================================================================================
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C.D. C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2000March 31, 2001
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
Exact Name of Registrant as Commission I.R.S. Employer
Specified in Its Charter File Number Identification No.
- --------------------------------------------------------------- ----------- ------------------
HAWAIIAN ELECTRIC INDUSTRIES, INC. 1-8503 99-0208097
and Principal Subsidiary
HAWAIIAN ELECTRIC COMPANY, INC. 1-4955 99-0040500
State of Hawaii
- --------------------------------------------------------------------------------
(State or other jurisdiction of incorporation or organization)
900 Richards Street, Honolulu, Hawaii 96813
- --------------------------------------------------------------------------------
(Address of principal executive offices and zip code)
Hawaiian Electric Industries, Inc. ----- (808) 543-5662
Hawaiian Electric Company, Inc. -------- (808) 543-7771
- --------------------------------------------------------------------------------
(Registrant's telephone number, including area code)
None
- --------------------------------------------------------------------------------
(Former name, former address and former fiscal year,
if changed since last report)
================================================================================
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
_____----- -----
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Class of Common Stock Outstanding November 3, 2000
- --------------------------------------------------------------------------------------------------------------
Hawaiian Electric Industries, Inc. (Without Par Value)........... 32,831,065 Shares
Hawaiian Electric Company, Inc. ($6 2/3 Par Value)............... 12,805,843 Shares (not publicly traded)
==============================================================================================================
Class of Common Stock Outstanding May 3, 2001
- --------------------------------------------------------------------------------
Hawaiian Electric Industries, Inc. (Without Par Value)... 32,449,048 Shares
Hawaiian Electric Company, Inc. ($6 2/3 Par Value)....... 12,805,843 Shares
(not publicly traded)
================================================================================
Hawaiian Electric Industries, Inc. and subsidiaries
Hawaiian Electric Company, Inc. and subsidiaries
Form 10-Q--Quarter ended September 30, 2000March 31, 2001
INDEX
Page No.
Glossary of terms...............................................................terms .................................................................. ii
Forward-looking statements......................................................statements ......................................................... v
PART I. FINANCIAL INFORMATION
Item 1. Financial statements
Hawaiian Electric Industries, Inc. and subsidiaries
---------------------------------------------------
Consolidated balance sheets (unaudited) -
September 30, 2000March 31, 2001 and December 31, 1999..........................2000.................................. 1
Consolidated statements of income (unaudited) -
three and nine months ended September 30, 2000March 31, 2001 and 1999...........2000............................ 2
Consolidated statements of retained earningschanges in stockholders' equity (unaudited) -
three and nine months ended September 30, 2000March 31, 2001 and 1999...........2000............................ 3
Consolidated statements of cash flows (unaudited) -
ninethree months ended September 30, 2000March 31, 2001 and 1999.....................2000............................ 4
Notes to consolidated financial statements (unaudited)................................ 5
Hawaiian Electric Company, Inc. and subsidiaries
------------------------------------------------
Consolidated balance sheets (unaudited) -
September 30, 2000March 31, 2001 and December 31, 1999..........................2000.................................. 11
Consolidated statements of income (unaudited) -
three and nine months ended September 30, 2000March 31, 2001 and 1999...........2000............................ 12
Consolidated statements of retained earnings (unaudited) -
three and nine months ended September 30, 2000March 31, 2001 and 1999...........2000............................ 12
Consolidated statements of cash flows (unaudited) -
ninethree months ended September 30, 2000March 31, 2001 and 1999.....................2000............................ 13
Notes to consolidated financial statements (unaudited)................................ 14
Item 2. Management's discussion and analysis of financial condition
and results of operations......................................... 36operations............................................. 26
Item 3. Quantitative and qualitative disclosures about market risk.......... 51risk.............. 35
PART II. OTHER INFORMATION
Item 1. Legal proceedings................................................... 52proceedings..................................................... 36
Item 2. Changes in securities and use of proceeds............................. 36
Item 4. Submission of matters to a vote of security holders................... 37
Item 5. Other information................................................... 52information..................................................... 37
Item 6. Exhibits and reports on Form 8-K.................................... 54
Signatures...................................................................... 558-K...................................... 50
Signatures.......................................................................... 51
i
Hawaiian Electric Industries, Inc. and subsidiaries
Hawaiian Electric Company, Inc. and subsidiaries
Form 10-Q--Quarter ended September 30, 2000March 31, 2001
GLOSSARY OF TERMS
Terms Definitions
- ----- ------------------ ---------------
AFUDC Allowance for funds used during construction
APB Accounting Principles Board
ASB American Savings Bank, F.S.B., a wholly owned subsidiary of HEI Diversified, Inc.
and parent company of American Savings Investment Services Corp. (and its
subsidiary since March 15, 2001, Bishop Insurance Agency of Hawaii, Inc.), ASB
Service Corporation, AdCommunications, Inc., American Savings Mortgage Co., Inc.
and ASB Realty Corporation
Baotou Steel Baotou Iron & Steel (Group) Co., Ltd.
ASBR ASB Realty Corporation
BLNR Board of Land and Natural Resources of the State of Hawaii
CDUP Conservation District Use Permit
CEPALCO Cagayan Electric Power & Light Co., Inc.
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., HECO Capital Trust I, HECO
Capital Trust II, HEI Diversified, Inc., American Savings Bank, F.S.B. and its
subsidiaries, HEI Power Corp. and its subsidiaries, Pacific Energy Conservation
Services, Inc., HEI District Cooling, Inc., ProVision Technologies, Inc., HEI
Properties, Inc., HEI Leasing, Inc., Hycap Management, Inc., Hawaiian Electric
Industries Capital Trust I, Hawaiian Electric Industries Capital Trust II, Hawaiian
Electric Industries Capital Trust III, HEI Preferred Funding, LP, The Old Oahu Tug
Service, Inc. (formerly Hawaiian Tug & Barge Corp.) and Malama Pacific Corp. and
its subsidiaries
Consumer Division of Consumer Advocacy, Department of Commerce and Advocate Consumer Affairs of the
Advocate State of Hawaii
D&O Decision and order
DHHL Department of Hawaiian Home Lands of the State of Hawaii
DLNR Department of Land and Natural Resources of the State of Hawaii
DOH Department of Health of the State of Hawaii
DTCC Dual-train combined-cycle
EAPRC East Asia Power Resources Corporation
Enserch Enserch Development Corporation
EPAEAB Environmental Protection Agency - federal
EPHE EPHE Philippines Energy Company, Inc.Appeals Board
ii
GLOSSARY OF TERMS, continued
Terms Definitions
- ----- ------------------ ---------------
EAPRC East Asia Power Resources Corporation
Enserch Enserch Development Corporation
EPA Environmental Protection Agency - federal
EPHE EPHE Philippines Energy Company, Inc.
FASB Financial Accounting Standards Board
FDIC Federal Deposit Insurance Corporation
federal U.S. Government
FHLB Federal Home Loan Bank
GAAP Accounting principles generally accepted in the United States of America
GPA Guam Power Authority
Hamakua Hamakua Energy Partners, L.P., formerly known as Encogen Hawaii, L.P.
Partners
L.P.HAR Hawaii Administrative Rules
HCPC Hilo Coast Power Company
HECO Hawaiian Electric Company, Inc., a wholly ownedan electric utility subsidiary of Hawaiian Electric
Industries, Inc. and parent company of Maui Electric Company, Limited, Hawaii
Electric Light Company, Inc., HECO Capital Trust I and HECO Capital Trust II
HEI Hawaiian Electric Industries, Inc., direct parent company of Hawaiian Electric
Company, Inc., HEI Diversified, Inc., HEI Power Corp., Pacific Energy Conservation
Services, Inc., HEI District Cooling, Inc., ProVision Technologies, Inc., HEI
Properties, Inc., HEI Leasing, Inc., Hycap Management, Inc., Hawaiian Electric
Industries Capital Trust I, Hawaiian Electric Industries Capital Trust II, Hawaiian
Electric Industries Capital Trust III, The Old Oahu Tug Service, Inc. (formerly
Hawaiian Tug & Barge Corp.) and Malama Pacific 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.
HEIII HEI Investments, Inc. (formerly HEI Investment Corp.), a subsidiary of HEI Power
Corp.
HEIPC HEI Power Corp., a wholly owned subsidiary of Hawaiian Electric Industries, Inc.,
and the parent company of several subsidiaries
HEIPC Group HEI Power Corp. and its subsidiaries
Group
iii
GLOSSARY OF TERMS, continued
Terms Definitions
- ------- ---------------
HELCO Hawaii Electric Light Company, Inc., a wholly owned electric utility subsidiary of
Hawaiian Electric Company, Inc.
iii
GLOSSARY OF TERMS, continued
Terms Definitions
- ----- -----------
HPG HEI Power Corp. Guam, a wholly owned subsidiary of HEI Power Corp.
HRS Hawaii Revised Statutes
HTB Hawaiian Tug & Barge Corp. On November 10, 1999, HTB sold substantially all of its
operating assets and the stock of Young Brothers, Limited, and changed its name to
The Old Oahu Tug Service, Inc.
IMPC Inner Mongolia Power Company
IPP Independent power producer
KCP Kawaihae Cogeneration Partners
KDC Keahole Defense Coalition
KWH Kilowatthour
MECO Maui Electric Company, Limited, a wholly owned electric utility subsidiary of
Hawaiian Electric Company, Inc.
MPC Malama Pacific Corp., a wholly owned subsidiary of Hawaiian
Electric Industries, Inc. and parent company of several real
estate subsidiaries. On September 14, 1998, the HEI Board of
Directors adopted a plan to exit the residential real estate
development business engaged in by Malama Pacific Corp. and
its subsidiaries.
MW Megawatt
NOV Notice of Violation
OTS Office of Thrift Supervision, Department of Treasury
PBR Performance-based rate-making
PSD permit Prevention of Significant Deterioration/Covered Source permit
PRPs Potentially responsible parties
PSC Public Service Company
PUC Public Utilities Commission of the State of Hawaii
ROACE Return on average common equity
SEC Securities and Exchange Commission
iv
GLOSSARY OF TERMS, continued
Terms Definitions
- ------- ---------------
SFAS Statement of Financial Accounting Standards
SOP Statement of Position
TOOTS The Old Oahu Tug Service, Inc. (formerly Hawaiian Tug & Barge Corp. (HTB)), a wholly
owned subsidiary of Hawaiian Electric Industries, Inc. On November 10, 1999,
HTB sold YBYoung Brothers, Limited and substantially all of HTB's operating assets.assets and
changed its name
YB Young Brothers, Limited, which was sold on November 10, 1999, was formerly a wholly
owned subsidiary of Hawaiian Tug & Barge Corp.which was sold on November 10, 1999Corp.
iv
Forward-looking statements
This report and other presentations made by Hawaiian Electric Industries, Inc.
(HEI) and its subsidiaries containscontain "forward-looking statements," which include
statements that are predictive in nature, depend upon or refer to future events
or conditions, and/or include words such as "expects", "anticipates", "intends",
"plans", "believes", "predicts", "estimates" or similar expressions. In
addition, any statements concerning future financial performance (including
future revenues, earnings/losses or growth rates), ongoing business strategies
or prospects and possible future actions, which may be provided by management,
are also forward-
lookingforward-looking statements. Forward-looking statements are based on
current expectations and projections about future events and are subject to
risks, uncertainties and assumptions about HEI and its subsidiaries, the
performance of the industries in which they do business and economic and market
factors, among other things. These statements are not guaranties of future
performance. Such risks, uncertainties and other important factors could cause
actual results to differ materially from those in the forward-looking statements
and include, but are not limited to, the following: . the effect of international,
national and local economic conditions, including the condition of the Hawaii
tourist and construction industries and the Hawaii housing market; . the effects
of weather and natural disasters; . product demand and market acceptance risks;
.
increasing competition in the electric utility, banking and international power
industries; . capacity and supply constraints or difficulties; . fuel oil price
changes;
.changes and the continued availability of the electric utilities' energy cost
adjustment clauses; new technological developments;
. federal, state and
international governmental and regulatory actions, including changes in laws,
rules and regulations applicable to HEI and its subsidiaries, decisions in rate
cases and other Public Utilities Commission of the State of Hawaii (PUC)
proceedings and on permitting issues, required corrective actions and changes in
taxation; . the results of financing efforts;
. the timing and extent of changes in
interest rates; .the risks inherent in changes in the value of and market for
securities available for sale; the timing and extent of changes in foreign
currency exchange rates, particularly in the Philippines and China;
. the convertibility and availability of foreign
currency, particularly in the Philippines and China;
. the risks inherent in
implementing hedging strategies, including the availability and pricing of
forward contracts; . political and business risks inherent in doing business in
developing countries; . the risks associated with the installationultimate outcome of new computer systems;
.tax positions taken; the risk that
ASB Realty Corporation fails to qualify as a real estate investment trust for
federal and state income tax purposes, in which case it would be subject to
regular corporate income taxation; and
. other risks or uncertainties described
elsewhere in this report and in other periodic reports previously and
subsequently filed by HEI and/or Hawaiian Electric Company, Inc. (HECO) with the
Securities and Exchange Commission (SEC). Forward-looking statements speak only
as of the date of this report.the report, presentation or filing in which they are made.
v
PART I - FINANCIAL INFORMATION
- --------------------------------------------------------------------------------
Item 1. Financial statements
- -----------------------------
Hawaiian Electric Industries, Inc. and subsidiaries
Consolidated balance sheets (unaudited)
September 30,March 31, December 31,
(in thousands) 2001 2000
1999
- -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
Assets
- ------
Cash and equivalents................................................................equivalents........................................................ $ 179,653197,197 $ 199,906215,034
Accounts receivable and unbilled revenues, net...................................... 174,551 154,605net.............................. 163,014 191,501
Available-for-sale investment securities............................................ 107,955 -and mortgage/asset-backed securities.......... 2,244,895 164,668
Held-to-maturity investment and mortgage/asset-backed securities.................... 2,193,189 2,159,945securities............ 80,385 2,105,837
Loans receivable, net............................................................... 3,222,625 3,211,878net....................................................... 3,213,204 3,211,325
Property, plant and equipment, net of accumulated
depreciation of $1,208,339$1,256,655 and $1,129,078........................................ 2,078,306 2,066,195$1,230,691............................... 2,089,446 2,091,345
Regulatory assets................................................................... 116,299 114,759
Other............................................................................... 313,755 276,997assets........................................................... 115,659 116,623
Other....................................................................... 302,248 273,861
Goodwill and other intangibles...................................................... 127,227 106,741
---------- ----------
$8,513,560 $8,291,026
========== ==========intangibles.............................................. 98,503 99,128
- ----------------------------------------------------------------------------------------------------------------
$8,504,551 $8,469,322
================================================================================================================
Liabilities and stockholders' equity
- ------------------------------------
Liabilities
Accounts payable....................................................................payable............................................................ $ 129,687126,414 $ 117,447127,565
Deposit liabilities................................................................. 3,558,285 3,491,655liabilities......................................................... 3,637,134 3,584,646
Short-term borrowings............................................................... 93,483 151,833borrowings....................................................... 158,468 104,398
Securities sold under agreements to repurchase...................................... 584,652 661,215repurchase.............................. 609,707 596,504
Advances from Federal Home Loan Bank................................................ 1,308,612 1,189,081Bank........................................ 1,204,252 1,249,252
Long-term debt...................................................................... 1,080,324 977,529debt.............................................................. 1,063,376 1,088,731
Deferred income taxes............................................................... 186,000 181,277taxes....................................................... 139,584 147,513
Contributions in aid of construction................................................ 208,316 206,302
Other............................................................................... 256,073 231,854
---------- ----------
7,405,432 7,208,193
---------- ----------construction........................................ 210,624 211,518
Other....................................................................... 274,576 284,891
- ----------------------------------------------------------------------------------------------------------------
7,424,135 7,395,018
- ----------------------------------------------------------------------------------------------------------------
HEI- and HECO-obligated preferred securities of trust subsidiaries
directly or indirectly holding solely HEI and HEI-guaranteed
and HECO and HECO-guaranteed subordinated debentures............................debentures.................... 200,000 200,000
Preferred stock of subsidiaries - not subject to mandatory redemption...............redemption....... 34,406 34,406
Minority interests.................................................................. 851 841
---------- ----------
235,257 235,247
---------- ----------interests.......................................................... 815 839
- ----------------------------------------------------------------------------------------------------------------
235,221 235,245
- ----------------------------------------------------------------------------------------------------------------
Stockholders' equity
Preferred stock, no par value, authorized 10,000 shares; issued: none..............none...... - -
Common stock, no par value, authorized 100,000 shares; issued
and outstanding: 32,79233,370 shares and 32,213 shares................................ 680,814 665,33532,991 shares........................ 705,121 691,925
Retained earnings................................................................... 192,057 182,251
---------- ----------
872,871 847,586
---------- ----------
$8,513,560 $8,291,026
========== ==========
earnings........................................................... 154,530 147,324
Accumulated other comprehensive loss........................................ (14,456) (190)
- ----------------------------------------------------------------------------------------------------------------
845,195 839,059
- ----------------------------------------------------------------------------------------------------------------
$8,504,551 $8,469,322
================================================================================================================
See accompanying "Notes to consolidated financial statements."
1
Hawaiian Electric Industries, Inc. and subsidiaries
Consolidated statements of income (unaudited)
Three months ended Nine months endedMarch 31 2001 2000
- ----------------------------------------------------------------------------------------------------------------
(in thousands, except per share amounts and September 30, September 30,
----------------------- ------------------------------
ratio of earnings to fixed charges)
2000 1999 2000 1999
- --------------------------------------------------------------------------------------------------------------------------------
Revenues
Electric utility.................................................. $ 337,324 $ 277,283 $ 934,574 $ 767,346utility.................................................................. $318,423 $289,405
Savings bank...................................................... 114,300 102,624 333,266 304,663bank...................................................................... 115,754 110,267
International power............................................... (5,719) 933 (8,004) 3,257
Other............................................................. (38) 11,610 1,042 39,119
--------- --------- ---------- ----------
445,867 392,450 1,260,878 1,114,385
--------- --------- ---------- ----------power............................................................... 1,969 1,665
Other............................................................................. (1,279) 538
- ----------------------------------------------------------------------------------------------------------------
434,867 401,875
- ----------------------------------------------------------------------------------------------------------------
Expenses
Electric utility.................................................. 284,031 230,811 778,036 635,637utility.................................................................. 270,413 237,775
Savings bank...................................................... 97,321 87,705 280,782 258,824bank...................................................................... 95,605 91,077
International power............................................... 3,038 2,315 9,635 6,751
Other............................................................. 967 15,068 6,587 43,880
--------- --------- ---------- ----------
385,357 335,899 1,075,040 945,092
--------- --------- ---------- ----------power............................................................... 773 2,115
Other............................................................................. 2,359 2,706
- ----------------------------------------------------------------------------------------------------------------
369,150 333,673
- ----------------------------------------------------------------------------------------------------------------
Operating income (loss)
Electric utility.................................................. 53,293 46,472 156,538 131,709utility.................................................................. 48,010 51,630
Savings bank...................................................... 16,979 14,919 52,484 45,839bank...................................................................... 20,149 19,190
International power............................................... (8,757) (1,382) (17,639) (3,494)
Other............................................................. (1,005) (3,458) (5,545) (4,761)
--------- --------- ---------- ----------
60,510 56,551 185,838 169,293
--------- --------- ---------- ----------power............................................................... 1,196 (450)
Other............................................................................. (3,638) (2,168)
- ----------------------------------------------------------------------------------------------------------------
65,717 68,202
- ----------------------------------------------------------------------------------------------------------------
Interest expense--other than savings bank......................... (19,261) (17,600) (58,489) (54,488)bank......................................... (20,005) (19,072)
Allowance for borrowed funds used during construction............. 807 716 2,220 1,955construction............................. 676 691
Preferred stock dividends of subsidiaries......................... (501)subsidiaries......................................... (502) (498) (1,505) (1,624)
Preferred securities distributions of trust subsidiaries.......... (4,008)subsidiaries.......................... (4,009) (12,026) (12,016)(4,009)
Allowance for equity funds used during construction............... 1,505 1,176 4,102 3,202
--------- --------- ---------- ----------construction............................... 1,265 1,269
- ----------------------------------------------------------------------------------------------------------------
Income before income taxes........................................ 39,052 36,336 120,140 106,322taxes........................................................ 43,142 46,583
Income taxes...................................................... 17,003 14,704 50,019 41,180
--------- --------- ---------- ----------taxes...................................................................... 15,397 17,607
- ----------------------------------------------------------------------------------------------------------------
Net income........................................................income........................................................................ $ 22,04927,745 $ 21,632 $ 70,121 $ 65,142
========= ========= ========== ==========28,976
================================================================================================================
Basic earnings per common share...................................share................................................... $ 0.680.84 $ 0.67 $ 2.16 $ 2.02
========= ========= ========== ==========0.90
================================================================================================================
Diluted earnings per common share.................................share................................................. $ 0.670.83 $ 0.67 $ 2.15 $ 2.02
========= ========= ========== ==========0.90
================================================================================================================
Dividends per common share........................................share........................................................ $ 0.62 $ 0.62
$ 1.86 $ 1.86
========= ========= ========== ==========================================================================================================================
Weighted-average number of common shares outstanding...................................... 32,642 32,203 32,438 32,180outstanding.............................. 33,159 32,266
Dilutive effect of stock options and dividend equivalents.... 135 91 132 97
--------- --------- ---------- ----------equivalents.................... 153 106
- ----------------------------------------------------------------------------------------------------------------
Adjusted weighted-average shares.................................. 32,777 32,294 32,570 32,277
========= ========= ========== ==========shares.................................................. 33,312 32,372
================================================================================================================
Ratio of earnings to fixed charges (SEC method)
Excluding interest on ASB deposits........................... 1.71deposits........................................... 1.78 ========== ==========1.86
================================================================================================================
Including interest on ASB deposits........................... 1.47 1.46
========== ==========deposits........................................... 1.49 1.57
================================================================================================================
See accompanying "Notes to consolidated financial statements."
2
Hawaiian Electric Industries, Inc. and subsidiaries
Consolidated statements of retained earningschanges in stockholders' equity (unaudited)
Three months ended Nine months ended
September 30, September 30,
-------------------------- --------------------------Accumulated
Common stock other
------------------------------- Retained comprehensive
(in thousands) 2000 1999 2000 1999Shares Amount earnings income (loss) Total
- ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
Retained earnings, beginning
Balance, December 31, 2000..................... 32,991 $691,925 $147,324 $ (190) $839,059
Comprehensive income:
Net income.................................. - - 27,745 - 27,745
Cash flow hedge:
Cumulative effect of period.....the adoption of
SFAS No. 133, net of tax benefits
of $1,031............................. - - - (1,619) (1,619)
Derivative losses, net of tax benefits
of $757............................... - - - (1,189) (1,189)
Unrealized losses on securities:
Cumulative effect of the adoption of
SFAS No. 133, net of taxes of $571.... - - - 1,060 1,060
Unrealized losses arising during
the period, net of tax benefits
of $6,716............................. - - - (12,470) (12,470)
Minimum pension liability adjustment,
net of tax benefits of $30............... - - - (48) (48)
- --------------------------------------------------------------------------------------------------------------------------------
Comprehensive income (loss).................... - - 27,745 (14,266) 13,479
- --------------------------------------------------------------------------------------------------------------------------------
Issuance of common stock....................... 379 13,196 - - 13,196
Cash dividends ($0.62 per share)............... - - (20,539) - (20,539)
- --------------------------------------------------------------------------------------------------------------------------------
Balance, March 31, 2001........................ 33,370 $705,121 $154,530 $(14,456) $845,195
================================================================================================================================
Balance, December 31, 1999..................... 32,213 $665,614 $182,251 $ 190,224(279) $847,586
Net income..................................... - - 28,976 - 28,976
Issuance of common stock....................... 102 2,622 - - 2,622
Cash dividends ($0.62 per share)............... - - (20,025) - (20,025)
- --------------------------------------------------------------------------------------------------------------------------------
Balance, March 31, 2000........................ 32,315 $668,236 $191,202 $ 168,858 $ 182,251 $ 165,252
Net income................................. 22,049 21,632 70,121 65,142
Common stock dividends..................... (20,216) (19,972) (60,315) (59,876)
----------- ----------- ----------- -----------
Retained earnings, end of period........... $ 192,057 $ 170,518 $ 192,057 $ 170,518
=========== =========== =========== ===========(279) $859,159
================================================================================================================================
Net income approximates comprehensive income for the three months ended
March 31, 2000.
See accompanying "Notes to consolidated financial statements."
3
Hawaiian Electric Industries, Inc. and subsidiaries
Consolidated statements of cash flows (unaudited)
NineThree months ended September 30,
------------------------------March 31 2001 2000
- ----------------------------------------------------------------------------------------------------------------
(in thousands) 2000 1999
- -------------------------------------------------------------------------------------------------------------------------------
Cash flows from operating activities
Net income...................................................................................income.......................................................................... $ 70,12127,745 $ 65,14228,976
Adjustments to reconcile net income to net cash provided by operating activities
Depreciation of property, plant and equipment.......................................... 81,657 81,871equipment................................. 27,289 27,143
Other amortization..................................................................... 7,493 11,345amortization............................................................ 3,862 1,476
Provision for loan losses.............................................................. 9,400 10,848losses..................................................... 3,000 3,000
Deferred income taxes.................................................................. 4,726 (4,175)taxes......................................................... 786 (300)
Allowance for equity funds used during construction.................................... (4,102) (3,202)construction........................... (1,265) (1,269)
Changes in assets and liabilities
Decrease (increase) in accounts receivable and unbilled revenues, net............ (19,946) 914net.............. 28,487 815
Increase (decrease) in accounts payable..................................................... 12,240 15,145payable................................. (1,151) 388
Changes in other assets and liabilities.......................................... 67,459 1,711
--------- ---------liabilities................................. (33,209) 2,153
- ----------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities.................................................... 229,048 179,599
--------- ---------activities........................................... 55,544 62,382
- ----------------------------------------------------------------------------------------------------------------
Cash flows from investing activities
Principal repayments on available-for-sale investment securities.................... 890 -
Proceeds from sale of investment securities......................................... 12,157 -
Available-for-sale mortgage/asset-backed securities purchased....................... (189,706) -
Principal repayments on available-for-sale mortgage/asset-backed securities......... 82,132 -
Proceeds from sale of mortgage/asset-backed securities.............................. 23,713 -
Held-to-maturity mortgage/asset-backed securities purchased.................................. (320,102) (623,942)purchased......................... - (151,425)
Principal repayments on held-to-maturity mortgage/asset-backed securities.................... 191,873 470,063
Principal repayments on held-to-maturity investment securities............................... 1,455securities........... - Held-to-maturity investment securities purchased............................................. (56,500) (54,782)
Principal repayments on held-to-maturity investment securities............................... 43,000 43,00058,434
Loans receivable originated and purchased.................................................... (417,302) (528,777)purchased........................................... (177,139) (110,360)
Principal repayments on loans receivable..................................................... 352,050 435,725receivable............................................ 135,017 103,611
Proceeds from sale of loans......................................................... 35,124 2,921
Capital expenditures......................................................................... (92,887) (88,444)expenditures................................................................ (26,226) (25,080)
Acquisition of a Philippines investment......................................................investment............................................... - (87,500)
Other............................................................................... 3,895 4,846
- Other........................................................................................ 46,940 19,585
--------- -------------------------------------------------------------------------------------------------------------------------
Net cash used in investing activities........................................................ (338,973) (327,572)
--------- ---------activities............................................... (100,143) (204,553)
- ----------------------------------------------------------------------------------------------------------------
Cash flows from financing activities
Net increase (decrease) in deposit liabilities............................................... 66,630 (306,467)liabilities................................................. 52,488 66,369
Net decreaseincrease in short-term borrowings with original maturities of three months or less....... (58,419) (58,237)57,066 81,026
less...............................................................................
Repayment of other short-term borrowings............................................ (3,000) -
Net increase in retail repurchase agreements................................................. 8,560 167,765agreements........................................ 35 2,280
Proceeds from securities sold under agreements to repurchase................................. 460,181 290,000
Repurchaserepurchase........................ 296,132 218,728
Repayments of securities sold under agreements to repurchase................................. (550,710) (378,612)repurchase........................ (283,232) (240,085)
Proceeds from advances from Federal Home Loan Bank........................................... 470,031 684,100Bank.................................. 7,000 218,531
Principal payments on advances from Federal Home Loan Bank................................... (350,500) (407,600)Bank.......................... (52,000) (180,500)
Proceeds from issuance of long-term debt..................................................... 113,150 167,452debt............................................ 9,595 6,304
Repayment of long-term debt.................................................................. (10,500) (88,500)
Redemptiondebt......................................................... (35,000) -
Preferred securities distributions of electric utility subsidiaries' preferred stock................................. - (47,080)trust subsidiaries............................ (4,009) (4,009)
Net proceeds from issuance of common stock................................................... 10,841 3,432stock.......................................... 8,936 2,590
Common stock dividends....................................................................... (52,278) (59,876)
Preferred securities distributions of trust subsidiaries..................................... (12,026) (12,016)
Other........................................................................................ (5,288) (9,212)
--------- ---------dividends.............................................................. (16,517) (20,025)
Other............................................................................... (10,732) (6,361)
- ----------------------------------------------------------------------------------------------------------------
Net cash provided by (used in) financing activities.......................................... 89,672 (54,851)
--------- ---------activities........................................... 26,762 144,848
- ----------------------------------------------------------------------------------------------------------------
Net decreaseincrease (decrease) in cash and equivalents......................................................... (20,253) (202,824)equivalents..................................... (17,837) 2,677
Cash and equivalents, beginning of period....................................................period........................................... 215,034 199,906
412,254
--------- ---------- ----------------------------------------------------------------------------------------------------------------
Cash and equivalents, end of period..........................................................period................................................. $ 179,653197,197 $ 209,430
========= =========202,583
=================================================================================================================
See accompanying "Notes to consolidated financial statements."
4
Hawaiian Electric Industries, Inc. and subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2000 and 1999
(Unaudited)
- --------------------------------------------------------------------------------
(1) Basis of presentation
- ---------------------------------------------------
The accompanying unaudited consolidated financial statements have been prepared
in conformity with accounting principles generally accepted in the United States
of America (GAAP) for interim financial information and with the instructions to
SEC Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include
all of the information and footnotes required by GAAP for complete financial
statements. 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. The
accompanying unaudited consolidated financial statements should be read in
conjunction with the consolidated financial statements and the notes thereto
incorporated by reference in HEI's Annual Report on SEC Form 10-K for the year
ended December 31, 1999 and the consolidated financial statements and the notes
thereto in HEI's Quarterly Reports on SEC Form 10-Q for the quarters ended March
31, 2000 and June 30, 2000.
In the opinion of HEI's management, the accompanying unaudited consolidated
financial statements contain all material adjustments required by GAAP to
present fairly the Company's financial position as of September 30, 2000March 31, 2001 and
December 31, 1999,2000, and the results of its operations for the three and nine
months ended September 30, 2000 and 1999, and its cash flows for the
ninethree months ended September 30, 2000March 31, 2001 and 1999.2000. All such adjustments are of a normal
recurring nature, unless otherwise disclosed in this Form 10-Q or other
referenced material. Results of operations for interim periods are not
necessarily indicative of results for the full year.
CertainWhen required, certain reclassifications have beenare made to prior periods' consolidated
financial statements to conform to the 20002001 presentation.
