1
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, 1993
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 ON
REGISTRANT TITLE OF EACH CLASS WHICH REGISTERED
Hawaiian Electric Common Stock, Without Par Value New York Stock Exchange
Industries, Inc. Pacific Stock Exchange
Hawaiian Electric First Mortgage Bonds, New York Stock Exchange
Company, Inc. Series S, 7.58%
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
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act
of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes X No __
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 registrants 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. [ X ]
2
AGGREGATE MARKET
VALUES OF THE
VOTING STOCK NUMBER OF SHARES
HELD BY OF COMMON STOCK
NONAFFILIATES OF OUTSTANDING OF
THE REGISTRANTS ON THE REGISTRANTS
MARCH 21, 1994 MARCH 21, 1994
------------------ ----------------
Hawaiian Electric $931,627,000 27,913,931
Industries, Inc. (Without par
value)
Hawaiian Electric N/A 11,258,290
Company, Inc. ($6 2/3 par value)
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,
1993:
Hawaiian Electric Industries,
Inc............................ Parts I, II, and III
Hawaiian Electric Company,
Inc............................ Parts I, II, and III
Portions of Proxy Statement of
Hawaiian Electric Industries,
Inc., dated March 10, 1994,
for the Annual Meeting of
Stockholders.................... Parts I and 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.
3
TABLE OF CONTENTS
Page
Glossary of Terms................................................... ii
PART I
Item 1. Business................................................... 1
Item 2. Properties................................................. 46
Item 3. Legal Proceedings.......................................... 48
Item 4. Submission of Matters to a Vote of Security Holders........ 50
PART II
Item 5. Market for Registrants' Common Equity and
Related Stockholder Matters................................ 51
Item 6. Selected Financial Data.................................... 51
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations.................................. 51
Item 8. Financial Statements and Supplementary Data................ 52
Item 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure................................... 52
PART III
Item 10. Directors and Executive Officers of the Registrants........ 52
Item 11. Executive Compensation..................................... 56
Item 12. Security Ownership of Certain Beneficial Owners
and Management............................................. 61
Item 13. Certain Relationships and Related Transactions............. 63
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports
on Form 8-K............................................... 63
Independent Auditors' Report - HEI................................... 66
Independent Auditors' Report - HECO.................................. 67
Index to Exhibits.................................................... 87
Signatures........................................................... 103
i
4
GLOSSARY OF TERMS
Defined below are certain terms used in this report:
TERMS DEFINITIONS
- ----- -----------
1935 ACT Public Utility Holding Company Act of 1935
ADA Americans with Disabilities Act
AES Applied Energy Services, Inc.
AES-BP AES Barbers Point, Inc.
AFUDC Allowance for funds used during construction
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
Corp., ASB Service Corporation,
AdCommunications, Inc. and Associated Mortgage,
Inc.
BBC Bottom Biological Community
BHP BHP Petroleum Americas Refining Inc.
BHPH BHP Petroleum Americas (Hawaii) Inc.
BIF Bank Insurance Fund
BPPI Baldwin Pacific Properties, Inc., a limited
partner of Baldwin*Malama (a limited
partnership in which Malama Development Corp.
is a general partner)
BTU British thermal unit
CERCLA Comprehensive Environmental Response,
Compensation and Liability Act
COMPANY Hawaiian Electric Industries, Inc. and its
direct and indirect subsidiaries, including,
without limitation, Hawaiian Electric Company,
Inc., Maui Electric Company, Limited, Hawaii
Electric Light Company, Inc., HEI Investment
Corp., Malama Pacific Corp. and its
subsidiaries, Hawaiian Tug & Barge Corp., Young
Brothers, Limited, HEI Diversified, Inc.,
American Savings Bank, F.S.B. and its
subsidiaries, and Lalamilo Ventures, Inc.
CONSUMER Division of Consumer Advocacy, Department of
ADVOCATE Commerce and Consumer Affairs of the State of
Hawaii
CT Combustion turbine
CUSA Chevron U.S.A., Inc., a fuel oil supplier
DOH Department of Health of the State of Hawaii
DSM Demand-side management
EPA Environmental Protection Agency -- federal
EPCRA Emergency Planning and Community Right-to-Know
Act
ERL State of Hawaii Environmental Response Law
FASB Financial Accounting Standards Board
FDIC Federal Deposit Insurance Corporation
FDICIA Federal Deposit Insurance Corporation
Improvement Act of 1991
FEDERAL U.S. Government
FEDERAL BANKING Comptroller of the Currency, Federal Reserve
AGENCIES Board, Federal Deposit Insurance Corporation and
OTS
FERC Federal Energy Regulatory Commission
FHA Federal Housing Administration
FHLB Federal Home Loan Bank
FHLBB Federal Home Loan Bank Board
FHLBB AGREEMENT Regulatory Capital Maintenance/Dividend Agreement
between Hawaiian Electric Industries, Inc., HEI
Diversified, Inc. and the Federal Savings and
Loan Insurance Corporation
FHLMC Federal Home Loan Mortgage Corporation
ii
5
GLOSSARY OF TERMS (continued)
TERMS DEFINITIONS
- ----- -----------
FIRREA Financial Institutions Reform, Recovery, and Enforcement Act of 1989
FSLIC Federal Savings and Loan Insurance Corporation
Hawaii State of Hawaii
HCPC Hilo Coast Processing Company
HECO Hawaiian Electric Company, Inc., a wholly owned electric utility
subsidiary of Hawaiian Electric Industries, Inc. and parent company
of Maui Electric Company, Limited and Hawaii Electric Light Company,
Inc.
HEI Hawaiian Electric Industries, Inc., parent company of Hawaiian
Electric Company, Inc., HEI Investment Corp., Malama Pacific Corp.,
Hawaiian Tug & Barge Corp., Lalamilo Ventures, Inc. and HEI
Diversified, Inc.
HEIDI HEI Diversified, Inc., a wholly owned subsidiary of Hawaiian Electric
Industries, Inc., the parent company of American Savings Bank,
F.S.B. and the holder of record of the common stock of The Hawaiian
Insurance & Guaranty Company, Limited, which is currently in state
rehabilitation proceedings
HEIIC HEI Investment Corp., a wholly owned subsidiary of Hawaiian Electric
Industries, Inc.
HELCO Hawaii Electric Light Company, Inc., a wholly owned electric utility
subsidiary of Hawaiian Electric Company, Inc.
HERS Hawaiian Electric Renewable Systems, Inc., formerly a wholly owned
subsidiary of Hawaiian Electric Industries, Inc. and formerly parent
company of Lalamilo Ventures, Inc.
HIG The Hawaiian Insurance & Guaranty Company, Limited, currently in
state rehabilitation proceedings and parent company of United
National Insurance Company, Ltd., Hawaiian Underwriters Insurance
Co., Ltd., Guardian Life Underwriters, Inc., Guardian Financial
Corporation and Independent Adjustment, Inc. HEI Diversified, Inc.
is the holder of record of HIG's common stock
HIRI Hawaiian Independent Refinery, Inc., a fuel oil refinery
HITI Hawaiian Interisland Towing, Inc.
HP Horsepower
HRRV Honolulu Resource Recovery Venture
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
INSURED A bank or savings association, the deposits of which are insured by
DEPOSITORY the Bank Insurance Fund or the Savings Association Insurance Fund,
INSTITUTION respectively
IRP Integrated resource plan
IRR Interest rate risk
KW Kilowatt
KWH Kilowatthour
LVI Lalamilo Ventures, Inc., formerly a wholly owned subsidiary of
Hawaiian Electric Renewable Systems, Inc. and now a wholly owned
subsidiary of Hawaiian Electric Industries, Inc.
MBTU Million British thermal unit
MDC Malama Development Corp., a wholly owned subsidiary of Malama Pacific
Corp.
iii
6
GLOSSARY OF TERMS (continued)
TERMS DEFINITIONS
- ----- -----------
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 Malama Project-I, Inc.,
ML Holdings, Ltd., Malama Waterfront Corp., Malama Property Investment
Corp., Malama Development Corp., Malama Makakilo Corp., Malama
Realty Corp., Malama Elua Corp., Malama Kolu Corp., Malama Hoaloha
Corp. and Malama Mohala Corp.
MW Megawatt
NOI Notice of intent
NPDES National Pollutant Discharge Elimination System
OPA Federal Oil Pollution Act of 1990
OTS Office of Thrift Supervision, Department of Treasury
PCB Polychlorinated biphenyl
PGV Puna Geothermal Ventures
PSD Prevention of significant deterioration
PTI Power Technologies, Inc.
PUC Public Utilities Commission of the State of Hawaii
PURPA Public Utility Regulatory Policies Act of 1978
QTL Qualified Thrift Lender
RCRA Resource Conservation and Recovery Act of 1976
REGISTRANT Hawaiian Electric Industries, Inc. or Hawaiian Electric Company, Inc.
SAIF Savings Association Insurance Fund
SARA Superfund Amendments and Reauthorization Act
SEC Securities and Exchange Commission
SFAS Statement of Financial Accounting Standards
STATE State of Hawaii
TSCA Toxic Substance Control Act of 1976
TRA Tax Reform Act of 1986
UIC Underground Injection Control
UST Underground storage tank
YB Young Brothers, Limited, a wholly owned subsidiary of
Hawaiian Tug & Barge Corp.
iv
7
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,
financial services, freight transportation, real estate development and other
businesses, in each case primarily or exclusively in the State of Hawaii. 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
subsidiaries, MECO and HELCO, are regulated operating public utilities
providing the only public utility electric service on the islands of Oahu,
Maui, Lanai, Molokai and Hawaii. HEI also owns directly or indirectly the
following nonelectric public utility subsidiaries which comprise its diversified
companies: HEIDI and its subsidiary, ASB, and ASB's subsidiaries; HTB and its
subsidiary; MPC and its subsidiaries; HEIIC; and LVI. HEIDI is also the holder
of record of the common stock of HIG, which was acquired in 1987 and provided
property and casualty insurance primarily in Hawaii. HIG is currently in
rehabilitation proceedings and it is expected that HEIDI will relinquish all
ownership rights in HIG and its subsidiaries during 1994. See "Discontinued
operations--The Hawaiian Insurance & Guaranty Co., Limited."
ASB was acquired in 1988, is the second largest savings bank in Hawaii as
measured by total assets as of September 30, 1993, and has 45 retail branches
as of December 31, 1993. 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
develops and invests in real estate. HEIIC was formed in 1984 and is a passive
investment company which has sold substantially all of its investments in
marketable securities over the last few years and currently plans no new
investments. In March of 1993, pursuant to the decision made at the end of the
third quarter of 1992, the stock of HERS, formerly an HEI wind energy
subsidiary, was sold to The New World Power Corporation and LVI became a direct
subsidiary of HEI. See "Discontinued operations -- Hawaiian Electric Renewable
Systems, Inc."
The financial information about the Company's industry segments is
incorporated herein by reference to page 28 of HEI's 1993 Annual Report to
Stockholders, portions of which are filed herein as HEI Exhibit 13(a).
For additional information about the Company, reference is made to
"Management's Discussion and Analysis of Financial Condition and Results of
Operations," incorporated herein by reference to pages 29 to 39 of HEI's 1993
Annual Report to Stockholders, portions of which are filed herein as HEI
Exhibit 13(a).
RATING AGENCIES' ACTIONS
On February 8, 1993, Standard & Poor's (S&P) lowered HEI's and HECO's long-
term credit ratings. S&P lowered HEI's medium-term note credit rating to BBB
from BBB+, citing HECO's reduced credit worthiness and the write-off of HEI's
investment in HIG. S&P noted that considerable political and financial
uncertainty will remain until the ultimate impact of HIG on HEI is determined.
S&P maintained a negative rating outlook reflecting downward pressure on HEI's
and HECO's earnings which could intensify in the absence of adequate rate
relief for HECO. HEI's commercial paper rating of A-2 was reaffirmed.
On February 26, 1993, Duff & Phelps Credit Rating Co. (D&P) lowered HEI's
medium-term note rating to BBB+ from A- due to the continuing uncertainty
surrounding HEI and its decision to cease operations at HIG. D&P noted that the
extent of additional financial responsibility ultimately required, if any, is
unknown, which adds risk that was not reflected in D&P's prior rating. HEI's
commercial paper rating of Duff 1- (one-minus) was reaffirmed.
On February 11, 1994, in response to HEI's announcement that it signed an
agreement to settle the lawsuit filed by the Hawaii Insurance Commissioner and
Hawaii Insurance Guaranty Association against HEI relating to losses sustained
by HIG from Hurricane Iniki, D&P stated that the settlement and additional
charge to income fit within the assumptions pertinent to D&P's current ratings
for HEI. The settlement agreement is subject to court approval. (See
"Discontinued operations -- The Hawaiian Insurance & Guaranty Co., Ltd. for a
further discussion on the settlement agreement.)
1
8
On April 28, 1993, Moody's Investor Service (Moody's) confirmed the credit
ratings of HEI, citing HEI's plans to issue additional common equity in order
to rebalance its capital structure. Moody's stated that its concerns regarding a
lawsuit associated with HIG and stemming from Hurricane Iniki are partially
mitigated by the possible long period before a fully litigated decision is
reached. The confirmation concluded a review for possible downgrade initiated
on December 4, 1992.
In October 1993, S&P completed its review of the U.S. investor-owned electric
utility industry and concluded that more stringent financial risk standards are
appropriate to counter mounting business risk. "S&P believes the industry's
credit profile is threatened chiefly by intensifying competitive pressures," the
agency said in a statement. It also cited sluggish demand expectations, slow
earnings growth prospects, high dividend payouts and environmental cost
pressures. Under the new guidelines, S&P rated HECO's business position as
average.
As of February 11, 1994, HEI's and HECO's S&P, Moody's and D&P security
ratings were as follows:
S&P (1) Moody's (2) D&P (3)
------- ----------- -------
HEI
Medium-term notes BBB Baa2 BBB+
Commercial paper A-2 P-2 Duff 1-
Ratings outlook Negative N/A N/A
HECO
First mortgage bonds BBB+ A3 A
Unsecured notes BBB Baa1 A-
Cumulative preferred stock BBB baa1 BBB+
Commercial paper A-2 P-2 Duff 1-
Ratings outlook Negative N/A N/A
N/A Not applicable.
(1) S&P. Debt rated BBB or BBB+ is regarded as having an adequate capacity to
pay interest and repay principal. Whereas it normally exhibits adequate
protection parameters, adverse economic conditions or changing
circumstances are more likely to lead to a weakened capacity to pay
interest and repay principal for debt in this category than in higher
rated categories.
The ratings may be modified by the addition of a plus or minus sign to
show relative standing within the major categories.
A commercial paper rating is a current assessment of the likelihood of
timely payment of debt having an original maturity of no more than 365
days. Commercial paper rated A-2 indicates that capacity for timely
payment on issues is satisfactory.
(2) Moody's. Bonds which are rated Baa2 or Baa1 are considered as medium grade
obligations, i.e., they are neither highly protected nor poorly secured.
Interest payment and principal security appear adequate for the present but
certain protective elements may be lacking or may be characteristically
unreliable over any great length of time. Such bonds lack outstanding
investment characteristics and in fact have speculative characteristics as
well.
Bonds which are rated A3 possess many favorable investment attributes
and are to be considered as upper medium grade obligations. Factors
giving security to principal and interest are considered adequate but
elements may be present which suggest a susceptibility to impairment
sometime in the future.
Preferred stock rated baa1 is considered to be a medium grade preferred
stock, neither highly protected nor poorly secured. Earnings and asset
protection appear adequate at present but may be questionable over a great
length of time.
Numeric modifiers are added to debt and preferred stock ratings.
Numeric modifier 1 indicates that the security ranks in the higher end of
its generic rating category and numeric modifier 2 indicates a mid-range
ranking.
Commercial paper rated P-2 is considered to have a strong ability for
repayment of senior short-term obligations. This will normally be
evidenced by the following characteristics: a) leading market positions
in well- established industries, b) high rates of return on funds
employed, c) conservative capitalization structure with moderate reliance
on debt and ample asset protection, d) broad margins in earnings coverage
of fixed financial charges and high internal cash generation and e) well
established access to a range of financial markets and assured sources of
alternate liquidity. Earnings trends and coverage ratios, while sound,
may be more subject to variation. Capitalization characteristics, while
still appropriate, may be more affected by external conditions. Ample
alternate liquidity is maintained.
(3) Duff & Phelps. Debt rated BBB+ is regarded as having below average
protection factors, but still considered sufficient for prudent investment.
There may be considerable variability in risk during economic cycles.
2
9
Debt rated A or A- is considered to have protection factors that are
average but adequate. However, risk factors are more variable and greater
in periods of economic stress.
Commercial paper rated Duff 1- indicates a high certainty of timely
payment. Liquidity factors are strong and supported by good fundamental
protection factors. Risk factors are very small.
Each security rating listed above is not a recommendation to buy, sell or hold
securities. Each rating may be subject to revision or withdrawal at any time by
the assigning rating organization and should be evaluated independently of any
other rating.
Neither HEI nor HECO management can predict with certainty future rating
agency actions or their effects on the future cost of capital of HEI or HECO.
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 acquired MECO in 1968 and HELCO in 1970.
In 1993, the electric utilities contributed approximately 77% of HEI's
consolidated revenues from continuing operations and approximately 76% of HEI's
consolidated operating income from continuing operations, excluding unallocated
corporate expenses and eliminations. At December 31, 1993, the assets of the
electric utilities represented approximately 38% of the total assets of the
Company, excluding assets at the corporate level and eliminations. For
additional information about the electric utilities, see "Management's
Discussion and Analysis of Financial Condition and Results of Operations,"
incorporated herein by reference to pages 29 to 39 of HEI's 1993 Annual Report
to Stockholders, portions of which are filed herein as HEI Exhibit 13(a) and
pages 3 to 9 of HECO's 1993 Annual Report to Stockholder, portions of which are
filed herein as HECO Exhibit 13(b).
The islands of Oahu, Maui, Lanai, Molokai and Hawaii have a combined
population estimated at 1,104,000, or approximately 95% of the population of
the State of Hawaii, and cover 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 and authorizing 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 islands of Maui,
Lanai and Molokai in the County of Maui and the small County of Kalawao on the
island of Molokai, 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 numberEof their electric
customer accounts as of December 31, 1993, 1992 and 1991 and their electric
sales revenues for each of the years then ended:
1993 1992 1991
-------------------- ------------------- ----------------------
Electric Electric Electric
Customer sales Customer sales Customer sales
(dollars in thousands) accounts revenues accounts revenues accounts revenues(1)
- ---------------------- -------- -------- -------- -------- -------- -----------
HECO.................. 263,478 $644,029 257,442 $564,574 255,176 $534,503
MECO.................. 51,064 113,018 50,263 104,149 48,519 101,002
HELCO................. 56,556 112,968 55,412 104,470 53,351 100,983
------- -------- ------- -------- ------- --------
371,098 $870,015 363,117 $773,193 357,046 $736,488
======= ======== ======= ======== ======= ========
(1) Includes the effect of the change in the method of estimating unbilled
kilowatthour sales and revenues.
3
10
Revenues from the sale of electricity in 1993 were from the following types of
customers in the proportions shown:
HECO MECO HELCO Total
---- ---- ----- -----
Residential. . . . . . . 30% 35% 42% 33%
Commercial . . . . . . . 28 35 38 30
Large light and power. . 41 30 20 36
Other. . . . . . . . . . 1 -- -- 1
---- ---- ---- ----
100% 100% 100% 100%
==== ==== ==== ====
Total electricity sales for all three utilities in 1993 were 8,325 million
kilowatthours (KWH), a 0.1% decrease from 1992 sales. The relatively low sales
in 1993 reflect cooler weather, the slowing in the state economy and
conservation efforts.
Approximately 10% of consolidated operating revenues of HECO and its
subsidiaries was derived from the sale of electricity to various federal
government agencies in 1993, 1992 and 1991. HECO's fifth largest customer, the
Naval Base at Barbers Point, Oahu, is expected to be closed within the next
four to five years. 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
Department of Defense installations to implement demand-side management
programs which will help them achieve their energy reduction objectives. It is
expected that several Department of Defense installations will sign a Basic
Ordering Agreement under which HECO will implement the energy conservation
projects. 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 results of operations.
4
11
SELECTED CONSOLIDATED ELECTRIC UTILITY OPERATING STATISTICS
1993 1992 1991** 1990 1989
----- ---- ------- ---- ----
KWH SALES (MILLIONS)
Residential.......................... 2,340.3 2,326.8 2,270.5 2,204.2 2,129.3
Commercial........................... 2,284.6 2,273.9 2,205.1 2,105.9 2,013.9
Large light and power................ 3,646.2 3,675.8 3,622.6 3,601.3 3,453.9
Other................................ 54.1 55.4 55.4 56.3 52.0
------- ------- ------- ------- -------
8,325.2 8,331.9 8,153.6 7,967.7 7,649.1
======= ======= ======= ======= =======
NET ENERGY GENERATED AND
PURCHASED (MILLIONS OF KWH)
Net generated....................... 5,789.6 6,555.4 6,991.1 7,746.2 7,692.1
Purchased........................... 3,101.0 2,325.0 1,599.7 713.3 448.9
------- ------- ------- ------- -------
8,890.6 8,880.4 8,590.8 8,459.5 8,141.0
======= ======= ======= ======= =======
Losses and system uses (%).......... 6.1 6.0 4.9*** 5.6 5.8
ENERGY SUPPLY (YEAREND)
Generating capability--MW........... 1,638 1,592 1,552 1,555 1,558
Firm purchased capability--MW....... 473 454 228 46 47
------- ------- ------- ------- -------
2,111 2,046 1,780 1,601 1,605
======= ======= ======= ======= =======
Gross peak demand--MW*............. 1,496 1,493 1,446 1,408 1,359
Btu per net KWH generated........... 10,846 10,870 10,768 10,692 10,685
Average fuel oil cost per
million Btu (cents)............... 340.5 317.1 367.5 400.1 324.6
CUSTOMER ACCOUNTS (YEAREND)
Residential......................... 320,987 314,185 308,770 299,473 293,568
Commercial.......................... 48,008 46,817 46,189 44,885 44,211
Large light and power............... 628 641 637 621 594
Other............................... 1,475 1,474 1,450 1,438 1,466
------- ------- ------- ------- -------
371,098 363,117 357,046 346,417 339,839
======= ======= ======= ======= =======
ELECTRIC REVENUES (THOUSANDS)
Residential......................... $283,662 $250,808 $235,295 $221,701 $193,560
Commercial.......................... 262,751 236,350 224,300 210,232 181,921
Large light and power............... 317,816 280,871 271,863 264,812 222,181
Other............................... 5,786 5,164 5,030 5,013 4,230
-------- -------- -------- -------- --------
$870,015 $773,193 $736,488 $701,758 $601,892
======== ======== ======== ======== ========
AVERAGE DREVENUE PER KWH SOLD (CENTS)
Residential......................... 12.12 10.78 10.36 10.06 9.09
Commercial.......................... 11.50 10.39 10.17 9.98 9.03
Large light and power............... 8.72 7.64 7.51 7.35 6.43
Other............................... 10.69 9.32 9.08 8.90 8.14
------- ------- ------- ------- --------
Average revenue per KWH sold........ 10.45 9.28 9.03 8.81 7.87
RESIDENTIAL STATISTICS
Average annual use per customer
account (KWH)...................... 7,367 7,460 7,427 7,416 7,318
Average annual revenue per
customer account................... $892.98 $804.09 $769.64 $745.96 $665.22
Average number of customer
accounts........................... 317,657 311,915 305,720 297,202 290,973
------- ------- ------- ------- -------
* Sum of the peak demands on all islands served, noncoincident and
nonintegrated.
** Includes the effect of the change in the method of estimating unbilled KWH
sales and revenues.
*** Excluding the effect of the change in the method of estimating unbilled
KWH sales and revenues, losses and system uses would have been 5.6%.
5
12
GENERATION STATISTICS
The following table contains certain generation statistics as of December 31,
1993, and for the year ended December 31, 1993. The capability available for
operation at any given time may be less than the generating capability shown
because of temporary outages for inspection, maintenance, repairs or unforeseen
circumstances.
Generating
and firm
purchased KWH net
capability Gross generated
(MW) at peak Annual and
December 31, demand Reserve load purchased
Systems 1993 (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 1,174.0 42.2% 71.09% 7,029.8
------- ------- ------ ------ --------
ISLAND OF MAUI-MECO
Conventional oil-fired steam units............. 37.6
Combined-cycle unit............................ 58.0
Diesel......................................... 105.7
Firm contract power(4)......................... 16.0
------- ------- ------ ------ --------
217.3 156.7 38.7% 69.9 % 927.6
------- ------- ------ ------ --------
ISLAND OF LANAI-MECO
Diesel......................................... 9.7 4.5 115.6% 66.3 % 25.7
------- ------- ------ ------ --------
ISLAND OF MOLOKAI-HELCO
Diesel......................................... 6.5
Combustion turbine............................. 2.2
------- ------- ------ ------- --------
8.7 6.1 42.6% 64.3 % 34.0
------- ------- ------ ------- --------
ISLAND OF HAWAII-HELCO
Conventional oil-fired steam units............. 71.2
Combustion turbines............................ 45.7
Diesel......................................... 37.7
Firm contract power(4)......................... 51.0
------- ------- ------ ------- --------
205.6 155.0 32.6% 66.6 % 873.5
------- ------- ------ ------- --------
Total.......................................... 2,110.3 1,496.3 41.0% 70.5 % 8,890.6
======= ======= ====== ======= ========
(1) HECO units at normal ratings less 14.0 MW due to capability restrictions,
and MECO and HELCO units at reserve ratings.
(2) Noncoincident and nonintegrated.
(3) Independent power producers - 180.0 MW (Kalaeloa), 180.0 MW (AES-BP) and
46.0 MW (HRRV).
(4) Non-utility generation-MECO: 16.0 MW (Hawaiian Commercial & Sugar
Company) and HELCO: 25.0 MW (Puna Geothermal Ventures), 18.0 MW (HCPC)
and 8.0 MW (Hamakua Sugar Company). Hamakua Sugar Company filed for
bankruptcy in 1992 and is expected to discontinue operations in 1994.
6
13
REQUIREMENTS AND PLANS FOR ADDITIONAL GENERATING CAPACITY
Each of the three utilities completed its first Integrated Resource Plan (IRP)
in 1993. These plans identified and evaluated a mix of resources to meet near-
and long-term consumer energy needs in an efficient and reliable manner at the
lowest reasonable cost. The IRPs include demand-side management (DSM) programs
to reduce load and fuel consumption and consider the impact on the environment,
culture, community lifestyles and economy of the state.
On July 1, 1993, HECO filed its first Integrated Resource Plan with the
Hawaii Public Utilities Commission (PUC). This plan was subsequently modified
in January 1994 due to a change in load forecast. The decrease in the load
forecast, the inclusion of the impact of proposed DSM programs, and the
deferred retirement of Honolulu Unit Nos. 8 & 9 until 2004, allowed HECO to
defer its next generating unit addition to the year 2005. In its plan, HECO
recommended that this next generating unit be a coal-fired atmospheric
fluidized bed combustion unit to provide a fuel alternative to oil. Because of
the uncertainty of the impact of new environmental regulations and the
political pressure to remove Honolulu Power Plant from downtown Honolulu
earlier than the 2004 time frame, alternate plans are being developed to add
generating capacity earlier if necessary.
MECO completed construction of its first 58-MW dual-train combined-cycle
facility in 1993 at a cost of $78 million. On December 15, 1993, MECO filed
its first IRP with the PUC. MECO plans to add a second dual-train combined-cycle
unit with the addition of a 20-MW combustion turbine (CT) in 1996, another
20-MW CT in 1999 and the conversion of these units into a 58-MW combined-cycle
unit with the addition of an 18-MW steam turbine in 2000. MECO's Molokai
Division plans to purchase three 2.2-MW diesel units; two in 1995 and one in
1996. MECO's Lanai Division plans to add three 2.2-MW diesel units in 1996.
On October 15, 1993, HELCO filed its first IRP with the PUC. HELCO has a
power purchase agreement with Puna Geothermal Ventures (PGV) for 25 MW which
became a firm source of power on June 27, 1993. Hamakua Sugar Company filed for
bankruptcy in 1992 and ceased power production on May 7, 1993, but resumed on
July 15, 1993, under a court-approved harvest plan which is expected to
continue over a period of 10 to 16 months. It is expected that Hamakua's
capacity of 8MW will be unavailable to HELCO by the end of 1994. Hilo Coast
Processing Company (HCPC) will discontinue harvesting sugar cane in late 1994
and has indicated that it may increase its power export capability and switch
its primary fuel from bagasse (sugarcane waste) to coal. This would require a
new modified power purchase agreement, which would be subject to PUC approval.
For capacity planning, HELCO assumed that HCPC would continue to provide 18 MW
of firm power to HELCO under the existing power purchase agreement. The
installation of a phased combined-cycle unit is proceeding. The service date
for the first CT, CT-4, is scheduled for July 1, 1995 pending Conservation
District Use Application approval at the existing Keahole Power Plant site.
Although capacity after CT-4 is not required until April 1996, CT-5 is
scheduled to be installed immediately after CT-4 in September 1995 based on
economies of the earlier schedule which allows HELCO to use the same
construction contract as CT-4. In addition, the earlier schedule permits HELCO
to proceed with the planned retirements of its older, less efficient units and
to mitigate uncertainties with respect to deliveries from HELCO's power
purchase producers. Conversion of CT-4 and CT-5 to combined-cycle operation
with the addition of a steam unit, ST-7 is expected to occur by October 1997.
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. Other nonoil projects include a
generating unit burning municipal waste and a fluidized bed unit burning coal.
HECO currently has three major power purchase agreements. In general, HECO's
payments under these power purchase agreements are based upon available
capacity and energy. Payments for capacity generally are not required if the
contracted capacity is not available, and payments are reduced, under certain
conditions, if available capacity drops below contracted levels. In general,
the payment rates for capacity have been predetermined for the terms of the
agreements. The energy charges will vary over the terms of the agreements and
HECO may pass on changes in the fuel component of the energy charges to
customers through energy cost adjustment clauses in its rate schedules. HECO
does not operate nor does it participate in the operation of any of the
facilities that provide power under the three agreements. Title to the
facilities does not pass to HECO upon expiration of the agreements, and the
agreements do not contain bargain purchase options with respect to the
facilities.
7
14
In March 1988, HECO entered into a power purchase agreement with AES Barbers
Point, Inc. (AES-BP), a Hawaii-based cogeneration subsidiary of Applied Energy
Services, Inc. (AES) 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, under the control of HECO's system
dispatcher. The AES-BP 180-MW coal-fired cogeneration plant utilizes a "clean
coal" technology and became operational in September 1992. The facility is
designed to sell sufficient steam to qualify under the Public Utility
Regulatory Policies Act of 1978 (PURPA) as an unregulated cogenerator.
HECO entered into an agreement in October 1988 with Kalaeloa Partners, L.P.
(Kalaeloa) a limited partnership whose sole general partner is an indirect,
wholly owned subsidiary of ASEA Brown Boveri, Inc., 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. The Kalaeloa facility, which was completed in the second
quarter of 1991, is a combined-cycle operation, consisting of two oil-fired
combustion turbines and a steam turbine which utilizes waste heat from the
combustion turbines. The facility is designed to sell sufficient steam to
qualify under PURPA as an unregulated cogenerator.
HECO has also entered into a power purchase contract and a firm capacity
amendment with Honolulu Resource Recovery Venture (HRRV), which has built a 60-
MW refuse-fired plant. The HRRV unit began to provide firm energy in the second
quarter of 1990 and currently supplies HECO with 46 MW of firm capacity.
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, 1993. Assuming that the
three independent power producers operate at the minimum availability criteria
in the power purchase agreements, aggregate fixed capacity charges under the
three major agreements are expected to be between approximately $95 million and
$98 million annually from 1994 through 2015, $73 million in 2016, between $59
million and $62 million annually from 2017 through 2021, and $46 million in
2022.
