-----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, FTDEa/2cGSXCCu3TOWRjVrudTElZbGIcT9+MaBT94iyjdUjDFvdAS70XtBjmQsmC rugP7vqYzCNX+uRJ2fNaYw== 0000898430-95-001681.txt : 19950823 0000898430-95-001681.hdr.sgml : 19950823 ACCESSION NUMBER: 0000898430-95-001681 CONFORMED SUBMISSION TYPE: 10-K/A PUBLIC DOCUMENT COUNT: 9 CONFORMED PERIOD OF REPORT: 19941231 FILED AS OF DATE: 19950822 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-K/A SEC ACT: 1934 Act SEC FILE NUMBER: 001-08503 FILM NUMBER: 95565947 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-K/A SEC ACT: 1934 Act SEC FILE NUMBER: 001-04955 FILM NUMBER: 95565948 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-K/A 1 FORM 10-K/A FYE 12-31-94 UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D. C. 20549 FORM 10-K/A [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended December 31, 1994 OR [_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
COMMISSION REGISTRANT; STATE OF INCORPORATION; I.R.S. EMPLOYER FILE NUMBER ADDRESS; AND TELEPHONE NUMBER IDENTIFICATION NO. ----------- ---------------------------------- ------------------ 1-8503 HAWAIIAN ELECTRIC INDUSTRIES, INC. 99-0208097 (A Hawaii Corporation) 900 Richards Street Honolulu, Hawaii 96813 Telephone (808) 543-5662 1-4955 HAWAIIAN ELECTRIC COMPANY, INC. 99-0040500 (A Hawaii Corporation) 900 Richards Street Honolulu, Hawaii 96813 Telephone (808) 543-7771
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:
NAME OF EACH EXCHANGE REGISTRANT TITLE OF EACH CLASS ON WHICH REGISTERED ---------- ------------------- --------------------- Hawaiian Electric Common Stock, Without Par Value New York Stock Exchange Industries, Inc. Pacific Stock Exchange Hawaiian Electric First Mortgage Bonds, New York Stock Exchange Company, Inc. Series S, 7.58%
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:
REGISTRANT TITLE OF EACH CLASS ---------- ---------------------- Hawaiian Electric Industries, Inc. ........... None Hawaiian Electric Company, Inc. .............. Cumulative Preferred Stock
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 ----- ----- Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K [_] PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K (a)(1) Financial Statements The following financial statements contained in HEI's 1994 Annual Report to Stockholders and HECO's 1994 Annual Report to Stockholder, portions of which are filed by HEI as Exhibit 13(a) and, portions of which are filed by HECO as Exhibit 13(b), respectively, are incorporated by reference in Part II, Item 8, of this Form 10-K: 1994 Annual Report to Stockholder(s) (Page/s) ------------------- HEI HECO --- ---- Independent Auditors' Reports 39 31 Consolidated Statements of Income, Years Ended December 31, 1994, 1993 and 1992 40 11 Consolidated Statements of Retained Earnings, Years Ended December 31, 1994, 1993 and 1992 40 11 Consolidated Balance Sheets, December 31, 1994 and 1993 41 12 Consolidated Statements of Capitalization, December 31, 1994 and 1993 na 13-14 Consolidated Statements of Cash Flows, Years Ended December 31, 1994, 1993 and 1992 42 15 Notes to Consolidated Financial Statements 43-67 16-30 56 (a)(2) Financial Statement Schedules The following financial statement schedules for HEI and HECO are included in this Report on the pages indicated below: Page/s in Form 10-K ----------------- HEI HECO ---- ---- Independent auditors' report 58 59 Schedule I Condensed financial information of registrant, Hawaiian Electric Industries, Inc. (Parent Company) as of December 31, 1994 and 1993 and years ended December 31, 1994, 1993 and 1992 60-62 na Schedule II Valuation and qualifying accounts, years ended December 31, 1994, 1993 and 1992 63 63 Certain Schedules, other than those listed, are omitted because they are not required, or are not applicable, or the required information is shown in the consolidated financial statements or notes included in HEI's 1994 Annual Report to Stockholders and HECO's 1994 Annual Report to Stockholder, which financial statements are incorporated herein by reference. (a)(3) Exhibits Exhibits for HEI and HECO and their subsidiaries are listed in the "Index to Exhibits" found on pages 64 through 71 of this Form 10-K. The exhibits listed for HEI and HECO are listed in the index under the headings "HEI" and "HECO," respectively, except that the exhibits listed under "HECO" are also considered exhibits for HEI. (b) Reports on Form 8-K HEI and HECO: During the fourth quarter of 1994, HEI and HECO filed a Current Report, Form 8-K dated November 29, 1994, with the SEC. HEI and HECO filed information under Item 5 regarding the PUC decision and order on a generic docket to determine whether SFAS No. 106, "Employers' Accounting for Postretirement Benefits Other Than Pensions," should be adopted for rate-making purposes. 57 [KPMG Peat Marwick letterhead] Independent Auditors' Report The Board of Directors and Stockholders Hawaiian Electric Industries, Inc.: Under date of January 25, 1995, we reported on the consolidated balance sheets of Hawaiian Electric Industries, Inc. and subsidiaries as of December 31, 1994 and 1993, and the related consolidated statements of income, retained earnings and cash flows for each of the years in the three-year period ended December 31, 1994, as contained in the 1994 annual report to stockholders. These consolidated financial statements and our report thereon are incorporated by reference in the annual report on Form 10-K for the year 1994. In connection with our audits of the aforementioned consolidated financial statements, we also have audited the related financial statement schedules as listed in the accompanying index. These financial statement schedules are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statement schedules based on our audits. In our opinion, such financial statement schedules, when considered in relation to the basic consolidated financial statements taken as a whole, present fairly, in all material respects, the information set forth therein. As discussed in note 14 to the consolidated financial statements, effective January 1, 1993, the Company changed its method of accounting for income taxes. Additionally, as discussed in note 17 to the consolidated financial statements, effective January 1, 1993, the Company changed its method of accounting for postretirement benefits other than pensions. /s/ KPMG Peat Marwick LLP Honolulu, Hawaii January 25, 1995 58 [KPMG Peat Marwick letterhead] Independent Auditors' Report The Board of Directors and Stockholder Hawaiian Electric Company, Inc.: Under date of January 25, 1995, we reported on the consolidated balance sheets and consolidated statements of capitalization of Hawaiian Electric Company, Inc. (a wholly-owned subsidiary of Hawaiian Electric Industries, Inc.) and subsidiaries as of December 31, 1994 and 1993, and the related consolidated statements of income, retained earnings and cash flows for each of the years in the three-year period ended December 31, 1994, as contained in the 1994 annual report to stockholder. These consolidated financial statements and our report thereon are incorporated by reference in the annual report on Form 10-K for the year 1994. In connection with our audits of the aforementioned consolidated financial statements, we also have audited the related financial statement schedule as listed in the accompanying index. The financial statement schedule is the responsibility of the Company's management. Our responsibility is to express an opinion on the financial statement schedule based on our audits. In our opinion, such financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein. As discussed in note 7 to the consolidated financial statements, effective January 1, 1993, the Company changed its method of accounting for income taxes. Additionally, as discussed in note 10 to the consolidated financial statements, effective January 1, 1993, the Company changed its method of accounting for postretirement benefits other than pensions. /s/ KPMG Peat Marwick LLP Honolulu, Hawaii January 25, 1995 59 Hawaiian Electric Industries, Inc. SCHEDULE I -- CONDENSED FINANCIAL INFORMATION OF REGISTRANT HAWAIIAN ELECTRIC INDUSTRIES, INC. (PARENT COMPANY) CONDENSED BALANCE SHEETS
December 31, --------------- (in thousands) 1994 1993 - ----------------------------------------------------------------------------------------- ASSETS Cash and equivalents $ 223 $ 32,383 Advances to and notes receivable from subsidiaries 27,696 28,455 Accounts receivable 2,565 6,679 Other investments 809 809 Property, plant and equipment, net 2,460 2,874 Other assets 5,857 3,289 Investment in wholly owned subsidiaries, at equity 888,651 805,226 -------- -------- $928,261 $879,715 ======== ======== LIABILITIES AND STOCKHOLDERS' EQUITY Accounts payable $ 9,246 $ 8,861 Advances from subsidiaries 2,293 -- Commercial paper 12,750 -- Long-term debt, net 209,500 200,500 Deferred income taxes 4,301 3,927 Unamortized tax credits 29 36 Other 8,053 23,363 -------- -------- 246,172 236,687 -------- -------- Stockholders' equity Common stock 546,254 514,710 Retained earnings 135,835 128,318 -------- -------- 682,089 643,028 -------- -------- $928,261 $879,715 ======== ======== Note to Balance Sheets Long-term debt, net, consisted of the following: Promissory notes, 6.3% - 7.6%, due in various years through 2003 $113,000 $113,000 Promissory notes, 8.2% - 9.9%, due in various years through 2011 61,500 87,500 Promissory note, variable rate (6.45% at December 31, 1994) due 1999 35,000 -- -------- -------- $209,500 $200,500 ======== ========
As of December 31, 1994, HEI guaranteed debt of its subsidiaries and affiliates amounting to $11 million. The aggregate payments of principal required on long-term debt subsequent to December 31, 1994 are $1 million in 1995, $37 million in 1996, $51 million in 1997, $21 million in 1998, $41 million in 1999 and $59 million thereafter. 60 Hawaiian Electric Industries, Inc. SCHEDULE I - CONDENSED FINANCIAL INFORMATION OF REGISTRANT (CONTINUED) HAWAIIAN ELECTRIC INDUSTRIES, INC. (PARENT COMPANY) CONDENSED STATEMENTS OF INCOME
Years ended December 31, ---------------------------------- (in thousands) 1994 1993 1992 - -------------------------------------------------------------------------- REVENUES $ 3,318 $ 3,353 $ 1,884 Equity in income from continuing operations of subsidiaries 84,819 74,764 68,156 ------- -------- -------- 88,137 78,117 70,040 ------- -------- -------- EXPENSES: Operating, administrative and general 7,786 6,897 1,637 Taxes, other than income taxes 292 226 193 Depreciation and amortization of property, plant and equipment 587 569 660 ------- -------- -------- 8,665 7,692 2,490 ------- -------- -------- 79,472 70,425 67,550 Interest expense 15,195 18,355 12,641 ------- -------- -------- INCOME FROM CONTINUING OPERATIONS BEFORE INCOME TAX BENEFIT 64,277 52,070 54,909 Income tax benefit (8,753) (9,614) (6,806) ------- -------- -------- Income from continuing operations 73,030 61,684 61,715 Loss from discontinued operations -- (13,025) (73,297) ------- -------- -------- NET INCOME (LOSS) $73,030 $ 48,659 $(11,582) ======= ======== ========
61 Hawaiian Electric Industries, Inc. SCHEDULE I- CONDENSED FINANCIAL INFORMATION OF REGISTRANT (CONTINUED) HAWAIIAN ELECTRIC INDUSTRIES, INC. (PARENT COMPANY) CONDENSED STATEMENTS OF CASH FLOWS
Years ended December 31, ------------------------------------- (in thousands) 1994 1993 1992 - ----------------------------------------------------------------------------- CASH FLOWS FROM OPERATING ACTIVITIES Income from continuing operations $ 73,030 $ 61,684 $ 61,715 Adjustments to reconcile income from continuing operations to net cash provided by operating activities (84,819) (74,764) (68,156) Equity in income from continuing operations of subsidiaries Common stock dividends received from subsidiaries 43,909 53,305 33,884 Depreciation and amortization of property, plant and equipment 587 569 660 Other amortization 209 294 282 Deferred income taxes and tax credits, net 367 232 825 Changes in assets and liabilities Decrease (increase) in accounts receivable 4,114 (6,211) 984 Increase (decrease) in accounts payable 385 (16,506) 22,497 Changes in other assets and liabilities (15,485) 34,733 (15,447) --------- -------- -------- 22,297 53,336 37,244 Cash flows from discontinued operations 36 2,525 -- --------- --------- -------- NET CASH PROVIDED BY OPERATING ACTIVITIES 22,333 55,861 37,244 --------- --------- -------- CASH FLOWS FROM INVESTING ACTIVITIES Net decrease (increase) in advances to and notes receivable from subsidiaries (16,141) 8,756 1,024 Capital expenditures (177) (193) (535) Additional investments in subsidiaries (25,510) (65,000) (56,967) Other -- 50 -- --------- --------- -------- (41,828) (56,387) (56,478) Net investment in discontinued operations -- -- (24,751) --------- --------- -------- NET CASH USED IN INVESTING ACTIVITIES (41,828) (56,387) (81,229) --------- --------- -------- CASH FLOWS FROM FINANCING ACTIVITIES Net increase(decrease) in advances from subsidiaries with original maturities of three months or less 2,293 (185) (15,463) Proceeds from other short-term borrowings -- -- 36,000 Repayment of other short-term borrowings -- (36,000) -- Net increase in commercial paper 12,750 -- -- Proceeds from issuance of long-term debt 35,000 37,000 50,000 Repayment of long-term debt (26,000) (22,500) -- Net proceeds from issuance of common stock 13,602 88,658 18,248 Common stock dividends (47,676) (42,012) (39,214) Other (2,634) 1,949 413 --------- --------- -------- NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES (12,665) 26,910 49,984 --------- --------- -------- Net increase (decrease) in cash and equivalents (32,160) 26,384 5,999 Cash and equivalents, beginning of year 32,383 5,999 -- --------- --------- -------- CASH AND EQUIVALENTS, END OF YEAR $ 223 $ 32,383 $ 5,999 ========= ========= ========
Supplemental disclosures of noncash activities: In 1994, $16.9 million of HEI advances to HEIDI were converted to equity in a noncash transaction. In 1992, HEI converted $9.5 million of long-term debt of HERS to equity. HEI assumed the $9.5 million of HERS' long-term debt in a noncash transaction. Common stock dividends reinvested by stockholders in HEI common stock in noncash transactions amounted to $18 million in 1994, $17 million in 1993 and $15 million in 1992. 62 Hawaiian Electric Industries, Inc. and Hawaiian Electric Company, Inc. SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS Years ended December 31, 1994, 1993 and 1992
- ------------------------------------------------------------------------------------------------------------------------- Col. A Col. B Col. C Col. D Col. E - ------------------------------------------------------------------------------------------------------------------------- Additions ---------------------------- Charged to Balance at costs and Balance at beginning of other Charged to end of (in thousands) period expenses accounts Deductions period - ------------------------------------------------------------------------------------------------------------------------- 1994 ---- Allowance for uncollectible accounts Hawaiian Electric Company, Inc. and subsidiaries $ 1,357 $ 2,177 $ 674 $ 3,072 $ 1,136 Other companies 220 130 2 72 280 --------- --------- ------- --------- --------- $ 1,577 $ 2,307 $ 676(a) $ 3,144(b) $ 1,416 ========= ========= ======= ========= ========= Allowance for uncollectible interest (ASB) $ 341 $ 760 $ -- $ -- $ 1,101 ========= ========= ======= ========= ========= Allowance for losses for loans receivable (ASB) $ 5,314 $ 3,983 $ 67(a) $ 571(b) $ 8,793 ========= ========= ======= ========== ========= 1993 ---- Allowance for uncollectible accounts Hawaiian Electric Company, Inc. and subsidiaries $ 1,120 $ 1,521 $ 815 $ 2,099 $ 1,357 Other companies 172 155 1 108 220 --------- --------- ------- --------- --------- $ 1,292 $ 1,676 $ 816(a) $ 2,207(b) $ 1,577 ========= ========= ======= ========= ========= Allowance for uncollectible interest (ASB) $ 482 $ -- $ -- $ 141 $ 341 ========= ========= ======= ========= ========= Allowance for losses for loans receivable (ASB) $ 5,157 $ 779 $ 36(a) $ 658(b) $ 5,314 ========= ========= ======= ========= ========= 1992 ---- Allowance for uncollectible accounts Hawaiian Electric Company, Inc. and subsidiaries $ 1,032 $ 1,246 $ 820 $ 1,978 $ 1,120 Other companies 214 104 2 148 172 --------- --------- ------- --------- --------- $ 1,246 $ 1,350 $ 822(a) $ 2,126(b) $ 1,292 ========= ========= ======= ========= ========= Allowance for uncollectible interest (ASB) $ 45 $ 437 $ -- $ -- $ 482 ========= ========= ======= ========= ========= Allowance for losses for loans receivable (ASB) $ 3,818 $ 1,494 $ 47(a) $ 202(b) $ 5,157 ========= ========= ======= ========= =========
(a) Primarily bad debts recovered. (b) Bad debts charged off. 63 INDEX TO EXHIBITS The exhibits designated by an asterisk (*) are filed herein. The exhibits not so designated are incorporated by reference to the indicated filing. A copy of any exhibit may be obtained upon written request for a $0.20 per page charge from the HEI Stock Transfer Division, P.O. Box 730, Honolulu, Hawaii 96808-0730. Exhibit no. Description - ----------- ----------- HEI: - --- 3(i).1(a) HEI's Restated Articles of Incorporation (Exhibit 4(b) to Registration No. 33-7895). 3(i).2(a) Articles of Amendment of HEI filed June 30, 1990 (Exhibit 4(b) to Registration No. 33-40813). 3(ii) HEI's By-Laws (Exhibit 4(c) to Registration No. 33-21761). 4.1 Agreement to provide the SEC with instruments which define the rights of holders of certain long-term debt of HEI and its subsidiaries (Exhibit 4.1 to HEI's Annual Report on Form 10-K for the fiscal year ended December 31, 1992, File No. 1-8503). 4.2 Indenture, dated as of October 15, 1988, between HEI and Citibank, N.A., as Trustee (Exhibit 4 to Registration No. 33-25216). 4.3 First Supplemental Indenture dated as of June 1, 1993 between HEI and Citibank, N.A., as Trustee, to Indenture dated as of October 15, 1988 between HEI and Citibank, N.A., as Trustee (Exhibit 4(a) to HEI's Quarterly Report on Form 10-Q for the quarter ended September 30, 1993, File No. 1-8503). 4.4 Officers' Certificate dated as of November 9, 1988, pursuant to Sections 102 and 301 of the Indenture, dated as of October 15, 1988, between HEI and Citibank, N.A., as Trustee, establishing Medium-Term Notes, Series A (Exhibit 4.2 to HEI's Annual Report on Form 10-K for the fiscal year ended December 31, 1988, File No. 1-8503). 4.5 Pricing Supplements Nos. 1 through 11 to the Registration Statement on Form S-3 of HEI (Registration No. 33-25216) filed in connection with the sale of Medium-Term Notes, Series A (filed under Rule 424(b) in connection with Registration No. 33-25216). 4.6 Pricing Supplements Nos. 1 through 9 to the Registration Statement on Form S-3 of HEI (Registration No. 33-58820) filed in connection with the sale of Medium-Term Notes, Series B (Exhibit 4(b) to HEI's Quarterly Report on Form 10-Q for the quarter ended September 30, 1993, File No. 1-8503). *4.7 Pricing Supplement No. 10 to Registration Statement on Form S-3 of HEI (Registration No. 33-58820). 4.8 Purchase Agreement dated March 7, 1991 among HEI and the Purchasers named therein, together with the Notes issued to such Purchasers, each dated March 7, 1991, pursuant to the Purchase Agreement (Exhibit 4.5 to HEI's Annual Report on Form 10-K for the fiscal year ended December 31, 1990, File No. 1-8503). 4.9 Composite conformed copy of the Note Purchase Agreement dated as of December 16, 1991 among HEI and the Purchasers named therein (Exhibit 4.6 to HEI's Annual Report on Form 10-K for the fiscal year ended December 31, 1991, File No. 1-8503). 64 Exhibit no. Description - ----------- ----------- 10.1 PUC Order Nos. 7070, 7153, 7203 and 7256 in Docket No. 4337, including copy of "Conditions for the Merger and Corporate Restructuring of Hawaiian Electric Company, Inc." dated September 23, 1982 (Exhibit 10 to Amendment No. 1 to Form U-1). 10.2 Regulatory Capital Maintenance/Dividend Agreement dated May 26, 1988, between HEI, HEIDI and the Federal Savings and Loan Insurance Corporation (by the Federal Home Loan Bank of Seattle) (Exhibit (28)- 2 to HEI's Current Report on Form 8-K dated May 26, 1988, File No. 1- 8503). 10.2(a) OTS letter regarding release from Part II.B. of the Regulatory Capital Maintenance/Dividend Agreement dated May 26, 1988 (Exhibit 10.3(a) to HEI's Annual Report on Form 10-K for the fiscal year ended December 31, 1992, File No. 1-8503). 10.3 Executive Incentive Compensation Plan (Exhibit 10(a) to HEI's Annual Report on Form 10-K for the fiscal year ended December 31, 1987, File No. 1-8503). 10.4 HEI Executives' Deferred Compensation Plan (Exhibit 10.5 to HEI's Annual Report on Form 10-K for the fiscal year ended December 31, 1990, File No. 1-8503). 10.5 Retirement Benefit Agreement--Andrew T. F. Ing and HEI (Exhibit 10(b) to HEI's Annual Report on Form 10-K for the fiscal year ended December 31, 1987, File No. 1-8503). 10.6 1987 Stock Option and Incentive Plan of HEI as amended and restated effective April 21, 1992 (Exhibit A to Proxy Statement of HEI, dated March 6, 1992, for the Annual Meeting of Stockholders, File No. 1- 8503). 10.7 HEI Long-Term Incentive Plan (Exhibit 10.11 to HEI's Annual Report on Form 10-K for the fiscal year ended December 31, 1988, File No. 1- 8503). 10.8 HEI Supplemental Executive Retirement Plan effective January 1, 1990 (Exhibit 10.9 to HEI's Annual Report on Form 10-K for the fiscal year ended December 31, 1990, File No. 1-8503). 10.9 HEI Excess Benefit Plan (Exhibit 10.13 (Exhibit A) to HEI's Annual Report on Form 10-K for the fiscal year ended December 31, 1989, File No. 1-8503). 10.10 Change-in-Control Agreement (Exhibit 10.14 to HEI's Annual Report on Form 10-K for the fiscal year ended December 31, 1989, File No. 1- 8503). 10.11 Non-employee Director Retirement Plan, effective as of October 1, 1989 (Exhibit 10.15 to HEI's Annual Report on Form 10-K for the fiscal year ended December 31, 1989, File No. 1-8503). 10.12 HEI 1990 Non-employee Director Stock Plan (Exhibit 10(a) to HEI's Quarterly Report on Form 10-Q for the quarter ended September 30, 1990, File No. 1-8503). 10.13 HEI Non-employee Directors' Deferred Compensation Plan (Exhibit 10.14 to HEI's Annual Report on Form 10-K for the fiscal year ended December 31, 1990, File No. 1-8503). 65 Exhibit no. Description - ----------- ----------- 10.14 HEI and HECO Executives' Deferred Compensation Agreement. The agreement pertains to and is substantially identical for all the HEI and HECO executive officers (Exhibit 10.15 to HEI's Annual Report on Form 10-K for the fiscal year ended December 31, 1991, File No. 1- 8503). 10.15 Contract of Sale between HECO and Malama Waterfront Corp., dated December 20, 1989, for the sale and purchase of the Honolulu Power Plant Parcels, Iwilei Tank Farm Parcel and the buildings, structures and other improvements (Exhibit 10.18 to HEI's Annual Report on Form 10-K for the fiscal year ended December 31, 1989, File No. 1-8503). 10.15(a) First Amendment to Contract of Sale by and between HECO and Malama Waterfront Corp., dated September 25, 1990, amending the Contract of Sale between HECO and Malama Waterfront Corp., dated December 20, 1989, for the sale and purchase of the Honolulu Power Plant Parcels, Iwilei Tank Farm Parcel and the buildings, structures and other improvements (Exhibit 10(d) to HEI's Quarterly Report on Form 10-Q for the quarter ended September 30, 1990, File No. 1-8503). 10.16 Settlement Agreement and General Release made and entered into on February 10, 1994, by and between the Insurance Commissioner as Rehabilitator/Liquidator, the HIG Group, HIGA, HEI, HEIDI and others. (Exhibit 10.20 to HEI's Annual Report on Form 10-K for the fiscal year ended December 31, 1993, File No. 1-8503). *11 Computation of Earnings Per Share of Common Stock. Filed herein as page 72. *12(a) Computation of Ratio of Earnings to Fixed Charges. Filed herein as pages 73 and 74. *13(a) Pages 25 to 68 of HEI's 1994 Annual Report to Stockholders (with the exception of the data incorporated by reference in Part I, Part II, Part III and Part IV, no other data appearing in the 1994 Annual Report to Stockholders is to be deemed filed as part of this Form 10-K Annual Report). *21(a) Subsidiaries of HEI. Filed herein as page 76. *23 Consent of Independent Auditors. Filed herein as page 78. *27(a) HEI and subsidiaries financial data schedule, December 31, 1994 and year ended December 31, 1994. *99.1(a) Annual Report on Form 11-K for the HEI 401-K Retirement Savings Plan for the year ended December 31, 1994. 99.2(a) Amendment 1994-1 to the Hawaiian Electric Industries, Inc. Retirement Savings Plan for incorporation by reference into Registration Statement on Form S-8 (Registration No. 33-52911) (Exhibit 99 to HEI's Quarterly Report on Form 10-Q for the quarter ended March 31, 1994, File No. 1-8503). *99.3(a) Amendment 1994-2 to the Hawaiian Electric Industries, Inc. Retirement Savings Plan for incorporation by reference into Registration Statement on Form S-8 (Registration No. 33-52911). 66 Exhibit no. Description - ----------- ----------- HECO: - ----- 3(i).1(b) HECO's Certificate of Amendment of Articles of Incorporation (filed June 30, 1987) (Exhibit 3.1 to HECO's Annual Report on Form 10-K for the fiscal year ended December 31, 1988, File No. 1-4955). 3(i).2(b) Statement of Issuance of Shares of Preferred or Special Classes in Series for HECO Series R Preferred Stock filed December 15, 1989 (Exhibit 3.1(a) to HECO's Annual Report on Form 10-K for the fiscal year ended December 31, 1989, File No. 1-4955). 3(i).3 Articles of Amendment to HECO's Amended Articles of Incorporation filed December 21, 1989 (Exhibit 3.1(b) to HECO's Annual Report on Form 10-K for the fiscal year ended December 31, 1989, File No. 1-4955). 3(ii) HECO's By-Laws (Exhibit 3.2 to HECO's Annual Report on Form 10-K for the fiscal year ended December 31, 1988, File No. 1-4955). 4.1 Agreement to provide the SEC with instruments which define the rights of holders of certain long-term debt of HECO, HELCO and MECO (Exhibit 4 to HECO's Annual Report on Form 10-K for the fiscal year ended December 31, 1988, File No. 1-4955). 4.2 Indenture dated as of December 1, 1993 between HECO and The Bank of New York, as Trustee (Exhibit 4(a) to Registration No. 33-51025). 4.3 Indenture dated as of December 1, 1993 among MECO, HECO, as guarantor, and The Bank of New York, as Trustee (Exhibit 4(b) to Registration No. 33-51025). 4.4 Indenture dated as of December 1, 1993 among HELCO, HECO, as guarantor, and The Bank of New York, as Trustee (Exhibit 4(c) to Registration No. 33-51025). 4.5 Officers' Certificate dated as of December 22, 1993, pursuant to Sections 102 and 301 of the Indenture dated as of December 1, 1993 between HECO and The Bank of New York, as Trustee, establishing the $20,000,000 Notes, 5.15% Series Due 1996 (Exhibit 4.5 to HECO's Annual Report on Form 10-K for the fiscal year ended December 31, 1993, File No. 1-4955). 4.6 Officers' Certificate dated as of December 22, 1993, pursuant to Sections 102 and 301 of the Indenture dated as of December 1, 1993 between HECO and The Bank of New York, as Trustee, establishing the $30,000,000 Notes, 5.83% Series Due 1998 (Exhibit 4.6 to HECO's Annual Report on Form 10-K for the fiscal year ended December 31, 1993, File No. 1-4955). 4.7 Officers' Certificate dated as of December 22, 1993, pursuant to Sections 102 and 301 of the Indenture dated as of December 1, 1993 among MECO, HECO, as guarantor, and The Bank of New York, as Trustee, establishing the $10,000,000 Notes, 5.15% Series Due 1996 (Exhibit 4.7 to HECO's Annual Report on Form 10-K for the fiscal year ended December 31, 1993, File No. 1-4955). 67 Exhibit no. Description - ----------- ----------- 4.8 Officers' Certificate dated as of December 22, 1993, pursuant to Sections 102 and 301 of the Indenture dated as of December 1, 1993 among HELCO, HECO, as guarantor, and The Bank of New York, as Trustee, establishing the $10,000,000 Notes, 4.85% Series Due 1995 (Exhibit 4.8 to HECO's Annual Report on Form 10-K for the fiscal year ended December 31, 1993, File No. 1-4955). 10.1 Power Purchase Agreement between Kalaeloa Partners, L.P., and HECO dated October 14, 1988 (Exhibit 10(a) to HECO's Quarterly Report on Form 10-Q for the quarter ended September 30, 1988, File No. 1-4955). 10.1(a) Amendment No. 1 to Power Purchase Agreement between HECO and Kalaeloa Partners, L.P., dated June 15, 1989 (Exhibit 10(c) to HECO's Quarterly Report on Form 10-Q for the quarter ended June 30, 1989, File No. 1-4955). 10.1(b) Lease Agreement between Kalaeloa Partners, L.P., as Lessor, and HECO, as Lessee, dated February 27, 1989 (Exhibit 10(d) to HECO's Quarterly Report on Form 10-Q for the quarter ended June 30, 1989, File No. 1-4955). 10.1(c) Restated and Amended Amendment No. 2 to Power Purchase Agreement between HECO and Kalaeloa Partners, L.P., dated February 9, 1990 (Exhibit 10.2(c) to HECO's Annual Report on Form 10-K for the fiscal year ended December 31, 1989, File No. 1-4955). 10.1(d) Agreement to Extend the "Cancellation Window" in the Kalaeloa Power Purchase Agreement dated June 21, 1990 (Exhibit 10(e) to HECO's Quarterly Report on Form 10-Q for the quarter ended June 30, 1990, File No. 1-4955). 10.1(e) Amendment No. 3 to Power Purchase Agreement between HECO and Kalaeloa Partners, L.P., dated December 10, 1991 (Exhibit 10.2(e) to HECO's Annual Report on Form 10-K for the fiscal year ended December 31, 1991, File No. 1-4955). 10.2 Purchase Power Agreement between AES Barbers Point, Inc. and HECO, entered into on March 25, 1988 (Exhibit 10(a) to HECO's Quarterly Report on Form 10-Q for the quarter ended March 31, 1988, File No. 1-4955). 10.2(a) Agreement between HECO and AES Barbers Point, Inc., pursuant to letters dated May 10, 1988 and April 20, 1988 (Exhibit 10.4 to HECO's Annual Report on Form 10-K for the fiscal year ended December 31, 1988, File No. 1-4955). 10.2(b) Amendment No. 1 to the Purchase Power Agreement between AES Barbers Point, Inc. and HECO (Exhibit 10 to HECO's Quarterly Report on Form 10-Q for the quarter ended September 30, 1989, File No. 1-4955). 10.2(c) HECO's Conditional Notice of Acceptance to AES Barbers Point, Inc. dated January 15, 1990 (Exhibit 10.3(c) to HECO's Annual Report on Form 10-K for the fiscal year ended December 31, 1989, File No. 1-4955). 10.3 Power Purchase Agreement between HELCO and Hilo Coast Processing Company dated May 31, 1988 (included in Exhibit 10 to HECO's Quarterly Report on Form 10-Q for the quarter ended June 30, 1988, File No. 1-4955). 68 Exhibit no. Description - ----------- ----------- *10.3(a) Letter agreement between HELCO and Hilo Coast Processing Company dated January 5, 1995. 10.4 Agreement between MECO and Hawaiian Commercial & Sugar Company pursuant to letters dated November 29, 1988 and November 1, 1988 (Exhibit 10.8 to HECO's Annual Report on Form 10-K for the fiscal year ended December 31, 1988, File No. 1-4955). 10.4(a) Amended and Restated Power Purchase Agreement by and between A&B- Hawaii, Inc., through its division, Hawaiian Commercial & Sugar Company, and MECO, dated November 30, 1989 (Exhibit 10(e) to HECO's Quarterly Report on Form 10-Q for the quarter ended September 30, 1990, File No. 1-4955). 10.4(b) First Amendment to Amended and Restated Power Purchase Agreement by and between A&B-Hawaii, Inc., through its division, Hawaiian Commercial & Sugar Company, and MECO, dated November 1, 1990, amending the Amended and Restated Power Purchase Agreement dated November 30, 1989 (Exhibit 10(f) to HECO's Quarterly Report on Form 10-Q for the quarter ended September 30, 1990, File No. 1-4955). 10.5 Purchase Power Contract between HELCO and Thermal Power Company, dated March 24, 1986 (Exhibit 10(a) to HECO's Quarterly Report on Form 10-Q for the quarter ended June 30, 1989, File No. 1-4955). 10.5(a) Firm Capacity Amendment between HELCO and Puna Geothermal Venture (assignee of AMOR VIII, who is the assignee of Thermal Power Company), dated July 28, 1989, amending Purchase Power Contract between HELCO and Thermal Power Company, dated March 24, 1986 (Exhibit 10(b) to HECO's Quarterly Report on Form 10-Q for the quarter ended June 30, 1989, File No. 1-4955). 10.6 Purchase Power Contract between HECO and the City and County of Honolulu dated March 10, 1986 (Exhibit 10.9 to HECO's Annual Report on Form 10-K for the fiscal year ended December 31, 1989, File No. 1- 4955). 10.6(a) Firm Capacity Amendment, dated April 8, 1991, to Purchase Power Contract, dated March 10, 1986, by and between HECO and the City & County of Honolulu (Exhibit 10 to HECO's Quarterly Report on Form 10- Q for the quarter ended March 31, 1991, File No. 1-4955). 10.7 Purchase Power Contract between MECO and Zond Pacific, Inc., dated May 24, 1991 (Exhibit 10 to HECO's Quarterly Report on Form 10-Q for the quarter ended June 30, 1991, File No. 1-4955). 10.8 Low Sulfur Fuel Oil Supply Contract by and between CUSA and HECO dated May 29, 1990 (Exhibit 10(a) to HECO's Quarterly Report on Form 10-Q for the quarter ended June 30, 1990, File No. 1-4955). 10.8(a) Second Amendment, dated September 9, 1993, to Low Sulfur Fuel Oil Supply Contract, dated May 29, 1990, by and between CUSA and HECO (Exhibit 10(a) to HECO's Quarterly Report on Form 10-Q for the quarter ended September 30, 1993, File No. 1-4955). 10.8(b) Inter-Island Industrial Fuel Oil and Diesel Fuel Contract by and between CUSA and HECO, MECO, HELCO, HTB and YB dated as of September 23, 1991 (Exhibit 10(a) to HECO's Quarterly Report on Form 10-Q for the quarter ended September 30, 1991, File No. 1-4955). 69 Exhibit no. Description - ----------- ----------- 10.8(c) Third Amendment, dated October 1, 1993, to Inter-Island Industrial Fuel Oil and Diesel Fuel Contract dated September 23, 1991, by and between CUSA and HECO, MECO, HELCO, HTB and YB (Exhibit 10(b) to HECO's Quarterly Report on Form 10-Q for the quarter ended September 30, 1993, File No. 1-4955). 10.8(d) Facilities and Operating Contract by and between CUSA and HECO dated as of May 29, 1990 (Exhibit 10.10(b) to HECO's Annual Report Form 10- K for the fiscal year ended December 31, 1991, File No. 1-4955). 10.8(e) Second Amendment, dated September 21, 1993, to the Facilities and Operating Contract dated May 29, 1990, by and between CUSA and HECO (Exhibit 10(c) to HECO's Quarterly Report on Form 10-Q for the quarter ended September 30, 1993, File No. 1-4955). 10.9 Low Sulfur Fuel Oil Supply Contract between HIRI (succeeded by BHP) and HECO dated April 25, 1990 (Exhibit 10(b) to HECO's Quarterly Report on Form 10-Q for the quarter ended June 30, 1990, File No. 1- 4955). 10.9(a) First Amendment, dated October 1, 1993, to Low Sulfur Fuel Oil Supply Contract, dated April 25, 1990, between BHP and HECO (Exhibit 10(d) to HECO's Quarterly Report on Form 10-Q for the quarter ended September 30, 1993, File No. 1-4955). 10.9(b) Inter-Island Industrial Fuel Oil and Diesel Fuel Contract by and between HIRI (succeeded by BHP) and HECO, MECO and HELCO dated September 23, 1991 (Exhibit 10(b) to HECO's Quarterly Report on Form 10-Q for the quarter ended September 30, 1991, File No. 1-4955). 10.9(c) Second Amendment, dated October 7, 1993, to Inter-Island Industrial Fuel Oil and Diesel Fuel Contract, dated September 23, 1991 by and between BHP and HECO, MECO and HELCO (Exhibit 10(e) to HECO's Quarterly Report on Form 10-Q for the quarter ended September 30, 1993, File No. 1-4955). 10.10 Low Sulfur Fuel Oil Sale/Purchase Contract between HECO and C. Itoh & Co. (America), Inc. dated June 7, 1990 (Exhibit 10(c) to HECO's Quarterly Report on Form 10-Q for the quarter ended June 30, 1990, File No. 1-4955). 10.11 Contract of private carriage by and between HITI and HELCO dated November 10, 1993 (Exhibit 10.13 to HECO's Annual Report on Form 10-K for the fiscal year ended December 31, 1993, File No. 1-4955). 10.12 Contract of private carriage by and between HITI and MECO dated November 12, 1993 (Exhibit 10.14 to HECO's Annual Report on Form 10-K for the fiscal year ended December 1, 1993, File No. 1-4955). 10.13 HECO Non-employee Directors' Deferred Compensation Plan (Exhibit 10.16 to HECO's Annual Report on Form 10-K for the fiscal year ended December 31, 1990, File No. 1-4955). 10.14 HEI and HECO Executives' Deferred Compensation Agreement. The agreement pertains to and is substantially identical for all the HEI and HECO executive officers (Exhibit 10.15 to HEI's Annual Report on Form 10-K for the fiscal year ended December 31, 1991, File No. 1- 8503). 70 Exhibit no. Description - ----------- ----------- 10.15 Contract of Sale between HECO and Malama Waterfront Corp., dated December 20, 1989, for the sale and purchase of the Honolulu Power Plant Parcels, Iwilei Tank Farm Parcel and the buildings, structures and other improvements (Exhibit 10.18 to HEI's Annual Report on Form 10-K for the fiscal year ended December 31, 1989, File No. 1-8503). 10.15(a) First Amendment to Contract of Sale by and between HECO and Malama Waterfront Corp., dated September 25, 1990, amending the Contract of Sale between HECO and Malama Waterfront Corp., dated December 20, 1989, for the sale and purchase of the Honolulu Power Plant Parcels, Iwilei Tank Farm Parcel and the buildings, structures and other improvements (Exhibit 10(d) to HEI's Quarterly Report on Form 10-Q for the quarter ended September 30, 1990, File No. 1-8503). *11 Computation of Earnings Per Share of Common Stock. See note on page 2 of HECO's 1994 Annual Report to Stockholder attached as Exhibit 13(b) hereto. *12(b) Computation of Ratio of Earnings to Fixed Charges. Filed herein as page 75. *13(b) Pages 2 to 31 and 33 of HECO's 1994 Annual Report to Stockholder (with the exception of the data incorporated by reference in Part I, Part II, Part III and Part IV, no other data appearing in the 1994 Annual Report to Stockholder is to be deemed filed as part of this Form 10-K Annual Report). *21(b) Subsidiaries of HECO. Filed herein as page 77. *27(b) HECO and subsidiaries financial data schedule, December 31, 1994 and year ended December 31, 1994. *99(b) Reconciliation of electric utility operating income per HEI and HECO Consolidated Statements of Income. Filed herein as page 79. 71 HEI Exhibit 11
