<PAGE>
================================================================================
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 8-K
CURRENT REPORT
Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
Date of Report: August 3, 1999
Exact Name of Registrant Commission I.R.S. Employer
as Specified in Its Charter File Number Identification No.
--------------------------- ----------- ------------------
Hawaiian Electric Industries, Inc. 1-8503 99-0208097
Hawaiian Electric Company, Inc. 1-4955 99-0040500
State of Hawaii
----------------------------------------------
(State or other jurisdiction of incorporation)
900 Richards Street, Honolulu, Hawaii 96813
----------------------------------------------------------------
(Address of principal executive offices and zip code)
Registrant's telephone number, including area code:
(808) 543-5662 - Hawaiian Electric Industries, Inc. (HEI)
(808) 543-7771 - Hawaiian Electric Company, Inc. (HECO)
None
--------------------------------------------------------------
(Former name or former address, if changed since last report.)
================================================================================
<PAGE>
Item 5. Other Events
Forward-looking information
This report and other presentations made by Hawaiian Electric Industries, Inc.
(HEI) and Hawaiian Electric Company, Inc. (HECO) contain forward-looking
statements within the meaning of Section 21E of the Securities Exchange Act of
1934. Except for historical information contained herein, the matters set forth
are forward-looking statements that involve certain risks and uncertainties that
could cause actual results to differ materially from those in the forward-
looking statements. Potential risks and uncertainties include, but are not
limited to, such factors as 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 industry; capacity and supply constraints or
difficulties; new technological developments; governmental and regulatory
actions, including decisions in rate cases and on permitting issues; the results
of financing efforts; the timing and extent of changes in interest rates and
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
systems and the avoidance of Year 2000 problems. Investors are also referred to
other risks and uncertainties discussed elsewhere in this report and in other
periodic reports previously and subsequently filed by HEI and/or HECO with the
Securities and Exchange Commission (SEC).
Refunding Special Purpose Revenue Bonds
It is anticipated that the Department of Budget and Finance of the State of
Hawaii will issue and sell in August 1999 refunding special purpose revenue
bonds, in two series, in the aggregate principal amount of $61.4 million for the
benefit of HECO and its subsidiaries, Maui Electric Company, Limited (MECO) and
Hawaii Electric Light Company, Inc. (HELCO). The proceeds of the sale will be
used to provide a portion of the funds required for the refunding prior to
stated maturity, at redemption prices which include premiums, of the 7.2% Series
1984 Special Purpose Revenue Bonds ($11.4 million, sold for the benefit of
HELCO) and the 7-5/8% Series 1988 Special Purpose Revenue Bonds ($50.0 million,
sold for the benefit of all three companies). A preliminary official statement
with respect to the refunding special purpose revenue bonds is being prepared
and is expected to be circulated on or about August 4, 1999. The following
portions of the Form 8-K provide financial information for HECO and its
subsidiaries for the second quarter and the six months ended June 30, 1999, and
other updated information, in advance of the filing by HEI and HECO of their
jointly-filed Form 10-Q for the quarter ended June 30, 1999.
1
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<TABLE>
<CAPTION>
Hawaiian Electric Company, Inc. and subsidiaries
Consolidated balance sheets (unaudited)
June 30, December 31,
(in thousands, except par value) 1999 1998
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Assets
Utility plant, at cost
Land.................................................................. $ 28,291 $ 30,312
Plant and equipment................................................... 2,783,752 2,750,487
Less accumulated depreciation......................................... (1,034,656) (982,172)
Plant acquisition adjustment, net..................................... 484 510
Construction in progress.............................................. 161,399 144,035
----------- ----------
Net utility plant............................................... 1,939,270 1,943,172
----------- ----------
Current assets
Cash and equivalents.................................................. 18,653 54,783
Customer accounts receivable, net..................................... 70,073 69,170
Accrued unbilled revenues, net........................................ 40,566 43,445
Other accounts receivable, net........................................ 1,553 4,082
Fuel oil stock, at average cost....................................... 23,141 16,778
Materials and supplies, at average cost............................... 19,342 17,266
Prepayments and other................................................. 4,167 3,858
----------- ----------
Total current assets............................................ 177,495 209,382
----------- ----------
Other assets
Regulatory assets..................................................... 111,618 108,344
Other................................................................. 46,627 50,355
----------- ----------
Total other assets.............................................. 158,245 158,699
----------- ----------
$ 2,275,010 $2,311,253
=========== ==========
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.............................................. 295,529 295,344
Retained earnings..................................................... 415,944 405,836
----------- ----------
Common stock equity............................................. 796,860 786,567
Cumulative preferred stock not subject to mandatory redemption....... 34,293 34,293
HECO-obligated mandatorily redeemable trust preferred securities
of subsidiary trusts holding solely HECO and HECO-guaranteed
debentures......................................................... 100,000 100,000
Long-term debt, net................................................... 626,754 621,998
----------- ----------
Total capitalization............................................ 1,557,907 1,542,858
----------- ----------
Current liabilities
Preferred stock sinking fund and optional redemption payments......... -- 47,080
Short-term borrowings nonaffiliates.................................. 123,127 133,863
Short-term borrowings affiliate...................................... -- 5,550
Accounts payable...................................................... 51,322 40,008
Interest and preferred dividends payable.............................. 10,983 11,214
Taxes accrued......................................................... 61,239 58,335
Other................................................................. 24,333 30,166
----------- ----------
Total current liabilities....................................... 271,004 326,216
----------- ----------
Deferred credits and other liabilities
Deferred income taxes................................................. 129,372 128,327
Unamortized tax credits............................................... 48,243 48,130
Other................................................................. 69,628 66,818
----------- ----------
Total deferred credits and other liabilities.................... 247,243 243,275
----------- ----------
Contributions in aid of construction..................................... 198,856 198,904
----------- ----------
$ 2,275,010 $2,311,253
=========== ==========
</TABLE>
See accompanying notes to HECO's consolidated financial statements.
