HECO Exhibit 13(b)
------------------
SELECTED FINANCIAL DATA
- -----------------------
HAWAIIAN ELECTRIC COMPANY, INC. and Subsidiaries
1994 1993 1992 1991 1990
---------------- ----------- ----------- ----------- -----------
(dollars in thousands)
INCOME STATEMENT DATA
(Years ended December 31,)
Operating revenues............... $ 907,308 $ 874,010 $ 776,929 $ 739,636 $ 704,853
Operating expenses............... 819,996 795,925 699,890 663,709 631,300
---------- ---------- ---------- ---------- ----------
Operating income................. 87,312 78,085 77,039 75,927 73,553
Other income..................... 14,793 11,556 9,740 4,511 6,804
---------- ---------- ---------- ---------- ----------
Income before
interest and
other charges................... 102,105 89,641 86,779 80,438 80,357
Interest and other
charges......................... 36,144 33,515 33,101 34,228 31,873
---------- ---------- ---------- ---------- ----------
Income before
preferred stock
dividends of HECO............... 65,961 56,126 53,678 46,210 48,484
Preferred stock
dividends of HECO............... 4,316 4,421 4,525 4,600 4,674
---------- ---------- ---------- ---------- ----------
Net income for common
stock........................... $ 61,645 $ 51,705 $ 49,153 $ 41,610 $ 43,810
========== ========== ========== ========== ==========
- -------------------------------------------------------------------------------------------------------
BALANCE SHEET DATA
(At December 31,)
Utility plant.................... $2,293,521 $2,102,534 $1,877,404 $1,701,218 $1,564,075
Accumulated
depreciation.................... (702,945) (641,230) (583,031) (536,552) (489,957)
---------- ---------- ---------- ---------- ----------
Net utility plant................ $1,590,576 $1,461,304 $1,294,373 $1,164,666 $1,074,118
========== ========== ========== ========== ==========
Total assets..................... $1,889,120 $1,703,276 $1,501,330 $1,318,023 $1,250,142
========== ========== ========== ========== ==========
Capitalization:/1/
Long-term debt................... $ 489,586 $ 484,736 $ 374,835 $ 365,098 $ 356,741
Preferred stock
subject to mandatory
redemption...................... 44,844 46,730 48,920 50,665 52,210
Preferred stock not
subject to mandatory
redemption...................... 48,293 48,293 36,293 36,293 36,293
Common stock equity.............. 633,901 570,663 499,894 440,831 365,812
---------- ---------- ---------- ---------- ----------
Total capitalization . $1,216,624 $1,150,422 $ 959,942 $ 892,887 $ 811,056
========== ========== ========== ========== ==========
- -------------------------------------------------------------------------------------------------------
CAPITAL STRUCTURE RATIOS (%)/2/
(At December 31,)
Debt............................. 45.5 44.1 45.9 43.1 48.4
Preferred stock.................. 7.0 8.0 7.9 9.4 10.1
Common stock equity.............. 47.5 47.9 46.2 47.5 41.5
=======================================================================================================
/1/ Includes amounts due within one year and sinking fund requirements.
/2/ Includes amounts due within one year, short-term borrowings from
nonaffiliates and affiliate, and sinking fund requirements.
Note: HEI owns all of HECO's common stock. Therefore, per share data is not
meaningful.
2
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
- ---------------------------------------------
THE FOLLOWING DISCUSSION SHOULD BE READ IN CONJUNCTION WITH THE CONSOLIDATED
FINANCIAL STATEMENTS AND ACCOMPANYING NOTES.
RESULTS OF OPERATIONS
- ---------------------
EARNINGS
- --------
Net income for common stock for 1994 was $61.6 million compared to $51.7
million for 1993 and $49.2 million for 1992. The 1994 net income represents a
10.2% return on the average amount of common stock equity invested in HECO and
its subsidiaries (collectively, the "Company"), compared to returns of 9.7% in
1993 and 10.5% in 1992.
SALES
- -----
Consolidated sales of electricity were 8,593 million kilowatthours (KWH) for
1994, 8,325 million KWH for 1993, and 8,332 million KWH for 1992. The 3.2%
increase in KWH sales in 1994 reflects the gradual recovery of Hawaii's economy
and the effects of warmer weather. Cool weather, the downturn in Hawaii's
economy, and conservation efforts resulted in a 0.1% decline in KWH sales in
1993 compared to 1992.
OPERATING REVENUES
- ------------------
Operating revenues were $907.3 million in 1994, compared to $874.0 million in
1993 and $776.9 million in 1992. The 1994 increase in operating revenues of
$33.3 million, or 3.8% over 1993 revenues, was due primarily to interim rate
increases granted by the PUC to HECO and HELCO and higher KWH sales of
electricity. The revenue increase was tempered by lower fuel oil prices, which
cost savings were passed through to customers. The rate schedules of the
Company include energy cost adjustment clauses under which electric rates are
adjusted for changes in the weighted average price for fuel oil and certain
components of purchased power costs, and the relative amounts of company-
generated power and purchased power.
Revenues for 1993 increased by $97.1 million, or 12.5%, over 1992 revenues
due primarily to the full year's effect of rate relief granted by the PUC during
1992 for HECO and HELCO, interim rate increases granted to MECO in 1993, and the
effects of higher fuel oil prices, which were passed through to customers.
OPERATING EXPENSES
- ------------------
Total operating expenses were $820.0 million in 1994 compared to $795.9
million in 1993 and $699.9 million in 1992. The increase in 1994 was due to an
increase in purchased power, other operation, maintenance, depreciation, income
taxes, and taxes other than income taxes expense, partially offset by lower fuel
oil expense. The increase in 1993 operating expenses over 1992 was primarily
due to an increase in purchased power, income taxes, and taxes other than income
taxes expense, partially offset by lower fuel oil expense and the establishment
of a regulatory asset for vacation earned by employees, but not yet taken. The
recognition of the regulatory asset for vacation earned, but not yet taken,
resulted in a one-time reduction in 1993 operating expenses of $4.2 million. For
rate-making purposes, the PUC permits recovery of vacation pay expense on a pay-
as-you-go basis.
Fuel oil expense was $186.7 million in 1994 compared to $213.3 million in
1993 and $225.6 million in 1992. The decrease in fuel oil expense in 1994 was
due primarily to lower fuel oil prices and fewer KWH generated. The decrease in
fuel oil expense in 1993 was due to fewer KWH generated due to the full year's
effect of power purchased from AES Barbers Point, Inc., offset somewhat by
higher fuel oil prices. In 1994, the Company paid an average of $18.92 per
barrel of fuel oil, compared to $21.09 in 1993 and $19.69 in 1992.
3
Purchased power expense was $271.6 million in 1994 compared to $258.7 million
in 1993 and $172.8 million in 1992. The increase in purchased power expense in
both 1994 and 1993 was due primarily to capacity and nonfuel purchased power
costs paid to independent power producers, and an increase in the number of KWH
purchased, mostly by HECO. Purchased KWH provided approximately 37.5% of the
total energy net generated and purchased in 1994 compared to 34.9% in 1993 and
26.2% in 1992.
Other operation expenses totaled $121.7 million in 1994, an increase of
$15.8 million over the 1993 amount. The increase was due primarily to higher
production, transmission and distribution, and administrative and general
expenses, including higher employee benefit costs and the absence in 1994 of the
one-time reduction to 1993 expenses due to the establishment of the regulatory
asset for vacation earned but not yet taken by employees. HEI charges for
general management, administrative and support services totaled $2.4 million in
1994, $2.3 million in 1993 and $5.6 million in 1992. In 1993, other operation
expenses totaled $106.0 million, an increase of $0.7 million over the 1992
amount. The increase was due primarily to higher production, transmission and
distribution, and administrative and general expenses, including higher employee
benefit costs, partially offset by lower management service fees from HEI, and
the one-time effect of the establishment of the regulatory asset for vacation
earned by employees, but not yet taken.
Maintenance expenses in 1994 of $46.4 million increased by $2.1 million from
1993 primarily due to the absence in 1994 of the one-time reduction to 1993
expenses due to the establishment of the regulatory asset for vacation earned
but not yet taken by employees, and increased maintenance on the transmission
and distribution systems, partially offset by lower production maintenance
expenses at HECO. In 1993, maintenance expenses totaled $44.3 million, a 0.8%
decrease from 1992, primarily due to the one-time effect of the establishment of
the regulatory asset for vacation earned by employees, but not yet taken,
partially offset by increased maintenance on the transmission and distribution
systems.
Depreciation expense was up 14.0% in 1994 to $63.8 million and up 3.9% in
1993 to $56.0 million. In both years, the increase reflects depreciation of the
Company's additions to plant in service in the previous year. Major additions
to plant in service in 1993 included HECO's Waiau-Makalapa 138-kilovolt line and
MECO's 18-megawatt heat recovery unit (Maalaea 15) and 20-megawatt combustion
turbine unit (Maalaea 16) at Maalaea. Major additions to plant in service in
1992 included transmission and distribution substation projects by HECO, the
addition of HELCO's 20-megawatt combustion turbine unit at Puna (CT-3) and the
addition of MECO's 20-megawatt combustion turbine unit (Maalaea 14).
Taxes, other than income taxes, increased by 6.4% in 1994 to $85.9 million,
and by 13.0% in 1993 to $80.7 million. These taxes consist primarily of taxes
based on revenues, and the increases reflect the corresponding increases in each
year's operating revenues. In 1994, the increase also reflects an increase in
the PUC fee rate from 0.25% to 0.5%, as mandated by the Hawaii State
Legislature.
The effective income tax rate was higher in 1994 and 1993 than in 1992
primarily due to the 1% increase in the Federal income tax rate commencing in
1993 and the use of gross-up accounting for income taxes related to the
Allowance for Funds Used During Construction (AFUDC) under Statement of
Financial Accounting Standards (SFAS) No. 109, effective January 1, 1993. The
increase in income taxes due to the gross-up accounting for AFUDC was offset,
however, by a corresponding increase in other income (see below).
OTHER INCOME
- ------------
Other income of $14.8 million for 1994 was $3.2 million higher than for 1993.
The increase was due primarily to higher Allowance for Equity Funds Used During
Construction (AFUDC-Equity), reflecting a higher average level of construction
in progress during the year. For 1993, income of $11.6 million was $1.8 million
4
higher than for 1992. The increase was primarily because of the "gross-up" of
AFUDC-Equity resulting from the effects of the adoption of SFAS No. 109, offset
by the income tax benefit related to the utilization of capital loss
carryforwards in 1992.
INTEREST AND OTHER CHARGES
- --------------------------
Interest and other charges for 1994 totaled $36.1 million, compared to $33.5
million for 1993 and $33.1 million for 1992. Interest expense on long-term debt
increased by $4.3 million in 1994 and decreased by $0.3 million in 1993. The
increase in 1994 was due to interest on drawdowns of tax-exempt special purpose
revenue bond proceeds during 1994, and the full year's interest on the drawdowns
of revenue bond proceeds and the sale of medium-term notes in 1993. The 1994
increase in interest expense was partially offset by lower interest expense on
first mortgage bonds resulting from the early redemptions in March 1994 of
HECO's 9.125% Series X mortgage bonds of $20 million, HELCO's 8.5% to 10.75%
Series I, L, M and N mortgage bonds totaling $12.5 million and MECO's 8.75% to
10.75% Series I, J, K, L and M mortgage bonds totaling $15.5 million. The 1993
decrease in interest expense on long-term debt was due to lower interest expense
on first mortgage bonds resulting from the redemption of MECO's 6.875% Series F
mortgage bonds of $0.9 million in March 1993 and HECO's 4.45% Series M mortgage
bonds of $16 million in July 1993; the early redemption of HECO's 8.2% Series R
mortgage bonds of $14 million and 8.35% Series T mortgage bonds of $16 million
in June 1993; and the early redemption of HECO's 9% Series Q mortgage bonds of
$23 million in 1992, partially offset by interest on drawdowns of tax-exempt
special purpose revenue bond proceeds during 1993 and the full year's interest
on the drawdowns made the previous year.
