================================================================================UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington,
D.C.D. C. 20549FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
x ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended December 31,
19972002OR
[ ]
¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 COMMISSION REGISTRANT; STATE OF INCORPORATION; I.R.S. EMPLOYER FILE NUMBER ADDRESS; AND TELEPHONE NUMBER IDENTIFICATION NO. - ----------- ----------------------------------- ------------------ 1-8503 HAWAIIAN ELECTRIC INDUSTRIES, INC. 99-0208097 (A Hawaii Corporation) 900 Richards Street Honolulu, Hawaii 96813 Telephone (808) 543-5662 1-4955 HAWAIIAN ELECTRIC COMPANY, INC. 99-0040500 (A Hawaii Corporation) 900 Richards Street Honolulu, Hawaii 96813 Telephone (808) 543-7771 SECURITIES REGISTEREDPURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
Commission
File Number
Registrant; State of Incorporation;
Address; and Telephone Number
I.R.S. Employer
Identification No.
1-8503 HAWAIIAN ELECTRIC INDUSTRIES,
INC. (A Hawaii Corporation)900 Richards Street, Honolulu, Hawaii 96813
Telephone (808) 543-5662
99-0208097 1-4955 HAWAIIAN ELECTRIC COMPANY,
INC. (A Hawaii Corporation)900 Richards Street, Honolulu, Hawaii 96813
Telephone (808) 543-7771
99-0040500 Securities registered pursuant to Section 12(b)
OF THE ACT: NAME OF EACH EXCHANGE REGISTRANT TITLE OF EACH CLASS ON WHICH REGISTERED - ---------- ------------------- -------------------- Hawaiian Electric Industries, Inc. Common Stock, New York Stock Without Par Value Exchange Hawaiian Electric Industries, Inc. Guarantee withof the Act:
Registrant
Title of each class
Name of each exchange
on which registered
Hawaiian Electric Industries, Inc.
Common Stock, Without Par Value New York Stock Exchange Hawaiian Electric Industries, Inc.
Guarantee with respect to 8.36% Trust Originated Preferred SecuritiesSM(TOPrS SM) New York Stock Exchange Hawaiian Electric Industries, Inc.
Preferred Stock Purchase Rights New York Stock Exchange Hawaiian Electric Company, Inc.
Guarantee with respect to 8.05% Cumulative Quarterly Income Preferred Securities Series 1997 (QUIPSSM) New York Stock Exchange Hawaiian Electric Company, Inc.
Guarantee with respect to 7.30% Cumulative Quarterly Income Preferred Securities Series 1998 (QUIPSSM) New York Stock Exchange Securities registered pursuant to
8.36% Exchange Trust Originated Preferred Securities (SM) (TOPrS (SM)) Hawaiian Electric Industries, Inc. Preferred Stock New York Stock Purchase Rights Exchange Hawaiian Electric Company, Inc. Guarantee with New York Stock respect to 8.05% Exchange Cumulative Quarterly Income Preferred Securities Series 1997 (QUIPS(SM)) SECURITIES REGISTERED PURSUANT TO SECTIONSection 12(g)OF THE ACT: REGISTRANT TITLE OF EACH CLASS - ---------- ------------------- Hawaiian Electric Industries, Inc. None Hawaiian Electric Company, Inc. Cumulative Preferred Stock ================================================================================of the Act:
Registrant
Title of each class
Hawaiian Electric Industries, Inc. None Hawaiian Electric Company, Inc. Cumulative Preferred Stock 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
Xx No--- ---¨Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of
registrant'sregistrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.[ ] ================================================================================¨ ================================================================================Indicate by check mark whether Registrant Hawaiian Electric Industries, Inc. is an accelerated filer (as defined in Rule 12b-2 of the Act). Yes x No¨
Indicate by check mark whether Registrant Hawaiian Electric Company, Inc. is an accelerated filer (as defined in Rule 12b-2 of the Act). Yes ¨ Nox
AGGREGATE MARKET VALUE NUMBER OF SHARES OF OF THE VOTING STOCK HELD COMMON STOCK OUT- BY NONAFFILIATES OF THE STANDING OF THE REGISTRANTS ON MARCH 13, REGISTRANTS ON 1998 MARCH 13, 1998 ------------------------ -------------------Aggregate market value of
the voting common equity
held by nonaffiliates of the
registrants on
June 30, 2002Number of shares of
common stockoutstanding of the
registrants onMarch 10, 2003
Hawaiian Electric Industries, Inc.
$1,300,041,000 32,001,007 (Without$1,546,487,536.65 37,024,258
(Without par value)Hawaiian Electric Company, Inc.
N/ANot applicable 12,805,843 ($
($62/2/3 par value)================================================================================DOCUMENTS INCORPORATED BY REFERENCE
PART OF FORMDocument
Part of
Form 10-K
INTO WHICH THE DOCUMENT IS DOCUMENT INCORPORATED - ------------------------------------------------------------------------ -------------------------Portions ofinto which the
document is
incorporated
Annual Reports to Stockholder(s) of the following registrants for the fiscal year ended December 31,
1997:2002:Hawaiian Electric Industries,
Inc....................................Inc.Parts I, II, III and IV Hawaiian Electric Company,
Inc.......................................Inc. (except for pages 3, 58 and 60)Parts I, II, III and IV Portions of Proxy Statement of Hawaiian Electric Industries, Inc., dated March
13, 1998,10, 2003, for the Annual Meeting of Stockholders
Part III================================================================================ THIS COMBINED FORMThis combined Form 10-K
REPRESENTS SEPARATE FILINGS BY HAWAIIAN ELECTRIC INDUSTRIES, INC. AND HAWAIIAN ELECTRIC COMPANY, INC. INFORMATION CONTAINED HEREIN RELATING TO ANY INDIVIDUAL REGISTRANT IS FILED BY EACH REGISTRANT ON ITS OWN BEHALF. NEITHER REGISTRANT MAKES ANY REPRESENTATIONS AS TO THE INFORMATION RELATING TO THE OTHER REGISTRANT. ================================================================================represents separate filings by Hawaiian Electric Industries, Inc. and Hawaiian Electric Company, Inc. Information contained herein relating to any individual registrant is filed by each registrant on its own behalf. Neither registrant makes any representations as to the information relating to the other registrant. i
Defined below are certain terms used in this report:
TERMS DEFINITIONS - -------- ----------- 1935 ACT Public Utility Holding Company Act of 1935 AES Applied Energy Services, Inc. AES-BP AES Barbers Point, Inc. (now known as AES Hawaii, Inc.) ARM Adjustable rate mortgage ASB American Savings Bank, F.S.B., a wholly owned subsidiary of HEI Diversified, Inc. and parent company of American Savings Investment Services Corporation, ASB Service Corporation, AdCommunications, Inc. and American Savings Mortgage Co., Inc. BoA Bank of America, FSB BHP BHP Petroleum Americas Refining Inc., a fuel oil supplier BIF Bank Insurance Fund BPPI Baldwin Pacific Properties, Inc., a limited partner of Baldwin*Malama (a limited partnership in which Malama Development Corp. is the general partner) Btu British thermal unit CDUP Conservation District Use Permit CERCLA Comprehensive Environmental Response, Compensation and Liability Act CHEVRON Chevron Products Company, a fuel oil supplier 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, HEI Investment Corp., Malama Pacific Corp. and its subsidiaries, Hawaiian Tug & Barge Corp., Young Brothers, Limited, HEI Diversified, Inc., American Savings Bank, F.S.B. and its subsidiaries, HEIDI Real Estate Corp., Pacific Energy Conservation Services, Inc., HEI Power Corp. and its subsidiaries, Hycap Management, Inc., Hawaiian Electric Industries Capital Trust I, Hawaiian Electric Industries Capital Trust II and Hawaiian Electric Industries Capital Trust III CONSUMER Division of Consumer Advocacy, Department of Commerce and Consumer ADVOCATE Affairs of the State of Hawaii CT Combustion turbine DOH Department of Health of the State of Hawaii DOT Department of Transportation of the State of Hawaii DSM Demand-side management ENCOGEN Encogen Hawaii, L.P. ENSERCH Enserch Development Corporation EPA Environmental Protection Agency - federal EPCRA Emergency Planning and Community Right-to-Know Act ERL Environmental Response Law of the State of Hawaii FASB Financial Accounting Standards Board FDIC Federal Deposit Insurance Corporation FDICIA Federal Deposit Insurance Corporation Improvement Act of 1991 FEDERAL U.S. Government FERC Federal Energy Regulatory Commission FHLB Federal Home Loan Bank FIRREA Financial Institutions Reform, Recovery, and Enforcement Act of 1989
Terms
Definitions
1935 Act
Public Utility Holding Company Act of 1935 AES Hawaii
AES Hawaii, Inc., formerly known as AES Barbers Point, Inc. ASB
American Savings Bank, F.S.B., a wholly-owned subsidiary of HEI Diversified, Inc. and parent company of American Savings Investment Services Corp. (and its subsidiary since March 15, 2001, Bishop Insurance Agency of Hawaii, Inc.), ASB Service Corporation, AdCommunications, Inc., American Savings Mortgage Co., Inc. and ASB Realty Corporation BIF
Bank Insurance Fund BoA
Bank of America, FSB BLNR
Board of Land and Natural Resources of the State of Hawaii Btu
British thermal unit CDUP
Conservation District Use Permit CERCLA
Comprehensive Environmental Response, Compensation and Liability Act Chevron
Chevron Products Company, a fuel oil supplier 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, Renewable Hawaii, Inc., HEI Diversified, Inc., American Savings Bank, F.S.B. 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.), HEI Power Corp. and its subsidiaries and Malama Pacific Corp. Consumer Advocate
Division of Consumer Advocacy, Department of Commerce and Consumer Affairs of the State of Hawaii CT
Combustion turbine DLNR
Department of Land and Natural Resources of the State of Hawaii D&O
Decision and order DOD
Department of Defense – federal DOH
Department of Health of the State of Hawaii DSM
Demand-side management DTCC
Dual-train combined-cycle EAPRC
East Asia Power Resources Corporation ECA
Energy cost adjustment Enserch
Enserch Development Corporation EPA
Environmental Protection Agency – federal ERL
Environmental Response Law of the State of Hawaii FDIC
Federal Deposit Insurance Corporation ii
GLOSSARY OF TERMS(continued)
TERMS DEFINITIONS - -------- -----------Terms
Definitions
FDICIA
Federal Deposit Insurance Corporation Improvement Act of 1991 federal
U.S. Government FHLB
Federal Home Loan Bank FICO
Financing Corporation FIRREA
Financial Institutions Reform, Recovery, and Enforcement Act of 1989 Hamakua Partners
Hamakua Energy Partners, L.P., formerly known as Encogen Hawaii, L.P. HRD
Hawi Renewable Development, Inc. HCPC
Hilo Coast Power Company, formerly Hilo Coast Processing Company HC&S
Hawaiian Commercial & Sugar Company, a division of A&B-Hawaii, Inc. HECO
Hawaiian Electric Company, Inc., a wholly ownedan electric utility subsidiary of Hawaiian Electric Industries, Inc. and parent company of Maui Electric Company, Limited, Hawaii Electric Light Company, Inc.and, HECO Capital Trust I,HECO'SHECO Capital Trust II and Renewable Hawaii, Inc.HECO’s Annual Report
Portions of Hawaiian Electric Company, Inc. 's’s 2002 Annual Report to Stockholder filed as HECO Exhibit 13, which portions are incorporated into this Form 10-K by referenceHECO’s Consolidated Financial
CONSOLIDATEDStatementsHawaiian Electric Company, Inc.’s Consolidated Financial Statements, incorporated into Parts I, II and IV of this FINANCIALForm 10-K by reference to pages1223 to3457 ofHawaiian STATEMENTS Electric Company, Inc's 1997HECO’s Annual Reportto Stockholder, portions of which are filed herein as HECO Exhibit 13 HECO'SHECO’s MD&A
Hawaiian Electric Company, Inc. 's Management's’s Management’s Discussion and Analysis of Financial Condition and Results of Operations, incorporated into Parts I, II and IV of this Form 10-K by reference to pages35 to1121 ofHawaiian Electric Company, Inc.'s 1997HECO’s Annual Reportto Stockholder, portions of which are filed herein as HECO Exhibit 13HEI
Hawaiian Electric Industries, Inc., direct parent company of Hawaiian Electric Company, Inc., HEI Investment Corp., Malama Pacific Corp., Hawaiian Tug & Barge Corp., HEIDiversified, Inc., Pacific Energy Conservation Services, Inc., HEIPower Corp.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,andHawaiian Electric Industries Capital Trust III,HEI'SThe Old Oahu Tug Service, Inc. (formerly Hawaiian Tug & Barge Corp.), HEI Power Corp. and Malama Pacific Corp.HEI’s Annual Report
Hawaiian Electric Industries, Inc. 's Consolidated Financial CONSOLIDATED Statements, incorporated into Parts I, II and IV of this FINANCIAL Form 10-K by reference to pages 26 and 40 to 65 of STATEMENTS Hawaiian Electric Industries, Inc.'s 1997’s 2002 Annual Report to Stockholders,portions ofwhichareis filedhereinas HEI Exhibit 13HEI'S MD&Aand incorporated into this Form 10-K by referenceHEI’s Consolidated Financial Statements
Hawaiian Electric Industries, Inc. 's Management's Discussion and Analysis of’s Consolidated FinancialCondition, Results of Operations and Market RiskStatements, incorporated into Parts I, II and IV of this Form 10-K by reference to pages2737 to3978 of HEI’s Annual ReportHEI’s MD&A
Hawaiian Electric Industries, Inc.’s Management’s Discussion and Analysis of Financial Condition and Results of Operations incorporated into Parts I, II and IV of this Form 10-K by reference to pages 4 to 31 of HEI’s Annual Report HEI’s 2003 Proxy Statement
Portions of Hawaiian Electric Industries, Inc. 's 1997 Annual Report to Stockholders,’s 2003 Proxy Statement dated March 10, 2003, which portionsof whicharefiled herein as HEI Exhibit 13incorporated into this Form 10-K by referenceHEIDI
HEI Diversified, Inc., a wholly ownedwholly-owned subsidiary of Hawaiian Electric Industries, Inc. and the parent company of American Savings Bank, F.S.B.and HEIDI Real Estate Corp. HEIICiii
GLOSSARY OF TERMS(continued)
Terms
Definitions
HEIII
HEI Investments, Inc. (formerly HEI Investment Corp.), a wholly ownedwholly-owned subsidiary ofHawaiian Electric Industries, Inc.HEI Power Corp.HEIPC
HEI Power Corp., a wholly ownedwholly-owned subsidiary of Hawaiian Electric Industries, Inc. and parent company of several subsidiaries. On October 23, 2001, the HEI Board of Directors adopted a formal plan to exit the international power business engaged in by HEI Power Corp. and its subsidiaries.HEIPC Group
HEI Power Corp. and its subsidiaries HEIPI
HEI Properties, Inc., a wholly-owned subsidiary of Hawaiian Electric Industries, Inc. HELCO
Hawaii Electric Light Company, Inc., a wholly ownedan electric utility subsidiary of Hawaiian Electric Company, Inc.HERS Hawaiian Electric Renewable Systems, Inc., formerly a wholly owned subsidiary of Hawaiian Electric Industries, Inc. and formerly parent company of Lalamilo Ventures, Inc. HIG The Hawaiian Insurance & Guaranty Company, Limited, an insurance company which was placed in state rehabilitation proceedings. HEI Diversified, Inc. was the holder of record of HIG's common stock prior to August 16, 1994iiiGLOSSARY OF TERMS (continued)
TERMS DEFINITIONS - -------- -----------HIRI Hawaiian Independent Refinery, Inc., a fuel oil refineryHITI
Hawaiian Interisland Towing, Inc. HP Horsepower HPG HEI Power Corp. Guam, a wholly owned subsidiary of HEI Power Corp.HTB
Hawaiian Tug & Barge Corp. , a wholly owned subsidiaryOn November 10, 1999, HTB sold substantially all ofHawaiian Electric Industries, Inc.its operating assets andparent companythe stock of Young Brothers, Limited,IBEW International Brotherhood of Electrical Workers IBU Inlandboatmen's Union of the Pacific, Marine Division, an affiliate of the International Longshoremen'sandWarehousemen's Union, Hawaii Division ILWU International Longshoremen's and Warehousemen's Unionchanged its name to The Old Oahu Tug Services, Inc.IPP
Independent power producer IRP
Integrated resource plan IRR Interest rate risk JCC Jones Capital Corporation KALAELOAKalaeloa
Kalaeloa Partners, L.P. KCP
Kawaihae Cogeneration Partners KDC
Keahole Defense Coalition kv
kilovolt KIP
Kalaeloa Investment Partners KPP
Kahua Power Partners LLC KWH
Kilowatthour LSFO
Low sulfur fuel oil LVI Lalamilo Ventures, Inc., formerly a wholly owned subsidiary of Hawaiian Electric Renewable Systems, Inc. and formerly a wholly owned subsidiary of Hawaiian Electric Industries, Inc. LVI was merged into HELCO on December 23, 1996MBtu
Million British thermal unit MD&A Management's Discussion and Analysis of Financial Condition and Results of Operations MDC Malama Development Corp., a wholly owned subsidiary of Malama Pacific Corp.MECO
Maui Electric Company, Limited, a wholly ownedan electric utility subsidiary of Hawaiian Electric Company, Inc.MMO Malama Mohala Corp., a wholly owned subsidiary of Malama Pacific Corp.MPC
Malama Pacific Corp., a wholly ownedwholly-owned subsidiary of Hawaiian Electric Industries, Inc.and parent companyOn September 14, 1998, the HEI Board ofseveralDirectors adopted a plan to exit the residential real estatesubsidiariesdevelopment business engaged in by Malama Pacific Corp. and its then-existing subsidiaries.MSFO
Medium sulfur fuel oil MW
Megawatt NAMegawatts na
Not applicable NAE North American Environmental, Inc. NOI Notice of intentNOV
Notice of Violation NPDES National Pollutant Discharge Elimination SystemOPA
Federal Oil Pollution Act of 1990 OTS
Office of Thrift Supervision, Department of Treasury PCB
Polychlorinated biphenyls iv
GLOSSARY OF TERMS(continued)
Terms
Definitions
PECS
Pacific Energy Conservation Services, Inc., a wholly ownedwholly-owned subsidiary of Hawaiian Electric Industries, Inc.PGV
Puna Geothermal Venture PPA
Power purchase agreement PSD
PERMITpermitPrevention of Significant Deterioration/Covered Source PermitpermitPUC
Public Utilities Commission of the State of Hawaii PURPA
Public Utility Regulatory Policies Act of 1978 ivGLOSSARY OF TERMS (continued)
TERMS DEFINITIONS - -------- -----------QF
Qualifying Facility under the Public Utility Regulatory Policies Act of 1978 QTL
Qualified Thrift Lender RCRA
Resource Conservation and Recovery Act of 1976 REGISTRANTRegistrant
Hawaiian Electric Industries, Inc. or Hawaiian Electric Company, Inc. ROACE
Return on average common equity ROR Return on rate basesee
When used with reference to the HEI Annual Report, HECO Annual Report, HEI’s Consolidated Financial Statements, HEI’s MD&A, HEI’s Quantitative and Qualitative Disclosures about Market Risk, HECO’s Consolidated Financial Statements, HECO’s MD&A, HECO’s Quantitative and Qualitative Disclosures about Market Risk or HEI’s 2003 Proxy Statement, “see” means that the referenced information is incorporated by reference to those documents SAIF
Savings Association Insurance Fund SARA Superfund Amendments and Reauthorization ActSEC
Securities and Exchange Commission SFASSOP
Statement of Financial Accounting StandardsPositionST
Steam turbine STATEstate
State of Hawaii TSCA Toxic Substance Control ActTesoro
Tesoro Hawaii Corp. dba BHP Petroleum Americas Refining Inc., a fuel oil supplier TOOTS
The Old Oahu Tug Service, Inc. (formerly Hawaiian Tug & Barge Corp. (HTB)), a wholly-owned subsidiary of 1976Hawaiian Electric Industries, Inc. On November 10, 1999, HTB sold YB and substantially all of HTB’s operating assets and changed its nameUIC
Underground Injection Control UST
Underground storage tank YB
Young Brothers, Limited, which was sold on November 10, 1999, was formerly a wholly ownedwholly-owned subsidiary of Hawaiian Tug & Barge Corp.v
Forward-looking informationForward-Looking Statements and Risk Factors
This report and other presentations made by
HEI, HECOHawaiian Electric Industries, Inc. (HEI) and Hawaiian Electric Company, Inc. (HECO) and their subsidiaries contain “forward-looking statements,” which include statements that are predictive in nature, depend upon or refer to future events or conditions, and usually include words such as “expects,” “anticipates,” “intends,” “plans,” “believes,” “predicts,” “estimates” or similar expressions. In addition, any statements concerning future financial performance (including future revenues, expenses, earnings or losses or growth rates), ongoing business strategies or prospects and possible future actions, which may be provided by management, are also forward-looking statements. Forward-looking statements are based on current expectations and projections about future events and are subject to risks, uncertainties and assumptions about HEI and its subsidiaries (including HECO and its subsidiaries), the performance of the industries in which they do business and economic and market factors, among other things.These forward-looking statementswithin the meaningare not guarantees ofSection 21E of the Securities Exchange Act of 1934. Except for historical information contained herein, the matters set forth are forward-looking statements that involve certain risksfuture performance.Risks, uncertainties and
uncertaintiesother important factors that could cause actual results to differ materially from those intheforward-lookingstatements. Potential risksstatements anduncertaintiesfrom historical results include, but are not limited to,such factors astheeffectfollowing:the effects of international, national and local economic conditions, including the condition of the Hawaii tourist and construction industries and the Hawaii and continental U.S. housing
market;markets;the effects of weather and natural disasters;
product demandthe effects of terrorist acts, the war on terrorism, potential war with Iraq, potential conflict or crisis with North Korea and
market acceptance risks; increasing competition in the electric utility industry; capacity and supply constraints or difficulties; new technologicalother global developments;governmental and regulatory actions, including decisions in rate cases and on permitting issues; the results of financing efforts;the timing and extent of changes in interest rates;
the risks inherent in changes in the value of and market for securities available for sale and pension and other retirement plan assets;
changes in assumptions used to calculate retirement benefits costs and changes in funding requirements;
product demand and market acceptance risks;
increasing competition in the electric utility and banking industries;
capacity and supply constraints or difficulties;
fuel oil price changes, performance by suppliers of their fuel oil delivery obligations and the continued availability to the electric utilities of their energy cost adjustment clauses;
the ability of independent power producers to deliver the firm capacity anticipated in their power purchase agreements;
the ability of the electric utilities to negotiate favorable collective bargaining agreements;
new technological developments that could affect the operations and prospects of HEI’s subsidiaries (including HECO and its subsidiaries) or their competitors;
federal, state and international governmental and regulatory actions, including changes in laws, rules and regulations applicable to HEI, HECO and their subsidiaries; decisions by the Hawaii Public Utilities Commission (PUC) in rate cases and other proceedings and by other agencies and courts on land use, environmental and other permitting issues; required corrective actions (such as with respect to environmental conditions, capital adequacy and business practices); and changes in taxation;
the risks associated with the geographic concentration of HEI’s businesses;
the effects of changes in accounting principles applicable to HEI, HECO and their subsidiaries;
the effects of changes by securities rating agencies in the ratings of the securities of HEI and HECO;
the results of
integrationfinancing efforts;faster than expected loan prepayments that can cause an acceleration of the
acquiredamortization of premiums on loans and investments and the impairment of mortgage servicing rights of American Savings Bank, F.S.B. (ASB);the ultimate net proceeds from the disposition of
America, FSB (BoA) - Hawaii operationsassets and settlement of liabilities of discontinued or sold operations;the ultimate outcome of tax positions taken by HEI and its subsidiaries, including with respect to ASB’s real estate investment trust subsidiary and HEI’s discontinued operations;
the
operationsrisks ofASB. Investorssuffering losses that arealso directed to consideruninsured; andother risks
andor uncertaintiesdiscusseddescribed elsewhere in this report and in other periodic reports previously and subsequently filed by HEI and/or HECO with theSEC.Securities and Exchange Commission (SEC).Forward-looking statements speak only as of the date of the report, presentation or filing in which they are made.
vi
PART I
------ ITEM 1. BUSINESS
ITEM 1. BUSINESS HEI
- ---HEI was incorporated in 1981 under the laws of the State of Hawaii and is a holding company with its principal subsidiaries engaged in the electric utility,
savings bank, freight transportation, real estate developmentbanking and other businesses operating primarily in the State ofHawaii, and in the pursuit of independent power projects in Asia and the Pacific. HEI'sHawaii. HEI’s predecessor, HECO, was incorporated under the laws of the Kingdom of Hawaii (now the State of Hawaii) on October 13, 1891. As a result of a 1983 corporate reorganization, HECO became an HEI subsidiary and common shareholders of HECO became common shareholders of HEI.HECO and its operating subsidiaries,
MECOMaui Electric Company, Limited (MECO) andHELCO,Hawaii Electric Light Company, Inc. (HELCO), are regulated electric public utilities providing the only electric public utility service on the islands of Oahu, Maui, Lanai, Molokai and Hawaii. HECO also owns all the common securities of HECO Capital TrustI.I and HECO Capital TrustI (a DelawareII (Delaware statutory businesstrust intrusts), whichHECO owns all the common securities) waswere formed to effect theissuanceissuances of $50 million of 8.05% cumulative quarterly income preferred securities in March 1997 and $50 million of 7.30% cumulative quarterly income preferred securities in December 1998, respectively, for the benefit of HECO, MECO and HELCO. In December 2002, HECO formed a subsidiary, Renewable Hawaii, Inc., to invest in renewable energy projects.Besides HECO and its subsidiaries, HEI also owns directly or indirectly the following
subsidiaries which comprise its diversified companies: HEIDIsubsidiaries: HEI Diversified, Inc. (HEIDI) (a holding company) and itssubsidiaries, HEIDI Real Estate Corp. andsubsidiary, ASB, and the subsidiaries of ASB;HTB and its subsidiary; MPC and its subsidiaries; HEIIC; PECS; HEIPC and its subsidiaries;Pacific Energy Conservation Services, Inc. (PECS); ProVision Technologies, Inc.; HEI Properties, Inc. (HEIPI); HEI Leasing, Inc. (currently inactive); Hycap Management, Inc. and its subsidiary; Hawaiian Electric Industries Capital Trust I;andHawaiian Electric Industries Capital Trust II and III(inactive(at all times inactive entities); HEI District Cooling, Inc. (currently inactive); The Old Oahu Tug Service, Inc. (TOOTS); HEI Power Corp. (HEIPC) and its subsidiaries (discontinued operations); and Malama Pacific Corp. (MPC) (discontinued operations).ASB, acquired in 1988, was the third largest financial institution in the State of Hawaii
as of December 31, 1997,and had6971 retail branches as of December 31,1997. On December 6, 1997,2002. ASBacquired substantially allhas subsidiaries involved in the sale and distribution ofthe Hawaii depositsinvestment and insurance products, advertising activities for ASB and its subsidiaries and holding real estate for employee use, and a subsidiary, ASB Realty Corporation, which elects to be taxed as a real estate investment trust and holds assets (primarily loans and mortgage-related securities) ofBoA, most of its Hawaii branches and certain of its Hawaii- based loans. The acquisition increased ASB's assets by$1.8 billionand its deposits by $1.7 billion.(see Note 9 to HEI’s Consolidated Financial Statements”).HEIDI was also the parent company of HEIDI Real Estate Corp., which was formed in February
19981998. In September 1999, HEIDI Real Estate Corp.’s name was changed toownHEIPI, andmanage real estate assets. HTB was acquired in 1986 and provides ship assist and charter towing services and owns YB, a regulated intrastate public carrierHEIDI transferred ownership ofwaterborne freight among the Hawaiian Islands. MPC was formed in 1985 and directly or through subsidiaries develops and invests in real estate. HEIIC was formed in 1984 and is a passive investment company which primarilyHEIPI to HEI. HEIPI currently holdsinvestments in leveraged leases.venture capital investments.PECS was formed in
August1994 and currently is a contract services companyprimarilyproviding limited support services in Hawaii.HEIPCProVision Technologies, Inc. was formed inMarch 1995October 1998 topursue, directly or through its subsidiaries or affiliates, independentsell, install, operate and maintain on-site powerprojectsgeneration equipment and auxiliary appliances inAsiaHawaii and thePacific.Pacific Rim. HEI Leasing, Inc. was formed in February 2000 to own passive investments and real estate subject to leases, but is currently inactive. Hycap Management, Inc., including its subsidiary HEI Preferred Funding, LP (a limited partnership in which Hycap Management, Inc. is the sole general partner), and Hawaiian Electric Industries Capital Trust I (a Delaware statutory business1trust in which HEI owns all the common securities) were formed to effect the issuance of $100 million of 8.36% HEI-obligated trust preferred securities in February1997.PriorHEI District Cooling, Inc. was formed in August 1998 toAugust 16, 1994, HEIDI wasdevelop, build, own, lease, operate and/or maintain, either directly or indirectly, central chilled water cooling system facilities, and other energy related products and services for commercial and residential buildings, but is currently inactive.In November 1999, Hawaiian Tug & Barge Corp. (HTB) sold substantially all of its operating assets and the
holder of record of the commonstock ofHIG, which was acquired in 1987YB for a nominal gain, changed its name to TOOTS andprovided property and casualty insurance primarily in Hawaii.ceased maritime freight transportation operations.For information about the Company’s discontinued operations,
of HIG,see Note2013 toHEI'sHEI’s Consolidated Financial Statementswhich is incorporated herein by referenceat pages 73 topage 6375 ofHEI's 1997HEI’s AnnualReport to Stockholders, portions of which are filed herein as HEI Exhibit 13. TheReport.For financial information about the
Company'sCompany’s industry segments,is incorporated herein by referencesee Note 2 topage 26HEI’s Consolidated Financial Statements at pages 50 to 51 ofHEI's 1997HEI’s AnnualReport to Stockholders, portions of which are filed herein as HEI Exhibit 13.Report.For additional information about the Company,
reference is made to Item 7see HEI’s MD&A, HEI’s “Quantitative andItem 7A -"HEI's Management's DiscussionQualitative Disclosures about Market Risk” andAnalysis of Financial Condition, Results of Operations and Market Risk" (HEI's MD&A) and to Item 14-HEI'sHEI’s Consolidated Financial Statementsincorporated herein by referenceat pages 4 topages 2731, 31 to3936 and 37 topage 26 and pages 40 to 65,78, respectively, ofHEI's 1997HEI’s AnnualReportReport.HEI’s website address iswww.hei.com. HEI and HECO currently make available through this website their annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and all amendments to
Stockholders, portions of which arethose reports (since 1994) as soon as reasonably practicable after such material is electronically filedherein as HEI Exhibit 13. ELECTRIC UTILITY - ----------------with the SEC.Electric utility
HECO and subsidiaries and service areas
HECO, MECO and HELCO are regulated operating electric public utilities engaged in the production, purchase, transmission, distribution and sale of electricity on the islands of Oahu; Maui, Lanai and Molokai; and Hawaii, respectively. HECO was incorporated under the laws of the Kingdom of Hawaii (now State of Hawaii)
on October 13,in 1891. HECO acquired MECO in 1968 and HELCO in 1970. In1997,2002, the electricutilities'utilities’ revenuesand operating incomeamounted to approximately 76%and 83%, respectively,ofHEI'sHEI’s consolidatedrevenues and operating income. For additional information about HECO, see HEI's MD&A and Note 3, incorporated herein by reference to pages 27 to 39 and 47 to 50, respectively, in HEI's 1997 Annual Report to Stockholders, and HECO's MD&A and HECO's consolidated financial statements incorporated by reference to pages 3 to 11 and 12 to 34, respectively, of HECO's 1997 Annual Report to Stockholder, portions of which are filed herein as HECO Exhibit 13.revenues.The islands of Oahu, Maui, Lanai, Molokai and Hawaii have a combined population currently estimated at
1,130,000,1,185,000, or approximately 95% of the population of the State of Hawaii, and comprise a service area of 5,766 square miles. The principal communities served include Honolulu (on Oahu), Wailuku and Kahului (on Maui) and Hilo and Kona (on Hawaii). The service areas also include numerous suburban communities, resorts, U.S. Armed Forces installations and agricultural operations.The state has granted HECO, MECO and HELCO
havenonexclusive franchises,from the state covering certain areas,which authorizethemthe utilities to construct, operate and maintain facilities over and under public streets and sidewalks.HECO'sHECO’s franchise covers the City & County of Honolulu,MECO'sMECO’s franchises cover the County of Maui and the County of Kalawao, andHELCO'sHELCO’s franchise covers the County of Hawaii. Each of these franchises will continue in effect for an indefinite period of time until forfeited, altered, amended or repealed.For additional information about HECO, see HEI’s MD&A, HEI’s “Quantitative and Qualitative Disclosures about Market Risk” and HEI’s Consolidated Financial Statements, incorporated herein by reference to pages 4 to 31, 31 to 36 and 37 to 78, respectively, of HEI’s Annual Report, and HECO’s MD&A, HECO’s “Quantitative and Qualitative Disclosures about Market Risk” and HECO’s Consolidated Financial Statements incorporated herein by reference to pages 5 to 21, 22 and 23 to 57, respectively, of HECO’s Annual Report.
Sales of electricity
HECO, MECO and HELCO provide the only electric public utility service on the islands they serve. The following table sets forth the number of
theirelectric customer accounts as of December 31,1997, 19962002, 2001 and19952000 andtheirelectric sales revenues by company for each of the years then ended:
1997 1996 1995 ------------------------------------------------------------------------------------- Electric Electric Electric (dollars in Customer sales Customer sales Customer sales thousands) accounts revenues accounts revenues accounts revenues - ---------------------------------------------------------------------------------------------------HECO................. 271,801 $ 779,425 271,602 $ 767,264 269,307 $712,380 MECO................. 54,605 151,625 53,763 144,434 53,339 127,284 HELCO................ 60,220 160,332 59,349 152,312 58,515 135,110 ------------------------------------------------------------------------------ 386,626 $1,091,382 384,714 $1,064,010 381,161 $974,774 ==============================================================================2
2002 2001 2000 (dollars in thousands)
Customer
accountsElectric sales
revenuesCustomer
accountsElectric sales
revenuesCustomer
accountsElectric sales
revenuesHECO
283,161 $ 865,608 280,911 $ 882,308 278,260 $ 880,663 MECO
59,983 191,029 58,840 203,847 57,601 192,823 HELCO
66,411 191,589 65,241 193,209 63,778 192,174 409,555 $ 1,248,226 404,992 $ 1,279,364 399,639 $ 1,265,660 Revenues from the sale of electricity in
19972002 were from the following types of customers in the proportions shown:
HECO MECO HELCO Total - ----------------------------------------------------------------------------------------------------------------Residential...................................... 32% 36% 41% 34% Commercial....................................... 30 34 37 32 Large light and power............................ 37 29 22 34 Other............................................ 1 1 -- -- --------------------------------------------------------------- 100% 100% 100% 100% ===============================================================
HECO MECO HELCO Total Residential
32 % 36 % 41 % 34 % Commercial
32 35 41 34 Large light and power
35 29 18 31 Other
1 — — 1 100 % 100 % 100 % 100 % HECO and its subsidiaries derived approximately 9%, 10% and 10% of their operating revenues from the sale of electricity to various federal government agencies in
1997, 19962002, 2001 and1995. One2000, respectively.Formerly one of
HECO'sHECO’s larger customers, the Naval Base at Barbers Point, Oahu,is expected to beclosed in 1999 with redevelopment of the baseoccurringto occur through 2020.HECO anticipatesConsidering (1) that the base closure willultimatelynecessitate relocation of essential flight operations and support personnel to another base on Oahu and (2) the Naval Air Station Barbers Point Community Redevelopment Plan will increase development of the area, HECO anticipates that the closure is likely to result inlittle, if any, lossan overall increase inaggregate KWH sales, if, as anticipated, the Navy continues to occupy portions of Barbers Point and much of the surplus facilities and land currently not utilized by the Navy is occupied by state agencies and others. On March 8, 1994, President Clinton signed an Executive Order which mandates that each federal agency develop and implement a program with the intent of reducing energy consumption by 30% by the year 2005 to the extent that these measures are cost-effective. The 30% reductions will be measured relative to the agency's 1985 energy use. HECO is working with various federal government agencies such as the Department of Defense to implement demand-side management programs which will help them achieve their energy reduction objectives.demand for electricity over time.In
November1995, HECO and the U.S. General Services Administration (GSA) entered into a Basic Ordering Agreement (GSA-BOA) under which HECOwillwould arrange for the financing and installation of energy conservation projects at federal facilities in Hawaii. Under theBasic Ordering Agreement,GSA-BOA, HECOundertookcompleted an air conditioning upgrade project and provided design work for solar water heating atthea federal office building in downtown Honoluluwhich project was completedin1997. Further,1997 and 1998.In 1996, HECO
commenced design work for solar water heating in this federal office building. Another project underway is with the Postal Service. HECO alsosigned an umbrella Basic Ordering Agreement with the Department of Defensein October 1996. There are currently seven(DOD-BOA). In December 2001, a new DOD-BOA was signed under which HECO will perform energy audits, feasibility design studies and construction projects. Through 2002, completed projectsunderwayincluded construction of an 1800-ton chiller plant at the Pearl Harbor Naval Shipyard, construction of a central chiller plant at Schofield Barracks, installation of solar water heating and retrofit lighting at three Naval housing facilities, the $10 million Pearl Harbor Naval Shipyard energy conservation project and a $2 million residential solar water heating project for theNavy.Army’s Helemano housing in central Oahu.In 1997, HECO and the U.S. Postal Service (USPS) signed a Shared Energy Savings Contract. Under the Contract, HECO performed feasibility studies at 11 USPS sites on Oahu. A $3 million energy efficiency project at the USPS’ primary mail processing facility at the Honolulu International Airport was completed in 2001.
In 2001, HECO was awarded a $1 million contract to perform feasibility studies for most of the major buildings on the campus of the University of Hawaii at Manoa and at various Community Colleges throughout the State. The contract included energy efficiency assessments and electrical metering. This contract was completed in 2002.
Executive Order 13123 mandates that each federal agency develop and implement a program to reduce energy consumption by 35% by the year 2010 to the extent that these measures are cost effective. The 35% reduction will be measured relative to the agency’s 1985 energy use. HECO continues to work with various federal agencies to implement demand-side management programs that will help them achieve their energy reduction objectives. Neither HEI nor HECO management can predict with certainty the impact of
President Clinton'sExecutive Order 13123 onthe Company'sHEI’s orconsolidated HECO'sHECO’s future financial condition, results of operations or liquidity.3SELECTED CONSOLIDATED ELECTRIC UTILITY OPERATING STATISTICSSelected consolidated electric utility operating statistics
2002 2001 2000 1999 1998 KWH sales (millions)
Residential
2,778.5 2,665.2 2,627.2 2,550.5 2,503.9 Commercial
3,073.6 3,016.1 2,923.5 2,781.5 2,674.9 Large light and power
3,639.2 3,636.5 3,666.9 3,598.3 3,636.4 Other
53.0 52.6 54.1 54.7 54.8 9,544.3 9,370.4 9,271.7 8,985.0 8,870.0 KWH net generated and purchased (millions)
Net generated
6,249.7 6,042.4 6,247.0 6,115.1 5,958.0 Purchased
3,829.6 3,861.6 3,572.0 3,391.7 3,434.1 10,079.3 9,904.0 9,819.0 9,506.8 9,392.1 Losses and system uses (%)
5.1 5.2 5.4 5.3 5.4 Energy supply (yearend)
Generating capability—MW
1,670 1,673 1,673 1,651 1,664 Firm purchased capability—MW
510 530 532 472 474 2,180 2,203 2,205 2,123 2,138 Gross peak demand—MW1
1,638 1,614 1,574 1,527 1,532 Btu per net KWH generated
10,673 10,675 10,818 10,789 10,684 Average fuel oil cost per Mbtu (cents)
466.4 539.3 538.5 329.7 308.8 Customer accounts (yearend)
Residential
356,244 352,132 347,316 342,957 338,454 Commercial
51,386 50,974 50,434 49,549 48,873 Large light and power
551 542 547 550 573 Other
1,374 1,344 1,342 1,299 1,289 409,555 404,992 399,639 394,355 389,189 Electric revenues (thousands)
Residential
$ 426,291 $ 425,287 $ 421,129 $ 356,631 $ 340,395 Commercial
425,595 436,751 422,977 345,808 322,772 Large light and power
389,312 409,977 414,067 336,434 331,957 Other
7,028 7,349 7,487 6,454 6,309 $ 1,248,226 $ 1,279,364 $ 1,265,660 $ 1,045,327 $ 1,001,433 Average revenue per KWH sold (cents)
Residential
15.34 15.96 16.03 13.98 13.60 Commercial
13.85 14.48 14.47 12.43 12.07 Large light and power
10.70 11.27 11.29 9.35 9.13 Other
13.26 13.98 13.84 11.80 11.52 Average revenue per KWH sold
13.08 13.65 13.65 11.63 11.29 Residential statistics
Average annual use per customer account (KWH)
7,840 7,620 7,618 7,490 7,425 Average annual revenue per customer account
$ 1,203 $ 1,216 $ 1,221 $ 1,047 $ 1,009 Average number of customer accounts
354,419 349,782 344,882 340,528 337,218
1997 1996 1995 1994 1993 ------------------------------------------------------------------ KWH SALES (MILLIONS)Residential............................... 2,531.0 2,540.4 2,471.3 2,427.5 2,340.3 Commercial................................ 2,676.8 2,662.4 2,624.7 2,451.2 2,284.6 Large light1
Sum of the peak demands on all islands served, noncoincident and
power..................... 3,700.7 3,733.0 3,655.1 3,658.6 3,646.2 Other..................................... 54.7 55.4 55.4 55.8 54.1 ------------------------------------------------------------------ 8,963.2 8,991.2 8,806.5 8,593.1 8,325.2 ================================================================== NET ENERGY GENERATED AND PURCHASED (MILLIONS OF KWH) Net generated............................. 5,885.9 5,994.3 5,850.6 5,727.6 5,789.6 Purchased................................. 3,622.8 3,565.3 3,511.6 3,437.8 3,101.0 ------------------------------------------------------------------ 9,508.7 9,559.6 9,362.2 9,165.4 8,890.6 ================================================================== Losses and system uses (%)................ 5.5 5.7 5.7 6.0 6.1 ENERGY SUPPLY (YEAREND) Generating capability--MW................. 1,634 1,636 1,637 1,637 1,638 Firm purchased capability--MW............. 474 474 469 465 473 ------------------------------------------------------------------ 2,108 2,110 2,106 2,102 2,111 ================================================================== Gross peak demand--MW (1)................. 1,573 1,561 1,537 1,527 1,496 Btu per net KWH generated................. 10,799 10,781 10,762 10,746 10,846 Average fuel oil cost per MBtu (cents).... 405.9 388.8 329.7 304.4 340.5 CUSTOMER ACCOUNTS (YEAREND) Residential............................... 336,094 333,807 330,508 325,495 320,987 Commercial................................ 48,671 49,069 48,585 47,916 48,008 Large light and power..................... 582 586 580 601 628 Other..................................... 1,279 1,252 1,488 1,480 1,475 ------------------------------------------------------------------ 386,626 384,714 381,161 375,492 371,098 ==================================================================nonintegrated.
ELECTRIC REVENUES (THOUSANDS)Residential............................... $ 367,432 $ 355,669 $324,923 $297,984 $283,662 Commercial................................ 347,308 338,785 313,909 281,664 262,751 Large light and power..................... 369,878 362,823 329,598 314,931 317,816 Other..................................... 6,764 6,733 6,344 5,927 5,786 ------------------------------------------------------------------- $1,091,382 $1,064,010 $974,774 $900,506 $870,015 =================================================================== AVERAGE REVENUE PER KWH SOLD (CENTS) Residential............................... 14.52 14.00 13.15 12.28 12.12 Commercial................................ 12.97 12.73 11.96 11.49 11.50 Large light and power..................... 9.99 9.72 9.02 8.61 8.72 Other..................................... 12.38 12.16 11.46 10.62 10.69 Average revenue per KWH sold.............. 12.18 11.83 11.07 10.48 10.45 RESIDENTIAL STATISTICS Average annual use per customer account (KWH).................................... 7,559 7,649 7,514 7,482 7,367 Average annual revenue per customer account.................................. $ 1,097 $ 1,071 $ 988 $ 918 $ 893 Average number of customer accounts....... 334,811 332,138 328,912 324,458 317,657 - ------------------------------------------------------------------------------------------------------------------(1) Sum of the peak demands on all islands served, noncoincident and nonintegrated. 4GENERATION STATISTICSGeneration statistics
The following table contains certain generation statistics as of December 31,
1997,2002 and for the year ended December 31,1997.2002. The capability available for operation at any given time may be more or less than the generating capability shown because of capability restrictions or temporary outages for inspection, maintenance, repairs or unforeseen circumstances.
Island of
Oahu-
HECO
Island of
Maui-
MECO
Island of
Lanai-MECO
Island of
Molokai-MECO
Island of
Hawaii-
HELCO
Total Generating and firm purchased capability (MW) at December 31, 20021
Conventional oil-fired steam units
1,161.0 37.6 — — 66.2 1,264.8 Diesel
— 96.1 10.4 9.8 39.0 155.3 Combustion turbines (peaking units)
102.0 — — — — 102.0 Combustion turbines
— 42.4 — 2.2 45.3 89.9 Combined-cycle unit
— 58.0 — — — 58.0 Firm contract power2
406.0 16.0 — — 87.6 509.6 1,669.0 250.1 10.4 12.0 238.1 2,179.6 Gross peak demand (MW)
1,250.0 193.9 4.9 6.6 182.2 1,637.6 3 Reserve margin
33.9 % 29.0 % 113.1 % 81.8 % 30.7 % 33.4 % Annual load factor
73.5 % 71.1 % 69.1 % 68.7 % 69.8 % 72.8 %3 KWH net generated and purchased (millions)
7,757.7 1,166.9 28.6 38.5 1,087.6 10,079.3
Generating1
HECO units at normal ratings; MECO and
firm purchased KWH net capability generated (MW)HELCO units atGross peak Annualreserve ratings.
2
Nonutility generators (oil-fired except as noted)—HECO: 180 MW (Kalaeloa), 180 MW (AES Hawaii, coal-fired) and
December 31, demand Reserve load purchased Systems 1997 (1) (MW) (2) margin factor (2) (millions) - -------------------------------------------------------------------------------------------------------------------ISLAND OF OAHU-HECO Conventional oil-fired steam units... 1,160.0 Combustion turbines (peaking units).. 103.0 Firm contract power (3).............. 406.0 ------------------------------------------------------------------------------ 1,669.0 1,220.0 36.8% 72.1% 7,424.2 ------------------------------------------------------------------------------ ISLAND OF MAUI-MECO Conventional oil-fired steam units... 37.6 Combined-cycle unit.................. 58.0 Diesel............................... 95.9 Firm contract power (4).............. 16.0 ------------------------------------------------------------------------------ 207.5 174.7 18.8% 70.2% 1,039.0 ------------------------------------------------------------------------------ ISLAND OF LANAI-MECO Diesel............................... 10.4 5.0 110.1% 65.6% 27.9 ------------------------------------------------------------------------------ ISLAND OF MOLOKAI-MECO Diesel............................... 9.9 Combustion turbine................... 2.2 ---------------------------------------------------------------------------- 12.1 6.6 83.3% 66.5% 37.1 ---------------------------------------------------------------------------- ISLAND OF HAWAII-HELCO Conventional oil-fired steam units... 71.2 Combustion turbines.................. 48.2 Diesel............................... 38.0 Firm contract power (4).............. 52.0 ---------------------------------------------------------------------------- 209.4 166.7 25.6% 69.3% 980.5 ---------------------------------------------------------------------------- Total................................ 2,108.4 1,573.0 34.0% 71.6% 9,508.7 ============================================================================46 MW (refuse-fired); MECO: 16 MW (HC&S, primarily bagasse-fired); HELCO: 5.6 MW (PGV, geothermal), 22 MW (HCPC, coal-fired) and 60 MW (Hamakua Partners).(1)
3
Noncoincident and nonintegrated.
In 2002, a 1,500 KW hydroelectric unit owned by HELCO was damaged and HELCO is presently exploring options to rebuild or replace the unit.
Generating reliability
HECO,
units at normal ratings,HELCO and MECO have isolated electrical systems that are not interconnected to each other or to any other electrical grid. HECO serves the island of Oahu and HELCO serves the island of Hawaii. MECO has three separate electrical systems—one each on the islands of Maui, Molokai and Lanai.Because each island system cannot rely upon backup generation from neighboring utilities, HECO, HELCO and MECO each maintain a higher level of reserve generation than is typically carried by interconnected mainland utilities, which are able to share reserve capacity. These higher levels of reserve margins are required to meet peak electric demands, to provide for scheduled maintenance of generating units
at(including the units operated by independent power producers (IPPs) relied upon for firm capacity) and to allow for the forced outage of the largest generating unit in the system. Although the planning for, and installation of, adequate levels of reserveratings. (2) Noncoincidentgeneration have contributed to the achievement of generally high levels of system reliability, service interruptions do occur from time to time as a result of unforeseen circumstances. For example, HECO implemented load shedding andnonintegrated. (3) Independenttemporarily shut off powerproducers-180 MW (Kalaeloa), 180 MW (AES-BP)to a significant number of customers on one occasion in 2002, due to unplanned generating unit outages. Load shedding is a predetermined plan that prevents overloading and46 MW (refuse-fired plant). (4) Nonutility generation-MECO: 16 MW (HC&S); HELCO: 30EMW (PGV)possible major damage to generating units and22 MW (HCPC). INTEGRATED RESOURCE PLANNING AND REQUIREMENTS FOR ADDITIONAL GENERATING CAPACITYpotentially a much larger power outage.HELCO’s management is concerned about the possibility of power interruptions as a result of the current operating status of various IPPs supplying power to it and the condition and performance of aging generators on the HELCO system that were intended to be operated less frequently once CT-4 and CT-5 were installed. A significant number of HELCO’s customers experienced rolling blackouts on two occasions in 2002 due to unplanned generating unit outages.