2
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<TABLE>
<CAPTION>
Hawaiian Electric Company, Inc. and subsidiaries
Consolidated statements of income (unaudited)
Three months ended Six months ended
June 30, June 30,
(in thousands, except for ratio of earnings --------------------------- -----------------------------
to fixed charges) 1999 1998 1999 1998
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Operating revenues.................................... $250,858 $242,204 $487,483 $498,247
-------- -------- -------- --------
Operating expenses
Fuel oil.............................................. 47,226 44,449 92,104 101,180
Purchased power....................................... 67,649 69,091 127,629 135,674
Other operation....................................... 32,477 33,879 64,800 69,965
Maintenance........................................... 13,583 10,866 26,888 21,230
Depreciation and amortization......................... 23,354 21,446 46,719 42,888
Taxes, other than income taxes........................ 23,524 23,054 46,420 47,346
Income taxes.......................................... 12,121 12,558 22,789 25,560
-------- -------- -------- --------
219,934 215,343 427,349 443,843
-------- -------- -------- --------
Operating income...................................... 30,924 26,861 60,134 54,404
-------- -------- -------- --------
Other income
Allowance for equity funds used
during construction................................ 987 2,866 2,026 5,642
Other, net............................................ 1,301 2,320 2,372 4,322
-------- -------- -------- --------
2,288 5,186 4,398 9,964
-------- -------- -------- --------
Income before interest and other charges.............. 33,212 32,047 64,532 64,368
-------- -------- -------- --------
Interest and other charges
Interest on long-term debt............................ 9,915 10,514 19,826 20,692
Amortization of net bond premium and expense.......... 404 373 767 722
Other interest charges................................ 1,851 1,667 3,920 3,301
Allowance for borrowed funds used
during construction................................ (599) (1,703) (1,239) (3,319)
Preferred stock dividends of subsidiaries............. 229 639 487 1,277
Preferred securities distributions of
trust subsidiaries................................. 1,918 1,007 3,827 2,013
-------- -------- -------- --------
13,718 12,497 27,588 24,686
-------- -------- -------- --------
Income before preferred stock dividends
of HECO............................................ 19,494 19,550 36,944 39,682
Preferred stock dividends of HECO..................... 270 861 639 1,731
-------- -------- -------- --------
Net income for common stock........................... $ 19,224 $ 18,689 $ 36,305 $ 37,951
======== ======== ======== ========
Ratio of earnings to fixed charges (SEC method)...... 2.98 3.13
======== ========
Hawaiian Electric Company, Inc. and subsidiaries
Consolidated statements of retained earnings (unaudited)
<CAPTION>
Three months ended Six months ended
June 30, June 30,
--------------------------------- ---------------------------------
(in thousands) 1999 1998 1999 1998
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Retained earnings, beginning of period................ $409,530 $391,518 $405,836 $387,582
Net income for common stock........................... 19,224 18,689 36,305 37,951
Common stock dividends................................ (12,810) -- (26,197) (15,326)
-------- -------- -------- --------
Retained earnings, end of period...................... $415,944 $410,207 $415,944 $410,207
======== ======== ======== ========
</TABLE>
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 to HECO's consolidated financial statements.
