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HECO EXHIBIT 13(b)
SELECTED CONSOLIDATED FINANCIAL DATA
Hawaiian Electric Company, Inc. (a wholly owned subsidiary of Hawaiian Electric
Industries, Inc.) and Subsidiaries
(dollars in thousands) 1993 1992 1991 1990 1989
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INCOME STATEMENT DATA (years ended December 31,):
Operating revenues ... $ 874,010 $ 776,929 $ 739,636 $ 704,853 $ 604,955
Operating expenses ... 795,925 699,890 663,709 631,300 528,167
---------- ---------- ---------- ---------- ----------
Operating income ..... 78,085 77,039 75,927 73,553 76,788
Other income ......... 11,556 9,740 4,511 6,804 6,385
---------- ---------- ---------- ---------- ----------
Income before
interest and
other charges ....... 89,641 86,779 80,438 80,357 83,173
Interest and other
charges ............. 33,515 33,101 34,228 31,873 30,340
---------- ---------- ---------- ---------- ----------
Income before
preferred stock
dividends of HECO ... 56,126 53,678 46,210 48,484 52,833
Preferred stock
dividends of HECO ... 4,421 4,525 4,600 4,674 3,097
---------- ---------- ---------- ---------- ----------
Net income for common
stock ............... $ 51,705 $ 49,153 $ 41,610 $ 43,810 $ 49,736
========== ========== ========== ========== ==========
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BALANCE SHEET DATA (at December 31,):
Utility plant ........ $2,102,534 $1,877,404 $1,701,218 $1,564,075 $1,444,356
Accumulated
depreciation ........ (641,230) (583,031) (536,552) (489,957) (448,213)
---------- ---------- ---------- ---------- ----------
Net utility plant .... $1,461,304 $1,294,373 $1,164,666 $1,074,118 $ 996,143
========== ========== ========== ========== ==========
Total assets ......... $1,703,276 $1,501,330 $1,318,023 $1,250,142 $1,127,088
========== ========== ========== ========== ==========
Capitalization:(1)
Long-term debt ....... $ 484,736 $ 374,835 $ 365,098 $ 356,741 $ 317,699
Preferred stock
subject to mandatory
redemption .......... 46,730 48,920 50,665 52,210 53,655
Preferred stock not
subject to mandatory
redemption .......... 48,293 36,293 36,293 36,293 36,293
Common stock equity .. 570,663 499,894 440,831 365,812 346,995
---------- ---------- ---------- ---------- ----------
Total capitalization . $1,150,422 $ 959,942 $ 892,887 $ 811,056 $ 754,642
========== ========== ========== ========== ==========
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CAPITAL STRUCTURE RATIOS (at December 31,) (%):(2)
Debt ................. 44.1 45.9 43.1 48.4 44.8
Preferred stock ...... 8.0 7.9 9.4 10.1 11.4
Common stock equity .. 47.9 46.2 47.5 41.5 43.8
==========================================================================================================
(1) Includes amounts due within one year and sinking fund requirements.
(2) Includes amounts due within one year, short-term borrowings from
nonaffiliates and affiliate, and sinking fund requirements.
Note: HEI owns all of HECO's common stock. Therefore, per share data is not
meaningful.
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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
EARNINGS
Net income for common stock for 1993 was $51.7 million compared to $49.2
million for 1992 and $41.6 million for 1991. The 1993 net income represents a
9.7% return on the average amount of common stock equity invested in HECO and
its subsidiaries (collectively, the "Company"), compared to returns of 10.5% in
1992 and 10.3% in 1991.
SALES
Consolidated sales of electricity were 8,325 million kilowatthours (KWH) for
1993, 8,332 million KWH for 1992, and 8,090 million KWH for 1991, excluding the
effect of the change made in 1991 in the method of estimating unbilled KWH
sales (see Note 15 in the "Notes to Consolidated Financial Statements"). Cool
weather, the downturn in the State economy and conservation efforts resulted in
a 0.1% decline in KWH sales in 1993 compared to 1992. KWH sales growth was
only 3.0% in 1992 due to the slowing in the State's economy. The low KWH sales
growth of 1.5% in 1991 reflects 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 REVENUES
Operating revenues were $874.0 million in 1993, compared to $776.9 million in
1992 and $739.6 million in 1991. Revenues for 1993 increased by $97.1 million,
or 12.5%, over 1992 revenues due primarily to the full year's effect of rate
relief granted by the PUC during 1992 for HECO and HELCO, interim rate
increases granted to MECO in 1993, and higher fuel oil prices, which are passed
through to customers. The rate schedules of the Company include energy cost
adjustment clauses under which electric rates are adjusted for changes in the
weighted average price for fuel oil and certain components of purchased power,
and the relative amounts of company-generated and purchased power.
Kilowatthour sales of electricity were relatively flat primarily because of
cooler weather, a downturn in the State economy and conservation efforts.
The 1992 increase in operating revenues of $37.3 million, or 5.0%, over
1991 revenues was due primarily to higher KWH sales of electricity and rate
relief granted by the PUC for HECO and HELCO. Revenues for 1992 included the
full year's effect of HECO rate relief for power purchased from Kalaeloa
Partners, L.P. (Kalaeloa) which commenced operations in May 1991, and the
effect of HECO rate relief for power purchased from AES Barbers Point, Inc.
(AES-BP) which commenced operations in September 1992. The revenue increase
was tempered by lower fuel oil prices, which cost savings were passed through
to customers.
OPERATING EXPENSES
Total operating expenses were $795.9 million in 1993, compared to $699.9
million in 1992 and $663.7 million in 1991. The increase in 1993 operating
expenses over 1992 was primarily due to an increase in purchased power, income
taxes, and taxes other than income taxes expenses, partially offset by lower
fuel oil expense and the establishment of a regulatory asset for vacation
earned by employees, but not yet taken. The recognition of a regulatory asset
for vacation earned, but not yet taken resulted in a reduction in 1993
operating expenses on a one-time basis by $4.0 million. For rate-making
purposes, the PUC permits recovery of vacation pay on a pay-as-you-go basis.
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The increase in operating expenses in 1992 was largely due to an increase
in purchased power and other operation and maintenance expenses, partially
offset by lower fuel oil expense. Expenses for 1992 include relatively small
amounts related to Hurricane Iniki which struck primarily the island of Kauai
in September 1992. The Company does not provide electric service to the island
of Kauai and, thus, was not significantly impacted by the hurricane.
Fuel oil expense was $213.3 million in 1993, compared to $225.6 million
in 1992 and $275.8 million in 1991. The decrease in fuel oil expense in 1993
was due to fewer KWH generated due to the full year's effect of power purchased
from AES-BP, offset somewhat by higher fuel oil prices. The decrease in fuel
oil expense in 1992 was due to lower fuel oil prices and a decrease in the
number of KWH generated as a result of the increase in power purchased from
Kalaeloa and AES-BP. In 1993, the Company paid an average of $21.09 per barrel
of fuel oil, compared to $19.69 in 1992 and $22.79 in 1991.
Purchased power expense was $258.7 million in 1993, compared to $172.8
million in 1992 and $106.7 million in 1991. The increase in purchased power
expense in both 1993 and 1992 was due primarily to capacity and nonfuel
purchase power costs paid to independent power producers, and an increase in
the number of KWH purchased, mostly at HECO. Purchased KWH provided
approximately 34.9% of the total energy net generated and purchased in 1993,
compared to 26.2% in 1992 and 18.6% in 1991. The increase in purchased power
expense in 1992 was due to purchases on Oahu from AES-BP which commenced
operations in September 1992 and Kalaeloa which commenced operations in May
1991.
Other operation expenses in 1993 totaled $106.0 million, an increase of
$0.7 million over the 1992 amount. The increase was due primarily to higher
production, transmission and distribution, and administrative and general
expenses, including higher employee benefit costs, offset by 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. HEI
charges for general management, administra-tive and support services totaled
$2.3 million, $5.6 million and $5.1 million in 1993, 1992 and 1991,
respectively. Other operation expenses of $105.3 million for 1992 were $4.3
million, or 4.3%, higher than 1991 expenses. The increase was due primarily to
higher production, distribution, and administrative and general expenses,
including higher employee benefit costs. The higher production expense was due
primarily to costs associated with the placement into service in May 1992 of
MECO's 20-megawatt combustion turbine unit, which is the first phase of a
56-megawatt combined-cycle facility, and in August 1992 of HELCO's 20-megawatt
combustion turbine, and higher costs incurred to operate generating units at
HELCO on a continuous basis due to the delay in receiving power from Puna
Geothermal Ventures (PGV), with whom HELCO has a purchase power agreement for
the purchase of 25 megawatts of firm capacity.