Integrated resource planning and requirements for additional generating capacity
As a result of a proceeding initiated in
January1990, thePUCPublic Utilities Commission of the State of Hawaii (PUC) issued an order inMarch1992(and revised it in May 1992)requiring the energy utilities in Hawaii to develop integrated resource plans (IRPs). The goal of integrated resource planning is the identification ofdemand-sidedemand- and supply-side resources and the integration of these resources for meeting near- and long-term consumer energy needs in an efficient and reliable manner at the lowest reasonable cost. In itsMay1992 order, the PUC adopted a"framework",“framework,” whichestablishesestablished both the process and the guidelines for developingIRPs and guidelines for the development of such plans.IRPs. ThePUC'sPUC’s framework directs that each plan cover a 20-year planning horizon with a five-year program implementation schedule and states that the planning cycle will be5repeated every three years. Under the framework, the PUC may approve, reject or require modifications of the utilities'utilities’ IRPs.The framework also states that utilities are entitled to recover all appropriate and reasonable integrated resource planning and implementation costs, including the costs of planning and implementing
demand-side management (DSM)DSM programs. Under appropriate circumstances, the utilitiesmayhave been allowed in the past to recovernetlostrevenuesmargins resulting from DSM programs and earn shareholder incentives. The PUC has approved IRP cost recovery provisions for HECO, MECO and HELCO. Pursuant to the cost recovery provisions, the electric utilitiesmayhave been allowed to recover through a surcharge the costs for approved DSM programs (including DSM program lost margins and shareholder incentives), and other incremental IRP costs incurred by the utilities and approved by the PUC, to the extent the costs are not included in their base rates.In October 2001, HECO and the Consumer Advocate finalized agreements, subject to PUC approval, under which HECO’s three commercial and industrial DSM programs and two residential DSM programs would be continued until HECO’s next rate case, which, under the agreements, HECO committed to file using a 2003 or 2004 test year and following the PUC’s rules for determining the test year. Under the agreements, HECO will cap the recovery of lost margins and shareholder incentives if such recovery would cause HECO to exceed its current authorized return on rate base. HECO also agreed it will not pursue the continuation of lost margins recovery and shareholder incentives through a surcharge mechanism in future rate cases. Consistent with the HECO agreements, in October 2001, HELCO and MECO reached agreements with the Consumer Advocate and filed requests to continue their four existing DSM programs. See “Other regulatory matters—Demand-side management programs—agreements with the Consumer Advocate” at page 9 in HECO’s MD&A. All of the electric utilities’ existing DSM programs are energy efficiency programs designed to reduce the consumption of electricity.
In August 2000, pursuant to a stipulation filed by the electric utilities and the parties in the IRP cost proceedings, the PUC issued an order allowing the electric utilities to begin recovering the 1995 through 1999 incremental IRP costs, subject to refund with interest, pending the PUC’s final decision and order (D&O) approving recovery of each respective year’s incremental IRP costs. The Consumer Advocate has objected to the recovery of $1.9 million (before interest) of the $8.5 million of incremental IRP costs incurred during the 1995-1998 and 2001 period, and the PUC’s decision is pending on this matter. The Consumer Advocate has not yet filed its position on the recovery of the $1.5 million of integrated resource planning costs the electric utilities incurred from 1999 through 2000. Procedural schedules for the IRP cost proceedings have been established with respect to the 1999-2003 IRP costs.
The electric utilities have completed the recovery of their respective 1995 through 2000 incremental IRP costs through a surcharge on customer bills, subject to refund with interest.
In addition, HECO completed the recovery of its 2001 incremental IRP costs in June 2002, subject to refund with interest. MECO is scheduled to complete the recovery of its 2001 incremental IRP costs by August 2003. As of December 31, 2002, the amount of revenues the electric utilities recorded for IRP cost recoveries, subject to refund with interest, amounted to $16 million. HECO and MECO expect to begin recovering their incremental 2002 IRP costs, subject to refund with interest pending a final D&O, following the filing of actual 2002 costs (which is expected to occur in late March or early April 2003).
In early 2001, the PUC issued its final D&O in the HELCO 2000 test year rate case, in which the PUC concluded that it is appropriate for HELCO to recover its IRP costs through base rates (and included an estimated amount for such costs in HELCO’s test year revenue requirements) and to discontinue recovery of incremental IRP costs through the separate surcharge. HELCO recovered its incremental IRP costs incurred in 2000, which were incurred prior to the final D&O in its rate case, through its surcharge. HELCO’s IRP costs incurred for 2001 and future years are recovered through HELCO’ s base rates. HELCO will continue to recover its DSM program costs, lost margins and shareholder incentives approved by the PUC in a separate surcharge.
The utilities have characterized their proposed IRPs as planning strategies, rather than fixed courses of action, and the resources ultimately added to their systems may differ from those included in their 20-year plans. Under the IRP framework, the utilities are required to submit annual evaluations of their plans (including a revised five-year program implementation schedule) and to submit new plans on a three-year
cycle.cycle, subject to changes approved by the PUC. Prior to proceeding with the DSM programs, separate PUC approval proceedings must be completed, in which the PUC further reviews the details of the proposed programs and theutilitiesutilities’ proposals for the recovery of DSM program expenditures,netlostrevenuesmargins and shareholder incentives.HECO's IRP.HECO’s IRP.HECO filed its second IRP with the PUC in January 1998 and updated the status of its DSM and Supply Side Action Plans in July 1999. In January 2001, the parties to the proceeding filed a
schedulestipulation for PUC approval to expedite the proceeding and the PUCproceedingapproved the stipulation, closed the docket and ordered HECO to submit its IRP annual evaluation report and program implementation schedule by October 2002 (subsequently extended to December 2002) and its next IRP by October 2005, as stipulated. The PUC also ordered HECO to immediately notify it inwhich it will be considered has not yet been determined. Thewriting if HECO requires additional generation prior to the 2009 time frame.In December 2002, HECO filed with the PUC its IRP evaluation report, updating the second IRP
identified changes in keyto reflect the latest sales and fuel forecasts andassumptions sinceupdated key planning assumptions.On the
development of HECO's initial IRP, which was filed in July 1993, modified in January 1994 and approved by the PUC as modified in its March 1995 final decision and order (D&O). HECO'ssupply side, HECO’s updated second IRPincludes IRP strategy options related to the transition to a more competitive environment in the electric utility industry. The IRP is a flexible resource strategy that allows the utility to make major decisions regarding the incremental implementation of program options for both supply-side and demand-side resources, based on HECO's IRP objectives and the best information available at the time decisions must be made. On the supply-side, HECO's second IRP focusesfocused on the planning for the next generating unit addition in the 2009 timeframe --frame—a107-MW simple cycle diesel fired107 MW simple-cycle combustion turbine. A second 107 MW simple-cycle combustion turbinewhich wouldis scheduled to bepart ofadded in 2015, and in 2016 a318-MW diesel fired 2-on-1conversion unit 105 MW steam turbine is scheduled to be added to create a dual-train combined-cycle unit.Phases 2 and 3 of the combined-cycle unit would be installed in 2013 and 2016, respectively.In addition, pursuant toHECO'sHECO’s generation asset management program, all existinggenerationgenerating units arereasonably expectedcurrently planned tooperatebe operated (future environmental considerations permitting) beyond the 20-year IRP planning period (1998-2017).HECO's second IRP includesOn the demand side, in November 2001, the PUC issued two D&Os allowing HECO to temporarily continue its five energy efficiency DSM programs
whichuntil its next rate case. The five energy efficiency DSM programs are designed to reduce the rate of increase inOahu'sOahu’s energy use, defer construction of new generating units,reduceminimize thestate's dependence onstate’s use of oil, and achieve savings for utility customers who participate in the programs. TheDSMenergy efficiency DSM programs include incentives for customers to install efficient lighting, refrigeration, water-heating and air-conditioning equipment and industrial motors.The PUC issued its final D&Os approving all five of HECO's original energy efficiency DSMHECO’s updated second IRP includes two load management programs scheduled for implementation in1996,2004 (i.e., a Dispatchable Commercial and Industrial Load Program and a Residential Direct Load Control Program). HECObegan implementing these programs in the third quarter of 1996. HECO filedplans to file applications with the PUCfor a commercial and industrial (C&I) load management program in June 1996, and a residential load control program in September 1997. HECO expects thatrequesting approval of these two load managementDSMprogramswill be reviewedby the second quarter of 2003.MECO’s IRP.MECO filed its second IRP with the PUC in
conceptMay 2000. A stipulated prehearing order was approved by the PUC inconjunction with HECO's second IRP. HECOOctober 2000. The parties filed individual Statements of Position in May 2001. MECO plans tocontinuework with the parties to the proceeding and attempt to reach a stipulation for PUC approval to expedite the proceeding, close the docket, and establish a schedule for MECO’s next IRP.MECO’s second IRP identified changes in key forecasts and assumptions since the development of MECO’s initial IRP. On the supply side, MECO’s second IRP focused on the planning
and implementationfor the installation ofDSM load management and energy efficiency programs that are cost-effective and also minimize rate impacts to all customers. MECO's IRP. The PUC issued its final D&O in MECO's IRP proceeding in May 1996. MECO's 20-year IRP includes four energy efficiency DSM programs similar to those developed for HECO. The supply-side resources proposed by MECO, as updated in its June 1997 evaluation, include installingapproximately214150 MW of additional generation through the year20132020 on the island of Maui, including5838 MW of generation at its Maalaea power plant site inthreeincrements from1998-2001,2000-2005, 100 MW at its new Waena site in increments from 2007-2018, beginning with a 20 MW combustion turbine in 2007, andapproximately 810 MW from the acquisition of a wind resource in 2003 (currently, MECO expects to receive 20 MW of wind energy in 2004). Approximately 4 MW of additional generation through the year2013 on2020 is planned for each of the islands of Lanai and Molokai.TheMECO completed the installation of the second 20 MW increment at Maalaea in September 2000, and the final increment of 18 MW, which was originally expected to be installed in 2005, is currently expected to be installed in early 2006 (assuming receipt in early 2004 of the necessary air permit, for which an application was submitted in December 2001).On the demand side, in November 2001 the PUC
approved MECO's DSM water heating program in July 1996, and MECO's C&Iissued a D&O allowing MECO to continue temporarily its four existing energy efficiency DSM programs, which are similar inSeptember 1996. MECO begandesign to HECO’s programs. MECO’s IRP included plans for a new energy efficiency DSM programimplementationand two new load management DSM programs. MECO does not plan to proceed with a new energy efficiency DSM program at this time, and MECO is inlate 1996. MECO's first IRP annual evaluation wasthe process of evaluating the load management DSM programs, and will determine at a later date the need for and timing of filing load management DSM program applications.HELCO’s IRP.In September 1998, HELCO filed with the PUC
in June 1997, andits second IRP,annual evaluation is scheduledwhich was updated in March 1999 and revised in June 1999. A schedule for the proceeding was approved by the PUC, and the parties tobe filedthe proceeding completed two rounds of discovery. HELCO plans to work with thePUC in June 1998. MECO's next IRP filing is scheduled for September 1999. 6In 1997, MECO's generation reserve margins were less thanparties to themargin specified by its capacity planning criteria (which are based on having enough reserve generation to cover for the unexpected loss of the largest unit taking into account projected peak loadsproceeding and,scheduled maintenance). This condition will probably continue, particularly in view of the recent reduction in the generation capacity being supplied by HC&S (see below under "Nonutility generation--MECO and HELCO power purchase agreements"), until Maalaea unit 17 begins commercial operations. HELCO's IRP. The PUC issued its final D&O in HELCO's IRP proceeding in May 1996. HELCO's 20-year IRP includes four energy efficiency DSM programssimilar tothose developedHECO’s IRP, attempt to reach a stipulation forHECO. The supply-side resources proposed in HELCO's five- year plan include installing 58 MW of generation atPUC approval to expedite the proceeding, close the docket, and establish aWest Hawaii site (see "HELCO power situation" below), undertaking transmission and distribution efficiency improvement projects and conducting alternate energy generation resource studies. HELCO's 20-year plan includes adding another diesel-fired dual-train combined-cycle unit at a West Hawaii site. HELCO received interim approvalschedule forits four DSM programs in October 1995 and final approval in September 1996. HELCO began implementing its DSM programs in December 1995. HELCO filed an application with the PUC for a C&I pilot load management program in October 1996. HELCO's firstHELCO’s next IRP annual evaluationwas filed withreport and program implementation schedule and its next IRP.The second IRP identified changes in key forecasts and assumptions since the
PUC in June 1997. HELCO's nextdevelopment of HELCO’s initial IRP. On the supply side, HELCO’s second IRPfiling is scheduled for September 1998. HELCO POWER SITUATION For a description of regulatory and judicial proceedings that have delayed HELCO's efforts to install additional generation in order to ease potential power supply constraintsfocused on theisland of Hawaii, seeplanning for generating unit additions after near-term additions. Due to delays in adding new generation, the"HELCO power situation" sectionnear-term additions proposed inNote 12 to HECO's Consolidated Financial Statements. Background. In 1991, HELCO identified the need, beginning in 1994, for additional generation to provide for forecast load growth while maintaining a satisfactory generation reserve margin, to address uncertainties about future deliveries of power from existing firm power producers and to permit the retirement of older generating units. Accordingly, HELCO proceeded with plans to installHELCO’s second IRP included installing two 20 MW combustion turbines (CTs) at its Keahole power plant site and proceeding in parallel with a power purchase agreement (PPA) with Hamakua Energy Partners, L.P. (Hamakua Partners, formerly Encogen Hawaii, L.P.) for a 60 MW (net) dual-train combined-cycle (DTCC) facility.The Hamakua Partners PPA was approved in 1999 and its DTCC facility was completed in December 2000. (See the discussion of HELCO power purchase agreements in “Nonutility generation.”) The two
20-megawatt (MW) combustion turbines (CT-4Keahole CTs, which were the first two phases of a planned 56 MW (net) DTCC unit, have been delayed. (See “HELCO power situation” in Note 11 of HECO’s Consolidated Financial Statements.) A PPA with Hilo Coast Power Company (HCPC) for 18 MW of firm capacity terminated at the end of 1999, but HELCO now purchases 22 MW of firm capacity from HCPC’s coal-fired facility under a new PPA, as a result of the delays in adding new generation. HELCO also has deferred the retirements of some of its older generating units. If CT-4 andCT-5), followed by an 18-MW heat steam recovery generator (ST-7), at which time theseCT-5 are installed, this would extend the target date for the third phase of its DTCC unit or other firm capacity additions until sometime after 2012. The timing of the need for additional new generation may change, however, based on factors such as the availability of permitting for the Keahole installations, the condition of the unitswould be converted to a 56-MW (net) combined-cycle unit. In January 1994,whose retirements have been deferred, and the status of the nonutility generators providing firm capacity, including Puna Geothermal Venture (PGV) and HCPC. (See the discussion of HELCO power purchase agreements in “Nonutility generation.”)On the demand side, in December 2001 the PUC
approved expenditures for CT-4,issued a D&O allowing HELCO to continue temporarily its four existing energy efficiency DSM programs, whichHELCO had plannedare similar in design toinstall in late 1994. InstallationHECO’s programs.New capital projects
The capital projects of
HELCO's phased combined-cycle unit attheKeahole power plant site has been revised dueelectric utilities may be subject todelays in (a)various approval and permitting processes, including obtaining PUC approvalfromof theHawaii Board of Land and Natural Resources (BLNR) of a Conservation District Use Permit (CDUP) amendment and (b) obtainingproject, air permits from the Department of Health of the State of Hawaii (DOH)andand/or the U.S. Environmental Protection Agency (EPA)a PSD permit forand land use permits from theKeahole power plant site. Subject to satisfactory resolution of the CDUP amendment and PSD permit matters, HELCO's current plan continues to be to have CT-4 and CT-5 be the next generating units added to its system. ST-7 is currently planned to be deferred to approximately 2006 unless the Encogen facility (described below) is not placed in service as planned. CDUP amendment. On July 10, 1997, the Third Circuit Court of the State ofHawaiiissued its Amended Findings of Fact, Conclusions of Law, Decision and Order on HELCO's appeal of an order of the BLNR, along with other civil cases relating to HELCO's application for a CDUP amendment. This decision allows HELCO to use its Keahole property as requested in its application. An amended order to the same effect was issued on August 18, 1997. Two final judgments have been entered, disposing of all but one of the consolidated cases. HELCO has submitted a form of final judgment to dispose of the last case pending pursuant to the court's directions. Opposing parties have appealed each of the final judgments and have also filed motions to stay the effectiveness of the judgments pending resolution of the appeals. A hearing on these motions was held on March 9, 1998, at which time the judge took the matter under advisement. Management believes that HELCO will ultimately prevail with regard to any appeals which may be taken and that the amended decision of the Third Circuit Court will be upheld. Declaratory judgment actions. In February 1997, the Keahole Defense Coalition and three individuals 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 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. In March 1998, an individual filed a complaint for declaratory judgment against HELCO, BLNR and DepartmentBoard of Land and Natural Resources(DLNR)(BLNR).The complaint basically allegesDifficulties in obtaining, or the inability to obtain, the necessary approvals or permits could result in project delays, increased project costs and/or project abandonments. Extensive project delays and significantly increased project costs could result in aviolation of her constitutional due process rights because the issue of which, if any, land use conditions apply to HELCO's useportion of theKeahole site was determined administratively by DLNR (throughproject costs being excluded from rates. If aletter issued in January 1998) rather than being decided by BLNR in a contested case. Also filed withproject is abandoned, thecomplaint was a motionproject costs are generally written-off tostay enforcement of the DLNR letter. HELCO intends to vigorously defend against the claims raised and management believes the allegations are without merit. 7IPP complaints. Two independent power producers (IPPs), Kawaihae Cogeneration Partners (KCP) and Enserch Development Corporation (Enserch), filed separate complaints against HELCO withexpense, unless the PUCin 1993 and 1994, respectively, allegingdetermines thatthey are entitled to power purchase contracts to provide HELCO with additional capacity, which they claimed would be a substitute for HELCO's planned 56-MW combined-cycle unit at Keahole. Under HELCO's current estimate of generating capacity requirements, there is a near term need for capacity in addition to the capacity which might be provided by either of the proposed IPP units. 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 combined-cycle unit, stating in its order that "noall or part of theprojectcosts may beincludeddeferred for later recovery inHELCO'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 directed 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." In April 1997, Hilo Coast Processing Company (HCPC) filed a complaint against HELCO with the PUC, requesting an immediate hearing on HCPC's offer for a new 20-year power purchase contract for its existing facility, which is proposed to be expanded from 22 MW to 32 MW. HCPC's existing power purchase agreement is scheduled to terminate at the end of 1999. Enserch complaint. In January 1998, HELCO filed with the PUC an application ----------------- for approval of a power purchase agreement for a 60-MW facility and an interconnection agreement with Encogen dated October 22, 1997. The agreements were entered into following a settlement agreement between Enserch and HELCO and are subject to PUC approval. The parties to the proceeding include HELCO, Encogen and the Consumer Advocate. Motions to intervene filed by KCP, HCPC and one other IPP were denied by the PUC. KCP complaint. In January 1996, the PUC ordered HELCO to continue in good ------------- faith to negotiate a power purchase agreement with KCP. In May 1997, KCP filed a motion for unspecified "sanctions" against HELCO for allegedly failing to negotiate in good faith. In June 1997, KCP filed a motion asking the PUC to designate KCP's facility as the next generating unit on the HELCO system and to determine the "allowable cost" which would be payable by HELCO to KCP. HELCO filed memoranda in opposition to KCP's motions. An evidentiary hearing was held and briefs were filed by both parties. Action by the PUC is pending. HCPC complaint. The PUC converted the HCPC complaint into a purchased power -------------- contract negotiation proceeding. An evidentiary hearing is scheduled for April 1998. Management cannot determine at this time whether the negotiations with KCP and HCPC and related PUC proceedings will result in the execution and/or PUC approval of a power purchase agreement or impact management's plans with regard to installation of HELCO's combined-cycle unit at the Keahole power plant site. NONUTILITY GENERATIONrates.Nonutility generation
The Company has supported state and federal energy policies which encourage the development of alternate energy sources that reduce
dependence onthe use of fuel oil.AlternateThe Company’s alternate energy sources range from wind, geothermal and hydroelectric power, to energy produced by the burning of bagasse (sugarcane waste). Other nonoil projects include a generating unit burningand municipal waste anda fluidized bed unit burningcoal.HECO
power purchase agreements.PPAs.HECO currently has three majorpower purchase agreements.PPAs. In March 1988, HECO entered into apower purchase agreementPPA with AES Barbers Point, Inc.(AES-BP, now(now known as AES Hawaii, Inc. (AES Hawaii)), a Hawaii-based,cogenerationindirect subsidiary of The AESCorporation (formerly known as Applied Energy Services, Inc.) of Arlington, Virginia.Corporation. The agreement withAES-BP,AES Hawaii, as amended in August 1989, provides that, for a period of 30 years beginning September 1992, HECO will purchase 180 MW of firm capacity. TheAES-BP 180-MWAES Hawaii 180 MW coal-fired cogeneration plant, which became operational in September 1992, utilizes a"clean coal"“clean coal” technology. The facility is designed to sell sufficient steam to be a"Qualifying Facility"“Qualifying Facility” (QF) under the Public Utility Regulatory Policies Act of 1978 (PURPA).8Under the amended PPA, AES Hawaii must obtain certain consents from HECO prior to entering into any arrangement to refinance the facility. HECO and AES Hawaii are in discussions regarding a possible refinancing of the facility by AES Hawaii, and concerning the terms upon which HECO would be willing to consent to the proposed refinancing. A letter of intent has been signed, but by its terms it is non-binding and the parties are proceeding to negotiate definitive documents. The arrangements addressed in the letter of intent contemplate that HECO will receive consideration for its consent, primarily in the form of a PPA amendment that will benefit ratepayers. If definitive documents acceptable to both parties are negotiated, they will be subject to several conditions, including PUC approval of the PPA amendment, and completion of the proposed refinancing. In October 1988, HECO entered into an agreement with Kalaeloa Partners, L.P. (Kalaeloa), a limited partnership whose sole general partner
iswas an indirect,wholly ownedwholly-owned subsidiary of ASEA Brown Boveri, Inc. (ABB), which has guaranteed certain ofKalaeloa'sKalaeloa’s obligations and, through affiliates,hascontracted to design, build, operate and maintain the facility. The agreement with Kalaeloa, as amended, provides that HECO will purchase 180 MW of firm capacity for a period of 25 years beginning in May23,1991. The Kalaeloa facility, which was completed in the second quarter of 1991, is a combined-cycle operation, consisting of two oil-fired combustion turbines burningLSFOlow sulfur fuel oil (LSFO) and a steam turbinewhichthat utilizes waste heat from the combustion turbines. The facility is designed to sell sufficient steam to be a"Qualifying Facility" under PURPA.QF. As of February 28, 1997, the ownership of Kalaeloa was restructuredsuchso that 1%is nowwas owned by the ABB subsidiary as the general partner and 99%iswas owned by Kalaeloa Investment Partners (KIP) as the limited partner. KIP is a limited partnership comprised ofCEAPSEG Hawaiian Management, Inc. andCEAPSEG Hawaiian Investment, Inc. (nonregulated affiliates of Public Service Enterprise Group Incorporated) and Harbert Power Corporation.A second phaseSubsequently, HECO consented to, and the PUC approved of, theFebruary 28, 1997 transaction, which is still pending, wouldtransfer of the general partner partnership interest from the ABB subsidiary to an entity affiliated with the owners of KIP.A modification of the existing ABB Guarantee of Kalaeloa obligations may be part of the second phase. HECO must consent to any changes in the ABB Guarantee.HECO also entered into a
power purchase contractPPA in March 1986 and a firm capacity amendment in April 1991 with the City and County of Honoluluwhich has builtwith respect to a64-MWrefuse-fired plant(H-Power)(H-POWER). TheH-PowerH-POWER facility began to provide firm energy in 1990 and currently supplies HECO with 46 MW of firm capacity. The firm capacity amendment provides that HECO will purchase firm capacity until mid-2015.HECO purchases energy on an as-available basis from two nonutility generators, which are diesel-fired qualifying cogeneration facilities at the two oil refineries (10 MW and 18 MW) on Oahu. HECO previously purchased energy on an as-available basis from an approximately 3 MW combustion turbine fired by methane gas from a landfill. In March 2002, the combustion turbine suffered a major failure. In July 2002, the owner of the facility requested that HECO terminate the PPA and HECO agreed.
The PUC has approved and allowed rate recovery for the firm capacity and purchased energy costs related to
HECO'sHECO’s three majorpower purchase agreements whichPPAs that provide a total of 406 MW of firm capacity, representing 24% ofHECO'sHECO’s total generating and firm purchasedcapabilitycapacity on the island of Oahu as of December 31,1997.2002. The PUC also has approved and allowed rate recovery for the purchased energy costs related to HECO’s as-available energy PPAs.MECO and HELCO power purchase agreements.As of December 31,
1997,2002, MECO and HELCO hadpower purchase agreementsPPAs for 16 MWand 52(includes 4 MW of system protection) and 88 MW of currently available firm capacity,respectively, representing 7% and 25% of their respective total generating and firm purchased capabilities.respectively.MECO has a
power purchase agreementPPA withHC&SHawaiian Commercial & Sugar Company (HC&S) for 16 MW of firmcapacity through December 31, 1999.capacity. The HC&S generating units primarily burn bagasse (sugar cane waste) along with secondary fuels of oil or coal. InDecember 1997, MECO entered into a letter agreement with HC&S which extends the power purchase agreement through December 31, 2000, and year-to-year thereafter, subject to termination on or after January 1, 2001, on not less than two years prior written notice by either party. OnMarch2,1998, an HC&S unit failed and HC&S lost 10 MW of generating capacity.It may be several months beforeHC&Sis able to replacereplaced the unitduring which timeand put it into operation in the second quarter of 2000. HC&S,mayhowever, has had some difficulties in meeting its contractual obligations to MECO in 2000, 2001 and 2002 due to operational constraints that led to several claims of force majeure by HC&S. The constraints have been primarily due to an extended drought condition on Maui that impacts HC&S’ irrigation pumping load for its sugar cane operations. There has also been a higher than normal reduction in energy produced due to other equipment outages. With the completion of some maintenance activities and the easing of drought conditions, HC&S returned to full contract capacity of 16 MW in late October 2002. On January 23, 2001, MECO rescinded a December 27, 1999 PPA termination notice that it had sent to HC&S and agreed with HC&S that neither party would issue to the other a notice of termination prior to the end of 2002. On June 14, 2002, MECO and HC&S agreed that neither party will give written notice of termination under the terms of the PPA, such that the PPA terminates prior to December 31, 2007. As a result, the PPA remains in force and effect through December 31, 2007, and from year to year thereafter, subject to termination on or after December 31, 2007 on notbe able to supply MECO with the full contracted capacity.less than two years’ prior written notice by either party.HELCO has a
power purchase agreement35-year PPA with Puna Geothermal Venture (PGV) for 30 MW of firmcapacity. On February 12, 1996, HELCOcapacity from its geothermal steam facility expiring on December 31, 2027. PGV’s output has been in decline since the middle of 2002 and PGVexecuted an amendmentwas able tothe power purchase agreement for 5produce only about 6 MW of firm capacity inaddition2002 compared to the 30 MW the company contracted to provide to HELCO. The loss of generation has been attributed to blockage of a source well due to a failed liner 5,000 feet below the earth’s surface and decreasing steam quality emanating from one of its source wells. PGV completed drilling an additional source well in February 2003, and converted the blocked source well into an injection well in early March 2003. The new injection well was tested and reached capacity levels of between 20 to 25 MW. PGV is in the process of obtaining a permit from the DOH for the new injection well. Without the new injection well, PGV is currently producing only about 10 to 11 MWthen being supplied. In August 1996,due to thePUC approvedhigh brine content coming from theamendment and, in September 1996,new source well. PGVbegan supplying 5is assessing whether to drill another source well or to install new generation equipment geared to utilize the excess brine. While PGV indicates it is seeking options to restore its 30 MWof additional firm power. In December 1994, atcommitment to HELCO as soon as possible, HELCO cannot predict when PGV will reach its contractual commitment.On October 4, 1999, HELCO entered into a
time when the Hilo Coast Processing Company (HCPC) contract was for delivery of 18 MW, HCPC filed a Chapter 11 bankruptcy petition. In July 1995, the bankruptcy court approved an amended and restated power purchase agreementPPA with HCPCforeffective January 1, 2000 through December 31, 2004, subject to early termination by HELCO after two years, whereby HELCO purchases 22 MW of firm capacityandfrom HCPC’s coal-fired facility. The PPA extends for one-year periods thereafter, unless terminated prior to an extension period. The PPA was amended on November 5, 1999. The PUC approved thedismissal of HCPC from bankruptcy. Also, see the "HELCO power situation" section above and in Note 12 to HECO's Consolidated Financial Statements.PPA, as amended, on December 7, 1999.In October 1997, HELCO entered into an agreement with Encogen, a limited partnership whose general partners
areat the time were wholly-owned special-purpose subsidiaries of Enserch and Jones CapitalCorporation (JCC).Corporation. Enserch Corporation and J.A. Jones, Inc., the parent companies of Enserch andJCC,Jones Capital Corporation, respectively,haveguaranteed certain ofEncogen's obligations, and an affiliate of Enserch will be contracted to operate and maintain the facility.Encogen’s obligations. The agreement provides that HELCO will purchase up to 60 MW (net) of firm capacity for a period of 30 years. The DTCC facility,will consistwhich primarily burns naphtha, consists of two oil-fired combustion turbines and a steam turbinewhichthat utilizes waste heat from the combustion turbines. The facilitywill beis designed to sell sufficient steam to be a"Qualifying Facility"QF. The PUC approved the agreement on July 14, 1999. On November 8, 1999, HELCO entered into a PPA Novation with Encogen and Hamakua Partners, which recognizes the transfer of the obligations of Encogen underPURPA.the PPA to Hamakua Partners. Hamakua Partners was formed as result of the sale of the general partner and limited partner partnership interests of Enserch to entities affiliated with TECO Energy Inc., which is a Florida-based energy company and parent company of Tampa Electric Company, a regulated electric utility. TECO Energy Inc. has replaced the guarantee of Enserch Corporation of certain of Hamakua Partners’ obligations. On August 12, 2000, Hamakua Partners began providing HELCO with firm capacity from the first phase of a two-phase construction completion schedule. On December 31, 2000, Hamakua Partners began providing firm capacity from the entire facility, following completion of the second phase of construction. In June 2001, Hamakua Partners demonstrated 60 MW output from the facility. Subsequently, the output deteriorated due to technical problems in the steam turbine. Hamakua Partners has since resolved its nozzle plugging problems, but due to high nitrogen oxide emissions and high steam turbine vibration problems, the output has been limited to 55-57 MW in early 2003. Hamakua Partners has requested outages to correct the problems and HELCO has tentatively scheduled the outages for March and April 2003.HELCO purchases energy on an as-available basis from a number of nonutility generators. The largest include an 11 MW run-of-the-river hydroelectric facility and a 7 MW wind facility. Apollo Energy Corporation (Apollo), the owner of the wind facility, has an existing contract to provide HELCO with as-available windpower through June 29, 2002 (and extending thereafter until terminated by HELCO or Apollo). Apollo filed a petition for hearing with the PUC on April 28, 2000, alleging that it had unsuccessfully attempted to negotiate a new power purchase agreement
was submittedwith HELCO. Apollo had offered to repower its existing 7 MW facility by the end of 2000 and to install additional wind turbines, up to a total allowed capacity of 15 MW, by the end of 2001. The parties agreed to limit to four issues the matters being presented to the PUC forapprovalguidance: whether Apollo is entitled to capacity payments; whether Apollo is entitled to a minimum purchase rate; whether certain performance standards should apply; and whether HELCO’s proposed dispute resolution provision should apply. A hearing on these issues was held on October 3 to 5, 2000. On May 30, 2001, the PUC issued a D&O in which it ordered HELCO and Apollo to continue tonegotiate a PPA, consistent with the terms of the D&O, and to submit by August 13, 2001 either a finalized PPA or
status reports informing the PUC of matters preventing finalization of a PPA. HELCO and Apollo were unable to agree to a PPA by August 13, 2001, and each submitted a status report. The parties continued to negotiate in 2002, but, final agreement has not been reached on various technical issues. Throughout 2002, the PUC has been kept informed through submittal of status of negotiations letters.
On August 17, 1999, HELCO entered into a PPA with Kahua Power Partners LLC (KPP) for the purchase of as-available energy from KPP’s proposed 10 MW windfarm. The PPA was amended by Amendment No. 1 dated April 4, 2000. The PUC approved the PPA, as amended, on June 1, 2001. KPP has not begun construction of its windfarm. GE Wind Energy completed the acquisition of certain assets of Enron Wind Corporation in May 2002, including the proposed KPP project. GE Wind Energy and Hawi Renewable Development Inc. (HRD) have since indicated they are in discussions to sell the windfarm project to HRD.
On January
1998. See "HELCO Power Situation" above. 9FUEL OIL USAGE AND SUPPLY All8, 2001, HELCO entered into a PPA with HRD for the purchase of as-available energy from HRD’s proposed 5 MW windfarm. An amendment to the PPA was completed on April 30, 2002. The PPA, as amended, was approved by the PUC on January 14, 2003. Due to transmission line limitations, the output of HRD would be limited to 3 MW, if the KPP windfarm is connected to the electric grid through the same 34.5 kV line. HELCO and HRD are in negotiations for a new PPA, under which HRD would sell energy from an expanded windfarm (approximately 10.6 MW) at the proposed windfarm site, if the KPP project is cancelled.The PUC has approved and allowed rate recovery for the firm capacity and purchased energy costs for MECO’s and HELCO’s approved firm capacity and as-available energy PPAs.
Fuel oil usage and supply
The rate schedules of the
Company'sCompany’s electric utility subsidiariescontaininclude energy cost adjustment (ECA) clauseswhereby the charges forunder which electricenergyrates (and consequently the revenues of the electric utility subsidiaries generally)automatically vary withare adjusted for changes in theweighted averageweighted-average price paid for fuel oil and certain components of purchasedenergy costs,power, and the relative amounts of company-generated power and purchased power.Accordingly, under these clauses, changes in fuel oil and certain purchased energy costs are passed on to customers. In the December 30, 1997 D&Os approving HECO and its subsidiaries' fuel supply contracts, the PUC noted that, in light of the length of the fuel supply contracts and the relative stability of fuel prices, the need for the continued use of energy cost adjustment clauses will be the subject of investigation in a generic docket or in a future rate case. In their rate increase applications based on 1999 test years, MECO and HELCO stated that they believe that their energy cost adjustment clauses continue to be necessary.See discussion below under"Rates"“Rates,” andthe "Energy cost adjustment clauses" section“Regulation of electric utility rates” and “Electric utility revenues” inHECO'sHECO’s MD&A.HECO'sHECO’s steam power plants burn
low sulfur fuel oil (LSFO). HECO'sLSFO. HECO’s combustion turbine peaking units burnNumberNo. 2 diesel fuel (diesel).MECO'sMECO’s andHELCO'sHELCO’s steam power plants burn medium sulfur fuel oil (MSFO) and their combustion turbine and diesel engine generating units burn diesel. The LSFO supplied to HECO is primarily derived from Indonesian and other Far East crude oils processed in Hawaii refineries. The MSFO supplied to MECO and HELCO is derived from U.S. domestic crude oil processed in Hawaii refineries.In December 1997, HECO executed
newcontracts for the purchase of LSFO and the use of certain fuel distribution facilities with Chevron Products Company (Chevron) and Tesoro Hawaii Corp. dba BHP Petroleum Americas Refining Inc.(BHP)(Tesoro). These fuel supply and facilities operations contracts have a term of seven years commencing January 1, 1998. The PUC approved the contracts andissued a final decision and order in December 1997 thatpermits the inclusion of costs incurred under these contracts inHECO's energy cost adjustment clause.HECO’s ECA clauses. HECO pays market-related prices for fuel supplies purchased under these agreements.HECO, MECO and HELCO
and affiliates, HTB and YB,executednewjoint fuel supply contracts with Chevron andBHPTesoro for the purchase of diesel and MSFO supplies and for the use of certain petroleum distribution facilities for a period of seven years commencing January 1, 1998. The PUCsubsequentlyapproved these contracts andissued a final decision and order in December 1997 that permittedpermits the electric utilities to include fuel costs incurred under these contracts in their respectiveenergy cost adjustmentECA clauses. The electric utilitiesand HTB and YBpay market-related prices for diesel and MSFO supplied under these agreements.The diesel supplies acquired by the Lanai Division of MECO are purchased under a contract with a local
Chevron-brandpetroleum wholesaler, Lanai Oil Co., Inc., executed on February 13, 1997. TheOn March 1, 2000, the PUCissuedapproved an amended contract with afinal D&O approving the contract in June 1997. The originalterm extending through December 31, 2001, and further extending through December 31, 2003 unless terminated as of thecontract, which provides for the deliveryend offuel to MECO's Lanai power plants, expired2001. This agreement has been extended through December 31,1997. The contract continues under a provision for extension on an "evergreen" basis cancelable by either party on 180 days advance notice.2003.See the fuel oil commitments information set forth in the
"Fuel contracts and other purchase commitments"“Fuel contracts” section in Note1211 toHECO'sHECO’s Consolidated Financial Statements.The following table sets forth the average cost of fuel oil used by HECO, MECO and HELCO to generate electricity in the years
1997, 19962002, 2001 and1995:2000:
HECO MECO HELCO Consolidated -------------------------------------------------------------------------------------------------------- $/Barrel c/MBtu $/Barrel c/MBtu $/Barrel c/MBtu $/Barrel c/MBtu - -----------------------------------------------------------------------------------------------------------------------1997........... 23.88 380.9 30.13 503.9 25.76 418.1 25.19 405.9 1996........... 22.57 361.2 29.33 490.6 25.47 413.8 24.08 388.8 1995........... 19.19 306.1 24.78 414.4 21.94 355.1 20.47 329.7
HECO MECO HELCO Consolidated $/Barrel ¢/MBtu $/Barrel ¢/MBtu $/Barrel ¢/MBtu $/Barrel ¢/MBtu 2002
27.95 442.3 32.78 548.5 30.58 496.7 29.10 466.4 2001
31.90 508.3 40.00 670.0 31.96 514.8 33.49 539.3 2000
31.63 503.1 38.91 651.0 35.37 577.1 33.44 538.5 The average per-unit cost of fuel oil consumed to generate electricity for HECO, MECO and HELCO reflects a different volume mix of fuel types and grades. In
1997, 99.8%2002, over 99% ofHECO'sHECO’s generation fuel consumption consisted of LSFO. The balance ofHECO'sHECO’s fuel consumption was diesel. Diesel made up approximately 73% ofMECO'sMECO’s and 32% ofHELCO'sHELCO’s fuel consumption.TheMSFO made up the remainder of the fuel consumption of MECO andHELCO consisted of MSFO.HELCO. In general, MSFO is the least costly fuel,10diesel is the most expensive fuel and the price of LSFO falls between the two on a per-barrel basis. Even though the average price per barrel basis. The averagewas lower in 2002 than 2001, the prices of LSFO, MSFO and dieselin 1997 weretrended higher during 2002 from the level prevailing at the end of 2001. The utilities’ price for MSFO averaged approximately 3% above thesame as the respectiveaverage pricelevels prevailingin19962001, while the price for LSFO and1996diesel averaged approximately 7% and 16%, respectively below the averageprices were higher than the respective average pricesprice in1995.2001.In December
1997,2000, HELCO and MECOexercised an option to extend for two years their existingexecuted contracts of private carriage with Hawaiian Interisland Towing, Inc. (HITI) for the shipment of MSFO and diesel supplies from their fuelsupplier'ssuppliers’ facilities on Oahu to storage locations on the islands of Hawaii and Maui,respectively.respectively, commencing January 1, 2002. These contracts were the result of a competitive bidding process and provide for the employment of a new double-hull bulk petroleum barge at freight rates approximately the same as prevailed under predecessor transportation contracts with HITI. The new barge entered utility service in March 2002. The contracts are for an initial term of 5 years with options for three additional 5-year extensions. On December 10, 2001, the PUC approved these contracts and issued a final orderin June 1994thatpermittedpermits HELCO and MECO to include the fuel transportation and related costs incurred under theoriginal contractsprovisions of these agreements in their respective ECA clauses.HITI never takes title to the fuel oil or diesel fuel, but does have custody and control while the fuel is in transit from Oahu. If there were an oil spill in transit, HITI is contractually obligated to indemnify HELCO and/or MECO. HITI has liability insurance coverage for oil spill related damage of $1 billion. State law provides a cap of $700 million on liability for releases of heavy fuel oil transported interisland by tank barge. HELCO and/or MECO may be responsible for any clean-up and/or fines that HITI or its insurance carrier does not cover.
The prices that HECO, MECO and HELCO pay for purchased energy from nonutility generators are generally linked to the price of oil. The AES Hawaii energy prices vary primarily with an inflation indicator. The energy prices for Kalaeloa, which purchases LSFO from Tesoro, vary primarily with world LSFO prices. The H-POWER, HC&S, PGV and HCPC energy prices are based on the electric utilities’ respective PUC-filed short-run avoided energy cost
adjustment clauses. Freightratescharged under the contracts are related(which vary with their respective composite fuel costs), subject topublished indices for industrial commoditiesminimum floor rates specified in their approved PPAs. The Hamakua Partners energy pricesand laborvary primarily with HELCO’s diesel costs.These contracts each include options for one additional two-year extension. In 1998, theThe Company estimates that
76%77% of the net energy generated and purchased by HECO and its subsidiaries in 2003 will be generated from the burning of oil. Increases in fuel oil prices are passed on to customers through the electric utilitysubsidiaries' energy cost adjustmentsubsidiaries’ ECA clauses. Failure by theCompany'sCompany’s oil suppliers to provide fuel pursuant to the supply contracts and/or substantial increases in fuel prices could adversely affect consolidatedHECO'sHECO’s and theCompany'sCompany’s financial condition, results of operations and/or liquidity. HECO, however, maintains an inventory of fuel oil in excess of onemonth'smonth’s supply. HELCO and MECO maintain approximately a one month’s supply of both MSFO and diesel. The PPAs with AES Hawaii and Hamakua Partners require that they maintain certain minimum fuel inventory levels.Transmission systems
HECO has 138 kilovolt (kv) transmission and 46 kv subtransmission lines. HELCO has 69 kv transmission and 34.5 kv subtransmission lines. MECO has 69 kv transmission and 23 kv subtransmission lines on Maui and 34.5 kv transmission lines on Molokai. Lanai has no transmission lines and uses 12 kv lines to distribute electricity. The electric utilities’ overhead and underground transmission and subtransmission lines, as well as their distribution lines, are uninsured because the amount of insurance available is limited and the premiums are extremely high.
Lines are added when needed to serve increased loads and/or for reliability reasons. In some design districts on Oahu, lines must be placed underground. By state law, the PUC generally must determine whether new 46 kv, 69 kv or 138 kv lines can be constructed overhead or must be placed underground. The process of acquiring permits and regulatory approvals for new lines can be contentious, time consuming (leading to project delays) and costly.
HECO system. HECO serves Oahu’s electricity requirements with firm capacity generating units located in West Oahu (1,057 MW); Waiau, adjacent to Pearl Harbor (499 MW); and Honolulu (113 MW). HECO’s nonfirm power sources (approximately 28 MW) are located primarily in West Oahu. HECO transmits power to its service areas on Oahu through approximately 219 miles of overhead and underground 138 kv transmission lines (of which
may be usedapproximately 8 miles are underground) and approximately 570 miles of overhead and underground 46 kv subtransmission lines. See “Oahu transmission system” in HECO’s MD&A.HELCO system.HELCO serves the
event fuel suppliers are not ableisland of Hawaii’s electricity requirements with firm capacity generating units located in West Hawaii (42 MW) and East Hawaii (196 MW). HELCO’s nonfirm power sources total 26 MW. HELCO transmits power toprovide fuel pursuantits service area on the island of Hawaii through approximately 468 miles of 69 kv overhead lines and approximately 173 miles of 34.5 kv overhead lines.MECO system.MECO serves its electricity requirements with firm capacity generating units located on the island of Maui (250 MW), Molokai (12 MW) and Lanai (10 MW). MECO has no nonfirm power sources. MECO transmits and distributes power to its service area on the
contracts for this periodislands oftime. RATESMaui, Molokai and Lanai through approximately 128 miles of 69 kv overhead lines and approximately 10 miles of 34.5 kv overhead lines.Rates
HECO, MECO and HELCO are subject to the regulatory jurisdiction of the PUC with respect to rates, issuance of securities, accounting and certain other matters. See
"Regulation“Regulation and othermatters--Electricmatters—Electric utility regulation."”All rate schedules of HECO and its subsidiaries contain
energy cost adjustmentECA clauses as described previously. Under current law and practices, specific and separate PUC approval is not required for each rate change pursuant to automatic rate adjustment clauses previously approved by the PUC. Rate increases, other than pursuant to such automatic adjustment clauses, require the prior approval of the PUC after public and contested case hearings. PURPA requires the PUC to periodically review theenergy cost adjustmentECA clauses of electric and gas utilities in the state, and such clauses, as well as the rates charged by the utilities generally, are subject to change.See
the "Regulation“Regulation of electric utility rates," "Recent” “Recent raterequests"requests” and"Energy“Electric utility revenues” in HECO’s MD&A.Public Utilities Commission of the State of Hawaii
In July 2002, Commissioner Dennis R. Yamada retired and Commissioner Wayne H. Kimura became the Chairman of the PUC. In September 2002, Gregg J. Kinkley began serving as Commissioner for a term to expire in June 2004, subject to state Senate confirmation. Prior to his appointment, Mr. Kinkley served as the Consumer Advocate of the State of Hawaii Department of Commerce and Consumer Affairs. Continuing to serve is Commissioner Janet E. Kawelo.
Most recent rate requests
HECO, HELCO and MECO initiate PUC proceedings from time to time to request electric rate increases to cover rising operating costs (e.g. purchased power) and the cost
adjustment clauses" sectionsof plant and equipment, including the cost of new capital projects to maintain and improve service reliability. As of March 10, 2003, the return on rate base (RORB) found by the PUC to be reasonable inHECO's MD&A. RECENT RATE REQUESTthe most recent final rate decision for each utility was 9.16% for HECO (D&O issued on December 11, 1995, based on a 1995 test year), 9.14% for HELCO (D&O issued on February 8, 2001, based on a 2000 test year) and 8.83% for MECO (amended D&O issued on April 6, 1999, based on a 1999 test year). For 2002, the actual simple average RORBs (calculated under the rate-making method and reported to the PUC) for HECO, HELCO and MECO were 8.94%, 9.15% and 8.83%, respectively. InMarch 1998,2002, MECO’s revenues from shareholder incentives were $0.7 million lower than the amount that would have been recorded if MECO had not agreed to cap such incentives when its authorized return on rate base was exceeded. Also in 2002, HELCO slightly exceeded its authorized return on rate base. In 2002, HECO did not exceed its authorized return on rate base.Hawaiian Electric Company, Inc.
In December 1993, HECO filed a request
with the PUCto increase rates11.5%based on a 1995 test year. HECO requested a 4.1% increase (as revised), or$17.3$28.2 million in annual revenues, based on a 13.25% return on average common equity (ROACE). In December 1995, HECO received a final D&O authorizing a 1.3%, or $9.1 million, increase in annual revenues, based on a 1995 test year and an 11.4% ROACE. HECO has not subsequently initiated a rate case, but in 2001 it agreed to initiate a rate case using a 2003 or 2004 test year. Also, see “Recent rate requests—Hawaiian Electric Company, Inc.” in HECO’s MD&A.Hawaii Electric Light Company, Inc.
In early 2001, HELCO received a final D&O from the PUC authorizing an $8.4 million, or 4.9% increase in annual revenues, effective February 15, 2001 and based on an 11.50% ROACE. The D&O included in rate base $7.6 million for pre-air permit facilities needed for the delayed Keahole power plant expansion project that the PUC had also found to be used or useful to support the existing generating units at Keahole. The timing of a future HELCO rate increase request to recover costs relating to the delayed Keahole power plant expansion project, i.e., adding two combustion turbines (CT-4 and CT-5) at Keahole, including the remaining cost of pre-air permit facilities, will depend on future circumstances. See “Certain factors that may affect future results and financial condition–Other regulatory and permitting contingencies” in HECO’s MD&A and “HELCO power situation” in Note 11 of HECO’s Consolidated Financial Statements.
On June 1, 2001, the PUC issued an order approving a new standby service rate schedule rider for HELCO. The standby service rider issue had been bifurcated from the rest of the rate case. The rider provides the rates, terms and conditions for obtaining backup and supplemental electric power from the utility when a customer obtains all or part of its electric power from sources other than HELCO.
Maui Electric Company, Limited
In January 1998, MECO filed a request to increase rates, based on a 1999 test year, primarily to recover costs relating to the addition of generating unit M17 in late 1998. In November 1998, MECO revised its requested increase to 11.9%, or $16.4 million, in annual revenues, based on a 12.75% ROACE. In 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
12.5% return on average common equity, primarily to recover the cost10.94% ROACE. The timing oftwo power generation projects--an agreement to buy power from Encogen's 60-megawatt plant in Hamakua and the cost of adding generating units at HELCO's Keahole power plant. Under HELCO's request, the portion of thea future MECO rate increase cannot be determined at this time.Regulatory asset related to
Encogen's generators would not go into effect until the facilities are completed and providing electric serviceBarbers Point Tank Farm project costsSee Note 6 to
customers. PUC SHOW CAUSE ORDER See the "PUC show cause order for HECO" section in Note 12 to HECO'sHECO’s Consolidated Financial Statements.HECO filed a motion to closeCompetition
In December 1996, the
proceeding in March 1998, based on the fact that the actual returns for 1997--a 10.26% ROACE and a 8.75% ROR--were below the returns thePUCfound to be fair and reasonable in the last rate proceeding. The Consumer Advocate has filed with the PUC a statement that it does not oppose HECO's request to close the proceedings. Management cannot predict what future PUC action, if any, may be taken in this proceeding. 11COMPETITION Legislation has been introduced in Congress that would restructure the electric utility industry with a view toward increasing competition by, for example, requiring retail wheeling and allowing customers to choose their generation supplier. In addition, the PUC hasinstituted 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. Seethe "Competition" section“Competition” inHECO'sHECO’s MD&A.In March 1998, the parties agreed to adopt a collaborative process and schedule whereby they will submit initial position papers and final position papers to the collaborative group in June 1998 and September 1998, respectively, and a collaborative report to the PUC by December 1998. A resolution has been introduced in the Hawaii Legislature, which, if adopted in its current form, would request that the Hawaii Department of Business, Economic Development, and Tourism examine the impediments to electric competition in the State of Hawaii and provide specific recommendations to the Legislature by December 31, 1998, for legislation to expedite the PUC proceedings on competition in the electric utility industry in Hawaii.Management cannot predict what changes, if any, may result from these efforts or what impact, if any,impact theythe changes may have on theCompany'sCompany’s orHECO'sconsolidated HECO’s financial condition, results of operations or liquidity.SAVINGS BANK--AMERICAN SAVINGS BANK,Electric and magnetic fields
Research on potential adverse health effects from exposure to electric and magnetic fields (EMF) continues. To date, no definite relationship between EMF and health risks has been clearly demonstrated. In 1996, the National Academy of Sciences examined more than 500 studies and stated that “the current body of evidence does not show that exposure to EMFs presents a human-health hazard.” An extensive study released in 1997 by the National Cancer Institute and the Children’s Cancer Group found no evidence of increased risk for childhood leukemia from EMF. In 1999, the National Institute of Environmental Health Sciences Director’s Report concluded that while EMF could not be found to be “entirely safe,” the evidence of a health risk was “weak” and did not warrant “aggressive” regulatory actions.
