<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 September 30, 2000
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
Exact Name of Registrant as Commission I.R.S. Employer
Specified in Its Charter File Number Identification No.
--------------------------- ----------- ------------------
HAWAIIAN ELECTRIC INDUSTRIES, INC. 1-8503 99-0208097
and Principal Subsidiary
HAWAIIAN ELECTRIC COMPANY, INC. 1-4955 99-0040500
State of Hawaii
--------------------------------------------------------------------------------
(State or other jurisdiction of incorporation or organization)
900 Richards Street, Honolulu, Hawaii 96813
--------------------------------------------------------------------------------
(Address of principal executive offices and zip code)
Hawaiian Electric Industries, Inc. ----- (808) 543-5662
Hawaiian Electric Company, Inc. -------- (808) 543-7771
--------------------------------------------------------------------------------
(Registrant's telephone number, including area code)
None
--------------------------------------------------------------------------------
(Former name, former address and former fiscal year, if changed since last
report)
================================================================================
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No _____
-----
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
<TABLE>
<CAPTION>
Class of Common Stock Outstanding November 3, 2000
--------------------------------------------------------------------------------------------------------------
<S> <C>
Hawaiian Electric Industries, Inc. (Without Par Value)........... 32,831,065 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 September 30, 2000
INDEX
<TABLE>
<CAPTION>
Page No.
<S> <C>
Glossary of terms............................................................... ii
Forward-looking statements...................................................... v
PART I. FINANCIAL INFORMATION
Item 1. Financial statements
Hawaiian Electric Industries, Inc. and subsidiaries
---------------------------------------------------
Consolidated balance sheets (unaudited) -
September 30, 2000 and December 31, 1999.......................... 1
Consolidated statements of income (unaudited) -
three and nine months ended September 30, 2000 and 1999........... 2
Consolidated statements of retained earnings (unaudited) -
three and nine months ended September 30, 2000 and 1999........... 3
Consolidated statements of cash flows (unaudited) -
nine months ended September 30, 2000 and 1999..................... 4
Notes to consolidated financial statements (unaudited).............. 5
Hawaiian Electric Company, Inc. and subsidiaries
------------------------------------------------
Consolidated balance sheets (unaudited) -
September 30, 2000 and December 31, 1999.......................... 11
Consolidated statements of income (unaudited) -
three and nine months ended September 30, 2000 and 1999........... 12
Consolidated statements of retained earnings (unaudited) -
three and nine months ended September 30, 2000 and 1999........... 12
Consolidated statements of cash flows (unaudited) -
nine months ended September 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......................................... 36
Item 3. Quantitative and qualitative disclosures about market risk.......... 51
PART II. OTHER INFORMATION
Item 1. Legal proceedings................................................... 52
Item 5. Other information................................................... 52
Item 6. Exhibits and reports on Form 8-K.................................... 54
Signatures...................................................................... 55
</TABLE>
i
<PAGE>
Hawaiian Electric Industries, Inc. and subsidiaries
Hawaiian Electric Company, Inc. and subsidiaries
Form 10-Q--Quarter ended September 30, 2000
GLOSSARY OF TERMS
<TABLE>
<CAPTION>
Terms Definitions
----- -----------
<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
Baotou Steel Baotou Iron & Steel (Group) Co., Ltd.
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
Advocate Consumer Affairs of the 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
DTCC Dual-train combined-cycle
EAPRC East Asia Power Resources Corporation
Enserch Enserch Development Corporation
EPA Environmental Protection Agency - federal
EPHE EPHE Philippines Energy Company, Inc.
</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 Accounting principles generally accepted in the United States of
America
GPA Guam Power Authority
Hamakua Hamakua Energy Partners, L.P., formerly known as Encogen Hawaii,
Partners L.P.
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.
IMPC Inner Mongolia Power Company
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/losses 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,
particularly in the Philippines and China;
. the convertibility and availability of foreign currency, particularly in the
Philippines and China;
. the risks inherent in implementing hedging strategies, including 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>
September 30, December 31,
(in thousands) 2000 1999
------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Assets
------
Cash and equivalents................................................................ $ 179,653 $ 199,906
Accounts receivable and unbilled revenues, net...................................... 174,551 154,605
Available-for-sale investment securities............................................ 107,955 -
Held-to-maturity investment and mortgage/asset-backed securities.................... 2,193,189 2,159,945
Loans receivable, net............................................................... 3,222,625 3,211,878
Property, plant and equipment, net of accumulated
depreciation of $1,208,339 and $1,129,078........................................ 2,078,306 2,066,195
Regulatory assets................................................................... 116,299 114,759
Other............................................................................... 313,755 276,997
Goodwill and other intangibles...................................................... 127,227 106,741
---------- ----------
$8,513,560 $8,291,026
========== ==========
Liabilities and stockholders' equity
------------------------------------
Liabilities
Accounts payable.................................................................... $ 129,687 $ 117,447
Deposit liabilities................................................................. 3,558,285 3,491,655
Short-term borrowings............................................................... 93,483 151,833
Securities sold under agreements to repurchase...................................... 584,652 661,215
Advances from Federal Home Loan Bank................................................ 1,308,612 1,189,081
Long-term debt...................................................................... 1,080,324 977,529
Deferred income taxes............................................................... 186,000 181,277
Contributions in aid of construction................................................ 208,316 206,302
Other............................................................................... 256,073 231,854
---------- ----------
7,405,432 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.................................................................. 851 841
---------- ----------
235,257 235,247
---------- ----------
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: 32,792 shares and 32,213 shares................................ 680,814 665,335
Retained earnings................................................................... 192,057 182,251
---------- ----------
872,871 847,586
---------- ----------
$8,513,560 $8,291,026
========== ==========
</TABLE>
See accompanying "Notes to consolidated financial statements."
1
<PAGE>
Hawaiian Electric Industries, Inc. and subsidiaries
Consolidated statements of income (unaudited)
<TABLE>
<CAPTION>
Three months ended Nine months ended
(in thousands, except per share amounts and September 30, September 30,
----------------------- ------------------------------
ratio of earnings to fixed charges) 2000 1999 2000 1999
--------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Revenues
Electric utility.................................................. $ 337,324 $ 277,283 $ 934,574 $ 767,346
Savings bank...................................................... 114,300 102,624 333,266 304,663
International power............................................... (5,719) 933 (8,004) 3,257
Other............................................................. (38) 11,610 1,042 39,119
--------- --------- ---------- ----------
445,867 392,450 1,260,878 1,114,385
--------- --------- ---------- ----------
Expenses
Electric utility.................................................. 284,031 230,811 778,036 635,637
Savings bank...................................................... 97,321 87,705 280,782 258,824
International power............................................... 3,038 2,315 9,635 6,751
Other............................................................. 967 15,068 6,587 43,880
--------- --------- ---------- ----------
385,357 335,899 1,075,040 945,092
--------- --------- ---------- ----------
Operating income (loss)
Electric utility.................................................. 53,293 46,472 156,538 131,709
Savings bank...................................................... 16,979 14,919 52,484 45,839
International power............................................... (8,757) (1,382) (17,639) (3,494)
Other............................................................. (1,005) (3,458) (5,545) (4,761)
--------- --------- ---------- ----------
60,510 56,551 185,838 169,293
--------- --------- ---------- ----------
Interest expense--other than savings bank......................... (19,261) (17,600) (58,489) (54,488)
Allowance for borrowed funds used during construction............. 807 716 2,220 1,955
Preferred stock dividends of subsidiaries......................... (501) (498) (1,505) (1,624)
Preferred securities distributions of trust subsidiaries.......... (4,008) (4,009) (12,026) (12,016)
Allowance for equity funds used during construction............... 1,505 1,176 4,102 3,202
--------- --------- ---------- ----------
Income before income taxes........................................ 39,052 36,336 120,140 106,322
Income taxes...................................................... 17,003 14,704 50,019 41,180
--------- --------- ---------- ----------
Net income........................................................ $ 22,049 $ 21,632 $ 70,121 $ 65,142
========= ========= ========== ==========
Basic earnings per common share................................... $ 0.68 $ 0.67 $ 2.16 $ 2.02
========= ========= ========== ==========
Diluted earnings per common share................................. $ 0.67 $ 0.67 $ 2.15 $ 2.02
========= ========= ========== ==========
Dividends per common share........................................ $ 0.62 $ 0.62 $ 1.86 $ 1.86
========= ========= ========== ==========
Weighted-average number of
common shares outstanding...................................... 32,642 32,203 32,438 32,180
Dilutive effect of stock options and dividend equivalents.... 135 91 132 97
--------- --------- ---------- ----------
Adjusted weighted-average shares.................................. 32,777 32,294 32,570 32,277
========= ========= ========== ==========
Ratio of earnings to fixed charges (SEC method)
Excluding interest on ASB deposits........................... 1.71 1.78
========== ==========
Including interest on ASB deposits........................... 1.47 1.46
========== ==========
</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 Nine months ended
September 30, September 30,
-------------------------- --------------------------
(in thousands) 2000 1999 2000 1999
--------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Retained earnings, beginning of period..... $ 190,224 $ 168,858 $ 182,251 $ 165,252
Net income................................. 22,049 21,632 70,121 65,142
Common stock dividends..................... (20,216) (19,972) (60,315) (59,876)
----------- ----------- ----------- -----------
Retained earnings, end of period........... $ 192,057 $ 170,518 $ 192,057 $ 170,518
=========== =========== =========== ===========
</TABLE>
See accompanying "Notes to consolidated financial statements."
3
<PAGE>
Hawaiian Electric Industries, Inc. and subsidiaries
Consolidated statements of cash flows (unaudited)
<TABLE>
<CAPTION>
Nine months ended
September 30,
------------------------------
(in thousands) 2000 1999
-------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Cash flows from operating activities
Net income................................................................................... $ 70,121 $ 65,142
Adjustments to reconcile net income to net cash provided by operating activities
Depreciation of property, plant and equipment.......................................... 81,657 81,871
Other amortization..................................................................... 7,493 11,345
Provision for loan losses.............................................................. 9,400 10,848
Deferred income taxes.................................................................. 4,726 (4,175)
Allowance for equity funds used during construction.................................... (4,102) (3,202)
Changes in assets and liabilities
Decrease (increase) in accounts receivable and unbilled revenues, net............ (19,946) 914
Increase in accounts payable..................................................... 12,240 15,145
Changes in other assets and liabilities.......................................... 67,459 1,711
--------- ---------
Net cash provided by operating activities.................................................... 229,048 179,599
--------- ---------
Cash flows from investing activities
Held-to-maturity mortgage/asset-backed securities purchased.................................. (320,102) (623,942)
Principal repayments on held-to-maturity mortgage/asset-backed securities.................... 191,873 470,063
Principal repayments on held-to-maturity investment securities............................... 1,455 -
Held-to-maturity investment securities purchased............................................. (56,500) (54,782)
Principal repayments on held-to-maturity investment securities............................... 43,000 43,000
Loans receivable originated and purchased.................................................... (417,302) (528,777)
Principal repayments on loans receivable..................................................... 352,050 435,725
Capital expenditures......................................................................... (92,887) (88,444)
Acquisition of a Philippines investment...................................................... (87,500) -
Other........................................................................................ 46,940 19,585
--------- ---------
Net cash used in investing activities........................................................ (338,973) (327,572)
--------- ---------
Cash flows from financing activities
Net increase (decrease) in deposit liabilities............................................... 66,630 (306,467)
Net decrease in short-term borrowings with original maturities of three months or less....... (58,419) (58,237)
Net increase in retail repurchase agreements................................................. 8,560 167,765
Proceeds from securities sold under agreements to repurchase................................. 460,181 290,000
Repurchase of securities sold under agreements to repurchase................................. (550,710) (378,612)
Proceeds from advances from Federal Home Loan Bank........................................... 470,031 684,100
Principal payments on advances from Federal Home Loan Bank................................... (350,500) (407,600)
Proceeds from issuance of long-term debt..................................................... 113,150 167,452
Repayment of long-term debt.................................................................. (10,500) (88,500)
Redemption of electric utility subsidiaries' preferred stock................................. - (47,080)
Net proceeds from issuance of common stock................................................... 10,841 3,432
Common stock dividends....................................................................... (52,278) (59,876)
Preferred securities distributions of trust subsidiaries..................................... (12,026) (12,016)
Other........................................................................................ (5,288) (9,212)
--------- ---------
Net cash provided by (used in) financing activities.......................................... 89,672 (54,851)
--------- ---------
Net decrease in cash and equivalents......................................................... (20,253) (202,824)
Cash and equivalents, beginning of period.................................................... 199,906 412,254
--------- ---------
Cash and equivalents, end of period.......................................................... $ 179,653 $ 209,430
========= =========
See accompanying "Notes to consolidated financial statements."