Hawaiian Electric Industries, Inc. COMPUTATION OF EARNINGS PER SHARE OF COMMON STOCK Years ended December 31, 1994, 1993, 1992, 1991 and 1990 (in thousands, except per share amounts) 1994 1993 1992 1991 1990 ------- ------- -------- ------- ------- Net income (loss) Continuing operations $73,030 $61,684 $ 61,715 $55,620 $42,895 Discontinued operations -- (13,025) (73,297) (794) 707 ------- ------- -------- ------- ------- $73,030 $48,659 $(11,582) $54,826 $43,602 ======= ======= ======== ======= ======= Weighted average number of common shares outstanding 28,137 25,938 24,275 22,882 21,559 ======= ======= ======== ======= ======= Earnings (loss) per common share Continuing operations $2.60 $2.38 $2.54 $2.43 $1.99 Discontinued operations -- (0.50) (3.02) (0.03) 0.03 ------- ------- -------- ------- ------- $2.60 $1.88 $(0.48) $2.40 $2.02 ======= ======= ======== ======= =======
Note: The dilutive effect of stock options is not material. 72 HEI Exhibit 12(a) (page 1 of 2) Hawaiian Electric Industries, Inc. COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES Years ended December 31, 1994, 1993, 1992, 1991 and 1990
1994 1993 1992 --------------------- ---------------------- --------------------- (dollars in thousands) (1) (2) (1) (2) (1) (2) - ----------------------------------------------------------------------------------------------------------------- FIXED CHARGES Total interest charges The Company (3) $82,306 $158,815 $68,254 $145,905 $67,559 $161,756 Proportionate share of fifty- percent-owned persons 539 539 564 564 1,051 1,051 Interest component of rentals 3,819 3,819 3,944 3,944 3,254 3,254 Pre-tax preferred stock dividend requirements of subsidiaries 11,899 11,899 11,018 11,018 9,606 9,606 ------- -------- -------- -------- -------- -------- TOTAL FIXED CHARGES $ 98,563 $175,072 $ 83,780 $161,431 $81,470 $175,667 ======= ======== ======== ======== ======== ======== EARNINGS Pre-tax income from continuing operations $126,049 $126,049 $108,770 $108,770 $ 91,244 $ 91,244 Undistributed earnings from less than fifty-percent-owned person -- -- -- -- (244) (244) Fixed charges, as shown 98,563 175,072 83,780 161,431 81,470 175,667 Interest capitalized The Company (4,924) (4,924) (3,881) (3,881) (2,104) (2,104) Proportionate share of fifty- percent-owned persons (539) (539) (408) (408) (803) (803) ------- -------- -------- -------- -------- -------- EARNINGS AVAILABE FOR FIXED CHARGES $219,149 $295,658 $188,261 $265,912 $169,563 $263,760 ======= ======== ======== ======== ======== ======== RATIO OF EARNINGS TO FIXED CHARGES 2.22 1.69 2.25 1.65 2.08 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 statements of income. 73 HEI Exhibit 12(a) (page 2 of 2) Hawaiian Electric Industries, Inc. COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES Years ended December 31, 1994, 1993, 1992, 1991 and 1990--Continued
1991 1990 ----------------------------------------------- (dollars in thousands) (1) (2) (1) (2) - --------------------------------------------------------------------------------------- FIXED CHARGES Total interest charges The Company (3) $ 69,957 $168,691 $ 76,897 $162,753 Proportionate share of fifty-percent-owned persons 1,875 1,875 406 406 Interest component of rentals 2,231 2,231 2,197 2,197 Pre-tax preferred stock dividend requirements of subsidiaries 10,449 10,449 11,450 11,450 -------- -------- -------- -------- TOTAL FIXED CHARGES $ 84,512 $183,246 $ 90,950 $176,806 ======== ======== ======== ======== EARNINGS Pre-tax income from continuing operations $ 87,953 $ 87,953 $ 74,088 $ 74,088 Undistributed earnings from less than fifty-percent-owned person (278) (278) 7 7 Fixed charges, as shown 84,512 183,246 90,950 176,806 Interest capitalized The Company (1,945) (1,945) (4,360) (4,360) Proportionate share of fifty-percent-owned persons (1,875) (1,875) (406) (406) -------- -------- -------- -------- EARNINGS AVAILABLE FOR FIXED CHARGES $168,367 $267,101 $160,279 $246,135 ======== ======== ======== ======== RATIO OF EARNINGS TO FIXED CHARGES 1.99 1.46 1.76 1.39 ======== ======== ======== ========
(1) Excluding interest on ASB deposits. (2) Including interest on ASB deposits. (3) Total interest charges exclude interest on nonrecourse debt from leveraged leases which is not included in interest expense in HEI's consolidated statements of income. 74 HECO Exhibit 12(b) Hawaiian Electric Company, Inc. COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES Years ended December 31, 1994, 1993 1992, 1991 and 1990
(dollars in thousands) 1994 1993 1992 1991 1990 - --------------------------------------------------------------------------------------------------- FIXED CHARGES Total interest charges $ 37,340 $ 35,287 $ 33,011 $ 33,248 $ 30,874 Interest component of rentals 808 970 1,070 1,130 1,341 Pretax preferred stock dividend requirements of subsidiaries 4,651 3,425 3,117 3,409 3,490 -------- -------- -------- -------- -------- TOTAL FIXED CHARGES $ 42,799 $ 39,682 $ 37,198 $ 37,787 $ 35,705 ======== ======== ======== ======== ======== EARNINGS Income before preferred stock dividends of HECO $ 65,961 $ 56,126 $ 53,678 $ 46,210 $ 48,484 Fixed charges, as shown 42,799 39,682 37,198 37,787 35,705 Income taxes (see note below) 43,588 36,897 23,843 23,816 23,927 Interest capitalized on AFUDC for borrowed funds (4,043) (3,869) (2,095) (1,307) (1,375) -------- -------- -------- -------- -------- EARNINGS AVAILABLE FOR FIXED CHARGES $148,305 $128,836 $112,624 $106,506 $106,741 ======== ======== ======== ======== ======== RATIO OF EARNINGS TO FIXED CHARGES 3.47 3.25 3.03 2.82 2.99 ======== ======== ======== ======== ======== NOTE: Income taxes is comprised of the following Income tax expense relating to operating income for regulatory purposes $ 43,820 $ 37,007 $ 26,254 $ 24,137 $ 24,145 Income tax benefit relating to nonoperating loss (232) (110) (2,411) (321) (218) -------- -------- -------- -------- -------- $ 43,588 $ 36,897 $ 23,843 $ 23,816 $ 23,927 ======== ======== ======== ======== ========
75 HEI Exhibit 21(a) Hawaiian Electric Industries, Inc. SUBSIDIARIES OF THE REGISTRANT The following is a list of all subsidiary corporations of the registrant as of March 21, 1995:
Name Place of incorporation - ---------------------------------------------------------------------------------------------------------------- Hawaiian Electric Company, Inc., including subsidiaries Maui Electric Company, Limited and Hawaii Electric Light Company, Inc. State of Hawaii HEI Investment Corp. State of Hawaii Lalamilo Ventures, Inc. State of Hawaii Malama Pacific Corp., including subsidiaries Malama Project-I, Inc., Malama Waterfront Corp., Malama Property Investment Corp., Malama Development Corp., Malama Realty Corp., Malama Elua Corp., TMG Service Corp., Malama Hoaloha Corp., Malama Mohala Corp. and Baldwin*Malama (a limited partnership in which Malama Development Corp. is the sole general partner) State of Hawaii Hawaiian Tug & Barge Corp., including subsidiary Young Brothers, Limited State of Hawaii HEI Diversified, Inc., including subsidiary American Savings Bank, State of Hawaii (except F.S.B. and its subsidiaries, American Savings Investment Corp., American Savings Bank, ASB Service Corporation, Adcommunications, Inc. and F.S.B., which is federally Associated Mortgage, Inc. chartered) Pacific Energy Conservation Services, Inc. State of Hawaii
76 HECO Exhibit 21(b) Hawaiian Electric Company, Inc. SUBSIDIARIES OF THE REGISTRANT The following is a list of all subsidiary corporations of the registrant as of March 21, 1995:
Name Place of incorporation - ---------------------------------------------------------------------------------------------------------------- Maui Electric Company, Limited State of Hawaii Hawaii Electric Light Company, Inc. State of Hawaii
77 [KPMG Peat Marwick letterhead] HEI Exhibit 23 The Board of Directors Hawaiian Electric Industries, Inc.: We consent to incorporation by reference in Registration Statement Nos. 33-56561 and 33-58820 on Form S-3 and in Registration Statement Nos. 33-65234 and 33- 52911 on Form S-8 of Hawaiian Electric Industries, Inc. of our report dated January 25 1995, relating to the consolidated balance sheets of Hawaiian Electric Industries, Inc. and subsidiaries as of December 31, 1994 and 1993, and the related consolidated statements of income, retained earnings and cash flows for each of the years in the three-year period ended December 31, 1994, which report is incorporated by reference in the 1994 annual report on Form 10-K of Hawaiian Electric Industries, Inc. Our report refers to changes in the method of accounting for income taxes and postretirement benefits other than pensions effective January 1, 1993. We also consent to incorporation by reference of our report dated January 25 1995 relating to the financial statement schedules of Hawaiian Electric Industries, Inc. in the aforementioned 1994 annual report on Form 10-K, which report is included in said Form 10-K. /s/ KPMG Peat Marwick LLP Honolulu, Hawaii March 21, 1995 78 HECO Exhibit 99(b) Hawaiian Electric Company, Inc. RECONCILIATION OF ELECTRIC UTILITY OPERATING INCOME PER HEI AND HECO CONSOLIDATED STATEMENTS OF INCOME
Years ended December 31, -------------------------------- (in thousands) 1994 1993 1992 - --------------------------------------------------------------------------- Operating income from regulated and nonregulated activities before income taxes (per HEI Consolidated Statements of Income) $136,628 $119,565 $103,841 Deduct: Income taxes on regulated activities (43,820) (37,007) (26,254) Revenues from nonregulated activities (6,411) (5,100) (1,761) Add: Expenses from nonregulated activities 915 627 1,213 -------- -------- -------- Operating income from regulated activities after income taxes (per HECO Consolidated Statements of Income) $ 87,312 $ 78,085 $ 77,039 ======== ======== ========
79 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) 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 signatures 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, Chief Financial Officer of HEI Treasurer and Director of HECO (Principal Financial Officer of (Principal Financial Officer of HEI) HECO) Date: August 22, 1995 Date: August 22, 1995 80 EX-4.7 2 PRICING SUPPLEMENT #10 HEI EXHIBIT 4.7 Pricing Supplement No. 10 Filing under Rule424(b)(3) Dated August 10, 1994 Registration File No. 33-58820 (To Prospectus dated June 11, 1993) $250,000,000 HAWAIIAN ELECTRIC INDUSTRIES, INC. MEDIUM-TERM NOTES, SERIES B Principal amount: $35,000,000 Floating Rate Notes: Interest Rate (if fixed rate): N/A Base Rate: LIBOR Stated Maturity Date: August 23, 1999 Index Maturity: 3 months Issue price (as a percentage of Spread: 0.45% principal amount): 100% Spread Multiplier: N/A Selling Agents' commission (%): 0.50% Maximum Interest Rate: N/A Purchasing Agents' discount Minimum Interest Rate: N/A or commission (%): N/A Initial Interest Rate: To be Net proceeds to the Company (%): $34,825,000 determined on August 19, 1994 Settlement date and time (original Interest Reset Period: Quarterly Issue date): August 23, 1994 Interest Determination Date(s): A/S Initial Redemption Date (if any): N/A Calculation Date(s): A/S Initial Redemption Percentage: N/A Interest Payment Period: Quarterly Annual Redemption Interest Payment and Reset Dates: Percentage Reduction: N/A 23rd day of February, May, August Optional Repayment Dates: N/A and November of each year and at Currency of Denomination: U.S. Maturity, with such exceptions Currency of Payment: U.S. as are described in the Prospectus Minimum Authorized if an interest Payment or Reset Denominations: $1,000 Date would otherwise be a day that Additional Terms: N/A is not a Business Day (as defined in the Prospectus) Regular Record Date(s): A/S Calculation Agent: Citibank, N.A.
Redemption prices (if any): The Redemption Price shall initially be __ N/A __% of the principal amount of such Notes to be redeemed and shall decline (but not below par) on each anniversary of the Initial Redemption Date by __ N/A __% of the principal amount to be redeemed until the Redemption Price is 100% of such principal amount. Use of Proceeds and Additional Terms: All or substantially all of the net proceeds to Hawaiian Electric Industries, Inc. ("HEI") from the sale of the Medium-Term Notes, Series B, covered by this Pricing Supplement will be used by HEI to retire commercial paper and/or temporarily invest in short-term securities pending such retirement. As of August 10, 1994, HEI's commercial paper outstanding totaled approximately $33 million. Such commercial paper bore interest at prevailing market rates and had maturities varying between 5 and 47 days. As of the date of this Pricing Supplement, the aggregate initial public offering price of the Notes which have been sold (including the Notes to which this Pricing Supplement relates) is $72,000,000. "N/A" as used herein means "Not applicable." "A/S" as used herein means "As stated in the Prospectus referred to above." MERRILL LYNCH & CO. GOLDMAN, SACHS & CO. EX-10.3(A) 3 LETTER TO JAMES ANDRASICK HECO Exhibit 10.3(a) -------------------- [HELCO LETTERHEAD] January 5, 1995 Mr. James S. Andrasick Chairman of the Board Hilo Coast Processing Company c/o C. Brewer and Company, Ltd. 827 Fort Street Honolulu, Hawaii 96813 Re: HCPC Power Plant, Purchase Power Amendment ------------------------------------------ Dear Jim: HELCO wishes to submit for your consideration this counterproposal for an amendment to the current purchase power agreement (PPA). This proposal is substantially based on HELCOs proposal of December 22, 1994, the intervening Bankruptcy Court proceedings, and subsequent discussions amongst the parties. Again, for ease of reference the proposal is restated herein in its entirety. This proposal supersedes all prior proposals relating to an amendment of the PPA. This letter (the Letter Agreement), when accepted by you, is an expression of the basis on which HELCO and HCPC are willing to enter into a definitive agreement to amend the PPA. 1. Agreement --------- HELCO offers to amend the PPA, as set forth herein and subject to the terms and conditions herein, along with any other terms and conditions which are customary for transactions of this type and consistent with this Letter Agreement. 2. Term of Amendment ----------------- From the effective date of the Definitive Agreement through December 31, 1999. 3. HELCO Dispatch -------------- Minimum of 4,000 KW during 48 operating weeks. Mr. James S. Andrasick January 5, 1995 Page 2 4. Capacity Guarantee ------------------ HCPC shall furnish HELCO 20,000 KW of capacity up to May 31, 1995 and 22,000 KW of capacity thereafter. (Kilovars to be discussed.) This capacity guarantee is based on the assumptions that such levels are within HCPCs permit limitations and conditions, and any necessary substation upgrades (see Substation Upgrades below) are completed by May 31, 1995 and, therefore, is conditioned upon compliance with applicable PUC rules and actual completion of the upgrades on or before that date. Accordingly, the effective date of the increase to 22,000 KW shall be delayed if necessary until such time as those conditions are met. HCPC must use its best efforts to meet these conditions in a timely manner. 5. Plant Shutdown Period --------------------- HCPC shall have the right to shut down for 4 consecutive weeks during each twelve-month period. The period shall be mutually agreeable to HCPC and HELCO. 6. Capacity Charge --------------- HELCO will pay HCPC for the Capacity Guarantee a graduated capacity charge which would average out to $218/kw-yr over the contract term. Specifically, HELCO will pay $167/kw-yr through December 31, 1995 and $231/kw-yr during the remainder of the term. Such amount shall be payable monthly within ten (10) days after the last day of the calendar month. Monthly repayment of the cash advance will be calculated so that HCPCs cash flow from the Capacity Charge net of such repayments is the same as that which would result from a levelized capacity charge of $218/kw-yr and repayment in monthly installments over the term of the Definitive Agreement. 7. Power Sales ----------- During each contract year, HELCO shall purchase at least 94% on a weekly basis and at least 98% on an annual basis of the following amounts of energy (subject to adjustment based on the effective date condition stated in "Capacity Guarantee" above):
Projected Assumed Contract Contract Time Period Capacity Guarantee Week Amount Year Amount ----------- ------------------ ----------- ----------- Effective Date - 5/31/95 20,000 KW 2,025,500 KWH 97,222,000 KWH 6/1/95 - 12/31/99 22,000 KW 2,192,400 KWH 105,235,200 KWH
Mr. James S. Andrasick January 5, 1995 Page 3 8. Energy Rates ------------ The rate for energy shall be the same as provided in the PPA, except that HELCO shall waive the energy rate discount provision. 9. Fuel Cost Differential ---------------------- It is anticipated that HCPC will exhaust its existing supply of coal before it is able to order and receive another shipment of coal. Accordingly, HCPC will be required to utilize diesel fuel to operate the plant from the time the coal is exhausted and until receipt of the first shipment of new coal supplies, approximately six weeks from the date of order (the Diesel Period). HELCO agrees to compensate HCPC for the Cost Differential incurred by HCPC during this Diesel Period, unless otherwise provided by the Interim Operating Agreement defined in Section20 herein. Such Cost Differential for this period shall be the actual price of diesel utilized by HCPC less the cost which would have been incurred by HCPC had it utilized an equivalent amount of coal for such period. Such cost differential shall be payable weekly in advance and reconciled within fifteen (15) days of the end of the Diesel Period. Provided, however, that HELCO may, at its option, provide to HCPC the diesel required to operate the plant during this period, in which case HELCO shall offset the lower of: (a) its cost for such diesel or (b) through January 31, 1995, the cost which would have been incurred by HCPC had it utilized an equivalent amount of coal against the next due energy payment and no other cost differential shall be owed to HCPC. After January 31, 1995, during the Diesel Period HELCO shall offset its cost for such diesel against the next due energy payment and, in addition, shall pay HCPC one-half of the difference between the energy payment and the cost which would have been incurred by HCPC had it utilized an equivalent amount of coal for such period. Furthermore, during such Diesel Period the minimum power sales levels in Section 7, "Power Sales," shall not apply and HELCO shall have the right to place the unit into standby reserve during periods in which the capacity is not needed by HELCO, such as weekend shutdowns. 10. Substation Upgrades ------------------- If necessary, and subject to compliance with applicable PUC rules, HELCO shall upgrade the substation and transmission lines interconnecting the HCPC Power Plant to HELCOs system in order to accommodate HCPC's supply of 22,000 KW of power. Any costs incurred by HELCO shall be prorated between HELCO and HCPC in proportion to the relative value derived by each party from the upgrade, pursuant to terms to be discussed. (For example, if the cost were $500,000 for an upgrade with a 20-year life, and HCPC derived five years of value from the upgrade, its share of the cost would be $125,000.) Mr. James S. Andrasick January 5, 1995 Page 4 11. Cash Advance ------------ HELCO shall advance to HCPC, upon execution of the Definitive Agreement and related documentation, a cash advance of $6 million to be directed $3.5 million for payment of its employee severance payments and similar employee benefit obligations and $2.5 million for power plant capital improvements. With regard to the $2.5 million, HCPC shall be required to use such funds for items, such as the stack extension, necessary for HCPC to continue power plant operations. Such advance is to be appropriately documented, shall bear interest at the rate of nine percent (9%), and shall be repaid in substantially equal installments over the term of the Definitive Agreement through an offset of payments owed by HELCO to HCPC for capacity. In addition, the making of such advance shall be secured by and conditioned upon HCPCOs arranging for HELCO to receive, contemporaneously with the making of the cash advance, security satisfactory to HELCO consisting of: (i) at all times during the term of the Definitive Agreement, agriculturally zoned lands having a fair market Ohighest and best useO appraised value at least equal to the unpaid principal balance of the cash advance (the "Land Security"), (ii) superpriority status pursuant to Section 364 of the Bankruptcy Code and (iii) a security interest in the proceeds of the PPA, to the extent not subject to the existing assignment of proceeds in favor of the State. The appraised value of the initial 600 acres, as well as any additional acreage necessary to meet the initial $6 million threshold, shall be subject to confirmation by a mutually agreed upon independent appraiser. The Land Security will be released by HELCO ratably as the principal on the cash advance is repaid. Such security shall be evidenced by the execution and filing of appropriate security agreements and other documents and shall have priority over the claims of other HCPC creditors. Furthermore, in the event that HCPC defaults on repayment of the cash advance and HELCO forecloses on the Land Security, HCPC agrees to arrange for the liquidation, within 18 months of the default, of a sufficient portion of such Land Security to cover HELCO's remaining principal balance on the cash advance and to remit the proceeds from such liquidation to HELCO in lieu of the Land Security itself. Should the liquidation proceeds not be sufficient to cover HELCO's remaining principal balance in full, HCPC shall cause to be contributed and liquidated additional land to make up the shortfall. Should the power plant be sold or the PPA otherwise terminate prior to December 31, 1999, or HCPC default on its obligations to generate power under the PPA or this amendment, any unpaid balance of the cash advance shall be immediately due and payable. 12. Revolving Fuel Line of Credit ----------------------------- HELCO agrees to provide a revolving line of credit to HCPC of up to $2 million, bearing interest at the rate of nine percent (9%) per annum, to facilitate HCPC's purchase of fuel to operate the Power Plant and to finance other operating expenses currently incurred in the operation of the Power Plant. Such drawings under this revolving line of credit shall be restricted to such use and shall be repaid Mr. James S. Andrasick January 5, 1995 Page 5 through an offset of energy payments owed by HELCO to HCPC until such time as the drawing is repaid in full; provided, however, that in the event energy payments are not projected by HELCO to be sufficient to repay the revolving line of credit within a reasonable revolving line of credit within a reasonable time, HELCO shall have the right to offset the balance against capacity payments. The outstanding balance under this revolving fuel line of credit shall be secured by and conditioned upon HCPC's granting HELCO, contemporaneously with HELCOs issuance of the line of credit, a lien on such fuel and superpriority status pursuant to Section 364 of the Bankruptcy Code. Such security shall be evidenced by the execution and filing of appropriate security agreements and shall have priority over the claims of other HCPC creditors. Should the power plant be sold or the PPA otherwise terminate prior to December 31, 1999, or HCPC default on its obligations to generate power under the PPA or the Definitive Agreement, any unpaid balance of the revolving fuel line of credit shall be immediately due and payable. 13. Option to Purchase Power Plant ------------------------------ HELCO shall waive the purchase option under Section XVI.B of the PPA. 14. PUC Approval ------------ HELCO shall seek a decision and order from the PUC approving the Definitive Agreement. HELCO shall have the right to terminate this amendment if the PUC disapproves, or if the PUC does not approve by interim or final decision and order, acceptable to HELCO in its sole discretion, which shall not be unreasonably invoked, within 180 days of the execution of the Definitive Agreement, inclusion of the energy and capacity costs incurred by HELCO pursuant to this amendment in its revenue requirements for ratemaking purposes or for the purpose of determining the reasonableness of HELCO's rates, upon 45 days written notice to HCPC. 15. Sugar Provisions ---------------- HELCO to waive other PPA provisions relating to sugar, subject to a more detailed review of the PPA to determine exactly which provisions would be affected. 16. Agreement Approval ------------------ Any amendment shall be contingent on obtaining all necessary final approvals of the Definitive Agreement and the proposed transaction, including without limitation, approvals by the Bankruptcy Court and by the respective Boards of Directors of HELCO and HCPC. For purposes of this provision, as well as any other provision herein requiring the parties to obtain certain approvals (including, but not limited to, PUC approval), the parties shall use their good faith efforts to obtain such approvals. Mr. James S. Andrasick January 5, 1995 Page 6 17. Termination of Offer -------------------- The offer set forth in this Letter Agreement terminates if not signed by HCPC and delivered to HELCO by the close of business today, January 5, 1995 (the Acceptance Date), or upon revocation in writing by HELCO at its sole discretion (Revocation), or upon rejection by HCPC, whichever is earlier. The offer shall be deemed rejected by HCPC and the offer shall thereupon terminate (a) if HCPC gives notice of rejection to HELCO, (b) if HCPC counters the offer set forth in this Letter Agreement, (c) if HCPC ceases production of power or otherwise defaults on its obligations under the PPA, or (d) for any other reasons deemed by law to be a rejection of an offer. 18. Termination of Letter Agreement ------------------------------- After acceptance on or before the Acceptance Date, this Letter Agreement shall terminate (a) in the event that a Definitive Agreement is not executed on or before thirty (30) calendar days of the Acceptance Date, or (b) if HCPC ceases production of power or otherwise defaults on its obligations under the PPA. 19. Effect of Bankruptcy -------------------- (a) In the event any cash advance, or drawing under the revolving fuel line of credit, is made pursuant to the Definitive Agreement and to the extent they are not repaid from payments under the PPA, as amended, repayments of such amounts shall constitute a superpriority expense of the HCPC bankruptcy estate, pursuant to Section 364 of the Bankruptcy Code. (b) At the same time as HCPC seeks Bankruptcy Court approval of the Definitive Agreement it shall also seek authorization from the Bankruptcy Court to assume the PPA, as amended by the Definitive Agreement. HELCOs agreement to the terms herein is made on the condition that HCPC also assumes the PPA. (c) In the event there is an occurrence of total default by HCPC as defined under Section XV of the PPA, HELCO shall have the right but not any obligation immediately to take possession of the HCPC Power Plant for the remaining term specified under the Definitive Agreement and to generate power regardless of whether or not it exercises its Default Purchase Option under the PPA. To the extent any automatic stay may apply, the parties agree that HELCO will be entitled to immediate relief from any automatic stay to permit it to take immediate possession of the HCPC Power Plant and generate power. The parties agree that in the event of such total default by HCPC, HELCO would have good cause, within the meaning of Section 362 of the Bankruptcy Code, to exercise its right to take immediate possession of the HCPC Power Plant and to generate power, in order to protect its interests under the PPA or the Definitive Agreement, to protect the public interest and to preserve the value of the HCPC Power Plant for the purposes of an effective reorganization of HCPC. Mr. James S. Andrasick January 5, 1995 Page 7 20. Interim Operating Agreement --------------------------- During the period between the execution of this Letter Agreement by HCPC and the receipt of the cash advance described in Section 11 herein (the Interim Period), HCPC shall continue to operate the plant and furnish HELCO 20,000 KW of capacity. HELCO and HCPC shall enter into an Interim Period Operating Agreement on or before the date of acceptance by HCPC of this Letter Agreement, or as soon thereafter as practicable thereafter, but not more than 14 days, which defines the rights and obligations of the parties during the Interim Period. HELCO may request an interim decision and order from the PUC allowing the recovery of energy payments in excess of that under the current PPA. 21. Definitive Agreement -------------------- Notwithstanding any language herein to the contrary, the completion of each of the transactions contemplated herein shall be subject to negotiation and execution of a definitive agreement and of all documents related to the transactions incorporated therein, providing for an amendment to the PPA pursuant to the terms of this Letter Agreement and containing terms and provisions satisfactory to HELCO (the Definitive Agreement). Promptly following the execution and return to HELCO of this Letter Agreement both parties agree to instruct their respective legal counsel to prepare the Definitive Agreement. 22. Extension of Temporary Restraining Order ---------------------------------------- Pending finalization and court approval of the Interim Operating Agreement, the parties agree to extend the temporary restraining order until such finalization and court approval occurs, except that the extension shall be on the same terms relating to capacity charge and fuel cost differential set forth in this Letter Agreement. In the event that, pursuant to the Definitive Agreement, HELCO is to pay to the State of Hawaii, in connection with HCPCs loan from the Department of Agriculture, an amount other than the $100,000 currently payable under the Assignment of Proceeds from the Sale of Electric Energy, HCPC shall obtain any necessary consents, including any consent from the State of Hawaii. Mr. James S. Andrasick January 5, 1995 Page 8 If the foregoing is acceptable, please so indicate by executing and returning the enclosed copy of this Letter Agreement by today, January 5, 1995, the Acceptance Date. Very truly yours, /s/ Warren H. W. Lee ACCEPTED AND AGREED TO on January 5 , 1995 ----------------------- HILO COAST PROCESSING COMPANY By /s/ James S. Andrasick ------------------------------- Its Chairman EX-13.(A) 4 HEI ANNUAL REPORT HEI Exhibit 13(a) SELECTED FINANCIAL DATA - -------------------------------------------------------------------------------- Hawaiian Electric Industries, Inc. and subsidiaries
Years ended December 31 1994 1993 1992 1991 1990 - -------------------------------------------------------------------------------------------------------------------------- (dollars in thousands, except per share amounts) RESULTS OF OPERATIONS Revenues $1,188,523 $1,142,170 $1,031,383 $ 993,242 $ 928,702 Net income (loss) Continuing operations $ 73,030 $ 61,684 $ 61,715 $ 55,620 $ 42,895 Discontinued operations -- (13,025) (73,297) (794) 707 - -------------------------------------------------------------------------------------------------------------------------- $ 73,030 $ 48,659 $ (11,582) $ 54,826 $ 43,602 ========================================================================================================================== Earnings (loss) per common share Continuing operations $ 2.60 $ 2.38 $ 2.54 $ 2.43 $ 1.99 Discontinued operations -- (0.50) (3.02) (0.03) 0.03 - -------------------------------------------------------------------------------------------------------------------------- $ 2.60 $ 1.88 $ (0.48) $ 2.40 $ 2.02 ========================================================================================================================== Return on average common equity 11.0% 8.2% (2.1)% 10.0% 8.7% ========================================================================================================================== FINANCIAL POSITION * Total assets $5,174,464 $4,521,592 $4,142,768 $3,716,872 $3,502,023 Deposit liabilities of the savings bank subsidiary 2,129,310 2,091,583 2,032,869 1,615,361 1,511,291 Advances from Federal Home Loan Bank to the savings bank subsidiary 616,374 289,674 194,099 258,593 205,716 Long-term debt, net 718,240 697,836 582,475 525,641 463,362 Preferred stock of electric utility subsidiaries Subject to mandatory redemption 44,844 46,730 48,920 50,665 52,210 Not subject to mandatory redemption 48,293 48,293 36,293 36,293 36,293 Stockholders' equity 682,089 643,028 547,741 581,446 510,543 COMMON STOCK DATA Book value per common share * 23.80 23.23 22.12 24.36 23.29 Market price range per common share High 36.50 38.88 44.63 37.88 40.00 Low 29.88 31.00 34.75 29.38 27.25 Yearend 32.38 35.88 37.25 36.75 31.63 Dividends per common share 2.33 2.29 2.25 2.21 2.17 Dividend payout ratio 90% 121% nm 92% 107% Dividend payout ratio-continuing operations 90% 95% 88% 91% 109% Market price to book value per common share * 136% 154% 168% 151% 136% Price earnings ratio ** 12.5x 15.1x 14.7x 15.1x 15.9x Common shares outstanding (thousands) Weighted average 28,137 25,938 24,275 22,882 21,559 Geographic distribution of ownership * State of Hawaii *** 7,278 6,969 6,663 6,399 6,100 Other 21,377 20,706 18,099 17,468 15,818 - -------------------------------------------------------------------------------------------------------------------------- Total shares outstanding 28,655 27,675 24,762 23,867 21,918 - -------------------------------------------------------------------------------------------------------------------------- Stockholders by geographic distribution * State of Hawaii *** 21,896 22,092 21,305 20,441 18,053 Other 18,830 18,374 16,891 15,598 13,883 - -------------------------------------------------------------------------------------------------------------------------- Total stockholders 40,726 40,466 38,196 36,039 31,936 ==========================================================================================================================
