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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1997
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
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(Address of principal executive offices and zip code)
Hawaiian Electric Industries, Inc. ----- (808) 543-5662
Hawaiian Electric Company, Inc. -------- (808) 543-7771
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(Registrant's telephone number, including area code)
None
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(Former name, former address and former fiscal year, if changed since last
report)
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Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [x] No [_]
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Class of Common Stock Outstanding May 7, 1997
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Hawaiian Electric Industries, Inc. (Without Par Value)........31,197,869 Shares
Hawaiian Electric Company, Inc. ($6 2/3 Par Value)...........12,805,843 Shares
(not publicly traded)
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Hawaiian Electric Industries, Inc. and subsidiaries
Hawaiian Electric Company, Inc. and subsidiaries
Form 10-Q--Quarter ended March 31, 1997
INDEX
Page No.
Glossary of terms............................................................................ ii
PART I. FINANCIAL INFORMATION
Item 1. Financial statements
Hawaiian Electric Industries, Inc. and subsidiaries
---------------------------------------------------
Consolidated balance sheets (unaudited) - March 31, 1997
and December 31, 1996.......................................................... 1
Consolidated statements of income (unaudited) - three months
ended March 31, 1997 and 1996.................................................. 2
Consolidated statements of retained earnings (unaudited) - three months
ended March 31, 1997 and 1996.................................................. 2
Consolidated statements of cash flows (unaudited) - three months
ended March 31, 1997 and 1996.................................................. 3
Notes to consolidated financial statements (unaudited) ........................... 4
Hawaiian Electric Company, Inc. and subsidiaries
------------------------------------------------
Consolidated balance sheets (unaudited) - March 31, 1997
and December 31, 1996.......................................................... 9
Consolidated statements of income (unaudited) - three months
ended March 31, 1997 and 1996.................................................. 10
Consolidated statements of retained earnings (unaudited) - three months
ended March 31, 1997 and 1996.................................................. 10
Consolidated statements of cash flows (unaudited) - three months
ended March 31, 1997 and 1996.................................................. 11
Notes to consolidated financial statements (unaudited) ........................... 12
Item 2. Management's discussion and analysis of financial condition
and results of operations...................................................... 17
PART II. OTHER INFORMATION
Item 1. Legal proceedings................................................................. 25
Item 4. Submission of matters to a vote of security holders............................... 25
Item 5. Other information................................................................. 26
Item 6. Exhibits and reports on Form 8-K.................................................. 27
Signatures .................................................................................. 30
i
Hawaiian Electric Industries, Inc. and subsidiaries
Hawaiian Electric Company, Inc. and subsidiaries
Form 10-Q--Quarter ended March 31, 1997
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
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, Pacific Energy Conservation Services, Inc., HEI
Power Corp. and its subsidiaries, Hycap Management, Inc.,
Hawaiian Electric Industries Capital Trust I, Hawaiian Electric
Industries Capital Trust II and Hawaiian Electric Industries
Capital Trust III
Consumer Division of Consumer Advocacy, Department of Commerce and Consumer
Advocate Affairs of the State of Hawaii
D&O Decision and order
DOH Department of Health of the State of Hawaii
Enserch Enserch Development Corporation
EPA Environmental Protection Agency - federal
FASB Financial Accounting Standards Board
FDIC Federal Deposit Insurance Corporation
FHLB Federal Home Loan Bank
FICO Financing Corporation
Funds Act Deposit Insurance Funds Act of 1996
GAAP Generally accepted accounting principles
HECO Hawaiian Electric Company, Inc., a wholly owned electric utility
subsidiary of Hawaiian Electric Industries, Inc. and parent
company of Maui Electric Company, Limited, Hawaii Electric Light
Company, Inc. and HECO Capital Trust I
HEI Hawaiian Electric Industries, Inc., parent company of Hawaiian
Electric Company, Inc., HEI Investment Corp., Malama Pacific
Corp., Hawaiian Tug & Barge Corp., HEI Diversified, Inc., Pacific
Energy Conservation Services, Inc., HEI Power Corp., Hycap
Management, Inc., Hawaiian Electric Industries Capital Trust I,
Hawaiian Electric Industries Capital Trust II and Hawaiian
Electric Industries Capital Trust III
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 until 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
PSD Prevention of Significant Deterioration/Covered Source Permit
PUC Public Utilities Commission of the State of Hawaii
ROACE Return on average common equity
ROR Return on rate base
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
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Item 1. Financial statements
- -----------------------------
Hawaiian Electric Industries, Inc. and subsidiaries
Consolidated balance sheets (unaudited)
March 31, December 31,
(in thousands) 1997 1996
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Assets
- ------
Cash and equivalents............................................................... $ 98,653 $ 97,417
Accounts receivable and unbilled revenues, net..................................... 151,720 150,858
Inventories, at average cost....................................................... 47,262 48,745
Real estate developments........................................................... 31,773 33,210
Investment and mortgage-backed securities.......................................... 1,391,167 1,377,591
Other investments.................................................................. 74,071 72,609
Loans receivable, net.............................................................. 2,036,259 2,002,028
Property, plant and equipment, net of accumulated
depreciation and amortization of $912,580 and $890,055.......................... 1,951,818 1,941,767
Regulatory assets.................................................................. 103,602 100,804
Other.............................................................................. 78,316 73,776
Goodwill and other intangibles..................................................... 35,984 37,035
------------ ------------
$6,000,625 $5,935,840
============ ============
Liabilities and stockholders' equity
- ------------------------------------
Liabilities
Accounts payable................................................................... $ 118,901 $ 107,896
Deposit liabilities................................................................ 2,174,429 2,150,370
Short-term borrowings.............................................................. 103,090 216,543
Securities sold under agreements to repurchase..................................... 550,276 479,742
Advances from Federal Home Loan Bank............................................... 625,274 684,274
Long-term debt..................................................................... 801,941 810,080
Deferred income taxes.............................................................. 189,190 185,609
Unamortized tax credits............................................................ 49,196 48,857
Contributions in aid of construction............................................... 197,391 197,805
Other.............................................................................. 177,427 194,564
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4,987,115 5,075,740
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HEI- and HECO-obligated preferred securities of trust
subsidiaries directly or indirectly holding solely subordinated
debentures of HEI, HEIDI, HECO, MECO and HELCO................................. 150,000 --
Preferred stock of electric utility subsidiaries
Subject to mandatory redemption................................................ 36,260 38,955
Not subject to mandatory redemption............................................ 48,293 48,293
------------ ------------
234,553 87,248
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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: 31,138 shares and 30,853 shares............................... 628,260 622,945
Retained earnings.................................................................. 150,697 149,907
------------ ------------
778,957 772,852
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$ 6,000,625 $ 5,935,840
============ ============
See accompanying notes to consolidated financial statements.
1
Hawaiian Electric Industries, Inc. and subsidiaries
Consolidated statements of income (unaudited)
(in thousands, except per share amounts and Three months ended March 31,
----------------------------
ratio of earnings to fixed charges) 1997 1996
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Revenues
Electric utility.................................................................... $273,756 $247,837
Savings bank........................................................................ 68,912 65,792
Other............................................................................... 16,525 12,540
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359,193 326,169
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Expenses
Electric utility.................................................................... 235,162 209,098
Savings bank........................................................................ 56,627 55,836
Other............................................................................... 18,052 14,500
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309,841 279,434
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Operating income (loss)
Electric utility.................................................................... 38,594 38,739
Savings bank........................................................................ 12,285 9,956
Other............................................................................... (1,527) (1,960)
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49,352 46,735
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Interest expense--electric utility and other........................................ (16,465) (16,159)
Allowance for borrowed funds used during construction............................... 1,527 1,350
Preferred stock dividends of electric utility subsidiaries.......................... (1,571) (1,675)
Preferred securities distributions of trust subsidiaries............................ (1,335) --
Allowance for equity funds used during construction................................. 2,673 2,651
----------- -----------
Income before income taxes.......................................................... 34,181 32,902
Income taxes........................................................................ 14,518 14,033
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Net income.......................................................................... $ 19,663 $ 18,869
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Earnings per common share........................................................... $0.64 $0.63
=========== ===========
Dividends per common share.......................................................... $0.61 $0.60
=========== ===========
Weighted average number of common shares outstanding................................ 30,960 29,884
=========== ===========
Ratio of earnings to fixed charges (SEC method)
Excluding interest on ASB deposits............................................. 1.83 1.91
=========== ===========
Including interest on ASB deposits............................................. 1.55 1.54
=========== ===========
Hawaiian Electric Industries, Inc. and subsidiaries
Consolidated statements of retained earnings (unaudited)
Three months ended March 31,
----------------------------
(in thousands) 1997 1996
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Retained earnings, beginning of period.............................................. $149,907 $144,216
Net income.......................................................................... 19,663 18,869
Common stock dividends.............................................................. (18,873) (17,913)
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Retained earnings, end of period.................................................... $150,697 $145,172
=========== ===========
See accompanying notes to consolidated financial statements.
