-----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, djlBLR8Td1YRsg8KnZJsC72vRQb9Bg5J8YY+aUhSN8ilc2ZOFUWBCowtQdSkjmBj d9I10+CwybxQZZNyUYkHSg== 0000898430-95-000802.txt : 19950512 0000898430-95-000802.hdr.sgml : 19950512 ACCESSION NUMBER: 0000898430-95-000802 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 8 CONFORMED PERIOD OF REPORT: 19950331 FILED AS OF DATE: 19950511 SROS: NYSE SROS: PSE FILER: COMPANY DATA: COMPANY CONFORMED NAME: HAWAIIAN ELECTRIC INDUSTRIES INC CENTRAL INDEX KEY: 0000354707 STANDARD INDUSTRIAL CLASSIFICATION: ELECTRIC SERVICES [4911] IRS NUMBER: 990208097 STATE OF INCORPORATION: HI FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 001-08503 FILM NUMBER: 95537021 BUSINESS ADDRESS: STREET 1: 900 RICHARDS ST CITY: HONOLULU STATE: HI ZIP: 96813 BUSINESS PHONE: 8085435662 MAIL ADDRESS: STREET 1: 900 RICHARDS STREET CITY: HONOLULU STATE: HI ZIP: 96813 FILER: COMPANY DATA: COMPANY CONFORMED NAME: HAWAIIAN ELECTRIC CO INC CENTRAL INDEX KEY: 0000046207 STANDARD INDUSTRIAL CLASSIFICATION: ELECTRIC SERVICES [4911] IRS NUMBER: 990040500 STATE OF INCORPORATION: HI FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 001-04955 FILM NUMBER: 95537022 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 March 31, 1995 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 May 5, 1995 - ----------------------------------------------------------------------------------------------------- Hawaiian Electric Industries, Inc. (Without Par Value)..... 29,008,326 Shares Hawaiian Electric Company, Inc. ($6 2/3 Par Value)......... 11,813,147 Shares (not publicly traded)
================================================================================ Hawaiian Electric Industries, Inc. and subsidiaries Hawaiian Electric Company, Inc. and subsidiaries Form 10-Q--Quarter ended March 31, 1995 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) - March 31, 1995 and December 31, 1994...................................... 1 Consolidated statements of income (unaudited) - three months ended March 31, 1995 and 1994.............................. 2 Consolidated statements of retained earnings (unaudited) - three months ended March 31, 1995 and 1994................. 2 Consolidated statements of cash flows (unaudited) - three months ended March 31, 1995 and 1994................. 3 Notes to consolidated financial statements (unaudited)....... 4 Hawaiian Electric Company, Inc. and subsidiaries ------------------------------------------------ Consolidated balance sheets (unaudited) - March 31, 1995 and December 31, 1994...................................... 8 Consolidated statements of income (unaudited) - three months ended March 31, 1995 and 1994................. 9 Consolidated statements of retained earnings (unaudited) - three months ended March 31, 1995 and 1994................. 9 Consolidated statements of cash flows (unaudited) - three months ended March 31, 1995 and 1994................. 10 Notes to consolidated financial statements (unaudited)....... 11 Item 2. Management's discussion and analysis of financial condition and results of operations........................ 15 PART II. OTHER INFORMATION Item 1. Legal proceedings............................................ 25 Item 4. Submission of matters to a vote of security holders.......... 25 Item 5. Other information............................................ 26 Item 6. Exhibits and reports on Form 8-K............................. 29 Signatures............................................................... 30 i Hawaiian Electric Industries, Inc. and subsidiaries Hawaiian Electric Company, Inc. and subsidiaries Form 10-Q--Quarter ended March 31, 1995 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, Lalamilo Ventures, Inc., Pacific Energy Conservation Services, Inc. and HEI Power Corp. (since its formation in March 1995) 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., HEI Diversified, Inc., Pacific Energy Conservation Services, Inc. and HEI Power Corp. (since its formation in March 1995) HEIDI HEI Diversified, Inc., a wholly owned subsidiary of Hawaiian Electric Industries, Inc. and the parent company of American Savings Bank, F.S.B. HEIIC HEI Investment Corp., a wholly owned subsidiary of Hawaiian Electric Industries, Inc. HEIPC HEI Power Corp., a wholly owned subsidiary of Hawaiian Electric Industries, Inc. HELCO Hawaii Electric Light Company, Inc., a wholly owned electric utility subsidiary of Hawaiian Electric Company, Inc. ii GLOSSARY OF TERMS, continued Terms Definitions - ----- ----------- HIG The Hawaiian Insurance & Guaranty Company, Limited, an insurance company currently in state rehabilitation proceedings. HEI Diversified, Inc. was the holder of record of HIG's common stock prior to August 16, 1994 HTB Hawaiian Tug & Barge Corp., a wholly owned subsidiary of Hawaiian Electric Industries, Inc. and parent company of Young Brothers, Limited KWH Kilowatthour MECO Maui Electric Company, Limited, a wholly owned electric utility subsidiary of Hawaiian Electric Company, Inc. MPC Malama Pacific Corp., a wholly owned subsidiary of Hawaiian Electric Industries, Inc. and parent company of several real estate subsidiaries MW Megawatt OTS Office of Thrift Supervision, Department of Treasury PBOP Postretirement benefits other than pension PGV Puna Geothermal Venture 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)
March 31, December 31, (in thousands) 1995 1994 - --------------------------------------------------------------------------------------------------- Assets Cash and equivalents................................................ $ 107,423 $ 87,623 Accounts receivable and unbilled revenues, net...................... 123,975 130,762 Inventories, at average cost........................................ 35,957 43,126 Real estate developments............................................ 36,952 33,956 Loans receivable, net............................................... 1,653,878 1,824,055 Marketable securities............................................... 1,303,814 1,099,810 Other investments................................................... 74,920 77,297 Property, plant and equipment, net.................................. 1,709,979 1,677,822 Regulatory assets................................................... 97,910 95,257 Other............................................................... 62,656 59,301 Goodwill and other intangibles...................................... 44,402 45,455 ---------- ---------- $5,251,866 $5,174,464 ========== ========== Liabilities and stockholders' equity Accounts payable.................................................... $ 89,454 $ 97,210 Deposit liabilities................................................. 2,108,813 2,129,310 Short-term borrowings............................................... 131,227 136,755 Securities sold under agreements to repurchase...................... 200,565 123,301 Advances from Federal Home Loan Bank................................ 618,374 616,374 Long-term debt...................................................... 742,677 718,240 Deferred income taxes............................................... 175,077 172,930 Unamortized tax credits............................................. 46,597 45,954 Contributions in aid of construction................................ 178,854 178,635 Other............................................................... 175,758 180,529 ---------- ---------- 4,467,396 4,399,238 ---------- ---------- Preferred stock of electric utility subsidiaries Subject to mandatory redemption..................................... 43,440 44,844 Not subject to mandatory redemption................................. 48,293 48,293 ---------- ---------- 91,733 93,137 ---------- ---------- Stockholders' equity Preferred stock, no par value, authorized 10,000 shares; issued: none..................................................... -- -- Common stock, no par value, authorized 100,000 shares; issued and outstanding 28,955 shares and 28,655 shares................... 556,025 546,254 Retained earnings................................................... 136,712 135,835 ---------- ---------- 692,737 682,089 ---------- ---------- $5,251,866 $5,174,464 ========== ==========
See accompanying notes to consolidated financial statements. 1 Hawaiian Electric Industries, Inc. and subsidiaries Consolidated statements of income (unaudited)
Three months ended March 31, (in thousands, except per share amounts and ---------------------------- ratio of earnings to fixed charges) 1995 1994 - ---------------------------------------------------------------------------------------------------- Revenues Electric utility..................................................... $232,521 $201,306 Savings bank......................................................... 60,717 50,083 Other................................................................ 13,036 13,653 -------- -------- 306,274 265,042 -------- -------- Expenses Electric utility..................................................... 197,108 176,982 Savings bank......................................................... 50,492 39,463 Other................................................................ 14,365 15,193 -------- -------- 261,965 231,638 -------- -------- Operating income (loss) Electric utility..................................................... 35,413 24,324 Savings bank......................................................... 10,225 10,620 Other................................................................ (1,329) (1,540) -------- -------- 44,309 33,404 -------- -------- Interest expense--electric utility and other......................... (14,952) (13,082) Allowance for borrowed funds used during construction................ 1,167 871 Preferred stock dividends of electric utility subsidiaries........... (1,731) (1,800) Allowance for equity funds used during construction.................. 2,367 1,951 -------- -------- Income before income taxes........................................... 31,160 21,344 Income taxes......................................................... 13,313 9,556 -------- -------- Net income........................................................... $ 17,847 $ 11,788 ======== ======== Earnings per common share............................................ $0.62 $0.42 ======== ======== Dividends per common share........................................... $0.59 $0.58 ======== ======== Weighted average number of common shares outstanding................. 28,772 27,768 ======== ======== Ratio of earnings to fixed charges (SEC method) Excluding interest on ASB deposits.............................. 1.93 1.92 ======== ======== Including interest on ASB deposits.............................. 1.56 1.50 ======== ======== Hawaiian Electric Industries, Inc. and subsidiaries Consolidated statements of retained earnings (unaudited) Three months ended March 31, ---------------------------- (in thousands) 1995 1994 - ---------------------------------------------------------------------------------------------------- Retained earnings, beginning of period............................... $135,835 $128,318 Net income........................................................... 17,847 11,788 Common stock dividends............................................... (16,970) (16,094) -------- -------- Retained earnings, end of period..................................... $136,712 $124,012 ======== ========
See accompanying notes to consolidated financial statements. 2 Hawaiian Electric Industries, Inc. and subsidiaries Consolidated statements of cash flows (unaudited)
Three months ended March 31, ---------------------------- (in thousands) 1995 1994 - ------------------------------------------------------------------------------------------------------------ Cash flows from operating activities Income from continuing operations........................................... $ 17,847 $ 11,788 Adjustments to reconcile income from continuing operations to net cash provided by (used in) operating activities Depreciation and amortization of property, plant and equipment........ 19,177 18,146 Other amortization.................................................... (487) (322) Deferred income taxes and tax credits, net............................ 3,208 5,910 Changes in assets and liabilities, net of effects from disposal of businesses Decrease in accounts receivable and unbilled revenues, net...... 6,817 9,657 Decrease in inventories......................................... 7,169 5,028 Increase in real estate developments............................ (879) (9,684) Increase in securities held for trading......................... -- (15,525) Increase in regulatory assets................................... (1,303) (4,892) Decrease in accounts payable.................................... (7,756) (957) Changes in other assets and liabilities......................... (6,112) (20,379) --------- --------- 37,681 (1,230) Cash used by discontinued operations........................................ (67) (220) --------- --------- Net cash provided by (used in) operating activities......................... 37,614 (1,450) --------- --------- Cash flows from investing activities Loans receivable originated and purchased................................... (84,121) (168,999) Principal repayments on loans receivable.................................... 30,096 76,279 Proceeds from sale of loans receivable...................................... 2,413 1,335 "Held-to-maturity" mortgage-backed securities purchased..................... (9,793) (126,802) Principal repayments on "held-to-maturity" mortgage-backed securities....... 30,032 75,427 Capital expenditures........................................................ (51,157) (37,909) Contributions in aid of construction........................................ 2,173 2,903 Other....................................................................... 140 1,928 --------- --------- Net cash used in investing activities....................................... (80,217) (175,838) --------- --------- Cash flows from financing activities Net increase (decrease) in deposit liabilities.............................. (20,497) 55,017 Net increase (decrease) in short-term borrowings with original maturities of three months or less.............................. (5,259) 75,405 Proceeds from other short-term borrowings................................... 252 496 Repayment of other short-term borrowings.................................... (521) (2,333) Proceeds from securities sold under agreements to repurchase................ 98,000 -- Repurchase of securities sold under agreements to repurchase................ (23,636) -- Proceeds from advances from Federal Home Loan Bank.......................... 185,500 168,000 Principal payments on advances from Federal Home Loan Bank.................. (183,500) (81,000) Proceeds from issuance of long-term debt.................................... 36,815 16,018 Repayment of long-term debt................................................. (12,400) (74,400) Redemption of electric utility subsidiaries' preferred stock................ (1,404) (392) Net proceeds from issuance of common stock.................................. 5,009 3,824 Common stock dividends...................................................... (12,236) (11,721) Other....................................................................... (3,720) (9,160) --------- --------- Net cash provided by financing activities................................... 62,403 139,754 --------- --------- Net increase (decrease) in cash and equivalents............................. 19,800 (37,534) Cash and equivalents, beginning of period................................... 87,623 116,260 --------- --------- Cash and equivalents, end of period......................................... $ 107,423 $ 78,726 ========= =========
See accompanying notes to consolidated financial statements. 3 Hawaiian Electric Industries, Inc. and subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS March 31, 1995 and 1994 (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 March 31, 1995 and December 31, 1994, and the results of its operations and its cash flows for the three months ended March 31, 1995 and 1994. 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, 1994. The consolidated balance sheet as of December 31, 1994 was derived from audited financial statements. (2) Electric utility subsidiary - -------------------------------- For Hawaiian Electric Company, Inc.'s consolidated financial information, including its commitments and contingencies, see pages 8 through 14. (3) Savings bank subsidiary - ---------------------------- Selected consolidated financial information American Savings Bank, F.S.B. and subsidiaries Income statement data
Three months ended March 31, ---------------------- (in thousands) 1995 1994 - ------------------------------------------------------------------------------- Interest income...................................... $ 57,633 $ 48,098 Interest expense..................................... 32,975 23,146 -------- -------- Net interest income.................................. 24,658 24,952 Provision for losses................................. (385) (242) Other income......................................... 3,084 1,985 Operating, administrative and general expenses....... (17,132) (16,075) -------- -------- Operating income..................................... 10,225 10,620 Income taxes......................................... 4,276 4,413 -------- -------- Net income........................................... $ 5,949 $ 6,207 ======== ========
4 American Savings Bank, F.S.B. and subsidiaries Balance sheet data
March 31, December 31, (in thousands) 1995 1994 - -------------------------------------------------------------------------------- Assets Cash and equivalents............................... $ 106,356 $ 76,502 Investment securities.............................. 33,012 32,523 Mortgage-backed securities......................... 1,270,802 1,067,287 Loans receivable, net.............................. 1,653,878 1,824,055 Other.............................................. 70,872 69,829 Goodwill and other intangibles..................... 44,402 45,455 ---------- ---------- $3,179,322 $3,115,651 ========== ========== Liabilities and equity Deposit liabilities................................ $2,108,813 $2,129,310 Securities sold under agreements to repurchase..... 200,565 123,301 Advances from Federal Home Loan Bank............... 618,374 616,374 Other.............................................. 53,032 51,078 ---------- ---------- 2,980,784 2,920,063 Common stock equity................................ 198,538 195,588 ---------- ---------- $3,179,322 $3,115,651 ========== ==========
(4) Real estate subsidiary - --------------------------- MPC and its subsidiaries' total real estate project inventory, equity investment in real estate joint ventures and loans and advances to unconsolidated joint ventures or joint venture partners amounted to $52 million and $51 million at March 31, 1995 and December 31, 1994, respectively. MPC's present focus is to reduce its current investment in real estate development assets to increase cash flow to the Company by continuing the development and sales of its existing projects. There are currently no plans to invest in new projects. At March 31, 1995, 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 $7.8 million of outstanding loans and $6.4 million of additional undrawn loan facilities. All such loans are collateralized by real property. At March 31, 1995, HEI had agreed with the lenders of construction loans and loan facilities, of which approximately $13.7 million was outstanding and $6.9 million was undrawn, that it will maintain ownership of l00% of the stock of MPC and that it intends, subject to good and prudent business practices, to keep MPC financially sound and responsible to meet its obligations as guarantor. (5) Regulatory assets - ---------------------- Regulatory assets at March 31, 1995 and December 31, 1994 included the following deferred costs:
March 31, December 31, (in thousands) 1995 1994 - -------------------------------------------------------------------------------- Postretirement benefits other than pensions......... $36,160 $36,670 Income taxes........................................ 25,530 23,522 Unamortized debt expense on retired issues.......... 7,352 7,513 Integrated resource planning costs.................. 7,780 7,189 Computer system development costs................... 6,479 6,090 Vacation earned, but not yet taken.................. 6,490 5,972 Preliminary plant costs on suspended project........ 5,759 5,768 Other............................................... 2,360 2,533 ------- ------- $97,910 $95,257 ======= =======
5 (6) Interest expense - --------------------- Interest expense by segment, excluding interest on nonrecourse debt from leveraged leases, consisted of the following:
Three months ended March 31, -------------------- (in thousands) 1995 1994 - -------------------------------------------------------------------------------- Electric utility........................................ $10,446 $ 9,063 Other................................................... 4,506 4,019 ------- ------- 14,952 13,082 Savings bank............................................ 32,975 23,146 ------- ------- $47,927 $36,228 ======= =======
(7) Cash flows - --------------- Supplemental disclosures of cash flow information Cash paid (received) for interest [net of capitalized amounts] and income taxes was as follows:
Three months ended March 31, -------------------- (in thousands) 1995 1994 - ----------------------------------------------------------------------------------------------------- Interest (including interest paid by savings bank, but excluding interest paid on nonrecourse debt on leveraged leases)............................... $39,546 $34,186 ======= ======= Interest on nonrecourse debt on leveraged leases.............................. $ 239 $ 256 ======= ======= Income taxes.................................................................. $ (681) $ 4,894 ======= =======
Supplemental disclosures of noncash activities In the three months ended March 31, 1995, ASB received $223 million in mortgage- backed securities in exchange for loans. Common stock dividends reinvested by shareholders in HEI common stock in noncash transactions amounted to $4,734,000 and $4,373,000 for the three months ended March 31, 1995 and 1994, respectively. The allowance for equity funds used during construction, which was capitalized as part of the cost of electric utility plant, amounted to $2,367,000 and $1,951,000 for the three months ended March 31, 1995 and 1994, respectively. In March 1994, Malama Development Corp.'s Baldwin*Malama partnership closed on an option to purchase approximately 147 acres of land on the island of Maui from Baldwin Pacific Properties, Inc. Of the total land purchase price of $9.9 million, Baldwin*Malama issued mortgage notes payable of $8.0 million in noncash consideration. (8) Accounting change - ---------------------- In March 1995, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards (SFAS) No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of." SFAS No. 121 requires that long-lived assets and certain identifiable intangibles held and used by an entity be reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. If the sum of the expected future cash flows (undiscounted and without interest charges) is less than the carrying amount of the asset, an impairment loss is recognized. Measurement of that loss would be based on the fair value of the asset. 6 Generally, SFAS No. 121 requires that long-lived assets and certain identifiable intangibles to be disposed of be reported at the lower of carrying amount or fair value less cost to sell. SFAS No. 121 also requires that a rate-regulated enterprise recognize an impairment for the amount of costs excluded when a regulator excludes all or part of a cost from the enterprise's rate base. The provisions of SFAS No. 121 must be adopted by the Company no later than January 1, 1996. The Company has not determined when it will adopt the provisions of SFAS No. 121 nor the impact of the adoption of SFAS No. 121 on its financial statements. (9) Discontinued operations - ---------------------------- The Hawaiian Insurance & Guaranty Co., Limited - ---------------------------------------------- The Hawaiian Insurance & Guaranty Company, Limited (HIG) and its subsidiaries (collectively, the HIG Group) are property and casualty insurance companies. HEIDI was the holder of record of all the common stock of HIG until August 16, 1994. In December 1992, due to a significant increase in the estimate of policyholder claims from Hurricane Iniki, the HEI Board of Directors had concluded that it would not contribute additional capital to HIG and the remaining investment in the HIG Group was written off. On December 24, 1992, a formal rehabilitation order vested full control over the HIG Group in the Insurance Commissioner (the Rehabilitator) and her deputies. On April 12, 1993, the Rehabilitator, the HIG Group and others filed a complaint against HEI, HEIDI and others. The complaint, which was subsequently amended, set forth several separate counts, including claims to the effect that HEI and/or HEIDI should be held liable for HIG's obligations and claims that directors and officers of HEI, HEIDI and the HIG Group were responsible for the losses suffered by the HIG Group. In 1994, HEI, HEIDI, the named directors and officers, the Rehabilitator and others signed an agreement to settle the lawsuit. In August 1994, $32 million was disbursed to the Rehabilitator, at which time a release of claims against HEI, its affiliates and their past and present officers and directors became effective. 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 1993. HEI and HEIDI are seeking reimbursement for the settlement and defense costs from its insurance carriers. One of the insurance carriers has filed a declaratory relief action seeking resolution of insurance coverage and other policy issues, and HEI and HEIDI have filed counterclaims. Trial is scheduled for October 1995, but may be postponed. Recoveries from HEI's insurance carriers, if any, will be recognized when realized. In December 1994, five insurance agencies, which had served as insurance agents for the HIG Group, filed a complaint against HEI, HEIDI and others. The complaint sets forth several causes of action, including breach of contract and piercing the corporate veil. The plaintiffs ask for relief from the defendants, including compensatory damages for lost commissions, lost business and lost profits in an amount to be proven at trial and punitive damages. In the opinion of management, losses, if any, resulting from the ultimate outcome of the lawsuit will not have a material adverse effect on the Company's financial condition or results of operations. In April 1995, it was announced by the state insurance commissioner that Vesta Fire Insurance Corp. of Birmingham, Alabama, agreed to buy HIG for $35 million in cash. The sale is subject, among other things, to approval by the state Circuit Court, which is supervising HIG's rehabilitation. 7 Hawaiian Electric Company, Inc. and subsidiaries Consolidated balance sheets (unaudited)
March 31, December 31, (in thousands, except par value) 1995 1994 - -------------------------------------------------------------------------------------- Assets Utility plant, at cost Property, plant and equipment..................... $2,155,660 $2,129,274 Construction in progress.......................... 186,147 164,247 Less--accumulated depreciation.................... (720,664) (702,945) ---------- ---------- Net utility plant........................... 1,621,143 1,590,576 ---------- ---------- Current assets Cash and equivalents.............................. 77 10,694 Customer accounts receivable, net................. 57,639 60,406 Accrued unbilled revenues, net.................... 35,642 38,435 Other accounts receivable, net.................... 7,867 10,302 Fuel oil stock, at average cost................... 13,719 21,966 Materials and supplies, at average cost........... 21,187 20,108 Prepayments and other............................. 2,163 2,028 ---------- ---------- Total current assets........................ 138,294 163,939 ---------- ---------- Other assets Regulatory assets................................. 95,215 92,524 Other............................................. 40,796 42,081 ---------- ---------- Total other assets.......................... 136,011 134,605 ---------- ---------- $1,895,448 $1,889,120 ========== ========== Capitalization and liabilities Capitalization Common stock, $6 2/3 par value, authorized 50,000 shares; outstanding 11,813 shares....... $ 78,766 $ 78,766 Premium on capital stock.......................... 246,629 246,600 Retained earnings................................. 315,408 308,535 ---------- ---------- Common stock equity......................... 640,803 633,901 Cumulative preferred stock Not subject to mandatory redemption............ 48,293 48,293 Subject to mandatory redemption................ 41,070 42,470 Long-term debt, net............................... 505,520 468,653 ---------- ---------- Total capitalization........................ 1,235,686 1,193,317 ---------- ---------- Current liabilities Long-term debt due within one year................ 9,903 20,933 Preferred stock sinking fund requirements......... 2,370 2,374 Short-term borrowings - nonaffiliates............. 105,467 117,866 Short-term borrowings - affiliate................. 800 -- Accounts payable.................................. 45,724 54,662 Interest and preferred dividends payable.......... 10,898 8,575 Income taxes payable.............................. 12,116 3,300 Other taxes accrued............................... 24,777 39,666 Other............................................. 27,846 30,111 ---------- ---------- Total current liabilities................... 239,901 277,487 ---------- ---------- Deferred credits Deferred income taxes............................. 108,832 108,362 Unamortized tax credits........................... 45,597 44,939 Other............................................. 86,578 86,380 ---------- ---------- Total deferred credits...................... 241,007 239,681 ---------- ---------- Contributions in aid of construction................. 178,854 178,635 ---------- ---------- $1,895,448 $1,889,120 ========== ==========
See accompanying notes to HECO's consolidated financial statements. 8 Hawaiian Electric Company, Inc. and subsidiaries Consolidated statements of income (unaudited)
Three months ended March 31, ---------------------- (in thousands, except for ratio of earnings to fixed charges) 1995 1994 - --------------------------------------------------------------------------------------------- Operating revenues................................................ $231,176 $200,098 -------- -------- Operating expenses Fuel oil.......................................................... 48,477 38,618 Purchased power................................................... 63,853 62,986 Other operation................................................... 34,183 29,711 Maintenance....................................................... 11,222 10,742 Depreciation...................................................... 16,982 16,117 Taxes, other than income taxes.................................... 22,079 18,738 Income taxes...................................................... 11,174 7,054 -------- -------- 207,970 183,966 -------- -------- Operating income.................................................. 23,206 16,132 -------- -------- Other income Allowance for equity funds used during construction............... 2,367 1,951 Other, net........................................................ 1,237 1,185 -------- -------- 3,604 3,136 -------- -------- Income before interest and other charges.......................... 26,810 19,268 -------- -------- Interest and other charges Interest on long-term debt........................................ 8,078 8,012 Amortization of net bond premium and expense...................... 314 247 Other interest charges............................................ 2,054 804 Allowance for borrowed funds used during construction............. (1,167) (871) Preferred stock dividends of subsidiaries......................... 692 716 -------- -------- 9,971 8,908 -------- -------- Income before preferred stock dividends of HECO................... 16,839 10,360 Preferred stock dividends of HECO................................. 1,039 1,084 -------- -------- Net income for common stock....................................... $ 15,800 $ 9,276 ======== ======== Ratio of earnings to fixed charges (SEC method)................... 3.27 2.58 ======== ======== Hawaiian Electric Company, Inc. and subsidiaries Consolidated statements of retained earnings (unaudited) Three months ended March 31, ---------------------- (in thousands) 1995 1994 - --------------------------------------------------------------------------------------------- Retained earnings, beginning of period............................ $308,535 $275,401 Net income for common stock....................................... 15,800 9,276 Common stock dividends............................................ (8,927) (9,923) -------- -------- Retained earnings, end of period.................................. $315,408 $274,754 ======== ========
See accompanying notes to HECO's consolidated financial statements. 9 Hawaiian Electric Company, Inc. and subsidiaries Consolidated statements of cash flows (unaudited)
Three months ended March 31, ---------------------- (in thousands) 1995 1994 - --------------------------------------------------------------------------------------------------- Cash flows from operating activities Income before preferred stock dividends of HECO........................... $ 16,839 $ 10,360 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.............................................. 16,982 16,117 Other amortization.................................................. 750 1,527 Deferred income taxes............................................... 470 1,211 Tax credits, net.................................................... 1,076 851 Allowance for equity funds used during construction................. (2,367) (1,951) Decrease in accounts receivable..................................... 5,202 7,414 Decrease in accrued unbilled revenues............................... 2,793 3,736 Decrease in fuel oil stock.......................................... 8,247 4,346 Decrease (increase) in materials and supplies....................... (1,079) 843 Increase in regulatory assets....................................... (1,303) (4,892) Decrease in accounts payable........................................ (8,938) (3,083) Increase in interest and preferred dividends payable................ 2,323 2,434 Changes in other assets and liabilities............................. (5,796) (20,540) -------- -------- Net cash provided by operating activities................................. 35,199 18,373 -------- -------- Cash flows from investing activities Capital expenditures...................................................... (47,319) (36,701) Contributions in aid of construction...................................... 2,173 2,903 -------- -------- Net cash used in investing activities..................................... (45,146) (33,798) -------- -------- Cash flows from financing activities Common stock dividends.................................................... (8,927) (9,923) Preferred stock dividends................................................. (1,039) (1,084) Proceeds from issuance of long-term debt.................................. 36,815 16,018 Repayment of long-term debt............................................... (11,000) (48,000) Redemption of preferred stock............................................. (1,404) (392) Net increase (decrease) in short-term borrowings from nonaffiliates and affiliate with original maturities of three months or less......... (11,599) 63,805 Other..................................................................... (3,516) (6,337) -------- -------- Net cash provided by (used in) financing activities....................... (670) 14,087 -------- -------- Net decrease in cash and equivalents...................................... (10,617) (1,338) Cash and equivalents, beginning of period................................. 10,694 1,922 -------- -------- Cash and equivalents, end of period....................................... $ 77 $ 584 ======== ========
See accompanying notes to HECO's consolidated financial statements. 10 Hawaiian Electric Company, Inc. and subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS March 31, 1995 and 1994 (Unaudited) - -------------------------------------------------------------------------------- (1) Accounting statement - ------------------------- In the opinion of HECO's 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 March 31, 1995 and December 31, 1994, and the results of their operations and their cash flows for the three months ended March 31, 1995 and 1994. 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, 1994. The consolidated balance sheet as of December 31, 1994 was derived from audited financial statements. (2) Regulatory assets - ---------------------- Regulatory assets at March 31, 1995 and December 31, 1994 include the following deferred costs:
March 31, December 31, (in thousands) 1995 1994 - -------------------------------------------------------------------------------- Postretirement benefits other than pensions......... $33,559 $34,032 Income taxes........................................ 25,436 23,427 Unamortized debt expense on retired issues.......... 7,352 7,513 Integrated resource planning costs.................. 7,780 7,189 Computer system development costs................... 6,479 6,090 Vacation earned, but not yet taken.................. 6,490 5,972 Preliminary plant costs on suspended project........ 5,759 5,768 Other............................................... 2,360 2,533 ------- ------- $95,215 $92,524 ======= =======
(3) Cash flows - --------------- Supplemental disclosures of cash flow information Cash paid for interest (net of capitalized amounts) and income taxes was as follows:
Three months ended March 31, ------------------- (in thousands) 1995 1994 - -------------------------------------------------------------------------------- Interest................................................. $ 6,038 $ 6,149 ======= ======= Income taxes............................................. $ 582 $ 2,470 ======= =======