nm Not meaningful. * At December 31. ** Calculated using yearend market price per common share divided by earnings per common share from continuing operations. *** Does not include depository and brokerage accounts, which may contain additional shares beneficially owned by Hawaii stockholders. See Note 2, "Discontinued operations" in the "Notes to Consolidated Financial Statements" for a discussion of the Company's former property and casualty insurance business and wind energy business. 25 SEGMENT FINANCIAL INFORMATION - -------------------------------------------------------------------------------- Hawaiian Electric Industries, Inc. and subsidiaries
Years ended December 31 1994 1993 1992 - -------------------------------------------------------------------------------------- (in thousands) REVENUES Electric utility $ 913,719 $ 879,110 $ 778,690 Savings bank 215,525 199,734 202,995 Other 59,279 63,326 49,698 - -------------------------------------------------------------------------------------- $1,188,523 $1,142,170 $1,031,383 ====================================================================================== OPERATING INCOME (LOSS) Electric utility $ 136,628 $ 119,565 $ 103,841 Savings bank 42,525 44,117 31,327 Other (5,020) (6,044) 1,051 - -------------------------------------------------------------------------------------- $ 174,133 $ 157,638 $ 136,219 ====================================================================================== DEPRECIATION AND AMORTIZATION OF PROPERTY, PLANT AND EQUIPMENT Electric utility $ 63,779 $ 55,960 $ 53,856 Savings bank 3,551 3,167 2,852 Other 4,926 5,187 5,220 - -------------------------------------------------------------------------------------- $ 72,256 $ 64,314 $ 61,928 ====================================================================================== CAPITAL EXPENDITURES Electric utility $ 195,525 $ 212,916 $ 188,323 Savings bank 11,316 3,920 4,828 Other 2,749 3,822 4,283 - -------------------------------------------------------------------------------------- $ 209,590 $ 220,658 $ 197,434 ====================================================================================== IDENTIFIABLE ASSETS (AT DECEMBER 31) Electric utility $1,889,120 $1,703,276 $1,501,330 Savings bank 3,115,651 2,618,485 2,461,694 Other 169,693 199,831 179,072 - -------------------------------------------------------------------------------------- 5,174,464 4,521,592 4,142,096 Net assets of discontinued -- -- 672 operations - -------------------------------------------------------------------------------------- $5,174,464 $4,521,592 $4,142,768 ======================================================================================
As of January 1, 1993, Hawaiian Electric Industries, Inc. (HEI) refined its method of determining costs chargeable to its subsidiaries by identifying additional common costs categories, increasing the number of cost causation factors used to allocate common costs and utilizing timesheets. The refinements resulted in lower allocations to subsidiaries and more expenses retained at corporate in 1993 and 1994. HEI's principal segments are as follows: ELECTRIC UTILITY - -------------------------------------------------------------------------------- Hawaiian Electric Company, Inc. and its wholly owned subsidiaries, Hawaii Electric Light Company, Inc. and Maui Electric Company, Limited, are operating electric public utilities in the business of generating, purchasing, transmitting, distributing and selling electric energy, and are regulated by the Public Utilities Commission of the State of Hawaii (PUC). SAVINGS BANK - -------------------------------------------------------------------------------- American Savings Bank, F.S.B. (ASB) is a Federally chartered savings bank providing a full range of banking services to individual and corporate customers through its branch system in Hawaii. ASB is subject to examination and comprehensive regulation by the Department of Treasury, Office of Thrift Supervision and the Federal Deposit Insurance Corporation, and is also subject to regulations of the Board of Governors of the Federal Reserve System. OTHER - -------------------------------------------------------------------------------- Hawaiian Tug & Barge Corp. provides tugboat and charter barge services in Hawaii and the Pacific area and, together with its subsidiary, Young Brothers, Limited (YB), provides general freight and containerized cargo transportation between the Hawaiian Islands. YB operates as an authorized common carrier that services all major ports in Hawaii under the Hawaii Water Carrier Act and is regulated by the PUC. Malama Pacific Corp. and its wholly owned subsidiaries invest in and develop real estate. HEI Investment Corp. invests primarily in leveraged leases. Pacific Energy Conservation Services, Inc. (PECS) is a nonutility service company formed in 1994 to promote energy conservation in Hawaii and the Pacific Basin. PECS had no operations in 1994. Other also includes amounts for HEI, HEI Diversified, Inc. and intercompany eliminations. 26 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 - -------------------------------------------------------------------------------- Hawaiian Electric Industries, Inc. (HEI) and its subsidiaries (collectively, the Company) reported net income of $2.60 per share in 1994, due to the results of its major operating segments-the electric utility and the savings bank-partly offset by losses in the "other" segment. Earnings per share from continuing operations for 1994 increased 9% over 1993 due primarily to increased electric utility earnings. Many factors affected HEI's 1994 consolidated results, including Hawaii's economic environment. Although Hawaii's economy grew rapidly in the late 1980's, the economy slowed from 1991 through 1993 due to the effects of the Gulf War and Hurricane Iniki as well as the U.S. and Japan recessions. In 1994, for the first time in many years, Hawaii's unemployment rate exceeded the national average. This unusual recessionary period appears to be over. A modest economic recovery began in 1994 led by Hawaii's key industry, tourism. Visitor arrivals were up about 5.4% over 1993, the first annual increase since 1990, largely as a result of U.S. economic expansion and the economic recovery in Japan. However, the near-term impact of the January 1995 earthquake in Japan, the flood in Los Angeles and the devaluation of the Mexican peso on visitor arrivals to Hawaii is uncertain. The Company from time to time considers various strategies designed to enhance its competitive position and to increase its ability to adapt to and anticipate changes in its businesses. These strategies may include the formation or acquisition of new businesses. The Company may from time to time be engaged in preliminary discussions, either internally or with third parties, regarding these potential strategies. No assurances can be given as to whether any of these strategies will be successfully implemented or any potential transaction will actually occur, or the ultimate effect of any such transaction or strategy on the Company's financial condition or competitive position. In 1995, HEI is forming a new subsidiary to pursue independent power projects in Asia, beginning with the Philippines. With continuing economic growth in the U.S. and Asia and the stabilization of the construction industry and defense spending in Hawaii, Hawaii's economy is expected to continue its recovery and grow moderately during the second half of the 1990's. By providing essential services in Hawaii, HEI management believes that the Company is well positioned to take advantage of Hawaii's projected growth. CONSOLIDATED - --------------------------------------------------------------------------------
% % % 1994 CHANGE 1993 change 1992 change - --------------------------------------------------------------------------------------------------- (in millions, except per share amounts) Revenues $1,189 4 $1,142 11 $1,031 4 Operating income 174 10 158 16 136 2 Net income (loss) Continuing operations $ 73.0 18 $ 61.7 -- $ 61.7 11 Discontinued operations -- 100 (13.0) 82 (73.3) nm - --------------------------------------------------------------------------------------------------- $ 73.0 50 $ 48.7 nm $(11.6) nm =================================================================================================== Earnings (loss) per common share Continuing operations $ 2.60 9 $ 2.38 (6) $ 2.54 5 Discontinued operations -- 100 (0.50) 83 (3.02) nm - --------------------------------------------------------------------------------------------------- $ 2.60 38 $ 1.88 nm $(0.48) nm =================================================================================================== Weighted average number of common shares outstanding 28.1 8 25.9 7 24.3 6 Effective tax rate for continuing operations 42% 43% 32%
nm Not meaningful. 27 The following discussion should be read in conjunction with the segment discussions. . The increase in 1994 net income from continuing operations compared to 1993 was due to improved results of the electric utility and "other" segments, partly offset by a 2% decrease in net income of the savings bank segment. . 1993 results include $15.0 million in after-tax losses from the settlement of a lawsuit involving the discontinued operations of The Hawaiian Insurance & Guaranty Co., Limited and its subsidiaries (the HIG Group) and $2.0 million in after-tax gain from the reversal of a reserve after the sale of the discontinued operations of Hawaiian Electric Renewable Systems, Inc. (HERS), the Company's former wind energy business. . 1993 income from continuing operations was flat when compared to 1992 and included increases in net income from the savings bank and electric utility segments, offset by an increase in net loss from the "other" segment. . 1992 results include $73.3 million in after-tax losses from the discontinued operations of the HIG Group and HERS. Higher earnings from continuing operations resulted from increases at the electric utility and savings bank segments. . The effective tax rate was higher in 1994 and 1993 than in 1992 primarily due to the following: (1) a 1% increase in the federal income tax rate commencing in 1993; (2) the use of gross-up accounting for income taxes related to the allowance for funds used during construction (AFUDC) under Statement of Financial Accounting Standards (SFAS) No. 109 effective January 1, 1993; (3) the treatment of Maritime Administration Capital Contribution Fund (CCF) contributions as temporary (rather than permanent) differences between financial reporting and tax income under SFAS No. 109 effective January 1, 1993; and (4) the utilization of capital loss carryforwards in 1992. . Dividends per common share increased in 1994 to $2.33, from $2.29 in 1993 and $2.25 in 1992. HEI and its predecessor company, Hawaiian Electric Company, Inc. (HECO), have paid dividends continuously since 1901. Dividends per share have been higher each year since 1964. Although the Company's long-term goal is to have dividend growth keep pace with inflation, the Company believes that recent payout ratios (the percentages of earnings paid out in dividends) have been too high. The Company believes that a payout ratio of 80% or less is more appropriate and, in the future, hopes to increase earnings faster than dividends to reduce the payout ratio. One of the keys to improved earnings is continued regulatory support as evidenced by timely rate case decisions by the Hawaii Public Utilities Commission (PUC). Another key to long-term growth in earnings is growth and expansion of the Company. Thus, the Company is looking at opportunities to grow in Hawaii, Asia and the Pacific. Following is a general discussion of revenues, expenses and operating income by business segment. Segment information is also shown in "Segment Financial Information" on page 26 and in the "Notes to Consolidated Financial Statements." ELECTRIC UTILITY - --------------------------------------------------------------------------------
% % % 1994 CHANGE 1993 change 1992 change - ------------------------------------------------------------------------------------------------ (in millions, except per barrel amounts and number of employees) Revenues/1/ $ 914 4 $ 879 13 $ 779 5 Expenses Fuel oil 187 (12) 213 (5) 226 (18) Purchased power 272 5 259 50 173 62 Other 318 11 287 4 276 7 Operating income 137 14 120 15 104 4 Allowance for funds used during construction 13 21 11 22 9 67 Net income 62 19 52 5 49 18 Average price per barrel of fuel oil/1/ 18.92 (10) 21.09 7 19.69 (14) Kilowatthour sales 8,593 3 8,325 -- 8,332 3 Number of employees 2,219 -- 2,226 5 2,118 5
/1/ The rate schedules of the electric utilities contain energy cost adjustment clauses under which electric rates are adjusted for changes in the weighted average price paid for fuel oil and certain components of purchased energy costs, and the relative amounts of company-generated power and purchased power. Accordingly, changes in fuel oil and certain components of purchased energy costs are passed on to customers. 28 . In 1994, the electric utilities' revenues increased 4% compared to 1993 primarily due to rate relief granted by the PUC and a 3.2% increase in kilowatthour sales of electricity, partly offset by lower fuel oil prices. The kilowatthour sales increase reflects the gradual recovery of Hawaii's economy and the effects of warmer weather. Fuel oil expense declined because of lower fuel oil prices and lower company generated kilowatthours. Purchased power expense was higher due to an increase in kilowatthours purchased. The 11% increase in other expenses was due to a 14% increase in depreciation expense as a result of plant additions, a 12% increase in other operation and maintenance expenses and a 6% increase in taxes, other than income taxes. Other operation and maintenance expenses in 1994 increased partly because 1993 expenses reflect a one-time reduction of $4 million due to the establishment under SFAS No. 71 of a regulatory asset for vacation earned by employees, but not yet taken. Operating income for 1994 increased 14% compared to 1993 due in part to rate relief and higher kilowatthour sales, partly offset by the increased expenses. Consolidated HECO's return on average common equity for 1994 was 10.2%, compared to 9.7% for 1993 and 10.5% for 1992. . 1993 revenues increased 13% over 1992 due in part to rate relief received in late 1992, primarily to recover purchased power expenses. Kilowatthour sales of electricity for the year were down 0.1% compared to 1992 primarily because of cooler weather, a downturn in Hawaii's economy and conservation. Fuel oil expense was lower despite higher fuel oil prices because fewer kilowatthours were generated as purchased power increased. Purchased power expense increased with a full year of purchases from a major independent power producer. The 4% increase in other expenses was partly due to a 4% increase in depreciation expense as a result of plant additions and a 13% increase in taxes, other than income taxes. Operating income for 1993 increased 15% compared to 1992 due in part to rate relief, lower management service fees from HEI and the one-time reduction in expense due to the establishment of a regulatory asset for vacation earned by employees, but not yet taken. . 1992 revenues increased 5% over 1991 due to higher kilowatthour sales of electricity and rate relief, partly offset by lower fuel oil prices. Higher 1992 operating income was primarily due to rate relief and increased kilowatthour sales, offset in part by higher expenses. Net income increased 18% as a result of the higher operating income and higher AFUDC due to higher construction work- in-progress balances. HECO and its subsidiaries do not provide electric service to the island of Kauai and were not significantly affected by Hurricane Iniki, which struck Kauai in September 1992. 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, new technologies and governmental regulations. Competition in Hawaii is also affected by the scarcity of generation sites and lack of interconnections. The Energy Policy Act of 1992 encourages competition by allowing both utilities and nonutilities to form generation subsidiaries without becoming subject to regulation under the Public Utility Holding Company Act of 1935. To date, HECO and its subsidiaries have not faced this type of competition. 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 companies worked with a large military housing project, installing energy-efficient equipment that decreased the facility's electricity consumption by one-third. In August 1994, HEI formed a new nonutility energy service company, Pacific Energy Conservation Services, Inc. (PECS), to promote energy conservation in Hawaii and the Pacific Basin. PECS is considering potential projects to install, finance, operate and maintain energy conservation equipment, while sharing a percentage of the saved energy costs with its clients. 29 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 new technologies like electric vehicles. 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 postretirement benefits other than pensions (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 recognized by HECO, Hawaii Electric Light Company, Inc. (HELCO), Maui Electric Company, Limited (MECO) and Young Brothers, Limited (YB) for PBOP costs accrued from January 1, 1993 through December 31, 1994 and amounted to $36.7 million for the four companies at December 31, 1994. 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 increase in PBOP expense. See Note 17 in the "Notes to Consolidated Financial Statements," for further information. 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 a final decision and order from the PUC authorizing a $40.5 million, or 6.5%, increase in annual revenues, effective January 1, 1995 and based on a 12.15% return on average common equity. The order granted HECO an increase of approximately $3.5 million in annual revenues, in addition to reaffirming 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, represented an increase of approximately 5%, or $38.5 million in additional annual revenues, over rates in effect at the time of the revised filing (which rates included interim rate relief granted on the 1994 test year application). The revised requested increase is needed to cover rising operating costs (including PBOP costs discussed above) and costs of new capital projects to maintain and improve service reliability. 30 The PUC completed hearings in November 1994 on HECO's rate increase request based on a 1995 test year. 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 annual revenues, or a 13.4% increase over the rates then in effect. The requested increase is based on a 1994 test year and a 12.4% return on average common equity (which was later increased to 13.1%). The increase is needed to cover the costs of plant and equipment, 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 increase of approximately $0.1 million in annual revenues, in addition to reaffirming 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 June 1994, HELCO filed a notice of intent to file an application for a general rate increase using a 1995 test year. The increase is expected to be required primarily to cover investments in new generating units. The application has not yet been filed and may be filed based on a 1996 test year. 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 decisions which authorized step increases totaling $8.2 million in annual revenues. In August 1994, MECO received the final decision and order from the PUC granting an 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 December 1994, MECO filed a notice of intent to request rate relief, based on a 1996 test year. 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.
SAVINGS BANK % % % 1994 CHANGE 1993 change 1992 change - ------------------------------------------------------------------------------------------ (in millions) Revenues $ 216 8 $ 200 (2) $ 203 2 Net interest income 99 4 96 23 78 21 Operating income 43 (4) 44 41 31 24 Net income 25 (2) 25 36 19 24 Interest-earning assets Average balance $2,700 15 $2,356 7 $2,207 15 Weighted average yield 7.53% (6) 8.01% (8) 8.73% (11) Interest-bearing liabilities Average balance $2,611 13 $2,306 6 $2,171 14 Weighted average rate 3.98% (1) 4.02% (24) 5.28% (20) Interest rate spread 3.55% (11) 3.99% 16 3.45% 6
31 American Savings Bank, F.S.B. (ASB) earnings depend primarily on net interest income, the difference between the interest income earned on interest-earning assets (loans receivable, mortgage-backed securities and investments) and interest expense incurred on interest-bearing liabilities (deposit liabilities and borrowings). ASB's loan volumes and yields are affected by market interest rates, competition, demand for real estate financing, availability of funds and management's responses to these factors. Other factors affecting ASB's operating results include income from servicing loans and expenses from operations. . 1994 net interest income increased 4% over 1993, despite an 11% decrease in interest rate spread, due to a $392 million higher average balance of loans and mortgage-backed securities. Operating and net income declined slightly due to an increased provision for loan losses, higher compensation and employee benefits expenses and higher trading portfolio losses. The decline was offset in part by interest income on a tax refund from an amended tax return. 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 February 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. Also, the recent recession in Hawaii 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. As Hawaii's economy begins its recovery, management expects to see a reversal in the trend of increased delinquencies. Another unfavorable trend has been the outflow of deposits partly due to competition from money market funds. In 1994, there was a small increase in deposits due to interest credited, partly offset by an outflow of deposit accounts. 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 put 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 1993, falling interest rates resulted in improved interest rate spreads as interest-bearing liabilities repriced downward at a faster pace than interest-earning assets. During 1994, the 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 in part to 1993's refinancings and repricing of adjustable loans and mortgage-backed securities. 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. . 1993 net interest income increased 23% over 1992 due to the significantly lower cost of funds and a higher average balance of loans. The 1993 interest rate spread increased 16% over 1992. The increase in net interest income was partially offset by higher administrative and general expenses, including $0.8 million of higher federal insurance premiums for deposits. . 1992 net interest income increased 21% over 1991 due largely to a higher average balance of interest-earning assets, a low interest rate environment and a 6% increase in the interest rate spread resulting from an inflow of low-cost deposits. The $290 million increase in the average balance of interest-earning assets was funded primarily with low-cost deposits. 32
OTHER % % % 1994 CHANGE 1993 change 1992 change - --------------------------------------------------------------------------------- (in millions) Revenues $ 59 (6) $ 63 27 $ 50 (8) Operating income (loss) (5) 17 (6) nm 1 (86)
nm Not meaningful. The "Other" business segment includes results of operations from Hawaiian Tug & Barge Corp. (HTB) and its subsidiary, YB, which are maritime freight transportation companies; HEI Investment Corp. (HEIIC), which is a company primarily holding investments in leveraged leases; Malama Pacific Corp. (MPC) and its subsidiaries, which are real estate investment and development companies; PECS, a newly formed energy service company with no operations in 1994; HEI and HEI Diversified, Inc. (HEIDI), parent companies; and eliminations of intercompany transactions. . The freight transportation subsidiaries recorded operating income of $3.6 million in 1994, compared with an operating loss of $0.1 million in 1993 and operating income of $3.4 million in 1992. The increase in 1994 was due in part to higher harbor assists and contract tows and a gain on the sale of a barge. Despite YB's rate increases in 1993, HTB's consolidated operating results were down significantly in 1993 compared to 1992 due in part to lower charter revenues at HTB, the termination of an oil hauling contract in mid-1992 and losses on the sale of vessels when HTB exited the heavy fuel-oil shipping business. The decrease in operating income in 1992 was due in part to higher maintenance costs from drydocking more barges and higher depreciation expense. HTB and YB have been hampered by Hawaii's recent recession and decreased construction activity. 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. Also, see the PBOP discussion under the "Electric utility - Recent rate requests" section. . In 1993, HEIIC refinanced the nonrecourse debt supporting a leveraged lease, resulting in additional income, which was largely offset by the cumulative effect of the 1% federal income tax rate increase. No new investments are currently planned for HEIIC. . MPC's operating loss was $1.5 million in 1994, compared with an operating loss of $0.6 million in 1993 and $1.3 million in 1992. MPC's real estate development activities have been impacted by the slow real estate market in Hawaii. MPC sold fewer units in 1994 than 1993 and fewer units in 1993 than 1992. Writedowns were taken for the carrying value of certain real estate projects in 1994, 1993 and 1992. See Note 6 in the "Notes to Consolidated Financial Statements" for a further discussion on MPC and its subsidiaries. . The HEI and HEIDI corporate operating loss increased $1.0 million in 1994 compared to 1993 due in part to higher employee benefits expense. The HEI and HEIDI corporate operating loss increased $4.6 million in 1993 compared to 1992 primarily due to a refinement in the method of identifying costs chargeable to subsidiaries, resulting in lower allocations to subsidiaries and more expenses retained at corporate. See page 26 for more information on the corporate allocation methodology refinement. DISCONTINUED OPERATIONS - -------------------------------------------------------------------------------- See Note 2 in the "Notes to Consolidated Financial Statements" for information on the discontinued operations of the HIG Group and HERS. 33 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 of the resulting accounting change, 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 taking steps to reduce EMF, where practical, 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. EFFECTS OF INFLATION - -------------------------------------------------------------------------------- Inflation, as measured by the U.S. Consumer Price Index, averaged 2.6% in 1994 and 3.0% in 1993 and 1992. Although the rate of inflation over the past three years has been relatively low compared with the late 1970's and early 1980's, inflation continues to have an impact on HEI's operations. Inflation increases operating costs and the replacement cost of assets. Subsidiaries with significant physical assets, such as the electric utility companies, replace assets at much higher costs and must request rate relief to maintain adequate earnings. In the past, the PUC has generally approved rate relief to cover the effects of inflation. In 1992, 1993 and 1994, the electric utility companies received rate relief, in part to cover increases due to inflation in operating expenses and construction costs. ACCOUNTING CHANGES - -------------------------------------------------------------------------------- See Note 1 in the "Notes to Consolidated Financial Statements." 34 LIQUIDITY AND CAPITAL RESOURCES - ------------------------------------------------------------------------------- CONSOLIDATED - ------------------------------------------------------------------------------- The Company believes that its ability to generate cash, both internally from operations and externally from debt and equity issues, is adequate to maintain sufficient liquidity to fund its construction programs and to cover debt and other cash requirements in the foreseeable future. The Company's total assets were $5.2 billion and $4.5 billion at December 31, 1994 and 1993, respectively. Asset growth in 1994 stemmed from growth in ASB's loan and mortgage-backed securities portfolios and capital expenditures by the electric utility companies. The consolidated capital structure of HEI was as follows:
December 31 1994 1993 - ------------------------------------------------------------------------ (in millions) Short-term borrowings $ 137 8% $ 40 3% Long-term debt, net 718 44 698 47 Preferred stock of electric utility subsidiaries 93 6 95 6 Common stock equity 682 42 643 44 - ------------------------------------------------------------------------ $1,630 100% $1,476 100% ========================================================================
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. HEI plans to maintain its debt and equity structure close to the levels at December 31, 1994 and 1993 through the issuance of short-term and long-term debt, the issuance of preferred stock by the electric utilities, retained earnings and the issuance of common stock by HEI through public offerings, the Dividend Reinvestment and Stock Purchase Plan and other plans. As of February 15, 1995, the Standard & Poor's (S&P), Moody's Investors Service (Moody's) and Duff & Phelps Credit Rating Co.'s (Duff & Phelps) ratings of HEI's and HECO's securities were as follows:
S&P Moody's Duff & Phelps - ------------------------------------------------------------------------ HEI - --- Medium-term notes BBB Baa2 BBB+ Commercial paper A-2 P-2 Duff 2 HECO - ---- First mortgage bonds BBB+ A3 A Unsecured notes BBB Baa1 A- Cumulative preferred stock BBB baa1 BBB+ Commercial paper A-2 P-2 Duff 1-
The above ratings are not recommendations to buy, sell or hold any securities, and such ratings may be subject to revision or withdrawal at any time by the rating agencies. In January 1995, S&P revised its ratings outlook on HEI and HECO to "stable" from "negative" citing recent PUC decisions which demonstrate a continuing trend of regulatory support for the electric utility subsidiaries' heavy construction program and HEI's commitment to a well balanced capital structure. Neither HEI nor HECO management can predict with certainty future rating agency actions or their effects on the future cost of capital to HEI or HECO. At December 31, 1994, $178 million of a $250 million registered medium-term note program was available for offering by HEI. 35 Operating activities provided net cash of $130 million in 1994, $139 million in 1993 and $98 million in 1992. Investing activities such as capital expenditures and the origination and purchases of loans and mortgage-backed securities accounted for a significant portion of the net cash used of $713 million in 1994, $352 million in 1993 and $392 million in 1992. Financing activities provided net cash of $554 million in 1994, $172 million in 1993 and $395 million in 1992. In 1994, significant amounts of cash came from the net increases in advances from the Federal Home Loan Bank, securities sold under agreements to repurchase and short-term borrowings. A portion of net assets of HECO and ASB are not available for transfer to HEI in the form of dividends, loans or advances without regulatory approval. However, such restrictions are not expected to significantly affect the operations of HEI, its ability to pay dividends on its common stock or its ability to meet other cash obligations. (See Note 18 in the "Notes to Consolidated Financial Statements.") Total HEI consolidated financing requirements for 1995 through 1999, including net capital expenditures, debt retirements (excluding repayments of Advances to 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:
December 31 1994 1993 - ------------------------------------------------------------------------ (in millions) Short-term borrowings from nonaffiliates and affiliate $ 118 9% $ 41 3% Long-term debt, net 489 37 485 41 Preferred stock Subject to mandatory redemption 45 3 47 4 Not subject to mandatory redemption 48 4 48 4 Common stock equity 634 47 570 48 - ------------------------------------------------------------------------ $1,334 100% $1,191 100% ========================================================================
In 1994, the electric utility companies used $186 million in cash for capital expenditures and $29 million for common stock dividends. Operations provided $102 million in cash and $15 million of cash came from third-party contributions in aid of construction. Financing activities provided $78 million, including a $77 million net increase in short-term borrowings. Also, HEI provided $30 million of cash through its purchase of HECO common stock. 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. 36 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, with the remaining 30% primarily for generation projects. At December 31, 1994, purchase commitments other than fuel and power purchase contracts were approximately $83 million, including amounts for construction projects. (Also see Note 4 in the "Notes to Consolidated Financial Statements" for a discussion of fuel and power purchase commitments.) For 1995, electric utility net capital expenditures 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 projects. Drawdowns of proceeds from the sale of tax-exempt special purpose revenue bonds, sales of common stock to HEI and the generation of funds from internal sources are expected to provide the cash needed for the net capital expenditures. Capital expenditure estimates and the timing of construction projects are reviewed periodically by management and may change significantly as a result of many considerations, including changes in economic conditions, changes in forecasts of kilowatthour sales and peak load, the availability of alternate energy and purchased power, the availability of generating sites and transmission and distribution corridors, the ability to obtain adequate and timely rate relief, escalation in construction costs, demand-side management programs and requirements of environmental and other regulatory and permitting authorities. 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 December 31, 1994, an additional $170 million of revenue bonds had been authorized by the Hawaii Legislature for issuance prior to the end of 1997.
