-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, IG0lqUBNYYoF/Rh+eAmyYnqLPcK/pO6kmcPZCapjwtq0k63CstV6dzu0rSvdwKOT suYhzvYxgxpGXeyGSIvFDg== 0000898430-96-003723.txt : 19960814 0000898430-96-003723.hdr.sgml : 19960814 ACCESSION NUMBER: 0000898430-96-003723 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 19960630 FILED AS OF DATE: 19960813 SROS: NYSE SROS: PSE FILER: COMPANY DATA: COMPANY CONFORMED NAME: HAWAIIAN ELECTRIC INDUSTRIES INC CENTRAL INDEX KEY: 0000354707 STANDARD INDUSTRIAL CLASSIFICATION: ELECTRIC SERVICES [4911] IRS NUMBER: 990208097 STATE OF INCORPORATION: HI FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 001-08503 FILM NUMBER: 96609382 BUSINESS ADDRESS: STREET 1: 900 RICHARDS ST CITY: HONOLULU STATE: HI ZIP: 96813 BUSINESS PHONE: 8085435662 MAIL ADDRESS: STREET 1: 900 RICHARDS STREET CITY: HONOLULU STATE: HI ZIP: 96813 FILER: COMPANY DATA: COMPANY CONFORMED NAME: HAWAIIAN ELECTRIC CO INC CENTRAL INDEX KEY: 0000046207 STANDARD INDUSTRIAL CLASSIFICATION: ELECTRIC SERVICES [4911] IRS NUMBER: 990040500 STATE OF INCORPORATION: HI FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 001-04955 FILM NUMBER: 96609383 BUSINESS ADDRESS: STREET 1: 900 RICHARDS ST CITY: HONOLULU STATE: HI ZIP: 96813 BUSINESS PHONE: 8085437771 MAIL ADDRESS: STREET 1: 900 RICHARDS STREET CITY: HONOLULU STATE: HI ZIP: 96813 FORMER COMPANY: FORMER CONFORMED NAME: HAWAIIAN ELECTRIC CO LTD DATE OF NAME CHANGE: 19670212 10-Q 1 FORM 10-Q DATED JUNE 30, 1996 UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D. C. 20549 FORM 10-Q [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended June 30, 1996 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 Exact Name of Registrant as Commission I.R.S. Employer Specified in Its Charter File Number Identification No. - ------------------------------------- ----------- ------------------ HAWAIIAN ELECTRIC INDUSTRIES, INC. 1-8503 99-0208097 and Principal Subsidiary HAWAIIAN ELECTRIC COMPANY, INC. 1-4955 99-0040500 STATE OF HAWAII - -------------------------------------------------------------------------------- (State or other jurisdiction of incorporation or organization) 900 RICHARDS STREET, HONOLULU, HAWAII 96813 - -------------------------------------------------------------------------------- (Address of principal executive offices and zip code) HAWAIIAN ELECTRIC INDUSTRIES, INC. ----- (808) 543-5662 HAWAIIAN ELECTRIC COMPANY, INC. ------- (808) 543-7771 - -------------------------------------------------------------------------------- (Registrant's telephone number, including area code) NONE - -------------------------------------------------------------------------------- (Former name, former address and former fiscal year, if changed since last report) ================================================================================ Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No ----- ----- APPLICABLE ONLY TO CORPORATE ISSUERS: Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date. Class of Common Stock Outstanding August 1, 1996 - -------------------------------------------------------------------------------- Hawaiian Electric Industries, Inc. (Without Par Value)................... 30,425,824 Shares Hawaiian Electric Company, Inc. ($6 2/3 Par Value)........................ 12,302,657 Shares (not publicly traded) ================================================================================ Hawaiian Electric Industries, Inc. and subsidiaries Hawaiian Electric Company, Inc. and subsidiaries Form 10-Q--Quarter ended June 30, 1996 INDEX Page No. Glossary of terms..................................................... ii PART I. FINANCIAL INFORMATION Item 1. Financial statements Hawaiian Electric Industries, Inc. and subsidiaries --------------------------------------------------- Consolidated balance sheets (unaudited) - June 30, 1996 and December 31, 1995....................................... 1 Consolidated statements of income (unaudited) - three and six months ended June 30, 1996 and 1995.......................... 2 Consolidated statements of retained earnings (unaudited) - three and six months ended June 30, 1996 and 1995............ 2 Consolidated statements of cash flows (unaudited) - six months ended June 30, 1996 and 1995................................ 3 Notes to consolidated financial statements (unaudited)........ 4 Hawaiian Electric Company, Inc. and subsidiaries ------------------------------------------------ Consolidated balance sheets (unaudited) - June 30, 1996 and December 31, 1995....................................... 9 Consolidated statements of income (unaudited) - three and six months ended June 30, 1996 and 1995.......................... 10 Consolidated statements of retained earnings (unaudited) - three and six months ended June 30, 1996 and 1995............. 10 Consolidated statements of cash flows (unaudited) - six months ended June 30, 1996 and 1995................................. 11 Notes to consolidated financial statements (unaudited)......... 12 Item 2. Management's discussion and analysis of financial condition and results of operations........................................ 16 PART II. OTHER INFORMATION Item 1. Legal proceedings.......................................... 25 Item 5. Other information.......................................... 25 Item 6. Exhibits and reports on Form 8-K........................... 27 Signatures............................................................. 27 i Hawaiian Electric Industries, Inc. and subsidiaries Hawaiian Electric Company, Inc. and subsidiaries Form 10-Q--Quarter ended June 30, 1996 GLOSSARY OF TERMS
TERMS DEFINITIONS - ----- ----------- AFUDC Allowance for funds used during construction ASB American Savings Bank, F.S.B., a wholly owned subsidiary of HEI Diversified, Inc. and parent company of American Savings Investment Services Corp., ASB Service Corporation, AdCommunications, Inc. and Associated Mortgage, Inc. BIF Bank Insurance Fund BLNR Board of Land and Natural Resources of the State of Hawaii CDUP Conservation District Use Permit amendment COMPANY Hawaiian Electric Industries, Inc. and its direct and indirect subsidiaries, including, without limitation, Hawaiian Electric Company, Inc., Maui Electric Company, Limited, Hawaii Electric Light Company, Inc., HEI Investment Corp., Malama Pacific Corp. and its subsidiaries, Hawaiian Tug & Barge Corp., Young Brothers, Limited, HEI Diversified, Inc., American Savings Bank, F.S.B. and its subsidiaries, Lalamilo Ventures, Inc. and HEI Power Corp. and its subsidiaries D&O Decision and Order DOH Department of Health of the State of Hawaii EMF Electric and magnetic fields EPA Environmental Protection Agency - federal FASB Financial Accounting Standards Board FDIC Federal Deposit Insurance Corporation FHLB Federal Home Loan Bank HECO Hawaiian Electric Company, Inc., a wholly owned electric utility subsidiary of Hawaiian Electric Industries, Inc. and parent company of Maui Electric Company, Limited and Hawaii Electric Light Company, Inc. HEI Hawaiian Electric Industries, Inc., parent company of Hawaiian Electric Company, Inc., HEI Investment Corp., Malama Pacific Corp., Hawaiian Tug & Barge Corp., Lalamilo Ventures, Inc., HEI Diversified, Inc., Pacific Energy Conservation Services, Inc. and HEI Power Corp. HEIDI HEI Diversified, Inc., a wholly owned subsidiary of Hawaiian Electric Industries, Inc. and the parent company of American Savings Bank, F.S.B.
ii GLOSSARY OF TERMS, CONTINUED
TERMS DEFINITIONS - ----- ----------- HEIIC HEI Investment Corp., a wholly owned subsidiary of Hawaiian Electric Industries, Inc. HEIPC HEI Power Corp., a wholly owned subsidiary of Hawaiian Electric Industries, Inc., and the parent company of several subsidiaries HELCO Hawaii Electric Light Company, Inc., a wholly owned electric utility subsidiary of Hawaiian Electric Company, Inc. HIG The Hawaiian Insurance & Guaranty Company, Limited, an insurance company which was placed in state rehabilitation proceedings. HEI Diversified, Inc. was the holder of record of HIG's common stock prior to August 16, 1994 HTB Hawaiian Tug & Barge Corp., a wholly owned subsidiary of Hawaiian Electric Industries, Inc. and parent company of Young Brothers, Limited IPP Independent power producer IRP Integrated resource plan IRR Interest rate risk KCP Kawaihae Cogeneration Partners KWH Kilowatthour MECO Maui Electric Company, Limited, a wholly owned electric utility subsidiary of Hawaiian Electric Company, Inc. MPC Malama Pacific Corp., a wholly owned subsidiary of Hawaiian Electric Industries, Inc. and parent company of several real estate subsidiaries MW Megawatt OTS Office of Thrift Supervision, Department of Treasury PGV Puna Geothermal Venture PSD Prevention of Significant Deterioration/Covered Source Permit PUC Public Utilities Commission of the State of Hawaii ROACE Return on average common equity SAIF Savings Association Insurance Fund SEC Securities and Exchange Commission SFAS Statement of Financial Accounting Standards YB Young Brothers, Limited, a wholly owned subsidiary of Hawaiian Tug & Barge Corp.
