<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 March 31, 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.
Class of Common Stock Outstanding May 3, 2000
- ------------------------------------------------------------------------------
Hawaiian Electric Industries, Inc. (Without Par Value)... 32,366,116 Shares
Hawaiian Electric Company, Inc. ($6 2/3 Par Value)....... 12,805,843 Shares
(not publicly traded)
===============================================================================
<PAGE>
Hawaiian Electric Industries, Inc. and subsidiaries
Hawaiian Electric Company, Inc. and subsidiaries
Form 10-Q--Quarter ended March 31, 2000
INDEX
<TABLE>
<CAPTION>
Page No.
<S> <C>
Glossary of terms................................................... ii
Forward-looking information......................................... v
PART I. FINANCIAL INFORMATION
Item 1. Financial statements
Hawaiian Electric Industries, Inc. and subsidiaries
---------------------------------------------------
Consolidated balance sheets (unaudited) -
March 31, 2000 and December 31, 1999..................... 1
Consolidated statements of income (unaudited) -
three months ended March 31, 2000 and 1999............... 2
Consolidated statements of retained earnings (unaudited) -
three months ended March 31, 2000 and 1999............... 3
Consolidated statements of cash flows (unaudited) -
three months ended March 31, 2000 and 1999............... 4
Notes to consolidated financial statements (unaudited)..... 5
Hawaiian Electric Company, Inc. and subsidiaries
------------------------------------------------
Consolidated balance sheets (unaudited) -
March 31, 2000 and December 31, 1999..................... 10
Consolidated statements of income (unaudited) -
three months ended March 31, 2000 and 1999............... 11
Consolidated statements of retained earnings (unaudited) -
three months ended March 31, 2000 and 1999............... 11
Consolidated statements of cash flows (unaudited) -
three months ended March 31, 2000 and 1999............... 12
Notes to consolidated financial statements (unaudited)..... 13
Item 2. Management's discussion and analysis of financial condition
and results of operations................................ 25
Item 3. Quantitative and qualitative disclosures about market risk. 35
PART II. OTHER INFORMATION
Item 1. Legal proceedings.......................................... 36
Item 2. Changes in securities and use of proceeds.................. 36
Item 4. Submission of matters to a vote of security holders........ 36
Item 5. Other information.......................................... 37
Item 6. Exhibits and reports on Form 8-K........................... 39
Signatures.......................................................... 40
</TABLE>
i
<PAGE>
Hawaiian Electric Industries, Inc. and subsidiaries
Hawaiian Electric Company, Inc. and subsidiaries
Form 10-Q--Quarter ended March 31, 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
ASBR ASB Realty Corporation
BIF Bank Insurance Fund
BLNR Board of Land and Natural Resources of the State of Hawaii
CDUP Conservation District Use Permit
Company Hawaiian Electric Industries, Inc. and its direct and indirect subsidiaries,
including, without limitation, Hawaiian Electric Company, Inc., Maui Electric
Company, Limited, Hawaii Electric Light Company, Inc., HECO Capital Trust I, HECO
Capital Trust II, HEI Diversified, Inc., American Savings Bank, F.S.B. and its
subsidiaries, HEI Power Corp. and its subsidiaries, Pacific Energy Conservation
Services, Inc., HEI District Cooling, Inc., ProVision Technologies, Inc., HEI
Properties, Inc., HEI Leasing, Inc., Hycap Management, Inc., Hawaiian Electric
Industries Capital Trust I, Hawaiian Electric Industries Capital Trust II, Hawaiian
Electric Industries Capital Trust III, HEI Preferred Funding, LP, The Old Oahu Tug
Service, Inc. (formerly Hawaiian Tug & Barge Corp.) and Malama Pacific Corp. and
its subsidiaries
Consumer Division of Consumer Advocacy, Department of Commerce and Consumer Affairs of the
Advocate State of Hawaii
D&O Decision and order
DLNR Department of Land and Natural Resources of the State of Hawaii
DOH Department of Health of the State of Hawaii
EAPRC East Asia Power Resources Corporation
Enserch Enserch Development Corporation
EPHC El Paso Philippines Holding Company, Inc.
EPA Environmental Protection Agency - federal
</TABLE>
ii
<PAGE>
GLOSSARY OF TERMS, continued
<TABLE>
<CAPTION>
Terms Definitions
- ----- -----------
<S> <C>
FASB Financial Accounting Standards Board
FDIC Federal Deposit Insurance Corporation
federal U.S. Government
FHLB Federal Home Loan Bank
FICO Financing Corporation
GAAP Generally accepted accounting principles
GPA Guam Power Authority
Hamakua Hamakua Energy Partners, L.P., formerly known as Encogen Hawaii, L.P.
Partners
HCPC Hilo Coast Power Company
HECO Hawaiian Electric Company, Inc., a wholly owned electric utility subsidiary of
Hawaiian Electric Industries, Inc. and parent company of Maui Electric Company,
Limited, Hawaii Electric Light Company, Inc., HECO Capital Trust I and HECO Capital
Trust II
HEI Hawaiian Electric Industries, Inc., direct parent company of Hawaiian Electric
Company, Inc., HEI Diversified, Inc., HEI Power Corp., Pacific Energy Conservation
Services, Inc., HEI District Cooling, Inc., ProVision Technologies, Inc., HEI
Properties, Inc., HEI Leasing, Inc., Hycap Management, Inc., Hawaiian Electric
Industries Capital Trust I, Hawaiian Electric Industries Capital Trust II, Hawaiian
Electric Industries Capital Trust III, The Old Oahu Tug Service, Inc. (formerly
Hawaiian Tug & Barge Corp.) and Malama Pacific Corp.
HEIDI HEI Diversified, Inc., a wholly owned subsidiary of Hawaiian Electric Industries,
Inc. and the parent company of American Savings Bank, F.S.B.
HEIII HEI Investments, Inc. (formerly HEI Investment Corp.), a subsidiary of HEI Power
Corp.
HEIPC HEI Power Corp., a wholly owned subsidiary of Hawaiian Electric Industries, Inc.,
and the parent company of several subsidiaries
HEIPC
Group HEI Power Corp. and its subsidiaries
HELCO Hawaii Electric Light Company, Inc., a wholly owned electric utility subsidiary of
Hawaiian Electric Company, Inc.
</TABLE>
iii
<PAGE>
GLOSSARY OF TERMS, continued
<TABLE>
<CAPTION>
Terms Definitions
- ----- -----------
<S> <C>
HPG HEI Power Corp. Guam, a wholly owned subsidiary of HEI Power Corp.
IPP Independent power producer
KCP Kawaihae Cogeneration Partners
KWH Kilowatthour
MECO Maui Electric Company, Limited, a wholly owned electric utility subsidiary of
Hawaiian Electric Company, Inc.
MPC Malama Pacific Corp., a wholly owned subsidiary of Hawaiian Electric Industries,
Inc. and parent company of several real estate subsidiaries. On September 14, 1998,
the HEI Board of Directors adopted a plan to exit the residential real estate
development business engaged in by Malama Pacific Corp. and its subsidiaries.
MW Megawatt
NOV Notice of Violation
OTS Office of Thrift Supervision, Department of Treasury
PSD permit Prevention of Significant Deterioration/Covered Source permit
PUC Public Utilities Commission of the State of Hawaii
ROACE Return on average common equity
SAIF Savings Association Insurance Fund
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" within the
meaning of the Private Securities Litigation Reform Act of 1995 (the Act).
Forward-looking statements include statements which are predictive in nature,
which depend upon or refer to future events or conditions, which include words
such as "expects", "anticipates", "intends", "plans", "believes", "estimates" or
similar expressions. In addition, any statements concerning future financial
performance (including future revenues, earnings or growth rates), ongoing
business strategies or prospects and possible future actions, which may be
provided by management are also forward-looking statements as defined by the
Act. 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 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;
. new technological developments;
. 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 and changes in taxation;
. the results of financing efforts;
. the timing and extent of changes in interest rates;
. the timing and extent of changes in foreign currency exchange rates;
. the convertibility and availability of foreign currency;
. 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 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>
March 31, December 31,
(in thousands) 2000 1999
- ----------------------------------------------------------------------------------------------------
<S> <C> <C>
Assets
- ------
Cash and equivalents................................... $ 202,583 $ 199,906
Accounts receivable and unbilled revenues, net......... 153,790 154,605
Investment and mortgage/asset-backed securities........ 2,255,257 2,159,945
Loans receivable, net.................................. 3,205,008 3,211,878
Property, plant and equipment, net of accumulated
depreciation of $1,158,137 and $1,129,078........... 2,063,430 2,066,195
Regulatory assets...................................... 115,885 114,759
Other.................................................. 356,996 276,997
Goodwill and other intangibles......................... 104,788 106,741
---------------- -----------------
$8,457,737 $8,291,026
================ =================
Liabilities and stockholders' equity
- ------------------------------------
Liabilities
Accounts payable....................................... $ 117,835 $ 117,447
Deposit liabilities.................................... 3,558,024 3,491,655
Short-term borrowings.................................. 232,859 151,833
Securities sold under agreements to repurchase......... 645,406 661,215
Advances from Federal Home Loan Bank................... 1,227,112 1,189,081
Long-term debt......................................... 983,881 977,529
Deferred income taxes.................................. 180,974 181,277
Contributions in aid of construction................... 205,481 206,302
Other.................................................. 211,724 231,854
---------------- -----------------
7,363,296 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..................................... 876 841
---------------- -----------------
235,282 235,247
---------------- -----------------
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: 32,315 shares
and 32,213 shares..................................... 667,957 665,335
Retained earnings...................................... 191,202 182,251
---------------- -----------------
859,159 847,586
---------------- -----------------
$8,457,737 $8,291,026
================ =================
</TABLE>
See accompanying "Notes to consolidated financial statements."
1
<PAGE>
<TABLE>
<CAPTION>
Hawaiian Electric Industries, Inc. and subsidiaries
Consolidated statements of income (unaudited)
Three months ended March 31,
(in thousands, except per share amounts and --------------------------------
ratio of earnings to fixed charges) 2000 1999
- ---------------------------------------------------------------- --------------------------------
<S> <C> <C>
Revenues
Electric utility........................................... $289,405 $237,791
Savings bank............................................... 110,267 100,280
International power........................................ 1,665 992
Other...................................................... 538 13,184
------------ ---------------
401,875 352,247
------------ ---------------
Expenses
Electric utility........................................... 237,775 196,890
Savings bank............................................... 91,077 85,149
International power........................................ 2,115 1,608
Other...................................................... 2,706 14,568
------------ ---------------
333,673 298,215
------------ ---------------
Operating income (loss)
Electric utility........................................... 51,630 40,901
Savings bank............................................... 19,190 15,131
International power........................................ (450) (616)
Other...................................................... (2,168) (1,384)
------------ ---------------
68,202 54,032
------------ ---------------
Interest expense--other than savings bank.................. (19,072) (17,888)
Allowance for borrowed funds used during construction...... 691 640
Preferred stock dividends of subsidiaries.................. (498) (627)
Preferred securities distributions of trust subsidiaries... (4,009) (3,999)
Allowance for equity funds used during construction........ 1,269 1,039
------------ ---------------
Income before income taxes................................. 46,583 33,197
Income taxes............................................... 17,607 12,443
------------ ---------------
Net income................................................. $ 28,976 $ 20,754
============ ===============
Basic earnings per common share............................ $ 0.90 $ 0.65
============ ===============
Diluted earnings per common share.......................... $ 0.90 $ 0.64
============ ===============
Dividends per common share................................. $ 0.62 $ 0.62
============ ===============
Weighted-average number of common shares outstanding....... 32,266 32,153
Dilutive effect of stock options and dividend
equivalents........................................... 106 83
------------ ---------------
Adjusted weighted-average shares........................... 32,372 32,236
============ ===============
Ratio of earnings to fixed charges (SEC method)
Excluding interest on ASB deposits.................... 1.86 1.76
============ ===============
Including interest on ASB deposits.................... 1.57 1.43
============ ===============
</TABLE>
See accompanying "Notes to consolidated financial statements."
2
<PAGE>
<TABLE>
<CAPTION>
Hawaiian Electric Industries, Inc. and subsidiaries
Consolidated statements of retained earnings (unaudited)
Three months ended March 31,
--------------------------------
(in thousands) 2000 1999
- --------------------------------------------------------------------------------------------------
<S> <C> <C>
Retained earnings, beginning of period..................... $182,251 $165,252
Net income................................................. 28,976 20,754
Common stock dividends..................................... (20,025) (19,949)
------------ ---------------
Retained earnings, end of period........................... $191,202 $166,057
============ ===============
</TABLE>
See accompanying "Notes to consolidated financial statements."
3
<PAGE>
Hawaiian Electric Industries, Inc. and subsidiaries
Consolidated statements of cash flows (unaudited)
<TABLE>
<CAPTION>
Three months ended
March 31,
-----------------------------
(in thousands) 2000 1999
- ---------------------------------------------------------------------------------------------------
<S> <C> <C>
Cash flows from operating activities
Net income......................................................... $ 28,976 $ 20,754
Adjustments to reconcile net income to net cash provided by
operating activities
Depreciation of property, plant and equipment................ 27,143 27,190
Other amortization........................................... 1,476 4,261
Provision for loan losses.................................... 3,000 2,920
Deferred income taxes........................................ (300) (130)
Allowance for equity funds used during construction.......... (1,269) (1,039)
Changes in assets and liabilities
Decrease in accounts receivable and unbilled revenues,
net................................................... 815 11,979
Increase in accounts payable........................... 388 5,111
Changes in other assets and liabilities................ 2,153 (53,665)
---------- ------------
Net cash provided by operating activities.......................... 62,382 17,381
---------- ------------
Cash flows from investing activities
Held-to-maturity mortgage/asset-backed securities purchased........ (151,425) (249,256)
Principal repayments on held-to-maturity mortgage/asset-backed
securities........................................................ 58,434 191,956
Loans receivable originated and purchased.......................... (110,360) (208,096)
Principal repayments on loans receivable........................... 103,611 159,420
Capital expenditures............................................... (25,080) (22,174)
Acquisition of Philippines investment.............................. (87,500) -
Other.............................................................. 7,767 4,517
----------- -----------
Net cash used in investing activities.............................. (204,553) (123,633)
----------- -----------
Cash flows from financing activities
Net increase (decrease) in deposit liabilities..................... 66,369 (49,465)
Net increase in short-term borrowings with original maturities of
three months or less.............................................. 81,026 19,266
Net increase in retail repurchase agreements....................... 2,280 765
Proceeds from securities sold under agreements to repurchase....... 218,728 132,000
Repurchase of securities sold under agreements to repurchase....... (240,085) (186,000)
Proceeds from advances from Federal Home Loan Bank................. 218,531 32,000
Principal payments on advances from Federal Home Loan Bank......... (180,500) (30,000)
Proceeds from issuance of long-term debt........................... 6,304 3,594
Redemption of electric utility subsidiaries' preferred stock....... - (37,068)
Net proceeds from issuance of common stock......................... 2,590 2,162
Common stock dividends............................................. (20,025) (19,949)
Preferred securities distributions of trust subsidiaries........... (4,009) (3,999)
Other.............................................................. (6,361) (4,378)
---------- ------------
Net cash provided by (used in) financing activities................ 144,848 (141,072)
---------- ------------
Net increase (decrease) in cash and equivalents.................... 2,677 (247,324)
Cash and equivalents, beginning of period.......................... 199,906 412,254
---------- ------------
Cash and equivalents, end of period................................ $ 202,583 $ 164,930
========== ============
</TABLE>
See accompanying "Notes to consolidated financial statements."