SAVINGS BANK - ------------------------------------------------------------------------------------------ December 31 1994 1993 - ------------------------------------------------------------------------------------------ % % $ change $ change - ------------------------------------------------------------------------------------------ (in millions) Assets $3,116 19 $2,618 6 Loans receivable 1,824 5 1,735 19 Mortgage-backed securities 1,067 69 630 (11) Deposit liabilities 2,129 2 2,092 3 Securities sold under agreements to repurchase 123 nm -- (100) Advances from Federal Home Loan Bank 616 113 290 49
nm Not meaningful. As of September 30, 1994, ASB was the fourth largest financial institution in the state based on total assets of $2.9 billion. In 1994, ASB's total assets increased primarily due to originations and purchases of loans and mortgage- backed securities of $937 million, partly offset by repayments of $413 million. Loans and deposits continued to grow in 1994, although at a slower pace than in 1993 and 1992. At December 31, 1994, loans which do not accrue interest totaled $23.8 million or 1.31% of net loans outstanding. At the end of 1994, there were only three properties acquired in settlement of loans valued at $0.8 million. For 1994, cash used by investing activities was $540 million, due largely to the origination of loans receivable and the purchase of mortgage-backed securities, partly offset by principal repayments. Cash provided by financing activities included a net increase of $327 million in advances from the Federal Home Loan Bank, $122 million in securities sold under agreements to repurchase and $38 million in deposit liabilities, partly offset by common stock dividends of $15 million. 37 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. In the last two years, advances from the Federal Home Loan Bank have become a more significant source of funds as the demand for deposits has decreased. Using higher cost sources of funds 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 December 31, 1994. OTS regulations require each savings association to have regulatory capital at least sufficient to meet three requirements: tangible capital and core (leverage) capital of 1.5% and 3.0%, respectively, of adjusted total assets; and a risk-based capital standard equal to 8.0% of risk-weighted assets. As of December 31, 1994, ASB was in compliance with the minimum capital requirements with a tangible capital ratio of 4.9%, a core capital ratio of 5.2% and a risk- based capital ratio of 11.4%. The OTS adopted a rule adding an interest rate risk (IRR) component to the existing risk-based capital requirement. Institutions with an "above normal" level of IRR exposure 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. Although the regulation generally became effective January 1, 1994, the IRR capital deduction, which was to go into effect with the September 1994 Thrift Financial Report, has been waived until the OTS finalizes the process under which institutions may appeal such capital deductions. This means that in calculating the risk-based capital requirement, ASB was not required to deduct capital for IRR, and did not report such a deduction for the December 1994 Thrift Financial Report. However, based on the lowest IRR reported as of the three prior quarter-ends, ASB would not have been required to hold additional capital at December 31, 1994, if the new rule had been in effect at that time. The Federal Deposit Insurance Corporation Improvement Act of 1991 established a statutory framework for closer monitoring of insured depository institutions in order to ensure "prompt corrective action" by regulators as an institution's capital position declines. The OTS rules for prompt corrective action, effective on December 19, 1992, define the capital measures for five capital categories (well-capitalized, adequately capitalized, under-capitalized, significantly under-capitalized and critically under-capitalized), and provide for progressively more stringent restrictions and supervision as capital levels decline. To be classified as "well-capitalized," an institution must have a "leverage ratio" of 5%, a "Tier-1 risk-based ratio" of 6% and a "total risk- based ratio" of 10%. As of December 31, 1994, ASB believes that based on OTS capital standards it would have been classified as "well-capitalized" with a leverage ratio of 5.2%, a Tier-1 risk-based ratio of 11.0% and a total risk- based ratio of 11.4%. 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 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. 38 INDEPENDENT AUDITORS' REPORT - -------------------------------------------------------------------------------- The Board of Directors and Stockholders Hawaiian Electric Industries, Inc.: We have audited the accompanying consolidated balance sheets of Hawaiian Electric Industries, Inc. and subsidiaries as of December 31, 1994 and 1993, and the related consolidated statements of income, retained earnings and cash flows for each of the years in the three-year period ended December 31, 1994. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Hawaiian Electric Industries, Inc. and subsidiaries as of December 31, 1994 and 1993, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 1994, in conformity with generally accepted accounting principles. As discussed in Note 14 to the consolidated financial statements, effective January 1, 1993, the Company changed its method of accounting for income taxes. Additionally, as discussed in Note 17 to the consolidated financial statements, effective January 1, 1993, the Company changed its method of accounting for postretirement benefits other than pensions. /s/ KPMG Peat Marwick LLP Honolulu, Hawaii January 25, 1995 39 CONSOLIDATED STATEMENTS OF INCOME - ------------------------------------------------------------------------------- Hawaiian Electric Industries, Inc. and subsidiaries
Years ended December 31 1994 1993 1992 - --------------------------------------------------------------------------------- (in thousands, except per share amounts) REVENUES Electric utility $ 913,719 $ 879,110 $ 778,690 Savings bank 215,525 199,734 202,995 Other 59,279 63,326 49,698 - --------------------------------------------------------------------------------- 1,188,523 1,142,170 1,031,383 - --------------------------------------------------------------------------------- EXPENSES Electric utility 777,091 759,545 674,849 Savings bank 173,000 155,617 171,668 Other 64,299 69,370 48,647 - --------------------------------------------------------------------------------- 1,014,390 984,532 895,164 - --------------------------------------------------------------------------------- OPERATING INCOME (LOSS) Electric utility 136,628 119,565 103,841 Savings bank 42,525 44,117 31,327 Other (5,020) (6,044) 1,051 - --------------------------------------------------------------------------------- 174,133 157,638 136,219 - --------------------------------------------------------------------------------- Interest expense--electric utility and other (54,028) (53,192) (47,141) Allowance for borrowed funds used during construction 4,043 3,869 2,095 Preferred stock dividends of electric utility subsidiaries (7,163) (6,518) (6,710) Allowance for equity funds used during construction 9,064 6,973 6,781 - --------------------------------------------------------------------------------- INCOME FROM CONTINUING OPERATIONS BEFORE INCOME TAXES 126,049 108,770 91,244 Income taxes 53,019 47,086 29,529 - --------------------------------------------------------------------------------- INCOME FROM CONTINUING OPERATIONS 73,030 61,684 61,715 - --------------------------------------------------------------------------------- DISCONTINUED OPERATIONS, NET OF INCOME TAXES Loss from operations -- -- (57,090) Loss on disposal -- (13,025) (16,207) - --------------------------------------------------------------------------------- LOSS FROM DISCONTINUED OPERATIONS -- (13,025) (73,297) - --------------------------------------------------------------------------------- NET INCOME (LOSS) $ 73,030 $ 48,659 $ (11,582) ================================================================================= EARNINGS (LOSS) PER COMMON SHARE CONTINUING OPERATIONS $2.60 $2.38 $2.54 DISCONTINUED OPERATIONS -- (0.50) (3.02) - --------------------------------------------------------------------------------- $2.60 $1.88 $(0.48) ================================================================================= DIVIDENDS PER COMMON SHARE $2.33 $2.29 $2.25 ================================================================================= WEIGHTED AVERAGE NUMBER OF COMMON SHARES OUTSTANDING 28,137 25,938 24,275 =================================================================================
CONSOLIDATED STATEMENTS OF RETAINED EARNINGS - ------------------------------------------------------------------------------- Hawaiian Electric Industries, Inc. and subsidiaries
Years ended December 31 1994 1993 1992 - --------------------------------------------------------------------------------- (in thousands) RETAINED EARNINGS, BEGINNING OF YEAR $ 128,318 $ 138,484 $ 204,663 Net income (loss) 73,030 48,659 (11,582) Common stock dividends (65,513) (58,825) (54,597) - --------------------------------------------------------------------------------- RETAINED EARNINGS, END OF YEAR $ 135,835 $ 128,318 $ 138,484 =================================================================================
See accompanying "Notes to Consolidated Financial Statements." 40 CONSOLIDATED BALANCE SHEETS - -------------------------------------------------------------------------------- Hawaiian Electric Industries, Inc. and subsidiaries
December 31 1994 1993 - ------------------------------------------------------------------------------------------- (in thousands) ASSETS Cash and equivalents $ 87,623 $ 116,260 Accounts receivable and unbilled revenues, net 130,762 117,116 Inventories, at average cost 43,126 39,405 Real estate developments 33,956 29,673 Loans receivable, net 1,824,055 1,735,098 Marketable securities (estimated market value $1,051,673 and $710,369) 1,099,810 698,755 Other investments 77,297 77,106 Property, plant and equipment, net Land $ 33,861 $ 33,103 Plant and equipment 2,220,213 2,058,201 Construction in progress 171,251 129,875 ---------- ---------- 2,425,325 2,221,179 Less - accumulated depreciation (747,503) 1,677,822 (678,190) 1,542,989 ---------- ---------- Regulatory assets 95,257 62,543 Other 59,301 52,983 Goodwill and other intangibles 45,455 49,664 - ------------------------------------------------------------------------------------------- $5,174,464 $4,521,592 =========================================================================================== LIABILITIES AND STOCKHOLDERS' EQUITY Accounts payable $ 97,210 $ 88,628 Deposit liabilities 2,129,310 2,091,583 Short-term borrowings 136,755 40,416 Securities sold under agreements to repurchase 123,301 -- Advances from Federal Home Loan Bank 616,374 289,674 Long-term debt, net 718,240 697,836 Deferred income taxes 172,930 168,329 Unamortized tax credits 45,954 44,357 Contributions in aid of construction 178,635 165,005 Other 180,529 197,713 - ------------------------------------------------------------------------------------------- 4,399,238 3,783,541 - ------------------------------------------------------------------------------------------- PREFERRED STOCK OF ELECTRIC UTILITY SUBSIDIARIES Subject to mandatory redemption 44,844 46,730 Not subject to mandatory redemption 48,293 48,293 - ------------------------------------------------------------------------------------------- 93,137 95,023 - ------------------------------------------------------------------------------------------- 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: 28,655 shares and 27,675 shares 546,254 514,710 Retained earnings 135,835 128,318 - ------------------------------------------------------------------------------------------- 682,089 643,028 - ------------------------------------------------------------------------------------------- $5,174,464 $4,521,592 ===========================================================================================
See accompanying "Notes to Consolidated Financial Statements." 41 CONSOLIDATED STATEMENTS OF CASH FLOWS - -------------------------------------------------------------------------------- Hawaiian Electric Industries, Inc. and subsidiaries
Years ended December 31 1994 1993 1992 - ------------------------------------------------------------------------------ (in thousands) CASH FLOWS FROM OPERATING ACTIVITIES Income from continuing operations $ 73,030 $ 61,684 $ 61,715 Adjustments to reconcile income from continuing operations to net cash provided by operating activities Depreciation and amortization of property, plant and equipment 72,256 64,314 61,928 Other amortization (660) (88) 784 Deferred income taxes and tax credits, net 9,161 3,164 (4,530) Changes in assets and liabilities, net of effects from disposal of businesses, acquisition of partnership interest and acquisition of control of joint venture Decrease (increase) in accounts receivable and unbilled revenues, net (13,646) 1,108 (17,515) Decrease (increase) in inventories (3,721) (453) 2,593 Decrease (increase) in other securities held for trading 45,396 (22,359) (9,161) Increase in regulatory assets (9,885) (9,606) (2,921) Increase in accounts payable 8,582 6,248 8,474 Changes in other assets and liabilities (17,570) 35,401 (3,614) - ------------------------------------------------------------------------------ 162,943 139,413 97,753 Cash flows used by discontinued operations (32,623) (92) -- - ------------------------------------------------------------------------------ NET CASH PROVIDED BY OPERATING ACTIVITIES 130,320 139,321 97,753 - ------------------------------------------------------------------------------ CASH FLOWS FROM INVESTING ACTIVITIES Loans receivable originated and purchased (515,070) (557,009) (585,292) Principal repayments on loans receivable 225,002 288,932 268,672 Proceeds from sale of loans receivable 2,138 633 5,208 "Held-to-maturity" mortgage-backed securities purchased (421,649) (190,517) (216,289) Principal repayments on "held-to-maturity" mortgage-backed securities 187,967 269,816 307,364 Capital expenditures (200,526) (213,685) (190,653) Contributions in aid of construction 15,112 20,158 17,949 Other (5,695) 29,980 25,953 - ------------------------------------------------------------------------------ (712,721) (351,692) (367,088) Net investment in discontinued operations -- -- (24,751) - ------------------------------------------------------------------------------ NET CASH USED IN INVESTING ACTIVITIES (712,721) (351,692) (391,839) - ------------------------------------------------------------------------------ CASH FLOWS FROM FINANCING ACTIVITIES Net increase in deposit liabilities 37,727 58,714 417,508 Net increase (decrease) in short-term borrowings with original maturities of three months or less 101,688 (93,247) 92,303 Proceeds from other short-term borrowings 1,008 25,622 36,000 Repayment of other short-term borrowings (6,357) (72,707) -- Proceeds from securities sold under agreements to repurchase 145,669 -- 43,000 Repurchase of securities sold under agreements to repurchase (23,330) (27,000) (145,200) Proceeds from advances from Federal Home Loan Bank 998,200 194,692 32,900 Principal payments on advances from Federal Home Loan Bank (671,500) (99,117) (97,400) Proceeds from issuance of long-term debt 87,814 193,788 83,736 Repayment of long-term debt (75,427) (70,801) (43,436) Proceeds from issuance of electric utility subsidiaries' preferred stock -- 12,000 -- Redemption of electric utility subsidiaries' preferred stock (1,886) (2,190) (1,745) Net proceeds from issuance of common stock 13,602 88,658 18,248 Common stock dividends (47,676) (42,012) (39,214) Other (5,768) 5,477 (1,595) - ------------------------------------------------------------------------------ NET CASH PROVIDED BY FINANCING ACTIVITIES 553,764 171,877 395,105 - ------------------------------------------------------------------------------ Net increase (decrease) in cash and equivalents (28,637) (40,494) 101,019 Cash and equivalents, beginning of year 116,260 156,754 55,735 - ------------------------------------------------------------------------------ CASH AND EQUIVALENTS, END OF YEAR $ 87,623 $ 116,260 $ 156,754 ==============================================================================
See accompanying "Notes to Consolidated Financial Statements." 42 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - -------------------------------------------------------------------------------- GENERAL - -------------------------------------------------------------------------------- BASIS OF FINANCIAL STATEMENT PRESENTATION. The financial statements have been prepared in conformity with generally accepted accounting principles. In preparing the financial statements, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities as of the date of the balance sheet and revenues and expenses for the period. Actual results could differ significantly from those estimates. Material estimates that are particularly susceptible to significant change relate to the determination of regulatory assets, the allowance for loan losses, the provision for costs in excess of net realizable values of real estate projects and the provisions for losses relating to the disposal of discontinued businesses. Management believes that such assets, allowances and provisions have been appropriately established in accordance with generally accepted accounting principles. CONSOLIDATION. The consolidated financial statements include the accounts of Hawaiian Electric Industries, Inc. (HEI), a holding company, and its direct and indirect wholly owned subsidiaries (collectively, the Company). HEI's subsidiaries are Hawaiian Electric Company, Inc. (HECO), parent company of Hawaii Electric Light Company, Inc. (HELCO) and Maui Electric Company, Limited (MECO); HEI Diversified, Inc. (HEIDI), parent company of American Savings Bank, F.S.B. (ASB); Hawaiian Tug & Barge Corp. (HTB), parent company of Young Brothers, Limited (YB); Lalamilo Ventures, Inc. (LVI); Malama Pacific Corp. (MPC), parent company of several real estate subsidiaries; HEI Investment Corp. (HEIIC); and Pacific Energy Conservation Services, Inc. All significant intercompany accounts and transactions have been eliminated in consolidation. PUBLIC UTILITY COMMISSION REGULATION. The electric utility subsidiaries and YB are regulated by the Public Utilities Commission of the State of Hawaii (PUC) and account for the effects of regulation under Statement of Financial Accounting Standards (SFAS) No. 71, "Accounting for the Effects of Certain Types of Regulation." As a result, the actions of regulators can affect the timing of recognition of revenues, expenses, assets and liabilities. INVESTMENTS. DEBT AND EQUITY SECURITIES. In May 1993, the Financial Accounting Standards Board (FASB) issued SFAS No. 115, "Accounting for Certain Investments in Debt and Equity Securities." The Company adopted the provisions of SFAS No. 115 effective January 1, 1994, and the implementation of SFAS No. 115 did not have a material effect on the Company's financial condition or results of operations. Debt securities that the Company has the positive intent and ability to hold to maturity are classified as held-to-maturity securities and reported at amortized cost. Equity securities (with readily determinable fair values) and debt securities that are bought and held principally for the purpose of selling them in the near term are classified as trading securities and reported at fair value, with unrealized gains and losses included in earnings. Equity securities (with readily determinable fair values) and debt securities not classified as either held-to-maturity securities or trading securities are classified as available-for-sale securities and reported at fair value, with unrealized gains and losses excluded from earnings and reported in a separate component of stockholders' equity. 43 OTHER INVESTMENTS. Investments in joint ventures and other investments for which the Company has the ability to exercise significant influence over the operating and financing policies of the enterprise are accounted for under the equity method. For held-to-maturity investments, available-for-sale investments and other investments described above, declines in value determined to be other than temporary are reflected in net income. The specific identification method is used in determining realized gains and losses on the sale of securities. PROPERTY, PLANT AND EQUIPMENT. Property, plant and equipment are stated at cost. The cost of plant constructed by the electric utility subsidiaries includes applicable engineering, supervision, administrative and general expenses, and an allowance for the cost of funds used during the construction period. Upon the ordinary retirement or sale of electric utility plant, no gain or loss is recognized. The cost of the plant retired or sold and the cost of removal (net of salvage obtained) are charged to accumulated depreciation. POSTRETIREMENT AND POSTEMPLOYMENT BENEFITS. Pension costs are charged primarily to expense and electric utility plant. The Company's policy is to fund pension costs in amounts consistent with the requirements of the Employee Retirement Income Security Act. Certain health care and/or life insurance benefits are provided to retired employees (substantially all of whom become eligible for these benefits upon retirement) and the employees' beneficiaries and covered dependents. Effective January 1, 1993, the Company adopted the provisions of SFAS No. 106, "Employers' Accounting for Postretirement Benefits Other Than Pensions," which requires that the expected cost of postretirement benefits other than pensions be accrued during the years in which employees render service (see Note 17). Previously, the cost of these benefits were recognized when paid. The resulting change in the method of accounting for postretirement benefits other than pensions had no material effect on net income for 1993, primarily due to the regulated nature of the electric utility subsidiaries and YB. In November 1992, the FASB issued SFAS No. 112, "Employers' Accounting for Postemployment Benefits." This statement requires employers to recognize the obligation to provide postemployment benefits in accordance with SFAS No. 43, "Accounting for Compensated Absences," if the obligation is attributable to employees' services already rendered, employees' rights to those benefits accumulate or vest, payment of the benefits is probable, and the amount of the benefits can be reasonably estimated. The Company adopted the provisions of SFAS No. 112 on January 1, 1994. The implementation of SFAS No. 112 did not have a material effect on the Company's financial condition or results of operations. DEPRECIATION AND AMORTIZATION. Depreciation of plant and equipment is computed primarily using the straight-line method over the estimated useful lives of the assets. Goodwill relates to the acquisition of ASB and is being amortized on a straight-line basis over 25 years. Core deposit intangibles are being amortized each year at the greater of the actual attrition rate of such deposit base or 10% of the original value. Subsequent to its acquisition, ASB evaluates whether later events or circumstances have occurred that indicate the remaining estimated useful life of an intangible asset may warrant revision or that the remaining balance of an intangible asset may not be recoverable. When factors indicate that an intangible asset should be evaluated for possible impairment, ASB will use an estimate of undiscounted future cash flows over the remaining useful life of the asset in measuring whether the intangible asset is recoverable. 44 ENVIRONMENTAL EXPENDITURES. In general, environmental contamination treatment costs are charged to expense, unless it is probable such costs will be recovered through rates authorized by the PUC. Also, environmental costs are capitalized if: the costs extend the life, increase the capacity, or improve the safety or efficiency of property owned; the costs mitigate or prevent environmental contamination that has yet to occur and that otherwise may result from future operations; or the costs are incurred in preparing property for sale. Liabilities are recorded when environmental assessments and/or remedial efforts are probable, and the cost can be reasonably estimated. Corresponding regulatory assets are recorded when it is probable that such costs would be allowed by the PUC as reasonable and necessary costs of service to be recovered in future rates. INCOME TAXES. The Company adopted the provisions of SFAS No. 109, "Accounting for Income Taxes" effective January 1, 1993. Previously, income taxes were recognized in accordance with the provisions of Accounting Principles Board Opinion No. 11. The resulting change in the method of accounting for income taxes had no material effect on net income for 1993, primarily due to the regulated nature of the electric utility subsidiaries and YB (see Note 14). Federal and state tax credits are deferred and amortized over the estimated useful lives of the properties which qualified for the credits. EARNINGS PER COMMON SHARE. Earnings per common share are based upon the weighted average number of shares of common stock outstanding. The dilutive effect of stock options is not material. CASH FLOWS. The Company considers cash on hand, deposits in banks, deposits with the Federal Home Loan Bank, money market accounts, certificates of deposit, short-term commercial paper and reverse repurchase agreements with original maturities of three months or less to be cash and equivalents. RECLASSIFICATIONS. Certain reclassifications have been made to prior years' consolidated financial statements to conform to the 1994 presentation. ACCOUNTING CHANGES - 1995 IMPLEMENTATION. In May 1993, the FASB issued SFAS No. 114 "Accounting by Creditors for Impairment of a Loan." The Company adopted the provisions of SFAS No. 114, as amended by SFAS No. 118, effective January 1, 1995. The adoption did not have a material effect on the Company's financial condition and, in the opinion of management, will not have a material effect on the Company's 1995 results of operations. ELECTRIC UTILITY - -------------------------------------------------------------------------------- CONTRIBUTIONS IN AID OF CONSTRUCTION. The electric utility subsidiaries receive contributions from customers for special construction requirements. As directed by the PUC, the contributions are amortized on a straight-line basis over 30 years which approximates the estimated useful lives of the facilities for which the contributions were received. This amortization is an offset against depreciation expense. ELECTRIC UTILITY REVENUES. Electric utility revenues are based on rates authorized by the PUC and include revenues applicable to electric energy consumed in the accounting period but not yet billed to the customers. The rate schedules of the electric utility subsidiaries include energy cost adjustment clauses under which electric rates are adjusted for changes in the weighted average price paid for fuel oil and certain components of purchased power, and the relative amounts of company-generated and purchased power. 45 SAVINGS BANK - -------------------------------------------------------------------------------- LOANS RECEIVABLE. Any discount or premium on loans is amortized over the estimated life of the loan using the level-yield method. The valuation allowance for estimated losses on loans receivable is provided to the extent that such losses are expected to be incurred. The accrual of interest on a loan is discontinued when the loan becomes more than 90 days delinquent or on an earlier basis when there is reasonable doubt as to its collectability. REAL ESTATE ACQUIRED IN SETTLEMENT OF LOANS. Real estate acquired in settlement of loans is recorded at the lower of cost or fair value less estimated selling expenses. LOAN ORIGINATION AND COMMITMENT FEES. Loan origination fees (net of direct loan origination costs) are deferred and recognized as an adjustment of yield over the life of the loan. Nonrefundable commitment fees (net of direct loan origination costs, if applicable) for commitments to originate or purchase loans are deferred and, if the commitment is exercised, recognized as an adjustment of yield over the life of the loan. If the commitment expires unexercised, nonrefundable commitment fees are recognized as income upon expiration of the commitment. 2. DISCONTINUED OPERATIONS - -------------------------------------------------------------------------------- HAWAIIAN ELECTRIC RENEWABLE SYSTEMS, INC. - -------------------------------------------------------------------------------- In October 1992, the HEI Board of Directors ratified management's September 30, 1992 plan to exit the nonutility wind energy business because of chronic mechanical problems with its wind turbines and continuing operating losses. In March 1993, HEI sold the stock of Hawaiian Electric Renewable Systems, Inc. (HERS) to The New World Power Corporation for an amount which was not material. In 1993, in connection with the sale of HERS, HEI reversed reserves for HERS' disposal costs that were no longer needed due to the terms of the sale, resulting in a gain on disposal of $2.0 million (net of $1.2 million of income taxes). In 1992, HERS operating revenues were $0.6 million, loss from operations was $5.5 million (net of $8.1 million of income tax benefits) and loss on disposal was $8.1 million (net of $9.0 million of income tax benefits). THE HAWAIIAN INSURANCE & GUARANTY COMPANY, 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. 46 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. HEI is seeking reimbursement for the settlement and defense costs from its insurance carriers. One of HEI's insurance carriers has filed a declaratory relief action seeking resolution of insurance coverage and other policy issues, and HEI has filed counterclaims. Trial is scheduled for October 1995. Recoveries from HEI's insurance carriers, if any, will be recognized when realized. The settlement of the lawsuit resulted in a loss on disposal of $15.0 million (net of $9.2 million of income tax benefits) in 1993. In 1992, HIG operating revenues were $80.7 million, loss from operations was $51.6 million (net of $28.5 million of income tax benefits) and loss on disposal was $8.1 million (net of $5.0 million of income tax benefits). In December 1994, five insurance agencies, which had served as insurance agents for the HIG Group, filed a complaint against HEI, HEIDI and others. The complaint set forth several causes of action, including breach of contract and piercing the corporate veil. The plaintiffs 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. 3. SEGMENT FINANCIAL INFORMATION - -------------------------------------------------------------------------------- Segment financial information on page 26 is incorporated herein by reference. 47 4. ELECTRIC UTILITY SUBSIDIARY - -------------------------------------------------------------------------------- Hawaiian Electric Company, Inc. and subsidiaries Selected consolidated financial information
INCOME STATEMENT DATA Years ended December 31 1994 1993 1992 - ------------------------------------------------------------------------------- (in thousands) REVENUES Operating revenues $907,308 $874,010 $776,929 Other--nonregulated 6,411 5,100 1,761 - ------------------------------------------------------------------------------- 913,719 879,110 778,690 - ------------------------------------------------------------------------------- EXPENSES Fuel oil 186,717 213,285 225,611 Purchased power 271,636 258,723 172,761 Other operation 121,740 105,957 105,303 Maintenance 46,427 44,281 44,653 Depreciation 63,779 55,960 53,856 OpTaxes, other than income taxes 85,877 80,712 71,452 Other--nonregulated 915 627 1,213 - ------------------------------------------------------------------------------- 777,091 759,545 674,849 - ------------------------------------------------------------------------------- Operating income from regulated and nonregulated activities 136,628 119,565 103,841 Allowance for equity funds used during construction 9,064 6,973 6,781 Interest and other charges (40,187) (37,384) (35,196) Allowance for borrowed funds used during construction 4,043 3,869 2,095 - ------------------------------------------------------------------------------- Income before income taxes and preferred stock dividends of HECO 109,548 93,023 77,521 Income taxes 43,587 36,897 23,843 - ------------------------------------------------------------------------------- Income before preferred stock dividends of HECO 65,961 56,126 53,678 Preferred stock dividends of HECO 4,316 4,421 4,525 - ------------------------------------------------------------------------------- Net income for common stock $ 61,645 $ 51,705 $ 49,153 ===============================================================================
BALANCE SHEET DATA December 31 1994 1993 - ------------------------------------------------------------------------------------- (dollars in thousands) ASSETS Utility plant, at cost Property, plant and equipment $2,129,274 $1,976,192 Less accumulated depreciation (702,945) (641,230) Construction in progress 164,247 126,342 - ------------------------------------------------------------------------------------- Net utility plant 1,590,576 1,461,304 Accounts receivable, net 70,708 64,012 Unbilled revenues, net 38,435 34,735 Regulatory assets 92,524 61,078 Other 96,877 82,147 - ------------------------------------------------------------------------------------- $1,889,120 $1,703,276 ===================================================================================== CAPITALIZATION AND LIABILITIES Common stock equity $ 633,901 $ 570,663 Cumulative preferred stock Not subject to mandatory redemption, dividend rates of 4.25-8.875% 48,293 48,293 Subject to mandatory redemption, dividend rates of 7.68-13.75% 44,844 46,730 Long-term debt, net 489,586 484,736 - ------------------------------------------------------------------------------------- Total capitalization 1,216,624 1,150,422 Short-term borrowings from nonaffiliates and affiliate 117,866 40,928 Deferred income taxes 108,362 107,449 Unamortized tax credits 44,939 43,348 Contributions in aid of construction 178,635 165,005 Other 222,694 196,124 - ------------------------------------------------------------------------------------- $1,889,120 $1,703,276 =====================================================================================
48 CUMULATIVE PREFERRED STOCK. Certain cumulative preferred shares of HECO and its subsidiaries are redeemable at the option of the respective company at a premium or par. The remaining cumulative preferred shares are subject to mandatory sinking fund provisions at par and optional redemption provisions at a premium. The total sinking fund requirements on preferred stock subject to mandatory redemption from 1995 to 1999 are $2 million each year. INDEBTEDNESS. See Notes 10 and 11. MAJOR CUSTOMERS. The electric utility subsidiaries derived 10% of their operating revenues from the sale of electricity to various federal government agencies amounting to $89 million in 1994, $91 million in 1993 and $78 million in 1992. COMMITMENTS AND CONTINGENCIES. FUEL CONTRACTS AND OTHER PURCHASE COMMITMENTS. HECO and its subsidiaries have contractual agreements to purchase a minimum amount of 0.5% sulfur residual fuel oil and 0.4% sulfur diesel fuel through 1995. The prices under these contracts are tied to market prices of petroleum products as reported in Singapore and the U.S. Pacific Northwest. Based on the average price per barrel prevailing on January 1, 1995, the estimated amount of required purchases for 1995 is $171 million. The actual amount of purchases in 1995 could vary substantially from such estimates as a result of changes in market prices and other factors. HECO and its subsidiaries purchased $186 million, $205 million and $216 million of fuel under these or prior contractual agreements in 1994, 1993 and 1992, respectively. New contracts to replace expiring ones are expected to be entered into in the normal course of business. At December 31, 1994, HECO and its subsidiaries had purchase commitments, other than fuel and power purchase contracts, amounting to approximately $83 million. POWER PURCHASE AGREEMENTS. At December 31, 1994, HECO and its subsidiaries had power purchase agreements for 465 megawatts (MW) of firm capacity representing approximately 22% of the total of their generating capabilities and purchased power firm capacities. Rate recovery is allowed for energy and firm capacity payments under these agreements. Assuming that each of the agreements remains in place and the minimum availability criteria in the power purchase agreements are met [including HELCO's agreement in principle with Hilo Coast Processing Company (HCPC)-see discussion which follows], 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 $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. 49 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. HELCO obtained a temporary restraining order and, later, an extension of such order, requiring HCPC to continue operations of the HCPC facility through March 7, 1995, with HELCO to pay an additional amount for the power HCPC supplies. On January 5, 1995, HELCO and HCPC entered into an agreement in principle, subject to the negotiation and execution of a definitive agreement, amending the existing power purchase agreement through December 1999. The definitive agreement must be approved by the bankruptcy court and is subject to cancellation by HELCO if not approved by the PUC within 180 days of its execution. If unable to purchase power from HCPC as contemplated by the agreement in principle, HELCO would be operating with a slim generation margin and might have to initiate planned service interruptions (rolling blackouts) until it is able to arrange for additional generation. HELCO RELIABILITY INVESTIGATION. In July 1991, following service interruptions and rolling blackouts instituted 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. The PUC may formulate minimum reliability standards for HELCO, use the standards to assess HELCO's system reliability, and re-examine the rate increase approved in October 1992 to see whether any adjustments are appropriate. In the opinion of management, any adjustment by the PUC to its October 1992 rate increase resulting from the reliability investigation would not have a material adverse effect on the Company's financial condition or results of operations. Subsequent to the hearings on HELCO's reliability, HELCO's generation margin improved. However, HELCO's generation margin was adversely affected by the cessation of operations by Hamakua Sugar Company in 1994 and will be further adversely affected if an agreement in principle that HELCO has reached with HCPC is not implemented. See "Power purchase agreements" above. HELCO is proceeding with plans to install two 20-MW combustion turbines in 1995 or 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. Also, HELCO has 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 nonutility generation alternative. However, 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. 50 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 that may be issued, 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 beyond HECO's control. Nevertheless, HECO received 3,063 customer claims, which totaled approximately $7.8 million, within the time limit to file claims. 1,530 of these claims are for property damage and most have been settled, with no admission of liability, or closed as of December 31, 1994. The other 1,533 claims involve personal injury or economic loss, such as lost profits, and generally have not been covered by settlement. 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. 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. MANAGEMENT SERVICES FEES. HEI charges to HECO and its subsidiaries for general management and administrative services totaled $2.4 million, $2.3 million and $5.6 million in 1994, 1993 and 1992, respectively. 51 5. SAVINGS BANK SUBSIDIARY - ------------------------------------------------------------------------------- American Savings Bank, F.S.B. and subsidiaries Selected consolidated financial information