5
(2) Segment financial information
- ----------------------------------
Segment financial information was as follows:
Electric Savings International
($ in(in thousands) utility bank Powerpower Other Total
- ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
Three months ended September 30,March 31, 2001
Revenues from external customers..... $ 318,421 $ 115,754 $ 1,965 $ (1,273) $ 434,867
Intersegment revenues................ 2 - 4 (6) -
- ---------------------------------------------------------------------------------------------------------------------
Revenues......................... 318,423 115,754 1,969 (1,279) 434,867
=====================================================================================================================
Income (loss) before income taxes.... 35,001 18,737 775** (11,371) 43,142
Income taxes (benefit)............... 13,576 6,862 341 (5,382) 15,397
- ---------------------------------------------------------------------------------------------------------------------
Net income (loss)................ 21,425 11,875 434** (5,989) 27,745
=====================================================================================================================
Assets*.............................. 2,366,829 6,010,289 100,552 26,881 8,504,551
=====================================================================================================================
Three months ended March 31, 2000
Revenues from external customers*....... 337,312 114,300 (5,779) 34 445,867customers..... $ 289,391 $ 110,263 $ 1,654 $ 567 $ 401,875
Intersegment revenues................... 12revenues................ 14 4 11 (29) -
60 (72) - ----------- ------------ ------------- ----------- -------------
Revenues............................ 337,324 114,300 (5,719) (38) 445,867
=========== ============ ============= =========== =============---------------------------------------------------------------------------------------------------------------------
Revenues......................... 289,405 110,267 1,665 538 401,875
=====================================================================================================================
Income (loss) before income taxes....... 40,955 15,568 (9,184) (8,287) 39,052taxes.... 38,902 17,783 (659) (9,443) 46,583
Income taxes (benefit).................. 15,935 5,753 343 (5,028) 17,003
----------- ------------ ------------- ----------- -------------............... 15,177 6,562 262 (4,394) 17,607
- ---------------------------------------------------------------------------------------------------------------------
Net income (loss)................... 25,020 9,815 (9,527) (3,259) 22,049
=========== ============ ============= =========== =============
Nine months ended September 30, 2000
Revenues from external customers........ 934,545 333,262 (8,067) 1,138 1,260,878
Intersegment revenues................... 29 4 63 (96) -
----------- ------------ ------------- ----------- -------------
Revenues............................ 934,574 333,266 (8,004) 1,042 1,260,878
=========== ============ ============= =========== =============
Income (loss) before income taxes....... 119,023 48,257 (18,550) (28,590) 120,140
Income taxes (benefit).................. 46,264 17,825 692 (14,762) 50,019
----------- ------------ ------------- ----------- -------------
Net income (loss)................... 72,759 30,432 (19,242) (13,828) 70,121
=========== ============ ============= =========== =============................ 23,725 11,221 (921) (5,049) 28,976
=====================================================================================================================
Assets**................................ 2,331,307 5,981,326 173,164 27,763 8,513,560
=========== ============ ============= =========== =============
Three months ended September 30, 1999
Revenues from external customers........ 277,274 102,616 933 11,627 392,450
Intersegment revenues................... 9 8 - (17) -
----------- ------------ ------------- ----------- -------------
Revenues............................ 277,283 102,624 933 11,610 392,450
=========== ============ ============= =========== =============
Income (loss) before income taxes....... 33,704 13,569 (1,514) (9,423) 36,336
Income taxes (benefit).................. 13,389 5,070 (80) (3,675) 14,704
----------- ------------ ------------- ----------- -------------
Net income (loss)................... 20,315 8,499 (1,434) (5,748) 21,632
=========== ============ ============= =========== =============
Nine months ended September 30, 1999
Revenues from external customers........ 767,337 304,640 3,257 39,151 1,114,385
Intersegment revenues................... 9 23 - (32) -
----------- ------------ ------------- ----------- -------------
Revenues............................ 767,346 304,663 3,257 39,119 1,114,385
=========== ============ ============= =========== =============
Income (loss) before income taxes....... 92,740 41,789 (3,808) (24,399) 106,322
Income taxes (benefit).................. 36,120 15,708 (148) (10,500) 41,180
----------- ------------ ------------- ----------- -------------
Net income (loss)................... 56,620 26,081 (3,660) (13,899) 65,142
=========== ============ ============= =========== =============
Assets**................................ 2,292,350 5,753,432 47,712 148,154 8,241,648
=========== ============ ============= =========== =============.............................. 2,290,877 5,943,462 192,196 31,202 8,457,737
=====================================================================================================================
* "International Power" includesAt March 31.
** Includes the equity in net lossesreversal of EPHE
Philippines Energy Company, Inc.
** At September 30.$1.5 million of a guaranty obligation, see note (5).
Revenues attributed to foreign countries for the periods identified above were
not significant.
65
(3) Electric utility subsidiary
- --------------------------------
For Hawaiian Electric Company, Inc.'sHECO's consolidated financial information, including its commitments and
contingencies, see pages 11 through 35.26.
(4) Savings bank subsidiary
- ----------------------------
Selected financial information
American Savings Bank, F.S.B. and subsidiaries
Consolidated balance sheet data
September 30,March 31, December 31,
(in thousands) 2001 2000
1999
- -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
Assets
Cash and equivalents..............................................equivalents.................................................... $ 171,101192,319 $ 192,807207,785
Available-for-sale investment securities..........................securities................................ 107,208 107,955
Available-for-sale mortgage/asset-backed securities..................... 1,791,531 56,713
Available-for-sale mortgage/asset-backed securities
pledged for repurchase agreements.................................. 346,156 -
Held-to-maturity investment securities............................ 90,393 186,799securities.................................. 80,385 91,723
Held-to-maturity mortgage/asset-backed securities................. 2,102,796 1,973,146securities....................... - 1,697,343
Held-to-maturity mortgage/asset-backed securities
pledged for repurchase agreements.................................. - 316,771
Loans receivable, net............................................. 3,222,625 3,211,878
Other............................................................. 185,574 176,836net................................................... 3,213,204 3,211,325
Other................................................................... 180,983 180,572
Goodwill and other intangibles.................................... 100,882 106,741
---------- ----------
$5,981,326 $5,848,207
========== ==========intangibles.......................................... 98,503 99,128
- ------------------------------------------------------------------------------------------------------
$6,010,289 $5,969,315
======================================================================================================
Liabilities and equity
Deposit liabilities............................................... $3,558,285 $3,491,655liabilities..................................................... $3,637,134 $3,584,646
Securities sold under agreements to repurchase.................... 584,652 661,215repurchase.......................... 609,707 596,504
Advances from Federal Home Loan Bank.............................. 1,308,612 1,189,081
Other............................................................. 77,538 70,239
---------- ----------
5,529,087 5,412,190Bank.................................... 1,204,252 1,249,252
Other................................................................... 105,189 81,277
- ------------------------------------------------------------------------------------------------------
5,556,282 5,511,679
Minority interests................................................ 3,468 3,300interests and preferred stock of subsidiary.................... 3,469 3,412
Preferred stock................................................... 75,113 75,113stock......................................................... 75,000 75,000
Common stock equity............................................... 373,658 357,604
---------- ----------
$5,981,326 $5,848,207
========== ==========equity..................................................... 375,538 379,224
- ------------------------------------------------------------------------------------------------------
$6,010,289 $5,969,315
======================================================================================================
6
American Savings Bank, F.S.B. and subsidiaries
Consolidated income statement data
Three months ended Nine months ended
September 30, September 30,
----------------------- -----------------------March 31 2001 2000
- ------------------------------------------------------------------------------------------------------
(in thousands) 2000 1999 2000 1999
- --------------------------------------------------------------------------------------------------------------
Interest income.................................... $108,326 $ 95,402 $314,110 $281,840income......................................................... $107,601 $102,508
Interest expense................................... 61,885 51,592 175,937 153,351
-------- -------- -------- --------expense........................................................ 60,500 55,718
- ------------------------------------------------------------------------------------------------------
Net interest income................................ 46,441 43,810 138,173 128,489income..................................................... 47,101 46,790
Provision for loan losses..........................losses............................................... (3,000) (4,750) (9,400) (10,848)(3,000)
Other income....................................... 5,974 7,222 19,156 22,823income............................................................ 8,153 7,759
Operating, administrative and general expenses..... (32,436) (31,363) (95,445) (94,625)
-------- -------- -------- --------expenses.......................... (32,105) (32,359)
- ------------------------------------------------------------------------------------------------------
Operating income................................... 16,979 14,919 52,484 45,839income........................................................ 20,149 19,190
Minority interests................................. 58interests...................................................... 59 57
Income taxes............................................................ 6,862 6,562
- 168 -
Income taxes....................................... 5,753 5,070 17,825 15,708
-------- -------- -------- --------------------------------------------------------------------------------------------------------------
Income before preferred stock dividends............ 11,168 9,849 34,491 30,131dividends................................. 13,228 12,571
Preferred stock dividends..........................dividends............................................... 1,353 1,350
4,059 4,050
-------- -------- -------- --------- ------------------------------------------------------------------------------------------------------
Net income.........................................income.............................................................. $ 9,81511,875 $ 8,499 $ 30,432 $ 26,081
======== ======== ======== ========11,221
======================================================================================================
7
Disposition of certain debt securities
In June 2000, the Office of Thrift Supervision (OTS) advised ASBAmerican Savings
Bank, F.S.B. (ASB) that four debt securities, in the original aggregate
principal amount of $114 million, were impermissible investments under
regulations applicable to federal savings banks. The securities, purchased
through two brokers, are trust certificates which are rated Aaa as to principal
repayment but are not rated as to interest. InThe trust certificates represent (i) the
second quarterright to receive the principal amount of the trust certificates at maturity from
an Aaa-rated swap counterparty (principal swap) and (ii) the right to receive
the cash flow received on subordinated notes (income class notes). ASB
recognizes interest income on these securities on a cash basis. In 2000, ASB had
reclassified these trust certificates from a "held-to-maturity" status to an
"available-for-sale" status in its financial statements and recorded these
securities at their estimated fair value. For the nine months ended September
30, 2000, ASB realizedrecognized a $3.8
million net loss on the writedown of these securities. Interest incomesecurities to their estimated fair
value. In the first quarter of 2001, ASB recognized a $0.5 million net loss on
the writedown of one series of these securities is being recognized on a cash
basis.trust certificates to its estimated fair
value. Additional losses could result from the ultimate disposition of these
securities, or if there is a further "other-than-temporary" decline in their
fair value.
Because of the ongoing regulatory demands that ASB dispose of the securities,
ASB has undertaken efforts to dispose of those four trust certificate
investments by the end of the second quarter of 2001. ASB has demanded that the
brokers who sold these securities agree to rescission of the transactions. One
broker, through whom ASB purchased one issue of trust certificates for
approximately $30 million, arranged a transaction which closed in April 2001 for
the disposition of that issue for an amount approximating ASB's original
purchase price.
ASB has filed a lawsuit against the broker through whom the other three issues
of trust certificates were purchased, seeking rescission and other remedies,
including recovery of any losses ASB may incur as a result of its purchase and
ownership of these trust certificates. ASB has taken steps to terminate the
principal swap for two of the three series and to cause the related income class
notes to be sold (or their value otherwise determined and paid to ASB in
accordance with the trust agreement), with the proceeds to be paid to ASB. HEI's
bid to purchase the income class notes for the first of these two series of
notes for approximately $10.2 million has been accepted, and HEI currently
intends to submit bids to purchase the income class notes underlying the other
two issues of trust certificates.
7
Reclassification of certain debt securities
On January 1, 2001, ASB reclassified approximately $2 billion of the securities
it owns from held-to-maturity to available-for-sale. See note (7), "Recent
accounting pronouncements-Derivative instruments and hedging activities."
(5) International power subsidiary
- -----------------------------------
China project
In 1998 and 1999, the HEIPC GroupHEI Power Corp. and its subsidiaries (HEIPC Group) acquired
what is now a 75% interest in a joint venture, Baotou Tianjiao Power Co., Ltd.,
formed to design, construct, own, operate and manage a 200 megawatt (MW) (net)
coal-fired power plant to be located in Inner Mongolia, People's Republic of
China. The power plant is being built "inside the fence" for Baotou Iron & Steel
(Group) Co., Ltd. (Baotou Steel). The project has received approval from both
the National and Inner Mongolia governments. Construction had commenced and the
first of the two units had been expected to be online by early 2001, and the
second six months later. However, the Inner Mongolia Power Company (IMPC), which
owns and operates the electricity grid in Inner Mongolia, has refusedcaused a delay of
the project by failing to enter into a satisfactory interconnection arrangement
with the joint venture. The HEIPC Group does not believe that it is prudent to
continue construction without an interconnection arrangement whose terms are
consistent with the project as approved by the National and Inner Mongolia
governments. Under the Power Purchase Contract between the joint venture and
Baotou Steel, it is Baotou Steel's responsibility to secure an interconnection
arrangement with IMPC. The HEIPC Group continues to work with Baotou Steel and
IMPC to secure a satisfactory interconnection arrangement. If such an
arrangement is not obtained, the HEIPC Group intends to withdraw from the
project (including the HEIPC Group's commitment to invest up to an additional
$86 million toward the project, subject to certain conditions) and seek recovery
of its investment of approximately $25 million to date. Management cannot
predict the outcome of such efforts, nor estimate its impairment loss, if any,
at this time. The financial statements do not include any adjustments that might
result from the outcome of this uncertainty.
Philippines investment
On March 7, 2000, an indirect subsidiary of HEIPCHEI Power Corp. (HEIPC) acquired a
50% interest in EPHE Philippines Energy Company, Inc. (EPHE), an indirect
subsidiary of El Paso Energy Corporation, (EPEC), for $87.5 million plus up to an
additional $6 million of payments that are contingent upon future earnings of East Asia
Power Resources Corporation (EAPRC). EPHE ownsthen owned approximately 91.7% of the
common shares of EAPRC, a Philippines holding company primarily engaged in the
electric generation business in Manila and Cebu through its direct and indirect
subsidiaries, using land and barge-based generating facilities fired by bunker
fuel oil, with total installed capacity of approximately 390 MW. The HEIPC Group
accountsaccounted for its investment in EPHE under the equity method of accounting.
Revenues for the international power segment for the third quarter and first
nine months of 2000 include the equity in net losses of EPHE. The net losses of
EPHE do not reflect any U.S. or Philippines tax benefits. The Company
consolidates the accounts of the HEIPC Group on a one-month lag due to the time
needed to consolidate HEIPC's subsidiaries. At September 30, 2000, the Company's
investment in EPHE was $69.7 million and is included in the consolidated balance
sheet in "Other" assets and "Goodwill and other intangibles." The decline in
carrying value from $87.5 million was due to the equity in net losses, goodwill
amortization and a negative $3.5 million foreign currency translation
adjustment. The
Company evaluates equity investments when events or changes in circumstances
indicate that the carrying value of such assets may not be recoverable. Due to
the netequity losses of $24.1 million incurred in the second and third quarters of 2000 from the investment in EPHE
and the changes in the political and economic conditions related to the
investment (e.g.,(primarily devaluation of the Philippine peso and increase in fuel
oil prices), management has
8
evaluateddetermined that the investment for impairment. The Company determines whether an
impairment has occurredin EAPRC was impaired
based on an estimate of the undiscounted future operating cash flows, (excluding interest) attributable toand on
December 31, 2000, wrote off the remaining $65.7 million investment as compared toin EAPRC
based upon management's estimate of fair value using anticipated cash flows
discounted at a rate commensurate with the carrying
valuerisks involved. On December 31, 2000,
the Company also accrued a potential payment obligation under an HEI guaranty of
$10 million of EAPRC loans. In the first quarter of 2001, HEI was partially
released from the guaranty obligation and the Company reversed $1.5 million
($0.9 million, net of income taxes) of the investment. As of September 30, 2000, based upon current conditions
and assumptions, no writedown of the investment in EPHE is required for
financial statement purposes based$10 million accrued on the estimated undiscounted future cash
flows (excluding interest) attributable to the investment. However, if estimates
or circumstances change, it may be necessary for the Company to adjust the
carrying value of its investment down to the then estimated fair value and any
such adjustment would likely be material.
In connection with and subsequent to the HEIPC Group's investment in EPHE, HEI
has guaranteed up to $35 million of existing and potential obligations related
to this investment.
(6) Retirement benefits
- -----------------------
Change in method of calculating market-related value of retirement benefit plan
assets
Since 1993, the Company has determined the market-related value of retirement
benefit (pension and other postretirement benefits) plan assets by calculating
the difference between the expected return and the actual return on the fair
value of the plan assets, then amortizing the difference over future years -- 0%
in the first year and 25% in years two to five, and finally subtracting the
unamortized differences for the past four years from fair value. For the year
2000 and future years, the method of calculating the market-related value of the
plan assets was changed to include a 15% range around the fair value of such
assets (i.e., 85% to 115% of fair value). If the market-related value is outside
the 15% range, then the amount outside the range will be recognized immediately
in the calculation of annual net periodic benefit cost. If the market-related
value remains within the 15% range, the Company will continue to amortize the
difference over future years using the amortization method previously used. This
change in accounting principle is preferable because it results in calculated
asset values of the plans that more closely approximate fair value, while still
mitigating the effect of annual fair value fluctuations. No range was used in
prior years as the market-related value of the plan assets has been within the
15% range at each yearend from 1993 to 1998. Therefore, the cumulative effect of
this change is nil. The effect of the change in accounting principle on the
first nine months of 2000 was to increase net income approximately $3 million
($0.10 in basic earnings per common share).
Change in discount rate
The Company changed the discount rate used to calculate the net periodic costs
of pension and other postretirement benefits from 6.5% at December 31,
1998 to
7.75% at December 31, 1999 based on interest rates prevailing at the time. The
effect of the change was to reduce the projected benefit obligation at December
31, 1999 by approximately $110 million and to increase net income by
approximately $4 million ($0.13 in basic earnings per common share) for the
first nine months of 2000.
(7)8
(6) Cash flows
- ---------------
Supplemental disclosures of cash flow information
CashFor the three months ended March 31, 2001 and 2000, the Company paid for interest
(net of capitalized amounts)amounting to $64.8 million and $56.5 million, respectively.
For the three months ended March 31, 2001 and 2000, the Company paid income
taxes was as
follows:
Nine months ended September 30,
-----------------------------------------
(in thousands) 2000 1999
- ----------------------------------------------------------------------------------------------------------------------
Interest (including interest paid by savings bank, but excluding interest
paid on nonrecourse debt on leveraged leases).............................. $205,784 $199,198
================== ==================
Income taxes................................................................ $ 12,214 $ 38,289
================== ==================
The decrease in income taxes paid for the nine months ended September 30, 2000
comparedamounting to the same period in 1999 was primarily due to the change in the
timing of recognition of the real estate investment trust taxable income.
9
$13.4 million and $0.6 million, respectively.
Supplemental disclosures of noncash activities
In April 2000, HEI recommenced issuing new common shares under the HEI Dividend
Reinvestment and Stock Purchase Plan (DRIP). From March 1998 to March 2000, HEI
had acquired for cash its common shares in the open market to satisfy the
requirements of the HEI DRIP. Under the HEI DRIP, common stock dividends
reinvested by shareholders in HEI common stock in noncash transactions amounted
to $8.0$4.0 million for the ninethree months ended September 30, 2000.
(8)March 31, 2001.
(7) Recent accounting pronouncements
- -------------------------------------
Derivative instruments and hedging activities
In June 1998,The Company adopted the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards (SFAS)
No. 133, "Accounting for Derivative Instruments and Hedging Activities," whichas
amended, on January 1, 2001. SFAS No. 133 establishes accounting and reporting
standards for derivative instruments and hedging activities and requires that an
entity recognize all derivatives as either assets or liabilities in the balance
sheet and measure those instruments at fair value. The provisionsadoption of SFAS No. 133
were amended by SFAS No. 137 to be effective for all fiscal quarters of
fiscal years beginning after June 15, 2000. The Company will adoptdid not have a material impact on the Company's financial condition, net income
or liquidity.
SFAS No. 133, as amended, onallows the reclassification of certain debt securities
from held-to-maturity to either available-for-sale or trading at the time of
adoption. On January 1, 2001. Management believes2001, ASB reclassified approximately $2 billion in
mortgage/asset-backed securities and $13 million in investment securities having
estimated fair values of approximately $2 billion and $13 million, respectively,
from held-to-maturity to available-for-sale. This reclassification gives ASB the
impactability to better manage its risks (including interest rate, liquidity and
credit risks). At January 1, 2001, the gross unrealized gain on such securities,
net of adoption will
not be material.
Certain transactions involving stock compensationincome taxes, was approximately $1 million, and was included in
accumulated other comprehensive income within stockholders' equity.
In MarchApril 2000, simultaneous with the FASB issued FASB Interpretation No. 44, "Accounting for
Certain Transactions Involving Stock Compensation, An Interpretationsale of APB
Opinion No. 25," which clarifies$100 million of medium-term notes,
HEI entered into a swap agreement to manage a portion of its interest rate risk.
The swap effectively fixed the applicationinterest rate on the $100 million of Accounting Principles Board
(APB) Opinion No. 25 for certain issues butdebt at
7.995% until maturity. Other than this swap, the Company does not address any issues relatedcurrently use
derivatives to manage interest rate risk. On January 1, 2001, HEI designated
this swap as a cash flow hedge, which hedges the applicationvariability of forecasted cash
flows attributable to interest rate risk. All conditions were met to assume no
ineffectiveness in the hedging relationship. Thus, this cash flow hedge is
accounted for under the shortcut method by recording the value of the swap on
the balance sheet as either an asset or liability with a corresponding offset
recorded in accumulated other comprehensive income within stockholders' equity,
net of tax. HEI recorded the after-tax transition amount associated with
establishing the fair value method in SFAS No. 123. The Interpretation
clarifies (a)of the definition of an employee for purposes of applying APB Opinion
No. 25, (b)swap on the criteria for determining whether a plan qualifiesbalance sheet as a noncompensatory plan, (c) the accounting consequencereduction of
various modifications to
the terms$1.6 million in accumulated other comprehensive income.
(in thousands)
Summary of a previously fixed stock option award,transition adjustment, January 1, 2001
Balance sheet - liabilities and (d) the accounting for
an exchange of stock compensation awards in a business combination. The Company
adopted the provisions of the Interpretation on July 1, 2000 with no resulting
material impact to the Company's results of operations, financial condition or
liquidity.
(9)stockholders' equity
Deferred income taxes $(1,031)
Other liabilities 2,650
Accumulated other comprehensive loss (1,619)
-----------
$ -
===========
9
(8) Commitments and contingencies
- ----------------------------------
See note (4), "Savings bank subsidiary," and note (5), "International power
subsidiary," above and note (5)(3), "Commitments and contingencies," in HECO's
"Notes to consolidated financial statements."
(10) Discontinued operations--Malama Pacific Corp. (MPC)(9) Subsequent event - ---------------------------------------------------------
On September 14, 1998,issuance of medium-term notes
- -----------------------------------------------------
In March 1999, HEI filed a registration statement with the SEC to register $300
million of Medium-Term Notes, Series C (Series C Notes). In April 2001, HEI Board of Directors adopted a plan to exitsold
the residential real estate development business (engaged by MPC and its
subsidiaries) by September 1999. Accordingly, MPC management commenced a program
to sell all of MPC's real estate assets and investments and HEI reported MPC as
a discontinued operation in the Company's consolidated statement of income in
the third quarter of 1998. In the slow Hawaii real estate market, however, the
plan to dispose of MPC's real estate assets and investments is taking longer
than expected.
As of September 30, 2000, the remaining net assets of the discontinued
residential real estate development operations amounted to $13last $100 million (included
in "Other" assets) and consisted primarily of real estate assets, receivables
and deferred tax assets, reduced by loans and accounts payable.
(11) Sale of maritime freight transportation and harbor assist operations
- --------------------------------------------------------------------------
In November 1999, HTB sold substantially all of its operating assetsSeries C Notes. The $100 million of Series C Notes
sold in April 2001 have a fixed interest rate of 7.56% and YB for
a nominal gain.maturity date of
April 10, 2006.
10
Hawaiian Electric Company, Inc. and subsidiaries
Consolidated balance sheets (unaudited)
September 30,March 31, December 31,
(in thousands, except par value) 2001 2000
1999
- -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
Assets
Utility plant, at cost
Land................................................................Land.................................................................. $ 28,99929,131 $ 30,95231,037
Plant and equipment................................................. 2,925,970 2,851,126equipment................................................... 2,978,171 2,974,153
Less accumulated depreciation....................................... (1,147,681) (1,076,373)depreciation......................................... (1,193,511) (1,170,184)
Plant acquisition adjustment, net................................... 419 458net..................................... 393 406
Construction in progress............................................ 166,937 151,981
----------------- ---------------progress.............................................. 177,306 157,183
- ----------------------------------------------------------------------------------------------------------------
Net utility plant............................................. 1,974,644 1,958,144
----------------- ---------------plant............................................... 1,991,490 1,992,595
- ----------------------------------------------------------------------------------------------------------------
Current assets
Cash and equivalents................................................ 3,432 1,966equivalents.................................................. 419 1,534
Customer accounts receivable, net................................... 80,578 68,768net..................................... 75,189 88,546
Accrued unbilled revenues, net...................................... 59,918 53,830net........................................ 54,891 64,020
Other accounts receivable, net...................................... 1,642 2,172net........................................ 2,032 5,426
Fuel oil stock, at average cost..................................... 31,135 34,954cost....................................... 35,812 37,124
Materials and supplies, at average cost............................. 20,134 20,046cost............................... 18,733 16,787
Prepayments and other............................................... 4,619 4,649
----------------- ---------------other................................................. 32,588 4,697
- ----------------------------------------------------------------------------------------------------------------
Total current assets.......................................... 201,458 186,385
----------------- ---------------assets............................................ 219,664 218,134
- ----------------------------------------------------------------------------------------------------------------
Other assets
Regulatory assets................................................... 116,299 114,759
Other............................................................... 38,906 43,521
----------------- ---------------assets..................................................... 115,659 116,623
Other................................................................. 40,016 41,170
- ----------------------------------------------------------------------------------------------------------------
Total other assets............................................ 155,205 158,280
----------------- ---------------assets.............................................. 155,675 157,793
- ----------------------------------------------------------------------------------------------------------------
$ 2,331,3072,366,829 $ 2,302,809
================= ===============2,368,522
================================================================================================================
Capitalization and liabilities
Capitalization
Common stock, $6 2/3 par value, authorized
50,000 shares; outstanding 12,806 shares.........................shares........................... $ 85,387 $ 85,387
Premium on capital stock............................................ 295,611 295,510stock.............................................. 295,688 295,655
Retained earnings................................................... 448,208 425,206
----------------- ---------------earnings..................................................... 465,395 443,970
- ----------------------------------------------------------------------------------------------------------------
Common stock equity........................................... 829,206 806,103equity............................................. 846,470 825,012
Cumulative preferred stock - not subject to mandatory redemption....redemption...... 34,293 34,293
HECO-obligated mandatorily redeemable trust preferred securities of
subsidiary trusts holding solely HECO and HECO-guaranteed debentures........................................................debentures. 100,000 100,000
Long-term debt, net................................................. 659,324 646,029
----------------- ---------------debt........................................................ 677,376 667,731
- ----------------------------------------------------------------------------------------------------------------
Total capitalization.......................................... 1,622,823 1,586,425
----------------- ---------------capitalization............................................ 1,658,139 1,627,036
- ----------------------------------------------------------------------------------------------------------------
Current liabilities
Short-term borrowings from nonaffiliates and affiliate.............. 82,303 107,013borrowings-nonaffiliates................................... 96,869 104,398
Short-term borrowings-affiliate....................................... 1,964 8,764
Accounts payable.................................................... 54,360 52,116payable...................................................... 49,809 71,698
Interest and preferred dividends payable............................ 17,817 8,160payable.............................. 16,937 10,483
Taxes accrued....................................................... 92,279 66,535
Other............................................................... 9,114 31,485
----------------- ---------------accrued......................................................... 65,774 78,186
Other................................................................. 19,920 10,559
- ----------------------------------------------------------------------------------------------------------------
Total current liabilities..................................... 255,873 265,309
----------------- ---------------liabilities....................................... 251,273 284,088
- ----------------------------------------------------------------------------------------------------------------
Deferred credits and other liabilities
Deferred income taxes............................................... 137,710 131,105taxes................................................. 137,946 137,066
Unamortized tax credits............................................. 48,033 48,206
Other............................................................... 58,552 65,462
----------------- ---------------credits............................................... 47,478 47,603
Other................................................................. 61,369 61,211
- ----------------------------------------------------------------------------------------------------------------
Total deferred credits and other liabilities.................. 244,295 244,773
----------------- ---------------liabilities.................... 246,793 245,880
- ----------------------------------------------------------------------------------------------------------------
Contributions in aid of construction................................... 208,316 206,302
----------------- ---------------construction..................................... 210,624 211,518
- ----------------------------------------------------------------------------------------------------------------
$ 2,331,3072,366,829 $ 2,302,809
================= ===============2,368,522
================================================================================================================
See accompanying notes"Notes to HECO's consolidated financial statements."
11
Hawaiian Electric Company, Inc. and subsidiaries
Consolidated statements of income (unaudited)
Three months ended Nine months endedMarch 31 2001 2000
- ----------------------------------------------------------------------------------------------
(in thousands, except for ratio of earnings September 30, September 30,
------------------------------ ------------------------------
to fixed charges)
2000 1999 2000 1999
- --------------------------------------------------------------------------------------------------------------------------
Operating revenues.................................... $335,263 $275,925 $930,167 $763,408
------------- ------------- ------------- -------------revenues.................................................. $317,293 $288,421
- ----------------------------------------------------------------------------------------------
Operating expenses
Fuel oil.............................................. 95,883 58,942 262,130 151,046oil............................................................ 88,245 75,155
Purchased power....................................... 85,092 71,952 225,762 199,581power..................................................... 81,916 70,226
Other operation....................................... 30,582 35,730 85,787 100,530
Maintenance........................................... 16,156 14,436 42,311 41,324
Depreciation.......................................... 24,605 23,322 73,269 70,041operation..................................................... 29,774 27,741
Maintenance......................................................... 15,197 12,533
Depreciation........................................................ 24,609 24,334
Taxes, other than income taxes........................ 31,615 26,039 87,981 72,459taxes...................................... 30,491 27,361
Income taxes.......................................... 15,828 13,419 46,222 36,208
------------- ------------- ------------- -------------
299,761 243,840 823,462 671,189
------------- ------------- ------------- -------------taxes........................................................ 13,604 15,193
- ----------------------------------------------------------------------------------------------
283,836 252,543
- ----------------------------------------------------------------------------------------------
Operating income...................................... 35,502 32,085 106,705 92,219
------------- ------------- ------------- -------------income.................................................... 33,457 35,878
- ----------------------------------------------------------------------------------------------
Other income
Allowance for equity funds used during construction... 1,505 1,176 4,102 3,202construction................. 1,265 1,269
Other, net............................................ 1,856 998 3,569 3,370
------------- ------------- ------------- -------------
3,361 2,174 7,671 6,572
------------- ------------- ------------- -------------net.......................................................... 977 575
- ----------------------------------------------------------------------------------------------
2,242 1,844
- ----------------------------------------------------------------------------------------------
Income before interest and other charges.............. 38,863 34,259 114,376 98,791
------------- ------------- ------------- -------------charges............................ 35,699 37,722
- ----------------------------------------------------------------------------------------------
Interest and other charges
Interest on long-term debt............................ 10,024 10,313 29,876 30,139debt.......................................... 9,929 9,932
Amortization of net bond premium and expense.......... 485 436 1,452 1,203expense........................ 530 442
Other interest charges................................ 1,725 1,494 5,257 5,414charges.............................................. 2,073 1,897
Allowance for borrowed funds used during construction. (807) (716) (2,220) (1,955)construction............... (676) (691)
Preferred stock dividends of subsidiaries.............subsidiaries........................... 229 228 229 686 716
Preferred securities distributions of trust subsidiaries.......................................... 1,918subsidiaries............ 1,919 5,756 5,746
------------- ------------- ------------- -------------
13,573 13,675 40,807 41,263
------------- ------------- ------------- -------------1,919
- ----------------------------------------------------------------------------------------------
14,004 13,727
- ----------------------------------------------------------------------------------------------
Income before preferred stock dividends of HECO....... 25,290 20,584 73,569 57,528HECO..................... 21,695 23,995
Preferred stock dividends of HECO.....................HECO................................... 270 269 810 908
------------- ------------- ------------- -------------270
- ----------------------------------------------------------------------------------------------
Net income for common stock...........................stock......................................... $ 25,02021,425 $ 20,315 $ 72,759 $ 56,620
============= ============= ============= =============23,725
==============================================================================================
Ratio of earnings to fixed charges (SEC method)....... 3.68 3.07
============= =============..................... 3.29 3.61
==============================================================================================
Hawaiian Electric Company, Inc. and subsidiaries
Consolidated statements of retained earnings (unaudited)
Three months ended Nine months ended
September 30, September 30,
------------------------------ ------------------------------March 31 2001 2000
- ---------------------------------------------------------------------------------------------
(in thousands)
2000 1999 2000 1999
- -------------------------------------------------------------------------------------------------------------------------
Retained earnings, beginning of period................ $441,199 $415,944period.............................. $443,970 $425,206 $405,836
Net income for common stock........................... 25,020 20,315 72,759 56,620stock......................................... 21,425 23,725
Common stock dividends................................ (18,011) (14,419) (49,757) (40,616)
------------- ------------- ------------- -------------dividends.............................................. - (13,952)
- ---------------------------------------------------------------------------------------------
Retained earnings, end of period...................... $448,208 $421,840 $448,208 $421,840
============= ============= ============= =============period.................................... $465,395 $434,979
=============================================================================================
HEI owns all the common stock of HECO. Therefore, per share data with respect to
shares of common stock of HECO are not meaningful.
See accompanying notes"Notes to HECO's consolidated financial statements."