2
Hawaiian Electric Industries, Inc. and subsidiaries
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
Three months ended
March 31,
------------------------
(in thousands) 1997 1996
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CASH FLOWS FROM OPERATING ACTIVITIES
Net income..................................................................................... $ 19,663 $ 18,869
Adjustments to reconcile net income to net cash provided by operating activities
Depreciation and amortization of property, plant and equipment........................... 22,776 20,579
Other amortization....................................................................... 3,624 2,155
Deferred income taxes and tax credits, net............................................... 1,183 2,657
Allowance for equity funds used during construction...................................... (2,673) (2,651)
Changes in assets and liabilities
Decrease (increase) in accounts receivable and unbilled revenues, net.............. (862) 18,740
Decrease (increase) in inventories................................................. 1,483 (3,275)
Increase in regulatory assets...................................................... (2,822) (858)
Increase (decrease) in accounts payable............................................ 11,005 (1,809)
Changes in other assets and liabilities............................................ (20,909) (18,617)
--------- ----------
NET CASH PROVIDED BY OPERATING ACTIVITIES...................................................... 32,468 35,790
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES
Loans receivable originated and purchased...................................................... (70,812) (107,907)
Principal repayments on loans receivable....................................................... 35,004 41,754
Proceeds from sale of loans receivable......................................................... 517 675
Held-to-maturity mortgage-backed securities purchased.......................................... (81,028) (65,112)
Principal repayments on held-to-maturity mortgage-backed securities ........................... 68,630 87,104
Capital expenditures........................................................................... (30,287) (40,920)
Contributions in aid of construction........................................................... 1,281 2,460
Other.......................................................................................... 517 21
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NET CASH USED IN INVESTING ACTIVITIES.......................................................... (76,178) (81,925)
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CASH FLOWS FROM FINANCING ACTIVITIES
Net increase in deposit liabilities............................................................ 24,059 33,256
Net increase (decrease) in short-term borrowings with
original maturities of three months or less................................................. (112,855) 25,063
Proceeds from other short-term borrowings...................................................... 390 76
Repayment of other short-term borrowings....................................................... (988) (391)
Proceeds from securities sold under agreements to repurchase................................... 280,000 95,100
Repurchase of securities sold under agreements to repurchase................................... (209,100) (53,500)
Proceeds from advances from Federal Home Loan Bank............................................. 217,000 --
Principal payments on advances from Federal Home Loan Bank..................................... (276,000) (77,000)
Proceeds from issuance of long-term debt....................................................... 4,821 10,009
Repayment of long-term debt.................................................................... (13,000) (15,000)
Proceeds from issuance of HEI- and HECO-obligated preferred securities of trust subsidiaries... 150,000 --
Redemption of electric utility subsidiaries' preferred stock................................... (2,695) (2,400)
Net proceeds from issuance of common stock..................................................... 2,776 4,712
Common stock dividends......................................................................... (15,239) (12,380)
Other.......................................................................................... (4,223) (4,184)
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NET CASH PROVIDED BY FINANCING ACTIVITIES...................................................... 44,946 3,361
--------- ---------
Net increase (decrease) in cash and equivalents................................................ 1,236 (42,774)
Cash and equivalents, beginning of period...................................................... 97,417 130,833
--------- ---------
Cash and equivalents, end of period............................................................ $ 98,653 $ 88,059
========= =========
See accompanying notes to consolidated financial statements.
3
Hawaiian Electric Industries, Inc. and subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 1997 and 1996
(Unaudited)
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(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, 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 March 31, 1997 and
December 31, 1996, and the results of its operations and its cash flows for the
three months ended March 31, 1997 and 1996. 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 16.
(3) SAVINGS BANK SUBSIDIARY
- ----------------------------
SELECTED CONSOLIDATED FINANCIAL INFORMATION
American Savings Bank, F.S.B. and subsidiaries
Income statement data
Three months ended
March 31,
---------------------------
(in thousands) 1997 1996
- -----------------------------------------------------------------------------------------------
Interest income..................................................... $65,200 $62,080
Interest expense.................................................... 37,820 37,538
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NET INTEREST INCOME................................................. 27,380 24,542
Provision for loan losses........................................... (1,189) (420)
Other income........................................................ 3,712 3,712
Operating, administrative and general expenses...................... (17,618) (17,878)
--------- ---------
OPERATING INCOME.................................................... 12,285 9,956
Income taxes........................................................ 5,186 4,166
-------- ---------
NET INCOME.......................................................... $ 7,099 $ 5,790
======== =========
4
American Savings Bank, F.S.B. and subsidiaries
Balance sheet data
March 31, December 31,
(in thousands) 1997 1996
- ---------------------------------------------------------------------------------------------------------------------------
Assets
Cash and equivalents.............................................................. $ 90,575 $ 93,905
Held-to-maturity investment securities............................................ 38,188 37,518
Held-to-maturity mortgage-backed securities....................................... 1,351,766 1,340,073
Loans receivable, net............................................................. 2,036,259 2,002,028
Other............................................................................. 80,897 80,128
Goodwill and other intangibles.................................................... 35,984 37,035
------------ ------------
$ 3,633,669 $ 3,590,687
============ ============
Liabilities and equity
Deposit liabilities............................................................... $ 2,174,429 $ 2,150,370
Securities sold under agreements to repurchase.................................... 550,276 479,742
Advances from Federal Home Loan Bank.............................................. 625,274 684,274
Other............................................................................. 57,474 54,251
------------ ------------
3,407,453 3,368,637
Common stock equity............................................................... 226,216 222,050
------------ ------------
$ 3,633,669 $ 3,590,687
============ ============
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).
On September 30, 1996, President Clinton signed into law the Deposit Insurance
Funds Act of 1996 (Funds Act), which required 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% of aggregate insured deposits as of October 1, 1996. In
addition, effective January 1, 1997, the Funds Act provided 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.
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. ASB's special assessment was $8.3 million
after tax, and was accrued in September 1996. In December 1996, the FDIC adopted
a risk-based assessment schedule for SAIF institutions, effective January 1,
1997, that was identical to the existing base rate schedule for BIF
institutions: zero 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 of 6.5 cents per $100 of deposits for SAIF institutions and 1.3
cents per $100 of deposits for BIF institutions (subject to quarterly
adjustment). By law, the FICO rate on BIF-assessable deposits must be one-fifth
the rate on SAIF-assessable deposits until the insurance funds are merged or
until January 1, 2000, whichever occurs first, at which time the FICO interest
obligation for both banks and thrifts should thereafter be identical, at a
currently estimated rate of 2.4 cents per $100 of deposits.
As a "well-capitalized" thrift, ASB's base deposit-insurance premium effective
January 1, 1997 is zero and its assessment for funding FICO interest payments is
6.5 cents per $100 of deposits, compared to payments that would have been
calculated at 23 cents per $100 of deposits under the premium schedule in effect
during the first three quarters of 1996.
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. Certain of the legislative proposals
advanced to address this issue, if adopted, could have a material adverse effect
on the Company. For example, if thrift charters are eliminated and ASB obtains a
bank charter, HEI and its subsidiaries might become subject
5
to the restrictions on the permissible activities of a bank holding company.
While certain of the 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 $45 million and $46 million at
March 31, 1997 and December 31, 1996, respectively. The amounts MPC will
ultimately realize relative to these real estate investments could differ
materially from the recorded amounts as of March 31, 1997.
At March 31, 1997, MPC or its subsidiaries had issued (i) guarantees under which
they were jointly and severally contingently liable with their joint venture
partners for $2.1 million of outstanding loans and (ii) payment guarantees under
which MPC or its subsidiaries were severally contingently liable for $5.6
million of outstanding loans and $2.9 million of additional undrawn loan
facilities. All such loans are collateralized by real property. At March 31,
1997, HEI had agreed with the lenders of construction loans and loan facilities,
of which approximately $8.0 million was outstanding and $3.8 million was
undrawn, that it will maintain ownership of l00% of the stock of MPC and that it
intends, subject to good and prudent business practices, to keep MPC financially
sound and responsible to meet its obligations as guarantor.
(5) HEI- AND HECO-OBLIGATED PREFERRED SECURITIES OF TRUST SUBSIDIARIES
- ----------------------------------------------------------------------
DIRECTLY OR INDIRECTLY HOLDING SOLELY SUBORDINATED DEBENTURES OF HEI,
---------------------------------------------------------------------
HEIDI, HECO, MECO AND HELCO
---------------------------
In February 1997, Hawaiian Electric Industries Capital Trust I (the Trust), a
grantor trust, issued and sold, in an underwritten registered public offering, 4
million of its 8.36% Company-obligated preferred securities (trust preferred
securities), representing preferred undivided beneficial ownership interests in
the assets of the Trust. HEI owns 100% of the common securities of the Trust.
The Trust utilized the proceeds from the issuance of the trust preferred
securities ($100 million) and the trust common securities ($3.2 million) to
purchase all the limited partner interests in HEI Preferred Funding, LP (the
Partnership). Hycap Management, Inc. (Hycap), a wholly owned subsidiary of HEI,
is the sole general partner of the Partnership. Substantially all of the
proceeds from the sale of the limited partner interests and the general partner
interest were used by the Partnership to purchase 8.36% junior subordinated
debentures of HEI and HEIDI due in 2017 in the aggregate principal amount of
$120.1 million. The limited partner interests in the Partnership is the sole
asset of the Trust. HEI and HEIDI's junior subordinated debentures represent
substantially all of the assets of the Partnership. In connection with these
transactions, HEI issued subordinated guarantees relating to the performance of
certain obligations by the Trust, the Partnership and HEIDI. HEI's obligations
under the agreements related to the issuances of such securities, taken
together, effectively constitute a full and unconditional guarantee on a
subordinated basis by HEI of amounts due on the trust preferred securities. The
debentures issued by HEI and HEIDI to the Partnership, the interests in the
Partnership, HEI's investment in Hycap and the common securities of the Trust
owned by HEI have been eliminated in the Company's consolidated balance sheet as
of March 31, 1997.
In March 1997, HECO Capital Trust I, a grantor trust, issued and sold, in an
underwritten registered public offering, 2 million of its 8.05% cumulative
quarterly income preferred securities with an aggregate liquidation value of $50
million. See note (2) in HECO's "Notes to consolidated financial statements" for
a discussion of the HECO-obligated preferred securities of trust subsidiary
holding solely subordinated debentures of HECO, MECO and HELCO.
6
(6) CASH FLOWS
- ---------------
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash paid for interest (net of capitalized amounts) and income taxes was as
follows:
Three months ended
March 31,
-----------------------
(in thousands) 1997 1996
- ---------------------------------------------------------------------------------------------------------
Interest (including interest paid by savings bank, but excluding
interest paid on nonrecourse debt on leveraged leases)...................... $47,604 $49,203
=========== ==========
Interest on nonrecourse debt from leveraged leases............................ $198 $182
=========== ==========
Income taxes.................................................................. $4,822 $860
=========== ==========
SUPPLEMENTAL DISCLOSURES OF NONCASH ACTIVITIES
Common stock dividends reinvested by shareholders in HEI common stock in noncash
transactions amounted to $3.6 million and $5.5 million for the three months
ended March 31, 1997 and 1996, respectively.