INCOME STATEMENT DATA Years ended December 31 1994 1993 1992 - ------------------------------------------------------------------------------- (in thousands) Interest income $203,373 $ 188,619 $ 192,644 Interest expense 103,906 92,701 114,748 - ------------------------------------------------------------------------------- Net interest income 99,467 95,918 77,896 Provision for losses (3,983) (779) (1,494) Other income 12,152 11,115 10,351 Operating, administrative and general expenses (65,111) (62,137) (53,915) - ------------------------------------------------------------------------------- Operating income 42,525 44,117 32,838 Income taxes 17,760 18,835 13,280 - ------------------------------------------------------------------------------- Net income $ 24,765 $ 25,282 $ 19,558 ===============================================================================
BALANCE SHEET DATA December 31 1994 1993 - ------------------------------------------------------------------------------- (in thousands) ASSETS Cash and equivalents $ 76,502 $ 77,610 Investment securities 32,523 68,599 Mortgage-backed securities 1,067,287 630,156 Loans receivable, net 1,824,055 1,735,098 Other 69,829 57,358 Goodwill and other intangibles 45,455 49,664 - ------------------------------------------------------------------------------- $3,115,651 $2,618,485 =============================================================================== LIABILITIES AND EQUITY Deposit liabilities $2,129,310 $2,091,583 Securities sold under agreements to repurchase 123,301 -- Advances from Federal Home Loan Bank 616,374 289,674 Other 51,078 52,717 - ------------------------------------------------------------------------------- 2,920,063 2,433,974 Common stock equity 195,588 184,511 - ------------------------------------------------------------------------------- $3,115,651 $2,618,485 ===============================================================================
INVESTMENT AND MORTGAGE-BACKED SECURITIES. Investment and mortgage-backed securities consisted of the following:
December 31 1994 1993 - ----------------------------------------------------------------------------------------------------------------------------- Gross Gross Estimated Gross Gross Estimated Carrying unrealized unrealized market Carrying unrealized unrealized market value gains losses value value gains losses value - ----------------------------------------------------------------------------------------------------------------------------- (in thousands) Investment securities: Securities held for trading $ -- $ -- $ -- $ -- $ 45,396 $ -- $ -- $ 45,396 Stock in FHLB of Seattle 32,523 -- -- 32,523 23,203 -- -- 23,203 - ----------------------------------------------------------------------------------------------------------------------------- 32,523 -- -- 32,523 68,599 -- -- 68,599 - ----------------------------------------------------------------------------------------------------------------------------- Mortgage-backed securities: Private-issue 707,260 243 (28,858) 678,645 465,373 4,339 (1,440) 468,272 FHLMC 75,546 1,899 (1,331) 76,114 117,803 8,024 -- 125,827 GNMA 78,693 185 (6,285) 72,593 42,539 906 (629) 42,816 FNMA 205,788 557 (14,547) 191,798 4,441 414 -- 4,855 - ----------------------------------------------------------------------------------------------------------------------------- 1,067,287 2,884 (51,021) 1,019,150 630,156 13,683 (2,069) 641,770 - ----------------------------------------------------------------------------------------------------------------------------- $1,099,810 $2,884 $(51,021) $ 1,051,673 $698,755 $13,683 $(2,069) $710,369 =============================================================================================================================
52 ASB has private-issue mortgage-backed securities and mortgage-backed securities purchased from the Federal Home Loan Mortgage Corporation (FHLMC), Government National Mortgage Association (GNMA) and Federal National Mortgage Association (FNMA). All such mortgage-backed securities as of December 31, 1994 are classified as "held-to-maturity" securities. Contractual maturities are not presented for ASB's mortgage-backed securities held for investment because these securities are not due at a single maturity date. The weighted average interest rate for mortgage-backed securities at December 31, 1994 and 1993 was 6.21% and 6.65%, respectively. Mortgage-backed securities with a carrying value of approximately $862 million and $469 million at December 31, 1994 and 1993, respectively, were pledged as collateral to secure public funds, deposits with the Federal Reserve Bank of San Francisco and advances from the Federal Home Loan Bank (FHLB) of Seattle. At December 31, 1994, mortgage-backed securities sold under agreements to repurchase had a carrying value of $137 million. ASB did not sell mortgage-backed securities or other securities held for investment in 1994, 1993 or 1992. In 1994 and 1993, proceeds from the sale of trading securities were approximately $59 million and $30 million, respectively, resulting in a net loss of $2.0 million and a net gain of $0.1 million, respectively. There were no sales of investment securities during 1992. LOANS RECEIVABLE. Loans receivable consisted of the following:
December 31 1994 1993 - ------------------------------------------------------------------- (in thousands) Real estate loans Conventional $1,636,282 $1,584,218 Construction and development 32,074 26,526 Troubled debt restructurings 16,151 3,397 - ------------------------------------------------------------------- 1,684,507 1,614,141 Loans secured by savings deposits 15,378 15,015 Consumer loans 144,505 129,961 Commercial loans 27,981 24,494 - ------------------------------------------------------------------- 1,872,371 1,783,611 Undisbursed portion of loans in process (18,312) (16,315) Deferred fees and discounts, including net purchase accounting discounts (21,211) (26,884) Allowance for loan losses (8,793) (5,314) - ------------------------------------------------------------------- $1,824,055 $1,735,098 ===================================================================
At December 31, 1994 and 1993, the weighted average interest rate for loans receivable was 7.73% and 7.63%, respectively. At December 31, 1994 and 1993, nonaccrual and renegotiated loans were $25 million and $8 million, respectively. ASB services real estate loans ($327 million, $178 million and $311 million at December 31, 1994, 1993 and 1992, respectively) which are not included in the accompanying consolidated financial statements. Fees earned for servicing loans are reported as income when the related mortgage loan payments are collected. Loan servicing costs are charged to expense as incurred. Mortgage loan commitments of approximately $35 million are not reflected on the balance sheet as of December 31, 1994. Of such commitments, $29 million were for variable-rate mortgage loans and $6 million were for fixed-rate mortgage loans. In January 1995, ASB entered into a pool purchase contract to sell to and service for the FNMA certain 15-year and 30-year conventional fixed-rate, level payment residential mortgage loans in the amount of $200 million. In addition, the FNMA agreed to issue its Guaranteed Mortgage Pass-Through Securities backed by these same mortgages. 53 ALLOWANCE FOR LOAN LOSSES. For 1994, 1993 and 1992, net charge-offs amounted to $0.5 million, $0.6 million and $0.2 million, respectively. For 1994, 1993 and 1992, the ratio of net charge-offs to average loans outstanding was 0.03%, 0.04% and 0.01%, respectively. REAL ESTATE ACQUIRED IN SETTLEMENT OF LOANS. At December 31, 1994 and 1993, ASB had real estate acquired in settlement of loans of $0.8 million and $0.2 million, respectively. DEPOSIT LIABILITIES. Deposit liabilities consisted of the following:
December 31 1994 1993 - --------------------------------------------------------------------------- Weighted Weighted average average rate amount rate Amount - --------------------------------------------------------------------------- (dollars in thousands) Commercial checking -- % $ 18,444 -- % $ 17,405 Other checking 2.39 250,350 2.42 255,838 Passbook 3.49 1,112,230 3.48 1,211,330 Money market 3.51 70,860 3.11 106,362 Term certificates 5.08 677,426 4.40 500,648 - --------------------------------------------------------------------------- 3.84% $2,129,310 3.52% $2,091,583 ===========================================================================
At December 31, 1994 and 1993, deposit accounts of $100,000 or more totaled $407 million and $438 million, respectively. The approximate scheduled maturities of term certificates outstanding at December 31, 1994 were $373 million in 1995, $180 million in 1996, $33 million in 1997, $11 million in 1998 and $21 million in 1999. The interest expense on savings deposits by type of deposit was as follows:
Years ended December 31 1994 1993 1992 - ---------------------------------------------------------- (in thousands) Interest-bearing checking $ 5,997 $ 6,679 $ 9,982 Passbook 42,624 42,021 34,645 Money market 2,670 3,758 6,447 Term certificates 25,218 25,193 43,265 - ---------------------------------------------------------- $76,509 $77,651 $94,339 ==========================================================
SECURITIES SOLD UNDER AGREEMENTS TO REPURCHASE. At December 31, 1994, securities sold under agreements to repurchase consisted of mortgage-backed securities sold under fixed-coupon agreements. Other than Federal Home Loan Mortgage Corporation (FHLMC) mortgage-backed securities, the securities underlying the agreements were delivered to the brokers/dealers who arranged the transactions. The FHLMC mortgage-backed securities are book-entry securities and were delivered by appropriate entry into the counterparties' accounts at the Federal Reserve System. At December 31, 1994, the $137 million carrying value of securities underlying the agreements remained in ASB's asset accounts. The obligation to repurchase securities sold is reflected as a liability in the consolidated balance sheets. At December 31, 1994, approximately $123 million of agreements to repurchase substantially the same securities were outstanding. At December 31, 1994, the weighted average interest rate on securities sold under agreements to repurchase was 6.22% and the weighted average remaining days to maturity was 118 days. Securities sold under agreements to repurchase averaged $21 million, $20 million and $66 million during 1994, 1993 and 1992, respectively, and the maximum amount outstanding at any month-end during 1994, 1993 and 1992 was $123 million, $27 million and $125 million, respectively. 54 ADVANCES FROM FEDERAL HOME LOAN BANK. Advances from the FHLB, secured by mortgage-backed securities and stock in the FHLB, were summarized as follows:
December 31 1994 1993 - ----------------------------------------------------------------------- Weighted Weighted average average rate Amount rate Amount - ----------------------------------------------------------------------- (dollars in thousands) Due in 1994 --% $ -- 6.40% $ 73,000 1995 6.39 337,822 8.33 16,822 1996 6.56 116,060 7.23 58,360 1997 5.77 94,800 5.99 73,800 1998 4.96 36,392 4.96 36,392 1999 4.98 20,300 4.98 20,300 Thereafter 4.98 11,000 4.98 11,000 - ----------------------------------------------------------------------- 6.17% $616,374 6.24% $289,674 =======================================================================
As a member of the FHLB system, ASB is required to own a specific number of shares of capital stock of the FHLB of Seattle and is required to maintain cash and investments in U.S. Government and other qualifying securities in an amount equal to 5% of the amount of its savings accounts and other obligations due within one year. COMMON STOCK EQUITY. As of December 31, 1994, ASB was in compliance with the minimum capital requirements under the Office of Thrift Supervision regulations. MANAGEMENT SERVICES FEES. In the second quarter of 1992, HEI changed its method of billing corporate-level expenses to ASB such that only certain direct charges, rather than fully-allocated costs, were billed to ASB. However, no change was made by HEI in the manner in which corporate-level expenses for that year were allocated for segment reporting purposes. Thus, operating income for the savings bank segment differs from the operating income reported in the separate financial statements of ASB for 1992 because of corporate-level expenses which were allocated to the segment, but were not billed. In 1994 and 1993, corporate-level expenses allocated to the savings bank segment did not differ from the amount billed to ASB, and operating income for the savings bank segment did not differ from the operating income reported in the separate financial statements of ASB. For segment reporting purposes, HEI expenses allocated to the savings bank segment for general management and administrative services totaled $0.8 million, $0.8 million and $2.0 million for 1994, 1993 and 1992, respectively. 6. REAL ESTATE SUBSIDIARY - ------------------------------------------------------------------------------- At December 31, 1994 and 1993, 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 $51 million and $49 million, respectively. RELATED PARTY TRANSACTIONS. Two joint ventures involve partnerships in which a director of HEI has significant interests. Another joint venture involves a corporate partner in which the family of an HEI officer has a significant interest. Investments in joint ventures with related parties totaled $13 million and $15 million at December 31, 1994 and 1993, respectively. 55 COMMITMENTS AND CONTINGENCIES. At December 31, 1994, MPC or its subsidiaries had issued (i) guaranties under which they were jointly and severally contingently liable with their joint venture partners for $1.9 million of outstanding loans and (ii) payment guaranties under which MPC or its subsidiaries were severally contingently liable for $7.2 million of outstanding loans and $7.1 million of additional undrawn loan facilities. At December 31, 1994, HEI had agreed with the lenders of construction loans and loan facilities, of which approximately $13.3 million was outstanding and $7.9 million was undrawn, that it will maintain ownership of 100% of the stock of MPC and that it intends, subject to good and prudent business practices, to keep MPC financially sound and responsible to meet its obligations. 7. OTHER INVESTMENTS - -------------------------------------------------------------------------------- Other investments, which have no ready market, consisted of the following:
December 31 1994 1993 - ---------------------------------------------------------- (in thousands) Leveraged leases (see Note 8) $54,372 $53,115 Real estate joint venture interests 15,259 17,494 Other 7,666 6,497 - ---------------------------------------------------------- $77,297 $77,106 ==========================================================
Realized gains and losses from the sale and writedown of other investments were not material in 1994, 1993 or 1992. 8. INVESTMENT IN LEVERAGED LEASES - -------------------------------------------------------------------------------- HEIIC owns commercial real estate which is subject to several leveraged lease agreements entered into in 1987. The initial lease terms expire in 2009 and 2010, after which the lessees have options to renew the leases at fixed rentals for additional periods of up to 28 years. The real estate reverts back to HEIIC at the end of the last renewal term if not purchased by the lessees. HEIIC also has a 15% ownership interest in an 818-MW coal-fired generating unit, which is subject to a leveraged lease agreement entered into in 1985 and expiring in 2013. The lessee has options to renew the lease at fixed rentals for at least 8.5 additional years, and thereafter at fair market rentals. 56 In 1993, HEIIC refinanced approximately $13 million of nonrecourse debt supporting one of the leveraged leases, reducing the interest rate from 16.75% to 8.68%. As a result of the refinancing, 1993 net income increased by $1.1 million and an additional $7.5 million of net income from the leveraged lease will be recognized over the remaining life of the lease. HEIIC's net investment in leveraged leases was as follows:
December 31 1994 1993 - --------------------------------------------------------------- (in thousands) Rentals receivable, net of principal and interest on nonrecourse debt $ 61,994 $ 62,225 Estimated residual value of leased assets 35,266 35,268 Less unearned income (42,888) (44,378) - --------------------------------------------------------------- Investment in leveraged leases 54,372 53,115 Less deferred income taxes arising from leveraged leases (46,277) (45,418) - --------------------------------------------------------------- $ 8,095 $ 7,697 ===============================================================
9. REGULATORY ASSETS - ------------------------------------------------------------------------------- Regulatory assets at December 31, 1994 and 1993 included the following deferred costs:
December 31 1994 1993 - ----------------------------------------------------------------- (in thousands) Postretirement benefits other than pensions $36,670 $19,210 Income taxes 23,522 16,297 Unamortized debt expense on retired issuances 7,513 5,435 Integrated resource planning costs 7,189 4,661 Computer system development costs 6,090 3,152 Vacation earned, but not yet taken 5,972 5,494 Preliminary plant costs on suspended project 5,768 5,199 Other 2,533 3,095 - ----------------------------------------------------------------- $95,257 $62,543 =================================================================
10. SHORT-TERM BORROWINGS - -------------------------------------------------------------------------------- Short-term borrowings at December 31, 1994 and 1993 had a weighted average interest rate of 6.5% and 4.7%, respectively, and consisted of commercial paper and bank loans. At December 31, 1994 and 1993, HEI maintained bank lines of credit which totaled $50 million and HECO maintained bank lines of credit which totaled $125 million and $108 million, respectively. The HEI and HECO lines of credit support the issuance of commercial paper. There were no borrowings under any line of credit during 1994 or 1993. 57 11. LONG-TERM DEBT - -------------------------------------------------------------------------------- Long-term debt consisted of the following:
December 31 1994 1993 - ------------------------------------------------------------------------------------------------------------------------------- (dollars in thousands) First mortgage bonds 4.55-5.75%, due in various years through 1997 $ 24,000 $ 24,000 7.63-7.88%, due in various years through 2003 22,000 22,000 8.50-9.88%, due in various years through 2016 -- 43,000 10.75%, due 2005 -- 5,000 - ------------------------------------------------------------------------------------------------------------------------------- 46,000 94,000 - ------------------------------------------------------------------------------------------------------------------------------- Obligations to the State of Hawaii for the repayment of special purpose revenue bonds issued on behalf of electric utility subsidiaries 6.88% refunding series 1987, due 2012 57,500 57,500 7.20% series 1984, due 2014 11,400 11,400 7.63% series 1988, due 2018 50,000 50,000 7.35-7.60% series 1990, due 2020 100,000 100,000 6.55% series 1992, due 2022 60,000 60,000 5.45% series 1993, due 2023 100,000 100,000 - ------------------------------------------------------------------------------------------------------------------------------- 378,900 378,900 Less funds on deposit with trustees (3,391) (56,205) Less unamortized discount (1,923) (1,986) - ------------------------------------------------------------------------------------------------------------------------------- 373,586 320,709 - ------------------------------------------------------------------------------------------------------------------------------- Promissory notes 4.85-5.83%, due in various years through 1998 70,000 70,000 6.26-7.59%, due in various years through 2003 113,000 113,000 8.20-9.90%, due in various years through 2011 72,700 100,100 Variable rate (6.45% at December 31, 1994), due 1999 35,000 -- Variable rate (9.25% at December 31, 1994), due 2001 7,954 -- Other -- 27 - ------------------------------------------------------------------------------------------------------------------------------- 298,654 283,127 - ------------------------------------------------------------------------------------------------------------------------------- $718,240 $697,836 ===============================================================================================================================
The first mortgage bonds are secured by separate indentures which purport to be liens on substantially all of the real and personal property now owned or hereafter acquired by the respective electric utility subsidiaries. At December 31, 1994, the aggregate principal payments required on long-term debt for 1995 through 1999 are $23 million in 1995, $68 million in 1996, $65 million in 1997, $52 million in 1998 and $42 million in 1999. 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%. 58 12. COMMON STOCK - -------------------------------------------------------------------------------- Changes to common stock were as follows:
1994 1993 1992 - ------------------------------------------------------------------------------------------- Common Common Common Shares Stock Shares stock Shares stock - ------------------------------------------------------------------------------------------- (in thousands) Balance, beginning of year 27,675 $514,710 24,762 $409,257 23,867 $376,783 Issuance of common stock Public offering -- -- 2,000 74,500 -- -- Dividend reinvestment and stock purchase plan 869 28,087 758 28,013 703 27,102 HEI retirement savings and other plans 111 3,605 155 5,637 192 6,822 Expenses and other -- (148) -- (2,697) -- (1,450) - ------------------------------------------------------------------------------------------- Balance, end of year 28,655 $546,254 27,675 $514,710 24,762 $409,257 ===========================================================================================
At December 31, 1994, the Company had reserved a total of 4,552,000 shares of common stock for future issuance under the Dividend Reinvestment and Stock Purchase Plan, Hawaiian Electric Industries Retirement Savings Plan, 1987 Stock Option and Incentive Plan and other plans. 13. INTEREST EXPENSE - -------------------------------------------------------------------------------- Interest expense by segment (including amounts capitalized as allowance for borrowed funds used during construction and excluding interest on nonrecourse debt on leveraged leases) was as follows:
Years ended December 31 1994 1993 1992 - ------------------------------------------------------------------------------------------- (in thousands) Electric utility $ 37,340 $ 35,287 $ 33,011 Other 16,688 17,905 14,130 - ------------------------------------------------------------------------------------------- 54,028 53,192 47,141 Savings bank 103,906 92,701 114,748 - ------------------------------------------------------------------------------------------- $157,934 $145,893 $161,889 ===========================================================================================
14. INCOME TAXES - -------------------------------------------------------------------------------- In February 1992, the FASB issued SFAS No. 109, "Accounting for Income Taxes," which requires companies to use the asset and liability method of accounting for income taxes. The objective of the asset and liability method is to establish deferred tax assets and liabilities for the temporary differences between the financial reporting basis and the tax basis of the Company's assets and liabilities at enacted tax rates expected to be in effect when such deferred tax assets or liabilities are realized or settled. 59 Effective January 1, 1993, the Company adopted SFAS No. 109. The resulting change in the method of accounting for income taxes had no material effect on net income for 1993 primarily due to the regulated nature of the electric utility subsidiaries and YB. For these PUC regulated subsidiaries, the net increase in deferred income taxes payable arising from the adoption of SFAS No. 109 is recoverable through future rates and has been recorded as a regulatory asset. In 1993, additional income tax expense of $1.8 million was recognized under SFAS No. 109 as a result of the 1% increase in the maximum corporate income tax rate enacted by the Omnibus Budget Reconciliation Act of 1993. Total income tax expense (benefit) was recorded as follows:
Years ended December 31 1994 1993 1992 - ------------------------------------------------------------------------- (in thousands) Continuing operations $53,019 $47,086 $ 29,529 Discontinued operations -- (7,982) (50,623) - ------------------------------------------------------------------------- $53,019 $39,104 $(21,094) =========================================================================
The components of income taxes attributable to income from continuing operations were as follows:
Years ended December 31 1994 1993 1992 - ------------------------------------------------------------------------- (in thousands) Federal Current $40,798 $40,537 $ 32,425 Deferred 4,665 (152) (7,085) Deferred tax credits, net (278) 50 (1,777) - ------------------------------------------------------------------------- 45,185 40,435 23,563 - ------------------------------------------------------------------------- State Current 3,060 3,385 1,634 Deferred 1,218 (475) (332) Deferred tax credits, net 3,556 3,741 4,664 - ------------------------------------------------------------------------- 7,834 6,651 5,966 - ------------------------------------------------------------------------- $53,019 $47,086 $ 29,529 =========================================================================
Under Accounting Principles Board Opinion No. 11, the sources of timing differences in the recognition of revenues and expenses for tax and financial reporting purposes related to the 1992 provision for deferred income taxes were as follows:
Year ended December 31 1992 - ------------------------------------------------------------------------- (in thousands) Excess of tax depreciation over financial reporting straight-line depreciation $ 2,977 Excess tax deductions from leveraged leases 2,099 Interest capitalized for tax purposes (3,347) Gain on sale of land deferred for financial reporting purposes (4,737) Contributions in aid of construction and customer advances, net (6,095) Other 1,686 - ------------------------------------------------------------------------- $(7,417) =========================================================================
60 A reconciliation of the amount of income taxes attributable to income from continuing operations computed at the federal statutory rate to the amount provided in the Company's consolidated statements of income was as follows:
Years ended December 31 1994 1993 1992 - ------------------------------------------------------------------------------ (in thousands) Federal statutory income tax rate 35% 35% 34% Amount at the federal statutory income tax rate $44,117 $38,070 $31,023 State income taxes, net of effect on federal income taxes 5,092 4,323 3,938 Preferred stock dividends of electric utility subsidiaries 2,507 2,281 2,281 Difference between financial reporting and tax straight-line depreciation for which no deferred taxes were provided -- -- 3,015 Amortization of contributions in aid of construction -- -- (1,658) Amortization of utility deferred income taxes in excess of current rates -- -- (1,675) Amortization of deferred tax credits -- -- (1,776) Allowance for funds used during construction -- -- (2,375) Utilization of capital loss carryforwards -- -- (3,317) Other, net 1,303 2,412 73 - ------------------------------------------------------------------------------ $53,019 $47,086 $29,529 ==============================================================================
Deferred tax assets and deferred tax liabilities were comprised of the following:
December 31 1994 1993 - ------------------------------------------------------------------------------ (in thousands) Deferred tax assets Property, plant and equipment $ 7,424 $ 6,133 Contributions in aid of construction and customer advances 52,892 44,932 Other 29,947 25,435 - ------------------------------------------------------------------------------ 90,263 76,500 - ------------------------------------------------------------------------------ Deferred tax liabilities Property, plant and equipment 165,835 162,671 Leveraged leases 46,277 45,418 Regulatory asset 8,897 6,237 Other 42,184 29,324 - ------------------------------------------------------------------------------ 263,193 243,650 Discontinued operations -- 1,179 - ------------------------------------------------------------------------------ 263,193 244,829 - ------------------------------------------------------------------------------ Deferred income taxes $172,930 $168,329 ==============================================================================
There was no valuation allowance provided for deferred tax assets at December 31, 1994 or 1993. 15. CASH FLOWS - ------------------------------------------------------------------------------ SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION. In 1994, 1993 and 1992, cash paid for interest (including interest paid by the savings bank, but excluding interest paid on nonrecourse debt on leveraged leases), net of capitalized amounts which were not material, amounted to $154 million, $142 million and $159 million, respectively. In 1994, 1993 and 1992, cash paid for interest on nonrecourse debt on leveraged leases amounted to $9 million, $10 million and $11 million, respectively. In 1994, 1993 and 1992, cash paid for income taxes amounted to $47 million, $6 million and $29 million, respectively. In 1993, tax benefits were realized from the discontinued operations of the HIG Group. 61 SUPPLEMENTAL DISCLOSURES OF NONCASH ACTIVITIES. In 1994, ASB received $203 million in mortgage-backed securities in exchange for loans. Common stock dividends reinvested by shareholders in HEI common stock in noncash transactions amounted to $18 million, $17 million and $15 million in 1994, 1993 and 1992, respectively. Effective in 1993, HECO recognized the estimated fair value of noncash contributions in aid of construction received in 1993 and prior years, which increased both plant and contributions in aid of construction by $26 million. The estimated fair value of noncash contributions in aid of construction received in 1994 amounted to $6 million. The allowance for equity funds used during construction, which was capitalized as part of the cost of electric utility plant, amounted to $9 million, $7 million and $7 million in 1994, 1993 and 1992, respectively. In 1994, a consolidated real estate joint venture, in which the Company has a controlling interest, closed on an option to purchase approximately 147 acres of land. Of the total land purchase price of $9.9 million, the joint venture issued mortgage notes payable of $8.0 million in noncash consideration. 16. STOCK OPTION AND INCENTIVE PLAN - -------------------------------------------------------------------------------- Under the 1987 Stock Option and Incentive Plan, as amended, an aggregate of 1,250,000 shares of common stock may be issued to officers and key employees as incentive stock options, nonqualified stock options, restricted stock, stock appreciation rights, stock payments or dividend equivalents. Only nonqualified stock options have been granted to date. For these options, the purchase price of common stock was based on the market value of the common stock on or near the date of grant. Options may be exercised as determined by the Compensation Committee of the Board of Directors, but in no event after 10 years and one day from the date of grant in the case of nonqualified stock options. Nonqualified stock option transactions were as follows:
1994 1993 1992 - --------------------------------------------------------------------------- Options outstanding, beginning of year 463,458 359,000 227,500 Granted 97,000 123,000 209,000 Exercised -- (18,542) (75,625) Canceled (3,125) -- (1,875) - --------------------------------------------------------------------------- Options outstanding, end of year 557,333 463,458 359,000 =========================================================================== Options exercisable, December 31 330,958 235,458 189,625 =========================================================================== Price range for options Exercised High $-- $36 $36 Low -- 30 27 Outstanding, December 31 High 41 41 41 Low 30 30 30 ===========================================================================
62 17. RETIREMENT BENEFITS - ------------------------------------------------------------------------------- PENSIONS. The Company has several defined benefit pension plans which cover substantially all employees. Benefits are based on the employees' years of service and base compensation. The funded status of the pension plans and the amounts recognized in the consolidated financial statements were as follows:
December 31 1994 1993 - --------------------------------------------------------------------------- (in thousands) Accumulated benefit obligation Vested $308,888 $293,627 Nonvested 32,948 43,543 - --------------------------------------------------------------------------- $341,836 $337,170 =========================================================================== Projected benefit obligation $420,512 $432,435 Plan assets at fair value, primarily equity securities and fixed income investments 400,956 410,369 - --------------------------------------------------------------------------- Projected benefit obligation in excess of plan assets 19,556 22,066 Unrecognized prior service cost (3,600) (2,401) Unrecognized net gain 6,844 4,958 Unrecognized net transition obligation (19,878) (22,259) Adjustment required to recognize minimum liability 1,251 1,985 - --------------------------------------------------------------------------- Accrued pension liability $ 4,173 $ 4,349 ===========================================================================
Plans with an accumulated benefit obligation exceeding assets were not material. Net periodic pension cost included the following components:
Years ended December 31 1994 1993 1992 - --------------------------------------------------------------------------- (in thousands) Service cost--benefits earned during the period $ 16,834 $ 11,423 $ 10,358 Interest cost on projected benefit obligation 30,067 27,350 27,401 Actual loss (return) on plan assets 11,520 (56,710) (14,050) Amortization and deferral, net (39,001) 35,607 (5,721) - --------------------------------------------------------------------------- $ 19,420 $ 17,670 $ 17,988 ===========================================================================
Of these net periodic pension costs, $14 million, $12 million and $12 million were expensed in 1994, 1993 and 1992, respectively, and the remaining amounts were charged primarily to electric utility plant. For all pension plans, at December 31, 1994 and 1993, the discount rate assumed in determining the actuarial present value of the projected benefit obligation was 8% and 7%, respectively. For 1994, 1993 and 1992, the expected long-term rate of return on assets was 8% and the assumed rate of increase in future compensation levels was 5%. For most of the plans, the transition obligation (the projected benefit obligation in excess of plan assets at January 1, 1987) is being amortized ratably over 16 years beginning in 1987. POSTRETIREMENT BENEFITS OTHER THAN PENSIONS. The Company provides various postretirement benefits other than pensions to eligible employees upon retirement. Health and life insurance benefits are provided to eligible employees of HEI, HECO and its subsidiaries, and YB upon their retirement. Health benefits are provided with contributions by retirees toward costs based on their years of service and retirement date. Generally, employees are eligible for these benefits if, upon retirement, they participate in one of the Company's defined benefit pension plans. The Company began funding some of these benefits near yearend 1994. Through December 31, 1992, the cost of postretirement benefits other than pensions had not been recognized until paid (i.e., the pay- as-you-go method). Payments for postretirement benefits other than pensions amounted to $3 million in 1992. 63 Effective January 1, 1993, the Company adopted SFAS No. 106, "Employers' Accounting for Postretirement Benefits Other Than Pensions," which requires accrual, during the years that an employee renders the necessary service, of the expected cost of providing postretirement benefits other than pensions to that employee and the employee's beneficiaries and covered dependents. The transition obligation is being amortized ratably over 20 years beginning in 1993. In February 1992, the PUC opened a generic docket to determine whether SFAS No. 106 should be adopted for rate-making purposes. In November 1994, the PUC issued a decision and order authorizing recovery of the full cost ofpostretirement benefits other than pensions effective January 1, 1995. HECO, HELCO, MECO and YB are required to establish trust funds and to deposit into these funds the recovered SFAS No. 106 costs. The regulatory asset established from January 1, 1993 through December 31, 1994 for postretirement benefits other than pensions is being amortized ratably over 18 years beginning in 1995 for rate-making and financial reporting purposes. The funded status of the postretirement benefit plans and the amounts recognized in the consolidated financial statements were as follows:
December 31, 1994 1993 - ----------------------------------------------------------------- (in thousands) Accumulated postretirement benefit obligation Retirees $ 61,932 $ 61,498 Fully eligible active plan participants 36,287 33,086 Other active plan participants 49,427 53,760 - ----------------------------------------------------------------- 147,646 148,344 Plan assets at fair value, primarily fixed income investments 2,833 -- - ----------------------------------------------------------------- Accumulated postretirement benefit obligation in excess of plan assets 144,813 148,344 Unrecognized net gain (loss) 8,423 (880) Unrecognized net transition obligation (118,701) (127,940) - ----------------------------------------------------------------- Accrued postretirement benefits liability $ 34,535 $ 19,524 =================================================================
At December 31, 1994 and 1993, the assumed discount rate used to measure the accumulated postretirement benefit obligation was 8% and 7%, respectively. For 1994 and 1993, the assumed rate of increase in future compensation levels was 5%. Net periodic postretirement benefit cost included the following components:
Years ended December 31 1994 1993 - ----------------------------------------------------- (in thousands) Service cost $ 5,269 $ 5,712 Interest cost 10,066 11,216 Amortization and deferral, net 6,734 6,733 - ----------------------------------------------------- $22,069 $23,661 =====================================================
