===============================================================================
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1994
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
Exact Name of Registrant as Commission I.R.S. Employer
Specified in Its Charter File Number Identification No.
- - ------------------------------------- ----------- ------------------
HAWAIIAN ELECTRIC INDUSTRIES, INC. 1-8503 99-0208097
and Principal Subsidiary
HAWAIIAN ELECTRIC COMPANY, INC. 1-4955 99-0040500
STATE OF HAWAII
- - --------------------------------------------------------------------------------
(State or other jurisdiction of incorporation or organization)
900 RICHARDS STREET, HONOLULU, HAWAII 96813
- - --------------------------------------------------------------------------------
(Address of principal executive offices and zip code)
HAWAIIAN ELECTRIC INDUSTRIES, INC. ----- (808) 543-5662
HAWAIIAN ELECTRIC COMPANY, INC. ------- (808) 543-7771
- - --------------------------------------------------------------------------------
(Registrant's telephone number, including area code)
NONE
- - --------------------------------------------------------------------------------
(Former name, former address and former fiscal year,
if changed since last report)
================================================================================
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes x No
--- ---
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Class of Common Stock Outstanding May 4, 1994
- - --------------------------------------------------------------------------------
Hawaiian Electric Industries, Inc. (Without Par Value)... 27,966,848 Shares
Hawaiian Electric Company, Inc. ($6 2/3 Par Value)....... 11,258,290 Shares
(not publicly traded)
================================================================================
Hawaiian Electric Industries, Inc. and subsidiaries
Hawaiian Electric Company, Inc. and subsidiaries
Form 10-Q--Quarter ended March 31, 1994
INDEX
Page No.
Glossary of terms .................................................... ii
PART I. FINANCIAL INFORMATION
Item 1. Financial statements
Hawaiian Electric Industries, Inc. and subsidiaries
- - ---------------------------------------------------
Consolidated balance sheets (unaudited) - March 31, 1994
and December 31, 1993 .............................................. 1
Consolidated statements of income (unaudited) - three months
ended March 31, 1994 and 1993 ...................................... 2
Consolidated statements of retained earnings (unaudited) - three
months ended March 31, 1994 and 1993 ............................... 2
Consolidated statements of cash flows (unaudited) - three months
ended March 31, 1994 and 1993 ...................................... 3
Notes to consolidated financial statements (unaudited) .............. 4
Hawaiian Electric Company, Inc. and subsidiaries
- - ------------------------------------------------
Consolidated balance sheets (unaudited) - March 31, 1994
and December 31, 1993 .............................................. 10
Consolidated statements of income (unaudited) - three months
ended March 31, 1994 and 1993 ...................................... 11
Consolidated statements of retained earnings (unaudited) - three
months ended March 31, 1994 and 1993 ............................... 11
Consolidated statements of cash flows (unaudited) - three months
ended March 31, 1994 and 1993 ...................................... 12
Notes to consolidated financial statements (unaudited) .............. 13
Item 2. Management's discussion and analysis of financial condition
and results of operations .................................. 18
PART II. OTHER INFORMATION
Item 1. Legal proceedings .......................................... 28
Item 4. Submission of matters to a vote of security holders ........ 28
Item 5. Other information .......................................... 29
Item 6. Exhibits and reports on Form 8-K ........................... 31
Signatures ........................................................... 32
i
Hawaiian Electric Industries, Inc. and subsidiaries
Hawaiian Electric Company, Inc. and subsidiaries
Form 10-Q--Quarter ended March 31, 1994
GLOSSARY OF TERMS
Terms Definitions
- - ----- -----------
AFUDC Allowance for funds used during construction
ASB American Savings Bank, F.S.B., a wholly owned subsidiary of HEI
Diversified Inc. and parent company of American Savings
Investment Services Corp., ASB Service Corporation,
AdCommunications, Inc. and Associated Mortgage, Inc.
Company Hawaiian Electric Industries, Inc. and its direct and indirect
subsidiaries, including, without limitation, Hawaiian
Electric Company, Inc., Maui Electric Company, Limited,
Hawaii Electric Light Company, Inc., HEI Investment Corp.,
Malama Pacific Corp. and its subsidiaries, Hawaiian Tug &
Barge Corp., Young Brothers, Limited, HEI Diversified, Inc.,
American Savings Bank, F.S.B. and its subsidiaries, and
Lalamilo Ventures, Inc.
Consumer Division of Consumer Advocacy, Department of Commerce and
Advocate Consumer Affairs of the State of Hawaii
DOH Department of Health of the State of Hawaii
EPA Environmental Protection Agency - federal
FASB Financial Accounting Standards Board
HECO Hawaiian Electric Company, Inc., a wholly owned electric
utility subsidiary of Hawaiian Electric Industries, Inc. and
parent company of Maui Electric Company, Limited and Hawaii
Electric Light Company, Inc.
HEI Hawaiian Electric Industries, Inc., parent company of
Hawaiian Electric Company, Inc., HEI Investment Corp., Malama
Pacific Corp., Hawaiian Tug & Barge Corp., Lalamilo Ventures,
Inc. and HEI Diversified, Inc.
HEIDI HEI Diversified, Inc., a wholly owned subsidiary of Hawaiian
Electric Industries, Inc., the parent company of American
Savings Bank, F.S.B., and the holder of record of the
common stock of The Hawaiian Insurance & Guaranty Company,
Limited, which is currently in state rehabilitation
proceedings
HEIIC HEI Investment Corp., a wholly owned subsidiary of Hawaiian
Electric Industries, Inc.
HELCO Hawaii Electric Light Company, Inc., a wholly owned electric
utility subsidiary of Hawaiian Electric Company, Inc.
HERS Hawaiian Electric Renewable Systems, Inc., formerly a wholly
owned subsidiary of Hawaiian Electric Industries, Inc. and
formerly parent company of Lalamilo Ventures, Inc.
ii
GLOSSARY OF TERMS, continued
Terms Definitions
- - ----- -----------
HIG HIG The Hawaiian Insurance & Guaranty Company, Limited,
currently in state rehabilitation proceedings and parent
company of United National Insurance Company, Ltd., Hawaiian
Underwriters Insurance Co., Ltd., Guardian Life Underwriters,
Inc., Guardian Financial Corporation, and Independent
Adjustment, Inc. HEI Diversified, Inc. is the holder of
record of HIG's common stock
HTB Hawaiian HTB Tug & Barge Corp., a wholly owned subsidiary of
Hawaiian Electric Industries, Inc. and parent company of
Young Brothers, Limited
MECO Maui Electric Company, Limited, a wholly owned electric
utility subsidiary of Hawaiian Electric Company, Inc.
MPC Malama Pacific Corp., a wholly owned subsidiary of Hawaiian
Electric Industries, Inc. and parent company of Malama
Project-I, Inc., ML Holdings, Ltd., Malama Waterfront Corp.,
Malama Property Investment Corp., Malama Development Corp.,
Malama Makakilo Corp., Malama Realty Corp., Malama Elua
Corp., Malama Kolu Corp., Malama Hoaloha Corp., and Malama
Mohala Corp.
MW Megawatt
OTS Office of Thrift Supervision, Department of Treasury
PGV Puna Geothermal Ventures
PUC Public Utilities Commission of the State of Hawaii
SEC Securities and Exchange Commission
SFAS Statement of Financial Accounting Standards
YB Young Brothers, Limited, a wholly owned subsidiary of
Hawaiian Tug & Barge Corp.
iii
PART I - FINANCIAL INFORMATION
------------------------------
Item 1. FINANCIAL STATEMENTS
--------------------
Hawaiian Electric Industries, Inc. and subsidiaries
CONSOLIDATED BALANCE SHEETS (unaudited)
March 31, December 31,
(in thousands) 1994 1993
- - -----------------------------------------------------------------------------------------------------------------------
ASSETS
Cash and equivalents...................................................... $ 78,726 $ 116,260
Accounts receivable and unbilled revenues, net............................ 107,459 117,116
Inventories, at average cost.............................................. 34,377 39,405
Real estate developments.................................................. 39,357 29,673
Loans receivable, net..................................................... 1,828,912 1,735,098
Marketable securities..................................................... 766,181 698,755
Other investments......................................................... 75,735 77,106
Property, plant and equipment, net........................................ 1,562,855 1,542,989
Regulatory assets......................................................... 72,417 62,077
Other..................................................................... 56,629 53,449
Goodwill and other intangibles............................................ 48,612 49,664
---------- ----------
$4,671,260 $4,521,592
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Accounts payable.......................................................... $ 87,671 $ 88,628
Deposit liabilities....................................................... 2,146,600 2,091,583
Short-term borrowings..................................................... 113,984 40,416
Advances from Federal Home Loan Bank...................................... 376,674 289,674
Long-term debt, net....................................................... 647,422 697,836
Deferred income taxes..................................................... 173,378 168,329
Unamortized tax credits................................................... 44,759 44,357
Contributions in aid of construction...................................... 166,283 165,005
Other..................................................................... 172,975 197,713
---------- ----------
3,929,746 3,783,541
---------- ----------
PREFERRED STOCK OF ELECTRIC UTILITY SUBSIDIARIES
Subject to mandatory redemption........................................... 46,338 46,730
Not subject to mandatory redemption....................................... 48,293 48,293
---------- ----------
94,631 95,023
---------- ----------
STOCKHOLDERS' EQUITY
Preferred stock, no par value, authorized 10,000 shares; no shares
outstanding
Common stock, no par value, authorized 100,000 shares;
outstanding 27,915 shares and 27,675 shares............................. 522,871 514,710
Retained earnings......................................................... 124,012 128,318
---------- ----------
646,883 643,028
---------- ----------
$4,671,260 $4,521,592
========== ==========
See accompanying notes to consolidated financial statements.
1
Hawaiian Electric Industries, Inc. and subsidiaries
Consolidated statements of income (unaudited)
(in thousands, except per share amounts and Three months ended March 31,
ratio of earnings to fixed charges) -----------------------------
1994 1993
- - ------------------------------------------------------------------------------------------------
Revenues
Electric utility................................................. $201,306 $206,646
Savings bank..................................................... 50,083 49,263
Other............................................................ 13,653 23,439
-------- --------
265,042 279,348
-------- --------
Expenses
Electric utility................................................. 176,982 186,929
Savings bank..................................................... 39,463 39,675
Other............................................................ 15,193 24,413
-------- --------
231,638 251,017
-------- --------
Operating income (loss)
Electric utility................................................. 24,324 19,717
Savings bank..................................................... 10,620 9,588
Other............................................................ (1,540) (974)
-------- --------
33,404 28,331
-------- --------
Interest expense--electric utility and other..................... (13,082) (12,761)
Allowance for borrowed funds used during construction............ 871 919
Preferred stock dividends of electric utility subsidiaries....... (1,800) (1,632)
Allowance for equity funds used during construction.............. 1,951 1,559
-------- --------
Income from continuing operations before income taxes............ 21,344 16,416
Income taxes..................................................... 9,556 7,124
-------- --------
Income from continuing operations................................ 11,788 9,292
Income from discontinued operations (less applicable
income taxes of $1,102 in 1993)................................ -- 1,800
-------- --------
Net income....................................................... $ 11,788 $ 11,092
======== ========
Earnings per common share
Continuing operations.......................................... $0.42 $0.38
Discontinued operations........................................ -- 0.07
-------- --------
$0.42 $0.45
======== ========
Dividends per common share....................................... $0.58 $0.57
======== ========
Weighted average number of common shares outstanding............. 27,768 24,860
======== ========
Ratio of earnings to fixed charges (SEC method)
Excluding interest on ASB deposits.......................... 1.92 1.76
======== ========
Including interest on ASB deposits.......................... 1.50 1.38
======== ========
Hawaiian Electric Industries, Inc. and subsidiaries
CONSOLIDATED STATEMENTS OF RETAINED EARNINGS (UNAUDITED)
Three months ended March 31,
----------------------------
(in thousands) 1994 1993
- - -----------------------------------------------------------------------------------------------
Retained earnings, beginning of period........................... $128,318 $138,484
Net income........................................................ 11,788 11,092
Common stock dividends............................................ (16,094) (14,165)
-------- --------
Retained earnings, end of period.................................. $124,012 $135,411
======== ========
See accompanying notes to consolidated financial statements.
