10-K 1 FORM 10-K UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D. C. 20549 FORM 10-K [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended December 31, 1994 OR [_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
COMMISSION REGISTRANT; STATE OF INCORPORATION; I.R.S. EMPLOYER FILE NUMBER ADDRESS; AND TELEPHONE NUMBER IDENTIFICATION NO. ----------- ---------------------------------- ------------------ 1-8503 HAWAIIAN ELECTRIC INDUSTRIES, INC. 99-0208097 (A Hawaii Corporation) 900 Richards Street Honolulu, Hawaii 96813 Telephone (808) 543-5662 1-4955 HAWAIIAN ELECTRIC COMPANY, INC. 99-0040500 (A Hawaii Corporation) 900 Richards Street Honolulu, Hawaii 96813 Telephone (808) 543-7771
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:
NAME OF EACH EXCHANGE REGISTRANT TITLE OF EACH CLASS ON WHICH REGISTERED ---------- ------------------- --------------------- Hawaiian Electric Common Stock, Without Par Value New York Stock Exchange Industries, Inc. Pacific Stock Exchange Hawaiian Electric First Mortgage Bonds, New York Stock Exchange Company, Inc. Series S, 7.58%
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:
REGISTRANT TITLE OF EACH CLASS ---------- ---------------------- Hawaiian Electric Industries, Inc. ........... None Hawaiian Electric Company, Inc. .............. Cumulative Preferred Stock
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No ----- ----- Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K [_]
AGGREGATE MARKET VALUE NUMBER OF SHARES OF OF THE VOTING STOCK COMMON STOCK HELD BY NONAFFILIATES OUTSTANDING OF THE OF THE REGISTRANTS ON REGISTRANTS ON MARCH 20, 1995 MARCH 20, 1995 ----------------------- -------------------- Hawaiian Electric Industries, Inc. $944,530,000 28,951,112 (Without par value) Hawaiian Electric Company, Inc. N/A 11,813,147 ($6 2/3 par value)
DOCUMENTS INCORPORATED BY REFERENCE
PART OF FORM 10-K INTO WHICH THE DOCUMENT IS DOCUMENT INCORPORATED --------------------------------------------------- ------------------------- Portions of Annual Reports to Stockholder(s) of the following registrants for the fiscal year ended December 31, 1994: Hawaiian Electric Industries, Inc. ............ Parts I, II, III and IV Hawaiian Electric Company, Inc. ............... Parts I, II, III and IV Portions of Proxy Statement of Hawaiian Electric Industries, Inc., dated March 10, 1995, for the Annual Meeting of Stockholders.................. Part III
THIS COMBINED FORM 10-K REPRESENTS SEPARATE FILINGS BY HAWAIIAN ELECTRIC INDUSTRIES, INC. AND HAWAIIAN ELECTRIC COMPANY, INC. INFORMATION CONTAINED HEREIN RELATING TO ANY INDIVIDUAL REGISTRANT IS FILED BY EACH REGISTRANT ON ITS OWN BEHALF. NEITHER REGISTRANT MAKES ANY REPRESENTATIONS AS TO THE INFORMATION RELATING TO THE OTHER REGISTRANT. TABLE OF CONTENTS
PAGE Glossary of Terms.............................................. ii PART I Item 1. Business........................................... 1 Item 2. Properties......................................... 42 Item 3. Legal Proceedings.................................. 44 Item 4. Submission of Matters to a Vote of Security Holders 44 PART II Item 5. Market for Registrants' Common Equity and Related Stockholder Matters...................... 46 Item 6. Selected Financial Data............................ 46 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations.............. 46 Item 8. Financial Statements and Supplementary Data........ 47 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.............. 47 PART III Item 10. Directors and Executive Officers of the Registrants 47 Item 11. Executive Compensation............................. 50 Item 12. Security Ownership of Certain Beneficial Owners and Management................................... 54 Item 13. Certain Relationships and Related Transactions..... 56 PART IV Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K...................................... 56 Independent Auditors' Report - HEI............................... 58 Independent Auditors' Report - HECO.............................. 59 Index to Exhibits................................................ 64 Signatures....................................................... 82
i GLOSSARY OF TERMS Defined below are certain terms used in this report:
TERMS DEFINITIONS ----------------------------- ------------------------------------------------- 1935 ACT Public Utility Holding Company Act of 1935 ADA Americans with Disabilities Act AES Applied Energy Services, Inc. AES-BP AES Barbers Point, Inc. AFUDC Allowance for funds used during construction ARM Adjustable rate mortgage ASB American Savings Bank, F.S.B., a wholly owned subsidiary of HEI Diversified, Inc. and parent company of American Savings Investment Services Corp., ASB Service Corporation, AdCommunications, Inc. and Associated Mortgage, Inc. BBC Bottom Biological Community BHP BHP Petroleum Americas Refining Inc., a fuel oil supplier BPPI Baldwin Pacific Properties, Inc., a limited partner of Baldwin*Malama (a limited partnership in which Malama Development Corp. is a general partner) Btu British thermal unit CDUP Conservation District Use Permit CERCLA Comprehensive Environmental Response, Compensation and Liability Act COMPANY Hawaiian Electric Industries, Inc. and its direct and indirect subsidiaries, including, without limitation, Hawaiian Electric Company, Inc., Maui Electric Company, Limited, Hawaii Electric Light Company, Inc., HEI Investment Corp., Malama Pacific Corp. and its subsidiaries, Hawaiian Tug & Barge Corp., Young Brothers, Limited, HEI Diversified, Inc., American Savings Bank, F.S.B. and its subsidiaries, Lalamilo Ventures, Inc. and Pacific Energy Conservation Services, Inc. CONSUMER ADVOCATE Division of Consumer Advocacy, Department of Commerce and Consumer Affairs of the State of Hawaii CT Combustion turbine CUSA Chevron U.S.A., Inc., a fuel oil supplier DOH Department of Health of the State of Hawaii DSM Demand-side management EPA Environmental Protection Agency - federal EPCRA Emergency Planning and Community Right-to-Know Act ERL State of Hawaii Environmental Response Law FDIC Federal Deposit Insurance Corporation FDICIA Federal Deposit Insurance Corporation Improvement Act of 1991 FEDERAL U.S. Government FERC Federal Energy Regulatory Commission FHA Federal Housing Administration FHLB Federal Home Loan Bank
ii GLOSSARY OF TERMS (continued)
TERMS DEFINITIONS ----------------------------- ------------------------------------------------- FIRREA Financial Institutions Reform, Recovery, and Enforcement Act of 1989 FSLIC Federal Savings and Loan Insurance Corporation HAWAII State of Hawaii HCPC Hilo Coast Processing Company HECO Hawaiian Electric Company, Inc., a wholly owned electric utility subsidiary of Hawaiian Electric Industries, Inc. and parent company of Maui Electric Company, Limited and Hawaii Electric Light Company, Inc. HEI Hawaiian Electric Industries, Inc., parent company of Hawaiian Electric Company, Inc., HEI Investment Corp., Malama Pacific Corp., Hawaiian Tug & Barge Corp., Lalamilo Ventures, Inc., HEI Diversified, Inc. and Pacific Energy Conservation Services, Inc. HEIDI HEI Diversified, Inc., a wholly owned subsidiary of Hawaiian Electric Industries, Inc. and the parent company of American Savings Bank, F.S.B. HEIIC HEI Investment Corp., a wholly owned subsidiary of Hawaiian Electric Industries, Inc. HELCO Hawaii Electric Light Company, Inc., a wholly owned electric utility subsidiary of Hawaiian Electric Company, Inc. HERS Hawaiian Electric Renewable Systems, Inc., formerly a wholly owned subsidiary of Hawaiian Electric Industries, Inc. and formerly parent company of Lalamilo Ventures, Inc. HIG The Hawaiian Insurance & Guaranty Company, Limited, an insurance company currently in state rehabilitation proceedings. HEI Diversified, Inc. was the holder of record of HIG's common stock prior to August 16, 1994 HIRI Hawaiian Independent Refinery, Inc., a fuel oil refinery HITI Hawaiian Interisland Towing, Inc. HP Horsepower HTB Hawaiian Tug & Barge Corp., a wholly owned subsidiary of Hawaiian Electric Industries, Inc. and parent company of Young Brothers, Limited IBEW International Brotherhood of Electrical Workers IBU Inlandboatmen's Union of the Pacific, Marine Division, an affiliate of the International Longshoremen's and Warehousemen's Union, Hawaii Division IPP Independent power producer IRP Integrated resource plan IRR Interest rate risk KALAELOA Kalaeloa Partners, L. P. KWH Kilowatthour LSFO Low sulfur fuel oil LVI Lalamilo Ventures, Inc., formerly a wholly owned subsidiary of Hawaiian Electric Renewable Systems, Inc. and now a wholly owned subsidiary of Hawaiian Electric Industries, Inc.
iii GLOSSARY OF TERMS (continued)
TERMS DEFINITIONS ----------------------------- ------------------------------------------------- MBtu Million British thermal unit MDC Malama Development Corp., a wholly owned subsidiary of Malama Pacific Corp. MECO Maui Electric Company, Limited, a wholly owned electric utility subsidiary of Hawaiian Electric Company, Inc. MMO Malama Mohala Corp., a wholly owned subsidiary of Malama Pacific Corp. MPC Malama Pacific Corp., a wholly owned subsidiary of Hawaiian Electric Industries, Inc. and parent company of several real estate subsidiaries MSFO Medium sulfur fuel oil MW Megawatt na Not applicable NOI Notice of intent NPDES National Pollutant Discharge Elimination System OPA Federal Oil Pollution Act of 1990 OTS Office of Thrift Supervision, Department of Treasury PCB Polychlorinated biphenyl PECS Pacific Energy Conservation Services, Inc., a wholly owned subsidiary of Hawaiian Electric Industries, Inc. PGV Puna Geothermal Ventures PSD Prevention of significant deterioration PUC Public Utilities Commission of the State of Hawaii PURPA Public Utility Regulatory Policies Act of 1978 QTL Qualified Thrift Lender RCRA Resource Conservation and Recovery Act of 1976 REGISTRANT Hawaiian Electric Industries, Inc. or Hawaiian Electric Company, Inc. SAIF Savings Association Insurance Fund SARA Superfund Amendments and Reauthorization Act SEC Securities and Exchange Commission SFAS Statement of Financial Accounting Standards ST Steam turbine STATE State of Hawaii TSCA Toxic Substance Control Act of 1976 UIC Underground Injection Control UST Underground storage tank YB Young Brothers, Limited, a wholly owned subsidiary of Hawaiian Tug & Barge Corp.
iv PART I ITEM 1. BUSINESS HEI HEI was incorporated in 1981 under the laws of the State of Hawaii and is a holding company with subsidiaries engaged in the electric utility, savings bank, freight transportation, real estate development and other businesses, in each case primarily or exclusively in the State of Hawaii. HEI's predecessor, HECO, was incorporated under the laws of the Kingdom of Hawaii (now the State of Hawaii) on October 13, 1891. As a result of a 1983 corporate reorganization, HECO became an HEI subsidiary and common shareholders of HECO became common shareholders of HEI. HECO and its subsidiaries, MECO and HELCO, are regulated operating public utilities providing the only public utility electric service on the islands of Oahu, Maui, Lanai, Molokai and Hawaii. HEI also owns directly or indirectly the following subsidiaries which comprise its diversified companies: HEIDI and its subsidiary, ASB, and ASB's subsidiaries; HTB and its subsidiary; MPC and its subsidiaries; HEIIC; LVI; and PECS. ASB was acquired in 1988, is the fourth largest financial institution in Hawaii as measured by total assets as of September 30, 1994, and has 46 retail branches as of December 31, 1994. HTB was acquired in 1986 and provides ship assist and charter towing services and owns YB, a regulated intrastate public carrier of waterborne freight among the Hawaiian Islands. MPC was formed in 1985 and develops and invests in real estate. HEIIC was formed in 1984 and is a passive investment company which primarily holds investments in leveraged leases and currently plans no new investments. PECS is a nonutility service company formed in 1994 to promote energy conservation in Hawaii and the Pacific Basin. HEI will be forming a new company to pursue independent power projects in Asia, beginning with the Philippines. Prior to August 16, 1994, HEIDI was the holder of record of the common stock of HIG, which was acquired in 1987 and provided property and casualty insurance primarily in Hawaii. In March of 1993, pursuant to the decision made in 1992, the stock of HERS, formerly an HEI wind energy subsidiary, was sold to The New World Power Corporation and LVI became a direct subsidiary of HEI. HEI is attempting to transfer LVI's windfarm to HELCO, at no cost to electric customers. For information about the discontinued operations of HIG and HERS, see Note 2 to HEI's Consolidated Financial Statements which is incorporated herein by reference to pages 46 to 47 of HEI's 1994 Annual Report to Stockholders, portions of which are filed herein as HEI Exhibit 13(a). The financial information about the Company's industry segments is incorporated herein by reference to page 26 of HEI's 1994 Annual Report to Stockholders, portions of which are filed herein as HEI Exhibit 13(a). For additional information about the Company, reference is made to "Management's Discussion and Analysis of Financial Condition and Results of Operations," incorporated herein by reference to pages 27 to 38 of HEI's 1994 Annual Report to Stockholders, portions of which are filed herein as HEI Exhibit 13(a). ELECTRIC UTILITY HECO AND SUBSIDIARIES AND SERVICE AREAS HECO, MECO and HELCO are regulated operating electric public utilities engaged in the production, purchase, transmission, distribution and sale of electricity on the islands of Oahu; Maui, Lanai and Molokai; and Hawaii, respectively. HECO was incorporated under the laws of the Kingdom of Hawaii (now State of Hawaii) on October 13, 1891. HECO acquired MECO in 1968 and HELCO in 1970. In 1994, the electric utilities contributed approximately 77% of HEI's consolidated revenues from continuing operations and approximately 78% of HEI's consolidated operating income from continuing operations. At December 31, 1994, the assets of the electric utilities represented approximately 37% of the total assets of the Company. For additional information about the electric utilities, see "Management's Discussion and Analysis of Financial Condition and Results of Operations," incorporated herein by reference to pages 27 to 38 of HEI's 1994 Annual Report to Stockholders, 1 portions of which are filed herein as HEI Exhibit 13(a) and pages 3 to 10 of HECO's 1994 Annual Report to Stockholders, portions of which are filed herein as HECO Exhibit 13(b). The islands of Oahu, Maui, Lanai, Molokai and Hawaii have a combined population estimated at 1,123,000, or approximately 95% of the population of the State of Hawaii, and cover a service area of 5,766 square miles. The principal communities served include Honolulu (on Oahu), Wailuku and Kahului (on Maui) and Hilo and Kona (on Hawaii). The service areas also include numerous suburban communities, resorts, U.S. Armed Forces installations and agricultural operations. HECO, MECO and HELCO have nonexclusive franchises from the state covering certain areas and authorizing them to construct, operate and maintain facilities over and under public streets and sidewalks. HECO's franchise covers the City & County of Honolulu, MECO's franchises cover the County of Maui and the County of Kalawao on the islands of Maui, Lanai and Molokai and HELCO's franchise covers the County of Hawaii. Each of these franchises will continue in effect for an indefinite period of time until forfeited, altered, amended or repealed. SALES OF ELECTRICITY HECO, MECO and HELCO provide the only electric public utility service on the islands they serve. The following table sets forth the number of their electric customer accounts as of December 31, 1994, 1993 and 1992 and their electric sales revenues for each of the years then ended:
1994 1993 1992 --------------------------- --------------------------- --------------------------- Electric Electric Electric Customer sales Customer sales Customer sales (dollars in thousands) accounts revenues accounts revenues accounts revenues ---------------------- ------------- ------------ ------------- ------------ ------------- ------------ HECO 264,992 $652,442 263,478 $644,029 257,442 $564,574 MECO 52,483 119,805 51,064 113,018 50,263 104,149 HELCO 58,017 128,259 56,556 112,968 55,412 104,470 ------------- ------------ ------------- ------------ ------------- ------------ 375,492 $900,506 371,098 $870,015 363,117 $773,193 ============= ============ ============= ============ ============= ============
Revenues from the sale of electricity in 1994 were from the following types of customers in the proportions shown:
HECO MECO HELCO Total ------------ ------------ ------------- ------------ Residential 31% 35% 42% 33% Commercial 29 35 38 31 Large light and power 39 29 20 35 Other 1 1 -- 1 ------------ ------------ ------------- ------------ 100% 100% 100% 100% ============ ============ ============= ============
Approximately 10% of consolidated operating revenues of HECO and its subsidiaries was derived from the sale of electricity to various federal government agencies in 1994, 1993 and 1992. HECO's fifth largest customer, the Naval Base at Barbers Point, Oahu, is expected to be closed within the next few years. On March 8, 1994, President Clinton signed an Executive Order which mandates that each federal agency develop and implement a program with the intent of reducing energy consumption by 30% by the year 2005 to the extent that these measures are cost-effective. The 30% reductions will be measured relative to the agency's 1985 energy use. HECO is working with various Department of Defense installations to implement demand-side management programs which will help them achieve their energy reduction objectives. It is expected that several Department of Defense installations will sign a Basic Ordering Agreement under which HECO may implement the energy conservation projects. Neither HEI nor HECO management can predict with certainty the impact of President Clinton's Executive Order on the Company's or HECO and subsidiaries' future results of operations. 2 SELECTED CONSOLIDATED ELECTRIC UTILITY OPERATING STATISTICS
1994 1993 1992 1991 ** 1990 -------- -------- -------- -------- -------- KWH SALES (MILLIONS) Residential 2,427.5 2,340.3 2,326.8 2,270.5 2,204.2 Commercial 2,451.2 2,284.6 2,273.9 2,205.1 2,105.9 Large light and power 3,658.6 3,646.2 3,675.8 3,622.6 3,601.3 Other 55.8 54.1 55.4 55.4 56.3 -------- -------- -------- -------- -------- 8,593.1 8,325.2 8,331.9 8,153.6 7,967.7 ======== ======== ======== ======== ======== NET ENERGY GENERATED AND PURCHASED (MILLIONS OF KWH) Net generated 5,727.6 5,789.6 6,555.4 6,991.1 7,746.2 Purchased 3,437.8 3,101.0 2,325.0 1,599.7 713.3 -------- -------- -------- -------- -------- 9,165.4 8,890.6 8,880.4 8,590.8 8,459.5 ======== ======== ======== ======== ======== Losses and system uses (%) 6.0 6.1 6.0 4.9*** 5.6 ENERGY SUPPLY (YEAREND) Generating capability--MW 1,637 1,638 1,592 1,552 1,555 Firm purchased capability--MW 465 473 454 228 46 -------- -------- -------- -------- -------- 2,102 2,111 2,046 1,780 1,601 ======== ======== ======== ======== ======== Gross peak demand--MW * 1,527 1,496 1,493 1,446 1,408 Btu per net KWH generated 10,746 10,846 10,870 10,768 10,692 Average fuel oil cost per million Btu (cents) 304.4 340.5 317.1 367.5 400.1 CUSTOMER ACCOUNTS (YEAREND) Residential 325,495 320,987 314,185 308,770 299,473 Commercial 47,916 48,008 46,817 46,189 44,885 Large light and power 601 628 641 637 621 Other 1,480 1,475 1,474 1,450 1,438 -------- -------- -------- -------- -------- 375,492 371,098 363,117 357,046 346,417 ======== ======== ======== ======== ======== ELECTRIC REVENUES (THOUSANDS) Residential $297,984 $283,662 $250,808 $235,295 $221,701 Commercial 281,664 262,751 236,350 224,300 210,232 Large light and power 314,931 317,816 280,871 271,863 264,812 Other 5,927 5,786 5,164 5,030 5,013 -------- -------- -------- -------- -------- $900,506 $870,015 $773,193 $736,488 $701,758 ======== ======== ======== ======== ======== AVERAGE REVENUE PER KWH SOLD (CENTS) Residential 12.28 12.12 10.78 10.36 10.06 Commercial 11.49 11.50 10.39 10.17 9.98 Large light and power 8.61 8.72 7.64 7.51 7.35 Other 10.62 10.69 9.32 9.08 8.90 -------- -------- -------- -------- -------- Average revenue per KWH sold 10.48 10.45 9.28 9.03 8.81 RESIDENTIAL STATISTICS Average annual use per customer account (KWH) 7,482 7,367 7,460 7,427 7,416 Average annual revenue per customer account $ 918.40 $ 892.98 $ 804.09 $ 769.64 $ 745.96 Average number of customer accounts 324,458 317,657 311,915 305,720 297,202 ======== ======== ======== ======== ========
* Sum of the peak demands on all islands served, noncoincident and nonintegrated. ** Includes the one-time effect of a change in the method of estimating unbilled KWH sales and revenues. *** Excluding the effect of a change in the method of estimating unbilled KWH sales and revenues, losses and system uses would have been 5.6%. 3 GENERATION STATISTICS The following table contains certain generation statistics as of December 31, 1994, and for the year ended December 31, 1994. The capability available for operation at any given time may be less than the generating capability shown because of capability restrictions or temporary outages for inspection, maintenance, repairs or unforeseen circumstances.
Generating and firm purchased KWH net capability Gross generated (MW) at peak Annual and December 31, demand Reserve load purchased Systems 1994 /1/ (MW) /2/ margin factor /2/ (millions) ------- ------------- --------- -------- ----------- ------------- ISLAND OF OAHU-HECO Conventional oil-fired steam units 1,160.0 Combustion turbines (peaking units) 103.0 Firm contract power /3/ 406.0 ------- ------- ----- ----- ------- 1,669.0 1,193.0 39.9% 71.7% 7,223.0 ------- ------- ----- ----- ------- ISLAND OF MAUI-MECO Conventional oil-fired steam units 37.6 Combined-cycle unit 58.0 Diesel 105.7 Firm contract power /4/ 16.0 ------- ------- ----- ----- ------- 217.3 163.2 33.2% 70.1% 968.4 ------- ------- ----- ----- ------- ISLAND OF LANAI-MECO Diesel 9.7 4.7 105.5% 66.5% 27.1 ------- ------- ----- ----- ------- ISLAND OF MOLOKAI-MECO Diesel 6.5 Combustion turbine 2.2 ------- ------- ----- ----- ------- 8.7 6.4 37.0% 65.9% 36.3 ------- ------- ----- ----- ------- ISLAND OF HAWAII-HELCO Conventional oil-fired steam units 71.2 Combustion turbines 45.7 Diesel 37.7 Firm contract power /4/ 43.0 ------- ------- ----- ----- ------- 197.6 159.2 24.1% 67.5% 910.6 ------- ------- ----- ----- ------- Total 2,102.3 1,526.5 37.7% 71.1% 9,165.4 ======= ======= ===== ===== =======
/1/ HECO units at normal ratings less 14.0 MW due to capability restrictions, and MECO and HELCO units at reserve ratings. /2/ Noncoincident and nonintegrated. /3/ Independent power producers--180.0 MW (Kalaeloa), 180.0 MW (AES-BP) and 46.0 MW (H-Power). /4/ Nonutility generation--MECO: 16.0 MW (Hawaiian Commercial & Sugar Company) and HELCO: 25.0 MW (PGV) and 18.0 MW (HCPC-see "Nonutility generation"). 4 INTEGRATED RESOURCE PLANNING AND REQUIREMENTS FOR ADDITIONAL GENERATING CAPACITY As a result of a proceeding initiated in January 1990, the PUC issued an order in March 1992 (as revised in May 1992) requiring that the energy utilities in Hawaii develop integrated resource plans (IRPs). The goal of integrated resource planning is the identification of the demand-side and supply-side resources and the integration of these resources for meeting near- and long-term consumer energy needs in an efficient and reliable manner at the lowest reasonable cost. In the first phase of the IRP proceeding, the PUC adopted a "framework," which establishes both the process for developing IRPs and guidelines for the development of such plans. The PUC's framework directs that each plan cover a 20-year planning horizon with a five-year program implementation schedule and states that the planning cycle will be repeated every three years. Under the framework, the PUC may approve, reject or require modifications of the utilities' IRPs. The framework also states that utilities are entitled to recover all appropriate and reasonable integrated resource planning and implementation costs, including the costs of planning and implementing demand-side management (DSM) programs. Under appropriate circumstances, the utilities may recover net lost revenues resulting from DSM programs and earn shareholder incentives. The PUC will determine the appropriate cost recovery mechanism when a specific DSM program application is filed. The PUC has approved IRP cost recovery provisions (IRP Clauses) for HECO, MECO, and HELCO. Pursuant to the IRP Clauses, the electric utilities may recover through a surcharge the costs for approved DSM programs, and other IRP costs incurred and approved by the PUC, to the extent the costs are not included in their base rates. Each energy utility has been assigned an individual IRP docket in which the specific issues relative to each company's IRP can be addressed. The PUC provides for public participation in the planning process by requiring each utility to form an advisory group and by holding hearings to review each plan. Any IRP developed will require PUC approval prior to implementation. Management cannot predict, until the completion and approval of the IRPs, what effect, if any, integrated resource planning may eventually have on HECO, MECO and HELCO. In July 1993, HECO filed with the PUC its 20-year (1994-2013) IRP for the island of Oahu, together with a five-year (1994-1998) implementation schedule. HELCO filed its plan in October 1993. MECO filed its plan in December 1993. These plans identified and evaluated a mix of resources to meet near- and long- term consumer energy needs in an efficient and reliable manner at the lowest reasonable cost. The IRPs include demand-side management (DSM) programs to reduce load and fuel consumption and consider the impact on the environment, culture, community lifestyles and economy of the state. The PUC must review and approve major elements of the resource plans before the utilities may implement them. The utilities proposed modifications to their plans during the course of PUC proceedings to review the plans. The utilities have characterized their proposed IRPs as planning strategies, rather than fixed courses of action, and the resources ultimately added to their systems may differ from those included in the 20-year plan. Under the IRP framework, the utilities are required to submit annual evaluations of their plans (including a revised five-year program implementation schedule) and to submit new plans on a three-year cycle. Prior to proceeding with the DSM programs, separate PUC approval proceedings must be completed, in which the PUC will further review the details of the proposed programs and the utilities' proposals for the recovery of DSM program expenditures, net lost revenues and shareholder incentives. HECO has filed separate applications for approval of its proposed DSM programs, and evidentiary hearings on several of these applications were held in January and February of 1995. The evidentiary hearing for the last HECO DSM program application will be held in May of 1995. MECO and HELCO expect to file DSM program applications in 1995. HECO's IRP. HECO's plan includes proposals for five energy efficiency DSM programs beginning in 1995, which are designed to reduce the rate of increase in Oahu's energy use (allowing HECO to delay construction of power plants), to reduce the state's dependence on oil and to achieve savings for its utility customers who take advantage of the programs, and two load management DSM programs beginning in the year 2000. The DSM programs include several proposed incentives to customers to install efficient lighting, refrigeration, water- heating and air-conditioning equipment and industrial motors. The supply-side programs proposed in the HECO plan include the addition of a "clean coal" 5 technology unit in 2005, following the retirement of HECO's Honolulu Power Plant (which is assumed, for planning purposes, to be retired at the end of 2004), the repowering of two existing units at its Waiau Power Plant, and the addition of two oil-fired combustion turbines at the end of the first decade in the new century. Consistent with its current plan to continue operation of its Honolulu Power Plant, in 1993 HECO withdrew an application it had filed in December 1989 for approval of a proposed sale and leaseback of the Honolulu Power Plant site. Hearings on HECO's IRP have been completed and HECO is awaiting the PUC's decision. MECO's IRP. MECO's plan includes proposals for four energy efficiency DSM programs beginning in 1995 similar to those developed for HECO. The supply-side programs proposed by MECO include installing approximately 199 MW of additional generation through the year 2013 on the island of Maui, approximately 11 MW through the year 2001 on the island of Lanai and approximately 13 MW through the year 2013 on the island of Molokai. Hearings on MECO's plan have been held and MECO is awaiting the PUC's decision. HELCO's IRP. HELCO's plan includes proposals for four energy efficiency DSM programs beginning in 1995 similar to those developed for HECO. In addition to the full-scale DSM programs, HELCO is planning an interruptible load pilot program. The supply-side programs proposed in HELCO's five-year plan include installing a 58-MW dual-train combined-cycle unit at HELCO's Keahole plant site, undertaking transmission and distribution efficiency improvement projects and conducting alternate energy generation resource studies. HELCO's 20-year plan includes adding another diesel-fired dual-train combined-cycle unit and a combustion turbine (first phase of a dual-train combined-cycle unit) at a new West Hawaii site by the year 2009. Hearings on HELCO's IRP have been completed and HELCO is awaiting the PUC's decision. HELCO expects to file the DSM programs with the PUC in 1995. Depending on the timing of the PUC decision, actual energy reductions are likely to occur starting in 1996, one year later than what HELCO was projecting in the five-year plan. The schedule for the installation of HELCO's phased combined cycle unit (CT-4, CT-5 and ST-7) at HELCO's Keahole plant site has been revised due to delays in obtaining approval of the Prevention of Significant Deterioration/Covered Source permit and the Conservation District Use Permit (CDUP) amendment for the Keahole power plant site. The proposed service date for CT-4 has been revised to June 1996 followed by CT-5 in August 1996, based on receiving approval of the CDUP amendment by the latest expected date of December 28, 1995. The installation dates could occur earlier in 1996, if CDUP approval is received earlier. The conversion to combined-cycle with the installation of ST-7 is the same as the previous schedule of October 1, 1997. With the delay in the CT-4 and CT-5 commercial operation schedule, the retirements of several units have been deferred until CT-4 and CT-5 are installed. HELCO is continuing its efforts to complete the development of a contingency plan for delays in the CT-4 and CT-5 projects. The PUC completed evidentiary hearings in 1994 on the CT-5 and ST-7 phases of the Keahole combined-cycle unit and also on two complaints filed by independent power producers (IPPs) who want to displace HELCO's proposed Keahole unit. The PUC must decide if the IPPs can meet the timing for HELCO's need for capacity and whether the prices for capacity and energy that they have proposed are at or below HELCO's avoided cost. NONUTILITY GENERATION The Company has supported state and federal energy policies which encourage the development of alternate energy sources that reduce dependence on fuel oil. Alternate energy sources range from wind, geothermal and hydroelectric power, to energy produced by the burning of bagasse. Other non-oil projects include a generating unit burning municipal waste and a fluidized bed unit burning coal. The "Power purchase agreements" section in Note 4 to HEI's Consolidated Financial Statements is incorporated herein by reference to pages 49 to 50 of HEI's 1994 Annual Report to Stockholders, portions of which are filed herein as HEI Exhibit 13(a). HECO power purchase agreements. HECO currently has three major power purchase agreements. In March 1988, HECO entered into a power purchase agreement with AES Barbers Point, Inc. (AES-BP), a Hawaii-based cogeneration subsidiary of Applied Energy Services, Inc. (AES) of Arlington, Virginia. The agreement with AES-BP, as amended in August 1989, provides that, for a period of 30 6 years, HECO will purchase 180 MW of firm capacity, under the control of HECO's system dispatcher. The AES-BP 180-MW coal-fired cogeneration plant utilizes a "clean coal" technology and became operational in September 1992. The facility is designed to sell sufficient steam to be a "Qualifying Facility" under the Public Utility Regulatory Policies Act of 1978 (PURPA). In October 1988, HECO entered into an agreement with Kalaeloa Partners, L.P. (Kalaeloa) a limited partnership whose sole general partner is an indirect, wholly owned subsidiary of ASEA Brown Boveri, Inc., which has guaranteed certain of Kalaeloa's obligations and, through affiliates, has contracted to design, build, operate and maintain the facility. The agreement with Kalaeloa, as amended, provides that HECO will purchase 180 MW of firm capacity for a period of 25 years. The Kalaeloa facility, which was completed in the second quarter of 1991, is a combined-cycle operation, consisting of two oil-fired combustion turbines and a steam turbine which utilizes waste heat from the combustion turbines. The facility is designed to sell sufficient steam to be a "Qualifying Facility" under PURPA. HECO disputed certain amounts (primarily energy charges) billed each month under its power purchase agreements with Kalaeloa and AES-BP. 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 requested that its dispute with HECO be arbitrated, and the arbitration proceedings were completed in August 1994. The arbitrators' decision did not have a material effect on HECO's consolidated financial condition or results of operations. Discussions between HECO and AES-BP to resolve their disputed billing have been held. HECO and AES-BP have agreed to settle the dispute and have signed a letter agreement summarizing terms of the settlement. The financial impact of the settlement will not have a material adverse effect on HECO's consolidated financial condition or results of operations. HECO also entered into a power purchase contract and a firm capacity amendment with the City and County of Honolulu, which has built a 60-MW refuse-fired plant (H-Power). The H-Power facility began to provide firm energy in the second quarter of 1990 and currently supplies HECO with 46 MW of firm capacity. The PUC has approved and allowed rate recovery for the costs related to HECO's three major power purchase agreements, which provide a total of 406 MW of firm capacity, representing 24% of HECO's total generating and firm purchased capability on the island of Oahu as of December 31, 1994. HERS owned and operated a windfarm on the island of Oahu and sold the electricity it generated to HECO. In March 1993, HEI sold the stock of HERS to The New World Power Corporation with the power purchase agreements between HERS and HECO continuing in effect. HELCO and MECO power purchase agreements. As of December 31, 1994, HELCO and MECO had power purchase agreements for 43 MW and 16 MW of firm capacity, respectively, representing 22% and 7% of their respective total generating and firm purchased capabilities. HELCO has a power purchase agreement with PGV for 25 MW of firm capacity. PGV, an independent geothermal power producer which experienced substantial delays in commencing commercial operations, passed an acceptance test in June 1993. Although a problem with one of its wells reduced production during 1994, it is now considered to be a firm capacity source for 25 MW. HELCO filed suit against PGV in 1993 for penalties and other relief related to PGV's failure to provide power to HELCO by October 3, 1991. HELCO has recognized energy and capacity purchased from PGV as expenses, but has withheld certain of such firm capacity and energy payments to PGV. On March 7, 1995, HELCO and PGV executed a Settlement Agreement. As to the part of the settlement agreement dealing with penalties, it was agreed that HELCO would keep $3.2 million of the amount previously withheld by HELCO. In addition, PGV has agreed to provide additional energy in the amount of $2.3 million to HELCO above PGV's current firm capacity obligation at a unit cost less than or equal to the current unit cost. HELCO has not yet recognized any income for the $5.5 million settlement amount. The portion of the settlement that HELCO will pass on to customers will be subject to approval by the PUC. The Settlement Agreement is contingent on, among other items, the PUC not denying the inclusion of HELCO's energy payments to PGV, pursuant to an amendment to the power purchase agreement, in HELCO's fuel clause or base rates. The Settlement Agreement will automatically terminate if there is such a denial within sixty days of the execution of the Settlement Agreement. 7 HELCO has a power purchase agreement with HCPC for 18 MW of firm capacity. HCPC discontinued harvesting sugar in late 1994, as had been announced earlier. On December 12, 1994, HCPC filed a Chapter 11 bankruptcy petition and advised HELCO that it would cease operating its plant in December 1994. HELCO obtained a temporary restraining order and, later, extensions of such order, requiring HCPC to continue operations of the HCPC facility through March 24, 1995, with HELCO to pay an additional amount for the power HCPC supplies. On January 5, 1995, HELCO and HCPC entered into an agreement in principle, subject to the negotiation and execution of a definitive agreement, amending the existing power purchase agreement through December 1999. The definitive agreement must be approved by the bankruptcy court (unless HCPC acts to dismiss the action from Bankruptcy Court) and is subject to cancellation by HELCO if not approved by the PUC within 180 days of its execution. If the definitive agreement is executed and approved, HCPC has indicated that it can increase its power export capability to HELCO by 4 MW (to 22 MW). The stock of LVI was transferred to HEI prior to the sale of HERS to The New World Power Corporation. As of December 31, 1994, LVI's windfarm on the island of Hawaii consisted of 67 operating wind turbines with a total operating capacity of 1.25 MW. LVI sells its electricity to HELCO and the Hawaii County Department of Water Supply. Hamakua Sugar Company terminated power delivery to HELCO on October 5, 1994, upon completion of the bankruptcy court-approved final harvest plan. As a result, HELCO's system capability was reduced by 8 MW. MECO has a power purchase agreement with Hawaiian Commercial & Sugar Company for 16 MW of firm capacity through December 31, 1999. FUEL OIL USAGE AND SUPPLY All rate schedules of the Company's electric utility subsidiaries contain energy cost adjustment clauses whereby the charges for electric energy (and consequently the revenues of the subsidiaries generally) automatically vary with the weighted average price paid for fuel oil and certain components of purchased energy, and the relative amounts of company-generated power and purchased power. Accordingly, changes in fuel oil and certain purchased energy costs are passed on to customers. See discussion below under "Rates." HECO's steam power plants burn low sulfur fuel oil (LSFO). HECO's combustion turbine peaking units on Oahu burn Number 2 diesel fuel (diesel). MECO and HELCO consume medium sulfur fuel oil (MSFO) in their steam generating plants and consume diesel in the operation of their combustion turbine and diesel engine generating units. The LSFO consumed by HECO in its Oahu generating units is primarily derived from Indonesian and other Far East crude oils processed in island refineries. The MSFO supplied to MECO and HELCO is derived from the local refining of U.S. domestic crude oil. In the second half of 1993, HECO amended previously existing contracts for the purchase of LSFO with Chevron, U.S.A., Inc. (CUSA) and BHP Petroleum Americas Refining Inc. (BHP) providing for an extension for a period of two years commencing January 1, 1994. The PUC approved these amendments and issued a final order in December 1993 that permitted the inclusion of costs incurred under these contracts in HECO's energy cost adjustment clause. HECO pays market- related prices for fuel supplies purchased under these agreements. HECO, MECO, HELCO and affiliates, HTB and YB, amended previously existing joint fuel supply contracts with CUSA and BHP to provide for the purchase of diesel and MSFO supplies for a period of two years commencing January 1, 1994. The PUC subsequently approved these amendments and issued a final order in December 1993 that permitted the electric utilities to include fuel costs incurred under these contracts in their respective energy cost adjustment clauses. The electric utilities pay market-related prices for diesel and MSFO supplied under these agreements. The diesel supplies obtained by the Lanai Division of MECO are purchased under an arrangement with a CUSA-branded jobber (wholesale merchant) on Lanai. The Molokai Division of MECO purchases diesel under the joint fuel supply contract with CUSA referred to above. The fuel oil commitments information in Note 11 to HECO's Consolidated Financial Statements is incorporated herein by reference to pages 24 and 25 of HECO's 1994 Annual Report to Stockholder, portions of which are filed herein as HECO Exhibit 13(b). 8 The following table sets forth the average cost of fuel oil used to generate electricity in the years 1994, 1993 and 1992:
HECO MECO HELCO Consolidated ----------------- ------------------ ------------------ ---------------------- $/Barrel c/MBtu $/Barrel c/MBtu $/Barrel c/MBtu $/Barrel c/MBtu -------- ------ -------- ------ -------- ------ -------- ------ 1994 17.55 279.1 23.36 391.6 20.98 340.9 18.92 304.4 1993 20.27 323.7 24.85 416.3 21.02 344.4 21.09 340.5 1992 18.71 298.4 23.90 399.4 20.68 339.0 19.69 317.1
The average per-unit cost of fuel oil consumed to generate electricity for HECO, MECO and HELCO reflects a different volume mix of fuel types and grades. In 1994, 99.7% of HECO's generation fuel consumption consisted of LSFO. The balance of HECO's fuel consumption was diesel. Diesel also made up approximately two thirds of MECO's and one third of HELCO's fuel consumption. The remainder of fuel consumption of MECO and HELCO consisted of MSFO. In general, MSFO is the least costly fuel, diesel is the most expensive fuel and the price of LSFO falls between the two on a per barrel basis. The average prices of LSFO and diesel in 1994 were significantly less than the respective average prices in 1993. The average price of MSFO was higher in 1994 than in the previous year. HTB was contractually obligated to ship heavy fuel oil for HELCO and MECO through December 1993. Effective December 31, 1993, HTB exited the heavy fuel oil shipping business. See "Regulation and other matters-Environmental regulation-Water quality controls." HELCO and MECO carried out a bidding process to determine who would ship heavy fuel oil beyond 1993. Several bids were received and evaluated and two contracts were signed with Hawaiian Interisland Towing, Inc., subject to PUC approval. Each of the contracts has a two-year term commencing on January 1, 1994, with an option to extend for up to three two-year periods. In June 1994, the PUC approved both contracts and allowed HELCO and MECO to include the costs for fuel transportation and related costs incurred under the contracts in their respective energy cost adjustment clause. In 1995, it is estimated that 78% of the net energy generated and purchased by HECO and its subsidiaries will come from oil. Failure by the Company's oil suppliers to provide fuel pursuant to the supply contracts and/or substantial increases in fuel prices could adversely affect HECO and its subsidiaries' and the Company's financial condition and results of operations. RATES HECO, MECO and HELCO are subject to the regulatory jurisdiction of the PUC with respect to rates, standards of service, issuance of securities, accounting and certain other matters. See "Regulation and other matters-Electric utility regulation." All rate schedules of HECO and its subsidiaries contain an energy cost adjustment clause to reflect changes in the price paid for fuel oil and certain components of purchased power, and the relative amounts of company-generated power and purchased power. Under current law and practices, specific and separate PUC approval is not required for each rate change pursuant to automatic rate adjustment clauses previously approved by the PUC. Rate increases, other than pursuant to such automatic adjustment clauses, require the prior approval of the PUC after public and contested case hearings. PURPA requires the PUC to periodically review the energy cost adjustment clauses of electric and gas utilities in the state, and such clauses, as well as the rates charged by the utilities generally, are subject to change. The PUC has broad discretion in its regulation of the rates charged by the Company's utility subsidiaries and in other matters. Any adverse decision by the PUC concerning the level or method of determining electric utility rates, the authorized returns on equity or other matters, or any prolonged delay in rendering a decision in a rate or other proceeding, could have a material adverse effect on HECO and its subsidiaries, and the Company's financial condition and results of operations. Upon a showing of probable entitlement, the PUC is required to issue an interim decision in a rate case within 10 months from the date of filing a completed application if the evidentiary hearing is completed (subject to extension for 30 days if the evidentiary hearing is not completed). There is no time limit for rendering a final decision. Interim rate increases are subject to refund with interest, pending the final outcome of the case. 9 The "Recent rate requests" section in "Management's Discussion and Analysis of Financial Condition and Results of Operations" is incorporated herein by reference to pages 30 to 31 of HEI's 1994 Annual Report to Stockholders, portions of which are filed herein as HEI Exhibit 13(a). In February 1995, MECO applied to the PUC for permission to increase electric rates to provide $23 million in annual revenues, or a 17.4% increase over current rates, based on a 1996 test year and a 13.5% return on average common equity. In March 1995, HELCO applied to the PUC for permission to increase electric rates to provide $27 million in annual revenues, or an 18.7% increase over current rates, based on a 1996 test year and a 13.5% return on average common equity. HECO and its subsidiaries participated in the PUC's generic docket to determine whether SFAS No. 106 should be adopted for rate-making purposes. The information on postretirement benefits other than pensions in Management's Discussion and Analysis of Financial Condition and Results of Operations and in Note 17 to HEI's Consolidated Financial Statements is incorporated herein by reference to pages 30 and 63 to 64 of HEI's 1994 Annual Report to Stockholders, portions of which are filed herein as HEI Exhibit 13(a). Management cannot predict with certainty when decisions in pending or future rate cases will be rendered or the amount of any interim or final rate increase that will be granted. WAIAU-CAMPBELL INDUSTRIAL PARK TRANSMISSION LINES In 1993, the PUC held hearings concerning Part 2 of the proposed Waiau- Campbell Industrial Park (CIP) 138-kilovolt transmission lines. These lines will be part of a second transmission corridor in West Oahu, running approximately 15 miles between CIP and HECO's Waiau Power Plant. The new lines are needed (1) to increase system reliability by locating the new lines in a separate corridor from the existing lines, (2) to provide additional transmission capacity to meet expected load growth and (3) to provide transmission capacity for existing and new power generation projects planned for West Oahu. HECO experienced 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 estimated that this proposal would cost approximately $100 million more than the cost of overhead lines. In April 1994, the PUC issued a decision which permits HECO to construct the lines above ground. While the PUC recognized the concerns of aesthetics and EMF, it felt that neither concern was sufficient to justify the added cost of undergrounding the lines. In May 1994, appeals to the state Supreme Court were filed by intervenors in the PUC proceeding requesting that the Court overturn the PUC's ruling that allows HECO to construct the lines above ground. No stay of the PUC order has been entered and HECO is proceeding with the overhead construction of the lines. Management cannot predict with certainty the final outcome of this appeal or the impact the final outcome may have on the cost of the lines or on system reliability. 10 SAVINGS BANK-AMERICAN SAVINGS BANK, F.S.B. GENERAL ASB was granted a charter as a federal savings bank in January 1987. Prior to that time, ASB operated as the Hawaii division of American Savings & Loan Association of Salt Lake City, Utah since 1925. At September 30, 1994, ASB's total assets were $2.9 billion and it was the fourth largest financial institution in Hawaii based on total assets. At December 31, 1994, ASB's total assets were $3.1 billion. HEI agreed with the OTS's predecessor regulatory agency that ASB's regulatory capital would be maintained at a level of at least 6% of ASB's total liabilities, or at such greater amount as may be required from time to time by regulation. Under the agreement, HEI's obligation to contribute additional capital was limited to a maximum aggregate amount of approximately $65.1 million. HEI elected to contribute additional capital of $1.0 million, $0.8 million and $24.0 million to ASB during 1994, 1993 and 1992, respectively. ASB is subject to the OTS regulations for dividends and other distributions applicable to financial institutions regulated by the OTS. ASB acquired First Nationwide Bank's Hawaii branches and deposits on October 6, 1990. The acquisition increased ASB's statewide retail branch network by 9 branches and its deposit base by $247 million, and provided approximately $239 million in cash. ASB's earnings depend primarily on its net interest income--the difference between the interest income earned on interest-earning assets (loans receivable, mortgage-backed securities and investments) and the interest expense incurred on interest-bearing liabilities (deposit liabilities and borrowings). Deposits traditionally have been the principal source of ASB's funds for use in lending, meeting liquidity requirements and making investments. ASB also derives funds from receipt of interest and principal on outstanding loans receivable, borrowings from the Federal Home Loan Bank (FHLB) of Seattle, securities sold under agreements to repurchase and other sources, including collateralized medium-term notes. In 1993 and 1994, advances from the FHLB became a more significant source of funds. For additional information about ASB, reference is made to Note 5 to HEI's Consolidated Financial Statements, incorporated herein by reference to pages 52 through 55 of HEI's 1994 Annual Report to Stockholders, portions of which are filed herein as HEI Exhibit 13(a). The following table sets forth selected data for ASB for the periods indicated:
Years ended December 31, ------------------------------------ 1994 1993 1992 /2/ ------ ------ -------- Return on assets Net income divided by average total assets /1/ 0.86% 1.00% 0.78% Return on equity Net income divided by average equity /1/ 12.96% 14.18% 12.10% Equity to assets ratio Average equity divided by average total assets 6.64% 7.03% 6.46%
/1/ Net income includes amortization of goodwill and core deposit intangibles. /2/ Reflects allocation of corporate-level expenses for segment reporting purposes, which were not billed to ASB. In the second quarter of 1992, HEI changed its method of billing corporate-level expenses to ASB. Under the new billing procedure, only certain direct charges, rather than fully-allocated costs, are billed to ASB. However, no change was made by HEI in the manner in which corporate-level expenses were allocated for segment reporting purposes. 11 CONSOLIDATED AVERAGE BALANCE SHEET The following table sets forth average balances of major balance sheet categories for the periods indicated. Average balances for each period have been calculated using the average month-end or daily average balances during the period.
Years ended December 31, ------------------------------------ (in thousands) 1994 1993 1992 -------------- ---------- ----------- ---------- ASSETS Investment securities $ 88,728 $ 136,987 $ 102,490 Mortgage-backed securities 732,623 647,973 793,248 Loans receivable, net 1,878,581 1,570,751 1,311,367 Other 178,088 183,151 173,585 ---------- ---------- ---------- $2,878,020 $2,538,862 $2,380,690 ========== ========== ========== LIABILITIES AND STOCKHOLDER'S EQUITY Deposit liabilities $2,134,029 $2,076,192 $1,882,523 Other borrowings 477,331 230,101 288,862 Other 75,573 54,212 55,586 Stockholder's equity 191,087 178,357 153,719 ---------- ---------- ---------- $2,878,020 $2,538,862 $2,380,690 ========== ========== ==========
ASSET/LIABILITY MANAGEMENT Interest rate sensitivity refers to the relationship between market interest rates and net interest income resulting from the repricing of interest-earning assets and interest-bearing liabilities. Interest rate risk arises when an interest-earning asset matures or when its interest rate changes in a time frame different from that of the supporting interest-bearing liability. Maintaining an equilibrium between rate sensitive interest-earning assets and interest-bearing liabilities will reduce some interest rate risk but it will not guarantee a stable net interest spread because yields and rates may change simultaneously or at different times and such changes may occur in differing increments. Market rate fluctuations could materially affect the overall net interest spread even if interest-earning assets and interest-bearing liabilities were perfectly matched. The difference between the amounts of interest-earning assets and interest-bearing liabilities that reprice during a given period is called "gap." An asset-sensitive position or "positive gap" exists when more assets than liabilities reprice within a given period; a liability-sensitive position or "negative gap" exists when more liabilities than assets reprice within a given period. A positive gap generally produces more net interest income in periods of rising interest rates and a negative gap generally produces more net interest income in periods of falling interest rates. As rates increased during 1994, the gap in the near term (0-6 months) was a negative 7.6% of total assets as compared to a cumulative one-year positive gap position of 3.0% of total assets as of December 31, 1994. The negative near- term gap position reflects increases in FHLB advances and other borrowings to support investment activities. The cumulative one-year 1994 positive gap was primarily due to investments in adjustable rate loans and mortgage-backed securities. 12 The following table shows ASB's interest rate sensitivity at December 31, 1994:
Cumulative volumes at December 31, 1994 subject to repricing within ------------------------------------------------------------------------------------------------ 6 months 6 months 1-5 Over 5 (dollars in millions) or less to 1 year years years Total /1/ --------------------- ------------- ------------- ---------- ----------- ------------ INTEREST-EARNING ASSETS Real estate loans and mortgage- backed securities Balloon and adjustable rate $ 541 $ 550 $ 51 $ -- $1,142 Fixed rate 1-4 unit residential 120 106 580 598 1,404 Other 46 26 58 34 164 Consumer and other loans 122 4 19 13 158 Commercial loans 7 2 7 7 23 Other interest-earning assets 43 -- -- -- 43 ------------- ------------- ---------- ----------- ------------- Total interest-earning assets 879 688 715 652 2,934 ------------- ------------- ---------- ----------- ------------- INTEREST-BEARING LIABILITIES Certificate accounts 226 146 245 60 677 Money market accounts 71 -- -- -- 71 "Negotiable Order of Withdrawal" accounts 269 -- -- -- 269 Passbook accounts 242 60 390 420 1,112 FHLB advances 186 152 268 11 617 Other borrowings 123 -- -- -- 123 ------------- ------------- ---------- ----------- ------------- Total interest-bearing liabilities 1,117 358 903 491 2,869 ------------- ------------- ---------- ----------- ------------- Interest rate sensitivity gap /2/ $ (238) $ 330 $ (188) $ 161 $ 65 ============= ============= ========== =========== ============= Cumulative interest rate sensitivity gap $ (238) $ 92 $ (96) $ 65 ============= ============= ========== =========== Cumulative interest rate sensitivity gap over total assets (7.64)% 2.95% (3.08)% 2.09% ============= ============= ========== ===========
/1/ The table does not include $182 million of noninterest-earning assets and $51 million of noninterest-bearing liabilities. /2/ The difference between the total interest-earning assets and the total interest-bearing liabilities. 13 INTEREST INCOME AND INTEREST EXPENSE The following table sets forth average balances, interest and dividend income, interest expense and weighted average yields earned and rates paid, for certain categories of interest-earning assets and interest-bearing liabilities for the periods indicated. Average balances for each period have been calculated using the average month-end or daily average balances during the period.
Years ended December 31, --------------------------------------------------- (dollars in thousands) 1994 1993 1992 ---------- ---------- ---------- Loans Average balances $1,878,581 $1,570,751 $1,311,367 Interest income $ 154,026 $ 135,778 $ 124,714 Weighted average yield 8.20% 8.64% 9.51% Mortgage-backed securities Average balances $ 732,623 $ 647,973 $ 793,248 Interest income $ 44,043 $ 43,397 $ 60,774 Weighted average yield 6.01% 6.70% 7.66% Investments /1/, /2/ Average balances $ 88,728 $ 136,987 $ 102,490 Interest and dividend income $ 5,304 $ 9,444 $ 7,156 Weighted average yield 5.98% 6.89% 6.98% Total interest-earning assets Average balances $2,699,932 $2,355,711 $2,207,105 Interest and dividend income $ 203,373 $ 188,619 $ 192,644 Weighted average yield 7.53% 8.01% 8.73% Deposits Average balances $2,134,029 $2,076,192 $1,882,523 Interest expense $ 76,509 $ 77,651 $ 94,339 Weighted average rate 3.59% 3.74% 5.01% Borrowings Average balances $ 477,331 $ 230,101 $ 288,862 Interest expense $ 27,397 $ 15,050 $ 20,409 Weighted average rate 5.74% 6.54% 7.07% Total interest-bearing liabilities Average balances $2,611,360 $2,306,293 $2,171,385 Interest expense $ 103,906 $ 92,701 $ 114,748 Weighted average rate 3.98% 4.02% 5.28% Net balance, net interest income and interest rate spread Net balance $ 88,572 $ 49,418 $ 35,720 Net interest income $ 99,467 $ 95,918 $ 77,896 Interest rate spread 3.55% 3.99% 3.45%
/1/ ASB has no material amount of tax-exempt investments for periods shown. Investments include interest-bearing deposits, marketable securities and investments in regulatory agencies. /2/ Includes interest-bearing deposits in the Federal Home Loan Bank of Seattle. 14 The following table shows the effect on net interest income of (1) changes in interest rates (change in weighted average interest rate multiplied by prior period average portfolio balance) and (2) changes in volume (change in average portfolio balance multiplied by prior period rate). Any remaining change is allocated to the above two categories on a pro rata basis.