Other interest charges of $4.8 million for 1994 were $2.7 million lower than
for 1993 due to lower interest on short-term borrowings as a result of lower
borrowing levels during the year, partially offset by higher interest rates.
COMPETITION
- -----------
The electric utility industry has become increasingly competitive due to
regulatory and technological developments. Competition is affected by factors
including price, reliability of service, alternate energy sources, new
technologies and governmental regulations. Competition in Hawaii is also
affected by the scarcity of generation sites and lack of interconnections.
The Energy Policy Act of 1992 encourages competition by allowing both
utilities and nonutilities to form generation subsidiaries without becoming
subject to regulation under the Public Utility Holding Company Act of 1935. To
date, HECO and its subsidiaries have not faced this type of competition.
However, management cannot predict the future impact, if any, of the Energy
Policy Act of 1992 on the Company.
On the demand-side, a new kind of competitor--the energy service company--is
seeking customers in government and private business and promising to help them
reduce utility bills. On Oahu, one of these companies worked with a large
military housing project, installing energy-efficient equipment that decreased
the facility's electricity consumption by one-third. In August 1994, HEI formed
a new nonutility energy service company, Pacific Energy Conservation Services,
Inc. (PECS), to promote energy conservation in Hawaii and the Pacific Basin.
PECS is considering potential projects to install, finance, operate and maintain
energy conservation equipment, while sharing a percentage of the saved energy
costs with its clients.
In response to increased competition, HECO and its subsidiaries are looking
at strategies to enhance their competitive position, including increasing
efforts to provide reliable electric service at a reasonable cost, offering
customers new choices regarding the services provided and promoting conservation
and new technologies like electric vehicles.
5
REGULATION OF ELECTRIC UTILITY RATES
- ------------------------------------
The PUC has broad discretion in its regulation of the rates charged by the
Company and in other matters. Any adverse decision by the PUC concerning the
level or method of determining utility rates, the authorized returns on equity
or other matters, or any prolonged delay in rendering a decision in a rate or
other proceeding, could have a material adverse effect on the Company's
financial condition and results of operations. Upon a showing of probable
entitlement, the PUC is required to issue an interim decision in a rate case
within 10 months from the date of filing a completed application if the
evidentiary hearing is completed (subject to extension for 30 days if the
evidentiary hearing is not completed). There is no time limit for rendering a
final decision. Interim rate increases are subject to refund with interest,
pending the final outcome of the case.
RECENT RATE REQUESTS AND RESULTS
- --------------------------------
HECO. In July 1993, HECO applied to the PUC for permission to increase
-----
electric rates, based on a 1994 test year and a 12.6% return on average common
equity (which was later increased to 12.75%). The increase requested, as
subsequently revised, represented an increase of 8.6% over rates in effect at
the time of the revised filing, or $53.8 million in additional annual revenues.
The revised requested increase was needed to cover rising operating costs
including the costs related to the change in method of accounting for
postretirement benefits other than pensions (PBOP) (which increases were
recently allowed by the final decision in a separate generic docket discussed
below), and to cover the cost of new capital projects to maintain and improve
service reliability. In December 1994, HECO received a final decision and order
from the PUC authorizing a $40.5 million, or 6.5%, increase in annual revenues,
effective January 1, 1995 and based on a 12.15% return on average common equity.
The order granted HECO an increase of approximately $3.5 million in annual
revenues, in addition to reaffirming interim increases that took effect in
April, May and November 1994. The final decision and order, together with the
PBOP decision and order, resulted in $50.5 million of annual rate relief.
In December 1993, HECO applied to the PUC for permission to increase electric
rates, based on a 1995 test year and a 12.3% return on average common equity
(which was later increased to 13.25%). The requested increase, as subsequently
revised, represented an increase of approximately 5%, or $38.5 million in
additional annual revenues over rates in effect at the time of the revised
filing (which rates included interim rate relief granted in the 1994 test year
application). The revised requested increase is needed to cover rising
operating costs (including the costs related to the change in the method of
accounting for PBOP discussed below), and the cost of new capital projects to
maintain and improve service reliability. The PUC completed hearings in
November 1994 on HECO's rate increase request based on a 1995 test year. In
December 1994, HECO received an interim decision and order authorizing an
increase of $13.2 million, or 1.9%, in annual revenues. The interim order was
based on a 12.6% return on average common equity. Approximately $10.6 million
of the interim increase took effect January 1, 1995, which was the beginning of
the test year, and the balance will be effective in steps in May and November
1995.
HELCO. In November 1993, HELCO applied to the PUC for permission to increase
------
electric rates to provide $15.8 million in annual revenues, or a 13.4% increase
over rates then in effect. The requested increase is based on a 1994 test year
and a 12.4% return on average common equity (which was later increased to
13.1%). The increase is needed to cover plant and equipment related costs,
operating costs necessary to maintain and improve service and provide reliable
power, and PBOP costs which are discussed below. In August 1994, HELCO received
an interim decision and order from the PUC on its rate increase application
authorizing an increase of $13.6 million in annual revenues, or approximately
11.7%, and based on a 12.4% return on average common equity. $13.2 million of
the increase took effect in August 1994 and $0.4 million in November 1994. In
February 1995, HELCO received a final decision and order from the PUC
authorizing a $13.7 million, or 11.8%,
6
increase in annual revenues, based on a 12.6% return on average common equity.
The order granted HELCO an increase of approximately $0.1 million in annual
revenues, in addition to reaffirming interim increases that took effect in
August and November 1994. The final decision and order, together with the PBOP
decision and order, resulted in $15.5 million of annual rate relief.
In June 1994, HELCO filed a notice of intent to file an application for a
general rate increase using a 1995 test year. The increase is expected to be
required primarily to cover investments in new generating units. The
application has not yet been filed and may be filed based on a 1996 test year.
MECO. In November 1991, MECO filed a request to increase rates, based on a
-----
1992/1993 test year. In January 1993, MECO revised its requested increase to
$11.4 million annually, or 10% over the rates then in effect, based on a 13.0%
return on average common equity. Most of the proposed increase reflected the
costs of adding a 58-megawatt combined-cycle generating unit on Maui in three
phases and PBOP costs which are discussed below. In 1993, MECO received four
interim decisions which authorized step increases totaling $8.2 million in
annual revenues. In August 1994, MECO received the final decision and order
from the PUC granting an increase of $8.1 million in annual revenues, or
approximately 7.0%, based on a 12.75% return on average common equity. That
action, together with the PBOP decision and order, resulted in $10.0 million of
annual rate relief.
In December 1994, MECO filed a notice of intent to request rate relief, based
on a 1996 test year. In February 1995, the PUC granted MECO's motion requesting
a waiver of the PUC's rule which otherwise provides for a 1996 test year only
when an application is filed in the last six months of 1995. MECO plans to file
its rate increase application in early 1995.
Management cannot predict with certainty when decisions in pending or future
rate cases will be rendered or the amount of any interim or final rate increase
that will be granted.
POSTRETIREMENT BENEFITS OTHER THAN PENSIONS. In November 1994, the PUC
--------------------------------------------
issued a decision and order in a generic docket opened in February 1992 with
respect to the accounting and rate-making treatment of the costs of
postretirement benefits other than pensions. The decision and order authorized
full recovery of PBOP costs determined pursuant to SFAS No. 106, effective
January 1, 1995. The decision and order also allowed the recovery of the
regulatory assets related to PBOP costs, over the next 18 years. These
regulatory assets were recognized by the Company for PBOP costs accrued from
January 1, 1993 through December 31, 1994 and amounted to $34.0 million at
December 31, 1994. This order will result in additional annual revenues of
approximately $10.0 million, $1.8 million and $1.9 million for HECO, HELCO and
MECO, respectively, to cover the increase in PBOP expense. See Note 10 in the
"Notes to Consolidated Financial Statements," for further information.
EFFECTS OF INFLATION
- --------------------
Inflation, as measured by the U.S. Consumer Price Index, averaged 2.6% in
1994 and 3.0% in 1993 and 1992. Although the rate of inflation over the past
three years has been relatively low compared with the late 1970's and early
1980's, inflation continues to have an impact on the Company's operations.
Inflation increases operating costs and the replacement cost of assets. The
Company has significant physical assets and replaces assets at much higher
costs, and must request rate relief to maintain adequate earnings. In the past,
the PUC has generally approved rate relief to cover the effects of inflation.
In 1992, 1993 and 1994, the Company received rate relief, in part to cover
increases due to inflation in operating expenses and construction costs.
ACCOUNTING FOR THE EFFECTS OF CERTAIN TYPES OF REGULATION
- ---------------------------------------------------------
The Company follows the accounting prescribed by SFAS No. 71, "Accounting for
the Effects of Certain Types of Regulation." SFAS No. 71 provides guidance in
preparing financial statements for most public utilities. Under SFAS No. 71, if
7
regulation provides assurance that incurred costs will be recovered in the
future, those costs must be capitalized rather than expensed. If the continued
application of SFAS No. 71 would no longer be appropriate--due to increased
competition or regulatory, legislative or judicial actions or otherwise--the
financial effects of the resulting accounting change, including a write-off of
all regulatory assets, could be material.
ENVIRONMENTAL MATTERS
- ---------------------
The Company is subject to numerous laws and regulations which are designed to
protect the environment, and include air and water quality controls, hazardous
waste and toxic substance controls and the Federal Oil Pollution Act of 1990.
The Company is exempt from certain environmental requirements applicable on the
U.S. mainland, such as the acid rain provisions of the 1990 Clean Air Act
Amendments. However, the Company is subject to environmental laws and
regulations which could potentially impact the Company in terms of operating
existing facilities, constructing and operating new facilities and ensuring the
proper cleanup and disposal of hazardous waste and toxic substances. Management
believes that the recovery through rates of most, if not all, of any costs
incurred by the Company in complying with these environmental requirements would
be allowed by the PUC. However, as with other costs reviewed by the PUC in the
rate-making process, costs incurred by HECO and its subsidiaries in complying
with these environmental requirements may not be fully allowed by the PUC for
rate-making purposes. Based on information available to the Company, management
is not aware of any contingent liabilities relating to environmental matters
that would have a material adverse effect on the Company.
ELECTRIC AND MAGNETIC FIELDS
- ----------------------------
Research is ongoing about the potential adverse health effects from exposure
to electric and magnetic fields (EMF). However, the scientific community has
not yet reached a consensus on the nature of any health effects. HECO and its
subsidiaries are participating in utility industry funded studies on the subject
and are considering possible steps to reduce EMF, where feasible, in the design
of new transmission and distribution facilities. The Company cannot predict the
impact, if any, the EMF issue may have on the Company in the future.