Supplemental disclosure of noncash activities The allowance for equity funds used during construction, which was capitalized as part of the cost of electric utility plant, amounted to $2,367,000 and $1,951,000 for the three months ended March 31, 1995 and 1994, respectively. 11 (4) Commitments and contingencies - ---------------------------------- Power purchase agreements. At March 31, 1995, HECO and its subsidiaries had power purchase agreements for 465 megawatts (MW) of firm capacity, representing approximately 22% of the total of their generating capability and firm purchased capacity. Rate recovery is allowed for energy and firm capacity payments under these agreements. Assuming that each of the agreements remains in place and the minimum availability criteria in the power purchase agreements are met, aggregate minimum fixed capacity charges are expected to be approximately $107 million in 1995, $109 million in each of 1996 and 1997, $106 million in 1998, $109 million in 1999 and an aggregate of $2.1 billion thereafter. In general, payments under the power purchase agreements for 465 MW of firm capacity are based upon available capacity and energy. Payments for capacity generally are not required if the contracted capacity is not available, and payments are reduced, under certain conditions, if available capacity drops below contracted levels. In general, the payment rates for capacity have been predetermined for the terms of the agreements. The energy payment 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 the energy cost adjustment clause 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 agreements. Title to the facilities does not pass to HECO nor its subsidiaries upon expiration of the agreements, and the agreements do not contain bargain purchase options with respect to the facilities. HELCO has a power purchase agreement with HCPC for 18 MW of firm capacity. On December 12, 1994, HCPC filed a Chapter 11 bankruptcy petition and advised HELCO that it would cease operating its plant in December 1994. By stipulation, HELCO obtained a temporary restraining order (TRO) and, later, extensions of such order, requiring HCPC to continue operations of the HCPC facility through May 31, 1995, with HELCO to pay an additional amount for the power HCPC supplies (which was increased to 20 MW under the TRO). On January 5, 1995, HELCO and HCPC entered into an agreement in principle, subject to the negotiation and execution of a definitive agreement, to amend the existing power purchase agreement through December 1999. The definitive agreement, which was executed in the form of a number of separate agreements on March 24, 1995, is not effective until it is approved by the bankruptcy court (or the bankruptcy proceeding is dismissed by the bankruptcy court) and is subject to cancellation by HELCO if not approved by the PUC within 180 days of its execution. If the definitive agreement becomes effective, HCPC has indicated that it can increase its power export capability to HELCO to 22 MW. HELCO reliability investigation. In July 1991, following service interruptions and rolling blackouts on the island of Hawaii, the PUC initiated an investigation into the reliability of HELCO's system and held hearings. Further hearings were held in July 1992 following additional service interruptions and rolling blackouts. In its October 1992 decision approving a rate increase for HELCO, the PUC stated that it may formulate minimum reliability standards for HELCO, use the standards to assess HELCO's system reliability, and re-examine the approved rate increase to see whether any adjustments are appropriate. In the opinion of management, any adjustment by the PUC to its October 1992 rate increase resulting from the reliability investigation is not expected to have a material adverse effect on the Company's financial condition or results of operations. HELCO is proceeding with plans to install two 20-MW combustion turbines in 1996, followed by an 18-MW heat steam recovery generator in 1997. However, two independent power producers have each filed with the PUC separate complaints against HELCO, alleging that they are entitled to a power purchase contract to provide all or part of the capacity. HELCO has also encountered procedural and other difficulties in obtaining the necessary air permit and Conservation District Use Permit (CDUP) which would allow the combined-cycle unit to be constructed. As a result of these permitting delays, HELCO's unit installation schedule has been adversely impacted and HELCO is exploring other alternatives to meet projected energy needs, including any viable, timely and cost-effective unaffiliated nonutility generation alternative as well as mitigation measures to ensure reliable service until HELCO's combined cycle unit is permitted and in service. Until additional generation is in place, management believes that there is a significant risk of capacity shortages on the island of Hawaii that could result in rolling blackouts within the next year. 12 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, which was consolidated with a pending investigation of an outage that occurred in 1988. Power Technologies, Inc. (PTI), an independent consultant hired by HECO with the approval of the PUC, investigated the outage. HECO is implementing certain of PTI's recommendations and is either studying or disagrees with certain of the other recommendations. Management cannot predict the timing and outcome of any PUC decision and order, if any, with respect to the outages or PTI's recommendations. HECO's PUC-approved tariff states that HECO is not liable for interruptions or insufficiency of supply when the cause was not within HECO's control through the exercise of reasonable diligence and care. Nevertheless, HECO received 3,063 customer claims, which totaled approximately $7.8 million, within the time limit to file claims as a result of the April 9, 1991 outage. 1,530 of these claims are for property damage and most have been settled, with no admission of liability, or closed as of March 31, 1995. None of the other 1,533 claims, which generally involve personal injury or economic loss, such as lost profits, has been settled. Seven direct or indirect business customers have 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. HECO has filed an answer which denies the principal allegations in the complaint. The class has not been certified. Trial has been set for January 1996. In 1991, HECO 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 1991 outage will not have a material adverse effect on the Company. (5) Accounting change - ---------------------- In March 1995, the FASB issued SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of." SFAS No. 121 requires that long-lived assets and certain identifiable intangibles held and used by an entity be reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. If the sum of the expected future cash flows (undiscounted and without interest charges) is less than the carrying amount of the asset, an impairment loss is recognized. Measurement of that loss would be based on the fair value of the asset. Generally, SFAS No. 121 requires that long-lived assets and certain identifiable intangibles to be disposed of be reported at the lower of carrying amount or fair value less cost to sell. SFAS No. 121 also requires that a rate-regulated enterprise recognize an impairment for the amount of costs excluded when a regulator excludes all or part of a cost from the enterprise's rate base. The provisions of SFAS No. 121 must be adopted by HECO and its subsidiaries no later than January 1, 1996. HECO and its subsidiaries have not determined when they will adopt the provisions of SFAS No. 121 nor the impact of the adoption of SFAS No. 121 on HECO's consolidated financial statements. 13 (6) Summarized financial information - ------------------------------------- Summarized financial information for HECO's consolidated subsidiaries, HELCO and MECO, is as follows:
HELCO MECO -------------------------- -------------------------- March 31, December 31, March 31, December 31, (in thousands) 1995 1994 1995 1994 - ---------------------------------------------------------------------------------------------------------- Balance sheet data Current assets................................ $ 22,777 $ 25,151 $ 25,260 $ 29,204 Noncurrent assets............................. 342,898 335,725 275,748 272,019 -------- -------- -------- -------- $365,675 $360,876 $301,008 $301,223 ======== ======== ======== ======== Common stock equity........................... $122,180 $120,908 $109,132 $108,313 Cumulative preferred stock Not subject to mandatory redemption....... 10,000 10,000 8,000 8,000 Subject to mandatory redemption........... 7,800 7,800 6,545 6,545 Current liabilities........................... 56,704 59,787 29,980 34,197 Noncurrent liabilities........................ 168,991 162,381 147,351 144,168 -------- -------- -------- -------- $365,675 $360,876 $301,008 $301,223 ======== ======== ======== ========
HELCO MECO -------------------------- -------------------------- Three months ended Three months ended March 31, March 31, -------------------------- -------------------------- (in thousands) 1995 1994 1995 1994 - ---------------------------------------------------------------------------------------------------------- Income statement data Operating revenues............................ $32,695 $28,951 $29,793 $27,361 Operating income.............................. 3,423 2,403 3,743 3,628 Net income for common stock................... 2,548 1,353 2,289 1,948
(7) Reconciliation of electric utility operating income per HEI and HECO -------------------------------------------------------------------- consolidated statements of income ---------------------------------
Three months ended March 31, --------------------- (in thousands) 1995 1994 - --------------------------------------------------------------------------------------------------- Operating income from regulated and nonregulated activities before income taxes (per HEI consolidated statements of income)................. $35,413 $24,324 Deduct: Income taxes on regulated activities..................................... (11,174) (7,054) Revenues from nonregulated activities.................................... (1,345) (1,208) Add: Expenses from nonregulated activities.................................... 312 70 ------- ------- Operating income from regulated activities after income taxes (per HECO consolidated statements of income).................................. $23,206 $16,132 ======= =======
14 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 March 31, (in thousands, except per ---------------------- % Primary reason(s) for significant share amounts) 1995 1994 change change* - -------------------------------------------------------------------------------------------------------------------------------- Revenues............................ $306,274 $265,042 16 Increases for the electric utility and savings bank segments Operating income.................... 44,309 33,404 33 Increase for the electric utility segment Net income.......................... 17,847 11,788 51 Higher operating income and lower effective tax rate, partly offset by higher interest expense due to higher borrowings Earnings per common share........... $0.62 $0.42 48 See above Weighted average number of common shares outstanding...... 28,772 27,768 4
* Also see segment discussions which follow. For the three months ended March 31, 1995, HEI reported net income of $17.8 million, or $0.62 per share, compared to $11.8 million, or $0.42 per share, for the same period of 1994. Net income increased due to improved results by the electric utility segment. 15 Following is a general discussion of revenues, expenses and operating income by business segment. Electric utility - ----------------
Three months ended March 31, (in thousands, except per ---------------------- % Primary reason(s) for significant share amounts) 1995 1994 change change* - -------------------------------------------------------------------------------------------------------------------------------- Revenues............................ $232,521 $201,306 16 Rate relief, higher fuel oil prices which are passed on to customers and a 1.2% increase in KWH sales Expenses Fuel oil.......................... 48,477 38,618 26 Higher fuel oil prices and more KWHs generated Purchased power................... 63,853 62,986 1 Other............................. 84,778 75,378 12 Higher other operation and maintenance expense including the increase in postretirement benefits other than pensions (PBOP) expense, depreciation expense and taxes, other than income taxes Operating income.................... 35,413 24,324 46 Rate relief and a 1.2% increase in KWH sales, partly offset by higher expenses Net income.......................... 15,800 9,276 70 Higher operating income, partly offset by higher interest expense Average fuel oil price per barrel.......................... 19.82 16.33 21
Operating income for the electric utility segment was up 46% for the three months ended March 31, 1995 compared to the same period last year. The increase in operating income was primarily due to timely rate relief, partly offset by higher expenses. HECO received interim rate relief on January 1 for 1995 and the PUC's decision allowing recovery of PBOP costs was effective on January 1, 1995. Results for the first quarter of 1994 did not include interim rate relief for HECO. When compared with the first quarter of 1994, the revenues of HECO and its subsidiaries for the first quarter of 1995 benefited from approximately $20 million of rate relief, including rate relief in 1994 after the first quarter and interim rate relief effective January 1, 1995. Competition The electric utility industry has become increasingly competitive due to regulatory and technological developments. Competition is affected by factors including price, reliability of service, alternate energy sources, new technologies and governmental regulations. Competition in Hawaii is also affected by the scarcity of generation sites and lack of interconnections with other utility systems. 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. To date, HECO and its subsidiaries have not faced competition from any entity under this authority. However, management cannot predict the future impact, if any, of the Energy Policy Act of 1992 on the Company. On the demand-side, 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 16 companies worked with a large military housing project during 1992 to install energy-efficient equipment that decreased the facility's electricity consumption by one-third. To promote energy conservation in Hawaii and the Pacific Basin, HEI formed a new nonutility energy service company, Pacific Energy Conservation Services, Inc. (PECS) in August 1994. PECS is currently developing its business plan. In response to increased competition, HECO and its subsidiaries are looking at strategies to enhance their competitive position, including increasing efforts to provide reliable electric service at a reasonable cost, offering customers new choices regarding the services provided and promoting conservation and new technologies like electric vehicles. Major customers Approximately 10% of consolidated operating revenues of HECO and its subsidiaries was derived from the sale of electricity to various federal government agencies in 1994. One of HECO's largest customers, the Naval Base at Barbers Point, Oahu, is expected to be closed within the next few years. However, HECO does not anticipate that the base closure will result in much of a loss, if any, in aggregate KWH sales as the Navy will continue to occupy portions of Barbers Point and much of the surplus facilities currently not utilized by the Navy will probably be occupied by state agencies. The military has been directed to study mandatory bidding for power contracts for two locations--Pearl Harbor and a Marine Corps installation on Oahu. If the Navy and Marine Corps require bidding for power contracts, HECO intends to submit bids. On March 8, 1994, President Clinton signed an Executive Order which mandates that each federal agency develop and implement a program with the intent of reducing energy consumption by 30% by the year 2005 to the extent that these measures are cost-effective. The 30% reductions will be measured relative to the agency's 1985 energy use. HECO is working with various Department of Defense installations to implement demand-side management programs which will help them achieve their energy reduction objectives. It is expected that several Department of Defense installations will sign a Basic Ordering Agreement under which HECO may implement the energy conservation projects. Neither HEI nor HECO management can predict with certainty the impact of President Clinton's Executive Order on the Company's or HECO and subsidiaries' future results of operations. Regulation of electric utility rates The PUC has broad discretion in its regulation of the rates charged by HEI's electric utility subsidiaries and in other matters. Any adverse decision 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 or other proceeding, could have a material adverse effect on the Company's financial condition and results of operations. Upon a showing of probable entitlement, the PUC is required to issue an interim decision in a rate case within 10 months from the date of filing a completed application if the evidentiary hearing is completed (subject to extension for 30 days if the evidentiary hearing is not completed). There is no time limit for rendering a final decision. Interim rate increases are subject to refund with interest, pending the final outcome of the case. Recent rate requests Postretirement benefits other than pensions - ------------------------------------------- In November 1994, the PUC issued a decision and order in a generic docket opened in February 1992 with respect to the accounting and rate-making treatment of the costs of PBOP. The decision and order authorized full recovery of PBOP costs determined pursuant to SFAS No. 106, effective January 1, 1995. The decision and order also allowed the recovery of the regulatory assets related to PBOP costs, over the next 18 years. These regulatory assets were established by HECO, HELCO, MECO and YB for PBOP costs accrued from January 1, 1993 through December 31, 1994 and amounted to $36.2 million for the four companies at March 31, 1995. This order will result in additional annual revenues of approximately $10.0 million, $1.8 million, $1.9 million and $1.0 million for HECO, HELCO, MECO and YB, respectively, to cover the annual increase in PBOP expense. 17 Hawaiian Electric Company, Inc. - ------------------------------- . 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%). The increase requested, as subsequently revised, represented an increase of 8.6% over rates in effect at the time of the revised filing, or $53.8 million in additional annual revenues. The revised requested increase was needed to cover rising operating costs (including PBOP costs discussed above) and to cover the cost of new capital projects to maintain and improve service reliability. In December 1994, HECO received from the PUC a final decision and order based on a 12.15% return on average common equity and authorizing a $40.5 million, or 6.5%, increase in annual revenues, effective January 1, 1995. The order granted HECO an additional increase of approximately $3.5 million in annual revenues, over interim increases that took effect in April, May and November 1994. The final decision and order, together with the PBOP decision and order, resulted in $50.5 million of annual rate relief. . 