UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1996
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
Exact Name of Registrant as Commission I.R.S. Employer
Specified in Its Charter File Number Identification No.
- --------------------------- ----------- ------------------
HAWAIIAN ELECTRIC INDUSTRIES, INC. 1-8503 99-0208097
and Principal Subsidiary
HAWAIIAN ELECTRIC COMPANY, INC. 1-4955 99-0040500
STATE OF HAWAII
- -------------------------------------------------------------------------------
(State or other jurisdiction of incorporation or organization)
900 RICHARDS STREET, HONOLULU, HAWAII 96813
- -------------------------------------------------------------------------------
(Address of principal executive offices and zip code)
HAWAIIAN ELECTRIC INDUSTRIES, INC. ----- (808) 543-5662
HAWAIIAN ELECTRIC COMPANY, INC. ------- (808) 543-7771
- -------------------------------------------------------------------------------
(Registrant's telephone number, including area code)
NONE
- -------------------------------------------------------------------------------
(Former name, former address and former fiscal year, if changed since last
report)
===============================================================================
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
----- -----
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Class of Common Stock Outstanding November 1, 1996
- ---------------------------------------------------------------------------------------------------
Hawaiian Electric Industries, Inc. (Without Par Value)... 30,663,953 Shares
Hawaiian Electric Company, Inc. ($6 2/3 Par Value)....... 12,302,657 Shares (not publicly traded)
===================================================================================================
Hawaiian Electric Industries, Inc. and subsidiaries
Hawaiian Electric Company, Inc. and subsidiaries
Form 10-Q--Quarter ended September 30, 1996
INDEX
PAGE NO.
Glossary of terms...................................................... ii
PART I. FINANCIAL INFORMATION
Item 1. Financial statements
Hawaiian Electric Industries, Inc. and subsidiaries
---------------------------------------------------
Consolidated balance sheets (unaudited) -
September 30, 1996 and December 31, 1995.................... 1
Consolidated statements of income (unaudited) - three and
nine months ended September 30, 1996 and 1995............... 2
Consolidated statements of retained earnings (unaudited) -
three and nine months ended September 30, 1996 and 1995..... 2
Consolidated statements of cash flows (unaudited) - nine
months ended September 30, 1996 and 1995.................... 3
Notes to consolidated financial statements (unaudited)....... 4
Hawaiian Electric Company, Inc. and subsidiaries
------------------------------------------------
Consolidated balance sheets (unaudited) -
September 30, 1996 and December 31, 1995.................... 9
Consolidated statements of income (unaudited) - three and
nine months ended September 30, 1996 and 1995............... 10
Consolidated statements of retained earnings (unaudited) -
three and nine months ended September 30, 1996 and 1995..... 10
Consolidated statements of cash flows (unaudited) - nine
months ended September 30, 1996 and 1995.................... 11
Notes to consolidated financial statements (unaudited)....... 12
Item 2. Management's discussion and analysis of financial condition
and results of operations................................... 16
PART II. OTHER INFORMATION
Item 1. Legal proceedings............................................ 27
Item 5. Other information............................................ 27
Item 6. Exhibits and reports on Form 8-K............................. 28
Signatures............................................................. 29
i
Hawaiian Electric Industries, Inc. and subsidiaries
Hawaiian Electric Company, Inc. and subsidiaries
Form 10-Q--Quarter ended September 30, 1996
GLOSSARY OF TERMS
TERMS DEFINITIONS
- ----- -----------
AFUDC Allowance for funds used during construction
ASB American Savings Bank, F.S.B., a wholly owned subsidiary of
HEI Diversified, Inc. and parent company of American Savings
Investment Services Corp., ASB Service Corporation,
AdCommunications, Inc. and American Savings Mortgage Co.,
Inc.
BIF Bank Insurance Fund
BLNR Board of Land and Natural Resources of the State of Hawaii
CDUP Conservation District Use Permit amendment
COMPANY Hawaiian Electric Industries, Inc. and its direct and
indirect subsidiaries, including, without limitation,
Hawaiian Electric Company, Inc., Maui Electric Company,
Limited, Hawaii Electric Light Company, Inc., HEI Investment
Corp., Malama Pacific Corp. and its subsidiaries, Hawaiian
Tug & Barge Corp., Young Brothers, Limited, HEI Diversified,
Inc., American Savings Bank, F.S.B. and its subsidiaries,
Lalamilo Ventures, Inc. and HEI Power Corp. and its
subsidiaries
CONSUMER ADVOCATE Division of Consumer Advocacy, Department of Commerce and
Consumer Affairs of the State of Hawaii
D&O Decision and Order
DOH Department of Health of the State of Hawaii
EMF Electric and magnetic fields
EPA Federal Environmental Protection Agency
FASB Financial Accounting Standards Board
FDIC Federal Deposit Insurance Corporation
FHLB Federal Home Loan Bank
HECO Hawaiian Electric Company, Inc., a wholly owned electric
utility subsidiary of Hawaiian Electric Industries, Inc. and
parent company of Maui Electric Company, Limited and Hawaii
Electric Light Company, Inc.
HEI Hawaiian Electric Industries, Inc., parent company of
Hawaiian Electric Company, Inc., HEI Investment Corp.,
Malama Pacific Corp., Hawaiian Tug & Barge Corp., Lalamilo
Ventures, Inc., HEI Diversified, Inc., Pacific Energy
Conservation Services, Inc. and HEI Power Corp.
ii
GLOSSARY OF TERMS, CONTINUED
TERMS DEFINITIONS
- ----- -----------
HEIDI HEI Diversified, Inc., a wholly owned subsidiary of Hawaiian
Electric Industries, Inc. and the parent company of American
Savings Bank, F.S.B.
HEIIC HEI Investment Corp., a wholly owned subsidiary of Hawaiian
Electric Industries, Inc.
HEIPC HEI Power Corp., a wholly owned subsidiary of Hawaiian
Electric Industries, Inc., and the parent company of several
subsidiaries
HELCO Hawaii Electric Light Company, Inc., a wholly owned electric
utility subsidiary of Hawaiian Electric Company, Inc.
HIG The Hawaiian Insurance & Guaranty Company, Limited, an
insurance company which was placed in state rehabilitation
proceedings. HEI Diversified, Inc. was the holder of record
of HIG's common stock prior to August 16, 1994
HTB Hawaiian Tug & Barge Corp., a wholly owned subsidiary of
Hawaiian Electric Industries, Inc. and parent company of
Young Brothers, Limited
IPP Independent power producer
IRP Integrated resource plan
IRR Interest rate risk
KCP Kawaihae Cogeneration Partners
KWH Kilowatthour
MECO Maui Electric Company, Limited, a wholly owned electric
utility subsidiary of Hawaiian Electric Company, Inc.
MPC Malama Pacific Corp., a wholly owned subsidiary of Hawaiian
Electric Industries, Inc. and parent company of several real
estate subsidiaries
MW Megawatt
OTS Office of Thrift Supervision, Department of Treasury
PGV Puna Geothermal Venture
PSD Prevention of Significant Deterioration/Covered Source
Permit
PUC Public Utilities Commission of the State of Hawaii
ROACE Return on average common equity
SAIF Savings Association Insurance Fund
SEC Securities and Exchange Commission
SFAS Statement of Financial Accounting Standards
YB Young Brothers, Limited, a wholly owned subsidiary of
Hawaiian Tug & Barge Corp.
iii
PART I - FINANCIAL INFORMATION
- -------------------------------------------------------------------------------
ITEM 1. FINANCIAL STATEMENTS
- -----------------------------
Hawaiian Electric Industries, Inc. and subsidiaries
CONSOLIDATED BALANCE SHEETS (UNAUDITED)
September 30, December 31,
(in thousands) 1996 1995
- ------------------------------------------------------------------------------------------------
ASSETS
Cash and equivalents............................................. $ 94,266 $ 130,833
Accounts receivable and unbilled revenues, net................... 147,628 142,505
Inventories, at average cost..................................... 48,001 35,258
Real estate developments......................................... 34,554 35,023
Marketable securities............................................ 1,424,929 1,479,552
Other investments................................................ 74,142 74,325
Loans receivable, net............................................ 1,977,432 1,687,801
Property, plant and equipment, net of accumulated
depreciation of $874,415 and $815,547......................... 1,896,301 1,808,195
Regulatory assets................................................ 99,867 99,693
Other............................................................ 67,934 69,315
Goodwill and other intangibles................................... 38,088 41,245
---------- ----------
$5,903,142 $5,603,745
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES
Accounts payable................................................. $ 110,709 $ 94,806
Deposit liabilities.............................................. 2,176,216 2,223,755
Short-term borrowings............................................ 170,174 181,825
Securities sold under agreements to repurchase................... 479,976 412,521
Advances from Federal Home Loan Bank............................. 668,274 501,274
Long-term debt................................................... 822,514 758,463
Deferred income taxes............................................ 186,425 182,101
Unamortized tax credits.......................................... 48,159 46,965
Contributions in aid of construction............................. 194,153 191,854
Other............................................................ 197,047 190,535
---------- ----------
5,053,647 4,784,099
---------- ----------
PREFERRED STOCK OF ELECTRIC UTILITY SUBSIDIARIES
Subject to mandatory redemption.................................. 39,255 41,750
Not subject to mandatory redemption.............................. 48,293 48,293
---------- ----------
87,548 90,043
---------- ----------
STOCKHOLDERS' EQUITY
Preferred stock, no par value, authorized 10,000 shares;
issued: none................................................. -- --
Common stock, no par value, authorized 100,000 shares; issued
and outstanding: 30,618 shares and 29,773 shares.............. 614,383 585,387
Retained earnings................................................ 147,564 144,216
---------- ----------
761,947 729,603
---------- ----------
$5,903,142 $5,603,745
========== ==========
See accompanying notes to consolidated financial statements.
1
Hawaiian Electric Industries, Inc. and subsidiaries
CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
Three months ended Nine months ended
(in thousands, except per share amounts and September 30, September 30,
--------------------- ---------------------
ratio of earnings to fixed charges) 1996 1995 1996 1995
- ---------------------------------------------------------------------------------------------------------------
REVENUES
Electric utility.............................................. $284,417 $261,886 $ 797,241 $738,913
Savings bank.................................................. 68,281 63,151 200,351 185,473
Other......................................................... 15,460 11,844 43,978 38,666
-------- -------- ---------- --------
368,158 336,881 1,041,570 963,052
-------- -------- ---------- --------
EXPENSES
Electric utility.............................................. 234,285 211,215 664,995 614,530
Savings bank.................................................. 58,461 53,462 170,373 155,716
FDIC special assessment.................................. 13,835 -- 13,835 --
Other......................................................... 16,834 15,529 49,477 45,752
-------- -------- ---------- --------
323,415 280,206 898,680 815,998
-------- -------- ---------- --------
OPERATING INCOME (LOSS)
Electric utility.............................................. 50,132 50,671 132,246 124,383
Savings bank.................................................. (4,015) 9,689 16,143 29,757
Other......................................................... (1,374) (3,685) (5,499) (7,086)
-------- -------- ---------- --------
44,743 56,675 142,890 147,054
-------- -------- ---------- --------
Interest expense--electric utility and other.................. (16,060) (15,931) (48,309) (46,398)
Allowance for borrowed funds used during
construction................................................. 1,098 1,327 3,602 3,832
Preferred stock dividends of electric utility
subsidiaries................................................. (1,667) (1,726) (5,008) (5,183)
Allowance for equity funds used during
construction................................................. 2,399 2,590 7,197 7,575
-------- -------- ---------- --------
INCOME BEFORE INCOME TAXES.................................... 30,513 42,935 100,372 106,880
Income taxes.................................................. 13,141 17,784 42,768 45,002
-------- -------- ---------- --------
NET INCOME.................................................... $ 17,372 $ 25,151 $ 57,604 $ 61,878
======== ======== ========== ========
Earnings per common share..................................... $0.57 $0.86 $1.91 $2.13
======== ======== ========== ========
Dividends per common share.................................... $0.60 $0.59 $1.80 $1.77
======== ======== ========== ========
Weighted average number of common
shares outstanding......................................... 30,465 29,331 30,178 29,058
======== ======== ========== ========
Ratio of earnings to fixed charges (SEC method)
Excluding interest on ASB deposits......................... 1.90 2.03
========== ========
Including interest on ASB deposits......................... 1.54 1.62
========== ========
Hawaiian Electric Industries, Inc. and subsidiaries
CONSOLIDATED STATEMENTS OF RETAINED EARNINGS (UNAUDITED)
Three months ended Nine months ended
September 30, September 30,
-------------------- -----------------------
(in thousands) 1996 1995 1996 1995
- -----------------------------------------------------------------------------------------------------------------
RETAINED EARNINGS, BEGINNING OF PERIOD........................ $148,450 $138,462 $ 144,216 $135,835
Net income.................................................... 17,372 25,151 57,604 61,878
Common stock dividends........................................ (18,258) (17,293) (54,256) (51,393)
-------- -------- ---------- --------
RETAINED EARNINGS, END OF PERIOD.............................. $147,564 $146,320 $ 147,564 $146,320
======== ======== ========== ========
See accompanying notes to consolidated financial statements.
