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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
COMMISSION REGISTRANT; STATE OF INCORPORATION; I.R.S. EMPLOYER
FILE NUMBER ADDRESS; AND TELEPHONE NUMBER IDENTIFICATION NO.
- ----------- ----------------------------------- ------------------
1-8503 HAWAIIAN ELECTRIC INDUSTRIES, INC. 99-0208097
(A Hawaii Corporation)
900 Richards Street
Honolulu, Hawaii 96813
Telephone (808) 543-5662
1-4955 HAWAIIAN ELECTRIC COMPANY, INC. 99-0040500
(A Hawaii Corporation)
900 Richards Street
Honolulu, Hawaii 96813
Telephone (808) 543-7771
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
NAME OF EACH EXCHANGE
REGISTRANT TITLE OF EACH CLASS ON WHICH REGISTERED
- ---------- ------------------- --------------------
Hawaiian Electric Industries, Inc. Common Stock, New York Stock
Without Par Value Exchange
Hawaiian Electric Industries, Inc. Guarantee with New York Stock
respect to 8.36% Exchange
Trust Originated
Preferred Securities
(SM) (TOPrS (SM))
Hawaiian Electric Industries, Inc. Preferred Stock New York Stock
Purchase Rights Exchange
Hawaiian Electric Company, Inc. Guarantee with New York Stock
respect to 8.05% Exchange
Cumulative Quarterly
Income Preferred
Securities Series 1997
(QUIPS(SM))
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
REGISTRANT TITLE OF EACH CLASS
- ---------- -------------------
Hawaiian Electric Industries, Inc. None
Hawaiian Electric Company, Inc. Cumulative Preferred Stock
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Indicate by check mark whether the registrant (1) has filed all reports to
be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for 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
--- ---
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
================================================================================
================================================================================
AGGREGATE MARKET VALUE NUMBER OF SHARES OF
OF THE VOTING STOCK HELD COMMON STOCK OUT-
BY NONAFFILIATES OF THE STANDING OF THE
REGISTRANTS ON MARCH 13, REGISTRANTS ON
1998 MARCH 13, 1998
------------------------ -------------------
Hawaiian Electric Industries,
Inc. $1,300,041,000 32,001,007
(Without par value)
Hawaiian Electric Company, Inc. N/A 12,805,843
($6 2/3 par value)
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DOCUMENTS INCORPORATED BY REFERENCE
PART OF FORM 10-K
INTO WHICH THE
DOCUMENT IS
DOCUMENT INCORPORATED
- ------------------------------------------------------------------------ -------------------------
Portions of Annual Reports to Stockholder(s) of the following
registrants for the fiscal year ended December 31, 1997:
Hawaiian Electric Industries, Inc.................................... Parts I, II, III, and IV
Hawaiian Electric Company, Inc....................................... Parts I, II, III, and IV
Portions of Proxy Statement of Hawaiian Electric Industries, Inc.,
dated March 13, 1998, for the Annual Meeting of Stockholders Part III
================================================================================
THIS COMBINED FORM 10-K REPRESENTS SEPARATE FILINGS BY HAWAIIAN ELECTRIC
INDUSTRIES, INC. AND HAWAIIAN ELECTRIC COMPANY, INC. INFORMATION CONTAINED
HEREIN RELATING TO ANY INDIVIDUAL REGISTRANT IS FILED BY EACH REGISTRANT ON ITS
OWN BEHALF. NEITHER REGISTRANT MAKES ANY REPRESENTATIONS AS TO THE INFORMATION
RELATING TO THE OTHER REGISTRANT.
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TABLE OF CONTENTS
Page
Glossary of Terms........................................................................ ii
PART I
Item 1. Business.................................................................... 1
Item 2. Properties.................................................................. 42
Item 3. Legal Proceedings........................................................... 44
Item 4. Submission of Matters to a Vote of Security Holders......................... 44
PART II
Item 5. Market for Registrants' Common Equity and Related Stockholder Matters....... 45
Item 6. Selected Financial Data..................................................... 46
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations................................................ 46
Item 7a. Quantitative and Qualitative Disclosures About Market Risk.................. 46
Item 8. Financial Statements and Supplementary Data................................. 46
Item 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure................................................. 46
PART III
Item 10. Directors and Executive Officers of the Registrants......................... 47
Item 11. Executive Compensation...................................................... 49
Item 12. Security Ownership of Certain Beneficial Owners and Management.............. 53
Item 13. Certain Relationships and Related Transactions.............................. 54
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K................. 54
Independent Auditors' Report - HEI....................................................... 56
Independent Auditors' Report - HECO...................................................... 57
Index to Exhibits........................................................................ 62
Signatures............................................................................... 79
i
GLOSSARY OF TERMS
Defined below are certain terms used in this report:
TERMS DEFINITIONS
- -------- -----------
1935 ACT Public Utility Holding Company Act of 1935
AES Applied Energy Services, Inc.
AES-BP AES Barbers Point, Inc. (now known as AES Hawaii, Inc.)
ARM Adjustable rate mortgage
ASB American Savings Bank, F.S.B., a wholly owned subsidiary of HEI
Diversified, Inc. and parent company of American Savings
Investment Services Corporation, ASB Service Corporation,
AdCommunications, Inc. and American Savings Mortgage Co., Inc.
BoA Bank of America, FSB
BHP BHP Petroleum Americas Refining Inc., a fuel oil supplier
BIF Bank Insurance Fund
BPPI Baldwin Pacific Properties, Inc., a limited partner of Baldwin*Malama
(a limited partnership in which Malama Development Corp. is the
general partner)
Btu British thermal unit
CDUP Conservation District Use Permit
CERCLA Comprehensive Environmental Response, Compensation and Liability Act
CHEVRON Chevron Products Company, a fuel oil supplier
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., HECO Capital Trust I, 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, HEIDI Real Estate Corp.,
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
CT Combustion turbine
DOH Department of Health of the State of Hawaii
DOT Department of Transportation of the State of Hawaii
DSM Demand-side management
ENCOGEN Encogen Hawaii, L.P.
ENSERCH Enserch Development Corporation
EPA Environmental Protection Agency - federal
EPCRA Emergency Planning and Community Right-to-Know Act
ERL Environmental Response Law of the State of Hawaii
FASB Financial Accounting Standards Board
FDIC Federal Deposit Insurance Corporation
FDICIA Federal Deposit Insurance Corporation Improvement Act of 1991
FEDERAL U.S. Government
FERC Federal Energy Regulatory Commission
FHLB Federal Home Loan Bank
FIRREA Financial Institutions Reform, Recovery, and Enforcement Act of 1989
ii
GLOSSARY OF TERMS (continued)
TERMS DEFINITIONS
- -------- -----------
HCPC Hilo Coast Processing Company
HC&S Hawaiian Commercial & Sugar Company, a division of A&B-Hawaii,
Inc.
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
HECO'S Hawaiian Electric Company, Inc.'s Consolidated Financial
CONSOLIDATED Statements, incorporated into Parts I, II and IV of this
FINANCIAL Form 10-K by reference to pages 12 to 34 of Hawaiian
STATEMENTS Electric Company, Inc's 1997 Annual Report to
Stockholder, portions of which are filed herein as
HECO Exhibit 13
HECO'S MD&A Hawaiian Electric Company, Inc.'s Management's Discussion and
Analysis of Financial Condition and Results of Operations,
incorporated into Parts I, II and IV of this Form 10-K by
reference to pages 3 to 11 of Hawaiian Electric Company,
Inc.'s 1997 Annual Report to Stockholder, portions of which
are filed herein as HECO Exhibit 13
HEI Hawaiian Electric Industries, Inc., direct 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
HEI'S Hawaiian Electric Industries, Inc.'s Consolidated Financial
CONSOLIDATED Statements, incorporated into Parts I, II and IV of this
FINANCIAL Form 10-K by reference to pages 26 and 40 to 65 of
STATEMENTS Hawaiian Electric Industries, Inc.'s 1997
Annual Report to Stockholders, portions of which are filed
herein as HEI Exhibit 13
HEI'S MD&A Hawaiian Electric Industries, Inc.'s Management's Discussion and
Analysis of Financial Condition, Results of Operations and Market Risk
incorporated into Parts I, II and IV of this Form 10-K by reference to
pages 27 to 39 of Hawaiian Electric Industries, Inc.'s 1997 Annual
Report to Stockholders, portions of which are filed herein as HEI
Exhibit 13
HEIDI HEI Diversified, Inc., a wholly owned subsidiary of Hawaiian Electric
Industries, Inc. and the parent company of American Savings Bank,
F.S.B. and HEIDI Real Estate Corp.
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 parent company of several subsidiaries
HELCO Hawaii Electric Light Company, Inc., a wholly owned electric utility
subsidiary of Hawaiian Electric Company, Inc.
HERS Hawaiian Electric Renewable Systems, Inc., formerly a wholly owned
subsidiary of Hawaiian Electric Industries, Inc. and formerly parent
company of Lalamilo Ventures, Inc.
HIG The Hawaiian Insurance & Guaranty Company, Limited, an insurance
company which was placed in state rehabilitation proceedings. HEI
Diversified, Inc. was the holder of record of HIG's common stock prior
to August 16, 1994
iii
GLOSSARY OF TERMS (continued)
TERMS DEFINITIONS
- -------- -----------
HIRI Hawaiian Independent Refinery, Inc., a fuel oil refinery
HITI Hawaiian Interisland Towing, Inc.
HP Horsepower
HPG HEI Power Corp. Guam, a wholly owned subsidiary of HEI Power Corp.
HTB Hawaiian Tug & Barge Corp., a wholly owned subsidiary of Hawaiian
Electric Industries, Inc. and parent company of Young Brothers, Limited
IBEW International Brotherhood of Electrical Workers
IBU Inlandboatmen's Union of the Pacific, Marine Division, an affiliate of
the International Longshoremen's and Warehousemen's Union, Hawaii
Division
ILWU International Longshoremen's and Warehousemen's Union
IPP Independent power producer
IRP Integrated resource plan
IRR Interest rate risk
JCC Jones Capital Corporation
KALAELOA Kalaeloa Partners, L.P.
KCP Kawaihae Cogeneration Partners
KWH Kilowatthour
LSFO Low sulfur fuel oil
LVI Lalamilo Ventures, Inc., formerly a wholly owned subsidiary of Hawaiian
Electric Renewable Systems, Inc. and formerly a wholly owned subsidiary
of Hawaiian Electric Industries, Inc. LVI was merged into HELCO on
December 23, 1996
MBtu Million British thermal unit
MD&A Management's Discussion and Analysis of Financial Condition and Results
of Operations
MDC Malama Development Corp., a wholly owned subsidiary of Malama Pacific
Corp.
MECO Maui Electric Company, Limited, a wholly owned electric utility
subsidiary of Hawaiian Electric Company, Inc.
MMO Malama Mohala Corp., a wholly owned subsidiary of Malama Pacific Corp.
MPC Malama Pacific Corp., a wholly owned subsidiary of Hawaiian Electric
Industries, Inc. and parent company of several real estate subsidiaries
MSFO Medium sulfur fuel oil
MW Megawatt
NA Not applicable
NAE North American Environmental, Inc.
NOI Notice of intent
NOV Notice of Violation
NPDES National Pollutant Discharge Elimination System
OPA Federal Oil Pollution Act of 1990
OTS Office of Thrift Supervision, Department of Treasury
PCB Polychlorinated biphenyls
PECS Pacific Energy Conservation Services, Inc., a wholly owned subsidiary
of Hawaiian Electric Industries, Inc.
PGV Puna Geothermal Venture
PSD PERMIT Prevention of Significant Deterioration/Covered Source Permit
PUC Public Utilities Commission of the State of Hawaii
PURPA Public Utility Regulatory Policies Act of 1978
iv
GLOSSARY OF TERMS (continued)
TERMS DEFINITIONS
- -------- -----------
QTL Qualified Thrift Lender
RCRA Resource Conservation and Recovery Act of 1976
REGISTRANT Hawaiian Electric Industries, Inc. or Hawaiian Electric Company, Inc.
ROACE Return on average common equity
ROR Return on rate base
SAIF Savings Association Insurance Fund
SARA Superfund Amendments and Reauthorization Act
SEC Securities and Exchange Commission
SFAS Statement of Financial Accounting Standards
ST Steam turbine
STATE State of Hawaii
TSCA Toxic Substance Control Act of 1976
UIC Underground Injection Control
UST Underground storage tank
YB Young Brothers, Limited, a wholly owned subsidiary of
Hawaiian Tug & Barge Corp.
v
Forward-looking information
This report and other presentations made by HEI, HECO and their subsidiaries
contain forward-looking statements within the meaning of Section 21E of the
Securities Exchange Act of 1934. Except for historical information contained
herein, the matters set forth 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
international, national and local economic conditions, including the condition
of the Hawaii tourist and construction industries and the Hawaii housing market;
the effects of weather and natural disasters; product demand and market
acceptance risks; increasing competition in the electric utility industry;
capacity and supply constraints or difficulties; new technological developments;
governmental and regulatory actions, including decisions in rate cases and on
permitting issues; the results of financing efforts; the timing and extent of
changes in interest rates; and the results of integration of the acquired Bank
of America, FSB (BoA) - Hawaii operations with the operations of ASB. Investors
are also directed to consider other risks and uncertainties discussed in other
periodic reports previously and subsequently filed by HEI and/or HECO with the
SEC.
PART I
------
ITEM 1. BUSINESS
HEI
- ---
HEI was incorporated in 1981 under the laws of the State of Hawaii and is a
holding company with subsidiaries engaged in the electric utility, savings bank,
freight transportation, real estate development and other businesses, primarily
in the State of Hawaii, and in the pursuit of independent power projects in Asia
and the Pacific. HEI's predecessor, HECO, was incorporated under the laws of the
Kingdom of Hawaii (now the State of Hawaii) on October 13, 1891. As a result of
a 1983 corporate reorganization, HECO became an HEI subsidiary and common
shareholders of HECO became common shareholders of HEI.
HECO and its operating subsidiaries, MECO and HELCO, are regulated electric
public utilities providing the only electric public utility service on the
islands of Oahu, Maui, Lanai, Molokai and Hawaii. HECO also owns all the common
securities of HECO Capital Trust I. HECO Capital Trust I (a Delaware statutory
business trust in which HECO owns all the common securities) was formed to
effect the issuance of $50 million of 8.05% cumulative quarterly income
preferred securities in March 1997 for the benefit of HECO, MECO and HELCO.
Besides HECO, HEI also owns directly or indirectly the following subsidiaries
which comprise its diversified companies: HEIDI and its subsidiaries, HEIDI Real
Estate Corp. and ASB, and the subsidiaries of ASB; HTB and its subsidiary; MPC
and its subsidiaries; HEIIC; PECS; HEIPC and its subsidiaries; Hycap Management,
Inc. and its subsidiary; Hawaiian Electric Industries Capital Trust I; and
Hawaiian Electric Industries Capital Trust II and III (inactive entities).
ASB, acquired in 1988, was the third largest financial institution in the State
of Hawaii as of December 31, 1997, and had 69 retail branches as of
December 31, 1997. On December 6, 1997, ASB acquired substantially all of the
Hawaii deposits of BoA, most of its Hawaii branches and certain of its Hawaii-
based loans. The acquisition increased ASB's assets by $1.8 billion and its
deposits by $1.7 billion. HEIDI Real Estate Corp. was formed in February 1998 to
own and manage real estate assets.
HTB was acquired in 1986 and provides ship assist and charter towing services
and owns YB, a regulated intrastate public carrier of waterborne freight among
the Hawaiian Islands. MPC was formed in 1985 and directly or through
subsidiaries develops and invests in real estate. HEIIC was formed in 1984 and
is a passive investment company which primarily holds investments in leveraged
leases. PECS was formed in August 1994 and is a contract services company
primarily providing limited support services in Hawaii. HEIPC was formed in
March 1995 to pursue, directly or through its subsidiaries or affiliates,
independent power projects in Asia and the Pacific. Hycap Management, Inc.,
including subsidiary HEI Preferred Funding, LP (a limited partnership in which
Hycap Management, Inc. is the sole general partner), and Hawaiian Electric
Industries Capital Trust I (a Delaware statutory business
1
trust in which HEI owns all the common securities) were formed to effect the
issuance of $100 million of 8.36% HEI-obligated trust preferred securities in
February 1997.
Prior to August 16, 1994, HEIDI was the holder of record of the common stock of
HIG, which was acquired in 1987 and provided property and casualty insurance
primarily in Hawaii. For information about the discontinued operations of HIG,
see Note 20 to HEI's Consolidated Financial Statements which is incorporated
herein by reference to page 63 of HEI's 1997 Annual Report to Stockholders,
portions of which are filed herein as HEI Exhibit 13.
The financial information about the Company's industry segments is incorporated
herein by reference to page 26 of HEI's 1997 Annual Report to Stockholders,
portions of which are filed herein as HEI Exhibit 13.
For additional information about the Company, reference is made to Item 7 and
Item 7A -"HEI's Management's Discussion and Analysis of Financial Condition,
Results of Operations and Market Risk" (HEI's MD&A) and to Item 14-HEI's
Consolidated Financial Statements, incorporated herein by reference to pages 27
to 39 and to page 26 and pages 40 to 65, respectively, of HEI's 1997 Annual
Report to Stockholders, portions of which are filed herein as HEI Exhibit 13.
ELECTRIC UTILITY
- ----------------
HECO and subsidiaries and service areas
HECO, MECO and HELCO are regulated operating electric public utilities engaged
in the production, purchase, transmission, distribution and sale of electricity
on the islands of Oahu; Maui, Lanai and Molokai; and Hawaii, respectively. HECO
was incorporated under the laws of the Kingdom of Hawaii (now State of Hawaii)
on October 13, 1891. HECO acquired MECO in 1968 and HELCO in 1970.
In 1997, the electric utilities' revenues and operating income amounted to
approximately 76% and 83%, respectively, of HEI's consolidated revenues and
operating income. For additional information about HECO, see HEI's MD&A and
Note 3, incorporated herein by reference to pages 27 to 39 and 47 to 50,
respectively, in HEI's 1997 Annual Report to Stockholders, and HECO's MD&A and
HECO's consolidated financial statements incorporated by reference to pages 3 to
11 and 12 to 34, respectively, of HECO's 1997 Annual Report to Stockholder,
portions of which are filed herein as HECO Exhibit 13.
The islands of Oahu, Maui, Lanai, Molokai and Hawaii have a combined population
estimated at 1,130,000, or approximately 95% of the population of the State of
Hawaii, and comprise a service area of 5,766 square miles. The principal
communities served include Honolulu (on Oahu), Wailuku and Kahului (on Maui) and
Hilo and Kona (on Hawaii). The service areas also include numerous suburban
communities, resorts, U.S. Armed Forces installations and agricultural
operations.
HECO, MECO and HELCO have nonexclusive franchises from the state covering
certain areas, which authorize them to construct, operate and maintain
facilities over and under public streets and sidewalks. HECO's franchise covers
the City & County of Honolulu, MECO's franchises cover the County of Maui and
the County of Kalawao, and HELCO's franchise covers the County of Hawaii. Each
of these franchises will continue in effect for an indefinite period of time
until forfeited, altered, amended or repealed.
Sales of electricity
HECO, MECO and HELCO provide the only electric public utility service on the
islands they serve. The following table sets forth the number of their electric
customer accounts as of December 31, 1997, 1996 and 1995 and their electric
sales revenues for each of the years then ended:
1997 1996 1995
-------------------------------------------------------------------------------------
Electric Electric Electric
(dollars in Customer sales Customer sales Customer sales
thousands) accounts revenues accounts revenues accounts revenues
- ---------------------------------------------------------------------------------------------------
HECO................. 271,801 $ 779,425 271,602 $ 767,264 269,307 $712,380
MECO................. 54,605 151,625 53,763 144,434 53,339 127,284
HELCO................ 60,220 160,332 59,349 152,312 58,515 135,110
------------------------------------------------------------------------------
386,626 $1,091,382 384,714 $1,064,010 381,161 $974,774
==============================================================================
2
Revenues from the sale of electricity in 1997 were from the following types of
customers in the proportions shown:
HECO MECO HELCO Total
- ----------------------------------------------------------------------------------------------------------------
Residential...................................... 32% 36% 41% 34%
Commercial....................................... 30 34 37 32
Large light and power............................ 37 29 22 34
Other............................................ 1 1 -- --
---------------------------------------------------------------
100% 100% 100% 100%
===============================================================
HECO and its subsidiaries derived approximately 10% of their operating revenues
from the sale of electricity to various federal government agencies in 1997,
1996 and 1995. One of HECO's larger customers, the Naval Base at Barbers Point,
Oahu, is expected to be closed in 1999 with redevelopment of the base occurring
through 2020. HECO anticipates that the base closure will ultimately result in
little, if any, loss in aggregate KWH sales, if, as anticipated, the Navy
continues to occupy portions of Barbers Point and much of the surplus facilities
and land currently not utilized by the Navy is occupied by state agencies and
others. On March 8, 1994, President Clinton signed an Executive Order which
mandates that each federal agency develop and implement a program with the
intent of reducing energy consumption by 30% by the year 2005 to the extent that
these measures are cost-effective. The 30% reductions will be measured relative
to the agency's 1985 energy use. HECO is working with various federal government
agencies such as the Department of Defense to implement demand-side management
programs which will help them achieve their energy reduction objectives. In
November 1995, HECO and the U.S. General Services Administration entered into a
Basic Ordering Agreement under which HECO will arrange for financing and
installation of energy conservation projects at federal facilities in Hawaii.
Under the Basic Ordering Agreement, HECO undertook an air conditioning upgrade
project at the federal office building in downtown Honolulu, which project was
completed in 1997. Further, HECO commenced design work for solar water heating
in this federal office building. Another project underway is with the Postal
Service. HECO also signed an umbrella Basic Ordering Agreement with the
Department of Defense in October 1996. There are currently seven projects
underway for the Navy. Neither HEI nor HECO management can predict with
certainty the impact of President Clinton's Executive Order on the Company's or
consolidated HECO's future financial condition, results of operations or
liquidity.
3
SELECTED CONSOLIDATED ELECTRIC UTILITY OPERATING STATISTICS
1997 1996 1995 1994 1993
------------------------------------------------------------------
KWH SALES (MILLIONS)
Residential............................... 2,531.0 2,540.4 2,471.3 2,427.5 2,340.3
Commercial................................ 2,676.8 2,662.4 2,624.7 2,451.2 2,284.6
Large light and power..................... 3,700.7 3,733.0 3,655.1 3,658.6 3,646.2
Other..................................... 54.7 55.4 55.4 55.8 54.1
------------------------------------------------------------------
8,963.2 8,991.2 8,806.5 8,593.1 8,325.2
==================================================================
NET ENERGY GENERATED AND PURCHASED
(MILLIONS OF KWH)
Net generated............................. 5,885.9 5,994.3 5,850.6 5,727.6 5,789.6
Purchased................................. 3,622.8 3,565.3 3,511.6 3,437.8 3,101.0
------------------------------------------------------------------
9,508.7 9,559.6 9,362.2 9,165.4 8,890.6
==================================================================
Losses and system uses (%)................ 5.5 5.7 5.7 6.0 6.1
ENERGY SUPPLY (YEAREND)
Generating capability--MW................. 1,634 1,636 1,637 1,637 1,638
Firm purchased capability--MW............. 474 474 469 465 473
------------------------------------------------------------------
2,108 2,110 2,106 2,102 2,111
==================================================================
Gross peak demand--MW (1)................. 1,573 1,561 1,537 1,527 1,496
Btu per net KWH generated................. 10,799 10,781 10,762 10,746 10,846
Average fuel oil cost per MBtu (cents).... 405.9 388.8 329.7 304.4 340.5
CUSTOMER ACCOUNTS (YEAREND)
Residential............................... 336,094 333,807 330,508 325,495 320,987
Commercial................................ 48,671 49,069 48,585 47,916 48,008
Large light and power..................... 582 586 580 601 628
Other..................................... 1,279 1,252 1,488 1,480 1,475
------------------------------------------------------------------
386,626 384,714 381,161 375,492 371,098
==================================================================
ELECTRIC REVENUES (THOUSANDS)
Residential............................... $ 367,432 $ 355,669 $324,923 $297,984 $283,662
Commercial................................ 347,308 338,785 313,909 281,664 262,751
Large light and power..................... 369,878 362,823 329,598 314,931 317,816
Other..................................... 6,764 6,733 6,344 5,927 5,786
-------------------------------------------------------------------
$1,091,382 $1,064,010 $974,774 $900,506 $870,015
===================================================================
AVERAGE REVENUE PER KWH SOLD (CENTS)
Residential............................... 14.52 14.00 13.15 12.28 12.12
Commercial................................ 12.97 12.73 11.96 11.49 11.50
Large light and power..................... 9.99 9.72 9.02 8.61 8.72
Other..................................... 12.38 12.16 11.46 10.62 10.69
Average revenue per KWH sold.............. 12.18 11.83 11.07 10.48 10.45
RESIDENTIAL STATISTICS
Average annual use per customer account
(KWH).................................... 7,559 7,649 7,514 7,482 7,367
Average annual revenue per customer
account.................................. $ 1,097 $ 1,071 $ 988 $ 918 $ 893
Average number of customer accounts....... 334,811 332,138 328,912 324,458 317,657
- ------------------------------------------------------------------------------------------------------------------
(1) Sum of the peak demands on all islands served, noncoincident and
nonintegrated.
4
GENERATION STATISTICS
The following table contains certain generation statistics as of December 31,
1997, and for the year ended December 31, 1997. The capability available for
operation at any given time may be less than the generating capability shown
because of capability restrictions or temporary outages for inspection,
maintenance, repairs or unforeseen circumstances.
Generating and
firm purchased KWH net
capability generated
(MW) at Gross peak Annual and
December 31, demand Reserve load purchased
Systems 1997 (1) (MW) (2) margin factor (2) (millions)
- -------------------------------------------------------------------------------------------------------------------
ISLAND OF OAHU-HECO
Conventional oil-fired steam units... 1,160.0
Combustion turbines (peaking units).. 103.0
Firm contract power (3).............. 406.0
------------------------------------------------------------------------------
1,669.0 1,220.0 36.8% 72.1% 7,424.2
------------------------------------------------------------------------------
ISLAND OF MAUI-MECO
Conventional oil-fired steam units... 37.6
Combined-cycle unit.................. 58.0
Diesel............................... 95.9
Firm contract power (4).............. 16.0
------------------------------------------------------------------------------
207.5 174.7 18.8% 70.2% 1,039.0
------------------------------------------------------------------------------
ISLAND OF LANAI-MECO
Diesel............................... 10.4 5.0 110.1% 65.6% 27.9
------------------------------------------------------------------------------
ISLAND OF MOLOKAI-MECO
Diesel............................... 9.9
Combustion turbine................... 2.2
----------------------------------------------------------------------------
12.1 6.6 83.3% 66.5% 37.1
----------------------------------------------------------------------------
ISLAND OF HAWAII-HELCO
Conventional oil-fired steam units... 71.2
Combustion turbines.................. 48.2
Diesel............................... 38.0
Firm contract power (4).............. 52.0
----------------------------------------------------------------------------
209.4 166.7 25.6% 69.3% 980.5
----------------------------------------------------------------------------
Total................................ 2,108.4 1,573.0 34.0% 71.6% 9,508.7
============================================================================
(1) HECO units at normal ratings, and MECO and HELCO units at reserve ratings.
(2) Noncoincident and nonintegrated.
(3) Independent power producers-180 MW (Kalaeloa), 180 MW (AES-BP) and 46 MW
(refuse-fired plant).
(4) Nonutility generation-MECO: 16 MW (HC&S); HELCO: 30EMW (PGV) and 22 MW
(HCPC).
INTEGRATED RESOURCE PLANNING AND REQUIREMENTS FOR ADDITIONAL GENERATING CAPACITY
As a result of a proceeding initiated in January 1990, the PUC issued an order
in March 1992 (and revised it in May 1992) requiring the energy utilities in
Hawaii to develop integrated resource plans (IRPs). The goal of integrated
resource planning is the identification of demand-side and supply-side resources
and the integration of these resources for meeting near- and long-term consumer
energy needs in an efficient and reliable manner at the lowest reasonable cost.
In its May 1992 order, the PUC adopted a "framework", which establishes both the
process for developing IRPs and guidelines for the development of such plans.
The PUC's framework directs that each plan cover a 20-year planning horizon with
a five-year program implementation schedule and states that the planning cycle
will be
5
repeated every three years. Under the framework, the PUC may approve, reject or
require modifications of the utilities' IRPs.
The framework also states that utilities are entitled to recover all appropriate
and reasonable integrated resource planning and implementation costs, including
the costs of planning and implementing demand-side management (DSM) programs.
Under appropriate circumstances, the utilities may recover net lost revenues
resulting from DSM programs and earn shareholder incentives. The PUC has
approved IRP cost recovery provisions for HECO, MECO and HELCO. Pursuant to the
cost recovery provisions, the electric utilities may recover through a surcharge
the costs for approved DSM programs (including DSM program lost margins and
shareholder incentives), and other IRP costs incurred and approved by the PUC,
to the extent the costs are not included in their base rates.
The utilities have characterized their proposed IRPs as planning strategies,
rather than fixed courses of action, and the resources ultimately added to their
systems may differ from those included in their 20-year plans. Under the IRP
framework, the utilities are required to submit annual evaluations of their
plans (including a revised five-year program implementation schedule) and to
submit new plans on a three-year cycle. Prior to proceeding with the DSM
programs, separate PUC approval proceedings must be completed, in which the PUC
further reviews the details of the proposed programs and the utilities
proposals for the recovery of DSM program expenditures net lost revenues and
shareholder incentives.
HECO's IRP. HECO filed its second IRP with the PUC in January 1998, and a
schedule for the PUC proceeding in which it will be considered has not yet been
determined. The second IRP identified changes in key forecasts and assumptions
since the development of HECO's initial IRP, which was filed in July 1993,
modified in January 1994 and approved by the PUC as modified in its March 1995
final decision and order (D&O). HECO's second IRP includes IRP strategy options
related to the transition to a more competitive environment in the electric
utility industry. The IRP is a flexible resource strategy that allows the
utility to make major decisions regarding the incremental implementation of
program options for both supply-side and demand-side resources, based on HECO's
IRP objectives and the best information available at the time decisions must be
made.
On the supply-side, HECO's second IRP focuses on the planning for the next
generating unit addition in the 2009 time frame -- a 107-MW simple cycle diesel
fired combustion turbine, which would be part of a 318-MW diesel fired 2-on-1
combined-cycle unit. Phases 2 and 3 of the combined-cycle unit would be
installed in 2013 and 2016, respectively. In addition, pursuant to HECO's
generation asset management program, all existing generation units are
reasonably expected to operate (future environmental considerations permitting)
beyond the 20-year IRP planning period (1998-2017).
HECO's second IRP includes five energy efficiency DSM programs, which are
designed to reduce the rate of increase in Oahu's energy use, defer construction
of new generating units, reduce the state's dependence on oil, and achieve
savings for utility customers who participate in the programs. The DSM energy
efficiency programs include incentives for customers to install efficient
lighting, refrigeration, water-heating and air-conditioning equipment and
industrial motors. The PUC issued its final D&Os approving all five of HECO's
original energy efficiency DSM programs in 1996, and HECO began implementing
these programs in the third quarter of 1996. HECO filed applications with the
PUC for a commercial and industrial (C&I) load management program in June 1996,
and a residential load control program in September 1997. HECO expects that
these two load management DSM programs will be reviewed in concept by the PUC in
conjunction with HECO's second IRP. HECO plans to continue the planning and
implementation of DSM load management and energy efficiency programs that are
cost-effective and also minimize rate impacts to all customers.