12
Hawaiian Electric Company, Inc. and subsidiaries
Consolidated statements of cash flows (unaudited)
Nine
Three months ended September 30,
--------------------------------March 31 2001 2000
- --------------------------------------------------------------------------------------------------
(in thousands) 2000 1999
- --------------------------------------------------------------------------------------------------------------------
Cash flows from operating activities
Income before preferred stock dividends of HECO............................HECO.......................... $ 73,56921,695 $ 57,52823,995
Adjustments to reconcile income before preferred stock dividends of
HECO to net cash provided by operating activities
Depreciation of property, plant and equipment........................ 73,269 70,041equipment...................... 24,609 24,334
Other amortization................................................... 5,379 4,718amortization................................................. 3,206 1,069
Deferred income taxes................................................ 6,605 313taxes.............................................. 1,341 1,418
Tax credits, net..................................................... 1,016 1,568net................................................... 267 339
Allowance for equity funds used during construction.................. (4,102) (3,202)construction................ (1,265) (1,269)
Changes in assets and liabilities
Decrease (increase) in accounts receivable...................... (11,280) 4,135
Increasereceivable............................... 16,751 821
Decrease in accrued unbilled revenues........................... (6,088) (4,123)revenues......................... 9,129 798
Decrease (increase) in fuel oil stock........................... 3,819 (9,793)stock.................................... 1,312 7,285
Increase in materials and supplies.............................. (88) (2,044)supplies............................ (1,946) (297)
Increase in regulatory assets................................... (2,707) (2,464)
Increaseassets................................. (695) (513)
Decrease in accounts payable.................................... 2,244 10,741payable.................................. (21,889) (6,550)
Changes in other assets and liabilities......................... 13,359 17,546
------------- -------------liabilities....................... (16,571) (12,323)
- --------------------------------------------------------------------------------------------------
Net cash provided by operating activities.................................. 154,995 144,964
------------- -------------activities................................ 35,944 39,107
- --------------------------------------------------------------------------------------------------
Cash flows from investing activities
Capital expenditures....................................................... (88,955) (68,714)expenditures..................................................... (24,485) (23,848)
Contributions in aid of construction....................................... 6,713 6,327
Proceeds from sale of assets............................................... - 1,499construction..................................... 1,803 1,647
Payments on notes receivable...............................................receivable............................................. - 138
1,199
------------- -------------- --------------------------------------------------------------------------------------------------
Net cash used in investing activities...................................... (82,104) (59,689)
------------- -------------activities.................................... (22,682) (22,063)
- --------------------------------------------------------------------------------------------------
Cash flows from financing activities
Common stock dividends..................................................... (49,757) (40,616)dividends................................................... - (13,952)
Preferred stock dividends.................................................. (810) (908)dividends................................................ (270) (270)
Preferred securities distributions of trust subsidiaries................... (5,756) (5,746)subsidiaries................. (1,919) (1,919)
Proceeds from issuance of long-term debt................................... 13,150 73,052
Repayment of long-term debt................................................ - (50,000)
Redemption of preferred stock.............................................. - (47,080)debt................................. 9,595 6,304
Net decrease in short-term borrowings from nonaffiliates and
affiliate with original maturities of three months or less........................ (24,710) (36,302)
Other...................................................................... (3,542) (6,279)
------------- -------------less.............. (11,333) (2,036)
Repayment of other short-term borrowings................................. (3,000) -
Other.................................................................... (7,450) (6,051)
- --------------------------------------------------------------------------------------------------
Net cash used in financing activities...................................... (71,425) (113,879)
------------- -------------activities.................................... (14,377) (17,924)
- --------------------------------------------------------------------------------------------------
Net increase (decrease)decrease in cash and equivalents............................ 1,466 (28,604)equivalents..................................... (1,115) (880)
Cash and equivalents, beginning of period..................................period................................ 1,534 1,966
54,783
------------- -------------- --------------------------------------------------------------------------------------------------
Cash and equivalents, end of period........................................period...................................... $ 3,432419 $ 26,179
============= =============
See accompanying notes to HECO's consolidated financial statements.1,086
==================================================================================================
See accompanying "Notes to consolidated financial statements."
13
Hawaiian Electric Company, Inc. and subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2000 and 1999
(Unaudited)
- --------------------------------------------------------------------------------
(1) Basis of presentation
- --------------------------
The accompanying unaudited consolidated financial statements have been prepared
in conformity with GAAP for interim financial information and with the
instructions to SEC Form 10-Q and Article 10 of Regulation S-X. Accordingly,
they do not include all of the information and footnotes required by GAAP for
complete financial statements. 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.
The accompanying unaudited consolidated financial statements should be read in
conjunction with the consolidated financial statements and the notes thereto
incorporated by reference in HECO's Annual Report on SEC Form 10-K for the year
ended December 31, 1999 and the consolidated financial statements and the notes
thereto in HECO's Quarterly Reports on SEC Form 10-Q for the quarters ended
March 31, 2000 and June 30, 2000.
In the opinion of HECO's management, the accompanying unaudited consolidated
financial statements contain all material adjustments required by GAAP to
present fairly the financial position of HECO and its subsidiaries as of
September 30, 2000March 31, 2001 and December 31, 1999,2000, and the results of their operations for the three and nine months ended September 30, 2000 and 1999, and their
cash flows for the ninethree months ended September 30, 2000March 31, 2001 and 1999.2000. All such
adjustments are of a normal recurring nature, unless otherwise disclosed in this
Form 10-Q or other referenced material. Results of operations for interim
periods are not necessarily indicative of results for the full year.
CertainWhen required, certain reclassifications have beenare made to prior periods' consolidated
financial statements to conform to the 20002001 presentation.
(2) Retirement benefits
- ------------------------
Change in method of calculating market-related value of retirement benefit plan
assets
Since 1993, HECO and its subsidiaries have determined the market-related value
of retirement benefit (pension and other postretirement benefits) plan assets by
calculating the difference between the expected return and the actual return on
the fair value of the plan assets, then amortizing the difference over future
years -- 0% in the first year and 25% in years two to five, and finally
subtracting the unamortized differences for the past four years from fair value.
For the year 2000 and future years, the method of calculating the market-related
value of the plan assets was changed to include a 15% range around the fair
value of such assets (i.e., 85% to 115% of fair value). If the market-related
value is outside the 15% range, then the amount outside the range will be
recognized immediately in the calculation of annual net periodic benefit cost.
If the market-related value remains within the 15% range, HECO and its
subsidiaries will continue to amortize the difference over future years using
the amortization method previously used. This change in accounting principle is
preferable because it results in calculated asset values of the plans that more
closely approximate fair value, while still mitigating the effect of annual fair
value fluctuations. No range was used in prior years as the market-related value
of the plan assets has been within the 15% range at each yearend from 1993 to
1998. Therefore, the cumulative effect of this change is nil. The effect of the
change in accounting principle on the first nine months of 2000 was to increase
net income approximately $3 million.
14
Change in discount rate
HECO and its subsidiaries changed the discount rate used to calculate the net
periodic costs of pension and other postretirement benefits from 6.5% at
December 31, 1998 to 7.75% at December 31, 1999 based on interest rates
prevailing at the time. The effect of the change was to reduce the projected
benefit obligation at December 31, 1999 by approximately $102 million and to
increase net income by approximately $4 million for the first nine months of
2000.
(3) Regulatory assets
- ---------------------
Regulatory asset related to Barbers Point Tank Farm project costs
In 1989, HECO began planning and engineering for a combined cycle unit addition
as a contingency in the event an independent power producer was not able to
deliver firm power to HECO as planned. Subsequently, HECO's planning and
engineering work expanded from contingency planning to adding new generation.
In December 1991, HECO filed an application for the installation of a nominal
200 MW combined cycle power plant located at HECO's Barbers Point Tank Farm.
Due to changes in circumstances, the expected timing for HECO's next generating
unit was significantly delayed, and HECO withdrew its application in May 1993.
In August 1994, HECO informed the Public Utilities Commission of the State of
Hawaii (PUC) that, consistent with past and current company practices, the $5.8
million in accumulated project costs would be allocated primarily to ongoing
active capital projects as part of the engineering clearing. The PUC advised
HECO to file an application, which it did in February 1995. The Consumer
Advocate objected to the accounting treatment proposed by HECO.
To simplify and expedite the proceeding, in September 2000, HECO and the
Consumer Advocate reached an agreement on the accounting treatment, subject to
PUC approval. Acceptance of the agreement by the parties was without prejudice
to any position either of them may take in this or any subsequent proceeding.
Under the agreement, $4.5 million of the $5.8 million total project costs will
be amortized to operating expense ratably over a five-year period after
receiving PUC approval. In September 2000, HECO adjusted the project costs to
reflect the agreement with the Consumer Advocate, resulting in an after tax
write-off of $0.8 million. The PUC's approval of the agreement has been
requested.
Integrated Resource Planning costs
In 1992, the PUC established a framework for Integrated Resource Planning (IRP)
and ordered the companies to develop an integrated resource plan in accordance
with the IRP framework. The framework also provides that the utilities are
entitled to recover appropriate IRP and implementation costs. Each year, the
electric utilities submit a budget of the IRP costs for the upcoming year, and
request subsequent recovery of the actual costs incurred. Actual IRP costs
incurred since 1995 have been recorded as a regulatory asset, and the electric
utilities have been awaiting PUC approval for recovery of those costs.
In August 2000, pursuant to a stipulation filed by the electric utilities and
the parties in the IRP cost proceedings, the PUC issued an order allowing the
electric utilities to begin recovering the 1995 through 1999 IRP costs (over a
12 month period for HECO and a 24 month period for HELCO and MECO), subject to
refund with interest, pending the PUC's final decision and order approving
recovery of each respective year's IRP costs. On September 1, 2000, the
electric utilities began recovering 1995 through 1999 IRP costs through a
surcharge on customers bills. As of September 30, 2000, the amount of revenues
recorded, subject to refund with interest, amounted to $0.8 million.
15
(4) Cash flows
- ---------------
Supplemental disclosures of cash flow information
CashFor the three months ended March 31, 2001 and 2000, HECO and its subsidiaries
paid for interest (net of capitalized amounts)amounting to $5.5 million and $2.6 million, respectively.
For the three months ended March 31, 2001 and 2000, HECO and its subsidiaries
paid income taxes was as
follows:
Nine months ended September 30,
--------------------------------
(in thousands) 2000 1999
- -------------------------------------------------------------------------------------------
Interest................................................... $24,298 $28,786
============= ==============
Income taxes............................................... $20,941 $17,352
============= ==============
amounting to $3.4 million and $9.5 million, respectively.
Supplemental disclosure of noncash activities
The allowance for equity funds used during construction, which was charged to
construction in progress as part of the cost of electric utility plant, amounted
to $4.1 million and $3.2$1.3 million for each of the ninethree months ended September 30, 2000March 31, 2001 and 1999, respectively.
(5)2000.
(3) Commitments and contingencies
- ----------------------------------
HELCO power situation
Background.
In 1991, Hawaii Electric Light Company, Inc. (HELCO) began planning
- ---------- to meet
increased electric generation demand forecasted for 1994. HELCO's plans were to
install at its Keahole power plant two 20 MW combustion turbines (CT-4 and CT-5)CT-
5), followed by an 18 MW heat steam recovery generator (ST-7), at which time
these units would be converted to a 56 MW (net) dual-train combined-cycle
(DTCC) unit.
In January 1994, the PUC approved expenditures for CT-4, which HELCO had planned
to install in late 1994. The timing of the installation of HELCO's phased DTCC unit at the Keahole power
plant siteunits
has been revised on several occasions due to delays described below,
in (a) obtaining approvalan amendment of
a land use permit from the Hawaii Board of Land and Natural Resources (BLNR) of a Conservation District Use Permit (CDUP) amendment and
(b) obtainingan air permit from the Department of Health of the State of Hawaii (DOH) and the
U.S. Environmental Protection Agency (EPA) a Prevention of Significant
Deterioration/Covered Source permit (PSD permit) for the Keahole power plant site. The
delays are also attributable to lawsuits, claims and petitions filed by
independent power producers (IPPs) and other parties challenging these permits
and objecting to the expansion, alleging among other things that
14
(1) operation of the expanded Keahole site would not comply with land use
regulations (including noise standards) and HELCO's land patent; (2) HELCO
cannot operate the plant within current air quality standards; and (3) HELCO could
alternatively purchase power from IPPs to meet increased electric generation
demand.
CDUPdemand; and (4) HELCO's land use entitlement expired in April 1999 and HELCO's
request for an extension must be heard in a contested case hearing.
For a detailed description and a partial history of the Keahole Power Plant
situation, see "HELCO power situation" on pages 9 to 17 of HEI's Annual Report
on SEC Form 10-K for the year ended December 31, 2000. Recent developments in
this situation are described below.
Land use permit amendment. On July 10, 1997, theThe Third Circuit Court of the State of Hawaii (the
- ---------------
issued its Amended Findings of Fact, Conclusions of Law, Decision and Order
addressing HELCO's appeal of an order of-------------------------
Circuit Court) ruled in 1997 that because the BLNR along with other consolidated
civil cases relatinghad failed to render a valid
decision on HELCO's application for a CDUP amendment. Becauseto amend its land use permit before the
BLNR failed to take valid agency action or render a proper decision within the
180 day
statutory deadline, (as calculated by the Court), the Court ruled that
HELCO was automatically entitled to put its land to the uses requested in its
CDUP amendment application pursuant to the default provision of Section 183-41,
Hawaii Revised Statutes (HRS). This decision allowed HELCO to use its Keahole property as requested in its application. An amended order tosite for the same effect
was issued on August 18, 1997.expansion
project (HELCO's "default entitlement"). Final judgments have been entered in all of the consolidated cases. Appeals with respect to the final judgments for certain of
the cases have been filed with the Hawaii Supreme Court. Motions filed with the
Third Circuit Court
related to stay the effectiveness of the judgments pending
resolution of the appeals were denied in April and July 1998 (in responsethis ruling are on appeal to a
motion for reconsideration). In August 1998, the Hawaii Supreme Court, which in 1998
denied nonhearing motions forto stay ofthe Circuit Court's final judgment pending resolution of
the appeals.
Management believes that HELCO will ultimately prevail on appeal and that the
final judgments of the Thirdappeal.
The Circuit Court will be upheld.
16
TheCourt's final judgment with respect to HELCO's entitlement to automatically put its
land to the uses requested in its CDUP amendment application (which is in part 1
of the final judgment, and is referred to as HELCO's "default entitlement") was
entered February 11, 1998. The final judgment statesprovided that HELCO must comply with the
conditions in its application (part 2 of the final judgment), and that the
standard conditions in Section 13-2-21 of the Hawaii Administrative Rules (HAR),
the rules of the Department of Land and Natural Resources (DLNR), apply to the
extent the standard conditions are not incompatible with HRS Section 183-41
(part 3 of the final judgment). On August 17, 1999, certain plaintiffs filed a
joint motion to enforce parts 2 and 3 of the final judgment (relating to
applicable conditions) and to stay part 1 of the final judgment (the default
entitlement) until such time as the applicable conditions were identified and it
was determined whether HELCO had or could meet the applicable conditions. At a
September 23, 1999 hearing, the Third Circuit Court ruled that the BLNR must
issue a written decision by November 30, 1999 on certain issues raised in the
administrative petition filed by the Keahole Defense Coalition (KDC) in August
1998, including specific determinations of which conditions are not inconsistent
with HELCO's ability to proceed under the default entitlement. At a BLNR meeting
on October 22, 1999, the BLNR determined that all 15 standard land use
conditions in HAR 13-2-21(a) applied to HELCO's default entitlement and that the
conditions in HELCO's pre-existing CDUP and amendments continue to apply with
respect to those existing permits. The BLNR specifically did not address at that
time the question of HELCO's compliance with each of those conditions. The BLNR
issued a written decision on November 19, 1999. Certain plaintiffs filed two
motions in the Third Circuit Court attempting to implement their interpretation
of the BLNR's ruling. On November 2, 1999, those plaintiffs filed a second joint
motion to enforce part 2 and part 3 of the final judgment. In that motion, they
alleged that the Keahole project cannot meet the conditions relating to
compatibility with the surrounding area and improvement of the existing physical
and environmental aspects of the subject area. Furthermore, they claimed that
the project would be a prohibited use that cannot be placed in the conservation
district, relying on zoning rules implemented by the BLNR in 1994 in furtherance
of Act 270, which prohibited fossil fuel fired generating units in the
conservation district. However, the Third Circuit Court had earlier ruled that
Act 270 does not apply to HELCO's application, which was filed prior to the
effective date of Act 270. Plaintiffs asked that HELCO be enjoined from placing
further structures and improvements on the Keahole site and be ordered to remove
all existing structures and improvements.
On November 5, 1999, the same plaintiffs filed a third joint motion to enforce
judgment. In this motion, they asked that the Court void HELCO's default
entitlement on the basis that HELCO forfeited its default entitlement by
allegedly electing, through HELCO's construction of the pre-PSD portions of the
project, to build a project different from that described in its application.
They also requested that HELCO be enjoined from continuing construction activity
at the site and ordered to restore the Keahole site to its pre-August 1992
condition. These motions were heard on December 13, 1999 and were denied by the
Court. The Court also ruled that any complaints received by the BLNR or DLNR
regarding the Keahole project were to be addressed in writing within 32 days of
mailing of the complaint. An Order to this effect was issued on February 22,
2000. On April 13, 2000, KDC and an individual plaintiff filed a fourth motion
to enforce the judgment, which substantially reiterates their second joint
motion dated November 2, 1999 (see above) and a motion for sanctions against the
BLNR. In light of a BLNR hearing on April 14, 2000, a stipulation to withdraw
these motions was filed, and the plaintiffs indicated that they would refile the
fourth motion after the written order from the BLNR is issued.
On June 21, 2000, the same plaintiffs filed a fifth joint motion to enforce
judgment, generally restating the claims in the second and fourth motions. On
July 7, 2000, Department of Hawaiian Home Lands filed a joinder in that motion
and on July 12, 2000 Waimana also filed a joinder. A hearing was held on August
28, 2000. At that hearing, the main issue was how the three-year construction
period in the standard land use conditions would be appliedinsofar
as those conditions were not inconsistent with HELCO's default entitlement.
Subsequent to entry of the Keahole
project,Circuit Court's final judgment, there have been
numerous proceedings before the Circuit Court and there was discussion as to whether the BLNR's August 16, 2000 order
(see "BLNR petitions" herein) had addressed that issue and the related issue of
whether HELCO was in compliance with that condition. The Court took the matter
under advisement. Because discussion at the August 28, 2000 hearing had raised
the question of whether KDC and an individual plaintiff had specifically posed
certain questions to the BLNR in their February 7, 2000 Request to Nullify, on
August 31, 2000 HELCO filed a letter with the BLNR requesting specific rulings
on these issues. In response, on September 5, 2000, KDC and the individual
plaintiff filed an ex-parte
17
motion to file a memorandum in response to HELCO's letter and filed the
memorandum itself, which claimed that HELCO's letter was an improper
communication with the Court while a matter was pending decision. On September
6, 2000, the Court granted the ex-parte motion and set a hearing for September
18, 2000. At the hearing, the Court ruled to strike HELCO's letter from the
Court record and ruled that, as a mattervarious
plaintiffs (a) have sought determinations of law, absent any legal or equitable
extension authorized by the BLNR pursuant to legal authority, the three-year
construction deadline expired on April 26, 1999. The Court also denied KDC and
the individual plaintiff's request for an injunction barring further
construction.
HELCO filed a request for extension with BLNR on October 20, 2000. Management
believes the extension will be obtained. Because substantially all of the pre-
PSD construction has been completed and because HELCO is awaiting the necessary
PSD permit before the generating units can be installed, it is not anticipated
that the Court's ruling will have any immediate impact on project construction.
For other developments regarding these issues, see "BLNR petitions."
On October 27, 2000, KDC and another plaintiff filed a motion requesting the
court to impose a stay on any further activities by HELCO pursuantwhat conditions apply to HELCO's
default entitlement, until such time as(b) have claimed that HELCO has not complied with
applicable land use conditions and that its default entitlement should thus be
forfeited, (c) have claimed that HELCO will not be able to operate the Hawaii Supreme Court acts on the
pending appeals. A hearing is scheduled for December 11, 2000.
PSD permit. In 1997, the EPA approved a revised draft permitproposed
plant without violating applicable land use conditions and the DOH issued
- ----------
a final PSD permit for HELCO's DTCC unit. Nine appealsprovisions of
the issuance of the
permit were filed with the EPA's Environmental Appeals Board (EAB) in December
1997.
On November 25, 1998, the EAB issued an Order Denying Review in PartHawaii's Clean Air Act and Remanding in Part. The EAB denied appeals of the permit that were based on
challenges to (1) the DOH's use of a netting analysis (with respect to nitrogen
oxide (NOx) emissions), (2) the DOH's determination of Best Available Control
Technology for control of sulfur dioxide emissions,Noise Pollution Act and (3) certain aspects of
the DOH's ambient air and source impact analysis. However, the EAB concluded
that the DOH had not adequately responded to comments that had been made during
the public comment period that data relating to certain ambient air
concentrations were outdated or were measured at unrepresentative locations. The
EAB remanded the proceedings and directed the DOH to reopen the permit for the
limited purpose of (1) providing an updated air quality impact report
incorporating current data on sulfur dioxide and particulate matter ambient
concentrations and (2) providing a sufficient explanation of why the carbon
monoxide and ozone data used to support the permit are reasonably
representative, or performing a new air quality analysis based on data shown to
be representative of the air quality in the area to be affected by the project.
The EAB directed the DOH to accept and respond to public comments on the DOH's
decisions with respect to these issues and ruled that(d) have sought orders
enjoining any further appeals of its
decision would be limited to the issues addressed on remand. On March 3, 1999,
the EAB issued an Order denying motions for reconsideration which had been filed
by HELCO, KDC and Kawaihae Cogeneration Partners (KCP). HELCO, working closely
with the DOH and EPA, planned its response to the EAB remand and, in January
1999, commenced collection of several months of additional data at a new site.
As part of the remand process, the DOH held a public hearing on the draft permit
on October 7, 1999, limited to the issues remanded by the EAB. After considering
issues raisedconstruction at the public hearing, the DOH changed its position and required
HELCO to complete a full 12 months of data collection at the new site (which
collection began in January 1999) and also required that two months of data be
collected at a more representative elevation to corroborate the data collected
at the newKeahole site.
This data collection was completed at the end of April 2000 and
provided excellent corroboration of the data collected at the new site. HELCO is
awaiting issuance of a revised permit by DOH, at which time DOH will open the
public comment period and schedule another public hearing. It is anticipated
that the hearing will take place in December 2000. As a result of these
actions,Although there havehas not been further delays in HELCO's construction of CT-4 and CT-
5. Although the actual length of the delays is uncertain, management believes
CT-4 and CT-5 will be in service in early to mid-2002. HELCO continues to work
with the DOH and EPA with the objective of having the final permit reissued in
early 2001 and of reaching a final resolution of any appealsthese claims, to the EAB as
expeditiously as possible thereafter. HELCO believes that the PSD permit will
18
eventually be obtaineddate there
have been three rulings on these claims which may adversely affect HELCO's
ability to construct and that installation ofoperate CT-4 and CT-5 will begin when
the PSD permit is obtained and any EAB appeals from its issuance are resolved.
KDC declaratory judgment action. In February 1997, KDC and three individuals
- -------------------------------
(Plaintiffs) filedCT-5. First, based on a lawsuit in the Third Circuit Court of the State of Hawaii
against HELCO, the director of the DOH, and the BLNR, seeking declaratory
rulings with regard to five counts alleging that, with regard to the Keahole
project, one or more of the defendants had violated, or could not allow the
plant to operate without violating, the State Clean Air Act, the State Noise
Pollution Act, conditions of HELCO's conditional use permit, covenants of
HELCO's land patent and Hawaii administrative rules regarding standard
conditions applicable to land permits. The Complaint was amended in March 1998
to add a sixth count, claiming that an amendment to a provision of the land
patent (relating to the conditions under which the State could repurchase the
land) is void and that the original provision should be reinstated.
On April 12, 1999, the Court ruled that, because there were no remaining issues
of fact in the case, a May 1999 trial date was vacated, no further discovery was
authorized, and proceedings before the Court were suspended pending any further
administrative actionchange by the
DOH and BLNR. The Court's rulings to date on the
six counts in the KDC complaint are as follows:
1. Count I (State Clean Air Act): At a hearing on April 5, 1999, the Court
ruled that the DOH was within its discretionary authority in granting
HELCO's requests for additional extensions of time to file its Title V air
permit applications.
2. Count II (State Noise Pollution Act): At a hearing relating to Count II on
February 16, 1999, the DOH notified the Court and the parties of a change in its interpretation of the noise rules it promulgated under the StateHawaii
Noise Pollution Act. The change in interpretation would apply toAct, the Keahole
plant the noise standard applicable to the emitter property (which the DOH
claims to beCircuit Court has ruled that a 55 dBA55dBA daytime and 45 dBA45dBA
nighttime standard)noise standard, rather than the previously-appliedpreviously applied 70dBA noise
standard, applies to HELCO's plant, but has left enforcement of the receptor properties in the
surrounding agricultural park (a 70 dBA standard).
In responseruling to
the new position announced by the DOH, on February 23, 1999
HELCO filed a declaratory judgment action against the DOH, alleging that
the noise rules were invalid on constitutional grounds. At a hearing on
March 31, 1999, the Court granted KDC's motion to dismiss HELCO's
complaint and Plaintiffs' motion for reconsideration on Count II and ruled
that the applicable noise standard was 55 dBA daytime and 45 dBA
nighttime. The Court specifically reserved ruling on HELCO's claims or
potential claims based on estoppel and on the constitutionality of the
noise rules "as applied" to HELCO's Keahole plant. On March 31, 1999, the
Third Circuit Court also granted in part and denied in part HELCO's motion
for leave to file a cross-claim and a third-party complaint, stating that
HELCO may file such motions on the "as applied" and "estoppel" claims once
the DOH actually applies the 55/45 dBA noise standard to the Keahole
plant.
On May 12, 1999, the Order dismissing HELCO's declaratory judgment
complaint was issued and final judgment was entered. The DOH objected to
the entry of final judgment before all issues in the lawsuit were
resolved, but an Order denying that motion was issued on July 26, 1999.
HELCO filed a notice of appeal on August 25, 1999 and KDC filed a notice
of cross-appeal on September 3, 1999. Opening briefs were filed with the
Hawaii Supreme Court in January 2000, answering briefs were filed in
February and March 2000 and reply briefs were filed in March and April
2000. Briefing is now complete.DOH. The DOH has not issuedtaken any formal enforcement action applyingaction. If and when the
55/45
dBA standard toDOH actually enforces the Keahole plant.stricter standards, HELCO may assert that the noise
regulations are unconstitutional as applied. Meanwhile, HELCO has installed
noise mitigation measures on the existing diesel units at Keahole, has obtained
from the DLNR an administrative
approval to install an additional silencer on CT-2 and is exploring possible
noise mitigation measures, which can be implemented if necessary, for CT-4 and
CT-5. 3. Count III (violation of CDUP): AtSecond, in September 2000, the Circuit Court ruled that, absent a hearing on April 12, 1999, the Court
granted HELCO's motion for summary judgment and suspended proceedings on
this Count pending referral of this matter to the
19
BLNR. (Should the DOH find HELCO in violation of the noise rules (see
Count II), the BLNR would be called to act on the impact of such
violation, if any, on the CDUP.)
4. Count IV (violations of HELCO's land patent): At a hearing on April 12,
1999, the Court granted HELCO's motion for summary judgment and suspended
proceedings on this Count pending referral of this matter to the BLNR.
(Should the DOH find HELCO in violation of the noise rules (see Count II),
the BLNR would be requested to determine the impact of such violation, if
any, on the land patent.)
5. Count V (HELCO's ability to comply with land use regulations): At a
hearing on April 12, 1999, the Court granted HELCO's motion for summary
judgment and suspended proceedings on this Count pending referral of this
matter to the BLNR for resolution of the administrative proceeding which
had been pending before it. (See "BLNR petitions" herein.)
6. Count VI (amendment of HELCO's land patent): At the March 31, 1999
hearing, the Court granted Plaintiffs' motion for summary judgment,
finding that a 1984 amendment to HELCO's land patent was invalid because
the BLNR had failed to comply with the statutory procedure relating to
amendments. The amendment was intended to correct an error in the original
land patent with regard to the repurchase clause in the patent and to
conform the language to the applicable statute, under which the State
would have the right to repurchase the site (as opposed to an automatic
reversion) if it were no longer used for utility purposes. This matter was
heardlegal or
equitable extension properly authorized by the BLNR, at its hearing on February 25,the three-year construction
period in the DLNR's standard land use conditions expired in April 1999. In
October 2000, and a corrected land
patent has been issued. (See "BLNR petitions" herein.)
If and when the DOH and BLNR/DLNR act on all issues relating to Counts II
through VI, and depending upon their rulings, the KDC lawsuit may be moot.
Orders were entered on April 16, 1999 with regard to Count I, May 18, 1999 with
regard to Count VI, and June 3, 1999 with regard to Counts II through V. On
April 30, 1999, KDC filed a motion to determine prevailing party and to tax
attorney fees and costs and a motion for discovery sanctions. After hearing the
motion, the Court ruled that Plaintiffs were the prevailing party as to Counts
II and V and were entitled to fees and costs with regard to those counts, denied
Plaintiffs' motion for fees as the prevailing party with regard to Count VI,
denied HELCO's motion for fees as the prevailing party with regard to Count I
and granted Plaintiffs' request for discovery sanctions against HELCO for late
supplementation of responses to discovery requests. HELCO filed motions to alter
or amend the orders regarding attorneys' fees and costs, and orders granting
those motions were issued on September 22, 1999. HELCO appealed the amended
orders to the Hawaii Supreme Court, which dismissed the appeal on January 20,
2000, on the grounds that the appeal was premature. On September 1, 2000, KDC
and others filed a motion in Third Circuit Court to enter partial (nonfinal)
judgment based on the September 22, 1999 order. The motion was denied by an
order dated September 21, 2000.
HELCO intends to continue to vigorously defend against the claims raised in this
case and in related administrative actions.
BLNR petitions. On August 5, 1998, KDC filed with the BLNR a Petitionrequest for - ---------------
Declaratory Ruling under HRS Section 91-8. The petitionextension of the
construction deadline and, in January 2001, the BLNR sent the request to a
contested case hearing. A hearings officer has been selected, but procedures and
schedules for the hearing have not yet been set. In April 2001, however, the
Circuit Court ordered the BLNR to allow discovery in the contested case hearing,
with the Court maintaining jurisdiction over any questions of privilege. Third,
in December 2000, the Circuit Court granted a motion to stay further
construction until extension of the construction deadline is obtained from the
BLNR, at which time the Court would consider lifting the stay.
On March 28, 2001, an individual plaintiff filed a motion for post-judgment
relief and a subpoena to require a former BLNR member to appear before the
Circuit Court. When the hearing on this motion was postponed from April 23, 2001
to May 7, 2001, the individual plaintiff did not issue another subpoena to the
former BLNR member. Citing testimony in support of the project given by the
former BLNR member at a March 6, 2001 public hearing on HELCO's air permit, the
individual alleged that the standard conditions in HAR Section 13-2-21 applytestimony established grounds to HELCO's default entitlement
to use its Keahole site,conclude that the
letter issued to HELCOformer BLNR member was unduly influenced by evidence of the DLNR in January
1998 was erroneous because it failed to incorporate all conditions applicable toneed for the existing permits, and that the DOH issued three separate Notices of
Violation (NOVs) to HELCO in 1992 and 1998 for violation of clean air rules,
which NOVs are alleged to constitute violations under the existing permits and
render such permits null and void. The petition requestedproject
that the BLNR commence
ahad improperly admitted during the contested case on the petition; that the BLNR determine that HELCO has
violated the terms of its existing conditional use permits, causing such permits
to be null and void;hearing in 1995-
1996 and that the BLNR determinemember voted to approve HELCO's application on that
HELCO has violatedbasis. The plaintiff therefore requested the conditions applicableCircuit Court to order that: (1)
the agency record be supplemented by adding the transcript of the former BLNR
member's testimony; (2) the plaintiff be allowed an opportunity to argue the
prejudicial effect of HELCO's submission of evidence on the need for the project
on her
15
right to due process; (3) the plaintiff's motion be granted and the Circuit
Court thereby: (a) vacate its February 11, 1998 judgment denying her cross-
appeal; (b) grant her cross-appeal; (c) suspend operation of the default
entitlement such that HELCO should be
enjoined from usingand the proceedings now before the BLNR; (d) certify the remaining
issues in the current appeal to the Supreme Court as being issues for
interlocutory appeal; and (e) certify its order in granting her motion to the
Supreme Court. A hearing on this motion was held on May 7, 2001. The Court took
the matter under advisement and requested additional briefing on the issues by
May 18, 2001.
Air permit. In 1997, the EPA approved a draft permit and the DOH issued a final
- ----------
air permit for the Keahole property under such default entitlement.