ACCOUNTING CHANGES
- ------------------
See Note 1 in the "Notes to Consolidated Financial Statements."
LIQUIDITY AND CAPITAL RESOURCES
- -------------------------------
The Company believes that its ability to generate cash, both internally from
operations and externally from debt and equity issues, is adequate to maintain
sufficient liquidity to fund its construction programs and to cover debt and
other cash requirements in the foreseeable future.
Capital expenditures requiring the use of cash, as shown on the "Consolidated
Statements of Cash Flows," totaled approximately $186.5 million in 1994, of
which $114.8 million was attributable to HECO, $45.8 million to HELCO and
$25.9 million to MECO. Approximately 84% of the total 1994 capital expenditures
was for transmission and distribution and other projects, including HECO's
Waiau-CIP 138-kilovolt line, and 16% was for generation projects, including
HELCO's Keahole combustion turbines and MECO's Molokai generation expansion.
Cash contributions in aid of construction received in 1994 totaled $15.1
million.
The Company's investment in plant and equipment for 1994 was financed with
cash from operating activities and cash from financing activities. Cash
provided by operating activities totaled $102.3 million in 1994. Cash provided
by financing activities totaled a net $77.8 million and included a net $4.8
million in drawdowns
8
of proceeds from the sale of tax-exempt special purpose revenue bonds, less
long-term debt repayments primarily for first mortgage bonds. The Company used
$28.5 million for common stock dividends. Short-term borrowings provided $76.9
million in cash and HEI provided $30.0 million through its purchase of HECO
common stock.
The Company's consolidated financing requirements for the years 1995 through
1999, including net capital expenditures, debt retirements and sinking fund
requirements, are estimated to total $850 million. The Company's consolidated
internal sources, after the payment of common stock and preferred stock
dividends, are currently expected to provide approximately 60% of the total $850
million requirements, with debt and equity financing providing the remaining
requirements. The Company estimates that it will require approximately $60
million in common equity, other than retained earnings, over the five-year
period 1995 through 1999. The PUC must approve issuances of long-term debt and
equity for HECO, HELCO and MECO.
Capital expenditures include the costs of projects which are required to
meet expected load growth, to improve reliability and to replace and upgrade
existing equipment. Net capital expenditures, for the five-year period 1995
through 1999, are currently estimated to total $750 million. Approximately 70%
of gross capital expenditures, including AFUDC and capital expenditures funded
by third party cash contributions in aid of construction, is for transmission
and distribution projects, with the remaining 30% primarily for generation
projects. At December 31, 1994, purchase commitments other than fuel and power
purchase contracts were approximately $83 million, including amounts for
construction projects. (Also see Note 11 in the "Notes to Consolidated
Financial Statements" for a discussion of fuel and power purchase commitments.)
Capital expenditures for 1995, net of cash contributions in aid of
construction and excluding AFUDC, are estimated to be $170 million, and gross
capital expenditures are estimated to be $205 million, of which approximately
65% is for transmission and distribution projects. An estimated $40 million is
planned for new generation projects. Drawdowns of proceeds from the sale of
tax-exempt special purpose revenue bonds, sales of common stock to HEI and the
generation of funds from internal sources are expected to provide the cash
needed for the net capital expenditures.
Capital expenditure estimates and the timing of construction projects are
reviewed periodically by management and may change significantly as a result of
many considerations. Among these considerations are changes in economic condi-
tions, changes in forecasts of kilowatthour sales and peak load, the
availability of alternate energy and purchased power, the availability of
generating sites and transmission and distribution line corridors, the ability
to obtain adequate and timely rate relief, escalation in construction costs,
demand-side management programs and requirements of environmental and other
regulatory and permitting authorities.
In 1993, the Department of Budget and Finance of the State of Hawaii (DBF)
issued a total of $100 million in tax-exempt special purpose revenue bonds, with
a maturity of thirty years and a fixed coupon interest rate of 5.45%, on behalf
of HECO, HELCO and MECO at a 2% discount, resulting in a yield of approximately
5.6%. As of December 31, 1994 approximately $3.4 million of the proceeds from
the sale of special purpose revenue bonds were available to be used. In January
1995, the DBF issued tax-exempt special purpose revenue bonds, in the principal
amount of $47 million with a maturity of 30 years and a fixed coupon interest
rate of 6.6% on behalf of HECO, HELCO and MECO. The bonds were issued at a
discount, resulting in a yield of approximately 6.75%. As of February 1, 1995,
an additional $170 million of revenue bonds had been authorized by the Hawaii
legislature for issuance prior to the end of 1997.
As of February 15, 1995, Standard & Poor's Corporation (S&P), Moody's
Investors Service (Moody's) and Duff & Phelps Credit Rating Co. (D&P) rated
HECO's securities as follows:
9
S&P Moody's D&P
---- ------- -------
First mortgage bonds........ BBB+ A3 A
Revenue bonds............... BBB Baa1 A-
Cumulative preferred stock.. BBB baa1 BBB+
Other unsecured debt........ BBB Baa1 A-
Commercial paper............ A-2 P-2 Duff 1-
====================================================
The above ratings are not recommendations to buy, sell or hold any securities,
and such ratings may be subject to revision or withdrawal at any time by the
rating agencies.
In January 1995, S&P revised its ratings outlook on HECO to "stable" from
"negative" citing recent PUC decisions which demonstrate a continuing trend of
regulatory support for the Company's heavy construction program. The Company's
management cannot predict with certainty future rating agency actions or their
effects on the future cost of capital to the Company.
10
CONSOLIDATED STATEMENTS OF INCOME
=================================
HAWAIIAN ELECTRIC COMPANY, INC. and Subsidiaries
Years ended December 31 1994 1993 1992
- ------------------------------------------------- --------- --------- ---------
(in thousands)
Operating revenues............................... $907,308 $874,010 $776,929
-------- -------- --------
Operating expenses:
Fuel oil......................................... 186,717 213,285 225,611
Purchased power.................................. 271,636 258,723 172,761
Other operation.................................. 121,740 105,957 105,303
Maintenance...................................... 46,427 44,281 44,653
Depreciation and amortization.................... 63,779 55,960 53,856
Taxes, other than income taxes................... 85,877 80,712 71,452
Income taxes..................................... 43,820 37,007 26,254
-------- -------- --------
819,996 795,925 699,890
-------- -------- --------
OPERATING INCOME................................. 87,312 78,085 77,039
-------- -------- --------
OTHER INCOME:
Allowance for equity funds used during
construction.................................... 9,064 6,973 6,781
Other, net....................................... 5,729 4,583 2,959
-------- -------- --------
14,793 11,556 9,740
-------- -------- --------
INCOME BEFORE INTEREST AND OTHER CHARGES......... 102,105 89,641 86,779
-------- -------- --------
INTEREST AND OTHER CHARGES:
Interest on long-term debt....................... 31,369 27,046 27,307
Amortization of debt discount, premium and
expense......................................... 1,208 774 638
Other interest charges........................... 4,763 7,467 5,066
Allowance for borrowed funds used during
construction.................................... (4,043) (3,869) (2,095)
Preferred stock dividends of subsidiaries........ 2,847 2,097 2,185
-------- -------- --------
36,144 33,515 33,101
-------- -------- --------
INCOME BEFORE PREFERRED STOCK DIVIDENDS OF HECO.. 65,961 56,126 53,678
Preferred stock dividends of HECO................ 4,316 4,421 4,525
-------- -------- --------
NET INCOME FOR COMMON STOCK...................... $ 61,645 $ 51,705 $ 49,153
======== ======== ========
CONSOLIDATED STATEMENTS OF RETAINED EARNINGS
============================================
HAWAIIAN ELECTRIC COMPANY, INC. and Subsidiaries
Years ended December 31 1994 1993 1992
- -------------------------------------- --------- --------- ---------
(in thousands)
RETAINED EARNINGS, BEGINNING OF YEAR.. $275,401 $249,583 $223,478
Net income for common stock........... 61,645 51,705 49,153
Common stock dividends................ (28,511) (25,887) (23,048)
-------- -------- --------
RETAINED EARNINGS, END OF YEAR........ $308,535 $275,401 $249,583
======== ======== ========
See accompanying "Notes to Consolidated Financial Statements."
11
CONSOLIDATED BALANCE SHEETS
===========================
HAWAIIAN ELECTRIC COMPANY, INC. and Subsidiaries
December 31 1994 1993
- ----------------------------------------------------------------- ----------- -----------
(in thousands)
Assets
Utility plant, at cost:
Land............................................................. $ 27,108 $ 26,976
Plant and equipment.............................................. 2,101,447 1,948,445
Less accumulated depreciation.................................... (702,945) (641,230)
Plant acquisition adjustment, net................................ 719 771
Construction in progress......................................... 164,247 126,342
---------- ----------
Net utility plant............................................ 1,590,576 1,461,304
---------- ----------
Current assets:
Cash and equivalents............................................. 10,694 1,922
Customer accounts receivable, net................................ 60,406 55,614
Accrued unbilled revenues, net................................... 38,435 34,735
Other accounts receivable, net................................... 10,302 8,398
Fuel oil stock, at average cost.................................. 21,966 18,188
Materials and supplies, at average cost.......................... 20,108 20,239
Prepayments and other............................................ 2,028 2,715
---------- ----------
Total current assets......................................... 163,939 141,811
---------- ----------
Other assets:
Regulatory assets................................................ 92,524 61,078
Unamortized debt expense......................................... 9,662 10,179
Long-term receivables and other.................................. 32,419 28,904
---------- ----------
Total other assets........................................... 134,605 100,161
---------- ----------
$1,889,120 $1,703,276
========== ==========
CAPITALIZATION AND LIABILITIES
Capitalization (see Consolidated Statements of Capitalization):
Common stock equity.............................................. $ 633,901 $ 570,663
Cumulative preferred stock:
Not subject to mandatory redemption............................. 48,293 48,293
Subject to mandatory redemption................................. 42,470 45,410
Long-term debt, net.............................................. 468,653 436,776
---------- ----------
Total capitalization......................................... 1,193,317 1,101,142
---------- ----------
Current liabilities:
Long-term debt due within one year............................... 20,933 47,960
Preferred stock sinking fund requirements........................ 2,374 1,320
Short-term borrowings--nonaffiliates............................. 117,866 28,928
Short-term borrowings--affiliate................................. -- 12,000
Accounts payable................................................. 54,662 41,808
Interest and preferred dividends payable......................... 8,575 10,332
Income taxes payable............................................. 3,300 6,232
Other taxes accrued.............................................. 39,666 36,959
Other............................................................ 30,111 31,036
---------- ----------
Total current liabilities.................................... 277,487 216,575
---------- ----------
Deferred credits and other liabilities:
Deferred income taxes............................................ 108,362 107,449
Unamortized tax credits.......................................... 44,939 43,348
Other............................................................ 86,380 69,757
---------- ----------
Total deferred credits and other liabilities................. 239,681 220,554
---------- ----------
Contributions in aid of construction............................. 178,635 165,005
---------- ----------
$1,889,120 $1,703,276
========== ==========
See accompanying "Notes to Consolidated Financial Statements."
