-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, A1lDJKYxG79059B6kR+7g0sOenrhev4BB9SV58s9PbYAu2FiBNEEkRuFDOoTf91T pfnhXP3+CiNuVikUuIgrkw== 0000898430-96-000957.txt : 19960326 0000898430-96-000957.hdr.sgml : 19960326 ACCESSION NUMBER: 0000898430-96-000957 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 14 CONFORMED PERIOD OF REPORT: 19951231 FILED AS OF DATE: 19960325 SROS: NYSE SROS: PSE FILER: COMPANY DATA: COMPANY CONFORMED NAME: HAWAIIAN ELECTRIC CO INC CENTRAL INDEX KEY: 0000046207 STANDARD INDUSTRIAL CLASSIFICATION: ELECTRIC SERVICES [4911] IRS NUMBER: 990040500 STATE OF INCORPORATION: HI FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K405 SEC ACT: 1934 Act SEC FILE NUMBER: 001-04955 FILM NUMBER: 96538176 BUSINESS ADDRESS: STREET 1: 900 RICHARDS ST CITY: HONOLULU STATE: HI ZIP: 96813 BUSINESS PHONE: 8085437771 MAIL ADDRESS: STREET 1: 900 RICHARDS STREET CITY: HONOLULU STATE: HI ZIP: 96813 FORMER COMPANY: FORMER CONFORMED NAME: HAWAIIAN ELECTRIC CO LTD DATE OF NAME CHANGE: 19670212 FILER: COMPANY DATA: COMPANY CONFORMED NAME: HAWAIIAN ELECTRIC INDUSTRIES INC CENTRAL INDEX KEY: 0000354707 STANDARD INDUSTRIAL CLASSIFICATION: ELECTRIC SERVICES [4911] IRS NUMBER: 990208097 STATE OF INCORPORATION: HI FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K405 SEC ACT: 1934 Act SEC FILE NUMBER: 001-08503 FILM NUMBER: 96538177 BUSINESS ADDRESS: STREET 1: 900 RICHARDS ST CITY: HONOLULU STATE: HI ZIP: 96813 BUSINESS PHONE: 8085435662 MAIL ADDRESS: STREET 1: 900 RICHARDS STREET CITY: HONOLULU STATE: HI ZIP: 96813 10-K405 1 FORM 10-K405 ================================================================================ 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, 1995 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 New York Stock Exchange Industries, Inc. Par Value Pacific Stock Exchange Hawaiian Electric First Mortgage Bonds, New York Stock Exchange Company, Inc. Series S, 7 5/8% 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 [X] =============================================================================== =============================================================================== AGGREGATE MARKET VALUE OF THE VOTING NUMBER OF SHARES STOCK HELD BY OF COMMON STOCK NONAFFILIATES OF THE OUTSTANDING OF THE REGISTRANTS ON REGISTRANTS ON MARCH 15, 1996 MARCH 15, 1996 -------------------- ------------------ Hawaiian Electric Industries, Inc. $1,059,264,000 30,050,033 (Without par value) Hawaiian Electric Company, Inc. N/A 12,302,657 ($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, 1995: 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 8, 1996, 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...................................................... 39 Item 3. Legal Proceedings............................................... 41 Item 4. Submission of Matters to a Vote of Security Holders............. 41 PART II Item 5. Market for Registrants' Common Equity and Related Stockholder Matters.................................. 43 Item 6. Selected Financial Data......................................... 43 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations.................................... 43 Item 8. Financial Statements and Supplementary Data..................... 44 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure..................................... 44 PART III Item 10. Directors and Executive Officers of the Registrants............. 44 Item 11. Executive Compensation.......................................... 46 Item 12. Security Ownership of Certain Beneficial Owners and Management.. 50 Item 13. Certain Relationships and Related Transactions.................. 52 PART IV Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K..................................................... 52 Independent Auditors' Report - HEI......................................... 54 Independent Auditors' Report - HECO........................................ 55 Index to Exhibits.......................................................... 60 Signatures................................................................. 75
i GLOSSARY OF TERMS Defined below are certain terms used in this report:
TERMS DEFINITIONS - ----- ----------- 1935 ACT Public Utility Holding Company Act of 1935 AES Applied Energy Services, Inc. AES-BP AES Barbers Point, Inc. 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. BHP BHP Petroleum Americas Refining Inc., a fuel oil supplier BIF Bank Insurance Fund BPPI Baldwin Pacific Properties, Inc., a limited partner of Baldwin*Malama (a limited partnership in which Malama Development Corp. is a general partner) BTU British thermal unit CDUP Conservation District Use Permit amendment 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., Pacific Energy Conservation Services, Inc. and HEI Power Corp. CONSUMER Division of Consumer Advocacy, Department of Commerce and ADVOCATE 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 DOT Department of Transportation of the State of Hawaii DSM Demand-side management EPA Environmental Protection Agency - federal EPCRA Emergency Planning and Community Right-to-Know Act ERL State of Hawaii Environmental Response Law FASB Financial Accounting Standards Board FDIC Federal Deposit Insurance Corporation FDICIA Federal Deposit Insurance Corporation Improvement Act of 1991 FEDERAL U.S. Government FERC Federal Energy Regulatory Commission FHLB Federal Home Loan Bank FIRREA Financial Institutions Reform, Recovery, and Enforcement Act of 1989 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.
ii GLOSSARY OF TERMS (continued)
TERMS DEFINITIONS - ----- ----------- 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., Pacific Energy Conservation Services, Inc. and HEI Power Corp. 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. HEIPC HEI Power 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 which was placed in state rehabilitation proceedings. HEI Diversified, Inc. was the holder of record of HIG's common stock prior to August 16, 1994 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 ILWU International Longshoremen's and Warehousemen's Union IPP Independent power producer IRP Integrated resource plan IRR Interest rate risk KALAELOA Kalaeloa Partners, L. P. KCP Kawaihae Cogeneration Partners KWH Kilowatthour LSFO Low sulfur fuel oil LVI Lalamilo Ventures, Inc., formerly a wholly owned subsidiary of Hawaiian Electric Renewable Systems, Inc. and now a wholly owned subsidiary of Hawaiian Electric Industries, Inc. MBTU Million British thermal unit MD&A Management's Discussion and Analysis of Financial Condition and Results of Operations MDC Malama Development Corp., a wholly owned subsidiary of Malama Pacific Corp. MECO Maui Electric Company, Limited, a wholly owned electric utility subsidiary of Hawaiian Electric Company, Inc.
iii GLOSSARY OF TERMS (continued)
TERMS DEFINITIONS - ----- ----------- MMO Malama Mohala Corp., a wholly owned subsidiary of Malama Pacific Corp. MPC Malama Pacific Corp., a wholly owned subsidiary of Hawaiian Electric Industries, Inc. and parent company of several real estate subsidiaries MSFO Medium sulfur fuel oil MW Megawatt NA Not applicable NAE North American Environmental, Inc. NOI Notice of intent 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 Venture 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, primarily 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 its subsidiaries; HTB and its subsidiary; MPC and its subsidiaries; HEIIC; LVI; PECS (an inactive company) and HEIPC. ASB, acquired in 1988, is the fourth largest financial institution in the state based on total assets and the third largest financial institution based on deposits, in each case as of September 30, 1995, and has 47 retail branches as of December 31, 1995. 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. HEIPC was formed in March 1995 to pursue independent power projects and energy conservation projects in Asia and the Pacific. 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 page 45 of HEI's 1995 Annual Report to Stockholders, portions of which are filed herein as HEI Exhibit 13. The financial information about the Company's industry segments is incorporated herein by reference to page 26 of HEI's 1995 Annual Report to Stockholders, portions of which are filed herein as HEI Exhibit 13. For additional information about the Company, reference is made to "Management's Discussion and Analysis of Financial Condition and Results of Operations" (MD&A), incorporated herein by reference to pages 27 to 36 of HEI's 1995 Annual Report to Stockholders, portions of which are filed herein as HEI Exhibit 13. ELECTRIC UTILITY - ---------------- HECO AND SUBSIDIARIES AND SERVICE AREAS HECO, MECO and HELCO are regulated operating electric public utilities engaged in the production, purchase, transmission, distribution and sale of electricity on the islands of Oahu; Maui, Lanai and Molokai; and Hawaii, respectively. HECO was incorporated under the laws of the Kingdom of Hawaii (now State of Hawaii) on October 13, 1891. HECO acquired MECO in 1968 and HELCO in 1970. In 1995, the electric utilities contributed approximately 76% of HEI's consolidated revenues from continuing operations and approximately 85% of HEI's consolidated operating income from continuing operations. At December 31, 1995, the assets of the electric utilities represented approximately 36% of the total assets of the Company. For additional information about the electric utilities, see MD&A and Note 4, incorporated herein by reference to pages 27 to 36 and 46 to 48 of HEI's 1995 Annual Report to Stockholders, portions of which are filed herein as HEI Exhibit 13, and the MD&A for the electric utilities (HECO MD&A) and HECO consolidated financial statements incorporated by reference to pages 3 to 30 of HECO's 1995 Annual Report to Stockholder, portions of which are filed herein as HECO Exhibit 13. 1 The islands of Oahu, Maui, Lanai, Molokai and Hawaii have a combined population estimated at 1,130,000, or approximately 95% of the population of the State of Hawaii, and 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, 1995, 1994 and 1993 and their electric sales revenues for each of the years then ended:
1995 1994 1993 --------------------------------------------------------------------------------------- Customer Electric sales Customer Electric sales Customer Electric sales (dollars in thousands) accounts revenues accounts revenues accounts revenues - ------------------------------------------------------------------------------------------------------------------------------- HECO ................................. 269,307 $712,380 264,992 $652,442 263,478 $644,029 MECO ................................. 53,339 127,284 52,483 119,805 51,064 113,018 HELCO................................. 58,515 135,110 58,017 128,259 56,556 112,968 --------------------------------------------------------------------------------------- 381,161 $974,774 375,492 $900,506 371,098 $870,015 =======================================================================================
Revenues from the sale of electricity in 1995 were from the following types of customers in the proportions shown:
HECO MECO HELCO Total - ------------------------------------------------------------------------------------------------------------------------------- Residential.................................................... 31% 36% 41% 33% Commercial..................................................... 31 34 38 32 Large light and power.......................................... 37 29 20 34 Other.......................................................... 1 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 1995, 1994 and 1993. One of HECO's larger customers, the Naval Base at Barbers Point, Oahu, is expected to be closed within the next few years. However, HECO anticipates that the base closure will ultimately result in little, if any, loss in aggregate KWH sales, if, as currently anticipated, the Navy continues to occupy portions of Barbers Point and if much of the surplus facilities and land currently not utilized by the Navy is occupied by state agencies. On March 8, 1994, President Clinton signed an Executive Order which mandates that each federal agency develop and implement a program with the intent of reducing energy consumption by 30% by the year 2005 to the extent that these measures are cost-effective. The 30% reductions will be measured relative to the agency's 1985 energy use. HECO is working with various federal government agencies such as the Department of Defense to implement demand-side management programs which will help them achieve their energy reduction objectives. In November 1995, HECO and the U.S. General Services Administration entered into a Basic Ordering Agreement (BOA) under which HECO would provide for financing and installation of energy conservation projects at federal facilities in Hawaii. The first project to be undertaken under the umbrella BOA is a $4 million air conditioning upgrade at the federal office building in downtown Honolulu. Neither HEI nor HECO management can predict with certainty the impact of President Clinton's Executive Order on the Company's or consolidated HECO's future results of operations. 2
SELECTED CONSOLIDATED ELECTRIC UTILITY OPERATING STATISTICS 1995 1994 1993 1992 1991 (2) ------------------------------------------------------- KWH SALES (MILLIONS) Residential............................. 2,471.3 2,427.5 2,340.3 2,326.8 2,270.5 Commercial.............................. 2,624.7 2,451.2 2,284.6 2,273.9 2,205.1 Large light and power................... 3,655.1 3,658.6 3,646.2 3,675.8 3,622.6 Other................................... 55.4 55.8 54.1 55.4 55.4 ----------------------------------------------------- 8,806.5 8,593.1 8,325.2 8,331.9 8,153.6 ===================================================== NET ENERGY GENERATED AND PURCHASED (MILLIONS OF KWH) Net generated........................... 5,850.6 5,727.6 5,789.6 6,555.4 6,991.1 Purchased............................... 3,511.6 3,437.8 3,101.0 2,325.0 1,599.7 ----------------------------------------------------- 9,362.2 9,165.4 8,890.6 8,880.4 8,590.8 ===================================================== Losses and system uses (%).............. 5.7 6.0 6.1 6.0 4.9 (3) ENERGY SUPPLY (YEAREND) Generating capability--MW............... 1,637 1,637 1,638 1,592 1,552 Firm purchased capability--MW........... 469 465 473 454 228 ----------------------------------------------------- 2,106 2,102 2,111 2,046 1,780 ===================================================== Gross peak demand--MW (1)............... 1,537 1,527 1,496 1,493 1,446 Btu per net KWH generated............... 10,762 10,746 10,846 10,870 10,768 Average fuel oil cost per million Btu (cents)................................ 329.7 304.4 340.5 317.1 367.5 CUSTOMER ACCOUNTS (YEAREND) Residential............................. 330,508 325,495 320,987 314,185 308,770 Commercial.............................. 48,585 47,916 48,008 46,817 46,189 Large light and power................... 580 601 628 641 637 Other................................... 1,488 1,480 1,475 1,474 1,450 ----------------------------------------------------- 381,161 375,492 371,098 363,117 357,046 ===================================================== ELECTRIC REVENUES (THOUSANDS) Residential............................. $324,923 $297,984 $283,662 $250,808 $235,295 Commercial.............................. 313,909 281,664 262,751 236,350 224,300 Large light and power................... 329,598 314,931 317,816 280,871 271,863 Other................................... 6,344 5,927 5,786 5,164 5,030 ----------------------------------------------------- $974,774 $900,506 $870,015 $773,193 $736,488 ===================================================== AVERAGE REVENUE PER KWH SOLD (CENTS) Residential............................. 13.15 12.28 12.12 10.78 10.36 Commercial.............................. 11.96 11.49 11.50 10.39 10.17 Large light and power................... 9.02 8.61 8.72 7.64 7.51 Other................................... 11.46 10.62 10.69 9.32 9.08 ----------------------------------------------------- Average revenue per KWH sold............ 11.07 10.48 10.45 9.28 9.03 RESIDENTIAL STATISTICS Average annual use per customer account (KWH)............................... 7,514 7,482 7,367 7,460 7,427 Average annual revenue per customer account.................... $ 988 $ 918 $ 893 $ 804 $ 770 Average number of customer accounts..... 328,912 324,458 317,657 311,915 305,720 - -----------------------------------------------------------------------------------------------------
(1) Sum of the peak demands on all islands served, noncoincident and nonintegrated. (2) Includes the one-time effect of a change in the method of estimating unbilled KWH sales and revenues. (3) 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, 1995, and for the year ended December 31, 1995. 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 capability KWH net (MW) at Gross peak Annual generated and December 31, demand Reserve load purchased Systems 1995 (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 1,190.0 40.3% 73.3% 7,359.2 --------------------------------------------------------------------------------------- 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 --------------------------------------------------------------------------------------- 217.3 170.7 27.3% 69.5% 1,005.9 --------------------------------------------------------------------------------------- ISLAND OF LANAI--MECO Diesel.............................. 9.7 4.8 102.1% 66.6% 27.5 --------------------------------------------------------------------------------------- ISLAND OF MOLOKAI--MECO Diesel.............................. 6.5 Combustion turbine.................. 2.2 --------------------------------------------------------------------------------------- 8.7 7.0 24.3% 61.1% 37.1 --------------------------------------------------------------------------------------- ISLAND OF HAWAII--HELCO Conventional oil-fired steam units.. 71.2 Combustion turbines................. 45.7 Diesel.............................. 37.7 Firm contract power (4)............. 47.0 --------------------------------------------------------------------------------------- 201.6 164.4 22.6% 67.2% 932.5 --------------------------------------------------------------------------------------- Total............................... 2,106.3 1,536.9 37.0% 72.1% 9,362.2 =======================================================================================
(1) HECO units at normal ratings, and MECO and HELCO units at reserve ratings. (2) Noncoincident and nonintegrated. (3) Independent power producers--180 MW (Kalaeloa), 180 MW (AES-BP) and 46 MW (H-Power). (4) Nonutility generation--MECO: 16 MW (Hawaiian Commercial & Sugar Company) and HELCO: 25 MW (PGV) and 22 MW (HCPC). INTEGRATED RESOURCE PLANNING AND REQUIREMENTS FOR ADDITIONAL GENERATING CAPACITY As a result of a proceeding initiated in January 1990, the PUC issued an order in March 1992 (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 4 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 electric 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 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 five proposed DSM programs, and evidentiary hearings on these applications were held in January, February and May 1995. In June and July 1995, MECO and HELCO, respectively, filed four separate DSM applications for PUC approval. HECO's IRP. The PUC issued its final decision and order in HECO's IRP proceeding on March 31, 1995. The PUC found that HECO's proposed 20-year IRP "is in the public interest, is consistent with the goals and objectives of integrated resource planning, and represents a reasonable course for meeting the energy needs of its customers." In addition, the PUC found that HECO's IRP "identifies the resources or the mix of resources for meeting near and long term consumer energy needs in an efficient and reliable manner at the lowest reasonable cost." 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" 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. HECO is still awaiting PUC approval for its five DSM programs. Depending on the timing of the PUC decisions, HECO expects to begin program 5 implementation in 1996, one year later than what HECO was projecting in its five-year implementation schedule. HECO proposes to file with the PUC by July 1996 its first annual evaluation of its approved 20-year IRP. The annual evaluation will include a revised five-year implementation schedule, and will assess the continuing validity of the forecasts and assumptions upon which its IRP and program implementation schedule were fashioned. HECO's latest sales, peak load and fuel price forecasts may have an impact on the supply-side and demand-side resources currently proposed for implementation over the 1994-2013 IRP planning horizon. Management cannot predict at this time what effect, if any, these forecasts may eventually have on HECO's approved IRP. MECO's IRP. MECO's 20-year IRP 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. Approximately 20 MW of additional generation are currently scheduled to be placed in service on Maui in 1997, 4.4 MW on Lanai in 1996 and 6.6 MW on Molokai in 1996. Hearings on MECO's 20-year IRP have been completed and MECO is awaiting the PUC's decision. MECO is also awaiting PUC approval for its four DSM programs. Depending on the timing of the PUC decisions, MECO expects to begin program implementation in 1996, one year later than what MECO was projecting in its five-year implementation schedule. HELCO's IRP. HELCO's 20-year IRP 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 20-year IRP have been completed and HELCO is awaiting the PUC's decision. HELCO filed applications to approve its four DSM programs with the PUC on July 6, 1995. Although hearings have not yet been held on these applications, on October 26, 1995, HELCO received from the PUC interim approval to implement the DSM programs as part of HELCO's contingency plan to address HELCO's capacity situation. See "HELCO power situation" below. HELCO projects that the DSM programs will reduce HELCO's peak load by 1.5 megawatts one year after implementation of the DSM programs. HELCO POWER SITUATION In 1991, HELCO identified the need for additional generation beginning in 1994 to provide for forecasted load growth while maintaining a satisfactory generation reserve margin, to address uncertainties about future deliveries of power from existing firm power producers (see "Nonutility generation") and to permit the retirement of older generating units. HELCO added firm capacity to its system in August 1992 (a 20-MW HELCO-owned unit) and in June 1993 (pursuant to a power purchase agreement for 25 MW of firm capacity). Also, HELCO proceeded with plans to install two 20-MW combustion turbines, followed by an 18-MW heat steam recovery generator, at which time these units would be converted to a 56- MW (net) combined-cycle unit. In January 1994, the PUC approved expenditures for the first combustion turbine, which HELCO had planned to install in late 1994, and in September 1995, the PUC conditionally approved expenditures for the second combustion turbine and the steam recovery generator. Despite HELCO's best efforts to install the necessary additional generation in time to meet the forecasted load, the schedule for the installation of HELCO's phased combined-cycle unit (CT-4, CT-5 and ST-7) at HELCO's Keahole power plant site was revised due to delays in obtaining approval of the Prevention of Significant Deterioration/Covered Source Permit (PSD) and the Conservation District Use Permit amendment (CDUP) for the Keahole power plant site. The proposed service date for CT-4 has most recently been revised to February 1997 followed by CT-5 in April 1997, if approvals of the CDUP and PSD are received by the end of March 1996. The conversion to a combined-cycle unit with the installation of ST-7 remains scheduled for October 1997. In late 1995, a contested case hearing with respect to the CDUP was conducted and the hearing officer recommended denial of the CDUP application. The Hawaii Board of Land and Natural Resources 6 (BLNR) may decide to adopt, modify, or reject the hearing officer's recommendation. The BLNR was scheduled to make a decision on HELCO's CDUP application by February 26, 1996. On February 23, 1996, however, the BLNR informed HELCO that it was continuing deliberations on the application and extended the application expiration period from February 26, 1996 to March 27, 1996. If the BLNR denies HELCO's CDUP application, this would delay, if not prevent, installation of HELCO's project at the 15-acre Keahole site. The Hawaii Department of Health (DOH) forwarded HELCO's air permit to the Environmental Protection Agency (EPA) for its approval. In a November 1995 letter to the DOH, the EPA declined to sign HELCO's air permit. HELCO requested that the EPA reconsider this decision and the EPA agreed to reconsider based on additional information supplied by HELCO. In a second letter dated February 6, 1996, the EPA set forth information to be considered by HELCO which it feels may address HELCO's concerns regarding the emission control technology to be used, and stated that it would continue discussions with HELCO at a later date. HELCO responded specifically to the EPA's positions by letter dated March 8, 1996, and discussions are ongoing. If the EPA does not sign the permit forwarded by the DOH, this would delay, if not prevent, HELCO's project. Two independent power producers (IPPs) filed separate complaints against HELCO with the PUC, alleging that they are entitled to power purchase contracts to provide HELCO with additional capacity which, under HELCO's current estimates of generating capacity requirements, would be in place of the planned 56-MW addition by HELCO. In July 1995, the PUC issued a decision and order in a docket involving one of the IPPs, Kawaihae Cogeneration Partners (KCP). In the order, the PUC stated its position on various issues affecting HELCO's avoided cost calculations (several of which were contrary to HELCO's recommendations). In September 1995, HELCO provided proposals to the two IPPs, and further negotiations have been undertaken. Status reports on the negotiations with the two IPPs were filed with the PUC at the end of September and October 1995. In September 1995, the PUC allowed HELCO to continue to pursue construction of and commit expenditures for the second combustion turbine and the steam recovery generator for its planned combined-cycle unit, stating in its order that "no part of the project may be included in HELCO's rate base unless and until the project is in fact installed, and is used and useful for utility purposes." In view of permitting delays and the need for power, the PUC also ordered HELCO to continue negotiating with the IPPs and directed that the facility to be built should be the one that can be most expeditiously put into service at "allowable cost." On January 26, 1996, the PUC ordered that the KCP docket be reopened and that HELCO and KCP continue in good faith to negotiate a power purchase agreement, file a list of unresolved issues requiring PUC guidance and meet with the PUC on March 27, 1996. The other IPP has requested similar assistance from the PUC. HELCO has opposed reopening of that docket for this purpose. If HELCO's negotiations with the IPPs result in a power purchase agreement and/or if HELCO's combined-cycle unit is not installed, HELCO may be required to write off a portion of the costs incurred in its efforts to put into service its combined-cycle unit ($43 million as of December 31, 1995) if such costs ultimately are not recoverable from customers or others. Such a write-off could have a material adverse effect on consolidated HECO's and the Company's financial condition and results of operations. In June 1995, HELCO filed with the PUC its generation resource contingency plan detailing alternatives and mitigation measures to address possible further delays in obtaining the permits necessary to construct its combined-cycle unit. HELCO has arranged for additional firm capacity to be provided by its existing firm power producers (see "Nonutility generation"), obtained contracts shifting loads to off-peak hours, begun in January 1996 implementing its energy- efficiency DSM programs based on interim PUC approval (see "Integrated resource planning and requirements for additional generating capacity") and deferred generation unit retirements. These measures have helped HELCO maintain its reserve margin and reduce the risk of capacity shortages. HELCO is also proposing installation of up to 6 MW of dispersed generation diesel units that could provide power by late 1996. In January 1996, the PUC opened a generic docket relating to HELCO's contingency plan, which had been submitted to the PUC in June 1995. Pursuant to the PUC order, HELCO submitted updated information to the PUC on March 18, 1996 and addressed comments by the Consumer Advocate on the June 1995 contingency plan. 7 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 page 47 of HEI's 1995 Annual Report to Stockholders, portions of which are filed herein as HEI Exhibit 13. 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 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, which became operational in September 1992, utilizes a "clean coal" technology. The facility is designed to sell sufficient steam to be a "Qualifying Facility" under the Public Utility Regulatory Policies Act of 1978 (PURPA). 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 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, 1995. 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, 1995, HELCO and MECO had power purchase agreements for 47 MW and 16 MW of firm capacity, respectively, representing 23% 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 recognized energy and capacity purchased from PGV as expenses, but withheld certain 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 1995, HELCO refunded to customers approximately $0.8 million of the $3.2 million withheld and is awaiting the PUC's decision on whether any additional amounts are required to be refunded. In addition, PGV agreed to provide additional energy in the amount of $2.3 million to HELCO above PGV's current firm capacity obligation. In 1995, PGV provided HELCO with $1.0 million of the $2.3 million additional energy, and HELCO reduced its energy cost adjustment charges to customers by $1.0 million. On February 12, 1996, HELCO and PGV executed an amendment to the existing power purchase agreement, under which PGV would be obligated to provide an additional 5 MW of firm capacity to 8 HELCO commencing in late 1996. The amendment has been submitted to the PUC for approval. Such additional capacity will assist HELCO in addressing its capacity situation. In December 1994, at a time when the Hilo Coast Processing Company (HCPC) contract was for delivery of 18 MW, HCPC filed a Chapter 11 bankruptcy petition. In July 1995, the bankruptcy court approved an amended and restated HELCO and HCPC power purchase agreement for 22 MW of firm capacity and the dismissal of HCPC from bankruptcy, subject to a condition that was satisfied. The stock of LVI was transferred to HEI prior to the sale of HERS to The New World Power Corporation. As of December 31, 1995, LVI's windfarm on the island of Hawaii consisted of wind turbines with a total operating capacity of 1.6 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 electric utility subsidiaries generally) automatically vary with 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 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 1995, HECO executed new contracts for the purchase of LSFO and use of certain fuel distribution facilities with Chevron, U.S.A., Inc. (CUSA) and BHP Petroleum Americas Refining Inc. (BHP). These fuel supply and facilities operations contracts have a term of two years commencing January 1, 1996. The PUC approved the contracts and issued final orders in December 1995 and January 1996 that permit the inclusion of costs incurred under these contracts in HECO's energy cost adjustment clause. HECO pays market-related prices for fuel supplies purchased under these agreements. HECO, MECO, HELCO and affiliates, HTB and YB, executed new joint fuel supply contracts with CUSA and BHP to provide for the purchase of diesel and MSFO supplies and for the use of certain petroleum distribution facilities for a period of two years commencing January 1, 1996. The PUC subsequently approved these contracts and issued final orders in December 1995 and January 1996 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 set forth in the "Fuel contracts and other purchase commitments" section in Note 11 to HECO's Consolidated Financial Statements is incorporated herein by reference to page 25 of HECO's 1995 Annual Report to Stockholder, portions of which are filed herein as HECO Exhibit 13. 9 The following table sets forth the average cost of fuel oil used to generate electricity in the years 1995, 1994 and 1993:
HECO MECO HELCO Consolidated ------------------------------------------------------------------------------- $/Barrel c/MBtu $/Barrel c/MBtu $/Barrel c/MBtu $/Barrel c/MBtu - ------------------------------------------------------------------------------------------ 1995....... 19.19 306.1 24.78 414.4 21.94 355.1 20.47 329.7 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
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 1995, 99.8% 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 the 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, MSFO and diesel in 1995 were higher than the respective average prices in 1994. However, the average prices of LSFO and diesel remained below the respective price levels prevailing in 1993. 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. The PUC approved these contracts and issued a final order in June 1994 that permitted HELCO and MECO to include the costs of fuel transportation and related costs incurred under the contracts in their respective energy cost adjustment clause. Freight rates charged under the contracts are related to published indices for industrial commodities prices and labor costs. In December 1995, HELCO and MECO exercised an option to extend for two years their existing contracts with Hawaiian Interisland Towing, Inc. for the shipment of MSFO and diesel supplies from their fuel supplier's facilities on Oahu to storage locations on the islands of Hawaii and Maui, respectively. These contracts include options for two additional two- year extensions. In 1996, the Company estimates that 76% of the net energy generated and purchased by HECO and its subsidiaries will come from oil. This percentage is down from 87% in 1992, due largely to the purchases from independent power producers whose fuel sources are primarily coal, and to a lesser extent, geothermal, solid waste and bagasse (sugarcane waste). Failure by the Company's oil suppliers to provide fuel pursuant to the supply contracts and/or substantial increases in fuel prices could adversely affect consolidated HECO's and the Company's financial condition and results of operations. HECO and its subsidiaries, however, maintain an inventory of fuel oil approximating a month's supply, which may be used in the event fuel suppliers are not able to provide fuel pursuant to the contracts for this period of time, and increases in fuel oil prices would be passed on to customers through the electric utility subsidiaries' energy cost adjustment clauses. 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 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. 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. 10 The "Regulation of electric utility rates" and "Recent rate requests" sections in MD&A are incorporated herein by reference to pages 29 and 30 of HEI's 1995 Annual Report to Stockholders, portions of which are filed herein as HEI Exhibit 13. In March 1996, HELCO received an interim decision and order authorizing a 4.8%, or $6.8 million, increase in annual revenues, based on a 11.65% return on average common equity. Interim increases are subject to refund with interest, pending the final outcome of the case. HECO and its subsidiaries participated in the PUC's generic docket to determine whether Statement of Financial Accounting Standards (SFAS) No. 106 should be adopted for rate-making purposes. The information on postretirement benefits other than pensions in MD&A and in the "Postretirement benefits other than pensions" section in Note 17 to HEI's Consolidated Financial Statements is incorporated herein by reference to pages 29, 58 and 59 of HEI's 1995 Annual Report to Stockholders, portions of which are filed herein as HEI Exhibit 13. WAIAU-CAMPBELL INDUSTRIAL PARK TRANSMISSION LINES In 1993, the PUC held hearings concerning Part 2 of the Waiau-Campbell Industrial Park (CIP) 138-kilovolt transmission lines. These lines are part of a second transmission corridor in West Oahu, running approximately 15 miles between CIP and HECO's Waiau power plant. The new lines were needed (1) to increase system reliability, (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 was 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 permitted 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 allowed HECO to construct the lines above ground. Management cannot predict with certainty the final outcome of the appeals. No stay of the PUC order has been entered. HECO completed construction of the overhead lines which were placed in service in August 1995. 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. As of September 30, 1995, ASB was the fourth largest financial institution in the state based on total assets of $3.3 billion and the third largest financial institution based on deposits of $2.2 billion. HEI agreed with the Office of Thrift Supervision's (OTS) predecessor regulatory agency that ASB's regulatory capital would be maintained at a level of at least 6% of ASB's total liabilities, or at such greater amount as may be required from time to time by regulation. Under the agreement, HEI's obligation to contribute additional capital was limited to a maximum aggregate amount of approximately $65.1 million. HEI elected to contribute additional capital of $12.0 million, $1.0 million and $0.8 million to ASB during 1995, 1994 and 1993, respectively. Most of the additional capital contribution to ASB in 1995 was contributed in anticipation of legislative proposals in Congress to make a one-time assessment of thrifts to fully capitalize the Savings Association Insurance Fund (SAIF). See "Savings bank regulation, Deposit Insurance, Deposit Insurance Assessment" for a further description of the legislative proposals and their potential impact. ASB is subject to the OTS regulations for dividends and other distributions applicable to financial institutions regulated by the OTS. ASB's earnings depend primarily on its net interest income--the difference between the interest income earned on interest-earning assets (loans receivable, mortgage-backed securities and investments) and the interest expense incurred on interest-bearing liabilities (deposit liabilities and borrowings). Deposits 11 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 recent years, securities sold under agreements to repurchase and advances from the FHLB of Seattle have become more significant sources of funds. For additional information about ASB, reference is made to "Savings Bank" under MD&A and to Note 5 to HEI's Consolidated Financial Statements, incorporated herein by reference to pages 31 to 32, 35 to 36 and 49 to 52 of HEI's 1995 Annual Report to Stockholders, portions of which are filed herein as HEI Exhibit 13. The following table sets forth selected data for ASB for the periods indicated:
Years ended December 31, --------------------------- 1995 1994 1993 - --------------------------------------------------------------------- Equity to assets ratio Average equity divided by average total assets....................... 6.23% 6.64% 7.03% Return on assets Net income divided by average total assets (1)......................... 0.71% 0.86% 1.00% Return on equity Net income divided by average equity (1)......................... 11.5% 13.0% 14.2%
(1) Net income includes amortization of goodwill and core deposit intangibles. Average balances for each period have been calculated using the average month-end balances during the period. 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) 1995 1994 1993 - ------------------------------------------------------------------------------ ASSETS Investment securities............... $ 80,633 $ 88,728 $ 136,987 Mortgage-backed securities.......... 1,251,192 732,623 647,973 Loans receivable, net............... 1,751,729 1,878,581 1,570,751 Other............................... 173,895 178,088 183,151 --------------------------------------- $3,257,449 $2,878,020 $2,538,862 ======================================= LIABILITIES AND STOCKHOLDER'S EQUITY Deposit liabilities................. $2,149,229 $2,134,029 $2,076,192 Other borrowings.................... 835,310 477,331 230,101 Other............................... 69,903 75,573 54,212 Stockholder's equity................ 203,007 191,087 178,357 --------------------------------------- $3,257,449 $2,878,020 $2,538,862 =======================================
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 12 "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 and part of 1995, the gap in the near term (0-6 months) was a negative 7.6% of total assets as compared to a cumulative one-year negative gap position of 2.6% of total assets as of December 31, 1995. The negative near-term gap position reflects increases in short-term certificate of deposits and other borrowings to support investment activities. The lower cumulative one-year 1995 negative gap was primarily due to investments in adjustable rate loans and mortgage-backed securities. The following table shows ASB's interest rate sensitivity at December 31, 1995:
Cumulative volumes at December 31, 1995 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......... $ 554 $ 644 $ 84 $ -- $1,282 Fixed rate 1-4 unit residential..... 181 131 655 496 1,463 Other.............................. 46 24 71 34 175 Consumer and other loans............... 133 6 23 23 185 Commercial loans....................... 7 3 11 7 28 Other interest-earning assets.......... 97 -- -- -- 97 ------------------------------------------------------- Total interest-earning assets.......... 1,018 808 844 560 3,230 ------------------------------------------------------- Interest-bearing liabilities - ---------------------------- Certificate accounts................... 314 457 139 54 964 Money market accounts.................. 65 -- -- -- 65 "Negotiable Order of Withdrawal" accounts............................. 276 -- -- -- 276 Passbook accounts...................... 157 52 342 368 919 FHLB advances.......................... 121 85 167 128 501 Other borrowings....................... 343 45 25 -- 413 ------------------------------------------------------- Total interest-bearing liabilities..... 1,276 639 673 550 3,138 ------------------------------------------------------- Interest rate sensitivity gap (2)...... $ (258) $ 169 $ 171 $ 10 $ 92 ======================================================= Cumulative interest rate sensitivity gap...................... $ (258) $ (89) $ 82 $ 92 =========================================== Cumulative interest rate sensitivity gap over total assets................ (7.56)% (2.61)% 2.40% 2.70% ===========================================
(1) The table does not include $183 million of noninterest-earning assets and $57 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) 1995 1994 1993 - ------------------------------------------------------------------------------- Loans Average balances .................... $1,751,729 $1,878,581 $1,570,751 Interest income ..................... $ 146,046 $ 154,026 $ 135,778 Weighted average yield .............. 8.34% 8.20% 8.64% Mortgage-backed securities Average balances .................... $1,251,192 $ 732,623 $ 647,973 Interest income ..................... $ 85,727 $ 44,043 $ 43,397 Weighted average yield............... 6.85% 6.01% 6.70% Investments (1) (2) Average balances .................... $ 80,633 $ 88,728 $ 136,987 Interest and dividend income......... $ 4,921 $ 5,304 $ 9,444 Weighted average yield............... 6.10% 5.98% 6.89% Total interest-earning assets Average balances .................... $3,083,554 $2,699,932 $2,355,711 Interest and dividend income......... $ 236,694 $ 203,373 $ 188,619 Weighted average yield............... 7.68% 7.53% 8.01% Deposits Average balances .................... $2,149,229 $2,134,029 $2,076,192 Interest expense .................... $ 89,296 $ 76,509 $ 77,651 Weighted average rate................ 4.15% 3.59% 3.74% Borrowings Average balances .................... $ 835,310 $ 477,331 $ 230,101 Interest expense .................... $ 53,409 $ 27,397 $ 15,050 Weighted average rate................ 6.39% 5.74% 6.54% Total interest-bearing liabilities Average balances .................... $2,984,539 $2,611,360 $2,306,293 Interest expense .................... $ 142,705 $ 103,906 $ 92,701 Weighted average rate................ 4.78% 3.98% 4.02% Net balance, net interest income and interest rate spread Net balance ......................... $ 99,015 $ 88,572 $ 49,418 Net interest income.................. $ 93,989 $ 99,467 $ 95,918 Interest rate spread................. 2.90% 3.55% 3.99%
(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, 1995 vs. 1994 - ------------------------------------- Income from interest-earning assets Loan portfolio........................... $ 2,588 $(10,568) $(7,980) Mortgage-backed securities............... 6,874 34,810 41,684 Investments.............................. 105 (488) (383) ------------------------------- 9,567 23,754 33,321 ------------------------------- Expense from interest-bearing liabilities Deposits................................. 12,228 559 12,787 FHLB advances and other borrowings....... 3,413 22,599 26,012 ------------------------------- 15,641 23,158 38,799 ------------------------------- Net interest income....................... $ (6,074) $ 596 $(5,478) =============================== 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 ===============================
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 $17.9 million in 1995, compared to $12.2 million in 1994 and $11.1 million in 1993. The increase in other income during 1995 was primarily due to a $3.9 million one-time gain on sale of trading account securities. In November 1995, the Financial Accounting Standards Board (FASB) issued a special report, "A Guide to Implementation of Statement 115 on Accounting for Certain Investments in Debt and Equity Securities." In connection with the guidance provided in the special report, the FASB indicated that an enterprise may reassess the appropriateness of the classifications of all securities held at that time and account for any resulting reclassifications at fair value in accordance with the requirements of SFAS No. 115. Such reclassifications were required to occur no later than December 31, 1995. The guidance indicated that reclassifications from the held- to-maturity category that resulted from this one-time reassessment would not call into question the intent of an enterprise to hold other debt securities to maturity in the future. In accordance with the implementation guidance provided in the special report, ASB transferred approximately $49.5 million of mortgage- backed securities previously classified as held-to-maturity securities to trading account securities on November 28, 1995. All such securities were then sold prior to the end of 1995. 15 LENDING ACTIVITIES General. ASB's net loan and mortgage-backed securities portfolio totaled approximately $3.1 billion at December 31, 1995, representing 91.8% of its total assets, compared to $2.9 billion, or 92.8%, and $2.4 billion, or 90.3%, at December 31, 1994 and 1993, respectively. ASB's loan portfolio consists primarily of conventional residential mortgage loans which are not insured by the Federal Housing Administration nor guaranteed by the Veterans Administration. The following tables set forth the composition of ASB's loan and mortgage-backed securities portfolio:
December 31, ----------------------------------------------------------------------------------- 1995 1994 1993 ----------------------------------------------------------------------------------- (dollars in thousands) Balance % of total Balance % of total Balance % of total - ------------------------------------------------------------------------------------------------------------------------------ Real estate loans (1) Conventional............................. $1,474,232 47.06% $1,636,282 56.59% $1,584,218 66.98% Construction and development............. 21,285 0.68 32,074 1.11 26,526 1.12 Troubled debt restructurings............. 15,982 0.51 16,151 0.56 3,397 0.14 ----------------------------------------------------------------------------------- 1,511,499 48.25 1,684,507 58.26 1,614,141 68.24 Less Unearned fees and discounts............ (15,244) (0.49) (21,159) (0.73) (26,728) (1.13) Undisbursed loan funds................. (10,422) (0.33) (13,844) (0.48) (13,142) (0.55) Allowance for losses................... (10,837) (0.34) (7,259) (0.25) (3,962) (0.17) ----------------------------------------------------------------------------------- Total real estate loans, net............. 1,474,996 47.09 1,642,245 56.80 1,570,309 66.39 ----------------------------------------------------------------------------------- Other loans Loans on deposits........................ 15,688 0.50 15,378 0.53 15,015 0.63 Consumer and other loans................. 170,743 5.45 144,505 5.00 129,961 5.49 Commercial loans......................... 34,666 1.11 27,981 0.97 24,494 1.04 ----------------------------------------------------------------------------------- 221,097 7.06 187,864 6.50 169,470 7.16 Less Unearned fees and discounts............ (38) (0.00) (52) (0.00) (156) (0.01) Undisbursed loan funds................. (6,175) (0.20) (4,468) (0.16) (3,173) (0.13) Allowance for losses................... (2,079) (0.07) (1,534) (0.05) (1,352) (0.06) ----------------------------------------------------------------------------------- Total other loans, net................... 212,805 6.79 181,810 6.29 164,789 6.96 ----------------------------------------------------------------------------------- Mortgage-backed securities, net of discounts............................... 1,444,832 46.12 1,067,287 36.91 630,156 26.65 ----------------------------------------------------------------------------------- Total loans and mortgage-backed securities, net........................ $3,132,633 100.00% $2,891,342 100.00% $2,365,254 100.00% ===================================================================================
(1) Includes renegotiated loans. 16
December 31, -------------------------------------------------------------- 1992 1991 -------------------------------------------------------------- (dollars in thousands) Balance % of total Balance % of total - ---------------------------------------------------------------------------------------------------------------------------- Real estate loans (1) Conventional............................................... $1,294,769 59.59% $ 976,004 50.02% Construction and development............................... 33,123 1.53 24,978 1.28 Troubled debt restructurings............................... 8,945 0.41 180 0.01 -------------------------------------------------------------- 1,336,837 61.53 1,001,162 51.31 Less Unearned fees and discounts.............................. (20,422) (0.94) (16,106) (0.82) Undisbursed loan funds................................... (16,203) (0.74) (11,854) (0.61) Allowance for losses..................................... (3,626) (0.17) (2,678) (0.14) -------------------------------------------------------------- Total real estate loans, net............................... 1,296,586 59.68 970,524 49.74 -------------------------------------------------------------- Other loans Loans on deposits.......................................... 15,013 0.69 15,528 0.80 Consumer and other loans................................... 134,943 6.21 144,356 7.40 Commercial loans........................................... 21,830 1.01 22,998 1.18 -------------------------------------------------------------- 171,786 7.91 182,882 9.38 Less Unearned fees and discounts.............................. (148) (0.01) (204) (0.01) Undisbursed loan funds................................... (3,805) (0.18) (3,436) (0.18) Allowance for losses..................................... (1,531) (0.07) (1,140) (0.06) -------------------------------------------------------------- Total other loans, net..................................... 166,302 7.65 178,102 9.13 -------------------------------------------------------------- Mortgage-backed securities, net of discounts............... 709,891 32.67 802,430 41.13 -------------------------------------------------------------- Total loans and mortgage-backed securities, net......................................... $2,172,779 100.00% $1,951,056 100.00% ==============================================================
(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, 1995, approximately $55.5 million of loans purchased from other lenders were secured by properties located in the continental United States. For additional information, including information concerning the geographic distribution of ASB's mortgage-backed securities portfolio and the geographic concentration of credit risk, reference is made to Note 19 to HEI's Consolidated Financial Statements, incorporated herein by reference to page 59 of HEI's 1995 Annual Report to Stockholders, portions of which are filed herein as HEI Exhibit 13. The amount of loans originated during 1995, 1994, 1993, 1992 and 1991 were $382 million, $523 million, $564 million, $601 million and $387 million, respectively. The decrease in loans originated in 1995 from 1994 was due in part to lower refinancings and the weak economy. Residential mortgage lending. During the last half of 1995, interest rates along with the demand for adjustable rate mortgage (ARM) loans over fixed rate loans decreased compared with 1994. 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 27.7% of the total originations of first mortgage loans in 1995, compared to 46.3% and 24.7% in 1994 and 1993, respectively. ASB intends to continue to emphasize the origination and purchase of ARM loans to further improve its asset/liability structure. ASB is permitted to lend up to 100% of the appraised value of the real property securing a loan. Its general policy is to require private mortgage insurance when the loan-to-value ratio of 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. 17 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, 1995, 1994 and 1993, construction and development loans represented 1.2%, 1.7% and 1.5%, 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 1995, 1994 and 1993, loans on these types of properties accounted for approximately 5.9%, 6.6% and 6.0%, 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 1995, 1994 and 1993, loans of these types accounted for approximately 11.5%, 6.2% and 4.3%, 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, 1995, 1994 and 1993, corporate banking loans represented 1.7%, 1.3% 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 through a securitization process and also on loans for which ASB acts as collection agent on behalf of third-party purchasers. ASB generally charges the borrower at loan settlement a loan origination fee ranging from 2% to 3% of the amount borrowed. Loan origination fees (net of direct loan origination costs) are deferred and recognized as an adjustment of yield over the life of the loan. Nonrefundable commitment fees (net of direct loan origination costs, if applicable) to originate or purchase loans are deferred. The nonrefundable commitment fees are recognized as an adjustment of yield over the life of the loan if the commitment is exercised. If the commitment expires unexercised, nonrefundable commitment fees are recognized in income upon expiration of the commitment. Loan portfolio risk elements. When a borrower fails to make a required payment on a loan and does not cure the delinquency promptly, the loan is classified as delinquent. If delinquencies are not cured promptly, ASB normally commences a collection action, including foreclosure proceedings in the case of secured loans. In a foreclosure action, the property securing the delinquent debt is sold at a public auction in which ASB may participate as a bidder to protect its interest. If ASB is the successful bidder, the property is classified in a real estate owned account until it is sold. At December 31, 1995, there were nine residential properties acquired in settlement of loans totaling $2.7 million or 0.08% of total assets. 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 one residential property acquired in settlement of a loan totaling $0.2 million, or 0.01% 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 1.7%, 1.4%, 0.5%, 1.0% and 0.1%, of ASB's total net loans outstanding 18 at December 31, 1995, 1994, 1993, 1992 and 1991, respectively. The following table sets forth certain information with respect to nonaccrual and renegotiated loans for the dates indicated:
December 31, ----------------------------------------------- (in thousands) 1995 1994 1993 1992 1991 - --------------------------------------------------------------------------------------- Nonaccrual loans-- Real estate 1-4 unit residential................. $11,533 $ 8,773 $5,006 $12,526 $ 556 Income property...................... 13,820 14,224 220 395 -- ----------------------------------------------- Total real estate...................... 25,353 22,997 5,226 12,921 556 Commercial............................. 11 25 38 1,059 -- Consumer............................... 1,702 793 460 181 439 ----------------------------------------------- Total nonaccrual loans................. $27,066 $23,815 $5,724 $14,161 $ 995 =============================================== Renegotiated loans not included above-- Real estate 1-4 unit residential................. $ 1,053 $ 1,004 $ 381 $ -- $ -- Income property...................... -- -- 1,486 -- 180 Commercial........................... -- -- 324 -- -- ----------------------------------------------- Total renegotiated loans............... $ 1,053 $ 1,004 $2,191 $ -- $ 180 ===============================================
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 $27.1 million (1.6% of total loans) at December 31, 1995, $23.8 million (1.3% of total loans) at December 31, 1994, $5.7 million (0.3% of total loans) at December 31, 1993, $14.2 million (0.9% of total loans) at December 31, 1992 and $1.0 million (0.1% of total loans) at December 31, 1991. 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. In 1994, the $18 million increase in nonaccrual real estate loans was 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 was 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. Based on evaluations of collection prospects, a specific loss reserve of $1.6 million was established in 1994 for one of the loans secured by a commercial retail/office building located on the island of Oahu. In 1995, the $3.3 million increase in nonaccrual loans was a result of Hawaii's continued weak economy. 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. 19 The following table presents the changes in the allowance for loan losses for the periods indicated.