Maintenance expenses in 1993 of $44.3 million decreased by $0.4 million
from 1992 primarily due to the one-time effect of the establishment of a
regulatory asset for vacation earned by employees, but not yet taken, offset by
increased maintenance on the transmission and distribution systems.
Maintenance expenses in 1992 were $44.7 million, a 13.2% increase over 1991.
The increase was due to higher production maintenance expenses, reflecting more
generating unit overhauls and maintenance of auxiliary generating equipment at
HECO, and a major overhaul of HELCO's Puna steam turbine unit; and increased
maintenance on the transmission and distribution systems.
Depreciation expense was up 3.9% in 1993 to $56.0 million and up 9.9% in
1992 to $53.9 million. The increase in both years reflects depreciation of the
Company's additions to plant in service in the previous year. Major additions
to plant in service in 1992 consisted primarily of transmission and
distribution substation projects at HECO, the addition of HELCO's 20-megawatt
combustion turbine and the addition of MECO's 20-megawatt combustion turbine.
Major additions to plant in service in 1991 consisted primarily of transmission
and distribution projects, including the interconnection of the AES-BP power
plant to HECO's system. Revised depreciation rates for HECO which went into
effect in late 1991 also contributed to higher depreciation expense in 1992.
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Taxes, other than income taxes increased 13.0% in 1993 to $80.7 million
and increased 5.6% in 1992 to $71.5 million. These taxes consist primarily of
taxes based on revenues, and the increases reflect the corresponding increases
in each year's operating revenues.
Income tax expense was higher in 1993 than 1992 and 1991 primarily due to
the 1% Federal income tax rate increase retroactive to January 1, 1993 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.
OTHER INCOME
Other income of $11.6 million for 1993 was $1.8 million higher than for 1992
primarily because of the "gross-up" of allowance for equity funds used during
construction (AFUDC-Equity) resulting from the effects of the adoption of SFAS
No. 109, offset by the income tax benefit related to the utilization of capital
loss carryforwards in 1992. Other income of $9.7 million for 1992 was $5.2
million higher than for 1991. The increase was due primarily to higher
AFUDC-Equity, reflecting a higher level of construction in progress throughout
the year, and a $2.0 million income tax benefit related to the utilization of
capital loss carryforwards. The capital losses, for which no tax benefits were
previously recognized, were incurred primarily in 1987.
INTEREST AND OTHER CHARGES
Interest and other charges for 1993 totaled $33.5 million, compared to $33.1
million for 1992 and $34.2 million for 1991. Interest expense on long-term
debt for 1993 and 1992 decreased $0.3 million and increased $0.3 million,
respectively. The decrease in 1993 was due to lower interest expense on first
mortgage bonds resulting from the redemption of MECO's 6.875% Series F mortgage
bonds of $0.9 million in March 1993 and HECO's 4.45% Series M mortgage bonds of
$16 million in July 1993, and the early redemption of HECO's 8.2% Series R
mortgage bonds of $14 million and 8.35% Series T mortgage bonds of $16 million
in June 1993 and HECO's 9% Series Q mortgage bonds of $23 million in 1992,
offset by interest on drawdowns of tax-exempt special purpose revenue bond
proceeds during 1993 and the full year's interest on the drawdowns made the
previous year. The 1992 increase in interest expense was partially offset by
lower interest expense on first mortgage bonds resulting from the redemption of
HECO's 4.65% Series L mortgage bonds of $12 million in April 1991, and the
early redemptions of HECO's 9% Series Q mortgage bonds of $23 million in 1992,
and three issues of first mortgage bonds in 1991, i.e., HECO's 11 7/8% Series V
mortgage bonds of $12 million, HELCO's 16 1/8% Series O mortgage bonds of $2
million and MECO's 16 1/8% Series N mortgage bonds of $4 million.
Other interest charges of $7.5 million for 1993 was $2.4 million higher
than for 1992 primarily due to higher interest on short-term borrowings due to
higher borrowing levels, offset by lower interest rates.
REGULATION OF ELECTRIC UTILITY RATES
The PUC has broad discretion in its regulation of the rates charged by the
Company. Any adverse decision by the PUC concerning the level or method of
determining utility rates, the authorized returns on equity or other matters,
or any significant delay in rendering a decision in a rate proceeding, could
have a material effect on the Company's financial condition and results of
operations. Upon the 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 a 30-day extension if the evidentiary hearing is not completed). However,
there is no time limit for rendering 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
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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, HELCO applied to the PUC for permission to increase
electric rates, using a 1994 test year and requesting an increase of
approximately $15.8 million in annual revenues, or 13.4%, over revenues
provided by rates currently in effect. The requested increase is based on a
12.4% return on average common equity and is needed to cover plant, equipment
and operating costs necessary to maintain and improve service and provide
reliable power for its customers.
In November 1991, MECO filed a request to increase rates by approximately
$18.3 million annually, or approximately 17% above the rates in effect at the
time of the filing, in several steps. 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%, 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 authorizing step increases totaling $8.2 million in annual
revenues, or 7.2%, and based on a rate of return on average common equity of
12.75%. 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 and AES-BP and has withheld payment of some of the
disputed amounts pending resolution. See "Power purchase agreements" under
Note 11 in the "Notes to Consolidated Financial Statements" for a further
discussion of this matter.
HELCO RELIABILITY INVESTIGATION
The PUC initiated an investigation into the reliability of HELCO's system in
July 1991. See "HELCO reliability investigation" under Note 11 in the "Notes
to Consolidated Financial Statements" for a further discussion of this matter.
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 before the City Council, 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 the Company.
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 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
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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 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.
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 the Company's operations.
Inflation increases operating costs and the replacement cost of assets.
The Company has significant physical assets, replaces 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 Company received rate relief, in part to
cover increases due to inflation in operating expenses and construction costs,
as reflected in higher depreciation expense.
HECO 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 11 in the "Notes to
Consolidated Financial Statements" for a discussion of HECO's contingent
liabil-ities related to the outage.
ENVIRONMENTAL REGULATIONS
The Company is 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.
The Company is exempt from certain environmental requirements applicable on the
U.S. mainland, such as the acid rain provisions of the 1990 Clean Air Act
Amendments. However, the Company is 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 most, if not all, of any costs incurred by the Company
in complying with these environmental requirements would be allowed by the PUC
as reasonable and necessary costs of service for rate-making purposes.
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 could have a
material adverse effect on the Company's financial condition or results of
operations.
ACCOUNTING CHANGES
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
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condition or results of operations primarily due to the regulated nature of the
Company. See Note 7 in the "Notes to Consolidated Financial Statements" for
more information.
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
Company. See Note 10 in the "Notes to Consolidated Financial Statements" for
more information.
POSTEMPLOYMENT BENEFITS
Effective January 1, 1994, the Company adopted the provisions of 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.
LIQUIDITY AND FINANCING REQUIREMENTS
Capital expenditures requiring the use of cash, as shown on the "Consolidated
Statements of Cash Flows," totaled approximately $205.9 million in 1993, of
which $116.0 was attributable to HECO, $46.7 million was attributable to HELCO
and $43.2 million was attributable to MECO. Approximately 68% of the total
1993 capital expenditures were for transmission and distribution and other
projects, and 32% for generation projects, including additions to HECO's Archer
substation and Waiau-Makalapa 138-kilovolt line, MECO's 56-megawatt
combined-cycle facility, and HELCO's Keahole combustion turbine. Cash
contributions in aid of construction received in 1993 totaled $20.2 million.
The Company's investment in plant and equipment for 1993 was financed
with cash from operating activities and cash from financing activities. Cash
provided by operating activities totaled $98.4 million in 1993. Cash provided
by financing activities totaled a net $58.4 million and included $109.9 million
from the issuance of unsecured notes and drawdowns of proceeds from tax-exempt
special purpose revenue bonds, net of long-term debt repayments. HEI provided
$45.0 million through its purchase of HECO common stock.