MECO's IRP. The PUC issued its final D&O in MECO's IRP proceeding in May 1996.
MECO's 20-year IRP includes four energy efficiency DSM programs similar to those
developed for HECO. The supply-side resources proposed by MECO, as updated in
its June 1997 evaluation, include installing approximately 214 MW of additional
generation through the year 2013 on the island of Maui, including 58 MW of
generation at its Maalaea power plant site in three increments from 1998-2001,
and approximately 8 MW through the year 2013 on each of the islands of Lanai and
Molokai. The PUC approved MECO's DSM water heating program in July 1996, and
MECO's C&I DSM programs in September 1996. MECO began DSM program implementation
in late 1996. MECO's first IRP annual evaluation was filed with the PUC in June
1997, and its second IRP annual evaluation is scheduled to be filed with the PUC
in June 1998. MECO's next IRP filing is scheduled for September 1999.
6
In 1997, MECO's generation reserve margins were less than the margin specified
by its capacity planning criteria (which are based on having enough reserve
generation to cover for the unexpected loss of the largest unit taking into
account projected peak loads and scheduled maintenance). This condition will
probably continue, particularly in view of the recent reduction in the
generation capacity being supplied by HC&S (see below under "Nonutility
generation--MECO and HELCO power purchase agreements"), until Maalaea unit 17
begins commercial operations.
HELCO's IRP. The PUC issued its final D&O in HELCO's IRP proceeding in May 1996.
HELCO's 20-year IRP includes four energy efficiency DSM programs similar to
those developed for HECO. The supply-side resources proposed in HELCO's five-
year plan include installing 58 MW of generation at a West Hawaii site (see
"HELCO power situation" below), undertaking transmission and distribution
efficiency improvement projects and conducting alternate energy generation
resource studies. HELCO's 20-year plan includes adding another diesel-fired
dual-train combined-cycle unit at a West Hawaii site. HELCO received interim
approval for its four DSM programs in October 1995 and final approval in
September 1996. HELCO began implementing its DSM programs in December 1995.
HELCO filed an application with the PUC for a C&I pilot load management program
in October 1996. HELCO's first IRP annual evaluation was filed with the PUC in
June 1997. HELCO's next IRP filing is scheduled for September 1998.
HELCO POWER SITUATION
For a description of regulatory and judicial proceedings that have delayed
HELCO's efforts to install additional generation in order to ease potential
power supply constraints on the island of Hawaii, see the "HELCO power
situation" section in Note 12 to HECO's Consolidated Financial Statements.
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 PUC approved expenditures for CT-4, which HELCO had planned
to install in late 1994.
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 Department of Health of the State of
Hawaii (DOH) and the U.S. Environmental Protection Agency (EPA) a PSD
permit for the Keahole power plant site. Subject to satisfactory resolution of
the CDUP amendment and PSD permit matters, HELCO's current plan continues to be
to have CT-4 and CT-5 be the next generating units added to its system. ST-7 is
currently planned to be deferred to approximately 2006 unless the Encogen
facility (described below) is not placed in service as planned.
CDUP amendment. On July 10, 1997, the Third Circuit Court of the State of Hawaii
issued its Amended Findings of Fact, Conclusions of Law, Decision and Order on
HELCO's appeal of an order of the BLNR, along with other civil cases relating to
HELCO's application for a CDUP amendment. This decision allows HELCO to use its
Keahole property as requested in its application. An amended order to the same
effect was issued on August 18, 1997. Two final judgments have been entered,
disposing of all but one of the consolidated cases. HELCO has submitted a form
of final judgment to dispose of the last case pending pursuant to the court's
directions. Opposing parties have appealed each of the final judgments and have
also filed motions to stay the effectiveness of the judgments pending resolution
of the appeals. A hearing on these motions was held on March 9, 1998, at which
time the judge took the matter under advisement. Management believes that HELCO
will ultimately prevail with regard to any appeals which may be taken and that
the amended decision of the Third Circuit Court will be upheld.
Declaratory judgment actions. In February 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.
In March 1998, an individual filed a complaint for declaratory judgment against
HELCO, BLNR and Department of Land and Natural Resources (DLNR). The complaint
basically alleges a violation of her constitutional due process rights because
the issue of which, if any, land use conditions apply to HELCO's use of the
Keahole site was determined administratively by DLNR (through a letter issued in
January 1998) rather than being decided by BLNR in a contested case. Also filed
with the complaint was a motion to stay enforcement of the DLNR letter.
HELCO intends to vigorously defend against the claims raised and management
believes the allegations are without merit.
7
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 claimed 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 HELCO's rate base unless
and until the project is in fact installed, and is used and useful for utility
purposes." 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
IPP's) should be the one that can be most expeditiously put into service at
"allowable cost."
In April 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.
Enserch complaint. In January 1998, HELCO filed with the PUC an application
-----------------
for approval of a power purchase agreement for a 60-MW facility and an
interconnection agreement with Encogen dated October 22, 1997. The
agreements were entered into following a settlement agreement between
Enserch and HELCO and are subject to PUC approval. The parties to the
proceeding include HELCO, Encogen and the Consumer Advocate. Motions to
intervene filed by KCP, HCPC and one other IPP were denied by the PUC.
KCP complaint. In January 1996, the PUC ordered HELCO to continue in good
-------------
faith to negotiate a power purchase agreement with KCP. In May 1997, KCP
filed a motion for unspecified "sanctions" against HELCO for allegedly
failing to negotiate in good faith. In June 1997, KCP filed a motion asking
the PUC to designate KCP's facility as the next generating unit on the
HELCO system and to determine the "allowable cost" which would be payable
by HELCO to KCP. HELCO filed memoranda in opposition to KCP's motions. An
evidentiary hearing was held and briefs were filed by both parties. Action
by the PUC is pending.
HCPC complaint. The PUC converted the HCPC complaint into a purchased power
--------------
contract negotiation proceeding. An evidentiary hearing is scheduled for
April 1998.
Management cannot determine at this time whether the negotiations with KCP and
HCPC and related PUC proceedings will result in the execution and/or PUC
approval of a power purchase agreement or impact management's plans with regard
to installation of HELCO's combined-cycle unit at the Keahole power plant site.
NONUTILITY GENERATION
The Company has supported state and federal energy policies which encourage the
development of alternate energy sources that reduce dependence on fuel oil.
Alternate energy sources range from wind, geothermal and hydroelectric power, to
energy produced by the burning of bagasse (sugarcane waste). Other nonoil
projects include a generating unit burning municipal waste and a fluidized bed
unit burning coal.
HECO power purchase agreements. HECO currently has three major power purchase
agreements. In March 1988, HECO entered into a power purchase agreement with AES
Barbers Point, Inc. (AES-BP, now known as AES Hawaii, Inc.), a Hawaii-based
cogeneration subsidiary of The AES Corporation (formerly known as Applied Energy
Services, Inc.) of Arlington, Virginia. The agreement with AES-BP, as amended in
August 1989, provides that, for a period of 30 years, HECO will purchase 180 MW
of firm capacity. The AES-BP 180-MW coal-fired cogeneration plant, which became
operational in September 1992, utilizes a "clean coal" technology. The facility
is designed to sell sufficient steam to be a "Qualifying Facility" under the
Public Utility Regulatory Policies Act of 1978 (PURPA).
8
In October 1988, HECO entered into an agreement with Kalaeloa Partners, L.P.
(Kalaeloa), a limited partnership whose sole general partner is an indirect,
wholly owned subsidiary of ASEA Brown Boveri, Inc. (ABB), which has guaranteed
certain of Kalaeloa's obligations and, through affiliates, has contracted to
design, build, operate and maintain the facility. The agreement with Kalaeloa,
as amended, provides that HECO will purchase 180 MW of firm capacity for a
period of 25 years beginning May 23, 1991. The Kalaeloa facility, which was
completed in the second quarter of 1991, is a combined-cycle operation,
consisting of two oil-fired combustion turbines burning LSFO and a steam turbine
which utilizes waste heat from the combustion turbines. The facility is designed
to sell sufficient steam to be a "Qualifying Facility" under PURPA. As of
February 28, 1997, the ownership of Kalaeloa was restructured such that 1% is
now owned by the ABB subsidiary as the general partner and 99% is owned by
Kalaeloa Investment Partners (KIP) as the limited partner. KIP is a limited
partnership comprised of CEA Hawaiian Management, Inc. and CEA Investment, Inc.
(nonregulated affiliates of Public Service Enterprise Group Incorporated) and
Harbert Power Corporation. A second phase of the February 28, 1997 transaction,
which is still pending, would transfer the general partner interest from the ABB
subsidiary to an entity affiliated with the owners of KIP. A modification of the
existing ABB Guarantee of Kalaeloa obligations may be part of the second phase.
HECO must consent to any changes in the ABB Guarantee.
HECO also entered into a power purchase contract in March 1986 and a firm
capacity amendment in April 1991 with the City and County of Honolulu, which has
built a 64-MW refuse-fired plant (H-Power). The H-Power facility began to
provide firm energy in 1990 and currently supplies HECO with 46 MW of firm
capacity. The firm capacity amendment provides that HECO will purchase firm
capacity until mid-2015.
The PUC has approved and allowed rate recovery for the costs related to HECO's
three major power purchase agreements which provide a total of 406 MW of firm
capacity, representing 24% of HECO's total generating and firm purchased
capability on the island of Oahu as of December 31, 1997.
MECO and HELCO power purchase agreements. As of December 31, 1997, MECO and
HELCO had power purchase agreements for 16 MW and 52 MW of firm capacity,
respectively, representing 7% and 25% of their respective total generating and
firm purchased capabilities.
MECO has a power purchase agreement with HC&S for 16 MW of firm capacity through
December 31, 1999. In December 1997, MECO entered into a letter agreement with
HC&S which extends the power purchase agreement through December 31, 2000, and
year-to-year thereafter, subject to termination on or after January 1, 2001, on
not less than two years prior written notice by either party. On March 2, 1998,
an HC&S unit failed and HC&S lost 10 MW of generating capacity. It may be
several months before HC&S is able to replace the unit, during which time HC&S
may not be able to supply MECO with the full contracted capacity.
HELCO has a power purchase agreement with Puna Geothermal Venture (PGV) for 30
MW of firm capacity. On February 12, 1996, HELCO and PGV executed an amendment
to the power purchase agreement for 5 MW of firm capacity in addition to the 25
MW then being supplied. In August 1996, the PUC approved the amendment and, in
September 1996, PGV began supplying 5 MW of additional firm power.
In December 1994, at a time when the Hilo Coast Processing Company (HCPC)
contract was for delivery of 18 MW, HCPC filed a Chapter 11 bankruptcy petition.
In July 1995, the bankruptcy court approved an amended and restated power
purchase agreement with HCPC for 22 MW of firm capacity and the dismissal of
HCPC from bankruptcy. Also, see the "HELCO power situation" section above and in
Note 12 to HECO's Consolidated Financial Statements.
In October 1997, HELCO entered into an agreement with Encogen, a limited
partnership whose general partners are wholly-owned special-purpose subsidiaries
of Enserch and Jones Capital Corporation (JCC). Enserch Corporation and J.A.
Jones, Inc., the parent companies of Enserch and JCC, respectively, have
guaranteed certain of Encogen's obligations, and an affiliate of Enserch will be
contracted to operate and maintain the facility. The agreement provides that
HELCO will purchase 60 MW of firm capacity for a period of 30 years. The
facility will consist of two oil-fired combustion turbines and a steam turbine
which utilizes waste heat from the combustion turbines. The facility will be
designed to sell sufficient steam to be a "Qualifying Facility" under PURPA. The
agreement was submitted to the PUC for approval in January 1998. See "HELCO
Power Situation" above.
9
FUEL OIL USAGE AND SUPPLY
All rate schedules of the Company's electric utility subsidiaries contain energy
cost adjustment clauses whereby the charges for electric energy (and
consequently the revenues of the electric utility subsidiaries generally)
automatically vary with changes in the weighted average price paid for fuel oil
and certain components of purchased energy costs, and the relative amounts of
company-generated power and purchased power. Accordingly, under these clauses,
changes in fuel oil and certain purchased energy costs are passed on to
customers. In the December 30, 1997 D&Os approving HECO and its subsidiaries'
fuel supply contracts, the PUC noted that, in light of the length of the fuel
supply contracts and the relative stability of fuel prices, the need for the
continued use of energy cost adjustment clauses will be the subject of
investigation in a generic docket or in a future rate case. In their rate
increase applications based on 1999 test years, MECO and HELCO stated that they
believe that their energy cost adjustment clauses continue to be necessary. See
discussion below under "Rates" and the "Energy cost adjustment clauses" section
in HECO's MD&A.
HECO's steam power plants burn low sulfur fuel oil (LSFO). HECO's combustion
turbine peaking units burn Number 2 diesel fuel (diesel). MECO's and HELCO's
steam power plants burn medium sulfur fuel oil (MSFO) and their combustion
turbine and diesel engine generating units burn diesel. The LSFO supplied to
HECO is primarily derived from Indonesian and other Far East crude oils
processed in Hawaii refineries. The MSFO supplied to MECO and HELCO is derived
from U.S. domestic crude oil processed in Hawaii refineries.
In December 1997, HECO executed new contracts for the purchase of LSFO and use
of certain fuel distribution facilities with Chevron Products Company (Chevron)
and BHP Petroleum Americas Refining Inc. (BHP). These fuel supply and facilities
operations contracts have a term of seven years commencing January 1, 1998. The
PUC approved the contracts and issued a final decision and order in December
1997 that permits the inclusion of costs incurred under these contracts in
HECO's energy cost adjustment clause. HECO pays market-related prices for fuel
supplies purchased under these agreements.
HECO, MECO, HELCO and affiliates, HTB and YB, executed new joint fuel supply
contracts with Chevron and BHP for the purchase of diesel and MSFO supplies and
for the use of certain petroleum distribution facilities for a period of seven
years commencing January 1, 1998. The PUC subsequently approved these contracts
and issued a final decision and order in December 1997 that permitted the
electric utilities to include fuel costs incurred under these contracts in their
respective energy cost adjustment clauses. The electric utilities and HTB and YB
pay market-related prices for diesel and MSFO supplied under these agreements.
The diesel supplies acquired by the Lanai Division of MECO are purchased under a
contract with a local Chevron-brand wholesaler, Lanai Oil Co., Inc., executed on
February 13, 1997. The PUC issued a final D&O approving the contract in June
1997. The original term of the contract, which provides for the delivery of fuel
to MECO's Lanai power plants, expired December 31, 1997. The contract continues
under a provision for extension on an "evergreen" basis cancelable by either
party on 180 days advance notice.
See the fuel oil commitments information set forth in the "Fuel contracts and
other purchase commitments" section in Note 12 to HECO's Consolidated Financial
Statements.
The following table sets forth the average cost of fuel oil used to generate
electricity in the years 1997, 1996 and 1995:
HECO MECO HELCO Consolidated
--------------------------------------------------------------------------------------------------------
$/Barrel c/MBtu $/Barrel c/MBtu $/Barrel c/MBtu $/Barrel c/MBtu
- -----------------------------------------------------------------------------------------------------------------------
1997........... 23.88 380.9 30.13 503.9 25.76 418.1 25.19 405.9
1996........... 22.57 361.2 29.33 490.6 25.47 413.8 24.08 388.8
1995........... 19.19 306.1 24.78 414.4 21.94 355.1 20.47 329.7
The average per-unit cost of fuel oil consumed to generate electricity for HECO,
MECO and HELCO reflects a different volume mix of fuel types and grades. In
1997, 99.8% of HECO's generation fuel consumption consisted of LSFO. The balance
of HECO's fuel consumption was diesel. Diesel made up approximately 73% of
MECO's and 32% of HELCO's fuel consumption. The remainder of the fuel
consumption of MECO and HELCO consisted of MSFO. In general, MSFO is the least
costly fuel,
10
diesel is the most expensive fuel and the price of LSFO falls between the two on
a per barrel basis. The average prices of LSFO, MSFO and diesel in 1997 were
approximately the same as the respective average price levels prevailing in 1996
and 1996 average prices were higher than the respective average prices in 1995.
In December 1997, HELCO and MECO exercised an option to extend for two years
their existing contracts with Hawaiian Interisland Towing, Inc. for the shipment
of MSFO and diesel supplies from their fuel supplier's facilities on Oahu to
storage locations on the islands of Hawaii and Maui, respectively. The PUC
approved these contracts and issued a final order in June 1994 that permitted
HELCO and MECO to include the fuel transportation and related costs incurred
under the original contracts in their respective energy cost adjustment clauses.
Freight rates charged under the contracts are related to published indices for
industrial commodities prices and labor costs. These contracts each include
options for one additional two-year extension.
In 1998, the Company estimates that 76% of the net energy generated and
purchased by HECO and its subsidiaries will be generated from the burning of
oil. Increases in fuel oil prices are passed on to customers through the
electric utility subsidiaries' energy cost adjustment clauses. Failure by the
Company's oil suppliers to provide fuel pursuant to the supply contracts and/or
substantial increases in fuel prices could adversely affect consolidated HECO's
and the Company's financial condition, results of operations and/or liquidity.
HECO, however, maintains an inventory of fuel oil in excess of one month's
supply, which may be used in the event fuel suppliers are not able to provide
fuel pursuant to the contracts for this period of time.
RATES
HECO, MECO and HELCO are subject to the regulatory jurisdiction of the PUC with
respect to rates, issuance of securities, accounting and certain other matters.
See "Regulation and other matters--Electric utility regulation."
All rate schedules of HECO and its subsidiaries contain energy cost adjustment
clauses as described previously. Under current law and practices, specific and
separate PUC approval is not required for each rate change pursuant to automatic
rate adjustment clauses previously approved by the PUC. Rate increases, other
than pursuant to such automatic adjustment clauses, require the prior approval
of the PUC after public and contested case hearings. PURPA requires the PUC to
periodically review the energy cost adjustment clauses of electric and gas
utilities in the state, and such clauses, as well as the rates charged by the
utilities generally, are subject to change.
See the "Regulation of electric utility rates," "Recent rate requests" and
"Energy cost adjustment clauses" sections in HECO's MD&A.
RECENT RATE REQUEST
In March 1998, HELCO filed a request with the PUC to increase rates 11.5%, or
$17.3 million in annual revenues, based on a 1999 test year and a 12.5% return
on average common equity, primarily to recover the cost of two power generation
projects--an agreement to buy power from Encogen's 60-megawatt plant in Hamakua
and the cost of adding generating units at HELCO's Keahole power plant. Under
HELCO's request, the portion of the rate increase related to Encogen's
generators would not go into effect until the facilities are completed and
providing electric service to customers.
PUC SHOW CAUSE ORDER
See the "PUC show cause order for HECO" section in Note 12 to HECO's
Consolidated Financial Statements. HECO filed a motion to close the proceeding
in March 1998, based on the fact that the actual returns for 1997--a 10.26%
ROACE and a 8.75% ROR--were below the returns the PUC found to be fair and
reasonable in the last rate proceeding. The Consumer Advocate has filed with the
PUC a statement that it does not oppose HECO's request to close the proceedings.
Management cannot predict what future PUC action, if any, may be taken in this
proceeding.
11
COMPETITION
Legislation has been introduced in Congress that would restructure the electric
utility industry with a view toward increasing competition by, for example,
requiring retail wheeling and allowing customers to choose their generation
supplier. In addition, the PUC has instituted a proceeding to identify and
examine the issues surrounding electric competition and to determine the impact
of competition on the electric utility infrastructure in Hawaii. See the
"Competition" section in HECO's MD&A. In March 1998, the parties agreed to adopt
a collaborative process and schedule whereby they will submit initial position
papers and final position papers to the collaborative group in June 1998 and
September 1998, respectively, and a collaborative report to the PUC by December
1998. A resolution has been introduced in the Hawaii Legislature, which, if
adopted in its current form, would request that the Hawaii Department of
Business, Economic Development, and Tourism examine the impediments to electric
competition in the State of Hawaii and provide specific recommendations to the
Legislature by December 31, 1998, for legislation to expedite the PUC
proceedings on competition in the electric utility industry in Hawaii.
Management cannot predict what changes, if any, may result from these efforts or
any impact they may have on the Company's or HECO's consolidated financial
condition, results of operations or liquidity.
SAVINGS BANK--AMERICAN SAVINGS BANK, F.S.B.
- ---------------------------------------------
GENERAL
ASB was granted a federal savings bank charter in January 1987. Prior to that
time, ASB had operated since 1925 as the Hawaii division of American Savings &
Loan Association of Salt Lake City, Utah. As of December 31, 1997, ASB was the
third largest financial institution in the State of Hawaii with total assets of
$5.5 billion and deposits of $3.9 billion.
HEI agreed with the Office of Thrift Supervision's (OTS) predecessor regulatory
agency that ASB's regulatory capital would be maintained at a level of at least
6% of ASB's total liabilities, or at such greater amount as may be required from
time to time by regulation. Under the agreement, HEI's obligation to contribute
additional capital was limited to a maximum aggregate amount of approximately
$65.1 million. At December 31, 1997, HEI's maximum obligation to contribute
additional capital has been reduced to approximately $28.3 million because of
additional capital contributions of $36.8 million by HEI to ASB since the
acquisition, exclusive of capital contributions made in connection with ASB's
acquisition of most of the Hawaii operations of BoA. ASB is subject to OTS
regulations on dividends and other distributions applicable to financial
institutions regulated by the OTS.
ASB's earnings depend primarily on its net interest income--the difference
between the interest income earned on interest-earning assets (loans receivable,
mortgage-backed securities and investments) and the interest expense incurred on
interest-bearing liabilities (deposit liabilities and borrowings). Deposits
traditionally have been the principal source of ASB's funds for use in lending,
meeting liquidity requirements and making investments. ASB also derives funds
from receipt of interest and principal on outstanding loans receivable,
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 significant sources of funds.
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 Federal Deposit Insurance Corporation (FDIC) of 65.7 cents per
$100 of deposits insured by the Savings Association Insurance Fund (SAIF) and
held as of March 31, 1995. ASB's assessment was $8.3 million after tax and was
accrued in September 1996. The assessment resulted in a reduction of ASB's
deposit-insurance premiums from 23 cents to 6.48 cents per $100 of deposits,
effective January 1, 1997. With the reduction in deposit-insurance premiums,
ASB's annual after-tax savings was approximately $2 million for 1997.
For additional information about ASB, including ASB's acquisition of most of the
Hawaii operations of BoA in December 1997, see the "Savings Bank" sections under
HEI's MD&A and Note 4 to HEI's Consolidated Financial Statements.
12
The following table sets forth selected data for ASB for the years indicated:
Years ended December 31,
-----------------------------------------------
1997 1996 1995
- ----------------------------------------------------------------------------------------------------------
Common equity to assets ratio
Average common equity divided by average total assets..... 6.09% 6.21% 6.23%
Return on assets
Net income divided by average total assets (1)............ 0.67 (2) 0.43 (3) 0.71
Return on common equity
Net income divided by average common equity (1)........... 11.0 (2) 6.8 (3) 11.5
(1) Net income includes amortization of goodwill and core deposit intangibles.
Average balances for each year have been calculated using the average
month-end balances during the year, with the average balances for 1997
reflecting the effect of the acquisition of most of BoA's Hawaii operations
on December 6, 1997.
(2) Excluding the BoA - Hawaii one-time acquisition expenses, the return on
assets and return on common equity ratios would have been 0.70% and 12.1%,
respectively.
(3) Excluding the FDIC special assessment of $8.3 million after taxes, the
return on assets and return on common equity ratios would have been 0.70%
and 10.6%, respectively.
CONSOLIDATED AVERAGE BALANCE SHEET
The following table sets forth average balances of ASB's major balance sheet
categories for the years indicated. Average balances for each year have been
calculated using the average month-end or daily average balances during the
year, with the average balances for 1997 reflecting the effect of the
acquisition of most of BoA's Hawaii operations on December 6, 1997.
Years ended December 31,
---------------------------------------------------
(in thousands) 1997 1996 1995
- --------------------------------------------------------------------------------------------------------
ASSETS
Investment securities................................ $ 114,981 $ 83,163 $ 80,633
Mortgage-backed securities........................... 1,449,570 1,402,165 1,251,192
Loans receivable, net................................ 2,143,106 1,868,489 1,751,729
Other................................................ 213,124 167,894 173,895
--------------------------------------------
$3,920,781 $3,521,711 $3,257,449
============================================
LIABILITIES AND STOCKHOLDER'S EQUITY
Deposit liabilities.................................. $2,324,426 $2,210,058 $2,149,229
Other borrowings..................................... 1,261,511 1,023,223 835,310
Other................................................ 90,300 69,677 69,903
Stockholder's equity................................. 244,544 218,753 203,007
--------------------------------------------
$3,920,781 $3,521,711 $3,257,449
============================================
ASSET/LIABILITY MANAGEMENT
Interest rate sensitivity refers to the relationship between market interest
rates and net interest income resulting from the repricing of interest-earning
assets and interest-bearing liabilities. Interest rate risk arises when an
interest-earning asset matures or when its interest rate changes in a time frame
different from that of the supporting interest-bearing liability. Maintaining an
equilibrium between rate sensitive interest-earning assets and interest-bearing
liabilities will reduce some interest rate risk but it will not guarantee a
stable net interest spread because yields and rates may change simultaneously or
at different times and such changes may occur in differing increments. Market
rate fluctuations could materially affect the overall net interest spread even
if interest-earning assets and interest-bearing liabilities were perfectly
matched. The difference between the amounts of interest-earning assets and
interest-bearing liabilities that reprice during a given period is called "gap."
An asset-sensitive position or "positive gap" exists when more assets than
liabilities reprice within a given period; a liability-sensitive position or
"negative gap" exists when more liabilities than assets reprice within a given
period. A positive gap generally produces more net interest income in periods of
rising interest rates and a negative gap generally produces more net interest
income in periods of falling interest rates.
13
As of December 31, 1997, the gap in the near term (0-6 months) was a negative
7.3% of total assets as compared to a cumulative one-year negative gap position
of 2.1% of total assets. The difference between the near-term and one-year
negative gap positions is primarily due to reduced amounts of repricing of
interest-bearing liabilities such as in short-term certificates of deposits and
other borrowings to support investment activities. The following table shows
ASB's interest rate sensitivity at December 31, 1997:
Cumulative amounts at December 31, 1997
subject to repricing within
-----------------------------------------------------------------------
6 months 6 months 1-5 Over 5
(dollars in millions) or less to 1 year years years Total (1)
- --------------------------------------------------------------------------------------------------------------
Interest-earning assets
- -----------------------
Real estate loans and mortgage-
backed securities
Balloon and adjustable rate......... $ 869 $ 828 $ 243 $ 3 $1,943
Fixed rate 1-4 unit residential..... 180 153 880 1,090 2,303
Other............................... 54 35 95 49 233
Consumer and other loans............. 230 11 55 54 350
Commercial loans..................... 44 4 16 8 72
Other interest-earning assets........ 122 42 -- -- 164
---------------------------------------------------------------------
Total interest-earning assets........ 1,499 1,073 1,289 1,204 5,065
---------------------------------------------------------------------
Interest-bearing liabilities
- ----------------------------
Certificate accounts................. 1,087 393 238 66 1,784
Money market accounts................ 56 47 213 32 348
Negotiable Order of Withdrawal accounts 66 59 334 169 628
Passbook accounts.................... 175 67 440 475 1,157
FHLB advances........................ 246 105 197 188 736
Other borrowings..................... 274 113 -- -- 387
----------------------------------------------------------------------------
Total interest-bearing liabilities... 1,904 784 1,422 930 5,040
----------------------------------------------------------------------------
Interest rate sensitivity gap (2)... $ (405) $ 289 $ (133) $ 274 $ 25
============================================================================
Cumulative interest rate
sensitivity gap.................... $ (405) $ (116) $ (249) $ 25
============================================================
Cumulative interest rate sensitivity
gap over total assets.............. (7.30)% (2.09)% (4.49)% 0.45%
- ---------------------------------------------------------------------------------------------------------------------
(1) The table does not include $483 million of noninterest-earning assets and
$112 million of noninterest-bearing liabilities.
(2) The difference between the total interest-earning assets and the total
interest-bearing liabilities.
14
INTEREST INCOME AND INTEREST EXPENSE
The following table sets forth average balances, interest and dividend income,
interest expense and weighted average yields earned and rates paid, for certain
categories of interest-earning assets and interest-bearing liabilities for the
years indicated. Average balances for each year have been calculated using the
average month-end or daily average balances during the year, with the average
balances for 1997 reflecting the effect of the acquisition of most of BoA's
Hawaii operations on December 6, 1997.
Years ended December 31,
-----------------------------------------------------------
(dollars in thousands) 1997 1996 1995
- ---------------------------------------------------------------------------------------------------------
Loans
Average balances.......................... $2,143,106 $1,868,489 $1,751,729
Interest income........................... $ 174,489 $ 155,865 $ 146,046
Weighted average yield.................... 8.14% 8.34% 8.34%
Mortgage-backed securities
Average balances.......................... $1,449,570 $1,402,165 $1,251,192
Interest income........................... $ 95,990 $ 94,561 $ 85,727
Weighted average yield.................... 6.62% 6.74% 6.85%
Investments (1)
Average balances.......................... $ 114,981 $ 83,163 $ 80,633
Interest and dividend income.............. $ 7,139 $ 5,288 $ 4,921
Weighted average yield.................... 6.21% 6.36% 6.10%
Total interest-earning assets
Average balances.......................... $3,707,657 $3,353,817 $3,083,554
Interest and dividend income.............. $ 277,618 $ 255,714 $ 236,694
Weighted average yield.................... 7.49% 7.62% 7.68%
Deposits
Average balances.......................... $2,324,426 $2,210,058 $2,149,229
Interest expense.......................... $ 89,099 $ 91,164 $ 89,296
Weighted average rate..................... 3.83% 4.12% 4.15%
Borrowings
Average balances.......................... $1,261,511 $1,023,223 $ 835,310
Interest expense.......................... $ 75,563 $ 62,500 $ 53,409
Weighted average rate..................... 5.99% 6.11% 6.39%
Total interest-bearing liabilities
Average balances.......................... $3,585,937 $3,233,281 $2,984,539
Interest expense.......................... $ 164,662 $ 153,664 $ 142,705
Weighted average rate..................... 4.59% 4.75% 4.78%
Net balance, net interest income
and interest rate spread
Net balance.............................. $ 121,720 $ 120,536 $ 99,015
Net interest income...................... $ 112,956 $ 102,050 $ 93,989
Interest rate spread..................... 2.90% 2.87% 2.90%
(1) Investments include stock in the Federal Home Loan Bank of Seattle.
15
The following table shows the effect on net interest income of (1) changes in
interest rates (change in weighted average interest rate multiplied by prior
year average portfolio balance) and (2) changes in volume (change in average
portfolio balance multiplied by prior period rate). Any remaining change is
allocated to the above two categories on a pro rata basis.
