1
HEI Exhibit 13(a)
SELECTED FINANCIAL DATA
Hawaiian Electric Industries, Inc. and subsidiaries
Years ended December 31 1993 1992 1991 1990 1989
---------- ---------- ---------- -------- --------
(dollars in thousands, except per share amounts)
RESULTS OF OPERATIONS
Revenues. . . . . . . . . . . . . . . . . . . . . $1,142,170 $1,031,383 $993,242 $928,702 $810,828
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
========== ========== ========== ======== ========
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
========== ========== ========== ======== ========
Return on average common equity . . . . . . . . . 8.2% (2.1)% 10.0% 8.7% 13.5%
FINANCIAL POSITION *
Total assets . . . . . . . . . . . . . . . . . . $4,521,592 $4,142,768 $3,716,872 $3,502,023 $2,968,382
Deposit liabilities of the savings bank subsidiary $2,091,583 $2,032,869 $1,615,361 $1,511,291 $1,094,558
Advances from Federal Home Loan Bank
to the savings bank subsidiary . . . . . . . . $289,674 $194,099 $258,593 $205,716 $253,410
Long-term debt, net . . . . . . . . . . . . . . . $697,836 $582,475 $525,641 $463,362 $430,385
Preferred stock of electric utility subsidiaries
Subject to mandatory redemption . . . . . . . $46,730 $48,920 $50,665 $52,210 $53,655
Not subject to mandatory redemption . . . . . $48,293 $36,293 $36,293 $36,293 $36,293
Stockholders' equity. . . . . . . . . . . . . . . $643,028 $547,741 $581,446 $510,543 $493,014
COMMON STOCK DATA
Book value per common share * . . . . . . . . . . $23.23 $22.12 $24.36 $23.29 $23.18
Market price range per common share
High. . . . . . . . . . . . . . . . . . . . . $38.88 $44.63 $37.88 $40.00 $40.25
Low. . . . . . . . . . . . . . . . . . . . . $31.00 $34.75 $29.38 $27.25 $29.38
Yearend . . . . . . . . . . . . . . . . . . . $35.88 $37.25 $36.75 $31.63 $40.25
Market price to book value per common share * . . 154% 168% 151% 136% 174%
Price earnings ratio ** . . . . . . . . . . . . . 15.1 14.7 15.1 15.9 14.5
Dividends per common share . . . . . . . . . . . $2.29 $2.25 $2.21 $2.17 $2.07
Dividend payout ratio . . . . . . . . . . . . . . 121% NM 92% 107% 68%
Dividend payout ratio-continuing operations . . . 95% 88% 91% 109% 75%
Common shares outstanding (thousands)
Weighted average. . . . . . . . . . . . . . . 25,938 24,275 22,882 21,559 20,960
Geographic distribution of ownership *
State of Hawaii *** . . . . . . . . . . . 6,969 6,663 6,399 6,100 5,610
Other . . . . . . . . . . . . . . . . . . 20,706 18,099 17,468 15,818 15,656
---------- ---------- ---------- -------- --------
Total shares outstanding. . . . . . . 27,675 24,762 23,867 21,918 21,266
========== ========== ========== ======== ========
Stockholders by geographic distribution *
State of Hawaii *** . . . . . . . . . . . . . 22,092 21,305 20,441 18,053 17,350
Other. . . . . . . . . . . . . . . . . . . . 18,374 16,891 15,598 13,883 13,946
---------- ---------- ---------- -------- --------
Total stockholders . . . . . . . . . . . 40,466 38,196 36,039 31,936 31,296
========== ========== ========== ======== ========
NM Not meaningful.
* At December 31.
** Calculated using yearend market price per common share divided by
earnings per common share from continuing operations.
*** Does not include depository and brokerage accounts, which may contain
additional shares beneficially owned by Hawaii stockholders.
See Note 2, "Discontinued operations" in the "Notes to Consolidated Financial
Statements" for a discussion of the Company's former property and casualty
insurance business and wind energy business.
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SEGMENT FINANCIAL INFORMATION
Hawaiian Electric Industries, Inc. and subsidiaries
Years ended December 31 1993 1992 1991
(in thousands) ---------- ---------- --------
REVENUES
Electric utility . . . . . . . . . . . . . . . . $ 879,110 $ 778,690 $740,632
Savings bank . . . . . . . . . . . . . . . . . . 199,734 202,995 198,776
Other . . . . . . . . . . . . . . . . . . . . . . 63,326 49,698 53,834
---------- ---------- --------
$1,142,170 $1,031,383 $993,242
========== ========== ========
OPERATING INCOME (LOSS)
Electric utility.. . . . . . . . . . . . . . . . $119,565 $103,841 $100,256
Savings bank . . . . . . . . . . . . . . . . . . 44,117 31,327 25,215
Other . . . . . . . . . . . . . . . . . . . . . . (6,044) 1,051 7,585
-------- -------- --------
$157,638 $136,219 $133,056
======== ======== ========
DEPRECIATION AND AMORTIZATION OF
PROPERTY, PLANT AND EQUIPMENT
Electric utility. . . . . . . . . . . . . . . . . $55,960 $53,856 $49,005
Savings bank . . . . . . . . . . . . . . . . . . 3,167 2,852 2,466
Other . . . . . . . . . . . . . . . . . . . . . . 5,187 5,220 4,805
------- ------- -------
$64,314 $61,928 $56,276
======= ======= =======
CAPITAL EXPENDITURES
Electric utility . . . . . . . . . . . . . . . . $212,916 $188,323 $145,898
Savings bank . . . . . . . . . . . . . . . . . . 3,920 4,828 5,099
Other . . . . . . . . . . . . . . . . . . . . . . 3,822 4,283 10,463
-------- -------- --------
$220,658 $197,434 $161,460
======== ======== ========
IDENTIFIABLE ASSETS (AT DECEMBER 31)
Electric utility. . . . . . . . . . . . . . . . . $1,703,276 $1,501,330 $1,318,023
Savings bank. . . . . . . . . . . . . . . . . . . 2,618,485 2,461,694 2,175,789
Other . . . . . . . . . . . . . . . . . . . . . . 199,831 179,072 170,968
---------- ---------- ----------
4,521,592 4,142,096 3,664,780
Net assets of discontinued operations . . . . . . -- 672 52,092
---------- ---------- ----------
$4,521,592 $4,142,768 $3,716,872
========== ========== ==========
See Note 3, "Segment financial information" in the "Notes to Consolidated
Financial Statements" for a description of each segment.
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion should be read in conjunction with the consolidated
financial statements and accompanying notes.
RESULTS OF OPERATIONS
Hawaiian Electric Industries, Inc. (HEI) and its subsidiaries (collectively,
the Company) reported net income of $1.88 per share in 1993, due to the results
of the major operating segments--the electric utility and the savings bank,
partly offset by losses in the "Other" segment. Also included in the 1993
results is a loss from the discontinued insurance business of $0.58 per share,
partly offset by a gain from the discontinued wind energy operations of $0.08
per share. In early 1994, HEI, the Insurance Commissioner of the State of
Hawaii, the Hawaii Insurance Guaranty Association (HIGA) and others signed an
agreement, which is subject to court approval, to settle the lawsuit filed by
the Insurance Commissioner and HIGA against HEI, HEI Diversified, Inc. (HEIDI)
and certain officers and directors, resulting in a charge, net of income tax
benefit, to discontinued operations of $15 million for 1993. Earnings per
share from continuing operations for 1993 were down 6% to $2.38 per share
compared to $2.54 per share in 1992 due primarily to an increase in the
weighted average number of common shares outstanding.
Many factors affected HEI's 1993 consolidated results, including Hawaii's
economic environment. Hawaii's economic growth rate has fallen below
the U.S. economic growth rate in the past 3 years. Worldwide competition,
restructuring in the airline industry and economic sluggishness, particularly
in California and Japan, are affecting tourism, the state's largest industry.
As growth in Hawaii has moderated and conservation efforts have increased,
Hawaiian Electric Company, Inc. (HECO) and its subsidiaries currently estimate
that the kilowatthour sales average annual growth rate will be approximately
1.7% for the five-year period 1994 through 1998. The electric utilities have
proposed demand-side management programs which will encourage conservation and
have asked the PUC for continued recovery of their fixed costs and the costs of
implementing the demand-side management programs and for shareholder incentives.
As the credit rating agencies have noted--regulatory, economic and
technological changes are exposing the electric utility industry to increased
competition. The electric utilities' response to these competitive challenges
and their ability to obtain timely and adequate rate relief will be key in 1994
and beyond. It is also uncertain whether two of the state's major industries--
tourism and construction--will recover in 1994. Economic forecasts for
growth in Hawaii real gross state product in 1994 range from negative 2% to
no growth.
Over the longer term, it is expected that Hawaii's economy will grow, driven
by rebounding tourism markets and the resumption of construction and foreign
investment. By providing essential services in Hawaii, HEI management believes
that the Company is well positioned to take advantage of the state's projected
longer-term economic growth.
CONSOLIDATED
% % %
1993 CHANGE 1992 change 1991 change
------ ------ ------ ------ ------ ------
(in millions, except per share amounts)
Revenues . . . . . . . . . . . . . . . . . . . . $1,142 11 $1,031 4 $ 993 7
Operating income . . . . . . . . . . . . . . . . 158 16 136 2 133 14
Net income (loss)
Continuing operations . . . . . . . . . . . . . $ 61.7 -- $ 61.7 11 $ 55.6 30
Discontinued operations. . . . . . . . . . . . . (13.0) 82 (73.3) NM (0.8) NM
------ -- ------- -- ------ --
$ 48.7 NM $(11.6) NM $ 54.8 26
====== == ======= == ====== ==
Earnings (loss) per common share
Continuing operations . . . . . . . . . . . . . $ 2.38 (6) $ 2.54 5 $ 2.43 22
Discontinued operations . . . . . . . . . . . . (0.50) 83 (3.02) NM (0.03) NM
------ -- ------- -- ------ --
$ 1.88 NM $ (0.48) NM $ 2.40 19
====== == ======= == ====== ==
Weighted average number of common shares
outstanding. . . . . . . . . . . . . . . . . . . 25.9 7 24.3 6 22.9 6
Effective tax rate for continuing operations . . 43.3% 32.4% 36.8%
NM Not meaningful.
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o 1993 results include $15.0 million in net losses, or $0.58 per share,
from the discontinued operations of The Hawaiian Insurance & Guaranty Co.,
Limited and its subsidiaries (the HIG Group), the Company's property and
casualty insurance business currently in rehabilitation proceedings, and $2.0
million in gains, or $0.08 per share, from the discontinued operations of
Hawaiian Electric Renewable Systems, Inc. (HERS), the Company's former wind
energy business. Pursuant to a settlement agreement signed in early 1994, upon
final court approval, HEI will pay $32.0 million to the Insurance Commissioner
as Rehabilitator/Liquidator of the HIG Group 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. 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.
1993 income from continuing operations was flat when compared to 1992
and included increases in net income from the savings bank and the electric
utility companies, offset by a decrease in net income from the freight
transportation subsidiaries and an increase in net loss from HEI corporate. In
1993, the savings bank's interest rate spread increased 54 basis points
compared to 1992. Also in 1993, the freight transportation companies
incurred losses on the sale of their heavy fuel oil shipping assets
and have been negatively impacted by the slowing in Hawaii's construction
activity and the economy in general. As of January 1, 1993, HEI refined its
method of identifying costs chargeable to its subsidiaries, resulting in the
retention of a greater amount of expense at the HEI level.
"Interest expense--electric utility and other" increased 13% due to
increased borrowings at the electric utilities and at the corporate level,
partially offset by lower interest rates. Also in 1993, the effective tax rate
applicable to continuing operations increased significantly as explained below.
o 1992 results include $73.3 million, or $3.02 per share, in losses from
the discontinued operations of the HIG Group and HERS. Higher revenues and
earnings from continuing operations resulted from increases at the electric
utility companies and the savings bank, partly offset by decreases in the
"Other" segment. In 1992, the electric utilities on the islands of Oahu and
Hawaii obtained interim and final rate relief, the electric utilities'
kilowatthour sales increased 3% and the savings bank's interest rate spread
increased 19 basis points. "Interest expense--electric utility and other,"
applicable to continuing operations, increased 8% due to increased borrowings
at the electric utilities and at the corporate level, partially offset by
lower interest rates.
o 1991 results reflect the change in the method used by the electric
utility companies to estimate unbilled kilowatthour sales and revenues which
added $3.8 million to net income. Excluding $11.7 million of investment
writedowns (net of taxes) in 1990, 1991 earnings per share from continuing
operations would have been 10 cents lower than 1990, primarily due to lower
earnings from the electric utility and real estate companies, partially offset
by higher earnings from the savings bank. In 1991, the electric utilities
waited for needed rate relief, the real estate company was faced with a
slowdown in the market and the entire Company was affected by the Gulf war and
recession on the U.S. mainland. The 7% increase in 1991 consolidated revenues
from continuing operations was due to higher revenues from all segments.
"Interest expense--electric utility and other," applicable to continuing
operations, increased 5% primarily due to increased electric utility companies'
borrowings.
o The effective tax rate applicable to continuing operations was higher
in 1993 than 1992 and 1991 primarily due to the 1% federal income tax rate
increase retroactive to January 1, 1993, the recapture of tax benefits due to
the sale of a barge acquired with cash from the Maritime Administration Capital
Construction Fund (CCF) and the effects of the adoption of Statement of
Financial Accounting Standards (SFAS) No. 109. SFAS No. 109 does not allow
net-of-tax accounting for the "Allowance for Funds Used During Construction"
(AFUDC). This results in higher income taxes due to the "gross-up" of AFUDC for
income taxes, but does not impact net income. SFAS No. 109 also changes the
accounting for financial reporting purposes of Hawaiian Tug & Barge Corp.'s
(HTB) contributions to the CCF. Income tax expense was higher in 1993 because
CCF contributions are now treated as temporary (rather than permanent)
differences between book and tax income. The effective tax rate was relatively
low in 1992 due primarily to the utilization of capital loss carryforwards.
o Dividends per common share increased in 1993 to $2.29, from $2.25 in
1992 and $2.21 in 1991. Dividends have been higher each year for the past
30 years.
30
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Following is a general discussion of revenues, expenses and operating income by
business segment. Segment information is also shown in "Segment Financial
Information" on page 28 and in the "Notes to Consolidated Financial
Statements."
ELECTRIC UTILITY
% % %
1993 CHANGE 1992 change 1991 change
----- ------ ----- ------ ----- ------
(in millions, except per barrel amounts
and number of employees)
Revenues (1). . . . . . . . . . . . . . . . . $879 13 $779 5 $741 5
Expenses
Fuel oil . . . . . . . . . . . . . . . . . 213 (5) 226 (18) 276 (17)
Purchased power . . . . . . . . . . . . . . 259 50 173 62 107 131
Other (2) . . . . . . . . . . . . . . . . . 287 4 276 7 258 12
Operating income. . . . . . . . . . . . . . . 120 15 104 4 100 --
Allowance for funds used
during construction . . . . . . . . . . . 10.8 22 8.9 67 5.3 (10)
Net income . . . . . . . . . . . . . . . . . 51.7 5 49.2 18 41.6 (5)
Average price per barrel of fuel oil (1). . . 21.09 7 19.69 (14) 22.79 (8)
Kilowatthour sales. . . . . . . . . . . . . . 8,325 -- 8,332 3 8,090(3) 2
Number of employees . . . . . . . . . . . . . 2,226 5 2,118 5 2,015 3
(1) The rate schedules of the electric utilities include energy cost adjustment
clauses under which electric rates are adjusted for changes in the weighted
average price paid for fuel oil and certain components of purchased power, and
the relative amounts of company generated and purchased power.
(2) HEI charges to the electric utilities for general management,
administrative and support services totaled $2.3 million, $5.6 million and $5.1
million in 1993, 1992 and 1991, respectively. As of January 1, 1993, HEI
refined its method of identifying costs chargeable to its subsidiaries.
In 1993, the electric utilities established a regulatory asset for vacation
earned by employees, but not yet taken. The recognition of the regulatory asset
reduced 1993 expenses on a one-time basis by $4.0 million.
(3) Excludes the effect of the change in the method of estimating unbilled
kilowatthour sales and revenues.
o In 1993, the electric utilities' revenues increased 13% compared to
1992 revenues due in part to rate relief received in late 1992, primarily to
recover purchased power expenses. Kilowatthour sales of electricity for the
year were down 0.1% compared to 1992 primarily because of cooler weather, a
downturn in the state economy and conservation. Lower fuel oil expense was the
result of fewer kilowatthours generated, as purchased power increased, partly
offset by higher fuel oil prices. Higher purchased power expense was due to the
full-year effect of power purchased from a major independent power producer,
AES Barbers Point, Inc., which had commenced commercial operations in September
1992. The 4% increase in other expenses was partly due to a 4% increase in
depreciation as a result of plant additions and a 13% increase in taxes, other
than income taxes. Operating income for 1993 increased 15% compared to 1992 due
in part to rate relief, lower management service fees from HEI and the one-time
effect of the establishment of a regulatory asset for vacation earned by
employees, but not yet taken. For rate-making purposes, vacation pay is being
recovered in rates as the vacation time is taken. As of December 31, 1993, the
regulatory asset for vacation earned, but not yet taken, amounted to $5.5
million. The recognition of the regulatory asset increased operating income by
$4.0 million and net income by $2.4 million for the year ended December 31,
1993. Consolidated HECO's return on average common equity for 1993 was 9.7%,
compared to 10.5% for 1992 and 10.3% for 1991.
o 1992 revenues increased over 1991 revenues due to higher kilowatthour
sales of electricity and rate relief granted by the Hawaii Public Utilities
Commission (PUC), including rate relief for power purchased from two major
independent power producers, Kalaeloa Partners, L.P. and AES Barbers Point,
Inc., which commenced operations in May 1991 and September 1992, respectively.
The increase was tempered by lower fuel oil prices, the cost savings of which
were passed through to customers. While sales of electricity in HECO and its
subsidiaries' service territory increased faster than the national industry
average, consolidated HECO kilowatthour sales growth was only 3%. Higher 1992
operating income was primarily due to rate relief and increased kilowatthour
sales at consolidated HECO, offset in part by higher expenses. Net income
increased 18% as a result of the higher operating income and higher AFUDC
due to higher construction work-in-progress balances. HECO and its subsidiaries
do not provide electric service to the island of Kauai and, thus, were not
significantly impacted by Hurricane Iniki.
o 1991 revenues increased over 1990 revenues largely due to rate
increases granted by the PUC primarily to permit HECO to recover the cost of
power purchased from Kalaeloa Partners, L.P., a 1.5% increase in kilowatthour
sales of electricity and the one-time effect of approximately $7 million of a
change in the method of estimating unbilled kilowatthour sales and revenues. The
increase in revenues was tempered by lower fuel oil prices, the cost savings of
which were passed through to
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customers. The relatively low kilowatthour sales growth reflected the departure
of troops to the Middle East in early 1991 and a decline in tourism due to the
Gulf war and the recession on the U.S. mainland. Operating income for 1991 was
about the same as in 1990 because the effect of the increase in 1991
kilowatthour sales was offset by higher other operation and maintenance
expenses and by higher depreciation expense as a result of plant additions.