2
Hawaiian Electric Industries, Inc. and subsidiaries
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
Nine months ended
September 30,
----------------------
(in thousands) 1996 1995
- ----------------------------------------------------------------------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income................................................................. $ 57,604 $ 61,878
Adjustments to reconcile net income to net cash provided
by operating activities
Depreciation and amortization of property, plant and equipment........... 61,553 57,662
Other amortization....................................................... 9,584 2,275
Deferred income taxes and tax credits, net............................... 6,955 8,005
Allowance for equity funds used during construction...................... (7,197) (7,575)
Changes in assets and liabilities
Increase in accounts receivable and unbilled revenues, net............ (5,123) (9,614)
Decrease (increase) in inventories.................................... (12,743) 3,727
Decrease (increase) in real estate developments....................... 469 (1,125)
Decrease (increase) in regulatory assets.............................. 24 (3,708)
Increase (decrease) in accounts payable............................... 15,903 (4,464)
Changes in other assets and liabilities............................... (5,605) (6,939)
--------- ---------
NET CASH PROVIDED BY OPERATING ACTIVITIES.................................. 121,424 100,122
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES
Loans receivable originated and purchased.................................. (420,981) (263,846)
Principal repayments on loans receivable................................... 130,745 104,392
Proceeds from sale of loans receivable..................................... 2,314 6,254
Held-to-maturity mortgage-backed securities purchased...................... (199,999) (146,029)
Principal repayments on held-to-maturity mortgage-backed securities........ 252,511 119,430
Capital expenditures....................................................... (146,346) (146,244)
Contributions in aid of construction....................................... 7,979 8,482
Other...................................................................... 3,382 (7,600)
--------- ---------
NET CASH USED IN INVESTING ACTIVITIES...................................... (370,395) (325,161)
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase (decrease) in deposit liabilities............................. (47,539) 47,777
Net increase (decrease) in short-term borrowings with original maturities
of three months or less................................................... (10,640) 44,946
Proceeds from other short-term borrowings.................................. 1,064 745
Repayment of other short-term borrowings................................... (2,075) (2,162)
Proceeds from securities sold under agreements to repurchase............... 470,100 424,000
Repurchase of securities sold under agreements to repurchase............... (402,000) (220,339)
Proceeds from advances from Federal Home Loan Bank......................... 643,700 355,200
Principal payments on advances from Federal Home Loan Bank................. (476,700) (431,700)
Proceeds from issuance of long-term debt................................... 81,360 48,444
Repayment of long-term debt................................................ (17,400) (13,400)
Redemption of electric utility subsidiaries' preferred stock............... (2,495) (1,744)
Net proceeds from issuance of common stock................................. 14,849 13,497
Common stock dividends..................................................... (40,155) (36,840)
Other...................................................................... 335 (5,747)
--------- ---------
NET CASH PROVIDED BY FINANCING ACTIVITIES.................................. 212,404 222,677
--------- ---------
Net decrease in cash and equivalents....................................... (36,567) (2,362)
Cash and equivalents, beginning of period.................................. 130,833 87,623
--------- ---------
CASH AND EQUIVALENTS, END OF PERIOD........................................ $ 94,266 $ 85,261
========= =========
See accompanying notes to consolidated financial statements.
3
Hawaiian Electric Industries, Inc. and subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
- --------------------------------------------------------------------------------
(1) BASIS OF PRESENTATION
- --------------------------
The accompanying unaudited consolidated financial statements have been prepared
in conformity with generally accepted accounting principles (GAAP) for interim
financial information and with the instructions to Securities and Exchange
Commission (SEC) Form 10-Q and Article 10 of Regulation S-X. Accordingly, they
do not include all of the information and footnotes required by generally
accepted accounting principles for complete financial statements. In preparing
the financial statements, management is required to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the balance sheet
and the reported amounts of revenues and expenses for the period. Actual results
could differ significantly from those estimates. The accompanying unaudited
consolidated financial statements should be read in conjunction with the
consolidated financial statements and the notes thereto incorporated by
reference in HEI's Annual Report on SEC Form 10-K for the year ended December
31, 1995 (as amended) and the consolidated financial statements and the notes
thereto in HEI's Quarterly Report on SEC Form 10-Q for the quarters ended March
31 and June 30, 1996.
In the opinion of HEI's management, the accompanying unaudited consolidated
financial statements contain all material adjustments required by GAAP to
present fairly the Company's financial position as of September 30, 1996 and
December 31, 1995, and the results of its operations for the three months and
nine months ended September 30, 1996 and 1995, and its cash flows for the nine
months ended September 30, 1996 and 1995. All such adjustments are of a normal
recurring nature, unless otherwise disclosed in this Form 10-Q or other
referenced material. Results of operations for interim periods are not
necessarily indicative of results for the full year.
(2) ELECTRIC UTILITY SUBSIDIARY
- --------------------------------
For Hawaiian Electric Company, Inc.'s consolidated financial information,
including its commitments and contingencies, see pages 9 through 15.
(3) SAVINGS BANK SUBSIDIARY
- ----------------------------------------
SELECTED CONSOLIDATED FINANCIAL INFORMATION
American Savings Bank, F.S.B. and subsidiaries
Income statement data
Three months ended Nine months ended
September 30, September 30,
--------------------- --------------------
(in thousands) 1996 1995 1996 1995
- ------------------------------------------------------------------------------------------------------------------
Interest income.................................................. $ 64,519 $ 59,533 $188,973 $175,094
Interest expense................................................. 39,701 36,577 114,966 104,551
-------- -------- -------- --------
NET INTEREST INCOME.............................................. 24,818 22,956 74,007 70,543
Provision for losses............................................. (521) (242) (1,412) (867)
Operating, administrative and general expenses................... (18,239) (16,643) (53,995) (50,298)
FDIC special assessment........................................ (13,835) -- (13,835) --
Other income..................................................... 3,762 3,618 11,378 10,379
-------- -------- -------- --------
OPERATING INCOME (LOSS).......................................... (4,015) 9,689 16,143 29,757
Income taxes..................................................... (1,381) 4,047 7,041 12,462
-------- -------- -------- --------
NET INCOME (LOSS)................................................ $ (2,634) $ 5,642 $ 9,102 $ 17,295
======== ======== ======== ========
4
American Savings Bank, F.S.B. and subsidiaries
Balance sheet data
September 30, December 31,
(in thousands) 1996 1995
- ---------------------------------------------------------------------------------
ASSETS
Cash and equivalents.................................. $ 92,168 $ 129,678
Held-to-maturity investment securities................ 36,778 34,720
Held-to-maturity mortgage-backed securities........... 1,388,151 1,444,832
Loans receivable, net................................. 1,977,432 1,687,801
Other................................................. 75,673 75,150
Goodwill and other intangibles........................ 38,088 41,245
---------- ----------
$3,608,290 $3,413,426
========== ==========
LIABILITIES AND EQUITY
Deposit liabilities................................... $2,176,216 $2,223,755
Securities sold under agreements to repurchase........ 479,976 412,521
Advances from Federal Home Loan Bank.................. 668,274 501,274
Other................................................. 67,879 57,973
---------- ----------
3,392,345 3,195,523
Common stock equity................................... 215,945 217,903
---------- ----------
$3,608,290 $3,413,426
========== ==========
DEPOSIT-INSURANCE PREMIUMS AND REGULATORY DEVELOPMENTS
The deposit accounts of ASB and other thrifts are insured by the Savings
Association Insurance Fund (SAIF). The deposit accounts of commercial banks are
insured by the Bank Insurance Fund (BIF). The SAIF and BIF are administered by
the Federal Deposit Insurance Corporation (FDIC). In order to capitalize these
funds, thrifts and banks have in the past paid costs of insurance ranging from
23 cents to 31 cents per $100 of deposits. However, the FDIC may reduce these
assessment rates when the SAIF and BIF individually reach a designated 1.25%
reserve ratio. The BIF reached the designated reserve ratio in 1995.
On September 30, 1996, President Clinton signed into law the Deposit Insurance
Funds Act of 1996 (Funds Act), which requires the FDIC to impose a one-time
special assessment on SAIF members in an amount sufficient to increase the SAIF
reserve ratio to 1.25% as of October 1, 1996. In addition, effective January 1,
1997, the Funds Act provides that the assessment base for raising funds to pay
interest on obligations issued by the Financing Corporation (FICO) is to be
expanded to include the deposits of banks as well as thrifts. The provisions of
the Funds Act should enable SAIF institutions to achieve, over time, parity with
BIF institutions in the schedules of the premiums to be paid for deposit
insurance coverage and to fund FICO interest obligations.
In October, 1996, the FDIC set the one-time special assessment for SAIF deposits
at 65.7 cents per $100 of deposits, to be applied against insured deposits held
by SAIF institutions as of March 31, 1995, subject to such adjustments as the
FDIC finds necessary to achieve the 1.25% SAIF reserve ratio as of October 1,
1996. ASB's special assessment was estimated to be $8.3 million after-tax, and
was accrued in September 1996. In October, 1996, the FDIC also proposed a
risk-based assessment schedule for SAIF institutions, effective January 1, 1997,
that would be identical to the existing base rate schedule for BIF institutions:
0 to 27 cents per $100 of deposits. Added to this base rate schedule through
1999 will be the assessment to fund the FICO's interest obligations, estimated
at 6.45 cents per $100 of deposits for SAIF institutions and at 1.3 cents per
$100 of deposits for BIF institutions. From 2000 through 2017, the FICO
interest obligation burden for both thrifts and banks should be identical, at an
estimated level of 2.4 cents per $100 of deposits.
ASB believes that, as a well-capitalized thrift, its base deposit insurance
premium effective January 1, 1997 under the FDIC's proposal should be 0 and its
assessment for funding FICO interest payments should be 6.45 cents per $100 of
deposits, compared to its payments through the third quarter of 1996 calculated
at 23 cents per $100 of deposits. At this level of base premiums and FICO
assessments, and assuming that ASB maintains its well-capitalized status,
management expects that ASB's annual after-tax savings will amount to
approximately $2 million per year for the years 1997 through 1999 (based on
deposit liabilities as of September 30, 1996). Further savings are expected to
result for the years 2000 through 2017 if the assessment to fund FICO interest
payments is reduced as proposed.
The Funds Act provides that the SAIF and BIF will be merged into the Deposit
Insurance Fund by January 1, 1999, but only if no insured depository institution
is a thrift on that date. The Funds Act leaves to subsequent legislation,
however, the manner in which thrift charters might be eliminated in favor of a
bank or some other form of charter. If thrift charters are eliminated and ASB
obtains a bank charter, HEI and its subsidiaries might become subject to the
restrictions on the permissible activities of a bank holding company. While
certain of the
5
proposals that have been advanced would grandfather the activities of existing
savings and loan holding companies such as HEI, management cannot predict
whether or in what form any of these proposals might ultimately be adopted or
the extent to which the business of HEI or ASB might be affected.
(4) REAL ESTATE SUBSIDIARY
- ---------------------------
MPC and its subsidiaries' total real estate project inventory, equity investment
in real estate joint ventures and loans and advances to unconsolidated joint
ventures or joint venture partners amounted to $49 million and $50 million at
September 30, 1996 and December 31, 1995, respectively. MPC's present focus is
to reduce its current investment in real estate development assets and increase
cash flow by continuing the development and sales of its existing projects.