4
<PAGE>
Hawaiian Electric Industries, Inc. and subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2000 and 1999
(Unaudited)
- --------------------------------------------------------------------------------
(1) Basis of presentation
- -------------------------
The accompanying unaudited consolidated financial statements have been prepared
in conformity with generally accepted accounting principles (GAAP) for interim
financial information and with the instructions to SEC Form 10-Q and Article 10
of Regulation S-X. Accordingly, they do not include all of the information and
footnotes required by GAAP for complete financial statements. In preparing the
financial statements, management is required to make estimates and assumptions
that affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the balance sheet and the
reported amounts of revenues and expenses for the period. Actual results could
differ significantly from those estimates. The accompanying unaudited
consolidated financial statements should be read in conjunction with the
consolidated financial statements and the notes thereto incorporated by
reference in HEI's Annual Report on SEC Form 10-K for the year ended December
31, 1999.
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 March 31, 2000 and
December 31, 1999, and the results of its operations and its cash flows for the
three months ended March 31, 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) 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 March 31, 2000
Revenues from external customers..... 289,391 110,263 1,654 567 401,875
Intersegment revenues................ 14 4 11 (29) -
-------------- --------------- ----------------- --------------- -------------
Revenues......................... 289,405 110,267 1,665 538 401,875
============== =============== ================= =============== =============
Income (loss) before income taxes.... 38,902 17,783 (659) (9,443) 46,583
Income taxes (benefit)............... 15,177 6,562 262 (4,394) 17,607
-------------- --------------- ----------------- --------------- -------------
Net income (loss)................ 23,725 11,221 (921) (5,049) 28,976
============== =============== ================= =============== =============
Assets*.............................. 2,290,877 5,943,462 192,196 31,202 8,457,737
============== =============== ================= =============== =============
Three months ended March 31, 1999
Revenues from external customers..... 237,791 100,272 992 13,192 352,247
Intersegment revenues................ - 8 - (8) -
-------------- --------------- ----------------- --------------- -------------
Revenues......................... 237,791 100,280 992 13,184 352,247
============== =============== ================= =============== =============
Income (loss) before income taxes.... 27,701 13,781 (686) (7,599) 33,197
Income taxes (benefit)............... 10,620 5,256 103 (3,536) 12,443
-------------- --------------- ----------------- --------------- -------------
Net income (loss)................ 17,081 8,525 (789) (4,063) 20,754
============== =============== ================= =============== ============
Assets*.............................. 2,255,148 5,585,313 44,502 153,711 8,038,674
============== =============== ================= =============== ============
</TABLE>
* At March 31.
Revenues attributed to foreign countries for the periods identified above were
not significant.
5
<PAGE>
(3) Electric utility subsidiary
- --------------------------------
For Hawaiian Electric Company, Inc.'s consolidated financial information,
including its commitments and contingencies, see pages 10 through 24.
(4) Savings bank subsidiary
- ----------------------------
Selected financial information
American Savings Bank, F.S.B. and subsidiaries
Consolidated balance sheet data
<TABLE>
March 31, December 31,
(in thousands) 2000 1999
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Assets
Cash and equivalents............................................................ $ 194,572 $ 192,807
Held-to-maturity investment securities.......................................... 188,671 186,799
Held-to-maturity mortgage/asset-backed securities............................... 2,066,586 1,973,146
Loans receivable, net........................................................... 3,205,008 3,211,878
Other........................................................................... 183,837 176,836
Goodwill and other intangibles.................................................. 104,788 106,741
------------------ --------------------
$5,943,462 $5,848,207
================== ====================
Liabilities and equity
Deposit liabilities............................................................. $3,558,024 $3,491,655
Securities sold under agreements to repurchase.................................. 645,406 661,215
Advances from Federal Home Loan Bank............................................ 1,227,112 1,189,081
Other........................................................................... 70,074 70,239
------------------ --------------------
5,500,616 5,412,190
Minority interests.............................................................. 3,357 3,300
Preferred stock................................................................. 75,113 75,113
Common stock equity............................................................. 364,376 357,604
------------------ --------------------
$5,943,462 $5,848,207
================== ====================
</TABLE>
American Savings Bank, F.S.B. and subsidiaries
Consolidated income statement data
<TABLE>
<CAPTION>
Three months ended March 31,
----------------------------------------------
(in thousands) 2000 1999
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Interest income................................................................... $102,508 $ 92,947
Interest expense.................................................................. 55,718 51,456
----------------- --------------------
Net interest income............................................................... 46,790 41,491
Provision for loan losses......................................................... (3,000) (2,920)
Other income...................................................................... 7,759 7,333
Operating, administrative and general expenses.................................... (32,359) (30,773)
----------------- --------------------
Operating income.................................................................. 19,190 15,131
Income taxes...................................................................... 6,562 5,256
----------------- --------------------
Income before preferred stock dividends........................................... 12,628 9,875
Preferred stock dividends......................................................... 1,350 1,350
Minority interests................................................................ 57 -
----------------- --------------------
Net income........................................................................ $ 11,221 $ 8,525
================= ====================
</TABLE>
6
<PAGE>
Subsequent event
In April 2000, ASB Realty Corporation issued preferred stock with an aggregate
liquidation preference of $187 million to ASB. ASB plans to sell $60 million of
the preferred stock in a private placement prior to June 30, 2000, which sale
will increase ASB's capital for regulatory purposes.
(5) International power subsidiary
- -----------------------------------
China project
In 1998 and 1999, HEIPC Group acquired what is now a 75% interest in a joint
venture, Baotou Tianjiao Power Co., Ltd., formed to design, construct, own,
operate and manage a 200 megawatt (MW) (net) coal-fired power plant to be
located in Inner Mongolia, People's Republic of China. The power plant is being
built "inside the fence" for Baotou Iron & Steel (Group) Co., Ltd. (Baotou
Steel). The project has received approval from both the National and Inner
Mongolia governments. Construction had commenced and the first of the two units
had been expected to be online by early 2001, and the second six months later.
However, the Inner Mongolia Power Company (IMPC), which owns and operates the
electricity grid in Inner Mongolia, has refused to enter into an interconnection
arrangement with the joint venture. The HEIPC Group does not believe that it is
prudent to continue construction without an interconnection arrangement whose
terms are consistent with the project as approved by the National and Inner
Mongolia governments. Under the Power Purchase Contract between the joint
venture and Baotou Steel, it is Baotou Steel's responsibility to secure an
interconnection arrangement with IMPC. Accordingly, the HEIPC Group believes
Baotou Steel is now in default. The HEIPC Group intends to cause the joint
venture to pursue remedies for the default and, if not cured, withdraw from the
project (including the HEIPC Group's commitment to invest up to an additional
$86 million toward the project, subject to certain conditions) and seek recovery
of its investment of approximately $25 million to date. Management cannot
predict the outcome of such efforts, nor estimate its impairment loss, if any,
at this time. The financial statements do not include any adjustments that might
result from the outcome of this uncertainty.
Philippines investment
On March 7, 2000, an indirect subsidiary of HEIPC acquired a 50% interest in El
Paso Philippines Holding Company, Inc. (EPHC), an indirect subsidiary of El Paso
Energy Corporation (EPEC), for $87 million plus up to an additional $6 million
of payments that are contingent upon future earnings of East Asia Power
Resources Corporation (EAPRC). EPHC owns approximately 91.7% of the common
shares of EAPRC, a Philippines holding company primarily engaged in the electric
generation business in Manila and Cebu through its direct and indirect
subsidiaries, using land and barge-based generating facilities fired by bunker
fuel oil, with total installed capacity of approximately 390 MW. Also on March
7, 2000, HEI entered into an agreement with EPEC to guarantee 50% of EPEC's
payment obligations under an EPEC Guaranty Agreement, up to $10 million. The
Guaranty Agreement supports EAPRC's and East Asia Diesel Power Corporation's
revolving loan facility of up to $20 million. HEI is currently engaged in
discussions with the provider of the loan facility to provide HEI's separate
guaranty of 50% of the obligations under the revolving loan facility in place of
the guaranty agreement with EPEC.
7
<PAGE>
(6) Retirement benefits
- -------------------------
Change in method of calculating market-related value of retirement benefit plan
assets
Since 1993, the Company determined the market-related value of retirement
benefit (pension and other postretirement benefits) plan assets by calculating
the difference between the expected return and the actual return on the fair
value of the plan assets, then amortizing the difference over future years -- 0%
in the first year and 25% in years two to five, and finally subtracting the
unamortized differences for the past four years from fair value. In the first
quarter of 2000, the method of calculating the market-related value of the plan
assets was changed to include a 15% range around the fair value of such assets
(i.e., 85% to 115% of fair value). If the market-related value is outside the
15% range, then the amount outside the range will be recognized immediately in
the calculation of annual net periodic benefit cost. If the market-related value
remains within the 15% range, the Company will continue to amortize the
difference over future years using the amortization method previously used.
This change in accounting principle is preferable because it results in
calculated asset values of the plans that more closely approximate fair value,
while still mitigating the effect of annual fair value fluctuations. No range
was used in prior years as the market-related value of the plan assets has been
within the 15% range at each yearend from 1993 to 1998. Therefore, the
cumulative effect of this change is nil. The effect of the change in accounting
principle on the first quarter of 2000 was to increase net income approximately
$1 million ($0.03 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 $1 million ($0.4 in basic earnings per common share) for the first
quarter 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>
Three months ended March 31,
---------------------------------------------
(in thousands) 2000 1999
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Interest (including interest paid by savings bank, but excluding interest
paid on nonrecourse debt on leveraged leases).............................. $56,493 $58,359
================ ================
Income taxes................................................................ $ 631 $37,106
================ ================
</TABLE>
The decrease in income taxes paid for the three months ended March 31, 2000
compared to the same period in 1999 was primarily due to the payment of
significant federal taxes with the federal tax return extension in 1999.
Supplemental disclosures of noncash activities
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 $1.3 million and $1.0 million for the three months ended March 31, 2000 and
1999, respectively.
8
<PAGE>
(8) Recent accounting pronouncements
- -------------------------------------
Derivative instruments and hedging activities
In June 1998, the Financial Accounting Standards Board (FASB) issued Statement
of Financial Accounting Standards (SFAS) No. 133, "Accounting for Derivative
Instruments and Hedging Activities," which establishes accounting and reporting
standards for derivative instruments and hedging activities and requires that an
entity recognize all derivatives as either assets or liabilities in the balance
sheet and measure those instruments at fair value. The provisions of SFAS No.
133 were amended by SFAS No. 137 to be effective for all fiscal quarters of
fiscal years beginning after June 15, 2000. The Company will adopt SFAS No. 133,
as amended, on January 1, 2001, but management has not yet determined the
impact, if any, of adoption.
(9) Commitments and contingencies
- ----------------------------------
See note (5), "International power subsidiary," above and note (4), "Commitments
and contingencies," in HECO's "Notes to consolidated financial statements."
(10) Discontinued operations--Malama Pacific Corp. (MPC)
- ---------------------------------------------------------
On September 14, 1998, the HEI Board of Directors adopted a plan to exit the
residential real estate development business (engaged by MPC and its
subsidiaries) by September 1999. Accordingly, MPC management commenced a program
to sell all of MPC's real estate assets and investments and HEI reported MPC as
a discontinued operation in the Company's consolidated statements of income in
the third quarter of 1998. In the slow Hawaii real estate market, however, the
plan to dispose of MPC's real estate assets and investments is taking longer
than expected.
As of March 31, 2000, the remaining net assets of the discontinued residential
real estate development operations amounted to $15 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.
(12) Subsequent event - issuance of medium-term notes
- ------------------------------------------------------
In March 1999, HEI filed a registration statement with the SEC to register $300
million of Medium-Term Notes, Series C (Series C Notes). In April 2000, HEI sold
$100 million of its Series C Notes, with $100 million of Series C Notes
remaining available for issuance from time to time. The $100 million of Series C
Notes sold have a floating rate of LIBOR plus 105 basis points (adjusted every
three months and with an initial interest rate of 7.33%) and a maturity date of
April 15, 2003. Simultaneous with the sale of the Series C Notes, however, HEI
entered into a swap agreement with Bank of America, N.A., which effectively
fixes the interest rate on the $100 million of debt at 7.995% until maturity.