</TABLE>
4
<PAGE>
Hawaiian Electric Industries, Inc. and subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2000 and 1999
(Unaudited)
--------------------------------------------------------------------------------
(1) Basis of presentation
-------------------------
The accompanying unaudited consolidated financial statements have been prepared
in conformity with accounting principles generally accepted in the United States
of America (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 Reports on SEC Form 10-Q for the quarters ended March
31, 2000 and June 30, 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 September 30, 2000 and
December 31, 1999, and the results of its operations for the three and nine
months ended September 30, 2000 and 1999, and its cash flows for the nine months
ended September 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 September 30, 2000
Revenues from external customers*....... 337,312 114,300 (5,779) 34 445,867
Intersegment revenues................... 12 - 60 (72) -
----------- ------------ ------------- ----------- -------------
Revenues............................ 337,324 114,300 (5,719) (38) 445,867
=========== ============ ============= =========== =============
Income (loss) before income taxes....... 40,955 15,568 (9,184) (8,287) 39,052
Income taxes (benefit).................. 15,935 5,753 343 (5,028) 17,003
----------- ------------ ------------- ----------- -------------
Net income (loss)................... 25,020 9,815 (9,527) (3,259) 22,049
=========== ============ ============= =========== =============
Nine months ended September 30, 2000
Revenues from external customers........ 934,545 333,262 (8,067) 1,138 1,260,878
Intersegment revenues................... 29 4 63 (96) -
----------- ------------ ------------- ----------- -------------
Revenues............................ 934,574 333,266 (8,004) 1,042 1,260,878
=========== ============ ============= =========== =============
Income (loss) before income taxes....... 119,023 48,257 (18,550) (28,590) 120,140
Income taxes (benefit).................. 46,264 17,825 692 (14,762) 50,019
----------- ------------ ------------- ----------- -------------
Net income (loss)................... 72,759 30,432 (19,242) (13,828) 70,121
=========== ============ ============= =========== =============
Assets**................................ 2,331,307 5,981,326 173,164 27,763 8,513,560
=========== ============ ============= =========== =============
Three months ended September 30, 1999
Revenues from external customers........ 277,274 102,616 933 11,627 392,450
Intersegment revenues................... 9 8 - (17) -
----------- ------------ ------------- ----------- -------------
Revenues............................ 277,283 102,624 933 11,610 392,450
=========== ============ ============= =========== =============
Income (loss) before income taxes....... 33,704 13,569 (1,514) (9,423) 36,336
Income taxes (benefit).................. 13,389 5,070 (80) (3,675) 14,704
----------- ------------ ------------- ----------- -------------
Net income (loss)................... 20,315 8,499 (1,434) (5,748) 21,632
=========== ============ ============= =========== =============
Nine months ended September 30, 1999
Revenues from external customers........ 767,337 304,640 3,257 39,151 1,114,385
Intersegment revenues................... 9 23 - (32) -
----------- ------------ ------------- ----------- -------------
Revenues............................ 767,346 304,663 3,257 39,119 1,114,385
=========== ============ ============= =========== =============
Income (loss) before income taxes....... 92,740 41,789 (3,808) (24,399) 106,322
Income taxes (benefit).................. 36,120 15,708 (148) (10,500) 41,180
----------- ------------ ------------- ----------- -------------
Net income (loss)................... 56,620 26,081 (3,660) (13,899) 65,142
=========== ============ ============= =========== =============
Assets**................................ 2,292,350 5,753,432 47,712 148,154 8,241,648
=========== ============ ============= =========== =============
</TABLE>
* "International Power" includes the equity in net losses of EPHE
Philippines Energy Company, Inc.
** At September 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 35.
(4) Savings bank subsidiary
----------------------------
Selected financial information
American Savings Bank, F.S.B. and subsidiaries
Consolidated balance sheet data
<TABLE>
<CAPTION>
September 30, December 31,
(in thousands) 2000 1999
-------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Assets
Cash and equivalents.............................................. $ 171,101 $ 192,807
Available-for-sale investment securities.......................... 107,955 -
Held-to-maturity investment securities............................ 90,393 186,799
Held-to-maturity mortgage/asset-backed securities................. 2,102,796 1,973,146
Loans receivable, net............................................. 3,222,625 3,211,878
Other............................................................. 185,574 176,836
Goodwill and other intangibles.................................... 100,882 106,741
---------- ----------
$5,981,326 $5,848,207
========== ==========
Liabilities and equity
Deposit liabilities............................................... $3,558,285 $3,491,655
Securities sold under agreements to repurchase.................... 584,652 661,215
Advances from Federal Home Loan Bank.............................. 1,308,612 1,189,081
Other............................................................. 77,538 70,239
---------- ----------
5,529,087 5,412,190
Minority interests................................................ 3,468 3,300
Preferred stock................................................... 75,113 75,113
Common stock equity............................................... 373,658 357,604
---------- ----------
$5,981,326 $5,848,207
========== ==========
</TABLE>
American Savings Bank, F.S.B. and subsidiaries
Consolidated income statement data
<TABLE>
<CAPTION>
Three months ended Nine months ended
September 30, September 30,
----------------------- -----------------------
(in thousands) 2000 1999 2000 1999
--------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Interest income.................................... $108,326 $ 95,402 $314,110 $281,840
Interest expense................................... 61,885 51,592 175,937 153,351
-------- -------- -------- --------
Net interest income................................ 46,441 43,810 138,173 128,489
Provision for loan losses.......................... (3,000) (4,750) (9,400) (10,848)
Other income....................................... 5,974 7,222 19,156 22,823
Operating, administrative and general expenses..... (32,436) (31,363) (95,445) (94,625)
-------- -------- -------- --------
Operating income................................... 16,979 14,919 52,484 45,839
Minority interests................................. 58 - 168 -
Income taxes....................................... 5,753 5,070 17,825 15,708
-------- -------- -------- --------
Income before preferred stock dividends............ 11,168 9,849 34,491 30,131
Preferred stock dividends.......................... 1,353 1,350 4,059 4,050
-------- -------- -------- --------
Net income......................................... $ 9,815 $ 8,499 $ 30,432 $ 26,081
======== ======== ======== ========
</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. In the second quarter of 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. For the nine months ended September
30, 2000, ASB realized a $3.8 million net loss on the writedown of these
securities. Interest income on these securities is being recognized on a cash
basis. 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 a satisfactory
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
EPHE Philippines Energy Company, Inc. (EPHE), 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). EPHE 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 EPHE under the equity method of accounting.
Revenues for the international power segment for the third quarter and first
nine months of 2000 include the equity in net losses of EPHE. The net losses of
EPHE do not reflect any U.S. or Philippines tax benefits. The Company
consolidates the accounts of the HEIPC Group on a one-month lag due to the time
needed to consolidate HEIPC's subsidiaries. At September 30, 2000, the Company's
investment in EPHE was $69.7 million and is included in the consolidated balance
sheet in "Other" assets and "Goodwill and other intangibles." The decline in
carrying value from $87.5 million was due to the equity in net losses, goodwill
amortization and a negative $3.5 million foreign currency translation
adjustment.
The Company evaluates equity investments when events or changes in circumstances
indicate that the carrying value of such assets may not be recoverable. Due to
the net losses incurred in the second and third quarters of 2000 from the
investment in EPHE and the changes in the political and economic conditions
related to the investment (e.g., devaluation of the Philippine peso and increase
in fuel oil prices), management has
8
<PAGE>
evaluated the investment for impairment. The Company determines whether an
impairment has occurred based on an estimate of undiscounted future cash flows
(excluding interest) attributable to the investment, as compared to the carrying
value of the investment. As of September 30, 2000, based upon current conditions
and assumptions, no writedown of the investment in EPHE is required for
financial statement purposes based on the estimated undiscounted future cash
flows (excluding interest) attributable to the investment. However, if estimates
or circumstances change, it may be necessary for the Company to adjust the
carrying value of its investment down to the then estimated fair value and any
such adjustment would likely be material.
In connection with and subsequent to the HEIPC Group's investment in EPHE, HEI
has guaranteed up to $35 million of existing and potential obligations related
to this investment.
(6) Retirement benefits
-----------------------
Change in method of calculating market-related value of retirement benefit plan
assets
Since 1993, the Company has 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. For the year
2000 and future years, 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 nine months of 2000 was to increase net income approximately $3 million
($0.10 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 $4 million ($0.13 in basic earnings per common share) for the
first nine 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>
Nine months ended September 30,
-----------------------------------------
(in thousands) 2000 1999
----------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Interest (including interest paid by savings bank, but excluding interest
paid on nonrecourse debt on leveraged leases).............................. $205,784 $199,198
================== ==================
Income taxes................................................................ $ 12,214 $ 38,289
================== ==================
</TABLE>
The decrease in income taxes paid for the nine months ended September 30, 2000
compared to the same period in 1999 was primarily due to the change in the
timing of recognition of the real estate investment trust taxable income.
9
<PAGE>
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 $8.0 million for the nine months ended September 30, 2000.
(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. Management believes the impact of adoption will
not be material.
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 but 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 (5), "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 statement 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 September 30, 2000, the remaining net assets of the discontinued
residential real estate development operations amounted to $13 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>
September 30, December 31,
(in thousands, except par value) 2000 1999
-------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Assets
Utility plant, at cost
Land................................................................ $ 28,999 $ 30,952
Plant and equipment................................................. 2,925,970 2,851,126
Less accumulated depreciation....................................... (1,147,681) (1,076,373)
Plant acquisition adjustment, net................................... 419 458
Construction in progress............................................ 166,937 151,981
----------------- ---------------
Net utility plant............................................. 1,974,644 1,958,144
----------------- ---------------
Current assets
Cash and equivalents................................................ 3,432 1,966
Customer accounts receivable, net................................... 80,578 68,768
Accrued unbilled revenues, net...................................... 59,918 53,830
Other accounts receivable, net...................................... 1,642 2,172
Fuel oil stock, at average cost..................................... 31,135 34,954
Materials and supplies, at average cost............................. 20,134 20,046
Prepayments and other............................................... 4,619 4,649
----------------- ---------------
Total current assets.......................................... 201,458 186,385
----------------- ---------------
Other assets
Regulatory assets................................................... 116,299 114,759
Other............................................................... 38,906 43,521
----------------- ---------------
Total other assets............................................ 155,205 158,280
----------------- ---------------
$ 2,331,307 $ 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............................................ 295,611 295,510
Retained earnings................................................... 448,208 425,206
----------------- ---------------
Common stock equity........................................... 829,206 806,103
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................................................. 659,324 646,029
----------------- ---------------
Total capitalization.......................................... 1,622,823 1,586,425
----------------- ---------------
Current liabilities
Short-term borrowings from nonaffiliates and affiliate.............. 82,303 107,013
Accounts payable.................................................... 54,360 52,116
Interest and preferred dividends payable............................ 17,817 8,160
Taxes accrued....................................................... 92,279 66,535
Other............................................................... 9,114 31,485
----------------- ---------------
Total current liabilities..................................... 255,873 265,309
----------------- ---------------
Deferred credits and other liabilities
Deferred income taxes............................................... 137,710 131,105
Unamortized tax credits............................................. 48,033 48,206
Other............................................................... 58,552 65,462
----------------- ---------------
Total deferred credits and other liabilities.................. 244,295 244,773
----------------- ---------------
Contributions in aid of construction................................... 208,316 206,302
----------------- ---------------
$ 2,331,307 $ 2,302,809
================= ===============
</TABLE>
See accompanying notes to HECO's consolidated financial statements.
11
<PAGE>
<TABLE>
<CAPTION>
Hawaiian Electric Company, Inc. and subsidiaries
Consolidated statements of income (unaudited)
Three months ended Nine months ended
(in thousands, except for ratio of earnings September 30, September 30,
------------------------------ ------------------------------
to fixed charges) 2000 1999 2000 1999
--------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Operating revenues.................................... $335,263 $275,925 $930,167 $763,408
------------- ------------- ------------- -------------
Operating expenses
Fuel oil.............................................. 95,883 58,942 262,130 151,046
Purchased power....................................... 85,092 71,952 225,762 199,581
Other operation....................................... 30,582 35,730 85,787 100,530
Maintenance........................................... 16,156 14,436 42,311 41,324
Depreciation.......................................... 24,605 23,322 73,269 70,041
Taxes, other than income taxes........................ 31,615 26,039 87,981 72,459
Income taxes.......................................... 15,828 13,419 46,222 36,208
------------- ------------- ------------- -------------
299,761 243,840 823,462 671,189
------------- ------------- ------------- -------------
Operating income...................................... 35,502 32,085 106,705 92,219
------------- ------------- ------------- -------------
Other income
Allowance for equity funds used during construction... 1,505 1,176 4,102 3,202
Other, net............................................ 1,856 998 3,569 3,370
------------- ------------- ------------- -------------
3,361 2,174 7,671 6,572
------------- ------------- ------------- -------------
Income before interest and other charges.............. 38,863 34,259 114,376 98,791
------------- ------------- ------------- -------------
Interest and other charges
Interest on long-term debt............................ 10,024 10,313 29,876 30,139
Amortization of net bond premium and expense.......... 485 436 1,452 1,203
Other interest charges................................ 1,725 1,494 5,257 5,414
Allowance for borrowed funds used during construction. (807) (716) (2,220) (1,955)
Preferred stock dividends of subsidiaries............. 228 229 686 716
Preferred securities distributions of trust
subsidiaries.......................................... 1,918 1,919 5,756 5,746
------------- ------------- ------------- -------------
13,573 13,675 40,807 41,263
------------- ------------- ------------- -------------
Income before preferred stock dividends of HECO....... 25,290 20,584 73,569 57,528
Preferred stock dividends of HECO..................... 270 269 810 908
------------- ------------- ------------- -------------
Net income for common stock........................... $ 25,020 $ 20,315 $ 72,759 $ 56,620
============= ============= ============= =============
Ratio of earnings to fixed charges (SEC method)....... 3.68 3.07
============= =============
</TABLE>
Hawaiian Electric Company, Inc. and subsidiaries
Consolidated statements of retained earnings (unaudited)
<TABLE>
<CAPTION>
Three months ended Nine months ended
September 30, September 30,
------------------------------ ------------------------------
(in thousands) 2000 1999 2000 1999
-------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Retained earnings, beginning of period................ $441,199 $415,944 $425,206 $405,836
Net income for common stock........................... 25,020 20,315 72,759 56,620
Common stock dividends................................ (18,011) (14,419) (49,757) (40,616)
------------- ------------- ------------- -------------
Retained earnings, end of period...................... $448,208 $421,840 $448,208 $421,840
============= ============= ============= =============
</TABLE>
HEI owns all the common stock of HECO. Therefore, per share data with respect to
shares of common stock of HECO are not meaningful.
