<PAGE>
================================================================================
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2000
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
<TABLE>
<CAPTION>
Exact Name of Registrant as Commission I.R.S. Employer
<S> <C> <C>
Specified in Its Charter File Number Identification No.
----------------------------- ----------- ------------------
HAWAIIAN ELECTRIC INDUSTRIES, INC. 1-8503 99-0208097
</TABLE>
and Principal Subsidiary
HAWAIIAN ELECTRIC COMPANY, INC. 1-4955 99-0040500
State of Hawaii
--------------------------------------------------------------------------------
(State or other jurisdiction of incorporation or organization)
900 Richards Street, Honolulu, Hawaii 96813
--------------------------------------------------------------------------------
(Address of principal executive offices and zip code)
Hawaiian Electric Industries, Inc. ----- (808) 543-5662
Hawaiian Electric Company, Inc. ------- (808) 543-7771
--------------------------------------------------------------------------------
(Registrant's telephone number, including area code)
None
--------------------------------------------------------------------------------
(Former name, former address and former fiscal year, if changed since last
report)
================================================================================
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes x No
------ ------
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
<TABLE>
<CAPTION>
Class of Common Stock Outstanding August 3, 2000
-----------------------------------------------------------------------------------------------------------------------------------
<CAPTION>
<S> <C>
Hawaiian Electric Industries, Inc. (Without Par Value) 32,604,276 Shares
Hawaiian Electric Company, Inc. ($6 2/3 Par Value). 12,805,843 Shares (not publicly traded)
</TABLE>
<PAGE>
Hawaiian Electric Industries, Inc. and subsidiaries
Hawaiian Electric Company, Inc. and subsidiaries
Form 10-Q--Quarter ended June 30, 2000
INDEX
Page No.
Glossary of terms..............................................ii
Forward-looking statements......................................v
PART I. FINANCIAL INFORMATION
<TABLE>
<CAPTION>
Item 1. Financial statements
Hawaiian Electric Industries, Inc. and subsidiaries
---------------------------------------------------
<S> <C> <C>
Consolidated balance sheets (unaudited) -
June 30, 2000 and December 31, 1999........................ 1
Consolidated statements of income (unaudited) -
three and six months ended June 30, 2000 and 1999.......... 2
Consolidated statements of retained earnings (unaudited) -
three and six months ended June 30, 2000 and 1999.......... 3
Consolidated statements of cash flows (unaudited) -
six months ended June 30, 2000 and 1999.................... 4
Notes to consolidated financial statements (unaudited)....... 5
Hawaiian Electric Company, Inc. and subsidiaries
------------------------------------------------
Consolidated balance sheets (unaudited) -
June 30, 2000 and December 31, 1999........................ 11
Consolidated statements of income (unaudited) -
three and six months ended June 30, 2000 and 1999.......... 12
Consolidated statements of retained earnings (unaudited) -
three and six months ended June 30, 2000 and 1999.......... 12
Consolidated statements of cash flows (unaudited) -
six months ended June 30, 2000 and 1999.................... 13
Notes to consolidated financial statements (unaudited)....... 14
Item 2. Management's discussion and analysis of financial condition
and results of operations.................................. 26
Item 3. Quantitative and qualitative disclosures about market risk... 39
</TABLE>
PART II. OTHER INFORMATION
<TABLE>
<S> <C> <C>
Item 1. Legal proceedings............................................ 40
Item 5. Other information............................................ 40
Item 6. Exhibits and reports on Form 8-K............................. 41
Signatures................................................................. 42
</TABLE>
i
<PAGE>
Hawaiian Electric Industries, Inc. and subsidiaries
Hawaiian Electric Company, Inc. and subsidiaries
Form 10-Q--Quarter ended June 30, 2000
GLOSSARY OF TERMS
Terms Definitions
----- -----------
<TABLE>
<CAPTION>
<S> <C>
AFUDC Allowance for funds used during construction
ASB American Savings Bank, F.S.B., a wholly owned subsidiary of HEI Diversified, Inc.
and parent company of American Savings Investment Services Corp., ASB Service
Corporation, AdCommunications, Inc., American Savings Mortgage Co., Inc. and ASB
Realty Corporation
ASBR ASB Realty Corporation
BLNR Board of Land and Natural Resources of the State of Hawaii
CDUP Conservation District Use Permit
Company Hawaiian Electric Industries, Inc. and its direct and indirect subsidiaries,
including, without limitation, Hawaiian Electric Company, Inc., Maui Electric
Company, Limited, Hawaii Electric Light Company, Inc., HECO Capital Trust I, HECO
Capital Trust II, HEI Diversified, Inc., American Savings Bank, F.S.B. and its
subsidiaries, HEI Power Corp. and its subsidiaries, Pacific Energy Conservation
Services, Inc., HEI District Cooling, Inc., ProVision Technologies, Inc., HEI
Properties, Inc., HEI Leasing, Inc., Hycap Management, Inc., Hawaiian Electric
Industries Capital Trust I, Hawaiian Electric Industries Capital Trust II, Hawaiian
Electric Industries Capital Trust III, HEI Preferred Funding, LP, The Old Oahu Tug
Service, Inc. (formerly Hawaiian Tug & Barge Corp.) and Malama Pacific Corp. and
its subsidiaries
Consumer Division of Consumer Advocacy, Department of Commerce and Consumer Affairs of the
Advocate State of Hawaii
D&O Decision and order
DLNR Department of Land and Natural Resources of the State of Hawaii
DOH Department of Health of the State of Hawaii
EAPRC East Asia Power Resources Corporation
Enserch Enserch Development Corporation
EPHC El Paso Philippines Holding Company, Inc.
EPA Environmental Protection Agency - federal
</TABLE>
ii
<PAGE>
GLOSSARY OF TERMS, continued
<TABLE>
<CAPTION>
Terms Definitions
----- -----------
<S> <C>
FASB Financial Accounting Standards Board
FDIC Federal Deposit Insurance Corporation
federal U.S. Government
FHLB Federal Home Loan Bank
GAAP Generally accepted accounting principles
GPA Guam Power Authority
Hamakua Hamakua Energy Partners, L.P., formerly known as Encogen Hawaii, L.P.
Partners
HCPC Hilo Coast Power Company
HECO Hawaiian Electric Company, Inc., a wholly owned electric utility subsidiary of
Hawaiian Electric Industries, Inc. and parent company of Maui Electric Company,
Limited, Hawaii Electric Light Company, Inc., HECO Capital Trust I and HECO Capital
Trust II
HEI Hawaiian Electric Industries, Inc., direct parent company of Hawaiian Electric
Company, Inc., HEI Diversified, Inc., HEI Power Corp., Pacific Energy Conservation
Services, Inc., HEI District Cooling, Inc., ProVision Technologies, Inc., HEI
Properties, Inc., HEI Leasing, Inc., Hycap Management, Inc., Hawaiian Electric
Industries Capital Trust I, Hawaiian Electric Industries Capital Trust II, Hawaiian
Electric Industries Capital Trust III, The Old Oahu Tug Service, Inc. (formerly
Hawaiian Tug & Barge Corp.) and Malama Pacific Corp.
HEIDI HEI Diversified, Inc., a wholly owned subsidiary of Hawaiian Electric Industries,
Inc. and the parent company of American Savings Bank, F.S.B.
HEIII HEI Investments, Inc. (formerly HEI Investment Corp.), a subsidiary of HEI Power
Corp.
HEIPC HEI Power Corp., a wholly owned subsidiary of Hawaiian Electric Industries, Inc.,
and the parent company of several subsidiaries
HEIPC
Group HEI Power Corp. and its subsidiaries
HELCO Hawaii Electric Light Company, Inc., a wholly owned electric utility subsidiary of
Hawaiian Electric Company, Inc.
</TABLE>
iii
<PAGE>
GLOSSARY OF TERMS, continued
<TABLE>
<CAPTION>
Terms Definitions
----- -----------
<S> <C>
HPG HEI Power Corp. Guam, a wholly owned subsidiary of HEI Power Corp.
IPP Independent power producer
KCP Kawaihae Cogeneration Partners
KWH Kilowatthour
MECO Maui Electric Company, Limited, a wholly owned electric utility subsidiary of
Hawaiian Electric Company, Inc.
MPC Malama Pacific Corp., a wholly owned subsidiary of Hawaiian Electric Industries,
Inc. and parent company of several real estate subsidiaries. On September 14, 1998,
the HEI Board of Directors adopted a plan to exit the residential real estate
development business engaged in by Malama Pacific Corp. and its subsidiaries.
MW Megawatt
NOV Notice of Violation
OTS Office of Thrift Supervision, Department of Treasury
PSD permit Prevention of Significant Deterioration/Covered Source permit
PUC Public Utilities Commission of the State of Hawaii
ROACE Return on average common equity
SEC Securities and Exchange Commission
SFAS Statement of Financial Accounting Standards
SOP Statement of Position
TOOTS The Old Oahu Tug Service, Inc. (formerly Hawaiian Tug & Barge Corp. (HTB)), a wholly
owned subsidiary of Hawaiian Electric Industries, Inc. On November 10, 1999,
HTB sold YB and substantially all of HTB's operating assets.
YB Young Brothers, Limited, a wholly owned subsidiary of Hawaiian Tug & Barge Corp.
which was sold on November 10, 1999
</TABLE>
iv
<PAGE>
Forward-looking statements
This report and other presentations made by Hawaiian Electric Industries, Inc.
(HEI) and its subsidiaries contains "forward-looking statements," which include
statements that are predictive in nature, depend upon or refer to future events
or conditions, and/or include words such as "expects", "anticipates", "intends",
"plans", "believes", "estimates" or similar expressions. In addition, any
statements concerning future financial performance (including future revenues,
earnings or growth rates), ongoing business strategies or prospects and possible
future actions, which may be provided by management are also forward-looking
statements. Forward-looking statements are based on current expectations and
projections about future events and are subject to risks, uncertainties and
assumptions about HEI and its subsidiaries, the performance of the industries in
which they do business and economic and market factors, among other things.
These statements are not guaranties of future performance. Such risks,
uncertainties and other important factors could cause actual results to differ
materially from those in the forward-looking statements and include, but are not
limited to, the following:
. the effect of international, national and local economic conditions,
including the condition of the Hawaii tourist and construction industries and
the Hawaii housing market;
. the effects of weather and natural disasters;
. product demand and market acceptance risks;
. increasing competition in the electric utility, banking and international
power industries;
. capacity and supply constraints or difficulties;
. fuel oil price changes;
. new technological developments;
. federal, state and international governmental and regulatory actions,
including changes in laws, rules and regulations applicable to HEI and its
subsidiaries, decisions in rate cases and on permitting issues, required
corrective actions and changes in taxation;
. the results of financing efforts;
. the timing and extent of changes in interest rates;
. the timing and extent of changes in foreign currency exchange rates;
. the convertibility and availability of foreign currency;
. the availability and pricing of forward contracts;
. political and business risks inherent in doing business in developing
countries;
. the risks associated with the installation of new computer systems;
. the risk that ASB Realty Corporation fails to qualify as a real estate
investment trust for federal and state income tax purposes, in which case it
would be subject to regular corporate income taxation; and
. other risks or uncertainties described elsewhere in this report and in other
periodic reports previously and subsequently filed by HEI and/or Hawaiian
Electric Company, Inc. (HECO) with the Securities and Exchange Commission
(SEC).
Forward-looking statements speak only as of the date of this report.
v
<PAGE>
PART I - FINANCIAL INFORMATION
--------------------------------------------------------------------------------
Item 1. Financial statements
-----------------------------
Hawaiian Electric Industries, Inc. and subsidiaries
Consolidated balance sheets (unaudited)
<TABLE>
<CAPTION>
June 30, December 31,
(in thousands) 2000 1999
---------------------------------------------------------------------------------------------------
<S> <C> <C>
Assets
------
Cash and equivalents................................... $ 215,083 $ 199,906
Accounts receivable and unbilled revenues, net......... 167,537 154,605
Available-for-sale investment securities............... 110,615 -
Held-to-maturity investment and mortgage/asset-backed
securities............................................ 2,180,944 2,159,945
Loans receivable, net.................................. 3,222,454 3,211,878
Property, plant and equipment, net of accumulated
depreciation of $1,183,623 and $1,129,078........... 2,068,742 2,066,195
Regulatory assets...................................... 117,169 114,759
Other.................................................. 304,531 276,997
Goodwill and other intangibles......................... 156,235 106,741
---------- ----------
$8,543,310 $8,291,026
========== ==========
Liabilities and stockholders' equity
------------------------------------
Liabilities
Accounts payable....................................... $ 115,819 $ 117,447
Deposit liabilities.................................... 3,557,709 3,491,655
Short-term borrowings.................................. 130,217 151,833
Securities sold under agreements to repurchase......... 636,122 661,215
Advances from Federal Home Loan Bank................... 1,298,612 1,189,081
Long-term debt......................................... 1,077,497 977,529
Deferred income taxes.................................. 184,329 181,277
Contributions in aid of construction................... 207,225 206,302
Other.................................................. 233,415 231,854
--------- ---------
7,440,945 7,208,193
--------- ---------
HEI- and HECO-obligated preferred securities of trust
subsidiaries directly or indirectly holding solely HEI and
HEI-guaranteed and HECO and HECO-guaranteed subordinated debentures 200,000 200,000
Preferred stock of subsidiaries - not subject to mandatory
redemption............................................ 34,406 34,406
Minority interests..................................... 918 841
------- -------
235,324 235,247
------- -------
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: 32,564 shares and 32,213 shares... 676,817 665,335
Retained earnings...................................... 190,224 182,251
867,041 847,586
---------- ----------
$8,543,310 $8,291,026
========== ==========
See accompanying "Notes to consolidated financial statements."
</TABLE>
1
<PAGE>
Hawaiian Electric Industries, Inc. and subsidiaries
Consolidated statements of income (unaudited)
<TABLE>
<CAPTION>
Three months ended Six months ended
June 30, June 30,
------------------------- ----------------------------
<S> <C> <C> <C> <C>
(in thousands, except per share amounts and
ratio of earnings to fixed charges) 2000 1999 2000 1999
---------------------------------------------- ----------------------------------------------------------
Revenues
Electric utility......................... $307,845 $252,272 $597,250 $490,063
Savings bank............................. 108,699 101,759 218,966 202,039
International power...................... (3,950) 1,332 (2,285) 2,324
Other.................................... 542 14,325 1,080 27,509
------------------------- ----------------------------
413,136 369,688 815,011 721,935
------------------------- ----------------------------
Expenses
Electric utility......................... 256,230 207,936 494,005 404,826
Savings bank............................. 92,384 85,970 183,461 171,119
International power...................... 4,482 2,828 6,597 4,436
Other.................................... 2,914 14,244 5,620 28,812
------------------------- ----------------------------
356,010 310,978 689,683 609,193
------------------------- ----------------------------
Operating income (loss)
Electric utility......................... 51,615 44,336 103,245 85,237
Savings bank............................. 16,315 15,789 35,505 30,920
International power...................... (8,432) (1,496) (8,882) (2,112)
Other.................................... (2,372) 81 (4,540) (1,303)
------------------------- ----------------------------
57,126 58,710 125,328 112,742
------------------------- ----------------------------
Interest expense--other than savings bank (20,156) (19,000) (39,228) (36,888)
Allowance for borrowed funds used during 722 599 1,413 1,239
construction............................
