<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: February 24, 2000
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 7. Financial Statements and Exhibits.
(c) Exhibits.
HEI Exhibit 13.1 Pages 26 to 70 of HEI's 1999 Annual Report to Stockholders
HECO Exhibit 13.2 Pages 2 to 34 and 36 of HECO's 1999 Annual Report to
Stockholder
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: February 24, 2000 Date: February 24, 2000
<PAGE>
HEI Exhibit 13.1
<TABLE>
<CAPTION>
Selected Financial Data
- -----------------------------------------------------------------------------------------------------------------------------------
Hawaiian Electric Industries, Inc. and subsidiaries
Years ended December 31 1999 1998 1997 1996 1995
- ----------------------------------------------------------------------------------------------------------------------------------
(dollars in thousands, except per share amounts)
<S> <C> <C> <C> <C> <C>
Results of operations
Revenues.................................................... $1,523,290 $1,485,165 $1,460,427 $1,402,135 $1,291,644
Net income (loss)
Continuing operations................................... $ 92,894 $ 94,628 $ 91,843 $ 80,555 $ 80,114
Discontinued operations................................. 3,953 (9,817) (5,401) (1,897) (2,621)
- -----------------------------------------------------------------------------------------------------------------------------------
$ 96,847 $ 84,811 $ 86,442 $ 78,658 $ 77,493
===================================================================================================================================
Basic earnings (loss) per common share
Continuing operations................................... $ 2.89 $ 2.96 $ 2.93 $ 2.66 $ 2.75
Discontinued operations................................. 0.12 (0.31) (0.17) (0.06) (0.09)
- -----------------------------------------------------------------------------------------------------------------------------------
$ 3.01 $ 2.65 $ 2.76 $ 2.60 $ 2.66
===================================================================================================================================
Diluted earnings per common share........................... $ 3.00 $ 2.64 $ 2.75 $ 2.59 $ 2.65
===================================================================================================================================
Return on average common equity............................. 11.6% 10.3% 10.9% 10.5% 11.0%
===================================================================================================================================
Return on average common equity-
continuing operations *................................ 11.1% 11.5% 11.6% 10.7% 11.4%
===================================================================================================================================
Financial position **
Total assets................................................ $8,291,026 $8,199,260 $7,946,206 $5,925,496 $5,591,401
Deposit liabilities......................................... 3,491,655 3,865,736 3,916,600 2,150,370 2,223,755
Securities sold under agreements to repurchase.............. 661,215 523,800 386,691 479,742 412,521
Advances from Federal Home Loan Bank........................ 1,189,081 805,581 736,474 684,274 501,274
Long-term debt.............................................. 977,529 899,598 794,621 802,126 750,509
HEI- and HECO-obligated preferred securities of
trust subsidiaries....................................... 200,000 200,000 150,000 - -
Preferred stock of subsidiaries
Subject to mandatory redemption......................... - 33,080 35,770 38,955 41,750
Not subject to mandatory redemption..................... 34,406 48,406 48,293 48,293 48,293
Stockholders' equity........................................ 847,586 826,972 814,681 772,852 729,603
Common stock
Book value per common share **.............................. 26.31 25.75 25.54 25.05 24.51
Market price per common share
High.................................................... 40.50 42.56 41.50 39.50 39.75
Low..................................................... 28.06 36.38 32.88 33.25 32.13
December 31............................................. 28.88 40.25 40.88 36.13 38.75
Dividends per common share.................................. 2.48 2.48 2.44 2.41 2.37
Dividend payout ratio....................................... 82% 94% 88% 93% 89%
Dividend payout ratio-continuing operations................. 86% 84% 83% 91% 86%
Market price to book value per common share **.............. 110% 156% 160% 144% 158%
Price earnings ratio ***.................................... 10.0x 13.6x 14.0x 13.6x 14.1x
Common shares outstanding (thousands) **.................... 32,213 32,116 31,895 30,853 29,773
Weighted-average........................................ 32,188 32,014 31,375 30,310 29,187
Stockholders ****........................................... 39,970 40,793 41,430 41,773 40,436
- -----------------------------------------------------------------------------------------------------------------------------------
Employees **................................................ 3,262 3,722 3,672 3,327 3,376
- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
* Net income from continuing operations divided by average common equity.
** At December 31.
*** Calculated using December 31 market price per common share divided by
basic earnings per common share from continuing operations.
**** At December 31. Registered stockholders plus participants in the HEI
Dividend Reinvestment and Stock Purchase Plan who are not registered
stockholders. At February 16, 2000, HEI had 40,467 stockholders.
See Note 4, "Savings bank subsidiary," in the "Notes to Consolidated Financial
Statements" for a discussion of American Savings Bank, F.S.B.'s acquisition of
most of the Hawaii operations of Bank of America, FSB in December 1997.
See Note 17, "Discontinued operations," in the "Notes to Consolidated Financial
Statements" for a discussion of the Company's former residential real estate
development business and property and casualty insurance business.
- --------------------------------------------------------------------------------
26
<PAGE>
Management's Discussion and Analysis of Financial Condition and Results of
--------------------------------------------------------------------------
Operations
----------
The following discussion should be read in conjunction with HEI's consolidated
financial statements and accompanying notes.
Results of operations
---------------------
Hawaiian Electric Industries, Inc. (HEI) and its subsidiaries (collectively, the
Company) reported basic earnings per share from continuing operations of $2.89
in 1999, reflecting the results of the electric utility and savings bank
segments, partly offset by losses in the international power and "other"
segments. Basic earnings per share from continuing operations for 1999 decreased
2% from 1998 in spite of a 1.3% increase in electric utility kilowatthour (KWH)
sales. The electric utilities' net income for 1999 decreased 7% from 1998 as
expenses grew more than revenues and the allowance for funds used during
construction (AFUDC) decreased. American Savings Bank, F.S.B. (ASB) reported 17%
higher net income for 1999 reflecting a higher interest rate spread and the now
fully-integrated Hawaii operations of Bank of America, FSB (BoA), which were
purchased in December 1997. The international power subsidiaries reported a $1.1
million higher loss for 1999 due primarily to increased business development
expenses. The "other" segment reported comparable losses for 1999 and 1998 in
total.
The Company reported basic earnings per share of $3.01 in 1999, up 14% from
1998. 1999 results included a net gain of $4.0 million for the reversal of part
of a loss reserve established in 1998 for discontinued real estate operations
after actual losses on real estate dispositions were less than originally
estimated and certain contractual commitments were successfully renegotiated.
1998 results included a net loss of $23.6 million from the real estate
operations which were discontinued in September 1998 and a net gain of $13.8
million from the settlement with three insurance carriers relating to the
Company's formerly owned property and casualty insurance subsidiary.
The Company from time to time considers various strategies designed to enhance
its competitive position and to increase its ability to anticipate and adapt to
changes in its businesses. These strategies may include the formation of new
subsidiaries or the acquisition of existing businesses. The Company may from
time to time be engaged in preliminary discussions, either internally or with
third parties, regarding potential transactions. Management cannot predict
whether any of these strategies or transactions will be successfully
implemented.
In December 1997, ASB completed the purchase of $0.9 billion of the Hawaii-
based loans and the assumption of $1.7 billion of the Hawaii deposit liabilities
of BoA. The Company also formed HEI Power Corp. (HEIPC) in 1995 to pursue
independent power and integrated energy services projects in Asia and the
Pacific through new wholly owned subsidiaries (collectively, the HEIPC Group).
The HEIPC Group has a 20-year energy conversion agreement with the Guam Power
Authority (GPA), pursuant to which two oil-fired 25 megawatt (MW) (net) units
were repaired and are being operated and maintained, and now has a 75% interest
in a joint venture formed to construct and operate a 200 MW (net) coal-fired
power plant in Inner Mongolia, People's Republic of China, over a period of
approximately 20 years. The HEIPC Group also invested in Cagayan Electric Power
& Light Co., Inc. (CEPALCO) in 1998 and increased its ownership interest in
1999. On February 10, 2000, an indirect subsidiary of HEIPC signed an agreement
to acquire a 50% interest in El Paso Philippines Holding Company, Inc. (EPHC).
The acquisition is subject to several conditions precedent which must be met or
waived before closing, and there can be no assurance that the proposed
acquisition will be completed.
Hawaii's economy has a major influence on HEI's results of operations. After
eight years of flat performance, Hawaii's economy is showing signs of growth.
The economy grew 2.2% in each of 1999 and 1998 after inflation. A significant
factor in this growth has been an increase in tourism, Hawaii's main economic
driver. Total visitor arrivals grew 1.6% in 1999 to 6.8 million, led by a 6.1%
rise in westbound visitors. Although eastbound visitor counts were down
overall, there were signs of a turnaround towards the end of 1999. Hotel
occupancy and average room revenues also increased moderately in 1999. Another
key economic sector, the construction industry, appears to have improved as
indicated by a significant rise in private building permits, the stabilization
of construction jobs, and the start of new private construction projects in
Waikiki. Other signs of a recovering economy include growing employment and
personal income, and declining unemployment rates and bankruptcy filings.
Although there are several positive signs of recovery, Hawaii's economy
remains fragile and recovery will probably be gradual. Tourism, for instance, is
dependent on the health of two principal markets, California and Japan. A
significant downturn in either could derail Hawaii's economic recovery. Also,
the stock of many Hawaii-based companies remains depressed, which could affect
business investments. And rising mortgage rates could also depress real estate
transactions.
The general consensus among Hawaii's economists, however, is that Hawaii's
economy will strengthen in the year 2000 and will continue to grow steadily in
the 2% range over
27
<PAGE>
the next few years. Factors contributing to optimism about future growth include
continued expansion of the U.S. economy, recovering Asian economies, a strong
yen which increases the Japanese purchasing power in Hawaii, steady growth in
personal income, an improving labor situation and a boost in construction
activity.
Following is a general discussion of HEI's consolidated results that should be
read in conjunction with the segment discussions that follow.
<TABLE>
<CAPTION>
Consolidated
- ------------------------------------------------------------------------------------------------------------------------------
% % %
1999 change 1998 change 1997 change
- ------------------------------------------------------------------------------------------------------------------------------
(in millions, except per share amounts)
<S> <C> <C> <C> <C> <C> <C>
Revenues..................................... $1,523 3 $1,485 2 $1,460 4
Operating income............................. 234 4 225 6 213 12
Income from continuing operations............ $ 93 (2) $ 95 3 $ 92 14
Gain (loss) from discontinued operations..... 4 NM (10) NM (6) NM
------ ------ ------
Net income................................... $ 97 14 $ 85 (2) $ 86 10
------ ------ ------
Basic earnings (loss) per share
Continuing operations..................... $ 2.89 (2) $ 2.96 1 $ 2.93 10
Discontinued operations................... 0.12 NM (0.31) NM (0.17) NM
------ ------ ------
$ 3.01 14 $ 2.65 (4) $ 2.76 6
------ ------ ------
Weighted-average number of common shares
outstanding................................. 32.2 1 32.0 2 31.4 4
Dividend payout ratio........................ 82% 94% 88%
Dividend payout ratio -
continuing operations..................... 86% 84% 83%
</TABLE>
NM Not meaningful.
. The 14% increase in 1999 net income over 1998 was due primarily to the
discontinued real estate operations. In 1999, actual losses on real estate
dispositions were less than originally estimated and certain contractual
commitments were successfully renegotiated. Thus, in 1999, the Company reversed
a part of the loss reserve established in 1998 for the discontinued real estate
operations. The decrease in 1999 income from continuing operations from 1998 was
primarily due to a 7% decrease in the electric utilities' net income and a 26%
increase in the international power subsidiaries' net loss, partly offset by a
17% increase in ASB's net income.
. The decrease in 1998 net income from 1997 was due to the loss from the
discontinued real estate operations, partly offset by the settlement received
from director and officer liability insurance carriers. The increase in 1998
income from continuing operations over 1997 was primarily due to a 15% increase
in ASB's net income and a 3% increase in the electric utilities' net income,
partly offset by the higher net loss from the international power and "other"
segments.
. The increase in 1997 net income over 1996 was due to a 76% increase in
ASB's net income, primarily due to the one-time 1996 assessment by the Federal
Deposit Insurance Corporation (FDIC) which led to lower FDIC insurance premiums
in 1997, and a decrease in the net loss from the international power and "other"
segments, partly offset by a 4% decrease in the net income of the electric
utility segment.
. Shareholder dividends are declared and paid quarterly by HEI at the
discretion of HEI's Board of Directors. HEI's Board maintained the 1999 annual
dividends per common share at $2.48. The annual dividend per common share was
$2.48 in 1998 and $2.44 in 1997.
. HEI and its predecessor company, Hawaiian Electric Company, Inc. (HECO),
have paid dividends continuously since 1901. On January 25, 2000, HEI's Board
maintained the quarterly dividend of $0.62 per common share because the Board's
objective of reducing HEI's dividend payout ratio through earnings growth had
not yet been achieved. However, HEI is beginning to see the results of two of
its growth strategies--the acquisition of BoA's Hawaii operations and the
pursuit of independent power and integrated energy services projects in Asia and
the Pacific. When the Board considers its dividend policy in 2001, it will
further evaluate the results of these strategies.
At the indicated annual dividend rate of $2.48 per share and the closing
share price on February 16, 2000 of $29.13, HEI's dividend yield was 8.5%.
28
<PAGE>
Following is a general discussion of revenues, expenses and operating income or
loss by business segment. Segment information is also shown in Note 2 in the
"Notes to Consolidated Financial Statements."
<TABLE>
<CAPTION>
Electric utility
- ----------------------------------------------------------------------------------------------------------------------------
% % %
1999 change 1998 change 1997 change
- ----------------------------------------------------------------------------------------------------------------------------
(in millions, except per barrel amounts and number of employees)
<S> <C> <C> <C> <C> <C> <C>
Revenues /1/................................ $1,055 4 $1,016 (8) $1,108 2
Expenses
Fuel oil................................... 217 11 196 (24) 257 3
Purchased power............................ 276 - 274 (6) 293 2
Other...................................... 387 5 369 (5) 386 4
Operating income............................ 175 (2) 177 3 172 (1)
Allowance for funds used
during construction................... 7 (58) 16 (6) 17 (3)
Net income.................................. 75 (7) 81 3 78 (4)
Return on average common equity............. 9.4% 10.4% 10.3%
Average price per barrel of fuel oil /1/.... $20.46 7 $19.14 (24) $25.19 5
Kilowatthour sales.......................... 8,985 1 8,870 (1) 8,963 -
Number of employees (at December 31)........ 1,975 (2) 2,020 (4) 2,115 (2)
</TABLE>
/1/ The rate schedules of the electric utilities contain energy cost adjustment
clauses through which changes in fuel oil prices and certain components of
purchased energy costs are passed on to customers.
. In 1999, the electric utilities' revenues increased by 4%, or $39 million,
from 1998. Of this $39 million increase, $21 million was due to higher fuel oil
prices, $12 million was due to a 1.3% increase in KWH sales of electricity and
the remainder was due primarily to higher rates at Maui Electric Company,
Limited (MECO). The increase in KWH sales was primarily due to an increase in
the number of customers and the slight improvement in Hawaii's economy, partly
offset by cooler temperatures which result in lower residential and commercial
air conditioning usage. In spite of the higher KWH sales, operating income for
1999 decreased 2% compared to 1998 due to higher expenses. Fuel oil expense
increased 11% due primarily to higher fuel oil prices and more KWHs generated.
The 5% increase in other expenses was due to a 4% increase in other operation
and maintenance expenses, a 4% increase in taxes, other than income taxes,
resulting from increased revenues, and a 9% increase in depreciation expense as
a result of plant additions. Other operation and maintenance expenses in 1999
increased primarily due to more generating unit overhaul work and more
transmission and distribution maintenance work, partly offset by lower employee
benefit costs, including lower pension and other postretirement benefit
expenses. AFUDC for 1999 was significantly lower than 1998 due to a lower base
on which AFUDC is calculated, including the termination of AFUDC related to the
expansion of the Keahole power plant (see "HELCO power situation" in Note 3 of
the "Notes to Consolidated Financial Statements").
. In 1998, the electric utilities' revenues decreased from 1997 by 8%, or $92
million due to lower fuel oil prices ($82 million) and a 1.0% decrease in KWH
sales of electricity ($10 million). The decrease in KWH sales was partly due to
Hawaii's slow economy and partly due to cooler temperatures, which result in
lower residential and commercial air conditioning usage. The combined 14%
decrease in fuel oil and purchased power expenses is primarily due to lower fuel
oil prices, fewer KWHs purchased and better generating unit efficiency. The 5%
decrease in other expenses was due to a 6% decrease in other operation and
maintenance expenses and an 8% decrease in taxes, other than income taxes,
resulting from decreased revenues. The decreases were partly offset by a 4%
increase in depreciation expense as a result of plant additions. Other operation
and maintenance expenses in 1998 decreased primarily due to lower employee
benefit costs, including lower pension costs and negotiated bargaining unit
benefit changes, less generating unit overhaul and corrective maintenance work,
and other cost containment and productivity improvement efforts. Throughout
1998, salaries and wages were frozen. In spite of the lower KWH sales, operating
income for 1998 increased 3% compared to 1997 due to the lower expenses.
29
<PAGE>
. In 1997, the electric utilities' revenues increased 2% over 1996, primarily
due to higher fuel oil prices; the recovery of integrated resource planning
related costs (including demand-side management (DSM) program costs, lost
margins and shareholder incentives related to the DSM programs) and higher
rates. The increases were partly offset by a 0.3% decrease in KWH sales of
electricity, partly due to cooler weather and Hawaii's slow economy. Fuel oil
and purchased power expenses increased 2% primarily due to higher fuel oil
prices. The 4% increase in other expenses was due to a 4% increase in other
operation expenses, a 12% increase in depreciation expense as a result of plant
additions and a 3% increase in taxes, other than income taxes, resulting from
increased revenues. Other operation expenses in 1997 increased primarily due to
higher integrated resource planning related costs (including DSM program costs).
Operating income for 1997 decreased 1% compared to 1996 due to the lower KWH
sales and increased expenses, partly offset by the effects of rate increases and
DSM program related shareholder incentives.
Competition
The electric utility industry is becoming increasingly competitive. Independent
power producers 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 and its subsidiaries have been able to compete
successfully by offering customers economic alternatives that, among other
things, employ energy efficient electrotechnologies such as the heat pump water
heater.
Legislation has been introduced in Congress to facilitate competition in the
electric utility industry. The bills generally respect the state's right to
implement retail wheeling and in one case has exempted Hawaii and Alaska due to
their lack of interties. The proposed "Comprehensive Electricity Competition
Act," submitted to Congress in May 1999, includes a provision that would allow
states to "opt out" of the proposed retail competition deadline of January 1,
2003.
On December 30, 1996, the Public Utilities Commission of the State of Hawaii
(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 "Competition proceeding," in Note 3 of the
"Notes to Consolidated Financial Statements."
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 February 16,
2000, the return on average common equity (ROACE) found by the PUC to be
reasonable in the most recent final rate decision for each utility was 11.4% for
HECO (D&O issued on December 11, 1995 and based on a 1995 test year), 11.65% for
Hawaii Electric Light Company, Inc. (HELCO) (D&O issued on April 2, 1997 and
based on a 1996 test year) and 10.94% for MECO (amended D&O issued on April 6,
1999 and based on a 1999 test year). For 1999, the actual simple average ROACE
(calculated under the rate-making method and reported to the PUC) for HECO,
HELCO and MECO were 10.41%, 7.56% and 9.64%, respectively.
Hawaii Electric Light Company, Inc. In October 1999, HELCO filed a request to
- -----------------------------------
increase rates by 9.6%, or $15.5 million in annual revenues, based on a 2000
test year, primarily to recover (1) costs relating to an agreement to buy power
from the 60 MW plant of Hamakua Energy Partners, L.P., formerly known as Encogen
Hawaii, L.P. (Hamakua Partners) and (2) depreciation of and a return on
additional investments in plant and equipment since the last rate case,
including pre-air permit facilities placed in service at the Keahole power
plant. In its application, HELCO presented evidence to justify an ROACE of 13.5%
for the 2000 test year.
30
<PAGE>
The timing of a future HELCO rate increase request, if any, to recover costs
relating to adding CT-4 and CT-5 will depend on future circumstances. See
"HELCO power situation," in Note 3 of the "Notes to Consolidated Financial
Statements."
Maui Electric Company, Limited. In January 1998, MECO filed a request to
- ------------------------------
increase rates, based on a 1999 test year, 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 and 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.
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 1999.
Later this year, MECO expects to file a rate increase request, based on a 2001
test year, primarily to recover costs relating to the addition of generating
unit M19 in early 2001.
Energy cost adjustment clauses
The rate schedules of the electric utility subsidiaries include energy cost
adjustment clauses under which electric rates are adjusted for changes in the
weighted-average price paid for fuel oil and certain components of purchased
power, and the relative amounts of company-generated power and purchased power.
Accordingly, changes in fuel oil prices and certain components of purchased
power costs are passed on to customers. In the December 30, 1997 D&Os approving
HECO and its subsidiaries' fuel supply contracts, the PUC noted that, in light
of the length of the fuel supply contracts and the relative stability of fuel
prices, the need for the continued use of energy cost adjustment clauses will be
the subject of investigation in a generic docket or in a future rate case. In
MECO's and HELCO's rate increase applications based on a 1999 and 2000 test
year, respectively, each company stated that it believed that its energy cost
adjustment clause continues to be necessary. In the amended final D&O for MECO's
1999 test year rate increase application, MECO's energy cost adjustment clause
was continued.
Accounting for the effects of certain types of regulation
In accordance with Statement of Financial Accounting Standards (SFAS) No. 71,
"Accounting for the Effects of Certain Types of Regulation," the Company's
financial statements reflect assets and costs of HECO and its subsidiaries based
on current cost-based rate-making regulations. Management believes HECO and its
subsidiaries' operations currently satisfy the SFAS No. 71 criteria. However, if
events or circumstances should change so that those criteria are no longer
satisfied, management believes that a material adverse effect on the Company's
results of operations, financial position or liquidity may result. See Notes 1,
3 and 6 in the "Notes to Consolidated Financial Statements."
Commitments and contingencies
See "Commitments and contingencies," in Note 3 of the "Notes to Consolidated
Financial Statements."
<TABLE>
<CAPTION>
Savings bank
- -----------------------------------------------------------------------------------------------------------------------------
% % %
1999 change 1998 change 1997 change
- -----------------------------------------------------------------------------------------------------------------------------
(in millions)
<S> <C> <C> <C> <C> <C> <C>
Revenues.................................... $ 410 - $ 410 39 $ 294 8
Net interest income......................... 173 6 164 45 113 11
Operating income............................ 60 12 54 20 45 71
Net income.................................. 35 17 30 15 26 76
Return on average common equity............. 10.2% 9.2% $ 11.0%/1/
Interest-earning assets
Average balance /1/........................ $5,305 2 $5,187 40 $ 3,708 11
Weighted-average yield..................... 7.16% (2) 7.34% (2) 7.49% (2)
Interest-bearing liabilities
Average balance /1/........................ $5,212 2 $5,126 43 $ 3,586 11
Weighted-average rate...................... 3.97% (6) 4.23% (8) 4.59% (3)
Interest rate spread........................ 3.19% 3 3.11% 7 2.90% 1
</TABLE>
/1/ Calculated using the average month-end balances during the years.
31
<PAGE>
Earnings of ASB depend primarily on net interest income, the difference between
interest income earned on interest-earning assets (loans receivable,
mortgage/asset-backed securities and investments) and interest expense incurred
on interest-bearing liabilities (deposit liabilities and borrowings). ASB's loan
volumes and yields are affected by market interest rates, competition, demand
for real estate financing, availability of funds and management's responses to
these factors. Other factors affecting ASB's operating results include income
from servicing loans and expenses from operations.
Deposits traditionally have been the principal source of ASB's funds for use
in lending, meeting liquidity requirements and making investments. ASB also
derives funds from borrowings, payments of interest and principal on outstanding
loans receivable and mortgage/asset-backed securities, and other sources. In
recent years, advances from the Federal Home Loan Bank (FHLB) of Seattle and
securities sold under agreements to repurchase have become more significant
sources of funds as the demand for deposits has decreased due in part to
increased competition from money market and mutual funds. Using sources of funds
with a higher cost than deposits, such as advances from the FHLB, puts downward
pressure on ASB's net interest income.
In December 1997, ASB was able to grow significantly through the acquisition
of loans and other assets and the assumption of $1.7 billion of deposits and
other liabilities from BoA.
. ASB's 1999 revenues were comparable to 1998 due to a 2% higher average
balance of interest-earning assets, offset by a 2% lower weighted-average yield
on interest-earning assets. Net interest income in 1999 increased 6% over 1998
due to the higher volume of business and a higher interest rate spread--the
difference between the weighted-average yield on interest-earning assets and the
weighted-average rate on interest-bearing liabilities. The decrease in rates
paid on ASB's passbook and savings accounts (reduced 50 basis points) and
checking accounts (reduced 25 basis points), effective October 1, 1998,
contributed to the increase in ASB's interest rate spread. Partly offsetting the
higher net interest income in 1999 were higher general and administrative
expenses, including higher compensation and employee benefits, higher office
occupancy and equipment expenses, and an increase in the provision for loan
losses. As of December 31, 1999 and 1998, ASB's allowance for loan losses were
$35.3 million and $39.8 million, respectively. In 1999, management disposed of
nonperforming loans at a loss, which resulted in higher charge-offs. ASB's ratio
of net charge-offs to average loans outstanding was 0.66% for 1999 compared to
0.13% for 1998 and an annualized 0.13% for all U.S. thrifts for the first nine
months of 1999. On the positive side, ASB's nonaccrual and renegotiated loans
represented 2.3% of total loans outstanding at December 31, 1999 compared to
3.1% a year earlier. Consulting fees for 1999 decreased as 1998 fees included
the costs to integrate the BoA operations (including consulting expenditures to
consolidate and streamline operations). Year 2000 remediation expenses were
comparable in 1999 and 1998 at approximately $2.7 million.
. ASB's 1998 revenues increased 39% over 1997 due to a 40% higher average
balance of interest-earning assets, reflecting the December 1997 BoA acquisition
and a higher demand for residential lending as the relatively low interest rate
environment resulted in strong refinancing activity. 1998 net interest income
increased 45% over 1997 due to the higher volume of business and a higher
interest rate spread. Contributing to the increase in ASB's interest rate spread
was the higher spread on the earning assets and interest-bearing liabilities
acquired from BoA and the decrease in rates paid on ASB's passbook, savings and
checking accounts, effective October 1, 1998.
The significant increase in operating income in 1998 reflected the full year
of earnings from the acquired BoA Hawaii operations. The higher results and 9.2%
ROACE for 1998, however, were not as high as expected, partly due to the effects
of a flat yield curve, rising delinquencies, Year 2000 remediation expenses and
the costs to integrate the BoA operations. With the slow Hawaii economy leading
to higher delinquencies, ASB's allowance for loan losses increased by $10
million to $40 million in 1998. ASB's ratio of net charge-offs to average loans
outstanding, however, still remained relatively low at 0.13% compared to 0.25%
for all U.S. thrifts for 1998.
Despite a 20% increase in operating income, ASB and subsidiaries' 1998 income
taxes were flat compared to 1997 income taxes. In March 1998, ASB formed a
subsidiary, ASB Realty Corporation, which elects to be taxed as a real estate
investment trust. This reorganization reduced ASB's state income taxes by $2.5
million in 1998 and $2.8 million in 1999. Although the State of Hawaii has
indicated in a tax information release that it may challenge the tax treatment
of this reorganization, ASB believes that its tax position is proper.
32
<PAGE>
. ASB's 1997 revenues increased 8% over 1996 due to an 11% higher average
balance of interest-earning assets, partly offset by lower yields. 1997 net
interest income increased 11% over 1996 due to a slightly higher net average
balance of interest-earning assets and a slightly higher interest rate spread.
One of the primary factors contributing to the increase in ASB's interest rate
spread was the decrease in rates paid on ASB's deposits commencing in November
1996. Excluding the effects of the 1997 acquisition expenses ($2.4 million after
tax) and the one-time 1996 FDIC assessment ($8.3 million after tax), operating
and net income were up 22% and 23%, respectively, compared to 1996 due to higher
net interest income and lower deposit insurance premiums, partly offset by
higher employee expenses.
Loans receivable increased a net 52% in 1997, primarily due to the purchase
of Hawaii-based BoA loans. However, higher unemployment and other factors
contributed to increased loan delinquencies. Taking into account the BoA
acquisition, in 1997 ASB's allowance for loan losses increased by $11 million to
$30 million. ASB's ratio of net charge-offs to average loans outstanding,
however, remained relatively low at 0.12% compared to 0.29% for all U.S. thrifts
for 1997.
<TABLE>
<CAPTION>
International Power
- ------------------------------------------------------------------------------------------------------------------------
% % %
1999 change 1998 change 1997 change
- ------------------------------------------------------------------------------------------------------------------------
(in millions)
<S> <C> <C> <C> <C> <C> <C>
Revenues.................................... $ 4 (6) $ 5 58 $ 3 767
Operating loss.............................. (5) (50) (3) (59) (2) 22
</TABLE>
HEIPC was formed in March 1995 and its subsidiaries have been and will be formed
from time to time to pursue independent power and integrated energy services
projects in Asia and the Pacific. The HEIPC Group had consolidated operating
losses of $4.7 million in 1999, $3.2 million in 1998 and $2.0 million in 1997.
The increase in the 1999 operating loss was due to increased business
development expenses and a unit mechanical failure in Guam, partly offset by
1999 dividends from an investment in the Philippines. The increase in the 1998
operating loss was due to increased China business development expenses, partly
offset by operating income from the Guam project. The decrease in operating loss
for 1997 was due to operating income from the Guam project.
In September 1996, HEI Power Corp. Guam (HPG), entered into an energy
conversion agreement for approximately 20 years with the GPA, pursuant to which
HPG has repaired and is operating and maintaining two oil-fired 25 MW (net)
units at Tanguisson, Guam. HPG's total cost to repair the two units was $15
million. In 1999, a mechanical failure of one of the units resulted in
additional expenses and lost revenues for HPG of approximately $1 million. HPG
may be able to recover some or all of this amount from various parties,
including an insurance carrier. The unit has been fully operational since
September 1999.
The GPA project site is contaminated with oil from spills occurring prior to
HPG's assuming operational control. HPG has agreed to manage the operation and
maintenance of GPA's waste oil recovery system at the project site consistent
with GPA's oil recovery plan as approved by the U.S. Environmental Protection
Agency. GPA, however, has agreed to indemnify and hold HPG harmless from any
pre-existing environmental liability.
In 1998 and 1999, the HEIPC Group acquired what is now a 75% interest in a
joint venture, Baotou Tianjiao Power Co., Ltd., formed to design, construct,
own, operate and manage a 200 MW (net) coal-fired power plant to be located
inside Baotou Iron & Steel (Group) Co., Ltd.'s complex in Inner Mongolia,
People's Republic of China. See "China project," in Note 5 of the "Notes to
Consolidated Financial Statements."
In December 1998, the HEIPC Group invested $7.6 million to acquire convertible
cumulative nonparticipating 8% preferred shares in CEPALCO, an electric
distribution company in the Philippines. In September 1999, the HEIPC Group also
acquired 5% of the outstanding CEPALCO common stock for $2.1 million. The
acquisitions were strategic moves to put the HEIPC Group in a position to
participate in the anticipated privatization of the National Power Corporation
and growth in the electric distribution business in the Philippines.
33
<PAGE>
The HEIPC Group has invested approximately $49 million and at December 31,
1999 was committed to invest up to an additional $86 million in foreign power
projects, subject to certain conditions.
On February 10, 2000, an indirect subsidiary of HEIPC signed an agreement to
acquire a 50% interest in EPHC, which is an indirect subsidiary of El Paso
Energy Corporation, for $87 million plus up to an additional $6 million of
contingent payments. The acquisition is subject to several conditions precedent
which must be met or waived before closing. EPHC owns approximately 91.7% of the
common shares of East Asia Power Resources Corporation, a Philippines holding
company primarily engaged in the electric generation business in Manila and Cebu
through its direct and indirect subsidiaries, using land and barge-based
generating facilities, fired by bunker fuel oil, with total installed capacity
of approximately 390 MW.