See accompanying notes to HECO's consolidated financial statements.
12
<PAGE>
<TABLE>
<CAPTION>
Hawaiian Electric Company, Inc. and subsidiaries
Consolidated statements of cash flows (unaudited)
Nine months ended
September 30,
--------------------------------
(in thousands) 2000 1999
--------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Cash flows from operating activities
Income before preferred stock dividends of HECO............................ $ 73,569 $ 57,528
Adjustments to reconcile income before preferred stock dividends of HECO
to net cash provided by operating activities
Depreciation of property, plant and equipment........................ 73,269 70,041
Other amortization................................................... 5,379 4,718
Deferred income taxes................................................ 6,605 313
Tax credits, net..................................................... 1,016 1,568
Allowance for equity funds used during construction.................. (4,102) (3,202)
Changes in assets and liabilities
Decrease (increase) in accounts receivable...................... (11,280) 4,135
Increase in accrued unbilled revenues........................... (6,088) (4,123)
Decrease (increase) in fuel oil stock........................... 3,819 (9,793)
Increase in materials and supplies.............................. (88) (2,044)
Increase in regulatory assets................................... (2,707) (2,464)
Increase in accounts payable.................................... 2,244 10,741
Changes in other assets and liabilities......................... 13,359 17,546
------------- -------------
Net cash provided by operating activities.................................. 154,995 144,964
------------- -------------
Cash flows from investing activities
Capital expenditures....................................................... (88,955) (68,714)
Contributions in aid of construction....................................... 6,713 6,327
Proceeds from sale of assets............................................... - 1,499
Payments on notes receivable............................................... 138 1,199
------------- -------------
Net cash used in investing activities...................................... (82,104) (59,689)
------------- -------------
Cash flows from financing activities
Common stock dividends..................................................... (49,757) (40,616)
Preferred stock dividends.................................................. (810) (908)
Preferred securities distributions of trust subsidiaries................... (5,756) (5,746)
Proceeds from issuance of long-term debt................................... 13,150 73,052
Repayment of long-term debt................................................ - (50,000)
Redemption of preferred stock.............................................. - (47,080)
Net decrease in short-term borrowings from nonaffiliates and affiliate
with original maturities of three months or less........................ (24,710) (36,302)
Other...................................................................... (3,542) (6,279)
------------- -------------
Net cash used in financing activities...................................... (71,425) (113,879)
------------- -------------
Net increase (decrease) in cash and equivalents............................ 1,466 (28,604)
Cash and equivalents, beginning of period.................................. 1,966 54,783
------------- -------------
Cash and equivalents, end of period........................................ $ 3,432 $ 26,179
============= =============
See accompanying notes to HECO's consolidated financial statements.
</TABLE>
13
<PAGE>
Hawaiian Electric Company, Inc. and subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 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 Reports on SEC Form 10-Q for the quarters ended
March 31, 2000 and June 30, 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
September 30, 2000 and December 31, 1999, and the results of their operations
for the three and nine months ended September 30, 2000 and 1999, and their cash
flows for the nine months ended September 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 have 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.
For the year 2000 and future years, 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 nine months of 2000 was to increase
net income approximately $3 million.
14
<PAGE>
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 $4 million for the first nine months of
2000.
(3) Regulatory assets
---------------------
Regulatory asset related to Barbers Point Tank Farm project costs
In 1989, HECO began planning and engineering for a combined cycle unit addition
as a contingency in the event an independent power producer was not able to
deliver firm power to HECO as planned. Subsequently, HECO's planning and
engineering work expanded from contingency planning to adding new generation.
In December 1991, HECO filed an application for the installation of a nominal
200 MW combined cycle power plant located at HECO's Barbers Point Tank Farm.
Due to changes in circumstances, the expected timing for HECO's next generating
unit was significantly delayed, and HECO withdrew its application in May 1993.
In August 1994, HECO informed the Public Utilities Commission of the State of
Hawaii (PUC) that, consistent with past and current company practices, the $5.8
million in accumulated project costs would be allocated primarily to ongoing
active capital projects as part of the engineering clearing. The PUC advised
HECO to file an application, which it did in February 1995. The Consumer
Advocate objected to the accounting treatment proposed by HECO.
To simplify and expedite the proceeding, in September 2000, HECO and the
Consumer Advocate reached an agreement on the accounting treatment, subject to
PUC approval. Acceptance of the agreement by the parties was without prejudice
to any position either of them may take in this or any subsequent proceeding.
Under the agreement, $4.5 million of the $5.8 million total project costs will
be amortized to operating expense ratably over a five-year period after
receiving PUC approval. In September 2000, HECO adjusted the project costs to
reflect the agreement with the Consumer Advocate, resulting in an after tax
write-off of $0.8 million. The PUC's approval of the agreement has been
requested.
Integrated Resource Planning costs
In 1992, the PUC established a framework for Integrated Resource Planning (IRP)
and ordered the companies to develop an integrated resource plan in accordance
with the IRP framework. The framework also provides that the utilities are
entitled to recover appropriate IRP and implementation costs. Each year, the
electric utilities submit a budget of the IRP costs for the upcoming year, and
request subsequent recovery of the actual costs incurred. Actual IRP costs
incurred since 1995 have been recorded as a regulatory asset, and the electric
utilities have been awaiting PUC approval for recovery of those costs.
In August 2000, pursuant to a stipulation filed by the electric utilities and
the parties in the IRP cost proceedings, the PUC issued an order allowing the
electric utilities to begin recovering the 1995 through 1999 IRP costs (over a
12 month period for HECO and a 24 month period for HELCO and MECO), subject to
refund with interest, pending the PUC's final decision and order approving
recovery of each respective year's IRP costs. On September 1, 2000, the
electric utilities began recovering 1995 through 1999 IRP costs through a
surcharge on customers bills. As of September 30, 2000, the amount of revenues
recorded, subject to refund with interest, amounted to $0.8 million.
15
<PAGE>
(4) Cash flows
---------------
Supplemental disclosures of cash flow information
Cash paid for interest (net of capitalized amounts) and income taxes was as
follows:
<TABLE>
<CAPTION>
Nine months ended September 30,
--------------------------------
(in thousands) 2000 1999
-------------------------------------------------------------------------------------------
<S> <C> <C>
Interest................................................... $24,298 $28,786
============= ==============
Income taxes............................................... $20,941 $17,352
============= ==============
</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 $4.1 million and $3.2 million for the nine months ended September 30, 2000
and 1999, respectively.
(5) Commitments and contingencies
----------------------------------
HELCO power situation
Background. In 1991, Hawaii Electric Light Company, Inc. (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 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 allowed 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.
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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), apply to the
extent the standard conditions are not 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.
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 was held on August
28, 2000. At that hearing, the main issue was how the three-year construction
period in the standard land use conditions would be applied to the Keahole
project, and there was discussion as to whether the BLNR's August 16, 2000 order
(see "BLNR petitions" herein) had addressed that issue and the related issue of
whether HELCO was in compliance with that condition. The Court took the matter
under advisement. Because discussion at the August 28, 2000 hearing had raised
the question of whether KDC and an individual plaintiff had specifically posed
certain questions to the BLNR in their February 7, 2000 Request to Nullify, on
August 31, 2000 HELCO filed a letter with the BLNR requesting specific rulings
on these issues. In response, on September 5, 2000, KDC and the individual
plaintiff filed an ex-parte
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motion to file a memorandum in response to HELCO's letter and filed the
memorandum itself, which claimed that HELCO's letter was an improper
communication with the Court while a matter was pending decision. On September
6, 2000, the Court granted the ex-parte motion and set a hearing for September
18, 2000. At the hearing, the Court ruled to strike HELCO's letter from the
Court record and ruled that, as a matter of law, absent any legal or equitable
extension authorized by the BLNR pursuant to legal authority, the three-year
construction deadline expired on April 26, 1999. The Court also denied KDC and
the individual plaintiff's request for an injunction barring further
construction.
HELCO filed a request for extension with BLNR on October 20, 2000. Management
believes the extension will be obtained. Because substantially all of the pre-
PSD construction has been completed and because HELCO is awaiting the necessary
PSD permit before the generating units can be installed, it is not anticipated
that the Court's ruling will have any immediate impact on project construction.
For other developments regarding these issues, see "BLNR petitions."
On October 27, 2000, KDC and another plaintiff filed a motion requesting the
court to impose a stay on any further activities by HELCO pursuant to HELCO's
default entitlement until such time as the Hawaii Supreme Court acts on the
pending appeals. A hearing is scheduled for December 11, 2000.
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 nitrogen
oxide (NOx) emissions), (2) the DOH's determination of Best Available Control
Technology 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 December 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 to mid-2002. HELCO continues to work
with the DOH and EPA with the objective of having the final permit reissued in
early 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
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eventually be obtained and that installation of CT-4 and CT-5 will 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 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
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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.
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
motion, 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. On September 1, 2000, KDC
and others filed a motion in Third Circuit Court to enter partial (nonfinal)
judgment based on the September 22, 1999 order. The motion was denied by an
order dated September 21, 2000.
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
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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. An order to this effect was issued on November 19, 1999.
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 (1) HELCO cannot satisfy all
conditions and laws, (2) 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 (3) 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. 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 was issued on August 16,
2000.
Subsequent to the February 25th 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. For a
discussion of the subsequent decision of the Third Circuit Court on this issue
and a discussion of HELCO's request for extension, see "CDUP amendment" above.
IPP complaints filed with the PUC and other IPP information. 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 each claimed that they would be a
substitute for HELCO's planned 56 MW (net) DTCC unit at Keahole. The Enserch
and HCPC complaints have been resolved.
In September 1995, the PUC allowed HELCO to continue to pursue construction of
and commit expenditures for the second combustion turbine (CT-5) and the steam
recovery generator (ST-7) for its planned DTCC unit, but stated in its order
that "no part of the project may be included in HELCO's rate base unless and
until the project is in fact installed, and is used and useful for utility
purposes." The PUC also ordered HELCO to continue negotiating with the IPPs and
held that the facility to be built (i.e., either HELCO's or one of the IPP's)
should be the one that can be most expeditiously put into service at "allowable
cost."
The current status of the KCP complaint is as follows:
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
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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.
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. The
first phase of the project (22 MW) began commercial operation on August 12, 2000
and, according to Hamakua Partners, 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.
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 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
is intended to ensure reliability until the Keahole project is 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 29, 2002, filed a petition for
hearing with the PUC on April 28, 2000, alleging that it had unsuccessfully
attempted for over 75 days to negotiate a new power purchase agreement with
HELCO. Apollo had offered 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 was held on
October 3-5, 2000, and briefing is to follow. 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).
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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 was added on
August 12, 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 to mid-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 September 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 approximately $81.0 million, including
$32.4 million for equipment and material purchases, $27.0 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 September 30,
2000, approximately $23.5 million of the $81.0 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 September
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
23
<PAGE>
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. 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 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 the
Honolulu Harbor Work Group. Effective January 30, 1998, the Work 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 Work 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 Work 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. Texaco Group, Inc. and Philips Petroleum have
joined the Work 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 Work Group, the DOH, the EPA and the U.S. Coast Guard met to
discuss the Conceptual Site Model, how to proceed and other matters.
The Work Group is working on closing out any remaining obligations under the
voluntary agreement, including completing responses to questions raised by the
DOH on the Conceptual Site Model, and proposing an interim plan and procedure to
respond to petroleum discharges in the Honolulu Harbor area.
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
24
<PAGE>
claimed and covered under insurance policies, but such coverage is not
determinable at this time. The Work Group is working on determining a fair
method of cost allocation within the group to fund future remediation work that
may be required by the DOH or EPA.
(6) HECO-obligated mandatorily redeemable trust preferred securities of
-----------------------------------------------------------------------
subsidiary trusts holding solely HECO and HECO-guaranteed debentures
------------------------------------------------------------------------
In March 1997, HECO Capital Trust I (Trust I), a grantor trust and a wholly
owned subsidiary of HECO, sold (i) in a public offering, 2 million of its HECO-
Obligated 8.05% Cumulative Quarterly Income Preferred Securities, Series 1997
(1997 trust preferred securities) with an aggregate liquidation preference of
$50 million and (ii) to HECO, common securities with a liquidation preference of
approximately $1.55 million. Proceeds from the sale of the 1997 trust preferred
securities and the common securities were used by Trust I to purchase 8.05%
Junior Subordinated Deferrable Interest Debentures, Series 1997 (1997 junior
deferrable debentures) issued by HECO in the principal amount of $31.55 million
and issued by each of MECO and HELCO in the respective principal amounts of $10
million. The 1997 junior deferrable debentures, which bear interest at 8.05% and
mature on March 27, 2027, together with the subsidiary guarantees (pursuant to
which the obligations of MECO and HELCO under their respective debentures are
fully and unconditionally guaranteed by HECO), are the sole assets of Trust I.
The 1997 trust preferred securities must be redeemed at the maturity of the
underlying debt on March 27, 2027, which maturity may be shortened to a date no
earlier than March 27, 2002 or extended to a date no later than March 27, 2046,
and are not redeemable at the option of the holders, but may be redeemed by
Trust I, in whole or in part, from time to time, on or after March 27, 2002 or
upon the occurrence of certain events. All of the proceeds from the sale were
invested by Trust I in the underlying debt securities of HECO, HELCO and MECO.