Increase (decrease) due to
----------------------------------------------
(in thousands) Rate Volume Total
- ---------------------------------------------------------------------------------------------------------
Year ended December 31, 1997 vs. 1996
- -----------------------------------------------------------
Income from interest-earning assets
Loan portfolio............................................ $(3,813) $22,437 $18,624
Mortgage-backed securities................................ (1,712) 3,141 1,429
Investments............................................... (128) 1,979 1,851
--------------------------------------
(5,653) 27,557 21,904
--------------------------------------
Expense from interest-bearing liabilities
Deposits.................................................. (6,622) 4,557 (2,065)
FHLB advances and other borrowings........................ (1,249) 14,312 13,063
--------------------------------------
(7,871) 18,869 10,998
--------------------------------------
Net interest income........................................ $ 2,218 $ 8,688 $10,906
======================================
Year ended December 31, 1996 vs. 1995
- -----------------------------------------------------------
Income from interest-earning assets
Loan portfolio............................................ $ -- $ 9,819 $ 9,819
Mortgage-backed securities................................ (1,391) 10,225 8,834
Investments............................................... 212 155 367
----------------------------------------
(1,179) 20,199 19,020
----------------------------------------
Expense from interest-bearing liabilities
Deposits.................................................. (647) 2,515 1,868
FHLB advances and other borrowings........................ (2,434) 11,525 9,091
----------------------------------------
(3,081) 14,040 10,959
----------------------------------------
Net interest income........................................ $ 1,902 $ 6,159 $ 8,061
========================================
OTHER INCOME
In addition to net interest income, ASB has various sources of other income,
including fee income from servicing loans, fees on deposit accounts, rental
income from premises and other income. Other income totaled approximately
$16.5 million in 1997, $15.7 million in 1996 and $17.9 million in 1995. The
decrease in other income during 1996 was primarily due to a $3.9 million one-
time gain on sale of trading account securities in 1995. Excluding the one-time
gain on sale of approximately $49.5 million of trading account securities in
1995, other income for 1996 increased $1.7 million over 1995 due to increases in
fee income from servicing loans.
LENDING ACTIVITIES
General. ASB's net loan and mortgage-backed securities portfolio increased to
approximately $4.9 billion at December 31, 1997 primarily due to the purchase of
$0.9 billion of Hawaii-based BoA loans and the purchase, primarily in
anticipation of the BoA acquisition, of $0.8 billion in mortgage-backed
securities. Loans and mortgage-backed securities represent 88.3% of total assets
at December 31, 1997, compared to $3.3 billion, or 93.1%, and $3.1 billion, or
91.8%, at December 31, 1996 and 1995, respectively. ASB's loan portfolio
consists primarily of conventional residential mortgage loans which are not
insured by the Federal Housing Administration or guaranteed by the Veterans
Administration.
16
The following tables set forth the composition of ASB's loan and mortgage-backed
securities portfolio:
December 31,
-------------------------------------------------------------------------------------------
1997 1996 1995
-------------------------------------------------------------------------------------------
(dollars in thousands) Balance % of total Balance % of total Balance % of total
- --------------------------------------------------------------------------------------------------------------------------
Real estate loans (1)
Conventional................... $2,631,298 53.69% $1,800,365 53.87% $1,495,955 47.75%
Construction and development... 32,569 0.67 29,964 0.89 29,650 0.95
----------------------------------------------------------------------------------------
2,663,867 54.36 1,830,329 54.76 1,525,605 48.70
Less
Deferred fees and discounts.... (16,055) (0.33) (17,759) (0.53) (15,244) (0.49)
Undisbursed loan funds......... (13,724) (0.28) (14,532) (0.43) (10,422) (0.33)
Allowance for losses........... (20,450) (0.42) (15,792) (0.47) (10,837) (0.34)
----------------------------------------------------------------------------------------
Total real estate loans, net... 2,613,638 53.33 1,782,246 53.33 1,489,102 47.54
----------------------------------------------------------------------------------------
Other loans
Loans on deposits.............. 17,473 0.36 15,441 0.46 15,688 0.50
Consumer and other loans....... 342,146 6.98 192,315 5.75 170,743 5.45
Commercial loans............... 88,315 1.80 18,548 0.56 20,560 0.66
----------------------------------------------------------------------------------------
447,934 9.14 226,304 6.77 206,991 6.61
Less
Deferred fees and discounts.... (14) (0.00) (23) (0.00) (38) (0.00)
Undisbursed loan funds......... (16,211) (0.33) (3,086) (0.09) (6,175) (0.20)
Allowance for losses........... (9,500) (0.19) (3,413) (0.10) (2,079) (0.07)
----------------------------------------------------------------------------------------
Total other loans, net......... 422,209 8.62 219,782 6.58 198,699 6.34
----------------------------------------------------------------------------------------
Mortgage-backed securities,
net of discounts.............. 1,865,027 38.05 1,340,073 40.09 1,444,832 46.12
----------------------------------------------------------------------------------------
Total loans and
mortgage-backed securities,
net.......................... $4,900,874 100.00% $3,342,101 100.00% $3,132,633 100.00%
=========================================================================================
(1) Includes renegotiated loans.
17
December 31,
--------------------------------------------------------------
1994 1993
--------------------------------------------------------------
(dollars in thousands) Balance % of total Balance % of total
- ----------------------------------------------------------------------------------------------------------------------
Real estate loans (1)
Conventional..................................... $1,657,935 57.34% $1,587,615 67.12%
Construction and development..................... 36,184 1.25 26,526 1.12
--------------------------------------------------------------
1,694,119 58.59 1,614,141 68.24
Less
Deferred fees and discounts..................... (21,159) (0.73) (26,728) (1.13)
Undisbursed loan funds.......................... (16,056) (0.56) (13,142) (0.55)
Allowance for losses............................ (7,259) (0.25) (3,962) (0.17)
--------------------------------------------------------------
Total real estate loans, net..................... 1,649,645 57.05 1,570,309 66.39
--------------------------------------------------------------
Other loans
Loans on deposits................................ 15,378 0.53 15,015 0.63
Consumer and other loans......................... 144,505 5.00 129,961 5.49
Commercial loans................................. 18,369 0.64 24,494 1.04
--------------------------------------------------------------
178,252 6.17 169,470 7.16
Less
Deferred fees and discounts..................... (52) (0.00) (156) (0.01)
Undisbursed loan funds.......................... (2,256) (0.08) (3,173) (0.13)
Allowance for losses............................ (1,534) (0.05) (1,352) (0.06)
--------------------------------------------------------------
Total other loans, net........................... 174,410 6.04 164,789 6.96
--------------------------------------------------------------
Mortgage-backed securities, net of discounts..... 1,067,287 36.91 630,156 26.65
--------------------------------------------------------------
Total loans and mortgage-backed
securities, net.............................. $2,891,342 100.00% $2,365,254 100.00%
==============================================================
(1) Includes renegotiated loans.
Origination, purchase and sale of loans. Generally, loans originated and
purchased by ASB are secured by real estate located in Hawaii. As of
December 31, 1997, approximately $84.3 million of loans purchased from other
lenders were secured by properties located in the continental United States. For
additional information, including information concerning the geographic
distribution of ASB's mortgage-backed securities portfolio and the geographic
concentration of credit risk, see Note 19 to HEI's Consolidated Financial
Statements.
The amount of loans originated during 1997, 1996, 1995, 1994 and 1993 were
$327 million, $498 million, $382 million, $523 million and $564 million,
respectively. The decreases in loans originated in 1997 from 1996, in 1995 from
1994 and in 1994 from 1993 were due in part to the slow Hawaii real estate
market. The increase in loans originated in 1996 from 1995 was due primarily to
higher refinancings of residential mortgage loans from other financial
institutions.
Residential mortgage lending. During 1997 and 1996 the demand for adjustable
rate mortgage (ARM) loans over fixed rate loans decreased compared with 1995.
ARM loans carry adjustable interest rates which are typically set according to a
short-term index. Payment amounts may be adjusted periodically based on changes
in interest rates. ARM loans represented approximately 7.7% of the total
originations of first mortgage loans in 1997, compared to 12.6% and 27.7% in
1996 and 1995, respectively. ASB intends to continue to emphasize the
origination and purchase of ARM loans to further improve its asset/liability
structure.
ASB is permitted to lend up to 100% of the appraised value of the real property
securing a loan. Its general policy is to require private mortgage insurance
when the loan-to-value ratio of the property exceeds 80% of the lower of the
appraised value or purchase price at origination. For nonowner-occupied
residential properties, the loan-to-value ratio may not exceed 90% of the lower
of the appraised value or purchase price at origination.
18
Construction and development lending. ASB provides both fixed and adjustable
rate loans for the construction of one-to-four residential unit and commercial
properties. Construction and development financing generally involves a higher
degree of credit risk than long-term financing on improved, occupied real
estate. Accordingly, all construction and development loans are priced higher
than loans secured by completed structures. ASB's underwriting, monitoring and
disbursement practices with respect to construction and development financing
are designed to ensure sufficient funds are available to complete construction
projects. As of December 31, 1997, 1996 and 1995, construction and development
loans represented 1.0%, 1.5% and 1.2%, respectively, of ASB's gross loan
portfolio. See "Loan portfolio risk elements."
Multi-family residential and commercial real estate lending. Permanent loans
secured by multi-family properties (generally apartment buildings), as well as
commercial and industrial properties (including office buildings, shopping
centers and warehouses), are originated by ASB for its own portfolio as well as
for participation with other lenders. In 1997, 1996 and 1995, loans on these
types of properties accounted for approximately 2.7%, 3.2% and 5.9%,
respectively, of ASB's total mortgage loan originations. The objective of
commercial real estate lending is to diversify ASB's loan portfolio to include
sound, income-producing properties.
Consumer lending. ASB offers a variety of secured and unsecured consumer loans.
Loans secured by deposits are limited to 90% of the available account balance.
ASB also offers VISA cards, automobile loans, general purpose consumer loans,
second mortgage loans, home equity lines of credit, checking account overdraft
protection and unsecured lines of credit. In 1997, 1996 and 1995, loans of these
types accounted for approximately 9.0%, 8.0% and 11.5%, respectively, of ASB's
total loan originations.
Corporate banking/commercial lending. ASB is authorized to make both secured
and unsecured corporate banking loans to business entities. This lending
activity is designed to diversify ASB's asset structure, shorten maturities,
provide rate sensitivity to the loan portfolio and attract business checking
deposits. ASB acquired $56.9 million of corporate banking loans from BoA. As of
December 31, 1997, 1996 and 1995, corporate banking loans represented 2.8%, 0.8%
and 0.9%, respectively, of ASB's total net loan portfolio.
Loan origination fee and servicing income. In addition to interest earned on
loans, ASB receives income from servicing of loans, for late payments and from
other related services. Servicing fees are received on loans originated and
subsequently sold by ASB through a securitization process and also on loans for
which ASB acts as collection agent on behalf of third-party purchasers. ASB
acquired the servicing rights for approximately $305 million of residential
loans from BoA.
ASB generally charges the borrower at loan settlement a loan origination fee
ranging from 2% to 3% of the amount borrowed. See the "Loan origination and
commitment fees" section in Note 1 to HEI's Consolidated Financial Statements.
Loan portfolio risk elements. When a borrower fails to make a required payment
on a loan and does not cure the delinquency promptly, the loan is classified as
delinquent. If delinquencies are not cured promptly, ASB normally commences a
collection action, including foreclosure proceedings in the case of secured
loans. In a foreclosure action, the property securing the delinquent debt is
sold at a public auction in which ASB may participate as a bidder to protect its
interest. If ASB is the successful bidder, the property is classified in a real
estate owned account until it is sold. ASB's real estate acquired in settlement
of loans represented 0.07% of total assets at December 31, 1997 and 1996 and
0.08% of total assets at December 31, 1995.
In addition to delinquent loans, other significant lending risk elements
include: (1) accruing loans which are over 90 days past due as to principal or
interest, (2) loans accounted for on a nonaccrual basis (nonaccrual loans), and
(3) loans on which various concessions are made with respect to interest rate,
maturity, or other terms due to the inability of the borrower to service the
obligation under the original terms of the agreement (renegotiated loans). ASB
has no loans which are over 90 days past due on which interest is being accrued
for the years presented in the table below. The level of nonaccrual and
renegotiated loans represented 2.4%, 2.5%, 1.7%, 1.4% and 0.5%, of ASB's total
net loans outstanding
19
at December 31, 1997, 1996, 1995, 1994 and 1993, respectively. The following
table sets forth certain information with respect to nonaccrual and renegotiated
loans as of the dates indicated:
December 31,
-----------------------------------------------------------------
(in thousands) 1997 1996 1995 1994 1993
- -----------------------------------------------------------------------------------------------------------
Nonaccrual loans-
Real estate
1-4 unit residential..................... $36,643 $23,585 $11,533 $ 8,773 $5,006
Income property.......................... 29,955 19,832 13,820 14,224 220
-----------------------------------------------------------------
Total real estate......................... 66,598 43,417 25,353 22,997 5,226
Commercial................................ 776 937 11 25 38
Consumer.................................. 4,435 2,701 1,702 793 460
-----------------------------------------------------------------
Total nonaccrual loans.................... $71,809 $47,055 $27,066 $23,815 $5,724
=================================================================
Renegotiated loans not included above-
Real estate
1-4 unit residential..................... $ 2,264 $ 3,211 $ 1,053 $ 1,004 $ 381
Income property.......................... -- -- -- -- 1,486
Commercial............................... -- -- -- -- 324
-----------------------------------------------------------------
Total renegotiated loans.................. $ 2,264 $ 3,211 $ 1,053 $ 1,004 $2,191
=================================================================
ASB's policy generally is to place mortgage loans on a nonaccrual status
(interest accrual is suspended) when the loan becomes more than 90 days past due
or on an earlier basis when there is a reasonable doubt as to its
collectability. Loans on nonaccrual status amounted to $71.8 million (2.3% of
total loans), $47.1 million (2.3% of total loans), $27.1 million (1.6% of total
loans), $23.8 million (1.3% of total loans) and $5.7 million (0.3% of total
loans) at December 31, 1997, 1996, 1995, 1994 and 1993, respectively.
Since 1994, the increases in nonaccrual loans were a result of Hawaii's weak
economy. In 1994, a rising trend of delinquencies resulted in a $3.8 million
increase in nonaccrual residential loans, and the $14.0 million increase in
nonaccrual income property loans was primarily due to three commercial real
estate loans with principal balances totaling $11.8 million that were
renegotiated. In 1996, the $20.0 million increase in nonaccrual real estate
loans can be attributed primarily to a single real estate developer with
residential, commercial real estate and commercial loans totaling approximately
$16.5 million that were restructured during 1996. In 1997, the $24.7 million
increase in nonaccrual loans includes a $13.1 million increase in smaller
balance residential loans and a $10.1 million increase in income property real
estate loans.
Allowance for loan losses. The provision for loan losses is dependent upon
management's evaluation as to the amount required to maintain the allowance for
loan losses at a level considered appropriate in relation to the risk of future
losses inherent in the loan portfolio. While management attempts to use the best
information available to make evaluations, future adjustments may be necessary
as circumstances change and additional information becomes available.
20
The following table presents the changes in the allowance for loan losses for
the years indicated.
Years ended December 31,
----------------------------------------------------------------
(dollars in thousands) 1997 1996 1995 1994 1993
- --------------------------------------------------------------------------------------------------------------------
Allowance for loan losses, beginning of year...... $19,205 $12,916 $ 8,793 $5,314 $5,157
Additions to provisions for losses................ 6,934 7,631 4,887 3,983 779
Allowance for losses on loans acquired from BoA... 6,445 -- -- -- --
NET CHARGE-OFFS
Real estate loans................................. 992 390 69 109 --
Other loans....................................... 1,642 952 695 395 622
----------------------------------------------------------------
Total net charge-offs............................. 2,634 1,342 764 504 622
----------------------------------------------------------------
Allowance for loan losses, end of year............ $29,950 $19,205 $12,916 $8,793 $5,314
================================================================
Ratio of net charge-offs during the year to
average loans outstanding.................... 0.12% 0.07% 0.04% 0.03% 0.04%
======================================================================
ASB's ratio of provisions for loan losses during the year to average loans
outstanding was 0.32%, 0.41%, 0.28%, 0.21% and 0.05% for the years ended
December 31, 1997, 1996, 1995, 1994 and 1993, respectively. In 1997, a
nonspecific allowance for loan losses amounting to approximately $6.4 million
was recorded in assigning acquisition cost to the loans receivable acquired from
BoA. In 1997, 1996 and 1995, to establish additional specific loss allowances
and in response to a rising trend of delinquencies caused by Hawaii's weak
economy, ASB increased its loss reserve by $4.3 million, $6.3 million and $4.1
million, respectively.
INVESTMENT ACTIVITIES
In recent years, ASB's investment portfolio has consisted primarily of stock of
the FHLB of Seattle, federal agency obligations and mortgage-backed securities.
In response to the then increasing interest rate environment, management decided
in 1994 to liquidate ASB's portfolio of securities held for trading and the
liquidation was completed in October 1994. ASB recognized a one-time gain on
sale of trading account securities in 1995 in accordance with implementation
guidance provided in a FASB special report. ASB did not maintain a portfolio of
securities held for trading during 1996 or 1997.
ASB's investment portfolio, excluding mortgage-backed securities to be held-to-
maturity, consisted of a $42.1 million investment in U.S. Treasury securities
and a $63.5 million investment in FHLB stock as of December 31, 1997. Investment
in FHLB stock amounted to $37.5 million and $34.7 million as of December 31,
1996 and 1995, respectively. The weighted average rate on investments during
1997, 1996 and 1995 was 7.57%, 7.80% and 6.03%, respectively. The amount that
ASB invests in FHLB stock is determined by regulatory requirements. See
"Regulation and other matters--Savings bank regulation--Federal Home Loan Bank
System."
DEPOSITS AND OTHER SOURCES OF FUNDS
General. Deposits traditionally have been the principal source of ASB's funds
for use in lending, meeting liquidity requirements and making investments. ASB
also derives funds from receipt of interest and principal on outstanding loans
receivable and mortgage-backed securities, borrowings from the FHLB of Seattle,
securities sold under agreements to repurchase and other sources. ASB borrows on
a short-term basis to compensate for seasonal or other reductions in deposit
flows. ASB also may borrow on a longer-term basis to support expanded lending or
investment activities. In the last few years, securities sold under agreements
to repurchase and advances from the FHLB have become significant
sources of funds as the demand for deposits has decreased. Using higher cost
sources of funds puts downward pressure on ASB's net interest income.
Deposits. ASB's deposits are obtained primarily from residents of Hawaii. In
1997, ASB had average deposits of $2.3 billion, with a net savings inflow of
$21.9 million, excluding interest credited to deposit accounts and excluding
$1.7 billion in deposits assumed from BoA. The net savings outflow for 1996 of
$152 million was due to competition from the equity market and management's
decision not to pursue high-priced certificates of deposits. In 1995, ASB had
average deposits of $2.1 billion, with a net
21
savings inflow of $15 million, excluding interest credited to deposit accounts.
In the three years ended December 31, 1997, ASB had no deposits placed by or
through a broker.
The following table illustrates the distribution of ASB's average deposits and
average daily rates by type of deposit for the years indicated. Average balances
for a year have been calculated using the average of month-end balances during
the year, with the average balances for 1997 reflecting the effect of the
acquisition of most of BoA's Hawaii operations on December 6, 1997.
Years ended December 31,
-------------------------------------------------------------------------------------------------------------
1997 1996 1995
-------------------------------------------------------------------------------------------------------------
% of Weighted % of Weighted % of Weighted
Average total average Average total average Average total average
(dollars in thousands) balance deposits rate % balance deposits rate % balance deposits rate %
---------------------------------------------------------------------------------------------------------------------------------
Passbook accounts....... $ 899,368 38.7% 2.98% $ 922,129 41.7% 3.41% $ 978,858 45.5% 3.48%
Negotiable Order of
Withdrawal accounts.... 305,626 13.2 1.19 271,696 12.3 1.60 264,996 12.4 2.09
Money market accounts... 93,425 4.0 3.76 65,494 3.0 3.51 66,634 3.1 3.43
Certificate accounts.... 1,026,007 44.1 5.38 950,739 43.0 5.59 838,741 39.0 5.66
-------------------------------------------------------------------------------------------------------
Total deposits......... $2,324,426 100.0% 3.83% $2,210,058 100.0% 4.12% $2,149,229 100.0% 4.15%
==========================================================================================================
At December 31, 1997, ASB had $741 million in certificate accounts of $100,000 or more, maturing as follows:
(in thousands) Amount
- -----------------------------------------------------------------------------------------------
Three months or less.......................................................... $373,741
Greater than three months through six months.................................. 217,072
Greater than six months through twelve months................................. 94,704
Greater than twelve months.................................................... 55,187
--------
$740,704
========
Borrowings. ASB obtains advances from the FHLB of Seattle provided certain
standards related to creditworthiness have been met. Advances are secured under
a blanket pledge of the common stock ASB owns in the FHLB, mortgage-backed
securities and certain notes held by ASB and the mortgages securing them. FHLB
advances generally are available to meet seasonal and other withdrawals of
deposit accounts, to expand lending and to assist in the effort to improve asset
and liability management. FHLB advances are made pursuant to several different
credit programs offered from time to time by the FHLB of Seattle.
At December 31, 1997, 1996 and 1995, advances from the FHLB amounted to
$736 million, $684 million and $501 million, respectively. The weighted average
rates on the advances from the FHLB outstanding at December 31, 1997, 1996 and
1995 were 6.26%, 6.42% and 6.52%, respectively. The maximum amount outstanding
at any month-end during 1997, 1996 and 1995 was $941 million, $691 million and
$618 million, respectively. Advances from the FHLB averaged $701 million,
$560 million and $559 million during 1997, 1996 and 1995, respectively, and the
approximate weighted average rate thereon was 6.32%, 6.49% and 6.55%,
respectively. During 1995, advances decreased as securities sold under
agreements to repurchase provided a lower cost funding source. During 1996, the
increase in advances supported investment activities as management decided not
to pursue high-priced certificates of deposits. During 1997, increased advances
from the FHLB were needed to support investment activities. In anticipation of
the BoA acquisition, ASB acquired approximately $0.8 billion in mortgage-backed
securities which were temporarily funded in part by advances from the FHLB.
At December 31, 1997 and 1996, securities sold under agreements to repurchase
consisted of mortgage-backed securities sold to brokers/dealers under fixed-
coupon agreements. The agreements are treated as financings and the obligations
to repurchase securities sold are reflected as a liability in the consolidated
balance sheets. The dollar amount of securities underlying the agreements
remains in the asset accounts. At December 31, 1997, 1996 and 1995, $375 million
(including accrued interest of $0.9 million), $480 million (including accrued
interest of $1.6 million) and $413 million (including accrued interest of
$2.5 million) of the agreements were to repurchase identical securities,
respectively. The weighted average rates on securities sold under agreements to
repurchase outstanding at December 31, 1997, 1996
22
and 1995 were 5.71%, 5.50% and 5.84%, respectively. The maximum amount
outstanding at any month-end during 1997, 1996 and 1995 was $765 million,
$480 million and $413 million, respectively. Securities sold under agreements to
repurchase averaged $560 million, $463 million and $277 million during 1997,
1996 and 1995, respectively, and the approximate weighted average interest rate
thereon was 5.58%, 5.65% and 6.08%, respectively. During 1997, increased
securities sold under agreements to repurchase were needed to temporarily fund
the purchase of mortgage-backed and investment securities in anticipation of the
BoA acquisition. During 1996 and 1995, increased securities sold under
agreements to repurchase were needed to support investment activities as the
demand for deposits decreased.
Other borrowings as of December 31, 1997 represents cash management repurchase
transactions. ASB sweeps selected commercial customers' excess deposit balances
into an overnight repurchase transaction.
Subject to obtaining certain approvals from the FHLB of Seattle, ASB may offer
collateralized medium-term notes due from nine months to 30 years from the date
of issue and bearing interest at a fixed or floating rate established at the
time of issue. At December 31, 1997, 1996 and 1995, ASB had no outstanding
collateralized medium-term notes.
The following table sets forth information concerning ASB's advances from FHLB
and other borrowings at the dates indicated:
December 31,
-----------------------------------------------------
(dollars in thousands) 1997 1996 1995
- -----------------------------------------------------------------------------------------------------------
Advances from FHLB.................................... $ 736,474 $ 684,274 $501,274
Securities sold under agreements to repurchase........ 375,366 479,742 412,521
Other borrowings...................................... 11,326 -- --
-----------------------------------------------------
Total borrowings...................................... $1,123,166 $1,164,016 $913,795
=====================================================
Weighted average rate................................. 6.06% 6.04% 6.21%
=====================================================
COMPETITION
The primary factors in competing for deposits are interest rates, the quality
and range of services offered, marketing, convenience of locations, hours and
perceptions of the institution's financial soundness and safety. Competition for
deposits comes primarily from other savings institutions, commercial banks,
credit unions, money market and mutual funds and other investment alternatives.
In Hawaii, there were 3 thrifts, 16 FDIC-insured banks and 117 credit unions at
December 31, 1997. Additional competition for deposits comes from various types
of corporate and government borrowers, including insurance companies. To meet
the competition, ASB offers a variety of savings and checking accounts at
competitive rates, convenient business hours, convenient branch locations with
interbranch deposit and withdrawal privileges at each branch and approximately
150 convenient automated teller machines. ASB also conducts advertising and
promotional campaigns.
The primary factors in competing for first mortgage and other loans are interest
rates, loan origination fees and the quality and range of lending services
offered. Competition for origination of first mortgage loans comes primarily
from other savings institutions, mortgage banking firms, commercial banks,
insurance companies and real estate investment trusts. ASB believes that it is
able to compete for such loans primarily through the interest rates and loan
fees it charges, the type of mortgage loan programs it offers and the efficiency
and quality of the services it provides its borrowers and the real estate
business community.
In recent years, there's been significant bank and thrift merger activity in
Hawaii. Management cannot predict the impact, if any, of these mergers on the
Company's future competitive position, results of operations, financial
condition or liquidity.
Recent Supreme Court ruling. The 1934 Federal Credit Union Act says membership
"shall be limited to groups having a common bond of occupation or association"
or to groups in a well-defined geographical area. In 1982, the National Credit
Union Administration expanded its definition of "common bond." Small businesses
that lacked enough workers to form their own credit unions were allowed to join
existing credit unions, so long as each group of employees had its own "bond."
Government officials say
23
that rule has let credit unions add about 15 million people to their membership
rolls. A group of North Carolina banks and the American Bankers Association sued
the government, saying the 1934 law required all members of a credit union to
share a single common bond. A federal appeals court ruled in the bankers' favor
in July 1997, and the Supreme Court ruled in the bankers' favor in February
1998. Although this ruling could result in increased deposits for ASB,
legislation has been proposed in Congress to retroactively authorize such
expansions in credit union membership.
OTHER
- -----
FREIGHT TRANSPORTATION -- HAWAIIAN TUG & BARGE CORP. AND YOUNG BROTHERS, LIMITED
- --------------------------------------------------------------------------------
GENERAL
HTB and its wholly owned subsidiary, YB, were acquired in 1986. A substantial
portion of the state's commodities are imported. HTB provides marine
transportation services in Hawaii and the Pacific area, including charter tug
and barge and harbor tug operations. YB, which is a regulated interisland cargo
carrier, transports general freight and containerized cargo by barge on a
regular schedule between all major ports in Hawaii. YB moved 3.5 million revenue
tons of cargo between the islands in 1997, compared to 3.3 million revenue tons
in 1996.
YB has a nonexclusive Certificate of Public Convenience and Necessity from the
PUC to operate as an intrastate common carrier by water. The Certificate will
remain in effect for an indefinite period unless suspended or terminated by the
PUC. YB encounters competition from, among others, interstate carriers and
unregulated contract carriers.
YB RATES
YB generally must accept for transport all cargo offered. YB rates and charges
must be approved by the PUC and the PUC has broad discretion in its regulation
of the rates charged by YB.
See the "Other" section of HEI's MD&A for additional information about YB's rate
increases.
REAL ESTATE--MALAMA PACIFIC CORP.
- --------------------------------
GENERAL
MPC was incorporated in 1985 and engages in real estate development activities,
both directly and through joint ventures.
MPC's real estate development investments and residential projects are targeted
for Hawaii's owner-occupant market. MPC is currently involved in the development
of four residential projects (Kua' Aina Ridge, Westhills at Makakilo Heights,
Piilani Village Phase 1 and Sunrise Estates) on approximately 268 acres of land
on the islands of Oahu, Maui and Hawaii encompassing approximately 450 homes or
lots, of which approximately 375 have been completed and sold. MPC and its joint
ventures own approximately 424 acres of land for future residential development.
Residential development generally requires a long lead time to obtain necessary
zoning changes, building permits and other required approvals. MPC's projects
are subject to the usual risks of real estate development, including
fluctuations in interest rates, the receipt of timely and appropriate state and
local zoning and other necessary approvals, possible cost overruns and
construction delays, adverse changes in general commerce and local market
conditions, compliance with applicable environmental and other regulations, and
potential competition from other new projects and resales of existing
residences.
JOINT VENTURE DEVELOPMENTS
Sunrise Estates. In 1990, MDC and HSC, Inc. formed Sunrise Estates Joint
Venture to develop and sell 165 one-acre house lots in Hilo, Hawaii (island of
Hawaii). Through 1993, sales of 156 lots closed. Subdivision approval for the
remaining nine lots was received in 1995. In 1996 and 1997, sales of five lots
closed.
In 1991, HSC, Inc. and Malama Elua Corp., a wholly owned subsidiary of MPC,
formed Sunrise Estates II Joint Venture to develop and sell approximately 146
one-acre house lots in Hilo, Hawaii, adjacent to the Sunrise Estates Joint
Venture project. Rezoning was completed in 1993 and the joint venture has
submitted the subdivision map for approval.
Baldwin*Malama. In 1990, MDC acquired a 50% general partnership interest in
Baldwin*Malama, a partnership with Baldwin Pacific Properties, Inc. (BPPI),
established to acquire approximately 172 acres
24
of land for potential development of about 780 single and multi-family
residential units in Kihei on the island of Maui. In 1994, the project received
approval to increase density to approximately 1,000 units. The first phase of
100 single family units is complete, and as of December 31, 1997, 99 units were
sold.
In May 1993, Baldwin*Malama was reorganized as a limited partnership in which
MDC is the sole general partner and BPPI is the sole limited partner. Beginning
in May 1993, MDC consolidated the accounts of Baldwin*Malama. Previously, MDC
accounted for its investment in Baldwin*Malama under the equity method. In
conjunction with the dissolution of the Baldwin*Malama general partnership and
formation of the limited partnership, MPC agreed to loan $1.6 million to BPPI
and up to $15 million to the limited partnership. Through 1997, MPC agreed to
increase the maximum loan amount to Baldwin*Malama up to $39.0 million. As of
December 31, 1997, the outstanding balances on MPC's loans to BPPI and
Baldwin*Malama were $0.8 million and $25.1 million, respectively.
Palailai Associates. Malama Mohala Corp. (MMO) owns a 50% interest in Palailai
Associates. In 1993, Palailai Associates completed the development and sale of
the first increment of 107 homes and lots and completed the bulk sale of its
38.8 acres of multi-family zoned land in Makakilo, Oahu. The second increment of
69 single family homes is also completed and sold. The third increment of 100
single family homes is in progress with 73 homes completed and sold as of
December 31, 1997. Palailai Associates owns approximately 47 acres of adjacent
land zoned for residential development.
MMO PROJECTS
Kipona Hills is a 66-unit subdivision located in Waikoloa on the island of
Hawaii. As of December 31, 1996, all homes or lots were completed and sold.
Kua' Aina Ridge is a 92-lot subdivision in Pukalani, Maui. Sales closings
commenced in 1993. As of December 31, 1997, 41 homes or lots were available for
sale.