iii PART I - FINANCIAL INFORMATION - -------------------------------------------------------------------------------- ITEM 1. FINANCIAL STATEMENTS - ------------------------------- Hawaiian Electric Industries, Inc. and subsidiaries CONSOLIDATED BALANCE SHEETS (UNAUDITED)
June 30, December 31, (in thousands) 1996 1995 - ---------------------------------------------------------------------------------------------------------------- ASSETS Cash and equivalents............................................... $ 90,300 $ 130,833 Accounts receivable and unbilled revenues, net.................... 147,835 142,505 Inventories, at average cost....................................... 44,289 35,258 Real estate developments........................................... 34,392 35,023 Marketable securities.............................................. 1,409,358 1,479,552 Other investments.................................................. 74,046 74,325 Loans receivable, net.............................................. 1,903,529 1,687,801 Property, plant and equipment, net of accumulated depreciation of $854,344 and $815,547......................... 1,854,425 1,808,195 Regulatory assets.................................................. 101,928 99,693 Other.............................................................. 72,285 69,315 Goodwill and other intangibles..................................... 39,140 41,245 ---------- ---------- $5,771,527 $5,603,745 ========== ========== LIABILITIES AND STOCKHOLDERS' EQUITY Accounts payable................................................... $ 97,394 $ 94,806 Deposit liabilities................................................ 2,259,024 2,223,755 Short-term borrowings.............................................. 166,377 181,825 Securities sold under agreements to repurchase..................... 455,252 412,521 Advances from Federal Home Loan Bank............................... 526,774 501,274 Long-term debt..................................................... 818,358 758,463 Deferred income taxes.............................................. 184,748 182,101 Unamortized tax credits............................................ 47,978 46,965 Contributions in aid of construction............................... 193,862 191,854 Other.............................................................. 179,882 190,535 ---------- ---------- 4,929,649 4,784,099 ---------- ---------- PREFERRED STOCK OF ELECTRIC UTILITY SUBSIDIARIES Subject to mandatory redemption.................................... 39,350 41,750 Not subject to mandatory redemption............................... 48,293 48,293 ---------- ---------- 87,643 90,043 ---------- ---------- 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 30,365 shares and 29,773 shares........... 605,785 585,387 Retained earnings.................................................. 148,450 144,216 ---------- ---------- 754,235 729,603 ---------- ---------- $5,771,527 $5,603,745 ========== ==========
See accompanying notes to consolidated financial statements. 1 Hawaiian Electric Industries, Inc. and subsidiaries CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
Three months ended Six months ended June 30, June 30, ------------------------ ------------------------- (in thousands, except per share amounts 1996 1995 1996 1995 and ratio of earnings to fixed charges) - ------------------------------------------------------------------------------------------------------------------------- REVENUES Electric utility................................... $264,987 $244,506 $512,824 $477,027 Savings bank....................................... 66,278 61,605 132,070 122,322 Other.............................................. 15,978 13,786 28,518 26,822 -------- -------- ------- -------- 347,243 319,897 673,412 626,171 -------- -------- ------- -------- EXPENSES Electric utility................................... 221,612 206,207 430,710 403,315 Savings bank....................................... 56,076 51,762 111,912 102,254 Other.............................................. 18,143 15,858 32,643 30,223 -------- -------- -------- -------- 295,831 273,827 575,265 535,792 -------- -------- -------- -------- OPERATING INCOME (LOSS) Electric utility................................... 43,375 38,299 82,114 73,712 Savings bank....................................... 10,202 9,843 20,158 20,068 Other.............................................. (2,165) (2,072) (4,125) (3,401) -------- -------- -------- -------- 51,412 46,070 98,147 90,379 -------- -------- -------- -------- Interest expense--electric utility and other....... (16,090) (15,515) (32,249) (30,467) Allowance for borrowed funds used during construction............................... 1,154 1,338 2,504 2,505 Preferred stock dividends of electric utility subsidiaries.............................. (1,666) (1,726) (3,341) (3,457) Allowance for equity funds used during construction...................................... 2,147 2,618 4,798 4,985 -------- -------- -------- -------- INCOME BEFORE INCOME TAXES......................... 36,957 32,785 69,859 63,945 Income taxes....................................... 15,594 13,905 29,627 27,218 -------- -------- -------- -------- NET INCOME......................................... $ 21,363 $ 18,880 $ 40,232 $ 36,727 ======== ======== ======== ======== Earnings per common share.......................... $0.71 $0.65 $1.34 $1.27 ======== ======== ======== ======== Dividends per common share......................... $0.60 $0.59 $1.20 $1.18 ======== ======== ======== ======== Weighted average number of common shares outstanding................................ 30,182 29,063 30,033 28,919 ======== ======== ======== ======== Ratio of earnings to fixed charges (SEC method) Excluding interest on ASB deposits.............. 1.96 1.93 ======== ======== Including interest on ASB deposits.............. 1.57 1.56 ======== ========
Hawaiian Electric Industries, Inc. and subsidiaries CONSOLIDATED STATEMENTS OF RETAINED EARNINGS (UNAUDITED)
Three months ended Six months ended June 30, June 30, -------------------------- ------------------------- (in thousands) 1996 1995 1996 1995 - ------------------------------------------------------------------------------------------------------------------------- RETAINED EARNINGS, BEGINNING OF PERIOD............. $145,172 $136,712 $144,216 $135,835 Net income......................................... 21,363 18,880 40,232 36,727 Common stock dividends............................. (18,085) (17,130) (35,998) (34,100) -------- -------- -------- -------- RETAINED EARNINGS, END OF PERIOD................... $148,450 $138,462 $148,450 $138,462 ======== ======== ======== ========
See accompanying notes to consolidated financial statements. 2 Hawaiian Electric Industries, Inc. and subsidiaries CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
Six months ended June 30, ------------------------- (in thousands) 1996 1995 - ----------------------------------------------------------------- CASH FLOWS FROM OPERATING ACTIVITIES Net income.............................. $ 40,232 $ 36,727 Adjustments to reconcile net income to net cash provided by operating activities Depreciation and amortization of property, plant and equipment.... 41,204 38,429 Other amortization................ 6,481 776 Deferred income taxes and tax credits, net..................... 4,744 6,074 Allowance for equity funds used during construction.............. (4,798) (4,985) Changes in assets and liabilities Increase in accounts receivable and unbilled revenues, net.............. (5,330) (11,850) Decrease (increase) in inventories................ (9,031) 5,092 Decrease (increase) in real estate developments........ 631 (685) Increase in regulatory assets..................... (1,676) (2,394) Increase (decrease) in accounts payable........... 2,588 (6,472) Changes in other assets and liabilities................ (16,997) (9,153) --------- --------- NET CASH PROVIDED BY OPERATING ACTIVITIES............................. 58,048 51,559 --------- --------- CASH FLOWS FROM INVESTING ACTIVITIES Loans receivable originated and purchased.............................. (308,574) (158,696) Principal repayments on loans receivable............................. 90,691 64,061 Proceeds from sale of loans receivable.. 2,092 3,582 Held-to-maturity mortgage-backed securities purchased................... (112,581) (79,566) Principal repayments on held-to-maturity mortgage-backed securities............................. 182,907 63,084 Capital expenditures.................... (85,540) (102,892) Contributions in aid of construction.... 5,984 6,414 Other................................... 1,164 1,066 --------- --------- NET CASH USED IN INVESTING ACTIVITIES... (223,857) (202,947) --------- --------- CASH FLOWS FROM FINANCING ACTIVITIES Net increase in deposit liabilities..... 35,269 34,072 Net increase (decrease) in short-term borrowings with original maturities of three months or less................... (14,738) 30,135 Proceeds from other short-term borrowings............................. 608 745 Repayment of other short-term borrowings............................. (1,318) (1,593) Proceeds from securities sold under agreements to repurchase............... 384,100 326,500 Repurchase of securities sold under agreements to repurchase............... (341,000) (172,339) Proceeds from advances from Federal Home Loan Bank......................... 323,200 251,200 Principal payments on advances from Federal Home Loan Bank................. (297,700) (338,700) Proceeds from issuance of long-term debt................................... 77,242 48,213 Repayment of long-term debt............. (17,400) (13,400) Redemption of electric utility subsidiaries' preferred stock.......... (2,400) (1,554) Net proceeds from issuance of common stock.................................. 9,746 10,112 Common stock dividends.................. (25,377) (24,510) Other................................... (4,956) (5,681) --------- --------- NET CASH PROVIDED BY FINANCING ACTIVITIES............................. 125,276 143,200 --------- --------- Net decrease in cash and equivalents.... (40,533) (8,188) Cash and equivalents, beginning of period................................. 130,833 87,623 --------- --------- CASH AND EQUIVALENTS, END OF PERIOD..... $ 90,300 $ 79,435 ========= =========
See accompanying notes to consolidated financial statements. 3 Hawaiian Electric Industries, Inc. and subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (1) BASIS OF PRESENTATION - -------------------------- The accompanying unaudited consolidated financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Securities and Exchange Commission (SEC) Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. The accompanying unaudited consolidated financial statements should be read in conjunction with the consolidated financial statements and the notes thereto incorporated by reference in HEI's Annual Report on SEC Form 10-K for the year ended December 31, 1995 (as amended) and the consolidated financial statements and the notes thereto in HEI's Quarterly Report on SEC Form 10-Q for the quarter ended March 31, 1996. In the opinion of HEI's management, the accompanying unaudited consolidated financial statements contain all material adjustments required by generally accepted accounting principles to present fairly the Company's financial position as of June 30, 1996 and December 31, 1995, and the results of its operations for the three months and six months ended June 30, 1996 and 1995, and its cash flows for the six months ended June 30, 1996 and 1995. All such adjustments are of a normal recurring nature, unless otherwise disclosed in this Form 10-Q or other referenced material. Results of operations for interim periods are not necessarily indicative of results for the full year. (2) ELECTRIC UTILITY SUBSIDIARY - -------------------------------- For Hawaiian Electric Company, Inc.'s consolidated financial information, including its commitments and contingencies, see pages 9 through 15. (3) SAVINGS BANK SUBSIDIARY - ---------------------------------------- SELECTED CONSOLIDATED FINANCIAL INFORMATION American Savings Bank, F.S.B. and subsidiaries Income statement data
Three months ended Six months ended June 30, June 30, -------------------- -------------------- (in thousands) 1996 1995 1996 1995 - --------------------------------------------------------------------------------------------- Interest income......................... $ 62,374 $ 57,928 $124,454 $115,561 Interest expense........................ 37,727 34,999 75,265 67,974 -------- -------- -------- -------- NET INTEREST INCOME..................... 24,647 22,929 49,189 47,587 Provision for losses.................... (471) (240) (891) (625) Other income............................ 3,904 3,677 7,616 6,761 Operating, administrative and general expenses............................... (17,878) (16,523) (35,756) (33,655) -------- -------- -------- -------- OPERATING INCOME........................ 10,202 9,843 20,158 20,068 Income taxes............................ 4,256 4,139 8,422 8,415 -------- -------- -------- -------- NET INCOME.............................. $ 5,946 $ 5,704 $ 11,736 $ 11,653 ======== ======== ======== ========
4 American Savings Bank, F.S.B. and subsidiaries Balance sheet data