In December 1998, HECO Capital Trust II (Trust II), a grantor trust and a wholly
owned subsidiary of HECO, sold (i) in a public offering, 2 million of its HECO-
Obligated 7.30% Cumulative Quarterly Income Preferred Securities, Series 1998
(1998 trust preferred securities) with an aggregate liquidation preference of
$50 million and (ii) to HECO, common securities with a liquidation preference of
approximately $1.55 million. Proceeds from the sale of the 1998 trust preferred
securities and the common securities were used by Trust II to purchase 7.30%
Junior Subordinated Deferrable Interest Debentures, Series 1998 (1998 junior
deferrable debentures) issued by HECO in the principal amount of $31.55 million
and issued by each of MECO and HELCO in the respective principal amounts of $10
million. The 1998 junior deferrable debentures, which bear interest at 7.30% and
mature on December 15, 2028, together with the subsidiary guarantees (pursuant
to which the obligations of MECO and HELCO under their respective debentures are
fully and unconditionally guaranteed by HECO), are the sole assets of Trust II.
The 1998 trust preferred securities must be redeemed at the maturity of the
underlying debt on December 15, 2028, which maturity may be shortened to a date
no earlier than December 15, 2003 or extended to a date no later than December
15, 2047, and are not redeemable at the option of the holders, but may be
redeemed by Trust II, in whole or in part, from time to time, on or after
December 15, 2003 or upon the occurrence of certain events. All of the proceeds
from the sale were invested by Trust II in the underlying debt securities of
HECO, HELCO and MECO, who used such proceeds from the sale of the 1998 junior
deferrable debentures primarily to effect the redemption of certain series of
their preferred stock having a total par value of $47 million.
The 1997 and 1998 junior deferrable debentures and the common securities of the
Trusts have been eliminated in HECO's consolidated balance sheets as of
September 30, 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).
25
<PAGE>
(7) 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. Management
believes the impact of adoption will not be material.
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 but 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.
26
<PAGE>
(8) Consolidating financial information
----------------------------------------
Hawaiian Electric Company, Inc. and subsidiaries
Consolidating balance sheet
<TABLE>
<CAPTION>
September 30, 2000
-----------------------------------------------------------------------------------
Reclassi-
fications
and
HECO HECO Elimina-
Capital Capital tions HECO
(in thousands) HECO HELCO MECO Trust I Trust II Consolidated
----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Assets
Utility plant, at cost
Utility plant (including construction
in progress)...................... $1,942,327 $ 618,687 $ 561,311 $ - $ - $ - $ 3,122,325
Less accumulated depreciation....... (737,715) (218,449) (191,517) - - - (1,147,681)
------------ ----------- ---------- ---------- --------- ------------ -------------
Net utility plant............... 1,204,612 400,238 369,794 - - - 1,974,644
------------ ----------- ---------- ---------- --------- ------------ -------------
Investment in wholly owned subsidiaries,
at equity.......................... 333,663 - - - - (333,663) -
------------ ----------- ---------- ---------- --------- ------------ -------------
Current assets
Cash and equivalents................ 9 2,555 868 - - - 3,432
Advances to affiliates ............. 14,800 - 10,500 51,546 51,546 (128,392) -
Customer accounts receivable, net .. 54,295 14,579 11,704 - - - 80,578
Accrued unbilled revenues, net...... 42,060 9,388 8,470 - - - 59,918
Other accounts receivable, net...... 1,600 1,153 (4) - - (1,107) 1,642
Fuel oil stock, at average cost..... 21,844 3,928 5,363 - - - 31,135
Materials and supplies, at average
cost.............................. 9,488 3,118 7,528 - - - 20,134
Prepayments and other............... 2,973 1,300 346 - - - 4,619
------------ ----------- ---------- ---------- --------- ------------ -------------
Total current assets............ 147,069 36,021 44,775 51,546 51,546 (129,499) 201,458
------------ ----------- ---------- ---------- --------- ------------ -------------
Other assets
Regulatory assets................... 77,703 20,012 18,584 - - - 116,299
Other............................... 25,841 5,481 7,584 - - - 38,906
------------ ----------- ---------- ---------- --------- ------------ -------------
Total other assets.............. 103,544 25,493 26,168 - - - 155,205
------------ ----------- ---------- ---------- --------- ------------ -------------
$1,788,888 $ 461,752 $ 440,737 $ 51,546 $ 51,546 $(463,162) $ 2,331,307
============ =========== ========== ========== ========= ============ =============
Capitalization and liabilities
Capitalization
Common stock equity................. $ 829,206 $163,518 $167,053 $ 1,546 $ 1,546 $(333,663) $ 829,206
Cumulative preferred stock-not
subject to mandatory redemption... 22,293 7,000 5,000 - - - 34,293
HECO-obligated mandatorily
redeemable trust preferred
securities of subsidiary trusts
holding solely HECO and HECO-
guaranteed debentures............. - - - 50,000 50,000 - 100,000
Long-term debt, net................. 445,257 145,924 171,235 - - (103,092) 659,324
------------ ----------- ---------- ---------- --------- ------------ -------------
Total capitalization............ 1,296,756 316,442 343,288 51,546 51,546 (436,755) 1,622,823
------------ ----------- ---------- ---------- --------- ------------ -------------
Current liabilities
Short-term borrowings from
nonaffiliates and affiliate....... 92,803 14,800 - - - (25,300) 82,303
Accounts payable.................... 37,766 11,012 5,582 - - - 54,360
Interest and preferred
dividends payable................. 10,645 3,162 4,154 - - (144) 17,817
Taxes accrued....................... 48,894 20,286 23,099 - - - 92,279
Other............................... 3,858 1,298 4,921 - - (963) 9,114
------------ ----------- ---------- ---------- --------- ------------ -------------
Total current liabilities....... 193,966 50,558 37,756 - - (26,407) 255,873
------------ ----------- ---------- ---------- --------- ------------ -------------
Deferred credits and other liabilities
Deferred income taxes............... 117,878 10,660 9,172 - - - 137,710
Unamortized tax credits............. 28,387 9,201 10,445 - - - 48,033
Other............................... 19,704 23,153 15,695 - - - 58,552
------------ ----------- ---------- ---------- --------- ------------ -------------
Total deferred credits and
other liabilities.......... 165,969 43,014 35,312 - - - 244,295
------------ ----------- ---------- ---------- --------- ------------ -------------
Contributions in aid of construction... 132,197 51,738 24,381 - - - 208,316
------------ ----------- ---------- ---------- --------- ------------ -------------
$1,788,888 $ 461,752 $ 440,737 $ 51,546 $ 51,546 $(463,162) $ 2,331,307
============ =========== ========== ========== ========= ============ =============
</TABLE>
27
<PAGE>
Hawaiian Electric Company, Inc. and subsidiaries
Consolidating balance sheet
<TABLE>
<CAPTION>
December 31, 1999
-------------------------------------------------------------------------------------
Reclassi-
fications
HECO HECO and
Capital Capital Elimina- HECO
(in thousands) HECO HELCO MECO Trust I Trust II tions Consolidated
----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Assets
Utility plant, at cost
Utility plant (including construction
in progress)........................ $1,893,318 $ 602,504 $ 538,695 $ - $ - $ - $ 3,034,517
Less accumulated depreciation........... (696,045) (204,578) (175,750) - - - (1,076,373)
---------- --------- --------- ------- -------- --------- -----------
Net utility plant................... 1,197,273 397,926 362,945 - - - 1,958,144
---------- --------- --------- ------- -------- --------- -----------
Investment in wholly owned subsidiaries,
at equity............................... 326,646 - - - - (326,646) -
---------- --------- --------- ------- -------- --------- -----------
Current assets
Cash and equivalents.................... 1,039 198 729 - - - 1,966
Advances to affiliates.................. 26,200 - 8,400 51,546 51,546 (137,692) -
Customer accounts receivable, net....... 46,744 12,155 9,869 - - - 68,768
Accrued unbilled revenues, net.......... 37,454 8,924 7,452 - - - 53,830
Other accounts receivable, net.......... 186 920 274 - - 792 2,172
Fuel oil stock, at average cost......... 24,438 3,610 6,906 - - - 34,954
Materials and supplies, at average cost. 9,096 3,195 7,755 - - - 20,046
Prepayments and other................... 3,076 1,258 315 - - - 4,649
---------- --------- --------- ------- -------- --------- -----------
Total current assets................ 148,233 30,260 41,700 51,546 51,546 (136,900) 186,385
---------- --------- --------- ------- -------- --------- -----------
Other assets
Regulatory assets....................... 77,264 20,233 17,262 - - - 114,759
Other................................... 28,955 7,393 7,173 - - - 43,521
---------- --------- --------- ------- -------- --------- -----------
Total other assets.................. 106,219 27,626 24,435 - - - 158,280
---------- --------- --------- ------- -------- --------- -----------
$1,778,371 $ 455,812 $ 429,080 $51,546 $ 51,546 $(463,546) $ 2,302,809
========== ========= ========= ======= ======== ========= ===========
Capitalization and liabilities
Capitalization
Common stock equity..................... $ 806,103 $ 159,719 $ 163,835 $ 1,546 $ 1,546 $(326,646) $ 806,103
Cumulative preferred stock-not
subject to mandatory redemption... 22,293 7,000 5,000 - - - 34,293
HECO-obligated mandatorily redeemable
trust preferred securities of
subsidiary trusts holding solely
HECO and HECO-guaranteed
debentures....................... - - - 50,000 50,000 - 100,000
Long-term debt, net..................... 432,112 145,810 171,200 - - (103,093) 646,029
---------- --------- --------- ------- -------- --------- -----------
Total capitalization................ 1,260,508 312,529 340,035 51,546 51,546 (429,739) 1,586,425
---------- --------- --------- ------- -------- --------- -----------
Current liabilities
Short-term borrowings from
nonaffiliates and affiliate......... 115,413 26,200 - - - (34,600) 107,013
Accounts payable........................ 36,658 6,977 8,481 - - - 52,116
Interest and preferred dividends
payable............................... 4,922 1,486 1,910 - - (158) 8,160
Taxes accrued........................... 37,876 13,205 15,454 - - - 66,535
Other................................... 21,721 4,362 4,451 - - 951 31,485
---------- --------- --------- ------- -------- --------- -----------
Total current liabilities........... 216,590 52,230 30,296 - - (33,807) 265,309
---------- --------- --------- ------- -------- --------- -----------
Deferred credits and other liabilities
Deferred income taxes................... 111,345 10,413 9,347 - - - 131,105
Unamortized tax credits................. 28,270 9,238 10,698 - - - 48,206
Other................................... 29,015 21,712 14,735 - - - 65,462
---------- --------- --------- ------- -------- --------- -----------
Total deferred credits and
other liabilities.............. 168,630 41,363 34,780 - - - 244,773
---------- --------- --------- ------- -------- --------- -----------
Contributions in aid of construction....... 132,643 49,690 23,969 - - - 206,302
---------- --------- --------- ------- -------- --------- -----------
$1,778,371 $ 455,812 $ 429,080 $51,546 $ 51,546 $(463,546) $ 2,302,809
========== ========= ========= ======= ======== ========= ===========
</TABLE>
28
<PAGE>
Hawaiian Electric Company, Inc. and subsidiaries
Consolidating statement of income
<TABLE>
<CAPTION>
Three months ended September 30, 2000
------------------------------------------------------------------------------------------
Reclassi-
fications
HECO HECO and
Capital Capital Elimina- HECO
(in thousands) HECO HELCO MECO Trust I Trust II tions Consolidated
--------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Operating revenues.................... $235,151 $ 50,240 $ 49,872 $ - $ - $ - $335,263
-------- -------- -------- ------- -------- -------- --------
Operating expenses
Fuel oil.............................. 65,316 10,887 19,680 - - - 95,883
Purchased power....................... 70,275 12,947 1,870 - - - 85,092
Other operation....................... 20,346 4,719 5,517 - - - 30,582
Maintenance........................... 9,641 2,691 3,824 - - - 16,156
Depreciation.......................... 14,910 4,809 4,886 - - - 24,605
Taxes, other than income taxes........ 22,125 4,791 4,699 - - - 31,615
Income taxes.......................... 10,304 2,713 2,811 - - - 15,828
-------- -------- -------- ------- -------- -------- --------
212,917 43,557 43,287 - - - 299,761
-------- -------- -------- ------- -------- -------- --------
Operating income...................... 22,234 6,683 6,585 - - - 35,502