Years ended December 31, -------------------------------------------------- (dollars in thousands) 1995 1994 1993 1992 1991 - --------------------------------------------------------------------------------------------------------------------- Allowance for loan losses, beginning of year.................. $ 8,793 $5,314 $5,157 $3,818 $3,387 -------------------------------------------------- ADDITIONS TO PROVISIONS FOR LOSSES Real estate loans............................................. 4,107 3,406 336 945 296 Other loans................................................... 780 577 443 549 345 -------------------------------------------------- Total additions............................................... 4,887 3,983 779 1,494 641 -------------------------------------------------- NET (RECOVERY) CHARGE-OFFS Real estate loans............................................. 69 109 -- (3) (12) Other loans................................................... 695 395 622 158 222 -------------------------------------------------- Total net charge-offs......................................... 764 504 622 155 210 -------------------------------------------------- Allowance for loan losses, end of year........................ $12,916 $8,793 $5,314 $5,157 $3,818 ================================================== Ratio of net charge-offs during the period to average loans outstanding.................................... 0.04% 0.03% 0.04% 0.01% 0.02% ==================================================
ASB's ratio of provisions for loan losses during the period to average loans outstanding was 0.28%, 0.21%, 0.05%, 0.11% and 0.06% for the years ended December 31, 1995, 1994, 1993, 1992 and 1991, 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 and 1995, 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 and $4.1 million, respectively. INVESTMENT ACTIVITIES In recent years, ASB's investment portfolio has consisted primarily of stock of the FHLB of Seattle, federal agency obligations and mortgage-backed securities. In response to the then increasing interest rate environment, management decided to liquidate ASB's portfolio of securities held for trading and the liquidation was completed in October 1994. Also, see the prior discussion under "Other income" of the one-time gain on sale of trading account securities in 1995. 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) 1995 1994 1993 - ---------------------------------------------------------------------------- Investment in FHLB stock................. $34,720 $32,523 $23,203 Marketable securities.................... -- -- 45,396 -------------------------------- Total investments........................ $34,720 $32,523 $68,599 ================================ Weighted average rate on investments (1). 6.03% 6.86% 9.75% ================================
(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 few years, securities sold under agreements to repurchase and advances from the FHLB have become a more 20 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 1995, ASB had average deposits aggregating $2.1 billion, with a net savings inflow of $15.0 million, excluding interest credited to deposit accounts. Net savings outflows for 1994 and 1993 were approximately $32 million and $9 million, respectively, excluding interest credited to deposit accounts. The net savings outflow 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 weighted average rate paid on deposits during 1995 was 4.15%, compared to 3.59% and 3.74% in 1994 and 1993, respectively. In the three years ended December 31, 1995, ASB had no deposits placed by or through a broker. 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, ----------------------------------------------------------------------------------------------------- 1995 1994 1993 ----------------------------------------------------------------------------------------------------- % of % of % of Average total Average Average total Average Average total Average (dollars in thousands) balance deposits rate % balance deposits rate % balance deposits rate % - ---------------------------------------------------------------------------------------------------------------------------------- Passbook accounts........... $ 978,858 45.5% 3.48% $1,215,919 57.0% 3.51% $1,126,880 54.3% 3.73% Negotiable Order of Withdrawal (NOW) accounts.................. 264,996 12.4 2.09 266,335 12.5 2.25 268,227 12.9 2.49 Money market accounts....... 66,634 3.1 3.43 88,320 4.1 3.02 119,238 5.7 3.15 Certificate accounts........ 838,741 39.0 5.66 563,455 26.4 4.48 561,847 27.1 4.48 ---------------------------------------------------------------------------------------------------- Total deposits.............. $2,149,229 100.0% 4.15% $2,134,029 100.0% 3.59% $2,076,192 100.0% 3.74% ====================================================================================================
At December 31, 1995, ASB had $267.9 million in certificate accounts of $100,000 or more, maturing as follows:
(in thousands) Amount - -------------------------------------------------------------------- Three months or less................................ $ 92,355 Greater than three months through six months........ 47,257 Greater than six months through twelve months....... 102,447 Greater than twelve months.......................... 25,876 ---------------- $ 267,935 ================
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, 1995, 1994 and 1993, advances from the FHLB amounted to $501 million, $616 million and $290 million, respectively. The weighted average rates on the advances from the FHLB outstanding at December 31, 1995, 1994 and 1993 were 6.52%, 6.17% and 6.24%, respectively. The maximum amount outstanding at any month-end during 1995, 1994 and 1993 was $618 million, $616 million and $290 million, respectively. Advances from the FHLB averaged $559 million, $453 million and $210 million during 1995, 1994 and 1993, respectively, and the approximate weighted average rate thereon was 6.55%, 5.77% and 6.84%, 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. During 1995, advances decreased as securities sold under agreements to repurchase provided a lower cost funding source. 21 At December 31, 1995 and 1994, 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, 1995 and 1994, $412.5 million (including accrued interest of $2.5 million) and $123.3 million (including accrued interest of $1.0 million) of the agreements were to repurchase identical 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, 1995 and 1994 were 5.84% and 6.22%, respectively. The maximum amount outstanding at any month-end during 1995, 1994 and 1993 was $413 million, $123 million and $27 million, respectively. Securities sold under agreements to repurchase averaged $277 million, $21 million and $20 million during 1995, 1994 and 1993, respectively, and the approximate weighted average interest rate thereon was 6.08%, 5.14% and 3.39%, respectively. During 1995, increased securities sold under agreements to repurchase were needed to support investment activities as the effects of rising interest rates and increased competition slowed deposit growth. 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, 1995, 1994 and 1993, 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) 1995 1994 1993 - ---------------------------------------------------------------------------------------- Advances from FHLB........................ $501,274 $616,374 $289,674 Securities sold under agreements to repurchase.............................. 412,521 123,301 -- ------------------------------------------- Total borrowings.......................... $913,795 $739,675 $289,674 =========================================== Weighted average rate (1)................. 6.21% 6.18% 6.24%
(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, 22 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 3.2 million revenue tons of cargo between the islands in 1995, compared to 3.0 million revenue tons in 1994. A substantial portion of the state's commodities are imported, and almost all of Hawaii's overseas inbound and outbound cargo moves through Honolulu. Cargo destined for the neighbor islands is trans-shipped through the Honolulu gateway. YB has a nonexclusive Certificate of Public Convenience and Necessity from the PUC to operate as an intrastate common carrier by water. The Certificate will remain in effect for an indefinite period unless suspended or terminated by the PUC. YB encounters competition from, among others, interstate carriers and unregulated contract carriers. YB RATES YB generally must accept for transport all cargo offered. YB rates and charges must be approved by the PUC and the PUC has broad discretion in its regulation of the rates charged by YB. 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 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 to be effective upon PUC approval. On December 12, 1994, the PUC granted YB approval to increase its rates 6% across-the-board (including the Minimum Bill of Lading), which became effective on December 15, 1994. On November 29, 1994, the PUC allowed the utility companies to record postretirement benefits other than pension costs on the accrual basis and to increase rates to recover such costs on January 1, 1995. After submission of certain information required by the PUC, the PUC issued a letter to YB authorizing a 2.66% increase in rates across-the-board effective January 1, 1995. On February 3, 1995, YB filed an application with the PUC to revise its tariff and rate schedules to: 1) streamline the existing tariff in order to minimize rate subsidization and encourage efficient cargo flow; 2) simplify the existing rules and regulations which were cumbersome to administer; and 3) rebalance the rates to reflect the differences in costs to handle and transport the various cargo offerings and to price competitively within YB's market while remaining revenue neutral. On March 24, 1995, the PUC suspended YB's application for a period of six months to and including September 30, 1995 and placed YB's proposed tariff changes under investigation. An evidentiary hearing was held on August 2, 1995. On September 29, 1995, the PUC authorized YB to implement Hawaii and Kauai county rates and to separate and revise the Maui county rates for the ports of Maui, Lanai, and Molokai. The new tariff became effective on October 10, 1995. REAL ESTATE--MALAMA PACIFIC CORP. - --------------------------------- GENERAL MPC was incorporated in 1985 and engages in real estate development activities, both directly and through joint ventures. MPC's real estate development investments and residential projects are targeted for Hawaii's owner-occupant market. MPC is currently involved in the development of five residential projects (Kipona Hills, Kua' Aina Ridge, Westpark and Westhills at Makakilo Heights, Piilani Village Phase 1 and Sunrise Estates) on approximately 316 acres of land on the islands of Oahu, Maui and Hawaii encompassing approximately 580 homes or lots, of which approximately 400 have been completed and sold. MPC and its joint ventures own approximately 424 acres of land for future residential development. Residential development generally requires a long lead time to obtain necessary zoning changes, building permits and other required approvals. MPC's projects are subject to the usual risks of real estate development, including fluctuations in interest rates, the receipt of timely and appropriate state and local zoning and other necessary approvals, possible cost overruns and construction delays, adverse changes in general commerce and local market conditions, compliance with applicable environmental and other regulations, and potential competition from other new projects and resales of existing residences. 23 In 1995, MPC and its subsidiaries continued to experience slow sales in their real estate projects. Although interest rates declined, sales were dampened by declining consumer confidence caused in large part by perceived lack of job security. JOINT VENTURE DEVELOPMENTS Makakilo Cliffs. In 1990, Malama Development Corp. (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 and 1995. Subdivision approval for the remaining nine lots was received 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 and subdivision approval is expected to be obtained in 1996. Ainalani Associates. Malama Mohala Corp. (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 approximately 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, 1995, 51 homes were completed and sold and two completed units were available for sale. In May 1993, Baldwin*Malama was reorganized as a limited partnership in which MDC is the sole general partner and BPPI is the sole limited partner. In conjunction with the dissolution of the Baldwin*Malama general partnership and formation of the limited partnership, MPC agreed to loan $1.6 million to BPPI and up to $15 million to the limited partnership. Through 1995, MPC agreed to increase the maximum loan amount to Baldwin*Malama up to $22.5 million. As of December 31, 1995, the outstanding balances on MPC's loans to BPPI and Baldwin*Malama were $1.0 million and $20.6 million, respectively. Beginning in May 1993, MDC consolidated the accounts of Baldwin*Malama. Previously, MDC accounted for its investment in Baldwin*Malama under the equity method. Palailai Associates. MMO assumed Ainalani Associates' 50% 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 completed, with 66 homes sold as of December 31, 1995. The third increment of 100 single family homes is in progress with 44 homes completed and sold as of December 31, 1995. Palailai Associates owns approximately 42 acres of adjacent land zoned for residential development. MMO PROJECTS In 1992, MMO acquired the Kipona Hills, Kua' Aina Ridge and Kehaulani Place projects of Ainalani Associates 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, 1995, 65 homes or lots were completed and sold, and one lot was available for sale. 24 Kua' Aina Ridge is a 92-lot subdivision in Pukalani, Maui. Subdivision improvements have been completed and sales closings commenced in 1993. As of December 31, 1995, 62 lots were available for sale, three homes were under construction and one completed unit was available for sale. Kehaulani Place, 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 and are ongoing. PROJECT FINANCING At December 31, 1995, MPC or its subsidiaries were directly liable for $12.6 million of outstanding loans and had additional loan facilities of $1.1 million. In addition, at December 31, 1995, MPC or its subsidiaries had issued (i) guaranties under which they were jointly and severally contingently liable with their joint venture partners for $2.0 million of outstanding loans and $0.3 million of additional undrawn loan facilities and (ii) payment guaranties under which MPC or its subsidiaries were severally contingently liable for $5.6 million of outstanding loans and $4.6 million of additional undrawn loan facilities. In total, at December 31, 1995, MPC or its subsidiaries were liable or contingently liable for $20.2 million of outstanding loans and $6.0 million in undrawn loan facilities. All such loans are collateralized by real property. At December 31, 1995, HEI had agreed with the lenders of construction loans and loan facilities, of which approximately $10.3 million was outstanding and $5.7 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. HEI INVESTMENT CORP. - -------------------- HEIIC was incorporated in May 1984 primarily to make passive, tax-advantaged investments in corporate securities and other long-term investments. HEIIC is not an "investment company" under the Investment Company Act of 1940 and has no direct employees. HEIIC's long-term investments consist primarily of investments in leveraged leases. HEIIC has a 15% ownership interest in an 818-MW coal-fired generating unit in Georgia, which is subject to a leveraged lease agreement 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 The Kroger Co. in various states. In 1995, HEIIC sold one supermarket to the lessee pursuant to the provisions of the leveraged lease agreement and recorded a net loss of $1.3 million on the sale. HEIIC's investments in leveraged leases amounted to $53.4 million and $54.4 million at December 31, 1995 and 1994, respectively. For further information concerning HEIIC's investments in leveraged leases, see Note 8 to HEI's Consolidated Financial Statements, incorporated herein by reference to page 53 of HEI's 1995 Annual Report to Stockholders, portions of which are filed herein as HEI Exhibit 13. No new investments are currently planned by HEIIC. HEI POWER CORP. - --------------- HEIPC was formed in March 1995 to pursue independent power projects and energy conservation projects in Asia and the Pacific. For a further description of HEIPC, including its $1.7 million operating loss in the first year of operation, see the discussion under "Other" in MD&A, incorporated herein by reference to page 32 of HEI's 1995 Annual Report to Stockholders, portions of which are filed herein as HEI Exhibit 13. In February 1996, HEIPC signed a "Memorandum of Understanding" with Massachusetts-based Beacon Hill Associates, Inc. for the development of a 60 MW naphtha-fueled combined-cycle power plant in Phnom Penh, Cambodia. DISCONTINUED OPERATIONS - ----------------------- For information concerning the Company's discontinued operations formerly conducted by HIG and HERS, see Note 2 to HEI's Consolidated Financial Statements, incorporated herein by reference to page 45 of HEI's 1995 Annual Report to Stockholders, portions of which are filed herein as HEI Exhibit 13. 25 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. HEI has obtained the PUC certification which is a prerequisite to obtaining an exemption for foreign utility operations and to the Company's maintenance of its exemption under the 1935 Act if it acquires such ownership interests. Legislation has been introduced in Congress that would repeal the 1935 Act leaving the regulation of utility holding companies to be governed by other federal and state laws. Management cannot predict if this legislation will be enacted or the final form it might take. HEI is subject to an agreement entered into with the PUC (the PUC Agreement) when HECO became a wholly owned subsidiary of HEI. The PUC Agreement, among other things, requires HEI to provide the PUC with periodic financial information and other reports concerning intercompany transactions and other matters. It prohibits the electric utilities from loaning funds to HEI or its nonutility subsidiaries and from redeeming common stock of the electric utility subsidiaries without PUC approval. Further, the PUC could limit the ability of the electric utility subsidiaries to pay dividends on their common stock. See "Restrictions on dividends and other distributions" and "Electric utility regulation" (regarding the PUC review of the relationship between HEI and HECO). As a result of the acquisition of ASB, HEI and HEIDI are subject to OTS registration, supervision and reporting requirements as savings and loan holding companies. In the event the OTS has reasonable cause to believe that the continuation by HEI or HEIDI of any activity constitutes a serious risk to the financial safety, soundness, or stability of ASB, the OTS is authorized under the Home Owners' Loan Act of 1933, as amended, to impose certain restrictions in the form of a directive to HEI and any of its subsidiaries, or HEIDI and any of its subsidiaries. Such possible restrictions include limiting (i) the payment of dividends by ASB; (ii) transactions between ASB, HEI or HEIDI, and the subsidiaries or affiliates of ASB, HEI or HEIDI; and (iii) the activities of ASB that might create a serious risk that the liabilities of HEI and its other affiliates, or HEIDI and its other affiliates, may be imposed on ASB. Theoretically, this authority would allow the OTS to prohibit dividends, limit affiliate transactions or otherwise restrict activities as a result of losses suffered by HEI, HEIDI or their other subsidiaries, and thus conceivably may be an indirect means of limiting affiliations between ASB and affiliates engaged in nonfinancial activities. See "Restrictions on dividends and other distributions." OTS regulations also generally prohibit savings and loan holding companies and their nonthrift subsidiaries from engaging in activities other than those which are specifically enumerated in the regulations. Such restrictions, if applicable to HEI and HEIDI, would significantly limit the kinds of activities in which HEI and HEIDI and their subsidiaries may engage. However, the OTS regulations provide for an exemption which is available to HEI and HEIDI if ASB satisfies the "qualified thrift lender" test discussed below. See "Savings bank regulation--FDIC Improvement Act of 1991 and implementing regulations--Qualified thrift lender test." ASB currently meets the qualified thrift lender test and must continue to meet the test in order to avoid restrictions on the activities of HEI and HEIDI and their subsidiaries which could result in a need to divest ASB. HEI and HEIDI are prohibited, directly or indirectly, or through one or more subsidiaries, from (i) acquiring control of, or acquiring by merger or purchase of assets, another insured institution or holding company thereof, without prior written OTS approval; (ii) acquiring more than 5% of the voting shares of another savings association or savings and loan holding company which is not a subsidiary; or (iii) acquiring or retaining control of a savings association not insured by the FDIC. No director or officer of HEI or HEIDI, or person beneficially owning more than 25% of such holding company's 26 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 53% 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, 1995. At December 31, 1995, HECO and its subsidiaries had net assets of $697 million, of which approximately $327 million were not available for transfer to HEI without regulatory approval. The ability of ASB to make capital distributions to HEI and other affiliates is restricted under federal law. Subject to a limited exception for stock redemptions that do not result in any decrease in ASB's capital and would improve ASB's financial condition, ASB is prohibited from declaring any dividends, making any other capital distribution, or paying a management fee to a controlling person if, following the distribution or payment, ASB would be deemed to be under-capitalized, significantly under-capitalized or critically under-capitalized. See "Savings bank regulation--FDIC Improvement Act of 1991 and Implementing Regulations--Prompt corrective action." As a Tier-1 institution (one that meets its 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 as of 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." 27 In March 1995, the PUC opened a generic docket to investigate whether Hawaii public utilities should be allowed to establish property damage reserves to recover the cost of damage to their facilities and equipment caused by catastrophic disasters. See "Property damage reserve" in MD&A, incorporated herein by reference to page 30 of HEI's 1995 Annual Report to Stockholders, portions of which are filed herein as HEI Exhibit 13. Any adverse decision or policy made or adopted by the PUC, or any prolonged delay in rendering a decision, could have a material adverse effect on consolidated HECO's and the Company's financial condition 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 opened a docket and initiated such a review to determine whether the HEI-HECO relationship, HEI's diversified activities, and HEI's policies, operations and practices 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 included a number of recommendations, most of which the Company has implemented. The PUC has not issued a final order in the docket. 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. 28 SAVINGS BANK REGULATION ASB, a federally-chartered savings bank, and its holding companies are subject to the regulatory supervision of the OTS and, in certain respects, the Federal Deposit Insurance Corporation (FDIC). In addition, ASB must comply with Federal Reserve Board reserve requirements and OTS liquidity requirements. See "Liquidity and capital resources-savings bank" in MD&A and "Proposed legislation affecting financial institutions" in Note 5 to HEI's Consolidated Financial Statements, incorporated herein by reference to pages 36 and 52 of HEI's 1995 Annual Report to Stockholders, portions of which are filed herein as HEI Exhibit 13. Deposit insurance - ----------------- Deposit insurance assessments. FIRREA provides for separately funded and maintained deposit insurance funds administered by the FDIC for savings associations and banks. SAIF generally insures the deposits of savings associations. The Bank Insurance Fund (BIF) generally insures the deposits of commercial banks. In 1991, the FDIC adopted a risk-based deposit insurance assessment system. Under this system, the actual assessment rate for a particular institution depends in part upon the supervisory risk rating the FDIC assigns to the institution. Savings associations and banks have in the past paid assessments ranging from 23 to 31 cents per $100 of deposits to capitalize the SAIF and BIF. However, under existing law, the FDIC may reduce these assessment rates when the SAIF and BIF individually reach a designated 1.25% reserve ratio. In 1995, the BIF reached the designated reserve ratio and the FDIC, therefore, reduced the assessment rates for banks. Effective in January 1996, well-capitalized banks pay only the legally required annual minimum of $2,000 for BIF insurance. For all other BIF members, the assessment rates range from 3 to 27 cents per $100 of deposits, depending on their risk classification. There is no reasonable likelihood that, under current conditions, the SAIF will achieve the designated 1.25% reserve ratio before the next century. Although the FDIC reduced the assessments paid by banks, it maintained the assessment rates of 23 to 31 cents per $100 of deposits for SAIF members. The disparity between the BIF and SAIF assessment rates places ASB (which paid an assessment rate of 23 cents per $100 of deposits in 1995) and other SAIF members at a disadvantage in competing against commercial banks. There have been a number of legislative proposals in Congress to address this situation, including making a one-time or phased-in assessment of thrifts to fully capitalize the SAIF, followed by a merger of the SAIF and the BIF; eliminating or reducing the disparity in the assessment rates paid by banks or thrifts if the SAIF is recapitalized through the assessment; and merging bank and thrift charters. Certain of these proposals, if adopted, could have a material adverse effect on the Company and ASB. For example, if a one-time assessment of 85 cents for every $100 of deposits is imposed, it is estimated that ASB would be assessed approximately $18 million on a pretax basis ($11 million after-tax), based on ASB's deposit liabilities as of March 31, 1995. If bank and thrift charters are merged, HEI and its other subsidiaries might become subject to the restrictions on the permissible activities of a bank holding company. While certain of the proposals under consideration would grandfather the activities of existing savings and loan holding companies, management cannot predict whether or in what form any of these proposals might ultimately be adopted or the extent to which the business of the Company or ASB might be affected. Deposit insurance coverage. FDIC Improvement Act of 1991 (FDICIA) amended various provisions of the Federal Deposit Insurance Act governing deposit insurance coverage. FDICIA, as further implemented by amendments to the FDIC's deposit insurance regulations, made certain significant changes relating to pro rata or "pass through" insurance coverage for employee benefit plan participants and beneficiaries, and insurance coverage for certain retirement accounts and trust funds. (The term "pass-through" insurance means that the insurance coverage passes through to each owner/beneficiary of the applicable deposit.) Although the vast majority of the FDIC's deposit insurance regulations, 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. 29 "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, 1995, ASB was well-capitalized. Financial Institutions Reform, Recovery, and Enforcement Act of 1989 and - ------------------------------------------------------------------------ implementing regulations - ------------------------ Capital requirements. Under Financial Institutions Reform, Recovery, and Enforcement Act of 1989 (FIRREA), the OTS set three capital standards for thrifts, each of which must be no less stringent than those applicable to national banks. 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, 1995, ASB was in compliance with all of the minimum standards with a core capital ratio of 5.4%, a tangible capital ratio of 5.2% and risk- based capital ratio of 12.9% (based on risk-based capital of $193.4 million, $73.9 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 OTS intends to delay implementation of the IRR capital deduction (which was to become effective with the September 1994 Thrift Financial Report) pending the testing of an OTS appeals process for certain institutions subject to such 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 1995 Thrift Financial Report. However, if the rule adding the IRR component had been implemented, ASB would not have been required to deduct an amount from total capital or to hold additional capital as of December 31, 1995. In August 1995, the Board of Governors of the Federal Reserve System, the FDIC and the Office of the Comptroller of the Currency adopted a regulation that stipulates IRR will be taken into account when determining a bank's capital adequacy. These banking agencies have also solicited comments on a proposed supervisory policy statement that describes the process they will use to assess the exposure of a bank's economic value to changes in interest rates. After these banking agencies gain experience with this process, they contemplate issuing standards establishing an explicit capital charge for IRR. FIRREA requires that the capital standards for thrifts be no less stringent than those applicable to national banks. Although the OTS has indicated that it will review any differences between its approach and that of the other federal banking agencies for the purpose of achieving greater consistency and uniformity among all four agencies, the impact of the proposed supervisory policy statement on ASB cannot be predicted at this time. Affiliate transactions. Significant restrictions apply to certain transactions between ASB and its affiliates, including HEI and its direct and indirect subsidiaries. FIRREA significantly altered both the scope and substance of such limitations on transactions with affiliates and provides for thrift affiliate rules similar to, but more restrictive than, those applicable to banks. For example, ASB is prohibited from making any loan or other extension of credit to an entity affiliated with ASB unless the affiliate is engaged exclusively in activities which the Federal Reserve Board has determined to be permissible for bank holding companies. There are also various other restrictions which apply to 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. 30 FDIC Improvement Act of 1991 and implementing regulations - --------------------------------------------------------- FDICIA subjects the banking and thrift industries to heightened regulation and supervision. 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. 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 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 6.0%, a total risk-based ratio of 10% and not be in a "troubled condition." As of December 31, 1995, ASB was well-capitalized with a leverage ratio of 5.4%, a Tier-1 risk-based ratio of 12.2% and a total risk-based ratio of 12.9%. 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. 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 1995, ASB was in compliance with the QTL test. See "Holding company regulation." Federal Home Loan Bank System - ----------------------------- ASB is a member of the FHLB System which consists of 12 regional FHLBs. The FHLB System provides a central credit facility for member institutions. ASB, as a member of the FHLB of Seattle, is required to own shares of capital stock in the FHLB of Seattle in an amount equal to the greater of 1% of ASB's aggregate unpaid residential loan principal at the beginning of each year, 0.3% of total assets or 5% of FHLB advances outstanding. The FHLBs serve as the central liquidity facilities for savings associations and resources of long-term funds for financing housing. Long-term advances may only be made for the purpose of providing funds for financing residential housing. Additionally, at such time as an advance is made or renewed, it must be secured by collateral from one of the following categories: (1) fully disbursed, whole first mortgages on improved residential property, or securities representing a whole interest in such mortgages; (2) securities issued, insured or guaranteed by the U.S. Government or any agency thereof; (3) FHLB deposits; and (4) other real estate-related collateral that has a readily ascertainable value and with respect to which a security interest can be perfected. The aggregate amount of outstanding advances secured by such other real estate-related collateral may not exceed 30% of the member's capital. 31 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" in its OTS examination report dated October 2, 1995. The Reigle-Neal Interstate Banking and Branching Act of 1994 (Interstate Banking Act) was signed into law on September 29, 1994. Beginning September 29, 1995, and subject to certain limits, adequately capitalized and adequately managed bank holding companies will be permitted to acquire control of banks in any state, including Hawaii. Beginning on June 1, 1997 or earlier if expressly permitted by Hawaii law, and subject to certain limits, an adequately capitalized and adequately managed bank may apply for permission to merge with an out-of-state bank and convert all branches of both banks into branches of a single bank. The State of Hawaii retains the authority to prohibit such mergers if, between September 29, 1994 and June 1, 1997, it enacts a law expressly prohibiting such mergers. Out-of-state banks may also be permitted to open new branches in Hawaii if Hawaii law so authorizes. Management cannot predict whether or in what form the Hawaii Legislature might adopt interstate branching legislation during the 1996 legislative session or the extent to which the business of the Company or ASB might be affected. 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. See also "Deposit insurance--Deposit insurance assessments." FREIGHT TRANSPORTATION REGULATION The PUC has broad authority in its regulation of the intrastate business and operations of YB. See "Other--Freight transportation--Hawaiian Tug & Barge Corp. and Young Brothers, Limited." In particular, the PUC has the authority to review and modify YB's intrastate rates and charges under the Hawaii Water Carrier Act. In all rate proceedings under such act, YB has the burden of proving the reasonableness of expenditures, contracts, leases or other transactions. An adverse decision or policy adopted by the PUC, or a delay in granting requested rate or other relief, could have a material effect on the financial condition or results of operations of YB. ENVIRONMENTAL REGULATION HEI and its subsidiaries are subject to federal and state statutes and governmental regulations pertaining to water quality, air quality and other environmental factors. Water quality controls. As part of the process of generating electricity, water used for condenser cooling of the electric utility subsidiaries' steam electric generating stations is discharged into ocean waters or into underground injection wells. The subsidiaries are required periodically to obtain permits from the DOH in order to be allowed to discharge the water. 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. 32 During 1995, the DOH issued NPDES permit renewals for MECO's Kahului generating station and for HECO's Kahe, Waiau and Honolulu generating stations. Only HELCO's Shipman generating station has yet to receive its NPDES permit renewal and is continuing to operate on an administrative extension of the previously expired permit. The DOH is preparing a draft permit, but is awaiting additional requested storm water information from HECO/HELCO. In September 1994, the DOH determined that MECO's Maalaea facility requires a NPDES permit for industrial-related storm water runoff. A storm water permit application was submitted to the DOH on April 18, 1995. Application processing by the DOH is on hold until baseline storm water data are submitted. The DOH also promulgated regulations that require storm water runoff and dewatering permits for construction-related projects. These 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 Notices of Intent (NOI) for both construction storm water discharge permits and dewatering permits. A NOI was also submitted in June 1995 for construction-related activities at MECO's Maalaea generation expansion project. HECO is also working cooperatively with the City & County of Honolulu Department of Public Works to obtain a blanket NPDES permit to discharge water removed from utility manholes into municipal storm drain systems. On August 15, 1995, the DOH issued a notice of apparent violation of NPDES permit requirements to HELCO's Shipman generating station. The violation was for the failure to periodically calibrate temperature recording equipment. By letter dated September 5, 1995, HECO's Environmental Department informed the DOH that immediate corrective actions were taken by HELCO. The DOH was satisfied with the response and will not take further action. All HECO and MECO facilities were in compliance with NPDES permit conditions during 1995. 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 approved MECO's construction of the new wells in December 1994, and injection well construction commenced at Maalaea in December 1995. The DOH also issued new UIC permits for HELCO's Puna (February 1995) and Keahole (March 1995) generating stations. As a result, HELCO has now received operating permits for all its facilities. HELCO and MECO are in compliance with new UIC monitoring requirements, including effluent monitoring and well status investigations. The DOH issued a notice of apparent violation to HELCO in August 1994 for failing to provide advanced notice of modification of the Hill No. 6 drainage well. The DOH requested additional information related to the drainage well modification in October 1994 and HECO responded on behalf of HELCO via letter in January 1995. In August 1995, the DOH issued a final notice and finding of violation, and assessed HELCO a $15,500 penalty, which HELCO paid to close the investigation. No further action is anticipated by the DOH. 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. MECO and HELCO facilities submitted completed UIC applications to the EPA in July 1994. A UIC application was also submitted for the proposed injection well system at Maalaea in November 1994. The EPA issued draft UIC permits and related public notices for the Keahole and Hill injection wells on May 22, 1995. HECO submitted comments on the draft permits in late June 1995. Final permits have not been issued. The EPA issued a letter to HECO in October 1995 confirming that the DOH-permitted wells may continue to operate without new EPA UIC permits. Currently, the EPA and DOH are discussing the possibility of consolidating federal requirements into the DOH UIC permits. Negotiations have been ongoing for several months. 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 33 insurance pools) have refused to issue these certificates because OPA provides for direct liability against guarantors. The Coast Guard issued interim guidelines in September 1992, which included the requirement that a spill response plan be submitted by February 18, 1993, and be finalized by August 18, 1993. The EPA and Hawaii Department 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 fuel storage facility, and the Ward Avenue facility; and to the DOT for the pipelines between Honolulu power plant and the Iwilei fuel storage facility and between the Chevron fuel storage facility in Hilo and the Shipman and Hill power plants, respectively. The EPA, DOT and Coast Guard promulgated regulations implementing OPA in July 1994, January 1993 and February 1993, respectively. Revised Facility Spill Response Plans (FSRPs) for the HECO Generating Stations (Kahe, Waiau, and Honolulu) and the Iwilei fuel storage facility were submitted to the EPA on January 12, 1995. HECO is awaiting the EPA's review and approval of these FSRPs. The HECO FSRP for the Kahe Generating Station was modified to include the Kahe pipeline, and was submitted to the DOT on February 15, 1995. The HECO pipeline connecting the Iwilei fuel storage facility and the Honolulu Generating Station was determined not to meet the DOT's definition of "significant and substantial harm". Thus, the DOT approval of the Honolulu- Iwilei pipeline FSRP is not required at this time in order to continue pipeline operations. The HECO Ward Avenue facility does not store more than one million gallons of oil, and is therefore not required to have an EPA approved response plan in order to continue storing/handling oil. Instead, HECO completed a Certification of the Applicability of the Substantial Harm Criteria for the Ward Avenue Complex in June 1995. A revised Kahului response plan was submitted to the EPA and Coast Guard in January 1995. The Coast Guard and EPA approved the Kahului FSRP. In September 1994, it was determined that MECO's Maalaea power plant was also required to develop an oil spill response plan. The Maalaea FSRP was submitted to the EPA on August 31, 1994. HECO submitted the revised HELCO Hilo Area Pipeline FSRP to the DOT on February 12, 1995. The DOT approved the HELCO Hilo Area Pipeline FSRP on February 15, 1995, with the condition that additional clarification be provided on some areas of the plan (which has been done). HELCO's Shipman facility does not store more than one million gallons of oil, and is therefore not required to have an EPA approved response plan in order to continue storing/handling oil. HELCO also completed a Certification of the Applicability of the Substantial Harm Criteria for the Shipman power plant, which was submitted in December 1995. Air quality controls. The generation stations of the utility subsidiaries operate under air pollution control permits issued by the DOH and, in a limited number of cases, by the EPA. The entire electric utility industry is being affected by the 1990 Amendments to the Clean Air Act. Hawaii utilities may be affected by the air toxics provisions (Title III) when the Maximum Allowable Control Technology (MACT) emission standards are proposed for generation units. Hawaii utilities are affected by the operating permit provisions (Title V). The DOH adopted implementing regulations on November 26, 1993 which required submission of permit applications for existing sources during 1994. All applications were filed in 1994 as required and supplementary information was filed in 1995. 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 withdrew that proposal in April 1995 for revision. A new draft rule is expected in early 1996 and, as ordered by federal court, a final rule is expected by July 1996. 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 steps to preclude future violations. An application for a 34 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 as to the Notice of Violation have been unsuccessful to date. The DOH has not yet 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. Follow-up questions from the DOH were received in October 1994 and were responded to in November 1994 and in February 1995. 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. Hazardous waste and toxic substances controls. The operations of the electric utility and freight transportation subsidiaries are subject to regulations promulgated by the EPA to implement the provisions of the Resource Conservation and Recovery Act (RCRA), the Superfund Amendments and Reauthorization Act (SARA) and the Toxic Substances Control Act (TSCA). The DOH has been working towards obtaining primacy to operate state-authorized RCRA (hazardous waste) programs. The DOH finalized RCRA administrative rules in mid-June 1994, with the rules becoming effective on June 18, 1994. The DOH's state contingency plan and the state Environmental Response Law (ERL) rules were adopted in August 1995. Whether on a federal or state level, RCRA provisions identify certain wastes as hazardous and set forth measures that must be taken in the transportation, storage, treatment and disposal of these wastes. Some of the wastes generated at steam electric generating stations possess characteristics which make them subject to these EPA regulations. Since October 1986, all HECO generating stations have operated RCRA-exempt wastewater treatment units to treat potentially regulated wastes from occasional boiler waterside and fireside cleaning operations. Steam generating stations at MECO and HELCO also operate similar RCRA-exempt wastewater management systems. In March 1990, the EPA changed RCRA testing requirements used to characterize a waste as hazardous which potentially affected the hazardous waste generating status of all facilities. A new and more stringent Toxicity Characteristic Leaching Procedure replaced the former Extraction Procedure toxicity test and included additional testing requirements for 25 organic compounds. HECO's continuing program to recharacterize all HECO, MECO and HELCO wastestreams using the Toxicity Characteristic Leaching Procedure 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. 35 The RCRA still regulates most generating stations as RCRA small quantity generators (SQGs). All Company 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. On February 20, 1995, the DOH favorably acknowledged HECO's response and issued MECO a "Return to Compliance Letter" for both facilities. 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. All HECO, MECO and HELCO USTs were in compliance with the DOH and EPA standards during 1995. 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. In September 1995, the EPA published a notice of proposed rule making to expand the types of industries required to file annual Toxic Release Inventory reports (i.e., to report facility releases of toxic chemicals). The proposed rule includes the steam electric category, which is currently exempt from Toxic Release Inventory reporting requirements. The EPA tentatively has scheduled the issuance of the proposed rule in April 1996. 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. The proposed rule calls for changes in determining PCB concentrations, and in marking, storage and disposal requirements. The final rule is anticipated to be issued in June 1996. By letter dated August 21, 1992 the EPA provided MECO with a notice of potential liability and request for information relating to a federal Superfund closure investigation at the North American Environmental, Inc. (NAE) storage facility in Clearfield, Utah. MECO was identified by the EPA as a potentially responsible party for three PCB capacitors originally contracted for disposal by Westinghouse. Although Westinghouse has already disposed of the capacitors, MECO was obligated to comply with the information requests attached to the EPA notice. A preliminary response to the EPA's information request was submitted to the EPA on October 5, 1992. MECO has since received confirmation from Westinghouse that the three capacitors were removed from the NAE facility and incinerated at Aptus (an EPA-approved facility in Kansas) on September 16, 1992. By letter dated December 2, 1992, the EPA notified MECO that a draft Administrative Order on Consent for the cleanup of the NAE facility had been sent to potentially responsible parties that have waste remaining at the NAE site and to parties that have expressed a desire to participate in the cleanup. MECO did not receive a draft Administrative Order on Consent because the three PCB capacitors were removed from the NAE facility and incinerated. By letter dated February 8, 1993, Westinghouse confirmed that it would indemnify MECO pursuant to its contract for this matter. In early 1995, the EPA issued an Administrative Order on Consent to the Freeport Center and the Defense Logistics Agency. Both agencies are responding to the AOC and are initiating corrective actions. Recovery of cleanup costs may fall back on other potentially responsible parties once cleanup is completed and costs have been determined. The state 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 36 of a facility where a hazardous substance comes to be located and any person who at the time of disposal of the hazardous substance owned or operated any facility at which such hazardous substance was disposed. The DOH issued final rules (or State Contingency Plan) implementing the state ERL on August 17, 1995. Potential exposure to liability under the state ERL/State Contingency Plan is associated with the release of regulated substances, including oil, to the environment. By letters 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 submitted a response to the DOH on April 28, 1995. The DOH letters to HTB and 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 and YB provided responses to the DOH letters. Based on a limited review of the responses received from HECO, HTB, YB and others, the DOH issued letters on December 18, 1995, indicating that the DOH has identified a number of parties, including HECO, HTB and YB, who appear to be either potentially responsible for the contamination and/or operate their facilities upon contaminated land. The DOH met with these identified parties on January 24, 1996 to inform them of its findings and to establish the framework to determine remedial and cleanup requirements. The DOH's goal is the formation of a voluntary response group comprised of these identified parties. The Honolulu Harbor area of investigation was divided into four units, with the highest priority area (Iwilei Area) to be addressed first. The DOH met a second time with the identified parties on March 14, 1996, and additional meetings are being scheduled. Because the process for determining appropriate remedial and cleanup action, if any, is at an early stage, management cannot predict at this time the costs of future site analysis, remediation and cleanup requirements, if any, nor can it estimate when such costs, if any, would be incurred. 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 was contacted in December 1995 for an update of its investigation. According to the DOH, investigations in the near future will primarily focus on past pipeline releases that occurred near the Kaunakakai Harbor and will not involve the old power plant area. However, investigations around the old power plant may be renewed should future soil sampling indicate a problem. Both HTB and YB generate small quantities of hazardous wastes as a result of operations and equipment maintenance activities and have contracted with a firm to dispose of these wastes in compliance with the EPA regulations and the RCRA provisions. YB, as a public carrier, also moves hazardous wastes and explosives for customers. Employees are trained in the applicable handling methods to assist in the safe movement of these cargoes. Both HTB and YB are subject to the jurisdiction of the Coast Guard which monitors ocean activities to ensure compliance with federal regulations. 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 ownership in a facility is held primarily to protect a security interest, provided that they do not participate in the management of the facility. Although there may be some risk of liability for ASB for environmental cleanup costs, the Company believes the risk is not as great for ASB, which specializes in residential lending, as it may be for other depository institutions which have a larger portfolio of commercial loans. 37 RATING AGENCIES' ACTIONS As of March 19, 1996, 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. 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 expensed approximately $2.2 million, $2.4 million and $2.3 million in 1995, 1994 and 1993, respectively, for research and development. Contributions to the Electric Power Research Institute accounted for most of the expenses. There were also expenses in the areas of energy conservation, environmental control, emissions control and for other similar studies relative to technologies with the potential of being specifically applicable to HECO, its subsidiaries and its customers. EMPLOYEE RELATIONS - ------------------ At December 31, 1995, the Company's continuing operations had 3,384 full-time and part-time employees, compared with 3,386 at December 31, 1994. HECO At December 31, 1995, HECO and its subsidiaries had 2,208 employees, compared with 2,219 employees at December 31, 1994. The current collective bargaining agreement between the International Brotherhood of Electrical Workers (IBEW), Local 1260, and HECO, MECO and HELCO, covering approximately 63% of the total employees of these companies, was extended in November 1995 for a two-year period from November 1, 1996 through October 31, 1998. The extension provides for noncompounded wage increases of 3% on November 1 of each year during the term of the agreement. The current benefits agreement between IBEW Local 1260 and HECO, MECO and HELCO was also extended for a two-year period and will be in effect until October 31, 1998. 38 HTB HTB and YB have a collective bargaining agreement with the Inlandboatmen's Union of the Pacific (IBU) effective from July 26, 1995 through July 25, 1998. A 2.5% across-the-board wage increase was effective for the first year, with 3% in the second and third years. Journeyman craftsmen were not included in this new contact but were covered in YB's contract with the International Longshoremen's and Warehousemen's Union (ILWU), Hawaii Division, Local 142. The agreement covers all employees of HTB and YB employed on ocean, inter-island and harbor tug operations and dispatchers. It 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, ILWU, Hawaii Division, Local 142. The agreement was ratified on December 23, 1994 after ten 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. OTHER The employees of HEI and its direct and indirect subsidiaries are not covered by any collective bargaining agreement, except as identified above. ITEM 2. PROPERTIES HEI leases 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 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, 1995. The three plants are situated on HECO-owned land having a combined area of 535 acres. In addition, HECO owns a total of 124 acres of land on which are located substations, transformer vaults, distribution baseyards and the Kalaeloa cogeneration facility. Electric lines are located over or under public and nonpublic properties. Most of HECO's leases, easements and licenses have been recorded. HECO owns overhead transmission lines, overhead distribution lines, underground cables, fully-owned or jointly-owned poles and steel or aluminum high voltage transmission towers. The transmission system operates at 46,000 and 138,000 volts. The total capacity of HECO's transmission and distribution substations was 5,736,000 kilovoltamperes at December 31, 1995. 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 844,600 barrels. The properties of HECO are subject to a first mortgage securing HECO's outstanding first mortgage bonds. A brief description of the properties of HECO's two electric utility subsidiaries follows: 39 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 a total maximum usable capacity of 145,300 barrels. MECO's administrative offices and engineering and distribution departments are located on 9.1 acres of MECO-owned land in Kahului. MECO also owns and operates smaller distribution and generation systems on the islands of Lanai and Molokai. The properties of MECO are subject to a first mortgage securing MECO's outstanding first mortgage bonds. HELCO owns and operates five generating plants on the island of Hawaii. These - ----- plants at Hilo (2), Waimea, Kona and Puna have an aggregate generating capability of 154.6 MW (excluding two small run-of-river hydro units). The plants are situated on HELCO-owned land having a combined area of approximately 43 acres. HELCO owns 6.0 acres of land in Kona, which are used for a baseyard, and it leases 4.0 acres of land for its baseyard in Hilo. The lease expires in 2030. The deeds to the sites located in Hilo contain certain restrictions which do not materially interfere with the use of the sites for public utility purposes. The properties of HELCO are subject to a first mortgage securing HELCO's outstanding first mortgage bonds. SAVINGS BANK - ------------ ASB owns its executive office building located in downtown Honolulu 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, 1995.
Number of branches ------------------------- Owned Leased Total - ----------------------------------------------------- Oahu...................... 5 25 30 Maui...................... 3 3 6 Kauai..................... 3 1 4 Hawaii.................... 2 4 6 Molokai................... -- 1 1 ------------------------- 13 34 47 =========================
The net book value of branches and office facilities is approximately $40 million. Of this amount, $33 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 (auxiliary boats) of 500 HP and two flatdecked barges as of December 31, 1995. 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, 1995. YB owns no real property, but rents on a month-to-month basis or leases various pier properties and warehouse facilities from the State of Hawaii under 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. 40 REAL ESTATE DEVELOPMENT - ----------------------- MPC. See Item 1, "Business--Other--Real estate--Malama Pacific Corp." MDC, MPC's subsidiary owns 1.27 acres of land adjacent to HECO's Ward Avenue facility on Oahu. As of December 31, 1995, there is an agreement to sell 0.23 acres of the property. The remaining property is leased to HECO and other commercial tenants. OTHER - ----- HEIIC. See Item 1, "Business--Other--HEI Investment Corp." LVI operates a windfarm on the island of Hawaii with a generating capability of 1.6 MW. LVI leases 78 acres of land for its windfarm. As of March 19, 1996, HEIPC leases office space in downtown Honolulu. ITEM 3. LEGAL PROCEEDINGS Except as provided for below and in "Item 1. Business," there are no known material pending legal proceedings, other than ordinary routine litigation incidental to their respective businesses, to which HEI or any of its subsidiaries is a party or of which any of their property is the subject. DISCONTINUED OPERATIONS - ----------------------- See "The Hawaiian Insurance & Guaranty Company, Limited" in Note 2 to HEI's Consolidated Financial Statements, incorporated herein by reference to page 45 of HEI's 1995 Annual Report to Stockholders, portions of which are filed herein as HEI Exhibit 13. In December 1994, five insurance agencies, which had served as insurance agents for HIG and its subsidiaries, filed a complaint against HEI, HEIDI and others. The complaint set forth several causes of action, including breach of contract and piercing the corporate veil. The plaintiffs asked for relief from the defendants, including compensatory damages for lost commissions, lost business and lost profits in an amount to be proven at trial and punitive damages. In August 1995, the court granted defendants' motions for summary judgment and in February 1996, the court directed that final judgment be entered. HECO POWER OUTAGE - ----------------- See "HECO power outage" in Note 4 to HEI's Consolidated Financial Statements, incorporated herein by reference to page 48 of HEI's 1995 Annual Report to Stockholders, portions of which are filed herein as HEI Exhibit 13. HELCO POWER SITUATION - --------------------- See "HELCO power situation" on pages 6 and 7 of this report. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS HEI AND HECO: During the fourth quarter of 1995, 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, 1996 and their years of company service are given as of December 31, 1995. Officers are appointed to serve until the meeting of the HEI Board of Directors following the next Annual Meeting of Stockholders (which will occur on April 23, 1996) 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. 41 Business experience HEI Executive Officers for past five years - -------------------------------------------------------------------------------- Robert F. Clarke, age 53 President and Chief Executive Officer................... 1/91 to date Director................................................ 4/89 to date (Company service: 8 years) T. Michael May, age 49 Senior Vice President................................... 9/95 to date Director................................................ 9/95 to date (Company service: 3 years) T. Michael May is also President of HECO and served as HECO Senior Vice President from 2/92 to 8/95. Prior to joining HECO, he was a principal partner in Management Assets Group (a general management consulting practice) from 9/89 to 1/92. Robert F. Mougeot, age 53 Financial Vice President and Chief Financial Officer.... 4/89 to date (Company service: 7 years) Peter C. Lewis, age 61 Vice President - Administration......................... 10/89 to date (Company service: 27 years) Charles F. Wall, age 56 Vice President and Corporate Information Officer........ 7/90 to date (Company service: 5 years) Andrew I. T. Chang, age 56 Vice President - Government Relations................... 4/91 to date Manager, Government Relations........................... 8/90 to 3/91 (Company service: 11 years) Constance H. Lau, age 43 Treasurer............................................... 4/89 to date (Company service: 11 years) Curtis Y. Harada, age 40 Controller.............................................. 1/91 to date Auditor, HECO........................................... 7/89 to 1/91 (Company service: 6 years) Betty Ann M. Splinter, age 50 Secretary............................................... 10/89 to date (Company service: 21 years) Wayne K. Minami, age 53 President and Chief Executive Officer, American Savings Bank, F.S.B. ................. 1/87 to date (Company service: 9 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 of the SEC's General Rules and Regulations under the Securities Exchange Act of 1934. There are no family relationships between any executive officer of HEI and any other executive officer or director of HEI, or any arrangement or understanding between any executive officer and any person pursuant to which the officer was selected. 42 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 59 and 61 (Note 18, "Regulatory restrictions on net assets" and Note 21, "Quarterly information (unaudited)" to HEI's Consolidated Financial Statements) and page 25 of HEI's 1995 Annual Report to Stockholders, portions of which are filed herein as HEI Exhibit 13. Certain restrictions on dividends and other distributions of HEI are described in this report under "Item 1. Business-- Regulation and other matters--Restrictions on dividends and other distributions." The total number of holders of record of HEI common stock as of March 15, 1996, was 22,672. 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 1995 and 1994 were as follows:
Quarter ended 1995 1994 - ----------------------------------------------------------------- March 31............................ $ 8,927,000 $9,923,000 June 30............................. 7,900,000 1,330,000 September 30........................ 8,770,000 7,594,000 December 31......................... 12,410,000 9,664,000
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 1995 Annual Report to Stockholder, portions of which are filed herein as HECO Exhibit 13. ITEM 6. SELECTED FINANCIAL DATA HEI: The information required by this item is incorporated herein by reference to page 25 of HEI's 1995 Annual Report to Stockholders, portions of which are filed herein as HEI Exhibit 13. HECO: The information required by this item is incorporated herein by reference to page 2 of HECO's 1995 Annual Report to Stockholder, portions of which are filed herein as HECO Exhibit 13. ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS HEI: The information required by this item is set forth in MD&A, incorporated herein by reference to pages 27 to 36 of HEI's 1995 Annual Report to Stockholders, portions of which are filed herein as HEI Exhibit 13. HECO: The information required by this item is set forth in HECO MD&A, incorporated herein by reference to pages 3 to 10 of HECO's 1995 Annual Report to Stockholder, portions of which are filed herein as HECO Exhibit 13. 43 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 38 to 61 of HEI's 1995 Annual Report to Stockholders, portions of which are filed herein as HEI Exhibit 13. HECO: The information required by this item is incorporated herein by reference to pages 11 to 30 of HECO's 1995 Annual Report to Stockholder, portions of which are filed herein as HECO Exhibit 13. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE HEI AND HECO: None 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 41 and 42 of this report. The list of current directors of HEI is incorporated herein by reference to page 62 of HEI's 1995 Annual Report to Stockholders, portions of which are filed herein as HEI Exhibit 13. Information on the current directors' business experience and directorships is incorporated herein by reference to pages 3 to 6 of the registrant's Definitive Proxy Statement, prepared for the Annual Meeting of Stockholders to be held on April 23, 1996. 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 23, 1996. HECO: The following persons are, or may be deemed, executive officers of HECO. Their ages are given as of February 28, 1996 and their years of company service are given as of December 31, 1995. Officers are appointed to serve until the meeting of the HECO Board of Directors following the next HECO Annual Meeting and/or until their respective successors have been appointed and qualified (or until their earlier resignation or removal). Company service includes service with HECO affiliates.
Business experience HECO Executive Officers for past five years - ----------------------------------------------------------------------------------------------- Robert F. Clarke, age 53 Chairman of the Board.............................................. 1/91 to date (Company service: 8 years) T. Michael May, age 49 President.......................................................... 9/95 to date Senior Vice President.............................................. 2/92 to 8/95 Director........................................................... 9/95 to date (Company service: 3 years) T. Michael May, prior to joining HECO, was a principal partner in Management Assets Group (a general management consulting practice) from 9/89 to 1/92.
44
Business experience HECO Executive Officers for past five years - ------------------------------------------------------------------------------------------------------ Jackie Mahi Erickson, age 55 Vice President - General Counsel & Government Relations.......... 7/95 to date Vice President - General Counsel................................. 2/91 to 6/95 Corporate Counsel................................................ 1/81 to 1/91 (Company service: 15 years) Charles M. Freedman, age 49 Vice President - Corporate Excellence............................ 7/95 to date Vice President - Corporate Relations............................. 5/92 to 6/95 (Company service: 5 years) Charles 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 62 Vice President - Regulatory Affairs.............................. 7/95 to date Vice President - Planning........................................ 12/91 to 6/95 Vice President, HELCO and MECO................................... 12/91 to date (Company service: 9 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. George T. Iwahiro, age 58 Vice President - Energy Delivery................................. 7/95 to date Vice President - Engineering..................................... 2/91 to 6/95 Vice President - Consumer, Regulatory and Public Affairs......... 2/85 to 1/91 Vice President, HELCO and MECO................................... 3/85 to 12/91 (Company service: 36 years) Thomas L. Joaquin, age 52 Vice President - Power Supply.................................... 7/95 to date Vice President - Operations...................................... 5/94 to 6/95 General Manager, Production...................................... 11/93 to 4/94 Manager, Production.............................................. 10/92 to 10/93 Manager, Production (MECO)....................................... 7/87 to 9/92 (Company service: 22 years) Richard L. O'Connell, age 66 Vice President - Customer Operations............................. 7/95 to date Vice President - Customer Relations.............................. 2/91 to 6/95 Vice President - Facilities...................................... 6/88 to 1/91 (Company service: 15 years) Paul A. Oyer, age 55 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: 29 years) Ernest T. Shiraki, age 48 Controller....................................................... 5/89 to date (Company service: 26 years)
45
Business experience HECO Executive Officers for past five years - -------------------------------------------------------------------------------- Molly M. Egged, age 45 Secretary......................................... 10/89 to date Secretary, HELCO and MECO......................... 10/89 to date Executive Secretary............................... 12/80 to 12/92 (Company service: 15 years)
HECO's executive officers, Robert F. Clarke, T. Michael May, 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 1995 Annual Report to Stockholder, portions of which are filed herein as HECO Exhibit 13. Information on the business experience and directorships of directors of HECO who are also directors of HEI is incorporated herein by reference to pages 3 through 6 of HEI's Definitive Proxy Statement, prepared for the Annual Meeting of Stockholders to be held on April 23, 1996. Mildred D. Kosaki, age 71, and Paul C. Yuen, age 67, as of February 28, 1996 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 and 9, 12 to 18 and 23 and 24 of HEI's Definitive Proxy Statement, prepared for the Annual Meeting of Stockholders to be held on April 23, 1996. HECO: The following tables set forth the information required for the chief executive officers of HECO and the four other most highly compensated HECO executive officers serving at the end of 1995. All executive compensation amounts presented for Harwood D. Williamson and T. Michael May are the same amounts presented in HEI's Definitive Proxy Statement, prepared for the Annual Meeting of Stockholders to be held on April 23, 1996. SUMMARY COMPENSATION TABLE - -------------------------- The following is the summary compensation table which sets forth the annual and long-term compensation of the chief executive officers of HECO and the four other most highly compensated executive officers of HECO serving at the end of 1995. 46 SUMMARY COMPENSATION TABLE
Long-Term Annual Compensation Compensation ---------------------------------------------- --------------------------- Awards Payouts Other ------------ ---------- All Annual Securities Other Compen- Underlying LTIP Compen- Name and Principal Salary Bonus sation Options Payouts sation Position (1) Year ($)(2) ($)(3) ($)(4) (#)(5) ($)(6) ($)(7) - ------------------------------------------------------------------------------------------------------------------------------------ Harwood D. Williamson......... 1995 $230,000 $ 57,920 $ 86,184 15,000 -- $22,956 President 1994 387,367 100,174 76,465 15,000 $ 0 20,663 1993 341,333 0 68,544 8,000 66,150 18,843 T. Michael May................ 1995 226,000 41,987 0 4,000 na 8,177 President 1994 199,667 32,995 0 0 na 8,151 1993 191,000 0 105,138 4,000 na 4,796 Paul A. Oyer.................. 1995 188,000 17,959 13,167 3,000 na 7,907 Financial Vice President 1994 188,067 22,283 11,928 0 na 7,106 and Treasurer 1993 175,100 0 10,806 3,000 na 6,339 George T. Iwahiro............. 1995 148,000 14,966 0 2,000 na 7,730 Vice President- 1994 139,867 18,476 0 0 na 7,042 Energy Delivery 1993 133,833 0 0 2,000 na 6,548 Edward Y. Hirata.............. 1995 140,000 16,519 270 3,000 na 10,002 Vice President- 1994 134,467 20,451 405 0 na 9,169 Regulatory Affairs 1993 129,000 0 540 3,000 na 9,310 Thomas L. Joaquin............. 1995 137,000 17,959 0 3,000 na 4,404 Vice President- 1994 112,700 22,283 0 0 na 4,219 Power Supply 1993 101,567 0 0 0 na 3,943
(1) Mr. Williamson retired as President and CEO effective September 1, 1995 and Mr. May succeeded Mr. Williamson effective the same date. (2) Includes a one-time lump sum transitional payment of $49,000 for Mr. Williamson and $9,800 for Mr. Oyer in 1994, representing two years of "normalized" insider directors' fees following a decision by the Compensation Committee of the HEI Board of Directors (the Committee) to discontinue all insider directors' fees, effective May 1, 1994. Also includes directors' fees of $7,700 for the period January 1 through April 30, 1994 and $28,000 for 1993 for Mr. Williamson and directors' fees of $1,400 for the period January 1 through April 30, 1994 and $5,600 for 1993 for Mr. Oyer. (3) The named executive officers are eligible for an incentive award under the Company's annual Executive Incentive Compensation Plan (EICP). EICP bonus payouts are reflected for the year earned. (4) Covers perquisites of $105,138 for Mr. May for 1993 which he recognized as imputed income under the Internal Revenue Code, including $40,026 for moving expenses grossed up for taxes and $63,282 for closing costs on the sale of his San Diego home grossed up for taxes. Covers interest earned on deferred compensation by Mr. Williamson at above-market interest rates on deferred annual and Long-Term Incentive Plan (LTIP) payouts as well as interest earned at market rates on deferred LTIP payouts in the amount of $86,184 for 1995, $76,465 for 1994 and $68,544 for 1993. Amounts for Mr. Oyer and Mr. Hirata represent above-market earnings on deferred annual payouts. (5) Except for Mr. Williamson, options granted did not include dividend equivalents. (6) LTIP payouts are determined in April each year for the three-year cycle ending on December 31 of the previous calendar year; if there is a payout, the amount is reflected as LTIP compensation in 47 the table for the previous year for the named executive officers. In April 1994, LTIP payouts were made for the 1991-1993 performance cycle and are reflected as LTIP compensation in the table for 1993. In April 1995, no LTIP payouts were made for the 1992-1994 performance cycle for the named executive officers. The determination of whether there will be a payout under the 1993-1995 LTIP will not be made until later this year. (7) Represents amounts accrued by the Company for certain death benefits provided to the named executive officers. Additional information is incorporated by reference to "Other Compensation Plans" on page 21 of HEI's Definitive Proxy Statement, prepared for the Annual Meeting of Stockholders to be held on April 23, 1996. OPTION GRANTS IN LAST FISCAL YEAR - --------------------------------- The following table shows the HEI stock options which were granted in 1995 to the executives named in the HECO Summary Compensation Table, all of which are nonqualified stock options. The practice of granting stock options, which may include dividend equivalent shares, has been followed each year since 1987.
Number of Percent of Securities Total Options Underlying Granted to Exercise Grant Date Options Employees in Price Expiration Present Granted (#)(1) Fiscal Year ($/share) Date Value ($)(2) - ----------------------------------------------------------------------------------------------------------------- Harwood D. Williamson........... 15,000 11% 32.83 April 18, 2005 $102,300 T. Michael May.................. 4,000 3 32.83 April 18, 2005 11,280 Paul A. Oyer.................... 3,000 2 32.83 April 18, 2005 8,460 George T. Iwahiro............... 2,000 1 32.83 April 18, 2005 5,640 Edward Y. Hirata................ 3,000 2 32.83 April 18, 2005 8,460 Thomas L. Joaquin............... 3,000 2 32.83 April 18, 2005 8,460
(1) For the 15,000 option shares granted with an exercise price of $32.83 per share to Mr. Williamson, additional dividend equivalent shares were granted at no additional cost throughout the four-year vesting period (vesting in equal installments) which began on the date of grant. Dividend equivalents are computed, as of each dividend record date, both with respect to the number of shares under the option and with respect to the number of dividend equivalent shares previously credited to the participant and not issued during the period prior to the dividend record date. No dividend equivalents were granted to the other named executive officers besides Mr. Williamson. Accelerated vesting is provided in the event a Change-in-Control occurs. No stock appreciation rights have been granted under the Company's current benefit plans. (2) Based on a Binomial Option Pricing Model which is a variation of the Black-Scholes Option Pricing Model. For the stock options granted on April 18, 1995, with a 10-year option period, an exercise price of $32.83, and with additional dividend equivalent shares granted for the first four years of the option (for Mr. Williamson only), the Binomial Value adjusted for forfeiture risk is $6.82 per share. The following assumptions were used in the model: Stock Price: $32.83; Exercise Price: $32.83; Term: 10 years; Volatility: 0.333; Interest Rate: 6.25%; and Dividend Rate: 6.57%. The following were the valuation results: Binomial Option Value: $2.82; Dividend Credit Value: $4.00; and Total Value $6.82. AGGREGATED OPTION EXERCISES AND FISCAL YEAR-END OPTION VALUES - ------------------------------------------------------------- The following table shows the stock options, including dividend equivalents, exercised by the named executive officers in 1995. Also shown is the number of unexercised options and the value of unexercised in the money options, including dividend equivalents, at the end of 1995. Under the Stock Option and Incentive Plan, dividend equivalents have been granted to Mr. Williamson as part of the stock option grant, except for the one-time, premium-priced grant to Mr. Williamson in May 1992. Dividend equivalents permit a participant who exercises a stock option to obtain at no additional cost, in addition to the option shares, the amount of dividends declared on the number of shares of common stock with respect to which the option is exercised during the period between the grant and the exercise 48 of the option. Dividend equivalents are computed, as of each dividend record date throughout the four-year vesting period (vesting in equal installments), which begins on the date of grant, both with respect to the number of shares underlying the option and with respect to the number of dividend equivalent shares previously credited to the executive officer and not issued during the period prior to the dividend record date. AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR-END OPTION VALUES
Value of Number of Unexercised Unexercised In the Money Options Options (Including (Including Dividend Dividend Dividend Equivalents) Equivalents) Shares Equivalents Value Value at Fiscal at Fiscal Acquired Acquired Realized Realized On Year-end Year-end (1) On On On Dividend ------------------------------------------ Exercise Exercise Options Equivalents Exercisable/ Exercisable/ (#) (#) ($) ($) Unexercisable(#) Unexercisable ($) - ----------------------------------------------------------------------------------------------------------------------------------- Harwood D. Williamson............. 64,000 10,916 $262,473 $410,245 40,000 / 0 $ 0 / 0 T. Michael May.................... -- -- -- -- 2,000 / 6,000 960 / 24,640 Paul A. Oyer...................... -- -- -- -- 7,678 / 4,500 61,151 / 18,480 George T. Iwahiro................. -- -- -- -- 2,000 / 3,000 6,510 / 12,320 Edward Y. Hirata.................. -- -- -- -- 1,500 / 4,500 720 / 18,480 Thomas L. Joaquin................. -- -- -- -- 0 / 3,000 0 / 17,760
(1) Includes exercisable dividend equivalents of $27,900 for Mr. Oyer. All options were in the money (where the option price is less than the closing price on December 29, 1995) except the 1992 premium-priced stock option grant to Mr. Williamson without dividend equivalents with an exercise price of $41.00 per share. Value based on closing price of $38.75 per share on the New York Stock Exchange on December 29, 1995. 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. May. 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 23, 1996. PENSION PLAN - ------------ The Retirement Plan for Employees of Hawaiian Electric Industries, Inc. and Participating Subsidiaries (the Retirement Plan) provides a monthly retirement pension for life. Additional information required under this item is incorporated by reference to "Pension Plans" on pages 16 and 17 of HEI's Definitive Proxy Statement, prepared for the Annual Meeting of Stockholders to be held on April 23, 1996. As of December 31, 1995, 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, 39 years (as of September 1, 1995); Mr. May, 3 years; Mr. Oyer, 29 years; Mr. Iwahiro, 36 years; Mr. Hirata, 9 years; and Mr. Joaquin, 22 years. CHANGE-IN-CONTROL AGREEMENTS - ---------------------------- Mr. May is the only named executive officer in the HECO Summary Compensation Table with whom HEI has a currently applicable Change-in-Control Agreement. Additional information required under this item is incorporated by reference to "Change-in-Control Agreements" on pages 17 and 18 of HEI's Definitive Proxy Statement, prepared for the Annual Meeting of Stockholders to be held on April 23, 1996. 49 HEI COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION - --------------------------------------------------------------- Decisions on executive compensation for the named HECO executive officers are made by the Committee which is composed of five independent nonemployee directors. All decisions by the Committee concerning HECO officers are reviewed by the full HEI Board of Directors 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, and are reviewed and approved by the HECO Board of Directors. Information required under this item is incorporated by reference to pages 23 and 24 of HEI's Definitive Proxy Statement, prepared for the Annual Meeting of Stockholders to be held on April 23, 1996. HECO BOARD OF DIRECTORS - ----------------------- Committees of the HECO Board - ---------------------------- During 1995, the Board of Directors of HECO had only one standing committee, the Audit Committee, which was comprised of four nonemployee directors: Ben F. Kaito, Chairman, and Mildred D. Kosaki, Diane J. Plotts and Paul C. Yuen. In 1995, 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 1995 Annual Report to Stockholder. On December 31, 1995, Ben F. Kaito retired, and on January 16, 1996, Edwin L. Carter was elected a HECO director and was appointed Chairman of the HECO Audit Committee. 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 1995, 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 $34.375 per share, which is equal to the closing sales price of HEI common stock on the New York Stock Exchange on April 18, 1995, as quoted in "Composite Transactions" in The Wall Street Journal, divided into $6,000, with a cash payment made in lieu of any fractional share. The nonemployee directors of HECO who were also nonemployee directors of HEI did not receive a separate retainer from HECO. In addition, a fee of $700 was paid in cash to each nonemployee director (including nonemployee directors of HECO who are also nonemployee directors of HEI) for each Board and Committee meeting attended by the director. The Chairman of the Audit Committee was paid an additional $100 for each Committee meeting attended. Effective May 1, 1994, employee members of the Board of Directors were no longer compensated for attendance at any meeting of the Board or committees of the Board. In 1995, 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. HECO participates in the Nonemployee Director Retirement Plan, a description of which is incorporated by reference to page 8 of HEI's Definitive Proxy Statement, prepared for the Annual Meeting of Stockholders to be held on April 23, 1996. 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 23, 1996. HECO: HEI owns all of the common stock of HECO, which is HECO's only class of voting securities. HECO has also issued and has outstanding various series of preferred stock, the holders of which, upon certain defaults in dividend payments, have the right to elect a majority of the directors of HECO. The following table shows the shares of HEI common stock beneficially owned by each HECO director (other than those who are also directors of HEI), named HECO executive officers as listed in the 50 Summary Compensation Table on pages 47 and 48 and by HECO directors and officers as a group, as of February 14, 1996, based on information furnished by the respective individuals.
Amount of Common Stock and Name of Individual or Group Nature of Beneficial Ownership - ---------------------------------------------------------------------------------- Total ---------------------- Directors - --------- Mildred D. Kosaki........... 1,887 (b) 1,887 --------------- Paul A. Oyer*............... 3,057 (a) 7,678 (d) 10,735 --------------- Paul C. Yuen................ 810 (b) 810 --------------- Other named executive officers - ----------------------------- George T. Iwahiro........... 6,558 (a) 823 (b) 2,000 (d) 9,381 --------------- Edward Y. Hirata............ 2,989 (a) 1,281 (b) 1,500 (d) 5,770 --------------- Thomas L. Joaquin........... 2,638 (a) 23 (b) 10 (c) 2,671 --------------- All directors and executive 35,093 (a) officers as a group 17,006 (b) (17 persons)............... 117 (c) 109,661 (d) 161,877** ---------------
* Also a named executive officer listed in the Summary Compensation Table on pages 47 and 48. ** HECO directors Messrs. Carter, Clarke, Henderson and May and Ms. Plotts, who also serve on the HEI Board of Directors are not shown separately, but are included in the total amount. The information required as to these directors is incorporated by reference to pages 10 and 11 of HEI's Definitive Proxy Statement, prepared for the Annual Meeting of Stockholders to be held on April 23, 1996. Messrs. Clarke and May are also named executive officers listed in the Summary Compensation Table incorporated by reference to pages 12 and 13 of the above-referenced Definitive Proxy Statement of HEI. The number of shares of common stock beneficially owned by any HECO director or by all HECO directors and officers as a group does not exceed 1% of the outstanding common stock of HEI. (a) Sole voting and investment power. (b) Shared voting and investment power (shares registered in name of respective individual and spouse). (c) Shares owned by spouse, children or other relatives sharing the home of the director or an officer in the group and in which personal interest of the director or officer is disclaimed. (d) Stock options, including accompanying dividend equivalents shares, exercisable within 60 days after February 14, 1996, under the 1987 Stock Option and Incentive Plan, as amended in 1992. 51 ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS HEI: The information required under this item is incorporated by reference to pages 23 to 25 of HEI's Definitive Proxy Statement, prepared for the Annual Meeting of Stockholders to be held on April 23, 1996. HECO: The information required under this item is incorporated by reference to pages 23 to 25 of HEI's Definitive Proxy Statement, prepared for the Annual Meeting of Stockholders to be held on April 23, 1996. 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 1995 Annual Report to Stockholders and HECO's 1995 Annual Report to Stockholder, portions of which are filed by HEI as Exhibit 13 and, portions of which are filed by HECO as Exhibit 13, respectively, are incorporated by reference in Part II, Item 8, of this Form 10-K:
1995 Annual Report to Stockholder(s) (Page/s) ---------------------------- HEI HECO - ------------------------------------------------------------------------------------------------ Independent Auditors' Report.................................. 37 31 Consolidated Statements of Income, Years ended December 31, 1995, 1994 and 1993............................ 38 11 Consolidated Statements of Retained Earnings, Years ended December 31, 1995, 1994 and 1993............................ 38 11 Consolidated Balance Sheets, December 31, 1995 and 1994....... 39 12 Consolidated Statements of Capitalization, December 31, 1995 and 1994.................................. na 13-14 Consolidated Statements of Cash Flows, Years ended December 31, 1995, 1994 and 1993............................ 40 15 Notes to Consolidated Financial Statements.................... 41-61 16-30 - ------------------------------------------------------------------------------------------------
(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................................... 54 55 Schedule I Condensed Financial Information of Registrant, Hawaiian Electric Industries, Inc. (Parent Company) as of December 31, 1995 and 1994 and Years ended December 31, 1995, 1994 and 1993........................................... 56-58 na Schedule II Valuation and Qualifying Accounts, Years ended December 31, 1995, 1994 and 1993......... 59 59
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 1995 Annual Report to Stockholders and HECO's 1995 Annual Report to Stockholder, which financial statements are incorporated herein by reference. 52 (A)(3) EXHIBITS Exhibits for HEI and HECO and their subsidiaries are listed in the "Index to Exhibits" found on pages 60 through 66 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 1995, HEI and HECO filed Current Reports, Forms 8-K, with the SEC dated December 11, 1995 and December 13, 1995. These reports contained information under Item 5, Other events, regarding HECO's receipt of a 1995 final rate order (Form 8-K dated December 11, 1995) and regarding an update of the HELCO power situation and discontinued operations (Form 8-K dated December 13, 1995). 53 [KPMG Peat Marwick letterhead] Independent Auditors' Report ---------------------------- The Board of Directors and Stockholders Hawaiian Electric Industries, Inc.: Under date of January 25, 1996, we reported on the consolidated balance sheets of Hawaiian Electric Industries, Inc. and subsidiaries as of December 31, 1995 and 1994, 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, 1995, as contained in the 1995 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 1995. 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. /s/ KPMG Peat Marwick LLP Honolulu, Hawaii January 25, 1996 54 [KPMG Peat Marwick letterhead] Independent Auditors' Report ---------------------------- The Board of Directors and Stockholder Hawaiian Electric Company, Inc.: Under date of January 25, 1996, 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, 1995 and 1994, 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, 1995, as contained in the 1995 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 1995. 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. /s/ KPMG Peat Marwick LLP Honolulu, Hawaii January 25, 1996 55 Hawaiian Electric Industries, Inc. SCHEDULE I -- CONDENSED FINANCIAL INFORMATION OF REGISTRANT HAWAIIAN ELECTRIC INDUSTRIES, INC. (PARENT COMPANY) CONDENSED BALANCE SHEETS
December 31, ------------------------ (in thousands) 1995 1994 - ------------------------------------------------------------------------------ ASSETS Cash and equivalents................................. $ 673 $ 223 Advances to and notes receivable from subsidiaries... 40,576 27,696 Accounts receivable.................................. 2,404 2,565 Other investments.................................... 810 809 Property, plant and equipment, net................... 2,455 2,460 Other assets......................................... 2,537 5,857 Investment in wholly owned subsidiaries, at equity... 967,437 888,651 ------------------------ $1,016,892 $928,261 ======================== LIABILITIES AND STOCKHOLDERS' EQUITY Accounts payable..................................... $ 7,152 $ 9,246 Advances from subsidiaries........................... -- 2,293 Commercial paper..................................... 45,393 12,750 Long-term debt....................................... 223,500 209,500 Deferred income taxes................................ 3,053 4,301 Unamortized tax credits.............................. 41 29 Other................................................ 8,150 8,053 ------------------------ 287,289 246,172 ------------------------ Stockholders' equity Common stock......................................... 585,387 546,254 Retained earnings.................................... 144,216 135,835 ------------------------ 729,603 682,089 ------------------------ $1,016,892 $928,261 ======================== Note to Balance Sheets - ---------------------- Long-term debt, consisted of the following: Promissory notes, 6.3% - 7.6%, due in various years through 2005.......................... $ 143,000 $113,000 Promissory notes, 8.2% - 9.9%, due in various years through 2011.......................... 45,500 61,500 Promissory note, variable rate (6.32% at December 31, 1995) due 1999............... 35,000 35,000 ------------------------ $ 223,500 $209,500 ========================
As of December 31, 1995, HEI guaranteed debt of its subsidiaries and affiliates amounting to $10 million. The aggregate payments of principal required on long-term debt subsequent to December 31, 1995 are $42 million in 1996, $51 million in 1997, $1 million in 1998, $41 million in 1999, $10 million in 2000 and $79 million thereafter. 56 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) 1995 1994 1993 - -------------------------------------------------------------------------- REVENUES.................................. $ 2,923 $ 3,318 $ 3,353 Equity in income from continuing operations of subsidiaries............... 89,198 84,819 74,764 ------------------------------- 92,121 88,137 78,117 ------------------------------- EXPENSES: Operating, administrative and general..... 7,543 7,786 6,897 Taxes, other than income taxes............ 282 292 226 Depreciation and amortization of property, plant and equipment............ 491 587 569 ------------------------------- 8,316 8,665 7,692 ------------------------------- 83,805 79,472 70,425 Interest expense.......................... 17,922 15,195 18,355 ------------------------------- INCOME FROM CONTINUING OPERATIONS BEFORE INCOME TAX BENEFIT................ 65,883 64,277 52,070 Income tax benefit........................ (11,610) (8,753) (9,614) ------------------------------- Income from continuing operations......... 77,493 73,030 61,684 Loss from discontinued operations, net of income tax benefit................ -- -- (13,025) ------------------------------- NET INCOME................................ $ 77,493 $73,030 $ 48,659 ===============================
57 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) 1995 1994 1993 - ------------------------------------------------------------------------------------------------------- CASH FLOWS FROM OPERATING ACTIVITIES Income from continuing operations.................................. $ 77,493 $ 73,030 $ 61,684 Adjustments to reconcile income from continuing operations to net cash provided by operating activities Equity in income from continuing operations of subsidiaries...................................... (89,198) (84,819) (74,764) Common stock dividends received from subsidiaries............................................... 51,435 43,909 53,305 Depreciation and amortization of property, plant and equipment................................... 491 587 569 Other amortization............................................... 239 209 294 Deferred income taxes and tax credits, net....................... (1,236) 367 232 Changes in assets and liabilities Decrease (increase) in accounts receivable...................... 161 4,114 (6,211) Increase (decrease) in accounts payable......................... (2,094) 385 (16,506) Changes in other assets and liabilities......................... 1,880 (15,485) 34,733 ----------------------------------- 39,171 22,297 53,336 Cash flows from discontinued operations............................ -- 36 2,525 ----------------------------------- NET CASH PROVIDED BY OPERATING ACTIVITIES.......................... 39,171 22,333 55,861 ----------------------------------- CASH FLOWS FROM INVESTING ACTIVITIES Net decrease (increase) in advances to and notes receivable from subsidiaries................................ (12,880) (16,141) 8,756 Capital expenditures............................................... (486) (177) (193) Additional investments in subsidiaries............................. (39,610) (25,510) (65,000) Other.............................................................. (2) -- 50 ----------------------------------- NET CASH USED IN INVESTING ACTIVITIES.............................. (52,978) (41,828) (56,387) ----------------------------------- CASH FLOWS FROM FINANCING ACTIVITIES Net increase (decrease) in advances from subsidiaries with original maturities of three months or less........................................... (2,293) 2,293 (185) Repayment of other short-term borrowings........................... -- -- (36,000) Net increase in commercial paper................................... 32,643 12,750 -- Proceeds from issuance of long-term debt........................... 30,000 35,000 37,000 Repayment of long-term debt........................................ (16,000) (26,000) (22,500) Net proceeds from issuance of common stock......................... 19,322 13,602 88,658 Common stock dividends............................................. (49,415) (47,676) (42,012) Other.............................................................. -- (2,634) 1,949 ----------------------------------- NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES................ 14,257 (12,665) 26,910 ----------------------------------- Net increase (decrease) in cash and equivalents................... 450 (32,160) 26,384 Cash and equivalents, beginning of year............................ 223 32,383 5,999 ----------------------------------- CASH AND EQUIVALENTS, END OF YEAR.................................. $ 673 $ 223 $ 32,383 ===================================
Supplemental disclosures of noncash activities: In 1995 and 1994, $1.3 million and $16.9 million, respectively, of HEI advances to HEIDI were converted to equity in a noncash transaction. Common stock dividends reinvested by stockholders in HEI common stock in noncash transactions amounted to $20 million in 1995, $18 million in 1994 and $17 million in 1993. 58 Hawaiian Electric Industries, Inc. and Hawaiian Electric Company, Inc. SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS Years ended December 31, 1995, 1994 and 1993
=================================================================================================================================== 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 - ----------------------------------------------------------------------------------------------------------------------------------- 1995 ---- Allowance for uncollectible accounts Hawaiian Electric Company, Inc. and subsidiaries....... $ 1,136 $ 2,492 $ 1,266 $ 3,793 $ 1,101 Other companies............... 280 400 -- 38 642 --------- --------- --------- --------- --------- $ 1,416 $ 2,892 $ 1,266(a) $ 3,831(b) $ 1,743 ========= ========= ========= ========= ========= Allowance for uncollectible interest (ASB)................ $ 1,101 $ 172 $ -- $ -- $ 1,273 ========= ========= ========= ========= ========= Allowance for losses for loans receivable (ASB).... $ 8,793 $ 4,887 $ 392(a) $ 1,156(b) $ 12,916 ========= ========= ========= ========= ========= 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 ========= ========= ========= ========= =========
(a) Primarily bad debts recovered. (b) Bad debts charged off. 59 INDEX TO EXHIBITS The exhibits designated by an asterisk (*) are filed herein. The exhibits not so designated are incorporated by reference to the indicated filing. A copy of any exhibit may be obtained upon written request for a $0.20 per page charge from the HEI Stock Transfer Division, P.O. Box 730, Honolulu, Hawaii 96808-0730.
EXHIBIT NO. DESCRIPTION - ----------- ----------- HEI: - ---- 3(i).1 HEI's Restated Articles of Incorporation (Exhibit 4(b) to Registration No. 33-7895). 3(i).2 Articles of Amendment of HEI filed June 30, 1990 (Exhibit 4(b) to Registration No. 33-40813). 3(ii) HEI's By-Laws (Exhibit 4(c) to Registration No. 33-21761). 4.1 Agreement to provide the SEC with instruments which define the rights of holders of certain long-term debt of HEI and its subsidiaries (Exhibit 4.1 to HEI's Annual Report on Form 10-K for the fiscal year ended December 31, 1992, File No. 1-8503). 4.2 Indenture, dated as of October 15, 1988, between HEI and Citibank, N.A., as Trustee (Exhibit 4 to Registration No. 33- 25216). 4.3 First Supplemental Indenture dated as of June 1, 1993 between HEI and Citibank, N.A., as Trustee, to Indenture dated as of October 15, 1988 between HEI and Citibank, N.A., as Trustee (Exhibit 4(a) to HEI's Quarterly Report on Form 10-Q for the quarter ended September 30, 1993, File No. 1-8503). 4.4 Officers' Certificate dated as of November 9, 1988, pursuant to Sections 102 and 301 of the Indenture, dated as of October 15, 1988, between HEI and Citibank, N.A., as Trustee, establishing Medium-Term Notes, Series A (Exhibit 4.2 to HEI's Annual Report on Form 10-K for the fiscal year ended December 31, 1988, File No. 1-8503). 4.5 Pricing Supplements Nos. 1 through 11 to the Registration Statement on Form S-3 of HEI (Registration No. 33-25216) filed in connection with the sale of Medium-Term Notes, Series A (filed under Rule 424(b) in connection with Registration No. 33-25216). 4.6 Pricing Supplements Nos. 1 through 9 to the Registration Statement on Form S-3 of HEI (Registration No. 33-58820) filed in connection with the sale of Medium-Term Notes, Series B (Exhibit 4(b) to HEI's Quarterly Report on Form 10-Q for the quarter ended September 30, 1993, File No. 1-8503). 4.7 Pricing Supplement No. 10 to Registration Statement on Form S-3 of HEI (Registration No. 33-58820) filed in connection with the sale of Medium-Term Notes, Series B (Exhibit 4.7 to HEI's Annual Report on Form 10-K for the fiscal year ended December 31, 1994, File No. 1-8503). *4.8 Pricing Supplement No. 11 to Registration Statement on Form S-3 of HEI (Registration No. 33-58820) filed on December 1, 1995 in connection with the sale of Medium-Term Notes, Series B. *4.9 Pricing Supplement No. 12 to Registration Statement on Form S-3 of HEI (Registration No. 33-58820) filed on February 12, 1996 in connection with the sale of Medium-Term Notes, Series B.
60
EXHIBIT NO. DESCRIPTION - ----------- ----------- 4.10 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). 4.11 Composite conformed copy of the Note Purchase Agreement dated as of December 16, 1991 among HEI and the Purchasers named therein (Exhibit 4.6 to HEI's Annual Report on Form 10-K for the fiscal year ended December 31, 1991, File No. 1-8503). 10.1 PUC Order Nos. 7070, 7153, 7203 and 7256 in Docket No. 4337, including copy of "Conditions for the Merger and Corporate Restructuring of Hawaiian Electric Company, Inc." dated September 23, 1982 (Exhibit 10 to Amendment No. 1 to Form U-1). 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 Executive's 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 Nonemployee Director Retirement Plan, effective as of October 1, 1989 (Exhibit 10.15 to HEI's Annual Report on Form 10-K for the fiscal year ended December 31, 1989, File No. 1-8503).
61
EXHIBIT NO. DESCRIPTION - ----------- ----------- 10.12 HEI 1990 Nonemployee Director Stock Plan (Exhibit 10(a) to HEI's Quarterly Report on Form 10-Q for the quarter ended September 30, 1990, File No. 1-8503). 10.13 HEI Nonemployee Directors' Deferred Compensation Plan (Exhibit 10.14 to HEI's Annual Report on Form 10-K for the fiscal year ended December 31, 1990, File No. 1-8503). 10.14 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 Settlement Agreement and General Release made and entered into on February 10, 1994, by and between the Insurance Commissioner as Rehabilitator/Liquidator, HIG and its subsidiaries, the Hawaii Insurance Guaranty Association, HEI, HEIDI and others. (Exhibit 10.20 to HEI's Annual Report on Form 10-K for the fiscal year ended December 31, 1993, File No. 1-8503). *11 Computation of Earnings per Share of Common Stock. Filed herein as page 67. *12 Computation of Ratio of Earnings to Fixed Charges. Filed herein as pages 68 and 69. 13 Pages 25 to 62 of HEI's 1995 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 1995 Annual Report to Stockholders is to be deemed filed as part of this Form 10-K Annual Report) (Exhibit 13 to HEI's Current Report on Form 8-K dated February 21, 1996, File No. 1-8503). *21 Subsidiaries of HEI. Filed herein as page 71. *23 Consent of Independent Auditors. Filed herein as page 73. *27.1 HEI and subsidiaries financial data schedule, December 31, 1995 and year ended December 31, 1995. HECO: - ----- 3(i).1 HECO's Certificate of Amendment of Articles of Incorporation (filed June 30, 1987) (Exhibit 3.1 to HECO's Annual Report on Form 10-K for the fiscal year ended December 31, 1988, File No. 1-4955). 3(i).2 Statement of Issuance of Shares of Preferred or Special Classes in Series for HECO Series R Preferred Stock filed December 15, 1989 (Exhibit 3.1(a) to HECO's Annual Report on Form 10-K for the fiscal year ended December 31, 1989, File No. 1-4955). 3(i).3 Articles of Amendment to HECO's Amended Articles of Incorporation filed December 21, 1989 (Exhibit 3.1(b) to HECO's Annual Report on Form 10-K for the fiscal year ended December 31, 1989, File No 1-4955). 3(ii) HECO's By-Laws (Exhibit 3.2 to HECO's Annual Report on Form 10-K for the fiscal year ended December 31, 1988, File No. 1-4955). 4.1 Agreement to provide the SEC with instruments which define the rights of holders of certain long-term debt of HECO, HELCO and MECO (Exhibit 4 to HECO's Annual Report on Form 10-K for the fiscal year ended December 31, 1988, File No. 1-4955). 4.2 Indenture dated as of December 1, 1993 between HECO and The Bank of New York, as Trustee (Exhibit 4(a) to Registration No. 33- 51025).
62
EXHIBIT NO. DESCRIPTION - ----------- ----------- 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). 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).
63
EXHIBIT NO. DESCRIPTION - ----------- ----------- 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 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 Amended and Restated Power Purchase Agreement between Hilo Coast Processing Company and HELCO dated March 24, 1995 (Exhibit 10 to HECO's Quarterly Report on Form 10-Q for the quarter ended March 31, 1995, File No. 1-4955). 10.4 Agreement between MECO and Hawaiian Commercial & Sugar Company pursuant to letters dated November 29, 1988 and November 1, 1988 (Exhibit 10.8 to HECO's Annual Report on Form 10-K for the fiscal year ended December 31, 1988, File No. 1-4955). 10.4(a) Amended and Restated Power Purchase Agreement by and between A&B- Hawaii, Inc., through its division, Hawaiian Commercial & Sugar Company, and MECO, dated November 30, 1989 (Exhibit 10(e) to HECO's Quarterly Report on Form 10-Q for the quarter ended September 30, 1990, File No. 1-4955). 10.4(b) First Amendment to Amended and Restated Power Purchase Agreement by and between A&B-Hawaii, Inc., through its division, Hawaiian Commercial & Sugar Company, and MECO, dated November 1, 1990, amending the Amended and Restated Power Purchase Agreement dated November 30, 1989 (Exhibit 10(f) to HECO's Quarterly Report on Form 10-Q for the quarter ended September 30, 1990, File No. 1- 4955). 10.5 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). *10.5(b) Performance Agreement and Fourth Amendment, dated February 12, 1996, to the Purchase Power Contract dated March 24, 1986 as Amended between HELCO and Puna Geothermal Venture. 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).