Preferred stock dividends of subsidiaries (506) (499) (1,004) (1,126)
Preferred securities distributions of trust
subsidiaries............................ (4,009) (4,008) (8,018) (8,007)
Allowance for equity funds used during
construction............................ 1,328 987 2,597 2,026
------------------------- ----------------------------
Income before income taxes............... 34,505 36,789 81,088 69,986
Income taxes............................. 15,409 14,033 33,016 26,476
------------------------- ----------------------------
Net income............................... $ 19,096 $ 22,756 $ 48,072 $ 43,510
========================= ============================
Basic earnings per common share.......... $0.59 $0.71 $ 1.49 $ 1.35
========================= ============================
Diluted earnings per common share........ $0.59 $0.71 $ 1.48 $ 1.35
========================= ============================
Dividends per common share............... $0.62 $0.62 $ 1.24 $ 1.24
========================= ============================
Weighted-average number of
common shares outstanding............. 32,403 32,183 32,335 32,168
Dilutive effect of stock options and
dividend equivalents............. 139 92 122 98
------------------------- ----------------------------
Adjusted weighted-average shares......... 32,542 32,275 32,457 32,266
========================= ============================
Ratio of earnings to fixed charges (SEC
method)
Excluding interest on ASB deposits.. 1.73 1.79
============================
Including interest on ASB deposits.. 1.48 1.45
============================
</TABLE>
See accompanying "Notes to consolidated financial statements."
2
<PAGE>
Hawaiian Electric Industries, Inc. and subsidiaries
Consolidated statements of retained earnings (unaudited)
<TABLE>
<CAPTION>
Three months ended June 30, Six months ended
June 30,
----------------------------- -----------------------------
<S> <C> <C> <C> <C>
(in thousands) 2000 1999 2000 1999
------------------------------------------------ ----------------------------------------------------------------
Retained earnings, beginning of period..... $191,202 $166,057 $182,251 $165,252
Net income................................. 19,096 22,756 48,072 43,510
Common stock dividends..................... (20,074) (19,955) (40,099) (39,904)
------------ ------------ ----------- -----------
Retained earnings, end of period........... $190,224 $168,858 $190,224 $168,858
============ ============ ============ ============
See accompanying "Notes to consolidated financial statements."
</TABLE>
3
<PAGE>
Hawaiian Electric Industries, Inc. and subsidiaries
Consolidated statements of cash flows (unaudited)
<TABLE>
<CAPTION>
Six months ended
June 30,
------------------------------
(in thousands) 2000 1999
-------------------------------------------------------------------------------------------------
<S> <C> <C>
Cash flows from operating activities
Net income......................................................... $ 48,072 $ 43,510
Adjustments to reconcile net income to net cash provided by
operating activities
Depreciation of property, plant and equipment................ 54,212 54,410
Other amortization........................................... 3,516 8,180
Provision for loan losses.................................... 6,400 6,098
Deferred income taxes........................................ 3,055 796
Allowance for equity funds used during construction.......... (2,597) (2,026)
Changes in assets and liabilities
Decrease (increase) in accounts receivable and
unbilled revenues, net................................ (12,932) 6,494
Increase (decrease) in accounts payable................ (1,628) 9,745
Changes in other assets and liabilities................ 25,468 (26,805)
------------------------------
Net cash provided by operating activities.......................... 123,566 100,402
------------------------------
Cash flows from investing activities
Held-to-maturity mortgage/asset-backed securities purchased........ (200,224) (479,844)
Principal repayments on held-to-maturity mortgage/asset-backed
securities........................................................ 126,600 364,060
Held-to-maturity investment securities purchased................... (56,500) -
Loans receivable originated and purchased.......................... (259,896) (400,473)
Principal repayments on loans receivable........................... 221,499 327,281
Capital expenditures............................................... (56,533) (57,759)
Acquisition of Philippines investment.............................. (87,500) -
Other.............................................................. 22,203 9,983
----------------------------
Net cash used in investing activities.............................. (290,351) (236,752)
------------------------------
Cash flows from financing activities
Net increase (decrease) in deposit liabilities..................... 66,054 (136,952)
Net decrease in short-term borrowings with original maturities of
three months or less.............................................. (21,616) (65,470)
Net increase in retail repurchase agreements....................... 4,240 125
Proceeds from securities sold under agreements to repurchase....... 376,841 198,000
Repurchase of securities sold under agreements to repurchase....... (410,878) (237,000)
Proceeds from advances from Federal Home Loan Bank................. 345,031 423,100
Principal payments on advances from Federal Home Loan Bank......... (235,500) (302,600)
Proceeds from issuance of long-term debt........................... 110,371 99,075
Repayment of long-term debt........................................ (10,500) (3,500)
Redemption of electric utility subsidiaries' preferred stock....... - (42,080)
Net proceeds from issuance of common stock......................... 7,374 2,510
Common stock dividends............................................. (36,059) (39,904)
Preferred securities distributions of trust subsidiaries........... (8,018) (8,007)
Other.............................................................. (5,378) (8,970)
-----------------------------
Net cash provided by (used in) financing activities................ 181,962 (121,673)
------------------------------
Net increase (decrease) in cash and equivalents.................... 15,177 (258,023)
Cash and equivalents, beginning of period.......................... 199,906 412,254
------------------------------
Cash and equivalents, end of period................................ $ 215,083 $ 154,231
==============================
See accompanying "Notes to consolidated financial statements."
</TABLE>
4
<PAGE>
Hawaiian Electric Industries, Inc. and subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2000 and 1999
(Unaudited)
_______________________________________________________________________________
(1) Basis of presentation
-------------------------
The accompanying unaudited consolidated financial statements have been prepared
in conformity with generally accepted accounting principles (GAAP) for interim
financial information and with the instructions to SEC Form 10-Q and Article 10
of Regulation S-X. Accordingly, they do not include all of the information and
footnotes required by GAAP for complete financial statements. In preparing the
financial statements, management is required to make estimates and assumptions
that affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the balance sheet and the
reported amounts of revenues and expenses for the period. Actual results could
differ significantly from those estimates. The accompanying unaudited
consolidated financial statements should be read in conjunction with the
consolidated financial statements and the notes thereto incorporated by
reference in HEI's Annual Report on SEC Form 10-K for the year ended December
31, 1999 and the consolidated financial statements and the notes thereto in
HEI's Quarterly Report on SEC Form 10-Q for the quarter ended March 31, 2000.
In the opinion of HEI's management, the accompanying unaudited consolidated
financial statements contain all material adjustments required by GAAP to
present fairly the Company's financial position as of June 30, 2000 and December
31, 1999, and the results of its operations for the three and six months ended
June 30, 2000 and 1999, and its cash flows for the six months ended June 30,
2000 and 1999. All such adjustments are of a normal recurring nature, unless
otherwise disclosed in this Form 10-Q or other referenced material. Results of
operations for interim periods are not necessarily indicative of results for the
full year.
Certain reclassifications have been made to prior periods' consolidated
financial statements to conform to the 2000 presentation.
5
<PAGE>
(2) Segment financial information
----------------------------------
Segment financial information was as follows:
<TABLE>
<CAPTION>
Electric Savings International
($ in thousands) utility bank Power Other Total
------------------------------------- ----------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Three months ended June 30, 2000
Revenues from external customers..... 307,842 108,699 (3,950) 545 413,136
Intersegment revenues................ 3 - - (3) -
----------- ---------- ----------- --------- -----------
Revenues......................... 307,845 108,699 (3,950) 542 413,136
=========== ========== =========== ========= ===========
Income (loss) before income taxes.... 39,166 14,906 (8,707) (10,860) 34,505
Income taxes (benefit)............... 15,152 5,510 87 (5,340) 15,409
----------- ---------- ----------- --------- -----------
Net income (loss)................ 24,014 9,396 (8,794) (5,520) 19,096
=========== ========== =========== ========= ===========
Six months ended June 30, 2000
Revenues from external customers..... 597,233 218,962 (2,288) 1,104 815,011
Intersegment revenues................ 17 4 3 (24) -
----------- ---------- ----------- --------- -----------
Revenues......................... 597,250 218,966 (2,285) 1,080 815,011
=========== ========== =========== ========= ===========
Income (loss) before income taxes.... 78,068 32,689 (9,366) (20,303) 81,088
Income taxes (benefit)............... 30,329 12,072 349 (9,734) 33,016
----------- --------- ---------- --------- -----------
Net income (loss)................ 47,739 20,617 (9,715) (10,569) 48,072
=========== ========== =========== ========== ===========
Assets*.............................. 2,326,249 6,002,445 185,699 28,917 8,543,310
=========== ========== =========== ========= ===========
Three months ended June 30, 1999
Revenues from external customers..... 252,272 101,752 1,332 14,332 369,688
Intersegment revenues................ - 7 - (7) -
----------- ---------- ----------- --------- -----------
Revenues......................... 252,272 101,759 1,332 14,325 369,688
=========== ========== =========== ========= ===========
Income (loss) before income taxes.... 31,335 14,439 (1,608) (7,377) 36,789
Income taxes (benefit)............... 12,111 5,382 (171) (3,289) 14,033
----------- ---------- ----------- --------- -----------
Net income (loss)................ 19,224 9,057 (1,437) (4,088) 22,756
=========== ========== =========== ========= ===========
Six months ended June 30, 1999
Revenues from external customers..... 490,063 202,024 2,324 27,524 721,935
Intersegment revenues................ - 15 - (15) -
----------- ---------- ----------- --------- -----------
Revenues......................... 490,063 202,039 2,324 27,509 721,935
=========== ========== =========== ========= ===========
Income (loss) before income taxes.... 59,036 28,220 (2,294) (14,976) 69,986
Income taxes (benefit)............... 22,731 10,638 (68) (6,825) 26,476
----------- ---------- ----------- --------- -----------
Net income (loss)................ 36,305 17,582 (2,226) (8,151) 43,510
=========== ========== =========== ========= ===========
Assets*.............................. 2,275,010 5,643,683 47,240 150,895 8,116,828
=========== ========== =========== ========= ===========
</TABLE>
* At June 30.
Revenues attributed to foreign countries for the periods identified above were
not significant.
6
<PAGE>
(3) Electric utility subsidiary
--------------------------------
For Hawaiian Electric Company, Inc.'s consolidated financial information,
including its commitments and contingencies, see pages 11 through 25.
(4) Savings bank subsidiary
----------------------------
Selected financial information
American Savings Bank, F.S.B. and subsidiaries
Consolidated balance sheet data
<TABLE>
<S> <C> <C>
June 30, December 31,
(in thousands) 2000 2000
------------------------------------------------------------------------------------------------------------------------------
Assets
Cash and equivalents............................................................ $ 204,152 $ 192,807
Available-for-sale investment securities........................................ 110,615 -
Held-to-maturity investment securities.......................................... 133,271 186,799
Held-to-maturity mortgage/asset-backed securities............................... 2,047,673 1,973,146
Loans receivable, net........................................................... 3,222,454 3,211,878
Other........................................................................... 181,445 176,836
Goodwill and other intangibles.................................................. 102,835 106,741
--------------------- --------------------
$6,002,445 $5,848,207
===================== ====================
Liabilities and equity
Deposit liabilities............................................................. $3,557,709 $3,491,655
Securities sold under agreements to repurchase.................................. 636,122 661,215
Advances from Federal Home Loan Bank............................................ 1,298,612 1,189,081
Other........................................................................... 63,148 70,239
--------------------- --------------------
5,555,591 5,412,190
Minority interests.............................................................. 3,410 3,300
Preferred stock................................................................. 75,113 75,113
Common stock equity............................................................. 368,331 357,604
--------------------- --------------------
$6,002,445 $5,848,207
===================== ====================
</TABLE>
American Savings Bank, F.S.B. and subsidiaries
Consolidated income statement data
<TABLE>
<CAPTION>
Three months ended Six months ended
June 30, June 30,
------------------------------ ------------------------
<S> <C> <C> <C> <C>
(in thousands) 2000 1999 2000 1999
-------------------------------------------------------------------------------------------------------------------
Interest income............................................ $103,276 $ 93,491 $205,784 $186,438
Interest expense........................................... 58,334 50,303 114,052 101,759
------------- ------------- ------------- ---------
Net interest income........................................ 44,942 43,188 91,732 84,679
Provision for loan losses.................................. (3,400) (3,178) (6,400) (6,098)
Other income............................................... 5,423 8,268 13,182 15,601
Operating, administrative and general expenses............. (30,650) (32,489) (63,009) (63,262)
------------- ------------- ------------- ---------
Operating income........................................... 16,315 15,789 35,505 30,920
Income taxes............................................... 5,510 5,382 12,072 10,638
------------- ------------- ------------- ---------
Income before preferred stock dividends.................... 10,805 10,407 23,433 20,282
Preferred stock dividends.................................. 1,356 1,350 2,706 2,700
Minority interests......................................... 53 - 110 -
------------- ------------- ------------- ---------
Net income................................................. $ 9,396 $ 9,057 $ 20,617 $ 17,582
============= ============= ============= =========
</TABLE>
7
<PAGE>
In June 2000, the Office of Thrift Supervision (OTS) advised ASB that four debt
securities in the original principal amount of $114 million were impermissible
investments under regulations applicable to federal savings banks. The
securities are trust certificates which are rated Aaa as to principal repayment
but are not rated as to interest. As of June 30, 2000, ASB had reclassified
these trust certificates from a "held-to-maturity" status to an "available-for-
sale" status in its financial statements and recorded these securities at their
estimated fair value. In the second quarter of 2000, as a result of this
reclassification, ASB realized a $2.1 million net loss on the writedown of these
securities and a $1.2 million net loss from the reversal of the related interest
accrual. Additional losses could result from the ultimate disposition of these
securities, or if there is a further decline in their fair value.
(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 megawatt (MW) (net) coal-fired power plant to be
located in Inner Mongolia, People's Republic of China. The power plant is being
built "inside the fence" for Baotou Iron & Steel (Group) Co., Ltd. (Baotou
Steel). The project has received approval from both the National and Inner
Mongolia governments. Construction had commenced and the first of the two units
had been expected to be online by early 2001, and the second six months later.
However, the Inner Mongolia Power Company (IMPC), which owns and operates the
electricity grid in Inner Mongolia, has refused to enter into an interconnection
arrangement with the joint venture. The HEIPC Group does not believe that it is
prudent to continue construction without an interconnection arrangement whose
terms are consistent with the project as approved by the National and Inner
Mongolia governments. Under the Power Purchase Contract between the joint
venture and Baotou Steel, it is Baotou Steel's responsibility to secure an
interconnection arrangement with IMPC. The HEIPC Group continues to work with
Baotou Steel and IMPC to secure a satisfactory interconnection arrangement. If
such an arrangement is not obtained, the HEIPC Group intends to withdraw from
the project (including the HEIPC Group's commitment to invest up to an
additional $86 million toward the project, subject to certain conditions) and
seek recovery of its investment of approximately $25 million to date.
Management cannot predict the outcome of such efforts, nor estimate its
impairment loss, if any, at this time. The financial statements do not include
any adjustments that might result from the outcome of this uncertainty.
Philippines investment
On March 7, 2000, an indirect subsidiary of HEIPC acquired a 50% interest in El
Paso Philippines Holding Company, Inc. (EPHC), an indirect subsidiary of El Paso
Energy Corporation (EPEC), for $87.5 million plus up to an additional $6 million
of payments that are contingent upon future earnings of East Asia Power
Resources Corporation (EAPRC). EPHC owns approximately 91.7% of the common
shares of EAPRC, a Philippines holding company primarily engaged in the electric
generation business in Manila and Cebu through its direct and indirect
subsidiaries, using land and barge-based generating facilities fired by bunker
fuel oil, with total installed capacity of approximately 390 MW. The HEIPC Group
accounts for its investment in EPHC under the equity method of accounting.
Revenues for the international power segment for the second quarter and first
six months of 2000 include the equity in net losses of EPHC. HEI consolidates
the accounts of the HEIPC Group on a one-month lag due to the time needed to
consolidate HEIPC's subsidiaries. At June 30, 2000, the Company's investment in
EPHC was $81.4 million and is included in the consolidated balance sheet in
"Other" assets and "Goodwill and other intangibles."