2
Hawaiian Electric Industries, Inc. and subsidiaries
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
Three months ended
March 31,
----------------------
(in thousands) 1994 1993
- - ------------------------------------------------------------------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES
Income from continuing operations....................................... $ 11,788 $ 9,292
Adjustments to reconcile income from continuing operations to
net cash provided by (used in) operating activities
Depreciation and amortization of property,
plant and equipment................................................ 18,146 17,062
Other amortization.................................................. (1,557) 348
Deferred income taxes and tax credits, net.......................... 5,910 4,373
Changes in assets and liabilities, net of effects from
disposal of businesses
Decrease in accounts receivable and unbilled revenues, net.... 9,657 11,946
Decrease (increase) in inventories............................ 5,028 (891)
Decrease (increase) in real estate developments............... (9,684) 1,033
Increase in securities held for trading....................... (15,525) (20,516)
Increase in regulatory assets................................. (10,340) (31,182)
Decrease in accounts payable.................................. (957) (3,019)
Changes in other assets and liabilities....................... (13,696) 27,534
--------- ---------
(1,230) 15,980
Cash flows from discontinued operations................................. (220) 2,134
--------- ---------
NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES..................... (1,450) 18,114
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES
Loans receivable originated and purchased............................... (168,999) (102,185)
Principal repayments on loans receivable................................ 76,279 59,957
Proceeds from sale of loans receivable.................................. 1,335 87
"Held-to-maturity" mortgage-backed securities purchased................. (126,802) --
Principal repayments on "held-to-maturity" mortgage-backed securities... 75,427 72,107
Increase in investments in real estate joint ventures................... (58) (190)
Distributions from real estate joint ventures........................... 1,528 7,273
Capital expenditures.................................................... (37,909) (50,970)
Contributions in aid of construction.................................... 2,903 773
Other................................................................... 458 (437)
--------- ---------
NET CASH USED IN INVESTING ACTIVITIES................................... (175,838) (13,585)
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase in deposit liabilities..................................... 55,017 37,148
Net increase (decrease) in short-term borrowings with
original maturities of three months or less.......................... 75,405 (27,403)
Proceeds from other short-term borrowings............................... 496 --
Repayment of other short-term borrowings................................ (2,333) --
Proceeds from advances from Federal Home Loan Bank...................... 168,000 --
Principal payments on advances from Federal Home Loan Bank.............. (81,000) (9,300)
Proceeds from issuance of long-term debt................................ 16,018 7,353
Repayment of long-term debt............................................. (74,400) (944)
Redemption of electric utility subsidiaries' preferred stock............ (392) (400)
Net proceeds from issuance of common stock.............................. 3,824 4,175
Common stock dividends.................................................. (11,721) (10,072)
Other................................................................... (9,160) (318)
--------- ---------
NET CASH PROVIDED BY FINANCING ACTIVITIES............................... 139,754 239
--------- ---------
Net increase (decrease) in cash and equivalents......................... (37,534) 4,768
Cash and equivalents, beginning of period............................... 116,260 156,754
--------- ---------
CASH AND EQUIVALENTS, END OF PERIOD..................................... $ 78,726 $ 161,522
========= =========
See accompanying notes to consolidated financial statements.
3
Hawaiian Electric Industries, Inc. and subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 1994 and 1993
(Unaudited)
________________________________________________________________________________
(1) Accounting statement
- - -------------------------
In the opinion of HEI's management, the accompanying unaudited consolidated
financial statements contain all material adjustments required by generally
accepted accounting principles to present fairly the Company's financial
position as of March 31, 1994 and December 31, 1993, and the results of its
operations and its cash flows for the three months ended March 31, 1994 and
1993. All such adjustments are of a normal recurring nature, except as described
below. These consolidated financial statements should be read in conjunction
with the consolidated financial statements and the notes thereto incorporated by
reference in HEI's Annual Report on SEC Form 10-K for the year ended December
31, 1993. The consolidated balance sheet as of December 31, 1993 was derived
from audited financial statements.
(2) Discontinued operations
- - ----------------------------
Hawaiian Electric Renewable Systems, Inc.
- - -----------------------------------------
On October 6, 1992, the Board of Directors of HEI ratified management's
September 30, 1992 plan to exit the nonutility wind energy business because of
chronic mechanical problems with its wind turbines and continuing losses from
operations. In March 1993, HEI sold the stock of HERS to The New World Power
Corporation for an amount which was not material. In the first quarter of 1993,
in connection with the sale of HERS, HEI reversed reserves for site restoral and
other HERS' disposal costs that were no longer needed due to the terms of the
sale, resulting in a gain on disposal of discontinued operations of $1.8
million.
The Hawaiian Insurance & Guaranty Co., Limited
- - ----------------------------------------------
HIG and its subsidiaries (the HIG Group) are property and casualty insurance
companies in the State of Hawaii. HEIDI, a subsidiary of HEI, is the holder of
record of all the common stock of HIG. On December 2, 1992, the Board of
Directors of HEI concluded that it would not contribute additional capital to
HIG and HEI/HEIDI's remaining investment in the HIG Group was written off in the
fourth quarter of 1992. The decision resulted from an increase in the estimate
of policyholder claims from Hurricane Iniki (which hit the Hawaiian Islands on
September 11, 1992).
On December 24, 1992, with the consent of the HIG Group, a formal rehabilitation
order (the Rehabilitation Order) was entered by the First Circuit Court of the
State of Hawaii, vesting full control over the HIG Group in the Insurance
Commissioner (the Rehabilitator/Liquidator) and her deputies.
On April 12, 1993, the Rehabilitator/Liquidator, HIG, United National Insurance
Company, Ltd. and Hawaiian Underwriters Insurance Co., Ltd. filed a complaint
against HEI, HEIDI and certain current and former officers and directors of HEI,
HEIDI and the HIG Group in state court on the island of Kauai. The complaint set
forth several separate counts, including claims to the effect that HEI and/or
HEIDI should be held liable for HIG's obligations based on allegations, among
others, that HIG was held out to be part of an HEI family of companies (and not
as a separate enterprise) and that HEIDI is liable for an assessment levied by
the Rehabilitator/Liquidator. The complaint alleges that certain current and
former officers and directors of HEI, HEIDI and the HIG Group have breached
their fiduciary duties to the HIG Group in numerous respects. The complaint
seeks declaratory relief and compensatory, general, special and punitive
damages, together with costs and attorneys' fees.
On July 12, 1993, the Rehabilitator/Liquidator filed a first amended complaint,
which repeated the claims asserted in the original complaint but added the
Hawaii Insurance Guaranty Association (HIGA) as a plaintiff and asserted certain
additional claims.
In early 1994, HEI, HEIDI, certain officers and directors, the
Rehabilitator/Liquidator and HIGA signed an agreement to settle the lawsuit,
subject to obtaining necessary court approvals. On April 6, 1994, the court in
which the HIG Group's rehabilitation proceeding is pending approved the
settlement agreement. Under the agreement, HEI paid $32.0 million into an escrow
account, which account will be disbursed to
4
the Rehabilitator/Liquidator in return for a final dismissal of the lawsuit and
a release of claims against HEI, its affiliates and their past and present
officers and directors.
The $32.0 million settlement amount, less income tax benefits and certain
amounts recognized in previously established reserves, resulted in a $15.0
million after-tax charge to discontinued operations in 1993. HEI is seeking
reimbursement from certain of its insurance carriers. HEI's claims against its
insurance carriers will require resolution of several insurance coverage and
other policy issues and the outcome of such claims cannot be predicted at this
time. One of HEI's insurance carriers has filed a declaratory relief action in
the U.S. District Court for the District of Hawaii seeking resolution of these
issues. Recoveries from HEI's insurance carriers, if any, will be recognized
when realized.
(3) Electric utility subsidiary
- - --------------------------------
For Hawaiian Electric Company, Inc.'s consolidated financial information,
including its commitments and contingencies, see pages 10 through 17.
(4) Savings bank subsidiary
- - ----------------------------
Selected consolidated financial information
American Savings Bank, F.S.B. and subsidiaries
Three months ended
March 31,
----------------------------
(in thousands) 1994 1993
_______________________________________________________________________________________
Income statement data
Interest income................................... $ 48,098 $ 46,387
Interest expense.................................. 23,146 23,921
---------- ----------
Net interest income............................... 24,952 22,466
Provision for losses.............................. (242) (222)
Other income...................................... 1,985 2,876
Operating, administrative and general expenses.... (16,075) (15,532)
---------- ----------
Operating income.................................. 10,620 9,588
Income taxes...................................... 4,413 3,920
---------- ----------
Net income........................................ $ 6,207 $ 5,668
========== ==========
(in thousands) March 31, 1994 December 31, 1993
_______________________________________________________________________________________
Balance sheet data
Assets
Cash and equivalents............................. $ 76,252 $ 77,610
Investment securities............................ 68,100 68,599
Mortgage-backed securities....................... 681,562 630,156
Loans receivable, net............................ 1,828,912 1,735,098
Other............................................ 58,858 57,358
Goodwill and other intangibles................... 48,612 49,664
---------- ----------
$2,762,296 $2,618,485
========== ==========
Liabilities and equity
Deposit liabilities.............................. $2,146,600 $2,091,583
Advances from Federal Home Loan Bank............. 376,674 289,674
Other............................................ 52,098 52,717
---------- ----------
2,575,372 2,433,974
Common stock equity.............................. 186,924 184,511
---------- ----------
$2,762,296 $2,618,485
========== ==========
5
American Savings Bank, F.S.B. and subsidiaries
Three months ended
March 31,
----------------------
(in thousands) 1994 1993
________________________________________________________________________________________________
Cash flow data
Cash flows from operating activities
Net income............................................................. $ 6,207 $ 5,668
Adjustments to reconcile net income to net cash provided by
(used in) operating activities
Decrease (increase) in accounts receivable.......................... (313) 520
Decrease (increase) in other securities held for trading............ 994 (20,516)
Decrease in accounts payable........................................ (17) (2,500)
Other............................................................... (2,808) 4,093
--------- ---------
Net cash provided by (used in) operating activities.................... 4,063 (12,735)
--------- ---------
Cash flows from investing activities
Loans receivable originated and purchased.............................. (168,999) (102,185)
Principal repayments on loans receivable............................... 76,279 59,957
Proceeds from sale of loans receivable................................. 1,335 87
"Held-to-maturity" mortgage-backed securities purchased................ (126,802) --
Principal repayments on "held-to-maturity" mortgage-backed securities.. 75,427 72,107
Capital expenditures................................................... (637) (680)
--------- ---------
Net cash provided by (used in) investing activities.................... (143,397) 29,286
--------- ---------
Cash flows from financing activities
Net increase in deposit liabilities.................................... 55,017 37,148
Proceeds from advances from Federal Home Loan Bank..................... 168,000 --
Principal payments on advances from Federal Home Loan Bank............. (81,000) (9,300)
Common stock dividends................................................. (4,041) (3,470)
--------- ---------
Net cash provided by financing activities.............................. 137,976 24,378
--------- ---------
Net increase (decrease) in cash and equivalents........................ (1,358) 40,929
Cash and equivalents, beginning of period.............................. 77,610 117,937
--------- ---------
Cash and equivalents, end of period.................................... $ 76,252 $ 158,866
========= =========
6
(5) Real estate subsidiary
- - ---------------------------
At March 31, 1994 and December 31, 1993, MPC and its subsidiaries' total real
estate project inventory, equity investment in real estate joint ventures and
loans to unconsolidated joint ventures or joint venture partners amounted to $57
million and $49 million, respectively.
In 1990, Malama Development Corp. (MDC) acquired a 50% general partnership
interest in Baldwin*Malama, a partnership with Baldwin Pacific Properties, Inc.
(BPPI). In May 1993, Baldwin*Malama was reorganized as a limited partnership in
which MDC became the sole general partner and BPPI the sole limited partner.
Beginning in May 1993, in conjunction with the dissolution of the general
partnership and formation of the limited partnership, MDC consolidated the
accounts of Baldwin*Malama. Previously, MDC accounted for its investment in
Baldwin*Malama under the equity method.
At March 31, 1994, MPC or its subsidiaries were directly liable for $17.6
million of outstanding loans and had additional loan facilities of $5.3 million.