The allowance for equity funds used during construction, which was capitalized
as part of the cost of electric utility plant, amounted to $2.7 million for each
of the three months ended March 31, 1997 and 1996.
(7) ACCOUNTING CHANGES
- -----------------------
ENVIRONMENTAL REMEDIATION LIABILITIES
In October 1996, the American Institute of Certified Public Accountants issued
Statement of Position (SOP) 96-1, "Environmental Remediation Liabilities." The
provisions of the SOP are consistent with the Company's current policies and,
accordingly, adoption of the SOP on January 1, 1997 did not have a material
effect on the Company's financial condition, results of operations or liquidity.
EARNINGS PER SHARE
In February 1997, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (SFAS) No. 128, "Earnings Per
Share". SFAS No. 128 is effective for both interim and annual periods ending
after December 15, 1997. The Company will adopt SFAS No. 128 in the fourth
quarter of 1997. SFAS No. 128 requires the presentation of "Basic" earnings per
share, representing income available to common shareholders divided by the
weighted average number of common shares outstanding for the period, and
"Diluted" earnings per share, which is similar to the current presentation of
fully diluted earnings per share. SFAS No. 128 requires restatement of all prior
period earnings per share data presented. Management does not expect adoption of
SFAS No. 128 to have a material impact on the Company's reported earnings per
share, financial position, results of operations or liquidity.
CAPITAL STRUCTURE
In February 1997, the FASB issued SFAS No. 129, "Disclosure of Information about
Capital Structure", which lists required disclosures about capital structure
that had been included in a number of previously existing statements and
opinions. SFAS No. 129 is effective for periods ending after December 15, 1997.
The Company will adopt the provisions of SFAS No. 129 in its financial
statements for 1997 and does not expect that its adoption will have a material
effect on the Company's financial condition, results of operations or liquidity.
7
(8) CONTINGENCIES
- -----------------
ENVIRONMENTAL REGULATION
By letters in January and February 1995, the Department of Health of the State
of Hawaii (DOH) advised HECO, HTB, YB and others that it 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 and requested information regarding past hazardous substances and oil
spills that may have occurred. HECO, HTB and YB provided responses to the DOH
letters. The DOH issued letters in December 1995, indicating that it had
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 in
January 1996 to inform them of its findings and to establish the framework to
determine remedial and cleanup requirements. A Technical Workgroup (comprised of
certain of the parties identified in the December 1995 DOH letter, including
HECO, Chevron U.S.A. Inc., Shell Oil Products Company and others) was formed to
conduct independent voluntary investigations relative to this issue.
Because the process for determining the nature and extent of any contamination,
the responsible parties and the appropriate remedial and cleanup action, if any,
is at an early stage, management cannot predict at this time the extent to which
the costs of further site analysis or future remediation and cleanup
requirements will be borne by HECO or YB, nor can it estimate when any such
costs would be incurred. Certain of such costs if incurred by HECO or YB may be
claimed and covered under insurance policies, but such coverage is not
determinable at this time.
THE HAWAIIAN INSURANCE & GUARANTY COMPANY, LIMITED
The Hawaiian Insurance & Guaranty Company, Limited (HIG) and its subsidiaries
(collectively, the HIG Group) are property and casualty insurance companies.
HEIDI was the holder of record of all the common stock of HIG until August 16,
1994. In December 1992, due to a significant increase in the estimate of
policyholder claims from Hurricane Iniki, the HEI Board of Directors concluded
it would not contribute additional capital to HIG and the remaining investment
in the HIG Group was written off. On December 24, 1992, a formal rehabilitation
order vested full control over the HIG Group in the Insurance Commissioner of
the State of Hawaii (the Rehabilitator) and her deputies.
A lawsuit stemming from this situation was settled in 1994, with the Company
making a settlement payment of $32 million to the Rehabilitator. HEI and HEIDI
are seeking reimbursement for the settlement and defense costs from their
insurance carriers. One of the insurance carriers filed a declaratory relief
action in the U.S. District Court for Hawaii seeking resolution of insurance
coverage and other policy issues, and HEI and HEIDI filed counterclaims. The
U.S. District Court has acted on several motions for partial summary judgment
filed by HEI, HEIDI and the insurance carrier. The remaining issues are
scheduled for trial on July 28, 1997. Recoveries from HEI's insurance carriers,
if any, will be recognized when realized.
8
Hawaiian Electric Company, Inc. and subsidiaries
CONSOLIDATED BALANCE SHEETS (UNAUDITED)
March 31, December 31,
(in thousands, except par value) 1997 1996
- ---------------------------------------------------------------------------------------------------------------------------
Assets
Utility plant, at cost
Land.................................................................... $ 29,914 $ 29,897
Plant and equipment..................................................... 2,477,978 2,446,073
Less accumulated depreciation and amortization.......................... (849,209) (828,917)
Plant acquisition adjustment, net....................................... 601 614
Construction in progress................................................ 196,463 197,835
---------------------- ----------------------
Net utility plant................................................. 1,855,747 1,845,502
---------------------- ----------------------
Current assets
Cash and equivalents.................................................... 3,308 823
Customer accounts receivable, net ...................................... 77,560 76,578
Accrued unbilled revenues, net.......................................... 41,686 43,726
Other accounts receivable, net.......................................... 4,797 4,179
Fuel oil stock, at average cost......................................... 27,107 28,490
Materials and supplies, at average cost................................. 18,813 18,942
Prepayments and other................................................... 3,627 3,676
---------------------- ----------------------
Total current assets.............................................. 176,898 176,414
---------------------- ----------------------
Other assets
Regulatory assets....................................................... 101,216 98,380
Other................................................................... 49,385 45,250
---------------------- ----------------------
Total other assets................................................ 150,601 143,630
---------------------- ----------------------
$2,183,246 $2,165,546
====================== ======================
Capitalization and liabilities
Capitalization
Common stock, $6 2/3 par value, authorized
50,000 shares; outstanding 12,806 shares............................. $ 85,387 $ 85,387
Premium on capital stock................................................ 297,060 298,154
Retained earnings....................................................... 369,872 367,770
---------------------- ----------------------
Common stock equity............................................... 752,319 751,311
Cumulative preferred stock
Not subject to mandatory redemption.................................. 48,293 48,293
Subject to mandatory redemption...................................... 34,565 36,160
HECO-obligated preferred securities of trust subsidiary holding
solely subordinated debentures of HECO, MECO and HELCO............... 50,000 --
Long-term debt, net..................................................... 594,087 589,226
---------------------- ----------------------
Total capitalization.............................................. 1,479,264 1,424,990
---------------------- ----------------------
Current liabilities
Long-term debt due within one year...................................... -- 13,000
Preferred stock sinking fund payments................................... 1,695 2,795
Short-term borrowings - nonaffiliates................................... 79,165 125,920
Short-term borrowings - affiliate....................................... 28,200 --
Accounts payable........................................................ 67,389 66,062
Interest and preferred dividends payable................................ 16,311 11,034
Taxes accrued........................................................... 50,500 55,586
Other................................................................... 18,969 24,843
---------------------- ----------------------
Total current liabilities......................................... 262,229 299,240
---------------------- ----------------------
Deferred credits and other liabilities
Deferred income taxes................................................... 119,339 119,613
Unamortized tax credits................................................. 47,964 47,634
Other................................................................... 77,059 76,264
---------------------- ----------------------
Total deferred credits and other liabilities...................... 244,362 243,511
---------------------- ----------------------
Contributions in aid of construction....................................... 197,391 197,805
---------------------- ----------------------
$2,183,246 $2,165,546
====================== ======================
See accompanying notes to HECO's consolidated financial statements.