There are currently no plans to invest in new projects.
At September 30, 1996, MPC or its subsidiaries had issued (i) guaranties under
which they were jointly and severally contingently liable with their joint
venture partners for $2.2 million of outstanding loans and (ii) payment
guaranties under which MPC or its subsidiaries were severally contingently
liable for $5.4 million of outstanding loans and $3.6 million of additional
undrawn loan facilities. All such loans are collateralized by real property. At
September 30, 1996, HEI had agreed with the lenders of construction loans and
loan facilities, of which approximately $9.1 million was outstanding and
$4.2 million was undrawn, that it will maintain ownership of 100% of the stock
of MPC and that it intends, subject to good and prudent business practices, to
keep MPC financially sound and responsible to meet its obligations as guarantor.
(5) CASH FLOWS
- ---------------
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash paid for interest (net of capitalized amounts) and income taxes was as
follows:
Nine months ended
September 30,
--------------------
(in thousands) 1996 1995
- ----------------------------------------------------------------------------------------------
Interest (including interest paid by savings bank, but excluding
interest paid on nonrecourse debt from leveraged leases)............ $154,843 $139,404
======== ========
Interest on nonrecourse debt from leveraged leases...................... $ 4,315 $ 4,764
======== ========
Income taxes............................................................ $ 36,117 $ 31,981
======== ========
SUPPLEMENTAL DISCLOSURES OF NONCASH ACTIVITIES
In the nine months ended September 30, 1995, ASB received $223 million in
mortgage-backed securities in exchange for loans.
Common stock dividends reinvested by shareholders in HEI common stock in noncash
transactions amounted to $14.1 million and $14.6 million for the nine months
ended September 30, 1996 and 1995, respectively.
The allowance for equity funds used during construction, which was capitalized
as part of the cost of electric utility plant, amounted to $7.2 million and
$7.6 million for the nine months ended September 30, 1996 and 1995,
respectively.
(6) ACCOUNTING CHANGES
- -----------------------
LONG-LIVED ASSETS
In March 1995, the Financial Accounting Standards Board (FASB) issued Statement
of Financial Accounting Standards (SFAS) No. 121, "Accounting for the Impairment
of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of." SFAS No. 121
requires that long-lived assets and certain identifiable intangibles held and
used by an entity be reviewed for impairment whenever events or changes in
circumstances indicate that the carrying amount of an asset may not be
recoverable. If the sum of the expected future cash flows derived from an asset
is less than the carrying amount of the asset, an impairment loss is recognized.
Measurement of that loss is based on the fair value of the asset.
Generally, SFAS No. 121 requires that long-lived assets and certain identifiable
intangibles to be disposed of be reported at the lower of carrying amount or
fair value less cost to sell. SFAS No. 121 also requires that a rate-regulated
enterprise recognize an impairment loss for the amount of costs excluded by a
regulator from the enterprise's rate base. The Company adopted the provisions of
SFAS No. 121 on
6
January 1, 1996. The adoption of SFAS No. 121 did not have a material effect on
the Company's financial condition or results of operations.
MORTGAGE SERVICING RIGHTS AND TRANSFERS AND SERVICING OF FINANCIAL ASSETS AND
EXTINGUISHMENTS OF LIABILITIES
In May 1995, the FASB issued SFAS No. 122, "Accounting for Mortgage Servicing
Rights." SFAS No. 122 requires that a mortgage banking enterprise (as defined)
that acquires mortgage servicing rights through either the purchase or
origination of mortgage loans and sells or securities those loans with
servicing rights retained should allocate the total cost of the mortgage loans
to the mortgage servicing rights and the loans based on their relative fair
values, if it is practicable to estimate those fair values. ASB adopted the
provisions of SFAS No. 122 on January 1, 1996. The adoption of SFAS No. 122 did
not have a material effect on the Company's financial condition or results of
operations.
In June 1996, the FASB issued SFAS No. 125, "Accounting for Transfers and
Servicing of Financial Assets and Extinguishments of Liabilities," which
provides accounting and reporting standards based on the consistent application
of a financial-components approach that focuses on control. Under that approach,
after a transfer of financial assets, an entity recognizes the financial and
servicing assets it controls and the liabilities it has incurred, derecognizes
financial assets when control has been surrendered, and derecognizes liabilities
when extinguished. SFAS No. 125 provides consistent standards for distinguishing
transfers of financial assets that are sales from transfers that are secured
borrowings. SFAS No. 125 amends or supersedes various statements, including
superseding SFAS No. 122. SFAS No. 125 is effective for transfers and servicing
of financial assets and extinguishments of liabilities occurring after December
31, 1996, and is to be applied prospectively. The Company will adopt the
provisions of SFAS No. 125 on January 1, 1997 and has not yet determined the
impact of the adoption.
STOCK-BASED COMPENSATION
In October 1995, the FASB issued SFAS No. 123, "Accounting for Stock-Based
Compensation." SFAS No. 123 establishes a fair value based method of accounting
for stock-based compensation, but does not require an entity to adopt the new
method for purposes of preparing its basic financial statements. For entities
not adopting the new method, SFAS No. 123 requires footnote disclosure of
proforma net income and earnings per share information as if the fair value
based method had been adopted. The disclosure requirements of SFAS No. 123 are
effective for financial statements for fiscal years beginning after December 15,
1995. The Company will comply with the disclosure requirements of SFAS No. 123
in its annual financial statements for 1996.
(7) DISCONTINUED OPERATIONS
- ----------------------------
THE HAWAIIAN INSURANCE & GUARANTY COMPANY, LIMITED
The Hawaiian Insurance & Guaranty Company, Limited (HIG) and its subsidiaries
(collectively, the HIG Group) were property and casualty insurance companies.
HEIDI was the holder of record of all the common stock of HIG until August 16,
1994. In December 1992, due to a significant increase in the estimate of
policyholder claims from Hurricane Iniki, the HEI Board of Directors concluded
it would not contribute additional capital to HIG and the remaining investment
in the HIG Group was written off. On December 24, 1992, a formal rehabilitation
order vested full control over the HIG Group in the Insurance Commissioner of
the State of Hawaii (the Rehabilitator) and her deputies.
On April 12, 1993, the Rehabilitator, the HIG Group and others filed a complaint
against HEI, HEIDI and others (Takayama Complaint). The Takayama Complaint,
which was subsequently amended, set forth several separate counts, including
claims that directors and officers of HEI, HEIDI and the HIG Group were
responsible for the losses suffered by the HIG Group and claims that HEI and/or
HEIDI should be held liable for HIG's obligations. The lawsuit was settled in
early 1994 and $32 million was disbursed to the Rehabilitator. In exchange, all
the plaintiffs released their claims against HEI, its affiliates and their past
and present officers and directors.
The $32 million settlement amount, less income tax benefits and certain amounts
recognized in previously established reserves, resulted in a $15 million after-
tax charge to discontinued operations in 1993. HEI and HEIDI are seeking
reimbursement for the settlement and defense costs from their insurance
carriers. One of the insurance carriers filed a declaratory relief action in the
U.S. District Court for Hawaii seeking resolution of insurance coverage and
other policy issues, and HEI and HEIDI
7
filed counterclaims. On December 15, 1995, the judge ruled on motions for
partial summary judgment that had been argued in June 1995. The District Court
found that HEI and HEIDI did not breach their insurance contract and that the
settlement they entered into was reasonable.
In June 1996, the District Court held a hearing on numerous cross-motions for
summary judgment with respect to the remaining issues in the case and, on
October 26, 1996, the judge ruled on these motions. Some parts of the decision
are favorable to HEI and HEIDI, and others are unfavorable. Among other things,
the District Court ruled that at least one claim in the Takayama Complaint fell
within the "Professional Services" exclusion in the policy, but also ruled that
coverage for other claims in the Takayama Complaint was not excluded by the
Professional Services exclusion. The District Court further ruled that the
policy does not afford coverage for the "piercing the corporate veil" and
"assessment" claims that had been asserted in the Takayama Complaint because
they represented claims against HEI and HEIDI, and not claims against the
directors and officers covered under the policy. The District Court also
concluded that a trial would be necessary to determine whether any portion of
the settlement was attributable to claims of misrepresentation and deceptive
trade practices for which only the companies and not the directors and officers
would have been liable. Finally, the District Court concluded that, in view of
its other rulings, a trial would be necessary to determine the appropriate
allocation of the settlement between covered and uncovered parties and claims,
and that HEI would have the burden of proof with respect to allocation. HEI is
considering whether to seek an interlocutory appeal with respect to certain of
the District Court's rulings which it believes to be in error, or to proceed to
trial. No trial date has been set. Recoveries from HEI's insurance carriers, if
any, will be recognized when realized.
(8) CONTINGENCIES
- ------------------
ENVIRONMENTAL REGULATION -- HAZARDOUS WASTE AND TOXIC SUBSTANCES CONTROL
By letters in January and February 1995, the Department of Health of the State
of Hawaii (DOH) advised HECO, HTB, YB and others that the DOH was conducting an
investigation to determine the nature and extent of actual or potential releases
of hazardous substances, oil, pollutants or contaminants at or near Honolulu
Harbor. The DOH letter to HECO requested information regarding past hazardous
substances and oil spills that may have occurred at HECO's Honolulu power plant
and nearby fuel storage and pipeline facilities which are located near Honolulu
Harbor. The DOH letters to HTB and YB requested the same information regarding
Pier 21 and Piers 24-29 in Honolulu Harbor. HECO, HTB and YB provided responses
to the DOH letters. Based on a limited review of the responses received from
HECO, HTB, YB and others, the DOH issued letters on December 18, 1995,
indicating that the DOH has identified a number of parties, including HECO, HTB
and YB, who appear to be either potentially responsible for the contamination
and/or operate their facilities upon contaminated land. The DOH met with these
identified parties on January 24, 1996 to inform them of its findings and to
establish the framework to determine remedial and cleanup requirements. The
DOH's goal was the formation of a voluntary response group comprised of these
identified parties. The Honolulu Harbor area of investigation was divided into
four units, with the highest priority area (Iwilei Area) to be addressed first.
The DOH met again with the identified parties in March and May 1996. A Technical
Workgroup (comprised of certain of the parties identified in the December 18,
1995 DOH letter, including HECO) held a meeting on August 19, 1996.
Representatives of the Department of Transportation of the State of Hawaii (DOT)
Harbors Division also attended the meeting and conditionally committed to join
the Workgroup. The Workgroup decided to conduct its own "voluntary"
investigations and to hire a consultant to conduct Phase 1 activities (i.e.,
data assimilation and reporting). Costs for the proposed Phase 1 work will be
shared, with the anticipated cost to each company not to exceed $10,000. HECO
agreed to participate in the Phase 1 portion of the project. The Workgroup
prepared and, on September 16, 1996, submitted a letter to the DOH proposing to
conduct a voluntary data assimilation investigation. The letter was signed by
BHP Petroleum Americas Refining Inc. and GASCO, Inc.; Chevron U.S.A. Inc.; Shell
Oil Products Company; Union Oil Company of California, dba UNOCAL; DOT and HECO.
HTB and YB declined to participate in the Phase I portion of the project.
Because the process for determining appropriate remedial and cleanup action, if
any, is at an early stage, management cannot predict at this time the costs of
further site analysis or future remediation and cleanup requirements, nor can it
estimate when such costs would be incurred. Certain of the costs incurred may be
claimed and covered under insurance policies, but such coverage is not
determinable at this time.