REGULATION OF ELECTRIC UTILITY RATES
The PUC has broad discretion in its regulation of the rates charged by HEI's
electric 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 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), but there is no limitation on the time within which
it must render a final decision.
PENDING RATE REQUESTS
In July 1993, HECO applied to the PUC for permission to increase electric
rates, based on a 1994 test year and a 12.6% return on average common equity.
In December 1993, HECO applied to the PUC for permission to increase electric
rates, based on a 1995 test year and a 12.3% return on average common equity.
Both requests combined represent a 16.7% increase over present rates, or
approximately $106 million in annual revenues. The requested increases are
needed to cover rising operating costs, to cover the cost of new capital
projects to maintain and improve service reliability, to cover additional
expenses associated with proposed changes in depreciation rates and methods and
to establish a self-insured property damage reserve for transmission and
distribution property in the event of catastrophic disasters.
In November 1993, Hawaii Electric Light Company, Inc. (HELCO) applied to
the PUC for permission to increase electric rates to provide approximately
$15.8 million in annual revenues, or a 13.4% increase over present rates. The
requested increase is based on a 1994 test year and a 12.4% return on average
common equity. The increase is needed to cover plant, equipment and operating
costs necessary to maintain and improve service and provide reliable power for
its customers.
In November 1991, Maui Electric Company, Limited (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. Evidentiary hearings were
held in January 1993 and, at the conclusion of the hearings, MECO's final
requested increase was adjusted to approximately $11.4 million annually, or
approximately 10% above the rates then in effect, 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 reflects a return on average common equity of
13.0%. In 1993, MECO received four interim decisions which authorized step
increases totaling $8.2 million in annual revenues, or 7.2%, based on a 12.75%
rate of return on average common equity. The interim increases are subject to
refund with interest, pending the final outcome of the case.
Management cannot predict with certainty when decisions in the rate cases
will be rendered or the amount of any interim or final rate increase that will
be granted.
HECO PURCHASED POWER BILLING DISPUTES
HECO is disputing certain amounts billed each month under its purchased power
agreements with Kalaeloa Partners, L.P. and AES Barbers Point, Inc. and has
withheld payment of some of the disputed amounts pending resolution. See "Power
purchase agreements" under Note 4 in the "Notes to Consolidated Financial
Statements" for a further discussion of this matter.
HECO POWER OUTAGE
On April 9, 1991, HECO experienced a power outage that affected all customers
on the island of Oahu. See "HECO power outage" under Note 4 in the "Notes to
Consolidated Financial Statements" for a discussion of contingent liabilities
related to the outage.
HELCO RELIABILITY INVESTIGATION
The PUC initiated an investigation into the reliability of HELCO's system in
July 1991. See "HELCO reliability investigation" under Note 4 in the "Notes to
Consolidated Financial Statements" for a further discussion of this matter.
WAIAU-CIP TRANSMISSION LINES
In 1993, the PUC held hearings concerning Part 2 of the proposed Waiau-CIP
138-kilovolt transmission lines. These lines will be a part of a second
transmission corridor in west Oahu, running approximately 15 miles between
Campbell Industrial Park (CIP) and HECO's Waiau power plant. The new lines are
needed (1) to increase system reliability by locating the new lines in a
separate corridor from the existing lines, (2) to provide additional
transmission capacity to meet expected load growth and (3) to provide
transmission capacity for existing and new power generation projects planned
for west Oahu. HECO is experiencing community opposition over the proposed
placement of portions of these lines based in part on the potential effects of
the lines on aesthetics and the concern of some that the electric and magnetic
fields (EMF) from the power lines
32
7
may have adverse health effects. HECO witnesses addressed EMF, the route
selection process, which involved extensive public input, as well as
engineering and related subjects. One proposal by those who oppose the route of
the overhead lines is to place Part 2 of the Waiau-CIP lines underground. HECO
estimates that this proposal would cost approximately $100 million more than
the cost of overhead lines.
Management cannot predict with certainty the final outcome of the hearings
or the impact the final outcome, including resulting delays, if any, may have
on the cost of the lines or on system reliability.
UNDERGROUNDING OF UTILITY LINES
There is a proposal before the Honolulu City Council and some public support
for the mandatory undergrounding of utility lines "whenever possible," except
in some remote areas. HECO opposes the proposal, in its current form, because
the resulting costs could be too much of a burden for customers. Both the City
Planning Department and the City Planning Commission oppose the bill.
Management believes the cost of undergrounding utility lines would be
recoverable in rates. However, management cannot predict with certainty the
ultimate outcome of such proposals or the impact of such proposals on HECO or
the Company.
SAVINGS BANK
% % %
1993 CHANGE 1992 change 1991 change
(in millions) ------ ------ ------ ------ ------ ------
Revenues . . . . . . . . . . $200 (2) $203 2 $199 10
Net interest income . . . . . 96 23 78 21 64 22
Operating income(1) . . . . . 44 41 31 24 25 14
Net income(1) . . . . . . . . 25 36 19 24 15 16
Interest-earning assets
Average balance . . . . . $2,356 7 $2,207 15 $1,917 15
Weighted average yield . . 8.01% (8) 8.73% (11) 9.84% (4)
Interest-bearing liabilities
Average balance . . . . . $2,306 6 $2,171 14 $1,898 15
Weighted average rate. . . 4.02% (24) 5.28% (20) 6.58% (9)
Interest rate spread . . . . 3.99% 16 3.45% 6 3.26% 9
One-year "gap" . . . . . . . 3.2% 2.3% (10.1%)
(1) Reflects allocation of corporate-level expenses for segment reporting
purposes. For segment reporting purposes, HEI expenses allocated to the savings
bank segment for general management, administrative and support services
totaled $0.8 million, $2.0 million and $1.7 million for 1993, 1992 and 1991,
respectively. As of January 1, 1993, HEI refined its method of identifying
costs chargeable to its subsidiaries.
American Savings Bank, F.S.B. (ASB) earnings depend primarily on 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). ASB's loan volumes and yields are affected by market interest
rates, competition, the demand for real estate financing, the availability of
funds and management's responses to these factors. Other factors affecting
ASB's operating results include income from servicing loans and expenses from
operations.
o 1993 net interest income increased 23% over 1992 due to the
significantly lower cost of funds and a higher average balance of loans. In 1993
and 1992, the spread between short-term and long-term interest rates was wider
than in 1991. In 1993, the weighted average rate on interest-bearing liabilities
decreased 126 basis points, while the weighted average yield on interest-earning
assets declined only 72 basis points, causing the interest rate spread to
increase 54 basis points. The increase in net interest income was partially
offset by higher administrative and general expenses, including $0.8 million of
higher federal insurance premiums for deposits.
o 1992 net interest income increased 21% due largely to a higher average
balance of interest-earning assets, a low interest rate environment and an
increase in the interest rate spread resulting from an inflow of low-cost
deposits. The $290 million increase in the average balance of interest-earning
assets was funded primarily with low-cost deposits. The weighted average rate
on interest- bearing liabilities decreased 130 basis points, while the weighted
average yield on interest-earning assets declined only 111 basis points,
causing the interest rate spread to increase 19 basis points.
o 1991 net interest income increased 22% due primarily to the higher
average balance of interest-earning assets resulting from the investment of
proceeds received after assuming the First Nationwide Bank deposit liabilities
in October 1990, the favorable interest rate environment and the increase in
the interest rate spread. The volume of ASB's business increased as reflected
in the $248 million increase in the average balance of interest-earning assets
in 1991 over 1990. During
33
8
1991, declining interest rates lowered the cost of interest-bearing liabilities
faster than the yield on interest-earning assets which resulted in an
improvement in the interest rate spread of 26 basis points.
o "Gap" is the difference between the amount of interest-earning assets
and interest-bearing liabilities that reprice during a given period. A
"positive gap" exists when more assets than liabilities reprice within a given
period; a "negative gap" exists when more liabilities than assets reprice
within a given period.
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. Generally, an increase in interest rates
should result in higher net interest income for a financial institution that is
in a positive gap position, as the yields on interest-earning assets increase
at a faster rate than the cost of interest-bearing liabilities. Conversely, a
decline in interest rates should result in lower net interest income.
o At December 31, 1993, ASB's private-issue mortgage-backed securities
represented whole or participating interests in pools of first mortgage loans
collateralized by real estate in the continental United States, and
approximately 81% of the portfolio was collateralized by real estate in
California. ASB's management has concluded, based on internal reviews of its
private-issue mortgage-backed securities, that any impairment in the value of
its mortgage-backed securities portfolio resulting from the consequences of the
earthquake that occurred on January 17, 1994 near Los Angeles, California is
not likely to have a material effect on the Company's financial condition or
results of operations. Substantially all private-issue mortgage-backed
securities at December 31, 1993, were rated investment grade by various
securities rating agencies.
OTHER
% % %
1993 CHANGE 1992 change 1991 change
(in millions) ----- ------ ----- ------ ----- ------
Revenues . . . . . . . . . . $63.3 27 $49.7 (8) $53.8 31
Operating income (loss) . . . (6.0) NM 1.1 (86) 7.6 NM
NM Not meaningful
The "Other" business segment includes results of operations from HTB and its
subsidiary, Young Brothers, Limited (YB), which are maritime freight
transportation companies; HEI Investment Corp. (HEIIC), which is a company
primarily holding investments in leveraged leases; Malama Pacific Corp. (MPC)
and its subsidiaries, which are real estate investment and development
companies; HEI and HEIDI, parent companies; and eliminations of
intercompany transactions.
o The freight transportation subsidiaries recorded an operating loss of
$0.1 million in 1993, compared with operating income of $3.4 million in 1992
and $5.0 million in 1991. Despite YB's rate increases in 1993, HTB's
consolidated operating results were down significantly due in part to lower
charter revenues at HTB, the termination of an oil hauling contract in mid-1992
and losses on the sale of a tug and two oil barges when HTB exited the business
of shipping of heavy fuel oil. HTB and YB have been negatively impacted by the
slowing in Hawaii's construction activity and the slow economy. The decrease in
operating income in 1992 was due in part to higher maintenance costs due to the
drydocking of more barges and higher depreciation expense. Operating income
increased $0.4 million in 1991 compared to 1990 primarily due to the gain on
the sale of an oil barge and lower maintenance expenses, offset in part by
higher depreciation expense.
o In 1993, HEIIC refinanced the nonrecourse debt supporting a leveraged
lease, resulting in additional income, which was largely offset by the
cumulative effect of the 1% federal income tax rate increase. As of December
31, 1993, HEIIC primarily held investments in leveraged leases. No new
investments are currently planned.
o MPC's operating loss was $0.6 million in 1993, compared with an
operating loss of $1.3 million in 1992 and operating income of $0.9 million in
1991. In 1993, MPC's real estate development activities were impacted by the
slow economy. MPC sold fewer units in 1993 than 1992. However, large writedowns
were taken for the carrying value of certain joint venture real estate projects
in 1992. See Notes 6 and 16 in the "Notes to Consolidated Financial Statements"
for a further discussion on MPC and its subsidiaries.
o The HEI and HEIDI corporate operating loss increased $4.6 million in
1993 compared to 1992
34
9
primarily due to a refinement in the method of identifying costs chargeable to
subsidiaries, resulting in lower allocations to subsidiaries and more expenses
retained at corporate. See Note 3 in the "Notes to Consolidated Financial
Statements" for more information on the corporate allocation methodology
refinement.
DISCONTINUED OPERATIONS
1993 1992 1991
(in millions, except per share amounts) ------ ------ ------
Net income (loss)
Insurance business . . . . . . . . . . . $(15.0) $(59.7) $ 1.7
Nonutility wind energy business . . . . . 2.0 (13.6) (2.5)
------ ------ ------
$(13.0) $(73.3) $ (0.8)
====== ====== ======
Earnings (loss) per common share
Insurance business . . . . . . . . . . . $(0.58) $(2.46) $ 0.08
Nonutility wind energy business . . . . . 0.08 (0.56) (0.11)
------ ------ ------
$(0.50) $(3.02) $(0.03)
====== ====== ======
See Note 2 in the "Notes to Consolidated Financial Statements" for information
on the discontinued operations of the HIG Group and HERS.
ENVIRONMENTAL MATTERS
HEI and its subsidiaries are subject to numerous laws and regulations which are
designed to protect the environment, and include air and water quality
controls, hazardous waste and toxic substance controls and the Federal Oil
Pollution Act of 1990. HEI's electric utility subsidiaries are exempt from
certain environmental requirements applicable on the U.S. mainland. For
example, the electric utility subsidiaries are exempt from the acid rain
provisions of the 1990 Clean Air Act Amendments. However, HEI and its
subsidiaries are subject to environmental laws and regulations which could
potentially impact the Company in terms of operating existing facilities,
constructing and operating new facilities and ensuring the proper cleanup and
disposal of hazardous waste and toxic substances. Management believes that the
recovery through rates of most, if not all, of any costs incurred by HECO and
its subsidiaries in complying with these environmental requirements would be
allowed by the PUC. However, as with other costs reviewed by the PUC in the
rate-making process, costs incurred by HECO and its subsidiaries in complying
with these environmental requirements may not be fully allowed or recovered.
Based on information available to the Company to date, management is not aware
of any contingent liabilities relating to environmental matters that would have
a material adverse effect on the Company's financial condition or results of
operations.
EFFECTS OF INFLATION
Inflation, as measured by the Consumer Price Index, averaged 2.7% in 1993, 3.0%
in 1992 and 4.2% in 1991. Although the rate of inflation over the past three
years has been relatively low compared with the late 1970's and early 1980's,
inflation continues to have an impact on HEI's operations.
Inflation increases operating costs and the replacement cost of assets.
Subsidiaries with significant physical assets, such as the electric utility
companies, replace assets at much higher costs and must request rate relief to
maintain adequate earnings. In the past, the PUC has generally approved rate
relief to cover the effects of inflation. In 1992 and 1993, the electric
utility companies received rate relief, in part to cover increases due to
inflation in operating expenses and construction costs.
ACCOUNTING CHANGES
POSTRETIREMENT BENEFITS OTHER THAN PENSIONS
Effective January 1, 1993, the Company adopted the provisions of SFAS No. 106,
"Employers' Accounting for Postretirement Benefits Other Than Pensions." The
resulting change in the method of accounting for postretirement benefits other
than pensions did not have a material effect on the Company's financial
condition or results of operations primarily due to the regulated nature of the
electric utility subsidiaries and YB. The PUC opened a generic docket to
determine whether SFAS No. 106 should be adopted for rate- making purposes, but
has not yet issued its final decision and order. See Note 18 in the "Notes to
Consolidated Financial Statements" for more information.
INCOME TAXES
Effective January 1, 1993, the Company adopted the provisions of SFAS No. 109,
"Accounting for Income Taxes." The resulting change in the method of accounting
for income taxes did not have a material effect on the Company's financial
condition or results of operations primarily due to the regulated nature of the
electric utility subsidiaries and YB. See Note 15 in the "Notes to Consolidated
Financial Statements" for more information.
POSTEMPLOYMENT BENEFITS
Effective January 1, 1994, the Company adopted the provisions of
35
10
SFAS No. 112, "Employers' Accounting for Postemployment Benefits." This
statement requires employers to recognize the obligation to provide
postemployment benefits in accordance with SFAS No. 43, "Accounting for
Compensated Absences," if the obligation is attributable to employees' services
already rendered, employees' rights to those benefits accumulate or vest,
payment of the benefits is probable, and the amount of the benefits can be
reasonably estimated. The resulting change in the method of accounting for
postemployment benefits did not have a material effect on the Company's
financial condition and, in the opinion of management, will not have a material
effect on the Company's 1994 results of operations. See Note 1 in the "Notes to
Consolidated Financial Statements" for more information.
CERTAIN INVESTMENTS IN DEBT AND EQUITY SECURITIES
Effective January 1, 1994, the Company adopted the provisions of SFAS No. 115,
"Accounting for Certain Investments in Debt and Equity Securities." This
statement requires that investments in equity securities that have readily
determinable fair values and investments in debt securities be classified in
three categories: held-to-maturity securities, trading securities and
available-for-sale securities. Each category has specific accounting
requirements. The resulting change in the method of accounting for investments
in debt and equity securities did not have a material effect on the Company's
financial condition and, in the opinion of management, will not have a material
effect on the Company's 1994 results of operations. See Note 1 in the "Notes to
Consolidated Financial Statements" for more information.
LOAN IMPAIRMENTS
In May 1993, the Financial Accounting Standards Board (FASB) issued SFAS No.
114, "Accounting by Creditors for Impairment of a Loan." This standard requires
that certain impaired loans be measured based on the present value of expected
future cash flows discounted at the loan's effective interest rate or, as a
practical expedient, at the loan's observable market price or the fair value of
the collateral if the loan is collateral dependent. The provisions of SFAS No.
114 must be adopted by ASB no later than January 1, 1995. If SFAS No. 114 were
adopted on December 31, 1993, it would not have had a material effect on the
Company's financial condition or results of operations. See Note 1 in the
"Notes to Consolidated Financial Statements" for more information.
LIQUIDITY AND CAPITAL RESOURCES
CONSOLIDATED
The Company believes that its ability to generate cash, both internally from
operations and externally from debt and equity issues, is adequate to maintain
sufficient liquidity to fund its construction programs and to cover debt and
other cash requirements in the foreseeable future.
The Company's total assets were $4.5 billion and $4.1 billion at
December 31, 1993 and 1992, respectively. Asset growth in 1993 stemmed from
growth in ASB's loan portfolio, increased capital expenditures by the electric
utility companies and the recognition of regulatory assets.
The consolidated capital structure of HEI was as follows:
December 31
----------------------------------------------
1993 1992
-------------------- -------------------
(in millions)
Short-term borrowings . . . . . . . . . . . . . . . . . . . . . $ 40 3% $ 160 12%
Long-term debt, net . . . . . . . . . . . . . . . . . . . . . . 698 47 583 42
Preferred stock of electric utility subsidiaries . . . . . . . 95 6 85 6
Common stock equity . . . . . . . . . . . . . . . . . . . . . . 643 44 548 40
------ --- ------ ---
$1,476 100% $1,376 100%
====== === ====== ===
ASB's deposit liabilities, securities sold under agreements to repurchase and
advances from the Federal Home Loan Bank are not included in the table above.