The HEIPC Group is actively pursuing other projects in Asia and the Pacific,
which are subject to approval of the HEIPC and HEI Boards of Directors. The
success of any project undertaken by the HEIPC Group will be dependent on many
factors, including the economic, political, monetary, technological, regulatory
and logistical circumstances surrounding each project and the location of the
project. Due to political or regulatory actions or other circumstances, projects
may be delayed or even prohibited. There is no assurance that any project
undertaken by the HEIPC Group will be successfully completed or that the HEIPC
Group's investment in any such project will not be lost, in whole or in part.
<TABLE>
<CAPTION>
Other
- ------------------------------------------------------------------------------------------------------------------------------
% % %
1999 change 1998 change 1997 change
- ------------------------------------------------------------------------------------------------------------------------------
(in millions)
<S> <C> <C> <C> <C> <C> <C>
Revenues.................................... $ 54 (1) $ 54 (3) $ 56 13
Operating income (loss)..................... 4 NM (3) (84) (2) 75
</TABLE>
NM Not meaningful.
The "other" business segment includes results of operations of The Old Oahu Tug
Service, Inc., formerly named Hawaiian Tug & Barge Corp. (HTB), and its formerly
owned subsidiary, Young Brothers, Limited (YB), maritime freight transportation
companies which were sold or shutdown in the fourth quarter of 1999; HEI
Investment Corp. (HEIIC), a company primarily holding investments in leveraged
leases; Pacific Energy Conservation Services, Inc., a contract services company
primarily providing windfarm operational and maintenance services to an
affiliated electric utility; HEI District Cooling, Inc., a company formed to
develop, build, own, lease, operate and/or maintain central chilled water,
cooling system facilities, and other energy related products and services;
ProVision Technologies, Inc., a company formed to sell, install, operate and
maintain on-site power generation equipment and auxiliary appliances in Hawaii
and the Pacific Rim; HEI Properties, Inc., a company formed to hold real estate
and related assets; Hawaiian Electric Industries Capital Trust I, HEI Preferred
Funding, LP and Hycap Management, Inc., companies formed primarily for the
purpose of effecting the issuance in 1997 of 8.36% Trust Originated Preferred
Securities; HEI and HEI Diversified, Inc. (HEIDI), holding companies; and
eliminations of intercompany transactions.
. In November 1999, HTB sold YB and substantially all of its operating assets
for a nominal gain. The freight transportation subsidiaries recorded operating
income of $5.9 million in 1999, $5.0 million in 1998 and $2.2 million in 1997.
Operating income in 1999 increased primarily due to a pension settlement and
curtailment gain resulting from the transfer of active employees to a subsidiary
of the purchaser of YB. Operating income in 1998 was higher than 1997 due to
higher general freight revenues, resulting from increased rates and cargo moved,
and lower operating expenses, resulting from lower labor related expenses and a
sailing schedule modification. Operating income in 1997 was lower than 1996 due
largely to a 19% increase in maintenance expenses, primarily for barges and
equipment.
. HEIIC recorded operating income of $5.1 million in 1999, $0.8 million in 1998
and $4.6 million in 1997. In 1999, HEIIC recorded $3.7 million in pretax income
resulting from the elimination of a loss accrual. In 1997, HEIIC recognized $3.9
million in pretax income, its proportionate share of income from an investment
in UTECH Venture Capital Corporation, which liquidated its investment in Ciena
Corporation.
. The corporate and other subsidiaries' operating loss was $7.5 million in
1999, $9.1 million in 1998 and $8.6 million in 1997. In 1999, HEI recorded $1.1
million of pretax income compared to $1.0 million of pretax expense in 1998 for
outstanding stock options, reflecting the decline in HEI's stock price.
34
<PAGE>
Discontinued operations
See Note 17 in the "Notes to Consolidated Financial Statements."
Environmental matters
- --------------------------------------------------------------------------------
HEI and its subsidiaries are subject to environmental laws and regulations which
could potentially impact the Company in material adverse respects in terms of
operating existing facilities, constructing and operating new facilities and
ensuring the proper cleanup and disposal of hazardous waste and toxic
substances. Management believes that the recovery through rates of most, if not
all, of any costs incurred by HECO and its subsidiaries in complying with these
environmental requirements would be allowed by the PUC. Based on information
available to the Company, management is not aware of any contingent liabilities
relating to environmental matters that would have a material adverse effect on
the Company.
Also, see the HPG discussion under "International Power" above and Note 3 in
the "Notes to Consolidated Financial Statements."
Year 2000 issue
- --------------------------------------------------------------------------------
The Company successfully addressed Year 2000 date issues with no major
disruptions of its business operations, no power outages and no major problems
with vendors. The cost of initiatives undertaken primarily for Year 2000
remediation is estimated to total $10.9 million, of which $4.3 million was
incurred by the electric utilities (including $0.2 million of capitalized
amounts) and $5.9 million by the savings bank (including $0.5 million of
capitalized amounts). No significant expenditures are anticipated for Year 2000
date issues in the future.
Effects of inflation
- --------------------------------------------------------------------------------
U.S. inflation, as measured by the U.S. Consumer Price Index, averaged 2.2% in
1999, 1.6% in 1998 and 2.3% in 1997. Hawaii inflation, as measured by the
Honolulu Consumer Price Index, averaged an estimated 0.5% in 1999, (0.2)% in
1998 and 0.7% in 1997. Although the rate of inflation over the past three years
has been relatively low compared with the late 1970's and early 1980's,
inflation continues to have an impact on HEI's operations.
Inflation increases operating costs and the replacement cost of assets.
Subsidiaries with significant physical assets, such as the electric utilities,
replace assets at much higher costs and must request and obtain rate increases
to maintain adequate earnings. In the past, the PUC has generally approved rate
increases to cover the effects of inflation. In 1999 and 1997 the electric
utilities received rate increases, in part to cover increases in construction
costs and operating expenses due to inflation.
Recent accounting pronouncements
- --------------------------------------------------------------------------------
See "Recent accounting pronouncements," in Note 1 of the "Notes to Consolidated
Financial Statements."
Liquidity and capital resources
-------------------------------
Consolidated
- --------------------------------------------------------------------------------
The Company believes that its ability to generate cash, both internally from
operations and externally from debt and equity issues, is adequate to maintain
sufficient liquidity to fund its construction programs and investments and to
cover debt and other cash requirements in the foreseeable future.
The Company's total assets were $8.3 billion and $8.2 billion at December 31,
1999 and 1998, respectively. Asset growth in 1999 primarily stemmed from the
growth in ASB's investment and mortgage/asset-backed securities and loans. Asset
growth in 1998 primarily stemmed from the growth in loans and cash at ASB and
the electric utilities' capital expenditures program.
The consolidated capital structure of HEI was as follows:
<TABLE>
<CAPTION>
December 31 1999 1998
- --------------------------------------------------------------------------------------------------------------------
(in millions)
<S> <C> <C> <C> <C>
Short-term borrowings........................................... $ 152 7% $ 223 10%
Long-term debt.................................................. 978 44 900 40
HEI- and HECO-obligated preferred securities of trust
subsidiaries................................................... 200 9 200 9
Preferred stock of subsidiaries................................. 34 2 81 4
Minority interests.............................................. 1 - 4 -
Common stock equity............................................. 848 38 827 37
- --------------------------------------------------------------------------------------------------------------------
$2,213 100% $2,235 100%
====================================================================================================================
</TABLE>
35
<PAGE>
ASB's deposit liabilities, securities sold under agreements to repurchase and
advances from the FHLB of Seattle are not included in the table above.
As of February 16, 2000, the Standard & Poor's (S&P) and Moody's Investors
Service's (Moody's) ratings of HEI's and HECO's securities were as follows:
<TABLE>
<CAPTION>
S&P Moody's
- ------------------------------------------------------------------------------------------------
HEI
- ---
<S> <C> <C>
Commercial paper....................................................... A-2 P-2
Medium-term notes...................................................... BBB Baa2
HEI-obligated preferred securities of trust subsidiary................. BB+ baa3
HECO
- ----
Commercial paper....................................................... A-2 P-2
Revenue bonds (insured)................................................ AAA Aaa
Revenue bonds (noninsured)............................................. BBB+ Baa1
HECO-obligated preferred securities of trust subsidiaries.............. BBB- baa1
Cumulative preferred stock (selected series)........................... nr baa2
</TABLE>
nr Not rated.
The above ratings are not recommendations to buy, sell or hold any securities;
such ratings may be subject to revision or withdrawal at any time by the rating
agencies; and each rating should be evaluated independently of any other rating.
Neither HEI nor HECO management can predict with certainty future rating agency
actions or their effects on the future cost of capital to HEI or HECO.
Operating activities provided net cash of $209 million in 1999, $225 million
in 1998 and $152 million in 1997. Investing activities used net cash of $428
million in 1999, $233 million in 1998 and $208 million in 1997. In 1999, net
cash used for investing activities consisted primarily of the purchase of
mortgage/asset-backed and investment securities and the origination of loans
(net of repayments) and capital expenditures, partly offset by the proceeds from
the sale of HTB assets (including the stock of YB). Financing activities
provided net cash of $2 million in 1999, $161 million in 1998 and $214 million
in 1997. In 1999, cash from financing activities was provided by the net
increases in certain liabilities (advances from the FHLB of Seattle, securities
sold under agreements to repurchase and long-term debt), mostly offset by net
decreases in deposit liabilities and short-term borrowings, the redemption of
certain series of the electric utilities subsidiaries' preferred stock and the
payment of common stock dividends and trust preferred securities distributions.
A portion of the net assets of HECO and ASB is not available for transfer to
HEI in the form of dividends, loans or advances without regulatory approval.
However, such restrictions are expected to not significantly affect the
operations of HEI, its ability to pay dividends on its common stock or its
ability to meet its cash obligations. See Note 15 in the "Notes to Consolidated
Financial Statements."
Total HEI consolidated financing requirements for 2000 through 2004, including
net capital expenditures (which exclude the allowance for funds used during
construction and capital expenditures funded by third-party cash contributions
in aid of construction), long-term debt retirements (excluding repayments of
advances from the FHLB of Seattle and securities sold under agreements to
repurchase) and preferred stock retirements, are estimated to total $1.2
billion. Of this amount, approximately $0.8 billion is for net capital
expenditures (mostly relating to the electric utilities' net capital
expenditures described below). HEI's consolidated internal sources, after the
payment of HEI dividends, are expected to provide approximately 66% of the
consolidated financing requirements, with debt and equity financing providing
the remaining requirements. Additional debt and equity financing may be required
to fund activities not included in the 2000 through 2004 forecast, such as the
development of additional independent power projects by the HEIPC Group in Asia
and the Pacific, or to fund changes in requirements, such as increases in the
amount of or an acceleration of capital expenditures of the electric utilities.
36
<PAGE>
Following is a discussion of the liquidity and capital resources of HEI's
largest segments.
Electric utility
- --------------------------------------------------------------------------------
HECO's consolidated capital structure was as follows:
<TABLE>
<CAPTION>
December 31 1999 1998
- ---------------------------------------------------------------------------------------------------------------
(in millions)
<S> <C> <C> <C> <C>
Short-term borrowings from nonaffiliates and affiliate...... $ 107 6% $ 139 8%
Long-term debt.............................................. 646 38 622 36
HECO-obligated preferred securities of trust subsidiaries... 100 6 100 6
Preferred stock
Subject to mandatory redemption............................ - - 33 2
Not subject to mandatory redemption........................ 34 2 48 3
Common stock equity......................................... 806 48 787 45
- ---------------------------------------------------------------------------------------------------------------
$1,693 100% $1,729 100%
===============================================================================================================
</TABLE>
In 1999, the electric utilities' investing activities used $91 million in cash,
primarily for capital expenditures. Financing activities used net cash of $120
million, including $65 million for the payment of common and preferred stock
dividends and preferred securities distributions, $47 million for preferred
stock redemptions and $32 million for the net repayment of short-term
borrowings, partially offset by a $24 million net increase in long-term debt.
Operating activities provided $159 million toward capital expenditures,
preferred stock redemptions and other cash requirements.
The electric utilities' consolidated financing requirements for 2000 through
2004, including net capital expenditures and long-term debt and preferred stock
retirements, are estimated to total $595 million. HECO's consolidated internal
sources, after the payment of common stock and preferred stock dividends, are
expected to provide cash in excess of the consolidated financing requirements
and may also be used to repay short-term borrowings.
As of December 31, 1999, $40 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, HELCO and MECO remains undrawn.
Also as of December 31, 1999, an additional $65 million of special purpose
revenue bonds was authorized by the Hawaii Legislature for issuance for the
benefit of HECO and HELCO prior to the end of 2003. HECO does not anticipate the
need to issue new common equity over the five-year period. The PUC must approve
issuances, if any, of long-term 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 2000 through 2004
are currently estimated to total $571 million. Approximately 70% of forecast
gross capital expenditures, which includes the allowance for funds used during
construction and capital expenditures funded by third-party cash contributions
in aid of construction, is for transmission and distribution projects, with the
remaining 30% primarily for generation projects.
For 2000, electric utility net capital expenditures are estimated to be $140
million. Gross capital expenditures are estimated to be $161 million, including
approximately $109 million for transmission and distribution projects,
approximately $39 million for generation projects and approximately $13 million
for general plant and other projects. Drawdowns of proceeds from previous and
future sales of tax-exempt special purpose revenue bonds and the generation of
funds from internal sources are expected to provide the cash needed for the net
capital expenditures in 2000.
37
<PAGE>
Management periodically reviews capital expenditure estimates and the timing
of construction projects. These estimates may change significantly as a result
of many considerations, including changes in economic conditions, changes in
forecasts of KWH sales and peak load, the availability of purchased power and
changes in expectations concerning the construction and ownership of future
generating units, the availability of generating sites and transmission and
distribution corridors, the ability to obtain adequate and timely rate
increases, escalation in construction costs, DSM programs and requirements of
environmental and other regulatory and permitting authorities.
See Note 3 in the "Notes to Consolidated Financial Statements" for a
discussion of fuel and power purchase commitments.
<TABLE>
<CAPTION>
Savings bank
- -------------------------------------------------------------------------------------------------------------------
% %
December 31 1999 change 1998 change
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
(in millions)
Assets...................................................... $5,848 3 $5,692 3
Loans receivable, net....................................... 3,212 2 3,143 4
Mortgage/asset-backed securities............................ 1,973 10 1,791 (4)
Deposit liabilities......................................... 3,492 (10) 3,866 (1)
Securities sold under agreements to repurchase.............. 661 26 524 35
Advances from FHLB.......................................... 1,189 48 806 9
</TABLE>
As of December 31, 1999, ASB was the third largest financial institution in the
state based on assets of $5.8 billion and deposits of $3.5 billion.
At December 31, 1999, loans that did not accrue interest totaled $68.5
million or 2.1% of net loans outstanding, compared to $85.5 million or 2.7% at
December 31, 1998. At December 31, 1999, there were 59 properties acquired in
settlement of loans valued at $4.6 million, compared to 42 properties valued at
$5.6 million at December 31, 1998.
For 1999, investing activities used net cash of $363 million, primarily due to
the purchase of mortgage/asset-backed and investment securities and origination
of loans, net of repayments. Net cash provided by financing activities in 1999
was $127 million, due largely to net increases of $384 million in advances from
FHLB and $137 million in securities sold under agreements to repurchase, partly
offset by net decreases of $374 million in deposit liabilities and by $22
million in common and preferred stock dividends.
Minimum liquidity levels are currently governed by the regulations adopted by
the Office of Thrift Supervision (OTS). ASB was in compliance with OTS liquidity
requirements as of December 31, 1999.
ASB believes that a satisfactory regulatory capital position provides a basis
for public confidence, affords protection to depositors, helps to ensure
continued access to capital markets on favorable terms and provides a foundation
for growth. As of December 31, 1999, ASB was in compliance with the OTS minimum
capital requirements (ratio requirements noted in parentheses) with a tangible
capital ratio of 5.7% (1.5%), a core capital ratio of 5.7% (3.0%) and a risk-
based capital ratio of 11.0% (8.0%).
FDIC regulations restrict the ability of financial institutions that are not
"well-capitalized" to offer interest rates on deposits that are significantly
higher than the rates offered by competing institutions. As of December 31,
1999, ASB was "well-capitalized" (ratio requirements noted in parentheses) with
a leverage ratio of 5.7% (5.0%), a Tier-1 risk-based ratio of 10.1% (6.0%) and a
total risk-based ratio of 11.0% (10.0%).
38
<PAGE>
The OTS adopted Thrift Bulletin 13a (TB 13a), which became effective on
December 1, 1998. In addition to other guidance, TB 13a provides detailed
guidelines for implementing revisions of the CAMELS rating system, published by
the Federal Financial Institutions Examination Council. The publication
announced revised interagency policies that, among other things, established the
Sensitivity to Market Risk component rating (the "S" rating). TB 13a provides
quantitative guidelines for an initial assessment of an institution's level of
interest rate risk. Examiners have broad discretion in implementing those
guidelines. TB 13a also provides guidelines concerning the factors examiners
consider in assessing the quality of an institution's risk management systems
and procedures. Management is developing and beginning to implement an action
plan to improve ASB's interest rate risk position. The plan includes obtaining
additional capital and making changes to improve the matching of asset and
liability durations, such as lengthening the term of costing liabilities and
selling a portion of ASB's long-term fixed rate loan production.
Significant interstate banking legislation has been enacted at both the
federal and state levels. Under the federal Riegle-Neal Interstate Banking and
Branching Efficiency Act of 1994, a bank holding company may acquire control of
a bank in any state, subject to certain restrictions. Under state law, effective
June 1, 1997, a bank chartered under state law may merge with an out-of-state
bank and convert all branches of both banks into branches of a single bank,
subject to certain restrictions. Although the federal and state laws apply only
to banks, such legislation may nonetheless affect the competitive balance among
banks, thrifts and other financial institutions and the level of competition
among financial institutions doing business in Hawaii.
By law, the Financing Corporation's (FICO) assessment rate on deposits insured
by the Bank Insurance Fund had to be one-fifth the rate on deposits insured by
the Savings Association Insurance Fund until January 1, 2000. Currently, the
FICO interest obligations for both banks and thrifts are identical, at a rate of
2.12 cents per $100 of deposits. See Note 4 in the "Notes to Consolidated
Financial Statements."
In November 1999, Congress passed the Gramm-Leach-Bliley Act (the Act). The
Act repeals the Depression Era Glass-Steagall Act so that banks, insurance
companies and investment firms can compete directly against each other, thereby
allowing "one-stop shopping" for an array of financial services. Although the
Act does further restrict the ability of a savings and loan holding company to
own both a savings association and nonfinancial subsidiaries, the savings and
loan holding company relationship among HEI, HEIDI and ASB is "grandfathered"
under the Act so that HEI and its subsidiaries will be able to continue to
engage in their current activities. It is too early to assess the net effect of
the Act on ASB's competitive position. On the one hand, the availability of
"one-stop shopping" for financial services might increase competitive pressures
on ASB. On the other hand, the restriction on the ability to combine savings
associations and nonfinancial subsidiaries under one holding company may
decrease competitive pressure by reducing the incentive to create new thrifts.
In addition to its effects upon competition, the Act might result in increased
costs for ASB. For example, the Act imposes on financial institutions an
obligation to protect the security and confidentiality of its customers'
nonpublic personal information, and directs, among others, the FDIC and the OTS
to establish "appropriate standards" to protect such information and its use.
Although ASB currently has in place a policy concerning customer privacy, it is
not known at this time whether the rules eventually adopted by the regulatory
authorities might impose additional compliance costs on ASB.
39
<PAGE>
Quantitative and Qualitative Disclosures about Market Risk
- --------------------------------------------------------------------------------
The Company's success is dependent, in part, upon ASB's ability to manage
interest rate risk. The Company manages various market risks in the ordinary
course of business, including credit risk, liquidity risk, commodity price risk
and foreign currency exchange rate risk, and believes its exposures to these
risks are not material as of December 31, 1999. Because the Company does not
have a portfolio of trading assets, the Company is not exposed to market risk
from trading activities. However, the Company considers interest rate risk to be
a very significant market risk as it could potentially have a significant effect
on the Company's financial condition and results of operations. Interest rate
risk can be defined as the exposure of the Company's earnings to adverse
movements in interest rates. The Company does not currently use derivatives to
manage interest rate risk.
ASB's Asset/Liability Management Committee (ALMCO) serves as the Senior
Investment Group charged with the responsibility of managing interest rate risk
and of carrying out the overall investment objectives and activities of ASB as
approved by the ASB Board of Directors. ALMCO establishes policies that monitor
and coordinate ASB's sources, uses and pricing of funds.
ASB continues to reduce the volatility of its net interest income by managing
the relationship of interest-sensitive assets to interest-sensitive liabilities.
To accomplish this, management has attempted to increase the amount of variable
rate assets. This has been difficult, however, in the relatively low interest
rate environment.
Residential real estate lending is and will continue to be a key component of
ASB's business. Residential lending demand in Hawaii has been primarily for
fixed rate products. Management has made significant purchases of adjustable-
rate mortgage/asset-backed securities (MBS) to offset predominantly fixed rate
loan production. ASB purchases adjustable-rate MBS with interest rates that are
adjusted primarily based on changes in U.S. Treasury indices.
ASB plans to build its portfolio of consumer and business banking loans which
generally earn higher rates of interest and have maturities shorter than
residential real estate loans. However, the origination of consumer and business
banking loans involves risks different from those associated with originating
residential real estate loans. For example, credit risk associated with consumer
and business banking loans is generally higher than for mortgage loans, the
sources and level of competition may be different and, compared to residential
real estate lending, consumer and business banking lending is a relatively new
business for ASB. These different risk factors are considered in the
underwriting and pricing standards established for consumer and business banking
loans.
ASB's approach to managing interest rate risk includes the changing of
repricing terms and diversifying the mix of maturities on certificates of
deposits and other interest-bearing liabilities. ASB manages the maturities of
its borrowings to balance changes in the demand for deposit maturities. ASB has
emphasized the need to attract core deposits that ASB believes are a steady
funding source having less sensitivity to changes in market interest rates than
other funding sources. At December 31, 1999, core deposits comprised 58% of
ASB's deposit base, compared to 55% at December 31, 1998.
The tables below provide contractual balances of ASB's on- and off-balance
sheet financial instruments in U.S. dollars at the expected maturity dates as
well as the estimated fair values of those on- and off-balance sheet financial
instruments as of December 31, 1999 and 1998, and constitute "forward-looking
statements." The expected maturity categories take into consideration historical
prepayment rates as well as actual amortization of principal and do not take
into consideration reinvestment of cash. Various prepayment rates ranging from
10% to 34% and 13% to 34% were used in computing the expected maturity of ASB's
interest-sensitive assets as of December 31, 1999 and 1998, respectively. The
expected maturity categories for interest-sensitive core deposits take into
consideration historical attrition rates based on core deposit studies. Core
deposit attrition rates ranging from 14% to 32% were used in expected maturity
computations for core deposits. The weighted-average interest rates for the
various assets and liabilities presented are as of December 31, 1999 and 1998.
See Note 18 in the "Notes to Consolidated Financial Statements" for
descriptions of the methods and assumptions used to estimate fair value of each
applicable class of financial instruments.
40
<PAGE>
<TABLE>
<CAPTION>
Savings bank
- -----------------------------------------------------------------------------------------------------------------
Expected maturity/principal repayment December 31, 1999
- -----------------------------------------------------------------------------------------------------------------
Esti-
mated
There- fair
(in millions) 2000 2001 2002 2003 2004 after Total value
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Interest-sensitive assets
Mortgage loans and MBS
Adjustable rate $ 359 $ 390 $ 298 $ 196 $ 153 $ 485 $1,881 $1,896
Average interest rate 7.0%
Fixed rate - one-to-four
family residential $ 187 $ 146 $ 115 $ 107 $ 95 $2,148 $2,798 $2,749
Average interest rate 7.1%
Fixed rate - multi-family residential
and nonresidential $ 2 $ 2 $ 2 $ 2 $ 2 $ 146 $ 156 $ 160
Average interest rate 8.3%
Consumer loans $ 78 $ 61 $ 18 $ 15 $ 12 $ 51 $ 235 $ 244
Average interest rate 10.0%
Commercial loans $ 24 $ 91 - - - - $ 115 $ 114
Average interest rate 9.1%
Investment securities and
interest-bearing deposits $ 67 - - - - $ 72 $ 139 $ 139
Average interest rate 7.0%
Interest-sensitive liabilities
Passbook deposits $ 231 $ 117 $ 101 $ 87 $ 75 $ 459 $1,070 $1,070
Average interest rate 2.3% 2.3% 2.3% 2.3% 2.3% 2.3% 2.3%
NOW and other demand deposits $ 124 $ 98 $ 77 $ 62 $ 49 $ 219 $ 629 $ 629
Average interest rate 0.9% 0.9% 0.9% 0.9% 0.9% 0.9% 0.9%
Money market accounts $ 103 $ 70 $ 47 $ 32 $ 22 $ 47 $ 321 $ 321
Average interest rate 3.0% 3.0% 3.0% 3.0% 3.0% 3.0% 3.0%
Certificates of deposit $1,243 $ 74 $ 20 $ 15 $ 86 $ 34 $1,472 $1,455
Average interest rate 4.8% 4.4% 5.7% 5.4% 6.3% 3.8% 4.9%
FHLB advances $ 372 $ 301 $ 78 $ 221 $ 91 $ 126 $1,189 $1,167
Average interest rate 5.7% 6.5% 6.6% 6.0% 6.9% 7.0% 6.3%
Other borrowings $ 628 $ 15 - $ 18 - - $ 661 $ 654
Average interest rate 5.6% 5.6% 5.4% 5.6%
Interest-sensitive off-balance sheet items
Loans serviced for others $ 617 $ 12
Average interest rate 7.8%
Loan commitments and
loans in process $ 33 -
Average interest rate 7.4%
Unused consumer lines of credit $ 483 $ 4
Average interest rate 12.2%
</TABLE>
41
<PAGE>
<TABLE>
<CAPTION>
Savings bank
- -----------------------------------------------------------------------------------------------------------------
Expected maturity/principal repayment December 31, 1998
- ---------------------------------------------------------------------------------------------------------------
Esti-
mated
There- fair
(in millions) 1999 2000 2001 2002 2003 after Total value
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Interest-sensitive assets
Mortgage loans and MBS
Adjustable rate $ 654 $ 418 $ 270 $ 174 $ 112 $ 198 $1,826 $1,842
Average interest rate 7.2%
Fixed rate - one-to-four
family residential $ 364 $ 315 $ 272 $ 235 $ 203 $1,152 $2,541 $2,551
Average interest rate 7.2%
Fixed rate - multi-family residential
and nonresidential $ 14 $ 15 $ 16 $ 18 $ 20 $ 85 $ 168 $ 181
Average interest rate 8.6%
Consumer loans $ 102 $ 69 $ 47 $ 31 $ 21 $ 41 $ 311 $ 321
Average interest rate 9.4%
Commercial loans $ 23 $ 20 $ 16 $ 12 $ 10 $ 7 $ 88 $ 84
Average interest rate 8.9%
Investment securities and
interest-bearing deposits $ 225 - - - - - $ 225 $ 225
Average interest rate 4.8% 4.8%
Interest-sensitive liabilities
Passbook deposits $ 254 $ 127 $ 109 $ 94 $ 81 $ 496 $1,161 $1,161
Average interest rate 2.5% 2.5% 2.5% 2.5% 2.5% 2.5% 2.5%
NOW and other demand deposits $ 125 $ 106 $ 106 $ 62 $ 61 $ 169 $ 629 $ 629
Average interest rate 0.9% 0.9% 0.9% 0.9% 0.9% 0.9% 0.9%
Money market accounts $ 96 $ 74 $ 74 $ 27 $ 26 $ 30 $ 327 $ 327
Average interest rate 3.4% 3.4% 3.4% 3.4% 3.4% 3.4% 3.4%
Certificates of deposit $1,514 $ 118 $ 24 $ 16 $ 16 $ 61 $1,749 $1,750
Average interest rate 5.1% 5.2% 5.6% 6.2% 5.4% 5.2% 5.1%
FHLB advances $ 177 $ 108 $ 110 $ 38 $ 180 $ 193 $ 806 $ 831
Average interest rate 5.6% 5.6% 6.4% 7.0% 5.9% 7.0% 6.2%
Other borrowings $ 491 - $ 33 - - - $ 524 $ 523
Average interest rate 5.3% 5.5% 5.3%
Interest-sensitive off-balance sheet items
Loans serviced for others $ 730 $ 13
Average interest rate 7.9%
Loan commitments and
loans in process $ 63 -
Average interest rate 6.6%
Unused consumer lines of credit $ 415 $ 3
Average interest rate 11.2%
</TABLE>
The Company's general policy is to manage other than savings bank interest rate
risk through use of a combination of short- and long-term debt and preferred
securities. The tables below provide information about the Company's other than
savings bank market sensitive financial instruments in U.S. dollars, including
contractual balances at the expected maturity dates as well as the estimated
fair values as of December 31, 1999 and 1998, and constitute "forward-looking
statements."
42
<PAGE>
<TABLE>
<CAPTION>
Other than savings bank
- ---------------------------------------------------------------------------------------------------------------
Expected maturity December 31, 1999
- ---------------------------------------------------------------------------------------------------------------
Esti-
mated
There- fair
(in millions) 2000 2001 2002 2003 2004 after Total value
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Interest-sensitive liabilities
Short-term borrowings $ 152 - - - - - $152 $152
Average interest rate 6.9% 6.9%
Long-term debt
Fixed rate $ 10 $ 57 $ 62 $ 39 $ 1 $809 $978 $935
Average interest rate 6.8% 7.1% 6.6% 6.8% 7.4% 6.2% 6.3%
HEI- and HECO- obligated preferred
securities of trust subsidiaries - - - - - $200 $200 $165
Average distribution rate 8.0% 8.0%
</TABLE>
<TABLE>
<CAPTION>
Expected maturity December 31, 1998
- --------------------------------------------------------------------------------------------------------------
Esti-
mated
There- fair
(in millions) 1999 2000 2001 2002 2003 after Total value
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Interest-sensitive liabilities
Short-term borrowings $ 223 - - - - - $223 $223
Average interest rate 5.9% 5.9%
Long-term debt
Fixed rate $ 7 $ 12 $ 59 $ 63 $ 39 $685 $865 $903
Average interest rate 7.5% 7.0% 7.1% 6.6% 6.8% 6.3% 6.4%
Variable rate $ 35 - - - - - $ 35 $ 35
Average interest rate 5.7% 5.7%
HEI- and HECO- obligated preferred
securities of trust subsidiaries - - - - - $200 $200 $202
Average distribution rate 8.0% 8.0%
Preferred stock of electric utility
subsidiaries subject to
mandatory redemption $ 33 - - - - - $ 33 $ 34
Average dividend rate 8.5% 8.5%
</TABLE>
Forward-Looking Information
- --------------------------------------------------------------------------------
This report and other presentations made by HEI and its subsidiaries 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 and banking industries; 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. Investors are also referred to other risks and uncertainties
discussed elsewhere in this Annual Report and in other periodic reports
previously and subsequently filed by HEI and/or HECO with the Securities and
Exchange Commission.
43
<PAGE>
Independent Auditors' Report
================================================================================
The Board of Directors and Stockholders
Hawaiian Electric Industries, Inc.:
We have audited the accompanying consolidated balance sheets of Hawaiian
Electric Industries, Inc. and subsidiaries as of December 31, 1999 and 1998, and
the related consolidated statements of income, retained earnings and cash flows
for each of the years in the three-year period ended December 31, 1999. These
consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Hawaiian
Electric Industries, Inc. and subsidiaries as of December 31, 1999 and 1998, and
the results of their operations and their cash flows for each of the years in
the three-year period ended December 31, 1999, in conformity with generally
accepted accounting principles.