While EMF has not been established as a cause of any health condition, there were important developments in 2002. EMF was formally classified as a possible human carcinogen in reports from two major public health organizations—the International Agency for Research on Cancer (IARC) and the California Department of Health Services (CDHS). The full implications of the IARC and CDHS reports remain to be seen. This does not mean that EMF has been established as a cause of childhood leukemia or any other cancer. The reports, however, may raise the profile of the EMF issue for electric utilities.
HECO and its subsidiaries are monitoring the research and continue to participate in utility industry funded studies on EMF and, where technically feasible and economically reasonable, continue to reduce EMF in the design and installation of new transmission and distribution facilities. Management cannot predict the impact, if any, the EMF issue may have on HECO, HELCO and MECO in the future.
Legislation
See “Legislation” in HECO’s MD&A.
State of Hawaii,ex rel., Bruce R. Knapp,Qui Tam Plaintiff, and Beverly Perry, on behalf of herself and all others similarly situated, Class Plaintiff, vs. The AES Corporation, AES Hawaii, Inc., HECO, and HEI
On April 22 and 23, 2002, HECO and HEI, respectively, were served with a complaint filed in the Circuit Court for the First Circuit of Hawaii which alleges that the State of Hawaii and HECO’s other customers have been overcharged for electricity as a result of alleged excessive prices in the amended power purchase agreement (Amended PPA) between defendants HECO and AES Hawaii, Inc. (AES-HI). AES-HI is a subsidiary of The AES Corporation (AES), which guarantees certain obligations of AES-HI under the Amended PPA.
HECO entered into a PPA with AES Barbers Point, Inc. (now known as AES-HI) in March 1988, and the PPA was amended in August 1989. The AES-HI 180 MW coal-fired cogeneration plant, which became operational in September 1992, utilizes a “clean-coal” technology and is designed to sell sufficient steam to be a “Qualifying Facility” under the Public Utility Regulatory Policies Act of 1978. The Amended PPA, which has a 30-year term, was approved by the PUC in December 1989, following contested case hearings in October 1988, an initial Decision and Order in July 1989, an amendment of the PPA in August 1989, and further contested case hearings in November 1989. Intervenors included the state Consumer Advocate and the U.S. Department of Defense. The PUC proceedings addressed a number of issues, including whether the prices for capacity and energy in the Amended PPA were less than HECO’s long-term estimated avoided costs, whether HECO needed the capacity to be provided by AES-HI, and whether the terms and conditions of the Amended PPA were reasonable.
The Complaint alleges that HECO’s payments to AES-HI for power, based on the prices, terms and conditions in the PUC-approved Amended PPA, have been “excessive” by over $1 billion since September 1992, and that approval of the Amended PPA was wrongfully obtained from the PUC as a result of alleged misrepresentations
and/or material omissions by the defendants, individually and/or in conspiracy, with respect to the estimated future costs of the Amended PPA versus the costs of hypothetical HECO-owned units. The Complaint included four claims for relief or causes of action: (1) violations of Hawaii’s Unfair and Deceptive Practices Act, (2) unjust enrichment/restitution, (3) fraud and (4) violation of Hawaii’s False Claim Act, otherwise known as qui tam claims (asserting that the State declined to take over the action). The Complaint sought treble damages, attorneys’ fees, rescission of the Amended PPA and punitive damages against HECO, HEI, AES-HI and AES.
On May 22, 2002, AES, with the consent of HECO and HEI, removed the case to the U.S. District Court for the District of Hawaii (District Court) on the ground that the action arises under and is completely preempted by the Public Utility Regulatory Policies Act of 1978.
On June 12, 2002, HECO and HEI filed a motion to dismiss the complaint on the grounds that the plaintiffs’ claims either arose prior to enactment of the Hawaii False Claims Act, which does not have retroactive application, or are barred by the applicable statutes of limitations. AES also filed a motion to dismiss, on the same and additional grounds.
Plaintiffs moved to remand the case to state court on June 21, 2002. On November 14, 2002, the District Court Judge remanded the case back to state court and denied plaintiffs’ request for attorneys’ fees and costs.
On December 20, 2002, HECO and HEI re-filed their motion to dismiss the complaint. AES joined in the motion. At a hearing on the motion in early 2003, the First Circuit Court ordered dismissal of the qui tam claims relating to actions prior to May 26, 2000, the effective date of the Hawaii False Claims Act, on the ground that the Act did not have retroactive application. Subsequently, the First Circuit Court issued a minute order dismissing Plaintiffs’ claims for (1) violations of Hawaii’s Unfair and Deceptive Practices Act, (2) unjust enrichment/restitution and (3) fraud, which claims were purportedly brought as a class action, on the ground that all of these claims were barred by the applicable statutes of limitations.
As a result of the Circuit Court’s ruling, the only claim that appears to remain is under the Hawaii False Claims Act based on allegations that false bills or claims were submitted to the State after May 26, 2000. Under the False Claims Act, a defendant may be liable to a qui tam plaintiff for treble damages, plus civil penalties of a minimum of $5,000 for each false claim, plus attorneys’ fees and costs incurred in the action. The Plaintiffs appear to claim that each monthly bill submitted to each state agency and office on Oahu constitutes a separate false claim. In early 2003, AES filed a motion to dismiss the remaining claims under the Hawaii False Claims Act, on the grounds that: 1) PURPA precludes judicial review of the PUC decision that approved the AES contract; 2) plaintiffs failed to pursue and exhaust administrative remedies; and 3) PURPA preempts challenges to rates established by the PUC in approving the AES contract.
Management intends to vigorously defend the lawsuit.
Commitments and contingencies
See “Certain factors that may affect future results and financial condition–Other regulatory and permitting contingencies” in HECO’s MD&A and Note 11 to HECO’s Consolidated Financial Statements for a discussion of important commitments and contingencies not discussed herein, including (but not limited to) HELCO’s Keahole power situation and HECO’s Kamoku-Pukele transmission line.
Bank—American Savings Bank, F.S.B.
- --------------------------------------------- GENERALGeneral
ASB was granted a federal savings bank charter in January 1987. Prior to that time, ASB had operated since 1925 as the Hawaii division of American Savings & Loan Association of Salt Lake City, Utah. As of December 31,
1997,2002, ASB was the third largest financial institution in the State of Hawaii with total assets of$5.5$6.3 billion and deposits of$3.9$3.8 billion. In 2002, the bank’s revenues amounted to approximately 24% of HEI’s consolidated revenues.HEI agreed with the Office of Thrift
Supervision'sSupervision’s (OTS) predecessor regulatory agency thatASB'sASB’s regulatory capital would be maintained at a level of at least 6% ofASB'sASB’s total liabilities, or at such greater amount as may be required from time to time by regulation. Under the agreement,HEI'sHEI’s obligation to contribute additional capital was limited to a maximum aggregate amount of approximately $65.1 million. At December 31,1997, HEI's2002, HEI’s maximum obligation to contribute additional capital has been reduced to approximately $28.3 million because of additional capital contributions of $36.8 million by HEI to ASB since the acquisition, exclusive of capital contributions made in connection withASB'sASB’s acquisition of most of the Hawaii operations ofBoA.Bank of America, FSB (BoA) (see below). ASB is subject to OTS regulations on dividends and other distributions applicable to financial institutions regulated by the OTS.ASB'sEffective December 6, 1997, ASB acquired certain loans and other assets and assumed certain deposits and other liabilities of the Hawaii operations of BoA pursuant to a Purchase and Assumption Agreement executed on May 26, 1997, as amended. ASB used the purchase method of accounting to account for the transaction. In this transaction, ASB assumed liabilities with an estimated fair value of $1.7 billion and paid a $0.1 billion premium on certain transferred deposit liabilities. The estimated fair value of tangible and intangible assets acquired, including cash of $0.8 billion, amounted to $1.8 billion. ASB recorded the excess of the purchase price over the estimated fair value of the identifiable net assets acquired of $72 million as goodwill and recorded the core deposit premium of approximately $20 million as an intangible asset. The accounting treatment for goodwill and other intangible assets has changed for 2002 and subsequent years such that goodwill is no longer amortized, but other intangible assets continue to be amortized, and goodwill and other intangible assets are reviewed for impairment at least annually. See “Goodwill and other intangible assets” in Note 1 of HEI’s Consolidated Financial Statements.
ASB’s earnings depend primarily on its net interest
income--theincome—the difference between the interest income earned on interest-earning assets (loans receivablemortgage-backed securitiesandinvestments)investment and mortgage-related securities) and the interest expense incurred on interest-bearing liabilities (deposit liabilities andborrowings). Deposits traditionally have been the principal source of ASB's funds for use in lending, meeting liquidity requirements and making investments. ASB also derives funds from receipt of interest and principal on outstanding loans receivable,borrowings, including advances from the Federal Home Loan Bank (FHLB) of Seattle and securities sold under agreements torepurchase and other sources. In recent years, securities sold under agreements to repurchase and advances from the FHLB of Seattle have become significant sources of funds. On September 30, 1996, President Clinton signed into law the Deposit Insurance Funds Act of 1996, which authorized a one-time deposit-insurance premium assessment by the Federal Deposit Insurance Corporation (FDIC) of 65.7 cents per $100 of deposits insured by the Savings Association Insurance Fund (SAIF) and held as of March 31, 1995. ASB's assessment was $8.3 million after tax and was accrued in September 1996. The assessment resulted in a reduction of ASB's deposit-insurance premiums from 23 cents to 6.48 cents per $100 of deposits, effective January 1, 1997. With the reduction in deposit-insurance premiums, ASB's annual after-tax savings was approximately $2 million for 1997.repurchase).For additional information about ASB,
including ASB's acquisition of most of the Hawaii operations of BoA in December 1997,see the"Savings Bank"sections underHEI's“Bank” in HEI’s MD&A, HEI’s “Quantitative and Qualitative Disclosures about Market Risk” and Note 4 toHEI'sHEI’s Consolidated Financial Statements.12The following table sets forth selected data for ASB for the years indicated:
Years ended December 31, 2002 2001 2000 Common equity to assets ratio
Average common equity divided by average total assets1
7.20 % 6.65 % 6.22 % Return on assets
Net income for common stock divided by average total assets1, 2
0.92 0.81 0.68 Return on common equity
Net income for common stock divided by average common equity1, 2
12.7 12.3 11.0 Tangible efficiency ratio
Total general and administrative expenses divided by net interest income and other income
58 56 57
Years ended December 31, ----------------------------------------------- 1997 1996 1995 - ----------------------------------------------------------------------------------------------------------Common equity to assets ratio1
Average
common equity divided bybalances calculated using the averagetotal assets..... 6.09% 6.21% 6.23% Return on assets Net income divided by average total assets (1)............ 0.67 (2) 0.43 (3) 0.71 Returndaily balances during 2002 and 2001 (except for return on common equity,Netwhich is calculated using the average month-end balance) and the average month-end balances during 2000.
2
In 2001 and 2000, net income
divided by average common equity (1)........... 11.0 (2) 6.8 (3) 11.5includes amortization of goodwill and other intangibles. In 2002, goodwill is no longer amortized, but other intangibles are still amortized, and goodwill and other intangibles are tested for impairment at least annually.(1) Net income includes amortization of goodwill and core deposit intangibles. Average balances for each year have been calculated using theConsolidated average
month-end balances during the year, with the average balances for 1997 reflecting the effect of the acquisition of most of BoA's Hawaii operations on December 6, 1997. (2) Excluding the BoA - Hawaii one-time acquisition expenses, the return on assets and return on common equity ratios would have been 0.70% and 12.1%, respectively. (3) Excluding the FDIC special assessment of $8.3 million after taxes, the return on assets and return on common equity ratios would have been 0.70% and 10.6%, respectively. CONSOLIDATED AVERAGE BALANCE SHEETbalance sheetThe following table sets forth average balances of
ASB'sASB’s major balance sheet categories for the years indicated. Average balancesfor each yearhave been calculated using theaverage month-end ordaily average balances during 2002 and 2001 and theyear, withaverage month-end balances during 2000.
Years ended December 31, (in thousands)
2002 2001 2000 Assets
Investment securities
$ 246,321 $ 308,712 $ 287,906 Mortgage-related securities
2,654,302 2,345,630 2,058,706 Loans receivable, net
2,844,341 2,963,521 3,215,879 Other
392,338 391,040 380,609 $ 6,137,302 $ 6,008,903 $ 5,943,100 Liabilities and stockholder’s equity
Savings deposits
$ 2,394,435 $ 2,059,486 $ 2,007,787 Term certificates
1,323,118 1,578,650 1,529,525 Other borrowings
1,770,831 1,778,766 1,880,952 Other
132,223 117,366 80,262 Stockholder’s equity
516,695 474,635 444,574 $ 6,137,302 $ 6,008,903 $ 5,943,100 In 2002, the increase in the average balance for mortgage-related securities was due to the exchange of loans for $0.4 billion of mortgage-related securities in 2001 and the investment of excess liquidity into mortgage-related securities. In 2002, the decrease in the average balance for loans receivable was due to the exchange of loans for mortgage-related securities in 2001 and the high loan prepayments in 2002 as result of the low interest rate environment. In 2002, the increase in savings deposits and the decrease in term certificates were due to ASB’s efforts in attracting low costing core deposits and depositors not willing to have their funds invested for long periods of time at current interest rates as the low interest rate environment has brought term certificate interest rates down near core deposit interest rates. In 2001, mortgage-related securities increased and loans receivable decreased largely because ASB exchanged loans for $0.4 billion of mortgage-related securities. The decreases in the average balances
for 1997 reflecting the effectofthe acquisition of most of BoA's Hawaii operations on December 6, 1997.
Years ended December 31, --------------------------------------------------- (in thousands) 1997 1996 1995 - -------------------------------------------------------------------------------------------------------- ASSETSInvestment securities................................ $ 114,981 $ 83,163 $ 80,633 Mortgage-backed securities........................... 1,449,570 1,402,165 1,251,192 Loans receivable, net................................ 2,143,106 1,868,489 1,751,729 Other................................................ 213,124 167,894 173,895 -------------------------------------------- $3,920,781 $3,521,711 $3,257,449 ============================================LIABILITIES AND STOCKHOLDER'S EQUITYDeposit liabilities.................................. $2,324,426 $2,210,058 $2,149,229 Other borrowings..................................... 1,261,511 1,023,223 835,310 Other................................................ 90,300 69,677 69,903 Stockholder's equity................................. 244,544 218,753 203,007 -------------------------------------------- $3,920,781 $3,521,711 $3,257,449 ============================================ASSET/LIABILITY MANAGEMENT Interest rate sensitivity refersother borrowings were due to therelationship between marketpayoff of maturing borrowings with funds from deposit inflows.Asset/liability management
See HEI’s “Quantitative and Qualitative Disclosures about Market Risk” in HEI’s Annual Report.
Interest income and interest
rates and net interest income resulting from the repricingexpenseSee “Results of
interest-earning assets and interest-bearing liabilities. Interest rate risk arises when an interest-earning asset matures or when its interest rate changesoperations—Bank” in HEI’s MD&A in HEI’s Annual Report for atime frame different from thattable ofthe supporting interest-bearing liability. Maintaining an equilibrium between rate sensitive interest-earning assets and interest-bearing liabilities will reduce some interest rate risk but it will not guarantee a stable net interest spread because yields and rates may change simultaneously or at different times and such changes may occur in differing increments. Market rate fluctuations could materially affect the overall net interest spread even if interest-earning assets and interest-bearing liabilities were perfectly matched. The difference between the amounts of interest-earning assets and interest-bearing liabilities that reprice during a given period is called "gap." An asset-sensitive position or "positive gap" exists when more assets than liabilities reprice within a given period; a liability-sensitive position or "negative gap" exists when more liabilities than assets reprice within a given period. A positive gap generally produces more net interest income in periods of rising interest rates and a negative gap generally produces more net interest income in periods of falling interest rates. 13As of December 31, 1997, the gap in the near term (0-6 months) was a negative 7.3% of total assets as compared to a cumulative one-year negative gap position of 2.1% of total assets. The difference between the near-term and one-year negative gap positions is primarily due to reduced amounts of repricing of interest-bearing liabilities such as in short-term certificates of deposits and other borrowings to support investment activities. The following table shows ASB's interest rate sensitivity at December 31, 1997:
Cumulative amounts at December 31, 1997 subject to repricing within -----------------------------------------------------------------------6 months 6 months 1-5 Over 5 (dollars in millions) or less to 1 year years years Total (1) - -------------------------------------------------------------------------------------------------------------- Interest-earning assets - ----------------------- Real estate loans and mortgage- backed securities Balloon and adjustable rate......... $ 869 $ 828 $ 243 $ 3 $1,943 Fixed rate 1-4 unit residential..... 180 153 880 1,090 2,303 Other............................... 54 35 95 49 233 Consumer and other loans............. 230 11 55 54 350 Commercial loans..................... 44 4 16 8 72 Other interest-earning assets........ 122 42 -- -- 164 --------------------------------------------------------------------- Total interest-earning assets........ 1,499 1,073 1,289 1,204 5,065 --------------------------------------------------------------------- Interest-bearing liabilities - ---------------------------- Certificate accounts................. 1,087 393 238 66 1,784 Money market accounts................ 56 47 213 32 348 Negotiable Order of Withdrawal accounts 66 59 334 169 628 Passbook accounts.................... 175 67 440 475 1,157 FHLB advances........................ 246 105 197 188 736 Other borrowings..................... 274 113 -- -- 387 ---------------------------------------------------------------------------- Total interest-bearing liabilities... 1,904 784 1,422 930 5,040 ---------------------------------------------------------------------------- Interest rate sensitivity gap (2)... $ (405) $ 289 $ (133) $ 274 $ 25 ============================================================================ Cumulative interest rate sensitivity gap.................... $ (405) $ (116) $ (249) $ 25 ============================================================ Cumulative interest rate sensitivity gap over total assets.............. (7.30)% (2.09)% (4.49)% 0.45% - ---------------------------------------------------------------------------------------------------------------------(1) The table does not include $483 million of noninterest-earning assets and $112 million of noninterest-bearing liabilities. (2) The difference between the total interest-earning assets and the total interest-bearing liabilities. 14INTEREST INCOME AND INTEREST EXPENSE The following table sets forthaverage balances, interest and dividend income, interest expense andweighted averageweighted-average yields earned and rates paid for certain categories of interest-earning assets and interest-bearing liabilities for the yearsindicated. Average balances for each year have been calculated using the average month-end or daily average balances during the year, with the average balances for 1997 reflecting the effect of the acquisition of most of BoA's Hawaii operations onended December6, 1997.
Years ended December 31, ----------------------------------------------------------- (dollars in thousands) 1997 1996 1995 - ---------------------------------------------------------------------------------------------------------Loans Average balances.......................... $2,143,106 $1,868,489 $1,751,729 Interest income........................... $ 174,489 $ 155,865 $ 146,046 Weighted average yield.................... 8.14% 8.34% 8.34% Mortgage-backed securities Average balances.......................... $1,449,570 $1,402,165 $1,251,192 Interest income........................... $ 95,990 $ 94,561 $ 85,727 Weighted average yield.................... 6.62% 6.74% 6.85% Investments (1) Average balances.......................... $ 114,981 $ 83,163 $ 80,633 Interest and dividend income.............. $ 7,139 $ 5,288 $ 4,921 Weighted average yield.................... 6.21% 6.36% 6.10% Total interest-earning assets Average balances.......................... $3,707,657 $3,353,817 $3,083,554 Interest and dividend income.............. $ 277,618 $ 255,714 $ 236,694 Weighted average yield.................... 7.49% 7.62% 7.68% Deposits Average balances.......................... $2,324,426 $2,210,058 $2,149,229 Interest expense.......................... $ 89,099 $ 91,164 $ 89,296 Weighted average rate..................... 3.83% 4.12% 4.15% Borrowings Average balances.......................... $1,261,511 $1,023,223 $ 835,310 Interest expense.......................... $ 75,563 $ 62,500 $ 53,409 Weighted average rate..................... 5.99% 6.11% 6.39% Total interest-bearing liabilities Average balances.......................... $3,585,937 $3,233,281 $2,984,539 Interest expense.......................... $ 164,662 $ 153,664 $ 142,705 Weighted average rate..................... 4.59% 4.75% 4.78% Net balance, net interest income and interest rate spread Net balance.............................. $ 121,720 $ 120,536 $ 99,015 Net interest income...................... $ 112,956 $ 102,050 $ 93,989 Interest rate spread..................... 2.90% 2.87% 2.90%(1) Investments include stock in the Federal Home Loan Bank of Seattle. 1531, 2002, 2001 and 2000. The following table shows the effect on net interest income of (1) changes in interest rates (change in
weighted averageweighted-average interest rate multiplied by prior year average portfolio balance) and (2) changes in volume (change in average portfolio balance multiplied by prior period rate). Any remaining change is allocated to the above two categories on apro rata basis.
Increase (decrease) due to ---------------------------------------------- (in thousands) Rate Volume Total - ---------------------------------------------------------------------------------------------------------Year ended December 31, 1997 vs. 1996 - ----------------------------------------------------------- Income from interest-earning assets Loan portfolio............................................ $(3,813) $22,437 $18,624 Mortgage-backed securities................................ (1,712) 3,141 1,429 Investments............................................... (128) 1,979 1,851 -------------------------------------- (5,653) 27,557 21,904 -------------------------------------- Expense from interest-bearing liabilities Deposits.................................................. (6,622) 4,557 (2,065) FHLB advances and other borrowings........................ (1,249) 14,312 13,063 -------------------------------------- (7,871) 18,869 10,998 -------------------------------------- Net interest income........................................ $ 2,218 $ 8,688 $10,906 ======================================
Year ended December 31, 1996 vs. 1995 - ----------------------------------------------------------- Income from interest-earning assets Loan portfolio............................................ $ -- $ 9,819 $ 9,819 Mortgage-backed securities................................ (1,391) 10,225 8,834 Investments............................................... 212 155 367 ---------------------------------------- (1,179) 20,199 19,020 ---------------------------------------- Expense from interest-bearing liabilities Deposits.................................................. (647) 2,515 1,868 FHLB advances and other borrowings........................ (2,434) 11,525 9,091 ---------------------------------------- (3,081) 14,040 10,959 ---------------------------------------- Net interest income........................................ $ 1,902 $ 6,159 $ 8,061 ========================================OTHER INCOME
Increase (decrease) due to (in thousands)
Rate Volume Total Year ended December 31, 2002 vs. 2001
Income from interest-earning assets
Loan portfolio
$ (19,676 ) $ (9,100 ) $ (28,776 ) Mortgage-related securities
(35,306 ) 18,377 (16,929 ) Investments
(4,969 ) (2,747 ) (7,716 ) (59,951 ) 6,530 (53,421 ) Expense from interest-bearing liabilities
Deposits
(35,062 ) (7,838 ) (42,900 ) FHLB advances and other borrowings
(17,372 ) (431 ) (17,803 ) (52,434 ) (8,269 ) (60,703 ) Net interest income
$ (7,517 ) $ 14,799 $ 7,282 Year ended December 31, 2001 vs. 2000
Income from interest-earning assets
Loan portfolio
$ (2,867 ) $ (19,777 ) $ (22,644 ) Mortgage-related securities
(19,981 ) 19,822 (159 ) Investments
(2,269 ) 1,148 (1,121 ) (25,117 ) 1,193 (23,924 ) Expense from interest-bearing liabilities
Deposits
(6,041 ) 3,380 (2,661 ) FHLB advances and other borrowings
(16,352 ) (6,277 ) (22,629 ) (22,393 ) (2,897 ) (25,290 ) Net interest income
$ (2,724 ) $ 4,090 $ 1,366 Other income
In addition to net interest income, ASB has various sources of other income, including fee income from servicing loans, fee income from financial products and services, fees on deposit accounts
rental income from premisesand other income. Other income totaled approximately$16.5$53.0 million in1997, $15.72002, $45.0 million in19962001 and$17.9$27.3 million in1995.2000. Thedecreaseincrease in other incomeduring 1996for 2002 wasprimarily due to a $3.9 million one- time gain on sale of trading account securities in 1995. Excluding the one-time gain on sale of approximately $49.5 million of trading account securities in 1995, other income for 1996 increased $1.7 million over 1995due to increases in fee income from its debit and automated teller machines (ATM) cards resulting from ASB’s expansion of its debit card base and its introduction of new ATM services in 2001 as well as higher fee income from its deposit liabilities as a result of restructuring of deposit products. Increased fee income from Bishop Insurance Agency of Hawaii, Inc. (BIA) which was acquired in March 2001 also contributed to the increase in other income. Offsetting these increases were lower fee income on loans serviced for others as ASB recorded writedowns of its mortgage servicingloans. LENDING ACTIVITIES General. ASB'srights due to faster prepayments on its servicing portfolio and a netloan and mortgage-backedloss of $0.6 million on the sale of securitiesportfolio increasedcompared toapproximately $4.9 billion at December 31, 1997a net gain of $8.0 million in 2001. The increase in otherincome for 2001 was primarily due to
the purchasea $8.0 million gain on sale of$0.9 billioninvestment and mortgage-related securities, increases in fees from ATM and debit cards resulting from ASB’s expansion ofHawaii-based BoA loansits debit card base andthe purchase, primarilyits introduction of new check cashing ATMs, increases inanticipationfee income from its deposit liabilities as a result ofthe BoA acquisition,restructuring of$0.8 billiondeposit products, fee income from BIA which was acquired inmortgage-backed securities.March 2001 and increases in revenues from sales of annuity products from American Savings Investment Services Corp.Lending activities
General.Loans and
mortgage-backedmortgage-related securitiesrepresent 88.3%of $5.7 billion represented 90.6% of total assets at December 31,1997,2002, compared to$3.3$5.2 billion, or93.1%86.7%, and$3.1$5.3 billion, or91.8%88.5%, at December 31,19962001 and1995,2000, respectively.ASB'sASB’s loan portfolio consists primarily of conventional residential mortgage loans, which arenotneither insured by the Federal Housing Administrationornor guaranteed by the Veterans Administration.16The following tables set forth the composition of
ASB'sASB’s loan andmortgage-backedmortgage-related securities portfolio:
December 31, 2002 2001 2000 (dollars in thousands)
Balance % of total Balance % of total Balance % of total Real estate loans1
Conventional (1-4 unit residential)
$ 2,389,852 41.70 % $ 2,294,372 44.02 % $ 2,758,667 52.23 % Commercial real estate
197,371 3.45 196,515 3.77 156,177 2.95 2,587,223 45.15 2,490,887 47.79 2,914,844 55.18 Less
Deferred fees and discounts
(18,937 ) (0.33 ) (17,946 ) (0.34 ) (21,588 ) (0.41 ) Undisbursed loan funds
(21,412 ) (0.37 ) (22,910 ) (0.45 ) (17,559 ) (0.33 ) Allowance for loan losses
(23,708 ) (0.42 ) (26,085 ) (0.50 ) (24,800 ) (0.47 ) Total real estate loans, net
2,523,166 44.03 2,423,946 46.50 2,850,897 53.97 Other loans
Consumer and other loans
245,853 4.29 252,487 4.84 238,351 4.51 Commercial loans
247,114 4.31 197,333 3.79 134,784 2.55 492,967 8.60 449,820 8.63 373,135 7.06 Less
Deferred fees and discounts
(416 ) — — — — — Undisbursed loan funds
(1 ) — (5 ) — (58 ) — Allowance for loan losses
(21,727 ) (0.38 ) (16,139 ) (0.31 ) (12,649 ) (0.24 ) Total other loans, net
470,823 8.22 433,676 8.32 360,428 6.82 Mortgage-related securities, net of discounts
2,736,679 47.75 2,354,849 45.18 2,070,827 39.21 Total loans and mortgage-related securities, net
$ 5,730,668 100.00 % $ 5,212,471 100.00 % $ 5,282,152 100.00 %
December 31, ------------------------------------------------------------------------------------------- 1997 1996 1995 ------------------------------------------------------------------------------------------- (dollars in thousands) Balance % of total Balance % of total Balance % of total - --------------------------------------------------------------------------------------------------------------------------Real estate loans (1) Conventional................... $2,631,298 53.69% $1,800,365 53.87% $1,495,955 47.75% Construction and development... 32,569 0.67 29,964 0.89 29,650 0.95 ---------------------------------------------------------------------------------------- 2,663,867 54.36 1,830,329 54.76 1,525,605 48.70 Less Deferred fees and discounts.... (16,055) (0.33) (17,759) (0.53) (15,244) (0.49) Undisbursed loan funds......... (13,724) (0.28) (14,532) (0.43) (10,422) (0.33) Allowance for losses........... (20,450) (0.42) (15,792) (0.47) (10,837) (0.34) ---------------------------------------------------------------------------------------- Total real estate loans, net... 2,613,638 53.33 1,782,246 53.33 1,489,102 47.54 ---------------------------------------------------------------------------------------- Other loans Loans on deposits.............. 17,473 0.36 15,441 0.46 15,688 0.50 Consumer and other loans....... 342,146 6.98 192,315 5.75 170,743 5.45 Commercial loans............... 88,315 1.80 18,548 0.56 20,560 0.66 ---------------------------------------------------------------------------------------- 447,934 9.14 226,304 6.77 206,991 6.61 Less Deferred fees and discounts.... (14) (0.00) (23) (0.00) (38) (0.00) Undisbursed loan funds......... (16,211) (0.33) (3,086) (0.09) (6,175) (0.20) Allowance for losses........... (9,500) (0.19) (3,413) (0.10) (2,079) (0.07) ---------------------------------------------------------------------------------------- Total other loans, net......... 422,209 8.62 219,782 6.58 198,699 6.34 ---------------------------------------------------------------------------------------- Mortgage-backed securities, net of discounts.............. 1,865,027 38.05 1,340,073 40.09 1,444,832 46.12 ---------------------------------------------------------------------------------------- Total loans and mortgage-backed securities, net.......................... $4,900,874 100.00% $3,342,101 100.00% $3,132,633 100.00% =========================================================================================(1) Includes renegotiated loans. 17
December 31, -------------------------------------------------------------- 1994 1993 -------------------------------------------------------------- (dollars in thousands) Balance % of total Balance % of total - ----------------------------------------------------------------------------------------------------------------------Real estate loans (1) Conventional..................................... $1,657,935 57.34% $1,587,615 67.12% Construction and development..................... 36,184 1.25 26,526 1.12 -------------------------------------------------------------- 1,694,119 58.59 1,614,141 68.24 Less Deferred fees and discounts..................... (21,159) (0.73) (26,728) (1.13) Undisbursed loan funds.......................... (16,056) (0.56) (13,142) (0.55) Allowance for losses............................ (7,259) (0.25) (3,962) (0.17) -------------------------------------------------------------- Total real estate loans, net..................... 1,649,645 57.05 1,570,309 66.39 -------------------------------------------------------------- Other loans Loans on deposits................................ 15,378 0.53 15,015 0.63 Consumer and other loans......................... 144,505 5.00 129,961 5.49 Commercial loans................................. 18,369 0.64 24,494 1.04 -------------------------------------------------------------- 178,252 6.17 169,470 7.16 Less Deferred fees and discounts..................... (52) (0.00) (156) (0.01) Undisbursed loan funds.......................... (2,256) (0.08) (3,173) (0.13) Allowance for losses............................ (1,534) (0.05) (1,352) (0.06) -------------------------------------------------------------- Total other loans, net........................... 174,410 6.04 164,789 6.96 -------------------------------------------------------------- Mortgage-backed securities, net of discounts..... 1,067,287 36.91 630,156 26.65 -------------------------------------------------------------- Total loans and mortgage-backed securities, net.............................. $2,891,342 100.00% $2,365,254 100.00% ==============================================================(1)1
Includes renegotiated loans. In 2001, ASB exchanged loans for $0.4 billion of mortgage-related securities.
December 31, 1999 1998 (dollars in thousands)
Balance % of total Balance % of total Real estate loans1
Conventional (1-4 unit residential)
$ 2,769,101 53.40 % $ 2,689,682 54.51 % Commercial real estate
170,663 3.29 198,530 4.03 2,939,764 56.69 2,888,212 58.54 Less
Deferred fees and discounts
(24,083 ) (0.46 ) (21,229 ) (0.43 ) Undisbursed loan funds
(19,368 ) (0.37 ) (14,685 ) (0.30 ) Allowance for loan losses
(22,319 ) (0.43 ) (27,944 ) (0.57 ) Total real estate loans, net
2,873,994 55.43 2,824,354 57.24 Other loans
Consumer and other loans
244,933 4.72 253,232 5.13 Commercial loans
106,098 2.05 94,045 1.91 351,031 6.77 347,277 7.04 Less
Deferred fees and discounts
— — (7 ) — Undisbursed loan funds
(118 ) — (16,592 ) (0.34 ) Allowance for loan losses
(13,029 ) (0.25 ) (11,835 ) (0.24 ) Total other loans, net
337,884 6.52 318,843 6.46 Mortgage-related securities, net of discounts
1,973,146 38.05 1,791,353 36.30 Total loans and mortgage-related securities, net
$ 5,185,024 100.00 % $ 4,934,550 100.00 %
1
Includes renegotiated loans.
The following table summarizes ASB’s loan portfolio, excluding loans held for sale, at December 31, 2002, based upon contractually scheduled principal payments and expected prepayments allocated to the indicated maturity categories:
December 31, 2002
Due (in millions)
Less
than
1 year1-5
yearsAfter
5 years
Total Residential loans
Fixed
$ 497 $ 484 $ 848 $ 1,829 Adjustable
208 226 112 546 705 710 960 2,375 Commercial real estate loans
Fixed
6 26 26 58 Adjustable
19 43 77 139 25 69 103 197 Consumer loans
Fixed
17 42 22 81 Adjustable
59 89 17 165 76 131 39 246 Commercial loans
Fixed
90 36 13 139 Adjustable
54 42 12 108 144 78 25 247 $ 950 $ 988 $ 1,127 $ 3,065 Origination, purchase and sale of loans.Generally, loans originated
and purchasedby ASB are secured by real estate located in Hawaii. As of December 31,1997,2002, approximately$84.3$22.7 million of loans purchased from other lenders were secured by properties located in the continental United States. For additional information, including information concerning the geographic distribution ofASB's mortgage-backedASB’s mortgage-related securities portfolio and the geographic concentration of credit risk, see Note1912 toHEI'sHEI’s Consolidated Financial Statements.The amount of loans originated during
1997, 1996, 1995, 19942002, 2001, 2000, 1999 and19931998 were$327 million, $498 million, $382 million, $523 million$1.2 billion, $1.0 billion, $0.5 billion, $0.6 billion and$564 million,$0.6 billion, respectively. Thedecreasesdemand for loans is primarily dependent on the Hawaii real estate market and loan refinancing activity. The increase in loan originations during 2002 was due to the strong Hawaii real estate market and low interest rates which have resulted in increased affordability of housing for consumers and higher loan refinancings. The increase in loan originations during 2001 was primarily due to the low interest rate environment, which resulted in higher loan refinancings. The decrease in loans originated in19972000 from1996, in 1995 from 1994 and in 1994 from 1993 were1999 was due in part tothea rise in interest rates and a slow Hawaii real estate market.The increase in loans originated in 1996 from 1995 was due primarily to higher refinancings of residential mortgage loans from other financial institutions.Residential mortgage lending.
During 1997 and 1996 the demand for adjustable rate mortgage (ARM) loans over fixed rate loans decreased compared with 1995. ARM loans carry adjustable interest rates which are typically set according to a short-term index. Payment amounts may be adjusted periodically based on changes in interest rates. ARM loans represented approximately 7.7% of the total originations of first mortgage loans in 1997, compared to 12.6% and 27.7% in 1996 and 1995, respectively. ASB intends to continue to emphasize the origination and purchase of ARM loans to further improve its asset/liability structure.ASB is permitted to lend up to 100% of the appraised value of the real property securing a loan. Its general policy is to require private mortgage insurance when the loan-to-value ratio of the property exceeds 80% of the lower of the appraised value or purchase price at origination. For nonowner-occupied residential properties, the loan-to-value ratio may not exceed 90% of the lower of the appraised value or purchase price at origination.18Construction and development lending.ASB provides both fixed and adjustable rate loans for the construction of one-to-four unit residential
unitand commercial properties. Construction and development financing generally involves a higher degree of credit risk than long-term financing on improved, occupied real estate. Accordingly, all construction and development loans are priced higher than loans secured by completed structures.ASB'sASB’s underwriting, monitoring and disbursement practices with respect to construction and development financing are designed to ensure sufficient funds are available to complete construction projects. As of December 31,1997, 19962002, 2001 and1995,2000, construction and development loans of $46.2 million, $52.0 million and $38.9 million which represented1.0%1.5%,1.5%1.8% and 1.2%, respectively, ofASB'sASB’s gross loan portfolio. Although construction and development loans are a small part of ASB’s current loan portfolio, in 2001 ASB enhanced its commercial real estate lending capabilities to diversify its loan portfolio and plans to increase construction and development lending. See"Loan“Loan portfolio risk elements." Multi-family”Multifamily residential and commercial real estate lending.Permanent loans secured by
multi-familymultifamily properties (generally apartment buildings), as well as commercial and industrial properties (including office buildings, shopping centers and warehouses), are originated by ASB for its own portfolio as well as for participation with other lenders. In1997, 19962002, 2001 and1995, loans2000, loan originations on these types of properties of $65.3 million, $55.0 million and $13.7 million, which accounted for approximately2.7%7.6%,3.2%8.3% and5.9%4.2%, respectively, ofASB'sASB’s total mortgage loan originations. In 2001, ASB enhanced its commercial real estate lending capabilities and plans to increase commercial real estate lending in the future. The objective of commercial real estate lending is to diversifyASB'sASB’s loanportfolio to include sound, income-producing properties.portfolio.Consumer lending.ASB offers a variety of secured and unsecured consumer loans. Loans secured by deposits are limited to 90% of the available account balance. ASB also offers secured and unsecured VISA cards, automobile loans, general purpose consumer
loans, second mortgageloans, home equity lines of credit, checking account overdraft protection and unsecured lines of credit. In1997, 19962002, 2001 and1995, loans2000, gross loan originations of these types of $131.8 million, $191.5 million and $103.5 million, which accounted for approximately9.0%10.8%,8.0%18.3% and11.5%19.1%, respectively, ofASB'sASB’s total loan originations.Corporate banking/commercialIn 2001, ASB increased its VISA credit card base by approximately 50%, primarily as a result of ASB’s implementation of an aggressive series of mail solicitation campaigns to extend consumer credit to existing customers.Business lending.ASB is authorized to make both secured and unsecured
corporate bankingbusiness loans to business entities. This lending activity is designed to diversifyASB'sASB’s asset structure, shorten maturities, provide rate sensitivity to the loan portfolio and attract business checking deposits.ASB acquired $56.9 million of corporate banking loans from BoA.As of December 31,1997, 19962002, 2001 and1995, corporate banking2000, business loans represented2.8%8.3%,0.8%6.9% and0.9%4.2%, respectively, ofASB'sASB’s total net loan portfolio.Loan origination fee and servicing income.In addition to interest earned on loans, ASB receives income from servicing
ofloans, for late payments and from other related services. Servicing fees are received on loans originated and subsequently sold by ASB through a securitization process and also on loans for which ASB acts as collection agent on behalf of third-party purchasers.ASB acquired theSee “Results of operations—Bank” at page 11 in HEI’s MD&A for a discussion of ASB’s 2002 writedown of mortgage servicingrights for approximately $305 million of residential loans from BoA.rights.ASB generally charges the borrower at loan settlement a loan origination fee
ranging from 2% to 3%of 1% of the amount borrowed. Seethe "Loan“Loan origination and commitmentfees" sectionfees” in Note 1 toHEI'sHEI’s Consolidated Financial Statements.Loan portfolio risk elements.When a borrower fails to make a required payment on a loan and does not cure the delinquency promptly, the loan is classified as delinquent. If delinquencies are not cured promptly, ASB normally commences a collection action, including foreclosure proceedings in the case of secured loans. In a foreclosure action, the property securing the delinquent debt is sold at a public auction in which ASB may participate as a bidder to protect its interest. If ASB is the successful bidder, the property is classified in a real estate owned account until it is sold.
ASB'sASB’s real estate acquired in settlement of loans represented0.07%0.19%, 0.24% and 0.15% of total assets at December 31,19972002, 2001 and1996 and 0.08% of total assets at December 31, 1995.2000, respectively.In addition to delinquent loans, other significant lending risk elements include: (1)
accruingloans which accrue interest and areover90 days or more past due as to principal or interest, (2) loans accounted for on a nonaccrual basis (nonaccrual loans), and (3) loans on which various concessions are made with respect to interest rate, maturity, or other terms due to the inability of the borrower to service the obligation under the original terms of the agreement (renegotiated loans). ASBhashad no loanswhich are overthat were 90 days or more past due on which interestiswas being accruedforas of theyearsdates presented in the table below. The level of nonaccrual and renegotiated loans represented2.4%0.9%,2.5%1.5%,1.7%1.5%,1.4%2.3% and0.5%3.1%, ofASB'sASB’s total net loans outstanding19at December 31, 1997, 1996, 1995, 19942002, 2001, 2000, 1999 and1993,1998, respectively. The following table sets forth certain information with respect to nonaccrual and renegotiated loans as of the dates indicated:
December 31, ----------------------------------------------------------------- (in thousands) 1997 1996 1995 1994 1993 - -----------------------------------------------------------------------------------------------------------Nonaccrual loans- Real estate 1-4 unit residential..................... $36,643 $23,585 $11,533 $ 8,773 $5,006 Income property.......................... 29,955 19,832 13,820 14,224 220 ----------------------------------------------------------------- Total real estate......................... 66,598 43,417 25,353 22,997 5,226 Commercial................................ 776 937 11 25 38 Consumer.................................. 4,435 2,701 1,702 793 460 ----------------------------------------------------------------- Total nonaccrual loans.................... $71,809 $47,055 $27,066 $23,815 $5,724 ================================================================= Renegotiated loans not included above- Real estate 1-4 unit residential..................... $ 2,264 $ 3,211 $ 1,053 $ 1,004 $ 381 Income property.......................... -- -- -- -- 1,486 Commercial............................... -- -- -- -- 324 ----------------------------------------------------------------- Total renegotiated loans.................. $ 2,264 $ 3,211 $ 1,053 $ 1,004 $2,191 =================================================================ASB's
December 31, (in thousands)
2002 2001 2000 1999 1998 Nonaccrual loans—
Real estate
1-4 unit residential
$ 9,783 $ 22,495 $ 26,738 $ 43,750 $ 47,565 Income property
983 10,129 15,132 18,747 29,456 Total real estate
10,766 32,624 41,870 62,497 77,021 Consumer
1,382 1,965 2,844 3,777 6,454 Commercial
3,633 3,018 2,872 2,192 2,030 Total nonaccrual loans
$ 15,781 $ 37,607 $ 47,586 $ 68,466 $ 85,505 Nonaccrual loans to total loans
0.5 % 1.3 % 1.4 % 2.1 % 2.6 % Renegotiated loans not included above—
Real estate
1-4 unit residential
$ — $ — $ 48 $ 876 $ 1,705 Income property
7,582 3,874 — 5,154 10,559 Commercial
2,175 2,681 — — — Total renegotiated loans
$ 9,757 $ 6,555 $ 48 $ 6,030 $ 12,264 ASB’s policy generally is to place mortgage loans on a nonaccrual status
(interest(i.e., interest accrual is suspended) when the loan becomesmore than90 days or more past due or on an earlier basis when there is a reasonable doubt as to itscollectability. Loans on nonaccrual status amounted to $71.8 million (2.3% of total loans), $47.1 million (2.3% of total loans), $27.1 million (1.6% of total loans), $23.8 million (1.3% of total loans) and $5.7 million (0.3% of total loans) at December 31, 1997, 1996, 1995, 1994 and 1993, respectively. Since 1994,collectibility.In 1998, the
increasesincrease in nonaccrual loanswerewas a result ofHawaii'sHawaii’s weakeconomy. In 1994,economy and was primarily due to arising trend of delinquencies resulted in a $3.8$10.3 million increase innonaccrualnonaccruing, smaller balance residentialloans,loans. In 2000 and 1999, the$14.0$20.9 millionincreaseand $17.0 million, respectively, decrease in nonaccrualincome propertyloans was primarily due tothreeincreased charge-offs and lower delinquencies. In 2001, the decrease in nonaccrual loans of $10.0 million was primarily due to lower delinquencies in residential loans and an income property loan taken into real estate owned. In 2002, the decrease in nonaccrual loans of $21.8 million was due to $12.7 million lower delinquencies in residential loans, a $5.0 million payoff of an income property loan and a $4.1 million reclassification of an income property loan to accrual status.A potential downturn in the Hawaii economy as a result of global issues could lead to higher delinquencies in ASB’s loan portfolio. At December 31, 2002, ASB had outstanding loans to businesses with significant exposure to the tourist industry, including an airline and hotels, of approximately 1.3% of total loans outstanding. Substantially all of these loans are secured by commercial real estate and/or business assets and were performing as of December 31, 2002.
Allowance for loan losses.ASB maintains an allowance for loan losses that it believes is adequate to absorb estimated losses on all loans. The level of allowance for loan losses is based on a continuing assessment of existing risks in the loan portfolio, historical loss experience, changes in collateral values, and current and anticipated economic conditions. For business and commercial real estate loans, a risk rating system is used. Loans are rated based on the degree of risk at origination and periodically thereafter, as appropriate. A credit review department performs an evaluation of these loan portfolios to ensure compliance with
principal balances totaling $11.8 millionthe internal risk rating system and timeliness of rating changes. Adverse changes in any of the risk factors could result in higher charge-offs and loan loss provisions. When loans are deemed impaired, the amount of impairment is measured based on the present value of expected future cash flows discounted at the loan’s effective interest rate and the fair value of the collateral securing the loan. ASB generally ceases the accrual of interest on loans when they become 90 days past due or when there is reasonable doubt as to collectibility. ASB uses either the cash or cost recovery method to record cash receipts on impaired loans thatwere renegotiated. In 1996,are not accruing interest. Impairment losses are charged to the$20.0 million increase in nonaccrual real estate loans can be attributed primarily to a single real estate developer with residential, commercial real estate and commercial loans totaling approximately $16.5 million that were restructured during 1996. In 1997, the $24.7 million increase in nonaccrual loans includes a $13.1 million increase in smaller balance residential loans and a $10.1 million increase in income property real estate loans. Allowance for loan losses. Theprovision for loan lossesis dependent upon management's evaluation as to the amount required to maintainand included in the allowance for loanlosses at a level considered appropriate in relation to the risk of future losses inherent in the loan portfolio. While management attempts to use the best information available to make evaluations, future adjustments may be necessary as circumstances change and additional information becomes available. 20losses. The following table presents the changes in the allowance for loan losses for the years
indicated.
