings per share of common stock HEI Hawaiian Electric Industries, Inc. and subsidiaries Exhibit 12(a) Computation of ratio of earnings to fixed charges, six months ended June 30, 1994 and 1993 HECO Hawaiian Electric Company, Inc. and subsidiaries Exhibit 12(b) Computation of ratio of earnings to fixed charges, six months ended June 30, 1994 and 1993
(b) Reports on Form 8-K During the quarter, HEI filed a Current Report, Form 8-K, with the SEC under "Item 5. Other Events" as follows: Dated Registrant Items reported - ---------------------------------------------------------------------------- April 6, 1994 HEI HEI receives state court approval of lawsuit settlement 38 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 (Principal Financial Officer of HEI) HECO) Date: August 8, 1994 Date: August 8, 1994 39 EX-11.(A) 2 EXHIBIT 11(A) HEI Exhibit 11(a) Hawaiian Electric Industries, Inc. and subsidiaries COMPUTATION OF EARNINGS PER SHARE OF COMMON STOCK (unaudited)
Three months ended Six months ended June 30, June 30, ------------------ ----------------- (in thousands, except for per share data) 1994 1993 1994 1993 - -------------------------------------------------------------------------------------------------- Income from continuing operations....................... $17,632 $18,977 $29,420 $28,269 Income from discontinued operations..................... -- -- -- 1,800 ------- ------- ------- ------- Net income.............................................. $17,632 $18,977 $29,420 $30,069 ======= ======= ======= ======= Average number of common shares outstanding............. 28,013 25,084 27,892 24,973 ======= ======= ======= ======= Earnings per common share: Continuing operations................................. $ 0.63 $ 0.76 $ 1.05 $ 1.13 Discontinued operations............................... -- -- -- 0.07 ------- ------- ------- ------- $0.63 $ 0.76 $ 1.05 $ 1.20 ======= ======= ======= =======
EX-11.(B) 3 EXHIBIT 11(B) HECO Exhibit 11(b) Hawaiian Electric Company, Inc. and subsidiaries COMPUTATION OF EARNINGS PER SHARE OF COMMON STOCK (unaudited) Hawaiian Electric Industries, Inc. owns all of the outstanding common stock of Hawaiian Electric Company, Inc. (HECO). Therefore, per share data with respect to shares of common stock of HECO are not meaningful. EX-12.(A) 4 EXHIBIT 12(A) HEI Exhibit 12(a) Hawaiian Electric Industries, Inc. and subsidiaries COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES (unaudited)
Six months ended June 30, --------------------------------------------- (dollars in thousands) 1994 (1) 1994 (2) 1993 (1) 1993 (2) - ---------------------------------------------------------------------------------------------------------- Fixed charges Total interest charges The Company (3)......................................... $ 37,341 $ 74,508 $ 33,078 $ 73,828 Proportionate share of fifty-percent-owned persons...... 171 171 382 382 Interest component of rentals.............................. 1,812 1,812 1,979 1,979 Pretax preferred stock dividend requirements of subsidiaries.............................................. 6,101 6,101 5,332 5,332 -------- -------- -------- -------- Total fixed charges........................................ $ 45,425 $ 82,592 $ 40,771 $ 81,521 ======== ======== ======== ======== Earnings Pretax income from continuing operations................... $ 52,415 $ 52,415 $ 48,310 $ 48,310 Fixed charges, as shown.................................... 45,425 82,592 40,771 81,521 Interest capitalized The Company............................................. (2,199) (2,199) (1,935) (1,935) Proportionate share of fifty-percent-owned persons...... (171) (171) (179) (179) -------- -------- -------- -------- Earnings available for fixed charges....................... $ 95,470 $132,637 $ 86,967 $127,717 ======== ======== ======== ======== Ratio of earnings to fixed charges......................... 2.10 1.61 2.13 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 statement of income. EX-12.(B) 5 EXHIBIT 12(B) HECO Exhibit 12(b) Hawaiian Electric Company, Inc. and subsidiaries COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES (unaudited)
Six months ended June 30, ------------------ (dollars in thousands) 1994 1993 - -------------------------------------------------------------------------------------- Fixed charges Total interest charges............................................. $18,170 $16,815 Interest component of rentals...................................... 425 534 Pretax preferred stock dividend requirements of subsidiaries....... 2,336 1,626 ------- ------- Total fixed charges................................................ $20,931 $18,975 ======= ======= Earnings Income before preferred stock dividends of HECO.................... $26,630 $26,146 Income taxes (see note below)...................................... 17,773 15,280 Fixed charges, as shown............................................ 20,931 18,975 AFUDC for borrowed funds........................................... (1,816) (1,928) ------- ------- Earnings available for fixed charges............................... $63,518 $58,473 ======= ======= Ratio of earnings to fixed charges................................. 3.03 3.08 ======= ======= Note: Income taxes is comprised of the following: Expense relating to operating income from regulated activities... $17,830 $15,339 Benefit relating to loss from nonregulated activities............ (57) (59) ------- ------- $17,773 $15,280 ======= =======
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