June 30, December 31, (in thousands) 1996 1995 - ---------------------------------------------------------------------------- ASSETS Cash and equivalents.................... $ 86,927 $ 129,678 Held-to-maturity investment securities.. 36,053 34,720 Held-to-maturity mortgage-backed 1,373,305 1,444,832 securities............................. Loans receivable, net................... 1,903,529 1,687,801 Other................................... 74,632 75,150 Goodwill and other intangibles.......... 39,140 41,245 ---------- ---------- $3,513,586 $3,413,426 ========== ========== LIABILITIES AND EQUITY Deposit liabilities..................... $2,259,024 $2,223,755 Securities sold under agreements to 455,252 412,521 repurchase............................. Advances from Federal Home Loan Bank.... 526,774 501,274 Other................................... 59,895 57,973 ---------- ---------- 3,300,945 3,195,523 Common stock equity..................... 212,641 217,903 ---------- ---------- $3,513,586 $3,413,426 ========== ==========
PROPOSED LEGISLATION AFFECTING FINANCIAL INSTITUTIONS The deposit accounts of ASB and other thrifts are insured by the Savings Association Insurance Fund (SAIF). The deposit accounts of commercial banks are insured by the Bank Insurance Fund (BIF). The SAIF and BIF are administered by the Federal Deposit Insurance Corporation (FDIC). In order to capitalize these funds, thrifts and banks have in the past paid costs of insurance ranging from 23 cents to 31 cents per $100 of deposits. However, under existing law, the FDIC may reduce these assessment rates when the SAIF and BIF individually reach a designated 1.25% reserve ratio. The BIF reached the designated reserve ratio in 1995, but the SAIF is unlikely to do so at present insurance rates for several years. Effective January 1996, well-capitalized banks pay only the legally required annual minimum of $2,000 for BIF insurance. For all other BIF institutions, the FDIC deposit insurance assessment rates range from 3 to 27 cents per $100 of deposits. While the FDIC reduced the deposit assessments paid by banks, it maintained the 23 to 31 cents per $100 of deposits assessment for thrifts, depending on their risk classification. This disparity places ASB and other thrifts at a disadvantage in competing with commercial banks. There have been a number of legislative proposals to address this situation, including making a one-time or phased-in assessment of thrifts to permit capitalization of the SAIF up to required levels, followed by a merger of the two funds; eliminating or reducing the disparity in the assessment rates paid by banks or thrifts if the SAIF is recapitalized through the assessment; and merging bank and thrift charters. Certain of these proposals, if adopted, could have a material adverse effect on the Company. For example, if a one-time assessment of 85 cents for every $100 of deposits is imposed, it is estimated that ASB would be assessed approximately $18 million on a pretax basis ($11 million after-tax), based on ASB's deposit liabilities as of March 31, 1995. If thrift and bank charters are merged, HEI and its other subsidiaries might become subject to the restrictions on the permissible activities of a bank holding company. While certain of the proposals under consideration would grandfather the activities of existing savings and loan holding companies, management cannot predict whether or in what form any of these proposals might ultimately be adopted or the extent to which the business of the Company or ASB might be affected. (4) REAL ESTATE SUBSIDIARY - --------------------------- MPC and its subsidiaries' total real estate project inventory, equity investment in real estate joint ventures and loans and advances to unconsolidated joint ventures or joint venture partners amounted to $49 million and $50 million at June 30, 1996 and December 31, 1995, respectively. MPC's present focus is to reduce its current investment in real estate development assets and increase cash flow by continuing the development and sales of its existing projects. There are currently no plans to invest in new projects. 5 At June 30, 1996, MPC or its subsidiaries had issued (i) guaranties under which they were jointly and severally contingently liable with their joint venture partners for $2.3 million of outstanding loans and (ii) payment guaranties under which MPC or its subsidiaries were severally contingently liable for $5.1 million of outstanding loans and $4.0 million of additional undrawn loan facilities. All such loans are collateralized by real property. At June 30, 1996, HEI had agreed with the lenders of construction loans and loan facilities, of which approximately $9.1 million was outstanding and $4.8 million was undrawn, that it will maintain ownership of l00% of the stock of MPC and that it intends, subject to good and prudent business practices, to keep MPC financially sound and responsible to meet its obligations as guarantor. (5) CASH FLOWS - --------------- SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION Cash paid for interest (net of capitalized amounts) and income taxes was as follows:
Six months ended June 30, --------------------- (in thousands) 1996 1995 - ----------------------------------------------------------------------------------------------- Interest (including interest paid by savings bank, but excluding interest paid on nonrecourse debt from leveraged leases)......................... $105,138 $92,457 ======== ======= Interest on nonrecourse debt from leveraged leases....................... $ 4,142 $ 4,534 ======== ======= Income taxes............................................................. $ 21,397 $19,809 ======== =======
SUPPLEMENTAL DISCLOSURES OF NONCASH ACTIVITIES In the six months ended June 30, 1995, ASB received $223 million in mortgage- backed securities in exchange for loans. Common stock dividends reinvested by shareholders in HEI common stock in noncash transactions amounted to $10.6 million and $9.6 million for the six months ended June 30, 1996 and 1995, respectively. The allowance for equity funds used during construction, which was capitalized as part of the cost of electric utility plant, amounted to $4.8 million and $5.0 million for the six months ended June 30, 1996 and 1995, respectively. (6) ACCOUNTING CHANGES--1996 IMPLEMENTATION - -------------------------------------------- LONG-LIVED ASSETS In March 1995, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards (SFAS) No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of." SFAS No. 121 requires that long-lived assets and certain identifiable intangibles held and used by an entity be reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. If the sum of the expected future cash flows derived from an asset is less than the carrying amount of the asset, an impairment loss is recognized. Measurement of that loss is based on the fair value of the asset. Generally, SFAS No. 121 requires that long-lived assets and certain identifiable intangibles to be disposed of be reported at the lower of carrying amount or fair value less cost to sell. SFAS No. 121 also requires that a rate-regulated enterprise recognize an impairment loss for the amount of costs excluded by a regulator from the enterprise's rate base. The Company adopted the provisions of SFAS No. 121 on January 1, 1996. The adoption of SFAS No. 121 did not have a material effect on the Company's financial condition or results of operations. 6 MORTGAGE SERVICING RIGHTS AND TRANSFERS AND SERVICING OF FINANCIAL ASSETS AND EXTINGUISHMENTS OF LIABILITIES In May 1995, the FASB issued SFAS No. 122, "Accounting for Mortgage Servicing Rights." SFAS No. 122 requires that a mortgage banking enterprise (as defined) that acquires mortgage servicing rights through either the purchase or origination of mortgage loans and sells or securitizes those loans with servicing rights retained should allocate the total cost of the mortgage loans to the mortgage servicing rights and the loans based on their relative fair values, if it is practicable to estimate those fair values. ASB adopted the provisions of SFAS No. 122 on January 1, 1996. The adoption of SFAS No. 122 did not have a material effect on the Company's financial condition or results of operations. In June 1996, the FASB issued SFAS No. 125, "Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities," which provides accounting and reporting standards based on the consistent application of a financial-components approach that focuses on control. Under that approach, after a transfer of financial assets, an entity recognizes the financial and servicing assets it controls and the liabilities it has incurred, derecognizes financial assets when control has been surrendered, and derecognizes liabilities when extinguished. SFAS No. 125 provides consistent standards for distinguishing transfers of financial assets that are sales from transfers that are secured borrowings. SFAS No. 125 amends or supersedes various statements, including superseding SFAS No. 122. SFAS No. 125 is effective for transfers and servicing of financial assets and extinguishments of liabilities occurring after December 31, 1996, and is to be applied prospectively. The Company will adopt the provisions of SFAS No. 125 on January 1, 1997, but has not determined the impact of the adoption. STOCK-BASED COMPENSATION In October 1995, the FASB issued SFAS No. 123, "Accounting for Stock-Based Compensation." SFAS No. 123 establishes a fair value based method of accounting for stock-based compensation, but does not require an entity to adopt the new method for purposes of preparing its basic financial statements. For entities not adopting the new method, SFAS No. 123 requires footnote disclosure of proforma net income and earnings per share information as if the fair value based method had been adopted. The disclosure requirements of SFAS No. 123 are effective for financial statements for fiscal years beginning after December 15, 1995. The Company will comply with the disclosure requirements of SFAS No. 123 in its annual financial statements for 1996. (7) DISCONTINUED OPERATIONS - ---------------------------- 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 concluded it would not contribute additional capital to HIG and the remaining investment in the HIG Group was written off. On December 24, 1992, a formal rehabilitation order vested full control over the HIG Group in the Insurance Commissioner of the State of Hawaii (the Rehabilitator) and her deputies. 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 that directors and officers of HEI, HEIDI and the HIG Group were responsible for the losses suffered by the HIG Group and claims that HEI and/or HEIDI should be held liable for HIG's obligations. The lawsuit was settled in early 1994 and $32 million was disbursed to the Rehabilitator. In exchange, all the plaintiffs released their claims against HEI, its affiliates and their past and present officers and directors. The $32 million settlement amount, less income tax benefits and certain amounts recognized in previously established reserves, resulted in a $15 million after- tax charge to discontinued operations in 1993. HEI and HEIDI are seeking reimbursement for the settlement and defense costs from their insurance carriers. One of the insurance carriers filed a declaratory relief action in the U.S. District Court for Hawaii seeking resolution of insurance coverage and other policy issues, and HEI and HEIDI filed counterclaims. On December 15, 1995, the judge ruled on motions for partial summary judgment that had been argued in June 1995. The District Court found that HEI and HEIDI did not breach their 7 insurance contract and that the settlement they entered into was reasonable. Among the issues left for consideration by the District Court include plaintiff's defense of allocation. In June 1996, the District Court held a hearing on cross-motions for summary judgment with respect to the remaining issues in the case, but the District Court has not yet ruled on these motions. In the event any issues remain for trial after the Court rules on these motions, a trial date must be set. Recoveries from HEI's insurance carriers, if any, will be recognized when realized. (8) CONTINGENCIES - ------------------ ENVIRONMENTAL REGULATION -- HAZARDOUS WASTE AND TOXIC SUBSTANCES CONTROL By letters in January and February 1995, the Department of Health of the State of Hawaii (DOH) advised HECO, HTB, YB and others that the DOH was conducting an investigation to determine the nature and extent of actual or potential releases of hazardous substances, oil, pollutants or contaminants at or near Honolulu Harbor. The DOH letter to HECO requested information regarding past hazardous substances and oil spills that may have occurred at HECO's Honolulu power plant and nearby fuel storage and pipeline facilities which are located near Honolulu Harbor. HECO submitted a response to the DOH on April 28, 1995. The DOH letters to HTB and YB requested information regarding past hazardous substances and oil spills that may have occurred at Pier 21 and Piers 24-29 in Honolulu Harbor. HTB and YB provided responses to the DOH letters. Based on a limited review of the responses received from HECO, HTB, YB and others, the DOH issued letters on December 18, 1995, indicating that the DOH has identified a number of parties, including HECO, HTB and YB, who appear to be either potentially responsible for the contamination and/or operate their facilities upon contaminated land. The DOH met with these identified parties on January 24, 1996 to inform them of its findings and to establish the framework to determine remedial and cleanup requirements. The DOH's goal is the formation of a voluntary response group comprised of these identified parties. The Honolulu Harbor area of investigation was divided into four units, with the highest priority area (Iwilei Area) to be addressed first. The DOH met again with the identified parties in March and May 1996. Because the process for determining appropriate remedial and cleanup action, if any, is at an early stage, management cannot predict at this time the costs of future site analysis, remediation and cleanup requirements, if any, nor can it estimate when such costs, if any, would be incurred. Certain of the costs incurred, if any, may be claimed and covered under existing insurance policies, but such coverage is not determinable at this time. 8 Hawaiian Electric Company, Inc. and subsidiaries CONSOLIDATED BALANCE SHEETS (UNAUDITED)