Years ended December 31, ---------------------------------------------------------------- (dollars in thousands) 1997 1996 1995 1994 1993 - --------------------------------------------------------------------------------------------------------------------Allowance for loan losses, beginning of year...... $19,205 $12,916 $ 8,793 $5,314 $5,157 Additions to provisions for losses................ 6,934 7,631 4,887 3,983 779 Allowance for losses on loans acquired from BoA... 6,445 -- -- -- -- NET CHARGE-OFFS Real estate loans................................. 992 390 69 109 -- Other loans....................................... 1,642 952 695 395 622 ---------------------------------------------------------------- Total net charge-offs............................. 2,634 1,342 764 504 622 ---------------------------------------------------------------- Allowance for loan losses, end of year............ $29,950 $19,205 $12,916 $8,793 $5,314 ================================================================ Ratio of net charge-offs during the year to average loans outstanding.................... 0.12% 0.07% 0.04% 0.03% 0.04% ======================================================================ASB's ratioindicated:
Years ended December 31, (dollars in thousands)
2002 2001 2000 1999 1998 Allowance for loan losses, beginning of year
$ 42,224 $ 37,449 $ 35,348 $ 39,779 $ 29,950 Provision for loan losses
9,750 12,500 13,050 16,500 13,802 Charge-offs
Residential real estate loans
2,345 4,800 8,867 4,962 1,987 Commercial real estate loans
441 215 – 10,776 – Consumer loans
3,479 3,595 3,801 4,712 2,052 Commercial loans
1,479 1,013 670 1,209 525 Total charge-offs
7,744 9,623 13,338 21,659 4,564 Recoveries
Residential real estate loans
858 1,212 1,926 448 438 Commercial real estate loans
52 342 214 75 – Consumer loans
257 311 244 188 127 Commercial loans
38 33 5 17 26 Total recoveries
1,205 1,898 2,389 728 591 Allowance for loan losses, end of year
$ 45,435 $ 42,224 $ 37,449 $ 35,348 $ 39,779 Ratio of allowance for loan losses, December 31, to average loans outstanding
1.60 % 1.42 % 1.16 % 1.11 % 1.29 % Ratio of provision for loan losses during the year to average loans outstanding
0.34 % 0.42 % 0.41 % 0.52 % 0.45 % Ratio of net charge-offs during the year to average loans outstanding
0.23 % 0.26 % 0.34 % 0.66 % 0.13 % The following table sets forth the allocation of
provisions for loan losses during the year to average loans outstanding was 0.32%, 0.41%, 0.28%, 0.21% and 0.05% for the years ended December 31, 1997, 1996, 1995, 1994 and 1993, respectively. In 1997, a nonspecificASB’s allowance for loan lossesamountingand the percentage of loans in each category toapproximately $6.4total loans at the dates indicated:
December 31, 2002 2001 2000 (dollars in thousands)
Balance % of total Balance % of total Balance % of total Residential real estate
$ 6,246 77.6 % $ 9,933 78.0 % $ 13,224 83.9 % Commercial real estate
6,343 6.4 9,031 6.7 8,928 4.7 Consumer
8,489 8.0 8,538 8.6 7,609 7.3 Commercial
12,118 8.0 6,388 6.7 4,126 4.1 Unallocated
12,239 NA 8,334 NA 3,562 NA $ 45,435 100.0 % $ 42,224 100.0 % $ 37,449 100.0 %
December 31, 1999 1998 (dollars in thousands)
Balance % of total Balance % of total Residential real estate
$ 14,394 84.2 % $ 10,523 83.2 % Commercial real estate
7,963 5.2 16,896 6.1 Consumer
9,850 7.4 9,623 7.8 Commercial
3,060 3.2 2,057 2.9 Unallocated
81 NA 680 NA $ 35,348 100.0 % $ 39,779 100.0 % NA Not applicable
In 2002, ASB’s allowance for loan losses increased by $3.2 million compared to an increase of $4.8 million in 2001. The 2002 increase was
recordeddue to a higher loans receivable balance and a higher unallocated component of the allowance for loan losses, which takes into consideration economic trends and estimation errors that are not necessarily captured inassigning acquisition costdetermining the allowance for loan losses for each loan category. The allowance was increased to account for ASB’s strategic focus of diversifying its loan portfolio from single-family home mortgages to commercial loans that have higher credit risk. Charge-offs were lower in 2002 compared to 2001 as a result of lower delinquencies. The strong Hawaii real estate market and low interest rates gave debtors the opportunity to sell their properties or refinance before defaulting. In addition, ASB improved its collection efforts. Residential and commercial real estate loan delinquencies decreased during 2002 and lower loan loss reserves were required for those lines of business. The allowance for loan losses on consumer loans has remained essentially the same during the year. In 2001, ASB’s allowance for loan losses increased by $4.8 million. Charge-offs were lower in 2001 compared to 2000 as a result of lower delinquencies. The 2001 increase in the allowance for loan losses was due to the increase in commercial real estate and commercial loansreceivable acquired from BoA.in the loan portfolio that have higher credit risk and a higher unallocated component of the allowance, which takes into consideration economic trends and estimation errors that are not necessarily captured in determining the allowance for loan losses for each loan category. In1997, 1996 and 1995,2000, ASB’s allowance for loan losses increased by $2.1 million. Charge-offs were lower in 2000 compared to 1999 as a result of lower delinquencies. In 1999, ASB’s allowance for loan losses decreased by $4.4 million. In 1999, management disposed of nonperforming loans at a loss, which resulted in higher charge-offs in 1999 compared to 1998. ASB increased its allowance for loan losses by $9.8 million in 1998 to establish additional specific loss allowances and in response to a rising trend of delinquencies caused byHawaii'sHawaii’s weakeconomy, ASB increased its loss reserve by $4.3 million, $6.3 million and $4.1 million, respectively. INVESTMENT ACTIVITIESeconomy.Investment activities
In recent years,
ASB'sASB’s investment portfoliohasconsisted primarily of stock of the FHLB of Seattle, federal agency obligations andmortgage-backedmortgage-related securities.In response toASB owns private-issue mortgage-related securities as well as mortgage-related securities issued by thethen increasing interest rate environment, management decided in 1994 to liquidate ASB's portfolioFederal Home Loan Mortgage Corporation (FHLMC), Government National Mortgage Association (GNMA) and Federal National Mortgage Association (FNMA). At December 31, 2002, the various securities rating agencies rated all of the private-issue mortgage-related securitiesheld for trading and the liquidation was completed in October 1994. ASB recognized a one-time gain on sale of trading account securities in 1995 in accordance with implementation guidance provided in a FASB special report.as investment grade. ASB did not maintain a portfolio of securities held for trading during19962002, 2001 or1997. ASB's2000.As of December 31, 2002 and 2001, ASB’s held-to-maturity investment portfolio consisted of $89.5 million and $84.2 million, respectively, of investment in FHLB stock. As of December 31, 2000, ASB’s held-to-maturity investment portfolio, excluding
mortgage-backedmortgage-related securities,to be held-to- maturity,consisted of a$42.1 million investment in U.S. Treasury securities and a $63.5$78.7 million investment in FHLB stockas of December 31, 1997. Investmentand a $13.1 million investment inFHLB stock amounted to $37.5 million and $34.7 million as of December 31, 1996 and 1995, respectively.collateralized debt obligations. Theweighted averageweighted-average rate on investments during1997, 19962002, 2001 and19952000 was7.57%6.19%,7.80%7.28% and6.03%5.62%, respectively. The amount that ASBinvestsis required to invest in FHLB stock is determined by regulatory requirements. See"Regulation“Regulation and othermatters--Savings bank regulation--Federalmatters—Bank regulation—Federal Home Loan Bank System." DEPOSITS AND OTHER SOURCES OF FUNDS”The following table summarizes ASB’s investment portfolio, at December 31, 2002, based upon contractually scheduled principal payments and expected prepayments allocated to the indicated maturity categories:
(in millions)
Less
than
1 year
1-5
years
6-10
years
After
10 years
Total FHLMC, GNMA, FNMA
$ 947 $ 628 $ 185 $ 100 $ 1,860 Private issue
509 308 40 20 877 $ 1,456 $ 936 $ 225 $ 120 $ 2,737 Weighted average yield
3.89 % 4.77 % 5.84 % 6.80 % 4.48 % Note: ASB does not currently invest in tax exempt obligations.
ASB’s investment in securities issued by Countrywide Financial and GMAC RFC, with a market value of $230 million and $124 million, respectively, exceeded 10% of the Company’s stockholder’s equity as of December 31, 2002.
On January 1, 2001, ASB reclassified a significant amount of securities from held-to-maturity to available-for-sale (see “Derivative instruments and hedging activities” in Note 1 to HEI’s Consolidated Financial Statements). Securities classified as available-for-sale are reported at fair value, with unrealized gains and losses excluded from earnings and reported in a separate component of stockholders’ equity (see “Material estimates and critical accounting policies—Consolidated—Investment securities” in HEI’s MD&A). At December 31, 2002, ASB had mortgage-related securities issued by FHLMC, GNMA and FNMA valued at $1.8 billion and private-issue mortgage-related securities valued at $0.9 billion in its available-for-sale investment portfolio.
Disposition of certain debt securities. In June 2000, the OTS advised ASB that four trust certificates, in the original aggregate principal amount of $114 million, were impermissible investments under regulations applicable to federal savings banks. The OTS subsequently required ASB to dispose of the securities. In April 2001, ASB sold one of the trust certificates for an amount approximating the original purchase price. After PaineWebber Incorporated (the broker that sold the remaining three trust certificates to ASB) rejected ASB’s demand that the transactions be rescinded, ASB filed a lawsuit against PaineWebber Incorporated. ASB is seeking rescission or other remedies, including recovery of any losses ASB (directly and through its indemnification of HEI) may incur as a result of its purchase and ownership of these trust certificates. For additional details, see Note 4 to HEI’s Consolidated Financial Statements.
To bring ASB into compliance with the OTS direction, ASB directed the trustees to terminate the principal swap component of the three trust certificates. After terminating the swaps, the related equity notes were sold by the swap counterparty to HEI. ASB has agreed to indemnify HEI against losses related to these income notes, but the indemnity obligation is payable solely out of any recoveries achieved in the litigation against PaineWebber Incorporated. In 2002, PaineWebber Incorporated filed a counterclaim alleging misrepresentation and fraud among other allegations.
In January 2003, a hearing on several motions for partial summary judgment was held. The Court denied all motions, except for a ruling that PaineWebber did not owe a fiduciary duty to ASB with respect to two of the three transactions. The Company has filed a motion for reconsideration on this ruling. In early March 2003, several additional motions filed by each party to request partial summary judgment relating to various aspects of ASB’s affirmative claims were heard. The Court denied certain of the motions, ruling that summary judgment was not available because there were issues of fact requiring trial on several claims and defining some of the elements that ASB must establish at trial to prevail on those claims. However, the court did grant motions for partial summary judgment in favor of PaineWebber with respect to certain of its alleged misrepresentations and omissions. The trial remains scheduled to begin in July 2003. Additional discovery and pretrial motion work is anticipated prior to trial. The ultimate outcome of this litigation cannot be determined at this time.
Deposits and other sources of funds
General.Deposits traditionally have been the principal source of
ASB'sASB’s funds for use in lending, meeting liquidity requirements and making investments. ASB also derives funds from the receipt of interest and principal on outstanding loans receivable andmortgage-backedmortgage-related securities, borrowings from the FHLB of Seattle, securities sold under agreements to repurchase and other sources. ASB borrows on a short-term basis to compensate for seasonal or other reductions in deposit flows. ASB also may borrow on a longer-term basis to support expanded lending or investment activities.InAdvances from thelast few years,FHLB and securities sold under agreements to repurchaseand advances from the FHLB have becomecontinue to be a significantsourcessource of fundsas the demand for deposits has decreased. Usingthat have a higher costsourcesof fundsputs downward pressure on ASB's net interest income.than core deposits.Deposits.
ASB'sASB’s deposits are obtained primarily from residents of Hawaii. In1997,2002 and 2001, ASB had average deposits of$2.3$3.7 billionwith a netand $3.6 billion, respectively. Net savings inflowof $21.9in 2002, 2001 and 2000 was $121.2 million,excluding interest credited to deposit accounts$94.9 million andexcluding $1.7 billion in deposits assumed from BoA. The net savings outflow for 1996 of $152$93.0 million,was due to competition from the equity market and management's decision not to pursue high-priced certificates of deposits. In 1995, ASB had average deposits of $2.1 billion, with a net 21savings inflow of $15 million, excluding interest credited to deposit accounts.respectively. In the three years ended December 31,1997,2002, ASB had no deposits placed by or through a broker.The following table illustrates the distribution of
ASB'sASB’s average deposits and average daily rates by type of deposit for the years indicated. Average balancesfor a yearhave been calculated using the averageofdaily balances during 2002 and 2001 and the average month-end balances during 2000.
Years ended December 31, 2002 2001 (dollars in thousands)
Average
balance
% of
total
deposits
Weighted
average
rate %
Average
balance
% of
total
deposits
Weighted
average
rate %
Passbook accounts
$ 1,188,042 31.9 % 1.22 % $ 1,049,441 28.9 % 1.91 % Negotiable order of withdrawal accounts
802,651 21.6 0.13 699,997 19.2 0.59 Money market accounts
403,742 10.9 1.51 310,048 8.5 2.40 Certificate accounts
1,323,118 35.6 3.92 1,578,650 43.4 5.38 Total deposits
$ 3,717,553 100.0 % 1.98 % $ 3,638,136 100.0 % 3.20 %
Year ended December 31, 2000 (dollars in thousands)
Average
balance
% of
totaldeposits
Weighted
average rate %
Passbook accounts
$ 1,058,763 29.9 % 2.00 % Negotiable order of withdrawal accounts
642,074 18.2 0.85 Money market accounts
306,950 8.7 2.94 Certificate accounts
1,529,525 43.2 5.46 Total deposits
$ 3,537,312 100.0 % 3.37 % At December 31, 2002, ASB had $262 million in certificate accounts of $100,000 or more, maturing as follows:
(in thousands)
Amount Three months or less
$ 67,863 Greater than three months through six months
36,098 Greater than six months through twelve months
33,993 Greater than twelve months
124,323 $ 262,277 Deposit-insurance premiums and regulatory developments.The Savings Association Insurance Fund (SAIF) insures the
year, withdeposit accounts of ASB and other thrifts. The Bank Insurance Fund (BIF) insures theaverage balancesdeposit accounts of commercial banks. The Federal Deposit Insurance Corporation (FDIC) administers the SAIF and BIF. In December 1997, ASB acquired BIF–assessable deposits as well as SAIF–assessable deposits from BoA. Congress is currently considering legislation which would merge the SAIF and the BIF. This legislation is supported by the FDIC.In December 1996, the FDIC adopted a risk-based base rate schedule for SAIF deposits, effective January 1, 1997,
reflectingthat was identical to theeffectexisting risk-based base rate schedule for BIF deposits: zero to 27 cents per $100 of deposits. Added to this base rate schedule through 1999 was theacquisitionassessment to fund the Financing Corporation’s (FICO’s) interest obligations, which assessment was initially set at 6.48 cents per $100 ofmostdeposits for SAIF deposits and 1.3 cents per $100 ofBoA's Hawaii operationsdeposits for BIF deposits (subject to quarterly adjustment). By law, the FICO’s assessment rate on deposits insured by the BIF had to be one-fifth the rate on deposits insured by the SAIF until January 1, 2000. Effective January 1, 2000, the assessment rate for funding FICO interest payments became identical for SAIF and BIF deposits. The assessment rate for funding FICO interest payments is determined quarterly and, as a “well capitalized” thrift, ASB’s base deposit insurance premium effective for the December6, 1997.31, 2002 quarterly payment is zero and its assessment for funding FICO interest payments is 1.68 cents per $100 of SAIF and BIF deposits, on an annual basis, based on deposits as of September 30, 2002.
Years ended December 31, ------------------------------------------------------------------------------------------------------------- 1997 1996 1995 ------------------------------------------------------------------------------------------------------------- % of Weighted % of Weighted % of Weighted Average total average Average total average Average total average (dollars in thousands) balance deposits rate % balance deposits rate % balance deposits rate % ---------------------------------------------------------------------------------------------------------------------------------Passbook accounts....... $ 899,368 38.7% 2.98% $ 922,129 41.7% 3.41% $ 978,858 45.5% 3.48% Negotiable Order of Withdrawal accounts.... 305,626 13.2 1.19 271,696 12.3 1.60 264,996 12.4 2.09 Money market accounts... 93,425 4.0 3.76 65,494 3.0 3.51 66,634 3.1 3.43 Certificate accounts.... 1,026,007 44.1 5.38 950,739 43.0 5.59 838,741 39.0 5.66 ------------------------------------------------------------------------------------------------------- Total deposits......... $2,324,426 100.0% 3.83% $2,210,058 100.0% 4.12% $2,149,229 100.0% 4.15% ========================================================================================================== At December 31, 1997, ASB had $741 million in certificate accounts of $100,000 or more, maturing as follows:(in thousands) Amount - -----------------------------------------------------------------------------------------------Three months or less.......................................................... $373,741 Greater than three months through six months.................................. 217,072 Greater than six months through twelve months................................. 94,704 Greater than twelve months.................................................... 55,187 -------- $740,704 ========Borrowings.ASB obtains advances from the FHLB of Seattle provided certain standards related to creditworthiness have been met. Advances are secured
underby a blanket pledge ofthe common stock ASB owns in the FHLB, mortgage-backed securities andcertain notes held by ASB and the mortgages securing them. To the extent that advances exceed the amount of mortgage loan collateral pledged to the FHLB of Seattle, the excess must be covered by qualified marketable securities held under the control of and at the FHLB of Seattle or at an approved third party custodian. FHLB advances generally are available to meet seasonal and other withdrawals of deposit accounts, to expand lending and to assist in the effort to improve asset and liability management. FHLB advances are made pursuant to several different credit programs offered from time to time by the FHLB of Seattle.At December 31,
1997, 19962002, 2001 and1995,2000, advances from the FHLB amounted to$736 million, $684 million$1.2 billion, $1.0 billion and$501 million,$1.2 billion, respectively. Theweighted averageweighted-average rates on the advances from the FHLB outstanding at December 31,1997, 19962002, 2001 and19952000 were6.26%5.10%,6.42%5.41% and6.52%6.67%, respectively. The maximum amount outstanding at any month-end during1997, 19962002, 2001 and19952000 was$941 million, $691 million$1.2 billion, $1.2 billion and$618 million,$1.3 billion, respectively. Advances from the FHLB averaged$701 million, $560 million$1.1 billion, $1.2 billion and$559 million$1.3 billion during1997, 19962002, 2001 and1995,2000, respectively, and the approximateweighted averageweighted-average ratethereonon the advances was6.32%5.29%,6.49%5.98% and 6.55%, respectively.During 1995, advances decreased as securitiesSecurities sold under agreements to repurchase
provided a lower cost funding source. During 1996, the increase in advances supported investment activitiesare accounted for asmanagement decided not to pursue high-priced certificates of deposits. During 1997, increased advances from the FHLB were needed to support investment activities. In anticipation of the BoA acquisition, ASB acquired approximately $0.8 billion in mortgage-backed securities which were temporarily funded in part by advances from the FHLB. At December 31, 1997 and 1996, securities sold under agreements to repurchase consisted of mortgage-backed securities sold to brokers/dealers under fixed- coupon agreements. The agreements are treated as financingsfinancing transactions and the obligations to repurchase these securitiessoldarereflectedrecorded asa liabilityliabilities in the consolidatedbalance sheets.statements of financial condition. Thedollar amount ofsecurities underlying the agreementsremainsto repurchase continue to be reflected in the assetaccounts.accounts (see Note 4 “Securities sold under agreements to repurchase” to HEI’s Consolidated Financial Statements). At December 31,1997, 19962002, 2001 and1995, $3752000, the entire outstanding amounts under these agreements of $667 million (including accrued interest of$0.9$6.4 million),$480$683 million (including accrued interest of$1.6$4.9 million) and$413$597 million (including accrued interest of$2.5$5.5 million)of the agreements, respectively, were torepurchasepurchase identicalsecurities, respectively.securities. Theweighted averageweighted-average rates on securities sold under agreements to repurchase outstanding at December 31,1997, 1996 222002, 2001 and 19952000 were5.71%3.17%,5.50%2.81% and5.84%6.32%, respectively. The maximum amount outstanding at any month-end during1997, 19962002, 2001 and19952000 was$765$751 million,$480$722 million and$413$657 million, respectively. Securities sold under agreements to repurchase averaged$560$663 million,$463$629 million and$277$625 million during1997, 19962002, 2001 and1995,2000, respectively, and the approximateweighted averageweighted-average interest ratethereonunder those agreements was5.58%3.11%,5.65%4.50% and6.08%5.98%, respectively.During 1997, increased securities sold under agreements to repurchase were needed to temporarily fund the purchase of mortgage-backed and investment securities in anticipation of the BoA acquisition. During 1996 and 1995, increased securities sold under agreements to repurchase were needed to support investment activities as the demand for deposits decreased. Other borrowings as of December 31, 1997 represents cash management repurchase transactions. ASB sweeps selected commercial customers' excess deposit balances into an overnight repurchase transaction. Subject to obtaining certain approvals from the FHLB of Seattle, ASB may offer collateralized medium-term notes due from nine months to 30 years from the date of issue and bearing interest at a fixed or floating rate established at the time of issue. At December 31, 1997, 1996 and 1995, ASB had no outstanding collateralized medium-term notes.The following table sets forth information concerning
ASB'sASB’s advances from the FHLB andother borrowingssecurities sold under agreements to repurchase at the dates indicated:
December 31, ----------------------------------------------------- (dollars in thousands) 1997 1996 1995 - -----------------------------------------------------------------------------------------------------------Advances from FHLB.................................... $ 736,474 $ 684,274 $501,274 Securities sold under agreements to repurchase........ 375,366 479,742 412,521 Other borrowings...................................... 11,326 -- -- ----------------------------------------------------- Total borrowings...................................... $1,123,166 $1,164,016 $913,795 ===================================================== Weighted average rate................................. 6.06% 6.04% 6.21% =====================================================COMPETITION
December 31, (dollars in thousands)
2002 2001 2000 Advances from the FHLB
$ 1,176,252 $ 1,032,752 $ 1,249,252 Securities sold under agreements to repurchase
667,247 683,180 596,504 Total borrowings
$ 1,843,499 $ 1,715,932 $ 1,845,756 Weighted-average rate
4.40 % 4.37 % 6.56 % Competition
The banking industry in Hawaii is highly competitive. ASB is the third largest financial institution in Hawaii and is in direct competition for deposits and loans, not only with the two larger institutions, but also with smaller institutions that are heavily promoting their services in certain niche areas, such as providing financial services to small and medium-sized businesses. ASB’s main competitors are banks, savings associations, credit unions, mortgage bankers, mortgage brokers, finance companies and brokerage firms. These competitors offer a variety of financial products to retail and business customers.
The primary factors in competing for deposits are interest rates, the quality and range of services offered, marketing, convenience of locations, hours of operation and perceptions of the
institution'sinstitution’s financial soundness and safety. Competition for deposits comes primarily from other savings institutions, commercial banks, credit unions, money market and mutual funds and other investment alternatives. In Hawaii, there were32 thrifts,167 FDIC-insured banks and117approximately 100 credit unions at December 31,1997.2002. Additional competition for deposits comes from various types of corporate and government borrowers, including insurance companies. To meetthecompetition, ASB offers a variety of savings and checking accounts at competitive rates, convenient business hours, convenient branch locations with interbranch deposit and withdrawal privileges at each branch andapproximately 150convenient automated teller machines. ASB also conducts advertising and promotional campaigns.The primary factors in competing for first mortgage and other loans are interest rates, loan origination fees and the quality and range of lending products and services offered. Competition for origination of first mortgage loans comes primarily from mortgage banking and brokerage firms, commercial banks, other savings institutions,
mortgage banking firms, commercial banks,insurance companies and real estate investment trusts. ASB believes that it is able to compete for such loans primarily through the competitive interest rates and loan fees it charges, the type of mortgage loan programs it offers and the efficiency and quality of the services it provides its borrowers and the real estate business community.In
recent years, there's2002, ASB began implementing a strategic plan to move from its traditional position as a thrift institution, focused on retail banking and residential mortgages, to a full-service bank. To make the shift, ASB continued to build its business and commercial real estate lines of business in 2002. The origination of business and commercial real estate loans involves risks different from those associated with originating residential real estate loans. For example, the sources and level of competition may be different and credit risk is generally higher than for mortgage loans. These different risk factors are considered in the underwriting and pricing standards established by ASB for its business and commercial real estate loans.In September 2002, ASB launched its STAR initiative (Strategic & Tactical Alignment of Resources), in which four of its lines of business – Retail Banking, Mortgage Banking, Commercial Real Estate and Commercial Banking – began implementing changes intended to increase profitability and enhance customer service.
There has been significant bank and thrift merger activity in Hawaii. Management cannot predict the impact, if any, of these mergers on the
Company'sCompany’s future competitive position, results of operations, financial condition or liquidity.Recent Supreme Court ruling.Credit Unions.The 1934 Federal Credit Union Act
saysstates that credit union membership"shall“shall be limited to groups having a common bond of occupation orassociation"association” or to groups in a well-defined geographical area. In 1982, the National Credit Union Administration expanded its definition of"common bond." Small“common bond” to allow “multiple common bonds”—i.e., small businesses that lacked enough workers to form their own credit unions were allowed to join existing credit unions so long as each group of employees had its own"bond."“bond.” Government officialssay 23estimate that this rule has letallowed credit unions to addaboutapproximately 15 million people to their membership rolls.A groupIn February 1998, the Supreme Court decided that this expanded definition ofNorth Carolina banks and the American Bankers Association sued the government, saying“common bond” was impermissible, holding that the 1934 law required all members of a credit union to share a single common bond.A federal appeals court ruledIn August 1998, the Credit Union Membership Access Act became law, which, among other things, amended the 1934 law to retroactively authorize credit union membership based on multiple common bonds, as long as each of the relevant groups has (with some exceptions) fewer than 3,000 members. The Credit Union Membership Access Act also facilitates the ability of insured credit unions to convert to mutual savings banks or savings associations, and requires that insured credit unions meet capital standards similar to those enacted for banks and thrifts in 1991.In December 1998, the National Credit Union Administration adopted final rules to implement the Credit Union Membership Access Act. The new rules appear to favor the creation of larger credit unions by facilitating the merger of credit unions with fewer than 3,000 members. Under a Regulatory Flexibility Program that went into effect on March 1, 2002, the National Credit Union Administration allowed certain credit unions to expand the services offered to members. It is too early to evaluate whether these developments will result in increased competition for ASB by credit unions.
See “Certain factors that may affect future results and financial condition—Bank—Regulation of ASB—Federal Thrift Charter” in HEI’s MD&A for a discussion of the Gramm-Leach-Bliley Act of 1998.
Other
HEI Investments, Inc.
In January 2000, HEI Investment Corp. (HEIIC), incorporated in May 1984 primarily to make passive investments in corporate securities and other long-term investments, changed its name to HEI Investments, Inc. (HEIII). HEIII is not an “investment company” under the Investment Company Act of 1940 and has no direct employees. In February 2000, HEIII became a subsidiary of HEIPC.
HEIII’s long-term investments currently consist primarily of investments in leveraged leases. Since 1985, HEIII (then called HEIIC) has had a 15% ownership interest in an 818 MW coal-fired generating unit in Georgia, which is subject to a leveraged lease agreement. In 1987, HEIIC purchased commercial buildings on leasehold properties located in the
bankers' favorcontinental United States, along with the related lease rights and obligations. These leveraged, purchase-leaseback investments include two major buildings housing operations of Hershey Foods inJuly 1997,Pennsylvania andthe Supreme Court ruledfive supermarkets leased to The Kroger Co. in various states. HEIII’s investments in leveraged leases are accounted for in thebankers' favorCompany’s continuing operations. For a discussion of HEIII’s former ownership interest in EPHE Philippines Energy Company, Inc. (EPHE), see “Discontinued operations.”HEI Properties, Inc.
HEIDI Real Estate Corp., originally a subsidiary of HEIDI, was formed in February 1998.
Although this ruling could resultIn September 1999, its name was changed to HEIPI and HEIDI transferred ownership of HEIPI to HEI. HEIPI currently holds primarily venture capital investments. As of December 31, 2002, HEIPI’s venture capital investments (in companies based inincreased deposits for ASB, legislation has been proposedHawaii and the U.S. mainland) amounted to $3.5 million.HEI Leasing, Inc.
HEI Leasing, Inc. was formed in
CongressFebruary 2000 toretroactively authorize such expansions in credit union membership. OTHER - ----- FREIGHT TRANSPORTATION -- HAWAIIAN TUG & BARGE CORP. AND YOUNG BROTHERS, LIMITED - -------------------------------------------------------------------------------- GENERALown passive investments and real estate subject to leases. It currently holds no investments or real estate subject to leases and is inactive.The Old Oahu Tug Service, Inc.
On November 10, 1999, HTB changed its name to TOOTS. Prior to that date, HTB was the parent of YB. In November 1999, HTB sold substantially all of its operating assets and the stock of YB and ceased operations. HTB and its
wholly ownedwholly-owned subsidiary, YB,werehad been acquired by HEI in 1986.A substantial portion of the state's commodities are imported.HTBprovideshad provided marine transportation services in Hawaii and the Pacific area, including charter tug and barge and harbor tug operations. YB, which is a regulated interisland cargo carrier, transports general freight and containerized cargo by barge on a regular schedule between all major ports in Hawaii.YB moved 3.5 million revenue tons of cargo betweenDiscontinued operations
For information concerning the
islands in 1997, compared to 3.3 million revenue tons in 1996. YB has a nonexclusive Certificate of Public ConvenienceCompany’s discontinued international power operations conducted by HEIPC andNecessity from the PUC to operate as an intrastate common carrier by water. The Certificate will remain in effect for an indefinite period unless suspended or terminated by the PUC. YB encounters competition from, among others, interstate carriersits subsidiaries andunregulated contract carriers. YB RATES YB generally must accept for transport all cargo offered. YB rates and charges must be approved by the PUC and the PUC has broad discretion initsregulation of the rates charged by YB. See the "Other" section of HEI's MD&A for additional information about YB's rate increases. REAL ESTATE--MALAMA PACIFIC CORP. - -------------------------------- GENERAL MPC was incorporated in 1985 and engages indiscontinued residential real estate developmentactivities, both directly and through joint ventures. MPC's real estate development investments and residential projects are targeted for Hawaii's owner-occupant market. MPC is currently involved in the development of four residential projects (Kua' Aina Ridge, Westhills at Makakilo Heights, Piilani Village Phase 1 and Sunrise Estates) on approximately 268 acres of land on the islands of Oahu, Maui and Hawaii encompassing approximately 450 homes or lots, of which approximately 375 have been completed and sold.business conducted by MPC and itsjoint ventures own approximately 424 acres of land forsubsidiaries, see “Certain factors that may affect futureresidential development. Residential development generally requiresresults and financial condition—Consolidated—Discontinued operations and asset dispositions” in HEI’s MD&A and Note 13 to HEI’s Consolidated Financial Statements.On March 6, 2000, a
long lead time to obtain necessary zoning changes, building permits and other required approvals. MPC's projects are subject to the usual risks of real estate development, including fluctuations in interest rates, the receipt of timely and appropriate state and local zoning and other necessary approvals, possible cost overruns and construction delays, adverse changes in general commerce and local market conditions, compliance with applicable environmental and other regulations, and potential competition from other new projects and resales of existing residences. JOINT VENTURE DEVELOPMENTS Sunrise Estates. In 1990, MDC and HSC, Inc. formed Sunrise Estates Joint Venture to develop and sell 165 one-acre house lots in Hilo, Hawaii (island of Hawaii). Through 1993, sales of 156 lots closed. Subdivision approval for the remaining nine lots was received in 1995. In 1996 and 1997, sales of five lots closed. In 1991, HSC, Inc. and Malama Elua Corp., a wholly ownedsubsidiary ofMPC, formed Sunrise Estates II Joint Venture to develop and sell approximately 146 one-acre house lots in Hilo, Hawaii, adjacent to the Sunrise Estates Joint Venture project. Rezoning was completed in 1993 and the joint venture has submitted the subdivision map for approval. Baldwin*Malama. In 1990, MDCHEIII, HEIPC Philippines Holding Co., Inc., acquired a 50%general partnershipinterest inBaldwin*Malama,EPHE Philippines Energy Company, Inc. (EPHE), which was the owner of approximately 91.7% of the common stock of East Asia Power Resources Corporation (EAPRC), apartnership with Baldwin Pacific Properties, Inc. (BPPI), established to acquire approximately 172 acres 24of land for potential development of about 780 singlePhilippines holding company primarily engaged in the electric generation business in Manila andmulti-family residential units in Kihei on the island of Maui. In 1994, the project received approval to increase density to approximately 1,000 units.Cebu. Thefirst phase of 100 single family units is complete, andCompany wrote off this investment as of December 31,1997, 99 units were sold. In May 1993, Baldwin*Malama2000 and subsequently classified the write-off in discontinued operations. See Note 13 to HEI’s Consolidated Financial Statements. Subsequently HEIPC Philippines Holding Co., Inc. wasreorganized as a limited partnershipdissolved and thereafter the capital stock it held inwhich MDC isEPHE at thesole general partnertime of the dissolution was cancelled pursuant to an EPHE capital stock reduction approved by the Philippine Securities andBPPI is the sole limited partner. Beginning in May 1993, MDC consolidated the accountsExchange Commission.The Company’s loss of
Baldwin*Malama. Previously, MDC accounted forits investment inBaldwin*Malama underEAPRC of approximately $90 million was recognized in 2000 for financial reporting purposes and was included in HEI’s 2001 income tax return as an ordinary loss. In 2002, HEI had requested that theequity method. In conjunction withInternal Revenue Service (IRS) confirm that thedissolutiontreatment of this loss, as an ordinary loss, was proper. This request for determination by theBaldwin*Malama general partnershipIRS is still in process, but in March 2003, the IRS made a tentative finding that the loss was a capital loss. The Company is currently evaluating the assertions made by the IRS in support of its tentative finding. Under the early determination process, the Company has the opportunity to refute the IRS’ assertions. The Company may also maintain its tax filing position andformationargue the issue when the IRS examines the 2001 income tax return. If the Company’s tax position does not ultimately prevail, the effect would be the Company would have to pay additional federal and state income taxes of $35 million for thelimited partnership, MPC agreed2001 tax year. However, in this event, the Company would likely take various actions which it believes would allow it toloan $1.6 millionrealize capital gains sufficient toBPPIoffset the capital loss andup to $15 millionlimit the adverse impact on HEI’s income statement to thelimited partnership. Through 1997, MPC agreed to increase the maximum loan amount to Baldwin*Malama up to $39.0 million. Asreversal ofDecember 31, 1997, the outstanding balances on MPC's loans to BPPIall or a portion of state tax benefits taken ($5 million) andBaldwin*Malama were $0.8 million and $25.1 million, respectively. Palailai Associates. Malama Mohala Corp. (MMO) owns a 50%interestin Palailai Associates. In 1993, Palailai Associates completed the development and sale of the first increment of 107 homes and lots and completed the bulk sale of its 38.8 acres of multi-family zoned land in Makakilo, Oahu. The second increment of 69 single family homes is also completed and sold. The third increment of 100 single family homes is in progress with 73 homes completed and sold as of December 31, 1997. Palailai Associates owns approximately 47 acres of adjacent land zoned for residential development. MMO PROJECTS Kipona Hills is a 66-unit subdivision located in Waikoloaon theisland of Hawaii. As of December 31, 1996, all homes or lots were completed and sold. Kua' Aina Ridge is a 92-lot subdivision in Pukalani, Maui. Sales closings commenced in 1993. As of December 31, 1997, 41 homes or lots were available for sale. Kehaulani Place, consisting of approximately 51 acres of land in Pukalani, Maui, is currently zoned for agriculture. Rezoning and land-use reclassification will be required before development can commence. Land planning and presentations to local community groups commenced in 1993 and are ongoing. PROJECT FINANCING At December 31, 1997, MPC or its subsidiaries were directly liable for $10.0 million of outstanding loans and had additional loan facilities of $0.8 million. See the "Commitments and contingencies" section in Note 5 to HEI's Consolidated Financial Statements. MPC or its subsidiaries may enter into additional commitments in connection with the financing of future phases of development of MPC's projects and HEI may enter into similar agreements regarding the ownership and financial condition of MPC. HEI INVESTMENT CORP. - -------------------- HEIIC was incorporated in May 1984 primarily to make passive, tax-advantaged investments in corporate securitieslate tax payments.Regulation and other
long-term investments. HEIIC is not an "investment company" under the Investment Company Act of 1940 and has no direct employees. HEIIC's long-term investments consist primarily of investments in leveraged leases. HEIIC has a 15% ownership interest in an 818-MW coal-fired generating unit in Georgia, which is subject to a leveraged lease agreement. In 1987, HEIIC purchased commercial buildings on leasehold properties located in the continental United States, along with the related lease rights and obligations. These leveraged, purchase-leaseback investments included two major buildings housing operations of Hershey Foods in Pennsylvania and six supermarkets leased to The Kroger Co. in various states. In 1995, HEIIC sold one of the six supermarkets to the lessee pursuant to the provisions of the leveraged lease agreement and recorded a net loss of $1.3 million on the sale. For further information concerning HEIIC's investments in leveraged leases, see Note 7 to HEI's Consolidated Financial Statements. No significant new investments are currently planned by HEIIC. HEI POWER CORP. - --------------- HEIPC was formed in March 1995 and its subsidiaries have been and will be formed from time to time to pursue independent power projects in Asia and the Pacific. In September 1996, HEIPC's subsidiary, HEI Power Corp. Guam (HPG), entered into an energy conversion agreement for approximately 20 years with the Guam Power Authority, pursuant to which 25HPG has repaired and is operating and maintaining two oil-fired 25-MW (net) units. On October 30, 1996, HEI filed with the SEC a "Notification of Foreign Utility Company Status" on Form U-57 with respect to this project. HEIPC is actively pursuing other projects in Asia and the Pacific. The success of any project undertaken by HEIPC in foreign countries will be dependent on many factors, including the economic, political, 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 HEIPC will be successfully completed or that HEIPC's investment in any such project will not be lost, in whole or in part. For further discussion of HEIPC's operating losses and HPG's energy conversion agreement, see the "Other" section in HEI's MD&A. DISCONTINUED OPERATIONS - ----------------------- For information concerning the Company's discontinued property and casualty insurance operations formerly conducted by HIG and a nonutility wind energy business, see Note 20 to HEI's Consolidated Financial Statements and the notes to HEI's Selected Financial Data, incorporated herein by reference to page 25 of HEI's 1997 Annual Report to Stockholders, portions of which are filed herein as HEI Exhibit 13. Also see Item 3, "Legal proceedings-Discontinued operations." REGULATION AND OTHER MATTERS - ---------------------------- HOLDING COMPANY REGULATIONmattersHolding company regulation
HEI and HECO are holding companies within the meaning of the Public Utility Holding Company Act of 1935 (1935 Act). However, under current rules and regulations, they are exempt from the comprehensive regulation of the
Securities and Exchange Commission (SEC)SEC under the 1935 Act except for Section 9(a)(2) (relating to the acquisition of securities of other public utility companies) through compliance withcertain annual filing requirementsthe requirement that it file annually Form U-3A-2 under the 1935 Act for holding companies which own utility businesses that are intrastate in character. The exemption afforded HEI and HECO may be revoked if the SEC finds that such exemption"may“may be detrimental to the public interest or the interest of investors or consumers."” HEI and HECO may own or have interests in foreign utility operations without adversely affecting this exemption so long as the requirements of other exemptions under the 1935 Act are satisfied. HEI has obtained the PUC certification which is a prerequisite to obtaining an exemption for foreign utility operations and to theCompany'sCompany’s maintenance of its exemption under the 1935 Act if it acquires such ownership interests.See the previous discussion of the HPG energy conversion agreementIn 1996, HEI filed with theGuam Power Authority under "Other-HEISEC a Form U-57, “Notification of Foreign Utility Company Status,” on behalf ofHEI Power Corp.
"Guam (for the HEIPC Group’s Guam project). In 1998, HEI filed two Form U-57’s on behalf of Baotou Tianjiao Power Co., Ltd. (for the HEIPC Group’s China project) and on behalf of Cagayan Electric Power & Light Co., Inc. (for the HEIPC Group’s investment in that entity). In March 2000, HEI filed a Form U-57 on behalf of EAPRC (for the HEIPC Group’s investment in that entity). With the discontinuance of HEIPC’s international power operations, no further Form U-57 filings are contemplated.Legislation has been introduced in Congress in the past that would repeal the 1935 Act, leaving the regulation of utility holding companies to be governed by other federal and state laws. Management cannot predict if
thissimilar legislation will be proposed or enacted in the future or the final form it might take.HEI is subject to an agreement entered into with the PUC (the PUC Agreement) when HECO became a
wholly ownedsubsidiary of HEI. The PUC Agreement, among other things, requires HEI to provide the PUC with periodic financial information and other reports concerning intercompany transactions and other matters. It prohibits the electric utilities from loaning funds to HEI or its nonutility subsidiaries and from redeeming common stock of the electric utility subsidiaries without PUC approval. Further, the PUC could limit the ability of the electric utility subsidiaries to pay dividends on their common stock. See"Restrictions“Restrictions on dividends and otherdistributions"distributions” and"Electric“Electric utilityregulation"regulation” (regarding the PUC review of the relationship between HEI and HECO).As a result of the acquisition of ASB, HEI and HEIDI are subject to OTS registration, supervision and reporting requirements as savings and loan holding companies. In the event the OTS has reasonable cause to believe that the continuation by HEI or HEIDI of any activity constitutes a serious risk to the financial safety, soundness, or stability of ASB, the OTS is authorized under the Home
Owners'Owners’ Loan Act of 1933, as amended, to impose certain restrictions in the form of a directive to HEI and any of its subsidiaries, or HEIDI and any of its subsidiaries. Such possible restrictions include limiting (i) the payment of dividends by ASB; (ii) transactions between ASB, HEI or HEIDI, and the subsidiaries or affiliates of ASB, HEI or HEIDI; and (iii) the activities of ASB that might create a serious risk that the liabilities of HEI and its other affiliates, or HEIDI and its other affiliates, may be imposed on ASB. Theoretically, this authority would allow the OTS to prohibit26dividends, limit affiliate transactions or otherwise restrict activities as a result of losses suffered by HEI, HEIDI or their other subsidiaries, and thus conceivably may be an indirect means of limiting affiliations between ASB and affiliates engaged in nonfinancial activities. See "Restrictions“Restrictions on dividends and other distributions."”OTS regulations also generally prohibit savings and loan holding companies and their nonthrift subsidiaries from engaging in activities other than those which are specifically enumerated in the regulations. Such restrictions, if applicable to HEI and HEIDI, would significantly limit the kinds of activities in which HEI and HEIDI and their subsidiaries may engage. However, the OTS regulations provide for an exemption which is available to HEI and HEIDI if ASB satisfies the
"qualifiedqualified thriftlender"lender (QTL) test discussed below. See"Savings bank regulation--FDIC Improvement Act of 1991 and implementing regulations-Qualified“Bank regulation—Qualified thrift lender test."” ASBcurrently meets the qualified thrift lender test andmust continue to meet the qualified thrift lender test in order to avoid restrictions on the activities of HEI and HEIDI and theirsubsidiaries whichsubsidiaries. The failure of ASB to satisfy the QTL test could result in a need to divest ASB. ASB met the QTL test at all times during 2002.On January 23, 2003, the OTS issued a notice and request for comments on proposed changes to the Thrift Financial Report (TFR), effective with the March 31, 2004 report, and stated its intention to propose amendments to Schedule CMR, Consolidated Maturity and Rate, at a later date. Generally speaking, the OTS-regulated thrifts must file a TFR quarterly in order to provide the OTS with specific information. The proposed changes in the TFR would require additional details in areas in which the OTS believes such details would be helpful to it, and also would eliminate some of the detailed information required under the current form which the OTS no longer finds to be useful. Two areas in which the OTS would require greater detail are (i) holding companies such as HEI and HEIDI and (ii) transactions with affiliates. In addition, the OTS is proposing that the deadlines by which the TFR and its associated Schedules must be filed should be shortened. ASB has not yet analyzed the additional costs of providing the more detailed information that would be required in the proposed changes to the TFR.
HEI and HEIDI are prohibited, directly or indirectly, or through one or more subsidiaries, from (i) acquiring control of, or acquiring by merger or purchase of assets, another insured institution or holding company thereof, without prior written OTS approval; (ii) acquiring more than 5% of the voting shares of another savings association or savings and loan holding company which is not a subsidiary; or (iii) acquiring or retaining control of a savings association not insured by the FDIC. No director or officer of HEI or HEIDI, or person beneficially owning more than 25% of such holding
company'scompany’s voting shares, may, except with the prior approval of the OTS, (a) also serve as a director, officer, or employee of any insured institution or (b) acquire control of any savings association not a subsidiary of such holding company.On May 26, 1997,ASB
entered intoRealty Corporation, aPurchase and Assumption Agreement with BoA to assume substantially allsubsidiary of ASB, is licensed as a nondepository financial services loan company under the Hawaiideposit liabilitiesCode ofBoA and acquire mostFinancial Institutions. As a result of its direct or indirect voting control of ASB Realty Corporation, each of HEI, HEIDI and ASB has registered as a “Financial Institution Holding Company” and an “Institution-Affiliated Party” under the HawaiibranchesCode. As a Financial Institution Holding Company, HEI, HEIDI andcertainASB are subject to examination by the Hawaii Commissioner of Financial Institutions (Hawaii Commissioner) to determine whether their respective conditions or activities are jeopardizing the safety and soundness of ASB Realty Corporation’s operations. However, the Hawaii Commissioner is authorized to conduct such an examination only if the Hawaii Commissioner has good cause to believe that the holding company is experiencing financial adversity which might have a material negative impact on the safety and soundness of ASB Realty Corporation.The Hawaii Commissioner has authority to issue a cease and desist order to ASB Realty Corporation, ASB, HEIDI and HEI, if, for example, the Commissioner has reasonable grounds to believe that such entity is violating or about to violate the Hawaii Code or is engaged in or about to engage in illegal, unauthorized, unsafe or unsound practices. In appropriate circumstances, the Commissioner may also have authority to order ASB Realty Corporation to correct any impairment of its
Hawaii-based loans. On October 29, 1997,capital and surplus and to prohibit ASB, HEIDI and HEI from participating in theOTS approved the transactionaffairs of ASB Realty Corporation.Restrictions on dividends and
the transaction closed effective December 6, 1997. RESTRICTIONS ON DIVIDENDS AND OTHER DISTRIBUTIONSother distributionsHEI is a legal entity separate and distinct from its various subsidiaries. As a holding company with no significant operations of its own, the principal sources of its funds are dividends or other distributions from its operating subsidiaries, borrowings and sales of equity. The rights of HEI and, consequently, its creditors and shareholders, to participate in any distribution of the assets of any of its subsidiaries is subject to the prior claims of the creditors and preferred stockholders of such subsidiary, except to the extent that claims of HEI in its capacity as a creditor are recognized.
The
abilityabilities of certain ofHEI'sHEI’s subsidiaries to pay dividends or make other distributions to HEIisare subject to contractual and regulatory restrictions. Under the PUC Agreement, in the event that the consolidated common stock equity of the electric utility subsidiaries falls below 35% of total electric utility capitalization (including in capitalization the current maturities of long-term debt, but excluding short-term borrowings), the electric utility subsidiaries would be restricted, unless they obtained PUC approval, in their payment of cash dividends to 80% of the earnings available for the payment of dividends in the current fiscal year and preceding five years, less the amount of dividends paid during that period. The PUC Agreement also provides that the foregoing dividend restriction shall not be construed to relinquish any right the PUC may have to review the dividend policies of the electric utility subsidiaries. The consolidated common stock equity ofHEI'sHEI’s electric utility subsidiaries was50%52% of their total capitalization (including in capitalization the current maturities of long-term debt,and preferred stock sinking fund requirements due within one yearbut excluding short-term borrowings) as of December 31,1997.2002. As of December 31,1997,2002, HECO and its subsidiaries had net assets of$769$923 million, of which approximately$410$452 million were not available for transfer to HEI without regulatory approval.The ability of ASB to make capital distributions to HEI and other affiliates is restricted under federal law. Subject to a limited exception for stock redemptions that do not result in any decrease in
ASB'sASB’s capital and would improveASB'sASB’s financial condition, ASB is prohibited from declaring any dividends, making any other capital distribution, orpaying a management fee to a controlling person if, following the distribution or payment, ASB would be deemed to be
under-capitalized,undercapitalized, significantlyunder-capitalizedundercapitalized or criticallyunder-capitalized.undercapitalized. See"Savings bank regulation--FDIC Improvement Act of 1991 and Implementing Regulations--Prompt“Bank regulation—Prompt corrective action." As a Tier-1 institution (one that meets its capital requirements and has not been notified by the OTS that it is in need of more than normal supervision), ASB may make” All capital distributionsin amounts upare subject toone-half of ASB's surplus capital ratio (the amount of its capital in excess of its capital requirement) at 27the beginning of a calendar year, plus its year-to-date net income for that calendar year. ASB, as a Tier-1 institution, may exceed the foregoing limits if ASB provides a thirty-day advancean OTS notice requirement. Also see Note 11 tothe OTS and receives no objection within thirty days. Even in the case of distributions within the permissible limits, however, a thirty day advance notice to the OTS is required.HEI’s Consolidated Financial StatementsHEI and its subsidiaries are also subject to debt covenants, preferred stock resolutions and the terms of guarantees that could limit their respective abilities to pay dividends. The Company does not expect that the regulatory and contractual restrictions applicable to HEI or its direct and indirect subsidiaries will significantly affect the operations of HEI or its ability to pay dividends on its common stock.
ELECTRIC UTILITY REGULATIONElectric utility regulation
The PUC regulates the rates, issuance of securities, accounting and certain other aspects of the operations of HECO and its electric utility subsidiaries. See the previous
discussiondiscussions under"Electric utility-Rates"“Electric utility—Rates” andthe "Regulation“Electric utility—Most recent rate requests,” and “Recent rate requests” and “Regulation of electric utilityrates"rates” in HECO’s MD&A.Any adverse decision or policy made or adopted by the PUC, or any prolonged delay in rendering a decision, could have a material adverse effect on consolidated HECO’s and
"Recent rate requests" sections in HECO's MD&A.the Company’s financial condition, results of operations or liquidity.The PUC has ordered the electric utility subsidiaries to develop plans for the integration of
demand-sidedemand- and supply-side resources available to meet consumer energy needs efficiently, reliably and at the lowest reasonable cost. See the previous discussion under"Electric utility-Integrated Resource Planning“Electric utility—Integrated resource planning and requirements for additional generating capacity." In March 1995, the PUC opened a generic docket to investigate whether Hawaii public utilities should be allowed to establish property damage reserves to recover the cost of damage to their facilities and equipment caused by catastrophic disasters. See "Property damage reserve" in HECO's MD&A. In March 1998, the PUC determined that it would not be in the best interests of the ratepayer to allow the utilities to establish a ratepayer funded self-insured property damage reserve. The PUC based its conclusion on: (1) the unknown probability of the occurrence of natural disasters and the uncertain magnitude of the resulting damages; (2) the intergenerational inequity that ratepayer- funded self-insurance programs create; and (3) the unclear tax effects of such reserves. In the order the PUC noted that, in an earlier decision regarding restoration expenses incurred by another electric utility as a result of Hurricane Iniki in 1992, the PUC had determined that the other utility's shareholders should not bear any of the restoration expenses. The PUC observed that one of the factors it considered in its earlier decision was the regulatory compact. The PUC also observed that the utility industry is facing competitive pressures and is undergoing changes, and, in light of this the relative responsibilities of ratepayers and shareholders for the cost of restoration and repair of any damage caused by uninsured catastrophic natural disasters will continue to be judged on the basis of the facts of each situation. Management cannot predict how the PUC might apportion the responsibility for restoration costs with respect to any uninsured catastrophic losses that HECO or its subsidiaries may incur in the future.”On December 30, 1996, the PUC issued an order instituting a proceeding to identify and examine the issues surrounding electric competition and to determine the impact of competition on the electric utility infrastructure in Hawaii. See
the previous discussion under "Electric utility-Competition." On March 10, 1997, the PUC issued a show cause order to HECO requesting information to assist the PUC“Competition” indetermining if it should reduce HECO's rates and require HECO to refund any excess earnings to its ratepayers. See the previous discussion under "Electric utility-PUC Show Cause Order." Any adverse decision or policy made or adopted by the PUC, or any prolonged delay in rendering a decision, could have a material adverse effect on consolidated HECO's and the Company's financial condition, results of operations or liquidity.HECO’s MD&A.Certain transactions between
HEI'sHEI’s electric public utility subsidiaries (HECO, MECO and HELCO) and HEI and affiliated interests are subject to regulation by the PUC. All contracts (including summaries of unwritten agreements),made on or after July 1, 1988 of $300,000 or more in a calendar year for management, supervisory, construction, engineering, accounting, legal, financial and similar services and for the sale, lease or transfer of property between a public utility and affiliated interests must be filed with the PUC to be effective, and the PUC may issue cease and desist orders if such contracts are not filed. All such affiliated contracts for capital expenditures (except for real property) must be accompanied by comparative price quotations from two nonaffiliates, unless the quotations cannot be28obtained without substantial expense. Moreover, all transfers of $300,000 or more of real property between a public utility and affiliated interests require the prior approval of the PUC and proof that the transfer is in the best interest of the public utility and its customers. If the PUC, in its discretion, determines that an affiliated contract wasis unreasonable or otherwise contrary to the public interest, the utility must either revise the contract or risk disallowance of the payments forrate-makingratemaking purposes. Inrate-makingratemaking proceedings, a utility must also prove the reasonableness of payments made to affiliated interests under any affiliatedcontractscontract of $300,000 or more by clear and convincing evidence. An"affiliated interest"“affiliated interest” is defined by statute and includes officers and directors of a public utility, every person owning or holding, directly or indirectly, 10% or more of the voting securities of a public utility, and corporations which have in common with a public utility more than one-third of the directors of that public utility.ToIn January 1993, to address community concerns expressed at the time, HECO proposed
by letter dated January 25, 1993,that the PUC initiate a review of the relationship between HEI and HECO and the effects of that relationship on the operations of HECO.By an order dated January 26, 1993, theThe PUC opened a docket and initiated such a review to determine whether the HEI-HECO relationship,HEI'sHEI’s diversified activities, andHEI'sHEI’s policies, operations and practices had resulted in or were having any negative effects on HECO, its electric utility subsidiaries and ratepayers. In May 1994, the PUC selected a consultant, Dennis Thomas and Associates,was selected by the PUCto perform the review. In early 1995, Dennis Thomas and Associates issued its report (the Thomas report) to the PUC. The Thomas report concluded that"on“on balance, diversification has not hurtelectric ratepayers.