HEI plans to maintain its debt and equity structure within range of the
levels at December 31, 1993 and 1992 through the issuance of short-term and
long-term debt, the electric utilities issuance of preferred stock, retained
earnings and issuance of common stock through public offerings and the
Dividend Reinvestment and Stock Purchase Plan and other plans.
At December 31, 1993, short-term borrowings were $120 million lower than
at December 31, 1992. In 1993, short-term borrowings were replaced with
long-term debt, preferred stock equity of the electric utility subsidiaries
and common stock equity. HEI raised approximately $105 million, after
expenses, from the sale of 2.9 million shares of common stock through a public
offering completed in August 1993 and through the Dividend Reinvestment and
Stock Purchase Plan and other plans.
36
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Pursuant to the settlement agreement signed in early 1994, upon final
court approval, HEI will pay $32 million to the Insurance Commissioner as
Rehabilitator/Liquidator of the HIG Group 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. HEI will fund the settlement out of available
cash and/or borrowings.
In October 1993, Standard & Poor's Corporation (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 and HECO's S&P, Moody's Investors
Service (Moody's) and Duff & Phelps Credit Rating Co.'s (Duff & Phelps)
security ratings were as follows:
HEI S&P Moody's Duff & Phelps
- ----- -------- ------- -------------
Medium-term notes . . . . . . . . . . BBB Baa2 BBB+
Commercial paper . . . . . . . . . . A-2 P-2 Duff 1-
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-
Outlook . . . . . . . . . . . . . . . Negative N/A N/A
N/A Not applicable.
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.
At December 31, 1993, $213 million of a $250 million registered
medium-term note program was available to HEI. HEI and HECO also maintained bank
lines of credit which totaled $50 million and $108 million, respectively, at
yearend 1993. As of January 1, 1994, HECO maintained bank lines of credit which
totaled $85 million. There were no borrowings under any line of credit during
1993 and 1992.
Operating activities provided net cash of $139 million in 1993, $98
million in 1992 and $142 million in 1991.
Investing activities such as capital expenditures and the origination
and purchases of loans accounted for a significant portion of the net cash used
of $352 million in 1993, $392 million in 1992 and $318 million in 1991.
Financing activities provided net cash of $172 million in 1993, $395
million in 1992 and $130 million in 1991. In 1993 significant amounts of cash
came from advances from the Federal Home Loan Bank and from the issuances of
long-term debt and common stock.
A portion of net assets (assets less liabilities) of HECO and ASB are
not available for transfer to HEI in the form of dividends, loans or advances
without regulatory approval. However, such restrictions are not expected to
significantly affect the operations of HEI, its ability to pay dividends on its
common stock or its ability to meet other cash obligations. (See Note 19 in the
"Notes to Consolidated Financial Statements.")
Total HEI consolidated financing requirements for the years 1994 through
1998, including net capital expenditures, debt retirements and sinking fund
requirements, are currently estimated to total $1.4 billion. Of this amount,
approximately $0.9 billion are for net capital expenditures (mostly relating to
the electric utility companies' net capital expenditures described below). HEI
consolidated internal sources, after the payment of HEI dividends, are expected
to provide approximately 42% of the consolidated financing requirements, with
debt and equity financing providing the remaining requirements. Over the
five-year period 1994 through 1998, HEI estimates that it will require
approximately $225 million in common equity, other than retained earnings, which
is expected to be provided principally by HEI's Dividend Reinvestment and Stock
Purchase Plan and the Hawaiian Electric Industries Retirement Savings Plan.
37
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Following is a discussion of the liquidity and capital resources of HEI's
largest segments.
ELECTRIC UTILITY
HECO's consolidated capital structure was as follows:
December 31
--------------------------------------------------------
1993 1992
-------------------- ----------------------
(in millions)
Short-term borrowings from
nonaffiliates and affiliate . . . . . . . . . $ 41 3% $ 122 11%
Long-term debt, net . . . . . . . . . . . . . . . 485 41 375 35
Preferred stock
Subject to mandatory redemption . . . . . . . 47 4 49 5
Not subject to mandatory redemption . . . . . 48 4 36 3
Common stock equity . . . . . . . . . . . . . . . 570 48 500 46
------ --- ------ ---
$1,191 100% $1,082 100%
====== === ====== ===
In 1993, the electric utility companies used $206 million in cash for capital
expenditures, $81 million for repayments of short-term borrowings and $30
million for preferred and common stock dividends. Operations provided $98
million in cash and $20 million of cash came from third-party contributions in
aid of construction. Financing activities provided $110 million, net of
long-term debt repayments, from the issuance of unsecured notes and the
drawdown of proceeds from tax-exempt special purpose revenue bonds. Also, HEI
provided $45 million of cash through its purchase of HECO common stock.
The electric utility's consolidated financing requirements for the
years 1994 through 1998, including net capital expenditures, debt retirements
and sinking fund payment requirements, are estimated to total $1.0 billion.
HECO's consolidated internal sources, after the payment of common stock and
preferred stock dividends, are currently expected to provide approximately 50%
of the total $1.0 billion requirements, with debt and equity financing
providing the remaining requirements. HECO currently estimates that it will
require approximately $100 million in common equity, other than retained
earnings, over the five-year period 1994 through 1998. The PUC must approve
issuances of long-term debt and equity for HECO, HELCO and MECO.
Capital expenditures include projects which are required to meet
expected load growth and improve reliability, and projects to replace and
upgrade existing equipment. Net capital expenditures for the five-year period
1994 through 1998 are currently estimated to total $0.9 billion. Approximately
70% of gross capital expenditures, including AFUDC and capital expenditures
funded by third party cash contributions in aid of construction, is for
transmission and distribution projects, with the remaining 30% primarily for
generation projects. At December 31, 1993, purchase commitments other than fuel
and power purchase contracts were approximately $61 million, including amounts
for construction projects. (Also see Note 4 in the "Notes to Consolidated
Financial Statements" for a discussion of power purchase commitments.)
For 1994, electric utility net capital expenditures are estimated to
be $205 million and gross capital expenditures are estimated to be $240
million, of which approximately 65% is for transmission and distribution
projects. An estimated $55 million is planned for new generation projects.
Drawdowns of proceeds from the sale of tax-exempt special purpose revenue
bonds, sales of common stock to HEI and the generation of funds from internal
sources are expected to provide the cash needed for the net capital
expenditures.
Capital expenditure estimates and the timing of construction projects
are reviewed periodically by management and may change significantly as a result
of many considerations, including changes in economic conditions, changes in
forecasts of kilowatthour sales and peak load, the availability of alternate
energy and purchased power sources, the availability of generating sites and
transmission and distribution corridors, the ability to obtain adequate and
timely rate relief, escalation in construction costs, demand-side management
programs and requirements of environmental and other regulatory and permitting
authorities.
In 1993, HECO and its subsidiaries raised $70 million from the
issuance of unsecured notes, with maturities varying from two to five years,
and $12 million from the sale of preferred stock, which is not subject to
mandatory redemption. Also in 1993, the State of Hawaii issued a total of $100
million in tax-exempt special purpose revenue bonds, with a maturity of thirty
years and a fixed coupon interest rate of 5.45%, on behalf of HECO, HELCO and
MECO at a 2% discount for an effective interest rate of approximately 5.6%. As
of December 31, 1993, approximately $56 million of the proceeds from the sale
of special purpose revenue bonds were available to be used and an additional
$47 million of revenue bonds was authorized by the Hawaii legislature for
issuance prior to the end of 1995.
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SAVINGS BANK
December 31 1993 1992
---------------------- --------------------
(in millions) $ % change $ % change
------ -------- ------ --------
Assets . . . . . . . . . . . . . . . . . . . . . . . . . . $2,618 6 $2,462 13
Loans receivable . . . . . . . . . . . . . . . . . . . . . 1,735 19 1,463 27
Mortgage-backed securities . . . . . . . . . . . . . . . . 630 (11) 710 (12)
Deposit liabilities. . . . . . . . . . . . . . . . . . . . 2,092 3 2,033 26
As of September 30, 1993, ASB was the second largest savings bank in the state
based on total assets of $2.5 billion. In 1993, ASB's total assets increased 6%
primarily due to originations and purchases of loans of $557 million, partly
offset by repayments on loans of $289 million. Loans and deposits continued to
grow in 1993, although at a slower pace than in 1992.
At December 31, 1993, loans which do not accrue interest totaled $5.7
million or only 0.32% of net loans outstanding. At the end of 1993, there was
only one property acquired in settlement of a loan valued at $0.2 million.
For the year ended December 31, 1993, cash used by investing
activities was $175 million, due largely to the origination of loans
receivable, partly offset by principal repayments. Cash provided by financing
activities included a net increase of $96 million in advances from the Federal
Home Loan Bank and $59 million in deposit liabilities, offset by repurchases
of all of ASB's remaining securities sold under agreements to repurchase of
$27 million and common stock dividends of $14 million.
Deposits traditionally have been the principal source of ASB's funds
for use in lending, meeting liquidity requirements and making investments. ASB
also derives funds from receipt of interest and principal on outstanding loans
receivable and mortgage-backed securities, borrowings from the Federal Home
Loan Bank of Seattle, securities sold under agreements to repurchase and other
sources. Minimum liquidity levels are currently governed by the regulations
adopted by the Office of Thrift Supervision (OTS). ASB was in compliance with
OTS liquidity requirements as of December 31, 1993.
OTS regulations require each savings association to have regulatory
capital at least sufficient to meet three requirements: tangible capital and
core (leverage) capital of 1.5% and 3.0%, respectively, of adjusted total
assets; and a risk-based capital standard equal to 8.0% of risk-adjusted
assets. As of December 31, 1993, ASB was in full compliance with the minimum
capital requirements with a tangible capital ratio of 5.2%, a core capital
ratio of 5.6% and risk-based capital of $151.0 million, $46.2 million in
excess of the minimum requirement.
The OTS has adopted a new rule adding an interest rate risk (IRR)
component to the existing risk-based capital requirement. The regulation is
effective January 1, 1994; however, the requirement that thrifts incorporate
IRR into their risk-based capital calculations, based on the OTS Thrift
Financial Report as of December 31, 1993, is effective July 1, 1994.
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 OTS regulation will require 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 IRR reported as of September 30, 1993,
ASB would not have been required to hold additional capital if the new rule had
been in effect at that time.
The Federal Deposit Insurance Corporation Improvement Act of 1991
established a statutory framework for closer monitoring of insured depository
institutions in order to ensure "prompt corrective action" by regulators as an
institution's capital position declines. The OTS rules for prompt corrective
action, effective on December 19, 1992, define the capital measures for five
capital categories (well-capitalized, adequately capitalized, undercapitalized,
significantly undercapitalized and critically undercapitalized), and provide
for progressively more stringent restrictions and supervision as capital
levels decline. To be classified as "well-capitalized," an institution must
have a "leverage ratio" of 5%, a "Tier-1 risk-based ratio" of 6% and a "total
risk-based ratio" of 10%. 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%.
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 regulation, 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 4% requirement with a core capital ratio of 5.6%.
ASB believes that a satisfactory regulatory capital position provides a
basis for public confidence, affords protection to depositors, helps to ensure
continued access to capital markets on favorable terms and provides a
foundation for anticipated growth.
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INDEPENDENT AUDITORS' REPORT
The Board of Directors and Stockholders
Hawaiian Electric Industries, Inc.:
We have audited the accompanying 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.
These consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Hawaiian Electric
Industries, Inc. and subsidiaries as of December 31, 1993 and 1992, and the
results of their operations and their cash flows for each of the years in the
three-year period ended December 31, 1993, in conformity with generally
accepted accounting principles.
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
40
15
CONSOLIDATED STATEMENTS OF INCOME
Hawaiian Electric Industries, Inc. and subsidiaries
Years ended December 31 1993 1992 1991
(in thousands, except per share amounts) ---------- ---------- --------
REVENUES
Electric utility . . . . . . . . . . . . . . . . . . . . . . . . . $ 879,110 $ 778,690 $740,632
Savings bank . . . . . . . . . . . . . . . . . . . . . . . . . . . 199,734 202,995 198,776
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 63,326 49,698 53,834
--------- ---------- --------
1,142,170 1,031,383 993,242
--------- ---------- --------
EXPENSES
Electric utility . . . . . . . . . . . . . . . . . . . . . . . . . 759,545 674,849 640,376
Savings bank . . . . . . . . . . . . . . . . . . . . . . . . . . . 155,617 171,668 173,561
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 69,370 48,647 46,249
--------- ---------- --------
984,532 895,164 860,186
--------- ---------- --------
OPERATING INCOME (LOSS)
Electric utility . . . . . . . . . . . . . . . . . . . . . . . . . 119,565 103,841 100,256
Savings bank . . . . . . . . . . . . . . . . . . . . . . . . . . . 44,117 31,327 25,215
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (6,044) 1,051 7,585
--------- ---------- --------
157,638 136,219 133,056
--------- ---------- --------
Interest expense--electric utility and other . . . . . . . . . . . (53,192) (47,141) (43,521)
Allowance for borrowed funds used during construction . . . . . . . 3,869 2,095 1,307
Preferred stock dividends of electric utility subsidiaries . . . . (6,518) (6,710) (6,887)
Allowance for equity funds used during construction . . . . . . . . 6,973 6,781 3,998
--------- ---------- --------
INCOME FROM CONTINUING OPERATIONS BEFORE INCOME TAXES . . . . . . . 108,770 91,244 87,953
Income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . 47,086 29,529 32,333
--------- ---------- --------
INCOME FROM CONTINUING OPERATIONS. . . . . . . . . . . . . . . . . 61,684 61,715 55,620
--------- ---------- --------
DISCONTINUED OPERATIONS, NET OF INCOME TAXES
Loss from operations . . . . . . . . . . . . . . . . . . . . . -- (57,090) (794)
Loss on disposal . . . . . . . . . . . . . . . . . . . . . . . (13,025) (16,207) --
--------- ---------- --------
LOSS FROM DISCONTINUED OPERATIONS . . . . . . . . . . . . . . . . . (13,025) (73,297) (794)
--------- ---------- --------
NET INCOME (LOSS) . . . . . . . . . . . . . . . . . . . . . . . . . $ 48,659 $ (11,582) $ 54,826
========= ========== ========
EARNINGS (LOSS) PER COMMON SHARE
CONTINUING OPERATIONS . . . . . . . . . . . . . . . . . . . . . $ 2.38 $ 2.54 $ 2.43
DISCONTINUED OPERATIONS . . . . . . . . . . . . . . . . . . . . (0.50) (3.02) (0.03)
--------- ---------- --------
$ 1.88 $ (0.48) $ 2.40
========= ========== ========
DIVIDENDS PER COMMON SHARE . . . . . . . . . . . . . . . . . . . . $ 2.29 $ 2.25 $ 2.21
========= ========== ========
WEIGHTED AVERAGE NUMBER OF COMMON SHARES OUTSTANDING . . . . . . . 25,938 24,275 22,882
========= ========== ========
CONSOLIDATED STATEMENTS OF RETAINED EARNINGS
Hawaiian Electric Industries, Inc. and subsidiaries
Years ended December 31 1993 1992 1991
(in thousands) -------- -------- --------
RETAINED EARNINGS, BEGINNING OF YEAR . . . . . . . . . . . . . . $138,484 $204,663 $200,286
Net income (loss) . . . . . . . . . . . . . . . . . . . . . . . . 48,659 (11,582) 54,826
Common stock dividends. . . . . . . . . . . . . . . . . . . . . . (58,825) (54,597) (50,449)
-------- -------- --------
RETAINED EARNINGS, END OF YEAR . . . . . . . . . . . . . . . . . $128,318 $138,484 $204,663
======== ======== ========
See accompanying "Notes to Consolidated Financial Statements."
41
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CONSOLIDATED BALANCE SHEETS
Hawaiian Electric Industries, Inc. and subsidiaries
December 31 1993 1992
(in thousands) ----------- -----------
ASSETS
Cash and equivalents . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 116,260 $ 156,754
Accounts receivable and unbilled revenues, net . . . . . . . . . . . . . . 117,116 118,246
Inventories, at average cost . . . . . . . . . . . . . . . . . . . . . . . 39,405 38,952
Real estate developments . . . . . . . . . . . . . . . . . . . . . . . . . 29,673 14,424
Loans receivable, net . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,735,098 1,462,888
Marketable securities (estimated market value $710,369 and $785,926) . . . 698,755 768,415
Other investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 77,106 81,974
Property, plant and equipment, net . . . . . . . . . . . . . . . . . . . . 1,542,989 1,387,828
Regulatory assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 62,077 7,668
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 53,449 53,944
Goodwill and other intangibles . . . . . . . . . . . . . . . . . . . . . . 49,664 51,003
Net assets of discontinued operations . . . . . . . . . . . . . . . . . . . -- 672
---------- ----------
$4,521,592 $4,142,768
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Accounts payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 88,628 $ 82,235
Deposit liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,091,583 2,032,869
Short-term borrowings . . . . . . . . . . . . . . . . . . . . . . . . . . . 40,416 160,211
Securities sold under agreements to repurchase . . . . . . . . . . . . . . -- 27,223
Advances from Federal Home Loan Bank . . . . . . . . . . . . . . . . . . . 289,674 194,099
Long-term debt, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . 697,836 582,475
Deferred income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . 168,329 156,915
Unamortized tax credits . . . . . . . . . . . . . . . . . . . . . . . . . . 44,357 42,912
Contributions in aid of construction . . . . . . . . . . . . . . . . . . . 165,005 126,308
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 197,713 104,567
---------- ----------
3,783,541 3,509,814
---------- ----------
PREFERRED STOCK OF ELECTRIC UTILITY SUBSIDIARIES
Subject to mandatory redemption . . . . . . . . . . . . . . . . . . . . . . 46,730 48,920
Not subject to mandatory redemption . . . . . . . . . . . . . . . . . . . . 48,293 36,293
---------- ----------
95,023 85,213
---------- ----------
STOCKHOLDERS' EQUITY
Preferred stock, no par value, authorized 10,000 shares;
no shares outstanding
Common stock, no par value, authorized 100,000 shares;
outstanding 27,675 shares and 24,762 shares . . . . . . . . . . . . . 514,710 409,257
Retained earnings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 128,318 138,484
---------- ----------
643,028 547,741
---------- ----------
$4,521,592 $4,142,768
========== ==========
See accompanying "Notes to Consolidated Financial Statements."