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 (which was later increased to 13.25%). The requested increase, as subsequently revised (to reflect the final decision and order in the 1994 test year case and the PBOP decision and order), represented an increase of approximately $28.2 million in additional annual revenues, over permanent rates in effect at the time of the revised filing. The revised requested increase was needed to cover rising operating costs and costs of new capital projects to maintain and improve service reliability. In December 1994, HECO received an interim decision and order authorizing an increase of $13.2 million, or 1.9%, in annual revenues. Approximately $10.6 million of the interim increase took effect January 1, 1995, which was the beginning of the test year. The balance is effective in steps in May and November 1995. The interim order was based on a 12.6% return on average common equity. Hawaii Electric Light Company, Inc. - ----------------------------------- . In November 1993, HELCO applied to the PUC for permission to increase electric rates to provide $15.8 million in additional annual revenues, or a 13.4% increase over the rates then in effect. The requested increase was based on a 1994 test year and a 12.4% return on average common equity (which was later increased to 13.1%). The increase was needed to cover plant and equipment costs, operating costs necessary to maintain and improve service and provide reliable power and PBOP costs discussed above. In February 1995, HELCO received a final decision and order from the PUC authorizing a $13.7 million, or 11.8%, increase in annual revenues, based on a 12.6% return on average common equity. The order granted HELCO an additional increase of approximately $0.1 million in annual revenues, over interim increases that took effect in August and November 1994. The final decision and order, together with the PBOP decision and order, resulted in $15.5 million of annual rate relief. . In March 1995, HELCO applied to the PUC for permission to increase electric rates to provide $27 million in additional annual revenues, or an 18.7% increase over current rates, based on a 1996 test year and a 13.5% return on average common equity. Maui Electric Company, Limited - ------------------------------ . In November 1991, MECO filed a request to increase rates. In January 1993, MECO revised its requested increase to $11.4 million annually, or 10% over the rates then in effect, based on a 13.0% return on average common equity. Most of the proposed increase reflected the costs of adding a 58-MW combined-cycle generating unit on Maui in three phases and PBOP costs discussed above. In 1993, MECO received four interim step increases. In August 1994, MECO received the final decision and order from the PUC granting a total increase of $8.1 million in annual revenues, or approximately 7.0%, based on a 12.75% return on average common equity. That action, together with the PBOP decision and order, resulted in $10 million of annual rate relief. . In February 1995, MECO applied to the PUC for permission to increase electric rates to provide $23 million in annual revenues, or a 17.4% increase over current rates, based on a 1996 test year and a 13.5% return on average common equity. Management cannot predict with certainty when decisions in pending or future rate cases will be rendered or the amount of any interim or final rate increase that will be granted. 18 Self-Insured Property Damage Reserve - ------------------------------------ In March 1995, the PUC opened a generic docket to investigate whether the public utilities in the State of Hawaii should be allowed to establish self-insured property damage reserves to cover the cost of damage to their facilities and equipment caused by catastrophic natural disasters. HECO's overhead transmission and distribution system is susceptible to wind damage, and its underground system is susceptible to earthquake and flood damage. The overhead and underground transmission and distribution systems have a replacement value in excess of $1 billion and are uninsured because the amount of transmission and distribution system insurance available is limited and the premiums are extremely high. Hearings on this docket have not yet been scheduled. Savings bank - ------------
Three months ended March 31, ---------------------- % (in thousands) 1995 1994 change Primary reason(s) for significant change* - -------------------------------------------------------------------------------------------------------------------------------- Revenues.......................... $60,717 $50,083 21 Higher interest income as a result of higher average mortgage-backed securities balance and yield Operating income.................. 10,225 10,620 (4) Lower net interest income and higher administrative and general expenses Net income........................ 5,949 6,207 (4) Lower operating income Interest rate spread.............. 3.10% 3.83% 3 basis points increase in the weighted average yield on interest-earning assets and 76 basis points increase in the weighted average rate on interest-bearing liabilities
The savings bank segment operating income decreased by 4% for the quarter in comparison with the same period last year. The lower operating income is due to higher administrative and general expenses and lower interest rate spread. ASB's interest rate spread--the difference between the weighted average yield on interest-earning assets and the weighted average rate on interest-bearing liabilities--decreased to 3.10% in the quarter from 3.83% in the comparable period of 1994. For the first quarter of 1995, the average mortgage-backed securities balance was up $475 million and the average borrowings balance was up $463 million from levels in the first quarter of 1994. In 1994, 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, increased 2.5% to 5.5%. In the first quarter of 1995, the federal funds rate increased 0.5% to 6.0%. The demand for mortgage loans has decreased partly due to the rising interest rates and the slow real estate market in Hawaii. Also, the recent recession and slow real estate market contributed to a trend of increased loan delinquencies. In 1994, nonaccrual and renegotiated loans increased $17 million and the allowance for loan losses increased $3 million. Management expects a reversal in the trend in increased delinquencies to follow improvements in Hawaii's economy and real estate market. Management however, cannot predict with certainty when such improvements will occur. Another trend has been the outflow of deposits partly due to competition from money market funds. In the first quarter of 1995, there was a savings outflow of $38 million, partly offset by interest credited of $18 million. For funding loans and purchasing mortgage-backed securities, ASB has turned to higher cost advances from the Federal Home Loan Bank and securities sold under agreements to repurchase. The use of higher cost sources of funds puts downward pressure on ASB's interest rate spread. The decrease in interest rate spread can also be attributed to the changing interest rate environment. During 1994 and the first quarter of 1995, rising interest rates caused the cost of interest-bearing liabilities to increase. However, yields on interest-earning assets in 1994 decreased 48 basis points due 19 in part to 1993's refinancings and the lag in the repricing of adjustable loans and mortgage-backed securities. Yields in the first quarter of 1995 increased only 3 basis points as the repricing of interest-earning assets lagged the repricing of interest-bearing liabilities. In the future, ASB's cost of interest-bearing liabilities may further increase, which may result in a decreased interest rate spread and lower net interest income. If interest rates stabilize, however, ASB's spread is expected to improve as adjustable-rate mortgages reprice to market levels. Other - -----
Three months ended March 31, ---------------------- % (in thousands) 1995 1994 change Primary reason(s) for significant change* - -------------------------------------------------------------------------------------------------------------------------------- Revenues........................... $13,036 $13,653 (5) MPC's lower unit sales, partly offset by the freight transportation subsidiaries' higher general freight revenues, interstate revenues and contract tows Operating loss..................... (1,329) (1,540) 14 Freight transportation subsidiaries' higher revenues and lower maintenance expense
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; PECS, which is an energy service company with no operations to date; HEIPC, which is a company formed in March 1995 to pursue independent power projects in Asia, beginning with the Philippines; HEI and HEIDI, which are holding companies; and eliminations of intercompany transactions. Freight transportation The freight transportation subsidiaries recorded operating income of $0.9 million in the first quarter of 1995 compared with $0.2 million in the first quarter of 1994. The increase in operating income was a result of higher general freight revenues, interstate revenues and contract tows, and lower maintenance expense. Revenue tons transported and tug operating hours for the first quarter of 1995 were both 6% higher than the first quarter of 1994. In May 1994, YB filed an application with the PUC to increase rates by approximately $2.4 million annually. In September 1994, YB filed a stipulated agreement with the PUC indicating YB and the Consumer Advocate had agreed to stipulate to a 6% general rate increase, or approximately $2.0 million annually. The increase took effect in December 1994. Real estate In 1994 and the first three months of 1995, MPC's real estate development activities were adversely impacted by economic conditions. The real estate market experienced slowdowns due to the weakness in Hawaii's economy and lack of consumer confidence. For the three months ended March 31, 1995, MPC recorded an operating loss of $0.2 million compared to an operating loss of $25,000 in the same period last year primarily due to lower unit sales. MPC's present focus is to reduce its current investment in real estate development assets to increase cash flow to the Company by continuing the development and sales of its existing projects. There are currently no plans to invest in new projects. For further information on MPC, see note (4) in HEI's "Notes to consolidated financial statements." 20 Other In 1995, HEIPC and its joint venture partners submitted a bid on an independent power project in the Philippines. HEIPC also has an option to join a group which has submitted a bid on another independent power project in the Philippines. The results of the bidding processes are expected to be received by July 31, 1995. Both projects are expected to be financed largely with debt, collateralized by the assets of the underlying project. HEIPC's equity investment in the two projects is not expected to exceed $35 million. Discontinued operations - ----------------------- See note (9) in HEI's "Notes to consolidated financial statements" for information on the discontinued operations of HIG. Accounting for the effects of certain types of regulation - --------------------------------------------------------- The electric utility companies and YB follow the accounting prescribed by SFAS No. 71, "Accounting for the Effects of Certain Types of Regulation." SFAS No. 71 provides guidance in preparing financial statements for most public utilities. Under SFAS No. 71, if regulation provides assurance that incurred costs will be recovered in the future, those costs must be capitalized rather than expensed. If the continued application of SFAS No. 71 would no longer be appropriate--due to increased competition or regulatory, legislative or judicial actions or otherwise--the financial effects, including a write-off of all regulatory assets, could be material. 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 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, management is not aware of any contingent liabilities relating to environmental matters that would have a material adverse effect on the Company. Electric and magnetic fields - ---------------------------- Research is ongoing about the potential adverse health effects from exposure to electric and magnetic fields (EMF). However, the scientific community has not yet reached a consensus on the nature of any health effects. HECO and its subsidiaries are participating in utility industry funded studies on the subject and are considering possible steps to reduce EMF, where feasible, in the design of new transmission and distribution facilities. The Company cannot predict the impact, if any, the EMF issue may have on the Company in the future. Accounting changes - ------------------ For discussions of SFAS No. 121 "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of," see note (8) in HEI's "Notes to consolidated financial statements" and note (5) in HECO's "Notes to consolidated financial statements." 21 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 their construction programs and to cover debt retirements and other cash requirements in the foreseeable future. The consolidated capital structure of HEI was as follows:
(in millions) March 31, 1995 December 31, 1994 - -------------------------------------------------------------------------------------------- Short-term borrowings................................ $ 131 8% $ 137 8% Long-term debt....................................... 742 45 718 44 Preferred stock of electric utility subsidiaries..... 92 5 93 6 Common stock equity.................................. 693 42 682 42 ------ --- ------ --- $1,658 100% $1,630 100% ====== === ====== ===
ASB's deposit liabilities, securities sold under agreements to repurchase and advances from the Federal Home Loan Bank are not included in the table above. For the first three months of 1995, net cash provided by operating activities was $38 million. Net cash used in investing activities was $80 million, largely due to ASB's loan originations and consolidated HECO's capital expenditures. Net cash provided by financing activities was $62 million, due primarily to a net increase in securities sold under agreements to repurchase and in long-term debt, partly offset by common stock dividends and a net decrease in deposit liabilities. Total HEI consolidated financing requirements for 1995 through 1999, including net capital expenditures, debt retirements (excluding repayments from Advances from Federal Home Loan Bank and repurchases of securities sold under agreements to repurchase) and sinking fund requirements, are currently estimated to total $1.1 billion. Of this amount, approximately $0.8 billion are for net capital expenditures (mostly relating to the electric utility companies' net capital expenditures described below). HEI consolidated internal sources, after the payment of HEI dividends, are expected to provide approximately 56% of the consolidated financing requirements, with debt and equity financing providing the remaining requirements. Over the five-year period 1995 through 1999, HEI estimates that it will require approximately $161 million in common equity, other than retained earnings, which is expected to be provided principally by HEI's Dividend Reinvestment and Stock Purchase Plan and the Hawaiian Electric Industries Retirement Savings Plan. 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) March 31, 1995 December 31, 1994 - ------------------------------------------------------------------------------------------ Short-term borrowings from nonaffiliates and affiliate.................................... $ 106 8% $ 118 9% Long-term debt..................................... 515 38 489 37 Preferred stock.................................... 92 7 93 7 Common stock equity................................ 641 47 634 47 ------ --- ------ --- $1,354 100% $1,334 100% ====== === ====== ===
Operating activities provided $35 million in net cash during the first three months of 1995. Investing activities used cash of $45 million for capital expenditures net of contributions in aid of construction. Financing activities used cash of $1 million primarily for the repayment of debt and payment of common and preferred dividends, offset by issuances of long-term debt. 22 The electric utility's consolidated financing requirements for 1995 through 1999, including net capital expenditures, debt retirements and sinking fund requirements, are estimated to total $850 million. HECO's consolidated internal sources, after the payment of common stock and preferred stock dividends, are currently expected to provide approximately 60% of the total $850 million requirements, with debt and equity financing providing the remaining requirements. HECO currently estimates that it will require approximately $60 million in common equity, other than retained earnings, over the five-year period 1995 through 1999. The PUC must approve issuances of long-term debt and equity for HECO, HELCO and MECO. Capital expenditures include the costs of projects which are required to meet expected load growth, to improve reliability and to replace and upgrade existing equipment. Net capital expenditures for the five-year period 1995 through 1999 are currently estimated to total $750 million. Approximately 70% of gross capital expenditures, including AFUDC and capital expenditures funded by third party cash contributions in aid of construction, is for transmission and distribution projects and the remaining 30% is primarily for generation projects. For 1995, electric utility capital expenditures net of cash contributions in aid of construction and excluding AFUDC are estimated to be $170 million and gross capital expenditures are estimated to be $205 million, of which approximately 65% is for transmission and distribution projects. An estimated $40 million is planned for new generation units. Drawdowns of proceeds from the sale of tax- exempt special purpose revenue bonds, sales of common stock to HEI, sales of preferred stock 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, the availability of generating sites and transmission and distribution line corridors, the adequacy and timeliness of rate relief, escalation in construction costs, demand-side management programs and requirements of environmental and other regulatory and permitting authorities. In January 1995, the Department of Budget and Finance of the State of Hawaii issued tax-exempt special purpose revenue bonds in the principal amount of $47 million, with a maturity of 30 years and a fixed coupon interest rate of 6.60%, and loaned the proceeds from the sale to HECO, HELCO and MECO. The bonds were issued at a discount, resulting in a yield of approximately 6.75%. As of March 31, 1995, an additional $170 million of revenue bonds had been authorized by the Hawaii Legislature for issuance prior to the end of 1997. Savings bank
March 31, December 31, % (in millions) 1995 1994 change - -------------------------------------------------------------------------------------------- Assets.............................................. $3,179 $3,116 2 Loans receivable.................................... 1,654 1,824 (9) Mortgage-backed securities.......................... 1,271 1,067 19 Deposit liabilities................................. 2,109 2,129 (1) Securities sold under agreements to repurchase...... 201 123 63 Advances from Federal Home Loan Bank................ 618 616 --