June 30, December 31, (in thousands, except par value) 1996 1995 - --------------------------------------------------------------------------- ASSETS Utility plant, at cost Property, plant and equipment........ $2,349,603 $2,291,545 Construction in progress............. 212,973 191,460 Less--accumulated depreciation....... (797,228) (762,770) ---------- ---------- NET UTILITY PLANT.............. 1,765,348 1,720,235 ---------- ---------- Current assets Cash and equivalents................. 1,965 20 Customer accounts receivable, net.... 77,422 67,698 Accrued unbilled revenues, net....... 39,997 43,695 Other accounts receivable, net....... 3,795 5,355 Fuel oil stock, at average cost...... 23,747 13,469 Materials and supplies, at average cost................................ 19,189 20,538 Prepayments and other................ 2,433 2,297 ---------- ---------- TOTAL CURRENT ASSETS........... 168,548 153,072 ---------- ---------- Other assets Regulatory assets.................... 99,426 97,114 Other................................ 48,326 45,862 ---------- ---------- TOTAL OTHER ASSETS............. 147,752 142,976 ---------- ---------- $2,081,648 $2,016,283 ========== ========== CAPITALIZATION AND LIABILITIES Capitalization Common stock, $6 2/3 par value, authorized 50,000 shares; outstanding 12,303 shares........... $ 82,031 $ 82,031 Premium on capital stock............. 271,480 271,449 Retained earnings.................... 356,644 343,425 ---------- ---------- COMMON STOCK EQUITY............ 710,155 696,905 Cumulative preferred stock Not subject to mandatory redemption....................... 48,293 48,293 Subject to mandatory redemption... 37,555 39,955 Long-term debt, net.................. 541,504 487,306 ---------- ---------- TOTAL CAPITALIZATION........... 1,337,507 1,272,459 ---------- ---------- Current liabilities Long-term debt due within one year... 43,000 29,903 Preferred stock sinking fund requirements........................ 1,795 1,795 Short-term borrowings - nonaffiliates 121,208 131,753 Short-term borrowings - affiliate.... 12,400 7,000 Accounts payable..................... 52,052 48,691 Interest and preferred dividends payable............................. 10,515 9,954 Taxes accrued........................ 37,234 42,968 Other................................ 25,822 37,573 ---------- ---------- TOTAL CURRENT LIABILITIES...... 304,026 309,637 ---------- ---------- Deferred credits and other liabilities Deferred income taxes................ 118,226 116,963 Unamortized tax credits.............. 46,946 45,935 Other................................ 81,081 79,435 ---------- ---------- TOTAL DEFERRED CREDITS AND OTHER LIABILITIES............. 246,253 242,333 ---------- ---------- Contributions in aid of construction.... 193,862 191,854 ---------- ---------- $2,081,648 $2,016,283 ========== ==========
See accompanying notes to HECO's consolidated financial statements. 9 Hawaiian Electric Company, Inc. and subsidiaries CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
Three months ended Six months ended June 30, June 30, (in thousands, except for ratio of ---------------------- -------------------- earnings to fixed charges) 1996 1995 1996 1995 - -------------------------------------------------------------------------------------------- OPERATING REVENUES...................... $262,807 $242,646 $508,751 $473,822 -------- -------- -------- -------- OPERATING EXPENSES Fuel oil................................ 61,665 48,816 115,287 97,293 Purchased power......................... 69,798 70,890 137,605 134,743 Other operation......................... 35,978 34,212 69,569 68,395 Maintenance............................. 11,448 12,411 23,393 23,633 Depreciation and amortization........... 18,338 17,028 36,681 34,010 Taxes, other than income taxes.......... 24,312 22,688 48,020 44,767 Income taxes............................ 13,660 12,096 25,893 23,270 -------- -------- -------- -------- 235,199 218,141 456,448 426,111 -------- -------- -------- -------- OPERATING INCOME........................ 27,608 24,505 52,303 47,711 -------- -------- -------- -------- OTHER INCOME Allowance for equity funds used during construction.................. 2,147 2,618 4,798 4,985 Other, net.............................. 2,165 1,710 4,016 2,947 -------- -------- -------- -------- 4,312 4,328 8,814 7,932 -------- -------- -------- -------- INCOME BEFORE INTEREST AND OTHER CHARGES 31,920 28,833 61,117 55,643 -------- -------- -------- -------- INTEREST AND OTHER CHARGES Interest on long-term debt.............. 8,735 8,587 17,263 16,665 Amortization of net bond premium and expense................................ 320 320 635 634 Other interest charges.................. 2,465 1,998 4,955 4,052 Allowance for borrowed funds used during construction.................. (1,154) (1,338) (2,504) (2,505) Preferred stock dividends of subsidiaries........................... 702 692 1,404 1,384 -------- -------- -------- -------- 11,068 10,259 21,753 20,230 -------- -------- -------- -------- INCOME BEFORE PREFERRED STOCK DIVIDENDS OF HECO.............................. 20,852 18,574 39,364 35,413 Preferred stock dividends of HECO....... 964 1,034 1,937 2,073 -------- -------- -------- -------- NET INCOME FOR COMMON STOCK............. $ 19,888 $ 17,540 $ 37,427 $ 33,340 ======== ======== ======== ======== Ratio of earnings to fixed charges (SEC method)......................... 3.46 3.34 ======== ========
Hawaiian Electric Company, Inc. and subsidiaries CONSOLIDATED STATEMENTS OF RETAINED EARNINGS (UNAUDITED)
Three months ended Six months ended June 30, June 30, ---------------------- -------------------- (in thousands) 1996 1995 1996 1995 - -------------------------------------------------------------------------------------------- RETAINED EARNINGS, BEGINNING OF PERIOD.. $349,910 $315,408 $343,425 $308,535 Net income for common stock............. 19,888 17,540 37,427 33,340 Common stock dividends.................. (13,154) (7,900) (24,208) (16,827) -------- -------- -------- -------- RETAINED EARNINGS, END OF PERIOD........ $356,644 $325,048 $356,644 $325,048 ======== ======== ======== ========
HEI owns all the common stock of HECO. Therefore, per share data with respect to shares of common stock of HECO are not meaningful. See accompanying notes to HECO's consolidated financial statements. 10 Hawaiian Electric Company, Inc. and subsidiaries CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
Six months ended June 30, ---------------------------- (in thousands) 1996 1995 - -------------------------------------------------------------------------------------------------------------------- CASH FLOWS FROM OPERATING ACTIVITIES Income before preferred stock dividends of HECO................................. $ 39,364 $ 35,413 Adjustments to reconcile income before preferred stock dividends of HECO to net cash provided by operating activities Depreciation and amortization of property, plant and equipment............ 36,681 34,010 Other amortization........................................................ 4,574 2,816 Deferred income taxes..................................................... 1,302 1,837 Tax credits, net.......................................................... 1,840 2,174 Allowance for equity funds used during construction....................... (4,798) (4,985) Changes in assets and liabilities Increase in accounts receivable........................................... (8,164) (7,741) Decrease (increase) in accrued unbilled revenues.......................... 3,698 (300) Decrease (increase) in fuel oil stock..................................... (10,278) 5,281 Decrease (increase) in materials and supplies............................. 1,349 (72) Increase in regulatory assets............................................. (1,676) (2,394) Increase (decrease) in accounts payable................................... 3,361 (7,645) Increase in interest and preferred dividends payable...................... 561 1,166 Changes in other assets and liabilities................................... (21,899) (14,012) -------- -------- NET CASH PROVIDED BY OPERATING ACTIVITIES....................................... 45,915 45,548 -------- -------- CASH FLOWS FROM INVESTING ACTIVITIES Capital expenditures............................................................ (79,820) (95,741) Contributions in aid of construction............................................ 5,984 6,414 Increase in notes receivable.................................................... (391) -- -------- -------- NET CASH USED IN INVESTING ACTIVITIES........................................... (74,227) (89,327) -------- -------- CASH FLOWS FROM FINANCING ACTIVITIES Common stock dividends.......................................................... (24,208) (16,827) Preferred stock dividends....................................................... (1,937) (2,073) Proceeds from issuance of long-term debt........................................ 67,242 48,213 Repayment of long-term debt..................................................... -- (11,000) Redemption of preferred stock................................................... (2,400) (1,554) Net increase (decrease) in short-term borrowings from nonaffiliates and affiliate with original maturities of three months or less................ (5,145) 20,899 Other........................................................................... (3,295) (4,134) -------- -------- NET CASH PROVIDED BY FINANCING ACTIVITIES....................................... 30,257 33,524 -------- -------- Net increase (decrease) in cash and equivalents................................. 1,945 (10,255) Cash and equivalents, beginning of period....................................... 20 10,694 -------- -------- CASH AND EQUIVALENTS, END OF PERIOD............................................. $ 1,965 $ 439 ======== ========
See accompanying notes to HECO's consolidated financial statements. 11 Hawaiian Electric Company, Inc. and subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (1) BASIS OF PRESENTATION - -------------------------- The accompanying unaudited consolidated financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to SEC Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. The accompanying unaudited consolidated financial statements should be read in conjunction with the consolidated financial statements and the notes thereto incorporated by reference in HECO's Annual Report on SEC Form 10-K for the year ended December 31, 1995 (as amended) and the consolidated financial statements and the notes thereto in HECO's Quarterly Report on SEC Form 10-Q for the quarter ended March 31, 1996. In the opinion of HECO's management, the accompanying unaudited consolidated financial statements contain all material adjustments required by generally accepted accounting principles to present fairly the financial position of HECO and its subsidiaries as of June 30, 1996 and December 31, 1995, and the results of their operations for the three months and six months ended June 30, 1996 and 1995, and their cash flows for the six months ended June 30, 1996 and 1995. All such adjustments are of a normal recurring nature, unless otherwise disclosed in this Form 10-Q or other referenced material. Results of operations for interim periods are not necessarily indicative of results for the full year. (2) CASH FLOWS - --------------- SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION Cash paid for interest (net of capitalized amounts) and income taxes was as follows:
Six months ended June 30, ----------------- (in thousands) 1996 1995 - ------------------------------------------------------------ Interest................................ $19,788 $17,332 ======= ======= Income taxes............................ $16,411 $19,174 ======= =======