Pursuant to a ruling from the Third Circuit Court that the BLNR decide certain
issues raised in this petition by November 30, 1999 (see "CDUP amendment"
herein), these issues were discussed at an October 22, 1999 BLNR meeting. The
BLNR determined that noneexpansion project. Nine appeals of the standard land use conditions were inconsistent
with HELCO's ability to proceed under its default
20
entitlement and, therefore, eachissuance of
the standard land use conditions applied to
the expansion. The BLNR did not, at that time, determine whether HELCO has
complied with the applicable conditions. The BLNR also determined that specific
conditions imposed by the BLNR on HELCO's original CDUP and amendments thereto
continue to apply to the existing plant but not to the expansion under the
default entitlement. An order to this effect was issued on November 19, 1999.
On February 7, 2000, KDC and an individual plaintiffpermit were filed with the BLNREPA's Environmental Appeals Board (EAB). In
November 1998, the EAB denied several of the appeals, but directed the DOH to
reopen the permit for the limited purpose of (1) providing an updated air
quality impact report on sulfur dioxide and particulate matter ambient
concentrations and (2) either providing a Request to Nullify "Default Entitlement." In the request, it is alleged that
HELCO's default entitlement is void because (1) HELCO cannot satisfy all
conditions and laws, (2) HELCO forfeited its default entitlement because it
redesignedsufficient explanation of why certain
facilities it has already constructeddata used to support existing CT-
2 rather than CT-4the permit were reasonably representative or performing a
new air quality analysis based on data shown to be representative. Upon remand,
the EPA and CT-5,DOH required additional data collection, which was satisfactorily
completed in April 2000. A draft permit was issued in January 2001 by the DOH,
and (3) the BLNR should exercise its right-to-
repurchase clauseDOH held a public hearing in HELCO's land patent. At its hearing on February 25, 2000,March 2001. The DOH is currently preparing
responses to comments submitted at the BLNR denied KDC's request. The BLNR stated that it has the power to consider
whether conditions have been met and to enforce those conditions if they are not
met, but not to enforce conditions in a way which violates either HRS Section
183-41 or the order of the Third Circuit Court which recognized HELCO's ability
to proceed with the Keahole project under a default entitlement. As to the third
claim, the BLNR authorized the issuance of a land patent with a corrected
repurchase provision at its hearing on February 25, 2000, after which time the
repurchase issue became moot sincepublic hearing. HELCO continues to usework
with the land for public
utility purposes. (See "KDC declaratory judgment action," relating to Count VI.)
A written decision onDOH and EPA with the February 25, 2000 rulings was issued on August 16,
2000.
Subsequentobjective of having the final air permit reissued
in mid-2001 and of reaching a final resolution of any appeals to the February 25th hearing, an issue was raised administrativelyEAB as
to whether the BLNR should impose condition 15, which would impose a completion
deadline on the project of three years following "approval." The issue was
included on the agenda for the April 14, 2000 BLNR hearing. However, during the
hearing the BLNR passed a motion to remove the item from the agenda. For a
discussion of the subsequent decision of the Third Circuit Court on this issue
and a discussion of HELCO's request for extension, see "CDUP amendment" above.expeditiously as possible thereafter.
IPP complaints filed with the PUC and other IPP information.Complaints. Three IPPs-KCP,IPPs--Kawaihae Cogeneration Partners (KCP), Enserch
- -----------------------------------------------------------
Enserch--------------
Development Corporation (Enserch) and Hilo Coast Power Company (HCPC)-
filed--filed
separate complaints against HELCO with the PUC in 1993, 1994 and 1997,1999, respectively, alleging
that they are each entitled to PPAsa power purchase agreement (PPA) to provide HELCO
with additional capacity. KCP and Enserch each claimed that they would be a
substitute for HELCO's planned 56 MW (net) DTCC unit atexpansion of Keahole.
The EnserchIn 1994 and HCPC complaints have been resolved.
In September 1995, the PUC allowed HELCO to continue to pursue construction of and commit
expenditures for the second combustion turbine (CT-5)CT-5 and the steam
recovery generator (ST-7) for its planned DTCC unit,ST-7, but stated in its ordernoted that "no part of the project maysuch costs are not to be included
in HELCO's rate base unless and until the project is in fact installed and is"is used and useful for utility
purposes." The PUC also ordered HELCO to continue negotiating with the IPPs and
held that the facility to be built (i.e., either HELCO's or one of the IPP's)
should be the one that can be most
expeditiously put into service at "allowable cost."
The current status of the KCP complaint is as follows:
KCP complaint. In January 1996, the PUC ordered HELCO to continue in good
-------------
faith to negotiateEnserch and HCPC complaints have been resolved. An Enserch affiliate (which
was subsequently sold) has a PUC-approved PPA with KCP. In May 1997, KCP filed a motion for
unspecified "sanctions" against HELCO for allegedly failing to negotiate in
good faith. In June 1997, KCP filed a motion asking the PUC to designate
KCP's facility as the next generating unit on the HELCO system and to
determine the "allowable cost" which would be payable by HELCO to KCP.
HELCO filed memoranda in opposition to KCP's motions. The PUC held an
evidentiary hearing in August 1997. KCP filed two other motions, which
HELCO opposed, to supplement the record. The PUC issued an Order in June
1998 which denied all of KCP's pending motions; provided rulings and/or
guidance on certain avoided cost and contract issues; directed HELCO to
prepare an updated avoided cost calculation that includes the Encogen
agreement; and directed HELCO and KCP to resume contract negotiations.
HELCO filed a motion for partial reconsideration with respect to one
avoided cost issue. The PUC granted HELCO's motion and modified its order
in July 1998. HELCO resumed negotiations with KCP in 1998 in compliance
with the Order, but no agreement has been reached. On November 20, 1998,
KCP filed a motion asking the PUC to appoint a hearings officer to make a
21
recommendation to the PUC regarding the terms and conditions of a PPA and
the calculation of avoided cost. HELCO filed a memorandum in opposition to
KCP's motion on December 2, 1998. On July 9, 1999, KCP filed an additional
motion, asking the PUC to reopen its complaint docket and to enforce the
Public Utility Regulatory Policies Act of 1978 by calculating the utility's
avoided cost. HELCO filed a memorandum in opposition to KCP's motion on
July 16, 1999, KCP filed a reply on July 22, 1999 and the Consumer Advocate
filed a SOP on August 2, 1999. No decision has been issued on KCP's two
most recent motions.
On October 29, 1999, the Third Circuit Court ruled that the lease between
Waimana and the Department of Hawaiian Home Lands for the site on which
KCP's plant was proposed to be built was invalid. In addition, KCP's air
permit is under scrutiny by the DOH, as it may have expired on January 31,
2000. In light of these and other issues, management believes that KCP's
proposal is not viable and, therefore, should not impact installation of
CT-4 and CT-5.
On January 16, 1998, HELCO filed with the PUC an application for approval of a
PPA for a 60 MW (net)
facility, and an interconnection agreement with Encogen
Hawaii, L.P. (Encogen), an Enserch affiliate, both dated October 22, 1997.which was placed in service in 2000. The PUC issuedalso approved a decisionrestated
and order approvingamended PPA between HELCO and HCPC which requires that HCPC continue to
provide HELCO with 22 MW of firm capacity from 2000 to 2004. HELCO may terminate
the agreements on July 14, 1999. The
decision was amended at HELCO's request on July 21, 1999PPA with HCPC as of the end of 2002, 2003 or 2004 by giving advance written
notice and became final and
nonappealable on August 23, 1999. Enserch sold its interestpaying an early termination amount of $0.5 million for each of the
remaining years in the partnership,
now called Hamakua Energy Partners L.P. (Hamakua Partners) in November 1999. The
first phase of the project (22 MW) began commercial operation on August 12, 2000
and, according to Hamakua Partners, the remainder of its 60 MW facility is
expected to be in-service by December 2000. This PPA wasfive-year term. Both PPAs were necessary to ensure
reliable service to customers on the island of Hawaii and, in the opinion of
management, doesdo not supplant the need for CT-4 and CT-5.
In DecemberOctober 1999, the PUC approved an amendedCircuit Court ruled that the lease for KCP's proposed plant
site was invalid. Based on this ruling and restated PPA between HELCO and
HCPC under which HCPC will continue to provide 22 MW of firm capacity. The term
of the agreement is for five years (through December 31, 2004) and may continue
beyondother reasons, management
believes that time unless either party provides notice of termination to the other
party by May 30 in the year of termination. HELCO has the right to terminate the
contract as of the end of 2002, 2003 or 2004KCP's pending proposal for an early termination amount of
$0.5 million for each of the remaining years in the five-year term. Like the PPA
with Hamakua Partners, this restated and amended PPA with HCPC was necessary to
ensure reliable service to customers. However, because the short term of thea PPA is intended to ensure reliability until the Keahole project is constructed, in
the opinion of management it does not supplantviable and, therefore,
will not impact the need for CT-4 and CT-5.
Apollo Energy Corporation (Apollo), which has an existing contract to provide
HELCO with as-available windpower through June 29, 2002, filed a petition for
hearing withManagement's evaluation; costs incurred. Management believes that the PUC on April 28, 2000, alleging that it had unsuccessfully
attempted for over 75 days to negotiate a new power purchase agreement with
HELCO. Apollo had offered to repower its existing 7 MW facility byissues
- ---------------------------------------
surrounding the end of
2000 and to install additional wind turbines, up to a total of 15 MW, by the end
of 2001. The parties agreed to limit to four issues the matters being presentedamendment to the PUC for guidance: whether Apollo is entitled to capacity payments;
whether Apollo is entitled toland use permit and applicable land use
conditions, the air permit, the IPP complaints and related matters will be
satisfactorily resolved and will not prevent HELCO from ultimately constructing
CT-4 and CT-5. Management currently expects that the BLNR, after holding a
minimum purchase rate; whether certain
performance standards should apply; and whether HELCO's proposed dispute
resolution provision should apply. Acontested case hearing, on these issues was held on
October 3-5, 2000, and briefing is to follow. Because Apollo is an as-
available energy provider, management believes this matter would not affectwill extend the needconstruction period for the Keahole project.
Pre-PSD workplant
expansion and noticesthat installation of violation. The costs for the CT-4 project (and,
-------------------------------------
to a lesser extent, the CT-5 project) include the costs of certain facilities
that benefit the existing Keahole power plant, but were originally scheduled to
be installed at the same time as the new generating units. HELCO proceeded with
the construction of the facilities that could be constructed prior to receipt of
the PSD permits for CT-4 and CT-5 (pre-PSD facilities) after receipt of the CDUP
amendment (as a result of the Third Circuit Court orders). (See "CDUP amendment"
herein.)
Pre-PSD facilities. The pre-PSD facilities include a
------------------
shop/warehouse/administration building (completed in 1998), fire protection
system upgrades (completed in September 1999), and a new water treatment
system (completed in December 1999, which supplies the demineralized water
needs of the existing CT at Keahole).
22
EPA NOV. In September 1998, the EPA issued an NOV to HELCO stating that
-------
HELCO violated the Hawaii State Implementation Plan by commencing
construction activities at the Keahole generating station without first
obtaining a final air permit. By law, 30 days after the NOV, the EPA may
issue an order requiring compliance with applicable laws, assessing
penalties and/or commencing a civil action seeking an injunction; however,
no order has yet been issued. In 1999, HELCO put the EPA on notice that
certain construction activities not affected by the NOV would continue, and
received approval to proceed with certain construction activities. However,
HELCO has halted work on other construction activities at Keahole until
further notice is provided or approval is obtained from the EPA, or untilwill begin when the final air
permit is received.
Contingency planning. In June 1995, HELCO filedeffective (i.e., after resolution of any EAB appeals), with an
expedited in-service date in the PUC its generation
- ---------------------
resource contingency plan detailing alternativessecond half of 2002. There can be no
assurances, however, that these results will be achieved or that this time frame
will be met.
The recovery of costs relating to CT-4 and mitigation measuresCT-5 are subject to address the delays that have occurred in adding new generation. Actions underrate-making
process governed by the plan (suchPUC. Management believes no adjustment to costs incurred
to put CT-4 and CT-5 into service is required as deferring the retirements of older, smaller units) have helped
HELCO maintain its reserve margin and reduce the risk of near-term capacity
shortages. In January 1996, the PUC opened a proceeding to evaluate HELCO's
contingency resource plan and HELCO's efforts to insure system reliability.
HELCO has filed reports with the PUC from time to time updating the contingency
plan and the status of implementing the plan. The last update was filed on March 31, 2000.
The first increment of new generation to be available to HELCO was added on
August 12, 2000 (Hamakua Partners' 22 MW CT). Despite delays in adding new
generation, HELCO's mitigation measures (including the extension of power
purchases from HCPC) should provide HELCO with sufficient generation reserve
margin to cover its projected monthly system peaks with units on scheduled
maintenance until additional new generation is added in late 2000 (the remaining
38 MW of Hamakua Partners' 60 MW DTCC unit) and in early to mid-2002 (CT-4 and
CT-5), and should provide HELCO with sufficient reserve margin in the event of
further delays in adding new generation. As new generation is added, HELCO will
retire its older, smaller generating units.
Costs incurred.2001. If it
becomes probable that CT-4 and/or CT-5 will not be - --------------
installed, however, HELCO may
be required to write-off a material portion of the costs incurred in its efforts
to put these units into service. As of September 30,
2000,March 31, 2001,
16
HELCO's costs incurred in its efforts to put CT-4 and CT-5 into service and to
support existing units amounted to approximately $81.0$74 million, including
$32.4$29 million for equipment and material purchases, $27.0$25 million for planning,
engineering, permitting, site development and other costs and $21.6$20 million for
an allowance for funds used during construction (AFUDC). As of September 30,
2000, approximately $23.5 million of the $81.0 million was transferred from
construction in progress to plant-in-service as such costs represent completed
pre-PSD facilities which relate to the existing units in service as well as to
CT-4 and CT-5.AFUDC.
Although management believes it has acted prudently with respect to the Keahole
project, effective December 1, 1998, HELCO decided to discontinue the accrual of
AFUDC on CT-4 and CT-5 (which would have been approximately $0.5 million after
tax per month). The length of due in part to the delays to date and potential further delays
were factors considered by management in its decision to discontinue the accrual
of AFUDC.delays.
HELCO has also deferred plans for ST-7 to approximately 2005. Since
ST-7 is not needed in the near future, noNo costs for ST-7 are included
in construction in progress.
Management believes that the issues surrounding the amendment to the land use
permit, the air permit, the IPP complaints and related matters will be
satisfactorily resolved and will not prevent HELCO from ultimately constructing
CT-4 and CT-5. The recovery of costs relating to CT-4 and CT-5 are subject to
the rate-making process governed by the PUC. Management believes no adjustment
to costs incurred to put CT-4 and CT-5 into service is required as of September
30, 2000.
Competition proceeding
On December 30, 1996, the PUC instituted a proceeding to identify and examine
the issues surrounding electric competition and to determine the impact of
competition on the electric utility infrastructure in Hawaii. After a
collaborative process involving the 19 parties to the proceeding, final
statements of position were prepared by several of the parties and submitted to
the PUC in October 1998. HECO's position is that retail competition is not
feasible in Hawaii, but that some of the benefits of competition can be achieved
through competitive bidding for new 23
generation, performance-based rate-making
(PBR) and innovative pricing provisions. The other parties to the proceeding
advanced numerous other proposals in their statements of position. TheIn January
2000, the PUC submitted a status report on its investigation to the Legislature.legislature.
In the report, the PUC stated that competitive bidding for new power supplies
(i.e., wholesale generation competition) is a logical first step to encourage
competition in the state's electric industry and that it plans to proceed with
an examination of the feasibility of competitive bidding. The PUC also indicated
in the report its plans to review specific policies to encourage renewable
energy resources in the power generation mix. The report states that "further
steps" by the PUC "will involve the development of specific policies to
encourage wholesale competition and the continuing examination of other areas
suitable for the development of competition." HECO cannot predict what the
ultimate outcome of the proceeding will be or which (if any) of the proposals
advanced in the proceeding will be implemented. In addition, some of the parties
may seek state legislative action on their proposals.
In May 1999, the PUC approved HECO's standard form contract for customer
retention that allows HECO to provide a rate option for customers who would
otherwise reduce their energy use from HECO's system by using energy from a
nonutility generator. Based on HECO's current rates, the standard form contract
provides a 2.77% and an 11.27% discount on base energy rates for "Large Power"
and "General Service Demand" customers, respectively. In March 2000, the PUC
approved a similar standard form contract for HELCO which, based on HELCO's
current rates, provides a 10.00% discount on base energy rates for "Large Power"
and "General Service Demand" customers.
In December 1999, HECO, HELCO and MECOMaui Electric Company, Limited (MECO) filed an
application with the PUC seeking permission to implement PBR in future rate
cases. The proposed PBR would allowhave allowed adjustments in the electric
utilities' rates (for up to five years after a rate case) based on an index-basedindex-
based price cap, an earnings sharing mechanism and a service quality mechanism.
In March 2000,early 2001, the PUC approved HELCO's standard form contractdismissed the electric utilities' PBR proposal without
prejudice, indicating it declines at this time to change its current cost of
service/rate of return methodology for customer
retention that allows HELCO to provide a rate option for customers who would
otherwise reduce their energy use from HELCO's system by using energy from a
nonutility generator. The standard form contract provides a 10% discount on base
energy rates for "Large Power" and "General Service Demand" customers. In May
1999, the PUC authorized HECO to offer a similar standard form contract.determining electric utility rates.
Environmental regulation
In early 1995, the DOH initially advised HECO, Hawaiian Tug & Barge Corp. (HTB),
Young Brothers, Limited (YB) and others that it 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
issued letters in December 1995, indicating that it had identified a number of
parties, including HECO, HTB and YB, who appear to be potentially responsible
for the contamination and/or operate their facilities upon contaminated land.
The DOH
17
met with these identified parties in January 1996 and certain of the identified
parties (including HECO, Chevron Products Company, the State of Hawaii
Department of Transportation Harbors Division and others) formed thea Honolulu
Harbor Work Group. Effective January 30, 1998, the Work Group and the DOH
entered into a voluntary agreement and scope of work to determine the nature and
extent of any contamination, the responsible parties and appropriate remedial
actions.
In 1999, the Work Group submitted reports to the DOH presenting environmental
conditions and recommendations for additional data gathering to allow for an
assessment of the need for risk-based corrective action (Conceptual Site Model).action. The Work Group also
engaged a consultant who identified 27 additional potentially responsible
parties (PRPs) who were not members of the Work Group, including YB. Under the
terms of the agreement for the sale of YB, HEI and The Old Oahu Tug Service,
Inc. (TOOTS, formerly HTB) have certain indemnity obligations, including
obligations with respect to the Honolulu Harbor investigation. Texaco Group, Inc. and Philips Petroleum have
joined the Work Group. In response to
the DOH's request for technical assistance, the EPA became involved with the
harbor investigation in June 2000. In August 2000, the Work Group, the DOH, the
EPA and the U.S. Coast Guard met to discuss the Conceptual Site Model, how to
proceed and other matters.
The Work Group is workingDOH issued notices to over 20 other PRPs, including YB, regarding the on
closing out any remaining obligations under the
voluntary agreement, including completing responses to questions raised by the
DOH on the Conceptual Site Model, and proposing an interim plan and procedure to
respond to petroleum dischargesgoing investigation in the Honolulu Harbor area. A new voluntary agreement and a
Joint Defense Agreement was signed by the parties in the Work Group and some of
the new PRPs, including Phillips Petroleum, but not YB. The next steps are
determining a method of cost allocation between the PRPs and remediation work.
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
further site analysis or future remediation and cleanup requirements, nor can it
estimate when such costs would be incurred. Certain of the costs incurred may be
24
claimed and covered under insurance policies, but such coverage is not
determinable at this time.
The Work Group is working on determining a fair
method of cost allocation within the group to fund future remediation work that
may be required by the DOH or EPA.
(6)(4) HECO-obligated mandatorily redeemable trust preferred securities of trust
- -----------------------------------------------------------------------
subsidiary trusts------------------------------------------------------------------------
subsidiaries holding solely HECO and HECO-guaranteed subordinated
------------------------------------------------------------------
debentures
- ----------------------------------------------------------------------------------
In March 1997, HECO Capital Trust I (Trust I), a grantor trust and a wholly
owned subsidiary of HECO, sold (i) in a public offering, 2 million of its HECO-
Obligated 8.05% Cumulative Quarterly Income Preferred Securities, Series 1997
(1997 trust preferred securities) with an aggregate liquidation preference of
$50 million and (ii) to HECO, common securities with a liquidation preference of
approximately $1.55 million. Proceeds from the sale of the 1997 trust preferred
securities and the common securities were used by Trust I to purchase 8.05%
Junior Subordinated Deferrable Interest Debentures, Series 1997 (1997 junior
deferrable debentures) issued by HECO in the principal amount of $31.55 million
and issued by each of MECO and HELCO in the respective principal amounts of
$10 million. The 1997 junior deferrable debentures, which bear interest at 8.05%
and mature on March 27, 2027, together with the subsidiary guarantees (pursuant
to which the obligations of MECO and HELCO under their respective debentures are
fully and unconditionally guaranteed by HECO), are the sole assets of Trust I.
The 1997 trust preferred securities must be redeemed at the maturity of the
underlying debt on March 27, 2027, which maturity may be shortened to a date no
earlier than March 27, 2002 or extended to a date no later than March 27, 2046,
and are not redeemable at the option of the holders, but may be redeemed by
Trust I, in whole or in part, from time to time, on or after March 27, 2002 or
upon the occurrence of certain events. All of the proceeds from the sale were
invested by Trust I in the underlying debt securities of HECO, HELCO and MECO.
In December 1998, HECO Capital Trust II (Trust II), a grantor trust and a wholly
owned subsidiary of HECO, sold (i) in a public offering, 2 million of its HECO-
Obligated 7.30% Cumulative Quarterly Income Preferred Securities, Series 1998
(1998 trust preferred securities) with an aggregate liquidation preference of
$50 million and (ii) to HECO, common securities with a liquidation preference of
approximately $1.55 million. Proceeds from the sale of the 1998 trust preferred
securities and the common securities were used by Trust II to purchase 7.30%
Junior Subordinated Deferrable Interest Debentures, Series 1998 (1998 junior
deferrable debentures) issued by HECO in the principal amount of $31.55 million
and issued by each of MECO and HELCO in the respective principal amounts of $10
million. The 1998 junior deferrable debentures, which bear interest at 7.30% and
mature on December 15, 2028, together with the subsidiary guarantees (pursuant
to which the obligations of MECO and
18
HELCO under their respective debentures are fully and unconditionally guaranteed
by HECO), are the sole assets of Trust II. The 1998 trust preferred securities
must be redeemed at the maturity of the underlying debt on December 15, 2028,
which maturity may be shortened to a date no earlier than December 15, 2003 or
extended to a date no later than December 15, 2047, and are not redeemable at
the option of the holders, but may be redeemed by Trust II, in whole or in part,
from time to time, on or after December 15, 2003 or upon the occurrence of
certain events. All of the proceeds from the sale were invested by Trust II in
the underlying debt securities of HECO, HELCO and MECO, who used such proceeds
from the sale of the 1998 junior deferrable debentures primarily to effect the
redemption of certain series of their preferred stock having a total par value
of $47 million.
The 1997 and 1998 junior deferrable debentures and the common securities of
the Trusts have been eliminated in HECO's consolidated balance sheets as of
September 30, 2000March 31, 2001 and December 31, 1999.2000. The 1997 and 1998 junior deferrable
debentures are redeemable only (i) at the option of HECO, MECO and HELCO,
respectively, in whole or in part, on or after March 27, 2002 (1997 junior
deferrable debentures) and December 15, 2003 (1998 junior deferrable debentures)
or (ii) at the option of HECO, in whole, upon the occurrence of a "Special
Event" (relating to certain changes in laws or regulations).
25
(7)(5) Recent accounting pronouncements
- ------------------------------------
Derivative instruments and hedging activities
In June 1998, the FASB issuedHECO and its subsidiaries adopted SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities," whichas amended, on January 1, 2001 with no
resulting material impact to consolidated financial condition, net income or
liquidity. SFAS No. 133 establishes accounting and reporting standards for
derivative instruments and hedging activities and requires that an entity
recognize all derivatives as either assets or liabilities in the statement of financial positionbalance sheet
and measure those instruments at fair value.
The
provisions of SFAS No. 133 were amended by SFAS No. 137 to be effective for all
fiscal quarters of fiscal years beginning after June 15, 2000. HECO and its
subsidiaries will adopt SFAS No. 133, as amended, on January 1, 2001. Management
believes the impact of adoption will not be material.
Certain transactions involving stock compensation
In March 2000, the FASB issued FASB Interpretation No. 44, " Accounting for
Certain Transactions Involving Stock Compensation, An Interpretation of APB
Opinion No. 25," which clarifies the application of APB Opinion No. 25 for
certain issues but does not address any issues related to the application of the
fair value method in SFAS No. 123. The Interpretation clarifies (a) the
definition of an employee for purposes of applying APB Opinion No. 25, (b) the
criteria for determining whether a plan qualifies as a noncompensatory plan, (c)
the accounting consequence of various modifications to the terms of a previously
fixed stock option award, and (d) the accounting for an exchange of stock
compensation awards in a business combination. HECO and its subsidiaries adopted
the provisions of the Interpretation on July 1, 2000 with no resulting material
impact to HECO's consolidated results of operations, financial condition or
liquidity.