Kehaulani Place, consisting of approximately 51 acres of land in Pukalani, Maui,
is currently zoned for agriculture. Rezoning and land-use reclassification will
be required before development can commence. Land planning and presentations to
local community groups commenced in 1993 and are ongoing.
PROJECT FINANCING
At December 31, 1997, MPC or its subsidiaries were directly liable for
$10.0 million of outstanding loans and had additional loan facilities of
$0.8 million. See the "Commitments and contingencies" section in Note 5 to HEI's
Consolidated Financial Statements. MPC or its subsidiaries may enter into
additional commitments in connection with the financing of future phases of
development of MPC's projects and HEI may enter into similar agreements
regarding the ownership and financial condition of MPC.
HEI INVESTMENT CORP.
- --------------------
HEIIC was incorporated in May 1984 primarily to make passive, tax-advantaged
investments in corporate securities and other long-term investments. HEIIC is
not an "investment company" under the Investment Company Act of 1940 and has no
direct employees.
HEIIC's long-term investments consist primarily of investments in leveraged
leases. HEIIC has a 15% ownership interest in an 818-MW coal-fired generating
unit in Georgia, which is subject to a leveraged lease agreement. In 1987, HEIIC
purchased commercial buildings on leasehold properties located in the
continental United States, along with the related lease rights and obligations.
These leveraged, purchase-leaseback investments included two major buildings
housing operations of Hershey Foods in Pennsylvania and six supermarkets leased
to The Kroger Co. in various states. In 1995, HEIIC sold one of the six
supermarkets to the lessee pursuant to the provisions of the leveraged lease
agreement and recorded a net loss of $1.3 million on the sale. For further
information concerning HEIIC's investments in leveraged leases, see Note 7 to
HEI's Consolidated Financial Statements. No significant new investments are
currently planned by HEIIC.
HEI POWER CORP.
- ---------------
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.
In September 1996, HEIPC's subsidiary, HEI Power Corp. Guam (HPG), entered into
an energy conversion agreement for approximately 20 years with the Guam Power
Authority, pursuant to which
25
HPG has repaired and is operating and maintaining two oil-fired 25-MW (net)
units. On October 30, 1996, HEI filed with the SEC a "Notification of Foreign
Utility Company Status" on Form U-57 with respect to this project.
HEIPC is actively pursuing other projects in Asia and the Pacific. The success
of any project undertaken by HEIPC in foreign countries will be dependent on
many factors, including the economic, political, technological, regulatory and
logistical circumstances surrounding each project and the location of the
project. Due to political or regulatory actions or other circumstances, projects
may be delayed or even prohibited. There is no assurance that any project
undertaken by HEIPC will be successfully completed or that HEIPC's investment in
any such project will not be lost, in whole or in part.
For further discussion of HEIPC's operating losses and HPG's energy conversion
agreement, see the "Other" section in HEI's MD&A.
DISCONTINUED OPERATIONS
- -----------------------
For information concerning the Company's discontinued property and casualty
insurance operations formerly conducted by HIG and a nonutility wind energy
business, see Note 20 to HEI's Consolidated Financial Statements and the notes
to HEI's Selected Financial Data, incorporated herein by reference to page 25 of
HEI's 1997 Annual Report to Stockholders, portions of which are filed herein as
HEI Exhibit 13. Also see Item 3, "Legal proceedings-Discontinued operations."
REGULATION AND OTHER MATTERS
- ----------------------------
HOLDING COMPANY REGULATION
HEI and HECO are holding companies within the meaning of the Public Utility
Holding Company Act of 1935 (1935 Act). However, under current rules and
regulations, they are exempt from the comprehensive regulation of the Securities
and Exchange Commission (SEC) under the 1935 Act except for Section 9(a)(2)
(relating to the acquisition of securities of other public utility companies)
through compliance with certain annual filing requirements under the 1935 Act
for holding companies which own utility businesses that are intrastate in
character. The exemption afforded HEI and HECO may be revoked if the SEC finds
that such exemption "may be detrimental to the public interest or the interest
of investors or consumers." HEI and HECO may own or have interests in foreign
utility operations without adversely affecting this exemption so long as the
requirements of other exemptions under the 1935 Act are satisfied. HEI has
obtained the PUC certification which is a prerequisite to obtaining an exemption
for foreign utility operations and to the Company's maintenance of its exemption
under the 1935 Act if it acquires such ownership interests. See the previous
discussion of the HPG energy conversion agreement with the Guam Power Authority
under "Other-HEI Power Corp."
Legislation has been introduced in Congress that would repeal the 1935 Act
leaving the regulation of utility holding companies to be governed by other
federal and state laws. Management cannot predict if this legislation will be
enacted or the final form it might take.
HEI is subject to an agreement entered into with the PUC (the PUC Agreement)
when HECO became a wholly owned subsidiary of HEI. The PUC Agreement, among
other things, requires HEI to provide the PUC with periodic financial
information and other reports concerning intercompany transactions and other
matters. It prohibits the electric utilities from loaning funds to HEI or its
nonutility subsidiaries and from redeeming common stock of the electric utility
subsidiaries without PUC approval. Further, the PUC could limit the ability of
the electric utility subsidiaries to pay dividends on their common stock. See
"Restrictions on dividends and other distributions" and "Electric utility
regulation" (regarding the PUC review of the relationship between HEI and HECO).
As a result of the acquisition of ASB, HEI and HEIDI are subject to OTS
registration, supervision and reporting requirements as savings and loan holding
companies.
In the event the OTS has reasonable cause to believe that the continuation by
HEI or HEIDI of any activity constitutes a serious risk to the financial safety,
soundness, or stability of ASB, the OTS is authorized under the Home Owners'
Loan Act of 1933, as amended, to impose certain restrictions in the form of a
directive to HEI and any of its subsidiaries, or HEIDI and any of its
subsidiaries. Such possible restrictions include limiting (i) the payment of
dividends by ASB; (ii) transactions between ASB, HEI or HEIDI, and the
subsidiaries or affiliates of ASB, HEI or HEIDI; and (iii) the activities of ASB
that might create a serious risk that the liabilities of HEI and its other
affiliates, or HEIDI and its other affiliates, may be imposed on ASB.
Theoretically, this authority would allow the OTS to prohibit
26
dividends, limit affiliate transactions or otherwise restrict activities as a
result of losses suffered by HEI, HEIDI or their other subsidiaries, and thus
conceivably may be an indirect means of limiting affiliations between ASB and
affiliates engaged in nonfinancial activities. See "Restrictions on dividends
and other distributions."
OTS regulations also generally prohibit savings and loan holding companies and
their nonthrift subsidiaries from engaging in activities other than those which
are specifically enumerated in the regulations. Such restrictions, if applicable
to HEI and HEIDI, would significantly limit the kinds of activities in which HEI
and HEIDI and their subsidiaries may engage. However, the OTS regulations
provide for an exemption which is available to HEI and HEIDI if ASB satisfies
the "qualified thrift lender" test discussed below. See "Savings bank
regulation--FDIC Improvement Act of 1991 and implementing regulations-Qualified
thrift lender test." ASB currently meets the qualified thrift lender test and
must continue to meet the test in order to avoid restrictions on the activities
of HEI and HEIDI and their subsidiaries which could result in a need to divest
ASB.
HEI and HEIDI are prohibited, directly or indirectly, or through one or more
subsidiaries, from (i) acquiring control of, or acquiring by merger or purchase
of assets, another insured institution or holding company thereof, without prior
written OTS approval; (ii) acquiring more than 5% of the voting shares of
another savings association or savings and loan holding company which is not a
subsidiary; or (iii) acquiring or retaining control of a savings association not
insured by the FDIC. No director or officer of HEI or HEIDI, or person
beneficially owning more than 25% of such holding company's voting shares, may,
except with the prior approval of the OTS, (a) also serve as director, officer,
or employee of any insured institution or (b) acquire control of any savings
association not a subsidiary of such holding company. On May 26, 1997, ASB
entered into a Purchase and Assumption Agreement with BoA to assume
substantially all of the Hawaii deposit liabilities of BoA and acquire most of
its Hawaii branches and certain of its Hawaii-based loans. On October 29, 1997,
the OTS approved the transaction and the transaction closed effective
December 6, 1997.
RESTRICTIONS ON DIVIDENDS AND OTHER DISTRIBUTIONS
HEI is a legal entity separate and distinct from its various subsidiaries. As a
holding company with no significant operations of its own, the principal sources
of its funds are dividends or other distributions from its operating
subsidiaries, borrowings and sales of equity. The rights of HEI and,
consequently, its creditors and shareholders, to participate in any distribution
of the assets of any of its subsidiaries is subject to the prior claims of the
creditors and preferred stockholders of such subsidiary, except to the extent
that claims of HEI in its capacity as a creditor are recognized.
The ability of certain of HEI's subsidiaries to pay dividends or make other
distributions to HEI is subject to contractual and regulatory restrictions.
Under the PUC Agreement, in the event that the consolidated common stock equity
of the electric utility subsidiaries falls below 35% of total electric utility
capitalization, the electric utility subsidiaries would be restricted, unless
they obtained PUC approval, in their payment of cash dividends to 80% of the
earnings available for the payment of dividends in the current fiscal year and
preceding five years, less the amount of dividends paid during that period. The
PUC Agreement also provides that the foregoing dividend restriction shall not be
construed to relinquish any right the PUC may have to review the dividend
policies of the electric utility subsidiaries. The consolidated common stock
equity of HEI's electric utility subsidiaries was 50% of their total
capitalization (including the current maturities of long-term debt and preferred
stock sinking fund requirements due within one year but excluding short-term
borrowings) as of December 31, 1997. As of December 31, 1997, HECO and its
subsidiaries had net assets of $769 million, of which approximately $410 million
were not available for transfer to HEI without regulatory approval.
The ability of ASB to make capital distributions to HEI and other affiliates is
restricted under federal law. Subject to a limited exception for stock
redemptions that do not result in any decrease in ASB's capital and would
improve ASB's financial condition, ASB is prohibited from declaring any
dividends, making any other capital distribution, or paying a management fee to
a controlling person if, following the distribution or payment, ASB would be
deemed to be under-capitalized, significantly under-capitalized or critically
under-capitalized. See "Savings bank regulation--FDIC Improvement Act of 1991
and Implementing Regulations--Prompt corrective action."
As a Tier-1 institution (one that meets its capital requirements and has not
been notified by the OTS that it is in need of more than normal supervision),
ASB may make capital distributions in amounts up to one-half of ASB's surplus
capital ratio (the amount of its capital in excess of its capital requirement)
at
27
the beginning of a calendar year, plus its year-to-date net income for that
calendar year. ASB, as a Tier-1 institution, may exceed the foregoing limits if
ASB provides a thirty-day advance notice to the OTS and receives no objection
within thirty days. Even in the case of distributions within the permissible
limits, however, a thirty day advance notice to the OTS is required.
HEI and its subsidiaries are also subject to debt covenants, preferred stock
resolutions and the terms of guarantees that could limit their respective
abilities to pay dividends. The Company does not expect that the regulatory and
contractual restrictions applicable to HEI or its direct and indirect
subsidiaries will significantly affect the operations of HEI or its ability to
pay dividends on its common stock.
ELECTRIC UTILITY REGULATION
The PUC regulates the rates, issuance of securities, accounting and certain
other aspects of the operations of HECO and its electric utility subsidiaries.
See the previous discussion under "Electric utility-Rates" and the "Regulation
of electric utility rates" and "Recent rate requests" sections in HECO's MD&A.
The PUC has ordered the electric utility subsidiaries to develop plans for the
integration of demand-side and supply-side resources available to meet consumer
energy needs efficiently, reliably and at the lowest reasonable cost. See the
previous discussion under "Electric utility-Integrated Resource Planning and
requirements for additional generating capacity."
In March 1995, the PUC opened a generic docket to investigate whether Hawaii
public utilities should be allowed to establish property damage reserves to
recover the cost of damage to their facilities and equipment caused by
catastrophic disasters. See "Property damage reserve" in HECO's MD&A. In March
1998, the PUC determined that it would not be in the best interests of the
ratepayer to allow the utilities to establish a ratepayer funded self-insured
property damage reserve. The PUC based its conclusion on: (1) the unknown
probability of the occurrence of natural disasters and the uncertain magnitude
of the resulting damages; (2) the intergenerational inequity that ratepayer-
funded self-insurance programs create; and (3) the unclear tax effects of such
reserves. In the order the PUC noted that, in an earlier decision regarding
restoration expenses incurred by another electric utility as a result of
Hurricane Iniki in 1992, the PUC had determined that the other utility's
shareholders should not bear any of the restoration expenses. The PUC observed
that one of the factors it considered in its earlier decision was the regulatory
compact. The PUC also observed that the utility industry is facing competitive
pressures and is undergoing changes, and, in light of this the relative
responsibilities of ratepayers and shareholders for the cost of restoration and
repair of any damage caused by uninsured catastrophic natural disasters will
continue to be judged on the basis of the facts of each situation. Management
cannot predict how the PUC might apportion the responsibility for restoration
costs with respect to any uninsured catastrophic losses that HECO or its
subsidiaries may incur in the future.
On December 30, 1996, the PUC issued an order instituting a proceeding to
identify and examine the issues surrounding electric competition and to
determine the impact of competition on the electric utility infrastructure in
Hawaii. See the previous discussion under "Electric utility-Competition."
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. See the
previous discussion under "Electric utility-PUC Show Cause Order."
Any adverse decision or policy made or adopted by the PUC, or any prolonged
delay in rendering a decision, could have a material adverse effect on
consolidated HECO's and the Company's financial condition, results of operations
or liquidity.
Certain transactions between HEI's public utility subsidiaries (HECO, MECO and
HELCO) and HEI and affiliated interests, are subject to regulation by the PUC.
All contracts (including summaries of unwritten agreements), made on or after
July 1, 1988 of $300,000 or more in a calendar year for management, supervisory,
construction, engineering, accounting, legal, financial and similar services and
for the sale, lease or transfer of property between a public utility and
affiliated interests must be filed with the PUC to be effective, and the PUC may
issue cease and desist orders if such contracts are not filed. All such
affiliated contracts for capital expenditures (except for real property) must be
accompanied by comparative price quotations from two nonaffiliates, unless the
quotations cannot be
28
obtained without substantial expense. Moreover, all transfers of $300,000 or
more of real property between a public utility and affiliated interests require
the prior approval of the PUC and proof that the transfer is in the best
interest of the public utility and its customers. If the PUC, in its discretion,
determines that an affiliated contract was unreasonable or otherwise contrary to
the public interest, the utility must either revise the contract or risk
disallowance of the payments for rate-making purposes. In rate-making
proceedings, a utility must also prove the reasonableness of payments made to
affiliated interests under any affiliated contracts of $300,000 or more by clear
and convincing evidence. An "affiliated interest" is defined by statute and
includes officers and directors of a public utility, every person owning or
holding, directly or indirectly, 10% or more of the voting securities of a
public utility, and corporations which have in common with a public utility more
than one-third of the directors of that public utility.
To address community concerns expressed at the time, HECO proposed by letter
dated January 25, 1993, that the PUC initiate a review of the relationship
between HEI and HECO and the effects of that relationship on the operations of
HECO. By an order dated January 26, 1993, the PUC opened a docket and initiated
such a review to determine whether the HEI-HECO relationship, HEI's diversified
activities, and HEI's policies, operations and practices had resulted in or were
having any negative effects on HECO, its electric utility subsidiaries and
ratepayers. In May 1994, a consultant, Dennis Thomas and Associates, was
selected by the PUC to perform the review. In early 1995, Dennis Thomas and
Associates issued its report to the PUC. The report concluded that "on balance,
diversification has not hurt electric ratepayers." Other major findings of the
study were that no utility assets have been used to fund HEI's nonutility
investments or operations, HEI has not denied needed capital to the electric
utilities and management processes within the electric utilities operate without
interference from HEI. The report also included a number of recommendations,
most of which the Company has implemented. In December 1996, the PUC issued an
order that adopted the Dennis Thomas and Associates report, ordered HECO to
continue to provide the PUC with status reports on its compliance with the PUC
agreement (pursuant to which HEI became the holding company of HECO) and closed
the investigation and proceeding. In the order, the PUC stated that it adopted
the recommendation that HECO, MECO and HELCO present a comprehensive analysis of
the impact that the holding company structure and investments in nonutility
subsidiaries have on a case-by-case basis on the cost of capital to each utility
in future rate cases and remove such effects from the cost of capital. See also
"Holding company regulation."
HECO and its subsidiaries are not subject to regulation by the Federal Energy
Regulatory Commission (FERC) under the Federal Power Act, except under Sections
210 through 212 (added by Title II of PURPA and amended by the Energy Policy Act
of 1992), which permit the FERC to order electric utilities to interconnect with
qualifying cogenerators and small power producers, and to wheel power to other
electric utilities. Title I of PURPA, which relates to retail regulatory
policies for electric utilities, also applies to HECO and its subsidiaries.
Title VII of the Energy Policy Act of 1992, which creates "exempt wholesale
generators" (EWGs) as a category that is exempt from the 1935 Act and which
addresses transmission access, also applies to HECO and its subsidiaries. The
Company cannot predict the extent to which cogeneration, EWGs, or transmission
access, will reduce its electrical loads, reduce its current and future
generating and transmission capability requirements, or affect its financial
condition, results of operations or liquidity.
Because they are located in the State of Hawaii, HECO and its subsidiaries are
exempt by statute from limitations set forth in the Powerplant and Industrial
Fuel Act of 1978 on the use of petroleum as a primary energy source.
SAVINGS BANK REGULATION
ASB, a federally chartered savings bank, and its holding companies are subject
to the regulatory supervision of the OTS and, in certain respects, the Federal
Deposit Insurance Corporation (FDIC). In addition, ASB must comply with Federal
Reserve Board reserve requirements and OTS liquidity requirements. See
"Liquidity and capital resources--Savings bank" in HEI's MD&A.
For a discussion of the disparity in the deposit insurance assessment rates and
Financing Corporation assessment rates that ASB and other thrifts have paid in
relation to the rates that most commercial banks have paid, the special
assessment made by the FDIC on ASB and other thrifts in 1996 to provide adequate
funding for the SAIF and thereby permit a reduction in deposit insurance
assessment rates for
29
thrifts and potential federal legislation affecting financial institutions, see
"Deposit insurance premiums and regulatory developments" in Note 4 to HEI's
Consolidated Financial Statements.
Deposit insurance coverage. The FDIC Improvement Act of 1991 (FDICIA) amended
various provisions of the Federal Deposit Insurance Act governing deposit
insurance coverage. FDICIA, as further implemented by amendments to the FDIC's
deposit insurance regulations, made certain significant changes relating to pro
rata or "pass through" insurance coverage for employee benefit plan participants
and beneficiaries, and insurance coverage for certain retirement accounts and
trust funds. (The term "pass-through" insurance means that the insurance
coverage passes through to each owner/beneficiary of the applicable deposit.)
Although the vast majority of the FDIC's deposit insurance regulations remain
unchanged (such as the basic rules providing that individual accounts are
insured to $100,000 separately from qualifying joint accounts), several
important changes were made.
Effective December 19, 1993, an individual's interest in deposits at the same
institution in any combination of certain retirement accounts will be added
together and insured up to $100,000 in the aggregate. This is a reduction from
the maximum of $400,000 in insurance coverage formerly provided if deposits were
made in four different types of retirement plan accounts.
"Pass-through" insurance coverage for the deposits of most employee benefit
plans (i.e., $100,000 per individual participating, not $100,000 per plan)
generally continues only for institutions that are "well-capitalized" under the
FDIC's prompt corrective action regulations. The FDIC has amended its deposit
insurance regulations to require financial institutions to provide employee
benefit plan depositors information, not otherwise available, on the
institution's capital category and whether "pass-through" deposit insurance is
available. As of December 31, 1997, ASB was "well-capitalized".
Financial Institutions Reform, Recovery, and Enforcement Act of 1989 and
- ------------------------------------------------------------------------
implementing regulations
- ------------------------
Capital requirements. Under the Financial Institutions Reform, Recovery, and
Enforcement Act of 1989 (FIRREA), the OTS set three capital standards for
thrifts, each of which must be no less stringent than those applicable to
national banks. As of December 31, 1997, ASB was in compliance with all of the
minimum standards with a core capital ratio of 5.1% (compared to a 3%
requirement), a tangible capital ratio of 5.0% (compared to a 1.5% requirement)
and risk-based capital ratio of 11.9% (based on risk-based capital of
$296 million, $97 million in excess of the 8% requirement).
In 1996, the Board of Governors of the Federal Reserve System, the FDIC and the
Office of the Comptroller of the Currency issued a joint agency policy statement
to bankers to provide guidance on sound practices for managing IRR. Effective
June 26, 1996, the joint agency policy statement augments the action taken by
the agencies in 1995 to implement the portion of the FDICIA addressing risk-
based capital standards for IRR. It also replaces the proposed joint agency
policy statement that the agencies issued for comment in 1995 regarding a
supervisory framework for measuring and assessing banks' IRR exposures. The
agencies have elected not to pursue a standardized measure and explicit capital
charge for IRR at this time. This decision reflects concerns about the burden,
accuracy and complexity of a standardized measure and recognition that industry
techniques for measuring IRR are continuing to evolve. Nonetheless, the agencies
will continue to place significant emphasis on the level of a bank's IRR
exposure and the quality of its risk management process when evaluating a bank's
capital adequacy. Although the OTS has indicated that it will review any
differences between its approach and that of the other agencies for the purpose
of achieving greater consistency and uniformity among all four agencies, the
impact of the joint agency policy statement on the IRR rule adopted by the OTS
and ultimately on ASB cannot be predicted at this time.
Affiliate transactions. Significant restrictions apply to certain transactions
between ASB and its affiliates, including HEI and its direct and indirect
subsidiaries. FIRREA significantly altered both the scope and substance of such
limitations on transactions with affiliates and provides for thrift affiliate
rules similar to, but more restrictive than, those applicable to banks. For
example, ASB is prohibited from making any loan or other extension of credit to
an entity affiliated with ASB unless the affiliate is engaged exclusively in
activities which the Federal Reserve Board has determined to be permissible for
bank holding companies. There are also various other restrictions which apply to
certain transactions between ASB and certain executive officers, directors and
insiders of ASB. ASB is also barred from making a purchase of or any investment
in securities issued by an affiliate, other than with respect to shares of a
subsidiary of ASB.
30
FDIC Improvement Act of 1991 and implementing regulations
- ---------------------------------------------------------
FDICIA subjects the banking and thrift industries to heightened regulation and
supervision. FDICIA made a number of reforms addressing the safety and soundness
of the deposit insurance system, supervision of domestic and foreign depository
institutions and improvement of accounting standards. FDICIA also limited
deposit insurance coverage, implemented changes in consumer protection laws and
called for least-cost resolution and prompt corrective action with regard to
troubled institutions.
Pursuant to FDICIA, the federal banking agencies have promulgated regulations
which may affect the operations of ASB and its holding companies. Such
regulations address, for example, standards for safety and soundness, real
estate lending, accounting and reporting, transactions with affiliates, and
loans to insiders.
Prompt corrective action. FDICIA establishes a statutory framework that is
triggered by the capital level of a savings association and subjects it to
progressively more stringent restrictions and supervision as capital levels
decline. The OTS rules implement the system of prompt corrective action. In
particular, the rules define the relevant capital measures for the categories of
"well-capitalized", "adequately capitalized", "under-capitalized",
"significantly under-capitalized" and "critically under-capitalized".
A savings association that is under-capitalized or significantly under-
capitalized is subject to additional mandatory supervisory actions and a number
of discretionary actions if the OTS determines that any of the actions is
necessary to resolve the problems of the association at the least possible long-
term cost to the SAIF. A savings association that is critically under-
capitalized must be placed in conservatorship or receivership within 90 days,
unless the OTS and the FDIC concur that other action would be more appropriate.
Interest rates. 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
December 31, 1997, ASB was "well-capitalized" and thus, not subject to these
interest rate restrictions.
Qualified thrift lender test. The FDICIA amended the qualified thrift lender
(QTL) test provisions of FIRREA by reducing the percentage of assets thrifts
must maintain in housing-related loans and investments from 70% to 65%, and
changing the computation period to require that the percentage be reached on a
monthly average basis in nine out of the previous 12 months. Savings
associations that fail to satisfy the QTL test by not holding the required
percentage of housing-related investments are subject to various penalties,
including limitations on their activities and restrictions on their FHLB
advances. Failure to satisfy the QTL test would also bring into operation
restrictions on the activities that may be engaged in by HEI, HEIDI and their
other subsidiaries and could effectively result in the required divestiture of
ASB. At all times during 1997, ASB was in compliance with the QTL test. See
"Holding company regulation."
Federal Home Loan Bank System
- -----------------------------
ASB is a member of the FHLB System which consists of 12 regional FHLBs. The FHLB
System provides a central credit facility for member institutions. ASB, as a
member of the FHLB of Seattle, is required to own shares of capital stock in the
FHLB of Seattle in an amount equal to the greater of 1% of ASB's aggregate
unpaid residential loan principal at the beginning of each year, 0.3% of total
assets or 5% of FHLB advances outstanding. The FHLBs serve as the central
liquidity facilities for savings associations and resources of long-term funds
for financing housing. Long-term advances may only be made for the purpose of
providing funds for financing residential housing. Additionally, at such time as
an advance is made or renewed, it must be secured by collateral from one of the
following categories: (1) fully disbursed, whole first mortgages on improved
residential property, or securities representing a whole interest in such
mortgages; (2) securities issued, insured or guaranteed by the U.S. Government
or any agency thereof; (3) FHLB deposits; and (4) other real estate-related
collateral that has a readily ascertainable value and with respect to which a
security interest can be perfected. The aggregate amount of outstanding advances
secured by such other real estate-related collateral may not exceed 30% of the
member's capital.
Other laws. ASB is subject to federal and state consumer protection laws which
affect lending activities, such as the Truth-in-Lending Law, the Truth in
Savings Act, the Equal Credit Opportunity Act, the Real Estate Settlement
Procedures Act and several federal and state financial privacy acts.
31
These laws may provide for substantial penalties in the event of noncompliance.
Management of ASB believes that its lending activities are in compliance with
these laws and regulations.
The Community Reinvestment Act (CRA) was enacted by Congress in 1977 to ensure
that banks and thrifts help meet the credit needs of their communities,
including low- and moderate-income areas, consistent with safe and sound lending
practices. The OTS will consider ASB's CRA record in evaluating an application
for a new deposit facility, including the establishment of a branch, the
relocation of a branch or office, or the acquisition of an interest in another
bank or thrift. ASB received a verbal CRA rating of "outstanding" from the OTS
in December 1997.
For a discussion of federal and state interstate branching legislation, see
"Liquidity and capital resources--Savings bank" in HEI's MD&A.
In August 1996, federal legislation was enacted that repeals the percentage of
taxable income method of tax accounting for bad debt reserves used by ASB and
other "large" thrift institutions. In place of this bad debt reserve method, ASB
is required to use the specific charge-off method used by most other businesses.
These rules are generally effective for taxable years beginning after 1995. The
related transaction rules eliminate the potential recapture of federal income
tax deductions arising from the bad debt reserve created prior to 1988. Only
post-1987 reserve net additions are subject to recapture into taxable income
ratably over a six-year period, beginning in 1997. ASB has established a
deferred tax liability of approximately $4.8 million for its post-1987 reserve.
Pending legislation. For a discussion of potential federal legislation
addressing the merger of the BIF and SAIF, thrift rechartering and financial
modernization, and possible adverse effects on HEI, see "Deposit-insurance
premiums and regulatory developments" in Note 4 to HEI's Consolidated Financial
Statements.
FREIGHT TRANSPORTATION REGULATION
The PUC has broad authority in its regulation of the intrastate business and
operations of YB. See "Other--Freight transportation--Hawaiian Tug & Barge Corp.
and Young Brothers, Limited." In particular, the PUC has the authority to review
and modify YB's intrastate rates and charges under the Hawaii Water Carrier Act.
In all rate proceedings under such act, YB has the burden of proving the
reasonableness of expenditures, contracts, leases or other transactions. An
adverse decision or policy adopted by the PUC, or a delay in granting requested
rate or other relief, could have a material adverse effect on the financial
condition, results of operations or liquidity of YB.
ENVIRONMENTAL REGULATION
HEI and its subsidiaries are subject to federal and state statutes and
governmental regulations pertaining to water quality, air quality and other
environmental factors.
Water quality controls. As part of the process of generating electricity, water
used for condenser cooling of the electric utility subsidiaries' steam electric
generating stations is discharged into ocean waters or into underground
injection wells. The subsidiaries are required periodically to obtain permits
from the DOH in order to be allowed to discharge the water, including obtaining
permit renewals for existing facilities and new permits for new facilities. The
electric utility subsidiaries must obtain National Pollutant Discharge
Elimination System (NPDES) permits from the DOH to allow wastewater and storm
water discharges into state waters for their coastal generating stations and
Underground Injection Control (UIC) permits for wastewater discharge to
underground injection wells for one MECO facility and several HELCO facilities.
The Federal Oil Pollution Act of 1990 (OPA) governs actual or threatened oil
releases in navigable U.S. waters (inland waters and up to three miles offshore)
and waters of the U.S.' exclusive economic zone (up to 200 miles to sea from the
shoreline). Responsible parties under OPA are jointly, severally and strictly
liable for oil removal costs incurred by the federal government or the state and
damages to natural resources and real or personal property. Responsible parties
include vessel owners and operators. OPA imposes fines and jail terms ranging in
severity depending on how the release was caused. OPA also requires that
responsible parties submit certificates of financial responsibility sufficient
to meet the responsible party's maximum limited liability. HTB complies with
this requirement through coverage with the Water Quality Insurance Syndicate and
YB qualifies as a self-insurer. The Coast Guard issued interim guidelines in
September 1992, which included the requirement that a spill response plan be
submitted by February 18, 1993, and be finalized by August 18, 1993. The EPA and
Hawaii Department
32
of Transportation (DOT) also have similar requirements for submission of spill
response plans. The EPA issued its proposed rules and guidelines on this matter
in February 1993. With HTB exiting the fuel transportation business at the end
of 1993, the Company's freight transportation operations subject the Company to
significantly lessened environmental risks. HTB's fuel and lubricating oil and
the other cargo carried in its barges may be accidentally discharged into ocean
waters causing a pollution hazard, but the quantities carried do not pose a
major environmental hazard. HTB and YB employees are trained to respond to oil
or other spills that occur. HTB and YB filed spill response plans in 1993, 1995
and 1996. The utilities filed preliminary spill response plans in 1993 for
certain facilities. Revised Facility Spill Response Plans (FSRPs) and additional
FSRPs were filed in 1994 and 1995.
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 cleaned, oil continued to seep back into the well system from behind the
retaining walls until March 1997. Monitoring and removal of this residual oil
continued. In March 1997, HELCO received a letter from the DOH concurring with
the ongoing cleanup approach and stating that more aggressive cleanup measures
should be considered if oil seepage into the drainage wells worsens. Oil seepage
into the well system has not been observed since March 1997.
Due to leaks in two wastewater treatment system tanks, an estimated
2,000 gallons of boiler cleaning wastewater was released to a HELCO Hill
facility drainage well in January 1997. After confirming that the wastewater
discharged exhibited characteristics of a hazardous waste, notification was
provided to federal, state and county agencies. A post-release drainage well
sample collected indicated that well conditions were nonhazardous. The treatment
tanks were repaired, the drainage well cleaned and a semiannual well status
check was performed by a consultant with satisfactory results. The DOH issued a
Notice of Apparent Violation of the UIC permit in February 1997 and will notify
HELCO of required compliance action, if any, stemming from this incident.