As of December 31, 1993, HELCO and MECO had power purchase agreements for 51
MW and 16 MW of firm capacity, respectively, representing 25% and 7% of their
respective total generating and firm purchased capabilities. Assuming that the
independent power producers operate at the minimum availability criteria in the
power purchase agreements, aggregate fixed capacity charges are expected to be
approximately $9 million annually in 1994 and 1995, $8 million from 1996
through 1999, $6 million from 2000 through 2002 and $4 million annually from
2003 through 2028.
HELCO has a power purchase agreement with PGV for 25 MW of firm capacity.
PGV, an independent geothermal power producer which experienced substantial
delays in commencing commercial operations, passed an acceptance test in June
1993 and is now considered to be a firm capacity source for 25 MW.
HERS owned and operated a windfarm on the island of Oahu and sold the
electricity it generated to HECO. The windfarm consisted of 14 600-KW and one
3,200-KW wind turbines. In March 1993, HEI sold the stock of HERS to The New
World Power Corporation with the power purchase agreements between HERS and
HECO continuing in effect. The stock of LVI was transferred to HEI prior to the
sale of HERS. LVI's windfarm on the island of Hawaii consists of 54 20-KW and
34 17.5-KW wind turbines. LVI sells its electricity to HELCO and the Hawaii
County Department of Water Supply. See "Discontinued operations--Hawaiian
Electric Renewable Systems, Inc."
Hamakua Sugar Company has been operating under Federal Bankruptcy Court
protection since August 1992. Hamakua is presently in a Chapter 11 bankruptcy
proceeding and is conducting a final sugar cane harvest over a period of 10 to
16 months, which began in July 1993. During the harvest, Hamakua has agreed to
supply HELCO with 8 MW of firm capacity under an amendment to HELCO's existing
power purchase agreement.
HELCO has a power purchase agreement with Hilo Coast Processing Company (HCPC)
for 18 MW of firm capacity. On July 31, 1992, C. Brewer and Company, Limited
publicly announced that Mauna Kea Agribusiness, which is the primary supplier
of sugar cane processed by HCPC, will begin converting its acreage to macadamia
nuts, eucalyptus trees and other diversified crops as of November 1, 1992, and
will discontinue harvesting sugar cane in late 1994. The announcement also
indicated that, after the last sugar harvest, HCPC's primary fuel would be
coal, supplemented by macadamia nut husks and other biomass material. It is
HELCO's understanding that HCPC plans to continue supplying power after 1994
(and may
8
15
even be in a position to supply more than 18 MW after its sugar processing
operations are discontinued), and HELCO has assumed that HCPC's commitment to
provide 18 MW of capacity will remain in effect for the current term of the
contract, which ends December 31, 2002.
BHP Petroleum Americas (Hawaii) Inc. (BHPH), formerly Pacific Resources,
Inc., stopped hauling heavy fuel oil from Oahu to the other Hawaiian
Islands at the end of May 1992. This may continue to affect the ability of the
sugar companies, which relied on the oil delivered by BHPH, to supply power to
HELCO and MECO. In light of this situation, some of the sugar companies have or
are considering conversion to alternative fuels.
Although it currently appears that heavy fuel oil will continue to be
commercially available, in the event of the unavailability of heavy fuel oil,
certain nonutility generators of electricity with contracts with HELCO and MECO
may need to use a more expensive alternative fuel such as diesel. The
legislation amending the state Environmental Response Law allows these
producers, subject to PUC approval, to charge the utilities rates for energy
purchases reflecting their higher fuel costs rather than the currently approved
rates and, in turn, permits each utility to pass on the increases to its
customers through an automatic rate adjustment clause. To minimize the rate
increase of any one utility, the legislation permits the PUC, under certain
conditions, to utilize a statewide automatic adjustment clause. In 1993, HELCO
received PUC approval for recovery of the higher fuel costs incurred by HCPC.
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 subsidiaries generally) automatically vary
with the weighted average price paid for fuel oil and certain components of
purchased energy, and the relative amounts of company-generated and purchased
power. Accordingly, changes in fuel oil and purchased energy costs are passed
on to customers. See "Electric utility -- Rates."
HECO's steam power plants burn low sulfur residual fuel oil. HECO's combustion
turbines (peaking units) on Oahu burn diesel fuel. MECO and HELCO burn medium
sulfur industrial fuel oil in their steam generating plants and diesel fuel in
their diesel engine and combustion turbine generating units.
In the second half of 1993, HECO concluded agreements with Chevron, U.S.A.,
Inc. (CUSA) and BHP Petroleum Americas Refining Inc. (BHP), formerly Hawaiian
Independent Refinery, Inc., to purchase supplies of low sulfur fuel oil for a
two-year term commencing January 1, 1994. The PUC approved these agreements and
issued a final order in December 1993 permitting inclusion of costs under the
contracts in the energy cost adjustment clause. HECO pays market-related prices
for fuel purchases made under these contracts.
HECO, MECO and HELCO have extended a contract with CUSA under which they
will purchase No. 2 diesel fuel over a period of two years beginning January
1, 1994. The Company's utility subsidiaries jointly purchase medium sulfur
residual fuel oil under this same contract and together purchase diesel fuel and
residual fuel oil under a recently extended contract with BHP. The contracts
with CUSA and BHP have been approved by the PUC which issued a final order in
December 1993 permitting inclusion of costs under the contracts in the
respective utility's energy cost adjustment clause. Diesel fuel and residual
fuel oil supplies purchased under these agreements are priced on a
market-related basis.
The diesel fuel supplied to the Lanai Division of MECO is provided under an
agreement with the CUSA jobber (i.e., wholesale merchant) on Lanai. The Molokai
Division of MECO receives diesel fuel supplies through the joint purchase
contract between HECO, MECO and HELCO and CUSA referred to above.
The low sulfur residual fuel oil burned by HECO on Oahu is derived primarily
from Indonesian and domestic crude oils. The medium sulfur residual fuel oil
burned by MECO and HELCO is generally derived from domestic crude oil.
The fuel oil commitments information in Note 11 to HECO's Consolidated
Financial Statements is incorporated herein by reference to page 24 of HECO's
1993 Annual Report to Stockholder, portions of which are filed herein as HECO
Exhibit 13(b).
9
16
The following table sets forth the average costs of fuel oil used to generate
electricity in the years 1993, 1992 and 1991:
HECO MECO HELCO Consolidated
------------------ ---------------- ---------------- ------------------
cents/ cents/ cents/ cents/
$/Barrel MBtu $/Barrel MBtu $/Barrel MBtu $/Barrel MBtu
-------- ------ -------- ------ -------- ------ -------- ------
1993..... 20.27 323.7 24.85 416.3 21.02 344.4 21.09 340.5
1992..... 18.71 298.4 23.90 399.4 20.68 339.0 19.69 317.1
1991..... 22.82 365.4 25.13 419.0 20.10 328.1 22.79 367.5
The average cost per barrel of fuel oil used to generate electricity for
HECO, MECO and HELCO reflects the different fuel mix of each company. HECO uses
primarily low sulfur residual fuel oil, MECO uses a significant amount of diesel
fuel and HELCO uses primarily medium sulfur residual fuel oil and a lesser
amount of diesel fuel. In general, medium sulfur fuel oil is the least costly
per barrel and diesel fuel is the most expensive. During 1993, the prices of
diesel fuel and low sulfur oil declined, while the price of medium sulfur fuel
oil displayed no sustained trend.
HTB was contractually obligated to ship heavy fuel oil for HELCO and
MECO through December 1993. Effective December 31, 1993, HTB exited the
heavy fuel oil shipping business. See "Regulation and other matters --
Environmental regulation -- Water quality controls." HELCO and MECO carried out
a bidding process to determine who would ship heavy fuel oil beyond 1993.
Several bids were received and evaluated and two contracts have been signed with
Hawaiian Interisland Towing, Inc., subject to PUC approval (which has been
obtained on an interim basis). HELCO and MECO have also begun to convert their
generating plants from burning heavy fuel oil to burning either heavy fuel oil
or diesel fuel in the event heavy fuel oil is no longer available in the future.
Diesel fuel does not pose the same environmental liability concerns as heavy
fuel oil, but it is more expensive and the use of diesel fuel could
significantly increase HELCO's and MECO's electric rates. Conversion would
assure HELCO and MECO more flexibility by permitting use of another type of fuel
besides heavy fuel oil.
In 1994, it is estimated that 75% of the net energy generated and purchased
by HECO and its subsidiaries will come from oil, down from 77% in
1993. Failure by the Company's oil suppliers to provide fuel pursuant to the
supply contracts and/or extremely high fuel prices could adversely affect HECO
and its subsidiaries' and the Company's financial condition and results of
operations.
RATES
HECO, MECO and HELCO are subject to the regulatory jurisdiction of the PUC
with respect to rates, standards of service, 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 an energy cost
adjustment clause to reflect changes in the price paid for fuel oil and certain
components of purchased power, and the relative amounts of company-generated
and purchased power. 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.
The PUC has broad discretion in its regulation of the rates charged by the
Company's utility subsidiaries. Any adverse decision by the PUC concerning the
level or method of determining electric utility rates, the authorized returns
on equity or other matters or any delay in rendering a decision in a rate
proceeding could have a material adverse effect on consolidated HECO's and the
Company's financial condition and results of operations. Upon a showing of
probable entitlement, the PUC is required to issue an interim decision in a
rate case within 10 months from the date of filing a complete application if the
evidentiary hearing is completed -- subject to extension for 30 days if the
evidentiary hearing is not completed. However, there is no time limit for
rendering a final decision.
10
17
HECO
Rate increase. On July 29, 1991, HECO applied to the PUC for permission
to increase electric rates on the island of Oahu in 1992. The rates
requested would have provided approximately $138 million in annual revenues, or
approximately 26.4% over HECO's then existing rates, based on January 1, 1992
fuel oil and purchased energy prices. The request was based on a 13.5% return on
average common equity.
On June 30, 1992, HECO received a final decision and order from the PUC. The
decision and order granted an increase of $124 million in annual revenues,
based on a 13.0% return on average common equity.
The increase took effect in steps in 1992. $28 million of the $124
million increase was granted in the interim decision effective April 1,
1992. A step increase of $2.3 million in annual revenues became effective July
8, 1992. Approximately $93 million of the $124 million increase represented a
pass-through of costs when HECO began purchasing generating capacity from
independent power producer AES-BP in September 1992. The increase is subject to
possible adjustments for postretirement benefits other than pensions.
The major reason for the difference between revenues requested in HECO's
application and the revenues granted by the PUCO's final decision and order
relates to postretirement benefits other than pensions expense. HECO requested
$11 million in annual revenues to cover the additional expense required under
SFAS No. 106, "Employers' Accounting for Postretirement Benefits Other Than
Pensions." The PUC has opened a separate generic docket on postretirement
benefits other than pensions and indicated that the total increase granted in
the final decision and order will be adjusted to reflect its decision in that
docket. The PUC has not yet issued a final decision and order in this generic
docket. The information on postretirement benefits other than pensions in Note
10 to HECO's Consolidated Financial Statements is incorporated herein by
reference to pages 23 to 24 of HECO's 1993 Annual Report to Stockholder,
portions of which are filed herein as HECO Exhibit 13(b).
Pending rate requests. On July 26, 1993, HECO applied to the PUC for
permission to increase electric rates, using a 1994 test year and requesting
rates designed to produce an increase of approximately $62 million in annual
revenues over the revenues provided by rates currently in effect. HECO
subsequently revised its rate request from $62 million to approximately $54
million by the close of the evidentiary hearings held in March 1994. The
revision resulted primarily from rescheduling certain capital projects from 1994
to 1995, and agreements among the parties with respect to certain issues. The
requested increase, as revised, is based on a 12.75% return on average common
equity and is needed to cover rising operating costs and the cost of new capital
projects to maintain and improve service reliability. In addition, the requested
increase includes approximately $9 million for costs arising out of the change
to accrual accounting for postretirement benefits other than pensions, and the
amount of the required increase will be reduced to the extent that rate relief
for these costs is received in another proceeding. The information on
postretirement benefits other than pensions in Note 10 to HECO's Consolidated
Financial Statements is incorporated herein by reference to pages 23 to 24 of
HECO's 1993 Annual Report to Stockholder, portions of which are filed herein as
HECO Exhibit 13(b). HECO has requested an interim increase of approximately $39
million by April 1994, and the remainder of the requested increase in steps in
1994.
On December 27, 1993, HECO applied to the PUC for permission to increase
electric rates, using a 1995 test year and requesting rates designed to produce
an increase of approximately $44 million in annual revenues over revenues
provided by the initially proposed 1994 rates. As a result of revisions to the
rate increase requested in 1994, the requested increase would be approximately
$52 million over revenues provided by proposed 1994 rates. The increase
requested by HECO is based on a 12.3% return on average common equity. The rate
request based on a 1995 test year is in addition to HECO's pending $54 million
rate increase requested for 1994. Both requests combined represent a 16.7%
increase, or $106 million, over present rates.
Revenue from the proposed increase would be used in part to cover the costs of
major transmission and distribution projects on Oahu, including an important
transmission corridor to connect power plants on the island's west side with
customers throughout Oahu.
The 1995 application includes requests for approximately $15 million for
additional expenses associated with proposed changes in depreciation rates and
methods and $7 million to establish a self-insured property damage reserve for
transmission and distribution property in the event of catastrophic disasters.
HECO seeks to establish the requested reserve because HECO is self-insured for
damage to its transmission and distribution property, except substations.
(HECO's subsidiaries are similarly self-insured.) Also, a
11
18
heightened concern for the risk of loss of this property has grown out
of the loss of virtually the entire transmission and distribution system of the
unaffiliated electric utility serving the island of Kauai as a result of
Hurricane Iniki in September 1992. HECO anticipates that evidentiary hearings
on the 1995 application will be held in late 1994.
HELCO
Rate increase. On July 31, 1991, HELCO asked the PUC to increase rates by $7.5
million a year, or 7.5%. The request was based on a 13.5% return on average
common equity and a 1992 test year. On October 2, 1992, HELCO received a final
decision and order from the PUC authorizing a total increase of $3.9 million in
annual revenues, based on a 13.0% return on average common equity.
HELCO's original request for rate increase included approximately $1.9 million
to cover the increased cost of postretirement benefits other than pensions, and
this request will be considered in a separate generic docket. The PUC has not
yet issued a final decision and order in this generic docket. The information on
postretirement benefits other than pensions in Note 10 to HECO's Consolidated
Financial Statements is incorporated herein by reference to pages 23 to 24 of
HECO's 1993 Annual Report to Stockholder, portions of which are filed herein as
HECO Exhibit 13(b). Other rate adjustments could be made based on the results
of the PUC's study of HELCO's service reliability. See "Item 3. Legal
Proceedings--HELCO reliability investigation."
Pending rate request. On November 30, 1993, HELCO applied to the PUC for
permission to increase electric rates, using a 1994 test year and requesting
rates designed to produce an increase of approximately $15.8 million in annual
revenues, or 13.4%, over revenues provided by rates currently in effect. The
requested increase is based on a 12.4% return on average common equity and is
needed to cover plant, equipment and operating costs to maintain and improve
service and provide reliable power for its customers. HELCO anticipates that
evidentiary hearings will be held later this year.
MECO
Pending rate request. In November 1991, MECO filed a request to increase
rates by approximately $18.3 million annually, or approximately 17% above the
rates in effect at the time of the filing, in several steps. Most of the
proposed increase reflected the costs of adding a 58-MW combined-cycle
generating unit on Maui in three phases and the costs related to the change in
the method of accounting for postretirement benefits other than pensions.
Evidentiary hearings were held in January 1993. At the conclusion of the
hearings, MECO's final requested increase was adjusted to approximately $11.4
million annually, or approximately 10%, in several steps in 1993. The decrease
in the requested rate increase resulted primarily from a reduced cost of
capital, lower administrative and general expenses and other revisions to MECO's
estimated revenue requirements for the 1993 test year used in the rate case.
MECO's revised request reflected a return on average common equity of 13.0%.
On January 29, 1993, MECO received an initial interim decision authorizing an
annual increase of $2.8 million, or 2.4%, effective February 1, 1993. This
interim decision covered, among other things, the costs associated with the
first phase of the 58-MW combined-cycle generating unit, which had been placed
in service on May 1, 1992. In the interim decision the PUC used a rate of
return on average common equity of 12.75% in light of a drop in interest rates
and changes in economic conditions since HECO's and HELCO's most recent rate
case decisions and orders. The PUC also stated that MECO is less dependent on
purchased power than HECO or HELCO, and that MECO's return on average common
equity will be more extensively reviewed for purposes of the final decision and
order. On May 7, 1993, MECO received a second interim decision authorizing a
step increase of an additional $4 million in annual revenues, or 3.6%,
effective May 8, 1993. This step increase covered the estimated annual costs of
the second phase of the 58-MW combined-cycle generating unit, a combustion
turbine which was placed into service on May 1, 1993. On October 21, 1993, MECO
received a third interim decision authorizing a step increase of an additional
$1 million in annual revenues, or 0.9%, effective October 21, 1993. This step
increase covered the estimated annual costs of the third and final phase of the
combined-cycle generating unit, which was placed into service on October 1,
1993. On December 9, 1993, MECO received a fourth interim decision authorizing
a step increase of an additional $0.4 million in annual revenues, effective
December 10, 1993, to cover wage increases that became effective on November 1,
1993. These interim increases are subject to refund with interest, pending the
final outcome of the case. MECO's management cannot predict with certainty when
a final decision in MECO's rate case will be rendered or the amount of the
final rate increase that will be granted.
12
19
SAVINGS BANK -- AMERICAN SAVINGS BANK, F.S.B.
GENERAL
ASB was granted a charter as a federal savings bank in January 1987. Prior to
that time, ASB operated as the Hawaii division of American Savings & Loan
Association of Salt Lake City, Utah since 1925. At September 30, 1993, ASB's
total assets were $2.5 billion and it was the second largest savings and loan
institution in Hawaii based on total assets.
ASB was acquired by the Company for approximately $115 million on May
26, 1988. The acquisition was accounted for using the purchase method of
accounting. Accordingly, tangible assets and liabilities were recorded at their
estimated fair values at the acquisition date. The acquisition was approved by
the Federal Home Loan Bank Board (FHLBB) which required HEI to enter into a
Regulatory Capital Maintenance/Dividend Agreement (the FHLBB Agreement). Under
the FHLBB Agreement, HEI agreed 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
FHLBB Agreement, HEI's obligation to contribute additional capital was limited
to a maximum aggregate amount of approximately $65.1 million. HEI elected to
contribute additional capital of $0.8 million and $24.0 million to ASB during
1993 and 1992, respectively. The FHLBB Agreement also included limitations on
ASB's ability to pay dividends. Under the Financial Institutions Reform,
Recovery and Enforcement Act of 1989 (FIRREA), the regulations of the FHLBB and
the FHLBB Agreement were transferred to the Office of Thrift Supervision (OTS).
Effective December 23, 1992, ASB was granted a release from the dividend
limitations imposed under the FHLBB Agreement. ASB is subject to the OTS
regulations for dividends and other distributions applicable to financial
institutions regulated by the OTS.
ASB acquired First Nationwide Bank's Hawaii branches and deposits on
October 6, 1990. The acquisition increased ASB's statewide retail branch
network from 36 to 45 branches and its deposit base by $247 million, and
provided approximately $239 million in cash.
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,
including collateralized medium-term notes.
For additional information about ASB, reference is made to Note 5 to HEI's
Consolidated Financial Statements, incorporated herein by reference to pages 53
through 57 of HEI's 1993 Annual Report to Stockholders, portions of which are
filed herein as HEI Exhibit 13(a).
The following table sets forth selected data for ASB for the periods
indicated:
Years ended December 31,
---------------------------
1993 1992(2) 1991
---- ------- ----
Return on assets
Net income divided by average
total assets (1).................. 1.00% 0.78% 0.72%
Return on equity
Net income divided by average
equity (1)........................ 14.18% 12.10% 11.18%
Equity to assets ratio
Average equity divided by average
total assets...................... 7.03% 6.46% 6.48%
(1) Net income includes amortization of goodwill and core deposit intangibles.
(2) Reflects allocation of corporate-level expenses for segment reporting
purposes, which were not billed to ASB. In the second quarter of 1992, HEI
changed its method of billing corporate-level expenses to ASB. Under the
new billing procedure, only certain direct charges, rather than
fully-allocated costs, are billed to ASB. However, no change was made by
HEI in the manner in which corporate-level expenses were allocated for
segment reporting purposes.
13
20
CONSOLIDATED AVERAGE BALANCE SHEET
The following table sets forth average balances of major balance sheet
categories for the periods indicated. Average balances for each period have
been calculated using the average month-end balances during the period.
Years ended December 31,
--------------------------------------
(in thousands) 1993 1992 1991
---------- --------- ----------
Assets
Investment securities........................ $ 136,987 $ 102,490 $ 95,125
Mortgage-backed securities................... 647,973 793,248 793,021
Loans receivable, net........................ 1,570,751 1,311,367 1,029,009
Other........................................ 183,151 173,585 152,135
---------- ---------- ----------
$2,538,862 $2,380,690 $2,069,290
========== ========== ==========
Liabilities and stockholder's equity
Deposit liabilities.......................... $2,076,192 $1,882,523 $1,557,301
Other borrowings............................. 230,101 288,862 340,562
Other........................................ 54,212 55,586 37,318
Stockholder's equity......................... 178,357 153,719 134,109
---------- ---------- ----------
$2,538,862 $2,380,690 $2,069,290
========== ========== ==========
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.
As rates in 1993 have remained at low levels, the gap in the near term
(0-6 months) was a negative 4.1% of total assets as compared to a cumulative
one-year positive gap position of 3.2% of total assets as of December 31, 1993.
The negative near-term gap position reflects customers moving more interest
sensitive funds into liquid passbook deposits. The cumulative one-year 1993
"positive gap" was primarily due to a very low interest rate environment that
led to faster prepayments of fixed rate loans with high interest rates coupled
with the increase of noninterest rate sensitive passbook deposits with a life
expectancy of greater than a year.
14
21
The following table shows ASB's interest rate sensitivity at December 31,
1993:
Cumulative volumes at December 31, 1993
subject to repricing within
------------------------------------------
1 year 1-5 Over 5
(dollars in thousands) or less years years Total (1)
- ---------------------- ------- ----- ------ ---------
INTEREST-EARNING ASSETS
Real estate loans and mortgage-
backed securities
Balloon and adjustable rate............. $ 759,062 $ 15,859 $ -- $ 774,921
Fixed rate 1-4 unit residential......... 256,668 615,208 400,434 1,272,310
Other................................... 59,171 64,413 29,650 153,234
Consumer and other loans.................. 114,684 19,676 9,556 143,916
Commercial loans.......................... 9,102 6,574 5,197 20,873
Other interest earning.................... 30,630 4,699 35,160 70,489
---------- -------- -------- ----------
Total interest-earning assets............. 1,229,317 726,429 479,997 2,435,743
---------- -------- -------- ----------
INTEREST-BEARING LIABILITIES
Certificate accounts...................... 321,191 136,170 43,287 500,648
Money market accounts..................... 106,362 -- -- 106,362
Commercial checking and "Negotiable
Order of Withdrawal" accounts............ 273,243 -- -- 273,243
Passbook accounts......................... 372,654 403,906 434,770 1,211,330
FHLB advances............................. 73,000 185,374 31,300 289,674
---------- -------- -------- ----------
Total interest-bearing liabilities........ 1,146,450 725,450 509,357 2,381,257
---------- -------- -------- ----------
Interest rate sensitivity gap (2)......... $ 82,867 $ 979 $ (29,360) $ 54,486
========== ========= ========= ==========
Cumulative interest rate sensitivity gap.. $ 82,867 $ 83,846 $ 54,486
========== ========= =========
Cumulative interest rate sensitivity gap
over total assets....................... 3.16% 3.20% 2.08%
========== ========= =========
(1) The table does not include $183 million of noninterest-earning assets and
$53 million of noninterest-bearing liabilities.
(2) The difference between the total interest-earning assets and the total
interest-bearing liabilities.
15
22
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
periods indicated. Average balances for each period have been calculated using
the average month-end balances during the period.
Years ended December 31,
-----------------------------------------------
(dollars in thousands) 1993 1992 1991
- ---------------------- ---------- ---------- ----------
Loans
Average balances..................... $1,570,751 $1,311,367 $1,029,009
Interest income...................... $135,778 $124,714 $109,187 (2)
Weighted average yield............... 8.64% 9.51% 10.61%
Mortgage-backed securities
Average balances..................... $647,973 $793,248 $793,021
Interest income...................... $43,397 $60,774 $72,282 (2)
Weighted average yield............... 6.70% 7.66% 9.11%
Investments (1)
Average balances..................... $136,987 $102,490 $95,125
Interest and dividend income......... $9,444 $7,156 $7,149
Weighted average yield............... 6.89% 6.98% 7.52%
Total interest-earning assets
Average balances..................... $2,355,711 $2,207,105 $1,917,155
Interest and dividend income......... $188,619 $192,644 $188,618 (2)
Weighted average yield............... 8.01% 8.73% 9.84%
Deposits
Average balances..................... $2,076,192 $1,882,523 $1,557,301
Interest expense..................... $77,651 $94,339 $99,042
Weighted average rate................ 3.74% 5.01% 6.36%
Borrowings
Average balances..................... $230,101 $288,862 $340,562
Interest expense..................... $15,050 $20,409 $25,798
Weighted average rate................ 6.54% 7.07% 7.58%
Total interest-bearing liabilities
Average balances..................... $2,306,293 $2,171,385 $1,897,863
Interest expense..................... $92,701 $114,748 $124,840
Weighted average rate................ 4.02% 5.28% 6.58%
Net balance, net interest income
and interest rate spread
Net balance........................... $49,418 $35,720 $19,292
Net interest income................... $95,918 $77,896 $63,778
Interest rate spread.................. 3.99% 3.45% 3.26%
(1) ASB has no material amount of tax-exempt investments for periods shown.
(2) Excludes nonrecurring items.
16
23
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
period 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, 1993 VS. 1992
Income from interest-earning assets
Loan portfolio.................................. $(12,101) $23,165 $11,064
Mortgage-backed securities...................... (7,060) (10,317) (17,377)
Investments..................................... (93) 2,381 2,288
--------- -------- --------
(19,254) 15,229 (4,025)
--------- -------- --------
Expense from interest-bearing liabilities
Deposits........................................ (25,675) 8,987 (16,688)
FHLB advances and other borrowings.............. (1,443) (3,916) (5,359)
--------- -------- --------
(27,118) 5,071 (22,047)
--------- -------- --------
Net interest income............................... $7,864 $10,158 $18,022
========= ======== ========
YEAR ENDED DECEMBER 31, 1992 VS. 1991
Income from interest-earning assets
Loan portfolio.................................. $(12,173) $27,700 $15,527
Mortgage-backed securities...................... (11,529) 21 (11,508)
Investments..................................... (530) 537 7
--------- -------- --------
(24,232) 28,258 4,026
--------- -------- --------
Expense from interest-bearing liabilities
Deposits........................................ (23,222) 18,519 (4,703)
FHLB advances and other borrowings.............. (1,655) (3,734) (5,389)
--------- -------- --------
(24,877) 14,785 (10,092)
--------- -------- --------
Net interest income............................... $ 645 $13,473 $14,118
========= ======= ========
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 $11.1
million in 1993, compared to $10.4 million in 1992 and $9.7 million in 1991.
17
24
LENDING ACTIVITIES
General. ASB's net loan and mortgage-backed securities portfolio totaled
approximately $2.4 billion at December 31, 1993, representing 90.3% of its
total assets, compared to $2.2 billion, or 88.3%, and $2.0 billion, or 89.7%, at
December 31, 1992 and 1991, respectively. ASB's loan portfolio consists
primarily of conventional residential mortgage loans which are not insured by
the Federal Housing Administration (FHA) nor guaranteed by the Veterans
Administration. At December 31, 1993, mortgage-backed securities represented
26.7% of the loan and mortgage-backed securities portfolio, compared to 32.7%
at December 31, 1992 and 41.1% at December 31, 1991.
The following tables set forth the composition of ASB's loan and mortgage-
backed securities portfolio:
December 31,
-------------------------------------------------------------------------------------
1993 1992 1991
------------------------ ------------------------ -------------------------
Balance % of total Balance % of total Balance % of total
(dollars in thousands) ------- ---------- ------- ---------- ------- ----------
REAL ESTATE LOANS (1)
Conventional...................... $1,584,218 66.98% $1,294,769 59.59% $ 976,004 50.02%
Construction and
development..................... 26,526 1.12 33,123 1.53 24,978 1.28
Troubled debt
restructuring................... 3,397 0.14 8,945 0.41 180 0.01
----------- ------- ----------- ------- ----------- -------
1,614,141 68.24 1,336,837 61.53 1,001,162 51.31
Less
Unearned fees and discounts....... (26,728) (1.13) (20,422) (0.94) (16,106) (0.82)
Undisbursed loan funds............ (13,142) (0.55) (16,203) (0.74) (11,854) (0.61)
Allowance for losses.............. (3,962) (0.17) (3,626) (0.17) (2,678) (0.14)
----------- ------- ----------- ------- ----------- -------
Total real estate loans, net........ 1,570,309 66.39 1,296,586 59.68 970,524 49.74
----------- ------- ----------- ------- ----------- -------
OTHER LOANS
Loans on deposits................... 15,015 0.63 15,013 0.69 15,528 0.80
Consumer and other loans............ 129,961 5.49 134,943 6.21 144,356 7.40
Commercial loans.................... 24,494 1.04 21,830 1.01 22,998 1.18
----------- ------- ----------- ------- ----------- -------
169,470 7.16 171,786 7.91 182,882 9.38
Less
Unearned fees and discounts....... (156) (0.01) (148) (0.01) (204) (0.01)
Undisbursed loan funds............ (3,173) (0.13) (3,805) (0.18) (3,436) (0.18)
Allowance for losses.............. (1,352) (0.06) (1,531) (0.07) (1,140) (0.06)
----------- ------- ----------- ------- ----------- -------
Total other loans, net.............. 164,789 6.96 166,302 7.65 178,102 9.13
----------- ------- ----------- ------- ----------- -------
MORTGAGE-BACKED SECURITIES,
NET OF DISCOUNTS.................. 630,156 26.65 709,891 32.67 802,430 41.13
----------- ------- ----------- ------- ----------- -------
TOTAL LOANS AND MORTGAGE-
BACKED SECURITIES, NET............ $2,365,254 100.00% $2,172,779 100.00% $1,951,056 100.00%
=========== ======= =========== ======= =========== =======
(1) Includes renegotiated loans.
18
25
December 31,
------------------------------------------------------------
1990 1989
--------------------------- ------------------------------
(dollars in thousands) Balance % of total Balance % of total
- ---------------------- ----------- ------------- ----------- ---------------
REAL ESTATE LOANS (1)
Conventional................. $ 792,197 44.95% $ 669,737 47.04%
Construction and development. 7,186 0.41 15,077 1.06
Troubled debt restructuring.. 220 0.01 708 0.04
Other real estate loans...... 130 0.01 130 0.01
----------- --------- ------------ ---------
799,733 45.38 685,652 48.15
Less
Unearned fees and discounts (14,356) (0.82) (13,544) (0.95)
Undisbursed loan funds..... (6,279) (0.36) (9,088) (0.64)
Allowance for losses....... (2,371) (0.13) (2,042) (0.14)
----------- --------- ------------ ---------
Total real estate loans, net 776,727 44.07 660,978 46.42
----------- --------- ------------ ---------
OTHER LOANS
Loans on deposits............ 16,968 0.96 15,299 1.07
Consumer and other loans..... 128,387 7.29 105,131 7.38
Commercial loans............. 19,591 1.11 14,314 1.01
----------- --------- ------------ ---------
164,946 9.36 134,744 9.46
Less
Unearned fees and discounts (252) (0.01) (309) (0.02)
Undisbursed loan funds..... (3,355) (0.19) (2,912) (0.20)
Allowance for losses....... (1,016) (0.06) (869) (0.06)
----------- --------- ------------ ---------
Total other loans, net....... 160,323 9.10 130,654 9.18
----------- --------- ------------ ---------
MORTGAGE-BACKED SECURITIES,
NET OF DISCOUNTS........... 825,292 46.83 632,249 44.40
----------- --------- ------------ ---------
TOTAL LOANS AND MORTGAGE-
BACKED SECURITIES, NET..... $1,762,342 100.00% $1,423,881 100.00%
=========== ========== ============ ==========
(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, 1993, approximately $11.9 million of loans which were 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,
reference is made to Note 20 to HEI's Consolidated Financial Statements,
incorporated herein by reference to page 67 of HEI's 1993 Annual Report to
Stockholders, portions of which are filed herein as HEI Exhibit 13(a).