In connection with and subsequent to the HEIPC Group's investment in EPHC, HEI
has guaranteed up to $35 million of existing and potential obligations related
to this investment and has approved an indemnity of up to approximately $16
million related to title issues on real property securing a debt of two EAPRC
subsidiaries.
8
<PAGE>
(6) Retirement benefits
-------------------------
Change in method of calculating market-related value of retirement benefit plan
assets
Since 1993, the Company determined the market-related value of retirement
benefit (pension and other postretirement benefits) plan assets by calculating
the difference between the expected return and the actual return on the fair
value of the plan assets, then amortizing the difference over future years -- 0%
in the first year and 25% in years two to five, and finally subtracting the
unamortized differences for the past four years from fair value. In the first
quarter of 2000, the method of calculating the market-related value of the plan
assets was changed to include a 15% range around the fair value of such assets
(i.e., 85% to 115% of fair value). If the market-related value is outside the
15% range, then the amount outside the range will be recognized immediately in
the calculation of annual net periodic benefit cost. If the market-related value
remains within the 15% range, the Company will continue to amortize the
difference over future years using the amortization method previously used. This
change in accounting principle is preferable because it results in calculated
asset values of the plans that more closely approximate fair value, while still
mitigating the effect of annual fair value fluctuations. No range was used in
prior years as the market-related value of the plan assets has been within the
15% range at each yearend from 1993 to 1998. Therefore, the cumulative effect of
this change is nil. The effect of the change in accounting principle on the
first six months of 2000 was to increase net income approximately $2 million
($0.07 in basic earnings per common share).
Change in discount rate
The Company changed the discount rate used to calculate the net periodic costs
of pension and other postretirement benefits from 6.5% at December 31, 1998 to
7.75% at December 31, 1999 based on interest rates prevailing at the time. The
effect of the change was to reduce the projected benefit obligation at December
31, 1999 by approximately $110 million and to increase net income by
approximately $3 million ($0.09 in basic earnings per common share) for the
first six months of 2000.
(7) Cash flows
---------------
Supplemental disclosures of cash flow information
Cash paid for interest (net of capitalized amounts) and income taxes was as
follows:
<TABLE>
<CAPTION>
Six months ended June 30,
---------------------------------------------
<S> <C> <C>
(in thousands) 2000 1999
-------------------------------------------------------------------------------------------------------------------------
Interest (including interest paid by savings bank, but excluding interest
paid on nonrecourse debt on leveraged leases).............................. $140,907 $139,858
==================== ====================
Income taxes................................................................ $ 11,773 $ 38,030
==================== ====================
</TABLE>
The decrease in income taxes paid for the six months ended June 30, 2000
compared to the same period in 1999 was primarily due to the payment of
significant federal taxes with the federal tax return extension in 1999.
Supplemental disclosures of noncash activities
In April 2000, HEI recommenced issuing new common shares under the HEI Dividend
Reinvestment and Stock Purchase Plan (DRIP). From March 1998 to March 2000, HEI
had acquired for cash its common shares in the open market to satisfy the
requirements of the HEI DRIP. Under the HEI DRIP, common stock dividends
reinvested by shareholders in HEI common stock in noncash transactions amounted
to $4.0 million for the six months ended June 30, 2000.
9
<PAGE>
(8) Recent accounting pronouncements
-------------------------------------
Derivative instruments and hedging activities
In June 1998, the Financial Accounting Standards Board (FASB) issued Statement
of Financial Accounting Standards (SFAS) No. 133, "Accounting for Derivative
Instruments and Hedging Activities," which establishes accounting and reporting
standards for derivative instruments and hedging activities and requires that an
entity recognize all derivatives as either assets or liabilities in the balance
sheet and measure those instruments at fair value. The provisions of SFAS No.
133 were amended by SFAS No. 137 to be effective for all fiscal quarters of
fiscal years beginning after June 15, 2000. 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.
Certain transactions involving stock compensation
In March 2000, the FASB issued FASB Interpretation No. 44, " Accounting for
Certain Transactions Involving Stock Compensation, An Interpretation of APB
Opinion No. 25," which clarifies the application of Accounting Principles Board
(APB) Opinion No. 25 for certain issues and does not address any issues related
to the application of the fair value method in SFAS No. 123. The Interpretation
clarifies (a) the definition of an employee for purposes of applying APB Opinion
No. 25, (b) the criteria for determining whether a plan qualifies as a
noncompensatory plan, (c) the accounting consequence of various modifications to
the terms of a previously fixed stock option award, and (d) the accounting for
an exchange of stock compensation awards in a business combination. The Company
adopted the provisions of the Interpretation on July 1, 2000 with no resulting
material impact to the Company's results of operations, financial condition or
liquidity.
(9) Commitments and contingencies
----------------------------------
See note (5), "International power subsidiary," above and note (4), "Commitments
and contingencies," in HECO's "Notes to consolidated financial statements."
(10) 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 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.
As of June 30, 2000, the remaining net assets of the discontinued residential
real estate development operations amounted to $12 million (included in "Other"
assets) and consisted primarily of real estate assets, receivables and deferred
tax assets, reduced by loans and accounts payable.
(11) Sale of maritime freight transportation and harbor assist operations
--------------------------------------------------------------------------
In November 1999, HTB sold substantially all of its operating assets and YB for
a nominal gain.
10
<PAGE>
Hawaiian Electric Company, Inc. and subsidiaries
Consolidated balance sheets (unaudited)
<TABLE>
<CAPTION>
June 30, December 31,
(in thousands, except par value) 2000 1999
-------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Assets
Utility plant, at cost
Land.................................................................. $ 28,963 $ 30,952
Plant and equipment................................................... 2,888,550 2,851,126
Less accumulated depreciation......................................... (1,125,385) (1,076,373)
Plant acquisition adjustment, net..................................... 432 458
Construction in progress.............................................. 171,290 151,981
------------------- ------------------
Net utility plant............................................... 1,963,850 1,958,144
------------------- ------------------
Current assets
Cash and equivalents.................................................. 5,654 1,966
Customer accounts receivable, net..................................... 79,712 68,768
Accrued unbilled revenues, net........................................ 54,691 53,830
Other accounts receivable, net........................................ 1,902 2,172
Fuel oil stock, at average cost....................................... 37,483 34,954
Materials and supplies, at average cost............................... 20,208 20,046
Prepayments and other................................................. 4,629 4,649
------------------- ------------------
Total current assets............................................ 204,279 186,385
------------------- ------------------
Other assets
Regulatory assets..................................................... 117,169 114,759
Other................................................................. 40,951 43,521
------------------- ------------------
Total other assets.............................................. 158,120 158,280
------------------- ------------------
$ 2,326,249 $ 2,302,809
=================== ==================
Capitalization and liabilities
Capitalization
Common stock, $6 2/3 par value, authorized
50,000 shares; outstanding 12,806 shares........................... $ 85,387 $ 85,387
Premium on capital stock.............................................. 295,578 295,510
Retained earnings..................................................... 441,199 425,206
------------------- ------------------
Common stock equity............................................. 822,164 806,103
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................................................... 656,497 646,029
------------------- ------------------
Total capitalization............................................ 1,612,954 1,586,425
------------------- ------------------
Current liabilities
Short-term borrowings................................................. 103,419 107,013
Accounts payable...................................................... 57,161 52,116
Interest and preferred dividends payable.............................. 11,564 8,160
Taxes accrued......................................................... 75,901 66,535
Other................................................................. 14,132 31,485
------------------- ------------------
Total current liabilities....................................... 262,177 265,309
------------------- ------------------
Deferred credits and other liabilities
Deferred income taxes................................................. 135,939 131,105
Unamortized tax credits............................................... 48,091 48,206
Other................................................................. 59,863 65,462
------------------- ------------------
Total deferred credits and other liabilities.................... 243,893 244,773
------------------- ------------------
Contributions in aid of construction..................................... 207,225 206,302
------------------- ------------------
$ 2,326,249 $ 2,302,809
=================== ==================
See accompanying notes to HECO's consolidated financial statements.
</TABLE>
11
<PAGE>
Hawaiian Electric Company, Inc. and subsidiaries
Consolidated statements of income (unaudited)
<TABLE>
<CAPTION>
Three months ended Six months ended
June 30, June 30,
--------------------------------- ---------------------------------
<S> <C> <C> <C> <C>
(in thousands, except for ratio of earnings
to fixed charges) 2000 1999 2000 1999
---------------------------------------------------------------------------------------------------------------------------------
Operating revenues.................................... $306,483 $250,858 $594,904 $487,483
-------------- -------------- -------------- --------------
Operating expenses
Fuel oil.............................................. 91,092 47,226 166,247 92,104
Purchased power....................................... 70,444 67,649 140,670 127,629
Other operation....................................... 27,464 32,477 55,205 64,800
Maintenance........................................... 13,622 13,583 26,155 26,888
Depreciation.......................................... 24,330 23,354 48,664 46,719
Taxes, other than income taxes........................ 29,005 23,524 56,366 46,420
Income taxes.......................................... 15,201 12,121 30,394 22,789
-------------- -------------- -------------- --------------
271,158 219,934 523,701 427,349
-------------- -------------- -------------- --------------
Operating income...................................... 35,325 30,924 71,203 60,134
-------------- -------------- -------------- --------------
Other income
Allowance for equity funds used during construction... 1,328 987 2,597 2,026
Other, net............................................ 1,138 1,301 1,713 2,372
-------------- -------------- -------------- --------------
2,466 2,288 4,310 4,398
-------------- -------------- -------------- --------------
Income before interest and other charges.............. 37,791 33,212 75,513 64,532
-------------- -------------- -------------- --------------
Interest and other charges
Interest on long-term debt............................ 9,920 9,915 19,852 19,826
Amortization of net bond premium and expense.......... 525 404 967 767
Other interest charges................................ 1,635 1,851 3,532 3,920
Allowance for borrowed funds used during construction. (722) (599) (1,413) (1,239)
Preferred stock dividends of subsidiaries............. 230 229 458 487
Preferred securities distributions of
trust subsidiaries................................. 1,919 1,918 3,838 3,827
-------------- -------------- -------------- --------------
13,507 13,718 27,234 27,588
-------------- -------------- -------------- --------------
Income before preferred stock dividends of HECO....... 24,284 19,494 48,279 36,944
Preferred stock dividends of HECO..................... 270 270 540 639
-------------- -------------- -------------- --------------
Net income for common stock........................... $ 24,014 $ 19,224 $ 47,739 $ 36,305
============== ============== ============== ==============
Ratio of earnings to fixed charges (SEC method)...... 3.64 2.98
============== ==============
</TABLE>
<TABLE>
<CAPTION>
Hawaiian Electric Company, Inc. and subsidiaries
Consolidated statements of retained earnings (unaudited)
Three months ended Six months ended
June 30, June 30,
--------------------------------- ---------------------------------
<S> <C> <C> <C> <C>
(in thousands) 2000 1999 2000 1999
---------------------------------------------------------------------------------------------------------------------------------
Retained earnings, beginning of period................ $434,979 $409,530 $425,206 $405,836
Net income for common stock........................... 24,014 19,224 47,739 36,305
Common stock dividends................................ (17,794) (12,810) (31,746) (26,197)
-------------- -------------- -------------- --------------
Retained earnings, end of period...................... $441,199 $415,944 $441,199 $415,944
============== ============== ============== ==============
HEI owns all the common stock of HECO. Therefore, per share data with respect to shares of common stock of HECO are not
meaningful.
See accompanying notes to HECO's consolidated financial statements.
</TABLE>
12
<PAGE>
Hawaiian Electric Company, Inc. and subsidiaries
Consolidated statements of cash flows (unaudited)
<TABLE>
<CAPTION>
Six months ended
June 30,
--------------------------------------------
<S> <C> <C>
(in thousands) 2000 1999
-----------------------------------------------------------------------------------------------------------------------
Cash flows from operating activities
Income before preferred stock dividends of HECO............................ $ 48,279 $ 36,944
Adjustments to reconcile income before preferred stock dividends of HECO
to net cash provided by operating activities
Depreciation of property, plant and equipment........................ 48,664 46,719
Other amortization................................................... 2,149 3,177
Deferred income taxes................................................ 4,834 1,045
Tax credits, net..................................................... 678 910
Allowance for equity funds used during construction.................. (2,597) (2,026)
Changes in assets and liabilities
Decrease (increase) in accounts receivable...................... (10,674) 1,626
Decrease (increase) in accrued unbilled revenues................ (861) 2,879
Increase in fuel oil stock...................................... (2,529) (6,363)
Increase in materials and supplies.............................. (162) (2,076)
Increase in regulatory assets................................... (1,181) (1,602)
Increase in accounts payable.................................... 5,045 11,314
Changes in other assets and liabilities......................... (5,171) 683
------------------- -------------------
Net cash provided by operating activities.................................. 86,474 93,230
------------------- -------------------
Cash flows from investing activities
Capital expenditures....................................................... (54,083) (44,042)
Contributions in aid of construction....................................... 4,543 4,423
Payments on notes receivable............................................... 138 794
------------------- -------------------
Net cash used in investing activities...................................... (49,402) (38,825)
------------------- -------------------
Cash flows from financing activities
Common stock dividends..................................................... (31,746) (26,197)
Preferred stock dividends.................................................. (540) (639)
Preferred securities distributions of trust subsidiaries................... (3,838) (3,827)
Proceeds from issuance of long-term debt................................... 10,371 4,675
Redemption of preferred stock.............................................. - (42,080)
Net decrease in short-term borrowings
with original maturities of three months or less........................ (3,594) (16,286)
Other...................................................................... (4,037) (6,181)
------------------- -------------------
Net cash used in financing activities...................................... (33,384) (90,535)
------------------- -------------------
Net increase (decrease) in cash and equivalents............................ 3,688 (36,130)
Cash and equivalents, beginning of period.................................. 1,966 54,783
------------------- -------------------
Cash and equivalents, end of period........................................ $ 5,654 $ 18,653
=================== ===================
See accompanying notes to HECO's consolidated financial statements.
</TABLE>
13
<PAGE>
Hawaiian Electric Company, Inc. and subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2000 and 1999
(Unaudited)
_______________________________________________________________________________
(1) Basis of presentation
--------------------------
The accompanying unaudited consolidated financial statements have been prepared
in conformity with GAAP for interim financial information and with the
instructions to SEC Form 10-Q and Article 10 of Regulation S-X. Accordingly,
they do not include all of the information and footnotes required by GAAP for
complete financial statements. In preparing the financial statements, management
is required to make estimates and assumptions that affect the reported amounts
of assets and liabilities and disclosure of contingent assets and liabilities at
the date of the balance sheet and the reported amounts of revenues and expenses
for the period. Actual results could differ significantly from those estimates.
The accompanying unaudited consolidated financial statements should be read in
conjunction with the consolidated financial statements and the notes thereto
incorporated by reference in HECO's Annual Report on SEC Form 10-K for the year
ended December 31, 1999 and the consolidated financial statements and the notes
thereto in HECO's Quarterly Report on SEC Form 10-Q for the quarter ended March
31, 2000.
In the opinion of HECO's management, the accompanying unaudited consolidated
financial statements contain all material adjustments required by GAAP to
present fairly the financial position of HECO and its subsidiaries as of June
30, 2000 and December 31, 1999, and the results of their operations for the
three and six months ended June 30, 2000 and 1999, and their cash flows for the
six months ended June 30, 2000 and 1999. All such adjustments are of a normal
recurring nature, unless otherwise disclosed in this Form 10-Q or other
referenced material. Results of operations for interim periods are not
necessarily indicative of results for the full year.
Certain reclassifications have been made to prior periods' consolidated
financial statements to conform to the 2000 presentation.