SUPPLEMENTAL DISCLOSURE OF NONCASH ACTIVITIES The allowance for equity funds used during construction, which was capitalized as part of the cost of electric utility plant, amounted to $4.8 million and $5.0 million for the six months ended June 30, 1996 and 1995, respectively. (3) COMMITMENTS AND CONTINGENCIES - ---------------------------------- HELCO POWER SITUATION BACKGROUND. In 1991, HELCO identified the need beginning in 1994 for additional - ---------- generation to provide for forecasted load growth while maintaining a satisfactory generation reserve margin, to address uncertainties about future deliveries of power from existing firm power producers and to permit the retirement of older generating units. In the same year, the Hawaii Public Utilities Commission (PUC) issued an order calling for an investigation of the reliability of HELCO's system following service interruptions and rolling blackouts instituted on the island of Hawaii. HELCO added firm capacity to its system in August 1992 (a 20-MW HELCO-owned unit) and in June 1993 (pursuant to a power purchase agreement for 25 MW of firm capacity). HELCO also proceeded with plans to install at its Keahole power plant site two 20-MW combustion turbines (CT-4 and CT-5), followed by an 18-MW heat steam recovery generator (ST-7), at which time these units would be converted to a 56-MW (net) combined-cycle unit. In January 1994, the PUC approved expenditures for CT-4, which HELCO had 12 planned to install in late 1994, and in September 1995, the PUC conditionally approved expenditures for CT-5 and ST-7. Despite HELCO's best efforts to install the necessary additional generation, the schedule for the installation of HELCO's phased combined-cycle unit at HELCO's Keahole power plant site was revised due to delays in obtaining approval of the air quality Prevention of Significant Deterioration/Covered Source Permit (PSD) and the Conservation District Use Permit amendment (CDUP) for the Keahole power plant site. CDUP DELAYS. In late 1995, a contested case hearing with respect to the CDUP - ----------- was conducted and the hearing officer recommended denial of the CDUP application. On April 22, 1996, the Hawaii Board of Land and Natural Resources (BLNR) issued a written order in which it stated that it had voted 3 in favor and 2 against a motion to accept the hearing officer's recommendation and that HELCO's CDUP application was denied. On May 10, 1996 the BLNR issued an amended order which no longer stated that the application was denied, but rather that it would not issue a permit based on that vote. HELCO's position is that denial of the CDUP application requires the favorable vote of at least 4 members of the BLNR, and that the failure of the BLNR to take effective action results in HELCO being entitled to its CDUP by operation of law. HELCO has filed both a complaint for declaratory judgment (basically asking that HELCO be allowed to put its land to the use requested and asking that BLNR and others act consistently with that purpose) and a protective appeal of the original BLNR order. Other parties have been allowed to intervene or cross-appeal, respectively, in those actions. On July 25, 1996, the Third Circuit Court consolidated HELCO'S cases and set an expedited schedule which results in oral arguments on September 30, 1996. A decision is anticipated shortly thereafter. These proceedings may further delay, if not prevent, HELCO's project. PSD PERMIT DELAYS. The Hawaii Department of Health (DOH) forwarded HELCO's PSD - ----------------- permit to the Environmental Protection Agency (EPA) for its approval. In a November 1995 letter to the DOH, the EPA declined to sign HELCO's PSD permit. HELCO requested that the EPA reconsider this decision and the EPA agreed to reconsider based on additional information supplied by HELCO. In a second letter dated February 6, 1996, the EPA set forth information to be considered by HELCO, and HELCO responded to the EPA's positions by letter dated March 8, 1996. By letter dated April 8, the EPA restated its determinations and indicated that further documentation is required from HELCO in order for the EPA to consider HELCO'S positions. By letter dated June 5, 1996 to the DOH, the EPA stated that it had reviewed HELCO's letter to the DOH dated April 3, 1996 in which HELCO proposed to reduce net nitrogen oxide emission increases at Keahole by retiring and/or reducing output of certain existing diesel units, that it found the netting approach procedurally and substantively acceptable, and that if emission increases were kept below significance levels it would not require the use of any particular emission control technology. In addition, the EPA has requested that the DOH reconsider the use of low sulfur naphtha fuel as best available control technology for sulfur dioxide emissions. HELCO has submitted information showing that the use of such fuel in the Keahole unit is economically infeasible. The DOH is still reviewing this issue. Information exchange and discussions with the EPA and the DOH are ongoing. If the EPA does not sign a permit forwarded by the DOH, this may further delay, if not prevent, HELCO's project. IPP COMPLAINTS. Two independent power producers (IPPs), Kawaihae Cogeneration - -------------- Partners (KCP) and Enserch Development Corporation (Enserch), filed separate complaints against HELCO with the PUC, alleging that they are entitled to power purchase contracts to provide HELCO with additional capacity which, under HELCO's current estimates of generating capacity requirements, would be in place of HELCO's planned 56-MW combined-cycle unit at Keahole. In July 1995, the PUC issued a decision and order in the docket involving KCP. In the order, the PUC stated its position on various issues affecting HELCO's avoided cost calculations (several of which were contrary to HELCO's recommendations). In September 1995, HELCO provided proposals to the two IPPs, and further negotiations were undertaken. Status reports on the negotiations with the two IPPs were filed with the PUC. In September 1995, the PUC allowed HELCO to continue to pursue construction of and commit expenditures for the second combustion turbine and the steam recovery generator for its planned combined-cycle unit, stating in its order that "no part of the project may be included in HELCO's rate base unless and until the project is in fact installed, and is used and useful for utility purposes." In view of permitting delays and the need for power, the PUC also ordered HELCO to continue negotiating with 13 the IPPs and directed that the facility to be built should be the one that can be most expeditiously put into service at "allowable cost." On January 26, 1996, the PUC ordered that the KCP docket be reopened and that HELCO and KCP continue in good faith to negotiate a power purchase agreement, file a list of unresolved issues requiring PUC guidance and meet with the PUC on March 27, 1996. Status reports were filed during March and the meeting was held as scheduled. On March 20, 1996, the PUC ordered that HELCO and Enserch file status reports with the PUC and, if requested by either party on or before April 15, 1996, hold a hearing on April 25, 1996. Status reports were filed by Enserch and HELCO during April and the hearing was held as scheduled. Additional written submissions were made to the PUC by the parties in the Enserch docket on June 14, 1996. The PUC may provide guidance to the IPPs and HELCO concerning certain issues as their negotiations continue. COSTS INCURRED. If HELCO's negotiations with the IPPs result in a power - -------------- purchase agreement and/or if HELCO's combined-cycle unit is not installed, HELCO may be required to write off a portion of the costs incurred in its efforts to put into service its combined-cycle unit ($46.3 million as of June 30, 1996) if such costs ultimately are not recoverable from customers or others. The $46.3 million includes approximately $26.7 million for equipment and material purchases, approximately $9.8 million for planning, engineering, permitting, site development and other costs and approximately $9.8 million as an allowance for funds used during construction (AFUDC). Management cannot determine at this time whether the negotiations with the IPPs will result in a power purchase agreement, or whether HELCO's combined cycle unit will be installed, or the amount of incurred costs, if any, that may not be recoverable from customers or others. CONTINGENCY PLANNING. In June 1995, HELCO filed with the PUC its generation - -------------------- resource contingency plan detailing alternatives and mitigation measures to address possible further delays in obtaining the permits necessary to construct its combined-cycle unit. HELCO has arranged for additional firm capacity to be provided by its existing firm power producers, obtained contracts shifting loads to off-peak hours, begun implementing in January 1996 its energy-efficiency demand-side management programs and deferred generation unit retirements. These measures have helped HELCO maintain its reserve margin and reduce the risk of capacity shortages. In January 1996, the PUC opened a generic docket relating to HELCO's contingency plan. Pursuant to the PUC order, HELCO submitted updated information to the PUC on March 18, 1996. ENVIRONMENTAL REGULATION--HAZARDOUS WASTE AND TOXIC SUBSTANCES CONTROLS See note (8), "Contingencies," in HEI's "Notes to consolidated financial statements." INTERIM RATE INCREASES Amounts recovered under interim rates in excess of final approved rates are subject to refund with interest. At June 30, 1996, previously recorded revenue amounts recognized under interim rate increases and subject to refund were not significant. (4) ACCOUNTING CHANGE - ---------------------- See note (6), "Accounting changes--Long-lived assets," in HEI's "Notes to consolidated financial statements." 14 (5) SUMMARIZED FINANCIAL INFORMATION - ------------------------------------- Summarized financial information for HECO's consolidated subsidiaries, HELCO and MECO, is as follows: BALANCE SHEET DATA
HELCO MECO ----------------------- ----------------------- June 30, December 31, June 30, December 31, (in thousands) 1996 1995 1996 1995 - ------------------------------------------------------------------------------------------------------------------- Current assets............................................ $ 26,405 $ 23,485 $ 28,581 $ 27,161 Noncurrent assets......................................... 376,689 368,785 330,365 306,191 -------- -------- -------- -------- $403,094 $392,270 $358,946 $333,352 ======== ======== ======== ======== Common stock equity....................................... $137,890 $136,930 $127,820 $126,458 Cumulative preferred stock Not subject to mandatory redemption................... 10,000 10,000 8,000 8,000 Subject to mandatory redemption....................... 7,500 7,500 6,055 6,055 Current liabilities....................................... 64,692 64,233 61,014 57,551 Noncurrent liabilities.................................... 183,012 173,607 156,057 135,288 -------- -------- -------- -------- $403,094 $392,270 $358,946 $333,352 ======== ======== ======== ========
INCOME STATEMENT DATA
HELCO MECO ------------------------------------------- ---------------------------------------------- Three months ended Six months ended Three months ended Six months ended June 30, June 30, June 30, June 30, ---------------------- ------------------ --------------------- --------------------- (in thousands) 1996 1995 1996 1995 1996 1995 1996 1995 - ------------------------------------------------------------------------------------------------------------------------------ Operating revenues............ $37,481 $33,551 $72,670 $66,246 $35,416 $31,448 $68,211 $61,241 Operating income.............. 4,768 3,933 7,457 7,356 3,695 4,147 7,625 7,890 Net income for common stock... 3,023 3,111 5,162 5,659 3,105 2,810 6,272 5,099
(6) RECONCILIATION OF ELECTRIC UTILITY OPERATING INCOME PER HEI AND HECO - ------------------------------------------------------------------------- CONSOLIDATED STATEMENTS OF INCOME ---------------------------------
Three months ended Six months ended June 30, June 30, -------------------- --------------------- (in thousands) 1996 1995 1996 1995 - ------------------------------------------------------------------------------------------------------------------ Operating income from regulated and nonregulated activities before income taxes (per HEI consolidated statements of income)....................... $ 43,375 $ 38,299 $ 82,114 $ 73,712 Deduct: Income taxes on regulated activities.................... (13,660) (12,096) (25,893) (23,270) Revenues from nonregulated activities................... (2,180) (1,860) (4,073) (3,205) Add: Expenses from nonregulated activities.................. 73 162 155 474 -------- -------- -------- -------- Operating income from regulated activities after income taxes (per HECO consolidated statements of income)....... $ 27,608 $ 24,505 $ 52,303 $ 47,711 ======== ======== ======== ========
15 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND - ------------------------------------------------------------------------------ RESULTS OF OPERATIONS --------------------- The following discussion should be read in conjunction with the consolidated financial statements and accompanying notes. RESULTS OF OPERATIONS
CONSOLIDATED - ------------ Three months ended June 30, (in thousands, except per -------------------- % Primary reason(s) for share amounts) 1996 1995 change significant change* - ------------------------------------------------------------------------------------------------------ Revenues..................... $347,243 $319,897 9 Increase for all segments Operating income............. 51,412 46,070 12 Increase for the electric utility and savings bank segments Net income................... 21,363 18,880 13 Higher operating income, partly offset by higher interest expense due to higher average borrowings and lower AFUDC Earnings per common share.... 0.71 0.65 9 See explanation for "net income," partly offset by an increase in shares outstanding Weighted average number of common shares outstanding... 30,182 29,063 4 Issuances under the Dividend Reinvestment and Stock Purchase Plan and other plans Six months ended June 30, (in thousands, except per -------------------- % Primary reason(s) for share amounts) 1996 1995 change significant change* - ------------------------------------------------------------------------------------------------------ Revenues..................... $673,412 $626,171 8 Increase for all segments Operating income............. 98,147 90,379 9 Increase for the electric utility segment Net income................... 40,232 36,727 10 Higher operating income, partly offset by higher interest expense due to higher average borrowings Earnings per common share.... 1.34 1.27 6 See explanation for "net income," partly offset by an increase in shares outstanding Weighted average number of common shares outstanding... 30,033 28,919 4 Issuances under the Dividend Reinvestment and Stock Purchase Plan and other plans
