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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 and Exchange Act of 1934
Date of Report: April 26, 1999
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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
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State of Hawaii
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(State or other jurisdiction of incorporation)
900 Richards Street, Honolulu, Hawaii 96813
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(Address of principal executive offices and zip code)
Registrant's phone number, including area code:
(808) 543-5662 - Hawaiian Electric Industries, Inc. (HEI)
(808) 543-7771 - Hawaiian Electric Company, Inc. (HECO)
None
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(Former name or former address, if changed since last report)
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Item 5. Other Events
Earnings release
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On April 27, 1999, Hawaiian Electric Industries, Inc. (HEI) issued the following
news release:
HONOLULU -- Hawaiian Electric Industries, Inc. (NYSE-HE) today reported net
income from continuing operations for the three months ended March 31, 1999 of
$20.8 million, or 65 cents per share, compared with $22.8 million, or 72 cents
per share, in the same quarter of 1998.
"Earnings were down for the first quarter, reflecting continued weakness in
Hawaii's economy," said Robert F. Clarke, HEI chairman, president and chief
executive officer. "Utility kilowatthour sales for the quarter were flat
compared to a year ago. Although our utilities continue to cut costs wherever
possible, it has become increasingly difficult to offset higher fixed costs such
as depreciation expense. Our savings bank continues to perform well since the
acquisition of Bank of America's Hawaii operations," said Clarke.
Electric utility net income in the first quarter was $17.1 million versus $19.3
million in the same period last year. Kilowatthour sales were flat. Higher
residential and commercial air conditioning usage due to warmer weather helped
to offset some of the impact of Hawaii's weak economy on kilowatthour sales.
Cooling degree days on Oahu in the first quarter were 4% higher than the year
before. Visitor arrivals in Hawaii through February remained level with the
comparable period of 1998.
Savings bank net income in the first quarter was $8.5 million compared to $8.4
million in the same period last year. The bank's interest rate spread - the
difference between the yield on earning assets and cost of funds - was 3.04% in
the recent quarter versus 3.21% in the same period of 1998. The bank's average
earning assets were up 3% compared to the same quarter of last year.
HEI will hold its annual meeting today at 9:30 a.m. in Honolulu, Hawaii to elect
four directors and an independent auditor and to transact any other business
that properly comes before the meeting.
HEI is a diversified holding company that delivers essential services to the
people of Hawaii. Its core businesses are electric utilities and a savings bank.
Other subsidiaries are involved in maritime freight transportation and
independent power and integrated energy services projects in Asia and the
Pacific.
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Hawaiian Electric Industries, Inc. and subsidiaries
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
<TABLE>
<CAPTION>
Quarters ended Twelve months ended
March 31, March 31,
(in thousands, except per share amounts) 1999 1988 1999 1998
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Revenues
Electric utility $ 237,791 $ 258,262 $ 995,812 $1,092,029
Savings bank 100,280 101,827 408,336 327,050
Other 14,176 14,769 58,406 59,872
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352,247 374,858 1,462,554 1,478,951
------------- ---------- ------------ ----------
Expenses
Electric utility 196,890 215,701 820,022 916,309
Savings bank 85,149 85,776 355,606 274,489
Acquisition costs* - - - 4,056
Other 16,176 16,920 64,709 64,589
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298,215 318,397 1,240,337 1,259,443
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Operating income (loss)
Electric utility 40,901 42,561 175,790 175,720
Savings bank 15,131 16,051 52,730 48,505
Other (2,000) (2,151) (6,303) (4,717)
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54,032 56,461 222,217 219,508
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Interest expense--electric utility and other (17,888) (17,609) (70,803) (64,057)
Allowance for borrowed funds used during construction 640 1,616 4,939 6,279
Preferred stock dividends of electric utility subsidiaries (627) (1,508) (5,124) (6,190)
Preferred securities distributions of trust subsidiaries (3,999) (3,096) (13,460) (12,361)
Allowance for equity funds used during construction 1,039 2,776 8,369 10,967
------------- ---------- ------------ ----------
Income from continuing operations
before income taxes 33,197 38,640 146,138 154,146
Income taxes 12,443 15,821 53,575 59,716
------------- ---------- ------------ ----------