The following table shows the amount of loans originated for the years
indicated:
Amount of
loans
(dollars in millions) originated
--------------------- ----------
1993................................. $564
1992................................. 601
1991................................. 387
1990................................. 366
1989................................. 318
19
26
Residential mortgage lending. During 1993, the demand for adjustable rate
mortgage (ARM) loans over fixed rate loans decreased compared with 1992. 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 24.7% of the total
originations of first mortgage loans in 1993, compared to 34.0% and 27.4% in
1992 and 1991, respectively. ASB intends to continue to emphasize the
origination and purchase of ARM loans to further improve its asset/liability
management.
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 owner-occupied property exceeds 80%
of the lower of the appraised value or purchase price. On nonowner-occupied
residential properties, the loan-to-value ratio may not exceed 80% of the lower
of the appraised value or purchase price.
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, 1993, 1992 and 1991, construction and development
loans represented 1.5%, 2.2% and 2.1%, 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 1993, 1992 and 1991, loans on these
types of properties accounted for approximately 6.0%, 8.2% and 7.5%,
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 1993, 1992 and 1991,
loans of these types accounted for approximately 4.3%, 4.9% and 11.1%,
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. As of December 31, 1993, 1992 and 1991, corporate banking loans
represented 1.2%, 1.2% and 1.67%, 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 and also on loans for which ASB acts as collection
agent on behalf of third-party purchasers.
ASB generally charges the borrower at loan settlement a loan origination fee
ranging from 2% to 3% of the amount borrowed. Loan origination fees (net of
direct loan origination costs) are deferred and recognized as an adjustment of
yield over the life of the loan. Nonrefundable commitment fees (net of direct
loan origination costs, if applicable) to originate or purchase loans are
deferred. The nonrefundable commitment fees are recognized as an adjustment of
yield over the life of the loan if the commitment is exercised. If the
commitment expires unexercised, nonrefundable commitment fees are recognized in
income upon expiration of the commitment.
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
20
27
in a real estate owned account until it is sold. At December 31,
1993, there was only one real estate property, a residential property, acquired
in settlement of a loan totaling $0.2 million, or 0.01% of total assets. At
December 31, 1992 there was only one real estate property, a commercial
property, acquired in settlement of a loan totaling $2.0 million, or 0.08% of
total assets. There was no real estate owned at December 31, 1991, 1990 and
1989.
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 0.5%, 1.0%, 0.1%, 0.1% and 0.2%, of ASB's total
net loans outstanding at December 31, 1993, 1992, 1991, 1990 and 1989,
respectively. The following table sets forth certain information with respect
to nonaccrual and renegotiated loans for the dates indicated:
December 31,
----------------------------------------------------------------------------
(in thousands) 1993 1992 1991 1990 1989
------------ ------------ ------------ ------------ ------------
Nonaccrual loans--
Real estate
1-4 unit residential........ $5,006 $12,526 $556 $704 $ 445
Income property............. 220 395 -- -- 356
Construction................ -- -- -- -- 82
Other....................... -- -- -- -- 45
------ ------- ---- ---- ------
Total real estate............. 5,226 12,921 556 704 928
Commercial.................... 38 1,059 -- 25 32
Consumer...................... 460 181 439 269 202
------ ------- ---- ---- ------
Total nonaccrual loans........ $5,724 $14,161 $995 $998 $1,162
====== ======= ==== ==== ======
Renegotiated loans not
included above-
Real estate
1-4 unit residential........ $ 381 $ -- $ -- $ -- $ --
Income property............. 1,486 -- 180 220 270
Commercial.................. 324 -- -- -- --
------ ------- ---- ---- ------
Total renegotiated loans...... $2,191 $ -- $180 $220 $ 270
====== ======= ==== ==== ======
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 $5.7 million (0.32% of
total loans) at December 31, 1993, $14.2 million (0.94% of total loans) at
December 31, 1992, $1.0 million (0.08% of total loans) at December 31, 1991,
$1.0 million (0.10% of total loans) at December 31, 1990 and $1.2 million
(0.14% of total loans) at December 31, 1989. The significant increase in loans
on nonaccrual status from year-end 1991 to 1992 was primarily due to the
effects of Hurricane Iniki on the island of Kauai, such as higher unemployment.
As of December 31, 1992, real estate loans with remaining principal balances of
$8.9 million were restructured to defer monthly contractual principal and
interest payments for three months with repayments of the entire deferred
amounts due at the end of the three-month period. These loans had been
classified as nonaccrual loans as of December 31, 1992. Substantially all of
these loans have resumed their normal repayment schedule and are classified as
performing loans as of December 31, 1993. For additional information, see
"Potential problem loans."
There were no loan loss provisions with respect to renegotiated loans in 1993,
1992, 1991, 1990 and 1989 because the estimated net realizable value of the
collateral for such loans was determined to be in excess of the outstanding
principal amounts of these loans. For additional information, see "Potential
problem loans."
Potential problem loans. A loan is classified as a potential problem loan
when the ability of the borrower to comply with present loan covenants is in
doubt. In September 1992, the island of Kauai suffered
21
28
substantial property damage from Hurricane Iniki. The high unemployment rate on
Kauai due to Hurricane Iniki resulted in loan payment defaults or deferrals
requiring such loans to be placed on a nonaccrual status. As of December 31,
1992, delinquencies of ASB's Kauai loans were $2.2 million, $2.5 million, $3.1
million and $0.4 million for 1-29 days, 30-59 days, 60-89 days and 90 days and
over delinquent, respectively. In anticipation of additional loans falling into
the 90 days and over category, ASB added reserves during 1992 of $0.6 million
for Kauai loans. As of December 31, 1993, substantially all of these loans have
resumed their normal repayment schedule improving delinquencies of ASB's Kauai
loans to $2.1 million, $0.5 million, $0.3 million and $0.7 million for 1-29
days, 30-59 days, 60-89 days and 90 days and over delinquent, respectively.
Due to the losses created by Hurricane Iniki, several insurance
companies have discontinued the sale and/or renewal of homeowners' insurance on
real estate in Hawaii. If a borrower is unable to obtain insurance, ASB has
procedures to "force place" insurance coverage. The "force place" policies are
underwritten by two U.S. insurance companies and would protect ASB, as lender,
for loans secured by real estate covered by such policies. The cost of the
policy is charged to the borrower. Based on the current circumstances,
management believes that the current shortage of homeowners' insurance in
Hawaii and the effect of Hurricane Iniki on ASB's future earnings will not be
material to the Company's financial condition or results of operations.
Allowance for loan losses. The provision for loan losses is dependent upon
management's evaluation as to the amount needed 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.
The following table presents the changes in the allowance for loan losses for
the periods indicated.
Years ended December 31,
----------------------------------------------------------
(dollars in thousands) 1993 1992 1991 1990 1989
---------- ---------- ---------- ---------- ----------
Allowance for loan losses, beginning of
year.................................. $5,157 $3,818 $3,387 $2,911 $2,685
ADDITIONS TO PROVISIONS FOR LOSSES ---------- ---------- ---------- ---------- ---------
Real estate loans....................... 336 945 296 329 100
Other loans............................. 443 549 345 299 306
---------- ---------- ---------- ---------- ----------
Total additions......................... 779 1,494 641 628 406
---------- ---------- ---------- ---------- ----------
NET (RECOVERY) CHARGE-OFFS
Real estate loans....................... -- (3) (12) -- --
Other loans............................. 622 158 222 152 180
---------- ---------- ---------- ---------- ----------
Total net charge-offs................... 622 155 210 152 180
---------- ---------- ---------- ---------- ----------
Allowance for loan losses, end of year.. $5,314 $5,157 $3,818 $3,387 $2,911
========== ========== ========== ========== ==========
Ratio of net charge-offs during the
period to average loans outstanding... 0.04% 0.01% 0.02% 0.02% 0.02%
========== ========== ========== ========== ==========
ASB's ratio of provisions for loan losses during the period to average
loans outstanding was 0.05%, 0.11%, 0.06%, 0.07% and 0.06% for the years ended
December 31, 1993, 1992, 1991, 1990 and 1989, respectively. The increase in
provisions for loan losses during 1992 was primarily due to the 27% increase in
average loans outstanding and a $0.6 million additional provision for Kauai
loans anticipated to be affected by Hurricane Iniki. See "Potential problem
loans." Without the additional $0.6 million provision on Kauai loans, the ratio
of provision for loan losses to average loans outstanding for the year ended
December 31, 1992 would have been 0.07%, which would be consistent with prior
years. The allowance for loan losses for the year ended December 31, 1993
includes the additional provision and charge-off of a single commercial loan of
$0.3 million, offset by the reversal of $0.6 million in provisions for Kauai
loans reclassified as performing. The ratio of provision for loan losses to
average loans outstanding for the year ended December 31, 1993 would have been
0.07%, if the reversal of the $0.6 million in provisions for Kauai loans and the
additional provision of $0.3 million for the commercial loan were excluded.
22
29
INVESTMENT ACTIVITIES
In recent years, ASB's investment portfolio has consisted primarily of
mortgage-backed securities, federal agency obligations and stock of the FHLB of
Seattle.
The following table sets forth the composition of ASB's investment portfolio,
excluding mortgage-backed securities to be held-to-maturity, at the dates
indicated:
December 31,
----------------------------------
(dollars in thousands) 1993 1992 1991
---------- ---------- ----------
Marketable securities
Federal agency obligations............. $ -- $15,293 $27,606
Other securities held for trading...... 45,396 23,037 13,876
--------- ---------- ---------
Total marketable securities.............. 45,396 38,330 41,482
Investments in regulatory agencies-FHLB
stock.................................. 23,203 20,194 17,932
--------- ---------- ---------
Total investments........................ $68,599 $58,524 $59,414
========= ========== =========
Weighted average rate on investments (1). 9.75% 9.38% 8.76%
========= ========== =========
(1) On investments during the year ended December 31.
DEPOSITS AND OTHER SOURCES OF FUNDS
General. Deposits traditionally have been the principal source of ASB's funds
for use in lending and other investments. ASB also derives funds from receipt
of interest and principal on outstanding loans, 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.
Deposits. ASB's deposits are obtained primarily from residents of Hawaii. In
1993, ASB had average deposits aggregating $2.1 billion. Savings outflow for
1993 was approximately $9 million excluding interest credited to deposit
accounts. Savings inflows for 1992 and 1991 were approximately $343 million and
$31 million, respectively, excluding interest credited to deposit accounts. The
substantial decrease in savings flow for 1993 was due primarily to the low
interest rate environment and the withdrawal of a trust company deposit account
of $92 million. The trust company was recently acquired by another financial
institution. The substantial increase in savings inflow for 1992 was due to
ASB's strategy to increase its retail market by paying higher rates of interest
on savings accounts than most of its competitors in Hawaii during this period.
The weighted average rate paid on deposits during 1993 decreased to 3.74%,
compared to 5.01% and 6.36% in 1992 and 1991, respectively. In the three years
ended December 31, 1993, ASB had no deposits placed by or through a broker.
23
30
The following table shows the distribution of ASB's average deposits
and average daily rates by type of deposit for the years indicated. Average
balances for a period have been calculated using the average of month-end
balances during the period.
Years ended December 31,
--------------------------------------------------------------------------------------------------------
1993 1992 1991
------------------------------ ------------------------------------- ---------------------------------
% of % of % of
(dollars in Average total Average Average total Average Average total Average
thousands) balance deposits rate % balance deposits rate % balance deposits rate %
------------------------------ ------------------------------------- ---------------------------------
Passbook
accounts....... $1,126,880 54.28% 3.73% $ 738,692 39.24% 4.69% $ 376,399 24.17% 5.38%
Negotiable
Order of
Withdrawal
(NOW)
accounts....... 268,227 12.92 2.49 242,682 12.89 4.11 173,348 11.13 4.95
Money market
accounts....... 119,238 5.74 3.15 149,811 7.96 4.30 161,034 10.34 6.11
Certificate
accounts....... 561,847 27.06 4.48 751,338 39.91 5.76 846,520 54.36 7.13
------------------------------ ------------------------------------- ---------------------------------
Total deposits. $2,076,192 100.00% 3.74% $1,882,523 100.00% 5.01% $1,557,301 100.00% 6.36%
============================== ===================================== =================================
At December 31, 1993, ASB had $166 million in certificate accounts of $100,000
or more maturing as follows:
(in thousands) Amount
--------
Three months or less............................... $ 83,984
Greater than three months through six months....... 16,471
Greater than six months through twelve months...... 33,527
Greater than twelve months......................... 32,296
--------
$166,278
========
Borrowings. ASB obtains advances from the FHLB of Seattle, provided
certain standards related to credit-worthiness have been met. Advances are
secured under a blanket pledge of the common stock ASB owns in the FHLB of
Seattle and each note or other instrument held by ASB and the mortgage securing
it. 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, 1993, 1992 and 1991, advances from the FHLB amounted to
$290 million, $194 million and $259 million, respectively. The weighted average
rate on the advances from the FHLB outstanding at December 31, 1993, 1992 and
1991 were 6.24%, 7.39% and 7.60%, respectively. The maximum amount outstanding
at any month-end during 1993, 1992 and 1991 was $290 million, $259 million and
$259 million, respectively. Advances from the FHLB averaged $210 million, $221
million and $203 million during 1993, 1992 and 1991, respectively, and the
approximate weighted average rate thereon was 6.84%, 7.65% and 7.99%,
respectively.
At December 31, 1992 and 1991, 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. There were no outstanding securities
sold under agreements to repurchase as of December 31, 1993. At December 31,
1992 and 1991, $27.2 million (including accrued interest of $0.2 million) and
$131.0 million (including accrued interest of $1.8 million), respectively, of
the agreements were to repurchase identical securities. The weighted average
rates on securities sold under agreements to repurchase outstanding at
December 31, 1992 and 1991 were 3.34% and 5.78%, respectively. The maximum
amount outstanding at any month-end during 1993, 1992 and 1991 was $27 million,
$125 million and $136 million, respectively.
24
31
Securities sold under agreements to repurchase averaged $20 million, $66 million
and $124 million during 1993, 1992 and 1991, respectively, and the approximate
weighted average interest rate thereon was 3.39%, 5.15% and 6.67%, respectively.
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, 1993, 1992 and 1991, 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) 1993 1992 1991
-------- -------- --------
Advances from FHLB.......... $289,674 $194,099 $258,593
Securities sold under
agreements to repurchase -- 27,223 131,018
Other borrowings............ -- -- 43
-------- -------- --------
Total borrowings............ $289,674 $221,322 $389,654
======== ======== ========
Weighted average rate (1)... 6.24% 6.89% 6.99%
(1) On borrowings at December 31.
COMPETITION
The primary factors in competing for deposits are interest rates, the
quality and range of services offered, marketing, convenience of office
locations, office 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. 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 office and 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.
OTHER
FREIGHT TRANSPORTATION -- HAWAIIAN TUG & BARGE CORP.
AND YOUNG BROTHERS, LIMITED
GENERAL
HTB and its wholly owned subsidiary, YB, were acquired from Dillingham
Corporation in 1986 for $18.7 million. HTB provides interisland 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 3.1 million
revenue tons of cargo between the islands in 1993, compared to 3.2 million tons
of cargo in 1992.
A substantial portion of the state's commodities are imported, and
almost all of Hawaii's overseas inbound and outbound cargo moves through
Honolulu. Cargo destined for the neighbor islands is trans-shipped through the
Honolulu gateway. Access to the interisland freight transportation market is
generally subject to state or federal regulation, and HTB and YB have active
competitors, such as interstate common carriers and, in certain instances,
unregulated contract carriers.
25
32
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. Although YB encounters competition from, among others, interstate carriers
and unregulated contract carriers, YB is the only authorized common carrier
under the Hawaii Water Carrier Act.
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.
In June 1987, the PUC commenced a proceeding to determine whether YB's
rates and charges should be reduced to reflect the effect of the Tax Reform Act
of 1986 (TRA). During the period from January 1, 1988 through June 30, 1993,
several rate reductions were imposed by the PUC as well as YB voluntarily
reducing its rates for selected commodities. On February 13, 1992, YB filed a
motion to rescind a 1.1% interim rate reduction which was implemented on
January 1, 1989. On June 30, 1993, the PUC approved YB's motion to rescind the
1.1% interim rate reduction, effective July 8, 1993, and in January 1994, the
PUC rendered a decision to close the TRA docket.
In September 1992, YB filed an application for a tariff change in its
minimum bill of lading from $10.43 to $21.03 (later increased to $21.62). This
application was suspended on October 7, 1992. On November 5, 1992, YB filed a
general rate increase application with the PUC for a 17.1% across the board
increase in rates effective December 20, 1992. On December 18, 1992, the PUC
ordered that the two applications be consolidated and that the consolidated
application be suspended for a period of six months to and including June 19,
1993. On February 12, 1993, YB reduced its general rate increase request to
15.7% from the 17.1% originally requested. The decrease in the request was
primarily due to a decrease in rate base resulting from the change in the test
year period and an adjustment to YB's capital structure to reflect more
leverage. The revised request was based on a rate of return of 16.7% on an
imputed equity of 55%. Hearings for this general rate increase and the tariff
change were held in May 1993. On June 30, 1993, the PUC issued a decision
granting an $18.00 minimum bill of lading charge and a 4.3% general rate
increase on all rates excluding the Minimum Bill of Lading and Marine Cargo
Insurance rates. The new rates and charges became effective on July 8, 1993.
This decision was based on a rate of return of 15.15% on an imputed equity of
55%. YB is also participating in the PUC's generic docket to determine whether
SFAS No. 106 should be adopted for rate-making purposes. The information on
postretirement benefits other than pensions in Note 18 to HEI's Consolidated
Financial Statements is incorporated herein by reference to pages 64 to 66 of
HEI's 1993 Annual Report to Stockholders, portions of which are filed herein as
HEI Exhibit 13(a).
On March 15, 1994, YB filed a Notice of Intent with the PUC informing
them that YB will be filing an application for a general rate increase.
REAL ESTATE-MALAMA PACIFIC CORP.
GENERAL
MPC was incorporated in 1985 and engages in real estate development
activities, either directly or through joint ventures.
MPC's real estate development investments in residential projects are
targeted for Hawaii's owner-occupant market. MPC's subsidiaries are currently
involved in the active development of five residential projects (Kipona Hills,
Kua' Aina Ridge, Westpark, Piilani Village Phase 1 and Sunrise Estates
Phase 1) on the islands of Oahu, Maui and Hawaii encompassing approximately
500 homes or lots, of which more than 260 have been completed and sold.
Either directly or through its joint ventures, MPC's subsidiaries have access
to nearly 450 acres of land for future residential development.
Residential development generally requires 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.
In 1993, Malama's real estate development activities continued to be
impacted by the economic conditions affecting the entire nation. Although
interest rates remained low, the real estate market experienced slowdowns due
to the weakness in the U.S. and Hawaii economies and lack of consumer
26
33
confidence. Sales prices and velocities are expected to remain relatively flat
through most of 1994, with improvement anticipated in late 1994 or 1995.
For a discussion of MPC's transactions with related parties, pages 21 to 23 of
HEI's Definitive Proxy Statement, prepared for the Annual Meeting of
Stockholders to be held on April 19, 1994 and filed herein as HEI Exhibit 22,
are incorporated herein by reference.
JOINT VENTURE DEVELOPMENTS
Makakilo Cliffs. In 1990, MDC and JGL Enterprises Inc. formed Makakilo Cliffs
Joint Venture for the development of a 280-unit multi-family residential
project on approximately 26 acres in Makakilo, Hawaii (island of Oahu). MDC's
partnership interest was assigned to Malama Makakilo Corp., another wholly
owned subsidiary of MPC, in August 1990. Sales of the first 81 units closed in
1991 and all remaining units closed in 1992. The joint venture was dissolved in
December 1993.
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). In 1993 and 1992, sales of three lots and 153Elots closed,
respectively. Sales of the remaining nine lots are expected in 1994.
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 140
one-acre house lots in Hilo, Hawaii, adjacent to the Sunrise Estates Joint
Venture project. Rezoning was completed in 1993 and site work is expected to
commence in late 1994 or early 1995.
Ainalani Associates. In 1990, MDC and MDT-BF Limited Partnership (MDT) formed
a joint venture known as Ainalani Associates for the acquisition and
development of five residential projects on the islands of Kauai, Maui and
Hawaii. In 1990, the project on the island of Kauai was completed and sold. In
1992, the land for a project on the island of Maui was sold in bulk. Ainalani
Associates also acquired a 50% interest in Palailai Associates, a partnership
for the development of residential housing on Oahu. The five projects and
partnership interest originally (i.e., before sales) encompassed approximately
270 acres of land. During 1990, MDC assigned its interest in Ainalani
Associates to MMO, another wholly owned subsidiary of MPC.
On August 17, 1992, MMO acquired MDT's 50% interest in Ainalani Associates.
Upon closing of the purchase, Ainalani Associates was dissolved. The amount of
consideration for the transfer, which was not material to the Company's
financial condition, was determined by arbitration which ended on March 31,
1993 and was based primarily on the net present value of MDT's partnership
interest in Ainalani Associates as of June 30, 1992. MMO plans to complete the
development and sale of Ainalani Associates three projects on the islands of
Maui and Hawaii, described below under "MMO projects," and has assumed Ainalani
Associates' 50% partnership interest in Palailai Associates, a partnership with
Palailai Holdings, Inc.
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 about 172 acres of land for potential development of
about 780 single and multi-family residential units in Kihei on the island of
Maui. The project has completed site work for the first phase of single family
units. At December 31, 1993, 23 homes were completed and sold, four homes were
under construction and six completed units were available for sale.
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. 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, and beginning in May 1993,
MDC consolidated the accounts of Baldwin*Malama. Previously, MDC accounted for
its investment in Baldwin*Malama under the equity method. At December 31, 1993,
the outstanding balance on MPC's loan to BPPI was $1.6 million.
Palailai Associates. MMO assumed Ainalani Associates' interest in Palailai
Associates on August 17, 1992 upon acquiring MDT's 50% interest in Ainalani
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 currently in progress, with 35 homes completed and
sold as of December 31, 1993. Palailai Associates owns approximately 62 acres
of adjacent land zoned for residential development.
27
34
MMO PROJECTS
On August 17, 1992, MMO acquired the Kipona Hills, Kua' Aina Ridge and
Hanohano projects of Ainalani as a result of MMO's acquisition of MDT's 50%
interest in Ainalani Associates and Ainalani Associates' subsequent
dissolution.
Kipona Hills is a 66-unit subdivision located in Waikoloa on the island of
Hawaii. Through December 31, 1993, 42 homes or lots were completed and sold,
and five completed homes and 19 lots were available for sale.
Kua' Aina Ridge is a 92-lot-only subdivision in Pukalani, Maui. Subdivision
improvements have been completed and sales closings commenced in 1993. As of
December 31, 1993, five lots were sold.
Kehaulani Place (formerly known as Hanohano), consisting of approximately 50
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.
PROJECT FINANCING
At December 31, 1993, MPC or its subsidiaries were directly liable for $11.5
million of outstanding construction loans and had additional construction loan
facilities of $5.8 million. In addition, at December 31, 1993, MPC or its
subsidiaries had issued (i) guaranties under which they were jointly and
severally contingently liable with their joint venture partners for $2.1
million of outstanding construction loans and (ii) payment guaranties under
which MPC or its subsidiaries were severally contingently liable for $4.6
million of outstanding construction loans and $4.7 million of additional
undrawn construction loan facilities. In total, at December 31, 1993, MPC or
its subsidiaries were liable or contingently liable for $18.2 million of
outstanding construction loans and $10.5 million in undrawn construction loan
facilities. At December 31, 1993, HEI had agreed with the lenders of
construction loans and loan facilities, of which approximately $10.5 million
was undrawn and $16.1 million was outstanding, that it will maintain ownership
of 100% of the stock of MPC and that it intends, subject to good and prudent
business practices, to keep MPC financially sound and responsible to meet its
obligations. 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.
MALAMA WATERFRONT CORP.
Malama Waterfront Corp., a wholly owned subsidiary of MPC, entered into an
agreement to purchase HECO's Honolulu Power Plant in a sale and leaseback
transaction. However, HECO is reconsidering the sale of the plant. See a
further discussion in "Item 2. Properties--Electric utility--HECO," beginning
on page 46.
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 has sold substantially all of its investments in marketable debt and
equity securities over the last few years.
HEIIC's long-term investments presently consist primarily of investments in
leveraged leases. HEIIC has a 25.3% lessor interest in a leveraged lease
agreement entered into in December 1985, under which 60% of an 818-MW
coal-fired generating unit in Georgia was leased until 2013. The lessee has
options to renew the lease at fixed rentals for at least 8.5 additional years
and thereafter at fair market rentals. In the fall of 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 Kroger Company
in California, Pennsylvania, Louisiana, Alabama and Illinois. HEIIC's
investments in leveraged leases amounted to $53.1 million and $51.2 million at
December 31, 1993 and 1992, respectively. Note 8 to HEI's Consolidated
Financial Statements is incorporated herein by reference to page 59 of HEI's
1993 Annual Report to Stockholders, portions or which are filed herein as HEI
Exhibit 13(a). No new investments are currently planned by HEIIC.
28
35
DISCONTINUED OPERATIONS
Note 2 to HEI's Consolidated Financial Statements is incorporated herein by
reference to pages 46 to 48 of HEI's 1993 Annual Report to Stockholders,
portions of which are filed herein as HEI Exhibit 13(a).
HAWAIIAN ELECTRIC RENEWABLE SYSTEMS, INC.
On October 6, 1992, the Board of Directors of HEI ratified management's
September 30, 1992 plan to exit the nonutility wind energy business because of
chronic mechanical problems with its wind turbines and continuing losses from
operations. In March 1993, HEI sold the stock of HERS to The New World Power
Corporation for an amount which was not material. Prior to the closing of the
sale, LVI was transferred to HEI. HEI is attempting to transfer LVI's windfarm
to HELCO, at no cost to electric customers.
THE HAWAIIAN INSURANCE & GUARANTY CO., LIMITED
HIG and its subsidiaries (the HIG Group) are property and casualty insurance
companies in the State of Hawaii. HEIDI, a subsidiary of HEI, is the holder of
record of all the common stock of HIG. On December 2, 1992, the Board of
Directors of HEI concluded that it would not contribute additional capital to
HIG and HEI/HEIDI's remaining investment in the HIG Group was written off in
the fourth quarter of 1992. The decision resulted from an increase in the
estimate of policyholder claims from Hurricane Iniki (which hit the Hawaiian
Islands on September 11, 1992) from $200 million to more than $300 million. At
that level of claims, it was estimated that the shortfall in the assets of the
HIG Group available to pay claims would be in excess of $80 million, and that
at least an additional $112 million in capital contributions from HEI would be
required if the HIG Group were to continue to write insurance as in the
past--$80 million to cover the shortfall plus $32 million of new capital.
On December 24, 1992, with the consent of the HIG Group, a formal
rehabilitation order (the Rehabilitation Order) was entered by the First
Circuit Court of the State of Hawaii, vesting full control over the HIG Group
in the Insurance Commissioner and her deputies. On January 7, 1993, the Deputy
Rehabilitator sent a letter to HEIDI, the holder of record of the outstanding
shares of HIG stock, purporting to assess the stock of HIG for $115 million.
HEIDI responded to the letter contesting the validity of the assessment and
denying its enforceability.
On April 12, 1993, the Rehabilitator filed her proposed rehabilitation plan
for approval by the First Circuit Court of the State of Hawaii. The plan
contemplates that HIG will be rehabilitated and capitalized through a
combination of retaining $20 million of HIG's assets and assigning all of HIG's
remaining assets and liabilities to its insurance company subsidiaries, United
National Insurance Company, Ltd. (UNICO) and Hawaiian Underwriters Insurance
Company, Ltd. (HUI), with UNICO and HUI being liquidated. The memorandum filed
in support of the plan stated that the shortfall in the assets of the HIG Group
available to satisfy their liabilities was estimated at $68 million as of
December 20, 1992, or $88 million taking into account the $20 million of HIG
assets proposed to be retained to capitalize the rehabilitated HIG. The
Rehabilitator stated that she hopes to reduce or eliminate the shortfall
through (a) a sale of HIG after its rehabilitation for a price in excess of the
$20 million of HIG assets to be retained to capitalize HIG plus its future
earnings, and/or (b) any net recoveries she is able to achieve through a
lawsuit (described below) filed on the same date against HEI, HEIDI and certain
current and former officers and directors of HIG, HEI and HEIDI. The plan,
after minor technical modifications, was approved by the Court in May 1993.
On April 12, 1993, the Rehabilitator, HIG, UNICO and HUI filed a complaint
against HEI, HEIDI and certain current and former officers and directors of
HEI, HEIDI and the HIG Group in state court on the island of Kauai, and
demanded a jury trial. The complaint sets forth several separate counts,
including claims to the effect that HEI and/or HEIDI should be held liable for
HIG's obligations based on allegations, among others, that HIG was held out to
be part of an HEI family of companies (and not as a separate enterprise) and
that HEIDI is liable for an assessment levied by the Rehabilitator. The
complaint also alleges, among other things, that HEI and HEIDI had
misrepresented that they would stand behind and support HIG in the event it
required a capital contribution, and that HEI and HEIDI are indirectly
responsible for alleged breaches of fiduciary duties by the officers and
directors. The complaint alleges that the officers and directors of HIG, HEIDI
and HEI have breached their fiduciary duties to HIG by reason of alleged excess
intercompany charges for administrative services, inadequate loss adjustment
reserves, inadequate underwriting guidelines, inadequate reinsurance procedures
and inadequate capitalization, among others. The complaint seeks declaratory
relief and compensatory, general, special and punitive damages, together with
costs and attorneys' fees.
29
36
On July 12, 1993 the Rehabilitator filed a first amended complaint. The first
amended complaint repeats the claims asserted in the original complaint but
adds Hawaii Insurance Guaranty Association (HIGA) as a plaintiff and asserts
certain additional claims. One of the additional claims is HIGA's request for
the imposition, for the benefit of HIGA and its members, of a constructive
trust on funds of the defendants to cover alleged damages relating to the
staffing of HIGA and its claims handling efforts, loss of use of funds paid by
HIGA's members in the form of assessments and loss of business to HIGA's
members resulting from the assessments. This claim is based on the allegation
that HEI's decision to exit the insurance business was an attempt to shift
responsibility for payment of claims to HIGA. The first amended complaint also
asserts a new claim for negligence and a statutory claim for unfair and
deceptive trade practices under Chapter 480 of the Hawaii Revised Statutes,
which permits the recovery of treble damages in certain cases.