64
EXHIBIT NO. DESCRIPTION - ----------- ----------- 10.6(a) Firm Capacity Amendment, dated April 8, 1991, to Purchase Power Contract, dated March 10, 1986, by and between HECO and the City & County of Honolulu (Exhibit 10 to HECO's Quarterly Report on Form 10-Q for the quarter ended March 31, 1991, File No. 1-4955). 10.7 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 as of November 20, 1995. *10.9 Inter-Island Industrial Fuel Oil and Diesel Fuel Contract by and between CUSA and HECO, MECO, HELCO, HTB and YB dated as of November 20, 1995. *10.10 Facilities and Operating Contract by and between CUSA and HECO dated as of November 20, 1995. *10.11 Low Sulfur Fuel Oil Supply Contract between BHP and HECO dated December 5, 1995. *10.12 Inter-Island Industrial Fuel Oil and Diesel Fuel Oil Contract by and between BHP and HECO, MECO and HELCO dated December 5, 1995. 10.13 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). 10.14 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). *10.14(a) Extension, dated December 18, 1995, of the contract of private carriage by and between HITI and HELCO dated November 10, 1993. 10.15 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). *10.15(a) Extension, dated December 18, 1995, of the contract of private carriage by and between HITI and MECO dated November 12, 1993. 10.16 HECO Nonemployee Directors' Deferred Compensation Plan (Exhibit 10.16 to HECO's Annual Report on Form 10-K for the fiscal year ended December 31, 1990, File No. 1-4955). 10.17 HEI and HECO Executives' Deferred Compensation Agreement. The agreement pertains to and is substantially identical for all the HEI and HECO executive officers (Exhibit 10.15 to HEI's Annual Report on Form 10-K for the fiscal year ended December 31, 1991, File No. 1-8503). *11 Computation of Earnings Per Share of Common Stock. See note on page 2 of HECO's 1995 Annual Report to Stockholder attached as HECO Exhibit 13 hereto. *12 Computation of Ratio of Earnings to Fixed Charges. Filed herein as page 70.
65
EXHIBIT NO. DESCRIPTION - ----------- ----------- *13 Pages 2 to 31 and 33 of HECO's 1995 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 1995 Annual Report to Stockholder is to be deemed filed as part of this Form 10-K Annual Report). *21 Subsidiaries of HECO. Filed herein as page 72. *27.2 HECO and subsidiaries financial data schedule, December 31, 1995 and year ended December 31, 1995. *99 Reconciliation of electric utility operating income per HEI and HECO Consolidated Statements of Income. Filed herein as page 74.
66 HEI Exhibit 11 Hawaiian Electric Industries, Inc. COMPUTATION OF EARNINGS PER SHARE OF COMMON STOCK Years ended December 31, 1995, 1994, 1993, 1992 and 1991
(in thousands, except per share amounts) 1995 1994 1993 1992 1991 - ---------------------------------------------------------------------------------------------- NET INCOME (LOSS) Continuing operations.................. $77,493 $73,030 $ 61,684 $ 61,715 $55,620 Discontinued operations................ -- -- (13,025) (73,297) (794) ------- ------- -------- -------- ------- $77,493 $73,030 $ 48,659 $(11,582) $54,826 ======= ======= ======== ======== ======= WEIGHTED AVERAGE NUMBER OF COMMON SHARES OUTSTANDING.................... 29,187 28,137 25,938 24,275 22,882 ======= ======= ======== ======== ======= EARNINGS (LOSS) PER COMMON SHARE Continuing operations.................. $ 2.66 $ 2.60 $ 2.38 $ 2.54 $ 2.43 Discontinued operations................ -- -- (0.50) (3.02) (0.03) ------- ------- -------- -------- ------- $ 2.66 $ 2.60 $ 1.88 $ (0.48) $ 2.40 ======= ======= ======== ======== =======
Note: The dilutive effect of stock options is not material. 67 HEI Exhibit 12 (page 1 of 2) Hawaiian Electric Industries, Inc. COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES Years ended December 31, 1995, 1994, 1993, 1992 and 1991
1995 1994 1993 ------------------------ -------------------- ------------------- (dollars in thousands) (1) (2) (1) (2) (1) (2) --------------------------------------------------------------------------------------------------------- FIXED CHARGES Total interest charges The Company (3)................. $117,494 $206,790 $ 82,306 $158,815 $ 68,254 $145,905 Proportionate share of fifty-percent-owned persons... 867 867 539 539 564 564 Interest component of rentals.... 3,857 3,857 3,819 3,819 3,944 3,944 Pretax preferred stock dividend requirements of subsidiaries.... 11,433 11,433 11,899 11,899 11,018 11,018 -------- -------- -------- -------- -------- -------- TOTAL FIXED CHARGES.............. $133,651 $222,947 $ 98,563 $175,072 $ 83,780 $161,431 ======== ======== ======== ======== ======== ======== EARNINGS Pretax income from continuing operations...................... $133,233 $133,233 $126,049 $126,049 $108,770 $108,770 Fixed charges, as shown.......... 133,651 222,947 98,563 175,072 83,780 161,431 Interest capitalized The Company..................... (6,337) (6,337) (4,924) (4,924) (3,881) (3,881) Proportionate share of fifty-percent-owned persons.... (867) (867) (539) (539) (408) (408) -------- -------- -------- -------- -------- -------- EARNINGS AVAILABLE FOR FIXED CHARGES......................... $259,680 $348,976 $219,149 $295,658 $188,261 $265,912 ======== ======== ======== ======== ======== ======== RATIO OF EARNINGS TO FIXED CHARGES 1.94 1.57 2.22 1.69 2.25 1.65 ======== ======== ======== ======== ======== ========
(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. 68 HEI Exhibit 12 (page 2 of 2) Hawaiian Electric Industries, Inc. COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES Years ended December 31, 1995, 1994, 1993, 1992 and 1991--Continued
1992 1991 -------------------- ------------------------ (dollars in thousands) (1) (2) (1) (2) -------------------------------------------------------------------------------------- FIXED CHARGES Total interest charges The Company (3)................... $ 67,559 $161,756 $ 69,957 $168,691 Proportionate share of fifty-percent-owned persons..... 1,051 1,051 1,875 1,875 Interest component of rentals...... 3,254 3,254 2,231 2,231 Pretax preferred stock dividend requirements of subsidiaries...... 9,606 9,606 10,449 10,449 -------- -------- -------- -------- TOTAL FIXED CHARGES................ $ 81,470 $175,667 $ 84,512 $183,246 ======== ======== ======== ======== EARNINGS Pretax income from continuing operations........................ $ 91,244 $ 91,244 $ 87,953 $ 87,953 Undistributed earnings from less than fifty-percent-owned persons.. (244) (244) (278) (278) Fixed charges, as shown............ 81,470 175,667 84,512 183,246 Interest capitalized The Company....................... (2,104) (2,104) (1,945) (1,945) Proportionate share of fifty-percent-owned persons...... (803) (803) (1,875) (1,875) -------- -------- -------- -------- EARNINGS AVAILABLE FOR FIXED CHARGES........................... $169,563 $263,760 $168,367 $267,101 ======== ======== ======== ======== RATIO OF EARNINGS TO FIXED CHARGES. 2.08 1.50 1.99 1.46 ======== ======== ======== ========
(1) Excluding interest on ASB deposits. (2) Including interest on ASB deposits. (3) Total interest charges exclude interest on nonrecourse debt from leveraged leases which is not included in interest expense in HEI's consolidated statements of income. 69 HECO Exhibit 12 Hawaiian Electric Company, Inc. COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES Years ended December 31, 1995, 1994, 1993, 1992 and 1991
(dollars in thousands) 1995 1994 1993 1992 1991 - --------------------------------------------------------------------------------------------------- FIXED CHARGES Total interest charges................. $ 44,377 $ 37,340 $ 35,287 $ 33,011 $ 33,248 Interest component of rentals.......... 672 808 970 1,070 1,130 Pretax preferred stock dividend requirements of subsidiaries......... 4,494 4,651 3,425 3,117 3,409 ----------------------------------------------------------- TOTAL FIXED CHARGES.................... $ 49,543 $ 42,799 $ 39,682 $ 37,198 $ 37,787 =========================================================== EARNINGS Income before preferred stock dividends of HECO.................... $ 77,023 $ 65,961 $ 56,126 $ 53,678 $ 46,210 Fixed charges, as shown................ 49,543 42,799 39,682 37,198 37,787 Income taxes (see note below).......... 50,198 43,588 36,897 23,843 23,816 Allowance for borrowed funds used during construction.................. (5,112) (4,043) (3,869) (2,095) (1,307) ----------------------------------------------------------- EARNINGS AVAILABLE FOR FIXED CHARGES... $171,652 $148,305 $128,836 $112,624 $106,506 =========================================================== RATIO OF EARNINGS TO FIXED CHARGES..... 3.46 3.47 3.25 3.03 2.82 =========================================================== NOTE: Income taxes is comprised of the following Income tax expense relating to operating income for regulatory purposes.......................... $ 50,719 $ 43,820 $ 37,007 $ 26,254 $ 24,137 Income tax benefit relating to nonoperating loss................. (521) (232) (110) (2,411) (321) ----------------------------------------------------------- $ 50,198 $ 43,588 $ 36,897 $ 23,843 $ 23,816 ===========================================================
70 HEI Exhibit 21 Hawaiian Electric Industries, Inc. SUBSIDIARIES OF THE REGISTRANT The following is a list of all subsidiary corporations of the registrant as of March 19, 1996:
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 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, F.S.B. and its subsidiaries, American State of Hawaii (except Savings Investment Services Corp., ASB American Savings Bank, Service Corporation, AdCommunications, Inc. F.S.B., which is federally and Associated Mortgage, Inc. ............... chartered) Pacific Energy Conservation Services, Inc. ... State of Hawaii HEI Power Corp. .............................. State of Hawaii
71 HECO Exhibit 21 Hawaiian Electric Company, Inc. SUBSIDIARIES OF THE REGISTRANT The following is a list of all subsidiary corporations of the registrant as of March 19, 1996:
Name Place of incorporation - -------------------------------------------------------------------------------- Maui Electric Company, Limited................ State of Hawaii Hawaii Electric Light Company, Inc. .......... State of Hawaii
72 [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, 1996, relating to the consolidated balance sheets of Hawaiian Electric Industries, Inc. and subsidiaries as of December 31, 1995 and 1994, 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, 1995, which report is incorporated by reference in the 1995 annual report on Form 10-K of Hawaiian Electric Industries, Inc. We also consent to incorporation by reference of our report dated January 25, 1996 relating to the financial statement schedules of Hawaiian Electric Industries, Inc. in the aforementioned 1995 annual report on Form 10-K, which report is included in said Form 10-K. /s/ KPMG Peat Marwick LLP Honolulu, Hawaii March 19, 1996 73 HECO Exhibit 99 Hawaiian Electric Company, Inc. RECONCILIATION OF ELECTRIC UTILITY OPERATING INCOME PER HEI AND HECO CONSOLIDATED STATEMENTS OF INCOME Years ended December 31, ----------------------------------- (in thousands) 1995 1994 1993 - --------------------------------------------------------------------------- [S] [C] [C] [C] Operating income from regulated and nonregulated activities before income taxes (per HEI Consolidated Statements of Income).... $159,043 $136,628 $119,565 Deduct: Income taxes on regulated activities.. (50,719) (43,820) (37,007) Revenues from nonregulated activities. (6,732) (6,411) (5,100) Add: Expenses from nonregulated activities. 1,130 915 627 ----------------------------------- Operating income from regulated activities after income taxes (per HECO Consolidated Statements of Income)............................ $102,722 $ 87,312 $ 78,085 =================================== 74 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 (Principal Financial Officer of HEI) of HECO (Principal Financial Officer of HECO) Date: March 19, 1996 Date: March 19, 1996 Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrants and in the capacities indicated on March 19, 1996. The signature of each of the undersigned shall be deemed to relate only to matters having reference to the above-named companies and any subsidiaries thereof. SIGNATURE TITLE - ------------------------ -------------------------------------------- /s/ Robert F. Clarke President and Director of HEI - ------------------------ Chairman of the Board of Directors of HECO Robert F. Clarke (Chief Executive Officer of HEI) /s/ T. Michael May Director of HEI - ------------------------ President and Director of HECO T. Michael May (Chief Executive Officer of HECO) /s/ Robert F. Mougeot Financial Vice President and - ------------------------ Chief Financial Officer of HEI Robert F. Mougeot (Principal Financial Officer of HEI) /s/ Curtis Y. Harada Controller of HEI - ------------------------ (Principal Accounting Officer of HEI) Curtis Y. Harada /s/ Paul Oyer Financial Vice President, Treasurer and - ------------------------ Director of HECO Paul A. Oyer (Principal Financial Officer of HECO) 75 SIGNATURES (CONTINUED) SIGNATURE TITLE - ------------------------ ----------------------------------------- /s/ Ernest T. Shiraki Controller of HECO - ------------------------ (Principal Accounting Officer of HECO) Ernest T. Shiraki /s/ Don E. Carroll Director of HEI - ------------------------ Don E. Carroll /s/ Edwin L. Carter Director of HEI and HECO - ------------------------ Edwin L. Carter /s/ John D. Field Director of HEI - ------------------------ John D. Field /s/ Richard Henderson Director of HEI and HECO - ------------------------ Richard Henderson /s/ Mildred D. Kosaki Director of HECO - ------------------------ Mildred D. Kosaki Director of HEI - ------------------------ Victor Hao Li /s/ Bill D. Mills Director of HEI - ------------------------ Bill D. Mills Director of HEI - ------------------------ A. Maurice Myers /s/ Ruth M. Ono Director of HEI - ------------------------ Ruth M. Ono 76 SIGNATURES (CONTINUED) ---------------------- SIGNATURE TITLE - -------------------------- ----------------------------- /s/ Diane J. Plotts Director of HEI and HECO - -------------------------- Diane J. Plotts /s/ James K. Scott Director of HEI - -------------------------- James K. Scott Director of HEI - -------------------------- Oswald K. Stender /s/ Kelvin H. Taketa Director of HEI - -------------------------- Kelvin H. Taketa /s/ Jeffrey N. Watanabe Director of HEI - -------------------------- Jeffrey N. Watanabe /s/ Paul C. Yuen Director of HECO - -------------------------- Paul C. Yuen 77 EX-4.8 2 PRICING SUPPLEMENT NO. 11 HEI Exhibit 4.8 Pricing Supplement No. 11 Filing under Rule 424(b)(3) Dated November 30, 1995 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: $30,000,000 Floating Rate Notes: N/A Interest Rate (if fixed rate): 6.66% Base Rate: N/A Stated Maturity Date: December 5, 2005 Commercial Paper Rate Issue price (as a percentage of Prime Rate principal amount): 100% LIBOR Selling Agent's commission (%): 0.625% Treasury Rate Purchasing Agent's discount CD Rate or commission (%): N/A Federal Funds Rate Net proceeds to the Company (%): 99.375% Other: Settlement date and time (original Index Maturity: N/A issue date): December 5, 1995 Spread: N/A Initial Redemption Date (if any): N/A Spread Multiplier: N/A Initial Redemption Percentage: N/A Maximum Interest Rate: N/A Annual Redemption Minimum Interest Rate: N/A Percentage Reduction: N/A Initial Interest Rate: N/A Optional Repayment Dates: N/A Interest Reset Period: N/A Currency of Denomination: U.S. Interest Determination Date(s): N/A Currency of Payment: U.S. Calculation Date(s): N/A Minimum Authorized Interest Payment Period: N/A Denominations: $1,000 Regular Record Date(s): N/A Additional Terms: N/A Calculation Agent: 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 its Medium-Term Notes, Series B, covered by this Pricing Supplement will be used by HEI to redeem its Medium-Term Notes, Series A (the "Series A Notes"), to retire commercial paper, to make temporary investments pending such redemptions and retirements and for other general corporate purposes. The aggregate principal amount of the Series A Notes is $20 million and they bear interest at rates per annum ranging from 9.70% to 9.90% and have maturity dates ranging from December 7, 1998 to December 30, 1998. As of November 30, 1995, HEI's commercial paper outstanding totaled approximately $51.2 million. Such commercial paper bore interest at prevailing market rates and had original maturities varying between 1 and 45 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 $102,000,000. "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-4.9 3 PRICING SUPPLEMENT NO. 12 HEI Exhibit 4.9 Pricing Supplement No. 12 Filing under Rule 424(b)(3) Dated February 9, 1996 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: $10,000,000 Floating Rate Notes: N/A Interest Rate (if fixed rate): 6.545% Base Rate: N/A Stated Maturity Date: February 14, 2006 Commercial Paper Rate Issue price (as a percentage of Prime Rate principal amount): 100% LIBOR Selling Agent's commission (%): 0.625% Treasury Rate Purchasing Agent's discount CD Rate or commission (%): N/A Federal Funds Rate Net proceeds to the Company (%): 99.375% Other: Settlement date and time (original Index Maturity: N/A issue date): February 14, 1996 Spread: N/A Initial Redemption Date (if any): N/A Spread Multiplier: N/A Initial Redemption Percentage: N/A Maximum Interest Rate: N/A Annual Redemption Minimum Interest Rate: N/A Percentage Reduction: N/A Initial Interest Rate: N/A Optional Repayment Dates: N/A Interest Reset Period: N/A Currency of Denomination: U.S. Interest Determination Date(s): N/A Currency of Payment: U.S. Calculation Date(s): N/A Minimum Authorized Interest Payment Period: N/A Denominations: $1,000 Regular Record Date(s): N/A Additional Terms: N/A Calculation Agent: 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 its Medium-Term Notes, Series B, covered by this Pricing Supplement will be used by HEI to repay maturing notes, to retire commercial paper, to make temporary investments pending such repayments and retirements and for other general corporate purposes. The aggregate principal amount of the notes that will be repaid is $10 million, bears interest at 8.92% and matures on February 15, 1996. As of February 9, 1996, HEI's commercial paper outstanding totaled approximately $50 million. Such commercial paper bore interest at prevailing market rates and had original maturities varying between 1 and 45 days. As of the date of this Pricing Supplement, the aggregate initial public offering price of the Series B Notes which have been sold (including the Series B Notes to which this Pricing Supplement relates) is $112,000,000. "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-10.5B 4 PERFORMANCE AGREEMENT HECO Exhibit 10.5(b) PERFORMANCE AGREEMENT AND FOURTH AMENDMENT TO THE PURCHASE POWER CONTRACT DATED MARCH 24, 1986 AS AMENDED THIS PERFORMANCE AGREEMENT AND FOURTH AMENDMENT ("Performance Agreement" or "Fourth Amendment") is made as of this 12th day of February 1996 ("Execution Date"), by and between HAWAII ELECTRIC LIGHT COMPANY, INC. (the "Company" or "HELCO"), and PUNA GEOTHERMAL VENTURE (the "Seller" or "PGV"). WHEREAS, the Company is an operating electric public utility on the Island of Hawaii subject to the Hawaii Public Utilities Law (Hawaii Revised Statutes, Chapter 269) and the rules and regulations of the Hawaii Public Utilities Commission (the "PUC" or "Commission"); WHEREAS, the Company has entered into a Purchase Power Contract for Unscheduled Energy Made Available From a Qualifying Facility (the "Unscheduled Energy Contract"), dated March 24, 1986, with Thermal Power Company ("Thermal Power") which was approved by the PUC by Decision and Order No. 8692, dated March 25, 1986, in Docket No. 5525; WHEREAS, Thermal Power assigned the Unscheduled Energy Contract to AMOR VIII and AMOR VIII assigned the Unscheduled Energy Contract to PGV; WHEREAS, HELCO and PGV have entered into that certain Firm Capacity Amendment to Purchase Power Contract, dated July 28, 1989 ("Firm Capacity Amendment"), which amended the Unscheduled Energy Contract, and was approved by the PUC by Decision and Order No. 10519, dated February 14, 1990, in Docket No. 6498; WHEREAS, by Amendment to Purchase Power Contract, As Amended ("Second Amendment"), HELCO and PGV amended the Unscheduled Energy Contract and Firm Capacity Amendment; WHEREAS, a number of issues arose between the Company and Seller which they settled in a Settlement Agreement dated March 7, 1995 ("Settlement Agreement"); WHEREAS, as part of the Settlement Agreement, the Company and Seller agreed to a third amendment ("Third Amendment") to the Unscheduled Energy Contract, Firm Capacity Amendment, and the Second Amendment (the Unscheduled Energy Contract as amended by the Firm Capacity Amendment, the Second Amendment, and the Third Amendment and as may be amended from time to time, is referred to as the "Amended PPC") (The Third Amendment was approved on an interim basis by the PUC by Interim Decision and Order No. 13876, dated May 5, 1995, in Docket No. 95-0074); WHEREAS, Seller presently provides to the Company, and the Company presently purchases from Seller, twenty-five (25) megawatts ("MW") of firm capacity from Seller's Facility pursuant to the Amended PPC; WHEREAS, the Seller desires to sell to the Company an additional five (5) MW of firm capacity generated by the Facility above the twenty-five (25) MW of firm capacity presently supplied, and the Company wishes to purchase such Energy from the Seller, upon the terms and conditions set forth herein; WHEREAS, the Seller's Facility will continue to be throughout the term of this Performance Agreement either (1) a qualifying, small power production facility under Subchapter 2 of the PUC's Standards for Small Power Production and Cogeneration in the State of Hawaii, Chapter 74 of Title 6 of the State's Administrative Rules, or (2) a "non-fossil fuel producer" within the meaning of Section 269-27.2, Hawaii Revised Statutes; NOW, THEREFORE, in consideration of the premises and the respective promises herein, the Company and the Seller hereby agree as follows: I. THE PROJECT A. Enhancement and Operation of Seller's Facility 1. Seller agrees to provide the Company with five (5) megawatts of firm capacity in addition to the twenty-five (25) megawatts of firm capacity currently being provided pursuant to the Amended PPC (for a total of thirty megawatts of firm capacity) and 18,600 kvar of reactive under this Agreement. The reactive shall be in proportion to power in the range of 0.85 lagging to 1.0 unity power factor and shall be dispatched by the Company to keep the Seller's generator within the limits of plus or minus 5% of the generator voltage. 2. Attached as Exhibit A, is a description of the proposed enhancements (the "Project") to Seller's Facility to enable Seller to provide an additional five (5) MW of firm capacity (a total of thirty megawatts of firm capacity) and 18,600 kvar of reactive. Seller's Facility as modified by the Project is referred to hereinafter as "Seller's Facility". 3. Seller shall be responsible for all costs associated in any way with Seller's Facility and/or the Project. 4. Seller shall be responsible for obtaining all permits, licenses, approvals and any other requirements 2 reasonably required for Seller to provide the additional five (5) megawatts of firm capacity pursuant to this Performance Agreement. 5. Within sixty (60) days of the Execution Date, a final (1) a single-line diagram of Seller's Facility, (2) relay list, and (3) trip scheme, all as may be modified by the Project, shall be prepared and, subject to the review and acceptance thereof by both parties, signed and attached to Attachment B To The Fourth Amendment as Exhibit 1 to Appendix B and made a part thereof. Such single line diagram shall expressly identify the final location on the Point of Interconnection. 6. Within sixty (60) days of the Execution Date, the design and specifications for protective equipment to protect HELCO's system, as may be modified by the Project, shall be prepared and, subject to the review and acceptance thereof by both parties, signed and attached to Amended PPC and made a part thereof. 7. Attached hereto as Exhibit B is a project schedule relating to the Project. 8. Prior to the Commercial Operation Date (as defined below) of the Seller's Facility to produce the additional five (5) megawatts of firm capacity (for a total of thirty (30) megawatts of firm capacity), Seller shall inform HELCO on the third business day of every month of the status of the Seller's Project as of the last day of the prior month, including but not limited to, any revisions to the date of installation, the date of operation in parallel with the Company's System, and the anticipated Commercial Operation Date (as defined below) of the Seller's Facility for the additional five (5) megawatts of Firm Capacity. B. Acceptance Tests. The Company shall conduct acceptance tests as part of the determination of when Firm Capacity payments related to the additional five (5) megawatts of firm capacity should begin. 1. Upon completion and testing of Seller's Facility as modified by the Project by Seller for the additional five (5) megawatts of firm capacity, Seller shall give HELCO seven (7) days prior notice of the time and date when Seller will be ready to begin the 100 continuous hours acceptance test for the additional five (5) megawatts of firm capacity. 2. Upon the agreed upon time and date, the Company shall conduct the 100 continuous hours acceptance test for the additional five (5) megawatts of firm capacity ("Acceptance Test"). At a minimum, Seller must be able to deliver to the 3 Company l00% of the Seller's Firm Capacity Obligation (30,000 kw of capacity and 18,600 kvar of reactive) for 100 consecutive hours under Company's Dispatch (as defined in Attachment E to the Fourth Amendment). The Acceptance Test may be started and/or completed prior to the Effective Date (as defined below) of this Performance Agreement. 3. As the last step of the Acceptance Test, Seller shall ramp Seller's Facility down to simulate a sudden loss of system load. Seller shall decrease power output from thirty (30) megawatts to ten (10) megawatts at an average ramp rate of one (1) megawatt per minute. Seller shall ramp Seller's Facility up in power output to simulate an increase in demand on the Facility. Seller shall increase power output from eighteen and one-half (18.5) megawatts to thirty (30) megawatts at an average ramp rate of one (1) MW/minute. In addition, during the Acceptance Test, the Seller shall demonstrate the ability to adjust kvars from 1,500 to 18,600. 4. The Seller's performance throughout the Acceptance Test shall be monitored remotely through the SCADA system and recorded. In addition, the Seller shall also allow HELCO representatives to be stationed at Seller's Facility to verify all data and ensure that all operational changes made at the request of HELCO were done within the bounds of good engineering and operating practices. 5. Upon successful completion of the Acceptance Test, HELCO will notify Seller in writing of the acceptance of the additional 5 MW of firm capacity and Seller will immediately acknowledge in writing such acceptance by HELCO. The date on which Seller's Facility is deemed to be capable of reliable delivery of the additional five (5) megawatts of firm capacity pursuant to this Performance Agreement after the successful completion of the Acceptance Test is referred to herein as the "Commercial Operation Date". II. PROJECT COMPLETION A. Commercial Operation Date. The Commercial Operation Date shall occur prior to or within six (6) months after the later of PUC Approval (as defined below in Section IV.A) or Bank's Consent (as defined in Section IV.B. below). B. Penalties For Not Meeting Commercial Operation Date Deadline. If the Commercial Operation Date for the additional five (5) megawatts does not occur within nine (9) months of the later of the date of PUC Approval or Bank's Consent (the "Commercial Operation Date Deadline"), then: 1. Seller shall pay HELCO one cent ($0.01) per on-peak hour for each kilowatt deficiency until Seller 4 satisfies the Acceptance Test. Kilowatt deficiency is the difference in kilowatts at any given time between the 5,000 kilowatts PGV is required to produce hereunder and the actual amount produced by PGV pursuant to this Performance Agreement. 2. Seller shall pay to HELCO late charges in the amount of $1,380.00 per day for each day commencing on the Commercial Operation Date Deadline until the Commercial Operation Date. 3. Any penalties incurred under this Section II.B. shall cease to accrue one year after the Commercial Operation Date Deadline. III. INTERCONNECTION FACILITIES A. The parties believe that there are no additional interconnection facilities required for HELCO's system to accept the additional five (5) megawatts of Energy to be provided by Seller pursuant to this Performance Agreement. B. If it is later determined that additional interconnection facilities are needed, then Seller shall be responsible for cost and construction of all interconnection facilities required to deliver the additional 5 MW of firm capacity from Seller's Facility to the Company's System. C. Seller shall be responsible for one hundred percent (100%) of the maintenance costs associated with any upgrade of existing interconnection facilities. IV. APPROVALS REQUIRED PRIOR TO EFFECTIVE DATE A. Public Utilities Commission Approval. 1. The parties will use their best efforts, including without limitation, participation in any PUC proceeding at the request of the other party, to obtain an appropriate decision and order satisfactory to the Company ("PUC Approval") that approves this Agreement and authorizes the Company to include payments made to the Seller hereunder in the Company's Energy Cost Adjustment Clause pursuant to Rule 6-60-6, Standards For Electric and Gas Utility Service, Title 6, Chapter 60, of the Hawaii Administrative Rules, and in the Company's Firm Capacity Surcharge pursuant to Section 269-27.2(d), Hawaii Revised Statutes, or in the Company's base rates pursuant to Section 269-16(b), Hawaii Revised Statutes, whichever occurs first. 2. The Company shall be responsible for submitting the application for PUC Approval and for all of the Company's costs associated thereto. Seller shall cooperate with the 5 Company in any reasonable manner to assist the Company in the application for PUC Approval and Seller shall be responsible for its costs in providing such cooperation and assistance. 3. Notwithstanding anything in this Performance Agreement to the contrary, in the event that the Commission denies the Company's application to include all payments to Seller hereunder in the Company's Energy Cost Adjustment Clause pursuant to Rule 6-60-6, Standards For Electric and Gas Utility Service, Title 6, Chapter 60, of the Hawaii Administrative Rules, and the Company's Firm Capacity Surcharge pursuant to Section 269-27.2(d), Hawaii Revised Statutes, or in the Company's base rates pursuant to Section 269-16(b), Hawaii Revised Statutes, then this Fourth Amendment, at HELCO's option and in HELCO's sole discretion, shall be null and void and of no further force and effect. HELCO shall have thirty (30) days from the date the PUC decision and order denying the Company's application becomes final and non-appealable to terminate this Agreement pursuant to this Section IV.A. B. Consent of Bank 1. Seller, at its own expense, shall use its best efforts to obtain from Credit Suisse, a bank organized and existing under the laws of Switzerland, as Agent and Collateral Agent for the benefit of its own account and such other financial institutions as may participate in the funding and other risks associated with the Facility (the "Bank"), a Consent of the Bank to this Fourth Amendment, related documents, and the transactions and obligations of Seller herein, substantially in the form attached hereto as Exhibit C ("Bank's Consent"). 2. Notwithstanding anything in this Performance Agreement to the contrary, in the event that the Bank does not execute the Bank's Consent, then this Fourth Amendment shall be null and void and of no further force and effect. V. EFFECTIVE DATE/CONDITIONS PRECEDENT A. Effective Date. The obligations of the parties under Section IV and Section VI of this Performance Agreement shall become effective on the Execution Date. The remaining provisions of this Performance Agreement (excluding Section IV and Section VI) shall not become effective until the later of (1) the date of obtaining PUC Approval, or (2) the date of obtaining the Bank's Consent (the "Effective Date"). B. Conditions Precedent. In addition to Section V.A., except for the obligations of the parties under Section IV and Section VI of this Performance Agreement, in no event shall the 6 Company be obligated under this Performance Agreement until the fulfillment of the following conditions: 1. The Company obtains PUC Approval as specified in Section IV.A. above; 2. Seller shall obtain and deliver to HELCO Bank's Consent, substantially in the form attached hereto as Exhibit C; 3. Seller successfully completes to HELCO's satisfaction the Acceptance Test described in Section I.B.; 4. Seller fulfills all of its In-Kind Obligations (as defined in the Settlement Agreement) under the Settlement Agreement; and 5. Each party shall have delivered or cause to be delivered to the other party, such documents which may be reasonably required pursuant to this Performance Agreement. C. Term. This Performance Agreement shall remain in effect for the same period of time as the Amended PPC, unless otherwise provided in this Performance Agreement. VI. TERMINATION/DEFAULT A. This Performance Agreement will terminate: 1. if the Bank's Consent is not received prior to June 1, 1996; 2. at HELCO's option, to be exercised by written notice to Seller by June 15, 1997, if PUC Approval satisfactory to HELCO is not received prior to May 1, 1997; 3. at HELCO's option, to be exercised by written notice to Seller, pursuant to Section IV.A.3.; 4. at the option of a non-defaulting party to be exercised by written notice to the other party if the other party commits any Event of Default and fails to cure such default in accordance with Sections VI.D. or VI.E. below; or 5. upon the termination of the Amended PPC. B. The occurrence of any of the following events at anytime during this Agreement shall constitute an "Event of Default" under this Performance Agreement by the Company: 7 1. in the event of nonperformance by the Company of any material obligation under this Performance Agreement; 2. failure of the Company to pay any amounts due and payable under this Performance Agreement within sixty (60) days after receipt of invoice; 3. the Company shall (1) be dissolved, be adjudicated as bankrupt, or become subject to an order for relief under any bankruptcy law; (2) fail to pay, or admit in writing its inability to pay, its debts generally as they become due; (3) make an assignment for the benefit of creditors; (4) apply for, seek, consent to, or acquiesce in the appointment of a receiver, custodian, trustee, examiner, liquidator or similar official for itself or any substantial part of its property; (5) institute any proceedings seeking an order for relief or to adjudicate it as bankrupt or insolvent, or seeking dissolution, winding up, liquidation, reorganization, arrangement, adjustment or composition of it or its debts under any law relating to bankruptcy, insolvency, reorganization, or relief of debtors; or (6) take any action to authorize or effect any of the foregoing actions; 4. without the application, approval, or consent of the Company, a receiver, trustee, examiner, liquidator or similar official shall be appointed for the Company or any part of its property, or a proceeding described in Section VI.B.3. above shall be instituted against the Company and such appointment shall continue undischarged or such proceeding shall continue undismissed or unstayed for a period of 60 consecutive days or the Company shall fail to file timely and answer or other pleading denying the material allegations filed against it in any such proceeding; 5. as provided for in Appendix E of the Amended PPC. C. The occurrence of any one of the following events at anytime during this Performance Agreement shall constitute an "Event of Default" under this Performance Agreement by Seller: 1. if Seller has failed to (a) have the injection pumps (as defined in Exhibit A attached hereto) on-site within twenty-three (23) weeks after the later of PUC Approval or the Bank's Consent or (b) have the injection pumps installed within twenty-six (26) weeks after the later of PUC Approval or the Bank's Consent. 2. if Seller cannot satisfactorily complete the Acceptance Test described in Section I.B within twenty-one (21) months after the later of PUC Approval or the Bank's Consent; 8 3. if Seller cannot satisfactorily fulfill its In-Kind Obligations under the Settlement Agreement and related documents within twenty-one (21) months after the later of PUC Approval or the Bank's Consent, provided that, in the event that HELCO declines to take Energy from PGV pursuant to Section II.B.2.c. of the Settlement Agreement from the Effective Date of this Performance Agreement, then the twenty-one (21) month period shall be extended by adding one day to the twenty-one (21) month period for each one hundred (100) megawatthours ("mwh") (rounded to the nearest increment of 100 mwh) of Energy HELCO declines to accept under Section II.B.2.c. of the Settlement Agreement, provided further that, notwithstanding anything to the contrary, any Energy offered to HELCO by PGV above 30 MW per hour during on-peak periods and/or above 25 MW per hour during off-peak periods, and declined by HELCO, shall not be included in calculating any extension of the twenty-one (21) month period; 4. in the event of nonperformance by Seller of any material obligation in this Performance Agreement; 5. failure of Seller to pay any amounts due and payable under this Performance Agreement within sixty (60) days after receipt of invoice; 6. abandonment of the Project or the discontinuance by the Seller of services covered under this Performance Agreement for a period of twelve (12) consecutive months unless such discontinuance is caused by Force Majeure under Section VIII below or an Event of Default by the Company; 7. if Seller shall (1) be dissolved, be adjudicated as bankrupt, or become subject to an order for relief under any bankruptcy law; (2) fail to pay, or admit in writing its inability to pay, its debts generally as they become due; (3) make an assignment for the benefit of creditors other than the Bank; (4) apply for, seek, consent to, or acquiesce in the appointment of a receiver, custodian, trustee, examiner, liquidator or similar official for itself or any substantial part of its property; (5) institute any proceedings seeking an order for relief or to adjudicate it as bankrupt or insolvent, or seeking dissolution, winding up, liquidation, reorganization, arrangement, adjustment or composition of it or its debts under any law relating to bankruptcy, insolvency, reorganization, or relief of debtors; or (6) take any action to authorize or effect any of the foregoing actions; 8. without the application, approval, or consent of Seller, a receiver, trustee, examiner, liquidator or similar official shall be appointed for Seller or any part of its property, or a proceeding described in Section VI.C.7. above shall be instituted against Seller and such appointment shall 9 continue undischarged or such proceeding shall continue undismissed or unstayed for a period of 60 consecutive days or Seller shall fail to file timely and answer or other pleading denying the material allegations filed against it in any such proceeding; 9. the failure to keep in force and effect all permits, approvals, licenses, permits and the like, reasonably required for Seller to provide the additional five (5) megawatts of firm capacity under this Performance Agreement; 10. the failure to maintain qualification of Seller's Facility pursuant to Section IX.E; or 11. as provided for in Appendix E of the Amended PPC. D. If an Event of Default, other than failure to make any payment due and payable within sixty (60) days after receipt of invoice, by either party shall extend for a period of sixty days after receipt of written notice of such Event of Default from the non-defaulting party, then the non-defaulting party may, at its option, terminate this Performance Agreement by delivering written notice of such termination to the party in default and/or may institute such legal action or proceedings or resort to such other remedies as it deems necessary; provided, however, that the party not in default shall not terminate this Performance Agreement at the end of such sixty day period if the party in default has corrected or commenced appropriate steps to correct such default and is diligently prosecuting same to completion. Such termination shall be effective on the date of written notice of termination to the party in default and shall not prejudice any rights of the non-defaulting party. E. If the Event of Default is based on a party's failure to make any payment that is due and payable under this Performance Agreement, the party claiming such Event of Default shall give written notice to the non-paying party stating that such payment is deemed payable. The non-paying party shall have ten (10) days from the receipt of such notice to make the required payment and if payment is not made within such ten (10 day period, the non-defaulting party may terminate this Performance Agreement pursuant to written notice provided in accordance with Section VI.D. above. F. Rights And Obligations Of The Parties Upon Default. If this Performance Agreement is terminated pursuant to this Section VI, the parties shall have no further obligations to each other hereunder except for such obligations as have been incurred hereunder prior to such termination. 10 Notwithstanding the foregoing, in the event of default, the non-defaulting party may exercise whatever legal or equitable remedies may be available to it against the defaulting party. However, the parties further agree that in no event shall either party be liable to the other for lost profits. G. Interpretation of Amended PPC. In the event this Performance Agreement is terminated, but the Amended PPC is still in effect, then the Amended PPC shall be interpreted as if the amendments to the Amended PPC described in Section VII below were never effective. H. No Cross Default. A breach of or default under this Performance Agreement shall not constitute a breach of or default under the Amended PPC. No Event of Default under this Performance Agreement shall constitute an Event of Default under the Amended PPC unless such event is specifically enumerated as an Event of Default under the Amended PPC. VII. AMENDMENT OF THE AMENDED PPC A. Upon the fulfillment of the conditions precedent set forth in Sections V.A. and V.B. above, the Amended PPC shall be amended as follows: 1. Appendix A, Description Of Seller's Generation And Conversion Facilities, of the Amended PPC is deleted in its entirety and replaced by Attachment A, which is attached hereto and made a part hereof. 2. Appendix B, Facilities Owned By The Seller, of the Amended PPC is deleted in its entirety and replaced by Attachment B, which is attached hereto and made a part hereof. 3. Appendix C, Interconnection Facilities Owned By The Company, of the Amended PPC is deleted in its entirety and replaced by Attachment C, which is attached hereto and made a part hereof. 4. Appendix D, Power Purchases By Company, of the Amended PPC is deleted in its entirety and replaced by Attachment D, which is attached hereto and made a part hereof. 5. Appendix F, Definitions, of the Amended PPC is deleted in its entirety and replaced by Attachment E, which is attached hereto and made a part hereof. 6. Section 15, Force Majeure, of the Amended PPC is deleted in its entirety and replaced by Attachment F, which is attached hereto and made a part hereof. 11 B. Upon the fulfillment of the conditions precedent set forth in Section V.B. above and the amendment of the Amended PPC as specified in Section VII.A. above, HELCO shall begin to make Firm Capacity payments pursuant to Paragraph 3(d) of Appendix B and Paragraph B.2. of Appendix D of the Amended PPC as amended by this Performance Agreement. VIII. FORCE MAJEURE A. If either party shall be wholly or partially prevented from performing any of its obligations under this Performance Agreement by reason of an event of force majeure reasonably beyond its control and not attributable to its neglect, then and in any such event, such party shall be excused from whatever performance is prevented by such event to the extent so prevented, and such party shall not be liable for any damage or loss resulting therefrom. Events of force majeure shall include accidents, lightning, rain, earthquake, wind, wind- blown water, riots, fire, flood, invasion, insurrection, lava flow or volcanic activity, tidal wave, civil commotion, the order of any court, judge or civil authority, war, and any act of God or the public enemy or any other cause beyond the reasonable control of the party relying on such cause to excuse its performance hereunder to the extent to which the party cannot remedy the problem by exercise of due diligence, including, but not limited to, the expenditure of all reasonable sums of money; provided that inadequate or extreme reservoir pressures, temperature, or the presence of foreign substances therein shall not be considered to be an event of force majeure except as provided in Section VIII.C. below. Notwithstanding the foregoing, however, force majeure does not include any labor dispute, any failure of Seller to obtain and/or maintain any permit or any full or partial curtailment of the electric output of the Facility that is caused by or arises from a mechanical or equipment breakdown, even if the breakdown occurs without the fault or negligence of Seller, unless such breakdown is caused by any of the specific force majeure events listed above and could not have been reasonably prevented. B. The party claiming an event of force majeure shall give prompt written notice of such event to the other party within 30 days of the date such party claiming force majeure knew or should have known of the event of force majeure. In addition, such party shall use reasonable diligence, to the extent practicable, to limit the impact of such event on the performance of its obligations under this Performance Agreement. Notwithstanding the foregoing, this Section VIII.B. shall not excuse any payment obligation that has theretofore accrued under this Performance Agreement. C. Inadequate or extreme reservoir pressures, temperatures, or the presence of foreign substances therein, 12 shall not be an event of force majeure unless the Seller has taken reasonable actions to avoid or mitigate any adverse impact on the Seller's ability to meet its obligations under this Performance Agreement including the expenditure of all reasonable sums of money. D. Any obligation of either party under this Performance Agreement shall be excused only to the extent and for the period that the party's inability to perform is caused by a force majeure event. The party so excused shall make all reasonable efforts including all reasonable expenditures of necessary funds to cure, mitigate or remedy a force majeure event. Any payments due as compensation for the obligation so excused shall also be excused for so long as the obligation is not performed due to force majeure. E. In the event that the Commercial Operation Date of the additional five (5) megawatts is delayed because of an event or events of force majeure, the time periods specified in Sections II.A and II.B shall be extended on a day-for- day basis to match the duration of the event of force majeure. F. Notwithstanding any other provision of this Performance Agreement, if a party is prevented from substantially performing its obligations under this Performance Agreement by an event of force majeure that continues for a period of twelve (12) consecutive months, the other party may terminate the Performance Agreement without further liability of either party to the other hereunder. Such termination shall be effective upon 90 days written notice given any time after the twelve month period has expired but prior to the resumption of substantial performance; provided, however, that if substantial performance is resumed during that 90 day period, such termination shall not be effective. IX. MISCELLANEOUS PROVISIONS A. Transmission Line Agreement. If, upon fulfillment of the conditions precedent of Section V.B. of this Performance Agreement, Seller is or thereafter becomes obligated to supply HELCO an amount of Energy equal to the remaining Transmission Line Obligation (as defined in the Settlement Agreement) pursuant to Section II.C.5 of the Settlement Agreement, then HELCO and PGV agree that the remaining Transmission Line Obligation shall be paid by offsetting any amounts owed by HELCO to PGV for energy payments for Energy provided to HELCO above 25 MW during on-peak periods and above 22 MW during off-peak periods. Presently, the remaining Transmission Line Obligation is Two Million Nine Hundred Eighteen Thousand Seven Hundred And No/100 Dollars ($2,918,700.00). B. Entire Agreement. Subject to Section VI.G. herein, this Performance Agreement, the Amended PPC and the Settlement 13 Agreement, including any and all attachments, exhibits and related documents (including, without limitation, the Transmission Line Agreement) constitute the entire understanding between the parties, supersedes any and all previous understandings between the parties, and binds and inures to the benefit of the parties, their successors and assigns. The parties have entered into this Performance Agreement in reliance upon the representations and mutual undertakings contained herein and not in reliance upon any oral or written representation or information provided to one party by any representative of the other party. No modification, amendment or waiver of all or any part of this Performance Agreement shall be valid unless it is in writing and signed by both parties. C. Continuing Effect. To the extent not amended by this Performance Agreement, the Amended PPC shall remain in full force and effect. D. Authority. All action on the part of the parties to authorize the execution, delivery and performance of this Performance Agreement and the consummation of the transactions contemplated herein, shall have been duly and validly taken by each party and that this Performance Agreement constitutes a valid and binding obligation of each party. E. Further Performance. Each party hereto shall and does hereby agree to make, execute, deliver and cooperate with each other, as the case may be, any and all agreements, instruments, documents, records and/or funds, as the case may be, whatsoever required, necessary and/or convenient to effect and consummate this Performance Agreement and to permit performance of all acts required hereunder. F. Defined Terms. Capitalized terms not otherwise defined in this Performance Agreement shall have the meaning ascribed to them in the Amended PPC. G. Electric Service Supplied By HELCO. This Performance Agreement and the Amended PPC do not provide for any electric services by HELCO to Seller. If Seller requires any electric services from HELCO, Seller shall receive such service in accordance with HELCO's tariff. H. Affiliated Interest. The Seller shall not sell or transfer more than a 10% equity interest to any person or entity, or enter into any other transaction that would make the Seller an Affiliated Interest with the Company as defined by Section 269-19.5, Hawaii Revised Statutes, without first notifying the Company and receiving appropriate PUC approval, if any is required. If the PUC (or any other entity which has the authority to do so) finds that the Seller is an Affiliated Interest with the Company, the Seller shall have 60 days to take whatever action may be appropriate to render the 14 relationship not to be an Affiliated Interest. The Company shall have the right to terminate the Amended PPC, including this Fourth Amendment and any future amendments, if the PUC prohibits the Company from recovering any payments made to the Seller under this Amended PPC, as amended herein and from time to time, due to the effect of Section 269-19.5, Hawaii Revised Statutes, relating to affiliated interests. I. Qualification Of Seller's Facility. Seller's Facility will continue to be throughout the term of this Performance Agreement either (1) a qualifying, small power production facility under Subchapter 2 of the PUC's Standards for Small Power Production and Cogeneration in the State of Hawaii, Chapter 74 of Title 6 of the State's Administrative Rules, or (2) a "non-fossil fuel producer" within the meaning of Section 269-27.2, Hawaii Revised Statutes. J. Governing Law. This Performance Agreement shall be subject to, governed by, construed and enforced in accordance with the laws of the State of Hawaii, without regard to choice of law principles, and each of the parties hereto shall and does hereby agree to submit to the personal jurisdiction and venue of the Circuit Court of the Third Circuit of the State of Hawaii or the United States District Court for the District of Hawaii, as the case may be. K. Headings. The headings herein are inserted only for convenience and reference, and shall in no way define, limit or describe the scope or intent of any provision of this Performance Agreement. L. No Party Deemed Drafter. This Performance Agreement reflects the results of negotiations between the parties hereto and, therefore, no party shall be deemed to be the drafter of this Performance Agreement. This Performance Agreement or any provision hereof shall not be construed or interpreted by any Circuit or Federal Court or other authority of competent jurisdiction before which this Performance Agreement is properly presented against any party as drafter. M. Severability. If any term or provision of this Performance Agreement or the application thereof to any person, entity or circumstance shall to any extent be invalid or unenforceable, the remainder of this Performance Agreement, or the application of such term or provision to persons, entities or circumstances other than those as to which it is invalid or unenforceable, shall not be affected thereby, and each term and provision of this Performance Agreement shall be valid and enforceable to the fullest extent permitted by law. N. Waiver. The failure of either party to enforce at any time any of the provisions of this Performance Agreement, or to require at any time performance by the other party of any of the provisions hereof, shall in no way be construed to be a 15 waiver of such provisions, nor in any way to affect the validity of this Performance Agreement or any part hereof, or the right of such party thereafter to enforce every such provision. O. Notice. Unless otherwise provided, all notices, requests, demands and other communications hereunder shall be in writing and shall be deemed given if (1) delivered personally, or (2) by facsimile transmission (followed with a hard copy by first class mail, postage prepaid), or (3) three (3) Business Days after being mailed by certified or registered mail, postage prepaid, return receipt requested, to the parties at the following addresses or at such other addresses as the parties shall have specified by notice hereunder: If to HELCO: HAWAII ELECTRIC LIGHT COMPANY, INC. 1200 Kilauea Avenue Hilo, Hawaii 96720-4295 ATTN: President FAX No.: (808) 969-0100 If to PGV: PUNA GEOTHERMAL VENTURE 14-3860 Kapoho Pahoa Road Pahoa, Hawaii 96778 or P. O. Box 30 Pahoa, Hawaii 96778 ATTN: General Manager FAX No.: (808) 965-7254 P. Counterparts/Facsimile Signatures. This Performance Agreement may be executed and delivered by the parties hereto in any number of counterparts, each of which shall be delivered an original or duplicate original, and all of which together shall constitute one and the same instrument or agreement. Counterparts may be exchanged by facsimile, which facsimile signatures shall be effective for all purposes and treated in the same manner as physical signatures. Notwithstanding the foregoing, the party using facsimile signatures agrees that it will promptly forward physically signed copies of this Performance Agreement to the other party. 16 IN WITNESS WHEREOF, the Company and the Seller have executed this Performance Agreement as of the day and year first above written. HAWAII ELECTRIC LIGHT COMPANY, INC. By: /s/ Warren H.W. Lee Name: Warren H.W. Lee Title: President By: /s/ Edward Y. Hirata Name: Edward Y. Hirata Title: Vice President PUNA GEOTHERMAL VENTURE By AMOR VIII CORPORATION, a Delaware corporation, Its General Partner By: /s/ J. B. Fahrendorf Name: J. B. Fahrendorf Title: President By CE PUNA L.P., a Maryland limited partnership, Its General Partner By CE PUNA I, INC., a Maryland corporation, Its General Partner By: /s/ John R. Farrell Name: John R. Farrell Title: Vice President 17 STATE OF HAWAII ) ) SS. CITY AND COUNTY OF HONOLUL ) On this 8th day of February, 1996, before me personally appeared WARREN H.W. LEE to me personally known, who, being by me duly sworn, did say that he/she is the PRESIDENT, of HAWAII ELECTRIC LIGHT COMPANY, INC., a Hawaii corporation, and that foregoing Performance Agreement was signed on behalf of HAWAII ELECTRIC LIGHT COMPANY, INC. by authority of its Board of Directors, and said officers acknowledged said Performance Agreement to be the free act and deed of HAWAII ELECTRIC LIGHT COMPANY, INC. /s/ Ann A. Okuno Notary Public, State of Hawaii My Commission expires: 3/22/98 STATE OF HAWAII ) ) SS. CITY AND COUNTY OF HONOLULU ) On this 5th day of February, 1996, before me personally appeared Edward Y. Hirata to me personally known, who, being by me duly sworn, did say that he/she is the Vice President, of HAWAII ELECTRIC LIGHT COMPANY, INC., a Hawaii corporation, and that foregoing Performance Agreement was signed on behalf of HAWAII ELECTRIC LIGHT COMPANY, INC. by authority of its Board of Directors, and said officers acknowledged said Performance Agreement to be the free act and deed of HAWAII ELECTRIC LIGHT COMPANY, INC. /s/ Anita J. Rocker Notary Public State of Hawaii My Commission expires: 6-7-97 STATE OF MARYLAND ) ) SS. COUNTY OF HARTFORD ) On this 9th day of February, 1996, before me appeared John R. Farrell, to me personally known, who, being by me duly sworn, did say that he/she is the Vice President of CE PUNA I, INC., a Maryland corporation; that said corporation is a general partner of CE Puna Limited Partnership, a Maryland limited partnership; that said CE Puna Limited Partnership is a general partner of Puna Geothermal Venture, a Hawaii general partnership named in the foregoing Performance Agreement; that said Performance Agreement was executed by said corporation as the duly authorized general partner of and on behalf of CE Puna Limited Partnership, as the duly authorized general partner of and on behalf of Puna Geothermal Venture, and acknowledged that the seal affixed to the foregoing Performance Agreement is the corporate seal of said corporation, and that said Performance Agreement was signed and sealed on behalf of said corporation by authority of its Board of Directors and in the name of and on behalf of CE Puna Limited Partnership and in the name of and on behalf of Puna Geothermal Venture, and said officer acknowledged said Performance Agreement to be the free act and deed of said corporation and as said general partner of CE Puna Limited Partnership as the general partner of Puna Geothermal Venture. /s/ Janet R. Cunningham Notary Public State of Maryland My Commission expires: 5/1/96 STATE OF OREGON ) ) SS. COUNTY OF CLACKAMAS ) On this 12th day of FEBRUARY, 1996, before me personally appeared JOSEPH B. FAHRENDORF to me personally known, who, being by me duly sworn, did say that he/she is the PRESIDENT of AMOR VIII CORPORATION, a Delaware corporation; that said corporation is a general partner of Puna Geothermal Venture, a Hawaii general partnership, named in the foregoing Performance Agreement; that said Performance Agreement was executed by said corporation as the duly authorized general partner of and on behalf of Puna Geothermal Venture, and acknowledged that the seal affixed to the foregoing Performance Agreement is the corporate seal of said corporation, and that said Performance Agreement was signed and sealed on behalf of said corporation by authority of its Board of Directors and in the name of and on behalf of Puna Geothermal Venture, and said officer and acknowledged said Performance Agreement to be the free act and deed of AMOR VIII Corporation as general partner of PUNA GEOTHERMAL VENTURE. /s/ Penny J. Brower Notary Public State of OREGON My Commission expires: 10/16/99 ATTACHMENT A TO THE FOURTH AMENDMENT APPENDIX A DESCRIPTION OF SELLER'S GENERATION AND CONVERSION FACILITIES 1. Name of facility: Puna Geothermal Venture (a) Location: Honuaula, Puna, County of Hawaii, State of Hawaii (b) Telephone number (for system emergencies) System Emergencies: (808) 965-7485 Switch Board (808) 965-6233 (c) Company billing account number: 06 686 520 01 2. Owner: Puna Geothermal Venture 3. Operator/1/: Puna Geothermal Venture 4. Name of person to whom payments are to be made: (a) Mailing address: Puna Geothermal Venture P. O. Box 30 Pahoa, Hawaii 96778 (b) Hawaii Gross Excise Tax License Number: 30067799 5. Equipment: (a) Type of facility and conversion equipment: Back pressure steam turbines integrated with air-cooled organic rankine cycle Ormat Energy Converters. (b) Design capacity:/2/ Total 30 MW - ------------- /1/ Attach a letter signed by an officer of the Seller warranting that the Seller is in good standing with the Hawaii Department of Commerce and Consumer Affairs. /2/ The "Design Capacity" may exceed 30 MW to the extent necessary for Seller to furnish up to 30 MW of "Allowed Capacity" as defined in Appendix F, provided that the "Allowed Capacity" of this Contract shall be 30 MW. ATTACHMENT A TO THE FOURTH AMENDMENT (c) Single or 3 phase: 3 phase (d) Name of manufacturer: Ormat or equivalent (e) Date of interconnection: December 31, 1989 6. Projected date of operation in parallel to company's System ("Operational Date"): First 25 MW - July 1, 1990 Next 5 MW - Nine (9) months after the later of PUC Approval or Bank's Consent 7. Date Firm Capacity Begins: First 25 MW - June 26, 1993 Next 5 MW - Upon the fulfillment of the conditions precedent set forth in Sections V.A. and V.B. of the Performance Agreement 8. Insurance carrier: Attached hereto as Exhibit 1 to Appendix A 9. If the owner is not the operator, a copy of the agreement between the owner and the operator which allows the operator to use the facility and which establishes the scope of operations by the operator and the respective rights of the owner and the operator with respect to the sale of electric energy from the Seller's facility shall be provided to HELCO. 10. If the land on which the facilities are located is not owned by the facility's owner, a copy of the agreement with the owner of the land which establishes the right of the facility's owner to put the facility on the land and the existence of required rights of way and easements shall be provided to HELCO. 2 ATTACHMENT A TO THE FOURTH AMENDMENT Exhibit 1 To Appendix A ----------------------- COSI PUNA, INC. & PUNA GEOTHERMAL VENTURE Addendum to Executive Summary LIABILITY - --------- 1. Commercial General Liability - Provides protection for those sums you become legally obligated to pay as damages because of Bodily Injury or Property Damage to a third party, caused by an occurrence, and arising out of the insured premises and/or those operations necessary or incidental to your business. Coverage also includes products and completed operations, contractual liability, independent contractors coverage, personal and advertising injury, fire legal liability and medical payments. Named Insured: Puna Geothermal Venture; COSI Puna, Inc. Insurance Company: Lexington Insurance Company Policy Number: CGL 553 55 81 Limits of Liability: $1,000,000 Each Occurrence $1,000,000 Personal and Advertising Injury $ 10,000 Medical Payments per Person $ 100,000 Fire Legal Liability $1,000,000 Products/Completed Operations Aggregate $2,000,000 General Aggregate Deductible: $ 25,000 each occurrence BI & PD Liability Policy Term: March 31, 1995 to March 31, 1996 ATTACHMENT A TO THE FOURTH AMENDMENT Exhibit 1 To Appendix A ----------------------- LIABILITY - --------- 2. Business Automobile Liability and Physical Damage - Provides protection for those sums you become legally obligated to pay as damages because of Bodily Injury or Property Damage to a third party, arising from the ownership, maintenance, or use of any owned, hired, or non-owned automobile, as outlined in the policy. Other coverages include uninsured motorists, medical payments and physical damage (Comprehensive and Collision for owned and hired vehicles). Insurance Company: Gulf Insurance Company Policy Number: BA 543 69 52 Limits of Liability: $1,000,000 Bodily injury $1,000,000 Property Damage $1,000,000 Uninsured Motorists $ 20,000 Personal Injury Protection $1,000,000 Hired and Non-Owned Automobile Deductible: $ 1,000 Comprehensive $ 1,000 Collision Policy Term: 8/1/95 - 8/1/96 Note: Schedule of vehicles on file with Company. 2 ATTACHMENT A TO THE FOURTH AMENDMENT Exhibit 1 To Appendix A ----------------------- 3. Workers Compensation and Employers Liability - Provides protection to your employees for any injury, death, or disease arising out of and in the course of employment, as outlined in the policy. Benefits are paid according to the Workers Compensation Law and Occupational Disease Law of each State or Territory. Insurance Company: The Travelers Insurance Company Policy Number: BUB599K4B4294 Limits of Liability: Coverage A: Workers Compensation - Statutory Coverage B: Employers Liability - $1,000,000 B|by Accident $1,000,000 B|by Disease Policy Limit $1,000,000 B|by Disease Each Employee Policy Term: 11/22/94 - 11/22/95 3 ATTACHMENT A TO THE FOURTH AMENDMENT Exhibit 1 To Appendix A ----------------------- 4. Umbrella Liability - Protects against catastrophic third party liability losses by providing excess limits of liability over and above the following General Liability, Automobile Liability, and the Employers Liability portion of the Worker's Compensation policy. Coverage is subject to terms, conditions and exclusions of the following policy: Named Insured: Puna Geothermal Venture; COSI Puna, Inc. Insurance Company: Lexington Insurance Company Policy Number: 8667359 Limit of Liability: $25,000,000 Each Occurrence $25,000,000 General Aggregate Self Insured Retention: $25,000 Policy Term: March 31, 1995 to March 31, 1996 4 ATTACHMENT A TO THE FOURTH AMENDMENT Exhibit 1 To Appendix A ----------------------- Control of Well - Provides protection for cost to gain control of well; the expense to redrill and/or restore the well to the condition prior to the blowout and cleanup and pollution expenses resulting from a blowout. A separate endorsement extends the policy to cover contractor's equipment (not rigs) in the insured's care, custody or control. Named Insured: Puna Geothermal Venture; COSI Puna, Inc. Insurance Company: Underwriter's at Lloyd's London and Certain Insurance Companies (through GSR) Policy Number: 62741 Limits: $20,000,000 Ea. Occurrence, OEE (100%) $ 1,000,000 Care, Custody & Control (100%) Deductible: $ 25,000 Each Occurrence, per Section OEE (100%) $ 25,000 Care, Custody & Control (100%) Policy Term: March 31, 1995 to March 31, 1996 Note: Premium Subject to Audit 5 ATTACHMENT A TO THE FOURTH AMENDMENT Exhibit 1 To Appendix A ----------------------- PROPERTY - -------- Property Damage - Provides repair or replacement cost coverage for damage to all real and personal property, including Business Interruption resulting from a covered peril. Provides coverage for fire and extended coverages, flood, earthquake, and transit, all subject to policy terms, conditions and exclusions. Boiler & Machinery - Provides repair or replacement cost coverage, including Business Interruption, resulting from sudden and accidental damage to objects, or parts thereof, subject to policy exclusions. Objects include, but are not limited to, pressure, mechanical, and electrical apparatus, including turbine generators. Insurance Company: Insurance Company of North America (INA) Policy Number: EUTFD835821-7 Policy Term: 8/1/95 - 8/1/96 Highlights of Limits: Combined Property Damage and Boiler & Machinery including: Business Interruption, Flood, Pollution Cleanup & Removal, Errors & Omissions, and Debris Removal Combined Unit $102,916,000 per occurrence Sub-Limits applicable to Property Damage: ----------------------------------------- Earthquake $40,000,000 Accounts Receivable $ 5,000,000 Valuable Papers $ 5,000,000 Demolition/Increased Cost of Construction $ 5,000,000 Extra Expense $ 5,000,000 6 ATTACHMENT A TO THE FOURTH AMENDMENT Exhibit 1 To Appendix A ----------------------- Property in Transit $ 5,000,000 Newly Acquired Property $ 5,000,000 (90 days) Transmission/ Distribution Lines $ 1,500,000 Sub-Limits applicable to Boiler & Machinery: -------------------------------------------- Business Interruption $13,514,000 Service Interruption $ 5,000,000 Extra Expense $ 5,000,000 Expediting Expense $ 1,000,000 Hazardous Substance $ 1,000,000 Ammonia Contamination $ 1,000,000 Water Damage $ 1,000,000 Deductibles: Property Damage $ 50,000 except Transmission/ Distribution Lines $ 250,000 Named Windstorms $ 250,000 Earthquake $ 100,000 or 2% whichever is greater Business Interruption 30 day waiting period except; Service Interruption 48 hour waiting period 7 ATTACHMENT B TO THE FOURTH AMENDMENT APPENDIX B FACILITIES OWNED BY THE SELLER 1. Seller's Facility (a) A final (1) a single-line diagram of Seller's Facility, (2) relay list, and (3) trip scheme shall be prepared and, subject to the review and acceptance thereof by both parties, signed and attached hereto as Exhibit 1 to Appendix B and made a part hereof. Such single-line diagram expressly identifies the final location of the Point of Interconnection. Material changes or additions to the Seller's Facility reflected in the single-line diagram, relay list, and trip scheme shall not be made without the prior written consent of the Company pursuant to Section 3 of the Contract. If any changes in or additions to such Facility, records, and operating procedures are required by the Company, the Company shall specify such changes to the Seller in writing, and except in the case of an emergency, Seller shall have the opportunity to review any such change or addition in advance. (b) The Seller shall furnish, install, operate and maintain facilities such as breakers, relay, switches, synchronizing equipment, monitoring equipment and control and protective devices acceptable to the Company as suitable for parallel operation with the Company's System. Such facilities shall be accessible at all times to authorized Company personnel. (c) The Seller shall furnish, install and maintain in accordance with the Company's requirements all conductors, service switches, fuses, meter sockets, meter and instrument transformer housing and mounting, switchboard meter test buses, meter panels and similar devices required for service connections and meter installations on the Seller's premises. (d) Seller shall install transducers, metering, AC and DC sources, telephone lines, and provide interconnecting wiring for supervisory and communications equipment. (e) The Company has reviewed and accepted the design drawings and Bill of Material for the Seller's electrical equipment required to interconnect with ATTACHMENT B TO THE FOURTH AMENDMENT the Company's System. The type of electrical equipment, the type of protective relaying equipment (which equipment shall be mutually agreeable to the parties) and the settings that affect the reliability and safety of operation of the Company's and Seller's interconnected system shall be acceptable to the Company. The Company, at its option, may request to witness operation of control, synchronizing, and protection schemes. (f) The Seller shall provide a manual disconnect device which provides a visible break to separate the Seller's Facility from the Company's System. Such disconnect device shall be lockable in the OPEN position and be readily accessible to Company personnel at all times. (g) In order to allow Seller's Facility to remain on-line and to assist in restart of parallel operation thereof with the Company's System, Seller may provide automatic equipment to isolate Seller's Facility from the Company's System during large system disturbances; provided that such automatic equipment has been approved by the Company prior to installation for compatibility with Company's System. 2. Operating Procedures (a) The Company may require periodic reviews of the Seller's Facility, maintenance records, available operating procedures and policies, and relay settings, and may request changes it deems necessary to protect the Company's System from damages resulting from the Seller's parallel operation. (b) Logs shall be kept by the Seller for information on unit availability, including reasons for planned and forced outages; circuit breaker trip operations; relay operations, including target initiation; and other unusual events. The Company shall have the right to review these logs, especially in analyzing system disturbances. The Seller will provide the Company with subsequent written confirmation any time the Seller experiences a unit trip. Such confirmation will include the date and time of the occurrence as well as the cause of the unit trip. (c) Seller shall limit its Facility's ramp rate to less than 2 MW/min. (d) The Company's Load Dispatcher shall specify the power factor at which energy is delivered by the Seller to 2 ATTACHMENT B TO THE FOURTH AMENDMENT the Company. Typical power factor requirements will normally operate in a range of O.85 lagging to 1.0. (e) If Seller is separated from the Company's System for any reason, the Seller, under no circumstances, shall reclose into the Company's system without first obtaining specific approval to do so from the Company's Load Dispatcher. Such approval shall be withheld only when such reclosing is not in accordance with Section 17(a) of this Contract and the Company's standard practices, policies and procedures. (f) The Company's Load Dispatcher will notify the Seller whenever the Seller must be separated from the Company's System pursuant to Sections 6 and 7 of this Contract. When possible, reasonable advance notice will be given to the Seller by the Company's Load Dispatcher, provided this provision does not limit the Company's obligation to give notice under Section 6(b) of this Contract. (g) The Seller shall submit the next five-year maintenance requirement in writing to the Company each year no later than June 30 of the previous year. The Company shall specify the maintenance schedule for the five-year period and inform the Seller in writing no later than September 30 of the same year. The Company shall not unreasonably delay maintenance of the Seller's Facility and will cooperate with Seller in establishing a reasonable schedule for the Seller's maintenance requirements. (h) The Seller shall notify the Company's Load Dispatcher prior to synchronizing a generator onto or taking a generator off the system. Such notification should be as far in advance as reasonably possible under the circumstances causing the action. (i) Company Dispatch - The Company shall have the sole and absolute right, through supervisory equipment or otherwise, to control, from moment to moment, within the limits of sound engineering practices, the rate of delivery of energy and capacity subject to a Legally Enforceable Obligation to a maximum of the Seller's Firm Capacity Obligation. 3. Seller's Firm Capacity Obligation (a) Firm Capacity Obligation. The Seller shall furnish the Company 30,000 kw of capacity and 18,600 kvar of reactive from the Effective Date of the Fourth 3 ATTACHMENT B TO THE FOURTH AMENDMENT Amendment until the end of the contract term pursuant to a Legally Enforceable Obligation, under the Company's Dispatch during the entire term hereof except for the "annual overhaul period" set forth in Paragraph 3(b) of this Appendix B. The reactive shall be in proportion to power in the range of 0.85 lagging to 1.0 unity power factor and shall be dispatched by the Company to keep the Seller's generator within the limits of plus or minus 5% of the generator voltage. (b) Plant Shutdown Period. The Seller may shut its facility down and shall have no obligation to furnish the Company the capacity described in Paragraph 3(a) of this Appendix B during the "Annual Overhaul Period." During each contract year the Annual Overhaul Period shall not be longer than 28 days and shall be taken during the period beginning May 15 and ending September 30, the specific days to be determined each contract year with the Company's approval, which approval shall not be unreasonably withheld, and shall not be in conflict with the schedule established for the Company's other firm capacity contracts. (c) Minimum Delivery Guarantee By The Company. The Company shall accept as much of the power made available from the Seller as possible, given the limitations resulting from the Company's obligations to purchase minimum amounts of firm capacity from other firm capacity sellers, the Company's existing obligations to purchase As-Available Energy, the Company's need to keep a minimum number of its own generating units on-line at least at a reasonable minimum loading, the Company's load during certain times of the day and other operating reasons, provided that the Company shall accept 25,000 kw during the on-peak hours (7:00 a.m. to 9:00 p.m.), and 20,000 kw in 1990 and 22,000 kw after 1990 during the off-peak hours. The Company shall purchase a minimum of 178,000,000 kwh each year from the Seller under the Company's Dispatch subject to the provisions of Section 6 and 7 of the Contract. The 178,000,000 kwh amount shall be reduced by the Energy (kwh) that the Seller should have delivered to the Company but could not due to reasons other than the Annual Overhaul Period and force majeure. (d) Capacity Payments. The Company shall pay the Seller for the Firm Capacity under Company Dispatch subject to a Legally Enforceable Obligation that the Seller is obligated to deliver to the Company pursuant to 4 ATTACHMENT B TO THE FOURTH AMENDMENT Paragraph 3 of this Appendix B as provided for by Paragraph B of Appendix D of this Contract. (e) Sanctions for Non-Performance. The Seller shall pay the sanctions provided for by Paragraph D of Appendix D of this Contract if it fails to satisfy its firm capacity obligations under this Contract. 4. Access to Facility (a) Seller hereby grants HELCO the right, but not the obligation, for the term of this Contract to enter upon the Facility with such prior notice as is reasonable under the circumstances to take such action as may be necessary in the reasonable opinion of HELCO (i) to maintain, inspect, read and test meters and other HELCO equipment, and (ii) to interconnect, interrupt, monitor or measure electrical generation produced at Seller's Facility. (b) PGV shall provide in the first month of every year on an annual basis throughout the term of this Contract, information and geothermal data in substantially the form attached hereto as Exhibit 2 to Appendix B. In addition, at HELCO's request, PGV shall meet with HELCO and provide such data, information and access to PGV's Facility reasonably required to update the December 12, 1995 "Geothermal Resource Assessment, Puna Geothermal Venture Expansion, Kilauea East Rift, Hawaii" by Gerald Niimi of Therma Source, Inc. and the January 15, 1996 "Analysis of Fluid Compositions at the Puna Geothermal Venture 30 mWe Geothermal Facility" by Donald Thomas of G-Tech Services, and/or provide a similar analysis to these reports. 5 ATTACHMENT B TO THE FOURTH AMENDMENT Exhibit 1 To Appendix B [To Be Attached -- Attach hereto a copy of a single-line diagram of the Seller's Facility, relay list, and trip scheme within sixty (60) days of the Execution Date (as defined in the Performance Agreement) pursuant to the Performance Agreement.] ATTACHMENT B TO THE FOURTH AMENDMENT Exhibit 2 To Appendix B PUNA GEOTHERMAL VENTURE KS10 PRODUCTION WELL DATA