In April 1997, HECO, on behalf of HELCO, notified the DOH that it became aware
that industrial oily wastewater was discharging into HELCO's Waimea facilityOs
dry well system in noncompliance with the facility's UIC permit. The discharge
of oily wastewater was stopped and, in May 1997, a written incident report was
submitted to the DOH. The DOH issued a Notice of Apparent Violation. The well
was cleaned and in July 1997 a response was submitted to a DOH request for
information. The DOH performed a site inspection in September 1997 and, in
January 1998, the DOH issued a Notice of Violation (NOV) imposing a civil
penalty fine on HELCO of $36,000, which HELCO paid in January 1998. The DOH has
closed this case.
Air quality controls. The generation stations of the utility subsidiaries
operate under air pollution control permits issued by the DOH and, in a limited
number of cases, by the EPA. The entire electric utility industry is being
affected by the 1990 Amendments to the Clean Air Act. Hawaii utilities may be
affected by the air toxics provisions (Title III) when the Maximum Allowable
Control Technology (MACT) emission standards are proposed for generation units.
Hawaii utilities are affected by the operating permit provisions (Title V). The
DOH adopted implementing regulations on November 26, 1993 which required
submission of permit applications during 1994 for existing sources. All
applications were filed in 1994 as required and supplementary information was
filed in 1995, 1996 and 1997. Results of further air quality analyses could
trigger requirements to mitigate emission impacts. Reports on emissions of air
toxics could trigger requirements to conduct risk assessments. Hawaii utilities
are also affected by the enforcement provisions (Title VII) which require the
EPA to promulgate new regulations which mandate "enhanced monitoring" of
emissions from many generation units. The EPA proposed a rule, called Compliance
Assurance Monitoring (CAM), in August 1996, and a final rule was issued in
October 1997. The CAM rule may require minor changes in emissions reporting
procedures, however, no emission monitor retrofits will be required for HECO,
HELCO and MECO.
On November 1, 1989, the DOH issued a NOV indicating that Maalaea units X-1 and
X-2 had exceeded operating limitations of 12 hours per day at various times in
1988. These incidents resulted from unscheduled unit outages and resulted in no
net increase in emissions by MECO. Subsequently, MECO took steps to preclude
future violations. An application for a permit modification was submitted to the
EPA, revising the operating hour limitation to annual rather than daily.
Approval was received from the EPA in July 1992. Units X-1 and X-2 continue to
operate in compliance with the revised permit.
33
Following a unit overhaul, emission compliance tests conducted for MECO's
Maalaea Unit 14 in late 1995 indicated that particulate emissions were in excess
of PSD permit limits. Corrective actions were taken and a retest in February
1996 confirmed that the unit returned to compliance with PSD limits. All test
reports were submitted to the DOH. By letter dated July 15, 1996, the DOH
indicated that a NOV will be issued for the past violations. By letter dated
January 31, 1997, the DOH invited MECO to meet to discuss settlement of this and
other open matters. By letter dated March 3, 1998, the DOH transmitted a draft
Consent Order to MECO, resolving all open MECO air emission compliance matters
which occurred from 1988 through 1996 (including the NOV for Maalaea units X-1
and X-2 described in the previous paragraph and past violations of Maalaea Unit
14). The draft Consent Order will be submitted for public comment. Under the
proposed settlement, MECO will contribute $100,000 over the next two years to an
environmental education program relating to air quality.
Initial source tests in December 1989 and subsequent retesting for HELCO's CT-2
generating unit indicated particulate emissions above permitted levels.
Following analysis, HECO (on behalf of HELCO) proposed in November 1990 that the
permitted particulate limit be increased. By letter dated April 13, 1992, the
EPA concurred that revision is warranted. The DOH issued a NOV on August 17,
1992 for the noncomplying emissions. HECO and HELCO worked with the DOH, the
manufacturer and a consultant to determine an appropriate new emission limit for
particulates as well as oxides of nitrogen. In accordance with discussions with
the DOH, CT-2 continues to operate pending issuance of a revised permit. On
January 20, 1998, the DOH issued a NOV to HELCO for noncomplying emissions from
March 16, 1993 through December 20, 1994 and from March 22, 1996 through
November 6, 1997. HELCO paid fines totaling $22,100 in the settlement of both
the 1992 and 1998 NOV's. Unit CT-2 is currently operating within all permit
limits by virtue of its having passed its November 1997 source test.
Hazardous waste and toxic substances controls. The operations of the electric
utility and freight transportation subsidiaries are subject to regulations
promulgated by the EPA to implement the provisions of the Resource Conservation
and Recovery Act (RCRA), the Superfund Amendments and Reauthorization Act (SARA)
and the Toxic Substances Control Act (TSCA). The DOH has been working towards
obtaining primacy to operate state-authorized RCRA (hazardous waste) programs.
The DOH finalized RCRA administrative rules in mid-June 1994, with the rules
becoming effective on June 18, 1994. The DOH's state contingency plan and the
State of Hawaii Environmental Response Law (ERL) rules were adopted in August
1995.
Whether on a federal or state level, RCRA provisions identify certain wastes as
hazardous and set forth measures that must be taken in the transportation,
storage, treatment and disposal of these wastes. Some of the wastes generated at
steam electric generating stations possess characteristics which make them
subject to these EPA regulations. Since October 1986, all HECO generating
stations have operated RCRA-exempt wastewater treatment units to treat
potentially regulated wastes from occasional boiler waterside and fireside
cleaning operations. Steam generating stations at MECO and HELCO also operate
similar RCRA-exempt wastewater management systems. In March 1990, the EPA
changed RCRA testing requirements used to characterize a waste as hazardous
which potentially affected the hazardous waste generating status of all
facilities. HECO's continuing program to recharacterize all HECO, MECO and HELCO
wastestreams has demonstrated the adequacy of the existing treatment systems and
identified other potential compliance requirements. Waste recharacterization
studies indicate that treatment facility wastestreams are nonhazardous and no
change in RCRA generator status is required.
RCRA underground storage tank (UST) regulations require all facilities with USTs
used to store petroleum products to comply with costly leak detection, spill
prevention and new tank standard retrofit requirements within a specified
compliance period based on tank age. On August 5, 1996, EPA conducted an UST
Field Citation inspection at the Ward Avenue complex. During the inspection HECO
was cited for a minor infraction, which was immediately corrected. HECO expects
to receive a NOV and a nominal fine.
The Emergency Planning and Community Right-to-Know Act (EPCRA) under SARA Title
III requires HECO, MECO and HELCO to report hazardous chemicals present in their
facilities in order to provide the public with information on these chemicals so
that emergency procedures can be established to protect the public in the event
of hazardous chemical releases. All HECO, MECO and HELCO facilities are in
compliance with applicable annual reporting requirements to the State Emergency
Planning Commission, the Local Emergency Planning Committee and local fire
departments. In September 1995, the EPA published a notice of proposed rule
making to expand the types of industries required to file
34
annual Toxic Release Inventory reports (i.e., to report facility releases of
toxic chemicals). The final rule includes the steam electric category (effective
January 1, 1998), which previously was exempt from Toxic Release Inventory
reporting requirements. Facilities are implementing actions to comply with
reporting requirements. Release reports for 1998 must be filed with the EPA by
July 1, 1999.
The TSCA regulations specify procedures for the handling and disposal of
polychlorinated biphenyls (PCB), a compound found in transformer and capacitor
dielectric fluids. HECO and its subsidiaries have instituted procedures to
monitor compliance with these regulations. In addition, HECO has implemented a
program to identify and replace PCB transformers and capacitors in the HECO
system. All HECO, MECO and HELCO facilities are currently believed to be in
compliance with PCB regulations. In December 1994, the EPA published in the
Federal Register a Proposed Rule to amend PCB disposal regulations. The proposed
rule calls for changes in determining PCB concentrations, and in marking,
storage and disposal requirements. A final rule is pending.
By letter dated August 21, 1992, the EPA provided MECO with a notice of
potential liability and request for information relating to a federal Superfund
closure investigation at the North American Environmental, Inc. (NAE) storage
facility in Clearfield, Utah. MECO was identified by the EPA as a potentially
responsible party for three PCB capacitors originally contracted for disposal by
Westinghouse. Although Westinghouse has already disposed of the capacitors, MECO
was obligated to comply with the information requests attached to the EPA
notice. A preliminary response to the EPA's information request was submitted to
the EPA on October 5, 1992. MECO has since received confirmation from
Westinghouse that the three capacitors were removed from the NAE facility and
incinerated at Aptus (an EPA-approved facility in Kansas) on September 16, 1992.
By letter dated December 2, 1992, the EPA notified MECO that a draft
Administrative Order on Consent (AOC) for the cleanup of the NAE facility had
been sent to potentially responsible parties that have waste remaining at the
NAE site and to parties that have expressed a desire to participate in the
cleanup. MECO did not receive a draft AOC because the three PCB capacitors were
removed from the NAE facility and incinerated. By letter dated February 8, 1993,
Westinghouse confirmed that it would indemnify MECO pursuant to its contract for
this matter. In early 1995, the EPA issued an AOC to the Freeport Center and the
Defense Logistics Agency. Both parties are initiating corrective actions.
Recovery of cleanup costs may fall back on other potentially responsible parties
once cleanup is completed and costs have been determined.
The Environmental Response Law of the State of Hawaii (ERL), as amended, governs
releases of hazardous substances, including oil, in areas within the state's
jurisdiction. Responsible parties under the ERL are jointly, severally and
strictly liable for a release of a hazardous substance into the environment.
Responsible parties include owners or operators of a facility where a hazardous
substance comes to be located and any person who at the time of disposal of the
hazardous substance owned or operated any facility at which such hazardous
substance was disposed. The DOH issued final rules (or State Contingency Plan)
implementing the ERL on August 17, 1995. Potential exposure to liability under
the ERL/State Contingency Plan is associated with the release of regulated
substances, including oil, to the environment.
For information regarding the investigation of the Honolulu Harbor area, see
Note 22 to HEI's Consolidated Financial Statements and Note 12 to HECO's
Consolidated Financial Statements.
Both HTB and YB generate small quantities of hazardous wastes as a result of
operations and equipment maintenance activities and have contracted with a firm
to dispose of these wastes in compliance with the EPA regulations and the RCRA
provisions. YB, as a public carrier, also moves hazardous wastes and explosives
for customers. Employees are trained in the applicable handling methods to
assist in the safe movement of these cargoes. Both HTB and YB are subject to the
jurisdiction of the Coast Guard which monitors ocean activities to ensure
compliance with federal regulations.
ASB may be subject to the provisions of the Comprehensive Environmental
Response, Compensation and Liability Act (CERCLA) and regulations promulgated
thereunder. CERCLA imposes liability for environmental cleanup costs on certain
categories of responsible parties, including the current owner and operator of a
facility and prior owners or operators who owned or operated the facility at the
time the hazardous substances were released or disposed. CERCLA exempts persons
whose ownership in a facility is held primarily to protect a security interest,
provided that they do not participate in the management of the facility.
Although there may be some risk of liability for ASB for environmental
35
cleanup costs, the Company believes the risk is not as great for ASB, which
specializes in residential lending, as it may be for other depository
institutions which have a larger portfolio of commercial loans.
For information about HPG, see the "Other" section in HEI's MD&A.
SECURITIES RATINGS
- ------------------
As of March 17, 1998, the Standard & Poor's (S&P), Moody's Investors Service
(Moody's) and Duff & Phelps Credit Rating Co.'s (Duff & Phelps) ratings of HEI's
and HECO's securities were as follows:
S&P Moody's Duff & Phelps
- ------------------------------------------------------------------------------------------------------------
HEI
- ---
Medium-term notes............................... BBB Baa2 BBB+
Commercial paper................................ A-2 P-2 Duff 2
HEI-obligated preferred securities of
trust subsidiaries........................... BBB- baa3 BBB
HECO
- ----
First mortgage bonds............................ A- A3 A
Revenue bonds and medium-term notes............. BBB+ Baa1 A-
Cumulative preferred stock...................... BBB baa1 BBB+
Commercial paper................................ A-2 P-2 Duff 1-
HECO-obligated preferred securities of
trust subsidiary............................. BBB baal BBB+
These ratings reflect only the view of the applicable rating agency at the time
the ratings are issued, from whom an explanation of the significance of such
ratings may be obtained. Each rating should be evaluated independently of any
other rating. There is no assurance that any such credit rating will remain in
effect for any given period of time or that such rating will not be lowered,
suspended or withdrawn entirely by the applicable rating agency if, in such
rating agency's judgment, circumstances so warrant. Any such lowering,
suspension or withdrawal of any rating may have an adverse effect on the market
price or marketability of HEIO's and/or HECO's securities, which could increase
the cost of capital of HEI and HECO. Neither HEI nor HECO management can predict
future rating agency actions or their effects on the future cost of capital of
HEI or HECO.
RESEARCH AND DEVELOPMENT
- ------------------------
HECO and its subsidiaries expensed approximately $2.3 million, $2.1 million and
$2.2 million in 1997, 1996 and 1995, respectively, for research and development.
Contributions to the Electric Power Research Institute accounted for most of the
expenses. There were also expenses in the areas of energy conservation,
environmental and emissions controls, and expenses for studies relative to
technologies that are applicable to HECO, its subsidiaries and their customers.
EMPLOYEE RELATIONS
- ------------------
At December 31, 1997, the Company had 3,672 full-time employees, compared with
3,327 at December 31, 1996. The increase in employees was primarily due to the
acquisition of most of the BoA Hawaii operations. At December 31, 1997 and 1996,
HEI had 50 full-time employees.
HECO
At December 31, 1997, HECO and its subsidiaries had 2,115 full-time employees,
compared with 2,152 at December 31, 1996.
The current collective bargaining agreement between the International
Brotherhood of Electrical Workers (IBEW), Local 1260, and HECO, MECO and HELCO,
covering approximately 63% of the total employees of these companies, was
extended in November 1995 for a two-year period from November 1, 1996 through
October 31, 1998. The extension provided for noncompounded wage increases of 3%
on November 1 of each year during the term of the agreement. The IBEW and HECO,
MECO and HELCO are currently in negotiations.
The current benefits agreement between IBEW, Local 1260 and HECO, MECO and HELCO
was also extended for a two-year period and will be in effect until October 31,
1998.
36
HTB
HTB and YB have a collective bargaining agreement with the Inlandboatmen's Union
of the Pacific (IBU) effective from July 26, 1995 through July 25, 1998. A 2.5%
across-the-board wage increase was effective for the first year, with 3% in the
second and third years. Journeyman craftsmen were not included in this new
contract but were covered in YB's contract with the International Longshoremen's
and Warehousemen's Union (ILWU), Hawaii Division, Local 142. The agreement
covers all unionized employees of HTB and YB employed on ocean, interisland and
harbor tug operations and dispatchers. It excludes office clerical employees,
professional and management employees, guards and watchmen.
YB has a collective bargaining agreement covering the period of July 1, 1996
through June 30, 1999 with the ILWU, Hawaii Division, Local 142. The agreement
provides for a 13.4% wage increase over the three-year period. The agreement
covers all regularly scheduled employees, receiving and delivery clerks on the
dock loading and discharging vessels, all maintenance personnel, documentation
clerks and customer service representatives employed by YB in the state. The
agreement excludes professional employees, supervisory employees, guards and
other clerical personnel.
OTHER
The employees of HEI and its direct and indirect subsidiaries are not covered by
any collective bargaining agreement, except as identified above.
DESCRIPTION OF HEI CAPITAL STOCK
- --------------------------------
The following supplements and restates the description of HEI's Common Stock and
Preferred Stock, the related rights of stockholders under the Stockholder Rights
Plan adopted by the Board of Directors of HEI on October 28, 1997, and other
related matters, for the purpose of updating the description thereof in
registration statements filed by HEI under the Securities Exchange Act of 1934
and the Securities Act of 1933.
Under HEI's Restated Articles of Incorporation (the "Articles"), HEI is
authorized to issue 100,000,000 shares of Common Stock without par value
("Common Stock") and 10,000,000 shares of Preferred Stock without par value
("Preferred Stock"). The Board of Directors has authorized and designated only
one series of Preferred Stock, being 500,000 shares of the Series A Junior
Participating Preferred Stock, but no shares of such series have been issued,
and no shares of such series are expected to be issued, unless the Rights
described below under "Stockholder Rights Plan" become exercisable and are
exercised. Upon issuance of any shares of the Series A Junior Preferred Stock,
the rights of the holders of Common Stock of HEI will be affected as described
below in the description of the Series A Junior Participating Preferred Stock.
COMMON STOCK
General. The outstanding shares of HEI's Common Stock are fully paid and
nonassessable. Additional shares of Common Stock, when issued, will be fully
paid and nonassessable when the consideration for which HEI's Board of Directors
authorizes their issuance has been received. The holders of Common Stock have no
preemptive rights and there are no conversion, redemption or sinking fund
provisions applicable thereto. The Common Stock is listed on the New York Stock
Exchange and is traded under the symbol HE. HEI's Common Stock is transferable
at the Stock Transfer Office of HEI, 900 Richards Street, Honolulu, Hawaii
96813, and at the office of Continental Stock Transfer & Trust Company, Co-
Transfer Agent and Registrar, 2 Broadway, New York, New York 10004.
Dividend rights. Stock and cash dividends may be paid to the holders of Common
Stock as and when declared by the Board of Directors, provided that, after
giving effect thereto, HEI is able to pay its debts as they become due in the
usual course of its business and HEI's total assets are not less than the sum of
its total liabilities plus the maximum amount that would be payable in any
liquidation in respect to all outstanding shares having preferential rights in
liquidation. All shares of Common Stock will participate equally with respect to
dividends. HEI's ability to pay dividends is now and in the future may be
limited by the restrictions and limitations now and hereafter to be set forth in
debt instruments, guarantees and resolutions creating series of Preferred Stock.
Liquidation rights. In the event of any liquidation, dissolution, receivership,
bankruptcy, disincorporation or winding up of the affairs of the Company,
voluntarily or involuntarily, holders of HEI's Common Stock are entitled to any
assets of HEI available for distribution to HEI's stockholders
37
after the payment in full of any preferential amounts to which holders of any
Preferred Stock may be entitled. All shares of Common Stock will rank equally in
the event of liquidation.
Voting rights. Holders of Common Stock are entitled to one vote per share,
subject to such limitation or loss of right as may be provided in resolutions
which may be adopted from time to time creating issues of Preferred Stock or
otherwise. At annual and special meetings of stockholders, a majority of the
outstanding shares of Common Stock constitute a quorum and the affirmative vote
of a majority of such quorum so present is sufficient to approve of any action
except as otherwise required by law, except with respect to the amendment of
certain provisions of HEI's By-laws and except as may be provided in resolutions
which may be adopted from time to time creating series of Preferred Stock.
Under HEI's current By-laws, one-third (as nearly as possible) of the total
number of directors is elected at each annual meeting of stockholders and no
holder of Common Stock is entitled to cumulate votes in an election of directors
so long as HEI shall have a class of securities registered pursuant to the
Exchange Act which are listed on a national securities exchange or traded over-
the-counter on the National Association of Securities Dealers, Inc. Automated
Quotation System. Under HEI's By-laws, directors may be removed from office only
for cause.
An amendment to the provisions in the By-laws relating to (1) matters which may
be brought before an annual meeting, (2) matters which may be brought before a
special meeting, (3) cumulative voting, (4) the number and staggered terms of
members of the Board of Directors, (5) removal of directors and (6) amendment of
the By-laws must in each case be approved either (a) by the affirmative vote of
80% of the shares entitled to vote generally with respect to election of
directors voting together as a single class, or (b) by the affirmative vote of a
majority of the entire Board of Directors plus a concurring vote of a majority
of the "continuing directors" (as that term is defined in Article XVIII of the
By-laws) voting separately and as a subclass of directors.
The provisions of HEI's By-laws referred to in the foregoing two paragraphs, and
the Stockholder Rights Plan and statutory provisions referred to below, may have
the effect of delaying, deferring or preventing a change in control of HEI.
Stockholder Rights Plan. On October 28, 1997, the Board of Directors of HEI
adopted a Stockholder Rights Plan and declared a dividend of one Right for each
share of Common Stock of HEI to stockholders of record on November 10, 1997 (the
"Record Date"). As of the Record Date there were 31,734,028 shares of Common
Stock outstanding. A Right will also attach to each share of Common Stock issued
between the Record Date and the Distribution Date (as such term is defined
below). Each Right will entitle the registered holder to purchase from HEI a
unit (a "Unit") consisting of one one-hundredth of a share of Series A Junior
Participating Preferred Stock without par value (the "Series A Preferred
Stock"), at a purchase price of $112 per Unit (the "Purchase Price"), subject to
adjustment. The description and terms of the Rights are set forth in the Rights
Agreement (the "Rights Agreement"), dated as of October 28, 1997, between HEI
and Continental Stock Transfer & Trust Company, as Rights Agent (the "Rights
Agent"). HEI's rights plan is designed to deter coercive or unfair takeover
tactics, including the gradual accumulation of shares in the open market,
partial or two-tiered tender offers, and private transactions through which an
acquiror gains control of HEI without offering fair value to all of HEI's
stockholders.
Until the Distribution Date (as defined below), (i) no separate Rights
Certificates will be distributed and the Rights will be evidenced by the Common
Stock certificates and will be transferred with and only with such Common Stock
certificates, (ii) new Common Stock certificates will contain a notation
incorporating the Rights Agreement by reference and (iii) the surrender for
transfer of any certificates for Common Stock outstanding will also constitute
the transfer of the Rights associated with the Common Stock represented by such
certificate. The Rights will separate from the Common Stock upon the earlier of
(i) 10 days following a public announcement that a person or group of affiliated
or associated persons (an "Acquiring Person") has acquired, or obtained the
right to acquire, beneficial ownership of 15% or more of the outstanding shares
of Common Stock other than as a result of repurchases of stock by HEI (the
"Stock Acquisition Date") or (ii) 10 days following the commencement of a tender
offer or exchange offer that would result in a person or group becoming an
Acquiring Person (the earlier of (i) and (ii), the "Distribution Date"). As
soon as practicable after the Distribution Date, Rights Certificates will be
mailed to holders of record of the Common Stock as of the close of business on
the Distribution Date and, thereafter, the separate Rights Certificates alone
will represent the Rights.
38
Except as otherwise determined by the Board of Directors, only shares of Common
Stock issued prior to the Distribution Date will have Rights attached.
The Rights are not exercisable until the Distribution Date and will expire at
the close of business on November 1, 2007 unless earlier redeemed by HEI as
described below. At no time will the Rights have any voting power.
In the event a person becomes an Acquiring Person, each holder of a Right will
thereafter have the right to receive, upon exercise, Common Stock (or, in
certain circumstances, cash, property or other securities of HEI), having a
value equal to two times the Exercise Price of the Right. Notwithstanding any of
the foregoing, following the occurrence of the event set forth in this paragraph
(the "Flip-in Event"), all Rights that are, or (under certain circumstances
specified in the Rights Agreement) were, beneficially owned by any Acquiring
Person will be null and void. However, Rights are not exercisable following the
occurrence of the Flip-in Event set forth above until such time as the Rights
are no longer redeemable by HEI as set forth below.
In the event that following the Stock Acquisition Date, (i) HEI engages in a
merger or business combination transaction in which HEI is not the surviving
corporation; (ii) HEI engages in a merger or business combination transaction in
which HEI is the surviving corporation and the Common Stock of HEI is changed or
exchanged; or (iii) 50% or more of HEI's assets or earning power is sold or
transferred (all deemed "Flip-Over Events"), each holder of a Right (except
Rights which have previously been voided as set forth above) shall thereafter
have the right to receive, upon exercise of the Right, Common Stock of the
acquiring company having a value equal to two times the Exercise Price of the
Right.
The Purchase Price payable, and the number of Units of Series A Preferred Stock
or other securities or property issuable upon exercise of the Rights are subject
to adjustment from time to time to prevent dilution (i) in the event of a stock
dividend on, or a subdivision, combination or reclassification of, the Series A
Preferred Stock, (ii) if holders of the Series A Preferred Stock are granted
certain rights or warrants to subscribe for preferred stock or convertible
securities at less than the current market price of the Series A Preferred
Stock, or (iii) upon the distribution to holders of the Series A Preferred Stock
of evidences of indebtedness or assets (excluding regular quarterly cash
dividends) or of subscription rights or warrants (other than those referred to
above).
At any time until ten days following the Stock Acquisition Date, HEI may redeem
the Rights in whole, but not in part, at a price of $0.01 per Right. Immediately
upon the action of the Board of Directors ordering redemption of the Rights, the
Rights will terminate and the only right of the holders of Rights will be to
receive the redemption price of $0.01 per Right.
Until a Right is exercised, the holder thereof, as such, will have no rights as
a preferred stockholder of HEI, including, without limitation, the right to vote
or to receive dividends.
Prior to the Distribution Date, HEI may supplement or amend any provision of the
Rights Agreement. After the Distribution Date, the provisions of the Rights
Agreement may be supplemented or amended by the Board in order to cure any
ambiguity, to make changes which do not materially adversely affect the
interests of holders of Rights (excluding the interest of any Acquiring Person),
to correct or supplement any defective or inconsistent provision in the Rights
Agreement, or to shorten or lengthen any time period under the Rights Agreement;
provided, however, that from and after the Distribution Date, no amendment to
lengthen the time period governing redemption shall be made unless such
lengthening is for the purpose of protecting, enhancing or clarifying the rights
of, and/or the benefits to, the holders of Rights. The Rights Agreement may not
be amended at a time when the Rights are not redeemable.
Restriction on Purchases of Shares and Consequences of Substantial Holdings of
Shares under Certain Hawaii and Federal Laws. Provisions of Hawaii and Federal
law, some of which are described below, place restrictions on the acquisition of
beneficial ownership of 5% or more of the voting power of HEI. The following
does not purport to be a complete enumeration of all such provisions, nor does
it purport to be a complete description of the statutory provisions that are
enumerated. Persons contemplating the acquisition of 5% or more of the issued
and outstanding shares of HEI's Common Stock should consult with their legal and
financial advisors concerning statutory and other restrictions on such
acquisitions.
The Hawaii Control Share Acquisition Act places restrictions on the acquisition
of ranges of voting power (starting at 10% and at 10% intervals up to a
majority) for the election of directors of HEI unless
39
the acquiring person obtains approval of the acquisition, in the manner
specified in the Act, by the affirmative vote of the holders of a majority of
the voting power of all shares entitled to vote, exclusive of the shares
beneficially owned by the acquiring person, and consummates the proposed control
share acquisition within 180 days after shareholder approval. If such approval
is not obtained, the statute provides that the shares acquired may not be voted
for a period of one year from the date of acquisition, the shares will be
nontransferable on HEI's books for one year after acquisition and HEI, during
the one-year period, shall have the right to call the shares for redemption
either at the prices at which the shares were acquired or at book value per
share as of the last day of the fiscal quarter ended prior to the date of the
call for redemption.
Under provisions of the Hawaii Business Corporation Act, subject to certain
exceptions, HEI may not be a party to a merger or consolidation unless the
merger or consolidation is approved by the holders of at least 75% of all of the
issued and outstanding voting stock of HEI.
Under provisions of Hawaii law regulating public utilities, not more than 25% of
the issued and outstanding voting stock of certain public utility corporations,
including Hawaiian Electric Company, Inc. ("HECO") and its wholly owned electric
utility subsidiaries, may be held, directly or indirectly, by any single foreign
corporation or any single nonresident alien, or held by any person, without the
prior approval of the PUC. The acquisition of more than 25% of the issued and
outstanding voting stock of HEI in one or more transactions might be deemed to
result in the holding of more than 25% of the voting stock of HECO and its
electric utility subsidiaries. In addition, HEI is subject to an agreement ("the
PUC Agreement") entered into with the PUC when HECO became a wholly owned
subsidiary of HEI. The PUC Agreement provides that the acquisition of HEI by a
third party, whether by purchase, merger, consolidation or otherwise, requires
the prior written approval of the PUC.
Under the Hawaii Environmental Disclosure Law, a person and that person's
affiliates who in the aggregate beneficially own 10% or more but less than 50%
of the securities entitled to vote for the election of directors of HEI may not
acquire more than 5% of such securities during any 12-month period without first
filing an environmental disclosure statement with the Hawaii Office of
Environmental Quality Control.
Under the Public Utility Holding Company Act of 1935 (the "1935 Act"), any
company (as defined in the 1935 Act) which owns, controls or holds with power to
vote 10% or more of the outstanding voting securities of HEI may be a public
utility holding company, subject to regulation under the 1935 Act, unless an
exemption is available under the 1935 Act or the Securities and Exchange
Commission (the "SEC"), upon application, declares such a company not to be a
holding company. In addition, under the 1935 Act, no person or company may,
without prior approval of the SEC, acquire 5% or more of the outstanding Common
Stock or other voting securities of HEI as long as HECO remains an HEI public
utility subsidiary and a public utility holding company.
The Savings and Loan Holding Company Act, the Change in Bank Control Act and the
Office of Thrift Supervision ("OTS") regulations place restrictions on certain
types of acquisitions of control of a savings bank and its holding company.
Generally, no company, or any director or officer of a savings and loan holding
company, or person who owns, or controls or holds with power to vote more than
25% of the voting stock of such holding company, may acquire control of a
savings bank insured by the Federal Deposit Insurance Corporation or its holding
company, without the prior written approval of the OTS. In addition, no person
(other than certain persons affiliated with a savings and loan holding company)
may acquire control of a savings bank or savings and loan holding company,
unless the OTS has been given 60 days' prior written notice of the acquisition
and has not objected to it. As a result of HEI's indirect ownership of American
Savings Bank, F.S.B. ("ASB"), the acquisition of control of HEI, HEI
Diversified, Inc. ("HEIDI") or ASB may be subject to the requirement of prior
written OTS approval or 60 days' prior written notice to the OTS, unless such
transaction would be exempt from such requirements under federal law or
regulation. "Control" in this context means the acquisition of, control of, or
holding proxies representing, more than 25% of the voting shares of HEI, HEIDI
or ASB, or the power to control in any manner the election of a majority of the
directors thereof. Moreover, under OTS regulations, one would be determined,
subject to rebuttal, to have acquired control if one acquires more than 10% of
the voting shares of HEI, HEIDI or ASB and is subject to one of certain
specified "control factors." Anyone acquiring more than 10%, or additional stock
above 10%, of any class of shares of HEI, HEIDI or ASB is required to file a
certification with the OTS.
40
Under the Jones Act, it is unlawful to transport merchandise between points in
the U.S. except in vessels owned by U.S. citizens. For a corporation to
demonstrate U.S. citizenship, it must be incorporated under the laws of the
United States or a state thereof, its chief executive officer and board chairman
must be U.S. citizens, a majority of its directors must be U.S. citizens and at
least 75% of its voting stock must be owned by U.S. citizens. If less than 75%
of the Common Stock of HEI (which is the only class of voting stock presently
outstanding) is owned by U.S. citizens, the vessels of HTB and YB would not be
permitted to engage in transport between points in Hawaii.