2619
(8)(6) Consolidating financial information
- ----------------------------------------
Hawaiian Electric Company, Inc. and subsidiaries
Consolidating balance sheet (unaudited)
September 30, 2000
-----------------------------------------------------------------------------------March 31, 2001
------------------------------------------------------------------------------------
Reclassi-
fications
and
HECO HECO Elimina-and
Capital Capital tionselimina- HECO
(in thousands) HECO HELCO MECO Trust I Trust II Consolidatedtions consolidated
- -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
Assets
Utility plant, at cost
Utility plant (including construction
in progress)...................... $1,942,327Land.................................... $ 618,68725,283 $ 561,3112,196 $ 1,652 $ - $ - $ - $ 3,122,325
Less accumulated depreciation....... (737,715) (218,449) (191,517)29,131
Plant and equipment..................... 1,875,771 542,467 559,933 - - - (1,147,681)
------------ ----------- ---------- ---------- --------- ------------ -------------
Net utility plant............... 1,204,612 400,238 369,7942,978,171
Less accumulated depreciation........... (766,771) (225,237) (201,503) - - - 1,974,644
------------ ----------- ---------- ---------- --------- ------------ -------------
Investment in wholly owned subsidiaries,
at equity.......................... 333,663(1,193,511)
Plant acquisition adjustment, net....... - - 393 - - - - (333,663) -
------------ ----------- ---------- ---------- --------- ------------ -------------
Current assets
Cash and equivalents................ 9 2,555 868393
Construction in progress................ 86,957 80,171 10,178 - - - 3,432
Advances to affiliates ............. 14,800177,306
- 10,500 51,546 51,546 (128,392) -
Customer accounts receivable, net .. 54,295 14,579 11,704-------------------------------------------------------------------------------------------------------------------------------
Net utility plant................... 1,221,240 399,597 370,653 - - - 80,578
Accrued unbilled revenues, net...... 42,060 9,388 8,4701,991,490
- - - 59,918
Other accounts receivable, net...... 1,600 1,153 (4) - - (1,107) 1,642
Fuel oil stock, at average cost..... 21,844 3,928 5,363 - - - 31,135
Materials and supplies, at average
cost.............................. 9,488 3,118 7,528 - - - 20,134
Prepayments and other............... 2,973 1,300 346 - - - 4,619
------------ ----------- ---------- ---------- --------- ------------ -------------
Total current assets............ 147,069 36,021 44,775 51,546 51,546 (129,499) 201,458
------------ ----------- ---------- ---------- --------- ------------ -------------
Other assets
Regulatory assets................... 77,703 20,012 18,584 - - - 116,299
Other............................... 25,841 5,481 7,584 - - - 38,906
------------ ----------- ---------- ---------- --------- ------------ -------------
Total other assets.............. 103,544 25,493 26,168 - - - 155,205
------------ ----------- ---------- ---------- --------- ------------ -------------
$1,788,888 $ 461,752 $ 440,737 $ 51,546 $ 51,546 $(463,162) $ 2,331,307
============ =========== ========== ========== ========= ============ =============
Capitalization and liabilities
Capitalization
Common stock equity................. $ 829,206 $163,518 $167,053 $ 1,546 $ 1,546 $(333,663) $ 829,206
Cumulative preferred stock-not
subject to mandatory redemption... 22,293 7,000 5,000 - - - 34,293
HECO-obligated mandatorily
redeemable trust preferred
securities of subsidiary trusts
holding solely HECO and HECO-
guaranteed debentures............. - - - 50,000 50,000 - 100,000
Long-term debt, net................. 445,257 145,924 171,235 - - (103,092) 659,324
------------ ----------- ---------- ---------- --------- ------------ -------------
Total capitalization............ 1,296,756 316,442 343,288 51,546 51,546 (436,755) 1,622,823
------------ ----------- ---------- ---------- --------- ------------ -------------
Current liabilities
Short-term borrowings from
nonaffiliates and affiliate....... 92,803 14,800 - - - (25,300) 82,303
Accounts payable.................... 37,766 11,012 5,582 - - - 54,360
Interest and preferred
dividends payable................. 10,645 3,162 4,154 - - (144) 17,817
Taxes accrued....................... 48,894 20,286 23,099 - - - 92,279
Other............................... 3,858 1,298 4,921 - - (963) 9,114
------------ ----------- ---------- ---------- --------- ------------ -------------
Total current liabilities....... 193,966 50,558 37,756 - - (26,407) 255,873
------------ ----------- ---------- ---------- --------- ------------ -------------
Deferred credits and other liabilities
Deferred income taxes............... 117,878 10,660 9,172 - - - 137,710
Unamortized tax credits............. 28,387 9,201 10,445 - - - 48,033
Other............................... 19,704 23,153 15,695 - - - 58,552
------------ ----------- ---------- ---------- --------- ------------ -------------
Total deferred credits and
other liabilities.......... 165,969 43,014 35,312 - - - 244,295
------------ ----------- ---------- ---------- --------- ------------ -------------
Contributions in aid of construction... 132,197 51,738 24,381 - - - 208,316
------------ ----------- ---------- ---------- --------- ------------ -------------
$1,788,888 $ 461,752 $ 440,737 $ 51,546 $ 51,546 $(463,162) $ 2,331,307
============ =========== ========== ========== ========= ============ =============
27
Hawaiian Electric Company, Inc. and subsidiaries
Consolidating balance sheet
December 31, 1999
-------------------------------------------------------------------------------------
Reclassi-
fications
HECO HECO and
Capital Capital Elimina- HECO
(in thousands) HECO HELCO MECO Trust I Trust II tions Consolidated
- ----------------------------------------------------------------------------------------------------------------------------------
Assets
Utility plant, at cost
Utility plant (including construction
in progress)........................ $1,893,318 $ 602,504 $ 538,695 $ - $ - $ - $ 3,034,517
Less accumulated depreciation........... (696,045) (204,578) (175,750) - - - (1,076,373)
---------- --------- --------- ------- -------- --------- -----------
Net utility plant................... 1,197,273 397,926 362,945 - - - 1,958,144
---------- --------- --------- ------- -------- --------- ------------------------------------------------------------------------------------------------------------------------------------------
Investment in wholly owned subsidiaries,
at equity............................... 326,646337,311 - - - - (326,646)(337,311) -
---------- --------- --------- ------- -------- --------- ------------ -------------------------------------------------------------------------------------------------------------------------------
Current assets
Cash and equivalents.................... 1,039 198 7299 4 406 - - - 1,966419
Advances to affiliates.................. 26,20018,100 - 8,4002,000 51,546 51,546 (137,692)(123,192) -
Customer accounts receivable, net....... 46,744 12,155 9,86948,493 13,942 12,754 - - - 68,76875,189
Accrued unbilled revenues, net.......... 37,454 8,924 7,45238,016 9,199 7,676 - - - 53,83054,891
Other accounts receivable, net.......... 186 920 2742,131 641 173 - - 792 2,172(913) 2,032
Fuel oil stock, at average cost......... 24,438 3,610 6,90624,204 3,372 8,236 - - - 34,95435,812
Materials and supplies, at average cost. 9,096 3,195 7,7558,234 2,386 8,113 - - - 20,04618,733
Prepayments and other................... 3,076 1,258 31525,710 4,999 1,879 - - - 4,649
---------- --------- --------- ------- -------- --------- -----------32,588
- -------------------------------------------------------------------------------------------------------------------------------
Total current assets................ 148,233 30,260 41,700164,897 34,543 41,237 51,546 51,546 (136,900) 186,385
---------- --------- --------- ------- -------- --------- -----------(124,105) 219,664
- -------------------------------------------------------------------------------------------------------------------------------
Other assets
Regulatory assets....................... 77,264 20,233 17,26277,685 19,498 18,476 - - - 114,759115,659
Other................................... 28,955 7,393 7,17326,228 6,258 7,530 - - - 43,521
---------- --------- --------- ------- -------- --------- -----------40,016
- -------------------------------------------------------------------------------------------------------------------------------
Total other assets.................. 106,219 27,626 24,435103,913 25,756 26,006 - - - 158,280
---------- --------- --------- ------- -------- --------- -----------
$1,778,371155,675
- -------------------------------------------------------------------------------------------------------------------------------
$1,827,361 $ 455,812459,896 $ 429,080437,896 $51,546 $51,546 $(461,416) $ 51,546 $(463,546) $ 2,302,809
========== ========= ========= ======= ======== ========= ===========2,366,829
===============================================================================================================================
Capitalization and liabilities
Capitalization
Common stock equity..................... $ 806,103846,470 $ 159,719165,062 $ 163,835169,157 $ 1,546 $ 1,546 $(326,646)$(337,311) $ 806,103846,470
Cumulative preferred stock-not
subject to mandatory redemption... 22,293 7,000 5,000 - - - 34,293
HECO-obligated mandatorily redeemable
trust preferred securities of
subsidiary trusts holding solely HECO
and HECO-guaranteed debentures.......................debentures..... - - - 50,000 50,000 - 100,000
Long-term debt, net..................... 432,112 145,810 171,200debt.......................... 462,935 145,939 171,594 - - (103,093) 646,029
---------- --------- --------- ------- -------- --------- -----------(103,092) 677,376
- -------------------------------------------------------------------------------------------------------------------------------
Total capitalization................ 1,260,508 312,529 340,0351,331,698 318,001 345,751 51,546 51,546 (429,739) 1,586,425
---------- --------- --------- ------- -------- --------- -----------(440,403) 1,658,139
- -------------------------------------------------------------------------------------------------------------------------------
Current liabilities
Short-term borrowings from
nonaffiliates and affiliate......... 115,413 26,200borrowings-nonaffiliates..... 96,869 - - - (34,600) 107,013
Accounts payable........................ 36,658 6,977 8,481- - 96,869
Short-term borrowings-affiliate......... 3,964 18,100 - - - 52,116(20,100) 1,964
Accounts payable........................ 33,248 9,043 7,518 - - - 49,809
Interest and preferred dividends payable............................... 4,922 1,486 1,910payable 9,995 3,151 3,904 - - (158) 8,160(113) 16,937
Taxes accrued........................... 37,876 13,205 15,45435,442 13,445 16,887 - - - 66,53565,774
Other................................... 21,721 4,362 4,45113,656 2,955 4,109 - - 951 31,485
---------- --------- --------- ------- -------- --------- -----------(800) 19,920
- -------------------------------------------------------------------------------------------------------------------------------
Total current liabilities........... 216,590 52,230 30,296193,174 46,694 32,418 - - (33,807) 265,309
---------- --------- --------- ------- -------- --------- -----------(21,013) 251,273
- -------------------------------------------------------------------------------------------------------------------------------
Deferred credits and other liabilities
Deferred income taxes................... 111,345 10,413 9,347118,439 10,487 9,020 - - - 131,105137,946
Unamortized tax credits................. 28,270 9,238 10,69828,040 8,964 10,474 - - - 48,20647,478
Other................................... 29,015 21,712 14,73521,805 23,660 15,904 - - - 65,462
---------- --------- --------- ------- -------- --------- -----------61,369
- -------------------------------------------------------------------------------------------------------------------------------
Total deferred credits and other
liabilities.............. 168,630 41,363 34,780liabilities...................... 168,284 43,111 35,398 - - - 244,773
---------- --------- --------- ------- -------- --------- -----------246,793
- -------------------------------------------------------------------------------------------------------------------------------
Contributions in aid of construction....... 132,643 49,690 23,969134,205 52,090 24,329 - - - 206,302
---------- --------- --------- ------- -------- --------- -----------
$1,778,371210,624
- -------------------------------------------------------------------------------------------------------------------------------
$1,827,361 $ 455,812459,896 $ 429,080437,896 $51,546 $51,546 $(461,416) $ 2,366,829
===============================================================================================================================
20
Hawaiian Electric Company, Inc. and subsidiaries
Consolidating balance sheet (unaudited)
December 31, 2001
------------------------------------------------------------------------------------
Reclassi-
fications
HECO HECO and
Capital Capital elimina- HECO
(in thousands) HECO HELCO MECO Trust I Trust II tions consolidated
- -------------------------------------------------------------------------------------------------------------------------------
Assets
Utility plant, at cost
Land.................................... $ 24,999 $ 2,470 $ 3,568 $ - $ - $ - $ 31,037
Plant and equipment..................... 1,865,486 556,094 552,573 - - - 2,974,153
Less accumulated depreciation........... (751,894) (222,476) (195,814) - - - (1,170,184)
Plant acquisition adjustment, net....... - - 406 - - - 406
Construction in progress................ 82,105 64,552 10,526 - - - 157,183
- -------------------------------------------------------------------------------------------------------------------------------
Net utility plant................... 1,220,696 400,640 371,259 - - - 1,992,595
- -------------------------------------------------------------------------------------------------------------------------------
Investment in wholly owned subsidiaries,
at equity............................... 333,809 - - - - (333,809) -
- -------------------------------------------------------------------------------------------------------------------------------
Current assets
Cash and equivalents.................... 1,398 4 132 - - - 1,534
Advances to affiliates.................. 21,800 - - 51,546 $(463,546)51,546 (124,892) -
Customer accounts receivable, net....... 60,484 15,022 13,040 - - - 88,546
Accrued unbilled revenues, net.......... 44,448 10,144 9,428 - - - 64,020
Other accounts receivable, net.......... 4,311 920 231 - - (36) 5,426
Fuel oil stock, at average cost......... 24,176 3,439 9,509 - - - 37,124
Materials and supplies, at average cost. 6,958 2,365 7,464 - - - 16,787
Prepayments and other................... 3,130 1,251 316 - - - 4,697
- -------------------------------------------------------------------------------------------------------------------------------
Total current assets................ 166,705 33,145 40,120 51,546 51,546 (124,928) 218,134
- -------------------------------------------------------------------------------------------------------------------------------
Other assets
Regulatory assets....................... 77,717 19,838 19,068 - - - 116,623
Other................................... 27,743 5,823 7,604 - - - 41,170
- -------------------------------------------------------------------------------------------------------------------------------
Total other assets.................. 105,460 25,661 26,672 - - - 157,793
- -------------------------------------------------------------------------------------------------------------------------------
$1,826,670 $ 2,302,809
========== ========= ========= ======= ======== ========= ===========459,446 $ 438,051 $51,546 $51,546 $(458,737) $ 2,368,522
===============================================================================================================================
Capitalization and liabilities
Capitalization
Common stock equity..................... $ 825,012 $ 162,901 $ 167,816 $ 1,546 $ 1,546 $(333,809) $ 825,012
Cumulative preferred stock-not
subject to mandatory redemption... 22,293 7,000 5,000 - - - 34,293
HECO-obligated mandatorily redeemable
trust preferred securities of
subsidary trusts holding solely HECO
and HECO-guaranteed debentures..... - - - 50,000 50,000 - 100,000
Long-term debt.......................... 453,310 145,931 171,582 - - (103,092) 667,731
- -------------------------------------------------------------------------------------------------------------------------------
Total capitalization................ 1,300,615 315,832 344,398 51,546 51,546 (436,901) 1,627,036
- -------------------------------------------------------------------------------------------------------------------------------
Current liabilities
Short-term borrowings-nonaffiliates..... 104,398 - - - - - 104,398
Short-term borrowings-affiliate......... 8,764 20,300 1,500 - - (21,800) 8,764
Accounts payable........................ 51,249 10,146 10,303 - - - 71,698
Interest and preferred dividends payable 6,779 1,790 2,045 - - (131) 10,483
Taxes accrued........................... 46,094 15,572 16,520 - - - 78,186
Other................................... 6,343 534 3,587 - - 95 10,559
- -------------------------------------------------------------------------------------------------------------------------------
Total current liabilities........... 223,627 48,342 33,955 - - (21,836) 284,088
- -------------------------------------------------------------------------------------------------------------------------------
Deferred credits and other liabilities
Deferred income taxes................... 116,642 10,535 9,889 - - - 137,066
Unamortized tax credits................. 28,179 8,975 10,449 - - - 47,603
Other................................... 22,284 23,821 15,106 - - - 61,211
- -------------------------------------------------------------------------------------------------------------------------------
Total deferred credits and other
liabilities..................... 167,105 43,331 35,444 - - - 245,880
- -------------------------------------------------------------------------------------------------------------------------------
Contributions in aid of construction....... 135,323 51,941 24,254 - - - 211,518
- -------------------------------------------------------------------------------------------------------------------------------
$1,826,670 $ 459,446 $ 438,051 $51,546 $51,546 $(458,737) $ 2,368,522
===============================================================================================================================
2821
Hawaiian Electric Company, Inc. and subsidiaries
Consolidating statement of income (unaudited)
Three months ended September 30, 2000
------------------------------------------------------------------------------------------March 31, 2001
------------------------------------------------------------------------------------
Reclassi-
fications
HECO HECO and
Capital Capital Elimina-elimina- HECO
(in thousands) HECO HELCO MECO Trust I Trust II tions Consolidatedconsolidated
- ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
Operating revenues.................... $235,151 $ 50,240 $ 49,872$215,219 $50,251 $51,823 $ - $ - $ - $335,263
-------- -------- -------- ------- -------- -------- --------$317,293
- --------------------------------------------------------------------------------------------------------------------------
Operating expenses
Fuel oil.............................. 65,316 10,887 19,68057,627 7,885 22,733 - - - 95,88388,245
Purchased power....................... 70,275 12,947 1,87063,461 18,074 381 - - - 85,09281,916
Other operation....................... 20,346 4,719 5,51719,590 4,338 5,846 - - - 30,58229,774
Maintenance........................... 9,641 2,691 3,82410,512 1,769 2,916 - - - 16,156
Depreciation.......................... 14,910 4,809 4,88615,197
Depreciation, of property, plant
and equipment...................... 15,196 4,065 5,348 - - - 24,60524,609
Taxes, other than income taxes........ 22,125 4,791 4,69920,766 4,772 4,953 - - - 31,61530,491
Income taxes.......................... 10,304 2,713 2,8118,229 2,603 2,772 - - - 15,828
-------- -------- -------- ------- -------- -------- --------
212,917 43,557 43,28713,604
- --------------------------------------------------------------------------------------------------------------------------
195,381 43,506 44,949 - - - 299,761
-------- -------- -------- ------- -------- -------- --------283,836
- --------------------------------------------------------------------------------------------------------------------------
Operating income...................... 22,234 6,683 6,58519,838 6,745 6,874 - - - 35,502
-------- -------- -------- ------- -------- -------- --------33,457
- --------------------------------------------------------------------------------------------------------------------------
Other income
Allowance for equity funds used
during construction................ 1,169 92 2441,076 57 132 - - - 1,5051,265
Equity in earnings of subsidiaries.... 8,6588,484 - - - - (8,658)(8,484) -
Other, net............................ 1,848 234 2651,176 116 56 1,037 941 (2,469) 1,856
-------- -------- -------- ------- -------- -------- --------
11,675 326 509(2,349) 977
- --------------------------------------------------------------------------------------------------------------------------
10,736 173 188 1,037 941 (11,127) 3,361
-------- -------- -------- ------- -------- -------- --------(10,833) 2,242
- --------------------------------------------------------------------------------------------------------------------------
Income before interest and
other charges............................ 33,909 7,009 7,094charges...................... 30,574 6,918 7,062 1,037 941 (11,127) 38,863
-------- -------- -------- ------- -------- -------- --------(10,833) 35,699
- --------------------------------------------------------------------------------------------------------------------------
Interest and other charges
Interest on long-term debt............ 5,833 1,905 2,2865,819 1,909 2,201 - - - 10,0249,929
Amortization of net bond premium
and expense........................ 318 79 88327 102 101 - - - 485530
Other interest charges................ 3,101 732 3613,315 749 358 - - (2,469) 1,725(2,349) 2,073
Allowance for borrowed funds used
during construction................ (633) (56) (118)(582) (35) (59) - - - (807)
Preferred stock dividends of
subsidiaries......................... - - - - - 228 228
Preferred securities distributions
of trust subsidiaries.............. - - - - - 1,918 1,918
-------- -------- -------- ------- -------- -------- --------
8,619 2,660 2,617 - - (323) 13,573
-------- -------- -------- ------- -------- -------- --------
Income before preferred stock
dividends of HECO.................. 25,290 4,349 4,477 1,037 941 (10,804) 25,290
Preferred stock dividends of HECO..... 270 133 95 1,006 912 (2,146) 270
-------- -------- -------- ------- -------- -------- --------
Net income for common stock........... $ 25,020 $ 4,216 $ 4,382 $ 31 $ 29 $ (8,658) $ 25,020
======== ======== ======== ======= ======== ======== ========
Hawaiian Electric Company, Inc. and subsidiaries
Consolidating statement of retained earnings
Three months ended September 30, 2000
------------------------------------------------------------------------------------------
Reclassi-
fications
HECO HECO and
Capital Capital Elimina- HECO
(in thousands) HECO HELCO MECO Trust I Trust II tions Consolidated
- --------------------------------------------------------------------------------------------------------------------------------
Retained earnings, beginning of period $441,199 $62,430 $71,612 $ - $ - $(134,042) $441,199
Net income for common stock........... 25,020 4,216 4,382 31 29 (8,658) 25,020
Common stock dividends................ (18,011) (3,060) (3,164) (31) (29) 6,284 (18,011)
-------- ------- ------- ------- -------- --------- --------
Retained earnings, end of period...... $448,208 $63,586 $72,830 $ - $ - $(136,416) $448,208
======== ======= ======= ======= ======== ========= ========
29
Hawaiian Electric Company, Inc. and subsidiaries
Consolidating statement of income
Three months ended September 30, 1999
----------------------------------------------------------------------------------------------
Reclassi-
fications
HECO HECO and
Capital Capital Elimina- HECO
(in thousands) HECO HELCO MECO Trust I Trust II tions Consolidated
- -------------------------------------------------------------------------------------------------------------------------------
Operating revenues.................... $192,920 $41,212 $41,793 $ - $ - $ - $ 275,925
-------- ------- ------- ------- -------- --------- ---------
Operating expenses
Fuel oil.............................. 36,428 9,157 13,357 - - - 58,942
Purchased power....................... 63,578 7,064 1,310 - - - 71,952
Other operation....................... 24,284 5,911 5,535 - - - 35,730
Maintenance........................... 7,727 1,625 5,084 - - - 14,436
Depreciation.......................... 14,040 4,492 4,790 - - - 23,322
Taxes, other than income taxes........ 18,223 3,837 3,979 - - - 26,039
Income taxes.......................... 8,704 2,541 2,174 - - - 13,419
-------- ------- ------- ------- -------- --------- --------
172,984 34,627 36,229 - - - 243,840
-------- ------- ------- ------- -------- --------- ---------
Operating income...................... 19,936 6,585 5,564 - - - 32,085
-------- ------- ------- ------- -------- --------- ---------
Other income
Allowance for equity funds used
during construction................ 880 100 196 - - - 1,176
Equity in earnings of subsidiaries.... 7,421 - - - - (7,421) -
Other, net............................ 889 266 292 1,037 941 (2,427) 998
-------- ------- ------- ------- -------- --------- ---------
9,190 366 488 1,037 941 (9,848) 2,174
-------- ------- ------- ------- -------- --------- ---------
Income before interest and
other charges...................... 29,126 6,951 6,052 1,037 941 (9,848) 34,259
-------- ------- ------- ------- -------- --------- ---------
Interest and other charges
Interest on long-term debt............ 5,776 2,148 2,389 - - - 10,313
Amortization of net bond premium
and expense........................ 284 69 83 - - - 436
Other interest charges................ 3,040 718 163 - - (2,427) 1,494
Allowance for borrowed funds used
during construction................ (558) (61) (97) - - - (716)(676)
Preferred stock dividends of
subsidiaries......................... - - - - - 229 229
Preferred securities distributions
of trust subsidiaries.............. - - - - - 1,919 1,919
-------- ------- ------- ------- -------- --------- ---------
8,542 2,874 2,538- --------------------------------------------------------------------------------------------------------------------------
8,879 2,725 2,601 - - (279) 13,675
-------- ------- ------- ------- -------- --------- ---------(201) 14,004
- --------------------------------------------------------------------------------------------------------------------------
Income before preferred stock
dividends of HECO.................. 20,584 4,077 3,51421,695 4,193 4,461 1,037 941 (9,569) 20,584(10,632) 21,695
Preferred stock dividends of HECO..... 269 133 96 1,007 912270 134 95 1,006 913 (2,148) 269
-------- ------- ------- ------- -------- --------- ---------270
- --------------------------------------------------------------------------------------------------------------------------
Net income for common stock........... $ 20,31521,425 $ 3,9444,059 $ 3,4184,366 $ 3031 $ 2928 $ (7,421)(8,484) $ 20,315
======== ======= ======= ======= ======== ========= =========21,425
==========================================================================================================================
Hawaiian Electric Company, Inc. and subsidiaries
Consolidating statement of retained earnings (unaudited)
Three months ended September 30, 1999
---------------------------------------------------------------------------------------March 31, 2001
------------------------------------------------------------------------------------
Reclassi-
fications
HECO HECO and
Capital Capital Elimina-elimina- HECO
(in thousands) HECO HELCO MECO Trust I Trust II tions Consolidatedconsolidated
- -----------------------------------------------------------------------------------------------------------------------------------
Retained earnings, beginning of period.... $415,944 $56,918 $67,455 $ - $ - $(124,373) $415,944
Net income for common stock............... 20,315 3,944 3,418 30 29 (7,421) 20,315
Common stock dividends.................... (14,419) (1,340) - (30) (29) 1,399 (14,419)
-------- ------- ------- ------- -------- --------- --------
Retained earnings, end of period.......... $421,840 $59,522 $70,873 $ - $ - $(130,395) $421,840
======== ======= ======= ======= ======== ========= ========
30
Hawaiian Electric Company, Inc. and subsidiaries
Consolidating statement of income
Nine months ended September 30, 2000
-------------------------------------------------------------------------------------------
Reclassi-
fications
HECO HECO and
Capital Capital Elimina- HECO
(in thousands) HECO HELCO MECO Trust I Trust II tions Consolidated
- ---------------------------------------------------------------------------------------------------------------------------------
Operating revenues.................... $648,225 $141,030 $140,912 $ - $ - $ - $930,167
-------- -------- -------- ------- -------- --------- --------
Operating expenses
Fuel oil.............................. 171,972 35,917 54,241 - - - 262,130
Purchased power....................... 191,082 29,647 5,033 - - - 225,762
Other operation....................... 57,118 13,669 15,000 - - - 85,787
Maintenance........................... 26,726 6,165 9,420 - - - 42,311
Depreciation.......................... 44,106 14,507 14,656 - - - 73,269
Taxes, other than income taxes........ 61,257 13,400 13,324 - - - 87,981
Income taxes.......................... 29,450 7,842 8,930 - - - 46,222
-------- -------- -------- ------- -------- --------- --------
581,711 121,147 120,604 - - - 823,462
-------- -------- -------- ------- -------- --------- --------
Operating income...................... 66,514 19,883 20,308 - - - 106,705
-------- -------- -------- ------- -------- --------- --------
Other income
Allowance for equity funds used
during construction................ 3,081 210 811 - - - 4,102
Equity in earnings of subsidiaries.... 26,345 - - - - (26,345) -
Other, net............................ 3,640 613 911 3,112 2,822 (7,529) 3,569
-------- -------- -------- ------- -------- --------- --------
33,066 823 1,722 3,112 2,822 (33,874) 7,671
-------- -------- -------- ------- -------- --------- --------
Income before interest and
other charges...................... 99,580 20,706 22,030 3,112 2,822 (33,874) 114,376
-------- -------- -------- ------- -------- --------- --------
Interest and other charges
Interest on long-term debt............ 17,318 5,715 6,843 - - - 29,876
Amortization of net bond premium
and expense........................ 952 234 266 - - - 1,452
Other interest charges................ 9,441 2,286 1,059 - - (7,529) 5,257
Allowance for borrowed funds used
during construction................ (1,700) (126) (394) - - - (2,220)
Preferred stock dividends of
subsidiaries......................... - - - - - 686 686
Preferred securities distributions
of trust subsidiaries.............. - - - - - 5,756 5,756
-------- -------- -------- ------- -------- --------- --------
26,011 8,109 7,774 - - (1,087) 40,807
-------- -------- -------- ------- -------- --------- --------
Income before preferred stock
dividends of HECO.................. 73,569 12,597 14,256 3,112 2,822 (32,787) 73,569
Preferred stock dividends of HECO..... 810 400 286 3,019 2,737 (6,442) 810
-------- -------- -------- ------- -------- --------- --------
Net income for common stock........... $ 72,759 $ 12,197 $ 13,970 $ 93 $ 85 $ (26,345) $ 72,759
======== ======== ======== ======= ======== ========= ========
Hawaiian Electric Company, Inc. and subsidiaries
Consolidating statement of retained earnings
Nine months ended September 30, 2000
----------------------------------------------------------------------------------------
Reclassi-
fications
HECO HECO and
Capital Capital Elimina- HECO
(in thousands) HECO HELCO MECO Trust I Trust II tions Consolidated
- ------------------------------------------------------------------------------------------------------------------------------------
Retained earnings, beginning of period.... $425,206 $59,806 $ 69,633 $ - $ - $(129,439) $425,206
Net income for common stock............... 72,759 12,197 13,970 93 85 (26,345) 72,759
Common stock dividends.................... (49,757) (8,417) (10,773) (93) (85) 19,368 (49,757)
-------- ------- -------- ------- -------- --------- --------
Retained earnings, end of period.......... $448,208 $63,586 $ 72,830 $ - $ - $(136,416) $448,208
======== ======= ======== ======= ======== ========= ========
31
Hawaiian Electric Company, Inc. and subsidiaries
Consolidating statement of income
Nine months ended September 30, 1999
------------------------------------------------------------------------------------------
Reclassi-
fications
HECO HECO and
Capital Capital Elimina- HECO
(in thousands) HECO HELCO MECO Trust I Trust II tions Consolidated
- --------------------------------------------------------------------------------------------------------------------------------
Operating revenues.................... $532,595 $116,039 $114,774 $ - $ - $ - $763,408
-------- -------- -------- ------- ------- --------- --------
Operating expenses
Fuel oil.............................. 96,247 22,027 32,772 - - - 151,046
Purchased power....................... 173,127 21,922 4,532 - - - 199,581
Other operation....................... 66,340 18,760 15,430 - - - 100,530
Maintenance........................... 22,153 6,820 12,351 - - - 41,324
Depreciation.......................... 42,212 13,471 14,358 - - - 70,041
Taxes, other than income taxes........ 50,551 10,974 10,934 - - - 72,459
Income taxes.......................... 23,936 5,593 6,679 - - - 36,208
-------- -------- -------- ------- ------- --------- --------
474,566 99,567 97,056 - - - 671,189
-------- -------- -------- ------- ------- --------- --------
Operating income...................... 58,029 16,472 17,718 - - - 92,219
-------- -------- -------- ------- ------- --------- --------
Other income
Allowance for equity funds used
during construction................ 2,441 255 506 - - - 3,202
Equity in earnings of subsidiaries.... 19,259 - - - - (19,259) -
Other, net............................ 3,205 774 593 3,112 2,812 (7,126) 3,370
-------- -------- -------- ------- ------- --------- --------
24,905 1,029 1,099 3,112 2,812 (26,385) 6,572
-------- -------- -------- ------- ------- --------- --------
Income before interest and
other charges...................... 82,934 17,501 18,817 3,112 2,812 (26,385) 98,791
-------- -------- -------- ------- ------- --------- --------
Interest and other charges
Interest on long-term debt............ 16,899 6,211 7,029 - - - 30,139
Amortization of net bond premium
and expense........................ 786 168 249 - - - 1,203
Other interest charges................ 9,270 2,228 1,042 - - (7,126) 5,414
Allowance for borrowed funds used
during construction................ (1,549) (158) (248) - - - (1,955)
Preferred stock dividends of - - - - - 716 716
subsidiaries.........................