9
Hawaiian Electric Company, Inc. and subsidiaries
CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
Three months ended
March 31,
--------------------------------------
(in thousands, except for ratio of earnings to fixed charges) 1997 1996
- ----------------------------------------------------------------------------------------------------------------------------
OPERATING REVENUES................................................................. $271,597 $245,944
-------- --------
OPERATING EXPENSES
Fuel oil........................................................................... 69,220 53,622
Purchased power.................................................................... 70,751 67,807
Other operation.................................................................... 36,911 33,591
Maintenance........................................................................ 12,063 11,945
Depreciation and amortization...................................................... 20,497 18,343
Taxes, other than income taxes..................................................... 25,637 23,708
Income taxes....................................................................... 11,704 12,233
-------- --------
246,783 221,249
-------- --------
OPERATING INCOME................................................................... 24,814 24,695
-------- --------
OTHER INCOME
Allowance for equity funds used during construction................................ 2,673 2,651
Other, net......................................................................... 2,071 1,851
-------- --------
4,744 4,502
-------- --------
INCOME BEFORE INTEREST AND OTHER CHARGES........................................... 29,558 29,197
-------- --------
INTEREST AND OTHER CHARGES
Interest on long-term debt......................................................... 9,859 8,528
Amortization of net bond premium and expense....................................... 327 315
Other interest charges............................................................. 2,106 2,490
Allowance for borrowed funds used during construction.............................. (1,527) (1,350)
Preferred stock dividends of subsidiaries.......................................... 650 702
Preferred securities distributions of trust subsidiary............................. 58 --
-------- --------
11,473 10,685
-------- --------
INCOME BEFORE PREFERRED STOCK DIVIDENDS OF HECO.................................... 18,085 18,512
Preferred stock dividends of HECO.................................................. 921 973
---------- --------
NET INCOME FOR COMMON STOCK........................................................ $ 17,164 $ 17,539
========== ========
Ratio of earnings to fixed charges (SEC method).................................... 3.08 3.32
========== ========
Hawaiian Electric Company, Inc. and subsidiaries
CONSOLIDATED STATEMENTS OF RETAINED EARNINGS (UNAUDITED)
Three months ended
March 31,
-----------------------------
(in thousands) 1997 1996
- ------------------------------------------------------------------------------------------------------------------------
RETAINED EARNINGS, BEGINNING OF PERIOD............................................. $367,770 $343,425
Net income for common stock........................................................ 17,164 17,539
Common stock dividends............................................................. (15,062) (11,054)
-------- --------
RETAINED EARNINGS, END OF PERIOD................................................... $369,872 $349,910
======== ========
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)
Three months ended
March 31,
--------------------------------
(in thousands) 1997 1996
- -------------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES
Income before preferred stock dividends of HECO.................................... $ 18,085 $ 18,512
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....................................................... 20,497 18,343
Other amortization........................................................... 2,502 1,219
Deferred income taxes........................................................ (274) 838
Tax credits, net............................................................. 739 920
Allowance for equity funds used during construction.......................... (2,673) (2,651)
Changes in assets and liabilities
Decrease (increase) in accounts receivable.............................. (1,600) 9,603
Decrease in accrued unbilled revenues................................... 2,040 9,552
Decrease (increase) in fuel oil stock................................... 1,383 (2,793)
Decrease (increase) in materials and supplies........................... 129 (343)
Increase in regulatory assets........................................... (2,822) (858)
Increase in accounts payable............................................ 1,327 1,654
Increase in interest and preferred dividends payable.................... 5,277 1,939
Changes in other assets and liabilities................................. (17,057) (17,201)
--------- ---------
NET CASH PROVIDED BY OPERATING ACTIVITIES.......................................... 27,553 38,734
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES
Capital expenditures............................................................... (28,144) (39,046)
Contributions in aid of construction............................................... 1,281 2,460
Payments on (issuance of) notes receivable......................................... 1,191 (312)
--------- ---------
NET CASH USED IN INVESTING ACTIVITIES.............................................. (25,672) (36,898)
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES
Common stock dividends............................................................. (15,062) (11,054)
Preferred stock dividends.......................................................... (921) (973)
Proceeds from issuance of HECO-obligated preferred securities of trust subsidiary.. 50,000 --
Proceeds from issuance of long-term debt........................................... 4,821 9
Repayment of long-term debt........................................................ (13,000) --
Redemption of preferred stock...................................................... (2,695) (2,400)
Net increase (decrease) in short-term borrowings from nonaffiliates
and affiliate with original maturities of three months or less.................. (18,555) 18,257
Other.............................................................................. (3,984) (4,002)
--------- ---------
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES................................ 604 (163)
--------- ---------
Net increase in cash and equivalents............................................... 2,485 1,673
Cash and equivalents, beginning of period.......................................... 823 20
--------- ---------
CASH AND EQUIVALENTS, END OF PERIOD................................................ $ 3,308 $ 1,693
========= =========
See accompanying notes to HECO's consolidated financial statements.
11
Hawaiian Electric Company, Inc. and subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 1997 and 1996
(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 December
31, 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 March
31, 1997 and December 31, 1996, and the results of their operations and their
cash flows for the three months ended March 31, 1997 and 1996. 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) HECO-OBLIGATED PREFERRED SECURITIES OF TRUST SUBSIDIARY HOLDING SOLELY
- ---------------------------------------------------------------------------
SUBORDINATED DEBENTURES OF HECO, MECO and HELCO
-----------------------------------------------
In March 1997, HECO Capital Trust I, a grantor trust, issued and sold, in an
underwritten registered public offering, 2 million of its 8.05% cumulative
quarterly income preferred securities (trust preferred securities), Series 1997,
with an aggregate liquidation value of $50 million. HECO Capital Trust I also
issued shares of common securities to HECO with an aggregate liquidation value
of approximately $2 million. Proceeds from the offering of the trust preferred
securities and the issuance of the common securities were used by HECO Capital
Trust I to purchase 8.05% junior subordinated deferrable interest debentures
Series 1997 (junior deferrable debentures) issued by HECO, MECO and HELCO with a
face value of approximately $52 million and a maturity date of 2027. The only
assets of HECO Capital Trust I are the junior deferrable debentures. In
connection with these transactions, HECO issued subordinated guarantees relating
to the performance of obligations by HECO Capital Trust I, MECO and HELCO.
HECO's obligations under the agreements related to the issuances of such
securities, taken together, effectively constitute a full and unconditional
guarantee on a subordinated basis by HECO of amounts due under the trust
preferred securities. The junior deferrable debentures issued by HECO, MECO and
HELCO to HECO Capital Trust I and the common securities of HECO Capital Trust I
owned by HECO have been eliminated in HECO's consolidated balance sheet as of
March 31, 1997.
(3) CASH FLOWS
- ---------------
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash paid for interest (net of capitalized amounts) and income taxes was as
follows:
Three months ended
March 31,
--------------------------
(in thousands) 1997 1996
- --------------------------------------------------------------------------------------------------------------------
Interest........................................................................... $6,244 $7,906
======= =======
Income taxes....................................................................... $306 $711
======= =======
12
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 $2.7 million for each
of the three months ended March 31, 1997 and 1996.
(4) COMMITMENTS AND CONTINGENCIES
- ----------------------------------
HELCO POWER SITUATION
BACKGROUND. In 1991, HELCO identified the need, beginning in 1994, for
- ----------
additional generation to provide for forecast 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. Accordingly, HELCO proceeded with plans to
install at its Keahole power plant site two 20-megawatt (MW) combustion turbines
(CT-4 and CT-5), followed by an 18-MW heat steam recovery generator (ST-7), at
which time these units would be converted to a 56-MW (net) combined-cycle unit.
In January 1994, the Public Utilities Commission of the State of Hawaii (PUC)
approved expenditures for CT-4, which HELCO had planned to install in late 1994.
Despite HELCO's best efforts to install this 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 (a) obtaining approval from the
Hawaii Board of Land and Natural Resources (BLNR) of a Conservation District
Use Permit (CDUP) amendment and (b) obtaining from the DOH and the U.S.
Environmental Protection Agency (EPA) an air quality Prevention of Significant
Deterioration/Covered Source (PSD) permit for the Keahole power plant site.
CDUP AMENDMENT. On January 3, 1997, the Third Circuit Court of the State of
- --------------
Hawaii issued a decision on HELCO's appeal of an order of the BLNR. The decision
in effect allows HELCO to use its Keahole property as requested in its
application for the CDUP amendment. Entry of final judgment on all unresolved
issues is pending. While this decision is subject to appeal upon entry of final
judgment, management believes that HELCO will ultimately prevail and the
decision will be upheld.
PSD PERMIT. In a November 1995 letter to the DOH, the EPA declined to sign
- ----------
HELCO's PSD permit for the combined-cycle unit on the basis that a different
emission control technology should be used. HELCO then proposed to reduce net
nitrogen oxide emission increases resulting from the addition of the combined-
cycle unit by retiring and/or reducing the use of certain existing Keahole
diesel units. The EPA stated that it found the netting proposal procedurally and
substantively acceptable, and that if emission increases were kept below
significance levels, it would not require the use of any particular emission
control technology. In December 1996, the DOH proposed a revised draft air
permit which reflected HELCO's netting proposal and was acceptable to HELCO. A
public hearing relating to the modifications in the revised draft permit was
held on March 3, 1997. Based on the proceedings to date, management believes
that HELCO will obtain the required PSD permit.
DECLARATORY JUDGMENT ACTION. On February 5, 1997, the Keahole Defense Coalition
- ---------------------------
and three individuals filed a lawsuit in the Third Circuit Court of the State of
Hawaii against HELCO, the director of the DOH, and the BLNR, seeking declaratory
rulings that, with regard to the Keahole project, one or more of the defendants
had violated, or could not allow the plant to operate without violating, the
State Clean Air Act, the State Noise Pollution Act, conditions of HELCO's
conditional use permit, covenants of HELCO's land patent and Hawaii
administrative rules regarding standard conditions applicable to land permits.
While management believes the allegations are without merit, it is too early to
predict the outcome of this lawsuit. HELCO has filed its answer, and intends to
vigorously defend against the claims raised.
IPP COMPLAINTS. Two independent power producers (IPPs), Kawaihae Cogeneration
- --------------
Partners (KCP) and Enserch Development Corporation (Enserch), filed separate
complaints against HELCO with the PUC in 1993 and 1994, respectively, alleging
that they are entitled to power purchase contracts to provide HELCO with
additional capacity which they claim would be a substitute for HELCO's planned
56-MW combined-cycle unit at Keahole. Under HELCO's current estimate of
generating capacity requirements, there is a near term need for capacity in
addition to the capacity which might be provided by either of the proposed IPP
units.
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
13
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 (i.e., either HELCO's or one of the
IPPs') should be the one that can be most expeditiously put into service at
"allowable cost."
On January 26, 1996, the PUC ordered HELCO to continue in good faith to
negotiate a power purchase agreement with KCP. Status reports were filed with
the PUC in March 1996. On December 12, 1996, KCP filed directly with the PUC a
new proposal pursuant to which it would construct a facility and have HELCO
operate and manage the facility. Although the new proposal had not been
submitted to or negotiated with HELCO, KCP asked the PUC to compel HELCO to
enter into the agreement. On December 19, 1996, HELCO filed a Motion to Dismiss
or to extend the time for responding. On March 10, 1997, the PUC denied KCP's
motion to compel HELCO to enter into KCP's proposed agreement, noting that KCP's
proposal was in the nature of a lease of a generating facility, rather than a
power purchase agreement within the purview of the Public Utility Regulatory
Policies Act of 1978. The PUC Order also confirmed the importance of placing the
next generating unit on line as quickly as possible to meet the recognized
generation shortfall on the island of Hawaii, and directed KCP and HELCO to
resume negotiations aimed at finalizing a power purchase agreement. The Order
directed HELCO and KCP to submit to the PUC, within 45 days of the Order, either
a finalized power purchase agreement or a written report on the matters
preventing an agreement, including specific positions on each disputed issue, as
to which the parties may request a hearing or submit to the PUC for resolution.