* Also see segment discussions which follow. 16 During the first six months of 1996, electric rates at HEI's three electric utility subsidiaries were designed to provide lower returns on average common equity (ROACEs) than the allowed ROACEs in effect during the first six months of 1995. The Hawaii Public Utilities Commission (PUC) decisions and orders (D&Os) issued in December 1995 and the first six months of 1996 established allowed ROACEs ranging from 11.40% to 11.65%, compared with ROACEs greater than 12% in effect in the first half of 1995. The PUC issued an order in December 1995 for HECO which lowered electric rates retroactive to January 1, 1995, and required a refund to customers. Had the lower rates actually been in effect from January 1, 1995, consolidated HEI's 1996 second quarter earnings per share would have exceeded earnings per share for the second quarter of 1995 by approximately 11 cents, or 18%, and consolidated HEI's earnings per share for the first half of 1996 would have exceeded earnings per share for the first half of 1995 by approximately 16 cents, or 14%. Following is a general discussion of revenues, expenses and operating income by business segment. ELECTRIC UTILITY - ----------------
Three months ended June 30, (in thousands, except per ------------------ % Primary reason(s) for barrel amounts 1996 1995 change significant change - --------------------------------------------------------------------------------------- Revenues..................... $264,987 $244,506 8 4.3% increase in KWH sales ($10 million), higher rates ($2 million) and higher fuel oil prices ($9 million) which are recovered through rates Expenses Fuel oil.................... 61,665 48,816 26 Higher fuel oil prices and more KWHs generated Purchased power............. 69,798 70,890 (2) Less KWHs purchased, partly offset by higher fuel oil prices Other....................... 90,149 86,501 4 Higher other operation expense, depreciation expense and taxes, other than income taxes, partly offset by lower maintenance expense Operating income............. 43,375 38,299 13 Higher revenues, partly offset by higher fuel oil and other expenses Net income................... 19,888 17,540 13 Higher operating income, partly offset by higher interest expense and lower AFUDC Fuel oil price per barrel.... 23.11 20.56 12
17
Six months ended June 30, (in thousands, except per --------------------- % Primary reason(s) for barrel amounts) 1996 1995 change significant change - ---------------------------------------------------------------------------------------------- Revenues..................... $512,824 $477,027 8 3.6% increase in KWH sales ($17 million), higher rates ($3 million) and higher fuel oil prices ($15 million) which are recovered through rates Expenses Fuel oil.................... 115,287 97,293 18 Higher fuel oil prices and more KWHs generated Purchased power............. 137,605 134,743 2 Higher purchased energy prices, partly due to higher fuel oil prices Other....................... 177,818 171,279 4 Higher other operation expense, depreciation expense and taxes, other than income taxes Operating income............. 82,114 73,712 11 Higher revenues, partly offset by higher expenses Net income................... 37,427 33,340 12 Higher operating income, partly offset by higher interest expense Fuel oil price per barrel.... 22.83 20.19 13
Had the lower rates in the PUC's December 1995 D&O for HECO been in effect from January 1, 1995, consolidated HECO's 1996 second quarter net income would have exceeded net income for the second quarter of 1995 by approximately 23%, and consolidated HECO's net income for six months ended June 30, 1996 would have exceeded net income for the first half of 1995 by approximately 22%. Kilowatthour sales in the second quarter and first half of 1996 increased 4.3% and 3.6%, respectively, from the same periods in 1995, partly due to increases in visitor arrivals and the number of customers and warmer weather. Also, the electric utilities have been controlling their other operation and maintenance expenses. REGULATION OF ELECTRIC UTILITY RATES The PUC has broad discretion in its regulation of the rates charged by HEI's electric utility subsidiaries and in other matters. Any adverse D&O by the PUC concerning the level or method of determining electric utility rates, the authorized returns on equity or other matters, or any prolonged delay in rendering a D&O in a rate or other proceeding, could have a material adverse effect on the Company's financial condition and results of operations. Upon a showing of probable entitlement, the PUC is required to issue an interim D&O in a rate case within 10 months from the date of filing a completed application if the evidentiary hearing is completed (subject to extension for 30 days if the evidentiary hearing is not completed). There is no time limit for rendering a final D&O. Interim rate increases are subject to refund with interest, pending the final outcome of the case. Management cannot predict with certainty when D&Os in pending or future rate cases will be rendered or the amount of any interim or final rate increase that will be granted. 18 Recent rate requests - -------------------- Hawaiian Electric Company, Inc. - ------------------------------- . In December 1993, HECO filed a request to increase rates based on a 1995 test year. HECO requested a 4.1% increase (as revised), or $28.2 million in annual revenues, based on a 13.25% ROACE. In December 1995, HECO received a final D&O authorizing a 1.3%, or $9.1 million, increase in annual revenues, based on an 11.4% ROACE. The D&O required a refund to customers because HECO had previously received four interim increases totaling $18.9 million on an annualized basis, or $9.8 million more than the amount that was finally approved. The reduced rate relief resulted primarily from the lower ROACE used by the PUC in the final D&O because of decreases in interest rates subsequent to the first interim increase, which was effective January 1, 1995 and was based on a 12.6% ROACE. The refund amount of $10.2 million (representing amounts received under interim rates in excess of final approved rates, with interest thereon), of which $10 million was accrued in December 1995, was returned to customers in the first half of 1996. The D&O also did not provide revenue to cover costs relating to postretirement executive life insurance. HECO and its subsidiaries wrote off a regulatory asset relating to such costs, resulting in a fourth quarter 1995 after-tax charge of $1.1 million. Hawaii Electric Light Company, Inc. - ----------------------------------- . In March 1995, HELCO filed a request to increase rates based on a 1996 test year. In February 1996, HELCO revised its requested increase to 6.2%, or $8.9 million in annual revenues, based on a 12.5% ROACE. In March 1996, HELCO received an interim D&O authorizing a 4.8%, or $6.8 million, increase in annual revenues, based on an 11.65% ROACE, effective March 4, 1996. . HELCO is considering filing a request to increase rates based on a 1997 test year. At this time, however, it appears unlikely. Maui Electric Company, Limited - ------------------------------ . In February 1995, MECO filed a request to increase rates based on a 1996 test year. MECO's final requested increase was 3.8%, or $5.0 million in annual revenues, based on an 11.5% ROACE. In January 1996, MECO received an interim D&O authorizing an increase of 2.8%, or $3.7 million in annual revenues, based on an 11.5% ROACE, effective February 1, 1996. . In May 1996, MECO filed a request to increase rates based on a 1997 test year. MECO requested an increase of 13%, or $18.9 million in annual revenues over rates in effect at the time of filing, based on a 12.9% ROACE. SAVINGS BANK - ------------
Three months ended June 30, ------------------ % (in thousands) 1996 1995 change Primary reason(s) for significant change - --------------------------------------------------------------------------------------------------------------- Revenues..................... $66,278 $61,605 8 Higher interest income as a result of higher average loans receivable and mortgage-backed securities balances, partly offset by lower yields Operating income............. 10,202 9,843 4 Higher net interest income, offset by higher compensation and employee benefits expenses Net income................... 5,946 5,704 4 Higher operating income Interest rate spread......... 2.79% 2.88% 12 basis points decrease in the weighted average yield on interest-earning assets, partly offset by 3 basis points decrease in the weighted average rate on interest- bearing liabilities
19
Six months ended June 30, ----------------- % (in thousands) 1996 1995 change Primary reason(s) for significant change - ---------------------------------------------------------------------------------------------------------------- Revenues..................... $132,070 $122,322 8 Higher interest income as a result of higher average mortgage-backed securities balance, partly offset by lower yield Operating income............. 20,158 20,068 -- Higher net interest income, offset by higher compensation and employee benefits expenses and higher office occupancy expense Net income................... 11,736 11,653 1 Higher operating income Interest rate spread......... 2.82% 2.98% 10 basis points decrease in the weighted average yield on interest-earning assets and 6 basis points increase in the weighted average rate on interest- bearing liabilities
Several factors contributed to the decrease in ASB's interest rate spread -- the difference between the weighted average yield on interest-earning assets and the weighted average rate on interest-bearing liabilities. One of the primary factors was the flattening of the yield curve beginning in 1995. Comparing second quarter 1996 to the same period in 1995, the weighted average rate on interest-bearing liabilities remained relatively constant, while the weighted average rate on interest-earning assets decreased. Comparing the first half of 1996 to the same period in 1995, the weighted average rate on interest-bearing liabilities increased, while the weighted average rate on interest-earning assets decreased. Deposits traditionally have been the principal source of ASB's funds for use in lending, meeting liquidity requirements and making investments. ASB also derives funds from receipt of interest and principal on outstanding loans receivable and mortgage-backed securities, borrowings from the Federal Home Loan Bank (FHLB) of Seattle, securities sold under agreements to repurchase and other sources. In recent years, securities sold under agreements to repurchase and advances from the FHLB of Seattle have become more significant sources of funds as the demand for deposits decreased. Using sources of funds with a higher cost than deposits puts downward pressure on ASB's net interest income. In 1995, the federal funds rate, which is the rate charged by banks for overnight loans to each other and which has a significant influence on deposit and loans receivable rates, increased from 5.5% to 6.0% and declined to 5.5% by year end. In the first six months of 1996, the federal funds rate decreased 25 basis points to 5.25%. 20 OTHER - -----
Three months ended June 30, ------------------ % (in thousands) 1996 1995 change Primary reason(s) for significant change - --------------------------------------------------------------------------------------------------------- Revenues..................... $15,978 $13,786 16 Real estate subsidiary sale of land in downtown Honolulu to a developer for a residential condominium Operating loss............... (2,165) (2,072) NM Higher administrative and general expenses at corporate, partly offset by real estate subsidiary sale of land in downtown Honolulu
Six months ended June 30, ------------------ % (in thousands) 1996 1995 change Primary reason(s) for significant change - --------------------------------------------------------------------------------------------------------- Revenues..................... $28,518 $26,822 6 Real estate subsidiary sale of land in downtown Honolulu to a developer for a residential condominium Operating loss............... (4,125) (3,401) NM Lower general freight revenue at freight transportation subsidiaries and the startup costs of HEIPC, partly offset by real estate subsidiary sale of land in downtown Honolulu