42
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CONSOLIDATED STATEMENTS OF CASH FLOWS
Hawaiian Electric Industries, Inc. and subsidiaries
Years ended December 31 1993 1992 1991
(in thousands) --------- --------- ----------
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
Depreciation and amortization of property, plant and equipment . . . . . 64,314 61,928 56,276
Other amortization . . . . . . . . . . . . . . . . . . . . . . . . . . . (2,623) 602 2,033
Deferred income taxes and tax credits, net . . . . . . . . . . . . . . . 3,164 (4,530) 7,456
Changes in assets and liabilities, net of effects from disposal of
businesses, acquisition of partnership interest and acquisition
of control of joint venture
Decrease (increase) in accounts receivable and unbilled revenues,
net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,108 (17,515) 14,248
Decrease (increase) in inventories . . . . . . . . . . . . . . . . (453) 2,593 15,959
Increase in other securities held for trading . . . . . . . . . . . (22,359) (9,161) (13,876)
Increase in accounts payable . . . . . . . . . . . . . . . . . . . 6,248 8,474 1,975
Changes in other assets and liabilities . . . . . . . . . . . . . . 33,380 (6,353) 1,714
--------- --------- ---------
144,463 97,753 141,405
Cash flows from discontinued operations . . . . . . . . . . . . . . . . . . . . (5,142) -- 750
--------- --------- ---------
NET CASH PROVIDED BY OPERATING ACTIVITIES. . . . . . . . . . . . . . . . . . . 139,321 97,753 142,155
CASH FLOWS FROM INVESTING ACTIVITIES --------- --------- ---------
Loans receivable originated and purchased . . . . . . . . . . . . . . . . . . . (557,009) (585,292) (379,445)
Principal repayments on loans receivable . . . . . . . . . . . . . . . . . . . 288,932 268,672 164,848
Proceeds from sale of loans receivable . . . . . . . . . . . . . . . . . . . . 633 5,208 6,271
Mortgage-backed securities purchased . . . . . . . . . . . . . . . . . . . . . (190,517) (216,289) (169,276)
Principal repayments on mortgage-backed securities . . . . . . . . . . . . . . 269,816 307,364 162,269
Proceeds from sale of mortgage-backed securities . . . . . . . . . . . . . . . -- -- 29,543
Increase in other marketable securities and other investments . . . . . . . . . (4,912) (1,506) (16,112)
Proceeds from redemption, sale, maturity and principal repayments of
other marketable securities and other investments . . . . . . . . . . . . . 24,350 12,129 30,934
Capital expenditures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (213,685) (190,653) (157,462)
Contributions in aid of construction . . . . . . . . . . . . . . . . . . . . . 20,158 17,949 16,632
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10,542 15,330 533
--------- --------- ---------
(351,692) (367,088) (311,265)
Net investment in discontinued operations . . . . . . . . . . . . . . . . . . . -- (24,751) (6,750)
--------- --------- ---------
NET CASH USED IN INVESTING ACTIVITIES . . . . . . . . . . . . . . . . . . . . . (351,692) (391,839) (318,015)
--------- --------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase in deposit liabilities . . . . . . . . . . . . . . . . . . . . . . 58,714 417,508 104,070
Net increase (decrease) in short-term borrowings with original maturities
of three months or less . . . . . . . . . . . . . . . . . . . . . . . . . . (93,247) 92,303 (93,876)
Proceeds from other short-term borrowings . . . . . . . . . . . . . . . . . . . 25,622 36,000 --
Repayment of other short-term borrowings . . . . . . . . . . . . . . . . . . . (72,707) -- --
Proceeds from securities sold under agreements to repurchase . . . . . . . . . -- 43,000 235,307
Repurchase of securities sold under agreements to repurchase . . . . . . . . . (27,000) (145,200) (242,876)
Proceeds from advances from Federal Home Loan Bank . . . . . . . . . . . . . . 194,692 32,900 178,860
Principal payments on advances from Federal Home Loan Bank . . . . . . . . . . (99,117) (97,400) (126,000)
Proceeds from issuance of long-term debt . . . . . . . . . . . . . . . . . . . 193,788 83,736 125,579
Repayment of long-term debt . . . . . . . . . . . . . . . . . . . . . . . . . . (70,801) (43,436) (63,300)
Proceeds from issuance of electric utility subsidiaries' preferred stock . . . 12,000 -- --
Redemption of electric utility subsidiaries' preferred stock . . . . . . . . . (2,190) (1,745) (1,545)
Net proceeds from issuance of common stock . . . . . . . . . . . . . . . . . . 88,658 18,248 51,415
Common stock dividends . . . . . . . . . . . . . . . . . . . . . . . . . . . . (42,012) (39,214) (36,877)
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5,477 (1,595) (617)
--------- --------- ---------
NET CASH PROVIDED BY FINANCING ACTIVITIES . . . . . . . . . . . . . . . . . . . 171,877 395,105 130,140
--------- --------- ---------
Net increase (decrease) in cash and equivalents . . . . . . . . . . . . . . . . (40,494) 101,019 (45,720)
Cash and equivalents, beginning of year . . . . . . . . . . . . . . . . . . . . 156,754 55,735 101,455
--------- --------- ---------
CASH AND EQUIVALENTS, END OF YEAR . . . . . . . . . . . . . . . . . . . . . . . $ 116,260 $ 156,754 $ 55,735
========= ========= =========
See accompanying "Notes to Consolidated Financial Statements."
43
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1 o SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
GENERAL
BASIS OF FINANCIAL STATEMENT PRESENTATION. The financial statements have been
prepared in conformity with generally accepted accounting principles. In
preparing the financial statements, management is required to make estimates
and assumptions that affect the reported amounts of assets and liabilities as
of the date of the balance sheet and revenues and expenses for the period.
Actual results could differ significantly from those estimates.
Material estimates that are particularly susceptible to significant
change relate to the determination of the allowance for loan losses, regulatory
assets, the provisions for costs in excess of net realizable values of real
estate projects and the provisions for losses relating to the disposal of
discontinued businesses. Management believes that such allowances and
provisions have been appropriately established in accordance with generally
accepted accounting principles.
CONSOLIDATION. The consolidated financial statements include the accounts of
Hawaiian Electric Industries, Inc. (HEI), a holding company, and its wholly
owned subsidiaries (collectively, the Company). These subsidiaries are Hawaiian
Electric Company, Inc. (HECO), parent company of Hawaii Electric Light
Company, Inc. (HELCO) and Maui Electric Company, Limited (MECO); HEI
Diversified, Inc. (HEIDI), parent company of American Savings Bank, F.S.B.
(ASB) and The Hawaiian Insurance & Guaranty Company, Limited (HIG); Hawaiian
Tug & Barge Corp. (HTB), parent company of Young Brothers, Limited (YB);
Lalamilo Ventures, Inc. (LVI); Malama Pacific Corp. (MPC); and HEI Investment
Corp. (HEIIC). In the fourth quarter of 1992, HEI/HEIDI wrote off its
investment in HIG and no longer consolidated the accounts of HIG and its
subsidiaries for financial reporting purposes.
All significant intercompany transactions and balances have been
eliminated in consolidation.
UTILITY REGULATION. The electric utility subsidiaries and YB are regulated by
the Public Utilities Commission of the State of Hawaii (PUC) and account for
the effects of regulation under Statement of Financial Accounting Standards
(SFAS) No. 71, "Accounting for the Effects of Certain Types of Regulation." As
a result, the actions of regulators can affect the timing of recognition of
revenues, expenses, assets and liabilities.
INVESTMENTS.
MARKETABLE SECURITIES. Investments in mortgage-backed and other marketable
securities, which management intends and has the ability to hold until
maturity, are carried at amortized cost.
Other securities held for trading are carried at market value with
unrealized gains or losses reflected in net income.
OTHER INVESTMENTS. Investments in joint ventures and other investments for
which the Company has the ability to exercise significant influence over the
operating and financing policies of the enterprise are accounted for under the
equity method.
For all investments, declines in value determined to be other than
temporary are reflected in net income. The specific identification method is
used in determining realized gains and losses on the sale of securities.
PROPERTY, PLANT AND EQUIPMENT. Property, plant and equipment are stated at
cost. The cost of plant constructed by the electric utility subsidiaries
includes applicable engineering, supervision, administrative and general
expenses, and an allowance for the cost of funds used during the construction
period. Upon the ordinary retirement or sale of electric utility plant, no gain
or loss is recognized. The cost of the plant retired or sold and the cost of
removal (net of salvage obtained) are charged to accumulated depreciation.
RETIREMENT BENEFITS. Pension costs are charged primarily to expense and
electric utility plant. The Company's policy is to fund pension costs in
amounts consistent with the requirements of the Employee Retirement Income
Security Act.
Certain health care and/or life insurance benefits are provided to
retired employees, substantially all of whom become eligible for these benefits
upon retirement, and the employees' beneficiaries and covered dependents.
Effective January 1, 1993, the Company adopted the provisions of SFAS No. 106,
"Employers' Accounting for Postretirement Benefits Other Than Pensions," which
requires that the expected cost of postretirement benefits other than pensions
be accrued during the years in which employees render service (see Note 18).
Previously, the cost of these benefits were recognized when paid. The resulting
change in the method of accounting for postretirement benefits other than
pensions had no material effect on net income for the year ended December 31,
1993 primarily due to the regulated nature of the electric utility subsidiaries
and YB.
DEPRECIATION AND AMORTIZATION. Depreciation of plant and equipment is computed
primarily using the straight-line method over the estimated useful lives of the
assets.
Goodwill relates to the acquisition of ASB and is being amortized on a
straight-line basis over 25 years.
Core deposit intangibles are being amortized each year at the greater
of the actual attrition rate of such deposit base or 10% of the original value.
44
19
ENVIRONMENTAL EXPENDITURES. In general, environmental contamination treatment
costs are charged to expense, unless such costs are probable of recovery
through rates authorized by the PUC. Also, environmental costs are capitalized
if: the costs extend the life, increase the capacity, or improve the safety or
efficiency of property owned; the costs mitigate or prevent environmental
contamination that has yet to occur and that otherwise may result from future
operations; or the costs are incurred in preparing for sale property currently
held for sale. Liabilities are recorded when environmental assessments and/or
remedial efforts are probable, and the cost can be reasonably estimated.
Corresponding regulatory assets are recorded when it is probable that such
costs would be allowed by the PUC as reasonable and necessary costs of service
for rate-making purposes.
INCOME TAXES. As further explained in Note 15, the Company adopted SFAS No.
109, "Accounting for Income Taxes" effective January 1, 1993. Previously,
income taxes were recognized in accordance with the provisions of Accounting
Principles Board Opinion No. 11. The resulting change in the method of
accounting for income taxes had no material effect on net income for the year
ended December 31, 1993, primarily due to the regulated nature of the electric
utility subsidiaries and YB.
Tax credits are deferred and amortized over the estimated useful lives
of the properties which qualified for the credits.
EARNINGS PER COMMON SHARE. Earnings per common share are based upon the
weighted average number of shares of common stock outstanding. The dilutive
effect of stock options is not material.
CASH FLOWS. The Company considers cash on hand, deposits in banks, deposits
with the Federal Home Loan Bank, money market accounts, certificates of
deposit, short-term commercial paper and reverse repurchase agreements with
original maturities of three months or less to be cash and equivalents.
RECLASSIFICATIONS. Certain reclassifications have been made to prior years'
consolidated financial statements to conform to the 1993 presentation.
DISCONTINUED OPERATIONS. In 1992, management decided to discontinue the
operations of Hawaiian Electric Renewable Systems, Inc. (HERS). Also, in 1992,
the Board of Directors of HEI concluded that it would not contribute additional
capital to the insurance businesses conducted by HIG and its subsidiaries and
the remaining investment therein was written off. Control of HIG and its
subsidiaries is vested in the Insurance Commissioner of the State of Hawaii
under a formal rehabilitation order. The nonutility wind energy and insurance
businesses are accounted for as discontinued operations in the accompanying
financial statements for all years presented.
INSURANCE.
The accounting policies followed by the insurance company until its
discontinuance in 1992 were:
Marketable securities. Investments held for trading were carried at
market value with unrealized gains or losses reflected in stockholders'
equity.
Unpaid insurance losses and loss expenses. Unpaid insurance losses and
loss expenses were determined on the basis of estimates of unpaid
amounts with respect to reported losses and losses incurred but not
reported. Provisions for losses and loss expenses were intended to
cover ultimate payment amounts, less amounts recoverable from
reinsurance. The insurance company ceded insurance to reinsurers under
various contracts which covered individual risks or entire classes of
business.
Unearned insurance premiums. Unearned insurance premiums, less any
portions ceded to reinsurers, were recognized as income ratably over
the terms of the policies.
See Note 2 for further information on discontinued operations. Except
where indicated, footnote disclosures relate solely to continuing operations.
ACCOUNTING CHANGES - 1994 AND 1995 IMPLEMENTATION.
POSTEMPLOYMENT BENEFITS. In November 1992, the Financial Accounting
Standards Board (FASB) issued SFAS No. 112, "Employers' Accounting for
Postemployment Benefits." This statement requires employers to recognize the
obligation to provide postemployment benefits in accordance with SFAS No. 43,
"Accounting for Compensated Absences," if the obligation is attributable to
employees' services already rendered, employees' rights to those benefits
accumulate or vest, payment of the benefits is probable, and the amount of the
benefits can be reasonably estimated. The Company adopted the provisions of SFAS
No. 112 on January 1, 1994. The implementation of SFAS No. 112 did not have a
material effect on the Company's consolidated financial condition and, in the
opinion of management, will not have a material effect on the Company's 1994
results of operations.
CERTAIN INVESTMENTS IN DEBT AND EQUITY SECURITIES. In May 1993, the
FASB issued SFAS No. 115, "Accounting for Certain Investments in Debt
and Equity Securities." This statement requires that investments in equity
securities that have readily determinable fair values and investments in
debt securities be classified in three categories and accounted for as follows:
o Debt securities that the enterprise has the positive intent and
ability to hold to maturity are classified as held-to- maturity
securities and reported at amortized cost.
45
20
o Debt and equity securities that are bought and held principally
for the purpose of selling them in the near term are classified as
trading securities and reported at fair value, with unrealized
gains and losses included in earnings.
o Debt and equity securities not classified as either
held-to-maturity securities or trading securities are classified
as available-for-sale securities and reported at fair value, with
unrealized gains and losses excluded from earnings and reported in
a separate component of shareholders' equity.
The Company adopted the provisions of SFAS No. 115 on January 1, 1994.
The implementation of SFAS No. 115 did not have a material effect on the
Company's consolidated financial condition and, in the opinion of management,
will not have a material effect on the Company's 1994 results of operations.
LOAN IMPAIRMENTS. In May 1993, the FASB issued SFAS No. 114, "Accounting by
Creditors for Impairment of a Loan." This standard requires that certain
impaired loans be measured based on the present value of expected future cash
flows discounted at the loan's effective interest rate or, as a practical
expedient, at the loan's observable market price or the fair value of the
collateral if the loan is collateral dependent. The provisions of SFAS No. 114
must be adopted by ASB no later than January 1, 1995. If SFAS No. 114 were
adopted on December 31, 1993, it would not have had a material effect on the
Company's consolidated financial condition or results of operations.
ELECTRIC UTILITY
ELECTRIC UTILITY REVENUES. Electric utility revenues are based on rates
authorized by the PUC and include revenues applicable to electric energy
consumed in the accounting period but not yet billed to the customers. The rate
schedules of the electric utility subsidiaries include energy cost adjustment
clauses under which electric rates are adjusted for changes in the weighted
average price paid for fuel oil and certain components of purchased power, and
the relative amounts of company-generated and purchased power.
CONTRIBUTIONS IN AID OF CONSTRUCTION. The electric utility subsidiaries
receive contributions from customers for special construction requirements. As
directed by the PUC, the contributions are amortized on a straight-line basis
over 30 years which approximates the estimated useful lives of the facilities
for which the contributions were received. This amortization is an offset
against depreciation expense.
SAVINGS BANK
LOANS RECEIVABLE. Any discount or premium on loans is amortized over the
estimated life of the loan using the level-yield method.
The valuation allowance for estimated losses on loans receivable is
provided to the extent that such losses are expected to be incurred.
The accrual of interest on a loan is discontinued when the loan becomes
more than 90 days delinquent or on an earlier basis when there is reasonable
doubt as to its collectability.
REAL ESTATE ACQUIRED IN SETTLEMENT OF LOANS. Real estate acquired in
settlement of loans is recorded at the lower of cost or fair value less
estimated selling expenses.
LOAN ORIGINATION AND COMMITMENT FEES. 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) for commitments to originate or purchase
loans are deferred and, if the commitment is exercised, recognized as an
adjustment of yield over the life of the loan. If the commitment expires
unexercised, nonrefundable commitment fees are recognized as income upon
expiration of the commitment.
2 o DISCONTINUED OPERATIONS
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. In 1993, in connection with
the sale of HERS, HEI reversed reserves for site restoral and other HERS'
disposal costs that were no longer needed due to the terms of the sale,
resulting in income from discontinued operations of $2.0 million.
46
21
Summary financial information for the discontinued operations of HERS was as
follows:
INCOME STATEMENT DATA
Years ended December 31 1992 1991
(in thousands) -------- -------
OPERATIONS
Revenues. . . . . . . . . . . . . . . . . . . . . . . . . $ 564 $ 1,063
Operating loss. . . . . . . . . . . . . . . . . . . . . . (12,630) (3,151)
Interest expense. . . . . . . . . . . . . . . . . . . . . (953) (1,385)
Income tax benefits . . . . . . . . . . . . . . . . . . . 8,128 2,038
-------- -------
Loss from operations. . . . . . . . . . . . . . . . . . . $ (5,455) $(2,498)
======== =======
Years ended December 31 1993 1992
(in thousands) ------- --------
DISPOSAL
Gain (loss) . . . . . . . . . . . . . . . $ 3,218 $(17,131)*
Income tax benefits (income taxes) . . . (1,223) 9,021
------- --------
Gain (loss) on disposal . . . . . . . . . $ 1,995 $ (8,110)
======= ========
* Includes provision of $700 for loss from operations during phase-out period.
BALANCE SHEET DATA
December 31, 1992
(in thousands) -----------------
ASSETS
Property, plant and equipment, net. . . . . . . . . . . $ 71
Other . . . . . . . . . . . . . . . . . . . . . . . . . 642
-----
713
-----
LIABILITIES
Deferred income taxes . . . . . . . . . . . . . . . . . (112)
Unamortized tax credits . . . . . . . . . . . . . . . . 6
Other. . . . . . . . . . . . . . . . . . . . . . . . . 147
-----
41
-----
Net assets of discontinued windfarm operations. . . . . $ 672
=====
THE HAWAIIAN INSURANCE & GUARANTY COMPANY, 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 of 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 (unaudited) to more than $300
million (unaudited). 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 (unaudited), and that at least an additional $112 million
(unaudited) in capital contributions from HEI would be required if the HIG
Group were to continue to write insurance as in the past--$80 million
(unaudited) to cover the shortfall plus $32 million (unaudited) 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 April 12, 1993, the Rehabilitator filed her proposed rehabilitation plan
for approval by the First Circuit Court of the State of Hawaii. 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
47
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that HEIDI is liable for an assessment levied by the Rehabilitator. The
complaint alleges that certain current and former officers and directors of
HEI, HEIDI and the HIG Group have breached their fiduciary duties to the HIG
Group in numerous respects. The complaint seeks declaratory relief and
compensatory, general, special and punitive damages, together with costs and
attorneys' fees.