In addition, at March 31, 1994, MPC or its subsidiaries had issued (i)
guaranties under which they were jointly and severally contingently liable with
their joint venture partners for $2.1 million of outstanding loans and (ii)
payment guaranties under which MPC or its subsidiaries were severally
contingently liable for $3.3 million of outstanding loans and $3.2 million of
additional undrawn loan facilities. In total, at March 31, 1994, MPC or its
subsidiaries were liable or contingently liable for $23.0 million of outstanding
loans and $8.5 million in undrawn loan facilities. At March 31, 1994, HEI had
agreed with the lenders of construction loans and loan facilities, of which
approximately $8.5 million was undrawn and $12.9 million was outstanding, that
it will maintain ownership of l00% of the stock of MPC and that it intends,
subject to good and prudent business practices, to keep MPC financially sound
and responsible to meet its obligations as guarantor. MPC or its subsidiaries
may enter into additional commitments in connection with the financing of future
phases of development of MPC's projects and HEI may enter into similar
agreements regarding the ownership and financial condition of MPC.
(6) Interest expense
- - ---------------------
Interest expense, excluding interest on nonrecourse debt from leveraged leases,
consisted of the following:
Three months ended
March 31,
------------------
(in thousands) 1994 1993
- - -----------------------------------------
Interest expense
Savings bank......... $23,146 $23,921
Electric utility..... 9,063 8,135
Other................ 4,019 4,626
------- -------
$36,228 $36,682
======= =======
7
(7) Cash flows
- - ---------------
Supplemental disclosures of cash flow information
Cash paid for interest (net of capitalized amounts) and cash paid (received) for
income taxes were as follows:
Three months ended
March 31,
------------------
(in thousands) 1994 1993
_____________________________________________________________________
Interest (including interest paid by savings
bank, but excluding interest paid on
nonrecourse debt on leveraged leases).......... $34,186 $ 34,378
======= ========
Income taxes.................................... $ 4,894 $(11,774)
======= ========
Cash paid for interest on nonrecourse debt on leveraged leases amounted to
$256,000 and $187,000 for the three months ended March 31, 1994 and 1993,
respectively.
Supplemental disclosures of noncash activities
Common stock dividends reinvested by shareholders in HEI common stock in noncash
transactions amounted to $4,373,000 and $4,093,000 for the three months ended
March 31, 1994 and 1993, respectively.
The allowance for equity funds used during construction, which was capitalized
as part of the cost of electric utility plant, amounted to $1,951,000 and
$1,559,000 for the three months ended March 31, 1994 and 1993, respectively.
In March 1994, MDC's Baldwin*Malama partnership closed on an option to purchase
approximately 147 acres of land on the island of Maui from BPPI. Of the total
land purchase price of $9.9 million, Baldwin*Malama issued mortgage notes
payable of $8.0 million in noncash consideration.
(8) Postretirement benefits other than pensions
- - ------------------------------------------------
The Company provides various postretirement benefits other than pensions to
eligible employees upon retirement. Health and life insurance benefits are
provided to eligible employees of HEI, HECO and its subsidiaries, and YB upon
their retirement. Medical, dental and vision benefits are provided to eligible
employees of HEI and HECO and its subsidiaries upon their retirement, with
contributions by retirees toward costs based on their years of service and
retirement date. Medical and vision benefits are provided to eligible bargaining
unit employees of YB upon their retirement at no cost. Employees are eligible
for these benefits if, upon retirement, they participate in one of the Company's
defined benefit pension plans. Currently, no funding has been provided for these
benefits. Through December 31, 1992, the cost of postretirement benefits other
than pensions had not been recognized until paid (i.e., the pay-as-you-go
method). Accordingly, no provision had been made for future benefits to existing
or retired employees.
Effective January 1, 1993, the Company adopted Statement of Financial Accounting
Standards (SFAS) No. 106, "Employers' Accounting for Postretirement Benefits
Other Than Pensions," which requires accrual, during the years that an employee
renders the necessary service, of the expected cost of providing postretirement
benefits other than pensions to that employee and the employee's beneficiaries
and covered dependents. The transition obligation is being recognized on a
delayed basis over 20 years.
In February 1992, the PUC opened a generic docket to determine whether SFAS No.
106 should be adopted for rate-making purposes. On July 15, 1993, the PUC issued
an interim decision and order in the generic docket, amending an earlier interim
decision and order to state that it is probable that its final decision will
allow, for rate-making purposes, the full costs of postretirement benefits other
than pensions calculated on the basis of SFAS No. 106. Upon request of HECO and
its subsidiaries, on January 11, 1994, the PUC issued another interim decision
and order which stated that it has "determined that it will allow each utility
to calculate, for ratemaking purposes, the full costs of postretirement benefits
other than pensions on an accrual basis, rather than the current pay-as-you-go
8
basis." The PUC further stated that it has not yet decided whether to adopt SFAS
No. 106 in its entirety or with modifications, but it reaffirmed that "(1) it is
probable that the final decision and order in these dockets will allow, for
ratemaking purposes, the full costs of postretirement benefits other than
pensions calculated on the basis of SFAS [No.] 106; and (2) it is probable that
the difference between the costs of postretirement benefits other than pensions
determined under SFAS [No.] 106 and the current pay-as-you-go method from
January 1, 1993, through the effective date of the postretirement benefits step
increases . . . will be recovered ratably through future rates over a period not
extending beyond 2013."
Beginning in the second quarter of 1993 and based upon the interim decisions and
orders, HECO and its subsidiaries and YB recognized regulatory assets and
deferred for financial reporting purposes the difference between the costs of
postretirement benefits other than pensions determined under SFAS No. 106 and
such costs under the pay-as-you-go method. Approximately $4.9 million of the
regulatory assets established in the second quarter of 1993 related to
postretirement benefits expensed in the first quarter of 1993. If the regulatory
assets had been established commencing January 1, 1993, the first quarter of
1993 operating income and net income would have been higher by $4.9 million and
$3.1 million, respectively. The regulatory assets for postretirement benefits
other than pensions totaled approximately $23.6 million as of March 31, 1994.
If the PUC in its final decision and order does not fully adopt SFAS No. 106 for
rate-making purposes and if under current accounting guidelines it is concluded
that recognition of regulatory assets with respect to the difference between the
accrual and the PUC-approved methods would be inappropriate, then the net
earnings of the Company would be adversely affected by SFAS No. 106 in 1994 and
future years. Management cannot predict with certainty when the final decision
in the generic docket will be rendered.
(9) Accounting changes in 1994
- - -------------------------------
Postemployment benefits
In November 1992, the Financial Accounting Standards Board (FASB) issued SFAS
No. 112, "Employers' Accounting for Postemployment Benefits." This statement
requires employers to recognize the obligation to provide postemployment
benefits in accordance with SFAS No. 43, "Accounting for Compensated
Absences," if the obligation is attributable to employees' services already
rendered, employees' rights to those benefits accumulate or vest, payment of the
benefits is probable, and the amount of the benefits can be reasonably
estimated. The Company adopted the provisions of SFAS No. 112 on January 1,
1994. The implementation of SFAS No. 112 did not have a material effect on the
Company's consolidated financial condition or the results of operations for the
first quarter of 1994.
Accounting for certain investments in debt and equity securities
In May 1993, the FASB issued SFAS No. 115, "Accounting for Certain Investments
in Debt and Equity Securities." This statement requires that investments in
equity securities that have readily determinable fair values and investments in
debt securities be classified in three categories and accounted for as
follows:
- Debt securities that the enterprise has the positive intent and ability
to hold to maturity are classified as held-to-maturity securities and
reported at amortized cost.
- Debt and equity securities that are bought and held principally for the
purpose of selling them in the near term are classified as trading
securities and reported at fair value, with unrealized gains and losses
included in earnings.
- Debt and equity securities not classified as either held-to-maturity
securities or trading securities are classified as available-for-sale
securities and reported at fair value, with unrealized gains and losses
excluded from earnings and reported in a separate component of
stockholders' equity.
The Company adopted the provisions of SFAS No. 115 on January 1, 1994. As of
March 31, 1994 and December 31, 1993, marketable securities consisted of trading
securities, stock in the Federal Home Loan Bank of Seattle and mortgage-backed
securities classified as held-to-maturity securities. The implementation of SFAS
No. 115 did not have a material effect on the Company's consolidated financial
condition or the results of operations for the first quarter of 1994.
9
Hawaiian Electric Company, Inc. and subsidiaries
Consolidated balance sheets (unaudited)
March 31, December 31,
(in thousands, except par value) 1994 1993
_________________________________________________________________________________________________________________________
Assets
Utility plant, at cost
Property, plant and equipment....................................................... $2,014,151 $1,976,192
Construction in progress............................................................ 125,375 126,342
Less--accumulated depreciation...................................................... (657,484) (641,230)
---------- ----------
Net utility plant............................................................. 1,482,042 1,461,304
---------- ----------
Current assets
Cash and equivalents................................................................ 584 1,922
Customer accounts receivable, net................................................... 50,009 55,614
Accrued unbilled revenues, net...................................................... 30,999 34,735
Other accounts receivable, net...................................................... 6,589 8,398
Fuel oil stock, at average cost..................................................... 13,842 18,188
Materials and supplies, at average cost............................................. 19,396 20,239
Prepayments and other............................................................... 2,577 2,715
---------- ----------
Total current assets.......................................................... 123,996 141,811
---------- ----------
Other assets
Regulatory assets................................................................... 70,676 60,612
Other............................................................................... 41,153 39,549
---------- ----------
Total other assets............................................................ 111,829 100,161
---------- ----------
$1,717,867 $1,703,276
========== ==========
Capitalization and liabilities
Capitalization
Common stock, $6 2/3 par value, authorized
50,000 shares; outstanding 11,258 shares......................................... $ 75,065 $ 75,065
Premium on capital stock............................................................ 220,162 220,197
Retained earnings................................................................... 274,754 275,401
---------- ----------
Common stock equity........................................................... 569,981 570,663
Cumulative preferred stock
Not subject to mandatory redemption.............................................. 48,293 48,293
Subject to mandatory redemption.................................................. 44,010 45,410
Long-term debt, net................................................................. 441,807 436,776
---------- ----------
Total capitalization.......................................................... 1,104,091 1,101,142
---------- ----------
Current liabilities
Long-term debt due within one year.................................................. 10,961 47,960
Preferred stock sinking fund requirements........................................... 2,328 1,320
Short-term borrowings - nonaffiliates............................................... 104,333 28,928
Short-term borrowings - affiliate................................................... 400 12,000
Accounts payable.................................................................... 38,725 41,808
Interest and preferred dividends payable............................................ 12,766 10,332
Income taxes payable................................................................ 8,324 6,232
Other taxes accrued................................................................. 19,809 36,959
Other............................................................................... 21,644 31,036
---------- ----------
Total current liabilities..................................................... 219,290 216,575
---------- ----------
Deferred credits
Deferred income taxes............................................................... 108,646 107,449
Unamortized tax credits............................................................. 43,774 43,348
Other............................................................................... 75,783 69,757
---------- ----------
Total deferred credits........................................................ 228,203 220,554
---------- ----------
Contributions in aid of construction................................................... 166,283 165,005
---------- ----------
$1,717,867 $1,703,276
========== ==========
See accompanying notes to HECO's consolidated financial statements.
10
Hawaiian Electric Company, Inc. and subsidiaries Three months ended
Consolidated statements of income (unaudited) March 31,
------------------------------
(in thousands, except for ratio of earnings to fixed charges) 1994 1993
- - -------------------------------------------------------------------------------------------------------------------------------
Operating revenues.......................................................................... $200,098 $205,560
-------- --------
Operating expenses
Fuel oil.................................................................................... 38,618 51,534
Purchased power............................................................................. 62,986 59,715
Other operation............................................................................. 29,711 30,839
Maintenance................................................................................. 10,742 10,690
Depreciation................................................................................ 16,117 14,910
Taxes, other than income taxes.............................................................. 18,738 19,178
Income taxes................................................................................ 7,054 4,989
-------- --------
183,966 191,855
-------- --------
Operating income............................................................................ 16,132 13,705
-------- --------
Other income
Allowance for equity funds used during construction......................................... 1,951 1,559
Other, net.................................................................................. 1,185 1,046
-------- --------
3,136 2,605
-------- --------
Income before interest and other charges.................................................... 19,268 16,310
-------- --------
Interest and other charges
Interest on long-term debt.................................................................. 8,012 6,889
Amortization of net bond premium and expense................................................ 247 174
Other interest charges...................................................................... 804 1,072
Allowance for borrowed funds used during construction....................................... (871) (919)
Preferred stock dividends of subsidiaries................................................... 716 522
-------- --------
8,908 7,738
-------- --------
Income before preferred stock dividends of HECO............................................. 10,360 8,572
Preferred stock dividends of HECO........................................................... 1,084 1,110
-------- --------
Net income for common stock................................................................. $ 9,276 $ 7,462
======== ========
Ratio of earnings to fixed charges (SEC method)............................................. 2.58 2.37
======== ========
Hawaiian Electric Company, Inc. and subsidiaries
Consolidated statements of retained earnings (unaudited)
Three months ended
March 31,
------------------------------
(in thousands) 1994 1993
- - -------------------------------------------------------------------------------------------------------------------------------
Retained earnings, beginning of period...................................................... $275,401 $249,583
Net income for common stock................................................................. 9,276 7,462
Common stock dividends...................................................................... (9,923) (6,649)
-------- -------
Retained earnings, end of period............................................................ $274,754 $250,396
======== ========
See accompanying notes to HECO's consolidated financial statements.
