UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, 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, 1999March 31, 2000
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.
- ---------------------------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 5, 1999
- ---------------------------------------------------------------------------------------------------------
Hawaiian Electric Industries, Inc. (Without Par Value).... 32,212,763 Shares
Hawaiian Electric Company, Inc. ($6 2/3 Par Value)........ 12,805,843 Shares (not publicly traded)
=========================================================================================================
Class of Common Stock Outstanding May 3, 2000
- ------------------------------------------------------------------------------
Hawaiian Electric Industries, Inc. (Without Par Value)... 32,366,116 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, 1999March 31, 2000
INDEX
Page No.
Page No.
Glossary of terms..........................................................terms................................................... ii
Forward-looking information................................................information......................................... v
PART I. FINANCIAL INFORMATION
Item 1. Financial statements
Hawaiian Electric Industries, Inc. and subsidiaries
---------------------------------------------------
Consolidated balance sheets (unaudited) -
September 30, 1999March 31, 2000 and December 31, 1998................1999..................... 1
Consolidated statements of income (unaudited) -
three and nine months ended September 30, 1999March 31, 2000 and 1998.1999............... 2
Consolidated statements of retained earnings (unaudited) -
three and nine months ended September 30, 1999March 31, 2000 and 1998.1999............... 3
Consolidated statements of cash flows (unaudited) -
ninethree months ended September 30, 1999March 31, 2000 and 1998...........1999............... 4
Notes to consolidated financial statements (unaudited)..... 5
Hawaiian Electric Company, Inc. and subsidiaries
------------------------------------------------
Consolidated balance sheets (unaudited) -
September 30, 1999March 31, 2000 and December 31, 1998................ 121999..................... 10
Consolidated statements of income (unaudited) -
three and nine months ended September 30, 1999March 31, 2000 and 1998. 131999............... 11
Consolidated statements of retained earnings (unaudited) -
three and nine months ended September 30, 1999March 31, 2000 and 1998. 131999............... 11
Consolidated statements of cash flows (unaudited) -
ninethree months ended September 30, 1999March 31, 2000 and 1998........... 141999............... 12
Notes to consolidated financial statements (unaudited)..... 1513
Item 2. Management's discussion and analysis of financial condition
and results of operations............................... 27operations................................ 25
Item 3. Quantitative and qualitative disclosures about market risk. 43
35
PART II. OTHER INFORMATION
Item 1. Legal proceedings........................................... 44proceedings.......................................... 36
Item 2. Changes in securities and use of proceeds.................. 36
Item 4. Submission of matters to a vote of security holders........ 36
Item 5. Other information........................................... 44information.......................................... 37
Item 6. Exhibits and reports on Form 8-K............................ 46
Signatures................................................................ 478-K........................... 39
Signatures.......................................................... 40
i
Hawaiian Electric Industries, Inc. and subsidiaries
Hawaiian Electric Company, Inc. and subsidiaries
Form 10-Q--Quarter ended September 30, 1999March 31, 2000
GLOSSARY OF TERMS
Terms Definitions
- ----- -----------
AFUDC Allowance for funds used during construction
ASB American Savings Bank, F.S.B., a wholly owned subsidiary of HEI Diversified, Inc.
and parent company of American Savings Investment Services Corp., ASB Service
Corporation, AdCommunications, Inc., American Savings Mortgage Co., Inc. and ASB
Realty Corporation
ASBR ASB Realty Corporation
BaoSteel Baotou Iron & Steel (Group) Co., Ltd.
BIF Bank Insurance Fund
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
Investment Corp., Hawaiian Tug & Barge Corp., Young Brothers, Limited, HEI Diversified, Inc., American Savings Bank, F.S.B. and its
subsidiaries, HEI Power Corp. and its subsidiaries, HEI Properties, Inc., Pacific Energy Conservation
Services, Inc., HEI Power Corp. and its subsidiaries, HEI District
Cooling, Inc., ProVision Technologies, 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 and Malama Pacific Corp. and its
subsidiaries
D&O Decision and order
DLNR Department of Land and Natural Resources of the State of Hawaii
DOH Department of Health of the State of Hawaii
EAB Environmental Appeals Board
Encogen Encogen Hawaii, L.P.
Enserch Enserch Development Corporation
EPA Environmental Protection Agency - federal
ii
GLOSSARY OF TERMS, continued
Terms Definitions
- ----- -----------
FASB Financial Accounting Standards Board
FDIC Federal Deposit Insurance Corporation
federal U.S. Government
FHLB Federal Home Loan Bank
FICO Financing Corporation
GAAP Generally accepted accounting principles
GPA Guam Power Authority
HCPC Hilo Coast Power Company, formerly Hilo Coast Processing Company
HECO Hawaiian Electric Company, Inc., a wholly owned electric utility
subsidiary of Hawaiian Electric Industries, Inc. and parent company of
Maui Electric Company, Limited, 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 Investment Corp., Hawaiian Tug & Barge
Corp., HEI Diversified, Inc., Pacific Energy Conservation Services,
Inc., HEI Power Corp., 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 Consumer Affairs of the
Advocate State of Hawaii
D&O Decision and order
DLNR Department of Land and Natural Resources of the State of Hawaii
DOH Department of Health of the State of Hawaii
EAPRC East Asia Power Resources Corporation
Enserch Enserch Development Corporation
EPHC El Paso Philippines Holding Company, Inc.
EPA Environmental Protection Agency - federal
ii
GLOSSARY OF TERMS, continued
Terms Definitions
- ----- -----------
FASB Financial Accounting Standards Board
FDIC Federal Deposit Insurance Corporation
federal U.S. Government
FHLB Federal Home Loan Bank
FICO Financing Corporation
GAAP Generally accepted accounting principles
GPA Guam Power Authority
Hamakua Hamakua Energy Partners, L.P., formerly known as Encogen Hawaii, L.P.
Partners
HCPC Hilo Coast Power Company
HECO Hawaiian Electric Company, Inc., a wholly owned electric utility subsidiary of
Hawaiian Electric Industries, Inc. and parent company of Maui Electric Company,
Limited, 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. and HEI Properties, Inc.
HEIIC HEI Investment Corp., 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
HELCO Hawaii Electric Light Company, Inc., a wholly owned electric utility subsidiary of
Hawaiian Electric Company, Inc.
HPG HEI Power Corp. Guam, a wholly owned subsidiary of HEI Power Corp.
iii
GLOSSARY OF TERMS, continued
Terms Definitions
- ----- -----------
HTB Hawaiian Tug & Barge Corp., a wholly owned subsidiary of Hawaiian
Electric Industries, Inc. and parent company of Young Brothers,
Limited.
Terms Definitions
- ----- -----------
HPG HEI Power Corp. Guam, a wholly owned subsidiary of HEI Power Corp.
IPP Independent power producer
KCP Kawaihae Cogeneration Partners
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
PSD permit Prevention of Significant Deterioration/Covered Source permit
PUC Public Utilities Commission of the State of Hawaii
ROACE Return on average common equity
SAIF Savings Association Insurance Fund
SEC Securities and Exchange Commission
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 YB and substantially all of HTB's operating assets.
YB Young Brothers, Limited, a wholly owned subsidiary of Hawaiian Tug & Barge Corp.
which was sold on November 10, 1999
HTB sold YB and substantially all
HTB's operating assets.
IPP Independent power producer
KCP Kawaihae Cogeneration Partners
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
PSD permit Prevention of Significant Deterioration/Covered Source permit
PUC Public Utilities Commission of the State of Hawaii
ROACE Return on average common equity
SAIF Savings Association Insurance Fund
SEC Securities and Exchange Commission
SFAS Statement of Financial Accounting Standards
YB Young Brothers, Limited, a wholly owned subsidiary of Hawaiian Tug &
Barge Corp. On November 10, 1999, HTB sold YB.
iv
Forward-looking informationstatements
This report and other presentations made by Hawaiian Electric Industries, Inc.
(HEI) and its subsidiaries contain forward-looking statementscontains "forward-looking statements" within the
meaning of Section 21Ethe Private Securities Litigation Reform Act of 1995 (the Act).
Forward-looking statements include statements which are predictive in nature,
which depend upon or refer to future events or conditions, which include words
such as "expects", "anticipates", "intends", "plans", "believes", "estimates" or
similar expressions. In addition, any statements concerning future financial
performance (including future revenues, earnings or growth rates), ongoing
business strategies or prospects and possible future actions, which may be
provided by management are also forward-looking statements as defined by the
Act. 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 Securities Exchange Actindustries in
which they do business and economic and market factors, among other things.
These statements are not guaranties of 1934. Except for historical
information contained herein, the matters set forth are forward-looking
statements that involve certainfuture performance. Such risks,
uncertainties and uncertainties that could cause actual
results to differ materially from those in the forward-looking statements.
Potential risks and uncertaintiesother important factors include, but are not limited to, such factors
asthe
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 bankinginternational
power industries;
. capacity and supply constraints or difficulties;
. new technological developments;
. governmental and regulatory actions, including changes in laws, rules and
regulations applicable to HEI and its subsidiaries, decisions in rate cases
and on permitting issues;issues and changes in taxation;
. the results of financing efforts;
. the timing and extent of changes in interest ratesrates;
. the timing and extent of changes in foreign currency exchange rates;
. the convertibility and availability of foreign currency;
. political and business risks inherent in doing business in developing
countries;
and. the risks associated with the installation of new computer systemssystems;
. the risk that ASB Realty Corporation fails to qualify as a real estate
investment trust for federal income tax purposes, in which case it would be
subject to regular corporate income taxation; and
the
avoidance of Year 2000 problems. Investors are also referred to. other risks andor uncertainties discusseddescribed 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.Commission
(SEC).
Forward-looking statements speak only as of the date of this report.
v
PART I - FINANCIAL INFORMATION
- -----------------------------------------------------------------------------------------------------------------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) 2000 1999
1998
- ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
Assets
- ------
Cash and equivalents............................................equivalents................................... $ 209,430202,583 $ 412,254199,906
Accounts receivable and unbilled revenues, net.................. 155,306 156,220net......... 153,790 154,605
Investment and mortgage/asset-backed securities................. 2,070,881 1,902,927securities........ 2,255,257 2,159,945
Loans receivable, net........................................... 3,215,717 3,143,197net.................................. 3,205,008 3,211,878
Property, plant and equipment, net of accumulated
depreciation of $1,158,137 and amortization of $1,147,935 and $1,063,023... 2,089,605 2,093,398$1,129,078........... 2,063,430 2,066,195
Regulatory assets............................................... 114,581 110,459
Other........................................................... 277,323 265,799assets...................................... 115,885 114,759
Other.................................................. 356,996 276,997
Goodwill and other intangibles.................................. 108,805 115,006
---------- ----------
$8,241,648 $8,199,260
========== ==========intangibles......................... 104,788 106,741
---------------- -----------------
$8,457,737 $8,291,026
================ =================
Liabilities and stockholders' equity
- ------------------------------------
Liabilities
Accounts payable................................................payable....................................... $ 123,008117,835 $ 107,863117,447
Deposit liabilities............................................. 3,559,269 3,865,736liabilities.................................... 3,558,024 3,491,655
Short-term borrowings........................................... 164,610 222,847borrowings.................................. 232,859 151,833
Securities sold under agreements to repurchase.................. 426,519 515,330repurchase......... 645,406 661,215
Advances from Federal Home Loan Bank............................ 1,082,081 805,581Bank................... 1,227,112 1,189,081
Long-term debt.................................................. 978,676 899,598debt......................................... 983,881 977,529
Deferred income taxes........................................... 181,963 186,138taxes.................................. 180,974 181,277
Contributions in aid of construction............................ 198,478 198,904
Other........................................................... 453,464 285,243
---------- ----------
7,168,068 7,087,240
---------- ----------construction................... 205,481 206,302
Other.................................................. 211,724 231,854
---------------- -----------------
7,363,296 7,208,193
---------------- -----------------
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 electric utility subsidiaries Subject to mandatory redemption............................. - 33,080
Notnot subject to
mandatory redemption......................... 34,293 48,293redemption.................................. 34,406 34,406
Minority interests.............................................. 3,494 3,675
---------- ----------
237,787 285,048
---------- ----------interests..................................... 876 841
---------------- -----------------
235,282 235,247
---------------- -----------------
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: 32,21232,315 shares
and 32,116 shares............ 665,275 661,72032,213 shares..................................... 667,957 665,335
Retained earnings............................................... 170,518 165,252
---------- ----------
835,793 826,972
---------- ----------
$8,241,648 $8,199,260
========== ==========
See accompanying notes to consolidated financial statements.earnings...................................... 191,202 182,251
---------------- -----------------
859,159 847,586
---------------- -----------------
$8,457,737 $8,291,026
================ =================
See accompanying "Notes to consolidated financial statements."
1
Hawaiian Electric Industries, Inc. and subsidiaries
Consolidated statements of income (unaudited)
Three months ended Nine months ended
September 30, September 30,March 31,
(in thousands, except per share amounts and --------------------------------
------------------------------------
ratio of earnings to fixed charges) 2000 1999
1998 1999 1998
- --------------------------------------------------------- ------------------------------------------------------------------------
Revenues---------------------------------------------------------------- --------------------------------
Revenues
Electric utility.................................... $277,283 $259,684 $767,346 $762,494utility........................................... $289,405 $237,791
Savings bank........................................ 102,624 103,229 304,663 306,324
Other............................................... 12,543 14,405 42,376 44,023
---------- ---------- ---------- ----------
392,450 377,318 1,114,385 1,112,841
---------- ---------- ---------- ----------bank............................................... 110,267 100,280
International power........................................ 1,665 992
Other...................................................... 538 13,184
------------ ---------------
401,875 352,247
------------ ---------------
Expenses
Electric utility.................................... 230,811 208,418 635,637 626,969utility........................................... 237,775 196,890
Savings bank........................................ 87,705 89,831 258,824 264,245
Other............................................... 17,383 16,770 50,631 48,753
---------- ---------- ---------- ----------
335,899 315,019 945,092 939,967
---------- ---------- ---------- ----------bank............................................... 91,077 85,149
International power........................................ 2,115 1,608
Other...................................................... 2,706 14,568
------------ ---------------
333,673 298,215
------------ ---------------
Operating income (loss)
Electric utility.................................... 46,472 51,266 131,709 135,525utility........................................... 51,630 40,901
Savings bank........................................ 14,919 13,398 45,839 42,079
Other............................................... (4,840) (2,365) (8,255) (4,730)
---------- ---------- ---------- ----------
56,551 62,299 169,293 172,874
---------- ---------- ---------- ----------bank............................................... 19,190 15,131
International power........................................ (450) (616)
Other...................................................... (2,168) (1,384)
------------ ---------------
68,202 54,032
------------ ---------------
Interest expense--electric utility and other........ (17,600) (17,601) (54,488) (53,345)expense--other than savings bank.................. (19,072) (17,888)
Allowance for borrowed funds used during construction.............................. 716 1,826 1,955 5,145construction...... 691 640
Preferred stock dividends of electric
utility subsidiaries.............................subsidiaries.................. (498) (1,499) (1,624) (4,507)(627)
Preferred securities distributions of trust subsidiaries.....................................subsidiaries... (4,009) (3,097) (12,016) (9,289)(3,999)
Allowance for equity funds used during construction..................................... 1,176 3,139 3,202 8,781
---------- ---------- ---------- ----------construction........ 1,269 1,039
------------ ---------------
Income from continuing operations before income taxes.............................. 36,336 45,067 106,322 119,659taxes................................. 46,583 33,197
Income taxes........................................ 14,704 17,288 41,180 46,140
---------- ---------- ---------- ----------
Income from continuing operations................... 21,632 27,779 65,142 73,519
---------- ---------- ---------- ----------
Discontinued operations, net of income taxes
Loss from operations............................. - (12,474) - (13,598)taxes............................................... 17,607 12,443
------------ ---------------
Net gain on disposals............................ - 3,781 - 3,781
---------- ---------- ---------- ----------
Loss from discontinued operations................... - (8,693) - (9,817)
---------- ---------- ---------- ----------
Net income..........................................income................................................. $ 21,63228,976 $ 19,086 $ 65,142 $ 63,702
========== ========== ========== ==========20,754
============ ===============
Basic earnings (loss) per common share
Continuing operations............................share............................ $ 0.670.90 $ 0.87 $ 2.02 $ 2.30
Discontinued operations.......................... - (0.27) - (0.31)
---------- ---------- ---------- ----------
$ 0.67 $ 0.60 $ 2.02 $ 1.99
========== ========== ========== ==========0.65
============ ===============
Diluted earnings (loss) per common share
Continuing operations............................ $ 0.67 $ 0.86 $ 2.02 $ 2.29
Discontinued operations.......................... - (0.27) - (0.31)
---------- ---------- ---------- ----------
$ 0.67 $ 0.59 $ 2.02 $ 1.98
========== ========== ========== ==========
Dividends per common share.......................... $ 0.90 $ 0.64
============ ===============
Dividends per common share................................. $ 0.62 $ 0.62
$ 1.86 $ 1.86
========== ========== ========== ====================== ===============
Weighted-average number of common shares outstanding (basic earnings per common share).... 32,203 32,010 32,180 31,992outstanding....... 32,266 32,153
Dilutive effect of stock options and dividend
equivalents...................... 91 128 97 138
---------- ---------- ---------- ----------equivalents........................................... 106 83
------------ ---------------
Adjusted weighted-average shares
(diluted earnings per common share).............. 32,294 32,138 32,277 32,130
========== ========== ========== ==========shares........................... 32,372 32,236
============ ===============
Ratio of earnings to fixed charges (SEC method)
Excluding interest on ASB deposits............. 1.78 1.90
========== ==========deposits.................... 1.86 1.76
============ ===============
Including interest on ASB deposits............. 1.46 1.49
========== ==========deposits.................... 1.57 1.43
============ ===============
See accompanying notes"Notes to consolidated financial statements."
2
Hawaiian Electric Industries, Inc. and subsidiaries
Consolidated statements of retained earnings (unaudited)
Three months ended Nine months ended
September 30, September 30,
--------------------------------March 31,
--------------------------------
(in thousands) 2000 1999
1998 1999 1998
- ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
Retained earnings, beginning of period................ $168,858 $164,807period..................... $182,251 $165,252
$159,862
Net income............................................ 21,632 19,086 65,142 63,702income................................................. 28,976 20,754
Common stock dividends................................ (19,972) (19,847) (59,876) (59,518)
-------- -------- -------- --------dividends..................................... (20,025) (19,949)
------------ ---------------
Retained earnings, end of period...................... $170,518 $164,046 $170,518 $164,046
======== ======== ======== ========period........................... $191,202 $166,057
============ ===============
See accompanying notes"Notes to consolidated financial statements."