The Company'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. The Company'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. The Company 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
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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 11 in the "Notes to Consolidated Financial
Statements" for a discussion of power purchase commitments.)
Capital expenditure estimates and the timing of various construction
projects are reviewed continually by management and may change as a result of
many considerations. Among these considerations are 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 line corridors, the
ability to obtain adequate and timely rate relief, escalations in construction
costs, demand side management programs and requirements of environmental and
other regulatory and permitting authorities.
Capital expenditures for 1994, net of cash contributions in aid of
construction and excluding AFUDC, 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. Approximately $20 million of the $240
million in capital expenditures will be provided through third-party cash
contributions in aid of construction. Drawdowns of proceeds from the sale of
tax-exempt special purpose revenue bonds, sales of common stock to HEI and
internal sources of funds are expected to provide the remaining funds needed
for capital expenditures.
In 1993, HECO and its subsidiaries issued $70 million in unsecured notes,
with maturities varying from two to five years, and $12 million in 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. As of December 31, 1993, an additional $47 million of
revenue bonds was authorized by the Hawaii legislature for issuance prior to
the end of 1995.
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, S&P, Moody's Investors Service (Moody's) and
Duff & Phelps Credit Rating Co. (D&P) rated HECO's securities as follows:
S&P Moody's D&P
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First mortgage bonds ......................... BBB+ A3 A
Revenue bonds ................................ BBB Baa1 A-
Cumulative preferred stock ................... BBB baa1 BBB+
Other unsecured debt ......................... BBB Baa1 A-
Commercial paper ............................. A-2 P-2 Duff 1-
Outlook ...................................... Negative N/A N/A
===========================================================================================
N/A = Not applicable
The Company's management cannot predict with certainty future rating
agency actions or their effects on the future cost of capital of the Company.
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CONSOLIDATED STATEMENTS OF INCOME
Hawaiian Electric Company, Inc. (a wholly owned subsidiary of Hawaiian Electric
Industries, Inc.) and Subsidiaries, years ended December 31,
(in thousands) 1993 1992 1991
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OPERATING REVENUES ................................. $874,010 $776,929 $739,636
-------- -------- --------
OPERATING 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
Income taxes ....................................... 37,007 26,254 24,137
-------- -------- --------
795,925 699,890 663,709
-------- -------- --------
OPERATING INCOME ................................... 78,085 77,039 75,927
-------- -------- --------
OTHER INCOME:
Allowance for equity funds used during
construction ..................................... 6,973 6,781 3,998
Other, net ......................................... 4,583 2,959 513
-------- -------- --------
11,556 9,740 4,511
-------- -------- --------
INCOME BEFORE INTEREST AND OTHER CHARGES ........... 89,641 86,779 80,438
-------- -------- --------
INTEREST AND OTHER CHARGES:
Interest on long-term debt ......................... 27,046 27,307 26,961
Amortization of net bond premium and expense ....... 774 638 589
Other interest charges ............................. 7,467 5,066 5,698
Allowance for borrowed funds used during
construction ..................................... (3,869) (2,095) (1,307)
Preferred stock dividends of subsidiaries .......... 2,097 2,185 2,287
-------- -------- --------
33,515 33,101 34,228
-------- -------- --------
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
======== ======== ========
CONSOLIDATED STATEMENTS OF RETAINED EARNINGS
Hawaiian Electric Company, Inc. (a wholly owned subsidiary of Hawaiian Electric
Industries, Inc.) and Subsidiaries, years ended December 31,
(in thousands) 1993 1992 1991
- -------------------------------------------------------------------------------------------------
RETAINED EARNINGS, BEGINNING OF YEAR ............... $249,583 $223,478 $209,336
Net income for common stock ........................ 51,705 49,153 41,610
Common stock dividends ............................. (25,887) (23,048) (27,468)
-------- -------- --------
RETAINED EARNINGS, END OF YEAR ..................... $275,401 $249,583 $223,478
======== ======== ========
See accompanying "Notes to Consolidated Financial Statements."
10
10
CONSOLIDATED BALANCE SHEETS
Hawaiian Electric Company, Inc. (a wholly owned subsidiary of Hawaiian Electric
Industries, Inc.) and Subsidiaries, December 31,
(in thousands) 1993 1992
- ---------------------------------------------------------------------------------------------
ASSETS
UTILITY PLANT, AT COST:
Land ..................................................... $ 26,976 $ 27,260
Plant and equipment ...................................... 1,948,445 1,742,291
Less accumulated depreciation ............................ (641,230) (583,031)
Plant acquisition adjustment, net ........................ 771 823
Construction in progress ................................. 126,342 107,030
---------- ----------
NET UTILITY PLANT ................................. 1,461,304 1,294,373
---------- ----------
CURRENT ASSETS:
Cash and equivalents ..................................... 1,922 30,883
Customer accounts receivable, net ........................ 55,614 53,970
Accrued unbilled revenues, net ........................... 34,735 35,647
Other accounts receivable, net ........................... 8,398 8,118
Fuel oil stock, at average cost .......................... 18,188 20,102
Materials and supplies, at average cost .................. 20,239 17,841
Prepayments and other .................................... 2,715 2,973
---------- ----------
TOTAL CURRENT ASSETS .............................. 141,811 169,534
---------- ----------
OTHER ASSETS:
Regulatory assets ........................................ 60,612 7,668
Unamortized debt expense ................................. 10,179 7,407
Long-term receivables and other .......................... 29,370 22,348
---------- ----------
TOTAL OTHER ASSETS ................................ 100,161 37,423
---------- ----------
$1,703,276 $1,501,330
========== ==========
CAPITALIZATION AND LIABILITIES
CAPITALIZATION (see Consolidated Statements of Capitalization):
Common stock equity ...................................... $ 570,663 $ 499,894
Cumulative preferred stock:
Not subject to mandatory redemption ................... 48,293 36,293
Subject to mandatory redemption ....................... 45,410 47,550
Long-term debt, net ...................................... 436,776 357,934
---------- ----------
TOTAL CAPITALIZATION .............................. 1,101,142 941,671
---------- ----------
CURRENT LIABILITIES:
Long-term debt due within one year ....................... 47,960 16,901
Preferred stock sinking fund requirements ................ 1,320 1,370
Short-term borrowings - nonaffiliates .................... 28,928 122,176
Short-term borrowings - affiliate ........................ 12,000 --
Accounts payable ......................................... 41,808 44,081
Interest and preferred dividends payable ................. 10,332 9,045
Income taxes payable ..................................... 6,232 2,533
Other taxes accrued ...................................... 36,959 27,583
Other .................................................... 31,036 17,837
---------- ----------
TOTAL CURRENT LIABILITIES ......................... 216,575 241,526
---------- ----------
DEFERRED CREDITS:
Deferred income taxes .................................... 107,449 101,447
Unamortized tax credits .................................. 43,348 41,608
Other .................................................... 69,757 48,770
---------- ----------
TOTAL DEFERRED CREDITS ............................ 220,554 191,825
---------- ----------
CONTRIBUTIONS IN AID OF CONSTRUCTION ..................... 165,005 126,308
---------- ---------
$1,703,276 $1,501,330
========== ==========
See accompanying "Notes to Consolidated Financial Statements."
11
11
CONSOLIDATED STATEMENTS OF CAPITALIZATION
Hawaiian Electric Company, Inc. (a wholly owned subsidiary of Hawaiian Electric
Industries, Inc.) and Subsidiaries, December 31,
(dollars in thousands, except per share amounts) 1993 1992
- -----------------------------------------------------------------------------------------
COMMON STOCK EQUITY:
Common stock of $6 2/3 par value. Authorized: 50,000,000
shares. Outstanding: 1993, 11,258,290 shares and 1992,
10,361,179 shares ........................................... $ 75,065 $ 69,081
Premium on capital stock ....................................... 220,197 181,230
Retained earnings .............................................. 275,401 249,583
-------- --------
COMMON STOCK EQUITY ...................................... 570,663 499,894
-------- --------
CUMULATIVE PREFERRED STOCK:
Authorized: 5,000,000 shares of $20 par value and
7,000,000 shares of $100 par value. Outstanding:
1993, 1,841,957 shares and 1992, 1,743,857 shares.