AVERAGE AVERAGE WELLHEAD WELLHEAD HOURS PRESSURE TEMP Mo. Total ON PROD STEAM BRINE TOTAL (PSIG) (DEG F) Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec KS09 PRODUCTION WELL DATA AVERAGE AVERAGE WELLHEAD WELLHEAD HOURS PRESSURE TEMP Mo. Total ON PROD STEAM BRINE TOTAL (PSIG) (DEG F) Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec
ATTACHMENT B TO THE FOURTH AMENDMENT Exhibit 2 to Appendix B PUNA GEOTHERMAL VENTURE COMBINED INJECTION DATA QUANTITIES OF FLUID INJECTED (K POUNDS)
Mo. Total GEOFLUID JAN FEB MAR APR MAY JUN JUL AUG SEP OCT NOV DEC
2 ATTACHMENT C TO THE FOURTH AMENDMENT APPENDIX C Interconnection Facilities Owned By The Company 1. The Company will design, construct, own, operate and maintain all facilities on the Company's side of the Point of Interconnection required to interconnect the Company's System with the Seller's Facility at 69 kv, including, without limitation, the following equipment at the Seller's Facility: (a) Necessary instrument transformers, test facilities (except switchboard meter test buses), meters, and protective line relays. (b) Supervisory and communication equipment for remote control and metering (a Remote Terminal Unit) at the Seller's Facility. (c) Provided, however, that PGV will construct the permanent switching station at the Point of Interconnection. (d) The Seller shall be responsible for the costs to design, permit, construct, and install the interconnection facilities owned by the Company. 2. The terms relating to the design, permitting, construction and operation of certain Interconnection Facilities, including power transmission lines, required to be installed in order to accept Energy from Seller's Facility have been determined by separate agreements between the parties. This Contract is subject in all respects to the parties' conclusion of satisfactory terms regarding the construction, installation and operation of such Interconnection Facilities and the payment therefor. To the extent a portion of such costs is to be paid by Seller, an allocation shall be agreed to by the parties that reflects benefits to Buyer's System of constructing or upgrading such Interconnection Facilities or portions thereof that are not required solely to interconnect Seller's Facility. Such cost allocation shall be subject to review and approval by the PUC. Presently, the Company and Seller's have entered into a Transmission Line Agreement, dated March 7, 1995, which is pending before the PUC for approval. The Transmission Line Agreement is incorporated herein by reference. ATTACHMENT C TO THE FOURTH AMENDMENT 3. The Seller shall reimburse the Company for any costs incurred in operating, maintaining, replacing, or relocating Company-owned Interconnection Facilities to the extent that such costs exceed Company's cost if the Seller were not interconnected to the Company's System. 4. The Company shall maintain full and complete information logs and records of (i) all meter readings; (ii) the calculation of amounts due to Seller; (iii) the operation and maintenance of the Interconnection Facilities; and (iv) information to verify events described in Section 6(a), 6(b), and 7 of this Contract, including but not limited to, unit availability (including reasons for planned and forced outages), circuit breaker trip operations, and relay operations (including target initiation). 5. The Seller shall be allowed to review the information logs and records maintained by the Company pursuant to Section 4 of this Appendix C, above, during the Company's normal business hours in accordance with the Company's rules for service to its customers. 2 ATTACHMENT D TO THE FOURTH AMENDMENT APPENDIX D POWER PURCHASES BY COMPANY (For 30 MW) A. ENERGY PURCHASES BY THE COMPANY 1. Subject to the other provisions of this Contract, including but not limited to Sections 6 and 7 of this Contract: a. The Company shall accept and pay for the first twenty-five (25) megawatts of on-peak Energy and the first twenty-two (22) megawatts of off-peak Energy generated by the Seller's Facility and delivered by the Seller to the Company at the higher of: (a) the respective on-peak and off-peak energy rates set forth in Paragraph A.3.a. of this APPENDIX D, or (b) $0.0656/kilowatthour ("kwh") on-peak or $0.0543/kwh off-peak; provided, however, that the rate of delivery of such Energy under this Paragraph A.1.a shall not exceed twenty-five (25) megawatts on-peak and twenty- two (22) megawatts off-peak at any given time. b. The Company shall accept and pay for an additional five (5) megawatts of on-peak Energy (above the twenty-five (25) megawatts delivered pursuant to Paragraph A.1.a above) generated by the Seller's Facility and delivered by the Seller to the Company at the higher of: (a) the on-peak energy rate set forth in Paragraph A.3.b. of this APPENDIX D, or (b) the Minimum Purchase Rate set forth in Paragraph A.4. of this APPENDIX D; provided, however, that the rate of delivery of such Energy under this Paragraph A.1.b shall not exceed five (5) megawatts at any given time. c. At the Company's sole discretion, the Company may accept and pay for any additional on-peak Energy provided above the thirty (30) megawatts of on-peak Energy (delivered pursuant to Paragraphs A.1.a. and A.1.b. above) at the higher of: (a) the on-peak energy rate set forth in Paragraph A.3.b. of this APPENDIX D, or (b) the Minimum Purchase Rate set forth in Paragraph A.4. of this APPENDIX D. ATTACHMENT D TO THE FOURTH AMENDMENT d. At the Company's sole discretion, the Company may accept and pay for any additional off-peak Energy above the twenty-two (22) megawatts of off-peak Energy (delivered pursuant to Paragraph A.1.a. above) generated by the Seller's Facility and delivered by the Seller to the Company at the higher of: (a) the Energy Rate/kwh calculated for on-peak energy set forth in Paragraph A.3.b. of this APPENDIX D less $0.01/kwh, or (b) $0.02/kwh. e. The Company agrees that it will not enter into any new contracts with independent power producers or amend any existing contracts with independent power producers that would obligate the Company to take any more off-peak As-Available Energy than the Company is presently obligated to take under an existing agreement without first agreeing to take an additional 5 megawatts of off-peak Energy from Seller. This provision shall not apply to the purchase, either in a new or existing contract with an independent power producer, of any additional amount of off-peak energy required in such contract because of the reasonable minimum operating requirements of an independent power producer. 2. Energy furnished by Seller to the Company shall be metered by a time- of-day meter that measures Energy delivery on at least one hour intervals. The Company shall not pay for any Energy that may be delivered by the Seller prior to installation and operation of the Company's meters. The on-peak hours shall be those between 7:00 a.m. and 9:00 p.m. daily, and the off-peak hours shall be those between 9:00 p.m. on one day and 7:00 a.m. on the following day. 3. Energy Rates a. The on-peak energy rate for the first 25 MW of on-peak Energy and the off-peak energy rate for the first 22 MW of off-peak Energy delivered pursuant to Paragraph A.1.a. above shall be one hundred percent (100%) of the Company's respective on-peak and off-peak Avoided Energy Costs (including avoided costs of fuel and operation and maintenance) in cents per kilowatthour, calculated in accordance with the provisions of the PUC's Standards, on file with the PUC and in effect for the month in which such Energy is delivered. 2 ATTACHMENT D TO THE FOURTH AMENDMENT b. The on-peak energy rate for the next 5 MW of on-peak Energy (above 25 MW) delivered pursuant to Paragraph A.1.b. above shall be: On-Peak Energy Rate/kwh = [Fuel Rate (Base Charge) x A] + [Variable O & M Rate (Base Charge) x (GDPIPD (current)/GDPIPD (base))] The terms in the above formula shall have the following meanings as stated: Fuel Rate (Base Charge): $0.038/kwh A = Fuel Actual (Diesel)/Fuel Base (Diesel) where: Fuel Actual (Diesel) is the average of each of the Thursday high and low Pacific Northwest Spot 0.5% No. 2 prices for Diesel Fuel ("PNW No. 2 prices"), as reported by Oil Price Information Service ("OPIS") from the 21st day of the second preceding month to the 20th day of the month preceding the month Energy is delivered to HELCO (Computation Month), expressed in dollars per gallon, rounded to the fourth decimal place; and Fuel Base (Diesel) is the average of each of the Thursday high and low PNW No. 2 prices as reported by OPIS from the 21st day of November 1995 to the 20th day of December 1995, expressed in dollars per gallon, rounded to the fourth decimal place and which the parties agreed is $0.5444/gallon. If OPIS is not published or does not publish a high and low price for a particular Thursday during the relevant one month period, the high and low prices for the closest preceding day for which OPIS publishes a price report will be used. In the event that PNW No. 2 prices are not published by OPIS then the parties agree to use another publication that publishes PNW No. 2 prices. In the event that PNW No. 2 prices are not published or otherwise available, the parties agree to adjust the 3 ATTACHMENT D TO THE FOURTH AMENDMENT Fuel Rate (Base Charge) by a new index, which, to the extent practicable, shall be applied in the same fashion as the index represented by the term "A" in the above formula. Variable O & M Rate (Base Charge) = $0.0029/kwh GDPIPD (current) = the final Gross Domestic Product Implicit Price Deflator ("GDPIPD") (there are four categories of GDPIPD -- advance, preliminary, final and revised final) as published by the United States Department of Commerce, Economics and Statistics Administration, Bureau of Economic Analysis ("Department of Commerce") for the third quarter of the calendar year preceding the calendar year in which the Energy is delivered. GDPIPD (base) = the final GDPIPD as published by the Department of Commerce for the third quarter of 1995. In the event that GDPIPD is not published by Department of Commerce, the parties agree to adjust the Variable O & M Rate (Base Charge) by another index mutually agreed upon by the parties. When adjusting the Variable O&M Rate (Base Charge), the adjustment shall apply to the energy delivered by Seller to HELCO in the month of the adjustment date (January 1) and then invoiced for payment in the following month. In other words, the annual adjustment factor will be first applied to the energy delivered in January to be invoiced in February. An example of the On-Peak Energy calculation is attached hereto as Exhibit 1 to Appendix D. 4. The Minimum Purchase Rate, as defined in APPENDIX F of this Contract, shall apply to the five (5) megawatts of Energy delivered by Seller under 4 ATTACHMENT D TO THE FOURTH AMENDMENT Paragraph A.1.b. above to the Company during the term of this Contract. 5. During each payment period Seller shall be credited at the rate of $0.002 per kilovarhour for each kilovarhour furnished by the Seller to the Company in excess of .62 x kwh. The kvarh meters shall be adjusted to prevent reversal in the event the power factor is leading. 6. This paragraph intentionally left blank. 7. The Seller shall deliver Energy under Company Dispatch pursuant to a Legally Enforceable Obligation as follows: a. On-Peak Period. During the 14 hour period from 7:00 a.m. to 9:00 p.m. each day, the Seller shall be obligated to deliver Energy under the Company's Dispatch at a rate equal to the Seller's Firm Capacity Obligation described in Paragraph 3.(a) of APPENDIX B of this Contract. b. Off-Peak Period. During the 10 hour period from midnight to 7:00 a.m. and 9:00 p.m. to midnight each day, the Seller shall be obligated to deliver energy under the Company's Dispatch at a rate not greater than the Seller's Firm Capacity Obligation described in Paragraph 3.(a) of APPENDIX B of this Contract and not less than the Minimum Delivery Guarantee. B. CAPACITY PURCHASES BY THE COMPANY 1. As compensation for providing the Firm Capacity under Company Dispatch as described in Paragraph 3(a) of APPENDIX B, the Company will pay the Seller a capacity payment, payable monthly within 20 days after the last day of the calendar month in which the firm capacity was provided, of 1/12 of the Annual Capacity Payment Rate. 2. The Capacity Payment Rate shall be: a. $4,000,000 per year for the first twenty-five (25) megawatts of firm capacity under Company Dispatch as described in Paragraph 3 of APPENDIX B beginning on June 26, 1993; and subject to the sanction provision of Paragraph D.1. of APPENDIX D; and 5 ATTACHMENT D TO THE FOURTH AMENDMENT b. $504,750 per year for the next five (5) megawatts of firm capacity under Company Dispatch above the first twenty-five (25) megawatts of firm capacity in Subsection B.2.a. as described in Paragraph 3 of APPENDIX B beginning on the date of the fulfillment of the conditions precedent set forth in Sections V.A. and V.B. of the Fourth Amendment; provided that the Seller has satisfied the Acceptance Test requirement of Section I.B. of the Fourth Amendment; and subject to the sanction provision of Paragraph D.1. of APPENDIX D. If the first year of operation for the additional 5 MW of firm capacity is a partial calendar year then the amount of the Capacity Payment ($504,750) shall be prorated on a daily basis ($1,380 per day) from the date of the fulfillment of the conditions precedent set forth in Sections V.A. and V.B. of the Fourth Amendment through December 31 of that year. 3. The Company shall not be required to pay any additional capacity payment for any additional power supplied by the Seller, either at the Company's or the Seller's request. 4. A failure by the Seller to provide the required Firm Capacity to the Company shall result in the reduction in the capacity payment due to the Seller from the Company in accordance with Paragraph D of APPENDIX D of this Contract. The Company shall not have any obligation to pay capacity payments to the Seller for periods in excess of twenty-four hours in which the Seller is unable to fulfill its obligations under the Contract, including but not limited to (i) circumstances which are subject to Paragraph 15 of this Contract relating to Force Majeure without fault, or (ii) for periods in which the Seller does not fulfill its obligations under Paragraph 3 of APPENDIX B of this Contract due to the Seller's "default," as such term is defined in APPENDIX E of this Contract. 5. If the Seller does not satisfy its firm capacity obligations as described in Paragraph 3 of APPENDIX B and Paragraph C of this APPENDIX D of this Contract, it shall pay sanctions as described in Paragraph D of this APPENDIX D. 6 ATTACHMENT D TO THE FOURTH AMENDMENT C. PERFORMANCE STANDARDS 1. The Seller acknowledges and agrees that the Seller's generating facility is expected to meet the following minimum standards for satisfactory day-to-day performance during each contract year: (i) an On-peak Availability (excluding the four-week annual maintenance period and downtime due to a catastrophic equipment failure) of 95 percent or better; (ii) not more than 6 Plant Trips per year; and (iii) a forced outage rate of 5 percent or less. 2. The "On-peak Availability" of the Seller's Facility (in percent) is to be computed by adding the total on-peak Energy under Company's Dispatch subject to a Legally Enforceable Obligation available from the Seller's Facility during the contract year, and dividing by the product of 4,718 on-peak hours per 48 week year (4,732 for leap years) times the Firm Capacity Obligation (prorated on a daily basis, if necessary) and multiplying the total by 100 percent. 3. "Catastrophic Equipment Failure" means a sudden, unexpected failure of a major piece of equipment which (i) substantially reduces or eliminates the capability of the Seller's Facility to produce power, (ii) is beyond the reasonable control of the Seller and could not have been prevented by the exercise of due diligence by the Seller, and (iii) despite the exercise of all reasonable efforts, requires more than sixty (60) days to repair. 4. "Plant Trip" means the sudden and immediate removal of the Seller's Facility from service as a result of an immediate mechanical/electrical/hydraulic control system trip or operator initiated trip/shutdown which requires the Company to take immediate steps to place an unscheduled generator on line to make up for the loss of output of the Seller's Facility; provided, however, that a Plant Trip shall not include: (i) any such removal which occurs within forty-eight (48) hours of the time at which the Seller's Facility is restarted following an outage; (ii) trips caused or initiated by the Company; or (iii) trips occurring during periods when the Seller has continued to furnish capacity to the Company at the request of the Company's Production Manager after the Seller has notified the Company's Production Manager that the Seller's Facility is likely to trip. 7 ATTACHMENT D TO THE FOURTH AMENDMENT 5. The "Forced Outage Rate" of the Seller's Facility during a contract year is to be computed by totaling the average megawatts unavailable for service due to forced outages or deratings on an hourly basis, multiplying the total by 100, and dividing by the product of 8,760 hours per year times the weighted average of the Seller's firm capacity obligation (prorated on a daily basis, if necessary). D. SANCTIONS 1. The capacity payment is to be made on the basis of the full availability of the Seller's Firm Capacity Obligation. When the Seller's full Firm Capacity Obligation is not available, the Seller shall pay the Company $0.0214 per on-peak hour for each kilowatt of deficiency based on annual capacity payments of $504,750 and 4,718 on- peak hours in a year for the first five (5) megawatts of deficiency and the Seller shall pay the Company $0.0339 per on-peak hour for each kilowatt of deficiency in excess of five (5) megawatts of deficiency based on annual capacity payments of $4 million and 4,718 on-peak hours in a year. 2. For each contract year in which the On-peak Availability of the Seller's Facility is less than 95 percent, unless the shortfall is due to a catastrophic equipment failure, the Seller shall pay $7,992 to the Company for each full percentage point of the shortfall less than 95 percent to and including 80 percent, and the Seller will pay $11,875 to the Company for each full percentage point of the shortfall less than 80 percent. 3. For each Plant Trip in excess of 6 per contract year, the Seller shall pay $10,000 to the Company. 4. The Company shall have the right to offset any payment due from the Seller under this Paragraph against any payments due to the Seller. 5. This paragraph intentionally left blank. 6. Each party may exercise whatever legal or equitable remedies may be available to enforce the obligations of this Contract in the event of a default by the other party. 8 ATTACHMENT D TO THE FOURTH AMENDMENT Exhibit 1 To Appendix D Illustration of On-Peak Energy Payment Rate On-Peak Energy Payment Rate = Fuel Component + Variable O&M Component Where: Fuel Component = Fuel Rate (Base Charge) x Fuel Index Variable O&M Component = Variable O&M Rate (Base Charge) x Variable O&M Index Fuel Rate (Base Charge) = $0.038/kwh Fuel Index = PNW (current)/PNW (base) Variable O&M Rate (Base Charge) = $0.0029/kwh Variable O&M Index = GDP IPD (current)/GDP IPD (base) On-Peak Energy Payment Rate = [$0.038/kwh x PNW (current)/PNW (base)] + [$0.0029 x GDP IPD (current)/GDP IPD (base)] Where: PNW (current) = the average of each of the Thursday high and low Pacific Northwest Spot 0.5% No. 2 prices for Diesel Fuel ("PNW"), as reported by Oil Price Information Service ("OPIS") from the 21st day of the second preceding month to the 20th day of the month energy is delivered by PGV to HELCO, expressed in $/gallon PNW (base) = $0.5444/gallon, the average of the Thursday high and low Pacific Northwest Spot 0.5% No. 2 prices for Diesel Fuel, as reported by OPIS from the 21st day of November 1995 to the 20th day of December 1995, expressed in $/gallon GDP IPD (current) = final GDP IPD for the 3rd Quarter of the year preceding the year that the Variable O&M Index will be used GDP IPD (base) = the final GDP IPD for the third quarter of 1995 (Note: 107.9 is the "preliminary" estimate used only for this illustration - the "final" shall be used in the actual calculation) On-Peak Energy Payment Rate = [$0.038/kwh x PNW (current)/$0.5444/gal] + [$0.0029 x GDP IPD (current)/107.9] ATTACHMENT D TO THE FOURTH AMENDMENT Exhibit 1 To Appendix D
OPIS PRICE PACIFIC NORTHWEST CUSA/HECO CUSA/HECO FOR DIESEL PRICE WEEKLY MONTHLY MONTH OF DATE LOW HIGH AVG PRICE AVERAGE DEC 1995 10/26/95 0.5800 0.5850 0.5825 0.5825 11/02/95 0.5775 0.5850 0.5813 0.5813 11/09/95 0.5900 0.5950 0.5925 0.5925 11/16/95 0.5625 0.5700 0.5663 0.5663 0.5806 JAN 1996 11/22/95 0.5550 0.5650 0.5600 0.5600 11/30/95 0.5400 0.5500 0.5450 0.5450 12/07/95 0.5350 0.5450 0.5400 0.5400 12/14/95 0.5300 0.5350 0.5325 0.5235 0.5444
2 ATTACHMENT E TO THE FOURTH AMENDMENT APPENDIX F DEFINITIONS 1. Allowed Capacity: The maximum Capacity agreed upon between Company and Seller that may be delivered to Company at any one time by the Seller, unless Company requests otherwise, which shall be thirty megawatts (30 MW). 2. As-Available Energy: Energy provided to Company on an unscheduled basis as it becomes available, rather than at prearranged times and in prearranged amounts, and which is not subject to a Legally Enforceable Obligation. 3. Avoided Energy Costs: The energy costs that the Company avoids by purchasing Energy from Seller, as defined in and calculated in accordance with the PUC's Standards. 4. Capacity: Electric power expressed in kilowatts or megawatts. 5. Company's Dispatch: Company's sole and absolute right to control, from moment to moment, through supervisory equipment, or otherwise, and in accordance with good engineering practice in the electric utility industry, the rate of delivery of Energy offered by Seller to Company. 6. Company's Fuel Adjustment Clause: The provision in the Company's rate schedules that allows Company to pass through to its customers the Company's costs of fuel and purchased power. 7. Company's System: The electric system owned and operated by the Company on the Island of Hawaii consisting of power plants, transmission and distribution lines, and related equipment for the production and delivery of electric power to the public. 8. Company's System Load Dispatcher: The authorized representative of Company who is responsible for carrying out Company's Dispatch. 9. Commercial Operation: For the first twenty-five (25) megawatts of Capacity, Commercial Operation is the date (June 26, 1993) on which Seller's Facility was deemed by Seller to be capable of reliable delivery of firm capacity. For the additional five (5) megawatts of capacity delivered under the Fourth Amendment, Commercial Operation is the date on which Seller's Facility is deemed by Seller to be capable of reliable delivery of an additional five (5) megawatts of firm capacity after the successful completion of the 100 hour Acceptance Test as stated in the Fourth Amendment. 10. Energy: Electric power expressed in kilowatthours. ATTACHMENT E TO THE FOURTH AMENDMENT 11. Energy Cost Adjustment Clause: Same as Company's Fuel Adjustment Clause. 12. Firm Capacity: Thirty megawatts (30 MW) of reliable electrical Capacity and 18,600 kvar of reactive which the Seller has agreed to make available to HELCO from Seller's Facility at the Point of Interconnection under the Company's Dispatch. 13. Firm Capacity Obligation: Seller's Legally Enforceable Obligation to provide Firm Capacity as described in Section 3(a) of APPENDIX B of this Contract. 14. Fourth Amendment: That certain PERFORMANCE AGREEMENT AND FOURTH AMENDMENT TO THE PURCHASE POWER CONTRACT DATED MARCH 24, 1986 AS AMENDED dated February __, 1996, by and between Hawaii Electric Light Company, Inc. and Puna Geothermal Venture. 15. Interconnection Facilities: The equipment and devices required to permit Seller's power plant to operate in parallel with and deliver electric power to Company's System, such as, but not limited to, transmission lines, transformers, switches, and circuit breakers. 16. Legally Enforceable Obligation: A binding commitment to supply Energy or Capacity at prearranged times and in prearranged amounts under Company's Dispatch, with sanctions for noncompliance. 17. Minimum Purchase Rate: The minimum rate payable by Company to Seller for on-peak Energy delivered by Seller to Company under this Contract shall be equal to the on-peak Energy Rate calculated pursuant to Paragraph A.3.b. of APPENDIX D on the date of PUC Approval (as defined in the Fourth Amendment). 18. Operational Date: The date(s) on which the respective generating units of Seller's Facility are projected for planning purposes to begin parallel operation with Company's System. 19. Point of Interconnection: The point of delivery of Energy and/or Capacity supplied by Seller to Company where Seller's Facility interconnects with Company's System. 20. PUC's Standards: Standards for Small Power Production and Cogeneration in the State of Hawaii, issued by the Hawaii Public Utilities Commission, Chapter 74 of Title 6, Hawaii Administrative Rules, currently in effect and as may be amended from time to time. 2 ATTACHMENT E TO THE FOURTH AMENDMENT 21. "Seller's Facility" or the "Facility": All real estate, fixtures and property owned, controlled, operated or managed by Seller in connection with, or to facilitate, the production, generation, transmission, delivery or furnishing of electricity by Seller to Company and required to interconnect with Company's System, except Seller's geothermal wellfield, pipelines, and other equipment located upstream from Seller's power plant. 3 ATTACHMENT F TO THE FOURTH AMENDMENT 15. Force Majeure (a) If either party shall be wholly or partially prevented from performing any of its obligations under this Contract by reason of an event of force majeure reasonably beyond its exclusive control and not attributable to its neglect, then and in any such event, such party shall be excused from whatever performance is prevented by such event to the extent so prevented, and such party shall not be liable for any damage or loss resulting therefrom. Events of force majeure shall include but not be limited to the following: accidents, action or inaction of any governmental agency (including the inability to obtain permits or authorization), lightning, rain, earthquake, wind, wind- blown water, riots, fire, flood, invasion, insurrection, lava flow or volcanic activity, tidal wave, civil commotion, the order of any court, judge or civil authority, war, and any act of God or the public enemy; provided that inadequate or extreme reservoir pressures, temperature, or the presence of foreign substances therein shall not be considered to be an event of force majeure except as provided in Subsection (c) of this paragraph. (b) The party claiming an event of force majeure shall give prompt written notice of such event to the other party within 30 days of the date such party claiming force majeure knew or should have known of the event of force majeure. In addition, such party shall use reasonable diligence, to the extent practicable, to limit the impact of such event on the performance of its obligations under this Contract. Notwithstanding the foregoing, this Subsection 15(b) shall not excuse any payment obligation that has theretofore accrued under this Contract. (c) Inadequate or extreme reservoir pressures, temperatures, or the presence of foreign substances therein, shall not be an event of force majeure unless the Seller has taken reasonable actions to avoid or mitigate any adverse impact on the Seller's ability to meet its obligations under this Contract. EXHIBIT A TO THE PERFORMANCE AGREEMENT DESCRIPTION OF ENHANCEMENTS The enhancements will increase the site electrical generating output by increasing the flow to the three existing injection wells. This will be accomplished mainly by the installation of three injection pumps ("injection pumps"). These injection pumps will increase injection pressure, thus increasing system flow and electric generation output. In addition, it is contemplated that condensate flows will be redirected from 4" and 6" lines currently in use to an existing 14" line. This change is intended to enhance process efficiency. EXHIBIT B TO THE PERFORMANCE AGREEMENT PROJECT SCHEDULE The timetable for completion of the project activities are expressed in weeks from the date of the later of PUC Approval or Bank's Consent of the Performance Agreement. The first number is the week in which the activity is expected to begin and the second number is the week in which the activity is expected to be completed. Description of Activity Timetable Engineering Week 0 to Week 12 Procurement Week 0 to Week 21 Installation Week 10 to Week 26 Power Output Week 26 Major Milestone PGV expects to have its injection pumps on site no later than 23 weeks after the later of PUC Approval or Bank's Consent of the Performance Agreement. EXHIBIT C TO THE PERFORMANCE AGREEMENT _____________, 1996 Hawaii Electric Light Company, Inc. 1200 Kilauea Avenue Hilo, Hawaii 96720-4295 RE: Consent To Performance Agreement Gentlemen: We refer to that certain Performance Agreement And Fourth Amendment To The Purchase Power Contract Dated March 24, 1986 as Amended ("Performance Agreement"), dated as of __________________, 1996, by and between Hawaii Electric Light Company, Inc. ("HELCO"), incorporated under the laws of the Republic of Hawaii, and Puna Geothermal Venture ("PGV"), a Hawaii general partnership. Capitalized terms used herein and not otherwise defined shall have the meaning set forth in the Performance Agreement and, if none, then as set forth in the Confirmation Agreement (as defined below). CREDIT SUISSE, a bank organized and existing under the laws of Switzerland, as Agent and Collateral Agent for the benefit of its own account and such other financial institutions as may participate in the funding and other risks associated with the Loan as defined below (hereinafter collectively referred to as "Credit Suisse"), the Lenders (as defined in the Confirmation Agreement) and PGV have entered into (i) a Credit Agreement-Construction Loan and Term Loan Facility, and (ii) an Assignment and Security Agreement ("Assignment"), pursuant to which Credit Suisse has agreed to make a loan ("Loan") to PGV for the purpose of constructing the PGV facility. Pursuant to the Assignment, PGV has granted to Credit Suisse a security interest in the HELCO-PGV Agreements, for the benefit of the Lenders, as security for the payment of all sums to become due and payable to Credit Suisse and the Lenders. EXHIBIT C TO THE PERFORMANCE AGREEMENT Hawaii Electric Light Company, Inc. Page 2 The Assignment requires PGV to obtain Credit Suisse's written consent prior to amending, canceling or terminating the HELCO-PGV Agreements. Pursuant to the Confirmation of Purchase Power Contract and Agreement ("Confirmation Agreement"), dated June 29, 1990, by and between HELCO, PGV and Credit Suisse, HELCO is also required to obtain the written consent of Credit Suisse prior to amending, canceling or terminating the HELCO-PGV Agreements. Under the Performance Agreement, PGV has agreed to provide, and HELCO has agreed to accept and pay for, an additional five (5) megawatts of firm capacity. In order to provide the additional firm capacity, the Performance Agreement requires amending certain of the HELCO-PGV Agreements, which in turn, requires the consent of Credit Suisse and Banque Nationale de Paris, a bank organized and existing under the laws of the Republic of France ("BNP"). Consent Credit Suisse and BNP have each reviewed the Performance Agreement and each hereby consent to PGV's and HELCO's execution of the Performance Agreement and the performance of the terms, conditions and obligations of the parties thereunder. This Consent shall be subject to, governed by, construed and enforced in accordance with the laws of the State of Hawaii, without regard to principles of choice of law. The individuals executing this Consent represent and warrant that they are duly authorized to do so on behalf of Credit Suisse and BNP, as the case maybe, and that this Consent, once executed, shall be fully binding upon Credit Suisse and BNP, as the case maybe, and their respective EXHIBIT C TO THE PERFORMANCE AGREEMENT Hawaii Electric Light Company, Inc. Page 3 successors, agents, representatives, administrators, trustees and assigns. Consented to and agreed to as the date first above written: CREDIT SUISSE By: ___________________________ Name: ___________________________ Title: ___________________________ By ___________________________ Name: ___________________________ Title: ___________________________ BANQUE NATIONALE de PARIS By: ___________________________ Name: ___________________________ Title: ___________________________ By: ___________________________ Name: ___________________________ Title: ___________________________ EXHIBIT C TO THE PERFORMANCE AGREEMENT STATE OF ____________ ) ) SS. COUNTY OF ___________ ) On this ______ day of _______________, 199___, before me appeared ______________________________ and ______________________________, to me personally known, who, being by me duly sworn, did say that they are ______________________________ and ______________________________, respectively, of CREDIT SUISSE, a bank organized and existing under the laws of Switzerland, as Agent and Collateral Agent; that the seal affixed to the foregoing instrument is the corporate seal of said bank; that said instrument was signed and sealed in behalf of said corporation by authority of its Board of Directors; and said ______________________________ and ______________________________ acknowledged said instrument to be the free act and deed of said bank. ___________________________________ Notary Public, State of ___________ My Commission expires: ____________ EXHIBIT C TO THE PERFORMANCE AGREEMENT STATE OF ____________ ) ) SS. COUNTY OF ___________ ) On this ______ day of _______________, 199___, before me appeared ______________________________ and ______________________________, to me personally known, who, being by me duly sworn, did say that they are ______________________________ and ______________________________, respectively, of BANQUE NATIONALE de PARIS, a bank organized and existing under the laws of the Republic of France; that the seal affixed to the foregoing instrument is the corporate seal of said bank; that said instrument was signed and sealed in behalf of said corporation by authority of its Board of Directors; and said ______________________________ and ______________________________ acknowledged said instrument to be the free act and deed of said bank. ___________________________________ Notary Public, State of ___________ My Commission expires: ____________ EX-10.8 5 LOW SULFUR FUEL CONTRACT HECO Exhibit 10.8 LOW SULFUR FUEL OIL SUPPLY CONTRACT by and between CHEVRON U.S.A. INC. and HAWAIIAN ELECTRIC COMPANY, INC. * * * * * * * * * LOW SULFUR FUEL OIL SUPPLY CONTRACT BY AND BETWEEN CHEVRON U.S.A. INC. AND HAWAIIAN ELECTRIC COMPANY, INC. TABLE OF CONTENTS ARTICLE 1: Definitions.................................... 1 ARTICLE 2: Term of Contract............................... 1 ARTICLE 3: Purchase Volumes and Delivery Rates............ 1 Section 3.1: Purchase Volumes..................................... 1 Section 3.2: Delivery Rates....................................... 1 ARTICLE 4: Quality........................................ 2 ARTICLE 5: Price.......................................... 3 Section 5.1: Price Per Physical Barrel............................ 3 Section 5.2: Flexibility in Supply Source......................... 4 Section 5.3: Fees, Taxes, Assessments, Levies, etc................ 4 Section 5.4: Rounding of Index Averages........................... 4 ARTICLE 6: [INTENTIONALLY OMITTED]........................ 4 ARTICLE 7: Pipeline Delivery.............................. 5 Section 7.1: LSFO Delivery........................................ 5 Section 7.2: Determination of Quality............................. 5 Section 7.3: Measurement of Quantity.............................. 5 Section 7.4: Disputes of Quality and Quantity..................... 5 ARTICLE 8: Marine Delivery................................ 6 Section 8.1: Notification of Use of HECO's Barbers Point Tankage.. 6 Section 8.2: Delivery of Marine Cargo............................. 6 Section 8.3: Determination of Quantity and Quality................ 6 Section 8.4: Delayed Invoicing.................................... 6 ARTICLE 9: Line Displacement Stock and Blend Stock........ 6 Section 9.1: Line Displacement Stock.............................. 6 Section 9.2: Blend Stock.......................................... 6 ARTICLE 10: Invoicing and Payment.......................... 7 Section 10.1: Invoices............................................ 7 Section 10.2: Payments............................................ 7 Section 10.3: Method of Payment................................... 7 ARTICLE 11: Contingencies.................................. 7 Section 11.1: Definition of Contingency........................... 7 Section 11.2: Obligations to Sell................................. 8 Section 11.3: Obligations to Purchase............................. 8 Section 11.4: Price Effectiveness................................. 8 Section 11.5: Combustion Specifications........................... 8 Section 11.6: Effective Date...................................... 9 Section 11.7: Refining and/or Delivery Operations Ownership....... 9 ARTICLE 12: Effect of Suspension or Reduction.............. 9 Section 12.1: Notice of Suspension or Reduction................... 9
Section 12.2: Option to Terminate................................. 9 Section 12.3: Prompt Notices...................................... 9 Section 12.4: U.S. Currency....................................... 9 Section 12.5: Substitute Suppliers................................ 9 ARTICLE 13: Waiver and Non-Assignability........................... 10 Section 13.1: Waiver.............................................. 10 Section 13.2: Non-Assignability................................... 10 Section 13.3: Definitions......................................... 10 ARTICLE 14: Default................................................ 10 ARTICLE 15: Conflict of Interest................................... 10 ARTICLE 16: Applicable Law......................................... 11 ARTICLE 17: Public Utility Commission Approval..................... 11 ARTICLE 18: Miscellaneous.......................................... 11 Section 18.1: Headings............................................ 11 Section 18.2: Entire Agreement.................................... 11 Section 18.3: Contract is Not an Asset............................ 11 Section 18.4: Notices............................................. 11 Section 18.5: Unenforceable Terms................................. 11 Section 18.6: Successors and Assigns.............................. 11 Section 18.7: Termination of Prior Agreement...................... 12
ADDENDUM No. 1: Sample Price Calculation ADDENDUM No. 2: Quality Adjustments ADDENDUM No. 3: Recovery of Worldscale Fixed Differential For Oil Pollution Liability Insurance LOW SULFUR FUEL OIL SUPPLY CONTRACT THIS CONTRACT dated as of November 20, 1995, by and between CHEVRON U.S.A. INC., a Pennsylvania corporation, ("Chevron") and HAWAIIAN ELECTRIC COMPANY, INC., a Hawaii corporation, ("HECO"), with the purpose for the sale and purchase of Low Sulfur Fuel Oil ("LSFO") and other petroleum products. WHEREAS, Chevron is a supplier of petroleum fuels with terminal and refinery facilities in Hawaii. WHEREAS, HECO is a utility engaged in the generation and sale of electricity, with terminal facilities, in Hawaii. NOW THEREFORE, the parties agree as follows: ARTICLE 1: Definitions Except where otherwise indicated, the following definitions shall apply throughout this contract: 1. "LSFO" means Chevron Low Sulfur Fuel Oil No. 6 per Section 4.1. 2. "physical barrel" means 42 American bulk gallons at 60 degrees F. 3. "year" means a calendar year. ARTICLE 2: Term of Contract The term of this Contract shall be from January 1, 1996 (the "Effective Date"), through December 31, 1997, and shall continue thereafter for additional 12-month periods (each 12-month period being an "Extension") beginning each successive January 1, unless HECO or Chevron gives written notice of termination at least 120 days before the beginning of an Extension. ARTICLE 3: Purchase Volumes and Delivery Rates Section 3.1: Purchase Volumes ----------------------------------------------------------------- This portion is confidential; therefore, it has been omitted and filed separately with the Commission. ----------------------------------------------------------------- Section 3.2: Delivery Rates (a) HECO shall advise Chevron of its nominated rate of delivery for each month seventy-five days prior to the beginning of that month. (b) Except to the extent that marine deliveries which are required by Chevron to meet the delivery requirement are prevented by the unavailability of HECO's Barbers Point tankage, beginning the 5th day of each month, at all times Page 1 during that month, Chevron's actual LSFO delivery rate, expressed in barrels per day, shall not fall below 85% of HECO's nominated volume to be delivered in the month of nomination as computed on a month-to- date ratable basis, found by multiplying the month of nomination's date by the nominated rate of delivery for that month, without the express prior agreement of HECO. (c) Chevron and HECO shall make best efforts to coordinate their separate LSFO marine and pipeline deliveries into and out of HECO's storage tanks at Barbers Point to minimize operational difficulties and costs, including but not limited to tankage availability and vessel demurrage. (d) Unless waived by HECO, Chevron's marine deliveries of LSFO shall be limited to 250,000 barrels, during: (i) any ten day period, and (ii) any calendar month, except during months when Chevron's LSFO production facilities at Barbers Point are not operating. (e) Unless waived by HECO, Chevron's actual LSFO deliveries during any month shall be limited to 200,000 barrels above HECO's nomination for that month. (f) Unless waived by HECO, Chevron shall not deliver LSFO from its Barbers Point Refinery into HECO's storage tanks at Barbers Point during the fifteen (l5) days immediately preceding the scheduled delivery of a marine cargo from a vessel chartered by HECO or HECO's representative pursuant to the Facilities and Operating Contract between Chevron and HECO, as long as Chevron's LSFO can be delivered directly to HECO's storage tanks at Kahe, Waiau or Iwilei. ARTICLE 4: Quality The LSFO delivered hereunder shall comply with the following specifications:
LSFO ASTM Test Specification Specification Method Units Limits - ------------- --------- ----- ------------- API Gravity D4052 Deg 12 min 24 max Sulfur D4292 Wt % 0.50 max Flash Point (1) D93 Deg F 150 min Pour Point D97 Deg F 125 max Viscosity D445 SSU at l00 min 210 Deg F 450 max Ash D482 Wt % 0.05 max Gross Heating D240 MM BTU/Bbl 6.000 min Value Nitrogen D4629 Wt % 0.50 Water & Sediment D1796 Wt % 0.50
Note: (1) Flash point shall be at least 50 degress F above the pour point or 150 degrees F, whichever is greater. Page 2 CHEVRON MAKES NO WARRANTY, EXPRESSED OR IMPLIED IN FACT OR BY LAW, AS TO THE MERCHANTABILITY OR FITNESS FOR ANY PARTICULAR PURPOSE CONCERNING THE LSFO OTHER THAN IT SHALL COMPLY WITH THE QUALITY HEREIN SPECIFIED, AND THAT IT SHALL BE SUITABLE FOR USE AS A BOILER FUEL. ARTICLE 5: Price Section 5.1: Price Per Physical Barrel ----------------------------------------------------------------- This portion is confidential; therefore, it has been omitted and filed separately with the Commission. ----------------------------------------------------------------- Page 3 ----------------------------------------------------------------- This portion is confidential; therefore, it has been omitted and filed separately with the Commission. ----------------------------------------------------------------- Section 5.2: Flexibility in Supply Source To provide the flexibility needed by Chevron to meet its obligations to HECO, the source and type of crude oil and other raw material, the place of manufacture, and the manufacturer of LSFO for delivery to HECO hereunder shall be determined solely by Chevron. The price of all LSFO delivered by Chevron to HECO hereunder shall be determined in accordance with the terms of this Contract regardless of where, how and by whom such LSFO is manufactured and regardless of the type or source of crude oil or other raw materials used in its manufacture. Section 5.3: Fees, Taxes, Assessments, Levies, etc. In addition to all other amounts payable by HECO under this Contract, HECO shall reimburse Chevron for all taxes, assessments, levies and imposts of whatsoever kind or nature imposed on Chevron by any governmental or quasi-governmental body, including without limitation the Hawaii General Excise Tax, the Hawaii Environmental Response Tax, the Customs User Fee, the Federal Superfund Act and oil spill liability fees, with respect to the sale of product under this Contract or the receipt by Chevron of payments hereunder. Notwithstanding the foregoing, HECO shall not be required to reimburse Chevron for any tax measured by or based on the net income of Chevron or for real property taxes. To avoid duplication of recovery, HECO shall not be required to reimburse Chevron under this Section 5.3 for any item expressly mentioned by Platt's Oilgram Price Report or Bunkerwire, or confirmed by Platt's in writing upon inquiry by either Chevron or HECO, as being included in a price used to compute the billing price under Section 5.1. As of the effective date of this Contract, the governmental fees, etc. which are currently in effect are the Hawaii General Excise Tax (4.167%), the Superfund Petroleum fee ($0.097 per barrel), the Customs User Fee ($0.002 per barrel), and the Hawaii Environmental Response Tax ($0.05 per barrel). The Hawaii General Excise Tax and the Hawaii Environmental Response Tax will be added to the invoiced price. The Superfund Petroleum fee and the Customs User fee will be added to the LSWR Index of Section 5.1, since Platt's is not currently including them in their published prices; these fees will not be added to the LA Bunker index since Platt's is currently including them in their published prices. Section 5.4: Rounding of Index Averages All prices, index averages, adjustments thereto and other sums payable hereunder shall be stated in the nearest thousandth of a dollar. ARTICLE 6 [INTENTIONALLY OMITTED] Page 4 ARTICLE 7: Pipeline Delivery Section 7:1: LSFO Delivery Delivery of LSFO by pipeline shall be by one of the following methods. (a) Chevron may deliver LSFO by pipeline from Chevron's Refinery into HECO's storage tanks at Barbers Point. Title and risk of loss of LSFO so delivered shall pass to HECO at the discharge flanges of Chevron's main pipeline feeder/blender pumps, P2027 and P2027A, where Chevron's piping systems a connect to HECO's LSFO delivery line leading to its storage tanks. (b) Pursuant to the Facilities and Operating Contract between Chevron and HECO, Chevron may deliver LSFO by pipeline from Barbers Point (either Chevron's refinery or HECO's storage tanks) into HECO's storage tanks at Kahe, Waiau and Iwilei. Title and risk of loss of LSFO delivered from Chevron's refinery shall pass to HECO at the discharge flanges of the main pipeline booster pumps at Chevron's refinery. Title and risk of loss of the LSFO delivered from HECO's storage tanks shall remain with HECO at all times. HECO agrees to pay a per barrel pipeline pumping fee for the LSFO delivered under Section 7.1 (b). The pipeline pumping fees and the measurement of the pumped quantities are described in the Facilities and Operating Contract between Chevron and HECO. Section 7.2: Determination of Quality The quality of LSFO delivered to HECO shall be determined on the basis of samples drawn by Chevron in such a manner as to be representative of each individual delivery. Samples shall be drawn from Chevron's tanks prior to delivery to HECO and shall be divided into four parts. Separate parts shall be provided to both HECO and Chevron to determine quality. The remaining parts shall be sealed and retained separately by Chevron and HECO. The official heat content determination shall be based upon an average of Chevron's and HECO's test results, provided that such results fall within the ASTM reproducibility standard (currently 50,000 BTU per barrel) for Test D-240. Chevron and HECO will make best efforts to evaluate heat content and exchange results within 3 working days. In the event of an unresolvable difference between HECO and Chevron, HECO's sealed part shall be provided to an independent laboratory for an official determination, which shall be final. In cases of disagreement or excessive delays in HECO's determination of heat content, Chevron shall have the right to invoice the sale using a provisional heat content of 6.2 MM BTU per barrel, with any required adjustments made after final agreement is reached. Chevron and HECO shall share equally the cost of independent tests and determinations. Section 7.3: Measurement of Quantity Quantities of LSFO and line displacement stock delivered hereunder shall be determined at the time of delivery by gauging Chevron's tanks before and after pumping. Measurements shall be taken by Chevron or Chevron's agent and witnessed by HECO or HECO's agent. However, at HECO's option, measurements may be taken by a mutually agreed upon independent inspector at both Chevron's refinery and HECO's receiving facilities. If a mutually agreed upon independent inspector is used, Chevron and HECO shall share equally the cost of such independent inspections. Volumes delivered hereunder shall be converted to 60 degrees F, using the latest revision of ASTM Table 6. Section 7.4: Disputes of Quality and Quantity If Chevron or HECO has reason to believe that the quality or quantity of product stated for a particular delivery per Sections 7.2 or 7.3 is incorrect, that party shall within sixty days of the delivery date, present the other party with documentation supporting such determination and the parties will confer, in good faith, on the causes for the discrepancy and shall proceed to correct such causes and adjust the quality and quantity, if justified, for the deliveries in question. Page 5 ARTICLE 8: Marine Delivery Section 8.1: Notification of Use of HECO's Barbers Point Tankage Chevron shall provide HECO at least sixty days advanced notice of its planned use of a specified volume of no more than 300,000 barrels of HECO's storage capacity at Barbers Point and HECO shall set aside the requested storage capacity for the purpose of accepting Chevron's marine delivery. Chevron shall then provide HECO with weekly updates on the anticipated arrival date of the marine cargo. If Chevron is unable to provide sixty days advance notice, HECO will make all commercially reasonable efforts to provide Chevron with up to 300,000 barrels of storage capacity at Barbers Point. Section 8.2: Delivery of Marine Cargo Chevron may deliver the volume of LSFO specified in Section 8.1 from Chevron's vessel directly into HECO's storage tanks at Barbers Point. Chevron shall not deliver more than the specified volume without prior written approval from HECO. Chevron may not deliver LSFO from Chevron's vessels directly into HECO's storage tanks at Kahe, at Waiau or at Iwilei, without HECO's prior written approval. Such approval may be given during unusual circumstances, such as pipeline maintenance. Title and risk of loss of LSFO shall pass to HECO at the flanges where Chevron's piping systems connect to HECO's piping systems for HECO's tankage at Barbers Point, Kahe, Waiau or Iwilei. Section 8.3: Determination of Quantity and Quality The quantity and quality of LSFO delivered by marine vessel shall be determined in the manner specified in Sections 7.2, 7.3 and 7.4 of this Contract, except as follows: (a) all measurements and samples shall be made and drawn by or under the supervision of an independent inspector, and the costs thereof shall be shared equally by Chevron and HECO. (b) volume shall be determined by gauging HECO's receiving tank(s) before and after pumping; and (c) samples to determine quality shall be drawn after the LSFO is discharged on Oahu. Section 8.4: Delayed Invoicing Invoicing of marine deliveries of LSFO, in any ten day period, shall be limited to ten times the average daily rate of HECO's nomination for the month against which the marine delivery applies. ARTICLE 9: Line Displacement Stock and Blend Stock Section 9.l: Line Displacement Stock. HECO shall purchase from Chevron whatever line displacement stock that is required for Chevron to complete the deliveries of LSFO and that is received into HECO's tankage at Kahe, Waiau and Iwilei. The price of No. 2 diesel fuel or No. 6 fuel oil used as line displacement stock shall be the then-current pricing for the fuel comprising the line displacement stock in Chevron's supply contract with HECO and HECO's affiliates, if such a supply contract is in effect; otherwise its price shall be the then-current Honolulu posted price for such fuel, less normally available discounts, if any, at the time of purchase. The price of No. 5 fuel oil used as line displacement stock shall be the sum of 40% of the then-current No. 2 diesel fuel pricing and 60% of the then-current No. 6 fuel oil pricing in Chevron's supply contract with HECO and HECO's affiliates, if such a supply contract is in effect; otherwise its price shall be the then-current Honolulu posted price for No. 5 fuel oil, less normally available discounts, if any, at the time of purchase. HECO's minimum purchase obligation and Chevron's maximum purchase obligation set forth in Article 3 shall be reduced by each physical barrel of line displacement stock sold. Section 9.2: Blend Stock In the event HECO desires to adjust the quality of its LSWR in its Barbers Point tanks to meet the specifications of Article 4, Chevron shall supply the necessary blend stock pursuant to Addendum 2. Page 6 ARTICLE 10: Invoicing and Payment Section 10.1: Invoices Invoices, which will show the price per physical barrel of LSFO, blend stock and line displacement stock sold will be prepared and dated following delivery and shall be rendered from time to time each calendar month. The invoices shall also show as a separate item the estimated amounts of any reimbursements to which Chevron is entitled pursuant to Section 5.3. Section 10.2: Payments Payments of such invoices shall be made in U.S. dollars. Timing of payments for sales and deliveries received shall be based upon the invoice issue date which shall be the invoice date or postmarked mailing date of the invoice, whichever is later, as follows: (a) Payment for a received invoice dated from the 1st through the 10th of a month is due on the 20th of the same month. (b) Payment for a received invoice dated from the 11th through the 20th of a month is due by the last day of the same month. (c) Payment for a received invoice dated from the 21st through the last day of the month is due on the 10th day of the following month. Due dates are the dates payments are to reach Chevron. If the due date falls on a Saturday, the payment shall be made on the preceding business day. If such date falls on a Sunday or a holiday, payment shall be made the following business day. Section 10.3: Method of Payment Payments shall be by bank wire transfer of immediately available funds to: Chevron U.S.A. Inc. Account Number 59-51755 First National Bank of Chicago, Chicago, IL ABA Ref. No. 071000013 For identification purposes, all wires must clearly indicate that payment is being made by order of HECO and provide the invoice reference number. In addition, written documentation evidencing specific invoices being paid shall be immediately forwarded to: Utility Fuel Receivables/Room 3338 Chevron U.S.A. Inc. P.O. Box 7006 San Francisco, California 94120-7006 Fax (415) 894-1195 ARTICLE 11: Contingencies Section 11.1: Definition of Contingency As used in this Article 11, the term "contingency" means: (a) any event reasonably beyond the control of the party affected; (b) compliance, voluntary or involuntary, with a direction or request of any government or person purporting to act with governmental authority; excluding, however, any such direction or request restricting or otherwise regulating combustion of the LSFO to be purchased by HECO hereunder, the effect of which restrictions or regulation upon the parties' performance shall be governed by Section 11.5 of this Contract; (c) total or partial expropriation, nationalization, confiscation, requisitioning or abrogation or breach of government contract or concession; Page 7 (d) closing of, or restriction on the use of, a port or pipeline; (e) maritime peril (including but not limited to, negligence in navigation or management of vessel, collision, stranding, destruction, or loss of vessel), storm, earthquake, flood; (f) accident, fire, explosion; (g) hostilities or war (declared or undeclared), embargo, blockage, riot, civil unrest, sabotage, revolution, insurrection; (h) strike or other labor difficulty (whomever's employees are involved), even though the strike or other labor difficulty could be settled by acceding to the demands of a labor group; or (i) loss or shortage of supply, production, manufacturing, distribution, refining, transportation, delivery facilities, receiving facilities, equipment, labor, material, power generation or power distribution caused by circumstances which the affected party is not able to overcome by the exercise of reasonable diligence or which the affected party is able to overcome only at substantial additional expense in relation to the expected revenue, benefits or rights related directly to this Contract. Section 11.2: Obligations to Sell Chevron shall not be obligated to sell or deliver LSFO to the extent that performance of this Contract is prevented, restricted or delayed by a contingency which significantly affects Chevron's ability to supply, manufacture or transport LSFO to HECO under this Contract from Chevron's U.S. West Coast and Hawaiian refineries. In such circumstances, deliveries of LSFO to HECO may be reduced on a basis as equitable to HECO as to Chevron's and its affiliates' other customers of crude and petroleum products, and Chevron shall not be obligated to acquire additional crude or LSFO but to the extent that it does acquire additional crude or LSFO, HECO shall be entitled to an equitable share of the LSFO acquired or derived from the crude acquired, at a price to be agreed from time-to-time. Section 11.3: Obligations to Purchase HECO shall not be obligated to purchase, receive or use LSFO to the extent that performance of this Contract in the customary manner is prevented, restricted or delayed by a contingency. In such circumstances, purchases from Chevron may be reduced on any basis as equitable to Chevron as to HECO's other suppliers of LSFO. Section 11.4: Price Effectiveness If at any time any price determined under this Contract cannot be given effect because to do so would violate a direction or request of any government or person purporting to act with governmental authority, HECO and Chevron shall attempt to agree on an alternate course of action, but failing agreement within 10 days the party adversely affected may suspend performance with respect to the quantity of LSFO affected by the direction or request. Section 11.5: Combustion Specifications To the extent that any governmental regulation requires combustion of LSFO meeting more stringent specifications or permits combustion of LSFO meeting less stringent specifications than those in Article 4, HECO and Chevron shall negotiate in good faith to agree on an alternative course of action that will allow HECO to comply with such regulation while purchasing the equivalent of the full quantity of LSFO it would be required to purchase under Article 3, at a price and on other terms and conditions that are fair to both parties. Chevron shall have no obligation to deliver LSFO meeting new specifications if it is not available for purchase from third parties and Chevron cannot manufacture such LSFO in existing facilities without new capital investment. If HECO and Chevron do not agree on such an alternate course of action, then HECO may comply with such regulation in any reasonable manner it chooses, including the option to purchase from other sources for its plants located within the area in which such regulation specifically applies, fuels which will enable HECO to comply with such regulation. In such case, HECO's minimum purchase obligations and Chevron's maximum supply obligations under Article 3 shall be reduced accordingly. Page 8 To the extent HECO is unable to utilize fuel to be supplied by Chevron under this Contract, but HECO does not purchase fuel which meets such requirements from other sources in an amount equal to the amount by which deliveries under this Contract are reduced, then purchases from Chevron may be reduced on any basis as equitable to Chevron as to HECO'S other suppliers of similar fuel oil. Any adjustments in price pursuant to this Section 11.5 shall be governed by Section 11.6, except that the adjustments shall apply to all LSFO delivered which meets the new specifications. Section 11.6: Effective Date In the event of retroactive adjustments hereunder, the charge or credit to HECO shall be computed and billed to HECO as soon as practical after the adjustment is known. In the event of retroactive changes which cause adjustments hereunder after termination of this Contract, payment shall be made within 15 days after receipt of written demand therefor by the other party. Section 11.7: Refining and/or Delivery Operations Ownership Chevron's obligations under this Contract shall be contingent on Chevron's continued ownership or operation of its refining or delivery facilities in Hawaii or the U.S. West Coast. Chevron shall have the right to terminate this Contract in the event the ownership and operation of its refining and delivery facilities in Hawaii and the U.S. West Coast are transferred to an entity other than an affiliate. Chevron shall give HECO 180 days' written notice. ARTICLE 12: Effect of Suspension or Reduction Section 12.1: Notice of Suspension or Reduction In the event of any suspension or reduction of sales and deliveries under Article 11, Chevron shall not be obligated to sell and HECO shall not be obligated to buy, after the period of suspension or reduction, the undelivered quantity of LSFO which normally would have been sold and delivered hereunder during the period of suspension or reduction. Section 12.2: Option to Terminate If sales and deliveries are suspended under Article 11 for more than 180 days, Chevron or HECO shall have the option while such suspension continues to terminate its obligations to the other party under this Contract on 30-days' written notice to the other party. Section 12.3: Prompt Notices Any party which relies upon Article 11 shall give the other party prompt notice thereof specifying the anticipated amount and duration of any suspension or reduction of deliveries. It shall also give prompt notice when it no longer expects to rely on Article 11 and deliveries shall be reinstated subject to all conditions of this Contract, unless this Contract has been terminated previously under Section 12.2. Section 12.4: United States Currency Nothing in Article 11 shall relieve HECO of the obligation to pay in full in United States currency for the LSFO sold and delivered hereunder and for other amounts due by HECO to Chevron under this Contract. Section 12.5: Substitute Suppliers While deliveries are suspended or reduced by Chevron pursuant to Article 11, it shall not be a breach of this Contract for HECO to buy from a supplier other than Chevron the quantities of LSFO which Chevron does not deliver. During this period of time there will be no minimum volume requirements. After any suspension or reduction has ended, minimum and maximum volume requirements of Article 3 for the annual period in which the suspension or reduction occurred will be reduced in proportion to the ratio of the number of days within the annual period during which no suspension or reduction was in effect, to the number of days within the annual period. Page 9 ARTICLE 13: Waiver and Non-Assignability Section 13.1: Waiver Waiver by one party of the other's breach of any provision of this Contract shall not be deemed a waiver of any subsequent or continuing breach of such provisions or of the breach of any other provision or provisions hereof. Section 13.2: Non-Assignability This Contract shall not be assignable by either party without the written consent of the other, which shall not be unreasonably withheld, except that either party may assign this Contract to any affiliate, provided that any such assignment shall not release that party from any of its obligations hereunder, and except that HECO may assign this Contract to the Trustee under its First Mortgage Bond Indentures. Chevron does not, by agreement to such an assignment, waive any right it may have to terminate this Contract for any breach hereof occurring at any time before or after any such assignment or release HECO of any obligations arising under this Contract after any such assignment. Following any such assignment, no further assignment may be made without the consent of Chevron. Section 13.3: Definitions In this Article 13 and Sections 11.2 and 11.7, "affiliate" shall mean any corporation controlling, controlled by or under common control, with either Chevron or HECO. "Control" of a corporation shall mean ownership, directly or indirectly, or at least 50% of the voting shares of such corporation. ARTICLE 14: Default If HECO or Chevron considers the other party to be in default of any obligation under this Contract, such party shall give the other party notice thereof. Such other party shall then have 30 days in which to remedy such default. If the default is not cured, the other party may, without prejudice to any other right or remedy of such party in respect of such breach, terminate its obligations under this Contract, except for HECO's obligation to pay in full in United States currency for the LSFO sold and delivered hereunder and for other amounts due by HECO to Chevron under this Contract by 45 days notice to the party in breach. Any termination shall be without prejudice to accrued rights. All rights and remedies hereunder are independent of each other and election of one remedy shall not exclude another. In no event shall either party be liable for any indirect, consequential, special or incidental damages of any kind whether based in contract, tort (including without limitation negligence or strict liability), warranty or otherwise. ARTICLE 15: Conflicts of Interest Conflicts of interest related to this Contract are strictly prohibited. Except as otherwise expressly provided herein, neither party nor any director, employee or agent of a party shall give to or receive from any director, employee or agent of the other party any gift, entertainment or other favor of significant value, or any commission, fee or rebate. Likewise, neither party nor any director, employee or agent of a party shall enter into any business arrangement with any director, employee or agent of the other party (or any affiliate), unless such person is acting for and on behalf of the other party, without prior written notification thereof to the other party. In the event of any violation of this Article 15, including any violation occurring prior to the date of this Contract which resulted directly or indirectly in one party's consent to enter into this Contract with the other party, such party may, at its sole option, terminate this Contract at any time and, except for obligations to pay in full in United States currency for the outstanding payment obligations hereunder, shall be relieved of any further obligation under this Contract. Both parties agree to immediately notify the other of any known violation of this Article. Page 10 ARTICLE 16: Applicable Law This Contract shall be construed in accordance with, and all disputes arising hereunder shall be determined in accordance with, the local law of the State of Hawaii, U.S.A. ARTICLE 17: Public Utility Commission Approval This Contract is required to be filed with the Hawaii Public Utilities Commission ("PUC") for approval. If in the proceedings initiated as a result of the filing of this Contract, the PUC disapproves or fails to authorize the recovery of the fuel costs incurred under this Contract through HECO's "Energy Cost Adjustment Clause", HECO may terminate this Contract by 30 days written notice to Chevron. ARTICLE 18: Miscellaneous Section 18.1: Headings Headings of the Articles and Sections are for convenient reference only and are not to be considered part of this Contract. Section 18.2: Entire Agreement This document contains the entire agreement between the parties covering the subject matter and cancels, as of the effective date hereof, all prior agreements of any kind between the parties covering such subject matter and any amendments thereto. There are no other agreements which constitute any part of the consideration for, or any condition to, either party's compliance with its obligations under this Contract. Section 18.3: Contract is Not an Asset This Contract shall not be deemed to be an asset in, and, at the option of a party, shall terminate in the event of any voluntary or involuntary receivership, bankruptcy or insolvency proceedings affecting the other party. Section 18.4: Notices Except as otherwise expressly provided herein, all notices shall be given in writing, by letter, facsimile, telegraph or telex to the following addresses, or such other address as the parties may designate by notice, and shall be deemed given upon receipt. Seller: Manager, Petroleum Coke, Heavy Fuels & Sulfur Chevron U.S.A. Inc. P.O. Box 7006 San Francisco, CA 94120-7006 Facsimile: (415) 894-1195 Buyer: Manager, Power Supply Services Department Hawaiian Electric Company, Inc. Box 2750 Honolulu, HI 96840-0001 Facsimile: (808) 543-7788 Section 18.5: Unenforceable Terms If any term or provision, or any part of any term or provision, of this Contract is held by any court or other competent authority to be illegal or unenforceable, the remaining terms, provisions, rights and obligations shall not be affected. Section 18.6: Successors and Assigns This Contract shall inure to the benefit of and be binding upon the parties hereto, their successors and permitted assigns. Page 11 Section 18.7: Termination of Prior Agreement Effective as of the Effective Date of the Term hereunder, this Contract hereby supersedes that certain Low Sulfur Fuel Oil Supply Contract between the parties dated May 29, 1990, and all amendments thereto. IN WITNESS WHEREOF, the parties hereto have executed this Low Sulfur Fuel Oil Supply Contract as of the day and year first hereinabove written. CHEVRON U.S.A. INC. HAWAIIAN ELECTRIC COMPANY, INC. By /s/ Phillip H. Fisher By /s/ Edward Y. Hirata Phillip H. Fisher Edward Y. Hirata (Printed or Typed Name) Its Manager, Petroleum Coke Its Vice President Heavy Fuels & Sulfur Regulatory Affairs By /s/ M. M. Egged Molly M. Egged (Printed or Typed Name) Its Secretary Page 12 ADDENDUM No. 1 Sample Price Calculation July 1995 * ~ * ~ * ~ * ~ * ~ * ~ * ~ * ~ * ~ * ~ * ~ * ~ * ~ * ~ * ~ * ~ * This portion is confidential; therefore, it has been omitted and filed separately with the Commission. * ~ * ~ * ~ * ~ * ~ * ~ * ~ * ~ * ~ * ~ * ~ * ~ * ~ * ~ * ~ * ~ * Addendum No. 1 LONDON TANKER BROKERS' PANEL LIMITED Directors: Prince Rupert House E. F. Shawyer (Chairman) 64 Queen Street M. G. Johnson LONDON EC4R 1AD A. G. Burgess R. W. Park Telephone: 0171-248 4747 P. C. Delaney Telex: 885118 G C. Waaler Fax: 0171-489 0536 R. W. Porter (Managing) 1st June 1995 Hawaiian Electric Company Inc P. O. Box 2750 Honolulu HI 96840-0001 Hawaii Attn: Mr. J. C. Aicken Dir. Fuel Resource Dear Sirs AFRA The results of the monthly average freight rate assessments made over the period 16th April 1995/15th May 1995 are as follows: MEDIUM RANGE (25,000/ 44,999 (LONG) TONS) WORLDSCALE 161.6 LARGE RANGE 1 (45,000/ 79,999 (LONG) TONS) WORLDSCALE 120.3 LARGE RANGE 2 (80,000/159,999 (LONG) TONS) WORLDSCALE 87.8 VLCC (160,000/319,999 (LONG) TONS) WORLDSCALE 54.9 ULCC (320,000/549,999 (LONG) TONS) WORLDSCALE 43.1 We would remind you that, in accordance with the agreement between us, these assessments are provided to you on the condition they will not be reproduced, supplied or disclosed to any other person. Yours faithfully LONDON TANKER BROKERS' PANEL LIMITED /s/ R.W. Porter R. W. Porter Managing Director ADDENDUM NO. 2 Quality Adjustments * ~ * ~ * ~ * ~ * ~ * ~ * ~ * ~ * ~ * ~ * ~ * ~ * ~ * ~ * ~ * ~ * This portion is confidential; therefore, it has been omitted and filed separately with the Commission. * ~ * ~ * ~ * ~ * ~ * ~ * ~ * ~ * ~ * ~ * ~ * ~ * ~ * ~ * ~ * ~ * * ~ * ~ * ~ * ~ * ~ * ~ * ~ * ~ * ~ * ~ * ~ * ~ * ~ * ~ * ~ * ~ * This portion is confidential; therefore, it has been omitted and filed separately with the Commission. * ~ * ~ * ~ * ~ * ~ * ~ * ~ * ~ * ~ * ~ * ~ * ~ * ~ * ~ * ~ * ~ * ADDENDUM NO. 3 Recovery of Worldscale Fixed Differential For Oil Pollution Liability Insurance The price formula for LSFO in Section 5.1 of the Contract includes the component "FREIGHT" that refers to a Worldscale 100 rate published in the current edition of Worldscale which incorporates a Fixed Rate Differential to reflect the cost of additional premiums for Oil Spill Liability Insurance on vessels carrying Persistent Oils applicable to voyages having a destination in the U.S.A.. Chevron acknowledges that any vessel used to transport LSFO that is sold and purchased under the Contract, including its components and the crude oil from which the LSFO is derived, shall be required to possess oil spill liability insurance coverage in the amount of $700 million. The price formula component "FREIGHT" refers to an AFRA rate applicable to a vessel size classification of LR-1, or Large Range 1. This vessel classification references tanker vessels ranging in size from 45,000 Long Tons Deadweight to 79,999 Long tons Deadweight. In order to derive an approximation of the relationship between Deadweight and Gross Registered Tons for a nominal vessel consistent with the mathematical average of this vessel size classification, the average of two vessels that have transported LSFO or its components to Hawaii in the recent past that are approximately equal to the midpoint of the LR-1 range were referenced. These vessels are described as follows:
Name Deadweight Tons (DWT) Gross Registered Tons (GRT) M/T London Spirit 62,097 36,865 M/T London Victory 62,156 36,865 Average 62,127 36,865
The Worldscale 100 rate that is to be included in the computation of FREIGHT is to be derived in the same manner as the following illustrative example calculations: 1. The Worldscale 100 rate in effect from February 19, 1995, shall include a Fixed Rate Differential which shall be the sum of a. and b. and shall be computed as follows: a. Fixed Rate Differential with respect to the additional insurance premiums For Basic $500 million coverage of Oil Pollution Liability Insurance on vessels carrying Persistent Oils to and from the U.S.A. Fixed Rate Differential = $0.27/GRT X 36,865 GRT 62,127 = $0.160 per Metric Tonne For illustrative purposes, this rate may be expressed in U.S. dollars per barrel as follows: = $0.160/Metric Tonne 6.75 barrels/Metric Tonne = $0.024/barrel b. Fixed Rate Differential with respect to the additional insurance premiums for Excess $200 million coverage of Oil Pollution Liability Insurance on vessels carrying Persistent Oils to and from the U.S.A. Fixed Rate Differential = $0.2225/GRT X 36,865 GRT 62,127 = $0.132 per Metric Tonne For illustrative purposes, this rate may be expressed in U.S. dollars per barrel as follows: = $0.132/Metric Tonne 6.75 barrels/Metric Tonne = $0.020/barrel The sum of which shall equal $0.2920 per Metric Tonne, or $0.044 expressed in U.S. dollars per barrel. 2. The AFRA Worldscale Points and their related Worldscale 100 rate applicable for each calendar quarter are based upon an average of the three monthly AFRA publications in the calendar quarter immediately preceding the calendar quarter of the nominated month of delivery. Therefore the relevant Fixed Rate Differentials computed above should be applied as follows: A. With respect to volumes of LSFO nominated during the three (3) months of the quarter following a change in the published rate (typically February of each year), the relevant Fixed Rate Differential to be included in the computation of the price component "FREIGHT" shall be the sum of: 50/90 multiplied by the Fixed Rate Differential computed prior to the rate change: and 40/90 multiplied by the Fixed Rate Differential computed using the revised rate: B. With respect to volumes of LSFO nominated for subsequent months, and continuing for so long as the Fixed Rate Differentials as set forth in Worldscale Circular shall be applicable, the relevant Fixed Rate Differential to be included in the computation of the price component "FREIGHT" shall be as derived in part 1 above. EX-10.9 6 INTER-ISLAND FUEL CONTRACT HECO Exhibit 10.9 INTER-ISLAND INDUSTRIAL FUEL OIL AND DIESEL FUEL CONTRACT By and Between CHEVRON U.S.A. INC. and HAWAIIAN ELECTRIC COMPANY, INC.; MAUI ELECTRIC COMPANY, LTD.; HAWAII ELECTRIC LIGHT CO., INC.; HAWAIIAN TUG & BARGE CORP.; and YOUNG BROTHERS, LIMITED.