3
Hawaiian Electric Industries, Inc. and subsidiaries
Consolidated statements of cash flows (unaudited)
Nine
Three months ended
September 30,
----------------------------------March 31,
-----------------------------
(in thousands) 2000 1999
1998
- ------------------------------------------------------------------------------------- -------------------------------------------------------------------------------------------------------------------------------------
Cash flows from continuing operating activities
Income from continuing operations...........................................................Net income......................................................... $ 65,14228,976 $ 73,51920,754
Adjustments to reconcile net income from continuing operations to net cash provided by
continuing operating activities
Depreciation and amortization of property, plant and equipment........................ 81,871 74,588equipment................ 27,143 27,190
Other amortization.................................................................... 11,345 11,397amortization........................................... 1,476 4,261
Provision for loan losses............................................................. 10,848 9,473losses.................................... 3,000 2,920
Deferred income taxes................................................................. (4,175) (864)taxes........................................ (300) (130)
Allowance for equity funds used during construction................................... (3,202) (8,781)construction.......... (1,269) (1,039)
Changes in assets and liabilities
Decrease in accounts receivable and unbilled revenues,
net...................... 914 1,639net................................................... 815 11,979
Increase (decrease) in accounts payable......................................... 15,145 (34,711)payable........................... 388 5,111
Changes in other assets and liabilities......................................... 1,711 54,110
--------- ---------liabilities................ 2,153 (53,665)
---------- ------------
Net cash provided by continuing operating activities........................................ 179,599 180,370
--------- ---------activities.......................... 62,382 17,381
---------- ------------
Cash flows from investing activities
Held-to-maturity mortgage/asset-backed securities purchased................................. (623,942) (401,740)purchased........ (151,425) (249,256)
Principal repayments on held-to-maturity mortgage/asset-backed
securities................... 470,063 402,288
Held-to-maturity investment securities purchased............................................ (54,782) (200,982)
Principal repayments on held-to-maturity investment securities.............................. 43,000 159,982securities........................................................ 58,434 191,956
Loans receivable originated and purchased................................................... (528,777) (494,683)purchased.......................... (110,360) (208,096)
Principal repayments on loans receivable.................................................... 435,725 358,582receivable........................... 103,611 159,420
Capital expenditures........................................................................ (88,444) (124,290)
Cash paid to Bankexpenditures............................................... (25,080) (22,174)
Acquisition of America, FSB for the purchase of loans receivable and
other assets, net of the assumption of deposit and other liabilities.....................Philippines investment.............................. (87,500) -
(24,018)
Proceeds from loans returned to Bank of America, FSB........................................ - 28,104
Other....................................................................................... 19,585 16,906
--------- ---------Other.............................................................. 7,767 4,517
----------- -----------
Net cash used in investing activities....................................................... (327,572) (279,851)
--------- ---------activities.............................. (204,553) (123,633)
----------- -----------
Cash flows from financing activities
Net decreaseincrease (decrease) in deposit liabilities......................................................... (306,467) (85,155)liabilities..................... 66,369 (49,465)
Net decreaseincrease in short-term borrowings with original maturities of
three months or less...... (58,237) (103,307)less.............................................. 81,026 19,266
Net increase (decrease) in retail repurchase agreements..................................... 167,765 (2,971)agreements....................... 2,280 765
Proceeds from securities sold under agreements to repurchase................................ 290,000 474,812repurchase....... 218,728 132,000
Repurchase of securities sold under agreements to repurchase................................ (378,612) (316,000)repurchase....... (240,085) (186,000)
Proceeds from advances from Federal Home Loan Bank.......................................... 684,100 661,500Bank................. 218,531 32,000
Principal payments on advances from Federal Home Loan Bank.................................. (407,600) (574,893)Bank......... (180,500) (30,000)
Proceeds from issuance of long-term debt.................................................... 167,452 185,394
Repayment of long-term debt................................................................. (88,500) (59,400)debt........................... 6,304 3,594
Redemption of electric utility subsidiaries' preferred stock................................ (47,080) (2,590)stock....... - (37,068)
Net proceeds from issuance of common stock.................................................. 3,432 4,553stock......................... 2,590 2,162
Common stock dividends...................................................................... (59,876) (59,518)dividends............................................. (20,025) (19,949)
Preferred securities distributions of trust subsidiaries.................................... (12,016) (9,289)
Other....................................................................................... (9,212) (3,728)
--------- ---------subsidiaries........... (4,009) (3,999)
Other.............................................................. (6,361) (4,378)
---------- ------------
Net cash provided by (used in) financing activities......................................... (54,851) 109,408
--------- ---------
Net cash provided by discontinued operations................................................ - 11,265
--------- ---------activities................ 144,848 (141,072)
---------- ------------
Net increase (decrease) in cash and equivalents............................................. (202,824) 21,192equivalents.................... 2,677 (247,324)
Cash and equivalents, beginning of period...................................................period.......................... 199,906 412,254
253,910
--------- ------------------- ------------
Cash and equivalents, end of period.........................................................period................................ $ 209,430202,583 $ 275,102
========= =========
See accompanying notes to consolidated financial statements.164,930
========== ============
See accompanying "Notes to consolidated financial statements."
4
Hawaiian Electric Industries, Inc. and subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30,March 31, 2000 and 1999
and 1998
(Unaudited)
- --------------------------------------------------------------------------------
(1) Basis of presentation
- ---------------------------------------------------
The accompanying unaudited consolidated financial statements have been prepared
in conformity with generally accepted accounting principles (GAAP) for interim
financial information and with the instructions to Securities and Exchange
Commission (SEC)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, 1998 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, 1999 and June 30, 1999.
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, 1999March 31, 2000 and
December 31, 1998,1999, and the results of its operations for the three and nine months
ended September 30, 1999 and 1998, and its cash flows for the
ninethree months ended September 30, 1999March 31, 2000 and 1998.1999. 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.
Certain reclassifications have been made to prior periods' consolidated
financial statements to conform to the 19992000 presentation.
5
(2) Segment financial information
- ----------------------------------
Segment financial information was as follows:
Electric Savings Holding Elimi-International
($ in thousands) utility bank power Other companies nations Total
- -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
QuarterThree months ended September 30,March 31, 2000
Revenues from external customers..... 289,391 110,263 1,654 567 401,875
Intersegment revenues................ 14 4 11 (29) -
-------------- --------------- ----------------- --------------- -------------
Revenues......................... 289,405 110,267 1,665 538 401,875
============== =============== ================= =============== =============
Income (loss) before income taxes.... 38,902 17,783 (659) (9,443) 46,583
Income taxes (benefit)............... 15,177 6,562 262 (4,394) 17,607
-------------- --------------- ----------------- --------------- -------------
Net income (loss)................ 23,725 11,221 (921) (5,049) 28,976
============== =============== ================= =============== =============
Assets*.............................. 2,290,877 5,943,462 192,196 31,202 8,457,737
============== =============== ================= =============== =============
Three months ended March 31, 1999
Revenues from external customers................... 277,274 102,616 13,142 (582)customers..... 237,791 100,272 992 13,192 352,247
Intersegment revenues................ - 392,450
Intersegment revenues........ 9 8 2,711 2,792 (5,520) - ------------------------------------------------------------------
Revenues................. 277,283 102,624 15,853 2,210 (5,520) 392,450
===================================================================
Profit(8) -
-------------- --------------- ----------------- --------------- -------------
Revenues......................... 237,791 100,280 992 13,184 352,247
============== =============== ================= =============== =============
Income (loss)*............... 33,704 13,569 (1,506) (9,431) - 36,336 before income taxes.... 27,701 13,781 (686) (7,599) 33,197
Income taxes (benefit)....... 13,389 5,070 582 (4,337) - 14,704
-------------------------------------------------------------------
Income............... 10,620 5,256 103 (3,536) 12,443
-------------- --------------- ----------------- --------------- -------------
Net income (loss) from
continuing operations. 20,315 8,499 (2,088) (5,094) - 21,632
===================================================================
Nine months ended September 30, 1999
Revenues from external
customers................... 767,337 304,640 41,834 574 - 1,114,385
Intersegment revenues........ 9 23 8,083 6,348 (14,463) -
-------------------------------------------------------------------
Revenues................. 767,346 304,663 49,917 6,922 (14,463) 1,114,385
===================================================================
Profit (loss)*............... 92,740 41,789 (950) (27,257) - 106,322
Income taxes (benefit)....... 36,120 15,708 1,493 (12,141) - 41,180
-------------------------------------------------------------------
Income (loss) from
continuing operations. 56,620 26,081 (2,443) (15,116) - 65,142
===================================================================
Quarter ended September 30, 1998
Revenues from external
customers................... 259,684 103,221 14,282 131 - 377,318
Intersegment revenues........ - 8 2,704 2,241 (4,953) -
-------------------------------------------
Revenues................. 259,684 103,229 16,986 2,372 (4,953) 377,318
===================================================================
Profit (loss)*............... 41,656 12,048 (351) (8,286) - 45,067
Income taxes (benefit)....... 16,680 4,144 500 (4,036) - 17,288
-------------------------------------------------------------------
Income (loss) from
continuing operations. 24,976 7,904 (851) (4,250) - 27,779
===================================================================
Nine months ended September 30, 1998
Revenues from external
customers................... 762,494 306,301 43,783 263 - 1,112,841
Intersegment revenues........ - 23 8,035 6,355 (14,413) -
-------------------------------------------------------------------
Revenues................. 762,494 306,324 51,818 6,618 (14,413) 1,112,841
===================================================================
Profit (loss)*............... 105,141 38,029 989 (24,500) - 119,659
Income taxes (benefit)....... 42,214 14,413 1,998 (12,485) - 46,140
-------------------------------------------------------------------
Income (loss) from
continuing operations. 62,927 23,616 (1,009) (12,015) - 73,519
===================================================================................ 17,081 8,525 (789) (4,063) 20,754
============== =============== ================= =============== ============
Assets*.............................. 2,255,148 5,585,313 44,502 153,711 8,038,674
============== =============== ================= =============== ============
* Income before income taxes and discontinued operations.At March 31.
Revenues attributed to foreign countries for the periods identified above were
not significant.
65
(3) Electric utility subsidiary
- --------------------------------
For Hawaiian Electric Company, Inc.'s consolidated financial information,
including its commitments and contingencies, see pages 1210 through 26.24.
(4) Savings bank subsidiary
- ----------------------------
Selected consolidated financial information
American Savings Bank, F.S.B. and subsidiaries
Income statement data
Three months ended Nine months ended
September 30, September 30,
------------------------------ --------------------------
(in thousands) 1999 1998 1999 1998
- --------------------------------------------------------------------------------------------------------------------
Interest income.......................................... $ 95,402 $ 95,385 $281,840 $285,437
Interest expense......................................... 51,592 56,214 153,351 163,265
-------- -------- -------- --------
Net interest income...................................... 43,810 39,171 128,489 122,172
Provision for losses..................................... (4,750) (3,125) (10,848) (9,473)
Other income............................................. 7,222 7,844 22,823 20,887
Operating, administrative and general expenses........... (31,363) (30,492) (94,625) (91,507)
-------- -------- -------- --------
Operating income......................................... 14,919 13,398 45,839 42,079
Income taxes............................................. 5,070 4,144 15,708 14,413
-------- -------- -------- --------
Income before preferred stock dividends.................. 9,849 9,254 30,131 27,666
Dividends on preferred stock held by parent.............. 1,350 1,350 4,050 4,050
-------- -------- -------- --------
Net income............................................... $ 8,499 $ 7,904 $ 26,081 $ 23,616
======== ======== ======== ========
American Savings Bank, F.S.B. and subsidiaries
BalanceConsolidated balance sheet data
March 31, December 31,
(in thousands) September 30,2000 1999 December 31, 1998
- ------------------------------------------------------------------------------------------------------------------------------
Assets
Cash and equivalents............................................................ $ 178,121194,572 $ 352,566192,807
Held-to-maturity investment securities.......................................... 127,563 111,574188,671 186,799
Held-to-maturity mortgage/asset-backed securities............................... 1,943,318 1,791,3532,066,586 1,973,146
Loans receivable, net........................................................... 3,215,717 3,143,1973,205,008 3,211,878
Other........................................................................... 179,908 177,976183,837 176,836
Goodwill and other intangibles.................................................. 108,805 115,006104,788 106,741
------------------ --------------------
$5,753,432 $5,691,672$5,943,462 $5,848,207
================== ====================
Liabilities and equity
Deposit liabilities............................................................. $3,559,269 $3,865,736$3,558,024 $3,491,655
Securities sold under agreements to repurchase.................................. 426,519 515,330645,406 661,215
Advances from Federal Home Loan Bank............................................ 1,082,081 805,5811,227,112 1,189,081
Other........................................................................... 258,109 92,15370,074 70,239
------------------ --------------------
5,325,978 5,278,8005,500,616 5,412,190
Minority interests.............................................................. 113 1133,357 3,300
Preferred stock held by parent.................................................. 75,000 75,000stock................................................................. 75,113 75,113
Common stock equity............................................................. 352,341 337,759364,376 357,604
------------------ --------------------
$5,753,432 $5,691,672$5,943,462 $5,848,207
================== ====================
American Savings Bank, F.S.B. and subsidiaries
Consolidated income statement data
Three months ended March 31,
----------------------------------------------
(in thousands) 2000 1999
- --------------------------------------------------------------------------------------------------------------------------------
Interest income................................................................... $102,508 $ 92,947
Interest expense.................................................................. 55,718 51,456
----------------- --------------------
Net interest income............................................................... 46,790 41,491
Provision for loan losses......................................................... (3,000) (2,920)
Other income...................................................................... 7,759 7,333
Operating, administrative and general expenses.................................... (32,359) (30,773)
----------------- --------------------
Operating income.................................................................. 19,190 15,131
Income taxes...................................................................... 6,562 5,256
----------------- --------------------
Income before preferred stock dividends........................................... 12,628 9,875
Preferred stock dividends......................................................... 1,350 1,350
Minority interests................................................................ 57 -
----------------- --------------------
Net income........................................................................ $ 11,221 $ 8,525
================= ====================
6
Subsequent event
In April 2000, ASB Realty Corporation issued preferred stock with an aggregate
liquidation preference of $187 million to ASB. ASB plans to sell $60 million of
the preferred stock in a private placement prior to June 30, 2000, which sale
will increase ASB's capital for regulatory purposes.
(5) International power subsidiary
- -----------------------------------
China project
In 1998 and 1999, 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 refused to enter into an 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. Accordingly, the HEIPC Group believes
Baotou Steel is now in default. The HEIPC Group intends to cause the joint
venture to pursue remedies for the default and, if not cured, 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 HEIPC acquired a 50% interest in El
Paso Philippines Holding Company, Inc. (EPHC), an indirect subsidiary of El Paso
Energy Corporation (EPEC), for $87 million plus up to an additional $6 million
of payments that are contingent upon future earnings of East Asia Power
Resources Corporation (EAPRC). EPHC 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. Also on March
7, 2000, HEI entered into an agreement with EPEC to guarantee 50% of EPEC's
payment obligations under an EPEC Guaranty Agreement, up to $10 million. The
Guaranty Agreement supports EAPRC's and East Asia Diesel Power Corporation's
revolving loan facility of up to $20 million. HEI is currently engaged in
discussions with the provider of the loan facility to provide HEI's separate
guaranty of 50% of the obligations under the revolving loan facility in place of
the guaranty agreement with EPEC.
7
Deposit-insurance premiums
The Savings Association Insurance Fund (SAIF) insures(6) Retirement benefits
- -------------------------
Change in method of calculating market-related value of retirement benefit plan
assets
Since 1993, the deposit accountsCompany determined the market-related value of ASBretirement
benefit (pension and other thrifts. The Bank Insurance Fund (BIF) insurespostretirement benefits) plan assets by calculating
the deposit
accountsdifference between the expected return and the actual return on the fair
value of commercial banks. The Federal Deposit Insurance Corporation (FDIC)
administers the SAIFplan assets, then amortizing the difference over future years -- 0%
in the first year and BIF.25% in years two to five, and finally subtracting the
unamortized differences for the past four years from fair value. In December 1996, the FDIC adoptedfirst
quarter of 2000, the method of calculating the market-related value of the plan
assets was changed to include a risk-based assessment schedule for SAIF
institutions, effective January 1, 1997, that was identical15% range around the fair value of such assets
(i.e., 85% to 115% of fair value). If the existing base
rate schedule for BIF institutions: zero to 27 cents per $100 of deposits. Added
to this base rate schedule through 1999market-related value is outside the
15% range, then the amount outside the range will be recognized immediately in
the assessmentcalculation of annual net periodic benefit cost. If the market-related value
remains within the 15% range, the Company will continue to fundamortize the
Financing Corporation's (FICO's)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 quarter of 2000 was to increase net income approximately
$1 million ($0.03 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 obligations. Inrates prevailing at the time. The
effect of the change was to reduce the projected benefit obligation at December
1997, ASB
acquired BIF-assessable deposits as well as SAIF-assessable deposits from Bank
of America, FSB. As a "well-capitalized" thrift, ASB's base deposit insurance
premium effective31, 1999 by approximately $110 million and to increase net income by
approximately $1 million ($0.4 in basic earnings per common share) for the September 30, 1999 quarterly payment is zero and its
assessment for funding FICO interest payments is 5.9 cents per $100first
quarter of SAIF-
assessable deposits and 1.2 cents per $100 of BIF-assessable deposits, on an
annual basis, based on deposits as of June 30, 1999. SAIF-assessable deposits
represented 89% of total deposits as of June 30, 1999.
(5)2000.