Income from continuing operations 20,754 22,819 92,563 94,430
Discontinued operations, net of income taxes
Loss from operations - (596) (13,002) (5,428)
Loss on disposal - - 3,781 -
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Loss from discontinued operations - (596) (9,221) (5,428)
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Net income $ 20,754 $ 22,223 $ 83,342 $ 89,002
============= ========== ============ ==========
Per common share
Basic earnings (loss) - Continuing operations $ 0.65 $ 0.72 $ 2.89 $ 2.98
- Discontinued operations - (0.02) (0.29) (0.17)
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$ 0.65 $ 0.70 $ 2.60 $ 2.81
============= ========== ============ ==========
Diluted earnings (loss) - Continuing operations $ 0.64 $ 0.71 $ 2.88 $ 2.98
- Discontinued operations - (0.02) (0.29) (0.17)
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$ 0.64 $ 0.69 $ 2.59 $ 2.81
============= ========== ============ ==========
Dividends $ 0.62 $ 0.62 $ 2.48 $ 2.45
============= ========== ============ ==========
Weighted average number of common shares outstanding 32,153 31,958 32,062 31,621
============= ========== ============ ==========
Adjusted weighted average shares 32,236 32,092 32,164 31,724
============= ========== ============ ==========
Income from continuing operations by segment
Electric utility $ 17,081 $ 19,262 $ 78,595 $ 80,287
Savings bank 8,525 8,360 30,428 27,594
Other (4,852) (4,803) (16,460) (13,451)
------------- ---------- ------------ ----------
Income from continuing operations $ 20,754 $ 22,819 $ 92,563 $ 94,430
============= ========== ============ ==========
</TABLE>
* One-time expenses incurred by ASB related to the acquisition in December 1997
of most of Bank of America - Hawaii operations ($2.4 million after tax).
<TABLE>
<S> <C> <C>
Income from continuing operations excluding acquisition costs $ 92,563 $ 96,872
============ ==========
Basic earnings per common share from continuing operations excluding acquisition costs $ 2.89 $ 3.06
============ ==========
</TABLE>
This information 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.
Results of operations for interim periods are not necessarily indicative of
results to be expected for future interim periods or the full year.
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Hawaii Electric Light Company, Inc. (HELCO) power situation
The following discussion updates the disclosure set forth in the Annual Report
on Form 10-K for the year ended December 31, 1998 of HEI and HECO concerning
the status of HELCO's efforts to provide additional generation on the island of
Hawaii.
Background. In 1991, HELCO identified the need, beginning in 1994, for
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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 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. Subject to satisfactory resolution of the CDUP
amendment, PSD permit and other matters, HELCO's current plan continues to
contemplate that CT-4 and CT-5 will be added to its system. HELCO has deferred
plans for ST-7 to approximately 2006 or 2007, unless the Encogen facility
(described below) is not placed in service as planned, and, in December 1998,
removed ST-7 costs from construction work-in-progress as described below.
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
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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 reasonable
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
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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 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 has been a further delay in
HELCO's construction of CT-4 and CT-5. The actual length of the delay will
depend on the actions needed to address the EAB's rulings, but is expected to
delay installation until 2000 or early 2001. Despite this additional delay,
HELCO believes that the PSD permit will eventually be obtained, and CT-4 and CT-
5 will be built. Although management believes it has acted prudently with
respect to this 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 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 determined that ST-7 would not be needed in the immediate future and, in
December 1998, 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.
Declaratory judgment actions. 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. Cross
motions for summary judgment were denied without explanation by orders filed in
March 1998. The court subsequently granted Plaintiffs' motion to clarify the
issues involved in one count of the complaint, but HELCO does not believe that
the court's ruling on this motion or related findings are significant with
respect to the ultimate outcome of the case. In December 1998, the case was set
for jury trial in May 1999. As a result of various motions which have been filed
and ruled upon since that time, on April 12, 1999, the Court ruled that, because
there were no remaining issues of fact in the case, the 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.