Increase (decrease) due to --------------------------------- (in thousands) Rate Volume Total -------------- -------- -------- --------- YEAR ENDED DECEMBER 31, 1994 VS. 1993 Income from interest-earning assets Loan portfolio $ (7,209) $ 25,457 $ 18,248 Mortgage-backed securities (4,715) 5,361 646 Investments (1,129) (3,011) (4,140) -------- -------- -------- (13,053) 27,807 14,754 -------- -------- -------- Expense from interest-bearing liabilities Deposits (3,228) 2,086 (1,142) FHLB advances and other borrowings (2,044) 14,391 12,347 ------- -------- -------- (5,272) 16,477 11,205 ------- -------- -------- Net interest income $ (7,781) $ 11,330 $ 3,549 ======== ======== ======== YEAR ENDED DECEMBER 31, 1993 VS. 1992 Income from interest-earning assets Loan portfolio $(12,101) $ 23,165 $ 11,064 Mortgage-backed securities (7,060) (10,317) (17,377) Investments (93) 2,381 2,288 -------- -------- -------- (19,254) 15,229 (4,025) -------- -------- -------- Expense from interest-bearing liabilities Deposits (25,675) 8,987 (16,688) FHLB advances and other borrowings (1,443) (3,916) (5,359) -------- -------- -------- (27,118) 5,071 (22,047) -------- -------- -------- Net interest income $ 7,864 $ 10,158 $ 18,022 ======== ======== ========
15 OTHER INCOME In addition to net interest income, ASB has various sources of other income, including fee income from servicing loans, fees on deposit accounts, rental income from premises and other income. Other income totaled approximately $12.2 million in 1994, compared to $11.1 million in 1993 and $10.4 million in 1992. LENDING ACTIVITIES General. ASB's net loan and mortgage-backed securities portfolio totaled approximately $2.9 billion at December 31, 1994, representing 92.8% of its total assets, compared to $2.4 billion, or 90.3%, and $2.2 billion, or 88.3%, at December 31, 1993 and 1992, respectively. ASB's loan portfolio consists primarily of conventional residential mortgage loans which are not insured by the Federal Housing Administration (FHA) nor guaranteed by the Veterans Administration. At December 31, 1994, mortgage-backed securities represented 36.9% of the loan and mortgage-backed securities portfolio, compared to 26.7% at December 31, 1993 and 32.7% at December 31, 1992. The following tables set forth the composition of ASB's loan and mortgage- backed securities portfolio:
December 31, --------------------------------------------------------------------------------- 1994 1993 1992 ------------------------- ------------------------ ------------------------ (dollars in thousands) Balance % of total Balance % of total Balance % of total ---------------------- ----------- ---------- ----------- ---------- ----------- ---------- REAL ESTATE LOANS /1/ Conventional $1,636,282 56.59% $1,584,218 66.98% $1,294,769 59.59% Construction and development 32,074 1.11 26,526 1.12 33,123 1.53 Troubled debt restructuring 16,151 0.56 3,397 0.14 8,945 0.41 ---------- ---------- ---------- ---------- ---------- ---------- 1,684,507 58.26 1,614,141 68.24 1,336,837 61.53 Less Unearned fees and discounts (21,159) (0.73) (26,728) (1.13) (20,422) (0.94) Undisbursed loan funds (13,844) (0.48) (13,142) (0.55) (16,203) (0.74) Allowance for losses (7,259) (0.25) (3,962) (0.17) (3,626) (0.17) ---------- ---------- ---------- ---------- ---------- ---------- Total real estate loans, net 1,642,245 56.80 1,570,309 66.39 1,296,586 59.68 ---------- ---------- ---------- ---------- ---------- ---------- OTHER LOANS Loans on deposits 15,378 0.53 15,015 0.63 15,013 0.69 Consumer and other loans 144,505 5.00 129,961 5.49 134,943 6.21 Commercial loans 27,981 0.97 24,494 1.04 21,830 1.01 ---------- ---------- ---------- ---------- ---------- ---------- 187,864 6.50 169,470 7.16 171,786 7.91 Less Unearned fees and discounts (52) (0.00) (156) (0.01) (148) (0.01) Undisbursed loan funds (4,468) (0.16) (3,173) (0.13) (3,805) (0.18) Allowance for losses (1,534) (0.05) (1,352) (0.06) (1,531) (0.07) ---------- ---------- ---------- ---------- ---------- ---------- Total other loans, net 181,810 6.29 164,789 6.96 166,302 7.65 ---------- ---------- ---------- ---------- ---------- ---------- MORTGAGE-BACKED SECURITIES, NET OF DISCOUNTS 1,067,287 36.91 630,156 26.65 709,891 32.67 ---------- ---------- ---------- ---------- ---------- ---------- TOTAL LOANS AND MORTGAGE-BACKED SECURITIES, NET $2,891,342 100.00% $2,365,254 100.00% $2,172,779 100.00% ========== ========== ========== ========== ========== ==========
/1/ Includes renegotiated loans. 16
December 31, -------------------------------------------------------------------- 1991 1990 -------------------------------------------------------------------- (dollars in thousands) Balance % of total Balance % of total --------------------- ----------------- ---------- ---------- ---------- REAL ESTATE LOANS /1/ Conventional $ 976,004 50.02% $ 792,197 44.95% Construction and development 24,978 1.28 7,186 0.41 Troubled debt restructuring 180 0.01 220 0.01 Other real estate loans -- -- 130 0.01 ----------------- ---------- ----------- ---------- 1,001,162 51.31 799,733 45.38 Less Unearned fees and discounts (16,106) (0.82) (14,356) (0.82) Undisbursed loan funds (11,854) (0.61) (6,279) (0.36) Allowance for losses (2,678) (0.14) (2,371) (0.13) ----------------- ---------- ----------- ---------- Total real estate loans, net 970,524 49.74 776,727 44.07 ----------------- ---------- ----------- ---------- OTHER LOANS Loans on deposits 15,528 0.80 16,968 0.96 Consumer and other loans 144,356 7.40 128,387 7.29 Commercial loans 22,998 1.18 19,591 1.11 ----------------- ---------- ----------- ---------- 182,882 9.38 164,946 9.36 Less Unearned fees and discounts (204) (0.01) (252) (0.01) Undisbursed loan funds (3,436) (0.18) (3,355) (0.19) Allowance for losses (1,140) (0.06) (1,016) (0.06) ----------------- ---------- ----------- ---------- Total other loans, net 178,102 9.13 160,323 9.10 ----------------- ---------- ----------- ---------- MORTGAGE-BACKED SECURITIES, NET OF DISCOUNTS 802,430 41.13 825,292 46.83 ----------------- ---------- ----------- ---------- TOTAL LOANS AND MORTGAGE-BACKED SECURITIES, NET $1,951,056 100.00% $1,762,342 100.00% ================= ========== ========== ==========
/1/ Includes renegotiated loans. Origination, purchase and sale of loans. Generally, loans originated and purchased by ASB are secured by real estate located in Hawaii. As of December 31, 1994, approximately $8.6 million of loans which were purchased from other lenders were secured by properties located in the continental United States. For additional information, including information concerning the geographic distribution of ASB's mortgage-backed securities portfolio and the geographic concentration of credit risk, reference is made to Note 19 to HEI's Consolidated Financial Statements, incorporated herein by reference to page 65 of HEI's 1994 Annual Report to Stockholders, portions of which are filed herein as HEI Exhibit 13(a). The following table shows the amount of loans originated for the years indicated:
Amount of (dollars in millions) loans originated -------------------- ---------------- 1994 $523 1993 564 1992 601 1991 387 1990 366
17 Residential mortgage lending. During 1994, interest rates rose and the demand for adjustable rate mortgage (ARM) loans over fixed rate loans increased compared with 1993. ARM loans carry adjustable interest rates which are typically set according to a short-term index. Payment amounts may be adjusted periodically based on changes in interest rates. ARM loans represented approximately 46.3% of the total originations of first mortgage loans in 1994, compared to 24.7% and 34.0% in 1993 and 1992, respectively. ASB intends to continue to emphasize the origination and purchase of ARM loans to further improve its asset/liability management. ASB is permitted to lend up to 100% of the appraised value of the real property securing a loan. Its general policy is to require private mortgage insurance when the loan-to-value ratio of owner-occupied property exceeds 80% of the lower of the appraised value or purchase price. On nonowner-occupied residential properties, the loan-to-value ratio may not exceed 80% of the lower of the appraised value or purchase price. Construction and development lending. ASB provides both fixed and adjustable rate loans for the construction of one-to-four residential unit and commercial properties. Construction and development financing generally involves a higher degree of credit risk than long-term financing on improved, occupied real estate. Accordingly, all construction and development loans are priced higher than loans secured by completed structures. ASB's underwriting, monitoring and disbursement practices with respect to construction and development financing are designed to ensure sufficient funds are available to complete construction projects. As of December 31, 1994, 1993 and 1992, construction and development loans represented 1.7%, 1.5% and 2.2%, respectively, of ASB's gross loan portfolio. See "Loan portfolio risk elements." Multi-family residential and commercial real estate lending. Permanent loans secured by multi-family properties (generally apartment buildings), as well as commercial and industrial properties (including office buildings, shopping centers and warehouses), are originated by ASB for its own portfolio as well as for participation with other lenders. In 1994, 1993 and 1992, loans on these types of properties accounted for approximately 6.6%, 6.0% and 8.2%, respectively, of ASB's total mortgage loan originations. The objective of commercial real estate lending is to diversify ASB's loan portfolio to include sound, income-producing properties. Consumer lending. ASB offers a variety of secured and unsecured consumer loans. Loans secured by deposits are limited to 90% of the available account balance. ASB also offers VISA cards, automobile loans, general purpose consumer loans, second mortgage loans, home equity lines of credit, checking account overdraft protection and unsecured lines of credit. In 1994, 1993 and 1992, loans of these types accounted for approximately 6.2%, 4.3% and 4.9%, respectively, of ASB's total loan originations. Corporate banking/commercial lending. ASB is authorized to make both secured and unsecured corporate banking loans to business entities. This lending activity is designed to diversify ASB's asset structure, shorten maturities, provide rate sensitivity to the loan portfolio and attract business checking deposits. As of December 31, 1994, 1993 and 1992, corporate banking loans represented 1.3%, 1.2% and 1.2%, respectively, of ASB's total net loan portfolio. Loan origination fee and servicing income. In addition to interest earned on loans, ASB receives income from servicing of loans, for late payments and from other related services. Servicing fees are received on loans originated and subsequently sold by ASB and also on loans for which ASB acts as collection agent on behalf of third-party purchasers. ASB generally charges the borrower at loan settlement a loan origination fee ranging from 2% to 3% of the amount borrowed. Loan origination fees (net of direct loan origination costs) are deferred and recognized as an adjustment of yield over the life of the loan. Nonrefundable commitment fees (net of direct loan origination costs, if applicable) to originate or purchase loans are deferred. The nonrefundable commitment fees are recognized as an adjustment of yield over the life of the loan if the commitment is exercised. If the commitment expires unexercised, nonrefundable commitment fees are recognized in income upon expiration of the commitment. 18 Loan portfolio risk elements. When a borrower fails to make a required payment on a loan and does not cure the delinquency promptly, the loan is classified as delinquent. If delinquencies are not cured promptly, ASB normally commences a collection action, including foreclosure proceedings in the case of secured loans. In a foreclosure action, the property securing the delinquent debt is sold at a public auction in which ASB may participate as a bidder to protect its interest. If ASB is the successful bidder, the property is classified in a real estate owned account until it is sold. At December 31, 1994, there were three residential properties acquired in settlement of loans totaling $0.8 million or 0.03% of total assets. At December 31, 1993, there was only one residential property acquired in settlement of a loan totaling $0.2 million, or 0.01% of total assets. At December 31, 1992 there was only one commercial property acquired in settlement of a loan totaling $2.0 million, or 0.08% of total assets. In addition to delinquent loans, other significant lending risk elements include: (1) accruing loans which are over 90 days past due as to principal or interest, (2) loans accounted for on a nonaccrual basis (nonaccrual loans), and (3) loans on which various concessions are made with respect to interest rate, maturity, or other terms due to the inability of the borrower to service the obligation under the original terms of the agreement (renegotiated loans). ASB has no loans which are over 90 days past due on which interest is being accrued for the years presented in the table below. The level of nonaccrual and renegotiated loans represented 1.4%, 0.5%, 1.0%, 0.1% and 0.1%, of ASB's total net loans outstanding at December 31, 1994, 1993, 1992, 1991 and 1990, respectively. The following table sets forth certain information with respect to nonaccrual and renegotiated loans for the dates indicated:
December 31, --------------------------------------------- (in thousands) 1994 1993 1992 1991 1990 -------------- --------- ------- ------- ------ ------ Nonaccrual loans- Real estate 1-4 unit residential $ 8,773 $5,006 $12,526 $ 556 $ 704 Income property 14,224 220 395 -- -- --------- ------ ------- ------ ------ Total real estate 22,997 5,226 12,921 556 704 Commercial 25 38 1,059 -- 25 Consumer 793 460 181 439 269 --------- ------- ------- ------ ------ Total nonaccrual loans $23,815 $5,724 $14,161 $ 995 $ 998 ========= ======= ======= ====== ====== Renegotiated loans not included above- Real estate 1-4 unit residential $ 1,004 $ 381 $ -- $ -- $ -- Income property -- 1,486 -- 180 220 Commercial -- 324 -- -- -- --------- ------- ------- ------ ------ Total renegotiated loans $ 1,004 $2,191 $ -- $ 180 $ 220 ========= ======= ======= ====== ======
ASB's policy generally is to place mortgage loans on a nonaccrual status (interest accrual is suspended) when the loan becomes more than 90 days past due or on an earlier basis when there is a reasonable doubt as to its collectability. Loans on nonaccrual status amounted to $23.8 million (1.27% of total loans) at December 31, 1994, $5.7 million (0.32% of total loans) at December 31, 1993, $14.2 million (0.94% of total loans) at December 31, 1992, $1.0 million (0.08% of total loans) at December 31, 1991 and $1.0 million (0.10% of total loans) at December 31, 1990. The significant increase in loans on nonaccrual status from yearend 1991 to 1992 was primarily due to the effects of Hurricane Iniki on the island of Kauai, such as higher unemployment. As of December 31, 1992, real estate loans with remaining principal balances of $8.9 million were restructured to defer monthly contractual principal and interest payments for three months with repayments of the entire deferred amounts due at the end of the three-month period. These loans had been classified as nonaccrual loans as of December 31, 1992. Substantially all of these loans have resumed their normal repayment schedule and are classified as performing loans. 19 In 1994, the $18 million increase in nonaccrual real estate loans is a result of Hawaii's weak economy. A rising trend of delinquencies resulted in a $3.8 million increase in nonaccrual residential loans. The $14 million increase in nonaccrual income property loans is primarily due to three commercial real estate loans with principal balances totaling $11.8 million that were restructured/renegotiated to defer monthly principal and interest payments for three to six months. Gross interest income deferred during 1994 relating to these restructured/renegotiated loans amounted to $0.5 million. Based on current evaluations of collection prospects, a specific loss reserve of $1.6 million was established for one of the loans secured by a commercial retail/office building located on the island of Oahu. There were no loan loss provisions with respect to renegotiated loans in 1993, 1992, 1991 and 1990 because the estimated net realizable value of the collateral for such loans was determined to be in excess of the outstanding principal amounts of these loans. Allowance for loan losses. The provision for loan losses is dependent upon management's evaluation as to the amount needed to maintain the allowance for loan losses at a level considered appropriate in relation to the risk of future losses inherent in the loan portfolio. While management attempts to use the best information available to make evaluations, future adjustments may be necessary as circumstances change and additional information becomes available. The following table presents the changes in the allowance for loan losses for the periods indicated.
Years ended December 31, --------------------------------------------- (dollars in thousands) 1994 1993 1992 1991 1990 ---------------------- ------- ------- ------ ------- ------- Allowance for loan losses, beginning of year $5,314 $5,157 $3,818 $3,387 $2,911 ------- ------- ------ ------- ------ ADDITIONS TO PROVISIONS FOR LOSSES Real estate loans 3,406 336 945 296 329 Other loans 577 443 549 345 299 ------- ------- ------ ------- ------ Total additions 3,983 779 1,494 641 628 ------- ------- ------ ------- ------ NET (RECOVERY) CHARGE-OFFS Real estate loans 109 -- (3) (12) -- Other loans 395 622 158 222 152 ------- ------- ------ ------- ------ Total net charge-offs 504 622 155 210 152 ------- ------- ------ ------- ------ Allowance for loan losses, end of year $8,793 $5,314 $5,157 $3,818 $3,387 ======= ======= ======= ======= ====== Ratio of net charge-offs during the period to average loans outstanding 0.03% 0.04% 0.01% 0.02% 0.02% ======= ======= ======= ======= ======
ASB's ratio of provisions for loan losses during the period to average loans outstanding was 0.21%, 0.05%, 0.11%, 0.06% and 0.07% for the years ended December 31, 1994, 1993, 1992, 1991 and 1990, respectively. The increase in provisions for loan losses during 1992 was primarily due to the 27% increase in average loans outstanding and a $0.6 million additional provision for Kauai loans anticipated to be affected by Hurricane Iniki. In 1994, to establish additional specific loss reserves and in response to a rising trend of delinquencies caused by Hawaii's weak economy, ASB increased its loss reserve by $3.5 million. INVESTMENT ACTIVITIES In recent years, ASB's investment portfolio has consisted primarily of mortgage-backed securities, federal agency obligations and stock of the FHLB of Seattle. In response to the increasing interest rate environment, management decided to liquidate ASB's portfolio of securities held for trading and the liquidation was completed in October 1994. 20 The following table sets forth the composition of ASB's investment portfolio, excluding mortgage-backed securities to be held-to-maturity, at the dates indicated:
December 31, ------------------------------------------ (dollars in thousands) 1994 1993 1992 --------------------- ----------- ------------- ----------- Marketable securities Federal agency obligations $ -- $ -- $15,293 Other securities held for trading -- 45,396 23,037 ----------- ------------- ----------- Total marketable securities -- 45,396 38,330 Investments in regulatory agencies-FHLB stock 32,523 23,203 20,194 ----------- ------------- ----------- Total investments $32,523 $68,599 $58,524 =========== ============= =========== Weighted average rate on investments/1/ 6.86% 9.75% 9.38% =========== ============= ===========
/1/ On investments during the year ended December 31. DEPOSITS AND OTHER SOURCES OF FUNDS General. Deposits traditionally have been the principal source of ASB's funds for use in lending, meeting liquidity requirements and making investments. ASB also derives funds from receipt of interest and principal on outstanding loans receivable and mortgage-backed securities, borrowings from the FHLB of Seattle, securities sold under agreements to repurchase and other sources. ASB borrows on a short-term basis to compensate for seasonal or other reductions in deposit flows. ASB also may borrow on a longer-term basis to support expanded lending or investment activities. In the last two years, advances from the FHLB have become a more significant source of funds as the demand for deposits has decreased. Using higher cost sources of funds puts downward pressure on ASB's net interest income. Deposits. ASB's deposits are obtained primarily from residents of Hawaii. In 1994, ASB had average deposits aggregating $2.1 billion. Net savings outflows for 1994 and 1993 were approximately $32 million and $9 million, respectively, excluding interest credited to deposit accounts. Net savings inflow for 1992 was approximately $343 million, excluding interest credited to deposit accounts. The decrease in net savings flow for 1994 was due primarily to the effects of rising interest rates and increased competition. The net savings outflow for 1993 was due primarily to the withdrawal of a trust company deposit account of $92 million. The trust company had been acquired by another financial institution. The substantial increase in net savings inflow for 1992 was due to ASB's strategy to increase its retail market by paying higher rates of interest on savings accounts than most of its competitors in Hawaii during this period. The weighted average rate paid on deposits during 1994 decreased to 3.59%, compared to 3.74% and 5.01% in 1993 and 1992, respectively. In the three years ended December 31, 1994, ASB had no deposits placed by or through a broker. 21 The following table shows the distribution of ASB's average deposits and average daily rates by type of deposit for the years indicated. Average balances for a period have been calculated using the average of month-end balances during the period.
Years ended December 31, ------------------------------------------------------------------------------------------------- 1994 1993 1992 ------------------------------ ------------------------------- -------------------------------- % of % of % of (dollars in Average total Average Average total Average Average total Average thousands) balance deposits rate % balance deposits rate % balance deposits rate % ----------- ---------- -------- ------- ---------- --------- -------- --------- --------- -------- Passbook accounts $1,215,919 56.98% 3.51% $1,126,880 54.28% 3.73% $738,692 39.24% 4.69% Negotiable Order of Withdrawal (NOW) accounts 266,335 12.48 2.25 268,227 12.92 2.49 242,682 12.89 4.11 Money market accounts 88,320 4.14 3.02 119,238 5.74 3.15 149,811 7.96 4.30 Certificate accounts 563,455 26.40 4.48 561,847 27.06 4.48 751,338 39.91 5.76 ---------- ------ ---- ---------- ------ ---- ---------- ------ ---- Total deposits $2,134,029 100.00% 3.59% $2,076,192 100.00% 3.74% $1,882,523 100.00% 5.01% ========== ====== ==== ========== ====== ==== ========== ====== ====
At December 31, 1994, ASB had $203.7 million in certificate accounts of $100,000 or more, maturing as follows:
(in thousands) Amount -------------- -------- Three months or less $ 84,986 Greater than three months through six months 26,571 Greater than six months through twelve months 41,866 Greater than twelve months 50,291 -------- $203,714 ========
Borrowings. ASB obtains advances from the FHLB of Seattle, provided certain standards related to credit-worthiness have been met. Advances are secured under a blanket pledge of the common stock ASB owns in the FHLB of Seattle and each note or other instrument held by ASB and the mortgage securing it. FHLB advances generally are available to meet seasonal and other withdrawals of deposit accounts, to expand lending and to assist in the effort to improve asset and liability management. FHLB advances are made pursuant to several different credit programs offered from time to time by the FHLB of Seattle. At December 31, 1994, 1993 and 1992, advances from the FHLB amounted to $616 million, $290 million and $194 million, respectively. The weighted average rate on the advances from the FHLB outstanding at December 31, 1994, 1993 and 1992 were 6.17%, 6.24% and 7.39%, respectively. The maximum amount outstanding at any month-end during 1994, 1993 and 1992 was $616 million, $290 million and $259 million, respectively. Advances from the FHLB averaged $453 million, $210 million and $221 million during 1994, 1993 and 1992, respectively, and the approximate weighted average rate thereon was 5.77%, 6.84% and 7.65%, respectively. During 1994, increased advances from the FHLB were needed to support investment activities as the effects of rising interest rates and increased competition slowed deposit growth. At December 31, 1994 and 1992, securities sold under agreements to repurchase consisted of mortgage-backed securities sold to brokers/dealers under fixed- coupon agreements. The agreements are treated as financings and the obligations to repurchase securities sold are reflected as a liability in the consolidated balance sheets. The dollar amount of securities underlying the agreements remains in the asset accounts. At December 31, 1994 and 1992, $123.3 million (including accrued interest of $1.0 million) and $27.2 million (including accrued interest of $0.2 million) of the agreements were to repurchase substantially the same securities, respectively. There were no outstanding securities sold under agreements to repurchase as of December 31, 1993. The weighted average rates on securities sold under agreements to repurchase outstanding at December 31, 1994 and 1992 were 6.22% and 3.34%, 22 respectively. The maximum amount outstanding at any month-end during 1994, 1993 and 1992 was $123 million, $27 million and $125 million, respectively. Securities sold under agreements to repurchase averaged $21 million, $20 million and $66 million during 1994, 1993 and 1992, respectively, and the approximate weighted average interest rate thereon was 5.14%, 3.39% and 5.15%, respectively. Subject to obtaining certain approvals from the FHLB of Seattle, ASB may offer collateralized medium-term notes due from nine months to 30 years from the date of issue and bearing interest at a fixed or floating rate established at the time of issue. At December 31, 1994, 1993 and 1992, ASB had no outstanding collateralized medium-term notes. The following table sets forth information concerning ASB's advances from FHLB and other borrowings at the dates indicated:
December 31, ------------------------------------------------- (dollars in thousands) 1994 1993 1992 --------------------- ------------ ------------- ------------ Advances from FHLB $616,374 $289,674 $194,099 Securities sold under agreements to repurchase 123,301 -- 27,223 -------- -------- -------- Total borrowings $739,675 $289,674 $221,322 ======== ======== ======== Weighted average rate /1/ 6.18% 6.24% 6.89%
/1/ On borrowings at December 31. COMPETITION The primary factors in competing for deposits are interest rates, the quality and range of services offered, marketing, convenience of office locations, office hours and perceptions of the institution's financial soundness and safety. Competition for deposits comes primarily from other savings institutions, commercial banks, credit unions, money market and mutual funds and other investment alternatives. Additional competition for deposits comes from various types of corporate and government borrowers, including insurance companies. To meet the competition, ASB offers a variety of savings and checking accounts at competitive rates, convenient business hours, convenient branch locations with interbranch deposit and withdrawal privileges at each office and conducts advertising and promotional campaigns. The primary factors in competing for first mortgage and other loans are interest rates, loan origination fees and the quality and range of lending services offered. Competition for origination of first mortgage loans comes primarily from other savings institutions, mortgage banking firms, commercial banks, insurance companies and real estate investment trusts. ASB believes that it is able to compete for such loans primarily through the interest rates and loan fees it charges, the type of mortgage loan programs it offers and the efficiency and quality of the services it provides its borrowers and the real estate business community. OTHER FREIGHT TRANSPORTATION -- HAWAIIAN TUG & BARGE CORP AND YOUNG BROTHERS, LIMITED ------------------------------------------------------------------------------- GENERAL HTB and its wholly owned subsidiary, YB, were acquired in 1986. HTB provides marine transportation services in Hawaii and the Pacific area, including charter tug and barge and harbor tug operations. YB, which is a regulated interisland cargo carrier, transports general freight and containerized cargo by barge on a regular schedule between all major ports in Hawaii. YB moved 3.0 million revenue tons of cargo between the islands in 1994, compared to 3.1 million tons of cargo in 1993. A substantial portion of the state's commodities are imported, and almost all of Hawaii's overseas inbound and outbound cargo moves through Honolulu. Cargo destined for the neighbor islands is transshipped through the Honolulu gateway. 23 YB has a nonexclusive Certificate of Public Convenience and Necessity from the PUC to operate as an intrastate common carrier by water. The Certificate will remain in effect for an indefinite period unless suspended or terminated by the PUC. Although YB encounters competition from, among others, interstate carriers and unregulated contract carriers, YB is the only authorized common carrier under the Hawaii Water Carrier Act. YB RATES YB generally must accept for transport all cargo offered. YB rates and charges must be approved by the PUC and the PUC has broad discretion in its regulation of the rates charged by YB. In September 1992, YB filed an application for a tariff change in its minimum bill of lading from $10.43 to $21.03 (later increased to $21.62). This application was suspended on October 7, 1992. On November 5, 1992, YB filed a general rate increase application with the PUC for a 17.1% across-the-board increase in rates effective December 20, 1992. On December 18, 1992, the PUC ordered that the two applications be consolidated and that the consolidated application be suspended for a period of six months to and including June 19, 1993. On February 12, 1993, YB reduced its general rate increase request to 15.7% from the 17.1% originally requested. The decrease in the request was primarily due to a decrease in rate base resulting from the change in the test year period and an adjustment to YB's capital structure to reflect more leverage. The revised request was based on a rate of return of 16.7% on an imputed equity of 55%. Hearings for this general rate increase and the tariff change were held in May 1993. On June 30, 1993, the PUC issued a decision granting an $18.00 minimum bill of lading charge and a 4.3% general rate increase on all rates excluding the Minimum Bill of Lading and Marine Cargo Insurance rates. The new rates and charges became effective on July 8, 1993. This decision was based on a rate of return of 15.15% on an imputed equity of 55%. Also, on June 30, 1993, the PUC approved YB's motion to rescind a 1.1% interim rate reduction for the effects of the Tax Reform Act of 1986, effective July 8, 1993. YB filed an application on May 16, 1994 requesting PUC approval to increase its general freight rates by 5.9% and its Minimum Bill of Lading charge from $18.00 to $20.93 to be effective July 1, 1994. On June 17, 1994, the PUC suspended YB's application for a period of six months to and including December 31, 1994. On August 12, 1994, YB filed its testimonies and exhibits for a 1995 test year and simultaneously filed a Motion to Amend its May 16, 1994 Application to request a 10.3% rate increase. The Consumer Advocate filed its opposition to YB's motion on August 22, 1994. On September 26, 1994, YB filed with the PUC a Stipulation indicating YB and the Consumer Advocate had agreed to stipulate to a 6% general rate increase effective upon PUC approval. On December 12, 1994, the PUC granted YB approval to increase its rates 6% across-the-board, which YB put into effect on December 15, 1994. YB also participated in the PUC's generic docket to determine whether SFAS No. 106 should be adopted for rate-making purposes. The information on postretirement benefits other than pensions in Management's Discussion and Analysis of Financial Condition and Results of Operations and in Note 17 to HEI's Consolidated Financial Statements is incorporated herein by reference to pages 30 and 63 to 64 of HEI's 1994 Annual Report to Stockholders, portions of which are filed herein as HEI Exhibit 13(a). REAL ESTATE-MALAMA PACIFIC CORP. -------------------------------- GENERAL MPC was incorporated in 1985 and engages in real estate development activities, either directly or through joint ventures. MPC's real estate development investments in residential projects are targeted for Hawaii's owner-occupant market. MPC's subsidiaries are currently involved in the active development of five residential projects (Kipona Hills, Kua' Aina Ridge, Westpark and Westhills at Makakilo Heights, Piilani Village Phase 1 and Sunrise Estates) on the islands of Oahu, Maui and Hawaii encompassing approximately 580 homes or lots, of which nearly 340 have been completed and sold. Either directly or through its joint ventures, MPC's subsidiaries have access to nearly 420 acres of land for future residential development. Residential development generally requires long lead time to obtain necessary zoning changes, building permits and other required approvals. MPC's projects are subject to the usual risks of real estate development, including fluctuations in interest rates, the receipt of timely and appropriate state and local 24 zoning and other necessary approvals, possible cost overruns and construction delays, adverse changes in general commerce and local market conditions, compliance with applicable environmental and other regulations, and potential competition from other new projects and resales of existing residences. In 1994, Malama's real estate development activities continued to experience slow sales activity. Although the local economy has started to strengthen, sales were dampened by significant increases in interest rates. Sales activity is expected to improve gradually in 1995 as the upturn in Hawaii's 1994 visitor count, after three consecutive years of decline, is a signal of improving economic conditions. JOINT VENTURE DEVELOPMENTS Makakilo Cliffs. In 1990, MDC and JGL Enterprises Inc. formed Makakilo Cliffs Joint Venture for the development of a 280-unit multi-family residential project on approximately 26 acres in Makakilo, Hawaii (island of Oahu). MDC's partnership interest was assigned to Malama Makakilo Corp., another wholly owned subsidiary of MPC, in August 1990. Sales of the first 81 units closed in 1991 and all remaining units closed in 1992. The joint venture was dissolved in December 1993. Sunrise Estates. In 1990, MDC and HSC, Inc. formed Sunrise Estates Joint Venture to develop and sell 165 one-acre house lots in Hilo, Hawaii (island of Hawaii). In 1993 and 1992, sales of three lots and 153 lots closed, respectively. There were no sales in 1994. Sales of the remaining nine lots are expected in 1995. In 1991, HSC, Inc. and Malama Elua Corp., a wholly owned subsidiary of MPC, formed Sunrise Estates II Joint Venture to develop and sell approximately 140 one-acre house lots in Hilo, Hawaii, adjacent to the Sunrise Estates Joint Venture project. Rezoning was completed in 1993, subdivision approvals are in progress and site work is expected to commence in 1996. Ainalani Associates. MMO and MDT-BF Limited Partnership (MDT) were partners in a joint venture known as Ainalani Associates. In 1992, MMO acquired MDT's 50% interest in Ainalani Associates, and the partnership was dissolved. MMO is completing the development and sale of three projects on the islands of Maui and Hawaii, described below under "MMO projects" and is a 50% partner in Palailai Associates, a partnership with Palailai Holdings, Inc. Baldwin*Malama. In 1990, MDC acquired a 50% general partnership interest in Baldwin*Malama, a partnership with Baldwin Pacific Properties, Inc. (BPPI), established to acquire about 172 acres of land for potential development of about 780 single and multi-family residential units in Kihei on the island of Maui. In 1994, the project received approval to increase density to approximately 1,000 units. The project has completed site work for the first phase of single family units. At December 31, 1994, 37 homes were completed and sold, two homes were under construction and one completed unit was available for sale. In May 1993, Baldwin*Malama was reorganized as a limited partnership in which MDC is the sole general partner and BPPI is the sole limited partner. In conjunction with the dissolution of the Baldwin*Malama general partnership and formation of the limited partnership, MPC agreed to loan $1.6 million to BPPI and up to $15 million to the limited partnership. In 1994, MPC agreed to increase the loan amount to Baldwin*Malama up to $19 million. Beginning in May 1993, MDC consolidated the accounts of Baldwin*Malama. Previously, MDC accounted for its investment in Baldwin*Malama under the equity method. At December 31, 1994, the outstanding balance on MPC's loan to BPPI was $1.2 million. Palailai Associates. MMO assumed Ainalani Associates' interest in Palailai Associates in 1992 upon acquiring MDT's 50% interest in Ainalani Associates. In 1993, Palailai Associates completed the development and sale of the first increment of 107 homes and lots and completed the bulk sale of its 38.8 acres of multi-family zoned land in Makakilo, Oahu. The second increment of 69 single family homes is nearly completed, with 64 homes completed and sold as of December 31, 1994. The third increment of 100 single family homes is in progress with 13 homes completed and sold as of December 31, 1994. Palailai Associates owns approximately 42 acres of adjacent land zoned for residential development. 25 MMO PROJECTS In 1992, MMO acquired the Kipona Hills, Kua' Aina Ridge and Kehaulani Place projects of Ainalani as a result of MMO's acquisition of MDT's 50% interest in Ainalani Associates and Ainalani Associates' subsequent dissolution. Kipona Hills is a 66-unit subdivision located in Waikoloa on the island of Hawaii. Through December 31, 1994, 56 homes or lots were completed and sold, and 10 lots were available for sale. Kua' Aina Ridge is a 92-lot-only subdivision in Pukalani, Maui. Subdivision improvements have been completed and sales closings commenced in 1993. As of December 31, 1994, 72 lots were available for sale. Kehaulani Place (formerly known as Hanohano), consisting of approximately 50 acres of land in Pukalani, Maui, is currently zoned for agriculture. Rezoning and land-use reclassification will be required before development can commence. Land planning and presentations to local community groups commenced in 1993. PROJECT FINANCING At December 31, 1994, MPC or its subsidiaries were directly liable for $14.1 million of outstanding loans and had additional loan facilities of $0.8 million. In addition, at December 31, 1994, MPC or its subsidiaries had issued (i) guaranties under which they were jointly and severally contingently liable with their joint venture partners for $1.9 million of outstanding loans and (ii) payment guaranties under which MPC or its subsidiaries were severally contingently liable for $7.2 million of outstanding loans and $7.1 million of additional undrawn loan facilities. In total, at December 31, 1994, MPC or its subsidiaries were liable or contingently liable for $23.2 million of outstanding loans and $7.9 million in undrawn loan facilities. All such loans are collateralized by real property. At December 31, 1994, HEI had agreed with the lenders of construction loans and loan facilities, of which approximately $13.3 million was outstanding and $7.9 million was undrawn, that it will maintain ownership of 100% of the stock of MPC and that it intends, subject to good and prudent business practices, to keep MPC financially sound and responsible to meet its obligations. MPC or its subsidiaries may enter into additional commitments in connection with the financing of future phases of development of MPC's projects and HEI may enter into similar agreements regarding the ownership and financial condition of MPC. MALAMA WATERFRONT CORP. In 1989, Malama Waterfront Corp., a wholly owned subsidiary of MPC, entered into an agreement to purchase HECO's Honolulu Power Plant in a sale and leaseback transaction subject to PUC approval. HECO withdrew its application for the sale and leaseback of the plant in July 1993. See a further discussion in "Item 2. Properties--Electric utility--HECO." HEI INVESTMENT CORP. -------------------- HEIIC was incorporated in May 1984 primarily to make passive, tax-advantaged investments in corporate securities and other long-term investments. HEIIC is not an "investment company" under the Investment Company Act of 1940 and has no direct employees. HEIIC has sold substantially all of its investments in marketable debt and equity securities over the last few years. HEIIC's long-term investments consist primarily of investments in leveraged leases. HEIIC has a 15% ownership interest in an 818-MW coal-fired generating unit in Georgia, which is subject to a leveraged lease agreement entered into in 1985 and expiring in 2013. The lessee has options to renew the lease at fixed rentals for at least 8.5 additional years, and thereafter at fair market rentals. In the fall of 1987, HEIIC purchased commercial buildings on leasehold properties located in the continental United States, along with the related lease rights and obligations. These leveraged, purchase-leaseback investments included two major buildings housing operations of Hershey Foods in Pennsylvania and six supermarkets leased to Kroger Company in California, Pennsylvania, Louisiana, Alabama and Illinois. HEIIC's investments in leveraged leases amounted to $54.4 million and $53.1 million at December 31, 1994 and 1993, respectively. Note 8 to HEI's Consolidated Financial Statements is incorporated herein by reference to pages 56 to 57 of HEI's 1994 Annual Report to Stockholders, portions or which are filed herein as HEI Exhibit 13(a). No new investments are currently planned by HEIIC. 26 PACIFIC ENERGY CONSERVATION SERVICES, INC. ------------------------------------------ PECS was formed in August 1994 to promote energy conservation in Hawaii and the Pacific Basin. PECS is considering potential projects to install, finance, operate and maintain energy conservation equipment, while sharing a percentage of the saved energy costs with its clients. In 1994, PECS had no operations. REGULATION AND OTHER MATTERS HOLDING COMPANY REGULATION HEI and HECO are holding companies within the meaning of the Public Utility Holding Company Act of 1935 (1935 Act). However, under current rules and regulations, they are exempt from the comprehensive regulation of the Securities and Exchange Commission (SEC) under the 1935 Act except for Section 9(a)(2) (relating to the acquisition of securities of other public utility companies) through compliance with certain annual filing requirements under the 1935 Act for holding companies which own utility businesses that are primarily intrastate in character. The exemption afforded HEI and HECO may be revoked if the SEC finds that such exemption "may be detrimental to the public interest or the interest of investors or consumers." HEI and HECO may own or have interests in foreign utility operations without adversely affecting this exemption so long as the requirements of other exemptions under the 1935 Act are satisfied. In February 1989 the SEC requested comments on a proposed Rule 17 regarding the conditions under which public utility holding companies, which have diversified their lines of business outside the utility area, may retain their intrastate exemption under section 3(a)(1) of the 1935 Act. Under the proposed rule, a public utility holding company which had diversified its activities into nonutility businesses would be entitled to retain its Section 3(a)(1) exemption only if it comes within a proposed federal or state safe-harbor provision following a grace period of three years after adoption of the rule. HEI does not satisfy the provisions of the federal safe-harbor provision in its currently proposed form, and may not necessarily satisfy the provisions of the state safe- harbor provision. If the rule were adopted in its proposed form and HEI does not satisfy the state safe-harbor provision, HEI might be required to register as a holding company under the Act and/or divest itself of certain of its nonutility subsidiaries. If a rule were adopted in some form requiring action on HEI's part to come within a state safe-harbor provision, the Company's present intention is to take all such action as is reasonable and appropriate to bring itself within the state safe-harbor provision. Even though the SEC has taken no action on the proposal for several years, HEI cannot predict whether a rule relating to diversification will be adopted in the proposed form or in a modified form, or the ultimate effects of any such rule on it or its subsidiaries if adopted. In November 1994, the SEC issued a concept release soliciting comments on modernization of utility regulation under the 1935 Act. This is part of a continuing effort by the SEC to evaluate the regulatory structure of the utility industry. Both regulatory and legislative changes are possible, but cannot be predicted at this time. HEI is subject to an agreement entered into with the PUC (the PUC Agreement) when HECO became a wholly owned subsidiary of HEI. The PUC Agreement, among other things, requires HEI to provide the PUC with periodic financial information and other reports concerning intercompany transactions and other matters. It prohibits the electric utilities from loaning funds to HEI or its nonutility subsidiaries and from redeeming common stock of the electric utility subsidiaries without PUC approval. Further, the PUC could limit the ability of the electric utility subsidiaries to pay dividends on their common stock. See "Restrictions on dividends and other distributions" and "Electric utility regulation" (regarding the PUC review of the relationship between HEI and HECO). As a result of the acquisition of ASB, HEI and HEIDI are subject to OTS registration, supervision and reporting requirements as savings and loan holding companies. In the event the OTS has reasonable cause to believe that the continuation by HEI or HEIDI of any activity constitutes a serious risk to the financial safety, soundness, or stability of ASB, the OTS is authorized under the Home Owners' Loan Act of 1933, as amended, to impose certain restrictions in the 27 form of a directive to HEI and any of its subsidiaries, or HEIDI and any of its subsidiaries. Such possible restrictions include limiting (i) the payment of dividends by ASB; (ii) transactions between ASB, HEI or HEIDI, and the subsidiaries or affiliates of ASB, HEI or HEIDI; and (iii) the activities of ASB that might create a serious risk that the liabilities of HEI and its other affiliates, or HEIDI and its other affiliates, may be imposed on ASB. Theoretically, this authority would allow the OTS to prohibit dividends, limit affiliate transactions or otherwise restrict activities as a result of losses suffered by HEI, HEIDI or their other subsidiaries, and thus conceivably may be an indirect means of limiting affiliations between ASB and affiliates engaged in nonfinancial activities. See "Restrictions on dividends and other distributions." OTS regulations also generally prohibit savings and loan holding companies and their nonthrift subsidiaries from engaging in activities other than those which are specifically enumerated in the regulations. Such restrictions, if applicable to HEI and HEIDI, would significantly limit the kinds of activities in which HEI and HEIDI and their subsidiaries may engage. However, the OTS regulations provide for an exemption which is available to HEI and HEIDI if ASB satisfies the "qualified thrift lender" test discussed below. See "FDIC Improvement Act of 1991 and Implementing Regulations." ASB currently meets the qualified thrift lender test and must continue to meet the test in order to avoid restrictions on the activities of HEI and HEIDI and their subsidiaries which could result in a need to divest ASB. HEI and HEIDI are prohibited, directly or indirectly, or through one or more subsidiaries, from (i) acquiring control of, or acquiring by merger or purchase of assets, another insured institution or holding company thereof, without prior written OTS approval; (ii) acquiring more than 5% of the voting shares of another savings association or savings and loan holding company which is not a subsidiary; or (iii) acquiring or retaining control of a savings association not insured by the FDIC. No director or officer of HEI or HEIDI, or person beneficially owning more than 25% of such holding company's voting shares, may, except with the prior approval of the OTS, (a) also serve as director, officer, or employee of any insured institution or (b) acquire control of any savings association not a subsidiary of such holding company. RESTRICTIONS ON DIVIDENDS AND OTHER DISTRIBUTIONS HEI is a legal entity separate and distinct from its various subsidiaries. As a holding company with no significant operations of its own, the principal sources of its funds are dividends or other distributions from its operating subsidiaries, borrowings and sales of equity. The rights of HEI and, consequently, its shareholders, to participate in any distribution of the assets of any of its subsidiaries is subject to the prior claims of the creditors and preferred stockholders of such subsidiary, except to the extent that claims of HEI in its capacity as a creditor are recognized. The ability of certain of HEI's subsidiaries to pay dividends or make other distributions to HEI is subject to contractual and regulatory restrictions. By agreement with the PUC, in the event that the consolidated common stock equity of the electric utility subsidiaries falls below 35% of total electric utility capitalization, these companies would be restricted, unless they obtained PUC approval, in their payment of cash dividends to 80% of the earnings available for the payment of dividends in the current fiscal year and preceding five years, less the amount of dividends paid during that period. The PUC Agreement also provides that the foregoing dividend restriction shall not be construed to relinquish any right the PUC may have to review the dividend policies of the electric utility subsidiaries. The consolidated common stock equity of HEI's electric utility subsidiaries was 52% of their total capitalization (including the current maturities of long-term debt and preferred stock sinking fund requirements due within one year but excluding short-term borrowings) as of December 31, 1994. At December 31, 1994, HECO and its subsidiaries had net assets of $634 million, of which approximately $314 million were not available for transfer to HEI without regulatory approval. The ability of ASB to make capital distributions to HEI and other affiliates is restricted under federal law. Subject to a limited exception for stock redemptions that do not result in any decrease in ASB's capital and would improve ASB's financial condition, ASB is prohibited from declaring any dividends, making any other capital distribution, or paying a management fee to a controlling person if, following the distribution or payment, ASB would be deemed to be under-capitalized, significantly under-capitalized or critically under-capitalized. See "Savings bank regulation-FDIC Improvement Act of 1991 and Implementing Regulations-Prompt corrective action." 28 As a Tier-1 institution (one that meets its fully phased-in capital requirements and has not been notified by the OTS that it is in need of more than normal supervision), ASB may make capital distributions without OTS approval in amounts up to one-half of ASB's surplus capital ratio (the amount of its capital in excess of its fully phased-in capital requirement) at the beginning of a calendar year, plus its net income for that calendar year to date. The term "fully phased-in capital requirements" means the institution's capital requirements under the statutory and regulatory standards applicable on December 31, 1994, as modified by any individual minimum capital requirements applicable to the institution. ASB, as a Tier-1 institution, may exceed the foregoing limits if ASB provides a thirty-day advance notice to the OTS and receives no objection within thirty days. Even in the case of distributions within the permissible limits, however, a thirty day advance notice to the OTS is required. HEI and its subsidiaries are also subject to debt covenants, preferred stock resolutions and guaranties that could limit their respective abilities to pay dividends. The Company does not expect that the regulatory and contractual restrictions applicable to HEI or its direct and indirect subsidiaries will significantly affect the operations of HEI or its ability to pay dividends on its common stock. ELECTRIC UTILITY REGULATION The PUC regulates the rates, standards of service, issuance of securities, accounting and certain other aspects of the operations of HEI's electric utility subsidiaries. See "Electric Utility-Rates." In addition, the PUC has ordered the electric utility subsidiaries to develop plans for the integration of demand-side and supply-side resources available to meet consumer energy needs efficiently, reliably and at the lowest reasonable cost. The PUC may approve, reject or require modifications of these plans. See "Electric Utility-Integrated Resource Planning and requirements for additional generating capacity." On March 7, 1995, the PUC opened a generic docket to investigate whether Hawaii public utilities should be allowed to establish self-insured property damage reserves to recover the cost of damage to their facilities and equipment caused by catastrophic natural disasters. In its 1995 test year rate case, HECO had proposed that it be allowed to establish a similar reserve, but withdrew the request under an agreement with the other parties that they would jointly request that the PUC initiate a generic docket. HECO has estimated that the value of its uninsured transmission and distribution facilities is in excess of $1 billion. Any adverse decision or policy made or adopted by the PUC could have a material adverse effect on HECO and its subsidiaries' and the Company's financial condition or results of operations. Certain transactions between HEI's public utility subsidiaries (HECO, MECO and HELCO) and HEI and affiliated interests, are subject to regulation by the PUC. Under the law, all contracts (including summaries of unwritten agreements), made on or after July 1, 1988 of $300,000 or more in a calendar year for management, supervisory, construction, engineering, accounting, legal, financial and similar services and for the sale, lease or transfer of property between a public utility and affiliated interests must be filed with the PUC to be effective, and the PUC may issue cease and desist orders if such contracts are not filed. All such affiliated contracts for capital expenditures (except for real property) must be accompanied by comparative price quotations from two nonaffiliates, unless the quotations cannot be obtained without substantial expense. Moreover, all transfers of $300,000 or more of real property between a public utility and affiliated interests require the prior approval of the PUC and proof that the transfer is in the best interest of the public utility and its customers. If the PUC, in its discretion, determines that an affiliated contract was unreasonable or otherwise contrary to the public interest, the utility must either revise the contract or risk disallowance of the payments for rate-making purposes. In rate- making proceedings, a utility must also prove the reasonableness of payments made to affiliated interests under any affiliated contracts of $300,000 or more by clear and convincing evidence. An "affiliated interest" is defined by statute and includes officers and directors of a public utility, every person owning or holding, directly or indirectly, 10% or more of the voting securities of a public utility, and corporations which have in common with a public utility more than one-third of the directors of that public utility. To address community concerns, HECO proposed by letter dated January 25, 1993, that the PUC initiate a review of the relationship between HEI and HECO and the effects of that relationship on the operations of HECO. By an order dated January 26, 1993, the PUC initiated such a review to determine whether the HEI- HECO relationship, HEI's diversified activities, and HEI's policies, operations and 29 practices have resulted in or are having any negative effects on HECO, its electric utility subsidiaries and ratepayers. In May 1994, a consultant, Dennis Thomas and Associates, was selected by the PUC to perform the review. In early 1995, Dennis Thomas and Associates issued its report to the PUC. The report concluded that "on balance, diversification has not hurt electric ratepayers." Other major findings of the study were that no utility assets have been used to fund HEI's nonutility investments or operations, HEI has not denied needed capital to the electric utilities and management processes within the electric utilities operate without interference from HEI. The report also made several recommendations, including initiating more ongoing communication between HEI and the PUC on diversification issues and any changes in HEI's diversification policy, providing the PUC with annual reports on compliance with the original conditions mandated by the PUC when HEI was formed, having a HECO Board of Directors with a majority of members who are not also directors of HEI and adoption of a policy statement by HECO's Board of Directors documenting its commitment to public service obligations. The Company is considering all the recommendations. See also "Holding company regulation." HECO and its subsidiaries are not subject to regulation by the Federal Energy Regulatory Commission (FERC) under the Federal Power Act, except under Sections 210 through 212 (added by Title II of PURPA), which permit the FERC to order electric utilities to interconnect with qualifying cogenerators and small power producers, and to wheel power to other electric utilities. Title I of PURPA, which relates to retail regulatory policies for electric utilities, also applies to HECO and its subsidiaries. Title VII of the Energy Policy Act of 1992, which creates "exempt wholesale generators" (EWGs) as a category that is exempt from the 1935 Act and which addresses transmission access, also applies to HECO and its subsidiaries. The Company cannot predict the extent to which cogeneration, EWGs, or transmission access, will reduce its electrical loads, reduce its current and future generating and transmission capability requirements, or affect its financial condition or results of operations. Because they are located in the State of Hawaii, HECO and its subsidiaries are exempt by statute from limitations set forth in the Powerplant and Industrial Fuel Act of 1978 on the use of petroleum as a primary energy source. SAVINGS BANK REGULATION ASB is a federally-chartered savings bank whose deposit accounts are insured by the Savings Association Insurance Fund (SAIF) administered by the Federal Deposit Insurance Corporation (FDIC). In addition, ASB must comply with Federal Reserve Board reserve requirements and OTS liquidity requirements. ASB and its holding companies are subject to the regulatory supervision of the OTS and, in certain respects, the FDIC. Deposit Insurance ----------------- Deposit Insurance Assessments. The FDIC administers a separately funded and maintained deposit insurance fund for savings associations. SAIF generally insures the deposits of savings associations, which were insured by the FSLIC prior to the enactment of the FIRREA. In recent years, the deposit insurance assessment rates for the SAIF have increased substantially above historical levels. However, the OTS decided not to increase the assessment rates savings associations are required to set aside on January 31, 1994, July 31, 1994 and January 31, 1995. It is uncertain to what extent rates may be raised in the future. As required by the Federal Deposit Insurance Corporation Improvement Act of 1991 (FDICIA), the FDIC amended its rule on assessments to establish a risk- based assessment system. Under the risk-based assessment system, the assessments (or premiums) paid by a savings association for deposit insurance are based on the risk posed by the savings association to the SAIF. The current annual assessment rates applicable to SAIF members range from 23 to 31 cents per $100 of insured deposits, depending on the institution's risk classification. Savings associations classified as strongest by the FDIC are subject to the lowest assessment rates. ASB paid an assessment at an annual rate of 23 cents per $100 of deposits for the semiannual period beginning January 1, 1995. The FDIC is considering a proposal to reduce banks' deposit insurance premiums, from their current rates of 23 to 31 cents per $100 of insured deposits, to a rate of 4 to 31 cents, depending on the health of the bank. Deposit insurance premiums for SAIF-insured institutions would remain at the current rates of 23 to 31 cents. If adopted, the FDIC proposal would result in a disparity between Bank Insurance Fund- 30 insured institutions and SAIF-insured institutions, potentially placing SAIF- insured institutions such as ASB at a competitive disadvantage. Deposit Insurance Coverage. The FDICIA amended various provisions of the Federal Deposit Insurance Act governing deposit insurance coverage. FDICIA, as further implemented by amendments to the FDIC's deposit insurance regulations, made certain significant changes relating to pro rata or "pass through" insurance coverage for employee benefit plan participants and beneficiaries, and insurance coverage for certain retirement accounts and trust funds. (The term "pass-through" insurance means that the insurance coverage passes through to each owner/beneficiary of the applicable deposit.) Although the vast majority of the FDIC's deposit insurance regulations, such as the basic rules providing that individual accounts are insured to $100,000 separately from qualifying joint accounts, remain unchanged, several important changes were made. Effective December 19, 1993, an individual's interest in deposits at the same institution in any combination of certain retirement accounts will be added together and insured up to $100,000 in the aggregate. This is a reduction from the maximum of $400,000 in insurance coverage formerly provided if deposits were made in four different types of retirement plan accounts. "Pass-through" insurance coverage for the deposits of most employee benefit plans (i.e., $100,000 per individual participating, not $100,000 per plan) generally continues only for institutions that are "well-capitalized" under the FDIC's prompt corrective action regulations. The FDIC has amended its deposit insurance regulations to require financial institutions to provide employee benefit plan depositors information, not otherwise available, on the institution's capital category and whether "pass-through" deposit insurance is available. As of December 31, 1994, ASB was well-capitalized. Financial Institutions Reform, Recovery and Enforcement Act of 1989 and ----------------------------------------------------------------------- Implementing Regulations ------------------------ Capital requirements. Under FIRREA, the OTS set three capital standards for thrifts, each of which must be no less stringent than those applicable to national banks. The three standards provide: (1) a leverage limit which requires a savings association to maintain core capital in an amount of not less than 3% of the association's adjusted total assets; (2) a tangible capital requirement of not less than 1.5% of an association's adjusted total assets; and (3) an 8% risk-based capital requirement, which may deviate from national bank standards to reflect interest rate risk or other risks, but such deviations may not result in materially lower levels of capital than would be required under risk-based capital standards applicable to national banks. Generally, the OTS must restrict the asset growth of an association that fails to meet the capital requirements. As of December 31, 1994, ASB was in compliance with all of the minimum standards with a core capital ratio of 5.2%, a tangible capital ratio of 4.9% and risk- based capital ratio of 11.4% (based on risk-based capital of $165.7 million, $49.8 million in excess of the requirement). The OTS has adopted a rule that adds an interest rate risk (IRR) component to the existing risk-based capital requirement. Institutions with an "above normal" level of IRR exposure will be required to hold additional capital. "Above normal" IRR is defined as any decline in market value of an institution's portfolio equity in excess of 2% of the market value of its assets, which would result from an immediate 200 basis point change in interest rates. The OTS rule requires a savings association with an "above normal" level of IRR exposure to hold one-half of the "above normal" IRR times the market value of its assets as capital, in addition to its existing 8% risk-based capital requirement. Although the rule generally became effective January 1, 1994, the interest rate risk capital deduction, which was to go into effect with the September 1994 Thrift Financial Report, has been waived until the OTS finalizes the process under which institutions may appeal such capital deductions. This means that in calculating the risk-based capital requirement, ASB was not required to deduct capital for IRR, and did not report such a deduction for the December 1994 Thrift Financial Report. The federal banking regulators have also proposed a similar regulation which may result in a more stringent capital requirement for IRR than the current OTS rule. FIRREA requires that the capital standards for thrifts be no less stringent than those applicable to national banks. The impact of the proposed federal banking regulation on ASB cannot be predicted at this time. Affiliate transactions. Significant restrictions apply to certain transactions between ASB and its affiliates, including HEI and its direct and indirect subsidiaries. FIRREA significantly altered both the scope and substance of such limitations on transactions with affiliates and provides for thrift affiliate rules similar to, but more restrictive than, those applicable to banks. For example, ASB is prohibited from making any loan or other extension of credit to an entity affiliated with ASB unless the affiliate is 31 engaged exclusively in activities which the Federal Reserve Board has determined to be permissible for bank holding companies. There are also various other restrictions which apply to loans and other transactions between ASB and certain executive officers, directors and insiders of ASB. ASB is also barred from making a purchase of or any investment in securities issued by an affiliate, other than with respect to shares of a subsidiary of ASB. FDIC Improvement Act of 1991 and Implementing Regulations --------------------------------------------------------- The FDICIA, enacted on December 19, 1991, subjects the banking and thrift industries to heightened regulation and supervision. The FDICIA makes a number of reforms addressing the safety and soundness of the deposit insurance system, supervision of domestic and foreign depository institutions and improvement of accounting standards. The FDICIA also limits deposit insurance coverage, implements changes in consumer protection laws and calls for least-cost resolution and prompt corrective action with regard to troubled institutions. Pursuant to FDICIA, the federal banking agencies have promulgated, or are in the process of promulgating, regulations which may affect the operations of ASB and its holding companies. Such regulations address, for example, standards for safety and soundness, real estate lending, accounting and reporting, transactions with affiliates, and loans to insiders. See also "Deposit Insurance." Prompt corrective action. FDICIA establishes a statutory framework that is triggered by the capital level of a savings association and subjects it to progressively more stringent restrictions and supervision as capital levels decline. The OTS rules implement the system of prompt corrective action. In particular, the rules define the relevant capital measures for the categories of well-capitalized, adequately capitalized, under-capitalized, significantly under-capitalized and critically under-capitalized. A savings association that is under-capitalized or significantly under- capitalized is subject to additional mandatory supervisory actions and a number of discretionary actions if the OTS determines that any of the actions is necessary to resolve the problems of the association at the least possible long- term cost to the SAIF. A savings association that is critically under- capitalized must be placed in conservatorship or receivership within 90 days, unless the OTS and the FDIC concur that other action would be more appropriate. Interest rates. FDIC regulations restrict the ability of financial institutions that are not "well-capitalized" to offer interest rates on deposits that are significantly higher than the rates offered by competing institutions. To be a "well-capitalized" institution not subject to these interest rate restrictions, an institution must have a "leverage ratio" of 5.0%, a "Tier-1 risk-based ratio" of 6%, a "total risk-based ratio" of 10% and not be in a "troubled condition." As of December 31, 1994, ASB was "well-capitalized" with a leverage ratio of 5.2%, a Tier-1 risk-based ratio of 11.0% and a total risk- based ratio of 11.4%. Qualified thrift lender test. The FDICIA amends the qualified thrift lender (QTL) test provisions of FIRREA by reducing the percentage of assets thrifts must maintain in housing-related loans and investments from 70% to 65%, and changing the computation period to require that the percentage be reached on a monthly average basis in nine out of the previous 12 months. A savings association's QTL ratio was formerly measured on a daily or weekly basis. Savings associations that fail to satisfy the QTL test by not holding the required percentage of housing-related investments are subject to various penalties, including limitations on their activities and restrictions on their FHLB advances. Failure to satisfy the QTL test would also bring into operation restrictions on the activities that may be engaged in by HEI, HEIDI and their other subsidiaries and could effectively result in the required divestiture of ASB. At all times during 1994, ASB was in compliance with the QTL test. See "Holding company regulation." Federal Home Loan Bank System ----------------------------- ASB is a member of the FHLB System which consists of 12 regional FHLBs. The FHLB System provides a central credit facility for member institutions. ASB, as a member of the FHLB of Seattle, is required to own shares of capital stock in the FHLB of Seattle in an amount equal to the greater of 1% of ASB's aggregate unpaid residential loan principal at the beginning of each year, 0.3% of total assets or 5% of FHLB advances outstanding. The FHLBs serve as the central liquidity facilities for savings associations and resources of long-term funds for financing housing. Long-term advances may only be made for the purpose of providing funds for financing residential housing. Additionally, at such time as an advance is made or renewed, it must be secured by collateral from one of the following categories: 32 (1) fully disbursed, whole first mortgages on improved residential property, or securities representing a whole interest in such mortgages; (2) securities issued, insured or guaranteed by the U.S. Government or any agency thereof; (3) FHLB deposits; and (4) other real