-------- -------- -------- ------- -------- -------- --------
Other income
Allowance for equity funds used
during construction................ 1,169 92 244 - - - 1,505
Equity in earnings of subsidiaries.... 8,658 - - - - (8,658) -
Other, net............................ 1,848 234 265 1,037 941 (2,469) 1,856
-------- -------- -------- ------- -------- -------- --------
11,675 326 509 1,037 941 (11,127) 3,361
-------- -------- -------- ------- -------- -------- --------
Income before interest and other
charges............................ 33,909 7,009 7,094 1,037 941 (11,127) 38,863
-------- -------- -------- ------- -------- -------- --------
Interest and other charges
Interest on long-term debt............ 5,833 1,905 2,286 - - - 10,024
Amortization of net bond premium
and expense........................ 318 79 88 - - - 485
Other interest charges................ 3,101 732 361 - - (2,469) 1,725
Allowance for borrowed funds used
during construction................ (633) (56) (118) - - - (807)
Preferred stock dividends of
subsidiaries......................... - - - - - 228 228
Preferred securities distributions
of trust subsidiaries.............. - - - - - 1,918 1,918
-------- -------- -------- ------- -------- -------- --------
8,619 2,660 2,617 - - (323) 13,573
-------- -------- -------- ------- -------- -------- --------
Income before preferred stock
dividends of HECO.................. 25,290 4,349 4,477 1,037 941 (10,804) 25,290
Preferred stock dividends of HECO..... 270 133 95 1,006 912 (2,146) 270
-------- -------- -------- ------- -------- -------- --------
Net income for common stock........... $ 25,020 $ 4,216 $ 4,382 $ 31 $ 29 $ (8,658) $ 25,020
======== ======== ======== ======= ======== ======== ========
</TABLE>
Hawaiian Electric Company, Inc. and subsidiaries
Consolidating statement of retained earnings
<TABLE>
<CAPTION>
Three months ended September 30, 2000
------------------------------------------------------------------------------------------
Reclassi-
fications
HECO HECO and
Capital Capital Elimina- HECO
(in thousands) HECO HELCO MECO Trust I Trust II tions Consolidated
--------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Retained earnings, beginning of period $441,199 $62,430 $71,612 $ - $ - $(134,042) $441,199
Net income for common stock........... 25,020 4,216 4,382 31 29 (8,658) 25,020
Common stock dividends................ (18,011) (3,060) (3,164) (31) (29) 6,284 (18,011)
-------- ------- ------- ------- -------- --------- --------
Retained earnings, end of period...... $448,208 $63,586 $72,830 $ - $ - $(136,416) $448,208
======== ======= ======= ======= ======== ========= ========
</TABLE>
29
<PAGE>
Hawaiian Electric Company, Inc. and subsidiaries
Consolidating statement of income
<TABLE>
<CAPTION>
Three months ended September 30, 1999
----------------------------------------------------------------------------------------------
Reclassi-
fications
HECO HECO and
Capital Capital Elimina- HECO
(in thousands) HECO HELCO MECO Trust I Trust II tions Consolidated
-------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Operating revenues.................... $192,920 $41,212 $41,793 $ - $ - $ - $ 275,925
-------- ------- ------- ------- -------- --------- ---------
Operating expenses
Fuel oil.............................. 36,428 9,157 13,357 - - - 58,942
Purchased power....................... 63,578 7,064 1,310 - - - 71,952
Other operation....................... 24,284 5,911 5,535 - - - 35,730
Maintenance........................... 7,727 1,625 5,084 - - - 14,436
Depreciation.......................... 14,040 4,492 4,790 - - - 23,322
Taxes, other than income taxes........ 18,223 3,837 3,979 - - - 26,039
Income taxes.......................... 8,704 2,541 2,174 - - - 13,419
-------- ------- ------- ------- -------- --------- --------
172,984 34,627 36,229 - - - 243,840
-------- ------- ------- ------- -------- --------- ---------
Operating income...................... 19,936 6,585 5,564 - - - 32,085
-------- ------- ------- ------- -------- --------- ---------
Other income
Allowance for equity funds used
during construction................ 880 100 196 - - - 1,176
Equity in earnings of subsidiaries.... 7,421 - - - - (7,421) -
Other, net............................ 889 266 292 1,037 941 (2,427) 998
-------- ------- ------- ------- -------- --------- ---------
9,190 366 488 1,037 941 (9,848) 2,174
-------- ------- ------- ------- -------- --------- ---------
Income before interest and
other charges...................... 29,126 6,951 6,052 1,037 941 (9,848) 34,259
-------- ------- ------- ------- -------- --------- ---------
Interest and other charges
Interest on long-term debt............ 5,776 2,148 2,389 - - - 10,313
Amortization of net bond premium
and expense........................ 284 69 83 - - - 436
Other interest charges................ 3,040 718 163 - - (2,427) 1,494
Allowance for borrowed funds used
during construction................ (558) (61) (97) - - - (716)
Preferred stock dividends of
subsidiaries......................... - - - - - 229 229
Preferred securities distributions
of trust subsidiaries.............. - - - - - 1,919 1,919
-------- ------- ------- ------- -------- --------- ---------
8,542 2,874 2,538 - - (279) 13,675
-------- ------- ------- ------- -------- --------- ---------
Income before preferred stock
dividends of HECO.................. 20,584 4,077 3,514 1,037 941 (9,569) 20,584
Preferred stock dividends of HECO..... 269 133 96 1,007 912 (2,148) 269
-------- ------- ------- ------- -------- --------- ---------
Net income for common stock........... $ 20,315 $ 3,944 $ 3,418 $ 30 $ 29 $ (7,421) $ 20,315
======== ======= ======= ======= ======== ========= =========
</TABLE>
Hawaiian Electric Company, Inc. and subsidiaries
Consolidating statement of retained earnings
<TABLE>
<CAPTION>
Three months ended September 30, 1999
---------------------------------------------------------------------------------------
Reclassi-
fications
HECO HECO and
Capital Capital Elimina- HECO
(in thousands) HECO HELCO MECO Trust I Trust II tions Consolidated
-----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Retained earnings, beginning of period.... $415,944 $56,918 $67,455 $ - $ - $(124,373) $415,944
Net income for common stock............... 20,315 3,944 3,418 30 29 (7,421) 20,315
Common stock dividends.................... (14,419) (1,340) - (30) (29) 1,399 (14,419)
-------- ------- ------- ------- -------- --------- --------
Retained earnings, end of period.......... $421,840 $59,522 $70,873 $ - $ - $(130,395) $421,840
======== ======= ======= ======= ======== ========= ========
</TABLE>
30
<PAGE>
Hawaiian Electric Company, Inc. and subsidiaries
Consolidating statement of income
<TABLE>
<CAPTION>
Nine months ended September 30, 2000
-------------------------------------------------------------------------------------------
Reclassi-
fications
HECO HECO and
Capital Capital Elimina- HECO
(in thousands) HECO HELCO MECO Trust I Trust II tions Consolidated
---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Operating revenues.................... $648,225 $141,030 $140,912 $ - $ - $ - $930,167
-------- -------- -------- ------- -------- --------- --------
Operating expenses
Fuel oil.............................. 171,972 35,917 54,241 - - - 262,130
Purchased power....................... 191,082 29,647 5,033 - - - 225,762
Other operation....................... 57,118 13,669 15,000 - - - 85,787
Maintenance........................... 26,726 6,165 9,420 - - - 42,311
Depreciation.......................... 44,106 14,507 14,656 - - - 73,269
Taxes, other than income taxes........ 61,257 13,400 13,324 - - - 87,981
Income taxes.......................... 29,450 7,842 8,930 - - - 46,222
-------- -------- -------- ------- -------- --------- --------
581,711 121,147 120,604 - - - 823,462
-------- -------- -------- ------- -------- --------- --------
Operating income...................... 66,514 19,883 20,308 - - - 106,705
-------- -------- -------- ------- -------- --------- --------
Other income
Allowance for equity funds used
during construction................ 3,081 210 811 - - - 4,102
Equity in earnings of subsidiaries.... 26,345 - - - - (26,345) -
Other, net............................ 3,640 613 911 3,112 2,822 (7,529) 3,569
-------- -------- -------- ------- -------- --------- --------
33,066 823 1,722 3,112 2,822 (33,874) 7,671
-------- -------- -------- ------- -------- --------- --------
Income before interest and
other charges...................... 99,580 20,706 22,030 3,112 2,822 (33,874) 114,376
-------- -------- -------- ------- -------- --------- --------
Interest and other charges
Interest on long-term debt............ 17,318 5,715 6,843 - - - 29,876
Amortization of net bond premium
and expense........................ 952 234 266 - - - 1,452
Other interest charges................ 9,441 2,286 1,059 - - (7,529) 5,257
Allowance for borrowed funds used
during construction................ (1,700) (126) (394) - - - (2,220)
Preferred stock dividends of
subsidiaries......................... - - - - - 686 686
Preferred securities distributions
of trust subsidiaries.............. - - - - - 5,756 5,756
-------- -------- -------- ------- -------- --------- --------
26,011 8,109 7,774 - - (1,087) 40,807
-------- -------- -------- ------- -------- --------- --------
Income before preferred stock
dividends of HECO.................. 73,569 12,597 14,256 3,112 2,822 (32,787) 73,569
Preferred stock dividends of HECO..... 810 400 286 3,019 2,737 (6,442) 810
-------- -------- -------- ------- -------- --------- --------
Net income for common stock........... $ 72,759 $ 12,197 $ 13,970 $ 93 $ 85 $ (26,345) $ 72,759
======== ======== ======== ======= ======== ========= ========
</TABLE>
Hawaiian Electric Company, Inc. and subsidiaries
Consolidating statement of retained earnings
<TABLE>
<CAPTION>
Nine months ended September 30, 2000
----------------------------------------------------------------------------------------
Reclassi-
fications
HECO HECO and
Capital Capital Elimina- HECO
(in thousands) HECO HELCO MECO Trust I Trust II tions Consolidated
------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Retained earnings, beginning of period.... $425,206 $59,806 $ 69,633 $ - $ - $(129,439) $425,206
Net income for common stock............... 72,759 12,197 13,970 93 85 (26,345) 72,759
Common stock dividends.................... (49,757) (8,417) (10,773) (93) (85) 19,368 (49,757)
-------- ------- -------- ------- -------- --------- --------
Retained earnings, end of period.......... $448,208 $63,586 $ 72,830 $ - $ - $(136,416) $448,208
======== ======= ======== ======= ======== ========= ========
</TABLE>
31
<PAGE>
Hawaiian Electric Company, Inc. and subsidiaries
Consolidating statement of income
<TABLE>
<CAPTION>
Nine months ended September 30, 1999
------------------------------------------------------------------------------------------
Reclassi-
fications
HECO HECO and
Capital Capital Elimina- HECO
(in thousands) HECO HELCO MECO Trust I Trust II tions Consolidated
--------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Operating revenues.................... $532,595 $116,039 $114,774 $ - $ - $ - $763,408
-------- -------- -------- ------- ------- --------- --------
Operating expenses
Fuel oil.............................. 96,247 22,027 32,772 - - - 151,046
Purchased power....................... 173,127 21,922 4,532 - - - 199,581
Other operation....................... 66,340 18,760 15,430 - - - 100,530
Maintenance........................... 22,153 6,820 12,351 - - - 41,324
Depreciation.......................... 42,212 13,471 14,358 - - - 70,041
Taxes, other than income taxes........ 50,551 10,974 10,934 - - - 72,459
Income taxes.......................... 23,936 5,593 6,679 - - - 36,208
-------- -------- -------- ------- ------- --------- --------
474,566 99,567 97,056 - - - 671,189
-------- -------- -------- ------- ------- --------- --------
Operating income...................... 58,029 16,472 17,718 - - - 92,219
-------- -------- -------- ------- ------- --------- --------
Other income
Allowance for equity funds used
during construction................ 2,441 255 506 - - - 3,202
Equity in earnings of subsidiaries.... 19,259 - - - - (19,259) -
Other, net............................ 3,205 774 593 3,112 2,812 (7,126) 3,370
-------- -------- -------- ------- ------- --------- --------
24,905 1,029 1,099 3,112 2,812 (26,385) 6,572
-------- -------- -------- ------- ------- --------- --------
Income before interest and
other charges...................... 82,934 17,501 18,817 3,112 2,812 (26,385) 98,791
-------- -------- -------- ------- ------- --------- --------
Interest and other charges
Interest on long-term debt............ 16,899 6,211 7,029 - - - 30,139
Amortization of net bond premium
and expense........................ 786 168 249 - - - 1,203
Other interest charges................ 9,270 2,228 1,042 - - (7,126) 5,414
Allowance for borrowed funds used
during construction................ (1,549) (158) (248) - - - (1,955)
Preferred stock dividends of - - - - - 716 716
subsidiaries.........................