Of the net periodic postretirement benefit cost, $3 million was expensed in each of 1994 and 1993, and the remaining amount was charged primarily to regulatory assets and also to electric utility plant and other accounts. At December 31, 1994, the assumed health care trend rates for 1995 and future years were as follows: medical, 7.5%; dental, 6%; and vision, 5%. A 1% increase in the trend rate for health care costs would have increased the accumulated postretirement benefit obligation at December 31, 1994 by approximately $21 million and the service and interest costs for 1994 by approximately $3 million. 64 18. REGULATORY RESTRICTIONS ON NET ASSETS - -------------------------------------------------------------------------------- At December 31, 1994, net assets (assets less liabilities) of approximately $510 million were not available for transfer to HEI from its subsidiaries in the form of dividends, loans or advances without regulatory approval. However, HEI expects that the regulatory restrictions will not materially affect the operations of the Company nor its ability to pay dividends on its common stock. 19. SIGNIFICANT GROUP CONCENTRATIONS OF CREDIT RISK - -------------------------------------------------------------------------------- Substantially all of the Company's business activity is with customers located in the State of Hawaii. Most of the financial instruments reflected on the consolidated balance sheets are based in the State of Hawaii, except for the mortgage-backed securities. Substantially all real estate loans receivable are secured by real estate in Hawaii. ASB's policy is to require mortgage insurance on all real estate loans with a loan to appraisal ratio in excess of 80%. At December 31, 1994, ASB's private-issue mortgage-backed securities represented whole or participating interests in pools of first mortgage loans collateralized by real estate in the continental United States, and approximately 61% of the portfolio was collateralized by real estate in California. At December 31, 1994, substantially all private-issue mortgage- backed securities were rated investment grade by various securities rating agencies. 20. FAIR VALUE OF FINANCIAL INSTRUMENTS - -------------------------------------------------------------------------------- The following methods and assumptions were used to estimate the fair value of each applicable class of financial instruments for which it is practicable to estimate that value: CASH AND EQUIVALENTS. The carrying amount approximates fair value because of the short maturity of these instruments. LOANS RECEIVABLE. For certain homogeneous categories of loans, such as some residential mortgages, credit card receivables, and other consumer loans, fair value is estimated using the quoted market prices for securities backed by similar loans, adjusted for differences in loan characteristics. The fair value of other types of loans is estimated by discounting the future cash flows using the current rates at which similar loans would be made to borrowers with similar credit ratings and for similar remaining maturities. MARKETABLE SECURITIES. Fair value is based on quoted market prices or dealer quotes. DEPOSIT LIABILITIES. Under SFAS No. 107, "Disclosures about Fair Value of Financial Instruments," the fair value of demand deposits, savings accounts, and certain money market deposits is the amount payable on demand at the reporting date. The fair value of fixed-maturity certificates of deposit is estimated using the rates currently offered for deposits of similar remaining maturities. SHORT-TERM BORROWINGS. The carrying amount approximates fair value because of the short maturity of these instruments. 65 SECURITIES SOLD UNDER AGREEMENTS TO REPURCHASE. Dealer quotes currently available to ASB for securities sold under agreements to repurchase with similar terms and remaining maturities are used to estimate fair value. ADVANCES FROM FEDERAL HOME LOAN BANK AND LONG-TERM DEBT. Fair value is estimated based on the quoted market prices for the same or similar issues or on the current rates offered for debt of the same or similar remaining maturities. PREFERRED STOCK OF ELECTRIC UTILITY SUBSIDIARIES SUBJECT TO MANDATORY REDEMPTION. There are no quoted market prices for the electric utility subsidiaries' preferred stocks. Fair value is estimated based on quoted market prices for similar issues of preferred stock. The estimated fair values of certain of the Company's financial instruments were as follows:
December 31 1994 1993 - ---------------------------------------------------------------------------------------------------------------------- Carrying Estimated Carrying Estimated amount fair value amount fair value - ---------------------------------------------------------------------------------------------------------------------- (in thousands) FINANCIAL ASSETS Cash and equivalents $ 87,623 $ 87,623 $ 116,260 $ 116,260 Loans receivable, net 1,824,055 1,756,650 1,735,098 1,801,044 Marketable securities 1,099,810 1,051,673 698,755 710,369 Other investments for which it is not practicable to estimate fair value/1/ 7,666 na 6,497 na FINANCIAL LIABILITIES Deposit liabilities 2,129,310 2,111,481 2,091,583 2,095,850 Short-term borrowings 136,755 136,755 40,416 40,416 Securities sold under agreements to repurchase 123,301 121,064 -- -- Advances from Federal Home Loan Bank 616,374 605,271 289,674 301,537 Long-term debt, net 718,240 682,956 697,836 722,347 PREFERRED STOCK OF ELECTRIC UTILITY SUBSIDIARIES SUBJECT TO MANDATORY REDEMPTION 44,844 46,478 46,730 49,583 OFF-BALANCE SHEET Commitments to extend credit/2/ Financial guaranties written/3/ - ----------------------------------------------------------------------------------------------------------------------
/1/ At December 31, 1994 and 1993, the other investments for which it is not practicable to estimate fair value consists primarily of an investment representing approximately 10% of the issued common stock of an untraded company; that investment had a carrying value of $5.2 million and $5.5 million at December 31, 1994 and 1993, respectively. At December 31, 1993, the total assets reported by this company were $61 million and the common stockholders' equity was $56 million. For 1993, revenues were $1.0 million, net realized and unrealized gain on investments was $8.0 million and net income was $3.7 million. /2/ At December 31, 1994 and 1993, neither the commitment fees received on commitments to extend credit nor the fair value thereof were significant to the consolidated financial statements of the Company. /3/ At December 31, 1994 and 1993, MPC or its subsidiaries had issued guaranties of loans with outstanding balances of $9.1 million and $6.7 million, respectively. All such loans are collateralized by real property. These guaranties relate to borrowings from third parties which bear interest at rates ranging from prime plus 1.0% to prime plus 1.5%. It is not practicable to estimate the fair value of these guaranties. na Not available. LIMITATIONS. Fair value estimates are made at a specific point in time, based on relevant market information and information about the financial instrument. These estimates do not reflect any premium or discount that could result from offering for sale at one time the Company's entire holdings of a particular financial instrument. Because no market exists for a significant portion of the Company's financial instruments, fair value estimates cannot be determined with precision. Changes in assumptions could significantly affect the estimates. Fair value estimates are provided for certain existing on- and off-balance sheet financial instruments without attempting to estimate the value of anticipated future business and the value of assets and liabilities that are not considered financial instruments. In addition, the tax ramifications related to the realization of the unrealized gains and losses can have a significant effect on fair value estimates and have not been considered. 66 21. QUARTERLY INFORMATION (UNAUDITED) - ------------------------------------------------------------------------------- Selected quarterly information was as follows:
Quarter ended YEAR ENDED - -------------------------------------------------------------------------------------------------------------- 1994 March 31 June 30 Sept. 30 Dec. 31 DEC. 31 - ----------------------------------------------------------------------------------------------------------------------------------- (in thousands, except per share amounts) Revenues $265,042 $284,556 $319,156 $319,769 $1,188,523 Operating income 33,404 42,955 51,550 46,224 174,133 Net income 11,788 17,632 22,691 20,919 73,030 Earnings per common share /1/ 0.42 0.63 0.80 0.73 2.60 Dividends per common share 0.58 0.58 0.58 0.59 2.33 Market price per common share /2/ High 36.50 34.63 33.88 32.88 36.50 Low 32.00 30.25 30.00 29.88 29.88 - ----------------------------------------------------------------------------------------------------------------------------------- 1993 - ----------------------------------------------------------------------------------------------------------------------------------- (in thousands, except per share amounts) Revenues $279,348 $281,645 $299,486 $281,691 $1,142,170 Operating income 28,331 43,919 40,458 44,930 157,638 Net income (loss) Continuing operations $ 9,292 $ 18,977 $ 16,088 $ 17,327 $ 61,684 Discontinued operations 1,800 -- -- (14,825) (13,025) - ----------------------------------------------------------------------------------------------------------------------------------- $ 11,092 $ 18,977 $ 16,088 $ 2,502 $ 48,659 =================================================================================================================================== Earnings (loss) per common share /1/ Continuing operations $ 0.38 $ 0.76 $ 0.61 $ 0.63 $ 2.38 Discontinued operations 0.07 -- -- (0.54) (0.50) - ----------------------------------------------------------------------------------------------------------------------------------- $ 0.45 $ 0.76 $ 0.61 $ 0.09 $ 1.88 =================================================================================================================================== Dividends per common share $ 0.57 $ 0.57 $ 0.57 $ 0.58 $ 2.29 Market price per common share /2/ High 38.88 38.50 38.63 38.75 38.88 Low 35.38 31.00 37.13 34.25 31.00 - -----------------------------------------------------------------------------------------------------------------------------------
/1/ The quarterly earnings per common share are based upon the weighted average number of shares of common stock outstanding in each quarter. /2/ Market prices shown are as reported on the NYSE Composite Tape. The common stock of HEI is traded on the New York and Pacific Stock Exchanges under the symbol HE. 67 DIRECTORS Committees of the Board of Robert F. Clarke, 52 (1) Victor Hao Li, S.J.D., 53 (2) Diane J. Plotts, 59 (1,2) Directors President and Co-chairman General Partner Chief Executive Officer Asia Pacific Consulting Group Mideast and China Trading Hawaiian Electric Industries, Inc. (international business Company (real estate (1) EXECUTIVE: 1989 consultant) development) 1987 Richard Henderson, Chairman 1988 (2) AUDIT: Edwin L. Carter, 69 (1, 3) Oswald K. Stender, 63 (3) Diane J. Plotts, Chairman Retired President and Bill D. Mills, 43 (3) Trustee (3) COMPENSATION: Chief Executive Officer Chairman of the Board and Kamehameha Schools/Bishop Edwin L. Carter, Chairman Bishop Trust Company, Ltd. Chief Executive Officer Estate (4) NOMINATING: (financial services) Bill Mills Development and (charitable trust) Jeffrey N. Watanabe, Chairman 1985 Investment Company, Inc. 1993 (real estate development) John D. Field, 69 (2) 1988 Kelvin H. Taketa, 40 (2) Retired Vice President- Vice President and Regulatory Affairs A. Maurice Myers, 54 (4) Director-Asia Pacific Region GTE Service Corporation President and The Nature Conservancy (telecommunications services) Chief Operating Officer (international conservation 1986 America West Airlines, Inc. nonprofit) (commercial air 1993 Richard Henderson, 66 (1, 3) transportation services) President 1991 Jeffrey N. Watanabe, 52 (1, HSC, Inc. 3, 4) (real estate investment and Ruth M. Ono, Ph.D., 59 (2) Partner development) Vice President Watanabe, Ing & Kawashima 1981 The Queen's Health Systems (private law firm) (hospital and health care 1987 Ben F. Kaito, 68 (1, 2, 4) services) Of Counsel 1987 Harwood D. Williamson, 63 Kaito & Ishida President and Chief (private law firm) Executive Officer 1981 Hawaiian Electric Company, Inc. 1985 Subsidiary Outside Directors Gladys C. Baisa, 54 Tom C. Kiely, 44 Denzil W. Rose, 69 Executive Director The Kiely Co., Inc. Retired President and Maui Economic Opportunity, Inc. (marketing consultants) General Manager (nonprofit human services) American Savings Bank, F.S.B. Hawaii Motors, Inc. Maui Electric Company, Ltd. 1994 (automobile dealership) 1995 Hawaii Electric Light Mildred D. Kosaki, 70 Company, Inc. Jorge G. Camara, M.D., 44 Specialist in education 1960 Camara Eye Clinic research (ophthalmology) Hawaiian Electric Company, Anne M. Takabuki, 38 American Savings Bank, F.S.B. Inc. Vice President 1990 1973 and General Counsel Wailea Resort Company, Ltd. Joseph W. Hartley, Jr., 61 Sanford J. Langa, 65 (resort and commercial President and Partner development) Chief Executive Officer Langa, Breen & Wiltsie Maui Electric Company, Ltd. Maui Land & Pineapple Company, (private law firm) 1993 Inc. Maui Electric Company, Ltd. (resort and commercial 1961 Donald K. Yamada, 63 development, agriculture) President Maui Electric Company, Ltd. B. Martin Luna, 56 Yamada Diversified 1993 (resigned effective March 1, Partner Corporation 1995) Carlsmith, Ball, Wichman, (construction and trucking Murray, Case & Ichiki services) Louise K. Y. Ing, 43 (private law firm) Hawaii Electric Light Partner Maui Electric Company, Ltd. Company, Inc. Alston Hunt Floyd & Ing 1978 1985 (private law firm) American Savings Bank, F.S.B. Paul C. Yuen, Ph.D., 66 1994 Dean, College of Engineering University of Hawaii-Manoa (higher education) Hawaiian Electric Company, Inc. 1993
Year denotes year of appointment or election to the board of directors 68 EX-13.(B) 5 HECO ANNUAL REPORT HECO Exhibit 13(b) ------------------ SELECTED FINANCIAL DATA - ----------------------- HAWAIIAN ELECTRIC COMPANY, INC. and Subsidiaries
1994 1993 1992 1991 1990 ---------------- ----------- ----------- ----------- ----------- (dollars in thousands) INCOME STATEMENT DATA (Years ended December 31,) Operating revenues............... $ 907,308 $ 874,010 $ 776,929 $ 739,636 $ 704,853 Operating expenses............... 819,996 795,925 699,890 663,709 631,300 ---------- ---------- ---------- ---------- ---------- Operating income................. 87,312 78,085 77,039 75,927 73,553 Other income..................... 14,793 11,556 9,740 4,511 6,804 ---------- ---------- ---------- ---------- ---------- Income before interest and other charges................... 102,105 89,641 86,779 80,438 80,357 Interest and other charges......................... 36,144 33,515 33,101 34,228 31,873 ---------- ---------- ---------- ---------- ---------- Income before preferred stock dividends of HECO............... 65,961 56,126 53,678 46,210 48,484 Preferred stock dividends of HECO............... 4,316 4,421 4,525 4,600 4,674 ---------- ---------- ---------- ---------- ---------- Net income for common stock........................... $ 61,645 $ 51,705 $ 49,153 $ 41,610 $ 43,810 ========== ========== ========== ========== ========== - ------------------------------------------------------------------------------------------------------- BALANCE SHEET DATA (At December 31,) Utility plant.................... $2,293,521 $2,102,534 $1,877,404 $1,701,218 $1,564,075 Accumulated depreciation.................... (702,945) (641,230) (583,031) (536,552) (489,957) ---------- ---------- ---------- ---------- ---------- Net utility plant................ $1,590,576 $1,461,304 $1,294,373 $1,164,666 $1,074,118 ========== ========== ========== ========== ========== Total assets..................... $1,889,120 $1,703,276 $1,501,330 $1,318,023 $1,250,142 ========== ========== ========== ========== ========== Capitalization:/1/ Long-term debt................... $ 489,586 $ 484,736 $ 374,835 $ 365,098 $ 356,741 Preferred stock subject to mandatory redemption...................... 44,844 46,730 48,920 50,665 52,210 Preferred stock not subject to mandatory redemption...................... 48,293 48,293 36,293 36,293 36,293 Common stock equity.............. 633,901 570,663 499,894 440,831 365,812 ---------- ---------- ---------- ---------- ---------- Total capitalization . $1,216,624 $1,150,422 $ 959,942 $ 892,887 $ 811,056 ========== ========== ========== ========== ========== - ------------------------------------------------------------------------------------------------------- CAPITAL STRUCTURE RATIOS (%)/2/ (At December 31,) Debt............................. 45.5 44.1 45.9 43.1 48.4 Preferred stock.................. 7.0 8.0 7.9 9.4 10.1 Common stock equity.............. 47.5 47.9 46.2 47.5 41.5 =======================================================================================================
/1/ Includes amounts due within one year and sinking fund requirements. /2/ Includes amounts due within one year, short-term borrowings from nonaffiliates and affiliate, and sinking fund requirements. Note: HEI owns all of HECO's common stock. Therefore, per share data is not meaningful. 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 - --------------------- EARNINGS - -------- Net income for common stock for 1994 was $61.6 million compared to $51.7 million for 1993 and $49.2 million for 1992. The 1994 net income represents a 10.2% return on the average amount of common stock equity invested in HECO and its subsidiaries (collectively, the "Company"), compared to returns of 9.7% in 1993 and 10.5% in 1992. SALES - ----- Consolidated sales of electricity were 8,593 million kilowatthours (KWH) for 1994, 8,325 million KWH for 1993, and 8,332 million KWH for 1992. The 3.2% increase in KWH sales in 1994 reflects the gradual recovery of Hawaii's economy and the effects of warmer weather. Cool weather, the downturn in Hawaii's economy, and conservation efforts resulted in a 0.1% decline in KWH sales in 1993 compared to 1992. OPERATING REVENUES - ------------------ Operating revenues were $907.3 million in 1994, compared to $874.0 million in 1993 and $776.9 million in 1992. The 1994 increase in operating revenues of $33.3 million, or 3.8% over 1993 revenues, was due primarily to interim rate increases granted by the PUC to HECO and HELCO and higher KWH sales of electricity. The revenue increase was tempered by lower fuel oil prices, which cost savings were passed through to customers. The rate schedules of the Company include energy cost adjustment clauses under which electric rates are adjusted for changes in the weighted average price for fuel oil and certain components of purchased power costs, and the relative amounts of company- generated power and purchased power. Revenues for 1993 increased by $97.1 million, or 12.5%, over 1992 revenues due primarily to the full year's effect of rate relief granted by the PUC during 1992 for HECO and HELCO, interim rate increases granted to MECO in 1993, and the effects of higher fuel oil prices, which were passed through to customers. OPERATING EXPENSES - ------------------ Total operating expenses were $820.0 million in 1994 compared to $795.9 million in 1993 and $699.9 million in 1992. The increase in 1994 was due to an increase in purchased power, other operation, maintenance, depreciation, income taxes, and taxes other than income taxes expense, partially offset by lower fuel oil expense. The increase in 1993 operating expenses over 1992 was primarily due to an increase in purchased power, income taxes, and taxes other than income taxes expense, partially offset by lower fuel oil expense and the establishment of a regulatory asset for vacation earned by employees, but not yet taken. The recognition of the regulatory asset for vacation earned, but not yet taken, resulted in a one-time reduction in 1993 operating expenses of $4.2 million. For rate-making purposes, the PUC permits recovery of vacation pay expense on a pay- as-you-go basis. Fuel oil expense was $186.7 million in 1994 compared to $213.3 million in 1993 and $225.6 million in 1992. The decrease in fuel oil expense in 1994 was due primarily to lower fuel oil prices and fewer KWH generated. The decrease in fuel oil expense in 1993 was due to fewer KWH generated due to the full year's effect of power purchased from AES Barbers Point, Inc., offset somewhat by higher fuel oil prices. In 1994, the Company paid an average of $18.92 per barrel of fuel oil, compared to $21.09 in 1993 and $19.69 in 1992. 3 Purchased power expense was $271.6 million in 1994 compared to $258.7 million in 1993 and $172.8 million in 1992. The increase in purchased power expense in both 1994 and 1993 was due primarily to capacity and nonfuel purchased power costs paid to independent power producers, and an increase in the number of KWH purchased, mostly by HECO. Purchased KWH provided approximately 37.5% of the total energy net generated and purchased in 1994 compared to 34.9% in 1993 and 26.2% in 1992. Other operation expenses totaled $121.7 million in 1994, an increase of $15.8 million over the 1993 amount. The increase was due primarily to higher production, transmission and distribution, and administrative and general expenses, including higher employee benefit costs and the absence in 1994 of the one-time reduction to 1993 expenses due to the establishment of the regulatory asset for vacation earned but not yet taken by employees. HEI charges for general management, administrative and support services totaled $2.4 million in 1994, $2.3 million in 1993 and $5.6 million in 1992. In 1993, other operation expenses totaled $106.0 million, an increase of $0.7 million over the 1992 amount. The increase was due primarily to higher production, transmission and distribution, and administrative and general expenses, including higher employee benefit costs, partially offset by lower management service fees from HEI, and the one-time effect of the establishment of the regulatory asset for vacation earned by employees, but not yet taken. Maintenance expenses in 1994 of $46.4 million increased by $2.1 million from 1993 primarily due to the absence in 1994 of the one-time reduction to 1993 expenses due to the establishment of the regulatory asset for vacation earned but not yet taken by employees, and increased maintenance on the transmission and distribution systems, partially offset by lower production maintenance expenses at HECO. In 1993, maintenance expenses totaled $44.3 million, a 0.8% decrease from 1992, primarily due to the one-time effect of the establishment of the regulatory asset for vacation earned by employees, but not yet taken, partially offset by increased maintenance on the transmission and distribution systems. Depreciation expense was up 14.0% in 1994 to $63.8 million and up 3.9% in 1993 to $56.0 million. In both years, the increase reflects depreciation of the Company's additions to plant in service in the previous year. Major additions to plant in service in 1993 included HECO's Waiau-Makalapa 138-kilovolt line and MECO's 18-megawatt heat recovery unit (Maalaea 15) and 20-megawatt combustion turbine unit (Maalaea 16) at Maalaea. Major additions to plant in service in 1992 included transmission and distribution substation projects by HECO, the addition of HELCO's 20-megawatt combustion turbine unit at Puna (CT-3) and the addition of MECO's 20-megawatt combustion turbine unit (Maalaea 14). Taxes, other than income taxes, increased by 6.4% in 1994 to $85.9 million, and by 13.0% in 1993 to $80.7 million. These taxes consist primarily of taxes based on revenues, and the increases reflect the corresponding increases in each year's operating revenues. In 1994, the increase also reflects an increase in the PUC fee rate from 0.25% to 0.5%, as mandated by the Hawaii State Legislature. The effective income tax rate was higher in 1994 and 1993 than in 1992 primarily due to the 1% increase in the Federal income tax rate commencing in 1993 and the use of gross-up accounting for income taxes related to the Allowance for Funds Used During Construction (AFUDC) under Statement of Financial Accounting Standards (SFAS) No. 109, effective January 1, 1993. The increase in income taxes due to the gross-up accounting for AFUDC was offset, however, by a corresponding increase in other income (see below). OTHER INCOME - ------------ Other income of $14.8 million for 1994 was $3.2 million higher than for 1993. The increase was due primarily to higher Allowance for Equity Funds Used During Construction (AFUDC-Equity), reflecting a higher average level of construction in progress during the year. For 1993, income of $11.6 million was $1.8 million 4 higher than for 1992. The increase was primarily because of the "gross-up" of AFUDC-Equity resulting from the effects of the adoption of SFAS No. 109, offset by the income tax benefit related to the utilization of capital loss carryforwards in 1992. INTEREST AND OTHER CHARGES - -------------------------- Interest and other charges for 1994 totaled $36.1 million, compared to $33.5 million for 1993 and $33.1 million for 1992. Interest expense on long-term debt increased by $4.3 million in 1994 and decreased by $0.3 million in 1993. The increase in 1994 was due to interest on drawdowns of tax-exempt special purpose revenue bond proceeds during 1994, and the full year's interest on the drawdowns of revenue bond proceeds and the sale of medium-term notes in 1993. The 1994 increase in interest expense was partially offset by lower interest expense on first mortgage bonds resulting from the early redemptions in March 1994 of HECO's 9.125% Series X mortgage bonds of $20 million, HELCO's 8.5% to 10.75% Series I, L, M and N mortgage bonds totaling $12.5 million and MECO's 8.75% to 10.75% Series I, J, K, L and M mortgage bonds totaling $15.5 million. The 1993 decrease in interest expense on long-term debt was due to lower interest expense on first mortgage bonds resulting from the redemption of MECO's 6.875% Series F mortgage bonds of $0.9 million in March 1993 and HECO's 4.45% Series M mortgage bonds of $16 million in July 1993; the early redemption of HECO's 8.2% Series R mortgage bonds of $14 million and 8.35% Series T mortgage bonds of $16 million in June 1993; and the early redemption of HECO's 9% Series Q mortgage bonds of $23 million in 1992, partially offset by interest on drawdowns of tax-exempt special purpose revenue bond proceeds during 1993 and the full year's interest on the drawdowns made the previous year. Other interest charges of $4.8 million for 1994 were $2.7 million lower than for 1993 due to lower interest on short-term borrowings as a result of lower borrowing levels during the year, partially offset by higher interest rates. 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. 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 this type of competition. 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 companies worked with a large military housing project, installing energy-efficient equipment that decreased the facility's electricity consumption by one-third. In August 1994, HEI formed a new nonutility energy service company, Pacific Energy Conservation Services, Inc. (PECS), to promote energy conservation in Hawaii and the Pacific Basin. PECS is considering potential projects to install, finance, operate and maintain energy conservation equipment, while sharing a percentage of the saved energy costs with its clients. 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. 5 REGULATION OF ELECTRIC UTILITY RATES - ------------------------------------ The PUC has broad discretion in its regulation of the rates charged by the Company and in other matters. Any adverse decision by the PUC concerning the level or method of determining 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 AND RESULTS - -------------------------------- HECO. 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 the costs related to the change in method of accounting for postretirement benefits other than pensions (PBOP) (which increases were recently allowed by the final decision in a separate generic docket discussed below), and to cover the cost of new capital projects to maintain and improve service reliability. In December 1994, HECO received a final decision and order from the PUC authorizing a $40.5 million, or 6.5%, increase in annual revenues, effective January 1, 1995 and based on a 12.15% return on average common equity. The order granted HECO an increase of approximately $3.5 million in annual revenues, in addition to reaffirming 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, represented an increase of approximately 5%, or $38.5 million in additional annual revenues over rates in effect at the time of the revised filing (which rates included interim rate relief granted in the 1994 test year application). The revised requested increase is needed to cover rising operating costs (including the costs related to the change in the method of accounting for PBOP discussed below), and the cost of new capital projects to maintain and improve service reliability. The PUC completed hearings in November 1994 on HECO's rate increase request based on a 1995 test year. In December 1994, HECO received an interim decision and order authorizing an increase of $13.2 million, or 1.9%, in annual revenues. The interim order was based on a 12.6% return on average common equity. Approximately $10.6 million of the interim increase took effect January 1, 1995, which was the beginning of the test year, and the balance will be effective in steps in May and November 1995. HELCO. In November 1993, HELCO applied to the PUC for permission to increase ------ electric rates to provide $15.8 million in annual revenues, or a 13.4% increase over rates then in effect. The requested increase is based on a 1994 test year and a 12.4% return on average common equity (which was later increased to 13.1%). The increase is needed to cover plant and equipment related costs, operating costs necessary to maintain and improve service and provide reliable power, and PBOP costs which are discussed below. In August 1994, HELCO received an interim decision and order from the PUC on its rate increase application authorizing an increase of $13.6 million in annual revenues, or approximately 11.7%, and based on a 12.4% return on average common equity. $13.2 million of the increase took effect in August 1994 and $0.4 million in November 1994. In February 1995, HELCO received a final decision and order from the PUC authorizing a $13.7 million, or 11.8%, 6 increase in annual revenues, based on a 12.6% return on average common equity. The order granted HELCO an increase of approximately $0.1 million in annual revenues, in addition to reaffirming 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 June 1994, HELCO filed a notice of intent to file an application for a general rate increase using a 1995 test year. The increase is expected to be required primarily to cover investments in new generating units. The application has not yet been filed and may be filed based on a 1996 test year. MECO. In November 1991, MECO filed a request to increase rates, based on a ----- 1992/1993 test year. 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-megawatt combined-cycle generating unit on Maui in three phases and PBOP costs which are discussed below. In 1993, MECO received four interim decisions which authorized step increases totaling $8.2 million in annual revenues. In August 1994, MECO received the final decision and order from the PUC granting an 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 $10.0 million of annual rate relief. In December 1994, MECO filed a notice of intent to request rate relief, based on a 1996 test year. In February 1995, the PUC granted MECO's motion requesting a waiver of the PUC's rule which otherwise provides for a 1996 test year only when an application is filed in the last six months of 1995. MECO plans to file its rate increase application in early 1995. 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. 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 postretirement benefits other than pensions. 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 recognized by the Company for PBOP costs accrued from January 1, 1993 through December 31, 1994 and amounted to $34.0 million at December 31, 1994. This order will result in additional annual revenues of approximately $10.0 million, $1.8 million and $1.9 million for HECO, HELCO and MECO, respectively, to cover the increase in PBOP expense. See Note 10 in the "Notes to Consolidated Financial Statements," for further information. EFFECTS OF INFLATION - -------------------- Inflation, as measured by the U.S. Consumer Price Index, averaged 2.6% in 1994 and 3.0% in 1993 and 1992. Although the rate of inflation over the past three years has been relatively low compared with the late 1970's and early 1980's, inflation continues to have an impact on the Company's operations. Inflation increases operating costs and the replacement cost of assets. The Company has significant physical assets and replaces assets at much higher costs, and must request rate relief to maintain adequate earnings. In the past, the PUC has generally approved rate relief to cover the effects of inflation. In 1992, 1993 and 1994, the Company received rate relief, in part to cover increases due to inflation in operating expenses and construction costs. ACCOUNTING FOR THE EFFECTS OF CERTAIN TYPES OF REGULATION - --------------------------------------------------------- The Company follows 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 7 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 of the resulting accounting change, including a write-off of all regulatory assets, could be material. ENVIRONMENTAL MATTERS - --------------------- The Company is 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. The Company is exempt from certain environmental requirements applicable on the U.S. mainland, such as the acid rain provisions of the 1990 Clean Air Act Amendments. However, the Company is 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 the Company 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 - ------------------ See Note 1 in the "Notes to Consolidated Financial Statements." LIQUIDITY AND CAPITAL RESOURCES - ------------------------------- The Company believes that its ability to generate cash, both internally from operations and externally from debt and equity issues, is adequate to maintain sufficient liquidity to fund its construction programs and to cover debt and other cash requirements in the foreseeable future. Capital expenditures requiring the use of cash, as shown on the "Consolidated Statements of Cash Flows," totaled approximately $186.5 million in 1994, of which $114.8 million was attributable to HECO, $45.8 million to HELCO and $25.9 million to MECO. Approximately 84% of the total 1994 capital expenditures was for transmission and distribution and other projects, including HECO's Waiau-CIP 138-kilovolt line, and 16% was for generation projects, including HELCO's Keahole combustion turbines and MECO's Molokai generation expansion. Cash contributions in aid of construction received in 1994 totaled $15.1 million. The Company's investment in plant and equipment for 1994 was financed with cash from operating activities and cash from financing activities. Cash provided by operating activities totaled $102.3 million in 1994. Cash provided by financing activities totaled a net $77.8 million and included a net $4.8 million in drawdowns 8 of proceeds from the sale of tax-exempt special purpose revenue bonds, less long-term debt repayments primarily for first mortgage bonds. The Company used $28.5 million for common stock dividends. Short-term borrowings provided $76.9 million in cash and HEI provided $30.0 million through its purchase of HECO common stock. The Company's consolidated financing requirements for the years 1995 through 1999, including net capital expenditures, debt retirements and sinking fund requirements, are estimated to total $850 million. The Company'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. The Company 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, with the remaining 30% primarily for generation projects. At December 31, 1994, purchase commitments other than fuel and power purchase contracts were approximately $83 million, including amounts for construction projects. (Also see Note 11 in the "Notes to Consolidated Financial Statements" for a discussion of fuel and power purchase commitments.) Capital expenditures for 1995, 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 projects. Drawdowns of proceeds from the sale of tax-exempt special purpose revenue bonds, sales of common stock to HEI and the generation of funds from internal sources are expected to provide the cash needed for the net capital expenditures. Capital expenditure estimates and the timing of construction projects are reviewed periodically by management and may change significantly as a result of many considerations. Among these considerations are changes in economic condi- tions, 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 ability to obtain adequate and timely rate relief, escalation in construction costs, demand-side management programs and requirements of environmental and other regulatory and permitting authorities. In 1993, the Department of Budget and Finance of the State of Hawaii (DBF) issued a total of $100 million in tax-exempt special purpose revenue bonds, with a maturity of thirty years and a fixed coupon interest rate of 5.45%, on behalf of HECO, HELCO and MECO at a 2% discount, resulting in a yield of approximately 5.6%. As of December 31, 1994 approximately $3.4 million of the proceeds from the sale of special purpose revenue bonds were available to be used. In January 1995, the DBF 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 6.6% on behalf of HECO, HELCO and MECO. The bonds were issued at a discount, resulting in a yield of approximately 6.75%. As of February 1, 1995, an additional $170 million of revenue bonds had been authorized by the Hawaii legislature for issuance prior to the end of 1997. As of February 15, 1995, Standard & Poor's Corporation (S&P), Moody's Investors Service (Moody's) and Duff & Phelps Credit Rating Co. (D&P) rated HECO's securities as follows: 9
S&P Moody's D&P ---- ------- ------- First mortgage bonds........ BBB+ A3 A Revenue bonds............... BBB Baa1 A- Cumulative preferred stock.. BBB baa1 BBB+ Other unsecured debt........ BBB Baa1 A- Commercial paper............ A-2 P-2 Duff 1- ====================================================
The above ratings are not recommendations to buy, sell or hold any securities, and such ratings may be subject to revision or withdrawal at any time by the rating agencies. In January 1995, S&P revised its ratings outlook on HECO to "stable" from "negative" citing recent PUC decisions which demonstrate a continuing trend of regulatory support for the Company's heavy construction program. The Company's management cannot predict with certainty future rating agency actions or their effects on the future cost of capital to the Company. 10 CONSOLIDATED STATEMENTS OF INCOME ================================= HAWAIIAN ELECTRIC COMPANY, INC. and Subsidiaries