/s/ KPMG LLP
Honolulu, Hawaii
January 24, 2000,
except as to the second paragraph
of Note 5, which is
as of February 24, 2000
44
<PAGE>
<TABLE>
<CAPTION>
Consolidated Statements of Income
- -----------------------------------------------------------------------------------------------------------------------------
Hawaiian Electric Industries, Inc. and subsidiaries
Years ended December 31 1999 1998 1997
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
(in thousands, except per share amounts)
Revenues
Electric utility........................................................... $1,055,204 $1,016,283 $1,107,523
Savings bank............................................................... 409,913 409,883 294,135
International power........................................................ 4,464 4,773 3,025
Other...................................................................... 53,709 54,226 55,744
- -----------------------------------------------------------------------------------------------------------------------------
1,523,290 1,485,165 1,460,427
- -----------------------------------------------------------------------------------------------------------------------------
Expenses
Electric utility........................................................... 880,490 838,833 935,770
Savings bank............................................................... 349,561 356,233 249,396
International power........................................................ 9,195 7,937 5,021
Other...................................................................... 50,173 57,516 57,533
- -----------------------------------------------------------------------------------------------------------------------------
1,289,419 1,260,519 1,247,720
- -----------------------------------------------------------------------------------------------------------------------------
Operating income (loss)
Electric utility........................................................... 174,714 177,450 171,753
Savings bank............................................................... 60,352 53,650 44,739
International power........................................................ (4,731) (3,164) (1,996)
Other...................................................................... 3,536 (3,290) (1,789)
- -----------------------------------------------------------------------------------------------------------------------------
233,871 224,646 212,707
- -----------------------------------------------------------------------------------------------------------------------------
Interest expense--electric utility and other............................... (72,631) (70,524) (62,292)
Allowance for borrowed funds used during construction...................... 2,576 5,915 6,190
Preferred stock dividends of subsidiaries.................................. (2,135) (6,005) (6,253)
Preferred securities distributions of trust subsidiaries................... (16,025) (12,557) (10,600)
Allowance for equity funds used during construction........................ 4,228 10,106 10,864
- -----------------------------------------------------------------------------------------------------------------------------
Income from continuing operations before income taxes...................... 149,884 151,581 150,616
Income taxes............................................................... 56,990 56,953 58,773
- -----------------------------------------------------------------------------------------------------------------------------
Income from continuing operations.......................................... 92,894 94,628 91,843
- -----------------------------------------------------------------------------------------------------------------------------
Discontinued operations, net of income taxes
Loss from operations.................................................... - (13,598) (5,401)
Net gain on disposals................................................... 3,953 3,781 -
- -----------------------------------------------------------------------------------------------------------------------------
Gain (loss) from discontinued operations................................... 3,953 (9,817) (5,401)
- -----------------------------------------------------------------------------------------------------------------------------
Net income................................................................. $ 96,847 $ 84,811 $ 86,442
=============================================================================================================================
Basic earnings (loss) per common share
Continuing operations................................................. $ 2.89 $ 2.96 $ 2.93
Discontinued operations............................................... 0.12 (0.31) (0.17)
- -----------------------------------------------------------------------------------------------------------------------------
$ 3.01 $ 2.65 $ 2.76
=============================================================================================================================
Diluted earnings (loss) per common share
Continuing operations................................................. $ 2.88 $ 2.95 $ 2.92
Discontinued operations............................................... 0.12 (0.31) (0.17)
- -----------------------------------------------------------------------------------------------------------------------------
$ 3.00 $ 2.64 $ 2.75
=============================================================================================================================
Dividends per common share................................................. $ 2.48 $ 2.48 $ 2.44
=============================================================================================================================
Weighted-average number of common shares outstanding....................... 32,188 32,014 31,375
Dilutive effect of stock options and dividend equivalents............ 103 115 95
- -----------------------------------------------------------------------------------------------------------------------------
Adjusted weighted-average shares........................................... 32,291 32,129 31,470
=============================================================================================================================
</TABLE>
<TABLE>
<CAPTION>
Consolidated Statements of Retained Earnings
- -----------------------------------------------------------------------------------------------------------------------------
Hawaiian Electric Industries, Inc. and subsidiaries
Years ended December 31 1999 1998 1997
- -----------------------------------------------------------------------------------------------------------------------------
(in thousands)
<S> <C> <C> <C>
Retained earnings, January 1............................................... $ 165,252 $ 159,862 $ 149,907
Net income................................................................. 96,847 84,811 86,442
Common stock dividends..................................................... (79,848) (79,421) (76,487)
- -----------------------------------------------------------------------------------------------------------------------------
Retained earnings, December 31............................................. $ 182,251 $ 165,252 $ 159,862
=============================================================================================================================
</TABLE>
See accompanying "Notes to Consolidated Financial Statements."
45
<PAGE>
<TABLE>
<CAPTION>
Consolidated Balance Sheets
- ------------------------------------------------------------------------------------------------------------------------------------
Hawaiian Electric Industries, Inc. and subsidiaries
December 31 1999 1998
- ------------------------------------------------------------------------------------------------------------------------------------
(in thousands)
<S> <C> <C> <C> <C>
ASSETS
Cash and equivalents....................................... $ 199,906 $ 412,254
Accounts receivable and unbilled revenues, net............. 154,605 156,220
Investment and mortgage/asset-backed securities (estimated
fair value $2,124,141 and $1,917,975)..................... 2,159,945 1,902,927
Loans receivable, net...................................... 3,211,878 3,143,197
Property, plant and equipment, net
Land.................................................. $ 44,292 $ 44,214
Plant and equipment................................... 2,977,997 2,945,512
Construction in progress.............................. 172,984 166,695
----------- -----------
3,195,273 3,156,421
Less -- accumulated depreciation...................... (1,129,078) 2,066,195 (1,063,023) 2,093,398
----------- -----------
Regulatory assets.......................................... 114,759 110,459
Other...................................................... 276,997 265,799
Goodwill and other intangibles............................. 106,741 115,006
- ------------------------------------------------------------------------------------------------------------------------------------
$8,291,026 $8,199,260
====================================================================================================================================
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities
Accounts payable........................................... $ 117,447 $ 107,863
Deposit liabilities........................................ 3,491,655 3,865,736
Short-term borrowings...................................... 151,833 222,847
Securities sold under agreements to repurchase............. 661,215 523,800
Advances from Federal Home Loan Bank....................... 1,189,081 805,581
Long-term debt............................................. 977,529 899,598
Deferred income taxes...................................... 181,277 186,138
Contributions in aid of construction....................... 206,302 198,904
Other...................................................... 231,854 276,773
- ------------------------------------------------------------------------------------------------------------------------------------
7,208,193 7,087,240
- ------------------------------------------------------------------------------------------------------------------------------------
HEI- and HECO-obligated preferred securities of trust
subsidiaries directly or indirectly holding solely
HEI and HEI-guaranteed and HECO and
HECO-guaranteed subordinated debentures............. 200,000 200,000
Preferred stock of subsidiaries
Subject to mandatory redemption..................... - 33,080
Not subject to mandatory redemption................. 34,406 48,406
Minority interests......................................... 841 3,562
- ------------------------------------------------------------------------------------------------------------------------------------
235,247 285,048
- ------------------------------------------------------------------------------------------------------------------------------------
Stockholders' equity
Preferred stock, no par value, authorized 10,000 shares;
issued: none............................................. - -
Common stock, no par value, authorized 100,000 shares; issued
and outstanding: 32,213 shares and 32,116 shares......... 665,335 661,720
Retained earnings.......................................... 182,251 165,252
- ------------------------------------------------------------------------------------------------------------------------------------
847,586 826,972
- ------------------------------------------------------------------------------------------------------------------------------------
$8,291,026 $8,199,260
====================================================================================================================================
</TABLE>
See accompanying "Notes to Consolidated Financial Statements."
46
<PAGE>
Consolidated Statements of Cash Flows
- --------------------------------------------------------------------------------
Hawaiian Electric Industries, Inc. and subsidiaries
<TABLE>
<CAPTION>
Years ended December 31 1999 1998 1997
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
(in thousands)
Cash flows from operating activities
Income from continuing operations.............................................. $ 92,894 $ 94,628 $ 91,843
Adjustments to reconcile income from continuing operations to net cash
provided by continuing operating activities
Depreciation and amortization of property, plant and equipment........... 109,230 96,772 91,495
Other amortization....................................................... 13,771 16,024 13,848
Provision for loan losses................................................ 16,500 13,802 6,934
Deferred income taxes.................................................... (4,861) (3,788) (1,704)
Allowance for equity funds used during construction...................... (4,228) (10,106) (10,864)
Changes in assets and liabilities, net of effects from the acquisition
of Bank of America, FSB-Hawaii operations and disposal of businesses
Decrease (increase) in accounts receivable and
unbilled revenues, net........................................... 1,615 2,011 (2,396)
Increase (decrease) in accounts payable............................ 9,584 (40,582) (13,429)
Changes in other assets and liabilities............................ (25,092) 56,663 (23,239)
- -------------------------------------------------------------------------------------------------------------------------------
Net cash provided by continuing operating activities........................... 209,413 225,424 152,488
- -------------------------------------------------------------------------------------------------------------------------------
Cash flows from investing activities
Held-to-maturity mortgage/asset-backed securities purchased.................... (735,650) (521,054) (799,299)
Principal repayments on held-to-maturity
mortgage/asset-backed securities......................................... 552,174 592,073 272,662
Held-to-maturity investment securities purchased............................... (112,029) (200,982) (64,949)
Proceeds from maturity of investment securities................................ 43,000 199,982 -
Loans receivable originated and purchased...................................... (633,554) (654,576) (310,903)
Principal repayments on loans receivable....................................... 531,628 495,291 146,685
Capital expenditures........................................................... (134,363) (166,738) (147,301)
Purchase of savings bank-owned life insurance.................................. (20,000) - (35,000)
Cash received from (paid to) Bank of America, FSB for the assumption
of deposit and other liabilities, net of purchase of loans
receivable and other assets............................................... - (24,018) 714,843
Proceeds from loans returned to Bank of America, FSB........................... - 28,763 -
Proceeds from sale of Young Brothers, Limited and
Hawaiian Tug & Barge Corp. assets......................................... 41,610 - -
Other.......................................................................... 39,583 18,012 15,336
- -------------------------------------------------------------------------------------------------------------------------------
Net cash used in investing activities.......................................... (427,601) (233,247) (207,926)
- -------------------------------------------------------------------------------------------------------------------------------
Cash flows from financing activities
Net increase (decrease) in deposit liabilities................................. (374,081) (50,864) 105,982
Net increase (decrease) in short-term borrowings with original
maturities of three months or less....................................... (71,014) (61,816) 71,143
Net increase (decrease) in retail repurchase agreements........................ (1,251) (2,856) 11,326
Proceeds from securities sold under agreements to repurchase................... 901,372 531,812 1,557,000
Repurchase of securities sold under agreements to repurchase................... (764,154) (392,500) (1,660,600)
Proceeds from advances from Federal Home Loan Bank............................. 906,400 706,500 1,337,500
Principal payments on advances from Federal Home Loan Bank..................... (522,900) (637,393) (1,285,300)
Proceeds from issuance of long-term debt....................................... 199,656 194,216 74,233
Repayment of long-term debt.................................................... (121,900) (89,400) (81,900)
Proceeds from issuance of HEI- and HECO-obligated
preferred securities of trust subsidiaries............................... - 50,000 150,000
Redemption of electric utility subsidiaries' preferred stock................... (47,080) (2,690) (3,185)
Net proceeds from issuance of common stock..................................... 3,449 8,191 22,994
Common stock dividends......................................................... (79,848) (79,421) (61,799)
Preferred securities distributions of trust subsidiaries....................... (16,025) (12,557) (10,600)
Other.......................................................................... (11,107) (212) (12,783)
- -------------------------------------------------------------------------------------------------------------------------------
Net cash provided by financing activities...................................... 1,517 161,010 214,011
- -------------------------------------------------------------------------------------------------------------------------------
Net cash provided by (used in) discontinued operations......................... 4,323 5,157 (1,776)
- -------------------------------------------------------------------------------------------------------------------------------
Net increase (decrease) in cash and equivalents................................ (212,348) 158,344 156,797
Cash and equivalents, January 1................................................ 412,254 253,910 97,113
- -------------------------------------------------------------------------------------------------------------------------------
Cash and equivalents, December 31.............................................. $ 199,906 $ 412,254 $ 253,910
===============================================================================================================================
</TABLE>
See accompanying "Notes to Consolidated Financial Statements."
47
<PAGE>
Notes to Consolidated Financial Statements
1. Summary of significant accounting policies
- --------------------------------------------------------------------------------
General
- --------------------------------------------------------------------------------
Hawaiian Electric Industries, Inc. (HEI) is a holding company with subsidiaries
engaged in electric utility, savings bank and other businesses, primarily in the
State of Hawaii, and also engaged in the development of and investment in
independent power and integrated energy service projects in Asia and the
Pacific. In November 1999, an HEI subsidiary, Hawaiian Tug & Barge Corp. (HTB),
sold Young Brothers, Limited (YB) and substantially all of HTB's operating
assets. HTB's name was then changed to The Old Oahu Tug Service, Inc. (TOOTS).
In September 1998, HEI adopted a plan to exit the residential real estate
development business conducted by Malama Pacific Corp. and its subsidiaries.
Basis of presentation. In preparing the consolidated financial statements,
management is required to make estimates and assumptions that affect the
reported amounts of assets and liabilities, the disclosure of contingent assets
and liabilities and the reported amounts of revenues and expenses. Actual
results could differ significantly from those estimates.
Material estimates that are particularly susceptible to significant change
include the amounts reported for regulatory assets, allowance for loan losses
and pension and other postretirement benefit obligations.
Consolidation. The consolidated financial statements include the accounts of HEI
and its subsidiaries (collectively, the Company). All significant intercompany
accounts and transactions have been eliminated in consolidation. The accounts of
HEI Power Corp. (HEIPC) and subsidiaries are consolidated as of November 30 due
to the time needed to consolidate these subsidiaries. If material transactions
occur in December, such transactions are accrued as of November 30.
Investments. Debt securities that the Company intends to and has the ability to
hold to maturity are classified as held-to-maturity securities and reported at
amortized cost. Marketable equity securities and debt securities that are bought
and held principally for the purpose of selling them in the near term are
classified as trading securities and reported at fair value, with unrealized
gains and losses included in earnings. Marketable equity securities and debt
securities not classified as either held-to-maturity or trading securities are
classified as available-for-sale securities and reported at fair value, with
unrealized gains and losses excluded from earnings and reported in a separate
component of stockholders' equity.
For nontrading securities, declines in value determined to be nontemporary
are included in earnings and result in a new cost basis for the investment. The
specific identification method is used in determining realized gains and losses
on the sales of securities.
Equity method. Investments in up to 50%-owned affiliates for which the Company
has the ability to exercise significant influence over the operating and
financing policies of the entity are accounted for under the equity method,
whereby the investment is carried at cost, plus the Company's equity in
undistributed earnings or losses since acquisition.
Property, plant and equipment. Property, plant and equipment are reported at
cost. Self-constructed electric utility plant includes engineering, supervision,
and administrative and general costs, and an allowance for the cost of funds
used during the construction period. Upon the retirement or sale of electric
utility plant, no gain or loss is recognized. The cost of the plant retired or
sold and the cost of removal (net of salvage value) are charged to accumulated
depreciation.
Retirement benefits. Pension and other postretirement benefit costs are charged
primarily to expense and electric utility plant. The Company's policy is to fund
pension costs in amounts consistent with the requirements of the Employee
Retirement Income Security Act of 1974. Certain health care and/or life
insurance benefits are provided to eligible retired employees and the employees'
beneficiaries and covered dependents.
Depreciation. Depreciation is computed primarily using the straight-line method
over the estimated useful lives of the assets. Electric utility plant has useful
lives ranging from 20 to 45 years for production plant, from 25 to 50 years for
transmission and distribution plant and from 8 to 45 years for general plant.
The electric utility subsidiaries' composite annual depreciation rate was 3.9%
in 1999, 1998 and 1997.
48
<PAGE>
Environmental expenditures. The Company is subject to numerous federal and state
environmental statutes and regulations. In general, environmental contamination
treatment costs are charged to expense, unless it is probable the Public
Utilities Commission of the State of Hawaii (PUC) would allow such costs to be
recovered in future rates. Also, environmental costs are capitalized if the
costs extend the life, increase the capacity, or improve the safety or
efficiency of property; the costs mitigate or prevent future environmental
contamination; or the costs are incurred in preparing the property for sale.
Liabilities are recorded when environmental assessments and/or remedial efforts
are probable, and the cost can be reasonably estimated. Corresponding regulatory
assets are recorded when it is probable the PUC would allow such costs to be
recovered in future rates.
Income taxes. Deferred income tax assets and liabilities are established for the
temporary differences between the financial reporting bases and the tax bases of
the Company's assets and liabilities at enacted tax rates expected to be in
effect when such deferred tax assets or liabilities are realized or settled.
Federal and state tax credits are deferred and amortized over the estimated
useful lives of the properties which qualified for the credits.
Earnings per share. Basic earnings per share (EPS) is computed by dividing net
income by the weighted-average number of common shares outstanding for the
period. Diluted EPS is computed similarly, except that common shares for
dilutive stock options and dividend equivalents are added to the denominator.
At December 31, 1999, 1998 and 1997, options to purchase 486,500, 146,000
and 184,000 shares of common stock, respectively, were not included in the
computation of diluted EPS because the options' exercise prices were greater
than the average market price of HEI's common stock for 1999, 1998 and 1997,
respectively.
Cash flows. The Company considers cash on hand, deposits in banks, deposits
with the Federal Home Loan Bank (FHLB) of Seattle, money market accounts,
certificates of deposit, short-term commercial paper and reverse repurchase
agreements, with original maturities of three months or less, to be cash and
equivalents.
Recent accounting pronouncements.
Comprehensive income. In June 1997, the Financial Accounting Standards Board
(FASB) issued Statement of Financial Accounting Standards (SFAS) No. 130,
"Reporting Comprehensive Income." The Company adopted SFAS No. 130 effective
January 1, 1998, but had no material "other" comprehensive income items for the
years presented in the statements of income or accumulated as of the balance
sheet dates presented.
Derivative instruments and hedging activities. In June 1998, the FASB issued
SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities,"
which establishes accounting and reporting standards for derivative instruments
and hedging activities and requires that an entity recognize all derivatives as
either assets or liabilities in the statement of financial position and measure
those instruments at fair value. 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. The Company will adopt SFAS No. 133, as amended, on January
1, 2001, but management has not yet determined the impact, if any, of adoption.
Reclassifications. Certain reclassifications have been made to prior years'
financial statements to conform to the 1999 presentation.
49
<PAGE>
Electric utility
- --------------------------------------------------------------------------------
Regulation by the PUC. The electric utility subsidiaries are regulated by the
PUC and account for the effects of regulation under SFAS No. 71, "Accounting for
the Effects of Certain Types of Regulation." The actions of regulators can
affect the timing of recognition of revenues, expenses, assets and liabilities.
Contributions in aid of construction. The electric utility subsidiaries receive
contributions from customers for special construction requirements. As directed
by the PUC, the subsidiaries amortize contributions on a straight-line basis
over 30 years as an offset against depreciation expense.
Electric utility revenues. Electric utility revenues are based on rates
authorized by the PUC and include revenues applicable to energy consumed in the
accounting period but not yet billed to the customers. Revenue amounts recorded
pursuant to a PUC interim order are subject to refund, with interest, pending a
final order.
The rate schedules of the electric utility subsidiaries include energy cost
adjustment clauses under which rates are adjusted for changes in the weighted-
average price paid for fuel oil and certain components of purchased power, and
the relative amounts of company-generated power and purchased power.
Allowance for funds used during construction (AFUDC). AFUDC is an accounting
practice whereby the costs of debt and equity funds used to finance plant
construction are removed from the statement of income and charged to
construction in progress on the balance sheet.
The weighted-average AFUDC rate was 8.7% in 1999, 8.9% in 1998 and 9.0% in
1997, and reflected quarterly compounding.
Savings bank
- --------------------------------------------------------------------------------
Loans receivable. American Savings Bank, F.S.B. (ASB) states loans receivable at
cost less an allowance for loan losses, loan origination and commitment fees and
purchase premiums and discounts. Interest on loans is credited to income as it
is earned. Premiums are amortized and discounts are accreted over the estimated
life of the loan using the level-yield method.
Allowance for loan losses. ASB deems a loan impaired when it is probable that
ASB will be unable to collect all amounts due according to the contractual terms
of the loan agreement. When such a loan is deemed impaired, the amount of the
impairment is measured based on the present value of expected future cash flows
discounted at the loan's effective interest rate or based on the fair value of
the collateral securing the loan. Impairment losses are charged to the provision
for loan losses and included in the allowance for loan losses.
For the remaining loans receivable portfolio (smaller-balance homogeneous
loans), ASB weighs several factors in determining the adequacy of the valuation
allowance for estimated losses, including management's review of the existing
risks in the loan portfolio, prevailing economic conditions and the historical
loss experience.
ASB uses either the cash or cost-recovery method to record cash receipts on
impaired loans that are not accruing interest. For smaller-balance homogeneous
loans, ASB generally ceases the accrual of interest on a loan that is more than
90 days past due or when there is reasonable doubt as to the loan's
collectibility. Subsequent recognition of interest income for such loans is
generally on the cash method.
Real estate acquired in settlement of loans. ASB records real estate acquired
in settlement of loans at the lower of cost or fair value less estimated selling
expenses.
Loan origination and commitment fees. ASB defers loan origination fees (net of
direct costs) and recognizes such fees as an adjustment of yield over the life
of the loan. ASB also defers nonrefundable commitment fees (net of direct loan
origination costs, if applicable) for commitments to originate or purchase loans
and, if the commitment is exercised, recognizes such fees as an adjustment of
yield over the life of the loan. If the commitment expires unexercised, ASB
recognizes nonrefundable commitment fees as income upon expiration.
50
<PAGE>
Amortization of goodwill and core deposit intangibles. ASB amortizes goodwill on
a straight-line basis over 25 years and core deposit intangibles each year at
the greater of the actual attrition rate of such deposit base or 10% of the
original value. Management evaluates whether later events or changes in
circumstances indicate the remaining estimated useful life of an intangible
asset may warrant revision or that the remaining balance of an intangible asset
may not be recoverable. When factors indicate that an intangible asset should be
evaluated for possible impairment, management uses an estimate of undiscounted
future cash flows over the remaining useful life of the asset in measuring
whether the intangible asset is recoverable.
International power
- --------------------------------------------------------------------------------
Foreign currency translation. For non-U.S. subsidiaries, asset and liability
accounts are translated at year end exchange rates and revenues and expenses are
translated at average exchange rates for the year or historical exchange rates,
as appropriate. For subsidiaries whose functional currency is deemed to be other
than the U.S. dollar, translation adjustments are included as a separate
component of other comprehensive income and stockholders' equity. Gains and
losses on foreign currency transactions are recorded in income.
2. Segment financial information
- --------------------------------------------------------------------------------
The segments of the Company, the electric utility, savings bank and
international power segments, are strategic business units that offer different
products and services and operate in different regulatory environments. The
accounting policies of the segments are the same as those described in the
summary of significant accounting policies, except that income taxes for each
segment is calculated on a "stand-alone" basis. HEI evaluates segment
performance based on income from continuing operations. The Company accounts for
intersegment sales and transfers as if the sales and transfers were to third
parties, that is, at current market prices. Intersegment revenues consist
primarily of interest and preferred dividends.
Electric utility
- --------------------------------------------------------------------------------
Hawaiian Electric Company, Inc. (HECO) and its wholly owned operating
subsidiaries, Hawaii Electric Light Company, Inc. (HELCO) and Maui Electric
Company, Limited (MECO), are electric public utilities in the business of
generating, purchasing, transmitting, distributing and selling electric energy,
and are regulated by the PUC.
Savings bank
- --------------------------------------------------------------------------------
ASB is a federally chartered savings bank providing a full range of banking
services to individual and corporate customers through its branch system in
Hawaii. ASB is subject to examination and comprehensive regulation by the
Department of Treasury, Office of Thrift Supervision and the Federal Deposit
Insurance Corporation (FDIC), and is also subject to regulations of the Board of
Governors of the Federal Reserve System. In December 1997, ASB acquired most of
the Hawaii operations of Bank of America, FSB (BoA).
International power
- --------------------------------------------------------------------------------
HEIPC and its wholly owned subsidiaries (collectively, the HEIPC Group) were
formed to pursue independent power and integrated energy services projects in
Asia and the Pacific. In 1996, an HEIPC subsidiary entered into an energy
conversion agreement for approximately 20 years with the Guam Power Authority
for the rehabilitation, operation and maintenance of two 25 megawatt (MW) (net)
generating units which began commercial operations in 1997. In 1998 and 1999,
the HEIPC Group acquired what is now a 75% interest in a joint venture formed to
design, construct, own, operate and manage a 200 MW (net) coal-fired power plant
in China over a period of approximately 20 years. In 1998 and 1999, the HEIPC
Group invested $9.7 million to acquire convertible cumulative nonparticipating
8% preferred shares and common shares in Cagayan Electric Power & Light Co.,
Inc., an electric distribution company in the Philippines.
Other
- --------------------------------------------------------------------------------
In November 1999, HTB sold YB and substantially all of HTB's operating assets.
HTB provided tugboat and charter barge services in Hawaii and the Pacific area
and, together with its formerly wholly owned subsidiary, YB, provided general
freight and containerized cargo transportation among the Hawaiian Islands. Also,
in November 1999, HTB's name was changed to TOOTS.
HEI Investment Corp. holds investments primarily in leveraged leases.
"Other" also includes amounts for the holding companies and other
subsidiaries.
51
<PAGE>
<TABLE>
<CAPTION>
Electric Savings International
(dollars in thousands) utility bank Power*** Other Total
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
1999
Revenues from external customers...... 1,055,193 409,883 4,464 53,750 1,523,290
Intersegment revenues................. 11 30 - (41) -
- ------------------------------------------------------------------------------------------------------------------------------
Revenues.......................... 1,055,204 409,913 4,464 53,709 1,523,290
==============================================================================================================================
Depreciation and amortization......... 99,631 15,711 989 6,670 123,001
==============================================================================================================================
Interest expense...................... 48,461 207,168 514 23,656 279,799
==============================================================================================================================
Profit (loss)*........................ 123,269 54,940 (5,245) (23,080) 149,884
Income taxes (benefit)................ 48,047 19,528 (156) (10,429) 56,990
- ------------------------------------------------------------------------------------------------------------------------------
Income (loss) from
continuing operations........... 75,222 35,412 (5,089) (12,651) 92,894
==============================================================================================================================
Capital expenditures.................. 108,109 8,366 14,726 3,162 134,363
==============================================================================================================================
Assets**.............................. 2,302,809 5,848,207 51,766 88,244 8,291,026
==============================================================================================================================
1998
Revenues from external customers...... 1,016,283 409,853 4,773 54,256 1,485,165
Intersegment revenues................. - 30 - (30) -
- ------------------------------------------------------------------------------------------------------------------------------
Revenues.......................... 1,016,283 409,883 4,773 54,226 1,485,165
==============================================================================================================================
Depreciation and amortization......... 93,484 15,438 978 2,896 112,796
==============================================================================================================================
Interest expense...................... 47,921 216,994 538 22,065 287,518
==============================================================================================================================
Profit (loss)*........................ 135,348 48,250 (3,702) (28,315) 151,581
Income taxes (benefit)................ 54,572 17,987 329 (15,935) 56,953
- ------------------------------------------------------------------------------------------------------------------------------
Income (loss) from
continuing operations........... 80,776 30,263 (4,031) (12,380) 94,628
==============================================================================================================================
Capital expenditures.................. 131,895 10,401 17,864 6,578 166,738
==============================================================================================================================
Assets**.............................. 2,311,253 5,691,672 43,923 152,412 8,199,260
==============================================================================================================================
1997
Revenues from external customers...... 1,107,523 294,105 3,001 55,798 1,460,427
Intersegment revenues................. - 30 24 (54) -
- ------------------------------------------------------------------------------------------------------------------------------
Revenues.......................... 1,107,523 294,135 3,025 55,744 1,460,427
==============================================================================================================================
Depreciation and amortization......... 91,948 7,839 403 5,153 105,343
==============================================================================================================================
Interest expense...................... 48,778 164,662 397 13,117 226,954
==============================================================================================================================
Profit (loss)*........................ 130,724 44,349 (2,393) (22,064) 150,616
Income taxes (benefit)................ 52,535 18,016 191 (11,969) 58,773
- ------------------------------------------------------------------------------------------------------------------------------
Income (loss) from
continuing operations........... 78,189 26,333 (2,584) (10,095) 91,843
==============================================================================================================================
Capital expenditures.................. 122,140 7,796 14,525 2,840 147,301
==============================================================================================================================
Assets**.............................. 2,212,314 5,548,412 15,518 169,962 7,946,206
==============================================================================================================================
</TABLE>
* Income before income taxes and discontinued operations.
** At December 31.
*** 1998 and 1997 have been reclassified to include this segment.
Revenues attributed to foreign countries and long-lived assets located in
foreign countries as of the dates and for the periods identified above were not
significant.
52
<PAGE>
3 . Electric utility subsidiary
- -----------------------------------------------------------------------------
Hawaiian Electric Company, Inc. and subsidiaries
Selected consolidated financial information
Income statement data
<TABLE>
<CAPTION>
Years ended December 31 1999 1998 1997
- -----------------------------------------------------------------------------------------------------------------------------------
(in thousands)
<S> <C> <C> <C>
Revenues
Operating revenues.................................................................... $1,050,323 $ 1,008,899 $1,098,755
Other--nonregulated................................................................... 4,881 7,384 8,768
- -----------------------------------------------------------------------------------------------------------------------------------
1,055,204 1,016,283 1,107,523
- -----------------------------------------------------------------------------------------------------------------------------------
Expenses
Fuel oil.............................................................................. 216,693 195,940 257,002
Purchased power....................................................................... 275,691 274,450 292,852
Other operation....................................................................... 136,303 142,992 148,959
Maintenance........................................................................... 57,425 43,183 49,858
Depreciation and amortization of property, plant and equipment........................ 93,301 85,655 82,017
Taxes, other than income taxes........................................................ 99,788 95,808 104,232
Other--nonregulated................................................................... 1,289 805 850
- -----------------------------------------------------------------------------------------------------------------------------------
880,490 838,833 935,770
- -----------------------------------------------------------------------------------------------------------------------------------
Operating income from regulated and nonregulated activities........................... 174,714 177,450 171,753
Allowance for equity funds used during construction................................... 4,228 10,106 10,864
Interest and other charges............................................................ (57,071) (54,669) (54,423)
Allowance for borrowed funds used during construction................................. 2,576 5,915 6,190
- -----------------------------------------------------------------------------------------------------------------------------------
Income before income taxes and preferred stock dividends of HECO...................... 124,447 138,802 134,384
Income taxes.......................................................................... 48,047 54,572 52,535
- -----------------------------------------------------------------------------------------------------------------------------------
Income before preferred stock dividends of HECO....................................... 76,400 84,230 81,849
Preferred stock dividends of HECO..................................................... 1,178 3,454 3,660
- -----------------------------------------------------------------------------------------------------------------------------------
Net income for common stock........................................................... $ 75,222 $ 80,776 $ 78,189
===================================================================================================================================
<CAPTION>
Balance sheet data
December 31 1999 1998
- -----------------------------------------------------------------------------------------------------------------------------------
(in thousands)
<S> <C> <C>
Assets
Utility plant, at cost
Property, plant and equipment...................................................... $ 2,882,536 $2,781,309
Less accumulated depreciation...................................................... (1,076,373) (982,172)
Construction in progress........................................................... 151,981 144,035
- -----------------------------------------------------------------------------------------------------------------------------------
Net utility plant..................................................................... 1,958,144 1,943,172
Regulatory assets..................................................................... 114,759 108,344
Other................................................................................. 229,906 259,737
- -----------------------------------------------------------------------------------------------------------------------------------
$ 2,302,809 $2,311,253
===================================================================================================================================
Capitalization and liabilities
Common stock equity................................................................... $ 806,103 $ 786,567
Cumulative preferred stock
Not subject to mandatory redemption, dividend rates of 4.25-8.875%................... 34,293 48,293
Subject to mandatory redemption, dividend rates of 7.68-12.75%....................... - 33,080
HECO-obligated mandatorily redeemable preferred securities of trust subsidiaries holding
solely HECO and HECO-guaranteed subordinated debentures.......................... 100,000 100,000
Long-term debt........................................................................ 646,029 621,998
- -----------------------------------------------------------------------------------------------------------------------------------
Total capitalization.................................................................. 1,586,425 1,589,938
Short-term borrowings from nonaffiliates and affiliate................................ 107,013 139,413
Deferred income taxes................................................................. 131,105 128,327
Contributions in aid of construction.................................................. 206,302 198,904
Other................................................................................. 271,964 254,671
- -----------------------------------------------------------------------------------------------------------------------------------
$ 2,302,809 $2,311,253
===================================================================================================================================
</TABLE>
Cumulative preferred stock. Certain cumulative preferred stock of HECO and its
subsidiaries is redeemable at the option of the respective company at a premium
or par. At December 31, 1999 and 1998, outstanding preferred stock not subject
to mandatory redemption had dividend rates ranging from 4.25% to 7.625% and
4.25% to 8.875%, respectively. At December 31, 1998, outstanding preferred stock
subject to mandatory redemption had dividend rates ranging from 7.68% to 12.75%;
all such preferred stock was redeemed during 1999.