At December 31, 1994, ASB was the fourth largest financial institution in the state based on total assets of $3.1 billion and the third largest financial institution based on deposits of $2.1 billion. The 19% increase in mortgage- backed securities in the first quarter of 1995 was primarily due to the securitization of $223 million of loans receivable. Under OTS rules, these securitized loans (i.e., Federal National Mortgage Association mortgage-backed securities) require less capital than loans receivable. Thus, ASB has securitized loans to support its recent growth. For the first three months of 1995, cash used by ASB's investing activities was $33 million, due largely to the origination of loans and purchase of mortgage- backed securities, partly offset by principal repayments. Cash provided by financing activities was $53 million as a result of a net increase of 23 $74 million in securities sold under agreements to repurchase, partly offset by a $20 million decrease in deposit liabilities and by common stock dividends of $3 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 receipt of interest and principal on outstanding loans receivable and mortgage-backed securities, borrowings from the Federal Home Loan Bank of Seattle, securities sold under agreements to repurchase and other sources. Recently, advances from the Federal Home Loan Bank and securities sold under agreements to repurchase have become more significant sources of funds as the demand for deposits has decreased. The advances and securities sold under agreements to repurchase are higher cost sources of funds than deposits and their use puts downward pressure on ASB's net interest income. 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 March 31, 1995. 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 a risk-based capital standard equal to 8.0% of risk-adjusted assets. As of March 31, 1995, ASB was in full compliance with the minimum capital requirements with a tangible capital ratio of 5.0%, a core capital ratio of 5.2% and a risk-based capital ratio of 11.9%. The OTS has adopted a rule adding an interest rate risk (IRR) component to the existing risk-based capital requirement. The regulation became 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, was to be effective September 30, 1994. The OTS has provided a waiver of the IRR capital deduction until it can finalize an appeals process. 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 an amount equal to 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 have been required to deduct $5.8 million from total capital at March 31, 1995 if the rule had been in effect at that time. As of March 31, 1995, ASB's risk-based capital ratio, adjusted for the IRR component, would have been 11.5%, still meeting capital requirements and "well-capitalized" levels. The federal banking regulators have also proposed a similar regulation which may result in a more stringent capital requirement for IRR than the current OTS rule. Such a regulation could result in more stringent capital requirements for ASB and other thrifts because the Financial Institutions Reform, Recovery, and Enforcement Act of 1989 requires that the capital standards for thrifts be no less stringent than those applicable to national banks. The impact of the proposed federal banking regulation on ASB cannot be predicted at this time. Federal Deposit Insurance Corporation regulations restrict the ability of financial institutions that are not "well-capitalized" to offer interest rates on deposits that are significantly higher than the rates offered by competing institutions. To be a "well-capitalized" institution not subject to these interest rate restrictions, an institution must have a "leverage ratio" of 5.0%, a "Tier-1 risk-based ratio" of 6%, a "total risk-based ratio" of 10% and not be in a "troubled condition." As of March 31, 1995, ASB was "well-capitalized" with a leverage ratio of 5.2%, a Tier-1 risk-based ratio of 11.4% and a total risk- based ratio of 11.9%. 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. On September 29, 1994, the Reigle-Neal Interstate Banking and Branching Efficiency Act of 1994 (Interstate Banking Act) was signed into law. The Interstate Banking Act will create a uniform system of interstate banking in the U.S. Also, subject to certain limitations, it will permit interstate branching by U.S. banks, marking a major departure from previous law. Although the Interstate Banking Act applies 24 only to banks, it could nonetheless affect the competitive balance among banks, thrifts and other financial institutions and the level of competition among financial institutions doing business in Hawaii. PART II - OTHER INFORMATION ================================================================================ Item 1. Legal proceedings - -------------------------- There are no significant 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 4. Submission of matters to a vote of security holders - ------------------------------------------------------------ HEI The Annual Meeting of Stockholders of HEI was held on April 25, 1995. Proxies for the meeting were solicited pursuant to Regulation 14A under the Securities Exchange Act of 1934. As of February 15, 1995, the record date for the Annual Meeting, there were 28,762,655 shares of common stock issued and outstanding and entitled to vote. There was no solicitation in opposition to the management nominees to the Board of Directors as listed in the proxy statement for the meeting and such nominees were elected to the Board of Directors. The results of the election of the single Class I director-nominee, the Class II director-nominees and independent auditor are as follows:
Common stock -------------------------------------------------------------------- Broker For Withheld Against Abstain nonvotes ----------- ------------ ------------ ---------- ---------- Election of Class I Director: James K. Scott 23,736,127 451,963 1,405,005 Election of Class II Directors: Victor Hao Li 23,764,049 424,041 1,405,005 Diane J. Plotts 23,783,072 405,018 1,405,005 Kelvin H. Taketa 23,727,402 460,688 1,405,005 Jeffrey N. Watanabe 23,608,436 579,654 1,405,005 Harwood D. Williamson 23,779,673 408,417 1,405,005 Election of KPMG Peat Marwick LLP as auditor: 23,793,343 157,658 237,089 1,405,005
Class III Directors--Edwin L. Carter, Richard Henderson, Ben F. Kaito, Bill D. Mills and Oswald K. Stender--continue in office with terms ending at the 1996 Annual Meeting. Class I Directors--Robert F. Clarke, John D. Field, A. Maurice Myers and Ruth M. Ono--continue in office with terms ending at the 1997 Annual Meeting. HECO The Annual Meeting of the Sole Stockholder of HECO was conducted by written consent effective April 25, 1995. The incumbent members of the Board of Directors of HECO were re-elected. The incumbent members continuing in office are Robert F. Clarke, Richard Henderson, Ben F. Kaito, Mildred D. Kosaki, Paul A. Oyer, Diane J. Plotts, Harwood D. Williamson and Paul C. Yuen. In addition, KPMG Peat Marwick LLP was elected auditor of HECO for the fiscal year 1995. 25 Item 5. Other information - -------------------------- A. HECO's President and chief executive officer's retirement In May 1995, HECO announced the retirement of Harwood D. (Dan) Williamson, 63 years old, president and chief executive officer, effective September 1, 1995. Mr. Williamson will be succeeded by T. Michael May, 48 years old, currently Senior Vice President of HECO. B. Puna Geothermal Venture (PGV) HELCO has a power purchase agreement with PGV for 25 MW of firm capacity. PGV, an independent geothermal power producer which experienced substantial delays in commencing commercial operations, passed an acceptance test in June 1993. Although a problem with one of its wells reduced production during 1994, PGV is now considered to be a firm capacity source for 25 MW. HELCO filed suit against PGV in 1993 for penalties and other relief related to PGV's failure to provide power to HELCO by October 3, 1991. On March 7, 1995, HELCO and PGV executed a Settlement Agreement, which became effective on May 6, 1995. As to the part of the settlement agreement dealing with penalties, PGV agreed to pay $5.5 million to HELCO, including $3.2 million previously withheld by HELCO, and $2.3 million in the form of supplemental energy deliveries to HELCO over approximately a three-year period. HELCO has not yet recognized any income for the $5.5 million settlement amount. The portion of the settlement that HELCO will pass on to customers is subject to review by the PUC. HELCO informed the PUC on April 11, 1995 that it intended to pass on $0.8 million ($3.2 million less HELCO's out-of- pocket costs) of the settlement to ratepayers by means of a temporary reduction in rates from June 1, 1995 to August 31, 1995, and to reduce energy cost adjustment charges to ratepayers in the amount of $2.3 million over approximatly three years. C. Integrated Resource Planning As a result of a proceeding initiated in January 1990, the PUC issued an order in March 1992 (as revised in May 1992) requiring that the energy utilities in Hawaii develop integrated resource plans (IRPs). The goal of integrated resource planning is the identification of the demand-side and supply-side resources and the integration of these resources for meeting near- and long-term consumer energy needs in an efficient and reliable manner at the lowest reasonable cost. In the first phase of the IRP proceeding, the PUC adopted a "framework", which establishes both the process for developing IRPs and guidelines for the development of such plans. The PUC's framework directs that each plan cover a 20-year planning horizon with a five-year program implementation schedule and states that the planning cycle will be repeated every three years. Under the framework, the PUC may approve, reject or require modifications of the utilities' IRPs. The framework also states that utilities are entitled to recover all appropriate and reasonable integrated resource planning and implementation costs, including the costs of planning and implementing demand-side management (DSM) programs. Under appropriate circumstances, the utilities may recover net lost revenues resulting from DSM programs and earn shareholder incentives. In July 1993, HECO filed with the PUC its 20-year (1994-2013) IRP for the island of Oahu, together with a five-year (1994-1998) implementation schedule. HELCO filed its plan in October 1993. MECO filed its plan in December 1993. The utilities have modified their IRPs during the IRP proceedings. The utilities have characterized their proposed IRPs as planning strategies, rather than fixed courses of action, and the resources ultimately added to their systems may differ from those included in the 20-year plan. Under the IRP framework, the utilities are required to submit annual evaluations of their plans (including a revised five-year program implementation schedule) and to submit new plans on a three-year cycle. In March 1995 the PUC approved HECO's IRP, as modified. Individual demand-side management programs must still be approved by the PUC. HECO has proposed five full-scale energy efficiency programs. These programs include air conditioning, lighting, refrigeration and industrial motor uses for existing commercial/industrial customers; a similar program for new commercial/industrial customers in the new construction market; a program to do custom-tailored energy efficiency programs for commercial/industrial customers; and residential water heating programs for existing customers and the new construction market. Management cannot predict with certainty, until completion and approval of 26 the proposed full-scale energy efficiency programs what effect, if any, these programs will have on HECO. The IRPs for MECO and HELCO will require PUC approval prior to implementation. Management cannot predict the outcome of the proceedings or the impact of any IRP ultimately approved on MECO and HELCO. D. 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, its electric utility subsidiaries and ratepayers. In May 1994, a consultant, Dennis Thomas and Associates, was selected by the PUC to perform the review. In early 1995, Dennis Thomas and Associates issued its report to the PUC. The report concluded that "on balance, diversification has not hurt electric ratepayers." Other major findings of the study were that no utility assets have been used to fund HEI's nonutility investments or operations, HEI has not denied needed capital to the electric utilities and management processes within the electric utilities operate without interference from HEI. The report also made several recommendations, including initiating more ongoing communication between HEI and the PUC on diversification issues and any changes in HEI's diversification policy, providing the PUC with annual reports on compliance with the original conditions mandated by the PUC when HEI was formed, having a HECO Board of Directors with a majority of members who are not also directors of HEI and adoption of a policy statement by HECO's Board of Directors documenting its commitment to public service obligations. In April 1995, HEI and HECO submitted their response to the PUC. E. 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
Years Ended December 31, -------------------------------------------- Three months ended March 31, 1995 1994 1993 1992 1991 1990 -------------- ---- ---- ---- ---- ---- 1.93 2.22 2.25 2.08 1.99 1.76 ==== ==== ==== ==== ==== ====
Ratio of earnings to fixed charges including interest on ASB deposits
Years Ended December 31, -------------------------------------------- Three months ended March 31, 1995 1994 1993 1992 1991 1990 -------------- ---- ---- ---- ---- ---- 1.56 1.69 1.65 1.50 1.46 1.39 ==== ==== ==== ==== ==== ====
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, 27 (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. 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
Years Ended December 31, -------------------------------------------- Three months ended March 31, 1995 1994 1993 1992 1991 1990 -------------- ---- ---- ---- ---- ---- 3.27 3.47 3.25 3.03 2.82 2.99 ==== ==== ==== ==== ==== ====
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. 28 Item 6. Exhibits and reports on Form 8-K - ----------------------------------------- (a) Exhibits HECO Hawaiian Electric Company, Inc. and subsidiaries Amended and Exhibit 10 restated power purchase agreement between Hilo Coast Processing Company and Hawaii Electric Light Company, Inc. dated March 24, 1995 HEI Hawaiian Electric Industries, Inc. and subsidiaries Exhibit 11(a) Computation of earnings per share of common stock, three months ended March 31, 1995 and 1994 HECO Hawaiian Electric Company, Inc. and subsidiaries Computation of Exhibit 11(b) earnings per share of common stock HEI Hawaiian Electric Industries, Inc. and subsidiaries Computation Exhibit 12(a) of ratio of earnings to fixed charges, three months ended March 31, 1995 and 1994 HECO Hawaiian Electric Company, Inc. and subsidiaries Computation Exhibit 12(b) of ratio of earnings to fixed charges, three months ended March 31, 1995 and 1994 HEI Hawaiian Electric Industries, Inc. and subsidiaries Financial Exhibit 27(a) Data Schedule March 31, 1995 and three months ended March 31, 1995 HECO Hawaiian Electric Company, Inc. and subsidiaries Financial Data Exhibit 27(b) Schedule March 31, 1995 and three months ended March 31, 1995 (b) Reports on Form 8-K During the quarter, HEI and HECO filed a Current Report, Form 8-K, with the SEC under "Item 5. Other Events" and "Item 7. Financial Statements and Exhibits" as follows:
Dated Registrant/s Items reported - ------------------------------------------------------------------------------------------------------- December 29, 1994 HEI, HECO News releases: HEI utility subsidiary receives rate relief and HEI utility subsidiary receives 1995 interim rate order; Rating agency actions
29 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 (Principal Financial Officer of HEI) of HECO) Date: May 8, 1995 Date: May 8, 1995 30 EX-10 2 HECO POWER PURCHASE AGREEMENT HECO EXHIBIT 10 --------------- AMENDED AND RESTATED POWER PURCHASE AGREEMENT between HILO COAST PROCESSING COMPANY and HAWAII ELECTRIC LIGHT COMPANY, INC. TABLE OF CONTENTS AMENDED AND RESTATED POWER PURCHASE AGREEMENT ---------------------------------------------
Page ---- I. Definitions 3 A. HELCO Dispatch 3 B. Contract Year 4 C. Partial Contract Year 4 D. Contract Week 4 E. PUC 4 F. PUC Approval 4 G. Good Engineering and Operating Practices 4 II. HCPC's Obligation to Supply Capacity 6 A. Capacity Guarantee 6 B. Plant Shutdown Period 6 C. Capacity Charge 6 D. Conditions Related to Capacity Guarantee 7 III. Sale and Purchase of Energy 9 A. Energy Sale and Purchase Guarantee; Purchase of Additional Energy 9 B. Determination of Energy Rates 11 C. Application of Rates 13 D. Payments 13 IV. [deleted] 13 V. 69 kv Substation and Transmission Line 13 A. Existing Facilities 13 B. Upgrade of Facilities 14 VI. Metering 15
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Page ---- VII. Purchase of Power by HCPC 16 VIII. Interruption of Service 16 IX. Performance Standards and Sanctions 17 A. Minimum Performance Standards 17 B. Sanctions 19 C. Deletion of Capacity Charge 20 X. Privity 21 XI. Assignment 22 XII. Arbitration 22 A. Enforcement of Contract 22 B. Attorneys' Fees 23 XIII. Training Standards 23 XIV. Term 23 XV. Termination; Default 23 A. Termination upon HCPC's Total Default 23 B. HCPC's Failure to Restore Unit 24 C. HELCO Right to Possession 25 XVI. HELCO's Purchase Options 26 A. Default Purchase Option 26 B. [deleted] 27 C. [deleted] 27 D. Protection of Option to Purchase 27 XVII. Mutual Release 28
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Page ---- XVIII. Effective Date; Necessary Approvals and Conditions 28 XIX. General Provisions 30 A. Severability 30 B. Section Headings 31 C. Notices 31 D. Entire Agreement 32 E. Governing Law 32 F. Modifications, Amendments or Waivers 32 G. Interpretation 33 H. Good Faith Efforts 33 Exhibit A A-1 Exhibit B B-1