estate-related collateral that has a readily ascertainable value and with respect to which a security interest can be perfected. The aggregate amount of outstanding advances secured by such other real estate-related collateral may not exceed 30% of the member's capital. Other laws, regulations and proposed legislation ------------------------------------------------ Other laws. ASB is subject to federal and state consumer protection laws which affect lending activities, such as the Truth-in-Lending Law, the Truth in Savings Act, the Equal Credit Opportunity Act, the Real Estate Settlement Procedures Act and several federal and state financial privacy acts. These laws may provide for substantial penalties in the event of noncompliance. Management of ASB believes that its lending activities are in compliance with these laws and regulations. The Community Reinvestment Act (CRA) was enacted by Congress in 1977 to ensure that banks and thrifts help meet the credit needs of their communities, including low- and moderate-income areas, consistent with safe and sound lending practices. The OTS will consider ASB's CRA record in evaluating an application for a new deposit facility, including the establishment of a branch, the relocation of a branch or office, or the acquisition of an interest in another bank or thrift. ASB received a CRA rating of "outstanding" as a result of its last OTS examination. The Reigle-Neal Interstate Banking and Branching Act of 1994 (Interstate Banking Act) was signed into law on September 29, 1994. The Interstate Banking Act generally permits bank holding companies to acquire banks in any state after September 29, 1995, thereby creating a uniform system of interstate banking in the United States. In addition, subject to certain limitations, the Interstate Banking Act will permit interstate branching by U.S. banks, marking a major departure from previous law. Beginning June 1, 1997, a bank will be permitted to merge with another bank across state lines. Banks will also be permitted to establish new branches in states where they do not own a deposit-taking institution only when the host state's law expressly authorizes such branching for all out-of-state banks. Although the Interstate Banking Act applies only to banks, it could result in greater competitive pressures on savings associations such as ASB. Pending legislation. Bills are now pending or expected to be introduced in the United States Congress that contain proposals for altering the structure, regulation and competitive relationships of the nation's financial institutions. If enacted into law, these pending bills could have the effect of increasing or decreasing the cost of doing business, limiting or expanding permissible activities, or affecting the competitive balance among banks, thrifts and other financial institutions. Some of these bills would realign the structure and jurisdiction of various financial institution regulatory agencies and the FHLB system. Whether or in what form any such legislation may be adopted or the extent to which the business of the Company or ASB might be affected thereby cannot be predicted. FREIGHT TRANSPORTATION REGULATION The PUC has broad authority in its regulation of the intrastate business and operations of YB. See "Other-Freight Transportation-Hawaiian Tug & Barge Corp. and Young Brothers, Limited." In particular, the PUC has the authority to review and modify YB's intrastate rates and charges under the Hawaii Water Carrier Act. In all rate proceedings under such act, YB has the burden of proving the reasonableness of expenditures, contracts, leases, or other transactions. An adverse decision or policy adopted by the PUC could have a material effect on the financial condition or results of operations of YB. 33 ENVIRONMENTAL REGULATION HEI and its subsidiaries are subject to federal and state statutes and governmental regulations pertaining to water quality, air quality and other environmental factors. Water Quality Controls. As part of the process of generating electricity, water used for condenser cooling of the electric utility subsidiaries' steam electric generating stations is discharged into ocean waters or into underground injection wells. The subsidiaries are required periodically to obtain permits from the Hawaii Department of Health (DOH) in order to be allowed to discharge the water. The electric utility subsidiaries must obtain National Pollutant Discharge Elimination System (NPDES) permits from the DOH to allow wastewater discharges into ocean waters for each of five generating stations (three at HECO and one each at MECO and HELCO) and Underground Injection Control (UIC) permits for wastewater discharge to underground injection wells for several HELCO facilities and one MECO facility. During 1993 and 1994, applications were submitted to the DOH for the renewal of NPDES permits for the five generating stations. Existing NPDES permits for all facilities have expired, but have been administratively extended until such time as DOH can issue new permits. All facilities will continue to operate in compliance with existing permit requirements until new NPDES permits are issued. The DOH has prepared draft NPDES permits for three generating stations. A new demineralizer system was installed at the Kahe Generating Station to supplement the existing flash evaporator system and provide the facility with a more reliable and higher capacity source of high quality boiler makeup water. Commercial operation of the new demineralizer system commenced in December 1994. An application to revise the existing NPDES permit to include demineralizer system wastewater was submitted to the DOH in May 1993. The DOH consolidated this application review with its review of the Kahe NPDES permit renewal application, which was submitted in December 1993. The DOH recognized this facility modification in its recently completed draft NPDES permit. Although the DOH was not able to issue the final permit in time for the start of demineralizer system discharges, it did allow operations to start. The EPA promulgated new NPDES storm water discharge regulations in November 1990 and the DOH finalized its administrative rules in October 1992. New storm water discharge permits are required for electric utility storm water that is discharged to: existing NPDES-permitted outfalls, separate storm water conveyances that discharge directly to navigable waters and municipal storm sewer systems. Facilities with storm water discharges to existing NPDES- permitted outfalls were not required to reapply for a new NPDES permit until existing permits expire. Three HECO generating stations and one MECO generating station discharge storm water to NPDES-permitted outfalls. These four facilities have included required storm water information in the most recent NPDES permit renewal application. For storm water discharged to separate storm water conveyances, Notice of Intent (NOI) Applications for General Permits were submitted to the DOH in April 1993 for the HECO facilities. The DOH issued Notices of General Permit Coverage (NGPC) for the HECO facilities in 1994. In September 1994, the DOH determined that MECO's Maalaea facility requires a NPDES permit. A storm water permit application is currently being finalized by MECO's consultant. Completed storm water pollution control plans were submitted to the DOH in September 1994 for two HECO facilities. The DOH will be incorporating NGPC storm water permitting requirements into new facility NPDES permits (mentioned earlier) which are expected to be issued in early 1995. The DOH also promulgated regulations that require storm water runoff and dewatering permits for construction-related projects. These new construction related permits require discharge monitoring and implementation of best management practices during construction activities to comply with state water quality standards. To date, HECO has submitted several NOIs for both construction storm water discharge permits and dewatering permits. HECO is also working cooperatively with the City & County Department of Public Works to obtain a blanket NPDES permit to discharge water removed from utility manholes into Municipal storm drain systems. In 1990 and 1991, HELCO reapplied for UIC permits at four affected facilities and applied for new UIC permits for seven existing but previously unregistered wells. To date, the DOH has issued new UIC permits for all dry wells, cesspools and injection wells, with the exception of one injection well at the Puna plant. Because the DOH is still processing the Puna UIC permit application, the facility's injection well continues to operate under an administrative extension of the previous permit. A consultant was hired to conduct semiannual well status monitoring and reporting for all cesspools and injection wells, which commenced in December 1994. While compiling information in response to an earlier DOH 34 request for additional facility and injection well information, HECO discovered that a drainage well had been modified in June 1993 without providing required notification to the DOH. In July 1994, HECO notified the DOH of the drainage well modification and the DOH issued a notice of apparent violation for failing to provide advance notice of the well modification in August 1994. In October 1994, the DOH submitted a follow up letter requesting information related to the drainage well modification. HECO submitted a response to the DOH in January 1995 and is currently awaiting feedback from the DOH. In April 1993, HELCO received DOH approvals to construct an injection well and backup well, respectively, at its Keahole power plant. Well construction and testing were completed in December 1993. A well certification report was submitted to DOH in November 1994 to complete the final application for a UIC permit to operate (PTO). A UIC PTO is expected to be issued. On November 30, 1993, HECO notified the DOH that its consultant's drilling subcontractor had to abandon well No. 2 (i.e., due to the loss of a bailer in the well) and had started construction of a replacement well. HECO has since been providing well abandonment information to the DOH. In a May 19, 1994 letter, the DOH notified HELCO of two apparent violations of DOH UIC rules for failure to obtain DOH approval to construct a replacement well for well No. 2 and to submit an injection well abandonment application for the well. A well abandonment summary report (prepared by Stone & Webster Engineering Corporation) was submitted to DOH in June 1994. In August 1994, the DOH issued a conditional acceptance of the injection well abandonment. The abandoned well was surveyed, mapped and permanently marked in accordance with the DOH's list of conditions. Due to the proposed addition of generating units at MECO's Maalaea Generating Station, a UIC permit application was submitted to the DOH in September 1994 to install another injection well system to handle wastestreams that might be generated from the new generating units. The DOH issued MECO approval to construct the new wells in December 1994. In August 1993, MECO and HELCO were informed by the EPA that federal UIC permits would be required for all existing and proposed injection wells. Under the most recent agreement between the EPA and DOH, the EPA will allow the DOH to continue operation of its state UIC permit program. Hence, all affected injection wells (including dry wells) will be regulated by both federal and state UIC permits. The EPA issued UIC permit applications to MECO and HELCO facilities in January 1994. Completed UIC applications were submitted to the EPA in July 1994. The EPA is currently processing the applications and requested additional information for several injection wells. HECO submitted a response to the EPA's questions on one injection well in October 1994 and is preparing responses to questions on the other facilities. A UIC application was prepared for the proposed addition of another injection well system at Maalaea and submitted to the EPA in November 1994. The Federal Oil Pollution Act of 1990 (OPA) governs actual or threatened oil releases in navigable U.S. waters (inland waters and up to three miles offshore) and waters of the U.S.' exclusive economic zone (up to 200 miles to sea from the shoreline). Responsible parties under OPA are jointly, severally and strictly liable for oil removal costs incurred by the federal government or the state and damages to natural resources and real or personal property. Responsible parties include vessel owners and operators. OPA imposes fines and jail terms ranging in severity depending on how the release was caused. OPA also requires that responsible parties submit certificates of financial responsibility sufficient to meet the responsible party's maximum limited liability. Protection and Indemnity Insurance Clubs (mutual insurance pools) have refused to issue these certificates because OPA provides for direct liability against guarantors. The Coast Guard is in the process of addressing this particular issue and adopting regulations implementing OPA. However, the Coast Guard did issue interim guidelines in September 1992, which included the requirement that a spill response plan be submitted by February 18, 1993, and be finalized by August 18, 1993. The EPA and Department of Transportation (DOT) also have similar requirements for submission of spill response plans. The EPA issued its proposed rules and guidelines on this matter in February 1993. With HTB exiting the fuel transportation business at the end of 1993, the Company's freight transportation operations subject the Company to significantly lessened environmental risks. HTB's fuel and lubricating oil and the other cargo carried in its barges may be accidentally discharged into ocean waters causing a pollution hazard, but the quantities carried do not pose a major environmental hazard. HTB and YB employees are trained to respond to oil or other spills that occur. The utilities filed preliminary plans on February 18, 1993 with regard to the following facilities: to the Coast Guard for the Kahului Harbor terminaling facility and pipeline; to the EPA for the Honolulu, Waiau, Kahe, Shipman and Kahului power plants, the Iwilei Tank Farm, and the Ward Avenue facility; and to the DOT for the pipeline between Honolulu power plant and the Iwilei Tank Farm and between the Chevron Tank Farm in Hilo and the Shipman and Hill power plants, respectively. The EPA, DOT 35 and U.S. Coast Guard promulgated regulations implementing OPA in July 1994, January 1993 and February 1993, respectively. The utilities have revised or are revising their preliminary response plans to address the recent rules promulgated by the regulatory agencies. Air Quality Controls. The generation stations of the utility subsidiaries operate under air pollution control permits issued by the DOH and, in a limited number of cases, by the EPA. The entire electric utility industry is being affected by the 1990 Amendments to the Clean Air Act. Hawaii utilities may be affected by the air toxics provisions (Title III) when the Maximum Allowable Control Technology (MACT) emission standards are proposed for generation units. Hawaii utilities are affected by the operating permit provisions (Title V). The DOH adopted implementing regulations on November 26, 1993 which require submission of permit applications for existing sources during 1994. All applications have been filed as required. Results of further air quality analyses could trigger requirements to mitigate emission impacts. Reports on emissions of air toxics could trigger requirements to conduct risk assessments. Hawaii utilities are also affected by the enforcement provisions (Title VII) which require the EPA to promulgate new regulations which mandate "enhanced monitoring" of emissions from many generation units. In response, the EPA proposed rules on October 1, 1993 which allow for cost effective alternatives to costly continuous emission monitoring systems. The EPA is expected to finalize the proposal in 1995. On November 1, 1989, the DOH issued a Notice and Finding of Violation and Order indicating that Maalaea units X-1 and X-2 had exceeded operating limitations of 12 hours per day at various times in 1988. These incidents resulted from unscheduled unit outages and resulted in no net increase in emissions by MECO. Subsequently, MECO took both structural and procedural steps to preclude future violations. An application for a permit modification was submitted to the EPA, revising the operating hour limitation to annual rather than daily. Approval was received from the EPA in July 1992. Settlement discussions have been unsuccessful to date. The DOH is now expected to set a hearing on the Notice of Violation. Units X-1 and X-2 continue to operate in compliance with the revised permit. Initial source tests for HELCO's CT-2 generating unit in December 1989 indicated particulate emissions above permitted levels. Subsequent retesting confirmed earlier results. Following analysis, HECO (on behalf of HELCO) proposed in November 1990 that the permitted particulate limit be increased. By letter dated April 13, 1992, the EPA concurred that revision is warranted. HECO and HELCO worked with the DOH, the manufacturer and a consultant to determine an appropriate new emission limit for particulates as well as oxides of nitrogen. A comprehensive emission test program has been completed and on April 14, 1994, a final report was submitted to the DOH for its review. On May 5, 1994, a petition was submitted to the DOH to revise NOx limits, and an application to revise the particulate limit was submitted to the DOH on August 30, 1994. The DOH had issued a notice of violation on August 17, 1992 for the non-complying emissions. In accordance with discussions with the DOH, CT-2 continues to operate pending issuance of the revised permit. Emission tests conducted by MECO in January 1992 on the six diesel units at Miki Basin, Lanai were consistent with earlier indications that emissions were above permit limits. Those tests results were submitted to the DOH. After unit adjustments and improvements in measurements of hourly fuel usage, additional tests were conducted in July and September 1993 which indicated that all six units are in compliance with permit limits. A report on these tests was submitted to the DOH. After reviewing the report, the DOH concluded in a letter dated December 13, 1993 that all six units are operating in compliance with permit limits. The DOH will determine what action, if any, would be appropriate for the previous indications of violation. A Notice and Finding of Violation and Order was issued by the DOH to HELCO on July 8, 1993 for excessive visible emissions from Shipman Unit 1 on September 23, 1991 and on January 31, 1992. The DOH ordered HELCO to come into compliance. HELCO's written response to the DOH dated July 29, 1993 stated that HELCO had come into compliance and identified the cause of the problem as corroded air heater tubes that were replaced in February 1993. The repairs were necessarily delayed for approximately one year until there was sufficient island-wide generation to allow Unit 1 to be shutdown. No further action has been required by the DOH. 36 Hazardous Waste and Toxic Substances Controls. The operations of the electric utility and freight transportation subsidiaries are subject to regulations promulgated by the EPA to implement the provisions of the Resource Conservation and Recovery Act (RCRA), the Superfund Amendments and Reauthorization Act (SARA) and the Toxic Substances Control Act (TSCA). The DOH has been working towards obtaining primacy to operate state authorized RCRA (hazardous waste) programs. The DOH finalized RCRA administrative rules in mid-June 1994, with the rules becoming effective on June 18, 1994. The DOH's draft state Environmental Response Law rules were just released. Whether on a federal or state level, RCRA provisions identify certain wastes as hazardous and set forth measures that must be taken in the transportation, storage, treatment and disposal of these wastes. Some of the wastes generated at steam electric generating stations possess characteristics which make them subject to these EPA regulations. Since October 1986, all HECO generating stations have operated RCRA-exempt wastewater treatment units to treat potentially regulated wastes from occasional boiler waterside and fireside cleaning operations. Steam generating stations at MECO and HELCO also operate similar RCRA-exempt wastewater management systems. In March 1990, the EPA changed RCRA testing requirements used to characterize a waste as hazardous which potentially affected the hazardous waste generating status of all facilities. A new and more stringent Toxicity Characteristic Leaching Procedure (TCLP) replaced the former Extraction Procedure (EP) toxicity test and included additional testing requirements for 25 organic compounds. HECO's continuing program to re-characterize all HECO, MECO and HELCO wastestreams using the TCLP test has demonstrated the adequacy of the existing treatment systems and identified other potential compliance requirements. Waste recharacterization studies indicate that treatment facility wastestreams are nonhazardous and no change in RCRA generator status is required. MECO reported that the Maui County landfills will no longer accept wet sludge from its wastewater treatment operations at the Kahului power plant. Because MECO needed to remove sludge from the wastewater ponds to make room for a forthcoming unit overhaul, arrangements were made with the municipal government to have the nonhazardous sludge accepted at the County's composting station. On January 28, 1994, a MECO contractor removed the sludge from the wastewater ponds for transport to the County's composting station. The composting station was closed upon arrival and the contractor was instructed to return to the Kahului plant to wait until the composting station reopened. Through a series of verbal contacts, the contractor made arrangements to discharge the load to the County's sewage treatment plant in Kahului. Upon learning of the contractor's action, MECO management contacted the Maui County Wastewater Treatment Branch to notify them of the discharge to the sewage treatment facility. The current status of Maui County's investigation of the sludge discharge is unknown. The RCRA still regulates most generating stations as RCRA small quantity generators (SQGs). All facilities listed with the DOH and EPA as SQGs are believed to be in compliance with RCRA requirements. In July 1994, the DOH conducted hazardous waste compliance evaluation inspections at MECO's Kahului and Maalaea power plants to review facility status as SQGs. On October 20, 1994, the DOH issued warning letters and inspection reports to the Kahului and Maalaea facilities. Potential RCRA violations and areas of concern were listed for both facilities. HECO submitted responses to the DOH on December 5, 1994, contesting most of the potential violations cited by the DOH. With the exception of some solvent handling concerns, which have been corrected, all other areas of DOH concern were not RCRA hazardous waste violations. HECO is currently awaiting DOH's follow up. RCRA underground storage tank (UST) regulations require all facilities with USTs used to store petroleum products to comply with costly leak detection, spill prevention and new tank standard retrofit requirements within a specified compliance period based on tank age. HECO and MECO initiated tank replacement programs in 1989 due to the age of their existing tanks. MECO currently operates a single UST in compliance with DOH and EPA standards. HECO completed tank removal and replacement projects at all its facilities in 1992. HELCO initiated and completed tank upgrades in 1992. In June 1994, the DOH requested that HELCO certify compliance with Federal release detection requirements for UST systems. Subsequent review of tank upgrades and leak detection systems revealed that HELCO was not in full compliance with piping monitoring requirements at the Kona and Waimea operation centers. In September 1994, self-certification statements were submitted to the DOH indicating that HELCO was in compliance with leak detection requirements for the Kanoelehua Operations Center UST system, but not the Kona and Waimea UST systems. The self-certification forms provided the DOH with a schedule for corrective measures which were completed on September 21, 1994. After conducting a UST leak detection compliance inspection at HECO's Ward Avenue Complex in July 1994, the DOH 37 issued an August 1, 1994 Warning Letter for deficiencies identified during the inspection. HECO submitted a completed "Verification of Compliance Status" form to the DOH on September 12, 1994. The response letter indicated that all UST leak detection compliance deficiencies cited in the Warning Letter had been corrected. The Emergency Planning and Community Right-to-Know Act (EPCRA) under SARA Title III requires HECO, MECO and HELCO to report hazardous chemicals present in their facilities in order to provide the public with information on these chemicals so that emergency procedures can be established to protect the public in the event of hazardous chemical releases. HECO has six facilities, MECO five facilities and HELCO seven facilities that qualify as "reporting facilities" under EPCRA. All HECO, MECO and HELCO facilities are in compliance with applicable reporting requirements, which are made annually to the State Emergency Planning Commission, the Local Emergency Planning Committee and local fire departments. The TSCA regulations specify procedures for the handling and disposal of polychlorinated biphenyl (PCB), a compound found in transformer and capacitor dielectric fluids. HECO and its subsidiaries have instituted procedures to monitor compliance with these regulations. In addition, HECO has implemented a program to identify and replace PCB transformers and capacitors in the HECO system. All HECO, MECO and HELCO facilities are currently believed to be in compliance with PCB regulations. In December 1994, the EPA published in the Federal Register a Proposed Rule to amend PCB disposal regulations and HECO is currently reviewing the proposed rules to determine potential impacts on utility operations. By letter dated August 21, 1992 the EPA provided MECO with a notice of potential liability and request for information relating to a federal Superfund (CERCLA) closure investigation at the North American Environmental, Inc. (NAE) storage facility in Clearfield, Utah. MECO was identified by the EPA as a potentially responsible party for three PCB capacitors originally contracted for disposal by Westinghouse. Although Westinghouse has already disposed of the capacitors, MECO was obligated to comply with the information requests attached to the EPA notice. A preliminary response to the EPA's information request was submitted to the EPA on October 5, 1992. MECO has since received confirmation from Westinghouse that the three capacitors were removed from the NAE facility and incinerated at Aptus (an EPA-approved facility in Kansas) on September 16, 1992. By letter dated December 2, 1992, the EPA notified MECO that a draft Administrative Order on Consent for the cleanup of the NAE facility had been sent to potentially responsible parties that have waste remaining at the NAE site and to parties that have expressed a desire to participate in the cleanup. MECO did not receive a draft Administrative Order on Consent because the three PCB capacitors were removed from the NAE facility and incinerated. However, the EPA has not made final determinations regarding individual liability for cleanup of the NAE facility. By letter dated February 8, 1993, Westinghouse confirmed that it would indemnify MECO pursuant to its contract for this matter. The state Environmental Response Law (ERL), as amended, governs releases of hazardous substances, including oil, in areas within the state's jurisdiction. Responsible parties under the state ERL are jointly, severally and strictly liable for a release of a hazardous substance into the environment. Responsible parties include owners or operators of a facility where a hazardous substance comes to be located and any person who at the time of disposal of the hazardous substance owned or operated any facility at which such hazardous substance was disposed. The DOH has drafted regulations implementing the state ERL. An area of potential exposure to liability under the state ERL is the release of oil from fuel storage tanks. By letters dated in January and February 1995, the DOH advised HECO, HTB, YB and others that the DOH was conducting an investigation to determine the nature and extent of actual or potential releases of hazardous substances, oil, pollutants or contaminants at or near Honolulu Harbor. The DOH letter to HECO requested information regarding past hazardous substances and oil spills that may have occurred at HECO's Honolulu Power Plant and nearby fuel storage and pipeline facilities, which are located near Honolulu Harbor. HECO is presently working on its response to the DOH letter. The DOH letters to HTB/YB requested information regarding past hazardous substances and oil spills that may have occurred at Pier 21 and Piers 24-29 in Honolulu Harbor. HTB/YB have provided responses to the DOH letters. 38 By letter dated December 15, 1994, the DOH advised MECO that the DOH was conducting an investigation to determine the nature and extent of actual or potential releases of hazardous substances, oil, pollutants or contaminants at Kaunakakai, Molokai, Hawaii. The DOH letter requested information regarding past hazardous substances and oil spills that may have occurred in the area of a former Molokai Electric Company Limited's (MOECO) Power Plant site which had been located at Kaunakakai. Operations at this MOECO power plant were terminated in 1985, prior to MECO acquiring MOECO in 1989. In February 1995, HECO filed its initial response to the DOH's request for information, and filed additional information in March 1995. The DOH has not replied to the information filed by HECO. Both HTB and YB generate small quantities of hazardous wastes as a result of operations and equipment maintenance activities and have contracted with a firm to dispose of these wastes in compliance with the EPA regulations and the RCRA provisions. YB, as a public carrier, also moves hazardous wastes and explosives for customers. Employees are trained in the applicable handling methods to assist in the safe movement of these cargoes. Both HTB and YB are subject to the jurisdiction of the U.S. Coast Guard which monitors ocean activities to ensure compliance with federal regulations. Finally, ASB may be subject to the provisions of the Comprehensive Environmental Response, Compensation and Liability Act (CERCLA) and regulations promulgated thereunder. CERCLA imposes liability for environmental cleanup costs on certain categories of responsible parties, including the current owner and operator of a facility and prior owners or operators who owned or operated the facility at the time the hazardous substances were released or disposed. CERCLA exempts persons whose indicia of ownership in a facility are held primarily to protect a security interest, provided that they do not participate in the management of the facility. The EPA promulgated a final rule, effective as of April 29, 1992, to clarify circumstances under which lenders are exempt from liability under CERCLA. The EPA final rule addresses the activities of the holder of a security interest that will and will not trigger liability as "participation in management." However, the U.S. Court of Appeals for the District of Columbia Circuit vacated the EPA final rule in February 1994, finding that the EPA had no authority to issue a rule defining the scope of the CERCLA exemption from liability for secured creditors. It is possible that a petition for rehearing may be filed, or that the U.S. Congress may enact legislation addressing this matter. Although there may be some danger for ASB of liability for environmental cleanup costs, the Company believes the danger is not as great for ASB, which specializes in residential lending, as it may be for other depository institutions which have a larger portfolio of commercial loans. AMERICANS WITH DISABILITIES ACT HEI and its subsidiaries are subject to the Americans with Disabilities Act (ADA), a comprehensive federal law intended to eliminate discrimination against individuals with disabilities. Several titles of the ADA are applicable to the Company including Title I, Employment, and Title III, Public Accommodations and Services Operated by Private Entities. HEI and its subsidiaries believe they are in compliance with both Title I and Title III of the ADA. The eventual cost of such compliance activities is not expected to have a material effect on the financial condition or results of operations of the Company or HECO and its subsidiaries. 39 RATING AGENCIES' ACTIONS As of March 21, 1995, the Standard & Poor's (S&P), Moody's Investors Service (Moody's) and Duff & Phelps Credit Rating Co.'s (Duff & Phelps) ratings of HEI's and HECO's securities were as follows:
S&P Moody's Duff & Phelps -------------------------------------------------------------- HEI --- Medium-term notes BBB Baa2 BBB+ Commercial paper A-2 P-2 Duff 2 HECO ---- First mortgage bonds BBB+ A3 A Unsecured notes BBB Baa1 A- Cumulative preferred stock BBB baa1 BBB+ Commercial paper A-2 P-2 Duff 1-
The Company has been informed by such rating agencies that each of the ratings referenced above is within a category that signifies "investment grade." However, each such rating reflects only the view of the applicable rating agency at the time the rating is issued, from whom an explanation of the significance of such ratings may be obtained. Each rating should be evaluated independently of any other rating. There is no assurance that any such credit rating will remain in effect for any given period of time or that such rating will not be lowered, suspended or withdrawn entirely by the applicable rating agency if, in such rating agency's judgment, circumstances so warrant. Any such lowering, suspension or withdrawal of any rating may have an adverse effect on the market price or marketability of HEI's and/or HECO's securities and serve to increase the cost of capital of HEI and HECO. In January 1995, S&P revised its ratings outlook on HEI and HECO to "stable" from "negative" citing recent PUC decisions which demonstrate a continuing trend of regulatory support for the electric utility subsidiaries' heavy construction program and HEI's commitment to a well balanced capital structure. Neither HEI nor HECO management can predict with certainty future rating agency actions or their effects on the future cost of capital of HEI or HECO. RESEARCH AND DEVELOPMENT HECO and its subsidiaries spent approximately $2.4 million, $2.3 million and $2.3 million in 1994, 1993 and 1992, respectively, on research and development. Contributions to the Electric Power Research Institute accounted for most of the expenditures. Expenditures were also made in the areas of energy conservation, environmental control, emissions control and for other similar studies relative to technologies with the potential of being specifically applicable to HECO and its subsidiaries. EMPLOYEE RELATIONS At December 31, 1994, the Company's continuing operations had 3,386 full-time and part-time employees, compared with 3,399 at December 31, 1993. HECO At December 31, 1994, HECO and its subsidiaries had 2,219 employees, compared with 2,226 employees at December 31, 1993. The current collective bargaining agreement between the International Brotherhood of Electrical Workers (IBEW), Local 1260, and HECO, MECO and HELCO, covering approximately 63% of the total employees of these companies, covers a four-year period from November 1, 1992 through October 31, 1996. The contract provides for noncompounded wage increases of 4.25% on November 1 of each year during the term of the agreement. The "Flexible Work Hours/Week Schedule" was the major work rule added to the current contract. In 1992, the benefits agreement between IBEW Local 1260 and HECO, MECO and HELCO was modified, and the current agreement will be in effect until October 31, 1996. Revisions were made to the medical plans and postretirement benefits. 40 HTB HTB has a collective bargaining agreement with the Inlandboatmen's Union of the Pacific (IBU) effective from July 26, 1990 through July 25, 1995. An 8% across-the-board wage increase (with further adjustments for licensed seamen and journeymen craftsmen) was effective for the first year. From July 26, 1991 through July 25, 1995, the agreement specifies annual increases of 4%. The agreement covers all employees of HTB employed on ocean and harbor tugs and all dispatchers, but excludes office clerical employees, confidential employees, professional and management employees, guards and watchmen. YB has a collective bargaining agreement covering the period of July 1, 1993 through June 30, 1996 with the International Longshoremen's and Warehousemen's Union, Hawaii Division, Local 142. The agreement was ratified on December 23, 1994 after eight months of negotiation. The agreement covers all full-time and part-time receiving and delivery clerks working on the docks loading and discharging vessels, all maintenance personnel, documentation clerks and customer service representatives employed by YB in the state. The agreement excludes confidential employees, professional employees, supervisory employees, guards and other clerical personnel. The agreement generally provides for a per hour across-the-board wage increase of 40 cents (1.8% to 3.8%) in July 1993, 20 cents (0.9% to 1.5%) in January 1994, 55 cents (2.3% to 4.1%) in July 1994 and 65 cents (2.7% to 4.6%) in July 1995. On June 1, 1991, HTB transferred four tugs and vessel personnel to YB. YB has a "Letter of Understanding" with the IBU, dated September 17, 1991, which agrees to honor the appropriate provisions agreed upon in HTB's collective bargaining agreement, which runs through July 25, 1995, as to the transferred personnel. OTHER The employees of HEI and its direct and indirect subsidiaries are not covered by any collective bargaining agreement, except as identified above. 41 ITEM 2. PROPERTIES HEI leases 15,931 square feet of office space in downtown Honolulu. The leases expire at various dates from March 31, 1996 to April 30, 1999 (with an option for HEI to extend one of the leases on most of the office space to March 31, 2001). HEI also leases 9,667 square feet of office space from HECO in downtown Honolulu. The properties of HEI's subsidiaries are as follows: ELECTRIC UTILITY See page 4 for the "Generation statistics" of HECO and its subsidiaries, such as generating and firm purchased capability, reserve margin and annual load factor. HECO owns and operates three generating plants on the island of Oahu at ---- Honolulu, Waiau and Kahe, with an aggregate generating capability of 1,263 MW at December 31, 1994. The three plants are situated on HECO-owned land having a combined area of 535 acres. In addition, HECO owns a total of 123 acres of land on which are located substations, transformer vault sites, distribution base yards and the Kalaeloa cogeneration facility site. Electric lines are located over or under public and nonpublic properties. Most of HECO's leases, easements and licenses have been recorded. HECO owns overhead transmission lines, overhead distribution lines, underground cables, fully-owned or jointly-owned poles and steel or aluminum high voltage transmission towers. The transmission system operates at 46,000 and 138,000 volts. The total capacity of HECO's transmission and distribution substations was 5,673,000 kilovoltamperes at December 31, 1994. HECO owns a building and approximately 11.5 acres of land located in Honolulu which houses its operating, engineering and information services departments and a warehousing center. It also leases an office building and certain office spaces in Honolulu. The lease for the office building expires in November 2002, with an option to further extend the lease to November 2012. The leases for certain office spaces expire on various dates through November 30, 2004 with options to extend to various dates through November 30, 2014. HECO owns 19.2 acres of land at Barbers Point used to situate fuel oil storage facilities with a combined capacity of 970,700 barrels. HECO also owns fuel oil tanks at each plant site with a total maximum usable capacity of 915,400 barrels. The properties of HECO are subject to a first mortgage securing HECO's outstanding first mortgage bonds. On December 20, 1989, HECO applied to the PUC for the approval of the sale to Malama Waterfront Corp. and leaseback of the Honolulu Power Plant and Iwilei tank farm, the approval of the transfer values and the approval of the accounting and rate-making treatments thereof. Prior to the PUC rendering a decision on this application, HECO determined that changing conditions altered the economics of the proposed sale such that a later retirement of the Honolulu Power Plant may be more favorable. HECO then withdrew its application for the sale and leaseback of the plant in July 1993. A brief description of the properties of HECO's two electric utility subsidiaries follows: MECO owns and operates two generating plants on the island of Maui, at Kahului ---- and Maalaea, with an aggregate capability of 201.3 MW. The plants are situated on MECO-owned land having a combined area of 28.6 acres. MECO also owns fuel oil storage facilities at these sites with an aggregate maximum usable storage capacity of 145,300 barrels. MECO's administrative offices and engineering and distribution departments are located on 9.1 acres of MECO-owned land in Kahului. MECO also owns and operates smaller distribution and generation systems on the islands of Lanai and Molokai. The properties of MECO are subject to a first mortgage securing MECO's outstanding first mortgage bonds. HELCO owns and operates five generating plants on the island of Hawaii. These ----- plants at Hilo (2), Waimea, Kona and Puna have an aggregate generating capability of 154.6 MW (excluding two small run-of-river hydro units). The plants are situated on HELCO-owned land having a combined area of 42 approximately 43 acres. HELCO owns 6.0 acres of land in Kona, which are used for a baseyard, and it leases 4.0 acres of land for its baseyard in Hilo. The lease expires in 2030. The deeds to the sites located in Hilo contain certain restrictions which do not materially interfere with the use of the sites for public utility purposes. The properties of HELCO are subject to a first mortgage securing HELCO's outstanding first mortgage bonds. SAVINGS BANK ASB owns its executive office building located in downtown Honolulu and land --- and an office building in the Mililani Technology Park on Oahu. The following table sets forth certain information with respect to branches owned and leased by ASB and its subsidiaries at December 31, 1994.
Number of branches ------------------------- Owned Leased Total ----- ------ ----- Oahu 5 24 29 Maui 3 3 6 Kauai 3 1 4 Hawaii 2 4 6 Molokai -- 1 1 -- -- -- 13 33 46 == == ==
The net book value of branches and office facilities is approximately $39 million. Of this amount, $32 million represents the net book value of the land and improvements for the branches and office facilities owned by ASB and $7 million represents the net book value of ASB's leasehold improvements. OTHER FREIGHT TRANSPORTATION ---------------------- HTB owned seven tugboats ranging from 1,430 to 2,668 HP, two tenders of 500 HP and two flatdecked barges as of December 31, 1994. HTB owns no real property, but rents on a month-to-month basis its pier property used in its operations from the State of Hawaii under a revocable permit. YB, HTB's subsidiary, owned four tugboats, two doubledecked and six flatdecked barges and most of its shoreside equipment, including 20-foot containers, chassis, 20-foot and 40-foot refrigerated containers, container vans, hi-lifts, flatracks, automobile racks and other related equipment as of December 31, 1994. YB has three-year leases expiring at various dates in 1995 through 1996 for shoreside equipment (containers, flatracks and chassis) at a monthly cost of approximately $18,100. YB owns no real property, but rents on a month-to-month basis or leases various pier property and warehouse facilities from the State of Hawaii under a revocable permit, or under a five-year lease. All lease terms began on January 1, 1992. It is expected that expiring leases will be renewed as necessary. REAL ESTATE DEVELOPMENT ----------------------- MPC. See Item 1, "Business-Other-Real estate-Malama Pacific Corp." --- OTHER ----- HEIIC. See Item 1, "Business-Other-HEI Investment Corp." ----- LVI operates a windfarm on the island of Hawaii with a generating capability of 1.25 MW. LVI leases 78 acres of land for its windfarm. As of March 21, 1995, PECS owns no real property. 43 ITEM 3. LEGAL PROCEEDINGS Except as provided for below and in "Item 1. Business," there are no known pending legal proceedings, other than ordinary routine litigation incidental to their respective businesses, to which HEI or any of its subsidiaries is a party or of which any of their property is the subject. DISCONTINUED OPERATIONS See "The Hawaiian Insurance & Guaranty Company, Limited" in Note 2 to HEI's Consolidated Financial Statements, incorporated herein by reference to pages 46 to 47 of HEI's 1994 Annual Report to Stockholders, portions of which are filed herein as HEI Exhibit 13(a). HECO POWER OUTAGE See "HECO power outage" in Note 4 to HEI's Consolidated Financial Statements, incorporated herein by reference to page 51 of HEI's 1994 Annual Report to Stockholders, portions of which are filed herein as HEI Exhibit 13(a). HELCO RELIABILITY INVESTIGATION See "HELCO reliability investigation" in Note 4 to HEI's Consolidated Financial Statements, incorporated herein by reference to page 50 of HEI's 1994 Annual Report to Stockholders, portions of which are filed herein as HEI Exhibit 13(a). ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS HEI AND HECO: During the fourth quarter of 1994, no matters were submitted to a vote of security holders of the Registrants. EXECUTIVE OFFICERS OF HEI The following persons are, or may be deemed, executive officers of HEI. Their ages are given as of February 28, 1995 and their years of company service are given as of December 31, 1994. Officers are appointed to serve until the meeting of the Board of Directors following the next Annual Meeting of Stockholders (which will occur on April 25, 1995) and/or until their successors have been appointed and qualified (or until their earlier resignation or removal). Company service includes service with an HEI subsidiary.
Business experience for past HEI Executive Officers five years --------------------------------------------------------------------------- Robert F. Clarke, age 52 President and Chief Executive Officer 1/91 to date Group Vice President - Diversified Companies 5/88 to 12/90 Director 4/89 to date (Company service: 7 years) Harwood D. Williamson, age 63 Senior Vice President 2/95 to date Group Vice President - Utility companies 5/88 to 6/94 Director 4/85 to date (Company service: 38 years) Robert F. Mougeot, age 52 Financial Vice President and Chief Financial Officer 4/89 to date (Company service: 6 years)
44 Business experience for past HEI Executive Officers (continued) five years -------------------------------------------------------------------------------- Peter C. Lewis, age 60 Vice President - Administration 10/89 to date (Company service: 26 years) Charles F. Wall, age 55 Vice President and Corporate Information Officer 7/90 to date (Company service: 4 years) Charles F. Wall, prior to joining the Company, served as Director of Information Management of GTE Hawaiian Tel from 1981 to 1990. Andrew I. T. Chang, age 55 Vice President - Government Relations 4/91 to date Manager, Government Relations 8/90 to 3/91 Manager, Government Relations, HECO 1/85 to 7/90 (Company service: 10 years) Constance H. Lau, age 42 Treasurer 4/89 to date (Company service: 10 years) Curtis Y. Harada, age 39 Controller 1/91 to date Auditor, HECO 7/89 to 1/91 (Company service: 5 years) Betty Ann M. Splinter, age 49 Secretary 10/89 to date (Company service: 20 years) Wayne K. Minami, age 52 President and Chief Executive Officer, American Savings Bank, F.S.B 1/87 to date (Company service: 8 years) HEI's executive officers, with the exception of Charles F. Wall and Andrew I. T. Chang, are officers and/or directors of one or more of HEI's subsidiaries. Mr. Minami is deemed an executive officer of HEI under the definition of Rule 3b-7. There are no family relationships between any executive officer of HEI and any other executive officer or director of HEI, or any arrangement or understanding between any executive officer and any person pursuant to which the officer was selected. 45 PART II ITEM 5. MARKET FOR REGISTRANTS' COMMON EQUITY AND RELATED STOCKHOLDER MATTERS HEI: The information required by this item is incorporated herein by reference to pages 65 and 67 (Note 18, "Regulatory restrictions on net assets" and Note 21, "Quarterly information (unaudited)," of the Notes to HEI's Consolidated Financial Statements) and page 25 of HEI's 1994 Annual Report to Stockholders, portions of which are filed herein as HEI Exhibit 13(a). Certain restrictions on dividends and other distributions of HEI are described in "Item 1. Business-- Regulation and other matters--Restrictions on dividends and other distributions." The total number of holders of record of HEI common stock as of March 9, 1995, was 23,867. HECO: The information required with respect to "Market information" and "holders" is not applicable. Since the corporate restructuring on July 1, 1983, all the common stock of HECO has been held solely by its parent, HEI, and is not publicly traded. The dividends declared and paid on HECO's common stock for the four quarters of 1994 and 1993 were as follows:
Quarter ended 1994 1993 ------------------------------------ March 31 $9,923,000 $6,649,000 June 30 1,330,000 3,731,000 September 30 7,594,000 8,233,000 December 31 9,664,000 7,274,000
The regulatory restrictions on net assets are incorporated herein by reference to page 27 (Note 12 to HECO's Consolidated Financial Statements, "Regulatory restrictions on distributions to parent") of HECO's 1994 Annual Report to Stockholder, portions of which are filed herein as HECO Exhibit 13(b). ITEM 6. SELECTED FINANCIAL DATA HEI: The information required by this item is incorporated herein by reference to page 25 of HEI's 1994 Annual Report to Stockholders, portions of which are filed herein as HEI Exhibit 13(a). HECO: The information required by this item is incorporated herein by reference to page 2 of HECO's 1994 Annual Report to Stockholder, portions of which are filed herein as HECO Exhibit 13(b). ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS HEI: The information required by this item is incorporated herein by reference to pages 27 to 38 of HEI's 1994 Annual Report to Stockholders, portions of which are filed herein as HEI Exhibit 13(a). HECO: The information required by this item is incorporated herein by reference to pages 3 to 10 of HECO's 1994 Annual Report to Stockholder, portions of which are filed herein as HECO Exhibit 13(b). 46 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA HEI: The information required by this item is incorporated herein by reference to the section entitled "Segment financial information" on page 26 and to pages 40 to 67 of HEI's 1994 Annual Report to Stockholders, portions of which are filed herein as HEI Exhibit 13(a). HECO: The information required by this item is incorporated herein by reference to pages 11 to 30 of HECO's 1994 Annual Report to Stockholder, portions of which are filed herein as HECO Exhibit 13(b). ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE HEI and HECO: None PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANTS HEI: Information for this item concerning the executive officers of HEI is set forth on pages 44 through 45 of this report. The list of current directors of HEI is incorporated herein by reference to page 68 of HEI's 1994 Annual Report to Stockholders, portions of which are filed herein as HEI Exhibit 13(a). In 1995, the HEI Board of Directors is recommending to the stockholders the election of James K. Scott, Ed.D., age 43, as a director of HEI. Information on the nominee's and current directors' business experience and directorships is incorporated herein by reference to pages 3 to 6 of the registrant's Definitive Proxy Statement, prepared for the Annual Meeting of Stockholders to be held on April 25, 1995. There are no family relationships between any director of HEI and any other executive officer or director of HEI, or any arrangement or understanding between any director and any person pursuant to which the director was selected. The information required under this item by Item 405 of Regulation S-K is incorporated by reference to page 11 of HEI's Definitive Proxy Statement, prepared for the Annual Meeting of Stockholders to be held on April 25, 1995. 47 HECO: The following persons are, or may be deemed, executive officers of HECO. Their ages are given as of February 28, 1995 and their years of company service are given as of December 31, 1994. Officers are appointed to serve until the meeting of the Board of Directors following the next Annual Meeting and/or until their respective successors have been appointed and qualified. Company service includes service with HECO affiliates. Business experience for past HECO Executive Officers five years -------------------------------------------------------------------------------- Robert F. Clarke, age 52 Chairman of the Board 1/91 to date (Company service: 7 years) Harwood D. Williamson, age 63 President and Chief Executive Officer 1/91 to date President and Chief Operating Officer 2/85 to 12/90 Director 4/85 to date Chairman of the Board, HELCO and MECO 3/85 to date (Company service: 38 years) T. Michael May, age 48 Senior Vice President 2/92 to date (Company service: 3 years) T. Michael May, prior to joining HECO, was a principal partner in Management Assets Group from 9/89 to 1/92. Joan M. Diamond, age 44 Vice President - Human Resources 2/91 to date Manager, Human Resources 5/89 to 1/91 (Company service: 10 years) Jackie Mahi Erickson, age 54 Vice President - General Counsel 2/91 to date Corporate Counsel 1/81 to 1/91 (Company service: 14 years) Charles M. Freedman, age 48 Vice President - Corporate Relations 5/92 to date (Company service: 4 years) Charles M. Freedman, prior to rejoining HECO on 5/92, served as Director of Communications in the Office of the Governor of Hawaii, from 1986 to 4/92. Edward Y. Hirata, age 61 Vice President - Planning 12/91 to date Vice President, HELCO and MECO 12/91 to date (Company service: 8 years) Edward Y. Hirata, prior to rejoining HECO on 12/91, served as Director of Department of Transportation for the State of Hawaii, from 4/87 to 11/91. 48 Business experience for past HECO Executive Officers five years -------------------------------------------------------------------------------- George T. Iwahiro, age 57 Vice President - Engineering 2/91 to date Vice President - Consumer, Regulatory and Public Affairs 2/85 to 1/91 Vice President, HELCO and MECO 3/85 to 12/91 (Company service: 35 years) Thomas L. Joaquin, age 51 Vice President - Operations 5/94 to date General Manager, Production 11/93 to 4/94 Manager, Production 10/92 to 10/93 Manager, Production (MECO) 7/87 to 9/92 (Company service: 22 years) Richard L. O'Connell, age 65 Vice President - Customer Relations 2/91 to date Vice President - Facilities 6/88 to 1/91 (Company service: 14 years) Paul A. Oyer, age 54 Financial Vice President and Treasurer 5/89 to date Director 4/85 to date Financial Vice President and Treasurer, HELCO and MECO 3/85 to date (Company service: 28 years) David M. Rodrigues, age 59 Vice President - Corporate Excellence 11/93 to date Vice President - Operations 5/89 to 10/93 (Company service: 24 years) Ernest T. Shiraki, age 47 Controller 5/89 to date (Company service: 25 years) Molly M. Egged, age 44 Secretary 10/89 to date Secretary, HELCO and MECO 10/89 to date Executive Secretary 12/80 to 12/92 (Company service: 14 years) HECO's executive officers, Robert F. Clarke, Harwood D. Williamson, Edward Y. Hirata, Paul A. Oyer and Molly M. Egged, are officers of one or more of the affiliated HEI companies. There are no family relationships between any executive officer or director of HECO and any other executive officer or director of HECO, or any arrangement or understanding between any director and any person pursuant to which the director was selected. The list of current directors of HECO is incorporated herein by reference to page 33 of HECO's 1994 Annual Report to Stockholder, portions of which are filed herein as HECO Exhibit 13(b). Information on the business experience and directorships of directors of HECO who are also directors of HEI is incorporated herein by reference to pages 4 through 6 of HEI's Definitive Proxy Statement, prepared for the Annual Meeting of Stockholders to be held on April 25, 1995. 49 Mildred D. Kosaki, age 70, and Paul C. Yuen, age 66, as of February 28, 1995 are the only outside directors of HECO who are not directors of HEI. Mrs. Kosaki has been a Director of HECO since 1973. She resigned from the HEI Board in 1987. She was also a Director of the International Pacific University from 1989 to 1991. She is a specialist in education research. Dr. Yuen, who was elected a Director of HECO in April 1993, is Dean of the College of Engineering at the University of Hawaii-Manoa. In the past five years, he has held various administrative positions at the University of Hawaii-Manoa. He also serves on the Boards of Cyanotech Corporation and the Pacific International Center for High Technology Research. Information on Mr. Oyer's business experience and directorship is indicated above. ITEM 11. EXECUTIVE COMPENSATION HEI: The information required under this item for HEI is incorporated by reference to pages 8 to 9 and 12 to 25 of HEI's Definitive Proxy Statement, prepared for the Annual Meeting of Stockholders to be held on April 25, 1995. HECO: The following tables set forth the information required for the chief executive officer of HECO and the four other most highly compensated HECO executive officers serving at the end of 1994. All executive compensation amounts presented for Harwood D. Williamson are duplicative of the amounts presented in HEI's Definitive Proxy Statement, prepared for the Annual Meeting of Stockholders to be held on April 25, 1995. Summary compensation table The following is the summary compensation table which sets forth the annual and long-term compensation of the chief executive officer of HECO and the four other most highly compensated executive officers of HECO serving at the end of 1994. 50 SUMMARY COMPENSATION TABLE
Long-Term Annual Compensation Compensation ------------------------------- ---------------------------- Other Awards Payouts All --------- -------- Annual Securities Other Compen- Underlying LTIP Compen- Name and Principal Salary Bonus sation Options Payouts sation Position Year ($)/1/ ($)/2/ ($)/3/ (#)/4/ ($)/5/ ($)/6/ --------------------- ---- -------- -------- ------- ------- ------ ------- Harwood D. Williamson 1994 $387,367 $100,174 $76,465 15,000 $ -- $20,663 President and CEO 1993 341,333 0 68,544 8,000 66,150 18,843 1992 316,666 37,288 62,750 48,000 0 0 T. Michael May 1994 199,667 32,995 0 0 na 8,151 Senior Vice President 1993 191,000 0 0 4,000 na 4,796 1992 168,336 29,100 0 0 na 78,577 Paul A. Oyer 1994 188,067 22,283 11,928 0 na 7,106 Financial Vice President 1993 175,100 0 10,806 3,000 na 6,339 and Treasurer 1992 166,031 21,373 9,790 0 na 0 David M. Rodrigues 1994 140,667 22,283 0 0 na 7,482 Vice President-Corporate 1993 134,833 0 0 3,000 na 6,864 Excellence 1992 126,833 21,373 0 0 na 0 George T. Iwahiro 1994 139,867 18,476 0 0 na 7,042 Vice President- 1993 133,833 0 0 2,000 na 6,548 Engineering 1992 127,169 17,762 0 0 na 0
/1/ Includes a one-time lump sum transitional payment in 1994, representing two years of "normalized" insider directors' fees following a decision by the Compensation Committee to discontinue all insider directors' fees, effective May 1, 1994; the table includes lump sum payments of $49,000 for Mr. Williamson and $9,800 for Mr. Oyer. Also includes directors' fee of $7,700 for the period January 1 through April 30, 1994, $28,000 for 1993 and $25,000 for 1992 for Mr. Williamson and directors' fee of $1,400 for the period January 1 through April 30, 1994, $5,600 for 1993 and $4,700 for 1992 for Mr. Oyer. /2/ The named executive officers are eligible for an incentive award under the Company's annual Executive Incentive Compensation Plan (EICP). EICP bonus payouts for the previous year's performance period are made in the first two months of the year following the previous year's performance period; if there is a payout, the amount is reflected as bonus compensation in the table for the previous year for the named executive. /3/ Covers interest earned on deferred compensation and includes above-market earnings in the amount of $70,055 for 1994, $63,467 for 1993 and $57,498 for 1992 on deferred annual and Long-Term Incentive Plan (LTIP) payouts for Mr. Williamson. Amounts for Mr. Oyer represent above-market earnings on deferred annual payouts. /4/ Includes a special one-time, premium-priced grant of 40,000 shares of HEI stock without dividend equivalents for Mr. Williamson in 1992. Other options granted in each of the three years for Mr. Williamson included dividend equivalents. For each of the other named executive officers, options granted in 1993 did not include dividend equivalents. /5/ LTIP payouts are determined in April each year for the three-year cycle ending on December 31 of the previous calendar year; if there is a payout, the amount is reflected as LTIP compensation in the table for the previous year for the named executive officers. In April 1994, LTIP payouts were made for the 1991-1993 performance cycle and are reflected as LTIP compensation in the table for 1993. In 1995 only Mr. Williamson was eligible to receive a LTIP payout. The determination of whether there will be a payout for Mr. Williamson under the 1992-1994 LTIP will not be made until April 1995. /6/ Represents amounts accrued by the Company in 1993 and 1994 for certain death benefits provided to the named executive officers. In 1992, the Company did not accrue for these benefits. Additional information is incorporated by reference to pages 21-22 of HEI's Definitive Proxy Statement, prepared for the Annual Meeting of Stockholders to be held on April 25, 1995. Covers reimbursement of moving expenses for Mr. May in 1992. 51 Option grants in last fiscal year A stock option was granted to one of the named executive officers in the HECO Summary Compensation Table, Mr. Williamson. Additional information required under this item is incorporated by reference to page 13 of HEI's Definitive Proxy Statement, prepared for the Annual Meeting of Stockholders to be held on April 25, 1995. Aggregated option exercises and fiscal year-end option values No stock options were exercised by the named executive officers in 1994. The following table shows the number of unexercised options and the value of in the money unexercised options, including dividend equivalents, at the end of 1994. Under the Stock Option and Incentive Plan, dividend equivalents have been granted to Mr. Williamson as part of the stock option grant, except for the one- time, premium-priced grant in May 1992. For each of the other named executive officers, no options were granted in 1994. Dividend equivalents permit a participant who exercises a stock option to obtain at no additional cost, in addition to the option shares, the amount of dividends declared on the number of shares of common stock with respect to which the option is exercised during the period between the grant and the exercise of the option. Dividend equivalents are computed, as of each dividend record date throughout the four-year vesting period (vesting in equal installments), which begins on date of grant, both with respect to the number of shares underlying the option and with respect to the number of dividend equivalent shares previously credited to the executive officer and not issued during the period prior to the dividend record date. AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR-END OPTION VALUES
Value of Number of Unexercised Unexercised In the Money Options Options (Including (Including Dividend Dividend Equivalents) Equivalents) Dividend Value at Fiscal at Fiscal Shares Equivalents Value Realized On Year-end Year-end /1/ Acquired Acquired ------------- -------------- On On Realized Dividend Exercisable/ Exercisable/ Exercise Exercise On Options Equivalents Unexercisable Unexercisable (#) (#) ($) ($) (#) ($) -------- --------- ---------- ---------- ------------ -------------- Harwood D. Williamson -- -- $ -- $ -- 67,510/29,914 $56,356/ -- T. Michael May -- -- -- -- 1,000/3,000 -- / -- Paul A. Oyer -- -- -- -- 6,178/3,000 -- / -- David M. Rodrigues -- -- -- -- 3,000/3,000 -- / -- George T. Iwahiro -- -- -- -- 1,000/2,000 -- / --
/1/ Includes dividend equivalents of $45,681 exercisable for Mr. Williamson. No options were in the money (where the option price is less than the closing price on December 31, 1994) except the 1989 stock option grant with dividend equivalents with an exercise price of $30.24 per share. Value based on closing price of $32.375 per share on the New York Stock Exchange on December 31, 1994. 52 Long-Term Incentive Plan awards table A Long-Term Incentive Plan award was made to one of the named executive officers in the HECO Summary Compensation Table, Mr. Williamson. Additional information required under this item is incorporated by reference to page 15 of HEI's Definitive Proxy Statement, prepared for the Annual Meeting of Stockholders to be held on April 25, 1995. Pension plan The Retirement Plan for Employees of Hawaiian Electric Industries, Inc. and Participating Subsidiaries (the Retirement Plan) provides a monthly retirement pension for life. Additional information required under this item is incorporated by reference to pages 16 to 17 of HEI's Definitive Proxy Statement, prepared for the Annual Meeting of Stockholders to be held on April 25, 1995. As of December 31, 1994, the named executive officers in the HECO Summary Compensation Table had the following number of years of credited service under the Retirement Plan: Mr. Williamson, 38 years; Mr. May, 2 years; Mr. Oyer, 28 years; Mr. Rodrigues, 24 years; and Mr. Iwahiro, 35 years. Change-in-Control Agreement Messrs. Williamson and May are the only named executive officers in the HECO Summary Compensation Table with whom HEI has entered into a Change-in-Control Agreement. Additional information required under this item is incorporated by reference to pages 17 to 18 of HEI's Definitive Proxy Statement, prepared for the Annual Meeting of Stockholders to be held on April 25, 1995. Based on W-2 earnings for the five most recent years (1990-1994) or the portion of such period during which the executive performed personal service for HEI and its subsidiaries, the lump sum severance payable under these agreements would be as follows: Mr. Williamson - $1,133,837 and Mr. May - $762,197. Compensation Committee Report on Executive Compensation Introduction Decisions on executive compensation for the named executive officers are made by the Compensation Committee of the HEI Board of Directors (the Committee) which is composed of five independent nonemployee directors. All decisions by the Committee are reviewed by the full HEI Board except for decisions about HEI's stock-based plans, which are made solely by the Committee in order to satisfy Securities Exchange Act Rule 16b-3. The Committee has retained the services of an independent compensation consulting firm to assist in executive compensation matters. Except for specific compensation decisions regarding Mr. Williamson which are discussed below, additional information required under this item is incorporated by reference to pages 18 through 22 of HEI's Definitive Proxy Statement, prepared for the Annual Meeting of Stockholders to be held on April 25, 1995. Base Salary Mr. Williamson's base salary is determined based on the recommendation of Robert F. Clarke, President and Chief Executive Officer of HEI and Chairman of the Board of HECO, within the salary range recommended by the Committee's independent compensation consultant and with the Committee's approval. Mr. Clarke's recommendation is based on an overall evaluation of Mr. Williamson's performance during the preceding year. This evaluation is subjective in nature and takes into account all aspects of Mr. Williamson's responsibilities at the total discretion of Mr. Clarke and the Committee. Mr. Williamson's base salary was raised from an annual rate of $320,000 to an annual rate of $336,000, effective May 1, 1994. This action by the Committee was subsequently ratified by the HECO Board of Directors. 53 Stock Options The 1994 stock option grant to Mr. Williamson of 15,000 shares of HEI Common Stock plus dividend equivalents was based on the consultant's recommendation and the independent evaluation of an appropriate grant level by Mr. Clarke and the Committee. In this evaluation, the Committee took into account prior grants to Mr. Williamson and an overall subjective evaluation of Mr. Williamson's job performance. HECO Board of Directors Committees of the HECO Board The Board of Directors of HECO has only one standing committee, the Audit Committee, which is comprised of four nonemployee directors: Ben F. Kaito, Chairman, and Mildred D. Kosaki, Diane J. Plotts and Paul C. Yuen. In 1994, the Audit Committee held five meetings to review with management, the internal auditor and HECO's independent auditors the activities of the internal auditor, the results of the annual audit by the independent auditor and the financial statements which are included in HECO's 1993 Annual Report to Stockholder. The Audit Committee holds such meetings as it deems advisable to review the financial operations of HECO. Remuneration of HECO Directors and attendance at meetings In 1994, Mildred D. Kosaki and Paul C. Yuen were the only nonemployee directors of HECO who were not also directors of HEI. They were paid a retainer of $12,000, one-half of which was distributed in the common stock of HEI pursuant to the HEI Nonemployee Director Stock Plan and one-half of which was distributed in cash. The number of shares of stock distributed was based on a price of $33.28 per share, which is equal to the average of the daily high and low sales prices of HEI common stock for all trading days in March 1994, divided into $6,000, with a cash payment made in lieu of any fractional share. In addition, a fee of $700 was paid in cash to each nonemployee director for each Board and Committee meeting attended by the director. The Chairman of the Audit Committee was paid an additional $100 for each Committee meeting attended. Effective May 1, 1994, members of the Board of Directors who are employees of the Company were no longer compensated for attendance at any meeting of the Board or committees of the Board. In 1994, there were six regular bi-monthly meetings and one special meeting of the Board of Directors. All incumbent directors, attended at least 75% of the combined total number of meetings of the Board and Committee on which they served, except Diane J. Plotts. HECO participates in the Nonemployee Director Retirement Plan described on page 8 of HEI's Definitive Proxy Statement, prepared for the Annual Meeting of Stockholders to be held on April 25, 1995. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT HEI: The information required under this item is incorporated by reference to pages 10 and 11 of HEI's Definitive Proxy Statement, prepared for the Annual Meeting of Stockholders to be held on April 25, 1995. HECO: HEI owns all of the common stock of HECO, which is HECO's only class of voting securities. HECO has also issued and has outstanding various series of preferred stock, the holders of which, upon certain defaults in dividend payments, have the right to elect a majority of the directors of HECO. 54 The following table shows the shares of HEI common stock beneficially owned by each HECO director, named HECO executive officers as listed in the Summary Compensation Table on page 51 and by HECO directors and officers as a group, as of February 15, 1995, based on information furnished by the respective individuals.