On July 12, 1993, the Rehabilitator filed a first amended complaint,
which repeats the claims asserted in the original complaint but adds the Hawaii
Insurance Guaranty Association (HIGA) as a plaintiff and asserts certain
additional claims. The first amended complaint asserts new claims for
negligence and the imposition of a constructive trust 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. Discovery proceedings were initiated beginning in late 1993.
In early 1994, HEI, HEIDI, certain officers and directors, the
Rehabilitator/Liquidator and HIGA signed an agreement to settle the lawsuit.
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 hearing on a motion to approve the settlement
is scheduled in March 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 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.
Summary financial information for the discontinued operations of the
HIG Group was as follows:
INCOME STATEMENT DATA
Years ended December 31 1992 1991
(in thousands) -------- -------
OPERATIONS
Revenues . . . . . . . . . . . . . . . . . . . . $ 80,654 $89,536
Operating income (loss) . . . . . . . . . . . . (80,146) 1,328
Income tax benefits. . . . . . . . . . . . . . . 28,511 376
-------- -------
Income (loss) from operations . . . . . . . . . $(51,635) $ 1,704
======== =======
Years ended December 31 1993 1992
(in thousands) -------- --------
DISPOSAL
Loss . . . . . . . . . . . . . $(24,225) $(13,060)
Income tax benefits . . . . . . 9,205 4,963
-------- --------
Loss on disposal . . . . . . . $(15,020) $ (8,097)
======== ========
48
23
3 o SEGMENT FINANCIAL INFORMATION
Segment financial information on page 28 is incorporated herein by reference.
As of January 1, 1993, HEI refined its method of identifying costs chargeable
to its subsidiaries. Under the refined methodology, additional common costs
categories have been identified and the number of cost causation factors used
to allocate common costs has increased. Also, timesheets are used to identify
chargeable labor costs. The refined methodology resulted in lower allocations
to subsidiaries and more expenses retained at corporate in 1993.
HEI's principal segments are as follows:
ELECTRIC UTILITY
HECO and its wholly owned subsidiaries, HELCO and MECO, are operating electric
public utilities in the business of generating, purchasing, transmitting,
distributing and selling electric energy, and are regulated by the PUC.
SAVINGS BANK
ASB is a Federally chartered savings bank providing a full range of banking
services to individual and corporate customers through its branch system in
Hawaii. ASB is subject to examination and comprehensive regulation by the
Department of Treasury, Office of Thrift Supervision (OTS) and the Federal
Deposit Insurance Corporation, and is also subject to regulations of the Board
of Governors of the Federal Reserve System.
OTHER
HTB provides tugboat and charter barge services in Hawaii and the Pacific area
and, together with its subsidiary, YB, provides general freight and
containerized cargo transportation between the Hawaiian islands. YB operates as
an authorized common carrier that services all major ports in Hawaii under the
Hawaii Water Carrier Act and is regulated by the PUC.
MPC and its wholly owned subsidiaries invest in and develop real estate.
HEIIC invests primarily in leveraged leases.
Other also includes certain HEI and HEIDI activities and intercompany
eliminations.
DISCONTINUED OPERATIONS
HIG and its subsidiaries, United National Insurance Company, Ltd. and Hawaiian
Underwriters Insurance Co., Ltd., are property and casualty insurance companies
which were placed in rehabilitation proceedings under the control of the
Insurance Commissioner of the State of Hawaii by a Rehabilitation Order entered
by the First Circuit Court of the State of Hawaii on December 24, 1992. HIG
continues to operate in rehabilitation and its insurance company subsidiaries
are being liquidated.
HERS owned and LVI owns nonutility wind energy facilities. HERS was sold in
March 1993.
See Note 2 for further information on discontinued operations.
49
24
4 o ELECTRIC UTILITY SUBSIDIARY
Hawaiian Electric Company, Inc. and subsidiaries
Selected consolidated financial information
INCOME STATEMENT DATA
Years ended December 31 1993 1992 1991
(in thousands) -------- -------- --------
REVENUES
Operating revenues . . . . . . . . . . . . . . . . . . . . . . . $874,010 $776,929 $739,636
Other--nonregulated . . . . . . . . . . . . . . . . . . . . . . . 5,100 1,761 996
-------- -------- --------
879,110 778,690 740,632
-------- -------- --------
EXPENSES
Fuel oil . . . . . . . . . . . . . . . . . . . . . . . . . . . . 213,285 225,611 275,806
Purchased power . . . . . . . . . . . . . . . . . . . . . . . . . 258,723 172,761 106,660
Other operation . . . . . . . . . . . . . . . . . . . . . . . . . 105,957 105,303 100,990
Maintenance . . . . . . . . . . . . . . . . . . . . . . . . . . . 44,281 44,653 39,463
Depreciation . . . . . . . . . . . . . . . . . . . . . . . . . . 55,960 53,856 49,005
Taxes, other than income taxes . . . . . . . . . . . . . . . . . 80,712 71,452 67,648
Other--nonregulated . . . . . . . . . . . . . . . . . . . . . . . 627 1,213 804
-------- -------- --------
759,545 674,849 640,376
-------- -------- --------
Operating income from regulated and nonregulated activities . . . 119,565 103,841 100,256
Allowance for equity funds used during construction . . . . . . . 6,973 6,781 3,998
Interest and other charges . . . . . . . . . . . . . . . . . . . (37,384) (35,196) (35,535)
Allowance for borrowed funds used during construction . . . . . . 3,869 2,095 1,307
-------- -------- --------
Income before income taxes and preferred stock
dividends of HECO . . . . . . . . . . . . . . . . . . . . . . . 93,023 77,521 70,026
Income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . 36,897 23,843 23,816
-------- -------- --------
Income before preferred stock dividends of HECO . . . . . . . . . 56,126 53,678 46,210
Preferred stock dividends of HECO . . . . . . . . . . . . . . . . 4,421 4,525 4,600
-------- -------- --------
Net income for common stock . . . . . . . . . . . . . . . . . . . $ 51,705 $ 49,153 $ 41,610
======== ======== ========
BALANCE SHEET DATA
December 31 1993 1992
(dollars in thousands) ---------- ----------
ASSETS
Utility plant, at cost
Property, plant and equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . $1,976,192 $1,770,374
Less accumulated depreciation . . . . . . . . . . . . . . . . . . . . . . . . . . . (641,230) (583,031)
Construction in progress . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 126,342 107,030
---------- ----------
Net utility plant . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,461,304 1,294,373
Accounts receivable, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 64,012 62,088
Unbilled revenues, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34,735 35,647
Regulatory assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 60,612 7,668
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 82,613 101,554
---------- ----------
$1,703,276 $1,501,330
========== ==========
CAPITALIZATION AND LIABILITIES
Common stock equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 570,663 $ 499,894
Cumulative preferred stock
Not subject to mandatory redemption, dividend rates of 4.25-8.875% . . . . . . . . 48,293 36,293
Subject to mandatory redemption, dividend rates of 7.68-13.75% . . . . . . . . . . 46,730 48,920
Long-term debt, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 484,736 374,835
---------- ----------
Total capitalization . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,150,422 959,942
Short-term borrowings, from nonaffiliates and affiliate . . . . . . . . . . . . . . . 40,928 122,176
Deferred income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 107,449 101,447
Unamortized tax credits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 43,348 41,608
Contributions in aid of construction . . . . . . . . . . . . . . . . . . . . . . . . 165,005 126,308
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 196,124 149,849
---------- ----------
$1,703,276 $1,501,330
========== ==========
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CASH FLOW DATA
Years ended December 31 1993 1992 1991
(in thousands) --------- --------- ---------
CASH FLOWS FROM OPERATING ACTIVITIES
Income before preferred stock dividends of HECO . . . . . . . . . . . . $ 56,126 $ 53,678 $ 46,210
Adjustments to reconcile income before preferred stock dividends
of HECO to net cash provided by operating activities
Depreciation and amortization of property,
plant and equipment . . . . . . . . . . . . . . . . . . . . . . . . 55,960 53,856 49,005
Decrease (increase) in accounts receivable and
unbilled revenues, net . . . . . . . . . . . . . . . . . . . . . . . (1,012) (17,095) 8,109
Decrease (increase) in inventories . . . . . . . . . . . . . . . . . . (484) 2,449 16,027
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (12,185) (14,195) 3,667
--------- --------- ---------
NET CASH PROVIDED BY OPERATING ACTIVITIES . . . . . . . . . . . . . . . 98,405 78,693 123,018
--------- --------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES
Capital expenditures . . . . . . . . . . . . . . . . . . . . . . . . . (205,943) (181,542) (141,900)
Contributions in aid of construction . . . . . . . . . . . . . . . . . 20,158 17,949 16,632
Proceeds from sales of assets . . . . . . . . . . . . . . . . . . . . . -- 14,270 --
--------- --------- ---------
NET CASH USED IN INVESTING ACTIVITIES . . . . . . . . . . . . . . . . . (185,785) (149,323) (125,268)
--------- --------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase (decrease) in short-term borrowings from nonaffiliates
and affiliates with original maturities of three months or less . . . (81,248) 87,606 (35,350)
Proceeds from other short-term borrowings . . . . . . . . . . . . . . . 25,259 -- --
Repayment of other short-term borrowings . . . . . . . . . . . . . . . (25,259) -- --
Proceeds from issuance of long-term debt . . . . . . . . . . . . . . . 156,788 33,130 40,579
Repayment of long-term debt . . . . . . . . . . . . . . . . . . . . . . (46,901) (23,393) (32,222)
Proceeds from issuance of preferred stock . . . . . . . . . . . . . . . 12,000 -- --
Redemption of preferred stock . . . . . . . . . . . . . . . . . . . . . (2,190) (1,745) (1,545)
Preferred stock dividends . . . . . . . . . . . . . . . . . . . . . . . (4,421) (4,525) (4,600)
Proceeds from issuance of common stock . . . . . . . . . . . . . . . . 45,000 33,000 61,000
Common stock dividends . . . . . . . . . . . . . . . . . . . . . . . . (25,887) (23,048) (27,468)
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5,278 67 831
--------- --------- ---------
NET CASH PROVIDED BY FINANCING ACTIVITIES . . . . . . . . . . . . . . . 58,419 101,092 1,225
--------- --------- ---------
Net increase (decrease) in cash and equivalents . . . . . . . . . . . . (28,961) 30,462 (1,025)
Cash and equivalents, beginning of year . . . . . . . . . . . . . . . . 30,883 421 1,446
--------- --------- ---------
CASH AND EQUIVALENTS, END OF YEAR . . . . . . . . . . . . . . . . . . . $ 1,922 $ 30,883 $ 421
========= ========= =========
CUMULATIVE PREFERRED STOCK. Certain cumulative preferred shares of HECO and
its subsidiaries are redeemable at the option of the respective company at a
premium or par. The remaining cumulative preferred shares are subject to
mandatory sinking fund provisions at par and optional redemption provisions at
a premium. In December 1993, HECO's subsidiaries issued $12 million of
preferred stock not subject to mandatory redemption with a dividend rate of
7.625%. The total sinking fund requirements on preferred stock subject to
mandatory redemption for the next five years and thereafter are $1.3 million in
1994, $2.2 million in 1995, $2.2 million in 1996, $2.2 million in 1997, $1.8
million in 1998 and $37.0 million thereafter.
INDEBTEDNESS. See Notes 11 and 12.
MAJOR CUSTOMERS. The electric utility subsidiaries derived 10% of their
operating revenues from the sale of electricity to various federal government
agencies amounting to $91 million in 1993, $78 million in 1992 and $77 million
in 1991.
COMMITMENTS AND CONTINGENCIES.
FUEL CONTRACTS AND OTHER PURCHASE COMMITMENTS. To assure access to a long-term
supply of residual fuel oil and diesel fuel, HECO has contractual agreements to
purchase a minimum amount of 0.5% sulfur residual fuel oil and 0.4% sulfur
diesel fuel annually through 1995. The fuel oil prices under these contracts
are tied to market prices of products as reported in Singapore and the U.S.
Pacific Northwest. Based on the average price per barrel at January 1, 1994,
the amount of required purchases for 1994 is estimated at $83 million. HECO's
subsidiaries have contractual agreements through 1995 under which the amount of
required purchases for 1994 is estimated at $43 million, based on the average
price per barrel at January 1, 1994. The actual amount of such purchases by
HECO and its subsidiaries could vary substantially as a result of changes in
the market price of fuel oil and other factors. HECO and its subsidiaries
purchased $205 million, $216 million and
51
26
$251 million of fuel under these or prior contractual agreements in 1993, 1992
and 1991, respectively. New contracts to replace expiring ones are expected to
be entered into in the normal course of business.
At December 31, 1993, HECO and its subsidiaries had purchase commitments
other than fuel and power purchase contracts amounting to approximately
$61 million.
POWER PURCHASE AGREEMENTS. In general, payments under the major 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 and its subsidiaries may pass on
changes in the fuel component of the energy charges to customers through energy
cost adjustment clauses in its rate schedules. HECO and its subsidiaries do not
operate nor participate in the operation of any of the facilities that provide
power under the major agreements. Title to the facilities does not pass to HECO
and its subsidiaries upon expiration of the agreements, and the agreements do
not contain bargain purchase options with respect to the facilities.
As of December 31, 1993, HECO and its subsidiaries had power purchase
agreements for 473 megawatts (MW) of firm capacity representing approximately
22% of the total of their generating capabilities and purchased power firm
capacities. Rate recovery is allowed for energy and firm capacity payments
under these agreements. Assuming that each of the agreements remains in place
and the minimum availability criteria in the power purchase agreements are met,
aggregate minimum fixed capacity charges are expected to be approximately $107
million annually in 1994 and 1995, between $99 million and $106 million
annually from 1996 through 2015, between $50 million and $77 million annually
from 2016 through 2022 and $4 million annually from 2023 through 2028.
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 HECO's consolidated financial condition and
results of operations.
HELCO's power purchase agreements include an amended power purchase agreement
with Hamakua Sugar Company (Hamakua), a power purchase agreement with Puna
Geothermal Ventures (PGV) and a power purchase agreement with Hilo Coast
Processing Company (HCPC). Hamakua is in a Chapter 11 bankruptcy proceeding and
is now 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. PGV, an independent geothermal power producer which had
experienced substantial delays in commencing commercial operations, passed an
acceptance test in June 1993 and is now considered to be a firm capacity source
for 25 MW. HCPC, which provides 18 MW of firm capacity, has announced that it
will discontinue harvesting sugar cane in the second half of 1994, but has
stated that it intends to continue generating power using coal supplemented by
biomass materials and diesel fuel oil.
HECO POWER OUTAGE. On April 9, 1991, HECO experienced a power outage that
affected all customers on the island of Oahu. The PUC initiated an
investigation of the outage 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 a hearing on the April 9, 1991 outage in May
1991 and further hearings are expected at a later time. The parties to the
investigation (HECO, Consumer Advocate and United States Department of Defense)
agreed that HECO should retain an independent consultant to investigate the
cause of the 1991 outage. The PUC approved HECO's retention of Power
Technologies, Inc. (PTI). PTI's report, with more than 100 recommendations, was
submitted to the PUC in August 1993 and HECO filed its comments on the PTI
recommendations with the PUC in November 1993. 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 HECO "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 [HECO'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,
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27
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 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.
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.
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 "Power purchase
agreements" herein). 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 upon HECO's consolidated
financial condition or results of operations.
CHANGE IN ACCOUNTING ESTIMATE. In September 1991, HECO and its subsidiaries
revised the method of estimating unbilled kilowatthour sales and revenues. The
revised method results in more accurate estimates. The effect of this change in
accounting estimate resulted in a nonrecurring increase in HECO and its
subsidiaries' net income of $3.8 million for 1991, or $0.17 per HEI common
share.
MANAGEMENT SERVICES FEES. HEI charges to HECO and its subsidiaries for general
management, administrative and support services totaled $2.3 million, $5.6
million and $5.1 million in 1993, 1992 and 1991, respectively.
5 o SAVINGS BANK SUBSIDIARY
American Savings Bank, F.S.B. and subsidiaries
Selected consolidated financial information
INCOME STATEMENT DATA
Years ended December 31 1993 1992 1991
-------- -------- --------
(in thousands)
Interest income . . . . . . . . . . . . . . . . . . . . . . . . . . . . $188,619 $192,644 $189,072
Interest expense . . . . . . . . . . . . . . . . . . . . . . . . . . . 92,701 114,748 124,840
-------- -------- --------
Net interest income . . . . . . . . . . . . . . . . . . . . . . . . . . 95,918 77,896 64,232
Provision for losses . . . . . . . . . . . . . . . . . . . . . . . . . (779) (1,494) (641)
Other income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11,115 10,351 9,704
Operating, administrative and general expenses . . . . . . . . . . . . (62,137) (53,915) (48,080)
-------- -------- --------
Operating income . . . . . . . . . . . . . . . . . . . . . . . . . . . 44,117 32,838 25,215
Income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18,835 13,280 10,224
-------- -------- --------
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 25,282 $ 19,558 $ 14,991
======== ======== ========
53
28
BALANCE SHEET DATA
December 31 1993 1992
(in thousands) ---------- -----------
ASSETS
Cash and equivalents . . . . . . . . . . . . . . . . . . . . . . $ 77,610 $ 117,937
Investment securities . . . . . . . . . . . . . . . . . . . . . . 68,599 58,524
Mortgage-backed securities . . . . . . . . . . . . . . . . . . . 630,156 709,891
Loans receivable, net . . . . . . . . . . . . . . . . . . . . . . 1,735,098 1,462,888
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 57,358 61,451
Goodwill and other intangibles . . . . . . . . . . . . . . . . . 49,664 51,003
---------- ----------
$2,618,485 $2,461,694
========== ==========
LIABILITIES AND EQUITY
Deposit liabilities . . . . . . . . . . . . . . . . . . . . . . . $2,091,583 $2,032,869
Securities sold under agreements to repurchase . . . . . . . . . -- 27,223
Advances from Federal Home Loan Bank . . . . . . . . . . . . . . 289,674 194,099
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 52,717 35,504
---------- ----------
2,433,974 2,289,695
Common stock equity . . . . . . . . . . . . . . . . . . . . . . . 184,511 171,999
---------- ----------
$2,618,485 $2,461,694
========== ==========
CASH FLOW DATA
Years ended December 31 1993 1992 1991
--------- --------- ---------
(in thousands)
CASH FLOWS FROM OPERATING ACTIVITIES
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 25,282 $ 19,558 $ 14,991
Adjustments to reconcile net income to net cash provided by operating
activities
Decrease in accounts receivable . . . . . . . . . . . . . . . . . . 1,283 1,461 3,424
Increase in other securities held for trading . . . . . . . . . . . (22,359) (9,161) (13,876)
Increase in accounts payable . . . . . . . . . . . . . . . . . . . 6,736 237 2,003
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9,371 (1,360) 7,405
--------- --------- ---------
NET CASH PROVIDED BY OPERATING ACTIVITIES . . . . . . . . . . . . . . . 20,313 10,735 13,947
--------- --------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES
Loans receivable originated and purchased . . . . . . . . . . . . . . . (557,009) (585,292) (379,445)
Principal repayments on loans receivable . . . . . . . . . . . . . . . 288,932 268,672 164,848
Proceeds from sale of loans receivable . . . . . . . . . . . . . . . . 633 5,208 6,271
Mortgage-backed securities purchased . . . . . . . . . . . . . . . . . (190,517) (216,289) (169,276)
Principal repayments on mortgage-backed securities . . . . . . . . . . 269,816 307,364 162,269
Proceeds from sale of mortgage-backed securities . . . . . . . . . . . -- -- 29,543
Proceeds from maturity of investment securities . . . . . . . . . . . . 15,000 12,000 19,924
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (2,014) (4,822) (19,995)
--------- --------- ---------
NET CASH USED IN INVESTING ACTIVITIES . . . . . . . . . . . . . . . . . (175,159) (213,159) (185,861)
--------- --------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase in deposit liabilities . . . . . . . . . . . . . . . . . . 58,714 417,508 104,070
Proceeds from securities sold under agreements to repurchase . . . . . -- 43,000 235,307
Repurchase of securities sold under agreements to repurchase . . . . . (27,000) (145,200) (242,876)
Proceeds from advances from Federal Home Loan Bank . . . . . . . . . . 194,692 32,900 178,860
Principal payments on advances from Federal Home Loan Bank . . . . . . (99,117) (97,400) (126,000)
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (12,770) 14,390 (21,347)
--------- --------- ---------
NET CASH PROVIDED BY FINANCING ACTIVITIES . . . . . . . . . . . . . . . 114,519 265,198 128,014
--------- --------- ---------
Net increase (decrease) in cash and equivalents . . . . . . . . . . . . (40,327) 62,774 (43,900)
Cash and equivalents, beginning of year . . . . . . . . . . . . . . . . 117,937 55,163 99,063
--------- --------- ---------
CASH AND EQUIVALENTS, END OF YEAR . . . . . . . . . . . . . . . . . . . $ 77,610 $ 117,937 $ 55,163
========= ========= =========
54
29
MORTGAGE-BACKED SECURITIES. The weighted average interest rate of
mortgage-backed securities at December 31, 1993 and 1992 was 6.65% and 7.60%,
respectively.