Major customers. HECO and its subsidiaries received approximately 9% ($98
million), 10% ($98 million) and 10% ($110 million) of their operating revenues
from the sale of electricity to various federal government agencies in 1999,
1998 and 1997, respectively.
53
<PAGE>
Commitments and contingencies
Fuel contracts. HECO and its subsidiaries have contractual agreements to
purchase minimum quantities of fuel oil and diesel fuel through 2004 (at prices
tied to the market prices of petroleum products in Singapore and Los Angeles).
Based on the average price per barrel at January 1, 2000, the estimated cost of
minimum purchases under the fuel supply contracts for 2000 is $262 million. The
actual cost of purchases in 2000 could vary substantially from this estimate as
a result of changes in market prices, quantities actually purchased and other
factors. HECO and its subsidiaries purchased $229 million, $183 million and $248
million of fuel under contractual agreements in 1999, 1998 and 1997,
respectively.
Power purchase agreements. At December 31, 1999, HECO and its subsidiaries had
power purchase agreements for 534 MW of firm capacity, including its power
purchase agreement with Hamakua Energy Partners, L.P., formerly known as Encogen
Hawaii, L.P. (Hamakua Partners) for 60 MW of firm capacity beginning in late
2000. The PUC allows rate recovery for energy and firm capacity payments under
these agreements. Assuming that each of the agreements remains in place for its
current term and the minimum availability criteria in the power purchase
agreements are met, aggregate minimum fixed capacity charges are expected to be
approximately $112 million in 2000, $120 million in 2001, $116 million in 2002,
$118 million each in 2003 and 2004 and a total of $1.9 billion in 2005 through
2030.
In general, HECO and its subsidiaries base their payments under the power
purchase agreements upon available capacity and energy and they are generally
not required to make payments for capacity if the contracted capacity is not
available, and payments are reduced, under certain conditions, if available
capacity drops below contracted levels. In general, the payment rates for
capacity have been predetermined for the terms of the agreements. Energy
payments will vary over the terms of the agreements and HECO and its
subsidiaries pass on changes in the fuel component of the energy charges to
customers through the energy cost adjustment clause in their rate schedules.
HECO and its subsidiaries do not operate nor participate in the operation of any
of the facilities that provide power under the agreements. Title to the
facilities does not pass to HECO or its subsidiaries upon expiration of the
agreements, and the agreements do not contain bargain purchase options for the
facilities.
Interim rate increases. At December 31, 1999, HECO and its subsidiaries had not
recognized revenues under interim rate increases that were subject to refund.
HELCO power situation. In 1991, HELCO began planning for the expansion of its
Keahole power plant to meet increased electric generation demand forecasted for
1994. HELCO's plans were to install two 20 MW combustion turbines (CT-4 and CT-
5), followed by an 18 MW heat steam recovery generator (ST-7), at which time
these units would be converted to a 56 MW (net) combined-cycle unit. In January
1994, the PUC approved expenditures for CT-4, which HELCO had planned to install
in late 1994. Installation of the units has been predicated upon HELCO obtaining
an amendment to its Keahole land use permit and obtaining an air permit from the
federal Environmental Protection Agency (EPA) and the Department of Health of
the State of Hawaii (DOH). The Keahole expansion has been delayed due to
lawsuits, claims and petitions brought by independent power producers (IPPs) and
others objecting to the expansion and alleging among other things that (1)
operation of the expanded Keahole site would not comply with land use
regulations (including noise standards) and HELCO's land patent; (2) HELCO
cannot operate the plant within current air quality standards; and (3) HELCO
could alternatively purchase power from IPPs to meet increased electric
generation demand.
Land use permit amendment. The Third Circuit Court of the State of Hawaii ruled
- -------------------------
in 1997 that HELCO was entitled to use its Keahole site for the expansion
project. Final judgments of the Third Circuit Court related to this ruling are
on appeal to the Hawaii Supreme Court.
In a lawsuit filed by the Keahole Defense Coalition (KDC) and others claiming
in part that HELCO was applying an incorrect noise standard, the Third Circuit
Court ruled in favor of KDC that the stricter noise standards apply to HELCO's
plant, but left enforcement of the ruling to the DOH. The DOH has not taken any
formal enforcement action. If and when the DOH actually enforces the stricter
standards, HELCO may assert that the noise regulations are unconstitutional as
applied. In the meantime, HELCO has determined that noise mitigation measures
can be implemented, if necessary, for both the existing units and CT-4 and CT-5.
Those measures have already been installed on the existing diesel units, and
HELCO has applied for administrative approval from the Department of Land and
Natural Resources of the State of Hawaii to install an additional silencer on
CT-2.
54
<PAGE>
Air permit. In 1997, the EPA approved a revised draft permit and the DOH issued
- ----------
a final air permit for the Keahole expansion project. Nine appeals of the
issuance of the permit were filed with the EPA's Environmental Appeals Board
(EAB) in December 1997. In November 1998, the EAB denied review of certain
appeals, but directed the DOH to reopen the permit for the limited purpose of
reviewing data supporting the permit. HELCO collected several months of
additional data at a new site. After considering issues raised at an October
1999 public hearing and by the EPA, the DOH is now requiring HELCO to complete a
full 12 months of data collection at the new site (which collection began in
January 1999) and also is requiring that two months of data be collected at
another elevation to corroborate the data collected at the new site. Since there
are currently no stays on the project, installation of CT-4 and CT-5 is expected
to begin when the air permit is obtained.
IPP Complaints. Three IPPs--Encogen Hawaii, L.P. (now Hamakua Partners), Hilo
- --------------
Coast Power Company (HCPC) and Kawaihae Cogeneration Partners (KCP)--had filed
complaints with the PUC alleging that they are entitled to power purchase
contracts to provide HELCO with additional capacity. Two of those complaints
have been resolved, as described below. Two IPPs had claimed they would be a
substitute for HELCO's planned expansion of Keahole. In 1994 and 1995, the PUC
allowed HELCO to pursue construction of and commit expenditures for the Keahole
expansion project. However, the PUC noted that such costs are not to be included
in rate base until the project is installed and being used for utility purposes.
The PUC also ordered HELCO to negotiate with the IPPs and held that the facility
to be built should be the one that can be most expeditiously put into service at
"allowable cost."
HELCO and Hamakua Partners subsequently executed a power purchase agreement
(PPA) for a 60 MW (net) facility and an interconnection agreement, which were
approved by the PUC in July 1999. If Hamakua Partners meets the deadlines in the
PPA, its first phase of 22 MW will be in-service by August 2000 and the
remainder of its 60 MW facility will be in-service by December 2000. This PPA
was necessary to ensure reliable service to customers on the island of Hawaii
and, in the opinion of management, does not supplant the need for CT-4 and CT-5.
The PUC has also approved a restated and amended PPA between HELCO and HCPC
which has a term of five years. The negotiated agreement is substantially
different from the 30-year contract for 32 MW which HCPC had proposed. The
agreement requires that HCPC continue to provide HELCO with 22 MW of capacity
during the entire term of the agreement, 2000 to 2004. HELCO may opt for an
early termination of the PPA after 2001 by giving HCPC written notice no later
than May 30 of the year of termination and paying an early termination amount of
$0.5 million for each of the remaining years in the five-year term. Like the
Hamakua Partners PPA, this restated and amended PPA was necessary to ensure
reliable service to customers until CT-4 and CT-5 are placed in service.
As of December 31, 1999, KCP still has a PPA proposal pending. No agreement
has been reached. If KCP were to negotiate a PPA with HELCO and place its plant
in service prior to the installation of CT-4 and CT-5, CT-4 and CT-5 may not be
installed until additional generating capacity is required. In October 1999,
however, the Third Circuit Court ruled that the lease for KCP's proposed plant
site was invalid. At December 31, 1999, management continues to believe that
KCP's proposal is not viable and, therefore, will not impact CT-4 and CT-5.
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 December 31,
1999, HELCO's costs incurred in its efforts to put CT-4 and CT-5 into service
amounted to approximately $79.8 million, including $32.3 million for equipment
and material purchases, $25.9 million for planning, engineering, permitting,
site development and other costs and $21.6 million for AFUDC. As of December 31,
1999, approximately $23.1 million of the $79.8 million was transferred from
construction in progress to plant-in-service as such costs represent completed
facilities which relate to the existing units in service as well as CT-4 and CT-
5.
Although management believes it has acted prudently with respect to the
Keahole project, effective December 1, 1998, HELCO decided to discontinue the
accrual of AFUDC on CT-4 and CT-5 (which would have been approximately $0.5
million after tax per month). The length of 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 Hamakua Partners facility is not placed
in service as planned. As ST-7 is not needed in the near future, no costs for
ST-7 are included in construction in progress.
55
<PAGE>
Management believes that the issues surrounding the amendment to the land use
permit, the air permit, the IPP complaints and related matters will be
satisfactorily resolved and will not prevent HELCO from ultimately constructing
CT-4 and CT-5. Costs relating to CT-4 and CT-5 are subject to the rate-making
process governed by the PUC. Management believes no adjustment to costs incurred
to put CT-4 and CT-5 into service is required as of December 31, 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 (PBR) and innovative pricing provisions. The other
parties to the proceeding advanced numerous other proposals in their statements
of position. The PUC recently submitted a status report on its investigation to
the Legislature, at its request. In the report, the PUC stated that competitive
bidding for new power supplies (i.e., wholesale generation competition) is a
logical first step to encourage competition in the state's electric industry and
that it plans to proceed with an examination of the feasibility of competitive
bidding. The PUC also plans to review specific policies to encourage renewable
energy resources in the power generation mix. The report states that "further
steps" by the PUC "will involve the development of specific policies to
encourage wholesale competition and the continuing examination of other areas
suitable for the development of competition."
Some of the parties may seek state legislative action on their proposals. HECO
cannot predict what the ultimate outcome of the proceeding will be or which (if
any) of the proposals advanced in the proceeding will be implemented.
In May 1999, the PUC approved HECO's standard form contract for customer
retention that allows HECO to provide a rate option for customers who would
otherwise reduce their energy use from HECO's system by using energy from a
nonutility generator. Based on HECO's current rates, the standard form contract
provides a 2.77% discount on base energy rates for "Large Power" customers and
an 11.27% discount on base energy rates for "General Service Demand" customers.
In December 1999, HECO, HELCO and MECO filed an application with the PUC seeking
permission to implement PBR in future rate cases. The proposed PBR would allow
adjustments in the electric utilities' rates (for up to five years after a rate
case) based on an index-based price cap, an earnings sharing mechanism and a
service quality mechanism.
Environmental regulation. In early 1995, the DOH initially advised HECO, HTB, YB
and others that it was conducting an investigation to determine the nature and
extent of actual or potential releases of hazardous substances, oil, pollutants
or contaminants at or near Honolulu Harbor. The DOH issued letters in December
1995, indicating that it had identified a number of parties, including HECO, HTB
and YB, who appear to be potentially responsible for the contamination and/or
operate their facilities upon contaminated land. The DOH met with these
identified parties in January 1996 and certain of the identified parties
(including HECO, Chevron Products Company, the State of Hawaii Department of
Transportation Harbors Division and others) formed a Honolulu Harbor Working
Group. Effective January 30, 1998, the 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.
In 1999, the Working Group submitted reports to the DOH presenting
environmental conditions and recommendations for additional data gathering to
allow for an assessment of the need for risk-based corrective action. The
Working Group also engaged a consultant who identified 27 additional potentially
responsible parties, including YB. Under the terms of the agreement for the sale
of YB, HEI and TOOTS (formerly HTB) have certain indemnity obligations,
including obligations with respect to the Honolulu Harbor investigation. TOOTS
has joined the Working Group.
Because the process for determining appropriate remedial and cleanup action,
if any, is at an early stage, management cannot predict at this time the costs
of further site analysis or future remediation and cleanup requirements, nor can
it estimate when such costs would be incurred. Certain of the costs incurred may
be claimed and covered under insurance policies, but such coverage is not
determinable at this time.
56
<PAGE>
4. Savings bank subsidiary
- --------------------------------------------------------------------------------
American Savings Bank, F.S.B. and subsidiaries
Selected consolidated financial information
Income statement data
<TABLE>
<CAPTION>
Years ended December 31 1999 1998 1997
- -------------------------------------------------------------------------------------------------------------------------------
(in thousands)
<S> <C> <C> <C>
Interest income............................................................ $ 379,979 $ 380,661 $277,618
Interest expense........................................................... 207,168 216,994 164,662
- -------------------------------------------------------------------------------------------------------------------------------
Net interest income........................................................ 172,811 163,667 112,956
Provision for loan losses.................................................. (16,500) (13,802) (6,934)
Other income............................................................... 29,934 29,223 16,517
Operating, administrative and general expenses............................. (125,893) (125,438) (77,800)
- -------------------------------------------------------------------------------------------------------------------------------
Operating income........................................................... 60,352 53,650 44,739
Income taxes............................................................... 19,528 17,987 18,016
- -------------------------------------------------------------------------------------------------------------------------------
Income before preferred stock dividends.................................... 40,824 35,663 26,723
Preferred stock dividends.................................................. (5,412) (5,400) (390)
- -------------------------------------------------------------------------------------------------------------------------------
Net income................................................................. $ 35,412 $ 30,263 $ 26,333
===============================================================================================================================
</TABLE>
<TABLE>
<CAPTION>
Balance sheet data
December 31 1999 1998
- --------------------------------------------------------------------------------------------------------------------------
(in thousands)
<S> <C> <C>
Assets
Cash and equivalents................................................................ $ 192,807 $ 352,566
Held-to-maturity investment securities.............................................. 186,799 111,574
Held-to-maturity mortgage/asset-backed securities................................... 1,973,146 1,791,353
Loans receivable, net............................................................... 3,211,878 3,143,197
Other............................................................................... 176,836 177,976
Goodwill and other intangibles...................................................... 106,741 115,006
- --------------------------------------------------------------------------------------------------------------------------
$5,848,207 $5,691,672
==========================================================================================================================
Liabilities and equity
Deposit liabilities................................................................. $3,491,655 $3,865,736
Securities sold under agreements to repurchase...................................... 661,215 523,800
Advances from Federal Home Loan Bank................................................ 1,189,081 805,581
Other............................................................................... 70,239 83,683
- --------------------------------------------------------------------------------------------------------------------------
5,412,190 5,278,800
Minority interests.................................................................. 3,300 -
Preferred stock..................................................................... 75,113 75,113
Common stock equity................................................................. 357,604 337,759
- --------------------------------------------------------------------------------------------------------------------------
$5,848,207 $5,691,672
==========================================================================================================================
</TABLE>
Acquisition of most of the Hawaii operations of Bank of America, FSB. Effective
December 6, 1997, ASB acquired certain loans and other assets and assumed
certain deposits and other liabilities of the Hawaii operations of BoA pursuant
to a Purchase and Assumption Agreement executed on May 26, 1997, as amended. ASB
used the purchase method of accounting to account for the transaction.
Accordingly, the accompanying financial statements include the results of
operations related to the assets acquired and liabilities assumed from the
acquisition date. In this transaction, ASB assumed liabilities with an estimated
fair value of $1.7 billion and paid a $0.1 billion premium on certain
transferred deposit liabilities. The estimated fair value of tangible and
intangible assets acquired, including cash of $0.8 billion, amounted to $1.8
billion. ASB recorded the excess of the purchase price over the estimated fair
value of the identifiable net assets acquired of $72 million as goodwill and
recorded the core deposit premium of approximately $20 million as an intangible
asset.
Deposit-insurance premiums and regulatory developments. The Savings Association
Insurance Fund (SAIF) insures the deposit accounts of ASB and other thrifts.
The Bank Insurance Fund (BIF) insures the deposit accounts of commercial banks.
The FDIC administers the SAIF and BIF. In December 1997, ASB acquired BIF-
assessable deposits as well as SAIF-assessable deposits from BoA.
In December 1996, the FDIC adopted a risk-based assessment schedule for SAIF
deposits, effective January 1, 1997, that was identical to the existing base
rate schedule for BIF deposits: zero to 27 cents per $100 of deposits. Added to
this base rate schedule through 1999 was the assessment to fund the Financing
Corporation's (FICO's) interest obligations, which assessment was initially set
at 6.48 cents per $100 of deposits for SAIF deposits and 1.3 cents per $100 of
deposits for BIF deposits (subject to quarterly adjustment). Effective January
1, 2000, the assessment rate for funding FICO interest payments became identical
for SAIF and BIF deposits at a rate of 2.12 cents per $100 of deposits. As a
"well-capitalized" thrift, ASB's base deposit insurance premium effective for
the December 31, 1999 quarterly payment is zero and its assessment for funding
FICO interest payments is 2.12 cents per $100 of SAIF and BIF deposits, on an
annual basis, based on deposits as of September 30, 1999.
57
<PAGE>
Investment and mortgage/asset-backed securities.
<TABLE>
<CAPTION>
December 31 1999 1998
- -------------------------------------------------------------------------------------------------------------------------------
Gross Gross Estimated Gross Gross Estimated
Carrying unrealized unrealized fair Carrying unrealized unrealized fair
value gains losses value value gains losses value
- -------------------------------------------------------------------------------------------------------------------------------
(in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Investment securities:
Stock in FHLB
of Seattle........... $ 73,750 $ - $ - $ 73,750 $ 68,553 $ - $ - $ 68,553
Collateralized
debt obligations..... 71,510 494 (42) 71,962 - - - -
Other.................. 41,539 - (90) 41,449 43,021 140 - 43,161
- -------------------------------------------------------------------------------------------------------------------------------
186,799 494 (132) 187,161 111,574 140 - 111,714
- -------------------------------------------------------------------------------------------------------------------------------
Mortgage/asset-
backed securities:
Private issue........... 1,000,620 1,212 (12,338) 989,494 522,307 1,212 (1,892) 521,627
FHLMC................... 114,466 144 (1,647) 112,963 164,291 2,975 (7) 167,259
GNMA.................... 300,195 477 (5,805) 294,867 399,012 4,915 (485) 403,442
FNMA.................... 557,865 1,155 (19,364) 539,656 705,743 9,923 (1,733) 713,933
- -------------------------------------------------------------------------------------------------------------------------------
1,973,146 2,988 (39,154) 1,936,980 1,791,353 19,025 (4,117) 1,806,261
- -------------------------------------------------------------------------------------------------------------------------------
$2,159,945 $ 3,482 $(39,286) $2,124,141 $1,902,927 $19,165 $(4,117) $1,917,975
===============================================================================================================================
</TABLE>
ASB owns private-issue mortgage/asset-backed securities and mortgage/asset-
backed securities purchased from the Federal Home Loan Mortgage Corporation
(FHLMC), Government National Mortgage Association (GNMA) and Federal National
Mortgage Association (FNMA). ASB classifies all such mortgage/asset-backed
securities owned as of December 31, 1999 as held-to-maturity securities.
Contractual maturities are not presented for mortgage/asset-backed securities
because these securities are not due at a single maturity date. The weighted-
average interest rate for mortgage/asset-backed securities at December 31, 1999
and 1998 was 6.77% and 6.70%, respectively.
ASB pledged mortgage/asset-backed securities with a carrying value of
approximately $1.5 billion and $1.2 billion at December 31, 1999 and 1998,
respectively, as collateral to secure public funds, deposits with the Federal
Reserve Bank of San Francisco and advances from the FHLB of Seattle. At December
31, 1999 and 1998, mortgage/asset-backed securities sold under agreements to
repurchase had a carrying value of $437 million and $542 million, respectively.
ASB did not sell mortgage/asset-backed securities or other securities held for
investment in 1999, 1998 or 1997.
Loans receivable.
<TABLE>
<CAPTION>
December 31 1999 1998
- ---------------------------------------------------------------------------------------------------------------------------
(in thousands)
<S> <C> <C>
Real estate loans
Conventional...................................................................... $2,896,058 $2,852,938
Construction and development...................................................... 43,706 35,274
- ---------------------------------------------------------------------------------------------------------------------------
2,939,764 2,888,212
Loans secured by savings deposits................................................... 14,496 16,836
Consumer loans...................................................................... 230,437 236,396
Commercial loans.................................................................... 97,213 94,045
- ---------------------------------------------------------------------------------------------------------------------------
3,281,910 3,235,489
Undisbursed portion of loans in process............................................. (19,486) (31,277)
Deferred fees and discounts, including net purchase
accounting discounts............................................................. (24,083) (21,236)
Allowance for loan losses........................................................... (35,348) (39,779)
- ---------------------------------------------------------------------------------------------------------------------------
Loans held to maturity.............................................................. 3,202,993 3,143,197
Commercial loans held for sale...................................................... 8,885 -
- ---------------------------------------------------------------------------------------------------------------------------
$3,211,878 $3,143,197
===========================================================================================================================
</TABLE>
At December 31, 1999 and 1998, the weighted-average interest rate for loans
receivable was 7.60% and 7.78%, respectively.
At December 31, 1999, ASB pledged loans with an amortized cost of
approximately $270.3 million as collateral to secure advances from the FHLB of
Seattle.
At December 31, 1999, ASB had impaired loans totaling $38 million, which
consisted of $23 million of income property loans, $13 million of residential
real estate loans for properties of one to four units and $2 million of
commercial loans.
58
<PAGE>
At December 31, 1998, ASB had impaired loans totaling $50 million, which
consisted of $39 million of income property loans, $9 million of residential
real estate loans for properties of one to four units and $2 million of
commercial loans. The average balances of impaired loans during 1999, 1998 and
1997 were $45 million, $44 million and $38 million, respectively. At December
31, 1999, 1998 and 1997, the allowance for loan losses for impaired loans was
$4.5 million, $10.7 million and $7.1 million, respectively.
At December 31, 1999 and 1998, ASB had nonaccrual and renegotiated loans of
$74 million and $98 million, respectively.
ASB services real estate loans ($617 million, $730 million and $872 million at
December 31, 1999, 1998 and 1997, respectively), which are not included in the
accompanying consolidated financial statements. ASB reports fees earned for
servicing loans as income when the related mortgage loan payments are collected
and charges loan servicing costs to expense as incurred.
Mortgage loan commitments of approximately $13.6 million are not reflected in
the consolidated balance sheet as of December 31, 1999. Of such commitments,
$6.1 million were for variable-rate mortgage loans and $7.5 million were for
fixed-rate mortgage loans.
Allowance for loan losses. For 1999, 1998 and 1997, the provision for loan
losses was $16.5 million, $13.8 million and $6.9 million, respectively; net
charge-offs amounted to $20.9 million, $4.0 million and $2.6 million,
respectively; and the ratio of net charge-offs to average loans outstanding was
0.66%, 0.13% and 0.12%, respectively.
Real estate acquired in settlement of loans. At December 31, 1999 and 1998,
ASB's real estate acquired in settlement of loans was $4.6 million and $5.6
million, respectively.
Deposit liabilities.
<TABLE>
<CAPTION>
December 31 1999 1998
- -------------------------------------------------------------------------------------------------------------------------
Weighted- Weighted-
average average
(in thousands) stated rate Amount stated rate Amount
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Commercial checking.............................................. - % $ 107,491 - % $ 117,589
Other checking................................................... 1.04 521,325 1.04 511,291
Passbook......................................................... 2.25 1,070,461 2.50 1,160,951
Money market..................................................... 3.00 321,315 3.37 326,685
Term certificates................................................ 4.85 1,471,063 5.12 1,749,220
- -------------------------------------------------------------------------------------------------------------------------
3.16% $3,491,655 3.49% $3,865,736
=========================================================================================================================
</TABLE>
At December 31, 1999 and 1998, deposit accounts of $100,000 or more totaled $0.7
billion and $1.1 billion, respectively.
The approximate amounts of term certificates outstanding at December 31, 1999
with scheduled maturities for 2000 through 2004 were $1.2 billion in 2000, $73.6
million in 2001, $19.6 million in 2002, $14.9 million in 2003 and $85.9 million
in 2004.
Interest expense on savings deposits by type of deposit was as follows:
<TABLE>
<CAPTION>
Years ended December 31 1999 1998 1997
- -------------------------------------------------------------------------------------------------------------------
(in thousands)
<S> <C> <C> <C>
Interest-bearing checking............................................................. $ 5,169 $ 5,706 $ 3,627
Passbook.............................................................................. 25,939 33,050 26,769
Money market.......................................................................... 10,942 12,958 3,517
Term certificates..................................................................... 78,288 90,355 55,186
- -------------------------------------------------------------------------------------------------------------------
$120,338 $142,069 $89,099
===================================================================================================================
</TABLE>
Securities sold under agreements to repurchase.
<TABLE>
<CAPTION>
December 31, 1999
- ------------------------------------------------------------------------------------------------------------------
Collateralized by mortgage/asset-backed
Repurchase Weighted securities
-------------------------------------------
Maturity liability average rate Carrying value Market value
- ------------------------------------------------------------------------------------------------------------------
(in thousands)
<S> <C> <C> <C> <C>
1 to 29 days............................ $ 42,741 5.34% $ 52,874 $ 51,586
30 to 90 days........................... 195,861 5.55 222,791 213,814
Over 90 days............................ 422,613 5.61 470,647 461,043
- --------------------------------------------------------------------------------------------------------------
$661,215 5.58% $746,312 $726,443
==============================================================================================================
</TABLE>
At December 31, 1999, securities sold under agreements to repurchase consisted
of mortgage/asset-backed securities sold under fixed-coupon agreements. The
FHLMC, GNMA and FNMA mortgage/asset-backed securities are book-entry securities
and were delivered by appropriate entry into the counterparties' accounts at the
Federal Reserve System. The remaining securities underlying the agreements were
delivered to the brokers/dealers who arranged the transactions. The carrying
value of securities underlying the agreements remained in ASB's asset accounts
and the obligation to repurchase securities sold is reflected as a liability in
the consolidated balance sheet. At December 31, 1999 and 1998, ASB had
agreements to repurchase identical securities totaling $661 million and $524
million, respectively. At December 31, 1999 and 1998, the weighted-average rate
on securities sold under agreements to repurchase was 5.58% and 5.33%,
respectively, and the weighted-average remaining days to
59
<PAGE>
maturity was 163 days and 135 days, respectively. During 1999, 1998 and 1997,
securities sold under agreements to repurchase averaged $540 million, $487
million and $561 million, respectively, and the maximum amount outstanding at
any month-end was $661 million, $652 million and $765 million, respectively.
Advances from Federal Home Loan Bank.
<TABLE>
<CAPTION>
December 31 1999 1998
- -------------------------------------------------------------------------------------------------------------------------------
Weighted- Weighted-
average average
stated rate Amount stated rate Amount
- -------------------------------------------------------------------------------------------------------------------------------
(in thousands)
<S> <C> <C> <C> <C>
Due in
1999..................................................... - % $ - 5.55% $176,800
2000..................................................... 5.74 371,760 5.64 107,760
2001..................................................... 6.47 301,000 6.44 110,000
2002..................................................... 6.60 77,800 6.96 37,500
2003..................................................... 5.99 221,200 5.93 180,200
2004..................................................... 6.87 90,821 6.90 75,821
Thereafter............................................... 7.00 126,500 7.01 117,500
- -------------------------------------------------------------------------------------------------------------------------------
6.25% $1,189,081 6.17% $805,581
===============================================================================================================================
</TABLE>
Advances from the FHLB of Seattle are secured by mortgage/asset-backed
securities and stock in the FHLB of Seattle. As a member of the FHLB system, ASB
is required to own a specific number of shares of capital stock of the FHLB of
Seattle and is required to maintain cash and investments in U.S. Government and
other qualifying securities in an amount equal to 4% of the amount of its
savings accounts and other obligations due within one year.
Common stock equity. As of December 31, 1999, ASB was in compliance with the
minimum capital requirements under the Office of Thrift Supervision regulations.
5 . International power subsidiary
- --------------------------------------------------------------------------------
China project. In 1998 and 1999, the HEIPC Group acquired what is now a 75%
interest in a joint venture, Baotou Tianjiao Power Co., Ltd., formed to design,
construct, own, operate and manage a 200 MW (net) coal-fired power plant to be
located in Inner Mongolia, People's Republic of China. Ownership of the plant
will be transferred, without charge, to the sole purchaser of the power in
approximately 20 years. Construction has commenced and the first of two units is
expected to be on line by early 2001 and the second unit six months thereafter.
As of December 31, 1999, the HEIPC Group had invested $24 million and is
committed to invest up to an additional $86 million toward the China project.
Subsequent event. On February 10, 2000, an indirect subsidiary of HEIPC signed
an agreement to acquire a 50% interest in El Paso Philippines Holding Company,
Inc. (EPHC), which is an indirect subsidiary of El Paso Energy Corporation, for
$87 million plus up to an additional $6 million of contingent payments. The
acquisition is subject to several conditions precedent which must be met or
waived before closing. EPHC owns approximately 91.7% of the common shares of
East Asia Power Resources Corporation, a Philippines holding company primarily
engaged in the electric generation business in Manila and Cebu through its
direct and indirect subsidiaries, using land and barge-based generating
facilities, fired by bunker fuel oil, with total installed capacity of
approximately 390 MW.
6 . Regulatory assets
- --------------------------------------------------------------------------------
In accordance with SFAS No. 71, the Company's financial statements reflect
assets and costs of HECO and its subsidiaries and YB (prior to the sale of YB)
based on current cost-based rate-making regulations. Continued accounting under
SFAS No. 71 requires that certain criteria be met. Management believes HECO and
its subsidiaries' operations currently satisfy the criteria. However, if events
or circumstances should change so that the criteria are no longer satisfied,
management believes that a material adverse effect on the Company's results of
operations, financial position or liquidity may result.
Regulatory assets are expected to be fully recovered through rates over PUC
authorized periods ranging from 1 to 36 years and included the following
deferred costs:
<TABLE>
<CAPTION>
December 31 1999 1998
- --------------------------------------------------------------------------------------------------------
(in thousands)
<S> <C> <C>
Income taxes................................................. $ 57,692 $ 54,506
Postretirement benefits other than pensions.................. 23,267 27,108
Other........................................................ 33,800 28,845
- --------------------------------------------------------------------------------------------------------
$114,759 $110,459
========================================================================================================
</TABLE>
60
<PAGE>
7 . Short-term borrowings
- ------------------------------------------------------------------------------
Short-term borrowings consisted of commercial paper issued by HEI and HECO at
December 31, 1999 and 1998 and had a weighted-average interest rate of 6.9% and
5.9%, respectively.
At December 31, 1999 and 1998, HEI maintained bank lines of credit which
totaled $104 million and $130 million, respectively, and HECO maintained bank
lines of credit which totaled $125 million. The HEI and HECO lines of credit
support the issuance of commercial paper. There were no borrowings under any
line of credit during 1999 or 1998.