KCP and HELCO filed their written reports on April 24 and 25, 1997,
respectively. KCP has requested a hearing to resolve the remaining issues.
On October 4, 1996, the PUC issued its D&O that, among other things, required
HELCO and Enserch 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. The
parties were not able to finalize a power purchase agreement within the 75 days
and, accordingly, filed status reports with the PUC on December 24, 1996.
Negotiations are ongoing, and the parties have continued to update the PUC on
the status of the negotiations.
On April 1, 1997, Hilo Coast Processing Company (HCPC) filed a complaint
against HELCO with the PUC, requesting an immediate hearing on HCPC's offer for
a new 20-year power purchase contract for its existing facility, which is
proposed to be expanded from 22 MW to 32 MW. HCPC's existing power purchase
agreement is scheduled to terminate at the end of 1999. HELCO's answer to the
complaint is due at the end of May 1997.
Management cannot determine at this time whether the negotiations with the IPPs
and related PUC proceedings will result in a power purchase agreement.
COSTS INCURRED. As of March 31, 1997, HELCO's costs incurred in its efforts to
- --------------
put into service its combined-cycle unit amounted to $50.6 million, including
approximately $26.8 million for equipment and material purchases, approximately
$10.5 million for planning, engineering, permitting, site development and other
costs and approximately $13.3 million as an allowance for funds used during
construction.
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 arranged for additional firm capacity to be
provided by its existing firm power producers, obtained contracts shifting loads
to off-peak hours, deferred generation unit retirements and, in January 1996,
began the implementation of its energy-efficiency demand-side management
programs. These measures have helped HELCO maintain its reserve margin and
reduce the risk of capacity shortages.
In January 1996, the PUC opened a proceeding to evaluate HELCO's contingency
resource plan and HELCO's efforts to insure system reliability. HELCO filed
reports in March and October 1996 and April 1997 to update the PUC on its
contingency plan and its implementation.
ENVIRONMENTAL REGULATION
See note (8), "Contingencies," in HEI's "Notes to consolidated financial
statements."
14
PUC SHOW CAUSE ORDER FOR HECO
On March 10, 1997, the PUC issued a show cause order to HECO requesting
information to assist the PUC in determining if it should reduce HECO's rates
and require HECO to refund any excess earnings to its ratepayers.
In the order, the PUC cites that for 1996 HECO recorded a return on average
common equity (ROACE) of 11.93% and a simple average rate of return on rate base
(ROR) of 9.70% which exceeded the 11.40% ROACE and the 9.16% ROR determined to
be reasonable by the PUC in the utility's last rate case. The PUC also compared
HECO's 1994, 1995 and 1996 actual results of operations (for ratemaking
purposes) with the projected results of operations that the PUC used in
approving electric rates in HECO's last two rate cases. The PUC stated that
those results appeared to indicate that it is unlikely that the ROR experienced
by HECO in 1996 will decrease significantly in the future and that it is
therefore appropriate to examine HECO's rate of return.
The revenues recorded by HECO during 1996 were based on rates approved in a
final PUC D&O in HECO's 1995 test year rate case. The amount of 1996 net income
represented by the difference between the actual ROR of 9.70% and the 9.16%
determined reasonable in December 1995 by the PUC was less than $4.5 million. It
would be highly unusual if this show cause order were to result in a refund to
customers based on a retroactive calculation. By contrast, the refund of $10
million of revenues, which was ordered by the PUC in December of 1995 and
refunded in the first half of 1996, related to revenues that had been collected
under interim rate orders in which the PUC clearly stated that revenues
collected under the interim orders were subject to refund.
On April 7, 1997, HECO filed its response to the PUC's order. HECO indicated the
reported RORs for 1995 and 1996 were higher than the return used to determine
the 1995 test year revenue requirements primarily due to the impact in 1995 of
higher kilowatthour sales because of warmer than normal weather, and the impact
in 1996 of higher kilowatthour sales because of normal expected sales growth,
increased military sales and warmer than normal weather. HECO also reported that
its pro forma results for 1997 projects a ROR (for ratemaking purposes) of
9.39%. HECO indicated that the return it expects to earn in 1997 is within the
"zone of reasonableness" and should not be deemed excessive. Among other things,
HECO explained that the weighted average cost of capital in 1997 should be
higher than the 9.16% found to be reasonable in HECO's 1995 test year rate case,
because a higher ROACE is appropriate under 1997 market conditions. HECO also
pointed out that it is not compensated in those years when its actual results
fall below returns that were found to be reasonable in the most recent rate
case. Management cannot predict the PUC's assessment of HECO's response or what
future PUC action may be taken in this proceeding.
(5) ACCOUNTING CHANGES
- -----------------------
ENVIRONMENTAL REMEDIATION LIABILITIES
In October 1996, the American Institute of Certified Public Accountants issued
SOP 96-1, "Environmental Remediation Liabilities." The provisions of the SOP are
consistent with HECO and its subsidiaries' current policies and, accordingly,
adoption of the SOP on January 1, 1997 did not have a material effect on HECO's
consolidated financial condition, results of operations or liquidity.
CAPITAL STRUCTURE
In February 1997, the FASB issued SFAS No. 129, "Disclosure of Information about
Capital Structure", which lists required disclosures about capital structure
that had been included in a number of previously existing statements and
opinions. SFAS No. 129 is effective for periods ending after December 15, 1997.
HECO and its subsidiaries' will adopt the provisions of SFAS No. 129 in its
financial statements for 1997 and does not expect the adoption will have a
material effect on HECO's consolidated financial condition, results of
operations or liquidity.
15
(6) SUMMARIZED FINANCIAL INFORMATION
- -------------------------------------
Summarized financial information for HECO's subsidiaries, HELCO and MECO, is as
follows:
BALANCE SHEET DATA
HELCO MECO
--------------------------------- ----------------------------------
March 31, December 31, March 31, December 31,
(in thousands) 1997 1996 1997 1996
- ---------------------------------------------------------------------------------------------------------------------------
Current assets...................................... $ 27,921 $ 26,345 $ 29,864 $ 30,701
Noncurrent assets................................... 394,006 390,464 372,519 366,489
--------- ---------- --------- ---------
$421,927 $416,809 $402,383 $397,190
========= ========== ========= =========
Common stock equity................................. $140,718 $143,212 $147,892 $147,573
Cumulative preferred stock
Not subject to mandatory redemption............. 10,000 10,000 8,000 8,000
Subject to mandatory redemption................. 7,200 7,200 5,765 5,960
Current liabilities................................. 71,411 73,650 36,324 41,700
Noncurrent liabilities.............................. 192,598 182,747 204,402 193,957
--------- --------- --------- ---------
$421,927 $416,809 $402,383 $397,190
========= ========= ========= =========
INCOME STATEMENT DATA
HELCO MECO
---------------------------------- ----------------------------------
Three months ended Three months ended
March 31, March 31,
---------------------------------- ----------------------------------
(in thousands) 1997 1996 1997 1996
- ---------------------------------------------------------------------------------------------------------------------------
Operating revenues................................. $40,338 $35,189 $37,979 $32,795
Operating income................................... 3,343 2,689 4,429 3,930
Net income for common stock........................ 2,736 2,139 3,295 3,167
(7) RECONCILIATION OF ELECTRIC UTILITY OPERATING INCOME PER HEI AND HECO
--------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF INCOME
---------------------------------
Three months ended
March 31,
-------------------------------
(in thousands) 1997 1996
- -----------------------------------------------------------------------------------------------------------------------
Operating income from regulated and nonregulated activities before income taxes (per
HEI consolidated statements of income)............................................. $38,594 $38,739
Deduct:
Income taxes on regulated activities............................................... (11,704) (12,233)
Revenues from nonregulated activities.............................................. (2,159) (1,893)
Add:
Expenses from nonregulated activities.............................................. 83 82
------- -------
Operating income from regulated activities after income taxes (per HECO consolidated
statements of income).............................................................. $24,814 $24,695
======= =======
16
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 SEC.
RESULTS OF OPERATIONS
HEI CONSOLIDATED
- ----------------
Three months ended
March 31,
(in thousands, except per ----------------- % Primary reason(s) for significant
share amounts) 1997 1996 change change*
- ----------------------------------------------------------------------------------------------------------------
Revenues............................. $359,193 $326,169 10 Increases for all segments
Operating income .................... 49,352 46,735 6 Increase for the savings bank segment
and "other" segment
Net income........................... 19,663 18,869 4 Higher operating income, partly offset
by higher preferred securities
distributions due to the issuance of
HEI-obligated preferred securities of
trust subsidiary and higher interest
expense due to higher average
borrowings and higher cost of
borrowings
Earnings per common share............ $0.64 $0.63 2 See explanation for "net income,"
partly offset by an increase in shares
outstanding
Weighted average number of common
shares outstanding.................. 30,960 29,884 4 Issuances under the Dividend
Reinvestment and Stock Purchase Plan
and other plans
* Also see segment discussions which follow.
17
Following is a general discussion of the results of operations by business
segment.
ELECTRIC UTILITY
- ----------------
Three months ended
March 31,
(in thousands,except per ------------------------------ % Primary reason(s) for significant
barrel amounts) 1997 1996 change change
- -----------------------------------------------------------------------------------------------------------------------------
Revenues...................... $273,756 $247,837 10 Recovery through rates of higher fuel prices
($19 million) and integrated resource planning
costs ($3 million, including demand-side
management program costs and lost margins),
higher rates ($2 million) and a 0.7% increase
in KWH sales ($2 million)
Expenses
Fuel oil................... 69,220 53,622 29 Higher fuel oil prices and more KWHs generated
Purchased power............ 70,751 67,807 4 Higher fuel prices, partly offset by less
KWHs purchased
Other...................... 95,191 87,669 9 Higher other operation expense (partly due to
higher integrated resource plan related
costs), depreciation expense and taxes, other
than income taxes
Operating income.............. 38,594 38,739 -- Higher revenues offset by higher expenses
Net income................... 17,164 17,539 (2) Lower operating income and higher interest
expense
Fuel oil price per barrel..... 28.12 22.50 25
Kilowatthour (KWH) sales in the first quarter of 1997 increased 0.7% from the
same quarter in 1996, partly due to an increase in the number of customers.