9
<PAGE>
<TABLE>
<CAPTION>
Hawaiian Electric Company, Inc. and subsidiaries
Consolidated balance sheets (unaudited)
March 31, December 31,
(in thousands, except par value) 2000 1999
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Assets
Utility plant, at cost
Land.................................................................. $ 29,067 $ 30,952
Plant and equipment................................................... 2,875,920 2,851,126
Less accumulated depreciation......................................... (1,102,639) (1,076,373)
Plant acquisition adjustment, net..................................... 445 458
Construction in progress.............................................. 154,196 151,981
--------------- --------------
Net utility plant............................................... 1,956,989 1,958,144
--------------- --------------
Current assets
Cash and equivalents.................................................. 1,086 1,966
Customer accounts receivable, net..................................... 68,382 68,768
Accrued unbilled revenues, net........................................ 53,032 53,830
Other accounts receivable, net........................................ 1,737 2,172
Fuel oil stock, at average cost....................................... 27,669 34,954
Materials and supplies, at average cost............................... 20,343 20,046
Prepayments and other................................................. 3,463 4,649
--------------- --------------
Total current assets............................................ 175,712 186,385
--------------- --------------
Other assets
Regulatory assets..................................................... 115,885 114,759
Other................................................................. 42,291 43,521
--------------- --------------
Total other assets.............................................. 158,176 158,280
--------------- --------------
$ 2,290,877 $ 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.............................................. 295,542 295,510
Retained earnings..................................................... 434,979 425,206
-------------- --------------
Common stock equity............................................. 815,908 806,103
Cumulative preferred stock - not subject to mandatory redemption...... 34,293 34,293
HECO-obligated mandatorily redeemable preferred securities of trust
subsidiaries holding solely HECO and HECO-guaranteed subordinated
debentures........................................................... 100,000 100,000
Long-term debt, net................................................... 652,381 646,029
-------------- --------------
Total capitalization............................................ 1,602,582 1,586,425
-------------- --------------
Current liabilities
Short-term borrowings................................................. 104,977 107,013
Accounts payable...................................................... 45,566 52,116
Interest and preferred dividends payable.............................. 17,527 8,160
Taxes accrued......................................................... 55,679 66,535
Other................................................................. 15,825 31,485
-------------- --------------
Total current liabilities....................................... 239,574 265,309
-------------- --------------
Deferred credits and other liabilities
Deferred income taxes................................................. 132,523 131,105
Unamortized tax credits............................................... 48,149 48,206
Other................................................................. 62,568 65,462
-------------- --------------
Total deferred credits and other liabilities.................... 243,240 244,773
-------------- --------------
Contributions in aid of construction..................................... 205,481 206,302
-------------- --------------
$ 2,290,877 $ 2,302,809
============== ==============
</TABLE>
See accompanying "Notes to consolidated financial statements."
10
<PAGE>
<TABLE>
<CAPTION>
Hawaiian Electric Company, Inc. and subsidiaries
Consolidated statements of income (unaudited)
Three months ended March 31,
--------------------------------------
(in thousands, except for ratio of earnings to fixed charges) 2000 1999
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Operating revenues......................................................... $288,421 $236,625
-------------- --------------
Operating expenses
Fuel oil................................................................... 75,155 44,878
Purchased power............................................................ 70,226 59,980
Other operation............................................................ 27,741 32,323
Maintenance................................................................ 12,533 13,305
Depreciation............................................................... 24,334 23,365
Taxes, other than income taxes............................................. 27,361 22,896
Income taxes............................................................... 15,193 10,668
-------------- --------------
252,543 207,415
-------------- --------------
Operating income........................................................... 35,878 29,210
-------------- --------------
Other income
Allowance for equity funds used during construction........................ 1,269 1,039
Other, net................................................................. 575 1,071
-------------- --------------
1,844 2,110
-------------- --------------
Income before interest and other charges................................... 37,722 31,320
-------------- --------------
Interest and other charges
Interest on long-term debt................................................. 9,932 9,911
Amortization of net bond premium and expense............................... 442 363
Other interest charges..................................................... 1,897 2,069
Allowance for borrowed funds used during construction...................... (691) (640)
Preferred stock dividends of subsidiaries.................................. 228 258
Preferred securities distributions of trust subsidiaries................... 1,919 1,909
-------------- --------------
13,727 13,870
-------------- --------------
Income before preferred stock dividends of HECO............................ 23,995 17,450
Preferred stock dividends of HECO.......................................... 270 369
-------------- --------------
Net income for common stock................................................ $ 23,725 $ 17,081
============== ==============
Ratio of earnings to fixed charges (SEC method)............................ 3.61 2.85
============== ==============
</TABLE>
<TABLE>
<CAPTION>
Hawaiian Electric Company, Inc. and subsidiaries
Consolidated statements of retained earnings (unaudited)
Three months ended March 31,
--------------------------------------
(in thousands) 2000 1999
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Retained earnings, beginning of period..................................... $425,206 $405,836
Net income for common stock................................................ 23,725 17,081
Common stock dividends..................................................... (13,952) (13,387)
-------------- --------------
Retained earnings, end of period........................................... $434,979 $409,530
============== ==============
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 consolidated financial statements."
</TABLE>
11
<PAGE>
<TABLE>
<CAPTION>
Hawaiian Electric Company, Inc. and subsidiaries
Consolidated statements of cash flows (unaudited)
Three months ended
March 31,
------------------------------------------
(in thousands) 2000 1999
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Cash flows from operating activities
Income before preferred stock dividends of HECO............................ $ 23,995 $ 17,450
Adjustments to reconcile income before preferred stock dividends of HECO
to net cash provided by operating activities
Depreciation of property, plant and equipment........................ 24,334 23,365
Other amortization................................................... 1,069 1,650
Deferred income taxes................................................ 1,418 196
Tax credits, net..................................................... 339 396
Allowance for equity funds used during construction.................. (1,269) (1,039)
Changes in assets and liabilities
Decrease in accounts receivable................................. 821 4,556
Decrease in accrued unbilled revenues........................... 798 5,543
Decrease in fuel oil stock...................................... 7,285 5,373
Increase in materials and supplies.............................. (297) (1,428)
Increase in regulatory assets................................... (513) (23)
Decrease in accounts payable.................................... (6,550) (2,336)
Changes in other assets and liabilities......................... (12,323) (11,851)
-------------- --------------
Net cash provided by operating activities.................................. 39,107 41,852
-------------- --------------
Cash flows from investing activities
Capital expenditures....................................................... (23,848) (17,592)
Contributions in aid of construction....................................... 1,647 3,750
Payments on notes receivable............................................... 138 395
-------------- --------------
Net cash used in investing activities...................................... (22,063) (13,447)
-------------- --------------
Cash flows from financing activities
Common stock dividends..................................................... (13,952) (13,387)
Preferred stock dividends.................................................. (270) (369)
Preferred securities distributions of trust subsidiaries................... (1,919) (1,909)
Proceeds from issuance of long-term debt................................... 6,304 3,594
Redemption of preferred stock.............................................. - (37,068)
Net decrease in short-term borrowings
with original maturities of three months or less........................ (2,036) (10,183)
Other...................................................................... (6,051) (4,509)
-------------- --------------
Net cash used in financing activities...................................... (17,924) (63,831)
-------------- --------------
Net decrease in cash and equivalents....................................... (880) (35,426)
Cash and equivalents, beginning of period.................................. 1,966 54,783
-------------- --------------
Cash and equivalents, end of period........................................ $ 1,086 $ 19,357
============== ==============
</TABLE>
See accompanying "Notes to consolidated financial statements."
12
<PAGE>
Hawaiian Electric Company, Inc. and subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 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.
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 March
31, 2000 and December 31, 1999, and the results of their operations and cash
flows for the three months ended March 31, 2000 and 1999. All such adjustments
are of a normal recurring nature, unless otherwise disclosed in this Form 10-Q
or other referenced material. Results of operations for interim periods are not
necessarily indicative of results for the full year.
Certain reclassifications have been made to prior periods' consolidated
financial statements to conform to the 2000 presentation.
(2) Retirement benefits
- ------------------------
Change in method of calculating market-related value of retirement benefit plan
assets
Since 1993, HECO and its subsidiaries determined the market-related value of
retirement benefit (pension and other postretirement benefits) plan assets by
calculating the difference between the expected return and the actual return on
the fair value of the plan assets, then amortizing the difference over future
years -- 0% in the first year and 25% in years two to five, and finally
subtracting the unamortized differences for the past four years from fair value.
In the first quarter of 2000, the method of calculating the market-related value
of the plan assets was changed to include a 15% range around the fair value of
such assets (i.e., 85% to 115% of fair value). If the market-related value is
outside the 15% range, then the amount outside the range will be recognized
immediately in the calculation of annual net periodic benefit cost. If the
market-related value remains within the 15% range, HECO and its subsidiaries
will continue to amortize the difference over future years using the
amortization method previously used. This change in accounting principle is
preferable because it results in calculated asset values of the plans that more
closely approximate fair value, while still mitigating the effect of annual fair
value fluctuations. No range was used in prior years as the market-related value
of the plan assets has been within the 15% range at each yearend from 1993 to
1998. Therefore, the cumulative effect of this change is nil. The effect of the
change in accounting principle on the first quarter of 2000 was to increase net
income approximately $1 million.
Change in discount rate
HECO and its subsidiaries changed the discount rate used to calculate the net
periodic costs of pension and other postretirement benefits from 6.5% at
December 31, 1998 to 7.75% at December 31, 1999 based on interest rates
prevailing at the time. The effect of the change was to reduce the projected
benefit obligation at December 31, 1999 by approximately $102 million and to
increase net income by approximately $1 million for the first quarter of 2000.
13
<PAGE>
(3) Cash flows
- ---------------
Supplemental disclosures of cash flow information
Cash paid for interest (net of capitalized amounts) and income taxes was as
follows:
<TABLE>
<CAPTION>
Three months ended March 31,
-----------------------------------------
(in thousands) 2000 1999
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Interest................................................................... $2,572 $4,459
============== ==============
Income taxes............................................................... $9,546 $4,095
============== ==============
</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 $1.3 million and $1.0 million for the three months ended March 31, 2000 and
1999, respectively.
(4) Commitments and contingencies
- ----------------------------------
HELCO power situation
Background. In 1991, HELCO began planning for the expansion of its Keahole power
- ----------
plant to meet increased electric generation demand forecasted for 1994. HELCO's
plans were to install two 20 MW combustion turbines (CT-4 and CT-5), followed by
an 18 MW heat steam recovery generator (ST-7), at which time these units would
be converted to a 56 MW (net) dual-train combined-cycle (DTCC) unit. In January
1994, the Public Utilities Commission of the State of Hawaii (PUC) approved
expenditures for CT-4, which HELCO had planned to install in late 1994.
The timing of the installation of HELCO's phased DTCC unit at the Keahole power
plant site has been revised on several occasions due to delays, described below,
in (a) obtaining approval from the Hawaii Board of Land and Natural Resources
(BLNR) of a Conservation District Use Permit (CDUP) amendment and (b) obtaining
from the Department of Health of the State of Hawaii (DOH) and the U.S.
Environmental Protection Agency (EPA) a Prevention of Significant
Deterioration/Covered Source permit (PSD permit) for the Keahole power plant
site. The delays are also attributable to lawsuits, claims and petitions filed
by independent power producers (IPPs) and other parties challenging these
permits and objecting to the expansion, alleging among other things that (1)
operation of the expanded Keahole site would not comply with land use
regulations (including noise standards) and HELCO's land patent; (2) HELCO
cannot operate the plant within current air quality standards; and (3) HELCO
could alternatively purchase power from IPPs to meet increased electric
generation demand.
CDUP amendment. On July 10, 1997, the Third Circuit Court of the State of Hawaii
- ---------------
issued its Amended Findings of Fact, Conclusions of Law, Decision and Order
addressing HELCO's appeal of an order of the BLNR, along with other consolidated
civil cases relating to HELCO's application for a CDUP amendment. Because the
BLNR failed to take valid agency action or render a proper decision within the
180 day statutory deadline (as calculated by the Court), the Court ruled that
HELCO was automatically entitled to put its land to the uses requested in its
CDUP amendment application pursuant to the default provision of Section 183-41,
Hawaii Revised Statutes (HRS). This decision allows HELCO to use its Keahole
property as requested in its application. An amended order to the same effect
was issued on August 18, 1997. Final judgments have been entered in all of the
consolidated cases. Appeals with respect to the final judgments for certain of
the cases have been filed with the Hawaii Supreme Court. Motions filed with the
Third Circuit Court to stay the effectiveness of the judgments pending
resolution of the appeals were denied in April and July 1998 (in response to a
motion for reconsideration). In August 1998, the Hawaii Supreme Court denied
nonhearing motions for stay of final judgment pending resolution of the appeals.
Management believes that HELCO will ultimately prevail on appeal and that the
final judgments of the Third Circuit Court will be upheld.
14
<PAGE>
The final judgment with respect to HELCO's entitlement to automatically put its
land to the uses requested in its CDUP amendment application (which is in part 1
of the final judgment, and is referred to as HELCO's "default entitlement") was
entered February 11, 1998. The final judgment states that HELCO must comply with
the conditions in its application (part 2 of the final judgment), and that the
standard conditions in Section 13-2-21 of the Hawaii Administrative Rules (HAR),
the rules of the Department of Land and Natural Resources (DLNR), do not apply
to the extent the standard conditions are incompatible with HRS Section 183-41
(part 3 of the final judgment). On August 17, 1999, certain plaintiffs filed a
joint motion to enforce parts 2 and 3 of the final judgment (relating to
applicable conditions) and to stay part 1 of the final judgment (the default
entitlement) until such time as the applicable conditions were identified and it
was determined whether HELCO had or could meet the applicable conditions. At a
September 23, 1999 hearing, the Third Circuit Court ruled that the BLNR must
issue a written decision by November 30, 1999 on certain issues raised in the
administrative petition filed by the Keahole Defense Coalition (KDC) in August
1998, including specific determinations of which conditions are not inconsistent
with HELCO's ability to proceed under the default entitlement. At a BLNR meeting
on October 22, 1999, the BLNR determined that all 15 standard land use
conditions in HAR 13-2-21(a) applied to HELCO's default entitlement and that the
conditions in HELCO's pre-existing CDUP and amendments continue to apply with
respect to those existing permits. The BLNR specifically did not address at that
time the question of HELCO's compliance with each of those conditions. The BLNR
issued a written decision on November 19, 1999. Certain plaintiffs filed two
motions in the Third Circuit Court attempting to implement their interpretation
of the BLNR's ruling. On November 2, 1999, those plaintiffs filed a second joint
motion to enforce part 2 and part 3 of the final judgment. In that motion, they
alleged that the Keahole project cannot meet the conditions relating to
compatibility with the surrounding area and improvement of the existing physical
and environmental aspects of the subject area. Furthermore, they claimed that
the project would be a prohibited use that cannot be placed in the conservation
district, relying on zoning rules implemented by 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
BLNR. In light of a BLNR hearing on April 14, 2000, KDC and the individual
plaintiff have circulated a stipulation to withdraw these motions, and indicated
that they would refile the fourth motion after the written order from the BLNR
is issued. The stipulation has not yet been filed. For further developments
regarding these issues, see "BLNR petitions."