Amount and Nature of Name of Individual or Group* Title of Class Beneficial Ownership ---------------------------- --------------- ----------------------- Total ----- Directors --------- Mildred D. Kosaki Common 1,596 (b) 1,596 ---------- Paul A. Oyer** Common 2,675 (a) 6,928 (d) 9,603 ---------- Paul C. Yuen Common 636 (b) 636 ---------- Named executive officers ------------------------ T. Michael May Common 562 (a) 514 (b) 2,000 (d) 3,076 ---------- George T. Iwahiro Common 6,444 (a) 155 (b) 1,750 (d) 8,349 ---------- David M. Rodrigues Common 2,729 (a) 424 (b) 3,750 (d) 6,903 ---------- Common Stock Beneficially 25,403 (a) Owned by Directors and Officers 4,581 (b) as a Group (14 persons) 109 (c) 25,146 (d) 55,239*** ----------
* Excludes HECO directors Messrs. Clarke, Henderson, Kaito, and Williamson and Ms. Plotts, who also serve on the HEI Board of Directors. The information required is incorporated by reference to pages 10 and 11 of HEI's Definitive Proxy Statement, prepared for the Annual Meeting of Stockholders to be held on April 25, 1995. Messrs. Clarke and Williamson are also named executive officers listed in the Summary Compensation Table on pages 12 and 13 of the above-referenced Definitive Proxy Statement of HEI. ** Also a named executive officer listed in the Summary Compensation Table on page 51. *** The number of shares of common stock beneficially owned by any HECO director or by all HECO directors and officers as a group does not exceed 1% of the outstanding common stock of HEI. (a) Sole voting and investment power. (b) Shared voting and investment power (shares registered in name of respective individual and spouse). (c) Shares owned by spouse, children or other relatives sharing the home of the director or an officer in the group and in which personal interest of the director or officer is disclaimed. (d) Stock options exercisable within 60 days after February 15, 1995, under the 1987 Stock Option and Incentive Plan, as amended. Shares for Mr. Oyer include accompanying dividend equivalents (720 shares) for stock options awarded in 1988 only. 55 ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS HEI: The information required under this item is incorporated by reference to pages 24 to 26 of HEI's Definitive Proxy Statement, prepared for the Annual Meeting of Stockholders to be held on April 25, 1995. HECO: As of December 31, 1994, T. Michael May, Senior Vice President of HECO, was indebted to HECO in the amount of $180,000 by reason of loans made to him by HECO for relocation purposes. Mr. May's note bears interest at 6.28% and is due in 2008 or upon demand, if Mr. May ceases to be employed by HECO, and is secured by a second mortgage on real estate. PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K (a)(1) Financial Statements The following financial statements contained in HEI's 1994 Annual Report to Stockholders and HECO's 1994 Annual Report to Stockholder, portions of which are filed by HEI as Exhibit 13(a) and, portions of which are filed by HECO as Exhibit 13(b), respectively, are incorporated by reference in Part II, Item 8, of this Form 10-K: 1994 Annual Report to Stockholder(s) (Page/s) ------------------- HEI HECO --- ---- Independent Auditors' Reports 39 31 Consolidated Statements of Income, Years Ended December 31, 1994, 1993 and 1992 40 11 Consolidated Statements of Retained Earnings, Years Ended December 31, 1994, 1993 and 1992 40 11 Consolidated Balance Sheets, December 31, 1994 and 1993 41 12 Consolidated Statements of Capitalization, December 31, 1994 and 1993 na 13-14 Consolidated Statements of Cash Flows, Years Ended December 31, 1994, 1993 and 1992 42 15 Notes to Consolidated Financial Statements 43-67 16-30 56 (a)(2) Financial Statement Schedules The following financial statement schedules for HEI and HECO are included in this Report on the pages indicated below: Page/s in Form 10-K ----------------- HEI HECO ---- ---- Independent auditors' report 58 59 Schedule I Condensed financial information of registrant, Hawaiian Electric Industries, Inc. (Parent Company) as of December 31, 1994 and 1993 and years ended December 31, 1994, 1993 and 1992 60-62 na Schedule II Valuation and qualifying accounts, years ended December 31, 1994, 1993 and 1992 63 63 Certain Schedules, other than those listed, are omitted because they are not required, or are not applicable, or the required information is shown in the consolidated financial statements or notes included in HEI's 1994 Annual Report to Stockholders and HECO's 1994 Annual Report to Stockholder, which financial statements are incorporated herein by reference. (a)(3) Exhibits Exhibits for HEI and HECO and their subsidiaries are listed in the "Index to Exhibits" found on pages 64 through 71 of this Form 10-K. The exhibits listed for HEI and HECO are listed in the index under the headings "HEI" and "HECO," respectively, except that the exhibits listed under "HECO" are also considered exhibits for HEI. (b) Reports on Form 8-K HEI and HECO: During the fourth quarter of 1994, HEI and HECO filed a Current Report, Form 8-K dated November 29, 1994, with the SEC. HEI and HECO filed information under Item 5 regarding the PUC decision and order on a generic docket to determine whether SFAS No. 106, "Employers' Accounting for Postretirement Benefits Other Than Pensions," should be adopted for rate-making purposes. 57 [KPMG Peat Marwick letterhead] Independent Auditors' Report The Board of Directors and Stockholders Hawaiian Electric Industries, Inc.: Under date of January 25, 1995, we reported on the consolidated balance sheets of Hawaiian Electric Industries, Inc. and subsidiaries as of December 31, 1994 and 1993, 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, 1994, as contained in the 1994 annual report to stockholders. These consolidated financial statements and our report thereon are incorporated by reference in the annual report on Form 10-K for the year 1994. In connection with our audits of the aforementioned consolidated financial statements, we also have audited the related financial statement schedules as listed in the accompanying index. These financial statement schedules are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statement schedules based on our audits. In our opinion, such financial statement schedules, when considered in relation to the basic consolidated financial statements taken as a whole, present fairly, in all material respects, the information set forth therein. As discussed in note 14 to the consolidated financial statements, effective January 1, 1993, the Company changed its method of accounting for income taxes. Additionally, as discussed in note 17 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 LLP Honolulu, Hawaii January 25, 1995 58 [KPMG Peat Marwick letterhead] Independent Auditors' Report The Board of Directors and Stockholder Hawaiian Electric Company, Inc.: Under date of January 25, 1995, we reported on the consolidated balance sheets and consolidated statements of capitalization of Hawaiian Electric Company, Inc. (a wholly-owned subsidiary of Hawaiian Electric Industries, Inc.) and subsidiaries as of December 31, 1994 and 1993, 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, 1994, as contained in the 1994 annual report to stockholder. These consolidated financial statements and our report thereon are incorporated by reference in the annual report on Form 10-K for the year 1994. In connection with our audits of the aforementioned consolidated financial statements, we also have audited the related financial statement schedule as listed in the accompanying index. The financial statement schedule is the responsibility of the Company's management. Our responsibility is to express an opinion on the financial statement schedule based on our audits. In our opinion, such financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein. 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 LLP Honolulu, Hawaii January 25, 1995 59 Hawaiian Electric Industries, Inc. SCHEDULE I -- CONDENSED FINANCIAL INFORMATION OF REGISTRANT HAWAIIAN ELECTRIC INDUSTRIES, INC. (PARENT COMPANY) CONDENSED BALANCE SHEETS
December 31, --------------- (in thousands) 1994 1993 ----------------------------------------------------------------------------------------- ASSETS Cash and equivalents $ 223 $ 32,383 Advances to and notes receivable from subsidiaries 27,696 28,455 Accounts receivable 2,565 6,679 Other investments 809 809 Property, plant and equipment, net 2,460 2,874 Other assets 5,857 3,289 Investment in wholly owned subsidiaries, at equity 888,651 805,226 -------- -------- $928,261 $879,715 ======== ======== LIABILITIES AND STOCKHOLDERS' EQUITY Accounts payable $ 9,246 $ 8,861 Advances from subsidiaries 2,293 -- Commercial paper 12,750 -- Long-term debt, net 209,500 200,500 Deferred income taxes 4,301 3,927 Unamortized tax credits 29 36 Other 8,053 23,363 -------- -------- 246,172 236,687 -------- -------- Stockholders' equity Common stock 546,254 514,710 Retained earnings 135,835 128,318 -------- -------- 682,089 643,028 -------- -------- $928,261 $879,715 ======== ======== Note to Balance Sheets Long-term debt, net, consisted of the following: Promissory notes, 6.3% - 7.6%, due in various years through 2003 $113,000 $113,000 Promissory notes, 8.2% - 9.9%, due in various years through 2011 61,500 87,500 Promissory note, variable rate (6.45% at December 31, 1994) due 1999 35,000 -- -------- -------- $209,500 $200,500 ======== ========
As of December 31, 1994, HEI guaranteed debt of its subsidiaries and affiliates amounting to $11 million. The aggregate payments of principal required on long-term debt subsequent to December 31, 1994 are $1 million in 1995, $37 million in 1996, $51 million in 1997, $21 million in 1998, $41 million in 1999 and $59 million thereafter. 60 Hawaiian Electric Industries, Inc. SCHEDULE I - CONDENSED FINANCIAL INFORMATION OF REGISTRANT (CONTINUED) HAWAIIAN ELECTRIC INDUSTRIES, INC. (PARENT COMPANY) CONDENSED STATEMENTS OF INCOME
Years ended December 31, ---------------------------------- (in thousands) 1994 1993 1992 -------------------------------------------------------------------------- REVENUES $ 3,318 $ 3,353 $ 1,884 Equity in income from continuing operations of subsidiaries 84,819 74,764 68,156 ------- -------- -------- 88,137 78,117 70,040 ------- -------- -------- EXPENSES: Operating, administrative and general 7,786 6,897 1,637 Taxes, other than income taxes 292 226 193 Depreciation and amortization of property, plant and equipment 587 569 660 ------- -------- -------- 8,665 7,692 2,490 ------- -------- -------- 79,472 70,425 67,550 Interest expense 15,195 18,355 12,641 ------- -------- -------- INCOME FROM CONTINUING OPERATIONS BEFORE INCOME TAX BENEFIT 64,277 52,070 54,909 Income tax benefit (8,753) (9,614) (6,806) ------- -------- -------- Income from continuing operations 73,030 61,684 61,715 Loss from discontinued operations -- (13,025) (73,297) ------- -------- -------- NET INCOME (LOSS) $73,030 $ 48,659 $(11,582) ======= ======== ========
61 Hawaiian Electric Industries, Inc. SCHEDULE I- CONDENSED FINANCIAL INFORMATION OF REGISTRANT (CONTINUED) HAWAIIAN ELECTRIC INDUSTRIES, INC. (PARENT COMPANY) CONDENSED STATEMENTS OF CASH FLOWS
Years ended December 31, ------------------------------------- (in thousands) 1994 1993 1992 ----------------------------------------------------------------------------- CASH FLOWS FROM OPERATING ACTIVITIES Income from continuing operations $ 73,030 $ 61,684 $ 61,715 Adjustments to reconcile income from continuing operations to net cash provided by operating activities (84,819) (74,764) (68,156) Equity in income from continuing operations of subsidiaries Common stock dividends received from subsidiaries 43,909 53,305 33,884 Depreciation and amortization of property, plant and equipment 587 569 660 Other amortization 209 294 282 Deferred income taxes and tax credits, net 367 232 825 Changes in assets and liabilities Decrease (increase) in accounts receivable 4,114 (6,211) 984 Increase (decrease) in accounts payable 385 (16,506) 22,497 Changes in other assets and liabilities (15,485) 34,733 (15,447) --------- -------- -------- 22,297 53,336 37,244 Cash flows from discontinued operations 36 2,525 -- --------- --------- -------- NET CASH PROVIDED BY OPERATING ACTIVITIES 22,333 55,861 37,244 --------- --------- -------- CASH FLOWS FROM INVESTING ACTIVITIES Net decrease (increase) in advances to and notes receivable from subsidiaries (16,141) 8,756 1,024 Capital expenditures (177) (193) (535) Additional investments in subsidiaries (25,510) (65,000) (56,967) Other -- 50 -- --------- --------- -------- (41,828) (56,387) (56,478) Net investment in discontinued operations -- -- (24,751) --------- --------- -------- NET CASH USED IN INVESTING ACTIVITIES (41,828) (56,387) (81,229) --------- --------- -------- CASH FLOWS FROM FINANCING ACTIVITIES Net increase(decrease) in advances from subsidiaries with original maturities of three months or less 2,293 (185) (15,463) Proceeds from other short-term borrowings -- -- 36,000 Repayment of other short-term borrowings -- (36,000) -- Net increase in commercial paper 12,750 -- -- Proceeds from issuance of long-term debt 35,000 37,000 50,000 Repayment of long-term debt (26,000) (22,500) -- Net proceeds from issuance of common stock 13,602 88,658 18,248 Common stock dividends (47,676) (42,012) (39,214) Other (2,634) 1,949 413 --------- --------- -------- NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES (12,665) 26,910 49,984 --------- --------- -------- Net increase (decrease) in cash and equivalents (32,160) 26,384 5,999 Cash and equivalents, beginning of year 32,383 5,999 -- --------- --------- -------- CASH AND EQUIVALENTS, END OF YEAR $ 223 $ 32,383 $ 5,999 ========= ========= ========
Supplemental disclosures of noncash activities: In 1994, $16.9 million of HEI advances to HEIDI were converted to equity in a noncash transaction. In 1992, HEI converted $9.5 million of long-term debt of HERS to equity. HEI assumed the $9.5 million of HERS' long-term debt in a noncash transaction. Common stock dividends reinvested by stockholders in HEI common stock in noncash transactions amounted to $18 million in 1994, $17 million in 1993 and $15 million in 1992. 62 Hawaiian Electric Industries, Inc. and Hawaiian Electric Company, Inc. SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS Years ended December 31, 1994, 1993 and 1992
------------------------------------------------------------------------------------------------------------------------- Col. A Col. B Col. C Col. D Col. E ------------------------------------------------------------------------------------------------------------------------- Additions ---------------------------- Charged to Balance at costs and Balance at beginning of other Charged to end of (in thousands) period expenses accounts Deductions period ------------------------------------------------------------------------------------------------------------------------- 1994 ---- Allowance for uncollectible accounts Hawaiian Electric Company, Inc. and subsidiaries $ 1,357 $ 2,177 $ 674 $ 3,072 $ 1,136 Other companies 220 130 2 72 280 --------- --------- ------- --------- --------- $ 1,577 $ 2,307 $ 676(a) $ 3,144(b) $ 1,416 ========= ========= ======= ========= ========= Allowance for uncollectible interest (ASB) $ 341 $ 760 $ -- $ -- $ 1,101 ========= ========= ======= ========= ========= Allowance for losses for loans receivable (ASB) $ 5,314 $ 3,983 $ 67(a) $ 571(b) $ 8,793 ========= ========= ======= ========== ========= 1993 ---- Allowance for uncollectible accounts Hawaiian Electric Company, Inc. and subsidiaries $ 1,120 $ 1,521 $ 815 $ 2,099 $ 1,357 Other companies 172 155 1 108 220 --------- --------- ------- --------- --------- $ 1,292 $ 1,676 $ 816(a) $ 2,207(b) $ 1,577 ========= ========= ======= ========= ========= Allowance for uncollectible interest (ASB) $ 482 $ -- $ -- $ 141 $ 341 ========= ========= ======= ========= ========= Allowance for losses for loans receivable (ASB) $ 5,157 $ 779 $ 36(a) $ 658(b) $ 5,314 ========= ========= ======= ========= ========= 1992 ---- Allowance for uncollectible accounts Hawaiian Electric Company, Inc. and subsidiaries $ 1,032 $ 1,246 $ 820 $ 1,978 $ 1,120 Other companies 214 104 2 148 172 --------- --------- ------- --------- --------- $ 1,246 $ 1,350 $ 822(a) $ 2,126(b) $ 1,292 ========= ========= ======= ========= ========= Allowance for uncollectible interest (ASB) $ 45 $ 437 $ -- $ -- $ 482 ========= ========= ======= ========= ========= Allowance for losses for loans receivable (ASB) $ 3,818 $ 1,494 $ 47(a) $ 202(b) $ 5,157 ========= ========= ======= ========= =========
(a) Primarily bad debts recovered. (b) Bad debts charged off. 63 INDEX TO EXHIBITS The exhibits designated by an asterisk (*) are filed herein. The exhibits not so designated are incorporated by reference to the indicated filing. A copy of any exhibit may be obtained upon written request for a $0.20 per page charge from the HEI Stock Transfer Division, P.O. Box 730, Honolulu, Hawaii 96808-0730. Exhibit no. Description ----------- ----------- HEI: --- 3(i).1(a) HEI's Restated Articles of Incorporation (Exhibit 4(b) to Registration No. 33-7895). 3(i).2(a) Articles of Amendment of HEI filed June 30, 1990 (Exhibit 4(b) to Registration No. 33-40813). 3(ii) HEI's By-Laws (Exhibit 4(c) to Registration No. 33-21761). 4.1 Agreement to provide the SEC with instruments which define the rights of holders of certain long-term debt of HEI and its subsidiaries (Exhibit 4.1 to HEI's Annual Report on Form 10-K for the fiscal year ended December 31, 1992, File No. 1-8503). 4.2 Indenture, dated as of October 15, 1988, between HEI and Citibank, N.A., as Trustee (Exhibit 4 to Registration No. 33-25216). 4.3 First Supplemental Indenture dated as of June 1, 1993 between HEI and Citibank, N.A., as Trustee, to Indenture dated as of October 15, 1988 between HEI and Citibank, N.A., as Trustee (Exhibit 4(a) to HEI's Quarterly Report on Form 10-Q for the quarter ended September 30, 1993, File No. 1-8503). 4.4 Officers' Certificate dated as of November 9, 1988, pursuant to Sections 102 and 301 of the Indenture, dated as of October 15, 1988, between HEI and Citibank, N.A., as Trustee, establishing Medium-Term Notes, Series A (Exhibit 4.2 to HEI's Annual Report on Form 10-K for the fiscal year ended December 31, 1988, File No. 1-8503). 4.5 Pricing Supplements Nos. 1 through 11 to the Registration Statement on Form S-3 of HEI (Registration No. 33-25216) filed in connection with the sale of Medium-Term Notes, Series A (filed under Rule 424(b) in connection with Registration No. 33-25216). 4.6 Pricing Supplements Nos. 1 through 9 to the Registration Statement on Form S-3 of HEI (Registration No. 33-58820) filed in connection with the sale of Medium-Term Notes, Series B (Exhibit 4(b) to HEI's Quarterly Report on Form 10-Q for the quarter ended September 30, 1993, File No. 1-8503). *4.7 Pricing Supplement No. 10 to Registration Statement on Form S-3 of HEI (Registration No. 33-58820). 4.8 Purchase Agreement dated March 7, 1991 among HEI and the Purchasers named therein, together with the Notes issued to such Purchasers, each dated March 7, 1991, pursuant to the Purchase Agreement (Exhibit 4.5 to HEI's Annual Report on Form 10-K for the fiscal year ended December 31, 1990, File No. 1-8503). 4.9 Composite conformed copy of the Note Purchase Agreement dated as of December 16, 1991 among HEI and the Purchasers named therein (Exhibit 4.6 to HEI's Annual Report on Form 10-K for the fiscal year ended December 31, 1991, File No. 1-8503). 64 Exhibit no. Description ----------- ----------- 10.1 PUC Order Nos. 7070, 7153, 7203 and 7256 in Docket No. 4337, including copy of "Conditions for the Merger and Corporate Restructuring of Hawaiian Electric Company, Inc." dated September 23, 1982 (Exhibit 10 to Amendment No. 1 to Form U-1). 10.2 Regulatory Capital Maintenance/Dividend Agreement dated May 26, 1988, between HEI, HEIDI and the Federal Savings and Loan Insurance Corporation (by the Federal Home Loan Bank of Seattle) (Exhibit (28)- 2 to HEI's Current Report on Form 8-K dated May 26, 1988, File No. 1- 8503). 10.2(a) OTS letter regarding release from Part II.B. of the Regulatory Capital Maintenance/Dividend Agreement dated May 26, 1988 (Exhibit 10.3(a) to HEI's Annual Report on Form 10-K for the fiscal year ended December 31, 1992, File No. 1-8503). 10.3 Executive Incentive Compensation Plan (Exhibit 10(a) to HEI's Annual Report on Form 10-K for the fiscal year ended December 31, 1987, File No. 1-8503). 10.4 HEI Executives' Deferred Compensation Plan (Exhibit 10.5 to HEI's Annual Report on Form 10-K for the fiscal year ended December 31, 1990, File No. 1-8503). 10.5 Retirement Benefit Agreement--Andrew T. F. Ing and HEI (Exhibit 10(b) to HEI's Annual Report on Form 10-K for the fiscal year ended December 31, 1987, File No. 1-8503). 10.6 1987 Stock Option and Incentive Plan of HEI as amended and restated effective April 21, 1992 (Exhibit A to Proxy Statement of HEI, dated March 6, 1992, for the Annual Meeting of Stockholders, File No. 1- 8503). 10.7 HEI Long-Term Incentive Plan (Exhibit 10.11 to HEI's Annual Report on Form 10-K for the fiscal year ended December 31, 1988, File No. 1- 8503). 10.8 HEI Supplemental Executive Retirement Plan effective January 1, 1990 (Exhibit 10.9 to HEI's Annual Report on Form 10-K for the fiscal year ended December 31, 1990, File No. 1-8503). 10.9 HEI Excess Benefit Plan (Exhibit 10.13 (Exhibit A) to HEI's Annual Report on Form 10-K for the fiscal year ended December 31, 1989, File No. 1-8503). 10.10 Change-in-Control Agreement (Exhibit 10.14 to HEI's Annual Report on Form 10-K for the fiscal year ended December 31, 1989, File No. 1- 8503). 10.11 Non-employee Director Retirement Plan, effective as of October 1, 1989 (Exhibit 10.15 to HEI's Annual Report on Form 10-K for the fiscal year ended December 31, 1989, File No. 1-8503). 10.12 HEI 1990 Non-employee Director Stock Plan (Exhibit 10(a) to HEI's Quarterly Report on Form 10-Q for the quarter ended September 30, 1990, File No. 1-8503). 10.13 HEI Non-employee Directors' Deferred Compensation Plan (Exhibit 10.14 to HEI's Annual Report on Form 10-K for the fiscal year ended December 31, 1990, File No. 1-8503). 65 Exhibit no. Description ----------- ----------- 10.14 HEI and HECO Executives' Deferred Compensation Agreement. The agreement pertains to and is substantially identical for all the HEI and HECO executive officers (Exhibit 10.15 to HEI's Annual Report on Form 10-K for the fiscal year ended December 31, 1991, File No. 1- 8503). 10.15 Contract of Sale between HECO and Malama Waterfront Corp., dated December 20, 1989, for the sale and purchase of the Honolulu Power Plant Parcels, Iwilei Tank Farm Parcel and the buildings, structures and other improvements (Exhibit 10.18 to HEI's Annual Report on Form 10-K for the fiscal year ended December 31, 1989, File No. 1-8503). 10.15(a) First Amendment to Contract of Sale by and between HECO and Malama Waterfront Corp., dated September 25, 1990, amending the Contract of Sale between HECO and Malama Waterfront Corp., dated December 20, 1989, for the sale and purchase of the Honolulu Power Plant Parcels, Iwilei Tank Farm Parcel and the buildings, structures and other improvements (Exhibit 10(d) to HEI's Quarterly Report on Form 10-Q for the quarter ended September 30, 1990, File No. 1-8503). 10.16 Settlement Agreement and General Release made and entered into on February 10, 1994, by and between the Insurance Commissioner as Rehabilitator/Liquidator, the HIG Group, HIGA, HEI, HEIDI and others. (Exhibit 10.20 to HEI's Annual Report on Form 10-K for the fiscal year ended December 31, 1993, File No. 1-8503). *11 Computation of Earnings Per Share of Common Stock. Filed herein as page 72. *12(a) Computation of Ratio of Earnings to Fixed Charges. Filed herein as pages 73 and 74. *13(a) Pages 25 to 68 of HEI's 1994 Annual Report to Stockholders (with the exception of the data incorporated by reference in Part I, Part II, Part III and Part IV, no other data appearing in the 1994 Annual Report to Stockholders is to be deemed filed as part of this Form 10-K Annual Report). *21(a) Subsidiaries of HEI. Filed herein as page 76. *23 Consent of Independent Auditors. Filed herein as page 78. *27(a) HEI and subsidiaries financial data schedule, December 31, 1994 and year ended December 31, 1994. *99.1(a) Annual Report on Form 11-K for the HEI 401-K Retirement Savings Plan for the year ended December 31, 1994. 99.2(a) Amendment 1994-1 to the Hawaiian Electric Industries, Inc. Retirement Savings Plan for incorporation by reference into Registration Statement on Form S-8 (Registration No. 33-52911) (Exhibit 99 to HEI's Quarterly Report on Form 10-Q for the quarter ended March 31, 1994, File No. 1-8503). *99.3(a) Amendment 1994-2 to the Hawaiian Electric Industries, Inc. Retirement Savings Plan for incorporation by reference into Registration Statement on Form S-8 (Registration No. 33-52911). 66 Exhibit no. Description ----------- ----------- HECO: ----- 3(i).1(b) HECO's Certificate of Amendment of Articles of Incorporation (filed June 30, 1987) (Exhibit 3.1 to HECO's Annual Report on Form 10-K for the fiscal year ended December 31, 1988, File No. 1-4955). 3(i).2(b) Statement of Issuance of Shares of Preferred or Special Classes in Series for HECO Series R Preferred Stock filed December 15, 1989 (Exhibit 3.1(a) to HECO's Annual Report on Form 10-K for the fiscal year ended December 31, 1989, File No. 1-4955). 3(i).3 Articles of Amendment to HECO's Amended Articles of Incorporation filed December 21, 1989 (Exhibit 3.1(b) to HECO's Annual Report on Form 10-K for the fiscal year ended December 31, 1989, File No. 1-4955). 3(ii) HECO's By-Laws (Exhibit 3.2 to HECO's Annual Report on Form 10-K for the fiscal year ended December 31, 1988, File No. 1-4955). 4.1 Agreement to provide the SEC with instruments which define the rights of holders of certain long-term debt of HECO, HELCO and MECO (Exhibit 4 to HECO's Annual Report on Form 10-K for the fiscal year ended December 31, 1988, File No. 1-4955). 4.2 Indenture dated as of December 1, 1993 between HECO and The Bank of New York, as Trustee (Exhibit 4(a) to Registration No. 33-51025). 4.3 Indenture dated as of December 1, 1993 among MECO, HECO, as guarantor, and The Bank of New York, as Trustee (Exhibit 4(b) to Registration No. 33-51025). 4.4 Indenture dated as of December 1, 1993 among HELCO, HECO, as guarantor, and The Bank of New York, as Trustee (Exhibit 4(c) to Registration No. 33-51025). 4.5 Officers' Certificate dated as of December 22, 1993, pursuant to Sections 102 and 301 of the Indenture dated as of December 1, 1993 between HECO and The Bank of New York, as Trustee, establishing the $20,000,000 Notes, 5.15% Series Due 1996 (Exhibit 4.5 to HECO's Annual Report on Form 10-K for the fiscal year ended December 31, 1993, File No. 1-4955). 4.6 Officers' Certificate dated as of December 22, 1993, pursuant to Sections 102 and 301 of the Indenture dated as of December 1, 1993 between HECO and The Bank of New York, as Trustee, establishing the $30,000,000 Notes, 5.83% Series Due 1998 (Exhibit 4.6 to HECO's Annual Report on Form 10-K for the fiscal year ended December 31, 1993, File No. 1-4955). 4.7 Officers' Certificate dated as of December 22, 1993, pursuant to Sections 102 and 301 of the Indenture dated as of December 1, 1993 among MECO, HECO, as guarantor, and The Bank of New York, as Trustee, establishing the $10,000,000 Notes, 5.15% Series Due 1996 (Exhibit 4.7 to HECO's Annual Report on Form 10-K for the fiscal year ended December 31, 1993, File No. 1-4955). 67 Exhibit no. Description ----------- ----------- 4.8 Officers' Certificate dated as of December 22, 1993, pursuant to Sections 102 and 301 of the Indenture dated as of December 1, 1993 among HELCO, HECO, as guarantor, and The Bank of New York, as Trustee, establishing the $10,000,000 Notes, 4.85% Series Due 1995 (Exhibit 4.8 to HECO's Annual Report on Form 10-K for the fiscal year ended December 31, 1993, File No. 1-4955). 10.1 Power Purchase Agreement between Kalaeloa Partners, L.P., and HECO dated October 14, 1988 (Exhibit 10(a) to HECO's Quarterly Report on Form 10-Q for the quarter ended September 30, 1988, File No. 1-4955). 10.1(a) Amendment No. 1 to Power Purchase Agreement between HECO and Kalaeloa Partners, L.P., dated June 15, 1989 (Exhibit 10(c) to HECO's Quarterly Report on Form 10-Q for the quarter ended June 30, 1989, File No. 1-4955). 10.1(b) Lease Agreement between Kalaeloa Partners, L.P., as Lessor, and HECO, as Lessee, dated February 27, 1989 (Exhibit 10(d) to HECO's Quarterly Report on Form 10-Q for the quarter ended June 30, 1989, File No. 1-4955). 10.1(c) Restated and Amended Amendment No. 2 to Power Purchase Agreement between HECO and Kalaeloa Partners, L.P., dated February 9, 1990 (Exhibit 10.2(c) to HECO's Annual Report on Form 10-K for the fiscal year ended December 31, 1989, File No. 1-4955). 10.1(d) Agreement to Extend the "Cancellation Window" in the Kalaeloa Power Purchase Agreement dated June 21, 1990 (Exhibit 10(e) to HECO's Quarterly Report on Form 10-Q for the quarter ended June 30, 1990, File No. 1-4955). 10.1(e) Amendment No. 3 to Power Purchase Agreement between HECO and Kalaeloa Partners, L.P., dated December 10, 1991 (Exhibit 10.2(e) to HECO's Annual Report on Form 10-K for the fiscal year ended December 31, 1991, File No. 1-4955). 10.2 Purchase Power Agreement between AES Barbers Point, Inc. and HECO, entered into on March 25, 1988 (Exhibit 10(a) to HECO's Quarterly Report on Form 10-Q for the quarter ended March 31, 1988, File No. 1-4955). 10.2(a) Agreement between HECO and AES Barbers Point, Inc., pursuant to letters dated May 10, 1988 and April 20, 1988 (Exhibit 10.4 to HECO's Annual Report on Form 10-K for the fiscal year ended December 31, 1988, File No. 1-4955). 10.2(b) Amendment No. 1 to the Purchase Power Agreement between AES Barbers Point, Inc. and HECO (Exhibit 10 to HECO's Quarterly Report on Form 10-Q for the quarter ended September 30, 1989, File No. 1-4955). 10.2(c) HECO's Conditional Notice of Acceptance to AES Barbers Point, Inc. dated January 15, 1990 (Exhibit 10.3(c) to HECO's Annual Report on Form 10-K for the fiscal year ended December 31, 1989, File No. 1-4955). 10.3 Power Purchase Agreement between HELCO and Hilo Coast Processing Company dated May 31, 1988 (included in Exhibit 10 to HECO's Quarterly Report on Form 10-Q for the quarter ended June 30, 1988, File No. 1-4955). 68 Exhibit no. Description ----------- ----------- *10.3(a) Letter agreement between HELCO and Hilo Coast Processing Company dated January 5, 1995. 10.4 Agreement between MECO and Hawaiian Commercial & Sugar Company pursuant to letters dated November 29, 1988 and November 1, 1988 (Exhibit 10.8 to HECO's Annual Report on Form 10-K for the fiscal year ended December 31, 1988, File No. 1-4955). 10.4(a) Amended and Restated Power Purchase Agreement by and between A&B- Hawaii, Inc., through its division, Hawaiian Commercial & Sugar Company, and MECO, dated November 30, 1989 (Exhibit 10(e) to HECO's Quarterly Report on Form 10-Q for the quarter ended September 30, 1990, File No. 1-4955). 10.4(b) First Amendment to Amended and Restated Power Purchase Agreement by and between A&B-Hawaii, Inc., through its division, Hawaiian Commercial & Sugar Company, and MECO, dated November 1, 1990, amending the Amended and Restated Power Purchase Agreement dated November 30, 1989 (Exhibit 10(f) to HECO's Quarterly Report on Form 10-Q for the quarter ended September 30, 1990, File No. 1-4955). 10.5 Purchase Power Contract between HELCO and Thermal Power Company, dated March 24, 1986 (Exhibit 10(a) to HECO's Quarterly Report on Form 10-Q for the quarter ended June 30, 1989, File No. 1-4955). 10.5(a) Firm Capacity Amendment between HELCO and Puna Geothermal Venture (assignee of AMOR VIII, who is the assignee of Thermal Power Company), dated July 28, 1989, amending Purchase Power Contract between HELCO and Thermal Power Company, dated March 24, 1986 (Exhibit 10(b) to HECO's Quarterly Report on Form 10-Q for the quarter ended June 30, 1989, File No. 1-4955). 10.6 Purchase Power Contract between HECO and the City and County of Honolulu dated March 10, 1986 (Exhibit 10.9 to HECO's Annual Report on Form 10-K for the fiscal year ended December 31, 1989, File No. 1- 4955). 10.6(a) Firm Capacity Amendment, dated April 8, 1991, to Purchase Power Contract, dated March 10, 1986, by and between HECO and the City & County of Honolulu (Exhibit 10 to HECO's Quarterly Report on Form 10- Q for the quarter ended March 31, 1991, File No. 1-4955). 10.7 Purchase Power Contract between MECO and Zond Pacific, Inc., dated May 24, 1991 (Exhibit 10 to HECO's Quarterly Report on Form 10-Q for the quarter ended June 30, 1991, File No. 1-4955). 10.8 Low Sulfur Fuel Oil Supply Contract by and between CUSA and HECO dated May 29, 1990 (Exhibit 10(a) to HECO's Quarterly Report on Form 10-Q for the quarter ended June 30, 1990, File No. 1-4955). 10.8(a) Second Amendment, dated September 9, 1993, to Low Sulfur Fuel Oil Supply Contract, dated May 29, 1990, by and between CUSA and HECO (Exhibit 10(a) to HECO's Quarterly Report on Form 10-Q for the quarter ended September 30, 1993, File No. 1-4955). 10.8(b) Inter-Island Industrial Fuel Oil and Diesel Fuel Contract by and between CUSA and HECO, MECO, HELCO, HTB and YB dated as of September 23, 1991 (Exhibit 10(a) to HECO's Quarterly Report on Form 10-Q for the quarter ended September 30, 1991, File No. 1-4955). 69 Exhibit no. Description ----------- ----------- 10.8(c) Third Amendment, dated October 1, 1993, to Inter-Island Industrial Fuel Oil and Diesel Fuel Contract dated September 23, 1991, by and between CUSA and HECO, MECO, HELCO, HTB and YB (Exhibit 10(b) to HECO's Quarterly Report on Form 10-Q for the quarter ended September 30, 1993, File No. 1-4955). 10.8(d) Facilities and Operating Contract by and between CUSA and HECO dated as of May 29, 1990 (Exhibit 10.10(b) to HECO's Annual Report Form 10- K for the fiscal year ended December 31, 1991, File No. 1-4955). 10.8(e) Second Amendment, dated September 21, 1993, to the Facilities and Operating Contract dated May 29, 1990, by and between CUSA and HECO (Exhibit 10(c) to HECO's Quarterly Report on Form 10-Q for the quarter ended September 30, 1993, File No. 1-4955). 10.9 Low Sulfur Fuel Oil Supply Contract between HIRI (succeeded by BHP) and HECO dated April 25, 1990 (Exhibit 10(b) to HECO's Quarterly Report on Form 10-Q for the quarter ended June 30, 1990, File No. 1- 4955). 10.9(a) First Amendment, dated October 1, 1993, to Low Sulfur Fuel Oil Supply Contract, dated April 25, 1990, between BHP and HECO (Exhibit 10(d) to HECO's Quarterly Report on Form 10-Q for the quarter ended September 30, 1993, File No. 1-4955). 10.9(b) Inter-Island Industrial Fuel Oil and Diesel Fuel Contract by and between HIRI (succeeded by BHP) and HECO, MECO and HELCO dated September 23, 1991 (Exhibit 10(b) to HECO's Quarterly Report on Form 10-Q for the quarter ended September 30, 1991, File No. 1-4955). 10.9(c) Second Amendment, dated October 7, 1993, to Inter-Island Industrial Fuel Oil and Diesel Fuel Contract, dated September 23, 1991 by and between BHP and HECO, MECO and HELCO (Exhibit 10(e) to HECO's Quarterly Report on Form 10-Q for the quarter ended September 30, 1993, File No. 1-4955). 10.10 Low Sulfur Fuel Oil Sale/Purchase Contract between HECO and C. Itoh & Co. (America), Inc. dated June 7, 1990 (Exhibit 10(c) to HECO's Quarterly Report on Form 10-Q for the quarter ended June 30, 1990, File No. 1-4955). 10.11 Contract of private carriage by and between HITI and HELCO dated November 10, 1993 (Exhibit 10.13 to HECO's Annual Report on Form 10-K for the fiscal year ended December 31, 1993, File No. 1-4955). 10.12 Contract of private carriage by and between HITI and MECO dated November 12, 1993 (Exhibit 10.14 to HECO's Annual Report on Form 10-K for the fiscal year ended December 1, 1993, File No. 1-4955). 10.13 HECO Non-employee Directors' Deferred Compensation Plan (Exhibit 10.16 to HECO's Annual Report on Form 10-K for the fiscal year ended December 31, 1990, File No. 1-4955). 10.14 HEI and HECO Executives' Deferred Compensation Agreement. The agreement pertains to and is substantially identical for all the HEI and HECO executive officers (Exhibit 10.15 to HEI's Annual Report on Form 10-K for the fiscal year ended December 31, 1991, File No. 1- 8503). 70 Exhibit no. Description ----------- ----------- 10.15 Contract of Sale between HECO and Malama Waterfront Corp., dated December 20, 1989, for the sale and purchase of the Honolulu Power Plant Parcels, Iwilei Tank Farm Parcel and the buildings, structures and other improvements (Exhibit 10.18 to HEI's Annual Report on Form 10-K for the fiscal year ended December 31, 1989, File No. 1-8503). 10.15(a) First Amendment to Contract of Sale by and between HECO and Malama Waterfront Corp., dated September 25, 1990, amending the Contract of Sale between HECO and Malama Waterfront Corp., dated December 20, 1989, for the sale and purchase of the Honolulu Power Plant Parcels, Iwilei Tank Farm Parcel and the buildings, structures and other improvements (Exhibit 10(d) to HEI's Quarterly Report on Form 10-Q for the quarter ended September 30, 1990, File No. 1-8503). *11 Computation of Earnings Per Share of Common Stock. See note on page 2 of HECO's 1994 Annual Report to Stockholder attached as Exhibit 13(b) hereto. *12(b) Computation of Ratio of Earnings to Fixed Charges. Filed herein as page 75. *13(b) Pages 2 to 31 and 33 of HECO's 1994 Annual Report to Stockholder (with the exception of the data incorporated by reference in Part I, Part II, Part III and Part IV, no other data appearing in the 1994 Annual Report to Stockholder is to be deemed filed as part of this Form 10-K Annual Report). *21(b) Subsidiaries of HECO. Filed herein as page 77. *27(b) HECO and subsidiaries financial data schedule, December 31, 1994 and year ended December 31, 1994. *99(b) Reconciliation of electric utility operating income per HEI and HECO Consolidated Statements of Income. Filed herein as page 79. 71 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrants have duly caused this report to be signed on their behalf by the undersigned, thereunto duly authorized. The signatures of the undersigned companies shall be deemed to relate only to matters having reference to such companies and any subsidiaries thereof. HAWAIIAN ELECTRIC INDUSTRIES, INC. HAWAIIAN ELECTRIC COMPANY, INC. (Registrant) (Registrant) By /s/ Robert F. Mougeot By /s/ Paul Oyer ------------------------------- ---------------------------- Robert F. Mougeot Paul A. Oyer Financial Vice President and Financial Vice President, Chief Financial Officer of HEI Treasurer and Director of HECO (Principal Financial Officer of (Principal Financial Officer of HEI) HECO) Date: March 21, 1995 Date: March 21, 1995 Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrants and in their capacities at March 21, 1995. The signature of each of the undersigned shall be deemed to relate only to matters having reference to the above-named companies and any subsidiaries thereof. SIGNATURE TITLE --------- ----- /s/ Robert F. Clarke President and Director of HEI ------------------------------------ Chairman of the Board of Directors of HECO Robert F. Clarke (Chief Executive Officer of HEI) /s/ Harwood D. Williamson Director of HEI ------------------------------------ President and Director of HECO Harwood D. Williamson (Chief Executive Officer of HECO) /s/ Robert F. Mougeot Financial Vice President and ------------------------------------ Chief Financial Officer of HEI Robert F. Mougeot (Principal Financial Officer of HEI) /s/ Curtis Y. Harada Controller of HEI ------------------------------------ (Principal Accounting Officer of HEI) Curtis Y. Harada /s/ Paul Oyer Financial Vice President, Treasurer and ------------------------------------ Director of HECO Paul A. Oyer (Principal Financial Officer of HECO) 80 SIGNATURES (Continued) SIGNATURE TITLE --------- ----- /s/ Ernest T. Shiraki Controller of HECO ------------------------------------ (Principal Accounting Officer of HECO) Ernest T. Shiraki /s/ Edwin L. Carter Director of HEI ------------------------------------ Edwin L. Carter /s/ John D. Field Director of HEI ------------------------------------ John D. Field /s/ Richard Henderson Director of HEI and HECO ------------------------------------ Richard Henderson /s/ Ben F. Kaito Director of HEI and HECO ------------------------------------ Ben F. Kaito /s/ Mildred D. Kosaki Director of HECO ------------------------------------ Mildred D. Kosaki /s/Victor Hao Li Director of HEI ------------------------------------ Victor Hao Li /s/ Bill D. Mills Director of HEI ------------------------------------ Bill D. Mills /s/ A. Maurice Myers Director of HEI ------------------------------------ A. Maurice Myers /s/ Ruth M. Ono Director of HEI ------------------------------------ Ruth M. Ono 81 SIGNATURES (Continued) SIGNATURE TITLE --------- ----- Director of HEI and HECO ------------------------------------ Diane J. Plotts Director of HEI ------------------------------------ Oswald K. Stender Director of HEI ------------------------------------ Kelvin H. Taketa /s/ Jeffrey N. Watanabe Director of HEI ------------------------------------ Jeffrey N. Watanabe Director of HECO ------------------------------------ Paul C. Yuen 82 EX-11 2 HEI COMP OF EARNINGS PER SHARE HEI Exhibit 11
Hawaiian Electric Industries, Inc. COMPUTATION OF EARNINGS PER SHARE OF COMMON STOCK Years ended December 31, 1994, 1993, 1992, 1991 and 1990 (in thousands, except per share amounts) 1994 1993 1992 1991 1990 ------- ------- -------- ------- ------- Net income (loss) Continuing operations $73,030 $61,684 $ 61,715 $55,620 $42,895 Discontinued operations -- (13,025) (73,297) (794) 707 ------- ------- -------- ------- ------- $73,030 $48,659 $(11,582) $54,826 $43,602 ======= ======= ======== ======= ======= Weighted average number of common shares outstanding 28,137 25,938 24,275 22,882 21,559 ======= ======= ======== ======= ======= Earnings (loss) per common share Continuing operations $2.60 $2.38 $2.54 $2.43 $1.99 Discontinued operations -- (0.50) (3.02) (0.03) 0.03 ------- ------- -------- ------- ------- $2.60 $1.88 $(0.48) $2.40 $2.02 ======= ======= ======== ======= =======
Note: The dilutive effect of stock options is not material. 72 EX-12.A 3 HEI COMP OF RATIO OF EARNINGS HEI Exhibit 12(a) (page 1 of 2) Hawaiian Electric Industries, Inc. COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES Years ended December 31, 1994, 1993, 1992, 1991 and 1990
1994 1993 1992 --------------------- ---------------------- --------------------- (dollars in thousands) (1) (2) (1) (2) (1) (2) ----------------------------------------------------------------------------------------------------------------- FIXED CHARGES Total interest charges The Company (3) $82,306 $158,815 $68,254 $145,905 $67,559 $161,756 Proportionate share of fifty- percent-owned persons 539 539 564 564 1,051 1,051 Interest component of rentals 3,819 3,819 3,944 3,944 3,254 3,254 Pre-tax preferred stock dividend requirements of subsidiaries 11,899 11,899 11,018 11,018 9,606 9,606 ------- -------- -------- -------- -------- -------- TOTAL FIXED CHARGES $ 98,563 $175,072 $ 83,780 $161,431 $81,470 $175,667 ======= ======== ======== ======== ======== ======== EARNINGS Pre-tax income from continuing operations $126,049 $126,049 $108,770 $108,770 $ 91,244 $ 91,244 Undistributed earnings from less than fifty-percent-owned person -- -- -- -- (244) (244) Fixed charges, as shown 98,563 175,072 83,780 161,431 81,470 175,667 Interest capitalized The Company (4,924) (4,924) (3,881) (3,881) (2,104) (2,104) Proportionate share of fifty- percent-owned persons (539) (539) (408) (408) (803) (803) ------- -------- -------- -------- -------- -------- EARNINGS AVAILABE FOR FIXED CHARGES $219,149 $295,658 $188,261 $265,912 $169,563 $263,760 ======= ======== ======== ======== ======== ======== RATIO OF EARNINGS TO FIXED CHARGES 2.22 1.69 2.25 1.65 2.08 1.50 ======= ======== ======== ======== ======== ========
(1) Excluding interest on ASB deposits. (2) Including interest on ASB deposits. (3) Total interest charges exclude interest on nonrecourse debt from leveraged leases which is not included in interest expense in HEI's consolidated statements of income. 73 HEI Exhibit 12(a) (page 2 of 2) Hawaiian Electric Industries, Inc. COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES Years ended December 31, 1994, 1993, 1992, 1991 and 1990--Continued
1991 1990 ----------------------------------------------- (dollars in thousands) (1) (2) (1) (2) --------------------------------------------------------------------------------------- FIXED CHARGES Total interest charges The Company (3) $ 69,957 $168,691 $ 76,897 $162,753 Proportionate share of fifty-percent-owned persons 1,875 1,875 406 406 Interest component of rentals 2,231 2,231 2,197 2,197 Pre-tax preferred stock dividend requirements of subsidiaries 10,449 10,449 11,450 11,450 -------- -------- -------- -------- TOTAL FIXED CHARGES $ 84,512 $183,246 $ 90,950 $176,806 ======== ======== ======== ======== EARNINGS Pre-tax income from continuing operations $ 87,953 $ 87,953 $ 74,088 $ 74,088 Undistributed earnings from less than fifty-percent-owned person (278) (278) 7 7 Fixed charges, as shown 84,512 183,246 90,950 176,806 Interest capitalized The Company (1,945) (1,945) (4,360) (4,360) Proportionate share of fifty-percent-owned persons (1,875) (1,875) (406) (406) -------- -------- -------- -------- EARNINGS AVAILABLE FOR FIXED CHARGES $168,367 $267,101 $160,279 $246,135 ======== ======== ======== ======== RATIO OF EARNINGS TO FIXED CHARGES 1.99 1.46 1.76 1.39 ======== ======== ======== ========
(1) Excluding interest on ASB deposits. (2) Including interest on ASB deposits. (3) Total interest charges exclude interest on nonrecourse debt from leveraged leases which is not included in interest expense in HEI's consolidated statements of income. 74 EX-12.B 4 HECO COMP OF RATIO OF EARNINGS HECO Exhibit 12(b) Hawaiian Electric Company, Inc. COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES Years ended December 31, 1994, 1993 1992, 1991 and 1990
(dollars in thousands) 1994 1993 1992 1991 1990 --------------------------------------------------------------------------------------------------- FIXED CHARGES Total interest charges $ 37,340 $ 35,287 $ 33,011 $ 33,248 $ 30,874 Interest component of rentals 808 970 1,070 1,130 1,341 Pretax preferred stock dividend requirements of subsidiaries 4,651 3,425 3,117 3,409 3,490 -------- -------- -------- -------- -------- TOTAL FIXED CHARGES $ 42,799 $ 39,682 $ 37,198 $ 37,787 $ 35,705 ======== ======== ======== ======== ======== EARNINGS Income before preferred stock dividends of HECO $ 65,961 $ 56,126 $ 53,678 $ 46,210 $ 48,484 Fixed charges, as shown 42,799 39,682 37,198 37,787 35,705 Income taxes (see note below) 43,588 36,897 23,843 23,816 23,927 Interest capitalized on AFUDC for borrowed funds (4,043) (3,869) (2,095) (1,307) (1,375) -------- -------- -------- -------- -------- EARNINGS AVAILABLE FOR FIXED CHARGES $148,305 $128,836 $112,624 $106,506 $106,741 ======== ======== ======== ======== ======== RATIO OF EARNINGS TO FIXED CHARGES 3.47 3.25 3.03 2.82 2.99 ======== ======== ======== ======== ======== NOTE: Income taxes is comprised of the following Income tax expense relating to operating income for regulatory purposes $ 43,820 $ 37,007 $ 26,254 $ 24,137 $ 24,145 Income tax benefit relating to nonoperating loss (232) (110) (2,411) (321) (218) -------- -------- -------- -------- -------- $ 43,588 $ 36,897 $ 23,843 $ 23,816 $ 23,927 ======== ======== ======== ======== ========
75 EX-21.A 5 HEI LIST OF SUBSIDIARIES HEI Exhibit 21(a) Hawaiian Electric Industries, Inc. SUBSIDIARIES OF THE REGISTRANT The following is a list of all subsidiary corporations of the registrant as of March 21, 1995:
Name Place of incorporation ---------------------------------------------------------------------------------------------------------------- Hawaiian Electric Company, Inc., including subsidiaries Maui Electric Company, Limited and Hawaii Electric Light Company, Inc. State of Hawaii HEI Investment Corp. State of Hawaii Lalamilo Ventures, Inc. State of Hawaii Malama Pacific Corp., including subsidiaries Malama Project-I, Inc., Malama Waterfront Corp., Malama Property Investment Corp., Malama Development Corp., Malama Realty Corp., Malama Elua Corp., TMG Service Corp., Malama Hoaloha Corp., Malama Mohala Corp. and Baldwin*Malama (a limited partnership in which Malama Development Corp. is the sole general partner) State of Hawaii Hawaiian Tug & Barge Corp., including subsidiary Young Brothers, Limited State of Hawaii HEI Diversified, Inc., including subsidiary American Savings Bank, State of Hawaii (except F.S.B. and its subsidiaries, American Savings Investment Corp., American Savings Bank, ASB Service Corporation, Adcommunications, Inc. and F.S.B., which is federally Associated Mortgage, Inc. chartered) Pacific Energy Conservation Services, Inc. State of Hawaii
76 EX-21.B 6 HECO LIST OF SUBSIDIARIES HECO Exhibit 21(b) Hawaiian Electric Company, Inc. SUBSIDIARIES OF THE REGISTRANT The following is a list of all subsidiary corporations of the registrant as of March 21, 1995:
Name Place of incorporation ---------------------------------------------------------------------------------------------------------------- Maui Electric Company, Limited State of Hawaii Hawaii Electric Light Company, Inc. State of Hawaii
77 EX-23 7 CONSENT OF KPMG PEAT MARWICK [KPMG Peat Marwick letterhead] HEI Exhibit 23 The Board of Directors Hawaiian Electric Industries, Inc.: We consent to incorporation by reference in Registration Statement Nos. 33-56561 and 33-58820 on Form S-3 and in Registration Statement Nos. 33-65234 and 33- 52911 on Form S-8 of Hawaiian Electric Industries, Inc. of our report dated January 25 1995, relating to the consolidated balance sheets of Hawaiian Electric Industries, Inc. and subsidiaries as of December 31, 1994 and 1993, 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, 1994, which report is incorporated by reference in the 1994 annual report on Form 10-K of Hawaiian Electric Industries, Inc. Our report refers to changes in the method of accounting for income taxes and postretirement benefits other than pensions effective January 1, 1993. We also consent to incorporation by reference of our report dated January 25 1995 relating to the financial statement schedules of Hawaiian Electric Industries, Inc. in the aforementioned 1994 annual report on Form 10-K, which report is included in said Form 10-K. /s/ KPMG Peat Marwick LLP Honolulu, Hawaii March 21, 1995 78 EX-99.B 8 ELECTRIC UTILITY OP. INCOME HECO Exhibit 99(b) Hawaiian Electric Company, Inc. RECONCILIATION OF ELECTRIC UTILITY OPERATING INCOME PER HEI AND HECO CONSOLIDATED STATEMENTS OF INCOME
Years ended December 31, -------------------------------- (in thousands) 1994 1993 1992 --------------------------------------------------------------------------- Operating income from regulated and nonregulated activities before income taxes (per HEI Consolidated Statements of Income) $136,628 $119,565 $103,841 Deduct: Income taxes on regulated activities (43,820) (37,007) (26,254) Revenues from nonregulated activities (6,411) (5,100) (1,761) Add: Expenses from nonregulated activities 915 627 1,213 -------- -------- -------- Operating income from regulated activities after income taxes (per HECO Consolidated Statements of Income) $ 87,312 $ 78,085 $ 77,039 ======== ======== ========
79 EX-4.7 9 PRICING SUPPLEMENT #10 HEI EXHIBIT 4.7 Pricing Supplement No. 10 Filing under Rule424(b)(3) Dated August 10, 1994 Registration File No. 33-58820 (To Prospectus dated June 11, 1993) $250,000,000 HAWAIIAN ELECTRIC INDUSTRIES, INC. MEDIUM-TERM NOTES, SERIES B Principal amount: $35,000,000 Floating Rate Notes: Interest Rate (if fixed rate): N/A Base Rate: LIBOR Stated Maturity Date: August 23, 1999 Index Maturity: 3 months Issue price (as a percentage of Spread: 0.45% principal amount): 100% Spread Multiplier: N/A Selling Agents' commission (%): 0.50% Maximum Interest Rate: N/A Purchasing Agents' discount Minimum Interest Rate: N/A or commission (%): N/A Initial Interest Rate: To be Net proceeds to the Company (%): $34,825,000 determined on August 19, 1994 Settlement date and time (original Interest Reset Period: Quarterly Issue date): August 23, 1994 Interest Determination Date(s): A/S Initial Redemption Date (if any): N/A Calculation Date(s): A/S Initial Redemption Percentage: N/A Interest Payment Period: Quarterly Annual Redemption Interest Payment and Reset Dates: Percentage Reduction: N/A 23rd day of February, May, August Optional Repayment Dates: N/A and November of each year and at Currency of Denomination: U.S. Maturity, with such exceptions Currency of Payment: U.S. as are described in the Prospectus Minimum Authorized if an interest Payment or Reset Denominations: $1,000 Date would otherwise be a day that Additional Terms: N/A is not a Business Day (as defined in the Prospectus) Regular Record Date(s): A/S Calculation Agent: Citibank, N.A.