8
Hawaiian Electric Company, Inc. and subsidiaries
CONSOLIDATED BALANCE SHEETS (UNAUDITED)
September 30, December 31,
(in thousands, except par value) 1996 1995
- ---------------------------------------------------------------------------------------------
ASSETS
Utility plant, at cost
Property, plant and equipment.............................. $2,396,221 $2,291,545
Construction in progress................................... 222,400 191,460
Less--accumulated depreciation............................. (815,412) (762,770)
---------- ----------
NET UTILITY PLANT.................................... 1,803,209 1,720,235
---------- ----------
Current assets
Cash and equivalents....................................... 972 20
Customer accounts receivable, net.......................... 74,851 67,698
Accrued unbilled revenues, net............................. 41,663 43,695
Other accounts receivable, net............................. 3,552 5,355
Fuel oil stock, at average cost............................ 25,889 13,469
Materials and supplies, at average cost.................... 20,640 20,538
Prepayments and other...................................... 2,109 2,297
---------- ----------
TOTAL CURRENT ASSETS................................. 169,676 153,072
---------- ----------
Other assets
Regulatory assets.......................................... 97,404 97,114
Other...................................................... 43,519 45,862
---------- ----------
TOTAL OTHER ASSETS................................... 140,923 142,976
---------- ----------
$2,113,808 $2,016,283
========== ==========
CAPITALIZATION AND LIABILITIES
Capitalization
Common stock, $6 2/3 par value, authorized
50,000 shares; outstanding 12,303 shares................ $ 82,031 $ 82,031
Premium on capital stock................................... 271,496 271,449
Retained earnings.......................................... 365,567 343,425
---------- ----------
COMMON STOCK EQUITY.................................. 719,094 696,905
Cumulative preferred stock
Not subject to mandatory redemption..................... 48,293 48,293
Subject to mandatory redemption......................... 37,460 39,955
Long-term debt, net........................................ 545,660 487,306
---------- ----------
TOTAL CAPITALIZATION................................. 1,350,507 1,272,459
---------- ----------
Current liabilities
Long-term debt due within one year......................... 43,000 29,903
Preferred stock sinking fund requirements.................. 1,795 1,795
Short-term borrowings - nonaffiliates...................... 137,906 131,753
Short-term borrowings - affiliate.......................... -- 7,000
Accounts payable........................................... 59,295 48,691
Interest and preferred dividends payable................... 14,434 9,954
Taxes accrued.............................................. 46,285 42,968
Other...................................................... 20,473 37,573
---------- ----------
TOTAL CURRENT LIABILITIES............................ 323,188 309,637
---------- ----------
Deferred credits and other liabilities
Deferred income taxes...................................... 119,339 116,963
Unamortized tax credits.................................... 47,152 45,935
Other...................................................... 79,469 79,435
---------- ----------
TOTAL DEFERRED CREDITS AND OTHER LIABILITIES......... 245,960 242,333
---------- ----------
Contributions in aid of construction.......................... 194,153 191,854
---------- ----------
$2,113,808 $2,016,283
========== ==========
See accompanying notes to HECO's consolidated financial statements.
9
Hawaiian Electric Company, Inc. and subsidiaries
CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
Three months ended Nine months ended
September 30, September 30,
(in thousands, except for ratio of earnings ---------------------------------------------
to fixed charges) 1996 1995 1996 1995
- -------------------------------------------------------------------------------------------------------------
OPERATING REVENUES.............................................. $282,395 $260,123 $791,146 $733,945
-------- -------- -------- --------
OPERATING EXPENSES
Fuel oil........................................................ 66,452 57,365 181,739 154,658
Purchased power................................................. 75,069 70,250 212,674 204,993
Other operation................................................. 35,770 30,429 105,339 98,824
Maintenance..................................................... 11,729 11,349 35,122 34,982
Depreciation and amortization................................... 18,417 16,977 55,098 50,987
Taxes, other than income taxes.................................. 26,682 24,729 74,702 69,496
Income taxes.................................................... 16,474 16,760 42,367 40,030
-------- -------- -------- --------
250,593 227,859 707,041 653,970
-------- -------- -------- --------
OPERATING INCOME................................................ 31,802 32,264 84,105 79,975
-------- -------- -------- --------
OTHER INCOME
Allowance for equity funds used
during construction.......................................... 2,399 2,590 7,197 7,575
Other, net...................................................... 1,920 1,704 5,936 4,651
-------- -------- -------- --------
4,319 4,294 13,133 12,226
-------- -------- -------- --------
INCOME BEFORE INTEREST AND OTHER CHARGES........................ 36,121 36,558 97,238 92,201
-------- -------- -------- --------
INTEREST AND OTHER CHARGES
Interest on long-term debt...................................... 9,708 8,730 26,971 25,395
Amortization of net bond premium and expense.................... 333 319 968 953
Other interest charges.......................................... 1,672 2,291 6,627 6,343
Allowance for borrowed funds used
during construction.......................................... (1,098) (1,327) (3,602) (3,832)
Preferred stock dividends of subsidiaries....................... 703 691 2,107 2,075
-------- -------- -------- --------
11,318 10,704 33,071 30,934
-------- -------- -------- --------
INCOME BEFORE PREFERRED STOCK DIVIDENDS
OF HECO...................................................... 24,803 25,854 64,167 61,267
Preferred stock dividends of HECO............................... 964 1,035 2,901 3,108
-------- -------- -------- --------
NET INCOME FOR COMMON STOCK..................................... $ 23,839 $ 24,819 $ 61,266 $ 58,159
======== ======== ======== ========
Ratio of earnings to fixed charges
(SEC method)................................................. 3.67 3.66
======== ========
Hawaiian Electric Company, Inc. and subsidiaries
CONSOLIDATED STATEMENTS OF RETAINED EARNINGS (UNAUDITED)
Three months ended Nine months ended
September 30, September 30,
---------------------------------------------------
(in thousands) 1996 1995 1996 1995
- -------------------------------------------------------------------------------------------------------------------
RETAINED EARNINGS, BEGINNING OF PERIOD.. $356,644 $325,048 $343,425 $308,535
Net income for common stock............. 23,839 24,819 61,266 58,159
Common stock dividends.................. (14,916) (8,770) (39,124) (25,597)
-------- -------- -------- --------
RETAINED EARNINGS, END OF PERIOD........ $365,567 $341,097 $365,567 $341,097
======== ======== ======== ========
HEI owns all the common stock of HECO. Therefore, per share data with respect to
shares of common stock of HECO are not meaningful.
See accompanying notes to HECO's consolidated financial statements.
10
Hawaiian Electric Company, Inc. and subsidiaries
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
Nine months ended
September 30,
------------------------
(in thousands) 1996 1995
- --------------------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES
Income before preferred stock dividends of HECO......................................................... $ 64,167 $ 61,267
Adjustments to reconcile income before preferred stock dividends of HECO to net cash provided by
operating activities
Depreciation and amortization of property, plant and equipment.................................... 55,098 50,987
Other amortization................................................................................ 6,590 4,099
Deferred income taxes............................................................................. 2,367 4,040
Tax credits, net.................................................................................. 2,449 2,976
Allowance for equity funds used during construction............................................... (7,197) (7,575)
Changes in assets and liabilities
Increase in accounts receivable................................................................ (5,350) (2,087)
Decrease (increase) in accrued unbilled revenues............................................... 2,032 (3,643)
Decrease (increase) in fuel oil stock.......................................................... (12,420) 4,459
Increase in materials and supplies............................................................. (102) (518)
Decrease (increase) in regulatory assets....................................................... 24 (3,708)
Increase (decrease) in accounts payable........................................................ 10,604 (8,855)
Increase in interest and preferred dividends payable........................................... 4,480 4,070
Changes in other assets and liabilities........................................................ (15,865) (14,469)
--------- ---------
NET CASH PROVIDED BY OPERATING ACTIVITIES............................................................... 106,877 91,043
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES
Capital expenditures.................................................................................... (134,579) (138,089)
Contributions in aid of construction.................................................................... 7,979 8,482
Decrease (increase) in notes receivable................................................................. 602 (7,995)
--------- ---------
NET CASH USED IN INVESTING ACTIVITIES................................................................... (125,998) (137,602)
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES
Common stock dividends.................................................................................. (39,124) (25,597)
Preferred stock dividends............................................................................... (2,901) (3,108)
Proceeds from issuance of long-term debt................................................................ 71,360 48,444
Repayment of long-term debt............................................................................. -- (11,000)
Redemption of preferred stock........................................................................... (2,495) (1,744)
Net increase (decrease) in short-term borrowings from nonaffiliates and affiliate with original
maturities of three months or less..................................................................... (847) 33,145
Other................................................................................................... (5,920) (3,990)
--------- ---------
NET CASH PROVIDED BY FINANCING ACTIVITIES............................................................... 20,073 36,150
--------- ---------
Net increase (decrease) in cash and equivalents......................................................... 952 (10,409)
Cash and equivalents, beginning of period............................................................... 20 10,694
--------- ---------
CASH AND EQUIVALENTS, END OF PERIOD..................................................................... $ 972 $ 285
========= =========
See accompanying notes to HECO's consolidated financial statements.
11
Hawaiian Electric Company, Inc. and subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
- -------------------------------------------------------------------------------
(1) BASIS OF PRESENTATION
- --------------------------
The accompanying unaudited consolidated financial statements have been prepared
in conformity with GAAP for interim financial information and with the
instructions to SEC Form 10-Q and Article 10 of Regulation S-X. Accordingly,
they do not include all of the information and footnotes required by generally
accepted accounting principles for complete financial statements. In preparing
the financial statements, management is required to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the balance sheet
and the reported amounts of revenues and expenses for the period. Actual results
could differ significantly from those estimates. The accompanying unaudited
consolidated financial statements should be read in conjunction with the
consolidated financial statements and the notes thereto incorporated by
reference in HECO's Annual Report on SEC Form 10-K for the year ended
December31, 1995 (as amended) and the consolidated financial statements and the
notes thereto in HECO's Quarterly Report on SEC Form 10-Q for the quarters ended
March 31 and June30, 1996.
In the opinion of HECO's management, the accompanying unaudited consolidated
financial statements contain all material adjustments required by GAAP to
present fairly the financial position of HECO and its subsidiaries as of
September 30, 1996 and December 31, 1995, and the results of their operations
for the three months and nine months ended September 30, 1996 and 1995, and
their cash flows for the nine months ended September 30, 1996 and 1995. All such
adjustments are of a normal recurring nature, unless otherwise disclosed in this
Form10-Q or other referenced material. Results of operations for interim
periods are not necessarily indicative of results for the full year.
(2) CASH FLOWS
- ---------------
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash paid for interest (net of capitalized amounts) and income taxes was as
follows:
Nine months ended
September 30,
------------------
(in thousands) 1996 1995
- -------------------------------------------------------------
Interest................................ $26,417 $23,890
======= =======
Income taxes............................ $34,337 $31,879
======= =======
SUPPLEMENTAL DISCLOSURE OF NONCASH ACTIVITIES
The allowance for equity funds used during construction, which was capitalized
as part of the cost of electric utility plant, amounted to $7.2 million and
$7.6 million for the nine months ended September30, 1996 and 1995,
respectively.
(3) COMMITMENTS AND CONTINGENCIES
- ----------------------------------
HELCO POWER SITUATION
BACKGROUND. In 1991, HELCO identified the need beginning in 1994 for additional
- ----------
generation to provide for forecasted load growth while maintaining a
satisfactory generation reserve margin, to address uncertainties about future
deliveries of power from existing firm power producers and to permit the
retirement of older generating units. Also in 1991, the Hawaii Public Utilities
Commission (PUC) issued an order calling for an investigation of the reliability
of HELCO's system following service interruptions and rolling blackouts
instituted on the island of Hawaii. HELCO added firm capacity to its system in
August 1992 (a 20-MW HELCO-owned unit) and in June 1993 (pursuant to a power
purchase agreement for 25 MW of firm capacity). HELCO also proceeded with plans
to install at its Keahole power plant site two 20-MW combustion turbines (CT-4
and CT-5), followed by an 18-MW heat steam
12
recovery generator (ST-7), at which time these units would be converted to a 56-
MW (net) combined-cycle unit. In January 1994, the PUC approved expenditures for
CT-4, which HELCO had planned to install in late 1994, and in September 1995,
the PUC conditionally approved expenditures for CT-5 and ST-7.
Despite HELCO's best efforts to install the necessary additional generation, the
schedule for the installation of HELCO's phased combined-cycle unit at the
Keahole power plant site has been revised due to delays in obtaining approval of
the Conservation District Use Permit amendment (CDUP) and the air quality
Prevention of Significant Deterioration/Covered Source Permit (PSD) for the
Keahole power plant site. HELCO is filing regular periodic reports with the PUC
concerning the status of efforts to obtain these permits.