8 . Long-term debt
<TABLE>
<CAPTION>
December 31 1999 1998
- ---------------------------------------------------------------------------------------------------------------------------
(in thousands)
<S> <C> <C>
HELCO first mortgage bonds - 7.75%-7.88%, due 2002-2003............................. $ 5,000 $ 5,000
- ---------------------------------------------------------------------------------------------------------------------------
Obligations to the State of Hawaii for the repayment of special
purpose revenue bonds issued on behalf of electric utility subsidiaries
4.95%, due 2012.................................................................... 57,500 57,500
7.20%-7.63%, due 2014-2018......................................................... - 61,400
5.45%-7.60%, due 2020-2023......................................................... 240,000 260,000
5.65%-6.60%, due 2025-2027......................................................... 272,000 272,000
5.50%-6.20%, due 2014-2029......................................................... 116,400 -
- ---------------------------------------------------------------------------------------------------------------------------
685,900 650,900
Less funds on deposit with trustees.............................................. (40,221) (29,684)
Less unamortized discount........................................................ (4,650) (4,218)
- ---------------------------------------------------------------------------------------------------------------------------
641,029 616,998
- ---------------------------------------------------------------------------------------------------------------------------
Promissory notes
6.13%-7.13%, due in various years through 2014..................................... 305,500 208,500
8.20%-8.70%, due in various years through 2011..................................... 26,000 34,100
Variable rate (5.7% at December 31, 1998), paid in 1999............................ - 35,000
- ---------------------------------------------------------------------------------------------------------------------------
331,500 277,600
- ---------------------------------------------------------------------------------------------------------------------------
$977,529 $899,598
===========================================================================================================================
</TABLE>
The first mortgage bonds of HELCO have been secured by a mortgage which purports
to be a lien on substantially all of the real and personal property now owned or
hereafter acquired by HELCO.
At December 31, 1999, the aggregate principal payments required on long-term
debt for 2000 through 2004 are $10 million in 2000, $57 million in 2001, $62
million in 2002, $39 million in 2003 and $1 million in 2004.
9 . HEI- and HECO-obligated preferred securities of trust subsidiaries
- ------------------------------------------------------------------------------
In February 1997, Hawaiian Electric Industries Capital Trust I, a grantor trust
and wholly owned subsidiary of HEI, issued and sold 4 million of its HEI-
obligated 8.36% preferred securities (trust preferred securities), with an
aggregate liquidation value of $100 million. The trust preferred securities have
no scheduled maturity and are not redeemable at the option of the holders, but
may be redeemed by Hawaiian Electric Industries Capital Trust I, in whole or in
part, from time to time, after February 4, 2002.
In March 1997, HECO Capital Trust I, a grantor trust and wholly owned
subsidiary of HECO, issued and sold 2 million of its HECO-obligated 8.05%
Cumulative Quarterly Income Preferred Securities, Series 1997, with an aggregate
liquidation value of $50 million. The Cumulative Quarterly Income 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 HECO Capital Trust I, in whole
or in part, from time to time, on or after March 27, 2002.
In December 1998, HECO Capital Trust II, a grantor trust and wholly owned
subsidiary of HECO, issued and sold 2 million of its HECO-obligated 7.30%
Cumulative Quarterly Income Preferred Securities, Series 1998, with an aggregate
liquidation value of $50 million. The Cumulative Quarterly Income Preferred
Securities must be redeemed at the maturity of the underlying debt on December
15, 2028, which maturity may be shortened to a date no earlier than December 15,
2003 or extended to a date no later than December 15, 2047, and are not
redeemable at the option of the holders, but may be redeemed by HECO Capital
Trust II, in whole or in part, from time to time, on or after December 15, 2003.
61
<PAGE>
10 . Common stock
- -------------------------------------------------------------------------------
Changes to common stock were as follows:
<TABLE>
<CAPTION>
1999 1998 1997
- ----------------------------------------------------------------------------------------------------------------------
Common Common Common
Shares stock Shares stock Shares stock
- ----------------------------------------------------------------------------------------------------------------------
(in thousands)
<S> <C> <C> <C> <C> <C> <C>
Balance, January 1.................. 32,116 $661,720 31,895 $654,819 30,853 $622,945
Issuance of common stock
Dividend reinvestment and
stock purchase plan............ - - 30 1,174 686 24,847
Retirement savings and
other plans.................... 97 3,449 191 6,857 356 12,750
Expenses and other.................. - 166 - (1,130) - (5,723)
- ----------------------------------------------------------------------------------------------------------------------
Balance, December 31................ 32,213 $665,335 32,116 $661,720 31,895 $654,819
======================================================================================================================
</TABLE>
At December 31, 1999, HEI had reserved a total of 9.4 million shares of common
stock for future issuance under the HEI Dividend Reinvestment and Stock Purchase
Plan, the Hawaiian Electric Industries Retirement Savings Plan, the 1987 Stock
Option and Incentive Plan and other plans.
11 . Income taxes
- ------------------------------------------------------------------------------
The components of income taxes attributable to income from continuing operations
were as follows:
<TABLE>
<CAPTION>
Years ended December 31 1999 1998 1997
- -------------------------------------------------------------------------------------------------------------------
(in thousands)
<S> <C> <C> <C>
Federal
Current............................................................ $55,278 $56,118 $52,037
Deferred........................................................... 692 (2,452) (525)
Deferred tax credits, net.......................................... (1,596) (1,634) (1,621)
- -------------------------------------------------------------------------------------------------------------------
54,374 52,032 49,891
- -------------------------------------------------------------------------------------------------------------------
State
Current............................................................ 902 3,497 5,773
Deferred........................................................... 293 295 441
Deferred tax credits, net.......................................... 1,421 1,129 2,668
- -------------------------------------------------------------------------------------------------------------------
2,616 4,921 8,882
- -------------------------------------------------------------------------------------------------------------------
$56,990 $56,953 $58,773
===================================================================================================================
</TABLE>
In March 1998, ASB formed a subsidiary, ASB Realty Corporation, which elects to
be taxed as a real estate investment trust. This reorganization has reduced
ASB's state income taxes by $2.8 million for 1999 and $2.5 million for 1998.
Although the State of Hawaii has indicated in a tax information release that it
may challenge the tax treatment of this reorganization, ASB believes that its
tax position is proper.
A reconciliation of the amount of income taxes computed at the federal
statutory rate of 35% to the amount provided in the Company's consolidated
statements of income was as follows:
<TABLE>
<CAPTION>
Years ended December 31 1999 1998 1997
- ------------------------------------------------------------------------------------------------------------------
(in thousands)
<S> <C> <C> <C>
Amount at the federal statutory income tax rate..................... $52,459 $53,053 $52,716
State income taxes, net of effect on federal income taxes........... 1,700 3,199 5,773
Preferred stock dividends of subsidiaries........................... 747 2,102 2,189
Other, net.......................................................... 2,084 (1,401) (1,905)
- ------------------------------------------------------------------------------------------------------------------
$56,990 $56,953 $58,773
==================================================================================================================
</TABLE>
62
<PAGE>
The tax effects of temporary differences that give rise to deferred tax assets
and liabilities were as follows:
<TABLE>
<CAPTION>
December 31 1999 1998
- ------------------------------------------------------------------------------------------------------------
(in thousands)
<S> <C> <C>
Deferred tax assets
Property, plant and equipment............................................. $ 11,816 $ 12,186
Contributions in aid of construction and customer advances................ 51,834 55,249
Allowance for loan losses................................................. 13,100 10,984
Other..................................................................... 26,535 30,194
- ------------------------------------------------------------------------------------------------------------
103,285 108,613
- ------------------------------------------------------------------------------------------------------------
Deferred tax liabilities
Property, plant and equipment............................................. 173,248 185,598
Leveraged leases.......................................................... 42,915 44,151
Regulatory assets......................................................... 22,423 21,163
FHLB stock dividend....................................................... 12,298 10,231
Other..................................................................... 33,678 33,608
- ------------------------------------------------------------------------------------------------------------
284,562 294,751
- ------------------------------------------------------------------------------------------------------------
Net deferred income tax liability............................................ $181,277 $186,138
============================================================================================================
</TABLE>
The ultimate realization of deferred tax assets is dependent upon the generation
future taxable income during the periods in which those temporary differences
become deductible. Based upon historical taxable income, projections for future
taxable income and tax planning strategies, management believes it is more
likely than not the Company will realize the benefits of the deferred tax assets
and provided no valuation allowance for deferred tax assets during 1999, 1998
and 1997.
12 . Cash flows
- -------------------------------------------------------------------------------
Supplemental disclosures of cash flow information. In 1999, 1998 and 1997, the
Company paid interest amounting to $282 million, $279 million and $218 million,
respectively.
In 1999, 1998 and 1997, the Company paid income taxes amounting to $83
million, $32 million and $61 million, respectively. The increase in income taxes
paid in 1999 compared to 1998 was primarily due to a change in the timing of the
recognition of ASB's taxable income from ASB Realty Corporation, partly offset
by a change in the timing of Public Service Company tax deductions.
Supplemental disclosures of noncash activities. In 1997, HEI shareholders
reinvested common stock dividends amounting to $15 million. Beginning in March
1998, HEI acquired for cash its common shares in the open market, rather than
issuing additional shares, to satisfy the requirements of the HEI Dividend
Reinvestment and Stock Purchase Plan.
In 1999, 1998 and 1997, HECO and its subsidiaries capitalized as part of the
cost of electric utility plant an allowance for equity funds used during
construction amounting to $4 million, $10 million and $11 million, respectively.
13 . Stock option and incentive plan
- -------------------------------------------------------------------------------
Under the 1987 Stock Option and Incentive Plan, as amended, HEI may issue an
aggregate of 2,650,000 shares of common stock to officers and key employees as
incentive stock options, nonqualified stock options, restricted stock, stock
appreciation rights, stock payments or dividend equivalents. HEI has granted
only nonqualified stock options to date. For the nonqualified stock options, the
exercise price of each option generally equals the market price of HEI's stock
on or near the date of grant. Options generally become exercisable in
installments of 25% each year for four years, and expire if not exercised ten
years from the date of the grant. Certain options include dividend equivalents
over the four-year vesting period and are accounted for as compensatory options
under variable plan accounting.
The Company applies the provisions of Accounting Principles Board Opinion No.
25, "Accounting for Stock Issued to Employees," and related interpretations, in
accounting for stock-based compensation awards. The Company recorded
compensation expense (recovery) of ($1.1 million) as a result of the reduction
in the per share market value of the Company's common stock in 1999, $1.0
million in 1998 and $0.9 million in 1997 for the nonqualified stock options and
dividend equivalents. As of January 1, 1996, the Company adopted the disclosure-
only option under SFAS No. 123, "Accounting for Stock-Based Compensation." If
the accounting provisions of SFAS No. 123 had been adopted, the effect on 1999,
1998 and 1997 basic and diluted earnings per share would have been less than
five cents per share for 1999, 1998 and 1997.
63
<PAGE>
Information about HEI's stock option plan was summarized as follows:
<TABLE>
<CAPTION>
1999 1998 1997
- -----------------------------------------------------------------------------------------------------------------------
Weighted- Weighted- Weighted-
average average average
exercise exercise exercise
Shares price Shares price Shares price
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Outstanding, January 1........... 543,375 $36.40 639,550 $35.78 610,875 $36.32
Granted.......................... 224,500 35.59 86,000 40.99 145,000 34.61
Exercised........................ (24,000) 34.34 (135,425) 35.11 (84,825) 35.90
Forfeited or expired............. (4,000) 38.27 (46,750) 40.08 (31,500) 40.61
- -----------------------------------------------------------------------------------------------------------------------
Outstanding, December 31......... 739,875 $36.21 543,375 $36.40 639,550 $35.78
=======================================================================================================================
Options exercisable,
December 31................... 386,125 $36.08 295,875 $36.12 355,925 $36.87
=======================================================================================================================
</TABLE>
The weighted-average fair value of each option granted during the year was
$7.08, $8.42 and $7.65 (at grant date) in 1999, 1998 and 1997, respectively. The
weighted-average assumptions used to estimate fair value include: risk-free
interest rate of 5.2%, 5.6% and 6.7%; expected volatility of 14.3%, 12.4% and
9.8%; expected dividend yield of 6.7%, 6.7% and 6.8% for 1999, 1998 and 1997,
respectively, and expected life of 4.5 years for each of the three years.
The weighted-average fair value of each option grant is estimated on the date
of grant using a Binomial Option Pricing Model. At December 31, 1999,
unexercised stock options have exercise prices ranging from $32.72 to $41.00 per
common share, and a weighted-average remaining contractual life of 7.0 years.
14 . Retirement benefits
- -------------------------------------------------------------------------------
Pensions. The Company has several defined benefit pension plans which cover
substantially all employees. In general, benefits are based on the employees'
years of service and base compensation.
Postretirement benefits other than pensions. The Company provides various
postretirement benefits other than pensions to eligible employees upon
retirement. HEI and the electric utility subsidiaries provide eligible employees
health and life insurance benefits upon retirement. The amount of health
benefits is based on retirees' years of service and retirement date. Generally,
employees are eligible for these benefits if, upon retirement, they participate
in one of the Company's defined benefit pension plans.
Plan amendments. In August 1998, HECO, MECO and HELCO employees represented by
the International Brotherhood of Electrical Workers, Local 1260, ratified a
collective bargaining agreement for a two-year period from November 1, 1998
through October 31, 2000 and covering approximately 63% of the electric
utilities' employees. Under the agreement, HECO and its subsidiaries amended the
pension and the postretirement welfare benefits plans effective January 1, 1999.
The changes in benefit obligations and plan assets, the funded status of the
plans and the unrecognized and recognized amounts in the balance sheet were as
follows:
64
<PAGE>
<TABLE>
<CAPTION>
Pension benefits Other benefits
------------------------------------------------------------------------
(in thousands) 1999 1998 1999 1998
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Benefit obligation, January 1................. $ 643,941 $583,210 $136,879 $185,134
Service cost.................................. 23,363 21,629 3,458 4,831
Interest cost................................. 40,243 39,091 8,230 10,760
Amendments.................................... 11 (11,193) - (43,212)
Actuarial loss (gain)......................... (108,980) 36,575 (16,395) (15,433)
Benefits paid................................. (29,339) (25,371) (5,610) (5,201)
Adjustment due to sale of
freight transportation operations........ (17,297) - (7,157) -
- ----------------------------------------------------------------------------------------------------------------------
Benefit obligation, December 31............... 551,942 643,941 119,405 136,879
- ----------------------------------------------------------------------------------------------------------------------
Fair value of plan assets, January 1.......... 732,141 646,968 85,534 66,030
Actual return on plan assets.................. 208,856 104,263 29,916 10,084
Employer contribution......................... 2,523 6,281 7,444 14,621
Benefits paid................................. (29,339) (25,371) (5,610) (5,201)
Adjustment due to sale of
freight transportation operations........ (21,274) - (4,659) -
- ----------------------------------------------------------------------------------------------------------------------
Fair value of plan assets, December 31........ 892,907 732,141 112,625 85,534
- ----------------------------------------------------------------------------------------------------------------------
Funded status................................. 340,965 88,200 (6,780) (51,345)
Unrecognized net actuarial gain............... (344,162) (95,660) (64,978) (31,334)
Unrecognized net transition obligation........ 7,902 10,306 42,616 49,617
Unrecognized prior service cost............... (8,632) (6,837) - -
- ----------------------------------------------------------------------------------------------------------------------
Accrued benefit cost, December 31............. $ (3,927) $ (3,991) $(29,142) $(33,062)
======================================================================================================================
Amounts recognized in the balance sheet
consist of:
Prepaid benefit cost..................... $ 4,329 $ 3,017 $ - $ -
Accrued benefit liability................ (9,016) (7,786) (29,142) (33,062)
Intangible asset......................... 238 320 - -
Accumulated other
comprehensive income.................. 522 458 - -
- ----------------------------------------------------------------------------------------------------------------------
Accrued benefit cost, December 31............. $ (3,927) $ (3,991) $(29,142) $(33,062)
======================================================================================================================
</TABLE>
The following weighted-average assumptions were used in the accounting for the
plans:
<TABLE>
<CAPTION>
Pension benefits Other benefits
-----------------------------------------------------------------------------
December 31 1999 1998 1997 1999 1998 1997
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Discount rate................................. 7.75% 6.50% 7.00% 7.75% 6.50% 7.00%
Expected return on plan assets................ 10.0 10.0 10.0 10.0 10.0 10.0
Rate of compensation increase................. 4.6 4.5 5.0 4.6 4.6 5.0
</TABLE>
At December 31, 1999, the assumed health care trend rates for 2000 and future
years were as follows: medical, 6.3%; dental, 4.8%; and vision, 4.3%.
The components of net periodic benefit cost were as follows:
<TABLE>
<CAPTION>
Pension benefits Other benefits
--------------------------------------------------------------------------------------
Years ended December 31 1999 1998 1997 1999 1998 1997
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
(in thousands)
Service cost............................ $ 23,363 $ 21,629 $ 20,040 $ 3,458 $ 4,831 $ 6,379
Interest cost........................... 40,243 39,091 37,462 8,230 10,760 12,475
Expected return on plan assets.......... (61,923) (55,924) (45,265) (8,062) (6,765) (4,382)
Amortization of unrecognized transition
obligation............................. 2,348 2,352 2,352 3,511 5,846 6,585
Amortization of prior service cost...... (221) 379 625 - - -
Recognized actuarial loss (gain)........ 224 (68) 254 (1,610) (1,197) -
Additional loss (gain) due to
SFAS No. 88......................... (987) 77 - (30) - -
- -------------------------------------------------------------------------------------------------------------------------------
Net periodic benefit cost............... $ 3,047 $ 7,536 $ 15,468 $ 5,497 $13,475 $21,057
==============================================================================================================================
</TABLE>
65
<PAGE>
Of the net periodic pension benefit costs, the Company expensed $3 million, $6
million and $12 million in 1999, 1998 and 1997, respectively, and primarily
charged the remaining amounts to electric utility plant. Of the net periodic
other benefit costs, the Company expensed $4 million, $10 million and $16
million in 1999, 1998 and 1997, respectively, and primarily charged the
remaining amounts to electric utility plant.
At December 31, 1999 and 1998, the Company had pension plans in which the
accumulated benefit obligations exceeded plan assets at fair value, but such
plans did not have material benefit obligations.
The health care cost trend rate assumptions can have a significant effect on
the amounts reported for other benefits. At December 31, 1999, a one-percentage-
point increase in the assumed health care cost trend rates would have increased
the total service and interest cost by $0.5 million and the postretirement
benefit obligation by $5.2 million, and a one-percentage-point decrease would
have reduced the total service and interest cost by $0.6 million and the
postretirement benefit obligation by $5.5 million.
15 . Regulatory restrictions on net assets
- --------------------------------------------------------------------------------
At December 31, 1999, HEI subsidiaries could not transfer approximately $683
million of net assets to HEI in the form of dividends, loans or advances without
regulatory approval. HEI management expects that the regulatory restrictions
will not materially affect the operations of the Company nor HEI's ability to
pay common stock dividends.
16 . Significant group concentrations of credit risk
- --------------------------------------------------------------------------------
Most of the Company's business activity is with customers located in the State
of Hawaii. Most of the Company's financial instruments are based in the State of
Hawaii, except for the mortgage/asset-backed securities. Substantially all real
estate loans receivable are secured by real estate in Hawaii. ASB's policy is to
require mortgage insurance on all real estate loans with a loan to appraisal
ratio in excess of 80% at origination. At December 31, 1999, ASB's private-issue
mortgage/asset-backed securities represented whole or participating interests in
pools of mortgage loans collateralized by real estate in the continental U.S.,
and approximately 43% of the portfolio was collateralized by real estate in
California. As of December 31, 1999, various securities rating agencies had
rated the private-issue mortgage/asset-backed securities held by ASB as
investment grade.
17 . Discontinued operations
- --------------------------------------------------------------------------------
Malama Pacific Corp. (MPC). On September 14, 1998, the HEI Board of Directors
adopted a plan to exit the residential real estate development business (engaged
in by MPC and its subsidiaries) by September 1999. Accordingly, MPC management
commenced a program to sell all of MPC's real estate assets and investments and
HEI reported MPC as a discontinued operation in the Company's consolidated
statements of income in the third quarter of 1998. In the slow Hawaii real
estate market, however, the plan to dispose of MPC's real estate assets and
investments is taking longer than expected. Due to the decline in values of its
real estate assets and investments, MPC recognized impairment losses of $19.3
million in 1998 in accordance with the provisions of SFAS No. 121,
notwithstanding the plan to exit the residential real estate development
business. MPC recognized impairment losses of $4.2 million in 1997. Operating
activity of the residential real estate development business for the period
September 14, 1998 through December 31, 1998 was not significant. In 1999, MPC's
loss from operations, excluding interest expense, was not significant and MPC
received $10 million in net proceeds from the sale of properties. Based on sales
contracts executed in 1999, MPC expects to receive $6 million in net proceeds in
2000 and future years. In 1999, actual losses on real estate dispositions were
less than originally estimated and certain contractual commitments were
successfully renegotiated. Thus, in 1999, the Company reversed $4.0 million of
the loss reserve established in 1998.
Selected financial information for the discontinued operations of MPC and
subsidiaries is as follows:
66
<PAGE>
<TABLE>
<CAPTION>
Years ended December 31 1999 1998 1997
- ------------------------------------------------------------------------------------------------------------------
(in thousands, except per share amounts)
<S> <C> <C> <C>
Operations
Revenues...................................................... $ - $ 3,313 $ 7,702
==================================================================================================================
Operating loss (including impairment writedowns).............. $ - $(20,648) $(6,518)
Interest expense.............................................. - (1,609) (2,315)
Income tax benefits........................................... - (8,659) (3,432)
- ------------------------------------------------------------------------------------------------------------------
Loss from operations.......................................... - (13,598) (5,401)
- ------------------------------------------------------------------------------------------------------------------
Disposal
Gain (loss), including 1998 provision of $5,000 for
loss from operations during phase-out period............. 6,471 (16,343) -
Income taxes (benefits)....................................... 2,518 (6,359) -
- ------------------------------------------------------------------------------------------------------------------
Gain (loss) on disposal....................................... 3,953 (9,984) -
- ------------------------------------------------------------------------------------------------------------------
Gain (loss) from discontinued operations of MPC............... $3,953 $(23,582) $(5,401)
==================================================================================================================
Basic earnings (loss) per common share........................ $ 0.12 $ (0.74) $ (0.17)
==================================================================================================================
Diluted earnings (loss) per common share...................... $ 0.12 $ (0.73) $ (0.17)
==================================================================================================================
</TABLE>
As of December 31, 1999, the remaining net assets of the discontinued
residential real estate development operations amounted to $17 million (included
in "Other" assets) and consisted primarily of real estate assets, receivables
and deferred tax assets, reduced by loans and accounts payable. The amounts that
MPC will ultimately realize from the sale of the real estate assets could differ
materially from the recorded amounts.
Prior to September 14, 1998, interest expense (in the above table) consisted
of actual interest accrued on MPC's borrowings from banks and other third
parties, and allocated interest calculated at HEI's existing commercial paper
rates applied to intercompany borrowing amounts. Interest costs included in the
determination of the loss on disposal of MPC amounted to $2 million and
consisted of interest expected to be incurred on MPC's borrowings from banks and
other third parties and allocated interest. Allocated interest was calculated at
HEI's weighted-average cost of debt applied to 80% of MPC's expected remaining
assets, net of bank and other third party debt, over the expected disposal
period.
The Hawaiian Insurance & Guaranty Company, Limited (HIG). HIG and its
subsidiaries (collectively, the HIG Group) were property and casualty insurance
companies. In December 1992, due to a significant increase in the estimate of
policyholder claims from Hurricane Iniki, the HEI Board of Directors concluded
it would not contribute additional capital to HIG and the remaining investment
in the HIG Group was written off. On December 24, 1992, a formal rehabilitation
order vested full control over the HIG Group in the Insurance Commissioner of
the State of Hawaii (the Rehabilitator) and her deputies. HEI Diversified, Inc.
(HEIDI) was the holder of record of all the common stock of HIG until August 16,
1994. In 1994, the Company settled a lawsuit stemming from this situation, with
the Company making a settlement payment of $32 million to the Rehabilitator. HEI
and HEIDI sought reimbursement for the settlement, interest and defense costs
from three director and officer liability insurance carriers. In August 1998,
the Company settled all claims with the three former insurance carriers relating
to the 1994 settlement payment. The Company received $24.5 million ($13.8
million net of estimated expenses and income taxes, or $0.43 in basic and
diluted earnings per common share for 1998), and recorded the settlement as a
net gain on disposal of discontinued operations in the third quarter of 1998.
18 . Fair value of financial instruments
- --------------------------------------------------------------------------------
The Company used the following methods and assumptions to estimate the fair
value of each applicable class of financial instruments for which it is
practicable to estimate that value:
Cash and equivalents and short-term borrowings. The carrying amount
approximated fair value because of the short maturity of these instruments.
Investment and mortgage/asset-backed securities. Fair value was based on quoted
market prices or dealer quotes.
Loans receivable. For certain categories of loans, such as some residential
mortgages, credit card receivables, and other consumer loans, fair value was
estimated using the quoted market prices for securities backed by similar loans,
adjusted for differences in loan
67
<PAGE>
characteristics. The fair value of other types of loans was estimated by
discounting the future cash flows using the current rates at which similar loans
would be made to borrowers with similar credit ratings and for similar remaining
maturities.
Deposit liabilities. The fair value of demand deposits, savings accounts, and
certain money market deposits was estimated using the amount payable on demand
at the reporting date. The fair value of fixed-maturity certificates of deposit
was estimated using the rates currently offered for deposits of similar
remaining maturities.
Securities sold under agreements to repurchase. Fair value was estimated using
dealer quotes for securities sold under agreements to repurchase with similar
terms and remaining maturities.
Advances from Federal Home Loan Bank and long-term debt. Fair value was
estimated by discounting the future cash flows using the current rates available
for borrowings with similar remaining maturities.
HEI- and HECO-obligated preferred securities of trust subsidiaries. Fair value
was based on quoted market prices.
Preferred stock of electric utility subsidiaries subject to mandatory
redemption. At December 31, 1998, fair value was estimated using optional
redemption prices and par values as the preferred stock was redeemed in January
1999.
The estimated fair values of certain of the Company's financial instruments
were as follows:
<TABLE>
<CAPTION>
December 31 1999 1998
- -------------------------------------------------------------------------------------------------------------------------------
Carrying Estimated Carrying Estimated
amount fair value amount fair value
- -------------------------------------------------------------------------------------------------------------------------------
(in thousands)
<S> <C> <C> <C> <C>
Financial assets
Cash and equivalents.................................... $ 199,906 $ 199,906 $ 412,254 $ 412,254
Investment and mortgage/asset-backed securities......... 2,159,945 2,124,141 1,902,927 1,917,975
Loans receivable, net................................... 3,211,878 3,226,292 3,143,197 3,172,543
Financial liabilities
Deposit liabilities..................................... 3,491,655 3,475,044 3,865,736 3,867,051
Short-term borrowings................................... 151,833 151,833 222,847 222,847
Securities sold under agreements to repurchase.......... 661,215 653,624 523,800 522,762
Advances from Federal Home Loan Bank.................... 1,189,081 1,167,027 805,581 831,277
Long-term debt.......................................... 977,529 935,352 899,598 938,395
HEI- and HECO-obligated preferred
securities of trust subsidiaries...................... 200,000 165,000 200,000 202,453
Preferred stock of electric utility subsidiaries subject
to mandatory redemption................................. - - 33,080 34,466
Off-balance sheet
Commitments to extend credit /1/
- -------------------------------------------------------------------------------------------------------------------------------
</TABLE>
/1/ At December 31, 1999 and 1998, neither the commitment fees received on
commitments to extend credit nor the fair value thereof were significant to
the Company's consolidated financial statements.
Limitations. The Company makes fair value estimates at a specific point in
time, based on relevant market information and information about the financial
instrument. These estimates do not reflect any premium or discount that could
result if the Company were to sell its entire holding of a particular financial
instrument at one time. Because no market exists for a significant portion of
the Company's financial instruments, fair value estimates cannot be determined
with precision. Changes in assumptions could significantly affect the estimates.
Fair value estimates are provided for certain financial instruments without
attempting to estimate the value of anticipated future business and the value of
assets and liabilities that are not considered financial instruments. In
addition, the tax ramifications related to the realization of the unrealized
gains and losses could have a significant effect on fair value estimates and
have not been considered.
68
<PAGE>
19. Quarterly information (unaudited)
- --------------------------------------------------------------------------------
Selected quarterly information was as follows:
<TABLE>
<CAPTION>
Quarters ended Year ended
- --------------------------------------------------------------------------------------------------
1999 Mar. 31 Jun. 30 Sep. 30 Dec. 31 Dec. 31
- -------------------------------------------------------------------------------------------------------------------
(in thousands, except per share amounts)
<S> <C> <C> <C> <C> <C>
Revenues /1/............................. $352,247 $369,688 $392,450 $408,905 $1,523,290
Operating income /1/..................... 54,032 58,710 56,551 64,578 233,871
Net income
Continuing operations /1/............. $ 20,754 $ 22,756 $ 21,632 $ 27,752 $ 92,894
Discontinued operations............... - - - 3,953 3,953
---------------------------------------------------------------------------
$ 20,754 $ 22,756 $ 21,632 $ 31,705 $ 96,847
---------------------------------------------------------------------------
Basic earnings per common share /2/
Continuing operations /1/............. $ 0.65 $ 0.71 $ 0.67 $ 0.86 $ 2.89
Discontinued operations............... - - - 0.12 0.12
---------------------------------------------------------------------------
$ 0.65 $ 0.71 $ 0.67 $ 0.98 $ 3.01
---------------------------------------------------------------------------
Diluted earnings per common share /3/
Continuing operations /1/............. $ 0.64 $ 0.71 $ 0.67 $ 0.86 $ 2.88
Discontinued operations............... - - - 0.12 0.12
---------------------------------------------------------------------------
$ 0.64 $ 0.71 $ 0.67 $ 0.98 $ 3.00
---------------------------------------------------------------------------
Dividends per common share............... $ 0.62 $ 0.62 $ 0.62 $ 0.62 $ 2.48
Market price per common share /4/
High.................................. 40.50 36.88 36.38 36.13 40.50
Low................................... 34.50 34.56 34.38 28.06 28.06
</TABLE>
<TABLE>
<CAPTION>
Quarters ended Year ended
- -----------------------------------------------------------------------------------------------------
1998 Mar. 31 Jun. 30 Sep. 30 Dec. 31 Dec. 31
- ------------------------------------------------------------------------------------------------------------------------
(in thousands, except per share amounts)
<S> <C> <C> <C> <C> <C>
Revenues................................. $374,858 $360,665 $377,318 $372,324 $1,485,165
Operating income......................... 56,461 54,114 62,299 51,772 224,646
Net income (loss)
Continuing operations................. $ 22,819 $ 22,921 $ 27,779 $ 21,109 $ 94,628
Discontinued operations............... (596) (528) (8,693) - (9,817)
----------------------------------------------------------------------------
$ 22,223 $ 22,393 $ 19,086 $ 21,109 $ 84,811
----------------------------------------------------------------------------
Basic earnings (loss) per common share /2/
Continuing operations................. $ 0.72 $ 0.72 $ 0.87 $ 0.66 $ 2.96
Discontinued operations............... (0.02) (0.02) (0.27) - (0.31)
----------------------------------------------------------------------------
$ 0.70 $ 0.70 $ 0.60 $ 0.66 $ 2.65
----------------------------------------------------------------------------
Diluted earnings (loss) per common share /3/
Continuing operations................. $ 0.71 $ 0.72 $ 0.86 $ 0.66 $ 2.95
Discontinued operations............... (0.02) (0.02) (0.27) - (0.31)
----------------------------------------------------------------------------
$ 0.69 $ 0.70 $ 0.59 $ 0.66 $ 2.64
----------------------------------------------------------------------------
Dividends per common share............... $ 0.62 $ 0.62 $ 0.62 $ 0.62 $ 2.48
Market price per common share /4/
High.................................. 42.19 42.00 41.25 42.56 42.56
Low................................... 38.69 37.88 36.38 38.50 36.38
- ------------------------------------------------------------------------------------------------------------------------
</TABLE>
1 Amounts for the fourth quarter include the elimination of an HEIIC loss
accrual ($3.7 million pretax, $2.3 million after tax) and a reversal of the
loss recorded in the third quarter for the sale of YB and HTB assets partly
due to higher than expected proceeds on the sale of HTB's assets ($3.3
million pretax, $2.0 million after tax).
2 The quarterly basic earnings (loss) per common share are based upon the
weighted-average number of shares of common stock outstanding in each
quarter.
3 The quarterly diluted earnings (loss) per common share are based upon the
weighted-average number of shares of common stock outstanding in each quarter
plus the dilutive incremental shares at quarter end.
4 Market prices of HEI common stock (symbol HE) shown are as reported on the
NYSE Composite Tape.