3
<PAGE>
Hawaiian Electric Company, Inc. and subsidiaries
Consolidated statements of cash flows (unaudited)
<TABLE>
<CAPTION>
Six months ended
June 30,
-------------------------------------------
(in thousands) 1999 1998
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Cash flows from operating activities
Income before preferred stock dividends of HECO............................ $ 36,944 $ 39,682
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............................................... 46,719 42,888
Other amortization................................................... 3,177 3,625
Deferred income taxes................................................ 1,045 1,163
Tax credits, net..................................................... 910 2,553
Allowance for equity funds used during construction.................. (2,026) (5,642)
Changes in assets and liabilities
Decrease in accounts receivable................................. 1,626 6,252
Decrease in accrued unbilled revenues........................... 2,879 1,162
Decrease (increase) in fuel oil stock........................... (6,363) 5,656
Decrease (increase) in materials and supplies................... (2,076) 812
Increase in regulatory assets................................... (1,602) (3,265)
Increase (decrease) in accounts payable......................... 11,314 (9,003)
Changes in other assets and liabilities......................... 683 (28,769)
-------- --------
Net cash provided by operating activities.................................. 93,230 57,114
-------- --------
Cash flows from investing activities
Capital expenditures....................................................... (44,042) (60,542)
Contributions in aid of construction....................................... 4,423 5,560
Payments on notes receivable............................................... 794 756
-------- --------
Net cash used in investing activities...................................... (38,825) (54,226)
-------- --------
Cash flows from financing activities
Common stock dividends..................................................... (26,197) (15,326)
Preferred stock dividends.................................................. (639) (1,731)
Preferred securities distributions of trust subsidiaries................... (3,827) (2,013)
Proceeds from issuance of long-term debt................................... 4,675 62,982
Repayment of long-term debt................................................ -- (57,500)
Redemption of preferred stock.............................................. (42,080) (2,400)
Net increase (decrease) in short-term borrowings from nonaffiliates
and affiliate with original maturities of three months or less.......... (16,286) 13,364
Other...................................................................... (6,181) (462)
-------- --------
Net cash used in financing activities...................................... (90,535) (3,086)
-------- --------
Net decrease in cash and equivalents....................................... (36,130) (198)
Cash and equivalents, beginning of period.................................. 54,783 1,676
-------- --------
Cash and equivalents, end of period........................................ $ 18,653 $ 1,478
======== ========
</TABLE>
See accompanying notes to HECO's consolidated financial statements.
4
<PAGE>
Hawaiian Electric Company, Inc. and subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 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 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 Report on SEC Form 10-Q for the quarter ended March 31, 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 June
30, 1999 and December 31, 1998, the results of their operations for the three
and six months ended June 30, 1999 and 1998, and their cash flows for the six
months ended June 30, 1999 and 1998. 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 1999 presentation.
(2) Cash flows
- ---------------
Supplemental disclosures of cash flow information
Cash paid for interest (net of capitalized amounts) and income taxes was as
follows:
<TABLE>
<CAPTION>
Six months ended
June,
-------------------------------
(in thousands) 1999 1998
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Interest................................................................... $22,880 $22,641
======= =======
Income taxes............................................................... $ 5,153 $22,277
======= =======
</TABLE>
The decrease in income taxes paid for the six months ended June 30, 1999
compared to the same period in 1998 was primarily due to the increase in year-
to-date Public Service Company tax deductions.
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 $2.0 million and $5.6 million for the six months ended June 30, 1999 and
1998, respectively.
5
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(3) Commitments and contingencies
- ----------------------------------
HELCO power situation
Background. In 1991, HELCO identified 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
deliveries 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 site two 20 megawatt (MW) combustion turbines
(CT-4 and CT-5), followed by an 18 MW heat recovery steam generator (ST-7), at
which time these units would be converted to a 58 MW 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 primarily attributable to lawsuits, claims and petitions
filed by independent power producers and other parties.
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. 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.
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 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
6
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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 denying motions for
reconsideration which had been filed by HELCO, the Keahole Defense Coalition
(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
work with the DOH to address the issues specified in the EAB remand order, with
the objective of having the final permit reissued by the end of 1999 and of
reaching a final resolution of any appeals to the EAB as expeditiously as
possible thereafter. HELCO believes that the PSD permit will eventually be
obtained.
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 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) and 45 dBA (nighttime) standard) rather
than the previously-applied noise standard of the receptor properties in
the surrounding agricultural park (a 70 dBA standard).
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 the new
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 May 12, 1999, the
Order dismissing HELCO's declaratory judgment complaint was issued and
Final Judgment was entered. The DOH objected to the entry of Final
Judgment before all issues in the lawsuit were resolved, but an Order
denying that motion was issued on July 26, 1999. HELCO has 30 days
thereafter to appeal.
Also on March 31, 1999, the Court 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
7
<PAGE>
55/45 dBA noise standard to the Keahole plant. An Order confirming this
ruling was entered on June 1, 1999.
The DOH has not issued any formal enforcement action applying the 55/45
dBA standard to the Keahole plant.
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 BLNR. (Should DOH find HELCO
in violation of the noise rules (see Count II), 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 BLNR. (Should
DOH find HELCO in violation of the noise rules (see Count II), 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 BLNR for resolution of the administrative proceeding now pending
before it. (See "BLNR petition," below.)
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
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 and BLNR
have discussed correcting this matter through an administrative or
judicial reformation of the land patent.
If and when the DOH and BLNR/ Department of Land and Natural Resources of the
State of Hawaii (DLNR) act on the 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 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 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,
- ----------------
Plaintiff Ratliff 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, whose subsidiary is a partner in
KCP, filed a lawsuit in the Third Circuit Court of the State of Hawaii, asking
8
<PAGE>
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 Ratliff
lawsuit with the KDC lawsuit and the dismissal with prejudice of the Waimana
lawsuit. Ratliff filed a motion for summary judgment with regard to the claims
in her lawsuit and 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.