CDUP delays. In late 1995, a contested case hearing with respect to the CDUP
- -----------
was conducted and the hearing officer recommended denial of the CDUP
application. On April 22, 1996, the Hawaii Board of Land and Natural Resources
(BLNR) issued a written order in which it stated that it had voted 3 in favor
and 2 against a motion to accept the hearing officer's recommendation and that
HELCO'S CDUP application was denied. On May 10, 1996 the BLNR issued an amended
order which no longer stated that the application was denied, but rather that it
would not issue a permit based on that vote. HELCO's position is that denial of
the CDUP application requires the favorable vote of at least 4 members of the
BLNR, and that the failure of the BLNR to take effective action results in HELCO
being entitled to its CDUP by operation of law. HELCO has filed in the Circuit
Court for the Third Circuit of Hawaii both a complaint for declaratory judgment
(basically asking that HELCO be allowed to put its land to the use requested and
asking that BLNR and others act consistently with that purpose) and a protective
appeal of the original BLNR order. Other parties have been allowed to intervene
or cross-appeal, respectively, in those actions. On July 25, 1996, the Third
Circuit Court consolidated HELCO's cases and set an expedited schedule which
resulted in oral arguments on September 30, 1996. The parties submitted their
proposed findings and form of order on October 15, 1996 and a decision should be
forthcoming. These proceedings may further delay, if not prevent, HELCO's
project.
PSD permit delays. The Department of Health of the State of Hawaii (DOH)
- -----------------
forwarded HELCO's PSD permit to the Environmental Protection Agency (EPA) for
its approval. In a November 1995 letter to the DOH, the EPA declined to sign
HELCO'S PSD permit. HELCO requested that the EPA reconsider this decision and
the EPA agreed to reconsider based on additional information supplied by HELCO.
In a second letter dated February 6, 1996, the EPA set forth information to be
considered by HELCO, and HELCO responded to the EPA's positions by letter dated
March 8, 1996. By letter dated April 8, 1996, the EPA restated its
determinations and indicated that further documentation is required from HELCO
in order for the EPA to consider HELCO's positions. By letter dated June 5,
1996 to the DOH, the EPA stated that it had reviewed HELCO's letter to the DOH
dated April 3, 1996 in which HELCO proposed to reduce net nitrogen oxide
emission increases at Keahole by retiring and/or reducing output of certain
existing diesel units, that it found the netting approach procedurally and
substantially acceptable, and that if emission increases were kept below
significance levels it would not require the use of any particular emission
control technology. In addition, the EPA has requested that the DOH reconsider
the use of low sulfur naphtha fuel as the best available control technology for
sulfur dioxide missions. HELCO has submitted information showing that the use
of such fuel in the Keahole unit is not economically feasible. The DOH is still
reviewing this issue. Information exchange and discussions with the EPA and the
DOH are ongoing. If the EPA does not sign a permit forwarded by the DOH, this
may further delay, if not prevent, HELCO's project.
IPP complaints. Two independent power producers (IPPs), Kawaihae Cogeneration
- --------------
Partners (KCP) and Enserch Development Corporation (Enserch), filed separate
complaints against HELCO with the PUC, alleging that they are entitled to power
purchase contracts to provide HELCO with additional capacity which, under
HELCO'S current estimates of generating capacity requirements, would be in place
of HELCO's planned 56-MW combined-cycle unit at Keahole. In July 1995, the PUC
issued a decision and order in the KCP docket. In the order, the PUC determined
various issues affecting HELCO's avoided cost calculations (several of which
were contrary to HELCO's recommendations and others of which adopted HELCO's
recommendations). In September 1995, HELCO provided proposals to the two IPPs,
and further negotiations were undertaken. Status reports on the negotiations
with the two IPPs were filed with the PUC.
13
In September 1995, the PUC allowed HELCO to continue to pursue construction of
and commit expenditures for the second combustion turbine (CT-5) and the steam
recovery generator (ST-7) for its planned combined-cycle unit, stating in its
order that "no part of the project may be included in HELCO's rate base unless
and until the project is in fact installed, and is used and useful for utility
purposes." In view of permitting delays and the need for power, the PUC also
ordered HELCO to continue negotiating with the IPPs and directed that the
facility to be built should be the one that can be most expeditiously put into
service at "allowable cost."
On January 26, 1996, the PUC ordered that the KCP docket be reopened and that
HELCO and KCP continue in good faith to negotiate a power purchase agreement and
file a list of unresolved issues requiring PUC guidance. On March 20, 1996, the
PUC ordered that HELCO and Enserch file status reports with the PUC. Status
reports were filed by Enserch and HELCO and a hearing was held on April 25,
1996. Additional written submissions were made to the PUC by the parties in the
Enserch docket on June 14 and July 11, 1996. On October 4, 1996, the PUC issued
its order in the Enserch docket. In the order, the PUC determined a number of
issues affecting the allocation of transmission interconnection costs and the
calculation of HELCO's avoided costs (several of which were contrary to HELCO's
recommendations and others of which adopted HELCO's recommendations). The order
requires the parties to continue to negotiate on an expeditious basis and,
within 75 days, to submit to the PUC either a finalized power purchase agreement
or reports on matters that are preventing the finalization of an agreement.
Enserch filed a motion for "clarification" of the order on October 14, 1996,
HELCO filed a memorandum in opposition to the motion on October 23, 1996,
Enserch filed a memorandum in reply to HELCO's memorandum in opposition to the
motion on November 4, 1996, and HELCO plans to file a supplemental memorandum in
opposition.
Costs incurred. If it becomes probable that HELCO's combined-cycle unit will
- --------------
not be installed (which may occur if the CDUP is denied or if HELCO's
negotiations with the IPPs result in a power purchase agreement), HELCO may be
required to write off a portion of the costs incurred in its efforts to put into
service its combined-cycle unit ($47.7 million as of September 30, 1996) if such
costs ultimately are not recoverable from customers or others. The $47.7 million
includes approximately $26.7 million for equipment and material purchases,
approximately $10.1 million for planning, engineering, permitting, site
development and other costs and approximately $10.9 million as an allowance for
funds used during construction. Management cannot determine at this time whether
the negotiations with the IPPs will result in a power purchase agreement, or
whether HELCO's combined-cycle unit will be installed, or the amount of incurred
costs, if any, that may not be recoverable from customers or others.
Contingency planning. In June 1995, HELCO filed with the PUC its generation
- --------------------
resource contingency plan detailing alternatives and mitigation measures to
address possible further delays in obtaining the permits necessary to construct
its combined-cycle unit. HELCO has arranged for additional firm capacity to be
provided by its existing firm power producers, obtained contracts shifting loads
to off-peak hours, begun implementing in January 1996 its energy-efficiency
demand-side management programs and deferred generation unit retirements. These
measures have helped HELCO maintain its reserve margin and reduce the risk of
capacity shortages. In January 1996, the PUC issued an order opening a generic
docket relating to HELCO's contingency plan. Pursuant to the PUC order, HELCO
submitted updated information to the PUC on March 18, 1996, and filed a further
update on October 10, 1996.
ENVIRONMENTAL REGULATION - HAZARDOUS WASTE AND TOXIC SUBSTANCES CONTROLS
See note (8), "Contingencies," in HEI's "Notes to consolidated financial
statements."
INTERIM RATE INCREASES
Amounts recovered under interim rates in excess of final approved rates are
subject to refund with interest. At September 30, 1996, previously recorded
revenue amounts recognized under interim rate increases and subject to refund
were not significant.
(4) ACCOUNTING CHANGE
- ----------------------
See note (6), "Accounting changes--Long-lived assets," in HEI's "Notes to
consolidated financial statements."
14
(5) SUMMARIZED FINANCIAL INFORMATION
- -------------------------------------
Summarized financial information for HECO's consolidated subsidiaries, HELCO and
MECO, is as follows:
BALANCE SHEET DATA
HELCO MECO
------------------------------ ----------------------------
September 30, December 31, September 30, December 31,
(in thousands) 1996 1995 1996 1995
- ---------------------------------------------------------------------------------------------------------
Current assets............................ $ 25,667 $ 23,485 $ 28,216 $ 27,161
Noncurrent assets......................... 382,167 368,785 348,685 306,191
-------- -------- -------- --------
$407,834 $392,270 $376,901 $333,352
======== ======== ======== ========
Common stock equity....................... $138,186 $136,930 $130,026 $126,458
Cumulative preferred stock
Not subject to mandatory redemption... 10,000 10,000 8,000 8,000
Subject to mandatory redemption....... 7,500 7,500 5,960 6,055
Current liabilities....................... 68,536 64,233 76,941 57,551
Noncurrent liabilities.................... 183,612 173,607 155,974 135,288
-------- -------- -------- --------
$407,834 $392,270 $376,901 $333,352
======== ======== ======== ========
INCOME STATEMENT DATA
HELCO MECO
------------------------------------- -------------------------------------
Three months Nine months Three months Nine months
ended ended ended ended
September 30, September 30, September 30, September 30,
----------------- ----------------- ----------------- ------------------
(in thousands) 1996 1995 1996 1995 1996 1995 1996 1995
- ----------------------------------------------------------------------------------------------------------------------
Operating
revenues........................... $40,139 $34,937 $112,809 $101,183 $38,732 $34,029 $106,943 $95,270
Operating
income............................. 4,512 4,613 11,969 11,969 4,950 4,406 12,575 12,296
Net income for
common stock....................... 2,563 3,983 7,725 9,642 4,531 3,310 10,803 8,409
(6) RECONCILIATION OF ELECTRIC UTILITY OPERATING INCOME PER HEI AND HECO
--------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF INCOME
---------------------------------
Three months ended Nine months ended
September 30, September 30,
--------------------- --------------------
(in thousands) 1996 1995 1996 1995
- -----------------------------------------------------------------------------------------------------------------
Operating income from regulated and nonregulated
activities before income taxes (per HEI consolidated
statements of income) $ 50,132 $ 50,671 $132,246 $124,383
Deduct:
Income taxes on regulated activities.......................... (16,474) (16,760) (42,367) (40,030)
Revenues from nonregulated activities......................... (2,022) (1,763) (6,095) (4,968)
Add:
Expenses from nonregulated activities......................... 166 116 321 590
-------- -------- -------- --------
Operating income from regulated activities after income
taxes (per HECO consolidated statements of income).............. $ 31,802 $ 32,264 $ 84,105 $ 79,975
======== ======== ======== ========
15
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
- -------------------------------------------------------------------------
RESULTS OF OPERATIONS
---------------------
The following discussion should be read in conjunction with the consolidated
financial statements and accompanying notes.
Except for historical information contained herein, the matters set forth in
Management's Discussion and Analysis of Financial Condition and Results of
Operations are forward-looking statements that involve certain risks and
uncertainties that could cause actual results to differ materially from those in
the forward-looking statements. Potential risks and uncertainties include, but
are not limited to, such factors as the effect of economic conditions, product
demand and market acceptance risks, the impact of competitive products and
pricing, capacity and supply constraints or difficulties, new technological
developments, governmental and regulatory actions, actual purchases under
agreements, the results of financing efforts and the timing and extent of
changes in interest rates. Investors are also directed to consider other risks
and uncertainties discussed in other periodic reports filed by HEI and/or HECO
with the Securities and Exchange Commission.