Preferred securities distributions
of trust subsidiaries.............. - - - - - 5,746 5,746
-------- -------- -------- ------- ------- --------- --------
25,406 8,449 8,072 - - (664) 41,263
-------- -------- -------- ------- ------- --------- --------
Income before preferred stock
dividends of HECO.................. 57,528 9,052 10,745 3,112 2,812 (25,721) 57,528
Preferred stock dividends of HECO..... 908 400 316 3,019 2,727 (6,462) 908
-------- -------- -------- ------- ------- --------- --------
Net income for common stock........... $ 56,620 $ 8,652 $ 10,429 $ 93 $ 85 $ (19,259) $ 56,620
======== ======== ======== ======= ======= ========= ========
Hawaiian Electric Company, Inc. and subsidiaries
Consolidating statement of retained earnings
Nine months ended September 30, 1999
-------------------------------------------------------------------------------------------
Reclassi-
fications
HECO HECO and
Capital Capital Elimina- HECO
(in thousands) HECO HELCO MECO Trust I Trust II tions Consolidated
- -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
Retained earnings, beginning of period $405,836 $57,210 $62,992$443,970 $62,962 $73,586 $ - $ - $(120,202) $405,836$(136,548) $443,970
Net income for common stock........... 56,620 8,652 10,429 93 85 (19,259) 56,62021,425 4,059 4,366 31 28 (8,484) 21,425
Common stock dividends................ (40,616) (6,340) (2,548) (93) (85) 9,066 (40,616)
-------- ------- ------- ------- -------- --------- --------- (1,904) (3,032) (31) (28) 4,995 -
- --------------------------------------------------------------------------------------------------------------------------
Retained earnings, end of period...... $421,840 $59,522 $70,873$465,395 $65,117 $74,920 $ - $ - $(130,395) $421,840
======== ======= ======= ======= ======== ========= ========$(140,037) $465,395
==========================================================================================================================
3222
Hawaiian Electric Company, Inc. and subsidiaries
Consolidating statement of income (unaudited)
Three months ended March 31, 2000
------------------------------------------------------------------------------------
Reclassi-
fications
HECO HECO and
Capital Capital elimina- HECO
(in thousands) HECO HELCO MECO Trust I Trust II tions consolidated
- --------------------------------------------------------------------------------------------------------------------------
Operating revenues.................... $200,349 $44,211 $43,861 $ - $ - $ - $288,421
- --------------------------------------------------------------------------------------------------------------------------
Operating expenses
Fuel oil.............................. 47,586 12,208 15,361 - - - 75,155
Purchased power....................... 60,661 7,936 1,629 - - - 70,226
Other operation....................... 18,768 4,390 4,583 - - - 27,741
Maintenance........................... 8,718 1,562 2,253 - - - 12,533
Depreciation, of property, plant
and equipment...................... 14,598 4,849 4,887 - - - 24,334
Taxes, other than income taxes........ 18,980 4,219 4,162 - - - 27,361
Income taxes.......................... 9,240 2,507 3,446 - - - 15,193
- --------------------------------------------------------------------------------------------------------------------------
178,551 37,671 36,321 - - - 252,543
- --------------------------------------------------------------------------------------------------------------------------
Operating income...................... 21,798 6,540 7,540 - - - 35,878
- --------------------------------------------------------------------------------------------------------------------------
Other income
Allowance for equity funds used
during construction................ 932 49 288 - - - 1,269
Equity in earnings of subsidiaries.... 9,328 - - - - (9,328) -
Other, net............................ 645 186 281 1,037 941 (2,515) 575
- --------------------------------------------------------------------------------------------------------------------------
10,905 235 569 1,037 941 (11,843) 1,844
- --------------------------------------------------------------------------------------------------------------------------
Income before interest and
other charges...................... 32,703 6,775 8,109 1,037 941 (11,843) 37,722
- --------------------------------------------------------------------------------------------------------------------------
Interest and other charges
Interest on long-term debt............ 5,740 1,912 2,280 - - - 9,932
Amortization of net bond premium
and expense........................ 285 70 87 - - - 442
Other interest charges................ 3,204 789 418 - - (2,514) 1,897
Allowance for borrowed funds used
during construction................ (521) (30) (140) - - - (691)
Preferred stock dividends of
subsidiaries......................... - - - - - 228 228
Preferred securities distributions
of trust subsidiaries.............. - - - - - 1,919 1,919
- --------------------------------------------------------------------------------------------------------------------------
8,708 2,741 2,645 - - (367) 13,727
- --------------------------------------------------------------------------------------------------------------------------
Income before preferred stock
dividends of HECO.................. 23,995 4,034 5,464 1,037 941 (11,476) 23,995
Preferred stock dividends of HECO..... 270 133 96 1,006 913 (2,148) 270
- --------------------------------------------------------------------------------------------------------------------------
Net income for common stock........... $ 23,725 $ 3,901 $ 5,368 $ 31 $ 28 $ (9,328) $ 23,725
==========================================================================================================================
Hawaiian Electric Company, Inc. and subsidiaries
Consolidating statement of retained earnings (unaudited)
Three months ended March 31, 2000
------------------------------------------------------------------------------------
Reclassi-
fications
HECO HECO and
Capital Capital elimina- HECO
(in thousands) HECO HELCO MECO Trust I Trust II tions consolidated
- --------------------------------------------------------------------------------------------------------------------------
Retained earnings, beginning of period $425,206 $59,806 $69,633 $ - $ - $(129,439) $425,206
Net income for common stock........... 23,725 3,901 5,368 31 28 (9,328) 23,725
Common stock dividends................ (13,952) (2,431) (3,583) (31) (28) 6,073 (13,952)
- --------------------------------------------------------------------------------------------------------------------------
Retained earnings, end of period...... $434,979 $61,276 $71,418 $ - $ - $(132,694) $434,979
==========================================================================================================================
23
Hawaiian Electric Company, Inc. and subsidiaries
Consolidating statement of cash flows (unaudited)
NineThree months ended September 30, 2000
----------------------------------------------------------------------------------------March 31, 2001
------------------------------------------------------------------------------------
Reclassi-
fications
HECO HECO and
Capital Capital Elimina-elimina- HECO
(in thousands)thousand s) HECO HELCO MECO Trust I Trust II tions Consolidatedconsolidated
- -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
Cash flows from operating activities
Income before preferred stock
dividends of HECO.......................HECO...................... $ 73,56921,695 $ 12,5974,193 $ 14,2564,461 $ 3,1121,037 $ 2,822 $(32,787)941 $(10,632) $ 73,56921,695
Adjustments to reconcile income before
preferred stock dividends of HECO to
net cash provided by operating
activities
Equity in earnings................... (26,345)earnings................ (8,484) - - - - 26,3458,484 -
Common stock dividends received
from subsidiaries............... 19,368subsidiaries................ 4,995 - - - - (19,368)(4,995) -
Depreciation of property,
plant and equipment............. 44,106 14,507 14,656equipment.............. 15,196 4,065 5,348 - - - 73,26924,609
Other amortization................... 3,436 670 1,273amortization................ 1,451 551 1,204 - - - 5,3793,206
Deferred income taxes................ 6,532 247 (174)taxes............. 1,797 (49) (407) - - - 6,6051,341
Tax credits, net..................... 933 139 (56)net.................. 128 48 91 - - - 1,016267
Allowance for equity funds used
during construction............. (3,081) (210) (811)construction.............. (1,076) (57) (132) - - - (4,102)(1,265)
Changes in assets and liabilities
IncreaseDecrease in accounts
receivable.. (8,965) (2,657) (1,557)receivable................... 14,171 1,359 344 - - 1,899 (11,280)
Increase877 16,751
Decrease in accrued unbilled
revenues........................ (4,606) (464) (1,018)revenues..................... 6,432 945 1,752 - - - (6,088)9,129
Decrease (increase) in fuel
oil stock........................... 2,594 (318) 1,543stock.................... (28) 67 1,273 - - - 3,819
Decrease (increase)1,312
Increase in materials and
supplies............... (392) 77 227supplies..................... (1,276) (21) (649) - - - (88)(1,946)
Increase in regulatory assets.... (1,403) (174) (1,130)assets. (239) (34) (422) - - - (2,707)
Increase (decrease)(695)
Decrease in accounts payable.................... 1,108 4,035 (2,899)payable.. (18,001) (1,103) (2,785) - - - 2,244(21,889)
Changes in other assets and
liabilities..................... (8,752) 8,729 9,525liabilities.................. (16,394) (2,619) 1,400 - - 3,857 13,359
-------- -------- -------- ------- ------- -------- -------1,042 (16,571)
- --------------------------------------------------------------------------------------------------------------------------
Net cash provided by operating
activities.. 98,102 37,178 33,835 3,112 2,822 (20,054) 154,995
-------- -------- -------- ------- ------- -------- -------activities............................. 20,367 7,345 11,478 1,037 941 (5,224) 35,944
- --------------------------------------------------------------------------------------------------------------------------
Cash flows from investing activities
Capital expenditures....................... (51,023) (16,088) (21,844)expenditures.................... (15,999) (3,523) (4,963) - - - (88,955)(24,485)
Contributions in aid of construction....... 2,927 2,479 1,307construction.... 622 795 386 - - - 6,7131,803
Advances to (repayments from) affiliates... 11,400affiliates 3,700 - (2,100)(2,000) - - (9,300)(1,700) -
Payments on notes receivable............... - 138 - - - - 138
-------- -------- -------- ------- ------- -------- -------
Net cash used in investing activities...... (36,696) (13,471) (22,637)activities... (11,677) (2,728) (6,577) - - (9,300) (82,104)
-------- -------- -------- ------- ------- -------- -------(1,700) (22,682)
- --------------------------------------------------------------------------------------------------------------------------
Cash flows from financing activities
Common stock dividends..................... (49,757) (8,417) (10,773) (93) (85) 19,368 (49,757)dividends.................. - (1,904) (3,032) (31) (28) 4,995 -
Preferred stock dividends.................. (810) (400) (286)dividends............... (270) (134) (95) - - 686 (810)229 (270)
Preferred securities distributions
of trust subsidiaries.................subsidiaries.................. - - - (3,019) (2,737)(1,006) (913) - (5,756)(1,919)
Proceeds from issuance of
long-term debt... 13,059 91debt......................... 9,595 - - - - 13,150- 9,595
Net decrease in short-term borrowings
from nonaffiliates and affiliate with
original maturities of three months
or less.............................. (22,610) (11,400)less................................ (9,333) (2,200) (1,500) - - - 9,300 (24,710)
Other...................................... (2,318) (1,224)1,700 (11,333)
Repayment of other short-term
borrowings............................. (3,000) - - - - (3,542)
-------- -------- -------- ------- ------- -------- -------- (3,000)
Other................................... (7,071) (379) - - - - (7,450)
- --------------------------------------------------------------------------------------------------------------------------
Net cash used in financing activities...... (62,436) (21,350) (11,059) (3,112) (2,822) 29,354 (71,425)
-------- -------- -------- ------- ------- -------- -------activities... (10,079) (4,617) (4,627) (1,037) (941) 6,924 (14,377)
- --------------------------------------------------------------------------------------------------------------------------
Net increase (decrease) in
cash and equivalents.................. (1,030) 2,357 139equivalents................... (1,389) - 274 - - - 1,466(1,115)
Cash and equivalents, beginning of
period.. 1,039 198 729period................................. 1,398 4 132 - - - 1,966
-------- -------- -------- ------- ------- -------- -------1,534
- --------------------------------------------------------------------------------------------------------------------------
Cash and equivalents, end of period........period..... $ 9 $ 2,5554 $ 868406 $ - $ - $ - $ 3,432
======== ======== ======== ======= ======= ======== =======419
==========================================================================================================================
3324
Hawaiian Electric Company, Inc. and subsidiaries
Consolidating statement of cash flows (unaudited)
NineThree months ended September 30, 1999March 31, 2000
----------------------------------------------------------------------------------------
Reclassi-
fications
HECO HECO and
Capital Capital Elimina-elimina- HECO
(in thousands)thousand s) HECO HELCO MECO Trust I Trust II tions Consolidatedconsolidated
- -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
Cash flows from operating activities
Income before preferred stock
dividends of HECO......................... $ 57,52823,995 $ 9,0524,034 $ 10,7455,464 $ 3,1121,037 $ 2,812941 $(11,476) $ (25,721) $ 57,52823,995
Adjustments to reconcile income before
preferred stock dividends of HECO to net
cash provided by operating activities
Equity in earnings..................... (19,259)earnings................... (9,328) - - - - 19,2599,328 -
Common stock dividends received
from subsidiaries................. 9,066subsidiaries................... 6,073 - - - - (9,066)(6,073) -
Depreciation of property,
plant and equipment............... 42,212 13,471 14,358equipment................. 14,598 4,849 4,887 - - - 70,04124,334
Other amortization..................... 2,235 570 1,913amortization................... 697 161 211 - - - 4,7181,069
Deferred income taxes.................. 1,129 (453) (363)taxes................ 906 229 283 - - - 3131,418
Tax credits, net....................... 1,304 318 (54)net..................... 311 47 (19) - - - 1,568339
Allowance for equity funds used
during construction............... (2,441) (255) (506)construction................. (932) (49) (288) - - - (3,202)(1,269)
Changes in assets and liabilities
Decrease (increase) in
accounts receivable.......... 3,020 1,170 (1,073)receivable............. (1,179) 288 (187) - 178 840 4,135
Increase1,899 821
Decrease (increase) in accrued - -
unbilled revenues.......................... (2,423) (718) (982)revenues............... 701 211 (114) - 798
Decrease in fuel oil stock....... 6,230 250 805 - - - (4,123)7,285
Decrease (increase) in materials - -
and supplies.................... (299) (44) 46 - (297)
Increase in fuel oil stock......... (7,271) (734) (1,788)regulatory assets.... (346) (21) (146) - - - (9,793)(513)
Increase (decrease) in materials and
supplies.......................... (1,796) (222) (26)accounts
payable......................... (5,889) 1,148 (1,809) - - - (2,044)
Decrease (increase) in regulatory
assets........................ 707 (1,323) (1,848) - - - (2,464)
Increase in accounts payable....... 6,392 195 4,154 - - - 10,741(6,550)
Changes in other assets
and liabilities.............. 6,560 1,439 4,819liabilities................. (12,757) (857) 1,271 - (178) 4,906 17,546
-------- -------- -------- ------- ------- --------- ---------20 (12,323)
- ------------------------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities.... 96,963 22,510 29,349 3,112 2,812 (9,782) 144,964
-------- -------- -------- ------- ------- --------- ---------activities.. 22,781 10,246 10,404 1,037 941 (6,302) 39,107
- ------------------------------------------------------------------------------------------------------------------------------
Cash flows from investing activities
Capital expenditures......................... (41,322) (12,737) (14,655)expenditures....................... (16,329) (3,469) (4,050) - - - (68,714)(23,848)
Contributions in aid of construction......... 4,600 757 970construction....... 999 390 258 - - - 6,3271,647
Advances to (repayments from) affiliates..... 4,400affiliates... 3,200 - (8,800)(3,100) - - 4,400(100) -
Proceeds from sale of assets................. 1,499Payments on notes receivable............... - 138 - - - - 138
- 1,499
Payments on notes receivable................. - 1,199 - - - - 1,199
-------- -------- -------- ------- -------- --------- ---------------------------------------------------------------------------------------------------------------------------------------
Net cash used in investing activities........ (30,823) (10,781) (22,485)activities...... (12,130) (2,941) (6,892) - - 4,400 (59,689)
-------- -------- -------- ------- ------- --------- ---------(100) (22,063)
- ------------------------------------------------------------------------------------------------------------------------------
Cash flows from financing activities
Common stock dividends....................... (40,616) (6,340) (2,548) (93) (85) 9,066 (40,616)dividends..................... (13,952) (2,431) (3,583) (31) (28) 6,073 (13,952)
Preferred stock dividends.................... (908) (400) (316)dividends.................. (270) (133) (96) - - 716 (908)229 (270)
Preferred securities distributions
of trust subsidiaries...................subsidiaries..................... - - - (3,019) (2,727)(1,006) (913) - (5,746)(1,919)
Proceeds from issuance of long-term debt..... 39,313 24,843 8,896debt... 6,304 - - - 73,052
Repayment of long-term debt.................. (30,000) (11,000) (9,000) - - - (50,000)
Redemption of preferred stock................ (28,600) (10,000) (8,480) - - - (47,080)6,304
Net decreaseincrease (decrease) in short-term
borrowingsBorrowings from nonaffiliates and
affiliate with original maturities
of three months or less................................ (27,502) (4,400)less.............. 1,064 (3,200) - - - (4,400) (36,302)
Other........................................ (4,768) (1,267) (244)100 (2,036)
Other...................................... (4,827) (1,224) - - - (6,279)
-------- -------- -------- ------- ------- --------- ---------- (6,051)
- ------------------------------------------------------------------------------------------------------------------------------
Net cash used in financing activities........ (93,081) (8,564) (11,692) (3,112) (2,812) 5,382 (113,879)
-------- -------- -------- ------- ------- --------- ---------activities...... (11,681) (6,988) (3,679) (1,037) (941) 6,402 (17,924)
- ------------------------------------------------------------------------------------------------------------------------------
Net increase (decrease) in
cash and equivalents.................... (26,941) 3,165 (4,828)equivalents...................... (1,030) 317 (167) - - - (28,604)(880)
Cash and equivalents, beginning of period.... 29,753 10,024 15,006period.. 1,039 198 729 - - - 54,783
-------- -------- -------- ------- ------- --------- ---------1,966
- ------------------------------------------------------------------------------------------------------------------------------
Cash and equivalents, end of period..........period........ $ 2,8129 $ 13,189515 $ 10,178562 $ - $ - $ - $ 26,179
======== ======== ======== ======= ======= ========= =========1,086
==============================================================================================================================
34
HECO has not provided separate financial statements and other disclosures
concerning HELCO and MECO because management has concluded that such financial
statements and other information are not material to holders of the 1997 and
1998 junior deferrable debentures issued by HELCO and MECO which have been fully
and unconditionally guaranteed by HECO.
(9)25
(8) Reconciliation of electric utility operating income per HEI and HECO
- -------------------------------------------------------------------------
consolidated statements of income
- ---------------------------------
Three months ended Nine months ended
September 30, September 30,
-------------------------- --------------------------March 31, 2001 2000
- ------------------------------------------------------------------------------------------------------
(in thousands)
2000 1999 2000 1999
- ----------------------------------------------------------------------------------------------------------------------------------
Operating income from regulated and nonregulated activities before income
taxes (per HEI consolidated statements of income).............................. $ 53,29348,010 $ 46,472 $ 156,538 $ 131,70951,630
Deduct:
Income taxes on regulated activities............................. (15,828) (13,419) (46,222) (36,208)activities......................................... (13,604) (15,193)
Revenues from nonregulated activities............................ (2,061) (1,358) (4,407) (3,938)activities........................................ (1,130) (984)
Add:
Expenses from nonregulated activities............................ 98 390 796 656
----------- -------- --------- ---------activities........................................ 181 425
- ------------------------------------------------------------------------------------------------------
Operating income from regulated activities after income taxes (per HECO
consolidated statements of income)................................................................ $ 35,50233,457 $ 32,085 $ 106,705 $ 92,219
=========== ======== ========= =========35,878
======================================================================================================
35
Item 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 of HEI and HECO and accompanying notes.
RESULTS OF OPERATIONS
HEI Consolidated
- ----------------
Three months ended
September 30,March 31,
(in thousands, except per ----------------------------------------------- % Primary reason(s) for
share amounts) 2001 2000 1999 change Significantsignificant change*
- ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
Revenues........................... $445,867 $392,450 14 Increases for the electric utility and savings bank
segments, partly offset by decreases for the "other"
and international power segments
Operating income................... 60,510 56,551 7$434,867 $401,875 8 Increases for the electric utility, savings
bank and "other"international power segments, partly
offset by a decrease for the "other" segment
Operating income................... 65,717 68,202 (4) Increases for the savings bank and
international power segmentsegments, more than offset
by decreases for the electric utility and
"other" segments
Net income......................... 22,049 21,632 2 Higher27,745 28,976 (4) Lower operating income and AFUDC, partly offset by higher interest
expense due to higher average borrowings resulting fromdue
to an HEIPC acquisition in March 2000, and higherpartly
offset by lower income taxes due to no tax
reductions for losses from foreign operations
Basic earnings
per common share................ $ 0.680.84 $ 0.67 10.90 (7) See explanation for net income and weighted
average number of common shares outstanding
Weighted-average number of common
shares outstanding................ 32,642 32,203 1 Issuances under the Dividend Reinvestment and Stock
Purchase Plan and other plans
36
Nine months ended
September 30,
(in thousands, except per ------------------------- % Primary reason(s) for
share amounts) 2000 1999 change significant change*
- ------------------------------------------------------------------------------------------------------------------------------------
Revenues........................... $1,260,878 $1,114,385 13 Increases for the electric utility and savings bank
segments, partly offset by decreases for the "other"
and international power segments
Operating income................... 185,838 169,293 10 Increases for the electric utility and savings bank
segments, partly offset by decreases for the
international power and "other" segments
Net income......................... 70,121 65,142 8 Higher operating income and AFUDC, partly offset by
higher interest expense due to higher average
borrowings resulting from an HEIPC acquisition in
March 2000 and higher income taxes due to higher
operating income and no tax reductions for losses
from foreign operations
Basic earnings
per common share................ $ 2.16 $ 2.02 7 See explanation for net income
Weighted-average number of common
shares outstanding................ 32,438 32,180 133,159 32,266 3 Issuances under the Dividend Reinvestment and
Stock Purchase Plan and other plans
* Also see segment discussions which follow.
3726
Following is a general discussion of the results of operations by business
segment.
Electric utility
- ----------------
Three months ended
March 31,
(in thousands, except per September 30,---------------------- %
----------------------------
barrel amounts) 2001 2000 1999 Changechange Primary reason(s) for significant change
- ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
Revenues...................... $337,324 $277,283 22$318,423 $289,405 10 Higher fuel oil and purchased energy fuel
prices, the effects of which are passed on to
customers ($5020 million), and 4.1%1.7% higher KWH
sales ($8 million)
Expenses
Fuel oil..................... 95,883 58,942 63 Higher fuel oil prices and more KWHs generated
Purchased power.............. 85,092 71,952 18 Higher fuel prices and more KWHs purchased
Other........................ 103,056 99,917 3 Higher taxes, other than income taxes,
maintenance and depreciation expenses, partly
offset by lower other operation expenses
(including lower retirement benefits expenses)
Operating income.............. 53,293 46,472 15 Higher KWH sales and lower other operation
expenses, partly offset by higher taxes,
other than income taxes, maintenance and
depreciation expenses
Net income................... 25,020 20,315 23 Higher operating income and AFUDC, partially
offset by higher income taxes
Kilowatthour sales (millions). 2,433 2,338 4
Average fuel oil price
per barrel................. $ 34.42 $ 21.69 59
38
Nine months ended
(in thousands, except per September 30,
------------------------------------ %
barrel amounts) 2000 1999 change Primary reason(s) for significant change
- -----------------------------------------------------------------------------------------------------------------------------------
Revenues...................... $934,574 $767,346 22 Higher fuel oil and purchased energy prices,
the effects of which are passed on to
customers ($145 million), 3.1% higher KWH
sales ($20 million)HELCO rate increase and
the recovery of integrated resource planning
and related costs
Expenses
Fuel oil..................... 262,130 151,046 7488,245 75,155 17 Higher fuel oil prices, and morepartly offset by
fewer KWHs generated
Purchased power.............. 225,762 199,581 1381,916 70,226 17 Higher fuel prices, higher capacity charges
due to increased capacity (including a new
IPP, Hamakua Energy) and availability, and
more KWHs purchased
Other........................ 290,144 285,010 2100,252 92,394 9 Higher other operation and maintenance
expenses and taxes, other than income taxes
maintenance and depreciation expenses, partly
offset by lower other operation expense
(including lower retirement benefits expenses)
Operating income.............. 156,538 131,709 1948,010 51,630 (7) Higher KWH sales and lower other operation
expense, partlyHELCO rate increase,
more than offset by higher taxes, other
than income taxes, maintenance
expense and depreciation expensespurchased power capacity charges
Net income................... 72,759 56,620 29 Higherincome.................... 21,425 23,725 (10) Lower operating income and AFUDC, partially
offset by higher income taxesinterest
expense
Kilowatthour sales (millions). 6,902 6,692 3
Average fuel2,241 2,203 2
Fuel oil price per barrel................. $ 32.09 $ 18.86 70barrel..... $34.88 $29.14 20
Kilowatthour (KWH) sales in the thirdfirst quarter and first nine months of 20002001 increased 4.1% and 3.1%, respectively,1.7% from the
same periodsquarter in 1999,2000, partly due to warmer weather, the improvement in Hawaii's
economy and an increase in the number of customers, warmer weather and an improvement in
Hawaii's economy. From December 1999 to September 2000, fuel prices on Oahu have
increased approximately 33%, but the typical monthly Oahu residential
electricity bill for 600 KWH has increased only 8%. HECO and its subsidiaries
pass both increases and decreases in the cost of fuel and purchased energy
prices through to their customers via their Energy Cost Adjustment Clauses. In
spite of the increase in rates due to higher fuel prices, the electric
utilities' KWH sales have increased.customers. Electric utility operating
income, for the
first nine months of 2000 increased 19%however, decreased 7% from the first nine months of 1999,quarter 2000, primarily due to
the higher KWH sales and 10% lower other operationpurchased power and maintenance expenses. Maintenance expenses were
higher due to more production, transmission and distribution maintenance work in
the first quarter of 2001 than in the first quarter of 2000. Other operation
expenses were lowerincreased 7% primarily due to a
decrease of approximately $9 millionhigher integrated resource planning costs
which were recovered in pension and other postretirement
benefits expenses partly due to an increase in the discount rate (from 6.50% at
December 31, 1998 to 7.75% at December 31, 1999) and a change in the method of
determining market-related value of retirement benefit plan assets (see note (2)
in HECO's "Notes to consolidated financial statements").
39revenues.
27
In October 2000, due to flashfloods and lightning storms, HELCO's transmission
and distribution facilities and generation power plants were damaged. Uninsured
repairs are estimated to amount to $1.5 million.
Competition
The electric utility industry is becoming increasingly competitive. IPPs are
well established in Hawaii and continue to actively pursue new projects.
Customer self-generation, with or without cogeneration, has made inroads in
Hawaii and is a continuing competitive factor. Competition in the generation
sector in Hawaii is moderated, however, by the scarcity of generation sites,
various permitting processes and lack of interconnections to other electric
utilities. HECO hasand its subsidiaries have been able to compete successfully by
offering customers economic alternatives that, among other things, employ energy
efficient electrotechnologies such as the heat pump water heater.
OnIn December 30, 1996, the PUC instituted a proceeding to identify and examine the
issues surrounding electric competition and to determine the impact of
competition on the electric utility infrastructure in Hawaii. In their statement
of position (SOP), HECO and its subsidiaries proposed to achieve some of the
benefits of competition through proposals for (1) competitive bidding for new
generation, (2) performance-based rate-making (which would include an index-
based price cap, an earnings sharing mechanism and a benchmark incentive plan)
and (3) innovative pricing provisions (including rate restructuring, expanded
time-of-use rates, customer migration rates such as standby charges, flexible
pricing to encourage economic development and to compete with customer
generation options, new service options and two-part rates incorporating real-
time pricing). HECO and its subsidiaries suggest in their SOP that these
proposals be implemented through PUC approval of applications submitted in a
series of separate proceedings to be initiated by HECO, HELCO and MECO. See "Competition
proceeding" in note (5) in(3) of HECO's "Notes to consolidated financial statements."
PUC regulationRegulation of electric utility rates
The PUC has broad discretion in its regulation of the rates charged by HEI's
electric utility subsidiaries and in other matters. Any adverse decision and
order (D&O)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.
In May 2001, David Morihara became a commissioner on the PUC replacing Rae Loui.
David Morihara is a Democrat, businessman and former state representative. The
other commissioners are Dennis Yamada, Chairman (serving on the PUC since 1994),
and Gregory Pai (serving on the PUC since 1998).
Recent rate requests
HEI's electric utility subsidiaries initiate PUC proceedings from time to time
to request 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. As of September
30, 2000,May 3, 2001,
the return on average common equity (ROACE) found by the PUC to be reasonable in
the most recent final rate decision for each utility was 11.4%11.40% for HECO (D&O
issued on December 11, 1995 and based on a 1995 test year), 11.65%11.50% for HELCO
(D&O issued on April 2, 1997February 8, 2001 and based on a 19962000 test year) and 10.94% for
MECO (D(amended D&O issued on April 6, 1999 and based on a 1999 test year).
Hawaii Electric Light Company, Inc.
- -----------------------------------
In October 1999, HELCO filed a request to increase rates by 9.6%, or $15.5
million in annual revenues, based on a 2000 test year, primarily to recover
(1) costs relating to the agreement to buy power from the 60 MW plant of Hamakua
Energy Partners, L.P. (Hamakua) and (2) depreciation of and a return on additional investments in
plant, equipment and equipmentdeferred charges since the last rate case, including pre-PSDpre-
air permit facilities placed in service at the Keahole power plant (see
"HELCO power situation--Pre-PSD work and notices of violation" in note (5) of
HECO's "Notes to consolidated financial statements").
40
The Consumer Advocate filedplant. In its
testimony on May 8, 2000.application, HELCO filed its
rebuttal testimony on June 19, 2000 and continuedpresented evidence to justify an increase of at
least $15.5 million and a ROACE of 13.25%13.5% for the 2000
test year. Hearings were
held in August 2000.
To simplify and expedite the rate case proceeding, HELCO and the Consumer
Advocate entered into a negotiated settlement agreement, subject to PUC
consideration and approval, with respect to certain test year estimates. As part
of the settlement agreement, HECO, MECO and HELCO (the electric utilities)
agreed to make a prospective change to their accounting treatment of canceled
project costs. Historically, the electric utilities classified projects that
were not completed as either canceled or abandoned, depending on whether the
projects were stopped before (canceled) or after (abandoned) significant costs
were incurred for material purchases and/or construction. The parties agreed
that effective October 1, 2000, the electric utilities will charge the costs of
canceled projects to operating expense, which is similar to and consistent with
the treatment for abandoned project costs. An appropriate amount of canceled
project costs will be included in revenue requirements in rate case proceedings.
Prior to October 1, 2000, the electric utilities allocated the costs of canceled
projects to on-going capital projects, operation and maintenance expenses and
other accounts through a clearing process. Management believes that this change
in accounting procedure will not have a material effect on the electric
utilities' results of operations, financial condition or liquidity. The electric
utilities may seek PUC approval for different accounting treatments in unusual
or special circumstances.
In
September 2000,early 2001, HELCO received an interima final D&O from the PUC which authorized a
1.93%,authorizing an $8.4 million,
or $3.5 million,4.9% increase in annual revenues, effective September 1, 2000February 15, 2001 and based on an
11.65% ROACE which was the ROACE authorized11.50% ROACE. The order granted HELCO an increase of approximately $2.3 million
in HELCO's previous
rate case.annual revenues, in addition to affirming interim increases that took effect
in September 2000 ($3.5 million) and January 2001 ($2.6 million). The interim D&O granted rate relief for the cost$8.4
million increase covered costs relating to buy power from
Phase I of the Hamakua facility, which is currently in service. HELCO has
requested a step increase in rates when Phase II of the Hamakua facility is
placed in service in late November 2000, if a final D&O has not been issued by
that time. While certain revenue requirement amounts contested by the Consumer
Advocate werePartners power purchase
agreement and included in rates approved on an interim basis, others were not.
For example,rate base $7.6 million for pre-air permit facilities
28
that the interim D&O included ratesPUC found to cover HELCO's calculation of fuel
oil expense and its purchase power paymentsbe used or useful to HCPC, but did not include rates
to cover depreciation of and a return on investments in facilities placed in
service sincesupport the last rate case at the Keahole Power Plant to serve both
existing and yet unbuilt generating units. The Consumer Advocate disagreed with
HELCO's calculation of fuel oil expense and purchase power payments to HCPC and
objected to including the pre-service costs in rates until the new generating units
are in service.at Keahole. The PUC may grant an interim rate increase (subject to refund with interest
pending the final outcome of the case) if the PUC believes that the public
utility is probably entitled to an increase in its rates. The adoption of
revenue, expense, rate base and cost of capitalalso included amounts (including the ROACE)
for purposes of an interim rate increase does not commit the PUC to accept any
such amounts in its final D&O. In determining such interim amounts, the PUC has
stated that it must often postpone determinations of reasonableness with respect
to contested matters.HELCO's incremental
integrated resource planning costs, which HELCO had previously recovered through
a surcharge.
The timing of a future HELCO rate increase request, if any, to recover costs
relating to adding CT-4 and CT-5two combustion turbines at Keahole, including the remaining
$14.8 million cost of pre-air permit facilities, will depend on future
circumstances. See "HELCO power situation" in note (5)(3) of HECO's "Notes to
consolidated financial statements."
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 of HECO
and its subsidiaries 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, financial position or
liquidity may result. As of September 30, 2000,March 31, 2001, HECO's consolidated regulatory
assets amounted to $116 million.
41
Legislation
Congress and the Hawaii legislature periodically consider legislation that could
have positive or negative effects on the utilities and their customers. For
example, Congress is considering an energy plan designed to increase the supply
of oil, as well as legislation that would promote renewable energy sources and
conservation. The Hawaii legislature did not consider deregulation in its 2001
session, but passed legislation which established renewable energy goals for the
state (7% by 2003, 8% by 2007, 9% in 2010) and net energy metering of small
photovoltaic and wind generating systems up to 10 kilowatts with a maximum
installed base of 0.5% of an electric utilities' peak demand (i.e., a customer
may be a net user or supplier of energy and will pay to or receive credit from
the electric utility accordingly). Management cannot predict whether any such
legislation or other proposed legislation affecting the utilities will be signed
into law or, if signed into law, in what form and with what effects on the
utilities or their customers.
Savings bank
- ------------
Three months ended
September 30,March 31,
---------------------- %
----------------------------------------
(in thousands) 2001 2000 1999 change Primary reason(s) for significant change
- ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
Revenues............... $114,300 $102,624 11Revenues............. $115,754 $110,267 5 Higher interest income as a result of
higher average balances of interest-earning
assets and higher weighted-average yields
on mortgage/asset-backed securities and
loan
balancesloans and higher other income (including
higher fee income, offset by a 6% higher average
interest-earning asset balance$0.7 million
writedown of collateralized debt
obligations)
Operating income....... 16,979 14,919 14income..... 20,149 19,190 5 Higher net interest and other income partly offset
by the writedown of "available-for-sale"
debt securities. See note (4) in HEI's
"Notes to consolidated financial
statements."and
slightly lower general and administrative
expenses
Net income............. 9,815 8,499 15income........... 11,875 11,221 6 Higher operating income
partly offset by
higher income taxes
Interest rate spread... 3.11% 3.22% (3) 46spread. 3.01% 3.28% (8) 9 basis points increase in the
weighted-average yield on interest-earning
assets, more than offset by a 5736 basis
points increase in the weighted-average
rate on interest-bearing liabilities
Nine months ended
September 30, %
----------------------------------------
(in thousands) 2000 1999 Change Primary reason(s) for significant change
- --------------------------------------------------------------------------------------------------------------------------
Revenues............... $333,266 $304,663 9 Higher interest income as a result of
higher weighted-average yields on
mortgage/asset-backed securities and loan
balances and a 5% higher average
interest-earning asset balance
Operating income....... 52,484 45,839 14 Higher net interest income, partly offset
by the writedown of "available-for-sale"
debt securities. See note (4) in HEI's
"Notes to consolidated financial
statements."
Net income............. 30,432 26,081 17 Higher operating income, partly offset by
higher income taxes
Interest rate spread... 3.18% 3.17% - 39 basis points increase in the
weighted-average yield on interest-earning
assets, mostly offset by a 38 basis points
increase in the weighted-average rate on
interest-bearing liabilities
29
ASB's interest rate spread--the difference between the weighted-average yield on
interest-earning assets and the weighted-average rate on interest-bearing
liabilities--decreased 3.4% and increased 0.3% for the third8%. Comparing first quarter and first
nine months of 2000, respectively, compared2001 to the same periodsperiod in
1999.
Comparing the first
42
nine months and the third quarter of 2000, to the same periods in 1999, the weighted-average yields on interest-earning assets increased more than the
weighted-average ratesrate on interest-bearing liabilities increased. Impactingincreased more
than the weighted-average yield on interest-earning assets was the recognition of
interest income on a cash basis for four debt securities in the principal amount
of $114 million. The weighted-average yield on interest-earning assets is
calculated by dividing the annualized interest or dividend income by the average
interest-earning asset balances. Since the interest on the four debt securities
is accounted for on a cash basis, the interest income received on these debt
securities is not annualized for the purposes of calculating the weighted-
average yields on interest-earning assets. See note (4) in HEI's "Notes to
consolidated financial statements."increased.
Deposits traditionally have been the principal source of ASB's funds for use in
lending, meeting liquidity requirements and making investments. Deposits
increased by $67$52 million in the first nine monthsquarter of 2000,2001, including $73$29 million of
interest credited to accounts. ASB also derives funds from borrowings, payments
of interest and principal on outstanding loans receivable and investment and
mortgage/asset-backed securities and other sources. In recent years, advancesAdvances from the Federal
Home Loan Bank (FHLB) of Seattle and securities sold under
agreementscontinue to repurchase have become morebe a significant sourcessource of funds as
the demand for deposits decreaseddecreases due in part to increased competition from
money market and mutual funds. Using sources of funds with a higher cost than
deposits, such as advances from the FHLB, puts downward pressure on ASB's interest rate spread and net
interest income.
During the first nine monthsquarter of 2000,2001, ASB added $9$3 million to its allowance for loan
losses. As of September 30, 2000,March 31, 2001, ASB's allowance for loan losses was 1.15%1.19% of
average loans outstanding. The following table presents the changes in the
allowance for loan losses for the periods indicated.
NineThree months ended September 30,
-----------------------------------------March 31, 2001 2000
- ---------------------------------------------------------------------------
(in thousands) 2000 1999
- --------------------------------------------------------------------------------------------------------------
Allowance for loan losses, beginning of period....................... $ 35,348 $ 39,779
Additions to provisionsJanuary 1............. $37,449 $35,348
Provision for losses................................... 9,400 10,848loan losses........................ 3,000 3,000
Net charge-offs...................................................... (7,914) (9,980)
------------ ----------charge-offs.................................. (2,018) (1,763)
-------- -------
Allowance for loan losses, end of period............................. $ 36,834 $ 40,647
============ ==========March 31.............. $38,431 $36,585
======== ========
In March 1998, ASB formed a wholly owned operating subsidiary, ASB Realty
Corporation, which elects to be taxed as a real estate investment trust. This
reorganization has reduced ASB's income taxes. For the first nine monthsquarter of 2000,2001,
ASB and subsidiaries' effective income tax rate was 34%. Although the State of
Hawaii has indicated that it may challenge the tax treatment of this
reorganization, ASB believes that its tax position is proper.
Regulation
Federal Deposit Insurance Corporation (FDIC) regulations restrict the ability of
financial institutions that are not "well-capitalized" to compete on the same
terms as "well-capitalized" institutions, such as by offering interest rates on
deposits that are significantly higher than the rates offered by competing
institutions. As of September 30, 2000,March 31, 2001, ASB was "well-capitalized" (ratio
requirements noted in parentheses) with a leverage ratio of 5.9%6.1% (5.0%), a Tier-
1 risk-based ratio of 10.3%10.6% (6.0%) and a total risk-based ratio of 11.2%11.5%
(10.0%).
For a discussion of securities deemed impermissible investments by the OTS, see
note (4) of HEI's "Notes to consolidated financial statements."
Examination of ASB by the OTS
- -----------------------------OTS. ASB is subject to examination by the OTS. In
- -----------------------------
conducting its examinations, the OTS utilizes the Uniform Financial Institutions
Rating System (UFIRS), adopted by Thrift Bulletin 69 (TB 69) dated January 10, 1997. The UFIRS ratingthe Federal Financial Institutions Examination Council,
which system utilizes the "CAMELS" criteria for rating financial institutions.
The six components in the rating system are: Capital adequacy, Asset quality,
- -
Management, Earnings, Liquidity and Sensitivity to market risk.
The "C" rating
- - - - -
assesses whether an institution's capital is adequate in relation to its risk
profile, current operations, and future needs. This factor considers the
institution's dividend policy and practices and the institution's prompt
corrective action rating. The "A" rating evaluates asset quality. The asset
quality rating reflects the extent of credit
43
risk associated with the loan and investment portfolios, real estate owned,
other assets, and off-balance sheet risks as well as the institution's ability
to manage those risks. The "M" rating is a reflection of the performance of the
entire management team of the institution, including the board of directors and
all levels of management. The rating is an assessment of management's overall
effectiveness. The "E" component evaluates whether earnings are sufficient for
necessary capital formation. The quality (stability) and composition (source) of
earnings are important criteria in this evaluation. The "L" rating measures
liquidity in relation to the institution's level of liquid assets, its outside
sources of funds, and the adequacy of its funds (or cash flow) management
practices. The "S" rating component addresses the degree that changes in
interest rates, commodity prices, and equity prices could adversely affect the
earnings or economic capital of the institution. The "S" component, while broad
in scope, is applied by the financial institution regulators only to the
elements of market risk that are relevant to the institution being examined. As
applied to ASB, the OTS has in the past and will likely continue in the future
to focus the S component inquiry on interest-rate risk. (ASB does not hold
inventories of foreign currency, and it does not have material exposure to
equity price volatility).