11
Hawaiian Electric Company, Inc. and subsidiaries
Consolidated statements of cash flows (unaudited) Three months ended
March 31,
-----------------------
1994 1993
(in thousands)
- - ------------------------------------------------------------------------------------------------------------------------------
Cash flows from operating activities
Income before preferred stock dividends of HECO....................................................... $10,360 $ 8,572
Adjustments to reconcile income before preferred stock dividends of HECO to net cash provided by
operating activities
Depreciation and amortization of property,
plant and equipment.......................................................................... 16,117 14,910
Other amortization.............................................................................. 292 174
Deferred income taxes........................................................................... 1,211 (1,156)
Tax credits, net................................................................................ 851 1,026
Allowance for equity funds used during construction............................................. (1,951) (1,559)
Decrease in accounts receivable................................................................. 7,414 7,972
Decrease in accrued unbilled revenues........................................................... 3,736 2,769
Decrease (increase) in fuel oil stock........................................................... 4,346 (324)
Decrease (increase) in materials and supplies................................................... 843 (530)
Increase in regulatory assets................................................................... (10,064) (31,182)
Decrease in accounts payable.................................................................... (3,083) (5,749)
Increase in interest and preferred dividends payable............................................ 2,434 1,871
Changes in other assets and liabilities......................................................... (14,133) 21,327
------- -------
Net cash provided by operating activities............................................................. 18,373 18,121
------- -------
Cash flows from investing activities
Capital expenditures.................................................................................. (36,701) (49,781)
Contributions in aid of construction.................................................................. 2,903 773
------ -------
Net cash used in investing activities................................................................. (33,798) (49,008)
------- -------
Cash flows from financing activities
Common stock dividends................................................................................ (9,923) (6,649)
Preferred stock dividends............................................................................. (1,084) (1,110)
Proceeds from issuance of long-term debt.............................................................. 16,018 7,353
Repayment of long-term debt........................................................................... (48,000) (850)
Redemption of preferred stock......................................................................... (392) (400)
Net increase in short-term borrowings from nonaffiliates and affiliate with original maturities
of three months or less.............................................................................. 63,805 1,309
Other................................................................................................. (6,337) 579
------ ------
Net cash provided by financing activities............................................................. 14,087 232
------ ------
Net decrease in cash and equivalents.................................................................. (1,338) (30,655)
Cash and equivalents, beginning of period............................................................. 1,922 30,883
------- --------
Cash and equivalents, end of period................................................................... $ 584 $ 228
======= ========
See accompanying notes to HECO's consolidated financial statements.
12
Hawaiian Electric Company, Inc. and subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 1994 and 1993
(Unaudited)
- - --------------------------------------------------------------------------------
(1) Accounting statement
- - -------------------------
In the opinion of HECO's management, the accompanying unaudited consolidated
financial statements contain all material adjustments required by generally
accepted accounting principles to present fairly the financial position of HECO
and its subsidiaries as of March 31, 1994 and December 31, 1993, and the results
of their operations and their cash flows for the three months ended March 31,
1994 and 1993. All such adjustments are of a normal recurring nature. These
consolidated financial statements should be read in conjunction with the
consolidated financial statements and the notes thereto incorporated by
reference in HECO's Annual Report on SEC Form 10-K for the year ended December
31, 1993. The consolidated balance sheet as of December 31, 1993 was derived
from audited financial statements.
(2) Cash flows
- - ---------------
Supplemental disclosures of cash flow information
Cash paid for interest (net of capitalized amounts) and income taxes was as
follows:
Three months ended
March 31,
---------------
(in thousands) 1994 1993
- - -------------------------------------------------------------------------------
Interest.................................................... $6,149 $6,198
====== ======
Income taxes................................................ $2,470 $4,245
====== ======
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 $1,951,000 and
$1,559,000 for the three months ended March 31, 1994 and 1993, respectively.
(3) Commitments and contingencies
- - ----------------------------------
Power purchase agreements
In general, payments under the major power purchase agreements are based upon
available capacity and energy. Payments for capacity generally are not required
if the contracted capacity is not available, and payments are reduced, under
certain conditions, if available capacity drops below contracted levels. In
general, the payment rates for capacity have been predetermined for the terms of
the agreements. The energy charges will vary over the terms of the agreements
and HECO and its subsidiaries may pass on changes in the fuel component of the
energy charges to customers through energy cost adjustment clauses in its rate
schedules. HECO and its subsidiaries do not operate nor participate in the
operation of any of the facilities that provide power under the major
agreements. Title to the facilities does not pass to HECO and its subsidiaries
upon expiration of the agreements, and the agreements do not contain bargain
purchase options with respect to the facilities.
As of March 31, 1994, HECO and its subsidiaries had power purchase agreements
for 473 megawatts (MW) of firm capacity representing approximately 22% of the
total of their generating capabilities and purchased power firm capacities. Rate
recovery is allowed for energy and firm capacity payments under these
agreements. Assuming that each of the agreements, except for the agreement with
Hilo Coast Processing Company, remains in place and the minimum availability
criteria in the power purchase agreements are met, aggregate minimum fixed
capacity charges are expected to be approximately $107 million annually in 1994
and 1995, between $99 million and $106 million annually from 1996
13
through 2015, between $50 million and $77 million annually from 2016 through
2022 and $4 million annually from 2023 through 2028.
HECO is disputing certain amounts (primarily energy charges) billed each month
under its power purchase agreements with Kalaeloa Partners, L.P. (Kalaeloa) and
AES Barbers Point, Inc. (AES-BP) and has withheld payment of some of the
disputed amounts pending resolution. Disputed amounts billed by Kalaeloa and
AES-BP through March 31, 1994 for which HECO has withheld payment totaled
approximately $2.3 million and $1.6 million, respectively. Approximately $1.1
million of the total amounts withheld, if ultimately paid, are expected to be
includable in HECO's energy cost adjustment clause and passed through to
customers.
HECO has not recognized any portion of the withheld amounts as an expense or
liability in its financial statements. Discussions between HECO and Kalaeloa,
and HECO and AES-BP to resolve the disputed billing amounts are continuing. In
the event the parties are unable to settle the disputes, both the Kalaeloa and
AES-BP power purchase agreements contain provisions whereby either party to the
agreement may cause the dispute to be submitted to binding arbitration. Kalaeloa
has requested that its dispute with HECO be arbitrated. The arbitrators have
been selected and the arbitration commenced in May 1994. Under the agreement,
the arbitration proceeding is intended to be completed within 60 days, with the
arbitrators to render their decision within 45 days thereafter. Based on
information currently available, HECO's management believes that the ultimate
outcome of these disputes will not have a material adverse effect on HECO's
consolidated financial condition and results of operations.
HELCO's power purchase agreements include an amended power purchase agreement
with Hamakua Sugar Company (Hamakua), a power purchase agreement with Puna
Geothermal Ventures (PGV) and a power purchase agreement with Hilo Coast
Processing Company (HCPC). Hamakua is in a Chapter 11 bankruptcy proceeding and
is now conducting a final sugar cane harvest over a period of 10 to 16 months,
which began in July 1993. During the harvest, Hamakua has agreed to supply HELCO
with 8 MW of firm capacity under an amendment to HELCO's existing power purchase
agreement. PGV, an independent geothermal power producer which had experienced
substantial delays in commencing commercial operations, passed an acceptance
test in June 1993 and is now considered to be a firm capacity source for 25 MW.
In March 1994, HCPC, which currently provides 18 MW of firm capacity, issued a
written notice of termination to HELCO indicating that it would cease producing
power in March 1997, and HELCO in turn issued a written notice of its
preliminary intent to purchase the HCPC facility, subject to a number of
conditions. Under the terms of the power purchase agreement, HELCO has the
option to purchase the facility. HELCO and HCPC will negotiate the "fair market
value" of the plant to a party other than HELCO. If the parties can't agree on
the "fair market value," the issue may be submitted to arbitration.
HECO power outage
On April 9, 1991, HECO experienced a power outage that affected all customers on
the island of Oahu. The PUC initiated an investigation of the outage by its
order dated April 16, 1991. This investigation was consolidated with a pending
investigation of an outage that occurred in 1988. The PUC held a hearing on the
April 9, 1991 outage in May 1991. The parties to the investigation (HECO,
Consumer Advocate and U.S. Department of Defense) agreed that HECO retain an
independent consultant to investigate why one of the transmission lines involved
in the outage tripped out of service. The PUC approved HECO's retention of Power
Technologies, Inc. (PTI) and directed that the objectives of the study be to
assess the reliability and overall stability of HECO's electric power system, to
identify possible weaknesses, deficiencies and conditions within the system that
contributed to the island-wide power outage, and to recommend a plan to increase
the reliability of HECO's system and minimize the occurrence of future island-
wide outages. PTI's report, with more than 100 recommendations, was submitted to
the PUC in August 1993 and HECO filed its comments on the PTI recommendations
with the PUC in November 1993. Further proceedings have not been scheduled at
this time. Management cannot predict the timing and outcome of any decision and
order to be issued by the PUC with respect to the outages or with respect to the
recommendations made by PTI.
HECO's PUC-approved tariff rule states that HECO "will not be liable for
interruption or insufficiency of supply or any loss, cost, damage or expense of
any nature whatsoever, occasioned thereby if caused by accident, storm, fire,
strikes, riots, war or any cause not within [HECO's] control through the
exercise of reasonable diligence and care." Under the rule, customers had 30
days from the date of the power
14
outage to file claims. HECO received approximately 2,900 customer claims which
totaled approximately $7 million. Of the 2,900 claims, approximately 1,450 are
for property damage. As of March 31, 1994, HECO had settled approximately 561 of
these property damage claims, had settlement offers outstanding with respect to
approximately 93 more of these claims and anticipates making settlement offers
with respect to the remaining property claims upon receipt and review of
appropriate supporting documentation. The settlement offers are being made for
purposes of settlement and compromise only, and without any admission by HECO of
liability for the outage. Not covered in the settlement offers and requests for
documentation are approximately 1,450 claims involving alleged personal injury
or economic losses, such as lost profits.
On April 19, 1991, seven direct or indirect business customers on the island of
Oahu filed a lawsuit against HECO on behalf of themselves and an alleged class,
claiming $75 million in compensatory damages and additional unspecified amounts
for punitive damages because of the April 9, 1991 outage. The lawsuit was
dismissed without prejudice in March 1993 and subsequently refiled by the
plaintiffs. HECO has filed an answer which denies the principal allegations in
the complaint, sets forth affirmative defenses, and asserts that the suit should
not be maintained as a class action. Discovery proceedings have been initiated.
No trial date has been set. In March 1994, HECO filed a motion for an order
denying class certification of the lawsuit and the plaintiffs responded with a
cross-motion for class certification. Both motions were denied. Plaintiffs have
filed a motion seeking clarification of the orders requesting that the court
clarify that the effect of the orders was not to decide the class certification
issue and HECO responded with its position that the effect of the orders was to
deny class certification. Plaintiffs' motion for clarification is pending.
HECO has recorded a liability of $1 million for the total amount of expected
defense costs and settlements with respect to the outage. In the opinion of
management, losses (if any) in excess of that for which provision has been made,
net of estimated insurance recoveries, resulting from the ultimate outcome of
the lawsuit and claims related to the April 9, 1991 outage will not have a
material adverse effect on the Company or consolidated HECO.