(2) Retirement benefits
--------------------------
Change in method of calculating market-related value of retirement benefit plan
assets
Since 1993, HECO and its subsidiaries determined the market-related value of
retirement benefit (pension and other postretirement benefits) plan assets by
calculating the difference between the expected return and the actual return on
the fair value of the plan assets, then amortizing the difference over future
years -- 0% in the first year and 25% in years two to five, and finally
subtracting the unamortized differences for the past four years from fair value.
In the first quarter of 2000, the method of calculating the market-related value
of the plan assets was changed to include a 15% range around the fair value of
such assets (i.e., 85% to 115% of fair value). If the market-related value is
outside the 15% range, then the amount outside the range will be recognized
immediately in the calculation of annual net periodic benefit cost. If the
market-related value remains within the 15% range, HECO and its subsidiaries
will continue to amortize the difference over future years using the
amortization method previously used. This change in accounting principle is
preferable because it results in calculated asset values of the plans that more
closely approximate fair value, while still mitigating the effect of annual fair
value fluctuations. No range was used in prior years as the market-related value
of the plan assets has been within the 15% range at each yearend from 1993 to
1998. Therefore, the cumulative effect of this change is nil. The effect of the
change in accounting principle on the first six months of 2000 was to increase
net income approximately $2 million.
Change in discount rate
HECO and its subsidiaries changed the discount rate used to calculate the net
periodic costs of pension and other postretirement benefits from 6.5% at
December 31, 1998 to 7.75% at December 31, 1999 based on interest rates
prevailing at the time. The effect of the change was to reduce the projected
benefit obligation at December 31, 1999 by approximately $102 million and to
increase net income by approximately $2 million for the first six months of
2000.
14
<PAGE>
(3) Cash flows
---------------
Supplemental disclosures of cash flow information
Cash paid for interest (net of capitalized amounts) and income taxes was as
follows:
<TABLE>
<CAPTION>
Six months ended June 30,
-----------------------------------------
(in thousands) 2000 1999
--------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Interest................................................................... $19,862 $22,880
================== ==================
Income taxes............................................................... $11,622 $ 5,153
================== ==================
</TABLE>
Supplemental disclosure of noncash activities
The allowance for equity funds used during construction, which was charged to
construction in progress as part of the cost of electric utility plant, amounted
to $2.6 million and $2.0 million for the six months ended June 30, 2000 and
1999, respectively.
(4) Commitments and contingencies
----------------------------------
HELCO power situation
Background. In 1991, HELCO began planning to meet increased electric generation
----------
demand forecasted for 1994. HELCO's plans were to install at its keahole power
plant two 20 MW combustion turbines (CT-4 and CT-5), followed by an 18 MW heat
steam recovery generator (ST-7), at which time these units would be converted to
a 56 MW (net) dual-train combined-cycle (DTCC) unit. In January 1994, the Public
Utilities Commission of the State of Hawaii (PUC) approved expenditures for CT-
4, which HELCO had planned to install in late 1994.
The timing of the installation of HELCO's phased DTCC unit at the Keahole power
plant site has been revised on several occasions due to delays, described below,
in (a) obtaining approval from the Hawaii Board of Land and Natural Resources
(BLNR) of a Conservation District Use Permit (CDUP) amendment and (b) obtaining
from the Department of Health of the State of Hawaii (DOH) and the U.S.
Environmental Protection Agency (EPA) a Prevention of Significant
Deterioration/Covered Source permit (PSD permit) for the Keahole power plant
site. The delays are also attributable to lawsuits, claims and petitions filed
by independent power producers (IPPs) and other parties challenging these
permits and objecting to the expansion, alleging among other things that (1)
operation of the expanded Keahole site would not comply with land use
regulations (including noise standards) and HELCO's land patent; (2) HELCO
cannot operate the plant within current air quality standards; and (3) HELCO
could alternatively purchase power from IPPs to meet increased electric
generation demand.
CDUP amendment. On July 10, 1997, the Third Circuit Court of the State of Hawaii
---------------
issued its Amended Findings of Fact, Conclusions of Law, Decision and Order
addressing HELCO's appeal of an order of the BLNR, along with other consolidated
civil cases relating to HELCO's application for a CDUP amendment. Because the
BLNR failed to take valid agency action or render a proper decision within the
180 day statutory deadline (as calculated by the Court), the Court ruled that
HELCO was automatically entitled to put its land to the uses requested in its
CDUP amendment application pursuant to the default provision of Section 183-41,
Hawaii Revised Statutes (HRS). This decision allows HELCO to use its Keahole
property as requested in its application. An amended order to the same effect
was issued on August 18, 1997. Final judgments have been entered in all of the
consolidated cases. Appeals with respect to the final judgments for certain of
the cases have been filed with the Hawaii Supreme Court. Motions filed with the
Third Circuit Court to stay the effectiveness of the judgments pending
resolution of the appeals were denied in April and July 1998 (in response to a
motion for reconsideration). In August 1998, the Hawaii Supreme Court denied
nonhearing motions for stay of final judgment pending resolution of the appeals.
Management believes that HELCO will ultimately prevail on appeal and that the
final judgments of the Third Circuit Court will be upheld.
15
<PAGE>
The final judgment with respect to HELCO's entitlement to automatically put its
land to the uses requested in its CDUP amendment application (which is in part 1
of the final judgment, and is referred to as HELCO's "default entitlement") was
entered February 11, 1998. The final judgment states that HELCO must comply with
the conditions in its application (part 2 of the final judgment), and that the
standard conditions in Section 13-2-21 of the Hawaii Administrative Rules (HAR),
the rules of the Department of Land and Natural Resources (DLNR), do not apply
to the extent the standard conditions are incompatible with HRS Section 183-41
(part 3 of the final judgment). On August 17, 1999, certain plaintiffs filed a
joint motion to enforce parts 2 and 3 of the final judgment (relating to
applicable conditions) and to stay part 1 of the final judgment (the default
entitlement) until such time as the applicable conditions were identified and it
was determined whether HELCO had or could meet the applicable conditions. At a
September 23, 1999 hearing, the Third Circuit Court ruled that the BLNR must
issue a written decision by November 30, 1999 on certain issues raised in the
administrative petition filed by the Keahole Defense Coalition (KDC) in August
1998, including specific determinations of which conditions are not inconsistent
with HELCO's ability to proceed under the default entitlement. At a BLNR meeting
on October 22, 1999, the BLNR determined that all 15 standard land use
conditions in HAR 13-2-21(a) applied to HELCO's default entitlement and that the
conditions in HELCO's pre-existing CDUP and amendments continue to apply with
respect to those existing permits. The BLNR specifically did not address at that
time the question of HELCO's compliance with each of those conditions. The BLNR
issued a written decision on November 19, 1999. Certain plaintiffs filed two
motions in the Third Circuit Court attempting to implement their interpretation
of the BLNR's ruling. On November 2, 1999, those plaintiffs filed a second joint
motion to enforce part 2 and part 3 of the final judgment. In that motion, they
alleged that the Keahole project cannot meet the conditions relating to
compatibility with the surrounding area and improvement of the existing physical
and environmental aspects of the subject area. Furthermore, they claimed that
the project would be a prohibited use that cannot be placed in the conservation
district, relying on zoning rules implemented by the BLNR in 1994 in furtherance
of Act 270, which prohibited fossil fuel fired generating units in the
conservation district. However, the Third Circuit Court had earlier ruled that
Act 270 does not apply to HELCO's application, which was filed prior to the
effective date of Act 270. Plaintiffs asked that HELCO be enjoined from placing
further structures and improvements on the Keahole site and be ordered to remove
all existing structures and improvements.
On November 5, 1999, the same plaintiffs filed a third joint motion to enforce
judgment. In this motion, they asked that the Court void HELCO's default
entitlement on the basis that HELCO forfeited its default entitlement by
allegedly electing, through HELCO's construction of the pre-PSD portions of the
project, to build a project different from that described in its application.
They also requested that HELCO be enjoined from continuing construction activity
at the site and ordered to restore the Keahole site to its pre-August 1992
condition. These motions were heard on December 13, 1999 and were denied by the
Court. The Court also ruled that any complaints received by the BLNR or DLNR
regarding the Keahole project were to be addressed in writing within 32 days of
mailing of the complaint. An Order to this effect was issued on February 22,
2000. On April 13, 2000, KDC and an individual plaintiff filed a fourth motion
to enforce the judgment, which substantially reiterates their second joint
motion dated November 2, 1999 (see above) and a motion for sanctions against the
BLNR. In light of a BLNR hearing on April 14, 2000, a stipulation to withdraw
these motions was filed, and the plaintiffs indicated that they would refile the
fourth motion after the written order from the BLNR is issued. Although the
BLNR still has not issued its order, on June 21, 2000, the same plaintiffs filed
a fifth joint motion to enforce judgment, generally restating the claims in the
second and fourth motions. On July 7, 2000, Department of Hawaiian Home Lands
filed a joinder in that motion and on July 12, 2000 Waimana also filed a
joinder. A hearing is scheduled for August 28, 2000. For further developments
regarding these issues, see "BLNR petitions."
PSD permit. In 1997, the EPA approved a revised draft permit and the DOH issued
----------
a final PSD permit for HELCO's DTCC unit. Nine appeals of the issuance of the
permit were filed with the EPA's Environmental Appeals Board (EAB) in December
1997.
On November 25, 1998, the EAB issued an Order Denying Review in Part and
Remanding in Part. The EAB denied appeals of the permit that were based on
challenges to (1) the DOH's use of a netting analysis (with respect to
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nitrogen oxide (NOx) emissions), (2) the DOH's determination of Best Available
Control Technology (BACT) for control of sulfur dioxide emissions, and (3)
certain aspects of the DOH's ambient air and source impact analysis. However,
the EAB concluded that the DOH had not adequately responded to comments that had
been made during the public comment period that data relating to certain ambient
air concentrations were outdated or were measured at unrepresentative locations.
The EAB remanded the proceedings and directed the DOH to reopen the permit for
the limited purpose of (1) providing an updated air quality impact report
incorporating current data on sulfur dioxide and particulate matter ambient
concentrations and (2) providing a sufficient explanation of why the carbon
monoxide and ozone data used to support the permit are reasonably
representative, or performing a new air quality analysis based on data shown to
be representative of the air quality in the area to be affected by the project.
The EAB directed the DOH to accept and respond to public comments on the DOH's
decisions with respect to these issues and ruled that any further appeals of its
decision would be limited to the issues addressed on remand. On March 3, 1999,
the EAB issued an Order denying motions for reconsideration which had been filed
by HELCO, KDC and Kawaihae Cogeneration Partners (KCP). HELCO, working closely
with the DOH and EPA, planned its response to the EAB remand and, in January
1999, commenced collection of several months of additional data at a new site.
As part of the remand process, the DOH held a public hearing on the draft permit
on October 7, 1999, limited to the issues remanded by the EAB. After considering
issues raised at the public hearing, the DOH changed its position and required
HELCO to complete a full 12 months of data collection at the new site (which
collection began in January 1999) and also required that two months of data be
collected at a more representative elevation to corroborate the data collected
at the new site. This data collection was completed at the end of April 2000 and
provided excellent corroboration of the data collected at the new site. HELCO is
awaiting issuance of a revised permit by DOH, at which time DOH will open the
public comment period and schedule another public hearing. It is anticipated
that the hearing will take place in early October 2000. As a result of these
actions, there have been further delays in HELCO's construction of CT-4 and CT-
5. Although the actual length of the delays is uncertain, management believes
CT-4 and CT-5 will be in service in early 2002. HELCO continues to work with the
DOH and EPA with the objective of having the final permit reissued by the
beginning of 2001 and of reaching a final resolution of any appeals to the EAB
as expeditiously as possible thereafter. HELCO believes that the PSD permit will
eventually be obtained. Since there are no stays on the project, installation of
CT-4 and CT-5 is expected to begin when the PSD permit is obtained and any EAB
appeals from its issuance are resolved.
KDC declaratory judgment action. In February 1997, KDC and three individuals
-------------------------------
(Plaintiffs) filed a lawsuit in the Third Circuit Court of the State of Hawaii
against HELCO, the director of the DOH, and the BLNR, seeking declaratory
rulings with regard to five counts alleging that, with regard to the Keahole
project, one or more of the defendants had violated, or could not allow the
plant to operate without violating, the State Clean Air Act, the State Noise
Pollution Act, conditions of HELCO's conditional use permit, covenants of
HELCO's land patent and Hawaii administrative rules regarding standard
conditions applicable to land permits. The Complaint was amended in March 1998
to add a sixth count, claiming that an amendment to a provision of the land
patent (relating to the conditions under which the State could repurchase the
land) is void and that the original provision should be reinstated.
On April 12, 1999, the Court ruled that, because there were no remaining issues
of fact in the case, a May 1999 trial date was vacated, no further discovery was
authorized, and proceedings before the Court were suspended pending any further
administrative action by the DOH and BLNR. The Court's rulings to date on the
six counts in the KDC complaint are as follows:
1. Count I (State Clean Air Act): At a hearing on April 5, 1999, the Court
ruled that the DOH was within its discretionary authority in granting
HELCO's requests for additional extensions of time to file its Title V air
permit applications.
2. Count II (State Noise Pollution Act): At a hearing relating to Count II on
February 16, 1999, the DOH notified the Court and the parties of a change
in its interpretation of the noise rules promulgated under the State Noise
Pollution Act. The change in interpretation would apply to the Keahole
plant the noise standard applicable to the emitter property (which the DOH
claims to be a 55 dBA daytime and 45 dBA
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nighttime standard) rather than the previously-applied noise standard of
the receptor properties in the surrounding agricultural park (a 70 dBA
standard).
In response to the new position announced by the DOH, on February 23, 1999
HELCO filed a declaratory judgment action against the DOH, alleging that
the noise rules were invalid on constitutional grounds. At a hearing on
March 31, 1999, the Court granted KDC's motion to dismiss HELCO's
complaint and Plaintiffs' motion for reconsideration on Count II and ruled
that the applicable noise standard was 55 dBA daytime and 45 dBA
nighttime. The Court specifically reserved ruling on HELCO's claims or
potential claims based on estoppel and on the constitutionality of the
noise rules "as applied" to HELCO's Keahole plant. On March 31, 1999, the
Third Circuit Court also granted in part and denied in part HELCO's motion
for leave to file a cross-claim and a third-party complaint, stating that
HELCO may file such motions on the "as applied" and "estoppel" claims once
the DOH actually applies the 55/45 dBA noise standard to the Keahole
plant.
On May 12, 1999, the Order dismissing HELCO's declaratory judgment
complaint was issued and final judgment was entered. The DOH objected to
the entry of final judgment before all issues in the lawsuit were
resolved, but an Order denying that motion was issued on July 26, 1999.
HELCO filed a notice of appeal on August 25, 1999 and KDC filed a notice
of cross-appeal on September 3, 1999. Opening briefs were filed with the
Hawaii Supreme Court in January 2000, answering briefs were filed in
February and March 2000 and reply briefs were filed in March and April
2000. Briefing is now complete.
The DOH has not issued any formal enforcement action applying the 55/45
dBA standard to the Keahole plant. Meanwhile, HELCO has installed noise
mitigation measures on the existing diesel units at Keahole, has obtained
from the DLNR an administrative approval to install an additional silencer
on CT-2 and is exploring possible noise mitigation measures, which can be
implemented if necessary, for CT-4 and CT-5.
3. Count III (violation of CDUP): At a hearing on April 12, 1999, the Court
granted HELCO's motion for summary judgment and suspended proceedings on
this Count pending referral of this matter to the BLNR. (Should the DOH
find HELCO in violation of the noise rules (see Count II), the BLNR would
be called to act on the impact of such violation, if any, on the CDUP.)
4. Count IV (violations of HELCO's land patent): At a hearing on April 12,
1999, the Court granted HELCO's motion for summary judgment and suspended
proceedings on this Count pending referral of this matter to the BLNR.