"” Other major findingsof the studywere that (1) no utility assets have been used to fundHEI'sHEI’s nonutility investments or operations,HEI has not denied needed capital to the electric utilities and(2) management processes within the electric utilities operate without interference fromHEI.HEI and (3) HECO’s access to capital did not suffer as a result of HEI’s involvement in nonutility activities and that diversification did not permanently raise or lower the cost of capital incorporated into the rates paid by HECO’s utility customers. The Thomas report also included a number of recommendations, most of which the Company has implemented. In December 1996, the PUC issued an order that adopted theDennisThomasand Associatesreport in its entirety, ordered HECO to continue to provide the PUC with status reports on its compliance with the PUC agreement (pursuant to which HEI became the holding company of HECO) and closed the investigation and proceeding. The PUC has not required that the Company implement all of the recommendations in the Thomas report. In the order, the PUC also stated that it adopted the recommendation of the DOD that HECO, MECO and HELCO present a comprehensive analysis of the impact that the holding company structure and investments in nonutility subsidiaries have on a case-by-case basis on the cost of capital to each utility in future rate cases and remove such effects from the cost of capital. The PUC has accepted, in subsequent MECO and HELCO rate cases, the presentations made by MECO and HELCO that there was no such impact in those cases. See also"Holding“Holding company regulation."”HECO and its electric utility subsidiaries are not subject to regulation by the Federal Energy Regulatory Commission
(FERC)under the Federal Power Act, except under Sections 210 through 212 (added by Title II of PURPA and amended by the Energy Policy Act of 1992), which permit theFERCFederal Energy Regulatory Commission to order electric utilities to interconnect with qualifying cogenerators and small power producers, and to wheel power to other electric utilities. Title I of PURPA, which relates to retail regulatory policies for electric utilities,also applies to HECOandits subsidiaries.Title VII of the Energy Policy Act of 1992, which creates"exempt“exempt wholesalegenerators"generators” (EWGs) as a category that is exempt from the 1935 Act andwhichaddresses transmission access, alsoappliesapply to HECO and its electric utility subsidiaries. The Company cannot predict the extent to which cogeneration, EWGs or transmission access will reduce its electrical loads, reduce its current and future generating and transmission capability requirements or affect its financial condition, results of operations or liquidity.Because they are located in the State of Hawaii, HECO and its subsidiaries are exempt by statute from limitations set forth in the Powerplant and Industrial Fuel Act of 1978 on the use of petroleum as a primary energy source.
SAVINGS BANK REGULATIONBank regulation
ASB, a federally chartered savings bank, and its holding companies are subject to the regulatory supervision of the OTS and, in certain respects, the
Federal Deposit Insurance Corporation (FDIC).FDIC and the Hawaii Commissioner of Financial Institutions. See above under “Holding company regulation.” In addition, ASB must comply with Federal Reserve Board reserve requirements and OTS liquidity requirements. See"Liquidity“Liquidity and capitalresources--Savings bank"resources—Bank” inHEI'sHEI’s MD&A.For a discussion of the disparity in the deposit insurance assessment rates and Financing Corporation assessment rates that ASB and other thrifts have paid in relation to the rates that most commercial banks have paid, the special assessment made by the FDIC on ASB and other thrifts in 1996 to provide adequate funding for the SAIF and thereby permit a reduction in deposit insurance assessment rates for 29thrifts and potential federal legislation affecting financial institutions, see "Deposit insurance premiums and regulatory developments" in Note 4 to HEI's Consolidated Financial Statements.Deposit insurance coverage.The
FDIC ImprovementFederal Deposit Insurance Act,of 1991 (FDICIA)as amendedvarious provisions ofby the Federal Deposit Insurance Corporation Insurance Actgoverning deposit insurance coverage. FDICIA, as further implementedof 1991 (FDICIA), and regulations promulgated byamendments totheFDIC's deposit insurance regulations, made certain significant changes relating to pro rata or "pass through"FDIC, govern insurance coveragefor employee benefit plan participants and beneficiaries, and insurance coverage for certain retirement accounts and trust funds. (The term "pass-through" insurance means thatof deposit amounts. Generally, theinsurance coverage passes through to each owner/beneficiary of the applicable deposit.) Although the vast majority of the FDIC's deposit insurance regulations remain unchanged (such as the basic rules providing that individual accountsdeposits maintained by a depositor in an insured institution are insured to $100,000,separately fromwith the amount of all deposits held by a depositor in the same capacity (even if held in separate accounts) aggregated for purposes of applying the $100,000 limit. For example, all deposits held in a depositor’s individual capacity are aggregated with each other but not with deposits maintained by such depositor and his or her spouse in a qualifying jointaccounts), several important changes were made. Effective December 19, 1993,account, these latter joint deposits being separately insured to anindividual'saggregate of $100,000. An individual’s interest in deposits at the same institution in any combination of certain retirement accounts and employee benefit plans will be added together and insured up to $100,000 in the aggregate.This is a reduction fromInstitutions that are “well capitalized” under the
maximum of $400,000 inFDIC’s prompt corrective action regulations are generally able to provide “pass-through” insurance coverageformerly provided if deposits were made in four different types(i.e., insurance coverage that passes through to each owner/beneficiary ofretirement plan accounts. "Pass-through" insurance coveragethe applicable deposit) for the deposits of most employee benefit plans (i.e., $100,000 perindividual participating, not $100,000 per plan)
generally continues only for institutions that are "well-capitalized" under. Consequently, theFDIC's prompt corrective action regulations. TheFDIChas amended itsdeposit insurance regulationstorequire financial institutions to provide employee benefit plan depositors information, not otherwise available, on theinstitution'sinstitution’s capital category and whether"pass-through"“pass-through” deposit insurance is available. As of December 31,1997,2002, ASB was"well-capitalized". Financial Institutions Reform, Recovery,“well capitalized.”Federal thrift charter.See “Certain factors that may affect future results and
Enforcementfinancial condition—Bank—Regulation of ASB—Federal Thrift Charter” in HEI’s MD&A.Recent legislation.The Gramm-Leach-Bliley Act of
19891998 (the Act) imposes on financial institutions an obligation to protect the security and- ------------------------------------------------------------------------confidentiality of its customers’ nonpublic personal information and, on February 1, 2001, the FDIC and OTS issued final guidelines for the establishment of standards for safeguarding such information effective from July 1, 2001. The Act also requires public disclosure of certain agreements entered into by insured depository institutions and their affiliates in fulfillment of the Community Reinvestment Act of 1977, and the filing of an annual report with the appropriate regulatory agencies. On January 10, 2001, the FDIC and the OTS issued final rules implementing these provisions of the Act, effective from April 1, 2001. Although the Act will continue to impose additional compliance costs on ASB, ASB believes that any ongoing compliance costs will not be significant.The International Money Laundering Abatement and Financial Anti-Terrorism Act of 2001(the 2001 Act), which is part of the USA Patriot Act, imposes on financial institutions a wide variety of additional obligations with respect to such matters as collecting information, monitoring relationships and reporting suspicious activities. Among other things, the 2001 Act requires the U.S. Treasury to issue regulations
- ------------------------establishing minimum requirements for verifying the identity of persons seeking to open an account, maintaining records of the information used for such verification, and consulting lists of known or suspected terrorists or terrorist organizations. Although ASB has “know your customer” policies in place, it will not be able to assess the additional cost (if any) of complying with the new regulations until they are issued. The 2001 Act also requires financial institutions to establish anti-money laundering programs and, with respect to correspondent and private banking accounts of non-U.S. persons, to implement appropriate due diligence policies to detect money laundering activities carried out through such accounts. ASB is monitoring the steps being taken by the regulatory agencies to implement these and other provisions of the 2001 Act.Effective January 1, 2003, the OTS issued final regulations specifying the record keeping and confirmation requirements applicable to thrifts and their subsidiaries engaged in effecting securities transactions for customers, which will apply to one of ASB’s subsidiaries which effects securities transactions as an agent. However, ASB does not believe the new requirements will result in significant additional compliance costs.
Capital
requirements.requirements. Under the Financial Institutions Reform, Recovery, and Enforcement Act of 1989 (FIRREA), the OTS has set three capital standards for thrifts, each of which must be no less stringent than those applicable to national banks. As of December 31,1997,2002, ASB was in compliance with all of the minimum standards with a core capital ratio of5.1%6.7% (compared to a3%4.0% requirement), a tangible capital ratio of5.0%6.7% (compared to a 1.5% requirement) and total risk-based capital ratio of11.9%14.7% (based on risk-based capital of$296$452.7 million,$97$206.7 million in excess of the8%8.0% requirement).In 1996,Effective April 1, 1999, the OTS revised its risk-based capital standards as part of the effort by the OTS, FDIC, the Board of Governors of the Federal Reserve System
the FDICand the Office of the Comptroller of the Currencyissued a joint agency policy statement to bankers to provide guidance on sound practices for managing IRR. Effective June 26, 1996, the joint agency policy statement augments the action taken by the agencies in 1995to implement the provisions of the Riegle Community Development and Regulatory Improvement Act of 1994, which requires these agencies to work together to make uniform their respective regulations and guidelines implementing common statutory or supervisory policies. These OTS revisions affect the risk-based capital treatment of: (1) construction loans on presold residential properties; (2) junior liens on 1- to 4-family residential properties; (3) investments in mutual funds; and (4) the core capital leverage ratio for institutions which do not have a composite rating of “1” under the Uniform Financial Institution Rating System (i.e., the CAMELS rating system).Under the new rules, an institution with a composite rating of “1” under the CAMELS rating system must maintain core capital in an amount equal to at least 3% of adjusted total assets. All other institutions must maintain a minimum core capital of 4% of adjusted total assets, and higher capital ratios may be required if warranted by particular circumstances. As of December 31, 2002, ASB met the applicable minimum core capital requirement of the revised OTS regulations.
Effective July 1, 2002, new OTS rules eliminated the requirement that one-to-four-family residential mortgage loans have a maximum loan-to-value ratio of not more than 80% at origination in order to qualify for a 50% risk rate in calculating capital charges. The new rules conform OTS practice to the more flexible federal Interagency Guidelines for Real Estate Lending by requiring that qualifying mortgage loans be underwritten in accordance with prudent underwriting standards, including standards (i) relating the amortized principal balance of the loan to the value of the property at origination and (ii) establishing acceptable forms of credit enhancement for loans exceeding loan-to-value thresholds. In addition, the new rule eliminates the former requirement that a thrift must deduct from total capital the portion of a land loan or non-residential construction loan that exceeds an 80% loan-to-value ratio.
On January 1, 2002, new OTS regulations went into effect with respect to the
FDICIA addressing risk-regulatory capital treatment of recourse obligations, residual interests, direct credit substitutes and asset- and mortgage-backed securities. The revised capital regulations affect institutions that (1) securitize and sell their assets but retain a residual interest or provide recourse arrangements; (2) credit enhance third party assets; or (3) invest in third party asset- and mortgage-backed securities. Recourse obligations, residual interests, direct credit substitutes and asset- and mortgage-backed securities are now risk-weighted based on their credit agency rating. The new regulations have had a slight positive impact on ASB’s risk-based capital.On July 1, 2002, new regulations went into effect which reduced the risk rating under the OTS’ risk-based capital
standardsrules forIRR. It also replacesclaims on and claims guaranteed by “qualifying securities firms,” such as broker-dealers which are registered with theproposed joint agency policy statementSEC and comply with net capital requirements, from 100% to 20%, and to zero percent for certain claims on qualifying securities firms thatthe agenciesare collateralized with, for example, cash deposits or securities issuedfor comment in 1995 regarding a supervisory framework for measuring and assessing banks' IRR exposures. The agencies have elected not to pursue a standardized measure and explicit capital charge for IRR at this time. This decision reflects concerns about the burden, accuracy and complexity of a standardized measure and recognition that industry techniques for measuring IRR are continuing to evolve. Nonetheless, the agencies will continue to place significant emphasis on the level of a bank's IRR exposure and the quality of its risk management process when evaluating a bank's capital adequacy. Although the OTS has indicated that it will review any differences between its approach and that of the other agencies for the purpose of achieving greater consistency and uniformity among all four agencies, the impact of the joint agency policy statement on the IRR rule adoptedby or guaranteed by theOTS and ultimately on ASB cannot be predicted at this time.U.S.Affiliate
transactions.transactions. Significant restrictions apply to certain transactions between ASB and its affiliates, including HEI and its direct and indirect subsidiaries. FIRREA significantly altered both the scope and substance of such limitations on transactions with affiliates andprovidesprovided for thrift affiliate rules similar to, but more restrictive than, those applicable to banks. On November 27, 2002, the Federal Reserve Board (FRB) issued Regulation W, effective April 1, 2003 which, generally speaking, unifies in one public document FRB’s prior interpretations of the statutory provisions governing affiliate transactions. Although thrifts are excluded from Regulation W, on December 12, 2002, OTS issued an interim final rule, also effective April 1, 2003, which applies Regulation W to thrifts with modifications appropriate to the greater restrictions under which thrifts operate. For example, ASB is prohibited from making any loan or other extension of credit to an entity affiliated with ASB unless the affiliate is engaged exclusively in activities which the Federal Reserve Board has determined to be permissible for bank holding companies. There are also various other restrictions which apply to certain transactions between ASB and certain executive officers, directors and insiders of ASB. ASB is also barred from making a purchase of or any investment in securities issued by an affiliate, other than with respect to shares of a subsidiary of ASB.30Financial Derivatives and Interest Rate Risk.In 1996, the Board of Governors of the Federal Reserve System, the FDIC
Improvement Actand the Office of the Comptroller of the Currency issued a joint agency policy statement to bankers to provide guidance on sound practices for managing interest rate risk. However, the OTS has elected not to pursue a standardized policy towards interest rate risk and investment and derivatives activities with the other federal banking regulators.On December 1, 1998, the OTS issued final rules on financial derivatives, effective January 1, 1999. The OTS views these final rules as consistent with, although more detailed than, the 1996 joint policy statement. The purpose of these rules is to update the OTS rules on financial derivatives, which had remained virtually unchanged for over 15 years. Most significantly, the new rules address interest rate swaps, a derivative instrument commonly used by thrifts to manage interest rate risk which was not addressed in the prior OTS rules. Currently ASB does not use interest rate swaps to manage interest rate risk, but may do so in the future. Generally speaking, the new rules permit thrifts to engage in transactions involving financial derivatives to the extent these transactions are otherwise authorized under applicable law and are safe and sound. The new rules have required ASB to revise its internal procedures for handling financial derivative transactions, including increased involvement of the ASB Board of Directors.
Concurrently with the issuance of the new rules of financial derivative transactions, the OTS also adopted on December 1, 1998 Thrift Bulletin 13a (TB 13a) for purpose of providing guidance on the management of interest rate risks, investment securities and derivatives activities. TB 13a also describes the guidelines OTS examiners will use in assigning the “Sensitivity to Market Risk” component rating under the Uniform Financial Institutions Rating System (i.e., the CAMELS rating system). TB 13a became effective on December 1, 1998, and replaced several previous Thrift Bulletins dealing with interest rate risk and securities activities.
Effective July 1, 2002, new OTS rules eliminated the interest rate risk component of the OTS’s risk-based capital regulations. As a result of waivers granted by the Acting OTS Director, these regulations had never gone into effect and the OTS had relied instead on the interest rate risk guidelines of TB 13a, which will continue in effect. The OTS will apply a 100% risk weight to all stripped, mortgage-related securities regardless of issuer or guarantor.
TB 13a updates the OTS’s minimum standards for thrift institutions’ interest rate risk management practices with regard to board-approved risk limits and interest rate risk measurement systems, and makes several significant changes. First, under TB 13a, institutions no longer set board-approved limits or provide measurements for the plus and minus 400 basis point interest rate scenarios prescribed by the original TB 13. TB 13a also changes the form in which those limits should be expressed. Second, TB 13a provides guidance on how the OTS will assess the prudence of an institution’s risk limits. Third, TB 13a raises the size threshold above which institutions should calculate their own estimates of the interest rate sensitivity of Net Portfolio Value (NPV) from $500 million to $1 billion in assets. Fourth, TB 13a specifies a set of desirable features that an institution’s risk measurement methodology should utilize. Fifth, TB 13a provides an extensive discussion of “sound practices” for interest rate risk management.
TB 13a also contains guidance on thrifts’ investment and derivatives activities by describing the types of analysis institutions should perform prior to purchasing securities or financial derivatives. TB13a 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.
Liquidity. Effective July 18 2001, the OTS removed the regulation that required a savings association to maintain an average daily balance of liquid assets of at least 4% of their liquidity base and retained a provision requiring a savings association to maintain sufficient liquidity to ensure safe and sound operations. ASB’s principal sources of liquidity are customer deposits, wholesale borrowings, the sale of mortgage loans into the secondary market channels and the maturity and repayment of portfolio loans and mortgage-related securities. ASB’s principal sources of borrowings are advances from FHLB and securities sold under agreements to repurchase from broker/dealers. ASB is approved by the FHLB to borrow up to 35% of assets to the extent it provides qualifying collateral and holds sufficient FHLB stock. At December 31, 2002, ASB’s unused FHLB borrowing capacity was approximately $1.0 billion. ASB utilizes growth in deposits, advances from FHLB and securities sold under agreements to repurchase to fund maturing and withdrawable deposits, repay maturing borrowings, fund existing and future loans and make investments. At December 31, 2002, ASB had commitments to borrowers for undisbursed loan funds and unused lines and letters of credit of $0.8 billion. Management believes ASB’s current sources of funds will enable it to meet these obligations while maintaining liquidity at satisfactory levels.
Supervision.The adoption of FDICIA in 1991
and implementing regulations - --------------------------------------------------------- FDICIA subjectssubjected the banking and thrift industries to heightened regulation and supervision. FDICIA made a number of reforms addressing the safety and soundness of the deposit insurance system, supervision of domestic and foreign depository institutions and improvement of accounting standards. FDICIA also limited deposit insurance coverage, implemented changes in consumer protection laws and called for least-cost resolution and prompt corrective action with regard to troubled institutions.Pursuant to FDICIA, the federal banking agencies
havepromulgated regulations which may affect the operations of ASB and its holding companies. Such regulations address, for example, standards for safety and soundness, real estate lending, accounting and reporting, transactions with affiliates, and loans to insiders.Prompt corrective action.FDICIA establishes a statutory framework that is triggered by the capital level of a savings association and subjects it to progressively more stringent restrictions and supervision as capital levels decline. The OTS rules implement the system of prompt corrective action. In particular, the rules define the relevant capital measures for the categories of
"well-capitalized"“well capitalized”,"adequately capitalized"“adequately capitalized”,"under-capitalized"“undercapitalized”,"significantly under-capitalized"“significantly undercapitalized” and"critically under-capitalized".“critically undercapitalized.”A savings association that is
under-capitalized“undercapitalized” orsignificantly under- capitalized“significantly undercapitalized” is subject to additional mandatory supervisory actions and a number of discretionary actions if the OTS determines that any of the actions is necessary to resolve the problems of the association at the least possiblelong- termlong-term cost to the SAIF. A savings association that iscritically under- capitalized“critically undercapitalized” must be placed in conservatorship or receivership within 90 days, unless the OTS and the FDIC concur that other action would be more appropriate. As of December 31, 2002, ASB was “well-capitalized.”Interest rates.FDIC regulations restrict the ability of financial institutions that are
not "Well-capitalized"undercapitalized to offer interest rates on deposits that are significantly higher than the rates offered by competing institutions. As of December 31,1997,2002, ASB was"well-capitalized"“well capitalized” and thus not subject to these interest rate restrictions.Qualified thrift lender test.
TheFDICIA amended thequalified thrift lender (QTL)QTL test provisions of FIRREA by reducing the percentage of assets thrifts must maintain inhousing-related loans and investments“qualified thrift investments” from 70% to 65%, and changing the computation period to require that the percentage be reached on a monthly average basis innine9 out of the previous 12 months. The 1997 Omnibus Appropriations Act expanded the types of loans that constitute “qualified thrift investments” from the traditional category of housing-related loans to include small business loans, education loans, loans made through credit card accounts, as well as a basket of other consumer loans and certain other types of assets not to exceed20% of total assets. Savings associations that fail to satisfy the QTL test by not holding the required percentage of
housing-related investments“qualified thrift investments” are subject to various penalties, including limitations on theiractivities and restrictions on their FHLB advances.activities. Failure to satisfy the QTL test would also bring into operation restrictions on the activities that may be engaged in by HEI, HEIDI and their other subsidiaries and could effectively result in the required divestiture of ASB. At all times during1997,2002, ASB was in compliance with the QTL test. As of December 31, 2002, 90.7% of ASB’s portfolio assets was “qualified thrift investments.” See"Holding“Holding company regulation."”Federal Home Loan Bank
System - -----------------------------System.ASB is a member of the FHLB System which consists of 12 regional FHLBs. The FHLB System provides a central credit facility for member institutions.ASB, as a member ofHistorically, theFHLB of Seattle, is required to own shares of capital stock in the FHLB of Seattle in an amount equal to the greater of 1% of ASB's aggregate unpaid residential loan principal at the beginning of each year, 0.3% of total assets or 5% of FHLB advances outstanding. TheFHLBsservehave served as the central liquidity facilities for savings associations andresourcessources of long-term funds for financing housing.Long-term advancesThe FHLB may onlybe mademake long-term advances to ASB for the purpose of providing funds for financing residential housing.Additionally, atAt such time as an advance is made to ASB or renewed, it must be secured by collateral from one of the following categories: (1) fully disbursed, whole first mortgages on improved residential property, or securities representing a whole interest in such mortgages; (2) securities issued, insured or guaranteed by the U.S. Government or any agency thereof; (3) FHLB deposits; and (4) other real estate-related collateral that has a readily ascertainable value and with respect to which a security interest can be perfected. The aggregate amount of outstanding advances secured by such other real estate-related collateral may not exceed 30% of ASB’s capital.ASB, as a member of the
member's capital. Other laws.FHLB of Seattle, is required to own shares of capital stock in the FHLB of Seattle in an amount equal to the greater of 1% of ASB’s aggregate unpaid residential loan principal at the beginning of each year, 0.3% of total assets or 5% of FHLB advances outstanding and any shares held by ASB in excess of its required minimum may be immediately redeemed by ASB. However, as a result of the Gramm-Leach-Bliley Act, each regional FHLB is required to formulate and submit for Federal Housing Finance Board (Board) approval a plan to meet new minimum capital standards to be promulgated by the Board. The Board issued the final regulations establishing the new minimum capital standards on January 30, 2001. As mandated by Gramm-Leach-Bliley, these regulations require each FHLB to maintain a minimum total capital leverage ratio of 5% of total assets and include risk-based capital standards requiring each FHLB to maintain permanent capital in an amount sufficient to meet credit risk and market risk. In June 2001, the FHLB of Seattle formulated a capital plan to meet these new minimum capital standards, which plan was submitted to and approved by the Board. The new plan requires ASB to own capital stock in the FHLB of Seattle in an amount equal to the total of 3.5% of the FHLB of Seattle’s advances to ASB plus the greater of (i) 5% of the outstanding balance of loans sold to the FHLB of Seattle by ASB or (ii) 0.75% of ASB’s mortgage loans and pass through securities. At December 31, 2002, ASB was required to own capital stock in the FHLB of Seattle in the amount of $65.4 million. ASB’s excess capital stock in the FHLB of Seattle was $24.1 million. In addition, stock in the FHLB of Seattle will be subject tofederal and state consumer protection laws which affect lending activities, such asa 5-year notice of redemption. This 5-year notice period has an adverse but immaterial effect on ASB’s liquidity.Community Reinvestment.In 1977, Congress enacted the
Truth-in-Lending Law, the Truth in Savings Act, the Equal Credit Opportunity Act, the Real Estate Settlement Procedures Act and several federal and state financial privacy acts. 31These laws may provide for substantial penalties in the event of noncompliance. Management of ASB believes that its lending activities are in compliance with these laws and regulations. TheCommunity Reinvestment Act (CRA)was enacted by Congress in 1977to ensure that banks and thrifts help meet the credit needs of their communities, including low- and moderate-income areas, consistent with safe and sound lending practices. The OTS will considerASB'sASB’s CRA record in evaluating an application for a new deposit facility, including the establishment of a branch, the relocation of a branch or office, or the acquisition of an interest in another bank or thrift. ASB received averbalCRA rating of"outstanding"“outstanding” from the OTS in December1997. For a discussion1997 and such rating was reaffirmed as of September 2002.Other laws.ASB is subject to federal and state
interstate branching legislation, see "Liquidityconsumer protection laws which affect lending activities, such as the Truth-in-Lending Law, the Truth-in-Savings Act, the Equal Credit Opportunity Act, the Real Estate Settlement Procedures Act andcapital resources--Savings bank"several federal and state financial privacy acts. These laws may provide for substantial penalties inHEI's MD&A. In August 1996, federal legislation was enactedthe event of noncompliance. ASB believes thatrepeals the percentage of taxable income method of tax accounting for bad debt reserves used by ASBits lending activities are in compliance with these laws andother "large" thrift institutions. In place of this bad debt reserve method, ASB is required to use the specific charge-off method used by most other businesses. These rules are generally effective for taxable years beginning after 1995. The related transaction rules eliminate the potential recapture of federal income tax deductions arising from the bad debt reserve created prior to 1988. Only post-1987 reserve net additions are subject to recapture into taxable income ratably over a six-year period, beginning in 1997. ASB has established a deferred tax liability of approximately $4.8 million for its post-1987 reserve. Pending legislation. For a discussion of potential federal legislation addressing the merger of the BIF and SAIF, thrift rechartering and financial modernization, and possible adverse effects on HEI, see "Deposit-insurance premiums and regulatory developments" in Note 4 to HEI's Consolidated Financial Statements. FREIGHT TRANSPORTATION REGULATION The PUC has broad authority in itsregulations.Environmental regulation
of the intrastate business and operations of YB. See "Other--Freight transportation--Hawaiian Tug & Barge Corp. and Young Brothers, Limited." In particular, the PUC has the authority to review and modify YB's intrastate rates and charges under the Hawaii Water Carrier Act. In all rate proceedings under such act, YB has the burden of proving the reasonableness of expenditures, contracts, leases or other transactions. An adverse decision or policy adopted by the PUC, or a delay in granting requested rate or other relief, could have a material adverse effect on the financial condition, results of operations or liquidity of YB. ENVIRONMENTAL REGULATIONHEI and its subsidiaries are subject to federal and state statutes and governmental regulations pertaining to water quality, air quality and other environmental factors.
Water quality
controls.controls. As part of the process of generating electricity, water used for condenser cooling of the electric utilitysubsidiaries'subsidiaries’ steam electric generating stations is discharged into ocean waters or into underground injection wells. The subsidiaries are periodically requiredperiodicallyto obtain permits from the DOH in order to be allowed to discharge the water, including obtaining permit renewals for existing facilities and new permits for new facilities. The electric utility subsidiaries must obtain National Pollutant Discharge Elimination System (NPDES) permits from the DOH to allow wastewater and storm water discharges into state and federal waters for their coastal generating stations and Underground Injection Control (UIC) permits for wastewater discharge to underground injection wells for one MECO facility and several HELCO facilities.The DOH conducted NPDES permit compliance inspections at HELCO’s Shipman generating station in February 2002, MECO’s Kahului generating station in July 2002, and at HECO’s Honolulu generating station in July 2002 and Kahe and Waiau generating stations in December 2002. All facilities were found to be in compliance with NPDES permit requirements.
In 1994, HELCO constructed two UIC-permitted injection wells designed to receive wastewater from CT-4 and CT-5 once they become operational, as well as from other existing activities at the Keahole power plant. Although these wells were installed and the UIC permit issued, the associated piping connections to the wells were not made due to anticipation of the forthcoming CT-4 and CT-5 generation additions. In connection with the preconstruction stay originally issued for CT-4 and CT-5, HELCO registered the UIC wells as inactive. Because the land issue matter with CT-4 and CT-5 appeared to be resolved and construction activities resumed in May 2002, HELCO submitted an application to DOH to reactivate the UIC permit for these wells. On October 3, 2002, the Third Circuit Court reversed an earlier Decision and Order by the BLNR regarding construction of CT-4 and CT-5 and HELCO halted construction activity. Although the DOH indicated it was ready to issue the UIC permit, HELCO submitted a letter on November 20, 2002 to notify the DOH of the recently issued court order. The issuance of the permit is currently on hold. Regardless of the pending court decision on CT-4 and CT-5, HELCO intends to at least reactivate the UIC permit and complete the piping connections for existing wastewater operations at the facility. Existing wastewater management activities do not currently require a UIC permit, but will be rerouted to the injection wells as a process improvement. See Note 11 to HECO’s Consolidated Financial Statements.
The Federal Oil Pollution Act of 1990 (OPA) governs actual or threatened oil releases in navigable U.S. waters (inland waters and up to three miles offshore) and waters of the U.S.
'exclusive economic zone (up to 200 miles to sea from the shoreline).ResponsibleIn the event of an oil release to navigable U.S. waters, OPA establishes strict and joint and several liability for responsible partiesunder OPA are jointly, severally and strictly liablefor 1) oil removal costs incurred by the federal government or the state, and 2) damages to natural resources and real or personal property. Responsible parties include vessel owners andoperators.operators of on-shore facilities. OPA imposes fines and jail terms ranging in severity depending on how the release was caused. OPA also requires that responsible parties submit certificates of financial responsibility sufficient to meet the responsibleparty'sparty’s maximum limited liability.HTB compliesHECO is currently involved in an ongoing investigation of the Honolulu Harbor area. (See Note 11 to HECO’s Consolidated Financial Statements.) Under the terms of the agreement for the sale of YB, HEI and TOOTS have certain environmental obligations arising from conditions existing prior to the sale of YB, including obligations withthis requirement through coveragerespect to the Honolulu Harbor investigation. See Note 3 to HEI’s Consolidated Financial Statements.EPA regulations under OPA also require that certain facilities that store petroleum prepare and implement Spill Prevention, Containment and Countermeasure (SPCC) Plans in order to prevent releases of petroleum to navigable waters of the U.S. HECO, HELCO and MECO facilities subject to the SPCC program are in compliance with these requirements. On July 17, 2002, EPA amended the
Water Quality Insurance SyndicateSPCC regulations to include facilities, such as substations, thatuse (as opposed to store) petroleum products. HECO, HELCO and
YB qualifies as a self-insurer. The Coast Guard issued interim guidelines in September 1992, which includedMECO have determined that therequirement that a spill response plan be submitted by February 18, 1993, and be finalized by August 18, 1993. The EPA and Hawaii Department 32of Transportation (DOT) also have similar requirements for submission of spill response plans. The EPA issued its proposed rules and guidelines on this matter in February 1993. With HTB exiting the fuel transportation business at the end of 1993, the Company's freight transportation operations subject the Company to significantly lessened environmental risks. HTB's fuel and lubricating oil and the other cargo carried in its barges may be accidentally discharged into ocean waters causing a pollution hazard, but the quantities carried do not pose a major environmental hazard. HTB and YB employees are trained to respond to oil or other spills that occur. HTB and YB filed spill response plans in 1993, 1995 and 1996. The utilities filed preliminary spill response plans in 1993 for certain facilities. Revised Facility Spill Response Plans (FSRPs) and additional FSRPs were filed in 1994 and 1995. Dueamended SPCC program applies to aleak innumber of their substations. By interim final rule, thefuel transfer system, approximately 100 gallons of bunker fuel oil were released to a HELCO Shipman facility drainage well system in November 1996. The release was reported to state and county agencies in December 1996. AlthoughEPA amended thefuel oil was removed from the well system and the well system was cleaned, oil continued to seep back into the well system from behind the retaining walls until March 1997. Monitoring and removal of this residual oil continued. In March 1997, HELCO received a letter from the DOH concurring with the ongoing cleanup approach and stating that more aggressive cleanup measures should be considered if oil seepage into the drainage wells worsens. Oil seepage into the well system has not been observed since March 1997. Due to leaks in two wastewater treatment system tanks, an estimated 2,000 gallons of boiler cleaning wastewater was released to a HELCO Hill facility drainage well in January 1997. After confirming that the wastewater discharged exhibited characteristics of a hazardous waste, notification was provided to federal, state and county agencies. A post-release drainage well sample collected indicated that well conditions were nonhazardous. The treatment tanks were repaired, the drainage well cleaned and a semiannual well status check was performed by a consultant with satisfactory results. The DOH issued a Notice of Apparent Violationrevised regulations, which now require development of theUIC permit in February 1997SPCC plans for these facilities by April 17, 2003, andwill notifyimplementation of the plans by October 18, 2003. Concurrently, EPA proposed a rule to further extend compliance dates for the amended regulations by one year. HECO, HELCOof required compliance action, if any, stemming from this incident. In April 1997, HECO, on behalf of HELCO, notified the DOHand MECO are currently developing SPCC plans for all facilities thatit became aware that industrial oily wastewater was discharging into HELCO's Waimea facilityOs dry well system in noncompliance with the facility's UIC permit. The discharge of oily wastewater was stopped and, in May 1997, a written incident report was submittedare subject to theDOH. The DOH issued a Notice of Apparent Violation. The well was cleaned and in July 1997 a response was submitted to a DOH request for information. The DOH performed a site inspection in September 1997 and, in January 1998, the DOH issued a Notice of Violation (NOV) imposing a civil penalty fine on HELCO of $36,000, which HELCO paid in January 1998. The DOH has closed this case.amended SPCC requirements.Air quality controls.The
generationgenerating stations of the utility subsidiaries operate under air pollution control permits issued by the DOH and, in a limited number of cases, by the EPA. The entire electric utility industry isbeingaffected by the 1990 Amendments to the Clean AirAct. Hawaii utilitiesAct (CAA), recent changes to the National Ambient Air Quality Standard (NAAQS) for ozone, and adoption of a NAAQS for fine particulate matter. New and proposed changes to the federal New Source Review permitting regulations, as well as new regulatory programs, if enacted, regarding global warming and mandating further reductions of certain air emissions will also pose challenges for the industry. If the Clear Skies Bill is adopted as currently proposed, HECO, and to a lesser extent, HELCO and MECO will likely incur significant capital and operations and maintenance costs beginning one to two years after enactment. HECO boilers may be affected by the air toxics provisions (Title III) of the CAA when the Maximum Allowable Control Technology (MACT) emission standards areproposedestablished forgenerationthose units.Hawaii utilities areCAA operating permits (Title V permits) have been issued for all affectedby the operating permit provisions (Title V). The DOH adopted implementing regulations on November 26, 1993generating units except for HELCO’s Keahole CT-2, for whichrequired submission of permit applications during 1994 for existing sources. All applications were filed in 1994 as required and supplementary information was filed in 1995, 1996 and 1997. Results of further air quality analyses could trigger requirements to mitigate emission impacts. Reports on emissions of air toxics could trigger requirements to conduct risk assessments. Hawaii utilities are also affected by the enforcement provisions (Title VII) which require the EPA to promulgate new regulations which mandate "enhanced monitoring" of emissions from many generation units. The EPA proposed a rule, called Compliance Assurance Monitoring (CAM), in August 1996, and a final rule was issued in October 1997. The CAM rule may require minor changes in emissions reporting procedures, however, no emission monitor retrofits will be required for HECO, HELCO and MECO. On November 1, 1989, the DOH issued a NOV indicating that Maalaea units X-1 and X-2 had exceeded operating limitations of 12 hours per day at various times in 1988. These incidents resulted from unscheduled unit outages and resulted in no net increase in emissions by MECO. Subsequently, MECO took steps to preclude future violations. An application fora permitmodification was submitted to the EPA, revising the operating hour limitation to annual rather than daily. Approval was received from the EPA in July 1992. Units X-1is currently pending.Initial and
X-2 continue to operate in compliance with the revised permit. 33Following a unit overhaul, emission compliance tests conducted for MECO's Maalaea Unit 14 in late 1995 indicated that particulate emissions were in excess of PSD permit limits. Corrective actions were taken and a retest in February 1996 confirmed that the unit returned to compliance with PSD limits. All test reports were submitted to the DOH. By letter dated July 15, 1996, the DOH indicated that a NOV will be issued for the past violations. By letter dated January 31, 1997, the DOH invited MECO to meet to discuss settlement of this and other open matters. By letter dated March 3, 1998, the DOH transmitted a draft Consent Order to MECO, resolving all open MECO air emission compliance matters which occurred from 1988 through 1996 (including the NOV for Maalaea units X-1 and X-2 described in the previous paragraph and past violations of Maalaea Unit 14). The draft Consent Order will be submitted for public comment. Under the proposed settlement, MECO will contribute $100,000 over the next two years to an environmental education program relating to air quality. Initialfollow-up source tests inDecember1989 andsubsequent retesting1990 forHELCO'sHELCO’s CT-2 generating unit indicated particulate emissions above permitted levels. Following analysis, HECO (on behalf of HELCO) proposedin November 1990that the permitted particulate limit be increased.By letter dated April 13, 1992, theEPA concurredthat revision is warranted. The DOH issued a NOV on August 17, 1992 forwith thenoncomplying emissions.recommendation. HECO and HELCO worked with the DOH, the manufacturer and a consultant to determine an appropriate new emission limit for particulates as well as oxides of nitrogen.In accordance with discussions withDOH prepared a draft permit incorporating theDOH,revised emission standards that was subject of a public hearing on January 7, 2002. EPA is currently reviewing the draft permit and HELCO anticipates EPA’s approval. CT-2 continues to operate pending issuance ofathe revised permit.On January 20,In 1998, the DOH issueda NOVtwo NOVs to HELCO fornoncomplyingearlier periods of non-complying emissions fromMarch 16, 1993 through December 20, 1994CT-2 that HELCO andfrom March 22, 1996 through November 6, 1997. HELCO paid fines totaling $22,100 inthesettlement of both the 1992 and 1998 NOV's.DOH settled. Unit CT-2 is currently operating within all existing permit limits by virtue of its having passed itsNovember 1997annual sourcetest.tests since 1997.Hazardous waste and toxic substances controls.The operations of the electric utility and former freight transportation subsidiaries are subject to regulations promulgated by the EPA to implement the provisions of the Resource Conservation and Recovery Act (RCRA), the Superfund Amendments and Reauthorization Act
(SARA)and the Toxic Substances ControlAct (TSCA). TheAct. In 2001, the DOHhas been working towards obtainingobtained primacy to operate state-authorized RCRA (hazardous waste) programs. TheDOH finalized RCRA administrative rules in mid-June 1994, with the rules becoming effective on June 18, 1994. The DOH'sDOH’s state contingency plan and the State of Hawaii Environmental Response Law (ERL) rules were adopted in August 1995.Whether on aOn both federal
orand statelevel,levels, RCRA provisions identify certain wastes as hazardous and set forth measures that must be taken in the transportation, storage, treatment and disposal of these wastes. Someof thewastes generated at steam electric generating stations possess characteristicswhich makethat subject themsubjectto these EPA regulations. Since October 1986, all HECO generating stations have operated RCRA-exempt wastewater treatment units to treat potentially regulated wastes from occasional boiler waterside and fireside cleaning operations. Steam generating stations at MECO and HELCO also operate similar RCRA-exempt wastewater management systems.In March 1990, theThe EPA
changed RCRA testing requirements used to characterizeissued awastefinal regulatory determination on May 22, 2000, concluding that fossil fuel combustion wastes do not warrant regulation as hazardouswhich potentially affectedunder Subtitle C of RCRA. This determination retains (or maintains) the existing hazardous wastegenerating statusexemption for these types ofall facilities. HECO's continuing programwastes. It also allows for more flexibility in waste management strategies. The electric utilities’ waste characterization programs continue torecharacterize all HECO, MECO and HELCO wastestreams has demonstrateddemonstrate the adequacy of the existing treatmentsystems and identified other potential compliance requirements.systems. Waste recharacterization studies indicate that treatment facility wastestreams arenonhazardous and no change in RCRA generator status is required.nonhazardous.RCRA underground storage tank (UST) regulations require all facilities with USTs used
to storefor storing petroleum products to comply with costly leak detection, spill prevention and new tank standard retrofitrequirements withinrequirements. All HECO, HELCO and MECO USTs currently meet these standards and continue in operation.The DOH conducted solid and hazardous waste compliance inspections under RCRA at HELCO’s Hill generating station (including the Kanoelehua base yard) and Puna generating station in April 2000. The DOH issued inspection reports and warning letters to HELCO for the Hill/Kanoelehua facility and the Puna facility in June and July 2000, respectively. HELCO addressed the potential deficiencies at the Hill/Kanoelehua facility and submitted a
specifiedresponse to the DOH in July 2000. The DOH issued a return to complianceperiod basedletter for this facility in late July 2000. HELCO submitted its responses to the DOH’s Puna facility’s warning letter in September and December 2000. In January 2002, the DOH issued a second warning letter regarding a regulatory interpretation issue related to used oil processing at Puna. Based ontank age. On August 5, 1996,follow-up discussions with the DOH, HELCO submitted a used oil processing permit application in March 2002 to bring closure to the used oil processing issue. In July 2002, the DOH issued a used oil processing permit to HELCO for the Puna facility. No enforcement action is anticipated.The EPA conducted
anRCRA compliance inspections at the Kahului and Maalaea generating stations in June 2001. The Kahului facility is currently considered to be in compliance with RCRA requirements. In August 2001, the EPA issued a Warning Letter to MECO for potential RCRA deficiencies at the Maalaea facility, all of which have been addressed by MECO. MECO submitted its response to the warning letter and additional requested data to the EPA in September 2001. In August 2002, the EPA issued a Certification of Violation Correction letter that stated all potential violations listed in the Warning Letter were adequately addressed and that MECO had returned to compliance.In July 1999, the DOH conducted a UST
Field Citationinspection at HECO’s Ward Avenue Complex. The DOH conducted another follow-up UST inspection at the Ward Avenuecomplex.Complex in January 2002. The facility was found to be in compliance with UST requirements in both inspections. During 2002, theinspection HECO was cited for aDOH also conducted UST inspections at MECO’s Puunana communications facility (April 2002) and Kahului baseyard (August 2002), HELCO’s Kona and Waimea baseyards (June 2002), and HECO’s Waiau (September 2002) and Kahe (November 2002) generating stations. While minorinfraction, which was immediately corrected. HECO expects to receive a NOVconcerns were raised at the Kona, Waimea anda nominal fine.Kahului baseyards, all concerns were addressed and all facilities are in compliance with UST requirements.The Emergency Planning and Community Right-to-Know Act
(EPCRA)underSARASuperfund Amendments and Reauthorization Act Title III requires HECO, MECO and HELCO to report potentially hazardous chemicals present in their facilities in order to provide the public with information on these chemicals so that emergency procedures can be established to protect the public in the event of hazardous chemical releases. All HECO, MECO and HELCO facilities are in compliance with applicable annual reporting requirements to the State Emergency Planning Commission, the Local Emergency Planning Committee and local fire departments.In September 1995, the EPA published a notice of proposed rule making to expand the types of industries required to file 34annual Toxic Release Inventory reports (i.e., to report facility releases of toxic chemicals). The final rule includesSince January 1, 1998, the steam electric industry category(effective January 1, 1998), which previously was exempt from Toxichas been subject to Toxics Release Inventory (TRI) reporting requirements.Facilities are implementing actions to comply with reporting requirements. ReleaseHECO, MECO and HELCO have timely filed release reportsfor 1998 must be filed withsince 1998. In November 2002, theEPA by July 1, 1999.Company identified several deviations in previous TRI reports. TheTSCACompany is in the process of submitting corrected reports.The Toxic Substances Control Act regulations specify procedures for the handling and disposal of polychlorinated biphenyls (PCB), a compound found in transformer and capacitor dielectric fluids. HECO, MECO and
its subsidiaries haveHELCO instituted procedures to monitor compliance with these regulations. In addition, HECOhasand its subsidiaries implemented a program to identify and replace PCB transformers and capacitors in the HECO system. In 1998, the EPA published the final rule on the PCB disposal amendments. The amended rule clarified certain procedures and provides some flexibility within the context of a complex regulatory program governing the use, handling and disposal of equipment and materials containing PCBs. The EPA believes that this rule will result in substantial cost savings to the regulated community while protecting against unreasonable risk of injury to health and the environment from exposure to PCBs. All HECO, MECO and HELCO facilities are currently believed to be in compliance with PCB regulations.In December 1994, the EPA published in the Federal Register a Proposed Rule to amend PCB disposal regulations.The
proposed rule calls for changes in determining PCB concentrations, and in marking, storage and disposal requirements. A final rule is pending. By letter dated August 21, 1992, the EPA provided MECO with a notice of potential liability and request for information relating to a federal Superfund closure investigation at the North American Environmental, Inc. (NAE) storage facility in Clearfield, Utah. MECO was identified by the EPA as a potentially responsible party for three PCB capacitors originally contracted for disposal by Westinghouse. Although Westinghouse has already disposed of the capacitors, MECO was obligated to comply with the information requests attached to the EPA notice. A preliminary response to the EPA's information request was submitted to the EPA on October 5, 1992. MECO has since received confirmation from Westinghouse that the three capacitors were removed from the NAE facility and incinerated at Aptus (an EPA-approved facility in Kansas) on September 16, 1992. By letter dated December 2, 1992, the EPA notified MECO that a draft Administrative Order on Consent (AOC) for the cleanup of the NAE facility had been sent to potentially responsible parties that have waste remaining at the NAE site and to parties that have expressed a desire to participate in the cleanup. MECO did not receive a draft AOC because the three PCB capacitors were removed from the NAE facility and incinerated. By letter dated February 8, 1993, Westinghouse confirmed that it would indemnify MECO pursuant to its contract for this matter. In early 1995, the EPA issued an AOC to the Freeport Center and the Defense Logistics Agency. Both parties are initiating corrective actions. Recovery of cleanup costs may fall back on other potentially responsible parties once cleanup is completed and costs have been determined. The Environmental Response Law of the State of Hawaii (ERL),ERL, as amended, governs releases of hazardous substances, including oil, in areas within thestate'sstate’s jurisdiction. Responsible parties under the ERL are jointly, severally and strictly liable for a release of a hazardous substance into the environment. Responsible parties include owners or operators of a facility where a hazardous substance comes to be located and any person who at the time of disposal of the hazardous substance owned or operated any facility at which such hazardous substance was disposed. The DOH issued final rules (or State Contingency Plan) implementing the ERL on August 17, 1995.Potential exposureOn July 30, 2002, personnel at MECO’s Maalaea Generating Station discovered a leak in an underground diesel fuel line. MECO immediately discontinued using the fuel line and notified the DOH of the release. MECO replaced the leaking fuel line with a temporary aboveground line and then constructed a new aboveground fuel line and concrete containment trough as a permanent replacement. MECO also notified the U.S. Fish & Wildlife Service (USFWS), which manages the Kealia Pond National Wildlife Refuge that is located south of the Maalaea facility. MECO constructed a sump at the point of the leak to
liability underremove fuel from theERL/State Contingency Plansubsurface. To date, MECO has recovered approximately 11,000 gallons of diesel fuel from the estimated 19,000-gallon release. In addition, MECO has installed soil borings and groundwater monitoring wells to assess the vertical and horizontal impacts of the fuel release. The investigation indicates that limited free phase fuel migration has occurred beneath the Maalaea facility and in a small portion of the buffer zone immediately to its south. The buffer zone isassociatedundeveloped property owned by MECO that separates the Maalaea facility from the Wildlife Refuge. Although monitoring wells indicate diesel fuel likely migrated to a small portion of the Wildlife Refuge that shares a common boundary with the facility, wells installed in the Wildlife Refuge itself indicate that migration has not been significant in that area. As a precautionary measure, with the guidance and consent of the USFWS and the DOH, MECO installed an interception trench in the buffer zone and in a small part of the Wildlife Refuge. The interception trench is designed to capture and facilitate removal of any fuel migrating from the impacted areas and to act as a barrier to migration beyond the trench. The interception trench appears to be operating as designed. Based on the results of the subsurface investigation and the location and design of the interception trench, management believes that the risk of the fuel release affecting wildlife, sensitive wildlife habitat or the ocean, which lies approximately one-quarter mile south ofregulated substances, including oil,the Maalaea facility, is minimal. MECO estimates that it will incur approximately $0.8 million to successfully remediate the impacts of the release, and expensed the $0.8 million in 2002.HECO, HELCO and MECO, like other utilities, periodically identify leaking petroleum-containing equipment such as USTs, piping and transformers. In a few instances, small amounts of PCBs have been identified in the leaking equipment. Each subsidiary reports releases from such equipment when and as required by applicable law and addresses impacts due to the
environment. For information regarding the investigation of the Honolulu Harbor area, see Note 22 to HEI's Consolidated Financial Statements and Note 12 to HECO's Consolidated Financial Statements. Both HTB and YB generate small quantities of hazardous wastes as a result of operations and equipment maintenance activities and have contracted with a firm to dispose of these wastesreleases in compliance with applicable regulatory requirements. Except as otherwise disclosed herein, theEPA regulationsCompany believes that each subsidiary’s costs of responding to any such releases to date will not have a material adverse effect, individually andthe RCRA provisions. YB, as a public carrier, also moves hazardous wastes and explosives for customers. Employees are trainedin theapplicable handling methods to assist inaggregate, on thesafe movement of these cargoes. Both HTB and YB are subject torespective subsidiary or thejurisdiction of the Coast Guard which monitors ocean activities to ensure compliance with federal regulations.Company.ASB may be subject to the provisions of
theComprehensive Environmental Response, Compensation and Liability Act (CERCLA) and regulations promulgated thereunder. CERCLA imposes liability for environmental cleanup costs on certain categories of responsible parties, including the current owner and operator of a facility and prior owners or operators who owned or operated the facility at the time the hazardous substances were released or disposed. CERCLA exempts persons whose ownership in a facility is held primarily to protect a security interest, provided that they do not participate in the management of the facility. Although there may be some risk of liability for ASB for environmental35cleanup costs in the event ASB forecloses on, and becomes the owner of, property with environmental problems, the Company believes the risk is not as great for ASB which specializes in residential lending,as it may be for other depository institutionswhichthat have a larger portfolio of commercial loans.For information about HPG, see the "Other" section in HEI's MD&A. SECURITIES RATINGS - ------------------Securities ratings
As of March
17, 1998,10, 2003, the Standard &Poor'sPoor’s (S&P), Moody'sand Moody’s InvestorsService (Moody's) and Duff & Phelps Credit Rating Co.'s (Duff & Phelps)Service’s (Moody’s) ratings ofHEI'sHEI’s andHECO'sHECO’s securities were as follows:
S&P Moody's Duff & Phelps - ------------------------------------------------------------------------------------------------------------Moody’s HEI
- ---Commercial paper
A-2 P-2 Medium-term
notes...............................notesBBB Baa2 BBB+ Commercial paper................................ A-2 P-2 Duff 2HEI-obligated preferred securities of trust
subsidiaries........................... BBB- baa3 BBBsubsidiaryBB+ Ba1 HECO
- ---- First mortgage bonds............................ A- A3 ACommercial paper
A-2 P-2 Revenue bonds
and medium-term notes.............(insured)AAA Aaa Revenue bonds (noninsured)
BBB+ Baa1 A- Cumulative preferred stock...................... BBB baa1 BBB+ Commercial paper................................ A-2 P-2 Duff 1-HECO-obligated preferred securities of trust
subsidiary............................. BBB baal BBB+subsidiariesBBB- Baa2 Cumulative preferred stock (selected series)
NR Baa3
NR Not rated. The above ratings are not recommendations to buy, sell or hold any securities; such ratings may be subject to revision or withdrawal at any time by the rating agencies; and each rating should be evaluated independently of any other rating. These ratings reflect only the view of the applicable rating agency at the time the ratings are issued, from whom an explanation of the significance of such ratings may be obtained.