Although the damages requested were not specified in the complaint or
amended complaint and were reserved for proof at trial, by demand letter dated
February 26, 1993 the Rehabilitator had demanded (1) from HEI and/or HEIDI, the
amount required to cure HIG's deficit, estimated by the Rehabilitator in the
letter at $68 million, and (2) $55 million for alleged breaches of duties and
other obligations owed to HIG by the officers and directors of HEI, HEIDI and
HIG. These demands were based on alternative theories of liability and the
amounts claimed are believed by management to be duplicative and not
cumulative.
On October 13, 1993, HEI and HEIDI filed their answers to the First Amended
Complaint, denying the material allegations thereof and asserting various
affirmative defenses. The officer and director defendants have filed similar
answers, together with a counterclaim against the Rehabilitator for
indemnification. On November 2, 1993, defendants HEI and HEIDI filed
counterclaims against the Rehabilitator and HIGA alleging that the
Rehabilitator and HIGA have not acted in accordance with their statutory duties
and that the Rehabilitator has wrongfully used HEI's logo since taking control
of HIG. Discovery proceedings were initiated beginning in late 1993.
Earlier, in February 1993, a complaint was filed by an individual against HEI,
HECO, HEIDI, HIGA and the Insurance Commissioner in the state court on the
island of Oahu seeking damages in an unspecified amount for an alleged class of
all direct purchasers of home and automobile insurance in the State of Hawaii
under various theories, including the theory that the alleged acts of the
Company with respect to the HIG Group constitute unfair or deceptive acts or
practices for which treble damages are requested. The complaint also asserted
claims against HEI and HEIDI on alleged "alter ego" and mismanagement theories.
Based on assurances from HECO that it could not pass on to electric utility
ratepayers any losses that HEI or HEIDI might suffer by reason of the insurance
business of the HIG Group, the plaintiff agreed to dismiss without prejudice
the case against HECO, and HECO was dismissed from the suit on September 13,
1993. Later, based on assurances from the Insurance Commissioner that plaintiff
would receive notice of any proposed settlement of her suit against HEI and
HEIDI and others before any such settlement would be submitted for court
approval, plaintiff agreed to dismiss without prejudice his entire complaint.
In November 1993, the entire complaint was dismissed without prejudice pursuant
to a stipulation signed by the parties and approved by the court.
In early 1994, HEI, HEIDI, certain officers and directors, the
Rehabilitator/Liquidator and HIGA signed an agreement to settle the lawsuit
related to the April 12, 1993 complaint, as amended. Under the agreement, which
is subject to court approval, HEI will pay $32.0 million to the
Rehabilitator/Liquidator in return for a dismissal of the lawsuit and a release
of claims against HEI, its affiliates and their past and present officers and
directors. A motion to approve the settlement was filed in early March 1994 and
a hearing on the motion was held on March 15, 1994.
The $32.0 million settlement amount, less income tax benefits and certain
amounts in previously established reserves, resulted in a $15.0 million after-
tax charge to discontinued operations in 1993. HEI will fund the settlement out
of available cash and/or borrowings. HEI is seeking reimbursement from certain
of its insurance carriers. HEI's claims against its insurance carriers will
require resolution of several insurance coverage and other policy issues and
the outcome of such claims cannot be predicted at this time. One of HEI's
insurance carriers has filed a declaratory relief action in the U.S. District
Court for the District of Hawaii seeking resolution of these issues. Recoveries
from HEI's insurance carriers, if any, will be recognized when realized.
30
37
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 primarily
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."
In February 1989 the SEC requested comments on a proposed Rule 17 regarding
the conditions under which public utility holding companies, which have
diversified their lines of business outside the utility area, may retain their
intrastate exemption under section 3(a)(1) of the 1935 Act. Under the proposed
rule, a public utility holding company which had diversified its activities
into nonutility businesses would be entitled to retain its Section 3(a)(1)
exemption only if it comes within a proposed federal or state safe-harbor
provision following a grace period of three years after adoption of the rule.
HEI does not satisfy the provisions of the federal safe-harbor provision in its
currently proposed form, and may not necessarily satisfy the provisions of the
state safe-harbor provision. If the rule were adopted in its proposed form and
HEI does not satisfy the state safe-harbor provision, HEI might be required to
register as a holding company under the Act and/or divest itself of certain of
its nonutility subsidiaries. If a rule were adopted in some form requiring
action on HEI's part to come within a state safe-harbor provision, the
Company's present intention is to take all such action as is reasonable and
appropriate to bring itself within the state safe-harbor provision. Even though
the SEC has taken no action on the proposal for several years, HEI cannot
predict whether a rule relating to diversification will be adopted in the
proposed form or in a modified form, or the ultimate effects of any such rule
on it or its subsidiaries if adopted.
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 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 "FDIC Improvement Act of 1991 and Implementing Regulations." 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.
31
38
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.
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 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 HEIOs subsidiaries to pay dividends or make other
distributions to HEI is subject to contractual and regulatory restrictions. By
agreement with the PUC, in the event that the consolidated common stock equity
of the electric utility subsidiaries falls below 35% of total electric utility
capitalization, these companies 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, 1993. At December 31, 1993, HECO and its subsidiaries had net
assets of $571 million, of which approximately $313 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."
ASB is subject to the provisions of the FHLBB Agreement (see "Savings
bank--American Savings Bank, F.S.B."). In December 1992, however, the OTS
released ASB and its holding companies from certain dividend provisions of the
FHLBB Agreement which were more stringent than the OTS capital distribution
regulations. All other provisions of the FHLBB Agreement remain in effect.
Accordingly, ASB is subject only to the capital distribution limitations under
applicable OTS regulations for its applicable tier designation at any given
time.
As a Tier-1 institution (one that meets its fully phased-in 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 without OTS
approval in amounts up to one-half of ASB's surplus capital ratio (the amount
of its capital in excess of its fully phased-in capital requirement) at the
beginning of a calendar year, plus its net income for that calendar year to
date. The term Ofully phased-in capital requirementsO means the institutionOs
capital requirements under the statutory and regulatory standards to be
applicable on December 31, 1994, as modified by any individual minimum capital
requirements applicable to the institution. 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 guaranties 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.
32
39
ELECTRIC UTILITY REGULATION
The PUC regulates the rates, standards of service, issuance of
securities, accounting and certain other aspects of the operations of HEI's
electric utility subsidiaries. See "Electric Utility--Rates." Any adverse
decision or policy made or adopted by the PUC could have a material adverse
effect on consolidated HECOOs and the Company's financial condition or results
of operations.
As a result of a proceeding initiated in January 1990, the PUC issued
an order in March 1992 (as revised in May 1992) requiring that the energy
utilities in Hawaii develop IRPs in accordance with a PUC-approved framework.
The goal of integrated resource planning is the identification of the
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 the first phase of the IRP
proceeding, the PUC adopted a "framework" for IRP, which established both the
process for developing integrated resource plans and guidelines for the
development of such plans. The PUC's framework is the standard practice manual
for each energy utility in the state to follow. The PUCOs framework directs
that each plan cover a 20-year planning horizon with a five-year action period
and states that the planning cycle will be repeated every three years. HECO,
HELCO and MECO each filed its initial IRP in July 1993, October 1993 and
December 1993, respectively.
The framework states that utilities are entitled to recover all appropriate
and reasonable IRP 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 shareholder incentives. The PUC will determine the appropriate
cost recovery mechanism when a specific DSM program application is filed.
In rate cases completed in 1991, the PUC approved IRP cost recovery provisions
(IRP Clauses) for HECO and HELCO. Pursuant to the IRP Clauses, HECO and HELCO
may recover through a surcharge the costs for approved DSM programs, and other
IRP costs incurred and approved by the PUC, to the extent the costs are not
included in their base rates. MECO has requested approval of an IRP Clause in
its pending rate case.
Each energy utility has been assigned an individual IRP docket in which the
specific issues relative to each company's IRP can be addressed. The PUC
provides for public participation in the planning process by requiring each
utility to form an advisory group and by holding hearings to review each plan.
Any IRP developed will require PUC approval prior to implementation. Management
cannot predict, until the completion and approval of the IRPs, what effect, if
any, integrated resource planning may eventually have on HECO, MECO and HELCO.
See "Electric utility--Requirements and plans for additional generating
capacity."
Certain transactions between HEI's public utility subsidiaries (HECO,
MECO and HELCO) and HEI and affiliated interests, are subject to regulation by
the PUC. Under the law, 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 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.
In order to address community concerns, 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 initiated such a review to determine
whether the HEI-HECO relationship, HEI's diversified activities, and HEIOs
policies, operations and practices have resulted in or are having any negative
effects on HECO and its electric utility subsidiaries.
33
40
The PUC further ordered that HECO pay for the costs of the review and
acknowledged HECO's willingness to do so. The PUC completed its specifications
and instructions for a study of the relationship of HEI with its subsidiaries
in February 1994 and is soliciting proposals from consultants to conduct the
study. According to the specifications and instructions, the study shall
determine (1) the actions and steps needed to be taken to insulate the regulated
utilities from any losses and liabilities of the non-utility subsidiaries,
(2) the changes required in the existing HEI policies and practices to ensure
the viability of the regulated utilities, and (3) the amendments required to the
Conditions of Merger and Restructuring to ensure the viability of the regulated
utilities and to enable the PUC to exercise its full statutory responsibilities
over the regulated utilities. At this time, no time period has been specified
for completion of the study. 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), 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 or results of operations.
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
American Savings Bank, F.S.B., is a federally-chartered savings bank
whose deposit accounts are insured by the Savings Association Insurance Fund
(SAIF) administered by the Federal Deposit Insurance Corporation (FDIC). In
addition, ASB must comply with Federal Reserve Board reserve requirements. The
OTS and the FDIC are jointly responsible for the supervision, examination and
regulation of savings associations such as ASB.
Deposit Insurance
Deposit Insurance Assessments. The FDIC administers a separately funded and
maintained deposit insurance fund for savings associations. SAIF generally
insures the deposits of savings associations, which were insured by the FSLIC
prior to the enactment of the Financial Institutions Reform, Recovery and
Enforcement Act of 1989 (FIRREA). In recent years, the deposit insurance
assessment rates for the SAIF have increased substantially above historical
levels. However, the OTS in 1994 decided not to increase the assessment rates
savings associations are required to set aside on January 31, 1994 and July 31,
1994. It is uncertain as to what extent rates may be raised in the future.
As required by the Federal Deposit Insurance Corporation Improvement Act of
1991 (FDICIA), the FDIC amended its rule on assessments to establish a new
risk-based assessment system. The final rule became effective October 1, 1993.
The new system, which was implemented beginning with the assessment period
commencing January 1, 1994, makes limited changes to the previously existing
"transitional" risk-based assessment system adopted for the two semiannual
assessment periods for 1993.
Under the new risk-based assessment system, the assessments (or premiums) paid
by a savings association for FDIC insurance are to be based on the risk posed
by the savings association to the SAIF. The current annual assessment rates
applicable to SAIF members range from 23 to 31 cents per $100 of domestic
deposits, depending on the institutionOs risk classification. Savings
associations classified as strongest by the FDIC are subject to the lowest
assessment rates. ASB paid an assessment of 23 cents per $100 of domestic
deposits for the semiannual period beginning January 1, 1994.
Deposit Insurance Coverage. The 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
34
41
certain retirement accounts and trust funds. Although the vast majority of the
FDIC's deposit insurance regulations, such as the basic rules providing that
individual accounts are insured to $100,000 separately from qualifying joint
accounts, remain unchanged, 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 for institutions that are "well-capitalized" under the
FDIC's prompt corrective action regulations. As of December 31, 1993, ASB was
well-capitalized. (The term "pass-through" insurance means that the insurance
coverage passes through to each owner/beneficiary of the applicable deposit.)
In December 1993, the FDIC proposed to amend its deposit insurance
regulations to require that, upon request, an insured institution disclose in
writing to existing and prospective depositors of employee benefit plan funds
certain capital information, including its "prompt corrective action" capital
category and whether employee benefit plan deposits would be eligible for
"pass-through" insurance coverage. The purpose of the proposed rule on
"pass-through" deposit insurance is to reduce the uncertainty about whether
employee benefit plan deposits are eligible for "pass-through" deposit
insurance coverage and to require insured depository institutions to provide
timely disclosure to employee benefit plan depositors when "pass-through"
deposit insurance coverage is no longer available. The proposed rule would
increase the chance that prospective and existing employee benefit plan
depositors are provided with the information necessary to make an informed
decision about where to place their funds. If adopted in its present form, the
proposed rule is not expected to have an adverse effect on ASB so long as ASB's
capital structure continues to permit "pass-through" insurance coverage for
employee benefit plan deposits.
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.
OTS Liquidity Requirements
The OTS requires each savings association to maintain an average daily
balance of liquid assets equal to a monthly average of at least a specified
percentage (currently 5%) of the average daily balance of its net withdrawable
deposits plus short-term borrowings. This liquidity requirement may be changed
from time to time by the OTS to any amount within the range of 4% to 10%. OTS
regulations also require each savings association to maintain an average daily
balance of short-term liquid assets at a specified percentage (currently 1%) of
the average daily balance of its net withdrawable deposits and borrowings
payable in one year or less. Fines may be imposed for failure to meet liquidity
requirements. As of December 31, 1993, ASB was in compliance with OTS liquidity
requirements.
Financial Institutions Reform, Recovery and Enforcement Act of 1989 and
Implementing Regulations
Under FIRREA, the FHLBB was abolished and its various functions reassigned to
existing and new government agencies. The OTS was established as an office in
the Department of the Treasury subject to the general oversight of the
Secretary of the Treasury. The OTS has responsibility to charter federal savings
associations, serve as the primary federal examiner and regulator of savings
associations and administer laws governing savings and loan holding companies.
Capital requirements. Under FIRREA, the OTS set three capital
standards for thrifts, each of which must be no less stringent than those
applicable to national banks. The three standards provide: (1) a leverage limit
which requires a savings association to maintain core capital in an amount of
not less than 3% of the association's adjusted total assets; (2) a tangible
capital requirement of not less than 1.5% of an association's adjusted total
assets; and (3) an 8% risk-based capital requirement, which may deviate from
national bank standards to reflect interest rate risk or other risks, but such
deviations may not result in materially lower levels of capital than would be
required under risk-based capital standards applicable to national banks.
Generally, the OTS must restrict the asset growth of an association that fails
to meet the
35
42
capital requirements. As of December 31, 1993, ASB was in compliance with all
of the minimum standards with a core capital ratio of 5.6%, a tangible capital
ratio of 5.2% and risk- based capital of $151.0 million, $46.2 million in
excess of the requirement.
The OTS adopted a new rule that adds an interest rate risk (IRR) component to
the existing risk-based capital requirement. Although the rule became effective
January 1, 1994, the first time ASB will be required to incorporate IRR into
its risk-based capital calculations will be July 1, 1994, based on Thrift
Financial Report data as of December 31, 1993. Institutions with an "above
normal" level of IRR exposure will be required to hold additional capital.
"Above normal" IRR is defined as any decline in market value of an
institution"s portfolio equity in excess of 2% of the market value of its
assets, which would result from an immediate 200 basis point change in interest
rates. The "TS rule requires a savings association with an "above normal" level
of IRR exposure to hold one-half of the "above normal" IRR times the market
value of its assets as capital, in addition to its existing 8% risk-based
capital requirement. Based on Thrift Financial Report data as of December 31,
1993, ASB would not have been required to hold additional capital if the new
rule had been in effect at that time.
The OTS is currently considering proposed regulations which will increase
capital requirements. One of the proposed regulations includes increasing core
capital requirements to either 4% or 5% for many savings associations. Under
the proposed regulations, ASB believes it would be required to comply with a 4%
requirement. As of December 31, 1993, ASB would have been in compliance with
the proposed regulations with a core capital ratio of 5.6%.
FHLB advances. 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.
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 loans and other transactions between ASB and
certain executive officers, directors and "affiliated persons" 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.
FDIC proposed rule: contracts adverse to safety and soundness. Pursuant to
FIRREA, the FDIC in April 1991 issued a proposed rule which would prevent any
depository institution (including ASB) from contracting for goods, products or
services in a way that would adversely affect its safety or soundness. An
"adverse contract" means any contract that "violates any law or regulation,
breaches a fiduciary duty, adversely affects or misrepresents the institution's
safety or soundness, or is likely to have any such result, including any such
contract that does not derive from an arms-length relationship."
Until the rule is adopted in its final form, it is difficult to assess the
possible impact of the proposed rule on ASB's operations.
Crime Control Act of 1990 and Implementing Regulations
The Crime Control Act of 1990, Title XXV of which comprises the Comprehensive
Thrift and Bank Fraud Prosecution and Taxpayer Recovery Act of 1990,
strengthens the authority of the OTS and other regulatory agencies to enforce
criminal penalties for offenses committed against financial institutions,
including savings associations.
36
43
FDIC Improvement Act of 1991 and Implementing Regulations
The FDICIA, enacted on December 19, 1991, subjects the banking and thrift
industries to heightened regulation and supervision. The FDICIA makes 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. The FDICIA also limits deposit insurance coverage,
implements changes in consumer protection laws and calls for least-cost
resolution and prompt corrective action with regard to troubled institutions.
Pursuant to FDICIA, the federal banking agencies have promulgated, or are in
the process of promulgating, regulations which may significantly 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. See also
"Deposit Insurance."
Prompt corrective action. FDICIA establishes a new 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 adopted final rules to implement the system of prompt
corrective action, which became effective on December 19, 1992. In particular,
the final 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, which 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, became final in June 1992. To be a "well-capitalized" institution
not subject to these interest rate restrictions, an institution must have a
"leverage ratio" of 5.0%, a "Tier-1 risk-based ratio" of 6%, a "total
risk-based ratio" of 10% and not be in a "troubled condition." As of December
31, 1993, ASB believes that, based on OTS capital standards, it would have been
classified as "well-capitalized" with a leverage ratio of 5.6%, a Tier-1
risk-based ratio of 11.1% and a total risk-based ratio of 11.5%.
Qualified thrift lender test. The FDICIA amends 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 for
nine out of the previous 12 months. Previous provisions of law measured a
savings association's QTL ratio on a daily or weekly basis. Under the QTL
regulations adopted by the OTS in May, 1993, the nine out of 12 month period is
a "rolling" calculation period, rather than a static three out of four annual
quarters measurement. 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 the types of activities they may
conduct 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. See "Holding company regulation."
At all times during 1993, ASB was in compliance with the QTL test.
Standards for Safety and Soundness. As required by the FDICIA, the OTS in
November 1993, proposed regulations for savings associations and their holding
companies which would establish safety and soundness standards in three
areas:operations and management; asset quality and earnings; and compensation.
Under the proposed rules, failure to adhere to any of the standards would
require a savings association or its holding company to submit to the OTS a
plan to achieve compliance. Until compliance is achieved, the OTS could restrict
asset growth, require an increased ratio of tangible equity to assets, restrict
interest rates, or take any other action that would better carry out the
purpose of prompt corrective action.
Among other things, the OTS is proposing regulations for savings and loan
holding companies that focus on savings and loan holding company activities
most likely to cause losses at a holding company's subsidiary savings
association. The OTS is proposing that each saving and loan holding company
(1) ensure that
37
44
transactions and relationships between the holding company and its subsidiary
savings association satisfy applicable fiduciary standards and do not have a
detrimental effect on the savings association's safe and sound operation;
(2) not engage in any activity, or cause its subsidiary savings association to
engage in any activity, that might create a serious risk that the liabilities
of the holding company and its other affiliates may be imposed on the savings
association; (3) not take any action that would impede the ability of its
subsidiary savings association to comply with the requirements of FDICIA or
fully implement any safety and soundness compliance plan required of the
savings association; and (4) take any corporate action necessary to enable the
subsidiary savings association to take actions required by a safety and
soundness compliance plan.
Until the regulations are adopted in final form, it is difficult to assess the
possible impact of the proposed regulations upon ASB's operations.
Federal Reserve Board Reserve Regulations
Pursuant to the Depository Institutions Deregulation Act of 1980, the
Federal Reserve Board adopted regulations that require ASB to maintain reserves
against its transaction accounts, nonpersonal time deposits and Eurocurrency
liabilities. The effect of these reserve requirements is to increase ASB's cost
of funds. Depending upon the type of deposit, maturity and amount, such reserve
requirements range between zero and 12%. Like other depository institutions
with offices in Hawaii on August 1, 1978 that were not members of the Federal
Reserve System, ASB was previously subject to a reduction in reserves required
by the Federal Reserve Board, which reduction was phased out gradually over the
period January 1, 1986 through January 6, 1993. Beginning January 7, 1993,
however, ASB and other Hawaii depository institutions became subject to the
full reserve requirements. For the calculation period including December 31,
1993, ASB was in compliance with the reserve requirements.
Other laws, regulations and proposed legislation
Other laws. ASB is subject to federal and state consumer protection laws
which affect lending activities, such as the Federal Truth-in-Lending Law, the
Federal Truth in Savings Act, the Federal Equal Credit Opportunity Act, the
Real Estate Settlement Procedures Act and several federal and state financial
privacy acts. 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.
OTS final rule: Nationwide branches. The OTS amended its rule on branching by
federal savings associations. The amendment deletes regulatory restrictions on
the branching authority of federal savings associations and permits nationwide
branching to the extent allowed by federal statute. The final rule took effect
on May 11, 1992, and pre-empts any Hawaii law or regulation purporting to
address the subject of branching by a federal savings association. The rule is
likely to stimulate and increase competition that ASB faces in Hawaii because
it reduces many previously existing barriers to entry into the Hawaii market by
federal savings associations.
CRA Reform. Acting at the request of President Clinton, the OTS and other
federal financial supervisory agencies are jointly proposing new regulations to
implement the Community Reinvestment Act (CRA). The proposed regulations would
replace the existing regulations in their entirety.
The CRA is designed to promote affirmative and ongoing efforts by regulated
financial institutions to help meet the credit needs of their entire
communities, including low-and moderate-income areas, consistent with safe and
sound operations, and to provide guidance on how the agencies assess the
performance of institutions in meeting that obligation.
The proposed regulations would provide clearer guidance to financial
institutions as to the nature and extent of their CRA obligation and the
methods by which the obligation would be assessed and enforced. Currently, CRA
assessments of financial institutions are based on 12 separate factors. Under
the proposal, assessment standards would be based on performance in three
specific areas: lending, service and investment. Based on these three
separate assessments, the OTS will assign ASB one of four overall composite
ratings: outstanding, satisfactory, needs to improve and substantial
noncompliance.
The lending test would evaluate direct lending to lower-income areas
and indirect lending through loan pools, lending consortia, subsidiaries and
funded nonchartered affiliates, and community development or affordable housing
lenders in which the thrift has made investments. The service test would
evaluate whether the financial institution is offering services to low-and
moderate-income areas in the form of branch offices and customer services,
such as low-cost check cashing and credit counseling for lower-income
38
45
customers. The investment test would evaluate a thrift's record of investing in
programs beneficial to low-income areas. These investments include community
development organizations, state and local and housing agency bonds, and small
and minority-owned business developments.
Although the proposed regulations call for revised data collection and
reporting procedures to go into effect July 1, 1994, evaluation under the new
CRA standards would not become mandatory until July 1995. During the interim
period, thrifts could elect to be evaluated under either the current CRA
regulations or the new CRA regulations.
ASB received a CRA rating of "outstanding" as a result of its last OTS
examination. ASB believes that, if adopted, the proposed data requirements may
impose greater costs in administrative and legal areas.
Pending legislation. Bills are now pending or expected to be introduced
in the United States Congress that contain proposals for altering
the structure, regulation and competitive relationships of the nation's
financial institutions. If enacted into law, these pending bills could have the
effect of increasing or decreasing the cost of doing business, limiting or
expanding permissible activities, or affecting the competitive balance among
banks, thrifts and other financial institutions. Some of these bills would
realign the structure and jurisdiction of various financial institution
regulatory agencies and modify interstate branching restrictions applicable to
banks. Whether or in what form any such legislation may be adopted or the
extent to which the business of the Company or ASB might be affected thereby
cannot be predicted.
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 could have a
material effect on the financial condition or results of operations of YB.
INSURANCE COMPANY REGULATION
HIG and its subsidiaries are in rehabilitation proceedings in Hawaii
and it is expected that HEIDI will relinquish all ownership rights in HIG and
its subsidiaries during 1994. HIG and its subsidiaries will remain subject to
regulation and supervision in the states, if any, in which they conduct
business. Such regulation and supervision involve, among other things, the
licensing of the insurance company and its agents, periodic examination of the
affairs and financial condition of the insurer and review of annual and other
mandatory reports on the financial condition and operations of the insurer.
State insurance commissioners also generally set mandatory capital and solvency
standards and regulate the types and amounts of investments and deposits of
securities for the benefit of the policyholders and may also regulate rates for
various coverages, policy contents and the scope of insurance policies.
HIG principally has done business in Hawaii, where it is extensively
regulated by the Insurance Division of the Department of Commerce and Consumer
Affairs pursuant to the Hawaii Insurance Code and regulations thereunder, which
include regulatory and supervisory provisions of the type discussed above. If
and to the extent that HIG continues to conduct an insurance business, it will
be doing so under the direction and control of the Insurance Commissioner as
the Rehabilitator of HIG. See the discussion under "Discontinued
operations--The Hawaiian Insurance & Guaranty Co., Limited."
The Hawaii Insurance Code contains additional provisions regulating
insurance companies and their affiliates and these provisions may continue to
apply to HEI and its affiliates so long as HEIDI continues to be the holder of
record of the stock of HIG. For example, the Insurance Code contains provisions
which require a party seeking to acquire control of an insurance company to
obtain the approval of such acquisition from the Hawaii Insurance Commissioner.
The Insurance Code also contains provisions regulating transactions within and
activities of an insurance holding company system and requires special
registration by each insurer that is within an insurance holding company
system.
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
39
46
underground injection wells. The subsidiaries are required periodically to
obtain permits from the Hawaii Department of Health (DOH) in order to be
allowed to discharge the water.
The electric utility subsidiaries must periodically obtain National Pollutant
Discharge Elimination System (NPDES) permits from the DOH to allow wastewater
discharges into ocean waters for each of the five generating stations (three at
HECO and one each at MECO and HELCO). Underground Injection Control (UIC)
permits for wastewater discharge to underground injection wells must be
obtained periodically for several HELCO facilities and one MECO facility.
During 1993, applications were submitted to the DOH for the renewal of
NPDES permits at HECO's Kahe and Honolulu generating stations, MECO's Kahului
generating station and HELCO's Shipman generating station. An application to
renew the Waiau generating station NPDES permit was submitted to the DOH in
January 1994. The existing NPDES permits for the Kahului and Honolulu
facilities expired on November 30, 1993 and January 31, 1994, respectively.
Because the DOH was not able to process the applications prior to the
expiration dates, administrative extensions of the permits were granted until
such time as new permits can be issued. The Kahului and Honolulu facilities
will continue to operate in compliance with existing permit requirements until
new NPDES permits are issued. All facilities are in compliance with existing
NPDES permit requirements for discharge and receiving water monitoring and
reporting.
To date, attempts to remove annual bottom biological community (BBC)
monitoring as NPDES permit conditions at the Honolulu and Kahului facilities
have been unsuccessful. A fourth year report for the Honolulu facility was
submitted to the DOH on January 17, 1994. The BBC monitoring report showed no
adverse effects from the Honolulu facility discharges. The January 17, 1994
letter to the DOH requested that HECO be relieved of BBC monitoring at the
Honolulu facility. The letter also requested an extension of the annual report
submittal for the Kahului facility because persistently adverse sea and weather
conditions had precluded monitoring activities. The BBC monitoring plan for the
Waiau generating station, submitted to the DOH for approval on November 16,
1992, was approved by the DOH on October 19, 1993. Monitoring was completed in
December 1993 and the first annual report was submitted to the DOH on January
27, 1994. The data collected during this first year survey will be used as the
baseline against which future surveys will be compared.
A new demineralizer system is to be installed at the Kahe Generating Station
to replace the existing flash evaporator system and provide the facility with a
more reliable and higher capacity source of high quality boiler makeup water.
Operation was originally scheduled for late December 1993, but has been
rescheduled for late August 1994. An application to revise the existing NPDES
permit to include demineralizer system wastewater was submitted to the DOH on
May 17, 1993. The DOH has not processed the application and recently indicated
the application review will be consolidated with their review of the Kahe NPDES
permit renewal application submitted on December 27, 1993.
The EPA promulgated new NPDES storm water discharge regulations in
November 1990 and the DOH finalized their administrative rules on October 29,
1992. New storm water discharge permits are required for electric utility storm
water that is discharged to: existing NPDES-permitted outfalls, separate storm
water conveyances that discharge directly to navigable waters and municipal
storm sewer systems. Facilities with storm water discharges to existing NPDES-
permitted outfalls were not required to reapply for a new NPDES permit until
existing permits expire. Three HECO generating stations (Kahe, Honolulu and
Waiau) and one MECO generating station (Kahului) discharge storm water to
NPDES-permitted outfalls. These four facilities have included required storm
water information in the most recent NPDES permit renewal application. For
storm water discharged to separate storm water conveyances, Notice of Intent
(NOI) Applications for General Permits were submitted to the DOH on April 14,
1993 for the Kahe, Waiau and Honolulu facilities. MECO and HELCO generating
stations were not required to submit NOIs. The DOH also promulgated regulations
that require storm water runoff and dewatering permits for construction-related
projects. These new construction-related permits require discharge monitoring
and implementation of best management practices during construction activities
to comply with state water quality standards. HECO recently submitted a NOI for
a construction storm water discharge permit for a substation project and a NOI
for a dewatering permit for a ductline project. HECO is also working
cooperatively with the City & County Department of Public Works to obtain a
blanket NPDES permit to discharge water removed from utility manholes into
municipal storm drain systems.
In February 1990, HELCO reapplied for UIC permits at four affected facilities
and applied for new UIC permits for five existing but previously unregistered
wells (three at Kanoelehua Baseyard and one each at
40
47
the Hill Tank Yard and Waimea Baseyard). Additional UIC permit applications
were submitted in July 1991 for two unregistered wells (Kanoelehua and Waimea
baseyards). To date, the DOH has issued new UIC permits for all dry wells
located at the Hill Tank Yard, Kanoelehua baseyard and Waimea baseyard. On
April 9, 1992, the DOH issued a UIC permit for one of Hill's reinjection wells
(No. 6). However, the permit was misplaced by HELCO upon receipt. The DOH
issued another copy of the permit in August 1993, and monitoring and reporting
requirements have been implemented in compliance with permit conditions. While,
as a result of the delay, HELCO was approximately one year behind in commencing
its monitoring program, no regulatory sanctions are anticipated. Administrative
extensions of all other HELCO UIC permits were granted by the DOH on December
3, 1991, and subsequently on February 5, 1993 and August 31, 1993. Existing
permits remain in effect until new permits are issued. Administrative
extensions stipulate that operations continue in compliance with former permit
requirements. On April 6 and 16, 1993, HELCO received DOH approvals to
construct an injection well and backup well, respectively, at its Keahole power
plant. Well construction and testing were completed in December 1993. A
consultant is preparing a well certification report which will be submitted to
the DOH with the final application for a UIC permit to operate. MECO received a
UIC permit to operate an injection well system at the Maalaea Generating
Station on February 20, 1992. The injection well system is designed to handle
low volume wastewater and sanitary wastewater discharges from Units 14 to 16. A
wastewater effluent monitoring program commenced at Maalaea in October 1992 and
is currently in compliance with monitoring and reporting requirements. Due to
the proposed addition of generating units at Maalaea, there are plans to
upgrade the wastewater treatment system to accommodate additional wastestreams
that might be generated.
In August 1993, MECO and HELCO were informed by the EPA that federal UIC
permits would be required for all existing and proposed injection wells. Under
the most recent agreement between the EPA and DOH, the EPA will allow the DOH
to continue operation of its state UIC permit program. Hence, all affected
injection wells (including dry wells) will be regulated by both federal and
state UIC permits. The EPA issued UIC permit applications to MECO and HELCO
facilities on January 25, 1994. The facilities have until May 25, 1994 to
submit the completed applications to the EPA.