SHARES
OUTSTANDING
PAR DECEMBER 31,
SERIES VALUE 1993
- ----------------------------------------------------
SERIES NOT SUBJECT TO MANDATORY REDEMPTION:
C--4 1/4% $ 20 (HECO) ........... 150,000 .............. 3,000 3,000
D--5% 20 (HECO) ........... 50,000 .............. 1,000 1,000
E--5% 20 (HECO) ........... 150,000 .............. 3,000 3,000
H--5 1/4% 20 (HECO) ........... 250,000 .............. 5,000 5,000
I--5% 20 (HECO) ........... 89,657 .............. 1,793 1,793
J--4 3/4% 20 (HECO) ........... 250,000 .............. 5,000 5,000
K--4.65% 20 (HECO) ........... 175,000 .............. 3,500 3,500
M--8.05% 100 (HECO) ........... 80,000 .............. 8,000 8,000
A--8 7/8% 100 (HELCO) .......... 30,000 .............. 3,000 3,000
G--7 5/8% 100 (HELCO) .......... 70,000 .............. 7,000 --
A--8% 100 (MECO) ........... 20,000 .............. 2,000 2,000
B--8 7/8% 100 (MECO) ........... 10,000 .............. 1,000 1,000
H--7 5/8% 100 (MECO) ........... 50,000 .............. 5,000 --
--------- -------- --------
1,374,657 .............. 48,293 36,293
========= -------- --------
SERIES SUBJECT TO MANDATORY REDEMPTION:
O--11 1/2% $100 (HECO) ........... 13,000 .............. 1,300 1,950
Q--7.68% 100 (HECO) ........... 96,000 .............. 9,600 10,000
R--8.75% 100 (HECO) ........... 200,000 .............. 20,000 20,000
B--10 3/4% 100 (HELCO) .......... 1,000 .............. 100 300
C--9 1/4% 100 (HELCO) .......... 8,000 .............. 800 1,000
D--12 3/4% 100 (HELCO) .......... 7,000 .............. 700 750
E--12.25% 100 (HELCO) .......... 8,000 .............. 800 850
F--8.5% 100 (HELCO) .......... 60,000 .............. 6,000 6,000
C--10 3/4% 100 (MECO) ........... -- .............. -- 50
D--8 3/4% 100 (MECO) ........... 14,300 .............. 1,430 1,620
E--12 1/4% 100 (MECO) ........... 4,000 .............. 400 600
F--13 3/4% 100 (MECO) ........... 6,000 .............. 600 800
G--8.5% 100 (MECO) ........... 50,000 .............. 5,000 5,000
--------- -------- --------
467,300 .............. 46,730 48,920
=========
Less sinking fund requirements due within one year ............. 1,320 1,370
-------- --------
45,410 47,550
-------- --------
CUMULATIVE PREFERRED STOCK .............................. $ 93,703 $ 83,843
-------- --------
(continued)
12
12
CONSOLIDATED STATEMENTS OF CAPITALIZATION, continued
Hawaiian Electric Company, Inc. (a wholly owned subsidiary of Hawaiian Electric
Industries, Inc.) and Subsidiaries, December 31,
(dollars in thousands) 1993 1992
- --------------------------------------------------------------------------------
LONG-TERM DEBT:
First mortgage bonds:
HECO:
4.45 5.75%, due 1994 through 1997 ........... $ 24,000 $ 40,000
7 5/8-9 1/8%, due 2001 through 2016 ......... 30,000 60,000
---------- --------
54,000 100,000
---------- --------
HELCO:
7 3/4-10 3/4%, due 2001 through 2006 ......... 17,500 17,500
---------- --------
MECO:
6.875%, due 1993 ............................. -- 850
7 3/4-10 3/4%, due 2002 through 2009 ......... 22,500 22,500
---------- --------
22,500 23,350
---------- --------
Total first mortgage bonds ............... 94,000 140,850
---------- --------
Obligations to the State of Hawaii for the
repayment of
Special Purpose Revenue Bonds:
HECO, 5.45%, series 1993, due 2023 ............... 50,000 --
HELCO, 5.45%, series 1993, due 2023 .............. 20,000 --
MECO, 5.45%, series 1993, due 2023 ............... 30,000 --
HECO, 6.55%, series 1992, due 2022 ............... 40,000 40,000
HELCO, 6.55%, series 1992, due 2022 .............. 12,000 12,000
MECO, 6.55%, series 1992, due 2022 ............... 8,000 8,000
HECO, 7 3/8%, series 1990C, due 2020 ............. 25,000 25,000
HELCO, 7 3/8%, series 1990C, due 2020 ............ 10,000 10,000
MECO, 7 3/8%, series 1990C, due 2020 ............. 20,000 20,000
HECO, 7.60%, series 1990B, due 2020 .............. 21,000 21,000
HELCO, 7.60%, series 1990B, due 2020 ............. 4,000 4,000
HECO, 7.35%, series 1990A, due 2020 .............. 16,000 16,000
HELCO, 7.35%, series 1990A, due 2020 ............. 3,000 3,000
MECO, 7.35%, series 1990A, due 2020 .............. 1,000 1,000
HECO, 7 5/8%, series 1988, due 2018 .............. 30,000 30,000
HELCO, 7 5/8%, series 1988, due 2018 ............. 11,000 11,000
MECO, 7 5/8%, series 1988, due 2018 ............. 9,000 9,000
HECO, 6 7/8%, refunding series 1987, due 2012 .... 42,580 42,580
HELCO, 6 7/8%, refunding series 1987, due 2012 ... 7,200 7,200
MECO, 6 7/8%, refunding series 1987, due 2012 .... 7,720 7,720
HELCO, 7.2%, series 1984, due 2014 ............... 11,400 11,400
---------- --------
378,900 278,900
Less funds on deposit with trustees .............. 56,205 44,993
---------- --------
Total obligations to the State of Hawaii .. 322,695 233,907
---------- --------
Other long-term debt - unsecured:
HECO, 5.15% note, due 1996 ....................... 20,000 --
HECO, 5.83% note, due 1998 ....................... 30,000 --
HELCO, 4.85% note, due 1995 ...................... 10,000 --
MECO, 5.15% note, due 1996 ....................... 10,000 --
Other ............................................ 27 78
---------- --------
Total other long-term debt - unsecured .... 70,027 78
---------- --------
Total long-term debt ...................... 486,722 374,835
Less unamortized discount ........................... 1,986 --
Less amounts due within one year .................... 47,960 16,901
---------- --------
LONG-TERM DEBT, NET ....................... 436,776 357,934
---------- --------
TOTAL CAPITALIZATION ...................... $1,101,142 $941,671
========== ========
See accompanying "Notes to Consolidated Financial Statements."
13
13
CONSOLIDATED STATEMENTS OF CASH FLOWS
Hawaiian Electric Company, Inc. (a wholly owned subsidiary of Hawaiian Electric
Industries, Inc.) and Subsidiaries, years ended December 31,
(in thousands) 1993 1992 1991
- --------------------------------------------------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Income before preferred stock dividends of
HECO ......................................$ 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 plant
and equipment ...................... 55,960 53,856 49,005
Other amortization ..................... 803 955 1,204
Deferred income taxes .................. (1,952) (11,074) 947
Tax credits, net ....................... 4,086 2,852 (230)
Allowance for equity funds used during
construction ....................... (6,973) (6,781) (3,998)
Decrease (increase) in accounts
receivable ......................... (1,924) (8,857) 12,338
Decrease (increase) in accrued unbilled
revenues ........................... 912 (8,238) (4,229)
Decrease in fuel oil stock ............. 1,914 2,466 17,648
Increase in materials and supplies ..... (2,398) (17) (1,621)
Increase (decrease) in accounts payable (2,273) 6,192 1,862
Increase (decrease) in interest and
preferred dividends payable ........ 1,287 925 (1,148)
Changes in other assets and liabilities (7,163) (7,264) 5,030
-------- -------- ---------
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
affiliate 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
Capital stock expense ........................ (84) (15) (123)
Common stock dividends ....................... (25,887) (23,048) (27,468)
Other ........................................ 5,362 82 954
-------- -------- ---------
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
======== ======== =========
See accompanying "Notes to Consolidated Financial Statements."