IPP complaints. Two independent power producers (IPPs), KCP and Enserch
- --------------
Development Corporation (Enserch), filed separate complaints against HELCO with
the PUC in 1993 and 1994, respectively, alleging that they are entitled to power
purchase contracts to provide HELCO with additional capacity, which they claimed
would be a substitute for HELCO's planned 58 MW DTCC unit at Keahole.
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 the 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 agreement 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,
which was amended at HELCO's request on July 21, 1999. If the decision is
not appealed (within the 30-day period allowed for filing a Notice of
Appeal), and Encogen meets the in-service date deadlines in the power
purchase agreement, Encogen's first phase of 22 MW is scheduled to be in-
service in April 2000 and the remainder of its 60 MW facility is scheduled
to be in-service in August 2000. If the decision is appealed, Encogen must
decide by February 15, 2000 whether it will proceed with the project
notwithstanding the appeal. If Encogen does proceed notwithstanding an
appeal, the in-service date deadlines for Phases 1 and 2 would be extended
to September 2000 and January 2001, respectively.
KCP complaint. In January 1996, the PUC ordered HELCO to continue in good
-------------
faith to negotiate a power purchase agreement 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
9
<PAGE>
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 agreement 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
position on August 2, 1999.
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, including which of
HELCO's planned unit additions could be deferred or displaced by a new
power purchase agreement with HCPC, was held in April 1998. On November 25,
1998, the PUC issued a Decision and Order in the HCPC complaint docket. The
Decision and Order states that (1) "whether the next immediate unit is
ultimately provided by Encogen at Hamakua or HELCO at Keahole, HCPC can
negotiate to provide the increment of power following the next immediate
unit", and "HELCO's sunk and parallel planning costs for CT-4 and CT-5 will
not be part of the avoided cost calculation", and (2) the reconductoring of
a transmission line to accept HCPC's proposed 32 MWs would be of system-
wide benefit, and the cost would not be included in the avoided cost
calculation. The decision also addressed a system-modeling issue, and
required that the avoided cost calculation be based on the same assumptions
used in the last (April 1998) avoided cost calculation. The PUC 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 have not finalized an
agreement. Status reports were filed by HCPC and HELCO in February 1999. In
its status report, HELCO requested a hearing with respect to the 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, 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 preventing finalization
of an agreement. As a result of a request by HCPC and HELCO, the PUC
submittal date has been extended to August 18, 1999. Negotiations between
HELCO and HCPC are continuing.
Management cannot determine at this time whether any party will appeal the
decision and order approving the Encogen power purchase agreement, whether
Encogen would proceed with its project if an appeal is taken, or whether the
negotiations with KCP or HCPC or related PUC proceedings will result in the
execution and/or PUC approval of an additional power purchase agreement.
BLNR petition. On August 5, 1998, KDC filed with the BLNR a Petition for
- --------------
Declaratory Ruling under Section 91-8, Hawaii Revised Statutes. The petition
alleged that all conditions in Hawaii Administrative Rules 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
10
<PAGE>
Notices of Violation (NOVs) to HELCO in 1992 and 1998 for violation of clean air
rules, which NOVs 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. The matter has not yet
been set before BLNR for a determination of whether a hearing will be held.
However, on June 3, 1999, counsel for BLNR submitted a status report to the
Third Circuit Court informing the Court that KDC's petition would be presented
to BLNR for resolution within 90 days of the status report.
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. 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. HELCO has put the EPA on notice that certain construction activities not
affected by the NOV are continuing, 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 obtaining the permits necessary to
construct its combined-cycle unit at Keahole. Actions under the plan have helped
HELCO maintain its reserve margin and reduce the risk of near-term capacity
shortages. In January 1996, the PUC opened a proceeding to evaluate HELCO's
contingency resource plan and HELCO's efforts to insure system reliability.
HELCO has filed reports with the PUC from time to time updating the contingency
plan and the status of implementing the plan. The most recent update was filed
on March 1, 1999. Due to the delays in adding new generation, upon the
expiration of the HCPC power purchase agreement for 22 MW at the end of 1999,
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. The addition of new generation is not expected to
occur until April 2000, at the earliest. When the HCPC power purchase agreement
expires at the end of 1999, HELCO will have sufficient generation to cover
projected monthly system peak loads with units on scheduled maintenance, but may
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. HELCO is negotiating with HCPC for a new power purchase
agreement and reviewing other options to mitigate the short-term reserve margin
shortfall.
Project status and costs incurred. 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) on
11
<PAGE>
CT-4 and CT-5 (which would have been approximately $0.4 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 Encogen facility is not placed in service as planned. In December
1998, HELCO removed $0.8 million in costs accumulated against ST-7 from
construction work-in-progress, writing off $0.6 million and reclassifying $0.2
million in costs to inventory, since ST-7 would not be needed in the immediate
future.