RESULTS OF OPERATIONS
CONSOLIDATED
- ------------
Three months ended
September 30,
(in thousands, except per ------------------- % Primary reason(s) for
share amounts) 1996 1995 change significant change*
- ------------------------------------------------------------------------------------------------------
Revenues........................ $368,158 $336,881 9 Increase for all segments
Operating income................ 44,743 56,675 (21) Decrease for the electric utility
and savings bank segments (see
"as adjusted" amounts below)
Net income...................... 17,372 25,151 (31) Lower operating income, higher
interest expense due to higher
average borrowings and lower
AFUDC (see "as adjusted"
amounts below)
Earnings per common share....... 0.57 0.86 (34) See explanation for "net income"
As adjusted **
Operating income............... 58,578 54,235 8 Increase for all segments
Net income..................... 25,705 23,661 9 Higher operating income, partly
offset by higher interest expense
due to higher average borrowings and
lower AFUDC
Earnings per common share...... 0.84 0.81 4 See explanation for "net income"
Weighted average number of
common shares outstanding...... 30,465 29,331 4 Issuances under the Dividend
Reinvestment and Stock Purchase
Plan and other plans
16
Nine months ended
September 30,
(in thousands, except per --------------------- % Primary reason(s) for
share amounts) 1996 1995 change significant change*
- ------------------------------------------------------------------------------------------------------
Revenues........................ $1,041,570 $963,052 8 Increase for all segments
Operating income................ 142,890 147,054 (3) Decrease for the savings
bank segment (see "as
adjusted" amounts below)
Net income...................... 57,604 61,878 (7) Lower operating income, higher
interest expense due to
higher average borrowings and
lower AFUDC (see "as adjusted"
amounts below)
Earnings per common share....... 1.91 2.13 (10) See explanation for "net income"
As adjusted **
Operating income........... 156,725 140,454 12 Increase for all segments
Net income................. 65,937 57,847 14 Higher operating income, partly
offset by higher interest
expense due to higher average
borrowings and lower AFUDC
Earnings per common share...... 2.18 1.99 10 See explanation for "net income"
Weighted average number of
common shares outstanding...... 30,178 29,058 4 Issuances under the Dividend
Reinvestment and Stock Purchase
Plan and other plans
* Also see segment discussions which follow.
** On September 30, 1996, President Clinton signed into law the Deposit
Insurance Funds Act of 1996, which authorizes a one-time deposit-insurance
premium assessment by the Federal Deposit Insurance Corporation (FDIC) of
65.7 cents per $100 of deposits insured by the Savings Association
Insurance Fund (SAIF) and held as of March 31, 1995. ASB's assessment was
estimated to be $8.3 million after-tax and was accrued in September 1996.
In December 1995, a rate order by the Public Utilities Commission of the
State of Hawaii (PUC) reduced the allowed return on equity for HECO to
11.4% and required a refund to customers retroactive to January 1, 1995.
The 1996 "as adjusted" amounts exclude the effect of the special FDIC
assessment, and the 1995 "as adjusted" amounts reflect the PUC's December
1995 rate order as if the adjusted rates had been in effect at the
beginning of 1995.
Shareholder dividends are declared and paid by HEI at the discretion of HEI's
Board of Directors. On October 15, 1996, HEI's Board of Directors increased the
quarterly cash dividend by 1 cent to $0.61 per share for the fourth quarter of
1996. At the indicated annual dividend rate of $2.44 and the closing share price
on October 15, 1996, of $33.88, HEI's dividend yield is 7.2%. HEI and its
predecessor company, HECO, have paid dividends continuously since 1901.
Dividends per share have increased each year since 1964.
Major factors considered in authorizing the dividend increase included the
state's continued gradual economic recovery, improvements in the visitor
industry, kilowatthour sales growth and productivity gains at the electric
utility subsidiaries and steady performance by the savings bank subsidiary. The
current payout ratio of 94% for the nine months ended September 30, 1996 is,
however, higher than the Board of Directors would prefer, and HEI's goal is to
increase earnings faster than dividends in order to reduce the company's payout
ratio to below 80%. Whether HEI will be able to achieve this goal will depend on
the actual performance of each of its business segments and is subject to all of
the risks inherent in their operations. Although the HEI Board of Directors has
traditionally
17
determined whether to increase the dividend in the fourth quarter, the Board has
decided that the next time it will consider whether to increase the dividend
will be the first quarter of 1998, so that it will have a full year of operating
results before taking action.
Following is a general discussion of revenues, expenses and operating income by
business segment.
ELECTRIC UTILITY
- ----------------
Three months ended
September 30,
(in thousands, except per --------------------- % Primary reason(s) for
barrel amounts) 1996 1995 change significant change
- ------------------------------------------------------------------------------------------------------
Revenues........................ $ 284,417 $261,886 9 3.3% increase in KWH sales
($9 million), higher rates
($1 million), higher fuel oil
prices ($11 million) which are
recovered through rates, and
recovery through rates of
integrated resource plan
costs ($2 million), including
demand-side management program
costs and net lost revenues
Expenses
Fuel oil....................... 66,452 57,365 16 Higher fuel oil prices and more
KWHs generated
Purchased power................ 75,069 70,250 7 More KWHs purchased and higher
fuel oil prices
Other.......................... 92,764 83,600 11 Higher other operation and
maintenance expense (partly due
to higher employee benefits expenses
and integrated resource plan
related costs), depreciation
expense and taxes, other than
income taxes
Operating income................ 50,132 50,671 (1) Higher revenues, offset by higher
expenses (see "as adjusted"
amounts below)
Net income...................... 23,839 24,819 (4) Lower operating income, higher
interest expense due to higher
average borrowings and lower AFUDC
(see "as adjusted" amounts below)
As adjusted *
Operating income.............. 50,132 48,231 4 Higher revenues, including higher
rates ($4 million), partly offset
by higher expenses
Net income.................... 23,839 23,329 2 Higher operating income, partly
offset by higher interest expense
due to higher average borrowings and
lower AFUDC
Fuel oil price per barrel....... 24.31 21.26
18
Nine months ended
September 30,
(in thousands, except per --------------------- % Primary reason(s) for
barrel amounts) 1996 1995 change significant change
- ------------------------------------------------------------------------------------------------------
Revenues........................ $ 797,241 $738,913 8 3.5% increase in KWH sales
($25 million), higher rates
($4 million), higher fuel oil
prices ($25 million) which are
recovered through rates, and
recovery through rates of
integrated resource plan
costs ($2 million), including
demand-side management program
costs and net lost revenues
Expenses
Fuel oil....................... 181,739 154,658 18 Higher fuel oil prices and more
KWHs generated
Purchased power................. 212,674 204,993 4 More KWHs purchased and higher
fuel oil prices
Other........................... 270,582 254,879 6 Higher other operation and
maintenance expense (partly
due to higher employee benefits
expenses and integrated resource
plan related costs), depreciation
expense and taxes, other than
income taxes
Operating income................ 132,246 124,383 6 Higher revenues, partly offset by
higher expenses (see "as adjusted"
amounts below)
Net income...................... 61,266 58,159 5 Higher operating income, partly
offset by higher interest expense
due to higher average borrowings and
lower AFUDC (see "as adjusted"
amounts below)
As adjusted *
Operating income.............. 132,246 117,783 12 Higher revenues, including higher
rates ($11 million), partly
offset by higher expenses
Net income.................... 61,266 54,128 13 Higher operating income, partly
offset by higher interest expense
due to higher average borrowings and
lower AFUDC
Fuel oil price per barrel....... 23.35 20.57
* In December 1995, a rate order by the PUC reduced the allowed return on equity
for HECO to 11.4% and required a refund to customers retroactive to January 1,
1995. The 1995 "as adjusted" amounts reflect the PUC's December 1995 rate
order as if the adjusted rates had been in effect at the beginning of 1995.
Had the lower rates in the PUC's December 1995 rate order for HECO been in
effect from January 1, 1995, consolidated HECO's 1996 third quarter net income
would have exceeded net income for the third quarter of 1995 by approximately
2%, and consolidated HECO's net income for the nine months ended September
30, 1996 would have exceeded net income for the first nine months of 1995 by
approximately 13%. Kilowatthour sales in the third quarter and first nine months
of 1996 increased 3.3% and 3.5%, respectively, from the same periods in 1995,
partly due to the state's gradually improving economy and an increase in the
number of customers.
19
REGULATION OF ELECTRIC UTILITY RATES
The PUC has broad discretion in its regulation of the rates charged by HEI's
electric utility subsidiaries and in other matters. Any adverse decision & order
(D&O) by the PUC concerning the level or method of determining electric utility
rates, the authorized returns on equity or other matters, or any prolonged delay
in rendering a D&O in a rate or other proceeding, could have a material adverse
effect on the Company's financial condition and results of operations. Upon a
showing of probable entitlement, the PUC is required to issue an interim D&O in
a rate case within 10 months from the date of filing a completed application if
the evidentiary hearing is completed (subject to extension for 30 days if the
evidentiary hearing is not completed). There is no time limit for rendering a
final D&O. Interim rate increases are subject to refund with interest, pending
the final outcome of the case. Management cannot predict with certainty when
D&Os in pending or future rate cases will be rendered or the amount of any
interim or final rate increase that will be granted.
Recent rate requests
- --------------------
Hawaiian Electric Company, Inc.
- -------------------------------
. In December 1993, HECO filed a request to increase rates based on a
1995 test year. HECO requested a 4.1% increase (as revised), or $28.2 million in
annual revenues, based on a 13.25% return on average common equity (ROACE). In
December 1995, HECO received a final D&O authorizing a 1.3%, or $9.1 million,
increase in annual revenues, based on an 11.4% ROACE. The D&O required a refund
to customers because HECO had previously received four interim increases
totaling $18.9 million on an annualized basis, or $9.8 million more than the
amount that was finally approved. The reduced rate relief resulted primarily
from the lower ROACE used by the PUC in the final D&O because of decreases in
interest rates subsequent to the first interim increase, which had been
effective January 1, 1995 and had been based on a 12.6% ROACE. The refund amount
of $10.2 million (representing amounts received under interim rates in excess of
final approved rates, with interest thereon), of which $10 million was accrued
in December 1995, was returned to customers in the first half of 1996. The D&O
also did not provide revenue to cover costs relating to post retirement
executive life insurance. HECO and its subsidiaries wrote off a regulatory asset
relating to such costs, resulting in a fourth quarter 1995 after-tax charge of
$1.1 million.
Hawaii Electric Light Company, Inc.
- -----------------------------------
. In March 1995, HELCO filed a request to increase rates based on a 1996
test year. In February 1996, HELCO revised its requested increase to 6.2%, or
$8.9 million in annual revenues, based on a 12.5% ROACE. In March 1996, HELCO
received an interim D&O authorizing a 4.8%, or $6.8 million, increase in annual
revenues, based on an 11.65% ROACE, effective March 4, 1996.
. It is now unlikely that HELCO will file a request to increase rates based
on a 1997 test year.
Maui Electric Company, Limited
- ------------------------------
. In February 1995, MECO filed a request to increase rates based on a 1996
test year. MECO's final requested increase was 3.8%, or $5.0 million in annual
revenues, based on an 11.5% ROACE. In January 1996, MECO received an interim D&O
authorizing an increase of 2.8%, or $3.7 million in annual revenues, based on an
11.5% ROACE, effective February 1, 1996.
. In May 1996, MECO filed a request to increase rates based on a 1997 test
year, primarily to recover the costs related to generating unit M17. MECO
requested an increase of 13%, or $18.9 million in annual revenues over rates in
effect at the time of filing, based on a 12.9% ROACE. On November 7, 1996, MECO
filed a motion with the PUC to approve an agreement between MECO and the
Consumer Advocate which would close the MECO 1997 rate case and would provide
MECO with an increase in annual revenues of $1.5 million over revenues at
currently effective rates, effective January 1, 1997, based on an 11.65% ROACE.
The $1.5 million increase, but not the resulting rate level, is subject to
adjustment if the rates approved in the final D&O for the 1996 rate case differ
from the interim rates currently in effect. The primary reason for the agreement
was a delay in the expected in-service date for MECO's generating unit M17,
from the second half of 1997 to the first half of 1998, which resulted from
delays in obtaining the necessary PSD permit from the DOH/EPA. MECO anticipates
that it will obtain the PSD permit necessary to place M17 in service in 1998, in
which event it is likely that MECO will file a request to increase rates based
on a 1998 test year.