(Should the DOH find HELCO in violation of the noise rules (see Count II),
the BLNR would be requested to determine the impact of such violation, if
any, on the land patent.)
5. Count V (HELCO's ability to comply with land use regulations): At a
hearing on April 12, 1999, the Court granted HELCO's motion for summary
judgment and suspended proceedings on this Count pending referral of this
matter to the BLNR for resolution of the administrative proceeding which
had been pending before it. (See "BLNR petitions" herein.)
6. Count VI (amendment of HELCO's land patent): At the March 31, 1999
hearing, the Court granted Plaintiffs' motion for summary judgment,
finding that a 1984 amendment to HELCO's land patent was invalid because
the BLNR had failed to comply with the statutory procedure relating to
amendments. The amendment was intended to correct an error in the original
land patent with regard to the repurchase clause in the patent and to
conform the language to the applicable statute, under which the State
would have the right to repurchase the site (as opposed to an automatic
reversion) if it were no longer used for utility purposes. This matter was
heard by the BLNR at its hearing on February 25, 2000 and a corrected
land patent has been issued. (See "BLNR petitions" herein.)
If and when the DOH and BLNR/DLNR act on all issues relating to Counts II
through VI, and depending upon their rulings, the KDC lawsuit may be moot.
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Orders were entered on April 16, 1999 with regard to Count I, May 18, 1999 with
regard to Count VI, and June 3, 1999 with regard to Counts II through V. On
April 30, 1999, KDC filed a motion to determine prevailing party and to tax
attorney fees and costs and a motion for discovery sanctions. After hearing, the
Court ruled that Plaintiffs were the prevailing party as to Counts II and V and
were entitled to fees and costs with regard to those counts, denied Plaintiffs'
motion for fees as the prevailing party with regard to Count VI, denied HELCO's
motion for fees as the prevailing party with regard to Count I and granted
Plaintiffs' request for discovery sanctions against HELCO for late
supplementation of responses to discovery requests. HELCO filed motions to alter
or amend the orders regarding attorneys' fees and costs, and orders granting
those motions were issued on September 22, 1999. HELCO appealed the amended
orders to the Hawaii Supreme Court, which dismissed the appeal on January 20,
2000, on the grounds that the appeal was premature.
HELCO intends to continue to vigorously defend against the claims raised in this
case and in related administrative actions.
BLNR petitions. On August 5, 1998, KDC filed with the BLNR a Petition for
---------------
Declaratory Ruling under HRS Section 91-8. The petition alleged that the
standard conditions in HAR Section 13-2-21 apply to HELCO's default entitlement
to use its Keahole site, that the letter issued to HELCO by the DLNR in January
1998 was erroneous because it failed to incorporate all conditions applicable to
the existing permits, and that the DOH issued three separate Notices of
Violation (NOVs) to HELCO in 1992 and 1998 for violation of clean air rules,
which NOVs are alleged to constitute violations under the existing permits and
render such permits null and void. The petition requested that the BLNR commence
a contested case on the petition; that the BLNR determine that HELCO has
violated the terms of its existing conditional use permits, causing such permits
to be null and void; and that the BLNR determine that HELCO has violated the
conditions applicable to its default entitlement, such that HELCO should be
enjoined from using the Keahole property under such default entitlement.
Pursuant to a ruling from the Third Circuit Court that the BLNR decide certain
issues raised in this petition by November 30, 1999 (see "CDUP amendment"
herein), these issues were discussed at an October 22, 1999 BLNR meeting. The
BLNR determined that none of the standard land use conditions were inconsistent
with HELCO's ability to proceed under its default entitlement and, therefore,
each of the standard land use conditions applied to the expansion. The BLNR did
not, at that time, determine whether HELCO has complied with the applicable
conditions. The BLNR also determined that specific conditions imposed by the
BLNR on HELCO's original CDUP and amendments thereto continue to apply to the
existing plant but not to the expansion under the default entitlement.
On February 7, 2000, KDC and an individual plaintiff filed with the BLNR a
Request to Nullify "Default Entitlement." In the request, it is alleged that
HELCO's default entitlement is void because HELCO cannot satisfy all conditions
and laws, that HELCO forfeited its default entitlement because it redesigned
certain facilities it has already constructed to support existing CT-2 rather
than CT-4 and CT-5, and that the BLNR should exercise its right to repurchase
clause in HELCO's land patent. At its hearing on February 25, 2000, the BLNR
denied KDC's request. The BLNR stated that it has the power to consider whether
conditions have been met and to enforce those conditions if they are not met,
but not to enforce conditions in a way which violates either HRS Section 183-41
or the order of the Third Circuit Court which recognized HELCO's ability to
proceed with the Keahole project under a default entitlement. Subsequent to the
hearing, an issue was raised administratively as to whether the BLNR should
impose condition 15, which would impose a completion deadline on the project of
three years following "approval." The issue was included on the agenda for the
April 14, 2000 BLNR hearing. However, during the hearing the BLNR passed a
motion to remove the item from the agenda. As to the third claim, the BLNR
authorized the issuance of a land patent with a corrected repurchase provision
at its hearing on February 25, 2000, after which time the repurchase issue
became moot since HELCO continues to use the land for public utility purposes.
(See "KDC declaratory judgment action," relating to Count VI.) A written
decision on the February 25, 2000 rulings is pending.
IPP complaints filed with the PUC. Three IPPs-KCP, Enserch Development
---------------------------------
Corporation (Enserch) and Hilo Coast Power Company (HCPC)-filed separate
complaints against HELCO with the PUC in 1993, 1994, and 1997, respectively,
alleging that they are entitled to PPAs to provide HELCO with additional
capacity. KCP and Enserch
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each claimed that they would be a substitute for HELCO's planned 56 MW (net)
DTCC unit at Keahole. Two of the complaints have been resolved, as described
below.
In September 1995, the PUC allowed HELCO to continue to pursue construction of
and commit expenditures for the second combustion turbine (CT-5) and the steam
recovery generator (ST-7) for its planned DTCC unit, but stated in its order
that "no part of the project may be included in HELCO's rate base unless and
until the project is in fact installed, and is used and useful for utility
purposes." The PUC also ordered HELCO to continue negotiating with the IPPs and
held that the facility to be built (i.e., either HELCO's or one of the IPP's)
should be the one that can be most expeditiously put into service at "allowable
cost."
The current status of these IPPs' PUC complaints is as follows:
Enserch complaint. On January 16, 1998, HELCO filed with the PUC an
-----------------
application for approval of a PPA for a 60 MW (net) facility and an
interconnection agreement with Encogen Hawaii, L.P. (Encogen), an Enserch
affiliate, both dated October 22, 1997. The PUC issued a decision and order
approving the agreements on July 14, 1999. The decision was amended at
HELCO's request on July 21, 1999 and became final and nonappealable on
August 23, 1999. Enserch sold its interest in the partnership, now called
Hamakua Energy Partners L.P. (Hamakua Partners) in November 1999. According
to Hamakua Partners, its first phase of 22 MW is expected to be in-service
in August 2000 and the remainder of its 60 MW facility is expected to be
in-service by December 2000. This PPA was necessary to ensure reliable
service to customers on the island of Hawaii and, in the opinion of
management, does not supplant the need for CT-4 and CT-5.
KCP complaint. In January 1996, the PUC ordered HELCO to continue in good
-------------
faith to negotiate a PPA with KCP. In May 1997, KCP filed a motion for
unspecified "sanctions" against HELCO for allegedly failing to negotiate in
good faith. In June 1997, KCP filed a motion asking the PUC to designate
KCP's facility as the next generating unit on the HELCO system and to
determine the "allowable cost" which would be payable by HELCO to KCP.
HELCO filed memoranda in opposition to KCP's motions. The PUC held an
evidentiary hearing in August 1997. KCP filed two other motions, which
HELCO opposed, to supplement the record. The PUC issued an Order in June
1998 which denied all of KCP's pending motions; provided rulings and/or
guidance on certain avoided cost and contract issues; directed HELCO to
prepare an updated avoided cost calculation that includes the Encogen
agreement; and directed HELCO and KCP to resume contract negotiations.
HELCO filed a motion for partial reconsideration with respect to one
avoided cost issue. The PUC granted HELCO's motion and modified its order
in July 1998. HELCO resumed negotiations with KCP in 1998 in compliance
with the Order, but no agreement has been reached. On November 20, 1998,
KCP filed a motion asking the PUC to appoint a hearings officer to make a
recommendation to the PUC regarding the terms and conditions of a PPA and
the calculation of avoided cost. HELCO filed a memorandum in opposition to
KCP's motion on December 2, 1998. On July 9, 1999, KCP filed an additional
motion, asking the PUC to reopen its complaint docket and to enforce the
Public Utility Regulatory Policies Act of 1978 by calculating the utility's
avoided cost. HELCO filed a memorandum in opposition to KCP's motion on
July 16, 1999, KCP filed a reply on July 22, 1999 and the Consumer Advocate
filed a SOP on August 2, 1999. No decision has been issued on KCP's two
most recent motions.
On October 29, 1999, the Third Circuit Court ruled that the lease
between Waimana and the Department of Hawaiian Home Lands for the site on
which KCP's plant was proposed to be built was invalid. In addition, KCP's
air permit is under scrutiny by the DOH, as it may have expired on January
31, 2000. In light of these and other issues, management believes that
KCP's proposal is not viable and, therefore, should not impact installation
of CT-4 and CT-5.
HCPC complaint. In December 1999, the PUC approved an amended and restated
--------------
PPA between HELCO and HCPC under which HCPC will continue to provide 22 MW
of firm capacity. The term of the agreement is for five years (through
December 31, 2004) and may continue beyond that time unless either party
provides notice of termination to the other party by May 30 in the year of
termination. HELCO has the right to terminate the contract as of the end of
2002, 2003 or 2004 for an early termination amount of $0.5 million
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for each of the remaining years in the five-year term. Like the PPA with
Hamakua Partners, this restated and amended PPA with HCPC was necessary to
ensure reliable service to customers. However, because the short term of
the PPA was intended to ensure reliability until the Keahole project was
constructed, in the opinion of management it does not supplant the need for
CT-4 and CT-5.
Apollo Energy Corporation (Apollo), which has an existing contract to provide
HELCO with as-available windpower through June 30, 2002, filed a petition for
hearing with the PUC on April 28, 2000, alleging that it has unsuccessfully
attempted for over 75 days to negotiate a new power purchase agreement with
HELCO. Apollo is offering to repower its existing 7 MW facility by the end of
2000 and to install additional wind turbines, up to a total of 15 MW, by the end
of 2001. The parties agreed to limit to four issues the matters being presented
to the PUC for guidance: whether Apollo is entitled to capacity payments;
whether Apollo is entitled to a minimum purchase rate; whether certain
performance standards should apply; and whether HELCO's proposed dispute
resolution provision should apply. A hearing on these issues is scheduled for
October 3, 2000. Because Apollo is an as-available energy provider,
management believes this matter would not affect the need for the Keahole
project.
Pre-PSD work and notices of violation. The costs for the CT-4 project (and, to a
-------------------------------------
lesser extent, the CT-5 project) include the costs of certain facilities that
benefit the existing Keahole power plant, but were originally scheduled to be
installed at the same time as the new generating units. HELCO proceeded with the
construction of the facilities that could be constructed prior to receipt of the
PSD permits for CT-4 and CT-5 (pre-PSD facilities) after receipt of the CDUP
amendment (as a result of the Third Circuit Court orders). (See "CDUP amendment"
herein.)
Pre-PSD facilities. The pre-PSD facilities include a
------------------
shop/warehouse/administration building (completed in 1998), fire protection
system upgrades (completed in September 1999), and a new water treatment
system (completed in December 1999, which supplies the demineralized water
needs of the existing CT at Keahole).
EPA NOV. In September 1998, the EPA issued an NOV to HELCO stating that
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HELCO violated the Hawaii State Implementation Plan by commencing
construction activities at the Keahole generating station without first
obtaining a final air permit. By law, 30 days after the NOV, the EPA may
issue an order requiring compliance with applicable laws, assessing
penalties and/or commencing a civil action seeking an injunction; however,
no order has yet been issued. In 1999, HELCO put the EPA on notice that
certain construction activities not affected by the NOV would continue, and
received approval to proceed with certain construction activities. However,
HELCO has halted work on other construction activities at Keahole until
further notice is provided or approval is obtained from the EPA, or until
the final air permit is received.
Contingency planning. In June 1995, HELCO filed with the PUC its generation
---------------------
resource contingency plan detailing alternatives and mitigation measures to
address the delays that have occurred in adding new generation. Actions under
the plan (such as deferring the retirements of older, smaller units) have helped
HELCO maintain its reserve margin and reduce the risk of near-term capacity
shortages. In January 1996, the PUC opened a proceeding to evaluate HELCO's
contingency resource plan and HELCO's efforts to insure system reliability.
HELCO has filed reports with the PUC from time to time updating the contingency
plan and the status of implementing the plan. The last update was filed on March
31, 2000.
The first increment of new generation to be available to HELCO is now expected
to be added in August 2000 (Hamakua Partners' 22 MW CT). Despite delays in
adding new generation, HELCO's mitigation measures (including the extension of
power purchases from HCPC) should provide HELCO with sufficient generation
reserve margin to cover its projected monthly system peaks with units on
scheduled maintenance until additional new generation is added in late 2000 (the
remaining 38 MW of Hamakua Partners' 60 MW DTCC unit) and in early 2002 (CT-4
and CT-5), and should provide HELCO with sufficient reserve margin in the event
of further delays in adding new generation. As new generation is added, HELCO
will retire its older, smaller generating units.
Costs incurred. If it becomes probable that CT-4 and/or CT-5 will not be
--------------
installed, HELCO may be required to write-off a material portion of the costs
incurred in its efforts to put these units into service. As of June 30, 2000,
HELCO's costs incurred in its efforts to put CT-4 and CT-5 into service and to
support existing units amounted to
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approximately $80.6 million, including $32.4 million for equipment and material
purchases, $26.6 million for planning, engineering, permitting, site development
and other costs and $21.6 million for an allowance for funds used during
construction (AFUDC). As of June 30, 2000, approximately $23.5 million of the
$80.6 million was transferred from construction in progress to plant-in-service
as such costs represent completed pre-PSD facilities which relate to the
existing units in service as well as to CT-4 and CT-5.
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 2005. Since
ST-7 is not needed in the near future, no costs for ST-7 are included in
construction in progress.
Management believes that the issues surrounding the amendment to the land use
permit, the air permit, the IPP complaints and related matters will be
satisfactorily resolved and will not prevent HELCO from ultimately constructing
CT-4 and CT-5. The recovery of costs relating to CT-4 and CT-5 are subject to
the rate-making process governed by the PUC. Management believes no adjustment
to costs incurred to put CT-4 and CT-5 into service is required as of June 30,
2000.
Competition proceeding
On December 30, 1996, the PUC instituted a proceeding to identify and examine
the issues surrounding electric competition and to determine the impact of
competition on the electric utility infrastructure in Hawaii. After a
collaborative process involving the 19 parties to the proceeding, final
statements of position were prepared by several of the parties and submitted to
the PUC in October 1998. HECO's position is that retail competition is not
feasible in Hawaii, but that some of the benefits of competition can be achieved
through competitive bidding for new 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
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."
HECO cannot predict what the ultimate outcome of the proceeding will be or which
(if any) of the proposals advanced in the proceeding will be implemented. In
addition, some of the parties may seek state legislative action on their
proposals.
In December 1999, HECO, HELCO and MECO filed an application with the PUC seeking
permission to implement PBR in future rate cases. The proposed PBR would allow
adjustments in the electric utilities' rates (for up to five years after a rate
case) based on an index-based price cap, an earnings sharing mechanism and a
service quality mechanism.