Mortgage-backed securities with a carrying value of
approximately $469 million and $331 million at December 31, 1993 and 1992,
respectively, were pledged as collateral to secure public funds, deposits with
the Federal Reserve Bank of San Francisco and advances from the Federal Home
Loan Bank of Seattle. At December 31, 1993, there were no mortgage-backed
securities sold under agreements to repurchase. At December 31, 1992,
mortgage-backed securities sold under agreements to repurchase had a carrying
value of $33 million.
LOANS RECEIVABLE. Loans receivable consisted of the following:
December 31 1993 1992
---------- ----------
(in thousands)
Real estate loans
Conventional . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $1,584,218 $1,294,769
Construction and development . . . . . . . . . . . . . . . . . . . . . . . . . . 26,526 33,123
Troubled debt restructurings . . . . . . . . . . . . . . . . . . . . . . . . . . 3,397 8,945
---------- ----------
1,614,141 1,336,837
Loans secured by savings deposits . . . . . . . . . . . . . . . . . . . . . . . 15,015 15,013
Consumer loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 129,961 134,943
Commercial loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24,494 21,830
---------- ----------
1,783,611 1,508,623
Undisbursed loans in process . . . . . . . . . . . . . . . . . . . . . . . . . . (16,315) (20,008)
Deferred fees and discounts, including net purchase accounting discounts . . . . (26,884) (20,570)
Allowance for loan losses . . . . . . . . . . . . . . . . . . . . . . . . . . . (5,314) (5,157)
---------- ----------
$1,735,098 $1,462,888
========== ==========
At December 31, 1993 and 1992, the weighted average interest rate for
loans receivable was 7.63% and 8.47%, respectively.
Nonaccrual and renegotiated loans were $8 million and $14 million at
December 31, 1993 and 1992, respectively.
ASB services real estate loans ($178 million, $311 million and $487
million at December 31, 1993, 1992 and 1991, respectively) which are not
included in the accompanying consolidated financial statements. Fees earned for
servicing loans are reported as income when the related mortgage loan payments
are collected. Loan servicing costs are charged to expense as incurred.
Mortgage loan commitments of approximately $83 million are not
reflected on the balance sheet as of December 31, 1993. Of such commitments,
$22 million were for variable-rate mortgage loans and $61 million were for
fixed-rate mortgage loans.
ALLOWANCE FOR LOAN LOSSES. For the years ended December 31, 1993, 1992 and
1991, net charge-offs amounted to $0.6 million, $0.2 million and $0.2 million,
respectively. The ratio of net charge-offs to average loans outstanding was
0.04%, 0.01%, and 0.02% for the years ended December 31, 1993, 1992 and 1991,
respectively.
REAL ESTATE ACQUIRED IN SETTLEMENT OF LOANS. At December 31, 1993 and 1992,
ASB had real estate acquired in settlement of loans of $0.2 million and $1.9
million, respectively.
DEPOSIT LIABILITIES. Deposit liabilities consisted of the following:
December 31 1993 1992
-------------------------- -------------------------
WEIGHTED Weighted
AVERAGE Average
RATE AMOUNT Rate Amount
-------- ---------- -------- ---------
(dollars in thousands)
Commercial checking . . . . . . . . . . . . . . . . -- % $ 17,405 -- % $ 19,060
Interest-bearing checking . . . . . . . . . . . . . 2.42 255,838 3.25 278,366
Passbook . . . . . . . . . . . . . . . . . . . . . 3.48 1,211,330 3.97 969,222
Money market . . . . . . . . . . . . . . . . . . . 3.11 106,362 3.65 131,774
Term certificates . . . . . . . . . . . . . . . . . 4.40 500,648 4.93 634,447
---- ---------- ---- ----------
3.52% $2,091,583 4.11% $2,032,869
==== ========== ==== ==========
55
30
At December 31, 1993 and 1992, deposit accounts of $100,000 or more
totaled $438 million and $465 million, respectively.
The approximate scheduled maturities of term certificates outstanding
at December 31, 1993 were $321 million in 1994, $77 million in 1995, $40
million in 1996, $5 million in 1997, $15 million in 1998 and $43 million in
subsequent years.
The interest expense on savings deposits by type of deposit was as
follows:
Years ended December 31 1993 1992 1991
(in thousands) ------- ------- -------
Interest-bearing checking . . . . . . . . . . . . . . . . . . . . . . . $ 6,679 $ 9,982 $ 8,575
Passbook . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 42,021 34,645 20,266
Money market . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,758 6,447 9,845
Term certificates . . . . . . . . . . . . . . . . . . . . . . . . . . . 25,193 43,265 60,356
------- ------- -------
$77,651 $94,339 $99,042
======= ======= =======
SECURITIES SOLD UNDER AGREEMENTS TO REPURCHASE. At December 31, 1993, there
are no securities sold under agreements to repurchase. At December 31, 1992,
securities sold under agreements to repurchase consisted of mortgage-backed
securities sold under fixed-coupon agreements. Other than Federal Home Loan
Mortgage Corporation (FHLMC) mortgage-backed securities, the securities
underlying the agreements were delivered to the brokers/dealers who arranged
the transactions. The FHLMC mortgage-backed securities are book-entry
securities and were delivered by appropriate entry into the counterparties'
accounts at the Federal Reserve System. At December 31, 1992, the $33 million
carrying value of securities underlying the agreements remained in ASB's asset
accounts. The obligation to repurchase securities sold is reflected as a
liability in the consolidated balance sheets. At December 31, 1992,
approximately $27 million of agreements to repurchase identical securities were
outstanding. At December 31, 1992, the weighted average interest rate on
securities sold under agreements to repurchase was 3.34% and the weighted
average remaining days to maturity were 270 days. Securities sold under
agreements to repurchase averaged $20 million, $66 million and $124 million
during 1993, 1992 and 1991, respectively, and the maximum amount outstanding at
any month-end during 1993, 1992 and 1991 was $27 million, $125 million and $136
million, respectively.
ADVANCES FROM FEDERAL HOME LOAN BANK. Advances from the Federal Home Loan Bank
(FHLB), secured by mortgage-backed securities and stock in the FHLB, are
summarized as follows:
December 31 1993 1992
------------------------- -------------------------
WEIGHTED Weighted
AVERAGE average
RATE AMOUNT rate Amount
-------- ------ -------- --------
(dollars in thousands)
Due in
1993 . . . . . . . . . . . . . . . . . . . . . . . -- % $ -- 8.57% $ 21,917
1994 . . . . . . . . . . . . . . . . . . . . . . . 6.40 73,000 6.94 62,000
1995 . . . . . . . . . . . . . . . . . . . . . . . 8.33 16,822 8.33 16,822
1996 . . . . . . . . . . . . . . . . . . . . . . . 7.23 58,360 7.48 52,860
1997 . . . . . . . . . . . . . . . . . . . . . . . 5.99 73,800 6.95 40,500
1998 . . . . . . . . . . . . . . . . . . . . . . . 4.96 36,392 -- --
Thereafter . . . . . . . . . . . . . . . . . . . . 4.98 31,300 -- --
----- -------- ------ --------
6.24% $289,674 7.39% $194,099
===== ======== ====== ========
As a member of the FHLB system, ASB is required to own a specific
number of shares of capital stock of the FHLB of Seattle and is required to
maintain cash and investments in U.S. Government and other qualifying
securities in an amount equal to 5% of the amount of its savings accounts
and other obligations due within one year.
COMMON STOCK EQUITY. OTS regulations require each thrift institution
to have regulatory capital at least sufficient to meet three requirements:
tangible capital and core (leverage) capital of 1.5% and 3.0%, respectively,
of adjusted total assets, and a risk-based capital standard equal to 8.0%
of risk-adjusted assets. As of December 31, 1993, ASB was in compliance
with all of the minimum capital requirements.
The Federal Deposit Insurance Corporation Improvement Act of 1991
established a statutory framework for closer monitoring of insured depository
institutions in order to ensure "prompt corrective action" by regulators as an
institution's capital position declines. The OTS rules for prompt corrective
action, effective on December 19, 1992, define the capital measures for five
capital categories (well-capitalized, adequately
56
31
capitalized, undercapitalized, significantly undercapitalized and critically
undercapitalized), and provide for progressively more stringent restrictions
and supervision as capital levels decline. To be classified as
"well-capitalized," an institution must have a "leverage ratio" of 5%, a
"Tier-1 risk-based ratio" of 6% and a "total risk-based ratio" of 10%. As of
December 31, 1993, ASB believes that based on OTS capital standards it would
have been classified as "well-capitalized."
MANAGEMENT SERVICES FEES. In the second quarter of 1992, HEI changed its
method of billing corporate-level expenses to ASB such that only certain direct
charges, rather than fully-allocated costs, were billed to ASB. However, no
change was made by HEI in the manner in which corporate-level expenses are
allocated for segment reporting purposes. Thus, operating income for the
savings bank segment differs from the operating income reported in the separate
financial statements of ASB for the year ended December 31, 1992 because of
corporate-level expenses which were allocated to the segment, but were not
billed. Also, because of the change in intercompany billing practice, net
income of ASB shown for the year ended December 31, 1992 is $1.0 million
greater than it would have been had the billing practice used in prior years
been consistently followed. In 1993 and 1991, corporate-level expenses
allocated to the savings bank segment did not differ from the amount billed to
ASB, and operating income for the savings bank segment did not differ from the
operating income reported in the separate financial statements of ASB. For
segment reporting purposes, HEI expenses allocated to the savings bank segment
for general management, administrative and support services totaled $0.8
million, $2.0 million and $1.7 million for 1993, 1992 and 1991, respectively.
6 o REAL ESTATE SUBSIDIARY
At December 31, 1993 and 1992, MPC and its subsidiaries' total real estate
project inventory, equity investment in real estate joint ventures and loans to
unconsolidated joint ventures or joint venture partners amounted to $49 million
and $41 million, respectively.
On August 17, 1992, Malama Mohala Corp. (MMO), a wholly owned subsidiary of
MPC, acquired MDT-BF Limited Partnership's (MDT) 50% interest in Ainalani
Associates (Ainalani), a joint venture between MMO and MDT. Upon closing of the
purchase, Ainalani was dissolved. The amount of consideration for the transfer,
which was not material to the Company's financial condition, was determined by
an arbitration process which ended on March 31, 1993 and was based primarily on
the net present value of MDT's partnership interest in Ainalani as of June 30,
1992. MMO plans to complete the development and sale of Ainalani's three
projects on the islands of Maui and Hawaii and has assumed Ainalani's 50%
partnership interest in Palailai Associates, a partnership with Palailai
Holdings, Inc.
In 1990, Malama Development Corp. (MDC) acquired a 50% general partnership
interest in Baldwin*Malama, a partnership with Baldwin Pacific Properties, Inc.
(BPPI). In May 1993, Baldwin*Malama was reorganized as a limited partnership in
which MDC became the sole general partner and BPPI the sole limited partner.
Beginning in May 1993, in conjunction with the dissolution of the general
partnership and formation of the limited partnership, MDC consolidated the
accounts of Baldwin*Malama. Previously, MDC accounted for its investment in
Baldwin*Malama under the equity method.
RELATED PARTY TRANSACTIONS. Two of MPC subsidiaries' joint ventures involve
partnerships in which a director of HEI has significant interests. Another
director of HEI had a significant interest in MDT, MMO's former partner in
Ainalani. Palailai Associates, one of MMO's joint ventures, involves a
corporate partner, Palailai Holdings, Inc., in which the family of an HEI
officer has a significant interest. Investments in joint ventures with related
parties aggregated $15 million and $21 million as of December 31, 1993 and
1992, respectively.
COMMITMENTS AND CONTINGENCIES. 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.
57
32
7 o INVESTMENTS
Marketable securities consisted of the following:
December 31 1993 1992
------------------------- -------------------------
ESTIMATED Estimated
CARRYING MARKET Carrying market
VALUE VALUE value value
-------- -------- -------- --------
(in thousands)
Savings bank
Mortgage-backed and other debt securities . . . . . $675,552 $687,166 $748,221 $765,732
Stock in Federal Home Loan Bank of Seattle . . . . 23,203 23,203 20,194 20,194
-------- -------- -------- --------
$698,755 $710,369 $768,415 $785,926
======== ======== ======== ========
ASB has private-issue mortgage-backed securities and mortgage-backed
securities purchased from the Federal Home Loan Mortgage Corporation (FHLMC),
Government National Mortgage Association (GNMA) and Federal National Mortgage
Association (FNMA). The amortized cost and estimated market values of ASB's
mortgage-backed and other debt securities were as follows:
December 31 1993 1992
----------------------------------------------- -----------------------------------------------
GROSS GROSS ESTIMATED Gross Gross Estimated
CARRYING UNREALIZED UNREALIZED MARKET Carrying unrealized unrealized market
VALUE GAINS LOSSES VALUE value gains losses value
-------- ---------- ---------- --------- -------- ---------- ---------- ---------
(in thousands)
Mortgage-backed
securities held for
investment
Private-issue . . $465,373 $4,339 $(1,440) $468,272 $491,566 $4,090 $(1,472) $494,184
FHLMC . . . . . 117,803 8,024 -- 125,827 182,670 12,378 -- 195,048
GNMA . . . . . . 42,539 906 (629) 42,816 22,488 1,030 (106) 23,412
FNMA . . . . . . 4,441 414 -- 4,855 13,167 1,100 -- 14,267
U.S. Government and
federal agencies
securities held for
investment . . . . -- -- -- -- 15,293 491 -- 15,784
Other securities held
for trading . . . 45,396 -- -- 45,396 23,037 -- -- 23,037
-------- ------- ------- -------- -------- ------- ------- --------
$675,552 $13,683 $(2,069) $687,166 $748,221 $19,089 $(1,578) $765,732
======== ======= ======= ======== ======== ======= ======= ========
Contractual maturities are not presented for ASB's mortgage-backed securities
held for investment because these securities are not due at a single maturity
date.
ASB did not sell mortgage-backed securities held for investment in 1993 and
1992. Proceeds from the sale of a mortgage-backed security held for investment
were approximately $30 million for 1991. The proceeds from the 1991 sale
approximated the carrying value of the mortgage-backed security. ASB did not
sell other debt securities held for investment during 1993, 1992 and 1991.
Other investments, which have no ready market, consisted of the following:
December 31 1993 1992
(in thousands) ------- -------
Leveraged leases (see Note 8) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $53,115 $51,202
Real estate joint venture interests . . . . . . . . . . . . . . . . . . . . . . . . . . . 17,494 24,796
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6,497 5,976
------- -------
$77,106 $81,974
======= =======
Realized gains and losses from the sale and writedown of other investments
were not material in 1993, 1992 and 1991.
58
33
8 o INVESTMENT IN LEVERAGED LEASES
HEIIC owns commercial real estate which is subject to several leveraged lease
agreements entered into in 1987. The initial lease terms expire in 2009 and
2010, after which the lessees have options to renew the leases at fixed rentals
for additional periods of up to 28 years. The real estate reverts back to HEIIC
at the end of the last renewal term if not purchased by the lessees.
HEIIC also has a 25% interest in a leveraged lease agreement entered
into in 1985 under which 60% of an 818-MW coal-fired generating unit 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 1993, HEIIC refinanced approximately $13 million of nonrecourse debt
supporting one of the leveraged leases, reducing the interest rate from 16.75%
to 8.68%. As a result of the refinancing, 1993 net income increased by $1.1
million and an additional $7.5 million of net income from the leveraged lease
will be recognized over the remaining life of the lease.
The Omnibus Budget Act of 1993, which raised the maximum corporate
income tax rate by 1% effective January 1, 1993, caused a reduction in 1993 net
income from leveraged leases of $0.5 million.