However, electric utility operating income was essentially flat due to higher
expenses, such as higher other operation expenses due to higher production
expenses and higher depreciation expense due to additions to plant in 1996.
Interest expense increased primarily due to additional revenue bond drawdowns.
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 and
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.
18
RECENT RATE REQUESTS
- --------------------
HEI's electric utility subsidiaries have requested electric rate increases to
cover rising operating costs, the cost of purchased power and the cost of plant
and equipment, including the cost of new capital projects to maintain and
improve service reliability.
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. In April 1997,
HELCO received a final D&O which made permanent the $6.8 million interim
increase.
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. The Consumer Advocate stipulated to the
proposed 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 April 1997, MECO received a final D&O authorizing
a 2.9%, or $3.9 million increase in annual revenues, based on a ROACE of 11.5%,
or a $0.2 million increase in annual revenues over the $3.7 million increase
allowed in the interim order.
. In May 1996, MECO filed a request to increase rates based on a 1997 test year,
primarily to recover the costs related to the anticipated 1997 addition of new
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 a
stipulation 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, based on an 11.65%
ROACE. The stipuluation stated that the increase would be effective January 1,
1997, but it has not and will not become effective unless and until the PUC
approves the stipulation. The primary reason for the stipulation 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.
CONTINGENCIES
See note (4) in HECO's "Notes to consolidated financial statements" for a
discussion of contigencies, including the HELCO power situation, environmental
regulation and the PUC show cause order for HECO.
19
SAVINGS BANK
- ------------
Three months ended
March 31,
----------------------------- %
(in thousands) 1997 1996 change Primary reason(s) for significant change
- ------------------------------------------------------------------------------------------------------------------------------
Revenues....................... $68,912 $65,792 5 Higher interest income as a result of the higher
average loans receivable balance, partly offset
by the lower average mortgage-backed securities
balance and lower weighted average yields on
these assets
Operating income*.............. 12,285 9,956 23 Higher net interest income and a reduction in
deposit-insurance premiums, partly offset by an
increase in the provision for loan losses and
higher compensation and employee benefit expenses
Net income*.................... 7,099 5,790 23 Higher operating income
Interest rate spread........... 2.97% 2.85% 9 basis points decrease in the weighted average
yield on interest-earning assets offset by a 21
basis points decrease 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 authorized a one-time deposit-insurance
premium assessment by the FDIC. ASB's assessment was $8.3 million after-tax
and was accrued in September 1996. After the one-time assessment, ASB's
deposit-insurance premiums (including assessments to pay interest on the FICO
bond) were reduced from 23 cents to 6.5 cents per $100 of deposits, effective
January 1, 1997. As a result of the reduction in deposit-insurance premiums,
ASB's pretax and after-tax savings were approximately $0.9 million and $0.5
million, respectively, for the first quarter of 1997. See note (3) in HEI's
"Notes to consolidated financial statements" for additional information.
Several factors contributed to the increase 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 decrease in ASB's deposit rates since September 1996. Comparing
first quarter 1997 to the same period in 1996, the weighted average rate on
interest-bearing liabilities decreased more than the weighted average yield 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. Deposits
increased by $24 million in the first quarter of 1997, including $17 million of
interest credited to accounts. ASB also derives funds from receipt of interest
and principal on outstanding loans receivable and mortgage-backed securities,
borrowings from the Federal Home Loan Bank (FHLB) of Seattle, securities sold
under agreements to repurchase and other sources. In recent years, securities
sold under agreements to repurchase and advances from the FHLB of Seattle have
become more significant sources of funds as the demand for deposits decreased.
Using sources of funds with a higher cost than deposits, such as securities sold
under agreements to repurchase, puts downward pressure on ASB's net interest
income.
In 1996, 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, decreased from 5.5% to 5.25%. In the first quarter
of 1997, the federal funds rate increased 25 basis points to 5.5%.
20
OTHER
- -----
Three months ended
March 31,
-------------------------- %
(in thousands) 1997 1996 change Primary reason(s) for significant change
- ------------------------------------------------------------------------------------------------------------------------------
Revenues....................... $16,525 $12,540 32 MPC's higher unit sales, freight transportation
subsidiaries' higher interstate revenue and
HEIIC's investment income
Operating loss................. (1,527) (1,960) 22 HEIIC's investment income
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 in Asia and the Pacific; Pacific Energy Conservation Services,
Inc., a contract services company providing limited services to an affiliate;
HEI and HEIDI, which are holding companies; and eliminations of intercompany
transactions.
FREIGHT TRANSPORTATION
The freight transportation subsidiaries recorded operating income of $0.4
million in each of the first quarters of 1997 and 1996. The flat operating
income for the quarter is due to higher interstate revenue offset by higher
operation and maintenance expenses. The freight transportation subsidiaries
continue to be negatively impacted by the slow economic activity on the neighbor
islands and the slow construction industry in Hawaii.
In December 1996, the PUC approved a stipulated agreement between YB and the
Consumer Advocate to increase rates by $1.4 million annually, or 3.9%, effective
in that month. In March 1997, YB filed a request with the PUC for a general rate
increase based on a 1997 test year. YB requested an increase of 8.2%, or $2.9
million in annual revenues, based on a 14.99% ROACE. On April 11, 1997, the PUC
suspended the request until October 10, 1997.
REAL ESTATE
MPC's real estate development activities have been negatively impacted by the
slow real estate market in Hawaii. It is expected that Hawaii's real estate
market will not rebound 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 in Asia and the Pacific.
HEIPC's consolidated operating loss in the first quarter of 1997 was $0.3
million, compared with $0.4 million for the same period in 1996.
In September 1996, 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 25-
MW (net) units at Tanguisson, Guam. On October 30, 1996, HEI filed with the SEC
a "Notification of Foreign Utility Company Status" on Form U-57. On November 11,
1996, HPG assumed operational control of the Tanguisson facility. HPG's total
cost to rehabilitate the two units is expected to be approximately $14 million,
approximately 80% of which HPG is seeking to fund through nonrecourse financing.
Repair of the facility is expected to be complete by the end of July 1997, but
payments by the Guam Power Authority under the agreement commenced in January
1997.
21
CONTINGENCIES
- -------------
See note (8) in HEI's "Notes to consolidated financial statements" for a
discussion of contingencies, including environmental regulation and The Hawaiian
Insurance & Guaranty Company, Limited.
ACCOUNTING CHANGES
- ------------------
For a discussion of SOP 96-1, "Environmental Remediation Liabilities", SFAS No.
128, "Earnings Per Share" and SFAS No. 129, "Disclosure of Information about
Capital Structure", see note (7) 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.
The consolidated capital structure of HEI was as follows:
(in millions) March 31, 1997 December 31, 1996
- ------------------------------------------------------------------------------------------------------------------------
Short-term borrowings.................................. $ 103 5% $ 217 11%
Long-term debt......................................... 802 42 810 43
HEI- and HECO-obligated
preferred securities of trust subsidiaries ......... 150 8 -- --
Preferred stock of electric utility subsidiaries....... 85 4 87 5
Common stock equity.................................... 779 41 773 41
-------- -------- -------- --------
$1,919 100% $1,887 100%
======== ======== ======== ========
ASB's deposit liabilities, securities sold under agreements to repurchase and
advances from FHLB are not included in the table above.
For the first three months of 1997, net cash provided by operating activities
was $32 million. Net cash used in investing activities was $76 million, largely
due to ASB's loan originations and mortgage-backed securities purchased, net of
repayments, and consolidated HECO's capital expenditures. Net cash provided by
financing activities was $45 million as a result of several factors, including
net increases in securities sold under agreements to repurchase and deposit
liabilities, and the issuance of HEI- and HECO-obligated preferred securities of
trust subsidiaries, partly offset by decreases in short-term borrowings and
advances from FHLB, and by common stock dividends.
See note (5) in HEI's "Notes to consolidated financial statements" and note (2)
in HECO's "Notes to consolidated financial statements" for a discussion of HEI-
and HECO-obligated preferred securities of trust subsidiaries. Proceeds related
to the issuance of these securities were used by HEI and HEIDI primarily to
repay short-term borrowings and to make loans to affiliates, and proceeds to
HECO, MECO and HELCO were used primarily to repay short-term borrowings incurred
to finance capital expenditures.
Total HEI consolidated financing requirements for 1997 through 2001, including
net capital expenditures (which exclude the allowance for funds used during
construction and capital expenditures funded by third-party cash contributions
in aid of construction), long-term debt retirements (excluding repayments of
advances from the 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 is 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 67% of the
consolidated financing requirements, with debt and equity financing providing
the remaining requirements. Over the five-year period 1997 through 2001, HEI
currently estimates that, in addition to retained earnings and the proceeds from
the sale of the HEI- and HECO-obligated preferred securities of trust
subsidiaries, it will require not more than $158 million in additional equity,
which is expected to be provided principally by the HEI Dividend Reinvestment
and Stock Purchase Plan and the Hawaiian Electric Industries Retirement Savings
Plan. The additional
22
equity will be used primarily to reduce HEI's overall borrowing level and to
fund the common equity requirements of its subsidiaries. Additional equity in
excess of the $158 million described above, and additional debt financing, may
be required to fund activities not included in the 1997-2001 forecast, such as
the development of additional independent power projects by HEIPC and its
subsidiaries 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) March 31, 1997 December 31, 1996
- -----------------------------------------------------------------------------------------------------------------------------
Short-term borrowings from nonaffiliates and
affiliate....................................... $ 107 7% $ 126 8%
Long-term debt..................................... 594 38 602 38
HECO-obligated preferred securities of trust
subsidiary...................................... 50 3 -- --
Preferred stock.................................... 85 5 87 6
Common stock equity................................ 752 47 751 48
------ ----- ------ -----
$1,588 100% $1,566 100%
====== ===== ====== =====
Operating activities provided $28 million in net cash during the first three
months of 1997. Investing activities used net cash of $26 million primarily for
capital expenditures. Financing activities provided net cash of $1 million,
including $50 million of proceeds from the sale of the HECO-obligated preferred
securities of trust subsidiary, mostly offset by net decreases in short-term
borrowings, long-term debt and preferred stock, and the payment of common and
preferred dividends.