12
CONSOLIDATED STATEMENTS OF CAPITALIZATION
=========================================
HAWAIIAN ELECTRIC COMPANY, INC. and Subsidiaries
December 31 1994 1993
- ------------------------------------------------------------ -------- --------
(dollars in thousands, except per share amounts)
Common stock equity:
Common stock of $6 2/3 par value. Authorized: 50,000,000
shares. Outstanding: 1994, 11,813,147 shares and 1993,
11,258,290 shares......................................... $ 78,766 $ 75,065
Premium on capital stock.................................... 246,600 220,197
Retained earnings........................................... 308,535 275,401
-------- --------
Common stock equity.................................... 633,901 570,663
-------- --------
Cumulative preferred stock:
Authorized: 5,000,000 shares of $20 par value and
7,000,000 shares of $100 par value. Outstanding:
1994, 1,823,097 shares and 1993, 1,841,957 shares.
SHARES
OUTSTANDING
PAR DECEMBER 31,
SERIES VALUE 1994
- ------------------------------------------------------------ ---------- -----------
Series not subject to mandatory redemption:
C-4 1/4% $ 20 (HECO) 150,000 3,000 3,000
D-5% 20 (HECO) 50,000 1,000 1,000
E-5% 20 (HECO) 150,000 3,000 3,000
H-5 1/4% 20 (HECO) 250,000 5,000 5,000
I-5% 20 (HECO) 89,657 1,793 1,793
J-4 3/4% 20 (HECO) 250,000 5,000 5,000
K-4.65% 20 (HECO) 175,000 3,500 3,500
M-8.05% 100 (HECO) 80,000 8,000 8,000
A-8 7/8% 100 (HELCO) 30,000 3,000 3,000
G-7 5/8% 100 (HELCO) 70,000 7,000 7,000
A-8% 100 (MECO) 20,000 2,000 2,000
B-8 7/8% 100 (MECO) 10,000 1,000 1,000
H-7 5/8% 100 (MECO) 50,000 5,000 5,000
----------- -------- --------
1,374,657 48,293 48,293
=========== -------- --------
Series subject to mandatory redemption:
O-11 1/2% $100 (HECO) 8,000 800 1,300
Q-7.68% 100 (HECO) 92,040 9,204 9,600
R-8.75% 100 (HECO) 200,000 20,000 20,000
B-10 3/4% 100 (HELCO) -- -- 100
C-9 1/4% 100 (HELCO) 6,000 600 800
D-12 3/4% 100 (HELCO) 6,500 650 700
E-12.25% 100 (HELCO) 7,500 750 800
F-8.5% 100 (HELCO) 60,000 6,000 6,000
D-8 3/4% 100 (MECO) 12,400 1,240 1,430
E-12 1/4% 100 (MECO) 2,000 200 400
F-13 3/4% 100 (MECO) 4,000 400 600
G-8.5% 100 (MECO) 50,000 5,000 5,000
----------- -------- --------
448,440 44,844 46,730
===========
Less sinking fund requirements due within one year.......... 2,374 1,320
-------- --------
42,470 45,410
-------- --------
Cumulative preferred stock............................. 90,763 93,703
-------- --------
See accompanying "Notes to Consolidated Financial Statements."
13
CONSOLIDATED STATEMENTS OF CAPITALIZATION, continued
====================================================
HAWAIIAN ELECTRIC COMPANY, INC. and Subsidiaries
December 31 1994 1993
- ------------------------------------------------------ ---------- ----------
(in thousands)
Long-term debt:
First mortgage bonds:
HECO:
4.55-5.75%, due 1995 through 1997.................. $ 24,000 $ 24,000
7 5/8%, due 2002................................... 10,000 30,000
---------- ----------
34,000 54,000
---------- ----------
HELCO:
7 3/4-7 7/8%, due 2002 through 2003................ 5,000 17,500
---------- ----------
MECO:
7 3/4-7 7/8%, due 2002 through 2003................ 7,000 22,500
---------- ----------
Total first mortgage bonds...................... 46,000 94,000
---------- ----------
Obligations to the State of Hawaii for the repayment
of Special Purpose Revenue Bonds:
HECO, 5.45%, series 1993, due 2023................... 50,000 50,000
HELCO, 5.45%, series 1993, due 2023.................. 20,000 20,000
MECO, 5.45%, series 1993, due 2023................... 30,000 30,000
HECO, 6.55%, series 1992, due 2022................... 40,000 40,000
HELCO, 6.55%, series 1992, due 2022.................. 12,000 12,000
MECO, 6.55%, series 1992, due 2022................... 8,000 8,000
HECO, 7 3/8%, series 1990C, due 2020................. 25,000 25,000
HELCO, 7 3/8%, series 1990C, due 2020................ 10,000 10,000
MECO, 7 3/8%, series 1990C, due 2020................. 20,000 20,000
HECO, 7.60%, series 1990B, due 2020.................. 21,000 21,000
HELCO, 7.60%, series 1990B, due 2020................. 4,000 4,000
HECO, 7.35%, series 1990A, due 2020.................. 16,000 16,000
HELCO, 7.35%, series 1990A, due 2020................. 3,000 3,000
MECO, 7.35%, series 1990A, due 2020.................. 1,000 1,000
HECO, 7 5/8%, series 1988, due 2018.................. 30,000 30,000
HELCO, 7 5/8%, series 1988, due 2018................. 11,000 11,000
MECO, 7 5/8%, series 1988, due 2018................. 9,000 9,000
HECO, 6 7/8%, refunding series 1987, due 2012........ 42,580 42,580
HELCO, 6 7/8%, refunding series 1987, due 2012....... 7,200 7,200
MECO, 6 7/8%, refunding series 1987, due 2012........ 7,720 7,720
HELCO, 7.2%, series 1984, due 2014................... 11,400 11,400
---------- ----------
378,900 378,900
Less funds on deposit with trustees.................. 3,391 56,205
---------- ----------
Total obligations to the State of Hawaii........ 375,509 322,695
---------- ----------
Other long-term debt - unsecured:
HECO, 5.15% note, due 1996........................... 20,000 20,000
HECO, 5.83% note, due 1998........................... 30,000 30,000
HELCO, 4.85% note, due 1995.......................... 10,000 10,000
MECO, 5.15% note, due 1996........................... 10,000 10,000
Other................................................ -- 27
---------- ----------
Total other long-term debt - unsecured.......... 70,000 70,027
---------- ----------
Total long-term debt............................ 491,509 486,722
Less unamortized discount............................. 1,923 1,986
Less amounts due within one year...................... 20,933 47,960
---------- ----------
Long-term debt, net................................ 468,653 436,776
---------- ----------
Total capitalization............................ $1,193,317 $1,101,142
========== ==========
See accompanying "Notes to Consolidated Financial Statements."
14
CONSOLIDATED STATEMENTS OF CASH FLOWS
=====================================
HAWAIIAN ELECTRIC COMPANY, INC. and Subsidiaries
Years ended December 31 1994 1993 1992
- ------------------------------------------------- ---------- ---------- ----------
(in thousands)
Cash flows from operating activities:
Income before preferred stock dividends of HECO.. $ 65,961 $ 56,126 $ 53,678
Adjustments to reconcile income before
preferred stock dividends of HECO to net
cash provided by operating activities:
Depreciation and amortization of plant
and equipment.............................. 63,779 55,960 53,856
Other amortization............................ 4,521 3,338 1,137
Deferred income taxes......................... 855 (1,952) (11,074)
Tax credits, net.............................. 3,271 4,086 2,852
Allowance for equity funds used during
construction............................... (9,064) (6,973) (6,781)
Increase in accounts receivable............... (6,696) (1,924) (8,857)
Decrease (increase) in accrued unbilled
revenues................................... (3,700) 912 (8,238)
Decrease (increase) in fuel oil stock......... (3,778) 1,914 2,466
Decrease (increase) in materials and
supplies................................... 131 (2,398) (17)
Increase in regulatory assets................. (9,885) (9,606) (2,921)
Increase (decrease) in accounts payable....... 12,854 (2,273) 6,192
Increase (decrease) in interest and
preferred dividends payable................ (1,757) 1,287 925
Changes in other assets and liabilities....... (14,170) (92) (4,525)
--------- --------- ---------
Net cash provided by operating activities........ 102,322 98,405 78,693
--------- --------- ---------
Cash flows from investing activities:
Capital expenditures............................. (186,461) (205,943) (181,542)
Contributions in aid of construction............. 15,112 20,158 17,949
Proceeds from sales of assets.................... -- -- 14,270
--------- --------- ---------
Net cash used in investing activities............ (171,349) (185,785) (149,323)
--------- --------- ---------
Cash flows from financing activities:
Net increase (decrease) in short-term
borrowings from nonaffiliates and
affiliate with original maturities
of three months or less......................... 76,938 (81,248) 87,606
Proceeds from other short-term borrowings........ -- 25,259 --
Repayment of other short-term borrowings......... -- (25,259) --
Proceeds from issuance of long-term debt......... 52,814 156,788 33,130
Repayment of long-term debt...................... (48,027) (46,901) (23,393)
Proceeds from issuance of preferred stock........ -- 12,000 --
Redemption of preferred stock.................... (1,886) (2,190) (1,745)
Preferred stock dividends........................ (4,316) (4,421) (4,525)
Proceeds from issuance of common stock........... 30,000 45,000 33,000
Capital stock expense............................ (59) (84) (15)
Common stock dividends........................... (28,511) (25,887) (23,048)
Other............................................ 846 5,362 82
--------- --------- ---------
Net cash provided by financing activities........ 77,799 58,419 101,092
--------- --------- ---------
Net increase (decrease) in cash and equivalents.. 8,772 (28,961) 30,462
Cash and equivalents, beginning of year.......... 1,922 30,883 421
--------- --------- ---------
Cash and equivalents, end of year................ $ 10,694 $ 1,922 $ 30,883
========= ========= =========
See accompanying "Notes to Financial Statements."
15
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
==========================================
HAWAIIAN ELECTRIC COMPANY, INC. and Subsidiaries
1 . SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF FINANCIAL STATEMENT PRESENTATION. The financial statements have been
- ------------------------------------------
prepared in conformity with generally accepted accounting principles. In
preparing the financial statements, management is required to make estimates and
assumptions that affect the reported amounts of assets and liabilities as of the
date of the balance sheet and revenues and expenses for the period. Actual
results could differ significantly from those estimates.
Material estimates that are particularly susceptible to significant change
relate to the determination of regulatory assets. Management believes that
regulatory assets have been appropriately established in accordance with
generally accepted accounting principles.
CONSOLIDATION. The consolidated financial statements include the accounts of
- --------------
Hawaiian Electric Company, Inc. (HECO) and its wholly owned subsidiaries
(collectively, the "Company"), Maui Electric Company, Limited (MECO) and Hawaii
Electric Light Company, Inc. (HELCO). HECO is a wholly owned subsidiary of
Hawaiian Electric Industries, Inc. (HEI).
All significant intercompany accounts and transactions have been eliminated
in consolidation.
PUBLIC UTILITY COMMISSION REGULATION. The Company is regulated by the Public
- -------------------------------------
Utilities Commission of the State of Hawaii (PUC) and accounts for the effects
of regulation under Statement of Financial Accounting Standards (SFAS) No. 71,
"Accounting for the Effects of Certain Types of Regulation." As a result, the
actions of regulators can affect the timing of recognition of revenues,
expenses, assets and liabilities.