iii AMENDED AND RESTATED POWER PURCHASE AGREEMENT --------------------------------------------- This Amended and Restated Power Purchase Agreement ("the Contract") is made and entered into on March 24, 1995 by and between HILO COAST PROCESSING COMPANY (hereinafter referred to as "HCPC") and HAWAII ELECTRIC LIGHT COMPANY, INC. (hereinafter referred to as "HELCO"). W I T N E S S E T H T H A T: ----------------------------- WHEREAS, HELCO is and has been an operating electric public utility on the Island of Hawaii in the State of Hawaii and is subject to the Hawaii Public Utilities Laws (Chapter 269 of the Hawaii Revised Statutes) and the rules and regulations of the Hawaii Public Utilities Commission (hereinafter referred to as the "PUC"); and WHEREAS, HELCO and Pepeekeo Sugar Company ("Pepeekeo") entered into that certain Purchase Power Agreement dated July 1, 1971 (hereinafter referred to as "the Initial Agreement"); and WHEREAS, Pepeekeo assigned all of its right, title and interest in and to the Initial Agreement to HCPC, subject to the terms, conditions and provisions thereof, pursuant to that certain Assignment of Power Purchase Agreement Contract made September 1, 1971 (hereinafter referred to as the "Assignment"); and WHEREAS, HELCO and HCPC agreed to amend and restate the Initial Agreement as heretofore amended and/or modified in its 1 entirety as of May 31, 1988, for a term through December 31, 2002 (hereinafter referred to as the "Prior Contract"); and WHEREAS, on July 31, 1992, C. Brewer and Company, Limited publicly announced that its subsidiary, Mauna Kea Agribusiness Company, Inc., the primary supplier of sugar cane processed by HCPC, would discontinue harvesting sugar in late 1994 and that, thereafter, HCPC's primary fuel would be coal, supplemented by biomass material; and WHEREAS, by letter dated March 25, 1994, HCPC notified HELCO of its intent to abandon the production of power on March 26, 1997; and WHEREAS, by letter dated April 22, 1994, HELCO notified HCPC of its preliminary intent to purchase HCPC's power plant facilities pursuant to the purchase option in its existing power purchase agreement; and WHEREAS, HELCO and HCPC were not able to negotiate a purchase agreeable to both parties; and WHEREAS, on December 12, 1994, HCPC filed a voluntary petition under Chapter 11 of the United States Bankruptcy Code and notified HELCO of its intent to shut down the power plant on December 18, 1994, which closing was delayed to December 25, 1994 by agreement of the parties; and WHEREAS, HELCO commenced an adversary proceeding in the Bankruptcy Court in which it sought a permanent injunction compelling HCPC to perform the Prior Contract according to its terms; and 2 WHEREAS, the Bankruptcy Court granted HELCO's motion for a temporary restraining order ("TRO") until January 6, 1995; and WHEREAS, on January 5, 1995, HELCO and HCPC entered into a Letter Agreement setting forth the terms and conditions of an interim operating agreement, an amended power purchase agreement which, upon approval of the Bankruptcy Court, is to be effective through December 31, 1999, a cash advance of $6,000,000 to be provided by HELCO to HCPC to finance severance payments and other employee benefits and capital expenditures, and a revolving line of credit of up to $2,000,000 to finance the purchase of fuel and other operating expenses; WHEREAS, pursuant to a stipulation between HELCO and HCPC making the TRO effective through March 7, 1995, which stipulation was subsequently extended through March 24, 1995, the Bankruptcy Court approved an amended power purchase arrangement as set forth in the Letter Agreement in lieu of an interim operating agreement; NOW, THEREFORE, in consideration of the mutual promises and obligations set forth herein, the sufficiency of which is hereby mutually acknowledged, the parties hereto agree as follows: I. Definitions. ----------- A. HELCO Dispatch. The term "HELCO dispatch" as used herein means -------------- HELCO's absolute and sole right, through supervisory equipment and otherwise, to control electrical energy generated by HCPC pursuant to this Contract up to such capacity as may be agreed upon from time to time, provided, however, that HELCO shall take at all times during the 48 operating weeks of 3 every contract year at least 4,000 kw of power in order to keep HCPC's turbine generator operating at the minimum load required to keep capacity available to HELCO as provided herein. B. Contract Year. The term "contract year" means a year during the ------------- term hereof beginning at 0001 hours on January 1 and ending at 0001 hours on January 1 of the following year. C. Partial Contract Year. The term "partial contract year" means the --------------------- period beginning at 0001 hours on the effective date of this Contract and ending at 0001 hours on January 1, 1996. D. Contract Week. The term "contract week" means the time period ------------- during the term hereof from 0001 hours on Monday through 2400 hours the following Sunday. E. PUC. PUC means the Hawaii Public Utilities Commission. --- F. PUC Approval. PUC Approval means the PUC order or orders described ------------ in Section XVIII. G. Good Engineering and Operating Practices. The practices, methods ---------------------------------------- and acts engaged in or approved by a significant portion of the electric utility industry for similarly situated U.S. facilities that at a particular time, in the exercise of reasonable judgment in light of the facts known or that reasonably should be known at the time a decision is made, would be expected to accomplish the desired result in a manner consistent with law, regulation, reliability, safety, environmental protection, economy and expedition. With respect to 4 the power plant, Good Engineering and Operating Practices include but are not limited to taking reasonable steps to ensure that: 1. Adequate materials, resources and supplies, including fuel, are available to meet the power plant's needs under normal conditions and reasonably anticipated abnormal conditions. 2. Sufficient operating personnel are available and are adequately experienced and trained to operate the power plant properly, efficiently and within manufacturer's guidelines and specifications and are capable of responding to emergency conditions. 3. Preventive, routine and non-routine maintenance and repairs are performed on a basis that ensures reliable long-term and safe operation, and are performed by knowledgeable, trained and experienced personnel utilizing proper equipment, tools, and procedures. 4. Appropriate monitoring and testing is done to ensure equipment is functioning as designed and to provide assurance that equipment will function properly under both normal and emergency conditions. 5. Equipment is operated in a safe manner and in a manner safe to workers, the general public and the environment and with regard to defined limitations such as steam pressure, temperature, and moisture content, chemical content and quality of make-up water, operating voltage, current, frequency, rotational speed, polarity, synchronization, control system limits, etc. 5 II. HCPC's Obligation to Supply Capacity. ------------------------------------ A. Capacity Guarantee. HCPC shall furnish HELCO 22,000 kw of ------------------ capacity and 13,600 kvar of reactive under HELCO dispatch during the entire term hereof except for the "annual overhaul period" set forth in Section II.B. below and except that HCPC shall be obligated to furnish 20,000 kw of capacity until the later of: (i) June 1, 1995 or, (ii) such time as HCPC's existing permit limitations and conditions are complied with and any necessary substation improvements to accommodate the 22,000 kw, pursuant to Section V, are completed. The reactive shall be in proportion to power in the range of 0.85 lagging to 1.0 unity power factor and shall be dispatched by HELCO so that HCPC keeps its turbine generator output, at HELCO's direction, within the limits of plus or minus 5% of 13.8 kv. B. Plant Shutdown Period. HCPC shall have the right to shut its --------------------- turbine generator down and shall have no obligation to furnish HELCO the capacity described in Section II.A. hereof during four consecutive weeks during each contract year (the "annual overhaul period"). The annual overhaul period shall be taken during the period mutually agreeable to HCPC and HELCO, the specific days to be determined each contract year with HELCO's approval, which approval shall not be unreasonably withheld. C. Capacity Charge. As compensation for maintaining the 20,000 kw and --------------- 22,000 kw of capacity under HELCO dispatch during the time periods as described herein, HELCO will pay HCPC a capacity charge, payable monthly within ten (10) days 6 after the last day of the calendar month, equal to an amount which would average $218/kw-yr over the contract term, specifically: (i) $306,167 per month ($167/kw-yr) through December 31, 1995, during the portion of such period when HCPC is obligated to provide 22,000 kw of capacity pursuant to Section II.A. ($278,333 per month during the portion of such period when HCPC is obligated to provide only 20,000 kw of capacity pursuant to Section II.A.), and (ii) $5,082,000 ($231/kw-yr) per contract year thereafter, commencing January 1, 1996 in twelve equal monthly installments. HELCO shall not be obligated to pay any additional capacity charge for any additional capacity supplied by HCPC, either at HELCO's request or at HCPC's request. A failure by HCPC to provide the required capacity to HELCO shall result in the reduction in the capacity charge due to HCPC from HELCO in accordance with Section IX.B.1. of this Contract. HELCO shall not have any obligation to pay capacity charges to HCPC (i) for periods in excess of 24 consecutive hours in which HCPC is unable to fulfill its obligations under Section II.A. of this Contract without fault as set forth in Section VIII, or (ii) for periods in which HCPC does not fulfill its obligations under Section II.A. of this Contract due to HCPC's "total default", as such term is defined in Section XV.B. of this Contract. D. Conditions Related to Capacity Guarantee. ---------------------------------------- 1. The capacity obligation amounts in Section II.A. are based on the assumption that such amounts are permissible under HCPC's applicable permits and any conditions thereunder. Upon HELCO's request, HCPC shall provide verification 7 of such assumption. Should the assumption be incorrect, HELCO reserves the right to require that HCPC use its best effort to cure any discrepancies in a timely manner and/or to adjust such capacity obligation, and the corresponding capacity charge under Section II.C., in order to comply with such permits and conditions. 2. The increase in HCPC's capacity obligation under Section II.A. is contingent upon the completion of any necessary substation upgrades pursuant to Section V by May 31, 1995, and upon compliance with any applicable PUC rules with regard to such upgrades. Accordingly, the effective date of the increase in the capacity obligation to 22,000 kw (projected for June 1, 1995) shall be delayed if necessary until such time as the foregoing conditions are met. 3. Acceptance Test. Increased firm capacity payments pursuant to --------------- Section II.C., reflecting the increased capacity obligation under Section II.A. to 22,000 kw, shall begin when acceptance tests conducted by HELCO indicate that HCPC has demonstrated delivery of the capacity guarantee during a 100 consecutive hour period at HELCO dispatch, beginning at a time designated in advance by HCPC, after compliance with Section II.A.(ii). At any time prior to the capacity tests, HCPC must demonstrate that facility has the ability to reduce load to the minimum 4,000 kw level and remain stable during the off-peak period on its primary fuel of coal. It must also demonstrate the ability to ramp up and down at the rate of 2 mw per minute. During all or part of the acceptance testing program HCPC shall 8 allow a HELCO representative to be onsite to verify and record various hourly meter readings and to see that the tests are conducted within the scope of Good Engineering and Operating Practices. HCPC shall notify HELCO with a minimum seven (7) days advance notice of when the power plant will be available for conduct of the acceptance test. III. Sale and Purchase of Energy. --------------------------- A. Energy Sale and Purchase Guarantee; Purchase of Additional ---------------------------------------------------------- Energy. - ------ 1. During each contract year of the term of this Contract, HCPC shall make available to HELCO under HELCO dispatch, at the regular rate, the amounts of kilowatt hours of energy per contract week and per contract year respectively listed under "Contract Week Amount" and "Contract Year Amount" in Section III.A.2. below. 2. During each contract year, HELCO shall purchase at least 94% on a weekly basis and at least 98% on an annual basis of said following amounts of energy (subject to a prorata reduction to the extent that the contract week or contract year energy amounts are not made available by HCPC):
Capacity Contract Contract Obligation Week Amount Year Amount ---------- -------------- --------------- 20,000 kw 2,025,500 kwh 97,224,000 kwh 22,000 kw 2,192,400 kwh 105,235,200 kwh
HELCO will use its best efforts, taking into account Good Engineering and Operating Practices with respect to HELCO's utility system practices, to dispatch at least the following amounts of energy per day on-peak (subject to a prorata 9 reduction to the extent that the capacity obligation is not provided by HCPC on-peak):
Capacity On-Peak Obligation kwh Amount ----------- ---------- 20,000 kw 246,000 22,000 kw 266,000
3. During the partial contract year, HELCO shall purchase at least 94% on a weekly basis of the contract week amount of energy specified in Section III.A.2. In the partial contract year, the Contract Year Amount shall be equal to the Contract Week Amount multiplied by the number of full weeks in the partial contract year minus the number of full weeks in the annual overhaul period. 4. Any energy utilized by HELCO at HCPC's request or at HELCO's request in excess of the contract week amount, whether through a temporary increase in capacity or otherwise, shall not count towards any contract week amount which HCPC is required to deliver at the regular rate. 5. HCPC anticipates that its power production facilities will produce energy during on-peak hours in addition to the amounts of energy which HCPC is obligated to deliver to HELCO under HELCO dispatch ("Additional On-peak Energy"). An HCPC estimate of the amount of Additional On-peak Energy that may be made available for the upcoming contract year ("HCPC's annual Additional On- peak Energy estimate") shall be given in writing to HELCO at least 30 days prior to the upcoming contract year. HCPC shall use its best efforts to insure the 10 accuracy of the estimate and shall notify HELCO of changes in that estimate as soon as possible. 6. HELCO shall attempt to arrange for the acceptance of such Additional On-peak Energy up to HCPC's annual Additional On-peak Energy estimate, provided that HELCO shall not be obligated to accept and pay for Additional On-peak Energy to the extent that HELCO determines that it is unable to do so, based on HELCO's minimum base load requirements and/or transmission system capacity, as determined by HELCO in accordance with industry standards, and giving priority to all sources of firm energy available to HELCO both now and in the future, and all sources of unscheduled energy available to HELCO under contracts or other legally enforceable obligations with effective dates prior to the effective date of this Contract. HELCO also shall not be obligated to accept and pay for Additional On-peak Energy if the cost of such energy would exceed the cost to HELCO if HELCO generated an equivalent amount of energy itself, or during any period in which purchases of energy by an electric utility from a qualifying facility could be discontinued or otherwise would not be required under the rules and regulations of the PUC. After giving effect to the foregoing, HELCO agrees that it will use its best efforts to accept such Additional On-peak Energy. B. Determination of Energy Rates. ----------------------------- 1. The regular rate for energy shall consist of on-peak and off- peak rates equal to: (a) the base on-peak and off-peak rates specified in Section III.B.4 of this Contract (the 11 "base rates") plus two-thirds of the difference between the base on-peak or off-peak rates and 100% of HELCO's on-peak and off-peak avoided cost, respectively, if HELCO's on-peak or off-peak avoided cost is greater than the respective base on-peak or off-peak rate, or (b) the base on-peak or off-peak rates, if such base rates are greater than HELCO's respective on-peak or off-peak avoided cost at the time the energy is delivered. The calculation of the on-peak energy payment rate is illustrated in Exhibit B to this Contract. 2. The on-peak hours shall be those between the hours of 0700 hours and 2100 hours each day and the off-peak hours shall be those between the hours of 2100 hours on one day and 0700 hours on the following day. 3. "HELCO's avoided cost" means HELCO's respective on-peak and off-peak avoided costs for energy in cents per kilowatt hour as shown by HELCO's most recent avoided cost filing with the PUC. 4. The base on-peak and off-peak rates shall be HELCO's avoided cost for the first quarter of 1995, specifically, $0.0541/kwh on-peak and $0.0451/kwh off-peak. 5. [deleted] 6. [deleted] 12 C. Application of Rates. -------------------- 1. The regular rate shall apply to all energy provided by HCPC per week up to the contract week amount as specified in Section III.A.2. 2. The regular rate also shall apply to all energy requested by HELCO and delivered by HCPC in excess of the contract week amount; it being understood, however, that HCPC shall not be required to supply such energy. 3. Notwithstanding Sections III.B and C.1 and 2 of this Contract, HELCO shall pay a rate for energy equal to the rates specified in Sections III.B and C of the Prior Contract until such date as the PUC approves recovery of HELCO's payments under this Contract to HCPC for purchased energy (and related revenue taxes) through its Energy Cost Adjustment Clause (to the extent that such payments are not recovered through HELCO's base electric rates). D. Payments. Charges for all energy delivered hereunder shall -------- be payable monthly within ten (10) days after the last day of the calendar month. IV. [deleted] V. 69 kv Substation and Transmission Line. -------------------------------------- A. Existing Facilities. ------------------- Pursuant to the Initial Agreement, HELCO constructed and equipped a 69/13.8 kv substation, transmission line and other necessary apparatus for the purpose of making HCPC capacity available to the HELCO system. Pursuant to the Prior Contract, HELCO charged HCPC $77,238 annually for a 20-year 13 period, paid in equal monthly installments from September 15, 1974 to September 14, 1994. The interconnection facilities include the following: 1. 69 kv and 13.8 kv equipment at the HELCO Pepeekeo Switching Station 2. Two 13.8 kv overhead polelines 3. Two 13.8 kv underground circuits 4. 13.8 kv breakers and switchgear equipment at the HCPC power plant 5. 