TABLE OF CONTENTS ARTICLE PAGE I. DEFINITIONS............................... 1 II. TERM...................................... 4 III. QUANTITY.................................. 4 IV. QUALITY................................... 8 V. PRICE, BTU DETERMINATION.................. 10 VI. DELIVERIES................................ 14 VII. DETERMINATION OF QUALITY.................. 17 VIII. MEASUREMENT OF QUANTITY................... 18 IX. INVOICING AND PAYMENT.................... 19 X. SELLER'S FACILITIES ON OAHU............... 21 XI. SELLER'S FACILITIES ON MAUI AND HAWAII.... 22 XII. CONTINGENCIES............................. 31 XIII. EFFECT OF SUSPENSION OR REDUCTION......... 33 XIV. WAIVER AND NONASSIGNABILITY............... 35 XV. CONFLICT OF INTEREST...................... 35
XVI. DEFAULT................................... 36 XVII. APPLICABLE LAW............................ 37 XVIII. INDEMNITY................................. 37 XIX. PUBLIC UTILITIES COMMISSION............... 39 XX. INSURANCE................................. 40 XXI. SAFETY AND TERMINAL PROTECTION............ 42 XXII. POLLUTION MITIGATION...................... 43 XXIII. MISCELLANEOUS............................. 44
ADDENDUMS NO. 1 SAMPLE PRICE CALCULATIONS---NOVEMBER, 1995 NO. 2 QUALITY CONTROL SAMPLES 3/4 SUMMARY AND SCHEMATIC OF SAMPLE LOCATIONS
INTER-ISLAND INDUSTRIAL FUEL OIL AND DIESEL FUEL CONTRACT THIS CONTRACT, dated as of November 20, 1995, by and between CHEVRON U.S.A. INC., a Pennsylvania corporation ("Seller"), and HAWAIIAN ELECTRIC COMPANY, INC.; MAUI ELECTRIC COMPANY, LTD.; HAWAII ELECTRIC LIGHT CO., INC.; HAWAIIAN TUG & BARGE CORP.; and YOUNG BROTHERS, LIMITED, each a Hawaii corporation (collectively referred to as "Buyers" and individually referred to as "Buyer" herein unless otherwise indicated). WHEREAS, Seller is a supplier of petroleum fuels with terminal and refinery facilities in Hawaii. WHEREAS, Buyers are engaged in various business activities: HECO, HELCO, and MECO are utilities engaged in the generation, purchase and sale of electricity in Hawaii; HT&B is a tug and barge company; YB is a barge company engaged in general marine transportation. NOW, therefore, the parties agree as follows: ARTICLE I DEFINITIONS Except where otherwise indicated, the following definitions shall apply throughout this Contract: 1. "CIFO" means Chevron Industrial Fuel Oil No. 6 per Section 4.1. 2. "Fuel Oil" means either Chevron Industrial Fuel Oil No. 6 or third party industrial fuel oil similar to Chevron Industrial Fuel Oil No. 6. 3. "Diesel" means Chevron Diesel Fuel No. 2 per Section 4.2. Page 1 4. "diesel" means either Chevron Diesel Fuel No. 2 or a third party diesel fuel similar to Chevron Diesel Fuel No. 2. 5. "Jet" means Chevron Jet Fuel per Section 4.3. 6. "jet" means either Chevron Jet Fuel or a third party jet fuel similar to Chevron Jet Fuel. 7. "Oil" means either Chevron Industrial Fuel Oil No. 6 or Chevron Diesel Fuel No. 2. 8. "oil" means Chevron Industrial Fuel Oil No. 6, Chevron Diesel Fuel No. 2, a third party industrial fuel oil similar to Chevron Industrial Fuel Oil No. 6, or a third party diesel fuel similar to Chevron Diesel Fuel Oil No. 2. 9. "HECO" means Hawaiian Electric Company, Inc., which has electrical generating facilities on the island of Oahu. 10. "MECO" means Maui Electric Company, Ltd., which has electrical generating facilities on the islands of Maui, Lanai and Molokai. For the purposes of this Contract "MECO" refers to the operations on the island of Maui only. 11. "MECO-Molokai" means the Molokai Division of Maui Electric Company, Ltd., which has electrical generation facilities on the island of Molokai. 12. "HELCO" means Hawaii Electric Light Co., Inc., which has electrical generating facilities on the island of Hawaii. 13. "HT&B" means Hawaiian Tug & Barge Corp., which operates a tug and barge fleet. 14. "YB" means Young Brothers, Limited, which operates a general marine transportation business. Page 2 15. "HMT" means Seller's Honolulu Marine Terminal at Honolulu Harbor Piers 30 and 31. 16. "HDT" means Seller's Honolulu Distribution Terminal at Honolulu Harbor Pier 35. 17. "Kaunakakai Terminal" means a third party Marine Terminal at Kaunakakai Harbor, Molokai. 18. "Oahu P/L" means Seller's Light product distribution pipeline between Seller's Barbers Point oil refinery and HECO's Waiau electric generating station. 19. "affiliate", except where otherwise expressly provided, means a corporation controlling, controlled by or under common control with Seller or Buyer, as the case may be. 20. "Carrier" means Buyer's nominated barge or designated trucking company. 21. "gallon" means a United States gallon of 231 cubic inches at 60 degrees F. 22. "physical barrel" means 42 American bulk gallons at 60 degrees F. 23. "year" means a calendar year. 24. "Deliver, Delivery, Deliveries or Delivered" refers to the Oil or Jet sold by Seller and purchased by Buyer. 25. "Loaded", when used in conjunction with Oil or Jet, refers to Buyer's Delivered Oil or Jet mixed with any cargo retains within Buyer's nominated barge. 26. "loaded", when used in conjunction with Oil or Jet, refers to Buyer's Delivered Oil or Jet or a third party's delivered oil or jet mixed with any cargo retains within Buyer's nominated barge. Page 3 27. "Received", when used in conjunction with Oil or Jet, refers to Buyer's Oil or Jet to be received by Seller into its terminals on Maui and Hawaii. "Received", when used in conjunction with oil, means a third party industrial fuel oil similar to Chevron Industrial Fuel Oil No. 6 or a third party diesel fuel similar to Chevron Diesel Fuel Oil No. 2 received by Seller into its terminals on Maui and Hawaii from Buyer's nominated barge. 28. "Returned", when used in conjunction with Oil, oil or Jet, refers to the Oil, oil or Jet returned by Seller from its terminals on Maui and Hawaii to Buyer for Buyer's use in Buyer's electrical generating facilities. ARTICLE II TERM The term of this Contract shall be from January 1, 1996 (the "Effective Date"), through December 31, 1997, and shall continue thereafter for additional 12-month periods (each 12-month period being an "Extension") beginning each successive January 1, unless Buyer or Seller gives written notice of termination at least 120 days before the beginning of an Extension. ARTICLE III QUANTITY Section 3.1 ------------------------------------------------------------------ This portion is confidential; therefore, it has been omitted and filed separately with the Commission. ------------------------------------------------------------------ Page 4 ------------------------------------------------------------------ This portion is confidential; therefore, it has been omitted and filed separately with the Commission. ------------------------------------------------------------------ Page 5 ------------------------------------------------------------------ This portion is confidential; therefore, it has been omitted and filed separately with the Commission. ------------------------------------------------------------------ Section 3.2 Prior to the 15th day of each month, HECO shall give Seller a forecast of each Buyer's monthly lifting of Diesel, CIFO and Jet from each supply point for each of the coming three months. Each Buyer recognizes the importance to Seller of reasonably accurate lifting forecasts because of Seller's need to plan production and shipments. Section 3.3 Buyers' purchases and Seller's Deliveries of CIFO and Diesel will occur in a ratable fashion throughout the year. At the end of each calendar year, Buyers' CIFO and Diesel purchase performance will each be reviewed by Seller for ratability. i. If upon review Buyers' volumes in any calendar quarter were less than 15% of the total minimum annual liftings for either CIFO or Diesel, a premium of $0.42/barrel will be charged to Buyer for the difference between 15% of total minimum annual liftings of that product and Buyers' actual liftings of that product. ii. If upon review Buyers' volumes in any calendar quarter were greater than 35% of the total maximum annual liftings for either CIFO or Diesel, a premium of $0.42/barrel will be Page 6 charged to Buyer for the difference between Buyers' actual liftings of that product and 35% of total maximum annual liftings of that product. iii. Seller understands Buyers' jet fuel purchases will occur in a non- ratable fashion and no ratability premiums will be applied to jet fuel purchases. Section 3.4 ------------------------------------------------------------------ This portion is confidential; therefore, it has been omitted and filed separately with the Commission. ------------------------------------------------------------------ Page 7 ------------------------------------------------------------------ This portion is confidential; therefore, it has been omitted and filed separately with the Commission. ------------------------------------------------------------------ ARTICLE IV QUALITY Section 4.1 The CIFO to be supplied hereunder shall be Seller's regular commercial grade of Chevron Industrial Fuel Oil No. 6, having the following specifications:
ASTM Item Specifications Test Method Gravity, API 6.5 min. D1298 or D4052-86 Flash, degrees F 150 min. D93 Viscosity, SSF @ 122 degrees F 179 min., 226 max. D445/D2161 Pour Point, degrees F 55 max. D97 Sulfur, % Wt. 2.0 max. D1552, D2622 or D4294 Sediment & Water, % Vol. 0.5 max. D1796 Heat Value, Gross** 6.0 D240
MM BTU/BBL ** Typical Value is 6.3. Section 4.2 The Diesel to be supplied hereunder shall be similar to Seller's regular commercial grade of Chevron Diesel Fuel No. 2 and have the following specifications:
Specification Test Item Units Limits Method Gravity @ 60 degrees F degrees API 30.0 min. D1298 or D4052-86 Specific 0.88 max. Viscosity @ 100 degrees F SSU 32.3 - 40.0
Page 8
Specification Test Item Units Limits Method Heat Value, Gross** MM BTU/BBL 5.84 Calculated or D240 Flash Point, PM degrees F 150 min. D93 Pout Point** degrees F 35 D97 Ash PPM, wt. 100 max. D482 Cetane Index 40 min. D4737 Carbon Residue, 10% Residuum %, wt. 0.35 max. D524 Sediment & Water %, vol. 0.05 max. D1796 Sulfur %, wt. 0.40 max. D1552, D2622 or D4294 Distillation 90% Recovered degrees F 540 - 650 D86 Sodium + Potassium PPM, wt. 0.5 max. D3605
** Chevron does not provide specifications on these items. Values are typical; they are not guaranteed. Section 4.3 The Jet to be supplied hereunder shall be similar to Seller's regular commercial grade of Chevron Jet Fuel; provided, however, Buyer agrees that the Jet shall be used exclusively as stationary combustion turbine start-up fuel. Any other use, including without limitation its use for aviation purposes, shall constitute unforeseeable misuse. Section 4.4 SELLER MAKES NO WARRANTY, EXPRESSED OR IMPLIED IN FACT OR BY LAW, AS TO MERCHANTABILITY OR FITNESS FOR ANY PARTICULAR PURPOSE concerning the Oil other than it shall comply with the quality herein specified, that the Diesel shall be suitable for use as a fuel, the CIFO shall be suitable for use as a boiler fuel, and the Jet shall be suitable for use as stationary combustion turbine start-up fuel. Page 9 ARTICLE V PRICE, BTU DETERMINATION Section 5.1 i. NO. 2 DIESEL FUEL ------------------------------------------------------------------ This portion is confidential; therefore, it has been omitted and filed separately with the Commission. ------------------------------------------------------------------ Page 10 ii. CIFO ---------------------------------------------------------------- This portion is confidential; therefore, it has been omitted and filed separately with the Commission. ---------------------------------------------------------------- iii. Jet. ---------------------------------------------------------------- This portion is confidential; therefore, it has been omitted and filed separately with the Commission. ---------------------------------------------------------------- Page 11 ---------------------------------------------------------------- This portion is confidential; therefore, it has been omitted and filed separately with the Commission. ---------------------------------------------------------------- Section 5.2 To provide the flexibility needed by Seller to meet its obligations to Buyer, the source and type of crude oil and other raw material, the place of manufacture, and the manufacturer of Oil for delivery to Buyer hereunder shall be determined solely by Seller. The price of all Oil Delivered by Seller to Buyer hereunder shall be determined in accordance with the terms of this Contract regardless of where, how and by whom such Oil is manufactured and regardless of the type or source of crude oil or other raw materials used in its manufacture. Section 5.3 In addition to all other amounts payable by Buyer under this Contract, Buyer shall reimburse Seller for all taxes, assessments, levies and imposts of whatsoever kind or nature imposed on Seller by any governmental or quasi-governmental body, including without limitation the Hawaii General Excise (Gross Income) Tax, the Hawaii Environmental Response Tax and Hawaii Liquid Fuel Tax, where applicable, with respect to the execution or performance of this Contract or the receipt by Seller of payments hereunder. Notwithstanding the foregoing, Buyer shall not be required to reimburse Seller for any tax measured by or based on the net income of Seller or for real property taxes. To avoid duplication of recovery, Buyer shall not be required to reimburse Seller under this Section 5.3 Page 12 for any item expressly mentioned by Platt's or Bunkerwire, or confirmed by Platt's or Bunkerwire in writing upon inquiry by either Buyer or Seller, as being included in a price used to compute PD1, PD2, PF or PJ under Section 5.1. As of the Contract execution date, the Superfund Petroleum fee of the Superfund Revenue Act of 1986 is the only tax, assessment, levy or impost implicitly reimbursed to Seller through inclusion in the Platt's listings within DI, FI and JI of Section 5.1. Section 5.4 ---------------------------------------------------------------- This portion is confidential; therefore, it has been omitted and filed separately with the Commission. ---------------------------------------------------------------- Section 5.5 Seller will draw representative samples of each CIFO Delivery, which will be used to determine the CIFO BTU content per Section 7.1. If the weighted average BTU content of the CIFO Delivered to Buyer during any half of any annual period is less than 6.2 MM BTU per physical barrel, the price of such CIFO delivered to Buyer during each month of that semiannual period shall be adjusted by multiplying the CIFO price as determined by Section 5.1.ii. for each month by a ratio of actual average heat content to 6.2 MM BTU and Seller shall issue Buyer a credit for the difference between such aggregate and the adjusted price. Section 5.6 All prices, adjustments thereto and other sums payable hereunder shall be stated in the nearest thousandth of a dollar. Page 13 ARTICLE VI DELIVERIES Section 6.1 i. Seller agrees to Deliver and MECO and HELCO agree to receive their Oil into their nominated barge, F.O.B. the HMT. The delivery rate on Diesel shall be 3,000 BPH minimum. The delivery rate on CIFO shall be 1,600 BPH minimum. Seller agrees to make its best, reasonable efforts in operating its current CIFO delivery systems to Deliver CIFO into the nominated barge at a temperature above 120(degrees)F. Buyer acknowledges that the CIFO delivery temperature is determined by Seller's and HECO's scheduling of other fuels in Seller's pipeline, and hence cannot be guaranteed. ii. When mutually agreed to, Seller may Deliver and MECO and HELCO may receive their Diesel into their nominated barge, F.O.B. Honolulu Harbor Piers 31 or 32. The delivery rate shall be 2,000 BPH minimum. iii. When mutually agreed to, Seller may Deliver and MECO and HELCO may receive their Oil into their nominated barge, F.O.B. Barbers Point Piers 5 or 6. The delivery rate shall be 4,000 BHP minimum. iv Seller and Buyer's agent or a mutually agreed upon independent inspector shall inspect the receiving barge cargo tanks to ensure that they contain only minimal remains of the previous cargo, before Seller will Deliver Oil to be terminaled per Article XI. Remains exceeding common commercial practice shall be removed by Buyer to protect the quality of the Delivered Oil. Buyer or Buyer's agent may remove the remains by any legal method at their disposal, including pumping the remains into Seller's slop tank at the HMT, if convenient to Seller. Seller shall have the right to charge Buyer for accepting remains if the quantity to be removed from any barge or the number of barges Page 14 requiring remains to be removed becomes excessive. Seller shall have the right to flush the receiving barge cargo tanks with a small quantity of Seller's Oil before loading the Delivered Oil. v. Seller and Buyer's agent or a mutually agreed upon independent inspector shall take a representative sample of the oil in the barge cargo tanks, after Seller has delivered Oil into MECO's and HELCO's nominated barges. See Addendum 2 hereto for an overview on all sampling. This sample will be divided into two parts and dated. One part shall be labeled "Seller's Loaded Sample." One part shall be sealed and labeled "Buyer's Loaded Retain." These samples shall indicate the quality of the mixture of Delivered Oil and the previous cargo remains and will provide an early warning of any quality problems with the Received Oil as described in Section 11.3. Section 6.2 Seller agrees to Deliver and HT&B and YB agree to receive their Diesel into their nominated vessel F.O.B. the HMT, Pier 31 or 32. The delivery rate shall be 175 BPH minimum. Section 6.3 Seller agrees to Deliver and HECO agrees to receive its Diesel under either of the options below. i. Seller will Deliver Diesel from the HDT into HECO's nominated tank truck at a delivery rate of 190 BPH minimum. ii. Seller will Deliver Diesel from the Oahu P/L into HECO's storage at HECO's Waiau Power Plant, at a delivery rate of 1,000 BPH minimum. Section 6.4 Seller agrees to deliver and MECO and HELCO agree to receive Jet at MECO's or HELCO's respective power plant truck unloading rack. Section 6.5 Seller agrees to Deliver and MECO-Molokai agrees to receive its Oil into its nominated marine terminal at Kaunakakai Harbor, Molokai. The delivery rate shall be 1,000 BPH minimum. Buyer will provide discharge facilities through an independent third party; Seller has no responsibility to procure discharge facilities on the island of Molokai. Page 15 Section 6.6 i. For the Delivered Oil under Sections 6.1 and 6.2, care, custody, control, title and risk of loss shall pass to Buyer as the Oil passes the flange connecting the cargo hose of the Buyer's nominated barge or vessel and Seller's pipeline. ii. For the Delivered Diesel under Section 6.3.i., care, custody, control, title and risk of loss shall pass to Buyer as the Oil passes the flange connecting the cargo hose of the Buyer's nominated tank truck or vessel and Sellers' truck loading rack. iii. For the Delivered Diesel under Section 6.3.ii., care, custody, control, title and risk of loss shall pass to Buyer as the Oil passes the flange connecting Buyer's pipeline at the Waiau Power Plant to the Oahu P/L. iv. For the Delivered Diesel under Section 6.5, care, custody, control, title and risk of loss shall pass to Buyer as the Oil passes the flange connecting the cargo hose of the Seller's nominated barge or vessel and the Buyer's designated pipeline. v. For the delivered Jet under section 6.4, care, custody, control, title and risk of loss shall pass to Buyer as the jet passes the flange connecting the cargo hose of the Seller's tank truck and Buyer's truck unloading rack at HELCO's and MECO's respective power plant. Section 6.7 Buyer agrees to provide Seller with five (5) days advance written notice of Oil to be Delivered under Section 6.1, 6.3.ii. or 6.4, and telephone notification for Diesel to be Delivered under Section 6.2 or 6.3.i. Seller shall make all reasonable effort to comply with this notice and advise Buyer promptly if the delivery time cannot be met. Page 16 ARTICLE VII DETERMINATION OF QUALITY Section 7.1 The quality of the Oil purchased by HECO and the quality of Jet purchased by HELCO and MECO shall be determined on the basis of composite samples drawn by Seller in such a manner as to be representative of each Delivery. The quality of the Oil purchased by MECO or HELCO, i.e., barge cargos, shall be determined on the basis of composite samples drawn by Seller, collected at a point prior to entry into each barge, in such a manner as to be representative of each barge cargo. The quality of the Oil purchased by MECO- Molokai shall be determined on the basis of composite samples drawn by Seller from receiving tanks at the Kaunakakai Terminal after each delivery. The heat content of the Oil shall be determined on a monthly weighted average basis for each Buyer from the same composite samples drawn by Seller at the time and place described above. See Addendum 2 hereto for an overview on all sampling. Such samples shall be divided into three (3) parts and dated. 1. One part shall be used by Seller to determine the heat content (gross BTU) per physical gallon and, if needed, the other qualities of Article IV ("Seller's Delivered Sample"). 2. One part shall be provided to Buyer for the purpose of verifying Seller's determinations ("Buyer's Delivered Sample"). 3. One sealed part shall be provided to Buyer ("Buyer's Delivered Retain"). Section 7.2 Within sixty (60) days after the end of each month, Buyer shall give Seller notice of any disagreement with Seller's quality or heat content determination for Delivered Oil and Delivered Jet during such month. In the event that such disagreement is not resolved within thirty (30) days, Buyer's Delivered Retain shall be submitted to a mutually agreed upon independent laboratory for inspection, whose determination shall be final and binding on both parties. Seller and Buyer shall share equally the cost of such independent inspections. Page 17 Section 7.3 If Buyer and Seller agree or the independent inspector determines that the quality of Delivered Oil and Delivered Jet did not equal the qualities described in Article IV (regardless if such Oil and Jet passed tests of conditional acceptance), the Buyer and Seller shall attempt to minimize the impact. This may include specification waiver especially if use of Oil and Jet will not harm Buyer or Seller, or delivering higher quality Oil and Jet in a timely manner to produce a specification quality blend in Seller's terminal. If all such, or similar efforts fail to resolve the quality problem, then Seller at Seller's expense, shall exchange the non-specification Oil and Jet and other oil downgraded by commingling with Seller's Oil and Jet, with Oil and Jet meeting the qualities of Article IV. However, in no event shall Seller be liable for any indirect, consequential, special or incidental damages of any kind whether based in contract, tort (including without limitation negligence or strict liability), warranty or otherwise allegedly caused by or based upon the qualities of the Oil and Jet. ARTICLE VIII MEASUREMENT OF QUANTITY Section 8.1 Quantities of the Oil sold and purchased under this Contract at the HMT shall be determined at the time of each Delivery by gauging the HMT tanks before and after pumping. Diesel sold and purchased under this Contract from the Oahu P/L shall be determined at the time of each Delivery by gauging Seller's tanks at its Barbers Point Refinery before and after pumping. Diesel sold and purchased under this Contract at the Kaunakakai Terminal shall be determined at the time of each Delivery by gauging Buyers' tanks at Kaunakakai before and after pumping. Volumes Delivered hereunder shall be converted to 60(degrees)F, using the latest revision of Table 6 of ASTM IP Petroleum Measurement Tables, American Edition, ASTM Designation D-1250. Measurements shall be taken by Seller and witnessed by Buyer or Buyer's agent. However, at Buyer's option, such measurements shall be taken by a mutually agreed upon independent inspector. Seller and Buyer shall share equally the Page 18 cost of independent inspections. Seller reserves the right to install meters on the Oahu P/L and to determine quantity as in Section 8.2. Section 8.2 Diesel sold and purchased under this Contract at the HDT and Jet sold and purchased by HELCO and MECO shall be determined at the time of each Delivery by reading calibrated meters, corrected in each instance to volume at 60(degrees)F in accordance with the latest issue of Table 6 of ASTM IP Petroleum Measurement Tables, American Edition, ASTM Designation D-1250. The meters used at the HDT and Seller's terminals on Hawaii and Maui shall be Seller's meters. Both Buyer and Seller shall have the right to review each other's routine certification documents. Section 8.3 If Buyer or Seller has reason to believe that the quantity of Oil and Jet stated for a particular Delivery per Sections 8.1 or 8.2 is incorrect, the party shall within sixty (60) days of the Delivery date, present the other party with documentation supporting such determination and the parties will confer, in good faith, on the causes for the discrepancy and shall proceed to correct such causes and adjust the quantity, if justified, for the deliveries in question. ARTICLE IX INVOICING AND PAYMENT Section 9.1 Invoices for the sale of CIFO, Diesel, and Jet and for the services provided by Seller as outlined in Article XI shall be rendered promptly to Buyer, upon receipt of all required information. Section 9.2 Payments shall be made in U.S. dollars. Timing of payments of invoices shall be as follows: i. Invoices to HECO, MECO, MECO-Molokai and HELCO: Page 19 a. Payment for Deliveries and services from the first through the tenth calendar day of a month for which invoices have been received is due on the twentieth day of the month. b. Payment for Deliveries and services from the eleventh through the twentieth calendar day of a month for which invoices have been received is due on the last day of the month. c. Payment for Deliveries and services from the twenty-first through the last calendar day of a month for which invoices have been received is due on the tenth day of the following month. Due dates are dates payments are to reach Seller. If the due date falls on a Saturday, the payment shall be due on the preceding business day. If such date falls on a Sunday or a holiday, payment shall be due the following business day. ii. Payment for Deliveries to HT&B and YB for which invoices have been received shall be paid within thirty (30) days of the Delivery date. Section 9.3 Method of payment shall be as follows: i. Payments of HECO, MECO, MECO-Molokai, and HELCO shall be by bank wire transfer of immediately available funds to: First National Bank of Chicago, Chicago, Illinois 60607 Attention: GFTS for credit to the following accounts, depending on which Buyer is making a payment: a. HECO Chevron U.S.A. Inc. - Section #632 Account No. 1184762 Page 20 b. HELCO Chevron U.S.A. Inc. - Section #632 Account No. 1237632 c. MECO Chevron U.S.A. Inc. - Section #632 Account No. 1237636 d. MECO-Molokai Chevron U.S.A. Inc. - Section #632 Account No. 6049549 For identification purposes, all wires must clearly indicate that payment is being made by order of Buyer and indicate the invoice reference number. In addition, written documentation evidencing specific invoices being paid shall be immediately forwarded to: Chevron U.S.A. Inc P.O. Box R Concord, California 94524 ii. Payment by HT&B and YB shall be mailed to: Chevron U.S.A. c/o First Interstate Bank Dept. 7351 Los Angeles, CA 90088 Payment shall include written documentation evidencing specific invoices being paid. ARTICLE X SELLER'S FACILITIES ON OAHU Seller agrees to provide the use of its Oahu P/L for the Diesel Delivered to HECO's Waiau Power Plant per Section 6.3.ii. Page 21 ARTICLE XI SELLER'S FACILITIES ON MAUI AND HAWAII As used in this Article XI, "Buyer" will refer only to MECO or HELCO. Section 11.1 ---------------------------------------------------------------- This portion is confidential; therefore, it has been omitted and filed separately with the Commission. ---------------------------------------------------------------- ii. Whenever Buyer purchases third party oil which is to be terminaled in Seller's facilities, Buyer shall obtain a sample representative of the oil in the barge cargo tanks, after the third party supplier has completed the loading of such oil into Buyer's nominated barge. See Addendum 2 hereto for an overview on all sampling. This sample shall be divided into three parts and dated. One part shall be labeled "Supplier's loaded sample" and delivered to Seller's representative as soon as possible. One part shall be labeled "Buyer's loaded sample." One part shall be sealed and labeled "Buyer's loaded retain." These samples shall indicate the quality of this mixture of purchased oil and the previous Page 22 cargo remains. To provide an early warning of any quality problems with the Received oil, Buyer agrees to perform a preliminary analysis on the Buyer's loaded sample consisting of API gravity, appearance and, in the case of diesel fuel, flash point, at the time such third party oil is loaded for transport. Buyer also agrees to deliver one copy of such preliminary analysis promptly to Seller's representative at the Honolulu Marine Terminal and to carry a second copy on board Buyer's nominated barge for delivery to Seller's representative upon arrival at the appropriate outer island terminal. Buyer further agrees that the cost of any additives which may be required to eliminate compatibility problems between third party oil and Seller's Oil at the outer island terminal shall be solely for Buyer's account. Section 11.2 Buyer shall provide Seller with estimated arrival times of the barge transporting the oil for which Buyer desires to use Seller's facilities on Maui or Hawaii. Buyer or Buyer's agent shall provide radio or phone notification to Seller's representative at each unloading location at least seven days prior to a third-party supplied oil delivery and at least 24 hours prior to a Seller supplied oil delivery. Buyer or Buyer's agent shall also provide the Captain of the Port with radio or phone notification at least 24 hours prior to any delivery. Should the estimated time of arrival change by two or more hours following the 24 hour arrival report, Buyer or Buyer's agent shall promptly report the change to Seller's representative and the Captain of the Port at the place of planned arrival. Section 11.3 i. Seller shall analyze Seller's Loaded sample of Section 6.1.iv and Buyer's supplied results from any Buyer's loaded sample of Section 11.1.ii for conditional acceptance for receiving the oil, and if warranted, analyze Seller's Loaded sample of Section 6.1.iv and Supplier's loaded sample of Section 11.1.ii for all the qualities described in Article IV, while Buyer's nominated barge is enroute to Maui or Hawaii, to reduce the risk of contaminating Seller's terminal inventories. See Addendum 2 hereto for an overview of Page 23 all sampling. If the loaded sample fails conditional acceptance, Seller shall promptly notify Buyer of any quality problems with the loaded oil. Both Buyer and Seller shall attempt to minimize the impact of any quality problem by specifications waiver especially if use of the loaded oil will not harm either Buyer or Seller, or by Buyer or Seller delivering higher quality oil in a timely manner to produce a specification quality blend at Seller's terminal. If all such, and similar, efforts fail to resolve the quality problem, then Buyer's loaded oil shall not be unloaded into Seller's terminal tanks. Buyer may return nonspecification Loaded Oil to Seller's Barbers Point refinery, in which case Seller shall replace the non-specification Loaded Oil by delivering an equal volume of Oil into Buyer's nominated barge at the HMT, in a timely manner. ii. All costs and expenses, including transportation, re-refining and handling costs incurred in returning and replacing non-specification loaded oil and Loaded Oil shall be paid by the party responsible for the contamination. Responsibility shall be determined by analyzing the Delivered Oil samples of Section 7.1 and the loaded oil samples of Section 6.1.iii and Section 11.1.ii. If Buyer and Seller cannot agree whether the Delivered Oil or the loaded oil meet the qualities specified in Article IV, then the sealed retain of the oil in question, Buyer's Delivered retain, Buyer's Loaded retain or Buyer's loaded retain shall be submitted to a mutually agreed upon independent laboratory, whose determination shall be final and binding on both parties. Seller shall have the responsibility for Buyer's transportation and handling costs for its own re-refining cost if it is determined that the qualities described in Article IV are not met by the Delivered Oil. Otherwise, Buyer shall be responsible for Seller's handling and re-refining cost and its own transportation and handling costs. The responsible party shall reimburse the other party for such costs and expenses within sixty (60) days of the delivery date of the non-specification loaded oil. However, in no event shall such party be responsible for any indirect, consequential, special or incidental damages of any kind whether based in contract, tort (including without limitation negligence or strict liability), warranty or otherwise Page 24 allegedly caused by or based upon the quality of the non-specification loaded oil. Seller and Buyer shall share equally the cost of any independent inspections. Section 11.4 Buyer shall be responsible for meeting all Coast Guard dock watch requirements at Hilo, Hawaii and Kahului, Maui. Charges levied by any governmental agency for the use of their facilities at Hilo, Hawaii or Kahului, Maui, including but not limited to the State of Hawaii's wharf and pipeline fees, shall be for Buyer's account. Section 11.5 Seller will take care, custody and control of Received oil having conditionally acceptable quality per Section 11.6 at the flange connecting Seller's independently owned pipeline at each location to the multiparty diesel pipeline at Kahului Harbor, Maui and the multiparty diesel and fuel oil pipelines at Hilo Harbor, Hawaii. Title and risk of loss shall remain with Buyer. Seller shall not be responsible for any type of loss of the oil while it is in Seller's custody except when loss or damage is caused by Seller's failure to use reasonable care in receiving, handling, storing, or delivering such oil. Received oil will be commingled with Seller's Oil in Seller's tankage at Seller's Kahului, Maui or Hilo, Hawaii terminals. Section 11.6 i. Quality of Received oil at the unloading location shall be determined by testing representative samples taken from Carrier's barge tanks. See Addendum 2 hereto for an overview of all sampling. Seller, or a mutually agreed third party, shall perform the sampling and testing as prescribed in the latest API-ASTM laboratory testing standards. Samples will be divided into four parts and dated. One part shall be tested promptly per Section 11.6.ii. One part shall be labeled "Seller's Received Sample," one part shall be sealed and labeled "Seller's Received Retain" and one part shall be labeled "Buyer's Received Sample" and provided to Buyer. ii. To facilitate Buyer's barge turnaround, one part of the sample taken in Section 11.6.i will be promptly tested for its API gravity, appearance and in the case of Diesel also for its Page 25 flash point. Received Oil will be considered conditionally acceptable if its API gravity is within 0.3 degrees of its gravity delivered to Buyer under Article VI. Received oil will be considered acceptable if its API gravity is within 0.3 degrees of the Supplier's loaded sample gravity as determined in Section 11.1.ii, and for diesel cargos, if its Flash point is above its 150 (degrees)F specification of Section 4.2. iii. Notwithstanding the above conditional acceptance, Seller may use Seller's Received Sample to determine all the qualities described in Article IV for Received oil. Within thirty (30) days after each oil cargo unloading, Seller shall give Buyer notice of any claim of contamination of Seller's Oil from commingling with Received oil. In the event that such claim is not resolved within thirty (30) days of the original claim, Seller's Received Retain shall be submitted to a mutually agreed upon independent laboratory for inspection, whose determination shall be final and binding on both parties. Seller and Buyer shall share equally the cost of such independent inspections. iv. If Buyer and Seller agree or the independent inspector determines that the quality of the Received oil did not meet the qualities described in Article IV, and the most recent Delivered Oil did meet the quality described in Article IV, both Buyer and Seller shall attempt to minimize the impact of any quality problem on Buyer by waiver of Buyer's requirement to meet specifications especially if Seller's use of the oil will not significantly harm Seller, or by Buyer or Seller delivering higher quality oil in a timely manner to produce a specification quality blend at Seller's terminal. If all such, and similar, efforts fail to resolve the quality problem, then Buyer will reimburse Seller the transportation, handling and re-refining costs of exchanging Buyer's and Seller's oil, with oil meeting the qualities described in Article IV. Such reimbursement shall occur within 60 days of Seller's original claim. However, in no event shall Buyer be liable for any indirect, consequential, special or incidental damages of any kind whether based in contract, tort (including without limitation negligence or strict liability), warranty or otherwise allegedly caused by or based upon the quality of the Received oil. Page 26 Section 11.7 The quantity of Received oil and Received Oil over which Seller takes custody shall be determined at the time of each barge cargo unloading by gauging Seller's terminal tank before and after pumping. Free water shall be drawn off prior to each level measurement. Volumes delivered hereunder shall be converted to 60(degrees)F, using the latest revision of Table 6 of ASTM IP Petroleum Measurement Tables, American Edition, ASTM Designation D-1250. Measurements shall be taken by Seller and witnessed by Buyer or Buyer's agent. However, at Buyer's option, such measurement shall be taken by a mutually agreed upon independent inspector. Buyer and Seller shall share equally the cost of independent inspections. Section 11.8 In the event that Buyer and Seller have agreed to commingle their oil in a barge or vessel compartment to reduce freight costs, and there are discrepancies between either the quantities of oil loaded per Section 6.1 and unloaded per Section 11.7 or the qualities of oil loaded per Section 7.1 and unloaded per Section 11.6, then Buyer and Seller shall share the benefits or losses of the discrepancy proportionally to the loaded volumes. Section 11.9 Buyer will provide Seller's terminal representative, during normal working hours, at least 24-hour notice of any transfers required from Seller's facilities in Kahului or Hilo. Section 11.10 Buyer shall regain care, custody and control of Returned Fuel Oil at the flange connecting Seller's Hilo terminal pipeline to Buyer's pipeline. i. The quantity of Fuel Oil over which Seller returns custody shall be determined at the time of each transfer by gauging Seller's terminal tanks before and after pumping. Volumes Returned hereunder shall be converted to 60(degrees)F, using the latest revision of Table 6 of ASTM IP Petroleum Measurement Tables, American Edition, ASTM Designation D-1250. Measurements shall be taken by Seller and witnessed by Buyer or Buyer's agent. However, at Buyer option, such measurements shall be taken by a mutually agreed upon Page 27 independent inspector. Buyer and Seller shall share equally the cost of independent inspections. ii. Buyer and Seller agree that Buyer shall maintain a positive inventory of Fuel Oil at Seller's Hilo terminal for Buyer's use, but acknowledge that a small negative inventory may occasionally result after Fuel Oil custody transfers from Seller to Buyer. Seller shall maintain a record of Buyer's net Fuel Oil inventory stored in its Hilo terminal based on receipts as determined in Section 11.7 and returns as determined in Section 11.10.i. Seller will provide book inventory records once each week, convenient to Seller's normal weekly inventory period. If at the end of any annual period, the net Fuel Oil inventory is negative, Seller will invoice Buyer and Buyer will pay Seller an amount equal to the net negative inventory in barrels multiplied by the sum of the December CIFO sales price at the end of the annual period per Section 5.1 and the December commercial freight rate charged by HELCO's carrier for a minimum cargo size of 38,000 barrels to Seller at the end of the annual period for CIFO transport between Honolulu Harbor, Oahu and Hilo Harbor, Hawaii. Section 11.11 Buyer shall regain care, custody and control of Returned diesel at the end of the fill pipe connecting Seller's terminal pipelines to Carrier's tank trucks. Transfers will be made in minimum 5,000 gallons per delivery load. i. The quantity of diesel over which Seller returns custody shall be determined at the time of each transfer by reading Seller's calibrated meters corrected in each instance to volume at 60(degrees)F using the latest revision of Table 6 of ASTM IP Petroleum Measurement Tables, American Edition, ASTM Designation D-1250. If Buyer or Seller have reason to believe that the quantity of Returned diesel stated for a particular transfer is incorrect, that party shall within fifteen days of the transfer date, present the other party with documentation supporting such determination and the parties will confer, in good faith, on the causes for the discrepancy and shall proceed to correct such causes and adjust the quantity, if justified, for the transfers in question. Page 28 ii. Seller shall maintain records of Buyer's net diesel inventories stored at each of its Kahului, Maui and Hilo, Hawaii terminals, based on receipts as determined in Section 11.7 and returns as determined in Section 11.11.i. Seller will provide book inventory records once each week, convenient to Seller's normal weekly inventory period. iii. Seller will periodically reconcile meter measurements with tank gaugings. Buyer may review Seller's reconciliation calculations. However, there will be no retroactive adjustments to the volumes delivered or received as a result of this procedure. Section 11.12 Seller shall be under no obligation to provide Buyer quantities of Returned oil greater than Buyer's current net oil inventory. However, Seller will attempt to meet Buyer's unanticipated needs, after considering the needs of its other customers and its own available inventory. Section 11.13 i. Returned oil transferred by Seller shall meet the qualities described in Article IV. Seller shall verify the quality of the Returned oil by taking a representative sample of the oil in Seller's tanks on Maui and Hawaii after each receipt of Buyer's or Seller's oil. See Addendum 2 hereto for an overview of all sampling. This sample shall be promptly tested by Seller for its API gravity, appearance and in the case of diesel also for its flash point. Buyer and Seller agree that successful passage of the prompt test on this sample is sufficient evidence for Seller to return oil to Buyer, without limiting Buyer's rights within Section 11.13.ii. Seller shall also take samples representative of the Returned oil after each receipt of Buyer's or Seller's oil into Seller's terminal. These samples will be divided into three parts and dated. One part shall be labeled "Seller's Returned Sample." One part shall be sealed and labeled "Buyer's Returned Retain" and one part shall be labeled "Buyer's Returned Sample." Both shall be provided to Buyer. ii. Notwithstanding the above conditional acceptance, Buyer may use Buyer's Returned Sample to determine all the qualities described in Article IV for the Returned oil. Within Page 29 thirty (30) days after each oil delivery, Buyer shall give Seller notice of any claim of contamination and of resulting losses. In the event that such claim is not resolved within thirty (30) days of the original claim, Buyer's Returned Retain shall be submitted to a mutually agreed upon independent laboratory for inspection, whose determination shall be final and binding on both parties. Seller and Buyer share equally the cost of such independent inspections. iii. If Buyer and Seller agree or the independent inspector determines that the quality of the Returned oil did not meet the qualities described in Article IV and that the most recent Received Oil and Received oil did meet the qualities described in Article IV, both Buyer and Seller shall attempt to minimize the impact of any quality problem on Seller by waiver of Seller's requirement to meet specifications, especially if Buyer's use of the oil will not significantly harm Buyer, or by Seller returning higher quality oil to produce a specification quality blend at Buyer's plants. If all such, and similar, efforts fail to resolve the quality problem, then Seller will, at Seller's expense, exchange Buyer's Returned oil and, if appropriate, any of Buyer's other similar oil which has been downgraded by commingling with the Returned oil, with oil meeting the qualities described in Article IV. Seller shall make its best, reasonable effort to replace Buyer's oil in a timely manner. However, in no event shall Seller be liable for any indirect, consequential, special or incidental damages of any kind whether based in contract, tort (including without limitation negligence or strict liability), warranty or otherwise allegedly caused by or based upon the quality of the Returned oil. Section 11.14 ---------------------------------------------------------------- This portion is confidential; therefore, it has been omitted and filed separately with the Commission. ---------------------------------------------------------------- Page 30 ii. ---------------------------------------------------------------- This portion is confidential; therefore, it has been omitted and filed separately with the Commission. ---------------------------------------------------------------- ARTICLE XII CONTINGENCIES Section 12.1 As used in this Article XII, the term "contingency" means: (a) any event reasonably beyond the control of the party affected; (b) compliance, voluntary or involuntary, with a direction or request of any government or person purporting to act with governmental authority; excluding, however, any such direction or request restricting or otherwise regulating combustion of the oil to be purchased by Buyer hereunder, the effect of which restrictions or regulation upon the parties' performance shall be governed by Section 12.5 of this Contract; (c) total or partial expropriation, nationalization, confiscation, requisitioning or abrogation or breach of a government contract or concession; (d) closing of, or restriction on the use of, a port or pipeline; (e) maritime peril (including but not limited to, negligence in navigation or management of vessel, collision, stranding, destruction, or loss of vessel), storm, earthquake, flood; (f) accident, fire, explosion; (g) hostilities or war (declared or undeclared), embargo, blockage, riot, civil unrest, sabotage, revolution, insurrection; (h) strike or other labor difficulty (whomever's employees are involved), even though the strike or other labor difficulty could be settled by acceding to the demands of a labor group; or, (i) loss or shortage of supply, production, manufacturing, distribution, refining, transportation, delivery facilities, receiving facilities, equipment, labor, material, power Page 31 generation or power distribution caused by circumstances which the affected party is not able to overcome by the exercise of reasonable diligence or which the affected party is able to overcome only at substantial additional expense in relation to the expected revenue, benefits or rights related directly to this Contract. Section 12.2 Seller shall not be obligated to sell or deliver Oil or Jet to the extent that performance of this Contract is prevented, restricted or delayed by a contingency which significantly affects Seller's ability to supply, manufacture or transport Oil or Jet to Buyer under this Contract from Seller's U.S. West Coast and Hawaiian refineries. In such circumstances, Deliveries of Oil or Jet to Buyer may be reduced on a basis as equitable to Buyer as to Seller's and its affiliates' other customers of crude and petroleum products, and Seller shall not be obligated to acquire additional crude, oil or jet but to the extent that it does acquire additional crude, oil or jet, Buyer shall be entitled to an equitable share of the oil or jet acquired or derived from the crude acquired, at a price to be agreed from time to time. Section 12.3 Buyer shall not be obligated to purchase, receive or use Oil or Jet to the extent that performance of this Contract in the customary manner is prevented, restricted or delayed by a contingency. In such circumstances, purchases from Seller may be reduced on any basis as equitable to Seller as to Buyer's other suppliers of oil or jet. Section 12.4 If at any time any price determined under this Contract cannot be given effect because to do so would violate a direction or request of any government or person purporting to act with governmental authority, Buyer and Seller shall attempt to agree on an alternate course of action but failing agreement within 10 days the party adversely affected may suspend performance with respect to the quantity of Oil or Jet affected by the direction or request. Page 32 Section 12.5 To the extent that any governmental regulation requires combustion of oil or jet meeting specifications other than those in Article IV, Buyer and Seller shall negotiate in good faith to agree on an alternative course of action that will allow Buyer to comply with such regulation while purchasing the equivalent of the full quantity of oil or jet it would be required to purchase under Article III, at a price and on other terms and conditions that are fair to both parties. Seller shall have no obligation to deliver oil or jet meeting new specifications if it is not available for purchase from third parties and Seller cannot manufacture such oil or jet in existing facilities without new capital investment. If Buyer and Seller do not agree on such an alternative course of action, then Buyer may comply with such regulation in any reasonable manner it chooses, including the option to purchase from other sources for its plant located within the area in which such regulation specifically applies, fuels which will enable Buyer to comply with such regulation. In such case, Buyer's minimum purchase requirement under Article III shall be reduced accordingly. Section 12.6 Seller's obligations under this Contract shall be contingent on Seller's continued ownership or operation of its refining or delivery facilities in Hawaii or the U.S. West Coast. Seller shall have the right to terminate this Contract in the event the ownership and operation of its refining and delivery facilities in Hawaii and the U.S. West Coast are transferred to an entity other than an affiliate. Seller shall give Buyer 180 days' written notice. ARTICLE XIII EFFECT OF SUSPENSION OR REDUCTION Section 13.1 In the event of any suspension of sales and Deliveries under Article XII, Seller shall not be obligated to sell and Buyer shall not be obligated to buy, after the period of suspension or reduction, the undelivered quantity of Oil or Jet which normally would have been sold and delivered hereunder during the period of suspension or reduction. Page 33 Section 13.2 If sales and Deliveries are suspended under Article XII for more than 180 days, Seller or Buyer shall then have the option while such suspension continues to terminate its obligations to the other party under this Contract on 30 days' written notice to the other party. Section 13.3 Any party which relies upon Article XII shall give the other party prompt notice thereof specifying the anticipated amount and duration of any suspension or reduction of Deliveries. It shall also give prompt notice when it no longer expects to rely on Article XII and Deliveries shall be reinstated subject to all conditions of this Contract, unless this Contract has been terminated previously under Section 13.2. Section 13.4 Nothing in Article XII shall relieve Buyer of the obligations to pay in full in United States currency for the Oil or Jet sold and Delivered hereunder and for other amounts due to Buyer to Seller under this Contract, nor relieve Seller of the obligation to return to Buyer the net positive inventory of Buyer's oil stored in Seller's Hilo, Hawaii and Kahului, Maui terminals. Section 13.5 While Deliveries are suspended or reduced by Seller pursuant to Article XII, it shall not be a breach of this Contract for Buyer to buy from a supplier other than Seller the quantities of Oil or Jet which Seller does not Deliver. During this period of time, there will be no minimum volume requirements. After any suspension or reduction has ended, minimum and maximum volume requirements for the semiannual period in which the suspension or reduction occurred will be reduced in proportion to the ratio of the number of days within the semiannual period during which no suspension or reduction was in effect, to the number of days within the semiannual period. Page 34 ARTICLE XIV WAIVER AND NONASSIGNABILITY Section 14.1 Waiver by one party of the other's breach of any provision of this Contract shall not be deemed a waiver of any subsequent or continuing breach of such provisions or of the breach of any other provision or provisions hereof. Section 14.2 This Contract shall not be assignable by either party without the written consent of the other, which shall not be unreasonably withheld, except that Seller may assign this Contract to any affiliate, provided that any such assignment shall not release Seller from any of its obligations hereunder, and except that HECO, MECO, MECO-Molokai, and HELCO may assign their interests in the Contract to the Trustee under their respective First Mortgage Bond Indentures. Seller does not, by agreement to such an assignment, waive any right it may have to terminate this Contract for any breach hereof occurring at any time before or after any such assignment or release Buyer of any obligations arising under this Contract after any such assignment. Following any such assignment, no further assignment may be made without the consent of Seller. ARTICLE XV CONFLICT OF INTEREST Conflicts of interest related to this Contract are strictly prohibited. Except as otherwise expressly provided herein, neither party nor any director, employee or agent of a party shall give to or receive from any director, employee or agent of the other party any gift, entertainment or other favor of significant value, or any commission, fee or rebate. Likewise, neither party nor any director, employee or agent of a party shall enter into any business arrangement with any director, employee or agent of the other party (or any affiliate), unless such person is acting for and on behalf of the other party, without prior written notification thereof to the other party. In the event of any violation of this paragraph, including any violation occurring prior to the date of this Contract which resulted directly or indirectly in one party's consent to enter into this Page 35 Contract with the other party, such party may, at its sole option, terminate this Contract at any time and, except for Buyer's obligation to pay in full in United States currency for the Oil sold and Delivered hereunder and for other amounts due by Buyer to Seller under this Contract, and for Seller's obligation to return to Buyer the net positive inventory of Buyer's oil stored in Seller's Hilo, Hawaii and Kahului, Maui terminals, shall be relieved of any further obligation under this Contract. Both parties agree to immediately notify the other of any known violation of this Article. ARTICLE XVI DEFAULT If Buyer or Seller considers the other party to be in default of any obligation under this Contract, such party shall give the other party notice thereof. Such other party shall then have 30 days in which to remedy such default. If the default is not cured, the other party may, without prejudice to any other right or remedy of such party in respect of such breach, terminate its obligations under this Contract, except for Buyer's obligation to pay in full in United States currency for the Oil or Jet sold and delivered hereunder and for other amounts due by Buyer to Seller under this Contract, and for Seller's obligation to return to Buyer the net positive inventory of Buyer's oil stored in Seller's Hilo, Hawaii and Kahului, Maui terminals, by 45 days' written notice to the party in breach. Any termination shall be without prejudice to accrued rights. All rights and remedies hereunder are independent of each other and election of one remedy shall not exclude another. Except as provided under Sections 18.2 and 18.4, in no event shall either party be liable for any indirect, consequential, special or incidental damages of any kind whether based in contract, tort (including without limitation negligence or strict liability), warranty or otherwise. Seller's termination of its obligations to a Buyer in this Contract due to default by that Buyer shall not terminate Seller's obligations to the remaining Buyers not in default of this Contract. Page 36 ARTICLE XVII APPLICABLE LAW This Contract shall be construed in accordance with, and all disputes arising hereunder shall be determined in accordance with, the local law of the State of Hawaii, U.S.A. ARTICLE XVIII INDEMNITY Section 18.1 Seller shall indemnify, defend and hold harmless Buyer, its directors, officers, employees and agents (including but not limited to affiliates and contractors and their employees) from and against all liabilities, damages, losses, penalties, claims, demands, suits, costs, expenses (including reasonable attorneys' fees), and proceedings of any nature whatsoever for personal injury (including death), or property damage, including but not limited to Buyer's facilities (collectively "Injury or Damage"), that results from non-specification or contaminated Delivered Oil or Jet, or that arises out of or is in any manner connected with the Delivery or Receipt of Oil or Jet related to this Contract at Seller's facilities when in the custody of Seller or the transportation of Oil or Jet related to this Contract when in the custody of Seller, except to the extent that such Injury or Damage may be attributable to the negligence or willful action of Buyer. This Section 18.1 shall not include any indirect, consequential, special or incidental damages of any kind whether based in contract, tort (including without limitation negligence or strict liability), warranty or otherwise. Section 18.2 Without limiting the generality of Section 18.1, Seller shall indemnify, defend and hold harmless Buyer, its directors, officers, employees and agents (including but not limited to affiliates and contractors and their employees) from and against all liabilities, damages, losses, penalties, claims, demands, suits, costs, expenses, and proceedings of any nature whatsoever directly or indirectly arising out of or attributable to the release, threatened release, discharge, disposal or presence of Oil, Jet or hazardous material related to this Contract when in the custody of Seller, or of MECO-Molokai Diesel related to this Contract when in the custody Page 37 of any carrier, except to the extent that such release, threatened release, discharge, disposal or presence of Oil, Jet or hazardous material may be attributable to the negligence or willful action of Buyer, including without limitation: (1) all foreseeable and unforeseeable consequential damages; (2) the reasonable costs of any required or necessary repair, cleanup or detoxification of an area of oil, jet or hazardous material and the preparation and implementation of any closure, remedial or other required plans; (3) the reasonable costs of the investigation of any environmental claims by Buyer; (4) the reasonable costs of Buyer's enforcement of this Contract; and (5) all reasonable costs and expenses incurred by Buyer in connection with clauses (1), (2), (3), and (4), including without limitation reasonable attorneys' fees and court costs. Section 18.3 Buyer shall indemnify, defend and hold harmless Seller, its directors, officers, employees and agents (including but not limited to affiliates and contractors and their employees) from and against all liabilities, damages, losses, penalties, claims, demands, suits, costs, expenses (including reasonable attorneys' fees), and proceedings of any nature whatsoever for personal injury (including death), or property damage, including but not limited to Seller's facilities (collectively "Injury or Damage"), that results from non-specification or contaminated Received oil or jet, or that arises out of or is in any manner connected with the delivery or receipt of oil or jet at Seller's facilities when in the custody of Buyer, any carrier or subsequent buyer of oil or jet related to this Contract or the transportation of oil or jet when in the custody of Buyer, any carrier or subsequent buyer of oil or jet related to this Contract, except to the extent that such Injury or Damage may be attributable to the negligence or willful action of Seller. This Section 18.3 shall not include any indirect, consequential, special or incidental damages of any kind whether based in contract, tort (including without limitation negligence or strict liability), warranty or otherwise. Section 18.4 Without limiting the generality of Section 18.3, Buyer shall indemnify, defend and hold harmless Seller, its directors, officers, employees and agents (including but not limited to affiliates and contractors and their employees) from and against all liabilities, damages, Page 38 losses, penalties, claims, demands, suits, costs, expenses, and proceedings of any nature whatsoever directly or indirectly arising out of or attributable to the release, threatened release, discharge, disposal or presence of oil, jet or hazardous material related to this Contract when in the custody of Buyer, any carrier (except any carrier of MECO-Molokai diesel related to this Contract) or subsequent buyer of oil or jet related to this Contract, except to the extent that such release, threatened release, discharge, disposal or presence of oil, jet or hazardous material may be attributable to the negligence or willful action of Seller, including without limitation: (1) all foreseeable and unforeseeable consequential damages; (2) the reasonable costs of any required or necessary repair, cleanup or detoxification of an area of oil, jet or hazardous material and the preparation and implementation of any closure, remedial or other required plans; (3) the reasonable costs of the investigation of any environmental claims by Seller; (4) the reasonable costs of Seller's enforcement of this Contract; and (5) all reasonable costs and expenses incurred by Seller in connection with clauses (1), (2), (3), and (4), including without limitation reasonable attorneys' fees and court costs. ARTICLE XIX PUBLIC UTILITIES COMMISSION Section 19.1 This Contract is required to be filed with the Hawaii Public Utilities Commission ("PUC") for approval. If in the proceedings initiated as a result of the filing of this Contract the PUC disapproves or fails to authorize the recovery of the fuel costs incurred under this Contract through Buyer's Energy Cost Adjustment Clause, Buyer may terminate this Contract by 30 days' written notice to Seller. Section 19.2 In the event that a Decision and Order or other action by a governmental regulatory body impairs Seller's ability to enforce any terminal and safety protection or operation provisions under this Contract, Buyer and Seller shall attempt to agree on an alternate course of action, but failing agreement within 10 days, the Seller may suspend performance with respect to Page 39 the quantity of oil or jet affected by said Decision and Order after giving Buyer 90 days' written notice. ARTICLE XX INSURANCE Section 20.1 Without in any way limiting Buyer's liability pursuant to this Contract, Buyer shall maintain and require any carrier or subsequent buyer of oil or jet related to this Contract to maintain the following insurance and all insurance that may be required under the applicable laws, ordinances, and regulations of any governmental authority: i. Workers' Compensation and Employers' Liability Insurance as prescribed by applicable law, including insurance covering liability under the Longshoremen's and Harbor Workers' Act, the Jones Act and the Outer Continental Shelf Land Act, if applicable. ii. Commercial General Liability Insurance including Bodily Injury and Property Damage Insurance with a limit not less than $1,000,000 combined single limit per occurrence. iii. Automobile Bodily Injury and Property Damage Liability Insurance on all owned, non-owned and hired vehicles used in receiving oil or jet from Seller's facilities with a limit not less than $1,000,000 combined single limit per occurrence for bodily injury and property damage. iv. Hull and Machinery Insurance including collision liability and tower's liability on vessels engaged in towage with a limit at least equal to the actual value of each vessel and barge. v. Marine Insurance under one of the two following options: Option One: Protection and Indemnity Insurance including coverage for injuries to or death of masters, mates and crew and excess collision liabilities. The limits of such insurance shall not be less than $25 million per occurrence. Vessel pollution liability insurance including coverage for TOVALOP liabilities and Page 40 pollution liabilities imposed by federal and state laws now or hereafter in effect in an amount not less than $500 million; or, Option Two: Protection and Indemnity Insurance on a full entry basis with an International Group P&I Club. Such insurance shall include, but not be limited to, coverage for injuries to or death of masters, mates and crew; excess collision liabilities and pollution liabilities imposed by federal and state laws now or hereafter in effect as well as TOVALOP liabilities (if applicable). Such insurance shall be unlimited as per International Group, P&I Club rules except for pollution liabilities which shall be limited to $500 million or the maximum pollution limit offered by the P&I Clubs of the International Group. Section 20.2 The above insurance shall include a requirement that the insurer provide Seller with 30 days' written notice prior to the effective date of any cancellation or material change of the insurance. The insurance specified in Sections 20.1 (i) and 20.1 (iv) shall contain a waiver of subrogation against Seller and an assignment of statutory lien, if applicable. The insurance specified in Sections 20.1 (ii), 20.1 (iii), and 20.1 (v) Option One Protection and Indemnity Insurance shall name Seller as additional insured. Section 20.3 Before performance of this Contract, Buyer shall provide Seller with certificates or other documentary evidence satisfactory to Seller of the insurance coverages and endorsements. Section 20.4 Without in any way limiting Seller's liability, Seller shall obtain from any Seller carrier or subsequent buyer from Seller of oil or jet related to this Contract the insurance coverages and endorsements set forth in this Article excepting that both Seller and Buyer be named as additional insureds. Page 41 Section 20.5 The terminaling and handling fees listed in Section 11.14 do not include any insurance covering loss of Buyer's oil or jet while it is in the custody of Seller. It is expressly understood and agreed that insurance, if any is desired by Buyer, shall be carried by Buyer at its own expense. ARTICLE XXI SAFETY AND TERMINAL PROTECTION Section 21.1 Any buyer or carrier of oil or jet related to this Contract or their agents shall comply with all of the operating and safety regulations of Seller, as amended from time-to-time, when alongside, upon, or when approaching the premises of Seller for the purpose of loading oil or jet related to this Contract or when departing Seller's premises after loading oil or jet related to this Contract. In particular, all smoking shall be limited to such locations and occasions as are specifically authorized in writing by Seller. If Seller determines that an unsafe condition exists, Seller may, at its absolute discretion, cease the loading or unloading operations and order any buyer or carrier of oil or jet related to this Contract or their agents to leave its place of mooring. Any loss or damage incurred by Seller, any buyer or carrier of oil or jet related to this Contract or their agents due to any violation by any buyer or carrier of oil or jet related to this Contract or their agents of Seller's operating and safety regulations shall be for Buyer's or Carrier's account. Copies of Seller's operating and safety regulations are available upon request. Section 21.2 In addition to its rights under Section 21.1, Seller shall have the right to refuse acceptance of any barge or vessel nominated by Buyer to load or discharge if in Seller's Terminal's sole opinion such barge or vessel for any reason is unacceptable. Seller's Terminal's acceptance or rejection of Buyer's nominated barge or vessel shall be communicated to Buyer within forty- eight (48) hours after the Terminal's receipt of nomination, and in the event Buyer's barge nomination is rejected, Seller shall provide Buyer satisfactory documentation of the basis for the rejection of such nomination. Seller's Terminal's acceptance or rejection of any barge or Page 42 vessel shall not constitute a continuing acceptance or rejection of such barge or vessel for subsequent loading or discharge. Seller shall not be liable for any loss, damage or delay caused by its rejection of a vessel nomination hereunder, nor any loss, damage or delay caused by its rejection of a vessel for failure to comply pursuant to Section 21.1. In no event shall the acceptance of a vessel by Seller be construed in any manner as a representation as to the vessel's operational, environmental or safety status. Neither Buyer nor any other party shall be entitled to rely on any such acceptance of a vessel by Seller hereunder. ARTICLE XXII POLLUTION MITIGATION Section 22.1 In the event an escape or discharge of oil or jet occurs from any barge or vessel carrying oil or jet related to this Contract and causes or threatens to cause pollution damage, Buyer or carrier will promptly take whatever measures are necessary to prevent or mitigate such damage. Buyer hereby authorizes Seller, or its agent, at Seller's option, upon notice to Buyer or master on the tug, to undertake such measures as are reasonably necessary to prevent or mitigate the pollution damage. Seller or its agent shall keep Buyer advised of the nature and results of any such measures taken and, if time permits, intended to be taken. Any of the aforementioned measures shall be at Buyer's sole expense (except to the extent that such escape or discharge was caused by the negligence or willful action of Seller or its agent), provided that if Buyer considers said measures should be discontinued, Buyer shall so notify Seller or its agent and thereafter Seller or its agent shall have no right to continue said measures at Buyer's authority or expense except as provided in Section 18.4. This provision shall be applicable only between Buyer and Seller and shall not affect, as between Buyer and Seller, any liability of Buyer to any third parties, including but not limited to governments. Section 22.2 In addition to its duties under Section 22.1, Buyer agrees to cooperate with all efforts and to pay all reasonable costs associated with preventive booming or other preventive measures that Seller reasonably determines is advisable on an isolated or routine basis. Page 43 ARTICLE XXIII MISCELLANEOUS Section 23.1 Headings of the Articles and Sections are for convenient reference only and are not to be considered part of this Contract. Section 23.2 This document contains the entire agreement between the parties covering the subject matter and cancels, as of the effective date hereof, all prior agreements of any kind between the parties covering such subject matter and any amendments thereto. There are no other agreements which constitute any part of the consideration for, or any condition to, either party's compliance with its obligations under this Contract. Section 23.3 Except as otherwise expressly provided herein, all notices shall be given in writing, by letter, facsimile, telegraph or telex to the following addresses, or such other address as the parties may designate by notice, and shall be deemed given upon receipt. Seller: Manager, Petroleum Coke, Heavy Fuels & Sulfur Chevron U.S.A. Inc. P.O. Box 7006 San Francisco, CA 94120-7006 FAX: (415) 894-1195 Buyer: Manager, Power Supply Services Department Hawaiian Electric Company, Inc. Box 2750 Honolulu, HI 96840-0001 FAX: (808) 543-7788 Page 44 The Manager, Power Supply Services Department, for Hawaiian Electric Company, Inc., shall be responsible for forwarding notices to the other parties to this Contract. Section 23.4 If any term or provision, or any part of any term or provision, of this Contract is held by any court or other competent authority to be illegal or unenforceable, the remaining terms, provisions, rights and obligations shall not be affected. Section 23.5 This Contract shall inure to the benefit of and be binding upon the parties hereto, their successors and permitted assigns. Section 23.6 Effective as of the Effective Date of the Term hereunder, this Contract hereby supersedes that certain Inter-Island Industrial Fuel Oil and Diesel Fuel Contract between the parties dated September 23, 1991, and all amendments thereto. IN WITNESS WHEREOF, the parties have caused these presents to become effective as of the day and year first hereinabove written. ACCEPTED AND AGREED: "Seller" CHEVRON U.S.A. INC. BY: /s/ Phillip H. Fisher Phillip H. Fisher TITLE: Manager, Petroleum Coke, Heavy Fuels & Sulfur Page 45 "Buyers" HAWAIIAN ELECTRIC COMPANY, INC. MAUI ELECTRIC COMPANY, LTD. BY: /s/ Edward Y. Hirata BY: /s/ Edward Y. Hirata Edward Y. Hirata Edward Y. Hirata (Printed or Typed Name) (Printed or Typed Name) Vice President TITLE: Regulatory Affairs TITLE: Vice President BY: /s/ Molly M. Egged BY: /s/ Molly M. Egged Molly M. Egged Molly M. Egged (Printed or Typed Name) (Printed or Typed Name) TITLE: Secretary TITLE: Secretary HAWAII ELECTRIC LIGHT COMPANY, INC. HAWAIIAN TUG & BARGE CORP. BY: /s/ Edward Y. Hirata BY: /s/ Glenn K. Y. Hong Edward Y. Hirata President Glenn K. Y. Hong (Printed or Typed Name) (Printed or Typed Name) TITLE: Vice President TITLE: President BY: /s/ Molly M. Egged BY: /s/ Molly M. Egged Molly M. Egged Molly M. Egged (Printed or Typed Name) (Printed or Typed Name) TITLE: Secretary TITLE: Secretary Page 46 YOUNG BROTHERS, LIMITED BY: /s/ Glenn K. Y. Hong Glenn K. Y. Hong (Printed or Typed Name) TITLE: President BY: /s/ Molly M. Egged Molly M. Egged (Printed or Typed Name) TITLE: Secretary Page 47 ADDENDUM NO. 1 SAMPLE PRICE CALCULATIONS-NOVEMBER, 1995 I. FUEL OIL ---------------------------------------------------------------- This portion is confidential; therefore, it has been omitted and filed separately with the Commission. ---------------------------------------------------------------- II. DIESEL FUEL NO. 2 ---------------------------------------------------------------- This portion is confidential; therefore, it has been omitted and filed separately with the Commission. ---------------------------------------------------------------- ---------------------------------------------------------------- This portion is confidential; therefore, it has been omitted and filed separately with the Commission. ---------------------------------------------------------------- III. JET FUEL ---------------------------------------------------------------- This portion is confidential; therefore, it has been omitted and filed separately with the Commission. ---------------------------------------------------------------- ADDENDUM NO. 2 QUALITY CONTROL SAMPLES SUMMARY
Frequency Sample Sample Method & Type Label Tanking Analysis Location 1. Refinery Production --- After Each Tank Receipt After Each Receipt Composite from Refinery Tank 2. HMT Inventory --- After Each Tank Receipt After Each Receipt Composite from HMT Tank 3. Delivered A. Buyer's During Each Barge Loading Only if Necessary Drip From Loading Line at Sample or Monthly HMT or Composite from B. Seller's Seller's Tanks at Barbers Sample Point C. Buyer's Retain 4. Loaded A. Seller's After Each Barge Loading A. After Each Loading Composite from Barge Tank Sample B. Only if Necessary at HMT B. Buyer's Retain 5. Loaded (Third- A. Buyer's After Each Barge Loading of A. After Each Loading Composite from Barge Party) Sample Third-Party Oil B. (Only if Necessary Tanks at Third-Party B. Supplier's C. ( Supplier's Dock Sample C. Buyer's Retain 6. Received A. Prompt Before Each Barge A. Before Each Unloading Composite from Barge B. Buyer's Unloading Whether Buyer's B. (Only if Necessary Tanks at Hilo or Kahului Sample or Seller's C. ( Harbor C. Seller's D. ( Sample D. Seller's Retain 7. Returned A. Prompt After Each Barge Unloading A. After Each Barge Composite from Seller's B. Buyer's Whether Buyer's or Seller's Unloading Tanks at Hilo or Kahului Sample B. (Only if Necessary Terminals C. Seller's C. ( Sample D. Buyer's Retain Applicable Contract Selection Sample Sample Action on Type Taking Analysis Failure 1. Refinery Production N/A N/A N/A 2. HMT Inventory N/A N/A N/A 3. Delivered 7.1 7.2 7.3 4. Loaded 6.1iii 11.3i 11.3i & 11.3ii 5. Loaded (Third- 11.1ii 11.3i 11.3i & 11.3ii Party) 6. Received A. (11.6i 11.6ii 11.6iv B. (11.6i 11.6iii 11.6iv C. ( D. ( 7. Returned A. 11.13i 11.13i 11.13iii B. (11.13i 11.13ii 11.13iii C. ( D. (