Preferred securities distributions
of trust subsidiaries.............. - - - - - 5,746 5,746
-------- -------- -------- ------- ------- --------- --------
25,406 8,449 8,072 - - (664) 41,263
-------- -------- -------- ------- ------- --------- --------
Income before preferred stock
dividends of HECO.................. 57,528 9,052 10,745 3,112 2,812 (25,721) 57,528
Preferred stock dividends of HECO..... 908 400 316 3,019 2,727 (6,462) 908
-------- -------- -------- ------- ------- --------- --------
Net income for common stock........... $ 56,620 $ 8,652 $ 10,429 $ 93 $ 85 $ (19,259) $ 56,620
======== ======== ======== ======= ======= ========= ========
</TABLE>
Hawaiian Electric Company, Inc. and subsidiaries
Consolidating statement of retained earnings
<TABLE>
<CAPTION>
Nine months ended September 30, 1999
-------------------------------------------------------------------------------------------
Reclassi-
fications
HECO HECO and
Capital Capital Elimina- HECO
(in thousands) HECO HELCO MECO Trust I Trust II tions Consolidated
---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Retained earnings, beginning of period $405,836 $57,210 $62,992 $ - $ - $(120,202) $405,836
Net income for common stock........... 56,620 8,652 10,429 93 85 (19,259) 56,620
Common stock dividends................ (40,616) (6,340) (2,548) (93) (85) 9,066 (40,616)
-------- ------- ------- ------- -------- --------- --------
Retained earnings, end of period...... $421,840 $59,522 $70,873 $ - $ - $(130,395) $421,840
======== ======= ======= ======= ======== ========= ========
</TABLE>
32
<PAGE>
Hawaiian Electric Company, Inc. and subsidiaries
Consolidating statement of cash flows
<TABLE>
<CAPTION>
Nine months ended September 30, 2000
----------------------------------------------------------------------------------------
Reclassi-
fications
HECO HECO and
Capital Capital Elimina- HECO
(in thousands) HECO HELCO MECO Trust I Trust II tions Consolidated
-----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Cash flows from operating activities
Income before preferred stock
dividends of HECO....................... $ 73,569 $ 12,597 $ 14,256 $ 3,112 $ 2,822 $(32,787) $ 73,569
Adjustments to reconcile income before
preferred stock dividends of HECO to net
cash provided by operating activities
Equity in earnings................... (26,345) - - - - 26,345 -
Common stock dividends received
from subsidiaries............... 19,368 - - - - (19,368) -
Depreciation of property,
plant and equipment............. 44,106 14,507 14,656 - - - 73,269
Other amortization................... 3,436 670 1,273 - - - 5,379
Deferred income taxes................ 6,532 247 (174) - - - 6,605
Tax credits, net..................... 933 139 (56) - - - 1,016
Allowance for equity funds used
during construction............. (3,081) (210) (811) - - - (4,102)
Changes in assets and liabilities
Increase in accounts receivable.. (8,965) (2,657) (1,557) - - 1,899 (11,280)
Increase in accrued unbilled
revenues........................ (4,606) (464) (1,018) - - - (6,088)
Decrease (increase) in fuel oil
stock........................... 2,594 (318) 1,543 - - - 3,819
Decrease (increase) in materials
and supplies............... (392) 77 227 - - - (88)
Increase in regulatory assets.... (1,403) (174) (1,130) - - - (2,707)
Increase (decrease) in accounts
payable.................... 1,108 4,035 (2,899) - - - 2,244
Changes in other assets and
liabilities..................... (8,752) 8,729 9,525 - - 3,857 13,359
-------- -------- -------- ------- ------- -------- -------
Net cash provided by operating activities.. 98,102 37,178 33,835 3,112 2,822 (20,054) 154,995
-------- -------- -------- ------- ------- -------- -------
Cash flows from investing activities
Capital expenditures....................... (51,023) (16,088) (21,844) - - - (88,955)
Contributions in aid of construction....... 2,927 2,479 1,307 - - - 6,713
Advances to (repayments from) affiliates... 11,400 - (2,100) - - (9,300) -
Payments on notes receivable............... - 138 - - - - 138
-------- -------- -------- ------- ------- -------- -------
Net cash used in investing activities...... (36,696) (13,471) (22,637) - - (9,300) (82,104)
-------- -------- -------- ------- ------- -------- -------
Cash flows from financing activities
Common stock dividends..................... (49,757) (8,417) (10,773) (93) (85) 19,368 (49,757)
Preferred stock dividends.................. (810) (400) (286) - - 686 (810)
Preferred securities distributions
of trust subsidiaries................. - - - (3,019) (2,737) - (5,756)
Proceeds from issuance of long-term debt... 13,059 91 - - - - 13,150
Net decrease in short-term borrowings
from nonaffiliates and affiliate with
original maturities of three months
or less.............................. (22,610) (11,400) - - - 9,300 (24,710)
Other...................................... (2,318) (1,224) - - - - (3,542)
-------- -------- -------- ------- ------- -------- -------
Net cash used in financing activities...... (62,436) (21,350) (11,059) (3,112) (2,822) 29,354 (71,425)
-------- -------- -------- ------- ------- -------- -------
Net increase (decrease) in
cash and equivalents.................. (1,030) 2,357 139 - - - 1,466
Cash and equivalents, beginning of period.. 1,039 198 729 - - - 1,966
-------- -------- -------- ------- ------- -------- -------
Cash and equivalents, end of period........ $ 9 $ 2,555 $ 868 $ - $ - $ - $ 3,432
======== ======== ======== ======= ======= ======== =======
</TABLE>
33
<PAGE>
Hawaiian Electric Company, Inc. and subsidiaries
Consolidating statement of cash flows
<TABLE>
<CAPTION>
Nine months ended September 30, 1999
----------------------------------------------------------------------------------------
Reclassi-
fications
HECO HECO and
Capital Capital Elimina- HECO
(in thousands) HECO HELCO MECO Trust I Trust II tions Consolidated
-----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Cash flows from operating activities
Income before preferred stock
dividends of HECO......................... $ 57,528 $ 9,052 $ 10,745 $ 3,112 $ 2,812 $ (25,721) $ 57,528
Adjustments to reconcile income before
preferred stock dividends of HECO to net
cash provided by operating activities
Equity in earnings..................... (19,259) - - - - 19,259 -
Common stock dividends received
from subsidiaries................. 9,066 - - - - (9,066) -
Depreciation of property,
plant and equipment............... 42,212 13,471 14,358 - - - 70,041
Other amortization..................... 2,235 570 1,913 - - - 4,718
Deferred income taxes.................. 1,129 (453) (363) - - - 313
Tax credits, net....................... 1,304 318 (54) - - - 1,568
Allowance for equity funds used
during construction............... (2,441) (255) (506) - - - (3,202)
Changes in assets and liabilities
Decrease (increase) in
accounts receivable.......... 3,020 1,170 (1,073) - 178 840 4,135
Increase in accrued unbilled
revenues.......................... (2,423) (718) (982) - - - (4,123)
Increase in fuel oil stock......... (7,271) (734) (1,788) - - - (9,793)
Increase in materials and
supplies.......................... (1,796) (222) (26) - - - (2,044)
Decrease (increase) in regulatory
assets........................ 707 (1,323) (1,848) - - - (2,464)
Increase in accounts payable....... 6,392 195 4,154 - - - 10,741
Changes in other assets
and liabilities.............. 6,560 1,439 4,819 - (178) 4,906 17,546
-------- -------- -------- ------- ------- --------- ---------
Net cash provided by operating activities.... 96,963 22,510 29,349 3,112 2,812 (9,782) 144,964
-------- -------- -------- ------- ------- --------- ---------
Cash flows from investing activities
Capital expenditures......................... (41,322) (12,737) (14,655) - - - (68,714)
Contributions in aid of construction......... 4,600 757 970 - - - 6,327
Advances to (repayments from) affiliates..... 4,400 - (8,800) - - 4,400 -
Proceeds from sale of assets................. 1,499 - - - - - 1,499
Payments on notes receivable................. - 1,199 - - - - 1,199
-------- -------- -------- ------- -------- --------- ---------
Net cash used in investing activities........ (30,823) (10,781) (22,485) - - 4,400 (59,689)
-------- -------- -------- ------- ------- --------- ---------
Cash flows from financing activities
Common stock dividends....................... (40,616) (6,340) (2,548) (93) (85) 9,066 (40,616)
Preferred stock dividends.................... (908) (400) (316) - - 716 (908)
Preferred securities distributions
of trust subsidiaries................... - - - (3,019) (2,727) - (5,746)
Proceeds from issuance of long-term debt..... 39,313 24,843 8,896 - - - 73,052
Repayment of long-term debt.................. (30,000) (11,000) (9,000) - - - (50,000)
Redemption of preferred stock................ (28,600) (10,000) (8,480) - - - (47,080)
Net decrease in short-term borrowings
from nonaffiliates and affiliate with
original maturities of three months
or less................................ (27,502) (4,400) - - - (4,400) (36,302)
Other........................................ (4,768) (1,267) (244) - - - (6,279)
-------- -------- -------- ------- ------- --------- ---------
Net cash used in financing activities........ (93,081) (8,564) (11,692) (3,112) (2,812) 5,382 (113,879)
-------- -------- -------- ------- ------- --------- ---------
Net increase (decrease) in
cash and equivalents.................... (26,941) 3,165 (4,828) - - - (28,604)
Cash and equivalents, beginning of period.... 29,753 10,024 15,006 - - - 54,783
-------- -------- -------- ------- ------- --------- ---------
Cash and equivalents, end of period.......... $ 2,812 $ 13,189 $ 10,178 $ - $ - $ - $ 26,179
======== ======== ======== ======= ======= ========= =========
</TABLE>
34
<PAGE>
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.
(9) Reconciliation of electric utility operating income per HEI and HECO
-------------------------------------------------------------------------
consolidated statements of income
---------------------------------
<TABLE>
<CAPTION>
Three months ended Nine months ended
September 30, September 30,
-------------------------- --------------------------
(in thousands) 2000 1999 2000 1999
----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Operating income from regulated and nonregulated activities
before income taxes (per HEI consolidated statements of income).. $ 53,293 $ 46,472 $ 156,538 $ 131,709
Deduct:
Income taxes on regulated activities............................. (15,828) (13,419) (46,222) (36,208)
Revenues from nonregulated activities............................ (2,061) (1,358) (4,407) (3,938)
Add:
Expenses from nonregulated activities............................ 98 390 796 656
----------- -------- --------- ---------
Operating income from regulated activities after income taxes
(per HECO consolidated statements of income)..................... $ 35,502 $ 32,085 $ 106,705 $ 92,219
=========== ======== ========= =========
</TABLE>
35
<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
September 30,
(in thousands, except per ----------------------- % Primary reason(s) for
share amounts) 2000 1999 change Significant change*
---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Revenues........................... $445,867 $392,450 14 Increases for the electric utility and savings bank
segments, partly offset by decreases for the "other"
and international power segments
Operating income................... 60,510 56,551 7 Increases for the electric utility, savings bank and
"other" segments, partly offset by a decrease for the
international power segment
Net income......................... 22,049 21,632 2 Higher operating income and AFUDC, partly offset by
higher interest expense due to higher average
borrowings resulting from an HEIPC acquisition in
March 2000 and higher income taxes due to no tax
reductions for losses from foreign operations
Basic earnings
per common share................ $ 0.68 $ 0.67 1 See explanation for net income
Weighted-average number of common
shares outstanding................ 32,642 32,203 1 Issuances under the Dividend Reinvestment and Stock
Purchase Plan and other plans
</TABLE>
36
<PAGE>
<TABLE>
<CAPTION>
Nine months ended
September 30,
(in thousands, except per ------------------------- % Primary reason(s) for
share amounts) 2000 1999 change significant change*
------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Revenues........................... $1,260,878 $1,114,385 13 Increases for the electric utility and savings bank
segments, partly offset by decreases for the "other"
and international power segments
Operating income................... 185,838 169,293 10 Increases for the electric utility and savings bank
segments, partly offset by decreases for the
international power and "other" segments
Net income......................... 70,121 65,142 8 Higher operating income and AFUDC, partly offset by
higher interest expense due to higher average
borrowings resulting from an HEIPC acquisition in
March 2000 and higher income taxes due to higher
operating income and no tax reductions for losses
from foreign operations
Basic earnings
per common share................ $ 2.16 $ 2.02 7 See explanation for net income
Weighted-average number of common
shares outstanding................ 32,438 32,180 1 Issuances under the Dividend Reinvestment and Stock
Purchase Plan and other plans
</TABLE>
* Also see segment discussions which follow.
37
<PAGE>
Following is a general discussion of the results of operations by business
segment.
Electric utility
----------------
<TABLE>
<CAPTION>
Three months ended
(in thousands, except per September 30, %
----------------------------
barrel amounts) 2000 1999 Change Primary reason(s) for significant change
-----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Revenues...................... $337,324 $277,283 22 Higher fuel oil and purchased energy prices,
the effects of which are passed on to
customers ($50 million), and 4.1% higher KWH
sales ($8 million)
Expenses
Fuel oil..................... 95,883 58,942 63 Higher fuel oil prices and more KWHs generated
Purchased power.............. 85,092 71,952 18 Higher fuel prices and more KWHs purchased
Other........................ 103,056 99,917 3 Higher taxes, other than income taxes,
maintenance and depreciation expenses, partly
offset by lower other operation expenses
(including lower retirement benefits expenses)
Operating income.............. 53,293 46,472 15 Higher KWH sales and lower other operation
expenses, partly offset by higher taxes,
other than income taxes, maintenance and
depreciation expenses
Net income................... 25,020 20,315 23 Higher operating income and AFUDC, partially
offset by higher income taxes
Kilowatthour sales (millions). 2,433 2,338 4
Average fuel oil price
per barrel................. $ 34.42 $ 21.69 59
</TABLE>
38
<PAGE>
<TABLE>
<CAPTION>
Nine months ended
(in thousands, except per September 30,
------------------------------------ %
barrel amounts) 2000 1999 change Primary reason(s) for significant change
-----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Revenues...................... $934,574 $767,346 22 Higher fuel oil and purchased energy prices,
the effects of which are passed on to
customers ($145 million), 3.1% higher KWH
sales ($20 million) and the recovery of
integrated resource planning costs
Expenses
Fuel oil..................... 262,130 151,046 74 Higher fuel oil prices and more KWHs generated
Purchased power.............. 225,762 199,581 13 Higher fuel prices and more KWHs purchased
Other........................ 290,144 285,010 2 Higher taxes, other than income taxes,
maintenance and depreciation expenses, partly
offset by lower other operation expense
(including lower retirement benefits expenses)
Operating income.............. 156,538 131,709 19 Higher KWH sales and lower other operation
expense, partly offset by higher taxes, other
than income taxes, maintenance and
depreciation expenses
Net income................... 72,759 56,620 29 Higher operating income and AFUDC, partially
offset by higher income taxes
Kilowatthour sales (millions). 6,902 6,692 3
Average fuel oil price
per barrel................. $ 32.09 $ 18.86 70
</TABLE>
Kilowatthour (KWH) sales in the third quarter and first nine months of 2000
increased 4.1% and 3.1%, 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. From December 1999 to September 2000, fuel prices on Oahu have
increased approximately 33%, but the typical monthly Oahu residential
electricity bill for 600 KWH has increased only 8%. HECO and its subsidiaries
pass both increases and decreases in the cost of fuel and purchased energy
prices through to their customers via their Energy Cost Adjustment Clauses. In
spite of the increase in rates due to higher fuel prices, the electric
utilities' KWH sales have increased. Electric utility operating income for the
first nine months of 2000 increased 19% from the first nine months of 1999,
primarily due to the higher KWH sales and 10% lower other operation and
maintenance expenses. 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").
39
<PAGE>
In October 2000, due to flashfloods and lightning storms, HELCO's transmission
and distribution facilities and generation power plants were damaged. Uninsured
repairs are estimated to amount to $1.5 million.
Competition
The electric utility industry is becoming increasingly competitive. IPPs are
well established in Hawaii and continue to actively pursue new projects.
Customer self-generation, with or without cogeneration, has made inroads in
Hawaii and is a continuing competitive factor. Competition in the generation
sector in Hawaii is moderated, however, by the scarcity of generation sites,
various permitting processes and lack of interconnections to other electric
utilities. HECO has been able to compete successfully by offering customers
economic alternatives that, among other things, employ energy efficient
electrotechnologies such as the heat pump water heater.