Each rating should be evaluated independently of any other rating.There is no assurance that any such credit rating will remain in effect for any given period of time or that such rating will not be lowered, suspended or withdrawn entirely by the applicable rating agency if, in such ratingagency'sagency’s judgment, circumstances so warrant. Any such lowering, suspension or withdrawal of any rating may have an adverse effect on the market price or marketability ofHEIO'sHEI’s and/orHECO'sHECO’s securities, which could increase the cost of capital of HEI and HECO. Neither HEI nor HECO management can predict future rating agency actions or their effects on the future cost of capital of HEI or HECO.RESEARCH AND DEVELOPMENT - ------------------------See “Liquidity and capital resources” in HEI’s MD&A.
Revenue bonds are issued by the Department of Budget and Finance of the State of Hawaii for the benefit of HECO and its subsidiaries, but the source of their repayment are the unsecured obligations of HECO and its subsidiaries under loan agreements and notes issued to the Department, including HECO’s guarantees of its subsidiaries’ obligations. The payment of principal and interest due on several series of these revenue bonds are insured either by MBIA Insurance Corporation or by Ambac Assurance Corporation, and the ratings of those bonds are based on the ratings of the obligations of the bond insurer rather than HECO.
Research and development
HECO and its subsidiaries expensed approximately
$2.3$2.8 million,$2.1$2.6 million and$2.2$3.0 million in1997, 19962002, 2001 and1995,2000, respectively, for research and development. Contributions to the Electric Power Research Institute accounted for most of the expenses. There were also expenses in the areas of energy conservation, new technologies, environmental and emissions controls, and expenses for studies relative to technologies that are applicable or may be applicable in the future to HECO, its subsidiaries and their customers.EMPLOYEE RELATIONS - ------------------Employee relations
At December 31,
1997,2002 and 2001, the Company had3,6723,220 and 3,189 full-time employees,compared with 3,327 at December 31, 1996. The increase inrespectively, of which 44 and 47 were employeeswas primarily due to the acquisitionofmostHEI, respectively, and 1,272 and 1,200 were employees ofthe BoA Hawaii operations.ASB and its subsidiaries, respectively.HECO
At December 31,
1997 and 1996, HEI had 50 full-time employees. HECO At December 31, 1997,2002, HECO and its subsidiaries had2,1151,894 full-time employees, compared with2,1521,930 at December 31,1996. The current2001. In August 2000, certain electric utility employees ratified new collective bargainingagreement between the International Brotherhood of Electrical Workers (IBEW), Local 1260, and HECO, MECO and HELCO,agreements covering approximately63%62% of thetotalemployees ofthese companies, was extended in November 1995 forHECO, HELCO and MECO. The collective bargaining agreements(including benefit agreements) cover a
two-yearthree-year period from November 1,19962000 through October 31,1998. The extension provided for noncompounded wage increases of 3%2003 and expire at midnight onNovember 1 of each year during the term of the agreement. The IBEW and HECO, MECO and HELCO are currently in negotiations. The current benefits agreement between IBEW, Local 1260 and HECO, MECO and HELCO was also extended for a two-year period and will be in effect untilOctober 31,1998. 36HTB HTB and YB have a2003. The electric utilities expect to begin negotiations for new collective bargainingagreement with the Inlandboatmen's Union of the Pacific (IBU) effective from July 26, 1995 through July 25, 1998. A 2.5% across-the-board wage increase was effective for the first year, with 3%agreements in thesecond andthirdyears. Journeyman craftsmen were not includedquarter of 2003. See “Collective bargaining agreements” inthis new contract but were covered in YB's contract with the International Longshoremen's and Warehousemen's Union (ILWU), Hawaii Division, Local 142. The agreement covers all unionized employees of HTB and YB employed on ocean, interisland and harbor tug operations and dispatchers. It excludes office clerical employees, professional and management employees, guards and watchmen. YB has a collective bargaining agreement covering the period of July 1, 1996 through June 30, 1999 with the ILWU, Hawaii Division, Local 142. The agreement provides for a 13.4% wage increase over the three-year period. The agreement covers all regularly scheduled employees, receiving and delivery clerks on the dock loading and discharging vessels, all maintenance personnel, documentation clerks and customer service representatives employed by YB in the state. The agreement excludes professional employees, supervisory employees, guards and other clerical personnel. OTHERHECO’s MD&A.Other
The employees of HEI and its direct and indirect subsidiaries, other than the electric utilities, are not covered by any collective bargaining
agreement, except as identified above. DESCRIPTION OFagreement.
ITEM 2. PROPERTIES HEI
CAPITAL STOCK - -------------------------------- The following supplements and restates the description of HEI's Common Stock and Preferred Stock, the related rights of stockholders under the Stockholder Rights Plan adopted by the Board of Directors of HEI on October 28, 1997, and other related matters, for the purpose of updating the description thereof in registration statements filed by HEI under the Securities Exchange Act of 1934 and the Securities Act of 1933. Under HEI's Restated Articles of Incorporation (the "Articles"), HEI is authorized to issue 100,000,000 shares of Common Stock without par value ("Common Stock") and 10,000,000 shares of Preferred Stock without par value ("Preferred Stock"). The Board of Directors has authorized and designated only one series of Preferred Stock, being 500,000 shares of the Series A Junior Participating Preferred Stock, but no shares of such series have been issued, and no shares of such series are expected to be issued, unless the Rights described below under "Stockholder Rights Plan" become exercisable and are exercised. Upon issuance of any shares of the Series A Junior Preferred Stock, the rights of the holders of Common Stock of HEI will be affected as described below in the description of the Series A Junior Participating Preferred Stock. COMMON STOCK General. The outstanding shares of HEI's Common Stock are fully paid and nonassessable. Additional shares of Common Stock, when issued, will be fully paid and nonassessable when the consideration for which HEI's Board of Directors authorizes their issuance has been received. The holders of Common Stock have no preemptive rights and there are no conversion, redemption or sinking fund provisions applicable thereto. The Common Stock is listed on the New York Stock Exchange and is traded under the symbol HE. HEI's Common Stock is transferable at the Stock Transfer Office of HEI, 900 Richards Street, Honolulu, Hawaii 96813, and at the office of Continental Stock Transfer & Trust Company, Co- Transfer Agent and Registrar, 2 Broadway, New York, New York 10004. Dividend rights. Stock and cash dividends may be paid to the holders of Common Stock as and when declared by the Board of Directors, provided that, after giving effect thereto, HEI is able to pay its debts as they become due in the usual course of its business and HEI's total assets are not less than the sum of its total liabilities plus the maximum amount that would be payable in any liquidation in respect to all outstanding shares having preferential rights in liquidation. All shares of Common Stock will participate equally with respect to dividends. HEI's ability to pay dividends is now and in the future may be limited by the restrictions and limitations now and hereafter to be set forth in debt instruments, guarantees and resolutions creating series of Preferred Stock. Liquidation rights. In the event of any liquidation, dissolution, receivership, bankruptcy, disincorporation or winding up of the affairs of the Company, voluntarily or involuntarily, holders of HEI's Common Stock are entitled to any assets of HEI available for distribution to HEI's stockholders 37leases office space from a nonaffiliated lessor in downtown Honolulu after the payment in full of any preferential amounts to which holders of any Preferred Stock may be entitled. All shares of Common Stock will rank equally in the event of liquidation. Voting rights. Holders of Common Stock are entitled to one vote per share, subject to such limitation or loss of right as may be provided in resolutions which may be adopted from time to time creating issues of Preferred Stock or otherwise. At annual and special meetings of stockholders, a majority of the outstanding shares of Common Stock constitute a quorum and the affirmative vote of a majority of such quorum so present is sufficient to approve of any action except as otherwise required by law, except with respect to the amendment of certain provisions of HEI's By-laws and except as may be provided in resolutions which may be adopted from time to time creating series of Preferred Stock. Under HEI's current By-laws, one-third (as nearly as possible) of the total number of directors is elected at each annual meeting of stockholders and no holder of Common Stock is entitled to cumulate votes in an election of directors so long as HEI shall have a class of securities registered pursuant to the Exchange Act which are listed on a national securities exchange or traded over- the-counter on the National Association of Securities Dealers, Inc. Automated Quotation System. Under HEI's By-laws, directors may be removed from office only for cause. An amendment to the provisions in the By-laws relating to (1) matters which may be brought before an annual meeting, (2) matters which may be brought before a special meeting, (3) cumulative voting, (4) the number and staggered terms of members of the Board of Directors, (5) removal of directors and (6) amendment of the By-laws must in each case be approved either (a) by the affirmative vote of 80% of the shares entitled to vote generally with respect to election of directors voting together as a single class, or (b) by the affirmative vote of a majority of the entire Board of Directors plus a concurring vote of a majority of the "continuing directors" (as that term is defined in Article XVIII of the By-laws) voting separately and as a subclass of directors. The provisions of HEI's By-laws referred to in the foregoing two paragraphs, and the Stockholder Rights Plan and statutory provisions referred to below, may have the effect of delaying, deferring or preventing a change in control of HEI. Stockholder Rights Plan. On October 28, 1997, the Board of Directors of HEI adopted a Stockholder Rights Plan and declared a dividend of one Right for each share of Common Stock of HEI to stockholders of record on November 10, 1997 (the "Record Date"). As of the Record Date there were 31,734,028 shares of Common Stock outstanding. A Right will also attach to each share of Common Stock issued between the Record Date and the Distribution Date (as such term is defined below). Each Right will entitle the registered holder to purchase from HEI a unit (a "Unit") consisting of one one-hundredth of a share of Series A Junior Participating Preferred Stock without par value (the "Series A Preferred Stock"), at a purchase price of $112 per Unit (the "Purchase Price"), subject to adjustment. The description and terms of the Rights are set forth in the Rights Agreement (the "Rights Agreement"), dated as of October 28, 1997, between HEI and Continental Stock Transfer & Trust Company, as Rights Agent (the "Rights Agent"). HEI's rights plan is designed to deter coercive or unfair takeover tactics, including the gradual accumulation of shares in the open market, partial or two-tiered tender offers, and private transactions through which an acquiror gains control of HEI without offering fair value to all of HEI's stockholders. Until the Distribution Date (as defined below), (i) no separate Rights Certificates will be distributed and the Rights will be evidenced by the Common Stock certificates and will be transferred with and only with such Common Stock certificates, (ii) new Common Stock certificates will contain a notation incorporating the Rights Agreement by reference and (iii) the surrender for transfer of any certificates for Common Stock outstanding will also constitute the transfer of the Rights associated with the Common Stock represented by such certificate. The Rights will separate from the Common Stock upon the earlier of (i) 10 days following a public announcement that a person or group of affiliated or associated persons (an "Acquiring Person") has acquired, or obtained the right to acquire, beneficial ownership of 15% or more of the outstanding shares of Common Stock other than as a result of repurchases of stock by HEI (the "Stock Acquisition Date") or (ii) 10 days following the commencement of a tender offer or exchange offer that would result in a person or group becoming an Acquiring Person (the earlier of (i) and (ii), the "Distribution Date"). As soon as practicable after the Distribution Date, Rights Certificates will be mailed to holders of record of the Common Stock as of the close of business on the Distribution Date and, thereafter, the separate Rights Certificates alone will represent the Rights. 38Except as otherwise determined by the Board of Directors, only shares of Common Stock issued prior to the Distribution Date will have Rights attached. The Rights are not exercisable until the Distribution Date and will expire at the close of business on November 1, 2007 unless earlier redeemed by HEI as described below. At no time will the Rights have any voting power. In the event a person becomes an Acquiring Person, each holder of a Right will thereafter have the right to receive, upon exercise, Common Stock (or, in certain circumstances, cash, property or other securities of HEI), having a value equal to two times the Exercise Price of the Right. Notwithstanding any of the foregoing, following the occurrence of the event set forth in this paragraph (the "Flip-in Event"), all Rights that are, or (under certain circumstances specified in the Rights Agreement) were, beneficially owned by any Acquiring Person will be null and void. However, Rights are not exercisable following the occurrence of the Flip-in Event set forth above until such time as the Rights are no longer redeemable by HEI as set forth below. In the event that following the Stock Acquisition Date, (i) HEI engages in a merger or business combination transaction in which HEI is not the surviving corporation; (ii) HEI engages in a merger or business combination transaction in which HEI is the surviving corporation and the Common Stock of HEI is changed or exchanged; or (iii) 50% or more of HEI's assets or earning power is sold or transferred (all deemed "Flip-Over Events"), each holder of a Right (except Rights which have previously been voided as set forth above) shall thereafter have the right to receive, upon exercise of the Right, Common Stock of the acquiring company having a value equal to two times the Exercise Price of the Right. The Purchase Price payable, and the number of Units of Series A Preferred Stock or other securities or property issuable upon exercise of the Rights are subject to adjustment from time to time to prevent dilution (i) in the event of a stock dividend on, or a subdivision, combination or reclassification of, the Series A Preferred Stock, (ii) if holders of the Series A Preferred Stock are granted certain rights or warrants to subscribe for preferred stock or convertible securities at less than the current market price of the Series A Preferred Stock, or (iii) upon the distribution to holders of the Series A Preferred Stock of evidences of indebtedness or assets (excluding regular quarterly cash dividends) or of subscription rights or warrants (other than those referred to above). At any time until ten days following the Stock Acquisition Date, HEI may redeem the Rights in whole, but not in part, at a price of $0.01 per Right. Immediately upon the action of the Board of Directors ordering redemption of the Rights, the Rights will terminate and the only right of the holders of Rights will be to receive the redemption price of $0.01 per Right. Until a Right is exercised, the holder thereof, as such, will have no rights as a preferred stockholder of HEI, including, without limitation, the right to vote or to receive dividends. Prior to the Distribution Date, HEI may supplement or amend any provision of the Rights Agreement. After the Distribution Date, the provisions of the Rights Agreement may be supplemented or amended by the Board in order to cure any ambiguity, to make changes which do not materially adversely affect the interests of holders of Rights (excluding the interest of any Acquiring Person), to correct or supplement any defective or inconsistent provision in the Rights Agreement, or to shorten or lengthen any time period under the Rights Agreement; provided, however, that from and after the Distribution Date, no amendment to lengthen the time period governing redemption shall be made unless such lengthening is for the purpose of protecting, enhancing or clarifying the rights of, and/or the benefits to, the holders of Rights. The Rights Agreement may not be amended at a time when the Rights are not redeemable. Restriction on Purchases of Shares and Consequences of Substantial Holdings of Shares under Certain Hawaii and Federal Laws. Provisions of Hawaii and Federal law, some of which are described below, place restrictions on the acquisition of beneficial ownership of 5% or more of the voting power of HEI. The following does not purport to be a complete enumeration of all such provisions, nor does it purport to be a complete description of the statutory provisions that are enumerated. Persons contemplating the acquisition of 5% or more of the issued and outstanding shares of HEI's Common Stock should consult with their legal and financial advisors concerning statutory and other restrictions on such acquisitions. The Hawaii Control Share Acquisition Act places restrictions on the acquisition of ranges of voting power (starting at 10% and at 10% intervals up to a majority) for the election of directors of HEI unless 39the acquiring person obtains approval of the acquisition, in the manner specified in the Act, by the affirmative vote of the holders of a majority of the voting power of all shares entitled to vote, exclusive of the shares beneficially owned by the acquiring person, and consummates the proposed control share acquisition within 180 days after shareholder approval. If such approval is not obtained, the statute provides that the shares acquired may not be voted for a period of one year from the date of acquisition, the shares will be nontransferable on HEI's books for one year after acquisition and HEI, during the one-year period, shall have the right to call the shares for redemption either at the prices at which the shares were acquired or at book value per share as of the last day of the fiscal quarter ended prior to the date of the call for redemption. Under provisions of the Hawaii Business Corporation Act, subject to certain exceptions, HEI may not be a party to a merger or consolidation unless the merger or consolidation is approved by the holders of at least 75% of all of the issued and outstanding voting stock of HEI. Under provisions of Hawaii law regulating public utilities, not more than 25% of the issued and outstanding voting stock of certain public utility corporations, including Hawaiian Electric Company, Inc. ("HECO") and its wholly owned electric utility subsidiaries, may be held, directly or indirectly, by any single foreign corporation or any single nonresident alien, or held by any person, without the prior approval of the PUC. The acquisition of more than 25% of the issued and outstanding voting stock of HEI in one or more transactions might be deemed to result in the holding of more than 25% of the voting stock of HECO and its electric utility subsidiaries. In addition, HEI is subject to an agreement ("the PUC Agreement") entered into with the PUC when HECO became a wholly owned subsidiary of HEI. The PUC Agreement provides that the acquisition of HEI by a third party, whether by purchase, merger, consolidation or otherwise, requires the prior written approval of the PUC. Under the Hawaii Environmental Disclosure Law, a person and that person's affiliates who in the aggregate beneficially own 10% or more but less than 50% of the securities entitled to vote for the election of directors of HEI may not acquire more than 5% of such securities during any 12-month period without first filing an environmental disclosure statement with the Hawaii Office of Environmental Quality Control. Under the Public Utility Holding Company Act of 1935 (the "1935 Act"), any company (as defined in the 1935 Act) which owns, controls or holds with power to vote 10% or more of the outstanding voting securities of HEI may be a public utility holding company, subject to regulation under the 1935 Act, unless an exemption is available under the 1935 Act or the Securities and Exchange Commission (the "SEC"), upon application, declares such a company not to be a holding company. In addition, under the 1935 Act, no person or company may, without prior approval of the SEC, acquire 5% or more of the outstanding Common Stock or other voting securities of HEI as long as HECO remains an HEI public utility subsidiary and a public utility holding company. The Savings and Loan Holding Company Act, the Change in Bank Control Act and the Office of Thrift Supervision ("OTS") regulations place restrictions on certain types of acquisitions of control of a savings bank and its holding company. Generally, no company, or any director or officer of a savings and loan holding company, or person who owns, or controls or holds with power to vote more than 25% of the voting stock of such holding company, may acquire control of a savings bank insured by the Federal Deposit Insurance Corporation or its holding company, without the prior written approval of the OTS. In addition, no person (other than certain persons affiliated with a savings and loan holding company) may acquire control of a savings bank or savings and loan holding company, unless the OTS has been given 60 days' prior written notice of the acquisition and has not objected to it. As a result of HEI's indirect ownership of American Savings Bank, F.S.B. ("ASB"), the acquisition of control of HEI, HEI Diversified, Inc. ("HEIDI") or ASB may be subject to the requirement of prior written OTS approval or 60 days' prior written notice to the OTS, unless such transaction would be exempt from such requirements under federal law or regulation. "Control" in this context means the acquisition of, control of, or holding proxies representing, more than 25% of the voting shares of HEI, HEIDI or ASB, or the power to control in any manner the election of a majority of the directors thereof. Moreover, under OTS regulations, one would be determined, subject to rebuttal, to have acquired control if one acquires more than 10% of the voting shares of HEI, HEIDI or ASB and is subject to one of certain specified "control factors." Anyone acquiring more than 10%, or additional stock above 10%, of any class of shares of HEI, HEIDI or ASB is required to file a certification with the OTS. 40Under the Jones Act, it is unlawful to transport merchandise between points in the U.S. except in vessels owned by U.S. citizens. For a corporation to demonstrate U.S. citizenship, it must be incorporated under the laws of the United States or a state thereof, its chief executive officer and board chairman must be U.S. citizens, a majority of its directors must be U.S. citizens and at least 75% of its voting stock must be owned by U.S. citizens. If less than 75% of the Common Stock of HEI (which is the only class of voting stock presently outstanding) is owned by U.S. citizens, the vessels of HTB and YB would not be permitted to engage in transport between points in Hawaii. Dividend Reinvestment and Stock Purchase Plan. Any individual of legal age or entity is eligible to participate in the HEI Dividend Reinvestment and Stock Purchase Plan (the "Plan") by making an initial cash investment in Common Stock, subject to applicable laws and regulations and the requirements of the Plan. Holders of Common Stock, and preferred stock of HEI's electric utility subsidiaries (HECO, MECO and HELCO), may automatically reinvest some or all of their dividends to purchase additional shares of Common Stock at market prices (as defined in the Plan). Participants in the Plan may also purchase additional shares of Common Stock at market prices (as defined in the Plan) by making cash contributions to the Plan. HEI reserves the right to suspend, modify or terminate the Plan at any time. Shares of Common Stock issued under the Plan may either be newly issued shares or shares purchased by the Plan on the open market. Participants do not pay brokerage commissions or service charges in connection with purchases of newly issued shares, but do pay their pro rata share of brokerage commissions if the shares are purchased by the Plan for participants on the open market. PREFERRED STOCK Authorized Preferred Stock. Preferred Stock may be issued by the Board of Directors in one or more series, without action by stockholders and with such preferences, voting powers, restrictions and qualifications as may be fixed by resolution of the Board of Directors authorizing the issuance of such shares. Under current Hawaii law, the terms and provisions of all shares of Preferred Stock must be identical except with respect to dividend rates, redemption and redemption prices, amounts payable in liquidation, sinking fund provisions, conversion privileges, if any, and voting rights, if any. If and when authorized by the Board of Directors, any such Preferred Stock may be preferred as to dividends or in liquidation, or both, over the Common Stock. For example, the terms of the Preferred Stock, if and when authorized, could prohibit dividends on shares of Common Stock until all dividends and any mandatory redemptions have been paid with respect to shares of Preferred Stock. In addition, the Board of Directors may, without stockholder approval, issue Preferred Stock with voting and conversion rights which could adversely affect the voting power or economic rights of the holders of Common Stock. Issuance of Preferred Stock by HEI could thus have the effect of delaying, deferring or preventing a change of control of HEI. The first and only series of Preferred Stock that has been authorized by the Board of Directors as of the date hereof is the Series A Junior Participating Preferred Stock. Series A Junior Participating Preferred Stock. On October 28, 1997, the Board of Directors of HEI authorized a series of 500,000 shares of Preferred Stock, designated the Series A Junior Participating Preferred Stock. The Series A Junior Participating Preferred Stock is without par value, and was created in conjunction with the Board's adoption of the Rights Agreement between HEI and Continental Stock Transfer & Trust Company, as Rights Agent. No shares of Series A Junior Participating Preferred Stock have been issued. The Series A Junior Participating Preferred Stock may be purchased under certain circumstances, as set forth in the Rights Agreement. The exercise price for one one-hundredth of a share of Series A Junior Participating Preferred Stock is $112, subject to adjustment. The Series A Junior Participating Preferred Stock ranks junior to all other series of Preferred Stock as to the payment of dividends and distribution of assets, unless the terms of any such series provide otherwise. If declared by the Board of Directors out of funds legally available therefor, the dividend rate for the Series A Junior Participating Preferred Stock is the greater of $61.00 per quarter, or 100 times the then current quarterly dividend per common share (as adjusted from time to time to reflect stock dividends, subdivisions or combinations). Whenever quarterly dividends on the Series A Junior Participating Preferred Stock are in arrears, dividends or other distributions may not be made on the Common Stock or on any series of Preferred Stock ranking junior to the Series A Junior Participating Preferred Stock. Upon liquidation, no holders of shares ranking junior to the Series A Junior Participating Preferred Stock shall receive any distribution until all holders of the Series A Junior Participating Preferred Stock shall have received $100 per share, plus any unpaid dividends (the "Series A Liquida- 41tion Preference"). Following payment of the Series A Liquidation Preference, no additional distributions shall be made to the holders of Series A Junior Participating Preferred Stock unless holders of Common Stock receive an amount equal to the Series A Liquidation Preference divided by 100, as adjusted, and thereafter (and after taking into account any amounts that may then be due to holders of any other series of Preferred Stock) the holders of the Series A Junior Participating Preferred Stock shall be entitled to share in the remaining assets of HEI with the holders of the Common Stock, ratably on a per share basis. In the event that there are not sufficient assets available to permit payment in full of the Series A Liquidation Preference and the liquidation preferences of all other series of Preferred Stock, if any, which rank on a parity with the Series A Junior Participating Preferred Stock, then such remaining assets shall be distributed ratably to the holders of such parity shares in proportion to their respective liquidation preferences. Each share of Series A Junior Participating Preferred Stock shall entitle the holder thereof to 100 votes, as may be adjusted from time to time, on all matters submitted to a vote of the stockholders of HEI, voting together with the Common Stock. If dividends on any Series A Junior Participating Preferred Stock are in arrears in an amount equal to six quarterly dividends, then until dividends for all previous quarters and for the current quarter have been declared and paid or set aside for payment, the holders of Series A Junior Participating Preferred Stock, voting as a class with holders of other series of Preferred Stock who are then entitled to vote thereon, shall also have the right to elect two directors to HEI's Board of Directors. The shares of Series A Junior Participating Preferred Stock are not redeemable. ITEM 2. PROPERTIES HEIand - --- thisunder a lease that expires on March 31,2001.2006. HEI alsoleasessubleases office space from HECO in downtown Honolulu. The properties ofHEIOsHEI’s subsidiaries are as follows:ELECTRIC UTILITY - ----------------Electric utility
See page 5 for the
"Generation statistics"“Generation statistics” of HECO and its subsidiaries, including generating and firm purchased capability, reserve margin and annual load factor.The electric utilities’ overhead and underground transmission and distribution systems (with the exception of substation buildings and contents) have a replacement value roughly estimated at $2 billion and are uninsured because the amount of transmission and distribution system insurance available is limited and the premiums are extremely high.
Electric lines are located over or under public and nonpublic properties. Most of the leases, easements and licenses for HECO’s, HELCO’s and MECO’s lines have been recorded.
HECO owns and operates three generating plants on the island of Oahu at
- ----Honolulu, Waiau and Kahe, with an aggregate generating capability of 1,263 MW at December 31,1997.2002. The three plants are situated on HECO-owned land having a combined area of 535acres.acres and one 3 acre parcel of land under a lease expiring December 31, 2018. In addition, HECO owns a total of127123 acres of land on whichare locatedsubstations, transformer vaults, distribution baseyards and the Kalaeloa cogenerationfacility. Electric linesfacility arelocated over or under public and nonpublic properties. Most of HECO's leases, easements and licenses have been recorded.located.HECO owns overhead transmission lines, overhead distribution lines, underground cables,
fullypoles (fully owned or jointlyowned polesowned) and steel or aluminum high voltage transmission towers. The transmission system operates at 46,000 and 138,000 volts. The total capacity ofHECO'sHECO’s transmission and distribution substations was6,411,0006,617,500 kilovoltamperes at December 31,1997.2002.HECO owns
a buildingbuildings and approximately 11.5 acres of land located in Honolulu which houses its operating, engineering and information services departments and a warehousing center. It also leases an office building and certain office spaces in Honolulu. The lease for the office building expires in November 2004, with an option to further extend the lease to November2012.2014. The leases for certain office spaces expire on various dates through November 30,20042007 with options to extend to various dates through November 30,2014.2017.HECO owns 19.2 acres of land at Barbers Point used to situate fuel oil storage facilities with a combined capacity of 970,700 barrels. HECO also owns fuel oil tanks at each of its plant
sitesites with a total maximum usable capacity of 844,600 barrels.MECOowns and operates two generating plants on the island of Maui, at Kahului
- ----and Maalaea, with an aggregate generating capability of191.5234.1 MW as of December 31,1997.2002. The plants are situated on MECO-owned land having a combined area of 28.6 acres. MECO also owns fuel oil storage facilities at these sites with a total maximum usable capacity of172,000176,355 barrels.MECO'sMECO owns two 1 MW stand-by diesel generators and a 4,000 gallon fuel storage tank located in Hana. MECO owns 65.7 acres of undeveloped land at Waena.MECO’s administrative offices and engineering and distribution departments are located on 9.1 acres of MECO-owned land in Kahului.
42MECO also owns and operates smaller distribution
andsystems, generation systems (with an aggregate capability of 22.4 MW as of December 31, 2002) and fuel storage facilities on the islands of Lanai andMolokai.Molokai, primarily on land owned by MECO.HELCO owns and operates five generating plants on the island of Hawaii. These
- -----plants at Hilo (2), Waimea, Kona and Puna have an aggregate generating capability of157.4150.5 MW as of December 31,19972002 (excluding two small run-of-river hydro units and one small windfarm). The plants are situated on HELCO-owned land having a combined area of approximately 43 acres. HELCO also owns6.06 acres of land in Kona, which is used for a baseyard, anditone acre of land in Hilo, which houses its administrative offices. HELCO also leases4.04 acres of land for its baseyard inHilo. TheHilo under a leaseexpiresexpiring in 2030. The deeds to the sites located in Hilo contain certain restrictions which do not materially interfere with the use of the sites for public utility purposes. HELCOleasesoccupies 78 acres of land for thewindfarm. The properties of HELCO are subjectwindfarm, pursuant to afirst mortgage securing HELCO's outstanding first mortgage bonds, which amounted to $5 million as of December 31, 1997. SAVINGS BANK - ------------long-term operating agreement.Bank
ASB owns its executive office building
locatedin downtown Honolulu and land and- ---anoffice buildingoperations center in the Mililani Technology Park on Oahu. ASB also leases space in an executive office building in downtown Honolulu.The following table sets forth
certaininformation with respect to bank branches owned and leased by ASBand its subsidiariesat December 31,1997.
Number of branches --------------------------------------------------- Owned Leased Total - ---------------------------------------------------------------------------------------------------------Oahu.................................................. 11 37 48 Maui.................................................. 3 4 7 Kauai................................................. 3 3 6 Hawaii................................................ 2 5 7 Molokai............................................... -- 1 1 --------------------------------------------------- 19 50 69 ===================================================The2002.
Number of branches Owned Leased Total Oahu
10 39 49 Maui
3 5 8 Kauai
3 3 6 Hawaii
2 5 7 Molokai
— 1 1 18 53 71 At December 31, 2002, the net book value of branches and office facilities is approximately
$49$41 million. Of this amount,$39$35 million represents the net book value of the land and improvements for the branches and office facilities owned by ASB and$10$6 million represents the net book value ofASB'sASB’s leasehold improvements.OTHER - ----- FREIGHT TRANSPORTATION - ---------------------- HTB owned seven tugboats rangingThe leases expire on various dates from1,430 to 3,400 HP, two tenders (auxiliary boats) of 500 HPApril 2003 through April 2033 andtwo flatdecked barges as of December 31, 1997. HTB owns no real property, but rents on a month-to-month basis its pier property used in its operations from the State of Hawaii under a revocable permit. YB, HTB's subsidiary, owned five tugboats, two doubledecked and seven flatdecked barges and most of its shoreside equipment, including 20-foot containers, chassis, 20-foot and 40-foot refrigerated containers, container vans, hi-lifts, flatracks, automobile racks and other related equipment as of December 31, 1997. YB owns no real property, but rents on a month-to-month basis or leases various pier properties and warehouse facilities from the State of Hawaii under revocable permits or five-year leases. It is expected that leases will be renegotiated as necessary. REAL ESTATE DEVELOPMENT - ----------------------- MPC. See Item 1, "Business--Other--Real estate--Malama Pacific Corp." MDC, MPC's subsidiary, owns land adjacent to HECO's Ward Avenue facility on Oahu. In 1996, the sale of 0.23 acresmany of theproperty was completed. The remaining 1.04 acres is leased to HECO and other commercial tenants. OTHER - ----- HEIIC. Seeleases have extension provisions.
ITEM 3. LEGAL PROCEEDINGS Except as identified in “Item 1. Business,” including information incorporated by reference in Item 1,
"Business--Other--HEI Investment Corp." 43As of March 17, 1998, HEIPC leases office space in downtown Honolulu. HEIPC also operates generating units at a facility in Tanguisson, Guam. See Item 1, "Business--Other--HEI Power Corp." ITEM 3. LEGAL PROCEEDINGS Except as provided for below and in "Item 1. Business,"there are no known material pending legal proceedingsother than ordinary routine litigation incidental to their respective businesses,to which HEI or any of its subsidiaries is a party orofto which any of their property isthesubject.DISCONTINUED OPERATIONS - -----------------------Certain HEI subsidiaries are involved in ordinary routine litigation incidental to their respective businesses.Discontinued operations
See Note
2013 toHEI'sHEI’s Consolidated FinancialStatements, incorporated herein by reference to page 63 of HEI's 1997 Annual Report to Stockholders, portions of which are filed herein as HEI Exhibit 13. In December 1994, five insurance agencies, which had served as insurance agents for the HIG Group, filed a complaint against HEI, HEIDI and others. The complaint set forth several causes of action, including breach of contract and piercing the corporate veil. The plaintiffs asked for relief from the defendants, including compensatory damages for lost commissions, business and profits, and punitive damages. In 1995, the court granted defendants' motion for summary judgment dismissing all claims. Judgment has been entered, plaintiffs have appealed and all appellate briefs have been filed. In the opinion of management, losses, if any, resulting from the ultimate outcome of the lawsuit will not have a material adverse effect on the Company's financial condition, results of operations or liquidity. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERSStatements.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS HEI and HECO:
During the fourth quarter of
1997,2002, no matters were submitted to a vote of security holders of the Registrants.EXECUTIVE OFFICERS OF
HEITHE REGISTRANT (HEI)The following persons are, or may be deemed to be, executive officers of HEI. Their ages are given as of February
18, 199812, 2003 and their years of company service are given as of December 31,1997.2002. Officers are appointed to serve until the meeting of the HEI Board of Directors after the next Annual Meeting of Stockholders (which will occur on April28, 1998)22, 2003) and/or until their successors have been appointed and qualified (or until their earlier resignation or removal). Company service includes service with an HEI subsidiary.
Business experienceHEI Executive Officers
Business experience
for past five years- ------------------------------------------------------------------------------------------------------Robert F. Clarke, age
55 President and Chief Executive Officer............................................ 1/91 to date Director......................................................................... 4/89 to date (Company service: 10 years) T. Michael May, age 51 Senior Vice President and Director............................................... 9/95 to date (Company service: 5 years) Mr. May is also60Chairman of the Board, President and Chief Executive Officer
of HECOPresident and
served as HECO Senior Vice President from 2/92Chief Executive OfficerDirector
(Company service: 15 years)
9/98 to date
1/91 to 8/
95. Robert F. Mougeot,984/89 to date
Eric K. Yeaman, age
5535Financial Vice President, Treasurer and Chief Financial
Officer.............................Officer(Company service: none)
Eric K. Yeaman, prior to joining HEI, served as Chief Operating and Financial Officer of Kamehameha Schools from 4/02 to 1/03, Chief Financial Officer of Kamehameha Schools from 7/00 to 4/02 and Senior Manager – Audit and Advisory Services of Arthur Andersen LLP (at Arthur Andersen LLP from 9/89 to 7/00).
01/03 to date (Company service: 9 years)Peter C. Lewis, age
6368Vice President
- Administration..................................................– Administration and Corporate SecretaryVice President – Administration
(Company service: 34 years)
1/99 to date
10/89 to
date (Company service: 29 years)12/98Charles F. Wall, age
5863Vice President and Corporate Information
Officer.................................Officer(Company service: 12 years)
7/90 to date (Company service: 7 years)44
Business experience HEI Executive Officers for past five years - ------------------------------------------------------------------------------------------------------ (continued)Andrew I. T. Chang, age
5863Vice President
-– GovernmentRelations.......................................Relations(Company service: 17 years)
4/91 to date (Company
HEI Executive Officers
Business experience
for past five years(continued)
Curtis Y. Harada, age 47
Controller
(Company service: 13 years)
1/91 to date T. Michael May, age 56
President and Chief Executive Officer, Hawaiian Electric Company, Inc.
Director, Hawaiian Electric Industries, Inc.
Senior Vice President, Hawaiian Electric Industries, Inc.
(Company service: 10 years)
9/95 to date
9/95 to date
9/95 to 4/01
Constance H. Lau, age
45 Treasurer................................................................... 4/89 to date (Company service: 13 years) Curtis Y. Harada, age 42 Controller.................................................................. 1/91 to date (Company service: 8 years) Betty Ann M. Splinter, age 52 Secretary................................................................... 10/89 to date (Company service: 23 years) Wayne K. Minami, age 5550President and Chief Executive Officer, American Savings Bank,
F.S.B......... 1/87F.S.B.Director, Hawaiian Electric Industries, Inc
Senior Executive Vice President and Chief Operating Officer,
American Savings Bank, F.S.B.
Treasurer, Hawaiian Electric Industries, Inc.
(Company service: 18 years)
6/01 to date
(Company service: 11 years)6/01 to date
12/99 to 6/01
4/89 to 10/99
HEI'sHEI’s executive officers, with the exception of Charles F. Wall and Andrew I. T. Chang, are also officers and/or directors of one or more of
HEI'sHEI’s subsidiaries. Mr.Minami isMay and Ms. Lau are deemedanto be executiveofficerofficers of HEI for purposes of this Item under the definition of Rule 3b-7 of theSEC'sSEC’s General Rules and Regulations under the Securities Exchange Act of 1934.There are no family relationships between any executive officer of HEI and any other executive officer or director of HEI, or any arrangement or understanding between any executive officer and any person pursuant to which the officer was selected.
PART II
------- ITEM 5. MARKET FOR REGISTRANTS' COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
ITEM 5. MARKET FOR REGISTRANTS’ COMMON EQUITY AND RELATED STOCKHOLDER MATTERS HEI:
The information required by this item is incorporated herein by reference to pages
62 and 653, 73 (Note18, "Regulatory11, “Regulatory restrictions on netassets"assets”) andNote 23, "Quarterly77 to 78 (Note 15, “Quarterly information (unaudited)" to HEI's”) of HEI’s Consolidated FinancialStatements) and page 25 of HEI's 1997 Annual Report to Stockholders, portions of which are filed herein as HEI Exhibit 13.Statements. Certain restrictions on dividends and other distributions of HEI are described in this report under"Item“Item 1.Business--Business—Regulation and othermatters--Restrictionsmatters—Restrictions on dividends and other distributions." The” HEI’s common stock is traded on the New York Stock Exchange and the total number of holders of record of HEI common stock as of March13, 1998,10, 2003, was20,146.14,459.In 2002, HEI issued an aggregate of 8,500 shares of unregistered common stock pursuant to the HEI 1990 Nonemployee Director Stock Plan, as amended and restated effective May 1, 2002 (the HEI Nonemployee Director Plan). Under the HEI Nonemployee Director Plan, each HEI nonemployee director receives, in addition to an annual cash retainer, an annual stock grant of 600 shares of HEI common stock (1,000 shares for the first time grant to a new HEI director) and each nonemployee subsidiary director who is not also an HEI nonemployee director receives an annual stock grant of 300 shares of HEI common stock. The HEI Nonemployee Director Plan is currently the only plan for nonemployee directors and provides for annual stock grants (described above) and annual cash retainers for nonemployee directors of HEI and its subsidiaries.
In 2001 and 2000, HEI issued an aggregate of 62,325 and 78,820 shares of unregistered common stock, respectively, pursuant to the HEI 1999 Nonemployee Company Director Stock Grant Plan (the HEI 1999 Nonemployee Director Plan), the HEI 1990 Nonemployee Director Stock Plan, amended effective April 27, 1999 (the Subsidiary Director Plan) and the Team Incentive Plan. Under the HEI 1999 Nonemployee Director Plan, each HEI nonemployee director received an annual stock grant of 300 shares of HEI common stock. Under the
Subsidiary Director Plan, 60% of the annual retainer payable to nonemployee subsidiary directors was paid in HEI common stock. Under the Team Incentive Plan, eligible employees of HECO, MECO and HELCO received awards of HEI common stock based on the attainment of performance goals by their respective companies. In early 2001, the Team Incentive Plan was terminated. Effective May 1, 2002, the provisions of the HEI 1999 Nonemployee Director Plan and the Subsidiary Director Plan were restated as the HEI Nonemployee Director Plan.
HEI did not register the shares issued under the director stock plans since their issuance 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. HEI did not register the shares issued under the Team Incentive Plan 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 were 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 was paid by such employees to their respective companies for the shares.
Equity compensation plan information
The following table sets forth information as of December 31, 2002 about HEI common stock that may be issued upon the exercise of awards granted under all of the Company’s equity compensation plans.
Plan category
(a)
Number of securities
to be issued upon
exercise ofoutstanding options,
warrants and rights (1)(b)
Weighted-average
exercise price of
outstanding options,
warrants and rights(c)
Number of securities remaining
available for future issuance
under equity compensation plans
(excluding securities reflected in
column (a)) (2)Equity compensation plans approved by shareholders
731,451 $ 36.62 541,978
(1) This represents the number of shares under options outstanding as of December 31, 2002 and dividend equivalent shares accrued as of December 31, 2002 under such options.
(2) This represents the number of shares remaining available as of December 31, 2002, including 498,739 under the 1987 Stock Option and Incentive Plan and 43,239 under the HEI Nonemployee Director Plan.
NA Not applicable HECO:
The information required with respect to
"Market information"“Market information” and"holders"“holders” is notapplicable.applicable to HECO. Since the corporate restructuring on July 1, 1983, all the common stock of HECO has been held solely by its parent, HEI, and is not publicly traded.45The dividends declared and paid on
HECO'sHECO’s common stock for the four quarters of19972002 and19962001 were as follows:
Quarters ended 1997 1996 - --------------------------------------------------------------------------------------------March 31................................................ $15,062,000 $11,054,000 June 30................................................. 12,873,000 13,154,000 September 30............................................ 13,586,000 14,916,000 December 31............................................. 16,856,000 17,879,000
Quarters ended
2002 2001 March 31
$ 9,233,000 $ — June 30
10,180,000 — September 30
11,925,000 17,037,000 December 31
12,805,000 19,272,000 The discussion of regulatory restrictions on
net assetsdistributions is incorporated herein by reference to page2947 (Note1312 toHECO'sHECO’s Consolidated Financial Statements,"Regulatory“Regulatory restrictions on distributions toparent"parent”) ofHECO's 1997HECO’s AnnualReport to Stockholder, portions of which are filed herein as HECO Exhibit 13. ITEM 6. SELECTED FINANCIAL DATAReport.
ITEM 6. SELECTED FINANCIAL DATA HEI:
The information required by this item is incorporated herein by reference to page
253 ofHEI's 1997HEI’s AnnualReport to Stockholders, portions of which are filed herein as HEI Exhibit 13.Report.HECO:
The information required by this item is incorporated herein by reference to page
24 ofHECO's 1997HECO’s AnnualReport to Stockholder, portions of which are filed herein as HECO Exhibit 13. ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL and ITEM 7A. CONDITION AND RESULTS OF OPERATIONS AND QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKSReport.
ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS HEI:
The information required by this item is set forth in HEI's MD&A, incorporated herein by reference to pages 27 to 39 of HEI's 1997 Annual Report to Stockholders, portions of which are filed herein as HEI Exhibit 13. HECO: The information required by this item is set forth in HECO's MD&A, incorporated herein by reference to pages 3 to 11 of HECO's 1997 Annual Report to Stockholder, portions of which are filed herein as HECO Exhibit 13. HECO is not required to provide "Quantitative and Qualitative Disclosures About Market Risks" in this Form 10-K. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA HEI: The information required by this item is incorporated herein by reference to the section entitled "Segment financial information" on page 26 and to pages 40 to 65 of HEI's 1997 Annual Report to Stockholders, portions of which are filed herein as HEI Exhibit 13. HECO:The information required by this item is incorporated herein by reference to pages
124 to3431 ofHECO's 1997HEI’s AnnualReportReport.HECO:
The information required by this item is incorporated herein by reference to
Stockholder, portionspages 5 to 21 ofwhich are filedHECO’s Annual Report.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK HEI:
The information required by this item is incorporated herein
as HECO Exhibit 13. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSUREby reference to pages 31 to 36 of HEI’s Annual Report.HECO:
The information required by this item is incorporated herein by reference to page 22 of HECO’s Annual Report.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA HEI:
The information required by this item is incorporated herein by reference to pages 37 to 78 of HEI’s Annual Report.
HECO:
The information required by this item is incorporated herein by reference to pages 23 to 57 of HECO’s Annual Report.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE HEI and HECO:
None
46PART III
-------- ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANTS
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANTS HEI:
Information for this item concerning the executive officers of HEI is set forth on pages
4451 and4552 of this report. The list of current directors of HEI is incorporated herein by reference to page6679 ofHEI's 1997HEI’s AnnualReport to Stockholders, portions of which are filed herein as HEI Exhibit 13.Report. Information on the currentdirectors'directors’ business experience and directorships is incorporated herein by reference to pages413 to615 ofHEI's DefinitiveHEI’s 2003 ProxyStatement, prepared forStatement. Information on theAnnual Meeting of Stockholders to be held on April 28, 1998. There are no family relationships between any directorremuneration of HEIand any other executive officer or director of HEI, or any arrangement or understanding between any director and any person pursuant to which the director was selected. The information required under this item by Item 405 of Regulation S-KDirectors is incorporated herein by reference topage 11pages 17 to 18 ofHEI's DefinitiveHEI’s 2003 ProxyStatement, preparedStatement.In connection with its periodic review of corporate governance trends and best practices, the HEI Board of Directors adopted a Revised Code of Conduct, including the code of ethics for, among others, the
Annual Meetingchief executive officer and senior financial officers ofStockholdersHEI, which may be viewed on HEI’s website atwww.hei.com.Section 16(a) beneficial ownership reporting compliance
For information required to be
held on April 28, 1998.reported under this caption, see page 21 of HEI’s 2003 Proxy Statement.HECO:
The following persons are, or may be deemed to be, executive officers of HECO. Their ages are given as of February
18, 199812, 2003 and their years of company service are given as of December 31,1997.2002. Officers are appointed to serve until the meeting of the HECO Board of Directors after the next HECO Annual Meeting (which will occuronin April28, 1998)2003) and/or until their respective successors have been appointed and qualified (or until their earlier resignation or removal). Company service includes service with HECO affiliates.
Business experienceHECO Executive Officers
Business experience
for past five years- --------------------------------------------------------------------------------------------------------Robert F. Clarke, age
5560Chairman of the
Board........................................................Board1/91 to date (Company(Company service:
1015 years)T. Michael May, age
5156President, Chief Executive Officer and
Director..............................Director9/95 to date Senior Vice President........................................................ 2/92 to 8/95Chairman of the Board, MECO and
HELCO........................................HELCO9/95 to date (Company(Company service:
510 years)Robert A. Alm, age 51
Senior Vice President – Public Affairs
7/01 to date (Company service: 1 year)
Robert A. Alm, prior to joining HECO, served as Executive Vice President of Financial Management Group at First Hawaiian Bank from 1/99 to 6/01 and Senior Vice President of Financial Management Group at First Hawaiian Bank from 2/96 to 12/98.
Thomas L. Joaquin, age 59
Senior Vice President – Operations
7/01 to date Vice President – Power Supply
7/95 to 06/01 (Company service: 29 years)
HECO Executive Officers
Business experience for
past five years(continued)
Karl E. Stahlkopf, age 62
Senior Vice President – Energy Solutions and Chief Technology Officer
5/02 to date (Company service: 8 months)
Karl E. Stahlkopf, prior to joining HECO, served as Vice President – Power Delivery and Utilization of the Electric Power Research Institute from 1/01 to 5/02; President and CEO of EPRI Solutions from 01/99 to 01/01; and Vice President – Energy Delivery and Utilization of the Electric Power Research Institute from 1/97 to 1/99.