13.8 kv revenue meters and metering support facilities at the HCPC power plant 6. Communication and current transformer circuit between the Pepeekeo Switching Station and the HCPC power plant. The point of interconnection is the jumper cables between the HELCO 13.8 kv overhead lines and HCPC's 13.8 kv underground conductors. HELCO will continue to own, operate and maintain at its expense items #1, #2, and the revenue meters in item #5. HCPC will continue to own, operate and maintain at its expense items #3, #4, the metering support facilities in item #5, and #6. B. Upgrade of Facilities. --------------------- To the extent necessary to accommodate HCPC's supply of 22,000 kw of capacity, HELCO shall, subject to any applicable PUC requirements, upgrade the existing substation and transmission line facilities, and shall use its best efforts to 14 meet the June 1, 1995 date for increasing HCPC's capacity obligation. Any costs incurred by HELCO in such upgrade shall be prorated between HELCO and HCPC, such that HCPC shall be allocated a portion of such cost equal to a fraction, the numerator of which shall be the number of full or partial calendar months between the commencement of the 22,000 kw capacity obligation and the end of the Contract term, and the denominator of which is the estimated useful life of the upgraded facilities. Such amount shall be payable in substantially equal monthly installments over the remaining term of this Contract upon completion of the upgrade, through a credit each month against the amount otherwise payable by HELCO under Section III.D. for energy purchased hereunder. VI. Metering. -------- All electric energy to be delivered hereunder shall be what is commonly called 3-phase 60 hertz alternating current and shall be delivered and metered at an electromotive force of 13.8 kv, a plus or minus 5% variation being allowable, at HCPC's 13.8 kv bus. All revenue-metering equipment shall be owned and operated by HELCO in a metering compartment provided by HCPC and meeting all PUC standards at the 13.8 kv bus. Metering shall be accomplished by an individual system measuring energy from HCPC. HELCO shall, at least once each contract year during the term hereof, test and adjust, in the presence of HCPC's representative, all revenue-metering equipment in conformity with the current standards followed by HELCO pursuant to PUC order or rule, which was ANSI C12 1975 (6th ed.) as of the date of this Contract. If said equipment is found inaccurate by more than 2%, then 15 adjustment in the billings for such inaccuracy shall be made within 30 days by one party to the other as the case may be. Any inaccuracy so discovered shall be conclusively presumed to have existed for half the period between the last inspection and the inspection in which the inaccuracy was discovered. VII. Purchase of Power by HCPC. ------------------------- Sales of electrical energy to HCPC by HELCO shall be governed by applicable rate schedules and rules and regulations at the time of such sales as specified in HELCO's tariff filed with the PUC, and not by this Contract. VIII. Interruption of Service. ----------------------- If HCPC shall be wholly or partially prevented from delivering the electrical energy contracted for herein, or if the service thereof shall be interrupted, or if HELCO shall be prevented from receiving, using and applying the same, by reason of or through strikes, riot, fire, flood, invasion, insurrection, lava flow or volcanic activity, tidal wave, civil commotion, accident, the order of any court or civil authority, any act of God or the public enemy, or any other similar or dissimilar cause reasonably beyond its exclusive control and not attributable to its neglect, then and in any such event, HCPC shall not be obligated to deliver said electrical energy hereunder during such period and shall not be liable for any damage or loss resulting from such interruption or suspension, and HELCO shall not be obligated or liable to take or pay for any such energy during such period. In the event of a strike of its own employees which would interfere with the delivery of energy hereunder, HCPC will utilize 16 its best efforts to operate the HCPC power plant facilities, including the use of supervisory labor. In any case, however, so long as HCPC is able to fulfill its obligations under this Contract, HELCO will continue to pay the capacity charge set forth in Section II.C. hereinabove. In the event HELCO is able to fulfill its obligations under this Contract but HCPC is unable to do so, HCPC shall continue to pay the charge set forth in Section V hereinabove. In the event of either party being unable to fulfill its obligations under this Contract without fault as aforesaid, for periods not in excess of 24 consecutive hours, then, and in such case, there will be no adjustment of the charge set forth in Section V or the capacity charge. In any of such event or events, the party or parties suffering such interruption or suspension shall be prompt and diligent in removing the cause thereof. In order to minimize the possibility of interruption, HCPC agrees to keep reasonable fuel reserves and a reasonable inventory of spare parts on hand at all times. IX. Performance Standards and Sanctions. ----------------------------------- A. Minimum Performance Standards. ----------------------------- 1. HCPC acknowledges and agrees that the HCPC unit is expected to meet the following minimum standards for satisfactory day-to-day performance during each contract year: (i) an on-peak unit availability (excluding the four-week annual maintenance period and downtime due to a catastrophic equipment failure) of 95 percent or better; (ii) not more than 6 unit trips per year; and (iii) a forced outage rate of 5 percent or less. 17 2. The on-peak availability of the HCPC Unit (in percent) is to be computed by adding the average megawatts available from the HCPC unit during each on-peak hour during the contract year, multiplying the total by 100, and dividing by either 94,080 (while the capacity obligation is 20,000 kw) or 103,488 (while the capacity obligation is 22,000 kw). In the case of the partial contract year, the foregoing formula shall be adjusted appropriately. 3. "Catastrophic equipment failure" means a sudden, unexpected failure of a major piece of equipment which (i) substantially reduces or eliminates the capability of the HCPC Unit to produce power, (ii) is beyond the reasonable control of HCPC and could not have been prevented by the exercise of due diligence by HCPC and, (iii) despite the exercise of all reasonable efforts, requires more than 60 days to repair. 4. "Unit trip" means the sudden and immediate removal of the HCPC Unit from service as a result of an immediate mechanical/electrical/hydraulic control system trip or operator initiated trip/shutdown which requires HELCO to take immediate steps to place an unscheduled generator on line to make up for the loss of output of the HCPC Unit; provided, however, that a unit trip shall not include: (i) any such removal which occurs within 48 hours of the time at which the HCPC Unit is restarted following an outage; (ii) trips caused or initiated by HELCO; or (iii) trips occurring during periods when HCPC has continued to furnish capacity to HELCO at the request of HELCO's 18 Production Manager after HCPC has notified HELCO's Production Manager that the HCPC Unit is likely to trip. 5. The forced outage rate of the HCPC unit during a contract year is to be computed by totaling the average megawatts unavailable for service due to forced outages or deratings on an hourly basis, multiplying the total by 100, and dividing by either 175,200 (while the capacity obligation is 20,000 kw) or 192,720 (while the capacity obligation is 22,000 kw). In the case of the partial contract year, the foregoing formula shall be adjusted appropriately. B. Sanctions. --------- 1. The capacity charge is to be made on the basis of the full availability of 22,000 kw (20,000 kw during the period HCPC has a capacity obligation of 20,000 kw under Section II.A.). For any full on-peak hour in which the full 22,000 kw (or 20,000 kw, as applicable) is not available, the capacity charge will be reduced by the following amounts for each kilowatt of deficiency: Capacity Obligation Sanction ------------------- -------- 20,000 kw $0.0311/kw 22,000 kw through 1995 (at $167/kw-yr) $0.0314/kw 1996 - 1999 (at $231/kw-yr) $0.0435/kw 2. For each contract year in which the on-peak availability of the HCPC unit is less than 95 percent, HCPC will pay to HELCO $5000 for each full percentage point of the 19 shortfall unless the shortfall is due to a catastrophic equipment failure. 3. For each unit trip in excess of 6 per contract year, HCPC shall pay $5000 to HELCO. 4. HELCO shall have the right to set off any payment due from HCPC under this Section against any payments due to HCPC. C. Deletion of Capacity Charge. --------------------------- 1. If the performance of the HCPC Unit fails to meet any of the following minimum criteria for any reason other than a catastrophic equipment failure, the capacity charge shall be deleted until, with respect to criterion (v) or (vi), HCPC demonstrates to HELCO's reasonable satisfaction that it has cured the defect or deficiencies causing the unit trips, and until, with respect to criterion (i), (ii) or (iii), HCPC operates the unit at or above the minimum criterion or criteria for one full year: (i) On-peak availability of no less than 75 percent for any one contract year; (ii) On-peak availability of no less than 80 percent for two out of any three consecutive contract years; (iii) Forced outage rate no greater than 15 percent for any one contract year; (iv) Forced outage rate no greater than 10 percent for two out of any three consecutive contract years; (v) Unit trips no greater than 18 for any one contract year; or 20 (vi) Unit trips no greater than 12 for any two out of three consecutive contract years. 2. Any period during which the HCPC Unit does not meet or exceed the minimum criteria set forth in Section IX.C.1. shall be termed a "deficiency period." 3. Notwithstanding the provisions of Section IX.C.1.(v) and (vi), the capacity charge shall not be deleted solely on the basis of excessive unit trips during such period following a deficiency period (not to exceed five (5) days) as HCPC is taking appropriate and timely corrective action acceptable to HELCO to cure any defects or deficiencies causing the unit trips. HCPC shall not be deemed to be taking appropriate and timely corrective action unless (i) it provides written notice to HELCO of the defects or deficiencies causing the unit trips, the corrective action it proposes to take, and an appropriate schedule for completing such corrective action within two (2) days after the end of a deficiency period, and (ii) it complies with such schedule. Such written notice shall not be valid unless it is provided within seven (7) days after the end of a deficiency period. X. Privity. ------- Any other term, covenant or provision herein contained to the contrary notwithstanding, this Contract is not intended and shall not be construed in any manner so as to benefit any third party; nor is it intended nor shall it be construed in a manner such as to place HCPC in privity with any parties who might have a contract to purchase electric energy from HELCO; nor is it 21 intended nor shall it be construed in any manner so as to impose a duty upon HCPC to supply electric energy to the public or any portion of the public or to any private person or parties not a party to this Contract, or to supply electric energy to any particular locality or district in the County of Hawaii. XI. Assignment. ---------- This Contract shall not be assigned by either party without the prior written consent of the other party; provided that HELCO may assign its interest in this Contract, upon written notice to HCPC, to the Trustee under HELCO's First Mortgage and Deed of Trust dated May 1, 1941, as it has been and may be amended from time to time; and further provided that HCPC may assign its interest in this Contract to Mauna Kea Agribusiness, Inc. and may request HELCO's consent to an assignment of this Contract pursuant to a refinancing by HCPC; which consent shall not be unreasonably withheld. XII. Arbitration. ----------- A. Enforcement of Contract. In the event any controversy or ----------------------- dispute arises with respect to this Contract or any of the terms or conditions hereof other than any dispute arising under Section XV, or with respect to any alleged breach hereof, such controversy or dispute, and all issues with respect to any obligation or duty to continue performance under this Contract pending resolution of such controversy or dispute, shall be submitted to and settled by arbitration in accordance with the laws of the State of Hawaii (which are currently codified in Chapter 658 of the Hawaii Revised Statutes) and the Commercial 22 Rules of the American Arbitration Association and the parties shall be bound by the award of such arbitration. B. Attorneys' Fees. In the event of any breach of any covenant --------------- or condition of this Contract, or any dispute or controversy with respect hereto, the prevailing party shall be entitled to recover from the other party all expenses and costs, including reasonable attorneys' fees, incurred in the enforcement of this Contract. XIII. Training Standards. ------------------ All HCPC employees operating and maintaining the steam generator and all HCPC employees maintaining the turbine generator shall have received training in accordance with good engineering and operating standards and practices. HCPC's operation and maintenance schedules shall be established to provide adequate staffing by qualified personnel at all times. XIV. Term. ---- The term of this Contract shall be from the effective date of this Contract, determined in accordance with Section XVIII.A., to and including December 31, 1999. XV. Termination; Default. -------------------- A. Termination upon HCPC's Total Default. ------------------------------------- 1. Upon the occurrence of a total default by HCPC, HELCO may, at its option, (i) terminate this Contract by delivering written notice of such termination to HCPC, and institute proceedings or resort to such other remedies not in conflict with this Contract as it deems appropriate, or (ii) continue this Contract, in which event HCPC shall pay HELCO's 23 power replacement cost, and institute proceedings or resort to such other remedies not in conflict with this Contract as it deems appropriate. Termination under this Section shall be effective 30 days from the date of HCPC's receipt of written notice of termination and shall not prejudice any other rights or remedies HELCO may have. 2. "Total default" means abandonment of the production of power by failure to maintain continuous service to the extent required by this Contract, when HCPC has the technical capability to maintain such service (including the ability to operate HCPC's Unit in a safe manner in accordance with good engineering and operating practices), for three (3) or more consecutive days, the last 24 hours of which shall be after notice to HCPC that it is in total default. 3. "HELCO's power replacement cost" means the cost to HELCO of replacing the capacity and energy that HCPC is obligated to furnish to HELCO pursuant to Sections II.A. and III.A.1. and 2. less the net payments HELCO would have made to HCPC for such capacity and energy. B. HCPC's Failure to Restore Unit. If HCPC shall fail to make ------------------------------ all reasonable efforts to restore the HCPC Unit to full or substantially full operating condition following any casualty loss and such failure continues for ten (10) days after written demand therefor by HELCO, HELCO shall have the option to terminate this Contract by giving written notice of such termination to HCPC. Such termination shall be effective 30 days from the date of HCPC's receipt of written notice of termination 24 and shall not prejudice any other rights or remedies HELCO may have. C. HELCO Right to Possession. In the event there is a total ------------------------- default by HCPC as defined under Section XV, HELCO shall have the right but not any obligation immediately to take possession of the HCPC Power Plant for the remaining term of the Contract and to generate power regardless of whether or not it exercises its default purchase option under Section XVI.A. If at the time of such total default HCPC remains under the jurisdiction of the Bankruptcy Court, to the extent any automatic stay may apply, the parties agree that HELCO has cause, within the meaning given that term in Section 362(d)(1) of the Bankruptcy Code, 11 U.S.C. (S) 362(d)(1), to obtain relief from any automatic stay to permit it to exercise its rights under this Section. If HELCO takes possession of the HCPC Power Plant, it must preserve the value and operational integrity of the plant so that the fair market value (less depreciation) of the plant is not negatively impacted. During and as a result of any such possession by HELCO, the risk of damage to or loss of the HCPC Power Plant shall be borne by HELCO to the extent such damage or loss is attributable to HELCO's failure to operate the power plant in accordance with (i) Good Engineering and Operating Practices and (ii) electric public utility standards. In the event HELCO takes possession of the HCPC Power Plant, HCPC shall make available to HELCO all operating manuals and equivalent information relating to the operation of the power plant. 25 XVI. HELCO's Purchase Options. ------------------------ A. Default Purchase Option. ----------------------- 1. In addition to any other rights or remedies HELCO may have, if a total default by HCPC occurs and HELCO gives notice of termination of this Contract to HCPC pursuant to Section XV.A., HELCO, at its option, shall have the right but not any obligation, to purchase the HCPC Power Plant, as defined and identified on Exhibit "A" to this Contract, free and clear of any liens, debts, mortgages or other encumbrances (which right shall be termed HELCO's "default purchase option"). 2. In order to preserve its default purchase option, HELCO shall provide written notice of its preliminary intent to exercise such option to purchase to HCPC within 30 days after HELCO gives notice of termination of this Contract to HCPC as a result of HCPC's total default. 3. Notice of intent to purchase hereunder by HELCO shall be in writing, and shall be given to HCPC within 15 days after agreement between the parties as to the fair market value of the HCPC Power Plant, or after a determination of such fair market value, with the closing of any such purchase contingent upon PUC approval unless waived by HELCO. 4. The purchase price pursuant to HELCO's default purchase option shall be the fair market value of the HCPC Power Plant. 5. If HELCO gives written notice of its preliminary intent to exercise its default purchase option after a total default by HCPC occurs, HELCO shall have the right but not 26 any obligation to immediately take possession of the HCPC Power Plant during any remaining term of this Contract and to generate electrical energy for its electric public utility system. If HELCO takes possession of the HCPC Power Plant, it must preserve the value and operational integrity of the plant so that the fair market value (less depreciation) of the plant is not negatively impacted. During and as a result of any such possession by HELCO, the risk of damage to or loss of the HCPC Power Plant shall be borne by HELCO to the extent such damage or loss is attributable to HELCO's failure to operate the power plant in accordance with (i) Good Engineering and Operating Practices and (ii) electric public utility standards. In the event HELCO takes possession of the HCPC Power Plant, HCPC shall make available to HELCO all operating manuals and equivalent information relating to the operation of the power plant. B. [deleted] C. [deleted] D. Protection of Option to Purchase. HCPC will not directly or -------------------------------- indirectly create, or permit to be created by any action or inaction of HCPC or those claiming through or under HCPC (and will not permit to remain, and will promptly discharge, any of the same so created or permitted) any mortgage, lien or encumbrance with respect to the HCPC Power Plant (other than those existing and disclosed in writing to HELCO by HCPC as of the date of this Contract) that would impair the exercise by HELCO of its option to purchase pursuant to Section XVI.A. of this Contract, 27 without HELCO's prior written consent, which consent shall not be unreasonably withheld. XVII. Mutual Release. -------------- Each party hereby waives and releases any and all claims it now has or may have against the other party resulting from, arising out of, connected with or traceable either directly or indirectly to any action of any party under the Prior Contract up to and including the effective date of this Contract. Any third party claim brought against either party within 30 days after the effective date of this Contract but resulting from, arising out of, connected with or traceable either directly or indirectly to any action of either party under the Prior Contract or while the TRO was in effect shall not be subject to such release. XVIII. Effective Date; Necessary Approvals and Conditions. -------------------------------------------------- A. This Contract shall be effective as of the earlier of: (i) the date of approval by the United States Bankruptcy Court or (ii) the date of a non-appealable dismissal of HCPC's bankruptcy action, Bankruptcy Case No. 94- 01491, United States Bankruptcy Court, State of Hawaii. B. HELCO shall use its good faith efforts to obtain, as soon as practicable, an order or orders from the PUC approving: (i) this Contract, amending and restating the Prior Contract in its entirety; (ii) the inclusion of energy and capacity costs to be incurred by HELCO pursuant to this Contract in HELCO's revenue requirements for ratemaking purposes or for the 28 purpose of determining the reasonableness of HELCO's rates and (iii) recovery of HELCO's payments to HCPC for purchased energy (and related revenue taxes) through its Energy Cost Adjustment Clause (to the extent that such payments are not recovered through HELCO's base electric rates). C. If the PUC Approval under Section XVIII.B. is not obtained in either an interim or final form, acceptable to HELCO in its sole discretion, which shall not be unreasonably invoked, within 180 days of the execution of this Contract (unless mutually extended by the parties), HELCO, by written notice to HCPC within 30 days of such 180 day period (as it may be extended by the parties), may terminate this Contract, such termination to be effective 45 days after receipt by HCPC of such notice. Furthermore, if the PUC approval under Section XVIII.B(i) is not obtained in either an interim or final form within 180 days of the execution of this Contract (unless mutually extended by the parties), HCPC, by written notice to HELCO within 30 days of such 180 day period (as it may be extended by the parties), may terminate this Contract, such termination to be effective 45 days after receipt by HELCO of such notice. D. In addition to any other conditions specified herein, this Contract shall be contingent upon the parties obtaining approval of the respective Boards of Directors of HELCO and HCPC. The parties shall use their good faith efforts to obtain all such approvals within ten (10) days of the date of execution of this Contract. 