In summary, the status of the various counts in the KDC complaint are as
follows:
1. Count I (State Clean Air Act): On April 5, 1999, the Court orally 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 disadvantage HELCO's
Keahole plant by applying the noise standard applicable to the emitter
property (which the DOH claims to be 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
4
<PAGE>
reserved ruling on HELCO's claims or potential claims on estoppel and on the
constitutionality of the noise rules "as applied" to HELCO's Keahole plant.
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 55/45 dBA noise standard to the Keahole
plant.
DOH has not yet formally applied the 55/45 dBA standard to the Keahole
plant. On April 20, 1999, counsel for the DOH sent a letter to counsel for
HELCO, reiterating DOH's "suggestion that HELCO apply for a variance or
noise permit." The letter is not an express finding of any violation and
does not constitute an enforcement action by the DOH. The letter states that
"The Department expressly leaves open the question of the timing of any
future formal requests for compliance or of any enforcement action that the
Department may thereafter deem appropriate."
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, it any, on the CDUP.) Discovery on this
Count was suspended until May 3, 1999.
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.)
Discovery on this Count was suspended until May 3, 1999.
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." herein.)
6. Count VI (amendment of HELCO's land patent): At the March 31, 1999 hearing,
the Court granted Plantiffs' motion for summary judgment, finding that a
1984 amendment 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. While the Count is no longer an issue for trial, BLNR must address
the status of the original land patent in light of the invalidity of the
amendment.
If and when the DOH and BLNR/DLNR act on the issues relating to Counts II, III,
IV and V,and depending upon their rulings, the KDC lawsuit may be moot.
Meanwhile, HELCO intends to vigorously defend against the claims raised in this
case and in related administrative actions and, based on the status of these
matters to date, management believes the final resolution of these matters will
not prevent it from constructing CT-4 and CT-5 at Keahole.
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 Department of Land and Natural Resources of the State of Hawaii (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 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
5
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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.
IPP complaints. Two independent power producers (IPPs), KCP and Enserch
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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, an Enserch
affiliate, both dated October 22, 1997. The agreements were entered into
following a settlement agreement between Enserch and HELCO and are subject
to PUC approval. The parties to the proceeding include HELCO, Encogen and
the Consumer Advocate. Motions to intervene filed by KCP, HCPC and one
other IPP were denied by the PUC. KCP filed a notice of appeal, which was
denied by the Hawaii Circuit Court of the First Circuit by written order
filed on February 8, 1999. The Consumer Advocate filed a Statement of
Position on December 11, 1998, in which it recommended that an evidentiary
hearing be held, following additional discovery, to address its issues and
concerns regarding the agreements. The parties signed an amendment to the
power purchase agreement on January 14, 1999 which, in part, provides that
either party may terminate the agreement if the PUC does not issue an order
within eighteen (18) months (extended from twelve (12) months originally in
the agreement) from the submission of the application. The PUC has
established a schedule of proceedings in 1999 for approval of the
agreement. The schedule provides the PUC with the opportunity to issue a
decision within the amendment's six-month extension period, which ends on
July 16, 1999. The parties have filed direct testimonies, final information
requests (FIRs) and responses to FIRs. On April 9, 1999, HELCO filed a
motion to strike certain portions of the Consumer Advocate's direct
testimony and exhibits relating to the amount of AFUDC included in the
avoided cost calculation for Encogen and on April 21, 1999, the PUC granted
HELCO's motion to strike. Rebuttal testimonies are due on April 29, 1999
and the evidentiary hearing is scheduled to begin on May 4, 1999.
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
6
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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. 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 contract 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
February 1998 for a 30-year contract. 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 (PPA) 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 32MWs 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 1, 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 yet finalized an agreement. Status
reports were filed by HCPC on February 1, 1999 and by HELCO on February 2,
1999 (HELCO had received a one-day extension). In its status report, HELCO
requested a hearing with respect to the pricing and avoided cost issues. On
February 24, 1999, 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 by March 12, 1999. On March 8,
1999, 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.