William A. Bonnet, age 59
Vice President – Government & Community Affairs
5/01 to date President, Maui Electric Company, Inc
9/96 to 5/01 (Company service: 17 years)
Jackie Mahi Erickson, age
5762Vice President
-& General Counsel3/03 to date Vice President – Customer Operations & General Counsel
10/98 to 3/03 Vice President – General Counsel & Government
Relations......................Relations9/95 to date Vice President - Corporate Counsel........................................... 2/91 to 8/95 (Company9/98(Company service:
1721 years)Charles M. Freedman, age
5156Vice President
-– CorporateRelations.........................................Relations3/98 to date Vice President
-– CorporateExcellence........................................Excellence7/95 to 2/98 (Company service: 11 years)
Chris M. Shirai, age 55
Vice President
- Corporate Relations......................................... 5/92– Energy Delivery12/99 to 6/95 (CompanydateManager, Engineering Department
7/96 to 11/99 (Company service:
733 years)Edward Y. Hirata,Thomas C. Simmons, age
6454Vice President
- Regulatory Affairs..........................................– Power Supply2/02 to date Manager, Power Supply
7/95 to date2/02(Company service: 31 years)
Richard A. von Gnechten, age 39
Financial Vice President
- Planning....................................................12/ 9100 to6/95 Vice President, MECOdateAssistant Treasurer and
HELCO............................................... 12/91Manager, Financial Services5/00 to date (Company11/00Manager, Customer Service
12/96 to 5/00 (Company service: 11 years)
47
Business experienceHECO Executive Officers
Business experience
for past five years- --------------------------------------------------------------------------------------------------------(continued)
Thomas J. Jezierny, age 53 Vice President - Energy Delivery............................................. 9/96 to date President, MECO.............................................................. 4/90 to 8/96 (Company service: 27 years) Thomas L. Joaquin, age 54 Vice President - Power Supply................................................ 7/95 to date Vice President - Operations.................................................. 5/94 to 6/95 General Manager, Production.................................................. 11/93 to 4/94 Manager, Production.......................................................... 10/92 to 10/93 (Company service: 24 years) Richard L. O'Connell, age 68 Vice President - Customer Operations......................................... 7/95 to date Vice President - Customer Relations.......................................... 2/91 to 6/95 (Company service: 17 years) Paul A. Oyer, age 57 Financial Vice President and Treasurer....................................... 4/89 to date Director..................................................................... 4/85 to date Financial Vice President and Treasurer, MECO and HELCO....................... 3/85 to date (Company service: 31 years)Patricia U. Wong, age
4146Vice President
-– CorporateExcellence........................................Excellence3/98 to date Manager, Environmental
Department............................................ 9/Department10/96 to 2/98 Associate General Counsel, Legal Department.................................. 5/90(Company service: 12 years)
Lorie Ann K. Nagata, age 44
Treasurer
12/00 to 9/96 (CompanydateManager, Management Accounting
5/98 to date Assistant Treasurer
3/97 to 11/00 Director, Management Accounting
12/94 to 4/98 (Company service:
720 years)Ernest T. Shiraki, age
50 Controller...................................................................55Controller
5/89 to date (Company(Company service:
2833 years)Molly M. Egged, age
47 Secretary....................................................................52Secretary
10/89 to date Secretary, MECO and HELCO.................................................... 10/89 to date (Company(Company service:
1722 years)HECO'sHECO’s executive officers, with the exception of Robert A. Alm, Jackie Mahi Erickson, Charles M. Freedman, Thomas L. Joaquin, Chris M. Shirai, Thomas C. Simmons and Patricia U. Wong, are also officers and/or directors of MECO, HELCO or Renewable Hawaii, Inc. HECO executive officers Robert F. Clarke, T. Michael May and Molly M. Egged are also officers of one or more of the affiliated nonutility HEI companies.
There are no family relationships between any executive officer or director of HECO and any other executive officer or director of HECO, or any arrangement or understanding between any director and any person pursuant to which the director was selected.
In connection with its periodic review of corporate governance trends and best practices, the HEI Board of Directors adopted a Revised Code of Conduct, including the code of ethics for, among others, the chief executive officer and senior financial officers of HECO, which may be viewed on HEI’s website atwww.hei.com.
HECO Board of Directors
The list of current directors of HECO is incorporated herein by reference to page
3659 ofHECO's 1997HECO’s AnnualReport to Stockholder, portions of which are filed herein as HECO Exhibit 13.Report. Information on the business experience and directorships of HECO directorsof HECOwho are also directors of HEI is incorporated herein by reference to pages4 through 613 to 15 ofHEI's DefinitiveHEI’s 2003 ProxyStatement, prepared for the Annual Meeting of Stockholders to be held on April 28, 1998. Paul C. Yuen, age 69, andStatement.Anne M. Takabuki
age 41,and Barry K. Taniguchi, ages 46 and 55, as of February18, 199812, 2003, respectively, are the onlyoutsidenonemployee directors of HECO who are not directors of HEI.Dr. Yuen, who was elected a director of HECO in April 1993, is Dean of the College of Engineering at the University of Hawaii-Manoa. In the past five years, he has held various administrative positions at the University of Hawaii-Manoa. He also serves on 48the board of Cyanotech Corporation. MissMs. Takabuki was elected a director of HECO in April 1997 and is Vice President/Secretary and General Counsel of Wailea Golf Resort, Inc. She also serves on the boards ofMECO,Wailea Golf Resort, Inc. and its affiliated companies,andMAGBA, Inc.Informationand Kapiolani Medical Foundation and is a member of the advisory Board of Directors of MECO. Mr. Taniguchi was elected a director of HECO in April 2001 and is President of KTA Super Stores. He also serves onMr. Oyer's business experiencethe boards of ASB, Puna Plantation Hawaii, Limited, anddirectorshipK. Taniguchi, Ltd. and isindicated above. ITEM 11. EXECUTIVE COMPENSATIONa member of the advisory Board of Directors of HELCO.Committees of the HECO Board
During 2002, the Board of Directors of HECO had one standing committee, the Audit Committee, which was comprised of four nonemployee directors: Diane J. Plotts, Chairman, Shirley J. Daniel, Anne M. Takabuki and Barry K. Taniguchi. The Audit Committee holds such meetings as it deems advisable to review the financial operations of HECO. In 2002, the Audit Committee held five meetings to review various matters with management, the internal auditor and HECO’s independent auditors, including the activities of the internal auditor, the results of the annual audit by the independent auditors and the financial statements which are included in HECO’s 2001 Annual Report to Stockholder.
Attendance at meetings
In 2002, there were six regular bi-monthly meetings of the HECO Board of Directors. All incumbent directors attended at least 75% of the combined total number of meetings of the Board and the Committee on which they served.
ITEM 11. EXECUTIVE COMPENSATION HEI:
The information required under this item for HEI is incorporated by reference to pages
9 to 10, 1317 to 19 and2422 to2534 ofHEI's DefinitiveHEI’s 2003 ProxyStatement, prepared for the Annual Meeting of Stockholders to be held on April 28, 1998.Statement.HECO:
The following tables set forth the information required for the chief executive officerRemuneration of HECO Directors
In 2002, Anne M. Takabuki and Barry K. Taniguchi were the
four other most highlyonly nonemployee HECO directors who were not also directors of HEI. Commencing May 1, 2002, they each received an annual cash retainer of $20,000 paid quarterly, and 300 shares of HEI stock. In order to receive the fourth quarter installment, directors are required to have attended at least 75% of the combined total of all the Board and Committee meetings on which the director serves. The nonemployee HECO directors who were also nonemployee HEI directors received an annual cash retainer of $10,000, paid quarterly, for their service on the HECO Board. The Chairman of the HECO Audit Committee was paid an additional annual cash retainer of $3,000. Employee members of the Board of Directors are not compensatedHECO executive officers servingfor attendance at any meeting of theendBoard or Committees of1997. Allthe Board.Summary compensation
amounts presented for T. Michael May are the same amounts presented in HEI's Definitive Proxy Statement, prepared for the Annual Meeting of Stockholders to be held on April 28, 1998. SUMMARY COMPENSATION TABLE - --------------------------tableThe following summary compensation table shows the annual and long-term compensation of the chief executive officer of HECO and the four other most highly compensated executive officers of HECO (collectively, the HECO Named Executive Officers) who served at the end of
1997.2002. All compensation amounts presented for T. Michael May are the same amounts presented in HEI’s 2003 Proxy Statement.SUMMARY COMPENSATION TABLE
Annual Compensation Awards Payouts Name and Principal Position
Year Salary
($)
Bonus(1)
($)
Other
AnnualCompen-
sation(2)
($)
Restricted
Stock
Award(3)
($)
Securities
Underlying
Options(4)
(#)
LTIP
Payouts(5)
($)
All
OtherCompen-
sation(6)
($)
T. Michael May
2002 472,000 286,960 0 NA 25,000 150,645 7,314 President and Chief Executive Officer
2001 415,000 163,257 0 NA 20,000 54,540 18,881 2000 408,000 62,971 0 NA 20,000 0 17,117 Robert A. Alm (7)
2002 223,000 57,227 0 NA 0 NA 1,698 Senior Vice President-Public Affairs
2001 100,000 30,367 0 NA 0 NA 2,825 Thomas L. Joaquin
2002 223,000 49,385 0 NA 0 NA 4,475 Senior Vice President-Operations
2001 202,000 58,597 0 NA 3,000 NA 11,745 2000 189,000 39,880 0 NA 0 NA 10,126 Karl C. Stahlkopf (8)
2002 187,000 52,421 100,000 140,880 0 NA 4,929 Senior Vice President- Energy Solutions and Chief Technology Officer
Jackie Mahi Erickson
2002 187,000 38,869 0 NA 0 NA 4,929 Vice President & General Counsel
2001 181,000 47,844 0 NA 3,000 NA 13,503 2000 175,000 44,803 0 NA 0 NA 12,012
NA Not applicable (not participants in the plan).
(1) The HECO Named Executive Officers are eligible for an incentive award under the Company’s annual Executive Incentive Compensation Plan (EICP). EICP bonus payouts are reflected as compensation for the year earned.
(2) Covers a signing bonus of $100,000 for Mr. Stahlkopf for 2002.
(3) On May 1, 2002, 3,000 shares of restricted stock were granted to Mr. Stahlkopf at $46.96 per share. Quarterly dividends on the 3,000 shares of restricted stock are paid to Mr. Stahlkopf. The 3,000 shares of restricted stock become unrestricted on May 1, 2007. As of December 31, 2002, the restricted stock value was $131,940 based on closing price of $43.98 per share on the New York Stock Exchange.
(4) Options granted earn dividend equivalents as further described below under “Option grants in last fiscal year.”
(5) Long-Term AnnualIncentive Plan (LTIP) payouts are determined in the first quarter of each year for the three-year cycle ending on December 31 of the previous calendar year.
(6) Represents amounts accrued each year by the Company for certain preretirement death benefits provided to the HECO Named Executive Officers. Additional information concerning these death benefits is incorporated by reference to “Other Compensation Compensation ----------------------------------- ---------------------------- Awards Payouts Other ------------- ------------ All Annual Securities Other Compen- Underlying LTIP Compen- Name and Principal Salary Bonus(1) sation(2) Options(3) Payouts(4) sation(5) Position Year ($) ($) ($) (#) ($) ($) - -------------------------------------------------------------------------------------------------------------------------T. Michael May............. 1997 $313,000 $ 0 $ 0 12,000 -- $16,423 PresidentPlans” on page 33 of HEI’s 2003 Proxy Statement.
(7) Mr. Alm joined HECO as the Senior Vice President-Public Affairs on July 1, 2001.
(8) Mr. Stahlkopf joined HECO as the Senior Vice President-Energy Solutions and Chief 1996 282,000 98,747 107,412 12,000 52,175 13,945 ExecutiveTechnology Officer1995 226,000 41,987 0 4,000 na 8,177 Paul A. Oyer............... 1997 202,000 0 16,042 3,000 na 9,291 Financial Vice President 1996 196,000 19,706 14,533 0 na 8,748 and Treasurer 1995 188,000 17,959 13,167 3,000 na 7,907 Thomas J. Jezierny......... 1997 172,000 0 0 3,000 -- 5,760 Vice President- 1996 151,000 21,524 0 3,000 19,526 4,785 Energy Delivery 1995 135,000 14,642 0 3,000 29,204 4,320 Thomas L. Joaquin.......... 1997 168,000 0 0 3,000 na 6,232 Vice President- 1996 154,000 19,706 0 0 na 5,546 Power Supply 1995 137,000 17,959 0 3,000 na 4,404 Edward Y. Hirata........... 1997 149,000 0 0 3,000 na 11,084 Vice President- 1996 144,000 18,054 135 0 na 10,381 Regulatory Affairs 1995 140,000 16,519 270 3,000 na 10,002 na Not applicable.on May 1, 2002.49(1) The named executive officers are eligible for an incentive award under the Company's annual Executive Incentive Compensation Plan (EICP). EICP bonus payouts are reflected as compensation for the year earned. (2) Covers perquisites of $107,412 for Mr. May for 1996 which he recognized as imputed income under the Internal Revenue Code, including $95,691 under the category club membership (representing onceOption grants in
a lifetime reimbursement of initiation fees of $50,000 grossed up for taxes, plus reimbursement of monthly dues not grossed up for taxes). Amounts for Mr. Oyer and Mr. Hirata represent above-market earnings on deferred annual payouts. (3) Except for Mr. May's, Mr. Oyer's, Mr. Joaquin's and Mr. Hirata's optionslast fiscal yearA stock option was granted in
1995, options granted include dividend equivalents. (4) Long-Term Incentive Plan (LTIP) payouts are determined in the second quarter of each year for the three-year cycle ending on December 312002 to only one of theprevious calendar year. If there is a payout, the amount is reflected as LTIP compensation in the table for the previous year forHECO Named Executive Officers, Mr.May and Mr. Jezierny. In April 1996, an LTIP payout was made for the 1993-1995 performance cycle and is reflected as LTIP compensation in the table for 1995. In May 1997, an LTIP payout was made for the 1994-1996 performance cycle and is reflected as LTIP compensation in the table for 1996. The determination of whether there will be a payoutMay. Additional information required underthe 1995-1997 LTIP will not be made until the second quarter ofthisyear. (5) Represents amounts accrued by the Company for certain death benefits provided to the named executive officers. Additional informationitem is incorporated by referenceto "Other Compensation Plans"on page2223 ofHEI's DefinitiveHEI’s 2003 ProxyStatement, prepared for the Annual Meeting of Stockholders to be held on April 28, 1998. OPTION GRANTS IN LAST FISCAL YEAR - --------------------------------- The following table presents information on the nonqualified stock options which were granted in 1997 to the executives named in the HECO Summary Compensation Table. The practice of granting stock options, which may include dividend equivalent shares, has been followed each year since 1987.
OPTION GRANTS IN LAST FISCAL YEAR Number of Percent of Securities Total Options Underlying Granted to Exercise Grant Date Options Employees in Price Expiration Present Granted (1)(#) Fiscal Year ($/share) Date Value (2)($) - ------------------------------------------------------------------------------------------------------------------------------T. Michael May........... 12,000 8% $34.61 April 14, 2007 $107,520 Paul A. Oyer............. 3,000 2 34.61 April 14, 2007 26,880 Thomas J. Jezierny....... 3,000 2 34.61 April 14, 2007 26,880 Thomas L. Joaquin........ 3,000 2 34.61 April 14, 2007 26,880 Edward Y. Hirata......... 3,000 2 34.61 April 14, 2007 26,880(1) For the 24,000Statement.Aggregated option
shares granted with an exercise price of $34.61 per share, additional dividend equivalent shares are granted at no additional cost throughout the four-year vesting period (vesting in equal installments) which begins on the date of grant. Dividend equivalents are computed, as of each dividend record date, both with respect to the number of shares under theexercises and fiscal yearend optionand with respect to the number of dividend equivalent shares previously credited to the participant and not issued during the period prior to the dividend record date. Accelerated vesting is provided in the event a change in control occurs. No stock appreciation rights have been granted under the Company's current benefit plans. (2) Based on a Binomial Option Pricing Model, which is a variation of the Black-Scholes Option Pricing Model. For the stock options granted on April 14, 1997, with a 10-year option period, an exercise price of $34.61, and with additional dividend equivalent shares granted for the first four years of the option, the Binomial Value adjusted for forfeiture risk is $8.96 per share. The following assumptions were used in the model: Stock Price: $34.61; Exercise Price: $34.61; Term: 10 years; Volatility: 0.098; Interest Rate: 7.05%; and Dividend Yield: 6.81%. The following were 50the valuation results: Binomial Option Value: $2.92; Dividend Credit Value: $6.04; and Total Value $8.96. AGGREGATED OPTION EXERCISES AND FISCAL YEAR-END OPTION VALUES - -------------------------------------------------------------valuesThe following table shows the stock options, including dividend equivalents, exercised by the
named executive officersHECO Named Executive Officers in1997.2002. Also shown is the number of securities underlying unexercised options and the value of unexercised in the money options, including dividend equivalents, at the end of1997. Under2002. HEI, under the Stock Option and Incentive Plan, granted dividend equivalentshave been grantedto allnamed executive officers as part of the 1997 stock option grant, to Mr. May as part of the 1996 stock option grant, to Mr. Oyer as part of the 1988 stock option grant and to Mr. JeziernyHECO Named Executive Officers as part of the stock option grant,for the 1990 through 1996 grants.except Mr. Joaquin’s 1995 stock option grant.Dividend equivalents permit a participant who exercises a stock option to obtain at no additional cost, in addition to the option shares, the amount of dividends declared
on the number of shares of common stock with respect to which the option is exercised during the periodbetween the grant and the exercise of theoption.option during the vesting period. Dividend equivalents are computed as of each dividend record date throughout the four-year vesting period,(vesting in equal installments), which begins on the date of grant,both with respect to the number of sharesunderlyingunder the option andwith respect tothe number of dividend equivalent shares previously credited to theexecutive officer andHECO Named Executive Officer, which have not been exercised/issued during the period prior to the dividend record date.AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND
FISCAL YEAR-END OPTION VALUES
Shares
Acquired
Dividend
Equivalents
Value
Realized
Value
Realized
OnDividend
Number of
Securities
UnderlyingUnexercised
Options (Including
Dividend
Equivalents)
at Fiscal Year-End
Value of
Unexercised In the
Money Options
(IncludingDividend
Equivalents) at
Fiscal Year-End (1)Name
On Exercise
(#)Acquired On
Exercise (#)On Options
($)Equivalents
($)Exercisable/
Unexercisable (#)
Exercisable/
Unexercisable ($)
T. Michael May
37,000 11,399 239,053 496,156 36,721 / 61,024 612,421 /590,164 Robert A. Alm
— — — — — /— — /— Thomas L. Joaquin
— — — — 10,679 / 3,460 161,189 /44,930 Karl C. Stahlkopf
— — — — — /— — /— Jackie Mahi Erickson
8,000 1,530 75,370 70,960 — /3,460 — /44,930
Value(1) Values based on closing price of Number of Unexercised In Unexercised$43.98 per share on theMoney Options Options (Including (Including Dividend Dividend Value Equivalents) at Equivalents)at Shares Dividend Realized On Fiscal Year-End Fiscal Year-End (1) Acquired Equivalents Value Dividend -------------------- --------------------- On Exercise Acquired On Realized On Equivalents Exercisable/ Exercisable/ (#) Exercise (#) Options ($) ($) Unexercisable (#) Unexercisable ($) - --------------------------------------------------------------------------------------------------------------------------------T. Michael May...... -- -- $ -- $ -- 9,379 / 24,767 $ 57,137 / 208,901 Paul A. Oyer........ 700 205 2,909 7,591 9,181 / 4,657 70,321 / 37,280 Thomas J. Jezierny.. -- -- -- -- 20,469 / 8,461 274,776 / 87,150 Thomas L. Joaquin... -- -- -- -- 1,500 / 4,657 12,068 / 37,280 Edward Y. Hirata.... -- -- -- -- 4,500 / 4,657 19,883 / 37,280New York Stock Exchange on December 31, 2002.(1) All options were in the money (where the option price is less than the closing price on December 31, 1997). Value based on closing price of $40.875 per share on the New York Stock Exchange on December 31, 1997. LONG-TERM INCENTIVE PLAN AWARDS TABLE - -------------------------------------Long-Term Incentive Plan awards table
A Long-Term Incentive Plan award made to Mr. May in
19972002 was the only such award made to thenamed executive officers in theHECOSummary Compensation Table.Named Executive Officers. Additional information required under this item is incorporated by reference topage 16“Long-Term Incentive Plan (LTIP) Awards” on pages 24 to 26 ofHEI's DefinitiveHEI’s 2003 ProxyStatement, prepared forStatement.Pension plan
Each of the
Annual Meeting of Stockholders to be held on April 28, 1998. PENSION PLAN - ------------ TheHECO Named Executive Officers participates in the Retirement Plan for Employees of Hawaiian Electric Industries, Inc. and Participating Subsidiaries (the Retirement Plan). In addition, Mr. May (but not the other HECO Named Executive Officers) participates in certain supplemental pension plans sponsored by HEI. For additional information required under this item for Mr. May, see “Pension Plans” on pages 26 to 28 of HEI’s 2003 Proxy Statement.The Retirement Plan provides a monthly retirement pension for life. Additional information required under this item is incorporated by reference to
"Pension Plans"“Pension Plans” on pages17 and 1826 to 28 ofHEI's DefinitiveHEI’s 2003 ProxyStatement, prepared for the Annual Meeting of Stockholders to be held on April 28, 1998.Statement. As of December 31,1997, the named executive officers in2002, the HECOSummary Compensation TableNamed Executive Officers had the following number of years of credited service under the Retirement Plan: Mr. May,510 years; Mr.Oyer, 31 years: Mr. Jezierny, 27Alm, 1 year; Ms. Erickson, 21 years; Mr. Joaquin,2429 years; and Mr.Hirata, 11 years. 51CHANGE-IN-CONTROL AGREEMENTS - ----------------------------Stahlkopf, 8 months.Change-in-Control Agreements
HECO does not have any Change-in-Control Agreements with any of the HECO Named Executive Officers. Mr. May is the only
named executive officer in theHECOSummary Compensation TableNamed Executive Officer with whom HEI has acurrently applicableChange-in-Control Agreement. Additional information required under this item is incorporated by reference to"Change-in-Control Agreements"“Change-in-Control Agreements” on pages18 and 1928 to 29 ofHEI's DefinitiveHEI’s 2003 ProxyStatement, prepared for the Annual Meeting of Stockholders to be held on April 28, 1998. EXECUTIVE MANAGEMENT COMPENSATION - --------------------------------- Decisions on executive compensation for the named HECO executive officers are made by theStatement.Executive Management Compensation
The HEI Compensation Committee,
which iscomposed of six independent nonemployeedirectors. All decisionsdirectors, approves executive compensation for the HECO Named Executive Officers. The information required to be disclosed concerning the Compensation Committee is incorporated herein by reference to pages 18 to 19 and 29 to 33 of HEI’s 2003 Proxy Statement. Actions of the Committeeconcerning HECO officersarereviewed and approvedsubject to ratification by the full HEIBoardand HECO Boards of Directorsas well as the HECO Board of Directors. HECO BOARD OF DIRECTORS - ----------------------- Committees of the HECO Board - ---------------------------- During 1997, the Board of Directors of HECO had only one standing committee, the Audit Committee, which was comprised of three nonemployee directors: Edwin L. Carter, Chairman, Diane J. Plotts and Paul C. Yuen. The Audit Committee holds such meetings as it deems advisable to review the financial operations of HECO. In 1997, the Audit Committee held five meetings to review with management, the internal auditor and HECO's independent auditors the activities of the internal auditor, the results of the annual audit by the independent auditors and the financial statements which are included in HECO's 1997 Annual Report to Stockholder. Remuneration of HECO Directors and attendance at meetings - --------------------------------------------------------- In 1997, Paul C. Yuen and Anne M. Takabuki were the only nonemployee directors of HECO who were not also directors of HEI. They were each paid a retainer of $20,000, 60% of which was distributed in the common stock of HEI pursuant to the HEI Nonemployee Director Stock Plan and 40% of which was distributed in cash. The number of shares of stock distributed was based on a share price of $33.3125, which is equal to the average high and low sales prices of HEI common stock on April 25, 1997, with a cash payment made in lieu of(excluding anyfractional share. The nonemployee directors of HECO who were also nonemployee directors of HEI did not receive a separate retainer from HECO. In addition, a fee of $700 was paid in cash to each nonemployee director (including nonemployee directors of HECO who are also nonemployee directors of HEI) for each Board and Committee meeting attended by the director. The Chairman of the HECO Audit Committee was paid an additional $100 for each Committee meeting attended. Employee members of the Board of Directors are not compensated for attendance at any meeting of the Board or Committees of the Board. In 1997, there were five regular bi-monthly meetings, two joint meetings and one special meeting of the HECO Board of Directors. All incumbent directors attended at least 75% of the combined total number of meetings of the Board and Committees on which they served. At the meeting of the HEI Board of Directors on December 17, 1996, the HEI Board voted to terminate the Nonemployee Director Retirement Plan referenced on page 9 of HEI's Definitive Proxy Statement, prepared for the Annual Meeting of Stockholders to be held on April 28, 1998, and pay the present value of the accrued retirement benefits to directors age 55 and under or with 5 years of service or less (Dr. Yuen) as of April 22, 1997, on the basis of 60% HEI Common Stock and 40% cash. A discount rate of 6.5% was used in the calculation of the present value and it was assumed that the current nonemployee director's accrued benefits would commence at the mandatory retirement age of 72. The total present value of Dr. Yuen's accrued benefits was $33,415, of which the cash portion was paid on January 30, 1997, and the stock portion was invested in Dr. Yuen's HEI Dividend Reinvestment and Stock Purchase Plan account on February 28, 1997. 52ITEM 12.affected individuals).
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS HEI:
The information required under this item is incorporated by reference to
pages 11 and 12page 20 ofHEI's DefinitiveHEI’s 2003 Proxy Statementpreparedand “Market forthe Annual Meeting of Stockholders to be held on April 28, 1998.Registrant’s Common Equity and Related Stockholder Matters–equity compensation plan information.”HECO:
HEI owns all of
theHECO’s common stock,of HECO,which isHECO'sHECO’s only class ofvoting securities.securities generally entitled to vote on matters requiring shareholder approval. HECO has also issued and has outstanding various series of preferred stock, the holders of which, upon certain defaults in dividend payments, have the right to elect a majority of the directors of HECO.The following table shows the shares of HEI common stock beneficially owned by each HECO director (other than those who are also directors of HEI), by each HECO Named Executive Officer (other than Mr. May, who is a named
HECOexecutiveofficers as listed in the Summary Compensation Table on pages 42 and 43officer of HEI) and by all HECO directors and all HECO executive officers as a group, as of February18, 1998,26, 2003, based on information furnished by the respective individuals.
Amount of Common Stock and Nature of Beneficial Ownership
Name of Individual
or Group
Sole Voting or
Investment
PowerShared Voting
or Investment
Power (1)Other
Beneficial
Ownership (2)Stock
Options (3)
Total Directors
Anne M. Takabuki
2,492 — — — 2,492 Barry K. Taniguchi
— 1,618 — — 1,618 Other HECO Named Executive Officers
Robert A. Alm
1,159 — — — 1,159 Thomas L. Joaquin
6,145 1,511 32 10,738 18,426 Karl C. Stahlkopf
3,151 — — — 3,151 Jackie Mahi Erickson
4,724 1,227 2 — 5,953 All directors and executive officers as a group (21 persons)
72,030 9,861 3,154 149,005 234,050 *
Amount* HECO directors Clarke, Daniel, May, Plotts, Scott and Watanabe, who also serve on the HEI Board of Common Stock and Nature of Name of Individual or Group Beneficial Ownership - ---------------------------------------------------------------------------------------------------- Total ----------Directors, - --------- Paul A. Oyer* 1,203 (a) 9,051 (d) 10,254 ------------------- Anne M. Takabuki 419 (a) 419 ------------------- Paul C. Yuen 1,012 (a) 1,069 (b) 2,081 ------------------- Other named executive officers - ------------------------------ Thomas J. Jezierny 3,473 (a) 24,109 (d) 27,582 ------------------- Thomas L. Joaquin 3,460 (a) 26 (b) 23 (c) 3,051 (d) 6,560 ------------------- Edward Y. Hirata 5,118 (a) 6,051 (d) 11,169 ------------------- Allare not shown separately, but are included in the total for all HECO directors and executive officers40,471 (a)as a group. The information required as to these directors is incorporated by reference to page 20 of HEI’s 2003 Proxy Statement. The number of shares of common stock beneficially owned by any HECO director or by all HECO directors and officers as a group(18 persons) 13,548 (b) 517 (c) 196,524 (d) 251,060** -------------------does not exceed 1% of the outstanding common stock of HEI.* Also a named executive officer listed in the Summary Compensation Table on pages 49 and 43. ** HECO directors Carter, Clarke, Henderson, May and Plotts, who also serve on the HEI Board of Directors, are not shown separately, but are included in the total amount. The information required as to these directors is incorporated by reference to page 11 of HEI's Definitive Proxy Statement, prepared for the Annual Meeting of Stockholders to be held on April 28, 1998. Messrs. Clarke and May are also named executive officers listed in the Summary Compensation Table incorporated by reference to pages 13 and 14 of the above-referenced Definitive Proxy 53Statement of HEI. The number of shares of common stock beneficially owned by any HECO director or by all HECO directors and officers as a group does not exceed 1% of the outstanding common stock of HEI. (a) Sole voting and investment power. (b) Shared voting and investment power (shares registered in name of respective individual and spouse). (c) Shares owned by spouse, children or other relatives sharing the home of the director or an officer in the group and in which personal interest of the director or officer is disclaimed. (d) Stock options, including accompanying dividend equivalents shares, exercisable within 60 days after February 18, 1998, under the 1987 Stock Option and Incentive Plan, as amended in 1992 and 1996. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
(1) Shares registered in name of the individual and spouse.
(2) Shares owned by spouse, children or other relatives sharing the home of the director or officer in which the director or officer disclaims personal interest.
(3) Stock options, including accompanying dividend equivalents shares, exercisable within 60 days after February 12, 2003, under the 1987 Stock Option and Incentive Plan
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS HEI:
The information required under this item is incorporated by reference to pages
24 to 2537 and 38 ofHEI's DefinitiveHEI’s 2003 ProxyStatement, prepared for the Annual Meeting of Stockholders to be held on April 28, 1998.Statement.HECO:
TheCertain information required under this item is incorporated by reference to
pages 24page 37 of HEI’s 2003 Proxy Statement. In addition, Karl C. Stahlkopf is currently indebted to25HECO in the amount ofHEI's Definitive Proxy Statement, prepared$162,500 for an employee relocation loan made to him on May 22, 2002, prior to theAnnual Meetingenactment ofStockholdersthe Sarbanes-Oxley Act of 2002. The loan is interest free, with the unpaid principal balance due on May 22, 2003 or sooner if Mr. Stahlkopf ceases to beheldan employee of HECO.
ITEM 14. CONTROLS AND PROCEDURES HEI:
Robert F. Clarke, HEI Chief Executive Officer, and Eric K. Yeaman, HEI Chief Financial Officer, have evaluated the disclosure controls and procedures of HEI as of March 13, 2003. Based on
April 28, 1998.their evaluations, as of March 13, 2003, they have concluded that the disclosure controls and procedures (as defined in Rules 13a-14 and 15d-14 under the Securities Exchange Act of 1934) are effective. There have been no significant changes in HEI’s internal controls or in other factors that could significantly affect these controls subsequent to March 13, 2003, including any corrective actions with regard to significant deficiencies and material weaknesses.HECO:
T. Michael May, HECO Chief Executive Officer, and Richard A. von Gnechten, HECO Chief Financial Officer, have evaluated the disclosure controls and procedures of HECO as of March 13, 2003. Based on their evaluations, as of March 13, 2003, they have concluded that the disclosure controls and procedures (as defined in Rules 13a-14 and 15d-14 under the Securities Exchange Act of 1934) are effective. There have been no significant changes in HECO’s internal controls or in other factors that could significantly affect these controls subsequent to March 13, 2003, including any corrective actions with regard to significant deficiencies and material weaknesses.
PART IV
------- ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K (a)(1)
FINANCIAL STATEMENTSFinancial statementsThe following financial statements contained in
HEI's 1997HEI’s Annual Reportto StockholdersandHECO's 1997HECO’s Annual Reportto Stockholder, portions of which are filed by HEI as Exhibit 13 and, portions of which are filed by HECO as Exhibit 13, respectively,are incorporated by reference in Part II, Item 8, of this Form 10-K:
1997 Annual Report to Stockholder(s) (Page/s) --------------------------------- HEI HECO ------------------------------------------------------------------------------------------------------Independent Auditors' Report...................................... 40 34 Consolidated Statements of Income, Years ended December 31, 1997, 1996 and 1995................................................... 41 12 Consolidated Statements of Retained Earnings, Years ended December 31, 1997, 1996 and 1995................................ 41 12 Consolidated Balance Sheets, December 31, 1997 and 1996........... 42 13 Consolidated Statements of Capitalization, December 31, 1997 and 1996...................................... na 14-15 Consolidated Statements of Cash Flows, Years ended December 31, 1997, 1996 and 1995............................................. 43 16 Notes to Consolidated Financial Statements........................ 26, 44-65 17-3354(A)
Pages in HEI’s and
HECO’s Annual ReportHEI HECO Independent Auditors’ Report
37 23 Consolidated Statements of Income, Years ended December 31, 2002, 2001 and 2000
38 24 Consolidated Statements of Retained Earnings, Years ended December 31, 2002, 2001 and 2000
NA 24 Consolidated Balance Sheets, December 31, 2002 and 2001
39 25 Consolidated Statements of Capitalization, December 31, 2002 and 2001
NA 26-27 Consolidated Statements of Changes in Stockholders’ Equity, Years ended December 31, 2002, 2001 and 2000
40 NA Consolidated Statements of Cash Flows, Years ended December 31, 2002, 2001 and 2000
41 28 Notes to Consolidated Financial Statements
42-78 29-57 NA Not applicable.
(a)(2)
FINANCIAL STATEMENT SCHEDULESFinancial statement schedulesThe following financial statement schedules for HEI and HECO are included in this
Reportreport on the pages indicated below:
Page/s in Form 10-K --------------------------------- HEI HECO --------------------------------------------------------------------------------------------------------Independent Auditors' Report 56 57 Schedule II Condensed Financial Information of Registrant, Hawaiian Electric Industries, Inc. (Parent Company) as of December 31, 1997 and 1996 and Years ended December 31, 1997, 1996 and 1995....... 58-60 na Schedule V Valuation and Qualifying Accounts, Years ended December 31, 1997, 1996 and 1995................... 61 61
Page/s in Form 10-K HEI HECO Independent Auditors’ Report
66 67 Schedule I Condensed Financial Information of Registrant, Hawaiian Electric Industries, Inc. (Parent Company) as of December 31, 2002 and 2001 and Years ended December 31, 2002, 2001 and 2000 68-70 NA Schedule II Valuation and Qualifying Accounts, Years ended December 31, 2002, 2001 and 2000 71 71 NA Not applicable.
Certain
Schedules,schedules, other than those listed, are omitted because they are not required, or are not applicable, or the required information is shown in the consolidated financial statementsor notes(including the notes) included inHEI's 1997HEI’s Annual Reportto StockholdersandHECO's 1997HECO’s Annual Report,to Stockholder,which financial statements are incorporated herein by reference.(A)(a)(3)
EXHIBITSExhibitsExhibits for HEI and HECO and their subsidiaries are listed in the
"Index“Index toExhibits"Exhibits” found on pages6272 through7083 of this Form 10-K. The exhibits listed for HEI and HECO are listed in the index under the headings"HEI"“HEI” and"HECO,"“HECO,” respectively, except that the exhibits listed under"HECO"“HECO” are also considered exhibits for HEI.(B) REPORTS ON FORM(b) Reports on Form 8-K
HEI AND HECO: During the fourth quarter of 1997,HEI and HECO:
Subsequent to September 30, 2002, HEI and/or HECO filed
a FormCurrent Reports, Forms 8-K,dated October 16, 1997, under Item 5, which included HEI's October 16, 1997 news release reporting third quarter 1997 earnings. Duringwith thefourth quarter of 1997, HEI filed a Form 8-K, dated December 6, 1997, under Items 2 and 7, which included the purchase and assumption agreement with BoA. On January 30, 1998, HEI filed a Form 8-K/A, dated December 6, 1997, under Item 7, which included financial statements and pro forma financial information relating to ASB's acquisition of most of the Hawaii operations of BoA. On March 2, 1998, HEI and HECO filed a Form 8-K, dated February 27, 1998, under Item 7, which included portions of HEI's 1997SEC as follows:
Dated (filing date)
Registrant/s
Items reported October 3, 2002
(October 10, 2002)
HEI/HECO Item 5. Update of HELCO Power
SituationOctober 21, 2002
(October 22, 2002)
HEI/HECO Item 5. HEI’s October 21, 2002 news
release (HEI reports third quarter 2002
earnings)November 12, 2002
(November 12, 2002)
HEI/HECO Item 5. HEI’s November 12, 2002
news release (HEI to webcast and
teleconference financial analyst
presentation on Tuesday,
November 19, 2002)November 13, 2002
(November 13, 2002)
HEI Item 5. Announcement of the
retirement of HEI Chief Financial
OfficerDecember 17, 2002
(December 18, 2002)
HEI/HECO Item 5. HEI and HECO announce
appointment of Shirley J. Daniel,
PH.D. to their Boards of DirectorsDecember 26, 2002
(December 26, 2002)
HEI Item 5. HEI’s December 26, 2002 news
release (HEI announces appointment of
Eric K. Yeaman as Financial Vice
President, Treasurer and Chief
Financial Officer)January 14, 2003
(January 14, 2003)
HEI/HECO Item 5. HEI’s January 14, 2003 news
release (HEI to webcast and
teleconference 2002 yearend earnings
on January 21, 2003)January 20, 2003
(January 21, 2003)
HEI/HECO Item 5. HEI’s January 20, 2003 news
release (HEI reports 2002 yearend
earnings) and retirement benefits
informationFebruary 25, 2003
(February 26, 2003)
HEI/HECO Item 7. Listing and attaching as
exhibits HEI’s 2002 Annual Report to
Stockholders in its entirety, portions of
HECO’s 2002 Annual Report to
Stockholder and Section 906
certificationsMarch 7, 2003
(March 10, 2003)
HEI Item 5. Announcing HEI’s sale of $100
million of its Medium-Term Notes,
Series D, and Item 7. Listing and
attaching as exhibits notes, attorneys’
opinions and pricing supplements[KPMG LLP letterhead]
Independent Auditors’ Report
to Stockholders and HECO's 1997 Annual Report to Stockholder. On March 11, 1998, HEI and HECO filed a Form 8-K, dated March 2, 1998, under Item 5, which updated the following: "PUC show cause order for HECO," "HELCO power situation," "Property damage reserve" and "Competition." 55[KPMG Peat Marwick letterhead] Independent Auditors' Report ----------------------------The Board of Directors and Stockholders
Hawaiian Electric Industries, Inc.:
Under date of January
19, 1998,20, 2003, we reported on the consolidated balance sheets of Hawaiian Electric Industries, Inc. and subsidiaries as of December 31,19972002 and1996,2001, and the related consolidated statements of income,retained earningschanges in stockholders’ equity and cash flows for each of the years in the three-year period ended December 31,1997,2002, as contained in the19972002 annual report to stockholders. These consolidated financial statements and our report thereon are incorporated by reference in the Company’s annual report on Form 10-K for the year1997.2002. In connection with our audits of the aforementioned consolidated financial statements, we also audited the related financial statement schedules as listed in the accompanyingindex.index under Item 15.(a)(2). These financial statement schedules are the responsibility of theCompany'sCompany’s management. Our responsibility is to express an opinion on these financial statement schedules based on our audits.In our opinion, such financial statement schedules, when considered in relation to the basic consolidated financial statements taken as a whole, present fairly, in all material respects, the information set forth therein.
/s/As discussed in note 1 of notes to consolidated financial statements, effective January 1, 2002, the Company changed its method of accounting for goodwill and other intangible assets and for stock-based compensation.
/s/ KPMG
Peat MarwickLLPHonolulu, Hawaii
January 20, 2003
[KPMG LLP
Honolulu, Hawaii January 19, 1998 56[KPMG Peat Marwickletterhead]Independent
Auditors'Auditors’ Report----------------------------The Board of Directors and Stockholder
Hawaiian Electric Company, Inc.:
Under date of January
19, 1998,20, 2003, we reported on the consolidated balance sheets and consolidated statements of capitalization of Hawaiian Electric Company, Inc. (awholly ownedsubsidiary of Hawaiian Electric Industries, Inc.) and subsidiaries as of December 31,19972002 and1996,2001, and the related consolidated statements of income, retained earnings and cash flows for each of the years in the three-year period ended December 31,1997,2002, as contained in the19972002 annual report to stockholder. These consolidated financial statements and our report thereon are incorporated by reference in the Company’s annual report on Form 10-K for the year1997.2002. In connection with our audits of the aforementioned consolidated financial statements, we also audited the related financial statement schedule as listed in the accompanyingindex.index under Item 15.(a)(2). The financial statement schedule is the responsibility of theCompany'sCompany’s management. Our responsibility is to express an opinion on the financial statement schedule based on our audits.In our opinion, such financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein.
/s//s/ KPMG
Peat MarwickLLPHonolulu, Hawaii
January
19, 1998 5720, 2003 Hawaiian Electric Industries, Inc.
SCHEDULE
II --I — CONDENSED FINANCIAL INFORMATION OF REGISTRANTHAWAIIAN ELECTRIC INDUSTRIES, INC. (PARENT COMPANY)
CONDENSED BALANCE SHEETS
December 31, ----------------------------------- (in thousands) 1997 1996 - -------------------------------------------------------------------------------------------------------ASSETS Cash and equivalents................................................ $ 416 $ 1,161 Advances to and notes receivable from subsidiaries.................. 25,459 40,455 Accounts receivable................................................. 1,315 2,135 Other investments................................................... 810 810 Property, plant and equipment, net.................................. 3,288 3,177 Other assets........................................................ 4,182 2,933 Investment in wholly owned subsidiaries, at equity.................. 1,245,415 1,021,115 ----------------------------------- $1,280,885 $1,071,786 =================================== LIABILITIES AND STOCKHOLDERS' EQUITY Accounts payable.................................................... $ 3,555 $ 7,231 Notes payable to subsidiaries....................................... 3,181 -- Commercial paper.................................................... 189,482 87,600 Long-term debt...................................................... 160,000 191,500 Loan from HEI Preferred Funding, LP (8.36% due in 2017)............. 103,000 -- Deferred income taxes............................................... 1,374 3,055 Unamortized tax credits............................................. 117 30 Other............................................................... 5,495 9,518 ----------------------------------- 466,204 298,934 ----------------------------------- Stockholders' equity Common stock........................................................ 654,819 622,945 Retained earnings................................................... 159,862 149,907 ----------------------------------- 814,681 772,852 ----------------------------------- $1,280,885 $1,071,786 =================================== Note to Balance Sheets - ---------------------- Long-term debt consisted of the following: Promissory notes, 6.3% - 7.1%, due in various years through 2012.... $ 96,000 $ 127,000 Promissory notes, 8.2% - 8.7%, due in various years through 2011.... 29,000 29,500 Promissory note, variable rate (6.325% at December 31, 1997) due 1999............................................................... 35,000 35,000 ----------------------------------- $ 160,000 $ 191,500 ===================================As of December 31, 1997, HEI guaranteed its subsidiary and affiliate nonintercompany debt of $7 million.
December 31, (in thousands)
2002 2001 Assets Cash and equivalents
$ 25,059 $ 19,155 Advances to and notes receivable from subsidiaries
5,600 48,297 Available-for-sale investment securities
7,971 15,610 Accounts receivable
1,593 1,832 Property, plant and equipment, net
2,089 2,600 Deferred income tax assets
13,110 10,337 Other assets
4,152 5,530 Net assets of discontinued operations
787 — Investments in subsidiaries, at equity
1,512,423 1,404,904 $ 1,572,784 $ 1,508,265 Liabilities and stockholders’ equity Liabilities
Accounts payable
$ 8,108 $ 8,077 Notes payable to subsidiaries
10,922 6,314 Long-term debt
401,000 460,500 Loan from HEI Preferred Funding, LP (8.36% due in 2017)
103,000 103,000 Other
3,454 685 Net liabilities of discontinued operations
— 24 526,484 578,600 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: 36,809 shares and 35,600 shares
839,503 787,374 Retained earnings
176,118 147,837 Accumulated other comprehensive income (loss)
30,679 (5,546 ) 1,046,300 929,665 $ 1,572,784 $ 1,508,265 Note to Balance Sheets
Long-term debt consisted of the following:
Promissory notes, 6.2 - 7.6%, due in various years from 2003 through 2014
$ 301,000 $ 360,500 Promissory note, 5.5%, due in 2003
100,000 100,000 $ 401,000 $ 460,500 The aggregate payments of principal required
on long-term debt and a loan from HEI Preferred Funding, LPsubsequent to December 31,19972002 on long-term debt are $136 million in 2003, $1 million in1998, $412004, $37 million in1999, $112005, $110 million in2000, $232006 and $10 million in2001 and $52007.As of December 31, 2002, HEI has a General Agreement of Indemnity in favor of SAFECO Insurance Company for losses in connection with any insurance/surety bonds they issue to HEI, including $10 million in
2002. 58mail insurance, a $1 million transfer agent errors and omissions bond and a $0.5 million self-insured automobile bond. Hawaiian Electric Industries, Inc.
SCHEDULE
II --I — CONDENSED FINANCIAL INFORMATION OF REGISTRANT(CONTINUED)(continued)HAWAIIAN ELECTRIC INDUSTRIES, INC. (PARENT COMPANY)
CONDENSED STATEMENTS OF INCOME
Years ended December 31, (in thousands)
2002 2001 2000 Revenues1
$ (3,881 ) $ (5,338 ) $ 940 Equity in income from continuing operations of subsidiaries
152,725 143,730 136,998 148,844 138,392 137,938 Expenses: Operating, administrative and general
15,633 10,481 7,322 Depreciation of property, plant and equipment
891 1,047 1,347 Taxes, other than income taxes
460 472 315 16,984 12,000 8,984 Operating income 131,860 126,392 128,954 Interest expense
37,576 43,539 40,195 Income from continuing operations before income tax benefits 94,284 82,853 88,759 Income tax benefits
23,933 24,893 20,577 Income from continuing operations
118,217 107,746 109,336 Loss from discontinued subsidiary operations
— (24,041 ) (63,592 ) Net income $ 118,217 $ 83,705 $ 45,744
Years ended December 31, ---------------------------------------------------- (in thousands) 1997 1996 1995 - --------------------------------------------------------------------------------------------------------REVENUES............................................ $ 2,468 $ 2,731 $ 2,923 Equity1
2002 and 2001 revenues include $4.5 million and $8.7 million, respectively, of writedowns of the income notes that HEI purchased in
incomeconnection with the termination ofsubsidiaries.................... 99,093 93,488 89,198 ---------------------------------------------------- 101,561 96,219 92,121 ---------------------------------------------------- EXPENSES: Operating, administrativeASB’s investment in trust certificates in May andgeneral............... 7,661 8,639 7,543 Depreciation and amortizationJuly 2001. See “Disposition ofproperty, plant and equipment.............................. 864 651 491 Taxes, other than income taxes...................... 300 325 282 ---------------------------------------------------- 8,825 9,615 8,316 ---------------------------------------------------- 92,736 86,604 83,805 Interest expense.................................... 22,822 18,103 17,922 ---------------------------------------------------- INCOME BEFORE INCOME TAX BENEFIT.................... 69,914 68,501 65,883 Income tax benefit.................................. 16,528 10,157 11,610 ---------------------------------------------------- NET INCOME.......................................... $ 86,442 $78,658 $77,493 ====================================================certain debt securities” in “Business–Bank–American Savings Bank, F.S.B.”59The Company’s financial reporting policy for income tax allocations is based upon a separate entity concept whereby each subsidiary provides income tax expense (or benefits) as if each were a separate taxable entity. The difference between the aggregate separate tax return income tax provisions and the consolidated financial reporting income tax provision is charged or credited to HEI’s separate tax provision.
Hawaiian Electric Industries, Inc.