(7) Cash flows
- ---------------
Supplemental disclosures of cash flow information
Cash paid for interest (net of capitalized amounts) and income taxes was as
follows:
NineThree months ended September 30,
------------------------------------------March 31,
---------------------------------------------
(in thousands) 2000 1999
1998
- -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
Interest (including interest paid by savings bank, but excluding interest
paid on nonrecourse debt on leveraged leases).............................................. $199,198 $200,453
================== ==================.............................. $56,493 $58,359
================ ================
Income taxes........................................................................taxes................................................................ $ 38,289 $ 27,325
================== ==================631 $37,106
================ ================
The increasedecrease in income taxes paid for the ninethree months ended September 30, 1999March 31, 2000
compared to the same period in 19981999 was primarily due to a changethe payment of
significant federal taxes with the federal tax return extension in the timing
of the recognition of ASB's loan portfolio taxable income, partly offset by a
change in the timing of Public Service Company tax deductions.1999.
Supplemental disclosures 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 $3.2$1.3 million and $8.8$1.0 million for the ninethree months ended September 30,March 31, 2000 and
1999, and 1998, respectively. The decrease in 1999 was due to the nonaccrual of AFUDC
with respect to HELCO's Keahole project and a lower construction in progress
base on which AFUDC is calculated because of the completion of projects and
their addition to plant in 1998.
(6) Accounting changes
- -----------------------
Costs of computer software developed or obtained for internal use and start-up
activities
In March 1998, the AICPA Accounting Standards Executive Committee issued
Statement of Position (SOP) 98-1, "Accounting for the Costs of Computer Software
Developed or Obtained for Internal Use," which requires that certain costs,
including certain payroll and payroll-related costs, be capitalized and
amortized over the estimated useful life of the software. In April 1998, the
AICPA Accounting Standards Executive Committee issued SOP 98-5, "Reporting on
the Costs of Start-up Activities," which requires that costs of start-up
activities, including organization costs, be expensed as incurred. The
provisions of SOP 98-1 and SOP 98-5 are effective for fiscal years beginning
after December 15, 1998. The Company adopted SOP 98-1 and SOP 98-5 effective
8
January 1, 1999. The adoption of SOP 98-1 and SOP 98-5 did not have a material
effect on the Company's financial condition, results of operations or liquidity.(8) Recent accounting pronouncements
- -------------------------------------
Derivative instruments and hedging activities
In June 1998, the Financial Accounting Standards Board (FASB) issued Statement
of Financial Accounting Standards (SFAS) No. 133, "Accounting for Derivative
Instruments and Hedging Activities," which 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. In
June 1999, theThe 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. The Company will adopt SFAS No. 133,
as amended, on January 1, 2001, but management has not yet determined the
impact, if any, of adoption.
(7)(9) Commitments and contingencies
- ----------------------------------
Environmental regulation
In early 1995, the Department of Health of the State of Hawaii (DOH) initially
advised HECO, Hawaiian Tug & Barge Corp. (HTB)See note (5), Young Brothers, Limited (YB)"International power subsidiary," above and others that it was conducting an investigationnote (4), "Commitments
and contingencies," in HECO's "Notes 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 to
operate their facilities upon contaminated land. The DOH met with these
identified parties in January 1996 and certain of the identified parties
including HECO, Chevron Products Company, Equilon Enterprises LLC (formerly
Shell Oil Products Company), the State of Hawaii Department of Transportation
Harbors Division and others formed a Technical Work Group and a Legal Work Group
which now function together as the Honolulu Harbor Working Group. Effective
January 30, 1998, the Honolulu Harbor Working 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.
On April 19, 1999, the Honolulu Harbor Working Group submitted to the DOH a
"Data Assimilation and Review" report, which presents the results of a study
conducted by a consultant to document environmental conditions in the Iwilei
Unit of the Honolulu Harbor study area related to potential petroleum impacts.
The location and sources (confirmed and potential) of petroleum releases were
identified. On September 3, 1999, the Honolulu Harbor Working Group submitted a
report that included the identification and evaluation of potential hazardous
areas, a preliminary risk screening and recommendations for additional data
gathering to allow an assessment of the need for risk-based corrective action.
The Honolulu Harbor Working Group engaged PHR Environmental Consultants, Inc.
(PHR) to assist in identifying additional potentially responsible parties, and
on October 7, 1999, PHR submitted a report to the DOH identifying 26 additional
potentially responsible parties, including YB. Under the terms of the agreement
for the sale of YB, HEI has certain indemnity obligations, including obligations
with respect to the Honolulu Harbor investigation.
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
claimed and covered under insurance policies, but such coverage is not
determinable at this time.
China project
In September 1998, HEI Power Corp. (HEIPC), through a wholly owned subsidiary's
80% ownership of a Mauritius Company, acquired an effective 60% interest in a
joint venture, Baotou Tianjiao Power Co., Ltd. (Tianjiao), formed to design,
construct, own, operate and manage a 200 megawatt (MW) coal-fired power plant to
be located inside Baotou Iron & Steel (Group) Co., Ltd.'s (BaoSteel's) complex
in Inner
9
Mongolia, People's Republic of China (PRC). BaoSteel, a state-owned enterprise
and the fifth largest steel company in China, is a 25% partner in the joint
venture and will purchase all the electricity generated. Ownership of the plant
will be transferred, without charge, to BaoSteel in approximately 20 years. As
of September 30, 1999, HEIPC and its subsidiaries (the HEIPC Group) had invested
approximately $17 million and are committed to invest up to an additional $83
million toward the China project, subject to certain conditions. Completion of
construction is dependent on BaoSteel making satisfactory arrangements with the
Inner Mongolia Power (Group) Co. Ltd. for BaoSteel's interconnection to the
grid. In early November 1999, the PRC central government directed the Inner
Mongolia government to coordinate the finalization of an interconnection
agreement.
(8)consolidated financial statements."
(10) Discontinued operations
- --- -----------------------
Malamaoperations--Malama Pacific Corp. (MPC)
- ---------------------------------------------------------
On September 14, 1998, the HEI Board of Directors adopted a plan to exit 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 statements 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.
Summary financial information for the discontinued operations of MPC is as
follows:
Three months Nine months ended
ended September 30, September 30,
(in thousands) 1998 1998
- -------------------------------------------------------------------------------------------------------------------------------
Operations
Revenues........................................................................ $ 743 $ 3,313
Operating loss (including impairment writedowns)................................ $(19,881) $(20,648)
Interest expense................................................................ (538) (1,609)
Income tax benefits............................................................. 7,945 8,659
------------------ ---------------------
Loss from operations............................................................ $(12,474) $(13,598)
------------------ ---------------------
Disposal
Loss, including provision of $5,000 for loss from operations
during phase-out period...................................................... $(16,343) $(16,343)
Income tax benefits............................................................. 6,359 6,359
------------------ ---------------------
Loss on disposal................................................................ $ (9,984) $ (9,984)
------------------ ---------------------
Loss from discontinued operations of MPC........................................ $(22,458) $(23,582)
================== =====================
Basic and diluted loss per common share......................................... $(0.70) $(0.74)
================== =====================
As of September 30, 1999,March 31, 2000, the remaining net assets of the discontinued residential
real estate development operations amounted to $20$15 million (included in "Other"
assets) and consisted primarily of real estate assets, receivables and deferred
tax assets, reduced by loans and accounts payable and a reserve for
the net loss from operations during the disposal period. The amounts that MPC
will ultimately realize from the sale of the real estate assets could differ
materially from the recorded amounts as of September 30, 1999.
In the second quarter of 1999, MPC closed the sale of one property and received
proceeds, net of selling expenses, of $3.8 million. The remaining MPC and/or its
joint ventures' properties to be sold consist of approximately 400 acres on
three islands. MPC is currently in active negotiations for the sale of
approximately 150 acres.
10
The Hawaiian Insurance & Guaranty Company, Limited (HIG)
HIG and its subsidiaries (collectively, the HIG Group) were property and
casualty insurance companies. In December 1992, due to a significant increase in
the estimate of policyholder claims from Hurricane Iniki, the HEI Board of
Directors concluded it would not contribute additional capital to HIG and the
remaining investment in the HIG Group was written off. On December 24, 1992, a
formal rehabilitation order vested full control over the HIG Group in the
Insurance Commissioner of the State of Hawaii (the Rehabilitator) and her
deputies. HEI Diversified, Inc. (HEIDI) was the holder of record of all the
common stock of HIG until August 16, 1994.
In 1994, the Company settled a lawsuit stemming from this situation, with the
Company making a settlement payment of $32 million to the Rehabilitator. HEI and
HEIDI sought reimbursement for the settlement, interest and defense costs from
three director and officer liability insurance carriers. In August 1998, the
Company settled all claims with the three former insurance carriers relating to
the 1994 settlement payment. The Company received $24.5 million ($13.8 million
net of estimated expenses and income taxes or $0.43 in basic and diluted
earnings per share for the quarter and nine months ended September 30, 1998),
and recorded the settlement as net gain on disposal of discontinued operations
in the third quarter of 1998.
(9)payable.
(11) Sale of maritime freight transportation and harbor assist operations
- --------------------------------------------------------------------------
In November 1999, HTB sold substantially all of its operating assets and YB for
a nominal gain.
(12) Subsequent event - issuance of medium-term notes
- ------------------------------------------------------
On August 4,In March 1999, HEI signed agreementsfiled 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 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 with an initial interest rate of 7.33%) and a maturity date of
April 15, 2003. Simultaneous with the sale of YB and certain
operating assetsthe Series C Notes, however, HEI
entered into a swap agreement with Bank of HTB to Saltchuk Resources, Inc. of Seattle, Washington. On
November 10, 1999,America, N.A., which effectively
fixes the sale of YB and substantially all of the operating assets
of HTB was closed. HEI plans to sell the remaining assets of HTB to other
parties. The Company expects an after-tax loss of approximately $2 millioninterest rate on the transactions and accrued the loss in the third quarter$100 million of 1999.
11debt at 7.995% until maturity.
9
Hawaiian Electric Company, Inc. and subsidiaries
Consolidated balance sheets (unaudited)
September 30,March 31, December 31,
(in thousands, except par value) 2000 1999
1998
- -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
Assets
Utility plant, at cost
Land.................................................................. $ 28,28429,067 $ 30,31230,952
Plant and equipment................................................... 2,802,830 2,750,4872,875,920 2,851,126
Less accumulated depreciation......................................... (1,056,196) (982,172)(1,102,639) (1,076,373)
Plant acquisition adjustment, net..................................... 471 510445 458
Construction in progress.............................................. 164,649 144,035154,196 151,981
--------------- --------------------------------
Net utility plant............................................... 1,940,038 1,943,1721,956,989 1,958,144
--------------- --------------------------------
Current assets
Cash and equivalents.................................................. 26,179 54,7831,086 1,966
Customer accounts receivable, net..................................... 67,452 69,17068,382 68,768
Accrued unbilled revenues, net........................................ 47,568 43,44553,032 53,830
Other accounts receivable, net........................................ 1,665 4,0821,737 2,172
Fuel oil stock, at average cost....................................... 26,571 16,77827,669 34,954
Materials and supplies, at average cost............................... 19,310 17,26620,343 20,046
Prepayments and other................................................. 3,751 3,8583,463 4,649
--------------- --------------------------------
Total current assets............................................ 192,496 209,382175,712 186,385
--------------- --------------------------------
Other assets
Regulatory assets..................................................... 112,582 108,344115,885 114,759
Other................................................................. 47,234 50,35542,291 43,521
--------------- --------------------------------
Total other assets.............................................. 159,816 158,699158,176 158,280
--------------- --------------------------------
$ 2,292,350 $2,311,2532,290,877 $ 2,302,809
=============== ================================
Capitalization and liabilities
Capitalization
Common stock, $6 2/3 par value, authorized
50,000 shares; outstanding 12,806 shares........................... $ 85,387 $ 85,387
Premium on capital stock.............................................. 295,468 295,344295,542 295,510
Retained earnings..................................................... 421,840 405,836
--------------- ------------------434,979 425,206
-------------- --------------
Common stock equity............................................. 802,695 786,567815,908 806,103
Cumulative preferred stock - not subject to mandatory redemption...... 34,293 34,293
HECO-obligated mandatorily redeemable trust preferred securities of subsidiary truststrust
subsidiaries holding solely HECO and HECO-guaranteed debentures.........................................................subordinated
debentures........................................................... 100,000 100,000
Long-term debt, net................................................... 645,176 621,998
--------------- ------------------652,381 646,029
-------------- --------------
Total capitalization............................................ 1,582,164 1,542,858
--------------- ------------------1,602,582 1,586,425
-------------- --------------
Current liabilities
Preferred stock sinking fund and optional redemption payments......... - 47,080
Short-term borrowings - nonaffiliates................................. 103,111 133,863
Short-term borrowings - affiliate..................................... - 5,550borrowings................................................. 104,977 107,013
Accounts payable...................................................... 50,749 40,00845,566 52,116
Interest and preferred dividends payable.............................. 16,739 11,21417,527 8,160
Taxes accrued......................................................... 70,649 58,33555,679 66,535
Other................................................................. 21,658 30,166
--------------- ------------------15,825 31,485
-------------- --------------
Total current liabilities....................................... 262,906 326,216
--------------- ------------------239,574 265,309
-------------- --------------
Deferred credits and other liabilities
Deferred income taxes................................................. 128,640 128,327132,523 131,105
Unamortized tax credits............................................... 48,502 48,13048,149 48,206
Other................................................................. 71,660 66,818
--------------- ------------------62,568 65,462
-------------- --------------
Total deferred credits and other liabilities.................... 248,802 243,275
--------------- ------------------243,240 244,773
-------------- --------------
Contributions in aid of construction..................................... 198,478 198,904
--------------- ------------------205,481 206,302
-------------- --------------
$ 2,292,350 $2,311,253
=============== ==================
See accompanying notes to HECO's consolidated financial statements.2,290,877 $ 2,302,809
============== ==============
12See accompanying "Notes to consolidated financial statements."
10
Hawaiian Electric Company, Inc. and subsidiaries
Consolidated statements of income (unaudited)
Three months ended Nine months endedMarch 31,
--------------------------------------
(in thousands, except for ratio of earnings September 30, September 30,
--------------------------------- ---------------------------------
to fixed charges) 2000 1999
1998 1999 1998
- ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
Operating revenues.................................... $275,925 $257,368 $763,408 $755,615
-------------- --------------revenues......................................................... $288,421 $236,625
-------------- --------------
Operating expenses
Fuel oil.............................................. 58,942 48,554 151,046 149,734oil................................................................... 75,155 44,878
Purchased power....................................... 71,952 69,148 199,581 204,822power............................................................ 70,226 59,980
Other operation....................................... 35,730 34,286 100,530 104,251
Maintenance........................................... 14,436 10,508 41,324 31,738
Depreciation and amortization......................... 23,322 21,448 70,041 64,336operation............................................................ 27,741 32,323
Maintenance................................................................ 12,533 13,305
Depreciation............................................................... 24,334 23,365
Taxes, other than income taxes........................ 26,039 24,263 72,459 71,609taxes............................................. 27,361 22,896
Income taxes.......................................... 13,419 16,693 36,208 42,253taxes............................................................... 15,193 10,668
-------------- --------------
-------------- --------------
243,840 224,900 671,189 668,743
-------------- --------------252,543 207,415
-------------- --------------
Operating income...................................... 32,085 32,468 92,219 86,872
-------------- --------------income........................................................... 35,878 29,210
-------------- --------------
Other income
Allowance for equity funds used during construction................................ 1,176 3,139 3,202 8,781construction........................ 1,269 1,039
Other, net............................................ 998 2,117 3,370 6,439net................................................................. 575 1,071
-------------- --------------
-------------- --------------
2,174 5,256 6,572 15,220
-------------- --------------1,844 2,110
-------------- --------------
Income before interest and other charges.............. 34,259 37,724 98,791 102,092
-------------- --------------charges................................... 37,722 31,320
-------------- --------------
Interest and other charges
Interest on long-term debt............................ 10,313 9,910 30,139 30,602debt................................................. 9,932 9,911
Amortization of net bond premium and expense.......... 436 374 1,203 1,096expense............................... 442 363
Other interest charges................................ 1,494 1,785 5,414 5,086charges..................................................... 1,897 2,069
Allowance for borrowed funds used during construction................................ (716) (1,826) (1,955) (5,145)construction...................... (691) (640)
Preferred stock dividends of subsidiaries............. 229 638 716 1,915subsidiaries.................................. 228 258
Preferred securities distributions of trust subsidiaries.................................subsidiaries................... 1,919 1,006 5,746 3,0191,909
-------------- --------------
-------------- --------------
13,675 11,887 41,263 36,573
-------------- --------------13,727 13,870
-------------- --------------
Income before preferred stock dividends of HECO............................................ 20,584 25,837 57,528 65,519HECO............................ 23,995 17,450
Preferred stock dividends of HECO..................... 269 861 908 2,592
-------------- --------------HECO.......................................... 270 369
-------------- --------------
Net income for common stock...........................stock................................................ $ 20,31523,725 $ 24,976 $ 56,620 $ 62,927
============== ==============17,081
============== ==============
Ratio of earnings to fixed charges (SEC method)...... 3.07 3.36............................ 3.61 2.85
============== ==============
Hawaiian Electric Company, Inc. and subsidiaries
Consolidated statements of retained earnings (unaudited)
Three months ended Nine months ended
September 30, September 30,
--------------------------------- ---------------------------------March 31,
--------------------------------------
(in thousands) 2000 1999
1998 1999 1998
- ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
Retained earnings, beginning of period................ $415,944 $410,207period..................................... $425,206 $405,836 $387,582
Net income for common stock........................... 20,315 24,976 56,620 62,927stock................................................ 23,725 17,081
Common stock dividends................................ (14,419) (28,464) (40,616) (43,790)
-------------- --------------dividends..................................................... (13,952) (13,387)
-------------- --------------
Retained earnings, end of period...................... $421,840 $406,719 $421,840 $406,719
============== ==============period........................................... $434,979 $409,530
============== ==============
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."