HELCO reliability investigation.
In July 1991, following service interruptions and rolling blackouts instituted
on the island of Hawaii, the PUC issued an order calling for an investigation
into the reliability of HELCO's system.
An evidentiary hearing was held in September 1991 and public hearings were held
in October 1991. In light of approximately 20 subsequent incidents of rolling
blackouts and service interruptions resulting from insufficient generation
margin, further evidentiary hearings were held in July 1992. With the input from
an independent consultant and the parties to the proceedings, the PUC may
formulate minimum reliability standards for HELCO, use the standards to assess
HELCO's system reliability, and re-examine the rate increase approved in October
1992 to see whether any adjustments are appropriate. In the opinion of
management, the PUC's adjustment, if any, resulting from the reliability
investigation will not have a material adverse effect on the Company's or HECO's
consolidated financial condition or results of operations.
HELCO's generation margin has improved with the addition of a 20-MW combustion
turbine in August 1992, PGV's commencement of commercial operations and
Hamakua's temporary return to commercial operation.
HELCO is proceeding with plans to install two 20-MW combustion turbines in 1995,
followed by an 18-MW heat steam recovery generator in 1997, at which time these
units will be converted to a combined-cycle unit, subject in each case to
obtaining necessary permits and approvals. The PUC has issued a decision and
order approving expenditures for the first 20-MW combustion turbine; evidentiary
hearings on the other portions of the unit are scheduled for July 1994. HELCO
has encountered procedural and other difficulties in obtaining the necessary
Conservation District Use Permit (CDUP) which would allow the combined cycle
unit to be constructed at the Keahole site, including intervenors filing for a
contested case hearing which has been postponed indefinitely. Further, Kawaihae
Cogeneration Partners and Enserch Development Corp. have each filed separate
complaints against HELCO with the PUC alleging that rather than having HELCO
build the combined cycle unit, they are entitled to a power purchase contract to
provide the capacity. The Board of Land and Natural Resources is expected to
address the CDUP at its May 13, 1994 meeting. If the CDUP were denied, HELCO
would explore other available alternatives, including nonutility generators, to
meet the projected energy needs. However, in the event of a delay or denial,
management believes that there may be rolling blackouts before construction
could be completed or any such alternative could be implemented.
15
(4) Summarized financial information
- - -------------------------------------
Summarized financial information for HECO's consolidated subsidiaries, HELCO and
MECO, is as follows:
HELCO MECO
----------------------- ----------------------
March 31, December 31, March 31, December 31,
(in thousands) 1994 1993 1994 1993
- - ------------------------------------------------------------------------------------
Balance sheet data
Current assets................. $ 20,607 $ 22,161 $ 22,250 $ 31,465
Noncurrent assets.............. 307,994 297,847 255,651 252,680
-------- -------- -------- --------
$328,601 $320,008 $277,901 $284,145
======== ======== ======== ========
Common stock equity............ $102,250 $102,438 $ 98,208 $ 97,569
Cumulative preferred stock
Not subject to mandatory
redemption................ 10,000 10,000 8,000 8,000
Subject to mandatory
redemption............... 8,100 8,100 7,135 7,135
Current liabilities............ 43,127 42,615 25,925 35,027
Noncurrent liabilities......... 165,124 156,855 138,633 136,414
-------- -------- -------- --------
$328,601 $320,008 $277,901 $284,145
======== ======== ======== ========
HELCO MECO
------------------- -------------------
Three months ended Three months ended
March 31, March 31,
------------------- -------------------
(in thousands) 1994 1993 1994 1993
- - -------------------------------------------------------------------------------
Income statement data
Operating revenues.................. $28,951 $26,579 $27,361 $26,009
Operating income.................... 2,403 2,273 3,628 2,151
Net income for common stock......... 1,353 809 1,948 1,346
(5) Reconciliation of electric utility operating income per HEI and HECO
- - -------------------------------------------------------------------------
consolidated statements of income
---------------------------------
Three months ended
March 31,
-------------------
(in thousands) 1994 1993
- - ---------------------------------------------------------------------------
Operating income from regulated and nonregulated
activities before income taxes (per HEI
consolidated statements of income)................ $24,324 $19,717
Deduct:
Income taxes on regulated activities............. (7,054) (4,989)
Revenues from nonregulated activities............ (1,208) (1,086)
Add:
Expenses from nonregulated activities............ 70 63
------- -------
Operating income from regulated activities after
income taxes (per HECO consolidated statements
of income)........................................ $16,132 $13,705
======= =======
16
(6) Postretirement benefits other than pensions
- - ------------------------------------------------
HECO and its subsidiaries provide medical, dental, vision, life insurance and
other benefits to eligible employees upon their retirement, with contributions
by retirees toward costs based on their years of service. Employees are eligible
for these benefits if, upon retirement, they participate in one of the Company's
defined benefit pension plans. Currently, no funding has been provided for these
benefits. Through December 31, 1992, the cost of these benefits had not been
recognized until paid. Accordingly, no provision was made for future
postretirement benefits other than pensions to existing or retired employees.
Effective January 1, 1993, HECO and its subsidiaries adopted SFAS No. 106,
"Employers' Accounting for Postretirement Benefits Other Than Pensions," which
requires accrual, during the years that an employee renders the necessary
service, of the expected cost of providing postretirement benefits other than
pensions to that employee and the employee's beneficiaries and covered
dependents. The transition obligation is being recognized on a delayed basis
over 20 years.
In February 1992, the PUC opened a generic docket to determine whether SFAS No.
106 should be adopted for rate-making purposes. On July 15, 1993, the PUC issued
an interim decision and order in the generic docket, amending an earlier interim
decision and order to state that it is probable that its final decision will
allow, for rate-making purposes, the full costs of postretirement benefits other
than pensions calculated on the basis of SFAS No. 106. Upon request of HECO and
its subsidiaries, on January 11, 1994, the PUC issued another interim decision
and order which stated that it has "determined that it will allow each utility
to calculate, for ratemaking purposes, the full costs of postretirement benefits
other than pensions on an accrual basis, rather than the current pay-as-you-go
basis." The PUC further stated that it has not yet decided whether to adopt SFAS
No. 106 in its entirety or with modifications, but it reaffirmed that "(1) it is
probable that the final decision and order in these dockets will allow, for
ratemaking purposes, the full costs of postretirement benefits other than
pensions calculated on the basis of SFAS [No.] 106; and (2) it is probable that
the difference between the costs of postretirement benefits other than pensions
determined under SFAS [No.] 106 and the current pay-as-you-go method from
January 1, 1993, through the effective date of the postretirement benefits step
increases . . . will be recovered ratably through future rates over a period not
extending beyond 2013."
Beginning in the second quarter of 1993 and based upon these interim decisions
and orders, HECO and its subsidiaries recognized regulatory assets and deferred
for financial reporting purposes the difference between the costs of
postretirement benefits other than pensions determined under SFAS No. 106 and
such costs under the pay-as-you-go method. Approximately $4.7 million of the
regulatory assets established in the second quarter of 1993 related to
postretirement benefits expensed in the first quarter of 1993. If the regulatory
assets had been established commencing January 1, 1993, the first quarter of
1993 operating income (per HEI consolidated statement of income) and net income
would have been higher by $4.7 million and $2.9 million, respectively. The
regulatory assets for postretirement benefits other than pensions totaled
approximately $22.0 million as of March 31, 1994.
If the PUC in its final decision and order does not fully adopt SFAS No. 106 for
rate-making purposes and if under current accounting guidelines it is concluded
that recognition of regulatory assets with respect to the difference between the
accrual and the PUC approved methods would be inappropriate, then the net
earnings of consolidated HECO would be adversely affected by SFAS No. 106 in
1994 and future years. Management cannot predict with certainty when the final
decision in the generic docket will be rendered.
(7) Accounting change in 1994
- - ------------------------------
Postemployment benefits
In November 1992, the FASB issued SFAS No. 112, "Employers' Accounting for
Postemployment Benefits." This statement requires employers to recognize the
obligation to provide postemployment benefits in accordance with SFAS No. 43,
"Accounting for Compensated Absences," if the obligation is attributable to
employees' services already rendered, employees' rights to those benefits
accumulate or vest, payment of the benefits is probable, and the amount of the
benefits can be reasonably estimated. HECO and its subsidiaries adopted the
provisions of SFAS No. 112 on January 1, 1994. The implementation of SFAS No.
112 did not have a material effect on consolidated HECO's financial condition or
the results of operations for the first quarter of 1994.
17
Item 2. Management's discussion and analysis of financial condition and
- - -----------------------------------------------------------------------
results of operations
---------------------
The following discussion should be read in conjunction with the consolidated
financial statements and accompanying notes.
RESULTS OF OPERATIONS
Consolidated
- - ------------
Three months ended
March 31,
------------------
(in thousands, except per % Primary reason(s) for significant
share amounts) 1994 1993 Change change*
- - ---------------------------------------------------------------------------------------------------------------
Revenues...................... $265,042 $279,348 (5) Electric utility and "other" segments
Operating Income.............. 33,404 28,331 18 Increases at the electric utility and
savings bank segments, partly offset by
the "other" segment
Income from continuing
operations................... $ 11,788 $ 9,292 27 Higher operating income, partly offset
by higher interest expense due to higher
borrowings and higher income taxes
Income from discontinued
operations................... -- 1,800 (100) Reversal of a reserve for the disposal of
HERS after the sale of HERS in March 1993
-------- --------
Net Income.................... $ 11,788 $ 11,092 6
======== ========
Earnings per common
share
Continuing operations....... $ 0.42 $ 0.38 11 See above
Discontinued
operations................. -- 0.07 (100) See above
-------- --------
$ 0.42 $ 0.45 (7)
======== ========
Weighted average
number of common
shares outstanding........... 27,768 24,860 12 Public offering of 2.0 million shares of
common stock completed in August 1993
and shares issued through the HEI dividend
reinvestment and stock purchase plan
* Also see segment discussions which follow.
For the three months ended March 31, 1994, HEI reported net income of $11.8
million, or $0.42 per share, compared to $11.1 million, or $0.45 per share, in
the same period of 1993. Net income increased due to higher earnings at the
electric utility and savings bank segments, partly offset by the reversal of a
reserve for the disposal of HERS after the sale of HERS in 1993. Net income for
the first quarter of 1993 was reduced by $3.1 million for net postretirement
benefits other than pensions expense, which expense was subsequently reversed as
a result of an amended interim decision by the PUC and recognized as a
18
regulatory asset in the second quarter of 1993. Without the postretirement
benefits other than pension expense in the first quarter of 1993, first quarter
1994 consolidated net income and electric utility net income would not have
shown an increase over the prior year quarter.
Dividends are paid by HEI as and when declared at the discretion of HEI's Board
of Directors. HEI and its predecessor company, HECO, have paid dividends
continuously since 1901. Dividends per share have been higher each year for the
past 30 years. Dividends per share growth is a major goal for the Company,
however, HEI must balance short-term and long-term goals. Management is
concerned that HEI's dividend payout ratio is too high. Over the next few years
HEI's management intends to recommend to HEI's Board of Directors to moderate
dividend growth until its payout ratio returns to a more acceptable level.
Following is a general discussion of revenues, expenses and operating
income by business segment.
Electric utility
- - ----------------
Three months ended
March 31,
-------------------
(in thousands, except per % Primary reason(s) for significant
barrel amounts) 1994 1993 change change
- - ------------------------------------------------------------------------------------------------------------------------
Revenues...................... $201,306 $206,646 (3) Lower fuel oil prices which are passed
on to customers, partly offset by a
4.2% increase in KWH sales
Expenses
Fuel oil..................... 38,618 51,534 (25) Lower fuel oil prices and KWHs generated
Purchased power.............. 62,986 59,715 5 Higher KWHs purchased
Other........................ 75,378 75,680 -- Lower postretirement benefits other than
pensions expense due to the recognition
of $4.7 million of expense in the first
quarter of 1993 (which expense was
reversed in the second quarter of 1993),
partly offset by higher 1994 other
operation expense and depreciation expense
Operating income.............. 24,324 19,717 23 Lower postretirement benefits other than
pensions expense due to the recognition
of $4.7 million of expense in the first
quarter of 1993 (which expense was
reversed in the second quarter of 1993)
Net income.................... 9,276 7,462 24 Higher operating income, partially
offset by higher effective tax rate
Fuel oil price per barrel..... 16.33 21.17 (23)
Operating income for the electric utility segment was up 23% for the three
months ended March 31, 1994. The increase in operating income is primarily due
to prior year's postretirement benefits other than pensions expense of $4.7
million which was subsequently reversed as a result of an amended interim
decision by the PUC and reflected as a regulatory asset in the second quarter of
1993 and an increase in consolidated kilowatthour sales of 4.2% from the first
quarter of 1993 due in part to an increase in tourism. See note (6) in HECO's
"Notes to consolidated financial statements." Without the $4.7 million
additional postretirement benefits expense in the first quarter of 1993,
electric utility operating income in the first quarter of 1994 would have been
lower than the first quarter of 1993 due in
19
part to higher other operation expenses, including transmission and distribution
expenses, and higher depreciation expense due to additions to plant in service
in 1993.