14
14
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Hawaiian Electric Company, Inc. (a wholly owned subsidiary of Hawaiian Electric
Industries, Inc.) and Subsidiaries
1 o SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
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 regulatory assets. Management believes that regulatory assets
have been established in accordance with generally accepted accounting
principles.
CONSOLIDATION. The consolidated financial statements include the accounts of
Hawaiian Electric Company, Inc. (HECO) and its wholly owned subsidiaries
(collectively, the "Company"), Maui Electric Company, Limited (MECO) and Hawaii
Electric Light Company, Inc. (HELCO).
All significant intercompany transactions and balances have been eliminated
in consolidation.
UTILITY REGULATION. The Company is regulated by the Public Utilities
Commission of the State of Hawaii (PUC) and accounts 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.
PROPERTY, PLANT AND EQUIPMENT. Property, plant and equipment are stated at
cost. The cost of plant constructed by the Company 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 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.
CONTRIBUTIONS IN AID OF CONSTRUCTION. The Company receives 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.
REVENUES. 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 Company 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.
RETIREMENT BENEFITS. Pension costs are charged primarily to expense and plant
accounts. It is the Company's policy to fund pension costs in amounts
consistent with the requirements of the Employee Retirement Income Security
Act.
The Company provides certain health care, life insurance and other benefits
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 10). Previously, the cost of these benefits were recognized
when paid. The resulting change in the method of accounting had no material
effect on net income for the year ended
15
15
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, continued
Hawaiian Electric Company, Inc. (a wholly owned subsidiary of Hawaiian Electric
Industries, Inc.) and Subsidiaries
December 31, 1993 due to the regulated nature of the Company's operations.
DEPRECIATION. Depreciation of plant and equipment is computed primarily using
the straight-line method over the estimated useful lives of the assets. The
composite annual depreciation rate was 3.9% in 1993, 3.8% in 1992 and 3.7% in
1991. HECO revised its depreciation rates for financial reporting and
rate-making purposes pursuant to PUC approval effective October 25, 1991. The
PUC also approved an increase in electric rates effective October 25, 1991 to
cover, among other things, the increased depreciation charges.
PREMIUM, DISCOUNT AND EXPENSE. The expenses of issuing long-term debt
securities and the premiums or discounts at which they were sold are amortized
against income over the terms of the respective securities.
ALLOWANCE FOR FUNDS USED DURING CONSTRUCTION. Allowance for funds used during
construction (AFUDC) is an accounting practice whereby the costs of debt and
equity funds used to finance plant construction are transferred from the
income statement to construction in progress on the balance sheet. The
procedure removes the effect of the costs of financing construction activity
from the income statement and treats such costs in the same manner as
construction labor and material costs.
The weighted average gross-of-tax AFUDC rate was 9.3% in 1993, 10.2% in 1992
and 10.3% in 1991 and reflects quarterly compounding.
INCOME TAXES. HECO and its subsidiaries are included in the consolidated
income tax returns of HECO's parent, Hawaiian Electric Industries, Inc. (HEI).
Income tax expense has been computed for financial statement purposes as if
HECO and its subsidiaries file separate consolidated HECO income tax returns.
As further explained in Note 7, 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 due to the regulated nature of the Company's
operations.
Federal and State tax credits are amortized over the estimated useful lives
of the properties which qualified for the credits.
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.
CASH FLOWS. The Company considers cash on hand, deposits in banks, money
market accounts, and investments in short-term commercial paper and repurchase
agreements with original maturities of three months or less to be cash and
equivalents.
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
16
16
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, continued
Hawaiian Electric Company, Inc. (a wholly owned subsidiary of Hawaiian Electric
Industries, Inc.) and Subsidiaries
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.
RECLASSIFICATION. Certain reclassifications have been made to prior year's
consolidated financial statements to conform to the 1993 presentation.
2 o CUMULATIVE PREFERRED STOCK
The following series of cumulative preferred stock are redeemable at the
option of the respective company:
Redemption
price
December 31,
Series 1993
- -----------------------------------------------------------------------------------
C, D, E, H, J and K (HECO) ............................................ $ 21.00
I (HECO) .............................................................. 20.00
M (HECO) .............................................................. 101.00
A (HELCO) ............................................................. 101.00
A (MECO) .............................................................. 101.00
B (MECO) .............................................................. 101.00
===================================================================================
The following series of cumulative preferred stock are subject to
mandatory sinking fund provisions and optional redemption provisions as
indicated below:
Annual sinking fund provision Optional
-------------------------------------- redemption
Number of shares price
-------------------- Commencement December 31,
Series Minimum Maximum date 1993
- ------------------------------------------------------------------------------------
O (HECO) ................. 3,250 6,500 10/15/86 $102.40
Q (HECO) ................. 4,000 4,000 1/15/93 111.12
R (HECO) ................. 10,000 20,000 1/15/95 107.00
B (HELCO) ................ 1,000 2,000 4/15/80 101.00
C (HELCO) ................ 1,000 2,000 10/15/85 101.55
D (HELCO) ................ 500 500 10/15/88 106.91
E (HELCO) ................ 500 500 10/15/90 107.46
F (HELCO) ................ 10,000 20,000 1/15/00 106.68
D (MECO) ................. 950 1,900 7/15/89 101.52
E (MECO) ................. 1,000 2,000 10/15/86 102.50
F (MECO) ................. 1,000 2,000 10/15/92 105.07
G (MECO) ................. 8,333 16,667 1/15/00 106.68
====================================================================================
Shares redeemed under the annual sinking fund provisions are redeemable
at par value of $100.
Under optional redemption provisions, shares are redeemable at the option
of the respective company at redemption prices shown above (except that prior
to specific dates, no shares of certain series of preferred stock may be
redeemed through refunding at a cost of money to the respective company which
is less than the dividend rate of such series).
17
17
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, continued
Hawaiian Electric Company, Inc. (a wholly owned subsidiary of Hawaiian Electric
Industries, Inc.) and Subsidiaries
In December 1993, HELCO and MECO issued $7,000,000 and $5,000,000,
respec-tively, of non-mandatorily redeemable preferred stock with a dividend
rate of 7.625%. Both series of stock are redeemable at the option of the
respective company beginning in 2003.
The total minimum sinking fund requirements on preferred stock subject to
mandatory redemption are $1,320,000 in 1994, $2,220,000 in 1995, 1996 and 1997,
$1,795,000 in 1998 and $36,955,000 thereafter.
HECO is obligated to make dividend, redemption and liquidation payments
on the preferred stock of MECO and HELCO if MECO and HELCO are unable to make
such payments, provided that such obligation is subordinated to any obligation
to make payments on HECO's own preferred stock.
3 o COMMON STOCK
In 1993, 1992 and 1991 HECO issued 897,111, 681,635 and 1,330,048 shares
of common stock to its parent, HEI, for $45 million, $33 million and $61
million, respectively.
4 o LONG-TERM DEBT
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 companies.
In December 1992, the Department of Budget and Finance of the State of
Hawaii (DBF) issued $60 million in tax-exempt special purpose revenue bonds
(Series 1992) on behalf of HECO ($40 million), HELCO ($12 million) and MECO ($8
million). The bonds are at a fixed rate of 6.55%.
In November 1993, the DBF issued $100 million in tax-exempt special
purpose revenue bonds (Series 1993) on behalf of HECO ($50 million), HELCO ($20
million) and MECO ($30 million). The bonds are at a fixed rate of 5.45% and
were issued at a discount of $2 million.
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 available only to pay for certain authorized
construction projects and certain expenses related to the bonds.
In December 1993, HECO and its subsidiaries issued $70 million of
unsecured debt. This issuance is comprised of a $20 million 5.15% note due in
1996 (HECO), a $30 million 5.83% note due in 1998 (HECO), a $10 million 4.85%
note due in 1995 (HELCO) and a $10 million 5.15% note due in 1996 (MECO). The
HELCO and MECO notes are unconditionally guaranteed by HECO.
At December 31, 1993, the aggregate payments of principal required on
long-term debt during the next five years are $47,960,000 in 1994, $20,933,000
in 1995, $29,933,000 in 1996, $12,933,000 in 1997, $29,933,000 in 1998 and
$343,044,000 thereafter.