Description of Addendum No. 2 to the Inter-Island Industrial Fuel and Diesel Fuel Contract by and between Chevron U.S.A. Inc. and Hawaiian Electric Company, Inc., Maui Electric Company, Ltd., Hawaii Electric Light Company, Inc., Hawaiian Tug & Barge Corp. and Young Brothers, Ltd. dated November 20, 1995 (the "Interisland Contract"): Page 2: Page two of Addendum No. 2 consists of one page entitled "ADDENDUM NO. 2 - QUALITY CONTROL SAMPLES SCHEMATIC" which in addition to the printed text, includes a diagram of the flow of 'DIESEL FUEL" and "INDUSTRIAL FUEL OIL" from refinery or third-party source to purchasers' locations, then to supplier's marine terminal where fuel is to be loaded into a vessel, then to the harbor where the vessel is to be discharged, through a multi-party pipeline, to the supplier's, purchaser's or a third-party terminal at the purchaser's destination island, and then to the purchaser. At numerous points in the flow of fuel sold, shipped and stored under the Interisland Contract, there are letters referencing 11 notes which are located at the bottom of the form and which provide a sample name, description, point of custody transfer, type of analysis to be performed or description of an inspection step. EX-10.10 7 FACILITIES AND OPERATING CONTRACT HECO Exhibit 10.10 FACILITIES AND OPERATING CONTRACT by and between CHEVRON U.S.A. INC. and HAWAIIAN ELECTRIC COMPANY, INC. * * * * * * * * * * * FACILITIES AND OPERATING CONTRACT BY AND BETWEEN CHEVRON U.S.A. INC. AND HAWAIIAN ELECTRIC COMPANY, INC. TABLE OF CONTENTS ARTICLE 1: Definitions................................................................................... 1 ARTICLE 2: Term of Contract.............................................................................. 1 ARTICLE 3: Transportation of LSFO to Kahe, Waiau and Iwilei.............................................. 1 Section 3.1: Pipeline Facilities....................................................................... 1 Section 3.2: Transport of LSFO......................................................................... 1 Section 3.2.A: Kahe Pipeline................................................................. 1 Section 3.2.B: Maximum Viscosity............................................................. 2 Section 3.3: Compensation.............................................................................. 2 Section 3.3.A: Facility Charge............................................................... 2 Section 3.3.B: Throughput Charge............................................................. 2 Section 3.3.C: Maintenance Charge............................................................ 2 Section 3.3.D: Invoices and Payment.......................................................... 3 Section 3.3.E: Clean Up of Spills............................................................ 3 Section 3.3.F: Discontinued Operation of Honolulu Generating Plant........................... 3 Section 3.4: Modification, Relocation and Replacement of Facilities.................................... 3 Section 3.4.A: Modification, Relocation and Replacement...................................... 3 Section 3.4.B: Effective Date of Adjustments in Fees......................................... 4 Section 3.5: LSFO Movement Coordination and Reporting.................................................. 4 Section 3.5.A: Coordination.................................................................. 4 Section 3.5.B: Reporting..................................................................... 4 Section 3.6: Title and Risk of Loss.................................................................... 5 ARTICLE 4: HECO'S Use of Chevron's Tanker Mooring Facilities and Submarine Line........................................................................... 5 Section 4.1: Use of Chevron's Facilities............................................................... 5 Section 4.2: Compensation.............................................................................. 6 Section 4.2.A: Compensation for LSFO Received................................................ 6 Section 4.2.B: Compensation for Line Displacement............................................ 6 Section 4.2.C: Credit for Cargo Used as Line Displacement.................................... 6 Section 4.2.D: Clean Island Council.......................................................... 6 Section 4.3: LSFO Movement Coordination and Reporting.................................................. 7 Section 4.3.A: Notification of Estimated Vessel Arrival...................................... 7 Section 4.3.B: Notice of Readiness........................................................... 7 Section 4.3.C: Berth Time.................................................................... 8 Section 4.3.D: Demurrage..................................................................... 8 Section 4.3.E: Vessel Berth.................................................................. 8 Section 4.3.F: Other Marine Provisions....................................................... 9 Section 4.3.G: Pollution Mitigation.......................................................... 9 Section 4.3.H: Reporting..................................................................... 9 Section 4.4: Title and Risk of Loss.................................................................... 9 Section 4.5: Oil Pollution Insurance................................................................... 9
ARTICLE 5: Operation and Maintenance of HECO's Barbers Point Tank Field.................................. 10 Section 5.1: Tank Field Facilities and Service......................................................... 10 Section 5.1.A: Tank Field Facilities......................................................... 10 Section 5.1.B: Services ..................................................................... 10 Section 5.1.C: Tank Field Facility Additions and Modifications............................... 11 Section 5.1.D: Additional Services........................................................... 11 Section 5.2: Compensation.............................................................................. 11 Section 5.2.A: Base Compensation............................................................. 11 Section 5.2.B: Determination of Fees for Additional Operation and Maintenance.............................................................. 12 Section 5.2.C: Other's Facilities Within HECO's Tank Field................................... 12 Section 5.2.D: Invoices and Payment.......................................................... 12 Section 5.3: Reports.................................................................................. 12 Section 5.4: Title and Risk of Loss................................................................... 13 Section 5.5: Insurance................................................................................ 13 ARTICLE 6: Waiau - Barbers Point Steam Exchange.......................................................... 13 Section 6.1: Facilities................................................................................ 13 Section 6.2: Services.................................................................................. 14 Section 6.3: Measurement of Chevron's Steam Consumption................................................ 14 Section 6.3.A: Steam Flow Meter Operable..................................................... 14 Section 6.3.B: Steam Flow Meter Inoperable................................................... 14 Section 6.4: Compensation.............................................................................. 14 ARTICLE 7: Measurement of Quantity and Quality........................................................... 15 Section 7.1: Measurement of Quantity................................................................... 15 Section 7.2: Determination of Quality.................................................................. 15 Section 7.3: Disputes of Quality and Quantity.......................................................... 15 ARTICLE 8: Line Displacement Stock....................................................................... 15 ARTICLE 9: Invoicing and Payment......................................................................... 16 Section 9.1: Invoices.................................................................................. 16 Section 9.2: Payments.................................................................................. 16 Section 9.3: Method of Payment......................................................................... 16 ARTICLE 10: Audits........................................................................................ 17 Section 10.1: Audits Requiring Non-Confidential Information............................................ 17 Section 10.2: Audits Requiring Confidential Information................................................ 17 Section 10.3: Independent Audits Using Non-Confidential Information.................................... 17 Section 10.4: Adjustments From Audit Findings.......................................................... 17 ARTICLE 11: Contingencies................................................................................. 17 Section 11.1: Definition of Contingency................................................................ 17 Section 11.2: Relief of Obligations.................................................................... 18 Section 11.3: Pricing Affected by Government Direction................................................. 18 ARTICLE 12: Effect of Suspension or Reduction............................................................. 18 Section 12.1: Notice of Suspension or Reduction........................................................ 18 Section 12.2: Chevron's and HECO's Rights during Suspension or Reduction............................... 18 Section 12.3: Termination Rights....................................................................... 18 Section 12.4: Payment for Services and Facility Usage Provided......................................... 19
ARTICLE 13: Waiver and Non-Assignability.................................................................. 19 Section 13.1: Waiver................................................................................... 19 Section 13.2: Non-Assignability........................................................................ 19 Section 13.3: Definitions.............................................................................. 19 ARTICLE 14: Default....................................................................................... 19 Section 14.1: Default.................................................................................. 19 Section 14.2: Termination Rights....................................................................... 19 ARTICLE 15: Conflict of Interest.......................................................................... 20 ARTICLE 16: Applicable Law................................................................................ 20 ARTICLE 17: Indemnity..................................................................................... 20 ARTICLE 18: Public Utility Commission Approval............................................................ 20 ARTICLE 19: Miscellaneous................................................................................. 21 Section 19.1: Headings................................................................................. 21 Section 19.2: Entire Agreement......................................................................... 21 Section 19.3: Contract is Not an Asset................................................................. 21 Section 19.4: Notices.................................................................................. 21 Section 19.5: Severability............................................................................. 21 Section 19.6: Successors and Assignes.................................................................. 21 Section 19.7: Consequential Damages.................................................................... 21 Section 19.8: Termination of Prior Agreement........................................................... 22
ADDENDUM 1: Adjustment Factors for Adjustable Charges and Fees ADDENDUM 2: Quality ADDENDUM 3: Chevron's Mooring and Submarine Lines ADDENDUM 4: Vessel Data Sheet ADDENDUM 5: List of Facilities in HECO's Tank Field System and Chevron's Tank Field Support System ADDENDUM 6: List of Facilities in HECO's Waiau Steam System APPENDIX 1: Chevron's and HECO's Fuel Oil Distribution Systems APPENDIX 2: Summary of Vessel Requirements at Barbers Point APPENDIX 3: Refinery Operating Standards and Instructions FACILITIES AND OPERATING CONTRACT THIS CONTRACT dated as of November 20, 1995, by and between CHEVRON U.S.A. INC., a Pennsylvania corporation, ("Chevron") and HAWAIIAN ELECTRIC COMPANY, INC., a Hawaii corporation, ("HECO"), with the purposes for the distribution of Low Sulfur Fuel Oil ("LSFO") and other petroleum products and for the management of LSFO terminal facilities. WHEREAS, each party owns and operates certain distribution and storage facilities, including pipelines and terminals, suitable for use in the delivery of LSFO. WHEREAS, the parties desire to enter into this contract for the use of such facilities. NOW THEREFORE, the parties agree as follows: ARTICLE 1: DEFINITIONS Except where otherwise indicated, the following definitions shall apply throughout this contract: 1. "LSFO" means Chevron Low Sulfur Fuel Oil No. 6 per Addendum 2. 2. "physical barrel" means 42 American bulk gallons at 60 degrees F. 3. "year" means a calendar year. ARTICLE 2: TERM OF CONTRACT The term of this Contract shall be from January 1, 1996 (the "Effective Date"), through December 31, 1997, and shall continue thereafter for additional 12-month periods (each 12-month period being an "Extension") beginning each successive January 1, unless HECO or Chevron gives written notice of termination at least 120 days before the beginning of an Extension. ARTICLE 3: TRANSPORTATION OF LSFO TO KAHE, WAIAU AND IWILEI Section 3.1: Pipeline Facilities Chevron owns a fuel oil distribution pipeline system which connects its Barbers Point refinery to its marine terminal at Honolulu and to HECO's tank fields at Waiau and Iwilei. HECO owns fuel oil pipelines systems which connect its tank fields at Barbers Point and Kahe to Chevron's fuel oil distribution pipeline system described above. Together these fuel oil pipeline systems shall be referred to as "Pipelines" and are shown in Appendix 1. Section 3.2: Transport of LSFO Chevron and HECO agree that the LSFO delivered by pipeline from Barbers Point (either Chevron's Refinery or HECO's storage tanks) into HECO's storage tanks at Kahe, Waiau and Iwilei may be transported using the Pipelines. Section 3.2.A: Kahe Pipeline Chevron shall operate and maintain HECO's Kahe pipeline in a safe, effective and efficient manner, in compliance with all applicable laws and regulations, in a reasonable and prudent manner and with generally accepted industry practices. In carrying out its duties Chevron shall exercise the same degree of skill, care and maintenance that Chevron utilizes in the operation and maintenance of its pipelines. Chevron's operating standards and instructions are available for HECO's inspection at Chevron's refinery. Applicable operating standards and instructions are listed in Appendix 3. Section 3.2.B: Maximum Viscosity The maximum LSFO viscosity for delivery to HECO's Waiau and Iwilei tank farms shall be 200 SUS at 210 degrees Fahrenheit. Section 3.3: Compensation As compensation for the utilization, operation and maintenance of the Pipelines to deliver HECO's or Chevron's LSFO to HECO's storage tanks at Kahe, Waiau and Iwilei, HECO shall pay to Chevron monthly delivery fees which are comprised of a Facility Charge, a Throughput Charge and a Maintenance Charge described herein. Section 3.3.A: Facility Charge A Monthly Facility Charge for each of the pipelines consists of two components as shown in the following table:
Adjustable Overhead and Operating Non-Adjusting Labor Charges Capital Charge January 1, 1990 January 1, 1996 Kahe $18,700 $ 810 Waiau 63,600 15,300 Iwilei 12,500 3,000
The Overhead and Operating Labor Charges shall be adjusted quarterly beginning January 1, 1996, in accordance with a factor ("An") based on the hourly earnings for the petroleum and coal products industry, described in Addendum 1 attached. Section 3.3.B: Throughput Charge A Throughput Charge is calculated by multiplying the number of physical barrels of fuel transported to each of the generating plant tank fields and the respective transport charge per physical barrel of fuel transported to that tank field. The base transport charges per physical barrel of fuel are $0.05 for Kahe, $0.094 for Waiau and $0.279 for Iwilei. These per barrel base transport charges shall be adjusted quarterly beginning January 1, 1996, in accordance with a factor ("Cn") based on a Producer Price Index for Fuels and Power, described in Addendum 1 attached. The number of physical barrels transported shall be determined pursuant to Section 7.1. Section 3.3.C: Maintenance Charge A Maintenance Charge reflecting costs as incurred will be the sum of (i), (ii), (iii) and (iv) and prorated according to (v) below. The maintenance performed on all pipelines shall be guided by then-current United States Department of Transportation regulations and periodic internal inspections utilizing then- current pipeline technology. (i) 110% of all maintenance materials costs, except as provided for in (iv) below. Material costs include all taxes paid on material purchased. (ii) 115% of all labor cost whether contract labor charges or Chevron's labor at equivalent Contractor's labor rate except as provided for in (iv) below. The term "Contractor" shall mean a mechanical Page 2 contractor properly licensed in the State of Hawaii, which Contractor shall be experienced in the type of work to be done and shall be chosen at the sole discretion of Chevron. (iii) 100% of all other direct costs, including but not limited to such items as equipment usage charges (whether Contractor's or Chevron's at equivalent Contractor rates), permits and consulting fees except as provided for in (iv) below. (iv) Base monthly fees of $11,000 on the section of Chevron's Pipelines between Barbers Point and HECO's Waiau tank field, $7,300 on the section of Chevron's Pipelines between HECO's Waiau and Iwilei tank fields and $7,300 on the section of Chevron's and HECO's Pipelines between Barbers Point and HECO's Kahe tank field; which reflect Chevron's total costs for maintenance of pumping and heating stations. The fees shall be adjusted quarterly beginning January 1, l996, using the composite factor (0.7 An + 0.3 Bn), where "An" and "Bn" are described in Addendum 1 attached. (v) HECO's share of the maintenance charges on each of the three sections of the Pipelines, pursuant to this Section 3.3.C will be calculated by dividing the total physical barrels of LSFO and line displacement stock delivered to HECO through that particular Pipeline section during the immediately preceding twelve months by the total physical barrels delivered through that particular Pipeline section into both HECO's storage tanks and to Chevron's terminal facilities at Honolulu. Chevron shall maintain adequate records to allow an audit of such records to verify to HECO that Chevron's maintenance costs are prudent. Section 3.3.D: Invoices and Payment Chevron will issue invoices for each month's Facility Charge on the fifteenth of the month. Chevron will issue invoices for the Throughput and Maintenance Charges in the month following the month in which the services and expenses are incurred. HECO will pay on these invoices in accordance with Article 9. Section 3.3.E: Clean Up of Spills Chevron shall expeditiously clean up any spills occurring from a leak, rupture or other incident to the Pipelines. To the extent such spills derive from delivering LSFO or line displacement stock on behalf of HECO, any costs incurred by Chevron for such cleanup shall be for the account of HECO and invoices for such services will be rendered by Chevron in accordance with Article 9 of this Contract; provided that HECO shall have no obligation to pay for spills caused by the gross negligence or willful acts of Chevron, its employees and its contractors and that Chevron will indemnify and hold HECO harmless for any such caused spills. Section 3.3.F: Discontinued Operation of Honolulu Generating Plant HECO shall not be charged any fees or charges associated with the section of the Pipelines between HECO's Waiau and Iwilei tank fields, after HECO has discontinued operation at its Honolulu generating plant. Section 3.4: Modification, Relocation and Replacement of Facilities Section 3.4.A: Modification, Relocation and Replacement If subsequent to January 1, 1996, modifications to any part of Chevron's Pipelines are reasonably required or any relocation or replacement is reasonably required, including: (i) replacement of any section of the Pipelines 1000 feet or more in length, Page 3 (ii) relocation of any length of the Pipelines, (iii) complete replacement of any equipment, (iv) any partial replacement of equipment costing more than $5,000; an additional non-adjusting Capital Charge component of the Facility Charge shall be established to assure a 15% return after tax on the additional capital employed by Chevron using a twenty year economic life, except to the extent that such modification, relocation or replacement is reimbursed by another party, including but not limited to a governmental agency. HECO's share of any such additional non-adjusting Capital Charge component will be calculated by dividing the total physical barrels of LSFO and line displacement stock delivered to HECO through that particular Pipeline section during the immediately preceding twelve months by the total physical barrels delivered through that particular Pipeline section into both HECO's storage tanks and to Chevron's terminal facilities at Honolulu during the same twelve month period. Coincident with the additional non-adjusting Capital Charge component, the adjustable and non-adjusting components of the Facility Charge shall be adjusted to reflect only the proportion of the Pipelines and equipment that is still utilized after the replacement or relocation. Throughput Charges shall also be adjusted to reflect any change in the amount of power used for pumping and steam used for the reheat station at Waiau. Any charges for a relocation or replacement will not begin until the complete commissioning of such changes. Section 3.4.B: Effective Date of Adjustments in Fees Any adjustments in the monthly delivery fee shall be deemed to apply to all LSFO delivered on or after the effective date of the event causing the adjustment in such fee, whether or not retroactive. In the event of retroactive adjustments hereunder, the charge or credit to HECO shall be computed and billed to HECO as soon as practical after the adjustment is known. In the event of retroactive changes which cause adjustments hereunder after termination of this Contract, payment shall be made within 15 days after receipt of written demand therefor by the other party. Section 3.5: LSFO Movement Coordination and Reporting Section 3.5.A: Coordination Chevron and HECO will mutually coordinate the transport of LSFO from HECO's Barbers Point tank field and the delivery of Chevron's LSFO (purchased under the LSFO supply contract between Chevron and HECO) to HECO's storage tanks at Kahe, Waiau and Iwilei. Transport scheduling shall be flexible to assure that HECO's generating plants' tankage is kept reasonably full and the LSFO which HECO is purchasing from Chevron is delivered from Chevron's refinery at a reasonably uniform rate in accordance with the LSFO supply contract. To assist in the coordination of transport: (i) HECO shall provide Chevron consumption forecasts ten days prior to the beginning of any month for the four subsequent months. The forecast for the first subsequent month shall define on a weekly basis the LSFO demands by each plant. The forecast for the second, third and fourth subsequent months shall define the LSFO requirements on a monthly basis for each plant, and (ii) Each week, Chevron shall provide HECO a schedule of daily transports of LSFO for each of the fourteen subsequent days. Section 3.5.B: Reporting Chevron shall provide HECO with transport summaries as transports occur, describing the following: Page 4 (i) Volumes, dates and sources of stock movements to HECO's storage tanks at Kahe, Waiau and Iwilei through the Pipelines, and (ii) Analysis of samples of HECO's stocks transported through the Pipelines, per Addendum 2. Before October of each year, Chevron shall inform HECO of and discuss with HECO Chevron's forecasted pipeline maintenance budget for the following year. Chevron shall promptly notify HECO if forecasted pipeline maintenance costs increase by more than 25% and discuss the reason for the forecasted increases. It is expressly recognized that these forecasts are only estimates and are not binding on Chevron. Section 3.6: Title and Risk of Loss Title to the LSFO transported in the Pipelines for HECO's account shall at all times remain with HECO. HECO shall bear the risk of loss of the LSFO transported in the Pipelines, unless due to the sole negligence of Chevron. ARTICLE 4: HECO'S USE OF CHEVRON'S TANKER MOORING FACILITIES AND SUBMARINE LINE Section 4.1: Use of Chevron's Facilities Chevron agrees to make available to HECO Chevron's Barbers Point tanker mooring facilities and one of Chevron's submarine lines ("Marine Facilities") as described in Addendum 3 hereto on a non-exclusive basis for HECO to receive HECO's third party LSFO into HECO's tank field adjacent to Chevron's Barbers Point refinery provided: (A) Chevron shall have the right to review each vessel nominated by HECO or by a representative designated in writing by HECO ("HECO's vessel") prior to the use of the Marine Facilities. HECO may submit the names of vessels it will consider nominating to obtain early acceptance of such vessels from Chevron up to three months in advance of the actual nomination. At the time each specific vessel is submitted for early acceptance or nominated for actual use Chevron shall have the right to refuse acceptance of such vessel nomination if in Chevron's opinion Chevron determines that such vessel is unacceptable; however, once given, Chevron's acceptance of a vessel shall remain in effect for six months or until the vessel next discharges at the terminal, whichever occurs first; unless there is a significant change in the vessel's operational, environmental or safety status, in which case Chevron may cancel its acceptance. In such determination, Chevron shall use the same standards in accepting vessels for HECO's use as Chevron uses in accepting vessels for its own use. Chevron's acceptance of a vessel shall not imply a continuing or future acceptance of the vessel, except as described herein. Chevron's acceptance, cancellation or rejection of HECO's vessel nomination shall be communicated to the nominator of such vessel after Chevron's receipt of the nomination and all the information necessary in Chevron's opinion to determine the vessel's suitability, as follows: (i) Early acceptance or rejection of a vessel shall be given within seven days. (ii) Acceptance or rejection of a specific nomination shall be given within one business day on the West Coast. All such communications may be made by telex or facsimile. The typical information necessary to determine a vessel's suitability is shown in Addendum 4. Chevron shall not liable for any loss, damage or delay caused by its rejection of a vessel nomination as provided herein. In no event shall the acceptance or rejection of a vessel by Chevron be construed in any manner as a representation as to the vessel's operational, environmental or safety status. Page 5 (B) The minimum cargo size shall be 200,000 barrels, except that HECO shall be permitted to deliver one l00,000 barrel cargo each calendar quarter. (C) HECO shall be responsible for any damage caused to the Marine Facilities which arises from the use of the Marine Facilities under this Section 4.1, except to the extent such damage is due to negligence of Chevron. (D) HECO's vessel shall arrange to have while at or near the Marine Facilities the services of one of Chevron's Mooring Masters who shall be the servant of HECO's vessel. When HECO's vessel employs mooring launches and tugs for berthing and unberthing the vessel, they shall also be servants of HECO's vessel. The master of HECO's vessel shall remain in control of his vessel at all times. (E) HECO's vessel shall arrive with an empty compartment of at least 15,000 barrels capacity for the purpose of receiving a suitable displacement stock from Chevron's Barber's Point refinery ("Refinery") or, at Chevron's option expressed before the vessel loads its LSFO cargo, the vessel shall provide Bunker C quality flush oil, for the purpose of displacing LSFO from the submarine line after discharging its LSFO cargo. Section 4.2: Compensation Section 4.2.A: Compensation for LSFO Received As compensation for the utilization of the Marine Facilities to receive LSFO for HECO, HECO shall pay to Chevron the sum of the following: (i) A fee for the use of the Marine Facilities of $0.37 per physical barrel of LSFO received for HECO. Thirty percent of the fee is deemed to be the capital component and shall not be adjusted, and seventy percent shall be adjusted quarterly beginning January 1, l996, in accordance with the composite factor (0.60 An + 0.20 Bn + 0.20 Cn), with "An", "Bn" and "Cn" defined in Addendum 1 hereto. The quantity of LSFO received for HECO shall be determined in the manner specified in Article 7. (ii) The actual costs Chevron is obligated to pay others for such items as, but not limited to, the use of tugs, launches, Chevron's Mooring Masters, or government fees. Section 4.2.B: Compensation for Line Displacement To the extent it is necessary to deliver line displacement stock to HECO, HECO shall purchase such stock according to Article 8. The quantity of line displacement stock delivered to HECO shall be determined according to Article 7. Section 4.2.C: Credit for Cargo Used as Line Displacement To the extent that small portions of HECO's LSFO cargo must be transferred into Chevron's refinery tankage to protect the quality of the remaining LSFO cargo from being downgraded by commingling with low flash point line displacement within the submarine line, Chevron shall credit HECO for such LSFO at HECO's per-barrel delivered cost of the cargo on an F.O.B. Barbers Point basis. To the extent that HECO's flush oil is transferred into Chevron's refinery tankage or remains within the submarine line as line displacement, Chevron shall credit HECO for such flush oil according to Article 8. The quantity of such LSFO or flush oils shall be determined according to Article 7. Section 4.2.D: Clean Island Council HECO shall pay a pro-rated share of Chevron's fees to the Clean Island Council associated with the use of Chevron's tanker mooring and the transport of oil through Chevron's submarine lines, which is calculated by first multiplying Page 6 such fee by the total physical barrels of HECO's or HECO's third-party LSFO transported through the submarine lines during the immediately preceding twelve months and then dividing by the total physical barrels of oil transported over Chevron's tanker mooring during such twelve months. Section 4.3: LSFO Movement Coordination and Reporting Section 4.3.A: Notification of Estimated Vessel Arrival (i) HECO shall propose for Chevron's approval a four day arrival window for HECO's vessel at least 30 days in advance. After Chevron's approval, changes in the arrival window may only be made with mutual consent. (ii) HECO shall update Chevron weekly regarding the anticipated vessel arrival date. (iii) After HECO has proposed an arrival window and until HECO's vessel departs, Chevron shall provide HECO weekly updates on Chevron's marine terminal schedule. (iv) HECO shall give Chevron 7, 5, 4, 3, 2, and 1 day notice by telex, facsimile, radio or telephone of the vessel's estimated time of arrival ("ETA") at the Marine Facilities. HECO will further notify Chevron of any ETA changes exceeding twelve hours and after the one- day notice, whenever a vessel's ETA changes by more than six hours. Section 4.3.B: Notice of Readiness (i) When HECO's vessel arrives at the customary anchorage or other place of waiting at the Marine Facilities and is in all respects ready to proceed to berth and commence discharging LSFO, the Master or his agent shall tender to Chevron or its agent at the Marine Facilities, a Notice of Readiness ("NOR") of the vessel to discharge LSFO, by letter, facsimile, radio, telephone or telex. (ii) If HECO's vessel tenders NOR during its four day arrival window, the NOR shall be effective upon receipt by the Marine Facilities. If HECO's vessel tenders NOR before the first day of the arrival window the NOR shall be effective 00:01 hours local time on the first day of the arrival window. However, Chevron shall give consideration on a reasonable efforts basis to allowing such vessel to berth and discharge prior to the first day of the vessel's arrival window, provided that in Chevron's sole judgment operating circumstances at the receiving facility so permit. If HECO's vessel tenders NOR after the end of the arrival window, the NOR shall be effective when the vessel is all fast in berth. (iii) HECO's vessel shall be provided a berth in its turn based upon the effective date and time of its NOR, provided that if HECO's vessel tenders NOR after the end of its arrival window, it shall be provided a berth as soon as is convenient for the Marine Facilities. Chevron shall exercise all reasonable efforts to accept the vessel for unloading at the earliest possible time. (iv) If HECO's vessel arrives within the previously agreed four day arrival window, Chevron shall have the right to delay berthing HECO's vessel, if necessary, for Chevron's operational reasons, provided that Chevron maintains a reasonable pumping schedule to HECO's Kahe, Waiau and Iwilei storage tanks. If Chevron delays HECO's vessel under the circumstances defined in this Section 4.3.B (iv), then Chevron shall pay demurrage to HECO, against HECO's invoice, for delays to HECO's vessels so incurred, pursuant to Section 4.3.D. Page 7 Section 4.3.C: Berth Time HECO shall be allowed berth time (defined as first line fast to all lines free) within which to complete discharging of each full or part cargo of LSFO. This berth time is the sum of six hours for berthing and unberthing and the number of hours to unload its LSFO at an unloading rate of 5,000 barrels per hour. If HECO's vessel exceeds berth time for any reason or if HECO's vessel fails to vacate berth after completing discharging, and failure to vacate is attributable to vessel's condition or breakdown and/or to owner, operator, Master, officers or crew of the vessel, vessel's agent or HECO, such excess berth time shall be subject to demurrage claims of Section 4.3.D. Section 4.3.D: Demurrage (i) Chevron will pay demurrage to HECO against HECO's invoice, supported by such data as may reasonably be requested, for all delays caused by Chevron subsequent to six hours after NOR is effective and prior to the time HECO's vessel is advised by Chevron that a berth is available for the vessel, provided that Chevron shall not be liable for any delay caused by fire, explosion, strike, lockout, stoppage or restraint of labor or by breakdown of machinery or equipment on or about the Refinery or Marine Facilities or, strike, lockout, stoppage or restraint of labor of Master, officers or crew of HECO's vessel, or of tugboat or pilots, or for any other cause which is beyond Chevron's reasonable control, including weather delays. (ii) HECO shall pay Chevron, against Chevron's invoice supported by such data as may reasonably be requested, for any demurrage, loss or damage caused by HECO which Chevron may incur, including such as may be incurred due to resulting delay in the berthing of other vessels awaiting their turn at berth. (iii) For vessels not documented in the U.S., demurrage shall be paid for all delay time, on an hourly basis or pro rata thereof, at a rate in accordance with the U.S. dollar equivalent as stated in the Worldwide Tanker Nominal Freight Scale ("Worldscale"), or such generally accepted scale as may replace Worldscale, for the size vessel in question adjusted to the level of the Average Freight Rate assessment ("AFRA") or such generally accepted scale as may replace AFRA, in force on the day of commencement of loading for vessels of similar size, or the actual charter party demurrage rate at which HECO or Chevron has chartered the vessel, whichever is less. (iv) For vessels documented in the U.S., demurrage shall be paid for all delay time, on an hourly basis or pro rata thereof, at a rate in accordance with the U.S. dollar equivalent as stated in the American Tanker Rate Schedule Revised ("AR"), or such generally accepted scale as may replace AR, for the size vessel in question adjusted to the level of the U.S. Freight Rate Average ("USFRA") or such generally accepted scale as may replace USFRA, in force on the day of commencement of loading for vessels of similar size, or the actual charter party demurrage rate at which HECO or Chevron has chartered the vessel, whichever is less. Section 4.3.E: Vessel Berth Chevron shall provide a berth as described in Addendum 3, and meeting the requirements of Appendix 2, so that HECO's vessels meeting the requirements of Appendix 2 may proceed to, lie at and depart from such berth, and Chevron shall not be deemed to warrant the safety of public channels, fairways, approaches thereto, anchorages, or other publicly maintained areas either inside or outside the port area where Chevron's berth is located. If HECO's vessel fails to abide by the conditions of use, Chevron shall be entitled to order the vessel to vacate the berth, provided that the vessel shall be entitled to tender a new NOR as set forth in Section 4.3.A upon correction of the failure. Chevron shall not be liable for any loss, damage, injury or delay resulting from conditions at any ports, berths, docks, anchorages or other places not caused by Chevron's fault or neglect, or which could have been avoided by the exercise of reasonable care on the part of HECO's vessel's Master. Page 8 Section 4.3.F: Other Marine Provisions (i) Hoses for discharging shall be furnished by Chevron in accordance with Chevron's normal practice and shall be connected to and disconnected from vessel's receiving flanges by HECO's vessel's crew. (ii) Vessels arranged for by HECO will fully comply (or will hold necessary waivers if not in compliance) with all applicable U.S. Coast Guard regulations. Any costs, including delays resulting from vessel's non-compliance with U.S. Coast Guard regulations, shall be at the expense of HECO. (iii) HECO's vessels when berthed at the Marine Facilities will maintain their engines in readiness and will be discharged in such a manner that they, at any stage of discharging operations, are able, if necessary for any reason, to immediately shut down cargo operations, and promptly disconnect hoses and mooring lines and vacate the berth. (iv) HECO's vessels will comply with all applicable Federal, state, regional and local government laws, regulations and ordinances, including but not limited, to air and water pollution. Section 4.3.G: Pollution Mitigation In the event an escape or discharge of oil occurs from HECO's vessels and causes or threatens to cause pollution damage, HECO or HECO's vessel's Master will promptly take whatever measures are necessary to prevent or mitigate such damage. HECO hereby authorizes Chevron, or its agent, at Chevron's option, upon notice to HECO or HECO's vessel's Master, to undertake such measures as are reasonably necessary to prevent or mitigate the pollution damage. Chevron or its agent shall keep HECO advised of the nature and results of any such measures intended to be taken. Any of the aforementioned measures shall be at HECO's expense (except to the extent that such escape or discharge was caused by Chevron or its agent), provided that if HECO considers said measures should be discontinued, HECO shall so notify Chevron or its agent and thereafter Chevron or its agent shall have no right to continue said measures at HECO's expense; however such notification shall not affect any liability of HECO to any third parties, including, but not limited to, governments. Section 4.3.H: Reporting Chevron will provide HECO with monthly summaries within ten days following the end of each month with the following information. (i) Vessel turnaround data, including pumping rates, for each cargo unloaded from HECO's vessels through Chevron's Marine Facilities. (ii) Analysis of samples of each cargo transferred through the submarine lines, per Addendum 2. Section 4.4: Title and Risk of Loss Title to the LSFO transported for HECO in Chevron's submarine pipeline system under this Article 4 shall at all times be with HECO. HECO shall bear the risk of loss of the LSFO transported by HECO in Chevron's submarine pipeline system under this Article 4 unless the loss is due to the negligence of Chevron. Section 4.5: Oil Pollution Insurance HECO warrants that HECO's vessel's owner will have in place the standard oil pollution coverage available from their Protection & Indemnity Insurance Club (U.S. $500 million available as of February 20, 1995), together with all additional oil pollution coverage which is available as of the date of the use of the Marine Facilities through their P&I Club or through underwriters providing first class security (U.S. $200 million available as of February 20, 1995). HECO further warrants that such coverage will remain in effect during HECO's use of HECO's vessel. Such Page 9 insurance shall include, but not be limited to, coverage for injuries to or death of masters, mates and crew; excess collision liabilities and pollution liabilities imposed by federal and state laws as well as TOVALOP liabilities (if applicable). ARTICLE 5: OPERATION AND MAINTENANCE OF HECO'S BARBERS POINT TANK FIELD Section 5.1: Tank Field Facilities and Service Section 5.1.A: Tank Field Facilities HECO has a tank field facility located adjacent to Chevron's Barbers Point refinery, which is for the receipt and storage of fuel. Chevron has tank field support systems which interconnect with its refinery systems to provide services to HECO's tank field facility. HECO and Chevron agree that Chevron shall operate and maintain HECO's tank field as if it were an extension of Chevron's refinery tank field. In that regard, HECO and Chevron agree that HECO's tank field and Chevron's tank field support systems shall include only the facilities outlined in Addendum 5. Together these tank field and tank field support facilities shall be referred to as "Tank Field Facilities." HECO shall provide electrical power to its tank field. Chevron shall provide low pressure steam and firewater to HECO's tank field. Section 5.1.B: Services Chevron agrees to operate and maintain HECO's tank field in a safe, effective and efficient manner, in compliance with all applicable laws and regulations, in a reasonable and prudent manner and with generally accepted industry practice. In carrying out its duties, Chevron will exercise the same degree of skill, care and maintenance that Chevron utilizes in the operation and maintenance of Chevron's refinery tank field. Chevron's duties include: (i) Overall supervision of the tank field, (ii) Handling receipt of fuel into the tank field, (iii) Gauging and sampling tanks, (iv) Handling movement of LSFO from tankage to pipeline booster pumps for transfer to HECO's storage tanks at Kahe, Waiau and Iwilei and occasionally to the Kalaeloa Combined Cycle Power Plant storage tanks at Barbers Point. (v) Handling movement of fuel within the tank field, including tank-to- tank transfers and tank mixing. (vi) Accounting and reporting, (vii) Maintenance of all tank field equipment, (viii) Housekeeping, (ix) Security, (x) Laboratory services. Chevron's operating standards and instructions are available for HECO's inspection at Chevron's refinery. Applicable operating standards and instructions are listed in Appendix 3. Page 10 Section 5.1.C: Tank Field Facility Additions and Modifications Any time during the term of this Contract that HECO and Chevron agree that additions or modifications to HECO's tank field facilities or to Chevron's refinery support systems, as listed in Addendum 5, are desired or required for the purpose of operating and maintaining HECO's tank field facilities in accordance with this Article 5, or if said additions or modifications are required by government regulations, HECO and Chevron further agree that: (i) Additional facilities or modifications to Chevron's refinery systems shall be designed and constructed by Chevron. (ii) Additional facilities or modifications to HECO's tank field shall be designed and constructed using standards that are acceptable to both HECO and Chevron. In that regard, Chevron shall have the right and opportunity to review and accept the design and construction specifications for the tank field on all facility replacements or modifications. Chevron agrees to conduct such review in an expeditious manner. Chevron shall have the right to inspect HECO's tank field facilities during the construction thereof in order to assure conformance with the specifications reviewed and accepted by Chevron. It is expressly understood and agreed by the parties hereto that Chevron's acceptance of the design and construction specifications of HECO's tank field modifications or additions shall in no way imply any responsibility therefor by Chevron and it is expressly agreed by HECO that Chevron shall, as a result of its review and acceptance of said specifications, assume no liability whatsoever for the accuracy, correctness or proper modification or replacement thereof. (iii) Chevron shall maintain and operate HECO's additional or modified tank field facilities in accordance with Section 5.1.B. (iv) HECO shall pay Chevron a fee that is in addition to the fee described in Section 5.2.A, as determined in accordance with Section 5.2.B. (v) The cost for such additional facilities or modifications shall be for the account of HECO. If such facilities are installed by Chevron, costs shall be determined in accordance with Section 5.2.A.(iii). Section 5.1.D: Additional Services If at any time HECO desires Chevron to provide services in addition to those described in Section 5.1.B, said additional service must be acceptable to Chevron. HECO shall pay Chevron an additional fee for the additional services, as determined in accordance with Section 5.2.B. Section 5.2: Compensation Section 5.2.A: Base Compensation As compensation for the operation and maintenance of HECO's tank field facilities in accordance with the terms and conditions hereof, HECO shall pay to Chevron the following fees: (i) A Base Fee of $52,833 per month; $44,500 of which is to cover normal operation, maintenance and services which shall be subject to adjustment quarterly beginning January 1, 1996, in accordance with factor "An" defined in Addendum 1 attached; and $8,333 of which is a monthly management fee which shall not be subject to adjustment during the term of this Contract. (ii) Monthly steam costs for heating fuel in tankage and piping and through heat exchangers for pumping. A portion of the low pressure steam shall be exchanged with the steam used by HECO for Chevron pursuant to Section 6.4.A. The remaining portion, if any, shall be charged at $3.00 Page 11 per 1000 pounds, and shall be adjusted each month in accordance with the ratio of the then-current LSFO price within the Chevron-HECO LSFO Supply Contract, divided by $15.50. (iii) The cost of any complete replacement of HECO's equipment, or any partial replacement of HECO's equipment, costing more than $5,000; and any costs incurred by Chevron for additions or modifications to HECO's or Chevron's facilities, as described in Section 5.1.C. These costs shall be determined as follows: (a) 110% of all maintenance materials costs. Material costs include all taxes paid on material purchased. (b) 115% of all labor cost whether contract labor charges or Chevron's labor at equivalent Contractor's labor rate. The term "Contractor" shall mean a mechanical contractor properly licensed in the State of Hawaii, which Contractor shall be experienced in the type of work to be done and shall be chosen at the sole discretion of Chevron. (c) 100% of all other direct costs, including but not limited to, such items as equipment usage charges (whether Contractor's or Chevron's at equivalent Contractor rates), permits and consulting fees. Section 5.2.B: Determination of Fees for Additional Operation and Maintenance The amount of the additional fee paid by HECO to Chevron for the operation and maintenance of such additional facilities or modifications described in Section 5.1.C and such additional services described in Section 5.1.D shall be negotiated by HECO and Chevron. If the parties fail to agree upon a new fee within 90 days from date of notice, such new fee shall be determined by arbitration to be conducted in accordance with the rules of the American Arbitration Association then obtaining. The dispute shall be heard by three arbitrators, and the cost of arbitration shall be shared equally between HECO and Chevron. The arbitration shall be held in San Francisco, California. The sole purpose of the arbitration shall be to determine an additional fee for the expense to Chevron in the performance of its services under Sections 5.1.C and 5.1.D hereto. Section 5.2.C: Other's Facilities Within HECO's Tank Field In addition to all other sums payable under this Section 5.2, HECO shall reimburse Chevron for all costs incurred by Chevron to maintain and repair the pipeline section described in Addendum 5, Section 1, Item 14, and for all clean- up and other costs incurred by Chevron in connection with any spills caused by the failure of such pipeline section. Section 5.2.D: Invoices and Payment Chevron will issue invoices for each month's Base Fee on the fifteenth of the month. Chevron will issue invoices for the monthly steam costs and the costs for the replacements, additions and modifications under Section 5.2.A.(iii) in the month following the month in which these costs are incurred. HECO will pay on these invoices in accordance with Article 9. Section 5.3: Reports Chevron shall provide HECO with monthly summaries within 10 days following the end of each month during the term hereof describing the following: (1) Opening and closing inventory of each of HECO's tanks, Page 12 (2) Volumes and dates of stock movements to and from each of HECO's tanks with an indication as to sources or destinations of stock, (3) Analysis of samples of each stock transferred in or out of HECO's tank field in accordance with Addendum 2 attached, (4) Volumes drained, spilled or lost from HECO's tank field facilities, (5) Summary of maintenance performed during the month. Section 5.4: Title and Risk of Loss Title to the facilities and to the fuel in HECO's tank field shall at all times remain with HECO. HECO shall bear the risk of loss or damage to HECO's fuel or to HECO's facilities unless such loss or damage is due to the sole negligence of Chevron. HECO shall hold Chevron harmless against any liability for loss or damage to Third Party fuel stored in HECO's facilities unless such loss is due to the sole negligence of Chevron. Section 5.5: Insurance HECO shall maintain at its own expense during the term hereof insurance, in respect of business, and all activities on or about or in connection with HECO's tank field facilities, of the types and in the minimum amounts described generally as follows: (A) Commercial Liability Insurance including Bodily Injury and Property Damage Insurance (also including explosion hazard) affording premises, products, completed operations, contractual and contingent liability (with respect to subcontractors) coverage of not less one million dollars ($1,000,000) combined single limit per occurrence for bodily injury and property damage. (B) A first excess policy over the above Commercial Liability Insurance policy with limits of not less than five million dollars ($5,000,000) combined single limit. (C) Fire insurance of not less than the value of HECO's tanks plus HECO's inventory of fuel therein from time to time to insure property owned by HECO which is in the care, custody and control of Chevron. Such insurance shall contain a clause waiving subrogation to any rights of HECO against Chevron in the event of loss. The insurance provided above shall include Chevron and its affiliated companies named as additional insureds, it being the intention of the parties that the insurance so affected shall protect both HECO and Chevron and be the primary insurance for any and all losses in respect of business and all activities on or about or in connection with, during the term of this Contract and any extensions thereof unless such losses or activities are a result of the sole or gross negligence of Chevron as provided herein with respect to the activity that is the subject of the respective insurance claim. HECO shall furnish certificates satisfactory to Chevron as evidence of such insurance. The insurance shall contain provisions that no cancellation or material changes in any policy shall become effective except upon thirty days' written notice to Chevron. ARTICLE 6: WAIAU - BARBERS POINT STEAM EXCHANGE Section 6.1: Facilities Chevron has facilities at Waiau ("Waiau Reheat Station") to reheat Chevron's and HECO's fuel oil being transported, respectively, to Chevron's marine terminal at Honolulu and to HECO's tank field at Iwilei. HECO has facilities at Page 13 Waiau ("Waiau Steam System") to provide 6,000 pounds per hour of 115 psig saturated steam to the plot limit of the Waiau Reheat Station. HECO and Chevron agree that the Waiau Steam System includes only the facilities listed in Addendum 6 attached. Section 6.2: Services HECO and Chevron agree that HECO shall operate and maintain the Waiau Steam System and provide steam to Chevron at the steam and condensate flanges at the plot limit of the Waiau Reheat Station. HECO shall operate and maintain the Waiau Steam System in accordance with generally accepted industry practice and shall provide for the accurate measurement of steam delivered to Chevron. HECO will deliver to Chevron at the Waiau Reheat Station 6,000 pounds per hour of 115 psig saturated steam at any time upon two hours prior request to HECO. If at any time HECO is unable or anticipates it may be unable to deliver the requested steam, it shall promptly notify Chevron. HECO shall also provide Chevron at least 72 hours prior notice of planned outages. In addition, HECO shall notify Chevron of any unplanned outages or failure within two hours of such occurrence. HECO shall not be held liable for any damages to the Waiau Reheat Station due to any outage, scheduled or unscheduled, where the steam supplied to the reheat station is terminated. Section 6.3: Measurement of Chevron's Steam Consumption Section 6.3.A: Steam Flow Meter Operable Chevron's steam consumption shall be measured as determined by the Waiau Steam System steam flow meter. HECO shall take and record meter readings at the beginning and the end of each month. HECO shall transmit monthly readings to Chevron's Barbers Point Refinery Financial Accounting Department within five working days of the month's end. HECO will keep the steam flow charts at Waiau for 12 months and if requested will send copies to Chevron. Chevron has the right to witness HECO's calibration of the Waiau Steam System steam meter and to receive supporting documentation. Section 6.3.B: Steam Flow Meter Inoperable In the event steam is delivered to Chevron at a time when the Waiau Steam System steam flow meter is malfunctioning, Chevron's steam usage during that period shall be determined by multiplying the sum of the total barrels of LSFO transported to Iwilei during the period of meter malfunction and the total barrels of Chevron Industrial Fuel Oil No. 6 ("CIFO") transported to Chevron's marine terminal at Honolulu during the period of meter malfunction by 7.2 pounds of steam used per barrel of fuel oil delivered. Quantities of such LSFO and CIFO shall be submitted to HECO within five working days from the billing month's end. Section 6.4: Compensation Chevron shall compensate HECO for the operation and maintenance of the Waiau Steam System in the following manner: (A) Low pressure steam shall be exchanged with steam used by Chevron for HECO pursuant to Section 5.2.A.(ii). If HECO provides more steam herein than Chevron provides under Section 5.2.A.(ii), HECO may charge such excess at the rates set forth in Section 5.2.A (ii). (B) Any costs incurred by HECO for additions or modifications to the Waiau Steam System that may be required by Chevron. (C) The cost of any complete or partial replacement of the Waiau Steam System equipment costing more than $1,000. Said replacements to be approved by Chevron. Page 14 ARTICLE 7: MEASUREMENT OF QUANTITY AND QUALITY Section 7.1: Measurement of Quantity Quantities of fuel and line displacement stock delivered under this Contract shall be determined at the time of transport by gauging the following shore tanks before and after such delivery: (A) Quantities delivered from Chevron tanks shall be determined by gauging such tanks. (B) Quantities delivered from HECO's tanks or marine vessels shall be determined by gauging HECO's tanks. (C) Quantities delivered from HECO's marine vessels into Chevron's tanks shall be determined by gauging Chevron's tanks. For transfers from shore tanks, measurements shall be taken by Chevron or Chevron's agent and witnessed by HECO or HECO's agent. However, at HECO's option, measurements may be taken by a mutually agreed upon independent inspector at both delivery and receiving facilities. If a mutually agreed upon independent inspector is used, Chevron and HECO shall share equally the cost of such independent inspections. For transfers from HECO's vessels, measurements shall be taken under the supervision of an independent inspector, whose costs shall be for HECO. Volumes delivered hereunder shall be converted to 60 degrees F, using the latest revision of ASTM Table 6. Section 7.2: Determination of Quality The quality of fuel transported to HECO shall be determined on the basis of samples drawn in such a manner as to be representative of each individual transport. For transfers from shore tanks, samples shall be drawn by Chevron from the shore tanks prior to transport. For transfers from HECO's vessels, samples shall be drawn by or under the supervision of an independent inspector, whose costs shall be for HECO. Samples shall be divided into two parts. One part shall be used by Chevron to determine qualities according to Addendum 2 attached. The other part shall be sealed and retained separately by HECO. Section 7.3: Disputes of Quality and Quantity If Chevron or HECO has reason to believe that the quality or quantity of product stated for a particular transport per Sections 7.1 or 7.2 is incorrect, that party shall within sixty days of the transport date, present the other party with documentation supporting such determination and the parties will confer, in good faith, on the causes for the discrepancy and shall proceed to correct such causes and adjust the quality and quantity, if justified, for the transports in question. ARTICLE 8: LINE DISPLACEMENT STOCK HECO shall purchase from Chevron whatever line displacement stock that is required for Chevron to complete the deliveries of LSFO and received into HECO's tankage at Kahe, Waiau and Iwilei. The price of No. 2 diesel fuel or No. 6 fuel oil used as line displacement stock shall be the then-current pricing for the fuel comprising the line displacement stock in Chevron's supply contract with HECO and HECO's affiliates, if such a supply contract is in effect; otherwise its price shall be the then-current Honolulu posted price for such fuel, less normally available discounts, if any, at the time of purchase. The price of No. 5 fuel oil used as line displacement stock shall be the sum of 40% of the then- current No. 2 diesel fuel pricing and 60% of the then-current No. 6 fuel oil pricing in Chevron's supply contract with HECO and HECO's affiliates, if such a supply contract is in effect; otherwise its price shall be the then-current Honolulu posted price for No. 5 fuel oil, less normally available discounts, if any, at the time of purchase. Page 15 ARTICLE 9: INVOICING AND PAYMENT Section 9.1: Invoices Invoices for the services performed pursuant to Articles 3, 4, 5, and 6 and for line displacement stock sold will be prepared and dated following delivery and shall be rendered from time to time each calendar month. The invoices shall be supported by such documentation to allow easy verification of the charges therein. Section 9.2: Payments Payments of such invoices shall be made in U.S. dollars. Timing of payments of sales and deliveries received shall be based upon the invoice issue date, which shall be the invoice date or postmarked mailing date of the invoice, whichever is later, as follows: (A) Payment for a received invoice dated from the 1st through the 10th of a month is due on the 20th of the same month. (B) Payment for a received invoice dated from the 11th through the 20th of a month is due by the last day of the same month. (C) Payment for a received invoice dated from the 21st through the last day of the month is due on the 10th day of the following month. Due dates are the dates payments are to reach Chevron. If the due date falls on a Saturday, the payment shall be made on the preceding business day. If such date falls on a Sunday or a holiday, payment shall be made the following business day. Section 9.3: Method of Payment Payments shall be by bank wire transfer of immediately available funds to: Chevron U.S.A. Inc. Account Number 59-51755 First National Bank of Chicago, Chicago, IL ABA Ref. No. 071000013 For identification purposes, all wires must clearly indicate that payment is being made by order of HECO and provide the invoice reference number. In addition, written documentation evidencing specific invoices being paid shall be immediately forwarded to: Utility Fuel Receivables Chevron U.S.A. Inc. P.O. Box 7006, Room 3338 San Francisco, California 94120-7006 Fax: (415) 894-1195 Page 16 ARTICLE 10: AUDITS Section 10.1: Audits Requiring Non-Confidential Information On request of HECO, Chevron shall furnish to HECO such full and complete documentation as HECO reasonably shall require in order to satisfy itself that data used by Chevron to establish all amounts charged hereunder are accurate. Section 10.2: Audits Requiring Confidential Information Notwithstanding the foregoing, in order to preserve the confidentiality of certain information not generally available, Chevron may elect to furnish some or all of such documentation to an independent auditor chosen by Chevron and HECO. In such an event, Chevron and HECO shall meet promptly to provide mutually satisfactory instructions to such auditor as to the facts to be verified in order to establish the accuracy of data used by Chevron to establish such charges. Chevron and HECO shall share equally the cost of such independent verification of the accuracy of data used by Chevron. Section 10.3: Independent Audits Using Non-Confidential Information In addition to the foregoing, HECO shall have the right to utilize such auditor at HECO's sole cost and expense to further certify the accuracy of any generally available information, and the accuracy of any and all amounts charged hereunder providing such auditor shall continue to be under the duty to Chevron to preserve the confidentiality of information furnished to it by Chevron. Section 10.4: Adjustments From Audit Findings Any findings of inaccuracies from the audits under Sections 10.1 and 10.3, including but not limited to billings, shall be resolved between the parties by negotiation, and failing resolution by arbitration, and appropriate adjustments to the charges shall be made. Any findings of inaccuracies from the audits under Section 10.2 shall be accepted by the parties and appropriate adjustments to the charges shall be made. ARTICLE 11: CONTINGENCIES Section 11.1: Definition of Contingency As used in this Article 11, the term "contingency" means: (A) any event reasonably beyond the control of the party affected; (B) compliance, voluntary or involuntary, with a direction or request of any government or person purporting to act with governmental authority; including that limiting HECO's recovery of all fuel costs incurred under this Contract; (C) total or partial expropriation, nationalization, confiscation, requisitioning or abrogation or breach of a government contract or concession; (D) closing, or restriction on the use of, a port or pipeline; (E) maritime peril (including but not limited to, negligence in navigation or management of vessel, collision, stranding, destruction, or loss of vessel), storm, earthquake, flood; (F) accident, fire, explosion; Page 17 (G) hostilities or war (declared or undeclared), embargo, blockage, riot, civil unrest, sabotage, revolution, insurrection; (H) strike or other labor difficulty (whomsoever's employees are involved), even though the strike or other labor difficulty could be settled by acceding to the demands of a labor group; (I) loss or shortage of production, manufacturing, power generation or distribution, transportation, delivery or receiving facilities, equipment, labor or material caused by circumstances not due to the affected party's lack of diligence. Section 11.2: Relief of Obligations Neither party shall be obligated to provide the services and the use of the facilities described under this Contract to the extent that performance of this Contract is prevented, restricted or delayed by a contingency which significantly affects that party's ability to do so. In such circumstances, the services and the use of the facilities provided to the other party may be reduced on a basis as equitable to that party as to the first party's other similar obligations, and the other party's payment obligations under Sections 3.3.A. and 5.2.A. (i) shall be reduced in direct proportion to the first party's reduction in services. Section 11.3: Pricing Affected By Government Direction If at any time any price determined under this Contract cannot be given effect because to do so would violate a direction or request of any government or person purporting to act with government authority, HECO and Chevron shall attempt to agree on an alternate course of action but failing agreement within 10 days the party adversely affected may suspend performance with respect to the services or use of facilities affected by the direction or request. ARTICLE 12: EFFECT OF SUSPENSION OR REDUCTION Section 12.1: Notice of Suspension or Reduction Any party which relies upon Sections 11.1 through 11.3 shall give the other party prompt notice thereof specifying the anticipated amount and duration of any suspension or reduction of services provided or received, or the use of facilities. It shall also give prompt notice when it no longer expects to rely on Sections 11.1 through 11.3, and services provided or received and use of facilities shall be reinstated subject to all conditions of this Contract, unless this Contract has been terminated previously under Section 12.3. Section 12.2: Chevron's and HECO's Rights During Suspension or Reduction While services or the use of facilities are suspended or reduced by one party pursuant to Sections 11.1 through 11.3, it shall not be a breach of this Contract for the other party to use the services or facilities of a third party. After any suspension or reduction has ended, there shall be no obligation on either party to make up for the services or facility usage not provided or used during the suspension or reduction. Section 12.3: Termination Rights If services and the use of facilities are suspended under Article 11 for more than 180 days, HECO or Chevron shall then have the option while such suspension continues to terminate its obligations to the other party under this Contract on 30 days notice to the other party. Page 18 Section 12.4: Payment for Services and Facility Usage Provided Nothing in Sections 11.1 through 11.3 nor Section 12.3 shall relieve HECO or Chevron of the obligation to pay in full in United States currency for the services and the use of facilities actually provided hereunder and for other amounts due by one party to the other under this Contract. ARTICLE 13: WAIVER AND NON-ASSIGNABILITY Section 13.1: Waiver Waiver by one party of the other's breach of any provision of this Contract shall not be deemed a waiver of any subsequent or continuing breach of such provisions or of the breach of any other provision or provisions hereof. Section 13.2: Non-Assignability This Contract shall not be assignable by either party without the written consent of the other, which shall not be unreasonably withheld, except that either party may assign this Contract to any affiliate, provided that any such assignment shall not release that party from any of its obligations hereunder, and except that HECO may assign this Contract to the Trustee under its First Mortgage Bond Indentures. Neither party, by agreement to such an assignment, waives any right it may have to terminate this Contract for any breach hereof occurring at any time before or after any such assignment or release the other party of any obligations arising under this Contract after any such assignment. Following any such assignment, no further assignment may be made without the consent of Chevron. Section 13.3: Definitions In Articles 13, l5 and 17, "affiliate" shall mean any corporation controlling, controlled by or under common control, with either Chevron or HECO. "Control" of a corporation shall mean ownership, directly or indirectly, of at least 50% of the voting shares of such corporation. ARTICLE 14: DEFAULT Section 14.1: Default If HECO or Chevron considers the other party to be in default in any obligation under this Contract, such party shall give the other party notice thereof. Such other party shall then have 30 days in which to remedy such default. If the default is not cured, the other party may, without prejudice to any other right or remedy of such party in respect of such breach, terminate its obligations under this Contract by 45 days notice to the party in breach. Any termination shall be without prejudice to accrued rights. All rights and remedies hereunder are independent of each other and election of one remedy shall not exclude another. In no event shall either party be liable for prospective profits or special, indirect or consequential damages. Section 14.2: Termination Rights If one party fails to perform any obligation under Articles 3, 4, 5 and 6 of this Contract, and such failure is not cured within 30 days after written notice thereof is given by the other party, the other party may give notice to the first party terminating the parties' rights and obligations under those Articles immediately. Page 19 ARTICLE 15: CONFLICT OF INTEREST Conflicts of interest related to this Contract are strictly prohibited. Except as otherwise expressly provided herein, neither party nor any director, employee or agent of a party shall give to or receive from any director, employee or agent of the other party any gift, entertainment or other favor of significant value, or any commission, fee or rebate. Likewise, neither party nor any director, employee or agent of a party shall enter into any business arrangement with any director, employee or agent of the other party or any affiliate, unless such person is acting for and on behalf of the other party, without prior written notification thereof to the other party. In the event of any violation of this Article 15, including any violation occurring prior to the date of this Contract which resulted directly or indirectly in one party's consent to enter into this Contract with the other party, such other party may at its sole option terminate this Contract at any time and, except for obligations to pay in full in United States currency for the outstanding payment obligations hereunder, shall be relieved of any further obligation under this Contract. Both parties agree to immediately notify the other of any known violation of this Article. ARTICLE 16: APPLICABLE LAW This Contract shall be construed in accordance with, and all disputes arising hereunder shall be determined in accordance with, the local law of the State of Hawaii, U.S.A. ARTICLE 17: INDEMNITY Chevron shall indemnify, defend and hold harmless HECO, its directors, officers, employees and agents (including but not limited to affiliates and contractors and their employees) from and against all liabilities, damages, losses, penalties, claims, demands, suits, costs, expenses, (including attorneys' fees) and proceedings of any nature whatsoever for personal injury, (including death) or property damage, including but not limited to HECO's facilities, that results from fuel which does not meet specifications or contaminated fuel or that arises out of or is in any manner connected with the storage or transportation of fuel in Chevron's custody, except to the extent that such injury or damage may be attributable to the negligence or willful action of HECO. HECO shall indemnify, defend and hold harmless Chevron, its directors, officers, employees and agents (including but not limited to affiliates and contractors and their employees) from and against all liabilities, damages, losses, penalties, claims, demands, suits, costs, expenses, (including attorneys' fees) and proceedings of any nature whatsoever for personal injury, (including death) or property damage, including but not limited to Chevron's facilities, that results from fuel which does not meet specifications or contaminated fuel or that arises out of or is in any manner connected with the storage or transportation of fuel in HECO's custody, except to the extent that such injury or damage may be attributable to the negligence or willful action of Chevron. The provisions of this Article 17 shall survive the termination of the Contract. ARTICLE 18: PUBLIC UTILITY COMMISSION APPROVAL This Contract is required to be filed with the Hawaii Public Utilities Commission ("PUC") for approval. If in the proceedings initiated as a result of the filing of this Contract the PUC disapproves or fails to authorize the recovery of the fuel costs incurred under this Contract through HECO's "Energy Cost Adjustment Clause", HECO may terminate this Contract by 30-days' written notice to Chevron. Page 20 ARTICLE 19: MISCELLANEOUS ------------------------- Section 19.1: Headings Headings of the Articles and Sections are for convenient reference only and are not to be considered part of this Contract. Section 19.2: Entire Agreement This document contains the entire agreement between the parties covering the subject matter and cancels, as of the effective date hereof, all prior agreements of any kind between the parties covering such subject matter and any amendments thereto. There are no other agreements which constitute any part of the consideration for, or any condition to, either party's compliance with its obligations under this Contract. Section 19.3: Contract is Not an Asset This Contract shall not be deemed to be an asset in, and, at the option of a party, shall terminate in the event of any voluntary or involuntary receivership, bankruptcy or insolvency proceedings affecting the other party. Section 19.4: Notices Except as otherwise expressly provided herein, all notices shall be given in writing, by letter, facsimile, telegraph or telex to the following addresses, or such other address as the parties may designate by notice, and shall be deemed given upon receipt. Chevron: Manager, Petroleum Coke, Heavy Fuels & Sulfur Chevron U.S.A. Inc. P.O. box 7006 San Francisco, CA 94120-7006 Facsimile: (415) 894-1195 HECO: Manager, Power Supply Services Department Hawaiian Electric Company, Inc. Box 2750 Honolulu, HI 96840-0001 Facsimile: (808) 543-7788 Section 19.5: Severability If any term or provision, or any part of any term or provision, of this Contract is held by any court or other competent authority to be illegal or unenforceable, the remaining terms, provisions, rights and obligations shall not be affected. Section 19.6: Successors and Assigns This Contract shall inure to the benefit of and be binding upon the parties hereto, their successors and permitted assigns. Section 19.7: Consequential Damages In no event shall either party be liable for any indirect, consequential, special or incidental damages of any kind whether based in contract, tort (including without limitation negligence or strict liability), warranty or otherwise. Page 21 Section 19.8: Termination of Prior Agreement Effective as of the Effective Date of the Term hereunder, this Contract hereby supersedes that certain Facilities and Operating Contract between the parties dated May 29, 1990, and all amendments thereto. IN WITNESS WHEREOF, the parties hereto have executed this Facilities and Operating Contract dated as of 11/20/95. CHEVRON U.S.A. INC. HAWAIIAN ELECTRIC COMPANY, INC. By: /s/ Phillip H. Fisher By: /s/ Edward Y. Hirata Phillip H. Fisher Edward Y. Hirata (Printed or Typed Name) Its Manager, Petroleum Coke, Its: Vice President Heavy Fuels & Sulfur Regulatory Affairs By: /s/ Molly M. Egged Molly M. Egged (Printed or Typed Name) Its: Secretary Page 22 ADDENDUM 1 ADJUSTMENT FACTORS FOR ADJUSTABLE CHARGES AND FEES The various adjustable charges and fees of Articles 3, 4, 5, and 6 of this Contract shall be adjusted as described therein based on the following factors. Section l: Labor Adjustment,"An" The labor adjustment factor, An, shall be defined as: The arithmetic average of the hourly earnings in dollars per hour for the petroleum and coal products industry as shown in the "Employment and Earning" publication of the U.S. Department of Labor, Bureau of Labor Statistics, for the three months of the second calendar quarter immediately preceding the calendar quarter of the month in which services are rendered, divided by the arithmetic average of the hourly earnings in dollars per hour for the petroleum and coal products industry as shown in the "Employment and Earning" publication of the U.S. Department of Labor, Bureau of Labor statistics, for the months July through September, 1989 (15.33). Section 2: Industrial Commodities Adjustment, "Bn" The industrial commodities adjustment factor, Bn, shall be defined as: The arithmetic average of the Producer Price Index (PPI) for Industrial Commodities as published by the U.S. Department of Labor, Bureau of Labor Statistics, for the three months of the second calendar quarter immediately preceding the calendar quarter of the month in which services are rendered, divided by the arithmetic average of the Producer Price Index (PPI) for Industrial Commodities as published by the U.S. Department of Labor, Bureau of Labor Statistics, for the months July through September, 1989 (111.8). Section 3: Fuels and Power Adjustment, "Cn" The fuels and power adjustment factor, Cn, shall be defined as: The arithmetic average of the Producer Price Index (PPI) for Fuels and Power (Code 5), as published by the U.S. Department of Labor Bureau of Labor Statistics, for the three months of the second calendar quarter immediately preceding the calendar quarter of the month in which services are rendered, divided by the arithmetic average of the Producer Price Index (PPI) for Fuels and Power (Code 5), as published by the U.S. Department of Labor, Bureau of Labor Statistics, for the months July through September, 1989 (73.8). ADDENDUM 2 QUALITY The LSFO transported hereunder shall be analyzed for the following qualities. HECO's LSFO specifications are shown for reference.