PSD permit. In 1997, the EPA approved a revised draft permit and the DOH issued
- ----------
a final PSD permit for HELCO's DTCC unit. Nine appeals of the issuance of the
permit were filed with the EPA's Environmental Appeals Board (EAB) in December
1997.
On November 25, 1998, the EAB issued an Order Denying Review in Part and
Remanding in Part. The EAB denied appeals of the permit that were based on
challenges to (1) the DOH's use of a netting analysis (with respect to nitrogen
oxide (NOx) emissions), (2) the DOH's determination of Best Available Control
Technology (BACT) for control of sulfur dioxide emissions, and (3) certain
aspects of the DOH's ambient air and source impact analysis. However, the EAB
concluded that the DOH had not adequately responded to comments that had been
made during
15
<PAGE>
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. As a
result of these actions, there have been further delays in HELCO's construction
of CT-4 and CT-5. Although the actual length of the delays is uncertain,
management believes CT-4 and CT-5 will be in service in early 2002. HELCO
continues to work with the DOH and EPA with the objective of having the final
permit reissued by the end of 2000 and of reaching a final resolution of any
appeals to the EAB as expeditiously as possible thereafter. HELCO believes that
the PSD permit will eventually be obtained. Since there are no stays on the
project, installation of CT-4 and CT-5 is expected to begin when the PSD permit
is obtained and any EAB appeals from its issuance are resolved.
KDC declaratory judgment action. In February 1997, KDC and three individuals
- -------------------------------
(Plaintiffs) filed a lawsuit in the Third Circuit Court of the State of Hawaii
against HELCO, the director of the DOH, and the BLNR, seeking declaratory
rulings with regard to five counts alleging that, with regard to the Keahole
project, one or more of the defendants had violated, or could not allow the
plant to operate without violating, the State Clean Air Act, the State Noise
Pollution Act, conditions of HELCO's conditional use permit, covenants of
HELCO's land patent and Hawaii administrative rules regarding standard
conditions applicable to land permits. The Complaint was amended in March 1998
to add a sixth count, claiming that an amendment to a provision of the land
patent (relating to the conditions under which the State could repurchase the
land) is void and that the original provision should be reinstated.
On April 12, 1999, the Court ruled that, because there were no remaining issues
of fact in the case, a May 1999 trial date was vacated, no further discovery was
authorized, and proceedings before the Court were suspended pending any further
administrative action by the DOH and BLNR. The Court's rulings to date on the
six counts in the KDC complaint are as follows:
1. Count I (State Clean Air Act): At a hearing on April 5, 1999, the Court
ruled that the DOH was within its discretionary authority in granting
HELCO's requests for additional extensions of time to file its Title V air
permit applications.
2. Count II (State Noise Pollution Act): At a hearing relating to Count II on
February 16, 1999, the DOH notified the Court and the parties of a change
in its interpretation of the noise rules promulgated under the State Noise
Pollution Act. The change in interpretation would apply to the Keahole
plant the noise standard applicable to the emitter property (which the DOH
claims to be a 55 dBA daytime and 45 dBA nighttime standard) rather than
the previously-applied noise standard of the receptor properties in the
surrounding agricultural park (a 70 dBA standard).
16
<PAGE>
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 applied
to the DLNR for administrative approval to install an additional silencer
on CT-2 and is exploring possible noise mitigation measures, which can be
implemented if necessary, for CT-4 and CT-5.
3. Count III (violation of CDUP): At a hearing on April 12, 1999, the Court
granted HELCO's motion for summary judgment and suspended proceedings on
this Count pending referral of this matter to the BLNR. (Should the DOH
find HELCO in violation of the noise rules (see Count II), the BLNR would
be called to act on the impact of such violation, if any, on the CDUP.)
4. Count IV (violations of HELCO's land patent): At a hearing on April 12,
1999, the Court granted HELCO's motion for summary judgment and suspended
proceedings on this Count pending referral of this matter to the BLNR.
(Should the DOH find HELCO in violation of the noise rules (see Count II),
the BLNR would be called to act on the impact of such violation, if any,
on the land patent.)
5. Count V (HELCO's ability to comply with land use regulations): At a
hearing on April 12, 1999, the Court granted HELCO's motion for summary
judgment and suspended proceedings on this Count pending referral of this
matter to 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. (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
Court ruled that Plaintiffs
17
<PAGE>
were the prevailing party as to Counts II and V and were entitled to fees and
costs with regard to those counts, denied Plaintiffs' motion for fees as the
prevailing party with regard to Count VI, denied HELCO's motion for fees as the
prevailing party with regard to Count I and granted Plaintiffs' request for
discovery sanctions against HELCO for late supplementation of responses to
discovery requests. HELCO filed motions to alter or amend the orders regarding
attorneys' fees and costs, and orders granting those motions were issued on
September 22, 1999. HELCO appealed the amended orders to the Hawaii Supreme
Court, which dismissed the appeal on January 20, 2000, on the grounds that the
appeal was premature.
HELCO intends to continue to vigorously defend against the claims raised in this
case and in related administrative actions.
BLNR petitions. On August 5, 1998, KDC filed with the BLNR a Petition for
- ---------------
Declaratory Ruling under HRS Section 91-8. The petition alleged that the
standard conditions in HAR Section 13-2-21 apply to HELCO's default entitlement
to use its Keahole site, that the letter issued to HELCO by the DLNR in January
1998 was erroneous because it failed to incorporate all conditions applicable to
the existing permits, and that the DOH issued three separate Notices of
Violation (NOVs) to HELCO in 1992 and 1998 for violation of clean air rules,
which NOVs are alleged to constitute violations under the existing permits and
render such permits null and void. The petition requested that the BLNR commence
a contested case on the petition; that the BLNR determine that HELCO has
violated the terms of its existing conditional use permits, causing such permits
to be null and void; and that the BLNR determine that HELCO has violated the
conditions applicable to its default entitlement, such that HELCO should be
enjoined from using the Keahole property under such default entitlement.
Pursuant to a ruling from the Third Circuit Court that the BLNR decide certain
issues raised in this petition by November 30, 1999 (see "CDUP amendment"
herein), these issues were discussed at an October 22, 1999 BLNR meeting. The
BLNR determined that none of the standard land use conditions were inconsistent
with HELCO's ability to proceed under its default entitlement and, therefore,
each of the standard land use conditions applied to the expansion. BLNR did not,
at that time, determine whether HELCO has complied with the applicable
conditions. The BLNR also determined that specific conditions imposed by the
BLNR on HELCO's original CDUP and amendments thereto continue to apply to the
existing plant but not to the expansion under the default entitlement.
On February 7, 2000, KDC and an individual plaintiff filed with BLNR a Request
to Nullify "Default Entitlement." In the request, it is alleged that HELCO's
default entitlement is void because HELCO cannot satisfy all conditions and
laws, that HELCO forfeited its default entitlement because it redesigned certain
facilities it has already constructed to support existing CT-2 rather than CT-4
and CT-5, and that the BLNR should exercise its right to repurchase clause in
HELCO's land patent. At its hearing on February 25, 2000, the BLNR denied KDC's
request. The BLNR stated that it has the power to consider whether conditions
have been met and to enforce those conditions if they are not met, but not to
enforce conditions in a way which violates either HRS Section 183-41 or the
order of the Third Circuit Court which recognized HELCO's ability to proceed
with the Keahole project under a default entitlement. Subsequent to the hearing,
an issue was raised administratively as to whether the BLNR should impose
condition 15, which would impose a completion deadline on the project of three
years following "approval." The issue was included on the agenda for the April
14, 2000 BLNR hearing. However, during the hearing the BLNR passed a motion to
remove the item from the agenda. As to the third claim, the BLNR authorized the
issuance of a land patent with a corrected repurchase provision at its hearing
on February 25, 2000, after which time the repurchase issue should become moot
since HELCO continues to use the land for public utility purposes. (See "KDC
declaratory judgment action," relating to Count VI.) A written decision on the
February 25, 2000 rulings is pending.
IPP complaints filed with the PUC. Three IPPs-KCP, Enserch Development
- ---------------------------------
Corporation (Enserch) and Hilo Coast Power Company (HCPC)-filed separate
complaints against HELCO with the PUC in 1993, 1994, and 1997, respectively,
alleging that they are entitled to PPAs to provide HELCO with additional
capacity. KCP and Enserch each claimed that they would be a substitute for
HELCO's planned 56 MW (net) DTCC unit at Keahole. Two of the complaints have
been resolved, as described below.
18
<PAGE>
In September 1995, the PUC allowed HELCO to continue to pursue construction of
and commit expenditures for the second combustion turbine (CT-5) and the steam
recovery generator (ST-7) for its planned DTCC unit, but stated in its order
that "no part of the project may be included in HELCO's rate base unless and
until the project is in fact installed, and is used and useful for utility
purposes." The PUC also ordered HELCO to continue negotiating with the IPPs and
held that the facility to be built (i.e., either HELCO's or one of the IPP's)
should be the one that can be most expeditiously put into service at "allowable
cost."
The current status of these IPPs' PUC complaints is as follows:
Enserch complaint. On January 16, 1998, HELCO filed with the PUC an
-----------------
application for approval of a PPA for a 60 MW (net) facility and an
interconnection agreement with Encogen Hawaii, L.P. (Encogen), an Enserch
affiliate, both dated October 22, 1997. The PUC issued a decision and order
approving the agreements on July 14, 1999. The decision was amended at
HELCO's request on July 21, 1999 and became final and nonappealable on
August 23, 1999. Enserch sold its interest in the partnership, now called
Hamakua Energy Partners L.P. (Hamakua Partners) in November 1999. According
to Hamakua Partners, its first phase of 22 MW is expected to be in-service
by August 2000 and the remainder of its 60 MW facility is expected to be
in-service by December 2000. This PPA was necessary to ensure reliable
service to customers on the island of Hawaii and, in the opinion of
management, does not supplant the need for CT-4 and CT-5.
KCP complaint. In January 1996, the PUC ordered HELCO to continue in good
-------------
faith to negotiate a PPA with KCP. In May 1997, KCP filed a motion for
unspecified "sanctions" against HELCO for allegedly failing to negotiate in
good faith. In June 1997, KCP filed a motion asking the PUC to designate
KCP's facility as the next generating unit on the HELCO system and to
determine the "allowable cost" which would be payable by HELCO to KCP.
HELCO filed memoranda in opposition to KCP's motions. The PUC held an
evidentiary hearing in August 1997. KCP filed two other motions, which
HELCO opposed, to supplement the record. The PUC issued an Order in June
1998 which denied all of KCP's pending motions; provided rulings and/or
guidance on certain avoided cost and contract issues; directed HELCO to
prepare an updated avoided cost calculation that includes the Encogen
agreement; and directed HELCO and KCP to resume contract negotiations.
HELCO filed a motion for partial reconsideration with respect to one
avoided cost issue. The PUC granted HELCO's motion and modified its order
in July 1998. HELCO resumed negotiations with KCP in 1998 in compliance
with the Order, but no agreement has been reached. On November 20, 1998,
KCP filed a motion asking the PUC to appoint a hearings officer to make a
recommendation to the PUC regarding the terms and conditions of a PPA and
the calculation of avoided cost. HELCO filed a memorandum in opposition to
KCP's motion on December 2, 1998. On July 9, 1999, KCP filed an additional
motion, asking the PUC to reopen its complaint docket and to enforce the
Public Utility Regulatory Policies Act of 1978 by calculating the utility's
avoided cost. HELCO filed a memorandum in opposition to KCP's motion on
July 16, 1999, KCP filed a reply on July 22, 1999 and the Consumer Advocate
filed a SOP on August 2, 1999. No decision has been issued on KCP's two
most recent motions.
On October 29, 1999, the Third Circuit Court ruled that the lease between
Waimana and the Department of Hawaiian Home Lands for the site on which
KCP's plant was proposed to be built was invalid. In addition, KCP's air
permit is under scrutiny by the DOH, as it may have expired on January 31,
2000. In light of these and other issues, management believes that KCP's
proposal is not viable and, therefore, should not impact installation of
CT-4 and CT-5.
HCPC complaint. In December 1999, the PUC approved an amended and restated
--------------
PPA between HELCO and HCPC. The term of the agreement, which is for the
continuing provision of 22 MW, 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
19
<PAGE>
of the PPA was intended to ensure reliability until the Keahole project was
constructed, in the opinion of management, it does not supplant the need
for CT-4 and CT-5.
Apollo Energy Corporation (Apollo), which has an existing contract to provide
HELCO with as-available windpower through June 30, 2002, filed a petition for
hearing with the PUC on April 28, 2000, alleging that it has unsuccessfully
attempted for over 75 days to negotiate a new power purchase agreement with
HELCO. Apollo is offering to repower its existing 7 MW facility by the end of
2000 and to install additional wind turbines, up to a total of 15 MW, by the end
of 2001. Because Apollo is an as-available energy provider, this matter would
not affect the need for the Keahole project.
Pre-PSD work and notices of violation. The costs for the CT-4 project (and, to a
- -------------------------------------
lesser extent, the CT-5 project) include the costs of certain facilities that
benefit the existing Keahole power plant, but were originally scheduled to be
installed at the same time as the new generating units. HELCO proceeded with the
construction of the facilities that could be constructed prior to receipt of the
PSD permits for CT-4 and CT-5 (pre-PSD facilities) after receipt of the CDUP
amendment (as a result of the Third Circuit Court orders). (See "CDUP amendment"
herein.)
Pre-PSD facilities. The pre-PSD facilities include a
------------------
shop/warehouse/administration building (completed in 1998), fire protection
system upgrades (completed in September 1999), and a new water treatment
system (completed in December 1999, which supplies the demineralized water
needs of the existing CT at Keahole).
EPA NOV. In September 1998, the EPA issued an NOV to HELCO stating that
-------
HELCO violated the Hawaii State Implementation Plan by commencing
construction activities at the Keahole generating station without first
obtaining a final air permit. By law, 30 days after the NOV, the EPA may
issue an order requiring compliance with applicable laws, assessing
penalties and/or commencing a civil action seeking an injunction; however,
no order has yet been issued. In 1999, HELCO put the EPA on notice that
certain construction activities not affected by the NOV would continue, and
received approval to proceed with certain construction activities. However,
HELCO has halted work on other construction activities at Keahole until
further notice is provided or approval is obtained from the EPA, or until
the final air permit is received.