Years ended December 31 1994 1993 1992 - ------------------------------------------------- --------- --------- --------- (in thousands) Operating revenues............................... $907,308 $874,010 $776,929 -------- -------- -------- Operating expenses: Fuel oil......................................... 186,717 213,285 225,611 Purchased power.................................. 271,636 258,723 172,761 Other operation.................................. 121,740 105,957 105,303 Maintenance...................................... 46,427 44,281 44,653 Depreciation and amortization.................... 63,779 55,960 53,856 Taxes, other than income taxes................... 85,877 80,712 71,452 Income taxes..................................... 43,820 37,007 26,254 -------- -------- -------- 819,996 795,925 699,890 -------- -------- -------- OPERATING INCOME................................. 87,312 78,085 77,039 -------- -------- -------- OTHER INCOME: Allowance for equity funds used during construction.................................... 9,064 6,973 6,781 Other, net....................................... 5,729 4,583 2,959 -------- -------- -------- 14,793 11,556 9,740 -------- -------- -------- INCOME BEFORE INTEREST AND OTHER CHARGES......... 102,105 89,641 86,779 -------- -------- -------- INTEREST AND OTHER CHARGES: Interest on long-term debt....................... 31,369 27,046 27,307 Amortization of debt discount, premium and expense......................................... 1,208 774 638 Other interest charges........................... 4,763 7,467 5,066 Allowance for borrowed funds used during construction.................................... (4,043) (3,869) (2,095) Preferred stock dividends of subsidiaries........ 2,847 2,097 2,185 -------- -------- -------- 36,144 33,515 33,101 -------- -------- -------- INCOME BEFORE PREFERRED STOCK DIVIDENDS OF HECO.. 65,961 56,126 53,678 Preferred stock dividends of HECO................ 4,316 4,421 4,525 -------- -------- -------- NET INCOME FOR COMMON STOCK...................... $ 61,645 $ 51,705 $ 49,153 ======== ======== ========
CONSOLIDATED STATEMENTS OF RETAINED EARNINGS ============================================ HAWAIIAN ELECTRIC COMPANY, INC. and Subsidiaries
Years ended December 31 1994 1993 1992 - -------------------------------------- --------- --------- --------- (in thousands) RETAINED EARNINGS, BEGINNING OF YEAR.. $275,401 $249,583 $223,478 Net income for common stock........... 61,645 51,705 49,153 Common stock dividends................ (28,511) (25,887) (23,048) -------- -------- -------- RETAINED EARNINGS, END OF YEAR........ $308,535 $275,401 $249,583 ======== ======== ========
See accompanying "Notes to Consolidated Financial Statements." 11 CONSOLIDATED BALANCE SHEETS =========================== HAWAIIAN ELECTRIC COMPANY, INC. and Subsidiaries
December 31 1994 1993 - ----------------------------------------------------------------- ----------- ----------- (in thousands) Assets Utility plant, at cost: Land............................................................. $ 27,108 $ 26,976 Plant and equipment.............................................. 2,101,447 1,948,445 Less accumulated depreciation.................................... (702,945) (641,230) Plant acquisition adjustment, net................................ 719 771 Construction in progress......................................... 164,247 126,342 ---------- ---------- Net utility plant............................................ 1,590,576 1,461,304 ---------- ---------- Current assets: Cash and equivalents............................................. 10,694 1,922 Customer accounts receivable, net................................ 60,406 55,614 Accrued unbilled revenues, net................................... 38,435 34,735 Other accounts receivable, net................................... 10,302 8,398 Fuel oil stock, at average cost.................................. 21,966 18,188 Materials and supplies, at average cost.......................... 20,108 20,239 Prepayments and other............................................ 2,028 2,715 ---------- ---------- Total current assets......................................... 163,939 141,811 ---------- ---------- Other assets: Regulatory assets................................................ 92,524 61,078 Unamortized debt expense......................................... 9,662 10,179 Long-term receivables and other.................................. 32,419 28,904 ---------- ---------- Total other assets........................................... 134,605 100,161 ---------- ---------- $1,889,120 $1,703,276 ========== ========== CAPITALIZATION AND LIABILITIES Capitalization (see Consolidated Statements of Capitalization): Common stock equity.............................................. $ 633,901 $ 570,663 Cumulative preferred stock: Not subject to mandatory redemption............................. 48,293 48,293 Subject to mandatory redemption................................. 42,470 45,410 Long-term debt, net.............................................. 468,653 436,776 ---------- ---------- Total capitalization......................................... 1,193,317 1,101,142 ---------- ---------- Current liabilities: Long-term debt due within one year............................... 20,933 47,960 Preferred stock sinking fund requirements........................ 2,374 1,320 Short-term borrowings--nonaffiliates............................. 117,866 28,928 Short-term borrowings--affiliate................................. -- 12,000 Accounts payable................................................. 54,662 41,808 Interest and preferred dividends payable......................... 8,575 10,332 Income taxes payable............................................. 3,300 6,232 Other taxes accrued.............................................. 39,666 36,959 Other............................................................ 30,111 31,036 ---------- ---------- Total current liabilities.................................... 277,487 216,575 ---------- ---------- Deferred credits and other liabilities: Deferred income taxes............................................ 108,362 107,449 Unamortized tax credits.......................................... 44,939 43,348 Other............................................................ 86,380 69,757 ---------- ---------- Total deferred credits and other liabilities................. 239,681 220,554 ---------- ---------- Contributions in aid of construction............................. 178,635 165,005 ---------- ---------- $1,889,120 $1,703,276 ========== ==========
See accompanying "Notes to Consolidated Financial Statements." 12 CONSOLIDATED STATEMENTS OF CAPITALIZATION ========================================= HAWAIIAN ELECTRIC COMPANY, INC. and Subsidiaries
December 31 1994 1993 - ------------------------------------------------------------ -------- -------- (dollars in thousands, except per share amounts) Common stock equity: Common stock of $6 2/3 par value. Authorized: 50,000,000 shares. Outstanding: 1994, 11,813,147 shares and 1993, 11,258,290 shares......................................... $ 78,766 $ 75,065 Premium on capital stock.................................... 246,600 220,197 Retained earnings........................................... 308,535 275,401 -------- -------- Common stock equity.................................... 633,901 570,663 -------- -------- Cumulative preferred stock: Authorized: 5,000,000 shares of $20 par value and 7,000,000 shares of $100 par value. Outstanding: 1994, 1,823,097 shares and 1993, 1,841,957 shares. SHARES OUTSTANDING PAR DECEMBER 31, SERIES VALUE 1994 - ------------------------------------------------------------ ---------- ----------- Series not subject to mandatory redemption: C-4 1/4% $ 20 (HECO) 150,000 3,000 3,000 D-5% 20 (HECO) 50,000 1,000 1,000 E-5% 20 (HECO) 150,000 3,000 3,000 H-5 1/4% 20 (HECO) 250,000 5,000 5,000 I-5% 20 (HECO) 89,657 1,793 1,793 J-4 3/4% 20 (HECO) 250,000 5,000 5,000 K-4.65% 20 (HECO) 175,000 3,500 3,500 M-8.05% 100 (HECO) 80,000 8,000 8,000 A-8 7/8% 100 (HELCO) 30,000 3,000 3,000 G-7 5/8% 100 (HELCO) 70,000 7,000 7,000 A-8% 100 (MECO) 20,000 2,000 2,000 B-8 7/8% 100 (MECO) 10,000 1,000 1,000 H-7 5/8% 100 (MECO) 50,000 5,000 5,000 ----------- -------- -------- 1,374,657 48,293 48,293 =========== -------- -------- Series subject to mandatory redemption: O-11 1/2% $100 (HECO) 8,000 800 1,300 Q-7.68% 100 (HECO) 92,040 9,204 9,600 R-8.75% 100 (HECO) 200,000 20,000 20,000 B-10 3/4% 100 (HELCO) -- -- 100 C-9 1/4% 100 (HELCO) 6,000 600 800 D-12 3/4% 100 (HELCO) 6,500 650 700 E-12.25% 100 (HELCO) 7,500 750 800 F-8.5% 100 (HELCO) 60,000 6,000 6,000 D-8 3/4% 100 (MECO) 12,400 1,240 1,430 E-12 1/4% 100 (MECO) 2,000 200 400 F-13 3/4% 100 (MECO) 4,000 400 600 G-8.5% 100 (MECO) 50,000 5,000 5,000 ----------- -------- -------- 448,440 44,844 46,730 =========== Less sinking fund requirements due within one year.......... 2,374 1,320 -------- -------- 42,470 45,410 -------- -------- Cumulative preferred stock............................. 90,763 93,703 -------- --------
See accompanying "Notes to Consolidated Financial Statements." 13 CONSOLIDATED STATEMENTS OF CAPITALIZATION, continued ==================================================== HAWAIIAN ELECTRIC COMPANY, INC. and Subsidiaries
December 31 1994 1993 - ------------------------------------------------------ ---------- ---------- (in thousands) Long-term debt: First mortgage bonds: HECO: 4.55-5.75%, due 1995 through 1997.................. $ 24,000 $ 24,000 7 5/8%, due 2002................................... 10,000 30,000 ---------- ---------- 34,000 54,000 ---------- ---------- HELCO: 7 3/4-7 7/8%, due 2002 through 2003................ 5,000 17,500 ---------- ---------- MECO: 7 3/4-7 7/8%, due 2002 through 2003................ 7,000 22,500 ---------- ---------- Total first mortgage bonds...................... 46,000 94,000 ---------- ---------- Obligations to the State of Hawaii for the repayment of Special Purpose Revenue Bonds: HECO, 5.45%, series 1993, due 2023................... 50,000 50,000 HELCO, 5.45%, series 1993, due 2023.................. 20,000 20,000 MECO, 5.45%, series 1993, due 2023................... 30,000 30,000 HECO, 6.55%, series 1992, due 2022................... 40,000 40,000 HELCO, 6.55%, series 1992, due 2022.................. 12,000 12,000 MECO, 6.55%, series 1992, due 2022................... 8,000 8,000 HECO, 7 3/8%, series 1990C, due 2020................. 25,000 25,000 HELCO, 7 3/8%, series 1990C, due 2020................ 10,000 10,000 MECO, 7 3/8%, series 1990C, due 2020................. 20,000 20,000 HECO, 7.60%, series 1990B, due 2020.................. 21,000 21,000 HELCO, 7.60%, series 1990B, due 2020................. 4,000 4,000 HECO, 7.35%, series 1990A, due 2020.................. 16,000 16,000 HELCO, 7.35%, series 1990A, due 2020................. 3,000 3,000 MECO, 7.35%, series 1990A, due 2020.................. 1,000 1,000 HECO, 7 5/8%, series 1988, due 2018.................. 30,000 30,000 HELCO, 7 5/8%, series 1988, due 2018................. 11,000 11,000 MECO, 7 5/8%, series 1988, due 2018................. 9,000 9,000 HECO, 6 7/8%, refunding series 1987, due 2012........ 42,580 42,580 HELCO, 6 7/8%, refunding series 1987, due 2012....... 7,200 7,200 MECO, 6 7/8%, refunding series 1987, due 2012........ 7,720 7,720 HELCO, 7.2%, series 1984, due 2014................... 11,400 11,400 ---------- ---------- 378,900 378,900 Less funds on deposit with trustees.................. 3,391 56,205 ---------- ---------- Total obligations to the State of Hawaii........ 375,509 322,695 ---------- ---------- Other long-term debt - unsecured: HECO, 5.15% note, due 1996........................... 20,000 20,000 HECO, 5.83% note, due 1998........................... 30,000 30,000 HELCO, 4.85% note, due 1995.......................... 10,000 10,000 MECO, 5.15% note, due 1996........................... 10,000 10,000 Other................................................ -- 27 ---------- ---------- Total other long-term debt - unsecured.......... 70,000 70,027 ---------- ---------- Total long-term debt............................ 491,509 486,722 Less unamortized discount............................. 1,923 1,986 Less amounts due within one year...................... 20,933 47,960 ---------- ---------- Long-term debt, net................................ 468,653 436,776 ---------- ---------- Total capitalization............................ $1,193,317 $1,101,142 ========== ==========
See accompanying "Notes to Consolidated Financial Statements." 14 CONSOLIDATED STATEMENTS OF CASH FLOWS ===================================== HAWAIIAN ELECTRIC COMPANY, INC. and Subsidiaries
Years ended December 31 1994 1993 1992 - ------------------------------------------------- ---------- ---------- ---------- (in thousands) Cash flows from operating activities: Income before preferred stock dividends of HECO.. $ 65,961 $ 56,126 $ 53,678 Adjustments to reconcile income before preferred stock dividends of HECO to net cash provided by operating activities: Depreciation and amortization of plant and equipment.............................. 63,779 55,960 53,856 Other amortization............................ 4,521 3,338 1,137 Deferred income taxes......................... 855 (1,952) (11,074) Tax credits, net.............................. 3,271 4,086 2,852 Allowance for equity funds used during construction............................... (9,064) (6,973) (6,781) Increase in accounts receivable............... (6,696) (1,924) (8,857) Decrease (increase) in accrued unbilled revenues................................... (3,700) 912 (8,238) Decrease (increase) in fuel oil stock......... (3,778) 1,914 2,466 Decrease (increase) in materials and supplies................................... 131 (2,398) (17) Increase in regulatory assets................. (9,885) (9,606) (2,921) Increase (decrease) in accounts payable....... 12,854 (2,273) 6,192 Increase (decrease) in interest and preferred dividends payable................ (1,757) 1,287 925 Changes in other assets and liabilities....... (14,170) (92) (4,525) --------- --------- --------- Net cash provided by operating activities........ 102,322 98,405 78,693 --------- --------- --------- Cash flows from investing activities: Capital expenditures............................. (186,461) (205,943) (181,542) Contributions in aid of construction............. 15,112 20,158 17,949 Proceeds from sales of assets.................... -- -- 14,270 --------- --------- --------- Net cash used in investing activities............ (171,349) (185,785) (149,323) --------- --------- --------- Cash flows from financing activities: Net increase (decrease) in short-term borrowings from nonaffiliates and affiliate with original maturities of three months or less......................... 76,938 (81,248) 87,606 Proceeds from other short-term borrowings........ -- 25,259 -- Repayment of other short-term borrowings......... -- (25,259) -- Proceeds from issuance of long-term debt......... 52,814 156,788 33,130 Repayment of long-term debt...................... (48,027) (46,901) (23,393) Proceeds from issuance of preferred stock........ -- 12,000 -- Redemption of preferred stock.................... (1,886) (2,190) (1,745) Preferred stock dividends........................ (4,316) (4,421) (4,525) Proceeds from issuance of common stock........... 30,000 45,000 33,000 Capital stock expense............................ (59) (84) (15) Common stock dividends........................... (28,511) (25,887) (23,048) Other............................................ 846 5,362 82 --------- --------- --------- Net cash provided by financing activities........ 77,799 58,419 101,092 --------- --------- --------- Net increase (decrease) in cash and equivalents.. 8,772 (28,961) 30,462 Cash and equivalents, beginning of year.......... 1,922 30,883 421 --------- --------- --------- Cash and equivalents, end of year................ $ 10,694 $ 1,922 $ 30,883 ========= ========= =========
See accompanying "Notes to Financial Statements." 15 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ========================================== HAWAIIAN ELECTRIC COMPANY, INC. and Subsidiaries 1 . SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES BASIS OF FINANCIAL STATEMENT PRESENTATION. The financial statements have been - ------------------------------------------ prepared in conformity with generally accepted accounting principles. In preparing the financial statements, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities as of the date of the balance sheet and revenues and expenses for the period. Actual results could differ significantly from those estimates. Material estimates that are particularly susceptible to significant change relate to the determination of regulatory assets. Management believes that regulatory assets have been appropriately established in accordance with generally accepted accounting principles. CONSOLIDATION. The consolidated financial statements include the accounts of - -------------- Hawaiian Electric Company, Inc. (HECO) and its wholly owned subsidiaries (collectively, the "Company"), Maui Electric Company, Limited (MECO) and Hawaii Electric Light Company, Inc. (HELCO). HECO is a wholly owned subsidiary of Hawaiian Electric Industries, Inc. (HEI). All significant intercompany accounts and transactions have been eliminated in consolidation. PUBLIC UTILITY COMMISSION REGULATION. The Company is regulated by the Public - ------------------------------------- Utilities Commission of the State of Hawaii (PUC) and accounts for the effects of regulation under Statement of Financial Accounting Standards (SFAS) No. 71, "Accounting for the Effects of Certain Types of Regulation." As a result, the actions of regulators can affect the timing of recognition of revenues, expenses, assets and liabilities. PROPERTY, PLANT AND EQUIPMENT. Property, plant and equipment are stated at - ------------------------------ cost. The cost of plant constructed by the Company includes applicable engineering, supervision, administrative and general expenses, and an allowance for the cost of funds used during the construction period. Upon the ordinary retirement or sale of plant, no gain or loss is recognized. The cost of the plant retired or sold and the cost of removal (net of salvage obtained) are charged to accumulated depreciation. CONTRIBUTIONS IN AID OF CONSTRUCTION. The Company receives contributions from - ------------------------------------- customers for special construction requirements. As directed by the PUC, the contributions are amortized on a straight-line basis over 30 years, which approximates the estimated useful lives of the facilities for which the contribu-tions were received. This amortization is an offset against depreciation expense. REVENUES. Revenues are based on rates authorized by the PUC and include - --------- revenues applicable to electric energy consumed in the accounting period but not yet billed to the customers. The rate schedules of the Company include energy cost adjustment clauses under which electric rates are adjusted for changes in the weighted average price paid for fuel oil and certain components of purchased power, and the relative amounts of company-generated power and purchased power. POSTRETIREMENT AND POSTEMPLOYMENT BENEFITS. Pension costs are charged primarily - ------------------------------------------- to expense and plant accounts. The Company's policy is to fund pension costs in amounts consistent with the requirements of the Employee Retirement Income Security Act. The Company provides certain health care, life insurance and other benefits to retired employees, substantially all of whom become eligible for these benefits upon retirement, and the employees' beneficiaries and covered dependents. Effective January 1, 1993, the Company adopted the provisions of SFAS No. 106, "Employers' Accounting for Postretirement Benefits Other Than Pensions," which requires that the expected cost of postretirement benefits other than pensions 16 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, continued ===================================================== HAWAIIAN ELECTRIC COMPANY, INC. and Subsidiaries be accrued during the years in which employees render service (see Note 10). Previously, the costs of these benefits were recognized when paid. The resulting change in the method of accounting for postretirement benefits other than pensions had no material effect on net income for 1993 primarily due to the regulated nature of the Company's operations. In November 1992, the Financial Accounting Standards Board (FASB) issued SFAS No. 112, "Employers' Accounting for Postemployment Benefits." This statement requires employers to recognize the obligation to provide postemployment benefits in accordance with SFAS No. 43, "Accounting for Compensated Absences," if the obligation is attributable to employees' services already rendered, employees' rights to those benefits accumulate or vest, payment of the benefits is probable, and the amount of the benefits can be reasonably estimated. The Company adopted the provisions of SFAS No. 112 on January 1, 1994. The implementation of SFAS No. 112 did not have a material effect on the Company's financial condition or results of operations. DEPRECIATION. Depreciation of plant and equipment is computed primarily using - ------------- the straight-line method over the estimated useful lives of the assets. The composite annual depreciation rate was 3.9% in 1994 and 1993 and 3.8% in 1992. PREMIUM, DISCOUNT AND EXPENSE. The expenses of issuing long-term debt - ------------------------------ securities and the premiums or discounts at which they were sold are amortized against income over the terms of the respective securities. ALLOWANCE FOR FUNDS USED DURING CONSTRUCTION. Allowance for funds used during - --------------------------------------------- construction (AFUDC) is an accounting practice whereby the costs of debt and equity funds used to finance plant construction are transferred from the income statement to construction in progress on the balance sheet. The procedure removes the effect of the costs of financing construction activity from the income statement and treats such costs in the same manner as construction labor and material costs. The weighted average gross-of-tax AFUDC rate was 9.4% in 1994, 9.3% in 1993 and 10.2% in 1992 and reflected quarterly compounding. INCOME TAXES. HECO and its subsidiaries are included in the consolidated income - ------------- tax returns of HECO's parent, HEI. Income tax expense has been computed for financial statement purposes as if HECO and its subsidiaries filed separate consolidated HECO income tax returns. The Company adopted the provisions of SFAS No. 109, "Accounting for Income Taxes" effective January 1, 1993. Previously, income taxes were recognized in accordance with the provisions of Accounting Principles Board Opinion No. 11. The resulting change in the method of accounting for income taxes had no material effect on net income for 1993 due to the regulated nature of the Company's operations (see Note 7). Federal and state tax credits are deferred and amortized over the estimated useful lives of the properties which qualified for the credits. CASH FLOWS. The Company considers cash on hand, deposits in banks, money market - ----------- accounts, certificates of deposit, short-term commercial paper and reverse repurchase agreements with original maturities of three months or less to be cash and equivalents. ENVIRONMENTAL EXPENDITURES. In general, environmental contamination treatment - --------------------------- costs are charged to expense, unless such costs are probable of recovery through rates authorized by the PUC. Also, environmental costs are capitalized if: the costs extend the life, increase the capacity, or improve the safety or efficiency of property owned; the costs mitigate or prevent environmental contamination that has yet to occur and that otherwise may result from future operations; or the costs are incurred in preparing property for sale. Liabilities are recorded when environmental assessments and/or remedial efforts are probable, and the cost can be 17 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, continued ===================================================== HAWAIIAN ELECTRIC COMPANY, INC. and Subsidiaries reasonably estimated. Corresponding regulatory assets are recorded when it is probable that such costs would be allowed by the PUC as reasonable and necessary costs of service to be recovered in future rates. RECLASSIFICATIONS. Certain reclassifications have been made to prior years' - ------------------ consolidated financial statements to conform to the 1994 presentation. 2 . CUMULATIVE PREFERRED STOCK The following series of cumulative preferred stock are redeemable at the option of the respective company and are subject to voluntary liquidation provisions as follows:
Voluntary liquidation Redemption price price December 31, December 31, Series 1994 1994 - ---------------------------- ------------ ------------ C, D, E, H, J and K (HECO).. $ 20.00 $ 21.00 I (HECO).................... 20.00 20.00 M (HECO).................... 100.00 101.00 A (HELCO)................... 101.00 101.00 A (MECO).................... 101.00 101.00 B (MECO).................... 101.00 101.00 ========================================================
The following series of cumulative preferred stock are subject to mandatory sinking fund, voluntary liquidation and optional redemption provisions as indicated below:
Voluntary Optional liquidation redemption Annual sinking fund provision price price ------------------------------ Number of shares ---------------- Commencement December 31, December 31, Series Minimum Maximum date 1994 1994 - ----------- ------- ------- ------------ ------------ ------------ O (HECO)... 3,250 6,500 10/15/86 $100.00 $101.70 Q (HECO)... 4,000 4,000 1/15/93 100.00 111.12 R (HECO)... 10,000 20,000 1/15/95 100.00 106.42 C (HELCO).. 1,000 2,000 10/15/85 101.00 101.00 D (HELCO).. 500 500 10/15/88 106.38 106.38 E (HELCO).. 500 500 10/15/90 106.92 106.92 F (HELCO).. 10,000 20,000 1/15/00 100.00 106.07 D (MECO)... 950 1,900 7/15/89 101.00 101.00 E (MECO)... 1,000 2,000 10/15/86 101.75 101.75 F (MECO)... 1,000 2,000 10/15/92 104.34 104.34 G (MECO)... 8,333 16,667 1/15/00 100.00 106.07 =======================================================================
Shares redeemed under the annual sinking fund provisions are redeemable at par value of $100. Under optional redemption provisions, shares are redeemable at the option of the respective company at redemption prices shown above (except that prior to specific dates, no shares of certain series of preferred stock may be redeemed through refunding at a cost of money to the respective company which is less than the dividend rate of such series). In the event of voluntary liquidation, preferred shareholders would be entitled, insofar as the assets of the Company would permit, to the liquidation prices shown above. The total minimum sinking fund requirements on preferred stock subject to mandatory redemption are $2,374,000 in 1995, $2,220,000 in 1996, $1,795,000 in 1997 and 1998, $1,695,000 in 1999 and a total of $34,965,000 thereafter. 18 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, continued ===================================================== HAWAIIAN ELECTRIC COMPANY, INC. and Subsidiaries HECO is obligated to make dividend, redemption and liquidation payments on the preferred stock of MECO and HELCO if MECO and HELCO are unable to make such payments, provided that such obligation is subordinated to any obligation to make payments on HECO's own preferred stock. 3 . COMMON STOCK In 1994, 1993 and 1992 HECO issued 554,857, 897,111 and 681,635 shares of common stock to its parent, HEI, for $30 million, $45 million and $33 million, respectively. 4 . LONG-TERM DEBT The first mortgage bonds are secured by separate indentures which purport to be liens on substantially all of the real and personal property now owned or hereafter acquired by the respective companies. The funds on deposit with trustees represent the undrawn proceeds from the issuance of the special purpose revenue bonds and earn interest at market rates. These funds are available only to pay for certain authorized construction projects and certain expenses related to the bonds. At December 31, 1994, the aggregate payments of principal required on long- term debt during the next five years are $20,933,000 in 1995, $29,933,000 in 1996, $12,933,000 in 1997, $29,933,000 in 1998 and nil in 1999. 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%. 5 . SHORT-TERM BORROWINGS Short-term borrowings from nonaffiliates at December 31, 1994 and 1993 had a weighted average interest rate of 6.3% and 3.6%, respectively, and consisted entirely of commercial paper. The Company maintained bank lines of credit which totaled approximately $125.0 million and $107.5 million at December 31, 1994 and 1993, respectively. The lines of credit support the issuance of commercial paper. There were no borrowings against any line of credit during 1994 and 1993. 6 . REGULATORY ASSETS Regulatory assets at December 31, 1994 and 1993 included the following deferred costs:
December 31 1994 1993 - ----------------------------------------------- ------- ------- (in thousands) Postretirement benefits other than pensions.... $34,032 $17,866 Income taxes................................... 23,427 16,176 Unamortized debt expense on retired issuances.. 7,513 5,435 Integrated resource planning costs............. 7,189 4,661 Computer system development costs.............. 6,090 3,152 Vacation earned, but not yet taken............. 5,972 5,494 Preliminary plant costs on suspended project... 5,768 5,199 Other.......................................... 2,533 3,095 ------- ------- $92,524 $61,078 ======= =======
19 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, continued ===================================================== HAWAIIAN ELECTRIC COMPANY, INC. and Subsidiaries In the first quarter of 1995, the Company applied to the PUC for recovery of the preliminary plant costs on suspended project. 7 . INCOME TAXES In February 1992, the FASB issued SFAS No. 109, "Accounting for Income Taxes", which requires companies to use the asset and liability method of accounting for income taxes. The objective of the asset and liability method is to establish deferred tax assets and liabilities for the temporary differences between the financial reporting basis and the tax basis of the Company's assets and liabilities at enacted tax rates expected to be in effect when such deferred tax assets or liabilities are realized or settled. Effective January 1, 1993, the Company adopted SFAS No. 109. The resulting change in the method of accounting for income taxes had no material effect on net income for 1993 primarily due to the regulated nature of the Company. The net increase in deferred income taxes payable arising from the adoption of SFAS No. 109 is recoverable through future rates and has been recorded as a regulatory asset. In 1993, additional income tax expense of $828,000 was recognized under SFAS No. 109 as a result of the 1% increase in the maximum corporate income tax rate enacted by the Omnibus Budget Reconciliation Act of 1993. The components of income taxes charged to operating expenses were as follows:
Years ended December 31 1994 1993 1992 - ---------------------------- -------- -------- --------- (in thousands) Federal: Current.................... $37,422 $33,556 $ 33,516 Deferred................... 2,133 432 (10,130) Deferred tax credits, net.. (1,922) (2,260) (1,740) ------- ------- -------- 37,633 31,728 21,646 ------- ------- -------- State: Current.................... 2,359 1,402 1,090 Deferred................... 315 (123) (1,074) Deferred tax credits, net.. 3,513 4,000 4,592 ------- ------- -------- 6,187 5,279 4,608 ------- ------- -------- Total....................... $43,820 $37,007 $ 26,254 ======= ======= ========
Income tax benefits related to nonoperating activities, included in "Other, Net" on the statements of income, amounted to $232,000, $109,000 and $2,411,000 for 1994, 1993 and 1992, respectively. Of the $2,411,000 income tax benefits related to nonoperating activities in 1992, $2,019,000 was a tax benefit arising from the utilization of a capital loss carryforward. The sources of timing differences in the recognition of revenues and expenses for tax and financial reporting purposes and the related deferred tax amounts under Accounting Principles Board Opinion No. 11 included in operating expenses in 1992 were as follows:
Year ended December 31 1992 - ----------------------------------------------------------------------- --------- (in thousands) Excess of tax depreciation over book straight-line depreciation rates.. $ 952 Contributions in aid of construction and customer advances, net........ (6,095) Interest capitalized for tax purposes.................................. (3,347) Excess of tax depreciation over financial reporting depreciation due to basis differences.............................................. 1,631 Gain on sale of land deferred for financial reporting purposes......... (4,737) Other.................................................................. 392 -------- Total.................................................................. $(11,204) ========
20 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, continued ===================================================== HAWAIIAN ELECTRIC COMPANY, INC. and Subsidiaries Deferred income taxes related to timing differences in the recognition of nonoperating revenues and expenses for tax and financial reporting purposes in 1992 were not significant. A reconciliation between income taxes charged to operating expenses and the amount of income taxes computed at the federal statutory rates on income before income taxes and preferred stock dividends follows:
Years ended December 31 1994 1993 1992 - ----------------------------------------------- -------- ------------ ----------- (dollars in thousands) Federal statutory income tax rate.............. 35% 35% 34% ======= ======== ======== Amount at the federal statutory income tax rate.......................................... $39,420 $ 33,331 $ 27,920 Allowance for funds used during construction not included in taxable income................ -- -- (2,375) State income taxes on operating income, net of effect on federal income taxes......................................... 4,022 3,431 3,139 Difference between financial reporting and tax straight-line depreciation for which no deferred taxes were provided.................. -- -- 3,015 Amortization of deferred tax credits........... -- 84 (1,720) Amortization of contributions in aid of construction.................................. -- -- (1,658) Amortization of federal deferred taxes in excess of current rates....................... -- (64) (1,675) Other.......................................... 378 225 (392) ------- -------- -------- Income taxes charged to operating expenses..... $43,820 $ 37,007 $ 26,254 ======= ======== ======== Deferred tax assets and deferred tax liabilities were comprised of the following: December 31 1994 1993 - ----------------------------------------------- -------- -------- (in thousands) Deferred tax assets: Property, plant and equipment................. $ 7,075 $ 5,810 Contributions in aid of construction and customer advances............................ 52,892 44,932 Other......................................... 13,858 13,625 -------- -------- 73,825 64,367 -------- -------- Deferred tax liabilities: Property, plant and equipment................. 157,067 153,765 Regulatory assets............................. 8,897 6,236 Other......................................... 16,223 11,815 -------- -------- 182,187 171,816 -------- -------- Net deferred tax liability..................... $108,362 $107,449 - ----------------------------------------------- ======== ========
There was no valuation allowance provided for deferred tax assets as of December 31, 1994 and 1993. 21 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, continued ===================================================== HAWAIIAN ELECTRIC COMPANY, INC. and Subsidiaries 8 . CASH FLOWS SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION ------------------------------------------------- Cash paid during 1994, 1993 and 1992 for interest (net of capitalized amounts which were not material) and income taxes was as follows:
Years ended December 31 1994 1993 1992 ------------------------- ------- ------- ------- (in thousands) Interest................. $35,001 $31,875 $30,021 ======= ======= ======= Income taxes............. $40,849 $34,796 $30,472 ======= ======= =======
SUPPLEMENTAL DISCLOSURES OF NONCASH ACTIVITIES - ---------------------------------------------- The allowance for equity funds used during construction, which was charged primarily to construction in progress amounted to $9,064,000, $6,973,000 and $6,781,000 in 1994, 1993 and 1992, respectively. Effective in 1993, the Company recognized the estimated fair value of noncash contributions in aid of construction received in 1993 and prior years, which increased both plant and contributions in aid of construction by $26,105,000. The estimated fair value of noncash contributions received in 1994 amounted to $5,556,000. 9 . MAJOR CUSTOMERS HECO and its subsidiaries derived 10% of their operating revenues from the sale of electricity to federal government agencies amounting to $89,479,000 in 1994, $90,614,000 in 1993 and $78,020,000 in 1992. 10 . RETIREMENT BENEFITS PENSIONS - -------- HECO and its subsidiaries participate in several of HEI's defined benefit pension plans which cover substantially all employees of HECO and its subsidiaries. Benefits are based on the employee's years of service and base compensation. The funded status of HECO and its subsidiaries' portion of the HEI pension plans and the amounts recognized in the consolidated financial statements were as follows:
December 31 1994 1993 - ------------------------------------ --------- --------- (in thousands) Accumulated benefit obligation: Vested............................ $285,605 $270,802 Nonvested......................... 30,279 40,791 -------- -------- $315,884 $311,593 ======== ======== Projected benefit obligation........ $388,150 $399,858 Plan assets at fair value, primarily equity securities and fixed income investments...... 376,968 386,912 -------- -------- Projected benefit obligation in excess of plan assets 11,182 12,946 Unrecognized prior service cost..... (240) -- Unrecognized net gain............... 9,316 9,374 Unrecognized net transition obligation (19,153) (21,440) Adjustment required to recognize minimum liability 282 321 -------- -------- Accrued pension liability........... $ 1,387 $ 1,201 ======== ========
22 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, continued ===================================================== HAWAIIAN ELECTRIC COMPANY, INC. and Subsidiaries Plans with an accumulated benefit obligation exceeding assets were not material. Net periodic pension cost included the following components:
Years ended December 31 1994 1993 1992 - ----------------------- -------- -------- -------- (in thousands) Service cost-benefits earned during the period ...... $ 14,469 $ 9,861 $ 8,935 Interest cost on projected benefit obligation ....... 27,803 25,437 25,735 Actual loss (return) on plan assets ................. 10,775 (53,703) (13,427) Amortization and deferral, net ...................... (37,154) 33,564 (5,614) -------- -------- -------- Net periodic pension cost ........................... $15,893 $ 15,159 $ 15,629 ======== ======== ========