HECO Reference ASTM Test Specification LSFO specification method Units Limits - ---------------------------------------------------------------- API Gravity D4052 Deg 12 min 24 max Sulfur D4292 Wt % 0.50 max Flash Point (1) D93 Deg F 150 min Pour Point D97 Deg F 125 max Viscosity D445 SSU at l00 min 210 Deg F 450 max Ash D482 Wt % 0.05 max Gross Heating D240 MM BTU/Bbl 6.000 min Value Nitrogen D4629 Wt % 0.50 Water & Sediment D1796 Wt % 0.50
Note: (1) Flash point shall be at least 50 degrees F above the pour point or 150 degrees F, whichever is greater. ADDENDUM 3 CHEVRON'S MOORING AND SUBMARINE LINES 1. Geographical Description of Mooring Area Chevron U.S.A. Inc., Hawaiian Refinery has been granted the use of the following anchorage for its Barbers Point Offshore Tanker Terminal: The waters of the Pacific Ocean within an area beginning at a point in latitude 21 degrees 16' 58" N and longitude 158 degrees 04' 39" W, thence on a bearing of 090 degrees true, 850 yards, thence on a bearing of 180 degrees true, 450 yards, thence on a bearing of 270 degrees true, 850 yards, thence on a bearing of 000 degrees true, 450 yards to the point of beginning. The center of the above described area is on an "approximate" bearing of 119 degrees true, 2.3 miles from the Barbers Point light. Three corners of the area are marked by buoys. The two southerly corners of the area are marked by lighted buoys which are painted orange and white and are in 84 feet of water. The northeasterly corner of the area is marked by a white spar buoy and is in 66 feet of water. The northwesterly corner of the area is unmarked. The area is designated as area "C" on the chart attached hereto this Addendum 3. Within the mooring area, there are seven mooring buoys. Vessels moor by using the ship's bow anchors and by running lines to the mooring buoys. ADDENDUM 4 [SEE ATTACHED] Description of Addendum No. 4 to the Facilities and Operating Contract by and between Chevron U.S.A. Inc. ("Chevron") and Hawaiian Electric Company, Inc. ("HECO"), dated November 20, 1995 (the "Facilities Contract"): Pages 1, 2: Pages one and two of Addendum No. 4 consist of a printed form with Chevron logo entitled "VESSEL DATA SHEET." The form is the product of Chevron Shipping Company with a reference C-728 (8-93) and generally consists of boxes and blanks which are to be filled in with respect to the physical description and operating characteristics of a particular petroleum tank vessel. The data sought concerning the particular vessel's physical characteristics includes but is not limited to the following: name; deadweight; length; breadth; distance from center manifold forward, and aft, basis parallel mid-body light ship draft; SCNRT; PCNRT; if double hull and SBT configured; percentage SDWT vessel can maintain in SBT and double-valve segregation mode; number and SWL of chain stoppers and boom/cranes; number, size and distance between bow chock openings; number and location of mooring bitts and closed chocks; number of shackles of port and starboard anchor chains; deck location, length, diameter, breaking strength of the vessel's mooring wires and ropes and whether they are on winches or drums; number, length, material, breaking strength of synthetic tails for mooring wires; if vessel equipped with IGS, vapor recovery system and COW; distances from manifold to ship's rail, flange center from deck, between manifold connections, BCM, and KTM. Data sought concerning operating characteristics of a particular vessel include but are not limited to: flag; number, nationality and English-language knowledge of officers and crew; if vessel has U.S. Coast Guard TVEL; date of last drydock and last Special Survey; if vessel is a member of TOVALOP; and name and particulars of OPA 90 Qualified Person and vessel contact parties. Pages 3, 4: Pages three and four of Addendum No. 4 consist of one page entitled "Mooring Information and Requirements" which in addition to the printed text, includes a diagram of a vessel which describes the required on-deck location and arrangement for mooring ropes and wires for a petroleum tank vessel with respect to mooring at a Chevron SPM or CMB facility, or if performing ship-to-ship lightering operations. This requirements data is to serve as a guide to assisting the completion of page four of Addendum No. 4. Page four is entitled "Mooring Arrangement Data Sheet for Lightering Operations," and in addition to the printed text, includes a hexagonal outline which is to represent a deck of a tank vessel. Upon this outline is to be marked the location of each of a given vessel's single drum winches, open fairleads, double drum winches, warping drums, closed fairleads and single and double mooring bitts. There are also three questions concerning the number, sufficiency and location of the given vessel's enclosed fairleads and tie-off bitts with respect to receiving headlines, sternlines and backsprings from the other vessel participating in the lighterage operation. ADDENDUM 5 LIST OF FACILITIES IN HECO'S TANK FIELD SYSTEM AND CHEVRON'S TANK FIELD SUPPORT SYSTEM Section 1: HECO's Facilities 1) Three LSFO storage tanks. 2) Two LSFO feeder pumps (main and spare) with electric drivers. 3) Jet mixing facilities for all LSFO tanks using feeder pumps as motive force. 4) Internal tank heaters -- pancake coil tank heaters using low pressure steam. 5) Tank Gauging System -- compatible with and connected to Chevron's refinery tank gauging system. 6) Storm Water Drainage System -- gravity drainage system to drain storm water to Chevron's refinery tank field impounding basin. 7) Single dike for area and gravity drainage system to drain a major oil spill to Chevron's refinery tank field impounding basin. 8) Lighting System 9) Fire Fighting System -- consisting of a looped waterline extending from Chevron's refinery tank field fire water system. 10) Electrical Substation and Electrical Distribution System 11) Steam Systems -- nominal 40 psig system to supply tank heating coils, steam tracing system and exchangers. 12) Condensate System -- collection and pumping system to recover and return 100 percent of condensate to Chevron's refinery condensate system. 13) Related Piping Systems -- a) LSFO -- steam traced and insulated lines needed to receive LSFO into tank field, transfer LSFO from tank to tank, and transfer LSFO to Chevron's Pipeline booster pumps. b) Steam and Condensate -- insulated steam and condensate pipelines. 14) Related Pipeline Systems -- that section of pipeline which is connected to Hawaiian Independent Refinery, Inc. or other facilities and falls within the legal boundaries of HECO's Barbers Point tank field. Section 2: Chevron's Tank Field Support System 1) Low Pressure Steam System -- insulated supply line with valves and meter routed from Chevron's refinery low pressure steam system to HECO's tank field plot limit. 2) Condensate System -- insulated condensate line with valves routed from HECO's tank field plot limit to Chevron's refinery condensate system. 3) Fire Water System -- two supply lines with valves routed from Chevron's refinery tank field fire water system to HECO's tank field plot limit for HECO's looped fire water system. 4) Storm Water Drainage System -- system is routed via gravity to Chevron's refinery tank field impounding basin. 5) Tank Gauging System -- signals from HECO's tank gauging system are routed to and connected into Chevron's refinery tank field control house tank gauging system. 6) LSFO Receiving Line -- steam traced and insulated line with valves routed from Chevron's marine unloading line to HECO's tank field plot limit. 7) LSFO Delivery Line -- steam traced and insulated line with valves routed from HECO's plot limit to Chevron's pipeline booster pumps' suction manifold. ADDENDUM 6 LIST OF FACILITIES IN HECO'S WAIAU STEAM SYSTEM 1) Steam Piping -- insulated piping from HECO's Waiau Unit No. 7 and No. 8 reboiler steam system to the plot limit of Chevron's Waiau Reheat Station 2) Condensate Inspection Tank 3) Two Condensate Drip Pumps 4) Steam Flow Meter 5) Miscellaneous -- pipeline valves, instrumentation and fittings APPENDIX 1 CHEVRON'S AND HECO'S FUEL OIL DISTRIBUTION SYSTEMS [See attached] Description of Appendix 1 to the Facilities and Operating Contract by and between Chevron U.S.A. Inc. ("Chevron") and Hawaiian Electric Company, Inc. ("HECO"), dated November 20, 1995 (the "Facilities Contract"): Appendix 1 consists of a reduced copy of a map or geographic diagram with Chevron identification entitled "Chevron's and HECO's fuel oil Pipelines to Honolulu and Kahe Point. Plant 28." The form is the product of "Chevron U.S.A., Inc. MFG. DEPT. HAWAIIAN REFINERY," dated 4-19-90, and has a document reference "28-HD-593-A." The diagram generally displays the location, size and route of Chevron and HECO pipelines from the Chevron off-shore tank mooring, HECO pipeline from Chevron refinery to Kahe Point Plant, Chevron Pipeline to Honolulu connecting the Chevron refinery with the HECO Waiau Plant, Chevron Kapalama Terminal, HECO Iwilei, Chevron Honolulu Marine Terminal Pier 30 and HECO Honolulu Plant. APPENDIX 2 SUMMARY OF VESSEL REQUIREMENTS AT BARBERS POINT A. Maximum Deadweight Tons - 150,000 B. Maximum Length Overall - 1,000' C. Maximum Draft - 50' (a maximum draft of 52' may be allowed during the summer months upon request) D. Maximum Distance Stern to Center of Cargo Manifold - MAX BCM 500' GENERAL REQUIREMENTS E. No cast iron is permitted in vessel's riser valves, pipes and fittings outboard of the last fixed rigid support to the deck. F. Vessel's port side manifold piping, valves and ancillary equipment necessary to retrieve, secure and release the submarine cargo transfer hose(s), shall be in accordance with the latest edition of the Oil Companies International Marine Forum, OCIMF, Standards for Oil Tanker Manifolds and Associated Equipment, which shall be an integral part of this agreement. G. All ground tackle must be in good working condition. Anchor chain wear shall not exceed 12.5% of the original diameter as measured by the vessel prior to its nomination. Vessels up to 50,000 DWT shall have at least l0 shots of chain on each anchor. Vessels over 50,000 DWT shall have at least 12 shots of chain on each anchor. H. Vessels should be equipped with a searchlight on each bridge wing to assist in illuminating buoys during mooring and unmooring at night. I. Handling of the submarine cargo transfer hose(s) shall be performed by the vessel's crew under the supervision of a ship's officer as designated by the vessel's master, as directed by the Chevron's Mooring Master in attendance. J. All vessels shall comply with regulations and procedures set forth in the Marine Terminal Manual for Barbers Point Offshore Tanker Terminal in its latest revision, in addition to U.S. Coast Guard and other government regulations. Vessels shall comply with all additions and revisions to the regulations and procedures in the Marine Terminal Manual upon sixty days' written notice or whatever shorter notice is required to comply with a mandate by government authority. K. All vessels are subject to inspection by Chevron upon arrival to determine their suitability for the berth. Vessels not meeting the standard requirements in the Marine Terminal Manual for Barbers Point Offshore Tanker Terminal may be refused for berthing. L. Vessels may be required to unberth and/or otherwise incur delay during adverse weather conditions. All costs, expenses, etc., or unberthing and reberthing shall be to the vessel's or HECO's account as the case may be. M. All vessels must have the capability of maintaining at least 30% of vessels DWT at all times while in the berth. N. Only uncontaminated SBT Ballast may be discharged to sea after a visual inspection of its surface has verifes\d its integrity. O. Vessels shall be equipped with seven (7) mooring wires, l000 feet in length and mounted on winches. For vessels up to 70,000 DWT, the wire breaking strength shall be at least 65 metric tons; for vessels over 70,000 DWT, the breaking strength shall be least 75 metric tons. If vessel's wires are used in combination with synthetic tails (pendants), these shall be in good condition and have a breaking strength at least equal to l.25 times that of the wire they serve. In addition, vessels shall be equipped with at least seven (7) synthetic mooring ropes, 720 feet in length, in good condition and with a nominal breaking strength of 75 metric tons. Synthetic mooring ropes should be made of polyester fiber or equivalent Polypropylene and nylon ropes are not acceptable. P. Winches and fittings must be so placed that mooring wires and synthetic lines can be run as follows:
Port Center Stbd Main deck fwd. l each - l each Main deck aft l each - l each Poop deck l each l each l each
Each synthetic rope shall be secured to a separate bitt using both horns of the bitt. Winch arrangements shall be such that port and starboard mooring wires/ropes may be handled simultaneously. Q. Portside hose boom and related equipment shall have a minimum safe working load capacity of ten long tons The vessel's hose boom and cargo manifold must be able to connect to one 12" over-the-rail hose. Hose boom topping life and runner must be of wire line and not synthetic line. APPENDIX 3 Refinery Operating Standards and Instructions - - - - - - - - - - A. Operating Standards H-4210 - Operation of the Main Pumphouse - Included by reference in H-4210 are: AR-9000 - General Operating Instructions AR-9060 - Sampling Oil AR-9209 - Breaking Lines AR-9220 - Operation of Tanks AR-9230 - Gauging Tanks AR-9240 - Cleaning Tanks AR-9410 - General Pumping Instructions AR-9422 - Operation of Centrifugal Pumps and Drivers AR-9920 - Safe Practices for Entering and Working in Enclosed Equipment AR-9510 - Care and Operation of Refinery Sewers and Draining Systems AR-9249 - Precautions in Repairing Tanks AR-9900 - Release of Operating Equipment for Mechanical Work AR-942l - Care and Operation of Reciprocating Pumps H-4050 - Operation of Electrical Distribution System AR-9070 - Static Electrical and Lightning Protection AR-9710 - Operation of Metering and Control Equipment H-9510 - Operation of Drainage and Effluent Treating Systems B. Refinery Instructions Ref. Inst. No. 3 - Refinery Security Refinery Inst. No. 80 - Good Housekeeping C. Emergency Plans and Procedures - Emergency Fire Organization D. Engineering (Maintenance) Instructions All instructions directly applicable to tank field and pipeline maintenance work. EX-10.11 8 BHP/HECO LOW SULFUR FUEL CONTRACT HECO EXHIBIT 10.11 LOW SULFUR FUEL OIL SUPPLY CONTRACT BETWEEN BHP PETROLEUM AMERICAS REFINING INC. AND HAWAIIAN ELECTRIC COMPANY, INC. This Contract is made by and between BHP PETROLEUM AMERICAS REFINING INC., a corporation duly incorporated under the laws of the State of Hawaii, having its principal place of business at 733 Bishop Street, Honolulu, Hawaii 96813, (hereinafter called "SELLER"), and HAWAIIAN ELECTRIC COMPANY, INC., a corporation duly incorporated and authorized to do business under the laws of the State of Hawaii, having its principal place of business at 900 Richards Street, Honolulu, Hawaii, (hereinafter called "BUYER"). NOW, THEREFORE, the parties agree as follows: ARTICLE I AGREEMENT SELLER shall sell and deliver or cause to be delivered, and BUYER shall buy, receive and pay for Low Sulfur Fuel Oil suitable for use as a boiler fuel of the specifications provided herein (the "Product") and in the quantity described herein. 1 ARTICLE II TERM The term of this Contract shall be for a two (2) year period commencing January 1, 1996, at 12:01 a.m. through December 31, 1997, at 12:00 midnight, Hawaiian time, subject to the provisions and conditions contained herein. ARTICLE III PRODUCT & QUALITY SELLER shall sell and deliver and BUYER shall receive and pay for Product that shall comply with the specifications as shown in Exhibit A attached hereto and incorporated herein by reference. ARTICLE IV QUANTITY 4.1 Quantity. ------------------------------------------------------------------ This portion is confidential; therefore, it has been omitted and filed separately with the Commission. ------------------------------------------------------------------ 2 ------------------------------------------------------------------ This portion is confidential; therefore, it has been omitted and filed separately with the Commission. ------------------------------------------------------------------ 4.2 Optional Purchases. ------------------------------------------------------------------ This portion is confidential; therefore, it has been omitted and filed separately with the Commission. ------------------------------------------------------------------ 3 ------------------------------------------------------------------ This portion is confidential; therefore, it has been omitted and filed separately with the Commission. ------------------------------------------------------------------ 4 4.3 Reallocation of Deliveries. If during any 15 calendar day period, deliveries of LSFO by SELLER to Kalaeloa Partners, L.P. ("Kalaeloa") are less than 20,000 barrels due to an unanticipated equipment outage at the oil-fired combined cycle facility owned by Kalaeloa at Campbell Industrial Park, SELLER and BUYER shall agree to reallocate deliveries of LSFO by SELLER, to the extent required by BUYER and not required by Kalaeloa, to BUYER. The reallocated LSFO shall be priced on the same basis as optional purchases as provided for in Section 4.2. ARTICLE V PRICE ------------------------------------------------------------------ This portion is confidential; therefore, it has been omitted and filed separately with the Commission. ------------------------------------------------------------------ 5 ------------------------------------------------------------------ This portion is confidential; therefore, it has been omitted and filed separately with the Commission. ------------------------------------------------------------------ 6 ------------------------------------------------------------------ This portion is confidential; therefore, it has been omitted and filed separately with the Commission. ------------------------------------------------------------------ 7 ------------------------------------------------------------------ This portion is confidential; therefore, it has been omitted and filed separately with the Commission. ------------------------------------------------------------------ ARTICLE VI DELIVERY 6.1 Notification and Product Delivery. Subject to the minimum and maximum amounts specified in Section 4.1, BUYER will provide SELLER notice ("Nomination") of the amount to be sold and delivered by SELLER and bought and received by BUYER for each calendar month no later than seventy-five (75) days prior to the first day of said month ("Nomination Month"). The Nomination shall specify both the quantities of Product and the delivery timing for the amount to be sold for the first and second half of the Nomination Month, respectively. No later than 10 days prior to the beginning of each calendar month, SELLER will provide BUYER a schedule of deliveries to be made for the following two months. The delivery 8 schedule shall specify the approximate quantity, the approximate date and a characterization of the approximate viscosity, either low, 100 - 200 SSU at 210 DF, medium, 201 - 350 SSU at 210 DF or high, over 350 SSU at 210 DF of each separate delivery. SELLER shall notify BUYER of a change to said delivery schedule because of one of the following causes with respect to each individual delivery when it shall become known to SELLER: a) A change in volume, if such change is in excess of 10% of the previously advised delivery volume; or b) A change in date, if such change is greater than 2 days from the previously advised date; or c) A change in the previously advised viscosity characterization. BUYER shall not be required to take Delivery, and SELLER shall not be required to make Delivery of more than fifty percent of a monthly nomination in any ten consecutive day period. The minimum and maximum amounts specified in Section 4.1 to be delivered in any given month may be further modified upon mutual agreement of the parties. If for reasons other than Force Majeure, BUYER's anticipated demand for LSFO on an annual basis during any calendar year during the term of this Contract declines below the BUYER's minimum annual quantity set forth in Section 4.1 (the difference between BUYER's anticipated demand and BUYER's minimum annual quantity being a "Purchase Deficit Position"), then BUYER shall give prompt written notice to SELLER. 9 If for reasons other than Force Majeure, SELLER shall have delivered Product for the Nomination Month such that the delivery rate, expressed in barrels per day, is below 85% of the nominated volume as computed on a month-to- date ratable basis, found by multiplying the day of the Nomination Month by the nominated rate of delivery for that month ("Failure to Supply Position"), then SELLER shall give prompt written notice to BUYER. 6.2 Title and Risk of Loss. Title to Product and the risk of loss of Product shall pass to BUYER at the connection between the flange of SELLER's pipeline and BUYER's tank farm pipeline at Barber's Point. 6.3 Determination of Quality. The quality and heat content of the Product shall be determined on the basis of a composite sample(s) drawn by a mutually agreed upon independent inspector from SELLER's issuing tank(s) in such a manner as to be representative of each individual Delivery. SELLER and BUYER shall share equally the cost of independent inspections. If the Delivery of Product is from more than one issuing tank, the specifications of the total Delivery of Product shall be determined on a volumetric weighted average from the representative samples drawn by the independent inspector. The representative samples drawn from SELLER's tank(s) shall be divided into a minimum of three (3) parts: 1. One part shall be used by for an analysis by SELLER's laboratory to determine quality and heat content (gross Btu) per barrel. 2. One part shall be provided to BUYER for the purpose of verifying SELLER's determinations. 10 3. At least one part shall be sealed and provided to BUYER, or to the independent inspector, to be retained. SELLER agrees to provide BUYER a copy of SELLER's laboratory analyses of the tank final samples, or a preliminary laboratory analyses if the analyses of the tank final samples is not available, showing sulfur content, flash point and sediment and water content prior to commencing delivery of the Product, provided, however, that SELLER shall provide BUYER the complete Certificate of Quality no later than two working days after the completion of the Delivery. BUYER shall have the right to perform laboratory analyses in order to verify the results of SELLER's laboratory analyses. The official determination of gross heat content shall be based upon SELLER's laboratory results provided that the arithmetic difference between SELLER's and BUYER's laboratory results is equal or less than the then existing reproducibility standard (currently 0.40 MJ/kg) for ASTM test D-240. If the difference between SELLER's and BUYER's laboratory results is greater than this ASTM reproducibility standard, the parties will confer, in good faith, to resolve the difference. In the event of an unresolvable difference between BUYER and SELLER, BUYER's sealed sample will be provided to an independent laboratory for an official determination, which shall be binding upon the parties. SELLER and BUYER shall share equally the costs of independent tests and determinations. The Product received by BUYER in a Delivery may include some amount of pipeline displacement stock ("Pipeline Fill"). The specification of the Pipeline Fill shall be determined by the SELLER on the basis of SELLER's representative sample of the storage tank from the which 11 the Pipeline Fill was issued. SELLER agrees to provide BUYER a copy of a laboratory analysis of the Pipeline Fill's specifications prior to shipment. To provide an early warning of any quality problems with the Product, SELLER agrees to perform a pre-shipment computer simulation blend ("Blend") of LSFO from each issuing tank and Pipeline Fill on a volumetric weighted average basis. The computer simulation shall provide confirmation of the Blend's API gravity, viscosity and percent by weight sulfur content. SELLER agrees to inform BUYER or BUYER's representative of the Blend results prior to shipment. SELLER agrees that under no circumstances shall it deliver Product to BUYER should the percent by weight of sulfur content of the Blend, determined by computing the weighted average by volume of LSFO issued from the SELLER's tank(s) and the Pipeline Fill volume, be greater than 0.50%, without BUYER's express written permission. If SELLER or BUYER has reason to believe that the quality or quantity of Product stated for a specific Delivery per Section 6.3 or Section 6.4 is incorrect, that party shall within thirty (30) days after the later of the date of the complete Certificate of Quality or the date of the final determination of gross heat content, present the other party with documents supporting such determination and the parties will confer, in good faith, on the causes for the discrepancy and shall proceed to correct such causes and adjust the quality and quantity, if justified, for the Delivery in question. In the event of an unresolvable difference between SELLER and BUYER, the sealed part of the representative sample in the possession of BUYER or the independent 12 inspector shall be provided to an independent laboratory for an official determination, which shall be final. SELLER and BUYER shall share equally the cost for such independent laboratory determination. If the quality of the Product received by BUYER fails to conform to the requirements of Article III of this Contract, both BUYER and SELLER shall attempt to minimize the impact of any quality problem by specification waiver if the use of the Product will not unreasonably cause harm to BUYER, or by SELLER delivering higher quality oil in a timely manner to produce a specification quality blend in BUYER's storage tank(s). If all such, and similar, efforts fail to resolve the quality problem, then BUYER may return non-specification Product to SELLER, in which case SELLER shall replace the non-specification Product to BUYER in a timely manner. All reasonable costs and expenses, including BUYER's handling costs incurred in returning and replacing non- specification Product, shall be paid by SELLER. 6.4 Determination of Quantity. Quantities of the Product delivered hereunder shall be determined at the time of each Delivery by gauging SELLER's tank(s) immediately before and after pumping. Volumes delivered hereunder shall be converted to 60 [degrees] F, using the latest revision of ASTM Table 6B. Measurements shall be taken jointly by representatives of SELLER and BUYER or by a mutually agreed upon independent inspector. SELLER and BUYER shall share equally the cost of independent inspections. 6.5 Purchase Deficit. ------------------------------------------------------------------ This portion is confidential; therefore, it has been omitted and filed separately with the Commission. ------------------------------------------------------------------ 13 ------------------------------------------------------------------ This portion is confidential; therefore, it has been omitted and filed separately with the Commission. ------------------------------------------------------------------ 6.6 Failure to Supply. In the event that the SELLER is in a Failure To Supply Position, both BUYER and SELLER shall attempt to minimize the impact of any Failure To Supply Position such that it not impose an unreasonable risk to BUYER. If the amount of deficient Product is such that SELLER's Delivery of Product to BUYER in the Nomination Month at the nominated volume, as computed on a month-to-date ratable basis, is deficient in aggregate by 50,000 barrels, BUYER may, at its option, purchase the undelivered Product elsewhere at the then prevailing market rates. The BUYER will invoice, and the SELLER shall pay, the cost difference between purchased Product and cost of Product if it had been delivered by SELLER. If the BUYER elects to purchase Product from other sources under this Section 6.6, the annual purchase requirement referenced in Section 4.1 and Section 6.1 shall be reduced correspondingly. 14 ARTICLE VII PAYMENT 7.1 Method of Payment. Invoices shall be prepared by SELLER after a Delivery has been completed. Invoices shall be accompanied by full documentation, acceptable to the BUYER, including quality certificates, quantity documentation, and price calculation. Payment shall be made without discount in USD within 7 business days from the receipt of invoice by wire transfer of immediately available funds to: Citibank, New York ABA # 021000089 BHP Petroleum Americas Refining Inc. Account #4064332 7.2 Payments. If SELLER's final laboratory result for gross heat content is unavailable or if said laboratory result is disputed by BUYER pursuant to Section 6.3, SELLER may issue a provisional invoice calculated on the basis of the heat-content standard of 6.2 million BTU per barrel. BUYER shall make payment for such provisional invoice in accordance with Section 7.1. If an invoice incorporating an item other than a heat rate adjustment which is disputed has been sent to BUYER, then BUYER shall make payment in accordance with Section 7.1 for such invoice items or that portion of the invoiced delivery which is not disputed by BUYER and in which case BUYER shall make such adjustment to taxes and other value-dependent items as are reasonable under the circumstances. The provisional invoice or invoice incorporating items in dispute shall be adjusted in accordance with the terms of Article V by subsequent invoicing or by issuing a credit or debit with respect to the original invoice within 7 15 business days of receipt of the independent laboratory determination pursuant to Section 6.3 or other resolution of the issue in dispute. BUYER shall make payment for such subsequent invoices or debits in accordance with Section 7.1. BUYER shall have the option to apply such credit against payments to be made subsequent to the receipt of the credit, or if such payments are not expected to be made within 7 business days, BUYER shall be able to receive said credit in immediately available funds within 3 business days of SELLER's receipt of BUYER's written instructions. 7.3 Interest. Interest will accrue on all amounts not paid within 7 business days of receipt of provisional or final invoice at the then existing London Inter-Bank Offered Rate (LIBOR). ARTICLE VIII NOTICES Any notice to be given hereunder shall be in writing unless specified otherwise and shall be deemed to have been duly given when sent or personally delivered to the other party at the address noted below: BUYER: HAWAIIAN ELECTRIC COMPANY, INC. P. O. Box 2750 Honolulu, Hawaii 96840 Attn: Vice President, Power Supply Facsimile: (808) 543-7707 16 SELLER: BHP PETROLEUM AMERICAS REFINING INC. P.O. Box 3379 Honolulu, Hawaii 96842 Attn: Vice President-Marketing Facsimile: (808) 547-3796 Notices may be by first class mail, postage prepaid, by elctronic transmission (facsimile or telex) or by personal delivery. The parites may substitute other addresses upon the giving of proper notice from time to time in the manner provided above. ARTICLE IX RENEGOTIATION It is understood and agreed that both parties entered into this Contract in reliance on governmental laws, rules, decrees, orders, regulations, and interpretations or implementation thereof in effect on the date of execution of this Contract or any subsequent amendments hereto, to the extent that they directly or indirectly affect the Product sold hereunder. If at any time any of the said laws, rules, regulations, implementations or interpretations thereof are changed or if new laws, rules, regulations or new interpretations and implementations thereof become effective, and such change or new laws, rules, regulations, interpretations or implementations thereof have a significant adverse economic effect upon either party, such that performance of this Contract would be inequitable or cause financial hardship to the affected party, then the affected party shall have the option to call for renegotiation of the Product Price or any other provision of this Contract the performance of which by the affected party would be inequitable or cause financial 17 hardship. Such option shall be exercised by the affected party at any time after such a change or new law, rule, regulation, interpretation or implementation thereof is effective, by giving notice to the other party of the call to renegotiate. Within ten (10) calendar days after the date of such notice, the parties shall enter into negotiations and in the event that the parties do not agree upon a new Product Price or other provision satisfactory to both parties within forty (40) calendar days after the date of such notice, the affected party shall have the right to terminate this Contract effective thirty (30) days after giving notice of termination to the other party within thirty (30) days immediately following the forty (40) day negotiation period. Until a mutually satisfactory new Product Price or other provision has been agreed upon, or until this Contract is terminated as provided herein, the Product Price or other provision that was in effect when the request for renegotiation was made shall continue in full force and effect. ARTICLE X TAXES, ASSESSMENTS, LEVIES AND IMPOSTS BUYER shall reimburse SELLER for all taxes, assessments, levies and imposts of whatsoever kind or nature imposed on SELLER by any governmental or quasi- governmental body (including without limitation the Hawaii Gross Excise Tax) with respect to the sale of Product under this Contract. Notwithstanding the foregoing, BUYER shall not be required to reimburse SELLER for any tax measured by or based on the net income of SELLER or for real 18 property taxes or to duplicate any item of expense of SELLER which is included in the Product Price as provided for in Section 4.2 and Article V of this Contract. ARTICLE XI FORCE MAJEURE 11.1 Force Majeure. As used in this contract, an event or act of "force majeure" is defined as follows: acts of God, wars, riots, strikes, labor disputes, lockouts, blockades, insurrections, inability to secure materials or labor by reason of allocations promulgated by governmental agencies, unavailability of shipping of crude oil supplies, epidemics, landslides, lightning, earthquakes, fires, floods, tidal waves, volcanic eruptions, explosions, failure of machinery or pipelines, or any other causes not within the control of the affected party. 11.2 Obligations Suspended. BUYER's obligation to purchase or receive Product, or SELLER's obligation to sell or delivery Product, shall be suspended to the extent performance is prevented by an event or act of force majeure for any period in which such event or act exists as to the party claiming force majeure; and so long as such party is exercising its good faith efforts to overcome such force majeure event. However, nothing in this Article excuses BUYER from its obligation to make payments of money due SELLER for Product already delivered to BUYER. 11.3 Notice of Force Majeure. The party claiming force majeure agrees to give the other party prompt written notice of an act or event of force majeure. The party claiming force majeure shall use due diligence to cure any act or event of force majeure, and shall give the other 19 party prompt notice after the act or event of force majeure has terminated. This Article shall not require any party to settle or compromise any strike or labor dispute. 11.4 No Make-Up Requirement. After the act or event of force majeure has terminated, SELLER shall not be obligated to sell and deliver and BUYER shall not be obligated to purchase and receive the undelivered quantity of Product that normally would have been sold and delivered during the period of force majeure. ARTICLE XII PRICE AND ALLOCATION CONTROLS 12.1 Regulatory Price Suspension. If SELLER is precluded by statute, or by regulation, rule, interpretation or order implementing such statute from obtaining any increase in Product Price, as determined pursuant to this Contract, the increase shall be suspended until said law, regulation, rule, interpretation or order permits the increase in whole or in part. In the event the law, regulation, rule, interpretation or order is terminated or is later modified to permit the increase, in whole or in part, the Product Price shall be increased for deliveries of the Product made thereafter to the level permitted under this Contract without further action by the parties. 12.2 Government Regulations. If the delivery or supply of Product pursuant to this Contract conflicts with or is limited or prohibited by any federal, state or local regulations, then to the extent of such conflict, limitation or prohibition, SELLER shall have no obligation to deliver or supply BUYER with the Product under this Contract and BUYER shall have no 20 obligation to purchase or receive the Product under this Contract. BUYER, in BUYER's discretion, may elect to complete and file any and all required Federal or state regulatory forms to permit, facilitate, or enable the supply of Product to BUYER under this Contract. SELLER shall fully cooperate with BUYER in the completion and filing of the foregoing forms. ARTICLE XIII ASSIGNMENT This Contract shall not be assigned by either party without prior written consent of the other party, and any assignment without such written consent, shall be void; provided, however, BUYER may assign this Contract to the Trustee under BUYER's First Mortgage Indenture dated December 1, 1938. ARTICLE XIV APPLICABLE LAW This Contract shall be deemed to be a Contract made under and shall be governed by and construed in accordance with the laws of the State of Hawaii. The parties hereby consent to the personal jurisdiction of the federal and state courts in the State of Hawaii. 21 ARTICLE XV PUBLIC UTILITIES COMMISSION This Contract is required to be filed with the Hawaii Public Utility Commission (PUC) for approval. If in the proceedings initiated as a result of the filing of this Contract, the PUC disapproves or fails to authorize the recovery of the fuel cost incurred under this Contract through the BUYER's Energy Cost Adjustment Clause, BUYER may terminate this Contract at any time within 90 days of disapproval by giving 60 days written notice to the SELLER. ARTICLE XVI ENTIRE AGREEMENT, WAIVER AND ILLEGALITY This Contract incorporates the entire agreement between the parties with reference to the subject matter and cancels and supersedes as of the date of execution hereof all prior oral or written understandings, or agreements, between the parties with respect to the subject matter and may only be modified by written instrument executed by duly authorized representatives of the parties. There are no other agreements which constitute any part of the consideration for, or any condition to, either party's compliance with its obligations under this Contract. Failure to insist upon strict performance of any provision shall not constitute a waiver of the right to require such performance, nor shall a waiver in one case constitute a waiver with respect to a later breach, whether of a similar nature or otherwise. If any term or provision of this Contract is held by any Court to be illegal or unenforceable, the remaining terms, provisions, rights and obligations shall 22 not be affected. The headings or captions are for convenience only and have no force or effect on legal meaning in the construction or enforcement of the Contract. Time shall be of the essence in this Contract. IN WITNESS WHEREOF, the parties hereto, intending to be legally bound thereby, have caused this Contract to be executed in duplicate originals by their duly authorized officers. HAWAIIAN ELECTRIC COMPANY, INC. By /s/ Edward Y. Hirata Its Vice President, Regulatory Affairs By /s/ Molly M. Egged Its Secretary BUYER Date: December 5, 1995 BHP PETROLEUM AMERICAS REFINING INC. By /s/ Faye W. Kurren Its Vice President SELLER Date: December 5, 1995 23 EXHIBIT A PRODUCT SPECIFICATIONS LSFO Specification - Test Item Measurement Unit Limits ASTM Method GRAVITY @ 60 DEGREES F. Degrees API 12.0 Min. D-4052 24.0 Max. VISCOSITY SSU At 210 DF 100 Min. D-445 450 Max. or D-2161 HEAT VALUE, GROSS MM BTU/BBL 6.0 million D-240 Min. or D-4868 * FLASH POINT Degrees F. 150 Min. D-93 POUR POINT Degrees F. 125 Max. D-97 ASH Percent, Weight 0.05 Max. D-482 SEDIMENT & WATER Percent, Weight 0.50 Max. D-1796 SULFUR Percent, Weight 0.50 Max. D-4292 NITROGEN Percent, Weight 0.50 Max. D-3431, D-4629 * Flash point shall be at least 50 DF above the pour point or 150 DF, whichever is greater. 24 EXHIBIT B EXAMPLE PRICE CALCULATION ----------------------------------------------------------------- This portion is confidential; therefore, it has been omitted and filed separately with the Commission. ----------------------------------------------------------------- 25 ---------------------------------------------------------------- This portion is confidential; therefore, it has been omitted and filed separately with the Commission. ---------------------------------------------------------------- 26 ---------------------------------------------------------------- This portion is confidential; therefore, it has been omitted and filed separately with the Commission. ---------------------------------------------------------------- 27 EXPLANATION OF TAXES: Taxes in the Product Price currently in effect include Superfund Tax of $0.097 per barrel and the Hawaii Environmental Response Tax of $0.050 per barrel. Also, Hawaii State General Excise Tax of 4.167% will be paid on all components of the Product Price, except the Hawaii Environmental Response Tax. 28 II. Determination Of Price Of Optional Purchases Under Article IV ---------------------------------------------------------------- This portion is confidential; therefore, it has been omitted and filed separately with the Commission. ---------------------------------------------------------------- 29 ---------------------------------------------------------------- This portion is confidential; therefore, it has been omitted and filed separately with the Commission. ---------------------------------------------------------------- 30 ---------------------------------------------------------------- This portion is confidential; therefore, it has been omitted and filed separately with the Commission. ---------------------------------------------------------------- 31 ---------------------------------------------------------------- This portion is confidential; therefore, it has been omitted and filed separately with the Commission. ---------------------------------------------------------------- 32 ---------------------------------------------------------------- This portion is confidential; therefore, it has been omitted and filed separately with the Commission. ---------------------------------------------------------------- EXPLANATION OF TAXES: Taxes in the price of optional purchases currently in effect include Superfund Tax of $0.097 per barrel and the Hawaii Environmental Response Tax of $0.050 per barrel. Also, Hawaii State General Excise Tax of 4.167% will be paid on all components of the Product Price, except the Hawaii Environmental Response Tax. 33 EXHIBIT C EXAMPLE DETERMINATION OF FREIGHT COMPONENTS PURSUANT TO ARTICLE IV AND ARTICLE V ---------------------------------------------------------------- This portion is confidential; therefore, it has been omitted and filed separately with the Commission. ---------------------------------------------------------------- 34 ---------------------------------------------------------------- This portion is confidential; therefore, it has been omitted and filed separately with the Commission. ---------------------------------------------------------------- 35 ---------------------------------------------------------------- This portion is confidential; therefore, it has been omitted and filed separately with the Commission. ---------------------------------------------------------------- 36 EX-10.12 9 INDUSTRIAL/DIESEL FUEL CONTRACT HECO Exhibit 10.12 INTER-ISLAND INDUSTRIAL FUEL OIL AND DIESEL FUEL OIL CONTRACT This Contract is made and entered into this 5th day of December, 1995, by and between BHP PETROLEUM AMERICAS REFINING INC., a Hawaii corporation, (hereinafter called "SELLER"), and HAWAIIAN ELECTRIC COMPANY, INC., and its wholly-owned subsidiaries Maui Electric Company, Ltd. and Hawaii Electric Light Company, Inc., Hawaii corporations, (hereinafter collectively called "BUYER"). NOW, THEREFORE, the parties agree as follows: ARTICLE I DEFINITIONS SECTION 1.1 Except where otherwise indicated, the following definitions shall apply throughout this Contract: 1. "Fuel Oil" means Industrial Fuel Oil No. 6 in accordance with Article IV and Exhibit A. 2. "Diesel" means Diesel Fuel Oil No. 2 in accordance with Article IV and Exhibit B. 3. "Product" means both Fuel Oil and Diesel. 4. "HECO" means Hawaiian Electric Company, Inc. 5. "HELCO" means Hawaii Electric Light Company, Inc. 6. "MECO" means Maui Electric Company, Ltd. 7. "gallon" means a United States gallon of 231 cubic inches at 60 degrees Fahrenheit. 8. "barrel" or "Bbl" means 42 United States gallons at 60 degrees Fahrenheit. 9. "SELLER's Loading Pier" means Piers 5 or 6 located at the Barbers Point Harbor, Oahu, Hawaii, and connected by pipeline to SELLER's Refinery at Barber's Point, Oahu, Hawaii. 10. "SELLER's SPM" means SELLER's offshore Single Point Mooring at Barbers Point, Oahu, Hawaii. 11. "LIBOR" means the simple average of London Inter-Bank Offered Rates for one month as published in the Wall Street Journal during past due period. SECTION 1.2 As to any purchase of Product by MECO, the term "BUYER" shall exclude HELCO, and as to any purchase of product by HELCO, the term "BUYER" shall exclude MECO. Furthermore, for purposes of this Contract (excluding any payments due from, and liabilities and indemnities attributable to, a BUYER) the term "BUYER" shall be deemed to mean MECO or HELCO, as applicable, and its authorized agent(s) for this purpose, unless otherwise specified or clearly inappropriate in the context. 2 ARTICLE II TERM The term of this Contract shall be from January 1, 1996 through December 31, 1997 (the "Original Term") and shall continue thereafter for additional successive 12-month periods (the "Additional Terms") beginning January 1, 1998, unless BUYER or SELLER gives written notice of termination at least seventy-five (75) days prior to the expiration of any previous term, including the Original Term. ARTICLE III QUANTITY ----------------------------------------------------------------- This portion is confidential; therefore, it has been omitted and filed separately with the Commission. ----------------------------------------------------------------- ARTICLE IV QUALITY The quality of the Fuel Oil and Diesel shall be as set forth in the attached Exhibits A and B, respectively. 3 ARTICLE V PRICE SECTION 5.1 ----------------------------------------------------------------- This portion is confidential; therefore, it has been omitted and filed separately with the Commission. ----------------------------------------------------------------- SECTION 5.2 ----------------------------------------------------------------- This portion is confidential; therefore, it has been omitted and filed separately with the Commission. ----------------------------------------------------------------- 4 ----------------------------------------------------------------- This portion is confidential; therefore, it has been omitted and filed separately with the Commission. ----------------------------------------------------------------- SECTION 5.3 ----------------------------------------------------------------- This portion is confidential; therefore, it has been omitted and filed separately with the Commission. ----------------------------------------------------------------- 5 ----------------------------------------------------------------- This portion is confidential; therefore, it has been omitted and filed separately with the Commission. ----------------------------------------------------------------- SECTION 5.4 ----------------------------------------------------------------- This portion is confidential; therefore, it has been omitted and filed separately with the Commission. ----------------------------------------------------------------- SECTION 5.5 ----------------------------------------------------------------- This portion is confidential; therefore, it has been omitted and filed separately with the Commission. ----------------------------------------------------------------- 6 ----------------------------------------------------------------- This portion is confidential; therefore, it has been omitted and filed separately with the Commission. ----------------------------------------------------------------- 7 ARTICLE VI PAYMENT SECTION 6.1 Invoices shall be prepared by SELLER and dated after a Delivery has been completed. A copy of the invoice will be sent to BUYER by facsimile. SELLER will transmit an original of the invoice to the BUYER on the same date by mail to the addresses set forth in Section 6.2. Original invoices shall be accompanied by full documentation, acceptable to the BUYER, including quality certificates, quantity documentation, and price calculation. Payment shall be made by BUYER within fifteen (15) calendar days from date of SELLER's invoice by bank wire transfer of immediately available funds to: Citibank, New York ABA # 021000089 BHP Petroleum Americas Refining Inc. Account #4064332 If SELLER's final laboratory result for gross heat content is unavailable or if said laboratory result is disputed by BUYER pursuant to Article VIII, SELLER may issue a provisional invoice calculated on the basis of the Diesel and Fuel Oil heat-content standards pursuant to Article V. BUYER shall make payment for such provisional invoice in accordance with the instructions of this Section 6.1. If an invoice incorporating an item other than a heat rate adjustment which is disputed has been sent to BUYER, then BUYER shall make payment in accordance with the instructions in this Section 6.1 for such invoice items or that portion of the invoiced Delivery which is not disputed by BUYER and in which case BUYER shall make such adjustment to taxes and other value-dependent items as are reasonable under the circumstances. 8 The provisional invoice or invoice incorporating items in dispute shall be adjusted in accordance with the terms of Article V by subsequent invoicing or by issuing a credit or debit with respect to the original invoice within 7 business days of receipt of the independent laboratory determination pursuant to Article VIII or other resolution of the issue in dispute. BUYER shall make payment for such subsequent invoices or debits in accordance with the instructions in this Section 6.1. BUYER shall have the option to apply such credit against payments to be made subsequent to the receipt of the credit, or if such payments are not expected to be made within 15 calendar days, BUYER shall be able to receive said credit in immediately available funds within 3 business days of SELLER's receipt of BUYER's written instructions. At SELLER's option and election, interest will accrue on all amounts not paid within 15 days of the date of the invoice at the then existing LIBOR. SECTION 6.2 Invoices which have been prepared in accordance with Section 6.1 shall be sent to the respective BUYER at the following address: MECO - Maui Electric Company, Ltd. P. O. Box 398 Kahului, Hawaii 96732 Attention: Production Department HELCO - Hawaii Electric Light Co., Inc. P. O. Box 1027 Hilo, Hawaii 96720 Attention: Purchasing Division Certificates of quality and quantity, reports of the independent petroleum inspector and other documents having to do with the quantity, quality, loading of Product onto BUYER's nominated 9 vessel or otherwise with the Product sold and purchased hereunder if directed to BUYER's agent, are to be sent in accordance with the provisions of Section 15.2 of this Contract. ARTICLE VII DELIVERIES, TITLE AND RISK OF LOSS SECTION 7.1 ----------------------------------------------------------------- This portion is confidential; therefore, it has been omitted and filed separately with the Commission. ----------------------------------------------------------------- 10 ----------------------------------------------------------------- This portion is confidential; therefore, it has been omitted and filed separately with the Commission. ----------------------------------------------------------------- SECTION 7.2 Prior to the 20th day of each month, BUYER shall give SELLER a forecast of liftings of Diesel and Fuel Oil for each of the next two months. BUYER shall be responsible for scheduling dock space at SELLER's Loading Pier for the barge with the State Harbors Division, and provide SELLER 48 hour notice of the proposed loading time. BUYER shall also provide 24 hours notice to SELLER during SELLER's regular business hours Monday through Friday (excluding holidays) of the final quantity to be loaded, subject to a +10% loading - tolerance; provided, however, that in the event of a loading on Monday, or on Tuesday, if Monday is a holiday, BUYER shall provide SELLER notice of the final quantity to be loaded, subject to a +10% loading tolerance, by 12 noon the - previous Friday, or by 12 noon the previous Thursday if Friday is a holiday. The final quantity notice must also be within 5,000 barrels of the 20th day forecast volumes. SECTION 7.3 BUYER's nominated barge shall comply with all applicable federal, state and local laws, rules and regulations, and SELLER's vessel acceptance standards, such as that portion of the "BHP Transport Petroleum Tanker Inspection Checklist" as may be applicable to unmanned petroleum tank barges, and shall be fit in every way to receive and carry Product. SELLER shall 11 provide BUYER its Operations Manual, other safety and operations procedures and vessel acceptance standards, and any amendments thereto, during the term of this Contract. While at SELLER's Loading Pier, BUYER's nominated barge shall operate in compliance with SELLER's Operations Manual as approved by the U.S. Coast Guard. In addition, a minimum of two qualified tankermen shall be provided by BUYER's barge during all loading operations at SELLER's Loading Pier or Third- Party Pier. BUYER's nominated barge shall vacate SELLER's Loading Pier or Third-Party Pier as soon as loading is completed, except if such delay is caused by any event or acts beyond the reasonable control of BUYER, including but not limited to acts of God, fire, governmental acts or labor disturbances. Dues and other charges on the barge (whether or not such dues or charges are based on the quantity of Product loaded or on the freight and without regard from whom such dues or charges are withheld) shall be paid by BUYER. Any taxes on freight shall be borne by BUYER. BUYER shall be responsible for any State fee imposed for use of SELLER's Loading Pier or Third-Party Pier in the nature of wharfage or pipeline toll. BUYER shall employ and also be responsible for costs of any support vessels, pilots, mooring masters, or line handlers supplied by SELLER or otherwise required at SELLER's Loading Pier, SPM, or Third-Party Pier, all of which shall become borrowed servants of BUYER. Neither SELLER, nor any of its associated or affiliated companies, nor any of the employees, servants, representatives and agents of any of the foregoing, shall be responsible for any losses, damages, delays or liabilities resulting from any negligence, incompetence or 12 incapacity of any pilot, line handler, mooring master required at SELLER's Loading Pier, SPM or Third-Party Pier or employed by BUYER or otherwise assisting BUYER at the express authorization of BUYER or BUYER's agent or the personnel of any tug(s) or other support vessels or arising from any unseaworthiness or any insufficiency of any tug or other support vessel employed by BUYER or otherwise assisting BUYER at the express authorization of BUYER or BUYER's agent and BUYER agrees to indemnify and hold SELLER harmless from and against any and all such losses, damages, delays or liabilities. At SELLER's Loading Pier or Third-Party Pier, laytime shall commence six hours after Notice of Readiness is tendered or three hours after BUYER's nominated barge is all secure at pier, whichever shall first occur. Allowable laytime shall be 14 hours; provided, however, that in the event that a part cargo or part cargoes belonging to a third party or third parties is/are loaded onto BUYER's nominated barge, allowable laytime shall be prorated and BUYER's allowable laytime shall be calculated on the basis of the ratio of the bill of lading volume of BUYER's cargo to the total bill of lading volume of the entire cargo loaded onto BUYER's nominated barge or vessel. Laytime shall cease when the hoses are disconnected; however, in the event part cargoes are loaded for BUYER and a third party or parties, BUYER's laytime shall commence as provided above if BUYER's cargo is loaded first, or shall commence upon commencement of loading of BUYER's cargo if BUYER's cargo is not the first to be loaded, and shall cease upon completion of loading of BUYER's cargo. Laytime is allotted and calculated using the barge currently named NOHO HELE (having approximately a 56,000 Bbl capacity). In the event that BUYER's nominated tank vessel is other than the NOHO HELE, laytime shall be the capacity of 13 the substitute tank vessel divided by 4,000 Bbl per hour; e.g., a 40,000 Bbl barge shall have an allocable laytime of 10 hours. Demurrage shall be payable at a rate equal to BUYER'S actual cost of tug and tow per hour for each hour used and prorated for each portion of an hour used in excess of allowable laytime. In the event the condition of Buyer's nominated barge renders it incapable of receiving cargo at the minimum delivery rate, such that the time spent loading BUYER's nominated barge (all cargoes) is in excess of nineteen (19) hours, SELLER shall have the right to suspend loading operations and order BUYER's nominated barge to vacate SELLER's Loading Pier or Third-Party Pier. SELLER shall not be liable for demurrage to the extent that allowed laytime is exceeded due to the condition of BUYER's nominated barge or tug, or is due to events or acts beyond SELLER's reasonable control. SECTION 7.4 While it is the intention of the parties to make deliveries of Product at SELLER's Loading Pier or Third-Party Pier, subject to mutual agreement, deliveries may be made at SELLER's SPM. In addition to those provisions of this Article VII not specific to SELLER's Loading Pier or Third-Party Pier, the following additional provisions will also apply to these SPM deliveries. SELLER agrees to make best, reasonable effort to deliver Fuel Oil into the BUYER's nominated barge at a temperature above 110 deg. F. BUYER's nominated barge shall operate in compliance with SELLER's Operations Manual approved by the U.S. Coast Guard and shall also comply with SELLER's current requirements for loading at its SPM as amended from time to time. SELLER may refuse to berth or load BUYER's nominated barge at SELLER's SPM for 14 failure to comply with SELLER's Operations Manual or requirements as aforesaid and shall not be liable for any resulting delays or expenses of BUYER. An accepted delivery day shall be determined in respect of each SPM loading pursuant to the provisions of this section. BUYER shall provide SELLER a proposed 3-day delivery window upon no less than seven (7) days' notice from the first proposed delivery day. The notice shall also specify the amount of the Product to be delivered, subject to a variation of plus or minus ten (10) percent at BUYER's option. The delivery window shall be narrowed to two (2) days upon no less than three (3) days' notice from the first proposed delivery day and one (1) day upon no less than two (2) days' notice from the first proposed delivery day. A final 24 hour accepted delivery day will be set by mutual agreement upon receipt of the two (2) day notice. SELLER may reject the final proposed delivery day upon providing BUYER 24 hours notice, with an alternate delivery day being set within one (1) day of BUYER's proposed delivery day. Notices may be given by telex, facsimile, radio or telephone. When BUYER's nominated barge is ready to load, the master of the barge's tug shall provide SELLER notice of readiness (NOR), and laytime shall commence six (6) running hours after receipt of the NOR, or upon the barge's arrival in berth (all fast), whichever first occurs. SELLER shall be allowed 24 hours laytime for loading the entire cargo requested in the seven (7) days' notice. BUYER's nominated barge shall vacate the SPM as soon as loading is completed. BUYER shall be responsible for any actual loss or damage incurred by SELLER as a direct result of the failure of BUYER's nominated barge to promptly vacate the SPM except if such delay is 15 caused by any event or acts beyond the reasonable control of BUYER, including but not limited to acts of God, fire, governmental acts or labor disturbances. In no event shall either party be responsible for prospective profits, or consequential damages allegedly caused by or based upon failure of BUYER's nominated barge to promptly vacate the SPM. SECTION 7.5 When an escape or discharge of oil or any polluting substance occurs in connection with or is caused by BUYER's nominated barge or its tow, or occurs from or is caused by loading operations, BUYER or its agents shall promptly take whatever measures are necessary or reasonable to prevent or mitigate environmental damage, without regard to whether or not said escape or discharge was caused by a negligent act or omission of BUYER's nominated barge or SELLER or BUYER or others. Failing such action by BUYER or its agents, SELLER, upon notice to BUYER and on BUYER's behalf, may promptly take whatever measures are reasonably necessary to prevent or mitigate pollution damage. Each party shall keep the other advised of the nature and results of the measures taken, and if time permits, the nature of the measures intended to be taken. Each party shall provide notice to the other pursuant to Section 15.2 or as otherwise provided in writing from time to time during the term of this Contract. The cost of all such measures taken shall be borne by BUYER except to the extent such escape or discharge was caused or contributed to by SELLER, and prompt reimbursement shall be made as appropriate; provided, however, that should BUYER or its agents give notice to SELLER to discontinue said measures (and to the extent government authorities allow SELLER to discontinue said measures) the continuance of SELLER's actions will no longer be deemed to 16 have been taken pursuant to the provisions of this clause. Notwithstanding any other provision in this Contract, the foregoing provisions shall be applicable only between BUYER and SELLER and shall not affect, as between BUYER and SELLER, any liability of BUYER to any third parties, including the State of Hawaii and the U.S. Government, if BUYER shall have such liability. Should SELLER incur any liability under Chapter 128D of the Hawaii Revised Statutes as a result of a spill from BUYER's nominated barge during transport, BUYER shall indemnify and hold SELLER harmless to the extent not caused by SELLER's negligence. BUYER warrants that any vessel used to load Product purchased from SELLER shall have in place Primary and Excess full Form Protection and Indemnity insurance including cover for Oil Pollution Clean-Up Liability and Liability for Oil Pollution Damage with a policy limit of $700,000,000, or the maximum available, as reflected by the coverage carried by other vessels calling at SELLER's SPM. ARTICLE VIII MEASUREMENT, SAMPLING AND TESTING SECTION 8.1 A mutually agreed upon independent petroleum inspector (Independent Inspector) shall attend every Product Delivery. A Delivery is defined as beginning with the initiation of pumping of each of Diesel or Fuel Oil from SELLER's refinery tank or nominated issuing tank to BUYER's nominated vessel and ending with the subsequent cessation of continuous pumping of Diesel or 17 Fuel Oil in such amount as is determined by the Independent Inspector's Certificate of Quantity. Reasonable charges rendered by the Independent Inspector shall be borne equally by BUYER and SELLER. SECTION 8.2 Quantity determination will be made by the Independent Inspector gauging SELLER's Product shore tanks before and after delivery. BUYER may verify SELLER's tank strapping tables at BUYER's election and sole expense. All measurements shall be made on the basis of net standard volumes in barrels corrected to 60 degrees Fahrenheit using the applicable ASTM-IP volume correction factor tables and should state whether such volumes are measured in air or in vacuum, with conversion in accordance with the most recent ASTM-IP Petroleum Measurement Tables (IP200) issued at the date of loading and otherwise by manual measurements such as ASTM-IP, Chapter 17 Procedures. The Independent Inspector shall (1) prepare and sign a certificate stating the quantity of the load, such certificate to utilize ASTM-IP standards, including measurement of sediment and water and API specific gravity, (2) furnish BUYER and SELLER each with a copy of such certificate; and (3) cable or advise by facsimile the quantity loaded to BUYER and SELLER. The data in the inspector's certificate of quantity prepared as provided herein shall, absent fraud or errors and omissions, be binding and conclusive upon both parties, and shall be used for verification of the invoice and Bill of Lading. 18 SECTION 8.3 Unless otherwise specifically provided herein, quality and heat content determination shall be based upon composite samples drawn from SELLER's issuing tanks and pipeline in accordance with ASTM sampling procedures in such a manner as to be representative of each individual Delivery of Fuel Oil and Diesel, respectively. If a Delivery of Diesel or Fuel Oil is from more than one issuing tank, the specifications of the total Delivery of Diesel or Fuel Oil shall be determined on a volumetric weighted average basis. The Independent Inspector shall draw (a) composite samples of diesel and fuel oil retain ("Retain Samples") prior to the loading of BUYER's nominated barge, if such diesel and fuel oil retain is accessible to standard sampling equipment, and (b) barge tank composite samples ("Barge Tank Samples") at the completion of loading the Diesel and at the completion of loading the Fuel Oil onto BUYER's nominated barge, in such a manner as to be representative of the total volume of diesel and fuel oil retain and of each individual Delivery, respectively. The samples described in subsections (a) and (b) herein shall be divided into a minimum of three (3) parts: 1. One part shall be retained by SELLER's laboratory for a period of three (3) months. 2. One part shall be provided to BUYER for the purpose of verifying SELLER's determinations. 3. At least one part shall be sealed and provided to BUYER, or to the Independent Inspector, to be retained. 19 SELLER agrees to provide BUYER a copy of SELLER's laboratory analyses of the issuing tank and pipeline samples showing API gravity, sulfur content, flash point and sediment and water content prior to commencing Delivery. SELLER shall provide BUYER the complete Certificate of Quality of the Diesel and the Fuel Oil no later than two working days after the completion of the Delivery. BUYER shall have the right to perform laboratory analyses in order to verify the results of SELLER's laboratory analyses. If SELLER or BUYER has reason to believe that the quality or quantity of Product stated for a specific Delivery is incorrect, including a dispute as to the test results of BUYER's samples and SELLER's shore tank and pipeline samples, then that party shall within thirty (30) days after the later of the date of the complete Certificate of Quality or the date of the final determination of gross heat content, present the other party with documents supporting such determination and the parties will confer, in good faith, on the causes for the discrepancy and shall proceed to correct such causes and adjust the quality and quantity, if justified, for the Delivery in question. In the event of an unresolvable difference between SELLER and BUYER, BUYER's sealed Barge Tank Samples, and also BUYER's sealed Retain Samples if relevant in the opinion of the Independent Inspector, shall be provided to an independent laboratory for a final determination, which shall be binding on the parties. SELLER and BUYER shall share equally the cost for such independent laboratory determination. In the event of any quality problems occurring, both SELLER and BUYER shall attempt to minimize the impact of any such quality problems. If efforts to resolve the quality problem fail, BUYER may return off-specification loaded Product to the SELLER's Barbers Point 20 refinery, in which case SELLER shall replace the off-specification Product by delivering an equal volume of Product into BUYER's nominated barge in a timely manner. All reasonable costs and expenses, including testing, transportation, re-refining, and handling costs incurred in returning and replacing off- specification Product shall be paid by the responsible party, as determined by the independent laboratory test results and any other applicable evidence. In no event shall either party be responsible for prospective profits, or consequential damages allegedly caused by or based upon any quality problem with the Product. ARTICLE IX RENEGOTIATION It is understood and agreed that both parties entered into this Contract in reliance on governmental laws, rules, decrees, orders, regulations, and interpretations or implementation thereof in effect on the date of execution of this Contract or any subsequent amendments hereto, to the extent that they directly or indirectly affect the Product sold or purchased hereunder. If at any time any of the said laws, rules, regulations, implementations or interpretations thereof are changed or if new laws, rules, regulations or new interpretations and implementations thereof become effective, and such change or new laws, rules, regulations, interpretations or implementations thereof have a significant adverse economic effect upon either party such that performance of this Contract would be inequitable or cause substantial financial hardship to the affected party, then the affected party shall have the option to call for renegotiation of the price of the Product or any other provision of this Contract the performance of which by the affected 21 party would be inequitable or cause substantial financial hardship. Such option shall be exercised by the affected party at any time after such a change or new law, rule, regulation, interpretation or implementation thereof is effective, by giving written notice to the other party of the call to renegotiate. Within ten (10) calendar days after the date of such notice, the parties shall enter into negotiations and in the event that the parties do not agree upon a new price for the Product or other provision satisfactory to both parties within forty (40) calendar days after the date of such notice, the affected party shall have the right to terminate this Contract effective thirty (30) days after giving notice of termination to the other party. Said notice of termination shall be given within thirty (30) days immediately following the forty (40) day negotiation period. Until a mutually satisfactory new price for the Product or other provision has been agreed upon, or until this Contract is terminated as provided herein, the price for the Product or other provision which was in effect when the request for renegotiation was made shall continue in full force and effect. ARTICLE X FORCE MAJEURE SECTION 10.1 Force Majeure. As used in this contract, an event or act of "force majeure" is defined as follows: acts of God, wars, riots, strikes, labor disputes, lockouts, blockades, insurrections, inability to secure materials or labor by reason of allocations promulgated by governmental 22 agencies, epidemics, landslides, lightning, earthquakes, fires, floods, tidal waves, volcanic eruptions, explosions, or any other causes not within the control of the affected party. SECTION 10.2 Obligations Suspended. BUYER's obligation to purchase or receive Product, or SELLER's obligation to sell or deliver Product, shall be suspended to the extent performance is prevented by an event or act of force majeure for any period in which such event or act exists as to the party claiming force majeure; and so long as such party is exercising its good faith efforts to overcome such force majeure event. However, nothing in this Article excuses BUYER from its obligation to make payments of money due SELLER for Product already delivered to BUYER. SECTION 10.3 Notice of Force Majeure. The party claiming force majeure agrees to give the other party prompt written notice of an act or event of force majeure. The party claiming force majeure shall use due diligence to cure any act or event of force majeure, and shall give the other party prompt notice after the act or event of force majeure has terminated. This Article shall not require any party to settle or compromise any strike or labor dispute. SECTION 10.4 No Make-Up Requirement. After the act or event of force majeure has terminated, SELLER shall not be obligated to sell and deliver and BUYER shall not be obligated to purchase and receive the undelivered quantity of Product which normally would have been sold and delivered during the period of force majeure. 23 ARTICLE XI PRICE AND ALLOCATION CONTROLS SECTION 11.1 Regulatory Price Suspension. If SELLER is precluded by statute, or by regulation, rule, interpretation or order implementing such statute from obtaining any increase in Product Price, as determined pursuant to this Contract, the increase shall be suspended until said law, regulation, rule, interpretation or order permits the increase in whole or in part. In the event the law, regulation, rule, interpretation or order is terminated or is later modified to permit the increase, in whole or in part, the Product Price shall be increased for deliveries of the Product made thereafter to the level permitted under this Contract without further action by the parties. SECTION 11.2 Government Regulations. If the delivery or supply of Product pursuant to this Contract conflicts with or is limited or prohibited by any federal, state or local regulations, then to the extent of such conflict, limitation or prohibition, SELLER shall have no obligation to deliver or supply BUYER with the Product under this Contract and BUYER shall have no obligation to purchase or receive the Product under this Contract. BUYER, in BUYER's discretion, may elect to complete and file any and all required Federal or state regulatory forms to permit, facilitate, or enable the supply of Product to BUYER under this Contract. SELLER shall fully cooperate with BUYER in the completion and filing of the foregoing forms. If purchase and receipt of Product pursuant to this contract conflicts with or is limited or prohibited by any 24 Federal, State, or local regulations, then to the extent of such conflict, limitation, or prohibition, BUYER shall have no obligation to purchase and receive the Product under this Contract. ARTICLE XII ASSIGNMENT This Contract shall not be assigned by either party without prior written consent of the other party, and any assignment without such written consent shall be void; provided, however, HECO, HELCO, and MECO may assign their interests in this Contract to the Trustee under their respective First Mortgage Indentures. ARTICLE XIII APPLICABLE LAW This Contract shall be deemed to be a Contract made under and shall be governed by and construed in accordance with the laws of the State of Hawaii. The parties hereby consent to the personal jurisdiction of the federal and state courts in the State of Hawaii. ARTICLE XIV PUBLIC UTILITIES COMMISSION APPROVAL This Contract is required to be filed with the Hawaii Public Utilities Commission for approval. If in proceedings initiated as a result of the filing of this Contract, the Public Utilities Commission disapproves or fails to authorize the recovery of fuel costs incurred under this 25 Contract through the BUYER's Energy Cost Adjustment Clause, BUYER may terminate this Contract at any time within ninety (90) days of disapproval by giving sixty (60) days written notice to the SELLER. ARTICLE XV ENTIRE AGREEMENT, WAIVER AND ILLEGALITY SECTION 15.1 This Contract incorporates the entire agreement between the parties with reference to the subject matter and cancels and supersedes as of the date of execution hereof all prior oral or written understandings, or agreements, between the parties with respect to the subject matter and may only be modified by written instrument executed by duly authorized representatives of the parties. There are no other agreements which constitute any part of the consideration for, or any condition to, either party's compliance with its obligations under this Contract. Failure to insist upon strict performance of any provision shall not constitute a waiver of the right to require such performance, nor shall a waiver in one case constitute a waiver with respect to a later breach, whether of a similar nature or otherwise. If any term or provision of this Contract is held by any Court to be illegal or unenforceable, the remaining terms, provisions, rights and obligations shall not be affected. The headings or captions are for convenience only and have no force or effect on legal meaning in the construction or enforcement of the Contract. Time shall be of the essence in this Contract. 26 SECTION 15.2 Except as otherwise expressly provided herein, all notices shall be given in writing, by letter, telegram, or telex to the following addresses, or such other addresses as the parties may designate by notice, and shall be deemed given upon receipt. SELLER: Vice President - Marketing BHP Petroleum Americas Refining Inc. 733 Bishop Street Honolulu, Hawaii 96813 Facsimile: (808) 547-3796 BUYER: Hawaiian Electric Company, Inc. P.O. Box 2750 Honolulu, Hawaii 96840 Attn: Manager, Power Supply Services Department Facsimile: (808) 543-7788 The Manager, Power Supply Services Department, for Hawaiian Electric Company, Inc. shall be responsible for forwarding notices to the other parties to this Contract. 27 IN WITNESS WHEREOF, the parties hereto, intending to be legally bound thereby, have caused this Contract to be executed in duplicate originals by their duly authorized officers. HAWAIIAN ELECTRIC BHP PETROLEUM AMERICAS COMPANY, INC. REFINING INC. By /s/ Edward Y. Hirata By /s/ Faye W. Kurren Its Vice President Its Vice President Regulatory Affairs SELLER By /s/ Molly M. Egged Its Secretary HAWAII ELECTRIC LIGHT COMPANY, INC. By /s/ Edward Y. Hirata Its Vice President By /s/ Molly M. Egged Its Secretary BUYER MAUI ELECTRIC COMPANY, LTD. By /s/ Edward Y. Hirata Its Vice President By /s/ Molly M. Egged Its Secretary BUYER 28 EXHIBIT A NO. 6 INDUSTRIAL FUEL OIL SPECIFICATIONS
Specification - Test Item Measurement Unit Limits ASTM Method GRAVITY @ 60 DEGREES F. Degrees API 6.5 Min. D-1298, D-4052-86 FLASH POINT Degrees F. 150 Min. D-93 VISCOSITY SSF At 77 DF - - - D-445, D-2161 VISCOSITY SSF At 122 DF 179 Min. D-445, 226 Max. D-2161 POUR POINT Degrees F. 55 Max. D-97 SULFUR Percent, Weight 2.00 Max. D-1552, D-2622, D-4294 SEDIMENT & WATER Percent, Volume 0.5 Max. D-1796 HEAT VALUE, GROSS MM BTU/BBL 6.2 million D-240 Min. LOADING TEMPERATURE Degrees F. 110 Min. n/a 150 Max.