Redemption prices (if any): The Redemption Price shall initially be __ N/A __% of the principal amount of such Notes to be redeemed and shall decline (but not below par) on each anniversary of the Initial Redemption Date by __ N/A __% of the principal amount to be redeemed until the Redemption Price is 100% of such principal amount. Use of Proceeds and Additional Terms: All or substantially all of the net proceeds to Hawaiian Electric Industries, Inc. ("HEI") from the sale of the Medium-Term Notes, Series B, covered by this Pricing Supplement will be used by HEI to retire commercial paper and/or temporarily invest in short-term securities pending such retirement. As of August 10, 1994, HEI's commercial paper outstanding totaled approximately $33 million. Such commercial paper bore interest at prevailing market rates and had maturities varying between 5 and 47 days. As of the date of this Pricing Supplement, the aggregate initial public offering price of the Notes which have been sold (including the Notes to which this Pricing Supplement relates) is $72,000,000. "N/A" as used herein means "Not applicable." "A/S" as used herein means "As stated in the Prospectus referred to above." MERRILL LYNCH & CO. GOLDMAN, SACHS & CO. EX-10.3A 10 LETTER AGREEMENT BETWEEN HELCO AND HILO HECO Exhibit 10.3(a) -------------------- [HELCO LETTERHEAD] January 5, 1995 Mr. James S. Andrasick Chairman of the Board Hilo Coast Processing Company c/o C. Brewer and Company, Ltd. 827 Fort Street Honolulu, Hawaii 96813 Re: HCPC Power Plant, Purchase Power Amendment ------------------------------------------ Dear Jim: HELCO wishes to submit for your consideration this counterproposal for an amendment to the current purchase power agreement (PPA). This proposal is substantially based on HELCOs proposal of December 22, 1994, the intervening Bankruptcy Court proceedings, and subsequent discussions amongst the parties. Again, for ease of reference the proposal is restated herein in its entirety. This proposal supersedes all prior proposals relating to an amendment of the PPA. This letter (the Letter Agreement), when accepted by you, is an expression of the basis on which HELCO and HCPC are willing to enter into a definitive agreement to amend the PPA. 1. Agreement --------- HELCO offers to amend the PPA, as set forth herein and subject to the terms and conditions herein, along with any other terms and conditions which are customary for transactions of this type and consistent with this Letter Agreement. 2. Term of Amendment ----------------- From the effective date of the Definitive Agreement through December 31, 1999. 3. HELCO Dispatch -------------- Minimum of 4,000 KW during 48 operating weeks. Mr. James S. Andresick January 5, 1995 Page 2 4. Capacity Guarantee ------------------ HCPC shall furnish HELCO 20,000 KW of capacity up to May 31, 1995 and 22,000 KW of capacity thereafter. (Kilovars to be discussed.) This capacity guarantee is based on the assumptions that such levels are within HCPCs permit limitations and conditions, and any necessary substation upgrades (see Substation Upgrades below) are completed by May 31, 1995 and, therefore, is conditioned upon compliance with applicable PUC rules and actual completion of the upgrades on or before that date. Accordingly, the effective date of the increase to 22,000 KW shall be delayed if necessary until such time as those conditions are met. HCPC must use its best efforts to meet these conditions in a timely manner. 5. Plant Shutdown Period --------------------- HCPC shall have the right to shut down for 4 consecutive weeks during each twelve-month period. The period shall be mutually agreeable to HCPC and HELCO. 6. Capacity Charge --------------- HELCO will pay HCPC for the Capacity Guarantee a graduated capacity charge which would average out to $218/kw-yr over the contract term. Specifically, HELCO will pay $167/kw-yr through December 31, 1995 and $231/kw-yr during the remainder of the term. Such amount shall be payable monthly within ten (10) days after the last day of the calendar month. Monthly repayment of the cash advance will be calculated so that HCPCs cash flow from the Capacity Charge net of such repayments is the same as that which would result from a levelized capacity charge of $218/kw-yr and repayment in monthly installments over the term of the Definitive Agreement. 7. Power Sales ----------- During each contract year, HELCO shall purchase at least 94% on a weekly basis and at least 98% on an annual basis of the following amounts of energy (subject to adjustment based on the effective date condition stated in "Capacity Guarantee" above):
Projected Assumed Contract Contract Time Period Capacity Guarantee Week Amount Year Amount ----------- ------------------ ----------- ----------- Effective Date - 5/31/95 20,000 KW 2,025,500 KWH 97,222,000 KWH 6/1/95 - 12/31/99 22,000 KW 2,192,400 KWH 105,235,200 KWH
Mr. James S. Andresick January 5, 1995 Page 3 8. Energy Rates ------------ The rate for energy shall be the same as provided in the PPA, except that HELCO shall waive the energy rate discount provision. 9. Fuel Cost Differential ---------------------- It is anticipated that HCPC will exhaust its existing supply of coal before it is able to order and receive another shipment of coal. Accordingly, HCPC will be required to utilize diesel fuel to operate the plant from the time the coal is exhausted and until receipt of the first shipment of new coal supplies, approximately six weeks from the date of order (the Diesel Period). HELCO agrees to compensate HCPC for the Cost Differential incurred by HCPC during this Diesel Period, unless otherwise provided by the Interim Operating Agreement defined in Section20 herein. Such Cost Differential for this period shall be the actual price of diesel utilized by HCPC less the cost which would have been incurred by HCPC had it utilized an equivalent amount of coal for such period. Such cost differential shall be payable weekly in advance and reconciled within fifteen (15) days of the end of the Diesel Period. Provided, however, that HELCO may, at its option, provide to HCPC the diesel required to operate the plant during this period, in which case HELCO shall offset the lower of: (a) its cost for such diesel or (b) through January 31, 1995, the cost which would have been incurred by HCPC had it utilized an equivalent amount of coal against the next due energy payment and no other cost differential shall be owed to HCPC. After January 31, 1995, during the Diesel Period HELCO shall offset its cost for such diesel against the next due energy payment and, in addition, shall pay HCPC one-half of the difference between the energy payment and the cost which would have been incurred by HCPC had it utilized an equivalent amount of coal for such period. Furthermore, during such Diesel Period the minimum power sales levels in Section 7, "Power Sales," shall not apply and HELCO shall have the right to place the unit into standby reserve during periods in which the capacity is not needed by HELCO, such as weekend shutdowns. 10. Substation Upgrades ------------------- If necessary, and subject to compliance with applicable PUC rules, HELCO shall upgrade the substation and transmission lines interconnecting the HCPC Power Plant to HELCOs system in order to accommodate HCPC's supply of 22,000 KW of power. Any costs incurred by HELCO shall be prorated between HELCO and HCPC in proportion to the relative value derived by each party from the upgrade, pursuant to terms to be discussed. (For example, if the cost were $500,000 for an upgrade with a 20-year life, and HCPC derived five years of value from the upgrade, its share of the cost would be $125,000.) Mr. James S. Andrasick January 5, 1995 Page 4 11. Cash Advance ------------ HELCO shall advance to HCPC, upon execution of the Definitive Agreement and related documentation, a cash advance of $6 million to be directed $3.5 million for payment of its employee severance payments and similar employee benefit obligations and $2.5 million for power plant capital improvements. With regard to the $2.5 million, HCPC shall be required to use such funds for items, such as the stack extension, necessary for HCPC to continue power plant operations. Such advance is to be appropriately documented, shall bear interest at the rate of nine percent (9%), and shall be repaid in substantially equal installments over the term of the Definitive Agreement through an offset of payments owed by HELCO to HCPC for capacity. In addition, the making of such advance shall be secured by and conditioned upon HCPCOs arranging for HELCO to receive, contemporaneously with the making of the cash advance, security satisfactory to HELCO consisting of: (i) at all times during the term of the Definitive Agreement, agriculturally zoned lands having a fair market Ohighest and best useO appraised value at least equal to the unpaid principal balance of the cash advance (the "Land Security"), (ii) superpriority status pursuant to Section 364 of the Bankruptcy Code and (iii) a security interest in the proceeds of the PPA, to the extent not subject to the existing assignment of proceeds in favor of the State. The appraised value of the initial 600 acres, as well as any additional acreage necessary to meet the initial $6 million threshold, shall be subject to confirmation by a mutually agreed upon independent appraiser. The Land Security will be released by HELCO ratably as the principal on the cash advance is repaid. Such security shall be evidenced by the execution and filing of appropriate security agreements and other documents and shall have priority over the claims of other HCPC creditors. Furthermore, in the event that HCPC defaults on repayment of the cash advance and HELCO forecloses on the Land Security, HCPC agrees to arrange for the liquidation, within 18 months of the default, of a sufficient portion of such Land Security to cover HELCO's remaining principal balance on the cash advance and to remit the proceeds from such liquidation to HELCO in lieu of the Land Security itself. Should the liquidation proceeds not be sufficient to cover HELCO's remaining principal balance in full, HCPC shall cause to be contributed and liquidated additional land to make up the shortfall. Should the power plant be sold or the PPA otherwise terminate prior to December 31, 1999, or HCPC default on its obligations to generate power under the PPA or this amendment, any unpaid balance of the cash advance shall be immediately due and payable. 12. Revolving Fuel Line of Credit ----------------------------- HELCO agrees to provide a revolving line of credit to HCPC of up to $2 million, bearing interest at the rate of nine percent (9%) per annum, to facilitate HCPC's purchase of fuel to operate the Power Plant and to finance other operating expenses currently incurred in the operation of the Power Plant. Such drawings under this revolving line of credit shall be restricted to such use and shall be repaid Mr. James S. Andresick January 5, 1995 Page 5 through an offset of energy payments owed by HELCO to HCPC until such time as the drawing is repaid in full; provided, however, that in the event energy payments are not projected by HELCO to be sufficient to repay the revolving line of credit within a reasonable revolving line of credit within a reasonable time, HELCO shall have the right to offset the balance against capacity payments. The outstanding balance under this revolving fuel line of credit shall be secured by and conditioned upon HCPC's granting HELCO, contemporaneously with HELCOs issuance of the line of credit, a lien on such fuel and superpriority status pursuant to Section 364 of the Bankruptcy Code. Such security shall be evidenced by the execution and filing of appropriate security agreements and shall have priority over the claims of other HCPC creditors. Should the power plant be sold or the PPA otherwise terminate prior to December 31, 1999, or HCPC default on its obligations to generate power under the PPA or the Definitive Agreement, any unpaid balance of the revolving fuel line of credit shall be immediately due and payable. 13. Option to Purchase Power Plant ------------------------------ HELCO shall waive the purchase option under Section XVI.B of the PPA. 14. PUC Approval ------------ HELCO shall seek a decision and order from the PUC approving the Definitive Agreement. HELCO shall have the right to terminate this amendment if the PUC disapproves, or if the PUC does not approve by interim or final decision and order, acceptable to HELCO in its sole discretion, which shall not be unreasonably invoked, within 180 days of the execution of the Definitive Agreement, inclusion of the energy and capacity costs incurred by HELCO pursuant to this amendment in its revenue requirements for ratemaking purposes or for the purpose of determining the reasonableness of HELCO's rates, upon 45 days written notice to HCPC. 15. Sugar Provisions ---------------- HELCO to waive other PPA provisions relating to sugar, subject to a more detailed review of the PPA to determine exactly which provisions would be affected. 16. Agreement Approval ------------------ Any amendment shall be contingent on obtaining all necessary final approvals of the Definitive Agreement and the proposed transaction, including without limitation, approvals by the Bankruptcy Court and by the respective Boards of Directors of HELCO and HCPC. For purposes of this provision, as well as any other provision herein requiring the parties to obtain certain approvals (including, but not limited to, PUC approval), the parties shall use their good faith efforts to obtain such approvals. Mr. James S. Andrasick January 5, 1995 Page 6 17. Termination of Offer -------------------- The offer set forth in this Letter Agreement terminates if not signed by HCPC and delivered to HELCO by the close of business today, January 5, 1995 (the Acceptance Date), or upon revocation in writing by HELCO at its sole discretion (Revocation), or upon rejection by HCPC, whichever is earlier. The offer shall be deemed rejected by HCPC and the offer shall thereupon terminate (a) if HCPC gives notice of rejection to HELCO, (b) if HCPC counters the offer set forth in this Letter Agreement, (c) if HCPC ceases production of power or otherwise defaults on its obligations under the PPA, or (d) for any other reasons deemed by law to be a rejection of an offer. 18. Termination of Letter Agreement ------------------------------- After acceptance on or before the Acceptance Date, this Letter Agreement shall terminate (a) in the event that a Definitive Agreement is not executed on or before thirty (30) calendar days of the Acceptance Date, or (b) if HCPC ceases production of power or otherwise defaults on its obligations under the PPA. 19. Effect of Bankruptcy -------------------- (a) In the event any cash advance, or drawing under the revolving fuel line of credit, is made pursuant to the Definitive Agreement and to the extent they are not repaid from payments under the PPA, as amended, repayments of such amounts shall constitute a superpriority expense of the HCPC bankruptcy estate, pursuant to Section 364 of the Bankruptcy Code. (b) At the same time as HCPC seeks Bankruptcy Court approval of the Definitive Agreement it shall also seek authorization from the Bankruptcy Court to assume the PPA, as amended by the Definitive Agreement. HELCOs agreement to the terms herein is made on the condition that HCPC also assumes the PPA. (c) In the event there is an occurrence of total default by HCPC as defined under Section XV of the PPA, HELCO shall have the right but not any obligation immediately to take possession of the HCPC Power Plant for the remaining term specified under the Definitive Agreement and to generate power regardless of whether or not it exercises its Default Purchase Option under the PPA. To the extent any automatic stay may apply, the parties agree that HELCO will be entitled to immediate relief from any automatic stay to permit it to take immediate possession of the HCPC Power Plant and generate power. The parties agree that in the event of such total default by HCPC, HELCO would have good cause, within the meaning of Section 362 of the Bankruptcy Code, to exercise its right to take immediate possession of the HCPC Power Plant and to generate power, in order to protect its interests under the PPA or the Definitive Agreement, to protect the Mr. James S. Andrasick January 5, 1995 Page 7 public interest and to preserve the value of the HCPC Power Plant for the purposes of an effective reorganization of HCPC. 20. Interim Operating Agreement --------------------------- During the period between the execution of this Letter Agreement by HCPC and the receipt of the cash advance described in Section 11 herein (the Interim Period), HCPC shall continue to operate the plant and furnish HELCO 20,000 KW of capacity. HELCO and HCPC shall enter into an Interim Period Operating Agreement on or before the date of acceptance by HCPC of this Letter Agreement, or as soon thereafter as practicable thereafter, but not more than 14 days, which defines the rights and obligations of the parties during the Interim Period. HELCO may request an interim decision and order from the PUC allowing the recovery of energy payments in excess of that under the current PPA. 21. Definitive Agreement -------------------- Notwithstanding any language herein to the contrary, the completion of each of the transactions contemplated herein shall be subject to negotiation and execution of a definitive agreement and of all documents related to the transactions incorporated therein, providing for an amendment to the PPA pursuant to the terms of this Letter Agreement and containing terms and provisions satisfactory to HELCO (the Definitive Agreement). Promptly following the execution and return to HELCO of this Letter Agreement both parties agree to instruct their respective legal counsel to prepare the Definitive Agreement. 22. Extension of Temporary Restraining Order -------------------------------------------- Pending finalization and court approval of the Interim Operating Agreement, the parties agree to extend the temporary restraining order until such finalization and court approval occurs, except that the extension shall be on the same terms relating to capacity charge and fuel cost differential set forth in this Letter Agreement. In the event that, pursuant to the Definitive Agreement, HELCO is to pay to the State of Hawaii, in connection with HCPCs loan from the Department of Agriculture, an amount other than the $100,000 currently payable under the Assignment of Proceeds from the Sale of Electric Energy, HCPC shall obtain any necessary consents, including any consent from the State of Hawaii. Mr. James S. Andrasick January 5, 1995 Page 8 If the foregoing is acceptable, please so indicate by executing and returning the enclosed copy of this Letter Agreement by today, January 5, 1995, the Acceptance Date. Very truly yours, /s/ Warren H. W. Lee ACCEPTED AND AGREED TO on January 5 , 1995 ----------------------- HILO COAST PROCESSING COMPANY By /s/ James S. Andrasick ------------------------------- Its Chairman EX-13.A 11 HEI 1994 ANNUAL REPORT HEI Exhibit 13(a) SELECTED FINANCIAL DATA -------------------------------------------------------------------------------- Hawaiian Electric Industries, Inc. and subsidiaries
Years ended December 31 1994 1993 1992 1991 1990 -------------------------------------------------------------------------------------------------------------------------- (dollars in thousands, except per share amounts) RESULTS OF OPERATIONS Revenues $1,188,523 $1,142,170 $1,031,383 $ 993,242 $ 928,702 Net income (loss) Continuing operations $ 73,030 $ 61,684 $ 61,715 $ 55,620 $ 42,895 Discontinued operations -- (13,025) (73,297) (794) 707 -------------------------------------------------------------------------------------------------------------------------- $ 73,030 $ 48,659 $ (11,582) $ 54,826 $ 43,602 ========================================================================================================================== Earnings (loss) per common share Continuing operations $ 2.60 $ 2.38 $ 2.54 $ 2.43 $ 1.99 Discontinued operations -- (0.50) (3.02) (0.03) 0.03 -------------------------------------------------------------------------------------------------------------------------- $ 2.60 $ 1.88 $ (0.48) $ 2.40 $ 2.02 ========================================================================================================================== Return on average common equity 11.0% 8.2% (2.1)% 10.0% 8.7% ========================================================================================================================== FINANCIAL POSITION * Total assets $5,174,464 $4,521,592 $4,142,768 $3,716,872 $3,502,023 Deposit liabilities of the savings bank subsidiary 2,129,310 2,091,583 2,032,869 1,615,361 1,511,291 Advances from Federal Home Loan Bank to the savings bank subsidiary 616,374 289,674 194,099 258,593 205,716 Long-term debt, net 718,240 697,836 582,475 525,641 463,362 Preferred stock of electric utility subsidiaries Subject to mandatory redemption 44,844 46,730 48,920 50,665 52,210 Not subject to mandatory redemption 48,293 48,293 36,293 36,293 36,293 Stockholders' equity 682,089 643,028 547,741 581,446 510,543 COMMON STOCK DATA Book value per common share * 23.80 23.23 22.12 24.36 23.29 Market price range per common share High 36.50 38.88 44.63 37.88 40.00 Low 29.88 31.00 34.75 29.38 27.25 Yearend 32.38 35.88 37.25 36.75 31.63 Dividends per common share 2.33 2.29 2.25 2.21 2.17 Dividend payout ratio 90% 121% nm 92% 107% Dividend payout ratio-continuing operations 90% 95% 88% 91% 109% Market price to book value per common share * 136% 154% 168% 151% 136% Price earnings ratio ** 12.5x 15.1x 14.7x 15.1x 15.9x Common shares outstanding (thousands) Weighted average 28,137 25,938 24,275 22,882 21,559 Geographic distribution of ownership * State of Hawaii *** 7,278 6,969 6,663 6,399 6,100 Other 21,377 20,706 18,099 17,468 15,818 -------------------------------------------------------------------------------------------------------------------------- Total shares outstanding 28,655 27,675 24,762 23,867 21,918 -------------------------------------------------------------------------------------------------------------------------- Stockholders by geographic distribution * State of Hawaii *** 21,896 22,092 21,305 20,441 18,053 Other 18,830 18,374 16,891 15,598 13,883 -------------------------------------------------------------------------------------------------------------------------- Total stockholders 40,726 40,466 38,196 36,039 31,936 ==========================================================================================================================
nm Not meaningful. * At December 31. ** Calculated using yearend market price per common share divided by earnings per common share from continuing operations. *** Does not include depository and brokerage accounts, which may contain additional shares beneficially owned by Hawaii stockholders. See Note 2, "Discontinued operations" in the "Notes to Consolidated Financial Statements" for a discussion of the Company's former property and casualty insurance business and wind energy business. 25 SEGMENT FINANCIAL INFORMATION -------------------------------------------------------------------------------- Hawaiian Electric Industries, Inc. and subsidiaries
Years ended December 31 1994 1993 1992 -------------------------------------------------------------------------------------- (in thousands) REVENUES Electric utility $ 913,719 $ 879,110 $ 778,690 Savings bank 215,525 199,734 202,995 Other 59,279 63,326 49,698 -------------------------------------------------------------------------------------- $1,188,523 $1,142,170 $1,031,383 ====================================================================================== OPERATING INCOME (LOSS) Electric utility $ 136,628 $ 119,565 $ 103,841 Savings bank 42,525 44,117 31,327 Other (5,020) (6,044) 1,051 -------------------------------------------------------------------------------------- $ 174,133 $ 157,638 $ 136,219 ====================================================================================== DEPRECIATION AND AMORTIZATION OF PROPERTY, PLANT AND EQUIPMENT Electric utility $ 63,779 $ 55,960 $ 53,856 Savings bank 3,551 3,167 2,852 Other 4,926 5,187 5,220 -------------------------------------------------------------------------------------- $ 72,256 $ 64,314 $ 61,928 ====================================================================================== CAPITAL EXPENDITURES Electric utility $ 195,525 $ 212,916 $ 188,323 Savings bank 11,316 3,920 4,828 Other 2,749 3,822 4,283 -------------------------------------------------------------------------------------- $ 209,590 $ 220,658 $ 197,434 ====================================================================================== IDENTIFIABLE ASSETS (AT DECEMBER 31) Electric utility $1,889,120 $1,703,276 $1,501,330 Savings bank 3,115,651 2,618,485 2,461,694 Other 169,693 199,831 179,072 -------------------------------------------------------------------------------------- 5,174,464 4,521,592 4,142,096 Net assets of discontinued -- -- 672 operations -------------------------------------------------------------------------------------- $5,174,464 $4,521,592 $4,142,768 ======================================================================================
As of January 1, 1993, Hawaiian Electric Industries, Inc. (HEI) refined its method of determining costs chargeable to its subsidiaries by identifying additional common costs categories, increasing the number of cost causation factors used to allocate common costs and utilizing timesheets. The refinements resulted in lower allocations to subsidiaries and more expenses retained at corporate in 1993 and 1994. HEI's principal segments are as follows: ELECTRIC UTILITY -------------------------------------------------------------------------------- Hawaiian Electric Company, Inc. and its wholly owned subsidiaries, Hawaii Electric Light Company, Inc. and Maui Electric Company, Limited, are operating electric public utilities in the business of generating, purchasing, transmitting, distributing and selling electric energy, and are regulated by the Public Utilities Commission of the State of Hawaii (PUC). SAVINGS BANK -------------------------------------------------------------------------------- American Savings Bank, F.S.B. (ASB) is a Federally chartered savings bank providing a full range of banking services to individual and corporate customers through its branch system in Hawaii. ASB is subject to examination and comprehensive regulation by the Department of Treasury, Office of Thrift Supervision and the Federal Deposit Insurance Corporation, and is also subject to regulations of the Board of Governors of the Federal Reserve System. OTHER -------------------------------------------------------------------------------- Hawaiian Tug & Barge Corp. provides tugboat and charter barge services in Hawaii and the Pacific area and, together with its subsidiary, Young Brothers, Limited (YB), provides general freight and containerized cargo transportation between the Hawaiian Islands. YB operates as an authorized common carrier that services all major ports in Hawaii under the Hawaii Water Carrier Act and is regulated by the PUC. Malama Pacific Corp. and its wholly owned subsidiaries invest in and develop real estate. HEI Investment Corp. invests primarily in leveraged leases. Pacific Energy Conservation Services, Inc. (PECS) is a nonutility service company formed in 1994 to promote energy conservation in Hawaii and the Pacific Basin. PECS had no operations in 1994. Other also includes amounts for HEI, HEI Diversified, Inc. and intercompany eliminations. 26 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS -------------------------------------------------------------------------------- The following discussion should be read in conjunction with the consolidated financial statements and accompanying notes. RESULTS OF OPERATIONS -------------------------------------------------------------------------------- Hawaiian Electric Industries, Inc. (HEI) and its subsidiaries (collectively, the Company) reported net income of $2.60 per share in 1994, due to the results of its major operating segments-the electric utility and the savings bank-partly offset by losses in the "other" segment. Earnings per share from continuing operations for 1994 increased 9% over 1993 due primarily to increased electric utility earnings. Many factors affected HEI's 1994 consolidated results, including Hawaii's economic environment. Although Hawaii's economy grew rapidly in the late 1980's, the economy slowed from 1991 through 1993 due to the effects of the Gulf War and Hurricane Iniki as well as the U.S. and Japan recessions. In 1994, for the first time in many years, Hawaii's unemployment rate exceeded the national average. This unusual recessionary period appears to be over. A modest economic recovery began in 1994 led by Hawaii's key industry, tourism. Visitor arrivals were up about 5.4% over 1993, the first annual increase since 1990, largely as a result of U.S. economic expansion and the economic recovery in Japan. However, the near-term impact of the January 1995 earthquake in Japan, the flood in Los Angeles and the devaluation of the Mexican peso on visitor arrivals to Hawaii is uncertain. The Company from time to time considers various strategies designed to enhance its competitive position and to increase its ability to adapt to and anticipate changes in its businesses. These strategies may include the formation or acquisition of new businesses. The Company may from time to time be engaged in preliminary discussions, either internally or with third parties, regarding these potential strategies. No assurances can be given as to whether any of these strategies will be successfully implemented or any potential transaction will actually occur, or the ultimate effect of any such transaction or strategy on the Company's financial condition or competitive position. In 1995, HEI is forming a new subsidiary to pursue independent power projects in Asia, beginning with the Philippines. With continuing economic growth in the U.S. and Asia and the stabilization of the construction industry and defense spending in Hawaii, Hawaii's economy is expected to continue its recovery and grow moderately during the second half of the 1990's. By providing essential services in Hawaii, HEI management believes that the Company is well positioned to take advantage of Hawaii's projected growth. CONSOLIDATED --------------------------------------------------------------------------------
% % % 1994 CHANGE 1993 change 1992 change --------------------------------------------------------------------------------------------------- (in millions, except per share amounts) Revenues $1,189 4 $1,142 11 $1,031 4 Operating income 174 10 158 16 136 2 Net income (loss) Continuing operations $ 73.0 18 $ 61.7 -- $ 61.7 11 Discontinued operations -- 100 (13.0) 82 (73.3) nm --------------------------------------------------------------------------------------------------- $ 73.0 50 $ 48.7 nm $(11.6) nm =================================================================================================== Earnings (loss) per common share Continuing operations $ 2.60 9 $ 2.38 (6) $ 2.54 5 Discontinued operations -- 100 (0.50) 83 (3.02) nm --------------------------------------------------------------------------------------------------- $ 2.60 38 $ 1.88 nm $(0.48) nm =================================================================================================== Weighted average number of common shares outstanding 28.1 8 25.9 7 24.3 6 Effective tax rate for continuing operations 42% 43% 32%
nm Not meaningful. 27 The following discussion should be read in conjunction with the segment discussions. . The increase in 1994 net income from continuing operations compared to 1993 was due to improved results of the electric utility and "other" segments, partly offset by a 2% decrease in net income of the savings bank segment. . 1993 results include $15.0 million in after-tax losses from the settlement of a lawsuit involving the discontinued operations of The Hawaiian Insurance & Guaranty Co., Limited and its subsidiaries (the HIG Group) and $2.0 million in after-tax gain from the reversal of a reserve after the sale of the discontinued operations of Hawaiian Electric Renewable Systems, Inc. (HERS), the Company's former wind energy business. . 1993 income from continuing operations was flat when compared to 1992 and included increases in net income from the savings bank and electric utility segments, offset by an increase in net loss from the "other" segment. . 1992 results include $73.3 million in after-tax losses from the discontinued operations of the HIG Group and HERS. Higher earnings from continuing operations resulted from increases at the electric utility and savings bank segments. . The effective tax rate was higher in 1994 and 1993 than in 1992 primarily due to the following: (1) a 1% increase in the federal income tax rate commencing in 1993; (2) the use of gross-up accounting for income taxes related to the allowance for funds used during construction (AFUDC) under Statement of Financial Accounting Standards (SFAS) No. 109 effective January 1, 1993; (3) the treatment of Maritime Administration Capital Contribution Fund (CCF) contributions as temporary (rather than permanent) differences between financial reporting and tax income under SFAS No. 109 effective January 1, 1993; and (4) the utilization of capital loss carryforwards in 1992. . Dividends per common share increased in 1994 to $2.33, from $2.29 in 1993 and $2.25 in 1992. HEI and its predecessor company, Hawaiian Electric Company, Inc. (HECO), have paid dividends continuously since 1901. Dividends per share have been higher each year since 1964. Although the Company's long-term goal is to have dividend growth keep pace with inflation, the Company believes that recent payout ratios (the percentages of earnings paid out in dividends) have been too high. The Company believes that a payout ratio of 80% or less is more appropriate and, in the future, hopes to increase earnings faster than dividends to reduce the payout ratio. One of the keys to improved earnings is continued regulatory support as evidenced by timely rate case decisions by the Hawaii Public Utilities Commission (PUC). Another key to long-term growth in earnings is growth and expansion of the Company. Thus, the Company is looking at opportunities to grow in Hawaii, Asia and the Pacific. Following is a general discussion of revenues, expenses and operating income by business segment. Segment information is also shown in "Segment Financial Information" on page 26 and in the "Notes to Consolidated Financial Statements." ELECTRIC UTILITY --------------------------------------------------------------------------------
% % % 1994 CHANGE 1993 change 1992 change ------------------------------------------------------------------------------------------------ (in millions, except per barrel amounts and number of employees) Revenues/1/ $ 914 4 $ 879 13 $ 779 5 Expenses Fuel oil 187 (12) 213 (5) 226 (18) Purchased power 272 5 259 50 173 62 Other 318 11 287 4 276 7 Operating income 137 14 120 15 104 4 Allowance for funds used during construction 13 21 11 22 9 67 Net income 62 19 52 5 49 18 Average price per barrel of fuel oil/1/ 18.92 (10) 21.09 7 19.69 (14) Kilowatthour sales 8,593 3 8,325 -- 8,332 3 Number of employees 2,219 -- 2,226 5 2,118 5
/1/ The rate schedules of the electric utilities contain 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 energy costs, and the relative amounts of company-generated power and purchased power. Accordingly, changes in fuel oil and certain components of purchased energy costs are passed on to customers. 28 . In 1994, the electric utilities' revenues increased 4% compared to 1993 primarily due to rate relief granted by the PUC and a 3.2% increase in kilowatthour sales of electricity, partly offset by lower fuel oil prices. The kilowatthour sales increase reflects the gradual recovery of Hawaii's economy and the effects of warmer weather. Fuel oil expense declined because of lower fuel oil prices and lower company generated kilowatthours. Purchased power expense was higher due to an increase in kilowatthours purchased. The 11% increase in other expenses was due to a 14% increase in depreciation expense as a result of plant additions, a 12% increase in other operation and maintenance expenses and a 6% increase in taxes, other than income taxes. Other operation and maintenance expenses in 1994 increased partly because 1993 expenses reflect a one-time reduction of $4 million due to the establishment under SFAS No. 71 of a regulatory asset for vacation earned by employees, but not yet taken. Operating income for 1994 increased 14% compared to 1993 due in part to rate relief and higher kilowatthour sales, partly offset by the increased expenses. Consolidated HECO's return on average common equity for 1994 was 10.2%, compared to 9.7% for 1993 and 10.5% for 1992. . 1993 revenues increased 13% over 1992 due in part to rate relief received in late 1992, primarily to recover purchased power expenses. Kilowatthour sales of electricity for the year were down 0.1% compared to 1992 primarily because of cooler weather, a downturn in Hawaii's economy and conservation. Fuel oil expense was lower despite higher fuel oil prices because fewer kilowatthours were generated as purchased power increased. Purchased power expense increased with a full year of purchases from a major independent power producer. The 4% increase in other expenses was partly due to a 4% increase in depreciation expense as a result of plant additions and a 13% increase in taxes, other than income taxes. Operating income for 1993 increased 15% compared to 1992 due in part to rate relief, lower management service fees from HEI and the one-time reduction in expense due to the establishment of a regulatory asset for vacation earned by employees, but not yet taken. . 1992 revenues increased 5% over 1991 due to higher kilowatthour sales of electricity and rate relief, partly offset by lower fuel oil prices. Higher 1992 operating income was primarily due to rate relief and increased kilowatthour sales, offset in part by higher expenses. Net income increased 18% as a result of the higher operating income and higher AFUDC due to higher construction work- in-progress balances. HECO and its subsidiaries do not provide electric service to the island of Kauai and were not significantly affected by Hurricane Iniki, which struck Kauai in September 1992. COMPETITION The electric utility industry has become increasingly competitive due to regulatory and technological developments. Competition is affected by factors including price, reliability of service, new technologies and governmental regulations. Competition in Hawaii is also affected by the scarcity of generation sites and lack of interconnections. The Energy Policy Act of 1992 encourages competition by allowing both utilities and nonutilities to form generation subsidiaries without becoming subject to regulation under the Public Utility Holding Company Act of 1935. To date, HECO and its subsidiaries have not faced this type of competition. However, management cannot predict the future impact, if any, of the Energy Policy Act of 1992 on the Company. On the demand-side, a new kind of competitor-the energy service company-is seeking customers in government and private business and promising to help them reduce utility bills. On Oahu, one of these companies worked with a large military housing project, installing energy-efficient equipment that decreased the facility's electricity consumption by one-third. In August 1994, HEI formed a new nonutility energy service company, Pacific Energy Conservation Services, Inc. (PECS), to promote energy conservation in Hawaii and the Pacific Basin. PECS is considering potential projects to install, finance, operate and maintain energy conservation equipment, while sharing a percentage of the saved energy costs with its clients. 29 In response to increased competition, HECO and its subsidiaries are looking at strategies to enhance their competitive position, including increasing efforts to provide reliable electric service at a reasonable cost, offering customers new choices regarding the services provided and promoting new technologies like electric vehicles. REGULATION OF ELECTRIC UTILITY RATES The PUC has broad discretion in its regulation of the rates charged by HEI's electric utility subsidiaries and in other matters. Any adverse decision by the PUC concerning the level or method of determining electric utility rates, the authorized returns on equity or other matters, or any prolonged delay in rendering a decision in a rate or other proceeding, could have a material adverse effect on the Company's financial condition and results of operations. Upon a showing of probable entitlement, the PUC is required to issue an interim decision in a rate case within 10 months from the date of filing a completed application if the evidentiary hearing is completed (subject to extension for 30 days if the evidentiary hearing is not completed). There is no time limit for rendering a final decision. Interim rate increases are subject to refund with interest, pending the final outcome of the case. RECENT RATE REQUESTS Postretirement benefits other than pensions ------------------------------------------- In November 1994, the PUC issued a decision and order in a generic docket opened in February 1992 with respect to the accounting and rate-making treatment of the costs of postretirement benefits other than pensions (PBOP). The decision and order authorized full recovery of PBOP costs determined pursuant to SFAS No. 106, effective January 1, 1995. The decision and order also allowed the recovery of the regulatory assets related to PBOP costs, over the next 18 years. These regulatory assets were recognized by HECO, Hawaii Electric Light Company, Inc. (HELCO), Maui Electric Company, Limited (MECO) and Young Brothers, Limited (YB) for PBOP costs accrued from January 1, 1993 through December 31, 1994 and amounted to $36.7 million for the four companies at December 31, 1994. This order will result in additional annual revenues of approximately $10.0 million, $1.8 million, $1.9 million and $1.0 million for HECO, HELCO, MECO and YB, respectively, to cover the increase in PBOP expense. See Note 17 in the "Notes to Consolidated Financial Statements," for further information. Hawaiian Electric Company, Inc. ------------------------------- . 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 (which was later increased to 12.75%). The increase requested, as subsequently revised, represented an increase of 8.6% over rates in effect at the time of the revised filing, or $53.8 million in additional annual revenues. The revised requested increase was needed to cover rising operating costs (including PBOP costs discussed above) and to cover the cost of new capital projects to maintain and improve service reliability. In December 1994, HECO received a final decision and order from the PUC authorizing a $40.5 million, or 6.5%, increase in annual revenues, effective January 1, 1995 and based on a 12.15% return on average common equity. The order granted HECO an increase of approximately $3.5 million in annual revenues, in addition to reaffirming interim increases that took effect in April, May and November 1994. The final decision and order, together with the PBOP decision and order, resulted in $50.5 million of annual rate relief. . In December 1993, HECO applied to the PUC for permission to increase electric rates, based on a 1995 test year and a 12.3% return on average common equity (which was later increased to 13.25%). The requested increase, as subsequently revised, represented an increase of approximately 5%, or $38.5 million in additional annual revenues, over rates in effect at the time of the revised filing (which rates included interim rate relief granted on the 1994 test year application). The revised requested increase is needed to cover rising operating costs (including PBOP costs discussed above) and costs of new capital projects to maintain and improve service reliability. 30 The PUC completed hearings in November 1994 on HECO's rate increase request based on a 1995 test year. In December 1994, HECO received an interim decision and order authorizing an increase of $13.2 million, or 1.9%, in annual revenues. Approximately $10.6 million of the interim increase took effect January 1, 1995, which was the beginning of the test year. The balance is effective in steps in May and November 1995. The interim order was based on a 12.6% return on average common equity. Hawaii Electric Light Company, Inc. ----------------------------------- . In November 1993, HELCO applied to the PUC for permission to increase electric rates to provide $15.8 million in annual revenues, or a 13.4% increase over the rates then in effect. The requested increase is based on a 1994 test year and a 12.4% return on average common equity (which was later increased to 13.1%). The increase is needed to cover the costs of plant and equipment, operating costs necessary to maintain and improve service and provide reliable power and PBOP costs discussed above. In February 1995, HELCO received a final decision and order from the PUC authorizing a $13.7 million, or 11.8%, increase in annual revenues, based on a 12.6% return on average common equity. The order granted HELCO an increase of approximately $0.1 million in annual revenues, in addition to reaffirming interim increases that took effect in August and November 1994. The final decision and order, together with the PBOP decision and order, resulted in $15.5 million of annual rate relief. . In June 1994, HELCO filed a notice of intent to file an application for a general rate increase using a 1995 test year. The increase is expected to be required primarily to cover investments in new generating units. The application has not yet been filed and may be filed based on a 1996 test year. Maui Electric Company, Limited ------------------------------ . In November 1991, MECO filed a request to increase rates. In January 1993, MECO revised its requested increase to $11.4 million annually, or 10% over the rates then in effect, based on a 13.0% return on average common equity. Most of the proposed increase reflected the costs of adding a 58-MW combined-cycle generating unit on Maui in three phases and PBOP costs discussed above. In 1993, MECO received four interim decisions which authorized step increases totaling $8.2 million in annual revenues. In August 1994, MECO received the final decision and order from the PUC granting an increase of $8.1 million in annual revenues, or approximately 7.0%, based on a 12.75% return on average common equity. That action, together with the PBOP decision and order, resulted in $10 million of annual rate relief. . In December 1994, MECO filed a notice of intent to request rate relief, based on a 1996 test year. Management cannot predict with certainty when decisions in pending or future rate cases will be rendered or the amount of any interim or final rate increase that will be granted.
SAVINGS BANK % % % 1994 CHANGE 1993 change 1992 change ------------------------------------------------------------------------------------------ (in millions) Revenues $ 216 8 $ 200 (2) $ 203 2 Net interest income 99 4 96 23 78 21 Operating income 43 (4) 44 41 31 24 Net income 25 (2) 25 36 19 24 Interest-earning assets Average balance $2,700 15 $2,356 7 $2,207 15 Weighted average yield 7.53% (6) 8.01% (8) 8.73% (11) Interest-bearing liabilities Average balance $2,611 13 $2,306 6 $2,171 14 Weighted average rate 3.98% (1) 4.02% (24) 5.28% (20) Interest rate spread 3.55% (11) 3.99% 16 3.45% 6
31 American Savings Bank, F.S.B. (ASB) earnings depend primarily on net interest income, the difference between the interest income earned on interest-earning assets (loans receivable, mortgage-backed securities and investments) and interest expense incurred on interest-bearing liabilities (deposit liabilities and borrowings). ASB's loan volumes and yields are affected by market interest rates, competition, demand for real estate financing, availability of funds and management's responses to these factors. Other factors affecting ASB's operating results include income from servicing loans and expenses from operations. . 1994 net interest income increased 4% over 1993, despite an 11% decrease in interest rate spread, due to a $392 million higher average balance of loans and mortgage-backed securities. Operating and net income declined slightly due to an increased provision for loan losses, higher compensation and employee benefits expenses and higher trading portfolio losses. The decline was offset in part by interest income on a tax refund from an amended tax return. In 1994, the federal funds rate, which is the rate charged by banks for overnight loans to each other and which has a significant influence on consumer rates, increased 2.5% to 5.5%. In February 1995, the federal funds rate increased 0.5% to 6.0%. The demand for mortgage loans has decreased partly due to the rising interest rates and the slow real estate market. Also, the recent recession in Hawaii contributed to a trend of increased loan delinquencies. In 1994, nonaccrual and renegotiated loans increased $17 million and the allowance for loan losses increased $3 million. As Hawaii's economy begins its recovery, management expects to see a reversal in the trend of increased delinquencies. Another unfavorable trend has been the outflow of deposits partly due to competition from money market funds. In 1994, there was a small increase in deposits due to interest credited, partly offset by an outflow of deposit accounts. For funding loans and purchasing mortgage-backed securities, ASB has turned to higher cost advances from the Federal Home Loan Bank and securities sold under agreements to repurchase. The use of higher cost sources of funds put downward pressure on ASB's interest rate spread. The decrease in interest rate spread can also be attributed to the changing interest rate environment. During 1993, falling interest rates resulted in improved interest rate spreads as interest-bearing liabilities repriced downward at a faster pace than interest-earning assets. During 1994, the rising interest rates caused the cost of interest-bearing liabilities to increase. However, yields on interest-earning assets in 1994 decreased 48 basis points due in part to 1993's refinancings and repricing of adjustable loans and mortgage-backed securities. In the future, ASB's cost of interest-bearing liabilities may further increase, which may result in a decreased interest rate spread and lower net interest income. If interest rates stabilize, however, ASB's spread is expected to improve as adjustable-rate mortgages reprice to market levels. . 1993 net interest income increased 23% over 1992 due to the significantly lower cost of funds and a higher average balance of loans. The 1993 interest rate spread increased 16% over 1992. The increase in net interest income was partially offset by higher administrative and general expenses, including $0.8 million of higher federal insurance premiums for deposits. . 1992 net interest income increased 21% over 1991 due largely to a higher average balance of interest-earning assets, a low interest rate environment and a 6% increase in the interest rate spread resulting from an inflow of low-cost deposits. The $290 million increase in the average balance of interest-earning assets was funded primarily with low-cost deposits. 32
OTHER % % % 1994 CHANGE 1993 change 1992 change --------------------------------------------------------------------------------- (in millions) Revenues $ 59 (6) $ 63 27 $ 50 (8) Operating income (loss) (5) 17 (6) nm 1 (86)
nm Not meaningful. The "Other" business segment includes results of operations from Hawaiian Tug & Barge Corp. (HTB) and its subsidiary, YB, which are maritime freight transportation companies; HEI Investment Corp. (HEIIC), which is a company primarily holding investments in leveraged leases; Malama Pacific Corp. (MPC) and its subsidiaries, which are real estate investment and development companies; PECS, a newly formed energy service company with no operations in 1994; HEI and HEI Diversified, Inc. (HEIDI), parent companies; and eliminations of intercompany transactions. . The freight transportation subsidiaries recorded operating income of $3.6 million in 1994, compared with an operating loss of $0.1 million in 1993 and operating income of $3.4 million in 1992. The increase in 1994 was due in part to higher harbor assists and contract tows and a gain on the sale of a barge. Despite YB's rate increases in 1993, HTB's consolidated operating results were down significantly in 1993 compared to 1992 due in part to lower charter revenues at HTB, the termination of an oil hauling contract in mid-1992 and losses on the sale of vessels when HTB exited the heavy fuel-oil shipping business. The decrease in operating income in 1992 was due in part to higher maintenance costs from drydocking more barges and higher depreciation expense. HTB and YB have been hampered by Hawaii's recent recession and decreased construction activity. In May 1994, YB filed an application with the PUC to increase rates by approximately $2.4 million annually. In September 1994, YB filed a stipulated agreement with the PUC indicating YB and the Consumer Advocate had agreed to stipulate to a 6% general rate increase, or approximately $2.0 million annually. The increase took effect in December 1994. Also, see the PBOP discussion under the "Electric utility - Recent rate requests" section. . In 1993, HEIIC refinanced the nonrecourse debt supporting a leveraged lease, resulting in additional income, which was largely offset by the cumulative effect of the 1% federal income tax rate increase. No new investments are currently planned for HEIIC. . MPC's operating loss was $1.5 million in 1994, compared with an operating loss of $0.6 million in 1993 and $1.3 million in 1992. MPC's real estate development activities have been impacted by the slow real estate market in Hawaii. MPC sold fewer units in 1994 than 1993 and fewer units in 1993 than 1992. Writedowns were taken for the carrying value of certain real estate projects in 1994, 1993 and 1992. See Note 6 in the "Notes to Consolidated Financial Statements" for a further discussion on MPC and its subsidiaries. . The HEI and HEIDI corporate operating loss increased $1.0 million in 1994 compared to 1993 due in part to higher employee benefits expense. The HEI and HEIDI corporate operating loss increased $4.6 million in 1993 compared to 1992 primarily due to a refinement in the method of identifying costs chargeable to subsidiaries, resulting in lower allocations to subsidiaries and more expenses retained at corporate. See page 26 for more information on the corporate allocation methodology refinement. DISCONTINUED OPERATIONS -------------------------------------------------------------------------------- See Note 2 in the "Notes to Consolidated Financial Statements" for information on the discontinued operations of the HIG Group and HERS. 33 ACCOUNTING FOR THE EFFECTS OF CERTAIN TYPES OF REGULATION -------------------------------------------------------------------------------- The electric utility companies and YB follow the accounting prescribed by SFAS No. 71, "Accounting for the Effects of Certain Types of Regulation." SFAS No. 71 provides guidance in preparing financial statements for most public utilities. Under SFAS No. 71, if regulation provides assurance that incurred costs will be recovered in the future, those costs must be capitalized rather than expensed. If the continued application of SFAS No. 71 would no longer be appropriate--due to increased competition or regulatory, legislative or judicial actions or otherwise--the financial effects of the resulting accounting change, including a write-off of all regulatory assets, could be material. ENVIRONMENTAL MATTERS -------------------------------------------------------------------------------- HEI and its subsidiaries are subject to numerous laws and regulations which are designed to protect the environment, and include air and water quality controls, hazardous waste and toxic substance controls and the Federal Oil Pollution Act of 1990. HEI's electric utility subsidiaries are exempt from certain environmental requirements applicable on the U.S. mainland. For example, the electric utility subsidiaries are exempt from the acid rain provisions of the 1990 Clean Air Act amendments. However, HEI and its subsidiaries are subject to environmental laws and regulations which could potentially impact the Company in terms of operating existing facilities, constructing and operating new facilities and ensuring the proper cleanup and disposal of hazardous waste and toxic substances. Management believes that the recovery through rates of most, if not all, of any costs incurred by HECO and its subsidiaries in complying with these environmental requirements would be allowed by the PUC. However, as with other costs reviewed by the PUC in the rate-making process, costs incurred by HECO and its subsidiaries in complying with these environmental requirements may not be fully allowed by the PUC for rate-making purposes. Based on information available to the Company, management is not aware of any contingent liabilities relating to environmental matters that would have a material adverse effect on the Company. ELECTRIC AND MAGNETIC FIELDS -------------------------------------------------------------------------------- Research is ongoing about the potential adverse health effects from exposure to electric and magnetic fields (EMF). However, the scientific community has not yet reached a consensus on the nature of any health effects. HECO and its subsidiaries are participating in utility industry funded studies on the subject and are taking steps to reduce EMF, where practical, in the design of new transmission and distribution facilities. The Company cannot predict the impact, if any, the EMF issue may have on the Company in the future. EFFECTS OF INFLATION -------------------------------------------------------------------------------- Inflation, as measured by the U.S. Consumer Price Index, averaged 2.6% in 1994 and 3.0% in 1993 and 1992. Although the rate of inflation over the past three years has been relatively low compared with the late 1970's and early 1980's, inflation continues to have an impact on HEI's operations. Inflation increases operating costs and the replacement cost of assets. Subsidiaries with significant physical assets, such as the electric utility companies, replace assets at much higher costs and must request rate relief to maintain adequate earnings. In the past, the PUC has generally approved rate relief to cover the effects of inflation. In 1992, 1993 and 1994, the electric utility companies received rate relief, in part to cover increases due to inflation in operating expenses and construction costs. ACCOUNTING CHANGES -------------------------------------------------------------------------------- See Note 1 in the "Notes to Consolidated Financial Statements." 34 LIQUIDITY AND CAPITAL RESOURCES ------------------------------------------------------------------------------- CONSOLIDATED ------------------------------------------------------------------------------- The Company believes that its ability to generate cash, both internally from operations and externally from debt and equity issues, is adequate to maintain sufficient liquidity to fund its construction programs and to cover debt and other cash requirements in the foreseeable future. The Company's total assets were $5.2 billion and $4.5 billion at December 31, 1994 and 1993, respectively. Asset growth in 1994 stemmed from growth in ASB's loan and mortgage-backed securities portfolios and capital expenditures by the electric utility companies. The consolidated capital structure of HEI was as follows:
December 31 1994 1993 ------------------------------------------------------------------------ (in millions) Short-term borrowings $ 137 8% $ 40 3% Long-term debt, net 718 44 698 47 Preferred stock of electric utility subsidiaries 93 6 95 6 Common stock equity 682 42 643 44 ------------------------------------------------------------------------ $1,630 100% $1,476 100% ========================================================================
ASB's deposit liabilities, securities sold under agreements to repurchase and advances from the Federal Home Loan Bank are not included in the table above. HEI plans to maintain its debt and equity structure close to the levels at December 31, 1994 and 1993 through the issuance of short-term and long-term debt, the issuance of preferred stock by the electric utilities, retained earnings and the issuance of common stock by HEI through public offerings, the Dividend Reinvestment and Stock Purchase Plan and other plans. As of February 15, 1995, the Standard & Poor's (S&P), Moody's Investors Service (Moody's) and Duff & Phelps Credit Rating Co.'s (Duff & Phelps) ratings of HEI's and HECO's securities were as follows:
S&P Moody's Duff & Phelps ------------------------------------------------------------------------ HEI --- Medium-term notes BBB Baa2 BBB+ Commercial paper A-2 P-2 Duff 2 HECO ---- First mortgage bonds BBB+ A3 A Unsecured notes BBB Baa1 A- Cumulative preferred stock BBB baa1 BBB+ Commercial paper A-2 P-2 Duff 1-
The above ratings are not recommendations to buy, sell or hold any securities, and such ratings may be subject to revision or withdrawal at any time by the rating agencies. In January 1995, S&P revised its ratings outlook on HEI and HECO to "stable" from "negative" citing recent PUC decisions which demonstrate a continuing trend of regulatory support for the electric utility subsidiaries' heavy construction program and HEI's commitment to a well balanced capital structure. Neither HEI nor HECO management can predict with certainty future rating agency actions or their effects on the future cost of capital to HEI or HECO. At December 31, 1994, $178 million of a $250 million registered medium-term note program was available for offering by HEI. 35 Operating activities provided net cash of $130 million in 1994, $139 million in 1993 and $98 million in 1992. Investing activities such as capital expenditures and the origination and purchases of loans and mortgage-backed securities accounted for a significant portion of the net cash used of $713 million in 1994, $352 million in 1993 and $392 million in 1992. Financing activities provided net cash of $554 million in 1994, $172 million in 1993 and $395 million in 1992. In 1994, significant amounts of cash came from the net increases in advances from the Federal Home Loan Bank, securities sold under agreements to repurchase and short-term borrowings. A portion of net assets of HECO and ASB are not available for transfer to HEI in the form of dividends, loans or advances without regulatory approval. However, such restrictions are not expected to significantly affect the operations of HEI, its ability to pay dividends on its common stock or its ability to meet other cash obligations. (See Note 18 in the "Notes to Consolidated Financial Statements.") Total HEI consolidated financing requirements for 1995 through 1999, including net capital expenditures, debt retirements (excluding repayments of Advances to Federal Home Loan Bank and repurchases of securities sold under agreements to repurchase) and sinking fund requirements, are currently estimated to total $1.1 billion. Of this amount, approximately $0.8 billion are for net capital expenditures (mostly relating to the electric utility companies' net capital expenditures described below). HEI consolidated internal sources, after the payment of HEI dividends, are expected to provide approximately 56% of the consolidated financing requirements, with debt and equity financing providing the remaining requirements. Over the five-year period 1995 through 1999, HEI estimates that it will require approximately $161 million in common equity, other than retained earnings, which is expected to be provided principally by HEI's Dividend Reinvestment and Stock Purchase Plan and the Hawaiian Electric Industries Retirement Savings Plan. Following is a discussion of the liquidity and capital resources of HEI's largest segments. ELECTRIC UTILITY -------------------------------------------------------------------------------- HECO's consolidated capital structure was as follows:
December 31 1994 1993 ------------------------------------------------------------------------ (in millions) Short-term borrowings from nonaffiliates and affiliate $ 118 9% $ 41 3% Long-term debt, net 489 37 485 41 Preferred stock Subject to mandatory redemption 45 3 47 4 Not subject to mandatory redemption 48 4 48 4 Common stock equity 634 47 570 48 ------------------------------------------------------------------------ $1,334 100% $1,191 100% ========================================================================
In 1994, the electric utility companies used $186 million in cash for capital expenditures and $29 million for common stock dividends. Operations provided $102 million in cash and $15 million of cash came from third-party contributions in aid of construction. Financing activities provided $78 million, including a $77 million net increase in short-term borrowings. Also, HEI provided $30 million of cash through its purchase of HECO common stock. The electric utility's consolidated financing requirements for 1995 through 1999, including net capital expenditures, debt retirements and sinking fund requirements, are estimated to total $850 million. HECO's consolidated internal sources, after the payment of common stock and preferred stock dividends, are currently expected to provide approximately 60% of the total $850 million requirements, with debt and equity financing providing the remaining requirements. HECO currently estimates that it will require approximately $60 million in common equity, other than retained earnings, over the five-year period 1995 through 1999. The PUC must approve issuances of long-term debt and equity for HECO, HELCO and MECO. 36 Capital expenditures include the costs of projects which are required to meet expected load growth, to improve reliability and to replace and upgrade existing equipment. Net capital expenditures for the five-year period 1995 through 1999 are currently estimated to total $750 million. Approximately 70% of gross capital expenditures, including AFUDC and capital expenditures funded by third party cash contributions in aid of construction, is for transmission and distribution projects, with the remaining 30% primarily for generation projects. At December 31, 1994, purchase commitments other than fuel and power purchase contracts were approximately $83 million, including amounts for construction projects. (Also see Note 4 in the "Notes to Consolidated Financial Statements" for a discussion of fuel and power purchase commitments.) For 1995, electric utility net capital expenditures are estimated to be $170 million and gross capital expenditures are estimated to be $205 million, of which approximately 65% is for transmission and distribution projects. An estimated $40 million is planned for new generation projects. Drawdowns of proceeds from the sale of tax-exempt special purpose revenue bonds, sales of common stock to HEI and the generation of funds from internal sources are expected to provide the cash needed for the net capital expenditures. Capital expenditure estimates and the timing of construction projects are reviewed periodically by management and may change significantly as a result of many considerations, including changes in economic conditions, changes in forecasts of kilowatthour sales and peak load, the availability of alternate energy and purchased power, the availability of generating sites and transmission and distribution corridors, the ability to obtain adequate and timely rate relief, escalation in construction costs, demand-side management programs and requirements of environmental and other regulatory and permitting authorities. In January 1995, the Department of Budget and Finance of the State of Hawaii issued tax-exempt special purpose revenue bonds in the principal amount of $47 million, with a maturity of 30 years and a fixed coupon interest rate of 6.60%, and loaned the proceeds from the sale to HECO, HELCO and MECO. The bonds were issued at a discount, resulting in a yield of approximately 6.75%. As of December 31, 1994, an additional $170 million of revenue bonds had been authorized by the Hawaii Legislature for issuance prior to the end of 1997.