Contingency planning. In June 1995, HELCO filed with the PUC its generation
- ---------------------
resource contingency plan detailing alternatives and mitigation measures to
address the delays that have occurred in adding new generation. Actions under
the plan (such as deferring the retirements of older, smaller units) have helped
HELCO maintain its reserve margin and reduce the risk of near-term capacity
shortages. In January 1996, the PUC opened a proceeding to evaluate HELCO's
contingency resource plan and HELCO's efforts to insure system reliability.
HELCO has filed reports with the PUC from time to time updating the contingency
plan and the status of implementing the plan. The last update was filed on March
31, 2000.
The first increment of new generation to be available to HELCO is now expected
to be added by August 2000 (Hamakua Partners' 22 MW CT). Despite delays in
adding new generation, HELCO's mitigation measures (including the extension of
power purchases from HCPC) should provide HELCO with sufficient generation
reserve margin to cover its projected monthly system peaks with units on
scheduled maintenance until additional new generation is added in late 2000 (the
remaining 38 MW of Hamakua Partners' 60 MW DTCC unit) and in early 2002 (CT-4
and CT-5), and should provide HELCO with sufficient reserve margin in the event
of further delays in adding new generation. As new generation is added, HELCO
will retire its older, smaller generating units.
Costs incurred. If it becomes probable that CT-4 and/or CT-5 will not be
- --------------
installed, HELCO may be required to write-off a material portion of the costs
incurred in its efforts to put these units into service. As of March 31, 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 $80.4 million, including $32.4
million for equipment and material purchases, $26.4 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 March 31, 2000,
approximately $24.1 million of the $80.4 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.
20
<PAGE>
Although management believes it has acted prudently with respect to the Keahole
project, effective December 1, 1998, HELCO decided to discontinue the accrual of
AFUDC on CT-4 and CT-5 (which would have been approximately $0.5 million after
tax per month). The length of the delays to date and potential further delays
were factors considered by management in its decision to discontinue the accrual
of AFUDC. HELCO has also deferred plans for ST-7 to approximately 2006 or 2007,
unless the Hamakua Partners facility is not placed in service as planned. 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 March 31,
2000.
Competition proceeding
On December 30, 1996, the PUC instituted a proceeding to identify and examine
the issues surrounding electric competition and to determine the impact of
competition on the electric utility infrastructure in Hawaii. After a
collaborative process involving the 19 parties to the proceeding, final
statements of position were prepared by several of the parties and submitted to
the PUC in October 1998. HECO's position is that retail competition is not
feasible in Hawaii, but that some of the benefits of competition can be achieved
through competitive bidding for new generation, performance-based rate-making
(PBR) and innovative pricing provisions. The other parties to the proceeding
advanced numerous other proposals in their statements of position. The PUC
submitted a status report on its investigation to the Legislature, at its
request. In the report, the PUC stated that competitive bidding for new power
supplies (i.e., wholesale generation competition) is a logical first step to
encourage competition in the state's electric industry and that it plans to
proceed with an examination of the feasibility of competitive bidding. The PUC
also plans to review specific policies to encourage renewable energy resources
in the power generation mix. The report states that "further steps" by the PUC
"will involve the development of specific policies to encourage wholesale
competition and the continuing examination of other areas suitable for the
development of competition."
Some of the parties may seek state legislative action on their proposals. HECO
cannot predict what the ultimate outcome of the proceeding will be or which (if
any) of the proposals advanced in the proceeding will be implemented.
In 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. HECO was
authorized by the PUC in May 1999 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 a
21
<PAGE>
Honolulu Harbor Working Group. Effective January 30, 1998, the Working Group and
the DOH entered into a voluntary agreement and scope of work to determine the
nature and extent of any contamination, the responsible parties and appropriate
remedial actions.
In 1999, the Working Group submitted reports to the DOH presenting environmental
conditions and recommendations for additional data gathering to allow for an
assessment of the need for risk-based corrective action. The Working Group also
engaged a consultant who identified 27 additional potentially responsible
parties, including YB. Under the terms of the agreement for the sale of YB, HEI
and The Old Oahu Tug Service, Inc. (TOOTS, formerly HTB) have certain indemnity
obligations, including obligations with respect to the Honolulu Harbor
investigation. TOOTS has joined the Working Group.
Because the process for determining appropriate remedial and cleanup action, if
any, is at an early stage, management cannot predict at this time the costs of
further site analysis or future remediation and cleanup requirements, nor can it
estimate when such costs would be incurred. Certain of the costs incurred may be
claimed and covered under insurance policies, but such coverage is not
determinable at this time.
(5) HECO-obligated mandatorily redeemable preferred securities of trust
- ------------------------------------------------------------------------
subsidiaries holding solely HECO and HECO-guaranteed subordinated debentures
----------------------------------------------------------------------------
In March 1997, HECO Capital Trust I (Trust I), a grantor trust and a wholly
owned subsidiary of HECO, sold (i) in a public offering, 2 million of its HECO-
Obligated 8.05% Cumulative Quarterly Income Preferred Securities, Series 1997
(1997 trust preferred securities) with an aggregate liquidation preference of
$50 million and (ii) to HECO, common securities with a liquidation preference of
approximately $1.55 million. Proceeds from the sale of the 1997 trust preferred
securities and the common securities were used by Trust I to purchase 8.05%
Junior Subordinated Deferrable Interest Debentures, Series 1997 (1997 junior
deferrable debentures) issued by HECO in the principal amount of $31.55 million
and issued by each of MECO and HELCO in the respective principal amounts of $10
million. The 1997 junior deferrable debentures, which bear interest at 8.05%
and mature on March 27, 2027, together with the subsidiary guarantees (pursuant
to which the obligations of MECO and HELCO under their respective debentures are
fully and unconditionally guaranteed by HECO), are the sole assets of Trust I.
The 1997 trust preferred securities must be redeemed at the maturity of the
underlying debt on March 27, 2027, which maturity may be shortened to a date no
earlier than March 27, 2002 or extended to a date no later than March 27, 2046,
and are not redeemable at the option of the holders, but may be redeemed by
Trust I, in whole or in part, from time to time, on or after March 27, 2002 or
upon the occurrence of certain events.
In December 1998, HECO Capital Trust II (Trust II), a grantor trust and a wholly
owned subsidiary of HECO, sold (i) in a public offering, 2 million of its HECO-
Obligated 7.30% Cumulative Quarterly Income Preferred Securities, Series 1998
(1998 trust preferred securities) with an aggregate liquidation preference of
$50 million and (ii) to HECO, common securities with a liquidation preference of
approximately $1.55 million. Proceeds from the sale of the 1998 trust preferred
securities and the common securities were used by Trust II to purchase 7.30%
Junior Subordinated Deferrable Interest Debentures, Series 1998 (1998 junior
deferrable debentures) issued by HECO in the principal amount of $31.55 million
and issued by each of MECO and HELCO in the respective principal amounts of $10
million. The 1998 junior deferrable debentures, which bear interest at 7.30% and
mature on December 15, 2028, together with the subsidiary guarantees (pursuant
to which the obligations of MECO and HELCO under their respective debentures are
fully and unconditionally guaranteed by HECO), are the sole assets of Trust II.
The 1998 trust preferred securities must be redeemed at the maturity of the
underlying debt on December 15, 2028, which maturity may be shortened to a date
no 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.
22
<PAGE>
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 March
31, 2000 and December 31, 1999. The 1997 and 1998 junior deferrable debentures
are redeemable only (i) at the option of HECO, MECO and HELCO, respectively, in
whole or in part, on or after March 27, 2002 (1997 junior deferrable debentures)
and December 15, 2003 (1998 junior deferrable debentures) or (ii) at the option
of HECO, in whole, upon the occurrence of a "Special Event" (relating to certain
changes in laws or regulations).
(6) Recent accounting pronouncements
- ------------------------------------
Derivative instruments and hedging activities
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities," which establishes accounting and reporting
standards for derivative instruments and hedging activities and requires that an
entity recognize all derivatives as either assets or liabilities in the
statement of financial position and measure those instruments at fair value. The
provisions of SFAS No. 133 were amended by SFAS No. 137 to be effective for all
fiscal quarters of fiscal years beginning after June 15, 2000. HECO and its
subsidiaries will adopt SFAS No. 133, as amended, on January 1, 2001, but
management has not yet determined the impact, if any, of adoption.
(7) Summarized financial information
- -------------------------------------
Summarized financial information for HECO's subsidiaries, HELCO and MECO, is as
follows:
<TABLE>
<CAPTION>
Balance sheet data
HELCO MECO
------------------------------------- -----------------------------------
March 31, December 31, March 31, December 31,
(in thousands) 2000 1999 2000 1999
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Current assets................................ $ 29,695 $ 30,260 $ 43,951 $ 41,700
Noncurrent assets............................. 423,739 425,552 387,200 387,380
------------ --------------- ------------ ---------------
$453,434 $455,812 $431,151 $429,080
============ =============== ============ ===============
Common stock equity........................... $161,194 $159,719 $165,626 $163,835
Cumulative preferred stock-not subject
to mandatory redemption................... 7,000 7,000 5,000 5,000
Current liabilities........................... 47,901 52,230 30,681 30,296
Noncurrent liabilities........................ 237,339 236,863 229,844 229,949
------------ --------------- ------------ ---------------
$453,434 $455,812 $431,151 $429,080
============ =============== ============ ===============
</TABLE>
<TABLE>
<CAPTION>
Income statement data
HELCO MECO
------------------------------------------ ------------------------------
Three months ended Three months ended
March 31, March 31,
------------------------------------------ -----------------------------
(in thousands) 2000 1999 2000 1999
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Operating revenues............................ $44,211 $36,900 $43,861 $35,681
Operating income.............................. 6,540 5,445 7,540 5,020
Net income for common stock................... 3,901 2,923 5,368 2,407
</TABLE>
HECO has not provided separate financial statements and other disclosures
concerning HELCO and MECO because management has concluded that such financial
statements and other information are not material to holders of the 1997 and
1998 junior deferrable debentures issued by HELCO and MECO which have been fully
and unconditionally guaranteed by HECO.
23
<PAGE>
(8) Reconciliation of electric utility operating income per HEI and HECO
- -------------------------------------------------------------------------
consolidated statements of income
- ---------------------------------
<TABLE>
<CAPTION>
Three months ended March 31,
--------------------------------------------
(in thousands) 2000 1999
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Operating income from regulated and nonregulated activities before
income taxes (per HEI consolidated statements of income).............. $ 51,630 $ 40,901
Deduct:
Income taxes on regulated activities.................................. (15,193) (10,668)
Revenues from nonregulated activities................................. (984) (1,166)
Add:
Expenses from nonregulated activities................................. 425 143
-------------- ---------------
Operating income from regulated activities after income taxes (per
HECO consolidated statements of income)............................... $ 35,878 $ 29,210
============== ===============
</TABLE>
24
<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
March 31,
(in thousands, except per --------------------------- % Primary reason(s) for
share amounts) 2000 1999 change significant change*
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Revenues........................ $401,875 $352,247 14 Increases for the electric utility,
savings bank and international power
segments, partly offset by a decrease for
the "other" segment
Operating income................ 68,202 54,032 26 Increases for the electric utility and
savings bank segments, partly offset by a
decrease for the "other" segment
Net income...................... 28,976 20,754 40 Higher operating income, partly offset by
higher interest expense due to higher
average borrowings due to an HEIPC
acquisition in March 2000
Basic earnings
per common share............. $ 0.90 $ 0.65 38 See explanation for net income
Weighted-average number of
common shares outstanding...... 32,266 32,153 - Issuances under the Dividend Reinvestment
and Stock Purchase Plan and other plans
</TABLE>
* Also see segment discussions which follow.
25
<PAGE>
Following is a general discussion of the results of operations by business
segment.
Electric utility
- ----------------
<TABLE>
<CAPTION>
Three months ended
March 31,
(in thousands, except per -------------------------------- %
barrel amounts) 2000 1999 change Primary reason(s) for significant change
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Revenues................... $289,405 $237,791 22 Higher fuel oil and purchased energy
prices, the effects of which are passed
on to customers ($42 million), 3.2%
higher KWH sales ($5 million) and the
recovery of demand-side management costs
Expenses
Fuel oil.................. 75,155 44,878 67 Higher fuel oil prices, partly offset by
fewer KWHs generated
Purchased power........... 70,226 59,980 17 Higher fuel prices and more KWHs purchased
Other..................... 92,394 92,032 - Higher taxes, other than income taxes,
and depreciation expense, partly offset
by lower other operation and maintenance
expenses (including lower retirement
benefits expenses)
Operating income........... 51,630 40,901 26 Higher KWH sales and lower other
operation and maintenance expenses,
partly offset by higher depreciation
expense
Net income................ 23,725 17,081 39 Higher operating income, partially offset
by higher income taxes
Kilowatthour sales 2,203 2,135 3
(millions)................
Fuel oil price per barrel.. $29.14 $16.94 72
</TABLE>
Kilowatthour (KWH) sales in the first quarter of 2000 increased 3.2% from the
same quarter in 1999, partly due to an increase in the number of customers, an
additional day in the quarter (February 29, 2000), and a slight improvement in
Hawaii's economy. Electric utility operating income increased 26% from first
quarter 1999, primarily due to the higher KWH sales and 12% lower other
operation and maintenance expenses ($5 million). Other operation expenses were
lower primarily due to a decrease of approximately $6 million in pension and
other postretirement benefits expenses partly due to an increase in the discount
rate (from 6.50% at December 31, 1998 to 7.75% at December 31, 1999) and a
change in the method of determining market-related value of retirement benefit
plan assets (see note (2) in HECO's "Notes to consolidated financial
statements"). Maintenance expense was lower due to more overhaul work in the
first quarter of 1999 than in the first quarter of 2000.