NM Not meaningful. The "Other" business segment includes results of operations from HTB and its subsidiary, YB, which are maritime freight transportation companies; HEIIC, which is a company primarily holding investments in leveraged leases; MPC and its subsidiaries, which are real estate development and investment companies; HEIPC and subsidiaries, which have been and will be formed from time to time to pursue independent power projects and energy services projects in Asia and the Pacific; HEI and HEIDI, which are holding companies; and eliminations of intercompany transactions. FREIGHT TRANSPORTATION The freight transportation subsidiaries recorded operating income of $0.5 million and $0.9 million in the second quarter and first half of 1996, respectively, compared with $0.6 million and $1.5 million in the same periods of 1995. The decrease in operating income was a result of lower general freight revenues as the freight transportation subsidiaries continue to be negatively impacted by the slow economic activity on the neighbor islands and the slow construction industry. In June 1996, YB filed a request with the PUC for a general rate increase based on a 1996 test year. YB requested an increase of 9.9%, or $3.5 million in annual revenues, based on a 15.15% ROACE. REAL ESTATE The real estate subsidiaries recorded operating income of $0.7 million and $0.4 million in the second quarter and first half of 1996, respectively, compared with operating losses of $0.4 million and $0.6 million in the same periods of 1995. In April 1996, MPC sold land in downtown Honolulu to a developer for a pretax gain of $1.1 million. MPC's other real estate development activities continue to be negatively impacted by the slow real estate market in Hawaii. It is not expected that there will be significant growth in Hawaii's economy or a rebound in Hawaii's real estate market in the near term. MPC's present focus is to reduce its current investment in real estate development assets and increase cash flow by continuing the development and sales of its existing projects. There are currently no plans to invest in new projects. For further information on MPC, see note (4) in HEI's "Notes to consolidated financial statements." 21 OTHER HEIPC was formed in March 1995 and its operating loss (i.e., startup costs) for the first half of 1996 was $1.0 million, compared with $0.5 million for the first half of 1995. In December 1995, HEIPC signed a "Memorandum of Understanding" with Agusan Power Corporation, Agusan Del Norte Electric Cooperative, Inc. and the provincial government of Agusan Del Norte for a 67% interest in a $28 million, 22-megawatt (MW) hydroelectric plant in the Philippines. The project is in a preliminary stage for HEIPC. No assurances can be given as to whether the project will be successfully completed. In February 1996, HEIPC signed a "Memorandum of Understanding" with Beacon Hill Associates, Inc. for a 50% interest in a 60-MW naphtha-fueled combined-cycle power plant in Phnom Penh, Cambodia. However, in June 1996, HEIPC withdrew from negotiations with Beacon Hill Associates, Inc. DISCONTINUED OPERATIONS - ----------------------- See note (7) in HEI's "Notes to consolidated financial statements" for information on the discontinued operations of HIG. ACCOUNTING CHANGES - ------------------ For a discussion of Statement of Financial Accounting Standards (SFAS) No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of"; SFAS No. 122, "Accounting for Mortgage Servicing Rights"; and SFAS No. 123, "Accounting for Stock-Based Compensation"; and SFAS No. 125, "Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities," see note (6) in HEI's "Notes to consolidated financial statements." FINANCIAL CONDITION LIQUIDITY AND CAPITAL RESOURCES - ------------------------------- The Company and consolidated HECO believe that their ability to generate cash, both internally from operations and externally from debt and equity issues, is adequate to maintain sufficient liquidity to fund their construction programs and to cover debt retirements and other cash requirements in the foreseeable future. The consolidated capital structure of HEI was as follows:
(in millions) June 30, 1996 December 31, 1995 - ----------------------------------------------------------------------- Short-term borrowings........ $ 167 9% $ 182 10% Long-term debt............... 818 45 758 43 Preferred stock of electric utility subsidiaries........ 88 5 90 5 Common stock equity.......... 754 41 730 42 ------ --- ------ --- $1,827 100% $1,760 100% ====== === ====== ===
ASB's deposit liabilities, securities sold under agreements to repurchase and advances from the Federal Home Loan Bank are not included in the table above. For the first six months of 1996, net cash provided by operating activities was $58 million. Net cash used in investing activities was $224 million, largely due to ASB's loan originations, net of repayments, and consolidated HECO's capital expenditures. Net cash provided by financing activities was $125 million as a result of several factors, including net increases in long-term debt, securities sold under agreements to repurchase, advances from FHLB and deposit liabilities, partly offset by a decrease in short-term borrowings and by common stock dividends. Total HEI consolidated financing requirements for 1996 through 2000 (excluding any financing requirements HEIPC may have), including net capital expenditures (which excludes the allowance for funds used during construction and capital expenditures funded by third-party cash contributions in aid of construction), debt retirements (excluding repayments of advances from FHLB of Seattle and securities sold under agreements to repurchase) and sinking fund requirements, are currently estimated to total $1.1 billion. Of this amount, approximately $0.9 billion are for net capital expenditures (mostly relating to the electric utilities' net capital expenditures described below). HEI consolidated internal 22 sources, after the payment of HEI dividends, are expected to provide approximately 57% of the consolidated financing requirements, with debt and equity financing providing the remaining requirements. Over the five-year period 1996 through 2000, HEI estimates that it will require approximately $172 million in new common equity, in addition to 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. The additional equity will be used to fund the electric utilities' common equity requirements related to their capital expenditure programs and to reduce HEI's overall borrowing level. Additional common equity in excess of the $172 million described above, and additional debt financing, may be required for the development of independent power projects and energy services projects by HEIPC in Asia and the Pacific. Following is a discussion of the liquidity and capital resources of HEI's largest segments. ELECTRIC UTILITY - ---------------- HECO's consolidated capital structure was as follows:
(in millions) June 30, 1996 December 31, 1995 - ----------------------------------------------------------------------- Short-term borrowings from nonaffiliates and affiliate...... $ 134 9% $ 139 10% Long-term debt.................... 584 38 517 36 Preferred stock................... 88 6 90 6 Common stock equity............... 710 47 697 48 ------ --- ------ --- $1,516 100% $1,443 100% ====== === ====== ===
Operating activities provided $46 million in net cash during the first six months of 1996. Investing activities used cash of $74 million primarily for capital expenditures, net of contributions in aid of construction. Financing activities provided cash of $30 million through an increase in long-term debt, partly offset by a net decrease in short-term borrowings, payment of common and preferred dividends and the sinking fund redemption of preferred stock. During May 1996, the Department of Budget and Finance of the State of Hawaii issued $75 million of special purpose revenue bonds on behalf of HECO, HELCO and MECO at a discount, resulting in a yield of 6.375%. As of June 30, 1996, an additional $95 million of revenue bonds had been authorized by the Hawaii Legislature for issuance prior to the end of 1997. In July 1996, an additional $150 million of revenue bonds was authorized by the Hawaii Legislature for issuance prior to the end of 1999. The electric utilities' consolidated financing requirements for 1996 through 2000, including net capital expenditures, debt retirements and sinking fund requirements, are estimated to total $887 million. HECO's consolidated internal sources, after the payment of common and preferred stock dividends, are currently expected to provide approximately 64% of the total $887 million requirements, with debt and equity financing providing the remaining requirements. HECO currently estimates that it will require approximately $64 million in new common equity, in addition to retained earnings, over the five-year period 1996 through 2000. The PUC must approve issuances of long-term debt and equity by HECO, HELCO and MECO. Capital expenditures include the costs of projects which are required to meet expected load growth, to improve reliability and to replace and upgrade existing equipment. Net capital expenditures for the five-year period 1996 through 2000 are currently estimated to total $805 million. Approximately 65% of gross capital expenditures, including the allowance for funds used during construction and capital expenditures funded by third-party cash contributions in aid of construction, is for transmission and distribution projects, with the remaining 35% primarily for generation projects. Capital expenditure estimates and the timing of construction projects are reviewed periodically by management and may change significantly as a result of many considerations, including changes in economic conditions, changes in forecasts of KWH sales and peak load, the availability of purchased power, the availability of generating sites and transmission and distribution corridors, the ability to obtain adequate and timely rate relief, escalation in construction costs, demand-side management programs and requirements of environmental and other regulatory and permitting authorities. 23 SAVINGS BANK - ------------
% (in millions) June 30, 1996 December 31, 1995 change - ------------------------------------------------------------------------------------- Assets.................................. $3,514 $3,413 3 Mortgage-backed securities.............. 1,373 1,445 (5) Loans receivable........................ 1,904 1,688 13 Deposit liabilities..................... 2,259 2,224 2 Securities sold under agreements to 455 413 10 repurchase............................. Advances from Federal Home Loan Bank.... 527 501 5
At March 31, 1996, ASB was the fourth largest financial institution in the state based on total assets of $3.4 billion and the third largest financial institution based on deposits of $2.3 billion. The 13% increase in loans receivable was partly due to the fact that ASB's refinancings of other institutions loans were high in the first half of 1996. This trend, however, is not expected to continue in the second half of 1996. For the first six months of 1996, cash used in ASB's investing activities was $146 million, due largely to the origination of loans receivable, partly offset by principal repayments. Cash provided by financing activities was $86 million as a result of a net increase of $43 million in securities sold under agreements to repurchase, $35 million in deposit liabilities and $26 million in advances from the FHLB of Seattle, partly offset by the return of an $11 million capital contribution and common stock dividends of $7 million. Minimum liquidity levels are currently governed by the regulations adopted by the Office of Thrift Supervision (OTS). ASB was in compliance with OTS liquidity requirements as of June 30, 1996. ASB believes that a satisfactory regulatory capital position provides a basis for public confidence, affords protection to depositors, helps to ensure continued access to capital markets on favorable terms and provides a foundation for growth. As of June 30, 1996, ASB was in compliance with the OTS minimum capital requirements (noted in parenthesis) with a tangible capital ratio of 5.01% (1.5%), a core capital ratio of 5.14% (3.0%) and a risk-based capital ratio of 11.97% (8.0%). The OTS has adopted a rule adding an interest rate risk (IRR) component to the existing risk-based capital requirement. Institutions with an "above normal" level of IRR exposure will be required to deduct an amount from total capital and may be required to hold additional capital. Although the rule became effective January 1, 1994, the OTS has provided a waiver of the IRR capital deduction until it can finalize an appeals process for institutions subject to such deductions. As of June 30, 1996, ASB would not have been required to deduct an amount from total capital or to hold additional capital if the rule adding the IRR component had been implemented. Federal Deposit Insurance Corporation regulations restrict the ability of financial institutions that are not well-capitalized to offer interest rates on deposits that are significantly higher than the rates offered by competing institutions. As of June 30, 1996, ASB was well-capitalized (ratio requirements noted in parenthesis) with a leverage ratio of 5.14% (5.0%), a Tier-1 risk-based ratio of 11.25% (6.0%) and a total risk-based ratio of 11.97% (10.0%). Significant interstate banking legislation has been enacted at both the federal and state levels. Under the federal Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994, a bank holding company may acquire control of a bank in any state, subject to certain restrictions. Under Hawaii law which takes effect on June 1, 1997, a bank chartered under Hawaii law may merge with an out-of- state bank and convert all branches of both banks into branches of a single bank, subject to certain restrictions. Although the federal and Hawaii laws apply only to banks, such legislation may nonetheless affect the competitive balance among banks, thrifts and other financial institutions and the level of competition among financial institutions doing business in Hawaii. For a discussion of proposed legislation affecting financial institutions, see note (3) in HEI's "Notes to consolidated financial statements." 