The electric utilities' consolidated financing requirements for 1997 through
2001, including net capital expenditures, long-term debt retirements and sinking
fund requirements, are estimated to total $768 million. HECO's consolidated
internal sources, after the payment of common and preferred stock dividends, are
currently expected to provide approximately 75% of the consolidated financing
requirements, with debt and equity financing providing the remaining
requirements. As of March 31, 1997, an additional $45 million of revenue bonds
was authorized by the Hawaii Legislature for issuance by the Department of
Budget and Finance of the State of Hawaii on behalf of HECO and HELCO prior to
the end of 1997, and an additional $150 million was authorized for issuance on
behalf of HECO and MECO prior to the end of 1999. Taking into account the
HECO-obligated preferred securities of trust subsidiary, HECO currently
estimates that it will require approximately $23 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 securities 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.
For 1997, electric utility net capital expenditures are estimated to be $118
million and gross capital expenditures are estimated to be $153 million.
Approximately 63% of forecast gross capital expenditures is for transmission and
distribution projects. An estimated $36 million is planned for new generation
projects. In addition to the proceeds from the issuance of the HECO-obligated
preferred securities of trust subsidiary received in March 1997, drawdowns of
proceeds from the sales of tax-exempt special purpose revenue bonds and the
generation of funds from internal sources are expected to provide the cash
needed for the net capital expenditures.
Capital expenditure estimates and the timing of construction projects are
reviewed periodically by management and may change significantly as a result of
many considerations, including changes in economic conditions, changes in
forecasts of 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 increases, escalation in
construction costs, demand-side management programs and requirements of
environmental and other regulatory and permitting authorities.
23
SAVINGS BANK
March 31, December 31, %
(in millions) 1997 1996 change
- ------------------------------------------------------------------------------------------------------------------------
Assets...................................................... $3,634 $3,591 1%
Mortgage-backed securities.................................. 1,352 1,340 1
Loans receivable, net....................................... 2,036 2,002 2
Deposit liabilities......................................... 2,174 2,150 1
Securities sold under agreements to repurchase.............. 550 480 15
Advances from Federal Home Loan Bank........................ 625 684 (9)
As of December 31, 1996, ASB was the fourth largest financial institution in the
state based on total assets of $3.6 billion and the third largest financial
institution based on deposits of $2.2 billion.
For the first three months of 1997, net cash provided by ASB's operating
activities was $11.1 million. Net cash used in ASB's investing activities was
$47 million, due largely to the origination of loans receivable and
mortgage-backed securities purchased, partly offset by principal repayments. Net
cash provided by financing activities was $33 million as a result of net
increases of $71 million in securities sold under agreements to repurchase and
$24 million in deposit liabilities, partly offset by a net decrease of $59
million in advances from the FHLB of Seattle and common stock dividends of $3
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 March 31, 1997.
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 March 31, 1997, ASB was in compliance with the OTS minimum
capital requirements (noted in parenthesis) with a tangible capital ratio of
5.3% (1.5%), a core capital ratio of 5.4% (3.0%) and a risk-based capital ratio
of 12.4% (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 March 31, 1997, ASB would not have been required 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 March 31, 1997,
ASB was well-capitalized (ratio requirements noted in parenthesis) with a
leverage ratio of 5.4% (5.0%), a Tier-1 risk-based ratio of 11.5% (6.0%) and a
total risk-based ratio of 12.4% (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.
With the enactment of federal legislation in 1996 to recapitalize the SAIF and
to reallocate the repayment burden on bonds issued to recapitalize the SAIF's
predecessor, it appears that legislation addressing the merger of the BIF and
the SAIF, thrift rechartering and financial modernization will remain a priority
for the U.S. Congress. Bills are now pending, or expected to be introduced in
Congress, that will contain proposals for altering the structure, regulation and
competitive relationships of the nation's financial institutions. Some of these
bills would abolish the thrift charter, requiring savings associations to
convert to banks, subject to certain grandfathering and transition provisions.
For a discussion of the unfavorable disparity in the deposit insurance
assessment rates and FICO assessment
24
rates that ASB and other thrifts have paid in relation to the rates that most
commercial banks have paid, and certain legislation affecting financial
institutions, see note (3) in HEI's "Notes to consolidated financial
statements."
PART II - OTHER INFORMATION
- --------------------------------------------------------------------------------
Item 1. LEGAL PROCEEDINGS
- --------------------------
There are no significant developments except as set forth in HEI's and HECO's
"Notes to consolidated financial statements," management's discussion and
analysis of financial condition and results of operations and Item 5, "Other
information."
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
- ------------------------------------------------------------
HEI
The Annual Meeting of Stockholders of HEI was held on April 22, 1997. Proxies
for the meeting were solicited pursuant to Regulation 14A under the Securities
Exchange Act of 1934. As of February 12, 1997, the record date for the Annual
Meeting, there were 30,940,397 shares of common stock issued and outstanding and
entitled to vote. There was no solicitation in opposition to the management
nominees to the Board of Directors as listed in the proxy statement for the
meeting and such nominees were elected to the Board of Directors.
The results of the voting for the single Class I director-nominees and the
independent auditor are as follows:
Shares of Common stock
-------------------------------------------------------------------------------------
Broker
For Withheld Against Abstain nonvotes
------------------ --------------- -------------- -------------- ---------------
Election of Class I Directors
Robert F. Clarke 27,646,220 427,571 --
A. Maurice Myers 27,638,246 435,545 --
James K. Scott 27,608,247 465,544 --
Election of KPMG Peat Marwick LLP as
independent auditor 27,597,694 179,532 296,565 --
Class II Directors--Victor Hao Li, T. Michael May, Diane J. Plotts, Kelvin H.
Taketa and Jeffrey N. Watanabe --continue in office with terms ending at the
1998 Annual Meeting. Class III Directors--Don E. Carroll, Edwin L. Carter,
Richard Henderson, Bill D. Mills and Oswald K. Stender--continue in office with
terms ending at the 1999 Annual Meeting. The number of Class I directors was
reduced to three as a result of the retirement of John D. Field on December 31,
1996 and the retirement of Ruth M. Ono, who did not stand for reelection at the
Annual Meeting. The HEI Board of Directors consists of 13 persons.
HECO
The Annual Meeting of the Sole Stockholder of HECO was conducted by written
consent effective April 22, 1997. Anne M. Takabuki was elected a director of
HECO at that time. The incumbent members of the Board of Directors of HECO were
re-elected. The incumbent members continuing in office are Edwin L. Carter,
Robert F. Clarke, Richard Henderson, T. Michael May, Paul A. Oyer, Diane J.
Plotts and Paul C. Yuen. In addition, KPMG Peat Marwick LLP was elected
independent auditor of HECO for the fiscal year 1997.
25
Item 5. OTHER INFORMATION
- --------------------------
A. Environmental matters
WATER QUALITY CONTROL
- ---------------------
Due to a leak in the fuel transfer system, approximately 100 gallons of bunker
fuel oil were released to a HELCO Shipman facility drainage well system in
November 1996. The release was reported to state and county agencies in December
1996. Although the fuel oil was removed from the well system and the well system
was steam cleaned, oil continues to seep back into the well system from behind
the retaining walls. Removal of this residual oil continues and HELCO has filed
a status report with the DOH. In March 1997, HELCO received a letter from the
DOH concurring with the ongoing cleanup approach. The DOH stated that more
aggressive cleanup measures should be considered if oil seepage into the
drainage wells worsens. HELCO's cleanup and visual monitoring efforts continue.
In April 1997, HECO notified the DOH that it became aware that HELCO was
discharging industrial oily wastewater into its Waimea facility's dry well
system in noncompliance with the facility's Underground Injection Control (UIC)
permit. A written incident report was submitted to the DOH in May 1997. HELCO is
currently developing alternative collection, treatment and disposal options for
the wastewater. Management anticipates that the DOH will issue a notice of
violation. It is unknown what further actions may be taken, if any.
AIR QUALITY CONTROL
- -------------------
In April 1997, the DOH met with MECO representatives to review all outstanding
air regulatory compliance issues which occurred at MECO during 1988 through
1996. The affected MECO facilities include Maalaea, Palaau, Lanai City and Miki
Basin generation sites. MECO is continuing discussions with the DOH to finalize
settlement of the outstanding issues.
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
Three months Years Ended December 31,
ended -----------------------------------------------------------------------------
March 31, 1997 1996 1995 1994 1993 1992
-------------- ------------- --------------- ------------- -------------- ---------
1.83 1.87 1.94 2.22 2.25 2.08
============== ============= =============== ============= ============== =========
RATIO OF EARNINGS TO FIXED CHARGES INCLUDING INTEREST ON ASB DEPOSITS
Three months Years Ended December 31,
ended -------------------------------------------------------------------------------
March 31, 1997 1996 1995 1994 1993 1992
--------------- ------------ ------------- ------------- -------------- ---------
1.55 1.53 1.57 1.69 1.65 1.50
================ ============= ============= ============= ============== =========
For purposes of calculating the ratio of earnings to fixed charges, "earnings"
represent the sum of (i) pretax income from continuing operations (excluding
undistributed net income or net loss from less than fifty-percent-owned persons)
and (ii) fixed charges (as hereinafter defined, but excluding capitalized
interest). "Fixed charges" are calculated both excluding and including interest
on ASB's deposits during the applicable periods and represent the sum of (i)
interest, whether capitalized or expensed, incurred by HEI and its subsidiaries
plus their proportionate share of interest on debt to outsiders incurred by
fifty-percent-owned persons, but excluding interest on nonrecourse debt from
leveraged leases which is not included in interest expense in HEI's consolidated
statements of income, (ii) amortization of debt expense and discount or premium
related to any indebtedness, whether capitalized or expensed, (iii) the interest
factor in rental expense, (iv) the preferred stock dividend
26
requirements of HEI's subsidiaries, increased to an amount representing the
pretax earnings required to cover such dividend requirements and (v) the
preferred securities distribution requirements of trust subsidiaries.