Of these net periodic pension costs, $10,801,000, $9,663,000 and $9,801,000 were expensed in 1994, 1993 and 1992, respectively, and the remaining amounts were charged primarily to electric utility plant. For all pension plans, as of December 31, 1994 and 1993, the discount rate assumed in determining the actuarial present value of the projected benefit obligation was 8.0% and 7.0%, respectively. For 1994, 1993 and 1992, the expected long-term rate of return on assets was 8.0% and the assumed rate of increase in future compensation levels was 5.0%. The unrecognized net transition obligation is the projected benefit obligation in excess of plan assets at January 1, 1987, less amounts amortized. The unrecognized net transition obligation is being amortized ratably over 16 years beginning in 1987. POSTRETIREMENT BENEFITS OTHER THAN PENSIONS - ------------------------------------------- The Company provides various postretirement benefits other than pensions to eligible employees upon retirement. Health and life insurance benefits are provided to eligible employees upon their retirement. Health benefits are provided with contributions by retirees toward costs based on their years of service and retirement date. Employees are eligible for these benefits if, upon retirement, they participate in one of the Company's defined benefit pension plans. The Company began funding some of these benefits near year-end 1994. Through December 31, 1992, the cost of postretirement benefits other than pensions had not been recognized until paid (i.e., the pay-as-you-go method). Payments for post-retirement benefits other than pensions amounted to $3,100,000 in 1992. Effective January 1, 1993, the Company adopted SFAS No. 106, "Employers' Accounting for Postretirement Benefits Other Than Pensions," which requires accrual, during the years that an employee renders the necessary service, of the expected cost of providing postretirement benefits other than pensions to that employee and the employee's beneficiaries and covered dependents. The transition obligation is being amortized ratably over 20 years beginning in 1993. In February 1992, the PUC opened a generic docket to determine whether SFAS No. 106 should be adopted for rate-making purposes. In November 1994, the PUC issued a decision and order authorizing recovery of the full cost of postretirement benefits other than pensions effective January 1, 1995. The Companies are required to establish trust funds and to deposit into these funds the recovered SFAS No. 106 costs. The regulatory asset established from January 1, 1993 through December 31, 1994 for postretirement benefits other than pensions is being amortized ratably over 18 years beginning in 1995 for rate- making and financial reporting purposes. The funded status of the postretirement benefit plans and the amounts recognized in the consolidated financial statements were as follows: 23 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, continued ===================================================== HAWAIIAN ELECTRIC COMPANY, INC. and Subsidiaries
December 31 1994 1993 - --------------------------------------------------- ---------- ---------- (in thousands) Accumulated postretirement benefit obligation: Retirees.......................................... $ 59,047 $ 58,861 Fully eligible active plan participants........... 34,261 30,772 Other active plan participants.................... 45,664 48,072 --------- --------- 138,972 137,705 Plan assets at fair value, primarily fixed income investments....................................... 2,732 -- --------- --------- Accumulated postretirement benefit obligation in excess of plan assets.......................... 136,240 137,705 Unrecognized net gain (loss)....................... 7,816 (819) Unrecognized net transition obligation............. (112,756) (119,020) --------- --------- Accrued postretirement benefits liability.......... $ 31,300 $ 17,866 ========= =========
As of December 31, 1994 and 1993, the assumed discount rates used to measure the accumulated postretirement benefit obligation were 8.0% and 7.0%, respectively. For 1994 and 1993, the assumed rate of increase in future compensation levels was 5.0%. Net periodic postretirement benefit cost included the following components:
Years ended December 31 1994 1993 - ------------------------------------------ ------- ------- (in thousands) Service cost.............................. $ 4,642 $ 5,115 Interest cost............................. 9,284 10,426 Amortization and deferral, net............ 6,264 6,264 ------- ------- Net periodic postretirement benefit cost.. $20,190 $21,805 ======= =======
Of the net periodic postretirement benefit cost, $2,573,000 and $2,362,000 was expensed in 1994 and 1993, respectively, and the remaining amounts were charged primarily to regulatory assets, and also to electric utility plant and other accounts. At December 31, 1994, the assumed health care trend rates for 1995 and future years were as follows: medical, 7.5%; dental, 6.0% and vision, 5.0%. A 1% increase in the trend rate for health care costs would have increased the accumulated postretirement benefit obligation as of December 31, 1994 by approxi-mately $19.9 million and the service and interest costs for 1994 by approximately $2.4 million. 11 . COMMITMENTS AND CONTINGENCIES FUEL CONTRACTS AND OTHER PURCHASE COMMITMENTS - --------------------------------------------- HECO and its subsidiaries have contractual agreements to purchase a minimum amount of 0.5% sulfur residual fuel oil and 0.4% sulfur diesel fuel through 1995. The prices under these contracts are tied to market prices of petroleum products as reported in Singapore and the U.S. Pacific Northwest. Based on the average price per barrel prevailing on January 1, 1995, the estimated amount of required purchases for 1995 is $171 million. The actual amount of purchases in 1995 could vary substantially from such estimates as a result of changes in market prices and other factors. HECO and its subsidiaries purchased $186 million, $205 million and $216 million of fuel under these or prior contractual agreements in 1994, 1993 and 24 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, continued ===================================================== HAWAIIAN ELECTRIC COMPANY, INC. and Subsidiaries 1992, respectively. New contracts to replace expiring ones are expected to be entered into in the normal course of business. At December 31, 1994, the Company had purchase commitments, other than fuel and power purchase contracts, amounting to approximately $83 million. POWER PURCHASE AGREEMENTS - ------------------------- As of December 31, 1994, the Company had power purchase agreements for 465 megawatts (MW) of firm capacity representing approximately 22% of their total generating capabilities and purchased power firm capacities. Rate recovery is allowed for energy and firm capacity payments under these agreements. Assuming that each of the agreements remains in place and the minimum availability criteria in the power purchase agreements are met [including HELCO's agreement in principle with Hilo Coast Processing Company (HCPC)--see discussion which follows], 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 $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 the Company may pass on changes in the fuel component of the energy charges to customers through energy cost adjustment clauses in its rate schedules. The Company does 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 the Company 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. Hamakua Sugar Company, which had supplied HELCO with 8 MW of firm capacity, ceased operations in October 1994. Puna Geothermal Ventures (PGV), an independent geothermal power producer which had experienced substantial delays in commencing commercial operations, passed an acceptance test in June 1993 and is now considered to be a firm capacity source for 25 MW. In March 1994, HCPC, which then provided 18 MW of firm capacity, issued a written notice of termination to HELCO indicating that it would cease producing power in March 1997. HELCO, in turn, issued a written notice of its preliminary intent to purchase the HCPC facility, subject to a number of conditions. HELCO has the right, but not the obligation, to purchase the facilities for fair market value. As permitted under the power purchase agreement, HCPC asked that the issue of the fair market value of the facilities be determined through binding arbitration. HELCO and HCPC then engaged in negotiations regarding the potential purchase of the plant or the possible amendment of the existing power purchase agreement to keep the plant operating at least through March 1997. On December 12, 1994, HCPC filed a Chapter 11 bankruptcy petition and advised HELCO that it would cease operating its plant in December 1994. HELCO obtained a temporary restraining order and, later, an extension of such order, requiring HCPC to continue operations of the HCPC facility through March 7, 1995, with HELCO to pay an additional amount for the power HCPC supplies. On January 5, 1995, HELCO and HCPC entered into an agreement in principle, subject to the negotiation and execution of a definitive agreement, amending the existing power purchase agreement through December 1999. The definitive agreement must be approved by the bankruptcy court and is subject to cancellation by HELCO if not approved by the PUC within 180 days of its execution. If unable to purchase power from HCPC as contemplated by 25 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, continued ===================================================== HAWAIIAN ELECTRIC COMPANY, INC. and Subsidiaries the agreement in principle, HELCO would be operating with a slim generation margin and might have to initiate planned service interruptions (rolling blackouts) until it is able to arrange for additional generation. 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 that may be issued, if any, with respect to the outages or PTI's recommendations. HECO's PUC-approved tariff rule states that HECO is not liable for interrup- tions or insufficiency of supply when the cause was beyond HECO's control. Nevertheless, HECO received 3,063 claims, which totaled approximately $7.8 million, within the time limit to file claims. 1,530 of these claims are for property damage and most have been settled, with no admission of liability, or closed as of December 31, 1994. The other 1,533 claims involve personal injury or economic loss, such as lost profits, and generally have not been covered by settlement. 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. 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. HELCO RELIABILITY INVESTIGATION - ------------------------------- In July 1991, following service interruptions and rolling blackouts instituted on the island of Hawaii, the PUC issued an order calling for an investigation into the reliability of HELCO's system and held hearings. In light of approximately 20 subsequent incidents of rolling blackouts and service interruptions resulting from insufficient generation margin, further evidentiary hearings were held in July 1992. With the input from an independent consultant and the parties to the proceedings, the PUC may formulate minimum reliability standards for HELCO, use the standards to assess HELCO's system reliability, and re-examine the rate increase approved in October 1992 to see whether any adjustments are appropriate. In the opinion of management, the PUC's adjustment, if any, resulting from the reliability investigation will not have a material adverse effect upon the Company's consolidated financial condition or results of operations. Subsequent to the hearings in this matter, HELCO's generation margin improved with the addition of a 20-MW combustion turbine in August 1992 and PGV's commencement of commercial operations. However, HELCO's generation margin was adversely affected by the cessation of operations by Hamakua and will be further adversely affected if an agreement in principle that HELCO has reached with HCPC is not implemented. See "Power Purchase Agreements" above. 26 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, continued ===================================================== HAWAIIAN ELECTRIC COMPANY, INC. and Subsidiaries HELCO is proceeding with plans to install two 20-MW combustion turbines at Keahole on the island of Hawaii in 1995 or 1996, followed by an 18-MW heat steam recovery generator in 1997, at which time these units will be converted to a combined-cycle unit, subject in each case to obtaining necessary permits and approvals. The PUC has issued a decision and order approving commitment of expenditures for the first 20-MW combustion turbine. Evidentiary hearings on the other portions of the unit were held in July 1994. Further, two independent power producers, Kawaihae Cogeneration Partners and Ensearch Development Corp., have each filed with the PUC separate complaints against HELCO, alleging that, rather than having HELCO build the combined-cycle unit, they are entitled to a power purchase contract to provide all or part of the capacity. An evidentiary hearing in the Kawaihae Cogeneration Partners docket was held in June 1994. The evidentiary hearing in the Ensearch Development Corp. docket was held in December 1994. HELCO has 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 at the Keahole site. As a result of these permitting delays, HELCO's unit installation schedule has been adversely impacted. To address the contingency that the air permit or CDUP might be signifi-cantly delayed or ultimately denied, HELCO is exploring other alternatives to meet projected energy needs, including any viable, timely and cost-effective unaffiliated nonutility generation alternative. However, until additional generation is in place, and depending on the availability of existing generation and the timing and size of load peaks, management believes that there is a significant risk of capacity shortages on the island of Hawaii that could result in rolling blackouts. 12 . REGULATORY RESTRICTIONS ON DISTRIBUTIONS TO PARENT At December 31, 1994, net assets (assets less liabilities) of approximately $314 million were not available for transfer to HEI in the form of dividends, loans or advances without regulatory approval. 13 . RELATED-PARTY TRANSACTIONS HEI charged HECO and its subsidiaries for general management and administrative services totaling $2,417,000, $2,258,000 and $5,604,000 in 1994, 1993 and 1992, respectively. The amounts charged by HEI to its subsidiaries are allocated primarily on the basis of actual labor hours. As of January 1, 1993, HEI refined its method of identifying costs chargeable to its subsidiaries, resulting in lower allocations to subsidiaries. HEI also charged HECO for data processing services totaling $3,554,000, $3,563,000 and $3,231,000 in 1994, 1993 and 1992, respectively. HECO's borrowings from HEI totaled nil and $12,000,000 at December 31, 1994 and 1993, respectively. The interest charged on short-term borrowings from HEI is computed based on HECO's short-term borrowing interest rate. Interest charged by HEI to HECO totaled $77,000, $1,795,000 and $232,000 in 1994, 1993 and 1992, respectively. 14 . SIGNIFICANT GROUP CONCENTRATIONS OF CREDIT RISK HECO and its subsidiaries are operating electric public utilities engaged in business on the islands of Oahu, Hawaii, Maui, Lanai and Molokai in the State of Hawaii. HECO and its subsidiaries grant credit to customers, all of whom reside or conduct business in the State of Hawaii. 27 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, continued ===================================================== HAWAIIAN ELECTRIC COMPANY, INC. and Subsidiaries 15 . FAIR VALUE OF FINANCIAL INSTRUMENTS The following methods and assumptions were used to estimate the fair value of each class of financial instruments for which it is practicable to estimate that value: CASH AND EQUIVALENTS. The carrying amount approximates fair value because of - --------------------- the short maturity of these instruments. SHORT-TERM BORROWINGS. The carrying amount approximates fair value because of - ---------------------- the short maturity of these instruments. LONG-TERM DEBT. Fair value is estimated based on the quoted market prices for - --------------- the same or similar issues of debt. CUMULATIVE PREFERRED STOCK SUBJECT TO MANDATORY REDEMPTION. There are no quoted - ----------------------------------------------------------- market prices for the Company's preferred stocks. Fair value is estimated based on quoted market prices for similar issues of preferred stock. The estimated fair values of the Company's financial instruments were as follows:
December 31 1994 1993 - ---------------------------------- ------------------- ------------------- Estimated Estimated Carrying fair Carrying fair amount value amount value -------- --------- -------- --------- (in thousands) Financial assets: Cash and equivalents.............. $ 10,694 $ 10,694 $ 1,922 $ 1,922 Financial liabilities: Short-term borrowings from nonaffiliates and affiliate..... 117,866 117,866 40,928 40,928 Long-term debt, net, including amounts due within one year..... 489,586 461,082 484,736 506,089 Cumulative preferred stock subject to mandatory redemption, including sinking fund requirements...................... 44,844 46,478 46,730 49,583 =============================================================================
LIMITATIONS. Fair value estimates are made at a specific point in time, based - ------------ on relevant market information and information about the financial instrument. These estimates do not reflect any premium or discount that could result from offering for sale at one time the Company's entire holdings of a particular financial instrument. Because no market exists for a significant portion of the Company's financial instruments, fair value estimates cannot be determined with precision. Changes in assumptions could significantly affect the estimates. Fair value estimates are based on existing financial instruments without attempting to estimate the value of anticipated future business and the value of assets and liabilities that are not considered financial instruments. In addi- tion, the tax ramifications related to the realization of the unrealized gains and losses can have a significant effect on fair value estimates and have not been considered. 28 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, continued ===================================================== HAWAIIAN ELECTRIC COMPANY, INC. and Subsidiaries 16 . SUMMARIZED FINANCIAL INFORMATION Summarized financial information for HECO's consolidated subsidiaries, HELCO and MECO, was as follows: HAWAII ELECTRIC LIGHT COMPANY, INC.
December 31 1994 1993 - ----------------------------- -------- -------- (in thousands) Balance sheet data Current assets............... $ 25,151 $ 22,161 Noncurrent assets............ 335,725 297,847 -------- -------- $360,876 $320,008 ======== ======== Common stock equity.......... $120,908 $102,438 Cumulative preferred stock: Not subject to mandatory redemption 10,000 10,000 Subject to mandatory redemption 7,800 8,100 Current liabilities.......... 59,787 42,615 Noncurrent liabilities....... 162,381 156,855 -------- -------- $360,876 $320,008 ======== ======== Years ended December 31 1994 1993 1992 - ----------------------------- -------- -------- -------- (in thousands) Income statement data Operating revenues........... $128,706 $113,579 $104,904 Operating income............. 11,821 11,902 10,951 Net income for common stock.. 8,420 5,807 5,770 ===========================================================
MAUI ELECTRIC COMPANY, LIMITED
December 31 1994 1993 - ----------------------------- -------- -------- (in thousands) Balance sheet data Current assets............... $ 29,204 $ 31,465 Noncurrent assets............ 272,019 252,680 -------- -------- $301,223 $284,145 ======== ======== Common stock equity.......... $108,313 $ 97,569 Cumulative preferred stock: Not subject to mandatory redemption 8,000 8,000 Subject to mandatory redemption 6,545 7,135 Current liabilities.......... 34,197 35,027 Noncurrent liabilities....... 144,168 136,414 -------- -------- $301,223 $284,145 ======== ======== Years ended December 31 1994 1993 1992 - ----------------------------- -------- -------- -------- (in thousands) Income statement data Operating revenues........... $120,966 $114,256 $105,343 Operating income............. 16,251 13,518 12,379 Net income for common stock.. 10,196 9,274 8,770 ===========================================================
29 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, continued ===================================================== HAWAIIAN ELECTRIC COMPANY, INC. and Subsidiaries 17 . CONSOLIDATED QUARTERLY FINANCIAL INFORMATION (UNAUDITED) Selected quarterly consolidated financial information for 1994 and 1993 was as follows:
Quarter ended YEAR ENDED - ------------------------------------------------------------------------------------------- 1994 March 31 June 30 Sept.30 Dec. 31 DEC. 31 - ------------------------------------------------------------------------------------------- (in thousands) Operating revenues..... $ 200,098 $ 217,884/1/ $247,844/1,2/ $241,482/1,2/ $907,308 Operating income....... 16,132 21,635/1/ 25,708/1,2/ 23,837/1,2/ 87,312 Net income for common stock................ 9,276 15,188/1/ 19,328/1,2/ 17,853/1,2/ 61,645 ============================================================================================ 1993 - ----------------------- (in thousands) Operating revenues..... $205,560/5/ $ 218,158/5/ $ 234,484/5/ $ 215,808/5/ $874,010 Operating income....... 13,705/5/ 22,862/3,4,5/ 20,377/3,5/ 21,141/3,5/ 78,085 Net income for common stock................ 7,462/5/ 16,465/3,4,5/ 14,548/3,5/ 13,230/3,5/ 51,705 ============================================================================================
/1/ Includes interim rate increases granted to HECO, primarily to cover the costs of new facilities and equipment. /2/ Includes interim rate increases granted to HELCO, primarily to cover the costs of plant and equipment and operating costs necessary to maintain and improve service. /3/ Includes an adjustment to establish a regulatory asset for the difference between postretirement benefits other than pension costs determined under SFAS No. 106 and such costs under the pay-as-you-go method. The effect was approximately $9.1 million, $4.4 million and $4.4 million on a pre-tax basis for the second, third and fourth quarters, respectively ($5.5 million, $2.7 million and $2.7 million, respectively on an after-tax basis.) /4/ Includes a nonrecurring adjustment to establish a regulatory asset for vacation earned but not yet taken by employees. The effect was approximately $4.2 million on a pre-tax basis ($2.6 million on an after-tax basis.) /5/ Includes interim rate increases granted to MECO, primarily to cover the costs of a phased installation of a combined-cycle generating unit on Maui. 30 INDEPENDENT AUDITORS' REPORT The Board of Directors and Stockholder Hawaiian Electric Company, Inc.: We have audited the accompanying consolidated balance sheets and consolidated statements of capitalization of Hawaiian Electric Company, Inc. (a wholly owned subsidiary of Hawaiian Electric Industries, Inc.) and subsidiaries as of December 31, 1994 and 1993, and the related consolidated statements of income, retained earnings and cash flows for each of the years in the three-year period ended December 31, 1994. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Hawaiian Electric Company, Inc. and subsidiaries as of December 31, 1994 and 1993, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 1994, in conformity with generally accepted accounting principles. As discussed in Note 7 to the consolidated financial statements, effective January 1, 1993, the Company changed its method of accounting for income taxes. Additionally, as discussed in Note 10 to the consolidated financial statements, effective January 1, 1993, the Company changed its method of accounting for postretirement benefits other than pensions. /s/ KPMG Peat Marwick Honolulu, Hawaii January 25, 1995 31 DIRECTORS AND OFFICERS
HAWAIIAN ELECTRIC COMPANY, HAWAII ELECTRIC LIGHT MAUI ELECTRIC COMPANY, INC. COMPANY, INC. LIMITED - -------------------------------------------------------------------------------------------- DIRECTORS DIRECTORS DIRECTORS ( ) indicates age and year indicates first elected or appointed./1/ ROBERT F. CLARKE (52), 1990 HARWOOD D. WILLIAMSON HARWOOD D. WILLIAMSON RICHARD HENDERSON (66), 1970 RICHARD HENDERSON GLADYS C. BAISA BEN F. KAITO/2/ (68), 1975 WARREN H. W. LEE THOMAS J. JEZIERNY MILDRED D. KOSAKI/2/ (70), 1973 DENZIL W. ROSE SANFORD J. LANGA PAUL A. OYER (54), 1985 DONALD K. YAMADA B. MARTIN LUNA DIANE J. PLOTTS/2/ (59), 1991 ANNE M. TAKABUKI HARWOOD D. WILLIAMSON (63), 1985 PAUL C. YUEN/2/ (66), 1993 - --------------------------------------------------------------------------------------------- /1/ All directors serve one year terms. /2/ Audit Committee member. OFFICERS OFFICERS OFFICERS ROBERT F. CLARKE HARWOOD D. WILLIAMSON HARWOOD D. WILLIAMSON Chairman of the Board Chairman of the Board Chairman of the Board HARWOOD D. WILLIAMSON WARREN H. W. LEE THOMAS J. JEZIERNY President and Chief Executive President President Officer PAUL A. OYER PAUL A. OYER T. MICHAEL MAY Financial Vice President Financial Vice President Senior Vice President and Treasurer and Treasurer JOAN M. DIAMOND EDWARD Y. HIRATA EDWARD Y. HIRATA Vice President-Human Resources Vice President Vice President JACKIE MAHI ERICKSON MOLLY M. EGGED MOLLY M. EGGED Vice President-General Counsel Secretary Secretary CHARLES M. FREEDMAN MICHAEL F. H. CHANG MARVIN A. HAWTHORNE Vice President-Corporate Relations Assistant Treasurer Assistant Treasurer EDWARD Y. HIRATA MARVIN A. HAWTHORNE DUANE T. HAYASHI Vice President-Planning Assistant Treasurer Assistant Treasurer GEORGE T. IWAHIRO DEORNA L. IKEDA MICHAEL E. KAM Vice President-Engineering Assistant Treasurer Assistant Treasurer THOMAS L. JOAQUIN WILLIAM J. STORMONT STANLEY T. NAKAMOTO Vice President-Operations Assistant Secretary Assistant Treasurer RICHARD L. O'CONNELL JESSIE K. AKAGI Vice President-Customer Relations Assistant Secretary PAUL A. OYER Financial Vice President and Treasurer DAVID M. RODRIGUES Vice President-Corporate Excellence ERNEST T. SHIRAKI Controller MOLLY M. EGGED Secretary MARVIN A. HAWTHORNE Assistant Treasurer
33 EX-27.(A) 6 HEI FINANCIAL DATA SCHEDULE
5 This schedule contains summary financial information extracted from Hawaiian Electric Industries, Inc. and subsidiaries' consolidated balance sheet as of December 31, 1994 and consolidated statement of income for the year ended December 31, 1994 and is qualified in its entirety by reference to such financial statements. 0000354707 HAWAIIAN ELECTRIC INDUSTRIES, INC. 1,000 YEAR DEC-31-1994 JAN-01-1994 DEC-31-1994 87,623 1,099,810 133,279 2,517 43,126 0 2,425,325 (747,503) 5,174,464 0 718,240 546,254 44,844 48,293 135,835 5,174,464 0 1,188,523 0 1,014,390 (5,944) 3,067 54,028 126,049 53,019 73,030 0 0 0 73,030 2.60 2.60
EX-27.(B) 7 HECO FINANCIAL DATA SCHEDULE
UT This schedule contains summary financial information extracted from Hawaiian Electric Company, Inc. and subsidiaries' consolidated balance sheet as of December 31, 1994 and consolidated statement of income and consolidated statement of cash flows for the year ended December 31, 1994 and is qualified in its entirety by reference to such financial statements. 0000046207 HAWAIIAN ELECTRIC CO., INC. 1,000 YEAR DEC-31-1994 JAN-01-1994 DEC-31-1994 PER-BOOK 1,590,576 0 163,939 9,662 124,943 1,889,120 78,766 246,600 308,535 633,901 42,470 48,293 468,653 0 0 117,866 20,933 2,374 0 0 554,630 1,889,120 907,308 43,820 776,176 819,996 87,312 14,793 102,105 36,144 65,961 4,316 61,645 28,511 33,111 102,322 0 0
EX-99.1(A) 8 ANNUAL REPORT ON FORM 11-K HEI EXHIBIT 99.1(a) SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 11-K [X] ANNUAL REPORT PURSUANT TO SECTION 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended December 31, 1994 ------------------------------------------- or [ ] TRANSITION REPORT PURSUANT TO SECTION 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 Commission file number 1-8503 HAWAIIAN ELECTRIC INDUSTRIES RETIREMENT SAVINGS PLAN Hawaiian Electric Industries, Inc. 900 Richards Street, Honolulu, Hawaii 96813 Total number of pages in this filing: 4 REQUIRED INFORMATION -------------------- Financial Statements. The statements of net assets available for benefits at - -------------------- December 31, 1994 and 1993, statements of changes in net assets available for benefits for the years ended December 31, 1994, 1993 and 1992, together with notes to financial statements, and KPMG Peat Marwick LLP's audit report thereon are filed as a part of this annual report in paper format under cover of Form SE dated March 21,1995. Exhibits. The written consent of KPMG Peat Marwick LLP with respect to the - -------- Plan's financial statements is attached hereto as Exhibit 1. Exhibit 1 [KPMG PEAT MARWICK LETTERHEAD] Hawaiian Electric Industries, Inc. Pension Investment Committee: We consent to incorporation by reference in Registration Statement No. 33-52911 on Form S-8 of Hawaiian Electric Industries, Inc. of our report dated March 10, 1995 included herein, relating to the statements of net assets available for benefits of the Hawaiian Electric Industries Retirement Savings Plan as of December 31, 1994 and 1993, and the related statements of changes in net assets available for benefits for each of the years in the three-year period ended December 31, 1994. /s/ KPMG Peat Marwick LLP Honolulu, Hawaii March 21, 1995 SIGNATURES ---------- The Plan. Pursuant to the requirements of the Securities Exchange Act of 1934, the trustees (or other persons who administer the employee benefit plan) have duly caused this annual report to be signed on its behalf by the undersigned hereunto duly authorized. HAWAIIAN ELECTRIC INDUSTRIES RETIREMENT SAVINGS PLAN Date: March 21, 1995 By: HAWAIIAN ELECTRIC INDUSTRIES PENSION INVESTMENT COMMITTEE Its Named Fiduciary By: /s/ Robert F. Mougeot -------------------------------- Robert F. Mougeot Its Chairman By: /s/ Constance H. Lau ------------------------------- Constance H. Lau Its Asset Manager and Secretary EX-99.3(A) 9 AMENDMENT TO THE HEI RETIREMENT SAVINGS PLAN HEI Exhibit 99.3(a) -------------------- AMENDMENT 1994-2 TO THE HAWAIIAN ELECTRIC INDUSTRIES RETIREMENT SAVINGS PLAN In accordance with Section 10.1 of the Hawaiian Electric Industries Retirement Savings Plan (the "Plan"), the Plan is hereby amended in the following respects: 1. Section 1.3 is amended by inserting the following after the fourth sentence thereof: "A Participant may also name a contingent Beneficiary to succeed to the interests of the named Beneficiary in the event such named Beneficiary shall not survive the Participant." 2. Section 1.7 is amended by revising the third sentence to read as follows: "Commencing January 1, 1994, only the first $150,000 (or such larger amount as the Commissioner of Internal Revenue may prescribe) of a Participant's Compensation (determined in accordance with Section 401(a)(17) of the Code) shall be taken into account for purposes of the Plan. In determining the Compensation of a Participant for purposes of this limitation, the rules of Section 414(q)(6) of the Code shall apply, except that in applying such rules, the term "family" shall include only the spouse of the Participant and any lineal descendants of the Participant who have not attained age 19 before the close of the Plan Year. If, as a result of the application of such rules, the dollar limitation is exceeded, then the limitation shall be prorated among the affected individuals in proportion to each such individual's Compensation as determined under this Section prior to the application of the limitation." 3. Section 1.8 is amended by revising the second sentence thereof to read as follows: "Eligible Employee means a Participant who is eligible to receive an ----------------- allocation of Salary Reduction Contributions for all or a portion of the Plan Year." 4. Section 1.16 is amended to read as follows: "Participant means any Employee who has satisfied the eligibility ----------- requirements of Article II and whose Accounts remain in the Plan and allocated to him. Active Participant means a Participant during the ------------------ period he is employed in an eligible class of Employees and is, therefore, eligible to receive an allocation of Salary Reduction Contributions." 5. Section 1.17 is amended to read as follows: "Participant Voluntary Contribution means the voluntary contributions of a ---------------------------------- Participant permitted prior to July 1, 1992." 6. Section 1.22 is amended to read as follows: "Plan Year means a 12-month period commencing on January 1 and --------- anniversaries thereof." 7. Section 3.3 is amended to read as follows: "Any Participant who has received a distribution from a qualified employee pension benefit plan or annuity plan may make a contribution to a Rollover Account established on his behalf; provided that proper verification is provided and the Plan Administrator, in his sole discretion, agrees in writing to such a contribution. The Plan shall not accept rollovers from individual retirement accounts, whether or not the funds involved originally were received as distributions from a qualified employee pension benefit plan." 8. Section 4.1 (a)(1) and (2) shall be amended by replacing the term "other Eligible Employees" with the term "non-Highly Compensated Employees". 9. Section 4.1 (b)(1) is amended to replace the word "Compensation" with the word "compensation". 10. Section 4.1(b)(3) is amended to read as follows: "For purposes of determining the actual deferral percentage of an Eligible Employee who is a Highly Compensated Employee by virtue of being either a five percent (5%) owner or among the top 10 highest paid, the Salary Reduction Contributions and compensation of Family Members of such Highly Compensated Employee shall be combined and the Family Members and such Highly Compensated Employee shall be treated as a single Employee. Such Family Members shall be disregarded in determining the actual deferral percentage for Participants who are non-Highly Compensated Employees." 11. Section 4.1(b) is amended to add a new subsection (6), to read as follows: "For purposes of this Section 4.1, the term "compensation" shall mean W-2 pay including any reductions related to arrangements qualifying under Sections 125 or 401(k) of the Code." -2- 12. Section 4.2(a)(1) and (2) shall be amended by replacing the term "other Eligible Employees" with the term "non-Highly Compensated Employees." 13. Section 4.2(b)(3) is amended to read as follows: "For purposes of determining the contribution percentage of an Eligible Employee who is a Highly Compensated Employee by virtue of being either a five percent (5%) owner or among the top 10 highest paid, the Participant Voluntary Contributions and compensation of Family Members of such Highly Compensated Employee shall be combined and the Family Members and such Highly Compensated Employee shall be treated as a single Employee. Such Family Members shall be disregarded in determining the actual deferral percentage for Participants who are non-Highly Compensated Employees." 14. Section 4.2(d)(2) is amended to replace the term "Compensation" with the term "compensation." 15. Section 4.2(d) is amended to add a new subsection (4), to read as follows: ""compensation" shall mean W-2 pay including any reductions related to arrangements qualifying under Sections 125 or 401(k) of the Code." 16. Section 4.4(c)(ii) is amended by replacing "April 1" with "February 15". 17. Section 4.5(b) is amended to read as follows: "If necessary to limit the annual addition to a Participant's Accounts for a limitation year, the Plan Administrator may reduce or suspend Salary Reduction Contributions, provided that notice of such reduction or suspension be given to the Participant. Such notice need not precede the reduction or suspension. If further necessary to limit the annual addition to a Participant's Accounts for a limitation year, distributions shall be made in the following order to the Participant on whose behalf such contributions were made, to the extent necessary to reduce the annual addition to the prescribed amount: (i) Participant Voluntary Contributions and interest thereon; (ii) Salary Reduction Contributions and interest thereon; (iii) Employer Contributions." 18. The third sentence of Section 4.5(d)(1) is amended to read as follows: "Annual additions for a limitation year shall, however, include Salary Reduction Contributions for such Plan Year that are subsequently distributed to or forfeited by a Participant pursuant to this Article IV, except to the extent of excess Salary Reduction Contributions and earnings thereon -3- refunded to the Participant by April 15 of the following Plan Year." 19. The first sentence of Section 5.3 shall be amended to read as follows: "The assets of the Plan and each investment alternative shall be valued on a daily basis." 20. Section 6.3(a) shall be amended by adding the following at the end thereof: "In distributing such amounts, distributions shall be made first from Participant Voluntary Contributions made prior to 1986." 21. Section 6.3(b)(3)(iv) is amended to read as follows: "Payment of tuition for the next 12 months of post-secondary education for the Participant, his spouse, children or dependents (as defined in Section 152 of the Code)." 22. Sections 6.2(b)(5)(ii) and 6.2(d) are amended to add the following at the end thereof: "Notwithstanding any other provision to the contrary, any Participant eligible to receive a distribution which would qualify as an "eligible rollover distribution" under Section 401(a)(31)(C) of the Code may elect to have such distribution paid directly to an "eligible retirement plan" as defined in Section 401(a)(31)(D) of the Code and, upon the Participant's specification of the eligible retirement plan to which such distribution is to be paid, such distribution shall be made in the form of a direct trustee-to-trustee transfer to the eligible retirement plan so specified." 23. Sections 6.4(d)(2) and (3) are amended to read as follows: "(2) Bear interest on unpaid principal at the then current money market account rate at American Savings Bank, plus two percent (2%). (3) Be subject to a substantially level amortization schedule and repayment on at least a monthly basis." 24. Section 6.4(f) is amended to read as follows: "A loan, if approved, shall be disbursed as soon as reasonably practicable after the date on which the loan is approved." 25. Section 6.6(a)(ii) is amended by replacing "tenth" with "fifth". -4- 26. Section 6.6(b)(3) is amended by adding the following at the end thereof: "The amount of the minimum which must be distributed in each calendar year shall be determined by dividing the Participant's vested Accounts by the applicable life expectancy. Any Participant who has attained age 70-1/2 may elect to have distributed to him in any Plan Year an amount greater than the minimum required distribution." 27. Section 7.4 is amended to read as follows: "To the extent any expenses of the Plan are not paid by Participants or paid out of the assets of the Plan, the Participating Companies shall pay all expenses of administering the Plan. Such expenses shall include any expenses incurred by a Participating Company, the Committee, the Asset Manager, or the Plan Administrator, including, but not limited to, the payment of professional fees of consultants. Commencing March 31, 1994 [check date] Participants shall be assessed a portion of Plan recordkeeping fees, including fees for plan loans, set-up fees and annual maintenance fees." Unless otherwise stated each of these Amendments shall be effective January 1, 1994. TO RECORD the adoption of this amendment to the Plan, the Hawaiian Electric Industries Pension Investment Committee has caused this document to be executed this 30th day of June , 1994. ------------ ------------------------- HAWAIIAN ELECTRIC INDUSTRIES PENSION INVESTMENT COMMITTEE By /s/ Constance H. Lau -------------------- By /s/ Peter C. Lewis ------------------ -5- -----END PRIVACY-ENHANCED MESSAGE-----