In March 2000, the PUC approved HELCO's standard form contract for customer
retention that allows HELCO to provide a rate option for customers who would
otherwise reduce their energy use from HELCO's system by using energy from a
nonutility generator. The standard form contract provides a 10% discount on base
energy rates for "Large Power" and "General Service Demand" customers. In May
1999, the PUC authorized HECO to offer a similar standard form contract.
Environmental regulation
In early 1995, the DOH initially advised HECO, Hawaiian Tug & Barge Corp. (HTB),
Young Brothers, Limited (YB) and others that it was conducting an investigation
to determine the nature and extent of actual or potential releases of hazardous
substances, oil, pollutants or contaminants at or near Honolulu Harbor. The DOH
issued
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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 (Conceptual Site Model).
The Working Group also engaged a consultant who identified 27 additional
potentially responsible parties, including YB. Under the terms of the agreement
for the sale of YB, HEI and The Old Oahu Tug Service, Inc. (TOOTS, formerly HTB)
have certain indemnity obligations, including obligations with respect to the
Honolulu Harbor investigation. TOOTS, Texaco Group, Inc. and Philips Petroleum
have joined the Working Group. In response to the DOH's request for technical
assistance, the EPA became involved with the harbor investigation in June 2000.
In August 2000, the Working Group, the DOH, the EPA and the U.S. Coast Guard met
to discuss the Conceptual Site Model, how to proceed and other matters.
Because the process for determining appropriate remedial and cleanup action, if
any, is at an early stage, management cannot predict at this time the costs of
further site analysis or future remediation and cleanup requirements, nor can it
estimate when such costs would be incurred. Certain of the costs incurred may be
claimed and covered under insurance policies, but such coverage is not
determinable at this time.
(5) HECO obligated mandatorily redeemable trust preferred securities of
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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
23
<PAGE>
of Trust II. The 1998 trust preferred securities must be redeemed at the
maturity of the underlying debt on December 15, 2028, which maturity may be
shortened to a date no earlier than December 15, 2003 or extended to a date no
later than December 15, 2047, and are not redeemable at the option of the
holders, but may be redeemed by Trust II, in whole or in part, from time to
time, on or after December 15, 2003 or upon the occurrence of certain events.
All of the proceeds from the sale were invested by Trust II in the underlying
debt securities of HECO, HELCO and MECO, who used such proceeds from the sale of
the 1998 junior deferrable debentures primarily to effect the redemption of
certain series of their preferred stock having a total par value of $47 million.
The 1997 and 1998 junior deferrable debentures and the common securities of the
Trusts have been eliminated in HECO's consolidated balance sheets as of June 30,
2000 and December 31, 1999. The 1997 and 1998 junior deferrable debentures are
redeemable only (i) at the option of HECO, MECO and HELCO, respectively, in
whole or in part, on or after March 27, 2002 (1997 junior deferrable debentures)
and December 15, 2003 (1998 junior deferrable debentures) or (ii) at the option
of HECO, in whole, upon the occurrence of a "Special Event" (relating to certain
changes in laws or regulations).
(6) Recent accounting pronouncements
------------------------------------
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. HECO and its
subsidiaries will adopt SFAS No. 133, as amended, on January 1, 2001, but
management has not yet determined the impact, if any, of adoption.
Certain transactions involving stock compensation
In March 2000, the FASB issued FASB Interpretation No. 44, " Accounting for
Certain Transactions Involving Stock Compensation, An Interpretation of APB
Opinion No. 25," which clarifies the application of APB Opinion No. 25 for
certain issues and does not address any issues related to the application of the
fair value method in SFAS No. 123. The Interpretation clarifies (a) the
definition of an employee for purposes of applying APB Opinion No. 25, (b) the
criteria for determining whether a plan qualifies as a noncompensatory plan, (c)
the accounting consequence of various modifications to the terms of a previously
fixed stock option award, and (d) the accounting for an exchange of stock
compensation awards in a business combination. HECO and its subsidiaries adopted
the provisions of the Interpretation on July 1, 2000 with no resulting material
impact to HECO's consolidated results of operations, financial condition or
liquidity.
24
<PAGE>
(7) Summarized financial information
-------------------------------------
Summarized financial information for HECO's subsidiaries, HELCO and MECO, is as
follows:
<TABLE>
<CAPTION>
Balance sheet data
HELCO MECO
------------------------------------------ ----------------------
<S> <C> <C> <C> <C>
June 30, December 31, June 30, December 31,
(in thousands) 2000 1999 2000 1999
----------------------------------------------------------------------------------------------------------------------------------
Current assets..................................... $ 36,661 $ 30,260 $ 42,686 $ 41,700
Noncurrent assets.................................. 423,725 425,552 392,204 387,380
---------------- -------------------- ---------------- ---------------
$460,386 $455,812 $434,890 $429,080
================ ==================== ================ ===============
Common stock equity.............................. $162,355 $159,719 $165,827 $163,835
Cumulative preferred stock-not subject
to mandatory redemption...................... 7,000 7,000 5,000 5,000
Current liabilities................................ 53,709 52,230 33,180 30,296
Noncurrent liabilities............................. 237,322 236,863 230,883 229,949
------------- --------------- ------------ -----------
$460,386 $455,812 $434,890 $429,080
============= ================== ============= ===========
</TABLE>
<TABLE>
<CAPTION>
Income statement data
HELCO MECO
----------------------------------------------------------- ------------------------------------
Three months ended Six months ended Three months ended Six months ended
June 30, June 30, June 30, June 30,
-------------------------------- ------------------ --------------------- -----------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
(in thousands) 2000 1999 2000 1999 2000 1999 2000 1999
----------------------------------------------------------------------------------------------------------------------------------
Operating revenues... $46,579 $37,927 $90,790 $74,827 $47,179 $37,299 $91,040 $72,980
Operating income..... 6,660 4,442 13,200 9,887 6,182 7,133 13,722 12,153
Net income for
common stock...... 4,080 1,786 7,981 4,709 4,219 4,604 9,587 7,011
</TABLE>
HECO has not provided separate financial statements and other disclosures
concerning HELCO and MECO because management has concluded that such financial
statements and other information are not material to holders of the 1997 and
1998 junior deferrable debentures issued by HELCO and MECO which have been fully
and unconditionally guaranteed by HECO.
(8) Reconciliation of electric utility operating income per HEI and HECO
-------------------------------------------------------------------------
consolidated statements of income
---------------------------------
<TABLE>
<CAPTION>
Three months ended Six months
June 30, ended
June 30,
------------------------------ --------------------------
<S> <C> <C> <C> <C>
(in thousands) 2000 1999 2000 1999
--------------------------------------------------------------- ----------- ------------ --------- -----------
Operating income from regulated and nonregulated activities
before income taxes (per HEI consolidated statements of income)..
$ 51,615 $ 44,336 $103,245 $ 85,237
Deduct:
Income taxes on regulated activities............................. (15,201) (12,121) (30,394) (22,789)
Revenues from nonregulated activities............................ (1,362) (1,414) (2,346) (2,580)
Add:
Expenses from nonregulated activities............................ 273 123 698 266
----------- ----------- ---------- -----------
Operating income from regulated activities after income taxes
(per HECO consolidated statements of income)..................... $ 35,325 $ 30,924 $ 71,203 $ 60,134
=========== ============ ========= ===========
</TABLE>
25
<PAGE>
Item 2. Management's discussion and analysis of financial condition and results
--------------------------------------------------------------------------------
of operations
-------------
The following discussion should be read in conjunction with the consolidated
financial statements of HEI and HECO and accompanying notes.
RESULTS OF OPERATIONS
HEI Consolidated
----------------
<TABLE>
<CAPTION>
Three months ended
June 30, Primary
(in thousands, except per ----------------------------- % reason(s) for
share amounts) 2000 1999 change significant change*
----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Revenues........................... $413,136 $369,688 12 Increases for the electric utility and savings
bank segments, partly offset by decreases for
the "other" and international power segments
Operating income................... 57,126 58,710 (3) Increases for the electric utility and savings
bank segments, more than offset by decreases
for the international power and "other"
segments
Net income......................... 19,096 22,756 (16) Lower operating income, higher interest
expense due to higher average borrowings
resulting from a HEIPC acquisition in March
2000 and higher income taxes due to no tax
benefits on losses from foreign operations
Basic earnings
per common share................ $ 0.59 $ 0.71 (17) See explanation for net income
Weighted-average number of common
shares outstanding................ 32,403 32,183 1 Issuances under the Dividend Reinvestment and
Stock Purchase Plan and other plans
</TABLE>
26
<PAGE>
<TABLE>
<CAPTION>
Six months ended
June 30,
(in thousands, except per ------------------------- % Primary reason(s) for
share amounts) 2000 1999 change significant change*
---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Revenues........................... $815,011 $721,935 13 Increases for the electric utility and savings
bank segments, partly offset by decreases for
the "other" and international power segments
Operating income................... 125,328 112,742 11 Increases for the electric utility and savings
bank segments, partly offset by decreases for
the international power and "other" segments
Net income......................... 48,072 43,510 10 Higher operating income and AFUDC, partly
offset by higher interest expense due to
higher average borrowings resulting from a
HEIPC acquisition in March 2000 and higher
income taxes due to higher operating income
and no tax benefits on losses from foreign
operations
Basic earnings
per common share................ $ 1.49 $ 1.35 10 See explanation for net income
Weighted-average number of common
shares outstanding................ 32,335 32,168 1 Issuances under the Dividend Reinvestment and
Stock Purchase Plan and other plans
</TABLE>
* Also see segment discussions which follow.
27
<PAGE>
Following is a general discussion of the results of operations by business
segment.
Electric utility
----------------
<TABLE>
<CAPTION>
Three months ended
June 30,
(in thousands, except per ---------------------------- %
barrel amounts) 2000 1999 change Primary reason(s) for significant change
-----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Revenues...................... $307,845 $252,272 22 Higher fuel oil and purchased energy prices,
the effects of which are passed on to
customers ($52 million) and 2.1%
higher KWH sales ($5 million)
Expenses
Fuel oil..................... 91,092 47,226 93 Higher fuel oil prices and KWHs generated
Purchased power.............. 70,444 67,649 4 Higher fuel prices, partly offset by fewer
KWHs purchased
Other........................ 94,694 93,061 2 Higher taxes, other than income taxes, and
depreciation expense, partly offset by lower
other operation expenses (including lower
retirement benefits expenses)
Operating income.............. 51,615 44,336 16 Higher KWH sales and lower other operation
expenses, partly offset by higher taxes,
other than income taxes, and depreciation
expense
Net income................... 24,014 19,224 25 Higher operating income and AFUDC, partially
offset by higher income taxes
Kilowatthour sales (millions). 2,266 2,219 2
Fuel oil price per barrel..... $32.51 $17.88 82
</TABLE>
28
<PAGE>
<TABLE>
<CAPTION>
Six months ended
June 30,
(in thousands, except per --------------------------------------- %
barrel amounts) 2000 1999 change Primary reason(s) for significant change
------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Revenues...................... $597,250 $490,063 22 Higher fuel oil and purchased energy prices,
the effects of which are passed on to
customers ($95 million), 2.6% higher KWH
sales ($12 million) and the recovery of
integrated resource planning costs
Expenses
Fuel oil..................... 166,247 92,104 80 Higher fuel oil prices and KWHs generated
Purchased power.............. 140,670 127,629 10 Higher fuel prices and more KWHs purchased
Other........................ 187,088 185,093 1 Higher taxes, other than income taxes, and
depreciation expense, partly offset by lower
(including lower retirement benefits expenses)
Operating income.............. 103,245 85,237 21 Higher KWH sales and lower other operation
and maintenance expenses, partly offset by
higher taxes, other than income taxes, and
depreciation expense
Net income................... 47,739 36,305 31 Higher operating income and AFUDC, partially
offset by higher income taxes
Kilowatthour sales (millions). 4,469 4,354 3
Fuel oil price per barrel..... $30.89 $17.41 77
</TABLE>
Kilowatthour (KWH) sales in the second quarter and first six months of 2000
increased 2.1% and 2.6%, respectively, from the same periods in 1999, partly due
to an increase in the number of customers, warmer weather and an improvement in
Hawaii's economy. Electric utility operating income for the first six months of
2000 increased 21% from the first six months of 1999, primarily due to the
higher KWH sales and 11% lower other operation and maintenance expenses ($10
million). Other operation expenses were lower primarily due to a decrease of
approximately $9 million in pension and other postretirement benefits expenses
partly due to an increase in the discount rate (from 6.50% at December 31, 1998
to 7.75% at December 31, 1999) and a change in the method of determining market-
related value of retirement benefit plan assets (see note (2) in HECO's "Notes
to consolidated financial statements"). Maintenance expense was slightly lower
as a result of less production maintenance work in the first six months of 2000
than in the first six months of 1999.
Competition
The electric utility industry is becoming increasingly competitive. IPPs are
well established in Hawaii and continue to actively pursue new projects.
Customer self-generation, with or without cogeneration, has made inroads in
Hawaii and is a continuing competitive factor. Competition in the generation
sector in Hawaii is moderated, however, by the scarcity of generation sites,
various permitting processes and lack of interconnections to other electric
utilities.
29
<PAGE>
HECO has been able to compete successfully by offering customers economic
alternatives that, among other things, employ energy efficient
electrotechnologies such as the heat pump water heater.
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. In their statement
of position (SOP), HECO and its subsidiaries proposed to achieve some of the
benefits of competition through proposals for (1) competitive bidding for new
generation, (2) performance-based rate-making (which would include an index-
based price cap, an earnings sharing mechanism and a benchmark incentive plan)
and (3) innovative pricing provisions (including rate restructuring, expanded
time-of-use rates, customer migration rates such as standby charges, flexible
pricing to encourage economic development and to compete with customer
generation options, new service options and two-part rates incorporating real-
time pricing). HECO suggests in its SOP that these proposals be implemented
through PUC approval of applications submitted in a series of separate
proceedings to be initiated by HECO in 1999 and 2000. See "Competition
proceeding" in note (4) in HECO's "Notes to consolidated financial statements."
PUC regulation of electric utility rates
The PUC has broad discretion in its regulation of the rates charged by HEI's
electric utility subsidiaries and in other matters. Any adverse decision and
order (D&O) by the PUC concerning the level or method of determining electric
utility rates, the authorized returns on equity or other matters, or any
prolonged delay in rendering a D&O in a rate or other proceeding, could have a
material adverse effect on the Company's financial condition and results of
operations. Upon a showing of probable entitlement, the PUC is required to issue
an interim D&O in a rate case within 10 months from the date of filing a
completed application if the evidentiary hearing is completed (subject to
extension for 30 days if the evidentiary hearing is not completed). There is no
time limit for rendering a final D&O. Interim rate increases are subject to
refund with interest, pending the final outcome of the case. Management cannot
predict with certainty when D&Os in pending or future rate cases will be
rendered or the amount of any interim or final rate increase that may be
granted.
Recent rate requests
HEI's electric utility subsidiaries initiate PUC proceedings from time to time
to request electric rate increases to cover rising operating costs, the cost of
purchased power and the cost of plant and equipment, including the cost of new
capital projects to maintain and improve service reliability. As of August 3,
2000, the return on average common equity (ROACE) found by the PUC to be
reasonable in the most recent final rate decision for each utility was 11.4% for
HECO (D&O issued on December 11, 1995 and based on a 1995 test year), 11.65% for
HELCO (D&O issued on April 2, 1997 and based on a 1996 test year) and 10.94% for
MECO (D&O issued on April 6, 1999 and based on a 1999 test year).
Hawaii Electric Light Company, Inc.