Under HELCO's current estimate of generating capacity requirements, there is a
need for capacity in addition to the capacity which might be provided by any one
of the IPPs. HELCO believes that issues surrounding the CDUP amendment, the PSD
permit, the declaratory judgment actions, the BLNR petition and related matters
will be satisfactorily resolved and will not prevent it from constructing CT-4
and CT-5. HELCO's current plan contemplates that CT-4 and CT-5 will be added to
its system by early 2001. Management cannot determine at this time, however, the
impact on its plans with regard to the installation of units CT-4 and CT-5 if
power purchase agreements with two or more of the IPPs (including Encogen) were
to be negotiated, approved by the PUC and implemented.
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 June 30, 1999, HELCO's costs incurred in its
efforts to put CT-4 and CT-5 into service amounted to $76.8 million, including
approximately $31.8 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. It is the opinion of management
that no adjustment is required to these costs as of June 30, 1999.
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
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 followed in the proceeding, but no timetable has
been set for such a determination. 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.
Environmental regulation
In early 1995, the DOH initially advised HECO 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, 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.
12
<PAGE>
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. The Honolulu Harbor Working Group will later submit a report that
will include 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. Tentatively,
it is expected that this report will be submitted to the DOH in the third
quarter of 1999.
On July 14, 1999, the Honolulu Harbor Working Group engaged PHR Environmental
Consultants, Inc. (PHR) to assist in identifying additional potentially
responsible parties. Preliminary results from PHR are expected later in the
third quarter 1999.
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.
Also, see discussion of the DOH NOV and the EPA NOV issued to HELCO above.
(4) HECO-obligated mandatorily redeemable trust preferred securities of
- -------------------------------------------------------------------------
subsidiary trusts holding solely HECO and HECO-guaranteed 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.
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
13
<PAGE>
earlier than December 15, 2003 or extended to a date no later than December 15,
2047, and are not redeemable at the option of the holders, but may be redeemed
by Trust II, in whole or in part, from time to time, on or after December 15,
2003 or upon the occurrence of certain events. All of the proceeds from the sale
were invested by Trust II in the underlying debt securities of HECO, HELCO and
MECO, who used such proceeds from the sale of the 1998 junior deferrable
debentures primarily to effect the redemption of certain series of their
preferred stock having a total par value of $47 million.
The 1997 and 1998 junior deferrable debentures and the common securities of the
Trusts have been eliminated in HECO's consolidated balance sheets as of June 30,
1999 and December 31, 1998. 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
- -----------------------
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. 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 Financial Accounting Standards Board 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 position and measure those instruments at fair value. In
June 1999, the provisions of SFAS No. 133 were amended by SFAS No. 137 to be
effective for all fiscal quarters of fiscal years beginning after June 15, 2000.
HECO and its subsidiaries will adopt SFAS No. 133, as amended, on January 1,
2001, but management has not yet determined the impact, if any, of adoption.
14
<PAGE>
(6) Summarized financial information
- -------------------------------------
Summarized financial information for HECO's subsidiaries, HELCO and MECO, is as
follows:
<TABLE>
<CAPTION>
Balance sheet data
HELCO MECO
-------------------------------------- ---------------------------------
June 30, December 31, June 30, December 31,
(in thousands) 1999 1998 1999 1998
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Current assets................................ $ 34,148 $ 35,473 $ 35,106 $ 41,103
Noncurrent assets............................. 422,489 424,278 392,328 382,517
-------- -------- -------- --------
$456,637 $459,751 $427,434 $423,620
======== ======== ======== ========
Common stock equity........................... $156,838 $157,269 $161,669 $157,402
Cumulative preferred stock-not subject
to mandatory redemption................... 7,000 7,000 5,000 5,000
Current liabilities........................... 57,078 62,313 30,381 32,052
Noncurrent liabilities........................ 235,721 233,169 230,384 229,166
-------- -------- -------- --------
$456,637 $459,751 $427,434 $423,620
======== ======== ======== ========
</TABLE>
<TABLE>
<CAPTION>
Income statement data
HELCO MECO
--------------------------------------------------- ----------------------------------------------
Three months ended Six months Three months ended Six months
June 30, ended June 30, June 30, ended June 30,
----------------------- ----------------------- ----------------------- -------------------
(in thousands) 1999 1998 1999 1998 1999 1998 1999 1998
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Operating
revenues......... $37,927 $37,602 $74,827 $76,377 $37,299 $32,515 $72,980 $68,245
Operating
income........... 4,442 4,804 9,887 9,370 7,133 4,662 12,153 9,363
Net income for
common stock..... 1,786 4,082 4,709 7,833 4,604 3,598 7,011 7,182
</TABLE>
HECO has not provided separate financial statements and other disclosures
concerning MECO and HELCO because in the opinion of management, such financial
statements and other information are not material to holders of the 1997 and
1998 junior deferrable debentures issued by MECO and HELCO which have been fully
and unconditionally guaranteed by HECO.