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 and its subsidiaries suggest in their SOP that these
proposals be implemented through PUC approval of applications submitted in a
series of separate proceedings to be initiated by HECO, HELCO and MECO. See
"Competition proceeding" in note (5) 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 September
30, 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. (Hamakua) 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 (5) of
HECO's "Notes to consolidated financial statements").
40
<PAGE>
The Consumer Advocate filed its testimony on May 8, 2000. HELCO filed its
rebuttal testimony on June 19, 2000 and continued to justify an increase of at
least $15.5 million and a ROACE of 13.25% for the 2000 test year. Hearings were
held in August 2000.
To simplify and expedite the rate case proceeding, HELCO and the Consumer
Advocate entered into a negotiated settlement agreement, subject to PUC
consideration and approval, with respect to certain test year estimates. As part
of the settlement agreement, HECO, MECO and HELCO (the electric utilities)
agreed to make a prospective change to their accounting treatment of canceled
project costs. Historically, the electric utilities classified projects that
were not completed as either canceled or abandoned, depending on whether the
projects were stopped before (canceled) or after (abandoned) significant costs
were incurred for material purchases and/or construction. The parties agreed
that effective October 1, 2000, the electric utilities will charge the costs of
canceled projects to operating expense, which is similar to and consistent with
the treatment for abandoned project costs. An appropriate amount of canceled
project costs will be included in revenue requirements in rate case proceedings.
Prior to October 1, 2000, the electric utilities allocated the costs of canceled
projects to on-going capital projects, operation and maintenance expenses and
other accounts through a clearing process. Management believes that this change
in accounting procedure will not have a material effect on the electric
utilities' results of operations, financial condition or liquidity. The electric
utilities may seek PUC approval for different accounting treatments in unusual
or special circumstances.
In September 2000, HELCO received an interim D&O from the PUC which authorized a
1.93%, or $3.5 million, increase in annual revenues, effective September 1, 2000
and based on an 11.65% ROACE which was the ROACE authorized in HELCO's previous
rate case. The interim D&O granted rate relief for the cost to buy power from
Phase I of the Hamakua facility, which is currently in service. HELCO has
requested a step increase in rates when Phase II of the Hamakua facility is
placed in service in late November 2000, if a final D&O has not been issued by
that time. While certain revenue requirement amounts contested by the Consumer
Advocate were included in rates approved on an interim basis, others were not.
For example, the interim D&O included rates to cover HELCO's calculation of fuel
oil expense and its purchase power payments to HCPC, but did not include rates
to cover depreciation of and a return on investments in facilities placed in
service since the last rate case at the Keahole Power Plant to serve both
existing and yet unbuilt generating units. The Consumer Advocate disagreed with
HELCO's calculation of fuel oil expense and purchase power payments to HCPC and
objected to including the pre-service costs in rates until the new generating
units are in service.
The PUC may grant an interim rate increase (subject to refund with interest
pending the final outcome of the case) if the PUC believes that the public
utility is probably entitled to an increase in its rates. The adoption of
revenue, expense, rate base and cost of capital amounts (including the ROACE)
for purposes of an interim rate increase does not commit the PUC to accept any
such amounts in its final D&O. In determining such interim amounts, the PUC has
stated that it must often postpone determinations of reasonableness with respect
to contested matters.
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 (5) of HECO's "Notes to consolidated financial
statements."
Accounting for the effects of certain types of regulation
In accordance with SFAS No. 71, "Accounting for the Effects of Certain Types of
Regulation," the Company's financial statements reflect assets and costs of HECO
and its subsidiaries 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 September 30, 2000, HECO's consolidated regulatory
assets amounted to $116 million.
41
<PAGE>
Savings bank
------------
<TABLE>
<CAPTION>
Three months ended
September 30, %
----------------------------------------
(in thousands) 2000 1999 change Primary reason(s) for significant change
---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Revenues............... $114,300 $102,624 11 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....... 16,979 14,919 14 Higher net interest income, partly offset
by the writedown of "available-for-sale"
debt securities. See note (4) in HEI's
"Notes to consolidated financial
statements."
Net income............. 9,815 8,499 15 Higher operating income, partly offset by
higher income taxes
Interest rate spread... 3.11% 3.22% (3) 46 basis points increase in the
weighted-average yield on interest-earning
assets, more than offset by a 57 basis
points increase in the weighted-average
rate on interest-bearing liabilities
</TABLE>
<TABLE>
<CAPTION>
Nine months ended
September 30, %
----------------------------------------
(in thousands) 2000 1999 Change Primary reason(s) for significant change
--------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Revenues............... $333,266 $304,663 9 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....... 52,484 45,839 14 Higher net interest income, partly offset
by the writedown of "available-for-sale"
debt securities. See note (4) in HEI's
"Notes to consolidated financial
statements."
Net income............. 30,432 26,081 17 Higher operating income, partly offset by
higher income taxes
Interest rate spread... 3.18% 3.17% - 39 basis points increase in the
weighted-average yield on interest-earning
assets, mostly offset by a 38 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 3.4% and increased 0.3% for the third quarter and first
nine months of 2000, respectively, compared to the same periods in 1999.
Comparing the first
42
<PAGE>
nine months and the third quarter of 2000 to the same periods in 1999, the
weighted-average yields on interest-earning assets increased more than the
weighted-average rates on interest-bearing liabilities increased. Impacting the
weighted-average yield on interest-earning assets was the recognition of
interest income on a cash basis for four debt securities in the principal amount
of $114 million. The weighted-average yield on interest-earning assets is
calculated by dividing the annualized interest or dividend income by the average
interest-earning asset balances. Since the interest on the four debt securities
is accounted for on a cash basis, the interest income received on these debt
securities is not annualized for the purposes of calculating the weighted-
average yields on interest-earning assets. 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 $67 million in the first nine months of 2000, including $73 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 nine months of 2000, ASB added $9 million to its allowance for
loan losses. As of September 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>
Nine months ended
September 30,
-----------------------------------------
(in thousands) 2000 1999
--------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Allowance for loan losses, beginning of period....................... $ 35,348 $ 39,779
Additions to provisions for losses................................... 9,400 10,848
Net charge-offs...................................................... (7,914) (9,980)
------------ ----------
Allowance for loan losses, end of period............................. $ 36,834 $ 40,647
============ ==========
</TABLE>
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 nine 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 September 30, 2000, ASB was "well-capitalized" (ratio
requirements noted in parentheses) with a leverage ratio of 5.9% (5.0%), a Tier-
1 risk-based ratio of 10.3% (6.0%) and a total risk-based ratio of 11.2%
(10.0%).
Examination of ASB by the OTS
-----------------------------
ASB is subject to examination by the OTS. In conducting its examinations, the
OTS utilizes the Uniform Financial Institutions Rating System (UFIRS), adopted
by Thrift Bulletin 69 (TB 69) dated January 10, 1997. The UFIRS rating system
utilizes the "CAMELS" criteria for rating financial institutions. The six
components in the rating system are: Capital adequacy, Asset quality,
- -
Management, Earnings, Liquidity, and Sensitivity to market risk. The "C" rating
- - - -
assesses whether an institution's capital is adequate in relation to its risk
profile, current operations, and future needs. This factor considers the
institution's dividend policy and practices and the institution's prompt
corrective action rating. The "A" rating evaluates asset quality. The asset
quality rating reflects the extent of credit
43
<PAGE>
risk associated with the loan and investment portfolios, real estate owned,
other assets, and off-balance sheet risks as well as the institution's ability
to manage those risks. The "M" rating is a reflection of the performance of the
entire management team of the institution, including the board of directors and
all levels of management. The rating is an assessment of management's overall
effectiveness. The "E" component evaluates whether earnings are sufficient for
necessary capital formation. The quality (stability) and composition (source) of
earnings are important criteria in this evaluation. The "L" rating measures
liquidity in relation to the institution's level of liquid assets, its outside
sources of funds, and the adequacy of its funds (or cash flow) management
practices. The "S" rating component addresses the degree that changes in
interest rates, commodity prices, and equity prices could adversely affect the
earnings or economic capital of the institution. The "S" component, while broad
in scope, is applied by the financial institution regulators only to the
elements of market risk that are relevant to the institution being examined. As
applied to ASB, the OTS has in the past and will likely continue in the future
to focus the S component inquiry on interest-rate risk. (ASB does not hold
inventories of foreign currency, and it does not have material exposure to
equity price volatility).
Thrift Bulletin 13a (TB 13a), adopted by the OTS on December 1, 1998, provides
guidance on the management of interest rate 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. TB 13a also provides quantitative guidelines for an initial
assessment of an institution's level of interest rate risk. Examiners have
broad discretion in implementing those guidelines. Finally, TB 13a also
provides guidelines concerning the factors examiners consider in assessing the
quality of an institution's risk management systems and procedures. These
factors include, among others, consideration of various interest-rate
sensitivity measures in the context of the institution's regulatory capital
position. Examiners will base their conclusions about an institution's level of
interest rate risk--the first dimension for determining the "S" component
rating--primarily on the interest rate sensitivity of the institution's net
portfolio value. The two specific measures of risk that will receive examiners'
primary attention are the Interest Rate Sensitivity Measure and the Post-shock
Net Present Value (NPV) Ratio. The "Interest Rate Sensitivity Measure" is
defined as the magnitude of the decline in an institution's NPV Ratio that
occurs as a result of an adverse rate shock of 200 basis points. This measure
equals the difference between an institution's Pre-shock NPV Ratio and its Post-
shock NPV Ratio and is expressed in basis points. "Post-shock NPV Ratio" is a
ratio determined by dividing an institution's NPV by the present value of its
assets, where both the numerator and the denominator are measured after a 200
basis point increase or decrease in market interest rates, whichever produces a
smaller ratio. In assessing the level of interest rate risk, a high (i.e.,
risky) Interest Rate Sensitivity Measure, by itself, may not cause supervisory
concern when the institution has a strong capital position. Because an
institution's risk of failure is linked to capital and, hence, to its ability to
absorb adverse economic shocks, an institution with a high level of economic
capital (i.e., NPV) may be able to support a high Interest Rate Sensitivity
Measure. The Post-shock NPV Ratio is a more comprehensive gauge of risk than
the Interest Rate Sensitivity Measure because it incorporates estimates of the
current economic value of an institution's portfolio, in addition to the
reported capital level and interest rate risk sensitivity.
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.
The OTS regularly conducts "safety and soundness" examinations of ASB on
generally a thirteen-month cycle. In accordance with TB 69, each CAMELS
component is examined and given a component rating. An overall CAMELS rating is
also given, after taking into account all of the component ratings. An
institution, its directors, officers and employees, are prohibited from
disclosing in any manner the OTS's report of its safety and soundness
examination or the component and overall CAMELS rating thereof to any person or
organization not officially
44
<PAGE>
connected with the institution as officer, director, employee, attorney, or
auditor, except as provided in 12 C.F.R. section 510.5. Independent auditors may
be provided access to the report of examination only after providing a written
statement that they will not disclose the report or any portion of it.
During 2000, the OTS has conducted CRA, compliance, systems, holding company and
safety and soundness examinations of ASB. The most recent OTS safety and
soundness examination, covering the period from January 1, 1999, up to and
including March 31, 2000, was completed on June 16, 2000 and ASB was not made
subject to (and is not subject to) any formal regulatory or administrative
direction or supervision such as a "memorandum of understanding" or a "cease and
desist" order following that examination.
ASB is undertaking all corrective actions requested by the OTS during the course
of its recent examinations and does not expect such corrective actions to have a
material adverse effect on its financial condition or results of operations.
Federal Thrift Charter
----------------------
In November 1999, Congress passed the Gramm-Leach-Bliley Act of 1998 (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 further restricts the creation of so-called "unitary savings and loan
holding companies" (i.e., companies such as HEI whose subsidiaries include one
or more savings associations and one or more nonfinancial subsidiaries), the
unitary savings and loan holding company relationship among HEI, HEIDI and ASB
is "grandfathered" under the Act so that HEI and its subsidiaries will be able
to continue to engage in their current activities. It is too early to assess
the net effect of the Act on ASB's competitive position. On the one hand, the
availability of "one-stop shopping" for financial services might increase
competitive pressures on ASB. On the other hand, the restriction on the creation
of new unitary savings and loan association holding companies may decrease
competitive pressure by reducing the incentive to create new thrifts. Under the
Act, any proposed acquisition of ASB would have to satisfy applicable statutory
and regulatory requirements and potential acquirers of ASB would most likely be
limited to companies that are already qualified as, or capable of qualifying as,
either a traditional savings and loan association holding company or a bank
holding company, or as one of the newly authorized financial holding companies
permitted under the Act.
In addition to its effects upon competition, the Act might result in increased
costs for ASB. For example, the Act imposes on financial institutions an
obligation to protect the security and confidentiality of its customers'
nonpublic personal information, and directs, among others, the FDIC and the OTS
to establish appropriate standards to protect such information and the use
thereof. On June 1, 2000, the FDIC and the OTS, among others, issued joint rules
to implement in part the provisions of the Act concerning the disclosure of
customers' nonpublic information and have set a required implementation date no
later than July 1, 2001. 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. ASB currently has in place a
policy concerning customer privacy and believes that any additional compliance
costs would not be significant.