5 o SHORT-TERM BORROWINGS
Short-term borrowings from nonaffiliates at December 31, 1993 and 1992
consisted entirely of commercial paper.
18
18
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, continued
Hawaiian Electric Company, Inc. (a wholly owned subsidiary of Hawaiian Electric
Industries, Inc.) and Subsidiaries
The Company maintained bank lines of credit which totaled approximately
$107.5 million and $135.0 million at December 31, 1993 and 1992, respectively.
The lines of credit support the issuance of commercial paper. There were no
borrowings against any line of credit during 1993 and 1992. Effective January
1, 1994, the Company's bank lines of credit totaled $85.0 million.
6 o REGULATORY ASSETS
Regulatory assets at December 31, 1993 and 1992 include the following
deferred costs:
December 31,
--------------------
(in thousands) 1993 1992
- -----------------------------------------------------------------------------------
Postretirement benefits other than pensions ............... $17,866 $ --
Income taxes .............................................. 16,176 --
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
------- ------
$60,612 $7,668
======= ======
The Company intends to apply to the PUC in 1994 for recovery of the
preliminary plant costs on a suspended project.
7 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 Company. The net increase in deferred income taxes
arising from the adoption of SFAS No. 109 is recoverable through future rates
and has been recorded as a regulatory asset. Under SFAS No. 109, additional
income tax expense of $828,000 resulted from the 1% increase in the maximum
corporate income tax rate enacted by the Omnibus Budget Reconciliation Act of
1993.
The components of income taxes charged to operating expenses were as
follows:
(in thousands) 1993 1992 1991
- -----------------------------------------------------------------------------------
FEDERAL:
Current .................................... $33,556 $33,516 $21,361
Deferred ................................... 432 (10,130) 594
Deferred tax credits, net .................. (2,260) (1,740) (1,730)
------- ------- -------
31,728 21,646 20,225
------- ------- -------
STATE:
Current .................................... 1,402 1,090 2,144
Deferred ................................... (123) (1,074) 267
Deferred tax credits, net .................. 4,000 4,592 1,501
------- ------- -------
5,279 4,608 3,912
------- ------- -------
Total ......................................... $37,007 $26,254 $24,137
======= ======= =======
19
19
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, continued
Hawaiian Electric Company, Inc. (a wholly owned subsidiary of Hawaiian Electric
Industries, Inc.) and Subsidiaries
Income tax benefits related to nonoperating activities, included in
"Other Net" on the income statement, amounted to $109,000, $2,411,000 and
$321,000 for 1993, 1992 and 1991, respectively. Of the $2,411,000 income tax
benefits related to nonoperating activities in 1992, $2,019,000 is a tax
benefit arising from the utilization of a capital loss carryforward.
The sources of timing differences and the related deferred tax amounts
under Accounting Principles Board Opinion No. 11 included in operating expenses
in 1992 and 1991 were as follows:
(in thousands) 1992 1991
- ---------------------------------------------------------------------------------------
Excess of tax depreciation over book straight-line
depreciation rates ........................................ $ 952 $ 2,108
Contributions in aid of construction and customer advances,
net ....................................................... (6,095) (2,773)
Interest capitalized for tax purposes ........................ (3,347) (1,967)
Excess of tax depreciation over book depreciation due to
basis differences ......................................... 1,631 1,324
Excess of tax pension deduction over book
expense ................................................... -- 2,728
Gain on sale of land deferred for book purposes .............. (4,737) --
Other ........................................................ 392 (559)
-------- -------
Total ........................................................ $(11,204) $ 861
======== =======
Deferred income taxes related to timing differences in the recognition of
nonoperating revenues and expenses for tax and financial reporting purposes in
1992 and 1991 were not significant.
A reconciliation between income taxes charged to operating expenses and
the amount of income taxes computed at the federal statutory rates on income
before income taxes and preferred stock dividends is as follows:
(dollars in thousands) 1993 1992 1991
- -----------------------------------------------------------------------------------------
Federal statutory income tax rate .................. 35% 34% 34%
======= ======= =======
Amount at the federal statutory income tax
rate ............................................ $33,331 $27,920 $24,695
Allowance for funds used during construction not
included in taxable income ...................... -- (2,375) (1,403)
State income taxes on operating income, net of
effect on federal income taxes .................. 3,431 3,139 2,473
Difference between book and tax straight-line
depreciation for which no deferred taxes were
provided ........................................ -- 3,015 2,676
Amortization of deferred tax credits ............... 84 (1,720) (1,677)
Amortization of contributions in aid of
construction .................................... -- (1,658) (1,476)
Amortization of federal deferred taxes in excess
of current rates ................................ (64) (1,675) (1,537)
Other .............................................. 225 (392) 386
------- ------- -------
Income taxes charged to operating expenses ......... $37,007 $26,254 $24,137
======= ======= =======
20
20
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, continued
Hawaiian Electric Company, Inc. (a wholly owned subsidiary of Hawaiian Electric
Industries, Inc.) and Subsidiaries
Deferred tax assets and deferred tax liabilities were comprised of the
following:
December 31,
(in thousands) 1993
- -------------------------------------------------------------------------------
Deferred tax assets:
Property, plant and equipment .................................. $ 5,810
Contributions in aid of construction and customer
advances .................................................... 44,932
Other .......................................................... 13,625
--------
64,367
--------
Deferred tax liabilities:
Property, plant and equipment .................................. 153,765
Regulatory assets .............................................. 6,236
Other .......................................................... 11,815
--------
171,816
--------
Net deferred tax liability ........................................ $107,449
========
There was no valuation allowance provided for deferred tax assets as of
December 31, 1993.
8 o CASH FLOWS
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash paid during 1993, 1992 and 1991 for interest (net of capitalized
amounts which were not material) and income taxes was as follows:
(in thousands) 1993 1992 1991
- -----------------------------------------------------------------------------
Interest ................................... $31,875 $30,021 $34,444
======= ======= =======
Income taxes ............................... $34,796 $30,472 $25,957
======= ======= =======
SUPPLEMENTAL DISCLOSURES OF NONCASH ACTIVITIES
The allowance for equity funds used during construction, which was
charged to construction in progress amounted to $6,973,000, $6,781,000 and
$3,998,000 in 1993, 1992 and 1991, respectively. Effective in 1993, the
Company 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 $26,105,000.
9 o MAJOR CUSTOMERS
HECO and its subsidiaries derived 10% of their operating revenues from
the sale of electricity to federal government agencies amounting to $90,614,000
in 1993, $78,020,000 in 1992 and $77,087,000 in 1991.
21
21
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, continued
Hawaiian Electric Company, Inc. (a wholly owned subsidiary of Hawaiian Electric
Industries, Inc.) and Subsidiaries
10 o RETIREMENT BENEFITS
PENSIONS
HECO and its subsidiaries participate in several of HEI's defined benefit
pension plans which cover substantially all employees of HECO and its
subsidiaries. Benefits are based on the employee's years of service and base
compensation.
The funded status of HECO and its subsidiaries' portion of the HEI
pension plans and the amounts recognized in the consolidated financial
statements at December 31, 1993 and 1992 were as follows:
December 31,
-------------------
(in thousands) 1993 1992
- ------------------------------------------------------------------------------
Accumulated benefit obligation:
Vested ............................................. $270,802 $225,751
Nonvested .......................................... 40,791 28,424
-------- --------
$311,593 $254,175
======== ========
Projected benefit obligation .......................... $399,858 $314,233
Plan assets at fair value, primarily equity securities
and fixed income investments ....................... 386,912 332,865
-------- --------
Projected benefit obligation in excess of (less than)
plan assets ........................................ 12,946 (18,632)
Unrecognized prior service cost ....................... -- (2)
Unrecognized net gain ................................. 9,374 43,111
Unrecognized net transition obligation ................ (21,440) (23,737)
Adjustment required to recognize minimum
liability .......................................... 321 465
-------- --------
Accrued pension liability ............................. $ 1,201 $ 1,205
======== ========
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:
(in thousands) 1993 1992 1991
- -------------------------------------------------------------------------------
Service cost-benefits earned during the period .. $ 9,861 $ 8,935 $ 8,461
Interest cost on projected benefit obligation ... 25,437 25,735 23,515
Actual return on plan assets .................... (53,703) (13,427) (70,089)
Net amortization and deferral ................... 33,564 (5,614) 52,663
------- ------- -------
Net periodic pension cost ....................... $15,159 $15,629 $14,550
======= ======= =======
Of these net periodic pension costs, $9,663,000, $9,801,000 and
$9,670,000 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 5.0%.