HEI infused $45 million of common stock equity into its electric utility
subsidiaries in 1993 in support of their capital expenditure programs. As
anticipated, HECO and its subsidiaries were not able to earn an adequate return
on that new equity during the first quarter of 1994. At the start of the second
quarter, however, the PUC granted an interim rate increase that recognizes the
increased investment in capital facilities on the island of Oahu. See "Pending
rate requests" below. Continued regulatory support from the PUC is important to
the future operating results of the electric utility companies.
Competition
The electric utility industry in general has become increasingly more
competitive as a result of such factors as regulatory and technological
developments. The level of competition is affected by various factors including
price, reliability of service, new technologies and governmental regulations.
The National Energy Policy Act of 1992 encourages competition by allowing both
utilities and nonutilities to form nonregulated generation subsidiaries to
supply additional electric energy without being restricted by the Public Utility
Holding Company Act of 1935.
In addition to independent power producers, a new kind of competitor--the energy
service company--is seeking customers in government and private business and
promising to help them reduce utility bills. On Oahu, one of these companies
worked with a large military housing project, installing energy-efficient air-
conditioning, water heating and other equipment, which decreased the facility's
electric consumption by one third.
In response to competition, HECO and its subsidiaries are taking certain actions
to heighten its focus on providing reliable electric service at reasonable
costs, as well as to offer customers new choices regarding the services
provided.
Regulation of electric utility rates
The PUC has broad discretion in its regulation of the rates charged by HEI's
electric utility subsidiaries. Any adverse decision by the PUC concerning the
level or method of determining electric utility rates, the authorized returns on
equity or other matters or any delay in rendering a decision in a rate
proceeding could have a material adverse effect on the Company's financial
condition and results of operations. Upon a showing of probable entitlement, the
PUC is required to issue an interim decision in a rate case within 10 months
from the date of filing a complete application if the evidentiary hearing is
completed (subject to extension for 30 days if the evidentiary hearing is not
completed), but there is no limitation on the time within which it must render a
final decision.
Pending rate requests.
In July 1993, HECO applied to the PUC for permission to increase electric rates,
based on a 1994 test year and a 12.6% return on average common equity (which was
later increased to 12.75%). In December 1993, HECO applied to the PUC for
permission to increase electric rates, based on a 1995 test year and a 12.3%
return on average common equity. Both requests combined represent a 16.7%
increase over rates in effect at the time of the filings, or approximately $106
million in annual revenues. The requested increases are needed to cover rising
operating costs, to cover the cost of new capital projects to maintain and
improve service reliability, to cover additional expenses associated with
proposed changes in depreciation rates and methods and to establish a self-
insured property damage reserve for transmission and distribution property in
the event of catastrophic disasters. On March 31, 1994, HECO received an interim
decision and order from the PUC on its rate increase application based on a 1994
test year authorizing an increase of $34.2 million in annual revenues, or
approximately 5.5%. The increase was effective April 1, 1994 and is based on a
12.0% return on average common equity. HECO had proposed interim rate relief of
approximately $39.9 million in annual revenues. Another interim increase of
approximately $1.4 million in annual revenues for nonbargaining unit wage
increases became effective May 1, 1994. The interim rate increases are subject
to refund with interest, pending the final outcome of the case.
In November 1993, HELCO applied to the PUC for permission to increase electric
rates to provide approximately $15.8 million in annual revenues, or a 13.4%
increase over present rates. The requested increase is based on a 1994 test year
and a 12.4% return on average common equity. The increase is
20
needed to cover plant, equipment and operating costs necessary to maintain and
improve service and provide reliable power for its customers. HELCO anticipates
that evidentiary hearings will be held in the third quarter of 1994.
In November 1991, MECO filed a request to increase rates by approximately $18.3
million annually, or approximately 17% above the rates in effect at the time of
the filing. Evidentiary hearings were held in January 1993 and, at the
conclusion of the hearings, MECO's final requested increase was adjusted to
approximately $11.4 million annually, or approximately 10% above the rates then
in effect, in several steps in 1993. The decrease in the requested rate increase
resulted primarily from a reduced cost of capital, lower administrative and
general expenses and other revisions to MECO's estimated revenue requirements
for the 1993 test year used in the rate case. MECO's revised request reflects a
return on average common equity of 13.0%. In 1993, MECO received four interim
decisions which authorized step increases totaling $8.2 million in annual
revenues, or 7.2%, based on a 12.75% return on average common equity. The
interim rate increases are subject to refund with interest, pending the final
outcome of the case.
Management cannot predict with certainty when decisions in the rate cases will
be rendered or the amount of any interim or final rate increase that will be
granted.
HECO purchased power billing disputes
HECO is disputing certain amounts billed each month under its purchased power
agreements with Kalaeloa Partners, L.P. and AES Barbers Point, Inc. and has
withheld payment of some of the disputed amounts pending resolution. See "Power
purchase agreements" under note (3) in HECO's "Notes to consolidated financial
statements" for a further discussion of this matter.
HECO power outage
On April 9, 1991, HECO experienced a power outage that affected all customers on
the island of Oahu. See "HECO power outage" under note (3) in HECO's "Notes to
consolidated financial statements" for a discussion of HECO's contingent
liabilities related to the outage.
HELCO reliability investigation and generation margin
The PUC initiated an investigation into the reliability of HELCO's system in
July 1991. See "HELCO reliability investigation" under note (3) in HECO's "Notes
to consolidated financial statements" for a discussion of this matter. Also see
Part II, Item 5, "Other information, Nonutility generation," for a further
discussion of two of HELCO's purchased power suppliers.
Waiau-CIP transmission lines
In 1993, the PUC held hearings concerning Part 2 of the proposed Waiau-CIP 138-
kilovolt transmission lines. These lines will be a part of a second transmission
corridor in West Oahu, running approximately 15 miles between Campbell
Industrial Park (CIP) and HECO's Waiau power plant. The new lines are needed
(1) to increase system reliability by locating the new lines in a separate
corridor from the existing lines, (2) to provide additional transmission
capacity to meet expected load growth and (3) to provide transmission capacity
for existing and new power generation projects planned for West Oahu. HECO
experienced community opposition over the proposed placement of portions of
these lines based in part on the potential effects of the lines on aesthetics
and the concern of some that the electric and magnetic fields (EMF) from the
power lines may have adverse health effects. HECO witnesses addressed EMF, the
route selection process (which involved extensive public input), as well as
engineering and related subjects. One proposal by those who oppose the route of
the overhead lines is to place Part 2 of the Waiau-CIP lines underground. HECO
estimated that this proposal would cost approximately $100 million more than the
cost of overhead lines. In April 1994, the PUC issued a decision on Part 2 of
the Waiau-CIP lines which permits HECO to construct the lines above ground.
While the PUC recognized the concerns of aesthetics and EMF, it felt that
neither concern was sufficient to justify the added cost of undergrounding the
lines. In May 1994, the state Supreme Court was asked to overturn the PUC's
ruling that allows HECO to construct the lines above ground. Management cannot
predict with certainty the final outcome of this development or the impact the
final outcome may have on the cost of the lines or on system reliability.
21
Undergrounding of utility lines
There is a proposal before the Honolulu City Council for the mandatory
undergrounding of utility lines "whenever possible," except in some remote
areas. HECO opposes the proposal in its current form because the resulting costs
could place too much of a burden on our customers. Management believes the cost
of undergrounding utility lines would be recoverable in rates. However,
management cannot predict with certainty the ultimate outcome of such proposals
or the impact of such proposals on HECO or the Company.
Savings bank
- - ------------
Three months ended
March 31,
------------------
%
(in thousands) 1994 1993 change Primary reason(s) for significant change
- - --------------------------------------------------------------------------------------------------------------
Revenues...................... $50,083 $49,263 2 Higher average loan balance, partly offset by
lower yields on interest-earning assets and
lower average balances on mortgage-backed
securities and investments
Operating income.............. 10,620 9,588 11 Higher net interest income due to higher net
average earning assets balance and higher
interest rate spread, partly offset by higher
administrative and general expenses
Net income.................... 6,207 5,668 10 Higher operating income, partly offset by
higher taxes
Interest rate spread.......... 3.83% 3.76% 44 basis points decrease in the weighted
average rate on interest-bearing
liabilities, partly offset by 37 basis
points decrease in the weighted average
yield on interest-earning assets
The savings bank segment posted increases in operating income of 11% for the
quarter over the same period last year. The improved performance is a result of
higher loan balances and higher interest rate spread. ASB's interest rate
spread--the difference between the weighted average yield on interest-earning
assets and the weighted average rate on interest-bearing liabilities--widened to
3.83% in the quarter from 3.76% in the comparable period of 1993. For the first
quarter of 1994, the average loan balance was up $296 million and the average
deposit balance was up $68 million from levels in the first quarter of 1993.
In 1994, the federal funds rate increased in three increments of 0.25% each. The
federal funds rate, which is the rate charged by banks for overnight loans to
each other and which has a significant influence on consumer rates, was 3.50% as
of March 31, 1994 and 3.75% as of April 18, 1994.
The yields on U.S. Treasury bonds increased as a result of the higher short-term
interest rates. Mortgage and other loan rates are based on key treasury rates.
Financial institutions incurring higher costs of funds can react by raising the
interest rate on new loans and setting higher repricing rates on adjustable rate
loans.
The rate increases did not significantly impact ASB's net interest income during
the first quarter of 1994. Higher interest rates on mortgage loans can take
about three to 12 months to impact portfolio yields through loan originations
and repricing of adjustable rate loans. Cost of interest bearing liabilities
remained stable during the first quarter of 1994. However, ASB's cost of
interest bearing liabilities may increase in the future, which may result in a
decreased interest rate spread and lower net interest income than there
otherwise would have been.
22
During the first quarter of 1994, ASB's securities held for trading experienced
a $0.9 million decrease in value which was primarily due to the higher yields on
U.S. Treasury bonds resulting in lower market values in fixed income securities.
Management cannot predict future changes in bond yields or their impact on the
value of ASB's portfolio of securities held for trading.
Other
- - -----
Three months ended
March 31,
--------------------
%
(in thousands) 1994 1993 change Primary reason(s) for significant change
- - ---------------------------------------------------------------------------------------------------------------------------
Revenues........................... $13,653 $23,439 (42) MPC - Bulk sale of land for $10 million
of proceeds and immaterial gain in 1993
HEIIC -Gain on leveraged lease refinancing
in 1993
Operating loss..................... (1,540) (974) (58) HEIIC - Gain on leveraged lease refinancing
in 1993
Offset by:
HTB-Postretirement benefits other than
pensions expense which was recorded in the
first quarter of 1993 and subsequently
reversed and reflected as a regulatory
asset in the second quarter of 1993
MPC-higher unit sales in 1994
The "Other" business segment includes results of operations from HTB and its
subsidiary, YB, which are maritime freight transportation companies; HEIIC,
which is a company primarily holding investments in leveraged leases; MPC and
its subsidiaries, which are real estate investment and development companies;
HEI and HEIDI, which are parent companies; and eliminations of intercompany
transactions.
Freight transportation
The freight transportation subsidiaries recorded operating income of $0.2
million in the first quarter of 1994 compared with an operating loss of $0.2
million in the first quarter of 1993. The improvement in operating income was
primarily due to postretirement benefits other than pensions expense of $0.2
million which was recorded in the first quarter of 1993 and subsequently
reversed as a result of an amended interim decision by the PUC and reflected as
a regulatory asset in the second quarter of 1993. HTB and YB have been
negatively impacted by the slow economy, the slowing in Hawaii's construction
activity and HTB's exiting the business of shipping of heavy fuel oil at the end
of 1993 due to concerns about the potential unlimited liability for oil spills
under the Federal Oil Pollution Act of 1990.