SAVINGS BANK ------------------------------------------------------------------------------------------ December 31 1994 1993 ------------------------------------------------------------------------------------------ % % $ change $ change ------------------------------------------------------------------------------------------ (in millions) Assets $3,116 19 $2,618 6 Loans receivable 1,824 5 1,735 19 Mortgage-backed securities 1,067 69 630 (11) Deposit liabilities 2,129 2 2,092 3 Securities sold under agreements to repurchase 123 nm -- (100) Advances from Federal Home Loan Bank 616 113 290 49
nm Not meaningful. As of September 30, 1994, ASB was the fourth largest financial institution in the state based on total assets of $2.9 billion. In 1994, ASB's total assets increased primarily due to originations and purchases of loans and mortgage- backed securities of $937 million, partly offset by repayments of $413 million. Loans and deposits continued to grow in 1994, although at a slower pace than in 1993 and 1992. At December 31, 1994, loans which do not accrue interest totaled $23.8 million or 1.31% of net loans outstanding. At the end of 1994, there were only three properties acquired in settlement of loans valued at $0.8 million. For 1994, cash used by investing activities was $540 million, due largely to the origination of loans receivable and the purchase of mortgage-backed securities, partly offset by principal repayments. Cash provided by financing activities included a net increase of $327 million in advances from the Federal Home Loan Bank, $122 million in securities sold under agreements to repurchase and $38 million in deposit liabilities, partly offset by common stock dividends of $15 million. 37 Deposits traditionally have been the principal source of ASB's funds for use in lending, meeting liquidity requirements and making investments. ASB also derives funds from receipt of interest and principal on outstanding loans receivable and mortgage-backed securities, borrowings from the Federal Home Loan Bank of Seattle, securities sold under agreements to repurchase and other sources. In the last two years, advances from the Federal Home Loan Bank have become a more significant source of funds as the demand for deposits has decreased. Using higher cost sources of funds puts downward pressure on ASB's net interest income. Minimum liquidity levels are currently governed by the regulations adopted by the Office of Thrift Supervision (OTS). ASB was in compliance with OTS liquidity requirements as of December 31, 1994. OTS regulations require each savings association to have regulatory capital at least sufficient to meet three requirements: tangible capital and core (leverage) capital of 1.5% and 3.0%, respectively, of adjusted total assets; and a risk-based capital standard equal to 8.0% of risk-weighted assets. As of December 31, 1994, ASB was in compliance with the minimum capital requirements with a tangible capital ratio of 4.9%, a core capital ratio of 5.2% and a risk- based capital ratio of 11.4%. The OTS adopted a rule adding an interest rate risk (IRR) component to the existing risk-based capital requirement. Institutions with an "above normal" level of IRR exposure may be required to hold additional capital. "Above normal" IRR is defined as any percentage decline in market value of an institution's portfolio equity in excess of 2% of the market value of its assets which would result from an immediate 200 basis point change in interest rates. Although the regulation generally became effective January 1, 1994, the IRR capital deduction, which was to go into effect with the September 1994 Thrift Financial Report, has been waived until the OTS finalizes the process under which institutions may appeal such capital deductions. This means that in calculating the risk-based capital requirement, ASB was not required to deduct capital for IRR, and did not report such a deduction for the December 1994 Thrift Financial Report. However, based on the lowest IRR reported as of the three prior quarter-ends, ASB would not have been required to hold additional capital at December 31, 1994, if the new rule had been in effect at that time. The Federal Deposit Insurance Corporation Improvement Act of 1991 established a statutory framework for closer monitoring of insured depository institutions in order to ensure "prompt corrective action" by regulators as an institution's capital position declines. The OTS rules for prompt corrective action, effective on December 19, 1992, define the capital measures for five capital categories (well-capitalized, adequately capitalized, under-capitalized, significantly under-capitalized and critically under-capitalized), and provide for progressively more stringent restrictions and supervision as capital levels decline. To be classified as "well-capitalized," an institution must have a "leverage ratio" of 5%, a "Tier-1 risk-based ratio" of 6% and a "total risk- based ratio" of 10%. As of December 31, 1994, ASB believes that based on OTS capital standards it would have been classified as "well-capitalized" with a leverage ratio of 5.2%, a Tier-1 risk-based ratio of 11.0% and a total risk- based ratio of 11.4%. ASB believes that a satisfactory regulatory capital position provides a basis for public confidence, affords protection to depositors, helps to ensure continued access to capital markets on favorable terms and provides a foundation for anticipated growth. On September 29, 1994, the Reigle-Neal Interstate Banking and Branching Efficiency Act of 1994 (Interstate Banking Act) was signed into law. The Interstate Banking Act will create a uniform system of interstate banking in the U.S. Also, subject to certain limitations, it will permit interstate branching by U.S. banks, marking a major departure from previous law. Although the Interstate Banking Act applies only to banks, it could nonetheless affect the competitive balance among banks, thrifts and other financial institutions and the level of competition among financial institutions doing business in Hawaii. 38 INDEPENDENT AUDITORS' REPORT -------------------------------------------------------------------------------- The Board of Directors and Stockholders Hawaiian Electric Industries, Inc.: We have audited the accompanying consolidated balance sheets of Hawaiian Electric Industries, Inc. and subsidiaries as of December 31, 1994 and 1993, 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, 1994. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Hawaiian Electric Industries, Inc. and subsidiaries as of December 31, 1994 and 1993, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 1994, in conformity with generally accepted accounting principles. As discussed in Note 14 to the consolidated financial statements, effective January 1, 1993, the Company changed its method of accounting for income taxes. Additionally, as discussed in Note 17 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 LLP Honolulu, Hawaii January 25, 1995 39 CONSOLIDATED STATEMENTS OF INCOME ------------------------------------------------------------------------------- Hawaiian Electric Industries, Inc. and subsidiaries
Years ended December 31 1994 1993 1992 --------------------------------------------------------------------------------- (in thousands, except per share amounts) REVENUES Electric utility $ 913,719 $ 879,110 $ 778,690 Savings bank 215,525 199,734 202,995 Other 59,279 63,326 49,698 --------------------------------------------------------------------------------- 1,188,523 1,142,170 1,031,383 --------------------------------------------------------------------------------- EXPENSES Electric utility 777,091 759,545 674,849 Savings bank 173,000 155,617 171,668 Other 64,299 69,370 48,647 --------------------------------------------------------------------------------- 1,014,390 984,532 895,164 --------------------------------------------------------------------------------- OPERATING INCOME (LOSS) Electric utility 136,628 119,565 103,841 Savings bank 42,525 44,117 31,327 Other (5,020) (6,044) 1,051 --------------------------------------------------------------------------------- 174,133 157,638 136,219 --------------------------------------------------------------------------------- Interest expense--electric utility and other (54,028) (53,192) (47,141) Allowance for borrowed funds used during construction 4,043 3,869 2,095 Preferred stock dividends of electric utility subsidiaries (7,163) (6,518) (6,710) Allowance for equity funds used during construction 9,064 6,973 6,781 --------------------------------------------------------------------------------- INCOME FROM CONTINUING OPERATIONS BEFORE INCOME TAXES 126,049 108,770 91,244 Income taxes 53,019 47,086 29,529 --------------------------------------------------------------------------------- INCOME FROM CONTINUING OPERATIONS 73,030 61,684 61,715 --------------------------------------------------------------------------------- DISCONTINUED OPERATIONS, NET OF INCOME TAXES Loss from operations -- -- (57,090) Loss on disposal -- (13,025) (16,207) --------------------------------------------------------------------------------- LOSS FROM DISCONTINUED OPERATIONS -- (13,025) (73,297) --------------------------------------------------------------------------------- NET INCOME (LOSS) $ 73,030 $ 48,659 $ (11,582) ================================================================================= EARNINGS (LOSS) PER COMMON SHARE CONTINUING OPERATIONS $2.60 $2.38 $2.54 DISCONTINUED OPERATIONS -- (0.50) (3.02) --------------------------------------------------------------------------------- $2.60 $1.88 $(0.48) ================================================================================= DIVIDENDS PER COMMON SHARE $2.33 $2.29 $2.25 ================================================================================= WEIGHTED AVERAGE NUMBER OF COMMON SHARES OUTSTANDING 28,137 25,938 24,275 =================================================================================
CONSOLIDATED STATEMENTS OF RETAINED EARNINGS ------------------------------------------------------------------------------- Hawaiian Electric Industries, Inc. and subsidiaries
Years ended December 31 1994 1993 1992 --------------------------------------------------------------------------------- (in thousands) RETAINED EARNINGS, BEGINNING OF YEAR $ 128,318 $ 138,484 $ 204,663 Net income (loss) 73,030 48,659 (11,582) Common stock dividends (65,513) (58,825) (54,597) --------------------------------------------------------------------------------- RETAINED EARNINGS, END OF YEAR $ 135,835 $ 128,318 $ 138,484 =================================================================================
See accompanying "Notes to Consolidated Financial Statements." 40 CONSOLIDATED BALANCE SHEETS -------------------------------------------------------------------------------- Hawaiian Electric Industries, Inc. and subsidiaries
December 31 1994 1993 ------------------------------------------------------------------------------------------- (in thousands) ASSETS Cash and equivalents $ 87,623 $ 116,260 Accounts receivable and unbilled revenues, net 130,762 117,116 Inventories, at average cost 43,126 39,405 Real estate developments 33,956 29,673 Loans receivable, net 1,824,055 1,735,098 Marketable securities (estimated market value $1,051,673 and $710,369) 1,099,810 698,755 Other investments 77,297 77,106 Property, plant and equipment, net Land $ 33,861 $ 33,103 Plant and equipment 2,220,213 2,058,201 Construction in progress 171,251 129,875 ---------- ---------- 2,425,325 2,221,179 Less - accumulated depreciation (747,503) 1,677,822 (678,190) 1,542,989 ---------- ---------- Regulatory assets 95,257 62,543 Other 59,301 52,983 Goodwill and other intangibles 45,455 49,664 ------------------------------------------------------------------------------------------- $5,174,464 $4,521,592 =========================================================================================== LIABILITIES AND STOCKHOLDERS' EQUITY Accounts payable $ 97,210 $ 88,628 Deposit liabilities 2,129,310 2,091,583 Short-term borrowings 136,755 40,416 Securities sold under agreements to repurchase 123,301 -- Advances from Federal Home Loan Bank 616,374 289,674 Long-term debt, net 718,240 697,836 Deferred income taxes 172,930 168,329 Unamortized tax credits 45,954 44,357 Contributions in aid of construction 178,635 165,005 Other 180,529 197,713 ------------------------------------------------------------------------------------------- 4,399,238 3,783,541 ------------------------------------------------------------------------------------------- PREFERRED STOCK OF ELECTRIC UTILITY SUBSIDIARIES Subject to mandatory redemption 44,844 46,730 Not subject to mandatory redemption 48,293 48,293 ------------------------------------------------------------------------------------------- 93,137 95,023 ------------------------------------------------------------------------------------------- STOCKHOLDERS' EQUITY Preferred stock, no par value, authorized 10,000 shares; issued: none -- -- Common stock, no par value, authorized 100,000 shares; issued and outstanding: 28,655 shares and 27,675 shares 546,254 514,710 Retained earnings 135,835 128,318 ------------------------------------------------------------------------------------------- 682,089 643,028 ------------------------------------------------------------------------------------------- $5,174,464 $4,521,592 ===========================================================================================
See accompanying "Notes to Consolidated Financial Statements." 41 CONSOLIDATED STATEMENTS OF CASH FLOWS -------------------------------------------------------------------------------- Hawaiian Electric Industries, Inc. and subsidiaries
Years ended December 31 1994 1993 1992 ------------------------------------------------------------------------------ (in thousands) CASH FLOWS FROM OPERATING ACTIVITIES Income from continuing operations $ 73,030 $ 61,684 $ 61,715 Adjustments to reconcile income from continuing operations to net cash provided by operating activities Depreciation and amortization of property, plant and equipment 72,256 64,314 61,928 Other amortization (660) (88) 784 Deferred income taxes and tax credits, net 9,161 3,164 (4,530) Changes in assets and liabilities, net of effects from disposal of businesses, acquisition of partnership interest and acquisition of control of joint venture Decrease (increase) in accounts receivable and unbilled revenues, net (13,646) 1,108 (17,515) Decrease (increase) in inventories (3,721) (453) 2,593 Decrease (increase) in other securities held for trading 45,396 (22,359) (9,161) Increase in regulatory assets (9,885) (9,606) (2,921) Increase in accounts payable 8,582 6,248 8,474 Changes in other assets and liabilities (17,570) 35,401 (3,614) ------------------------------------------------------------------------------ 162,943 139,413 97,753 Cash flows used by discontinued operations (32,623) (92) -- ------------------------------------------------------------------------------ NET CASH PROVIDED BY OPERATING ACTIVITIES 130,320 139,321 97,753 ------------------------------------------------------------------------------ CASH FLOWS FROM INVESTING ACTIVITIES Loans receivable originated and purchased (515,070) (557,009) (585,292) Principal repayments on loans receivable 225,002 288,932 268,672 Proceeds from sale of loans receivable 2,138 633 5,208 "Held-to-maturity" mortgage-backed securities purchased (421,649) (190,517) (216,289) Principal repayments on "held-to-maturity" mortgage-backed securities 187,967 269,816 307,364 Capital expenditures (200,526) (213,685) (190,653) Contributions in aid of construction 15,112 20,158 17,949 Other (5,695) 29,980 25,953 ------------------------------------------------------------------------------ (712,721) (351,692) (367,088) Net investment in discontinued operations -- -- (24,751) ------------------------------------------------------------------------------ NET CASH USED IN INVESTING ACTIVITIES (712,721) (351,692) (391,839) ------------------------------------------------------------------------------ CASH FLOWS FROM FINANCING ACTIVITIES Net increase in deposit liabilities 37,727 58,714 417,508 Net increase (decrease) in short-term borrowings with original maturities of three months or less 101,688 (93,247) 92,303 Proceeds from other short-term borrowings 1,008 25,622 36,000 Repayment of other short-term borrowings (6,357) (72,707) -- Proceeds from securities sold under agreements to repurchase 145,669 -- 43,000 Repurchase of securities sold under agreements to repurchase (23,330) (27,000) (145,200) Proceeds from advances from Federal Home Loan Bank 998,200 194,692 32,900 Principal payments on advances from Federal Home Loan Bank (671,500) (99,117) (97,400) Proceeds from issuance of long-term debt 87,814 193,788 83,736 Repayment of long-term debt (75,427) (70,801) (43,436) Proceeds from issuance of electric utility subsidiaries' preferred stock -- 12,000 -- Redemption of electric utility subsidiaries' preferred stock (1,886) (2,190) (1,745) Net proceeds from issuance of common stock 13,602 88,658 18,248 Common stock dividends (47,676) (42,012) (39,214) Other (5,768) 5,477 (1,595) ------------------------------------------------------------------------------ NET CASH PROVIDED BY FINANCING ACTIVITIES 553,764 171,877 395,105 ------------------------------------------------------------------------------ Net increase (decrease) in cash and equivalents (28,637) (40,494) 101,019 Cash and equivalents, beginning of year 116,260 156,754 55,735 ------------------------------------------------------------------------------ CASH AND EQUIVALENTS, END OF YEAR $ 87,623 $ 116,260 $ 156,754 ==============================================================================
See accompanying "Notes to Consolidated Financial Statements." 42 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -------------------------------------------------------------------------------- GENERAL -------------------------------------------------------------------------------- BASIS OF FINANCIAL STATEMENT PRESENTATION. The financial statements have been prepared in conformity with generally accepted accounting principles. In preparing the financial statements, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities as of the date of the balance sheet and revenues and expenses for the period. Actual results could differ significantly from those estimates. Material estimates that are particularly susceptible to significant change relate to the determination of regulatory assets, the allowance for loan losses, the provision for costs in excess of net realizable values of real estate projects and the provisions for losses relating to the disposal of discontinued businesses. Management believes that such assets, allowances and provisions have been appropriately established in accordance with generally accepted accounting principles. CONSOLIDATION. The consolidated financial statements include the accounts of Hawaiian Electric Industries, Inc. (HEI), a holding company, and its direct and indirect wholly owned subsidiaries (collectively, the Company). HEI's subsidiaries are Hawaiian Electric Company, Inc. (HECO), parent company of Hawaii Electric Light Company, Inc. (HELCO) and Maui Electric Company, Limited (MECO); HEI Diversified, Inc. (HEIDI), parent company of American Savings Bank, F.S.B. (ASB); Hawaiian Tug & Barge Corp. (HTB), parent company of Young Brothers, Limited (YB); Lalamilo Ventures, Inc. (LVI); Malama Pacific Corp. (MPC), parent company of several real estate subsidiaries; HEI Investment Corp. (HEIIC); and Pacific Energy Conservation Services, Inc. All significant intercompany accounts and transactions have been eliminated in consolidation. PUBLIC UTILITY COMMISSION REGULATION. The electric utility subsidiaries and YB are regulated by the Public Utilities Commission of the State of Hawaii (PUC) and account for the effects of regulation under Statement of Financial Accounting Standards (SFAS) No. 71, "Accounting for the Effects of Certain Types of Regulation." As a result, the actions of regulators can affect the timing of recognition of revenues, expenses, assets and liabilities. INVESTMENTS. DEBT AND EQUITY SECURITIES. In May 1993, the Financial Accounting Standards Board (FASB) issued SFAS No. 115, "Accounting for Certain Investments in Debt and Equity Securities." The Company adopted the provisions of SFAS No. 115 effective January 1, 1994, and the implementation of SFAS No. 115 did not have a material effect on the Company's financial condition or results of operations. Debt securities that the Company has the positive intent and ability to hold to maturity are classified as held-to-maturity securities and reported at amortized cost. Equity securities (with readily determinable fair values) and debt securities that are bought and held principally for the purpose of selling them in the near term are classified as trading securities and reported at fair value, with unrealized gains and losses included in earnings. Equity securities (with readily determinable fair values) and debt securities not classified as either held-to-maturity securities or trading securities are classified as available-for-sale securities and reported at fair value, with unrealized gains and losses excluded from earnings and reported in a separate component of stockholders' equity. 43 OTHER INVESTMENTS. Investments in joint ventures and other investments for which the Company has the ability to exercise significant influence over the operating and financing policies of the enterprise are accounted for under the equity method. For held-to-maturity investments, available-for-sale investments and other investments described above, declines in value determined to be other than temporary are reflected in net income. The specific identification method is used in determining realized gains and losses on the sale of securities. PROPERTY, PLANT AND EQUIPMENT. Property, plant and equipment are stated at cost. The cost of plant constructed by the electric utility subsidiaries includes applicable engineering, supervision, administrative and general expenses, and an allowance for the cost of funds used during the construction period. Upon the ordinary retirement or sale of electric utility plant, no gain or loss is recognized. The cost of the plant retired or sold and the cost of removal (net of salvage obtained) are charged to accumulated depreciation. POSTRETIREMENT AND POSTEMPLOYMENT BENEFITS. Pension costs are charged primarily to expense and electric utility plant. The Company's policy is to fund pension costs in amounts consistent with the requirements of the Employee Retirement Income Security Act. Certain health care and/or life insurance benefits are provided to retired employees (substantially all of whom become eligible for these benefits upon retirement) and the employees' beneficiaries and covered dependents. Effective January 1, 1993, the Company adopted the provisions of SFAS No. 106, "Employers' Accounting for Postretirement Benefits Other Than Pensions," which requires that the expected cost of postretirement benefits other than pensions be accrued during the years in which employees render service (see Note 17). Previously, the cost of these benefits were recognized when paid. The resulting change in the method of accounting for postretirement benefits other than pensions had no material effect on net income for 1993, primarily due to the regulated nature of the electric utility subsidiaries and YB. In November 1992, the 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 financial condition or results of operations. DEPRECIATION AND AMORTIZATION. Depreciation of plant and equipment is computed primarily using the straight-line method over the estimated useful lives of the assets. Goodwill relates to the acquisition of ASB and is being amortized on a straight-line basis over 25 years. Core deposit intangibles are being amortized each year at the greater of the actual attrition rate of such deposit base or 10% of the original value. Subsequent to its acquisition, ASB evaluates whether later events or circumstances have occurred that indicate the remaining estimated useful life of an intangible asset may warrant revision or that the remaining balance of an intangible asset may not be recoverable. When factors indicate that an intangible asset should be evaluated for possible impairment, ASB will use an estimate of undiscounted future cash flows over the remaining useful life of the asset in measuring whether the intangible asset is recoverable. 44 ENVIRONMENTAL EXPENDITURES. In general, environmental contamination treatment costs are charged to expense, unless it is probable such costs will be recovered through rates authorized by the PUC. Also, environmental costs are capitalized if: the costs extend the life, increase the capacity, or improve the safety or efficiency of property owned; the costs mitigate or prevent environmental contamination that has yet to occur and that otherwise may result from future operations; or the costs are incurred in preparing property 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 to be recovered in future rates. INCOME TAXES. The Company adopted the provisions of 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 1993, primarily due to the regulated nature of the electric utility subsidiaries and YB (see Note 14). Federal and state tax credits are deferred and amortized over the estimated useful lives of the properties which qualified for the credits. EARNINGS PER COMMON SHARE. Earnings per common share are based upon the weighted average number of shares of common stock outstanding. The dilutive effect of stock options is not material. CASH FLOWS. The Company considers cash on hand, deposits in banks, deposits with the Federal Home Loan Bank, money market accounts, certificates of deposit, short-term commercial paper and reverse repurchase agreements with original maturities of three months or less to be cash and equivalents. RECLASSIFICATIONS. Certain reclassifications have been made to prior years' consolidated financial statements to conform to the 1994 presentation. ACCOUNTING CHANGES - 1995 IMPLEMENTATION. In May 1993, the FASB issued SFAS No. 114 "Accounting by Creditors for Impairment of a Loan." The Company adopted the provisions of SFAS No. 114, as amended by SFAS No. 118, effective January 1, 1995. The adoption 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 1995 results of operations. ELECTRIC UTILITY -------------------------------------------------------------------------------- CONTRIBUTIONS IN AID OF CONSTRUCTION. The electric utility subsidiaries receive contributions from customers for special construction requirements. As directed by the PUC, the contributions are amortized on a straight-line basis over 30 years which approximates the estimated useful lives of the facilities for which the contributions were received. This amortization is an offset against depreciation expense. ELECTRIC UTILITY REVENUES. Electric utility revenues are based on rates authorized by the PUC and include revenues applicable to electric energy consumed in the accounting period but not yet billed to the customers. The rate schedules of the electric utility subsidiaries include energy cost adjustment clauses under which electric rates are adjusted for changes in the weighted average price paid for fuel oil and certain components of purchased power, and the relative amounts of company-generated and purchased power. 45 SAVINGS BANK -------------------------------------------------------------------------------- LOANS RECEIVABLE. Any discount or premium on loans is amortized over the estimated life of the loan using the level-yield method. The valuation allowance for estimated losses on loans receivable is provided to the extent that such losses are expected to be incurred. The accrual of interest on a loan is discontinued when the loan becomes more than 90 days delinquent or on an earlier basis when there is reasonable doubt as to its collectability. REAL ESTATE ACQUIRED IN SETTLEMENT OF LOANS. Real estate acquired in settlement of loans is recorded at the lower of cost or fair value less estimated selling expenses. LOAN ORIGINATION AND COMMITMENT FEES. Loan origination fees (net of direct loan origination costs) are deferred and recognized as an adjustment of yield over the life of the loan. Nonrefundable commitment fees (net of direct loan origination costs, if applicable) for commitments to originate or purchase loans are deferred and, if the commitment is exercised, recognized as an adjustment of yield over the life of the loan. If the commitment expires unexercised, nonrefundable commitment fees are recognized as income upon expiration of the commitment. 2. DISCONTINUED OPERATIONS -------------------------------------------------------------------------------- HAWAIIAN ELECTRIC RENEWABLE SYSTEMS, INC. -------------------------------------------------------------------------------- In October 1992, the HEI Board of Directors ratified management's September 30, 1992 plan to exit the nonutility wind energy business because of chronic mechanical problems with its wind turbines and continuing operating losses. In March 1993, HEI sold the stock of Hawaiian Electric Renewable Systems, Inc. (HERS) to The New World Power Corporation for an amount which was not material. In 1993, in connection with the sale of HERS, HEI reversed reserves for HERS' disposal costs that were no longer needed due to the terms of the sale, resulting in a gain on disposal of $2.0 million (net of $1.2 million of income taxes). In 1992, HERS operating revenues were $0.6 million, loss from operations was $5.5 million (net of $8.1 million of income tax benefits) and loss on disposal was $8.1 million (net of $9.0 million of income tax benefits). THE HAWAIIAN INSURANCE & GUARANTY COMPANY, LIMITED -------------------------------------------------------------------------------- The Hawaiian Insurance & Guaranty Company, Limited (HIG) and its subsidiaries (collectively, the HIG Group) are property and casualty insurance companies. HEIDI was the holder of record of all the common stock of HIG until August 16, 1994. In December 1992, due to a significant increase in the estimate of policyholder claims from Hurricane Iniki, the HEI Board of Directors had concluded that it would not contribute additional capital to HIG and the remaining investment in the HIG Group was written off. On December 24, 1992, a formal rehabilitation order vested full control over the HIG Group in the Insurance Commissioner (the Rehabilitator) and her deputies. 46 On April 12, 1993, the Rehabilitator, the HIG Group and others filed a complaint against HEI, HEIDI and others. The complaint, which was subsequently amended, set forth several separate counts, including claims to the effect that HEI and/or HEIDI should be held liable for HIG's obligations and claims that directors and officers of HEI, HEIDI and the HIG Group were responsible for the losses suffered by the HIG Group. In 1994, HEI, HEIDI, the named directors and officers, the Rehabilitator and others signed an agreement to settle the lawsuit. In August 1994, $32 million was disbursed to the Rehabilitator, at which time a release of claims against HEI, its affiliates and their past and present officers and directors became effective. HEI is seeking reimbursement for the settlement and defense costs from its insurance carriers. One of HEI's insurance carriers has filed a declaratory relief action seeking resolution of insurance coverage and other policy issues, and HEI has filed counterclaims. Trial is scheduled for October 1995. Recoveries from HEI's insurance carriers, if any, will be recognized when realized. The settlement of the lawsuit resulted in a loss on disposal of $15.0 million (net of $9.2 million of income tax benefits) in 1993. In 1992, HIG operating revenues were $80.7 million, loss from operations was $51.6 million (net of $28.5 million of income tax benefits) and loss on disposal was $8.1 million (net of $5.0 million of income tax benefits). In December 1994, five insurance agencies, which had served as insurance agents for the HIG Group, filed a complaint against HEI, HEIDI and others. The complaint set forth several causes of action, including breach of contract and piercing the corporate veil. The plaintiffs ask for relief from the defendants, including compensatory damages for lost commissions, lost business and lost profits in an amount to be proven at trial and punitive damages. In the opinion of management, losses, if any, resulting from the ultimate outcome of the lawsuit will not have a material adverse effect on the Company's financial condition or results of operations. 3. SEGMENT FINANCIAL INFORMATION -------------------------------------------------------------------------------- Segment financial information on page 26 is incorporated herein by reference. 47 4. ELECTRIC UTILITY SUBSIDIARY -------------------------------------------------------------------------------- Hawaiian Electric Company, Inc. and subsidiaries Selected consolidated financial information
INCOME STATEMENT DATA Years ended December 31 1994 1993 1992 ------------------------------------------------------------------------------- (in thousands) REVENUES Operating revenues $907,308 $874,010 $776,929 Other--nonregulated 6,411 5,100 1,761 ------------------------------------------------------------------------------- 913,719 879,110 778,690 ------------------------------------------------------------------------------- EXPENSES Fuel oil 186,717 213,285 225,611 Purchased power 271,636 258,723 172,761 Other operation 121,740 105,957 105,303 Maintenance 46,427 44,281 44,653 Depreciation 63,779 55,960 53,856 OpTaxes, other than income taxes 85,877 80,712 71,452 Other--nonregulated 915 627 1,213 ------------------------------------------------------------------------------- 777,091 759,545 674,849 ------------------------------------------------------------------------------- Operating income from regulated and nonregulated activities 136,628 119,565 103,841 Allowance for equity funds used during construction 9,064 6,973 6,781 Interest and other charges (40,187) (37,384) (35,196) Allowance for borrowed funds used during construction 4,043 3,869 2,095 ------------------------------------------------------------------------------- Income before income taxes and preferred stock dividends of HECO 109,548 93,023 77,521 Income taxes 43,587 36,897 23,843 ------------------------------------------------------------------------------- Income before preferred stock dividends of HECO 65,961 56,126 53,678 Preferred stock dividends of HECO 4,316 4,421 4,525 ------------------------------------------------------------------------------- Net income for common stock $ 61,645 $ 51,705 $ 49,153 ===============================================================================
BALANCE SHEET DATA December 31 1994 1993 ------------------------------------------------------------------------------------- (dollars in thousands) ASSETS Utility plant, at cost Property, plant and equipment $2,129,274 $1,976,192 Less accumulated depreciation (702,945) (641,230) Construction in progress 164,247 126,342 ------------------------------------------------------------------------------------- Net utility plant 1,590,576 1,461,304 Accounts receivable, net 70,708 64,012 Unbilled revenues, net 38,435 34,735 Regulatory assets 92,524 61,078 Other 96,877 82,147 ------------------------------------------------------------------------------------- $1,889,120 $1,703,276 ===================================================================================== CAPITALIZATION AND LIABILITIES Common stock equity $ 633,901 $ 570,663 Cumulative preferred stock Not subject to mandatory redemption, dividend rates of 4.25-8.875% 48,293 48,293 Subject to mandatory redemption, dividend rates of 7.68-13.75% 44,844 46,730 Long-term debt, net 489,586 484,736 ------------------------------------------------------------------------------------- Total capitalization 1,216,624 1,150,422 Short-term borrowings from nonaffiliates and affiliate 117,866 40,928 Deferred income taxes 108,362 107,449 Unamortized tax credits 44,939 43,348 Contributions in aid of construction 178,635 165,005 Other 222,694 196,124 ------------------------------------------------------------------------------------- $1,889,120 $1,703,276 =====================================================================================
48 CUMULATIVE PREFERRED STOCK. Certain cumulative preferred shares of HECO and its subsidiaries are redeemable at the option of the respective company at a premium or par. The remaining cumulative preferred shares are subject to mandatory sinking fund provisions at par and optional redemption provisions at a premium. The total sinking fund requirements on preferred stock subject to mandatory redemption from 1995 to 1999 are $2 million each year. INDEBTEDNESS. See Notes 10 and 11. MAJOR CUSTOMERS. The electric utility subsidiaries derived 10% of their operating revenues from the sale of electricity to various federal government agencies amounting to $89 million in 1994, $91 million in 1993 and $78 million in 1992. COMMITMENTS AND CONTINGENCIES. FUEL CONTRACTS AND OTHER PURCHASE COMMITMENTS. HECO and its subsidiaries have contractual agreements to purchase a minimum amount of 0.5% sulfur residual fuel oil and 0.4% sulfur diesel fuel through 1995. The prices under these contracts are tied to market prices of petroleum products as reported in Singapore and the U.S. Pacific Northwest. Based on the average price per barrel prevailing on January 1, 1995, the estimated amount of required purchases for 1995 is $171 million. The actual amount of purchases in 1995 could vary substantially from such estimates as a result of changes in market prices and other factors. HECO and its subsidiaries purchased $186 million, $205 million and $216 million of fuel under these or prior contractual agreements in 1994, 1993 and 1992, respectively. New contracts to replace expiring ones are expected to be entered into in the normal course of business. At December 31, 1994, HECO and its subsidiaries had purchase commitments, other than fuel and power purchase contracts, amounting to approximately $83 million. POWER PURCHASE AGREEMENTS. At December 31, 1994, HECO and its subsidiaries had power purchase agreements for 465 megawatts (MW) of firm capacity representing approximately 22% of the total of their generating capabilities and purchased power firm capacities. Rate recovery is allowed for energy and firm capacity payments under these agreements. Assuming that each of the agreements remains in place and the minimum availability criteria in the power purchase agreements are met [including HELCO's agreement in principle with Hilo Coast Processing Company (HCPC)-see discussion which follows], aggregate minimum fixed capacity charges are expected to be approximately $107 million in 1995, $109 million in each of 1996 and 1997, $106 million in 1998, $109 million in 1999 and $2.1 billion thereafter. In general, payments under the power purchase agreements for 465 MW of firm capacity 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 payment will vary over the terms of the agreements and HECO and its subsidiaries may pass on changes in the fuel component of the energy charges to customers through the energy cost adjustment clause in its rate schedules. HECO and its subsidiaries do not operate nor participate in the operation of any of the facilities that provide power under the agreements. Title to the facilities does not pass to HECO nor its subsidiaries upon expiration of the agreements, and the agreements do not contain bargain purchase options with respect to the facilities. 49 HELCO has a power purchase agreement with HCPC for 18 MW of firm capacity. On December 12, 1994, HCPC filed a Chapter 11 bankruptcy petition and advised HELCO that it would cease operating its plant in December 1994. HELCO obtained a temporary restraining order and, later, an extension of such order, requiring HCPC to continue operations of the HCPC facility through March 7, 1995, with HELCO to pay an additional amount for the power HCPC supplies. On January 5, 1995, HELCO and HCPC entered into an agreement in principle, subject to the negotiation and execution of a definitive agreement, amending the existing power purchase agreement through December 1999. The definitive agreement must be approved by the bankruptcy court and is subject to cancellation by HELCO if not approved by the PUC within 180 days of its execution. If unable to purchase power from HCPC as contemplated by the agreement in principle, HELCO would be operating with a slim generation margin and might have to initiate planned service interruptions (rolling blackouts) until it is able to arrange for additional generation. HELCO RELIABILITY INVESTIGATION. In July 1991, following service interruptions and rolling blackouts instituted on the island of Hawaii, the PUC initiated an investigation into the reliability of HELCO's system and held hearings. Further hearings were held in July 1992 following additional service interruptions and rolling blackouts. 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. In the opinion of management, any adjustment by the PUC to its October 1992 rate increase resulting from the reliability investigation would not have a material adverse effect on the Company's financial condition or results of operations. Subsequent to the hearings on HELCO's reliability, HELCO's generation margin improved. However, HELCO's generation margin was adversely affected by the cessation of operations by Hamakua Sugar Company in 1994 and will be further adversely affected if an agreement in principle that HELCO has reached with HCPC is not implemented. See "Power purchase agreements" above. HELCO is proceeding with plans to install two 20-MW combustion turbines in 1995 or 1996, followed by an 18-MW heat steam recovery generator in 1997. However, two independent power producers have each filed with the PUC separate complaints against HELCO, alleging that they are entitled to a power purchase contract to provide all or part of the capacity. Also, HELCO has encountered procedural and other difficulties in obtaining the necessary air permit and Conservation District Use Permit (CDUP) which would allow the combined-cycle unit to be constructed. As a result of these permitting delays, HELCO's unit installation schedule has been adversely impacted and HELCO is exploring other alternatives to meet projected energy needs, including any viable, timely and cost-effective nonutility generation alternative. However, until additional generation is in place, management believes that there is a significant risk of capacity shortages on the island of Hawaii that could result in rolling blackouts. 50 HECO POWER OUTAGE. On April 9, 1991, HECO experienced a power outage that affected all customers on the island of Oahu. The PUC initiated an investigation of the outage, which was consolidated with a pending investigation of an outage that occurred in 1988. Power Technologies, Inc. (PTI), an independent consultant hired by HECO with the approval of the PUC, investigated the outage. HECO is implementing certain of PTI's recommendations and is either studying or disagrees with certain of the other recommendations. Management cannot predict the timing and outcome of any PUC decision and order that may be issued, if any, with respect to the outages or PTI's recommendations. HECO's PUC-approved tariff states that HECO is not liable for interruptions or insufficiency of supply when the cause was beyond HECO's control. Nevertheless, HECO received 3,063 customer claims, which totaled approximately $7.8 million, within the time limit to file claims. 1,530 of these claims are for property damage and most have been settled, with no admission of liability, or closed as of December 31, 1994. The other 1,533 claims involve personal injury or economic loss, such as lost profits, and generally have not been covered by settlement. Seven direct or indirect business customers have 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. HECO has filed an answer which denies the principal allegations in the complaint. The class has not been certified. Trial has been set for January 1996. HECO recorded a liability of $1 million for the total amount of expected defense costs and settlements with respect to the outage. In the opinion of management, losses (if any) in excess of the amount for which provision has been made, net of estimated insurance recoveries, resulting from the ultimate outcome of the lawsuit and claims related to the April 1991 outage will not have a material adverse effect on the Company. MANAGEMENT SERVICES FEES. HEI charges to HECO and its subsidiaries for general management and administrative services totaled $2.4 million, $2.3 million and $5.6 million in 1994, 1993 and 1992, respectively. 51 5. SAVINGS BANK SUBSIDIARY ------------------------------------------------------------------------------- American Savings Bank, F.S.B. and subsidiaries Selected consolidated financial information
INCOME STATEMENT DATA Years ended December 31 1994 1993 1992 ------------------------------------------------------------------------------- (in thousands) Interest income $203,373 $ 188,619 $ 192,644 Interest expense 103,906 92,701 114,748 ------------------------------------------------------------------------------- Net interest income 99,467 95,918 77,896 Provision for losses (3,983) (779) (1,494) Other income 12,152 11,115 10,351 Operating, administrative and general expenses (65,111) (62,137) (53,915) ------------------------------------------------------------------------------- Operating income 42,525 44,117 32,838 Income taxes 17,760 18,835 13,280 ------------------------------------------------------------------------------- Net income $ 24,765 $ 25,282 $ 19,558 ===============================================================================
BALANCE SHEET DATA December 31 1994 1993 ------------------------------------------------------------------------------- (in thousands) ASSETS Cash and equivalents $ 76,502 $ 77,610 Investment securities 32,523 68,599 Mortgage-backed securities 1,067,287 630,156 Loans receivable, net 1,824,055 1,735,098 Other 69,829 57,358 Goodwill and other intangibles 45,455 49,664 ------------------------------------------------------------------------------- $3,115,651 $2,618,485 =============================================================================== LIABILITIES AND EQUITY Deposit liabilities $2,129,310 $2,091,583 Securities sold under agreements to repurchase 123,301 -- Advances from Federal Home Loan Bank 616,374 289,674 Other 51,078 52,717 ------------------------------------------------------------------------------- 2,920,063 2,433,974 Common stock equity 195,588 184,511 ------------------------------------------------------------------------------- $3,115,651 $2,618,485 ===============================================================================
INVESTMENT AND MORTGAGE-BACKED SECURITIES. Investment and mortgage-backed securities consisted of the following:
December 31 1994 1993 ----------------------------------------------------------------------------------------------------------------------------- Gross Gross Estimated Gross Gross Estimated Carrying unrealized unrealized market Carrying unrealized unrealized market value gains losses value value gains losses value ----------------------------------------------------------------------------------------------------------------------------- (in thousands) Investment securities: Securities held for trading $ -- $ -- $ -- $ -- $ 45,396 $ -- $ -- $ 45,396 Stock in FHLB of Seattle 32,523 -- -- 32,523 23,203 -- -- 23,203 ----------------------------------------------------------------------------------------------------------------------------- 32,523 -- -- 32,523 68,599 -- -- 68,599 ----------------------------------------------------------------------------------------------------------------------------- Mortgage-backed securities: Private-issue 707,260 243 (28,858) 678,645 465,373 4,339 (1,440) 468,272 FHLMC 75,546 1,899 (1,331) 76,114 117,803 8,024 -- 125,827 GNMA 78,693 185 (6,285) 72,593 42,539 906 (629) 42,816 FNMA 205,788 557 (14,547) 191,798 4,441 414 -- 4,855 ----------------------------------------------------------------------------------------------------------------------------- 1,067,287 2,884 (51,021) 1,019,150 630,156 13,683 (2,069) 641,770 ----------------------------------------------------------------------------------------------------------------------------- $1,099,810 $2,884 $(51,021) $ 1,051,673 $698,755 $13,683 $(2,069) $710,369 =============================================================================================================================
52 ASB has private-issue mortgage-backed securities and mortgage-backed securities purchased from the Federal Home Loan Mortgage Corporation (FHLMC), Government National Mortgage Association (GNMA) and Federal National Mortgage Association (FNMA). All such mortgage-backed securities as of December 31, 1994 are classified as "held-to-maturity" securities. Contractual maturities are not presented for ASB's mortgage-backed securities held for investment because these securities are not due at a single maturity date. The weighted average interest rate for mortgage-backed securities at December 31, 1994 and 1993 was 6.21% and 6.65%, respectively. Mortgage-backed securities with a carrying value of approximately $862 million and $469 million at December 31, 1994 and 1993, respectively, were pledged as collateral to secure public funds, deposits with the Federal Reserve Bank of San Francisco and advances from the Federal Home Loan Bank (FHLB) of Seattle. At December 31, 1994, mortgage-backed securities sold under agreements to repurchase had a carrying value of $137 million. ASB did not sell mortgage-backed securities or other securities held for investment in 1994, 1993 or 1992. In 1994 and 1993, proceeds from the sale of trading securities were approximately $59 million and $30 million, respectively, resulting in a net loss of $2.0 million and a net gain of $0.1 million, respectively. There were no sales of investment securities during 1992. LOANS RECEIVABLE. Loans receivable consisted of the following:
December 31 1994 1993 ------------------------------------------------------------------- (in thousands) Real estate loans Conventional $1,636,282 $1,584,218 Construction and development 32,074 26,526 Troubled debt restructurings 16,151 3,397 ------------------------------------------------------------------- 1,684,507 1,614,141 Loans secured by savings deposits 15,378 15,015 Consumer loans 144,505 129,961 Commercial loans 27,981 24,494 ------------------------------------------------------------------- 1,872,371 1,783,611 Undisbursed portion of loans in process (18,312) (16,315) Deferred fees and discounts, including net purchase accounting discounts (21,211) (26,884) Allowance for loan losses (8,793) (5,314) ------------------------------------------------------------------- $1,824,055 $1,735,098 ===================================================================
At December 31, 1994 and 1993, the weighted average interest rate for loans receivable was 7.73% and 7.63%, respectively. At December 31, 1994 and 1993, nonaccrual and renegotiated loans were $25 million and $8 million, respectively. ASB services real estate loans ($327 million, $178 million and $311 million at December 31, 1994, 1993 and 1992, respectively) which are not included in the accompanying consolidated financial statements. Fees earned for servicing loans are reported as income when the related mortgage loan payments are collected. Loan servicing costs are charged to expense as incurred. Mortgage loan commitments of approximately $35 million are not reflected on the balance sheet as of December 31, 1994. Of such commitments, $29 million were for variable-rate mortgage loans and $6 million were for fixed-rate mortgage loans. In January 1995, ASB entered into a pool purchase contract to sell to and service for the FNMA certain 15-year and 30-year conventional fixed-rate, level payment residential mortgage loans in the amount of $200 million. In addition, the FNMA agreed to issue its Guaranteed Mortgage Pass-Through Securities backed by these same mortgages. 53 ALLOWANCE FOR LOAN LOSSES. For 1994, 1993 and 1992, net charge-offs amounted to $0.5 million, $0.6 million and $0.2 million, respectively. For 1994, 1993 and 1992, the ratio of net charge-offs to average loans outstanding was 0.03%, 0.04% and 0.01%, respectively. REAL ESTATE ACQUIRED IN SETTLEMENT OF LOANS. At December 31, 1994 and 1993, ASB had real estate acquired in settlement of loans of $0.8 million and $0.2 million, respectively. DEPOSIT LIABILITIES. Deposit liabilities consisted of the following:
December 31 1994 1993 --------------------------------------------------------------------------- Weighted Weighted average average rate amount rate Amount --------------------------------------------------------------------------- (dollars in thousands) Commercial checking -- % $ 18,444 -- % $ 17,405 Other checking 2.39 250,350 2.42 255,838 Passbook 3.49 1,112,230 3.48 1,211,330 Money market 3.51 70,860 3.11 106,362 Term certificates 5.08 677,426 4.40 500,648 --------------------------------------------------------------------------- 3.84% $2,129,310 3.52% $2,091,583 ===========================================================================
At December 31, 1994 and 1993, deposit accounts of $100,000 or more totaled $407 million and $438 million, respectively. The approximate scheduled maturities of term certificates outstanding at December 31, 1994 were $373 million in 1995, $180 million in 1996, $33 million in 1997, $11 million in 1998 and $21 million in 1999. The interest expense on savings deposits by type of deposit was as follows:
Years ended December 31 1994 1993 1992 ---------------------------------------------------------- (in thousands) Interest-bearing checking $ 5,997 $ 6,679 $ 9,982 Passbook 42,624 42,021 34,645 Money market 2,670 3,758 6,447 Term certificates 25,218 25,193 43,265 ---------------------------------------------------------- $76,509 $77,651 $94,339 ==========================================================
SECURITIES SOLD UNDER AGREEMENTS TO REPURCHASE. At December 31, 1994, securities sold under agreements to repurchase consisted of mortgage-backed securities sold under fixed-coupon agreements. Other than Federal Home Loan Mortgage Corporation (FHLMC) mortgage-backed securities, the securities underlying the agreements were delivered to the brokers/dealers who arranged the transactions. The FHLMC mortgage-backed securities are book-entry securities and were delivered by appropriate entry into the counterparties' accounts at the Federal Reserve System. At December 31, 1994, the $137 million carrying value of securities underlying the agreements remained in ASB's asset accounts. The obligation to repurchase securities sold is reflected as a liability in the consolidated balance sheets. At December 31, 1994, approximately $123 million of agreements to repurchase substantially the same securities were outstanding. At December 31, 1994, the weighted average interest rate on securities sold under agreements to repurchase was 6.22% and the weighted average remaining days to maturity was 118 days. Securities sold under agreements to repurchase averaged $21 million, $20 million and $66 million during 1994, 1993 and 1992, respectively, and the maximum amount outstanding at any month-end during 1994, 1993 and 1992 was $123 million, $27 million and $125 million, respectively. 54 ADVANCES FROM FEDERAL HOME LOAN BANK. Advances from the FHLB, secured by mortgage-backed securities and stock in the FHLB, were summarized as follows:
December 31 1994 1993 ----------------------------------------------------------------------- Weighted Weighted average average rate Amount rate Amount ----------------------------------------------------------------------- (dollars in thousands) Due in 1994 --% $ -- 6.40% $ 73,000 1995 6.39 337,822 8.33 16,822 1996 6.56 116,060 7.23 58,360 1997 5.77 94,800 5.99 73,800 1998 4.96 36,392 4.96 36,392 1999 4.98 20,300 4.98 20,300 Thereafter 4.98 11,000 4.98 11,000 ----------------------------------------------------------------------- 6.17% $616,374 6.24% $289,674 =======================================================================
As a member of the FHLB system, ASB is required to own a specific number of shares of capital stock of the FHLB of Seattle and is required to maintain cash and investments in U.S. Government and other qualifying securities in an amount equal to 5% of the amount of its savings accounts and other obligations due within one year. COMMON STOCK EQUITY. As of December 31, 1994, ASB was in compliance with the minimum capital requirements under the Office of Thrift Supervision regulations. MANAGEMENT SERVICES FEES. In the second quarter of 1992, HEI changed its method of billing corporate-level expenses to ASB such that only certain direct charges, rather than fully-allocated costs, were billed to ASB. However, no change was made by HEI in the manner in which corporate-level expenses for that year were allocated for segment reporting purposes. Thus, operating income for the savings bank segment differs from the operating income reported in the separate financial statements of ASB for 1992 because of corporate-level expenses which were allocated to the segment, but were not billed. In 1994 and 1993, corporate-level expenses allocated to the savings bank segment did not differ from the amount billed to ASB, and operating income for the savings bank segment did not differ from the operating income reported in the separate financial statements of ASB. For segment reporting purposes, HEI expenses allocated to the savings bank segment for general management and administrative services totaled $0.8 million, $0.8 million and $2.0 million for 1994, 1993 and 1992, respectively. 6. REAL ESTATE SUBSIDIARY ------------------------------------------------------------------------------- At December 31, 1994 and 1993, MPC and its subsidiaries' total real estate project inventory, equity investment in real estate joint ventures and loans and advances to unconsolidated joint ventures or joint venture partners amounted to $51 million and $49 million, respectively. RELATED PARTY TRANSACTIONS. Two joint ventures involve partnerships in which a director of HEI has significant interests. Another joint venture involves a corporate partner in which the family of an HEI officer has a significant interest. Investments in joint ventures with related parties totaled $13 million and $15 million at December 31, 1994 and 1993, respectively. 55 COMMITMENTS AND CONTINGENCIES. At December 31, 1994, MPC or its subsidiaries had issued (i) guaranties under which they were jointly and severally contingently liable with their joint venture partners for $1.9 million of outstanding loans and (ii) payment guaranties under which MPC or its subsidiaries were severally contingently liable for $7.2 million of outstanding loans and $7.1 million of additional undrawn loan facilities. At December 31, 1994, HEI had agreed with the lenders of construction loans and loan facilities, of which approximately $13.3 million was outstanding and $7.9 million was undrawn, that it will maintain ownership of 100% of the stock of MPC and that it intends, subject to good and prudent business practices, to keep MPC financially sound and responsible to meet its obligations. 7. OTHER INVESTMENTS -------------------------------------------------------------------------------- Other investments, which have no ready market, consisted of the following:
December 31 1994 1993 ---------------------------------------------------------- (in thousands) Leveraged leases (see Note 8) $54,372 $53,115 Real estate joint venture interests 15,259 17,494 Other 7,666 6,497 ---------------------------------------------------------- $77,297 $77,106 ==========================================================
Realized gains and losses from the sale and writedown of other investments were not material in 1994, 1993 or 1992. 8. INVESTMENT IN LEVERAGED LEASES -------------------------------------------------------------------------------- HEIIC owns commercial real estate which is subject to several leveraged lease agreements entered into in 1987. The initial lease terms expire in 2009 and 2010, after which the lessees have options to renew the leases at fixed rentals for additional periods of up to 28 years. The real estate reverts back to HEIIC at the end of the last renewal term if not purchased by the lessees. HEIIC also has a 15% ownership interest in an 818-MW coal-fired generating unit, which is subject to a leveraged lease agreement entered into in 1985 and expiring in 2013. The lessee has options to renew the lease at fixed rentals for at least 8.5 additional years, and thereafter at fair market rentals. 56 In 1993, HEIIC refinanced approximately $13 million of nonrecourse debt supporting one of the leveraged leases, reducing the interest rate from 16.75% to 8.68%. As a result of the refinancing, 1993 net income increased by $1.1 million and an additional $7.5 million of net income from the leveraged lease will be recognized over the remaining life of the lease. HEIIC's net investment in leveraged leases was as follows:
December 31 1994 1993 --------------------------------------------------------------- (in thousands) Rentals receivable, net of principal and interest on nonrecourse debt $ 61,994 $ 62,225 Estimated residual value of leased assets 35,266 35,268 Less unearned income (42,888) (44,378) --------------------------------------------------------------- Investment in leveraged leases 54,372 53,115 Less deferred income taxes arising from leveraged leases (46,277) (45,418) --------------------------------------------------------------- $ 8,095 $ 7,697 ===============================================================
9. REGULATORY ASSETS ------------------------------------------------------------------------------- Regulatory assets at December 31, 1994 and 1993 included the following deferred costs:
December 31 1994 1993 ----------------------------------------------------------------- (in thousands) Postretirement benefits other than pensions $36,670 $19,210 Income taxes 23,522 16,297 Unamortized debt expense on retired issuances 7,513 5,435 Integrated resource planning costs 7,189 4,661 Computer system development costs 6,090 3,152 Vacation earned, but not yet taken 5,972 5,494 Preliminary plant costs on suspended project 5,768 5,199 Other 2,533 3,095 ----------------------------------------------------------------- $95,257 $62,543 =================================================================
10. SHORT-TERM BORROWINGS -------------------------------------------------------------------------------- Short-term borrowings at December 31, 1994 and 1993 had a weighted average interest rate of 6.5% and 4.7%, respectively, and consisted of commercial paper and bank loans. At December 31, 1994 and 1993, HEI maintained bank lines of credit which totaled $50 million and HECO maintained bank lines of credit which totaled $125 million and $108 million, respectively. The HEI and HECO lines of credit support the issuance of commercial paper. There were no borrowings under any line of credit during 1994 or 1993. 57 11. LONG-TERM DEBT -------------------------------------------------------------------------------- Long-term debt consisted of the following:
December 31 1994 1993 ------------------------------------------------------------------------------------------------------------------------------- (dollars in thousands) First mortgage bonds 4.55-5.75%, due in various years through 1997 $ 24,000 $ 24,000 7.63-7.88%, due in various years through 2003 22,000 22,000 8.50-9.88%, due in various years through 2016 -- 43,000 10.75%, due 2005 -- 5,000 ------------------------------------------------------------------------------------------------------------------------------- 46,000 94,000 ------------------------------------------------------------------------------------------------------------------------------- Obligations to the State of Hawaii for the repayment of special purpose revenue bonds issued on behalf of electric utility subsidiaries 6.88% refunding series 1987, due 2012 57,500 57,500 7.20% series 1984, due 2014 11,400 11,400 7.63% series 1988, due 2018 50,000 50,000 7.35-7.60% series 1990, due 2020 100,000 100,000 6.55% series 1992, due 2022 60,000 60,000 5.45% series 1993, due 2023 100,000 100,000 ------------------------------------------------------------------------------------------------------------------------------- 378,900 378,900 Less funds on deposit with trustees (3,391) (56,205) Less unamortized discount (1,923) (1,986) ------------------------------------------------------------------------------------------------------------------------------- 373,586 320,709 ------------------------------------------------------------------------------------------------------------------------------- Promissory notes 4.85-5.83%, due in various years through 1998 70,000 70,000 6.26-7.59%, due in various years through 2003 113,000 113,000 8.20-9.90%, due in various years through 2011 72,700 100,100 Variable rate (6.45% at December 31, 1994), due 1999 35,000 -- Variable rate (9.25% at December 31, 1994), due 2001 7,954 -- Other -- 27 ------------------------------------------------------------------------------------------------------------------------------- 298,654 283,127 ------------------------------------------------------------------------------------------------------------------------------- $718,240 $697,836 ===============================================================================================================================
The first mortgage bonds are secured by separate indentures which purport to be liens on substantially all of the real and personal property now owned or hereafter acquired by the respective electric utility subsidiaries. At December 31, 1994, the aggregate principal payments required on long-term debt for 1995 through 1999 are $23 million in 1995, $68 million in 1996, $65 million in 1997, $52 million in 1998 and $42 million in 1999. In January 1995, the Department of Budget and Finance of the State of Hawaii issued tax-exempt special purpose revenue bonds in the principal amount of $47 million, with a maturity of 30 years and a fixed coupon interest rate of 6.60%, and loaned the proceeds from the sale to HECO, HELCO and MECO. The bonds were issued at a discount, resulting in a yield of approximately 6.75%. 58 12. COMMON STOCK -------------------------------------------------------------------------------- Changes to common stock were as follows:
1994 1993 1992 ------------------------------------------------------------------------------------------- Common Common Common Shares Stock Shares stock Shares stock ------------------------------------------------------------------------------------------- (in thousands) Balance, beginning of year 27,675 $514,710 24,762 $409,257 23,867 $376,783 Issuance of common stock Public offering -- -- 2,000 74,500 -- -- Dividend reinvestment and stock purchase plan 869 28,087 758 28,013 703 27,102 HEI retirement savings and other plans 111 3,605 155 5,637 192 6,822 Expenses and other -- (148) -- (2,697) -- (1,450) ------------------------------------------------------------------------------------------- Balance, end of year 28,655 $546,254 27,675 $514,710 24,762 $409,257 ===========================================================================================
At December 31, 1994, the Company had reserved a total of 4,552,000 shares of common stock for future issuance under the Dividend Reinvestment and Stock Purchase Plan, Hawaiian Electric Industries Retirement Savings Plan, 1987 Stock Option and Incentive Plan and other plans. 13. INTEREST EXPENSE -------------------------------------------------------------------------------- Interest expense by segment (including amounts capitalized as allowance for borrowed funds used during construction and excluding interest on nonrecourse debt on leveraged leases) was as follows:
Years ended December 31 1994 1993 1992 ------------------------------------------------------------------------------------------- (in thousands) Electric utility $ 37,340 $ 35,287 $ 33,011 Other 16,688 17,905 14,130 ------------------------------------------------------------------------------------------- 54,028 53,192 47,141 Savings bank 103,906 92,701 114,748 ------------------------------------------------------------------------------------------- $157,934 $145,893 $161,889 ===========================================================================================
14. INCOME TAXES -------------------------------------------------------------------------------- In February 1992, the FASB issued SFAS No. 109, "Accounting for Income Taxes," which 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. 59 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 1993 primarily due to the regulated nature of the electric utility subsidiaries and YB. For these PUC regulated subsidiaries, the net increase in deferred income taxes payable arising from the adoption of SFAS No. 109 is recoverable through future rates and has been recorded as a regulatory asset. In 1993, additional income tax expense of $1.8 million was recognized under SFAS No. 109 as a result of the 1% increase in the maximum corporate income tax rate enacted by the Omnibus Budget Reconciliation Act of 1993. Total income tax expense (benefit) was recorded as follows:
Years ended December 31 1994 1993 1992 ------------------------------------------------------------------------- (in thousands) Continuing operations $53,019 $47,086 $ 29,529 Discontinued operations -- (7,982) (50,623) ------------------------------------------------------------------------- $53,019 $39,104 $(21,094) =========================================================================
The components of income taxes attributable to income from continuing operations were as follows:
Years ended December 31 1994 1993 1992 ------------------------------------------------------------------------- (in thousands) Federal Current $40,798 $40,537 $ 32,425 Deferred 4,665 (152) (7,085) Deferred tax credits, net (278) 50 (1,777) ------------------------------------------------------------------------- 45,185 40,435 23,563 ------------------------------------------------------------------------- State Current 3,060 3,385 1,634 Deferred 1,218 (475) (332) Deferred tax credits, net 3,556 3,741 4,664 ------------------------------------------------------------------------- 7,834 6,651 5,966 ------------------------------------------------------------------------- $53,019 $47,086 $ 29,529 =========================================================================
Under Accounting Principles Board Opinion No. 11, the sources of timing differences in the recognition of revenues and expenses for tax and financial reporting purposes related to the 1992 provision for deferred income taxes were as follows:
Year ended December 31 1992 ------------------------------------------------------------------------- (in thousands) Excess of tax depreciation over financial reporting straight-line depreciation $ 2,977 Excess tax deductions from leveraged leases 2,099 Interest capitalized for tax purposes (3,347) Gain on sale of land deferred for financial reporting purposes (4,737) Contributions in aid of construction and customer advances, net (6,095) Other 1,686 ------------------------------------------------------------------------- $(7,417) =========================================================================
60 A reconciliation of the amount of income taxes attributable to income from continuing operations computed at the federal statutory rate to the amount provided in the Company's consolidated statements of income was as follows:
Years ended December 31 1994 1993 1992 ------------------------------------------------------------------------------ (in thousands) Federal statutory income tax rate 35% 35% 34% Amount at the federal statutory income tax rate $44,117 $38,070 $31,023 State income taxes, net of effect on federal income taxes 5,092 4,323 3,938 Preferred stock dividends of electric utility subsidiaries 2,507 2,281 2,281 Difference between financial reporting and tax straight-line depreciation for which no deferred taxes were provided -- -- 3,015 Amortization of contributions in aid of construction -- -- (1,658) Amortization of utility deferred income taxes in excess of current rates -- -- (1,675) Amortization of deferred tax credits -- -- (1,776) Allowance for funds used during construction -- -- (2,375) Utilization of capital loss carryforwards -- -- (3,317) Other, net 1,303 2,412 73 ------------------------------------------------------------------------------ $53,019 $47,086 $29,529 ==============================================================================
Deferred tax assets and deferred tax liabilities were comprised of the following:
December 31 1994 1993 ------------------------------------------------------------------------------ (in thousands) Deferred tax assets Property, plant and equipment $ 7,424 $ 6,133 Contributions in aid of construction and customer advances 52,892 44,932 Other 29,947 25,435 ------------------------------------------------------------------------------ 90,263 76,500 ------------------------------------------------------------------------------ Deferred tax liabilities Property, plant and equipment 165,835 162,671 Leveraged leases 46,277 45,418 Regulatory asset 8,897 6,237 Other 42,184 29,324 ------------------------------------------------------------------------------ 263,193 243,650 Discontinued operations -- 1,179 ------------------------------------------------------------------------------ 263,193 244,829 ------------------------------------------------------------------------------ Deferred income taxes $172,930 $168,329 ==============================================================================
There was no valuation allowance provided for deferred tax assets at December 31, 1994 or 1993. 15. CASH FLOWS ------------------------------------------------------------------------------ SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION. In 1994, 1993 and 1992, cash paid for interest (including interest paid by the savings bank, but excluding interest paid on nonrecourse debt on leveraged leases), net of capitalized amounts which were not material, amounted to $154 million, $142 million and $159 million, respectively. In 1994, 1993 and 1992, cash paid for interest on nonrecourse debt on leveraged leases amounted to $9 million, $10 million and $11 million, respectively. In 1994, 1993 and 1992, cash paid for income taxes amounted to $47 million, $6 million and $29 million, respectively. In 1993, tax benefits were realized from the discontinued operations of the HIG Group. 61 SUPPLEMENTAL DISCLOSURES OF NONCASH ACTIVITIES. In 1994, ASB received $203 million in mortgage-backed securities in exchange for loans. Common stock dividends reinvested by shareholders in HEI common stock in noncash transactions amounted to $18 million, $17 million and $15 million in 1994, 1993 and 1992, respectively. Effective in 1993, HECO recognized the estimated fair value of noncash contributions in aid of construction received in 1993 and prior years, which increased both plant and contributions in aid of construction by $26 million. The estimated fair value of noncash contributions in aid of construction received in 1994 amounted to $6 million. The allowance for equity funds used during construction, which was capitalized as part of the cost of electric utility plant, amounted to $9 million, $7 million and $7 million in 1994, 1993 and 1992, respectively. In 1994, a consolidated real estate joint venture, in which the Company has a controlling interest, closed on an option to purchase approximately 147 acres of land. Of the total land purchase price of $9.9 million, the joint venture issued mortgage notes payable of $8.0 million in noncash consideration. 16. STOCK OPTION AND INCENTIVE PLAN -------------------------------------------------------------------------------- Under the 1987 Stock Option and Incentive Plan, as amended, an aggregate of 1,250,000 shares of common stock may be issued to officers and key employees as incentive stock options, nonqualified stock options, restricted stock, stock appreciation rights, stock payments or dividend equivalents. Only nonqualified stock options have been granted to date. For these options, the purchase price of common stock was based on the market value of the common stock on or near the date of grant. Options may be exercised as determined by the Compensation Committee of the Board of Directors, but in no event after 10 years and one day from the date of grant in the case of nonqualified stock options. Nonqualified stock option transactions were as follows:
1994 1993 1992 --------------------------------------------------------------------------- Options outstanding, beginning of year 463,458 359,000 227,500 Granted 97,000 123,000 209,000 Exercised -- (18,542) (75,625) Canceled (3,125) -- (1,875) --------------------------------------------------------------------------- Options outstanding, end of year 557,333 463,458 359,000 =========================================================================== Options exercisable, December 31 330,958 235,458 189,625 =========================================================================== Price range for options Exercised High $-- $36 $36 Low -- 30 27 Outstanding, December 31 High 41 41 41 Low 30 30 30 ===========================================================================
62 17. RETIREMENT BENEFITS ------------------------------------------------------------------------------- PENSIONS. The Company has several defined benefit pension plans which cover substantially all employees. Benefits are based on the employees' years of service and base compensation. The funded status of the pension plans and the amounts recognized in the consolidated financial statements were as follows:
December 31 1994 1993 --------------------------------------------------------------------------- (in thousands) Accumulated benefit obligation Vested $308,888 $293,627 Nonvested 32,948 43,543 --------------------------------------------------------------------------- $341,836 $337,170 =========================================================================== Projected benefit obligation $420,512 $432,435 Plan assets at fair value, primarily equity securities and fixed income investments 400,956 410,369 --------------------------------------------------------------------------- Projected benefit obligation in excess of plan assets 19,556 22,066 Unrecognized prior service cost (3,600) (2,401) Unrecognized net gain 6,844 4,958 Unrecognized net transition obligation (19,878) (22,259) Adjustment required to recognize minimum liability 1,251 1,985 --------------------------------------------------------------------------- Accrued pension liability $ 4,173 $ 4,349 ===========================================================================
Plans with an accumulated benefit obligation exceeding assets were not material. Net periodic pension cost included the following components:
Years ended December 31 1994 1993 1992 --------------------------------------------------------------------------- (in thousands) Service cost--benefits earned during the period $ 16,834 $ 11,423 $ 10,358 Interest cost on projected benefit obligation 30,067 27,350 27,401 Actual loss (return) on plan assets 11,520 (56,710) (14,050) Amortization and deferral, net (39,001) 35,607 (5,721) --------------------------------------------------------------------------- $ 19,420 $ 17,670 $ 17,988 ===========================================================================
Of these net periodic pension costs, $14 million, $12 million and $12 million were expensed in 1994, 1993 and 1992, respectively, and the remaining amounts were charged primarily to electric utility plant. For all pension plans, at December 31, 1994 and 1993, the discount rate assumed in determining the actuarial present value of the projected benefit obligation was 8% and 7%, respectively. For 1994, 1993 and 1992, the expected long-term rate of return on assets was 8% and the assumed rate of increase in future compensation levels was 5%. For most of the plans, the transition obligation (the projected benefit obligation in excess of plan assets at January 1, 1987) is being amortized ratably over 16 years beginning in 1987. POSTRETIREMENT BENEFITS OTHER THAN PENSIONS. The Company provides various postretirement benefits other than pensions to eligible employees upon retirement. Health and life insurance benefits are provided to eligible employees of HEI, HECO and its subsidiaries, and YB upon their retirement. Health benefits are provided with contributions by retirees toward costs based on their years of service and retirement date. Generally, employees are eligible for these benefits if, upon retirement, they participate in one of the Company's defined benefit pension plans. The Company began funding some of these benefits near yearend 1994. 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). Payments for postretirement benefits other than pensions amounted to $3 million in 1992. 63 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 amortized ratably over 20 years beginning in 1993. In February 1992, the PUC opened a generic docket to determine whether SFAS No. 106 should be adopted for rate-making purposes. In November 1994, the PUC issued a decision and order authorizing recovery of the full cost ofpostretirement benefits other than pensions effective January 1, 1995. HECO, HELCO, MECO and YB are required to establish trust funds and to deposit into these funds the recovered SFAS No. 106 costs. The regulatory asset established from January 1, 1993 through December 31, 1994 for postretirement benefits other than pensions is being amortized ratably over 18 years beginning in 1995 for rate-making and financial reporting purposes. The funded status of the postretirement benefit plans and the amounts recognized in the consolidated financial statements were as follows:
December 31, 1994 1993 ----------------------------------------------------------------- (in thousands) Accumulated postretirement benefit obligation Retirees $ 61,932 $ 61,498 Fully eligible active plan participants 36,287 33,086 Other active plan participants 49,427 53,760 ----------------------------------------------------------------- 147,646 148,344 Plan assets at fair value, primarily fixed income investments 2,833 -- ----------------------------------------------------------------- Accumulated postretirement benefit obligation in excess of plan assets 144,813 148,344 Unrecognized net gain (loss) 8,423 (880) Unrecognized net transition obligation (118,701) (127,940) ----------------------------------------------------------------- Accrued postretirement benefits liability $ 34,535 $ 19,524 =================================================================
At December 31, 1994 and 1993, the assumed discount rate used to measure the accumulated postretirement benefit obligation was 8% and 7%, respectively. For 1994 and 1993, the assumed rate of increase in future compensation levels was 5%. Net periodic postretirement benefit cost included the following components:
Years ended December 31 1994 1993 ----------------------------------------------------- (in thousands) Service cost $ 5,269 $ 5,712 Interest cost 10,066 11,216 Amortization and deferral, net 6,734 6,733 ----------------------------------------------------- $22,069 $23,661 =====================================================
Of the net periodic postretirement benefit cost, $3 million was expensed in each of 1994 and 1993, and the remaining amount was charged primarily to regulatory assets and also to electric utility plant and other accounts. At December 31, 1994, the assumed health care trend rates for 1995 and future years were as follows: medical, 7.5%; dental, 6%; and vision, 5%. A 1% increase in the trend rate for health care costs would have increased the accumulated postretirement benefit obligation at December 31, 1994 by approximately $21 million and the service and interest costs for 1994 by approximately $3 million. 64 18. REGULATORY RESTRICTIONS ON NET ASSETS -------------------------------------------------------------------------------- At December 31, 1994, net assets (assets less liabilities) of approximately $510 million were not available for transfer to HEI from its subsidiaries in the form of dividends, loans or advances without regulatory approval. However, HEI expects that the regulatory restrictions will not materially affect the operations of the Company nor its ability to pay dividends on its common stock. 19. SIGNIFICANT GROUP CONCENTRATIONS OF CREDIT RISK -------------------------------------------------------------------------------- Substantially all of the Company's business activity is with customers located in the State of Hawaii. Most of the financial instruments reflected on the consolidated balance sheets are based in the State of Hawaii, except for the mortgage-backed securities. Substantially all real estate loans receivable are secured by real estate in Hawaii. ASB's policy is to require mortgage insurance on all real estate loans with a loan to appraisal ratio in excess of 80%. At December 31, 1994, ASB's private-issue mortgage-backed securities represented whole or participating interests in pools of first mortgage loans collateralized by real estate in the continental United States, and approximately 61% of the portfolio was collateralized by real estate in California. At December 31, 1994, substantially all private-issue mortgage- backed securities were rated investment grade by various securities rating agencies. 20. FAIR VALUE OF FINANCIAL INSTRUMENTS -------------------------------------------------------------------------------- The following methods and assumptions were used to estimate the fair value of each applicable class of financial instruments for which it is practicable to estimate that value: CASH AND EQUIVALENTS. The carrying amount approximates fair value because of the short maturity of these instruments. LOANS RECEIVABLE. For certain homogeneous categories of loans, such as some residential mortgages, credit card receivables, and other consumer loans, fair value is estimated using the quoted market prices for securities backed by similar loans, adjusted for differences in loan characteristics. The fair value of other types of loans is estimated by discounting the future cash flows using the current rates at which similar loans would be made to borrowers with similar credit ratings and for similar remaining maturities. MARKETABLE SECURITIES. Fair value is based on quoted market prices or dealer quotes. DEPOSIT LIABILITIES. Under SFAS No. 107, "Disclosures about Fair Value of Financial Instruments," the fair value of demand deposits, savings accounts, and certain money market deposits is the amount payable on demand at the reporting date. The fair value of fixed-maturity certificates of deposit is estimated using the rates currently offered for deposits of similar remaining maturities. SHORT-TERM BORROWINGS. The carrying amount approximates fair value because of the short maturity of these instruments. 65 SECURITIES SOLD UNDER AGREEMENTS TO REPURCHASE. Dealer quotes currently available to ASB for securities sold under agreements to repurchase with similar terms and remaining maturities are used to estimate fair value. ADVANCES FROM FEDERAL HOME LOAN BANK AND LONG-TERM DEBT. Fair value is estimated based on the quoted market prices for the same or similar issues or on the current rates offered for debt of the same or similar remaining maturities. PREFERRED STOCK OF ELECTRIC UTILITY SUBSIDIARIES SUBJECT TO MANDATORY REDEMPTION. There are no quoted market prices for the electric utility subsidiaries' preferred stocks. Fair value is estimated based on quoted market prices for similar issues of preferred stock. The estimated fair values of certain of the Company's financial instruments were as follows:
December 31 1994 1993 ---------------------------------------------------------------------------------------------------------------------- Carrying Estimated Carrying Estimated amount fair value amount fair value ---------------------------------------------------------------------------------------------------------------------- (in thousands) FINANCIAL ASSETS Cash and equivalents $ 87,623 $ 87,623 $ 116,260 $ 116,260 Loans receivable, net 1,824,055 1,756,650 1,735,098 1,801,044 Marketable securities 1,099,810 1,051,673 698,755 710,369 Other investments for which it is not practicable to estimate fair value/1/ 7,666 na 6,497 na FINANCIAL LIABILITIES Deposit liabilities 2,129,310 2,111,481 2,091,583 2,095,850 Short-term borrowings 136,755 136,755 40,416 40,416 Securities sold under agreements to repurchase 123,301 121,064 -- -- Advances from Federal Home Loan Bank 616,374 605,271 289,674 301,537 Long-term debt, net 718,240 682,956 697,836 722,347 PREFERRED STOCK OF ELECTRIC UTILITY SUBSIDIARIES SUBJECT TO MANDATORY REDEMPTION 44,844 46,478 46,730 49,583 OFF-BALANCE SHEET Commitments to extend credit/2/ Financial guaranties written/3/ ----------------------------------------------------------------------------------------------------------------------
/1/ At December 31, 1994 and 1993, the other investments for which it is not practicable to estimate fair value consists primarily of an investment representing approximately 10% of the issued common stock of an untraded company; that investment had a carrying value of $5.2 million and $5.5 million at December 31, 1994 and 1993, respectively. At December 31, 1993, the total assets reported by this company were $61 million and the common stockholders' equity was $56 million. For 1993, revenues were $1.0 million, net realized and unrealized gain on investments was $8.0 million and net income was $3.7 million. /2/ At December 31, 1994 and 1993, neither the commitment fees received on commitments to extend credit nor the fair value thereof were significant to the consolidated financial statements of the Company. /3/ At December 31, 1994 and 1993, MPC or its subsidiaries had issued guaranties of loans with outstanding balances of $9.1 million and $6.7 million, respectively. All such loans are collateralized by real property. These guaranties relate to borrowings from third parties which bear interest at rates ranging from prime plus 1.0% to prime plus 1.5%. It is not practicable to estimate the fair value of these guaranties. na Not available. LIMITATIONS. Fair value estimates are made at a specific point in time, based on relevant market information and information about the financial instrument. These estimates do not reflect any premium or discount that could result from offering for sale at one time the Company's entire holdings of a particular financial instrument. Because no market exists for a significant portion of the Company's financial instruments, fair value estimates cannot be determined with precision. Changes in assumptions could significantly affect the estimates. Fair value estimates are provided for certain existing on- and off-balance sheet financial instruments without attempting to estimate the value of anticipated future business and the value of assets and liabilities that are not considered financial instruments. 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. 66 21. QUARTERLY INFORMATION (UNAUDITED) ------------------------------------------------------------------------------- Selected quarterly information was as follows:
Quarter ended YEAR ENDED -------------------------------------------------------------------------------------------------------------- 1994 March 31 June 30 Sept. 30 Dec. 31 DEC. 31 ----------------------------------------------------------------------------------------------------------------------------------- (in thousands, except per share amounts) Revenues $265,042 $284,556 $319,156 $319,769 $1,188,523 Operating income 33,404 42,955 51,550 46,224 174,133 Net income 11,788 17,632 22,691 20,919 73,030 Earnings per common share /1/ 0.42 0.63 0.80 0.73 2.60 Dividends per common share 0.58 0.58 0.58 0.59 2.33 Market price per common share /2/ High 36.50 34.63 33.88 32.88 36.50 Low 32.00 30.25 30.00 29.88 29.88 ----------------------------------------------------------------------------------------------------------------------------------- 1993 ----------------------------------------------------------------------------------------------------------------------------------- (in thousands, except per share amounts) Revenues $279,348 $281,645 $299,486 $281,691 $1,142,170 Operating income 28,331 43,919 40,458 44,930 157,638 Net income (loss) Continuing operations $ 9,292 $ 18,977 $ 16,088 $ 17,327 $ 61,684 Discontinued operations 1,800 -- -- (14,825) (13,025) ----------------------------------------------------------------------------------------------------------------------------------- $ 11,092 $ 18,977 $ 16,088 $ 2,502 $ 48,659 =================================================================================================================================== Earnings (loss) per common share /1/ Continuing operations $ 0.38 $ 0.76 $ 0.61 $ 0.63 $ 2.38 Discontinued operations 0.07 -- -- (0.54) (0.50) ----------------------------------------------------------------------------------------------------------------------------------- $ 0.45 $ 0.76 $ 0.61 $ 0.09 $ 1.88 =================================================================================================================================== Dividends per common share $ 0.57 $ 0.57 $ 0.57 $ 0.58 $ 2.29 Market price per common share /2/ High 38.88 38.50 38.63 38.75 38.88 Low 35.38 31.00 37.13 34.25 31.00 -----------------------------------------------------------------------------------------------------------------------------------
/1/ The quarterly earnings per common share are based upon the weighted average number of shares of common stock outstanding in each quarter. /2/ Market prices shown are as reported on the NYSE Composite Tape. The common stock of HEI is traded on the New York and Pacific Stock Exchanges under the symbol HE. 67 DIRECTORS Committees of the Board of Robert F. Clarke, 52 (1) Victor Hao Li, S.J.D., 53 (2) Diane J. Plotts, 59 (1,2) Directors President and Co-chairman General Partner Chief Executive Officer Asia Pacific Consulting Group Mideast and China Trading Hawaiian Electric Industries, Inc. (international business Company (real estate (1) EXECUTIVE: 1989 consultant) development) 1987 Richard Henderson, Chairman 1988 (2) AUDIT: Edwin L. Carter, 69 (1, 3) Oswald K. Stender, 63 (3) Diane J. Plotts, Chairman Retired President and Bill D. Mills, 43 (3) Trustee (3) COMPENSATION: Chief Executive Officer Chairman of the Board and Kamehameha Schools/Bishop Edwin L. Carter, Chairman Bishop Trust Company, Ltd. Chief Executive Officer Estate (4) NOMINATING: (financial services) Bill Mills Development and (charitable trust) Jeffrey N. Watanabe, Chairman 1985 Investment Company, Inc. 1993 (real estate development) John D. Field, 69 (2) 1988 Kelvin H. Taketa, 40 (2) Retired Vice President- Vice President and Regulatory Affairs A. Maurice Myers, 54 (4) Director-Asia Pacific Region GTE Service Corporation President and The Nature Conservancy (telecommunications services) Chief Operating Officer (international conservation 1986 America West Airlines, Inc. nonprofit) (commercial air 1993 Richard Henderson, 66 (1, 3) transportation services) President 1991 Jeffrey N. Watanabe, 52 (1, HSC, Inc. 3, 4) (real estate investment and Ruth M. Ono, Ph.D., 59 (2) Partner development) Vice President Watanabe, Ing & Kawashima 1981 The Queen's Health Systems (private law firm) (hospital and health care 1987 Ben F. Kaito, 68 (1, 2, 4) services) Of Counsel 1987 Harwood D. Williamson, 63 Kaito & Ishida President and Chief (private law firm) Executive Officer 1981 Hawaiian Electric Company, Inc. 1985 Subsidiary Outside Directors Gladys C. Baisa, 54 Tom C. Kiely, 44 Denzil W. Rose, 69 Executive Director The Kiely Co., Inc. Retired President and Maui Economic Opportunity, Inc. (marketing consultants) General Manager (nonprofit human services) American Savings Bank, F.S.B. Hawaii Motors, Inc. Maui Electric Company, Ltd. 1994 (automobile dealership) 1995 Hawaii Electric Light Mildred D. Kosaki, 70 Company, Inc. Jorge G. Camara, M.D., 44 Specialist in education 1960 Camara Eye Clinic research (ophthalmology) Hawaiian Electric Company, Anne M. Takabuki, 38 American Savings Bank, F.S.B. Inc. Vice President 1990 1973 and General Counsel Wailea Resort Company, Ltd. Joseph W. Hartley, Jr., 61 Sanford J. Langa, 65 (resort and commercial President and Partner development) Chief Executive Officer Langa, Breen & Wiltsie Maui Electric Company, Ltd. Maui Land & Pineapple Company, (private law firm) 1993 Inc. Maui Electric Company, Ltd. (resort and commercial 1961 Donald K. Yamada, 63 development, agriculture) President Maui Electric Company, Ltd. B. Martin Luna, 56 Yamada Diversified 1993 (resigned effective March 1, Partner Corporation 1995) Carlsmith, Ball, Wichman, (construction and trucking Murray, Case & Ichiki services) Louise K. Y. Ing, 43 (private law firm) Hawaii Electric Light Partner Maui Electric Company, Ltd. Company, Inc. Alston Hunt Floyd & Ing 1978 1985 (private law firm) American Savings Bank, F.S.B. Paul C. Yuen, Ph.D., 66 1994 Dean, College of Engineering University of Hawaii-Manoa (higher education) Hawaiian Electric Company, Inc. 1993
Year denotes year of appointment or election to the board of directors 68 EX-13.B 12 HECO 1994 ANNUAL REPORT HECO Exhibit 13(b) ------------------ SELECTED FINANCIAL DATA ----------------------- HAWAIIAN ELECTRIC COMPANY, INC. and Subsidiaries
1994 1993 1992 1991 1990 ---------------- ----------- ----------- ----------- ----------- (dollars in thousands) INCOME STATEMENT DATA (Years ended December 31,) Operating revenues............... $ 907,308 $ 874,010 $ 776,929 $ 739,636 $ 704,853 Operating expenses............... 819,996 795,925 699,890 663,709 631,300 ---------- ---------- ---------- ---------- ---------- Operating income................. 87,312 78,085 77,039 75,927 73,553 Other income..................... 14,793 11,556 9,740 4,511 6,804 ---------- ---------- ---------- ---------- ---------- Income before interest and other charges................... 102,105 89,641 86,779 80,438 80,357 Interest and other charges......................... 36,144 33,515 33,101 34,228 31,873 ---------- ---------- ---------- ---------- ---------- Income before preferred stock dividends of HECO............... 65,961 56,126 53,678 46,210 48,484 Preferred stock dividends of HECO............... 4,316 4,421 4,525 4,600 4,674 ---------- ---------- ---------- ---------- ---------- Net income for common stock........................... $ 61,645 $ 51,705 $ 49,153 $ 41,610 $ 43,810 ========== ========== ========== ========== ========== ------------------------------------------------------------------------------------------------------- BALANCE SHEET DATA (At December 31,) Utility plant.................... $2,293,521 $2,102,534 $1,877,404 $1,701,218 $1,564,075 Accumulated depreciation.................... (702,945) (641,230) (583,031) (536,552) (489,957) ---------- ---------- ---------- ---------- ---------- Net utility plant................ $1,590,576 $1,461,304 $1,294,373 $1,164,666 $1,074,118 ========== ========== ========== ========== ========== Total assets..................... $1,889,120 $1,703,276 $1,501,330 $1,318,023 $1,250,142 ========== ========== ========== ========== ========== Capitalization:/1/ Long-term debt................... $ 489,586 $ 484,736 $ 374,835 $ 365,098 $ 356,741 Preferred stock subject to mandatory redemption...................... 44,844 46,730 48,920 50,665 52,210 Preferred stock not subject to mandatory redemption...................... 48,293 48,293 36,293 36,293 36,293 Common stock equity.............. 633,901 570,663 499,894 440,831 365,812 ---------- ---------- ---------- ---------- ---------- Total capitalization . $1,216,624 $1,150,422 $ 959,942 $ 892,887 $ 811,056 ========== ========== ========== ========== ========== ------------------------------------------------------------------------------------------------------- CAPITAL STRUCTURE RATIOS (%)/2/ (At December 31,) Debt............................. 45.5 44.1 45.9 43.1 48.4 Preferred stock.................. 7.0 8.0 7.9 9.4 10.1 Common stock equity.............. 47.5 47.9 46.2 47.5 41.5 =======================================================================================================
/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. 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS --------------------------------------------- THE FOLLOWING DISCUSSION SHOULD BE READ IN CONJUNCTION WITH THE CONSOLIDATED FINANCIAL STATEMENTS AND ACCOMPANYING NOTES. RESULTS OF OPERATIONS --------------------- EARNINGS -------- Net income for common stock for 1994 was $61.6 million compared to $51.7 million for 1993 and $49.2 million for 1992. The 1994 net income represents a 10.2% return on the average amount of common stock equity invested in HECO and its subsidiaries (collectively, the "Company"), compared to returns of 9.7% in 1993 and 10.5% in 1992. SALES ----- Consolidated sales of electricity were 8,593 million kilowatthours (KWH) for 1994, 8,325 million KWH for 1993, and 8,332 million KWH for 1992. The 3.2% increase in KWH sales in 1994 reflects the gradual recovery of Hawaii's economy and the effects of warmer weather. Cool weather, the downturn in Hawaii's economy, and conservation efforts resulted in a 0.1% decline in KWH sales in 1993 compared to 1992. OPERATING REVENUES ------------------ Operating revenues were $907.3 million in 1994, compared to $874.0 million in 1993 and $776.9 million in 1992. The 1994 increase in operating revenues of $33.3 million, or 3.8% over 1993 revenues, was due primarily to interim rate increases granted by the PUC to HECO and HELCO and higher KWH sales of electricity. The revenue increase was tempered by lower fuel oil prices, which cost savings were 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 costs, and the relative amounts of company- generated power and purchased power. 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 the effects of higher fuel oil prices, which were passed through to customers. OPERATING EXPENSES ------------------ Total operating expenses were $820.0 million in 1994 compared to $795.9 million in 1993 and $699.9 million in 1992. The increase in 1994 was due to an increase in purchased power, other operation, maintenance, depreciation, income taxes, and taxes other than income taxes expense, partially offset by lower fuel oil expense. 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 expense, 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 the regulatory asset for vacation earned, but not yet taken, resulted in a one-time reduction in 1993 operating expenses of $4.2 million. For rate-making purposes, the PUC permits recovery of vacation pay expense on a pay- as-you-go basis. Fuel oil expense was $186.7 million in 1994 compared to $213.3 million in 1993 and $225.6 million in 1992. The decrease in fuel oil expense in 1994 was due primarily to lower fuel oil prices and fewer KWH generated. 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 Barbers Point, Inc., offset somewhat by higher fuel oil prices. In 1994, the Company paid an average of $18.92 per barrel of fuel oil, compared to $21.09 in 1993 and $19.69 in 1992. 3 Purchased power expense was $271.6 million in 1994 compared to $258.7 million in 1993 and $172.8 million in 1992. The increase in purchased power expense in both 1994 and 1993 was due primarily to capacity and nonfuel purchased power costs paid to independent power producers, and an increase in the number of KWH purchased, mostly by HECO. Purchased KWH provided approximately 37.5% of the total energy net generated and purchased in 1994 compared to 34.9% in 1993 and 26.2% in 1992. Other operation expenses totaled $121.7 million in 1994, an increase of $15.8 million over the 1993 amount. The increase was due primarily to higher production, transmission and distribution, and administrative and general expenses, including higher employee benefit costs and the absence in 1994 of the one-time reduction to 1993 expenses due to the establishment of the regulatory asset for vacation earned but not yet taken by employees. HEI charges for general management, administrative and support services totaled $2.4 million in 1994, $2.3 million in 1993 and $5.6 million in 1992. In 1993, other operation expenses 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, partially offset by lower management service fees from HEI, and the one-time effect of the establishment of the regulatory asset for vacation earned by employees, but not yet taken. Maintenance expenses in 1994 of $46.4 million increased by $2.1 million from 1993 primarily due to the absence in 1994 of the one-time reduction to 1993 expenses due to the establishment of the regulatory asset for vacation earned but not yet taken by employees, and increased maintenance on the transmission and distribution systems, partially offset by lower production maintenance expenses at HECO. In 1993, maintenance expenses totaled $44.3 million, a 0.8% decrease from 1992, primarily due to the one-time effect of the establishment of the regulatory asset for vacation earned by employees, but not yet taken, partially offset by increased maintenance on the transmission and distribution systems. Depreciation expense was up 14.0% in 1994 to $63.8 million and up 3.9% in 1993 to $56.0 million. In both years, the increase reflects depreciation of the Company's additions to plant in service in the previous year. Major additions to plant in service in 1993 included HECO's Waiau-Makalapa 138-kilovolt line and MECO's 18-megawatt heat recovery unit (Maalaea 15) and 20-megawatt combustion turbine unit (Maalaea 16) at Maalaea. Major additions to plant in service in 1992 included transmission and distribution substation projects by HECO, the addition of HELCO's 20-megawatt combustion turbine unit at Puna (CT-3) and the addition of MECO's 20-megawatt combustion turbine unit (Maalaea 14). Taxes, other than income taxes, increased by 6.4% in 1994 to $85.9 million, and by 13.0% in 1993 to $80.7 million. These taxes consist primarily of taxes based on revenues, and the increases reflect the corresponding increases in each year's operating revenues. In 1994, the increase also reflects an increase in the PUC fee rate from 0.25% to 0.5%, as mandated by the Hawaii State Legislature. The effective income tax rate was higher in 1994 and 1993 than in 1992 primarily due to the 1% increase in the Federal income tax rate commencing in 1993 and the use of gross-up accounting for income taxes related to the Allowance for Funds Used During Construction (AFUDC) under Statement of Financial Accounting Standards (SFAS) No. 109, effective January 1, 1993. The increase in income taxes due to the gross-up accounting for AFUDC was offset, however, by a corresponding increase in other income (see below). OTHER INCOME ------------ Other income of $14.8 million for 1994 was $3.2 million higher than for 1993. The increase was due primarily to higher Allowance for Equity Funds Used During Construction (AFUDC-Equity), reflecting a higher average level of construction in progress during the year. For 1993, income of $11.6 million was $1.8 million 4 higher than for 1992. The increase was primarily because of the "gross-up" of 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. INTEREST AND OTHER CHARGES -------------------------- Interest and other charges for 1994 totaled $36.1 million, compared to $33.5 million for 1993 and $33.1 million for 1992. Interest expense on long-term debt increased by $4.3 million in 1994 and decreased by $0.3 million in 1993. The increase in 1994 was due to interest on drawdowns of tax-exempt special purpose revenue bond proceeds during 1994, and the full year's interest on the drawdowns of revenue bond proceeds and the sale of medium-term notes in 1993. The 1994 increase in interest expense was partially offset by lower interest expense on first mortgage bonds resulting from the early redemptions in March 1994 of HECO's 9.125% Series X mortgage bonds of $20 million, HELCO's 8.5% to 10.75% Series I, L, M and N mortgage bonds totaling $12.5 million and MECO's 8.75% to 10.75% Series I, J, K, L and M mortgage bonds totaling $15.5 million. The 1993 decrease in interest expense on long-term debt 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; 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 the early redemption of HECO's 9% Series Q mortgage bonds of $23 million in 1992, partially 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. Other interest charges of $4.8 million for 1994 were $2.7 million lower than for 1993 due to lower interest on short-term borrowings as a result of lower borrowing levels during the year, partially offset by higher interest rates. COMPETITION ----------- The electric utility industry has become increasingly competitive due to regulatory and technological developments. Competition is affected by factors including price, reliability of service, alternate energy sources, new technologies and governmental regulations. Competition in Hawaii is also affected by the scarcity of generation sites and lack of interconnections. The Energy Policy Act of 1992 encourages competition by allowing both utilities and nonutilities to form generation subsidiaries without becoming subject to regulation under the Public Utility Holding Company Act of 1935. To date, HECO and its subsidiaries have not faced this type of competition. However, management cannot predict the future impact, if any, of the Energy Policy Act of 1992 on the Company. On the demand-side, a new kind of competitor--the energy service company--is seeking customers in government and private business and promising to help them reduce utility bills. On Oahu, one of these companies worked with a large military housing project, installing energy-efficient equipment that decreased the facility's electricity consumption by one-third. In August 1994, HEI formed a new nonutility energy service company, Pacific Energy Conservation Services, Inc. (PECS), to promote energy conservation in Hawaii and the Pacific Basin. PECS is considering potential projects to install, finance, operate and maintain energy conservation equipment, while sharing a percentage of the saved energy costs with its clients. In response to increased competition, HECO and its subsidiaries are looking at strategies to enhance their competitive position, including increasing efforts to provide reliable electric service at a reasonable cost, offering customers new choices regarding the services provided and promoting conservation and new technologies like electric vehicles. 5 REGULATION OF ELECTRIC UTILITY RATES ------------------------------------ The PUC has broad discretion in its regulation of the rates charged by the Company and in other matters. 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 prolonged delay in rendering a decision in a rate or other proceeding, could have a material adverse effect on the Company's financial condition and results of operations. Upon a showing of probable entitlement, the PUC is required to issue an interim decision in a rate case within 10 months from the date of filing a completed application if the evidentiary hearing is completed (subject to extension for 30 days if the evidentiary hearing is not completed). There is no time limit for rendering a final decision. Interim rate increases are subject to refund with interest, pending the final outcome of the case. RECENT RATE REQUESTS AND RESULTS -------------------------------- HECO. 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 (which was later increased to 12.75%). The increase requested, as subsequently revised, represented an increase of 8.6% over rates in effect at the time of the revised filing, or $53.8 million in additional annual revenues. The revised requested increase was needed to cover rising operating costs including the costs related to the change in method of accounting for postretirement benefits other than pensions (PBOP) (which increases were recently allowed by the final decision in a separate generic docket discussed below), and to cover the cost of new capital projects to maintain and improve service reliability. In December 1994, HECO received a final decision and order from the PUC authorizing a $40.5 million, or 6.5%, increase in annual revenues, effective January 1, 1995 and based on a 12.15% return on average common equity. The order granted HECO an increase of approximately $3.5 million in annual revenues, in addition to reaffirming interim increases that took effect in April, May and November 1994. The final decision and order, together with the PBOP decision and order, resulted in $50.5 million of annual rate relief. In December 1993, HECO applied to the PUC for permission to increase electric rates, based on a 1995 test year and a 12.3% return on average common equity (which was later increased to 13.25%). The requested increase, as subsequently revised, represented an increase of approximately 5%, or $38.5 million in additional annual revenues over rates in effect at the time of the revised filing (which rates included interim rate relief granted in the 1994 test year application). The revised requested increase is needed to cover rising operating costs (including the costs related to the change in the method of accounting for PBOP discussed below), and the cost of new capital projects to maintain and improve service reliability. The PUC completed hearings in November 1994 on HECO's rate increase request based on a 1995 test year. In December 1994, HECO received an interim decision and order authorizing an increase of $13.2 million, or 1.9%, in annual revenues. The interim order was based on a 12.6% return on average common equity. Approximately $10.6 million of the interim increase took effect January 1, 1995, which was the beginning of the test year, and the balance will be effective in steps in May and November 1995. HELCO. In November 1993, HELCO applied to the PUC for permission to increase ------ electric rates to provide $15.8 million in annual revenues, or a 13.4% increase over rates then in effect. The requested increase is based on a 1994 test year and a 12.4% return on average common equity (which was later increased to 13.1%). The increase is needed to cover plant and equipment related costs, operating costs necessary to maintain and improve service and provide reliable power, and PBOP costs which are discussed below. In August 1994, HELCO received an interim decision and order from the PUC on its rate increase application authorizing an increase of $13.6 million in annual revenues, or approximately 11.7%, and based on a 12.4% return on average common equity. $13.2 million of the increase took effect in August 1994 and $0.4 million in November 1994. In February 1995, HELCO received a final decision and order from the PUC authorizing a $13.7 million, or 11.8%, 6 increase in annual revenues, based on a 12.6% return on average common equity. The order granted HELCO an increase of approximately $0.1 million in annual revenues, in addition to reaffirming interim increases that took effect in August and November 1994. The final decision and order, together with the PBOP decision and order, resulted in $15.5 million of annual rate relief. In June 1994, HELCO filed a notice of intent to file an application for a general rate increase using a 1995 test year. The increase is expected to be required primarily to cover investments in new generating units. The application has not yet been filed and may be filed based on a 1996 test year. MECO. In November 1991, MECO filed a request to increase rates, based on a ----- 1992/1993 test year. In January 1993, MECO revised its requested increase to $11.4 million annually, or 10% over the rates then in effect, based on a 13.0% return on average common equity. Most of the proposed increase reflected the costs of adding a 58-megawatt combined-cycle generating unit on Maui in three phases and PBOP costs which are discussed below. In 1993, MECO received four interim decisions which authorized step increases totaling $8.2 million in annual revenues. In August 1994, MECO received the final decision and order from the PUC granting an increase of $8.1 million in annual revenues, or approximately 7.0%, based on a 12.75% return on average common equity. That action, together with the PBOP decision and order, resulted in $10.0 million of annual rate relief. In December 1994, MECO filed a notice of intent to request rate relief, based on a 1996 test year. In February 1995, the PUC granted MECO's motion requesting a waiver of the PUC's rule which otherwise provides for a 1996 test year only when an application is filed in the last six months of 1995. MECO plans to file its rate increase application in early 1995. Management cannot predict with certainty when decisions in pending or future rate cases will be rendered or the amount of any interim or final rate increase that will be granted. POSTRETIREMENT BENEFITS OTHER THAN PENSIONS. In November 1994, the PUC -------------------------------------------- issued a decision and order in a generic docket opened in February 1992 with respect to the accounting and rate-making treatment of the costs of postretirement benefits other than pensions. The decision and order authorized full recovery of PBOP costs determined pursuant to SFAS No. 106, effective January 1, 1995. The decision and order also allowed the recovery of the regulatory assets related to PBOP costs, over the next 18 years. These regulatory assets were recognized by the Company for PBOP costs accrued from January 1, 1993 through December 31, 1994 and amounted to $34.0 million at December 31, 1994. This order will result in additional annual revenues of approximately $10.0 million, $1.8 million and $1.9 million for HECO, HELCO and MECO, respectively, to cover the increase in PBOP expense. See Note 10 in the "Notes to Consolidated Financial Statements," for further information. EFFECTS OF INFLATION -------------------- Inflation, as measured by the U.S. Consumer Price Index, averaged 2.6% in 1994 and 3.0% in 1993 and 1992. 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 and 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, 1993 and 1994, the Company received rate relief, in part to cover increases due to inflation in operating expenses and construction costs. ACCOUNTING FOR THE EFFECTS OF CERTAIN TYPES OF REGULATION --------------------------------------------------------- The Company follows the accounting prescribed by SFAS No. 71, "Accounting for the Effects of Certain Types of Regulation." SFAS No. 71 provides guidance in preparing financial statements for most public utilities. Under SFAS No. 71, if 7 regulation provides assurance that incurred costs will be recovered in the future, those costs must be capitalized rather than expensed. If the continued application of SFAS No. 71 would no longer be appropriate--due to increased competition or regulatory, legislative or judicial actions or otherwise--the financial effects of the resulting accounting change, including a write-off of all regulatory assets, could be material. ENVIRONMENTAL MATTERS --------------------- 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 the recovery through rates of most, if not all, of any costs incurred by the Company in complying with these environmental requirements would be allowed by the PUC. However, as with other costs reviewed by the PUC in the rate-making process, costs incurred by HECO and its subsidiaries in complying with these environmental requirements may not be fully allowed by the PUC for rate-making purposes. Based on information available to the Company, management is not aware of any contingent liabilities relating to environmental matters that would have a material adverse effect on the Company. ELECTRIC AND MAGNETIC FIELDS ---------------------------- Research is ongoing about the potential adverse health effects from exposure to electric and magnetic fields (EMF). However, the scientific community has not yet reached a consensus on the nature of any health effects. HECO and its subsidiaries are participating in utility industry funded studies on the subject and are considering possible steps to reduce EMF, where feasible, in the design of new transmission and distribution facilities. The Company cannot predict the impact, if any, the EMF issue may have on the Company in the future. ACCOUNTING CHANGES ------------------ See Note 1 in the "Notes to Consolidated Financial Statements." LIQUIDITY AND CAPITAL RESOURCES ------------------------------- The Company believes that its ability to generate cash, both internally from operations and externally from debt and equity issues, is adequate to maintain sufficient liquidity to fund its construction programs and to cover debt and other cash requirements in the foreseeable future. Capital expenditures requiring the use of cash, as shown on the "Consolidated Statements of Cash Flows," totaled approximately $186.5 million in 1994, of which $114.8 million was attributable to HECO, $45.8 million to HELCO and $25.9 million to MECO. Approximately 84% of the total 1994 capital expenditures was for transmission and distribution and other projects, including HECO's Waiau-CIP 138-kilovolt line, and 16% was for generation projects, including HELCO's Keahole combustion turbines and MECO's Molokai generation expansion. Cash contributions in aid of construction received in 1994 totaled $15.1 million. The Company's investment in plant and equipment for 1994 was financed with cash from operating activities and cash from financing activities. Cash provided by operating activities totaled $102.3 million in 1994. Cash provided by financing activities totaled a net $77.8 million and included a net $4.8 million in drawdowns 8 of proceeds from the sale of tax-exempt special purpose revenue bonds, less long-term debt repayments primarily for first mortgage bonds. The Company used $28.5 million for common stock dividends. Short-term borrowings provided $76.9 million in cash and HEI provided $30.0 million through its purchase of HECO common stock. The Company's consolidated financing requirements for the years 1995 through 1999, including net capital expenditures, debt retirements and sinking fund requirements, are estimated to total $850 million. The Company's consolidated internal sources, after the payment of common stock and preferred stock dividends, are currently expected to provide approximately 60% of the total $850 million requirements, with debt and equity financing providing the remaining requirements. The Company estimates that it will require approximately $60 million in common equity, other than retained earnings, over the five-year period 1995 through 1999. The PUC must approve issuances of long-term debt and equity for HECO, HELCO and MECO. Capital expenditures include the costs of projects which are required to meet expected load growth, to improve reliability and to replace and upgrade existing equipment. Net capital expenditures, for the five-year period 1995 through 1999, are currently estimated to total $750 million. Approximately 70% of gross capital expenditures, including AFUDC and capital expenditures funded by third party cash contributions in aid of construction, is for transmission and distribution projects, with the remaining 30% primarily for generation projects. At December 31, 1994, purchase commitments other than fuel and power purchase contracts were approximately $83 million, including amounts for construction projects. (Also see Note 11 in the "Notes to Consolidated Financial Statements" for a discussion of fuel and power purchase commitments.) Capital expenditures for 1995, net of cash contributions in aid of construction and excluding AFUDC, are estimated to be $170 million, and gross capital expenditures are estimated to be $205 million, of which approximately 65% is for transmission and distribution projects. An estimated $40 million is planned for new generation projects. Drawdowns of proceeds from the sale of tax-exempt special purpose revenue bonds, sales of common stock to HEI and the generation of funds from internal sources are expected to provide the cash needed for the net capital expenditures. Capital expenditure estimates and the timing of construction projects are reviewed periodically by management and may change significantly as a result of many considerations. Among these considerations are changes in economic condi- tions, changes in forecasts of kilowatthour sales and peak load, the availability of alternate energy and purchased power, the availability of generating sites and transmission and distribution line corridors, the ability to obtain adequate and timely rate relief, escalation in construction costs, demand-side management programs and requirements of environmental and other regulatory and permitting authorities. In 1993, the Department of Budget and Finance of the State of Hawaii (DBF) 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, resulting in a yield of approximately 5.6%. As of December 31, 1994 approximately $3.4 million of the proceeds from the sale of special purpose revenue bonds were available to be used. In January 1995, the DBF issued tax-exempt special purpose revenue bonds, in the principal amount of $47 million with a maturity of 30 years and a fixed coupon interest rate of 6.6% on behalf of HECO, HELCO and MECO. The bonds were issued at a discount, resulting in a yield of approximately 6.75%. As of February 1, 1995, an additional $170 million of revenue bonds had been authorized by the Hawaii legislature for issuance prior to the end of 1997. As of February 15, 1995, Standard & Poor's Corporation (S&P), Moody's Investors Service (Moody's) and Duff & Phelps Credit Rating Co. (D&P) rated HECO's securities as follows: 9
S&P Moody's D&P ---- ------- ------- 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- ====================================================
The above ratings are not recommendations to buy, sell or hold any securities, and such ratings may be subject to revision or withdrawal at any time by the rating agencies. In January 1995, S&P revised its ratings outlook on HECO to "stable" from "negative" citing recent PUC decisions which demonstrate a continuing trend of regulatory support for the Company's heavy construction program. The Company's management cannot predict with certainty future rating agency actions or their effects on the future cost of capital to the Company. 10 CONSOLIDATED STATEMENTS OF INCOME ================================= HAWAIIAN ELECTRIC COMPANY, INC. and Subsidiaries
Years ended December 31 1994 1993 1992 ------------------------------------------------- --------- --------- --------- (in thousands) Operating revenues............................... $907,308 $874,010 $776,929 -------- -------- -------- Operating expenses: Fuel oil......................................... 186,717 213,285 225,611 Purchased power.................................. 271,636 258,723 172,761 Other operation.................................. 121,740 105,957 105,303 Maintenance...................................... 46,427 44,281 44,653 Depreciation and amortization.................... 63,779 55,960 53,856 Taxes, other than income taxes................... 85,877 80,712 71,452 Income taxes..................................... 43,820 37,007 26,254 -------- -------- -------- 819,996 795,925 699,890 -------- -------- -------- OPERATING INCOME................................. 87,312 78,085 77,039 -------- -------- -------- OTHER INCOME: Allowance for equity funds used during construction.................................... 9,064 6,973 6,781 Other, net....................................... 5,729 4,583 2,959 -------- -------- -------- 14,793 11,556 9,740 -------- -------- -------- INCOME BEFORE INTEREST AND OTHER CHARGES......... 102,105 89,641 86,779 -------- -------- -------- INTEREST AND OTHER CHARGES: Interest on long-term debt....................... 31,369 27,046 27,307 Amortization of debt discount, premium and expense......................................... 1,208 774 638 Other interest charges........................... 4,763 7,467 5,066 Allowance for borrowed funds used during construction.................................... (4,043) (3,869) (2,095) Preferred stock dividends of subsidiaries........ 2,847 2,097 2,185 -------- -------- -------- 36,144 33,515 33,101 -------- -------- -------- INCOME BEFORE PREFERRED STOCK DIVIDENDS OF HECO.. 65,961 56,126 53,678 Preferred stock dividends of HECO................ 4,316 4,421 4,525 -------- -------- -------- NET INCOME FOR COMMON STOCK...................... $ 61,645 $ 51,705 $ 49,153 ======== ======== ========