Dividend Reinvestment and Stock Purchase Plan. Any individual of legal age or
entity is eligible to participate in the HEI Dividend Reinvestment and Stock
Purchase Plan (the "Plan") by making an initial cash investment in Common
Stock, subject to applicable laws and regulations and the requirements of the
Plan. Holders of Common Stock, and preferred stock of HEI's electric utility
subsidiaries (HECO, MECO and HELCO), may automatically reinvest some or all of
their dividends to purchase additional shares of Common Stock at market prices
(as defined in the Plan). Participants in the Plan may also purchase additional
shares of Common Stock at market prices (as defined in the Plan) by making cash
contributions to the Plan. HEI reserves the right to suspend, modify or
terminate the Plan at any time. Shares of Common Stock issued under the Plan may
either be newly issued shares or shares purchased by the Plan on the open
market. Participants do not pay brokerage commissions or service charges in
connection with purchases of newly issued shares, but do pay their pro rata
share of brokerage commissions if the shares are purchased by the Plan for
participants on the open market.
PREFERRED STOCK
Authorized Preferred Stock. Preferred Stock may be issued by the Board of
Directors in one or more series, without action by stockholders and with such
preferences, voting powers, restrictions and qualifications as may be fixed by
resolution of the Board of Directors authorizing the issuance of such shares.
Under current Hawaii law, the terms and provisions of all shares of Preferred
Stock must be identical except with respect to dividend rates, redemption and
redemption prices, amounts payable in liquidation, sinking fund provisions,
conversion privileges, if any, and voting rights, if any.
If and when authorized by the Board of Directors, any such Preferred Stock may
be preferred as to dividends or in liquidation, or both, over the Common Stock.
For example, the terms of the Preferred Stock, if and when authorized, could
prohibit dividends on shares of Common Stock until all dividends and any
mandatory redemptions have been paid with respect to shares of Preferred Stock.
In addition, the Board of Directors may, without stockholder approval, issue
Preferred Stock with voting and conversion rights which could adversely affect
the voting power or economic rights of the holders of Common Stock. Issuance of
Preferred Stock by HEI could thus have the effect of delaying, deferring or
preventing a change of control of HEI. The first and only series of Preferred
Stock that has been authorized by the Board of Directors as of the date hereof
is the Series A Junior Participating Preferred Stock.
Series A Junior Participating Preferred Stock. On October 28, 1997, the Board of
Directors of HEI authorized a series of 500,000 shares of Preferred Stock,
designated the Series A Junior Participating Preferred Stock. The Series A
Junior Participating Preferred Stock is without par value, and was created in
conjunction with the Board's adoption of the Rights Agreement between HEI and
Continental Stock Transfer & Trust Company, as Rights Agent. No shares of Series
A Junior Participating Preferred Stock have been issued. The Series A Junior
Participating Preferred Stock may be purchased under certain circumstances, as
set forth in the Rights Agreement. The exercise price for one one-hundredth of a
share of Series A Junior Participating Preferred Stock is $112, subject to
adjustment.
The Series A Junior Participating Preferred Stock ranks junior to all other
series of Preferred Stock as to the payment of dividends and distribution of
assets, unless the terms of any such series provide otherwise. If declared by
the Board of Directors out of funds legally available therefor, the dividend
rate for the Series A Junior Participating Preferred Stock is the greater of
$61.00 per quarter, or 100 times the then current quarterly dividend per common
share (as adjusted from time to time to reflect stock dividends, subdivisions or
combinations). Whenever quarterly dividends on the Series A Junior Participating
Preferred Stock are in arrears, dividends or other distributions may not be made
on the Common Stock or on any series of Preferred Stock ranking junior to the
Series A Junior Participating Preferred Stock. Upon liquidation, no holders of
shares ranking junior to the Series A Junior Participating Preferred Stock shall
receive any distribution until all holders of the Series A Junior Participating
Preferred Stock shall have received $100 per share, plus any unpaid dividends
(the "Series A Liquida-
41
tion Preference"). Following payment of the Series A Liquidation Preference, no
additional distributions shall be made to the holders of Series A Junior
Participating Preferred Stock unless holders of Common Stock receive an amount
equal to the Series A Liquidation Preference divided by 100, as adjusted, and
thereafter (and after taking into account any amounts that may then be due to
holders of any other series of Preferred Stock) the holders of the Series A
Junior Participating Preferred Stock shall be entitled to share in the remaining
assets of HEI with the holders of the Common Stock, ratably on a per share
basis. In the event that there are not sufficient assets available to permit
payment in full of the Series A Liquidation Preference and the liquidation
preferences of all other series of Preferred Stock, if any, which rank on a
parity with the Series A Junior Participating Preferred Stock, then such
remaining assets shall be distributed ratably to the holders of such parity
shares in proportion to their respective liquidation preferences.
Each share of Series A Junior Participating Preferred Stock shall entitle the
holder thereof to 100 votes, as may be adjusted from time to time, on all
matters submitted to a vote of the stockholders of HEI, voting together with the
Common Stock. If dividends on any Series A Junior Participating Preferred Stock
are in arrears in an amount equal to six quarterly dividends, then until
dividends for all previous quarters and for the current quarter have been
declared and paid or set aside for payment, the holders of Series A Junior
Participating Preferred Stock, voting as a class with holders of other series of
Preferred Stock who are then entitled to vote thereon, shall also have the right
to elect two directors to HEI's Board of Directors. The shares of Series A
Junior Participating Preferred Stock are not redeemable.
ITEM 2. PROPERTIES
HEI leases office space from a nonaffiliated lessor in downtown Honolulu and
- ---
this lease expires on March 31, 2001. HEI also leases office space from HECO in
downtown Honolulu. The properties of HEIOs subsidiaries are as follows:
ELECTRIC UTILITY
- ----------------
See page 5 for the "Generation statistics" of HECO and its subsidiaries,
including generating and firm purchased capability, reserve margin and annual
load factor.
HECO owns and operates three generating plants on the island of Oahu at
- ----
Honolulu, Waiau and Kahe, with an aggregate generating capability of 1,263 MW at
December 31, 1997. The three plants are situated on HECO-owned land having a
combined area of 535 acres. In addition, HECO owns a total of 127 acres of land
on which are located substations, transformer vaults, distribution baseyards and
the Kalaeloa cogeneration facility.
Electric lines are located over or under public and nonpublic properties. Most
of HECO's leases, easements and licenses have been recorded.
HECO owns overhead transmission lines, overhead distribution lines, underground
cables, fully owned or jointly owned poles and steel or aluminum high voltage
transmission towers. The transmission system operates at 46,000 and 138,000
volts. The total capacity of HECO's transmission and distribution substations
was 6,411,000 kilovoltamperes at December 31, 1997.
HECO owns a building and approximately 11.5 acres of land located in Honolulu
which houses its operating, engineering and information services departments and
a warehousing center. It also leases an office building and certain office
spaces in Honolulu. The lease for the office building expires in November 2004,
with an option to further extend the lease to November 2012. The leases for
certain office spaces expire on various dates through November 30, 2004 with
options to extend to various dates through November 30, 2014.
HECO owns 19.2 acres of land at Barbers Point used to situate fuel oil storage
facilities with a combined capacity of 970,700 barrels. HECO also owns fuel oil
tanks at each plant site with a total maximum usable capacity of
844,600 barrels.
MECO owns and operates two generating plants on the island of Maui, at Kahului
- ----
and Maalaea, with an aggregate capability of 191.5 MW as of December 31, 1997.
The plants are situated on MECO-owned land having a combined area of 28.6 acres.
MECO also owns fuel oil storage facilities at these sites with a total maximum
usable capacity of 172,000 barrels.
MECO's administrative offices and engineering and distribution departments are
located on 9.1 acres of MECO-owned land in Kahului.
42
MECO also owns and operates smaller distribution and generation systems on the
islands of Lanai and Molokai.
HELCO owns and operates five generating plants on the island of Hawaii. These
- -----
plants at Hilo (2), Waimea, Kona and Puna have an aggregate generating
capability of 157.4 MW as of December 31, 1997 (excluding two small run-of-river
hydro units and one small windfarm). The plants are situated on HELCO-owned land
having a combined area of approximately 43 acres. HELCO also owns 6.0 acres of
land in Kona, which is used for a baseyard, and it leases 4.0 acres of land for
its baseyard in Hilo. The lease expires in 2030. The deeds to the sites located
in Hilo contain certain restrictions which do not materially interfere with the
use of the sites for public utility purposes. HELCO leases 78 acres of land for
the windfarm.
The properties of HELCO are subject to a first mortgage securing HELCO's
outstanding first mortgage bonds, which amounted to $5 million as of December
31, 1997.
SAVINGS BANK
- ------------
ASB owns its executive office building located in downtown Honolulu and land and
- ---
an office building in the Mililani Technology Park on Oahu.
The following table sets forth certain information with respect to branches
owned and leased by ASB and its subsidiaries at December 31, 1997.
Number of branches
---------------------------------------------------
Owned Leased Total
- ---------------------------------------------------------------------------------------------------------
Oahu.................................................. 11 37 48
Maui.................................................. 3 4 7
Kauai................................................. 3 3 6
Hawaii................................................ 2 5 7
Molokai............................................... -- 1 1
---------------------------------------------------
19 50 69
===================================================
The net book value of branches and office facilities is approximately $49
million. Of this amount, $39 million represents the net book value of the land
and improvements for the branches and office facilities owned by ASB and $10
million represents the net book value of ASB's leasehold improvements.
OTHER
- -----
FREIGHT TRANSPORTATION
- ----------------------
HTB owned seven tugboats ranging from 1,430 to 3,400 HP, two tenders (auxiliary
boats) of 500 HP and two flatdecked barges as of December 31, 1997.
HTB owns no real property, but rents on a month-to-month basis its pier property
used in its operations from the State of Hawaii under a revocable permit.
YB, HTB's subsidiary, owned five tugboats, two doubledecked and seven flatdecked
barges and most of its shoreside equipment, including 20-foot containers,
chassis, 20-foot and 40-foot refrigerated containers, container vans, hi-lifts,
flatracks, automobile racks and other related equipment as of December 31, 1997.
YB owns no real property, but rents on a month-to-month basis or leases various
pier properties and warehouse facilities from the State of Hawaii under
revocable permits or five-year leases. It is expected that leases will be
renegotiated as necessary.
REAL ESTATE DEVELOPMENT
- -----------------------
MPC. See Item 1, "Business--Other--Real estate--Malama Pacific Corp." MDC,
MPC's subsidiary, owns land adjacent to HECO's Ward Avenue facility on Oahu. In
1996, the sale of 0.23 acres of the property was completed. The remaining 1.04
acres is leased to HECO and other commercial tenants.
OTHER
- -----
HEIIC. See Item 1, "Business--Other--HEI Investment Corp."
43
As of March 17, 1998, HEIPC leases office space in downtown Honolulu. HEIPC also
operates generating units at a facility in Tanguisson, Guam. See Item 1,
"Business--Other--HEI Power Corp."
ITEM 3. LEGAL PROCEEDINGS
Except as provided for below and in "Item 1. Business," there are no known
material pending legal proceedings, other than ordinary routine litigation
incidental to their respective businesses, to which HEI or any of its
subsidiaries is a party or of which any of their property is the subject.
DISCONTINUED OPERATIONS
- -----------------------
See Note 20 to HEI's Consolidated Financial Statements, incorporated herein by
reference to page 63 of HEI's 1997 Annual Report to Stockholders, portions of
which are filed herein as HEI Exhibit 13.
In December 1994, five insurance agencies, which had served as insurance agents
for the HIG Group, filed a complaint against HEI, HEIDI and others. The
complaint set forth several causes of action, including breach of contract and
piercing the corporate veil. The plaintiffs asked for relief from the
defendants, including compensatory damages for lost commissions, business and
profits, and punitive damages. In 1995, the court granted defendants' motion for
summary judgment dismissing all claims. Judgment has been entered, plaintiffs
have appealed and all appellate briefs have been filed. In the opinion of
management, losses, if any, resulting from the ultimate outcome of the lawsuit
will not have a material adverse effect on the Company's financial condition,
results of operations or liquidity.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
HEI and HECO:
During the fourth quarter of 1997, no matters were submitted to a vote of
security holders of the Registrants.
EXECUTIVE OFFICERS OF HEI
The following persons are, or may be deemed, executive officers of HEI. Their
ages are given as of February 18, 1998 and their years of company service are
given as of December 31, 1997. Officers are appointed to serve until the meeting
of the HEI Board of Directors after the next Annual Meeting of Stockholders
(which will occur on April 28, 1998) and/or until their successors have been
appointed and qualified (or until their earlier resignation or removal). Company
service includes service with an HEI subsidiary.
Business experience
HEI Executive Officers for past five years
- ------------------------------------------------------------------------------------------------------
Robert F. Clarke, age 55
President and Chief Executive Officer............................................ 1/91 to date
Director......................................................................... 4/89 to date
(Company service: 10 years)
T. Michael May, age 51
Senior Vice President and Director............................................... 9/95 to date
(Company service: 5 years)
Mr. May is also President and Chief Executive Officer of HECO and served as
HECO Senior Vice President from 2/92 to 8/95.
Robert F. Mougeot, age 55
Financial Vice President and Chief Financial Officer............................. 4/89 to date
(Company service: 9 years)
Peter C. Lewis, age 63
Vice President - Administration.................................................. 10/89 to date
(Company service: 29 years)
Charles F. Wall, age 58
Vice President and Corporate Information Officer................................. 7/90 to date
(Company service: 7 years)
44
Business experience
HEI Executive Officers for past five years
- ------------------------------------------------------------------------------------------------------
(continued)
Andrew I. T. Chang, age 58
Vice President - Government Relations....................................... 4/91 to date
(Company service: 13 years)
Constance H. Lau, age 45
Treasurer................................................................... 4/89 to date
(Company service: 13 years)
Curtis Y. Harada, age 42
Controller.................................................................. 1/91 to date
(Company service: 8 years)
Betty Ann M. Splinter, age 52
Secretary................................................................... 10/89 to date
(Company service: 23 years)
Wayne K. Minami, age 55
President and Chief Executive Officer, American Savings Bank, F.S.B......... 1/87 to date
(Company service: 11 years)
HEI's executive officers, with the exception of Charles F. Wall and Andrew I. T.
Chang, are officers and/or directors of one or more of HEI's subsidiaries. Mr.
Minami is deemed an executive officer of HEI for purposes of this Item under the
definition of Rule 3b-7 of the SEC's General Rules and Regulations under the
Securities Exchange Act of 1934.
There are no family relationships between any executive officer of HEI and any
other executive officer or director of HEI, or any arrangement or understanding
between any executive officer and any person pursuant to which the officer was
selected.
PART II
-------
ITEM 5. MARKET FOR REGISTRANTS' COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
HEI:
The information required by this item is incorporated herein by reference to
pages 62 and 65 (Note 18, "Regulatory restrictions on net assets" and Note 23,
"Quarterly information (unaudited)" to HEI's Consolidated Financial Statements)
and page 25 of HEI's 1997 Annual Report to Stockholders, portions of which are
filed herein as HEI Exhibit 13. Certain restrictions on dividends and other
distributions of HEI are described in this report under "Item 1. Business--
Regulation and other matters--Restrictions on dividends and other
distributions." The total number of holders of record of HEI common stock as of
March 13, 1998, was 20,146.
HECO:
The information required with respect to "Market information" and "holders" is
not applicable. Since the corporate restructuring on July 1, 1983, all the
common stock of HECO has been held solely by its parent, HEI, and is not
publicly traded.
45
The dividends declared and paid on HECO's common stock for the four quarters of
1997 and 1996 were as follows:
Quarters ended 1997 1996
- --------------------------------------------------------------------------------------------
March 31................................................ $15,062,000 $11,054,000
June 30................................................. 12,873,000 13,154,000
September 30............................................ 13,586,000 14,916,000
December 31............................................. 16,856,000 17,879,000
The discussion of regulatory restrictions on net assets is incorporated herein
by reference to page 29 (Note 13 to HECO's Consolidated Financial Statements,
"Regulatory restrictions on distributions to parent") of HECO's 1997 Annual
Report to Stockholder, portions of which are filed herein as HECO Exhibit 13.
ITEM 6. SELECTED FINANCIAL DATA
HEI:
The information required by this item is incorporated herein by reference to
page 25 of HEI's 1997 Annual Report to Stockholders, portions of which are filed
herein as HEI Exhibit 13.
HECO:
The information required by this item is incorporated herein by reference to
page 2 of HECO's 1997 Annual Report to Stockholder, portions of which are filed
herein as HECO Exhibit 13.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
and ITEM 7A. CONDITION AND RESULTS OF OPERATIONS AND QUANTITATIVE
AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS
HEI:
The information required by this item is set forth in HEI's MD&A, incorporated
herein by reference to pages 27 to 39 of HEI's 1997 Annual Report to
Stockholders, portions of which are filed herein as HEI Exhibit 13.
HECO:
The information required by this item is set forth in HECO's MD&A, incorporated
herein by reference to pages 3 to 11 of HECO's 1997 Annual Report to
Stockholder, portions of which are filed herein as HECO Exhibit 13. HECO is not
required to provide "Quantitative and Qualitative Disclosures About Market
Risks" in this Form 10-K.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
HEI:
The information required by this item is incorporated herein by reference to the
section entitled "Segment financial information" on page 26 and to pages 40 to
65 of HEI's 1997 Annual Report to Stockholders, portions of which are filed
herein as HEI Exhibit 13.
HECO:
The information required by this item is incorporated herein by reference to
pages 12 to 34 of HECO's 1997 Annual Report to Stockholder, portions of which
are filed herein as HECO Exhibit 13.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
HEI and HECO:
None
46
PART III
--------
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANTS
HEI:
Information for this item concerning the executive officers of HEI is set forth
on pages 44 and 45 of this report. The list of current directors of HEI is
incorporated herein by reference to page 66 of HEI's 1997 Annual Report to
Stockholders, portions of which are filed herein as HEI Exhibit 13. Information
on the current directors' business experience and directorships is incorporated
herein by reference to pages 4 to 6 of HEI's Definitive Proxy Statement,
prepared for the Annual Meeting of Stockholders to be held on April 28, 1998.
There are no family relationships between any director of HEI and any other
executive officer or director of HEI, or any arrangement or understanding
between any director and any person pursuant to which the director was selected.
The information required under this item by Item 405 of Regulation S-K is
incorporated by reference to page 11 of HEI's Definitive Proxy Statement,
prepared for the Annual Meeting of Stockholders to be held on April 28, 1998.
HECO:
The following persons are, or may be deemed, executive officers of HECO. Their
ages are given as of February 18, 1998 and their years of company service are
given as of December 31, 1997. Officers are appointed to serve until the meeting
of the HECO Board of Directors after the next HECO Annual Meeting (which will
occur on April 28, 1998) and/or until their respective successors have been
appointed and qualified (or until their earlier resignation or removal). Company
service includes service with HECO affiliates.
Business experience
HECO Executive Officers for past five years
- --------------------------------------------------------------------------------------------------------
Robert F. Clarke, age 55
Chairman of the Board........................................................ 1/91 to date
(Company service: 10 years)
T. Michael May, age 51
President, Chief Executive Officer and Director.............................. 9/95 to date
Senior Vice President........................................................ 2/92 to 8/95
Chairman of the Board, MECO and HELCO........................................ 9/95 to date
(Company service: 5 years)
Jackie Mahi Erickson, age 57
Vice President - General Counsel & Government Relations...................... 9/95 to date
Vice President - Corporate Counsel........................................... 2/91 to 8/95
(Company service: 17 years)
Charles M. Freedman, age 51
Vice President - Corporate Relations......................................... 3/98 to date
Vice President - Corporate Excellence........................................ 7/95 to 2/98
Vice President - Corporate Relations......................................... 5/92 to 6/95
(Company service: 7 years)
Edward Y. Hirata, age 64
Vice President - Regulatory Affairs.......................................... 7/95 to date
Vice President - Planning.................................................... 12/91 to 6/95
Vice President, MECO and HELCO............................................... 12/91 to date
(Company service: 11 years)
47
Business experience
HECO Executive Officers for past five years
- --------------------------------------------------------------------------------------------------------
(continued)
Thomas J. Jezierny, age 53
Vice President - Energy Delivery............................................. 9/96 to date
President, MECO.............................................................. 4/90 to 8/96
(Company service: 27 years)
Thomas L. Joaquin, age 54
Vice President - Power Supply................................................ 7/95 to date
Vice President - Operations.................................................. 5/94 to 6/95
General Manager, Production.................................................. 11/93 to 4/94
Manager, Production.......................................................... 10/92 to 10/93
(Company service: 24 years)
Richard L. O'Connell, age 68
Vice President - Customer Operations......................................... 7/95 to date
Vice President - Customer Relations.......................................... 2/91 to 6/95
(Company service: 17 years)
Paul A. Oyer, age 57
Financial Vice President and Treasurer....................................... 4/89 to date
Director..................................................................... 4/85 to date
Financial Vice President and Treasurer, MECO and HELCO....................... 3/85 to date
(Company service: 31 years)
Patricia U. Wong, age 41
Vice President - Corporate Excellence........................................ 3/98 to date
Manager, Environmental Department............................................ 9/96 to 2/98
Associate General Counsel, Legal Department.................................. 5/90 to 9/96
(Company service: 7 years)
Ernest T. Shiraki, age 50
Controller................................................................... 5/89 to date
(Company service: 28 years)
Molly M. Egged, age 47
Secretary.................................................................... 10/89 to date
Secretary, MECO and HELCO.................................................... 10/89 to date
(Company service: 17 years)
HECO's executive officers Robert F. Clarke, T. Michael May and Molly M. Egged
are also officers of one or more of the affiliated nonutility HEI companies.
There are no family relationships between any executive officer or director of
HECO and any other executive officer or director of HECO, or any arrangement or
understanding between any director and any person pursuant to which the director
was selected.
The list of current directors of HECO is incorporated herein by reference to
page 36 of HECO's 1997 Annual Report to Stockholder, portions of which are filed
herein as HECO Exhibit 13. Information on the business experience and
directorships of directors of HECO who are also directors of HEI is incorporated
herein by reference to pages 4 through 6 of HEI's Definitive Proxy Statement,
prepared for the Annual Meeting of Stockholders to be held on April 28, 1998.
Paul C. Yuen, age 69, and Anne M. Takabuki, age 41, as of February 18, 1998 are
the only outside directors of HECO who are not directors of HEI. Dr. Yuen, who
was elected a director of HECO in April 1993, is Dean of the College of
Engineering at the University of Hawaii-Manoa. In the past five years, he has
held various administrative positions at the University of Hawaii-Manoa. He also
serves on
48
the board of Cyanotech Corporation. Miss Takabuki was elected a director of HECO
in April 1997 and is Vice President/General Counsel of Wailea Golf Resort, Inc.
She also serves on the boards of MECO, Wailea Golf Resort, Inc. and its
affiliated companies and MAGBA, Inc. Information on Mr. Oyer's business
experience and directorship is indicated above.
ITEM 11. EXECUTIVE COMPENSATION
HEI:
The information required under this item for HEI is incorporated by reference to
pages 9 to 10, 13 to 19, and 24 to 25 of HEI's Definitive Proxy Statement,
prepared for the Annual Meeting of Stockholders to be held on April 28, 1998.
HECO:
The following tables set forth the information required for the chief executive
officer of HECO and the four other most highly compensated HECO executive
officers serving at the end of 1997. All compensation amounts presented for T.
Michael May are the same amounts presented in HEI's Definitive Proxy Statement,
prepared for the Annual Meeting of Stockholders to be held on April 28, 1998.
SUMMARY COMPENSATION TABLE
- --------------------------
The following summary compensation table shows the annual and long-term
compensation of the chief executive officer of HECO and the four other most
highly compensated executive officers of HECO who served at the end of 1997.
SUMMARY COMPENSATION TABLE
Long-Term
Annual Compensation Compensation
----------------------------------- ----------------------------
Awards Payouts
Other ------------- ------------ All
Annual Securities Other
Compen- Underlying LTIP Compen-
Name and Principal Salary Bonus(1) sation(2) Options(3) Payouts(4) sation(5)
Position Year ($) ($) ($) (#) ($) ($)
- -------------------------------------------------------------------------------------------------------------------------
T. Michael May............. 1997 $313,000 $ 0 $ 0 12,000 -- $16,423
President and Chief 1996 282,000 98,747 107,412 12,000 52,175 13,945
Executive Officer 1995 226,000 41,987 0 4,000 na 8,177
Paul A. Oyer............... 1997 202,000 0 16,042 3,000 na 9,291
Financial Vice President 1996 196,000 19,706 14,533 0 na 8,748
and Treasurer 1995 188,000 17,959 13,167 3,000 na 7,907
Thomas J. Jezierny......... 1997 172,000 0 0 3,000 -- 5,760
Vice President- 1996 151,000 21,524 0 3,000 19,526 4,785
Energy Delivery 1995 135,000 14,642 0 3,000 29,204 4,320
Thomas L. Joaquin.......... 1997 168,000 0 0 3,000 na 6,232
Vice President- 1996 154,000 19,706 0 0 na 5,546
Power Supply 1995 137,000 17,959 0 3,000 na 4,404
Edward Y. Hirata........... 1997 149,000 0 0 3,000 na 11,084
Vice President- 1996 144,000 18,054 135 0 na 10,381
Regulatory Affairs 1995 140,000 16,519 270 3,000 na 10,002
na Not applicable.
49
(1) The named executive officers are eligible for an incentive award under the
Company's annual Executive Incentive Compensation Plan (EICP). EICP bonus
payouts are reflected as compensation for the year earned.
(2) Covers perquisites of $107,412 for Mr. May for 1996 which he recognized as
imputed income under the Internal Revenue Code, including $95,691 under the
category club membership (representing once in a lifetime reimbursement of
initiation fees of $50,000 grossed up for taxes, plus reimbursement of
monthly dues not grossed up for taxes). Amounts for Mr. Oyer and Mr. Hirata
represent above-market earnings on deferred annual payouts.
(3) Except for Mr. May's, Mr. Oyer's, Mr. Joaquin's and Mr. Hirata's options
granted in 1995, options granted include dividend equivalents.
(4) Long-Term Incentive Plan (LTIP) payouts are determined in the second quarter
of each year for the three-year cycle ending on December 31 of the previous
calendar year. If there is a payout, the amount is reflected as LTIP
compensation in the table for the previous year for Mr. May and Mr.
Jezierny. In April 1996, an LTIP payout was made for the 1993-1995
performance cycle and is reflected as LTIP compensation in the table for
1995. In May 1997, an LTIP payout was made for the 1994-1996 performance
cycle and is reflected as LTIP compensation in the table for 1996. The
determination of whether there will be a payout under the 1995-1997 LTIP
will not be made until the second quarter of this year.
(5) Represents amounts accrued by the Company for certain death benefits
provided to the named executive officers. Additional information is
incorporated by reference to "Other Compensation Plans" on page 22 of HEI's
Definitive Proxy Statement, prepared for the Annual Meeting of Stockholders
to be held on April 28, 1998.
OPTION GRANTS IN LAST FISCAL YEAR
- ---------------------------------
The following table presents information on the nonqualified stock options which
were granted in 1997 to the executives named in the HECO Summary Compensation
Table. The practice of granting stock options, which may include dividend
equivalent shares, has been followed each year since 1987.
OPTION GRANTS IN LAST FISCAL YEAR
Number of Percent of
Securities Total Options
Underlying Granted to Exercise Grant Date
Options Employees in Price Expiration Present
Granted (1)(#) Fiscal Year ($/share) Date Value (2)($)
- ------------------------------------------------------------------------------------------------------------------------------
T. Michael May........... 12,000 8% $34.61 April 14, 2007 $107,520
Paul A. Oyer............. 3,000 2 34.61 April 14, 2007 26,880
Thomas J. Jezierny....... 3,000 2 34.61 April 14, 2007 26,880
Thomas L. Joaquin........ 3,000 2 34.61 April 14, 2007 26,880
Edward Y. Hirata......... 3,000 2 34.61 April 14, 2007 26,880
(1) For the 24,000 option shares granted with an exercise price of $34.61 per
share, additional dividend equivalent shares are granted at no additional
cost throughout the four-year vesting period (vesting in equal installments)
which begins on the date of grant. Dividend equivalents are computed, as of
each dividend record date, both with respect to the number of shares under
the option and with respect to the number of dividend equivalent shares
previously credited to the participant and not issued during the period
prior to the dividend record date. Accelerated vesting is provided in the
event a change in control occurs. No stock appreciation rights have been
granted under the Company's current benefit plans.
(2) Based on a Binomial Option Pricing Model, which is a variation of the
Black-Scholes Option Pricing Model. For the stock options granted on April
14, 1997, with a 10-year option period, an exercise price of $34.61, and
with additional dividend equivalent shares granted for the first four years
of the option, the Binomial Value adjusted for forfeiture risk is $8.96 per
share. The following assumptions were used in the model: Stock Price:
$34.61; Exercise Price: $34.61; Term: 10 years; Volatility: 0.098; Interest
Rate: 7.05%; and Dividend Yield: 6.81%. The following were
50
the valuation results: Binomial Option Value: $2.92; Dividend Credit Value:
$6.04; and Total Value $8.96.
AGGREGATED OPTION EXERCISES AND FISCAL YEAR-END OPTION VALUES
- -------------------------------------------------------------
The following table shows the stock options, including dividend equivalents,
exercised by the named executive officers in 1997. Also shown is the number of
unexercised options and the value of unexercised in the money options, including
dividend equivalents, at the end of 1997. Under the Stock Option and Incentive
Plan, dividend equivalents have been granted to all named executive officers as
part of the 1997 stock option grant, to Mr. May as part of the 1996 stock option
grant, to Mr. Oyer as part of the 1988 stock option grant and to Mr. Jezierny as
part of the stock option grant for the 1990 through 1996 grants.
Dividend equivalents permit a participant who exercises a stock option to obtain
at no additional cost, in addition to the option shares, the amount of dividends
declared on the number of shares of common stock with respect to which the
option is exercised during the period between the grant and the exercise of the
option. Dividend equivalents are computed, as of each dividend record date
throughout the four-year vesting period (vesting in equal installments), which
begins on the date of grant, both with respect to the number of shares
underlying the option and with respect to the number of dividend equivalent
shares previously credited to the executive officer and not issued during the
period prior to the dividend record date.
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND
FISCAL YEAR-END OPTION VALUES
Value of
Number of Unexercised In
Unexercised the Money Options
Options (Including (Including
Dividend Dividend
Value Equivalents) at Equivalents)at
Shares Dividend Realized On Fiscal Year-End Fiscal Year-End (1)
Acquired Equivalents Value Dividend -------------------- ---------------------
On Exercise Acquired On Realized On Equivalents Exercisable/ Exercisable/
(#) Exercise (#) Options ($) ($) Unexercisable (#) Unexercisable ($)
- --------------------------------------------------------------------------------------------------------------------------------
T. Michael May...... -- -- $ -- $ -- 9,379 / 24,767 $ 57,137 / 208,901
Paul A. Oyer........ 700 205 2,909 7,591 9,181 / 4,657 70,321 / 37,280
Thomas J. Jezierny.. -- -- -- -- 20,469 / 8,461 274,776 / 87,150
Thomas L. Joaquin... -- -- -- -- 1,500 / 4,657 12,068 / 37,280
Edward Y. Hirata.... -- -- -- -- 4,500 / 4,657 19,883 / 37,280
(1) All options were in the money (where the option price is less than the
closing price on December 31, 1997). Value based on closing price of $40.875
per share on the New York Stock Exchange on December 31, 1997.
LONG-TERM INCENTIVE PLAN AWARDS TABLE
- -------------------------------------
A Long-Term Incentive Plan award made to Mr. May in 1997 was the only such award
made to the named executive officers in the HECO Summary Compensation Table.