PROPERTY, PLANT AND EQUIPMENT. Property, plant and equipment are stated at
- ------------------------------
cost. The cost of plant constructed by the Company includes applicable
engineering, supervision, administrative and general expenses, and an allowance
for the cost of funds used during the construction period. Upon the ordinary
retirement or sale of plant, no gain or loss is recognized. The cost of the
plant retired or sold and the cost of removal (net of salvage obtained) are
charged to accumulated depreciation.
CONTRIBUTIONS IN AID OF CONSTRUCTION. The Company receives contributions from
- -------------------------------------
customers for special construction requirements. As directed by the PUC, the
contributions are amortized on a straight-line basis over 30 years, which
approximates the estimated useful lives of the facilities for which the
contribu-tions were received. This amortization is an offset against
depreciation expense.
REVENUES. Revenues are based on rates authorized by the PUC and include
- ---------
revenues applicable to electric energy consumed in the accounting period but not
yet billed to the customers. The rate schedules of the Company include energy
cost adjustment clauses under which electric rates are adjusted for changes in
the weighted average price paid for fuel oil and certain components of purchased
power, and the relative amounts of company-generated power and purchased power.
POSTRETIREMENT AND POSTEMPLOYMENT BENEFITS. Pension costs are charged primarily
- -------------------------------------------
to expense and plant accounts. The Company's policy is to fund pension costs in
amounts consistent with the requirements of the Employee Retirement Income
Security Act.
The Company provides certain health care, life insurance and other benefits
to retired employees, substantially all of whom become eligible for these
benefits upon retirement, and the employees' beneficiaries and covered
dependents. Effective January 1, 1993, the Company adopted the provisions of
SFAS No. 106, "Employers' Accounting for Postretirement Benefits Other Than
Pensions," which requires that the expected cost of postretirement benefits
other than pensions
16
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, continued
=====================================================
HAWAIIAN ELECTRIC COMPANY, INC. and Subsidiaries
be accrued during the years in which employees render service (see Note 10).
Previously, the costs of these benefits were recognized when paid. The
resulting change in the method of accounting for postretirement benefits other
than pensions had no material effect on net income for 1993 primarily due to the
regulated nature of the Company's operations.
In November 1992, the Financial Accounting Standards Board (FASB) issued SFAS
No. 112, "Employers' Accounting for Postemployment Benefits." This statement
requires employers to recognize the obligation to provide postemployment
benefits in accordance with SFAS No. 43, "Accounting for Compensated Absences,"
if the obligation is attributable to employees' services already rendered,
employees' rights to those benefits accumulate or vest, payment of the benefits
is probable, and the amount of the benefits can be reasonably estimated. The
Company adopted the provisions of SFAS No. 112 on January 1, 1994. The
implementation of SFAS No. 112 did not have a material effect on the Company's
financial condition or results of operations.
DEPRECIATION. Depreciation of plant and equipment is computed primarily using
- -------------
the straight-line method over the estimated useful lives of the assets. The
composite annual depreciation rate was 3.9% in 1994 and 1993 and 3.8% in 1992.
PREMIUM, DISCOUNT AND EXPENSE. The expenses of issuing long-term debt
- ------------------------------
securities and the premiums or discounts at which they were sold are amortized
against income over the terms of the respective securities.
ALLOWANCE FOR FUNDS USED DURING CONSTRUCTION. Allowance for funds used during
- ---------------------------------------------
construction (AFUDC) is an accounting practice whereby the costs of debt and
equity funds used to finance plant construction are transferred from the income
statement to construction in progress on the balance sheet. The procedure
removes the effect of the costs of financing construction activity from the
income statement and treats such costs in the same manner as construction labor
and material costs.
The weighted average gross-of-tax AFUDC rate was 9.4% in 1994, 9.3% in 1993
and 10.2% in 1992 and reflected quarterly compounding.
INCOME TAXES. HECO and its subsidiaries are included in the consolidated income
- -------------
tax returns of HECO's parent, HEI. Income tax expense has been computed for
financial statement purposes as if HECO and its subsidiaries filed separate
consolidated HECO income tax returns.
The Company adopted the provisions of SFAS No. 109, "Accounting for Income
Taxes" effective January 1, 1993. Previously, income taxes were recognized in
accordance with the provisions of Accounting Principles Board Opinion No. 11.
The resulting change in the method of accounting for income taxes had no
material effect on net income for 1993 due to the regulated nature of the
Company's operations (see Note 7).
Federal and state tax credits are deferred and amortized over the estimated
useful lives of the properties which qualified for the credits.
CASH FLOWS. The Company considers cash on hand, deposits in banks, money market
- -----------
accounts, certificates of deposit, short-term commercial paper and reverse
repurchase agreements with original maturities of three months or less to be
cash and equivalents.
ENVIRONMENTAL EXPENDITURES. In general, environmental contamination treatment
- ---------------------------
costs are charged to expense, unless such costs are probable of recovery through
rates authorized by the PUC. Also, environmental costs are capitalized if: the
costs extend the life, increase the capacity, or improve the safety or
efficiency of property owned; the costs mitigate or prevent environmental
contamination that has yet to occur and that otherwise may result from future
operations; or the costs are incurred in preparing property for sale.
Liabilities are recorded when environmental assessments and/or remedial efforts
are probable, and the cost can be
17
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, continued
=====================================================
HAWAIIAN ELECTRIC COMPANY, INC. and Subsidiaries
reasonably estimated. Corresponding regulatory assets are recorded when it is
probable that such costs would be allowed by the PUC as reasonable and necessary
costs of service to be recovered in future rates.
RECLASSIFICATIONS. Certain reclassifications have been made to prior years'
- ------------------
consolidated financial statements to conform to the 1994 presentation.
2 . CUMULATIVE PREFERRED STOCK
The following series of cumulative preferred stock are redeemable at the
option of the respective company and are subject to voluntary liquidation
provisions as follows:
Voluntary
liquidation Redemption
price price
December 31, December 31,
Series 1994 1994
- ---------------------------- ------------ ------------
C, D, E, H, J and K (HECO).. $ 20.00 $ 21.00
I (HECO).................... 20.00 20.00
M (HECO).................... 100.00 101.00
A (HELCO)................... 101.00 101.00
A (MECO).................... 101.00 101.00
B (MECO).................... 101.00 101.00
========================================================
The following series of cumulative preferred stock are subject to mandatory
sinking fund, voluntary liquidation and optional redemption provisions as
indicated below:
Voluntary Optional
liquidation redemption
Annual sinking fund provision price price
------------------------------
Number of shares
---------------- Commencement December 31, December 31,
Series Minimum Maximum date 1994 1994
- ----------- ------- ------- ------------ ------------ ------------
O (HECO)... 3,250 6,500 10/15/86 $100.00 $101.70
Q (HECO)... 4,000 4,000 1/15/93 100.00 111.12
R (HECO)... 10,000 20,000 1/15/95 100.00 106.42
C (HELCO).. 1,000 2,000 10/15/85 101.00 101.00
D (HELCO).. 500 500 10/15/88 106.38 106.38
E (HELCO).. 500 500 10/15/90 106.92 106.92
F (HELCO).. 10,000 20,000 1/15/00 100.00 106.07
D (MECO)... 950 1,900 7/15/89 101.00 101.00
E (MECO)... 1,000 2,000 10/15/86 101.75 101.75
F (MECO)... 1,000 2,000 10/15/92 104.34 104.34
G (MECO)... 8,333 16,667 1/15/00 100.00 106.07
=======================================================================
Shares redeemed under the annual sinking fund provisions are redeemable at
par value of $100.
Under optional redemption provisions, shares are redeemable at the option of
the respective company at redemption prices shown above (except that prior to
specific dates, no shares of certain series of preferred stock may be redeemed
through refunding at a cost of money to the respective company which is less
than the dividend rate of such series). In the event of voluntary liquidation,
preferred shareholders would be entitled, insofar as the assets of the Company
would permit, to the liquidation prices shown above.
The total minimum sinking fund requirements on preferred stock subject to
mandatory redemption are $2,374,000 in 1995, $2,220,000 in 1996, $1,795,000 in
1997 and 1998, $1,695,000 in 1999 and a total of $34,965,000 thereafter.
18
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, continued
=====================================================
HAWAIIAN ELECTRIC COMPANY, INC. and Subsidiaries
HECO is obligated to make dividend, redemption and liquidation payments on
the preferred stock of MECO and HELCO if MECO and HELCO are unable to make such
payments, provided that such obligation is subordinated to any obligation to
make payments on HECO's own preferred stock.
3 . COMMON STOCK
In 1994, 1993 and 1992 HECO issued 554,857, 897,111 and 681,635 shares of
common stock to its parent, HEI, for $30 million, $45 million and $33 million,
respectively.
4 . LONG-TERM DEBT
The first mortgage bonds are secured by separate indentures which purport to
be liens on substantially all of the real and personal property now owned or
hereafter acquired by the respective companies.
The funds on deposit with trustees represent the undrawn proceeds from the
issuance of the special purpose revenue bonds and earn interest at market rates.
These funds are available only to pay for certain authorized construction
projects and certain expenses related to the bonds.
At December 31, 1994, the aggregate payments of principal required on long-
term debt during the next five years are $20,933,000 in 1995, $29,933,000 in
1996, $12,933,000 in 1997, $29,933,000 in 1998 and nil in 1999.
In January 1995, the Department of Budget and Finance of the State of Hawaii
issued tax-exempt special purpose revenue bonds, in the principal amount of $47
million with a maturity of 30 years and a fixed coupon interest rate of 6.60%,
and loaned the proceeds from the sale to HECO, HELCO and MECO. The bonds were
issued at a discount, resulting in a yield of approximately 6.75%.
5 . SHORT-TERM BORROWINGS
Short-term borrowings from nonaffiliates at December 31, 1994 and 1993 had a
weighted average interest rate of 6.3% and 3.6%, respectively, and consisted
entirely of commercial paper.
The Company maintained bank lines of credit which totaled approximately
$125.0 million and $107.5 million at December 31, 1994 and 1993, respectively.
The lines of credit support the issuance of commercial paper. There were no
borrowings against any line of credit during 1994 and 1993.
6 . REGULATORY ASSETS
Regulatory assets at December 31, 1994 and 1993 included the following
deferred costs:
December 31 1994 1993
- ----------------------------------------------- ------- -------
(in thousands)
Postretirement benefits other than pensions.... $34,032 $17,866
Income taxes................................... 23,427 16,176
Unamortized debt expense on retired issuances.. 7,513 5,435
Integrated resource planning costs............. 7,189 4,661
Computer system development costs.............. 6,090 3,152
Vacation earned, but not yet taken............. 5,972 5,494
Preliminary plant costs on suspended project... 5,768 5,199
Other.......................................... 2,533 3,095
------- -------
$92,524 $61,078
======= =======
19
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, continued
=====================================================
HAWAIIAN ELECTRIC COMPANY, INC. and Subsidiaries
In the first quarter of 1995, the Company applied to the PUC for recovery of
the preliminary plant costs on suspended project.
7 . INCOME TAXES
In February 1992, the FASB issued SFAS No. 109, "Accounting for Income
Taxes", which requires companies to use the asset and liability method of
accounting for income taxes. The objective of the asset and liability method is
to establish deferred tax assets and liabilities for the temporary differences
between the financial reporting basis and the tax basis of the Company's assets
and liabilities at enacted tax rates expected to be in effect when such deferred
tax assets or liabilities are realized or settled.