20
SAVINGS BANK
- ------------
Three months ended
September 30,
--------------------- % Primary reason(s) for
(in thousands) 1996 1995 change significant change
- ------------------------------------------------------------------------------------------------------
Revenues........................ $ 68,281 $ 63,151 8 Higher interest income as a
result of higher average loans
receivable and mortgage-backed
securities balances, partly
offset by lower yields
Operating income (loss)......... (4,015) 9,689 NM Accrual of $13.8 million
deposit-insurance premium special
assessment by the FDIC (see "as
adjusted" amounts below)
Net income (loss)............... (2,634) 5,642 NM $8.3 million (after-tax)
deposit-insurance premium special
assessment by the FDIC (see "as
adjusted" amounts below)
As adjusted *
Operating income............... 9,820 9,689 1 Higher net interest income,
partly offset by higher compensation
expense and an increase in
allowance for loan losses
Net income..................... 5,699 5,642 1 Higher operating income
Interest rate spread............ 2.76% 2.84% 13 basis points decrease in the
weighted average yield on
interest-earning assets, partly
offset by 5 basis points decrease
in the weighted average rate on
interest-bearing liabilities
NM Not meaningful.
21
Nine months ended
September 30,
--------------------- % Primary reason(s) for
(in thousands) 1996 1995 change significant change
- ------------------------------------------------------------------------------------------------------
Revenues........................ $ 200,351 $185,473 8 Higher interest income as a result
of higher average mortgage-backed
securities and loans receivable
balances, partly offset by lower
yields
Operating income................ 16,143 29,757 (46) Accrual of $13.8 million
deposit-insurance premium special
assessment by the FDIC (see "as
adjusted" amounts below)
Net income...................... 9,102 17,295 (47) $8.3 million (after-tax)
deposit-insurance premium special
assessment by the FDIC (see "as
adjusted" amounts below)
As adjusted *
Operating income............... 29,978 29,757 1 Higher net interest income, partly
offset by higher compensation
expense and an increase in
allowance for loan losses
Net income..................... 17,435 17,295 1 Higher operating income
Interest rate spread............ 2.80% 2.93% 11 basis points decrease in the
weighted average yield on
interest-earning assets and 2
basis points increase in the
weighted average rate on
interest-bearing liabilities
* On September 30, 1996, President Clinton signed into law the Deposit Insurance
Funds Act of 1996, which authorizes a one-time deposit-insurance premium
assessment by the FDIC of 65.7 cents per $100 of deposits insured by the SAIF
and held as of March 31, 1995. ASB's assessment was estimated to be $8.3
million after-tax and was accrued in September 1996. The 1996 "as adjusted"
amounts exclude the effect of the special FDIC assessment. In anticipation of
the assessment, HEI infused $9 million of additional equity capital into ASB
in September 1996. As of September 30, 1996, ASB was well-capitalized -- the
highest of five categories established by regulators. The assessment will
bring the SAIF to its statutory reserve level and should result in a reduction
of ASB's deposit-insurance premiums (including assessments to pay interest on
the FICO bond) from 23 cents to an estimated 6.45 cents per $100 of deposits,
effective January 1, 1997. With the reduction in deposit-insurance premiums,
management expects that ASB's annual after-tax savings will amount to
approximately $2 million, beginning January 1, 1997 (based on deposit
liabilities as of September 30, 1996). See note (3) in HEI's "Notes to
consolidated financial statements" for additional information.
Several factors contributed to the decrease in ASB's interest rate spread -- the
difference between the weighted average yield on interest-earning assets and the
weighted average rate on interest-bearing liabilities. One of the primary
factors was the flattening of the yield curve beginning in 1995. Comparing third
quarter 1996 to the same period in 1995, the weighted average rates on interest-
bearing liabilities and interest-earning assets decreased. Comparing the first
nine months of 1996 to the same period in 1995, the weighted average rate on
interest-bearing liabilities remained relatively constant, while the weighted
average rate on interest-earning assets decreased.
Deposits traditionally have been the principal source of ASB's funds for use in
lending, meeting liquidity requirements and making investments. ASB also derives
funds from receipt of interest and principal on outstanding loans receivable and
mortgage-backed securities, borrowings from the Federal Home Loan Bank (FHLB) of
Seattle, securities sold under agreements to repurchase and other sources. In
recent years, securities sold under agreements to repurchase and advances from
the FHLB of Seattle have become more significant sources of funds as the demand
for deposits decreased. Deposits
22
decreased by $83 million and $48 million in the three and nine months ended
September 30, 1996, respectively. Deposits increased by $14 million and $48
million in the three and nine months ended September 30, 1995. Using sources of
funds with a higher cost than deposits, such as advances from the FHLB, puts
downward pressure on ASB's net interest income.
In 1995, the federal funds rate, which is the rate charged by banks for
overnight loans to each other and which has a significant influence on deposit
and loans receivable rates, increased from 5.5% to 6.0% and declined to 5.5% by
yearend. In the first nine months of 1996, the federal funds rate decreased 25
basis points to 5.25%.
OTHER
- -----
Three months ended
September 30,
--------------------- % Primary reason(s) for
(in thousands) 1996 1995 change significant change
- ------------------------------------------------------------------------------------------------------
Revenues........................ $ 15,460 $ 11,844 31 1995 HEIIC pretax loss on
disposition of a leveraged lease
investment ($2 million)
Operating loss.................. (1,374) (3,685) 63 1995 HEIIC pretax loss on
disposition of a leveraged lease
investment ($2 million)
Nine months ended
September 30,
--------------------- % Primary reason(s) for
(in thousands) 1996 1995 change significant change
- ------------------------------------------------------------------------------------------------------
Revenues........................ $ 43,978 $ 38,666 14 MPC sale of land in downtown
Honolulu to a developer for a
residential condominium ($2 million)
and 1995 HEIIC pretax loss on
disposition of a leveraged lease
investment ($2 million)
Operating loss.................. (5,499) (7,086) 22 MPC sale of land in downtown
Honolulu to a developer for a
residential condominium ($1
million) and 1995 HEIIC pretax
loss on disposition of a leveraged
lease investment ($2 million),
partly offset by higher startup
costs at HEIPC
The "Other" business segment includes results of operations from HTB and its
subsidiary, YB, which are maritime freight transportation companies; HEIIC,
which is a company primarily holding investments in leveraged leases; MPC and
its subsidiaries, which are real estate development and investment companies;
HEIPC and its subsidiaries, which are companies formed to pursue independent
power projects and energy services projects in Asia and the Pacific; HEI and
HEIDI, which are holding companies; and eliminations of intercompany
transactions.
FREIGHT TRANSPORTATION
The freight transportation subsidiaries recorded operating income of
$1.1 million and $2.0 million in the third quarter and first nine months of
1996, respectively, compared with $0.9 million and $2.4 million in the same
periods of 1995. The increase in operating income for the quarter is due to
higher general freight and interstate revenue. However, the freight
transportation subsidiaries continue to be negatively impacted by the slow
economic activity on the neighbor islands and the slow construction industry. In
June 1996, YB filed a request with the PUC for a general rate increase based on
a 1996 test year. YB requested an increase of 9.9%, or $3.5 million in annual
revenues, based on a 15.15% ROACE. In September 1996, YB and the Consumer
Advocate filed a stipulated agreement with the PUC which would allow YB to
increase its rates by $1.4 million annually, or 3.9%. This agreement is subject
to PUC approval.
23
REAL ESTATE
The real estate subsidiaries recorded an operating loss of $0.3 million and
operating income of $37,000 in the third quarter and first nine months of 1996,
respectively, compared with operating losses of $0.3 million and $0.9 million in
the same periods of 1995. In April 1996, MPC sold land in downtown Honolulu to a
developer for a pretax gain of $1.1 million. MPC's other real estate development
activities continue to be negatively impacted by the slow real estate market in
Hawaii. It is not expected that there will be a rebound in Hawaii's real estate
market in the near term. MPC's present focus is to reduce its current investment
in real estate development assets and increase cash flow by continuing the
development and sales of its existing projects. There are currently no plans to
invest in new projects. For further information on MPC, see note (4) in HEI's
"Notes to consolidated financial statements."
OTHER
HEIPC was formed in March 1995 and its subsidiaries have been and will be formed
from time to time to pursue independent power projects and energy services
projects in Asia and the Pacific. HEIPC's consolidated operating loss (i.e.,
startup costs) for the first nine months of 1996 was $1.6 million, compared with
$1.0 million for the same period in 1995.
In September 1996, HEIPC's subsidiary, HEI Power Corp. Guam (HPG), entered into
an energy conversion agreement with the Guam Power Authority, pursuant to which
HPG will rehabilitate, operate and maintain for approximately 20 years two oil-
fired 26.5-megawatt (MW) units at Tanguisson, Guam. On October 30, 1996, HEI
filed with the SEC a "Notification of Foreign Utility Company Status" on Form U-
57, stating that HPG will assume operational control of the Tanguisson facility
by November 24, 1996. HPG's total cost to rehabilitate the two units will be
approximately $12 million, approximately $8 million of which HPG is seeking to
fund through nonrecourse financing.
HEIPC continues to pursue the development of a 22-MW hydroelectric plant in the
Philippines. The project is in a preliminary stage for HEIPC.
The success of any project undertaken by HEIPC in foreign countries will be
dependent on many factors, including the economic, political, technological,
regulatory and logistical circumstances surrounding each project and the
location of the project. Due to political or regulatory actions or other
circumstances, projects may be delayed or even prohibited. There is no assurance
that any project undertaken by HEIPC will be successfully completed or that
HEIPC's investment in any such project will not be lost, in whole or in part.
DISCONTINUED OPERATIONS
- -----------------------
See note (7) in HEI's "Notes to consolidated financial statements" for
information on the discontinued operations of HIG.
ACCOUNTING CHANGES
- ------------------
For a discussion of Statement of Financial Accounting Standards (SFAS) No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
Be Disposed Of"; SFAS No. 122, "Accounting for Mortgage Servicing Rights"; SFAS
No. 123, "Accounting for Stock-Based Compensation"; and SFAS No. 125,
"Accounting for Transfers and Servicing of Financial Assets and Extinguishments
of Liabilities," see note (6) in HEI's "Notes to consolidated financial
statements."
FINANCIAL CONDITION
LIQUIDITY AND CAPITAL RESOURCES
- -------------------------------
The Company and HECO and its subsidiaries believe that their ability to generate
cash, both internally from operations and externally from debt and equity
issues, is adequate to maintain sufficient liquidity to fund their construction
programs and to cover debt retirements and other cash requirements in the
foreseeable future.
24
The consolidated capital structure of HEI was as follows:
(in millions) September 30,1996 December 31, 1995
- ---------------------------------------------------------------------------
Short-term borrowings.............. $ 170 9% $ 182 10%
Long-term debt..................... 823 45 758 43
Preferred stock of electric
utility subsidiaries.............. 87 5 90 5
Common stock equity................ 762 41 730 42
------ ---- ------ ----
$1,842 100% $1,760 100%
====== ==== ====== ====
ASB's deposit liabilities, securities sold under agreements to repurchase and
advances from FHLB of Seattle are not included in the table above.
For the first nine months of 1996, net cash provided by operating activities was
$121 million. Net cash used in investing activities was $370 million, largely
due to ASB's loan originations, net of repayments, and consolidated HECO's
capital expenditures. Net cash provided by financing activities was $212 million
as a result of several factors, including net increases in long-term debt,
advances from FHLB of Seattle and securities sold under agreements to
repurchase, partly offset by decreases in deposit liabilities and short-term
borrowings and by common stock dividends.
Total HEI consolidated financing requirements for 1997 through 2001 (excluding
any financing requirements HEIPC may have), including net capital expenditures
(which excludes the allowance for funds used during construction and capital
expenditures funded by third-party cash contributions in aid of construction),
debt retirements (excluding repayments of advances from FHLB of Seattle and
securities sold under agreements to repurchase) and sinking fund requirements,
are currently estimated to total $1.0 billion. Of this amount, approximately
$0.8 billion are for net capital expenditures (mostly relating to the electric
utilities' net capital expenditures described below). HEI's consolidated
internal sources, after the payment of HEI dividends, are expected to provide
approximately 68% of the consolidated financing requirements, with debt and
equity financing providing the remaining requirements. Over the five-year period
1997 through 2001, HEI estimates that it will require approximately $158 million
in new common equity, in addition to retained earnings, which is expected to be
provided principally by HEI's Dividend Reinvestment and Stock Purchase Plan and
the Hawaiian Electric Industries Retirement Savings Plan. The additional equity
will be used primarily to reduce HEI's overall borrowing level and to fund the
electric utilities' common equity requirements related to their capital
expenditure programs. Additional common equity in excess of the $158 million
described above, and additional debt financing, may be required for the
development of independent power projects and energy services projects by HEIPC
in Asia and the Pacific.