Additional information required under this item is incorporated by reference to
page 16 of HEI's Definitive Proxy Statement, prepared for the Annual Meeting of
Stockholders to be held on April 28, 1998.
PENSION PLAN
- ------------
The Retirement Plan for Employees of Hawaiian Electric Industries, Inc. and
Participating Subsidiaries (the Retirement Plan) provides a monthly retirement
pension for life. Additional information required under this item is
incorporated by reference to "Pension Plans" on pages 17 and 18 of HEI's
Definitive Proxy Statement, prepared for the Annual Meeting of Stockholders to
be held on April 28, 1998. As of December 31, 1997, the named executive officers
in the HECO Summary Compensation Table had the following number of years of
credited service under the Retirement Plan: Mr. May, 5 years; Mr. Oyer, 31
years: Mr. Jezierny, 27 years; Mr. Joaquin, 24 years; and Mr. Hirata, 11 years.
51
CHANGE-IN-CONTROL AGREEMENTS
- ----------------------------
Mr. May is the only named executive officer in the HECO Summary Compensation
Table with whom HEI has a currently applicable Change-in-Control Agreement.
Additional information required under this item is incorporated by reference to
"Change-in-Control Agreements" on pages 18 and 19 of HEI's Definitive Proxy
Statement, prepared for the Annual Meeting of Stockholders to be held on April
28, 1998.
EXECUTIVE MANAGEMENT COMPENSATION
- ---------------------------------
Decisions on executive compensation for the named HECO executive officers are
made by the HEI Compensation Committee which is composed of six independent
nonemployee directors. All decisions by the Committee concerning HECO officers
are reviewed and approved by the full HEI Board of Directors as well as the HECO
Board of Directors.
HECO BOARD OF DIRECTORS
- -----------------------
Committees of the HECO Board
- ----------------------------
During 1997, the Board of Directors of HECO had only one standing committee, the
Audit Committee, which was comprised of three nonemployee directors: Edwin L.
Carter, Chairman, Diane J. Plotts and Paul C. Yuen. The Audit Committee holds
such meetings as it deems advisable to review the financial operations of HECO.
In 1997, the Audit Committee held five meetings to review with management, the
internal auditor and HECO's independent auditors the activities of the internal
auditor, the results of the annual audit by the independent auditors and the
financial statements which are included in HECO's 1997 Annual Report to
Stockholder.
Remuneration of HECO Directors and attendance at meetings
- ---------------------------------------------------------
In 1997, Paul C. Yuen and Anne M. Takabuki were the only nonemployee directors
of HECO who were not also directors of HEI. They were each paid a retainer of
$20,000, 60% of which was distributed in the common stock of HEI pursuant to the
HEI Nonemployee Director Stock Plan and 40% of which was distributed in cash.
The number of shares of stock distributed was based on a share price of
$33.3125, which is equal to the average high and low sales prices of HEI common
stock on April 25, 1997, with a cash payment made in lieu of any fractional
share. The nonemployee directors of HECO who were also nonemployee directors of
HEI did not receive a separate retainer from HECO. In addition, a fee of $700
was paid in cash to each nonemployee director (including nonemployee directors
of HECO who are also nonemployee directors of HEI) for each Board and Committee
meeting attended by the director. The Chairman of the HECO Audit Committee was
paid an additional $100 for each Committee meeting attended. Employee members of
the Board of Directors are not compensated for attendance at any meeting of the
Board or Committees of the Board.
In 1997, there were five regular bi-monthly meetings, two joint meetings and one
special meeting of the HECO Board of Directors. All incumbent directors attended
at least 75% of the combined total number of meetings of the Board and
Committees on which they served.
At the meeting of the HEI Board of Directors on December 17, 1996, the HEI Board
voted to terminate the Nonemployee Director Retirement Plan referenced on page 9
of HEI's Definitive Proxy Statement, prepared for the Annual Meeting of
Stockholders to be held on April 28, 1998, and pay the present value of the
accrued retirement benefits to directors age 55 and under or with 5 years of
service or less (Dr. Yuen) as of April 22, 1997, on the basis of 60% HEI Common
Stock and 40% cash. A discount rate of 6.5% was used in the calculation of the
present value and it was assumed that the current nonemployee director's accrued
benefits would commence at the mandatory retirement age of 72. The total present
value of Dr. Yuen's accrued benefits was $33,415, of which the cash portion was
paid on January 30, 1997, and the stock portion was invested in Dr. Yuen's HEI
Dividend Reinvestment and Stock Purchase Plan account on February 28, 1997.
52
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
HEI:
The information required under this item is incorporated by reference to pages
11 and 12 of HEI's Definitive Proxy Statement, prepared for the Annual Meeting
of Stockholders to be held on April 28, 1998.
HECO:
HEI owns all of the common stock of HECO, which is HECO's only class of voting
securities. HECO has also issued and has outstanding various series of preferred
stock, the holders of which, upon certain defaults in dividend payments, have
the right to elect a majority of the directors of HECO.
The following table shows the shares of HEI common stock beneficially owned by
each HECO director (other than those who are also directors of HEI), named HECO
executive officers as listed in the Summary Compensation Table on pages 42 and
43 and by HECO directors and officers as a group, as of February 18, 1998, based
on information furnished by the respective individuals.
Amount of Common Stock and Nature of
Name of Individual or Group Beneficial Ownership
- ----------------------------------------------------------------------------------------------------
Total
----------
Directors
- ---------
Paul A. Oyer* 1,203 (a)
9,051 (d) 10,254
-------------------
Anne M. Takabuki 419 (a) 419
-------------------
Paul C. Yuen 1,012 (a)
1,069 (b) 2,081
-------------------
Other named executive officers
- ------------------------------
Thomas J. Jezierny 3,473 (a)
24,109 (d) 27,582
-------------------
Thomas L. Joaquin 3,460 (a)
26 (b)
23 (c)
3,051 (d) 6,560
-------------------
Edward Y. Hirata 5,118 (a)
6,051 (d) 11,169
-------------------
All directors and executive officers 40,471 (a)
as a group (18 persons) 13,548 (b)
517 (c)
196,524 (d) 251,060**
-------------------
* Also a named executive officer listed in the Summary Compensation Table on
pages 49 and 43.
** HECO directors Carter, Clarke, Henderson, May and Plotts, who also serve on
the HEI Board of Directors, are not shown separately, but are included in
the total amount. The information required as to these directors is
incorporated by reference to page 11 of HEI's Definitive Proxy Statement,
prepared for the Annual Meeting of Stockholders to be held on April 28,
1998. Messrs. Clarke and May are also named executive officers listed in
the Summary Compensation Table incorporated by reference to pages 13 and 14
of the above-referenced Definitive Proxy
53
Statement of HEI. The number of shares of common stock beneficially owned
by any HECO director or by all HECO directors and officers as a group does
not exceed 1% of the outstanding common stock of HEI.
(a) Sole voting and investment power.
(b) Shared voting and investment power (shares registered in name of respective
individual and spouse).
(c) Shares owned by spouse, children or other relatives sharing the home of the
director or an officer in the group and in which personal interest of the
director or officer is disclaimed.
(d) Stock options, including accompanying dividend equivalents shares,
exercisable within 60 days after February 18, 1998, under the 1987 Stock
Option and Incentive Plan, as amended in 1992 and 1996.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
HEI:
The information required under this item is incorporated by reference to pages
24 to 25 of HEI's Definitive Proxy Statement, prepared for the Annual Meeting of
Stockholders to be held on April 28, 1998.
HECO:
The information required under this item is incorporated by reference to pages
24 to 25 of HEI's Definitive Proxy Statement, prepared for the Annual Meeting of
Stockholders to be held on April 28, 1998.
PART IV
-------
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a)(1) FINANCIAL STATEMENTS
The following financial statements contained in HEI's 1997 Annual Report to
Stockholders and HECO's 1997 Annual Report to Stockholder, portions of which are
filed by HEI as Exhibit 13 and, portions of which are filed by HECO as Exhibit
13, respectively, are incorporated by reference in Part II, Item 8, of this Form
10-K:
1997 Annual Report to
Stockholder(s) (Page/s)
---------------------------------
HEI HECO
------------------------------------------------------------------------------------------------------
Independent Auditors' Report...................................... 40 34
Consolidated Statements of Income, Years ended December 31, 1997,
1996 and 1995................................................... 41 12
Consolidated Statements of Retained Earnings, Years ended
December 31, 1997, 1996 and 1995................................ 41 12
Consolidated Balance Sheets, December 31, 1997 and 1996........... 42 13
Consolidated Statements of Capitalization,
December 31, 1997 and 1996...................................... na 14-15
Consolidated Statements of Cash Flows, Years ended December 31,
1997, 1996 and 1995............................................. 43 16
Notes to Consolidated Financial Statements........................ 26, 44-65 17-33
54
(A)(2) FINANCIAL STATEMENT SCHEDULES
The following financial statement schedules for HEI and HECO are included in
this Report on the pages indicated below:
Page/s in Form 10-K
---------------------------------
HEI HECO
--------------------------------------------------------------------------------------------------------
Independent Auditors' Report 56 57
Schedule II Condensed Financial Information of Registrant,
Hawaiian Electric Industries, Inc. (Parent
Company) as of December 31, 1997 and 1996 and
Years ended December 31, 1997, 1996 and 1995....... 58-60 na
Schedule V Valuation and Qualifying Accounts, Years ended
December 31, 1997, 1996 and 1995................... 61 61
Certain Schedules, other than those listed, are omitted because they are not
required, or are not applicable, or the required information is shown in the
consolidated financial statements or notes included in HEI's 1997 Annual Report
to Stockholders and HECO's 1997 Annual Report to Stockholder, which financial
statements are incorporated herein by reference.
(A)(3) EXHIBITS
Exhibits for HEI and HECO and their subsidiaries are listed in the "Index to
Exhibits" found on pages 62 through 70 of this Form 10-K. The exhibits listed
for HEI and HECO are listed in the index under the headings "HEI" and "HECO,"
respectively, except that the exhibits listed under "HECO" are also considered
exhibits for HEI.
(B) REPORTS ON FORM 8-K
HEI AND HECO:
During the fourth quarter of 1997, HEI and HECO filed a Form 8-K, dated October
16, 1997, under Item 5, which included HEI's October 16, 1997 news release
reporting third quarter 1997 earnings. During the fourth quarter of 1997, HEI
filed a Form 8-K, dated December 6, 1997, under Items 2 and 7, which included
the purchase and assumption agreement with BoA.
On January 30, 1998, HEI filed a Form 8-K/A, dated December 6, 1997, under Item
7, which included financial statements and pro forma financial information
relating to ASB's acquisition of most of the Hawaii operations of BoA. On March
2, 1998, HEI and HECO filed a Form 8-K, dated February 27, 1998, under Item 7,
which included portions of HEI's 1997 Annual Report to Stockholders and HECO's
1997 Annual Report to Stockholder. On March 11, 1998, HEI and HECO filed a Form
8-K, dated March 2, 1998, under Item 5, which updated the following: "PUC show
cause order for HECO," "HELCO power situation," "Property damage reserve" and
"Competition."
55
[KPMG Peat Marwick letterhead]
Independent Auditors' Report
----------------------------
The Board of Directors
and Stockholders
Hawaiian Electric Industries, Inc.:
Under date of January 19, 1998, we reported on the consolidated balance sheets
of Hawaiian Electric Industries, Inc. and subsidiaries as of December 31, 1997
and 1996, and the related consolidated statements of income, retained earnings
and cash flows for each of the years in the three-year period ended December 31,
1997, as contained in the 1997 annual report to stockholders. These consolidated
financial statements and our report thereon are incorporated by reference in the
annual report on Form 10-K for the year 1997. In connection with our audits of
the aforementioned consolidated financial statements, we also audited the
related financial statement schedules as listed in the accompanying index. These
financial statement schedules are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statement schedules based on our audits.
In our opinion, such financial statement schedules, when considered in relation
to the basic consolidated financial statements taken as a whole, present fairly,
in all material respects, the information set forth therein.
/s/ KPMG Peat Marwick LLP
Honolulu, Hawaii
January 19, 1998
56
[KPMG Peat Marwick letterhead]
Independent Auditors' Report
----------------------------
The Board of Directors
and Stockholder
Hawaiian Electric Company, Inc.:
Under date of January 19, 1998, we reported on the consolidated balance sheets
and consolidated statements of capitalization of Hawaiian Electric Company, Inc.
(a wholly owned subsidiary of Hawaiian Electric Industries, Inc.) and
subsidiaries as of December 31, 1997 and 1996, and the related consolidated
statements of income, retained earnings and cash flows for each of the years in
the three-year period ended December 31, 1997, as contained in the 1997 annual
report to stockholder. These consolidated financial statements and our report
thereon are incorporated by reference in the annual report on Form 10-K for the
year 1997. In connection with our audits of the aforementioned consolidated
financial statements, we also audited the related financial statement schedule
as listed in the accompanying index. The financial statement schedule is the
responsibility of the Company's management. Our responsibility is to express an
opinion on the financial statement schedule based on our audits.
In our opinion, such financial statement schedule, when considered in relation
to the basic consolidated financial statements taken as a whole, presents
fairly, in all material respects, the information set forth therein.
/s/ KPMG Peat Marwick LLP
Honolulu, Hawaii
January 19, 1998
57
Hawaiian Electric Industries, Inc.
SCHEDULE II -- CONDENSED FINANCIAL INFORMATION OF REGISTRANT
HAWAIIAN ELECTRIC INDUSTRIES, INC. (PARENT COMPANY)
CONDENSED BALANCE SHEETS
December 31,
-----------------------------------
(in thousands) 1997 1996
- -------------------------------------------------------------------------------------------------------
ASSETS
Cash and equivalents................................................ $ 416 $ 1,161
Advances to and notes receivable from subsidiaries.................. 25,459 40,455
Accounts receivable................................................. 1,315 2,135
Other investments................................................... 810 810
Property, plant and equipment, net.................................. 3,288 3,177
Other assets........................................................ 4,182 2,933
Investment in wholly owned subsidiaries, at equity.................. 1,245,415 1,021,115
-----------------------------------
$1,280,885 $1,071,786
===================================
LIABILITIES AND STOCKHOLDERS' EQUITY
Accounts payable.................................................... $ 3,555 $ 7,231
Notes payable to subsidiaries....................................... 3,181 --
Commercial paper.................................................... 189,482 87,600
Long-term debt...................................................... 160,000 191,500
Loan from HEI Preferred Funding, LP (8.36% due in 2017)............. 103,000 --
Deferred income taxes............................................... 1,374 3,055
Unamortized tax credits............................................. 117 30
Other............................................................... 5,495 9,518
-----------------------------------
466,204 298,934
-----------------------------------
Stockholders' equity
Common stock........................................................ 654,819 622,945
Retained earnings................................................... 159,862 149,907
-----------------------------------
814,681 772,852
-----------------------------------
$1,280,885 $1,071,786
===================================
Note to Balance Sheets
- ----------------------
Long-term debt consisted of the following:
Promissory notes, 6.3% - 7.1%, due in various years through 2012.... $ 96,000 $ 127,000
Promissory notes, 8.2% - 8.7%, due in various years through 2011.... 29,000 29,500
Promissory note, variable rate (6.325% at December 31, 1997) due
1999............................................................... 35,000 35,000
-----------------------------------
$ 160,000 $ 191,500
===================================
As of December 31, 1997, HEI guaranteed its subsidiary and affiliate
nonintercompany debt of $7 million.
The aggregate payments of principal required on long-term debt and a loan from
HEI Preferred Funding, LP subsequent to December 31, 1997 are $1 million in
1998, $41 million in 1999, $11 million in 2000, $23 million in 2001 and $5
million in 2002.
58
Hawaiian Electric Industries, Inc.
SCHEDULE II -- CONDENSED FINANCIAL INFORMATION OF REGISTRANT (CONTINUED)
HAWAIIAN ELECTRIC INDUSTRIES, INC. (PARENT COMPANY)
CONDENSED STATEMENTS OF INCOME
Years ended December 31,
----------------------------------------------------
(in thousands) 1997 1996 1995
- --------------------------------------------------------------------------------------------------------
REVENUES............................................ $ 2,468 $ 2,731 $ 2,923
Equity in income of subsidiaries.................... 99,093 93,488 89,198
----------------------------------------------------
101,561 96,219 92,121
----------------------------------------------------
EXPENSES:
Operating, administrative and general............... 7,661 8,639 7,543
Depreciation and amortization of property,
plant and equipment.............................. 864 651 491
Taxes, other than income taxes...................... 300 325 282
----------------------------------------------------
8,825 9,615 8,316
----------------------------------------------------
92,736 86,604 83,805
Interest expense.................................... 22,822 18,103 17,922
----------------------------------------------------
INCOME BEFORE INCOME TAX BENEFIT.................... 69,914 68,501 65,883
Income tax benefit.................................. 16,528 10,157 11,610
----------------------------------------------------
NET INCOME.......................................... $ 86,442 $78,658 $77,493
====================================================
59
Hawaiian Electric Industries, Inc.
SCHEDULE II -- CONDENSED FINANCIAL INFORMATION OF REGISTRANT (CONTINUED)
HAWAIIAN ELECTRIC INDUSTRIES, INC. (PARENT COMPANY)
CONDENSED STATEMENTS OF CASH FLOWS
Years ended December 31,
-----------------------------------------------
(in thousands) 1997 1996 1995
- -------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income.......................................................... $ 86,442 $ 78,658 $ 77,493
Adjustments to reconcile net income to net cash provided by
operating activities
Equity in income of subsidiaries.................................. (99,093) (93,488) (89,198)
Dividends/distributions received from subsidiaries................ 72,762 67,972 51,435
Depreciation and amortization of property, plant and equipment.... 864 651 491
Other amortization................................................ 183 288 239
Deferred income taxes and tax credits, net........................ (3,433) (9) (1,236)
Changes in assets and liabilities
Decrease in accounts receivable................................ 820 269 161
Increase (decrease) in accounts payable........................ (3,676) 79 (2,094)
Changes in other assets and liabilities........................ (3,615) 711 1,880
-----------------------------------------------
NET CASH PROVIDED BY OPERATING ACTIVITIES........................... 51,254 55,131 39,171
-----------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES
Net decrease (increase) in advances to and notes receivable from
subsidiaries....................................................... 14,996 121 (12,880)
Capital expenditures................................................ (975) (1,401) (488)
Additional investments in subsidiaries.............................. (203,703) (28,100) (39,610)
-----------------------------------------------
NET CASH USED IN INVESTING ACTIVITIES............................... (189,682) (29,380) (52,978)
-----------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase (decrease) in notes payable to subsidiaries with
original maturities of three months or less........................ 3,181 -- (2,293)
Net increase in commercial paper.................................... 101,882 42,207 32,643
Proceeds from issuance of long-term debt............................ 19,000 10,000 30,000
Repayment of long-term debt......................................... (50,500) (42,000) (16,000)
Loan from HEI Preferred Funding, LP................................. 103,000 -- --
Net proceeds from issuance of common stock.......................... 22,919 19,818 19,322
Common stock dividends.............................................. (61,799) (55,288) (49,415)
-----------------------------------------------
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES................. 137,683 (25,263) 14,257
-----------------------------------------------
Net increase (decrease) in cash and equivalents..................... (745) 488 450
Cash and equivalents, beginning of year............................. 1,161 673 223
-----------------------------------------------
CASH AND EQUIVALENTS, END OF YEAR................................... $ 416 $ 1,161 $ 673
===============================================
Supplemental disclosures of noncash activities:
In 1997, 1996 and 1995, $1.0 million, $1.1 million and $1.3 million,
respectively, of HEI advances to HEIDI were converted to equity in a noncash
transaction.
Common stock dividends reinvested by stockholders in HEI common stock in
noncash transactions amounted to $15 million in 1997, $18 million in 1996 and
$20 million in 1995.
60
Hawaiian Electric Industries, Inc.
and Hawaiian Electric Company, Inc.
SCHEDULE V -- VALUATION AND QUALIFYING ACCOUNTS
Years ended December 31, 1997, 1996 and 1995
- ---------------------------------------------------------------------------------------------------------------------------------
Col. A Col. B Col. C Col. D Col. E
- ---------------------------------------------------------------------------------------------------------------------------------
(in thousands) Additions
--------------------------------
Balance
at
beginning Charged to Balance at
of costs and Charged to end of
Description period expenses other accounts Deductions period
- ---------------------------------------------------------------------------------------------------------------------------------
1997
----
Allowance for uncollectible
accounts
Hawaiian Electric Company, Inc.
and subsidiaries................. $ 1,167 $ 2,850 $ 1,256 $ 3,988 $ 1,285
Other companies................... 1,433 653 -- 83 2,003
------------- -------------- -------------- ------------- --------------
$ 2,600 $ 3,503 $ 1,256(a) $ 4,071(b) $ 3,288
============= ============== ============== ============= ==============
Allowance for uncollectible
interest (ASB).................... $ 2,272 $ 2,166 $ -- $ -- $ 4,438
============= ============== ============== ============= ==============
Allowance for losses for loans
receivable (ASB).................. $ 19,205 $ 6,934 $ 6,656(c) $ 2,845(b) $ 29,950
============= ============== ============== ============= ==============
1996
----
Allowance for uncollectible
accounts
Hawaiian Electric Company, Inc.
and subsidiaries................. $ 1,101 $ 2,591 $ 1,310 $ 3,835 $ 1,167
Other companies................... 642 846 7 62 1,433
------------- -------------- -------------- ------------- --------------
$ 1,743 $ 3,437 $ 1,317(a) $ 3,897(b) $ 2,600
============= ============== ============== ============= ==============
Allowance for uncollectible
interest (ASB).................... $ 1,273 $ 999 $ -- $ -- $ 2,272
============= ============== ============== ============= ==============
Allowance for losses for loans
receivable (ASB).................. $ 12,916 $ 7,631 $ 106(a) $ 1,448(b) $ 19,205
============= ============== ============== ============= ==============
1995
----
Allowance for uncollectible
accounts
Hawaiian Electric Company, Inc.
and subsidiaries................. $ 1,136 $ 2,492 $ 1,266 $ 3,793 $ 1,101
Other companies................... 280 400 -- 38 642
------------- -------------- -------------- ------------- --------------
$ 1,416 $ 2,892 $ 1,266(a) $ 3,831(b) $ 1,743
============= ============== ============== ============= ==============
Allowance for uncollectible
interest (ASB).................... $ 1,101 $ 172 $ -- $ -- $ 1,273
============= ============== ============== ============= ==============
Allowance for losses for loans
receivable (ASB).................. $ 8,793 $ 4,887 $ 392(a) $ 1,156(b) $ 12,916
============= ============== ============== ============= ==============
(a) Primarily bad debts recovered.
(b) Bad debts charged off.
(c) Primarily related to loans receivable acquired from BoA.
61
INDEX TO EXHIBITS
The exhibits designated by an asterisk (*) are filed herein. The exhibits not so
designated are incorporated by reference to the indicated filing. A copy of any
exhibit may be obtained upon written request for a $0.20 per page charge from
the HEI Shareholder Services Division, P.O. Box 730, Honolulu, Hawaii 96808-
0730.
EXHIBIT NO. DESCRIPTION
- ----------- -----------
HEI:
- ----------------
3(i).1 HEI's Restated Articles of Incorporation (Exhibit 4(b) to Registration No. 33-7895).
3(i).2 Articles of Amendment of HEI filed June 30, 1990 (Exhibit 4(b) to Registration
No. 33-40813).
*3(i).3 Statement of Issuance of Shares of Preferred or Special Classes in Series for HEI
Series A Junior Participating Preferred Stock filed October 28, 1997.
3(ii) HEI's Restated By-Laws (Exhibit 3(ii) to Form 10-Q for the quarter ended September
30, 1997).
4.1 Agreement to provide the SEC with instruments which define the rights of holders of
certain long-term debt of HEI and its subsidiaries (Exhibit 4.1 to HEI's Annual
Report on Form 10-K for the fiscal year ended December 31, 1992, File No. 1-8503).
4.2 Rights Agreement, dated as of October 28, 1997, between HEI and Continental Stock
Transfer & Trust Company, as Rights Agent, which includes as Exhibit B thereto the
Form of Rights Certificates (Exhibit 1 to HEI's Form 8-A, dated October 28, 1997,
File No. 1-8503).
4.3 Indenture, dated as of October 15, 1988, between HEI and Citibank, N.A., as Trustee
(Exhibit 4 to Registration No. 33-25216).
4.4 First Supplemental Indenture dated as of June 1, 1993 between HEI and Citibank, N.A.,
as Trustee, to Indenture dated as of October 15, 1988 between HEI and Citibank, N.A.,
as Trustee (Exhibit 4(a) to HEI's Quarterly Report on Form 10-Q for the quarter ended
September 30, 1993, File No. 1-8503).
4.5 Pricing Supplements Nos. 1 through 9 to the Registration Statement on Form S-3 of HEI
(Registration No. 33-58820) filed in connection with the sale of Medium-Term Notes,
Series B (Exhibit 4(b) to HEI's Quarterly Report on Form 10-Q for the quarter ended
September 30, 1993, File No. 1-8503).
4.5(a) Pricing Supplement No. 10 to Registration Statement on Form S-3 of HEI (Registration
No. 33-58820) filed in connection with the sale of Medium-Term Notes, Series B
(Exhibit 4.7 to HEI's Annual Report on Form 10-K for the fiscal year ended December
31, 1994, File No. 1-8503).
4.5(b) Pricing Supplement No. 11 to Registration Statement on Form S-3 of HEI (Registration
No. 33-58820) filed on December 1, 1995 in connection with the sale of Medium-Term
Notes, Series B (Exhibit 4.8 to HEI's Annual Report on Form 10-K for the fiscal year
ended December 31, 1995, File No. 1-8503).
4.5(c) Pricing Supplement No. 12 to Registration Statement on Form S-3 of HEI (Registration
No. 33-58820) filed on February 12, 1996 in connection with the sale of Medium-Term
Notes, Series B (Exhibit 4.9 to HEI's Annual Report on Form 10-K for the fiscal year
ended December 31, 1995, File No. 1-8503).
62
EXHIBIT NO. DESCRIPTION
- ----------- -----------
4.5(d) Pricing Supplements Nos. 13 through 14 to Registration Statement on Form S-3 of HEI
(Registration No. 33-58820) filed on September 26, 1997 in connection with the sale
of Medium-Term Notes, Series B.
4.5(e) Pricing Supplement No. 15 to Registration Statement on Form S-3 of HEI (Registration
No. 33-58820) filed on September 29, 1997 in connection with the sale of Medium-Term
Notes, Series B.
4.5(f) Pricing Supplement No. 16 to Registration Statement on Form S-3 of HEI (Registration
No. 33-58820) filed on September 30, 1997 in connection with the sale of Medium-Term
Notes, Series B.
4.5(g) Pricing Supplement No. 17 to Registration Statement on Form S-3 of HEI (Registration
No. 33-58820) filed on October 2, 1997 in connection with the sale of Medium-Term
Notes, Series B.
4.5(h) Pricing Supplement No. 18 to Registration Statement on Form S-3 of HEI (Registration
No. 33-58820) filed on February 5, 1998 in connection with the sale of Medium-Term
Notes, Series B.
4.5(i) Pricing Supplement No. 19 to Registration Statement on Form S-3 of HEI (Registration
No. 33-58820) filed on February 6, 1998 in connection with the sale of Medium-Term
Notes, Series B.
4.5(j) Pricing Supplement No. 20 to Registration Statement on Form S-3 of HEI (Registration
No. 33-58820) filed on February 6, 1998 in connection with the sale of Medium-Term
Notes, Series B.
4.5(k) Pricing Supplement No. 21 to Registration Statement on Form S-3 of HEI (Registration
No. 33-58820) filed on February 12, 1998 in connection with the sale of Medium-Term
Notes, Series B.
4.6 Purchase Agreement dated March 7, 1991 among HEI and the Purchasers named therein,
together with the Notes issued to such Purchasers, each dated March 7, 1991, pursuant
to the Purchase Agreement (Exhibit 4.5 to HEI's Annual Report on
Form 10-K for the fiscal year ended December 31, 1990, File No. 1-8503).
4.7 Composite conformed copy of the Note Purchase Agreement dated as of December 16, 1991
among HEI and the Purchasers named therein (Exhibit 4.6 to HEI's Annual Report on
Form 10-K for the fiscal year ended December 31, 1991, File No. 1-8503).
4.8 Amended and Restated Agreement of Limited Partnership of 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).
4.9 Amended and Restated Trust Agreement of 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).
4.10 Junior Indenture between HEI and The Bank of 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).
63
EXHIBIT NO. DESCRIPTION
- ----------- -----------
4.11 Officers' Certificate in connection with 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).
4.12 8.36% Trust Originated Preferred Security (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).
4.13 8.36% Junior Subordinated Debenture Series A, Due 2017, of HEI (Exhibit 4(n) to HEI's
Current Report on Form 8-K dated February 4, 1997, File No. 1-8503).
4.14 Trust Preferred Securities Guarantee Agreement 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).
4.15 Partnership Guarantee Agreement with respect 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).
4.16 Affiliate Investment Instruments Guarantee 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).
4.17 Certificate Evidencing Trust Common Securities of HEI Trust I dated February 4, 1997
(Exhibit 4.12 to the Quarterly Report on Form 10-Q of HEI Trust I and the
Partnership, File No. 1-8503-02, for the quarter ended March 31, 1997).
4.18 Certificate Evidencing Partnership Preferred Securities of the Partnership dated
February 4, 1997 (Exhibit 4.13 to the Quarterly Report on Form 10-Q of HEI Trust I
and the Partnership, File No. 1-8503-02, for the quarter ended March 31, 1997).
10.1 PUC Order Nos. 7070, 7153, 7203 and 7256 in Docket No. 4337, including copy of
"Conditions for the Merger and Corporate Restructuring of Hawaiian Electric Company,
Inc." dated September 23, 1982 (Exhibit 10 to Amendment No. 1 to
Form U-1).
10.2 Regulatory Capital Maintenance/Dividend Agreement dated May 26, 1988, between HEI,
HEIDI and the Federal Savings and Loan Insurance Corporation (by the Federal Home
Loan Bank of Seattle) (Exhibit (28)-2 to HEI's Current Report on Form 8-K dated May
26, 1988, File No. 1-8503).
10.2(a) OTS letter regarding release from Part II.B. of the Regulatory Capital
Maintenance/Dividend Agreement dated May 26, 1988 (Exhibit 10.3(a) to HEI's Annual
Report on Form 10-K for the fiscal year ended December 31, 1992,
File No. 1-8503).
10.3 Executive Incentive Compensation Plan (Exhibit 10(a) to HEI's Annual Report on
Form 10-K for the fiscal year ended December 31, 1987, File No. 1-8503).
10.4 HEI Executives' Deferred Compensation Plan (Exhibit 10.5 to HEI's Annual Report on
Form 10-K for the fiscal year ended December 31, 1990, File No. 1-8503).
10.5 1987 Stock Option and Incentive Plan of HEI as amended and restated effective
February 20, 1996 (Exhibit A to Proxy Statement of HEI, dated March 8, 1996, for the
Annual Meeting of Stockholders, File No. 1-8503).
64
EXHIBIT NO. DESCRIPTION
- ----------- -----------
10.6 HEI Long-Term Incentive Plan (Exhibit 10.11 to HEI's Annual Report on Form 10-K
for the fiscal year ended December 31, 1988, File No. 1-8503).
10.7 HEI Supplemental Executive Retirement Plan effective January 1, 1990 (Exhibit 10.9 to
HEI's Annual Report on Form 10-K for the fiscal year ended December 31, 1990, File
No. 1-8503).