1311
Hawaiian Electric Company, Inc. and subsidiaries
Consolidated statements of cash flows (unaudited)
NineThree months ended
September 30,
--------------------------------------------March 31,
------------------------------------------
(in thousands) 2000 1999
1998
- --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
Cash flows from operating activities
Income before preferred stock dividends of HECO............................ $ 57,52823,995 $ 65,51917,450
Adjustments to reconcile income before preferred stock dividends of HECO
to net cash provided by operating activities
Depreciation and amortization of property, plant and equipment............................................... 70,041 64,336equipment........................ 24,334 23,365
Other amortization................................................... 4,718 5,2041,069 1,650
Deferred income taxes................................................ 313 1,8301,418 196
Tax credits, net..................................................... 1,568 3,829339 396
Allowance for equity funds used during construction.................. (3,202) (8,781)(1,269) (1,039)
Changes in assets and liabilities
Decrease in accounts receivable................................. 4,135 1,972821 4,556
Decrease (increase) in accrued unbilled revenues................ (4,123) 1,191revenues........................... 798 5,543
Decrease (increase) in fuel oil stock........................... (9,793) 9,971
Decrease (increase)stock...................................... 7,285 5,373
Increase in materials and supplies................... (2,044) 1,998supplies.............................. (297) (1,428)
Increase in regulatory assets................................... (2,464) (2,914)
Increase (decrease)(513) (23)
Decrease in accounts payable......................... 10,741 (11,557)payable.................................... (6,550) (2,336)
Changes in other assets and liabilities......................... 17,546 (495)
------------------- -------------------(12,323) (11,851)
-------------- --------------
Net cash provided by operating activities.................................. 144,964 132,103
------------------- -------------------39,107 41,852
-------------- --------------
Cash flows from investing activities
Capital expenditures....................................................... (68,714) (98,016)(23,848) (17,592)
Contributions in aid of construction....................................... 6,327 6,310
Proceeds from sales of assets.............................................. 1,499 -1,647 3,750
Payments on notes receivable............................................... 1,199 1,141
------------------- -------------------138 395
-------------- --------------
Net cash used in investing activities...................................... (59,689) (90,565)
------------------- -------------------(22,063) (13,447)
-------------- --------------
Cash flows from financing activities
Common stock dividends..................................................... (40,616) (43,790)(13,952) (13,387)
Preferred stock dividends.................................................. (908) (2,592)(270) (369)
Preferred securities distributions of trust subsidiaries................... (5,746) (3,019)(1,919) (1,909)
Proceeds from issuance of long-term debt................................... 73,052 72,894
Repayment of long-term debt................................................ (50,000) (57,500)6,304 3,594
Redemption of preferred stock.............................................. (47,080) (2,590)- (37,068)
Net decrease in short-term borrowings from nonaffiliates
and affiliate
with original maturities of three months or less.......... (36,302) (147)less........................ (2,036) (10,183)
Other...................................................................... (6,279) (974)
------------------- -------------------(6,051) (4,509)
-------------- --------------
Net cash used in financing activities...................................... (113,879) (37,718)
------------------- -------------------(17,924) (63,831)
-------------- --------------
Net increase (decrease)decrease in cash and equivalents............................ (28,604) 3,820equivalents....................................... (880) (35,426)
Cash and equivalents, beginning of period.................................. 1,966 54,783
1,676
------------------- --------------------------------- --------------
Cash and equivalents, end of period........................................ $ 26,1791,086 $ 5,496
=================== ===================
See accompanying notes to HECO's consolidated financial statements.19,357
============== ==============
14See accompanying "Notes to consolidated financial statements."
12
Hawaiian Electric Company, Inc. and subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30,March 31, 2000 and 1999 and 1998
(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, 1998 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, 1999 and June 30, 1999.
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, 1999March
31, 2000 and December 31, 1998,1999, and the results of their operations for
the three and nine months ended September 30, 1999 and 1998, and their cash
flows for the ninethree months ended September 30, 1999March 31, 2000 and 1998.1999. 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.
Certain reclassifications have been made to prior periods' consolidated
financial statements to conform to the 19992000 presentation.
(2) Retirement benefits
- ------------------------
Change in method of calculating market-related value of retirement benefit plan
assets
Since 1993, HECO and its subsidiaries 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.
In the first quarter of 2000, 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 quarter of 2000 was to increase net
income approximately $1 million.
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 $1 million for the first quarter of 2000.
13
(3) Cash flows
- ---------------
Supplemental disclosures of cash flow information
Cash paid for interest (net of capitalized amounts) and income taxes was as
follows:
NineThree months ended September 30,March 31,
-----------------------------------------
(in thousands) 2000 1999 1998
- --------------------------------------------------------------------------------------------------------------------
Interest................................................................... $28,786 $26,249
================== ==================$2,572 $4,459
============== ==============
Income taxes............................................................... $17,352 $22,277
================== ==================$9,546 $4,095
============== ==============
The decrease in income taxes paid for the nine months ended September 30, 1999
compared to the same period in 1998 was primarily due to a change in the timing
of Public Service Company tax deductions.
15
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 $3.2$1.3 million and $8.8$1.0 million for the ninethree months ended September 30,March 31, 2000 and
1999, and 1998, respectively.
The decrease in 1999 was due to the nonaccrual of AFUDC
with respect to HELCO's Keahole project and a lower construction in progress
base on which AFUDC is calculated because of the completion of projects and
their addition to plant in 1998.
(3)(4) Commitments and contingencies
- ----------------------------------
HELCO power situation
Background. In 1991, HELCO identifiedbegan planning for the need, beginning in 1994, for
- ----------
additional generation to provide for forecast load growth while maintaining a
satisfactory generation reserve margin, to address uncertainties about future
deliveriesexpansion of power from existing firm power producers and to permit the
retirement of older generating units. Accordingly, HELCO proceeded with plans to
install at its Keahole power
- ----------
plant siteto meet increased electric generation demand forecasted for 1994. HELCO's
plans were to install two 20 megawatt (MW)MW combustion turbines (CT-4 and CT-5), followed by
an 18 MW heat steam recovery steam generator (ST-7), at which time these units would
be converted to a 5856 MW (net) dual-train combined-cycle (DTCC) unit. In January
1994, the Public Utilities Commission of the State of Hawaii (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 site has been revised on several occasions due to delays, described below,
in (a) obtaining approval from the Hawaii Board of Land and Natural Resources
(BLNR) of a Conservation District Use Permit (CDUP) amendment and (b) obtaining
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 primarilyalso attributable to lawsuits, claims and petitions filed
by independent power producers (IPPs) and other parties.parties challenging these
permits and objecting to the expansion, alleging among other things that (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.
CDUP amendment. On July 10, 1997, the Third Circuit Court of the State of Hawaii
- ---------------
issued its Amended Findings of Fact, Conclusions of Law, Decision and Order
addressing HELCO's appeal of an order of the BLNR, along with other consolidated
civil cases relating to HELCO's application for a CDUP amendment. Because 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 allows HELCO to use its Keahole
property as requested in its application. An amended order to the same effect
was issued on August 18, 1997. 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 to stay the effectiveness of the judgments pending
resolution of the appeals were denied in April and July 1998 (in response to a
motion for reconsideration). In August 1998, the Hawaii Supreme Court denied
nonhearing motions for stay of final judgment pending resolution of the appeals.
Management believes that HELCO will ultimately prevail on appeal and that the
final judgments of the Third Circuit Court will be upheld.
14
The 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 states 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), do not apply
to the extent the standard conditions are 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 16
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. If a
written decision on the applicable conditions has not been distributed by the
BLNR by that date, the Court stated that it would impose a stay on HELCO's
ability to proceed under the default entitlement, effective as of noon on
November 30, 1999. 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. HELCO's position is that once a written decision
is issued by theThe BLNR to interested parties, the Court's order would have been
satisfied and the issue of a stay should be moot. See "BLNR petition" herein.
Although the BLNR has not yet
issued a written decision certainon November 19, 1999. Certain plaintiffs have 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 Motionsecond joint
motion to Enforce Part Twoenforce part 2 and Part Threepart 3 of the Final Judgment.final judgment. In that motion, they
allegealleged 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 claimclaimed that
the project would be a prohibited use that cannot be placed in the conservation
district, relying on zoning rules implemented by BLNR in 1994 in furtherance of
Act 270, which prohibited fossil fuel fired generating units in the conservation
district. However, the Third Circuit Court hashad earlier ruled that Act 270 does
not apply to HELCO's application, which was filed prior to the effective date of
Act 270. Plaintiffs askasked 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 Motionthird joint motion to Enforce
Judgment.enforce
judgment. In this motion, they askasked 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 requestrequested that HELCO be enjoined from continuing construction activity
at the site and ordered to restore the Keahole site to its pre-August 1992
condition. BothThese 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
BLNR. In light of a BLNR hearing on April 14, 2000, KDC and the individual
plaintiff have circulated a stipulation to withdraw these motions, which HELCO intends to oppose vigorously, are scheduled
to be heard on November 29, 1999.and indicated
that they would refile the fourth motion after the written order from the BLNR
is issued. The stipulation has not yet been filed. For further developments
regarding these issues, see "BLNR petitions."
PSD permit. In November 1995, the EPA declined to sign HELCO's PSD permit for
- ----------
the combined-cycle unit. HELCO revised its permit application and, in 1997, the EPA approved a revised draft permit and the DOH issued
- ----------
a final PSD permit for HELCO's DTCC unit. Nine appeals 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 Part 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 (BACT) for control of sulfur dioxide emissions, 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
15
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 any further appeals of its
decision would be limited to the issues addressed on remand. On March 3, 1999,
the EAB issued an Order 17
denying motions for reconsideration which had been filed
by HELCO, KDC and Kawaihae Cogeneration Partners (KCP). As a result of the EAB's decision on November 25, 1998 and its denial of all
motions for reconsideration on March 3, 1999, there have been further delays in
HELCO's construction of CT-4 and CT-5. The actual length of the delays will
depend on the actions needed to address the EAB's rulings. HELCO, continues to
workworking closely
with the DOH and EPA, planned its response to address the issues specified in the EAB remand order, with
the objectiveand, in January
1999, commenced collection of having the final permit reissued by the endseveral months of January 2000 and
of reachingadditional data at a final resolution of any appeals to the EAB as expeditiously as
possible thereafter.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. The next stepsAfter considering
issues raised 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 new site. This data collection was completed at the end of April 2000 and
provided excellent corroboration of the data collected at the new site. As a
result of these actions, there have 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 forin service in early 2002. HELCO
continues to work with the DOH to respondand EPA with the objective of having the final
permit reissued by the end of 2000 and of reaching a final resolution of any
appeals to the public comments made at the
hearing and to submit the proposed permit to the EPA for approval.EAB as expeditiously as possible thereafter. HELCO believes that
the PSD permit will eventually be obtained. Since there are no stays on the
project, installation of CT-4 and CT-5 is expected to 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) filed 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 of
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 action by the DOH and the 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 promulgated under the State Noise
Pollution Act. The change in interpretation would apply to the Keahole
plant the noise standard applicable to the emitter property (which the DOH
claims to be a 55 dBA (daytime)daytime and 45 dBA (nighttime)nighttime standard) rather than
the previously-applied noise standard of the receptor properties in the
surrounding agricultural park (a 70 dBA standard).
16
In response 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 Judgmentfinal judgment was entered. The DOH objected to
the entry of Final
Judgmentfinal 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. OnOpening briefs were filed with the
Hawaii Supreme Court in January 2000, answering briefs were filed in
February and March 31, 1999, the Court granted2000 and reply briefs were filed in partMarch 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
18
the "as applied" and "estoppel" claims once the DOH actually applies the
55/45 dBA noise standard to the Keahole plant. An Order confirming this
ruling was entered on June 1, 1999.April
2000. Briefing is now complete.
The DOH has not issued any formal enforcement action applying the 55/45
dBA standard to the Keahole plant. Meanwhile, HELCO has installed noise
mitigation measures on the existing diesel units at Keahole, has applied
to the DLNR for 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): 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 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 called to act on 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 nowwhich
had been pending before it. (See "BLNR petition"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. HELCO andThis matter was
heard by the BLNR have discussed correcting this matter through an administrative or
judicial reformation of the land patent.at its hearing on February 25, 2000. (See "BLNR
petitions" herein.)
If and when the DOH and the BLNR/DLNR act on theall issues relating to Counts II
through VI, and depending upon their rulings, the KDC lawsuit may be moot.
Meanwhile, HELCO is exploring possible noise mitigation measures, which can be
implemented if necessary, for both the existing units and CT-4 and CT-5.
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
Court ruled that Plaintiffs
17
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.
HELCO intends to continue to vigorously defend against the claims raised in this
case and in related administrative actions.
Other complaints. Two additional cases were filed in 1998. First, in March 1998,
- ----------------
one of the Plaintiffs filed a complaint for declaratory judgment against HELCO,
the BLNR and the DLNR. The complaint alleges a violation of Plaintiff's
constitutional due process rights because the land use conditions (if any) which
apply to HELCO's use of the Keahole site were determined administratively by the
DLNR (through a letter issued to HELCO on January 30, 1998) rather than being
decided by the BLNR in a contested case. Also filed with the complaint was a
motion to stay enforcement of the DLNR letter, which motion was denied in April
1998. Second, in May 1998, Waimana Enterprises, Inc., whose subsidiary is a
partner in KCP, filed a lawsuit in the Third Circuit Court of the State of
Hawaii, asking
19
for a declaration that the January 1998 DLNR letter is void and seeking an
injunction to prevent HELCO from further construction until the Court or the
BLNR, at a public hearing, determines what conditions and limitations apply and
whether HELCO is in compliance with them. At a hearing on February 8, 1999, the
parties agreed, and the Court orally ordered, the consolidation of the
Plaintiff's lawsuit with the KDC lawsuit and the dismissal with prejudice of the
Waimana lawsuit. The Plaintiff filed a motion for summary judgment with regard
to the claims in her lawsuit and the BLNR and DLNR, joined by HELCO, also filed
a motion for summary judgment in that lawsuit. At the March 31, 1999 hearing,
the Court granted the BLNR/DLNR motion and HELCO's joinder, finding that the
January 30, 1998 letter was a ministerial function properly performed by DLNR. A
proposed Order was approved by all counsel, but has not yet been entered by the
Court.
BLNR petition.petitions. On August 5, 1998, KDC filed with the BLNR a Petition for
- -----------------------------
Declaratory Ruling under HRS Section 91-8. The petition alleged that the
standard conditions in HAR Section 13-2-21 apply to HELCO's default entitlement
to use its Keahole site, that the letter issued to HELCO by the DLNR in January
1998 was erroneous because it failed to incorporate all conditions applicable to
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 requested that the BLNR commence
a 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; and that the BLNR determine that HELCO has violated the
conditions applicable to its default entitlement, such that HELCO should be
enjoined from using the Keahole property under such default entitlement.
The
BLNR requested that each of the parties submit statements of position on the
issues and HELCO filed its statement in October 1998. The last of the responsive
submissions of the parties was filed in December 1998. 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 none of the standard land use conditions were inconsistent
with HELCO's ability to proceed under its default entitlement and, therefore,
each of the standard land use conditions applied to the expansion. However, the BLNR hasdid not,
yet
determinedat 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.
On February 7, 2000, KDC and an individual plaintiff filed with BLNR a Request
to Nullify "Default Entitlement." In the request, it is alleged that HELCO's
default entitlement is void because HELCO cannot satisfy all conditions and
laws, that HELCO forfeited its default entitlement because it redesigned certain
facilities it has already constructed to support existing CT-2 rather than CT-4
and CT-5, and that the BLNR should exercise its right to repurchase clause in
HELCO's land patent. At its hearing on February 25, 2000, the BLNR denied KDC's
request. The BLNR still needsstated that it has the power to addressconsider 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
remaining issuesorder of the Third Circuit Court which recognized HELCO's ability to proceed
with the Keahole project under a default entitlement. Subsequent to the hearing,
an issue was raised inadministratively as to whether the petition.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. 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 should become moot
since HELCO continues to use the land for public utility purposes. (See "KDC
declaratory judgment action," relating to Count VI.) A written decision on the
February 25, 2000 rulings is pending.
IPP complaints. Two independent power producers (IPPs), KCPcomplaints filed with the PUC. Three IPPs-KCP, Enserch Development
- ---------------------------------
Corporation (Enserch) and Enserch
- --------------
Development Corporation (Enserch), filedHilo Coast Power Company (HCPC)-filed separate
complaints against HELCO with the PUC in 1993, 1994, and 1994,1997, respectively,
alleging that they are entitled to power
purchase contractsPPAs to provide HELCO with additional
capacity, whichcapacity. KCP and Enserch each claimed that they claimed would be a substitute for
HELCO's planned 5856 MW (net) DTCC unit at Keahole. Two of the complaints have
been resolved, as described below.
18
In September 1995, the PUC allowed HELCO to continue to pursue construction of
and commit expenditures for the second combustion turbine (CT-5) and the steam
recovery generator (ST-7) for its planned DTCC unit, but stated in its order
that "no part of the project may be included in HELCO's rate base unless and
until the project is in fact installed, and is used and useful for utility
purposes." 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 thethese IPPs' PUC complaints and of a complaint filed by Hilo
Coast Power Company (HCPC) in April 1997, is as follows:
Enserch complaint. On January 16, 1998, HELCO filed with the PUC an
-----------------
application for approval of a power purchase agreementPPA for a 60 MW (net) facility and an
interconnection agreement with Encogen Hawaii, L.P. (Encogen), an Enserch
affiliate, both dated October 22, 1997. The PUC issued a decision and order
approving the agreements on July 14, 1999. The decision was amended at
HELCO's request on July 21, 1999 and became final and nonappealable on
August 23, 1999. Enserch sold its interest in the partnership, now called
Hamakua Energy Partners L.P. (Hamakua Partners) in November 1999. According
to Encogen,Hamakua Partners, its first phase of 22 MW is expected to be in-service
in July
20
by August 2000 and the remainder of its 60 MW facility is expected to be
in-service by December 2000. This PPA was necessary to ensure reliable
service to customers on the island of Hawaii and, in November 2000. Encogen is currently pursuing the replacementopinion of
management, does not supplant the existing partnership. The change is not expected to affect completion of
the facility as scheduled.need for CT-4 and CT-5.
KCP complaint. In January 1996, the PUC ordered HELCO to continue in good
-------------
faith to negotiate a power purchase agreementPPA 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
recommendation to the PUC regarding the terms and conditions of a power purchase agreementPPA 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 statement of positionSOP 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.