15
<PAGE>
(7) Reconciliation of electric utility operating income per HEI and HECO
- --------------------------------------------------------------------------
consolidated statements of income
---------------------------------
<TABLE>
<CAPTION>
Three months ended Six months ended
June 30, June 30,
----------------------------- ---------------------------
(in thousands) 1999 1998 1999 1998
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Operating income from regulated and nonregulated activities
before income taxes (per HEI consolidated statements of
income).................................................... $ 44,336 $ 41,698 $ 85,237 $ 84,259
Deduct:
Income taxes on regulated activities....................... (12,121) (12,558) (22,789) (25,560)
Revenues from nonregulated activities...................... (1,414) (2,344) (2,580) (4,563)
Add:
Expenses from nonregulated activities...................... 123 65 266 268
-------- -------- -------- --------
Operating income from regulated activities after income
taxes (per HECO consolidated statements of income)......... $ 30,924 $ 26,861 $ 60,134 $ 54,404
======== ======== ======== ========
</TABLE>
16
<PAGE>
Excerpts from Management's Discussion and Analysis of Financial Condition and
- -----------------------------------------------------------------------------
Results of Operations
- ---------------------
The following discussion should be read in conjuction with the consolidated
financial statements of HECO and accompanying notes.
RESULTS OF OPERATIONS
<TABLE>
<CAPTION>
Electric utility
- ----------------
Three months ended
June 30,
(in thousands, except per ---------------------------- % Primary reason(s) for significant
barrel amounts) 1999 1998 change change
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Revenues................... $252,272 $244,548 3 3.2% higher KWH sales ($7 million) and
higher rates at MECO ($3 million), partly
offset by lower fuel oil prices, the
effects of which are passed on to
customers ($2 million)
Expenses
Fuel oil................. 47,226 44,449 6 Higher KWHs generated, partly offset by
lower fuel oil prices
Purchased power.......... 67,649 69,091 (2) Lower KWHs purchased and fuel prices
Other.................... 93,061 89,310 4 Higher maintenance and depreciation and
amortization expenses, partly offset by
lower other operation expenses
Operating income........... 44,336 41,698 6 Higher revenues and lower other operation
expenses, partly offset by higher
maintenance and depreciation and
amortization expenses
Net income for
common stock............ 19,224 18,689 3 Higher operating income, partly offset by
lower AFUDC
Kilowatthour sales
(millions).............. 2,219 2,152 3
Fuel oil price per barrel.. $17.88 $18.22 (2)
</TABLE>
17
<PAGE>
<TABLE>
<CAPTION>
Six months ended
June 30,
(in thousands, except per ---------------------------- % Primary reason(s) for significant
barrel amounts) 1999 1998 change change
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Revenues................... $490,063 $502,810 (3) Lower fuel oil prices, the effects of
which are passed on to customers ($22
million), partly offset by 1.8% higher
KWH sales ($7 million) and higher rates
at MECO ($6 million)
Expenses
Fuel oil................. 92,104 101,180 (9) Lower fuel oil prices, partly offset by
higher KWHs generated
Purchased power.......... 127,629 135,674 (6) Lower fuel prices and KWHs purchased
Other.................... 185,093 181,697 2 Higher maintenance and depreciation and
amortization expenses, partly offset by
lower other operation expenses
Operating income........... 85,237 84,259 1 Higher KWH sales and higher rates at MECO
and lower other operation expenses,
partly offset by higher maintenance and
depreciation and amortization expenses
(note: lower revenues were offset by
lower fuel oil and purchased power
expenses and lower taxes, other than
income taxes)
Net income for
common stock............ 36,305 37,951 (4) Higher operating income, more than offset
by lower AFUDC
Kilowatthour sales
(millions).............. 4,354 4,279 2
Fuel oil price per barrel.. $17.41 $20.89 (17)
</TABLE>
Kilowatthour (KWH) sales in the second quarter and first six months of 1999
increased 3.2% and 1.8%, respectively, from the same periods in 1998, partly due
to an increase in the number of customers and warmer weather. Although KWH sales
were higher, electric utility net income decreased 4% during the first six
months of 1999, primarily due to a 27% increase in maintenance expenses,
including a major scheduled combustion turbine overhaul, a 9% increase in
depreciation and amortization expense and a 64% decrease in AFUDC. Depreciation
increased and AFUDC decreased due to the additions to plant in 1998 and the
nonaccrual of AFUDC at Keahole. Partly offsetting the higher other expenses for
the first half of 1999 was a 7% decrease in other operation expenses, primarily
due to lower employee benefits expense.
18
<PAGE>
Updated KWH sales forecast
In May 1999, HECO, HELCO and MECO updated their five-year KWH sales forecast as
follows:
<TABLE>
<CAPTION>
Forecast
Actual ----------------------------------------------------------------------
1998 1999 2000 2001 2002 2003
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Sales (millions of KWH) (1)
HECO (Oahu)....................... 6,938 6,951 6,969 6,991 7,057 7,128
HELCO (Hawaii).................... 903 905 911 919 932 946
MECO (Maui, Lanai, Molokai)....... 1,029 1,056 1,078 1,104 1,133 1,167
----------------------------------------------------------------------------------
Total............................... 8,870 8,912 8,958 9,014 9,122 9,241
==================================================================================
Increase (decrease)
from previous year (%).......... (1.0) 0.5 0.5 0.6 1.2 1.3
==================================================================================
</TABLE>
(1) Assumes, among other things, the impact of demand-side management programs,
normalized weather based on a 23-year average and visitor arrival growth
beginning in 2001 (primarily due to better than expected Westbound
arrivals, and expected improvements in Japan's economy and the value of the
yen).