Effective January 1, 1993, the Company adopted SFAS No. 109. The resulting
change in the method of accounting for income taxes had no material effect on
net income for 1993 primarily due to the regulated nature of the Company. The
net increase in deferred income taxes payable arising from the adoption of SFAS
No. 109 is recoverable through future rates and has been recorded as a
regulatory asset. In 1993, additional income tax expense of $828,000 was
recognized under SFAS No. 109 as a result of the 1% increase in the maximum
corporate income tax rate enacted by the Omnibus Budget Reconciliation Act of
1993.
The components of income taxes charged to operating expenses were as follows:
Years ended December 31 1994 1993 1992
- ---------------------------- -------- -------- ---------
(in thousands)
Federal:
Current.................... $37,422 $33,556 $ 33,516
Deferred................... 2,133 432 (10,130)
Deferred tax credits, net.. (1,922) (2,260) (1,740)
------- ------- --------
37,633 31,728 21,646
------- ------- --------
State:
Current.................... 2,359 1,402 1,090
Deferred................... 315 (123) (1,074)
Deferred tax credits, net.. 3,513 4,000 4,592
------- ------- --------
6,187 5,279 4,608
------- ------- --------
Total....................... $43,820 $37,007 $ 26,254
======= ======= ========
Income tax benefits related to nonoperating activities, included in "Other,
Net" on the statements of income, amounted to $232,000, $109,000 and $2,411,000
for 1994, 1993 and 1992, respectively. Of the $2,411,000 income tax benefits
related to nonoperating activities in 1992, $2,019,000 was a tax benefit arising
from the utilization of a capital loss carryforward.
The sources of timing differences in the recognition of revenues and expenses
for tax and financial reporting purposes and the related deferred tax amounts
under Accounting Principles Board Opinion No. 11 included in operating expenses
in 1992 were as follows:
Year ended December 31 1992
- ----------------------------------------------------------------------- ---------
(in thousands)
Excess of tax depreciation over book straight-line depreciation rates.. $ 952
Contributions in aid of construction and customer advances, net........ (6,095)
Interest capitalized for tax purposes.................................. (3,347)
Excess of tax depreciation over financial reporting depreciation
due to basis differences.............................................. 1,631
Gain on sale of land deferred for financial reporting purposes......... (4,737)
Other.................................................................. 392
--------
Total.................................................................. $(11,204)
========
20
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, continued
=====================================================
HAWAIIAN ELECTRIC COMPANY, INC. and Subsidiaries
Deferred income taxes related to timing differences in the recognition of
nonoperating revenues and expenses for tax and financial reporting purposes in
1992 were not significant.
A reconciliation between income taxes charged to operating expenses and the
amount of income taxes computed at the federal statutory rates on income before
income taxes and preferred stock dividends follows:
Years ended December 31 1994 1993 1992
- ----------------------------------------------- -------- ------------ -----------
(dollars in thousands)
Federal statutory income tax rate.............. 35% 35% 34%
======= ======== ========
Amount at the federal statutory income tax
rate.......................................... $39,420 $ 33,331 $ 27,920
Allowance for funds used during construction
not included in taxable income................ -- -- (2,375)
State income taxes on operating income,
net of effect on federal income
taxes......................................... 4,022 3,431 3,139
Difference between financial reporting and tax
straight-line depreciation for which no
deferred taxes were provided.................. -- -- 3,015
Amortization of deferred tax credits........... -- 84 (1,720)
Amortization of contributions in aid of
construction.................................. -- -- (1,658)
Amortization of federal deferred taxes in
excess of current rates....................... -- (64) (1,675)
Other.......................................... 378 225 (392)
------- -------- --------
Income taxes charged to operating expenses..... $43,820 $ 37,007 $ 26,254
======= ======== ========
Deferred tax assets and deferred tax liabilities were comprised of the
following:
December 31 1994 1993
- ----------------------------------------------- -------- --------
(in thousands)
Deferred tax assets:
Property, plant and equipment................. $ 7,075 $ 5,810
Contributions in aid of construction and
customer advances............................ 52,892 44,932
Other......................................... 13,858 13,625
-------- --------
73,825 64,367
-------- --------
Deferred tax liabilities:
Property, plant and equipment................. 157,067 153,765
Regulatory assets............................. 8,897 6,236
Other......................................... 16,223 11,815
-------- --------
182,187 171,816
-------- --------
Net deferred tax liability..................... $108,362 $107,449
- ----------------------------------------------- ======== ========
There was no valuation allowance provided for deferred tax assets as of
December 31, 1994 and 1993.
21
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, continued
=====================================================
HAWAIIAN ELECTRIC COMPANY, INC. and Subsidiaries
8 . CASH FLOWS
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
-------------------------------------------------
Cash paid during 1994, 1993 and 1992 for interest (net of capitalized
amounts which were not material) and income taxes was as follows:
Years ended December 31 1994 1993 1992
------------------------- ------- ------- -------
(in thousands)
Interest................. $35,001 $31,875 $30,021
======= ======= =======
Income taxes............. $40,849 $34,796 $30,472
======= ======= =======
SUPPLEMENTAL DISCLOSURES OF NONCASH ACTIVITIES
- ----------------------------------------------
The allowance for equity funds used during construction, which was charged
primarily to construction in progress amounted to $9,064,000, $6,973,000 and
$6,781,000 in 1994, 1993 and 1992, respectively.
Effective in 1993, the Company recognized the estimated fair value of noncash
contributions in aid of construction received in 1993 and prior years, which
increased both plant and contributions in aid of construction by $26,105,000.
The estimated fair value of noncash contributions received in 1994 amounted to
$5,556,000.
9 . MAJOR CUSTOMERS
HECO and its subsidiaries derived 10% of their operating revenues from the
sale of electricity to federal government agencies amounting to $89,479,000 in
1994, $90,614,000 in 1993 and $78,020,000 in 1992.
10 . RETIREMENT BENEFITS
PENSIONS
- --------
HECO and its subsidiaries participate in several of HEI's defined benefit
pension plans which cover substantially all employees of HECO and its
subsidiaries. Benefits are based on the employee's years of service and base
compensation.
The funded status of HECO and its subsidiaries' portion of the HEI pension
plans and the amounts recognized in the consolidated financial statements were
as follows:
December 31 1994 1993
- ------------------------------------ --------- ---------
(in thousands)
Accumulated benefit obligation:
Vested............................ $285,605 $270,802
Nonvested......................... 30,279 40,791
-------- --------
$315,884 $311,593
======== ========
Projected benefit obligation........ $388,150 $399,858
Plan assets at fair value,
primarily equity securities
and fixed income investments...... 376,968 386,912
-------- --------
Projected benefit obligation in excess of plan assets 11,182 12,946
Unrecognized prior service cost..... (240) --
Unrecognized net gain............... 9,316 9,374
Unrecognized net transition obligation (19,153) (21,440)
Adjustment required to recognize minimum liability 282 321
-------- --------
Accrued pension liability........... $ 1,387 $ 1,201
======== ========
22
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, continued
=====================================================
HAWAIIAN ELECTRIC COMPANY, INC. and Subsidiaries
Plans with an accumulated benefit obligation exceeding assets were not
material.
Net periodic pension cost included the following components:
Years ended December 31 1994 1993 1992
- ----------------------- -------- -------- --------
(in thousands)
Service cost-benefits earned during the period ...... $ 14,469 $ 9,861 $ 8,935
Interest cost on projected benefit obligation ....... 27,803 25,437 25,735
Actual loss (return) on plan assets ................. 10,775 (53,703) (13,427)
Amortization and deferral, net ...................... (37,154) 33,564 (5,614)
-------- -------- --------
Net periodic pension cost ........................... $15,893 $ 15,159 $ 15,629
======== ======== ========
Of these net periodic pension costs, $10,801,000, $9,663,000 and $9,801,000
were expensed in 1994, 1993 and 1992, respectively, and the remaining amounts
were charged primarily to electric utility plant.
For all pension plans, as of December 31, 1994 and 1993, the discount rate
assumed in determining the actuarial present value of the projected benefit
obligation was 8.0% and 7.0%, respectively. For 1994, 1993 and 1992, the
expected long-term rate of return on assets was 8.0% and the assumed rate of
increase in future compensation levels was 5.0%.
The unrecognized net transition obligation is the projected benefit
obligation in excess of plan assets at January 1, 1987, less amounts amortized.
The unrecognized net transition obligation is being amortized ratably over 16
years beginning in 1987.
POSTRETIREMENT BENEFITS OTHER THAN PENSIONS
- -------------------------------------------
The Company provides various postretirement benefits other than pensions to
eligible employees upon retirement. Health and life insurance benefits are
provided to eligible employees upon their retirement. Health benefits are
provided with contributions by retirees toward costs based on their years of
service and retirement date. Employees are eligible for these benefits if, upon
retirement, they participate in one of the Company's defined benefit pension
plans. The Company began funding some of these benefits near year-end 1994.
Through December 31, 1992, the cost of postretirement benefits other than
pensions had not been recognized until paid (i.e., the pay-as-you-go method).
Payments for post-retirement benefits other than pensions amounted to $3,100,000
in 1992.
Effective January 1, 1993, the Company adopted SFAS No. 106, "Employers'
Accounting for Postretirement Benefits Other Than Pensions," which requires
accrual, during the years that an employee renders the necessary service, of the
expected cost of providing postretirement benefits other than pensions to that
employee and the employee's beneficiaries and covered dependents. The
transition obligation is being amortized ratably over 20 years beginning in
1993.
In February 1992, the PUC opened a generic docket to determine whether
SFAS No. 106 should be adopted for rate-making purposes. In November 1994, the
PUC issued a decision and order authorizing recovery of the full cost of
postretirement benefits other than pensions effective January 1, 1995. The
Companies are required to establish trust funds and to deposit into these funds
the recovered SFAS No. 106 costs. The regulatory asset established from January
1, 1993 through December 31, 1994 for postretirement benefits other than
pensions is being amortized ratably over 18 years beginning in 1995 for rate-
making and financial reporting purposes.
The funded status of the postretirement benefit plans and the amounts
recognized in the consolidated financial statements were as follows:
23
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, continued
=====================================================
HAWAIIAN ELECTRIC COMPANY, INC. and Subsidiaries
December 31 1994 1993
- --------------------------------------------------- ---------- ----------
(in thousands)
Accumulated postretirement benefit obligation:
Retirees.......................................... $ 59,047 $ 58,861
Fully eligible active plan participants........... 34,261 30,772
Other active plan participants.................... 45,664 48,072
--------- ---------
138,972 137,705
Plan assets at fair value, primarily fixed income
investments....................................... 2,732 --
--------- ---------
Accumulated postretirement benefit obligation
in excess of plan assets.......................... 136,240 137,705
Unrecognized net gain (loss)....................... 7,816 (819)
Unrecognized net transition obligation............. (112,756) (119,020)
--------- ---------
Accrued postretirement benefits liability.......... $ 31,300 $ 17,866
========= =========
As of December 31, 1994 and 1993, the assumed discount rates used to measure
the accumulated postretirement benefit obligation were 8.0% and 7.0%,
respectively. For 1994 and 1993, the assumed rate of increase in future
compensation levels was 5.0%.