HCPC complaint. In April 1997, HCPC filed a complaint against HELCO with
--------------
the PUC, requesting an immediate hearing on HCPC's offer for a new 20-year
power purchase agreement for its existing facility, which is proposed to be
expanded from 22 MW to 32 MW. HCPC's existing power purchase agreement is
scheduled to terminate at the end of 1999. The PUC converted the HCPC
complaint into a purchased power contract negotiation proceeding. HCPC
submitted a new proposal in the proceeding in March 1998 for a 32-year
power purchase agreement. An evidentiary hearing, which was limited to
three issues affecting the calculation of avoided costs, was held in April
1998. On November 25, 1998, the PUC issued a Decision and Order in the HCPC
complaint docket and directed that HCPC and HELCO continue to negotiate a
power purchase agreement and by February of 1999 submit to the PUC either a
finalized agreement or reports informing the PUC of the matters preventing
the finalization of an agreement. The parties entered into negotiations but
did not finalize an agreement at that time. Status reports were filed by
HCPC and HELCO in February 1999. In its status report, HELCO requested a
hearing with respect to pricing and avoided cost issues. The PUC issued an
Order reopening the docket to further assist HELCO and HCPC in negotiating
an agreement and giving each party an opportunity to file supplemental
memoranda. HELCO filed a Motion for Partial Reconsideration of the Order,
stating that it would waive its right to a hearing if it were allowed to
present oral arguments to the PUC. The PUC granted HELCO's motion, and oral
arguments were held on March 25, 1999. On June 24,December 1999, the PUC issued an
Order in which it agreed with HELCO's avoided cost calculation. The PUC
ordered HELCO and HCPC to continue negotiations consistent with the Order
and to submit either a finalized agreement or, if no agreement is reached,
to submit written reports informing the PUC of the matters that are
21
preventing finalization of an agreement. Reports were submitted by HCPC and
HELCO on August 18, 1999.
Subsequently, HELCO and HCPC reached agreement onapproved an amended and restated
agreement in October 1999.--------------
PPA between HELCO and HCPC. The term of the agreement, which is for the
continuing provision of 22 MW, is for five years (through December 31,
2004) and may continue beyond that time unless either party provides notice
of termination to the other party by May 3130 in the year of termination.
HELCO has the right to terminate the contract as of the end of 2002, 2003
or 2004 for amounts specifiedan early termination amount of $0.5 million for each of the
remaining years in the contract. The agreement is subjectfive-year term. Like the PPA with Hamakua Partners,
this restated and amended PPA with HCPC was necessary to PUC
approval,ensure reliable
service to customers. However, because the short term
19
of the PPA was intended to ensure reliability until the Keahole project was
constructed, in the opinion of management, it does not supplant the need
for CT-4 and provides that the agreement will be void unlessCT-5.
Apollo Energy Corporation (Apollo), which has an acceptable
interim or final PUC approval order is issued by Novemberexisting contract to provide
HELCO with as-available windpower through June 30, 1999 (unless
such date is extended). An application2002, filed a petition for
approval was submitted tohearing with the PUC on October 12, 1999. The PUC issued information requestsApril 28, 2000, alleging that it has unsuccessfully
attempted for over 75 days to HELCO on
October 20, 1999 and responses were filed on or about October 29, 1999. On
November 5, 1999, the agreement was amended to extend the date fornegotiate a final
PUC approval order to December 10, 1999. The CA issued information requests
on November 5, 1999 and responses are due on November 12, 1999.
Management cannot determine at this time whether the amended and restatednew power purchase agreement with
HCPC will be approvedHELCO. Apollo is offering to repower its existing 7 MW facility by the PUC or whetherend of
2000 and to install additional wind turbines, up to a total of 15 MW, by the negotiations with
KCP or related PUC proceedings will result inend
of 2001. Because Apollo is an as-available energy provider, this matter would
not affect the execution and/or PUC approval
of an additional power purchase agreement.need for the Keahole project.
Pre-PSD work and notices 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 (which is expected to be completed by the end of(completed in December 1999, and will
supplywhich supplies the demineralized water
needs of the existing CT at Keahole).
DOH notice of violation. In July 1998, the DOH issued an NOV to HELCO for
------------------------
items allegedly constituting unauthorized construction activity at the
Keahole Generating Station prior to receipt of an effective PSD permit for
CT-4 and CT-5. The NOV required HELCO to immediately halt construction
activities on pipe rack foundations, a retaining wall and an oil/water
separator, and imposed a fine of $48,800. HELCO complied with the stop work
order on the designated items and paid the fine.
EPA notice of violation.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 has put the EPA on notice that
certain construction activities not affected by the NOV are continuing,would continue, and
has
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 until
the final air permit is received.
Contingency planning. In June 1995, HELCO filed with the PUC its generation
- ---------------------
resource contingency plan detailing alternatives and mitigation measures to
address the delays that have occurred in adding new generation. Actions under
the plan (such 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 22
updating the contingency
plan and the status of implementing the plan. The last update was filed on March
1, 1999, and another update is planned to be filed
shortly.31, 2000.
The first increment of new generation to be available to HELCO is now expected
to be added in Julyby August 2000 (Encogen's(Hamakua Partners' 22 MW CT), at the earliest.. Despite delays in
adding new generation, HELCO's mitigation measures (including anthe 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 or 2001. However, if the amended and restated HCPC
agreement (extending HCPC's provision of 22(the
remaining 38 MW of firm capacity beyond December
31, 1999) is not approved (see "IPP complaints, HCPC complaint" herein)Hamakua Partners' 60 MW DTCC unit) and in early 2002 (CT-4
and CT-5), HELCO's
reserve margin (based on firm capacity without considering as-available
resources such as wind and run-of-the-river hydroelectric generators) in 2000
will be less than the margin called for by its generation planning criteria
until new generation is added. (HELCO would have sufficient generation to cover
projected monthly system peak loads with units on scheduled maintenance, but
might not always have enough reserve margin to make up for the unexpected outage
of one of its largest generation units beginning in January 2000 until new
generation is added.) The five-year extension of power purchases from HCPC,
which can be terminated after two years (upon payment of a $1.5 million early
termination payment), is intended to allow HELCO to maintain its generation
reserve margin at an acceptable level until new generation is added, and toshould provide HELCO with asufficient reserve cushionmargin in the event
of further delays in adding new generation. Additional increments of new firm capacity after Encogen's first CT are expected
to be added in November 2000 (the remaining 38 MW of Encogen's 60 MW DTCC unit),
and in early 2001 (CT-4 and CT-5). As new generation is added, beginning with
the completion of Encogen's 60 MW unit, HELCO
will retire its older, smaller generating units.
Project statusCosts incurred. If it becomes probable that CT-4 and/or CT-5 will not be
- --------------
installed, 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 March 31, 2000,
HELCO's costs incurred in its efforts to put CT-4 and CT-5 into service and to
support existing units amounted to approximately $80.4 million, including $32.4
million for equipment and material purchases, $26.4 million for planning,
engineering, permitting, site development and other costs incurred.and $21.6 million for
an allowance for funds used during construction (AFUDC). As of March 31, 2000,
approximately $24.1 million of the $80.4 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.
20
Although management believes it has acted
- --------------------------------- prudently with respect to the Keahole
project, effective December 1, 1998, HELCO decided to discontinue for financial reporting purposes, the accrual of
an
Allowance For Funds Used During Construction (AFUDC)AFUDC on CT-4 and CT-5 (which would have been approximately $0.4$0.5 million after
tax per month). The length of the delays to date and potential further delays
were factors considered by management in its decision to discontinue the accrual
of AFUDC. HELCO has also deferred plans for ST-7 to approximately 2006 or 2007,
unless the EncogenHamakua Partners facility is not placed in service as planned. In December 1998, HELCO removed
$0.8 million in costs accumulated againstSince
ST-7 from construction work-in-
progress, writing off $0.6 million and reclassifying $0.2 million in costs to
inventory, since ST-7 wouldis not be needed in the immediate future.
HELCOnear future, no costs for ST-7 are included in
construction in progress.
Management believes that the issues surrounding the CDUP amendment to the PSDland use
permit, the declaratory judgment actions,air permit, the BLNR petitionIPP complaints and related matters will be
satisfactorily resolved and will not prevent itHELCO from ultimately constructing
CT-4 and CT-5. HELCO's current plan contemplates thatThe recovery of costs relating to CT-4 and CT-5 will be addedare subject to
its systemthe rate-making process governed by early 2001. Under HELCO's current estimate of generating capacity
requirements, there will be a need for new capacity after the addition of
Encogen. The continuation of power purchases from HCPC, which can be terminated
at the end of 2001 upon payment of a $1.5 million early termination amount (see
"IPP complaints, HCPC complaint" herein), is intendedPUC. Management believes no adjustment
to allow HELCO to maintain
its generation reserve margin at an acceptable level until new generation is
added (whether by Encogen or by HELCO) and to provide HELCO with a reserve
cushion in the event of further delays in adding new generation, and is not
intended to defer the installation of CT-4 and CT-5.
If it becomes probable that CT-4 and/or CT-5 will not be installed, 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, 1999, HELCO's costs incurred
in its efforts to put CT-4 and CT-5 into service amounted to $ 77.3 million,
including approximately $32.3 million for equipment and material purchases,
approximately $23.5 million for planning, engineering, permitting, site
development and other costs and approximately $21.5 million for AFUDC accrued
through November 30, 1998, after which HELCO stopped accruing AFUDC. Of the
$77.3 million referred to above, $18.0 million relates to the cost of the
23
pre-PSD facilities (see "Pre-PSD work and notices of violation" herein). It is
the opinion of management that no adjustment is required to these costs as of September 30, 1999.March 31,
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 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. The PUC
will determine
what subsequent steps will be followedsubmitted a status report on its investigation to the Legislature, at its
request. 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 proceeding, but no timetable has
been setstate's electric industry and that it plans to
proceed with an examination of the feasibility of competitive bidding. The PUC
also 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 such a determination.the
development of competition."
Some of the parties may seek state legislative action on their proposals. 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 December 1999, HECO, HELCO and MECO filed an application with the PUC seeking
permission to implement PBR in future rate cases. The proposed PBR would allow
adjustments in the electric utilities' rates (for up to five years after a rate
case) based on an index-based price cap, an earnings sharing mechanism and a
service quality mechanism.
In March 2000, the PUC approved HELCO's standard form contract 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. HECO was
authorized by the PUC in May 1999 to offer a similar standard form contract.
Environmental regulation
See discussionIn 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 met with these identified parties in January 1996 and certain of the
DOH NOVidentified parties (including HECO, Chevron Products Company, the State of
Hawaii Department of Transportation Harbors Division and others) formed a
21
Honolulu Harbor Working Group. Effective January 30, 1998, the Working Group and
the EPA NOV issuedDOH entered into a voluntary agreement and scope of work to HELCO abovedetermine the
nature and note
(7), "Commitmentsextent of any contamination, the responsible parties and contingencies," in HEI's "Notesappropriate
remedial actions.
In 1999, the Working Group submitted reports to consolidated financial
statements."
(4)the DOH presenting environmental
conditions and recommendations for additional data gathering to allow for an
assessment of the need for risk-based corrective action. The Working Group also
engaged a consultant who identified 27 additional potentially responsible
parties, 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. TOOTS has joined the Working Group.
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
claimed and covered under insurance policies, but such coverage is not
determinable at this time.
(5) 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 II 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 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 24
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.
22
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, 1999March
31, 2000 and December 31, 1998.1999. 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).
(5) Accounting changes(6) Recent accounting pronouncements
- -----------------------
Costs of computer software developed or obtained for internal use and start-up
activities
In March 1998, the AICPA Accounting Standards Executive Committee issued SOP 98-
1, "Accounting for the Costs of Computer Software Developed or Obtained for
Internal Use," which requires that certain costs, including certain payroll and
payroll-related costs, be capitalized and amortized over the estimated useful
life of the software. In April 1998, the AICPA Accounting Standards Executive
Committee issued SOP 98-5, "Reporting on the Costs of Start-up Activities,"
which requires that costs of start-up activities, including organization costs,
be expensed as incurred. The provisions of SOP 98-1 and SOP 98-5 are effective
for fiscal years beginning after December 15, 1998. HECO and its subsidiaries
adopted SOP 98-1 and SOP 98-5 effective January 1, 1999. The adoption of SOP 98-
1 and SOP 98-5 did not have a material effect on HECO's consolidated financial
condition, results of operations or liquidity.------------------------------------
Derivative instruments and hedging activities
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities," which 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 position and measure those instruments at fair value. In
June 1999, theThe
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, but
management has not yet determined the impact, if any, of adoption.
(6)(7) Summarized financial information
- -------------------------------------
Summarized financial information for HECO's subsidiaries, HELCO and MECO, is as
follows:
Balance sheet data
HELCO MECO
--------------------------------- --------------------------------
September 30,------------------------------------- -----------------------------------
March 31, December 31, September 30,March 31, December 31,
(in thousands) 2000 1999 19982000 1999
1998
- -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
Current assets...................assets................................ $ 39,45329,695 $ 35,47330,260 $ 40,12943,951 $ 41,10341,700
Noncurrent assets................ 423,158 424,278 393,215 382,517assets............................. 423,739 425,552 387,200 387,380
------------ --------------- ------------- ------------ -------------
$462,611 $459,751 $433,344 $423,620---------------
$453,434 $455,812 $431,151 $429,080
============ =============== ============= ============ ============================
Common stock equity.............. $159,419 $157,269 $165,066 $157,402equity........................... $161,194 $159,719 $165,626 $163,835
Cumulative preferred stock-not subject
to mandatory redemption.redemption................... 7,000 7,000 5,000 5,000
Current liabilities.............. 49,814 62,313 31,926 32,052liabilities........................... 47,901 52,230 30,681 30,296
Noncurrent liabilities........... 246,378 233,169 231,352 229,166liabilities........................ 237,339 236,863 229,844 229,949
------------ --------------- ------------- ------------- -------------
$462,611 $459,751 $433,344 $423,620------------ ---------------
$453,434 $455,812 $431,151 $429,080
============ =============== ============= ============= ========================= ===============
25
Income statement data
HELCO MECO
------------------------------------------------------------------------------------------------------------------------------------------------------ ------------------------------
Three months ended Nine months ended Three months ended
Nine months ended
September 30, September 30, September 30, September 30,
------------------- ------------------- ------------------- -------------------March 31, March 31,
------------------------------------------ -----------------------------
(in thousands) 2000 1999 19982000 1999
1998 1999 1998 1999 1998
- ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
Operating revenues...... $41,212 $39,159 $116,039 $115,536 $41,795 $35,108 $114,775 $103,353revenues............................ $44,211 $36,900 $43,861 $35,681
Operating income........ 6,584 5,153 16,471 14,523 5,566 5,207 17,719 14,570income.............................. 6,540 5,445 7,540 5,020
Net income for common stock.. 3,943 4,498 8,652 12,331 3,418 4,196 10,429 11,378stock................... 3,901 2,923 5,368 2,407
HECO has not provided separate financial statements and other disclosures
concerning HELCO and MECO and HELCO because in the opinion of 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 MECOHELCO and HELCOMECO which have been fully
and unconditionally guaranteed by HECO.
(7)23
(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,
--------------------------------------------
(in thousands) 2000 1999
1998 1999 1998
- --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
Operating income from regulated and nonregulated activities before
income taxes (per HEI consolidated statements of income).................. $ 46,47251,630 $ 51,266 $131,709 $135,52540,901
Deduct:
Income taxes on regulated activities........... (13,419) (16,693) (36,208) (42,253)activities.................................. (15,193) (10,668)
Revenues from nonregulated activities.......... (1,358) (2,316) (3,938) (6,879)activities................................. (984) (1,166)
Add:
Expenses from nonregulated activities.......... 390 211 656 479
-------- ----------- ---------- ------------activities................................. 425 143
-------------- ---------------
Operating income from regulated activities after income taxes (per
HECO consolidated statements of income)......................................................... $ 32,08535,878 $ 32,468 $ 92,219 $ 86,872
========= =========== =========== ============29,210
============== ===============
2624
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) 2000 1999 1998 change significant change*
- ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
Revenues................. $392,450 $377,318 4 IncreaseRevenues........................ $401,875 $352,247 14 Increases for the electric utility,
savings bank and international power
segments, partly offset by a decrease for
the "other" segment
Operating income......... 56,551 62,299 (9) Decreasesincome................ 68,202 54,032 26 Increases for the electric utility and
"other"savings bank segments, partly offset by increasea
decrease for the savings bank"other" segment
Income (loss) from:
Continuing operations. $ 21,632 $ 27,779 (22) LowerNet income...................... 28,976 20,754 40 Higher operating income, and AFUDC
and higher preferred securities
distributions, partly offset by
lower preferred stock dividends
and income taxes
Discontinued - (8,693) NM Discontinued operations of real
operations........... estate subsidiary, partly offset
by insurance settlementhigher interest expense due to higher
average borrowings due to an HEIPC
acquisition in the
------------------------ third quarter of 1998
Net income......... $ 21,632 $ 19,086 13
========================March 2000
Basic earnings
per common share:
Continuing operations.share............. $ 0.670.90 $ 0.87 (23)0.65 38 See explanation for "Income
(loss) from continuing operations"
Discontinued - (0.27) NM See explanation for "Income
operations........... (loss) from discontinued
------------------------ operations"
$ 0.67 $ 0.60 12
========================net income
Weighted-average number of
common shares outstanding............. 32,203 32,010 1outstanding...... 32,266 32,153 - Issuances under the 1987Dividend Reinvestment
and Stock Option and Incentive Plan and
other plans
27
Nine months ended
September 30,
(in thousands, except per ------------------------ % Primary reason(s) for
share amounts) 1999 1998 change significant change*
- -------------------------------------------------------------------------------------------------
Revenues................. $1,114,385 $1,112,841 - Increase for the electric
utility segment
Operating income......... 169,293 172,874 (2) Decreases for the electric
utility and "other" segments,
partly offset by increase for
the savings bank segment
Income (loss) from:
Continuing operations. $ 65,142 $ 73,519 (11) Lower operating income and
AFUDC and higher preferred
securities distributions and
interest expense, partly
offset by lower preferred
stock dividends and income
taxes
Discontinued operations. - (9,817) NM Discontinued operations of
real estate subsidiary, partly
offset by insurance settlement
-------------------------- in 1998
Net income........... $ 65,142 $ 63,702 2
==========================
Basic earnings
per common share:
Continuing operations. $ 2.02 $ 2.30 (12) See explanation for "Income
(loss) from continuing operations"
Discontinued - (0.31) NM See explanation for "Income
operations........... (loss) from discontinued operations"
--------------------------
$ 2.02 $ 1.99 2
==========================
Weighted-average number
of common shares 1 Issuances under the 1987 Stock
outstanding............. 32,180 31,992 Option and IncentivePurchase Plan and other plans
* Also see segment discussions which follow.