22
22
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, continued
Hawaiian Electric Company, Inc. (a wholly owned subsidiary of Hawaiian Electric
Industries, Inc.) and Subsidiaries
The unrecognized net transition obligation is the projected benefit
obligation in excess of plan assets at January 1, 1987, less amounts amortized.
The unrecognized net transition obligation is being amortized over 16 years
beginning in 1987.
POSTRETIREMENT BENEFITS OTHER THAN PENSIONS
The Company provides medical, dental, vision, life insurance and other
benefits to eligible employees upon their retirement. Retirees contribute
toward the cost of medical, dental and vision benefits based on their years of
service and retirement date. Currently, no funding has been provided for
these benefits. Employees are eligible for these benefits if, upon retirement,
they participate in one of the Company's defined benefit pension plans.
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 $3,100,000 and $3,200,000 in 1992 and 1991, respectively.
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.
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 the Company, 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
106; and (2) it is probable that the difference between the costs of
post-retirement benefits other than pensions determined under SFAS 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, the Company recognized a
regulatory asset 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 asset totaled approximately $17,866,000 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:
23
23
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, continued
Hawaiian Electric Company, Inc. (a wholly owned subsidiary of Hawaiian Electric
Industries, Inc.) and Subsidiaries
December 31,
(in thousands) 1993
- ----------------------------------------------------------------------------
Accumulated postretirement benefit obligation:
Retirees ................................................. $ 58,861
Fully eligible active plan participants .................. 30,772
Other active plan participants ........................... 48,072
--------
137,705
Unrecognized net loss........................................ (819)
Unrecognized net transition obligation ...................... (119,020)
--------
Accrued liability recognized in the balance sheet ........... $ 17,866
========
As of December 31, 1993, the discount rate and the assumed 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:
(in thousands) 1993
- ----------------------------------------------------------------------------
Service cost ................................................. $ 5,115
Interest cost ................................................ 10,426
Net amortization and deferral ................................ 6,264
-------
Net periodic postretirement benefit cost ..................... $21,805
=======
Of the net periodic postretirement benefit cost, $2,362,000 was expensed
in 1993, and the remaining amounts were 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 $22.4 million and the service and interest costs for
1993 by approximately $3.1 million.
11 o 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 the 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 approximates $83 million. HECO's subsidiaries have
contractual agreements through 1995 under which the amount of required
purchases for 1994 approximates $43 million based on the average price per
barrel at January 1, 1994. The actual amount of purchases in 1994 could vary
substantially from such estimates 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 $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.
24
24
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, continued
Hawaiian Electric Company, Inc. (a wholly owned subsidiary of Hawaiian Electric
Industries, Inc.) and Subsidiaries
At December 31, 1993, the Company 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 the Company may pass on changes in the fuel component of the
energy charges to customers through energy cost adjustment clauses in its rate
schedules. The Company does 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 the Company upon expiration of the agreements,
and the agreements do not contain bargain purchase options with respect to the
facilities.
As of December 31, 1993, the Company had power purchase agreements for
473 megawatts (MW) of firm capacity representing approximately 22% 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, if any, on the Company'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
25
25
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, continued
Hawaiian Electric Company, Inc. (a wholly owned subsidiary of Hawaiian Electric
Industries, Inc.) and Subsidiaries
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. One major transmission line was de-energized
for routine maintenance when two major transmission lines tripped, causing
another major transmission line to become overloaded and automatically trip.
An island-wide power outage resulted. Power was restored over the next twelve
hours. The PUC initiated an investigation of the outage by its order dated
April 16, 1991. This investigation was consolidated with a pending
investigation of an outage that occurred in 1988. The 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 line trip. 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, 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.
26
26
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, continued
Hawaiian Electric Company, Inc. (a wholly owned subsidiary of Hawaiian Electric
Industries, Inc.) and Subsidiaries
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 a 20-MW
combustion turbine in July 1995 and a second 20-MW combustion turbine in
September 1995, followed by an 18-MW heat steam recovery generator in October
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 the Company's
consolidated financial condition or results of operations.
12 o REGULATORY RESTRICTIONS ON DISTRIBUTIONS TO PARENT
At December 31, 1993, net assets (assets less liabilities) of
approximately $313 million were not available for transfer to HEI in the form
of dividends, loans or advances without regulatory approval.
13 o RELATED-PARTY TRANSACTIONS
HEI charged HECO and its subsidiaries for general management,
administrative and support services totaling $2,258,000, $5,604,000 and
$5,133,000 in 1993, 1992 and 1991, respectively. As of January 1, 1993, HEI
refined its method of identifying costs chargeable to its subsidiaries,
resulting in less allocations to subsidiaries.
HEI also charged HECO for data processing services totaling $3,563,000,
$3,231,000 and $2,355,000 in 1993, 1992 and 1991, respectively.
HECO's borrowings from HEI totaled $12,000,000 and nil at December 31,
1993 and 1992, respectively. The interest charged on short-term borrowings
from HEI is computed based on HECO's short-term borrowing interest rate.
Interest charged by HEI to HECO totaled $1,795,000, $232,000 and $981,000 in
1993, 1992 and 1991, respectively.
14 o SIGNIFICANT GROUP CONCENTRATIONS OF CREDIT RISK
HECO and its subsidiaries are operating electric public utilities engaged
in business on the islands of Oahu, Hawaii, Maui, Lanai and Molokai in the
State of Hawaii. HECO and its subsidiaries grant credit to customers, all of
whom reside or conduct business in the State of Hawaii.
15 o CHANGE IN ACCOUNTING ESTIMATE
In September 1991, the Company 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 the Company's consolidated net income of $3.8 million
for 1991.
16 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.
27
27
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, continued
Hawaiian Electric Company, Inc. (a wholly owned subsidiary of Hawaiian Electric
Industries, Inc.) and Subsidiaries
The following methods and assumptions were used to estimate the fair
value of each 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.
SHORT-TERM BORROWINGS. The carrying amount approximates fair value because of
the short maturity of these investments.
LONG-TERM DEBT. Fair value is estimated based on the quoted market prices for
the same or similar issues for debt.
CUMULATIVE PREFERRED STOCK SUBJECT TO MANDATORY REDEMPTION. There are no
quoted market prices for the Company's preferred stocks. Fair value is
estimated based on quoted market prices for similar issues of preferred stock.
The estimated fair values of the Company's financial instruments are as
follows:
December 31, 1993 December 31, 1992
-------------------- -------------------
Estimated Estimated
Carrying fair Carrying fair
(in thousands) amount value amount value
- -------------------------------------------------------------------------------
FINANCIAL ASSETS:
Cash and equivalents .............. $ 1,922 $ 1,922 $ 30,883 $ 30,883
FINANCIAL LIABILITIES:
Short-term borrowings from
nonaffiliates and affiliate .... $ 40,928 $ 40,928 $122,176 $122,176
Long-term debt, net, including
amounts due within one year .... $484,736 $506,089 $374,835 $378,785
PREFERRED STOCK SUBJECT TO MANDATORY
REDEMPTION, INCLUDING SINKING FUND
REQUIREMENTS ...................... $ 46,730 $ 49,583 $ 48,920 $ 51,437
===============================================================================
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 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 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, property, plant and equipment, regulatory
assets, 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.
28
28
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, continued
Hawaiian Electric Company, Inc. (a wholly owned subsidiary of Hawaiian Electric
Industries, Inc.) and Subsidiaries
17 o SUMMARIZED FINANCIAL INFORMATION
Summarized financial information for HECO's consolidated subsidiaries, HELCO
and MECO, is as follows:
HAWAII ELECTRIC LIGHT COMPANY, INC.