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. Protection and Indemnity Insurance Clubs (mutual insurance pools)
have refused to issue these certificates because OPA provides for direct
liability against guarantors. The Coast Guard is in the process of addressing
this particular issue and adopting regulations implementing OPA. However, the
Coast Guard did issue interim guidelines on September 15, 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 Department of Transportation
(DOT) also have similar requirements for submission of spill response plans.
The EPA issued its proposed rules and guidelines on this matter on February 17,
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 their 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. The utilities filed preliminary plans on
February 18, 1993 with regard to the following facilities: to the Coast Guard
for the Kahului Harbor terminaling facility and pipeline; to the EPA for the
Honolulu, Waiau, Kahe, Shipman and Kahului power plants, the Iwilei Tank Farm,
and the Ward Avenue facility; and to the DOT for the pipeline between Honolulu
power plant and the Iwilei Tank Farm and between the Chevron Tank Farm in Hilo
and the Shipman and Hill power plants, respectively.
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
in the year 2000. Hawaii utilities are affected by the operating permit
provisions (Title V). The DOH adopted implementing regulations on November 26,
1993 which require submission of permit applications for existing sources by
July 26, 1994. Results of air quality
41
48
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 EPA to promulgate new regulations which mandate "enhanced
monitoring" of emissions from many generation units. In response, EPA submitted
proposals on October 1, 1993 which allows for cost effective alternatives to
costly continuous emission monitoring systems. EPA may finalize the proposal in
1994.
On November 1, 1989, the DOH issued a Notice and Finding of Violation and
Order 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 both structural and procedural 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. However, HEC's
proposal (on behalf of MECO) to the DOH for settlement based on an already-
completed work plan and a penalty of $10,000 was rejected. DOH is now expected
to set a hearing on the Notice of Violation. Units X-1 and X-2 continue to
operate in compliance with the revised permit.
Initial source tests for HELCO's CT-2 generating unit in December 1989
indicated particulate emissions above permitted levels. Subsequent retesting
confirmed earlier results. 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. HECO
and HELCO are working with the DOH, the manufacturer and a consultant to
determine an appropriate new emission limit for particulates as well as oxides
of nitrogen. A comprehensive emission test program has been completed and in
March 1994, the results were disclosed to DOH. A final report is now being
prepared and will be submitted to DOH for their review. HECO anticipates a July
1994 submittal of an application for revision of the permit. DOH had issued a
notice of violation on August 17, 1992 for the non-complying emissions. In
accordance with a draft consent order, CT-2 continues to operate pending
application and issuance of the revised permit.
Emission tests conducted by MECO in January 1992 on the six diesel units at
Miki Basin, Lanai were consistent with earlier indications that emissions were
above permit limits. Those tests results were submitted to DOH. After unit
adjustments and improvements in measurements of hourly fuel usage, additional
tests were conducted in July and September 1993 which indicated that all six
units are in compliance with permit limits. A report on these tests was
submitted to DOH. After reviewing the report, DOH concluded in a letter dated
December 13, 1993 that all six units are operating in compliance with permit
limits. DOH will determine what action, if any, would be appropriate for the
previous indications of violation.
On May 1, 1993, MECO completed the purchase of four diesel generators owned by
Palaau Corporation located at MECO's Palaau, Molokai facility. This increase in
size of MECO's facility triggered the immediate need to have a prevention of
significant deterioration (PSD) permit in order to operate the newly purchased
units. In accordance with requirements in a draft consent order negotiated with
DOH prior to acquisition of the units, MECO filed a complete application for a
PSD permit on May 7, 1993. Permit processing by DOH is on schedule. The four
units continue to operate pending issuance of a PSD permit.
A Notice and Finding of Violation and Order was issued by DOH to HELCO
on July 8, 1993 for excessive visible emissions from Shipman Unit 1 on
September 23, 1991 and on January 31, 1992. The DOH ordered HELCO to come into
compliance. HELCO's written response to DOH dated July 29, 1993 stated that
HELCO had come into compliance and identified the cause of the problem as
corroded air heater tubes that were replaced in February 1993. The repairs were
necessarily delayed for approximately one year until there was sufficient
island wide generation to allow Unit 1 to be shutdown. DOH has not responded to
HELCO's letter and HELCO believes that a penalty in this matter is
inappropriate. No further action has been required by DOH.
Hazardous waste and toxic substance 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 of 1976 (RCRA), the Superfund Amendments and Reauthorization
Act (SARA) and the Toxic Substances Control Act of 1976 (TSCA). The DOH has
been working towards obtaining primacy to operate state authorized RCRA
(hazardous waste) and SARA (superfund) programs. On January 11, 1993 the DOH
issued draft administrative rules for a state RCRA program. Public hearings
were held in February and March 1994, and HECO is awaiting feedback as to
whether any significant comments were received. The draft RCRA rules are being
reviewed to determine the
42
49
potential impact on utility operations. At this time, it appears
unlikely that the rules would impose any requirements beyond existing EPA
standards. The DOH also anticipates the issuance of draft superfund rules in
early 1994, but a release date has not been set.
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 (Honolulu, Kahe and Waiau) 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. A new and more stringent
Toxicity Characteristic Leaching Procedure (TCLP) replaced the former
Extraction Procedure toxicity test and included additional testing requirements
for 25 organic compounds. HECO's continuing program to recharacterize all HECO,
MECO and HELCO wastestreams using the TCLP test has demonstrated the adequacy
of the existing treatment systems and identified other potential compliance
requirements. Waste recharacterization studies clearly indicate that treatment
facility wastestreams are nonhazardous and no change in the RCRA generator
status is required.
MECO reported that the Maui County landfills will no longer accept wet
sludge from their wastewater treatment operations at the Kahului power plant.
Because MECO needed to remove sludge from the wastewater ponds to make room for
a forthcoming unit overhaul, arrangements were made with the county to have the
nonhazardous sludge accepted at the county's composting station. On January 28,
1994, a MECO contractor removed the sludge from the wastewater ponds for
transport to the county's composting station. The composting station was closed
upon arrival and the contractor was instructed to return to the Kahului plant
to wait until the composting station reopened. Through a series of verbal
contacts, the contractor made arrangements to discharge the loads to the
county's sewage treatment plant in Kahului. Upon learning of the contractor's
action, MECO management contacted the Maui County Wastewater Treatment Branch
to notify them of the discharge to the sewage treatment facility. Maui County
is conducting an investigation of the sludge discharge.
RCRA still regulates most generating stations as RCRA small quantity
generators. All HECO and subsidiaries' facilities listed with the DOH and EPA
are small quantity generators and are in compliance with RCRA requirements.
RCRA Biennial Hazardous Waste Reports for all HECO, MECO and HELCO facilities
were submitted to the EPA and DOH in March 1994 in compliance with reporting
requirements.
RCRA underground storage tank (UST) regulations require all facilities
with USTs (including those 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. HECO and
MECO initiated tank replacement programs in 1989 due to the age of their
existing tanks. MECO currently operates a single UST in compliance with DOH and
EPA standards. HECO completed tank removal and replacement projects at all its
facilities in 1992. HELCO initiated and completed tank upgrades in 1992. All
HECO, MECO and HELCO USTs are in compliance with mandatory leak detection
requirements, with the exception of a used oil UST located at Ward Avenue.
Efforts are underway to find an acceptable detection method for this UST. While
replacing four USTs at the Ward Avenue complex in February 1992, a product
release was confirmed and reported to the DOH as required by law. Contaminated
soils were excavated and transported to a soil management unit located at Waiau
power plant, where the contaminated soils were treated with a bioremediation
process. Tests in February 1993 indicated that the constituents in the removed
soils were below DOH monitoring levels. In September 1993, HECO received a
final consultant report on the Ward Avenue cleanup site. The report indicated
that all subsurface contamination resulting from the Ward Avenue UST release
had been removed to acceptable DOH levels, but that some residual contamination
remained in the subsurface from possible offsite contamination. HECO is
awaiting the submittal of the consultant's report on the soil treatment unit
results. Both reports will be submitted to the DOH with a request that the
treated soils be allowed for use as construction fill material.
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. HECO has six facilities, MECO has
five facilities and HELCO has seven facilities that qualify as "reporting
facilities" under EPCRA. All HECO, MECO and
43
50
HELCO facilities are in compliance with applicable reporting requirements,
which are made annually to the State Emergency Planning Commission, the
Local Emergency Planning Committee and local fire departments. On January 18,
1994, the DOH issued a notice that EPCRA reporting requirements were revised
during the 1993 state legislative session. Revisions include a requirement
to complete additional chemical information forms and submit a $100 per
facility filing fee.
The TSCA regulations specify procedures for the handling and disposal of
polychlorinated biphenyl (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.
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 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 Administrative Order on Consent because the three
PCB transformers were removed from the NAE facility and incinerated. However,
the EPA has not made final determinations regarding individual liability for
cleanup of the NAE facility. By letter dated February 8, 1993, Westinghouse
confirmed that it would indemnify MECO pursuant to its contract for this
matter.
The state Environmental Response Law (ERL), with amendments effective
on June 17, 1991, governs releases of hazardous substances, including oil, in
areas within the states jurisdiction. Responsible parties under the state 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 state Department
of Health is in the process of drafting regulations implementing the state ERL.
An area of potential exposure to liability under the state ERL is the release
of oil from fuel storage tanks.
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 U.S. Coast Guard which monitors ocean
activities to ensure compliance with federal regulations.
Finally, 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 indicia of ownership in a facility are held
primarily to protect a security interest, provided that they do not participate
in the management of the facility.
The EPA promulgated a final rule, effective as of April 29, 1992, to clarify
circumstances under which lenders are exempt from liability under CERCLA. The
EPA final rule addresses the activities of the holder of a security interest
that will and will not trigger liability as "participation in management."
However, the U.S. Court of Appeals for the District of Columbia Circuit vacated
the EPA final rule in February 1994, finding that the EPA had no authority to
issue a rule defining the scope of the CERCLA exemption from liability for
secured creditors. It is possible that a petition for rehearing may be filed,
or that the U.S. Congress may enact legislation addressing this matter. Although
there may be some danger for ASB of liability for environmental cleanup costs,
the Company believes the danger is not as great for ASB, which
44
51
specializes in residential lending, as it may be for other depository
institutions which have a larger portfolio of commercial loans.
AMERICANS WITH DISABILITIES ACT
HEI and its subsidiaries are subject to the Americans with Disabilities Act
(ADA), a comprehensive federal law intended to eliminate discrimination against
individuals with disabilities. Several titles of the ADA are applicable to the
Company including Title I, Employment, and Title III, Public Accommodations and
Services Operated by Private Entities.
HEI and its subsidiaries believe they are in compliance or in the process
of complying with both Title I and Title III of the ADA. The eventual cost of
such compliance activities is not expected to have a material effect on the
financial condition or results of operations of the Company or HECO and its
subsidiaries.
RESEARCH AND DEVELOPMENT
HECO and its subsidiaries spent approximately $2.3 million, $2.3 million and
$2.2 million in 1993, 1992 and 1991, respectively, on research and development
Contributions to the Electric Power Research Institute accounted for most of
the expenditures. Expenditures were also made in the areas of energy
conservation, environmental control, emissions control and for other similar
studies relative to technologies with the potential of being specifically
applicable to HECO and its subsidiaries.
EMPLOYEE RELATIONS
At December 31, 1993, the Company's continuing operations had 3,399 full-time
and part-time employees, compared with 3,291 at December 31, 1992.
HECO
At December 31, 1993, HECO and its subsidiaries had 2,226 employees, compared
with 2,118 employees at December 31, 1992.
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, cover a
four-year period from November 1, 1992 through October 31, 1996. The contract
provides for noncompounded wage increases of 4.25% on November 1 of each year
during the term of the agreement. The "Flexible Work Hours/Week Schedule" was
the major work rule added to the new contract.
The benefits agreement between IBEW Local 1260 and HECO, MECO and HELCO was
modified, and the current agreement will be in effect until October 31, 1996.
Revisions were made to the medical plans and postretirement benefits.
HTB
HTB has a collective bargaining agreement with the Inlandboatmen's Union of
the Pacific (IBU) effective from July 26, 1990 through July 25, 1995. An 8%
across-the-board wage increase (with further adjustments for licensed seamen
and journeymen craftsmen) was effective for the first year. From July 26, 1991
through July 25, 1995, the agreement specifies annual increases of 4%. The
agreement covers all employees of HTB employed on ocean and harbor tugs and all
dispatchers and tankermen, but excludes office clerical employees, confidential
employees, professional and management employees, guards and watchmen.
YB has a collective bargaining agreement covering the period of July 1, 1990
through June 30, 1993 with the International Longshoremen's and Warehousemen's
Union, Hawaii Division (ILWU), Local 142. The agreement has been mutually
extended by both parties until formal negotiation of the next agreement. The
agreement covers all full-time receiving and delivery clerks working on the
docks, full-time and regular part-time employees loading or discharging
vessels, all maintenance personnel, documentation clerks and customer service
representatives employed by YB in the state. The agreement excludes
confidential employees, professional employees, supervisory employees, guards
and other clerical personnel. The agreement provided for a per hour across-
the-board wage increase of 33 1/2 cents in July 1990 and March 1991, a 39-cent
increase in July 1991 and January 1992, and a 35-cent increase in July 1992
and January 1993.
On June 1, 1991, HTB transferred four tugs and vessel personnel to YB. YB
has a Letter of Understanding with the IBU, dated September 17, 1991, which
agrees to honor the appropriate provisions
45
52
agreed upon in HTB's collective bargaining agreement, which runs through
July 25, 1995, as to the transferred personnel.
OTHER
The employees of HEI and its direct and indirect subsidiaries are not
covered by any collective bargaining agreement, except as identified above.
EMPLOYEE BENEFIT PLANS
NONDISCRIMINATION RULES OF THE INTERNAL REVENUE CODE OF 1986
The Company's welfare benefit plans are subject to nondiscrimination
rules under the Internal Revenue Code of 1986. Specifically, these include
Section 79 (group term life insurance), Section 105 (accident and health
plans), Section 125 (cafeteria plans) and Section 129 (dependent care
assistance plans), which cover types of plans that the Company makes available
to employees, as well as Section 117(d) (qualified tuition reduction programs),
Section 501 (c)(9) (voluntary employee benefit associations) and Section 120
(qualified group legal services plans), which cover types of plans that the
Company does not presently maintain.
STOCK OPTION AND INCENTIVE PLAN
During 1993, 123,000 HEI Common Stock options were granted under the 1987
Stock Option and Incentive Plan, as amended, of which 73,000 shares included
dividend equivalents. HEI Common Stock issued under that plan in 1993 included
20,573 option shares exercised, including dividend equivalents, plus 559 shares
issued in lieu of a cash payout under the Long-Term Incentive Plan and 4,144
shares issued in lieu of a cash payout under the Executive Incentive Plan. As
of March 21, 1994, there were 45 participants in the Stock Option and Incentive
Plan. Information concerning the options and other awards granted under this
Plan is incorporated herein by reference to Note 17 to HEI's Consolidated
Financial Statements on page 64 of HEI's 1993 Annual Report to Stockholders,
portions of which are filed herein as HEI Exhibit 13(a) and pages 10 to 12 of
HEI's Definitive Proxy Statement, prepared for the Annual Meeting of
Stockholders to be held on April 19, 1994 and filed herein as HEI ExhibiT 22.
ITEM 2. PROPERTIES
HEI leases 17,612 square feet of office space in downtown Honolulu. The leases
expire at various dates from March 31, 1996 to April 30, 1999 (with an option
for HEI to extend one of the leases on most of the office space to March 31,
2001). The properties of HEI's subsidiaries are as follows:
ELECTRIC UTILITY
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, 1993. The three plants are situated on HECO-owned land having a
combined area of 535 acres. In addition, HECO owns a total of 114 acres of land
on which are located substations, transformer vault sites, distribution base
yards and the Kalaeloa cogeneration facility site.
Electric lines are located over or under public and nonpublic properties. Most
of HECO's leases, easements and licenses have been recorded.
At December 31, 1993, HECO owned approximately 828 miles of overhead
transmission lines, 1,171 miles of overhead distribution lines, 2,007 miles of
underground cables, 70,395 fully-owned or jointly-owned poles and 194 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 5,414,000 kilovoltamperes at December 31, 1993.
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 2002,
with an option to further extend the lease to November 2012. The leases for
certain office spaces expire on December 31, 1996 with options to extend to
December 31, 2001.
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
915,400 barrels.
46
53
The properties of HECO are subject to a first mortgage securing HECO's
outstanding first mortgage bonds.
On December 20, 1989, HECO applied to the PUC for the approval of the
sale to Malama Waterfront Corp. and leaseback of the Honolulu power plant and
Iwilei tank farm, the approval of the transfer values and the approval of the
accounting and rate-making treatments thereof. Prior to the PUC rendering a
decision on this application, HECO determined that changing conditions altered
the economics of the proposed sale such that a later retirement of the Honolulu
power plant may be more favorable. As such, HECO withdrew its application for
the sale and leaseback of the plant in July 1993.
A brief description of the properties of HECO's two electric utility
subsidiaries follows:
MECO owns and operates two generating plants on the island of Maui, at Kahului
and Maalaea, with an aggregate capability of 201.3 MW. 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 an aggregate maximum usable storage
capacity of 145,300 barrels.
MECO's administrative offices and engineering and distribution departments
are located on 9.1 acres of MECO-owned land in Kahului.
MECO also owns and operates smaller distribution and generation systems on
the islands of Lanai and Molokai.
The properties of MECO are subject to a first mortgage securing MECO's
outstanding first mortgage bonds.
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 154.6 MW (excluding two small run-of-river hydro units). The
plants are situated on HELCO-owned land having a combined area of approximately
43 acres. HELCO owns 6.0 acres of land in Kona, which are 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.
The properties of HELCO are subject to a first mortgage securing HELCO's
outstanding first mortgage bonds.
SAVINGS BANK
ASB owns its executive office building located in downtown Honolulu.
The following table sets forth certain information with respect to offices
owned and leased by ASB and its subsidiaries at December 31, 1993.
Number of offices
-------------------------------------------------
Owned Leased Total
----- ------ -----
Oahu...... 5 24 29
Maui...... 3 2 5
Kauai..... 3 1 4
Hawaii.... 2 4 6
Molokai... -- 1 1
-- -- --
13 32 45
== == ==
The net book value of office facilities is approximately $31 million. Of this
amount, $25 million represents the net book value of the land and improvements
for the 13 offices owned by ASB. The remaining $6 million represents the net
book value of ASB's leasehold improvements.
47
54
OTHER
FREIGHT TRANSPORTATION
HTB, currently owns seven tugboats ranging from 1,430 to 2,668 HP, two tenders
of 500 HP and three flatdecked barges.
HTB owns no real property, but rents on a month-to-month basis or leases its
pier property used in its operations from the State of Hawaii under a revocable
permit and two-year lease. It is expected that expiring leases will be renewed
as necessary.
YB, HTB's subsidiary, currently owns four charter tugs, two doubledecked and
six flatdecked barges and most of its shoreside equipment, including 20-foot
containers, chassis, refrigerated containers, container vans, hi-lifts,
flatracks, automobile racks and other related equipment.
YB has three- and four-year leases expiring at various dates in 1994 through
1995 for shoreside equipment (containers, flatracks and chassis) at a monthly
cost of approximately $8,500.
YB owns no real property, but rents on a month-to-month basis or leases
various pier property and warehouse facilities from the State of Hawaii under a
revocable permit, or under a two-year or five-year lease. All lease terms began
on January 1, 1992. It is expected that expiring leases will be renewed as
necessary.
REAL ESTATE DEVELOPMENT
MPC. See Item 1, "Business--Other--Real estate--Malama Pacific Corp."
OTHER
HEIIC. See Item 1, "Business--Other--HEI Investment Corp."
LVI operates a windfarm on the island of Hawaii with a generating capability
of 1.7 MW. LVI leases 78 acres of land for its windfarm.
ITEM 3. LEGAL PROCEEDINGS
Except as provided for below and in "Item 1. Business," there are no known
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.
HECO POWER OUTAGE
On April 9, 1991, HECO experienced a power outage that affected all customers
on the island of Oahu. One major transmission line was de-energized for routine
maintenance when two major transmission lines tripped, causing another major
transmission line to become overloaded and automatically trip. An island-wide
power outage resulted. Power was restored over the next twelve hours.
The PUC initiated an investigation of the outage by its order dated April 16,
1991. This investigation was consolidated with a pending investigation of an
outage that occurred in 1988. The PUC held an initial hearing on the April 9,
1991 outage in May 1991. In July 1991, HECO filed a report of its internal
investigative task force with the PUC. The report indicated that the results of
the investigation were inconclusive with respect to why one of the major lines
tripped and recommended actions to strengthen system reliability. The parties
to the investigation (HECO, Consumer Advocate and U.S. Department of Defense)
agreed that HECO should retain an independent consultant to investigate the
cause of the line trip. By an order dated October 23, 1991, the PUC approved
HECO's retention of Power Technologies, Inc. (PTI) and directed that the
objectives of the study be to assess the reliability and overall stability of
HECO's electric power system, to identify possible weaknesses, deficiencies and
conditions within the system that contributed to the island-wide power outage,
and to recommend a plan to increase the reliability of HECO's system and
minimize the occurrence of future island-wide outages. In its order, the PUC
also stated that: "[n]either the [PUC] nor HECO nor any of the other parties to
this docket is bound by PTI's report or analysis or is precluded from retaining
other consultants."
In August 1993, PTI's report was submitted to the PUC. In its report, PTI made
more than 100 recommendations for HECO to improve reliability, including
selective use of herbicides to control the growth of trees under power lines.
PTI said some recommendations are for implementation, some are for further
48
55
study and possible implementation and some are for consideration. Some of the
recommendations relate to the 1991 outage and some do not.
PTI identified four recommendations as deserving immediate attention: (1)
perform a detailed inspection of 138-kilovolt overhead transmission lines to
ensure that present clearance distances to trees, wire crossings and other
conductive objects are sufficient for at least one year; (2) determine
relationships between tree clearances and "line sag" changes that result from
lines carrying different amounts of electricity; (3) build the Waiau-Campbell
Industrial Park 138-kilovolt transmission line as soon as possible and consider
building the line to operate at higher voltage in the future; and (4) increase
the number of "live-line" overhead transmission linemen and engineering and
management personnel to support line and right-of-way functions. Regarding the
outage, PTI concluded that the fault on the third of four transmission lines
was the result of tree contact. This conclusion conflicts with the finding of
another consultant who found that certain evidence favored a fault in the line
over a pineapple field with no trees. Other PTI recommendations include (1)
reviewing reporting systems used by co-generators and independent power
producers from whom HECO buys power to be sure they are adequate to reveal
problems that could affect system reliability, and (2) keeping in service the
downtown Honolulu power plant previously scheduled for retirement in 1996.
HECO filed its comments on the PTI recommendations with the PUC in November
1993. Further proceedings have not been scheduled at this time. Management
cannot predict the timing and outcome of any decision and order to be issued by
the PUC with respect to the outages or with respect to the recommendations made
by PTI.
HECO's PUC-approved tariff rule states that "[t]he Company will not be
liable for interruption or insufficiency of supply or any loss, cost, damage or
expense of any nature whatsoever, occasioned thereby if caused by accident,
storm, fire, strikes, riots, war or any cause not within the Company's control
through the exercise of reasonable diligence and care." Under the rule,
customers had 30 days from the date of the power outage to file claims. HECO
received approximately 2,900 customer claims which totaled approximately $7
million. Of the 2,900 claims, approximately 1,450 are for property damage. As
of December 31, 1993, HECO had settled approximately 542 of these property
damage claims, had settlement offers outstanding with respect to approximately
119 more of these claims and anticipates making settlement offers with respect
to the remaining property claims upon receipt and review of appropriate
supporting documentation. The settlement offers are being made for purposes of
settlement and compromise only, and without any admission by HECO of liability
for the outage. Not covered in the settlement offers and requests for
documentation are approximately 1,450 claims involving alleged personal injury
or economic losses, such as lost profits.
On April 19, 1991, seven direct or indirect business customers on the island
of Oahu filed a lawsuit against HECO on behalf of themselves and an alleged
class, claiming $75 million in compensatory damages and additional unspecified
amounts for punitive damages because of the April 9, 1991 outage. The lawsuit
was dismissed without prejudice in March 1993 and subsequently refiled by the
plaintiffs. HECO has filed an answer which denies the principal allegations in
the complaint, sets forth affirmative defenses, and asserts that the suit
should not be maintained as a class action. Discovery proceedings have been
initiated. No trial date has been set. A motion for an order denying class
certification of the lawsuit has been filed and is set for hearing in March
1994.
A reserve equal to the deductible limits with respect to HECO's insurance
coverage has been recorded with respect to claims arising out of the April 1991
outage. In the opinion of management, losses (if any), net of estimated
insurance recoveries, resulting from the ultimate outcome of the lawsuit and
claims related to the April 9, 1991 outage will not have a material adverse
effect on the Company or consolidated HECO.
HELCO RELIABILITY INVESTIGATION
In July 1991, following service interruptions and rolling blackouts instituted
on the island of Hawaii, the PUC issued an order calling for an investigation
into the reliability of HELCO's system.
An evidentiary hearing was held in September 1991 and public hearings
were held in October 1991. In light of approximately 20 subsequent incidents of
rolling blackouts and service interruptions resulting from insufficient
generation margin, further evidentiary hearings were held in July 1992. With
the input from an independent consultant and the parties to the proceedings,
the PUC may formulate minimum reliability standards for HELCO, use the
standards to assess HELCO's system reliability, and re-examine the rate
increase approved in October 1992 to see whether any adjustments are
appropriate.
49
56
HELCO's generation margin has improved with the addition of a 20-MW
combustion turbine in August 1992, PGV's commencement of commercial operations
and Hamakua's temporary return to commercial operation (see "Item 1.
Business--Electric utility-Nonutility generation"). HELCO is proceeding with
plans to install two 20-MW combustion turbines in 1995, followed by an 18-MW
heat steam recovery generator in 1997, at which time these units will be
converted to a combined-cycle unit, subject in each case to obtaining necessary
permits.
In the opinion of management, the PUC's adjustment, if any, resulting
from the reliability investigation will not have a material adverse effect on
the Company's or HECO's consolidated financial condition or results of
operations.
HECO POWER PURCHASE AGREEMENTS DISPUTES
HECO is disputing certain amounts billed each month under its power
purchase agreements with Kalaeloa Partners, L.P. (Kalaeloa) and AES Barbers
Point, Inc. (AES-BP) and has withheld payment of some of the disputed amounts
pending resolution. With respect to the billings from Kalaeloa, HECO believes
that it has counterclaims which would mitigate, if not more than offset, the
disputed amounts billed by Kalaeloa. Disputed amounts billed by Kalaeloa and
AES-BP through December 31, 1993 totaled approximately $2.1 million and $1.5
million, respectively. Approximately $0.5 million of the total disputed
amounts, if paid, are includable in HECO's energy cost adjustment clause, and
would be passed through to customers.
HECO has not recognized any portion of the disputed amounts as an
expense or liability in its financial statements. Discussions between HECO and
Kalaeloa, and HECO and AES-BP to resolve the disputed billing amounts are
continuing. In the event the parties are unable to settle the disputes, both
the Kalaeloa and AES-BP power purchase agreements contain provisions whereby
either party to the agreement may cause the dispute to be submitted to binding
arbitration. Kalaeloa has requested that its dispute with HECO be arbitrated
and this arbitration process has commenced. Based on information currently
available, HECO's management believes that the ultimate outcome of these
disputes will not have a material adverse effect on the Company's or HECO's
consolidated financial condition or results of operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
HEI and HECO:
During the fourth quarter of 1993, no matters were submitted to a vote of
security holders of the Registrants.
50
57
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 67 and 69 (Note 19, "Regulatory restrictions on net assets" and Note 22,
"Quarterly information (unaudited)," of the Notes to HEI's Consolidated
Financial Statements) and page 27 of HEI's 1993 Annual Report to Stockholders,
portions of which are filed herein as HEI Exhibit 13(a). Certain restrictions
on dividends and other distributions of HEI are described in "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 21, 1994, was 24,672.
HECO:
Market information and holders--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.
The dividends declared and paid on HECO's common stock for the four
quarters of 1993 and 1992 are as follows:
Quarter ended 1993 1992
-------------------------------------------------
March 31........ $6,649,000 $5,118,000
June 30......... 3,731,000 5,254,000
September 30.... 8,233,000 5,742,000
December 31 .... 7,274,000 6,934,000
The regulatory restrictions on net assets are incorporated herein by
reference to page 27 (Note 12 to HECO's Consolidated Financial Statements,
"Regulatory restrictions on distributions to parent") of HECO's 1993 Annual
Report to Stockholder, portions of which are filed herein as HECO Exhibit
13(b).
ITEM 6. SELECTED FINANCIAL DATA
HEI:
The information required by this item is incorporated herein by reference to
page 27 of HEI's 1993 Annual Report to Stockholders, portions of which are
filed herein as HEI Exhibit 13(a).
HECO:
The information required by this item is incorporated herein by reference to
page 2 of HECO's 1993 Annual Report to Stockholder, portions of which are filed
herein as HECO Exhibit 13(b).
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
HEI:
The information required by this item is incorporated herein by reference to
pages 29 to 39 of HEI's 1993 Annual Report to Stockholders, portions of which
are filed herein as HEI Exhibit 13(a).
HECO:
The information required by this item is incorporated herein by reference to
pages 3 to 9 of HECO's 1993 Annual Report to Stockholder, portions of which are
filed herein as HECO Exhibit 13(b).
51
58
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 28 and to
pages 41 to 69 of HEI's 1993 Annual Report to Stockholders, portions of
which are filed herein as HEI Exhibit 13(a).
HECO:
The information required by this item is incorporated herein by reference to
pages 10 to 29 and to the section entitled "Consolidated quarterly financial
information (unaudited)" on page 31 of HECO's 1993 Annual Report to
Stockholder, portions of which are filed herein as HECO Exhibit 13(b).
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
ON ACCOUNTING AND FINANCIAL DISCLOSURE
HEI AND HECO:
None
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANTS
HEI:
The following persons are, or may be deemed, executive officers of HEI. Their
ages are given as of March 10, 1994. Officers are appointed to serve until the
meeting of the Board of Directors following the next Annual Meeting of
Stockholders (which shall occur on April 19, 1994) 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
for past
HEI Executive Officers five years
- -----------------------------------------------------------------------
Robert F. Clarke, age 51
President and Chief Executive Officer ................ 1/91 to date
Group Vice President - Diversified Companies ......... 5/88 to 12/90
Director ............................................. 4/89 to date
(Company service: 7 years)
Edward J. Blackburn, age 63
Group Vice President - Diversified Companies ......... 1/91 to date
President, HIG ....................................... 10/87 to 12/90
(Company service: 6 years)
Harwood D. Williamson, age 62
Group Vice President - Utility Companies ............. 5/88 to date
Director.............................................. 4/85 to date
(Company service: 37 years)
Robert F. Mougeot, age 51
Financial Vice President and Chief Financial Officer.. 4/89 to date
Auditor............................................... 10/88 to 4/89
(Company service: 5 years)
52
59
Business
experience
for past
HEI Executive Officers (continued) five years
- ---------------------------------------------------------------------------------
Peter C. Lewis, age 59
Vice President - Administration.............................. 10/89 to date
Vice President - Administration, HECO........................ 4/86 to 1/91
Vice President - Administration and Secretary................ 4/89 to 9/89
Vice President and Secretary................................. 7/81 to 4/89
(Company service: 26 years)
Charles F. Wall, age 54
Vice President and Corporate Information Officer............. 7/90 to date
(Company service: 3 years)
Charles F. Wall, prior to joining the Company,
served as Director of Information Management of
GTE Hawaiian Tel from 1981 to 1990.