29
EXHIBIT B DIESEL SPECIFICATIONS Specification - Test Item Measurement Unit Limits ASTM Method GRAVITY @ 60 DEGREES F. Degrees API 30.0 Min. D-1298, D-4052-86 SPECIFIC GRAVITY 60/60 DEGREES F. n/a .8762 Min. D-1298, D-4052-86 VISCOSITY SSU At 100 DF 32.6 Min. D-445, 40.1 Max. D-2161 FLASH POINT, PM Degrees F. 150 Min. D-93 POUR POINT Degrees F. 35 Max. D-97 ASH PPM, Wt. 100 Max. D-482 CETANE INDEX n/a 40 Min. D-4737 CARBON RESIDUE, 10% RESIDUUM %, Wt. .35 Max. D-524 SEDIMENT & WATER Percent, Volume 0.05 Max. D-1796 SULFUR Percent, Weight 0.40 Max. D-1552, D-2622, D-4294 DISTILLATION, 90% RECOVERED Degrees F. 540 - 650 D-86 SODIUM+POTASSIUM PPM, Wt. 0.5 Max. D-3605 NITROGEN PPM, Wt. Report D-4629 * HEAT VALUE, GROSS MM BTU/BBL 5.86 D-240, D-4868
* Typical Value 30 EXHIBIT C No. 6 FUEL OIL EXAMPLE PRICE CALCULATION * - * - * - * - * - * - * - * - * - * - * - * - * - * - * - * - * This portion is confidential; therefore, it has been omitted and filed separately with the Commission. * - * - * - * - * - * - * - * - * - * - * - * - * - * - * - * - * 31 * - * - * - * - * - * - * - * - * - * - * - * - * - * - * - * - * This portion is confidential; therefore, it has been omitted and filed separately with the Commission. * - * - * - * - * - * - * - * - * - * - * - * - * - * - * - * - * EXPLANATION OF TAXES: Taxes in the Fuel Oil price currently in effect include Superfund Tax of $0.097 per barrel and the Hawaii Environmental Response Tax of $0.050 per barrel. Also, Hawaii State General Excise Tax of 4.167% will be paid on all components of the Fuel Oil price, except the Hawaii Environmental Response Tax. 32 EXHIBIT D DIESEL EXAMPLE PRICE CALCULATION Illustrative Price Calculation for August, 1995 * - * - * - * - * - * - * - * - * - * - * - * - * - * - * - * - * This portion is confidential; therefore, it has been omitted and filed separately with the Commission. * - * - * - * - * - * - * - * - * - * - * - * - * - * - * - * - * 33 * - * - * - * - * - * - * - * - * - * - * - * - * - * - * - * - * This portion is confidential; therefore, it has been omitted and filed separately with the Commission. * - * - * - * - * - * - * - * - * - * - * - * - * - * - * - * - * 34 EXPLANATION OF TAXES: Taxes in the Diesel price currently in effect include Superfund Tax of $0.097 per barrel ($0.0023 per gallon), the Hawaii Environmental Response Tax of $0.050 per barrel ($0.0012 per gallon) and the Hawaii Liquid Fuel Tax of $0.01 per gallon. Also, the Hawaii State General Excise Tax of 4.167% will be paid on all components of the Diesel price, except the Hawaii Environmental Response Tax and the Hawaii Liquid Fuel Tax. 35 EX-10.14A 10 HITI/HELCO CONTRACT EXTENSION 12/18/95 Exhibit 10.14(a) December 18, 1995 Hawaiian Interisland Towing Incorporated, Inc. 735 Bishop Street, Suite 312 Honolulu, HI 96813 Attn: Mr. Gordon Smith, President Subject: Option to Extend Term under Contract of Private Carriage by and between Hawaiian Interisland Towing, Inc., and Hawaii Electric Light Company, Inc. Dear Mr. Smith: This letter will confirm the understanding between Hawaiian Interisland Towing, Inc. ("HITI"), and Hawaii Electric Light Company, Inc., ("HELCO") relating to the extension of the Contract of Private Carriage between HITI and HELCO, dated November 10, 1993. It has been mutually agreed to between HITI and HELCO that the Contract of Private Carriage is hereby extended pursuant to section 1.2 (Option to Extend Term) for an additional two year period beginning January 1, 1996. All previously agreed to terms and conditions, amendments, and addendums apply to this extension. Please indicate your acknowledgment and agreement to the foregoing by signing in the space provided below. Best Regards, /s/ Floyd Shiroma for J. C. Aicken Jeffrey C. Aicken Director, Fuel Resources ACKNOWLEDGED AND AGREED TO: THIS 26th DAY OF December, 1995 HAWAIIAN INTERISLAND TOWING, INC. BY: /s/ Gordon L. Smith ITS: President EX-10.15A 11 HITI/MECO CONTRACT EXTENSION 12/18/95 HECO Exhibit 10.15(a) December 18, 1995 Hawaiian Interisland Towing Incorporated, Inc. 735 Bishop Street, Suite 312 Honolulu, HI 96813 Attn: Mr. Gordon Smith, President Subject: Option to Extend Term under Contract of Private Carriage by and between Hawaiian Interisland Towing, Inc., and Maui Electric Company, Ltd. Dear Mr. Smith: This letter will confirm the understanding between Hawaiian Interisland Towing, Inc. ("HITI"), and Maui Electric Company, Ltd., ("MECO") relating to the extension of the Contract of Private Carriage between HITI and MECO, dated November 12, 1993. It has been mutually agreed to between HITI and MECO that the Contract of Private Carriage is hereby extended pursuant to section 1.2 (Option to Extend Term) for an additional two year period beginning January 1, 1996. All previously agreed to terms and conditions, amendments, and addendums apply to this extension. Please indicate your acknowledgment and agreement to the foregoing by signing in the space provided below. Best Regards, /s/ Floyd Shiroma for J. C. Aicken Jeffrey C. Aicken Director, Fuel Resources ACKNOWLEDGED AND AGREED TO: THIS 26th DAY OF December, 1995 HAWAIIAN INTERISLAND TOWING, INC. BY: /s/ Gordon L. Smith ITS: President EX-13 12 PAGES 2-31 AND 33 OF HECO'S ANNUAL REPORT HECO EXHIBIT 13 SELECTED FINANCIAL DATA ================================================================================ HAWAIIAN ELECTRIC COMPANY, INC. AND SUBSIDIARIES
1995 1994 1993 1992 1991 - ------------------------------------------------------------------------------------------------------------- (dollars in thousands) INCOME STATEMENT DATA Years ended December 31 Operating revenues................ $ 981,990 $ 907,308 $ 874,010 $ 776,929 $ 739,636 Operating expenses................ 879,268 819,996 795,925 699,890 663,709 ---------- ---------- ---------- ---------- ---------- Operating income.................. 102,722 87,312 78,085 77,039 75,927 Other income...................... 16,325 14,793 11,556 9,740 4,511 ---------- ---------- ---------- ---------- ---------- Income before interest and other charges......................... 119,047 102,105 89,641 86,779 80,438 Interest and other charges......................... 42,024 36,144 33,515 33,101 34,228 ---------- ---------- ---------- ---------- ---------- Income before preferred stock dividends of HECO......................... 77,023 65,961 56,126 53,678 46,210 Preferred stock dividends of HECO............... 4,126 4,316 4,421 4,525 4,600 ---------- ---------- ---------- ---------- ---------- Net income for common stock........................... $ 72,897 $ 61,645 $ 51,705 $ 49,153 $ 41,610 ========== ========== ========== ========== ========== ============================================================================================================ BALANCE SHEET DATA At December 31 Utility plant..................... $2,483,005 $2,293,521 $2,102,534 $1,877,404 $1,701,218 Accumulated depreciation.................... (762,770) (702,945) (641,230) (583,031) (536,552) ---------- ---------- ---------- ---------- ---------- Net utility plant................. $1,720,235 $1,590,576 $1,461,304 $1,294,373 $1,164,666 ========== ========== ========== ========== ========== Total assets...................... $2,016,283 $1,889,120 $1,703,276 $1,501,330 $1,318,023 ========== ========== ========== ========== ========== Capitalization:/1/ Long-term debt.................... $ 517,209 $ 489,586 $ 484,736 $ 374,835 $ 365,098 Preferred stock subject to mandatory redemption...................... 41,750 44,844 46,730 48,920 50,665 Preferred stock not subject to mandatory redemption...................... 48,293 48,293 48,293 36,293 36,293 Common stock equity............... 696,905 633,901 570,663 499,894 440,831 ---------- ---------- ---------- ---------- ---------- Total capitalization.............. $1,304,157 $1,216,624 $1,150,422 $ 959,942 $ 892,887 ========== ========== ========== ========== ========== ============================================================================================================ CAPITAL STRUCTURE RATIOS (%)/2/ At December 31 Debt.............................. 45.5 45.5 44.1 45.9 43.1 Preferred stock................... 6.2 7.0 8.0 7.9 9.4 Common stock equity............... 48.3 47.5 47.9 46.2 47.5
/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 1995 was $72.9 million compared to $61.6 million for 1994 and $51.7 million for 1993. The 1995 net income represents an 11.0% return on the average amount of common stock equity invested in HECO and its subsidiaries (collectively, the "Company"), compared to returns of 10.2% in 1994 and 9.7% in 1993. SALES - ----- Consolidated sales of electricity were 8,806 million kilowatthours (KWH) for 1995, 8,593 million KWH for 1994, and 8,325 million KWH for 1993. The increases in KWH sales in 1995 and 1994 reflect the effects of a partial recovery of Hawaii's economy and warmer weather. OPERATING REVENUES - ------------------ Operating revenues were $982.0 million in 1995, compared to $907.3 million in 1994 and $874.0 million in 1993. The 1995 increase in operating revenues of $74.7 million, or 8.2%, was due primarily to rate relief granted by the PUC, higher KWH sales and higher fuel oil prices, which 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 paid for fuel oil and certain components of purchased power costs, and the relative amounts of company-generated power and purchased power. Operating revenues for 1994 increased by $33.3 million, or 3.8%, over 1993 revenues 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. OPERATING EXPENSES - ------------------ Total operating expenses were $879.3 million in 1995 compared to $820.0 million in 1994 and $795.9 million in 1993. The increase in 1995 was due primarily to increases in fuel oil, purchased power, other operation, depreciation and amortization, taxes other than income taxes and income tax expenses. The increase in 1994 was due to increases in purchased power, other operation, maintenance, depreciation and amortization, taxes other than income taxes and income tax expenses, partially offset by lower fuel oil expense. Fuel oil expense was $207.0 million in 1995 compared to $186.7 million in 1994 and $213.3 million in 1993. The increase in fuel oil expense in 1995 was due primarily to higher fuel oil prices and higher KWH generated. The decrease in fuel oil expense in 1994 was due primarily to lower fuel oil prices and fewer KWH generated. In 1995, the Company paid an average of $20.47 per barrel of fuel oil, compared to $18.92 in 1994 and $21.09 in 1993. Purchased power expense was $276.4 million in 1995 compared to $271.6 million in 1994 and $258.7 million in 1993. The increase in purchased power expense in both 1995 and 1994 was due primarily to capacity and nonfuel purchased power costs paid to independent power producers (IPPs), 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 1995 and 1994 compared to 34.9% in 1993. 3 ================================================================================ Other operation expense totaled $137.3 million in 1995, an increase of $15.6 million over the 1994 amount. The increase was due primarily to higher administrative and general employee benefit costs, which included the first full year's expense for postretirement benefits other than pensions (PBOP) required under Statement of Financial Accounting Standards (SFAS) No. 106, and the write- off of a regulatory asset (i.e. deferred cost) for the 1994 and 1993 costs of postretirement executive life insurance. In 1994, other operation expense totaled $121.7 million, 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 a regulatory asset for vacation earned but not yet taken by employees. HEI charges for general management, administrative and support services totaled $2.5 million in 1995, $2.4 million in 1994 and $2.3 million in 1993. Maintenance expense in 1995 of $47.2 million increased slightly from 1994 primarily due to higher production maintenance expense, partially offset by lower weather related maintenance on the transmission and distribution systems. In 1994, maintenance expense totaled $46.4 million, a 4.8% increase from 1993 primarily due to the absence in 1994 of the one-time reduction to 1993 expenses due to the establishment of a 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. Depreciation and amortization expense was up 6.1% in 1995 to $67.6 million and up 14.0% in 1994 to $63.8 million. In both years, the increase reflects depreciation of the Company's additions to plant in service in the previous year. Additions to plant in service in 1994 consisted primarily of transmission and distribution projects. Major additions to plant in service in 1993 included HECO's Waiau-Makalapa 138-kilovolt line and MECO's 18-megawatt heat recovery unit and 20-megawatt combustion turbine unit at Maalaea. Taxes, other than income taxes, increased by 8.2% in 1995 to $93.0 million, and by 6.4% in 1994 to $85.9 million. These items consist primarily of taxes based on revenues, and the increases in these taxes 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 a result of legislation by the Hawaii State Legislature. OTHER INCOME - ------------ Other income for 1995 totaled $16.3 million, compared to $14.8 million for 1994 and $11.6 million for 1993. The increases in 1995 and 1994 were due primarily to higher Allowance for Equity Funds Used During Construction (AFUDC-Equity), reflecting higher average levels of construction in progress during both years. INTEREST AND OTHER CHARGES - -------------------------- Interest and other charges for 1995 totaled $42.0 million, compared to $36.1 million for 1994 and $33.5 million for 1993. Interest on long-term debt increased by $2.7 million in 1995 and increased by $4.3 million in 1994. The increase in 1995 was due to interest on drawdowns of tax-exempt special purpose revenue bond proceeds during 1995, and the full year's interest on the drawdowns of revenue bond proceeds in 1994. The 1995 increase in interest on long-term debt was partially offset by lower interest for first mortgage bonds resulting from the redemption of HECO's 4.55% Series N mortgage bonds of $11 million in February 1995 and lower medium-term note interest resulting from the retirement of HELCO's 4.85% medium-term note of $10 million in December 1995. The increase in interest on long-term debt 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 on long-term debt was partially offset by lower interest for first mortgage bonds resulting from the early redemptions in March 1994 of HECO's 9.125% 4 ================================================================================ 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. Other interest charges of $9.0 million for 1995 were $4.3 million higher than for 1994 due to higher interest on short-term borrowings as a result of higher borrowing levels during the year and higher interest rates. 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 is becoming increasingly competitive as a result of various factors including product price, service reliability, new technologies and government actions. Competition in Hawaii is also affected by the scarcity of generation sites, various permitting processes and lack of interconnections to other electric utilities. The Energy Policy Act of 1992 encourages competition by allowing utilities to form generation subsidiaries without becoming subject to regulation under the Public Utility Holding Company Act of 1935. To date, these provisions have not had a significant impact on HECO and its subsidiaries. IPPs are well established in Hawaii and continue to actively pursue new projects. Customer self-generation, with or without co-generation, has made inroads in Hawaii and is a continuing competitive threat. In response to this threat, HECO has been able to successfully offer economic alternatives to its customers that, among other things, employ energy efficient electrotechnologies such as the heat pump water heater. 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 and order (D&O) 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 D&O 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 D&O 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 D&O. Interim rate increases are subject to refund with interest, pending the final outcome of the case. Management cannot predict with certainty when D&Os in pending or future rate cases will be rendered or the amount of any interim or final rate increase that may be granted. RECENT RATE REQUESTS - -------------------- HECO and its subsidiaries have requested electric rate increases to cover rising operating costs, the cost of purchased power and the cost of plant and equipment, including the cost of new capital projects to maintain and improve service reliability. POSTRETIREMENT BENEFITS OTHER THAN PENSIONS ------------------------------------------- In November 1994, the PUC issued a D&O that authorized full recovery of PBOP costs, determined pursuant to SFAS No. 106, effective January 1, 1995. The D&O also allowed the recovery, over the next 18 years beginning January 1, 1995, of the 5 ================================================================================ regulatory asset related to PBOP costs. The costs of postretirement executive life insurance, however, were subsequently disallowed for HECO and MECO. See Note 10 in the "Notes to Consolidated Financial Statements." HECO ---- In July 1993, HECO filed a request to increase rates based on a 1994 test year. HECO requested an 8.6% increase (as revised) over rates in effect at the time of the revision, or $53.8 million in annual revenues, based on a 12.75% return on average common equity (ROACE). In December 1994, HECO received a final D&O authorizing an increase of 6.5%, or $40.5 million in annual revenues, effective January 1, 1995 and based on a 12.15% ROACE. The final D&O, together with the PBOP D&O, resulted in an increase of $50.5 million in annual revenues. In December 1993, HECO filed a request to increase rates based on a 1995 test year. HECO requested an increase of 4.1% (as revised), or $28.2 million in annual revenues, based on a 13.25% ROACE. In December 1995, HECO received a final D&O authorizing an increase of 1.3%, or $9.1 million in annual revenues, based on an 11.4% ROACE. The D&O required a refund to customers because HECO had previously received four interim increases totaling $18.9 million on an annualized basis, or $9.8 million more than the amount that was finally approved. The reduced rate relief resulted primarily from the lower ROACE used by the PUC in the final D&O because interest rates dropped considerably subsequent to the first interim increase, which was effective January 1, 1995 and was based on a 12.6% ROACE. The refund amount of $10.0 million (representing amounts recovered under interim rates in excess of final approved rates, with interest) was accrued in December 1995 and will be returned to customers in the first half of 1996. The D&O also did not provide revenue to cover costs relating to postretirement executive life insurance. The Company wrote-off a regulatory asset relating to such costs, resulting in a 1995 after-tax charge of $1.1 million. HELCO ----- In November 1993, HELCO filed a request to increase rates by 13.4%, or $15.8 million in annual revenues, based on a 1994 test year and a 12.4% ROACE (which was later increased to 13.1%). In February 1995, HELCO received a final D&O authorizing an increase of 11.8%, or $13.7 million in annual revenues, based on a 12.6% ROACE. The final D&O, together with the PBOP D&O, resulted in $15.5 million of annual rate relief. In March 1995, HELCO filed a request to increase rates based on a 1996 test year. In January 1996, HELCO revised its requested increase to 7.2%, or $10.3 million in annual revenues, based on a 12.5% ROACE. In March 1996, HELCO received an interim D&O authorizing an increase of 4.8%, or $6.8 million in annual revenues, based on a 11.65% ROACE. HELCO plans to file a request to increase rates, based on a 1997 test year. MECO ---- In November 1991, MECO filed a request to increase rates. In January 1993, MECO revised its requested increase to 10%, or $11.4 million in annual revenues, based on a 13.0% ROACE and a 1993 test year. In August 1994, MECO received a final D&O authorizing an increase of 7.0%, or $8.1 million in annual revenues, based on a 12.75% ROACE. The final D&O, together with the PBOP D&O, resulted in $10.0 million of annual rate relief. 6 ================================================================================ In February 1995, MECO filed a request to increase rates based on a 1996 test year. MECO's final requested increase was 3.8%, or $5.0 million in annual revenues, based on a 11.5% ROACE. In January 1996, MECO received an interim D&O authorizing an increase of 2.8%, or $3.7 million in annual revenues, based on an 11.5% ROACE, effective February 1, 1996. MECO had proposed an interim increase of $4.0 million. In February 1996, MECO filed a notice of intent with the PUC to increase rates, based on a 1997 test year. PROPERTY DAMAGE RESERVE ----------------------- In March 1995, the PUC opened a generic docket to investigate whether the public utilities in the State of Hawaii should be allowed to establish property damage reserves to cover the cost of damage to their facilities and equipment caused by catastrophic disasters. HECO's overhead transmission and distribution system is susceptible to wind and earthquake damage, and its underground system is susceptible to earthquake and flood damage. The overhead and underground transmission and distribution systems (with the exception of substation buildings and contents) have a replacement value roughly estimated at approximately $2 billion and are uninsured because the amount of transmission and distribution system insurance available is limited and the premiums are extremely high. Hearings on this docket are scheduled for September 1996. HELCO POWER SITUATION - --------------------- In the past few years, HELCO's reserve margin has been relatively low. HELCO needs additional generating capacity and has been proceeding with plans to install two 20-megawatt (MW) combustion turbines, followed by an 18-MW heat steam recovery generator, at which time these units would be converted to a 56-MW (net) combined-cycle unit. However, installation has been delayed because HELCO has encountered procedural and other difficulties in obtaining the necessary Conservation District Use Permit amendment (CDUP) and air permit that would allow the 56-MW unit to be constructed. In late 1995, a contested case hearing with respect to the CDUP was conducted and the hearing officer recommended denial of the CDUP application. The Hawaii Board of Land and Natural Resources (BLNR) may decide to adopt, modify, or reject the hearing officer's recommendation. The BLNR is scheduled to make a decision on HELCO's CDUP application by March 27, 1996. If the BLNR denies HELCO's CDUP application, this would delay, if not prevent, installation of HELCO's project at the 15-acre site. The Hawaii Department of Health (DOH) forwarded HELCO's air permit to the Environmental Protection Agency (EPA) for its approval. In a November 1995 letter to the DOH, the EPA declined to sign HELCO's air permit. HELCO requested that the EPA reconsider this decision and the EPA agreed to reconsider based on additional information supplied by HELCO. In a second letter dated February 6, 1996, the EPA set forth information to be considered by HELCO which it feels may address HELCO's concerns regarding the emission control technology to be used, and stated that it would continue discussions with HELCO at a later date. If the EPA does not sign the permit issued by the DOH, this would delay, if not prevent, HELCO's project. Two IPPs have filed separate complaints against HELCO with the PUC, alleging that they are entitled to power purchase contracts to provide HELCO with additional capacity which, under HELCO's current estimates of generating capacity requirements, would be in place of the planned 56-MW addition by HELCO. In September 1995, HELCO provided proposals to the two IPPs, and further negotiations have been undertaken. On January 26, 1996, the PUC ordered that the complaint docket filed by one of the IPPs be reopened. HELCO and the IPP are to seek PUC guidance on negotiation issues if a contract has not been finalized by March 11, 1996. 7 ================================================================================ If HELCO's negotiations with the IPPs result in a power purchase agreement and/or if HELCO's combined-cycle unit is not installed, HELCO may be required to write-off a portion of the costs incurred in its efforts to put into service its combined-cycle unit ($43 million as of December 31, 1995) if such costs ultimately are not recoverable from customers or others. In January 1996, the PUC opened a generic docket relating to HELCO's contingency plan, which had been submitted to the PUC in June 1995. It was ordered that HELCO submit updated information to the PUC by March 18, 1996 and address comments by the Consumer Advocate on the June 1995 contingency plan. See Note 11 in the "Notes to Consolidated Financial Statements." EFFECTS OF INFLATION - -------------------- Inflation, as measured by the U.S. Consumer Price Index, averaged 2.8% in 1995, 2.6% in 1994 and 3.0% in 1993. 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 costs which are much higher than those historically incurred, and requests rate relief as necessary to maintain adequate earnings. In the past, the PUC has generally approved rate relief to cover the effects of inflation. In 1993, 1994 and 1995, the Company received rate relief, in part to cover increases in operating expenses and construction costs due to inflation. ACCOUNTING FOR THE EFFECTS OF CERTAIN TYPES OF REGULATION - --------------------------------------------------------- In accordance with SFAS No. 71, "Accounting for the Effects of Certain Types of Regulation," the Company's financial statements reflect assets and costs based on current cost-based rate-making regulations. Management believes HECO and its subsidiaries' operations currently satisfy the SFAS No. 71 criteria. However, if events or circumstances should change so that those criteria are no longer satisfied, management believes that a material adverse effect on the Company's results of operations and financial position may result. See Note 6 in the "Notes to Consolidated Financial Statements" for further discussion. ENVIRONMENTAL MATTERS - --------------------- HECO 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, these costs 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 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. 8 ================================================================================ ACCOUNTING CHANGE - ----------------- 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 $184.7 million in 1995, of which $104.0 million was attributable to HECO, $35.4 million to HELCO and $45.3 million to MECO. Approximately 68% of the total 1995 capital expenditures was for transmission and distribution projects, including HECO's Waiau-CIP 138 kilovolt line, and approximately 32% was for generation and general plant projects, including HELCO's Keahole combustion turbines and MECO's Maalaea combustion turbine and Molokai generation expansion. Cash contributions in aid of construction received in 1995 totaled $10.4 million. The Company's investment in plant and equipment for 1995 was financed with cash from operating activities and cash from financing activities. Cash provided by operating activities totaled $138.2 million in 1995. Cash provided by financing activities totaled a net $32.2 million and included $27.5 million in drawdowns of proceeds from the sale of tax-exempt special purpose revenue bonds, net of long-term debt repayments. The Company used $38.0 million for common stock dividends. Short-term borrowings provided $20.9 million in cash and HEI provided $28.0 million through its purchase of HECO common stock. The Company's consolidated financing requirements for the years 1996 through 2000, including net capital expenditures, debt retirements and sinking fund requirements, are currently estimated to total $829 million. The Company's consolidated internal sources, after the payment of common stock and preferred stock dividends, are currently expected to provide approximately 66% of the consolidated financing requirements, with debt and equity financing providing the remaining requirements. As of December 31, 1995, an additional $170 million of revenue bonds had been authorized by the Hawaii legislature for issuance prior to the end of 1997. The Company currently estimates that it will require approximately $54 million in common equity, other than retained earnings, over the five-year period 1996 through 2000. 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 1996 through 2000, are currently estimated to total $747 million. Approximately 62% 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 38% primarily for generation projects. At December 31, 1995, purchase commitments other than fuel and power purchase contracts amounted to approximately $75 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 1996, net of cash contributions in aid of construction and excluding AFUDC, are estimated to be $154 million, and gross capital expendi-tures are estimated to be $189 million, of which approximately 58% is for trans-mission and distribution projects. An estimated $55 million is planned for new generation projects. Drawdowns of proceeds from the sale of tax-exempt special purpose revenue bonds, sale of common stock to HEI, sales of preferred stock and the generation of funds from internal sources are expected to provide the cash needed for the net capital expenditures. 9 ================================================================================ 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 KWH sales and peak load, the availability of 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. As of February 16, 1996, Standard & Poor's (S&P), Moody's Investors Service (Moody's) and Duff & Phelps Credit Rating Co. (D&P) rated HECO's securities as follows:
S&P Moody's D&P ---- ------- ------- 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. 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 1995 1994 1993 - ----------------------- --------- --------- --------- (in thousands) OPERATING REVENUES.......................... $981,990 $907,308 $874,010 -------- -------- -------- OPERATING EXPENSES: Fuel oil.................................... 207,001 186,717 213,285 Purchased power............................. 276,364 271,636 258,723 Other operation............................. 137,349 121,740 105,957 Maintenance................................. 47,225 46,427 44,281 Depreciation and amortization............... 67,649 63,779 55,960 Taxes, other than income taxes.............. 92,961 85,877 80,712 Income taxes................................ 50,719 43,820 37,007 -------- -------- -------- 879,268 819,996 795,925 -------- -------- -------- OPERATING INCOME............................ 102,722 87,312 78,085 -------- -------- -------- OTHER INCOME: Allowance for equity funds used during construction............................... 10,202 9,064 6,973 Other, net.................................. 6,123 5,729 4,583 -------- -------- -------- 16,325 14,793 11,556 -------- -------- -------- INCOME BEFORE INTEREST AND OTHER CHARGES.... 119,047 102,105 89,641 -------- -------- -------- INTEREST AND OTHER CHARGES: Interest on long-term debt.................. 34,088 31,369 27,046 Amortization of net bond premium and expense.................................... 1,273 1,208 774 Other interest charges...................... 9,016 4,763 7,467 Allowance for borrowed funds used during construction............................... (5,112) (4,043) (3,869) Preferred stock dividends of subsidiaries... 2,759 2,847 2,097 -------- -------- -------- 42,024 36,144 33,515 -------- -------- -------- INCOME BEFORE PREFERRED STOCK DIVIDENDS OF HECO.................................... 77,023 65,961 56,126 Preferred stock dividends of HECO........... 4,126 4,316 4,421 -------- -------- -------- NET INCOME FOR COMMON STOCK................. $ 72,897 $ 61,645 $ 51,705 ======== ======== ========
CONSOLIDATED STATEMENTS OF RETAINED EARNINGS ================================================================================ HAWAIIAN ELECTRIC COMPANY, INC. AND SUBSIDIARIES
Years ended December 31 1995 1994 1993 - ----------------------- --------- --------- --------- (in thousands) RETAINED EARNINGS, BEGINNING OF YEAR... $308,535 $275,401 $249,583 Net income for common stock............ 72,897 61,645 51,705 Common stock dividends................. (38,007) (28,511) (25,887) -------- -------- -------- RETAINED EARNINGS, END OF YEAR......... $343,425 $308,535 $275,401 ======== ======== ========
See accompanying "Notes to Consolidated Financial Statements." 11 CONSOLIDATED BALANCE SHEETS =============================================================================== HAWAIIAN ELECTRIC COMPANY, INC. AND SUBSIDIARIES
December 31 1995 1994 - ----------- ----------- ----------- (in thousands) ASSETS UTILITY PLANT, AT COST: Land............................................... $ 27,578 $ 27,108 Plant and equipment................................ 2,263,300 2,101,447 Less accumulated depreciation...................... (762,770) (702,945) Plant acquisition adjustment, net.................. 667 719 Construction in progress........................... 191,460 164,247 ---------- ---------- NET UTILITY PLANT.............................. 1,720,235 1,590,576 ---------- ---------- CURRENT ASSETS: Cash and equivalents............................... 20 10,694 Customer accounts receivable, net.................. 67,698 60,406 Accrued unbilled revenues, net..................... 43,695 38,435 Other accounts receivable, net..................... 5,355 10,302 Fuel oil stock, at average cost.................... 13,469 21,966 Materials and supplies, at average cost............ 20,538 20,108 Prepayments and other.............................. 2,297 2,028 ---------- ---------- TOTAL CURRENT ASSETS........................... 153,072 163,939 ---------- ---------- OTHER ASSETS: Regulatory assets.................................. 97,114 92,524 Unamortized debt expense........................... 10,022 9,662 Long-term receivables and other.................... 35,840 32,419 ---------- ---------- TOTAL OTHER ASSETS............................. 142,976 134,605 ---------- ---------- $2,016,283 $1,889,120 ========== ========== CAPITALIZATION AND LIABILITIES CAPITALIZATION (see Consolidated Statements of Capitalization): Common stock equity................................ $ 696,905 $ 633,901 Cumulative preferred stock: Not subject to mandatory redemption............... 48,293 48,293 Subject to mandatory redemption................... 39,955 42,470 Long-term debt, net................................ 487,306 468,653 ---------- ---------- TOTAL CAPITALIZATION........................... 1,272,459 1,193,317 ---------- ---------- CURRENT LIABILITIES: Long-term debt due within one year................. 29,903 20,933 Preferred stock sinking fund requirements.......... 1,795 2,374 Short-term borrowings--nonaffiliates............... 131,753 117,866 Short-term borrowings--affiliate................... 7,000 -- Accounts payable................................... 48,691 54,662 Interest and preferred dividends payable........... 9,954 8,575 Taxes accrued...................................... 42,968 42,966 Other.............................................. 37,573 30,111 ---------- ---------- TOTAL CURRENT LIABILITIES...................... 309,637 277,487 ---------- ---------- DEFERRED CREDITS AND OTHER LIABILITIES: Deferred income taxes.............................. 116,963 108,362 Unamortized tax credits............................ 45,935 44,939 Other.............................................. 79,435 86,380 ---------- ---------- TOTAL DEFERRED CREDITS AND OTHER LIABILITIES... 242,333 239,681 ---------- ---------- CONTRIBUTIONS IN AID OF CONSTRUCTION............... 191,854 178,635 ---------- ---------- $2,016,283 $1,889,120 ========== ==========
See accompanying "Notes to Consolidated Financial Statements." 12 CONSOLIDATED STATEMENTS OF CAPITALIZATION ================================================================================ HAWAIIAN ELECTRIC COMPANY, INC. AND SUBSIDIARIES
December 31 1995 1994 - ----------- ------------ -------- (dollars in thousands, except per share amounts) COMMON STOCK EQUITY: Common stock of $6 2/3 par value. Authorized: 50,000,000 shares. Outstanding: 1995, 12,302,657 shares and 1994, 11,813,147 shares....... $ 82,031 $ 78,766 Premium on capital stock............................. 271,449 246,600 Retained earnings.................................... 343,425 308,535 -------- -------- COMMON STOCK EQUITY................................ 696,905 633,901 -------- -------- CUMULATIVE PREFERRED STOCK: Authorized: 5,000,000 shares of $20 par value and 7,000,000 shares of $100 par value. Outstanding: 1995, 1,792,157 shares and 1994, 1,823,097 shares.
SHARES OUTSTANDING PAR DECEMBER 31, SERIES VALUE 1995 - ------ ------- ------------ 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)....... --........ -- 800 Q-7.68% 100 (HECO)....... 88,000........ 8,800 9,204 R-8.75% 100 (HECO)....... 190,000........ 19,000 20,000 C-9 1/4% 100 (HELCO)...... 4,000........ 400 600 D-12 3/4% 100 (HELCO)...... 6,000........ 600 650 E-12.25% 100 (HELCO)...... 7,000........ 700 750 F-8.5% 100 (HELCO)...... 60,000........ 6,000 6,000 D-8 3/4% 100 (MECO)....... 10,500........ 1,050 1,240 E-12 1/4% 100 (MECO)....... --........ -- 200 F-13 3/4% 100 (MECO)....... 2,000........ 200 400 G-8.5% 100 (MECO)....... 50,000........ 5,000 5,000 ------- ------ ------ 417,500........ 41,750 44,844 ======= Less sinking fund requirements due within one year... 1,795 2,374 ------ ------ 39,955 42,470 ------ ------ CUMULATIVE PREFERRED STOCK......................... 88,248 90,763 ------ ------
(continued) See accompanying "Notes to Consolidated Financial Statements." 13 CONSOLIDATED STATEMENTS OF CAPITALIZATION, continued ================================================================================ HAWAIIAN ELECTRIC COMPANY, INC. AND SUBSIDIARIES
December 31 1995 1994 - ----------- ---------- ---------- (in thousands) LONG-TERM DEBT: First mortgage bonds: HECO: 4.55-5.75%, due 1995 through 1997................... $ 13,000 $ 24,000 7 5/8%, due 2002.................................... 10,000 10,000 ---------- ---------- 23,000 34,000 ---------- ---------- HELCO: 7 3/4-7 7/8%, due 2002 through 2003................. 5,000 5,000 ---------- ---------- MECO: 7 3/4-7 7/8%, due 2002 through 2003................. 7,000 7,000 ---------- ---------- Total first mortgage bonds....................... 35,000 46,000 ---------- ---------- Obligations to the State of Hawaii for the repayment of Special Purpose Revenue Bonds: HECO, 6.60%, series 1995A, due 2025................... 40,000 -- HELCO, 6.60%, series 1995A, due 2025.................. 5,000 -- MECO, 6.60%, series 1995A, due 2025................... 2,000 -- 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, 7.20%, series 1984, due 2014................... 11,400 11,400 ---------- ---------- 425,900 378,900 Less funds on deposit with trustees................... 943 3,391 ---------- ---------- Total obligations to the State of Hawaii......... 424,957 375,509 ---------- ---------- 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, paid in 1995....................... -- 10,000 MECO, 5.15% note, due 1996............................ 10,000 10,000 ---------- ---------- Total other long-term debt - unsecured........... 60,000 70,000 ---------- ---------- Total long-term debt............................. 519,957 491,509 Less unamortized discount.............................. 2,748 1,923 Less amounts due within one year, net of discount...... 29,903 20,933 ---------- ---------- LONG-TERM DEBT, NET................................. 487,306 468,653 ---------- ---------- TOTAL CAPITALIZATION............................. $1,272,459 $1,193,317 ========== ==========
See accompanying "Notes to Consolidated Financial Statements." 14 CONSOLIDATED STATEMENTS OF CASH FLOWS ================================================================================ HAWAIIAN ELECTRIC COMPANY, INC. AND SUBSIDIARIES
Years ended December 31 1995 1994 1993 - ----------------------- ---------- ---------- ---------- (in thousands) CASH FLOWS FROM OPERATING ACTIVITIES: Income before preferred stock dividends of HECO... $ 77,023 $ 65,961 $ 56,126 Adjustments to reconcile income before preferred stock dividends of HECO to net cash provided by operating activities: Depreciation and amortization of property, plant and equipment.......................... 67,649 63,779 55,960 Other amortization............................. 9,389 4,521 3,338 Deferred income taxes.......................... 9,767 855 (1,952) Tax credits, net............................... 2,698 3,271 4,086 Allowance for equity funds used during construction................................. (10,202) (9,064) (6,973) Changes in assets and liabilities: Increase in accounts receivable.............. (2,345) (6,696) (1,924) Decrease (increase) in accrued unbilled revenues.................................... (5,260) (3,700) 912 Decrease (increase) in fuel oil stock........ 8,497 (3,778) 1,914 Decrease (increase) in materials and supplies.................................... (430) 131 (2,398) Increase in regulatory assets................ (4,247) (9,885) (9,606) Increase (decrease) in accounts payable...... (5,971) 12,854 (2,273) Increase (decrease) in interest and preferred dividends payable................. 1,379 (1,757) 1,287 Other........................................ (9,711) (14,170) (92) --------- --------- --------- NET CASH PROVIDED BY OPERATING ACTIVITIES......... 138,236 102,322 98,405 --------- --------- --------- CASH FLOWS FROM INVESTING ACTIVITIES: Capital expenditures.............................. (184,689) (186,461) (205,943) Contributions in aid of construction.............. 10,417 15,112 20,158 Issuance of notes receivable...................... (6,825) -- -- --------- --------- --------- NET CASH USED IN INVESTING ACTIVITIES............. (181,097) (171,349) (185,785) --------- --------- --------- CASH FLOWS FROM FINANCING ACTIVITIES: Net increase (decrease) in short-term borrowings from nonaffiliates and affiliate with original maturities of three months or less.......................... 20,887 76,938 (81,248) Proceeds from other short-term borrowings......... -- -- 25,259 Repayment of other short-term borrowings.......... -- -- (25,259) Proceeds from issuance of long-term debt.......... 48,544 52,814 156,788 Repayment of long-term debt....................... (21,000) (48,027) (46,901) Proceeds from issuance of preferred stock......... -- -- 12,000 Redemption of preferred stock..................... (3,094) (1,886) (2,190) Preferred stock dividends......................... (4,126) (4,316) (4,421) Proceeds from issuance of common stock............ 28,000 30,000 45,000 Capital stock expense............................. (7) (59) (84) Common stock dividends............................ (38,007) (28,511) (25,887) Other............................................. 990 846 5,362 --------- --------- --------- NET CASH PROVIDED BY FINANCING ACTIVITIES......... 32,187 77,799 58,419 --------- --------- --------- Net increase (decrease) in cash and equivalents... (10,674) 8,772 (28,961) CASH AND EQUIVALENTS, BEGINNING OF YEAR........... 10,694 1,922 30,883 --------- --------- --------- CASH AND EQUIVALENTS, END OF YEAR................. $ 20 $ 10,694 $ 1,922 ========= ========= =========
See accompanying "Notes to Consolidated 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 (GAAP). In preparing the financial statements, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the balance sheet and the reported amounts of revenues and expenses for the period. Actual results could differ significantly from those estimates. Examples of such estimates involving material amounts reflected in the financial statements include the amounts reported for regulatory assets and for pension and other postretirement benefit obligations. Management believes that such estimates have been appropriately established in accordance with GAAP. 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 contributions were received. This amortization is an offset against depreciation expense. REVENUES - -------- Revenues are based on rates authorized by the PUC and include revenues appli- cable to electric energy consumed in the accounting period but not yet billed to the customers. Revenue amounts recorded under PUC approved interim rate adjust- ments are subject to refund, with interest, pending final authorization by the PUC. 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 16 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, continued ================================================================================ HAWAIIAN ELECTRIC COMPANY, INC. AND SUBSIDIARIES - -------------------------------------------------------------------------------- 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 of 1974. Certain postretirement health care and/or life insurance benefits are provided to eligible retired employees and the employees' beneficiaries and covered dependents. In 1995, these postretirement benefits were charged primarily to expense and plant. In 1994 and 1993, these postretirement benefits were charged primarily to regulatory assets and expense. See Note 10. 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 3.8% in 1995 and 3.9% in 1994 and 1993. 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. This 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 1995 and 1994 and 9.3% in 1993 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. Deferred income tax assets and liabilities are established 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. Federal and state tax credits are deferred and amortized over the estimated useful lives of the properties which qualified for the credits. 17 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, continued ================================================================================ HAWAIIAN ELECTRIC COMPANY, INC. AND SUBSIDIARIES - -------------------------------------------------------------------------------- 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 - -------------------------- The Company is subject to numerous federal and state statutes and governmental regulations pertaining to water quality, air quality and other environmental factors. 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. ACCOUNTING CHANGE - 1996 IMPLEMENTATION - --------------------------------------- In March 1995, the FASB issued SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of." SFAS No. 121 requires that long-lived assets and certain identifiable intangibles held and used by an entity be reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. If the sum of the expected future cash flows derived from an asset is less than the carrying amount of the asset, an impairment loss is recognized. Measurement of that loss is based on the fair value of the asset. Generally, SFAS No. 121 requires that long-lived assets and certain identifiable intangibles to be disposed of be reported at the lower of carrying amount or fair value less cost to sell. SFAS No. 121 also requires that a rate-regulated enterprise recognize an impairment loss for the amount of costs excluded by a regulator from the enterprise's rate base. The Company adopted the provisions of SFAS No. 121 on January 1, 1996. The adoption of SFAS No. 121 did not have a material effect on the Company's financial condition or results of operations. 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 1995 1995 - ------ ------------ ------------ 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 and B (MECO)............................. 101.00 101.00
18 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, continued ================================================================================ HAWAIIAN ELECTRIC COMPANY, INC. AND SUBSIDIARIES - -------------------------------------------------------------------------------- The following series of cumulative preferred stock are subject to mandatory sinking fund, voluntary liquidation and optional redemption provisions as indicated below:
Annual sinking fund provision Voluntary Optional -------------------------------- liquidation redemption Number of shares price price ----------------- Commencement December 31, December 31, Series Minimum Maximum date 1995 1995 - ------------ ------- ------- ------------ ------------ ------------ Q (HECO).... 4,000 4,000 1/15/93 $100.00 $111.12 R (HECO).... 10,000 20,000 1/15/95 100.00 105.83 C (HELCO)... 1,000 2,000 10/15/85 101.00 101.00 D (HELCO)... 500 500 10/15/88 105.85 105.85 E (HELCO)... 500 500 10/15/90 106.39 106.39 F (HELCO)... 10,000 20,000 1/15/00 100.00 105.46 D (MECO).... 950 1,900 7/15/89 101.00 101.00 F (MECO).... 1,000 2,000 10/15/92 103.62 103.62 G (MECO).... 8,333 16,667 1/15/00 100.00 105.46
- -------------------------------------------------------------------------------- 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). 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 $1,795,000 in 1996 and 1997, $1,695,000 in 1998 and 1999, $3,428,300 in 2000 and a total of $31,341,700 thereafter. HECO is obligated to make dividend, redemption and liquidation payments on the preferred stock of either of its subsidiaries if the respective subsidiary is 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 1995, 1994 and 1993 HECO issued 489,510, 554,857 and 897,111 shares of common stock to its parent, HEI, for $28 million, $30 million and $45 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, 1995, the aggregate payments of principal required on long- term debt during the next five years are $30,000,000 in 1996, $13,000,000 in 1997, $30,000,000 in 1998, and nil in 1999 and 2000. 19 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, continued ================================================================================ HAWAIIAN ELECTRIC COMPANY, INC. AND SUBSIDIARIES - -------------------------------------------------------------------------------- 5. SHORT-TERM BORROWINGS - -------------------------------------------------------------------------------- Short-term borrowings from nonaffiliates at December 31, 1995 and 1994 had a weighted average interest rate of 6.1% and 6.3%, respectively, and consisted entirely of commercial paper. The Company maintained bank lines of credit which totaled approximately $145 million and $125 million at December 31, 1995 and 1994, respectively. The lines of credit support the issuance of commercial paper. There were no borrowings against any line of credit during 1995 and 1994. 6. REGULATORY ASSETS - ------------------------------------------------------------------------------- In accordance with SFAS No. 71, "Accounting for the Effects of Certain Types of Regulation," the Company's financial statements reflect assets and costs based on current cost-based rate-making regulations. Continued accounting under SFAS No. 71 requires that certain criteria be met. A utility's operations or portion of operations can cease to meet the criteria for various reasons, including a change in the method of regulation or a change in the competitive environment for regulated services. A utility whose operations or portion of operations cease to meet these criteria should discontinue application of SFAS No. 71 and write-off any regulatory assets and liabilities for those operations that no longer meet the requirements of SFAS No. 71. Management believes the Company's operations currently satisfy the SFAS No. 71 criteria. However, if events or circumstances should change so that the criteria are no longer satisfied, management believes that a material adverse effect on the Company's results of operations and financial position may result. Regulatory assets at December 31, 1995 and 1994 included the following deferred costs:
December 31 1995 1994 - ----------- ------- ------- (in thousands) Income taxes.......................................... $31,684 $23,427 Postretirement benefits other than pensions........... 30,426 34,032 Integrated resource planning costs.................... 9,425 7,189 Unamortized debt expense on retired issuances......... 6,860 7,513 Vacation earned, but not yet taken.................... 6,236 5,972 Preliminary plant costs on suspended project.......... 5,759 5,768 Computer system development costs..................... 4,602 6,090 Other................................................. 2,122 2,533 ------- ------- $97,114 $92,524 ======= =======
In 1995, the Company applied to the PUC for recovery of the preliminary plant costs on a suspended project. 7. INCOME TAXES - -------------------------------------------------------------------------------- The Company adopted the provisions of SFAS No. 109, "Accounting for Income Taxes," on January 1, 1993. 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. Deferred income taxes payable arising from the 20 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, continued ================================================================================ HAWAIIAN ELECTRIC COMPANY, INC. AND SUBSIDIARIES - -------------------------------------------------------------------------------- adoption of SFAS No. 109 are recoverable through future rates and have 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 1995 1994 1993 - ----------------------- -------- -------- -------- (in thousands) FEDERAL: Current................................... $35,553 $37,422 $33,556 Deferred.................................. 9,761 2,133 432 Deferred tax credits, net................. (1,702) (1,922) (2,260) ------- ------- ------- 43,612 37,633 31,728 ------- ------- ------- STATE: Current................................... 2,751 2,359 1,402 Deferred.................................. 1,658 315 (123) Deferred tax credits, net................. 2,698 3,513 4,000 ------- ------- ------- 7,107 6,187 5,279 ------- ------- ------- Total...................................... $50,719 $43,820 $37,007 ======= ======= =======
Income tax benefits related to nonoperating activities, included in "Other, net" on the consolidated statements of income, amounted to $521,000, $232,000 and $109,000 for 1995, 1994 and 1993, respectively. A reconciliation between income taxes charged to operating expenses and the amount of income taxes computed at the federal statutory rate of 35% on income before income taxes and preferred stock dividends follows:
Years ended December 31 1995 1994 1993 - ----------------------- -------- -------- -------- (dollars in thousands) Amount at the federal statutory income tax rate.......................... $45,675 $39,420 $33,331 State income taxes on operating income, net of effect on federal income taxes............................. 4,620 4,022 3,431 Other..................................... 424 378 245 ------- -------- ------- Income taxes charged to operating expenses................................. $50,719 $43,820 $37,007 ======= ======= ======
The tax effects of temporary differences which give rise to deferred tax assets and liabilities were as follows:
December 31 1995 1994 - ----------- -------- -------- (in thousands) Deferred tax assets: Property, plant and equipment....................... $ 8,019 $ 7,075 Contributions in aid of construction and customer advances................................. 53,709 52,892 Other............................................... 12,690 13,858 -------- -------- 74,418 73,825 -------- -------- Deferred tax liabilities: Property, plant and equipment....................... 160,531 157,067 Regulatory assets................................... 12,322 8,897 Other............................................... 18,528 16,223 -------- -------- 191,381 182,187 -------- -------- Deferred income taxes................................ $116,963 $108,362 ======== ========
21 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, continued ================================================================================ HAWAIIAN ELECTRIC COMPANY, INC. AND SUBSIDIARIES - -------------------------------------------------------------------------------- There was no valuation allowance provided for deferred tax assets as of December 31, 1995 and 1994. In assessing the realizability of deferred tax assets, management considers whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible. Management considers the scheduled reversal of deferred tax liabilities, projected future taxable income, and tax planning strategies in making this assessment. Based upon the level of historical taxable income and projections for future taxable income over the periods which the deferred tax assets are deductible, management believes it is more likely than not the Company will realize the benefits of these deductible differences. 8. CASH FLOWS - ------------------------------------------------------------------------------- SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION - ------------------------------------------------- Cash paid during 1995, 1994 and 1993 for interest (net of capitalized amounts which were not material) and income taxes was as follows:
Years ended December 31 1995 1994 1993 - -------------------------- ------- ------- ------- (in thousands) Interest................................... $36,161 $35,001 $31,875 ======= ======= ======= Income taxes............................... $43,148 $40,849 $34,796 ======= ======= =======
SUPPLEMENTAL DISCLOSURES OF NONCASH ACTIVITIES - ---------------------------------------------- The allowance for equity funds used during construction, which was charged primarily to construction in progress, amounted to $10,202,000, $9,064,000 and $6,973,000 in 1995, 1994 and 1993, respectively. Effective in 1993, the Company recognized the estimated fair value of noncash contributions in aid of construction received in 1988 through 1993, which increased both plant and contributions in aid of construction by $26,105,000. The estimated fair value of noncash contributions amounted to $10,552,000 and $5,556,000 in 1995 and 1994, respectively. 9. MAJOR CUSTOMERS - ------------------------------------------------------------------------------ HECO and its subsidiaries derived 10% of their operating revenues from the sale of electricity to various federal government agencies in 1995, 1994 and 1993. These revenues amounted to $97,175,000 in 1995, $89,479,000 in 1994 and $90,614,000 in 1993. 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 employees' years of service and base compensation. 22 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, continued ================================================================================ HAWAIIAN ELECTRIC COMPANY, INC. AND SUBSIDIARIES - -------------------------------------------------------------------------------- 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 1995 1994 - ----------- --------- -------- (in thousands) Accumulated benefit obligation: Vested.................................................. $343,452 $285,605 Nonvested............................................... 36,838 30,279 -------- -------- $380,290 $315,884 ======== ======== Projected benefit obligation............................. $473,398 $388,150 Plan assets at fair value, primarily equity securities and fixed income investments............................ 471,840 376,968 -------- -------- Projected benefit obligation in excess of plan assets.... 1,558 11,182 Unrecognized prior service cost.......................... (177) (240) Unrecognized net gain.................................... 14,235 9,316 Unrecognized net transition obligation................... (16,878) (19,153) Adjustment required to recognize minimum liability....... 405 282 -------- -------- Accrued (prepaid) pension liability...................... $ (857) $ 1,387 ======== ========
Plans with an accumulated benefit obligation exceeding plan assets at fair value were not material. For all pension plans, at December 31, 1995 and 1994, the assumed discount rate used to measure the projected benefit obligation was 7% and 8%, respectively. Net periodic pension cost included the following components:
Years ended December 31 1995 1994 1993 - ----------------------- --------- --------- --------- (in thousands) Service cost-benefits earned during the period... $ 12,701 $ 14,469 $ 9,861 Interest cost on projected benefit obligation.... 30,369 27,803 25,437 Actual loss (return) on plan assets.............. (99,313) 10,775 (53,703) Amortization and deferral, net................... 66,253 (37,154) 33,564 -------- -------- -------- Net periodic pension cost........................ $ 10,010 $ 15,893 $ 15,159 ======== ======== ========
Of these net periodic pension costs, $6,686,000, $10,801,000 and $9,663,000 were expensed in 1995, 1994 and 1993, respectively, and the remaining amounts were charged primarily to electric utility plant. The expected long-term rate of return on assets was 9% for 1995 and 8% for l994 and 1993. The assumed rate of increase in future compensation levels was 5% for 1995, 1994 and 1993. 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 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 in December 1994. 23 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, continued ================================================================================ HAWAIIAN ELECTRIC COMPANY, INC. AND SUBSIDIARIES - -------------------------------------------------------------------------------- In February 1992, the PUC opened a generic docket to determine whether SFAS No. 106, "Employers' Accounting for Postretirement Benefits Other Than Pensions," should be adopted for rate-making purposes. Effective January 1, 1993, the Company adopted the provisions of SFAS No. 106. In November 1994, the PUC issued a decision and order (D&O) authorizing recovery of the full cost of postretirement benefits other than pensions effective January 1, 1995. The companies were required to fund 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. In December 1995, however, the PUC issued a D&O in a rate case proceeding which did not provide revenue to cover the Company's costs relating to postretirement executive life insurance and the Company wrote-off the regulatory asset relating to such costs, resulting in a 1995 after-tax charge of $1.l million. The funded status of the postretirement benefit plans and the amounts recognized in the consolidated financial statements were as follows:
December 31 1995 1994 - ----------- ---------- ---------- (in thousands) Accumulated postretirement benefit obligation: Retirees........................................ $ 61,243 $ 59,047 Fully eligible active plan participants......... 43,895 34,261 Other active plan participants.................. 54,692 45,664 --------- --------- 159,830 138,972 Plan assets at fair value, primarily fixed income investments.............................. 23,357 2,732 --------- --------- Accumulated postretirement benefit obligation in excess of plan assets........................ 136,473 136,240 Unrecognized net gain............................ 3,013 7,816 Unrecognized net transition obligation........... (106,492) (112,756) --------- --------- Accrued postretirement benefits liability........ $ 32,994 $ 31,300 ========= =========
At December 31, 1995 and 1994, the assumed discount rate used to measure the accumulated postretirement benefit obligation was 7% and 8%, respectively. For 1995, 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 1995 1994 1993 - ----------------------- -------- ------- ------- (in thousands) Service cost............................... $ 4,878 $ 4,642 $ 5,115 Interest cost.............................. 10,836 9,284 10,426 Actual return on plan assets ..,........... (937) -- -- Amortization and deferral, net............. 6,605 6,264 6,264 ------- ------- ------- Net periodic postretirement benefit cost... $21,382 $20,190 $21,805 ======= ======= =======
Of the net periodic postretirement benefit costs, $2,573,000 and $2,362,000 were 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. In 1995, $15,351,000 was expensed, and the remaining amount was charged primarily to electric utility plant. For 1995, the expected long-term rate of return on assets for trusts which were not subject to federal income taxes was 9%. At December 31, 1995, trusts holding plan assets with a fair value of $5.9 million were subject to income taxes at a 24 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, continued ================================================================================ HAWAIIAN ELECTRIC COMPANY, INC. AND SUBSIDIARIES - -------------------------------------------------------------------------------- rate of 45%. The after-tax expected long-term rate of return on these plan assets was 6% for 1995. At December 31, 1995, the assumed health care trend rates for 1996 and future years were as follows: medical, 6.5%; dental, 5.0% and vision, 4.0%. The health care cost trend rate assumption can have a significant effect on the amounts reported. For example, a 1% increase in the trend rate for health care costs would have increased the accumulated postretirement benefit obligation at December 31, 1995 by approximately $22 million and the service and interest costs for 1995 by approximately $3 million. The transition obligation (the accumulated postretirement benefit obligation at January 1, 1993) is being amortized ratably over 20 years beginning in 1993. 11. COMMITMENTS AND CONTINGENCIES - ------------------------------------------------------------------------------- INTERIM RATE INCREASES - ---------------------- Amounts recovered under interim rates in excess of final approved rates are subject to refund with interest. In December 1995, HECO received final PUC authorization approving an increase in annual revenues of $9 million ($10 million less than the interim increases), effective January 1, 1995, and HECO recorded a refund of $10 million including interest, which will be returned to customers in the first half of 1996. At December 31, 1995, other previously recorded revenue amounts recognized under interim rate increases and subject to refund were not significant. FUEL CONTRACTS AND OTHER PURCHASE COMMITMENTS - --------------------------------------------- HECO and its subsidiaries have contractual agreements to purchase minimum amounts of 0.5% sulfur and 2.0% sulfur residual fuel oils and 0.4% sulfur diesel fuel through 1997 at prices which are tied to the market prices of petroleum products as reported in Singapore, Los Angeles and the U.S. Pacific Northwest, respectively. Based on the average price per barrel prevailing on January 1, 1996, the estimated amount of required purchases for 1996 is $203 million. The actual cost in 1996 could vary substantially from this estimate as a result of changes in market prices and other factors. HECO and its subsidiaries purchased $194 million, $186 million and $205 million of fuel under these or prior contractual agreements in 1995, 1994 and 1993, respectively. New contracts to replace expiring ones are expected to be entered into in the normal course of business. At December 31, 1995, the Company had purchase commitments, other than fuel and power purchase contracts, amounting to approximately $75 million. POWER PURCHASE AGREEMENTS - ------------------------- As of December 31, 1995, the Company had power purchase agreements for 469 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, aggregate minimum fixed capacity charges are expected to be approximately $109 million in each of 1996 and 1997, $106 million in 1998, $109 million in 1999, $102 million in 2000 and $2.0 billion thereafter. In general, payments under the power purchase agreements for 469 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 25 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, continued ================================================================================ HAWAIIAN ELECTRIC COMPANY, INC. AND SUBSIDIARIES - -------------------------------------------------------------------------------- contracted levels. In general, the payment rates for capacity have been pre- determined 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. HECO POWER OUTAGE - ----------------- On April 9, 1991, HECO experienced a power outage that affected all customers on the island of Oahu. Approximately 1,500 pending claims involving personal injury or economic loss, such as lost profits, because of the outage will be disposed of on a case by case basis and are not expected to have a material adverse effect on the Company's financial condition or results of operations. Seven direct or indirect business customers 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 outage. The judge in the case ruled that the case would not be certified as a class action. In January 1996, the case was dismissed pursuant to an immaterial cash settlement. In April 1991, the PUC initiated an investigation of the April 9, 1991 outage, which was consolidated with a pending investigation of an outage that occurred in 1988. Management cannot predict the timing and outcome of any PUC D&O that may be issued, if any, with respect to the outages. HELCO POWER SITUATION - --------------------- In the past few years, HELCO's reserve margin has been relatively low. HELCO needs additional generating capacity and has been proceeding with plans to install two 20-MW combustion turbines, followed by an 18-MW heat steam recovery generator, at which time these units would be converted to a 56-MW (net) combined-cycle unit. However, installation has been delayed because HELCO has encountered procedural and other difficulties in obtaining the necessary Conservation District Use Permit amendment (CDUP) and air permit that would allow the 56-MW unit to be constructed. In late 1995, a contested case hearing with respect to the CDUP was conducted and the hearing officer recommended denial of the CDUP application. The Hawaii Board of Land and Natural Resources (BLNR) may decide to adopt, modify, or reject the hearing officer's recommendation. The BLNR is scheduled to make a decision on HELCO's CDUP application by March 27, 1996. If the BLNR denies HELCO's application, this would delay, if not prevent, installation of HELCO's project at the 15-acre site. The Hawaii Department of Health (DOH) forwarded HELCO's air permit to the Environmental Protection Agency (EPA) for its approval. In a November 1995 letter to the DOH, the EPA declined to sign HELCO's air permit. HELCO requested that the EPA reconsider this decision and the EPA agreed to reconsider based on additional information supplied by HELCO. In a second letter dated February 6, 1996, the EPA set forth information to be considered by HELCO which it feels may address HELCO's concerns regarding the emission control technology to be used, and stated that it would continue discussions with HELCO at a later date. If the EPA does not sign the permit issued by the DOH, this would delay, if not prevent, HELCO's project. 26 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, continued ================================================================================ HAWAIIAN ELECTRIC COMPANY, INC. AND SUBSIDIARIES - -------------------------------------------------------------------------------- Two independent power producers (IPPs) have filed separate complaints against HELCO with the PUC, alleging that they are entitled to power purchase contracts to provide HELCO with additional capacity which, under HELCO's current estimates of generating capacity requirements, would be in place of the planned 56-MW addition by HELCO. In September 1995, HELCO provided proposals to the two IPPs, and further negotiations have been undertaken. On January 26, 1996, the PUC ordered that the complaint docket filed by one of the IPPs be reopened. HELCO and the IPP are to seek PUC guidance on negotiation issues if a contract has not been finalized by March 11, 1996. If HELCO's negotiations with the IPPs result in a power purchase agreement and/or if HELCO's combined-cycle unit is not installed, HELCO may be required to write-off a portion of the costs incurred in its efforts to put into service its combined-cycle unit ($43 million as of December 31, 1995) if such costs ultimately are not recoverable from customers or others. The $43 million includes equipment purchases, planning and engineering costs and an allowance for funds used during construction. Management cannot determine at this time whether the negotiations with the IPPs will result in a power purchase agreement or the amount of incurred costs, if any, that may not be recoverable from customers or others. 12. REGULATORY RESTRICTIONS ON DISTRIBUTIONS TO PARENT - ------------------------------------------------------------------------------- At December 31, 1995, net assets (assets less liabilities) of approximately $327 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 $2,469,000, $2,417,000 and $2,258,000 in 1995, 1994 and 1993, respectively. The amounts charged by HEI to its subsidiaries are allocated primarily on the basis of actual labor hours. HEI also charged HECO for data processing services totaling $3,461,000, $3,554,000 and $3,563,000 in 1995, 1994 and 1993, respectively. HECO's borrowings from HEI totaled $7,000,000 and nil at December 31, 1995 and 1994, 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 $621,000, $77,000 and $1,795,000 in 1995, 1994 and 1993, 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. 15. 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. 27 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, continued ================================================================================ HAWAIIAN ELECTRIC COMPANY, INC. AND SUBSIDIARIES - -------------------------------------------------------------------------------- NOTES RECEIVABLE - ---------------- Fair value is estimated by discounting future cash flows using rates offered by local lending institutions for loans of similar terms to companies with comparable credit risk. 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 1995 1994 - ----------- -------------------- -------------------- Estimated Estimated Carrying fair Carrying fair amount value amount value -------- --------- -------- --------- (in thousands) FINANCIAL ASSETS: Cash and equivalents................. $ 20 $ 20 $ 10,694 $ 10,694 Notes receivable..................... 6,825 6,760 -- -- FINANCIAL LIABILITIES: Short-term borrowings from nonaffiliates and affiliate........ 138,753 138,753 117,866 117,866 Long-term debt, net, including amounts due within one year........ 517,209 529,132 489,586 461,082 Cumulative preferred stock subject to mandatory redemption, including sinking fund requirements............ 41,750 43,737 44,844 46,478
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 addition, the tax ramifications related to the realization of the unrealized gains and losses can have a significant effect on fair value estimates and have not been considered. 28 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 1995 1994 - ----------- -------- -------- (in thousands) BALANCE SHEET DATA Current assets.................................... $ 23,485 $ 25,151 Noncurrent assets................................. 368,785 335,725 -------- -------- $392,270 $360,876 ======== ======== Common stock equity............................... $136,930 $120,908 Cumulative preferred stock: Not subject to mandatory redemption............. 10,000 10,000 Subject to mandatory redemption................. 7,500 7,800 Current liabilities............................... 64,233 59,787 Noncurrent liabilities............................ 173,607 162,381 -------- -------- $392,270 $360,876 ======== ========
Years ended December 31 1995 1994 1993 - ----------------------- -------- -------- -------- (in thousands) INCOME STATEMENT DATA Operating revenues....................... $135,730 $128,706 $113,579 Operating income......................... 15,959 11,821 11,902 Net income for common stock.............. 13,109 8,420 5,807
============================================================================== MAUI ELECTRIC COMPANY, LIMITED
December 31 1995 1994 - ----------- -------- -------- (in thousands) BALANCE SHEET DATA Current assets.................................... $ 27,161 $ 29,204 Noncurrent assets................................. 306,191 272,019 -------- -------- $333,352 $301,223 ======== ======== Common stock equity............................... $126,458 $108,313 Cumulative preferred stock: Not subject to mandatory redemption............. 8,000 8,000 Subject to mandatory redemption................. 6,055 6,545 Current liabilities............................... 57,551 34,197 Noncurrent liabilities............................ 135,288 144,168 -------- -------- $333,352 $301,223 ======== ========
Years ended December 31 1995 1994 1993 - ----------------------- -------- -------- -------- (in thousands) INCOME STATEMENT DATA Operating revenues...................... $128,707 $120,966 $114,256 Operating income........................ 16,575 16,251 13,518 Net income for common stock............. 11,798 10,196 9,274
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 1995 and 1994 was as follows:
Quarter ended - ------------------------------------------------------------------------------------- Year ended 1995 March 31 June 30 Sept. 30 Dec. 31 Dec. 31 - ------------------------------------------------------------------------------------- ---------- (in thousands) Operating revenues...... $231,176 $242,646 $260,123 $248,045/1/ $981,990 Operating income........ 23,206 24,505 32,264 22,747/1/ 102,722 Net income for common stock................. 15,800 17,540 24,819 14,738/1/ 72,897 =================================================================================================== 1994 - --------------------------------------------------------------------------------------------------- (in thousands) Operating revenues...... $200,098 $217,884/2/ $247,844/2,3/ $241,482/2,3/ $907,308 Operating income........ 16,132 21,635/2/ 25,708/2,3/ 23,837/2,3/ 87,312 Net income for common stock................. 9,276 15,188/2/ 19,328/2,3/ 17,853/2,3/ 61,645 ====================================================================================================
/1/ Includes accrual for amounts refundable to customers for the amounts recovered under interim rates in 1995 in excess of final approved rates, with interest. /2/ Includes interim rate increases granted to HECO, primarily to cover the costs of new facilities and equipment. /3/ 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. 30 INDEPENDENT AUDITORS' REPORT ================================================================================ To 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, 1995 and 1994, 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, 1995. 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, 1995 and 1994, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 1995 in conformity with generally accepted accounting principles. /s/ KPMG Peat Marwick LLP Honolulu, Hawaii January 25, 1996 31
DIRECTORS AND OFFICERS ====================================================================================== HAWAIIAN ELECTRIC HAWAII ELECTRIC LIGHT MAUI ELECTRIC COMPANY, COMPANY, INC. COMPANY, INC. LIMITED ===================================================================================== DIRECTORS (_) Indicates age and year indicates first elected or appointed./1/ Edwin L. Carter/2/ (70), 1996 T. Michael May T. Michael May Robert F. Clarke (53), 1990 Richard Henderson Gladys C. Baisa Richard Henderson (67), 1970 Warren H. W. Lee Thomas J. Jezierny Mildred D. Kosaki/2/ (71), 1973 Denzil W. Rose Sanford J. Langa T. Michael May (48), 1995 Donald K. Yamada B. Martin Luna Paul A. Oyer (55), 1985 Anne M. Takabuki Diane J. Plotts/2/ (60), 1991 Paul C. Yuen/2/ (67), 1993 - --------------------------- /1/ All directors serve one year terms. /2/ Audit Committee member. OFFICERS HAWAIIAN ELECTRIC HAWAII ELECTRIC LIGHT MAUI ELECTRIC COMPANY, COMPANY, INC. COMPANY, INC. LIMITED ROBERT F. CLARKE T. MICHAEL MAY T. MICHAEL MAY Chairman of the Board Chairman of the Board Chairman of the Board T. MICHAEL MAY WARREN H. W. LEE THOMAS J. JEZIERNY President and Chief President President Executive Officer PAUL A. OYER PAUL A. OYER JACKIE MAHI ERICKSON Financial Vice President Financial Vice President Vice President-General and Treasurer and Treasurer Counsel and Government Relations EDWARD Y. HIRATA EDWARD Y. HIRATA Vice President Vice President CHARLES M. FREEDMAN Vice President-Corporate MOLLY M. EGGED MOLLY M. EGGED Excellence Secretary Secretary EDWARD Y. HIRATA MICHAEL F. H. CHANG MARVIN A. HAWTHORNE Vice President-Regulatory Assistant Treasurer Assistant Treasurer Affairs PAUL N. FUJIOKA DUANE T. HAYASHI GEORGE T. IWAHIRO Assistant Treasurer Assistant Treasurer Vice President-Energy Delivery MARVIN A. HAWTHORNE STANLEY T. NAKAMOTO Assistant Treasurer Assistant Treasurer THOMAS L. JOAQUIN Vice President-Power Supply DEORNA L. IKEDA MICHAEL E. KAM Assistant Treasurer Assistant Treasurer RICHARD L. O'CONNELL Vice President-Customer WILLIAM J. STORMONT EILEEN S. WACHI Operations Assistant Secretary Assistant Secretary PAUL A. OYER Financial Vice President and Treasurer ERNEST T. SHIRAKI Controller MOLLY M. EGGED Secretary MARVIN A. HAWTHORNE Assistant Treasurer
33 EX-27.1 13 HEI 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, 1995 and consolidated statement of income for the year ended December 31, 1995 and is qualified in its entirety by referencce to such financial statements. 0000354707 HAWAIIAN ELECTRIC INDUSTRIES, INC. 1,000 YEAR DEC-31-1995 JAN-01-1995 DEC-31-1995 130,833 1,479,552 145,521 3,016 35,258 0 2,623,742 815,547 5,603,745 0 758,463 41,750 48,293 585,387 144,216 5,603,745 0 1,295,924 0 1,105,196 (8,429) 3,064 62,860 133,233 55,740 77,493 0 0 0 77,493 2.66 2.66
EX-27.2 14 HECO FINANCIAL DATA SCHEDULE
UT This schedule contains summary fiancial information extracted from Hawaiian Electric Company, Inc. and subsidiaries' consolidated balance sheet as of December 31, 1995 and consolidated statement of income and consolidated statement of cash flows for the year ended December 31, 1995 and is qualified in its entirety by reference to such financial statements. 0000046207 HAWAIIAN ELECTRIC CO., INC. 1,000 YEAR DEC-31-1995 JAN-01-1995 DEC-31-1995 PER-BOOK 1,720,235 0 153,072 10,022 132,954 2,016,283 82,031 271,449 343,425 696,905 39,955 48,293 487,306 7,000 0 131,753 29,903 1,795 0 0 573,373 2,016,283 981,990 50,719 828,549 879,268 102,722 16,325 119,047 42,024 77,023 4,126 72,897 38,007 35,497 138,236 0 0
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