26
<PAGE>
Competition
The electric utility industry is becoming increasingly competitive. Independent
power producers (IPPs) are well established in Hawaii and continue to actively
pursue new projects. Customer self-generation, with or without cogeneration, has
made inroads in Hawaii and is a continuing competitive factor. Competition in
the generation sector in Hawaii is moderated, however, by the scarcity of
generation sites, various permitting processes and lack of interconnections to
other electric utilities. HECO has been able to compete successfully by offering
customers economic alternatives that, among other things, employ energy
efficient electrotechnologies such as the heat pump water heater.
Legislation has been introduced in Congress that would restructure the electric
utility industry with a view toward increasing competition by, for example,
allowing customers to choose their generation supplier. Some of the bills would
exempt Alaska and Hawaii. Also, the Department of Energy's proposed
"Comprehensive Electricity Competition Act", submitted to Congress in June 1998,
includes a provision that would permit states to "opt out" of the proposed
retail competition deadline of not later than January 1, 2003.
On December 30, 1996, the PUC instituted a proceeding to identify and examine
the issues surrounding electric competition and to determine the impact of
competition on the electric utility infrastructure in Hawaii. In their statement
of position (SOP), HECO and its subsidiaries proposed to achieve some of the
benefits of competition through proposals for (1) competitive bidding for new
generation, (2) performance-based rate-making (which would include an index-
based price cap, an earnings sharing mechanism and a benchmark incentive plan)
and (3) innovative pricing provisions (including rate restructuring, expanded
time-of-use rates, customer migration rates such as standby charges, flexible
pricing to encourage economic development and to compete with customer
generation options, new service options and two-part rates incorporating real-
time pricing). HECO suggests in its SOP that these proposals be implemented
through PUC approval of applications submitted in a series of separate
proceedings to be initiated by HECO in 1999 and 2000. See note (4) in HECO's
"Notes to consolidated financial statements."
PUC regulation of electric utility rates
The PUC has broad discretion in its regulation of the rates charged by HEI's
electric utility subsidiaries and in other matters. Any adverse decision and
order (D&O) by the PUC concerning the level or method of determining electric
utility rates, the authorized returns on equity or other matters, or any
prolonged delay in rendering a D&O in a rate or other proceeding, could have a
material adverse effect on the Company's financial condition and results of
operations. Upon a showing of probable entitlement, the PUC is required to issue
an interim D&O in a rate case within 10 months from the date of filing a
completed application if the evidentiary hearing is completed (subject to
extension for 30 days if the evidentiary hearing is not completed). There is no
time limit for rendering a final D&O. Interim rate increases are subject to
refund with interest, pending the final outcome of the case. Management cannot
predict with certainty when D&Os in pending or future rate cases will be
rendered or the amount of any interim or final rate increase that may be
granted.
Recent rate requests
HEI's electric utility subsidiaries initiate PUC proceedings from time to time
to request electric rate increases to cover rising operating costs, the cost of
purchased power and the cost of plant and equipment, including the cost of new
capital projects to maintain and improve service reliability. As of May 3, 2000,
the return on average common equity (ROACE) found by the PUC to be reasonable in
the most recent final rate decision for each utility was 11.4% for HECO (D&O
issued on December 11, 1995 and based on a 1995 test year), 11.65% for HELCO
(D&O issued on April 2, 1997 and based on a 1996 test year) and 10.94% for MECO
(D&O issued on April 6, 1999 and based on a 1999 test year).
27
<PAGE>
Hawaii Electric Light Company, Inc.
- -----------------------------------
. In October 1999, HELCO filed a request to increase rates by 9.6%, or $15.5
million in annual revenues, based on a 2000 test year, primarily to recover (1)
costs relating to the agreement to buy power from the 60 MW plant of Hamakua
Energy Partners, L.P., and (2) depreciation of and a return on additional
investments in plant and equipment since the last rate case, including pre-PSD
facilities placed in service at the Keahole power plant (see "HELCO power
situation--Pre-PSD work and notices of violation" in note (4) of HECO's "Notes
to consolidated financial statements"). In its application, HELCO presented
evidence to justify an ROACE of 13.5% for the 2000 test year. The Consumer
Advocate filed its testimony on May 8, 2000 and HELCO's rebuttal testimony is
due on June 19, 2000. Hearings are scheduled to begin on August 15, 2000.
. The timing of a future HELCO rate increase request, if any, to recover costs
relating to adding CT-4 and CT-5 will depend on future circumstances. See "HELCO
power situation" in note (4) of HECO's "Notes to consolidated financial
statements."
Maui Electric Company, Limited
- ------------------------------
. In January 1998, MECO filed a request with the PUC to increase rates,
primarily to recover the costs related to the addition of generating unit M17 in
late 1998. In November 1998, MECO revised its requested increase to 11.9%, or
$16.4 million in annual revenues, based on a 12.75% ROACE. In December 1998,
MECO received an interim D&O from the PUC, effective January 1, 1999,
authorizing an 8.5%, or $11.7 million, increase in annual revenues (subject to
refund with interest, pending the final outcome of the case), based on a ROACE
of 11.12%, which was the ROACE authorized in MECO's prior rate case. In April
1999, MECO received an amended final D&O from the PUC which authorized an 8.2%,
or $11.3 million, increase in annual revenues, based on a 1999 test year and a
10.94% ROACE. The amended final D&O required a refund of approximately $0.1
million to customers because MECO had previously received (under the interim
D&O) an increase in excess of the amount that was finally approved.
. In March 1999, the PUC issued a D&O denying MECO's request to include $0.8
million in its rate base for exhaust flow enhancers that were provided as part
of a settlement for a warranty claim. MECO wrote-off the $0.8 million in the
first quarter of 1999.
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 March 31, 2000, HECO's consolidated regulatory
assets amounted to $116 million.
28
<PAGE>
Savings bank
- ------------
<TABLE>
<CAPTION>
Three months ended March 31,
-------------------------------------------- %
(in thousands) 2000 1999 change Primary reason(s) for significant change
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Revenues............... $110,267 $100,280 10 Higher interest income as a result of
higher weighted-average yields on
interest-earning assets and higher average
balances of mortgage/asset-backed
securities and loan balances
Operating income....... 19,190 15,131 27 Higher net interest income, partly offset
by higher office occupancy expenses
(including higher repairs and maintenance
expense, lease rent and depreciation)
Net income............. 11,221 8,525 32 Higher operating income
Interest rate spread... 3.28% 3.04% 8 36 basis points increase in the
weighted-average yield on interest-earning
assets, partly offset by a 12 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--increased 8%. Comparing first quarter 2000 to the same period in
1999, the weighted-average yield on interest-earning assets increased more than
the weighted-average rate on interest-bearing liabilities increased.
Deposits traditionally have been the principal source of ASB's funds for use in
lending, meeting liquidity requirements and making investments. Deposits
increased by $66 million in the first quarter of 2000, including $23 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 quarter of 2000, ASB added $3 million to its allowance for loan
losses. As of March 31, 2000, ASB's allowance for loan losses was 1.14% of
average loans outstanding. The following table presents the changes in the
allowance for loan losses for the periods indicated.
<TABLE>
<CAPTION>
Three months ended March 31,
--------------------------------------------
(in thousands) 2000 1999
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Allowance for loan losses, beginning of quarter...................... $35,348 $39,779
Additions to provisions for losses................................... 3,000 2,920
Net charge-offs...................................................... (1,763) (1,861)
--------------- ---------------
Allowance for loan losses, end of quarter............................ $36,585 $40,838
=============== ===============
</TABLE>
In March 1998, ASB formed a wholly owned operating subsidiary, ASB Realty
Corporation (ASBR), which elects to be taxed as a real estate investment trust.
This reorganization has reduced ASB's income taxes. For the first
29
<PAGE>
Quarter of 2000, ASB and subsidiaries' effective income tax rate was 34.2%.
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.
International power
- -------------------
<TABLE>
<CAPTION>
Three months ended
March 31,
--------------------------------------- %
(in thousands) 2000 1999 change Primary reason(s) for significant change
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Revenues......... $1,665 $ 992 68 Three months of revenues from Guam in 2000
compared to two months in 1999
Operating loss... (450) (616) 27
</TABLE>
HEIPC was formed in 1995 and its subsidiaries have been and will be formed from
time to time to pursue independent power and integrated energy services projects
in Asia and the Pacific.
In September 1996, HEI Power Corp. Guam (HPG), entered into an energy conversion
agreement for approximately 20 years with the Guam Power Authority (GPA),
pursuant to which HPG has repaired and is operating and maintaining two oil-
fired 25 MW (net) units at Tanguisson, Guam. HPG's total cost to repair the two
units was $15 million. In 1999, a mechanical failure of one of the units
resulted in additional expenses and lost revenue for HPG of approximately $1
million. HPG will recover some or all of this amount from an insurance carrier.
The GPA project site is contaminated with oil from spills occurring prior to
HPG's assuming operational control. HPG has agreed to manage the operation and
maintenance of GPA's waste oil recovery system at the project site consistent
with GPA's oil recovery plan as approved by the U.S. Environmental Protection
Agency. GPA, however, has agreed to indemnify and hold HPG harmless from any
pre-existing environmental liability.
In 1998 and 1999, the HEIPC Group acquired what is now a 75% interest in a joint
venture, Baotou Tianjiao Power Co., Ltd., formed to design, construct, own,
operate and manage a 200 MW (net) coal-fired power plant to be located inside
Baotou Iron & Steel (Group) Co., Ltd.'s (BaoSteel's) complex in Inner Mongolia,
Peoples Republic of China. 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 which put
the HEIPC Group in a position to participate in the anticipated privatization of
the National Power Corporation and growth in the electric distribution business
in the Philippines.
On March 7, 2000, an indirect subsidiary of HEIPC acquired a 50% interest in
EPHC, which is an indirect subsidiary of El Paso Energy Corporation, for $87
million plus up to an additional $6 million of payments that are contingent upon
future earnings of EAPRC. EPHC owns approximately 91.7% of the common shares of
EAPRC, a Philippines holding company primarily engaged in the electric
generation business in Manila and Cebu through its direct and indirect
subsidiaries, using land and barge-based generating facilities fired by bunker
fuel oil, with total installed capacity of approximately 390 MW. See note (5) in
HEI's "Notes to Consolidated Financial Statements."
The HEIPC Group is exposed to the impact of foreign currency fluctuations and
changes in fuel oil prices primarily due to its 50% investment in EPHC, which
owns 91.7% of the common shares of EAPRC. As of March 31, 2000, EAPRC had
approximately $193 million in U.S. dollar denominated debt. From March 7, 2000
(acquisition date) to March 31, 2000, the high and low Philippine peso exchange
rate was 40.875 peso = $1 and 41.125 peso = $1, respectively. The potential
immediate pretax loss to the HEIPC Group that would result from a hypothetical
10% devaluation in the Philippine peso exchange rate based on this position
would be approximately $8 million. In addition, the rates charged by EAPRC 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
30
<PAGE>
Philippines. Most of the fluctuation in fuel oil prices is not recovered in
rates charged by EAPRC. As of March 31, 2000, EAPRC had an annual minimum
purchase requirement (at prices tied to the market prices of petroleum products
in Singapore) for approximately 370,000 metric tons of fuel oil and EAPRC's
average price of fuel oil for March 2000 was approximately $144 per metric ton.
The HEIPC Group is evaluating hedging strategies to reduce its exposure to
foreign currency and fuel price fluctuations. The HEIPC Group is evaluating
hedging strategies to reduce its exposure to foreign currency and fuel price
fluctuations.
As of March 31, 2000, the HEIPC Group had invested approximately $137 million in
overseas power projects. The HEIPC Group is actively pursuing other projects in
Asia and the Pacific, which are subject to approval of the HEIPC and HEI Boards
of Directors. The success of any project undertaken by the HEIPC Group will be
dependent on many factors, including the economic, political, monetary,
technological, regulatory and logistical circumstances surrounding each project
and the location of the project. Due to political or regulatory actions or other
circumstances, projects may be delayed or even prohibited. There is no assurance
that any project undertaken by the HEIPC Group will be successfully completed or
that the HEIPC Group's investment in any such project will not be lost, in whole
or in part.
Other
- -----
<TABLE>
<CAPTION>
Three months ended
March 31,
---------------------------------------- %
(in thousands) 2000 1999 change Primary reason(s) for significant change
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Revenues......... $ 538 $13,184 (96) In November 1999, HTB sold YB and
substantially all of its operating assets
for a nominal gain. 1999 includes $13
million of HTB/YB revenues.
Operating loss... (2,168) (1,384) (57) No maritime freight transportation and
harbor assist operations in the first
quarter 2000 and higher corporate expenses
</TABLE>
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 formed to hold real estate and
related assets; HEI Leasing, Inc., a company formed in February 2000 to own
passive investments and real estate subject to leases; Hawaiian Electric
Industries Capital Trust I, HEI Preferred Funding, LP and Hycap Management,
Inc., companies formed primarily for the purpose of effecting the issuance of
8.36% Trust Originated Preferred Securities; HEI and HEI Diversified, Inc.,
holding companies; and eliminations of intercompany transactions.
In November 1999, HTB sold YB and substantially all of its operating assets for
a nominal gain. The maritime freight transportation and harbor assist
subsidiaries recorded operating income of $0.6 million in the first quarter of
1999.
31
<PAGE>
Discontinued operations
- -----------------------
See note (10) in HEI's "Notes to consolidated financial statements."
Contingencies
- -------------
See note (9) in HEI's "Notes to consolidated financial statements" and note (4)
in HECO's "Notes to consolidated financial statements" for discussions of
contingencies.
Recent accounting pronouncements
- --------------------------------
See note (8) and note (6) in HEI's and HECO's respective "Notes to consolidated
financial statements."
FINANCIAL CONDITION
Liquidity and capital resources
- -------------------------------
The Company and consolidated HECO each believes that its ability to generate
cash, both internally from operations and externally from debt and equity
issues, is adequate to maintain sufficient liquidity to fund 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) March 31, 2000 December 31, 1999
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Short-term borrowings............................. $ 233 10% $ 152 7%
Long-term debt.................................... 984 43 978 44
HEI- and HECO-obligated preferred
securities of trust subsidiaries............... 200 9 200 9
Preferred stock of subsidiaries................... 34 1 34 2
Minority interests................................ 1 - 1 -
Common stock equity............................... 859 37 848 38
------------ ----------- ----------- ----------
$2,311 100% $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 three months of 2000, net cash provided by operating activities of
consolidated HEI was $62 million. Net cash used in investing activities was $205
million, largely due to ASB's purchase of mortgage/asset-backed 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
$145 million as a result of several factors, including net increases in deposit
liabilities, short-term borrowings, 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 a net decrease in securities sold under
agreements to repurchase.