Thrift Bulletin (TB) 13a, (TB 13a), adopted by the OTS on December 1, 1998, provides
guidance on the management of interest rate risks, investment securities and
derivatives activities. TB 13a updates the OTS's minimum standards for thrift
institutions' interest rate risk management practices with regard to board-
approved limits and interest rate risk measurement systems. TB 13a also
contains guidance on thrifts' investment and derivative activities by describing
the types of analysis institutions should perform prior to purchasing securities
or financial derivatives. TB 13a also provides guidelines on the use of certain
types of securities and financial derivatives for purposes other than reducing
portfolio risk. TB 13a also provides quantitative guidelines for an initial
assessment of an institution's level of interest rate risk. Examiners have
broad discretion in implementing those guidelines. Finally, TB 13a also
provides guidelines concerning the factors examiners consider in assessing the
quality of an institution's risk management systems and procedures. These
factors include, among others, consideration of various interest-rate
sensitivity measures in the context of the institution's regulatory capital
position. Examiners will base their conclusions about an institution's level of
interest rate risk--the first dimension for determining the "S" component
rating--primarily on the interest rate sensitivity of the institution's net
portfolio value. The two specific measures of risk that will receive examiners'
primary attention are the Interest Rate Sensitivity Measure and the Post-shock
Net Present Value (NPV) Ratio. The "Interest Rate Sensitivity Measure" is
defined as the magnitude of the decline in an institution's NPV Ratio that
occurs as a result of an adverse rate shock of 200 basis points. This measure
equals the difference between an institution's Pre-shock NPV Ratio and its Post-
shock NPV Ratio and is expressed in basis points. "Post-shock NPV Ratio" is a
ratio determined by dividing an institution's NPV by the present value of its
assets, where both the numerator and the denominator are measured after a 200
basis point increase or decrease in market interest rates, whichever produces a
smaller ratio. In assessing the level of interest rate risk, a high (i.e.,
risky) Interest Rate Sensitivity Measure, by itself, may not cause supervisory
concern when the institution has a strong capital position. Because an
institution's risk of failure is linked to capital and, hence, to its ability to
absorb adverse economic shocks, an institution with a high level of economic
capital (i.e., NPV) may be able to support a high Interest Rate Sensitivity
Measure. The Post-shock NPV Ratio is a more comprehensive gauge of risk than
the Interest Rate Sensitivity Measure because it incorporates estimates of the
current economic value of an institution's portfolio, in addition to the
reported capital level and interest rate risk sensitivity.
Management has
developed and is implementing an action plan to improve ASB's interest rate risk
position. The current plan includes obtaining additional capital and making changes to improve the matching of
asset and liability durations, such as lengthening the term of costing
liabilities and selling a portion of ASB's long-
termlong-term fixed rate loan production.
The OTS regularly conducts "safety and soundness" examinations of ASB on
generally a thirteen-month cycle. In accordance with TB 69, each CAMELS
component is examined and given a component rating. An overall CAMELS rating is
also given, after taking into account all of the component ratings. An
institution, its directors, officers and employees, are prohibited from
disclosing in any manner the OTS's report of its safety and soundness
examination or the component and overall CAMELS rating thereof to any person or
organization not officially
4430
connected with the institution as officer, director, employee, attorney, or
auditor, except as provided in 12 C.F.R. section 510.5. Independent auditors may
be provided access to the report of examination only after providing a written
statement that they will not disclose the report or any portion of it.
During 2000, the OTS has conducted CRA,Community Reinvestment Act, compliance, systems,
holding company and safety and soundness examinations of ASB. The most recent
OTS safety and soundness examination, covering the period from January 1, 1999,
up to and including March 31, 2000, was completed on June 16, 2000 and ASB was not made
subject to (and is not subject to) any formal regulatory or administrative
direction or supervision such as a "memorandum of understanding" or a "cease and
desist" order following that examination.
ASB is undertaking all corrective actions requested by the OTS during the course
of its recent examinations and does not expect such corrective actions to have a
material adverse effect on its financial condition or results of operations.2000.
Federal Thrift Charter
- ----------------------Charter. In November 1999, Congress passed the Gramm-Leach-Bliley
- ----------------------
Act of 1998 (the Act).
The Act repeals the Depression-era Glass-Steagall Act so that, under which banks, insurance companies and investment
firms can compete directly against each other, thereby allowing "one-stop
shopping" for an array of financial services. Although the Act further restricts
the creation of so-called "unitary savings and loan holding companies" (i.e.,
companies such as HEI whose subsidiaries include one or more savings
associations and one or more nonfinancial subsidiaries), the unitary savings and
loan holding company relationship among HEI, HEIDIHEI Diversified, Inc. (HEIDI) and
ASB is "grandfathered" under the Act so that HEI and its subsidiaries will be
able to continue to engage in their current activities. It is too early to
assess the net effect of the Act on ASB's competitive position. On the one hand,
the availability of "one-stop shopping" for financial services might increase
competitive pressures on ASB. On the other hand, the restriction on the creation
of new unitary savings and loan association holding companies may decrease
competitive pressure by reducing the incentive to create new thrifts. Under the
Act, any proposed acquisition of ASB would have to satisfy applicable statutory
and regulatory requirements and potential acquirers of ASB would most likely be
limited to companies that are already qualified as, or capable of qualifying as,
either a traditional savings and loan association holding company or a bank
holding company, or as one of the newly authorized financial holding companies
permitted under the Act.
In addition to its effects upon competition, the Act might result in increased
costs for ASB. For example, the Act imposes on financial institutions an
obligation to protect the security and confidentiality of its customers'
nonpublic personal information, and directs, among others, the FDIC and the OTS
to establish appropriate standards to protect such information and the use
thereof. On June 1, 2000, the FDIC and the OTS, among others, issued joint rules
to implement in part the provisions of the Act concerning the disclosure of
customers' nonpublic information and have set a required implementation date no
later than July 1, 2001. On June 26, 2000, the FDIC and the OTS, among others,
issued proposed joint rules concerning administrative, technical and physical
safeguards for customer records and information. ASB currently has in place a
policy concerning customer privacy and believes that any additional compliance
costs would not be significant.
International power
- -------------------
Three months ended
September 30,March 31,
------------------- %
------------------------------
(in thousands) 2001 2000 1999 change Primary reason(s) for significant change
- --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
Revenues......... $(5,719) $ 933Revenues................ $1,969 $1,665 18 Higher leveraged lease income from HEI
Investments, Inc., which became a
subsidiary of HEIPC in February 2000
Operating income (loss). 1,196 (450) NM Losses from HEIPC's indirect investment$1.5 million partial release of a $10.0
million loan guaranty which was accrued
in EAPRC
Operating loss... (8,757) (1,382) (534) Losses from the EAPRC investment and
additional expenses related to the investment
45
Nine months ended
September 30, %
-------------------------------------
(in thousands)December 2000 1999 change Primary reason(s) for significant change
- --------------------------------------------------------------------------------------------------------------------
Revenues......... $ (8,004) $ 3,257 NM Losses from HEIPC's indirect investment in
EAPRC
Operating loss... (17,639) (3,494) (405) Losses from the EAPRC investment and
additional expenses related to the investment
NM Not meaningful.
HEIPC was formed in 1995 and its direct and indirect subsidiaries have been formed from time to time
to pursue independent power and integrated energy services projects in Asia and
the Pacific.
In September 1996, HEI Power Corp. Guam (HPG), entered into an energy conversion
agreement for approximately 20 years with the Guam Power Authority (GPA),
pursuant to which HPG has repaired and is operating and maintaining two oil-
fired 25 MW (net) units atin Tanguisson, Guam. HPG's total cost to repair the two
units was $15 million. In 1999, a mechanical failure of one of the units
resulted in additional expenses and lost revenue for HPG of approximately $1
million. In September 2000, HPG recovered this amount from GPA. The GPA project site is contaminated with oil from spills
occurring prior to HPG's assuming operational control. HPG has agreed to manage
the operation and maintenance of GPA's waste oil recovery system at the project
site consistent with GPA's oil recovery plan as approved by the EPA.U.S.
Environmental Protection Agency. GPA, however, has agreed to indemnify and hold
HPG harmless from any pre-existing environmental liability.
In 1998 and 1999, the HEIPC Group acquired what is now a 75% interest in a joint
venture, Baotou Tianjiao Power Co., Ltd., formed to design, construct, own,
operate and manage a 200 MW (net) coal-fired power plant to be located inside
Baotou Steel's complex in Inner Mongolia, People's Republic of China. The IMPC,
which owns and operates the electricity grid in Inner Mongolia, has refused to
enter into a satisfactory interconnection arrangement with the joint venture.
The HEIPC Group continues to work with Baotou Steel and IMPC to secure a
satisfactory interconnection arrangement. See "China
project," in note (5) of HEI's "Notes to consolidated financial statements."
In December 1998, the HEIPC Group invested $7.6 million to acquire convertible
cumulative nonparticipating 8% preferred shares in Cagayan Electric Power &
Light Co., Inc. (CEPALCO), an electric distribution company in the
31
Philippines. In September 1999, the HEIPC Group also acquired 5% of the
outstanding CEPALCO common stock for $2.1 million. The acquisitions were
strategic moves intended towhich put the HEIPC Group in a position to participate in the
anticipated privatization of the National Power Corporation and growth in the
electric distribution business in the Philippines.
On March 7, 2000, an indirect subsidiary of HEIPC acquired a 50% interest in
EPHE, which is an indirect subsidiary of El Paso Energy Corporation, for $87.5 million
plus up to an additional $6 million of payments that are contingent upon future earnings
of EAPRC. EPHE owns approximately 91.7% of the common shares of EAPRC, a
Philippines holding company primarily engaged in the electric generation
business in Manila and Cebu through its direct and indirect subsidiaries, using
land and barge-based generating facilities fired by bunker fuel oil, with total
installed capacity of approximately 390 MW. See note (5) in HEI's "Notes to
Consolidated Financial Statements." The HEIPC Group's higherNet income for the first quarter of 2000
does not include equity in net losses for the third quarterof EPHE. The accounts of HEIPC and
first nine months
of 2000 comparedsubsidiaries are consolidated on a one-month lag.
Due to the same periodslevel of losses incurred in 1999 are primarily attributable2000 and the changes in the political and
economic conditions related to
results from the investment in EAPRC and its subsidiaries (the EAPRC
46
Group). The HEIPC Group accounts for its investment in EPHE under the equity
method of accounting. HEI consolidates the accounts(e.g., devaluation of the
HEIPC Group on a one-
month lag due to the time needed to consolidate HEIPC's subsidiaries. The
results for the nine months ended September 30, 2000 thus reflects results of
the HEIPC Group's operations for the months of December 1999Philippines peso and January through
August 2000 (including the results of EPHE under the equity method of accounting
from March 7, 2000) and the results for the quarter ended September 30, 2000
thus reflects results for the months of June, July and August 2000. The EAPRC
Group is exposed to the impact of changesincrease in fuel oil prices and foreign
currency fluctuations. Higher fuel oil prices andprices), management determined that
the weakened value of the
Philippine peso were the primary causes of the losses incurred by the EAPRC
Group for the third quarter and first nine months of 2000.
The rates charged by the EAPRC Group under its purchase power agreements are
generally at a discount to the rates charged by the National Power Corporation,
a government owned and controlled corporation of the Philippines. Most of the
fluctuation in fuel oil prices is not recovered in rates charged by the EAPRC
Group. The EAPRC Group's base price of fuel oil per metric ton for March, April,
May, June, July, August and September 2000investment was approximately $143, $170, $153,
$163, $175, $149 and $171, respectively. To reduce its near-term exposure to
higher fuel oil prices, the EAPRC Group has purchased nondeliverable forward
contracts for fuel oil at an average price of $155 per metric ton for
approximately 80% of its anticipated purchases from August 1 toimpaired on December 31, 2000 and has purchased call option contracts at $159.75 per metric tonwrote off the remaining
investment in EAPRC.
Management is evaluating the overall international strategy and sold
put option contracts at $120 per metric ton for approximately 30%HEIPC's
strategic alternatives. The Company will not be investing in new international
power projects during this period of evaluation. Management expects to have
completed its anticipated purchases from January 1 to June 30,evaluation by the end of the third quarter 2001.
As of September 30, 2000, the EAPRC Group had approximately $200 million in U.S.
dollar denominated debt. From March 7, 2000 (acquisition date) to August 31, 2000, the high and low Philippine peso (PhP) exchange rate was PhP40.82 = $1 and
PhP45.22 = $1, respectively, an 11% fluctuation. Due to the deterioration of the
exchange rate from March 7 to August 31, 2000, as of September 30, 2000 the
HEIPC Group incurred a loss of approximately $7 million related to the EAPRC
Group's U.S. dollar denominated debt position. The potential immediate pretax
loss to the HEIPC Group that would result from a hypothetical 10% devaluation
(from PhP51.00 = $1) in the Philippine peso exchange rate based on this position
would be approximately $8 million (assuming no hedges are in place). As of
November 3, 2000, the exchange rate had further deteriorated to PhP51.00 = $1.
To reduce its near-term exposure to devaluation in the Philippine peso exchange
rate, the EAPRC Group purchased nondeliverable and deliverable forward contracts
and nondeliverable option contracts (collectively the FX Contracts) to cover
substantially all of its U.S. dollar denominated debt. The FX Contracts have
maturities from October 2000 through January 2001, at rates ranging from PhP47.00
to PhP48.30 = $1.
Based on prevailing and hedged fuel oil prices and trends in currency exchange
rates, management expects that the HEIPC Group will incur net losses for the
remainder of 2000 and that the net loss of the HEIPC Group for 2000 will cause
the Company`s 2000 earnings to be lower than its earnings in 1999. The EAPRC
Group continues to evaluate strategies to reduce its exposure to future fuel oil
price and foreign currency fluctuations.
As of September 30, 2000, the HEIPC Group has invested in or advanced to overseas
power projects approximately $138 million.$147 million, $100 million of which has been
written off. The success of any project undertaken by the HEIPC Group will beis
dependent on many factors, including the economic, political, monetary,
technological, regulatory and logistical circumstances surrounding each project
and the location of the project. Due to political or regulatory actions or other
circumstances, projects may be delayed or even prohibited. There is no assurance
that any project undertaken by the HEIPC Group will be successfully completed or
that the HEIPC Group's investment in any such project will not be lost, in whole
or in part.
47
Other
- -----
Three months ended
September 30,March 31,
------------------------ %
---------------------------------
(in thousands) 2001 2000 1999 change Primary reason(s) for significant change
- -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
Revenues......... $(1,279) $ (38) $11,610538 NM In November 1999, HTB sold YBEquity in net loss of Utech Venture Capital
Corporation ($1.5 million) and substantially all of its operating assets
for a nominal gain. Third quarter 1999
includes $12 million of HTB/YB revenues.lower
leveraged lease income from HEI
Investments, Inc., which was transferred to
HEIPC
Operating loss... (1,005) (3,458) (71) $2 million estimated loss on HTB's sale of
YB and most of its other assets which was
recorded in the third quarter of 1999 and
reversed in the fourth quarter of 1999, and
lower corporate expenses
Nine months ended
September 30, %
----------------------------------
(in thousands) 2000 1999 Change Primary reason(s)(3,638) (2,168) (68) See explanation for significant change
- -------------------------------------------------------------------------------------------------------------------
Revenues......... $ 1,042 $39,119 (97) In November 1999, HTB sold YB and
substantially all of its operating assets
for a nominal gain. The first nine months
of 1999 includes $38 million of HTB/YB
revenues.
Operating loss... (5,545) (4,761) (16) No maritime freight transportation and
harbor assist operations in the first nine
months of 2000revenues
NM Not meaningful.
The "other" business segment includes results of operations of TOOTS, formerly
named HTB, and its formerly owned subsidiary, YB,a maritime freight transportation and
harbor assist companiescompany which were sold or shutdownceased operations in
the fourth quarter of 1999; Pacific Energy Conservation Services, Inc., a
contract services company primarily providing windfarm operational and
maintenance services to an affiliated electric utility; HEI District Cooling,
Inc., a company formed to develop, build, own, lease, operate and/or maintain
central chilled water, cooling system facilities, and other energy related
products and services; ProVision Technologies, Inc., a company formed to sell,
install, operate and maintain on-
siteon-site power generation equipment and auxiliary
appliances in Hawaii and the Pacific Rim; HEI Properties, Inc., a company
currently holding passive investments and expected to hold real estate and
related assets; HEI Leasing, Inc., a company formed to
32
own real estate subject to leases; Hawaiian Electric Industries Capital Trust I,
HEI Preferred Funding, LP and Hycap Management, Inc., companies formed primarily
for the purpose of effecting the issuance of 8.36% Trust Originated Preferred
Securities; HEI and HEI Diversified, Inc.,HEIDI, holding companies; and eliminations of intercompany
transactions.
In November 1999, HTB sold YB and substantially all of its operating assets for
a nominal gain. The maritime freight transportation and harbor assist
subsidiaries recorded an operating loss of $0.7 million in the third quarter of
1999 and operating income of $1.5 million in the first nine months of 1999.
Discontinued operationsContingencies
- ------------------------------------
See note (10)(8) in HEI's "Notes to consolidated financial statements."
48
Contingencies
- -------------
See note (9)statements" and note (5)(3)
in HEI's and HECO's respective "Notes to consolidated financial statements" for discussions of
contingencies.
Recent accounting pronouncements
- --------------------------------
See note (8)(7) and note (7)(5) in HEI's and HECO's respective "Notes to consolidated
financial statements."
FINANCIAL CONDITION
Liquidity and capital resources
- -------------------------------
The Company and consolidated HECO each believebelieves 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 their respective
construction programs and investments and to satisfycover debt and other cash
requirements in the foreseeable future.
The consolidated capital structure of HEI was as follows:
(in millions) September 30, 2000March 31, 2001 December 31, 19992000
- -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
Short-term borrowings.............................borrowings................... $ 94 4%159 7% $ 152 7%104 5%
Long-term debt.................................... 1,080 47 978 44debt.......................... 1,063 46 1,089 48
HEI- and HECO-obligated preferred
securities of trust subsidiaries...............subsidiaries..... 200 9 200 9
Preferred stock of subsidiaries...................subsidiaries......... 34 21 34 21
Minority interests................................interests...................... 1 - 1 -
Common stock equity............................... 873 38 848 38
----------- ---------- ----------- ----------
$2,282equity..................... 845 37 839 37
- --------------------------------------------------------------------------------------
$2,302 100% $2,213$2,267 100%
=========== ========== =========== ================================================================================================
ASB's deposit liabilities, securities sold under agreements to repurchase and
advances from the FHLB of Seattle are not included in the table above.
For the first ninethree months of 2000,2001, net cash provided by operating activities of
consolidated HEI was $229$56 million. Net cash used in investing activities was $339$100
million, largely due to ASB's origination of loans and purchase of mortgage/asset-backed and investment securities, net
of repayments the HEIPC
Group's investment in the Philippinesand sales, and HECO's consolidated capital expenditures. Net cash
provided by financing activities was $90$27 million as a result of several factors,
including net increases in deposit liabilities, long-
term debtshort-term borrowings and
advances from Federal Home Loan Bank,securities sold under agreements to repurchase and the issuance of common stock,
partly offset by the payment of common stock dividends and trust preferred
securities distributions and net decreases in securities sold under agreements to repurchaselong-term debt and short-term
borrowings.advances from
the FHLB.
Total HEI consolidated financing requirements for 20002001 through 2004,2005, including
net capital expenditures (which exclude AFUDC and capital expenditures funded by
third-party cash contributions in aid of construction), long-term debt retirements
(excluding repayments of advances from the FHLB of Seattle and securities sold
under agreements to repurchase) and preferred stock retirements, are estimated
to total $1.2$1.3 billion. Of this amount, approximately $0.8$0.7 billion is for net
capital expenditures (mostly relating to the electric utilities' net capital
expenditures described below). HEI's consolidated internal sources, after the
payment of HEI dividends, are expected to provide approximately 66%59% of the
consolidated financing requirements, with debt and equity financing providing
the remaining requirements. Additional debt and equity financing may be required
to fund activities not included in the
2000-200433
2001 through 2005 forecast, such as increases in the amount of or an
acceleration of capital expenditures of the electric utilities.
In March 1999, HEI filedSee note (9) in HEI's "Notes to consolidated financial statements" for a
registration statement with the SEC to register $300
million of Medium-Term Notes, Series C (Series C Notes). In April 2000, HEI sold
$100 million of its Series C Notes, with $100 million of Series C
49
Notes remaining available for issuance from time to time. The $100 million of
Series C Notes sold have a floating rate of LIBOR plus 105 basis points
(adjusted every three months and an initial interest rate of 7.33%) and a
maturity date of April 15, 2003. Simultaneous with the saledescription of the Series C
Notes, however, HEI entered into a swap agreement with Bank of America, N.A.,
which effectively fixes the interest rate on the $100 million of debt at 7.995%
until maturity.medium-term notes issued in April 2001.
Following is a discussion of the liquidity and capital resources of HEI's
largest segments.
Electric utility
HECO's consolidated capital structure was as follows:
(in millions) September 30, 2000March 31, 2001 December 31, 19992000
- -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
Short-term borrowings.........................borrowings................ $ 82 5%99 6% $ 107 6%113 7%
Long-term debt................................ 659 39 646debt....................... 677 38 668 38
HECO-obligated preferred securities
of trust subsidiaries.................................subsidiaries............... 100 6 100 6
Preferred stock...............................stock...................... 34 2 34 2
Common stock equity........................... 829equity.................. 847 48 806 48
----------- ---------- ------------- ----------
$1,704825 47
- -------------------------------------------------------------------------------------
$1,757 100% $1,693$1,740 100%
=========== ========== ============= ===============================================================================================
Operating activities provided $155$36 million in net cash during the first nine
monthsquarter
of 2000.2001. Investing activities used net cash of $82$23 million, primarily for
capital expenditures. Financing activities used net cash of $71$14 million,
including $56$2 million for the payment of common and preferred dividends and preferred
securities distributions and $25$14 million for the net repayment of short-term
borrowings, partially offset by a $13$10 million net increase in long-
termlong-term debt.
The electric utilities' consolidated financing requirements for 20002001 through
2004,2005, including net capital expenditures and long-term debt retirements,repayments, are
estimated to total $595 million.$0.6 billion. HECO's consolidated internal sources, after the
payment of common stock and preferred stock dividends, are expected to provide
cash in excessapproximately 95% of the consolidatedtotal requirements, with debt and equity financing
requirements and may also be used
to repay short-term borrowings.providing the remaining requirements.
As of September 30, 2000, $30March 31, 2001, $19 million of proceeds from previous sales by the
Department of Budget and Finance of the State of Hawaii of special purpose
revenue bonds issued for the benefit of HECO MECO and HELCO remain undrawn. Also as of
September 30, 2000,March 31, 2001, an additional $65 million of special purpose revenue bonds remainswere
authorized by the Hawaii Legislature for issuance for the benefit of HECO and
HELCO prior to the end of 2003. TheHECO estimates that it will require
approximately $5 million in new common equity, requirements of HECO and its subsidiariesin addition to retained earnings,
over the five-year period will likely be met by retained earnings.2001 through 2005. The PUC must approve issuances, if
any, of long-term debt and equity securities by 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 20002001 through 20042005
are currently estimated to total $571 million.$0.6 billion. Approximately 70%65% of forecast
gross capital expenditures, which includes the allowance for funds used during
constructionAFUDC and capital expenditures
funded by third-party cash contributions in aid of construction, is for transmission
and distribution projects, with the remaining 30%35% primarily for generation
projects.
For 2000,2001, electric utility net capital expenditures are estimated to be $140$122
million. Gross capital expenditures are estimated to be $161$138 million, comprised
ofincluding
approximately $109$98 million for transmission and distribution projects,
approximately $39$24 million for new generation projects and approximately $13$16 million
for general plant and other projects. Drawdowns of proceeds from previous sales
of tax-exempt special purpose revenue bonds and the generation of funds from
internal sources are expected to provide the cash needed for net capital
expenditures in 2000.
50
2001.
Management periodically reviews capital expenditure estimates and the timing of
construction projects. These estimates 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 and
changes in expectations concerning the construction and ownership of future
generating units, the availability of generating sites and
34
transmission and distribution corridors, the ability to obtain adequate and
timely rate increases, escalation in construction costs, demand-side management
programs and requirements of environmental and other regulatory and permitting
authorities.
Savings bank
September 30,March 31, December 31, %
(in millions) 2001 2000 1999 change
- -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
Total assets.......................................... $5,981 $5,848 2
Available-for-sale investment securities.............. 108 - NM
Held-to-maturity investment$6,010 $5,969 1%
Investment and mortgage/asset-backed securities.................. 2,193 2,160securities....... 2,325 2,271 2
Loans receivable, net................................. 3,223 3,2123,213 3,211 -
Deposit liabilities................................... 3,558 3,492 23,637 3,585 1
Securities sold under agreements to repurchase........ 585 661 (11)610 597 2
Advances from Federal Home Loan Bank.................. 1,309 1,189 101,204 1,249 (4)
NM Not meaningful.
As of September 30, 2000,March 31, 2001, ASB was the third largest financial institution in Hawaii
based on total assets of $6.0$6 billion and deposits of $3.6 billion.
For the first nine monthsquarter of 2000,2001, net cash provided by ASB's operating activities
was $61$47 million. Net cash used in ASB's investing activities was $168$77 million,
due largely to the origination of loans and purchase of mortgage/asset-
backed and investmentasset-backed securities, net of
repayments.repayments and sales. Net cash provided by financing activities was $85$14 million
largely due to net increases of $67$52 million in deposit liabilities and $120 million in advances in Federal Home Loan Bank,
partly offset by a net decrease of $91$13
million in securities sold under agreements to repurchase, partly offset by a
net decrease of $45 million in advances in FHLB and $19$6 million in common and
preferred stock dividends.
Minimum liquidity levels are currently governed by the regulations adopted by
the OTS. ASB was in compliance with OTS liquidity requirements as of September
30, 2000.March 31,
2001.
ASB believes that a satisfactory regulatory capital position provides a basis
for public confidence, affords protection to depositors, helps to ensure
continued access to capital markets on favorable terms and provides a foundation
for growth. As of September 30, 2000,March 31, 2001, ASB was in compliance with the OTS minimum
capital requirements (noted(ratio requirements noted in parentheses) with a tangible
capital ratio of 5.9%6.1% (1.5%), a core capital ratio of 5.9%6.1% (4.0%) and a risk-basedrisk-
based capital ratio of 11.2%11.5% (8.0%).
Item 3. Quantitative and qualitative disclosures about market risk
- -------------------------------------------------------------------------------------------------------------------------------------
The Company considers interest rate risk to be a very significant market risk as
it could potentially have a significant effect on the Company's financial
condition and results of operations. In April 2000, HEI utilized an interest-
rate swap to manage a portion of its interest rate risk. See description in Item
2, "Financial condition - Liquidity and capital resources," above. The Company
is also exposed to commodity price risk and foreign currency exchange rate risk
primarily due to its indirect equity investment in EAPRC. See discussion in Item
2 above. For additional quantitative and qualitative
information about the Company's market risks, see pages 4016 to 4319 of HEI's 19992000
Annual Report to Stockholders.
51
U.S. Treasury yields at September 30, 2000March 31, 2001 and December 31, 19992000 were as follows:
September 30, 2000(%) March 31, 2001 December 31, 1999
------------------2000
----------- -------------- -----------------
3 month 6.20% 5.31%4.28 5.88
1 year 6.08 5.964.08 5.36
5 year 5.84 6.344.55 4.98
10 year 5.80 6.444.92 5.11
30 year 5.88 6.485.45 5.45
The 3 monthAs interest rates (as measured by U.S. Treasury yield increased 89 basis pointsyields) have decreased between 0
and the 30 year yield
decreased 60160 basis points from December 31, 19992000 to September 30, 2000.
ManagementMarch 31, 2001, management
believes that with the currentthis inverted yield curve there was an unfavorable, but
immaterial, change between December 31, 1999 and September 30,
2000those dates in the Company's estimated fair values of
its interest-sensitive assets, liabilities and off-balance sheet items.
35
PART II - OTHER INFORMATION
- --------------------------------------------------------------------------------
Item 1. Legal proceedings
- --------------------------
There are no significant developments in pending legal proceedings except as set
forth in HECO's "Notes to consolidated financial statements," and management's
discussion and analysis of financial condition and results of operations.
Item 2. Changes in securities and use of proceeds
- ---------------------------------------------------
HEI has issued unregistered common stock from January 1, 2001 through May 3,
2001 pursuant to the HEI 1990 Nonemployee Director Stock Plan, amended effective
April 27, 1999 (the Subsidiary Director Plan), the HEI 1999 Nonemployee Company
Director Stock Grant Plan (the HEI Nonemployee Director Plan), the HECO Utility
Group Team Incentive Plan and the HECO Utility Group Team Incentive Plan for
Bargaining Unit Employees (collectively, the Team Incentive Plan). Under the
Subsidiary Director Plan, 60% of the annual retainer payable to nonemployee
directors is paid in HEI common stock. Under the HEI Nonemployee Director Plan
as amended in 1999, a stock grant of 300 shares of HEI common stock is granted
to HEI nonemployee directors in addition to an annual retainer of $20,000. Under
the Team Incentive Plan, eligible employees of HECO, MECO and HELCO receive
awards of HEI common stock based on the attainment of performance goals by the
respective companies.
From January 1, 2001 through May 3, 2001, the director plans issued 1,932 shares
of HEI common stock, in exchange for the retention of cash by HEI that would
otherwise have been paid to the directors as retainers in the aggregate amount
of $72,000, and 2,700 shares of HEI common stock in the aggregate amount of
$101,000 from January 1, 2001 through May 3, 2001 to HEI directors in addition
to the retainer. In addition, from January 1, 2001 through May 3, 2001 the Team
Incentive Plan issued 57,693 shares of HEI common stock in exchange for cash
received by HEI from the electric utility subsidiaries in the aggregate amounts
of $2.1 million. The shares issued under the director stock plans were not
registered since they did not involve a "sale" as defined under Section 2(3) of
the Securities Act of 1933, as amended. Participation by nonemployee directors
of HEI and subsidiaries in the director stock plans is mandatory and thus does
not involve an investment decision. The shares issued under the Team Incentive
Plan were not registered because their initial sales to HECO, MECO and HELCO
were exempt as transactions not involving any public offering under Section 4(2)
of the Securities Act of 1933, as amended, and because their subsequent award to
eligible employees did not involve a "sale," as defined in Section 2(3) of the
Securities Act of 1933, as amended. Awards of HEI common stock under the Team
Incentive Plan are made to eligible employees on the basis of their attainment
of performance goals established by their respective companies and no cash or
other tangible or definable consideration is paid by such employees to their
respective companies for the shares.
36
Item 4. Submission of matters to a vote of security holders
- ------------------------------------------------------------
HEI
The Annual Meeting of Stockholders of HEI was held on April 24, 2001. Proxies
for the meeting were solicited pursuant to Regulation 14A under the Securities
Exchange Act of 1934. As of February 14, 2001 the record date for the Annual
Meeting, there were 33,128,022 shares of common stock issued and outstanding and
entitled to vote. There was no solicitation in opposition to the management
nominees to the Board of Directors as listed in the proxy statement for the
meeting and such nominees were elected to the Board of Directors.
The results of the voting for the Class II director-nominees and the independent
auditor are as follows:
Shares of Common Stock
--------------------------------------------------------
Broker
For Withheld Against Abstain nonvotes
----------- --------- -------- ------- ---------
Election of Class II Directors
Victor Hao Li 29,471,072 523,159 -
T. Michael May 29,528,879 465,352 -
Diane J. Plotts 29,431,613 562,618 -
Kelvin H. Taketa 29,495,442 498,789 -
Jeffrey N. Watanabe 29,474,029 520,202 -
Election of KPMG LLP
as independent auditor 29,554,401 230,232 209,598 -
Class III Directors -- Don E. Carroll, Bill D. Mills and Oswald K. Stender --
continue in office with terms ending at the 2002 Annual Meeting. Class I
Directors -- Robert F. Clarke, A. Maurice Myers and James K. Scott -- continue
in office with terms ending at the 2003 Annual Meeting.