69
<PAGE>
<TABLE>
<CAPTION>
HEI Directors
- -------------
<S> <C> <C>
Robert F. Clarke, 57 (1)* Bill D. Mills, 48 (3) Oswald K. Stender, 68 (3, 4)
Chairman, President and Chairman of the Board and Real estate consultant
Chief Executive Officer Chief Executive Officer (real estate)
Hawaiian Electric Industries, Inc. Bill Mills Development and 1993
1989 Investment Company, Inc.
(real estate development) Kelvin H. Taketa, 45 (2)*
Don E. Carroll, 58 (3, 4) 1988 President and Chief Executive
President and Chief Executive Officer
Officer A. Maurice Myers, 59 (3, 4) Hawaii Community Foundation
Oceanic Cablevision Chairman and (statewide charitable foundation)
(cable television broadcasting) Chief Executive Officer 1993
1996 Waste Management, Inc.
(environmental services) Jeffrey N. Watanabe, 57 (1, 4)*
Richard Henderson, 71 (1, 2)* 1991 Partner
President Watanabe, Ing & Kawashima
HSC, Inc. Diane J. Plotts, 64 (1, 2, 3)* (private law firm)
(real estate investment and General Partner 1987
development) Mideast and China Trading
1981 Company Committees of the Board
(real estate development) of Directors
------------------------------------------
Victor Hao Li, S.J.D., 58 (2)* 1987 (1) Executive:
Co-chairman Richard Henderson, Chairman
Asia Pacific Consulting Group James K. Scott, Ed.D., 48 (2)* (2) Audit:
(international business consultant) President Richard Henderson, Chairman
1988 Punahou School (3) Compensation:
(private education) Diane J. Plotts, Chairman
T. Michael May, 53* 1995 (4) Nominating & Corporate
President and Chief Executive Governance:
Officer Jeffrey N. Watanabe, Chairman
Hawaiian Electric Company, Inc.
1995
</TABLE>
*Also member of one or more subsidiary boards
Year denotes year of election to the board of directors
Information as of February 16, 2000
<TABLE>
<CAPTION>
HEI Officers
- ------------
<S> <C> <C>
Robert F. Clarke, 57 Peter C. Lewis, 65 Edwina H. Kawamoto, 36
Chairman, President and Vice President-Administration and Treasurer
Chief Executive Officer Corporate Secretary 1997
1987 1968
T. Michael May, 53 Charles F. Wall, 60 Curtis Y. Harada, 44
Senior Vice President Vice President and Controller
1992 Corporate Information Officer 1989
1990
Robert F. Mougeot, 57 Molly M. Egged, 49
Financial Vice President and Andrew I. T. Chang, 60 Assistant Secretary
Chief Financial Officer Vice President - Government Relations 1980
1988 1985
</TABLE>
Year denotes year of employment by the company
Information as of February 16, 2000
70
<PAGE>
HECO Exhibit 13.2
-----------------
Selected Financial Data
- --------------------------------------------------------------------------------
Hawaiian Electric Company, Inc. and Subsidiaries
<TABLE>
<CAPTION>
Years ended December 31 1999 1998 1997 1996 1995
- ------------------------------------------------------------------------------------------------------------------
(in thousands)
<S> <C> <C> <C> <C> <C>
Income statement data
Operating revenues................. $ 1,050,323 $ 1,008,899 $1,098,755 $1,071,426 $ 981,990
Operating expenses................. 927,482 892,747 987,715 962,635 879,268
----------- ------------ ---------- ---------- ----------
Operating income................... 122,841 116,152 111,040 108,791 102,722
Other income....................... 8,054 16,832 19,042 20,675 16,325
----------- ------------ ---------- ---------- ----------
Income before interest
and other charges................. 130,895 132,984 130,082 129,466 119,047
Interest and other charges......... 54,495 48,754 48,233 44,253 42,024
----------- ------------ ---------- ---------- ----------
Income before preferred
stock dividends of HECO........... 76,400 84,230 81,849 85,213 77,023
Preferred stock
dividends of HECO................. 1,178 3,454 3,660 3,865 4,126
----------- ------------ ---------- ---------- ----------
Net income for common stock........ $ 75,222 $ 80,776 $ 78,189 $ 81,348 $ 72,897
=========== ============ ========== ========== ==========
<CAPTION>
At December 31 1999 1998 1997 1996 1995
- ------------------------------------------------------------------------------------------------------------------
(dollars in thousands)
<S> <C> <C> <C> <C> <C>
Balance sheet data
Utility plant.................. $ 3,034,517 $ 2,925,344 $2,797,886 $2,674,419 $2,483,005
Accumulated depreciation....... (1,076,373) (982,172) (904,781) (828,917) (762,770)
----------- ------------ ---------- ---------- ----------
Net utility plant.............. $ 1,958,144 $ 1,943,172 $1,893,105 $1,845,502 $1,720,235
=========== ============ ========== ========== ==========
Total assets................... $ 2,302,809 $ 2,311,253 $2,212,314 $2,165,546 $2,016,283
=========== ============ ========== ========== ==========
Capitalization:/1/
Short-term borrowings
from non-affiliates
and affiliate................. $ 107,013 $ 139,413 $ 95,581 $ 125,920 $ 138,753
Long-term debt................. 646,029 621,998 627,621 602,226 517,209
Preferred stock subject to
mandatory redemption........... -- 33,080 35,770 38,955 41,750
Preferred stock not subject
to mandatory redemption........ 34,293 48,293 48,293 48,293 48,293
HECO-obligated preferred
securities of
subsidiary trusts............. 100,000 100,000 50,000 -- --
Common stock equity............ 806,103 786,567 769,235 751,311 696,905
----------- ------------ ---------- ---------- ----------
Total capitalization........... $ 1,693,438 $ 1,729,351 $1,626,500 $1,566,705 $1,442,910
=========== ============ ========== ========== ==========
Capital structure ratios (%)/1/
Debt........................... 44.5 44.0 44.4 46.5 45.5
Preferred stock................ 2.0 4.7 5.2 5.5 6.2
HECO-obligated preferred
securities of
subsidiary trusts............. 5.9 5.8 3.1 -- --
Common stock equity............ 47.6 45.5 47.3 48.0 48.3
- ------------------------------------------------------------------------------------------------------------------
</TABLE>
/1/ Includes amounts due within one year, short-term borrowings from
nonaffiliates and affiliate, and sinking fund and optional redemption
payments.
Note: HEI owns all of HECO's common stock. Therefore, per share data is not
meaningful.
2
<PAGE>
Management's Discussion and Analysis of Financial Condition and
Results of Operations
- --------------------------------------------------------------------------------
The following discussion should be read in conjunction with the consolidated
financial statements and accompanying notes.
Results of operations
- --------------------------------------------------------------------------------
Earnings
Net income for common stock for 1999 was $75.2 million compared to $80.8 million
for 1998 and $78.2 million for 1997. The 1999 net income represents a 9.4%
return on the average amount of common stock equity invested in the Company,
compared to returns of 10.4% in 1998 and 10.3% in 1997.
Sales
Consolidated sales of electricity were 8,985 million kilowatthours (KWH) for
1999, 8,870 million KWH for 1998, and 8,963 million KWH for 1997. The 1.3%
increase in KWH sales in 1999 was primarily due to an increase in the number of
customers and the slight improvement in Hawaii's economy, partly offset by
cooler temperatures which result in lower residential and commercial air
conditioning usage. The decrease in KWH sales in 1998 and 1997 were partly due
to Hawaii's slow economy and partly due to cooler temperatures.
Operating revenues
The rate schedules of the Company include energy cost adjustment clauses under
which electric rates are adjusted for changes in the weighted average price paid
for fuel oil and certain components of purchased power costs, and the relative
amounts of company-generated power and purchased power.
Operating revenues were $1,050.3 million in 1999, compared to $1,008.9
million in 1998 and $1,098.8 million in 1997. The 1999 increase in operating
revenues of $41.4 million, or 4.1%, was due to higher fuel oil prices which were
passed through to customers ($21.1 million), a 1.3% increase in KWH sales ($11.7
million), and the remainder was due primarily to higher rates at MECO. The 1998
decrease in operating revenues of $89.9 million, or 8.2%, was due primarily to
lower fuel oil prices ($82.1 million), and a 1.0% decrease in KWH sales ($9.8
million). The 1997 increase in operating revenues of $27.4 million, or 2.6%, was
due primarily to higher fuel oil prices, and recovery through rates of
Integrated Resource Planning (IRP) related costs, including Demand Side
Management (DSM) program costs, lost margins and shareholder incentives related
to the DSM programs, partly offset by the decrease in KWH sales.
Operating expenses
Total operating expenses were $927.5 million in 1999 compared to $892.7 million
in 1998 and $987.7 million in 1997. The increase in 1999 was due to increases in
expenses for fuel oil, purchased power, maintenance, depreciation and
amortization, and taxes other than income taxes, partly offset by a decrease in
other operation expense. The decrease in 1998 was due to decreases in expenses
for fuel oil, purchased power, other operation, maintenance, and taxes other
than income taxes. The increase in 1997 was due to increases in expenses for
fuel oil, purchased power, other operation, depreciation and amortization, and
taxes other than income taxes.
Fuel oil expense was $216.7 million in 1999 compared to $195.9 million in 1998
and $257.0 million in 1997. The 10.6% increase in fuel oil expense in 1999 was
due primarily to higher fuel oil prices and more KWHs generated. The decrease in
fuel oil expense in 1998 was due primarily to lower fuel oil prices and better
generating unit efficiency, partly offset by an increase in KWH generated. The
increase in fuel oil expense in 1997 was due primarily to higher fuel oil
prices. In 1999, the Company paid an average of $20.46 per barrel for fuel oil,
compared to $19.14 in 1998 and $25.19 in 1997.
3
<PAGE>
Management's Discussion and Analysis, continued
- --------------------------------------------------------------------------------
Purchased power expense was $275.7 million in 1999 compared to $274.5
million in 1998 and $292.9 million in 1997. The increase in purchased power
expense in 1999 was due to higher fuel oil prices, partly offset by fewer KWH
purchased. The decrease in purchased power expense in 1998 was due to lower fuel
prices and fewer KWH purchased. Purchased power expense increased in 1997 due
primarily to higher fuel oil prices and more KWH purchased. Purchased KWH
provided approximately 35.7% of the total energy net generated and purchased in
1999 compared to 36.6% in 1998 and 38.1% in 1997.
Other operation expenses totaled $136.3 million in 1999, compared to $143.0
million in 1998 and $149.0 million in 1997. The decrease in other operation
expenses in 1999 was due primarily to lower employee benefit costs, including
lower pension costs and other postretirement benefit expense. The decrease in
other operation expenses in 1998 was due primarily to lower pension costs and
postretirement benefits costs and negotiated bargaining unit benefit changes.
Other operation expenses increased in 1997 due primarily to higher IRP related
costs, including full scale DSM program costs. HEI charges for general
management, administrative and support services totaled $1.8 million in 1999,
$1.9 million in 1998 and $2.2 million in 1997.
Maintenance expenses in 1999 of $57.4 million increased by $14.2 million
from 1998 due primarily to higher production maintenance expenses largely due to
more generating unit overhaul work and more transmission and distribution
maintenance work. Maintenance expenses in 1998 of $43.2 million decreased by
$6.7 million from 1997 due primarily to less generating unit overhaul and
corrective maintenance work. Maintenance expenses in 1997 of $49.9 million
decreased by $2.4 million from 1996 due primarily to lower maintenance on the
transmission and distribution systems on Oahu and lower production maintenance
expenses for HELCO and MECO.
Depreciation and amortization expense was up 8.9% in 1999 to $93.3 million,
up 4.4% in 1998 to $85.7 million and up 11.7% in 1997 to $82.0 million. In all
years, the increases reflect depreciation on additions to plant in service in
the previous year. Major additions to plant in service included MECO's Maalaea
17 generating unit in the third and fourth quarter 1998, HECO's Kamehameha
Highway distribution projects in the fourth quarter 1998, and MECO's Maalaea-
Lahaina 3rd 69-kv line and generation expansion projects on Lanai and Molokai in
1996.
Taxes, other than income taxes, increased by 4.2% in 1999 to $99.8 million,
decreased by 8.1% in 1998 to $95.8 million and increased by 2.8% in 1997 to
$104.2 million. These taxes consist primarily of taxes based on revenues, and
the decrease or increase in these taxes reflect the corresponding decrease or
increase in each year's operating revenues.
Operating income
Operating income for 1999 increased 5.8% compared to 1998 due to higher KWH
sales, lower other operation expenses and income taxes, partially offset by
higher maintenance and depreciation and amortization expenses. Operating income
for 1998 increased 4.6% compared to 1997 due to lower other operation and
maintenance expenses, partly offset by lower KWH sales and higher depreciation
and amortization expenses and income taxes. Operating income for 1997 increased
2.1% compared to 1996 due in part to higher DSM program related shareholder
incentives, partially offset by increased expenses.
Other income
Other income for 1999 totaled $8.1 million compared to $16.8 million for 1998,
and $19.0 million for 1997. The decreases in all years were due primarily to
lower Allowance for Equity Funds Used During Construction (AFUDC-Equity). AFUDC-
Equity for 1999 was significantly lower than 1998 due to a lower base on which
AFUDC-Equity is calculated, including the termination of AFUDC-Equity related to
the expansion of the Keahole power plant. Effective December 1, 1998, HELCO
decided to discontinue the accrual of AFUDC-Debt and AFUDC-Equity on CT-4 and
CT-5. AFUDC-Equity would have been approximately $350,000 per month greater had
there not been this discontinuance (see "HELCO power situation" in Note 11 of
the "Notes to Consolidated Financial Statements"). The 1998 and 1997 decreases
were also due to less interest income on deferred IRP costs.
4
<PAGE>
Management's Discussion and Analysis, continued
- --------------------------------------------------------------------------------
Interest and other charges
Interest and other charges for 1999 totaled $54.5 million, compared to $48.8
million for 1998 and $48.2 million for 1997. Interest and other charges included
$7.7 million of preferred securities distributions by HECO's trust subsidiaries
in 1999, $4.2 million in 1998, and $3.1 million in 1997. See Note 3 in the
"Notes to Consolidated Financial Statements" for a discussion of the preferred
securities issued by the Trusts.
The 1999 decrease in interest on long-term debt of $0.6 million was due to
lower revenue bond interest rates. In September 1999, $50.0 million of 7 5/8%
Series 1988 Special Purpose Revenue Bonds sold by the State of Hawaii Department
of Budget and Finance on behalf of HECO, MECO and HELCO, were refinanced using
the proceeds from 5.75% Refunding Series 1999B Special Purpose Revenue Bonds,
sold in August 1999. In October 1999, $11.4 million of 7.20% Series 1984 Special
Purpose Revenue Bonds sold by the State of Hawaii Department of Budget and
Finance on behalf of HELCO, were refinanced using the proceeds from 5.50%
Refunding Series 1999A Special Purpose Revenue Bonds, sold in August 1999. The
1999 decrease was partially offset by interest on drawdowns of tax-exempt
special purpose revenue bond proceeds during 1999, and the full year's interest
on the 1998 drawdowns of revenue bond proceeds.
The 1998 increase in interest on long-term debt of $1.0 million was due to
interest on drawdowns of tax-exempt special purpose revenue bond proceeds during
1998, and the full year's interest on the 1997 drawdowns of revenue bond
proceeds. The 1998 increase was partially offset by lower revenue bond interest
rates, and lower medium-term note interest. In April 1998, $57.5 million of 6
7/8% Refunding Series 1987 Special Purpose Revenue Bonds sold by the State of
Hawaii Department of Budget and Finance on behalf of HECO, MECO and HELCO, were
refinanced using the proceeds from 4.95% Refunding Series 1998A Special Purpose
Revenue Bonds, sold in March 1998. In December 1998, HECO's 5.83% medium-term
note in the principal amount of $30 million was retired.
The 1997 increase in interest on long-term debt of $3.1 million was due to
interest on drawdowns of tax-exempt special purpose revenue bond proceeds during
1997, and the full year's interest on the 1996 drawdowns of revenue bond
proceeds. The 1997 increase was partially offset by lower interest on first
mortgage bonds resulting from the retirement in March 1997 of HECO's 5.75%
Series O mortgage bonds in the principal amount of $13 million, and the early
redemptions in November 1997 of MECO's 7.875% Series G and 7.75% Series H
mortgage bonds totaling $7 million and in December 1997 of HECO's 7 5/8% Series
S mortgage bonds in the principal amount of $10 million.
Other interest charges of $6.7 million for 1999 were $1.0 million higher than
for 1998 primarily due to higher interest on deferred IRP costs. Other interest
charges of $5.7 million for 1998 were $2.0 million lower than for 1997 due to
lower interest on short-term borrowings as a result of lower borrowing levels
during 1998. Other interest charges of $7.7 million for 1997 were $1.8 million
lower than for 1996 due to lower interest on short-term borrowings as a result
of lower borrowing levels during 1997, partially offset by higher interest
rates.
Preferred stock dividends of subsidiaries decreased by $1.6 million in 1999,
nil in 1998 and $0.1 million in 1997. The decrease in dividends for all years
is attributed to the scheduled sinking fund and optional redemptions of
preferred stock. See Note 2 in the "Notes to Consolidated Financial
Statements."
Competition
The electric utility industry is becoming increasingly competitive. Independent
power producers 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 and its subsidiaries have been able to compete
successfully by offering customers economic alternatives that, among other
things, employ energy efficient electrotechnologies such as the heat pump water
heater.
5
<PAGE>
Management's Discussion and Analysis, continued
- --------------------------------------------------------------------------------
Legislation has been introduced in Congress to facilitate competition in the
electric utility industry. The bills generally respect the state's right to
implement retail wheeling and in one case has exempted Hawaii and Alaska due to
their lack of interties. The proposed "Comprehensive Electricity Competition
Act," submitted to Congress in May 1999, includes a provision that would allow
states to "opt out" of the proposed retail competition deadline of 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 "Competition
proceeding" in Note 11 of the "Notes to Consolidated Financial Statements."
Regulation of electric utility rates
The PUC has broad discretion in its regulation of the rates charged by HECO and
its 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
HECO and its 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 February 16,
2000, the return on average common equity (ROACE) found by the PUC to be
reasonable in the most recent final rate decision for each utility was 11.4% for
HECO (D&O issued on December 11, 1995 and based on a 1995 test year), 11.65% for
HELCO (D&O issued on April 2, 1997 and based on a 1996 test year) and 10.94% for
MECO (amended D&O issued on April 6, 1999 and based on a 1999 test year). For
1999, the actual simple average ROACE (calculated under the rate-making method
and reported to the PUC) for HECO, HELCO and MECO were 10.41%, 7.56% and 9.64%,
respectively.
Hawaii Electric Light Company, Inc.
In October 1999, HELCO filed a request to increase rates by 9.6%, or $15.5
million in annual revenues, based on a 2000 test year, primarily to recover (1)
costs relating to an agreement to buy power from the 60 MW plant of Hamakua
Energy Partners, L.P., formerly known as Encogen Hawaii, L.P. (Hamakua Partners)
and (2) depreciation of and a return on additional investments in plant and
equipment since the last rate case, including pre-air permit facilities placed
in service at the Keahole power plant. In its application, HELCO presented
evidence to justify an ROACE of 13.5% for the 2000 test year.
The timing of a future HELCO rate increase request, if any, to recover costs
relating to adding CT-4 and CT-5 will depend on future circumstances. See
"HELCO power situation" in Note 11 of the "Notes to Consolidated Financial
Statements."
Maui Electric Company, Limited
In January 1998, MECO filed a request to increase rates, based on a 1999 test
year, 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
6
<PAGE>
Management's Discussion and Analysis, continued
- --------------------------------------------------------------------------------
received an interim D&O from the PUC and 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.
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 1999.
Later this year, MECO expects to file a rate increase request, based on a 2001
test year, primarily to recover costs relating to the addition of generating
unit M19 in early 2001.
Energy cost adjustment (ECA) clauses
The rate schedules of HECO, HELCO and MECO include ECA clauses under which
electric rates are adjusted for changes in the weighted-average price paid for
fuel oil and certain components of purchased power, and the relative amounts of
company-generated power and purchased power. Accordingly, changes in fuel oil
prices and certain components of purchased power costs are passed on to
customers. In the December 30, 1997 D&O's approving HECO and its subsidiaries'
fuel supply contracts, the PUC noted that, in light of the length of the fuel
supply contracts and the relative stability of fuel prices, the need for the
continued use of ECA clauses will be the subject of investigation in a generic
docket or in a future rate case. In MECO's and HELCO's rate increase
applications based on a 1999 and 2000 test year, respectively, each company
stated that it believed that its ECA clause continues to be necessary. In the
amended final D&O for MECO's 1999 test year rate increase application, MECO's
ECA clause was continued.
Accounting for the effects of certain types of regulation
In accordance with Statement of Financial Accounting Standards (SFAS) No. 71,
"Accounting for the Effects of Certain Types of Regulation," the Company's
financial statements reflect assets and costs based on current cost-based rate-
making regulations. Management believes HECO and its subsidiaries' operations
currently satisfy the SFAS No. 71 criteria. However, if events or circumstances
should change so that those criteria are no longer satisfied, management
believes that a material adverse effect on the Company's results of operations,
financial position, or liquidity would result. See Notes 1 and 6 in the "Notes
to Consolidated Financial Statements."
Commitments and contingencies
See Note 11 in the "Notes to Consolidated Financial Statements."
Environmental matters
HECO and its subsidiaries are subject to environmental laws and regulations
which could potentially impact the Company in material adverse respects in terms
of operating existing facilities, constructing and operating new facilities and
ensuring the proper cleanup and disposal of hazardous waste and toxic
substances. Management believes that the recovery through rates of most, if not
all, of any costs incurred by HECO and its subsidiaries in complying with these
environmental requirements would be allowed by the PUC. Based on information
available to the Company, management is not aware of any contingent liabilities
relating to environmental matters that would have a material adverse effect on
the Company. See Note 11 in the "Notes to Consolidated Financial Statements."
Year 2000 issue
HECO and its subsidiaries successfully addressed Year 2000 date issues with no
major disruptions of its business operations, no power outages and no major
problems with vendors. The cost of initiatives undertaken primarily for Year
2000 remediation is estimated to total $4.3 million, including $0.2 million of
capitalized amounts. No significant expenditures are anticipated for Year 2000
date issues in the future.
7
<PAGE>
Management's Discussion and Analysis, continued
- --------------------------------------------------------------------------------
Effects of inflation
U.S. inflation, as measured by the U.S. Consumer Price Index, averaged 2.2% in
1999, 1.6% in 1998 and 2.3% in 1997. Hawaii inflation, as measured by the
Honolulu Consumer Price Index, averaged an estimated 0.5% in 1999, (0.2)% in
1998 and 0.7% in 1997. Although the rate of inflation over the past three years
has been relatively low compared with the late 1970's and early 1980's,
inflation continues to have an impact on the Company's operations.
Inflation increases operating costs and the replacement cost of assets. With
significant physical assets, HECO and its subsidiaries replace assets at much
higher costs and must request and obtain rate increases to maintain adequate
earnings. In the past, the PUC has generally approved rate increases to cover
the effects of inflation. In 1999 and 1997, MECO and HELCO received rate
increases, in part to cover increases in construction costs and operating
expenses due to inflation.
Recent accounting pronouncement
See "Recent accounting pronouncement" in Note 1 of the "Notes to Consolidated
Financial Statements."
Liquidity and capital resources
- --------------------------------------------------------------------------------
The Company believes that its ability to generate cash, both internally from
operations and externally from debt and equity issues, is adequate to maintain
sufficient liquidity to fund its construction programs and to cover debt and
other cash requirements in the foreseeable future.
Capital expenditures requiring the use of cash, as shown on the "Consolidated
Statements of Cash Flows," totaled approximately $108.1 million in 1999, of
which $63.3 million was attributable to HECO, $20.6 million to HELCO and $24.2
million to MECO. Approximately 71% of the total 1999 capital expenditures was
for transmission and distribution projects and approximately 29% was for
generation and general plant projects. Cash contributions in aid of construction
received in 1999 totaled $13.8 million.
In 1999, the Company's investing activities used $91.2 million in cash,
primarily for capital expenditures. Financing activities used net cash of $120.3
million, including $64.7 million for the payment of common and preferred stock
dividends and preferred securities distributions, $47.1 million for preferred
stock redemptions and $32.4 million for the net repayment of short-term
borrowings, partially offset by a $23.9 million net increase in long-term debt.
Operating activities provided $158.7 million toward capital expenditures,
preferred stock redemptions and other cash requirements.
The Companies' consolidated financing requirements for 2000 through 2004,
including net capital expenditures and long-term debt and preferred stock
retirements, are estimated to total $595 million. HECO's consolidated internal
sources, after the payment of common stock and preferred stock dividends, are
expected to provide cash in excess of the consolidated financing requirements
and may also be used to repay short-term borrowings.
As of December 31, 1999, $40.2 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 remains undrawn.
Also as of December 31, 1999, an additional $65 million of special purpose
revenue bonds was authorized by the Hawaii Legislature for issuance by the
Department of Budget and Finance of the State of Hawaii for the benefit of HECO
and HELCO prior to the end of 2003. HECO does not anticipate the need to issue
new common equity over the five-year period. The PUC must approve issuances, if
any, of long-term securities by HECO, HELCO and MECO.
8
<PAGE>
Management's Discussion and Analysis, continued
- --------------------------------------------------------------------------------
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 2000 through 2004
are currently estimated to total $571 million. Approximately 70% of forecast
gross capital expenditures, including AFUDC and capital expenditures funded by
third-party cash contributions in aid of construction, is for transmission and
distribution projects, with the remaining 30% primarily for generation projects.
For 2000, net capital expenditures are estimated to be $140 million. Gross
capital expenditures are estimated to be $161 million, including approximately
$109 million for transmission and distribution projects, approximately $39
million for generation projects and approximately $13 million for general plant
and other projects. Drawdowns of proceeds from previous and future sales of tax-
exempt special purpose revenue bonds and the generation of funds from internal
sources are expected to provide the cash needed for the net capital expenditures
in 2000.
Management periodically reviews capital expenditure estimates and the timing
of construction projects. These estimates may change significantly as a result
of many considerations, including changes in economic conditions, changes in
forecasts of KWH sales and peak load, the availability of purchased power and
changes in expectations concerning the construction and ownership of future
generating units, the availability of generating sites and transmission and
distribution corridors, the ability to obtain adequate and timely rate
increases, escalation in construction costs, DSM programs and requirements of
environmental and other regulatory and permitting authorities.
See Note 11 in the "Notes to Consolidated Financial Statements" for a
discussion of fuel and power purchase commitments.
As of February 16, 2000, Standard & Poor's (S&P) and Moody's Investors
Service's (Moody's) ratings of HECO's securities were as follows:
S&P Moody's
- --------------------------------------------------------------------------------
Commercial paper.............................. A-2 P-2
Revenue bonds (insured)....................... AAA Aaa
Revenue bonds (noninsured).................... BBB+ Baa1
HECO-obligated preferred securities of trust
subsidiaries................................. BBB- baa1
Cumulative preferred stock (selected series).. nr baa2
- --------------------------------------------------------------------------------
nr Not rated
The above ratings are not recommendations to buy, sell or hold any securities;
such ratings may be subject to revision or withdrawal at any time by the rating
agencies; and each rating should be evaluated independently of any other rating.
The Company's management cannot predict with certainty future rating agency
actions or their effects on the future cost of capital to the Company.
9
<PAGE>
Quantitative and Qualitative Disclosures about Market Risk
- ----------------------------------------------------------
The Company manages various market risks in the ordinary course of business,
including credit risk, liquidity risk and commodity price risk, and believes its
exposures to these risks are not material as of December 31, 1999. Because the
Company does not have a portfolio of trading assets, the Company is not exposed
to market risk from trading activities. However, the Company considers interest
rate risk to be a very significant market risk as it could potentially have a
significant effect on the Company's financial condition and results of
operations. Interest rate risk can be defined as the exposure of the Company's
earnings to adverse movements in interest rates. The Company does not currently
use derivatives to manage interest rate risk. The Company's general policy is to
manage interest rate risk through use of a combination of short- and long-term
debt and preferred securities. The tables below provide information about the
Company's market sensitive financial instruments in U.S. dollars, including
contractual balances at the expected maturity dates as well as the estimated
fair values as of December 31, 1999 and 1998, and constitute "forward-looking
statements."
See Note 15 in the "Notes to Consolidated Financial Statements" for
descriptions of the methods and assumptions used to estimate fair value of each
applicable class of financial instruments.
<TABLE>
<CAPTION>
Expected maturity December 31, 1999
- --------------------------------------------------------------------------------
Estimated
There- fair
(dollars in millions) 2000 2001 2002 2003 2004 after Total value
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Interest-sensitive
liabilities
Short-term borrowings $107 -- -- -- -- -- $107 $107
Average interest
rate 6.9% -- -- -- -- -- 6.9%
Long-term debt
Fixed rate -- -- $ 2 $ 3 -- $641 $646 $626
Average interest
rate -- -- 7.9% 7.8% -- 6.0% 6.0%
HECO obligated mandatorily
redeemable trust
preferred securities
of subsidiary trusts -- -- -- -- -- $100 $100 $ 81
Average distribution -- -- -- -- 7.7% 7.7%
rate
</TABLE>
10
<PAGE>
Quantitative and Qualitative Disclosures about Market Risk, continued
- ---------------------------------------------------------------------
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------
Expected maturity December 31, 1998
- -----------------------------------------------------------------------------------------------------------------
Estimated
There- fair
(dollars in millions) 1999 2000 2001 2002 2003 after Total value
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Interest-sensitive
liabilities
Short-term borrowings $134 -- -- -- -- -- $ 134 $ 134
Average interest
rate 6.0% -- -- -- -- -- 6.0%
Long-term debt
Fixed rate -- -- -- $ 2 $ 3 $ 617 $ 622 $ 655
Average interest
rate -- -- -- 7.9% 7.8% 6.2% 6.3%
HECO obligated
preferred securities
of trust subsidiaries -- -- -- -- -- $ 100 $ 100 $ 97
Average distribu-
tion rate -- -- -- -- -- 7.7% 7.7%
Cumulative preferred
stock subject to
mandatory redemption $ 33 -- -- -- -- -- $ 33 $ 34
Average dividend
rate 8.5% -- -- -- -- -- 8.5%
</TABLE>
Forward-Looking Information
- ---------------------------
This report and other presentations made by HECO and its subsidiaries
(collectively, "the Company") 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; product demand and market acceptance
risks; the effects of weather and natural disasters; 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 the risks
associated with the installation of new computer systems. Investors are also
referred to other risks and uncertainties discussed elsewhere in this Annual
Report and in other periodic reports previously and subsequently filed by HECO
with the Securities and Exchange Commission.
11
<PAGE>
<TABLE>
<CAPTION>
Consolidated Statements of Income
- ---------------------------------------------------------------------------------
Hawaiian Electric Company, Inc. and Subsidiaries
Years ended December 31 1999 1998 1997
- ---------------------------------------------------------------------------------
(in thousands)
<S> <C> <C> <C>
Operating revenues......................... $1,050,323 $1,008,899 $1,098,755
---------- ---------- ----------
Operating expenses:
Fuel oil................................... 216,693 195,940 257,002
Purchased power............................ 275,691 274,450 292,852
Other operation............................ 136,303 142,992 148,959
Maintenance................................ 57,425 43,183 49,858
Depreciation and amortization.............. 93,301 85,655 82,017
Taxes, other than income taxes............. 99,788 95,808 104,232
Income taxes............................... 48,281 54,719 52,795
---------- ---------- ----------
927,482 892,747 987,715
---------- ---------- ----------
Operating income........................... 122,841 116,152 111,040
---------- ---------- ----------
Other income:
Allowance for equity funds used during
construction.............................. 4,228 10,106 10,864
Other, net................................. 3,826 6,726 8,178
---------- ---------- ----------
8,054 16,832 19,042
---------- ---------- ----------
Income before interest and other charges... 130,895 132,984 130,082
---------- ---------- ----------
Interest and other charges:
Interest on long-term debt................. 40,133 40,749 39,783
Amortization of net bond premium and
expense................................... 1,634 1,469 1,313
Other interest charges..................... 6,694 5,703 7,682
Allowance for borrowed funds used during
construction.............................. (2,576) (5,915) (6,190)
Preferred stock dividends of subsidiaries.. 945 2,551 2,593
Preferred securities distributions of
trust subsidiaries........................ 7,665 4,197 3,052
---------- ---------- ----------
54,495 48,754 48,233
---------- ---------- ----------
Income before preferred stock dividends
of HECO................................... 76,400 84,230 81,849
Preferred stock dividends of HECO.......... 1,178 3,454 3,660
---------- ---------- ----------
Net income for common stock................ $ 75,222 $ 80,776 $ 78,189
========== ========== ==========
</TABLE>
<TABLE>
<CAPTION>
Consolidated Statements of Retained Earnings
- ------------------------------------------------------------------------------------------
Hawaiian Electric Company, Inc. and Subsidiaries
Years ended December 31 1999 1998 1997
- ------------------------------------------------------------------------------------------
(in thousands)
<S> <C> <C> <C>
Retained earnings, January 1...................... $ 405,836 $ 387,582 $367,770
Net income for common stock....................... 75,222 80,776 78,189
Common stock dividends............................ (55,852) (62,522) (58,377)
----------- ---------- ----------
Retained earnings, December 31.................... $ 425,206 $ 405,836 $387,582
=========== ========== ==========
</TABLE>
See accompanying "Notes to Consolidated Financial Statements."