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
32
<PAGE>
included in the 2000-2004 forecast, such as the development of additional
independent power projects by the HEIPC Group in Asia and the Pacific, or to
fund changes in requirements, such as increases in the amount of or an
acceleration of capital expenditures of the electric utilities.
See note (11) in HEI's "Notes to consolidated financial statements" for a
description of the medium-term notes issued in April 2000.
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) March 31, 2000 December 31, 1999
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Short-term borrowings......................... $ 105 6% $ 107 6%
Long-term debt................................ 653 38 646 38
HECO-obligated preferred securities of trust
subsidiaries................................. 100 6 100 6
Preferred stock............................... 34 2 34 2
Common stock equity........................... 816 48 806 48
------------- ---------- ------------ ---------
$1,708 100% $1,693 100%
============= ========== ============ =========
</TABLE>
Operating activities provided $39 million in net cash during the first quarter
of 2000. Investing activities used net cash of $22 million, primarily for
capital expenditures. Financing activities used net cash of $18 million,
including $16 million for the payment of common and preferred dividends and
preferred securities distributions and $2 million for the net repayment of
short-term borrowings, partially offset by a $6 million net increase in long-
term debt.
The electric utilities' consolidated financing requirements for 2000 through
2004, including net capital expenditures, long-term debt and preferred stock
retirements, are estimated to total $595 million. HECO's consolidated internal
sources, after the payment of common stock and preferred stock dividends, are
expected to provide cash in excess of the consolidated financing requirements
and may also be used to repay short-term borrowings. As of March 31, 2000, $34
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 March 31, 2000, an additional
$65 million of special purpose revenue bonds was authorized by the Hawaii
Legislature for issuance for the benefit of HECO and HELCO prior to the end of
2003. HECO does not anticipate the need to issue new common equity over the
five-year period. The PUC must approve issuances, if any, of long-term 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.
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,
33
<PAGE>
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>
March 31, December 31, %
(in millions) 2000 1999 change
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Total assets.......................................... $5,943 $5,848 2
Loans receivable, net................................. 3,205 3,212 -
Mortgage/asset-backed securities...................... 2,067 1,973 5
Deposit liabilities................................... 3,558 3,492 2
Securities sold under agreements to repurchase........ 645 661 (2)
Advances from Federal Home Loan Bank.................. 1,227 1,189 3
</TABLE>
As of March 31, 2000, ASB was the third largest financial institution in Hawaii
based on total assets of $5.9 billion and deposits of $3.6 billion.
For the first quarter of 2000, net cash provided by ASB's operating activities
was $17 million. Net cash used in ASB's investing activities was $94 million,
due largely to the purchase of mortgage/asset-backed securities, net of
repayments. Net cash provided by financing activities was $79 million largely
due to net increases of $66 million in deposit liabilities and $38 million in
advances in Federal Home Loan Bank, partly offset by a net decrease of $21
million in securities sold under agreements to repurchase and $6 million in
common and preferred stock dividends.
Minimum liquidity levels are currently governed by the regulations adopted by
the Office of Thrift Supervision (OTS). ASB was in compliance with OTS liquidity
requirements as of March 31, 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 March 31, 2000, ASB was in compliance with the OTS minimum
capital requirements (noted in parentheses) with a tangible capital ratio of
5.8% (1.5%), a core capital ratio of 5.8% (4.0%) and a risk-based capital ratio
of 11.1% (8.0%).
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
March 31, 2000, ASB was "well-capitalized" (ratio requirements noted in
parentheses) with a leverage ratio of 5.8% (5.0%), a Tier-1 risk-based ratio of
10.2% (6.0%) and a total risk-based ratio of 11.1% (10.0%).
On December 1, 1998, the OTS adopted Thrift Bulletin 13a (TB 13a) for purposes
of providing guidance on the management of interest risks, investment securities
and derivatives activities. TB 13a updates the OTS's minimum standards for
thrift institutions' interest rate risk management practices with regard to
board-approved limits and interest rate risk measurement systems. TB 13a also
contains guidance on thrifts' investment and derivative activities by describing
the types of analysis institutions should perform prior to purchasing securities
or financial derivatives. TB 13a also provides guidelines on the use of certain
types of securities and financial derivatives for purposes other than reducing
portfolio risk. Finally, TB 13a provides detailed guidelines for implementing
part of the notice announcing the revision of the CAMELS rating system,
published by the Federal Financial Institutions Examination Council. That
publication announced revised interagency policies, that, among other things,
established the Sensitivity to Market Risk component rating (the "S" rating). TB
13a provides quantitative guidelines for an initial assessment of an
institution's level of interest rate risk. Examiners have broad discretion in
implementing those guidelines. It also provides guidelines concerning the
factors examiners consider in assessing the quality of an institution's risk
management systems and procedures. Management has developed and is
34
<PAGE>
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.
Significant interstate banking legislation has been enacted at both the federal
and state levels. Under the federal Riegle-Neal Interstate Banking and Branching
Efficiency Act of 1994, a bank holding company may acquire control of a bank in
any state, subject to certain restrictions. Under state law, effective June 1,
1997, a bank chartered under state law may merge with an out-of-state bank and
convert all branches of both banks into branches of a single bank, subject to
certain restrictions. Although the federal and state laws apply only to banks,
such legislation may nonetheless affect the competitive balance among banks,
thrifts and other financial institutions and the level of competition among
financial institutions doing business in Hawaii.
In November 1999, Congress passed the Gramm-Leach-Bliley Act (the Act). The Act
repeals the Depression Era Glass-Steagall Act so that banks, insurance companies
and investment firms can compete directly against each other, thereby allowing
"one-stop shopping" for an array of financial services. Although the Act does
further restrict the ability of a savings and loan holding company to own both a
savings association and nonfinancial subsidiaries, the savings and loan holding
company relationship among HEI, HEIDI and ASB is "grandfathered" under the Act
so that HEI and its subsidiaries will be able to continue to engage in their
current activities. The net effect of the Act on ASB's competitive position is
not known. On the one hand, the availability of "one-stop shopping" for
financial services might increase competitive pressures on ASB. On the other
hand, the restriction on the ability to combine savings associations and
nonfinancial subsidiaries under one holding company may decrease competitive
pressure by reducing the incentive to create new thrifts.
In addition to its effects upon competition, the Act might result in increased
costs for ASB. For example, the Act imposes on financial institutions an
obligation to protect the security and confidentiality of its customers'
nonpublic personal information, and directs, among others, the FDIC and the OTS
to establish "appropriate standards" to protect such information and its use.
Although ASB currently has in place a policy concerning customer privacy, it is
not known at this time whether the rules eventually adopted by the regulatory
authorities might impose additional compliance costs on ASB.
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 the first quarter of 2000, HEI utilized
an interest-rate swap to manage its interest rate risk. See note (12) in HEI's
"Notes to consolidated financial statements." 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.
U.S. Treasury yields at March 31, 2000 and December 31, 1999 were as follows:
<TABLE>
<CAPTION>
(%) March 31, 2000 December 31, 1999
--- -------------- -----------------
<S> <C> <C>
3 month 5.89 5.31
1 year 6.24 5.96
5 year 6.32 6.34
10 year 6.01 6.44
30 year 5.84 6.48
</TABLE>
As interest rates (as measured by U.S. Treasury yields) have increased or
decreased between 2 and 64 basis points from December 31, 1999 to March 31,
2000, management believes that with this inverted yield curve there was an
unfavorable, but immaterial, change between those dates in the Company's
estimated fair values of its interest-sensitive assets, liabilities and off-
balance sheet items.
35
<PAGE>
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 2. Changes in securities and use of proceeds.
- ---------------------------------------------------
HEI has issued unregistered common stock from January 1, 2000 through May 3,
2000 pursuant to the HEI 1990 Nonemployee Director Stock Plan, amended effective
April 27, 1999 (the Subsidiary Director Plan), the HEI 1999 Nonemployee Company
Director Stock Grant Plan (the HEI Nonemployee Director Plan), the HECO Utility
Group Team Incentive Plan and the HECO Utility Group Team Incentive Plan for
Bargaining Unit Employees (collectively, the Team Incentive Plan). Under the
Subsidiary Director Plan, 60% of the annual retainer payable to nonemployee
directors is paid in HEI common stock. Under the HEI Nonemployee Director Plan
as amended in 1999, a stock grant of 300 shares of HEI common stock is granted
to HEI nonemployee directors in addition to an annual retainer of $20,000. Under
the Team Incentive Plan, eligible employees of HECO, MECO and HELCO receive
awards of HEI common stock based on the attainment of performance goals by the
respective companies.
From January 1, 2000 through May 3, 2000, the director plans issued 2,268 shares
of HEI common stock, in exchange for the retention of cash by HEI that would
otherwise have been paid to the directors as retainers in the aggregate amount
of $84,000, and 3,000 shares of HEI common stock in the aggregate amount of
$111,000 from January 1, 2000 through May 3, 2000 to HEI directors in addition
to the retainer. In addition, from January 1, 2000 through May 3, 2000, the Team
Incentive Plan issued 73,552 shares of HEI common stock in exchange for cash
received by HEI from the electric utility subsidiaries in the aggregate amounts
of $2.2 million. The shares issued under the director stock plans were not
registered since they did not involve a "sale" as defined under Section 2(3) of
the Securities Act of 1933, as amended. Participation by nonemployee directors
of HEI and subsidiaries in the director stock plans is mandatory and thus does
not involve an investment decision. The shares issued under the Team Incentive
Plan were not registered because their initial sales to HECO, MECO and HELCO
were exempt as transactions not involving any public offering under Section 4(2)
of the Securities Act of 1933, as amended, and because their subsequent award to
eligible employees did not involve a "sale," as defined in Section 2(3) of the
Securities Act of 1933, as amended. Awards of HEI common stock under the Team
Incentive Plan are made to eligible employees on the basis of their attainment
of performance goals established by their respective companies and no cash or
other tangible or definable consideration is paid by such employees to their
respective companies for the shares.
Item 4. Submission of matters to a vote of security holders
- ------------------------------------------------------------
HEI
The Annual Meeting of Stockholders of HEI was held on April 25, 2000. Proxies
for the meeting were solicited pursuant to Regulation 14A under the Securities
Exchange Act of 1934. As of February 16, 2000, the record date for the Annual
Meeting, there were 32,297,786 shares of common stock issued and outstanding and
entitled to vote. There was no solicitation in opposition to the management
nominees to the Board of Directors as listed in the proxy statement for the
meeting and such nominees were elected to the Board of Directors.
36
<PAGE>
The results of the voting for the Class I director-nominees and the independent
auditor are as follows:
<TABLE>
<CAPTION>
Shares of Common Stock
-------------------------------------------------------------------------------------------
Broker
For Withheld Against Abstain nonvotes
----------------- --------------- -------------- -------------- ---------------
<S> <C> <C> <C> <C> <C>
Election of Class I Directors
Robert F. Clarke 29,651,391 643,829 --
A. Maurice Myers 29,622,435 672,785 --
James K. Scott 29,596,892 698,328 --
Election of KPMG LLP
as independent auditor 29,847,917 208,291 239,012 --
</TABLE>
Class II Directors--Victor Hao Li, S.J.D., T. Michael May, Diane J. Plotts,
Kelvin H. Taketa and Jeffrey N. Watanabe--continue in office with terms ending
at the 2001 Annual Meeting. Class III Directors-- Don E. Carroll, Richard
Henderson, Bill D. Mills and Oswald K. Stender --continue in office with terms
ending at the 2002 Annual Meeting.
HECO
The Annual Meeting of the Sole Stockholder of HECO was conducted by written
consent effective April 25, 2000. The incumbent members of the Board of
Directors of HECO were re-elected. The incumbent members continuing in office
are Robert F. Clarke, Richard Henderson, T. Michael May, Paul A. Oyer, Diane J.
Plotts, James K. Scott, Anne M. Takabuki, Jeffrey N. Watanabe and Paul C. Yuen.
In addition, KPMG LLP was elected independent auditor of HECO for the fiscal
year 2000.
Item 5. Other information
- --------------------------
A. 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. HECO is finalizing a settlement
agreement with the EPA which will determine the amount of penalties that will be
imposed. Management does not believe that the EPA imposed penalties will have a
material effect on HEI's or HECO's consolidated financial condition, results of
operations or liquidity.
B. Amended notice of property tax assessment for HELCO
In December 1999, the County Council of Hawaii County amended its ordinances to
rescind the exemption from real property taxes for utility companies. The
utilities currently pay a public service company tax that, by state statutory
language, is partly in lieu of real property taxes. On April 14, 2000, the
Department of Finance, Real Property Division of the County of Hawaii, sent
HELCO an amended notice of property assessment showing total real property taxes
owed of approximately $3.9 million for the fiscal year July 2000 to June 2001.
HELCO intends to appeal the amended notice by May 15, 2000 on the grounds of
denial of an exemption to which taxpayer HELCO is entitled, unconstitutionality
and illegality, including overassessment, improper methodology and other
procedural grounds. HELCO also intends to seek recovery of the assessment in
rebuttal testimony for its 2000 test year rate case.
37
<PAGE>
C. Ratio of earnings to fixed charges
The following tables set forth the ratio of earnings to fixed charges for HEI
and its subsidiaries for the periods indicated:
Ratio of earnings to fixed charges excluding interest on ASB deposits
<TABLE>
<CAPTION>
Three months Years ended December 31,
ended -------------------------------------------------------------------------------------------------
March 31, 2000 1999 1998 1997 1996 1995
- -------------------- ---------------- --------------- -------------- --------------- ----------------
<S> <C> <C> <C> <C> <C>
1.86 1.80 1.85 1.89 1.93 2.02
==================== ================ =============== ============== =============== ================
</TABLE>
Ratio of earnings to fixed charges including interest on ASB deposits
<TABLE>
<CAPTION>
Three months Years ended December 31,
ended -------------------------------------------------------------------------------------------------
March 31, 2000 1999 1998 1997 1996 1995
- -------------------- ---------------- --------------- -------------- --------------- ----------------
<S> <C> <C> <C> <C> <C>
1.57 1.48 1.47 1.58 1.56 1.60
==================== ================ =============== ============== =============== ================
</TABLE>
For purposes of calculating the ratio of earnings to fixed charges, "earnings"
represent the sum of (i) pretax income from continuing operations (excluding
undistributed net income or net loss from less than fifty-percent-owned persons)
and (ii) fixed charges (as hereinafter defined, but excluding capitalized
interest). "Fixed charges" are calculated both excluding and including interest
on ASB's deposits during the applicable periods and represent the sum of (i)
interest, whether capitalized or expensed, but excluding interest on nonrecourse
debt from leveraged leases which is not included in interest expense in HEI's
consolidated statements of income, (ii) amortization of debt expense and
discount or premium related to any indebtedness, whether capitalized or
expensed, (iii) the interest factor in rental expense, (iv) the preferred stock
dividend requirements of HEI's subsidiaries, increased to an amount representing
the pretax earnings required to cover such dividend requirements and (v) the
preferred securities distribution requirements of trust subsidiaries.