HECO
The Annual Meeting of the Sole Stockholder of HECO was conducted by written
consent effective April 24, 2001. The incumbent members of the Board of
Directors of HECO were re-elected, except for Richard Henderson and Paul C. Yuen
who both reached the mandatory retirement age as specified by Board resolution
and did not stand for re-election. Paul Oyer retired on November 30, 2000. The
incumbent members continuing in office are Robert F. Clarke, T. Michael May,
Diane J. Plotts, James K. Scott, Anne M. Takabuki and Jeffrey N. Watanabe. Also,
Barry K. Taniguchi was elected to the Board of Directors of HECO. KPMG LLP was
elected independent auditor of HECO for the fiscal year 2001.
Item 5. Other information
- --------------------------
A. Collective bargaining agreements
In August 2000, HECO, MECO and HELCO employees represented by the International
Brotherhood of Electrical Workers, AFL-CIO, Local 1260, ratified new collective
bargaining agreements covering approximately 62% of the employees of HECO, MECO
and HELCO. The new collective bargaining agreements (including benefit
agreements) cover a three-year period from November 1, 2000 through October 31,
2003. The main provisions of the agreements include noncompounded wage increases
of 2.25% effective November 1, 2000, 2.5% effective November 1, 2001 and 2.5%
effective November 1, 2002. The agreements also included increased employee
contributions to medical premiums.
B. EPA inspections at HECO's Waiau and Honolulu generating stations
In September 1999, the EPA conducted unannounced National Pollutant Discharge
Elimination System permit compliance inspections at HECO's Waiau and Honolulu
generating stations. The resulting compliance inspection report issued by the
EPA on December 22, 1999 cited procedural deficiencies in HECO's self-monitoring
program. HECO submitted a response to the EPA's findings on January 27, 2000 and
HECO has addressed the cited deficiencies. In September 2000, HECO and the EPA
signed consent agreements under which HECO will be required to pay $200,000 in
penalties. The consent agreements are subject to public comments and final EPA
approval.
C. Amended notice of property tax assessment for HELCO
In December 1999, the County Council of Hawaii County amended its ordinances to
rescind the exemptionExemption from real property taxes for utility companies. The
utilities currently pay aHECO, HELCO and MECO
In April 2001, the Governor of the State of Hawaii signed into law Act 64, which
provides for the sharing of the Public Service Company (PSC) tax revenues
between the state and counties of the state. This legislation is consistent
with a settlement agreement that was entered into in January 2001 by the state,
statutory language, is partlythe counties and the utility companies doing business in lieuHawaii. The sharing of
the PSC tax revenues will take effect on July 1, 2001.
In accordance with the settlement agreement, the utilities subject to the PSC
tax will pay the same amount of PSC taxes they would have under the old law,
which imposed taxes on electric revenues at rates ranging from 5.885% to 8.2%.
However, the state will now receive the taxes calculated at a 4% rate and
counties will now receive the revenues from the taxes in excess of 4%. In order
to share in these revenues, the counties must provide by ordinance for a real
property taxes. In March 2000,tax exemption for real property used by a public utility in its public
utility business and owned by the Department of Finance, Real Property Division ofpublic utility (or leased to it by a lease
under which the public utility is required to pay the taxes) and must not have
denied the exemption to the utility with regard to such property. Once the
counties waive and release
37
claims for real property tax due and payable before July 1, 2001, all the
complaints and tax appeals filed by the utilities against the state in Tax
Appeal Court before January 11, 2001 will be dismissed, but under the settlement
agreement, the County of Hawaii sent
HELCO a notice of property assessment showing total real property taxes owed ofwill keep the approximately $0.2$0.1 million for the fiscal year July 2000 to June 2001 and, in
April 2000, the Department sent HELCO an amended notice of property assessment
showing total real property taxes owed of approximately $3.9 million. HELCO
appealed both the March and April 2000 notices of property assessment. HELCO
filed a motion for summary judgment to have the April 2000 amended notice of
property assessment held unlawful, invalid and unenforceable on the grounds of
denial of an exemption to which taxpayer HELCO is entitled;
52
unconstitutionality and illegality, including overassessment; improper
methodology and other procedural grounds. On July 10, 2000, the Hawaii Tax Court
of Appeals ruled in HELCO's favor and granted the motion for summary judgment.
On August 10, 2000, HELCO paid its PSC tax monthly installment under protest and
filed a complaint against the State in Tax Appeal Court. On August 20, 2000,
HELCO paid its first semi-annual real
property tax installment on the March
assessmentHELCO paid under protest consistenton August 20, 2000.
The counties of Oahu, Hawaii and Maui have passed the enabling statutes in
accordance with the settlement agreement or having existing statutes which
exempt HECO, HELCO and MECO from the real property tax appeal filed in Tax Appeal court.
The Tax Appeal Court has facilitated settlement discussions among the utilities,
the Countytheir respective
counties of Hawaii and the State. Discussions have expanded to include the
other counties as well. In these settlement discussions, the parties are
discussing a resolution which would involve dividing the PSC tax revenues
between the State and the Counties. Details of the tentative settlement are
still being negotiated.
On September 20, 2000, the Hawaii County Council passed Bill 276, Draft 3, which
attempts to validate the methodology used in the April amended assessment and
would allow the County to use the values in the annual financial reports
submitted to the PUC, effective January 1, 2001. However, the ordinance
provides that the County will not impose this methodology if enabling
legislation is passed, which is consistent with the preliminary settlement
discussions described above.
D.operation.
B. Ratio of earnings to fixed charges
HEI and subsidiaries
Ratio of earnings to fixed charges excluding interest on ASB deposits
NineThree months ended Years ended December 31,
--------------------------------------------------------------------
ended
September 30,----------------------------------------------
March 31, 2001 2000 1999 1998 1997 1996
1995
- ----------------------- ----------- ---------- --------- ---------- -----------------------------------------------------------------------------------------
1.711.78 1.29 1.80 1.85 1.89 1.93
2.02
======================= =========== ========== ========= ========== =========================================================================================
Ratio of earnings to fixed charges including interest on ASB deposits
NineThree months ended Years ended December 31,
--------------------------------------------------------------------
Ended
September 30,----------------------------------------------
March 31, 2001 2000 1999 1998 1997 1996
1995
- ----------------------- ----------- ---------- --------- ---------- -----------------------------------------------------------------------------------------
1.471.49 1.19 1.48 1.47 1.58 1.56
1.60
======================= =========== ========== ========= ========== =========================================================================================
For purposes of calculating the ratio of earnings to fixed charges, "earnings"
represent the sum of (i) pretax income from continuing operations (excluding
undistributed net income or net loss from less than fifty-percent-owned50%-owned persons) and (ii)
fixed charges (as hereinafter defined, but excluding capitalized interest).
"Fixed charges" are calculated both excluding and including interest on ASB's
deposits during the applicable periods and represent the sum of (i) interest,
whether capitalized or expensed, but excluding interest on nonrecourse debt from
leveraged leases which is not included in interest expense in HEI's consolidated
statements of income, (ii) amortization of debt expense and discount or premium
related to any indebtedness, whether capitalized or expensed, (iii) the interest
factor in rental expense, (iv) the preferred stock dividend requirements of
HEI's subsidiaries, increased to an amount representing the pretax earnings
required to cover such dividend requirements and (v) the preferred securities
distribution requirements of trust subsidiaries.
HECO and subsidiaries
Ratio of earnings to fixed charges
NineThree months ended Years ended December 31,
--------------------------------------------------------------------
Ended
September 30,----------------------------------------------
March 31, 2001 2000 1999 1998 1997 1996
1995
- ----------------------- ----------- ---------- --------- ---------- -----------------------------------------------------------------------------------------
3.683.29 3.39 3.09 3.33 3.26 3.58
3.46
======================= =========== ========== ========= ========== =========================================================================================
53
For purposes of calculating the ratio of earnings to fixed charges, "earnings"
represent the sum of (i) pretax income before preferred stock dividends of HECO
and (ii) fixed charges (as hereinafter defined, but excluding the allowance for
borrowed funds used during construction). "Fixed charges" represent the sum of
(i) interest, whether capitalized or expensed, incurred by HECO and its
subsidiaries, (ii) amortization of debt expense and discount or premium related
to any indebtedness, whether capitalized or expensed, (iii) the interest factor
in rental expense, (iv) the preferred stock dividend requirements of HELCO and
MECO, increased to an amount representing the pretax earnings required to cover
such dividend requirements and (v) the preferred securities distribution
requirements of the trust subsidiaries.
38
C. The following information will be included in the appendices to the HEI
presentations to the investment community, spring 2001.
American Savings Bank, F.S.B. and Subsidiaries
Consolidated Statements of Operations
(in thousands)
Year ended December 31,
-----------------------------------------------
2000 1999 1998
------------ ------------ ------------
Interest and dividend income:
Interest and fees on loans $ 254,502 $ 244,566 $ 246,299
Interest on mortgage/asset-backed securities 152,340 122,281 120,608
Interest and dividends on investment securities 16,733 13,132 13,754
------------ ------------ ------------
Total interest and dividend income 423,575 379,979 380,661
------------ ------------ ------------
Interest expense:
Interest on deposit liabilities 119,192 120,338 142,069
Interest on Federal Home Loan Bank advances 82,294 58,533 48,663
Interest on securities sold under repurchase agreements 37,389 28,297 26,262
------------ ------------ ------------
Total interest expense 238,875 207,168 216,994
------------ ------------ ------------
Net interest income 184,700 172,811 163,667
Provision for loan losses 13,050 16,500 13,802
------------ ------------ ------------
Net interest income after provision for loan losses 171,650 156,311 149,865
------------ ------------ ------------
Other income:
Fees from other financial services 14,349 10,337 8,789
Fee income on loans serviced for others 2,764 3,124 3,648
Fee income on deposit liabilities 8,760 8,075 8,103
Loss on investments (5,838) 0 0
Other income 7,093 8,191 8,433
------------ ------------ ------------
Total other income 27,128 29,727 28,973
------------ ------------ ------------
General and administrative expenses:
Compensation and employee benefits 48,423 51,382 48,199
Office occupancy 27,154 25,864 23,323
Consulting 5,449 4,243 8,151
Federal insurance premiums 730 2,060 2,251
Marketing 3,700 4,488 4,168
Data processing 2,739 4,222 3,319
Amortization of goodwill and core deposit intangibles 7,613 8,265 9,325
Other 32,929 25,162 26,452
------------ ------------ ------------
Total general and administrative expenses 128,737 125,686 125,188
------------ ------------ ------------
Income before minority interest and
income taxes 70,041 60,352 53,650
Minority interest of ASB Realty 225 0 0
Income taxes 23,774 19,528 17,987
------------ ------------ ------------
Income before preferred stock dividends 46,042 40,824 35,663
Preferred stock dividends 5,412 5,412 5,400
------------ ------------ ------------
Net income for common stock $ 40,630 $ 35,412 $ 30,263
============ ============ ============
39
C. (continued)
American Savings Bank, F.S.B. and Subsidiaries
Consolidated Statements of Operations
(unaudited)
(in thousands)
Three months Three months
ended ended
March 31, 2001 March 31, 2000
--------------- ----------------
Interest and dividend income:
Interest and fees on loans $ 64,139 $ 61,991
Interest on mortgage/asset-backed securities 37,802 36,047
Interest and dividends on investment securities 5,660 4,470
----------- ---------
Total interest and dividend income 107,601 102,508
----------- ---------
Interest expense:
Interest on deposit liabilities 31,992 27,674
Interest on Federal Home Loan Bank advances 19,657 18,849
Interest on securities sold under repurchase agreements 8,851 9,195
----------- ---------
Total interest expense 60,500 55,718
----------- ---------
Net interest income 47,101 46,790
Provision for loan losses 3,000 3,000
----------- ---------
Net interest income after provision for loan losses 44,101 43,790
----------- ---------
Other income:
Fees from other financial services 3,764 3,274
Fee income on loans serviced for others 644 710
Fee income on deposit liabilities 2,193 2,086
Loss on investments (747) -
Other income 2,255 1,642
----------- ---------
Total other income 8,109 7,712
----------- ---------
General and administrative expenses:
Compensation and employee benefits 12,446 12,756
Office occupancy 6,946 7,011
Consulting 529 848
Federal insurance premiums 174 188
Marketing 888 878
Data processing 112 905
Amortization of goodwill and core deposit intangibles 1,668 1,953
Other 9,298 7,773
----------- ---------
Total general and administrative expenses 32,061 32,312
----------- ---------
Income before minority interest and
income taxes 20,149 19,190
Minority interest of ASB Realty 59 57
Income taxes 6,862 6,562
----------- ---------
Net income before preferred stock dividends 13,228 12,571
Preferred stock dividends 1,353 1,350
----------- ---------
Net income for common stock $ 11,875 $ 11,221
=========== =========
40
C. (continued)
American Savings Bank, F.S.B. and Subsidiaries
Consolidated Statement of Financial Condition
(in thousands)
December 31,
March 31, 2001 ---------------------------------------
Assets (unaudited) 2000 1999 1998
------ ----------------- --------- ---------- -----------
Cash and due from banks $ 117,470 $ 148,028 $ 166,783 $ 170,368
Interest-bearing deposits 74,849 59,757 26,024 182,198
Investment securities held-to-maturity 80,385 91,723 186,799 111,574
Investment securities available-for-sale 107,208 107,955 - -
Mortgage/asset-backed securities held-to-maturity - 2,014,114 1,973,146 1,791,353
Mortgage/asset-backed securities available-for-sale 2,137,687 56,713 - -
Loans receivable held for investment, net 3,195,437 3,202,943 3,202,993 3,143,197
Loans held for sale, at lower of cost or market 17,767 8,382 8,885 -
Real estate acquired in settlement of loans, net 8,280 8,948 4,597 5,566
Premises and equipment, net 58,204 59,082 66,110 68,028
Core deposit intangible, net 11,649 12,110 14,903 18,319
Goodwill, net 86,854 87,018 91,838 96,687
Other 114,499 112,542 106,129 104,382
------------- ------------ ------------ -------------
$6,010,289 $5,969,315 $5,848,207 $5,691,672
============= ============ ============ =============
Liabilities and Stockholder's Equity
------------------------------------
Liabilities:
Deposit liabilities $3,637,134 $3,584,646 $3,491,655 $3,865,736
Federal Home Loan Bank advances 1,204,252 1,249,252 1,189,081 805,581
Securities sold under repurchase agreements 609,707 596,504 661,215 523,800
Other liabilities 105,189 81,277 70,239 83,683
------------- ------------ ------------ -------------
Total liabilities 5,556,282 5,511,679 5,412,190 5,278,800
------------- ------------ ------------ -------------
Preferred stock of subsidiary, not subject to
mandatory redemption 113 113 113 113
Minority interests in consolidated subsidiary 3,356 3,299 3,300 -
Stockholder's equity:
Preferred stock 75,000 75,000 75,000 75,000
Common equity 375,538 379,224 357,604 337,759
------------- ------------ ------------ -------------
Total stockholder's equity 450,538 454,224 432,604 412,759
------------- ------------ ------------ -------------
$6,010,289 $5,969,315 $5,848,207 $5,691,672
============= ============ ============ =============
41
C. (continued)
American Savings Bank, F.S.B. and Subsidiaries
Key Financial Ratios (%)
(unaudited)
ASB PEER GROUPS
--------------- -------------------------------
HAWAII (1) DISTRICT (1)
QTR END QTR END QTR END
12/31/00 12/31/00 12/31/00
--------------- -------------- ---------------
Total assets (1)
% increase(decrease) (annualized) (0.80) (0.80) N/A
Earning assets/total assets (1) 91.50 91.71 92.91
Earning assets/costing liabilities(1) 102.52 102.55 107.59
Earnings (1)
Interest income/average assets 7.24 7.20 7.52
Interest expense/average assets 4.21 4.20 4.60
Net interest income/average assets 2.79 2.78 2.78
Non-interest income/average assets 0.59 0.60 0.72
Non-interest expense/average assets 2.20 2.22 1.95
ROA: net income/average assets 0.77 0.76 1.01
Yield on earning assets 7.88 7.82 8.09
Cost of funds 4.68 4.66 5.28
Regulatory ROE: net income/average equity 10.23 10.25 9.96
Capital adequacy
GAAP capital/total assets (1) 7.60 7.45 10.23
Fully phased-in capital requirement (2)
Tangible capital/tangible assets 6.07 N/A N/A
Core capital/tangible assets 6.07 N/A N/A
Risk based capital/risk-weighted assets 11.35 N/A N/A
Asset quality (1)
Delinquent loans/total assets 1.18 1.14 1.08
Real estate owned/total assets 0.17 0.17 0.14
Classified assets/total assets 1.08 1.05 0.95
Loan loss reserves/total loans and MBS 0.73 0.67 0.57
Delinquent loans/net loans 2.19 2.14 1.55
(1) Source: FHLB Quarterly Management Information Report
(2) Source: OTS UniformThrift Performance Report
N/A - Data not available.
42
C. (continued)
American Savings Bank, F.S.B. and Subsidiaries
Interest Rate Spread (%)
(unaudited)
Three Months
ended Year ended December 31,
March 31, ------------------------------------------------
2001 2000 1999 1998
---------------- ------------- ------------- ------------
Yield on loans and
mortgage/asset-backed securities 7.70 7.71 7.21 7.41
Yield on investments 4.60 5.81 6.01 5.76
-------- -------- -------- -------
Yield on loans, mortgage/asset-backed
securities and investments 7.53 7.61 7.16 7.34
-------- -------- -------- -------
Interest on deposits 3.60 3.37 3.25 3.68
Interest on borrowings 6.32 6.36 5.77 5.92
-------- -------- -------- -------
Interest on deposits and borrowings 4.52 4.41 3.97 4.23
-------- -------- -------- -------
Interest rate spread 3.01 3.20 3.19 3.11
======== ======== ======== =======
43
C. (continued)
American Savings Bank, F.S.B. and Subsidiaries
Interest Rate Sensitivity
(unaudited)
(dollars in millions)
Amounts at March 31, 2001
subject to repricing within
-------------------------------------------------------
1 year (greater than) Over 5
or less 1-5 years years Total (1)
------------ -------------- ---------- -----------
Interest-earning assets:
Real estate loans and mortgage/
asset-backed securities:
Balloon and adjustable rate $ 1,660 $ 338 $ - $ 1,998
Fixed rate 1-4 unit residential 419 981 1,399 2,799
Other 10 51 94 155
Consumer loans 186 66 - 252
Commercial loans 147 - - 147
Other interest earning assets 262 - - 262
--------- ---------- -------- -------
Total interest-earning assets 2,684 1,436 1,493 5,613
--------- ---------- -------- -------
Interest-bearing liabilities:
Certificate accounts 1,284 314 35 1,633
Money market accounts 87 182 27 296
NOW Accounts 137 367 186 690
Passbook accounts 199 394 425 1,018
FHLB advances 563 622 19 1,204
Other borrowings 610 - - 610
--------- ---------- -------- -------
Total interest-bearing liabilities 2,880 1,879 692 5,451
--------- ---------- -------- -------
Interest rate sensitivity gap (2) $ (196) $ (443) $ 801 $ 162
========= ========== ======== =======
Cumulative interest rate sensitivity gap $ (196) $ (639) $ 162
========= ========== ========
Cumulative interest rate sensitivity gap over
total assets (3.26)% (10.63)% 2.70 %
========= ========== ========
(1) The table does not include $397 million of noninterest-earning assets and
$105 million of noninterest-bearing liabilities.
(2) The difference between the total interest-earning assets and the total
interest-bearing liabilities.
44
C. (continued)
American Savings Bank, F.S.B. and Subsidiaries
Loan Portfolio Analysis
(unaudited)
(in thousands)
December 31,
----------------------------------------------------------------
March 31, 2001 2000 1999 1998
-------------------- ---------------------- -------------------- --------------------
Balance % Balance % Balance % Balance %
---------- --------- ----------- --------- ------------ ------- ----------- --------
REAL ESTATE LOANS (1-4 Residential):
Adjustable rate $ 596,981 18.15 $ 612,793 18.64 $ 555,270 16.87 $ 680,367 21.03
Fixed rate mortgages 2,047,405 62.26 2,050,953 62.38 2,098,766 63.78 1,854,084 57.30
Second Mortgages 44,109 1.34 46,514 1.41 54,286 1.65 67,768 2.09
Loans purchased 46,190 1.41 48,406 1.47 60,779 1.85 87,463 2.70
----------- ------- ------------ --------- ------------ ------- ----------- --------
2,734,685 83.16 2,758,666 83.90 2,769,101 84.15 2,689,682 83.12
COMMERCIAL & INDUSTRIAL LOANS:
Commercial financing 154,854 4.71 156,178 4.75 170,663 5.19 198,530 6.14
----------- ------- ------------ --------- ------------ ------- ----------- --------
Gross R/E loans 2,889,539 87.87 2,914,844 88.65 2,939,764 89.34 2,888,212 89.26
----------- ------- ------------ --------- ------------ ------- ----------- --------
CONSUMER LOANS:
Equity powerline 151,979 4.62 155,674 4.74 151,278 4.60 157,356 4.86
Installment 62,566 1.90 44,140 1.34 51,256 1.56 53,656 1.66
Visa 16,122 0.49 15,957 0.49 13,470 0.41 12,279 0.38
Preferred credit line 14,134 0.43 14,559 0.44 14,433 0.43 13,105 0.41
----------- ------- ------------ --------- ------------ ------- ----------- --------
244,801 7.44 230,330 7.01 230,437 7.00 236,396 7.31
----------- ------- ------------ --------- ------------ ------- ----------- --------
CORPORATE BANKING LOANS 146,672 4.46 134,784 4.10 106,098 3.22 94,045 2.91
SAVINGS ACCOUNT LOANS 7,516 0.23 8,021 0.24 14,496 0.44 16,836 0.52
----------- ------- ------------ --------- ------------ ------- ----------- --------
Gross loan portfolio 3,288,528 100.00 3,287,979 100.00 3,290,795 100.00 3,235,489 100.00
======= ========= ======= ========
Loans in process (15,346) (17,617) (19,486) (31,277)
Loan loss reserves (38,431) (37,449) (35,348) (39,779)
Discounts on loans (21,547) (21,588) (24,083) (21,236)
----------- ------------ ------------ -----------
Net loan portfolio $3,213,204 $3,211,325 $3,211,878 $3,143,197
=========== ============ ============ ===========
45
C. (continued)
American Savings Bank, F.S.B. and Subsidiaries
Nonaccrual and Renegotiated Loans
(unaudited)
(in thousands)
December 31,
March 31, --------------------------------------------
2001 2000 1999 1998
--------------- ------------ ------------ ------------
Nonaccrual loans:
1-4 unit residential $27,229 $26,738 $43,750 $47,565
Income property 13,469 15,132 18,747 29,456
--------- --------- --------- ---------
Total real estate 40,698 41,870 62,497 77,021
Commercial (corporate banking) 2,994 2,872 2,192 2,030
Consumer 2,545 2,844 3,777 6,454
--------- --------- --------- ---------
Total nonaccrual loans $46,237 (1) $47,586 (1) $68,466 (1) $85,505 (1)
========= ========= ========= =========
Renegotiated loans not included above $ 93 $ 48 $ 6,030 (2) $12,264 (2)
========= ========= ========= =========
(1) Includes restructured loans to a single real estate developer with
residential, income property and commercial loans totaling $3.2 million,
$4.4 million, $12.2 million and $13.6 million at March 31, 2001, December
31, 2000, 1999, and 1998, respectively.
(2) Primarily represents a commercial real estate loan of $8.1 million as of
12/31/98 that was written down to $5.2 million as of 12/31/99 and
foreclosed on in 2000.
46
C. (continued)
American Savings Bank, F.S.B. and Subsidiaries
Mortgage/Asset-backed Securities
(unaudited)
(in thousands)
December 31,
------------------------------------------------------
Marrch 31, 2001 2000 1999 1998
-------------------- ------------------- ----------------- ------------------
NET BOOK NET BOOK NET BOOK NET BOOK
VALUE (1) % VALUE (2) % VALUE (3) % VALUE (3) %
----------- ------- ---------- -------- ---------- ------ ----------- ------
Asset-backed Securities:
Federal Home Loan Mortgage Corp. $ 135,370 6.33 $ 45,318 2.19 $ 57,786 2.93 $ 81,573 4.56
Government National Mortgage Assn. 141,486 6.62 129,938 6.27 148,368 7.52 186,708 10.42
Federal National Mortgage Assn. 364,321 17.04 289,392 13.97 319,422 16.19 369,313 20.62
Private issue 116,761 5.46 118,799 5.74 154,602 47.00 114,889 6.41
----------- ------- ---------- -------- ---------- ------ ----------- ------
757,938 35.45 583,447 28.17 680,178 73.64 752,483 42.01
----------- ------- ---------- -------- ---------- ------ ----------- ------
Adjustable Rate Mortgage/
Asset-backed Securities:
Federal Home Loan Mortgage Corp. 93,468 4.37 98,760 4.77 56,680 2.87 82,718 4.62
Government National Mortgage Assn. 94,663 4.43 108,392 5.23 151,827 7.70 212,304 11.85
Federal National Mortgage Assn. 260,661 12.20 304,304 14.70 238,443 12.08 336,430 18.78
Private issue 930,957 43.55 975,924 47.13 846,018 42.88 407,418 22.74
----------- ------- ---------- -------- ---------- ------ ----------- ------
1,379,749 64.55 1,487,380 71.83 1,292,968 65.53 1,038,870 57.99
----------- ------- ---------- -------- ---------- ------ ----------- ------
Total Mortgage/
Asset-backed Securities $2,137,687 100.00 $2,070,827 100.00 $1,973,146 139.17 $1,791,353 100.00
=========== ======= ========== ======== ========== ====== =========== ======
(1) Classified as available-for-sale.
(2) Classified as held-to-maturity except for $10,454 of adjustable rate
Federal Home Loan Mortgage Corporation and $46,259 of adjustable rate
Federal National Mortgage Association securities.
(3) Classified as held-to-maturity.
47
C. (continued)
American Savings Bank, F.S.B. and Subsidiaries
Investment Portfolio
(unaudited)
(in thousands)
December 31,
March 31, --------------------------------------------------------
2001 (1) 2000 (2) 1999 (3) 1998 (3)
---------------- ---------------- ---------------- ----------------
Stock in Federal Home Loan Bank of Seattle $79,922 $78,661 $73,750 $68,553
Collateralized debt obligations 107,208 121,017 71,510 -
Federal agency obligations - - 41,539 43,021
Other investments 463 - - -
------------ ------------- ------------- -------------
Total investments $187,593 $199,678 $186,799 $111,574
============ ============= ============= =============
Weighted average rate on investments 4.09% 5.62% 6.81% 6.23%
============ ============= ============= =============
(1) Classified as held-to-maturity except for $107,208 of collateralized debt
obligations that are classified as available-for-sale.
(2) Classified as held-to-maturity except for $107,955 of collateralized debt
obligations that are classified as available-for-sale.
(3) Classified as held-to-maturity.
48
C. (continued)
American Savings Bank, F.S.B. and Subsidiaries
Deposits Liabilities
(unaudited)
(in thousands)
December 31,
----------------------------------------------------------------
March 31, 2001 2000 1999
-------------------------------- -------------------------------- ------------------------------
% of % of % of
Total Rate Total Rate Total Rate
Balance Deposits (%) Balance Deposits (%) Balance Deposits (%)
------------- --------- ------- ------------- -------- ------- ------------ --------- ------
Savings accounts $1,017,742 27.98 2.00 $1,018,347 28.41 2.00 $1,089,996 31.22 2.25
NOW and checking accounts 689,718 18.96 0.70 679,008 18.94 0.71 628,816 18.01 0.89
Money market accounts 296,270 8.15 2.67 288,042 8.03 2.89 321,315 9.20 3.00
------------- --------- ------- ------------- -------- ------- ------------ --------- ------
Total core deposits 2,003,730 55.09 1.65 1,985,397 55.38 1.69 2,040,127 58.43 1.95
------------- --------- ------- ------------- -------- ------- ------------ --------- ------
Certificate accounts 1,318,696 36.26 5.91 1,305,748 36.43 5.94 1,146,828 32.84 4.83
Jumbo certificate accounts 314,708 8.65 5.76 293,501 8.19 6.05 304,700 8.73 5.07
------------- --------- ------- ------------- -------- ------- ------------ --------- ------
Total deposits $3,637,134 100.00 3.55 $3,584,646 100.00 3.59 $3,491,655 100.00 3.16
============= ========= ======= ============= ======== ======= ============ ========= ======
49
Item 6. Exhibits and reports on Form 8-K
- -----------------------------------------
(a) Exhibits
HECO Amendment No. 4 to Power Purchase Agreement between
HEI Hawaiian Electric Industries, Inc. and subsidiaries
Exhibit 12.1 Computation of ratio of earnings to fixed charges, three
months ended March 31, 2001 and 2000
HECO Hawaiian Electric Company, Inc. and subsidiaries
Exhibit 12.2 Computation of ratio of earnings to fixed charges, three
months ended March 31, 2001 and
Exhibit 10.1 Kalaeloa Partners, L.P., dated October 1, 1999
HECO Termination Notice dated December 27, 1999 for Amended and
Exhibit 10.2 Restated Power Purchase Agreement by and between A&B Hawaii,
Inc., through its division, Hawaiian Commercial & Sugar Company,
and MECO, dated November 30, 1989, as amended
HEI Hawaiian Electric Industries, Inc. and subsidiaries
Exhibit 12.1 Computation of ratio of earnings to fixed charges, nine months
ended September 30, 2000
and 1999
HECO Hawaiian Electric Company, Inc. and subsidiaries
Exhibit 12.2 Computation of ratio of earnings to fixed charges, nine months
ended September 30, 2000 and 1999
HEI Hawaiian Electric Industries, Inc. and subsidiaries
Exhibit 27.1 Financial Data Schedule
September 30, 2000 and nine months ended September 30, 2000
HECO Hawaiian Electric Company, Inc. and subsidiaries
Exhibit 27.2 Financial Data Schedule
September 30, 2000 and nine months ended September 30, 2000
HEI First Amendment to Trust Agreement, made and entered into
Exhibit 99.1 August 1, 2000, between Fidelity Management Trust Company and HEI
for the Hawaiian Electric Industries Retirement Savings Plan for
incorporation by reference in the Registration Statement on Forms
S-8 (Regis. No. 333-02103)
HEI Second Amendment to Trust Agreement, made and entered into
Exhibit 99.2 November 1, 2000, between Fidelity Management Trust Company and
HEI for the Hawaiian Electric Industries Retirement Savings Plan
for incorporation by reference in the Registration Statement on
Forms S-8 (Regis. No. 333-02103)
54
(b) Reports on Form 8-K
Subsequent to June 30,December 31, 2000, HEI and/or HECO filed Current Reports,
Forms 8-K,
and/or 8-K/A, with the SEC as follows:
Dated Registrant/s Items reported
- --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
July 14,January 18, 2001 HEI/HECO Item 5. Announcement of HEI's teleconference call to review yearend
earnings on January 24, 2001
January 23, 2001 HEI/HECO Item 5. HEI's January 23, 2001 news release reporting 2000 earnings
February 23, 2001 HEI/HECO Item 7. HEI's 2000 Annual Report to Stockholders and portions of
HECO's 2000 Annual Report to Stockholder
April 23, 2001 HEI/HECO Item 5. HEI's April 23, 2001 news release reporting first quarter
2001 earnings
April 24, 2001 HEI Item 5. HEI's July 13, 2000April 24, 2001 news release - "HEI's International
(Form 8-K) Operation Estimates Second Quarter Net Loss," "International Power -
Philippines Investment"releases reporting HEI's
quarterly dividend and "Savings Bank."
July 24, 2000 HEI/HECO Item 5. HEI's July 24, 2000 news release "HEI Reports Second Quarter
(Form 8-K) 2000 Earnings" and other information.
July 24, 2000 HEI/HECO Item 5. HEI's July 24, 2000 news release "HEI Reports Second Quarter
(Form 8-K/A) 2000 Earnings" and other information.
September 1, 2000 HEI/HECO Item 5. Interim decision and order for HELCO.
(Form 8-K)
October 25, 2000 HEI/HECO Item 5. HEI's October 25, 2000 news release "HEI Reports Third
(Form 8-K) Quarter 2000 Earnings" and other information.the retirement of ASB's president
50
SIGNATURES
Pursuant to the requirements 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 signature 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
---------------------------Richard A. von Gnechten
-------------------------------- -----------------------------------
Robert F. Mougeot PaulRichard A. Oyervon Gnechten
Financial Vice President, andTreasurer Financial Vice President
and Chief Financial Officer Treasurer(Principal Financial Officer of HECO)
(Principal Financial Officer of HEI)
(Principal Financial Officer of
HECO)
Date: November 8, 2000May 14, 2001 Date: November 8, 2000
55May 14, 2001
51