-----------------------------------
. In October 1999, HELCO filed a request to increase rates by 9.6%, or $15.5
million in annual revenues, based on a 2000 test year, primarily to recover (1)
costs relating to the agreement to buy power from the 60 MW plant of Hamakua
Energy Partners, L.P., and (2) depreciation of and a return on additional
investments in plant and equipment since the last rate case, including pre-PSD
facilities placed in service at the Keahole power plant (see "HELCO power
situation--Pre-PSD work and notices of violation" in note (4) of HECO's "Notes
to consolidated financial statements"). The Consumer Advocate filed its
testimony on May 8, 2000. HELCO filed its rebuttal testimony on June 19, 2000
and continues to justify an increase of at least $15.5 million and a ROACE of
13.25% for the 2000 test year. Hearings are scheduled to begin on August 15,
2000.
. The timing of a future HELCO rate increase request, if any, to recover costs
relating to adding CT-4 and CT-5 will depend on future circumstances. See "HELCO
power situation" in note (4) of HECO's "Notes to consolidated financial
statements."
30
<PAGE>
Accounting for the effects of certain types of regulation
In accordance with SFAS No. 71, "Accounting for the Effects of Certain Types of
Regulation," the Company's financial statements reflect assets and costs of HECO
and its subsidiaries based on current cost-based rate-making regulations.
Management believes HECO and its subsidiaries' operations currently satisfy the
SFAS No. 71 criteria. However, if events or circumstances should change so that
those criteria are no longer satisfied, management believes that a material
adverse effect on the Company's results of operations, financial position or
liquidity may result. As of June 30, 2000, HECO's consolidated regulatory assets
amounted to $117 million.
Savings bank
------------
<TABLE>
<CAPTION>
Three months ended June 30, %
--------------------------------------------
<S> <C> <C> <C> <C>
(in thousands) 2000 1999 change Primary reason(s) for significant change
----------------------------------------------------------------------------------------------------------------------------------
Revenues............. $108,699 $101,759 7 Higher interest income as a result of
higher weighted-average yields on
mortgage/asset-backed securities and loan
balances and a 6% higher average
interest-earning asset balance
Operating income..... 16,315 15,789 3 Higher net interest income and lower
compensation and employee benefits expense,
partly offset by the impact of
reclassifying four debt securities. See
note (4) in HEI's "Notes to consolidated
financial statements."
Net income........... 9,396 9,057 4 Higher operating income, partly offset by
higher income taxes
Interest rate spread. 3.18% 3.21% (1) 38 basis points increase in the
weighted-average yield on interest-earning
assets, more than offset by a 41 basis
points increase in the weighted-average
rate on interest-bearing liabilities
</TABLE>
31
<PAGE>
<TABLE>
<CAPTION>
Six months ended June 30,
-------------------------------------------- %
(in thousands) 2000 1999 change Primary reason(s) for significant change
---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Revenues............. $218,966 $202,039 8 Higher interest income as a result of
higher weighted-average yields on
mortgage/asset-backed securities and loan
balances and a 5% higher average
interest-earning asset balance
Operating income..... 35,505 30,920 15 Higher net interest income, partly offset
by the impact of reclassifying four debt
securities. See note (4) in HEI's "Notes to
consolidated financial statements."
Net income........... 20,617 17,582 17 Higher operating income, partly offset by
higher income taxes
Interest rate spread. 3.19% 3.14% 2 33 basis points increase in the
weighted-average yield on interest-earning
assets, partly offset by a 28 basis points
increase in the weighted-average rate on
interest-bearing liabilities
</TABLE>
ASB's interest rate spread--the difference between the weighted-average yield on
interest-earning assets and the weighted-average rate on interest-bearing
liabilities--decreased 1% and increased 2% for the second quarter and first six
months of 2000, respectively, compared to the same periods in 1999. Comparing
the first six months of 2000 to the same period in 1999, the weighted-average
yield on interest-earning assets increased more than the weighted-average rate
on interest-bearing liabilities increased. Impacting the weighted-average yield
on interest-earning assets for the second quarter of 2000 was the reversal of
interest accrued on four debt securities in the principal amount of $114
million. See note (4) in HEI's "Notes to consolidated financial statements."
Deposits traditionally have been the principal source of ASB's funds for use in
lending, meeting liquidity requirements and making investments. Deposits
increased by $66 million in the first six months of 2000, including $48 million
of interest credited to accounts. ASB also derives funds from borrowings,
payments of interest and principal on outstanding loans receivable and
mortgage/asset-backed securities, and other sources. In recent years, advances
from the Federal Home Loan Bank (FHLB) of Seattle and securities sold under
agreements to repurchase have become more significant sources of funds as the
demand for deposits decreased due in part to increased competition from money
market and mutual funds. Using sources of funds with a higher cost than
deposits, such as advances from the FHLB, puts downward pressure on ASB's
interest rate spread and net interest income.
During the first six months of 2000, ASB added $6 million to its allowance for
loan losses. As of June 30, 2000, ASB's allowance for loan losses was 1.15% of
average loans outstanding. The following table presents the changes in the
allowance for loan losses for the periods indicated.
<TABLE>
<CAPTION>
Six months ended June 30,
--------------------------------------------
<S> <C> <C>
(in thousands) 2000 1999
-----------------------------------------------------------------------------------------------------------------
Allowance for loan losses, beginning of period....................... $35,348 $39,779
Additions to provisions for losses................................... 6,400 6,098
Net charge-offs...................................................... (4,695) (7,470)
------------------- -------------------
Allowance for loan losses, end of period............................. $37,053 $38,407
=================== ===================
</TABLE>
32
<PAGE>
In March 1998, ASB formed a wholly owned operating subsidiary, ASB Realty
Corporation, which elects to be taxed as a real estate investment trust. This
reorganization has reduced ASB's income taxes. For the first six months of 2000,
ASB and subsidiaries' effective income tax rate was 34%. Although the State of
Hawaii has indicated that it may challenge the tax treatment of this
reorganization, ASB believes that its tax position is proper.
Regulation
Federal Deposit Insurance Corporation (FDIC) regulations restrict the ability of
financial institutions that are not "well-capitalized" to compete on the same
terms as "well-capitalized" institutions, such as by offering interest rates on
deposits that are significantly higher than the rates offered by competing
institutions. As of June 30, 2000, ASB was "well-capitalized" (ratio
requirements noted in parentheses) with a leverage ratio of 5.8% (5.0%), a Tier-
1 risk-based ratio of 10.0% (6.0%) and a total risk-based ratio of 10.9%
(10.0%).
On December 1, 1998, the OTS adopted Thrift Bulletin 13a (TB 13a) for purposes
of providing guidance on the management of interest risks, investment securities
and derivatives activities. TB 13a updates the OTS's minimum standards for
thrift institutions' interest rate risk management practices with regard to
board-approved limits and interest rate risk measurement systems. TB 13a also
contains guidance on thrifts' investment and derivative activities by describing
the types of analysis institutions should perform prior to purchasing securities
or financial derivatives. TB 13a also provides guidelines on the use of certain
types of securities and financial derivatives for purposes other than reducing
portfolio risk. Finally, TB 13a provides detailed guidelines for implementing
part of the notice announcing the revision of the CAMELS rating system,
published by the Federal Financial Institutions Examination Council. That
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. It also provides guidelines concerning the
factors examiners consider in assessing the quality of an institution's risk
management systems and procedures. Management has developed and is implementing
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.
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, 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.
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. The net effect of the Act on ASB's competitive position is
not known. 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. On
June 1, 2000, the FDIC and the OTS, among others,
33
<PAGE>
issued joint rules to implement in part the provisions of the Act concerning the
disclosure of customers' nonpublic information. On June 26, 2000, the FDIC and
the OTS, among others, issued proposed joint rules concerning administrative,
technical and physical safeguards for customer records and information. Although
ASB currently has in place a policy concerning customer privacy, it is not known
at this time whether the rules adopted by the regulatory authorities might
impose additional compliance costs on ASB.
International power
-------------------
<TABLE>
<CAPTION>
Three months ended
June 30,
---------------------------------------- %
(in thousands) 2000 1999 change Primary reason(s) for significant change
--------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Revenues......... $(3,950) $ 1,332 NM Losses from HEIPC's indirect investment in
East Asia Power Resources Corporation
(EAPRC)
Operating loss... (8,432) (1,496) (464) Losses from the EAPRC investment and
additional expenses related to the
investment
</TABLE>
<TABLE>
<CAPTION>
Six months ended
June 30,
---------------------------------------- %
(in thousands) 2000 1999 change Primary reason(s) for significant change
--------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Revenues......... $(2,285) $ 2,324 NM Losses from HEIPC's indirect investment in
EAPRC
Operating loss... (8,882) (2,112) (321) Losses from the EAPRC investment and
additional expenses related to the
investment
</TABLE>
NM Not meaningful.
HEIPC was formed in 1995 and its subsidiaries have been and will be formed from
time to time to pursue independent power and integrated energy services projects
in Asia and the Pacific.
In September 1996, HEI Power Corp. Guam (HPG), entered into an energy conversion
agreement for approximately 20 years with the Guam Power Authority (GPA),
pursuant to which HPG has repaired and is operating and maintaining two oil-
fired 25 MW (net) units 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 revenue for HPG of approximately $1
million. HPG will recover some or all of this amount from an insurance carrier.
The GPA project site is contaminated with oil from spills occurring prior to
HPG's assuming operational control. HPG has agreed to manage the operation and
maintenance of GPA's waste oil recovery system at the project site consistent
with GPA's oil recovery plan as approved by the U.S. Environmental Protection
Agency. GPA, however, has agreed to indemnify and hold HPG harmless from any
pre-existing environmental liability.
In 1998 and 1999, the HEIPC Group acquired what is now a 75% interest in a joint
venture, Baotou Tianjiao Power Co., Ltd., formed to design, construct, own,
operate and manage a 200 MW (net) coal-fired power plant to be located inside
Baotou Steel's complex in Inner Mongolia, People's Republic of China. The IMPC,
which owns and operates the electricity grid in Inner Mongolia, has refused to
enter into an interconnection arrangement with the joint venture. The HEIPC
Group continues to work with Baotou Steel and IMPC to secure a satisfactory
interconnection arrangement. See "China project," in note (5) of HEI's "Notes to
consolidated financial statements."
In December 1998, the HEIPC Group invested $7.6 million to acquire convertible
cumulative nonparticipating 8% preferred shares in Cagayan Electric Power &
Light Co., Inc. (CEPALCO), an electric distribution company
34
<PAGE>
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 which put the HEIPC Group in a position to participate in the
anticipated privatization of the National Power Corporation and growth in the
electric distribution business in the Philippines.
On March 7, 2000, an indirect subsidiary of HEIPC acquired a 50% interest in
EPHC, which is an indirect subsidiary of El Paso Energy Corporation, for $87.5
million plus up to an additional $6 million of payments that are contingent upon
future earnings of EAPRC. EPHC owns approximately 91.7% of the common shares of
EAPRC, a Philippines holding company primarily engaged in the electric
generation business in Manila and Cebu through its direct and indirect
subsidiaries, using land and barge-based generating facilities fired by bunker
fuel oil, with total installed capacity of approximately 390 MW. See note (5) in
HEI's "Notes to Consolidated Financial Statements."
The HEIPC Group's higher net losses for the second quarter and first six months
of 2000 compared to the same periods in 1999 are primarily attributable to
results from the investment in EAPRC and its subsidiaries (the EAPRC Group). The
HEIPC Group accounts for its investment in EPHC under the equity method of
accounting. HEI consolidates the accounts of the HEIPC Group on a one-month lag
due to the time needed to consolidate HEIPC's subsidiaries. The results for the
six months ended June 30, 2000 thus reflects results of the HEIPC Group's
operations for the months of December 1999 and January through May 2000 and the
results for the quarter ended June 30, 2000 thus reflects results for the months
of March, April and May 2000. The EAPRC Group is exposed to the impact of
changes in fuel oil prices and foreign currency fluctuations. Higher fuel oil
prices and the weakened value of the Philippine peso were the primary causes of
the losses incurred by the EAPRC Group for the second quarter of 2000. The EAPRC
Group is evaluating strategies to reduce its exposure to future fuel oil price
and foreign currency fluctuations.
The rates charged by the EAPRC Group under its purchase power agreements are
generally at a discount to the rates charged by the National Power Corporation,
a government owned and controlled corporation of the Philippines. Most of the
fluctuation in fuel oil prices is not recovered in rates charged by the EAPRC
Group. The EAPRC Group's base price of fuel oil per metric ton for March, April,
May, June and July 2000 was approximately $143, $170, $153, $163 and $175,
respectively. To reduce its near-term exposure to higher fuel oil prices, the
EAPRC Group has purchased nondeliverable forward contracts for fuel oil at an
average price of $155 per metric ton for approximately 80% of its anticipated
purchases from August 1 to December 31, 2000.
As of June 30, 2000, the EAPRC Group had approximately $200 million in U.S.
dollar denominated debt. From March 7, 2000 (acquisition date) to May 31, 2000,
the high and low Philippine peso (PhP) exchange rate was PhP40.823 = $1 and
PhP43.250 = $1, respectively, a 6% fluctuation. Due to the deterioration of the
exchange rate from March 7 to May 31, 2000, as of June 30, 2000 the HEIPC Group
incurred a loss of approximately $3 million related to the EAPRC Group's U.S.
dollar denominated debt position. The potential immediate pretax loss to the
HEIPC Group that would result from a hypothetical 10% devaluation in the
Philippine peso exchange rate based on this position would be approximately $8
million. As of August 3, 2000, the exchange rate had further deteriorated to
PhP44.700 = $1.
Based on prevailing and hedged fuel oil prices and trends in currency exchange
rates, management expects that the HEIPC Group will incur net losses for the
remainder of 2000 and that the net loss of the HEIPC Group for 2000 will cause
HEI's 2000 earnings to be lower than its earnings in 1999.
As of June 30, 2000, the HEIPC Group has invested in or advanced to overseas
power projects approximately $138 million. 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.
35
<PAGE>
Other
-----
<TABLE>
<CAPTION>
Three months ended
June 30,
--------------------------------------- %
(in thousands) 2000 1999 change Primary reason(s) for significant change
-------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Revenues......... $ 542 $14,325 (96) In November 1999, HTB sold YB and
substantially all of its operating assets
for a nominal gain. Second quarter 1999
includes $13 million of HTB/YB revenues.
Operating loss... (2,372) 81 NM No maritime freight transportation and
harbor assist operations in the second
quarter 2000 and higher corporate expenses
</TABLE>
<TABLE>
<CAPTION>
Six months ended
June 30,
--------------------------------------- $
(in thousands) 2000 1999 change Primary reason(s) for significant change
-------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Revenues......... $ 1,080 $27,509 (96) In November 1999, HTB sold YB and
substantially all of its operating assets
for a nominal gain. The first half of 1999
includes $26 million of HTB/YB revenues.
Operating loss... (4,540) (1,303) (248) No maritime freight transportation and
harbor assist operations in the first half
of 2000 and higher corporate expenses
</TABLE>
NM Not meaningful.
The "other" business segment includes results of operations of TOOTS, formerly
HTB and its formerly owned subsidiary, YB, maritime freight transportation and
harbor assist companies which were sold or shutdown in the fourth quarter of
1999; Pacific Energy Conservation Services, Inc., a contract services company
primarily providing windfarm operational and maintenance services to an
affiliated electric utility; HEI District Cooling, Inc., a company formed to
develop, build, own, operate and/or maintain central chilled water, cooling
system facilities, and other energy related products and services; ProVision
Technologies, Inc., a company formed to sell, install, operate and maintain on-
site power generation equipment and auxiliary appliances in Hawaii and the
Pacific Rim; HEI Properties, Inc., a company currently holding passive
investments and expected to hold real estate and related assets; HEI Leasing,
Inc., a company formed to own real estate subject to leases; Hawaiian Electric
Industries Capital Trust I, HEI Preferred Funding, LP and Hycap Management,
Inc., companies formed primarily for the purpose of effecting the issuance of
8.36% Trust Originated Preferred Securities; HEI and HEI Diversified, Inc.,
holding companies; and eliminations of intercompany transactions.