HEIIC's net investment in leveraged leases was as follows:
December 31 1993 1992
(in thousands) ---------- -----------
Rentals receivable, net of principal and interest on nonrecourse debt . . . . . . . . $ 62,225 $ 49,055
Estimated residual value of leased assets . . . . . . . . . . . . . . . . . . . . . . . 35,268 35,268
Less unearned income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (44,378) (33,121)
---------- ----------
Investment in leveraged leases . . . . . . . . . . . . . . . . . . . . . . . . . . . . 53,115 51,202
Less deferred taxes arising from leveraged leases . . . . . . . . . . . . . . . . . . . (45,418) (44,928)
---------- ----------
$ 7,697 $ 6,274
========== ==========
9 o PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consisted of the following:
December 31 1993 1992
---------- ----------
(in thousands)
Land . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 33,103 $ 35,646
Plant and equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,058,201 1,858,150
Construction in progress . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 129,875 109,116
---------- ----------
2,221,179 2,002,912
Less--accumulated depreciation . . . . . . . . . . . . . . . . . . . . . . . . . . . (678,190) (615,084)
---------- ----------
$1,542,989 $1,387,828
========== ==========
10 o REGULATORY ASSETS
Regulatory assets at December 31, 1993 and 1992 include the following deferred
costs:
December 31 1993 1992
(in thousands) ---------- ----------
Postretirement benefits other than pensions . . . . . . . . . . . . . . . . . . . . . $ 19,210 $ --
Income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16,297 --
Preliminary plant costs on suspended project . . . . . . . . . . . . . . . . . . . . 6,577 --
Vacation earned, but not yet taken . . . . . . . . . . . . . . . . . . . . . . . . . 5,494 --
Unamortized debt expense on retired issuances . . . . . . . . . . . . . . . . . . . . 5,435 4,983
Integrated resource planning costs . . . . . . . . . . . . . . . . . . . . . . . . . 4,661 1,730
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4,403 955
---------- ----------
$ 62,077 $ 7,668
========== ==========
In 1994, HECO intends to apply to the PUC for recovery of the preliminary plant
costs on a suspended project.
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34
11 o SHORT-TERM BORROWINGS
Short-term borrowings at December 31, 1993 and 1992 consisted of
commercial paper and bank loans.
HEI maintained bank lines of credit which totaled $50 million and $30
million at December 31, 1993 and 1992, respectively. HECO maintained bank lines
of credit which totaled $108 million and $135 million at December 31, 1993 and
1992, respectively. As of January 1, 1994, HECO maintained bank lines of credits
which totaled $85 million. The HEI and HECO lines of credit support the issuance
of commercial paper. There were no borrowings under any line of credit during
1993 and 1992.
12 o LONG-TERM DEBT
Long-term debt consisted of the following:
December 31 1993 1992
(dollars in thousands) -------- --------
First mortgage bonds
4.45-5.75%, due in various years through 1997 . . . . . . . . . . . . . . . . . . . . . . $ 24,000 $ 40,000
6.875-7.875%, due in various years through 2003 . . . . . . . . . . . . . . . . . . . . . 22,000 22,850
8.20-9.875%, due in various years through 2016 . . . . . . . . . . . . . . . . . . . . . 43,000 73,000
10.75%, due 2005 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5,000 5,000
-------- --------
94,000 140,850
Obligations to the State of Hawaii for the repayment of special purpose -------- --------
revenue bonds issued on behalf of electric utility subsidiaries
6.875% refunding series 1987, due 2012 . . . . . . . . . . . . . . . . . . . . . . . . . 57,500 57,500
7.2% series 1984, due 2014 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11,400 11,400
7.625% series 1988, due 2018 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 50,000 50,000
7.35-7.6% series 1990, due 2020 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 100,000 100,000
6.55% series 1992, due 2022 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 60,000 60,000
5.45% series 1993, due 2023 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 100,000 --
-------- --------
378,900 278,900
Less funds on deposit with trustees . . . . . . . . . . . . . . . . . . . . . . . . . (56,205) (44,993)
Less unamortized discount . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (1,986) --
-------- --------
320,709 233,907
-------- --------
Promissory notes
4.85-5.83%, due in various years through 1998 . . . . . . . . . . . . . . . . . . . . . . 70,000 1,500
6.262-7.59%, due in various years through 2003 . . . . . . . . . . . . . . . . . . . . . 113,000 83,640
8.20-9.9%, due in various years through 2011 . . . . . . . . . . . . . . . . . . . . . . 100,100 122,500
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27 78
-------- --------
283,127 207,718
-------- --------
$697,836 $582,475
======== ========
The first mortgage bonds are secured by separate indentures which
purport to be liens on substantially all of the real and personal property now
owned or hereafter acquired by the respective electric utility subsidiaries.
In December 1993, HECO and its subsidiaries issued $70 million of
medium-term notes bearing interest at rates ranging from 4.85% to 5.83% and
with maturities varying between December 1995 through December 1998.
In June 1993, HEI issued $37 million of medium-term notes bearing
interest at rates ranging from 6.39% to 7.09% and with maturities varying
between June 1999 through June 2003.
In October 1992, HEI issued $50 million of senior unsecured debt
comprised of a $30 million 6.262% note and a $20 million 6.42% note, both due in
October 1997.
In 1993 and 1992, $100 million and $60 million, respectively, of fixed
rate, tax-exempt special purpose revenue bonds were issued by the Department of
Budget and Finance of the State of Hawaii on behalf of the electric utility
subsidiaries. The funds on deposit with trustees represent the undrawn proceeds
from the issuance of the special purpose revenue bonds and earn interest at
market rates. These funds are only available to the
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35
electric utility subsidiaries for certain authorized construction projects and
certain expenses related to the bonds.
At December 31, 1993, the aggregate payments of principal required on
long-term debt during the next five years and thereafter are $76 million in
1994, $23 million in 1995, $68 million in 1996, $65 million in 1997, $52
million in 1998 and $414 million thereafter.
13 o COMMON STOCK
Changes to common stock were as follows:
1993 1992 1991
--------------------- ---------------------- ---------------------
COMMON Common Common
SHARES STOCK Shares stock Shares stock
------ -------- ------ -------- ------ --------
(in thousands)
Balance, beginning of year . . . . . . . 24,762 $409,257 23,867 $376,783 21,918 $310,257
Issuance of common stock
Public offering . . . . . . . . . . . 2,000 74,500 -- -- 1,200 41,250
Dividend reinvestment and
stock purchase plan . . . . . . . 758 28,013 703 27,102 652 22,476
HEI retirement savings and
other plans . . . . . . . . . . . 155 5,637 192 6,822 97 3,145
Expenses and other . . . . . . . . . . -- (2,697) -- (1,450) -- (345)
------ -------- ------ -------- ------ --------
Balance, end of year . . . . . . . . . . 27,675 $514,710 24,762 $409,257 23,867 $376,783
====== ======== ====== ======== ====== ========
At December 31, 1993, the Company had reserved a total of 2,359,000
shares of common stock for issuance under the Hawaiian Electric Industries
Retirement Savings Plan, the Dividend Reinvestment and Stock Purchase Plan, and
the 1987 Stock Option and Incentive Plan.
14 o INTEREST EXPENSE
Interest expense, including amounts capitalized as allowance for borrowed funds
used during construction and excluding interest on nonrecourse debt on
leveraged leases, consisted of the following:
Years ended December 31 1993 1992 1991
-------- -------- --------
(in thousands)
Interest expense
Savings bank . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 92,701 $114,606 $124,532
Electric utility . . . . . . . . . . . . . . . . . . . . . . . . . . . 35,287 33,011 33,248
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17,905 14,130 10,273
-------- -------- --------
$145,893 $161,747 $168,053
======== ======== ========
15 o INCOME TAXES
In February 1992, the FASB issued SFAS No. 109, "Accounting for Income Taxes."
The new standard requires companies to use the asset and liability method of
accounting for income taxes. The objective of the asset and liability method
is to establish deferred tax assets and liabilities for the temporary
differences between the financial reporting basis and the tax basis of the
Company's assets and liabilities at enacted tax rates expected to be in effect
when such deferred tax assets or liabilities are realized or settled.
Effective January 1, 1993, the Company adopted SFAS No. 109. The resulting
change in the method of accounting for income taxes had no material effect on
net income for the year ended December 31, 1993 primarily due to the regulated
nature of the electric utility subsidiaries and YB. For these PUC regulated
subsidiaries, the net increase in deferred income taxes arising from the
adoption of SFAS No. 109 is recoverable
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36
through future rates and has been recorded as a regulatory asset. Under SFAS
No. 109, additional income tax expense of $1.8 million resulted from the 1%
increase in the maximum corporate income tax rate enacted by the Omnibus Budget
Reconciliation Act of 1993.
Total income tax expense (benefit) was allocated as follows:
Years ended December 31 1993 1992 1991
(in thousands) ------- -------- -------
Continuing operations . . . . . . . . . . . . . . $47,086 $ 29,529 $32,333
Discontinued operations . . . . . . . . . . . . . (7,982) (50,623) (2,414)
------- -------- -------
$39,104 $(21,094) $29,919
======= ======== =======
The components of income taxes attributable to income from continuing
operations were as follows:
Years ended December 31 1993 1992 1991
(in thousands) ------- ------- -------
Federal
Current . . . . . . . . . . . . . . . . . . . . $40,537 $32,425 $21,950
Deferred . . . . . . . . . . . . . . . . . . . (152) (7,085) 5,942
Deferred tax credits, net . . . . . . . . . . . . 50 (1,777) (1,771)
------- ------- -------
40,435 23,563 26,121
------- ------- -------
State
Current . . . . . . . . . . . . . . . . . . . . 3,385 1,634 2,927
Deferred . . . . . . . . . . . . . . . . . . . (475) (332) 1,467
Deferred tax credits, net . . . . . . . . . . . 3,741 4,664 1,818
------- ------- -------
6,651 5,966 6,212
------- ------- -------
$47,086 $29,529 $32,333
======= ======= =======
Under Accounting Principles Board Opinion No. 11, the sources of timing
differences in the recognition of revenues and expenses for tax and financial
reporting purposes related to the 1992 and 1991 provisions for deferred income
taxes were as follows:
Years ended December 31 1992 1991
(in thousands) ------- -------
Excess of tax depreciation over book straight-line depreciation rates . . . . . . . $ 2,977 $ 3,218
Excess tax deductions from leveraged leases . . . . . . . . . . . . . . . . . . . . 2,099 2,676
Excess of tax pension deduction over book expense . . . . . . . . . . . . . . . . . (47) 2,984
Interest capitalized for tax purposes . . . . . . . . . . . . . . . . . . . . . . . (3,347) (1,967)
Gain on sale of land deferred for book purposes . . . . . . . . . . . . . . . . . . (4,737) --
Contributions in aid of construction and customer advances, net . . . . . . . . . . (6,095) (2,773)
Other 1,733 3,271
------- -------
$(7,417) $ 7,409
======= =======
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A reconciliation of the amount of income taxes attributable to income from
continuing operations computed at the federal statutory rate to the amount
provided in the Company's Consolidated Statements of Income is as follows:
Years ended December 31 1993 1992 1991
(in thousands) ------- ------- -------
Federal statutory income tax rate . . . . . . . . . . . . . . . . 35% 34% 34%
Amount at the federal statutory income tax rate . . . . . . . . . $38,070 $31,023 $29,904
State income taxes, net of effect on federal income taxes . . . . 4,323 3,938 4,100
Preferred stock dividends of electric utility subsidiaries . . . 2,281 2,281 2,342
Difference between book and tax straight-line depreciation
for which no deferred taxes were provided . . . . . . . . . . -- 3,015 2,676
Amortization of contributions in aid of construction . . . . . . -- (1,658) (1,476)
Amortization of utility deferred income taxes in
excess of current rates . . . . . . . . . . . . . . . . . . . -- (1,675) (1,537)
Amortization of deferred tax credits . . . . . . . . . . . . . . -- (1,776) (1,787)
Allowance for funds used during construction . . . . . . . . . . -- (2,375) (1,403)
Utilization of capital loss carryforwards . . . . . . . . . . . . -- (3,317) (481)
Other, net . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,412 73 (5)
------- ------- -------
$47,086 $29,529 $32,333
======= ======= =======
For financial reporting purposes, the Company has not recognized any
benefit for operating losses of HIG, its discontinued insurance subsidiary, in
excess of the Company's tax basis in HIG.
Deferred tax assets and deferred tax liabilities were comprised of the
following:
DECEMBER 31, 1993
(in thousands) -----------------
Deferred tax assets
Property, plant and equipment . . . . . . . . . . . . . . . . $ 6,133
Contributions in aid of construction and customer advances . . 44,932
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25,435
--------
76,500
Deferred tax liabilities --------
Property, plant and equipment . . . . . . . . . . . . . . . . 162,671
Leveraged leases . . . . . . . . . . . . . . . . . . . . . . . 45,418
Regulatory asset . . . . . . . . . . . . . . . . . . . . . . . 6,237
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29,324
--------
243,650
Discontinued operations . . . . . . . . . . . . . . . . . . . 1,179
--------
244,829
--------
Net deferred tax liability . . . . . . . . . . . . . . . . . . . $168,329
========
There was no valuation allowance provided for deferred tax assets as of
December 31, 1993.
16 o CASH FLOWS
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION. Cash paid for interest (net
of capitalized amounts which were not material) and income taxes were as
follows:
Years ended December 31 1993 1992 1991
(in thousands) -------- -------- --------
Interest (including interest paid by savings bank, but
excluding interest paid on nonrecourse debt on
leveraged leases) . . . . . . . . . . . . . . . . . . . . . $142,138 $158,553 $169,092
======== ======== ========
Income taxes . . . . . . . . . . . . . . . . . . . . . . . . . $ 5,641 $ 29,162 $ 28,810
======== ======== ========
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In 1993, 1992 and 1991, cash paid for interest on nonrecourse debt on leveraged
leases amounted to $10 million, $11 million and $11 million, respectively.
SUPPLEMENTAL DISCLOSURES OF NONCASH ACTIVITIES. Common stock dividends
reinvested by shareholders in HEI common stock in noncash transactions amounted
to $17 million, $15 million and $14 million in 1993, 1992 and 1991,
respectively.
Effective in 1993, HECO recognized the estimated fair value of noncash
contributions in aid of construction received in 1993 and prior years, which
increased both plant and contributions in aid of construction by $26 million.
The allowance for equity funds used during construction, which was
capitalized as part of the cost of electric utility plant, amounted to $7
million, $7 million and $4 million in 1993, 1992 and 1991, respectively.
As described in Note 6, on August 17, 1992, MMO, a wholly owned
subsidiary of MPC, acquired MDT's 50% interest in Ainalani, a joint venture
between MMO and MDT. Upon closing of the purchase, Ainalani was dissolved. As
of December 31, 1992, MMO had made no payment to MDT for MDT's 50% interest in
Ainalani. In 1993, the payment to MDT, which was not material to the Company's
financial condition, was primarily reflected as an increase in other
investments in the Consolidated Statements of Cash Flows for the year ended
December 31, 1993. 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,
which constituted less than 1% of the total consolidated assets and
liabilities, respectively, of HEI and its subsidiaries.
17 o STOCK OPTION AND INCENTIVE PLAN
Under the 1987 Stock Option and Incentive Plan, as amended, an aggregate of
1,250,000 shares of common stock may be issued to officers and key employees as
incentive stock options, nonqualified stock options, restricted stock, stock
appreciation rights, stock payments or dividend equivalents.
Only nonqualified stock options have been granted to date. For these
options, the purchase price of common stock was based on the market value of
the common stock on or near the date of grant. Options may be exercised as
determined by the Compensation Committee of the Board of Directors, but in no
event after 10 years and one day from the date of grant in the case of
nonqualified stock options.
Nonqualified stock option transactions were as follows:
1993 1992 1991
------- ------- -------
Options outstanding, beginning of year . . . . . . . . . . . . . . . . 359,000 227,500 152,500
Granted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 123,000 209,000 98,500
Exercised . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (18,542) (75,625) (20,500)
Canceled . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -- (1,875) (3,000)
------- ------- -------
Options outstanding, end of year . . . . . . . . . . . . . . . . . . . 463,458 359,000 227,500
======= ======= =======
Options exercisable, December 31 . . . . . . . . . . . . . . . . . . . 235,458 189,625 92,750
======= ======= =======
Price range for options
Exercised
High . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $36 $36 $33
Low . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30 27 27
Outstanding, December 31
High . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 41 41 36
Low . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30 30 27
======= ======= =======
18 o RETIREMENT BENEFITS
PENSIONS. The Company has several defined benefit pension plans which cover
substantially all employees. Benefits are based on the employees' years of
service and base compensation.
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39
The funded status of the pension plans and the amounts recognized in
the consolidated financial statements were as follows:
December 31 1993 1992
(in thousands) -------- --------
Accumulated benefit obligation
Vested . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $293,627 $241,834
Nonvested . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 43,543 30,774
-------- --------
$337,170 $272,608
======== ========
Projected benefit obligation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $432,435 $336,617
Plan assets at fair value, primarily equity securities and fixed income investments . . 410,369 351,589
-------- --------
Projected benefit obligation in excess of (less than) plan assets . . . . . . . . . . 22,066 (14,972)
Unrecognized prior service cost . . . . . . . . . . . . . . . . . . . . . . . . . . . . (2,401) (2,666)
Unrecognized net gain . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4,958 44,542
Unrecognized net transition obligation . . . . . . . . . . . . . . . . . . . . . . . . (22,259) (24,657)
Adjustment required to recognize minimum liability . . . . . . . . . . . . . . . . . . 1,985 1,162
-------- --------
Accrued pension liability . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 4,349 $ 3,409
======== ========
The accumulated benefit obligation is the actuarial present value of
benefits attributed to past services rendered by employees based on recent pay
levels. The projected benefit obligation is the accumulated benefit obligation
adjusted for the effect of assumed future pay increases. Plans with an
accumulated benefit obligation exceeding assets were not material.
Net periodic pension cost included the following components:
Years ended December 31 1993 1992 1991
(in thousands) ------- ------- -------
Service cost--benefits earned during the period . . . . . . . . . . . . $11,423 $10,358 $ 9,518
Interest cost on projected benefit obligation . . . . . . . . . . . . . 27,350 27,401 24,741
Actual return on plan assets . . . . . . . . . . . . . . . . . . . . . (56,710) (14,050) (73,139)
Amortization and deferral, net . . . . . . . . . . . . . . . . . . . . 35,607 (5,721) 55,043
------- ------- --------
$17,670 $17,988 $16,163
======= ======= ========
Of these net periodic pension costs, $12 million, $12 million and $11
million were expensed in 1993, 1992 and 1991, respectively, and the remaining
amounts were charged primarily to electric utility plant and plant-related
accounts.
For all pension plans, as of December 31, 1993 and 1992, the discount
rate assumed in determining the actuarial present value of the projected
benefit obligation was 7.0% and 8.5%, respectively. For 1993, 1992 and 1991,
the expected long-term rate of return on assets was 8.0% and the assumed rate
of increase in future compensation levels was 5%.
The unrecognized net transition obligation is the projected benefit
obligation in excess of plan assets at January 1, 1987, less amounts amortized.
For most of the plans, the unrecognized net transition obligation is being
amortized over 16 years beginning in 1987.