Competition
The electric utility industry is becoming increasingly competitive. IPPs are
well established in Hawaii and continue to actively pursue new projects.
Customer self-generation, with or without cogeneration, has made inroads in
Hawaii and is a continuing competitive factor. Competition in the generation
sector in Hawaii is moderated, however, by the scarcity of generation sites,
various permitting processes and lack of interconnections to other electric
utilities. HECO 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 proposed "Comprehensive Electricity
Competition Act," submitted to Congress in May 1999, 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, 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 ratemaking (which would include an index-based price cap,
an earnings sharing mechanism and a benchmark incentive plan) and (3) innovative
pricing provisions (including rate restructuring, expanded time-of-use rates,
customer migration rates such as standby charges, flexible pricing to encourage
economic development and to compete with customer generation options, new
service options and two-part rates incorporating real-time pricing). HECO and
its subsidiaries suggest in their statement of position 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 approved HECO's standard form contract for customer
retention, which allows HECO to provide an 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.
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<PAGE>
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.
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 August 2,
1999, 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).
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 the delay in purchasing power from Encogen, HELCO's test year
1999 rate increase application was withdrawn in March 1999. New applications are
expected to be filed closer to the time when the new generation facilities are
expected to be completed.
On July 22, 1999, HELCO filed with the PUC a Notice of Intent to file an
application for an increase in rates based on a 2000 calendar year test period.
A Notice of Intent must be filed at least two months prior to the filing of a
general rate increase application. The increase is primarily to recover (1)
costs relating to an agreement to buy power from Encogen's planned 60 MW plant,
(2) depreciation of and return on additional investments in plant and equipment
since the last rate case, including pre-PSD permit construction at the Keahole
power plant, and (3) increases in other operation and maintenance expenses.
Maui Electric Company, Limited
- ------------------------------
In January 1998, MECO filed a request 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 costs relating 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.
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<PAGE>
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 to customers
because MECO had previously received under the interim D&O $0.4 million annually
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, which were provided as part
of a settlement for a warranty claim. MECO wrote-off the $0.8 million in the
first quarter of 1999.
Year 2000
The following discussion includes forward looking statements related, but not
limited, to the costs of remediation, the effect of such costs on 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. See also the discussion under "Forward-looking information" above.
State of readiness. HECO and its subsidiaries have identified information
- -------------------
technology (IT) and non-IT systems which will require Year 2000 remediation
work. HECO has prioritized these systems by importance, business risk and Year
2000 exposure, allocating resources accordingly. Remediation work for each of
the systems includes an assessment phase, a renovation and validation phase and
an implementation phase. Overall, the assessment phase is substantially complete
for HECO's and its subsidiaries' systems and it is estimated that 70% of the
renovation and validation phase has been completed as of June 30, 1999, with
lesser amounts of work completed on the implementation phase. The scheduled
completion date for each critical system is not later than September 1999,
except as described below.
In December 1998, HECO and its subsidiaries replaced the majority of their
business-critical applications with an integrated application suite that is
represented to be Year 2000 ready. The installation of an integrated application
suite has both simplified and lowered the cost of Year 2000 remediation efforts.
HECO and its subsidiaries have identified third parties with whom they have
significant business relationships and are corresponding with these vendors and
service providers to determine their Year 2000 readiness. Significant third
parties include fuel suppliers, independent power producers, financial
institutions and large customers. Approximately 87% of the vendors contacted
have responded to HECO regarding their compliance. HECO has formed an Oahu Power
Partners Year 2000 Group to provide a forum to share information among HECO,
independent power producers and fuel suppliers. HECO has contracted with two of
its major vendors of power plant equipment for their services in assessing,
remediating and testing their installed control systems. HECO and these vendors
have completed remediation of nine of HECO's 15 generating units which could be
affected by Year 2000 problems and have tested seven of the nine. HECO has
remediated and tested generating units with sufficient generating capacity to
meet projected peak load on Oahu for January 1, 2000. HECO expects to have
remediated the remaining units, needed for reserve capacity in August, September
and November, 1999. HELCO and MECO have remediated and tested generating units
with sufficient generating capacity to meet projected peak load on Hawaii and
Lanai, respectively, for January 1, 2000. By September 1, 1999, MECO expects to
have remediated and tested generating units with sufficient generating capacity
to meet projected peak load on Maui and Molokai for January 1, 2000.
Costs. HECO management believes that the cost to remediate its systems to
- ------
become Year 2000 ready 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 $2.5 million has been incurred through June 30, 1999.