12
<PAGE>
<TABLE>
<CAPTION>
Consolidated Balance Sheets
- ---------------------------------------------------------------------------------
Hawaiian Electric Company, Inc. and Subsidiaries
December 31 1999 1998
- ---------------------------------------------------------------------------------
(in thousands)
<S> <C> <C>
Assets
Utility plant, at cost:
Land.............................................. $ 30,952 $ 30,312
Plant and equipment............................... 2,851,126 2,750,487
Less accumulated depreciation..................... (1,076,373) (982,172)
Plant acquisition adjustment, net................. 458 510
Construction in progress.......................... 151,981 144,035
----------- ----------
Net utility plant............................ 1,958,144 1,943,172
----------- ----------
Current assets:
Cash and equivalents.............................. 1,966 54,783
Customer accounts receivable, net................. 68,768 69,170
Accrued unbilled revenues, net.................... 53,830 43,445
Other accounts receivable, net.................... 2,172 4,082
Fuel oil stock, at average cost................... 34,954 16,778
Materials and supplies, at average cost........... 20,046 17,266
Prepayments and other............................. 4,649 3,858
----------- ----------
Total current assets......................... 186,385 209,382
----------- ----------
Other assets:
Regulatory assets................................. 114,759 108,344
Unamortized debt expense.......................... 13,224 12,549
Long-term receivables and other................... 30,297 37,806
----------- ----------
Total other assets........................... 158,280 158,699
----------- ----------
$2,302,809 $2,311,253
========== ==========
</TABLE>
<TABLE>
<CAPTION>
Capitalization and liabilities
Capitalization (see Consolidated Statements of Capitalization):
<S> <C> <C>
Common stock equity........................................ $ 806,103 $ 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........................................ 646,029 621,998
---------- ----------
Total capitalization..................................... 1,586,425 1,542,858
---------- ----------
Current liabilities:
Preferred stock sinking fund and optional redemption
payments.................................................. -- 47,080
Short-term borrowings nonaffiliates........................ 107,013 133,863
Short-term borrowings affiliate............................ -- 5,550
Accounts payable........................................... 52,116 40,008
Interest and preferred dividends payable................... 8,160 11,214
Taxes accrued.............................................. 66,535 58,335
Other...................................................... 31,485 30,166
---------- ----------
Total current liabilities................................ 265,309 326,216
---------- ----------
Deferred credits and other liabilities:
Deferred income taxes...................................... 131,105 128,327
Unamortized tax credits.................................... 48,206 48,130
Other...................................................... 65,462 66,818
---------- ----------
Total deferred credits and other liabilities............. 244,773 243,275
---------- ----------
Contributions in aid of construction....................... 206,302 198,904
---------- ----------
$2,302,809 $2,311,253
========== ==========
</TABLE>
See accompanying "Notes to Consolidated Financial Statements."
13
<PAGE>
<TABLE>
<CAPTION>
Consolidated Statements of Capitalization
- -------------------------------------------------------------------------------------------
Hawaiian Electric Company, Inc. and Subsidiaries
December 31 1999 1998 1997
- -------------------------------------------------------------------------------------------
(dollars in thousands, except per share amounts)
Common stock equity:
<S> <C> <C> <C>
Common stock of $6 2/3 par value.
Authorized: 50,000,000 shares. Outstanding:
1999, 1998 and 1997, 12,805,843 shares............. $ 85,387 $ 85,387 $ 85,387
Premium on capital stock............................ 295,510 295,344 296,266
Retained earnings................................... 425,206 405,836 387,582
---------- ---------- ----------
Common stock equity............................... 806,103 786,567 $769,235
---------- ---------- ==========
Cumulative preferred stock:
Authorized: 5,000,000 shares of $20 par
value and 7,000,000 shares of $100 par value.
Outstanding: 1999, 1,234,657 shares and 1998,
1,705,457 shares.
</TABLE>
<TABLE>
<CAPTION>
Shares
outstanding
Par December 31,
Series value 1999 1999 1998
- ------------------------------------------------------------------------------------------------------------------------------------
Series not subject to mandatory redemption:
<S> <C> <C> <C> <C>
C-4 1/4% $ 20 (HECO) ........ 150,000 ........ 3,000 3,000
D-5% 20 (HECO) ........ 50,000 ........ 1,000 1,000
E-5% 20 (HECO) ........ 150,000 ........ 3,000 3,000
H-5 1/4% 20 (HECO) ........ 250,000 ........ 5,000 5,000
I-5% 20 (HECO) ........ 89,657 ........ 1,793 1,793
J-4 3/4% 20 (HECO) ........ 250,000 ........ 5,000 5,000
K-4.65% 20 (HECO) ........ 175,000 ........ 3,500 3,500
M-8.05% 100 (HECO) ........ -- ........ -- 8,000
A-8 7/8% 100 (HELCO) ........ -- ........ -- 3,000
G-7 5/8% 100 (HELCO) ........ 70,000 ........ 7,000 7,000
A-8% 100 (MECO) ........ -- ........ -- 2,000
B-8 7/8% 100 (MECO) ........ -- ........ -- 1,000
H-7 5/8% 100 (MECO) ........ 50,000 ........ 5,000 5,000
---------- ------- -------
1,234,657 ........ 34,293 48,293
==========
Less optional redemption payments due within
one year............................. -- 14,000
---------- -------
34,293 34,293
---------- -------
</TABLE>
<TABLE>
<CAPTION>
Series subject to mandatory redemption:
<S> <C> <C> <C> <C>
Q-7.68% $100 (HECO) ........... -- ........... -- 7,600
R-8.75% 100 (HECO) ........... -- ........... -- 13,000
D-12 3/4% 100 (HELCO) ........... -- ........... -- 450
E-12.25% 100 (HELCO) ........... -- ........... -- 550
F-8.5% 100 (HELCO) ........... -- ........... -- 6,000
D-8 3/4% 100 (MECO) ........... -- ........... -- 480
G-8.5% 100 (MECO) ........... -- ........... -- 5,000
----- ------- -------
-- ........... -- 33,080
=====
Less sinking fund and optional
redemption
payments due within one year.......... -- 33,080
------- -------
--
------- -------
Cumulative preferred stock.......... $34,293 $34,293
------- -------
(continued)
</TABLE>
See accompanying "Notes to Consolidated Financial Statements."
14
<PAGE>
Consolidated Statements of Capitalization, continued
Hawaiian Electric Company, Inc. and Subsidiaries
<TABLE>
<CAPTION>
December 31 1999 1998
- --------------------------------------------------------------------------------------------------------------
(in thousands)
<S> <C> <C>
HECO obligated mandatorily redeemable trust preferred
securities of subsidiary trusts holding solely HECO
and HECO-guaranteed debentures................................................ $ 100,000 $ 100,000
---------- ---------
Long-term debt:
First mortgage bonds:
HELCO: 7 3/4_7 7/8%, due 2002 through 2003.................................... 5,000 5,000
---------- ---------
Obligations to the State of Hawaii for the repayment
of Special Purpose Revenue Bonds:
HECO, 6.15%, refunding series 1999D, due 2020................................. 16,000 --
HELCO, 6.15%, refunding series 1999D, due 2020................................ 3,000 --
MECO, 6.15%, refunding series 1999D, due 2020................................. 1,000 --
HECO, 6.20%, series 1999C, due 2029........................................... 35,000 --
HECO, 5.75%, refunding series 1999B, due 2018................................. 30,000 --
HELCO, 5.75% refunding series 1999B, due 2018................................. 11,000 --
MECO, 5.75%, refunding series 1999B, due 2018................................. 9,000 --
HELCO, 5.50%, refunding series 1999A, due 2014................................ 11,400 --
HECO, 4.95%, refunding series 1998A, due 2012................................. 42,580 42,580
HELCO, 4.95%, refunding series 1998A, due 2012................................ 7,200 7,200
MECO, 4.95%, refunding series 1998A, due 2012................................. 7,720 7,720
HECO, 5.65%, series 1997A, due 2027........................................... 50,000 50,000
HELCO, 5.65%, series 1997A, due 2027.......................................... 30,000 30,000
MECO, 5.65%, series 1997A, due 2027........................................... 20,000 20,000
HECO, 5 7/8%, series 1996B, due 2026.......................................... 14,000 14,000
HELCO, 5 7/8%, series 1996B, due 2026......................................... 1,000 1,000
MECO, 5 7/8%, series 1996B, due 2026.......................................... 35,000 35,000
HECO, 6.20%, series 1996A, due 2026........................................... 48,000 48,000
HELCO, 6.20%, series 1996A, due 2026.......................................... 7,000 7,000
MECO, 6.20%, series 1996A, due 2026........................................... 20,000 20,000
HECO, 6.60%, series 1995A, due 2025........................................... 40,000 40,000
HELCO, 6.60%, series 1995A, due 2025.......................................... 5,000 5,000
MECO, 6.60%, series 1995A, due 2025........................................... 2,000 2,000
HECO, 5.45%, series 1993, due 2023............................................ 50,000 50,000
HELCO, 5.45%, series 1993, due 2023........................................... 20,000 20,000
MECO, 5.45%, series 1993, due 2023............................................ 30,000 30,000
HECO, 6.55%, series 1992, due 2022............................................ 40,000 40,000
HELCO, 6.55%, series 1992, due 2022........................................... 12,000 12,000
MECO, 6.55%, series 1992, due 2022............................................ 8,000 8,000
HECO, 7 3/8%, series 1990C, due 2020.......................................... 25,000 25,000
HELCO, 7 3/8%, series 1990C, due 2020......................................... 10,000 10,000
MECO, 7 3/8%, series 1990C, due 2020.......................................... 20,000 20,000
HECO, 7.60%, series 1990B, due 2020........................................... 21,000 21,000
HELCO, 7.60%, series 1990B, due 2020.......................................... 4,000 4,000
HECO, 7.35%, series 1990A, due 2020........................................... -- 16,000
HELCO, 7.35%, series 1990A, due 2020.......................................... -- 3,000
MECO, 7.35%, series 1990A, due 2020........................................... -- 1,000
HECO, 7 5/8%, series 1988, due 2018........................................... -- 30,000
HELCO, 7 5/8%, series 1988, due 2018.......................................... -- 11,000
MECO, 7 5/8%, series 1988, due 2018.......................................... -- 9,000
HELCO, 7.20%, series 1984, due 2014........................................... -- 11,400
---------- ----------
685,900 650,900
Less funds on deposit with trustees.. 40,221 29,684
---------- ----------
Total obligations to the State of Hawaii.................................... 645,679 621,216
---------- ----------
Total long-term debt........................................................ 650,679 626,216
Less unamortized discount...................................................... 4,650 4,218
---------- ----------
Long-term debt, net.......................................................... 646,029 621,998
---------- ----------
Total capitalization........................................................ $1,586,425 $1,542,858
========== ==========
</TABLE>
See accompanying "Notes to Consolidated Financial Statements."
15
<PAGE>
<TABLE>
<CAPTION>
Consolidated Statements of Cash Flows
- ----------------------------------------------------------------------------------------------------
Hawaiian Electric Company, Inc. and Subsidiaries
Years ended December 31 1999 1998 1997
- ----------------------------------------------------------------------------------------------------
(in thousands)
<S> <C> <C> <C>
Cash flows from operating activities:
Income before preferred stock dividends of HECO....... $ 76,400 $ 84,230 $ 81,849
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............................. 93,301 85,655 82,017
Other amortization................................ 6,330 7,829 9,931
Deferred income taxes............................. 2,778 2,944 5,894
Tax credits, net.................................. 1,671 1,086 2,661
Allowance for equity funds used during
construction.................................... (4,228) (10,106) (10,864)
Changes in assets and liabilities:
Decrease in accounts receivable................. 2,312 321 7,184
Decrease (increase) in accrued unbilled
revenues...................................... (10,385) 2,535 (2,254)
Decrease (increase) in fuel oil stock........... (18,176) 8,280 3,432
Decrease (increase) in materials and supplies... (2,780) 1,709 (33)
Increase in regulatory assets, net.............. (3,565) (4,447) (4,910)
Increase (decrease) in accounts payable......... 12,108 (9,797) (16,257)
Other........................................... 2,891 (12,498) (16,691)
--------- ---------- ---------
Net cash provided by operating activities............. 158,657 157,741 141,959
--------- ---------- ---------
Cash flows from investing activities:
Capital expenditures.................................. (108,109) (131,895) (122,140)
Contributions in aid of construction.................. 13,784 7,910 7,089
Proceeds from sales of assets......................... 1,525 -- --
Payments on notes receivable.......................... 1,609 1,531 2,291
--------- ---------- ---------
Net cash used in investing activities................. (91,191) (122,454) (112,760)
--------- ---------- ---------
Cash flows from financing activities:
Common stock dividends................................ (55,852) (62,522) (58,377)
Preferred stock dividends............................. (1,178) (3,454) (3,660)
Proceeds from issuance of HECO obligated
mandatorily redeemable trust preferred securities
of subsidiary trusts............................... -- 50,000 50,000
Preferred securities distributions of trust
subsidiaries....................................... (7,665) (4,197) (3,052)
Proceeds from issuance of long-term debt.............. 105,256 81,716 55,233
Repayment of long-term debt........................... (81,400) (87,500) (30,000)
Redemption of preferred stock......................... (47,080) (2,690) (3,185)
Net increase (decrease) in short-term borrowings from
nonaffiliates and affiliate with original
maturities of three months or less................. (32,400) 43,832 (30,339)
Other................................................. 36 2,635 (4,966)
--------- ---------- ---------
Net cash provided by (used in) financing (120,283) 17,820 (28,346)
activities......................................... --------- ---------- ---------
Net increase (decrease) in cash and equivalents....... (52,817) 53,107 853
Cash and equivalents, January 1....................... 54,783 1,676 823
--------- ---------- ---------
Cash and equivalents, December 31..................... $ 1,966 $ 54,783 $ 1,676
========= ========== =========
</TABLE>
See accompanying "Notes to Consolidated Financial Statements."
16
<PAGE>
Notes to Consolidated Financial Statements
- -------------------------------------------------------------------------------
Hawaiian Electric Company, Inc. and Subsidiaries
- -------------------------------------------------------------------------------
1. Summary of significant accounting policies
- -------------------------------------------------------------------------------
General
Hawaiian Electric Company, Inc. is engaged in the business of generating,
purchasing, transmitting, distributing and selling electric energy on the island
of Oahu and, through its two electric utility subsidiaries, on the islands of
Hawaii, Maui, Lanai and Molokai in the State of Hawaii.
Basis of presentation
In preparing the consolidated financial statements, management is required to
make estimates and assumptions that affect the reported amounts of assets and
liabilities, the disclosure of contingent assets and liabilities and the
reported amounts of revenues and expenses. Actual results could differ
significantly from those estimates.
Material estimates that are particularly susceptible to significant change
include the amounts reported for regulatory assets and pension and other
postretirement benefit obligations.
Consolidation
The consolidated financial statements include the accounts of Hawaiian Electric
Company, Inc. (HECO) and its wholly owned subsidiaries (collectively, the
"Company"), Maui Electric Company, Limited (MECO), Hawaii Electric Light
Company, Inc. (HELCO), HECO Capital Trust I and HECO Capital Trust II (Trusts).
HECO is a wholly owned subsidiary of Hawaiian Electric Industries, Inc. (HEI).
All significant intercompany accounts and transactions have been eliminated in
consolidation.
Regulation by the Public Utilities Commission of the State of Hawaii (PUC)
The Company is regulated by the PUC and accounts for the effects of regulation
under Statement of Financial Accounting Standards (SFAS) No. 71, "Accounting for
the Effects of Certain Types of Regulation." The actions of regulators can
affect the timing of recognition of revenues, expenses, assets and liabilities.
Property, plant and equipment
Property, plant and equipment are reported at cost. Self-constructed plant
includes engineering, supervision, and administrative and general costs, and an
allowance for the cost of funds used during the construction period. Upon the
ordinary retirement or sale of electric utility plant, no gain or loss is
recognized. The cost of the plant retired or sold and the cost of removal (net
of salvage value) are charged to accumulated depreciation.
Contributions in aid of construction
The Company receives contributions from customers for special construction
requirements. As directed by the PUC, the Company amortizes contributions on a
straight-line basis over 30 years as an offset against depreciation expense.
Revenues
Revenues are based on rates authorized by the PUC and include revenues
applicable to energy consumed in the accounting period but not yet billed to the
customers. Revenue amounts recorded pursuant to a PUC interim order are subject
to refund, with interest, pending a final order.
The rate schedules of the Company include energy cost adjustment (ECA) clauses
under which electric rates are adjusted for changes in the weighted average
price paid for fuel oil and certain components of purchased power, and the
relative amounts of company-generated power and purchased power.
17
<PAGE>
Notes to Consolidated Financial Statements, continued
- -------------------------------------------------------------------------------
Hawaiian Electric Company, Inc. and Subsidiaries
- -------------------------------------------------------------------------------
Retirement benefits
Pension and other postretirement benefits costs are charged primarily to expense
and electric utility plant. The Company's policy is to fund pension costs in
amounts consistent with the requirements of the Employee Retirement Income
Security Act of 1974. Certain health care and/or life insurance benefits are
provided to eligible retired employees and the employees' beneficiaries and
covered dependents. See Note 10.
Depreciation
Depreciation is computed primarily using the straight-line method over the
estimated useful lives of the assets. Electric utility plant has useful lives
ranging from 20 to 45 years for production plant, from 25 to 50 years for
transmission and distribution plant and from 8 to 45 years for general plant.
The composite annual depreciation rate was 3.9% in 1999, 1998 and 1997.
Premium, discount and expense
The expenses of issuing long-term debt securities and the premiums or discounts
at which they were sold are amortized against income over the terms of the
respective securities. Unamortized issue costs and discounts or premiums on
long-term debt retired prior to maturity are classified as regulatory assets or
liabilities and are amortized over the remaining term of the retired debt.
Allowance for funds used during construction (AFUDC)
AFUDC is an accounting practice whereby the costs of debt (AFUDC-Debt) and
equity (AFUDC-Equity) funds used to finance plant construction are removed from
the statement of income and charged to construction in progress on the balance
sheet.
The weighted average AFUDC rate was 8.7% in 1999, 8.9% in 1998 and 9.0% in
1997, and reflected quarterly compounding.
Environmental expenditures
The Company is subject to numerous federal and state environmental statutes and
regulations. In general, environmental contamination treatment costs are charged
to expense, unless it is probable the PUC would allow such costs to be recovered
in future rates. Also, environmental costs are capitalized if the costs extend
the life, increase the capacity, or improve the safety or efficiency of
property; the costs mitigate or prevent future environmental contamination; or
the costs are incurred in preparing the property for sale. Liabilities are
recorded when environmental assessments and/or remedial efforts are probable,
and the cost can be reasonably estimated. Corresponding regulatory assets are
recorded when it is probable the PUC would allow such costs to be recovered in
future rates.
Income taxes
HECO and its subsidiaries are included in the consolidated income tax returns of
HECO's parent, HEI. Income tax expense has been computed for financial statement
purposes as if HECO and its subsidiaries filed separate consolidated HECO income
tax returns.
Deferred income tax assets and liabilities are established for the temporary
differences between the financial reporting bases and the tax bases of the
Company's assets and liabilities at enacted tax rates expected to be in effect
when such deferred tax assets or liabilities are realized or settled.
Federal and state tax credits are deferred and amortized over the estimated
useful lives of the properties which qualified for the credits.
Cash flows
The Company considers cash on hand, deposits in banks, money market accounts,
certificates of deposit, short-term commercial paper and reverse repurchase
agreements, with original maturities of three months or less to be cash and
equivalents.
18
<PAGE>
Notes to Consolidated Financial Statements, continued
- -------------------------------------------------------------------------------
Hawaiian Electric Company, Inc. and Subsidiaries
- -------------------------------------------------------------------------------
Recent accounting pronouncement
Comprehensive income. In June 1997, the Financial Accounting Standards Board
(FASB) issued SFAS No. 130, "Reporting Comprehensive Income." The Company
adopted SFAS No. 130 effective January 1, 1998, but had no material "other"
comprehensive income items for the years presented in the statements of income
or accumulated as of the balance sheet dates presented.
Reclassifications
Certain reclassifications have been made to prior years' financial statements to
conform to the 1999 presentation.
2. Cumulative preferred stock
- -------------------------------------------------------------------------------
The following series of cumulative preferred stock are redeemable only at the
option of the respective company and are subject to voluntary liquidation
provisions as follows:
<TABLE>
<CAPTION>
Voluntary
liquidation Redemption
price price
December 31, December 31,
Series 1999 1999
- -------------------------------------------------------------------------------
<S> <C> <C>
C, D, E, H, J and K (HECO)................. $ 20.00 $21.00
I (HECO)................................... 20.00 20.00
G (HELCO).................................. 100.00 --
H (MECO)................................... 100.00 --
</TABLE>
- -------------------------------------------------------------------------------
HELCO's series G and MECO's series H preferred stock may not be redeemed by
the respective subsidiary prior to December 2003.
On December 15, 1998, the Company announced that it would redeem all
outstanding shares of four series of cumulative preferred stock. In January
1999, HECO redeemed all 80,000 shares of its Series M preferred stock, HELCO
redeemed all 30,000 shares of its Series A preferred stock and MECO redeemed all
20,000 and 10,000 shares of its Series A and Series B preferred stock,
respectively.
On December 15, 1998, the Company announced that it would redeem all
outstanding shares of seven series of cumulative preferred stock which are
subject to mandatory sinking fund provisions. In January 1999, HECO redeemed all
76,000 and 130,000 shares of its Series Q and R preferred stock, respectively.
Of the outstanding Series Q preferred stock, 4,000 shares were redeemed under
applicable sinking fund provisions and the remaining 72,000 shares were redeemed
at the December 31, 1998 optional redemption price. Of the outstanding Series R
preferred stock, 20,000 shares were redeemed under applicable sinking fund
provisions and the remaining 110,000 shares were redeemed at the December 31,
1998 optional redemption price. HELCO redeemed all 4,500, 5,500 and 60,000
shares of its Series D, E and F preferred stock, respectively, at the December
31, 1998 optional redemption price. MECO redeemed all 4,800 and 50,000 shares of
its Series D and G preferred stock, respectively, at the December 31, 1998
optional redemption price.
The total sinking fund and optional redemption payments in January 1999
amounted to $48,606,000, including redemption premiums in the aggregate amount
of approximately $1,526,000. The December 31, 1998, aggregate carrying amount of
the redeemed shares ($47,080,000) is reflected as a current liability in the
accompanying consolidated balance sheets. The aggregate redemption amount in
excess of the aggregate carrying amount of the redeemed shares ($1,526,000) is
recorded as a regulatory asset upon redemption.
19
<PAGE>
Notes to Consolidated Financial Statements, continued
- -------------------------------------------------------------------------------
Hawaiian Electric Company, Inc. and Subsidiaries
- -------------------------------------------------------------------------------
HECO is obligated to make dividend, redemption and liquidation payments on the
preferred stock of either of its subsidiaries if the respective subsidiary is
unable to make such payments, provided that such obligation is subordinated to
any obligation to make payments on HECO's own preferred stock.
3. 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. All of the proceeds from the sale were
invested by Trust I in the underlying debt securities of HECO, HELCO and MECO.
In December 1998, HECO Capital Trust II (Trust II), a grantor trust and a
wholly owned subsidiary of HECO, sold (i) in a public offering, 2 million of its
HECO-Obligated 7.30% Cumulative Quarterly Income Preferred Securities, Series
1998 (1998 trust preferred securities) with an aggregate liquidation preference
of $50 million and (ii) to HECO, common securities with a liquidation preference
of approximately $1.55 million. Proceeds from the sale of the 1998 trust
preferred securities and the common securities were used by Trust II to purchase
7.30% Junior Subordinated Deferrable Interest Debentures, Series 1998 (1998
junior deferrable debentures) issued by HECO in the principal amount of $31.55
million and issued by each of MECO and HELCO in the respective principal amounts
of $10 million. The 1998 junior deferrable debentures, which bear interest at
7.30% and mature on December 15, 2028, together with the subsidiary guarantees
(pursuant to which the obligations of MECO and HELCO under their respective
debentures are fully and unconditionally guaranteed by HECO), are the sole
assets of Trust II. The 1998 trust preferred securities must be redeemed at the
maturity of the underlying debt on December 15, 2028, which maturity may be
shortened to a date no earlier than December 15, 2003 or extended to a date no
later than December 15, 2047, and are not redeemable at the option of the
holders, but may be redeemed by Trust II, in whole or in part, from time to
time, on or after December 15, 2003 or upon the occurrence of certain events.
All of the proceeds from the sale were invested by Trust II in the underlying
debt securities of HECO, HELCO and MECO, who used such proceeds from the sale of
the 1998 junior deferrable debentures primarily to effect the redemption of
certain series of their preferred stock having a total par value of $47 million
(see Note 2).
Contractual arrangements (the "Back-up Undertakings") entered into by HECO in
connection with the issuance of the 1997 and 1998 trust preferred securities,
considered together, constitute a full and unconditional guarantee by HECO, on a
subordinated basis, of the periodic distributions due on the 1997 and 1998 trust
preferred securities and of amounts due upon the redemption thereof or upon
liquidation of the Trusts. The Back-up Undertakings include HECO's (i) guarantee
that the Trusts will make their respective periodic distributions and redemption
and liquidation payments to the extent the Trusts have funds available therefor,
20
<PAGE>
Notes to Consolidated Financial Statements, continued
- -------------------------------------------------------------------------------
Hawaiian Electric Company, Inc. and Subsidiaries
- -------------------------------------------------------------------------------
(ii) the subsidiary guarantees, (iii) obligations under an agreement to pay all
expenses and liabilities of the Trusts (other than the obligation of the Trusts
to pay amounts due to the holders of the 1997 and 1998 trust preferred
securities) and (iv) obligations under the trust agreements, HECO's 1997 and
1998 junior subordinated debentures and the respective indentures pursuant to
which the 1997 and 1998 junior subordinated debentures were issued. 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 December 31, 1999
and 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).
4. Long-term debt
- -------------------------------------------------------------------------------
The first mortgage bonds of HELCO are secured by a mortgage which purports to be
a lien on substantially all of the real and personal property now owned or
hereafter acquired by HELCO.
For special purpose revenue bonds, the funds on deposit with trustees
represent the undrawn proceeds from the issuance of the special purpose revenue
bonds and earn interest at market rates. These funds are available only to pay
(or reimburse payment of) expenditures in connection with certain authorized
construction projects and certain expenses related to the bonds.
At December 31, 1999, the aggregate payments of principal required on long-
term debt during the next five years are nil in 2000 and 2001, $2,000,000 in
2002, $3,000,000 in 2003 and nil in 2004.
In August 1999, the Series 1984, 7.2% Special Purpose Revenue Bonds and Series
1988, 7 5/8% Special Purpose Revenue Bonds were refunded with the proceeds from
the Refunding Series 1999A, 5.5% Special Purpose Revenue Bonds and the Refunding
Series 1999B, 5.75% Special Purpose Revenue Bonds, respectively. In November
1999, the Series 1990A, 7.35% Special Purpose Revenue Bonds were refunded with
the proceeds from the Refunding Series 1999D, 6.15% Special Purpose Revenue
Bonds. The premium paid on refunding these bonds is recorded as a regulatory
asset and amortized against income over the remaining term of the refunded
bonds.
In November 1999, the Department of Budget and Finance of the State of Hawaii
issued tax-exempt special purpose revenue bonds Series 1999C in the principal
amount of $35 million with a maturity of 30 years and a fixed coupon interest
rate of 6.2%, and loaned the proceeds from the sale to HECO.
5. Short-term borrowings
- -------------------------------------------------------------------------------
Short-term borrowings from nonaffiliates at December 31, 1999 and 1998 had a
weighted average interest rate of 6.9% and 6.0%, respectively, and consisted
entirely of commercial paper.
The Company maintained bank lines of credit which totaled approximately $125
million at December 31, 1999 and 1998. The lines of credit support the issuance
of commercial paper. There were no borrowings under any line of credit during
1999 or 1998.
21
<PAGE>
Notes to Consolidated Financial Statements, continued
- -------------------------------------------------------------------------------
Hawaiian Electric Company, Inc. and Subsidiaries
- -------------------------------------------------------------------------------
6. Regulatory assets
- -------------------------------------------------------------------------------
In accordance with SFAS No. 71, the Company's financial statements reflect
assets and costs based on current cost-based rate-making regulations. Continued
accounting under SFAS No. 71 requires that certain criteria be met. Management
believes the Company's operations currently satisfy the criteria. However, if
events or circumstances should change so that the criteria are no longer
satisfied, management believes that a material adverse effect on the Company's
results of operations, financial position or liquidity may result.
Regulatory assets are expected to be fully recovered through rates over PUC
authorized periods ranging from 1 to 36 years, and included the following
deferred costs:
<TABLE>
<CAPTION>
December 31 1999 1998
- -------------------------------------------------------------------------------
(in thousands)
<S> <C> <C>
Income taxes.......................................... $ 57,692 $ 54,442
Postretirement benefits other than pensions........... 23,267 25,057
Unamortized expense and premiums on retired debt and
equity issuances................................... 11,282 6,921
Integrated resource planning costs.................... 9,806 8,335
Vacation earned, but not yet taken.................... 6,241 6,620
Other................................................. 6,471 6,969
-------- --------
$114,759 $108,344
======== ========
</TABLE>
7. Income taxes
- -------------------------------------------------------------------------------
The components of income taxes charged to operating expenses were as follows:
<TABLE>
<CAPTION>
Years ended December 31 1999 1998 1997
- -------------------------------------------------------------------------------
(in thousands)
<S> <C> <C> <C>
Federal:
Current.................... $39,678 $44,934 $40,728
Deferred................... 3,841 3,985 6,498
Deferred tax credits, net.. (1,596) (1,634) (1,620)
------- ------- -------
41,923 47,285 45,606
------- ------- -------
State:
Current.................... 4,181 5,801 3,496
Deferred................... 506 547 1,032
Deferred tax credits, net.. 1,671 1,086 2,661
------- ------- -------
6,358 7,434 7,189
------- ------- -------
Total....................... $48,281 $54,719 $52,795
======= ======= =======
</TABLE>
Income tax benefits related to nonoperating activities, included in "Other,
net" on the consolidated statements of income, amounted to $234,000, $147,000
and $260,000 for 1999, 1998 and 1997, respectively.