Following is a discussion of the liquidity and capital resources of HEI's
largest segments.
ELECTRIC UTILITY
- ----------------
HECO's consolidated capital structure was as follows:
(in millions) September 30,1996 December 31, 1995
- --------------------------------------------------------------------------------
Short-term borrowings from
nonaffiliates and affiliate $ 138 9% $ 139 10%
Long-term debt............... 589 38 517 36
Preferred stock.............. 87 6 90 6
Common stock equity.......... 719 47 697 48
------ ---- ------ ----
$1,533 100% $1,443 100%
====== ==== ====== ====
Operating activities provided $107Emillion in net cash during the first nine
months of 1996. Investing activities used cash of $126 million primarily for
capital expenditures, net of contributions in aid of construction. Financing
activities provided cash of $20 million through an increase in long-term debt
resulting from the drawdown of proceeds from the sale of special purpose revenue
bonds, partly offset by a net decrease in short-term borrowings, payment of
common and preferred dividends and the sinking fund redemption of preferred
stock.
During May 1996, the Department of Budget and Finance of the State of Hawaii
issued $75 million of special purpose revenue bonds on behalf of HECO, HELCO and
MECO at a discount, resulting in a yield of 6.375%. As of September 30, 1996, an
additional $95 million of revenue bonds had been
25
authorized by the Hawaii Legislature for issuance prior to the end of 1997 and
an additional $150 million was authorized for issuance prior to the end of 1999.
The electric utilities' consolidated financing requirements for 1997 through
2001, including net capital expenditures, debt retirements and sinking fund
requirements, are estimated to total $763 million. HECO's consolidated internal
sources, after the payment of common and preferred stock dividends, are
currently expected to provide approximately 76% of the total $763 million in
requirements, with debt and equity financing providing the remaining
requirements. HECO currently estimates that it will require approximately
$36 million in new common equity, in addition to retained earnings, over the
five-year period 1997 through 2001. The PUC must approve issuances of long-term
debt and equity by HECO, HELCO and MECO.
Capital expenditures include the costs of projects which are required to meet
expected load growth, to improve reliability and to replace and upgrade existing
equipment. Net capital expenditures for the five-year period 1997 through 2001
are currently estimated to total $711 million. Approximately 65% of gross
capital expenditures, including the allowance for funds used during construction
and capital expenditures funded by third-party cash contributions in aid of
construction, is for transmission and distribution projects, with the remaining
35% primarily for generation projects.
Capital expenditure estimates and the timing of construction projects are
reviewed periodically by management and may change significantly as a result of
many considerations, including changes in economic conditions, changes in
forecasts of KWH sales and peak load, the availability of purchased power, the
availability of generating sites and transmission and distribution corridors,
the ability to obtain adequate and timely rate relief, escalation in
construction costs, demand-side management programs and requirements of
environmental and other regulatory and permitting authorities.
SAVINGS BANK
- ------------
September 30, December 31, %
(in millions) 1996 1995 change
- ---------------------------------------------------------------------------------------------------
Assets................................................ $3,608 $3,413 6
Mortgage-backed securities............................ 1,388 1,445 (4)
Loans receivable, net................................. 1,977 1,688 17
Deposit liabilities................................... 2,176 2,224 (2)
Securities sold under agreements to repurchase........ 480 413 16
Advances from Federal Home Loan Bank.................. 668 501 33
At June 30, 1996, ASB was the fourth largest financial institution in the state
based on total assets of $3.5 billion and the third largest financial
institution based on deposits of $2.3 billion. The 17% increase in loans
receivable noted above was partly due to the fact that ASB's refinancings of
other institutions' loans were high in the first nine months of 1996. This
trend, however, is not expected to continue in the last quarter of 1996.
For the first nine months of 1996, cash used in ASB's investing activities was
$237 million, due largely to the origination of loans receivable, partly offset
by principal repayments. Cash provided by financing activities was $176 million
as a result of a net increase of $167 million in advances from the FHLB of
Seattle and $68 million in securities sold under agreements to repurchase,
partly offset by a decrease of $48 million in deposit liabilities and common
stock dividends of $10 million.
Minimum liquidity levels are currently governed by the regulations adopted by
the Office of Thrift Supervision (OTS). ASB was in compliance with OTS liquidity
requirements as of September 30, 1996.
ASB believes that a satisfactory regulatory capital position provides a basis
for public confidence, affords protection to depositors, helps to ensure
continued access to capital markets on favorable terms and provides a foundation
for growth. As of September 30, 1996, ASB was in compliance with the OTS minimum
capital requirements (noted in parenthesis) with a tangible capital ratio of
5.0% (1.5%), a core capital ratio of 5.1% (3.0%) and a risk-based capital ratio
of 11.8% (8.0%).
The OTS has adopted a rule adding an interest rate risk (IRR) component to the
existing risk-based capital requirement. Institutions with an "above normal"
level of IRR exposure will be required to deduct an amount from total capital
and may be required to hold additional capital. Although the rule became
effective January 1, 1994, the OTS has provided a waiver of the IRR capital
deduction until it can finalize an appeals process for institutions subject to
such deductions. As of September 30, 1996,
26
ASB would not have been required to deduct an amount from total capital or to
hold additional capital if the rule adding the IRR component had been
implemented.
FDIC regulations restrict the ability of financial institutions that are not
well-capitalized to offer interest rates on deposits that are significantly
higher than the rates offered by competing institutions. As of September 30,
1996, ASB was well-capitalized (ratio requirements noted in parenthesis) with a
leverage ratio of 5.1% (5.0%), a Tier-1 risk-based ratio of 11.1% (6.0%) and a
total risk-based ratio of 11.8% (10.0%).
Significant interstate banking legislation has been enacted at both the federal
and state levels. Under the federal Riegle-Neal Interstate Banking and Branching
Efficiency Act of 1994, a bank holding company may acquire control of a bank in
any state, subject to certain restrictions. Under Hawaii law which takes effect
on June 1, 1997, a bank chartered under Hawaii law may merge with an out-of-
state bank and convert all branches of both banks into branches of a single
bank, subject to certain restrictions. Although the federal and Hawaii laws
apply only to banks, such legislation may nonetheless affect the competitive
balance among banks, thrifts and other financial institutions and the level of
competition among financial institutions doing business in Hawaii.
PART II - OTHER INFORMATION
- -------------------------------------------------------------------------------
ITEM 1. LEGAL PROCEEDINGS
- --------------------------
There are no significant developments except as set forth in HEI's and HECO's
"Notes to consolidated financial statements," management's discussion and
analysis of financial condition and results of operations and Item 5, "Other
information."
ITEM 5. OTHER INFORMATION
- --------------------------
A. MECO Maalaea Unit 14
Following a unit overhaul, emission compliance tests conducted for MECO's
Maalaea Unit 14 in October 1995 and documented in November 1995 indicated that
particulate emissions were in excess of Prevention of Significant
Deterioration/Covered Source Permit (PSD) limits. Corrective actions included
fine tuning of the combustion turbine's fuel nozzles in December 1995, and a
retest in February 1996 confirmed that the unit returned to compliance with PSD
limits. All test reports were submitted to the Department of Health of the State
of Hawaii (DOH). By letter dated July 15, 1996, the DOH indicated that a Notice
of Violation will be issued for the past violations. Management does not believe
that the issuance or final resolution of the Notice of Violation will have a
material adverse effect on consolidated HECO's financial condition or results of
operations.
B. Ratio of earnings to fixed charges
The following tables set forth the ratio of earnings to fixed charges for HEI
and its subsidiaries for the periods indicated:
RATIO OF EARNINGS TO FIXED CHARGES EXCLUDING INTEREST ON ASB DEPOSITS
---------
Years ended December 31,
Nine months ended --------------------------------------------------
September 30, 1996 1995 1994 1993 1992 1991
------------------ ---- ---- ---- ---- ----
1.90 1.94 2.22 2.25 2.08 1.99
==== ==== ==== ==== ==== ====
RATIO OF EARNINGS TO FIXED CHARGES INCLUDING INTEREST ON ASB DEPOSITS
---------
Years ended December 31,
Nine months ended --------------------------------------------------
September 30, 1996 1995 1994 1993 1992 1991
------------------ ---- ---- ---- ---- ----
1.54 1.57 1.69 1.65 1.50 1.46
==== ==== ==== ==== ==== ====
For purposes of calculating the ratio of earnings to fixed charges, "earnings"
represent the sum of (i) pretax income from continuing operations (excluding
undistributed net income or net loss from less than fifty-percent-owned persons)
and (ii) fixed charges (as hereinafter defined, but excluding capitalized
interest). "Fixed charges" are calculated both excluding and including interest
on ASB's deposits during the applicable periods and represent the sum of (i)
interest, whether capitalized or
27
expensed, incurred by HEI and its subsidiaries plus their proportionate share of
interest on debt to outsiders incurred by fifty-percent-owned persons, but
excluding interest on nonrecourse debt from leveraged leases which is not
included in interest expense in HEI's consolidated statements of income, (ii)
amortization of debt expense and discount or premium related to any
indebtedness, whether capitalized or expensed, (iii) the interest factor in
rental expense and (iv) the preferred stock dividend requirements of HEI's
subsidiaries, increased to an amount representing the pretax earnings required
to cover such dividend requirements.
The following table sets forth the ratio of earnings to fixed charges for HECO
and its subsidiaries for the periods indicated:
RATIO OF EARNINGS TO FIXED CHARGES
Nine months ended
September 30, 1996 Years ended December 31,
------------------ ------------------------------------------------
1995 1994 1993 1992 1991
---- ---- ---- ---- ----
3.67 3.46 3.47 3.25 3.03 2.82
==== ==== ==== ==== ==== ====
For purposes of calculating the ratio of earnings to fixed charges, "earnings"
represent the sum of (i) pretax income before preferred stock dividends of HECO
and (ii) fixed charges (as hereinafter defined, but excluding the allowance for
borrowed funds used during construction). "Fixed charges" represent the sum of
(i) interest, whether capitalized or expensed, incurred by HECO and its
subsidiaries, (ii) amortization of debt expense and discount or premium related
to any indebtedness, whether capitalized or expensed, (iii) the interest factor
in rental expense and (iv) the preferred stock dividend requirements of HELCO
and MECO, increased to an amount representing the pretax earnings required to
cover such dividend requirements.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
- -----------------------------------------
(a) EXHIBITS
HEI Hawaiian Electric Industries, Inc. and subsidiaries
Exhibit 12.1 Computation of ratio of earnings to fixed charges,
nine months ended September 30, 1996 and 1995 and years ended
December 31, 1995, 1994, 1993, 1992 and 1991
HECO Hawaiian Electric Company, Inc. and subsidiaries
Exhibit 12.2 Computation of ratio of earnings to fixed charges,
nine months ended September 30, 1996 and 1995 and years ended
December 31, 1995, 1994, 1993, 1992 and 1991
HEI Hawaiian Electric Industries, Inc. and subsidiaries
Exhibit 27.1 Financial Data Schedule
September 30, 1996 and nine months ended September 30, 1996
HECO Hawaiian Electric Company, Inc. and subsidiaries
Exhibit 27.2 Financial Data Schedule
September 30, 1996 and nine months ended September 30, 1996
(b) REPORTS ON FORM 8-K
During the quarter, no Current Report, Form 8-K, was filed with the SEC.
28
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrants have duly caused this report to be signed on their behalf by the
undersigned, thereunto duly authorized. The signature of each registrant shall
be deemed to relate only to matters having reference to that registrant and any
subsidiaries thereof.
HAWAIIAN ELECTRIC INDUSTRIES, INC. HAWAIIAN ELECTRIC COMPANY, INC.
(Registrant) (Registrant)
By /s/ Robert F. Mougeot By /s/ Paul Oyer
---------------------- ----------------------------
Robert F. Mougeot Paul A. Oyer
Financial Vice President and Financial Vice President and
Chief Financial Officer Treasurer
(Principal Financial Officer of HEI) (Principal Financial Officer
of HECO)
Date: November 12, 1996 Date: November 12, 1996
29