POSTRETIREMENT BENEFITS OTHER THAN PENSIONS. The Company provides various
postretirement benefits other than pensions to eligible employees upon
retirement. Health and life insurance benefits are provided to eligible
employees of HEI, HECO and its subsidiaries, and YB upon their retirement.
Medical, dental and vision benefits are provided to eligible employees of HEI
and HECO and its subsidiaries upon their retirement, with contributions by
retirees toward costs based on their years of service and retirement date.
Medical and vision benefits are provided to eligible bargaining unit employees
of YB upon their retirement at no cost. Employees are eligible for these
benefits if, upon retirement, they participate in one of the Company's defined
benefit pension plans. Currently, no funding has been provided for these
benefits. Through December 31, 1992, the cost of postretirement benefits other
than pensions had not been recognized until paid (i.e., the pay-as-you-go
method). Accordingly, no provision had been made for future benefits to
existing or retired employees. Payments for postretirement benefits other than
pensions amounted to $3 million in 1992 and 1991.
Effective January 1, 1993, the Company adopted SFAS No. 106, "Employers'
Accounting for Postretirement Benefits Other Than Pensions," which requires
accrual, during the years that an employee renders the necessary service, of
the expected cost of providing postretirement benefits other than pensions to
that employee and the employee's beneficiaries and covered dependents. The
transition obligation is being recognized on a delayed basis over 20 years.
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40
In February 1992, the PUC opened a generic docket to determine whether SFAS
No. 106 should be adopted for rate-making purposes. On July 15, 1993, the PUC
issued an interim decision and order in the generic docket, amending an earlier
interim decision and order to state that it is probable that its final decision
will allow, for rate-making purposes, the full costs of postretirement benefits
other than pensions calculated on the basis of SFAS No. 106. Upon request of
HECO and its subsidiaries, on January 11, 1994, the PUC issued another interim
decision and order which stated that it has "determined that it will allow each
utility to calculate, for ratemaking purposes, the full costs of postretirement
benefits other than pensions on an accrual basis, rather than the current pay-
as-you-go basis." The PUC further stated that it has not yet decided whether
to adopt SFAS No. 106 in its entirety or with modifications, but it reaffirmed
that "(1) it is probable that the final decision and order in these dockets
will allow, for ratemaking purposes, the full costs of postretirement benefits
other than pensions calculated on the basis of SFAS [No.] 106; and (2) it is
probable that the difference between the costs of postretirement benefits other
than pensions determined under SFAS [No.] 106 and the current pay-as-you-go
method from January 1, 1993, through the effective date of the postretirement
benefits step increases . . . will be recovered ratably through future rates
over a period not extending beyond 2013."
Based upon these interim decisions and orders, HECO and its subsidiaries
and YB recognized regulatory assets and deferred for financial reporting
purposes the difference between the costs of postretirement benefits other than
pensions determined under SFAS No. 106 and such costs under the pay-as-you-go
method. The regulatory assets totaled approximately $19.2 million as of
December 31, 1993.
If the PUC in its final decision and order does not fully adopt SFAS No.
106 for rate-making purposes and if under current accounting guidelines it is
concluded that recognition of a regulatory asset with respect to the difference
between the accrual and the pay-as-you-go methods would be inappropriate, then
the net earnings of the Company would be adversely affected by SFAS No. 106 in
1994 and future years. Management cannot predict with certainty when the final
decision in this docket will be rendered.
The accrued liability for postretirement benefits other than pensions was
as follows:
DECEMBER 31, 1993
(in thousands) -----------------
Accumulated postretirement benefit obligation
Retirees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 61,498
Fully eligible active plan participants . . . . . . . . . . . . . . . . . 33,086
Other active plan participants . . . . . . . . . . . . . . . . . . . . . 53,760
---------
148,344
Unrecognized net loss . . . . . . . . . . . . . . . . . . . . . . . . . . . (880)
Unrecognized net transition obligation . . . . . . . . . . . . . . . . . . (127,940)
---------
Accrued liability recognized in the balance sheet . . . . . . . . . . . . . $ 19,524
=========
As of December 31, 1993, the assumed discount rate and rate of increase in
future compensation levels used to measure the accumulated postretirement
benefit obligation were 7.0% and 5.0%, respectively.
Net periodic postretirement benefit cost included the following components:
Year ended December 31 1993
(in thousands) --------
Service cost . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 5,712
Interest cost . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11,216
Net amortization and deferral . . . . . . . . . . . . . . . . . . . . . . . 6,733
-------
$23,661
=======
Of the net periodic postretirement benefit cost, $3 million was expensed in
1993, and the remaining amount was charged primarily to regulatory assets,
electric utility plant and plant-related accounts.
As of December 31, 1993, the assumed health care trend rates for 1994 and
future years were as follows: medical, 7.0%; dental, 5.5%; and vision, 4.5%.
A 1% increase in the trend rate for health care costs would have increased
the accumulated postretirement benefit obligation as of December 31, 1993 by
approximately $25 million and the service and interest costs for 1993 by
approximately $3 million.
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19 o REGULATORY RESTRICTIONS ON NET ASSETS
At December 31, 1993, net assets (assets less liabilities) of approximately
$498 million were not available for transfer to HEI from its subsidiaries in
the form of dividends, loans or advances without regulatory approval. However,
HEI expects that the regulatory restrictions will not materially affect the
operations of the Company nor its ability to pay dividends on its common stock.
20 o SIGNIFICANT GROUP CONCENTRATIONS OF CREDIT RISK
Substantially all of the Company's business activity is with customers located
in the State of Hawaii. Most of the financial instruments reflected on the
consolidated balance sheets are based in the State of Hawaii, except for the
mortgage-backed securities. Substantially all real estate loans receivable are
secured by real estate in Hawaii.
At December 31, 1993, ASB's private-issue mortgage-backed securities
represented whole or participating interests in pools of first mortgage loans
collateralized by real estate in the continental United States, and
approximately 81% of the portfolio was collateralized by real estate in
California. ASB's management has concluded, based on internal reviews of its
private-issue mortgage-backed securities, that any impairment in the value of
its mortgage-backed securities portfolio resulting from the consequences of the
earthquake that occurred on January 17, 1994 near Los Angeles, California is
not likely to have a material effect on the Company's financial condition or
results of operations. At December 31, 1993, substantially all private-issue
mortgage-backed securities were rated investment grade by various securities
rating agencies.
21 o DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS
SFAS No. 107, "Disclosures about Fair Value of Financial Instruments," requires
that the Company disclose estimated fair values for certain financial
instruments.
The following methods and assumptions were used to estimate the fair
value of each applicable class of financial instruments for which it is
practicable to estimate that value:
CASH AND EQUIVALENTS. The carrying amount approximates fair value because of
the short maturity of these instruments.
LOANS RECEIVABLE. For certain homogeneous categories of loans, such as some
residential mortgages, credit card receivables, and other consumer loans, fair
value is estimated using the quoted market prices for securities backed by
similar loans, adjusted for differences in loan characteristics. The fair value
of other types of loans is estimated by discounting the future cash flows using
the current rates at which similar loans would be made to borrowers with
similar credit ratings and for similar remaining maturities.
MARKETABLE SECURITIES. Fair value is based on quoted market prices or dealer
quotes.
DEPOSIT LIABILITIES. Under SFAS No. 107, the fair value of demand deposits,
savings accounts, and certain money market deposits is the amount payable on
demand at the reporting date. The fair value of fixed-maturity certificates of
deposit is estimated using the rates currently offered for deposits of similar
remaining maturities.
SHORT-TERM BORROWINGS. The carrying amount approximates fair value because of
the short maturity of these investments.
SECURITIES SOLD UNDER AGREEMENTS TO REPURCHASE. Dealer quotes currently
available to ASB for securities sold under agreements to repurchase with
similar terms and remaining maturities are used to estimate fair value.
ADVANCES FROM FEDERAL HOME LOAN BANK AND LONG-TERM DEBT. Fair value is
estimated based on the quoted market prices for the same or similar issues or
on the current rates offered to ASB for debt of the same or similar remaining
maturities.
PREFERRED STOCK OF ELECTRIC UTILITY SUBSIDIARIES SUBJECT TO MANDATORY
REDEMPTION. There are no quoted market prices for the electric utility
subsidiaries' preferred stocks. Fair value is estimated based on quoted market
prices for similar issues of preferred stock.
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The estimated fair values of certain of the Company's financial instruments
were as follows:
December 31 1993 1992
--------------------------- ---------------------------
CARRYING ESTIMATED Carrying Estimated
AMOUNT FAIR VALUE amount fair value
(in thousands) ---------- ---------- ---------- ----------
FINANCIAL ASSETS
Cash and equivalents . . . . . . . . . . . . . . . $ 116,260 $ 116,260 $ 156,754 $ 156,754
Loans receivable, net . . . . . . . . . . . . . . 1,735,098 1,801,044 1,462,888 1,504,930
Marketable securities . . . . . . . . . . . . . . 698,755 710,369 768,415 785,926
Other investments for which it is not
practicable to estimate fair value (1) . . . . . 6,497 N/A 5,976 N/A
FINANCIAL LIABILITIES
Deposit liabilities . . . . . . . . . . . . . . . 2,091,583 2,095,850 2,032,869 2,038,552
Short-term borrowings . . . . . . . . . . . . . . 40,416 40,416 160,211 160,211
Securities sold under agreements to repurchase . . -- -- 27,223 27,272
Advances from Federal Home Loan Bank . . . . . . . 289,674 301,537 194,099 205,154
Long-term debt, net. . . . . . . . . . . . . . . . 697,836 722,347 582,475 589,142
PREFERRED STOCK OF ELECTRIC UTILITY SUBSIDIARIES
SUBJECT TO MANDATORY REDEMPTION . . . . . . . . . 46,730 49,583 48,920 51,437
OFF-BALANCE SHEET
Commitments to extend credit (2) . . . . . . . . . .
Financial guarantees written (3) . . . . . . . . . .
(1) At December 31, 1993 and 1992, the other investments for which it is not
practicable to estimate fair value consists primarily of an investment
representing approximately 10% of the issued common stock of an untraded
company; that investment had a carrying value of $5.5 million and $5.0
million as of December 31, 1993 and 1992, respectively. At December 31,
1992, the total assets reported by this company were $54 million and the
common stockholders' equity was $53 million. For 1992, revenues were $1.2
million and net loss was $1.3 million.
(2) At December 31, 1993 and 1992, neither the commitment fees received on
commitments to extend credit nor the fair value thereof were significant
to the consolidated financial statements of the Company.
(3) At December 31, 1993 and 1992, MPC or its subsidiaries had issued
guaranties of construction loans as described in Note 6. These guaranties
relate to borrowings from third parties which bear interest at rates
ranging from prime plus 1.0% to prime plus 1.5%. It is not practicable to
estimate the fair value of these guaranties.
N/A Not available.
LIMITATIONS. Fair value estimates are made at a specific point in time, based
on relevant market information and information about the financial instrument.
These estimates do not reflect any premium or discount that could result from
offering for sale at one time the Company's entire holdings of a particular
financial instrument. Because no market exists for a significant portion of the
Company's financial instruments, fair value estimates are based on judgments
regarding future expected loss experience, current economic conditions, risk
characteristics of various financial instruments and other factors. These
estimates are subjective in nature and involve uncertainties and matters of
significant judgment and, therefore, cannot be determined with precision.
Changes in assumptions could significantly affect the estimates.
Fair value estimates are based on existing on- and off-balance sheet
financial instruments without attempting to estimate the value of anticipated
future business and the value of assets and liabilities that are not considered
financial instruments. Significant assets and liabilities that are not
considered financial assets or liabilities include inventories, real estate
developments, leveraged leases, property, plant and equipment, regulatory
assets, goodwill, deferred income taxes, unamortized tax credits and
contributions in aid of construction. In addition, the tax ramifications related
to the realization of the unrealized gains and losses can have a significant
effect on fair value estimates and have not been considered.
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43
22 o QUARTERLY INFORMATION (UNAUDITED)
Selected quarterly information was as follows:
Quarter ended
-------------------------------------------------- YEAR ENDED
1993 March 31 June 30 Sept. 30 Dec. 31 DEC. 31
---- -------- -------- -------- -------- ----------
(in thousands, except per share amounts)
Revenues . . . . . . . . . . . . . . . . . $279,348 $281,645 $299,486 $281,691 $1,142,170
Operating income . . . . . . . . . . . . . 28,331 43,919 40,458 44,930 157,638
Net income (loss)
Continuing operations . . . . . . . . . . $ 9,292 $ 18,977 $ 16,088 $ 17,327 $ 61,684
Discontinued operations . . . . . . . . . 1,800 -- -- (14,825) (13,025)
-------- -------- -------- -------- ----------
$ 11,092 $ 18,977 $ 16,088 $ 2,502 $ 48,659
======== ======== ======== ======== ==========
Earnings (loss) per common share (1)
Continuing operations . . . . . . . . . . $ 0.38 $ 0.76 $ 0.61 $ 0.63 $ 2.38
Discontinued operations . . . . . . . . . 0.07 -- -- (0.54) (0.50)
-------- -------- -------- -------- ----------
$ 0.45 $ 0.76 $ 0.61 $ 0.09 $ 1.88
======== ======== ======== ======== ==========
Dividends per common share . . . . . . . . $ 0.57 $ 0.57 $ 0.57 $ 0.58 $ 2.29
Market price per common share (2)
High . . . . . . . . . . . . . . . . . . 38.88 38.50 38.63 38.75 38.88
Low . . . . . . . . . . . . . . . . . . . 35.38 31.00 37.25 34.25 31.00
======== ======== ======== ======== ==========
1992
----
(in thousands, except per share amounts)
Revenues . . . . . . . . . . . . . . . . . $237,456 $241,404 $270,917 $281,606 $1,031,383
Operating income . . . . . . . . . . . . . 31,644 33,511 37,301 33,763 136,219
Net income (loss)
Continuing operations . . . . . . . . . . $ 13,183 $ 15,513 $ 16,552 $ 16,467 $ 61,715
Discontinued operations . . . . . . . . . 809 228 (53,479) (20,855) (73,297)
-------- -------- -------- -------- ----------
$ 13,992 $ 15,741 $(36,927) $ (4,388) $ (11,582)
======== ======== ======== ======== ==========
Earnings (loss) per common share (1)
Continuing operations . . . . . . . . . . $ 0.55 $ 0.64 $ 0.68 $ 0.67 $ 2.54
Discontinued operations . . . . . . . . . 0.03 0.01 (2.20) (0.85) (3.02)
-------- -------- -------- -------- ----------
$ 0.58 $ 0.65 $ (1.52) $ (0.18) $ (0.48)
======== ======== ======== ======== ==========
Dividends per common share . . . . . . . . $ 0.56 $ 0.56 $ 0.56 $ 0.57 $ 2.25
Market price per common share (2)
High . . . . . . . . . . . . . . . . . . 37.13 39.88 44.63 42.00 44.63
Low . . . . . . . . . . . . . . . . . . . 35.13 36.13 39.50 34.75 34.75
======== ======== ======== ======== ==========
(1) The quarterly earnings per common share are based upon the weighted average
number of shares of common stock outstanding in each quarter.
(2) Market prices shown are as reported on the NYSE Composite Tape. The common
stock of HEI is traded on the New York and Pacific Stock Exchanges under
the symbol HE.
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44
DIRECTORS AND OFFICERS
DIRECTORS
Committees of the Board of Robert F. Clarke, 51 (1) Victor Hao Li, S.J.D., 52 Oswald K. Stender, 62 (3)
Directors President and (2) Trustee
Chief Executive Officer Co-Chairman Kamehameha Schools/Bishop
(1) Executive: Hawaiian Electric Industries, Asia Pacific Consulting Estate (charitable trust)
Thurston Twigg-Smith, Inc. Group (international 1993
Chairman 1989 business consultant)
(2) Audit: 1988
Diane J. Plotts, Edwin L. Carter, 68 (1, 3) Kelvin H. Taketa, 39 (2)
Chairman Retired President and Bill D. Mills, 42 (3) Vice President and
(3) Compensation: Chief Executive Officer Chairman of the Board and Director-Pacific Region
Edwin L. Carter, Bishop Trust Company, Ltd. Chief Executive Officer The Nature Conservancy
Chairman (financial services) Bill Mills Development and (international conservation
(4) Nominating: 1985 Investment Company, Inc. non-profit)
Richard Henderson, (real estate development) 1993
Chairman 1988
John D. Field, 68 (2) Thurston Twigg-Smith, 72
Retired Vice President- A. Maurice Myers, 53 (3) (1, 4)
Regulatory Affairs President and Chief President and
GTE Service Corporation Operating Officer Chief Executive Officer
(telecommunications services) America West Airlines, Inc. Persis Corporation
1986 (commercial air (newspaper publishing)
transporation services) 1981
1991
Richard Henderson, 65 (1, 3, Jeffrey N. Watanabe, 51 (1, 3)
4) Ruth M. Ono, Ph.D., 58 (2) Senior Partner
HSC, Inc. Vice President Watanabe, Ing and Kawashima
(real estate investment and The Queen's Health Systems (private law firm)
development) (hospital and health care 1987
1981 services)
1987
Ben F. Kaito, 67 (1, 2, 4) Harwood D. Williamson, 62
of Counsel Diane J. Plotts, 58 (1, 2) Group Vice President-
Kaito & Ishida General Partner Utility Companies
(private law firm) Mideast and China Hawaiian Electric
1981 Trading Company Industries, Inc.
(real estate development) 1985
1987
Subsidiary Outside Directors Jorge G. Camara, M.D., 43 Sanford J. Langa, 64 Anne M. Takabuki, 37
Camara Eye Clinic Attorney at law Vice President-
(ophthalmology) (private law firm) Finance and Administration
American Savings Bank Maui Electric Company Wailea Resort Company, Ltd.
1991 1961 (resort and commercial
development)
Maui Electric Company
1993
Joseph W. Hartley, Jr., 60 B. Martin Luna, 55
President and Partner
Chief Executive Officer Carlsmith, Ball, Wichman, Donald K. Yamada, 62
Maui Land & Pineapple Company, Murray, Case, Mukai and President
Inc. Ichiki (private law firm) Yamada Diversified
(resort and commercial Maui Electric Company Corporation (construction
development, agriculture) 1979 and trucking services)
Maui Electric Company Hawaii Electric Light
1993 Company
1985
Richard T. Ishida, 58 Denzil W. Rose, 68 Paul C. Yuen, Ph.D., 65
Attorney at law Retired President and Senior Vice President-
Goodsill Anderson Quinn & General Manager University of Hawaii
Stifel Hawaii Motors (higher education)
(private law firm) (automobile dealership) Hawaiian Electric Company
Hawaii Electric Light Company Hawaii Electric Light 1993
1984 Company
1960
Mildred D. Kosaki, 69
Specialist in education
research
Hawaiian Electric Company
1973
Year denotes year of
appointment of election
to the Board of Directors
70