Management cannot determine at this time whether the PUC will approve the
Encogen power purchase agreement or whether the negotiations with KCP or HCPC or
related PUC proceedings will result in the execution and/or PUC approval of a
power purchase agreement. 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. Management cannot determine at this
time the impact on its plans with regard to the installation of units CT-4 and
CT-5 at the Keahole power plant site if power purchase contracts with two or
more of the IPPs were to be negotiated, approved by the PUC and implemented.
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
alleges that all conditions in Hawaii Administrative Rules 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 constitute violations under the existing permits and
render such permits null and void. The petition requests 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.
7
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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.
Costs 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, 1999,
HELCO's costs incurred in its efforts to put CT-4 and CT-5 into service amounted
to $76.1 million, including approximately $31.2 million for equipment and
material purchases, approximately $23.4 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 (see discussion under "PSD Permit" above).
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,
and the expiration of the HCPC power purchase contract 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 generation planning criteria
until new generation is added. The addition of new generation is not expected
to occur until April 2000, at the earliest. As a result, 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.
Maui Electric Company, Limited (MECO) rate request
- --------------------------------------------------
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 12.75% return on average common
equity (ROACE) and a 1999 test year, primarily to recover the costs related 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 decision and order
(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 to customers
because MECO had previously received under the interim D&0 an interim increase
of $11.7 million in annual revenues, or $0.4 million annually in excess of the
amount that
8
<PAGE>
was finally approved. MECO will refund 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.
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 MW coal-fired power plant to be located
inside Baotou Iron & Steel (Group) Co., Ltd.'s (BaoSteel's) complex in Inner
Mongolia, People's Republic of China. 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. Construction
has commenced and unit 1 is expected to be on line by the end of 2000 and unit 2
six months thereafter. As of March 31, 1999, the HEIPC Group had invested $16
million and is committed to invest up to an additional $84 million toward the
China project.
HEI is currently arranging, on behalf of HEIPC, for the issuance by one or more
U.S. banks of standby letters of credit totaling up to approximately $65
million. The letters of credit are in support of the Tianjiao project and will
secure a portion of the payments that will be due to the project's construction
contractor upon the completion of each of the two units comprising the power
plant. The letters of credit will not shift the construction risk for the
project, which remains with the contractor. It is anticipated that the letters
will be drawn against only if Tianjiao fails to pay after testing and acceptance
of the units.
9
<PAGE>
HEI EXHIBIT 12
Hawaiian Electic Industries, Inc.
Computation of 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.
<TABLE>
<CAPTION>
Years Ended December 31,
--------------------------------------
Three Months Ended
1994 1995 1996 1997 1998 March 31, 1999
---- ---- ---- ---- ---- --------------
<S> <C> <C> <C> <C> <C> <C>
Ratio of Earnings to Fixed
Charges, excluding interest
on ASB deposits
2.31 2.02 1.93 1.89 1.85 1.76
==== ==== ==== ==== ==== ====
Ratio of Earnings to Fixed
Charges, including interest 1.73 1.60 1.56 1.58 1.47 1.43
on ASB deposits ==== ==== ==== ==== ==== ====
------------------------------------------------------------------------------------------
</TABLE>
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 (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 sudsidiaries.
10
<PAGE>
Item 7. Financial Statements and Exhibit
(c) Exhibits.
HEI Exhibit 12 Computation of Ratio of Earnings to Fixed Charges (filed herein
as page 10)
HEI Exhibit 23 Consent of KPMG LLP in connection with Registration Statement
on Form S-3 (Regis. No. 333-73225)
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 of HECO
(Principal Financial Officer of HEI) (Principal Financial Officer of HECO)
Date: April 26, 1999 Date: April 26, 1999
11
<PAGE>
HEI EXHIBIT 23
[KPMG LLP LETTERHEAD]
Accountants' Consent
The Board of Directors
Hawaiian Electric Industries, Inc.:
We consent to the use of our reports dated January 18, 1999 incorporated by
reference in Registration Statement No. 333-73225, and in the related
prospectus, and to the reference to our firm under the heading "EXPERTS" in the
prospectus.
Honolulu, Hawaii
April 27, 1999