Net periodic postretirement benefit cost included the following components:
Years ended December 31 1994 1993
- ------------------------------------------ ------- -------
(in thousands)
Service cost.............................. $ 4,642 $ 5,115
Interest cost............................. 9,284 10,426
Amortization and deferral, net............ 6,264 6,264
------- -------
Net periodic postretirement benefit cost.. $20,190 $21,805
======= =======
Of the net periodic postretirement benefit cost, $2,573,000 and $2,362,000
was expensed in 1994 and 1993, respectively, and the remaining amounts were
charged primarily to regulatory assets, and also to electric utility plant and
other accounts.
At December 31, 1994, the assumed health care trend rates for 1995 and future
years were as follows: medical, 7.5%; dental, 6.0% and vision, 5.0%.
A 1% increase in the trend rate for health care costs would have increased
the accumulated postretirement benefit obligation as of December 31, 1994 by
approxi-mately $19.9 million and the service and interest costs for 1994 by
approximately $2.4 million.
11 . COMMITMENTS AND CONTINGENCIES
FUEL CONTRACTS AND OTHER PURCHASE COMMITMENTS
- ---------------------------------------------
HECO and its subsidiaries have contractual agreements to purchase a minimum
amount of 0.5% sulfur residual fuel oil and 0.4% sulfur diesel fuel through
1995. The prices under these contracts are tied to market prices of petroleum
products as reported in Singapore and the U.S. Pacific Northwest. Based on the
average price per barrel prevailing on January 1, 1995, the estimated amount of
required purchases for 1995 is $171 million. The actual amount of purchases in
1995 could vary substantially from such estimates as a result of changes in
market prices and other factors. HECO and its subsidiaries purchased $186
million, $205 million and $216 million of fuel under these or prior contractual
agreements in 1994, 1993 and
24
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, continued
=====================================================
HAWAIIAN ELECTRIC COMPANY, INC. and Subsidiaries
1992, respectively. New contracts to replace expiring ones are expected to be
entered into in the normal course of business.
At December 31, 1994, the Company had purchase commitments, other than fuel
and power purchase contracts, amounting to approximately $83 million.
POWER PURCHASE AGREEMENTS
- -------------------------
As of December 31, 1994, the Company had power purchase agreements for 465
megawatts (MW) of firm capacity representing approximately 22% of their total
generating capabilities and purchased power firm capacities. Rate recovery is
allowed for energy and firm capacity payments under these agreements. Assuming
that each of the agreements remains in place and the minimum availability
criteria in the power purchase agreements are met [including HELCO's agreement
in principle with Hilo Coast Processing Company (HCPC)--see discussion which
follows], aggregate minimum fixed capacity charges are expected to be
approximately $107 million in 1995, $109 million in each of 1996 and 1997, $106
million in 1998, $109 million in 1999 and $2.1 billion thereafter.
In general, payments under the power purchase agreements for 465 MW of firm
capacity are based upon available capacity and energy. Payments for capacity
generally are not required if the contracted capacity is not available, and
payments are reduced, under certain conditions, if available capacity drops
below contracted levels. In general, the payment rates for capacity have been
predetermined for the terms of the agreements. The energy payment will vary
over the terms of the agreements and the Company may pass on changes in the fuel
component of the energy charges to customers through energy cost adjustment
clauses in its rate schedules. The Company does not operate nor participate in
the operation of any of the facilities that provide power under the agreements.
Title to the facilities does not pass to the Company upon expiration of the
agreements, and the agreements do not contain bargain purchase options with
respect to the facilities.
HELCO has a power purchase agreement with HCPC for 18 MW of firm capacity.
Hamakua Sugar Company, which had supplied HELCO with 8 MW of firm capacity,
ceased operations in October 1994. Puna Geothermal Ventures (PGV), an
independent geothermal power producer which had experienced substantial delays
in commencing commercial operations, passed an acceptance test in June 1993 and
is now considered to be a firm capacity source for 25 MW.
In March 1994, HCPC, which then provided 18 MW of firm capacity, issued a
written notice of termination to HELCO indicating that it would cease producing
power in March 1997. HELCO, in turn, issued a written notice of its preliminary
intent to purchase the HCPC facility, subject to a number of conditions. HELCO
has the right, but not the obligation, to purchase the facilities for fair
market value. As permitted under the power purchase agreement, HCPC asked that
the issue of the fair market value of the facilities be determined through
binding arbitration. HELCO and HCPC then engaged in negotiations regarding the
potential purchase of the plant or the possible amendment of the existing power
purchase agreement to keep the plant operating at least through March 1997.
On December 12, 1994, HCPC filed a Chapter 11 bankruptcy petition and advised
HELCO that it would cease operating its plant in December 1994. HELCO obtained
a temporary restraining order and, later, an extension of such order, requiring
HCPC to continue operations of the HCPC facility through March 7, 1995, with
HELCO to pay an additional amount for the power HCPC supplies. On January 5,
1995, HELCO and HCPC entered into an agreement in principle, subject to the
negotiation and execution of a definitive agreement, amending the existing power
purchase agreement through December 1999. The definitive agreement must be
approved by the bankruptcy court and is subject to cancellation by HELCO if not
approved by the PUC within 180 days of its execution. If unable to purchase
power from HCPC as contemplated by
25
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, continued
=====================================================
HAWAIIAN ELECTRIC COMPANY, INC. and Subsidiaries
the agreement in principle, HELCO would be operating with a slim generation
margin and might have to initiate planned service interruptions (rolling
blackouts) until it is able to arrange for additional generation.
HECO POWER OUTAGE
- -----------------
On April 9, 1991, HECO experienced a power outage that affected all customers
on the island of Oahu. The PUC initiated an investigation of the outage, which
was consolidated with a pending investigation of an outage that occurred in
1988.
Power Technologies, Inc. (PTI), an independent consultant hired by HECO with
the approval of the PUC, investigated the outage. HECO is implementing certain
of PTI's recommendations and is either studying or disagrees with certain of the
other recommendations. Management cannot predict the timing and outcome of any
PUC decision and order that may be issued, if any, with respect to the outages
or PTI's recommendations.
HECO's PUC-approved tariff rule states that HECO is not liable for interrup-
tions or insufficiency of supply when the cause was beyond HECO's control.
Nevertheless, HECO received 3,063 claims, which totaled approximately $7.8
million, within the time limit to file claims. 1,530 of these claims are for
property damage and most have been settled, with no admission of liability, or
closed as of December 31, 1994. The other 1,533 claims involve personal injury
or economic loss, such as lost profits, and generally have not been covered by
settlement.
Seven direct or indirect business customers have filed a lawsuit against HECO
on behalf of themselves and an alleged class, claiming $75 million in
compensatory damages and additional unspecified amounts for punitive damages
because of the April 9, 1991 outage. HECO has filed an answer which denies the
principal allegations in the complaint. The class has not been certified.
Trial has been set for January 1996.
HECO recorded a liability of $1 million for the total amount of expected
defense costs and settlements with respect to the outage. In the opinion of
management, losses (if any) in excess of the amount for which provision has been
made, net of estimated insurance recoveries, resulting from the ultimate outcome
of the lawsuit and claims related to the April 1991 outage will not have a
material adverse effect on the Company.
HELCO RELIABILITY INVESTIGATION
- -------------------------------
In July 1991, following service interruptions and rolling blackouts
instituted on the island of Hawaii, the PUC issued an order calling for an
investigation into the reliability of HELCO's system and held hearings.
In light of approximately 20 subsequent incidents of rolling blackouts and
service interruptions resulting from insufficient generation margin, further
evidentiary hearings were held in July 1992. With the input from an independent
consultant and the parties to the proceedings, the PUC may formulate minimum
reliability standards for HELCO, use the standards to assess HELCO's system
reliability, and re-examine the rate increase approved in October 1992 to see
whether any adjustments are appropriate. In the opinion of management, the
PUC's adjustment, if any, resulting from the reliability investigation will not
have a material adverse effect upon the Company's consolidated financial
condition or results of operations.
Subsequent to the hearings in this matter, HELCO's generation margin improved
with the addition of a 20-MW combustion turbine in August 1992 and PGV's
commencement of commercial operations. However, HELCO's generation margin was
adversely affected by the cessation of operations by Hamakua and will be further
adversely affected if an agreement in principle that HELCO has reached with HCPC
is not implemented. See "Power Purchase Agreements" above.
26
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, continued
=====================================================
HAWAIIAN ELECTRIC COMPANY, INC. and Subsidiaries
HELCO is proceeding with plans to install two 20-MW combustion turbines at
Keahole on the island of Hawaii in 1995 or 1996, followed by an 18-MW heat steam
recovery generator in 1997, at which time these units will be converted to a
combined-cycle unit, subject in each case to obtaining necessary permits and
approvals. The PUC has issued a decision and order approving commitment of
expenditures for the first 20-MW combustion turbine. Evidentiary hearings on
the other portions of the unit were held in July 1994. Further, two independent
power producers, Kawaihae Cogeneration Partners and Ensearch Development Corp.,
have each filed with the PUC separate complaints against HELCO, alleging that,
rather than having HELCO build the combined-cycle unit, they are entitled to a
power purchase contract to provide all or part of the capacity. An evidentiary
hearing in the Kawaihae Cogeneration Partners docket was held in June 1994. The
evidentiary hearing in the Ensearch Development Corp. docket was held in
December 1994.
HELCO has encountered procedural and other difficulties in obtaining the
necessary air permit and Conservation District Use Permit ("CDUP") which would
allow the combined-cycle unit to be constructed at the Keahole site. As a
result of these permitting delays, HELCO's unit installation schedule has been
adversely impacted. To address the contingency that the air permit or CDUP
might be signifi-cantly delayed or ultimately denied, HELCO is exploring other
alternatives to meet projected energy needs, including any viable, timely and
cost-effective unaffiliated nonutility generation alternative. However, until
additional generation is in place, and depending on the availability of existing
generation and the timing and size of load peaks, management believes that there
is a significant risk of capacity shortages on the island of Hawaii that could
result in rolling blackouts.
12 . REGULATORY RESTRICTIONS ON DISTRIBUTIONS TO PARENT
At December 31, 1994, net assets (assets less liabilities) of approximately
$314 million were not available for transfer to HEI in the form of dividends,
loans or advances without regulatory approval.
13 . RELATED-PARTY TRANSACTIONS
HEI charged HECO and its subsidiaries for general management and
administrative services totaling $2,417,000, $2,258,000 and $5,604,000 in 1994,
1993 and 1992, respectively. The amounts charged by HEI to its subsidiaries are
allocated primarily on the basis of actual labor hours. As of January 1, 1993,
HEI refined its method of identifying costs chargeable to its subsidiaries,
resulting in lower allocations to subsidiaries.
HEI also charged HECO for data processing services totaling $3,554,000,
$3,563,000 and $3,231,000 in 1994, 1993 and 1992, respectively.
HECO's borrowings from HEI totaled nil and $12,000,000 at December 31, 1994
and 1993, respectively. The interest charged on short-term borrowings from HEI
is computed based on HECO's short-term borrowing interest rate. Interest
charged by HEI to HECO totaled $77,000, $1,795,000 and $232,000 in 1994, 1993
and 1992, respectively.