NM Not meaningful.
2825
Following is a general discussion of the results of operations by business
segment.
Electric utility
- ----------------
Three months ended
March 31,
(in thousands, September 30,
except per -------------------------------------------------------------- %
barrel amounts) 2000 1999 change Primary reason(s) for significant barrel amounts) 1999 1998 change change
- --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
Revenues............. $277,283 $259,684 7Revenues................... $289,405 $237,791 22 Higher fuel oil and purchased energy
prices, the effects of which are passed
on to customers ($1342 million), 0.6%3.2%
higher KWH sales ($35 million) and higher rates at MECO ($3
million)the
recovery of demand-side management costs
Expenses
Fuel oil............ 58,942 48,554 21oil.................. 75,155 44,878 67 Higher fuel oil prices, partly offset by
lower KWH'sfewer KWHs generated
Purchased power..... 71,952 69,148 4power........... 70,226 59,980 17 Higher fuel prices and more KWHs purchased
and fuel
prices
Other............... 99,917 90,716 10Other..................... 92,394 92,032 - Higher taxes, other operation,
maintenancethan income taxes,
and depreciation and
amortization expenses
Operating income..... 46,472 51,266 (9) Higher KWH sales and rates at
MECO, more than offset by higher
other operation, maintenance and
depreciation and amortization
expenses
Net income for
common stock...... 20,315 24,976 (19) Lower operating income and AFUDC
and higher preferred securities
distributions, partly offset by
lower income taxes
Kilowatthour sales
(millions)........ 2,338 2,323 1
Fuel oil price per
barrel.............. $ 21.69 $ 17.79 22
29
Nine months ended
(in thousands, September 30,
except per --------------------------------- % Primary reason(s) for significant
barrel amounts) 1999 1998 change change
- ------------------------------------------------------------------------------------------------------------
Revenues............. $767,346 $762,494 1 1.4% higher KWH sales ($10
million) and higher rates at
MECO ($8 million), partly offset
by lower fuel prices, the
effects of which are passed on
to customers ($8 million), and
lower revenues related to
integrated resource planning
Expenses
Fuel oil............ 151,046 149,734 1 Higher KWHs generated, partly
offset by lower fuel oil prices
Purchased power..... 199,581 204,822 (3) Lower KWHs purchased, capacity
charges and fuel prices
Other............... 285,010 272,413 5 Higher maintenance and
depreciation and amortization
expenses,expense, partly offset
by lower other operation and maintenance
expenses (including lower retirement
benefits expenses)
Operating income..... 131,709 135,525 (3)income........... 51,630 40,901 26 Higher KWH sales and rates at
MECO and lower other
operation and maintenance expenses,
more thanpartly offset by higher maintenance and
depreciation
and amortization
expensesexpense
Net income for
common stock...... 56,620 62,927 (10) Lowerincome................ 23,725 17,081 39 Higher operating income, and AFUDC
and higher preferred securities
distributions, partlypartially offset
by lowerhigher income taxes
Kilowatthour sales 2,203 2,135 3
(millions)........ 6,692 6,601 1................
Fuel oil price per barrel.............. $18.86 $19.77 (5)barrel.. $29.14 $16.94 72
Kilowatthour (KWH) sales in the thirdfirst quarter and first nine months of 19992000 increased 0.6% and 1.4%, respectively,3.2% from the
same periodsquarter in 1998,1999, partly due to an increase in the number of customers. Although KWH sales were higher,
electriccustomers, an
additional day in the quarter (February 29, 2000), and a slight improvement in
Hawaii's economy. Electric utility netoperating income decreased 19% during the thirdincreased 26% from first
quarter of 1999, primarily due to a 37% increase inthe higher KWH sales and 12% lower other
operation and maintenance expenses (including a larger
scope of generating unit overhaul work and more chemical cleanings and equipment
part replacements), a 9% increase in depreciation and amortization expense and a
62% decrease in AFUDC. For the first nine months of 1999, electric utility net
income decreased by 10% due primarily to a 30% increase in maintenance($5 million). Other operation expenses a 9% increase in depreciation and amortization expense and a 63% decrease in
AFUDC. Depreciation increased due to additions to plant in 1998. AFUDC decreased
due to the nonaccrual of AFUDC with respect to HELCO's Keahole project beginning
in December 1998 and awere
lower construction in progress base on which AFUDC is
calculated. Partly offsetting the higher other expenses
30
for the first nine months of 1999 was a 4% decrease in other operation expenses, primarily due to a decrease of approximately $6 million 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"). Maintenance expense was lower employee benefits expense.due to more overhaul work in the
first quarter of 1999 than in the first quarter of 2000.
26
Competition
The electric utility industry is becoming increasingly competitive. IPPsIndependent
power producers (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 has 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.
Legislation has been introduced in Congress that would restructure the electric
utility industry with a view toward increasing competition by, for example,
allowing customers to choose their generation supplier. Some of the bills would
exempt Alaska and Hawaii. Also, the Department of Energy's proposed
"Comprehensive Electricity Competition Act,"Act", submitted to Congress in May 1999,June 1998,
includes a provision that would permit states to "opt out" of the proposed
retail competition deadline of not later than January 1, 2003.
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. See note (3) in
HECO's "Notes to Consolidated Financial Statements." 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 ratemakingrate-making (which would include an index-basedindex-
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-timereal-
time pricing). HECO andsuggests in its subsidiaries suggest in their statement of positionSOP that these proposals be implemented
through PUC approval of applications submitted in a series of separate
proceedings to be initiated by HECO in 1999 and 2000. In May 1999, the PUC approvedSee note (4) in HECO's
standard form contract for customer
retention that allows HECO"Notes 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% discount on base energy rates for "Large Power" customers and
an 11.27% discount on base energy rates for general service demand customers. In
June 1999, the PUC suspended a similar request by HELCO pending further internal
PUC review and required HELCO to respond to the statements of the Consumer
Advocate and various protestants in that docket (which HELCO completed on July
8, 1999).consolidated financial statements."
PUC regulation of electric utility rates
The PUC has broad discretion in its regulation of the rates charged by HEI's
electric utility subsidiaries and in other matters. Any adverse decision and
order (D&O) by the PUC concerning the level or method of determining electric
utility rates, the authorized returns on equity or other matters, or any
prolonged delay in rendering a D&O in a rate or other proceeding, could have a
material adverse effect on the Company's financial condition and results of
operations. Upon a showing of probable entitlement, the PUC is required to issue
an interim D&O in a rate case within 10 months from the date of filing a
completed application if the evidentiary hearing is completed (subject to
extension for 30 days if the evidentiary hearing is not completed). There is no
time limit for rendering a final D&O. Interim rate increases are subject to
refund with interest, pending the final outcome of the case. Management cannot
predict with certainty when D&Os in pending or future rate cases will be
rendered or the amount of any interim or final rate increase that may be
granted.
31
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, 1999,May 3, 2000,
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% for HECO (D&O
issued on December 11, 1995 and based on a 1995 test year), 11.65% for HELCO
(D&O issued on April 2, 1997 and based on a 1996 test year) and 10.94% for MECO
(D&O issued on April 6, 1999 and based on a 1999 test year).
27
Hawaii Electric Light Company, Inc.
- -----------------------------------
In March 1998, HELCO filed a request to increase rates by 11.5%, or $17.3
million in annual revenues, based on a 1999 test year and a 12.5% ROACE,
primarily to recover costs relating to (1) an agreement to buy power from
Encogen's 60 MW plant and (2) adding two combustion turbines (CT-4 and CT-5) at
HELCO's Keahole power plant. Due to the EAB's denial of HELCO's motion for
reconsideration of the EAB's November 25, 1998 decision (see "HELCO power
situation--PSD permit" in note (3) to HECO's "Notes to consolidated financial
statements") and a delay in purchasing power from Encogen, HELCO's test year
1999 rate increase application was withdrawn in March 1999.. 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 anthe agreement to buy power from Encogen's plannedthe 60 MW plant of Hamakua
Energy Partners, L.P., and (2) depreciation of and a return on additional
investments in plant and equipment since the last rate case, including pre-PSD
facilities placed in service at the Keahole power plant (see "HELCO power
situation--Pre-PSD work and notices of violation" in note 3 in(4) of HECO's "Notes
to consolidated financial statements"). Although HELCO's estimates for the test year justify an increase of $19.2
million, HELCO limited its request to $15.5 million realizing that the PUC often
uses other estimates based on later information and other factors. In its application, HELCO requestedpresented
evidence to justify an ROACE of 13.5% for the 2000 test year. The Consumer
Advocate filed its testimony on May 8, 2000 and HELCO's rebuttal testimony is
due on June 19, 2000. Hearings are scheduled to begin on August 15, 2000.
. The timing of a future HELCO rate increase request, if any, to recover costs
relating to adding CT-4 and CT-5 will depend on future circumstances. See "HELCO
power situation" in note (4) of HECO's "Notes to consolidated financial
statements."
Maui Electric Company, Limited
- ------------------------------
. In January 1998, MECO filed a request with the PUC to increase rates,
by 15.3%, or $22.4
million in annual revenues, based on a 1999 test year and a 12.75% ROACE,
primarily to recover the costs relatingrelated to the addition of generating unit M17 in
late 1998. In November 1998, MECO revised its requested increase to 11.9%, or
$16.4 million in annual revenues, based on a 12.75% ROACE. In December 1998,
MECO received an interim D&O from the PUC, effective January 1, 1999,
authorizing an 8.5%, or $11.7 million, increase in annual revenues (subject to
refund with interest, pending the final outcome of the case), based on a ROACE
of 11.12%, which was the ROACE authorized in MECO's prior rate case. In April
1999, MECO received an amended final D&O from the PUC which authorized an 8.2%,
or $11.3 million, increase in annual revenues, based on a 1999 test year and a
10.94% ROACE. The amended final D&O required a refund of approximately $0.1
million to customers because MECO had previously received under(under the interim
D&O $0.4 million annually&O) an increase in excess of the amount that was finally approved.
MECO refunded with interest
the excess amounts collected since January 1, 1999, which amounted to
approximately $0.1 million.. In March 1999, the PUC issued a D&O denying MECO's request to include $0.8
million in its rate base for exhaust flow enhancers whichthat were provided as part
of a settlement for a warranty claim. MECO wrote-off the $0.8 million in the
first quarter of 1999.
32Accounting 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 March 31, 2000, HECO's consolidated regulatory
assets amounted to $116 million.
28
Savings bank
- ------------
Three months ended September 30,
--------------------------------------March 31,
-------------------------------------------- %
(in thousands) 2000 1999 1998 change Primary reason(s) for significant change
- -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
Revenues......... $102,624 $103,229 (1) Lower otherRevenues............... $110,267 $100,280 10 Higher interest income (includingas a decrease in service fees)result of
higher weighted-average yields on
interest-earning assets and higher average
balances of mortgage/asset-backed
securities and loan balances
Operating income. 14,919 13,398 11income....... 19,190 15,131 27 Higher net interest income, partly offset
by an increase in the
provision for loan losses, higher office occupancy expenses
(including higher repairs and equipment
expensesmaintenance
expense, lease rent and higher compensation
and employee benefit expensesdepreciation)
Net income....... 8,499 7,904 8income............. 11,221 8,525 32 Higher operating income
Interest rate spread.......... 3.22% 2.99%spread... 3.28% 3.04% 8 3436 basis points decrease in the
weighted-average rate on
interest-bearing liabilities,
partly offset by an 11 basis
points decreaseincrease in the
weighted-average yield on interest-earning
assets, Nine months ended
September 30,
-------------------------------------- %
(in thousands) 1999 1998 change Primary reason(s) for significant change
- ----------------------------------------------------------------------------------------------------------------
Revenues......... $304,663 $306,324 (1) Lower interest income as a result
of lower weighted-average yields
on interest-earning assets, partly
offset by higher other income
(including a gain on the sale of a
building)
Operating income. 45,839 42,079 9 Higher net interest income and
other income, partly offset by an
increase in the provision for loan
losses, higher office occupancy
and equipment expenses and higher
compensation and employee benefit
expenses
Net income....... 26,081 23,616 10 Higher operating income
Interest rate
spread.......... 3.17% 3.10% 2 32 basis points decrease in the
weighted-average rate on
interest-bearing liabilities,
partly offset by a 2512 basis points
decreaseincrease in the weighted-average yieldrate on
interest-earning assetsinterest-bearing liabilities
33
ASB continued to be affected by Hawaii's weak economy, including the effects of
historically higher amounts of delinquencies, and the relatively flat yield
curve. The yield curve has started to widen which should favorably affect ASB's
net interest income over time.
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--increased 8% and 2% for the third. Comparing first quarter and first nine months of
1999, respectively, compared to the same periods in 1998. Comparing the third
quarter and first nine months of 19992000 to the same period in
1998,1999, the weighted-
averageweighted-average yield on interest-earning assets increased more than
the weighted-average rate on interest-bearing liabilities decreased more than the weighted-
average yield on interest-earning assets decreased. On April 1, 1999, ASB
reduced the rates offered on passbook/statement savings accounts by 25 basis
points.increased.
Deposits traditionally have been the principal source of ASB's funds for use in
lending, meeting liquidity requirements and making investments. ASB experienced
an outflow of deposits of $386Deposits
increased by $66 million ($267 million of which were certificates
of deposits, $166 million of which were transferred to retail repurchase
agreements) in the first nine monthsquarter of 1999, partly offset by $792000, including $23 million of
interest credited to accounts. ASB also derives funds from borrowings, payments
of interest and principal on outstanding loans receivable and mortgage/asset-
backed securities, and other sources. In recent years, advances from the Federal
Home Loan Bank (FHLB) of Seattle and securities sold under agreements to
repurchase have become more significant sources of funds as the demand for
deposits decreased 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.
In the slow Hawaii economy, ASB has experienced an increase in loan loss
reserves. During the first nine monthsquarter of 1999,2000, ASB added $10.8$3 million to its allowance for loan
losses. As of September 30, 1999,March 31, 2000, ASB's allowance for loan losses was 1.28%1.14% of
average loans outstanding, up from 1.18% a year ago.outstanding. The following table presents the changes in the
allowance for loan losses for the periods indicated.
NineThree months ended September 30,
-------------------------------March 31,
--------------------------------------------
(in thousands) 2000 1999
1998
- -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
Allowance for loan losses, beginning of period...............quarter...................... $35,348 $39,779 $29,950
Additions to provisions for losses........................... 10,848 9,473
Allowance for losses on loans returned to Bank of America,
FSB......................................................... - (107)losses................................... 3,000 2,920
Net charge-offs.............................................. (9,980) (2,719)
---------- ----------charge-offs...................................................... (1,763) (1,861)
--------------- ---------------
Allowance for loan losses, end of period..................... $40,647 $36,597
========== ==========quarter............................ $36,585 $40,838
=============== ===============
Management has been disposing of nonperforming loans at a loss which has
resulted in higher charge-offs. In the first nine months of 1999, proceeds from
the sales of nonperforming commercial real estate and residential loans were
invested in earning assets.
In March 1998, ASB formed a wholly owned operating subsidiary, ASB Realty
Corporation (ASBR), which elects to be taxed as a real estate investment trust.
This reorganization has reduced ASB's income taxes. For the first
nine months29
Quarter of 1999,2000, ASB and subsidiaries' effective income tax rate was 34.3%34.2%.
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.
34
OtherInternational power
- ------------------------
Three months ended
September 30,
-----------------------March 31,
--------------------------------------- %
(in thousands) 2000 1999 1998 change Primary reason(s) for significant change
- ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
Revenues..... $12,543 $14,405 (13) Estimated loss on the saleRevenues......... $1,665 $ 992 68 Three months of YB
and most of the other assets of
HTB ($2 million)revenues from Guam in 2000
compared to two months in 1999
Operating loss........ (4,840) (2,365) (105) Lower revenues (see above), higher
general and administrative
expenses at the holding companies
and higher maintenance expense at
the HEIPC Group, partly offset by
higher investment gains at HEIICloss... (450) (616) 27
Nine months ended
September 30,
------------------------- %
(in thousands) 1999 1998 change Primary reason(s) for significant change
- -----------------------------------------------------------------------------------------------------------
Revenues..... $42,376 $44,023 (4) Estimated loss on the sale of YB
and most of the other assets of
HTB ($2 million)
Operating
loss........ (8,255) (4,730) (75) Lower revenues (see above), higher
general and administrative
expenses at the holding companies
and higher maintenance expense at
the HEIPC Group, partly offset by
higher investment gains at HEIIC
The "other" business segment includes results of operations from Hawaiian Tug &
Barge Corp. and its subsidiary, Young Brothers, Limited, maritime freight
transportation companies; HEI Investment Corp., a company primarily holding
investments in leveraged leases; the HEIPC Group, companies formed to pursue
independent power and integrated energy services projects in Asia and the
Pacific; 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, 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-
site power generation equipment and auxiliary appliances in Hawaii and the
Pacific Rim; 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., holding companies; and eliminations
of intercompany transactions.
Freight transportation
The freight transportation subsidiaries recorded an operating loss of $0.7
million and operating income of $1.5 million in the third quarter and first nine
months of 1999, respectively, compared with operating income of $1.0 million and
$3.2 million in the same periods of 1998. The decreases were primarily due to
the estimated $2 million loss on the sale of YB and most of the other assets of
HTB. See note (9) in
35
HEI's "Notes to consolidated financial statements" for a discussion of the sale
of YB and certain assets of HTB.
Independent power and integrated energy services
HEIPC was formed in 1995 and its subsidiaries have been and will be formed from
time to time to pursue independent power and integrated energy services projects
in Asia and the Pacific. The HEIPC Group recorded operating losses of $1.4
million and $3.5 million in the third quarter and first nine months of 1999,
respectively, compared with $1.0 million and $2.6 million in the same periods of
1998. The increase in operating losses was due in part to a mechanical failure
of a unit at Tanguisson, Guam (described below).
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-MW25 MW (net) units at Tanguisson, Guam. In November 1996, HPG assumed
operational control of the Tanguisson facility. HPG's total cost to repair the two
units was $15 million. In the second quarter of 1999, a mechanical failure of one of the units
resulted in additional expenses and lost revenue for HPG which accounts for
part of the variance in operating losses for the quarter and year-to-date. The
unit was returned to service in September 1999.approximately $1
million. HPG may be able towill recover some or all of the negative financial impacts resultingthis amount from the mechanical failure
from various parties, including an insurance carrier.