December 31,
------------------------
(in thousands) 1993 1992
- ------------------------------------------------------------------------------
BALANCE SHEET DATA
Current assets ........................................ $ 22,161 $ 18,199
Noncurrent assets ..................................... 297,847 247,065
-------- --------
$320,008 $265,264
======== ========
Common stock equity ................................... $102,438 $ 87,413
Cumulative preferred stock:
Not subject to mandatory redemption ................ 10,000 3,000
Subject to mandatory redemption .................... 8,100 8,600
Current liabilities ................................... 42,615 27,319
Noncurrent liabilities ................................ 156,855 138,932
-------- --------
$320,008 $265,264
======== ========
Years ended December 31,
----------------------------------
(in thousands) 1993 1992 1991
- ------------------------------------------------------------------------------
INCOME STATEMENT DATA
Operating revenues ...................... $113,579 $104,904 $101,384
Operating income ........................ $ 11,902 $ 10,951 $ 13,033
Net income for common stock ............. $ 5,807 $ 5,770 $ 7,384
MAUI ELECTRIC COMPANY, LIMITED
December 31,
------------------------
(in thousands) 1993 1992
- ------------------------------------------------------------------------------
BALANCE SHEET DATA
Current assets ....................................... $ 31,465 $ 22,426
Noncurrent assets .................................... 252,680 209,083
-------- --------
$284,145 $231,509
======== ========
Common stock equity .................................. $ 97,569 $ 87,226
Cumulative preferred stock:
Not subject to mandatory redemption ................ 8,000 3,000
Subject to mandatory redemption .................... 7,135 7,725
Current liabilities .................................. 35,027 23,654
Noncurrent liabilities ............................... 136,414 109,904
-------- --------
$284,145 $231,509
======== ========
Years ended December 31,
----------------------------------
(in thousands) 1993 1992 1991
- ------------------------------------------------------------------------------
INCOME STATEMENT DATA
Operating revenues ....................... $114,256 $105,343 $101,870
Operating income ......................... $ 13,518 $ 12,379 $ 12,336
Net income for common stock .............. $ 9,274 $ 8,770 $ 7,851
29
29
INDEPENDENT AUDITORS' REPORT
The Board of Directors
and Shareholder
Hawaiian Electric Company, Inc.:
We have audited the accompanying consolidated balance sheets and consolidated
statements of capitalization of Hawaiian Electric Company, Inc. (a wholly
owned subsidiary of Hawaiian Electric Industries, Inc.) and subsidiaries as of
December 31, 1993 and 1992, and the related consolidated statements of income,
retained earnings and cash flows for each of the years in the three-year period
ended December 31, 1993. 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 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
Company, 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 7 to the consolidated financial statements, effective
January 1, 1993, the Company changed its method of accounting for income taxes.
Additionally, as discussed in Note 10 to the consolidated financial statements,
effective January 1, 1993, the Company changed its method of accounting for
postretirement benefits other than pensions.
\s\ KPMG Peat Marwick
Honolulu, Hawaii
February 11, 1994
30
30
CONSOLIDATED QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
Hawaiian Electric Company, Inc.(a wholly owned subsidiary of Hawaiian Electric
Industries, Inc.) and Subsidiaries
Selected quarterly consolidated financial information for 1993 and 1992 is
as follows:
(in thousands) Quarter ended
- ------------------------------------------------------------------------------------- Year ended
1993 March 31 June 30 Sept.30 Dec. 31 Dec. 31
- -------------------------------------------------------------------------------------------------
Operating revenues .......... $205,560(3) $218,158(3) $234,484(3) $215,808(3) $874,010
Operating income ............ 13,705(3) 22,862(1,2,3) 20,377(1,3) 21,141(1,3) 78,085
Net income for common stock.. 7,462(3) 16,465(1,2,3) 14,548(1,3) 13,230(1,3) 51,705
=================================================================================================
1992
- -------------------------------------------------------------------------------------------------
Operating revenues .......... $173,095 $176,613 $206,580(4) $220,641(4) $776,929
Operating income ............ 17,223 18,555 21,368(4) 19,893(4) 77,039
Net income for common stock.. 10,507 11,483 13,866(4) 13,297(4) 49,153
=================================================================================================
(1) Includes an adjustment to establish a regulatory asset for the difference
between postretirement benefits other than pension costs determined under
SFAS No. 106 and such costs under the pay-as-you-go method. The effect
was approximately $9.1 million, $4.4 million and $4.4 million on a
pre-tax basis for the second, third and fourth quarters, respectively
($5.5 million, $2.7 million and $2.7 million, respectively on an
after-tax basis.)
(2) Includes a nonrecurring adjustment to establish a regulatory asset for
vacation earned but not yet taken by employees. The effect was
approximately $4.2 million on a pre-tax basis ($2.6 million on an
after-tax basis.)
(3) Includes interim rate increases granted to MECO, primarily to cover the
costs of a phased installation of a combined-cycle generating unit on
Maui.
(4) Includes rate increases to primarily cover a pass-through of firm
capacity and nonfuel energy payments associated with the AES-BP power
purchase agreement.
31
31
DIRECTORS AND OFFICERS
HAWAIIAN ELECTRIC COMPANY, HAWAII ELECTRIC LIGHT MAUI ELECTRIC COMPANY,
INC. COMPANY, INC. LIMITED
A wholly owned subsidiary of A wholly owned subsidiary A wholly owned subsidiary
Hawaiian Electric Industries, of Hawaiian Electric of Hawaiian Electric
Inc. Company, Inc. Company, Inc.
DIRECTORS SUBSIDIARY DIRECTORS SUBSIDIARY DIRECTORS
(Age), year first elected or appointed.(1)
ROBERT F. CLARKE (51), 1990 HARWOOD D. WILLIAMSON HARWOOD D. WILLIAMSON
RICHARD HENDERSON (65), 1979 RICHARD HENDERSON JOSEPH W. HARTLEY, JR.
BEN F. KAITO(2) (67), 1975 RICHARD T. ISHIDA THOMAS J. JEZIERNY
MILDRED D. KOSAKI(2) (69), 1973 WARREN H. W. LEE SANFORD J. LANGA
PAUL A. OYER (53), 1985 DENZIL W. ROSE B. MARTIN LUNA
DIANE J. PLOTTS(2) (58), 1991 DONALD K. YAMADA ANNE M. TAKABUKI
THURSTON TWIGG-SMITH (72), 1967
HARWOOD D. WILLIAMSON (62), 1985
PAUL C. YUEN (65), 1993
- ---------
(1) All directors serve one year terms.
(2) Audit Committee member.
OFFICERS SUBSIDIARY OFFICERS SUBSIDIARY OFFICERS
ROBERT F. CLARKE HARWOOD D. WILLIAMSON HARWOOD D. WILLIAMSON
Chairman of the Board Chairman of the Board Chairman of the Board
HARWOOD D. WILLIAMSON WARREN H. W. LEE THOMAS J. JEZIERNY
President and Chief Executive President President
Officer
PAUL A. OYER PAUL A. OYER
T. MICHAEL MAY Financial Vice President Financial Vice President
Senior Vice President and Treasurer and Treasurer
JOAN M. DIAMOND EDWARD Y. HIRATA EDWARD Y. HIRATA
Vice President--Human Resources Vice President Vice President
JACKIE MAHI ERICKSON MOLLY M. EGGED MOLLY M. EGGED
Vice President--General Counsel Secretary Secretary
CHARLES M. FREEDMAN MICHAEL F. H. CHANG MARVIN A. HAWTHORNE
Vice President--Corporate Relations Assistant Treasurer Assistant Treasurer
EDWARD Y. HIRATA MARVIN A. HAWTHORNE DUANE T. HAYASHI
Vice President--Planning Assistant Treasurer Assistant Treasurer
GEORGE T. IWAHIRO WILLIAM J. STORMONT MICHAEL E. KAM
Vice President--Engineering Assistant Secretary Assistant Treasurer
RICHARD L. O'CONNELL STANLEY T. NAKAMOTO
Vice President--Customer Relations Assistant Treasurer
PAUL A. OYER JESSIE K. AKAGI
Financial Vice President and Treasurer Assistant Secretary
DAVID M. RODRIGUES
Vice President--Corporate Excellence
ERNEST T. SHIRAKI
Controller
MOLLY M. EGGED
Secretary
MARVIN A. HAWTHORNE
Assistant Treasurer
33