YB plans to file with the PUC its application for a rate increase and its cost
of service study in mid-May 1994.
Real estate
In 1993 and the first three months of 1994, MPC's real estate development
activities were adversely impacted by economic conditions. The real estate
market experienced slowdowns due to the weakness in Hawaii's economy and lack of
consumer confidence. For the three months ended March 31, 1994, MPC recorded an
operating loss of $25,000 compared to an operating loss of $0.6 million in the
same period last year primarily due to higher unit sales in 1994 and lower
general and administrative expenses.
In March 1994, MDC's Baldwin*Malama partnership closed on a option to purchase
approximately 147 acres of land on the island of Maui for future development
from BPPI for a purchase price of $9.9 million.
For further information on MPC, see note (5) in HEI's "Notes to consolidated
financial statements."
23
Investments in leverage leases
In 1993, HEIIC refinanced the nonrecourse debt supporting a leveraged lease,
resulting in additional operating income of approximately $1 million in the
first quarter of 1993.
Interest expense--electric utility and other
- - --------------------------------------------
Interest expense--electric utility and other, applicable to continuing
operations, increased 2.5% when compared to the same period last year. The
increase was primarily due to higher long-term debt at the utility level.
Income taxes
- - ------------
The effective tax rates on income from continuing operations for the three
months ended March 31, 1994 and 1993 were 44.8% and 43.4%, respectively. The
increase is primarily due to the 1% federal income tax rate increase retroactive
to January 1, 1993, but recorded beginning in the third quarter of 1993.
Discontinued operations
- - -----------------------
HERS
For a discussion of the discontinued operations of HERS, see note (2) in HEI's
"Notes to consolidated financial statements."
HIG
For a discussion of the discontinued operations of HIG, see note (2) in HEI's
"Notes to consolidated financial statements."
Accounting changes
- - ------------------
Accounting for income taxes
On January 1, 1993, the Company adopted the provisions of Statement of Financial
Accounting Standards (SFAS) No. 109, "Accounting for Income Taxes." The
resulting change in the method of accounting for income taxes did not have a
material effect on the Company's financial condition or results of operations
primarily due to the regulated nature of the electric utility subsidiaries
and YB.
Accounting for postretirement benefits other than pensions
For discussions of accounting for postretirement benefits other than pensions,
see note (8) in HEI's "Notes to consolidated financial statements" and note (6)
in HECO's "Notes to consolidated financial statements."
Postemployment benefits
For discussions of accounting for postemployment benefits, see note (9) in HEI's
"Notes to consolidated financial statements" and note (7) in HECO's "Notes to
consolidated financial statements."
Accounting for certain investments in debt and equity securities
For a discussion of accounting for certain investments in debt and equity
securities, see note (9) in HEI's "Notes to consolidated financial statements."
Future accounting changes
- - -------------------------
Accounting by creditors for impairment of a loan
In May 1993, the Financial Accounting Standards Board issued SFAS No. 114,
"Accounting by Creditors for Impairment of a Loan." This statement requires that
certain impaired loans be measured based on the present value of expected future
cash flows discounted at the loan's effective interest rate or, as a practical
expedient, at the loan's observable market price or the fair value of the
collateral if the loan is collateral dependent. The provisions of SFAS No. 114
must be adopted by ASB no later than January 1, 1995. If SFAS No. 114 were
adopted on January 1, 1994, it would not have had a material effect on the
Company's consolidated financial condition or the results of operations for the
first quarter of 1994.
24
Environmental matters
- - ---------------------
HEI and its subsidiaries are subject to numerous laws and regulations which are
designed to protect the environment, and include air and water quality controls,
hazardous waste and toxic substance controls and the Federal Oil Pollution Act
of 1990. HEI's electric utility subsidiaries are exempt from certain
environmental requirements applicable on the U.S. mainland. For example, the
electric utility subsidiaries are exempt from the acid rain provisions of the
1990 Clean Air Act Amendments. However, HEI and its subsidiaries are subject to
environmental laws and regulations which could potentially impact the Company in
terms of operating existing facilities, constructing and operating new
facilities and ensuring the proper cleanup and disposal of hazardous waste and
toxic substances. Management believes that the recovery through rates of most,
if not all, of any costs incurred by HECO and its subsidiaries in complying with
these environmental requirements would be allowed by the PUC. However, as with
other costs reviewed by the PUC in the rate-making process, costs incurred by
HECO and its subsidiaries in complying with these environmental requirements may
not be fully allowed by the PUC for rate-making purposes. Based on information
available to the Company to date, management is not aware of any contingent
liabilities relating to environmental matters that could have a material adverse
effect upon the Company or consolidated HECO.
FINANCIAL CONDITION
Liquidity and capital resources
- - -------------------------------
The Company and consolidated HECO believe that their ability to generate cash,
both internally from operations and externally from debt and equity issues, is
adequate to maintain sufficient liquidity to fund their construction programs
and to cover debt retirements and other cash requirements in the foreseeable
future.
The consolidated capital structure of HEI was as follows:
(in millions) March 31, 1994 December 31, 1993
- - -----------------------------------------------------------------------------
Short-term borrowings.......... $ 114 8% $ 40 3%
Long-term debt, net............ 647 43 698 47
Preferred stock of electric
utility subsidiaries.......... 95 6 95 6
Common stock equity............ 647 43 643 44
------ ---- ------ ----
$1,503 100% $1,476 100%
====== ==== ====== ====
ASB's deposit liabilities, securities sold under agreements to repurchase and
advances from the Federal Home Loan Bank are not included in the table above.
For the first three months of 1994, net cash used in operating activities was $1
million. Net cash used in investing activities was $176 million, largely due to
an increase in ASB's loans receivable and mortgage-backed securities and
consolidated HECO's capital expenditures. Net cash provided by financing
activities was $140 million, due primarily to a net increase in advances from
the Federal Home Loan Bank, deposit liabilities and short-term borrowings,
partly offset by net repayments of long-term debt and common stock dividends.
Pursuant to the settlement agreement discussed in note (2) in HEI's "Notes to
consolidated financial statements," in April 1994, HEI deposited $32 million in
an escrow account for future distribution to the Insurance Commissioner as
Rehabilitator/Liquidator of the HIG Group in return for a final dismissal of the
lawsuit against HEI, HEIDI and certain officers and directors and a release of
claims against HEI, its affiliates and their past and present officers and
directors. HEI funded the escrow deposit out of available cash and short-term
borrowings.
Total HEI consolidated financing requirements for the years 1994 through 1998,
including net capital expenditures, debt retirements and sinking fund
requirements, are currently estimated to total $1.4 billion. Of this amount,
approximately $0.9 billion are for net capital expenditures (mostly relating to
the electric utility companies' net capital expenditures described below). HEI's
consolidated internal sources, after the payment of HEI dividends, are expected
to provide approximately 42% of the consolidated financing requirements, with
debt and equity financing providing the remaining
25
requirements. Over the five-year period 1994 through 1998, HEI estimates that it
will require approximately $225 million in common equity, other than retained
earnings, which is expected to be provided principally by HEI's Dividend
Reinvestment and Stock Purchase Plan and the Hawaiian Electric Industries
Retirement Savings Plan.
HEI plans to issue approximately one million additional common shares in a
public offering in either late 1994 or early 1995, depending on market
conditions.
Following is a discussion of the liquidity and capital resources of HEI's
largest segments.
Electric utility
HECO's consolidated capital structure was as follows:
(in millions) March 31, 1994 December 31, 1993
- - -------------------------------------------------------------------------------------
Short-term borrowings from
nonaffiliates and affiliate. $104 8% $ 41 3%
Long-term debt, net.......... 453 37 485 41
Preferred stock.............. 95 8 95 8
Common stock equity.......... 570 47 570 48
------ ---- ------ ----
$1,222 100% $1,191 100%
====== ==== ====== ====
In the first quarter of 1994, HECO and its subsidiaries redeemed $48 million of
first mortgage bonds prior to the bonds' scheduled maturity dates. The first
mortgage bonds redeemed had original maturity dates between April 2001 and
December 2016 and interest rates between 8.5% and 10.75%. During the quarter,
HECO and its subsidiaries had also drawn $16 million of the proceeds from the
sale of special purpose revenue bonds.
Operating activities provided $18 million in net cash during the first three
months of 1994. Investing activities used cash of $34 million for capital
expenditures net of contributions in aid of construction. Financing activities
provided $14 million in net cash primarily from increased short-term borrowings.
The electric utility's consolidated financing requirements for the years 1994
through 1998, including net capital expenditures, debt retirements and sinking
fund payment requirements, are estimated to total $1.0 billion. HECO's
consolidated internal sources, after the payment of common stock and preferred
stock dividends, are currently expected to provide approximately 50% of the
total $1.0 billion in requirements, with debt and equity financing providing the
remaining requirements. HECO currently estimates that it will require
approximately $100 million in common equity, other than retained earnings, over
the five-year period 1994 through 1998. The PUC must approve issuances of long-
term debt and equity for HECO, HELCO and MECO.
Capital expenditures include projects which are required to meet expected load
growth and improve reliability, and projects to replace and upgrade existing
equipment. Net capital expenditures for the five-year period 1994 through 1998
are currently estimated to total $0.9 billion. Approximately 70% of gross
capital expenditures, including AFUDC and capital expenditures funded by third
party cash contributions in aid of construction, is for transmission and
distribution projects, with the remaining 30% primarily for generation projects.
For 1994, electric utility net capital expenditures are estimated to be $205
million and gross capital expenditures are estimated to be $240 million, of
which approximately 65% is for transmission and distribution projects. An
estimated $45 million of gross capital expenditures is planned for new
generation projects. Drawdowns of proceeds from the sale of tax-exempt special
purpose revenue bonds, sales of common stock to HEI and the generation of funds
from internal sources are expected to provide the cash needed for the net
capital expenditures.
Capital expenditure estimates and the timing of construction projects are
reviewed periodically by management and may change significantly as a result of
many considerations, including changes in economic conditions, changes in
forecasts of kilowatthour sales and peak load, the availability of alternate
energy and purchased power sources, the availability of generating sites and
transmission and distribution corridors, the ability to obtain adequate and
timely rate relief, escalation in construction
26
costs, demand-side management programs and requirements of environmental and
other regulatory and permitting authorities.
At March 31, 1994, approximately $40.2 million of the proceeds from the sale of
special purpose revenue bonds was available to be used and an additional $47
million of revenue bonds was authorized by the Hawaii legislature for issuance
prior to the end of 1995. A bill for legislative authorization of an additional
$170 million of revenue bonds in aggregate for HECO, HELCO and MECO for issuance
prior to the end of 1997 was passed by the Hawaii legislature during the second
quarter of 1994 and is currently before the Governor.
Savings bank
March 31, December %
(in millions) 1994 1993 change
- - --------------------------------------------------------------------------
Assets.......................... $2,762 $2,618 5
Loans receivable................ 1,829 1,735 5
Mortgage-backed securities...... 682 630 8
Deposit liabilities............. 2,147 2,092 3
At December 31, 1993, ASB was the second largest savings bank in the state based
on total assets of $2.6 billion. Since December 31, 1988, ASB's loans and
deposits have more than doubled. Loans and deposits continue to grow, although
at a slower pace than in the past.
For the first three months of 1994, cash used by investing activities was $143
million, due largely to the origination of loans receivable and purchase of
mortgage-backed securities, offset by principal repayments. Cash provided by
financing activities included a net increase of $87 million in advances from the
Federal Home Loan Bank and $55 million in deposit liabilities, offset by common
stock dividends of $4 million.
Deposits traditionally have been the principal source of ASB's funds for use in
lending, meeting liquidity requirements and making investments. ASB also derives
funds from the receipt of interest and principal on outstanding loans and
mortgage-backed securities, borrowings from the Federal Home Loan Bank of
Seattle, securities sold under agreements to repurchase and other sources.
Minimum liquidity levels are currently governed by the regulations adopted by
the Office of Thrift Supervision (OTS). ASB was in compliance with OTS liquidity
requirements as of March 31, 1994.