Andrew I. T. Chang, age 54
Vice President - Government Relations........................ 4/91 to date
Manager, Government Relations................................ 8/90 to 3/91
Manager, Government Relations, HECO.......................... 1/85 to 7/90
(Company service: 9 years)
Constance H. Lau, age 41
Treasurer.................................................... 4/89 to date
Treasurer, HECO.............................................. 12/87 to 4/89
Assistant Treasurer, MECO.................................... 12/87 to 4/89
Assistant Treasurer, HELCO................................... 12/87 to 4/89
(Company service: 9 years)
Curtis Y. Harada, age 38
Controller................................................... 1/91 to date
Auditor, HECO................................................ 7/89 to 1/91
(Company service: 4 years)
Curtis Y. Harada, prior to joining the Company,
served as Controller/Manager of Financial
Assurance of PacTel Corporation from 1987 to 1989.
Betty Ann M. Splinter, age 48
Secretary.................................................... 10/89 to date
Secretary, HECO.............................................. 4/86 to 9/89
(Company service: 19 years)
HEI's executive officers, with the exception of Peter C. Lewis, Charles F.
Wall and Andrew I. T. Chang, are officers and/or directors of one or more of
HEI's subsidiaries.
There are no family relationships between any executive officer or director
of HEI and any other executive officer or director of HEI.
The list of current directors of HEI is incorporated herein by reference to
page 70 of HEI's 1993 Annual Report to Stockholders, portions of which are
filed herein as HEI Exhibit 13(a). Information on their business experience and
directorships is incorporated herein by reference to pages 3 to 5 of the
registrant's Definitive Proxy Statement, prepared for the Annual Meeting of
Stockholders to be held on April 19, 1994, and filed herein as HEI Exhibit 22.
Thurston Twigg-Smith (who is not standing for reelection as a Director) is
President, Chief Executive Officer and Director of Persis Corporation;
Chairman, Chief Executive Officer and Director of Northwest Media, Inc., and
Maryville Alcoa Daily Times; Chairman of the Board of The Honolulu Advertiser;
Director of HECO, ASB and The Museum of Contemporary Art (Los Angles); Trustee
of the McInerny Foundation, Punahou School, Honolulu Academy of Arts, The
Contemporary Museum (Honolulu), Old Sturbridge Village (Massachusetts), The
Skowhegan School (Maine) and The Philatelic Foundation, N.Y.; and member of the
Governing Board of The Yale Art Gallery (Connecticut).
53
60
HECO:
The following table sets forth certain information concerning the executive
officers of HECO. Their ages are given as of March 10, 1994. Officers are
appointed to serve until the meeting of the Board of Directors following the
next Annual Meeting and/or until their respective successors have been
appointed and qualified. Company service includes service with HECO affiliates.
Business
experience
for past
HECO Executive Officers five years
- ------------------------------------------------------------------------------
Robert F. Clarke, age 51
Chairman of the Board.................................. 1/91 to date
(Company service: 7 years)
Harwood D. Williamson, age 62
President and Chief Executive Officer.................. 1/91 to date
President and Chief Operating Officer ................. 2/85 to 12/90
Director .............................................. 4/85 to date
Chairman of the Board, HELCO and MECO.................. 3/85 to date
(Company service: 37 years)
T. Michael May, age 47
Senior Vice President.................................. 2/92 to date
(Company service: 2 years)
T. Michael May, prior to joining HECO, was a principal
partner in Management Assets Group from 9/89 to 1/92.
He was president of Caterpillar Capital Company, Inc.
from 6/85 to 4/89
Joan M. Diamond, age 43
Vice President - Human Resources....................... 2/91 to date
Manager, Human Resources............................... 5/89 to 1/91
Manager, Organizational Development.................... 1/88 to 4/89
(Company service: 9 years)
Jackie Mahi Erickson, age 53
Vice President - General Counsel........................ 2/91 to date
Corporate Counsel....................................... 1/81 to 1/91
(Company service: 13 years)
Charles M. Freedman, age 47
Vice President - Corporate Relations.................... 5/92 to date
(Company service: 1 year)
Charles Freedman, prior to joining HECO, was Director of
Communications in the Office of the Governor of
Hawaii from 1986 to 4/92.
Edward Y. Hirata, age 60
Vice President - Planning............................... 12/91 to date
Vice President, HELCO and MECO.......................... 12/91 to date
(Company service: 7 years)
Edward Y. Hirata, prior to rejoining HECO on 12/91,
served as Director of Department of Transportation
for the State of Hawaii, from 12/86 to 11/91.
54
61
Business
experience
for past
HECO Executive Officers five years
- -------------------------------------------------------------------------------------
George T. Iwahiro, age 56
Vice President - Engineering................................... 2/91 to date
Vice President - Consumer, Regulatory and Public
Affairs....................................................... 2/85 to 1/91
Vice President, HELCO and MECO................................. 3/85 to 12/91
(Company service: 34 years)
Richard L. O'Connell, age 64
Vice President - Customer Relations............................ 2/91 to date
Vice President - Facilities.................................... 6/88 to 1/91
(Company service: 13 years)
Paul A. Oyer, age 53
Financial Vice President and Treasurer......................... 4/89 to date
Financial Vice President and Controller........................ 2/85 to 4/89
Director....................................................... 4/85 to date
Financial Vice President and Treasurer,
HELCO and MECO............................................... 6/85 to date
(Company service: 28 years)
David M. Rodrigues, age 58
Vice President - Corporate Excellence.......................... 11/93 to date
Vice President - Operations.................................... 5/89 to 10/93
Executive Assistant............................................ 7/88 to 4/89
(Company service: 23 years)
Ernest T. Shiraki, age 46
Controller..................................................... 4/89 to date
Manager, Budgets & Corporate Accounting........................ 5/85 to 4/89
(Company service: 24 years)
Molly M. Egged, age 43
Secretary...................................................... 10/89 to date
Secretary, HELCO and MECO...................................... 10/89 to date
Assistant Secretary............................................ 4/86 to 9/89
Executive Secretary............................................ 12/83 to 12/92
(Company service: 13 years)
HECO's executive officers, Robert F. Clarke, Harwood D. Williamson, Edward
Y. Hirata, Paul A. Oyer and Molly M. Egged, are officers of one or more of the
affiliated HEI companies.
There are no family relationships between any executive officer or director
of HECO and any other executive officer or director of HECO.
The list of current directors of HECO is incorporated herein by reference to
page 33 of HECO's 1993 Annual Report to Stockholder, portions of which are
filed herein as HECO Exhibit 13(b). Information on the business experience and
directorships of directors of HECO who are also directors of HEI is
incorporated herein by reference to pages 3 through 5 of HEI's Definitive Proxy
Statement, prepared for the Annual Meeting of Stockholders to be held on
April 19, 1994, and filed herein as HEI Exhibit 22.
55
62
Mildred D. Kosaki, age 69, and Paul C. Yuen, age 65, as of March 10, 1994,
are the only outside directors of HECO who are not directors of HEI. Mrs.
Kosaki has been a Director of HECO from 1973 to the present. She resigned from
the HEI Board in 1987. She was also a Director of the International Pacific
University from 1989 to 1991 and a Director on the Board of The Honolulu
Advertiser from 1983 to 1989. She is a specialist in education research. Dr.
Yuen, who was elected a Director of HECO in April 1993, is Senior Vice
President for the University of Hawaii and Executive Vice Chancellor for the
University of Hawaii-Manoa. In the past five years, he has had various
administrative positions at the University of Hawaii-Manoa. He also serves on
the Boards of Cyanotech Corporation, the Pacific International Center for High
Technology Research and Hawaii Cultured Pearls, Inc. Information on Mr. Oyer's
business experience and directorship is indicated above.
The information required under this item by Item 405 of Regulation S-K is
incorporated by reference to page 9 of HEI's Definitive Proxy Statement,
prepared for the Annual Meeting of Stockholders to be held on April 19, 1994,
and filed herein as HEI Exhibit 22.
ITEM 11. EXECUTIVE COMPENSATION
HEI:
The information required under this item for HEI is incorporated by reference
to pages 6 to 7 and 9 to 22 of HEI's Definitive Proxy Statement, prepared for
the Annual Meeting of Stockholders to be held on April 19, 1994, and filed
herein as HEI Exhibit 22.
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 1993. All executive compensation
amounts presented for Harwood D. Williamson are duplicative of the amounts
presented in HEI's Definitive Proxy Statement, prepared for the Annual Meeting
of Stockholders to be held on April 19, 1994, and filed herein as HEI Exhibit
22.
56
63
SUMMARY COMPENSATION TABLE
The following is the summary compensation table which sets forth the annual
and long-term compensation of the chief executive officer of HECO and the four
other most highly compensated executive officers of HECO serving at the end of
1993.
SUMMARY COMPENSATION TABLE
Long-Term
Annual Compensation Compensation
----------------------------------------- -----------------------
Awards Payouts
Other ---------- ------- All
Annual Securities Other
Compen- Underlying LTIP Compen-
Name and Principal Salary Bonus sation Options Payouts sation
Position Year ($) (1) ($) (2) ($) (3) (#) (4) ($) (5) ($) (6)
- ------------------------------- --------- --------- ---------- ---------- --------- ---------
Harwood D. Williamson..... 1993 $341,333 $ -- $68,544 8,000 $ -- $18,843
President and CEO 1992 316,666 37,288 62,750 48,000 -- --
1991 264,669 -- 8,000 55,951
T. Michael May(7)......... 1993 191,000 -- -- 4,000 -- 4,796
Senior Vice President 1992 168,336 29,100 -- -- -- 78,577
Paul A. Oyer.............. 1993 175,100 -- 10,806 3,000 -- 6,339
Financial Vice President 1992 166,031 21,373 9,790 -- -- --
and Treasurer 1991 152,002 -- 3,000 19,843
David M. Rodrigues........ 1993 134,833 -- -- 3,000 -- 6,864
Vice President-Corporate 1992 126,833 21,373 -- -- -- --
Excellence 1991 114,664 -- 3,000 --
George Iwahiro............ 1993 133,833 -- -- 2,000 -- 6,548
Vice President-Engineering 1992 127,169 17,762 -- -- -- --
1991 120,164 -- 2,000 --
(1) Includes directors' fees of $28,000 in 1993 and $25,000 in 1992 for Mr.
Williamson and directors' fees of $5,600 in 1993 and $4,700 in 1992 for
Mr. Oyer.
(2) The named executive officers are eligible for an incentive award under the
Company's annual Executive Incentive Compensation Plan (EICP). A decision
on EICP bonus payouts is made at the beginning of each year for the
previous year's performance period.
(3) Covers interest earned on deferred compensation and includes above-market
earnings in the amount of $63,467 for 1993 and $57,498 for 1992 on
deferred annual and Long-Term Incentive Plan (LTIP) payouts for Mr.
Williamson. Also includes above-market earnings in the amount of $10,806
for 1993 and $9,790 for 1992 on deferred annual payouts for Mr. Oyer.
(4) Includes a special one-time, premium-priced grant of 40,000 shares without
dividend equivalents for Mr. Williamson in 1992. Other options granted in
each of the three years for Mr. Williamson included dividend equivalents.
For each of the other named executive officers, options granted in 1993
and 1991 did not include dividend equivalents.
(5) LTIP payouts are determined in April each year for the three-year cycle
ending on December 31 of the previous calendar year. In 1993, only Mr.
Williamson was eligible to receive a LTIP payout; however, no LTIP payout
was received for the 1990-1992 performance cycle because none of the
minimum earnings threshold levels were achieved. The determination of
whether there will be a payout for Mr. Williamson under the 1991-1993 LTIP
will not be made until April 1994.
(6) Represents amounts accrued by the Company in 1993 for certain death
benefits provided to the named executive officers. In 1992 and 1991, the
Company did not accrue for these benefits. Additional information is
incorporated by reference to page 19 of HEI's Definitive Proxy Statement,
prepared for the Annual Meeting of Stockholders to be held on April 19,
1994, and filed herein as HEI Exhibit 22. Covers reimbursement of
moving expenses for Mr. May in 1992.
(7) Mr. May joined HECO as the Senior Vice President on February 1, 1992.
57
64
OPTION GRANTS IN LAST FISCAL YEAR
The following table shows the HEI stock options which were granted in 1993 to
the executives named in the HECO Summary Compensation Table, all of which are
nonqualified stock options. The practice of granting stock options, which may
include dividend equivalent shares, has been followed each year since 1987.
Number of
Securities Percent of
Underlying Total Options
Options Granted to Exercise Grant Date
Granted Employees in Price Expiration Present
(#) (1) Fiscal Year ($/share) Date Value ($) (2)
----------- -------------- --------- -------------- -------------
Harwood D. Williamson..... 8,000 7% $38.27 April 12, 2003 $77,280
T. Michael May............. 4,000 3 38.27 April 12, 2003 20,120
Paul A. Oyer............... 3,000 2 38.27 April 12, 2003 15,090
David M. Rodrigues......... 3,000 2 38.27 April 12, 2003 15,090
George Iwahiro............. 2,000 2 38.27 April 12, 2003 10,060
(1) For the 20,000 option shares granted with an exercise price of $38.27
per share, additional dividend equivalent shares are granted to
Mr. Williamson 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 with a
10-year option period, an exercise price of $38.27, and with additional
dividend equivalent shares granted for the first four years of the option,
the Binomial Value is $9.66 per share. The following assumptions were used
in the model: Stock Price: $38.27; Exercise Price: $38.27; Term: 10 years;
Volatility: .55; Interest Rate: 6.0%; and Dividend Rate: 6.4%. The
following were the valuation results: Binomial Option Value: $5.03;
Dividend Credit Value: $4.63; and Total Value: $9.66.
58
65
AGGREGATED OPTION EXERCISES AND FISCAL YEAREND OPTION VALUE TABLE
The following table shows the HEI stock options, including dividend
equivalents, exercised in 1993 by the named executive officers in the HECO
Summary Compensation Table. Also shown is the number and value of unexercised
options and dividend equivalents at the end of 1993. Under the Stock Option and
Incentive Plan, dividend equivalents were granted to Mr. Williamson as part of
the stock option award, except for the one-time, premium-priced grant in May
1992. For each of the other named executive officers, options granted in 1993
and 1991 did not include dividend equivalents.
Dividend equivalents permit a participant who exercises a stock option to
obtain at no additional cost, in addition to the option shares, the amount of
dividends declared on the number of shares of common stock with respect to
which the option is exercised during the period between the grant and the
exercise of the option. Dividend equivalents are computed, as of each dividend
record date throughout the four-year vesting period (vesting in equal
installments), which begins on date of grant, both with respect to the number
of shares underlying the option and with respect to the number of dividend
equivalent shares previously credited to the executive officer and not issued
during the period prior to the dividend record date.
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND
FISCAL YEAREND OPTION VALUES
Value of
Unexercised
Number of In the Money
Unexercised Options
Options (Including
(Including Dividend
Dividend Equivalents)
Dividend Equivalents) at Fiscal
Shares Equivalents Value at Fiscal Yearend Yearend (1)
Acquired Acquired Value Realized on ----------------- ----------------
on on Realized on Divideds Exercisable/ Exercisable/
Exercise(#) Exercise(#) Options($) Equivalents($) Unexercisable(#) Unexercisable($)
----------- ----------- ---------- -------------- ---------------- ----------------
Harwood D. Williamson. . -- -- $ -- $ -- 58,117/21,379 $117,711/38,916
T. Michael May . . . . . -- -- -- -- -- /4,000 --/--
Paul A. Oyer . . . . . . 542 158 2,846 6,024 4,678/4,500 37,937/4,733
David M. Rodrigues . . . -- -- -- -- 1,500/4,500 4,733/4,733
George Iwahiro . . . . . 1,000 -- 3,470 -- --/3,000 --/3,155
(1) Includes dividend equivalents of $79,916 exercisable and $26,296
unexercisable for Mr. Williamson and dividend equivalents of $25,830
exercisable for Mr. Oyer. All options were in the money (where the option
price is less than the closing price on December 31, 1993) except the 1990
stock option grant at $36.01 per share, the 1992 stock option grant at
$35.94 per share, and the 1993 stock option grant at $38.27 per share and
the 1992 premium-priced grant at $41.00 per share. Value based on closing
price of $35.875 per share on the New York Stock Exchange on December 31,
1993.
LONG-TERM INCENTIVE PLAN AWARDS TABLE
A Long-Term Incentive Plan award was made to one of the named executive
officers in the HECO Summary Compensation Table, Mr. Williamson. Additional
information required under this item is incorporated by reference to page 13 of
HEI's Definitive Proxy Statement, prepared for the Annual Meeting of
Stockholders to be held on April 19, 1994, and filed herein as HEI Exhibit 22.
59
66
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 pages 14 to 15 of HEI's Definitive Proxy
Statement, prepared for the Annual Meeting of Stockholders to be held on April
19, 1994, and filed herein as HEI Exhibit 22. As of December 31, 1993, the
named executive officers in the HECO Summary Compensation Table had the
following number of years of credited service under the Retirement Plan: Mr.
Williamson, 37 years; Mr. May, 1 year; Mr. Oyer, 27 years; Mr. Rodrigues, 23
years; and Mr. Iwahiro, 34 years.
CHANGE-IN-CONTROL AGREEMENT
Messrs. Williamson and May are the only named executive officers in the HECO
Summary Compensation Table in which HEI has entered into a
Change-in-Control Agreement. Additional information required under this item is
incorporated by reference to page 15 of HEI's Definitive Proxy Statement,
prepared for the Annual Meeting of Stockholders to be held on April 19, 1994,
and filed herein as HEI Exhibit 22.
Based on W-2 earnings for the five most recent years (1989-1993) or the
portion of such period during which the executive performed personal service for
HEI and its subsidiaries, the lump sum severance would be as follows: Mr.
Williamson - $1,035,551 and Mr. May - $869,890.
COMPENSATION COMMITTEE REPORT ON EXECUTIVE COMPENSATION
INTRODUCTION
Decisions on executive compensation for the named executive officers are
made by the Compensation Committee of the HEI Board of Directors which is
composed of six independent nonemployee directors. All decisions by the
Compensation Committee are reviewed by the full HEI Board except for decisions
about HEI's stock based plans, which must be made solely by the Committee in
order to satisfy Securities Exchange Act Rule 16b-3.
The Committee has retained the services of an independent compensation
consulting firm to assist in executive compensation matters.
Except for specific compensation decisions regarding Mr. Williamson
which are discussed below, additional information required under this item is
incorporated by reference to pages 16 through 19 of HEI's Definitive Proxy
Statement, prepared for the Annual Meeting of Stockholders to be held on
April 19, 1994, and filed herein as HEI Exhibit 22.
BASE SALARY
Mr. Williamson's base salary is determined based on the recommendation of
Robert F. Clarke, President and Chief Executive Officer of HEI and Chairman of
the Board of HECO, within the recommended salary range and the Committee's
approval. Mr. Clarke's recommendation is based on an overall evaluation of
Mr. Williamson's performance during the preceding year. This evaluation is
subjective in nature and takes into account all aspects of Mr. Williamson's
responsibilities at the discretion of Mr. Clarke. Mr. Williamson's base salary
was raised from an annual rate of $300,000 to an annual rate of $320,000,
effective May 1, 1993. This action by the Committee was subsequently ratified
by the HECO Board of Directors.
STOCK OPTIONS
The 1993 stock option award to Mr. Williamson of 8,000 shares of HEI Common
Stock plus dividend equivalents was based on the consultant's recommendation
and the independent evaluation of an appropriate award level by Mr. Clarke and
the HEI Compensation Committee. In this evaluation, the Committee took into
account prior awards to Mr. Williamson and an overall subjective evaluation of
Mr. Williamson's job performance.
60
67
HECO BOARD OF DIRECTORS
COMMITTEES OF THE HECO BOARD
The Board of Directors of HECO has only one standing committee, the
Audit Committee, which is comprised of three nonemployee directors: Ben F.
Kaito, Chairman, and Mildred D. Kosaki and Diane J. Plotts. In 1993, the Audit
Committee held four 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 auditor and the financial
statements which are included in HECO's 1992 Annual Report to Stockholder. The
Audit Committee holds such meetings as it deems advisable to review the
financial operations of HECO.
REMUNERATION OF THE HECO DIRECTORS AND ATTENDANCE AT MEETINGS
In 1993, William G. Foster (who passed away in October 1993), Mildred
D. Kosaki and Paul C. Yuen were the only nonemployee directors of HECO who were
not also directors of HEI. They were paid a retainer of $12,000, one-half of
which was distributed in the common stock of HEI pursuant to the HEI
Nonemployee Director Stock Plan and one-half of which was distributed in cash.
The number of shares of stock distributed was based on a price of $38.27 per
share, which is equal to the average of the daily high and low sales prices of
HEI common stock for all trading days in March 1993, divided into $6,000, with
a cash payment made in lieu of any fractional share. In addition, a fee of $700
was paid in cash to each director for each Board and Committee meeting attended
by the director. The Chairman of the Audit Committee was paid an additional
$100 for each Committee meeting attended.
In 1993, there were six regular bi-monthly meetings and one special
meeting of the Board of Directors. All incumbent directors, except William G.
Foster, attended at least 75% of the total number of meetings of the Board and
Committee on which they served.
HECO participates in the Nonemployee Director Retirement Plan described on
page 7 of HEI's Definitive Proxy Statement, prepared for the Annual Meeting of
Stockholders to be held on April 19, 1994, and filed herein as HEI Exhibit 22.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL
OWNERS AND MANAGEMENT
HEI:
The information required under this item is incorporated by reference to
pages 8 and 9 of HEI's Definitive Proxy Statement, prepared for the Annual
Meeting of Stockholders to be held on April 19, 1994, and filed herein as HEI
Exhibit 22.
61
68
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, named HECO executive officers as listed in the
Summary Compensation Table on page 57 and by HECO directors and officers as a
group, as of February 10, 1994, based on information furnished by the
respective individuals.
Name of Individual or Title of Amount and Nature of
Group Class Beneficial Ownership
- -----------------------------------------------------------------------------
Directors Total
- ----------- -----
Mildred D. Kosaki Common 1,308(2) 1,308
Paul A. Oyer* Common 2,163(1)
4,678(4) 6,841
Paul C. Yuen Common 456(2) 456
Named executive officers
- ------------------------
T. Michael May Common 514(2) 514
George T. Iwahiro Common 5,586(1)
144(2) 5,730
David M. Rodrigues Common 2,187(1)
394(2)
1,500(4) 4,081
Common Stock Beneficially 18,523(1)
Owned by Directors and Officers 6,411(2)
as a Group (13 persons**) 83(3)
8,553(4) 33,570***
* Also a named executive officer listed in the Summary Compensation Table on
page 57.
** Excludes HECO directors Messrs. Clarke, Henderson, Kaito, and Williamson
and Ms. Plotts, who also serve on the HEI Board of Directors. The
information required is incorporated by reference to pages 8 and 9 of HEI's
Definitive Proxy Statement, prepared for the Annual Meeting of Stockholders
to be held on April 19, 1994, and filed herein as HEI Exhibit 22. Messrs.
Clarke and Williamson are also named executive officers listed in the
Summary Compensation Table on page 10 of the above-referenced Definitive
Proxy 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.
(1) Sole voting and investment power.
(2) Shared voting and investment power (shares registered in name of respective
individual and spouse).
(3) 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.
(4) Stock options exercisable within 60 days after February 10, 1994, under the
1987 Stock Option and Incentive Plan, as amended. Shares for Mr. Oyer
include accompanying dividend equivalents (720 shares) for stock options
awarded in 1988 only.
62
69
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
HEI:
The information required under this item is incorporated by reference to pages
21 to 23 of HEI's Definitive Proxy Statement, prepared for the Annual Meeting
of Stockholders to be held on April 19, 1994, and filed herein as HEI Exhibit
22.
HECO:
As of December 31, 1992, T. Michael May, Senior Vice President of HECO, was
indebted to HECO in the amount of $290,000 by reason of loans made to him by
HECO in 1992 for relocation purposes. The noninterest-bearing notes were due in
1993. In 1993, $110,000 of Mr. May's indebtedness was paid and the remaining
$180,000 was converted to a 15-year note bearing interest at 6.28%. The note is
due in 2008 or upon demand, if Mr. May ceases to be employed by HECO, and is
secured by a second mortgage on real estate. As of December 31, 1993, Mr. May
was indebted to HECO in the amount of $180,000.
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 1993 Annual Report to
Stockholders and HECO's 1993 Annual Report to Stockholder, portions of which
are filed by HEI as Exhibit 13(a) and, portions of which are filed by HECO as
Exhibit 13(b), respectively, are incorporated by reference in Part II, Item 8,
of this Form 10-K:
1993 Annual Report to
Stockholder(s)
(Page/s)
-----------------------
HEI HECO
--- ----
Independent Auditors' Reports ......... 40 30
Consolidated Statements of Income,
Years Ended December 31, 1993, 1992
and 1991 .............................. 41 10
Consolidated Statements of Retained
Earnings, Years Ended December 31,
1993, 1992 and 1991 ................... 41 10
Consolidated Balance Sheets,
December 31, 1993 and 1992 ............ 42 11
Consolidated Statements of
Capitalization, December 31, 1993 and
1992 .................................. N/A 12-13
Consolidated Statements of Cash Flows,
Years Ended December 31, 1993, 1992
and 1991 .............................. 43 14
Notes to Consolidated Financial
Statements ............................ 44-69 16-29
63
70
(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 ......................... 66 67
Schedule I Marketable securities--other
investments, December 31, 1993......... 68 N/A
Schedule II Amounts receivable from related parties
and underwriters, promoters and
employees other than related parties,
December 31, 1993, 1992 and 1991....... 69-71 69-70
Schedule III Condensed financial information of
registrant, Hawaiian Electric
Industries, Inc. (Parent Company) as
of December 31, 1993 and 1992 and
years ended December 31, 1993, 1992,
and 1991 .............................. 72-74 N/A
Schedule V Property, plant and equipment, year
ended December 31, 1993................ 75 77
Schedule V Property, plant and equipment, December
31, 1992 and 1991...................... 76 N/A
Schedule V Property, plant and equipment, year
ended December 31, 1992................ N/A 78
Schedule V Property, plant and equipment,
December 31, 1991 ..................... N/A 79
Schedule VI Accumulated depreciation, depletion and
amortization of property, plant and
equipment, years ended December 31, 1993,
1992 and 1991 ......................... 80-82 80-82
Schedule VIII Valuation and qualifying accounts,
years ended December 31, 1993, 1992
and 1991............................... 83 83
Schedule IX Short-term borrowings, years ended
December 31, 1993, 1992 and 1991 ...... 84 85
Schedule X Supplementary income statement
information, years ended December 31,
1993, 1992 and 1991 ................... 86 86
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 1993 Annual Report
to Stockholders and HECO's 1993 Annual Report to Stockholder, which financial
statements are incorporated herein by reference.
64
71
(a)(3) EXHIBITS
Exhibits for HEI and HECO and their subsidiaries are listed in the
"Index to Exhibits" found on pages 87 through 94 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 1993, HEI and HECO filed three Current Reports,
Forms 8-K, with the SEC. In the Form 8-K dated October 5, 1993, HEI and HECO
filed information under Item 5 regarding HECO and its subsidiaries kilowatthour
sales forecast, PTI's report on HECO's power outage, and income taxes. In the
Form 8-K dated November 17, 1993, HEI and HECO filed information under Item 5
regarding the HELCO rate case filed in November 1993, MECO rate case filed in
November 1991, HECO's comments on PTI's report on HECO's power outage, HELCO
and MECO transportation of heavy fuel oil, liquidity and capital resources-
electric utility, Kalaeloa Partners, L.P. and AES Barbers Point, Inc. and
discontinued operations-insurance companies. In the Form 8-K dated December 27,
1993, HEI and HECO filed information under Item 5 regarding HECO filing its
1995 rate case.
65
72
(KPMG Peat Marwick Letterhead)
INDEPENDENT AUDITORS' REPORT
The Board of Directors
and Shareholders
Hawaiian Electric Industries, Inc.:
Under date of February 11, 1994, we reported on the consolidated balance
sheets of Hawaiian Electric Industries, Inc. and subsidiaries as of
December 31, 1993 and 1992, 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, 1993, as contained in the 1993 annual report to
shareholders. These consolidated financial statements and our report thereon
are incorporated by reference in the annual report on Form 10-K for the year
1993. In connection with our audits of the aforementioned consolidated
financial statements, we also have 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.
As discussed in note 15 to the consolidated financial statements, effective
January 1, 1993, the Company changed its method of accounting for income
taxes. Additionally, as discussed in note 18 to the consolidated financial
statements, effective January 1, 1993, the Company changed its method of
accounting for postretirement benefits other than pensions.
/s/ KPMG Peat Marwick
Honolulu, Hawaii
February 11, 1994
66
73
[KPMG Peat Marwick letterhead]
The Board of Directors
and Shareholder
Hawaiian Electric Company, Inc.:
Under date of February 11, 1994, 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, 1993 and 1992, 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, 1993, as contained in the 1993 annual
report to shareholder. These consolidated financial statements and our report
thereon are incorporated by reference in the annual report on Form 10-K for the
year 1993. In connection with our audits of the aforementioned consolidated
financial statements, we also have 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.
As discussed in note 7 to the consolidated financial statements, effective
January 1, 1993, the Company changed its method of accounting for income taxes.
Additionally, as discussed in note 10 to the consolidated financial statements,
effective January 1, 1993, the Company changed its method of accounting for
postretirement benefits other than pensions.
/s/ KPMG Peat Marwick
Honolulu, Hawaii
February 11, 1994
67
74
Hawaiian Electric Industries, Inc.
SCHEDULE I -- MARKETABLE SECURITIES - OTHER INVESTMENTS
December 31, 1993
========================================================================================================
Col. A Col. B Col. C Col. D Col. E
- --------------------------------------------------------------------------------------------------------
Amount at
which each
portfolio
Number of equity
of shares security
or units- Market issues and
principal value of each other
amount each security issue
of Cost issue at carried
bonds of balance in the
Name of issuer and title of and each sheet balance
each issue notes issue* date sheet
- --------------------------------------------------------------------------------------------------------
(dollars in thousands)
MARKETABLE SECURTIES
ASB
Stock in Federal Home Loan Bank
of Seattle...................... 232,034 $ 23,203 $ 23,203 $ 23,203
Other securities held for
trading......................... $ 44,049 45,396 45,396 45,396
Mortgage-backed securities **
Federal Home Loan Mortgage
Corporation................... $118,469 117,803 125,827 117,803
Private-issue mortgage-backed
securities.................... $461,778 465,373 468,272 465,373
Other........................... $ 46,575 46,980 47,671 46,980
-------- -------- --------
630,156 641,770 630,156
-------- -------- --------
TOTAL MARKETABLE SECURITIES..... $698,755 $710,369 $698,755
======== ======== ========
OTHER INVESTMENTS
HEIIC
Common stock.................... 9 $ 5,000 *** $ 5,517
Leveraged leases................ N/A 53,115 *** 53,115
------ --------
Subtotal...................... 58,115 58,632
------ --------
HEI, MPC and HTB
Preferred stock - HECO
(Series H).................... 100,000 808 *** 808
Real estate partnerships........ N/A 17,494 *** 17,494
Other........................... N/A 172 *** 172
------- --------
Subtotal...................... 18,474 18,474
------- --------
TOTAL OTHER INVESTMENTS......... $76,589 $ 77,106
======= ========
* Represents cost of each issue, except for: ASB's other securities held for
trading, which are stated at market, and mortgage-backed securities,
which are stated at amortized cost; and MPC's investment in real estate
partnerships, which are stated in accordance with the equity method of
accounting.
** Secured by residential property.
*** Not actively traded. Fair value considered to equal cost basis or
amount at which security is carried in the balance sheet.
68
75
Hawaiian Electric Industries, Inc.
and Hawaiian Electric Company, Inc.