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 U.S. Environmental Protection
Agency. GPA, however, has agreed to indemnify and hold HPG harmless from any
pre-existing environmental liability.
In September 1998 and 1999, the HEIPC (throughGroup acquired what is now a wholly owned, indirect subsidiary) acquired
an effective 60%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
BaoSteel'sBaotou Iron & Steel (Group) Co., Ltd.'s (BaoSteel's) complex in Inner Mongolia,
People'sPeoples Republic of China. See note (7), "China project," in note (5) of HEI's "Notes to
consolidated financial statements."
In December 1998, the HEIPC (through a wholly owned, indirect subsidiary)Group invested $7.6 million to acquire convertible
cumulative nonparticipating 8% preferred shares in CEPALCO,Cagayan Electric Power &
Light Co., Inc. (CEPALCO), an electric distribution company in the Philippines.
In September 1999, the HEIPC subsidiaryGroup also acquired 5% of the outstanding CEPALCO
common stock for approximately $2.1 million. The acquisitions arewere strategic moves which put
the HEIPC Group in a position to participate in the eventualanticipated 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
EPHC, which is an indirect subsidiary of El Paso Energy Corporation, for $87
million plus up to an additional $6 million of payments that are contingent upon
future earnings of EAPRC. EPHC 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 is exposed to the impact of foreign currency fluctuations and
changes in fuel oil prices primarily due to its 50% investment in EPHC, which
owns 91.7% of the common shares of EAPRC. As of March 31, 2000, EAPRC had
approximately $193 million in U.S. dollar denominated debt. From March 7, 2000
(acquisition date) to March 31, 2000, the high and low Philippine peso exchange
rate was 40.875 peso = $1 and 41.125 peso = $1, respectively. The potential
immediate pretax loss to the HEIPC Group that would result from a hypothetical
10% devaluation in the Philippine peso exchange rate based on this position
would be approximately $8 million. In addition, the rates charged by EAPRC 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
30
Philippines. Most of the fluctuation in fuel oil prices is not recovered in
rates charged by EAPRC. As of March 31, 2000, EAPRC had an annual minimum
purchase requirement (at prices tied to the market prices of petroleum products
in Singapore) for approximately 370,000 metric tons of fuel oil and EAPRC's
average price of fuel oil for March 2000 was approximately $144 per metric ton.
The HEIPC Group is evaluating hedging strategies to reduce its exposure to
foreign currency and fuel price fluctuations. The HEIPC Group is evaluating
hedging strategies to reduce its exposure to foreign currency and fuel price
fluctuations.
As of March 31, 2000, the HEIPC Group had invested approximately $137 million in
overseas power projects. The HEIPC Group is actively pursuing other projects in
Asia and the Pacific, thatwhich are subject to approval byof the HEIPC and HEI Boards
of Directors. The success of any project undertaken by the HEIPC Group will be
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.
Other
- -----
Three months ended
March 31,
---------------------------------------- %
(in thousands) 2000 1999 change Primary reason(s) for significant change
- --------------------------------------------------------------------------------------------------------------------------
Revenues......... $ 538 $13,184 (96) In November 1999, HTB sold YB and
substantially all of its operating assets
for a nominal gain. 1999 includes $13
million of HTB/YB revenues.
Operating loss... (2,168) (1,384) (57) No maritime freight transportation and
harbor assist operations in the first
quarter 2000 and higher corporate expenses
The "other" business segment includes results of operations of TOOTS, formerly
HTB and its formerly owned subsidiary, YB, maritime freight transportation and
harbor assist companies which were sold or shutdown 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, 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-
site power generation equipment and auxiliary appliances in Hawaii and the
Pacific Rim; HEI Properties, Inc., a company formed to hold real estate and
related assets; HEI Leasing, Inc., a company formed in February 2000 to own
passive investments and 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.,
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 operating income of $0.6 million in the first quarter of
1999.
31
Discontinued operations
- -----------------------
See note (8)(10) in HEI'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 and YB based on current cost-based rate-making regulations.
Management believes HECO and its subsidiaries' and YB's 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
36
on the Company's results of operations, financial position or liquidity may
result. As of September 30, 1999, HEI's and HECO's consolidated regulatory
assets amounted to $115 million and $113 million, respectively.
Contingencies
- -------------
See note (7)(9) in HEI's "Notes to consolidated financial statements" and note (3)(4)
in HECO's "Notes to consolidated financial statements" for discussions of
contingencies.
Year 2000 issueRecent accounting pronouncements
- ---------------
The following discussion includes numerous forward-looking statements. The
following discussion includes forward looking statements related, but not
limited, to the costs of remediation, the effect of such costs on HEI's and
HECO's financial condition and liquidity, anticipated dates of completion of
remediation work, future performance of remediated systems, third party
remediation, contingency plans and risks, and most reasonably likely worst case
scenarios. Also, see "Forward-looking information" on page v.
HEI consolidated
The Company is aware of the Year 2000 date issues associated with the practice
of encoding only the last two digits of four digit years in computer equipment,
software and devices with embedded technology. Year 2000 date issues, if not
properly addressed, may result in computer errors that could cause a disruption
of business operations. Further, the Company could be adversely impacted by Year
2000 date issues if suppliers, customers and other related businesses do not
address the issues successfully. HEI and subsidiary management have developed
Year 2000 programs and have teams in place. All significant computer-based
systems have been included in the inventory and assessment process. Priority has
been given to systems that are considered mission or business critical. HEI and
each business unit have appointed a Year 2000 project manager who provides
periodic reporting to their respective senior management and board of directors.
Both the electric utility and the savings bank segments are subject to external
oversight by their respective regulators. Although substantial effort is being
devoted to the Year 2000 issue, no absolute assurance can be given that the
Company will successfully avoid all problems that may arise. Further, no
absolute assurance can be given that the Year 2000 problems of other entities
will not have a material adverse impact on the Company's systems or results of
operations.
Costs. Management believes that the cost to remediate its systems to become
- ------
Year 2000 ready have not and will not have a material adverse effect on the
Company's financial condition or liquidity. The total cost of initiatives
undertaken primarily for Year 2000 remediation is estimated at $10.9 million, of
which approximately $9.9 million has been incurred through September 30, 1999.
The cost to remediate systems and the target dates provided below represent
management's best estimates at this time. These estimates are based on
information provided by various work units within the Company and external
parties such as vendors and business partners. Numerous assumptions have been
made regarding future dates, including the continued availability of internal
and external resources, third party remediation plans and the successful testing
of mission critical systems.
Electric utility
State of readiness. HECO and its subsidiaries identified information technology
- -------------------
(IT) and non-IT systems which required Year 2000 remediation work and
prioritized these systems by importance, business risk and Year 2000 exposure,
allocating resources accordingly. Remediation work for each of the systems
included an assessment phase, a renovation and validation phase and an
implementation phase. All work related to mission-critical electric generation
and distribution systems was completed by September 30, 1999. All other
remediation work is 99% complete and expected to be finished in November 1999.
In December 1998, HECO and its subsidiaries replaced the majority of their
business-critical information systems with an integrated application suite that
is Year 2000 ready. The installation of an integrated application suite has both
simplified and lowered the cost of Year 2000 IT remediation efforts.
37
Numerous Year 2000 tests of both in-house and purchased software have been
conducted. HECO and its subsidiaries identified third parties with whom they
have significant business relationships and contacted these vendors and service
providers to determine their Year 2000 readiness. Significant third parties
include fuel suppliers, IPPs, financial institutions and large customers. Over
99% of the vendors contacted have responded regarding their compliance. HECO and
MECO formed Power Partners Year 2000 groups to provide a forum to share
information among the utilities, their IPPs and fuel suppliers. HECO and MECO
also contracted with two of their major vendors of power plant equipment for
their services in assessing, remediating and testing their installed control
systems. HECO, HELCO and MECO have completed remediation and testing of all
generating units on Oahu, Hawaii, Maui, Molokai and Lanai. All IPPs have done
the same. Following national guidelines, HECO, HELCO, MECO and several IPPs
successfully conducted Year 2000 readiness drills in September 1999.
Costs. HECO management believes that the cost to remediate its systems to become
- ------
Year 2000 ready have not and will not have a material adverse effect on HECO's
consolidated financial condition or liquidity. The total cost of initiatives
undertaken primarily for Year 2000 remediation is estimated at $4.3 million, of
which $3.5 million has been incurred through September 30, 1999.
Risks. The Year 2000 remediation effort addresses two distinct areas of risk--
- ------
(1) electric systems, which deliver power to customers, and (2) business
systems, which handle data processing. Importantly, with respect to the electric
systems, neither the generation nor distribution systems are fully dependent on
automated control systems. HECO and its subsidiaries have the capability to
manually control the generation and dispatching of power and have some degree of
diversity and redundancy in their systems. There are never 100% guarantees of
service reliability. HECO believes, however, the most reasonably likely worst
case scenario would be brief, localized power outages and billing, payment,
collection and/or reporting errors or delays.
Contingency plans. Contingency plans in the event of a Year 2000 problem are
- ------------------
being finalized for HECO and its subsidiaries. Approximately 400 employees will
be on site on December 31, 1999 to January 1, 2000, and on other critical dates
in 2000 as deemed necessary. Other measures to mitigate risk include increased
fuel inventories, suspension of fuel transfers between locations, additional
units on-line and backup communications systems.
Savings Bank
State of readiness. ASB and its subsidiaries follow guidelines provided by the
- -------------------
Office of Thrift Supervision (OTS), which require ASB to first renovate its
mission critical systems. ASB, in its assessment, identified IT and non-IT
mission critical systems requiring Year 2000 remediation work. IT systems
include outsourced and in-house mainframe systems and applications, licensed
vendor applications, ATMs, desktop applications and high speed check sorting.
ASB has prioritized these systems by importance, business risk, and Year 2000
exposure, allocating resources accordingly. The OTS guidelines use a five-phase
approach to Year 2000 issues --an Awareness Phase, Assessment Phase, Renovation
Phase, Validation Phase and Implementation Phase. By July 1999, ASB successfully
completed the five-phase project of its mission critical systems. Re-testing may
be warranted due to system upgrades and regulatory requirements.
ASB and its subsidiaries identified third parties with whom they have
significant relationships including software-hardware systems providers, large
customers and a service bureau. ASB has implemented a Customer Impact Program
that monitors the activities of its large business and deposit customers. ASB
continues to monitor its service and supply vendors for Year 2000 compliance.
ASB initially reported a total of 426 vendors. Since then that number has been
adjusted to reflect consolidation and/or expansion of departments reporting
multiple use of the same vendors. To date ASB has identified 368 of 398 vendors
who are Year 2000 ready or in the process of becoming ready by January 1, 2000.
The remaining 30 vendors have been replaced or discontinued.
Costs. The total cost of initiatives undertaken by ASB primarily for Year 2000
- ------
remediation is estimated at $5.9 million, of which approximately $5.8 million
has been incurred through September 30, 1999.
38
Risks. The Year 2000 remediation effort addresses various areas of risk,
- ------
primarily ASB's business systems, including in-house applications, vendor
applications, service bureau applications and electronic banking. ASB believes
that the most reasonably likely worst case scenario would be localized
disruption of customer services. ASB believes off-line processing at all branch
sites is feasible for up to five working days.
Contingency plans. ASB's overall contingency plan provides the broad steps that
- ------------------
ASB could take if entire systems or partial systems were lost. In 1998, ASB
developed comprehensive and detailed contingency plans for mission critical
systems. ASB has used these contingency plans as models to develop similar
detailed plans for other departments. ASB's contingency plans include activating
off-line or manual procedures, implementing stand-in programs, activating the
disaster recovery plan and relocating certain operations to the recovery site.
In addition to the broader Year 2000 contingency plan, ASB has developed
specialized contingency plans to address the New Year 2000 event weekend.
Management will be in position to make critical decisions based on information
gathered at a dedicated Command Center. Recovery equipment will be pre-
positioned to best advantage. Furthermore, service agreements are in place to
assure skilled and technical vendors and service providers are on-site and/or
dedicated to ASB's recovery plans. Critical employees will be on-site or on
standby to lead recovery teams. Bank personnel will be available and assigned to
needed tasks. Bank management at the Command Center will coordinate all Year
2000 weekend activities.
Accounting changes
- --------------------------------------------------
See note (6)(8) and note (5)(6) in HEI's and HECO's respective "Notes to consolidated
financial statements."
FINANCIAL CONDITION
Liquidity and capital resources
- -------------------------------
The Company and consolidated HECO each believes that its ability to generate
cash, both internally from operations and externally from debt and equity
issues, is adequate to maintain sufficient liquidity to fund their respective
construction programs and investments and to satisfy debt and other cash
requirements in the foreseeable future.
The consolidated capital structure of HEI was as follows:
(in millions) September 30, 1999March 31, 2000 December 31, 19981999
- ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
Short-term borrowings...................borrowings............................. $ 165233 10% $ 152 7%
$ 223 10%
Long-term debt.......................... 979debt.................................... 984 43 978 44 900 40
HEI- and HECO-obligated preferred
securities of trust subsidiaries.....subsidiaries............... 200 9 200 9
Preferred stock of electric utility
subsidiaries...........................subsidiaries................... 34 1 34 2
81 4
Minority interests...................... 3interests................................ 1 - 41 -
Common stock equity..................... 836equity............................... 859 37 848 38
827 37
------------ ------------ ------------ ------------
$2,217----------- ----------- ----------
$2,311 100% $2,235$2,213 100%
============ ============ ============ ======================= =========== ==========
ASB's deposit liabilities, securities sold under agreements to repurchase and
advances from the FHLB and retail repurchase agreements are not included in the table above.
For the first ninethree months of 1999,2000, net cash provided by operating activities of
consolidated HEI consolidated was $180$62 million. Net cash used in investing activities was $328$205
million, largely due to ASB's purchase of mortgage/asset-backed securities, and origination of loans, net
of repayments, the HEIPC Group's investment in the Philippines and HECO's
consolidated capital expenditures. Net cash usedprovided by financing activities was
$55$145 million as a result of several factors, including net decreasesincreases in deposit
liabilities, securities
sold under agreements to repurchase and short-term borrowings, the redemption of
certain series of the electric utilities subsidiaries' preferred
39
stocklong-term debt and advances from Federal
Home Loan Bank, partly offset by the payment of common stock dividends and trust
preferred securities distributions partly offset byand a net increasesdecrease in advances from FHLB, retail
repurchasesecurities sold under
agreements and long-term debt.to repurchase.
Total HEI consolidated financing requirements for 19992000 through 2003,2004, including
net capital expenditures (which exclude the 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 billion. Of this amount, approximately $0.8 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 68%66% 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
32
included in the 1999-20032000-2004 forecast, such as the development of additional
independent power projects by the HEIPC Group in Asia and the Pacific, or to
fund changes in requirements, such as increases in the amount of or an
acceleration of capital expenditures of the electric utilities.
On March 2, 1999, HEI filedSee note (11) 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). On May 5, 1999,
HEI sold $100 million of its Series C Notes, with $200 million of Series C Notes
remaining available for issuance from time to time. The $100 million of Series C
Notes sold have a fixed interest rate of 6.51% with a maturity date of May 5,
2014. At the optiondescription of the holder, HEI may be required to repay themedium-term notes on May
5, 2006 at a repayment price equal to 98.1% of the principal amount to be
repaid.issued in April 2000.
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, 1999March 31, 2000 December 31, 19981999
- ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
Short-term borrowings from
nonaffiliates and affiliate........borrowings......................... $ 103105 6% $ 139 8%107 6%
Long-term debt...................... 645debt................................ 653 38 622 36646 38
HECO-obligated preferred securities of trust
subsidiaries..............subsidiaries................................. 100 6 100 6
Preferred stock.....................stock............................... 34 2 81 534 2
Common stock equity................. 803equity........................... 816 48 787 45
--------------806 48
------------- ------------------------ ------------ $1,685---------
$1,708 100% $1,729$1,693 100%
============== ============= ======================== ============ =========
Operating activities provided $145$39 million in net cash during the first nine
monthsquarter
of 1999.2000. Investing activities used net cash of $60$22 million, primarily for
capital expenditures. Financing activities used net cash of $114$18 million,
including $47$16 million for the payment of common and preferred dividends and
preferred securities distributions $47 million for preferred stock redemptions
and $36$2 million for the net repayment of
short-term borrowings, partially offset by a $23$6 million net increase in long-termlong-
term debt.
In August 1999, the Department of Budget and Finance of the State of Hawaii
issued and sold an aggregate of $61.4 million in refunding special purpose
revenue bonds on behalf of HECO, MECO and HELCO. The proceeds of the sale
(exclusive of accrued interest) were used to provide a portion of the funds
required for the refunding prior to stated maturity of the 7.2% Series 1984
Revenue Bonds ($11.4 million) and the 7-5/8% Series 1988 Revenue Bonds ($50
million).
The electric utilities' consolidated financing requirements for 19992000 through
2003,2004, including net capital expenditures, long-term debt retirements,and preferred stock
redemptions and sinking fund requirements,retirements, are currently estimated to total $666$595 million. HECO's consolidated internal
sources, after the payment of common stock and preferred stock dividends, are
expected to provide approximately 91%cash in excess of the consolidated financing requirements
with debt
financing providing the remaining requirements.and may also be used to repay short-term borrowings. As of 40
September 30, 1999, approximately $17.4March 31, 2000, $34
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, 1999,March 31, 2000, an additional
$100$65 million of special purpose revenue bonds werewas authorized by the Hawaii
Legislature for issuance for the benefit of HECO and HELCO prior to the end of
2003. It is anticipated thatHECO does not anticipate the Department of Budget and Finance ofneed to issue new common equity over the
State of Hawaii will issue and sell, in November 1999, $35 million aggregate
principal amount of special purpose revenue bonds on behalf of HECO and $20
million aggregate principal amount of refunding special purpose revenue bonds on
behalf of HECO, MECO and HELCO. The proceeds (exclusive of accrued interest)
from the sale of refunding revenue bonds, if issued, will be used to provide a
portion of the funds required to refund the 7.35% Series 1990A Revenue Bonds
($20 million) prior to stated maturity.five-year period. The PUC must approve issuances, if any, of long-
termlong-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 19992000 through 20032004
are currently estimated to total $595$571 million. Approximately 74%70% of forecast
gross capital expenditures, which includes the allowance for funds used during
construction and capital expenditures funded by third-party cash contributions
in aid of construction, is for transmission and distribution projects, with the
remaining 26%30% primarily for generation projects.