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<PAGE>
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. Because 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, HECO believes 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 developed for HECO and its subsidiaries. HECO and its subsidiaries plan to
have approximately 300 employees on standby on September 9, 1999 and December
31, 1999, and on other critical dates in 1999 and 2000, as deemed necessary.
Work crews will be able to manually operate equipment, making a prolonged power
outage unlikely.
FINANCIAL CONDITION
Liquidity and capital resources
- -------------------------------
Consolidated HECO believes that its ability to generate cash, both internally
from operations and externally from debt and equity issues, is adequate to
maintain sufficient liquidity to fund its construction programs and to satisfy
debt and other cash requirements in the foreseeable future.
Electric utility
HECO's consolidated capital structure was as follows:
<TABLE>
<CAPTION>
(in millions) June 30, 1999 December 31, 1998
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Short-term borrowings from nonaffiliates and
affiliate.................................... $ 123 7% $ 139 8%
Long-term debt................................ 627 37 622 36
HECO-obligated preferred securities of trust
subsidiaries................................. 100 6 100 6
Preferred stock............................... 34 2 81 5
Common stock equity........................... 797 48 787 45
------ ----- ------ -----
$1,681 100% $1,729 100%
====== ===== ====== =====
</TABLE>
Operating activities provided $93 million in net cash during the first six
months of 1999. Investing activities used net cash of $39 million, primarily for
capital expenditures. Financing activities used net cash of $91 million,
including $31 million for the payment of common and preferred dividends and
preferred securities distributions, $42 million for preferred stock redemptions
and $16 million for the net repayment of short-term borrowings, partially offset
by a $5 million net increase in long-term debt.
The electric utilities' consolidated financing requirements for 1999 through
2003, including net capital expenditures, long-term debt retirements, preferred
stock redemptions and sinking fund requirements, are currently estimated to
total $660 million. HECO's consolidated internal sources, after the payment of
common stock and preferred stock dividends, are expected to provide
approximately 79% of the consolidated financing requirements, with debt and
equity financing providing the remaining requirements. As of June 30, 1999, $25
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 June 30, 1999, an additional
$88 million of special purpose revenue bonds were authorized by the Hawaii
Legislature for issuance for the benefit of HECO and MECO prior to the end of
1999 and an additional $100 million of revenue bonds were authorized for
issuance for the benefit of HECO and HELCO prior to the end of 2003. HECO
estimates that it will require approximately $26 million in new common equity,
in addition to retained
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<PAGE>
earnings, over the five-year period 1999 through 2003. The PUC must approve
issuances of long-term debt and equity securities by HECO, HELCO and MECO.
Capital expenditures include the costs of projects which are required to meet
expected load growth, to improve reliability and to replace and upgrade existing
equipment. Net capital expenditures for the five-year period 1999 through 2003
are currently estimated to total $608 million. Approximately 75% 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 25% primarily for generation projects.
For 1999, electric utility net capital expenditures are estimated to be $142
million. Gross capital expenditures are estimated to be $157 million, comprised
of approximately $120 million for transmission and distribution projects, $12
million for new generation projects and $25 million for general plant and
existing generation projects. Drawdowns of proceeds from previous and future
sales of tax-exempt special purpose revenue bonds, sales of common stock to HEI
and the generation of funds from internal sources are expected to provide the
cash needed for the net capital expenditures.
Management periodically reviews capital expenditure estimates and the timing of
construction projects. These estimates may change significantly as a result of
many considerations, including changes in economic conditions, changes in
forecasts of KWH sales and peak load, the availability of purchased power, 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.
Ratio of earnings to fixed charges
The following table sets forth HECO's consolidated ratios of earnings to fixed
charges for the periods indicated:
<TABLE>
<CAPTION>
Six Months
Ended
Years Ended December 31, June 30,
------------------------------------------------------------ --------------------
1994 1995 1996 1997 1998 1998 1999
-------- -------- -------- -------- -------- -------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
Ratio of Earnings to Fixed Charges......... 3.47 3.46 3.58 3.26 3.33 3.13 2.98
======== ======== ======== ======== ======== ======== =========
</TABLE>
In computing the Ratio of Earnings to Fixed Charges, earnings represent Income
Before Preferred Stock Dividends of HECO (reduced by Allowance for Borrowed
Funds Used During Construction) plus federal and state income taxes and fixed
charges. Fixed charges consist of interest on all indebtedness (without
reduction for the Allowance for Borrowed Funds Used During Construction) plus
amortization of net bond premium and expense, pre-tax preferred stock dividend
requirements of MECO and HELCO, the estimated interest component of rentals and
the preferred securities distribution requirements of HECO Capital Trust I and
HECO Capital Trust II.
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<PAGE>
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)
/s/ Robert F. Mougeot /s/ Paul Oyer
- ----------------------------------- -------------------------------------
Robert F. Mougeot Paul A. Oyer
Financial Vice President and Financial Vice President and
Chief Financial Officer of HEI Treasurer
(Principal Financial Officer of HEI) (Principal Financial Officer of HECO)
Date: August 3, 1999 Date: August 3, 1999
24