SCHEDULE II--AMOUNTS RECEIVABLE FROM RELATED PARTIES
AND UNDERWRITERS, PROMOTERS AND EMPLOYEES
OTHER THAN RELATED PARTIES
December 31, 1993
================================================================================================================
Col. A Col. B Col. C Col. D Col. E
- ----------------------------------------------------------------------------------------------------------------
Deductions
Balance at ---------- Balance at end of Period
beginning Amounts ------------------------
Name of debtor of period Additions collected Current Noncurrent
- ----------------------------------------------------------------------------------------------------------------
(in thousands)
Baldwin*Malama Joint Venture (a)(b).. $1,347 $780 $2,127 $ -- $ --
HECO Executive Officer (c)........... 290 -- 290 -- --
HELCO Executive Officer (d).......... 120 -- -- -- 120
------- ------ ------ ------ -----
$1,757 $780 $2,417 $ -- $120
======= ====== ======= ====== =====
(a) Two unsecured promissory notes payable. Interest rate is based on Bank of
Hawaii's prime rate plus 2% for the first note and Bank of Hawaii's prime
rate plus 0.75% for the second note.
(b) In May 1993, Baldwin*Malama (B*M) was reorganized as a limited partnership
in which Malama Development Corp. (MDC) is the sole general partner and
Baldwin Pacific Properties, Inc. (BPPI) is the sole limited partner. In
conjunction with the dissolution of the B*M 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, and beginning in May
1993, MDC consolidated the accounts of B*M. Previously, MDC accounted for
its investment in B*M under the equity method. At December 31, 1993, the
outstanding balances on MPC's loan to B*M was $10.6 million, which was
eliminated in consolidation as an intercompany account. The interest rate
is based on one-half of Bank of Hawaii's prime plus 8.5%. The loan matures
in May 1995 and is secured by security interest in real property, option to
purchase land, and assignments of BPPI and MDC's partnership interests.
(c) Two unsecured noninterest-bearing notes payable from T. Michael May, Senior
Vice President of Hawaiian Electric Company, Inc. (HECO), due and collected
in 1993.
(d) Unsecured noninterest-bearing note payable from Warren H. W. Lee, President
of Hawaii Electric Light Co., Inc. (HELCO), which note was extended and is
currently due in 1995 or upon demand, if he ceases to be employed by HELCO.
69
76
Hawaiian Electric Industries, Inc.
and Hawaiian Electric Company, Inc.
SCHEDULE II - AMOUNTS RECEIVABLE FROM RELATED PARTIES
AND UNDERWRITERS, PROMOTERS AND EMPLOYEES
OTHER THAN RELATED PARTIES
December 31, 1992
================================================================================================================
Col. A Col. B Col. C Col. D Col. E
- ----------------------------------------------------------------------------------------------------------------
Deductions
Balance at ---------- Balance at end of period
beginning Amounts ------------------------
Name of debtor of period Additions collected Current Noncurrent
- ----------------------------------------------------------------------------------------------------------------
(in thousands)
Ainalani Associates (a).............. $20,101 $ 397 $20,498 $ -- $ --
Baldwin*Malama Joint Venture (b)..... 302 1,395 350 1,347 --
HECO Executive Officer (c) .......... -- 290 -- 290 --
HELCO Executive Officer (d) ......... -- 120 -- 120 --
------- ------- ------- ------ ------
$20,403 $ 2,202 $20,848 $1,757 $ --
======= ======= ======= ====== ======
(a) On August 17, 1992, Malama Mohala Corp. (MMO), a wholly owned subsidiary
of Malama Pacific Corp. (MPC), acquired MDT BF Limited Partnership's
(MDT) 50% interest in Ainalani Associates (Ainalani), a joint venture
between MMO and MDT. Prior to the acquisition of MDT's interest in
Ainalani, MMO accounted for its investment in Ainalani under the equity
method. Subsequent to the acquisition, MMO consolidated all of Ainalani's
assets and liabilities. Consequently, $19,497,000 of accounts
receivable from Ainalani was eliminated as a result of the acquisition.
Thus, only $1,001,000 of cash was actually collected.
(b) Two unsecured promissory notes payable, due December 31, 1992, extension of
maturity dates are being arranged. Interest rate is based on Bank of
Hawaii's prime rate plus 2% for the first note and Bank of Hawaii's prime
rate plus 0.75% for the second note.
(c) Two unsecured noninterest-bearing notes payable from T. Michael May, Senior
Vice President of Hawaiian Electric Company, Inc. (HECO), due in 1993 or
upon demand, if he ceases to be employed by HECO.
(d) Unsecured noninterest-bearing note payable from Warren H. W. Lee, President
of Hawaii Electric Light Co., Inc. (HELCO), due in 1993 or upon demand, if
he ceases to be employed by HELCO.
70
77
Hawaiian Electric Industries, Inc.
SCHEDULE II--AMOUNTS RECEIVABLE FROM RELATED PARTIES
AND UNDERWRITERS, PROMOTERS AND EMPLOYEES
OTHER THAN RELATED PARTIES
December 31, 1991
================================================================================================================
Col. A Col. B Col. C Col. D Col. E
- ----------------------------------------------------------------------------------------------------------------
Deductions
Balance at ----------- Balance at end of period
beginning Amounts -------------------------
Name of debtor of period Additions collected Current Noncurrent
- ----------------------------------------------------------------------------------------------------------------
(in thousands)
Ainalani Associates ............... $20,403 $7,803 $8,105 $5,133(a) $14,968(b)
Sunrise Estates Joint Venture ..... 100 193 293 -- --
Baldwin*Malama Joint Venture (c) .. -- 368 66 302 --
Makakilo Cliffs Joint Venture ...... 827 226 1,053 -- --
-------- ------ ------ ------ -------
$21,330 $8,590 $9,517 $5,435 $14,968
======= ====== ======= ====== =======
(a) Promissory note payable, due July 1992 with an option to extend to July
1993. Interest rate is based on Bank of Hawaii's prime rate plus 3.5%.
Promissory note is secured by real estate, the joint venture's interest in
a partnership and contract rights.
(b) Promissory note payable, due in 1995, except certain events may trigger
earlier partial repayment. Interest rate is based on Bank of Hawaii's
prime rate plus 2%. Promissory note is secured by real estate, the joint
venture's interest in a partnership and contract rights.
(c) Unsecured promissory note payable, due December 1992. Interest rate is
based on Bank of Hawaii's prime rate plus 2%.
71
78
Hawaiian Electric Industries, Inc.
SCHEDULE III -- CONDENSED FINANCIAL INFORMATION OF REGISTRANT
HAWAIIAN ELECTRIC INDUSTRIES, INC. (PARENT COMPANY)
BALANCE SHEETS
December 31,
----------------------
(in thousands) 1993 1992
- ----------------------------------------------------------------------
ASSETS
Cash and equivalents.......................... $ 32,383 $ 5,999
Short-term notes receivable from subsidiaries. 28,455 37,211
Accounts receivable........................... 12,559 3,239
Other investments............................. 809 809
Property, plant and equipment, net............ 2,874 3,250
Other assets.................................. 2,191 24,618
Investment in wholly owned subsidiaries,
at equity................................... 825,066 734,508
-------- --------
$904,337 $809,634
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Accounts payable.............................. $ 14,741 28,138
Short-term borrowings......................... -- 36,185
Long-term debt, net........................... 200,500 186,000
Deferred income taxes......................... 5,106 3,692
Unamortized tax credits....................... 36 39
Other......................................... 40,926 7,839
-------- --------
261,309 261,893
-------- --------
Stockholders' equity
Common stock.................................. 514,710 409,257
Retained earnings............................. 128,318 138,484
-------- --------
643,028 547,741
-------- --------
$904,337 $809,634
======== ========
Note to Balance Sheets
Long-term debt, net, consisted of the
following:
Promissory notes, 6.3% - 7.6%, due in
variuos years through 2003.................. $113,000 $ 76,000
Promissory notes, 8.2% - 9.9%, due in
various years through 2011.................. 87,500 108,500
Promissory note, 5.3%, due 1993.............. -- 1,500
-------- --------
$200,500 $186,000
======== ========
As of December 31, 1993, HEI guaranteed debt of its subsidiaries and affiliates
amounting to $13 million. In addition, in connection with the acquisition of
HIG, HEI has agreed to indemnify HIG with respect to 1985 and 1986 claims that
exceed an aggregate of $10.8 million up to $12.8 million and 50% of the claims
that exceed an aggregate of $12.8 million up to $13.8 million. HEIDI has made a
provision for the estimated liability related to these claims. Pursuant to the
settlement agreement with the Rehabilitator of HIG entered into in early 1994,
which agreement is subject to court approval, HEI will be relieved of all
obligations with respect to the indemnification of HIG.
The aggregate payments of principal required on long-term debt subsequent to
December 31, 1993 are $26 million in 1994, $1 million in 1995, $37 million in
1996, $51 million in 1997, $21 million in 1998 and $65 million thereafter.
72
79
Hawaiian Electric Industries, Inc.
SCHEDULE III--CONDENSED FINANCIAL INFORMATION OF REGISTRANT (continued)
HAWAIIAN ELECTRIC INDUSTRIES, INC. (PARENT COMPANY)
STATEMENTS OF INCOME
Years ended December 31,
-------------------------------------------
(in thousands) 1993 1992 1991
- -------------------------------------------------------------------------------------------
REVENUES.......................................... $ 3,353 $ 1,884 $ 3,491
Equity in income from continuing
operations of subsidiaries...................... 74,764 68,156 58,409
-------- -------- ---------
78,117 70,040 61,900
-------- -------- ---------
EXPENSES:
Operating, administrative and general............. 6,897 1,637 573
Taxes, other than income taxes.................... 226 193 196
Depreciation and amortization of property,
plant and equipment............................. 569 660 383
-------- --------- ---------
7,692 2,490 1,152
-------- --------- ---------
70,425 67,550 60,748
Interest expense.................................. 18,355 12,641 9,943
-------- --------- ---------
INCOME FROM CONTINUING OPERATIONS
BEFORE INCOME TAX BENEFIT........................ 52,070 54,909 50,805
Income tax benefit................................ 9,614 6,806 4,815
-------- --------- ---------
Income from continuing operations................. 61,684 61,715 55,620
Loss from discontinued operations................. (13,025) (73,297) (794)
-------- --------- ---------
NET INCOME (LOSS)................................. $48,659 $(11,582) $54,826
======== ========= =========
73
80
Hawaiian Electric Industries, Inc.
SCHEDULE III -- CONDENSED FINANCIAL INFORMATION OF REGISTRANT (continued)
HAWAIIAN ELECTRIC INDUSTRIES, INC. (PARENT COMPANY)
STATEMENTS OF CASH FLOWS
Years ended December 31,
----------------------------------------------
(in thousands) 1993 1992 1991
- --------------------------------------------------------------------------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES
Income from continuing operations............................ $61,684 $61,715 $55,620
Adjustments to reconcile income from continuing operations to
net cash provided by operating activities
Equity in income from continuing operations of subsidiaries (74,764) (68,156) (58,409)
Common stock dividends received from subsidiaries........... 53,305 33,884 36,873
Depreciation and amortization of property, plant and
equipment................................................. 569 660 383
Other amortization.......................................... 294 282 238
Deferred income taxes and tax credits, net.................. 232 825 3,144
Changes in assets and liabilities
Decrease (increase) in accounts receivable............... (9,320) (1,787) 92
Increase (decrease) in accounts payable.................. (13,397) 25,268 1,292
Changes in other assets and liabilities.................. 39,783 (15,447) (4,475)
-------- ------- -------
58,386 37,244 34,758
Cash flows from discontinued operations ...................... (2,525) -- 750
-------- ------- -------
NET CASH PROVIDED BY OPERATING ACTIVITIES..................... 55,861 37,244 35,508
-------- ------- -------
CASH FLOWS FROM INVESTING ACTIVITIES
Net decrease (increase) in short-term notes receivable from
subsidiaries................................................ 8,756 1,024 (4,590)
Capital expenditures.......................................... (193) (535) (2,912)
Additional investments in subsidiaries........................ (65,000) (56,967) (61,000)
Other......................................................... 50 -- 16
-------- ------- -------
(56,387) (56,478) (68,486)
Net investment in discontinued operations..................... -- (24,751) (6,750)
-------- ------- -------
NET CASH USED IN INVESTING ACTIVITIES......................... (56,387) (81,229) (75,236)
-------- ------- -------
CASH FLOWS FROM FINANCING ACTIVITIES
Net decrease in short-term borrowings with original maturities
of three months or less...................................... (185) (15,463) (42,935)
Proceeds from other short-term borrowings..................... -- 36,000 --
Repayment of other short-term borrowings...................... (36,000) -- --
Proceeds from issuance of long-term debt...................... 37,000 50,000 85,000
Repayment of long-term debt................................... (22,500) -- (17,000)
Net proceeds from issuance of common stock.................... 88,658 18,248 51,415
Common stock dividends........................................ (42,012) (39,214) (36,877)
Other......................................................... 1,949 413 125
-------- ------- -------
NET CASH PROVIDED BY FINANCING ACTIVITIES..................... 26,910 49,984 39,728
-------- ------- -------
Net increase in cash and equivalents.......................... 26,384 5,999 --
Cash and equivalents, beginning of year....................... 5,999 -- --
-------- ------- -------
CASH AND EQUIVALENTS, END OF YEAR............................. $ 32,383 $ 5,999 $ --
======== ======= =======
Supplemental disclosures of noncash activities:
In December 1992, the Board of Directors of HEI adopted a resolution which
converted $9.5 million of long-term debt of HERS to equity. HEI assumed the
$9.5 million of HERS' long-term debt in a noncash transaction.
Common stock dividends reinvested by stockholders in HEI common stock in
noncash transactions amounted to $17 million in 1993, $15 million in 1992 and
$14 million in 1991.
74
81
Hawaiian Electric Industries, Inc.
SCHEDULE V--PROPERTY, PLANT AND EQUIPMENT
Year ended December 31, 1993
=============================================================================================================
Col. A Col. B Col. C Col. D Col. E Col. F
- -------------------------------------------------------------------------------------------------------------
Other
changes,
Balance at net Balance at
beginning of Additions Retire- add end of
(in thousands) period at Cost(a) ments (deduct)(b) period
- -------------------------------------------------------------------------------------------------------------
HAWAIIAN ELECTRIC COMPANY,
INC. AND SUBSIDIARIES
ELECTRIC PLANT IN SERVICE
Land............................ $ 23,256 $ 289 $ 776 $ (167) $ 22,602
Production...................... 543,212 58,292 277 (1) 601,226
Transmission and distribution... 1,100,144 113,843 5,330 23,164 (c) 1,231,821
General......................... 98,361 18,573 1,633 (161) 115,140
---------- -------- ------- -------- ----------
1,764,973 190,997 8,016 22,835 1,970,789
Plant acquisition adjustment.... 823 -- -- (52) 771
Construction work in progress... 107,030 24,704 -- (5,391) 126,343
Property held for future use.... 4,578 53 -- -- 4,631
---------- -------- ------- -------- ----------
1,877,404 215,754 8,016 17,392 2,102,534
OTHER COMPANIES................... 125,508 7,741 13,875 (729) 118,645
---------- -------- ------- -------- ----------
TOTAL HAWAIIAN ELECTRIC
INDUSTRIES, INC. AND
SUBSIDIARIES..................... $2,002,912 $223,495 $21,891 $16,663 $2,221,179
========== ======== ======= ======== ==========
(a) Additions at cost include a $7.0 million allowance for equity funds
used during construction and noncash contributions in aid of
construction received in 1993 with an estimated fair value of $2.8
million.
(b) Includes transfers, adjustments and other charges and credits.
(c) Includes the estimated fair value of noncash contributions in aid of
construction of $23 million received in prior years, but recognized
in 1993.
75
82
Hawaiian Electric Industries, Inc.
SCHEDULE V--PROPERTY, PLANT AND EQUIPMENT
December 31, 1992 and 1991
============================================================================
Col. A Col. F(a) Col. F(a)
- ----------------------------------------------------------------------------
Balance at Balance at
December 31, December 31,
(in thousands) 1992(b) 1991(c)
- ----------------------------------------------------------------------------
HAWAIIAN ELECTRIC COMPANY, INC. AND
SUBSIDIARIES
ELECTRIC PLANT IN SERVICE
Land................................ $ 23,256 $ 24,071
Production.......................... 543,212 478,270
Transmission and distribution....... 1,100,144 995,989
General............................. 98,361 85,688
---------- ----------
1,764,973 1,584,018
Plant acquisition adjustment....... 823 910
Construction work in progress...... 107,030 114,974
Property held for future use....... 4,578 1,316
---------- ----------
1,877,404 1,701,218
OTHER COMPANIES......................... 125,508 118,563
---------- ----------
TOTAL HAWAIIAN ELECTRIC INDUSTRIES, INC.
AND SUBSIDIARIES...................... $2,002,912 $1,819,781
========== ==========
(a) Neither additions nor retirements in 1992 and 1991 amounted to more
than 10% of the ending balance as of the end of each of those respective
years.
(b) Additions at cost and retirements amounted to $197.4 million and $13.4
million, respectively, in 1992. The additions include a $6.8 million
allowance for equity funds used during construction.
(c) Additions at cost and retirements amounted to $161.5 million and $6.9
million respectively, in 1991. The additions include a $4.0 million
allowance for equity funds used during construction.
76
83
Hawaiian Electric Company, Inc.
SCHEDULE V--PROPERTY, PLANT AND EQUIPMENT
Year ended December 31, 1993
=============================================================================================================
Col. A Col. B Col. C Col. D Col. E Col. F
- -------------------------------------------------------------------------------------------------------------
Other
changes,
Balance at net Balance at
beginning Additions Retire- add end of
(in thousands) of period at Cost(a) ments (deduct)(b) period
- -------------------------------------------------------------------------------------------------------------
ELECTRIC PLANT IN SERVICE
Land............................. $ 23,256 $ 289 $ 776 $ (167) $ 22,602
Production....................... 543,212 58,292 277 (1) 601,226
Transmission and distribution.... 1,100,144 113,843 5,330 23,164(c) 1,231,821
General.......................... 98,361 18,573 1,633 (161) 115,140
---------- -------- ------- ------- ----------
1,764,973 190,997 8,016 22,835 1,970,789
Plant acquisition adjustment..... 823 -- -- (52) 771
Construction work in progress.... 107,030 24,704 -- (5,391) 126,343
Property held for future use..... 4,578 53 -- -- 4,631
---------- -------- ------- ------- ----------
$1,877,404 $215,754 $ 8,016 $17,392 $2,102,534
========== ======== ======= ======= ==========
(a) Additions at cost include a $7.0 million allowance for equity funds
used during construction and noncash contributions in aid of construction
received in 1993 with an estimated fair value of $2.8 million.
(b) Includes transfers, adjustments and other charges and credits.
(c) Includes the estimated fair value of noncash contributions in aid of
construction of $23 million received in prior years, but recognized in
1993.
77
84
Hawaiian Electric Company, Inc.
SCHEDULE V--PROPERTY, PLANT AND EQUIPMENT
Year ended December 31, 1992
=============================================================================================================
Col. A Col. B Col. C Col. D Col. E Col. F
- -------------------------------------------------------------------------------------------------------------
Other
changes,
Balance at net Balance at
beginning Additions Retire- add end of
(in thousands) of period at Cost(a) ments (deduct)(b) period
- -------------------------------------------------------------------------------------------------------------
ELECTRIC PLANT IN SERVICE
Land............................. $ 24,071 $ 131 $ 1,202 $ 256 $ 23,256
Production....................... 478,270 66,476 1,475 (59) 543,212
Transmission and distribution.... 995,989 111,048 6,659 (234) 1,100,144
General.......................... 85,688 14,701 1,951 (77) 98,361
---------- -------- ------- ------- ----------
1,584,018 192,356 11,287 (114) 1,764,973
Plant acquisition adjustment..... 910 -- -- (87) 823
Construction work in progress.... 114,974 (8,057) -- 113 107,030
Property held for future use..... 1,316 4,024 -- (762) 4,578
---------- -------- ------- ------- ----------
$1,701,218 $188,323 $11,287 $(850) $1,877,404
========== ======== ======= ======= ==========
(a) Additions at cost include a $6.8 million allowance for equity funds
used during construction.
(b) Includes transfers, adjustments and other charges and credits.
78
85
Hawaiian Electric Company, Inc.
SCHEDULE V--PROPERTY, PLANT AND EQUIPMENT
December 31, 1991
================================================================
Col. A Col. F(a)
- ----------------------------------------------------------------
Balance at
December 31,
(in thousands) 1991(b)
- ----------------------------------------------------------------
ELECTRIC PLANT IN SERVICE
Land..................................... $ 24,071
Production............................... 478,270
Transmission and distribution............ 995,989
General.................................. 85,688
----------
1,584,018
Plant acquisition adjustment............. 910
Construction work in progress............ 114,974
Property held for future use............. 1,316
----------
$1,701,218
==========
(a) Neither additions nor retirements in 1991 amounted to more than 10% of
the ending balance as of December 31, 1991.
(b) Additions at cost and retirements amounted to $145.9 million and $4.9
million, respectively, in 1991. The additions include a $4.0 million
allowance for equity funds used during construction.
79
86
Hawaiian Electric Industries, Inc.
and Hawaiian Electric Company, Inc.
SCHEDULE VI--ACCUMULATED DEPRECIATION, DEPLETION AND
AMORTIZATION OF PROPERTY, PLANT AND EQUIPMENT
Year ended December 31, 1993
=============================================================================================================
Col. A Col. B Col. C Col. D Col. E Col. F
- -------------------------------------------------------------------------------------------------------------
Additions Other
Balance at charged to changes Balance at
beginning of costs and Retire- add end of
(in thousands) period expenses ments (deduct)(a) period
- -------------------------------------------------------------------------------------------------------------
HAWAIIAN ELECTRIC COMPANY,
INC. AND SUBSIDIARIES
ELECTRIC PLANT IN SERVICE
Production........................ $224,726 $19,645 $ 463 $ (71) $243,837
Transmission and distribution..... 324,010 44,357 5,348 (2,867) 360,152
General........................... 36,430 5,140 1,632 145 40,083
-------- ------- ------- ------- --------
585,166 69,142 7,443 (2,793) 644,072
Less--retirement work in progress. 2,135 -- -- 707 2,842
-------- ------- ------- ------- --------
583,031 69,142 7,443 (3,500) 641,230
-------- ------- ------- ------- --------
OTHER COMPANIES..................... 32,053 8,354 3,447 -- 36,960
-------- ------- ------- ------- --------
TOTAL HAWAIIAN ELECTRIC INDUSTRIES,
INC. AND SUBSIDIARIES............. $615,084 $77,496 $10,890 $(3,500) $678,190
======== ======= ======= ======= ========
(a) Gross salvage on plant retired, cost of removal, transfers and
adjustments.
80
87
Hawaiian Electric Industries, Inc.
and Hawaiian Electric Company, Inc.
SCHEDULE VI--ACCUMULATED DEPRECIATION, DEPLETION AND
AMORTIZATION OF PROPERTY, PLANT AND EQUIPMENT
Year ended December 31, 1992
=============================================================================================================
Col. A Col. B Col. C Col. D Col. E Col. F
- -------------------------------------------------------------------------------------------------------------
Additions
charged Other
Balance at to costs changes Balance at
beginning of and Retire- add end of
(in thousands) period expenses ents (deduct)(a) period
- -------------------------------------------------------------------------------------------------------------
HAWAIIAN ELECTRIC COMPANY,
INC. AND SUBSIDIARIES
ELECTRIC PLANT IN SERVICE
Production........................ $209,957 $16,625 $ 1,475 $ (381) $224,726
Transmission and distribution..... 295,078 38,566 6,659 (2,975) 324,010
General........................... 33,665 4,646 1,951 70 36,430
-------- ------- ------- ------- --------
538,700 59,837 10,085 (3,286) 585,166
Less--retirement work in progress. 2,148 -- -- (13) 2,135
-------- ------- ------- ------- --------
536,552 59,837 10,085 (3,273) 583,031
-------- ------- ------- ------- --------
OTHER COMPANIES..................... 25,086 8,072 1,114 9 32,053
-------- ------- ------- ------- --------
TOTAL HAWAIIAN ELECTRIC INDUSTRIES,
INC. AND SUBSIDIARIES............. $561,638 $67,909 $11,199 $(3,264) $615,084
======== ======= ======= ======= ========
(a) Gross salvage on plant retired, cost of removal, transfers and
adjustments.
81
88
Hawaiian Electric Industries, Inc.
and Hawaiian Electric Company, Inc.
SCHEDULE VI--ACCUMULATED DEPRECIATION, DEPLETION AND
AMORTIZATION OF PROPERTY, PLANT AND EQUIPMENT
Year ended December 31, 1991
=============================================================================================================
Col. A Col. B Col. C Col. D Col. E Col. F
- -------------------------------------------------------------------------------------------------------------
Additions Other
Balance at charged to changes Balance at
beginning costs and Retire- add end of
(in thousands) of period expenses ments (deduct)(a) period
- -------------------------------------------------------------------------------------------------------------
HAWAIIAN ELECTRIC COMPANY, INC.
AND SUBSIDIARIES
ELECTRIC PLANT IN SERVICE
Production........................ $194,527 $15,738 $ 167 $ (141) $209,957
Transmission and distribution..... 266,352 34,348 3,415 (2,207) 295,078
General........................... 30,535 4,355 1,289 64 33,665
-------- ------- ------- ------- --------
491,414 54,441 4,871 (2,284) 538,700
Less--retirement work in progress. 1,457 -- -- 691 2,148
-------- ------- ------- ------- --------
489,957 54,441 4,871 (2,975) 536,552
-------- ------- ------- ------- --------
OTHER COMPANIES..................... 18,346 7,271 525 (6) 25,086
-------- ------- ------- ------- --------
TOTAL HAWAIIAN ELECTRIC INDUSTRIES,
INC. AND SUBSIDIARIES............. $508,803 $61,712 $ 5,396 $(2,981) $561,638
======== ======= ======= ======= ========
(a) Gross salvage on plant retired, cost of removal, transfers and
adjustments.
82
89
Hawaiian Electric Industries, Inc.
and Hawaiian Electric Company, Inc.
SCHEDULE VIII--VALUATION AND QUALIFYING ACCOUNTS
Years ended December 31, 1993, 1992 and 1991
=============================================================================================================
Col. A Col. B Col. C Col. D Col. E
- -------------------------------------------------------------------------------------------------------------
Additions
------------------------
Charged
Balance to costs
at begin- and Charged Balance
ning of other to at end of
(in thousands) period expenses accounts Deductions period
- -----------------------------------------------------------------------------------------------------------
1993
Allowance for uncollectible
accounts
Hawaiian Electric Company, Inc.
and subsidiaries................ $1,120 $1,521 $815 $2,099 $1,357
Other companies.................. 172 155 1 108 220
------ ------ ---- ------ ------
$1,292 $1,676 $816(a) $2,207(b) $1,577
====== ====== ==== ====== ======
Allowance for uncollectible
interest (ASB).................. $ 482 $ -- $ -- $ 141 $ 341
====== ====== ==== ====== ======
Allowance for losses for
loans receivable (ASB).......... $5,157 $ 779 $ -- $ 622(c) $5,314
====== ====== ==== ====== ======
1992
Allowance for uncollectible
accounts
Hawaiian Electric Company, Inc.
and subsidiaries............... $1,032 $1,246 $820 $1,978 $1,120
Other companies................. 214 104 2 148 172
------ ------ ---- ------ ------
$1,246 $1,350 $822(a) $2,126(b) $1,292
====== ====== ==== ====== ======
Allowance for uncollectible
interest (ASB).................. $ 45 $ 437 $ -- $ -- $ 482
====== ====== ==== ====== ======
Allowance for losses for loans
receivable (ASB)................ $3,818 $1,494 $ -- $ 155(c) $5,157
====== ====== ==== ====== ======
1991
Allowance for uncollectible
accounts
Hawaiian Electric Company, Inc.
and subsidiaries .............. $ 250 $3,019 $769 $3,006 $1,032
Other companies................ 148 95 2 31 214
------ ------ ---- ------ ------
$ 398 $3,114 $771(a) $3,037(b) $1,246
====== ====== ==== ====== ======
Allowance for uncollectible
interest (ASB)................. $ 43 $ 2 $ -- $ -- $ 45
====== ====== ==== ====== ======
Allowance for losses for
loans receivable (ASB)......... $3,387 $ 641 $ -- $ 210(c) $3,818
====== ====== ==== ====== ======
(a) Primarily bad debts recovered.
(b) Bad debts charged off.
(c) Net charge-offs.
83
90
Hawaiian Electric Industries, Inc.
SCHEDULE IX--SHORT-TERM BORROWINGS
Years ended December 31, 1993, 1992 and 1991
===================================================================================================================
Col. A Col. B Col. C Col. D Col. E Col. F
- -------------------------------------------------------------------------------------------------------------------
Maximum
Weighted amount Average Weighted
average outstanding amount average
interest rate during the outstanding interest rate
Balance at at end of period during the during the
(dollars in thousands) end of period period (month end) period (d) period (e)
- -------------------------------------------------------------------------------------------------------------------
1993
Commercial paper (a).............. $28,928 3.62% $185,264 $110,748 3.44%
Bank loan-HEI (b)................. -- -- 43,600 18,063 4.41
Bank loans-MPC (c)................ 11,488 7.35 15,494 12,062 7.33
1992
Commercial paper (a).............. 122,176 4.11 165,775 79,107 4.03
Bank loan-HEI (b)................. 36,000 4.56 36,000 197 4.56
Bank loan-MPC (c)................. 2,035 7.50 4,076 2,903 7.83
1991
Commercial paper (a).............. 29,420 5.26 123,172 67,218 6.78
(a) Unsecured promissory notes sold through dealers with a term of three
months or less.
(b) Borrowed under a formal credit arrangement with a bank with a term of
six months.
(c) Borrowed under formal credit agreements which, as of yearend, had
maturities of less than twelve months.
(d) Computed by multiplying the principal amounts of short-term borrowings
by the number of days during which those borrowings were outstanding and
dividing the sum of the products by the number of days in the year.
(e) Computed by dividing interest expense on short-term borrowings for the
period by the average amount of short-term borrowings outstanding during
the period.
84
91
Hawaiian Electric Company, Inc.
SCHEDULE IX--SHORT-TERM BORROWINGS
Years ended December 31, 1993, 1992 and 1991
===================================================================================================================
Col. A Col. B Col. C Col. D Col. E Col. F
- -------------------------------------------------------------------------------------------------------------------
Maximum
Weighted amount Average Weighted
average outstanding amount average
interest rate during the outstanding interest rate
Balance at at end of period during the during the
(dollars in thousands) end of period period (month end) period (b) period (c)
- -------------------------------------------------------------------------------------------------------------------
1993
Commercial paper (a).............. $ 28,928 3.62% $146,069 $101,914 3.44%
1992
Commercial paper (a).............. 122,176 4.11 133,275 76,152 4.04
1991
Commercial paper (a).............. 29,420 5.26 78,817 54,688 6.55
(a) Unsecured promissory notes sold through dealers with a term of three
months or less.
(b) Computed by multiplying the principal amounts of short-term borrowings
by the number of days during which those borrowings were outstanding and
dividing the sum of the products by the number of days in the year.
(c) Computed by dividing interest expense on short-term borrowings for the
period by the average amount of short-term borrowings outstanding during
the period.
85
92
Hawaiian Electric Industries, Inc.
and Hawaiian Electric Company, Inc.