10.8 HEI Excess Benefit Plan (Exhibit 10.13 (Exhibit A) to HEI's Annual Report on
Form 10-K for the fiscal year ended December 31, 1989, File No. 1-8503).
10.9 Change-in-Control Agreement (Exhibit 10.14 to HEI's Annual Report on Form 10-K
for the fiscal year ended December 31, 1989, File No. 1-8503).
10.10 Nonemployee Director Retirement Plan, effective as of October 1, 1989 (Exhibit 10.15
to HEI's Annual Report on Form 10-K for the fiscal year ended December 31, 1989,
File No. 1-8503).
10.11 HEI 1990 Nonemployee Director Stock Plan (Exhibit 10(a) to HEI's Quarterly Report on
Form 10-Q for the quarter ended September 30, 1990, File No. 1-8503).
10.12 HEI Nonemployee Directors' Deferred Compensation Plan (Exhibit 10.14 to HEI's Annual
Report on Form 10-K for the fiscal year ended December 31, 1990,
File No. 1-8503).
10.13 HEI and HECO Executives' Deferred Compensation Agreement. The agreement pertains to
and is substantially identical for all the HEI and HECO executive officers (Exhibit
10.15 to HEI's Annual Report on Form 10-K for the fiscal year ended December 31,
1991, File No. 1-8503).
10.14 Settlement Agreement and General Release made and entered into on February 10, 1994,
by and between the Insurance Commissioner as Rehabilitator/Liquidator, HIG and its
subsidiaries, the Hawaii Insurance Guaranty Association, HEI, HEIDI and others.
(Exhibit 10.20 to HEI's Annual Report on Form 10-K for the fiscal year ended December
31, 1993, File No. 1-8503).
*11 Computation of Earnings per Share of Common Stock. Filed herein as page 71.
*12.1 Computation of Ratio of Earnings to Fixed Charges. Filed herein as pages 72 and 73.
13 Pages 25 to 66 of HEI's 1997 Annual Report to Stockholders (with the exception of the
data incorporated by reference in Part I, Part II, Part III and Part IV, no other data
appearing in the 1997 Annual Report to Stockholders is to be deemed filed as part of
this Form 10-K Annual Report) (HEI Exhibit 13.1 to HEI's Current Report on Form 8-K
dated February 27, 1998, File No. 1-8503).
*21.1 Subsidiaries of HEI. Filed herein as page 75.
*23 Accountants' Consent. Filed herein as page 77.
*27.1 HEI and subsidiaries financial data schedule, December 31, 1997 and year ended
December 31, 1997.
*27.1(a) HEI and subsidiaries restated financial data schedule, December 31, 1996 and year
ended December 31, 1996.
*27.1(b) HEI and subsidiaries restated financial data schedule, December 31, 1995 and year
ended December 31, 1995.
65
EXHIBIT NO. DESCRIPTION
- ----------- -----------
*99.1 HEI Dividend Reinvestment and Stock Purchase Plan (as amended through February 2,
1998).
*99.2 Eighth Amendment to Trust Agreement, made and entered into on February 27, 1998,
Between Fidelity Management Trust Company and HEI for the Hawaiian Electric
Industries Retirement Savings Plan for incorporation by reference in the Registration
Statement on Form S-8 (Regis. No. 333-02103).
HECO:
- ----------------
3(i).1 HECO's Certificate of Amendment of Articles of Incorporation (filed June 30, 1987)
(Exhibit 3.1 to HECO's Annual Report on Form 10-K for the fiscal year ended December
31, 1988, File No. 1-4955).
3(i).2 Statement of Issuance of Shares of Preferred or Special Classes in Series for HECO
Series R Preferred Stock filed December 15, 1989 (Exhibit 3.1(a) to HECO's Annual
Report on Form 10-K for the fiscal year ended December 31, 1989, File No. 1-4955).
3(i).3 Articles of Amendment to HECO's Amended Articles of Incorporation filed December 21,
1989 (Exhibit 3.1(b) to HECO's Annual Report on Form 10-K for the fiscal year ended
December 31, 1989, File No 1-4955).
3(ii) HECO's By-Laws (Exhibit 3.2 to HECO's Annual Report on Form 10-K for the fiscal year
ended December 31, 1988, File No. 1-4955).
4.1 Agreement to provide the SEC with instruments which define the rights of holders of
certain long-term debt of HECO, HELCO and MECO (Exhibit 4 to HECO's Annual Report on
Form 10-K for the fiscal year ended December 31, 1988, File No. 1-4955).
4.2 Indenture dated as of December 1, 1993 between HECO and The Bank of New York, as
Trustee (Exhibit 4(a) to Registration No. 33-51025).
4.3 Indenture dated as of December 1, 1993 among MECO, HECO, as guarantor, and
The Bank of New York, as Trustee (Exhibit 4(b) to Registration No. 33-51025).
4.4 Indenture dated as of December 1, 1993 among HELCO, HECO, as guarantor, and
The Bank of New York, as Trustee (Exhibit 4(c) to Registration No. 33-51025).
4.5 Officers' Certificate dated as of December 22, 1993, pursuant to Sections 102 and 301
of the Indenture dated as of December 1, 1993 between HECO and The Bank of New York,
as Trustee, establishing the $30,000,000 Notes, 5.83% Series Due 1998 (Exhibit 4.6 to
HECO's Annual Report on Form 10-K for the fiscal year ended December 31, 1993, File
No. 1-4955).
4.6 Amended and Restated Trust Agreement of HECO 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).
4.7 HECO Junior Indenture with The Bank of New 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).
4.8 8.05% Cumulative Quarterly Income Preferred 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).
66
EXHIBIT NO. DESCRIPTION
- ----------- -----------
4.9 8.05% Junior Subordinated Deferrable Interest 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).
4.10 Trust Guarantee Agreement with respect to HECO 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).
4.11 MECO Junior Indenture with The Bank of New 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).
4.12 HELCO Junior Indenture with The Bank of New 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).
4.13 Agreement as to Expenses and Liabilities among 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).
10.1 Power Purchase Agreement between Kalaeloa Partners, L.P., and HECO dated October 14,
1988 (Exhibit 10(a) to HECO's Quarterly Report on Form 10-Q for the quarter ended
September 30, 1988, File No. 1-4955).
10.1(a) Amendment No. 1 to Power Purchase Agreement between HECO and Kalaeloa Partners, L.P.,
dated June 15, 1989 (Exhibit 10(c) to HECO's Quarterly Report on
Form 10-Q for the quarter ended June 30, 1989, File No. 1-4955).
10.1(b) Lease Agreement between Kalaeloa Partners, L.P., as Lessor, and HECO, as Lessee,
dated February 27, 1989 (Exhibit 10(d) to HECO's Quarterly Report on Form 10-Q for
the quarter ended June 30, 1989, File No. 1-4955).
10.1(c) Restated and Amended Amendment No. 2 to Power Purchase Agreement between HECO and
Kalaeloa Partners, L.P., dated February 9, 1990 (Exhibit 10.2(c) to HECO's Annual
Report on Form 10-K for the fiscal year ended December 31, 1989,
File No. 1-4955).
10.1(d) Amendment No. 3 to Power Purchase Agreement between HECO and Kalaeloa Partners, L.P.,
dated December 10, 1991 (Exhibit 10.2(e) to HECO's Annual Report on Form 10-K for the
fiscal year ended December 31, 1991, File No. 1-4955).
10.2 Power Purchase Agreement between AES Barbers Point, Inc. and HECO, entered into on
March 25, 1988 (Exhibit 10(a) to HECO's Quarterly Report on Form 10-Q for the quarter
ended March 31, 1988, File No. 1-4955).
10.2(a) Agreement between HECO and AES Barbers Point, Inc., pursuant to letters dated May 10,
1988 and April 20, 1988 (Exhibit 10.4 to HECO's Annual Report on
Form 10-K for fiscal year ended December 31, 1988, File No. 1-4955).
10.2(b) Amendment No. 1, entered into as of August 28, 1988, to Power Purchase Agreement
between AES Barbers Point, Inc. and HECO (Exhibit 10 to HECO's Quarterly Report on
Form 10-Q for the quarter ended September 30, 1989, File No. 1-4955).
67
EXHIBIT NO. DESCRIPTION
- ----------- -----------
10.2(c) HECO's Conditional Notice of Acceptance to AES Barbers Point, Inc. dated January 15,
1990 (Exhibit 10.3(c) to HECO's Annual Report on Form 10-K for the fiscal year ended
December 31, 1989, File No. 1-4955).
10.3 Amended and Restated Power Purchase Agreement between Hilo Coast Processing Company
and HELCO dated March 24, 1995 (Exhibit 10 to HECO's Quarterly Report on Form 10-Q
for the quarter ended March 31, 1995, File No. 1-4955).
10.4 Agreement between MECO and Hawaiian Commercial & Sugar Company pursuant to letters
dated November 29, 1988 and November 1, 1988 (Exhibit 10.8 to HECO's Annual Report on
Form 10-K for the fiscal year ended December 31, 1988,
File No. 1-4955).
10.4(a) Amended and Restated Power Purchase Agreement by and between A&B-Hawaii, Inc.,
through its division, Hawaiian Commercial & Sugar Company, and MECO, dated November
30, 1989 (Exhibit 10(e) to HECO's Quarterly Report on Form 10-Q for the quarter ended
September 30, 1990, File No. 1-4955).
10.4(b) First Amendment to Amended and Restated Power Purchase Agreement by and between
A&B-Hawaii, Inc., through its division, Hawaiian Commercial & Sugar Company, and
MECO, dated November 1, 1990, amending the Amended and Restated Power Purchase
Agreement dated November 30, 1989 (Exhibit 10(f) to HECO's Quarterly Report on Form
10-Q for the quarter ended September 30, 1990, File No. 1-4955).
*10.4(c) Letter agreement dated December 11, 1997 to Extend Term of Amended and Restated Power
Purchase Agreement Between A&B-Hawaii, Inc., through its division, Hawaiian
Commercial & Sugar Company, and MECO dated November 30, 1989, as Amended on November
1, 1990.
10.5 Purchase Power Contract between HELCO and Thermal Power Company dated March 24, 1986
(Exhibit 10(a) to HECO's Quarterly Report on Form 10-Q for the quarter ended June 30,
1989, File No. 1-4955).
10.5(a) Firm Capacity Amendment between HELCO and Puna Geothermal Venture (assignee of AMOR
VIII, who is the assignee of Thermal Power Company) dated July 28, 1989 to Purchase
Power Contract between HELCO and Thermal Power Company dated March 24, 1986 (Exhibit
10(b) to HECO's Quarterly Report on Form 10-Q for the quarter ended June 30, 1989,
File No. 1-4955).
*10.5(b) Amendment made in October 1993 to Purchase Power Contract between HELCO and Puna
Geothermal Venture dated March 24, 1986, as amended.
*10.5(c) Third Amendment dated March 7, 1995 to the Purchase Power Contract between HELCO and
Puna Geothermal Venture dated March 24, 1986, as amended.
10.5(d) Performance Agreement and Fourth Amendment dated February 12, 1996 to the Purchase
Power Contract between HELCO and Puna Geothermal Venture dated March 24, 1986, as
amended (Exhibit 10.5(b) to HECO's Annual Report on Form 10-K for the fiscal year
ended December 31, 1995, File No. 1-4955).
10.6 Purchase Power Contract between HECO and the City and County of Honolulu dated March
10, 1986 (Exhibit 10.9 to HECO's Annual Report on Form 10-K for the fiscal year ended
December 31, 1989, File No. 1-4955).
68
EXHIBIT NO. DESCRIPTION
- ----------- -----------
10.6(a) Firm Capacity Amendment, dated April 8, 1991, to Purchase Power Contract, dated March
10, 1986, by and between HECO and the City & County of Honolulu (Exhibit 10 to HECO's
Quarterly Report on Form 10-Q for the quarter ended March 31, 1991, File No. 1-4955).
*10.6(b) Amendment No. 2 to Purchase Power Contract Between HECO and City and County of
Honolulu dated March 10, 1986.
*10.7 Power Purchase Agreement between Encogen Hawaii, L.P. and HELCO dated October 22,
1997. The following attachments were omitted from Exhibit no. 10.7: Attachment C,
"Selected portions of the North American Electric Reliability Council Generating
Availability Data System Data Reporting Instructions dated October 1996" and
Attachment E, "Form of the Interconnection Agreement between Encogen Hawaii, L.P. and
HELCO" - provided in final form as Exhibit 10.7(a).
*10.7(a) Interconnection Agreement between Encogen Hawaii, L.P. and HELCO dated October 22,
1997.
*10.8 Low Sulfur Fuel Oil Supply Contract by and between Chevron and HECO dated as of
November 14, 1997 (confidential treatment has been requested for portions of this
exhibit).
*10.9 Inter-Island Industrial Fuel Oil and Diesel Fuel Supply Contract by and between
Chevron and HECO, MECO, HELCO, HTB and YB dated as of November 14, 1997 (confidential
treatment has been requested for portions of this exhibit).
*10.10 Facilities and Operating Contract by and between Chevron and HECO dated as of
November 14, 1997 (confidential treatment has been requested for portions of this
exhibit).
*10.11 Low Sulfur Fuel Oil Supply Contract by and between BHP and HECO dated as of November
14, 1997 (confidential treatment has been requested for portions of this exhibit).
*10.12 Inter-Island Industrial Fuel Oil and Diesel Fuel Supply Contract by and between BHP
and HECO, MECO and HELCO dated November 14, 1997 (confidential treatment has been
requested for portions of this exhibit).
10.13 Contract of private carriage by and between HITI and HELCO dated November 10, 1993
(Exhibit 10.13 to HECO's Annual Report on Form 10-K for the fiscal year ended
December 31, 1993, File No. 1-4955).
*10.13(a) Extension, dated December 1, 1997, of the contract of private carriage by and between
HITI and HELCO dated November 10, 1993.
10.14 Contract of private carriage by and between HITI and MECO dated November 12, 1993
(Exhibit 10.14 to HECO's Annual Report on Form 10-K for the fiscal year ended
December 1, 1993, File No. 1-4955).
*10.14(a) Extension, dated December 1, 1997, of the contract of private carriage by and between
HITI and MECO dated November 12, 1993.
10.15 HECO Nonemployee Directors' Deferred Compensation Plan (Exhibit 10.16 to HECO's
Annual Report on Form 10-K for the fiscal year ended December 31, 1990, File No.
1-4955).
69
EXHIBIT NO. DESCRIPTION
- ----------- -----------
10.16 HEI and HECO Executives' Deferred Compensation Agreement. The agreement pertains to
and is substantially identical for all the HEI and HECO executive officers (Exhibit
10.15 to HEI's Annual Report on Form 10-K for the fiscal year ended December 31,
1991, File No. 1-8503).
11 Computation of Earnings Per Share of Common Stock. See note on page 2 of HECO's 1997
Annual Report to Stockholder attached as HECO Exhibit 13 hereto.
*12.2 Computation of Ratio of Earnings to Fixed Charges. Filed herein as page 74.
13 Pages 2 to 34 and 36 of HECO's 1997 Annual Report to Stockholder (with the exception
of the data incorporated by reference in Part I, Part II, Part III and Part IV, no
other data appearing in the 1997 Annual Report to Stockholder is to be deemed filed
as part of this Form 10-K Annual Report) (HECO Exhibit 13.2 to HECO's Current Report
on Form 8-K dated February 27, 1998, File No. 1-4955).
*21.2 Subsidiaries of HECO. Filed herein as page 76.
*27.2 HECO and subsidiaries financial data schedule, December 31, 1997 and year ended
December 31, 1997.
*99.2 Reconciliation of electric utility operating income per HEI and HECO Consolidated
Statements of Income. Filed herein as page 78.
70
HEI Exhibit 11
Hawaiian Electric Industries, Inc.
COMPUTATION OF EARNINGS PER SHARE
OF COMMON STOCK
Years ended December 31, 1997, 1996, 1995, 1994 and 1993
(in thousands,
except per share amounts) 1997 1996 1995 1994 1993
- ------------------------------------------------------------------------------------------------------------------------
NET INCOME (LOSS)
Continuing operations....... $86,442 $78,658 $77,493 $73,030 $ 61,684
Discontinued operations..... -- -- -- -- (13,025)
--------------- --------------- --------------- --------------- ----------------
$86,442 $78,658 $77,493 $73,030 $ 48,659
=============== =============== =============== =============== ================
WEIGHTED AVERAGE NUMBER OF
COMMON SHARES OUTSTANDING.. 31,375 30,310 29,187 28,137 25,938
=============== =============== =============== =============== ================
ADJUSTED WEIGHTED AVERAGE
NUMBER OF COMMON SHARES
OUTSTANDING................ 31,470 30,388 29,248 28,193 25,989
=============== =============== =============== =============== ================
BASIC EARNINGS (LOSS) PER
COMMON SHARE
Continuing operations....... $ 2.76 $ 2.60 $ 2.66 $ 2.60 $ 2.38
Discontinued operations..... -- -- -- -- (0.50)
--------------- --------------- --------------- --------------- ----------------
$ 2.76 $ 2.60 $ 2.66 $ 2.60 $ 1.88
=============== =============== =============== =============== ================
DILUTED EARNINGS (LOSS) PER
COMMON SHARE
Continuing operations....... $ 2.75 $ 2.59 $ 2.65 $ 2.59 $ 2.37
Discontinued operations..... -- -- -- -- (0.50)
--------------- --------------- --------------- --------------- ----------------
$ 2.75 $ 2.59 $ 2.65 $ 2.59 $ 1.87
=============== =============== =============== =============== ================
71
HEI Exhibit 12.1 (page 1 of 2)
Hawaiian Electric Industries, Inc.
COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES
Years ended December 31, 1997, 1996, 1995, 1994 and 1993
1997 1996 1995
------------------------ ------------------------- ------------------------
(dollars in thousands) (1) (2) (1) (2) (1) (2)
- -------------------------------------------------------------------------------------------------------------------------
FIXED CHARGES
Total interest charges
The Company (3)................. $140,422 $229,521 $129,647 $220,811 $117,494 $206,790
Proportionate share of
fifty-percent-owned persons.... 569 569 751 751 867 867
Interest component of rentals.... 2,973 2,973 3,583 3,583 3,857 3,857
Pretax preferred stock dividend
requirements of subsidiaries.... 9,986 9,986 10,731 10,731 11,433 11,433
Preferred securities
distributions of trust
subsidiaries.................... 10,600 10,600 -- -- -- --
-------- -------- -------- -------- -------- --------
TOTAL FIXED CHARGES.............. $164,550 $253,649 $144,712 $235,876 $133,651 $222,947
======== ======== ======== ======== ======== ========
EARNINGS
Pretax income from continuing
operations...................... $141,783 $141,783 $133,488 $133,488 $133,233 $133,233
Fixed charges, as shown.......... 164,550 253,649 144,712 235,876 133,651 222,947
Interest capitalized
The Company..................... (6,442) (6,442) (7,177) (7,177) (6,337) (6,337)
Proportionate share of
fifty-percent-owned persons.... (128) (128) (746) (746) (867) (867)
-------- -------- -------- -------- -------- --------
EARNINGS AVAILABLE FOR FIXED
CHARGES......................... $299,763 $388,862 $270,277 $361,441 $259,680 $348,976
======== ======== ======== ======== ======== ========
RATIO OF EARNINGS TO FIXED
CHARGES......................... 1.82 1.53 1.87 1.53 1.94 1.57
======== ======== ======== ======== ======== ========
(1) Excluding interest on ASB deposits.
(2) Including interest on ASB deposits.
(3) Interest on nonrecourse debt from leveraged leases is not included in total
interest charges nor in interest expense in HEI's consolidated statements of
income.
72
HEI Exhibit 12.1 (page 2 of 2)
Hawaiian Electric Industries, Inc.
COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES
Years ended December 31, 1997, 1996, 1995, 1994 and 1993--Continued
1994 1993
-------------------------- --------------------------
(dollars in thousands) (1) (2) (1) (2)
- --------------------------------------------------------------------------------------------------------
FIXED CHARGES
Total interest charges
The Company (3)...................... $ 82,306 $158,815 $ 68,254 $145,905
Proportionate share of
fifty-percent-owned persons......... 539 539 564 564
Interest component of rentals......... 3,819 3,819 3,944 3,944
Pretax preferred stock dividend
requirements of subsidiaries......... 11,899 11,899 11,018 11,018
------------ ------------- ------------- -------------
TOTAL FIXED CHARGES................... $ 98,563 $175,072 $ 83,780 $161,431
============ ============= ============= =============
EARNINGS
Pretax income from continuing
operations........................... $126,049 $126,049 $108,770 $108,770
Fixed charges, as shown............... 98,563 175,072 83,780 161,431
Interest capitalized
The Company.......................... (4,924) (4,924) (3,881) (3,881)
Proportionate share of
fifty-percent-owned persons......... (539) (539) (408) (408)
------------ ------------- ------------- -------------
EARNINGS AVAILABLE FOR FIXED CHARGES.. $219,149 $295,658 $188,261 $265,912
============ ============= ============= =============
RATIO OF EARNINGS TO FIXED CHARGES.... 2.22 1.69 2.25 1.65
============ ============= ============= =============
(1) Excluding interest on ASB deposits.
(2) Including interest on ASB deposits.
(3) Interest on nonrecourse debt from leveraged leases is not included in total
interest charges nor in interest expense in HEI's consolidated statements of
income.
73
HECO Exhibit 12.2
Hawaiian Electric Company, Inc.
COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES
Years ended December 31, 1997, 1996, 1995, 1994 and 1993
(dollars in thousands) 1997 1996 1995 1994 1993
- ---------------------------------------------------------------------------------------------------------------------
FIXED CHARGES
Total interest charges................ $ 48,778 $ 47,451 $ 44,377 $ 37,340 $ 35,287
Interest component of rentals......... 757 690 672 808 970
Pretax preferred stock dividend
requirements of subsidiaries......... 4,150 4,358 4,494 4,651 3,425
Preferred securities distributions of
trust subsidiary..................... 3,052 -- -- -- --
-------------------------------------------------------------------------------
TOTAL FIXED CHARGES................... $ 56,737 $ 52,499 $ 49,543 $ 42,799 $ 39,682
===============================================================================
EARNINGS
Income before preferred stock
dividends of HECO.................... $ 81,849 $ 85,213 $ 77,023 $ 65,961 $ 56,126
Fixed charges, as shown............... 56,737 52,499 49,543 42,799 39,682
Income taxes (see note below)......... 52,535 55,888 50,198 43,588 36,897
Allowance for borrowed funds used
during construction.................. (6,190) (5,862) (5,112) (4,043) (3,869)
-------------------------------------------------------------------------------
EARNINGS AVAILABLE FOR FIXED CHARGES.. $184,931 $187,738 $171,652 $148,305 $128,836
===============================================================================
RATIO OF EARNINGS TO FIXED CHARGES.... 3.26 3.58 3.46 3.47 3.25
===============================================================================
Note:
Income taxes is comprised of the
following:
Income tax expense relating to
operating income for regulatory
purposes............................ $ 52,795 $ 56,170 $ 50,719 $ 43,820 $ 37,007
Income tax benefit relating to
nonoperating loss................... (260) (282) (521) (232) (110)
-------------------------------------------------------------------------------
$ 52,535 $ 55,888 $ 50,198 $ 43,588 $ 36,897
===============================================================================
74
HEI Exhibit 21.1
Hawaiian Electric Industries, Inc.
SUBSIDIARIES OF THE REGISTRANT
The following is a list of all subsidiaries of the registrant as of March 17,
1998:
State of incorporation or
Name organization
- ------------------------------------------------------------------------------------------------------
Hawaiian Electric Company, Inc., including subsidiaries Maui Electric
Company, Limited, Hawaii Electric Light Company, Inc. and HECO Hawaii
Capital Trust I.......................................................
HEI Investment Corp.................................................... Hawaii
Malama Pacific Corp., including subsidiaries Malama Waterfront Corp.,
Malama Property Investment Corp., Malama Development Corp., Malama
Realty Corp., Malama Elua Corp., TMG Service Corp., Malama Hoaloha
Corp., Malama Mohala Corp. and Baldwin*Malama (a limited
partnership in which Malama Development Corp. is the sole general
partner)............................................................ Hawaii
Hawaiian Tug & Barge Corp., including subsidiary Young Brothers,
Limited............................................................... Hawaii
HEI Diversified, Inc., including subsidiary HEIDI Real Estate Corp. Hawaii (except American
and American Savings Bank, F.S.B. and its subsidiaries, American Savings Bank, F.S.B., which
Savings Investment Services Corp., ASB Service Corporation, is federally chartered)
AdCommunications, Inc. and American Savings Mortgage Co., Inc.
Pacific Energy Conservation Services, Inc.............................. Hawaii
HEI Power Corp., including subsidiary HEI Power Corp. Guam and Cayman
Islands subsidiary, HEI Power Corp. International and its Cayman
Islands subsidiaries, HEIPC Cambodia Ventures, HEIPC Phnom Penh Power
(Limited), LLC, HEIPC Phnom Penh Power (General), LLC, HEIPC
Philippine Ventures, HEIPC Philippine Development, LLC, HEIPC Lake
Mainit Power, LLC, HEIPC Bulacan I and HEIPC Bulacan II and its Hawaii, unless otherwise
Republic of Mauritius subsidiary, HEI Power Corp. China............... noted
Hycap Management, Inc., including subsidiary HEI Preferred Funding, LP
(a limited partnership in which Hycap Management, Inc. is the sole
general partner)...................................................... Delaware
Hawaiian Electric Industries Capital Trust I (a business trust)........ Delaware
Hawaiian Electric Industries Capital Trust II (a business trust)....... Delaware
Hawaiian Electric Industries Capital Trust III (a business trust)...... Delaware
75
HECO Exhibit 21.2
Hawaiian Electric Company, Inc.
SUBSIDIARIES OF THE REGISTRANT
The following is a list of all subsidiaries of the registrant as of March 17,
1998:
Name State of incorporation
- ------------------------------------------------------------------------------------------------------
Maui Electric Company, Limited......................................... Hawaii
Hawaii Electric Light Company, Inc..................................... Hawaii
HECO Capital Trust I (a business trust)................................ Delaware
76
[KPMG Peat Marwick letterhead]
HEI Exhibit 23
Accountants' Consent
--------------------
The Board of Directors
Hawaiian Electric Industries, Inc.:
We consent to incorporation by reference in Registration Statement Nos. 33-
56561, 33-58820 and 333-18809 on Form S-3 and in Registration Statement Nos. 33-
65234, 333-05667 and 333-02103 on Form S-8 of Hawaiian Electric Industries,
Inc., and in Registration Statement Nos. 333-18809-01, 333-18809-02, 333-18809-
03 and 333-18809-04 on Form S-3 of Hawaiian Electric Industries Capital Trust I,
Hawaiian Electric Industries Capital Trust II, Hawaiian Electric Industries
Capital Trust III and HEI Preferred Funding, LP of our report dated January 19,
1998, relating to the consolidated balance sheets of Hawaiian Electric
Industries, Inc. and subsidiaries as of December 31, 1997 and 1996, and the
related consolidated statements of income, retained earnings and cash flows for
each of the years in the three-year period ended December 31, 1997, which report
is incorporated by reference in the 1997 annual report on Form 10-K of Hawaiian
Electric Industries, Inc. We also consent to incorporation by reference of our
report dated January 19, 1998 relating to the financial statement schedules of
Hawaiian Electric Industries, Inc. in the aforementioned 1997 annual report on
Form 10-K, which report is included in said Form 10-K.
/s/ KPMG Peat Marwick LLP
Honolulu, Hawaii
March 17, 1998
77
HECO Exhibit 99.2
Hawaiian Electric Company, Inc.
RECONCILIATION OF ELECTRIC UTILITY OPERATING
INCOME PER HEI AND HECO CONSOLIDATED
STATEMENTS OF INCOME
Years ended December 31,
-----------------------------------------------------
(in thousands) 1997 1996 1995
- ---------------------------------------------------------------------------------------------------------------
Operating income from regulated and nonregulated
activities before income taxes (per HEI Consolidated
Statements of Income).................................... $171,753 $173,613 $159,043
Deduct:
Income taxes on regulated activities..................... (52,795) (56,170) (50,719)
Revenues from nonregulated activities.................... (8,768) (9,442) (6,732)
Add:
Expenses from nonregulated activities.................... 850 790 1,130
-----------------------------------------------------
Operating income from regulated activities after income
taxes (per HECO Consolidated Statements of Income)....... $111,040 $108,791 $102,722
=====================================================
78
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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 signatures 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 of HEI Treasurer of HECO
(Principal Financial Officer of HEI) (Principal Financial Officer
of HECO)
Date: March 26, 1998 Date: March 26, 1998
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrants and in the capacities indicated on March 26, 1998. The signature of
each of the undersigned shall be deemed to relate only to matters having
reference to the above-named companies and any subsidiaries thereof.
SIGNATURE TITLE
- ---------------------------------------- -------------------------------------------
/s/ Robert F. Clarke President and Director of HEI
- ---------------------------------------- Chairman of the Board of Directors of HECO
Robert F. Clarke (Chief Executive Officer of HEI)
/s/ T. Michael May Senior Vice President and Director of HEI
- ---------------------------------------- President and Director of HECO
T. Michael May (Chief Executive Officer of HECO)
/s/ Robert F. Mougeot Financial Vice President and
- ---------------------------------------- Chief Financial Officer of HEI
Robert F. Mougeot (Principal Financial Officer of HEI)
/s/ Curtis Y. Harada Controller of HEI
- ---------------------------------------- (Principal Accounting Officer of HEI)
Curtis Y. Harada
/s/ Paul Oyer Financial Vice President, Treasurer and
- ---------------------------------------- Director of HECO
Paul A. Oyer (Principal Financial Officer of HECO)
79
SIGNATURES (CONTINUED)
SIGNATURE TITLE
- ---------------------------------------- -------------------------------------------
/s/ Ernest T. Shiraki Controller of HECO
- ---------------------------------------- (Principal Accounting Officer of HECO)
Ernest T. Shiraki
Director of HEI
- ----------------------------------------
Don E. Carroll
/s/ Edwin L. Carter Director of HEI and HECO
- ----------------------------------------
Edwin L. Carter
/s/ Richard Henderson Director of HEI and HECO
- ----------------------------------------
Richard Henderson
/s/ Victor Hao Li Director of HEI
- ----------------------------------------
Victor Hao Li
/s/ Bill D. Mills Director of HEI
- ----------------------------------------
Bill D. Mills
/s/ A. Maurice Myers Director of HEI
- ----------------------------------------
A. Maurice Myers
80
SIGNATURES (CONTINUED)
SIGNATURE TITLE
- ---------------------------------------- -------------------------------------------
/s/ Diane J. Plotts Director of HEI and HECO
- ----------------------------------------
Diane J. Plotts
/s/ James K. Scott Director of HEI
- ----------------------------------------
James K. Scott
/s/ Oswald K. Stender Director of HEI
- ----------------------------------------
Oswald K. Stender
/s/ Anne M. Takabuki Director of HECO
- ----------------------------------------
Anne M. Takabuki
/s/ Kelvin H. Taketa Director of HEI
- ----------------------------------------
Kelvin H. Taketa
/s/ Jeffrey N. Watanabe Director of HEI
- ----------------------------------------
Jeffrey N. Watanabe
/s/ Paul C. Yuen Director of HECO
- ----------------------------------------
Paul C. Yuen
81