In November 1999, HTB sold YB and substantially all of its operating assets for
a nominal gain. The maritime freight transportation and harbor assist
subsidiaries recorded operating income of $1.6 million in the second quarter of
1999 and $2.2 million in the first six months of 1999.
Discontinued operations
-----------------------
See note (10) in HEI's "Notes to consolidated financial statements."
36
<PAGE>
Contingencies
-------------
See note (9) and note (4) in HEI's and HECO's respective "Notes to consolidated
financial statements" for discussions of contingencies.
Recent accounting pronouncements
--------------------------------
See note (8) and note (6) in HEI's and HECO's respective "Notes to consolidated
financial statements."
FINANCIAL CONDITION
Liquidity and capital resources
-------------------------------
The Company and consolidated HECO each believe that its ability to generate
cash, both internally from operations and externally from debt and equity
issues, is adequate to maintain sufficient liquidity to fund their respective
construction programs and investments and to satisfy debt and other cash
requirements in the foreseeable future.
The consolidated capital structure of HEI was as follows:
<TABLE>
<CAPTION>
(in millions) June 30, 2000 December 31, 1999
----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Short-term borrowings............................. $ 130 5% $ 152 7%
Long-term debt.................................... 1,077 47 978 44
HEI- and HECO-obligated preferred
securities of trust subsidiaries............... 200 9 200 9
Preferred stock of subsidiaries................... 34 1 34 2
Minority interests................................ 1 - 1 -
Common stock equity............................... 867 38 848 38
--------------- -------------- --------------- --------------
$2,309 100% $2,213 100%
=============== ============== =============== ==============
</TABLE>
ASB's deposit liabilities, securities sold under agreements to repurchase and
advances from the FHLB are not included in the table above.
For the first six months of 2000, net cash provided by operating activities of
consolidated HEI was $124 million. Net cash used in investing activities was
$290 million, largely due to ASB's origination of loans and purchase of
mortgage/asset-backed and investment securities, net of repayments, the HEIPC
Group's investment in the Philippines and HECO's consolidated capital
expenditures. Net cash provided by financing activities was $182 million as a
result of several factors, including net increases in deposit liabilities, long-
term debt and advances from Federal Home Loan Bank, partly offset by the payment
of common stock dividends and trust preferred securities distributions and net
decreases in securities sold under agreements to repurchase and short-term
borrowings.
Total HEI consolidated financing requirements for 2000 through 2004, including
net capital expenditures (which exclude AFUDC and capital expenditures funded by
third-party cash contributions in aid of construction), long-term debt
retirements (excluding repayments of advances from the FHLB of Seattle and
securities sold under agreements to repurchase) and preferred stock retirements,
are estimated to total $1.2 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 2000-2004 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.
37
<PAGE>
In March 1999, HEI filed a registration statement with the SEC to register $300
million of Medium-Term Notes, Series C (Series C Notes). In April 2000, HEI sold
$100 million of its Series C Notes, with $100 million of Series C Notes
remaining available for issuance from time to time. The $100 million of Series C
Notes sold have a floating rate of LIBOR plus 105 basis points (adjusted every
three months and with an initial interest rate of 7.33%) and a maturity date of
April 15, 2003. Simultaneous with the sale of the Series C Notes, however, HEI
entered into a swap agreement with Bank of America, N.A., which effectively
fixes the interest rate on the $100 million of debt at 7.995% until maturity.
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>
(in millions) June 30, 2000 December 31,
1999
---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Short-term borrowings......................... $ 103 6% $ 107 6%
Long-term debt................................ 657 38 646 38
HECO-obligated preferred securities of trust
subsidiaries................................. 100 6 100 6
Preferred stock............................... 34 2 34 2
Common stock equity........................... 822 48 806 48
----------------- --------------- ------------------ --------------
$1,716 100% $1,693 100%
================= =============== ================== ==============
</TABLE>
Operating activities provided $86 million in net cash during the first six
months of 2000. Investing activities used net cash of $49 million, primarily for
capital expenditures. Financing activities used net cash of $33 million,
including $36 million for the payment of common and preferred dividends and
preferred securities distributions and $4 million for the net repayment of
short-term borrowings, partially offset by a $10 million net increase in long-
term debt.
The electric utilities' consolidated financing requirements for 2000 through
2004, including net capital expenditures, 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 June 30, 2000, $30
million of proceeds from previous sales by the Department of Budget and Finance
of the State of Hawaii of special purpose revenue bonds issued for the benefit
of HECO, MECO and HELCO remain undrawn. Also as of June 30, 2000, 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. The equity requirements of HECO and its subsidiaries over the five-year
period will likely be met by retained earnings. The PUC must approve issuances,
if any, of long-term debt and equity securities by HECO, HELCO and MECO.
Capital expenditures include the costs of projects which are required to meet
expected load growth, to improve reliability and to replace and upgrade existing
equipment. Net capital expenditures for the five-year period 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, comprised
of approximately $109 million for transmission and distribution projects,
approximately $39 million for new generation projects and approximately $13
million for general plant and other projects. Drawdowns of proceeds from
previous sales of tax-exempt special purpose revenue bonds and the generation of
funds from internal sources are expected to provide the cash needed for net
capital expenditures in 2000.
38
<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, demand-side management programs and
requirements of environmental and other regulatory and permitting authorities.
Savings bank
<TABLE>
<S> <C> <C> <C>
June 30, December 31, 1999 %
(in millions) 2000 change
----------------------------------------------------------------------------------------------------------------------
Total assets.......................................... $6,002 $5,848 3
Available-for-sale investment securities.............. 111 - NM
Held-to-maturity investment and mortgage/asset-backed
securities........................................ 2,181 2,160 1
Loans receivable, net................................. 3,222 3,212 -
Deposit liabilities................................... 3,558 3,492 2
Securities sold under agreements to repurchase........ 636 661 (4)
Advances from Federal Home Loan Bank.................. 1,299 1,189 9
</TABLE>
NM Not meaningful.
As of June 30, 2000, ASB was the third largest financial institution in Hawaii
based on total assets of $6.0 billion and deposits of $3.6 billion.
For the first six months of 2000, net cash provided by ASB's operating
activities was $31 million. Net cash used in ASB's investing activities was $152
million, due largely to the origination of loans and purchase of mortgage/asset-
backed and investment securities, net of repayments. Net cash provided by
financing activities was $133 million largely due to net increases of $66
million in deposit liabilities and $110 million in advances in Federal Home Loan
Bank, partly offset by a net decrease of $30 million in securities sold under
agreements to repurchase and $13 million in common and preferred stock
dividends.
Minimum liquidity levels are currently governed by the regulations adopted by
the OTS. ASB was in compliance with OTS liquidity requirements as of June 30,
2000.
ASB believes that a satisfactory regulatory capital position provides a basis
for public confidence, affords protection to depositors, helps to ensure
continued access to capital markets on favorable terms and provides a foundation
for growth. As of June 30, 2000, ASB was in compliance with the OTS minimum
capital requirements (noted in parentheses) with a tangible capital ratio of
5.8% (1.5%), a core capital ratio of 5.8% (4.0%) and a risk-based capital ratio
of 10.9% (8.0%).
Item 3. Quantitative and qualitative disclosures about market risk
------------------------------------------------------------------
The Company considers interest rate risk to be a very significant market risk as
it could potentially have a significant effect on the Company's financial
condition and results of operations. In April 2000, HEI utilized an interest-
rate swap to manage a portion of its interest rate risk. See description in Item
2 above. The Company is also exposed to commodity price risk and foreign
currency exchange rate risk primarily due to its indirect equity investment in
EAPRC. See discussion in Item 2 above. For additional quantitative and
qualitative information about the Company's market risks, see pages 40 to 43 of
HEI's 1999 Annual Report to Stockholders.
39
<PAGE>
U.S. Treasury yields at June 30, 2000 and December 31, 1999 were as follows:
<TABLE>
<CAPTION>
(%) June 30, 2000 December 31, 1999
------------------------------- -------------------------------- ---------------------------------
<S> <C> <C>
3 month 5.86 5.31
1 year 6.06 5.96
5 year 6.18 6.34
10 year 6.02 6.44
30 year 5.90 6.48
</TABLE>
The 3 month U.S. Treasury yield increased 55 basis points and the 30 year yield
decreased 58 basis points from December 31, 1999 to June 30, 2000. Management
believes that with the current inverted yield curve there was an unfavorable,
but immaterial, change between December 31, 1999 and June 30, 2000 in the
Company's estimated fair values of its interest-sensitive assets, liabilities
and off-balance sheet items.
PART II - OTHER INFORMATION
Item 1. Legal proceedings
--------------------------
There are no significant developments in pending legal proceedings except as set
forth in HECO's "Notes to consolidated financial statements," and management's
discussion and analysis of financial condition and results of operations.
Item 5. Other information
--------------------------
A. Amended notice of property tax assessment for HELCO
In December 1999, the County Council of Hawaii County amended its ordinances to
rescind the exemption from real property taxes for utility companies. The
utilities currently pay a public service company tax that, by state statutory
language, is partly in lieu of real property taxes. In March 2000, the
Department of Finance, Real Property Division of the County of Hawaii, sent
HELCO a notice of property assessment showing total real property taxes owed of
approximately $0.2 million for the fiscal year July 2000 to June 2001 and, in
April 2000, the Department sent HELCO an amended notice of property assessment
showing total real property taxes owed of approximately $3.9 million. HELCO
appealed both the March and April 2000 notices of property assessment. HELCO
filed a motion for summary judgment to have the April 2000 amended notice of
property assessment held unlawful, invalid and unenforceable on the grounds of
denial of an exemption to which taxpayer HELCO is entitled, unconstitutionality
and illegality, including overassessment, improper methodology and other
procedural grounds. On July 10, 2000, the Hawaii Tax Court of Appeals ruled in
HELCO's favor and granted the motion for summary judgment. However, the Hawaii
County Council is considering a proposed ordinance which attempts to validate
the April 2000 amended assessment, sets forth an exception to the general
methods of real property tax assessment and would allow the County to use the
values in the annual financial reports submitted to the PUC. HELCO plans to seek
recovery in a future rate case of any real property tax assessment that it is
required to pay.
B. Ratio of earnings to fixed charges
The following tables set forth the ratio of earnings to fixed charges for HEI
and its subsidiaries for the periods indicated:
Ratio of earnings to fixed charges excluding interest on ASB deposits
<TABLE>
<CAPTION>
Six months Years ended December 31,
ended
June 30, 2000 1999 1998 1997 1996 1995
--------------------- ---------------- --------------- -------------- --------------- ----------------
<S> <C> <C> <C> <C> <C>
1.73 1.80 1.85 1.89 1.93 2.02
===================== ================ =============== ============== =============== ================
</TABLE>
40
<PAGE>
Ratio of earnings to fixed charges including interest on ASB deposits
<TABLE>
<CAPTION>
Six months Years ended December 31,
ended -------------------------------------------------------------------------------------------------
June 30, 2000 1999 1998 1997 1996 1995
--------------------- ---------------- --------------- -------------- --------------- ----------------
<S> <C> <C> <C> <C> <C>
1.48 1.48 1.47 1.58 1.56 1.60
===================== ================ =============== ============== =============== ================
</TABLE>
For purposes of calculating the ratio of earnings to fixed charges, "earnings"
represent the sum of (i) pretax income from continuing operations (excluding
undistributed net income or net loss from less than fifty-percent-owned persons)
and (ii) fixed charges (as hereinafter defined, but excluding capitalized
interest). "Fixed charges" are calculated both excluding and including interest
on ASB's deposits during the applicable periods and represent the sum of (i)
interest, whether capitalized or expensed, but excluding interest on nonrecourse
debt from leveraged leases which is not included in interest expense in HEI's
consolidated statements of income, (ii) amortization of debt expense and
discount or premium related to any indebtedness, whether capitalized or
expensed, (iii) the interest factor in rental expense, (iv) the preferred stock
dividend requirements of HEI's subsidiaries, increased to an amount representing
the pretax earnings required to cover such dividend requirements and (v) the
preferred securities distribution requirements of trust subsidiaries.
The following table sets forth the ratio of earnings to fixed charges for HECO
and its subsidiaries for the periods indicated:
Ratio of earnings to fixed charges
<TABLE>
<CAPTION>
Six months Years ended December 31,
ended ------------------------------------------------------------------------------------------------
June 30, 2000 1999 1998 1997 1996 1995
--------------------- ---------------- --------------- -------------- --------------- ----------------
<S> <C> <C> <C> <C> <C>
3.64 3.09 3.33 3.26 3.58 3.46
===================== ================ =============== ============== =============== ================
</TABLE>
For purposes of calculating the ratio of earnings to fixed charges, "earnings"
represent the sum of (i) pretax income before preferred stock dividends of HECO
and (ii) fixed charges (as hereinafter defined, but excluding the allowance for
borrowed funds used during construction). "Fixed charges" represent the sum of
(i) interest, whether capitalized or expensed, incurred by HECO and its
subsidiaries, (ii) amortization of debt expense and discount or premium related
to any indebtedness, whether capitalized or expensed, (iii) the interest factor
in rental expense, (iv) the preferred stock dividend requirements of HELCO and
MECO, increased to an amount representing the pretax earnings required to cover
such dividend requirements and (v) the preferred securities distribution
requirements of the trust subsidiaries.
Item 6. Exhibits and reports on Form 8-K
-----------------------------------------
(a) Exhibits
<TABLE>
<CAPTION>
HEI Hawaiian Electric Industries, Inc. and subsidiaries
Exhibit 12.1 Computation of ratio of earnings to fixed charges, six months ended June 30, 2000
and 1999
<S> <C>
HECO Hawaiian Electric Company, Inc. and subsidiaries
Exhibit 12.2 Computation of ratio of earnings to fixed charges, six months ended June 30, 2000
and 1999
</TABLE>
41
<PAGE>
HEI Hawaiian Electric Industries, Inc. and subsidiaries
Exhibit 27.1 Financial Data Schedule
June 30, 2000 and six months ended June 30, 2000
HECO Hawaiian Electric Company, Inc. and subsidiaries
Exhibit 27.2 Financial Data Schedule
June 30, 2000 and six months ended June 30, 2000
(b) Reports on Form 8-K
Subsequent to March 31, 2000, HEI and/or HECO filed Current Reports, Forms 8-K
and/or 8-K/A, with the SEC as follows:
<TABLE>
<CAPTION>
Dated Registrant/s Items reported
--------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
July 14, 2000 HEI Item 5. HEI's July 13, 2000 news release - "HEI's International
(Form 8-K) Operation Estimates Second Quarter Net Loss," "International Power -
Philippines Investment" and "Savings Bank."
July 24, 2000 HEI/HECO Item 5. HEI's July 24, 2000 news release "HEI Reports Second Quarter
(Form 8-K) 2000 Earnings" and other information.
July 24, 2000 HEI/HECO Item 5. HEI's July 24, 2000 news release "HEI Reports Second Quarter
(Form 8-K/A) 2000 Earnings" and other information.
</TABLE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrants have duly caused this report to be signed on their behalf by the
undersigned, thereunto duly authorized. The signature of the undersigned
companies shall be deemed to relate only to matters having reference to such
companies and any subsidiaries thereof.
HAWAIIAN ELECTRIC INDUSTRIES, INC. HAWAIIAN ELECTRIC COMPANY, INC.
(Registrant) (Registrant)
By /s/ Robert F. Mougeot By /s/ Paul Oyer
---------------------- --------------
Robert F. Mougeot Paul A. Oyer
Financial Vice President and Financial Vice President and
Chief Financial Officer Treasurer
(Principal Financial Officer of HEI) (Principal Financial Officer of HECO)
Date: August 9, 2000 Date: August 9, 2000
42