A reconciliation between income taxes charged to operating expenses and the
amount of income taxes computed at the federal statutory rate of 35% on income
before income taxes and preferred stock dividends follows:
<TABLE>
<CAPTION>
Years ended December 31 1999 1998 1997
- -------------------------------------------------------------------------------------------------------------
(in thousands)
<S> <C> <C> <C>
Amount at the federal statutory income tax rate............................ $43,969 $ 49,525 $ 48,033
State income taxes on operating income, net of
effect on federal income taxes............................................ 4,133 4,832 4,673
Other...................................................................... 179 362 89
------- -------- --------
Income taxes charged to operating expenses................................. $48,281 $ 54,719 $ 52,795
======= ======== ========
</TABLE>
22
<PAGE>
Notes to Consolidated Financial Statements, continued
- --------------------------------------------------------------------------------
Hawaiian Electric Company, Inc. and Subsidiaries
- --------------------------------------------------------------------------------
The tax effects of temporary differences which give rise to deferred tax
assets and liabilities were as follows:
December 31 1999 1998
- -------------------------------------------------------------------------------
(in thousands)
Deferred tax assets:
Property, plant and equipment.............................. $ 11,349 $ 10,530
Contributions in aid of construction and customer
advances................................................. 51,835 55,248
Other...................................................... 15,660 15,031
-------- --------
78,844 80,809
-------- --------
Deferred tax liabilities:
Property, plant and equipment.............................. 170,231 171,557
Regulatory assets.......................................... 22,423 21,163
Other...................................................... 17,295 16,416
-------- --------
209,949 209,136
-------- --------
Net deferred income tax liability........................... $131,105 $128,327
======== ========
The ultimate realization of deferred tax assets is dependent upon the
generation of future taxable income during the periods in which those temporary
differences become deductible. Based upon historical taxable income, projections
for future taxable income and tax planning strategies, management believes it is
more likely than not the Company will realize the benefits of the deferred tax
assets and provided no valuation allowance for deferred tax assets during 1999,
1998 and 1997.
8. Cash flows
- --------------------------------------------------------------------------------
Supplemental disclosures of cash flow information
Cash paid during 1999, 1998 and 1997 for interest (net of AFUDC-Debt) and income
taxes was as follows:
Years ended December 31 1999 1998 1997
- --------------------------------------------------------------------------------
(in thousands)
Interest......................................... $48,163 $45,286 $41,685
======= ======= =======
Income taxes..................................... $38,856 $44,302 $44,027
======= ======= =======
Supplemental disclosures of noncash activities
The allowance for equity funds used during construction, which was charged
primarily to construction in progress, amounted to $4,228,000, $10,106,000 and
$10,864,000 in 1999, 1998 and 1997, respectively.
The estimated fair value of noncash contributions in aid of construction
amounted to $2,859,000, $2,446,000 and $1,931,000 in 1999, 1998 and 1997,
respectively.
9. Major customers
- --------------------------------------------------------------------------------
HECO and its subsidiaries derived approximately 9% of their operating revenues
from the sale of electricity to various federal government agencies in 1999, and
10% in 1998 and 1997. These revenues amounted to $98,192,000 in 1999,
$98,183,000 in 1998 and $110,410,000 in 1997.
23
<PAGE>
Notes to Consolidated Financial Statements, continued
- --------------------------------------------------------------------------------
Hawaiian Electric Company, Inc. and Subsidiaries
- --------------------------------------------------------------------------------
10. Retirement benefits
- --------------------------------------------------------------------------------
Pensions
The Company has several defined benefit pension plans which cover substantially
all employees. In general, benefits are based on the employees' years of
service and base compensation.
Postretirement benefits other than pensions
The Company provides various postretirement benefits other than pensions to
eligible employees upon retirement. HECO and its subsidiaries provide eligible
employees health and life insurance benefits upon retirement. The amount of
health benefits is based on retirees' years of service and retirement date.
Generally, employees are eligible for these benefits if, upon retirement, they
participate in one of the Company's defined benefit pension plans.
Plan amendments
In August 1998, HECO, MECO and HELCO employees represented by the International
Brotherhood of Electrical Workers, Local 1260, ratified a collective bargaining
agreement for a two-year period from November 1, 1998 through October 31, 2000
and covering approximately 63% of the Company's employees. Under the agreement,
HECO and its subsidiaries amended the pension and the postretirement welfare
benefits plans effective January 1, 1999.
The changes in benefit obligations and plan assets, the funded status of
the plans and the unrecognized and recognized amounts in the balance sheet were
as follows:
<TABLE>
<CAPTION>
Pension benefits Other benefits
---------------------------------------------------------------------
(in thousands) 1999 1998 1999 1998
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Benefit obligation, January 1............................... $ 582,513 $ 529,361 $ 127,293 $ 173,759
Service cost................................................ 19,475 18,192 3,171 4,462
Interest cost............................................... 36,384 35,534 7,685 10,117
Amendments.................................................. -- (11,083) -- (42,515)
Actuarial loss (gain)....................................... (100,867) 34,051 (15,981) (13,595)
Benefits paid............................................... (27,562) (23,542) (5,210) (4,935)
- ----------------------------------------------------------------------------------------------------------------------------------
Benefit obligation, December 31............................. 509,943 582,513 116,958 127,293
- ----------------------------------------------------------------------------------------------------------------------------------
Fair value of plan assets, January 1........................ 674,634 597,725 80,241 $ 61,895
Actual return on plan assets................................ 195,515 96,397 28,900 9,429
Employer contribution....................................... 158 4,054 6,712 13,852
Benefits paid............................................... (27,435) (23,542) (5,210) (4,935)
- ----------------------------------------------------------------------------------------------------------------------------------
Fair value of plan assets, December 31...................... 842,872 674,634 110,643 80,241
- ----------------------------------------------------------------------------------------------------------------------------------
Funded status............................................... 332,929 92,121 ( 6,315) (47,052)
Unrecognized net actuarial gain............................. (333,340) (93,927) (64,337) (28,562)
Unrecognized net transition obligation...................... 7,768 10,041 42,435 45,699
Unrecognized prior service cost............................. (10,016) (10,718) -- --
- ----------------------------------------------------------------------------------------------------------------------------------
Accrued benefit cost........................................ $ (2,659) $ (2,483) $ (28,217) $ (29,915)
==================================================================================================================================
Amounts recognized in the balance
sheet consist of:
Prepaid benefit cost.................................... $ 1,436 $ 744 $ -- $ --
Accrued benefit liability............................... (4,212) (3,392) (28,217) (29,915)
Intangible asset........................................ 73 109 -- --
Accumulated other comprehensive income.................. 44 56 -- --
- ----------------------------------------------------------------------------------------------------------------------------------
Accrued benefit cost........................................ $ (2,659) $ (2,483) $ (28,217) $ (29,915)
==================================================================================================================================
</TABLE>
24
<PAGE>
Notes to Consolidated Financial Statements, continued
- --------------------------------------------------------------------------------
Hawaiian Electric Company, Inc. and Subsidiaries
- --------------------------------------------------------------------------------
The following weighted-average assumptions were used in the accounting for the
plans:
<TABLE>
<CAPTION>
Pension benefits Other benefits
---------------------------------------------------------------------------
December 31 1999 1998 1997 1999 1998 1997
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Discount rate........................................ 7.75% 6.5% 7.0% 7.75% 6.5% 7.0%
Expected return on plan assets....................... 10.0 10.0 10.0 10.0 10.0 10.0
Rate of compensation increase........................ 4.65 4.65 5.0 4.65 4.65 5.0
</TABLE>
At December 31, 1999, the assumed health care trend rates for 2000 and
future years were as follows: medical, 6.25%; dental, 4.75%; and vision, 4.25%.
The components of the net periodic benefit cost were as follows:
<TABLE>
<CAPTION>
Pension benefits Other benefits
- ------------------------------------------------------------------------------------------------------------------------------------
(in thousands) 1999 1998 1997 1999 1998 1997
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Service cost................................ $ 19,475 $ 18,192 $ 17,012 $ 3,172 $ 4,462 $ 5,926
Interest cost............................... 36,384 35,533 34,119 7,685 10,118 11,730
Expected return on plan assets.............. (57,104) (51,493) (41,826) (7,644) (6,371) (4,123)
Amortization of unrecognized transition
obligation................................ 2,273 2,273 2,273 3,264 5,523 6,249
Amortization of prior service cost.......... (703) (194) 80 -- -- --
Recognized actuarial loss (gain)............ 9 (7) 99 (1,464) (1,015) --
- ------------------------------------------------------------------------------------------------------------------------------------
Net periodic benefit cost................... $ 334 $ 4,304 $ 11,757 $ 5,013 $ 12,717 $ 19,782
====================================================================================================================================
</TABLE>
Of the net periodic pension benefit costs, the Company expensed $0.2
million, $2.9 million and $7.9 million in 1999, 1998 and 1997, respectively, and
primarily charged the remaining amounts to electric utility plant. Of the net
periodic other benefit costs, the Company expensed $3.7 million, $9.4 million
and $14.2 million in 1999, 1998 and 1997, respectively, and primarily charged
the remaining amounts to electric utility plant.
At December 31, 1999 and 1998, the Company had pension plans in which the
accumulated benefit obligations exceeded plan assets at fair value, but such
plans did not have material benefit obligations.
The health care cost trend rate assumptions can have a significant effect
on the amounts reported for other benefits. At December 31, 1999, a one-
percentage-point increase in the assumed health care cost trend rates would have
increased the total service and interest cost by $0.5 million and the
postretirement benefit obligation by $5.1 million, and a one-percentage-point
decrease would have reduced the total service and interest cost by $0.6 million
and the postretirement benefit obligation by $5.4 million.
25
<PAGE>
Notes to Consolidated Financial Statements, continued
- --------------------------------------------------------------------------------
Hawaiian Electric Company, Inc. and Subsidiaries
- --------------------------------------------------------------------------------
11. Commitments and contingencies
- -------------------------------------------------------------------------------
Fuel contracts
The Company has contractual agreements to purchase minimum quantities of fuel
oil and diesel fuel through 2004 (at prices tied to the market prices of
petroleum products in Singapore and Los Angeles). Based on the average price per
barrel at January 1, 2000, the estimated cost of minimum purchases under the
fuel supply contracts for 2000 is $262 million. The actual cost of purchases in
2000 could vary substantially from this estimate as a result of changes in
market prices, quantities actually purchased and other factors. The Company
purchased $229 million, $183 million and $248 million of fuel under contractual
agreements in 1999, 1998 and 1997, respectively.
Power purchase agreements
At December 31, 1999, the Company had power purchase agreements for 534 MW of
firm capacity, including its power purchase agreement with Hamakua Energy
Partners, L.P., formerly known as Encogen Hawaii, L.P. (Hamakua Partners) for 60
MW of firm capacity beginning in late 2000. The PUC allows rate recovery for
energy and firm capacity payments under these agreements. Assuming that each of
the agreements remains in place for its current term and the minimum
availability criteria in the power purchase agreements are met, aggregate
minimum fixed capacity charges are expected to be approximately $112 million in
2000, $120 million in 2001, $116 million in 2002, $118 million each in 2003 and
2004, and a total of $1.9 billion in 2005 through 2030.
In general, the Company bases its payments under the power purchase
agreements upon available capacity and energy and is generally not required to
make payments for capacity if the contracted capacity is not available, and
payments are reduced, under certain conditions, if available capacity drops
below contracted levels. In general, the payment rates for capacity have been
predetermined for the terms of the agreements. Energy payments will vary over
the terms of the agreements and the Company passes on changes in the fuel
component of the energy charges to customers through the ECA clause in the rate
schedules. The Company does not operate nor participate in the operation of any
of the facilities that provide power under the agreements. Title to the
facilities does not pass to the Company upon expiration of the agreements, and
the agreements do not contain bargain purchase options for the facilities.
Interim rate increases
At December 31, 1999, HECO and its subsidiaries had not recognized revenues
under interim rate increases that were subject to refund.
HELCO power situation
In 1991, HELCO began planning for the expansion of its Keahole power plant to
meet increased electric generation demand forecasted for 1994. HELCO's plans
were to install two 20 MW combustion turbines (CT-4 and CT-5), followed by an 18
MW heat steam recovery generator (ST-7), at which time these units would be
converted to a 56 MW (net) combined-cycle unit. In January 1994, the PUC
approved expenditures for CT-4, which HELCO had planned to install in late 1994.
Installation of the units has been predicated upon HELCO obtaining an amendment
to its Keahole land use permit and obtaining an air permit from the federal
Environmental Protection Agency (EPA) and the Department of Health of the State
of Hawaii (DOH). The Keahole expansion has been delayed due to lawsuits, claims
and petitions brought by independent power producers (IPPs) and others objecting
to the expansion and alleging among other things that (1) operation of the
expanded Keahole site would not comply with land use regulations (including
noise standards) and HELCO's land patent; (2) HELCO cannot operate the plant
within current air quality standards; and (3) HELCO could alternatively purchase
power from IPPs to meet increased electric generation demand.
Land use permit amendment. The Third Circuit Court of the State of Hawaii ruled
in 1997 that HELCO was entitled to use its Keahole site for the expansion
project.
26
<PAGE>
Notes to Consolidated Financial Statements, continued
- --------------------------------------------------------------------------------
Hawaiian Electric Company, Inc. and Subsidiaries
- --------------------------------------------------------------------------------
Final judgments of the Third Circuit Court related to this ruling are on appeal
to the Hawaii Supreme Court.
In a lawsuit filed by the Keahole Defense Coalition (KDC) and others
claiming in part that HELCO was applying an incorrect noise standard, the Third
Circuit Court ruled in favor of KDC that the stricter noise standards apply to
HELCO's plant, but left enforcement of the ruling to the DOH. The DOH has not
taken any formal enforcement action. If and when the DOH actually enforces the
stricter standards, HELCO may assert that the noise regulations are
unconstitutional as applied. In the meantime, HELCO has determined that noise
mitigation measures can be implemented, if necessary, for both the existing
units and CT-4 and CT-5. Those measures have already been installed on the
existing diesel units, and HELCO has applied for administrative approval from
the Department of Land and Natural Resources of the State of Hawaii to install
an additional silencer on CT-2.
Air permit. In 1997, the EPA approved a revised draft permit and the DOH issued
a final air permit for the Keahole expansion project. Nine appeals of the
issuance of the permit were filed with the EPA's Environmental Appeals Board
(EAB) in December 1997. In November 1998, the EAB denied review of certain
appeals, but directed the DOH to reopen the permit for the limited purpose of
reviewing data supporting the permit. HELCO collected several months of
additional data at a new site. After considering issues raised at an October
1999 public hearing and by the EPA, the DOH is now requiring HELCO to complete a
full 12 months of data collection at the new site (which collection began in
January 1999) and also is requiring that two months of data be collected at
another elevation to corroborate the data collected at the new site. Since
there are currently no stays on the project, installation of CT-4 and CT-5 is
expected to begin when the air permit is obtained.
IPP Complaints. Three IPPs-Encogen Hawaii, L.P. (now Hamakua Partners), Hilo
Coast Power Company (HCPC) and Kawaihae Cogeneration Partners (KCP)-had filed
complaints with the PUC alleging that they are entitled to power purchase
contracts to provide HELCO with additional capacity. Two of those complaints
have been resolved, as described below. Two IPPs had claimed they would be a
substitute for HELCO's planned expansion of Keahole. In 1994 and 1995, the PUC
allowed HELCO to pursue construction of and commit expenditures for the Keahole
expansion project. However, the PUC noted that such costs are not to be included
in rate base until the project is installed and being used for utility purposes.
The PUC also ordered HELCO to negotiate with the IPPs and held that the facility
to be built should be the one that can be most expeditiously put into service at
"allowable cost."
HELCO and Hamakua Partners subsequently executed a power purchase agreement
(PPA) for a 60 MW (net) facility and an interconnection agreement, which were
approved by the PUC in July 1999. If Hamakua Partners meets the deadlines in the
PPA, its first phase of 22 MW will be in-service by August 2000 and the
remainder of its 60 MW facility will be in-service by December 2000. This PPA
was necessary to ensure reliable service to customers on the island of Hawaii
and, in the opinion of management, does not supplant the need for CT-4 and CT-5.
The PUC has also approved a restated and amended PPA between HELCO and HCPC
which has a term of five years. The negotiated agreement is substantially
different from the 30-year contract for 32 MW which HCPC had proposed. The
agreement requires that HCPC continue to provide HELCO with 22 MW of capacity
during the entire term of the agreement, 2000 to 2004. HELCO may opt for an
early termination of the PPA after 2001 by giving HCPC written notice no later
than May 30 of the year of termination and paying an early termination amount of
$0.5 million for each of the remaining years in the five-year term. Like the
Hamakua Partners PPA, this restated and amended PPA was necessary to ensure
reliable service to customers until CT-4 and CT-5 are placed in service.
As of December 31, 1999, KCP still has a PPA proposal pending. No agreement
has been reached. If KCP were to negotiate a PPA with HELCO and place its plant
in service prior to the installation of CT-4 and CT-5, CT-4 and CT-5 may not be
installed until additional generating capacity is required. In October 1999,
however, the Third Circuit Court ruled that the lease for KCP's proposed plant
site
27
<PAGE>
Notes to Consolidated Financial Statements, continued
- --------------------------------------------------------------------------------
Hawaiian Electric Company, Inc. and Subsidiaries
- --------------------------------------------------------------------------------
was invalid. At December 31, 1999, management continues to believe that KCP's
proposal is not viable and, therefore, will not impact CT-4 and CT-5.
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 December 31,
1999, HELCO's costs incurred in its efforts to put CT-4 and CT-5 into service
amounted to approximately $79.8 million, including $32.3 million for equipment
and material purchases, $25.9 million for planning, engineering, permitting,
site development and other costs and $21.6 million for AFUDC. As of December 31,
1999, approximately $23.1 million of the $79.8 million was transferred from
construction in progress to plant-in-service as such costs represent completed
facilities which relate to the existing units in service as well as CT-4 and CT-
5.
Although management believes it has acted prudently with respect to the
Keahole project, effective December 1, 1998, HELCO decided to discontinue the
accrual of AFUDC on CT-4 and CT-5 (which would have been approximately $0.5
million after tax per month). The length of 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 Hamakua Partners facility is not placed
in service as planned. As ST-7 is not needed in the near future, no costs for
ST-7 are included in construction work-in-progress.
Management believes that the issues surrounding the amendment to the land
use permit, the air permit, the IPP complaints and related matters will be
satisfactorily resolved and will not prevent HELCO from ultimately constructing
CT-4 and CT-5. Costs relating to CT-4 and CT-5 are subject to the rate-making
process governed by the PUC. Management believes no adjustment to costs incurred
to put CT-4 and CT-5 into service is required as of December 31, 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 ratemaking
(PBR) and innovative pricing provisions. The other parties to the proceeding
advanced numerous other proposals in their statements of position. The PUC
recently submitted a status report on its investigation to the Legislature, at
its request. In the report, the PUC stated that competitive bidding for new
power supplies (i.e. wholesale generation competition) is a logical first step
to encourage competition in the state's electric industry and that it plans to
proceed with an examination of the feasibility of competitive bidding. The PUC
also plans to review specific policies to encourage renewable energy resources
in the power generation mix. The report states that "further steps" by the PUC
"will involve the development of specific policies to encourage wholesale
competition and the continuing examination of other areas suitable for the
development of competition." Some of the parties may seek state legislative
action on their proposals. HECO cannot predict what the ultimate outcome of the
proceeding will be or which (if any) of the proposals advanced in the proceeding
will be implemented.
In May 1999, the PUC approved HECO's standard form contract for customer
retention that allows HECO to provide a rate option for customers who would
otherwise reduce their energy use from HECO's system by using energy from a
nonutility generator. Based on HECO's current rates, the standard form contract
provides a 2.77% discount on base energy rates for "Large Power" customers and
an 11.27% discount on base energy rates for "General Service Demand" customers.
In December 1999, HECO, HELCO and MECO filed an application with the PUC seeking
permission to implement PBR in future rate cases. The proposed PBR would allow
adjustments in the Companies' rates (for up to five years after a rate case)
based
28
<PAGE>
Notes to Consolidated Financial Statements, continued
- --------------------------------------------------------------------------------
Hawaiian Electric Company, Inc. and Subsidiaries
- --------------------------------------------------------------------------------
on an index-based price cap, an earnings sharing mechanism, and a service
quality mechanism.
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 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, the
State of Hawaii Department of Transportation Harbors Division and others) formed
a Honolulu Harbor Working Group. Effective January 30, 1998, the 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.
In 1999, the Working Group submitted reports to the DOH presenting
environmental conditions and recommendations for additional data gathering to
allow for an assessment of the need for risk-based corrective action. The
Working Group also engaged a consultant who identified 27 additional potentially
responsible parties.
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.
12. Regulatory restrictions on distributions to parent
- --------------------------------------------------------------------------------
At December 31, 1999, net assets (assets less liabilities and preferred stock)
of approximately $420 million were not available for transfer to HEI in the form
of dividends, loans or advances without regulatory approval.
13. Related-party transactions
- --------------------------------------------------------------------------------
HEI charged HECO and its subsidiaries $1,793,000, $1,852,000 and $2,230,000 for
general management and administrative services in 1999, 1998 and 1997,
respectively. The amounts charged by HEI to its subsidiaries are allocated
primarily on the basis of actual labor hours expended in providing such
services.
HEI also charged HECO $3,016,000, $2,236,000 and $1,871,000 for data
processing services in 1999, 1998 and 1997, respectively.
HECO's borrowings from HEI fluctuate during the year, and totaled nil and
$5,550,000 at December 31, 1999 and 1998, respectively. The interest charged on
short-term borrowings from HEI is computed based on HECO's short-term borrowing
interest rate. Interest charged by HEI to HECO totaled $89,000, $67,000 and
$433,000 in 1999, 1998 and 1997, respectively.
14. Significant group concentrations of credit risk
- --------------------------------------------------------------------------------
HECO and its utility subsidiaries are regulated operating electric public
utilities engaged in the generation, purchase, transmission, distribution and
sale of electricity on the islands of Oahu, Hawaii, Maui, Lanai and Molokai in
the State of Hawaii. HECO and its subsidiaries provide the only electric public
utility service on the islands they serve. HECO and its subsidiaries grant
credit to customers, all of whom reside or conduct business in the State of
Hawaii.
29
<PAGE>
15. Fair value of financial instruments
- --------------------------------------------------------------------------------
The Company used the following methods and assumptions to estimate the fair
value of each applicable class of financial instruments for which it is
practicable to estimate that value:
Cash and equivalents and short-term borrowings
The carrying amount approximates fair value because of the short maturity of
these instruments.
Notes receivable
At December 31, 1998, fair value was estimated by discounting future cash flows
using rates offered by local lending institutions for loans of similar terms to
companies with comparable credit risk.
Long-term debt
Fair value was estimated based on quoted market prices for the same or similar
issues of debt.
Cumulative preferred stock subject to mandatory redemption
At December 31, 1998, fair value was estimated using optional redemption prices
and par values, as the preferred stock was redeemed in January 1999.
HECO obligated mandatorily redeemable trust preferred securities
of subsidiary trusts holding solely HECO and HECO-guaranteed debentures
Fair value was based on quoted market prices.
The estimated fair values of the financial instruments held or issued by the
Company were as follows:
<TABLE>
<CAPTION>
December 31 1999 1998
- -----------------------------------------------------------------------------------------------
Estimated Estimated
Carrying fair Carrying fair
amount value amount value
- -----------------------------------------------------------------------------------------------
(in thousands)
<S> <C> <C> <C> <C>
Financial assets:
Cash and equivalents.................. $ 1,966 $ 1,966 $ 54,783 $ 54,783
Notes receivable...................... -- -- 1,747 1,737
Financial liabilities:
Short-term borrowings from
nonaffiliates and affiliate.......... 107,013 107,013 139,413 139,413
Long-term debt, net................... 646,029 626,365 621,998 655,397
Cumulative preferred stock subject
to mandatory redemption, including
sinking fund requirements............. -- -- 33,080 34,466
HECO obligated mandatorily redeemable
trust preferred securities of
subsidiary trusts holding solely
HECO and HECO-guaranteed
debentures............................ 100,000 80,750 100,000 96,952
- -----------------------------------------------------------------------------------------------
</TABLE>
Limitations
The Company makes fair value estimates at a specific point in time, based on
relevant market information and information about the financial instrument.
These
30
<PAGE>
Notes to Consolidated Financial Statements, continued
- --------------------------------------------------------------------------------
Hawaiian Electric Company, Inc. and Subsidiaries
- --------------------------------------------------------------------------------
estimates do not reflect any premium or discount that could result if the
Company were to sell its entire holding of a particular financial instrument at
one time. Because no market exists for a significant portion of the Company's
financial instruments, fair value estimates cannot be determined with precision.
Changes in assumptions could significantly affect the estimates.
Fair value estimates are provided for certain existing financial instruments
without attempting to estimate the value of anticipated future business and the
value of assets and liabilities that are not considered financial instruments.
In addition, the tax ramifications related to the realization of the unrealized
gains and losses could have a significant effect on fair value estimates and
have not been considered.
- --------------------------------------------------------------------------------
31
<PAGE>
Notes to Consolidated Financial Statements, continued
- --------------------------------------------------------------------------------
Hawaiian Electric Company, Inc. and Subsidiaries
16. Summarized financial information (unaudited)
- --------------------------------------------------------------------------------
Summarized financial information for HECO's consolidated electric utility
subsidiaries, HELCO and MECO, follows:
Hawaii Electric Light Company, Inc.
<TABLE>
<CAPTION>
December 31 1999 1998
- ------------------------------------------------------------------------------------------
(in thousands)
<S> <C> <C>
Balance sheet data
Current assets........................................ $ 30,260 $ 35,473
Noncurrent assets..................................... 425,552 424,278
-------- --------
$455,812 $459,751
======== ========
Common stock equity................................... $159,719 $157,269
Cumulative preferred stock, not subject to mandatory
redemption.......................................... 7,000 7,000
Current liabilities................................... 52,230 62,313
Noncurrent liabilities................................ 236,863 233,169
-------- --------
$455,812 $459,751
======== ========
</TABLE>
<TABLE>
<CAPTION>
Years ended December 31 1999 1998 1997
- ------------------------------------------------------------------------------------------
(in thousands)
<S> <C> <C> <C>
Income statement data
Operating revenues.................................... $159,681 $154,135 $161,120
Operating income...................................... 22,273 19,360 18,467
Net income for common stock........................... 11,893 16,074 15,263
- ------------------------------------------------------------------------------------------
</TABLE>
Maui Electric Company, Limited
<TABLE>
<CAPTION>
December 31 1999 1998
- ------------------------------------------------------------------------------------------
(in thousands)
<S> <C> <C>
Balance sheet data
Current assets........................................ $ 41,700 $ 41,103
Noncurrent assets..................................... 387,380 382,517
-------- --------
$429,080 $423,620
======== ========
Common stock equity................................... $163,835 $157,402
Cumulative preferred stock, not subject to mandatory
redemption.......................................... 5,000 5,000
Current liabilities................................... 30,296 32,052
Noncurrent liabilities................................ 229,949 229,166
-------- --------
$429,080 $423,620
======== ========
</TABLE>
<TABLE>
<CAPTION>
Years ended December 31 1999 1998 1997
- ------------------------------------------------------------------------------------------
(in thousands)
<S> <C> <C> <C>
Income statement data
Operating revenues.................................... $158,232 $137,923 $152,947
Operating income...................................... 24,868 19,741 17,882
Net income for common stock........................... 15,206 12,369 13,260
- ------------------------------------------------------------------------------------------
</TABLE>
HECO has not provided separate financial statements and other disclosures
concerning MECO and HELCO because management has concluded that such financial
statements and other information are not material to holders of securities
issued by MECO or HELCO which have been fully and unconditionally guaranteed by
HECO.
32
<PAGE>
Notes to Consolidated Financial Statements, continued
- --------------------------------------------------------------------------------
Hawaiian Electric Company, Inc. and Subsidiaries
17. Consolidated quarterly financial information (unaudited)
- --------------------------------------------------------------------------------
Selected quarterly consolidated financial information for 1999 and 1998 follows:
<TABLE>
<CAPTION>
Quarters ended Year ended
--------------------------------------------------
1999 March 31 June 30 Sept. 30 Dec. 31 Dec. 31
- -----------------------------------------------------------------------------------------------------------
(in thousands)
<S> <C> <C> <C> <C> <C>
Operating revenues................. $236,625 $250,858 $275,925 $ 286,915 $ 1,050,323
Operating income................... 29,210 30,924 32,085 30,622 122,841
Net income for common
stock............................ 17,081 19,224 20,315 18,602 75,222
1998
- -----------------------------------------------------------------------------------------------------------
(in thousands)
Operating revenues................. $256,043 $242,204 $257,368 $ 253,284 $ 1,008,899
Operating income................... 27,543 26,861 32,468 29,280 116,152
Net income for common
stock............................ 19,262 18,689 24,976 17,8491/1/ 80,7761/1/
- -----------------------------------------------------------------------------------------------------------
</TABLE>
/1/ Includes the effect of MECO's reduction in costs of generating unit M17 of
$3.4 million pretax and $3.0 million after tax.
Note: HEI owns all of HECO's common stock, therefore,
per share data is not meaningful.
33
<PAGE>
Independent Auditors' Report
- --------------------------------------------------------------------------------
To the Board of Directors and Stockholder
Hawaiian Electric Company, Inc.:
We have audited the accompanying consolidated balance sheets and consolidated
statements of capitalization of Hawaiian Electric Company, Inc. (a wholly owned
subsidiary of Hawaiian Electric Industries, Inc.) and subsidiaries as of
December 31, 1999 and 1998, and the related consolidated statements of income,
retained earnings and cash flows for each of the years in the three-year period
ended December 31, 1999. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Hawaiian
Electric Company, Inc. and subsidiaries as of December 31, 1999 and 1998, and
the results of their operations and their cash flows for each of the years in
the three-year period ended December 31, 1999, in conformity with generally
accepted accounting principles.
/s/ KPMG LLP
Honolulu, Hawaii
January 24, 2000
34
<PAGE>
Directors and Officers
- --------------------------------------------------------------------------------
HAWAIIAN ELECTRIC COMPANY, INC.
<TABLE>
<CAPTION>
<S> <C>
DIRECTORS
Robert F. Clarke, 57, 1990 James K. Scott, 48, 1999
Richard Henderson, 71, 1970 Anne M. Takabuki, 43, 1997 [1]
T. Michael May, 53, 1995 Jeffrey N. Watanabe, 57, 1999
Paul A. Oyer, 59, 1985 Paul C. Yuen, 71, 1993 [1]
Diane J. Plotts, 64, 1991 [1]
[1] Audit committee member.
Note: Year indicates first year elected or appointed. All directors serve one
year terms.
OFFICERS
Robert F. Clarke Thomas L. Joaquin
Chairman of the Board Vice President-Power Supply
T. Michael May Paul A. Oyer
President and Chief Executive Officer Financial Vice President and
Treasurer
Jackie Mahi Erickson Patricia U. Wong
Vice President-Customer Operations/General Counsel Vice President-Corporate Excellence
Charles M. Freedman Ernest T. Shiraki
Vice President-Corporate Relations Controller
Edward Y. Hirata Molly M. Egged
Vice President-Regulatory Affairs and Secretary
Government Relations Lorie Ann K. Nagata
Chris M. Shirai Assistant Treasurer
Vice President-Energy Delivery
HAWAII ELECTRIC LIGHT COMPANY, INC.
DIRECTORS
T. Michael May Barry K. Taniguchi
Richard Henderson Donald K. Yamada
Warren H. W. Lee
OFFICERS
T. Michael May Michael F. H. Chang
Chairman of the Board Assistant Treasurer
Warren H. W. Lee Paul N. Fujioka
President Assistant Treasurer
Paul A. Oyer Lorie Ann K. Nagata
Financial Vice President and Treasurer Assistant Treasurer
Edward Y. Hirata Ernest T. Shiraki
Vice President Assistant Treasurer
Molly M. Egged Deorna L. Ikeda
Secretary Assistant Secretary
MAUI ELECTRIC COMPANY, LIMITED
DIRECTORS
T. Michael May Sanford J. Langa
Gladys C. Baisa B. Martin Luna
William A. Bonnet Anne M. Takabuki
OFFICERS
T. Michael May Michael E. Kam
Chairman of the Board Assistant Treasurer
William A. Bonnet Lorie Ann K. Nagata
President Assistant Treasurer
Paul A. Oyer Stanley T. Nakamoto
Financial Vice President and Treasurer Assistant Treasurer
Edward Y. Hirata Ernest T. Shiraki
Vice President Assistant Treasurer
Molly M. Egged Eileen S. Wachi
Secretary Assistant Secretary
</TABLE>
Information provided as of February 16, 2000
36