SCHEDULE X--SUPPLEMENTARY INCOME STATEMENT INFORMATION
Years ended December 31, 1993, 1992 and 1991
- ---------------------------------------------------------------------------------------
Col. A Col. B
- ---------------------------------------------------------------------------------------
Charged to costs and expenses
-----------------------------------
(in thousands) 1993 1992 1991
- ---------------------------------------------------------------------------------------
MAINTENANCE AND REPAIRS
Hawaiian Electric Company, Inc. and subsidiaries... $44,281 $44,653 $39,463
Other companies.................................... 7,395 7,709 7,103
------- ------- -------
$51,676 $52,362 $46,566
======= ======= =======
DEPRECIATION AND AMORTIZATION
Depreciation and amortization of property, plant
and equipment
Hawaiian Electric Company, Inc. and subsidiaries
Electric utility plant and equipment............ $69,142 $59,837 $54,441
Less
Vehicle depreciation (charged to overhead
clearing accounts)........................... 1,316 1,112 1,062
Amortization of contributions in aid of
construction................................. 7,565 4,875 4,342
Amortization of regulatory assets............. 4,260 -- --
Depreciation charged to others................ 39 (9) 30
Other......................................... 2 3 2
------- ------- -------
55,960 53,856 49,005
Other companies................................. 8,354 8,072 7,271
------- ------- -------
Total depreciation and amortization of property,
plant and equipment............................ 64,314 61,928 56,276
------- ------- -------
Other amortization
ASB goodwill and other intangibles............. 4,210 3,677 3,681
Other ASB acquisition adjustments.............. (1,981) (2,129) (1,696)
Net discounts on loans receivable and mortgage-
backed securities............................. (6,256) (2,516) (1,695)
Net discounts and premiums on investments...... 293 317 288
Other, net
Hawaiian Electric Company, Inc. and
subsidiaries.............................. 803 955 1,204
Other companies ............................ 308 298 251
------- ------- -------
Total other amortization...................... (2,623) 602 2,033
------- ------- -------
$61,691 $62,530 $58,309
======= ======= =======
TAXES, OTHER THAN PAYROLL AND INCOME TAXES
Hawaiian Electric Company, Inc. and subsidiaries
Public service company tax.................... $51,527 $45,781 $42,793
Franchise tax................................. 21,725 18,919 18,561
Public utility commission fee................. 2,189 1,916 1,854
------- ------- -------
75,441 66,616 63,208
Other companies.................................. 5,582 4,742 4,320
------- ------- -------
$81,023 $71,358 $67,528
======= ======= =======
86
93
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 Stock Transfer 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(ii) HEI's By-Laws (Exhibit 4(c) to Registration No. 33-21761).
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 Indenture, dated as of October 15, 1988, between HEI and
Citibank, N.A., as Trustee (Exhibit 4 to Registration
No. 33-25216).
4.3 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).
4.4 Officers' Certificate dated as of November 9, 1988, pursuant
to Sections 102 and 301 of the Indenture, dated as of October
15, 1988, between HEI and Citibank, N.A., as Trustee,
establishing Medium-Term Notes, Series A (Exhibit 4.2 to
HEI's Annual Report on Form 10-K for the fiscal year ended
December 31, 1988, File No.1-8503).
4.5 Pricing Supplements Nos. 1 through 11 to the Registration
Statement on Form S-3 of HEI (Registration No. 33-25216)
filed in connection with the sale of Medium-Term Notes,
Series A (filed under Rule 424(b) in connection with
Registration No. 33-25216).
4.6 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).
4.7 Indenture, dated as of May 1, 1989, from ASB to Citibank,
N.A., as Trustee (Exhibit 4 to HEI's Quarterly Report on Form
10-Q for the quarter ended June 30, 1989, File No. 1-8503).
4.8 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).
4.9 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).
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).
87
94
EXHIBIT NO. DESCRIPTION
- ----------- -----------
10.2 Agreement to Purchase Assets and Assume Liabilities between
ASB and First Nationwide Bank dated May 24, 1990 (Exhibit
10(d) to HEI's Quarterly Report on Form 10-Q for the quarter
ended June 30, 1990, File No. 1-8503).
10.3 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).
10.3(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).
10.4 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).
10.5 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).
10.6 Retirement Benefit Agreement--Andrew T. F. Ing and HEI
(Exhibit 10(b) to HEI's Annual Report on Form 10-K for the
fiscal year ended December 31, 1987, File No. 1-8503).
10.7 1987 Stock Option and Incentive Plan of HEI as amended and
restated effective April 21, 1992 (Exhibit A to Proxy
Statement of HEI, dated March 6, 1992, for the Annual Meeting
of Stockholders, File No. 1-8503).
10.8 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).
10.9 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).
10.10 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).
10.11 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).
10.12 Non-employee 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).
10.13 HEI 1990 Non-employee 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).
10.14 HEI Non-employee 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).
10.15 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).
88
95
EXHIBIT NO. DESCRIPTION
- ----------- -----------
10.16 Contract of Sale between HECO and Malama Waterfront Corp.,
dated December 20, 1989, for the sale and purchase of the
Honolulu Power Plant Parcels, Iwilei Tank Farm Parcel and the
buildings, structures and other improvements (Exhibit 10.18
to HEI's Annual Report on Form 10-K for the fiscal year ended
December 31, 1989, File No. 1-8503).
10.16(a) First Amendment to Contract of Sale by and between HECO and
Malama Waterfront Corp., dated September 25, 1990, amending
the Contract of Sale between HECO and Malama Waterfront
Corp., dated December 20, 1989, for the sale and purchase of
the Honolulu Power Plant Parcels, Iwilei Tank Farm Parcel and
the buildings, structures and other improvements (Exhibit
10(d) to HEI's Quarterly Report on Form 10-Q for the quarter
ended September 30, 1990, File No. 1-8503).
10.17 Agreement among HIG, Hawaiian Underwriters Insurance Company,
Limited and United National Insurance Company, Limited and
Zenith Insurance Company dated June 3, 1987 (Exhibit 10.12 to
HEI's Annual Report on Form 10-K for the fiscal year ended
December 31, 1988, File No. 1-8503).
10.18 Agreement by and among HIG, Hawaiian Insurance Company, Ltd.,
and United National Insurance Company, Ltd. and Zenith
Insurance Company dated December 31, 1986 (Exhibit 10.13 to
HEI's Annual Report on Form 10-K for the fiscal year ended
December 31, 1988, File No. 1-8503).
10.18(a) Letter of Interpretation dated February 24, 1987, to
Agreement by and among HIG, Hawaiian Insurance Company, Ltd.,
and United National Insurance Company, Ltd. and Zenith
Insurance Company dated December 31, 1986 (Exhibit 10.13(a)
to HEI's Annual Report on Form 10-K for the fiscal year ended
December 31, 1988, File No. 1-8503).
10.19 Acquisition Agreement among HEI, IU International
Corporation, and C. Brewer, Ltd. dated as of June 5, 1987
(Exhibit 2 to HEI's Current Report on Form 8-K dated June 8,
1987, File No. 1-8503).
*10.20 Settlement Agreement and General Release made and entered
into on February 10, 1994, by and between the Insurance
Commissioner as Rehabilitator/Liquidator, the HIG Group,
HIGA, HEI, HEIDI and others.
*11 Computation of Earnings Per Share of Common Stock. Filed
herein as page 95.
*12(a) Computation of Ratio of Earnings to Fixed Charges. Filed
herein as pages 96 and 97.
*13(a) Pages 27 to 70 of HEI's 1993 Annual Report to Stockholders
(with the exception of the data incorporated by reference in
Part I, Part II and Part III, no other data appearing in the
1993 Annual Report to Stockholders is to be deemed filed as
part of this Form 10-K Annual Report).
*21(a) List of Subsidiaries of HEI. Filed herein as page 99.
*22 HEI's Definitive Proxy Statement, File No. 1-8503, prepared
for the April 19, 1994 Annual Meeting of Stockholders (with
the exception of the data incorporated by reference in Part I
and Part III, no other data appearing in the Proxy Statement
is to be deemed filed as part of this Form 10-K Annual Report).
*23 Consent of Independent Auditors. Filed herein as page 101.
*99(a) Annual Report on Form 11-K for the HEI 401-K Retirement
Savings Plan for the year ended December 31, 1993.
89
96
EXHIBIT NO. DESCRIPTION
- ----------- -----------
HECO:
3.1 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).
3.1(a) 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).
3.1(b) 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).
3.2 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 $20,000,000 Notes, 5.15% Series Due 1996.
*4.6 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.
*4.7 Officers' Certificate dated as of December 22, 1993, pursuant
to Sections 102 and 301 of the Indenture dated as of
December 1, 1993 among MECO, HECO, as guarantor, and The
Bank of New York, as Trustee, establishing the $10,000,000 Notes,
5.15% Series Due 1996.
*4.8 Officers' Certificate dated as of December 22, 1993, pursuant
to Sections 102 and 301 of the Indenture dated as of
December 1, 1993 among HELCO, HECO, as guarantor, and The
Bank of New York, as Trustee, establishing the $10,000,000 Notes,
4.85% Series Due 1995.
10.1(a) Contract between HECO and the United States of America, dated
January 31, 1945, with respect to the use of the then-owned
lands of HECO at Waiau, island of Oahu (Exhibit 13(c) to
Registration No. 2-23986).
10.1(b) Contract between HECO and the United States of America, dated
January 31, 1945, with respect to the use of certain lands at
Waiau, island of Oahu, acquired or to be acquired, subsequent
to January 31, 1945 (Exhibit 13(d) to Registration
No. 2-23986).
90
97
EXHIBIT NO. DESCRIPTION
- ----------- -----------
10.2 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).
10.2(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).
10.2(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).
10.2(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).
10.2(d) Agreement to Extend the "Cancellation Window" in the Kalaeloa
Power Purchase Agreement dated June 21, 1990 (Exhibit 10(e)
to HECO's Quarterly Report on Form 10-Q for the quarter ended
June 30, 1990, File No. 1-4955).
10.2(e) 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).
10.3 Purchase Power 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).
10.3(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).
10.3(b) Amendment No. 1 to the Purchase Power 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).
10.3(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).
10.4 Power Purchase Agreement between HELCO and Davies Hamakua
Sugar Company, dated October 15, 1981 (Exhibit 10.6 to HECO's
Annual Report on Form 10-K for the fiscal year ended
December 31, 1988, File No. 1-4955).
10.4(a) Letter agreement between HELCO and Hamakua Sugar Company,
Inc. dated May 18, 1987, amending the Power Purchase
Agreement between HELCO and Davies Hamakua Sugar Company
dated October 15, 1981 (Exhibit 10.6(a) to HECO's Annual
Report on Form 10-K for the fiscal year ended December 31,
1988, File No. 1-4955).
*10.4(b) Revised and restated amendment No. 2 to Power Purchase
Agreement between HELCO and Hamakua Sugar Company, Inc. dated
June 17, 1993, amending the Power Purchase Agreement between
HELCO and Davies Hamakua Sugar Company dated October 15,
1981.
91
98
EXHIBIT NO. DESCRIPTION
- ----------- -----------
10.5 Power Purchase Agreement between HELCO and Hilo Coast
Processing Company dated May 31, 1988 (included in Exhibit 10
to HECO's Quarterly Report on Form 10-Q for the quarter ended
June 30, 1988, File No. 1-4955).
10.6 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).
10.6(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).
10.6(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).
10.7 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).
10.7(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, amending
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).
10.8 Purchase Power Contract between HECO and the City and County
of Honolulu dated March 10, 1986 (HRRV Agreement)
(Exhibit 10.9 to HECO'S Annual Report on Form 10-K for the fiscal
year ended December 31, 1989, File No. 1-4955).
10.8(a) Firm capacity amendment, dated April 8, 1991, to purchase
power contract, dated March 10, 1986, by and between HECO and
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).
10.9 Purchase Power Contract between MECO and Zond Pacific, Inc.,
dated May 24, 1991 (Exhibit 10 to HECO's Quarterly Report on
Form 10-Q for the quarter ended June 30, 1991, File No.
1-4955).
10.10 Low Sulfur Fuel Oil Supply Contract by and between CUSA and
HECO dated May 29, 1990 (Exhibit 10(a) to HECO's Quarterly
Report on Form 10-Q for the quarter ended June 30, 1990, File
No. 1-4955).
10.10(a) Second amendment, dated September 9, 1993, to Low Sulfur Fuel
Oil Supply Contract, dated May 29, 1990, by and between CUSA
and HECO (Exhibit 10(a) to HECO's Quarterly Report on Form
10-Q for the quarter ended September 30, 1993, File No. 1-4955).
10.10(b) Inter-Island Industrial Fuel Oil and Diesel Fuel Contract by
and between CUSA and HECO, MECO, HELCO, HTB and YB dated as
of September 23, 1991 (Exhibit 10(a) to HECO's Quarterly
Report on Form 10-Q for the quarter ended September 30, 1991,
File No. 1-4955).
92
99
EXHIBIT NO. DESCRIPTION
- ----------- -----------
10.10(c) Third amendment, dated October 1, 1993, to Inter-Island
Industrial Fuel Oil and Diesel Fuel Contract dated September
23, 1991, by and between CUSA and HECO, MECO, HELCO, HTB and
YB (Exhibit 10(b) to HECO's Quarterly Report on Form 10-Q for
the quarter ended September 30, 1993, File No. 1-4955).
10.10(d) Facilities and Operating Contract by and between CUSA and
HECO dated as of May 29, 1990 (Exhibit 10.10(b) to HECO's
Annual Report Form 10-K for the fiscal year ended
December 31, 1991, File No. 1-4955).
10.10(e) Second amendment, dated September 21, 1993, to the Facilities
and Operating Contract dated May 29, 1990, by and between
CUSA and HECO (Exhibit 10(c) to HECO's Quarterly Report on
Form 10-Q for the quarter ended September 30, 1993,
File No. 1-4955).
10.11 Low Sulfur Fuel Oil Supply Contract between HIRI (succeeded
by BHP) and HECO dated April 25, 1990 (Exhibit 10(b) to
HECO's Quarterly Report on Form 10-Q for the quarter ended
June 30, 1990, File No. 1-4955).
10.11(a) First amendment, dated October 1, 1993, to Low Sulfur Fuel
Oil Supply Contract, dated April 25, 1990, between BHP and
HECO (Exhibit 10(d) to HECO's Quarterly Report on Form 10-Q
for the quarter ended September 30, 1993, File No. 1-4955).
10.11(b) Inter-Island Industrial Fuel Oil and Diesel Fuel Contract by
and between HIRI (succeeded by BHP) and HECO, MECO and HELCO
dated September 23, 1991 (Exhibit 10(b) to HECO's Quarterly
Report on Form 10-Q for the quarter ended September 30, 1991,
File No. 1-4955).
10.11(c) Second amendment, dated October 7, 1993, to Inter-Island
Industrial Fuel Oil and Diesel Fuel Contract, dated
September 23, 1991 by and between BHP and HECO, MECO and HELCO
(Exhibit 10(e) to HECO's Quarterly Report on Form 10-Q for the
quarter ended September 30, 1993, File No. 1-4955).
10.12 Low Sulfur Fuel Oil Sale/Purchase Contract between HECO and
C. Itoh & Co. (America), Inc. dated June 7, 1990 (Exhibit
10(c) to HECO'S Quarterly Report on Form 10-Q for the quarter
ended June 30, 1990, File No. 1-4955).
*10.13 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.
10.15 U.S.A. v. HECO Civil No. 88-00730 ACK: (1) Complaint for
Injunctive Relief and Civil Penalties (Clean Air Act, 42
U.S.C. Section 7401 et seq.); (2) Notice of Lodging of
Proposed Consent Decree; and (3) Consent Decree (Exhibit 10(b)
to HECO's Quarterly Report on Form 10-Q for the quarter ended
September 30, 1988, File No. 1-4955).
10.16 U.S.A. v. MECO Civil No. 88-00731 DAE: (1) Complaint for
Injunctive Relief and Civil Penalties (Clean Air Act, 42
U.S.C. Section 7401 et seq.); (2) Notice of Lodging of
Proposed Consent Decree; and (3) Consent Decree (Exhibit
10(c) to HECO's Quarterly Report on Form 10-Q for the
quarter ended September 30, 1988, File No. 1-4955).
10.17 HECO Non-employee 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).
10.18 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).
93
100
EXHIBIT NO. DESCRIPTION
- ----------- -----------
10.19 Contract of Sale between HECO and Malama Waterfront Corp.,
dated December 20, 1989, for the sale and purchase of the
Honolulu Power Plant Parcels, Iwilei Tank Farm Parcel and the
buildings, structures and other improvements (Exhibit 10.18
to HEI's Annual Report on Form 10-K for the fiscal year ended
December 31, 1989, File No. 1-8503).
10.19(a) First Amendment to Contract of Sale by and between HECO and
Malama Waterfront Corp., dated September 25, 1990, amending
the Contract of Sale between HECO and Malama Waterfront
Corp., dated December 20, 1989, for the sale and purchase of
the Honolulu Power Plant Parcels, Iwilei Tank Farm Parcel and
the buildings, structures and other improvements (Exhibit
10(d) to HEI's Quarterly Report on Form 10-Q for the quarter
ended September 30, 1990, File No. 1-8503).
*11 Computation of Earnings Per Share of Common Stock. See note
on page 2 of HECO's 1993 Annual Report to Stockholder
attached as Exhibit 13(b) hereto.
*12(b) Computation of Ratio of Earnings to Fixed Charges. Filed
herein as page 98.
*13(b) Pages 2 to 31 and 33 of HECO's 1993 Annual Report to
Stockholder (with the exception of the data incorporated by
reference in Part I, Part II and Part III, no other data
appearing in the 1993 Annual Report to Stockholder is to be
deemed filed as part of this Form 10-K Annual Report).
*21(b) List of Subsidiaries of HECO. Filed herein as page 100.
*99(b) Reconciliation of electric utility operating income per HEI
and HECO Consolidated Statements of Income. Filed herein as
page 102.
94
101
Hawaiian Electric Industries, Inc.
EXHIBIT 11 -- COMPUTATION OF EARNINGS PER SHARE
OF COMMON STOCK
Years ended December 31, 1993 1992,1991, 1990 AND 1989
(in thousands,
except per share amounts) 1993 1992 1991 1990 1989
---- ---- ---- ---- ----
Net income (loss)
Continuing operations............... $61,684 $ 61,715 $55,620 $42,895 $58,130
Discontinued operations............. (13,025) (73,297) (794) 707 5,945
-------- -------- -------- ------- -------
$48,659 $(11,582) $54,826 $43,602 $64,075
======== ======== ======== ======= =======
Weighted average number
of common shares
outstanding........................ 25,938 24,275 22,882 21,559 20,960
======== ======== ======== ======= =======
Earnings (loss) per
common share
Continuing operations............... $ 2.38 $ 2.54 $ 2.43 $ 1.99 $ 2.77
Discontinued operations............. (0.50) (3.02) (0.03) 0.03 0.29
-------- -------- -------- ------- -------
$ 1.88 $ (0.48) $ 2.40 $ 2.02 $ 3.06
======== ======== ======== ======= =======
Note: The dilutive effect of stock options is not material.
95
102
Hawaiian Electric Industries, Inc.
EXHIBIT 12(a) -- COMPUTATION OF
RATIO OF EARNINGS TO FIXED CHARGES
Years ended December 31, 1993, 1992, 1990 AND 1989
1993 1992 1991
----------------- ----------------- -----------------
(dollars in thousands) (1) (2) (1) (2) (1) (2)
- -------------------------------------------------------------------------------------------------------
FIXED CHARGES
Total interest charges
The Company (3)..................... $ 68,254 $145,905 $ 67,559 $161,756 $69,957 $168,691
Proportionate share of fifty-
percent-owned persons............. 564 564 1,051 1,051 1,875 1,875
Interest component of rentals......... 3,944 3,944 3,254 3,254 2,231 2,231
Pre-tax preferred stock dividend
requirements of subsidiaries........ 11,018 11,018 9,606 9,606 10,449 10,449
--------- --------- --------- --------- --------- ---------
Total fixed charges................... $ 83,780 $161,431 $ 81,470 $175,667 $ 84,512 $183,246
========= ========= ========= ========= ========= =========
EARNINGS
Pre-tax income from continuing
operations.......................... $108,770 $108,770 $ 91,244 $ 91,244 $ 87,953 $ 87,953
Undistributed earnings from less
than fifty-percent-owned person..... -- -- (244) (244) (278) (278)
Fixed charges, as shown............... 83,780 161,431 81,470 175,667 84,512 183,246
Interest capitalized
The Company......................... (3,881) (3,881) (2,104) (2,104) (1,945) (1,945)
Proportionate share of fifty-
percent-owned persons.............. (408) (408) (803) (803) (1,875) (1,875)
--------- --------- --------- --------- --------- ---------
EARNINGS AVAILABLE FOR FIXED
CHARGES............................. $188,261 $265,912 $169,563 $263,760 $168,367 $267,101
========= ========= ========= ========= ========= =========
RATIO OF EARNINGS TO FIXED
CHARGES............................. 2.25 1.65 2.08 1.50 1.99 1.46
========= ========= ========= ========= ========= =========
(1) Excluding interest on ASB deposits.
(2) Including interest on ASB deposits.
(3) Total interest charges exclude interest on nonrecourse debt from
leveraged leases which is not included in interest expense in HEI's
consolidated statements of income.
96
103
Hawaiian Electric Industries, Inc.
EXHIBIT 12(a) -- COMPUTATION OF
RATIO OF EARNINGS TO FIXED CHARGES
Years ended December 31, 1993, 1992, 1991, 1990 and 1989--Continued
1990 1989
------------------------------ -----------------------------
(dollars in thousands) (1) (2) (1) (2)
- -------------------------------------------------------------------------------------------------
FIXED CHARGES
Total interest charges
The Company (3).............. $ 76,897 $162,753 $ 76,078 $145,587
Proportionate share of
fifty-percent-owned
persons.................... 406 406 -- --
Interest component of rentals.. 2,197 2,197 1,895 1,895
Pre-tax preferred stock
dividend requirements
of subsidiaries.............. 11,450 11,450 6,684 6,684
--------- ---------- --------- ---------
TOTAL FIXED CHARGES............ $ 90,950 $176,806 $ 84,657 $154,166
========= ========= ========= ========
EARNINGS
Pre-tax income from continuing
operations................... $ 74,088 $ 74,088 $ 85,968 $ 85,968
Undistributed earnings from less
than fifty-percent owned
person....................... 7 7 (66) (66)
Fixed charges, as shown........ 90,950 176,806 84,657 154,166
Interest capitalized
The Company.................. (4,360) (4,360) (1,854) (1,854)
Proportionate share of fifty-
percent-owned persons...... (406) (406) -- --
--------- --------- --------- ---------
EARNINGS AVAILABLE FOR FIXED
CHARGES...................... $160,279 $246,135 $168,705 $238,214
========= ========= ========= =========
RATIO OF EARNINGS TO FIXED
CHARGES...................... 1.76 1.39 1.99 1.55
========= ========= ========= =========
(1) Excluding interest on ASB deposits.
(2) Including interest on ASB deposits.
(3) Total interest charges exclude interest on nonrecourse debt from
leveraged leases which is not included in interest expense in HEI's
consolidated statements of income.
97
104
Hawaiian Electric Company, Inc.
EXHIBIT 12(b) -- COMPUTATION OF
RATIO OF EARNINGS TO FIXED CHARGES
Years ended December 31, 1993, 1992, 1991, 1990 and 1989
(dollars in thousands) 1993 1992 1991 1990 1989
- ------------------------------------------------------------------------------------------------
FIXED CHARGES
Total interest charges.............. $ 35,287 $ 33,011 $ 33,248 $ 30,874 $ 30,027
Interest component of rentals....... 970 1,070 1,130 1,341 1,189
Pretax preferred stock dividend
requirements of subsidiaries...... 3,425 3,117 3,409 3,490 2,208
--------- --------- --------- --------- ---------
TOTAL FIXED CHARGES................. $ 39,682 $ 37,198 $ 37,787 $ 35,705 $ 33,424
========= ========= ========= ========= =========
EARNINGS
Income before preferred stock
dividends of HECO................. $ 56,126 $ 53,678 $ 46,210 $ 48,484 $ 52,833*
Fixed charges, as shown............. 39,682 37,198 37,787 35,705 33,424
Income taxes (see note below)....... 36,897 23,843 23,816 23,927 23,940
Interest capitalized on AFUDC for
borrowed funds.................... (3,869) (2,095) (1,307) (1,375) (1,220)
--------- --------- --------- --------- ---------
EARNINGS AVAILABLE FOR FIXED
CHARGES........................... $128,836 $112,624 $106,506 $106,741 $108,977
========= ========= ========= ========= =========
RATIO OF EARNINGS TO FIXED
CHARGES........................... 3.25 3.03 2.82 2.99 3.26
========= ========= ========= ========= =========
NOTE:
Income taxes is comprised of the
following
Income tax expense relating to
operating income for
regulatory purposes............. $ 37,007 $ 26,254 $ 24,137 $ 24,145 $ 26,258
Income tax benefit relating to
nonoperating income or loss..... (110) (2,411) (321) (218) (2,318)
--------- --------- --------- --------- ---------
$ 36,897 $ 23,843 $ 23,816 $ 23,927 $ 23,940
========= ========= ========= ========= =========
* Does not reflect corporate-level segment cost and tax allocation policy
adjustments in 1990.
98
105
Hawaiian Electric Industries, Inc.
EXHIBIT 21(a) -- LIST OF SUBSIDIARIES
The following is a list of all subsidiary corporations of the registrant as of
March 21, 1994:
Name Place of incorporation
- ----------------------------------------------------------------------------------------------
Hawaiian Electric Company, Inc., including
subsidiaries Maui Electric Company, Limited and
Hawaii Electric Light Company, Inc............................... State of Hawaii
HEI Investment Corp............................................... State of Hawaii
Lalamilo Ventures, Inc............................................ State of Hawaii
Malama Pacific Corp., including subsidiaries Malama Project-I,
Inc., ML Holdings, Ltd., Malama Waterfront Corp., Malama
Property Investment Corp., Malama Development Corp.,
Malama Makakilo Corp., Malama Realty Corp., Malama Elua Corp.,
Malama Kolu Corp., Malama Hoaloha Corp., Malama Mohala Corp.
and State of Hawaii Baldwin*Malama (a limited partnership in
which Malama Development Corp. is the sole general partner)....... State of Hawaii
Hawaiian Tug & Barge Corp., including subsidiary Young Brothers,
Limited........................................................... State of Hawaii
HEI Diversified, Inc., including subsidiaries:
(1) American Savings Bank, F.S.B. and its subsidiaries, State of Hawaii (except
American Savings Investment Services Corp., ASB Service American Savings Bank,
Corporation, AdCommunications, Inc. and Associated F.S.B., which is federally
Mortgage, Inc................................................. chartered)
(2) The Hawaiian Insurance & Guaranty Co., Limited and its
subsidiaries, United National Insurance Company, Ltd.,
Hawaiian Underwriters Insurance Co., Ltd., Guardian
Life Underwriters, Inc., Guardian Financial Corporation
and Independent Adjustment, Inc. (HEIDI is the holder of
record of the common stock of HIG, but HIG is currently
in rehabilitation proceedings and it is expected that
HEIDI will relinquish all ownership rights in HIG and its
subsidiaries during 1994.)..................................... State of Hawaii
99
106
Hawaiian Electric Company, Inc.
EXHIBIT 21(b) -- LIST OF SUBSIDIARIES
The following is a list of all subsidiary corporations of the registrant as of
March 21, 1994:
Name Place of incorporation
- ------------------------------------------------------------------------------------
Maui Electric Company, Limited....................... State of Hawaii
Hawaii Electric Light Company, Inc................... State of Hawaii
100
107
[KPMG Peat Marwick letterhead]
HEI EXHIBIT 23
The Board of Directors
Hawaiian Electric Industries, Inc.:
We consent to incorporation by reference in Registration Statement Nos.
33-52520 and 33-58820 on Form S-3 and in Registration Statement Nos. 33-65234
and 33-43892 on Form S-8 of Hawaiian Electric Industries, Inc. of our report
dated February 11, 1994, relating to the consolidated balance sheets of
Hawaiian Electric Industries, Inc. and subsidiaries as of December 31, 1993 and
1992, 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,
1993, which report is incorporated by reference in the 1993 annual report on
Form 10-K of Hawaiian Electric Industries, Inc. Our report refers to changes
in the method of accounting for income taxes and postretirement benefits other
than pensions effective January 1, 1993. We also consent to incorporation by
reference of our report dated February 11, 1994 relating to the financial
statement schedules of Hawaiian Electric Industries, Inc. in the aforementioned
1993 annual report on Form 10-K, which report is included in said Form 10-K.
/s/ KPMG Peat Marwick
Honolulu, Hawaii
March 22, 1994
101
108
Hawaiian Electric Company, Inc.
EXHIBIT 99(b) -- RECONCILIATION OF ELECTRIC UTILITY OPERATING
INCOME PER HEI AND HECO CONSOLIDATED
STATEMENTS OF INCOME
Years ended December 31,
----------------------------------------------
(in thousands) 1993 1992 1991
- -------------------------------------------------------------------------------------------
Operating income from regulated and
nonregulated activities before income
taxes (per HEI Consolidated
Statements of Income)...................... $119,565 $103,841 $100,256
Deduct:
Income taxes on regulated activities....... (37,007) (26,254) (24,137)
Revenues from nonregulated activities...... (5,100) (1,761) (996)
Add:
Expenses from nonregulated activities...... 627 1,213 804
-------- --------- ---------
Operating income from regulated activities
after income taxes (per HECO Consolidated
Statements of Income)...................... $78,085 $ 77,039 $ 75,927
======== ========= =========
102
109
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 A. OYER
------------------------------ ----------------------------
Robert F. Mougeot Paul A. Oyer
Financial Vice President and Financial Vice President,
Chief Financial Officer of HEI Treasurer and Director of HECO
(Principal Financial Officer of HEI) (Principal Financial Officer of HECO)
Date: March 22, 1994 Date: March 22, 1994
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 their capacities at March 22, 1994. 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/ HARWOOD D. WILLIAMSON Group Vice President - Utility Companies and
- ------------------------------ Director of HEI
Harwood D. Williamson President and Director of HECO
(Chief Executive Officer of HECO)
/s/ EDWARD J. BLACKBURN Group Vice President - Diversified Companies
- ------------------------------ of HEI
Edward J. Blackburn
/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 A. OYER Financial Vice President, Treasurer, and
- ------------------------------ Director of HECO
Paul A. Oyer (Principal Financial Officer of HECO)
103
110
SIGNATURES (continued)
Signature Title
- --------- -----
/s/ ERNEST T. SHIRAKI Controller of HECO
- ------------------------------ (Principal Accounting Officer of HECO)
Ernest T. Shiraki
/s/ EDWIN L. CARTER Director of HEI
- ------------------------------
Edwin L. Carter
/s/ JOHN D. FIELD Director of HEI
- ------------------------------
John D. Field
/s/ RICHARD HENDERSON Director of HEI and HECO
- ------------------------------
Richard Henderson
/s/ BEN F. KAITO Director of HEI and HECO
- ------------------------------
Ben F. Kaito
/s/ MILDRED D. KOSAKI Director of HECO
- ------------------------------
Mildred D. Kosaki
- ------------------------------ Director of HEI
Victor Hao Li
/s/ BILL D. MILLS Director of HEI
- -------------------------------
Bill D. Mills
- ------------------------------- Director of HEI
A. Maurice Myers
/s/ RUTH M. ONO Director of HEI
- ------------------------------
Ruth M. Ono
104
111
SIGNATURES (continued)
Signature Title
- --------- -----
/s/ DIANE J. PLOTTS Director of HEI and HECO
- ------------------------------
Diane J. Plotts
/s/ OSWALD K. STENDER Director of HEI
- ------------------------------
Oswald K. Stender
- ------------------------------ Director of HEI
Kelvin H. Taketa
- ------------------------------ Director of HEI and HECO
Thurston Twigg-Smith
/s/ JEFFREY N. WATANABE Director of HEI
- ------------------------------
Jeffrey N. Watanabe
/s/ PAUL C. YUEN Director of HECO
- ------------------------------
Paul C. Yuen
105