OTS regulations require each savings association to have regulatory capital at
least sufficient to meet three requirements: tangible capital and core
(leverage) capital of 1.5% and 3.0%, respectively, of adjusted total assets; and
a risk-based capital standard equal to 8.0% of risk-adjusted assets. As of March
31, 1994, ASB was in full compliance with the minimum capital requirements with
a tangible capital ratio of 5.0%, a core capital ratio of 5.4% and risk-based
capital of $153.9 million, $44.3 million in excess of the minimum requirement.
The OTS has adopted a new rule adding an interest rate risk (IRR) component to
the existing risk-based capital requirement. The regulation is effective January
1, 1994; however, the requirement that thrifts incorporate IRR into their risk-
based capital calculations, based on the OTS Thrift Financial Report as of
December 31, 1993, is effective July 1, 1994. Institutions with an "above
normal" level of IRR exposure will be required to hold additional capital.
"Above normal" IRR is defined as any decline in market value of an institution's
portfolio equity in excess of 2% of the market value of its assets, which would
result from an immediate 200 basis point change in interest rates. The OTS
regulation will require a savings association with an "above normal" level of
IRR exposure to hold one-half of the "above normal" IRR times the market value
of its assets as capital in addition to its existing 8% risk-based capital
requirement. Based on IRR reported as of December 31, 1993, ASB would not have
been required to hold additional capital if the new rule had been in effect at
that time.
The Federal Deposit Insurance Corporation Improvement Act of 1991 established a
statutory framework for closer monitoring of insured depository institutions in
order to ensure "prompt corrective action" by regulators as an institution's
capital position declines. The OTS rules for prompt corrective action,
effective on December 19, 1992, define the capital measures for five capital
categories (well-capitalized, adequately capitalized, under-capitalized,
significantly under-capitalized and critically under-capitalized), and provide
for progressively more stringent restrictions and supervision as capital levels
27
decline. To be classified as "well-capitalized," an institution must have a
"leverage ratio" of 5%, a "Tier-1 risk-based ratio" of 6% and a "total risk-
based ratio" of 10%. As of March 31, 1994, ASB believes that based on OTS
capital standards it would have been classified as "well-capitalized" with a
leverage ratio of 5.4%, a Tier-1 risk-based ratio of 10.8% and a total risk-
based ratio of 11.2%.
The OTS is currently considering proposed regulations which will increase
capital requirements. One of the proposed regulations includes increasing core
capital requirements to either 4% or 5% for many savings associations. Under the
proposed regulation, ASB believes it would be required to comply with a 4%
requirement. As of March 31, 1994, ASB would have been in compliance with the
proposed 4% requirement with a core capital ratio of 5.4%.
ASB believes that a satisfactory regulatory capital position provides a basis
for public confidence, affords protection to depositors, helps to ensure
continued access to capital markets on favorable terms and provides a foundation
for anticipated growth.
PART II - OTHER INFORMATION
- - --------------------------------------------------------------------------------
Item 1. Legal proceedings
- - --------------------------
There are no significant developments except as set forth in HEI's and HECO's
"Notes to consolidated financial statements," management's discussion and
analysis of financial condition and results of operations and Item 5, "Other
information."
Item 4. Submission of matters to a vote of security holders
- - ------------------------------------------------------------
HEI
The Annual Meeting of Stockholders of HEI was held on April 19, 1994. Proxies
for the meeting were solicited pursuant to Regulation 14A under the Securities
Exchange Act of 1934. As of February 10, 1994, the record date for the Annual
Meeting, there were 27,747,718 shares of common stock issued and outstanding and
entitled to vote. There was no solicitation in opposition to the management
nominees to the Board of Directors as listed in the proxy statement for the
meeting and such nominees were elected to the Board of Directors.
The results of the election of the Class I director-nominees and independent
auditor are as follows:
Common Stock
-------------------------------------------------------------
Broker
For Withheld Against Abstain nonvotes
---------- -------- -------- -------- ---------
Election of Class I Directors:
Robert F. Clarke 22,813,498 285,364 4,648,856
John D. Field 22,795,049 303,813 4,648,856
A. Maurice Myers 22,786,367 312,495 4,648,856
Ruth M. Ono 22,796,403 302,459 4,648,856
Election of KPMG Peat Marwick as auditor: 22,724,900 137,115 236,847 4,648,856
Class II Directors--Victor Hao Li, Diane J. Plotts, Kelvin H. Taketa, Jeffrey N.
Watanabe and Harwood D. Williamson--continue in office with terms ending at the
1995 Annual Meeting. Class III Directors--Edwin L. Carter, Richard Henderson,
Ben F. Kaito, Bill D. Mills and Oswald K. Stender--continue in office with terms
ending at the 1996 Annual Meeting.
28
HECO
The Annual Meeting of the Sole Stockholder of HECO was conducted by written
consent effective April 19, 1994. The incumbent members of the Board of
Directors of HECO were re-elected except for Thurston Twigg-Smith who reached
mandatory retirement age. The incumbent members continuing in office are Robert
F. Clarke, Richard Henderson, Ben F. Kaito, Mildred D. Kosaki, Paul A. Oyer,
Diane J. Plotts, Harwood D. Williamson and Paul C. Yuen. In addition, KPMG Peat
Marwick was elected auditor of HECO for the fiscal year 1994.
Item 5. Other information
- - --------------------------
Nonutility generation
- - ---------------------
A. Puna Geothermal Ventures (PGV)
PGV began supplying test energy to HELCO on April 22, 1993. As of June 27, 1993,
PGV had successfully completed the 100-hour acceptance test demonstrating its
ability to provide HELCO with the full 25 MW required in its power purchase
agreement (PPA). Therefore, as of that date, PGV commenced commercial operations
and HELCO's obligation to make firm capacity payments commenced.
On April 13, 1993, HELCO filed suit against PGV in the Third Circuit Court for
penalties and other relief (including general, incidental and consequential
damages and prejudgment interest) related to PGV's failure to provide power to
HELCO as of October 3, 1991. The lawsuit does not specify the amount sought.
Penalties were accrued until June 27, 1993 when PGV commenced commercial
operations. At the time the lawsuit was filed and as of June 27, 1993, the
accumulated penalty amounts were approximately $6 million and $7.5 million,
respectively. PGV has filed an answer and counterclaim and contends that any
penalties should be excused under the force majeure provisions of the PPA, on
the theory that delays were attributable to circumstances beyond PGV's control.
HELCO has recognized energy and capacity purchased from PGV as expenses, but has
withheld such firm capacity and energy payments to PGV. Amounts withheld for
June 1993 through March 1994 totaled approximately $3.2 million. HELCO continues
to reserve its right to offset accumulated damages and costs, including
penalties, against any future energy and capacity payments due to PGV.
B. Hilo Coast Processing Company (HCPC)
HELCO has a PPA with HCPC for 18 MW of firm capacity. On July 31, 1992, C.
Brewer and Company publicly announced that Mauna Kea Agribusiness, which is the
primary supplier of sugar cane processed by HCPC, would begin converting its
acreage to macadamia nuts, eucalyptus trees and other diversified crops as of
November 1, 1992, and would discontinue harvesting sugar cane in late 1994.
Subsequently, on March 25, 1994, HCPC issued a written notice to HELCO
indicating its intent to cease supplying power to HELCO pursuant to the PPA as
of March 26, 1997. As allowed under the PPA, on April 22, 1994, HELCO informed
HCPC in writing of its preliminary intent to purchase the HCPC facilities,
subject to a number of conditions.
Ratio of earnings to fixed charges
The following tables set forth the ratio of earnings to fixed charges for HEI
and its subsidiaries for the periods indicated:
Ratio of earnings to fixed charges excluding interest on ASB deposits
Years Ended December 31,
----------------------------
Three months
ended
March 31, 1994
- - --------------
1993 1992 1991 1990 1989
---- ---- ---- ---- ----
1.92 2.25 2.08 1.99 1.76 1.99
==== ==== ==== ==== ==== ====
29
Ratio of earnings to fixed charges including interest on ASB deposits
Years Ended December 31,
----------------------------
Three months
ended
March 31, 1994 1993 1992 1991 1990 1989
-------------- ---- ---- ---- ---- ----
1.50 1.65 1.50 1.46 1.39 1.55
==== ==== ==== ==== ==== ====
For purposes of calculating the ratio of earnings to fixed charges,
"earnings" represent the sum of (i) pretax income from continuing operations
(excluding undistributed net income or net loss from less than fifty-percent-
owned persons) and (ii) fixed charges (as hereinafter defined, but excluding
capitalized interest). "Fixed charges" are calculated both excluding and
including interest on ASB's deposits during the applicable periods and represent
the sum of (i) interest, whether capitalized or expensed, incurred by HEI and
its subsidiaries plus their proportionate share of interest on debt to outsiders
incurred by fifty-percent-owned persons, but excluding interest on nonrecourse
debt from leveraged leases which is not included in interest expense in HEI's
consolidated statements of income, (ii) amortization of debt expense and
discount or premium related to any indebtedness, whether capitalized or
expensed, (iii) the interest factor in rental expense and (iv) the preferred
stock dividend requirements of HEI's subsidiaries, increased to an amount
representing the pretax earnings required to cover such dividend requirements.
The following table sets forth the ratio of earnings to fixed charges for HECO
and its subsidiaries for the periods indicated:
RATIO OF EARNINGS TO FIXED CHARGES
Years Ended December 31,
--------------------------------
Three months
ended
March 31, 1994 1993 1992 1991 1990 1989
-------------- ---- ---- ---- ---- ----
2.58 3.25 3.03 2.82 2.99 3.26
==== ==== ==== ==== ==== ====
For purposes of calculating the ratio of earnings to fixed charges,
"earnings" represent the sum of (i) pretax income before preferred stock
dividends of HECO and (ii) fixed charges (as hereinafter defined, but excluding
the allowance for borrowed funds used during construction). "Fixed
charges" represent the sum of (i) interest, whether capitalized or expensed,
incurred by HECO and its subsidiaries, (ii) amortization of debt expense and
discount or premium related to any indebtedness, whether capitalized or
expensed, (iii) the interest factor in rental expense and (iv) the preferred
stock dividend requirements of HELCO and MECO, increased to an amount
representing the pretax earnings required to cover such dividend requirements.
30
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
- - -----------------------------------------
(a) EXHIBITS
HEI Hawaiian Electric Industries, Inc. and subsidiaries
Exhibit 11(a) Computation of earnings per share of common stock, three months
ended March 31, 1994 and 1993
HECO Hawaiian Electric Company, Inc. and subsidiaries
Exhibit 11(b) Computation of earnings per share of common stock
HEI Hawaiian Electric Industries, Inc. and subsidiaries
Exhibit 12(a) Computation of ratio of earnings to fixed charges, three months
ended March 31, 1994 and 1993
HECO Hawaiian Electric Company, Inc. and subsidiaries
Exhibit 12(b) Computation of ratio of earnings to fixed charges, three months
ended March 31, 1994 and 1993
HEI Amendment 1994-1 to the Hawaiian Electric Industries Retirement
Exhibit 99 Savings Plan, for incorporation by reference in Registration
Statement on Form S-8 (Regis. No. 33-52911)
(b) REPORTS ON FORM 8-K
During the quarter, HEI and/or HECO filed Current Reports, Forms 8-K, with the
SEC under "Item 5. Other Events" as follows:
Dated Registrant/s Items reported
- - -------------------------------------------------------------------------------
February 11, 1994 HEI, HECO News release: HEI reports 1993 earnings;
announces lawsuit settlement
March 30, 1994 HEI Description of common stock
March 31, 1994 HEI, HECO HECO receives interim rate relief
31
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrants have duly caused this report to be signed on their behalf by the
undersigned, thereunto duly authorized. The signature of the undersigned
companies shall be deemed to relate only to matters having reference to such
companies and any subsidiaries thereof.
HAWAIIAN ELECTRIC INDUSTRIES, INC. HAWAIIAN ELECTRIC COMPANY, INC.
(Registrant) (Registrant)
By /s/ Robert F. Mougeot By /s/ Paul Oyer
-------------------------------- -----------------------------
Robert F. Mougeot Paul A. Oyer
Financial Vice President and Financial Vice President and
Chief Financial Officer Treasurer
(Principal Financial Officer of HEI) (Principal Financial Officer of HECO)
Date: May 12, 1994 Date: May 12, 1994
32