For 1999,2000, electric utility net capital expenditures are estimated to be $119$140
million. Gross capital expenditures are estimated to be $138$161 million, comprised
of approximately $108$109 million for transmission and distribution projects,
$24approximately $39 million for new generation projects and $6approximately $13
million for general plant and other projects. Drawdowns of proceeds from
previous and future sales of tax-exempt special purpose revenue bonds and the generation of
funds from internal sources are expected to provide the cash needed for the net
capital expenditures.expenditures in 2000.
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,
33
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 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
SeptemberMarch 31, December 31, %
(in millions) 30,2000 1999 1998 change
- --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
Total assets.............................. $5,753 $5,692 1%assets.......................................... $5,943 $5,848 2
Loans receivable, net................................. 3,205 3,212 -
Mortgage/asset-backed securities.......... 1,943 1,791 8
Loans receivable, net..................... 3,216 3,143securities...................... 2,067 1,973 5
Deposit liabilities................................... 3,558 3,492 2
Deposit liabilities....................... 3,559 3,866 (8)
Securities sold under agreements to 427 515 (17)
repurchase...............................repurchase........ 645 661 (2)
Advances from Federal Home Loan Bank...... 1,082 806 34Bank.................. 1,227 1,189 3
As of September 30, 1999,March 31, 2000, ASB was the third largest financial institution in the
stateHawaii
based on total assets of $5.8$5.9 billion and deposits of $3.6 billion.
For the first nine monthsquarter of 1999,2000, net cash provided by ASB's operating activities
was $48$17 million. Net cash used in ASB's investing activities was $256$94 million,
due largely to the purchase of mortgage/asset-backed securities, and
origination of loans, net of
repayments. Net cash provided by financing activities was $33$79 million largely
due to a net increaseincreases of $277$66 million in FHLB
advancesdeposit liabilities and a net increase of $168$38 million in
retail repurchase agreements,advances in Federal Home Loan Bank, partly offset by a net decrease of $306 million in deposit liabilities (includes
$166 million of State of Hawaii certificate of deposits transferred to retail
repurchase agreements), a net decrease of $89$21
million in securities sold under agreements to repurchase and $16$6 million in
common and preferred stock dividends.
41
Minimum liquidity levels are currently governed by the regulations adopted by
the OTS.Office of Thrift Supervision (OTS). ASB was in compliance with OTS liquidity
requirements as of September
30, 1999.March 31, 2000.
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, 1999,March 31, 2000, ASB was in compliance with the OTS minimum
capital requirements (noted in parentheses) with a tangible capital ratio of
5.6%5.8% (1.5%), a core capital ratio of 5.6% (3.0%5.8% (4.0%) and a risk-based capital ratio
of 11.2%11.1% (8.0%).
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, 1999,March 31, 2000, ASB was "well-capitalized" (ratio requirements noted in
parentheses) with a leverage ratio of 5.6%5.8% (5.0%), a Tier-1 risk-based ratio of
10.3%10.2% (6.0%) and a total risk-based ratio of 11.2%11.1% (10.0%).
On December 1, 1998, the OTS adopted Thrift Bulletin 13a (TB 13a), which became
effective for purposes
of providing guidance on December 1, 1998. In additionthe management of interest 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 guidance,than reducing
portfolio risk. Finally, TB 13a provides detailed guidelines for implementing
revisionspart of the notice announcing the revision of the CAMELS rating system,
published by the Federal Financial Institutions Examination Council. TheThat
publication announced revised interagency policies, that, among other things,
established the Sensitivity to Market Risk component rating (the "S" rating). TB
13a provides quantitative guidelines for an initial assessment of an
institution's level of interest rate risk. Examiners have broad discretion in
implementing those guidelines. TB 13aIt also provides guidelines concerning the
factors examiners consider in assessing the quality of an institution's risk
management systems and procedures. Based on the calculation of ASB's interest
rate risk rating under these new guidelines, managementManagement has developed and is
developing and
beginning to implement34
implementing an action plan to improve ASB's interest rate risk position. The
plan may includeincludes obtaining additional capital contributions from HEIDI.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-term fixed rate loan
production.
Significant interstate banking legislation has been enacted at both the federal
and state levels. Under the federal Riegle-Neal Interstate Banking and Branching
Efficiency Act of 1994, a bank holding company may acquire control of a bank in
any state, subject to certain restrictions. Under state law, effective June 1,
1997, a bank chartered under state law may merge with an out-of-state bank and
convert all branches of both banks into branches of a single bank, subject to
certain restrictions. Although the federal and state laws apply only to banks,
such legislation may nonetheless affect the competitive balance among banks,
thrifts and other financial institutions and the level of competition among
financial institutions doing business in Hawaii.
For a discussion of the unfavorable disparity in the Financing Corporation
assessment rates that ASB and other thrifts have paid in relation to the rates
that most commercial banks have paid, see note (4) in HEI's "Notes to
Consolidated Financial Statements." By law, the Financing Corporation's
assessment rate on deposits insured by the Bank Insurance Fund must be one-fifth
the rate on deposits insured by the Savings Association Insurance Fund until the
insurance funds are merged or until January 1, 2000, whichever occurs first, at
which time the FICO interest obligation for both banks and thrifts should
thereafter be identical, at a currently estimated rate of 2.4 cents per $100 of
deposits.
OnIn November 4, 1999, Congress passed the Gramm-Leach-Bliley Act (the Act).
According to press reports, President Clinton is expected to sign the Act. The Act
repeals the Depression Era Glass-Steagall Act so that 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 does
further restrict the ability of a savings and loan holding company to own both a
savings association and nonfinancial subsidiaries, the savings and loan holding
company relationship among HEI, 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 theThe net effect of the Act on ASB's competitive position.position is
not known. On the one hand, the availability of "one-stop-shopping""one-stop shopping" for
financial services might increase competitive pressures on ASB. On the other
hand, the restriction on the ability to combine savings associations and
nonfinancial subsidiaries under one holding company may decrease competitive
pressure by reducing the incentive to create new thrifts.
42
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.its use.
Although ASB currently has in place a policy concerning customer privacy, it cannot beis
not known at this time whether the rules eventually adopted by the regulatory
authorities might impose additional compliance costs on ASB.
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 are impacted by ASB's abilityof operations. In the first quarter of 2000, HEI utilized
an interest-rate swap to manage its interest rate risk. See note (12) in HEI's
"Notes to consolidated financial statements." For additional quantitative and
qualitative information about the Company's market risks, see pages 3940 to 4143 of
HEI's 19981999 Annual Report to Stockholders.
U.S. Treasury yields at September 30, 1999March 31, 2000 and December 31, 19981999 were as follows:
September 30, 1999(%) March 31, 2000 December 31, 1998
------------------1999
--- -------------- -----------------
3 month 4.85 4.465.89 5.31
1 year 5.18 4.526.24 5.96
5 year 5.76 4.546.32 6.34
10 year 5.88 4.656.01 6.44
30 year 6.05 5.095.84 6.48
InterestAs interest rates (as measured by U.S. Treasury yields) have increased or
decreased between 392 and 12364 basis points from December 31, 19981999 to September 30, 1999 and had a
negative effect on the market value of ASB's interest-sensitive net earning
assets. On the positive side, in the nine months ended September 30, 1999, ASB's
interest-sensitive net earning assets have grown. Overall,March 31,
2000, management believes that with this inverted yield curve there was an
unfavorable, but immaterial, favorable change between those dates in the Company's
quantitative disclosuresestimated fair values of its interest-sensitive assets, liabilities and off-
balance sheet items.
4335
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, 2000 through May 3,
2000 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, 2000 through May 3, 2000, the director plans issued 2,268 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 $84,000, and 3,000 shares of HEI common stock in the aggregate amount of
$111,000 from January 1, 2000 through May 3, 2000 to HEI directors in addition
to the retainer. In addition, from January 1, 2000 through May 3, 2000, the Team
Incentive Plan issued 73,552 shares of HEI common stock in exchange for cash
received by HEI from the electric utility subsidiaries in the aggregate amounts
of $2.2 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.
Item 4. Submission of matters to a vote of security holders
- ------------------------------------------------------------
HEI
The Annual Meeting of Stockholders of HEI was held on April 25, 2000. Proxies
for the meeting were solicited pursuant to Regulation 14A under the Securities
Exchange Act of 1934. As of February 16, 2000, the record date for the Annual
Meeting, there were 32,297,786 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.
36
The results of the voting for the Class I director-nominees and the independent
auditor are as follows:
Shares of Common Stock
-------------------------------------------------------------------------------------------
Broker
For Withheld Against Abstain nonvotes
----------------- --------------- -------------- -------------- ---------------
Election of Class I Directors
Robert F. Clarke 29,651,391 643,829 --
A. Maurice Myers 29,622,435 672,785 --
James K. Scott 29,596,892 698,328 --
Election of KPMG LLP
as independent auditor 29,847,917 208,291 239,012 --
Class II Directors--Victor Hao Li, S.J.D., T. Michael May, Diane J. Plotts,
Kelvin H. Taketa and Jeffrey N. Watanabe--continue in office with terms ending
at the 2001 Annual Meeting. Class III Directors-- Don E. Carroll, Richard
Henderson, Bill D. Mills and Oswald K. Stender --continue in office with terms
ending at the 2002 Annual Meeting.
HECO
The Annual Meeting of the Sole Stockholder of HECO was conducted by written
consent effective April 25, 2000. The incumbent members of the Board of
Directors of HECO were re-elected. The incumbent members continuing in office
are Robert F. Clarke, Richard Henderson, T. Michael May, Paul A. Oyer, Diane J.
Plotts, James K. Scott, Anne M. Takabuki, Jeffrey N. Watanabe and Paul C. Yuen.
In addition, KPMG LLP was elected independent auditor of HECO for the fiscal
year 2000.
Item 5. Other information
- --------------------------
A. EPA notice of violationinspections at HECO's Waiau and civil administrative complaints
OnHonolulu generating stations
In September 30, 1999, HECO received civil administrative complaints from the EPA for alleged violations of Resource Conservation and Recovery Act hazardous
waste regulationsconducted unannounced National Pollutant Discharge
Elimination System permit compliance inspections at theHECO's Waiau and Kahe power plants. Penalties associated with
each alleged violation/count were identifiedHonolulu
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 complaints. The combined
penalty for both facilities amounted to approximately $153,000.EPA's findings on January 27, 2000 and
HECO has addressed the cited deficiencies. HECO is workingfinalizing a settlement
agreement with the EPA which will determine the amount of penalties that will be
imposed. Management does not believe that the EPA imposed penalties will have a
material effect on HEI's or HECO's consolidated financial condition, results of
operations or liquidity.
B. Amended notice of property tax assessment for HELCO
In December 1999, the County Council of Hawaii County amended its ordinances to
rescind the exemption from real property taxes for utility companies. The
utilities currently pay a settlementpublic service company tax that, by state statutory
language, is partly in lieu of real property taxes. On April 14, 2000, the
Department of Finance, Real Property Division of the matter.
B. DOHCounty of Hawaii, sent
HELCO an amended notice of violationproperty assessment showing total real property taxes
owed of approximately $3.9 million for Kahe sludge drying bed
By letter dated September 30, 1999, HECO received athe fiscal year July 2000 to June 2001.
HELCO intends to appeal the amended notice by May 15, 2000 on the grounds of
violation from the
DOH for alleged disposaldenial of hazardous waste at the sludge drying bed at the Kahe
power plant. Previously, in March 1999, HECO had voluntarily notified the DOH
upon discovering unexplained high levels of selenium in the sludge drying bed.
HECO initiated an investigationexemption to characterize the sitewhich taxpayer HELCO is entitled, unconstitutionality
and illegality, including overassessment, improper methodology and other
procedural grounds. HELCO also intends to determine the
sourceseek recovery of the contamination, and submitted a draft corrective action plan to the
DOHassessment in
April 1999. The source of the high levels of selenium remains unknown.
The notice of violation identifies revisions DOH would like to see in the
corrective action plan. HECO has 30 days to submit a revised plan to the DOHrebuttal testimony for review. Once the plan is approved, HECO has 60 days from that date to implement
and complete cleanup of the sludge drying bed. Although no monetary penalty is
imposed in the notice of violation, HECO will incur cleanup costs of
approximately $100,000.its 2000 test year rate case.
37
C. HECO power outage
On April 9, 1991, HECO experienced a power outage that affected all customers on
the island of Oahu. The PUC initiated an investigation of the April 9, 1991
outage, which was consolidated with a pending investigation of an outage that
occurred in 1988. Power Technologies, Inc. (PTI), an independent consultant
hired by HECO with the approval of the PUC, investigated the 1991 outage. HECO
implemented certain of PTI's recommendations and provided the PUC with summaries
of its progress on those recommendations. In July 1999, the PUC issued its D&O
and ordered that (1) PTI's report on the investigation, including its findings,
conclusions and recommendations, be accepted and approved, (2) HECO continue to
provide annual status reports on the final implementation of PTI's
recommendations and (3) the investigation be closed. The PUC also concluded that
no penalty was justified based on the facts and circumstances of the case. In
October 1999, the PUC clarified its order indicating that by approving and
accepting PTI's report, the PUC has not approved or disapproved HECO's
determinations as to whether or how to implement the specific recommendations of
the report.
D. Ratio of earnings to fixed charges
The following tables set forth the ratio of earnings to fixed charges for HEI
and its subsidiaries for the periods indicated:
44
Ratio of earnings to fixed charges excluding interest on ASB deposits
NineThree months Years ended December 31,
ended -----------------------------------------------------------------------------------
September 30,-------------------------------------------------------------------------------------------------
March 31, 2000 1999 1998 1997 1996 1995
1994
- -------------------- ------------- ------------- ------------ ------------ ----------------------------- --------------- -------------- --------------- ----------------
1.781.86 1.80 1.85 1.89 1.93 2.02
2.31
==================== ============= ============= ============ ============ ============================= =============== ============== =============== ================
Ratio of earnings to fixed charges including interest on ASB deposits
NineThree months Years ended December 31,
ended -----------------------------------------------------------------------------------
September 30,-------------------------------------------------------------------------------------------------
March 31, 2000 1999 1998 1997 1996 1995
1994
- -------------------- ------------- ------------- ------------ ------------ ----------------------------- --------------- -------------- --------------- ----------------
1.461.57 1.48 1.47 1.58 1.56 1.60
1.73
==================== ============= ============= ============ ============ ============================= =============== ============== =============== ================
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-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.
The following table sets forth the ratio of earnings to fixed charges for HECO
and its subsidiaries for the periods indicated:
Ratio of earnings to fixed charges
NineThree months Years ended December 31,
ended -----------------------------------------------------------------------------------
September 30,-------------------------------------------------------------------------------------------------
March 31, 2000 1999 1998 1997 1996 1995
1994
- -------------------- ------------- ------------- ------------ ------------ ----------------------------- --------------- -------------- --------------- ----------------
3.073.61 3.09 3.33 3.26 3.58 3.46
3.47
==================== ============= ============= ============ ============ ============================= =============== ============== =============== ================
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.
4538
Item 6. Exhibits and reports on Form 8-K
- -----------------------------------------
(a) Exhibits
HECO Hawaiian Electric Company,
HEI Hawaiian Electric Industries, Inc. and subsidiaries
Exhibit 12.1 Computation of ratio of earnings to fixed charges, three months ended March 31,
2000 and subsidiaries
Exhibit 10 Second Amended and Restated Power Purchase Agreement between Hilo
Coast Power Company and HELCO dated October 4, 1999
HEI Hawaiian Electric Industries, Inc. and subsidiaries
Exhibit 12.1 Computation of ratio of earnings to fixed charges,
nine months ended September 30, 1999 and 1998
HECO Hawaiian Electric Company, Inc. and subsidiaries
Exhibit 12.2 Computation of ratio of earnings to fixed charges,
nine months ended September 30, 1999 and 1998
HEI Hawaiian Electric Industries, Inc. and subsidiaries
Exhibit 27.1 Financial Data Schedule
September 30, 1999 and nine months ended September 30, 1999
HECO Hawaiian Electric Company, Inc. and subsidiaries
Exhibit 27.2 Financial Data Schedule
September 30, 1999 and nine months ended September 30, 1999
HECO Hawaiian Electric Company, Inc. and subsidiaries
Exhibit 12.2 Computation of ratio of earnings to fixed charges, three months ended March 31,
2000 and 1999
HEI KPMG LLP letter re: change in accounting principle
Exhibit 18.1
HECO KPMG LLP letter re: change in accounting principle
Exhibit 18.2
HEI Hawaiian Electric Industries, Inc. and subsidiaries
Exhibit 27.1 Financial Data Schedule
March 31, 2000 and three months ended March 31, 2000
HECO Hawaiian Electric Company, Inc. and subsidiaries
Exhibit 27.2 Financial Data Schedule
March 31, 2000 and three months ended March 31, 2000
(b) Reports on Form 8-K
Subsequent to June 30,December 31, 1999, HEI and/or HECO filed Current Reports, Forms
8-K, with the SEC as follows:
Dated Registrant/s Items reported
- ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
August 3, 1999February 29, 2000 HEI/HECO Item 5: Financial information7, portions of HECOHEI's 1999 Annual Report to Stockholders and
its subsidiaries for
the second quarter and six months ended June 30,HECO's 1999 and other
updated information
August 4, 1999 HEI Item 5: HEI's August 4, 1999 news release: Hawaiian Electric
Industries, Inc. Selling Maritime Freight Transportation
Operations
October 28, 1999 HEI/HECO Item 5: Financial information of HECO and its subsidiaries for
the third quarter and nine months ended September 30, 1999 and
other updated informationAnnual Report to Stockholder
4639
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. MougeotCurtis Y. Harada By /s/ Paul Oyer
---------------------- --------------
Robert F. Mougeot--------------------- ------------------------
Curtis Y. Harada Paul A. Oyer
Controller Financial Vice President and
Financial Vice President and
Chief Financial Officer(Principal Accounting Treasurer
(Principal Financial
Officer of HEI) (Principal Financial Officer
of HECO)
Date: November 10, 1999May 12, 2000 Date: November 10, 1999
47May 12, 2000
40