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
Three months Years Ended December 31,
ended -------------------------------------------------------------------------------------
March 31, 1997 1996 1995 1994 1993 1992
---------------------- --------------- --------------- ------------- -------------- ---------------
3.08 3.58 3.46 3.47 3.25 3.03
====================== =============== =============== ============= ============== ===============
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, (iv) the preferred stock dividend requirements of HELCO and
MECO, increased to an amount representing the pretax earnings required to cover
such dividend requirements and (v) the preferred securities distribution
requirements of trust subsidiary.
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
- -----------------------------------------
(a) EXHIBITS
HEI Amended and Restated Agreement of Limited
Exhibit 4.1 Partnership of HEI Preferred Funding, LP (the
Partnership) dated as of February 1, 1997
(Exhibit 4(e) to HEI's Current Report on
Form 8-K dated February 4, 1997, File No.
1-8503).
HEI Amended and Restated Trust Agreement of
Exhibit 4.2 Hawaiian Electric Industries Capital Trust I
(HEI Trust I) dated as of February 1, 1997
(Exhibit 4(f) to HEI's Current Report on Form
8-K dated February 4, 1997, File No. 1-8503).
HEI Junior Indenture between HEI and The Bank of
Exhibit 4.3 New York, as Trustee, dated as of February 1,
1997 (Exhibit 4(i) to HEI's Current Report on
Form 8-K dated February 4, 1997, File No.
1-8503).
HEI Officers' Certificate in connection with
Exhibit 4.4 issuance of 8.36% Junior Subordinated
Debenture, Series A, Due 2017 under Junior
Indenture of HEI (Exhibit 4(l) to HEI's
Current Report on Form 8-K dated February 4,
1997, File No. 1-8503).
HEI 8.36% Trust Originated Preferred Security
Exhibit 4.5 (Liquidation Amount $25 Per Trust Preferred
Security) of HEI Trust I (Exhibit 4(m) to
HEI's Current Report on Form 8-K dated
February 4, 1997, File No. 1-8503).
HEI 8.36% Junior Subordinated Debenture Series A,
Exhibit 4.6 Due 2017, of HEI (Exhibit 4(n) to HEI's
Current Report on Form 8-K dated February 4,
1997, File No. 1-8503).
HEI Trust Preferred Securities Guarantee Agreement
Exhibit 4.7 with respect to HEI Trust I dated as of
February 1, 1997 (Exhibit 4(o) to HEI's
Current Report on Form 8-K dated February 4,
1997, File No. 1-8503).
27
(a) EXHIBITS (CONTINUED)
HEI Partnership Guarantee Agreement with respect
Exhibit 4.8 to the Partnership dated as of February 1,
1997 (Exhibit 4(p) to HEI's Current Report on
Form 8-K dated February 4, 1997, File No.
1-8503).
HEI Affiliate Investment Instruments Guarantee
Exhibit 4.9 Agreement with respect to 8.36% Junior
Subordinated Debenture of HEIDI dated as of
February 1, 1997 (Exhibit 4(q) to HEI's
Current Report on Form 8-K dated
February 4, 1997, File No. 1-8503).
HECO Amended and Restated Trust Agreement of HECO
Exhibit 4.1 Capital Trust I (HECO Trust I) dated as of
March 1, 1997 (Exhibit 4(c) to HECO's Current
Report on Form 8-K dated March 27, 1997, File
No. 1-4955).
HECO HECO Junior Indenture with The Bank of New
Exhibit 4.2 York, as Trustee, dated as of March 1, 1997
(Exhibit 4(d) to HECO's Current Report on Form
8-K dated March 27, 1997, File No. 1-4955).
HECO 8.05% Cumulative Quarterly Income Preferred
Exhibit 4.3 Security (liquidation preference $25 per
preferred security) of HECO Trust I (Exhibit
4(e) to HECO's Current Report on Form 8-K
dated March 27, 1997, File No. 1-4955).
HECO 8.05% Junior Subordinated Deferrable Interest
Exhibit 4.4 Debenture, Series 1997 of HECO (Exhibit 4(f)
to HECO's Current Report on Form 8-K dated
March 27, 1997, File No. 1-4955).
HECO Trust Guarantee Agreement with respect to HECO
Exhibit 4.5 Trust I dated as of March 1, 1997 (Exhibit
4(g) to HECO's Current Report on Form 8-K
dated March 27, 1997, File No. 1-4955).
HECO MECO Junior Indenture with The Bank of New
Exhibit 4.6 York, as Trustee, including HECO Subsidiary
Guarantee, dated as of March 1, 1997 (with the
form of MECO's 8.05% Junior Subordinated
Deferrable Interest Debenture, Series 1997
included as Exhibit A) (Exhibit 4(h)-1 to
HECO's Current Report on Form 8-K dated March
27, 1997, File No. 1-4955).
HECO HELCO Junior Indenture with The Bank of New
Exhibit 4.7 York, as Trustee, including HECO Subsidiary
Guarantee, dated as of March 1, 1997 (with the
form of HELCO's 8.05% Junior Subordinated
Deferrable Interest Debenture, Series 1997
included as Exhibit A) (Exhibit 4(h)-2 to
HECO's Current Report on Form 8-K dated
March 27, 1997, File No. 1-4955).
HECO Agreement as to Expenses and Liabilities among
Exhibit 4.8 HECO Trust I, HECO, MECO and HELCO (Exhibit
4(i) to HECO's Current Report on Form 8-K
dated March 27, 1997, File No. 1-4955).
28
(a) EXHIBITS (CONTINUED)
HEI Hawaiian Electric Industries, Inc. and subsidiaries
Exhibit 12.1 Computation of ratio of earnings to fixed charges, three months ended March 31, 1997 and 1996
HECO Hawaiian Electric Company, Inc. and subsidiaries
Exhibit 12.2 Computation of ratio of earnings to fixed charges, three months ended March 31, 1997 and 1996
HEI Hawaiian Electric Industries, Inc. and subsidiaries
Exhibit 27.1 Financial Data Schedule
March 31, 1997 and three months ended March 31, 1997
HECO Hawaiian Electric Company, Inc. and subsidiaries
Exhibit 27.2 Financial Data Schedule
March 31, 1997 and three months ended March 31, 1997
HEI Sixth Amendment to Trust Agreement, made and entered into on April 1, 1997, Between Fidelity
Exhibit 99.1 Management Trust Company and HEI for the Hawaiian Electric Industries Retirement Savings Plan
for incorporation by reference in Registration Statement on Form S-8 (Regis. No. 333-02103)
HEI Amendment 1997-1 to the Hawaiian Electric Industries Retirement Savings Plan for
Exhibit 99.2 incorporation by reference in Registration Statement on Form S-8 (Regis. No. 333-02103)
HEI Amendment 1996-1 to the Hawaiian Electric Industries Retirement Savings Plan for
Exhibit 99.3 incorporation by reference in Registration Statement on Form S-8 (Regis. No. 333-02103)
29
(b) REPORTS ON FORM 8-K
During the quarter, HEI and/or HECO filed Current Reports, Forms 8-K, with the
SEC as follows:
Dated Registrant/s Items reported
- ----------------------------------------------------------------------------------------------------------------------
April 30, 1996 HECO Item 5, certain information contained in the preliminary official
statement prepared in connection with a proposed offering of Special
Purpose Revenue Bonds for the benefit of HECO, MECO and HELCO
January 3, 1997 HEI, HECO Item 5, HELCO power situation and docket on electric competition
January 27, 1997 HEI, HECO Item 5, News release: HEI reports 1996 earnings
February 4, 1997 HEI Item 5, Hawaiian Electric Industries Capital Trust I issued and sold
4,000,000 of its 8.36% Trust Obligated Preferred Securities; Item 7,
final form of documents delivered in connection with the offer and
sale of the securities
February 26, 1997 HEI Item 7, HEI Exhibit 13, pages 25 to 62 of HEI's 1996 Annual Report
to Stockholders
February 26, 1997 HECO Item 7, HEI Exhibit 13, pages 25 to 62 of HEI's 1996 Annual Report
to Stockholders
March 10, 1997 HEI, HECO Item 5, portions of HECO's Annual Report to Stockholder filed as an
exhibit, HELCO power situation and PUC show cause order; Item 7,
HECO Exhibit 13, pages 2 to 34 and 36 of HECO's 1996 Annual Report
to Stockholder
March 27, 1997 HEI, HECO Item 5, HECO Capital Trust I issued and sold 2,000,000 of its 8.05%
Cumulative Quarterly Income Preferred Securities; Item 7, final
form of documents delivered in connection with the offer and sale
of the securities
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrants have duly caused this report to be signed on their behalf by the
undersigned, thereunto duly authorized. The signature of the undersigned
companies shall be deemed to relate only to matters having reference to such
companies and any subsidiaries thereof.
HAWAIIAN ELECTRIC INDUSTRIES, INC. HAWAIIAN ELECTRIC COMPANY, INC.
(Registrant) (Registrant)
By /s/ Robert F. Mougeot By /s/ Paul Oyer
----------------------------- -----------------------------
Robert F. Mougeot Paul A. Oyer
Financial Vice President and Financial Vice President and
Chief Financial Officer Treasurer
(Principal Financial Officer of HEI) (Principal Financial Officer of HECO)
Date: May 12, 1997 Date: May 12, 1997
30