24 PART II - OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS - -------------------------- There are no significant developments except as set forth in HEI's and HECO's "Notes to consolidated financial statements," management's discussion and analysis of financial condition and results of operations and Item 5, "Other information." ITEM 5. OTHER INFORMATION - -------------------------- A. WAIAU-CAMPBELL INDUSTRIAL PARK TRANSMISSION LINES In 1993, the PUC held hearings concerning Part 2 of the Waiau-Campbell Industrial Park (CIP) 138-kilovolt transmission lines. These lines are part of a second transmission corridor in West Oahu, running approximately 15 miles between CIP and HECO's Waiau power plant. The new lines were needed (1) to increase system reliability, (2) to provide additional transmission capacity to meet expected load growth and (3) to provide transmission capacity for existing and new power generation projects planned for West Oahu. HECO experienced community opposition over the proposed placement of portions of these lines based in part on the potential effects of the lines on aesthetics and the concern of some that the electric and magnetic fields (EMF) from the power lines may have adverse health effects. HECO witnesses addressed EMF, the route selection process (which involved extensive public input), as well as engineering and related subjects. One proposal by those who oppose the route of the overhead lines was to place Part 2 of the Waiau-CIP lines underground. HECO estimated that this proposal would cost approximately $100 million more than the cost of overhead lines. In April 1994, the PUC issued a decision which permitted HECO to construct the lines above ground. While the PUC recognized the concerns of aesthetics and EMF, it felt that neither concern was sufficient to justify the added cost of undergrounding the lines. In May 1994, appeals to the state Supreme Court were filed by intervenors in the PUC proceeding requesting that the Court overturn the PUC's ruling that allowed HECO to construct the lines above ground. No stay of the PUC order was entered. HECO completed construction of the overhead lines which were placed in service in August 1995. In June 1996, the state Supreme Court affirmed the decision of the PUC. B. HELCO's and MECO's Integrated Resource Plans (IRPs) In May 1996, the PUC issued D&Os in which it approved HELCO's and MECO's respective IRPs and Action Plans. The PUC also approved HELCO's and MECO's mechanisms for recovery of demand-side management program expenditures, net lost revenues and shareholder incentives. HELCO was also ordered to conduct a study to determine the cost-effectiveness of establishing spinning reserve criteria and to submit the study to the PUC with its next IRP or with its next application to commit generation capacity funds, whichever submittal occurs earlier. C. Puna Geothermal Venture (PGV) On February 12, 1996, HELCO and PGV executed an amendment to the existing power purchase agreement, under which PGV would be obligated to provide an additional 5 MW of firm capacity to HELCO commencing in late 1996. The amendment was approved by the PUC in August 1996. Such additional capacity will assist HELCO in addressing its capacity situation. D. MECO Maalaea Unit 14 Following a unit overhaul, emission compliance tests conducted for MECO's Maalaea Unit 14 in October 1995 and documented in November 1995 indicated that particulate emissions were in excess of Prevention of Significant Deterioration/Covered Source Permit (PSD) limits. Corrective actions included fine tuning of the combustion turbine's fuel nozzles in December 1995, and a retest in February 1996 confirmed that the unit returned to compliance with PSD limits. All test reports were submitted to the Department of Health of the State of Hawaii (DOH). By letter dated July 15, 1996, the DOH indicated that a Notice of Violation will be issued for the past violations. Management does not believe that the issuance or final resolution of the Notice of Violation will have a material adverse effect on consolidated HECO's financial condition or results of operations. 25 E. Ratio of earnings to fixed charges The following tables set forth the ratio of earnings to fixed charges for HEI and its subsidiaries for the periods indicated: RATIO OF EARNINGS TO FIXED CHARGES EXCLUDING INTEREST ON ASB DEPOSITS ---------
Six months Years Ended December 31, ended -------------------------------- June 30, 1996 1995 1994 1993 1992 1991 ------------- ---- ---- ---- ---- ---- 1.96 1.94 2.22 2.25 2.08 1.99 ==== ==== ==== ==== ==== ====
RATIO OF EARNINGS TO FIXED CHARGES INCLUDING INTEREST ON ASB DEPOSITS ---------
Six months Years Ended December 31, ended -------------------------------- June 30, 1996 1995 1994 1993 1992 1991 ------------- ---- ---- ---- ---- ---- 1.57 1.57 1.69 1.65 1.50 1.46 ==== ==== ==== ==== ==== ====
For purposes of calculating the ratio of earnings to fixed charges, "earnings" represent the sum of (i) pretax income from continuing operations (excluding undistributed net income or net loss from less than fifty-percent-owned persons) and (ii) fixed charges (as hereinafter defined, but excluding capitalized interest). "Fixed charges" are calculated both excluding and including interest on ASB's deposits during the applicable periods and represent the sum of (i) interest, whether capitalized or expensed, incurred by HEI and its subsidiaries plus their proportionate share of interest on debt to outsiders incurred by fifty-percent-owned persons, but excluding interest on nonrecourse debt from leveraged leases which is not included in interest expense in HEI's consolidated statements of income, (ii) amortization of debt expense and discount or premium related to any indebtedness, whether capitalized or expensed, (iii) the interest factor in rental expense and (iv) the preferred stock dividend requirements of HEI's subsidiaries, increased to an amount representing the pretax earnings required to cover such dividend requirements. The following table sets forth the ratio of earnings to fixed charges for HECO and its subsidiaries for the periods indicated: RATIO OF EARNINGS TO FIXED CHARGES
Six months Years Ended December 31, ended -------------------------------- June 30, 1996 1995 1994 1993 1992 1991 ------------- ---- ---- ---- ---- ---- 3.46 3.46 3.47 3.25 3.03 2.82 ==== ==== ==== ==== ==== ====
For purposes of calculating the ratio of earnings to fixed charges, "earnings" represent the sum of (i) pretax income before preferred stock dividends of HECO and (ii) fixed charges (as hereinafter defined, but excluding the allowance for borrowed funds used during construction). "Fixed charges" represent the sum of (i) interest, whether capitalized or expensed, incurred by HECO and its subsidiaries, (ii) amortization of debt expense and discount or premium related to any indebtedness, whether capitalized or expensed, (iii) the interest factor in rental expense and (iv) the preferred stock dividend requirements of HELCO and MECO, increased to an amount representing the pretax earnings required to cover such dividend requirements. 26 ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K - ----------------------------------------- (a) EXHIBITS HEI Hawaiian Electric Industries, Inc. and subsidiaries Exhibit 12.1 Computation of ratio of earnings to fixed charges, six months ended June 30, 1996 and 1995 HECO Hawaiian Electric Company, Inc. and subsidiaries Exhibit 12.2 Computation of ratio of earnings to fixed charges, six months ended June 30, 1996 and 1995 HEI Hawaiian Electric Industries, Inc. and subsidiaries Exhibit 27.1 Financial Data Schedule June 30, 1996 and six months ended June 30, 1996 HECO Hawaiian Electric Company, Inc. and subsidiaries Exhibit 27.2 Financial Data Schedule June 30, 1996 and six months ended June 30, 1996 (b) REPORTS ON FORM 8-K During the quarter, HEI and HECO filed a Current Report on Form 8-K dated April 30, 1996, under "Item 5. Other Events." SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrants have duly caused this report to be signed on their behalf by the undersigned, thereunto duly authorized. The signature of each registrant shall be deemed to relate only to matters having reference to that registrant and any subsidiaries thereof. HAWAIIAN ELECTRIC INDUSTRIES, INC. HAWAIIAN ELECTRIC COMPANY, INC. (Registrant) (Registrant) By /s/ Curtis Y. Harada By /s/ Paul Oyer --------------------- ----------------- Curtis Y. Harada Paul Oyer Controller Financial Vice President and (Principal Accounting Officer of HEI) Treasurer (Principal Financial Officer of HECO) Date: August 6, 1996 Date: August 6, 1996 27 EX-12.1 2 HEI - COMPUTATION OF RATIO HEI Exhibit 12.1 ---------------- Hawaiian Electric Industries, Inc. and subsidiaries COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES (unaudited)
Six months ended June 30, --------------------------------------------- (dollars in thousands) 1996 (1) 1996 (2) 1995 (1) 1995 (2) - ---------------------------------------------------------------------------------------- FIXED CHARGES Total interest charges The Company (3)...................... $ 60,805 $108,145 $ 56,505 $ 99,038 Proportionate share of fifty-percent-owned persons......... 372 372 461 461 Interest component of rentals........... 2,052 2,052 1,939 1,939 Pretax preferred stock dividend requirements of subsidiaries........... 5,613 5,613 5,799 5,799 -------- -------- -------- -------- TOTAL FIXED CHARGES..................... $ 68,842 $116,182 $ 64,704 $107,237 ======== ======== ======== ======== EARNINGS Pretax income........................... $ 69,859 $ 69,859 $ 63,945 $ 63,945 Fixed charges, as shown................. 68,842 116,182 64,704 107,237 Interest capitalized The Company.......................... (3,135) (3,135) (3,102) (3,102) Proportionate share of fifty-percent-owned persons......... (372) (372) (461) (461) -------- -------- -------- -------- EARNINGS AVAILABLE FOR FIXED CHARGES.... $135,194 $182,534 $125,086 $167,619 ======== ======== ======== ======== RATIO OF EARNINGS TO FIXED CHARGES...... 1.96 1.57 1.93 1.56 ======== ======== ======== ========
(1) Excluding interest on ASB deposits. (2) Including interest on ASB deposits. (3) Total interest charges exclude interest on nonrecourse debt from leveraged leases which is not included in interest expense in HEI's consolidated statement of income. EX-12.2 3 HECO - COMPUTATION OF RATIO HECO Exhibit 12.2 ----------------- Hawaiian Electric Company, Inc. and subsidiaries COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES (unaudited)
Six months ended June 30, ------------------ (dollars in thousands) 1996 1995 - ---------------------------------------------------------------- FIXED CHARGES Total interest charges.................. $22,853 $21,351 Interest component of rentals........... 352 330 Pretax preferred stock dividend requirements of subsidiaries........... 2,293 2,252 ------- ------- TOTAL FIXED CHARGES..................... $25,498 $23,933 ======= ======= EARNINGS Income before preferred stock dividends of HECO................................ $39,364 $35,413 Income taxes (see note below)........... 25,795 23,054 Fixed charges, as shown................. 25,498 23,933 AFUDC for borrowed funds................ (2,504) (2,505) ------- ------- EARNINGS AVAILABLE FOR FIXED CHARGES.... $88,153 $79,895 ======= ======= RATIO OF EARNINGS TO FIXED CHARGES...... 3.46 3.34 ======= ======= Note: Income taxes are comprised of the following: Expense relating to operating income $25,893 $23,270 for regulated purposes.............. Benefit relating to nonoperating loss. (98) (216) ------- ------- $25,795 $23,054 ======= =======
EX-27.1 4 HEI - FINANCIAL DATA SCHEDULE
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM HAWAIIAN ELECTRIC INDUSTRIES, INC. AND SUBSIDIARIES' CONSOLIDATED BALANCE SHEET AS OF JUNE 30, 1996 AND CONSOLIDATED STATEMENT OF INCOME FOR THE SIX MONTHS ENDED JUNE 30, 1996 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 0000354707 HEI 1,000 6-MOS DEC-31-1996 JAN-01-1996 JUN-30-1996 90,300 1,409,358 147,835 0 44,289 0 2,708,769 854,344 5,771,527 0 818,358 39,350 48,293 605,785 148,450 5,771,527 0 673,412 0 575,265 (3,961) 0 32,249 69,859 29,627 40,232 0 0 0 40,232 1.34 1.34
EX-27.2 5 HECO - FINANCIAL DATA SCHEDULE
UT THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM HAWAIIAN ELECTRIC COMPANY, INC. AND SUBSIDIARIES' CONSOLIDATED BALANCE SHEET AS OF JUNE 30, 1996 AND CONSOLIDATED STATEMENT OF INCOME AND CONSOLIDATED STATEMENT OF CASH FLOWS FOR THE SIX MONTHS ENDED JUNE 30, 1996 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 0000046207 HECO 1,000 6-MOS DEC-31-1996 JAN-01-1996 JUN-30-1996 PER-BOOK 1,765,348 0 168,548 11,524 136,228 2,081,648 82,031 271,480 356,644 710,155 37,555 48,293 541,504 12,400 0 121,208 43,000 1,795 0 0 565,738 2,081,648 508,751 25,893 430,555 456,448 52,303 8,814 61,117 21,753 39,364 1,937 37,427 24,208 39,884 45,915 0 0
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