International power
-------------------
<TABLE>
<CAPTION>
Three months ended
September 30, %
------------------------------
(in thousands) 2000 1999 change Primary reason(s) for significant change
-------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Revenues......... $(5,719) $ 933 NM Losses from HEIPC's indirect investment in
EAPRC
Operating loss... (8,757) (1,382) (534) Losses from the EAPRC investment and
additional expenses related to the investment
</TABLE>
45
<PAGE>
<TABLE>
<CAPTION>
Nine months ended
September 30, %
-------------------------------------
(in thousands) 2000 1999 change Primary reason(s) for significant change
--------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Revenues......... $ (8,004) $ 3,257 NM Losses from HEIPC's indirect investment in
EAPRC
Operating loss... (17,639) (3,494) (405) Losses from the EAPRC investment and
additional expenses related to the investment
</TABLE>
NM Not meaningful.
HEIPC was formed in 1995 and its direct and indirect subsidiaries have been
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. In September 2000, HPG recovered this amount from GPA.
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 EPA. 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 a satisfactory 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 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 intended to
put the HEIPC Group in a position to participate in the anticipated
privatization of the National Power Corporation and growth in the electric
distribution business in the Philippines.
On March 7, 2000, an indirect subsidiary of HEIPC acquired a 50% interest in
EPHE, 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. EPHE 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 third quarter and first nine 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
46
<PAGE>
Group). The HEIPC Group accounts for its investment in EPHE 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 nine months ended September 30, 2000 thus reflects results of
the HEIPC Group's operations for the months of December 1999 and January through
August 2000 (including the results of EPHE under the equity method of accounting
from March 7, 2000) and the results for the quarter ended September 30, 2000
thus reflects results for the months of June, July and August 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 third quarter and first nine months of 2000.
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, July, August and September 2000 was approximately $143, $170, $153,
$163, $175, $149 and $171, 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 and has purchased call option contracts at $159.75 per metric ton and sold
put option contracts at $120 per metric ton for approximately 30% of its
anticipated purchases from January 1 to June 30, 2001.
As of September 30, 2000, the EAPRC Group had approximately $200 million in U.S.
dollar denominated debt. From March 7, 2000 (acquisition date) to August 31,
2000, the high and low Philippine peso (PhP) exchange rate was PhP40.82 = $1 and
PhP45.22 = $1, respectively, an 11% fluctuation. Due to the deterioration of the
exchange rate from March 7 to August 31, 2000, as of September 30, 2000 the
HEIPC Group incurred a loss of approximately $7 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
(from PhP51.00 = $1) in the Philippine peso exchange rate based on this position
would be approximately $8 million (assuming no hedges are in place). As of
November 3, 2000, the exchange rate had further deteriorated to PhP51.00 = $1.
To reduce its near-term exposure to devaluation in the Philippine peso exchange
rate, the EAPRC Group purchased nondeliverable and deliverable forward contracts
and nondeliverable option contracts (collectively the FX Contracts) to cover
substantially all of its U.S. dollar denominated debt. The FX Contracts have
maturities from October 2000 through January 2001 at rates ranging from PhP47.00
to PhP48.30 = $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
the Company`s 2000 earnings to be lower than its earnings in 1999. The EAPRC
Group continues to evaluate strategies to reduce its exposure to future fuel oil
price and foreign currency fluctuations.
As of September 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.
47
<PAGE>
Other
-----
<TABLE>
<CAPTION>
Three months ended
September 30, %
---------------------------------
(in thousands) 2000 1999 change Primary reason(s) for significant change
------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Revenues......... $ (38) $11,610 NM In November 1999, HTB sold YB and
substantially all of its operating assets
for a nominal gain. Third quarter 1999
includes $12 million of HTB/YB revenues.
Operating loss... (1,005) (3,458) (71) $2 million estimated loss on HTB's sale of
YB and most of its other assets which was
recorded in the third quarter of 1999 and
reversed in the fourth quarter of 1999, and
lower corporate expenses
</TABLE>
<TABLE>
<CAPTION>
Nine months ended
September 30, %
----------------------------------
(in thousands) 2000 1999 Change Primary reason(s) for significant change
-------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Revenues......... $ 1,042 $39,119 (97) In November 1999, HTB sold YB and
substantially all of its operating assets
for a nominal gain. The first nine months
of 1999 includes $38 million of HTB/YB
revenues.
Operating loss... (5,545) (4,761) (16) No maritime freight transportation and
harbor assist operations in the first nine
months of 2000
</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 an operating loss of $0.7 million in the third quarter of
1999 and operating income of $1.5 million in the first nine months of 1999.
Discontinued operations
-----------------------
See note (10) in HEI's "Notes to consolidated financial statements."
48
<PAGE>
Contingencies
-------------
See note (9) and note (5) in HEI's and HECO's respective "Notes to consolidated
financial statements" for discussions of contingencies.
Recent accounting pronouncements
--------------------------------
See note (8) and note (7) 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) September 30, 2000 December 31, 1999
---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Short-term borrowings............................. $ 94 4% $ 152 7%
Long-term debt.................................... 1,080 47 978 44
HEI- and HECO-obligated preferred
securities of trust subsidiaries............... 200 9 200 9
Preferred stock of subsidiaries................... 34 2 34 2
Minority interests................................ 1 - 1 -
Common stock equity............................... 873 38 848 38
----------- ---------- ----------- ----------
$2,282 100% $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 nine months of 2000, net cash provided by operating activities of
consolidated HEI was $229 million. Net cash used in investing activities was
$339 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 $90 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
increases in the amount of or an acceleration of capital expenditures of the
electric utilities.
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
49
<PAGE>
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 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) September 30, 2000 December 31, 1999
------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Short-term borrowings......................... $ 82 5% $ 107 6%
Long-term debt................................ 659 39 646 38
HECO-obligated preferred securities of trust
subsidiaries................................. 100 6 100 6
Preferred stock............................... 34 2 34 2
Common stock equity........................... 829 48 806 48
----------- ---------- ------------- ----------
$1,704 100% $1,693 100%
=========== ========== ============= ==========
</TABLE>
Operating activities provided $155 million in net cash during the first nine
months of 2000. Investing activities used net cash of $82 million, primarily for
capital expenditures. Financing activities used net cash of $71 million,
including $56 million for the payment of common and preferred dividends and
preferred securities distributions and $25 million for the net repayment of
short-term borrowings, partially offset by a $13 million net increase in long-
term debt.
The electric utilities' consolidated financing requirements for 2000 through
2004, including net capital expenditures and long-term debt 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 September 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 September 30, 2000, an additional $65
million of special purpose revenue bonds remains 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.
50
<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>
<CAPTION>
September 30, December 31, %
(in millions) 2000 1999 change
--------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Total assets.......................................... $5,981 $5,848 2
Available-for-sale investment securities.............. 108 - NM
Held-to-maturity investment and
mortgage/asset-backed securities.................. 2,193 2,160 2
Loans receivable, net................................. 3,223 3,212 -
Deposit liabilities................................... 3,558 3,492 2
Securities sold under agreements to repurchase........ 585 661 (11)
Advances from Federal Home Loan Bank.................. 1,309 1,189 10
</TABLE>
NM Not meaningful.
As of September 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 nine months of 2000, net cash provided by ASB's operating
activities was $61 million. Net cash used in ASB's investing activities was $168
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 $85 million largely due to net increases of $67 million
in deposit liabilities and $120 million in advances in Federal Home Loan Bank,
partly offset by a net decrease of $91 million in securities sold under
agreements to repurchase and $19 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 September
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 September 30, 2000, ASB was in compliance with the OTS minimum
capital requirements (noted in parentheses) with a tangible capital ratio of
5.9% (1.5%), a core capital ratio of 5.9% (4.0%) and a risk-based capital ratio
of 11.2% (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, "Financial condition - Liquidity and capital resources," 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.
51
<PAGE>
U.S. Treasury yields at September 30, 2000 and December 31, 1999 were as
follows:
<TABLE>
<CAPTION>
September 30, 2000 December 31, 1999
------------------ -----------------
<S> <C> <C>
3 month 6.20% 5.31%
1 year 6.08 5.96
5 year 5.84 6.34
10 year 5.80 6.44
30 year 5.88 6.48
</TABLE>
The 3 month U.S. Treasury yield increased 89 basis points and the 30 year yield
decreased 60 basis points from December 31, 1999 to September 30, 2000.
Management believes that with the current inverted yield curve there was an
unfavorable, but immaterial, change between December 31, 1999 and September 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. Collective bargaining agreements
In August 2000, HECO, MECO and HELCO employees represented by the International
Brotherhood of Electrical Workers, AFL-CIO, Local 1260, ratified new collective
bargaining agreements covering approximately 62% of the employees of HECO, MECO
and HELCO. The new collective bargaining agreements (including benefit
agreements) cover a three-year period from November 1, 2000 through October 31,
2003. The main provisions of the agreements include noncompounded wage increases
of 2.25% effective November 1, 2000, 2.5% effective November 1, 2001 and 2.5%
effective November 1, 2002. The agreements also included increased employee
contributions to medical premiums.
B. EPA inspections at HECO's Waiau and Honolulu generating stations
In September 1999, the EPA conducted unannounced National Pollutant Discharge
Elimination System permit compliance inspections at HECO's Waiau and Honolulu
generating stations. The resulting compliance inspection report issued by the
EPA on December 22, 1999 cited procedural deficiencies in HECO's self-monitoring
program. HECO submitted a response to the EPA's findings on January 27, 2000 and
HECO has addressed the cited deficiencies. In September 2000, HECO and the EPA
signed consent agreements under which HECO will be required to pay $200,000 in
penalties. The consent agreements are subject to public comments and final EPA
approval.
C. 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 (PSC) 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;
52
<PAGE>
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.
On August 10, 2000, HELCO paid its PSC tax monthly installment under protest and
filed a complaint against the State in Tax Appeal Court. On August 20, 2000,
HELCO paid its first semi-annual real property tax installment on the March
assessment under protest, consistent with the real property tax appeal filed in
Tax Appeal court.
The Tax Appeal Court has facilitated settlement discussions among the utilities,
the County of Hawaii and the State. Discussions have expanded to include the
other counties as well. In these settlement discussions, the parties are
discussing a resolution which would involve dividing the PSC tax revenues
between the State and the Counties. Details of the tentative settlement are
still being negotiated.
On September 20, 2000, the Hawaii County Council passed Bill 276, Draft 3, which
attempts to validate the methodology used in the April amended assessment and
would allow the County to use the values in the annual financial reports
submitted to the PUC, effective January 1, 2001. However, the ordinance
provides that the County will not impose this methodology if enabling
legislation is passed, which is consistent with the preliminary settlement
discussions described above.
D. Ratio of earnings to fixed charges
HEI and subsidiaries
Ratio of earnings to fixed charges excluding interest on ASB deposits
<TABLE>
<CAPTION>
Nine months Years ended December 31,
--------------------------------------------------------------------
ended
September 30, 2000 1999 1998 1997 1996 1995
----------------------- ----------- ---------- --------- ---------- -----------
<S> <C> <C> <C> <C> <C>
1.71 1.80 1.85 1.89 1.93 2.02
======================= =========== ========== ========= ========== ===========
</TABLE>
Ratio of earnings to fixed charges including interest on ASB deposits
<TABLE>
<CAPTION>
Nine months Years ended December 31,
--------------------------------------------------------------------
Ended
September 30, 2000 1999 1998 1997 1996 1995
----------------------- ----------- ---------- --------- ---------- -----------
<S> <C> <C> <C> <C> <C>
1.47 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.
HECO and subsidiaries
Ratio of earnings to fixed charges
<TABLE>
<CAPTION>
Nine months Years ended December 31,
--------------------------------------------------------------------
Ended
September 30, 2000 1999 1998 1997 1996 1995
----------------------- ----------- ---------- --------- ---------- -----------
<S> <C> <C> <C> <C> <C>
3.68 3.09 3.33 3.26 3.58 3.46
======================= =========== ========== ========= ========== ===========
</TABLE>
53
<PAGE>
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
HECO Amendment No. 4 to Power Purchase Agreement between HECO and
Exhibit 10.1 Kalaeloa Partners, L.P., dated October 1, 1999
HECO Termination Notice dated December 27, 1999 for Amended and
Exhibit 10.2 Restated Power Purchase Agreement by and between A&B Hawaii,
Inc., through its division, Hawaiian Commercial & Sugar Company,
and MECO, dated November 30, 1989, as amended
HEI Hawaiian Electric Industries, Inc. and subsidiaries
Exhibit 12.1 Computation of ratio of earnings to fixed charges, nine months
ended September 30, 2000 and 1999
HECO Hawaiian Electric Company, Inc. and subsidiaries
Exhibit 12.2 Computation of ratio of earnings to fixed charges, nine months
ended September 30, 2000 and 1999
HEI Hawaiian Electric Industries, Inc. and subsidiaries
Exhibit 27.1 Financial Data Schedule
September 30, 2000 and nine months ended September 30, 2000
HECO Hawaiian Electric Company, Inc. and subsidiaries
Exhibit 27.2 Financial Data Schedule
September 30, 2000 and nine months ended September 30, 2000
HEI First Amendment to Trust Agreement, made and entered into
Exhibit 99.1 August 1, 2000, between Fidelity Management Trust Company and HEI
for the Hawaiian Electric Industries Retirement Savings Plan for
incorporation by reference in the Registration Statement on Forms
S-8 (Regis. No. 333-02103)
HEI Second Amendment to Trust Agreement, made and entered into
Exhibit 99.2 November 1, 2000, between Fidelity Management Trust Company and
HEI for the Hawaiian Electric Industries Retirement Savings Plan
for incorporation by reference in the Registration Statement on
Forms S-8 (Regis. No. 333-02103)
54
<PAGE>
(b) Reports on Form 8-K
Subsequent to June 30, 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.
September 1, 2000 HEI/HECO Item 5. Interim decision and order for HELCO.
(Form 8-K)
October 25, 2000 HEI/HECO Item 5. HEI's October 25, 2000 news release "HEI Reports Third
(Form 8-K) Quarter 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: November 8, 2000 Date: November 8, 2000
55