29 E. As a condition precedent to the effectiveness of this Contract, the parties shall execute, obtain any necessary approvals for, and satisfy any conditions precedent specified in such agreements as are necessary to provide for a cash advance of $6,000,000 and a revolving line of credit of up to $2,000,000, as generally described in Paragraphs 11 and 12, respectively, of the Letter Agreement between the parties dated January 5, 1995, including any agreements concerning the security relating to such cash advance and revolving line of credit. The following agreements relate to the $6,000,000 cash advance: (i) Credit Agreement; (ii) Secured Promissory Note; (iii) Real Property Mortgage, Security Agreement and Financing Statement; (iv) Assignment of Proceeds in Power Purchase Agreement; (v) Agreement Re: Setoff and Assignment of Proceeds; Consent to Setoff and Assignment of Proceeds; and (vi) Letter Agreement by Mauna Kea Agribusiness Co., Inc. in favor of HELCO Re: Future Sales of Real Estate by Mauna Kea Agribusiness to Hilo Coast Processing Company. The following agreements relate to the revolving line of credit of up to $2,000,000: (i) Revolving Credit Agreement; (ii) Revolving Promissory Note; (iii) Security Agreement; (iv) Agreement Re: Setoff and Assignment of Proceeds; Consent to Setoff and Assignment of Proceeds; (v) Pledge and Security Agreement; (vi) Assignment of Proceeds in Power Purchase Agreement; (vii) Real Property Second Mortgage, Security Agreement and Financing Statement; and (viii) UCC-1, Financing Statement. 30 XIX. General Provisions. ------------------ A. Severability. Any portion or provision of this Contract ------------ which is invalid, illegal or unenforceable in any jurisdiction shall, as to that jurisdiction, be ineffective to the extent of such invalidity, illegality or unenforceability, without affecting in any way the remaining portions or provisions hereof in such jurisdiction or, to the extent permitted by law, rendering that or any other portion or provision thereof invalid, illegal or unenforceable in any other jurisdiction. B. Section Headings. The Section headings included in this ---------------- Contract are for the convenience of the parties only and shall not affect the construction or interpretation of this Contract. Schedules and Exhibits referred to in this Contract are an integral part of this Contract. C. Notices. All notices given pursuant to this Contract shall ------- be in writing and be personally delivered or mailed with postage prepaid, by registered or certified mail, return receipt requested to the address set forth below or such other address as a party may from time to time specify in writing to the other party. If so mailed and also sent by telegram or facsimile machine, the notice will conclusively be deemed to have been received on the business day next occurring 24 hours after the latest to occur of such mailing and telegraphic communication; otherwise, no notice shall be deemed given until it actually arrives at the address in question. The addresses to which notice are initially to be sent are as follows: 31 If to HELCO to: President Hawaii Electric Light Company, Inc. P. O. Box 1027 Hilo, Hawaii 96721 Telecopier No.: (808) 969-0249 With a copy to: Manager, Rate & Regulatory Affairs Department Hawaiian Electric Company, Inc. P. O. Box 2750 Honolulu, Hawaii 96840 Telecopier No.: (808) 543-4718 If to HCPC to: President and Chief Executive Officer Hilo Coast Processing Company P. O. Box 18 Pepeekeo, Hawaii 96783 Telecopier No.: (808) 964-5703 With a copy to: Chairman of the Board Hilo Coast Processing Company c/o C. Brewer and Company, Limited P. O. Box 1826 Honolulu, Hawaii 96805 Telecopier No.: (808) 544-6182 D. Entire Agreement. This Contract (including Exhibits "A" and ---------------- "B" hereto) constitutes the entire agreement of the parties with respect to the subject matter hereof and supersedes all prior written or oral and all contemporaneous oral agreements, understandings and negotiations between the parties with respect to the subject matter hereof. E. Governing Law. This Contract is governed by and is to be ------------- construed and interpreted in accordance with the laws of the State of Hawaii, without giving effect to the conflict of law principles thereof. 32 F. Modifications, Amendments or Waivers. Except as otherwise ------------------------------------ provided herein, provisions of this Contract may be modified, amended or waived only by a written document specifically identifying this Contract and signed by a duly authorized executive officer of a party. G. Interpretation. Because the terms of this Contract have -------------- been negotiated at arm's length among sophisticated parties represented by experienced counsel and with all parties having had the opportunity to request and bargain for provisions in their respective interests, the parties agree that any dispute as to the construction of this Contract shall be resolved by interpreting its terms according to their ordinary and every day meaning, and not for or against any party by virtue of its role in negotiating or drafting this Contract and that the rule of "interpretation against the draftsman" shall not apply. H. Good Faith Efforts. For purposes of any provision in this ------------------ Contract which requires any party to obtain certain approvals or comply with certain conditions, including, but not limited to, any approvals and conditions under Section XVIII hereof, such party shall use its good faith efforts to obtain such approvals or comply with such conditions in a timely manner. 33 IN WITNESS WHEREOF, the undersigned have caused these presents to be executed as of the day and year first above written. HILO COAST PROCESSING COMPANY By /s/ Kent T. Lucien ----------------------------------------- Its Treasurer HAWAII ELECTRIC LIGHT COMPANY, INC. By /s/ Warren H. W. Lee ----------------------------------------- Its President By /s/ Harwood D. Williamson ----------------------------------------- Its Chairman 34 STATE OF HAWAII ) ) SS. CITY & COUNTY OF HONOLULU ) On this 24th day of March, 1995, before me appeared Kent T. Lucien, to me personally known, who being by me duly sworn, did say that he is the Treasurer of HILO COAST PROCESSING COMPANY, an agricultural cooperative, and that said instrument was signed on behalf of said corporation by authority of its Board of Directors, and said officer acknowledged said instrument to be the free act and deed of said corporation. /s/ Mona Jean Aragon ----------------------------------- Notary Public, State of Hawaii My commission expires: 11-4-96 -------- 35 STATE OF HAWAII ) ) SS. CITY & COUNTY OF HONOLULU ) On this 24th day of March, 1995, before me appeared Warren H. W. Lee and Harwood D. Williamson to me personally known, who, being by me duly sworn, did say that they are the President and Chairman of HAWAII ELECTRIC LIGHT COMPANY, INC. a Hawaii corporation, and that said instrument was signed in behalf of said corporation by authority of its Board of Directors, and said President and Chairman severally acknowledged said instrument to be the free act and deed for said corporation. /s/ Donna K. Ahuna ----------------------------------- Notary Public, State of Hawaii My commission expires: 4-16-96 ------- L.S. 36 EXHIBIT A HCPC POWER PLANT OWNERSHIP TRANSFER ----------------------------------- 1. Transfer ownership of the power generating plant, associated equipment, and structures to include, but not be limited to the following: A. Powerhouse (boiler and turbine generator) B. Bagasse storage and handling buildings C. Coal storage area D. Fuel storage area E. Circulating water wells and pipeline F. Circulating water outfalls G. Fresh water well located off-site H. Land that Items A-G above are situated on as shown on the attached map. (Location of Item G is not shown.) 2. Obtain easements and rights-of-way to include but not be limited to the following: A. 13.8 KV generator feeder from the power plant to the HELCO substation B. Service roads C. Service water line from the fresh water well D. Power supply line for the fresh water well pump 3. Sever interconnections with plantation facilities, for the following items: A. 2.4 KV distribution system B. Domestic utilities (water, sanitary sewer, power, etc.) C. Service utilities (air, steam, etc.) 4. HCPC should obtain all government approvals and proper subdivision of the affected property prior to transfer of ownership. (Note: Coal storage area is situated on a parcel zoned for residential use.) 5. Equipment included in paragraph 1 above is described in greater detail on the attached page A3. A-1 [The original of this page is a map depicting the land upon which the HCPC power plant and related facilities subject to the purchase option in the power purchase agreement, specifically those listed as items 1.A-1.G on Page A-1, are situated.] A-2 HCPC POWER PLANT OWNERSHIP TRANSFER LIST OF EQUIPMENT
Number of Units Description - -------- ---------------------------------------- 5 Air Compressors, Instrument Air Dryer, Air Tank and Miscellaneous Tanks 4 Demineralize Chemical Treatment Pumps, Fuel Oil Heating, Pumping and Storage and Condensate Tanks Misc Piping, Superstructure, Support Steel and Bridge Crane 8 Minor Component Group Consisting of Rotary Seal Valves, Pressure Control Valves, Fiberglass Tank, Kittrell Silencer Check Valves and L.D. Fan Coupling 4 Conveying and Storage Equipment for Bagasse and Boiler Ash 4 Control Instrumentation System and Accessories 4 Motors for Fans and Boiler Feed Pumps and Auxiliaries 3 480 V and 2,400 V Load Centers and 13.8 KV Switchgear 1 Concrete Substructure and Foundations for Boiler and Turbogenerator 9 20 Mega-Watt DeLaval Turbo-Generator/Condenser, Vacuum Pump, Spare Parts and Cooling Water Heat Exchanger 1 330,000 lb./hr. 1,250 psig. 825/o/ F.T.T. Babcock and Wilcox Boiler and Spare Parts 5 Boiler Feed Pumps and Drive Turbine, Generator and Feedwater Heater 1 Fuel Storage Structure 1 Foundations 1 Fuel Reclaimers 9 Fuel Conveyors, Bagasse Plows and Trash Conveyer and Drives 1 Electrical System 3 Salt Water Wells Nos. 1, 2 and 3 1 Fresh Water Well System (off-site) with 6-inch Water Line to Power Plant
A-3 EXHIBIT B Calculation of Energy Payment Rate Assumptions: - ----------- HELCO on-peak base ("floor") rate (Prior Contract): $0.0437 HCPC on-peak energy payment rate (Prior Contract): HELCO avoided cost HCPC on-peak base ("floor") rate (this Contract): $0.0541 (rounded to $0.054 for illustration purposes) HCPC on-peak energy payment rate (this Contract): formula reflecting two-thirds of the increase/decrease between quarterly avoided cost figures HELCO on-peak filed avoided energy cost payment rates:
First year lst quarter $ 0.054 2d quarter $ 0.057 3d quarter $ 0.060 PUC approval 4th quarter $ 0.063 Second year 1st quarter $ 0.057 2d quarter $ 0.051 3d quarter $ 0.053 4th quarter $ 0.057 HCPC on-peak energy payment rates: - --------------------------------- First year lst quarter $ 0.054 2d quarter $ 0.057 3d quarter $ 0.060 PUC approval $ 0.058 (1) 4th quarter $ 0.060 Second year 1st quarter $ 0.056 2d quarter $ 0.054 (2) 3d quarter $ 0.054 (3) 4th quarter $ 0.056 (4)
(1) Immediate adjustment upon PUC approval, to reflect sharing formula (2) Due to floor (3) Effect of III.B: energy payment rate will not be increased even though HELCO's avoided cost increases, where HELCO's avoided cost for both the current and prior quarter are less than or equal to the floor (4) Effect of III.B: where HELCO's avoided cost increases and the current quarter's avoided cost is above the floor but the prior quarter's avoided cost is below the floor, HCPC's energy payment is increased but only to the extent of two-thirds the difference between the floor and the current quarter's avoided cost. B-1 EX-11.A 3 HEI COMP OF EARNINGS HEI Exhibit 11(a) ----------------- Hawaiian Electric Industries, Inc. and subsidiaries COMPUTATION OF EARNINGS PER SHARE OF COMMON STOCK (unaudited)
Three months ended March 31, ------------------ (in thousands, except per share data) 1995 1994 - -------------------------------------------------------------------------------- Net income................................................. $17,847 $11,788 ======= ======= Average number of common shares outstanding................ 28,772 27,768 ======= ======= Earnings per common share.................................. $0.62 $0.42 ======= =======
EX-11.B 4 HECO COMP OF EARNINGS 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 5 HEI COMP OF RATIO OF EARNINGS HEI Exhibit 12(a) ----------------- Hawaiian Electric Industries, Inc. and subsidiaries COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES (unaudited)
Three months ended Three months ended March 31, March 31, ---------------------- ---------------------- (dollars in thousands) 1995 (1) 1995 (2) 1994 (1) 1994 (2) - ---------------------------------------------------------------------------------------------------------------------------------- Fixed charges Total interest charges The Company (3).......................................................... $ 27,776 $ 48,215 $ 18,025 $ 36,327 Proportionate share of fifty-percent-owned persons....................... 191 191 81 81 Interest component of rentals............................................... 992 992 888 888 Pretax preferred stock dividend requirements of subsidiaries................ 2,908 2,908 3,066 3,066 -------- -------- -------- -------- Total fixed charges......................................................... $ 31,867 $ 52,306 $ 22,060 $ 40,362 ======== ======== ======== ======== Earnings Pretax income............................................................... $ 31,160 $ 31,160 $ 21,344 $ 21,344 Fixed charges, as shown..................................................... 31,867 52,306 22,060 40,362 Interest capitalized The Company.............................................................. (1,455) (1,455) (970) (970) Proportionate share of fifty-percent-owned persons....................... (191) (191) (81) (81) -------- -------- -------- -------- Earnings available for fixed charges........................................ $ 61,381 $ 81,820 $ 42,353 $ 60,655 ======== ======== ======== ======== Ratio of earnings to fixed charges.......................................... 1.93 1.56 1.92 1.50 ======== ======== ======== ========
(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 6 HECO COMP OF RATIO OF EARNINGS HECO Exhibit 12(b) ------------------ Hawaiian Electric Company, Inc. and subsidiaries COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES (unaudited)
Three months ended March 31, -------------------- (dollars in thousands) 1995 1994 - ------------------------------------------------------------------------------------------ Fixed charges Total interest charges............................................. $10,446 $ 9,063 Interest component of rentals...................................... 175 212 Pretax preferred stock dividend requirements of subsidiaries....... 1,125 1,169 ------- ------- Total fixed charges................................................ $11,746 $10,444 ======= ======= Earnings Income before preferred stock dividends of HECO.................... $16,839 $10,360 Income taxes (see note below)...................................... 10,970 7,008 Fixed charges, as shown............................................ 11,746 10,444 AFUDC for borrowed funds........................................... (1,167) (871) ------- ------- Earnings available for fixed charges............................... $38,388 $26,941 ======= ======= Ratio of earnings to fixed charges................................. 3.27 2.58 ======= ======= Note: Income taxes is comprised of the following Expense relating to operating income for regulatory purposes..... $11,174 $ 7,054 Benefit relating to nonoperating loss............................ (204) (46) ------- ------- $10,970 $ 7,008 ======= =======
EX-27.A 7 HEI ART. 5 FINANCIAL DATA SCHEDULE
5 This schedule contains summary financial information extracted from Hawaiian Electric Industries, Inc. and subsidiaries' consolidated balance sheet as of March 31, 1995 and consolidated statement of income for the three months ended March 31, 1995 and is qualified in its entirety by reference to such financial statements. 0000046207 HAWAIIAN ELECTRIC CO. INC. 1,000 3-MOS DEC-31-1995 JAN-01-1995 MAR-31-1995 107,423 1,303,814 126,507 2,532 35,957 0 2,477,230 767,251 5,251,866 0 742,677 556,025 43,440 48,293 136,712 5,251,866 0 306,274 0 261,965 (1,803) 973 14,952 31,160 13,313 17,847 0 0 0 17,847 0.62 0.62
EX-27.B 8 HECO ART. 5 FINANCIAL DATA SCHEDULE
UT This schedule contains summary financial information extracted from Hawaiian Electric Company, Inc. and subsidiaries' consolidated balance sheet as of March 31, 1995 and consolidated statement of income and consolidated statement of cash flows for the three months ended March 31, 1995 and is qualified in its entirety by reference to such financial statements. 0000354707 HAWAIIAN ELECTRIC INDUSTRIES, INC. 1,000 3-MOS DEC-31-1995 JAN-01-1995 MAR-31-1995 PER-BOOK 1,621,143 0 138,294 10,427 125,584 1,895,448 78,766 246,629 315,408 640,803 41,070 48,293 505,520 0 0 105,467 9,903 2,370 0 0 542,022 1,895,448 231,176 11,174 196,796 207,970 23,206 3,604 26,810 9,971 15,800 1,039 15,800 8,927 35,096 35,199 0 0
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