CONSOLIDATED STATEMENTS OF RETAINED EARNINGS ============================================ HAWAIIAN ELECTRIC COMPANY, INC. and Subsidiaries
Years ended December 31 1994 1993 1992 -------------------------------------- --------- --------- --------- (in thousands) RETAINED EARNINGS, BEGINNING OF YEAR.. $275,401 $249,583 $223,478 Net income for common stock........... 61,645 51,705 49,153 Common stock dividends................ (28,511) (25,887) (23,048) -------- -------- -------- RETAINED EARNINGS, END OF YEAR........ $308,535 $275,401 $249,583 ======== ======== ========
See accompanying "Notes to Consolidated Financial Statements." 11 CONSOLIDATED BALANCE SHEETS =========================== HAWAIIAN ELECTRIC COMPANY, INC. and Subsidiaries
December 31 1994 1993 ----------------------------------------------------------------- ----------- ----------- (in thousands) Assets Utility plant, at cost: Land............................................................. $ 27,108 $ 26,976 Plant and equipment.............................................. 2,101,447 1,948,445 Less accumulated depreciation.................................... (702,945) (641,230) Plant acquisition adjustment, net................................ 719 771 Construction in progress......................................... 164,247 126,342 ---------- ---------- Net utility plant............................................ 1,590,576 1,461,304 ---------- ---------- Current assets: Cash and equivalents............................................. 10,694 1,922 Customer accounts receivable, net................................ 60,406 55,614 Accrued unbilled revenues, net................................... 38,435 34,735 Other accounts receivable, net................................... 10,302 8,398 Fuel oil stock, at average cost.................................. 21,966 18,188 Materials and supplies, at average cost.......................... 20,108 20,239 Prepayments and other............................................ 2,028 2,715 ---------- ---------- Total current assets......................................... 163,939 141,811 ---------- ---------- Other assets: Regulatory assets................................................ 92,524 61,078 Unamortized debt expense......................................... 9,662 10,179 Long-term receivables and other.................................. 32,419 28,904 ---------- ---------- Total other assets........................................... 134,605 100,161 ---------- ---------- $1,889,120 $1,703,276 ========== ========== CAPITALIZATION AND LIABILITIES Capitalization (see Consolidated Statements of Capitalization): Common stock equity.............................................. $ 633,901 $ 570,663 Cumulative preferred stock: Not subject to mandatory redemption............................. 48,293 48,293 Subject to mandatory redemption................................. 42,470 45,410 Long-term debt, net.............................................. 468,653 436,776 ---------- ---------- Total capitalization......................................... 1,193,317 1,101,142 ---------- ---------- Current liabilities: Long-term debt due within one year............................... 20,933 47,960 Preferred stock sinking fund requirements........................ 2,374 1,320 Short-term borrowings--nonaffiliates............................. 117,866 28,928 Short-term borrowings--affiliate................................. -- 12,000 Accounts payable................................................. 54,662 41,808 Interest and preferred dividends payable......................... 8,575 10,332 Income taxes payable............................................. 3,300 6,232 Other taxes accrued.............................................. 39,666 36,959 Other............................................................ 30,111 31,036 ---------- ---------- Total current liabilities.................................... 277,487 216,575 ---------- ---------- Deferred credits and other liabilities: Deferred income taxes............................................ 108,362 107,449 Unamortized tax credits.......................................... 44,939 43,348 Other............................................................ 86,380 69,757 ---------- ---------- Total deferred credits and other liabilities................. 239,681 220,554 ---------- ---------- Contributions in aid of construction............................. 178,635 165,005 ---------- ---------- $1,889,120 $1,703,276 ========== ==========
See accompanying "Notes to Consolidated Financial Statements." 12 CONSOLIDATED STATEMENTS OF CAPITALIZATION ========================================= HAWAIIAN ELECTRIC COMPANY, INC. and Subsidiaries
December 31 1994 1993 ------------------------------------------------------------ -------- -------- (dollars in thousands, except per share amounts) Common stock equity: Common stock of $6 2/3 par value. Authorized: 50,000,000 shares. Outstanding: 1994, 11,813,147 shares and 1993, 11,258,290 shares......................................... $ 78,766 $ 75,065 Premium on capital stock.................................... 246,600 220,197 Retained earnings........................................... 308,535 275,401 -------- -------- Common stock equity.................................... 633,901 570,663 -------- -------- Cumulative preferred stock: Authorized: 5,000,000 shares of $20 par value and 7,000,000 shares of $100 par value. Outstanding: 1994, 1,823,097 shares and 1993, 1,841,957 shares. SHARES OUTSTANDING PAR DECEMBER 31, SERIES VALUE 1994 ------------------------------------------------------------ ---------- ----------- 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 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 5,000 ----------- -------- -------- 1,374,657 48,293 48,293 =========== -------- -------- Series subject to mandatory redemption: O-11 1/2% $100 (HECO) 8,000 800 1,300 Q-7.68% 100 (HECO) 92,040 9,204 9,600 R-8.75% 100 (HECO) 200,000 20,000 20,000 B-10 3/4% 100 (HELCO) -- -- 100 C-9 1/4% 100 (HELCO) 6,000 600 800 D-12 3/4% 100 (HELCO) 6,500 650 700 E-12.25% 100 (HELCO) 7,500 750 800 F-8.5% 100 (HELCO) 60,000 6,000 6,000 D-8 3/4% 100 (MECO) 12,400 1,240 1,430 E-12 1/4% 100 (MECO) 2,000 200 400 F-13 3/4% 100 (MECO) 4,000 400 600 G-8.5% 100 (MECO) 50,000 5,000 5,000 ----------- -------- -------- 448,440 44,844 46,730 =========== Less sinking fund requirements due within one year.......... 2,374 1,320 -------- -------- 42,470 45,410 -------- -------- Cumulative preferred stock............................. 90,763 93,703 -------- --------
See accompanying "Notes to Consolidated Financial Statements." 13 CONSOLIDATED STATEMENTS OF CAPITALIZATION, continued ==================================================== HAWAIIAN ELECTRIC COMPANY, INC. and Subsidiaries
December 31 1994 1993 ------------------------------------------------------ ---------- ---------- (in thousands) Long-term debt: First mortgage bonds: HECO: 4.55-5.75%, due 1995 through 1997.................. $ 24,000 $ 24,000 7 5/8%, due 2002................................... 10,000 30,000 ---------- ---------- 34,000 54,000 ---------- ---------- HELCO: 7 3/4-7 7/8%, due 2002 through 2003................ 5,000 17,500 ---------- ---------- MECO: 7 3/4-7 7/8%, due 2002 through 2003................ 7,000 22,500 ---------- ---------- Total first mortgage bonds...................... 46,000 94,000 ---------- ---------- Obligations to the State of Hawaii for the repayment of Special Purpose Revenue Bonds: HECO, 5.45%, series 1993, due 2023................... 50,000 50,000 HELCO, 5.45%, series 1993, due 2023.................. 20,000 20,000 MECO, 5.45%, series 1993, due 2023................... 30,000 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 ---------- ---------- 378,900 378,900 Less funds on deposit with trustees.................. 3,391 56,205 ---------- ---------- Total obligations to the State of Hawaii........ 375,509 322,695 ---------- ---------- Other long-term debt - unsecured: HECO, 5.15% note, due 1996........................... 20,000 20,000 HECO, 5.83% note, due 1998........................... 30,000 30,000 HELCO, 4.85% note, due 1995.......................... 10,000 10,000 MECO, 5.15% note, due 1996........................... 10,000 10,000 Other................................................ -- 27 ---------- ---------- Total other long-term debt - unsecured.......... 70,000 70,027 ---------- ---------- Total long-term debt............................ 491,509 486,722 Less unamortized discount............................. 1,923 1,986 Less amounts due within one year...................... 20,933 47,960 ---------- ---------- Long-term debt, net................................ 468,653 436,776 ---------- ---------- Total capitalization............................ $1,193,317 $1,101,142 ========== ==========
See accompanying "Notes to Consolidated Financial Statements." 14 CONSOLIDATED STATEMENTS OF CASH FLOWS ===================================== HAWAIIAN ELECTRIC COMPANY, INC. and Subsidiaries
Years ended December 31 1994 1993 1992 ------------------------------------------------- ---------- ---------- ---------- (in thousands) Cash flows from operating activities: Income before preferred stock dividends of HECO.. $ 65,961 $ 56,126 $ 53,678 Adjustments to reconcile income before preferred stock dividends of HECO to net cash provided by operating activities: Depreciation and amortization of plant and equipment.............................. 63,779 55,960 53,856 Other amortization............................ 4,521 3,338 1,137 Deferred income taxes......................... 855 (1,952) (11,074) Tax credits, net.............................. 3,271 4,086 2,852 Allowance for equity funds used during construction............................... (9,064) (6,973) (6,781) Increase in accounts receivable............... (6,696) (1,924) (8,857) Decrease (increase) in accrued unbilled revenues................................... (3,700) 912 (8,238) Decrease (increase) in fuel oil stock......... (3,778) 1,914 2,466 Decrease (increase) in materials and supplies................................... 131 (2,398) (17) Increase in regulatory assets................. (9,885) (9,606) (2,921) Increase (decrease) in accounts payable....... 12,854 (2,273) 6,192 Increase (decrease) in interest and preferred dividends payable................ (1,757) 1,287 925 Changes in other assets and liabilities....... (14,170) (92) (4,525) --------- --------- --------- Net cash provided by operating activities........ 102,322 98,405 78,693 --------- --------- --------- Cash flows from investing activities: Capital expenditures............................. (186,461) (205,943) (181,542) Contributions in aid of construction............. 15,112 20,158 17,949 Proceeds from sales of assets.................... -- -- 14,270 --------- --------- --------- Net cash used in investing activities............ (171,349) (185,785) (149,323) --------- --------- --------- Cash flows from financing activities: Net increase (decrease) in short-term borrowings from nonaffiliates and affiliate with original maturities of three months or less......................... 76,938 (81,248) 87,606 Proceeds from other short-term borrowings........ -- 25,259 -- Repayment of other short-term borrowings......... -- (25,259) -- Proceeds from issuance of long-term debt......... 52,814 156,788 33,130 Repayment of long-term debt...................... (48,027) (46,901) (23,393) Proceeds from issuance of preferred stock........ -- 12,000 -- Redemption of preferred stock.................... (1,886) (2,190) (1,745) Preferred stock dividends........................ (4,316) (4,421) (4,525) Proceeds from issuance of common stock........... 30,000 45,000 33,000 Capital stock expense............................ (59) (84) (15) Common stock dividends........................... (28,511) (25,887) (23,048) Other............................................ 846 5,362 82 --------- --------- --------- Net cash provided by financing activities........ 77,799 58,419 101,092 --------- --------- --------- Net increase (decrease) in cash and equivalents.. 8,772 (28,961) 30,462 Cash and equivalents, beginning of year.......... 1,922 30,883 421 --------- --------- --------- Cash and equivalents, end of year................ $ 10,694 $ 1,922 $ 30,883 ========= ========= =========
See accompanying "Notes to Financial Statements." 15 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ========================================== HAWAIIAN ELECTRIC COMPANY, INC. and Subsidiaries 1 . 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 appropriately 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). HECO is a wholly owned subsidiary of Hawaiian Electric Industries, Inc. (HEI). All significant intercompany accounts and transactions have been eliminated in consolidation. PUBLIC UTILITY COMMISSION 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 contribu-tions 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 power and purchased power. POSTRETIREMENT AND POSTEMPLOYMENT BENEFITS. Pension costs are charged primarily ------------------------------------------- to expense and plant accounts. The Company's policy is 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 16 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, continued ===================================================== HAWAIIAN ELECTRIC COMPANY, INC. and Subsidiaries be accrued during the years in which employees render service (see Note 10). Previously, the costs of these benefits were recognized when paid. The resulting change in the method of accounting for postretirement benefits other than pensions had no material effect on net income for 1993 primarily due to the regulated nature of the Company's operations. 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 financial condition or results of 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 1994 and 1993 and 3.8% in 1992. 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 9.4% in 1994, 9.3% in 1993 and 10.2% in 1992 and reflected quarterly compounding. INCOME TAXES. HECO and its subsidiaries are included in the consolidated income ------------- tax returns of HECO's parent, HEI. Income tax expense has been computed for financial statement purposes as if HECO and its subsidiaries filed separate consolidated HECO income tax returns. The Company adopted the provisions of 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 1993 due to the regulated nature of the Company's operations (see Note 7). Federal and state tax credits are deferred and amortized over the estimated useful lives of the properties which qualified for the credits. CASH FLOWS. The Company considers cash on hand, deposits in banks, money market ----------- accounts, certificates of deposit, short-term commercial paper and reverse repurchase agreements with original maturities of three months or less to be cash and equivalents. ENVIRONMENTAL EXPENDITURES. In general, environmental contamination treatment --------------------------- costs are charged to expense, unless such costs are probable of recovery through rates authorized by the PUC. Also, environmental costs are capitalized if: the costs extend the life, increase the capacity, or improve the safety or efficiency of property owned; the costs mitigate or prevent environmental contamination that has yet to occur and that otherwise may result from future operations; or the costs are incurred in preparing property for sale. Liabilities are recorded when environmental assessments and/or remedial efforts are probable, and the cost can be 17 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, continued ===================================================== HAWAIIAN ELECTRIC COMPANY, INC. and Subsidiaries 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 to be recovered in future rates. RECLASSIFICATIONS. Certain reclassifications have been made to prior years' ------------------ consolidated financial statements to conform to the 1994 presentation. 2 . CUMULATIVE PREFERRED STOCK The following series of cumulative preferred stock are redeemable at the option of the respective company and are subject to voluntary liquidation provisions as follows:
Voluntary liquidation Redemption price price December 31, December 31, Series 1994 1994 ---------------------------- ------------ ------------ C, D, E, H, J and K (HECO).. $ 20.00 $ 21.00 I (HECO).................... 20.00 20.00 M (HECO).................... 100.00 101.00 A (HELCO)................... 101.00 101.00 A (MECO).................... 101.00 101.00 B (MECO).................... 101.00 101.00 ========================================================
The following series of cumulative preferred stock are subject to mandatory sinking fund, voluntary liquidation and optional redemption provisions as indicated below:
Voluntary Optional liquidation redemption Annual sinking fund provision price price ------------------------------ Number of shares ---------------- Commencement December 31, December 31, Series Minimum Maximum date 1994 1994 ----------- ------- ------- ------------ ------------ ------------ O (HECO)... 3,250 6,500 10/15/86 $100.00 $101.70 Q (HECO)... 4,000 4,000 1/15/93 100.00 111.12 R (HECO)... 10,000 20,000 1/15/95 100.00 106.42 C (HELCO).. 1,000 2,000 10/15/85 101.00 101.00 D (HELCO).. 500 500 10/15/88 106.38 106.38 E (HELCO).. 500 500 10/15/90 106.92 106.92 F (HELCO).. 10,000 20,000 1/15/00 100.00 106.07 D (MECO)... 950 1,900 7/15/89 101.00 101.00 E (MECO)... 1,000 2,000 10/15/86 101.75 101.75 F (MECO)... 1,000 2,000 10/15/92 104.34 104.34 G (MECO)... 8,333 16,667 1/15/00 100.00 106.07 =======================================================================
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). In the event of voluntary liquidation, preferred shareholders would be entitled, insofar as the assets of the Company would permit, to the liquidation prices shown above. The total minimum sinking fund requirements on preferred stock subject to mandatory redemption are $2,374,000 in 1995, $2,220,000 in 1996, $1,795,000 in 1997 and 1998, $1,695,000 in 1999 and a total of $34,965,000 thereafter. 18 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, continued ===================================================== HAWAIIAN ELECTRIC COMPANY, INC. and Subsidiaries 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 . COMMON STOCK In 1994, 1993 and 1992 HECO issued 554,857, 897,111 and 681,635 shares of common stock to its parent, HEI, for $30 million, $45 million and $33 million, respectively. 4 . 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. 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. At December 31, 1994, the aggregate payments of principal required on long- term debt during the next five years are $20,933,000 in 1995, $29,933,000 in 1996, $12,933,000 in 1997, $29,933,000 in 1998 and nil in 1999. In January 1995, the Department of Budget and Finance of the State of Hawaii issued tax-exempt special purpose revenue bonds, in the principal amount of $47 million with a maturity of 30 years and a fixed coupon interest rate of 6.60%, and loaned the proceeds from the sale to HECO, HELCO and MECO. The bonds were issued at a discount, resulting in a yield of approximately 6.75%. 5 . SHORT-TERM BORROWINGS Short-term borrowings from nonaffiliates at December 31, 1994 and 1993 had a weighted average interest rate of 6.3% and 3.6%, respectively, and consisted entirely of commercial paper. The Company maintained bank lines of credit which totaled approximately $125.0 million and $107.5 million at December 31, 1994 and 1993, respectively. The lines of credit support the issuance of commercial paper. There were no borrowings against any line of credit during 1994 and 1993. 6 . REGULATORY ASSETS Regulatory assets at December 31, 1994 and 1993 included the following deferred costs:
December 31 1994 1993 ----------------------------------------------- ------- ------- (in thousands) Postretirement benefits other than pensions.... $34,032 $17,866 Income taxes................................... 23,427 16,176 Unamortized debt expense on retired issuances.. 7,513 5,435 Integrated resource planning costs............. 7,189 4,661 Computer system development costs.............. 6,090 3,152 Vacation earned, but not yet taken............. 5,972 5,494 Preliminary plant costs on suspended project... 5,768 5,199 Other.......................................... 2,533 3,095 ------- ------- $92,524 $61,078 ======= =======
19 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, continued ===================================================== HAWAIIAN ELECTRIC COMPANY, INC. and Subsidiaries In the first quarter of 1995, the Company applied to the PUC for recovery of the preliminary plant costs on suspended project. 7 . INCOME TAXES In February 1992, the FASB issued SFAS No. 109, "Accounting for Income Taxes", which 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 1993 primarily due to the regulated nature of the Company. The net increase in deferred income taxes payable arising from the adoption of SFAS No. 109 is recoverable through future rates and has been recorded as a regulatory asset. In 1993, additional income tax expense of $828,000 was recognized under SFAS No. 109 as a result of 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:
Years ended December 31 1994 1993 1992 ---------------------------- -------- -------- --------- (in thousands) Federal: Current.................... $37,422 $33,556 $ 33,516 Deferred................... 2,133 432 (10,130) Deferred tax credits, net.. (1,922) (2,260) (1,740) ------- ------- -------- 37,633 31,728 21,646 ------- ------- -------- State: Current.................... 2,359 1,402 1,090 Deferred................... 315 (123) (1,074) Deferred tax credits, net.. 3,513 4,000 4,592 ------- ------- -------- 6,187 5,279 4,608 ------- ------- -------- Total....................... $43,820 $37,007 $ 26,254 ======= ======= ========
Income tax benefits related to nonoperating activities, included in "Other, Net" on the statements of income, amounted to $232,000, $109,000 and $2,411,000 for 1994, 1993 and 1992, respectively. Of the $2,411,000 income tax benefits related to nonoperating activities in 1992, $2,019,000 was a tax benefit arising from the utilization of a capital loss carryforward. The sources of timing differences in the recognition of revenues and expenses for tax and financial reporting purposes and the related deferred tax amounts under Accounting Principles Board Opinion No. 11 included in operating expenses in 1992 were as follows:
Year ended December 31 1992 ----------------------------------------------------------------------- --------- (in thousands) Excess of tax depreciation over book straight-line depreciation rates.. $ 952 Contributions in aid of construction and customer advances, net........ (6,095) Interest capitalized for tax purposes.................................. (3,347) Excess of tax depreciation over financial reporting depreciation due to basis differences.............................................. 1,631 Gain on sale of land deferred for financial reporting purposes......... (4,737) Other.................................................................. 392 -------- Total.................................................................. $(11,204) ========
20 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, continued ===================================================== HAWAIIAN ELECTRIC COMPANY, INC. and Subsidiaries Deferred income taxes related to timing differences in the recognition of nonoperating revenues and expenses for tax and financial reporting purposes in 1992 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 follows:
Years ended December 31 1994 1993 1992 ----------------------------------------------- -------- ------------ ----------- (dollars in thousands) Federal statutory income tax rate.............. 35% 35% 34% ======= ======== ======== Amount at the federal statutory income tax rate.......................................... $39,420 $ 33,331 $ 27,920 Allowance for funds used during construction not included in taxable income................ -- -- (2,375) State income taxes on operating income, net of effect on federal income taxes......................................... 4,022 3,431 3,139 Difference between financial reporting and tax straight-line depreciation for which no deferred taxes were provided.................. -- -- 3,015 Amortization of deferred tax credits........... -- 84 (1,720) Amortization of contributions in aid of construction.................................. -- -- (1,658) Amortization of federal deferred taxes in excess of current rates....................... -- (64) (1,675) Other.......................................... 378 225 (392) ------- -------- -------- Income taxes charged to operating expenses..... $43,820 $ 37,007 $ 26,254 ======= ======== ======== Deferred tax assets and deferred tax liabilities were comprised of the following: December 31 1994 1993 ----------------------------------------------- -------- -------- (in thousands) Deferred tax assets: Property, plant and equipment................. $ 7,075 $ 5,810 Contributions in aid of construction and customer advances............................ 52,892 44,932 Other......................................... 13,858 13,625 -------- -------- 73,825 64,367 -------- -------- Deferred tax liabilities: Property, plant and equipment................. 157,067 153,765 Regulatory assets............................. 8,897 6,236 Other......................................... 16,223 11,815 -------- -------- 182,187 171,816 -------- -------- Net deferred tax liability..................... $108,362 $107,449 ----------------------------------------------- ======== ========
There was no valuation allowance provided for deferred tax assets as of December 31, 1994 and 1993. 21 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, continued ===================================================== HAWAIIAN ELECTRIC COMPANY, INC. and Subsidiaries 8 . CASH FLOWS SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION ------------------------------------------------- Cash paid during 1994, 1993 and 1992 for interest (net of capitalized amounts which were not material) and income taxes was as follows:
Years ended December 31 1994 1993 1992 ------------------------- ------- ------- ------- (in thousands) Interest................. $35,001 $31,875 $30,021 ======= ======= ======= Income taxes............. $40,849 $34,796 $30,472 ======= ======= =======
SUPPLEMENTAL DISCLOSURES OF NONCASH ACTIVITIES ---------------------------------------------- The allowance for equity funds used during construction, which was charged primarily to construction in progress amounted to $9,064,000, $6,973,000 and $6,781,000 in 1994, 1993 and 1992, 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. The estimated fair value of noncash contributions received in 1994 amounted to $5,556,000. 9 . MAJOR CUSTOMERS HECO and its subsidiaries derived 10% of their operating revenues from the sale of electricity to federal government agencies amounting to $89,479,000 in 1994, $90,614,000 in 1993 and $78,020,000 in 1992. 10 . 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 were as follows:
December 31 1994 1993 ------------------------------------ --------- --------- (in thousands) Accumulated benefit obligation: Vested............................ $285,605 $270,802 Nonvested......................... 30,279 40,791 -------- -------- $315,884 $311,593 ======== ======== Projected benefit obligation........ $388,150 $399,858 Plan assets at fair value, primarily equity securities and fixed income investments...... 376,968 386,912 -------- -------- Projected benefit obligation in excess of plan assets 11,182 12,946 Unrecognized prior service cost..... (240) -- Unrecognized net gain............... 9,316 9,374 Unrecognized net transition obligation (19,153) (21,440) Adjustment required to recognize minimum liability 282 321 -------- -------- Accrued pension liability........... $ 1,387 $ 1,201 ======== ========
22 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, continued ===================================================== HAWAIIAN ELECTRIC COMPANY, INC. and Subsidiaries Plans with an accumulated benefit obligation exceeding assets were not material. Net periodic pension cost included the following components:
Years ended December 31 1994 1993 1992 ----------------------- -------- -------- -------- (in thousands) Service cost-benefits earned during the period ...... $ 14,469 $ 9,861 $ 8,935 Interest cost on projected benefit obligation ....... 27,803 25,437 25,735 Actual loss (return) on plan assets ................. 10,775 (53,703) (13,427) Amortization and deferral, net ...................... (37,154) 33,564 (5,614) -------- -------- -------- Net periodic pension cost ........................... $15,893 $ 15,159 $ 15,629 ======== ======== ========
Of these net periodic pension costs, $10,801,000, $9,663,000 and $9,801,000 were expensed in 1994, 1993 and 1992, respectively, and the remaining amounts were charged primarily to electric utility plant. For all pension plans, as of December 31, 1994 and 1993, the discount rate assumed in determining the actuarial present value of the projected benefit obligation was 8.0% and 7.0%, respectively. For 1994, 1993 and 1992, 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%. 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 ratably over 16 years beginning in 1987. POSTRETIREMENT BENEFITS OTHER THAN PENSIONS ------------------------------------------- The Company provides various postretirement benefits other than pensions to eligible employees upon retirement. Health and life insurance benefits are provided to eligible employees upon their retirement. Health benefits are provided with contributions by retirees toward costs based on their years of service and retirement date. Employees are eligible for these benefits if, upon retirement, they participate in one of the Company's defined benefit pension plans. The Company began funding some of these benefits near year-end 1994. 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). Payments for post-retirement benefits other than pensions amounted to $3,100,000 in 1992. 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 amortized ratably over 20 years beginning in 1993. In February 1992, the PUC opened a generic docket to determine whether SFAS No. 106 should be adopted for rate-making purposes. In November 1994, the PUC issued a decision and order authorizing recovery of the full cost of postretirement benefits other than pensions effective January 1, 1995. The Companies are required to establish trust funds and to deposit into these funds the recovered SFAS No. 106 costs. The regulatory asset established from January 1, 1993 through December 31, 1994 for postretirement benefits other than pensions is being amortized ratably over 18 years beginning in 1995 for rate- making and financial reporting purposes. The funded status of the postretirement benefit plans and the amounts recognized in the consolidated financial statements were as follows: 23 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, continued ===================================================== HAWAIIAN ELECTRIC COMPANY, INC. and Subsidiaries
December 31 1994 1993 --------------------------------------------------- ---------- ---------- (in thousands) Accumulated postretirement benefit obligation: Retirees.......................................... $ 59,047 $ 58,861 Fully eligible active plan participants........... 34,261 30,772 Other active plan participants.................... 45,664 48,072 --------- --------- 138,972 137,705 Plan assets at fair value, primarily fixed income investments....................................... 2,732 -- --------- --------- Accumulated postretirement benefit obligation in excess of plan assets.......................... 136,240 137,705 Unrecognized net gain (loss)....................... 7,816 (819) Unrecognized net transition obligation............. (112,756) (119,020) --------- --------- Accrued postretirement benefits liability.......... $ 31,300 $ 17,866 ========= =========
As of December 31, 1994 and 1993, the assumed discount rates used to measure the accumulated postretirement benefit obligation were 8.0% and 7.0%, respectively. For 1994 and 1993, the assumed rate of increase in future compensation levels was 5.0%. Net periodic postretirement benefit cost included the following components:
Years ended December 31 1994 1993 ------------------------------------------ ------- ------- (in thousands) Service cost.............................. $ 4,642 $ 5,115 Interest cost............................. 9,284 10,426 Amortization and deferral, net............ 6,264 6,264 ------- ------- Net periodic postretirement benefit cost.. $20,190 $21,805 ======= =======
Of the net periodic postretirement benefit cost, $2,573,000 and $2,362,000 was expensed in 1994 and 1993, respectively, and the remaining amounts were charged primarily to regulatory assets, and also to electric utility plant and other accounts. At December 31, 1994, the assumed health care trend rates for 1995 and future years were as follows: medical, 7.5%; dental, 6.0% and vision, 5.0%. A 1% increase in the trend rate for health care costs would have increased the accumulated postretirement benefit obligation as of December 31, 1994 by approxi-mately $19.9 million and the service and interest costs for 1994 by approximately $2.4 million. 11 . COMMITMENTS AND CONTINGENCIES FUEL CONTRACTS AND OTHER PURCHASE COMMITMENTS --------------------------------------------- HECO and its subsidiaries have contractual agreements to purchase a minimum amount of 0.5% sulfur residual fuel oil and 0.4% sulfur diesel fuel through 1995. The prices under these contracts are tied to market prices of petroleum products as reported in Singapore and the U.S. Pacific Northwest. Based on the average price per barrel prevailing on January 1, 1995, the estimated amount of required purchases for 1995 is $171 million. The actual amount of purchases in 1995 could vary substantially from such estimates as a result of changes in market prices and other factors. HECO and its subsidiaries purchased $186 million, $205 million and $216 million of fuel under these or prior contractual agreements in 1994, 1993 and 24 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, continued ===================================================== HAWAIIAN ELECTRIC COMPANY, INC. and Subsidiaries 1992, respectively. New contracts to replace expiring ones are expected to be entered into in the normal course of business. At December 31, 1994, the Company had purchase commitments, other than fuel and power purchase contracts, amounting to approximately $83 million. POWER PURCHASE AGREEMENTS ------------------------- As of December 31, 1994, the Company had power purchase agreements for 465 megawatts (MW) of firm capacity representing approximately 22% of their total 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 [including HELCO's agreement in principle with Hilo Coast Processing Company (HCPC)--see discussion which follows], aggregate minimum fixed capacity charges are expected to be approximately $107 million in 1995, $109 million in each of 1996 and 1997, $106 million in 1998, $109 million in 1999 and $2.1 billion thereafter. In general, payments under the power purchase agreements for 465 MW of firm capacity 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 payment 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 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. HELCO has a power purchase agreement with HCPC for 18 MW of firm capacity. Hamakua Sugar Company, which had supplied HELCO with 8 MW of firm capacity, ceased operations in October 1994. Puna Geothermal Ventures (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. In March 1994, HCPC, which then provided 18 MW of firm capacity, issued a written notice of termination to HELCO indicating that it would cease producing power in March 1997. HELCO, in turn, issued a written notice of its preliminary intent to purchase the HCPC facility, subject to a number of conditions. HELCO has the right, but not the obligation, to purchase the facilities for fair market value. As permitted under the power purchase agreement, HCPC asked that the issue of the fair market value of the facilities be determined through binding arbitration. HELCO and HCPC then engaged in negotiations regarding the potential purchase of the plant or the possible amendment of the existing power purchase agreement to keep the plant operating at least through March 1997. On December 12, 1994, HCPC filed a Chapter 11 bankruptcy petition and advised HELCO that it would cease operating its plant in December 1994. HELCO obtained a temporary restraining order and, later, an extension of such order, requiring HCPC to continue operations of the HCPC facility through March 7, 1995, with HELCO to pay an additional amount for the power HCPC supplies. On January 5, 1995, HELCO and HCPC entered into an agreement in principle, subject to the negotiation and execution of a definitive agreement, amending the existing power purchase agreement through December 1999. The definitive agreement must be approved by the bankruptcy court and is subject to cancellation by HELCO if not approved by the PUC within 180 days of its execution. If unable to purchase power from HCPC as contemplated by 25 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, continued ===================================================== HAWAIIAN ELECTRIC COMPANY, INC. and Subsidiaries the agreement in principle, HELCO would be operating with a slim generation margin and might have to initiate planned service interruptions (rolling blackouts) until it is able to arrange for additional generation. HECO POWER OUTAGE ----------------- On April 9, 1991, HECO experienced a power outage that affected all customers on the island of Oahu. The PUC initiated an investigation of the outage, which was consolidated with a pending investigation of an outage that occurred in 1988. Power Technologies, Inc. (PTI), an independent consultant hired by HECO with the approval of the PUC, investigated the outage. HECO is implementing certain of PTI's recommendations and is either studying or disagrees with certain of the other recommendations. Management cannot predict the timing and outcome of any PUC decision and order that may be issued, if any, with respect to the outages or PTI's recommendations. HECO's PUC-approved tariff rule states that HECO is not liable for interrup- tions or insufficiency of supply when the cause was beyond HECO's control. Nevertheless, HECO received 3,063 claims, which totaled approximately $7.8 million, within the time limit to file claims. 1,530 of these claims are for property damage and most have been settled, with no admission of liability, or closed as of December 31, 1994. The other 1,533 claims involve personal injury or economic loss, such as lost profits, and generally have not been covered by settlement. Seven direct or indirect business customers have 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. HECO has filed an answer which denies the principal allegations in the complaint. The class has not been certified. Trial has been set for January 1996. HECO recorded a liability of $1 million for the total amount of expected defense costs and settlements with respect to the outage. In the opinion of management, losses (if any) in excess of the amount for which provision has been made, net of estimated insurance recoveries, resulting from the ultimate outcome of the lawsuit and claims related to the April 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 and held hearings. 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. 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. Subsequent to the hearings in this matter, HELCO's generation margin improved with the addition of a 20-MW combustion turbine in August 1992 and PGV's commencement of commercial operations. However, HELCO's generation margin was adversely affected by the cessation of operations by Hamakua and will be further adversely affected if an agreement in principle that HELCO has reached with HCPC is not implemented. See "Power Purchase Agreements" above. 26 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, continued ===================================================== HAWAIIAN ELECTRIC COMPANY, INC. and Subsidiaries HELCO is proceeding with plans to install two 20-MW combustion turbines at Keahole on the island of Hawaii in 1995 or 1996, followed by an 18-MW heat steam recovery generator in 1997, at which time these units will be converted to a combined-cycle unit, subject in each case to obtaining necessary permits and approvals. The PUC has issued a decision and order approving commitment of expenditures for the first 20-MW combustion turbine. Evidentiary hearings on the other portions of the unit were held in July 1994. Further, two independent power producers, Kawaihae Cogeneration Partners and Ensearch Development Corp., have each filed with the PUC separate complaints against HELCO, alleging that, rather than having HELCO build the combined-cycle unit, they are entitled to a power purchase contract to provide all or part of the capacity. An evidentiary hearing in the Kawaihae Cogeneration Partners docket was held in June 1994. The evidentiary hearing in the Ensearch Development Corp. docket was held in December 1994. HELCO has encountered procedural and other difficulties in obtaining the necessary air permit and Conservation District Use Permit ("CDUP") which would allow the combined-cycle unit to be constructed at the Keahole site. As a result of these permitting delays, HELCO's unit installation schedule has been adversely impacted. To address the contingency that the air permit or CDUP might be signifi-cantly delayed or ultimately denied, HELCO is exploring other alternatives to meet projected energy needs, including any viable, timely and cost-effective unaffiliated nonutility generation alternative. However, until additional generation is in place, and depending on the availability of existing generation and the timing and size of load peaks, management believes that there is a significant risk of capacity shortages on the island of Hawaii that could result in rolling blackouts. 12 . REGULATORY RESTRICTIONS ON DISTRIBUTIONS TO PARENT At December 31, 1994, net assets (assets less liabilities) of approximately $314 million were not available for transfer to HEI in the form of dividends, loans or advances without regulatory approval. 13 . RELATED-PARTY TRANSACTIONS HEI charged HECO and its subsidiaries for general management and administrative services totaling $2,417,000, $2,258,000 and $5,604,000 in 1994, 1993 and 1992, respectively. The amounts charged by HEI to its subsidiaries are allocated primarily on the basis of actual labor hours. As of January 1, 1993, HEI refined its method of identifying costs chargeable to its subsidiaries, resulting in lower allocations to subsidiaries. HEI also charged HECO for data processing services totaling $3,554,000, $3,563,000 and $3,231,000 in 1994, 1993 and 1992, respectively. HECO's borrowings from HEI totaled nil and $12,000,000 at December 31, 1994 and 1993, 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 $77,000, $1,795,000 and $232,000 in 1994, 1993 and 1992, respectively. 14 . 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. 27 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, continued ===================================================== HAWAIIAN ELECTRIC COMPANY, INC. and Subsidiaries 15 . FAIR VALUE OF FINANCIAL INSTRUMENTS 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 instruments. LONG-TERM DEBT. Fair value is estimated based on the quoted market prices for --------------- the same or similar issues of 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 were as follows:
December 31 1994 1993 ---------------------------------- ------------------- ------------------- Estimated Estimated Carrying fair Carrying fair amount value amount value -------- --------- -------- --------- (in thousands) Financial assets: Cash and equivalents.............. $ 10,694 $ 10,694 $ 1,922 $ 1,922 Financial liabilities: Short-term borrowings from nonaffiliates and affiliate..... 117,866 117,866 40,928 40,928 Long-term debt, net, including amounts due within one year..... 489,586 461,082 484,736 506,089 Cumulative preferred stock subject to mandatory redemption, including sinking fund requirements...................... 44,844 46,478 46,730 49,583 =============================================================================
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 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. In addi- tion, 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 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, continued ===================================================== HAWAIIAN ELECTRIC COMPANY, INC. and Subsidiaries 16 . SUMMARIZED FINANCIAL INFORMATION Summarized financial information for HECO's consolidated subsidiaries, HELCO and MECO, was as follows: HAWAII ELECTRIC LIGHT COMPANY, INC.
December 31 1994 1993 ----------------------------- -------- -------- (in thousands) Balance sheet data Current assets............... $ 25,151 $ 22,161 Noncurrent assets............ 335,725 297,847 -------- -------- $360,876 $320,008 ======== ======== Common stock equity.......... $120,908 $102,438 Cumulative preferred stock: Not subject to mandatory redemption 10,000 10,000 Subject to mandatory redemption 7,800 8,100 Current liabilities.......... 59,787 42,615 Noncurrent liabilities....... 162,381 156,855 -------- -------- $360,876 $320,008 ======== ======== Years ended December 31 1994 1993 1992 ----------------------------- -------- -------- -------- (in thousands) Income statement data Operating revenues........... $128,706 $113,579 $104,904 Operating income............. 11,821 11,902 10,951 Net income for common stock.. 8,420 5,807 5,770 ===========================================================
MAUI ELECTRIC COMPANY, LIMITED
December 31 1994 1993 ----------------------------- -------- -------- (in thousands) Balance sheet data Current assets............... $ 29,204 $ 31,465 Noncurrent assets............ 272,019 252,680 -------- -------- $301,223 $284,145 ======== ======== Common stock equity.......... $108,313 $ 97,569 Cumulative preferred stock: Not subject to mandatory redemption 8,000 8,000 Subject to mandatory redemption 6,545 7,135 Current liabilities.......... 34,197 35,027 Noncurrent liabilities....... 144,168 136,414 -------- -------- $301,223 $284,145 ======== ======== Years ended December 31 1994 1993 1992 ----------------------------- -------- -------- -------- (in thousands) Income statement data Operating revenues........... $120,966 $114,256 $105,343 Operating income............. 16,251 13,518 12,379 Net income for common stock.. 10,196 9,274 8,770 ===========================================================
29 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, continued ===================================================== HAWAIIAN ELECTRIC COMPANY, INC. and Subsidiaries 17 . CONSOLIDATED QUARTERLY FINANCIAL INFORMATION (UNAUDITED) Selected quarterly consolidated financial information for 1994 and 1993 was as follows:
Quarter ended YEAR ENDED ------------------------------------------------------------------------------------------- 1994 March 31 June 30 Sept.30 Dec. 31 DEC. 31 ------------------------------------------------------------------------------------------- (in thousands) Operating revenues..... $ 200,098 $ 217,884/1/ $247,844/1,2/ $241,482/1,2/ $907,308 Operating income....... 16,132 21,635/1/ 25,708/1,2/ 23,837/1,2/ 87,312 Net income for common stock................ 9,276 15,188/1/ 19,328/1,2/ 17,853/1,2/ 61,645 ============================================================================================ 1993 ----------------------- (in thousands) Operating revenues..... $205,560/5/ $ 218,158/5/ $ 234,484/5/ $ 215,808/5/ $874,010 Operating income....... 13,705/5/ 22,862/3,4,5/ 20,377/3,5/ 21,141/3,5/ 78,085 Net income for common stock................ 7,462/5/ 16,465/3,4,5/ 14,548/3,5/ 13,230/3,5/ 51,705 ============================================================================================
/1/ Includes interim rate increases granted to HECO, primarily to cover the costs of new facilities and equipment. /2/ Includes interim rate increases granted to HELCO, primarily to cover the costs of plant and equipment and operating costs necessary to maintain and improve service. /3/ 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.) /4/ 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.) /5/ Includes interim rate increases granted to MECO, primarily to cover the costs of a phased installation of a combined-cycle generating unit on Maui. 30 INDEPENDENT AUDITORS' REPORT The Board of Directors and Stockholder 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, 1994 and 1993, 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, 1994. 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, 1994 and 1993, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 1994, 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 January 25, 1995 31 DIRECTORS AND OFFICERS
HAWAIIAN ELECTRIC COMPANY, HAWAII ELECTRIC LIGHT MAUI ELECTRIC COMPANY, INC. COMPANY, INC. LIMITED -------------------------------------------------------------------------------------------- DIRECTORS DIRECTORS DIRECTORS ( ) indicates age and year indicates first elected or appointed./1/ ROBERT F. CLARKE (52), 1990 HARWOOD D. WILLIAMSON HARWOOD D. WILLIAMSON RICHARD HENDERSON (66), 1970 RICHARD HENDERSON GLADYS C. BAISA BEN F. KAITO/2/ (68), 1975 WARREN H. W. LEE THOMAS J. JEZIERNY MILDRED D. KOSAKI/2/ (70), 1973 DENZIL W. ROSE SANFORD J. LANGA PAUL A. OYER (54), 1985 DONALD K. YAMADA B. MARTIN LUNA DIANE J. PLOTTS/2/ (59), 1991 ANNE M. TAKABUKI HARWOOD D. WILLIAMSON (63), 1985 PAUL C. YUEN/2/ (66), 1993 --------------------------------------------------------------------------------------------- /1/ All directors serve one year terms. /2/ Audit Committee member. OFFICERS OFFICERS 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 DEORNA L. IKEDA MICHAEL E. KAM Vice President-Engineering Assistant Treasurer Assistant Treasurer THOMAS L. JOAQUIN WILLIAM J. STORMONT STANLEY T. NAKAMOTO Vice President-Operations Assistant Secretary Assistant Treasurer RICHARD L. O'CONNELL JESSIE K. AKAGI Vice President-Customer Relations Assistant Secretary PAUL A. OYER Financial Vice President and Treasurer DAVID M. RODRIGUES Vice President-Corporate Excellence ERNEST T. SHIRAKI Controller MOLLY M. EGGED Secretary MARVIN A. HAWTHORNE Assistant Treasurer
33 EX-27.A 13 HEI ART. 5 FINANCIAL DATA SCHEDULE
5 This schedule contains summary financial information extracted from Hawaiian Electric Industries, Inc. and subsidiaries' consolidated balance sheet as of December 31, 1994 and consolidated statement of income for the year ended December 31, 1994 and is qualified in its entirety by reference to such financial statements. 0000046207 HAWAIIAN ELECTRIC CO. INC 1,000 YEAR DEC-31-1994 JAN-01-1994 DEC-31-1994 87,623 1,099,810 133,279 2,517 43,126 0 2,425,325 (747,503) 5,174,464 0 718,240 546,254 44,844 48,293 135,835 5,174,464 0 1,188,523 0 1,014,390 (5,944) 3,067 54,028 126,049 53,019 73,030 0 0 0 73,030 2.60 2.60
EX-27.B 14 HECO ART. UT FINANCIAL DATA SCHEDULE
UT This schedule contains summary financial information extracted from Hawaiian Electric Company, Inc. and subsidiaries' consolidated balance sheet as of December 31, 1994 and consolidated statement of income and consolidated statement of cash flows for the year ended December 31, 1994 and is qualified in its entirety by reference to such financial statements. 0000354707 HAWAIIAN ELECTRIC INDUSTRIES, INC. 1,000 YEAR DEC-31-1994 JAN-01-1994 DEC-31-1994 PER-BOOK 1,590,576 0 163,939 9,662 124,943 1,889,120 78,766 246,600 308,535 633,901 42,470 48,293 468,653 0 0 117,866 20,933 2,374 0 0 554,630 1,889,120 907,308 43,820 776,176 819,996 87,312 14,793 102,105 36,144 65,961 4,316 61,645 28,511 33,111 102,322 0 0
EX-99.1A 15 ANNUAL REPORT ON FORM 11-K HEI EXHIBIT 99.1(a) SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 11-K [X] ANNUAL REPORT PURSUANT TO SECTION 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended December 31, 1994 ------------------------------------------- or [ ] TRANSITION REPORT PURSUANT TO SECTION 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 Commission file number 1-8503 HAWAIIAN ELECTRIC INDUSTRIES RETIREMENT SAVINGS PLAN Hawaiian Electric Industries, Inc. 900 Richards Street, Honolulu, Hawaii 96813 Total number of pages in this filing: 4 REQUIRED INFORMATION -------------------- Financial Statements. The statements of net assets available for benefits at -------------------- December 31, 1994 and 1993, statements of changes in net assets available for benefits for the years ended December 31, 1994, 1993 and 1992, together with notes to financial statements, and KPMG Peat Marwick LLP's audit report thereon are filed as a part of this annual report in paper format under cover of Form SE dated March 21,1995. Exhibits. The written consent of KPMG Peat Marwick LLP with respect to the -------- Plan's financial statements is attached hereto as Exhibit 1. Exhibit 1 [KPMG PEAT MARWICK LETTERHEAD] Hawaiian Electric Industries, Inc. Pension Investment Committee: We consent to incorporation by reference in Registration Statement No. 33-52911 on Form S-8 of Hawaiian Electric Industries, Inc. of our report dated March 10, 1995 included herein, relating to the statements of net assets available for benefits of the Hawaiian Electric Industries Retirement Savings Plan as of December 31, 1994 and 1993, and the related statements of changes in net assets available for benefits for each of the years in the three-year period ended December 31, 1994. /s/ KPMG Peat Marwick LLP Honolulu, Hawaii March 21, 1995 SIGNATURES ---------- The Plan. Pursuant to the requirements of the Securities Exchange Act of 1934, the trustees (or other persons who administer the employee benefit plan) have duly caused this annual report to be signed on its behalf by the undersigned hereunto duly authorized. HAWAIIAN ELECTRIC INDUSTRIES RETIREMENT SAVINGS PLAN Date: March 21, 1995 By: HAWAIIAN ELECTRIC INDUSTRIES PENSION INVESTMENT COMMITTEE Its Named Fiduciary By: /s/ Robert F. Mougeot -------------------------------- Robert F. Mougeot Its Chairman By: /s/ Constance H. Lau ------------------------------- Constance H. Lau Its Asset Manager and Secretary EX-99.3A 16 AMEND. 1994-2 TO HEI RET. SAVINGS PLAN HEI Exhibit 99.3(a) -------------------- AMENDMENT 1994-2 TO THE HAWAIIAN ELECTRIC INDUSTRIES RETIREMENT SAVINGS PLAN In accordance with Section 10.1 of the Hawaiian Electric Industries Retirement Savings Plan (the "Plan"), the Plan is hereby amended in the following respects: 1. Section 1.3 is amended by inserting the following after the fourth sentence thereof: "A Participant may also name a contingent Beneficiary to succeed to the interests of the named Beneficiary in the event such named Beneficiary shall not survive the Participant." 2. Section 1.7 is amended by revising the third sentence to read as follows: "Commencing January 1, 1994, only the first $150,000 (or such larger amount as the Commissioner of Internal Revenue may prescribe) of a Participant's Compensation (determined in accordance with Section 401(a)(17) of the Code) shall be taken into account for purposes of the Plan. In determining the Compensation of a Participant for purposes of this limitation, the rules of Section 414(q)(6) of the Code shall apply, except that in applying such rules, the term "family" shall include only the spouse of the Participant and any lineal descendants of the Participant who have not attained age 19 before the close of the Plan Year. If, as a result of the application of such rules, the dollar limitation is exceeded, then the limitation shall be prorated among the affected individuals in proportion to each such individual's Compensation as determined under this Section prior to the application of the limitation." 3. Section 1.8 is amended by revising the second sentence thereof to read as follows: "Eligible Employee means a Participant who is eligible to receive an ----------------- allocation of Salary Reduction Contributions for all or a portion of the Plan Year." 4. Section 1.16 is amended to read as follows: "Participant means any Employee who has satisfied the eligibility ----------- requirements of Article II and whose Accounts remain in the Plan and allocated to him. Active Participant means a Participant during the ------------------ period he is employed in an eligible class of Employees and is, therefore, eligible to receive an allocation of Salary Reduction Contributions." 5. Section 1.17 is amended to read as follows: "Participant Voluntary Contribution means the voluntary contributions of a ---------------------------------- Participant permitted prior to July 1, 1992." 6. Section 1.22 is amended to read as follows: "Plan Year means a 12-month period commencing on January 1 and --------- anniversaries thereof." 7. Section 3.3 is amended to read as follows: "Any Participant who has received a distribution from a qualified employee pension benefit plan or annuity plan may make a contribution to a Rollover Account established on his behalf; provided that proper verification is provided and the Plan Administrator, in his sole discretion, agrees in writing to such a contribution. The Plan shall not accept rollovers from individual retirement accounts, whether or not the funds involved originally were received as distributions from a qualified employee pension benefit plan." 8. Section 4.1 (a)(1) and (2) shall be amended by replacing the term "other Eligible Employees" with the term "non-Highly Compensated Employees". 9. Section 4.1 (b)(1) is amended to replace the word "Compensation" with the word "compensation". 10. Section 4.1(b)(3) is amended to read as follows: "For purposes of determining the actual deferral percentage of an Eligible Employee who is a Highly Compensated Employee by virtue of being either a five percent (5%) owner or among the top 10 highest paid, the Salary Reduction Contributions and compensation of Family Members of such Highly Compensated Employee shall be combined and the Family Members and such Highly Compensated Employee shall be treated as a single Employee. Such Family Members shall be disregarded in determining the actual deferral percentage for Participants who are non-Highly Compensated Employees." 11. Section 4.1(b) is amended to add a new subsection (6), to read as follows: "For purposes of this Section 4.1, the term "compensation" shall mean W-2 pay including any reductions related to arrangements qualifying under Sections 125 or 401(k) of the Code." -2- 12. Section 4.2(a)(1) and (2) shall be amended by replacing the term "other Eligible Employees" with the term "non-Highly Compensated Employees." 13. Section 4.2(b)(3) is amended to read as follows: "For purposes of determining the contribution percentage of an Eligible Employee who is a Highly Compensated Employee by virtue of being either a five percent (5%) owner or among the top 10 highest paid, the Participant Voluntary Contributions and compensation of Family Members of such Highly Compensated Employee shall be combined and the Family Members and such Highly Compensated Employee shall be treated as a single Employee. Such Family Members shall be disregarded in determining the actual deferral percentage for Participants who are non-Highly Compensated Employees." 14. Section 4.2(d)(2) is amended to replace the term "Compensation" with the term "compensation." 15. Section 4.2(d) is amended to add a new subsection (4), to read as follows: ""compensation" shall mean W-2 pay including any reductions related to arrangements qualifying under Sections 125 or 401(k) of the Code." 16. Section 4.4(c)(ii) is amended by replacing "April 1" with "February 15". 17. Section 4.5(b) is amended to read as follows: "If necessary to limit the annual addition to a Participant's Accounts for a limitation year, the Plan Administrator may reduce or suspend Salary Reduction Contributions, provided that notice of such reduction or suspension be given to the Participant. Such notice need not precede the reduction or suspension. If further necessary to limit the annual addition to a Participant's Accounts for a limitation year, distributions shall be made in the following order to the Participant on whose behalf such contributions were made, to the extent necessary to reduce the annual addition to the prescribed amount: (i) Participant Voluntary Contributions and interest thereon; (ii) Salary Reduction Contributions and interest thereon; (iii) Employer Contributions." 18. The third sentence of Section 4.5(d)(1) is amended to read as follows: "Annual additions for a limitation year shall, however, include Salary Reduction Contributions for such Plan Year that are subsequently distributed to or forfeited by a Participant pursuant to this Article IV, except to the extent of excess Salary Reduction Contributions and earnings thereon -3- refunded to the Participant by April 15 of the following Plan Year." 19. The first sentence of Section 5.3 shall be amended to read as follows: "The assets of the Plan and each investment alternative shall be valued on a daily basis." 20. Section 6.3(a) shall be amended by adding the following at the end thereof: "In distributing such amounts, distributions shall be made first from Participant Voluntary Contributions made prior to 1986." 21. Section 6.3(b)(3)(iv) is amended to read as follows: "Payment of tuition for the next 12 months of post-secondary education for the Participant, his spouse, children or dependents (as defined in Section 152 of the Code)." 22. Sections 6.2(b)(5)(ii) and 6.2(d) are amended to add the following at the end thereof: "Notwithstanding any other provision to the contrary, any Participant eligible to receive a distribution which would qualify as an "eligible rollover distribution" under Section 401(a)(31)(C) of the Code may elect to have such distribution paid directly to an "eligible retirement plan" as defined in Section 401(a)(31)(D) of the Code and, upon the Participant's specification of the eligible retirement plan to which such distribution is to be paid, such distribution shall be made in the form of a direct trustee-to-trustee transfer to the eligible retirement plan so specified." 23. Sections 6.4(d)(2) and (3) are amended to read as follows: "(2) Bear interest on unpaid principal at the then current money market account rate at American Savings Bank, plus two percent (2%). (3) Be subject to a substantially level amortization schedule and repayment on at least a monthly basis." 24. Section 6.4(f) is amended to read as follows: "A loan, if approved, shall be disbursed as soon as reasonably practicable after the date on which the loan is approved." 25. Section 6.6(a)(ii) is amended by replacing "tenth" with "fifth". -4- 26. Section 6.6(b)(3) is amended by adding the following at the end thereof: "The amount of the minimum which must be distributed in each calendar year shall be determined by dividing the Participant's vested Accounts by the applicable life expectancy. Any Participant who has attained age 70-1/2 may elect to have distributed to him in any Plan Year an amount greater than the minimum required distribution." 27. Section 7.4 is amended to read as follows: "To the extent any expenses of the Plan are not paid by Participants or paid out of the assets of the Plan, the Participating Companies shall pay all expenses of administering the Plan. Such expenses shall include any expenses incurred by a Participating Company, the Committee, the Asset Manager, or the Plan Administrator, including, but not limited to, the payment of professional fees of consultants. Commencing March 31, 1994 [check date] Participants shall be assessed a portion of Plan recordkeeping fees, including fees for plan loans, set-up fees and annual maintenance fees." Unless otherwise stated each of these Amendments shall be effective January 1, 1994. TO RECORD the adoption of this amendment to the Plan, the Hawaiian Electric Industries Pension Investment Committee has caused this document to be executed this 30th day of June , 1994. ------------ ------------------------- HAWAIIAN ELECTRIC INDUSTRIES PENSION INVESTMENT COMMITTEE By /s/ Constance H. Lau -------------------- By /s/ Peter C. Lewis ------------------ -5-