14 . SIGNIFICANT GROUP CONCENTRATIONS OF CREDIT RISK
HECO and its subsidiaries are operating electric public utilities engaged in
business on the islands of Oahu, Hawaii, Maui, Lanai and Molokai in the State of
Hawaii. HECO and its subsidiaries grant credit to customers, all of whom reside
or conduct business in the State of Hawaii.
27
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, continued
=====================================================
HAWAIIAN ELECTRIC COMPANY, INC. and Subsidiaries
15 . FAIR VALUE OF FINANCIAL INSTRUMENTS
The following methods and assumptions were used to estimate the fair value of
each class of financial instruments for which it is practicable to estimate that
value:
CASH AND EQUIVALENTS. The carrying amount approximates fair value because of
- ---------------------
the short maturity of these instruments.
SHORT-TERM BORROWINGS. The carrying amount approximates fair value because of
- ----------------------
the short maturity of these instruments.
LONG-TERM DEBT. Fair value is estimated based on the quoted market prices for
- ---------------
the same or similar issues of debt.
CUMULATIVE PREFERRED STOCK SUBJECT TO MANDATORY REDEMPTION. There are no quoted
- -----------------------------------------------------------
market prices for the Company's preferred stocks. Fair value is estimated based
on quoted market prices for similar issues of preferred stock.
The estimated fair values of the Company's financial instruments were as
follows:
December 31 1994 1993
- ---------------------------------- ------------------- -------------------
Estimated Estimated
Carrying fair Carrying fair
amount value amount value
-------- --------- -------- ---------
(in thousands)
Financial assets:
Cash and equivalents.............. $ 10,694 $ 10,694 $ 1,922 $ 1,922
Financial liabilities:
Short-term borrowings from
nonaffiliates and affiliate..... 117,866 117,866 40,928 40,928
Long-term debt, net, including
amounts due within one year..... 489,586 461,082 484,736 506,089
Cumulative preferred stock
subject to mandatory redemption,
including sinking fund
requirements...................... 44,844 46,478 46,730 49,583
=============================================================================
LIMITATIONS. Fair value estimates are made at a specific point in time, based
- ------------
on relevant market information and information about the financial instrument.
These estimates do not reflect any premium or discount that could result from
offering for sale at one time the Company's entire holdings of a particular
financial instrument. Because no market exists for a significant portion of the
Company's financial instruments, fair value estimates cannot be determined with
precision. Changes in assumptions could significantly affect the estimates.
Fair value estimates are based on existing financial instruments without
attempting to estimate the value of anticipated future business and the value of
assets and liabilities that are not considered financial instruments. In addi-
tion, the tax ramifications related to the realization of the unrealized gains
and losses can have a significant effect on fair value estimates and have not
been considered.
28
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, continued
=====================================================
HAWAIIAN ELECTRIC COMPANY, INC. and Subsidiaries
16 . SUMMARIZED FINANCIAL INFORMATION
Summarized financial information for HECO's consolidated subsidiaries, HELCO and
MECO, was as follows:
HAWAII ELECTRIC LIGHT COMPANY, INC.
December 31 1994 1993
- ----------------------------- -------- --------
(in thousands)
Balance sheet data
Current assets............... $ 25,151 $ 22,161
Noncurrent assets............ 335,725 297,847
-------- --------
$360,876 $320,008
======== ========
Common stock equity.......... $120,908 $102,438
Cumulative preferred stock:
Not subject to mandatory redemption 10,000 10,000
Subject to mandatory redemption 7,800 8,100
Current liabilities.......... 59,787 42,615
Noncurrent liabilities....... 162,381 156,855
-------- --------
$360,876 $320,008
======== ========
Years ended December 31 1994 1993 1992
- ----------------------------- -------- -------- --------
(in thousands)
Income statement data
Operating revenues........... $128,706 $113,579 $104,904
Operating income............. 11,821 11,902 10,951
Net income for common stock.. 8,420 5,807 5,770
===========================================================
MAUI ELECTRIC COMPANY, LIMITED
December 31 1994 1993
- ----------------------------- -------- --------
(in thousands)
Balance sheet data
Current assets............... $ 29,204 $ 31,465
Noncurrent assets............ 272,019 252,680
-------- --------
$301,223 $284,145
======== ========
Common stock equity.......... $108,313 $ 97,569
Cumulative preferred stock:
Not subject to mandatory redemption 8,000 8,000
Subject to mandatory redemption 6,545 7,135
Current liabilities.......... 34,197 35,027
Noncurrent liabilities....... 144,168 136,414
-------- --------
$301,223 $284,145
======== ========
Years ended December 31 1994 1993 1992
- ----------------------------- -------- -------- --------
(in thousands)
Income statement data
Operating revenues........... $120,966 $114,256 $105,343
Operating income............. 16,251 13,518 12,379
Net income for common stock.. 10,196 9,274 8,770
===========================================================
29
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, continued
=====================================================
HAWAIIAN ELECTRIC COMPANY, INC. and Subsidiaries
17 . CONSOLIDATED QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
Selected quarterly consolidated financial information for 1994 and 1993 was
as follows:
Quarter ended YEAR ENDED
- -------------------------------------------------------------------------------------------
1994 March 31 June 30 Sept.30 Dec. 31 DEC. 31
- -------------------------------------------------------------------------------------------
(in thousands)
Operating revenues..... $ 200,098 $ 217,884/1/ $247,844/1,2/ $241,482/1,2/ $907,308
Operating income....... 16,132 21,635/1/ 25,708/1,2/ 23,837/1,2/ 87,312
Net income for common
stock................ 9,276 15,188/1/ 19,328/1,2/ 17,853/1,2/ 61,645
============================================================================================
1993
- -----------------------
(in thousands)
Operating revenues..... $205,560/5/ $ 218,158/5/ $ 234,484/5/ $ 215,808/5/ $874,010
Operating income....... 13,705/5/ 22,862/3,4,5/ 20,377/3,5/ 21,141/3,5/ 78,085
Net income for common
stock................ 7,462/5/ 16,465/3,4,5/ 14,548/3,5/ 13,230/3,5/ 51,705
============================================================================================
/1/ Includes interim rate increases granted to HECO, primarily to cover the
costs of new facilities and equipment.
/2/ Includes interim rate increases granted to HELCO, primarily to cover the
costs of plant and equipment and operating costs necessary to maintain
and improve service.
/3/ Includes an adjustment to establish a regulatory asset for the difference
between postretirement benefits other than pension costs determined under
SFAS No. 106 and such costs under the pay-as-you-go method. The effect was
approximately $9.1 million, $4.4 million and $4.4 million on a
pre-tax basis for the second, third and fourth quarters, respectively ($5.5
million, $2.7 million and $2.7 million, respectively on an after-tax basis.)
/4/ Includes a nonrecurring adjustment to establish a regulatory asset for
vacation earned but not yet taken by employees. The effect was
approximately $4.2 million on a pre-tax basis ($2.6 million on an after-tax
basis.)
/5/ Includes interim rate increases granted to MECO, primarily to cover the
costs of a phased installation of a combined-cycle generating unit on Maui.
30
INDEPENDENT AUDITORS' REPORT
The Board of Directors
and Stockholder
Hawaiian Electric Company, Inc.:
We have audited the accompanying consolidated balance sheets and consolidated
statements of capitalization of Hawaiian Electric Company, Inc. (a wholly owned
subsidiary of Hawaiian Electric Industries, Inc.) and subsidiaries as of
December 31, 1994 and 1993, and the related consolidated statements of income,
retained earnings and cash flows for each of the years in the three-year period
ended December 31, 1994. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Hawaiian Electric
Company, Inc. and subsidiaries as of December 31, 1994 and 1993, and the results
of their operations and their cash flows for each of the years in the three-year
period ended December 31, 1994, in conformity with generally accepted accounting
principles.
As discussed in Note 7 to the consolidated financial statements, effective
January 1, 1993, the Company changed its method of accounting for income taxes.
Additionally, as discussed in Note 10 to the consolidated financial
statements, effective January 1, 1993, the Company changed its method of
accounting for postretirement benefits other than pensions.
/s/ KPMG Peat Marwick
Honolulu, Hawaii
January 25, 1995
31
DIRECTORS AND OFFICERS
HAWAIIAN ELECTRIC COMPANY, HAWAII ELECTRIC LIGHT MAUI ELECTRIC COMPANY,
INC. COMPANY, INC. LIMITED
- --------------------------------------------------------------------------------------------
DIRECTORS DIRECTORS DIRECTORS
( ) indicates age and year indicates
first elected or appointed./1/
ROBERT F. CLARKE (52), 1990 HARWOOD D. WILLIAMSON HARWOOD D. WILLIAMSON
RICHARD HENDERSON (66), 1970 RICHARD HENDERSON GLADYS C. BAISA
BEN F. KAITO/2/ (68), 1975 WARREN H. W. LEE THOMAS J. JEZIERNY
MILDRED D. KOSAKI/2/ (70), 1973 DENZIL W. ROSE SANFORD J. LANGA
PAUL A. OYER (54), 1985 DONALD K. YAMADA B. MARTIN LUNA
DIANE J. PLOTTS/2/ (59), 1991 ANNE M. TAKABUKI
HARWOOD D. WILLIAMSON (63), 1985
PAUL C. YUEN/2/ (66), 1993
- ---------------------------------------------------------------------------------------------
/1/ All directors serve one year terms.
/2/ Audit Committee member.
OFFICERS OFFICERS OFFICERS
ROBERT F. CLARKE HARWOOD D. WILLIAMSON HARWOOD D. WILLIAMSON
Chairman of the Board Chairman of the Board Chairman of the Board
HARWOOD D. WILLIAMSON WARREN H. W. LEE THOMAS J. JEZIERNY
President and Chief Executive President President
Officer
PAUL A. OYER PAUL A. OYER
T. MICHAEL MAY Financial Vice President Financial Vice President
Senior Vice President and Treasurer and Treasurer
JOAN M. DIAMOND EDWARD Y. HIRATA EDWARD Y. HIRATA
Vice President-Human Resources Vice President Vice President
JACKIE MAHI ERICKSON MOLLY M. EGGED MOLLY M. EGGED
Vice President-General Counsel Secretary Secretary
CHARLES M. FREEDMAN MICHAEL F. H. CHANG MARVIN A. HAWTHORNE
Vice President-Corporate Relations Assistant Treasurer Assistant Treasurer
EDWARD Y. HIRATA MARVIN A. HAWTHORNE DUANE T. HAYASHI
Vice President-Planning Assistant Treasurer Assistant Treasurer
GEORGE T. IWAHIRO DEORNA L. IKEDA MICHAEL E. KAM
Vice President-Engineering Assistant Treasurer Assistant Treasurer
THOMAS L. JOAQUIN WILLIAM J. STORMONT STANLEY T. NAKAMOTO
Vice President-Operations Assistant Secretary Assistant Treasurer
RICHARD L. O'CONNELL JESSIE K. AKAGI
Vice President-Customer Relations Assistant Secretary
PAUL A. OYER
Financial Vice President and Treasurer
DAVID M. RODRIGUES
Vice President-Corporate Excellence
ERNEST T. SHIRAKI
Controller
MOLLY M. EGGED
Secretary
MARVIN A. HAWTHORNE
Assistant Treasurer
33