The following table sets forth the ratio of earnings to fixed charges for HECO
and its subsidiaries for the periods indicated:
Ratio of earnings to fixed charges
<TABLE>
<CAPTION>
Three months Years ended December 31,
ended -------------------------------------------------------------------------------------------------
March 31, 2000 1999 1998 1997 1996 1995
- -------------------- ---------------- --------------- -------------- --------------- ----------------
<S> <C> <C> <C> <C> <C>
3.61 3.09 3.33 3.26 3.58 3.46
==================== ================ =============== ============== =============== ================
</TABLE>
For purposes of calculating the ratio of earnings to fixed charges, "earnings"
represent the sum of (i) pretax income before preferred stock dividends of HECO
and (ii) fixed charges (as hereinafter defined, but excluding the allowance for
borrowed funds used during construction). "Fixed charges" represent the sum of
(i) interest, whether capitalized or expensed, incurred by HECO and its
subsidiaries, (ii) amortization of debt expense and discount or premium related
to any indebtedness, whether capitalized or expensed, (iii) the interest factor
in rental expense, (iv) the preferred stock dividend requirements of HELCO and
MECO, increased to an amount representing the pretax earnings required to cover
such dividend requirements and (v) the preferred securities distribution
requirements of the trust subsidiaries.
38
<PAGE>
Item 6. Exhibits and reports on Form 8-K
- -----------------------------------------
(a) Exhibits
<TABLE>
<S> <C>
HEI Hawaiian Electric Industries, Inc. and subsidiaries
Exhibit 12.1 Computation of ratio of earnings to fixed charges, three months ended March 31,
2000 and 1999
HECO Hawaiian Electric Company, Inc. and subsidiaries
Exhibit 12.2 Computation of ratio of earnings to fixed charges, three months ended March 31,
2000 and 1999
HEI KPMG LLP letter re: change in accounting principle
Exhibit 18.1
HECO KPMG LLP letter re: change in accounting principle
Exhibit 18.2
HEI Hawaiian Electric Industries, Inc. and subsidiaries
Exhibit 27.1 Financial Data Schedule
March 31, 2000 and three months ended March 31, 2000
HECO Hawaiian Electric Company, Inc. and subsidiaries
Exhibit 27.2 Financial Data Schedule
March 31, 2000 and three months ended March 31, 2000
</TABLE>
(b) Reports on Form 8-K
Subsequent to December 31, 1999, HEI and/or HECO filed Current Reports, Forms
8-K, with the SEC as follows:
<TABLE>
<CAPTION>
Dated Registrant/s Items reported
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C>
February 29, 2000 HEI/HECO Item 7, portions of HEI's 1999 Annual Report to Stockholders and
HECO's 1999 Annual Report to Stockholder
</TABLE>
39
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrants have duly caused this report to be signed on their behalf by the
undersigned, thereunto duly authorized. The signature of the undersigned
companies shall be deemed to relate only to matters having reference to such
companies and any subsidiaries thereof.
HAWAIIAN ELECTRIC INDUSTRIES, INC. HAWAIIAN ELECTRIC COMPANY, INC.
(Registrant) (Registrant)
By /s/ Curtis Y. Harada By /s/ Paul Oyer
--------------------- ------------------------
Curtis Y. Harada Paul A. Oyer
Controller Financial Vice President and
(Principal Accounting Treasurer
Officer of HEI) (Principal Financial Officer
of HECO)
Date: May 12, 2000 Date: May 12, 2000
40
<PAGE>
HEI Exhibit 12.1
----------------
Hawaiian Electric Industries, Inc. and subsidiaries
COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES
(unaudited)
<TABLE>
<CAPTION>
Three months ended Three months ended
March 31, March 31,
------------------------------------- -------------------------------------
(dollars in thousands) 2000 (1) 2000 (2) 1999 (1) 1999 (2)
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Fixed charges
Total interest charges (3)..................... $ 47,213 $ 74,887 $ 36,642 $ 69,344
Interest component of rentals.................. 1,113 1,113 1,101 1,101
Pretax preferred stock dividend requirements
of subsidiaries............................... 795 795 992 992
Preferred securities distributions of
trust subsidiaries.......................... 4,009 4,009 3,999 3,999
------------- ------------ ------------- ------------
Total fixed charges........................... $ 53,130 $ 80,804 $ 42,734 $ 75,436
============= ============ ============= ============
Earnings
Pretax income from continuing operations....... $ 46,583 $ 46,583 $ 33,197 $ 33,197
Fixed charges, as shown........................ 53,130 80,804 42,734 75,436
Interest capitalized........................... (788) (788) (640) (640)
------------- ------------ ------------- ------------
Earnings available for fixed charges........... $ 98,925 $126,599 $ 75,291 $107,993
============= ============ ============= ============
Ratio of earnings to fixed charges............. 1.86 1.57 1.76 1.43
============= ============ ============= ============
</TABLE>
(1) Excluding interest on ASB deposits.
(2) Including interest on ASB deposits.
(3) Interest on nonrecourse debt from leveraged leases is not included in total
interest charges nor in interest expense in HEI's consolidated statements
of income.
<PAGE>
HECO Exhibit 12.2
-----------------
Hawaiian Electric Company, Inc. and subsidiaries
COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES
(unaudited)
<TABLE>
<CAPTION>
Three months ended
March 31,
-------------------------------
(dollars in thousands) 2000 1999
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Fixed charges
Total interest charges................................................. $12,271 $12,343
Interest component of rentals.......................................... 202 196
Pretax preferred stock dividend requirements of subsidiaries........... 362 399
Preferred securities distributions of trust subsidiaries............... 1,919 1,909
-------------- --------------
Total fixed charges.................................................... $14,754 $14,847
============== ==============
Earnings
Income before preferred stock dividends of HECO........................ $23,995 $17,450
Income taxes (see note below).......................................... 15,177 10,620
Fixed charges, as shown................................................ 14,754 14,847
AFUDC for borrowed funds............................................... (691) (640)
-------------- --------------
Earnings available for fixed charges................................... $53,235 $42,277
============== ==============
Ratio of earnings to fixed charges..................................... 3.61 2.85
============== ==============
Note:
Income taxes is comprised of the following
Income tax expense relating to income from regulated activities....... $15,193 $10,668
Income tax benefit relating to loss from nonregulated activities...... (16) (48)
-------------- --------------
$15,177 $10,620
============== ==============
</TABLE>
<PAGE>
HEI Exhibit 18.1
----------------
[KPMG LLP letterhead]
May 12, 2000
The Board of Directors
Hawaiian Electric Industries, Inc.
Honolulu, Hawaii
Ladies and Gentlemen:
We have been furnished with a copy of Form 10-Q of Hawaiian Electric Industries,
Inc. for the three months ended March 31, 2000, and have read the Company's
statements contained in note 6 to the consolidated condensed financial
statements included therein. As stated in note 6, the Company changed its method
of calculating the market-related value of the plan assets by including 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. The Company states that the newly adopted
accounting principle is preferable in the circumstances because the new method
results in calculated asset values of the plans that more closely approximate
fair value, while still mitigating the effect of annual fair value fluctuations.
In accordance with your request, we have reviewed and discussed with Company
officials the circumstances and business judgment and planning upon which the
decision to make this change in accounting principle was based.
We have not audited any consolidated financial statements of Hawaiian Electric
Industries, Inc. as of any date or for any period subsequent to December 31,
1999, nor have we audited the information set forth in the aforementioned note 6
to the consolidated condensed financial statements; accordingly, we do not
express an opinion concerning the factual information contained therein.
With regard to the aforementioned accounting change, authoritative criteria have
not been established for evaluating the preferability of one acceptable method
of accounting over another acceptable method. However, for purposes of Hawaiian
Electric Industries, Inc.'s compliance with the requirements of the Securities
and Exchange Commission, we are furnishing this letter.
Based on our review and discussion, with reliance on management's business
judgment and planning, we concur that the newly adopted method of accounting is
preferable in the Company's circumstances.
Very truly yours,
/s/ KPMG LLP
<PAGE>
HECO Exhibit 18.2
-----------------
[KPMG LLP letterhead]
May 12, 2000
The Board of Directors
Hawaiian Electric Company, Inc.
Honolulu, Hawaii
Ladies and Gentlemen:
We have been furnished with a copy of Form 10-Q of Hawaiian Electric Company,
Inc. for the three months ended March 31, 2000, and have read the Company's
statements contained in note 2 to the consolidated condensed financial
statements included therein. As stated in note 2, the Company changed its
method of calculating the market-related value of the plan assets by including 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. The Company states that the
newly adopted accounting principle is preferable in the circumstances because
the new method results in calculated asset values of the plans that more closely
approximate fair value, while still mitigating the effect of annual fair value
fluctuations. In accordance with your request, we have reviewed and discussed
with Company officials the circumstances and business judgment and planning upon
which the decision to make this change in accounting principle was based.
We have not audited any consolidated financial statements of Hawaiian Electric
Company, Inc. as of any date or for any period subsequent to December 31, 1999,
nor have we audited the information set forth in the aforementioned note 2 to
the consolidated condensed financial statements; accordingly, we do not express
an opinion concerning the factual information contained therein.
With regard to the aforementioned accounting change, authoritative criteria have
not been established for evaluating the preferability of one acceptable method
of accounting over another acceptable method. However, for purposes of Hawaiian
Electric Company, Inc.'s compliance with the requirements of the Securities and
Exchange Commission, we are furnishing this letter.
Based on our review and discussion, with reliance on management's business
judgment and planning, we concur that the newly adopted method of accounting is
preferable in the Company's circumstances.
Very truly yours,
/s/ KPMG LLP
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from Hawaiian
Electric Industries, Inc. and subsidiaries' consolidated balance sheet as of
March 31, 2000 and consolidated statement of income for the three months ended
March 31, 2000 and is qualified in its entirety by reference to such financial
statements.
</LEGEND>
<NAME> HAWAIIAN ELECTRIC INDUSTRIES, INC.
<CIK> 0000354707
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-2000
<PERIOD-START> JAN-01-2000
<PERIOD-END> MAR-31-2000
<CASH> 202,583
<SECURITIES> 2,255,257
<RECEIVABLES> 153,790
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 3,221,567
<DEPRECIATION> 1,158,137
<TOTAL-ASSETS> 8,457,737
<CURRENT-LIABILITIES> 0
<BONDS> 983,881
100,000
134,406
<COMMON> 667,957
<OTHER-SE> 191,202
<TOTAL-LIABILITY-AND-EQUITY> 8,457,737
<SALES> 0
<TOTAL-REVENUES> 401,875
<CGS> 0
<TOTAL-COSTS> 333,673
<OTHER-EXPENSES> 2,547
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 19,072
<INCOME-PRETAX> 46,583
<INCOME-TAX> 17,607
<INCOME-CONTINUING> 28,976
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 28,976
<EPS-BASIC> 0.90
<EPS-DILUTED> 0.90
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> UT
<LEGEND>
This schedule contains summary financial information extracted from Hawaiian
Electric Company, Inc. and subsidiaries' consolidated balance sheet as of
March 31, 2000 and consolidated statement of income and cash flows for the three
months ended March 31, 2000 and is qualified in its entirety by reference to
such financial statements.
</LEGEND>
<NAME> HAWIIAN ELECTRIC COMPANY, INC.
<CIK> 0000046207
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-2000
<PERIOD-START> JAN-01-2000
<PERIOD-END> MAR-31-2000
<BOOK-VALUE> PER-BOOK
<TOTAL-NET-UTILITY-PLANT> 1,956,989
<OTHER-PROPERTY-AND-INVEST> 0
<TOTAL-CURRENT-ASSETS> 175,712
<TOTAL-DEFERRED-CHARGES> 13,200
<OTHER-ASSETS> 144,976
<TOTAL-ASSETS> 2,290,877
<COMMON> 85,387
<CAPITAL-SURPLUS-PAID-IN> 295,542
<RETAINED-EARNINGS> 434,979
<TOTAL-COMMON-STOCKHOLDERS-EQ> 815,908
100,000
34,293
<LONG-TERM-DEBT-NET> 652,381
<SHORT-TERM-NOTES> 0
<LONG-TERM-NOTES-PAYABLE> 0
<COMMERCIAL-PAPER-OBLIGATIONS> 104,977
<LONG-TERM-DEBT-CURRENT-PORT> 0
0
<CAPITAL-LEASE-OBLIGATIONS> 0
<LEASES-CURRENT> 0
<OTHER-ITEMS-CAPITAL-AND-LIAB> 583,318
<TOT-CAPITALIZATION-AND-LIAB> 2,290,877
<GROSS-OPERATING-REVENUE> 288,421
<INCOME-TAX-EXPENSE> 15,193
<OTHER-OPERATING-EXPENSES> 237,350
<TOTAL-OPERATING-EXPENSES> 252,543
<OPERATING-INCOME-LOSS> 35,878
<OTHER-INCOME-NET> 1,844
<INCOME-BEFORE-INTEREST-EXPEN> 37,722
<TOTAL-INTEREST-EXPENSE> 13,727
<NET-INCOME> 23,995
270
<EARNINGS-AVAILABLE-FOR-COMM> 23,725
<COMMON-STOCK-DIVIDENDS> 13,952
<TOTAL-INTEREST-ON-BONDS> 41,639
<CASH-FLOW-OPERATIONS> 39,107
<EPS-BASIC> 0
<EPS-DILUTED> 0
</TABLE>