SCHEDULE
II --I — CONDENSED FINANCIAL INFORMATION OF REGISTRANT(CONTINUED)(continued)HAWAIIAN ELECTRIC INDUSTRIES, INC. (PARENT COMPANY)
CONDENSED STATEMENTS OF CASH FLOWS
Years ended December 31, ----------------------------------------------- (in thousands) 1997 1996 1995 - -------------------------------------------------------------------------------------------------------------------CASH FLOWS FROM OPERATING ACTIVITIES Net income.......................................................... $ 86,442 $ 78,658 $ 77,493 Adjustments to reconcile net income to net cash provided by operating activities Equity in income of subsidiaries.................................. (99,093) (93,488) (89,198) Dividends/distributions received from subsidiaries................ 72,762 67,972 51,435 Depreciation and amortization of property, plant and equipment.... 864 651 491 Other amortization................................................ 183 288 239 Deferred income taxes and tax credits, net........................ (3,433) (9) (1,236) Changes in assets and liabilities Decrease in accounts receivable................................ 820 269 161 Increase (decrease) in accounts payable........................ (3,676) 79 (2,094) Changes in other assets and liabilities........................ (3,615) 711 1,880 ----------------------------------------------- NET CASH PROVIDED BY OPERATING ACTIVITIES........................... 51,254 55,131 39,171 ----------------------------------------------- CASH FLOWS FROM INVESTING ACTIVITIES Net decrease (increase) in advances to and notes receivable from subsidiaries....................................................... 14,996 121 (12,880) Capital expenditures................................................ (975) (1,401) (488) Additional investments in subsidiaries.............................. (203,703) (28,100) (39,610) ----------------------------------------------- NET CASH USED IN INVESTING ACTIVITIES............................... (189,682) (29,380) (52,978) ----------------------------------------------- CASH FLOWS FROM FINANCING ACTIVITIES Net increase (decrease) in notes payable to subsidiaries with original maturities of three months or less........................ 3,181 -- (2,293) Net increase in commercial paper.................................... 101,882 42,207 32,643 Proceeds from issuance of long-term debt............................ 19,000 10,000 30,000 Repayment of long-term debt......................................... (50,500) (42,000) (16,000) Loan from HEI Preferred Funding, LP................................. 103,000 -- -- Net proceeds from issuance of common stock.......................... 22,919 19,818 19,322 Common stock dividends.............................................. (61,799) (55,288) (49,415) ----------------------------------------------- NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES................. 137,683 (25,263) 14,257 ----------------------------------------------- Net increase (decrease) in cash and equivalents..................... (745) 488 450 Cash and equivalents, beginning of year............................. 1,161 673 223 ----------------------------------------------- CASH AND EQUIVALENTS, END OF YEAR................................... $ 416 $ 1,161 $ 673 ===============================================
Years ended December 31, (in thousands)
2002 2001 2000 Cash flows from operating activities Income from continuing operations
$ 118,217 $ 107,746 $ 109,336 Adjustments to reconcile income from continuing operations to net cash provided by operating activities
Equity in net income of continuing subsidiaries
(152,725 ) (143,730 ) (136,998 ) Common stock dividends/distributions received from subsidiaries
78,599 62,944 93,661 Depreciation of property, plant and equipment
891 1,047 1,347 Other amortization
500 579 447 Writedowns of income notes
4,499 8,652 — Deferred income taxes
(6,495 ) (6,778 ) (1,569 ) Changes in assets and liabilities
Decrease (increase) in accounts receivable
239 (638 ) 131 Increase (decrease) in accounts payable
31 (346 ) 1,905 Increase (decrease) in taxes accrued
10,988 (47,603 ) 44,487 Changes in other assets and liabilities
5,266 4,709 (13,457 ) Net cash provided by (used in) operating activities 60,010 (13,418 ) 99,290 Cash flows from investing activities Net decrease (increase) in advances to and notes receivable from subsidiaries
42,697 (39,533 ) (8,764 ) Purchase of investments
— (27,929 ) — Capital expenditures
(396 ) (916 ) (622 ) Additional investments in subsidiaries
(325 ) (1,424 ) (485 ) Other
480 16 10 Net cash provided by (used in) investing activities 42,456 (69,786 ) (9,861 ) Cash flows from financing activities Net increase (decrease) in notes payable to subsidiaries with original maturities of three months or less
4,608 2,675 (2,340 ) Net decrease in commercial paper
— — (44,820 ) Proceeds from issuance of long-term debt
— 100,000 100,000 Repayment of long-term debt
(59,500 ) (60,500 ) (10,500 ) Net proceeds from issuance of common stock
32,451 78,937 14,080 Common stock dividends
(73,412 ) (67,015 ) (68,624 ) Net cash provided by (used in) financing activities (95,853 ) 54,097 (12,204 ) Net cash provided by (used in) discontinued operations (709 ) 47,585 (77,304 ) Net increase (decrease) in cash and equivalents
5,904 18,478 (79 ) Cash and equivalents, January 1
19,155 677 756 Cash and equivalents, December 31 $ 25,059 $ 19,155 $ 677 Supplemental disclosures of noncash activities:
In
1997, 19962002, 2001 and1995, $1.02000, $0.8 million,$1.1$0.8 million and$1.3$0.7 million, respectively, of HEI advances to HEIDI were converted to equity inanoncashtransaction. Commontransactions.In April 2000, HEI recommenced issuing new common shares under the HEI Dividend Reinvestment and Stock Purchase Plan (DRIP). From March 1998 to March 2000, HEI had acquired for cash its common shares in the open market to satisfy the requirements of the HEI DRIP. Under the HEI DRIP, common stock dividends reinvested by
stockholdersshareholders in HEI common stock in noncash transactions amounted to$15$17 million in1997, $182002, $16 million in19962001 and$20$12 million in1995. 602000. Hawaiian Electric Industries, Inc.
and Hawaiian Electric Company, Inc.
SCHEDULE
V --II — VALUATION AND QUALIFYING ACCOUNTSYears ended December 31,
1997, 19962002, 2001 and19952000
Col. A
Col. B Col. C Col. D Col. E (in thousands) Additions Description
Balance at
beginning
of periodCharged to
costs and
expensesCharged
to other
accountsDeductions Balance at
end of
period2002 Allowance for uncollectible accounts–Hawaiian Electric Company, Inc. and subsidiaries
$ 1,260 $ 1,444 $ 1,286 (a) $ 2,992 (b) $ 998 Allowance for uncollectible interest (ASB)
$ 2,710 — — $ 1,980 $ 730 Allowance for losses for loans receivable (ASB)
$ 42,224 $ 9,750 $ 1,205 (a) $ 7,744 (b) $ 45,435 2001 Allowance for uncollectible accounts–Hawaiian Electric Company, Inc. and subsidiaries
$ 939 $ 1,930 $ 1,246 (a) $ 2,855 (b) $ 1,260 Allowance for uncollectible interest (ASB)
$ 2,978 — — $ 268 $ 2,710 Allowance for losses for loans receivable (ASB)
$ 37,449 $ 12,500 $ 1,898 (a) $ 9,623 (b) $ 42,224 2000 Allowance for uncollectible accounts–Hawaiian Electric Company, Inc. and subsidiaries
$ 1,057 $ 1,403 $ 948 $ 2,469 $ 939 Other companies
61 — — 61 — $ 1,118 $ 1,403 $ 948 (a) $ 2,530 (b) $ 939 Allowance for uncollectible interest (ASB)
$ 5,695 — — $ 2,717 $ 2,978 Allowance for losses for loans receivable (ASB)
$ 35,348 $ 13,050 $ 2,389 (a) $ 13,338 (b) $ 37,449
- --------------------------------------------------------------------------------------------------------------------------------- Col. A Col. B Col. C Col. D Col. E - --------------------------------------------------------------------------------------------------------------------------------- (in thousands) Additions -------------------------------- Balance at beginning Charged to Balance at of costs and Charged to end of Description period expenses other accounts Deductions period - ---------------------------------------------------------------------------------------------------------------------------------1997 ---- Allowance for uncollectible accounts Hawaiian Electric Company, Inc. and subsidiaries................. $ 1,167 $ 2,850 $ 1,256 $ 3,988 $ 1,285 Other companies................... 1,433 653 -- 83 2,003 ------------- -------------- -------------- ------------- -------------- $ 2,600 $ 3,503 $ 1,256(a) $ 4,071(b) $ 3,288 ============= ============== ============== ============= ============== Allowance for uncollectible interest (ASB).................... $ 2,272 $ 2,166 $ -- $ -- $ 4,438 ============= ============== ============== ============= ============== Allowance for losses for loans receivable (ASB).................. $ 19,205 $ 6,934 $ 6,656(c) $ 2,845(b) $ 29,950 ============= ============== ============== ============= ============== 1996 ---- Allowance for uncollectible accounts Hawaiian Electric Company, Inc. and subsidiaries................. $ 1,101 $ 2,591 $ 1,310 $ 3,835 $ 1,167 Other companies................... 642 846 7 62 1,433 ------------- -------------- -------------- ------------- -------------- $ 1,743 $ 3,437 $ 1,317(a) $ 3,897(b) $ 2,600 ============= ============== ============== ============= ============== Allowance for uncollectible interest (ASB).................... $ 1,273 $ 999 $ -- $ -- $ 2,272 ============= ============== ============== ============= ============== Allowance for losses for loans receivable (ASB).................. $ 12,916 $ 7,631 $ 106(a) $ 1,448(b) $ 19,205 ============= ============== ============== ============= ============== 1995 ---- Allowance for uncollectible accounts Hawaiian Electric Company, Inc. and subsidiaries................. $ 1,136 $ 2,492 $ 1,266 $ 3,793 $ 1,101 Other companies................... 280 400 -- 38 642 ------------- -------------- -------------- ------------- -------------- $ 1,416 $ 2,892 $ 1,266(a) $ 3,831(b) $ 1,743 ============= ============== ============== ============= ============== Allowance for uncollectible interest (ASB).................... $ 1,101 $ 172 $ -- $ -- $ 1,273 ============= ============== ============== ============= ============== Allowance for losses for loans receivable (ASB).................. $ 8,793 $ 4,887 $ 392(a) $ 1,156(b) $ 12,916 ============= ============== ============== ============= ==============(a) Primarily bad debts recovered. (a) Primarily bad debts recovered. (b) Bad debts charged off. (c) Primarily related to loans receivable acquired from BoA. 61
(b) Bad debts charged off. The exhibits designated by an asterisk (*) are filed herein. The exhibits not so designated are incorporated by reference to the indicated filing. A copy of any exhibit may be obtained upon written request for a $0.20 per page charge from the HEI Shareholder Services Division, P.O. Box 730, Honolulu, Hawaii
96808- 0730.96808-0730.
EXHIBIT NO. DESCRIPTION - ----------- -----------Exhibit no.
Description
HEI:
- ----------------3(i).1
HEI'sHEI’s Restated Articles of Incorporation (Exhibit 4(b) to Registration No. 33-7895). 3(i).2
Articles of Amendment of HEI, filed June 30, 1990amending HEI’s Restated Articles of Incorporation (Exhibit 4(b) to Registration No. 33-40813).*3(i)3(i).3
Statement of Issuance of Shares of Preferred or Special Classes in Series for HEI Series A Junior Participating Preferred Stock filed October 28, 1997.(Exhibit 3(i).3 to HEI’s Annual Report on Form 10-K for the fiscal year ended December 31, 1997, File No. 1-8503).3(ii)
HEI'sHEI’s Amended and Restated By-LawsBy-Laws. (Exhibit 3(ii) to HEI’s Annual Report on Form10-Q10-K for thequarterfiscal year endedSeptember 30, 1997)December 31, 2001, File No. 1-8503).4.1
Agreement to provide the SEC with instruments which define the rights of holders of certain long-term debt of HEI and its subsidiaries (Exhibit 4.1 to HEI'sHEI’s Annual Report on Form 10-K for the fiscal year ended December 31, 1992, File No. 1-8503).4.2
Rights Agreement, dated as of October 28, 1997, between HEI and Continental Stock Transfer & Trust Company, as Rights Agent, which includes as Exhibit B thereto the Form of Rights Certificates (Exhibit 1 to HEI'sHEI’s Form 8-A, dated October 28, 1997, File No. 1-8503).4.3
Indenture, dated as of October 15, 1988, between HEI and Citibank, N.A., as Trustee (Exhibit 4 to Registration No. 33-25216). 4.4
First Supplemental Indenture dated as of June 1, 1993 between HEI and Citibank, N.A., as Trustee, to Indenture dated as of October 15, 1988 between HEI and Citibank, N.A., as Trustee (Exhibit 4(a) to HEI'sHEI’s Quarterly Report on Form 10-Q for the quarter ended September 30, 1993, File No. 1-8503).4.4(a)
Second Supplemental Indenture dated as of April 1, 1999 between HEI and Citibank, N.A., as Trustee, to Indenture dated as of October 15, 1988 between HEI and Citibank, N.A., as Trustee (Exhibit 4.1 to HEI’s Quarterly Report on Form 10-Q for the quarter ended March 31, 1999, File No. 1-8503). 4.4(b)
Third Supplemental Indenture dated as of August 1, 2002 between HEI and Citibank, N.A., as Trustee, to Indenture dated as of October 15, 1988 between HEI and Citibank, N.A., as Trustee (Exhibit 4 to HEI’s Current Report on Form 8-K dated August 16, 2002, File No. 1-8503). 4.5
Pricing Supplements Nos. 1 through 9 to the Registration Statement on Form S-3 of HEI (Registration No. 33-58820) filed in connection with the sale of Medium-Term Notes, Series B (Exhibit 4(b) to HEI'sHEI’s Quarterly Report on Form 10-Q for the quarter ended September 30, 1993, File No. 1-8503).
Exhibit no.
Description
4.5(a)
Pricing Supplement No. 10 to Registration Statement on Form S-3 of HEI (Registration No. 33-58820) filed in connection with the sale of Medium-Term Notes, Series B (Exhibit 4.7 to HEI's Annual Report on Form 10-K for the fiscal year ended December 31, 1994, File No. 1-8503). 4.5(b)Pricing Supplement No. 11 to Registration Statement on Form S-3 of HEI (Registration No. 33-58820) filed on December 1, 1995 in connection with the sale of Medium-Term Notes, Series B (Exhibit 4.8 to HEI'sHEI’s Annual Report on Form 10-K for the fiscal year ended December 31, 1995, File No. 1-8503).4.5(c)4.5(b)
Pricing Supplement No. 12 to Registration Statement on Form S-3 of HEI (Registration No. 33-58820) filed on February 12, 1996 in connection with the sale of Medium-Term Notes, Series B (Exhibit 4.9 to HEI'sHEI’s Annual Report on Form 10-K for the fiscal year ended December 31, 1995, File No. 1-8503).62
EXHIBIT NO. DESCRIPTION - ----------- -----------4.5(d)4.5(c)
Pricing Supplements Nos. 13 through 14 to Registration Statement on Form S-3 of HEI (Registration No. 33-58820) filed on September 26, 1997 in connection with the sale of Medium-Term Notes, Series B. 4.5(e)4.5(d)
Pricing Supplement No. 15 to Registration Statement on Form S-3 of HEI (Registration No. 33-58820) filed on September 29, 1997 in connection with the sale of Medium-Term Notes, Series B. 4.5(f)4.5(e)
Pricing Supplement No. 16 to Registration Statement on Form S-3 of HEI (Registration No. 33-58820) filed on September 30, 1997 in connection with the sale of Medium-Term Notes, Series B. 4.5(g)4.5(f)
Pricing Supplement No. 17 to Registration Statement on Form S-3 of HEI (Registration No. 33-58820) filed on October 2, 1997 in connection with the sale of Medium-Term Notes, Series B. 4.5(h) Pricing Supplement No. 18 to Registration Statement on Form S-3 of HEI (Registration No. 33-58820) filed on February 5, 1998 in connection with the sale of Medium-Term Notes, Series B. 4.5(i) Pricing Supplement No. 19 to Registration Statement on Form S-3 of HEI (Registration No. 33-58820) filed on February 6, 1998 in connection with the sale of Medium-Term Notes, Series B. 4.5(j)4.5(g)
Pricing Supplement No. 20 to Registration Statement on Form S-3 of HEI (Registration No. 33-58820) filed on February 6, 1998 in connection with the sale of Medium-Term Notes, Series B. 4.5(k)4.5(h)
Pricing Supplement No. 2122 to Registration Statement on Form S-3 of HEI (Registration No. 33-58820) filed onFebruary 12,June 10, 1998 in connection with the sale of Medium-Term Notes, Series B.4.6 Purchase Agreement dated March 7, 1991 among4.5(i)
Pricing Supplement No. 24 to Registration Statement on Form S-3 of HEI and the Purchasers named therein, together(Registration No. 33-58820) filed on June 10, 1998 in connection with the sale of Medium-Term Notes,issuedSeries B.4.5(j)
Pricing Supplement No. 1 to such Purchasers, each dated March 7, 1991, pursuant to the Purchase Agreement (Exhibit 4.5 to HEI's Annual ReportRegistration Statement on Form10-K forS-3 of HEI (Registration No. 333-73225) filed on May 3, 1999 in connection with thefiscal year ended December 31, 1990, Filesale of Medium-Term Notes, Series C.4.5(k)
Pricing Supplement No. 1-8503). 4.7 Composite conformed copy of the Note Purchase Agreement dated as of December 16, 1991 among HEI and the Purchasers named therein (Exhibit 4.62 toHEI's Annual ReportRegistration Statement on Form10-K forS-3 of HEI (Registration No. 333-73225) filed on April 11, 2000 in connection with thefiscal year ended December 31, 1991, Filesale of Medium-Term Notes, Series C.4.5(l)
Pricing Supplement No. 1-8503). 4.83 to Registration Statement on Form S-3 of HEI (Registration No. 333-73225) filed on April 5, 2001 in connection with the sale of Medium-Term Notes, Series C.
Exhibit no.
Description
4.5(m)
Pricing Supplement No. 1 to Registration Statement on Form S-3 of HEI (Registration No. 333-87782) filed on March 5, 2003 in connection with the sale of Medium-Term Notes, Series D. 4.5(n)
Pricing Supplement No. 2 to Registration Statement on Form S-3 of HEI (Registration No. 333-87782) filed on March 5, 2003 in connection with the sale of Medium-Term Notes, Series D. 4.6
Amended and Restated Agreement of Limited Partnership of the PartnershipHEI Preferred Funding, LP dated as of February 1, 1997 (Exhibit 4(e) toHEI'sHEI’s Current Report on Form 8-K dated February 4, 1997, File No. 1-8503).4.94.7
Amended and Restated Trust Agreement of Hawaiian Electric Industries Capital Trust I (HEI Trust I) dated as of February 1, 1997 (Exhibit 4(f) to HEI'sHEI’s Current Report on Form 8-K dated February 4, 1997, File No. 1-8503).4.104.8
Junior Indenture between HEI and The Bank of New York, as Trustee, dated as of February 1, 1997 (Exhibit 4(i) to HEI'sHEI’s Current Report on Form 8-K dated February 4, 1997, File No. 1-8503).63
EXHIBIT NO. DESCRIPTION - ----------- -----------4.11 Officers'4.9
Officers’ Certificate in connection with issuance of 8.36% Junior Subordinated Debenture, Series A, Due 2017 under Junior Indenture of HEI (Exhibit 4(l) to HEI'sHEI’s Current Report on Form 8-K dated February 4, 1997, File No. 1-8503).4.124.10
8.36% Trust Originated Preferred Security (Liquidation Amount $25 Per Trust Preferred Security) of HEI Trust I (Exhibit 4(m) to HEI'sHEI’s Current Report on Form 8-K dated February 4, 1997, File No. 1-8503).4.134.11
8.36% Junior Subordinated Debenture Series A, Due 2017, of HEI (Exhibit 4(n) to HEI'sHEI’s Current Report on Form 8-K dated February 4, 1997, File No. 1-8503).4.144.12
Trust Preferred Securities Guarantee Agreement with respect to HEI Trust I dated as of February 1, 1997 (Exhibit 4(o) to HEI'sHEI’s Current Report on Form 8-K dated February 4, 1997, File No. 1-8503).4.154.13
Partnership Guarantee Agreement with respect to the Partnership dated as of February 1, 1997 (Exhibit 4(p) to HEI'sHEI’s Current Report on Form 8-K dated February 4, 1997, File No. 1-8503).4.164.14
Affiliate Investment Instruments Guarantee Agreement with respect to 8.36% Junior Subordinated Debenture of HEIDI dated as of February 1, 1997 (Exhibit 4(q) to HEI'sHEI’s Current Report on Form 8-K dated February 4, 1997, File No. 1-8503).4.174.15
Certificate Evidencing Trust Common Securities of HEI Trust I dated February 4, 1997 (Exhibit 4.12 to the Quarterly Report on Form 10-Q of HEI Trust I and the Partnership, File No. 1-8503-02, for the quarter ended March 31, 1997). 4.184.16
Certificate Evidencing Partnership Preferred Securities of the Partnership dated February 4, 1997 (Exhibit 4.13 to the Quarterly Report on Form 10-Q of HEI Trust I and the Partnership, File No. 1-8503-02, for the quarter ended March 31, 1997).
Exhibit no.
Description
10.1
PUC Order Nos. 7070, 7153, 7203 and 7256 in Docket No. 4337, including copy of "Conditions“Conditions for the Merger and Corporate Restructuring of Hawaiian Electric Company, Inc."” dated September 23, 1982 (Exhibit 10 to Amendment No. 1 to Form U-1).10.2
Regulatory Capital Maintenance/Dividend Agreement dated May 26, 1988, between HEI, HEIDI and the Federal Savings and Loan Insurance Corporation (by the Federal Home Loan Bank of Seattle) (Exhibit (28)-2 to HEI'sHEI’s Current Report on Form 8-K dated May 26, 1988, File No. 1-8503).10.2(a)10.3
OTS letter regarding release from Part II.B. of the Regulatory Capital Maintenance/Dividend Agreement dated May 26, 1988 (Exhibit 10.3(a) to HEI'sHEI’s Annual Report on Form 10-K for the fiscal year ended December 31, 1992, File No. 1-8503).10.3*10.4
Executive Incentive Compensation Plan (Exhibit 10(a) to HEI's Annual Report on Form 10-K for the fiscal year ended December 31, 1987, File No. 1-8503). 10.4Plan.10.5
HEI Executives'Executives’ Deferred Compensation Plan (Exhibit 10.5 toHEI'sHEI’s Annual Report on Form 10-K for the fiscal year ended December 31, 1990, File No. 1-8503).10.510.6
1987 Stock Option and Incentive Plan of HEI as amended and restated effective February 20, 1996June 19, 2001 (ExhibitA4 toProxy Statement of HEI,HEI’s Current Report on Form 8-K, datedMarch 8, 1996, for the Annual Meeting of Stockholders,June 19, 2001, File No. 1-8503).64
EXHIBIT NO. DESCRIPTION - ----------- -----------10.6*10.7
HEI Long-Term Incentive Plan. *10.8(a)
HEI Supplemental Executive Retirement Plan effective as of January 1, 1989. *10.8(b)
HEI Excess Pay Supplemental Executive Retirement Plan. *10.9
HEI Excess Benefit Plan effective as of January 1, 1994. 10.10
Form of Change-in-Control Agreement (Exhibit 10.1110.14 toHEI'sHEI’s Annual Report on Form 10-K for the fiscal year ended December 31,1988,1989, File No. 1-8503).10.7 HEI Supplemental Executive10.11
Nonemployee Director Retirement Plan, effective Januaryas of October 1, 1989 (Exhibit 10.15 to HEI’s Annual Report on Form 10-K for the fiscal year ended December 31, 1989, File No. 1-8503).*10.12
HEI 1990 Nonemployee Director Stock Plan, As Amended and Restated. 10.13
HEI Nonemployee Directors’ Deferred Compensation Plan (Exhibit 10.910.14 toHEI'sHEI’s Annual Report on Form 10-K for the fiscal year ended December 31, 1990, File No. 1-8503).10.8 HEI Excess Benefit Plan (Exhibit 10.13 (Exhibit A) to HEI's Annual Report on10.14
Form 10-K for the fiscal year ended December 31, 1989, File No. 1-8503). 10.9 Change-in-Control Agreement (Exhibit 10.14 to HEI's Annual Report on Form 10-K for the fiscal year ended December 31, 1989, File No. 1-8503). 10.10 Nonemployee Director Retirement Plan, effective asofOctober 1, 1989 (Exhibit 10.15 to HEI's Annual Report on Form 10-K for the fiscal year ended December 31, 1989, File No. 1-8503). 10.11 HEI 1990 Nonemployee Director Stock Plan (Exhibit 10(a) to HEI's Quarterly Report on Form 10-Q for the quarter ended September 30, 1990, File No. 1-8503). 10.12 HEI Nonemployee Directors' Deferred Compensation Plan (Exhibit 10.14 to HEI's Annual Report on Form 10-K for the fiscal year ended December 31, 1990, File No. 1-8503). 10.13HEI and HECOExecutives'Executives’ Deferred Compensation Agreement. The agreement pertains to and is substantially identical for all the HEI and HECO executive officers (Exhibit 10.15 toHEI'sHEI’s Annual Report on Form 10-K for the fiscal year ended December 31, 1991, File No. 1-8503).10.14 Settlement
Exhibit no.
Description
*10.15
Employment Separation Agreement and General Release made and entered into on February 10, 1994,by and betweenthe Insurance Commissioner as Rehabilitator/Liquidator, HIGRobert F. Mougeot and HEI, and itssubsidiaries,subsidiary and affiliated entities and theHawaii Insurance Guaranty Association,shareholders, directors, officers, employees and agents of HEIHEIDIandothers. (Exhibit 10.20 to HEI's Annual Report on Form 10-K for the fiscal year ended December 31, 1993, File No. 1-8503).its subsidiary and affiliated entities effective November 24, 2002.*10.16
HEI Executive Death Benefit Plan of HEI and Participating Subsidiaries effective September 1, 2001. *11
Computation of Earnings per Share of Common Stock. Filed herein as page 71. *12.184.*12
Computation of Ratio of Earnings to Fixed Charges. Filed herein as pages 7285 and73. 13 Pages 25 to 66 of HEI's 199786.*13.1
HEI’s 2002 Annual Report to Stockholders (with(Appendix A to theexception ofProxy Statement prepared for thedata incorporated by reference in Part I, Part II, Part III and Part IV, no other data appearing in the 1997AnnualReportMeeting to Stockholdersisto bedeemed filed as part of this Form 10-K Annual Report) (HEI Exhibit 13.1held on April 22, 2003)18
KPMG LLP letter re: change in accounting principle (Exhibit 18.1 to HEI's CurrentHEI’s Quarterly Report on Form8-K dated February 27, 1998,10-Q for the quarter ended March 31, 2000, File No. 1-8503).*21.1*21
Subsidiaries of HEI. Filed herein as page 75.pages 88 and 89.*23
Accountants'Accountants’ Consent. Filed herein as page 77. *27.191.*99.1
Written Statement Pursuant to 18 U.S.C. Section 1350, as Adopted by Section 906 of the Sarbanes-Oxley Act of 2002 of Robert F. Clarke, HEI and subsidiaries financial data schedule, December 31, 1997 and year ended December 31, 1997. *27.1(a)Chief Executive Officer. Filed herein as page 92.*99.2
Written Statement Pursuant to 18 U.S.C. Section 1350, as Adopted by Section 906 of the Sarbanes-Oxley Act of 2002 of Eric K. Yeaman, HEI and subsidiaries restated financial data schedule, December 31, 1996 and year ended December 31, 1996. *27.1(b) HEI and subsidiaries restated financial data schedule, December 31, 1995 and year ended December 31, 1995.65
EXHIBIT NO. DESCRIPTION - ----------- -----------*99.1 HEI Dividend Reinvestment and Stock Purchase Plan (as amended through February 2, 1998). *99.2 EighthChief Financial Officer. Filed herein as page 93.*99.3
Amendment 2002-3 to Trust Agreement, made and entered into on February 27, 1998, Between Fidelity Management Trust Company and HEI forthe Hawaiian Electric Industries Retirement Savings Plan for incorporation by reference in the Registration Statement on Form S-8 (Regis. No. 333-02103).HECO:
- ----------------3(i).1
HECO'sHECO’s Certificate of Amendment of Articles of Incorporation (filed June 30, 1987)(Exhibit 3.1 toHECO'sHECO’s Annual Report on Form 10-K for the fiscal year ended December 31, 1988, File No. 1-4955).3(i).2
Statement of Issuance of Sharesof Preferred or Special Classes in Series for HECO Series R Preferred Stockfiled December 15, 1989(Exhibit 3.1(a) toHECO'sHECO’s Annual Report on Form 10-K for the fiscal year ended December 31, 1989, File No. 1-4955).3(i).3
Articles of Amendment to HECO'sHECO’s Amended Articles of Incorporationfiled December 21, 1989(Exhibit 3.1(b) toHECO'sHECO’s Annual Report on Form 10-K for the fiscal year ended December 31, 1989, File No 1-4955).3(i).4
Articles of Amendment to HECO’s Amended Articles of Incorporation (Exhibit 3(i).4 to HECO’s Annual Report on Form 10-K for the fiscal year ended December 31, 1998, File No 1-4955). 3(ii)
HECO'sHECO’s By-Laws (Exhibit 3.2 to HECO'sHECO’s Annual Report on Form 10-K for the fiscal year ended December 31, 1988, File No. 1-4955).4.1
Exhibit no.
Description
*4.1
Agreement to provide the SEC with instruments which define the rights of holders of certain long-term debt of HECO, HELCO and MECO (Exhibit 4 to HECO's Annual Report on Form 10-K for the fiscal year ended December 31, 1988, File No. 1-4955).MECO.4.2
Indenture dated as of December 1, 1993 between HECO and The Bank of New York, as Trustee (Exhibit 4(a) to Registration No. 33-51025). 4.3 Indenture dated as of December 1, 1993 among MECO, HECO, as guarantor, and The Bank of New York, as Trustee (Exhibit 4(b) to Registration No. 33-51025). 4.4 Indenture dated as of December 1, 1993 among HELCO, HECO, as guarantor, and The Bank of New York, as Trustee (Exhibit 4(c) to Registration No. 33-51025). 4.5 Officers' Certificate dated as of December 22, 1993, pursuant to Sections 102 and 301 of the Indenture dated as of December 1, 1993 between HECO and The Bank of New York, as Trustee, establishing the $30,000,000 Notes, 5.83% Series Due 1998 (Exhibit 4.6 to HECO's Annual Report on Form 10-K for the fiscal year ended December 31, 1993, File No. 1-4955). 4.6Amended and Restated Trust Agreement of HECO Capital Trust I (HECO Trust I) dated as of March 1, 1997 (Exhibit 4(c) to HECO'sHECO’s Current Report on Form 8-K dated March 27, 1997, File No. 1-4955).4.74.3
HECO Junior Indenture with The Bank of New York, as Trustee, dated as of March 1, 1997 (Exhibit 4(d) to HECO'sHECO’s Current Report on Form 8-K dated March 27, 1997, File No. 1-4955).4.84.4
8.05% Cumulative Quarterly Income Preferred Security (liquidation preference $25 per preferred security) of HECO Trust I (Exhibit 4(e) to HECO'sHECO’s Current Report on Form 8-K dated March 27, 1997, File No. 1-4955).66
EXHIBIT NO. DESCRIPTION - ----------- -----------4.94.5
8.05% Junior Subordinated Deferrable Interest Debenture, Series 1997 of HECO (Exhibit 4(f) to HECO'sHECO’s Current Report on Form 8-K dated March 27, 1997, File No. 1-4955).4.104.6
Trust Guarantee Agreement with respect to HECO Trust I dated as of March 1, 1997 (Exhibit 4(g) to HECO'sHECO’s Current Report on Form 8-K dated March 27, 1997, File No. 1-4955).4.114.7
MECO Junior Indenture with The Bank of New York, as Trustee, including HECO Subsidiary Guarantee, dated as of March 1, 1997 (with the form of MECO'sMECO’s 8.05% Junior Subordinated Deferrable Interest Debenture, Series 1997 included as Exhibit A) (Exhibit 4(h)-1 toHECO'sHECO’s Current Report on Form 8-K dated March 27, 1997, File No. 1-4955).4.124.8
HELCO Junior Indenture with The Bank of New York, as Trustee, including HECO Subsidiary Guarantee, dated as of March 1, 1997 (with the form of HELCO'sHELCO’s 8.05% Junior Subordinated Deferrable Interest Debenture, Series 1997 included as Exhibit A) (Exhibit 4(h)-2 toHECO'sHECO’s Current Report on Form 8-K dated March 27, 1997, File No. 1-4955).4.134.9
Agreement as to Expenses and Liabilities among HECO Trust I, HECO, MECO and HELCO (Exhibit 4(i) to HECO'sHECO’s Current Report on Form 8-K dated March 27, 1997, File No. 1-4955).4.10
Amended and Restated Trust Agreement of HECO Capital Trust II (HECO Trust II) dated as of December 1, 1998 (Exhibit 4(c) to HECO’s Current Report on Form 8-K dated December 4, 1998, File No. 1-4955). 4.11
HECO Junior Indenture with The Bank of New York, as Trustee, dated as of December 1, 1998 (with the form of HECO’s 7.30% Junior Subordinated Deferrable Interest Debenture, Series 1998, included as Exhibit A) (Exhibit 4(d) to HECO’s Current Report on Form 8-K dated December 4, 1998, File No. 1-4955).
Exhibit no.
Description
4.12
7.30% Cumulative Quarterly Income Preferred Security (liquidation preference $25 per preferred security) of HECO Trust II (Exhibit 4(e) to HECO’s Current Report on Form 8-K dated December 4, 1998, File No. 1-4955). 4.13
Trust Guarantee Agreement with respect to HECO Trust II dated as of December 1, 1998 (Exhibit 4(g) to HECO’s Current Report on Form 8-K dated December 4, 1998, File No. 1-4955). 4.14
MECO Junior Indenture with The Bank of New York, as Trustee, including HECO Subsidiary Guarantee, dated as of December 1, 1998 (with the form of MECO’s 7.30% Junior Subordinated Deferrable Interest Debenture, Series 1998 included as Exhibit A) (Exhibit 4(h) to HECO’s Current Report on Form 8-K dated December 4, 1998, File No. 1-4955). 4.15
HELCO Junior Indenture with The Bank of New York, as Trustee, including HECO Subsidiary Guarantee, dated as of December 1, 1998 (with the form of HELCO’s 7.30% Junior Subordinated Deferrable Interest Debenture, Series 1998) (Substantially the same as the MECO Junior Indenture included as Exhibit 4.14). 4.16
Agreement as to Expenses and Liabilities among HECO Trust II, HECO, MECO and HELCO (Exhibit 4(i) to HECO’s Current Report on Form 8-K dated December 4, 1998, File No. 1-4955). 10.1
Power Purchase Agreement between Kalaeloa Partners, L.P., and HECO dated October 14, 1988 (Exhibit 10(a) to HECO'sHECO’s Quarterly Report on Form 10-Q for the quarter ended September 30, 1988, File No. 1-4955).10.1(a)
Amendment No. 1 to Power Purchase Agreement between HECO and Kalaeloa Partners, L.P., dated June 15, 1989 (Exhibit 10(c) to HECO'sHECO’s Quarterly Report on Form 10-Q for the quarter ended June 30, 1989, File No. 1-4955).10.1(b)
Lease Agreement between Kalaeloa Partners, L.P., as Lessor, and HECO, as Lessee, dated February 27, 1989 (Exhibit 10(d) to HECO'sHECO’s Quarterly Report on Form 10-Q for the quarter ended June 30, 1989, File No. 1-4955).10.1(c)
Restated and Amended Amendment No. 2 to Power Purchase Agreement between HECO and Kalaeloa Partners, L.P., dated February 9, 1990 (Exhibit 10.2(c) to HECO'sHECO’s Annual Report on Form 10-K for the fiscal year ended December 31, 1989, File No. 1-4955).10.1(d)
Amendment No. 3 to Power Purchase Agreement between HECO and Kalaeloa Partners, L.P., dated December 10, 1991 (Exhibit 10.2(e) to HECO'sHECO’s Annual Report on Form 10-K for the fiscal year ended December 31, 1991, File No. 1-4955).10.1(e)
Amendment No. 4 to Power Purchase Agreement between HECO and Kalaeloa Partners, L.P., dated October 1, 1999 (Exhibit 10.1 to HECO’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2000, File No. 1-4955).
Exhibit no. Description
10.2 Power Purchase Agreement between AES Barbers Point, Inc. and HECO, entered into on March 25, 1988 (Exhibit 10(a) to HECO'sHECO’s Quarterly Report on Form 10-Q for the quarter ended March 31, 1988, File No. 1-4955).10.2(a) Agreement between HECO and AES Barbers Point, Inc., pursuant to letters dated May 10, 1988 and April 20, 1988 (Exhibit 10.4 to HECO'sHECO’s Annual Report on Form 10-K for fiscal year ended December 31, 1988, File No. 1-4955).10.2(b) Amendment No. 1, entered into as of August 28, 1988, to Power Purchase Agreement between AES Barbers Point, Inc. and HECO (Exhibit 10 to HECO'sHECO’s Quarterly Report on Form 10-Q for the quarter ended September 30, 1989, File No. 1-4955).67
EXHIBIT NO. DESCRIPTION - ----------- -----------10.2(c) HECO'sHECO’s Conditional Notice of Acceptance to AES Barbers Point, Inc. dated January 15, 1990 (Exhibit 10.3(c) to HECO'sHECO’s Annual Report on Form 10-K for the fiscal year ended December 31, 1989, File No. 1-4955).10.3 Amended and Restated Power Purchase Agreement between Hilo Coast Processing Company and HELCO dated March 24, 1995 (Exhibit 10 to HECO'sHECO’s Quarterly Report on Form 10-Q for the quarter ended March 31, 1995, File No. 1-4955).10.3(a) Second Amended and Restated Power Purchase Agreement between Hilo Coast Power Company and HELCO dated October 4, 1999 (Exhibit 10 to HECO’s Quarterly Report on Form 10-Q for the quarter ended September 30, 1999, File No. 1-4955). 10.3(b) Amendment No. 1 to the Second Amended and Restated Power Purchase Agreement between Hilo Coast Power Company and HELCO dated November 5, 1999 (Exhibit 10.3(b) to HECO’s Annual Report on Form 10-K for fiscal year ended December 31, 2001, File No. 1-4955). 10.4 Agreement between MECO and Hawaiian Commercial & Sugar Company pursuant to letters dated November 29, 1988 and November 1, 1988 (Exhibit 10.8 to HECO'sHECO’s Annual Report on Form 10-K for the fiscal year ended December 31, 1988, File No. 1-4955).10.4(a) Amended and Restated Power Purchase Agreement by and between A&B-Hawaii, Inc., through its division, Hawaiian Commercial & Sugar Company, and MECO, dated November 30, 1989 (Exhibit 10(e) to HECO'sHECO’s Quarterly Report on Form 10-Q for the quarter ended September 30, 1990, File No. 1-4955).10.4(b) First Amendment to Amended and Restated Power Purchase Agreement by and between A&B-Hawaii, Inc., through its division, Hawaiian Commercial & Sugar Company, and MECO, dated November 1, 1990, amending the Amended and Restated Power Purchase Agreement dated November 30, 1989 (Exhibit 10(f) to HECO'sHECO’s Quarterly Report on Form 10-Q for the quarter ended September 30, 1990, File No. 1-4955).*10.4(c)
Exhibit no.
Description
10.4(c)
Letter agreement dated December 11, 1997 to Extend Term of Amended and Restated Power Purchase Agreement Between A&B-Hawaii, Inc., through its division, Hawaiian Commercial & Sugar Company, and MECO dated November 30, 1989, as Amended on November 1, 1990.1990 (Exhibit 10.4(c) to HECO’s Annual Report on Form 10-K for the fiscal year ended December 31, 1997, File No. 1-4955).10.4(d)
Letter agreement dated October 22, 1998 to Extend Term of Amended and Restated Power Purchase Agreement Between A&B-Hawaii, Inc., through its division, Hawaiian Commercial & Sugar Company, and MECO dated November 30, 1989, as Amended on November 1, 1990 (Exhibit 10.4(d) to HECO’s Annual Report on Form 10-K for the fiscal year ended December 31, 1998, File No. 1-4955). 10.4(e)
Termination Notice dated December 27, 1999 for Amended and Restated Power Purchase Agreement by and between A&B Hawaii, Inc., through its division, Hawaiian Commercial & Sugar Company, and MECO, dated November 30, 1989, as amended (Exhibit 10.2 to HECO’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2000, File No. 1-4955). 10.4(f)
Rescission dated January 23, 2001 of Termination Notice for Amended and Restated Power Purchase Agreement by and between A&B Hawaii, Inc., through its division, Hawaiian Commercial & Sugar Company, and MECO, dated November 30, 1989, as amended (Exhibit 10.4(f) to HECO’s Annual Report on Form 10-K for the fiscal year ended December 31, 2000, File No. 1-4955). 10.5
Purchase Power Contract between HELCO and Thermal Power Company dated March 24, 1986 (Exhibit 10(a) to HECO'sHECO’s Quarterly Report on Form 10-Q for the quarter ended June 30, 1989, File No. 1-4955).10.5(a)
Firm Capacity Amendment between HELCO and Puna Geothermal Venture (assignee of AMOR VIII, who is the assignee of Thermal Power Company) dated July 28, 1989 to Purchase Power Contract between HELCO and Thermal Power Company dated March 24, 1986 (Exhibit 10(b) to HECO'sHECO’s Quarterly Report on Form 10-Q for the quarter ended June 30, 1989, File No. 1-4955).*10.5(b)10.5(b)
Amendment made in October 1993 to Purchase Power Contract between HELCO and Puna Geothermal Venture dated March 24, 1986, as amended. *10.5(c)amended (Exhibit 10.5(b) to HECO’s Annual Report on Form 10-K for the fiscal year ended December 31, 1997, File No. 1-4955).10.5(c)
Third Amendment dated March 7, 1995 to the Purchase Power Contract between HELCO and Puna Geothermal Venture dated March 24, 1986, as amended.amended (Exhibit 10.5(c) to HECO’s Annual Report on Form 10-K for the fiscal year ended December 31, 1997, File No. 1-4955).10.5(d)
Performance Agreement and Fourth Amendment dated February 12, 1996 to the Purchase Power Contract between HELCO and Puna Geothermal Venture dated March 24, 1986, as amended (Exhibit 10.5(b) to HECO'sHECO’s Annual Report on Form 10-K for the fiscal year ended December 31, 1995, File No. 1-4955).
Exhibit no.
Description
10.6
Purchase Power Contract between HECO and the City and County of Honolulu dated March 10, 1986 (Exhibit 10.9 to HECO'sHECO’s Annual Report on Form 10-K for the fiscal year ended December 31, 1989, File No. 1-4955).68
EXHIBIT NO. DESCRIPTION - ----------- -----------10.6(a)
Amendment No. 1 to Purchase Power Contract between HECO and the City and County of Honolulu dated March 10, 1986 (Exhibit 10.6 (a) to HECO’s Annual Report on Form 10-K for fiscal year ended December 31, 2001, File No. 1-4955). 10.6(b)
Firm Capacity Amendment, dated April 8, 1991, to Purchase Power Contract, dated March 10, 1986, by and between HECO and the City & County of Honolulu (Exhibit 10 to HECO'sHECO’s Quarterly Report on Form 10-Q for the quarter ended March 31, 1991, File No. 1-4955).*10.6(b)10.6(c)
Amendment No. 2 to Purchase Power Contract Between HECO and City and County of Honolulu dated March 10, 1986. *10.71986 (Exhibit 10.6(c) to HECO’s Annual Report on Form 10-K for the fiscal year ended December 31, 1997, File No. 1-4955).10.7
Power Purchase Agreement between Encogen Hawaii, L.P. and HELCO dated October 22, 1997. The1997 (but with the following attachmentswere omitted from Exhibit no. 10.7:omitted: Attachment C,"Selected“Selected portions of the North American Electric Reliability Council Generating Availability Data System Data Reporting Instructions dated October1996"1996” and Attachment E,"Form“Form of the Interconnection Agreement between Encogen Hawaii, L.P. andHELCO" -HELCO,” which is provided in final form as Exhibit 10.7(a)) (Exhibit 10.7 to HECO’s Annual Report on Form 10-K for the fiscal year ended December 31, 1997, File No. 1-4955).*10.7(a) Interconnection10.7(a)
Power Purchase Agreement between Encogen Hawaii, L.P. and HELCO dated October 22, 1997. *10.81997 (Exhibit 10.7(a) to HECO’s Annual Report on Form 10-K for the fiscal year ended December 31, 1997, File No. 1-4955).10.7(b)
Amendment No. 1, executed on January 14, 1999, to Power Purchase Agreement between Encogen Hawaii, L.P. and HELCO dated October 22, 1997 (Exhibit 10.7(b) to HECO’s Annual Report on Form 10-K for the fiscal year ended December 31, 1998, File No. 1-4955). 10.7(c)
Power Purchase Agreement Novation dated November 8, 1999 by and among Encogen Hawaii, L.P., Hamakua Energy Partners and HELCO (Exhibit 10.7(c) to HECO’s Annual Report on Form 10-K for fiscal year ended December 31, 2001, File No. 1-4955). 10.7(d)
Guarantee Agreement dated November 8, 1999 between TECO Energy, Inc. and HELCO (Exhibit 10.7(d) to HECO’s Annual Report on Form 10-K for fiscal year ended December 31, 2001, File No. 1-4955). 10.8
Low Sulfur Fuel Oil Supply Contract by and between Chevron and HECO dated as of November 14, 1997 (confidential treatment has been requested for portions of this exhibit) (Exhibit 10.8 to HECO’s Annual Report on Form 10-K for the fiscal year ended December 31, 1997, File No. 1-4955). *10.9
Exhibit no.
Description
10.9
Inter-Island Industrial Fuel Oil and Diesel Fuel Supply Contract by and between Chevron and HECO, MECO, HELCO, HTB and YB dated as of November 14, 1997 (confidential treatment has been requested for portions of this exhibit) (Exhibit 10.9 to HECO’s Annual Report on Form 10-K for the fiscal year ended December 31, 1997, File No. 1-4955). *10.1010.10
Facilities and Operating Contract by and between Chevron and HECO dated as of November 14, 1997 (confidential treatment has been requested for portions of this exhibit) (Exhibit 10.10 to HECO’s Annual Report on Form 10-K for the fiscal year ended December 31, 1997, File No. 1-4955). *10.1110.11
Low Sulfur Fuel Oil Supply Contract by and between BHP Petroleum Americas Refining Inc. and HECO dated as of November 14, 1997 (confidential treatment has been requested for portions of this exhibit) (Exhibit 10.11 to HECO’s Annual Report on Form 10-K for the fiscal year ended December 31, 1997, File No. 1-4955). *10.1210.12
Inter-Island Industrial Fuel Oil and Diesel Fuel Supply Contract by and between BHP Petroleum Americas Refining Inc. and HECO, MECO and HELCO dated November 14, 1997 (confidential treatment has been requested for portions of this exhibit) . 10.13 Contract of private carriage by and between HITI and HELCO dated November 10, 1993(Exhibit10.1310.12 toHECO'sHECO’s Annual Report on Form 10-K for the fiscal year ended December 31,1993,1997, File No. 1-4955).*10.13(a) Extension, dated December 1, 1997, of the contract10.13
Contract of private carriage by and between HITI and HELCO dated November 10, 1993.December 4, 2000 (Exhibit 10.13 to HECO’s Annual Report on Form 10-K for the fiscal year ended December 31, 2000, File No. 1-4955).10.14
Contract of private carriage by and between HITI and MECO dated November 12, 1993December 4, 2000 (Exhibit 10.14 toHECO'sHECO’s Annual Report on Form 10-K for the fiscal year ended December1, 1993,31, 2000, File No. 1-4955).*10.14(a) Extension, dated December 1, 1997, of the contract of private carriage by and between HITI and MECO dated November 12, 1993.10.15
HECO Nonemployee Directors'Directors’ Deferred Compensation Plan (Exhibit 10.16 toHECO'sHECO’s Annual Report on Form 10-K for the fiscal year ended December 31, 1990, File No. 1-4955).69
EXHIBIT NO. DESCRIPTION - ----------- -----------10.16
HEI and HECO Executives'Executives’ Deferred Compensation Agreement. The agreement pertains to and is substantially identical for all the HEI and HECO executive officers (Exhibit 10.15 toHEI'sHEI’s Annual Report on Form 10-K for the fiscal year ended December 31, 1991, File No. 1-8503).11
Computation of Earnings Per Share of Common Stock. See note on page 24 ofHECO's 1997HECO’s AnnualReport to Stockholder attached as HECO Exhibit 13 hereto. *12.2Report.*12
Computation of Ratio of Earnings to Fixed Charges. Filed herein as page 74. 1387.*13.2
Pages 1 to 2, 4 to 3457 and3659 ofHECO's 1997HECO’s Annual Reportto Stockholder(with the exception of the data incorporated by reference in Part I, Part II, Part III and Part IV, no other data appearing in the19972002 Annual Report to Stockholder is to be deemed filed as part of this Form 10-K Annual Report)(HECO Exhibit 13.218
KPMG LLP letter re: change in accounting principle (Exhibit 18.2 to HECO's CurrentHECO’s Quarterly Report on Form8-K dated February 27, 1998,10-Q for the quarter ended March 31, 2000, File No. 1-4955).*21.2
Exhibit no.
Description
*21
Subsidiaries of HECO. Filed herein as page 76. *27.290.*99.1
Written Statement Pursuant to 18 U.S.C. Section 1350, as Adopted by Section 906 of the Sarbanes-Oxley Act of 2002 of T. Michael May, HECO and subsidiaries financial data schedule, December 31, 1997 and year ended December 31, 1997.Chief Executive Officer. Filed herein as page 94.*99.2
Written Statement Pursuant to 18 U.S.C. Section 1350, as Adopted by Section 906 of the Sarbanes-Oxley Act of 2002 of Richard von Gnechten, HECO Chief Financial Officer. Filed herein as page 95. *99.3
Reconciliation of electric utility operating income per HEI and HECO Consolidated Statements of Income. Filed herein as page 78.96.70HEI Exhibit 11
Hawaiian Electric Industries, Inc.
COMPUTATION OF EARNINGS PER SHARE
OF COMMON STOCK
Years ended December 31,
1997, 1996, 1995, 19942002, 2001, 2000, 1999 and1993
(in thousands, except per share amounts) 1997 1996 1995 1994 1993 - ------------------------------------------------------------------------------------------------------------------------NET INCOME (LOSS) Continuing operations....... $86,442 $78,658 $77,493 $73,030 $ 61,684 Discontinued operations..... -- -- -- -- (13,025) --------------- --------------- --------------- --------------- ---------------- $86,442 $78,658 $77,493 $73,030 $ 48,659 =============== =============== =============== =============== ================ WEIGHTED AVERAGE NUMBER OF COMMON SHARES OUTSTANDING.. 31,375 30,310 29,187 28,137 25,938 =============== =============== =============== =============== ================ ADJUSTED WEIGHTED AVERAGE NUMBER OF COMMON SHARES OUTSTANDING................ 31,470 30,388 29,248 28,193 25,989 =============== =============== =============== =============== ================ BASIC EARNINGS (LOSS) PER COMMON SHARE Continuing operations....... $ 2.76 $ 2.60 $ 2.66 $ 2.60 $ 2.38 Discontinued operations..... -- -- -- -- (0.50) --------------- --------------- --------------- --------------- ---------------- $ 2.76 $ 2.60 $ 2.66 $ 2.60 $ 1.88 =============== =============== =============== =============== ================ DILUTED EARNINGS (LOSS) PER COMMON SHARE Continuing operations....... $ 2.75 $ 2.59 $ 2.65 $ 2.59 $ 2.37 Discontinued operations..... -- -- -- -- (0.50) --------------- --------------- --------------- --------------- ---------------- $ 2.75 $ 2.59 $ 2.65 $ 2.59 $ 1.87 =============== =============== =============== =============== ================711998
(in thousands, except per share amounts)
2002 2001 2000 1999 1998 Net income (loss)
Continuing operations
$ 118,217 $ 107,746 $ 109,336 $ 96,426 $ 97,262 Discontinued operations
— (24,041 ) (63,592 ) 421 (12,451 ) $ 118,217 $ 83,705 $ 45,744 $ 96,847 $ 84,811 Weighted-average number of common shares outstanding
36,278 33,754 32,545 32,188 32,014 Adjusted weighted-average number of common shares outstanding
36,477 33,942 32,687 32,291 32,129 Basic earnings (loss) per common share
Continuing operations
$ 3.26 $ 3.19 $ 3.36 $ 3.00 $ 3.04 Discontinued operations
— (0.71 ) (1.95 ) 0.01 (0.39 ) $ 3.26 $ 2.48 $ 1.41 $ 3.01 $ 2.65 Diluted earnings (loss) per common share
Continuing operations
$ 3.24 $ 3.18 $ 3.35 $ 2.99 $ 3.03 Discontinued operations
— (0.71 ) (1.95 ) 0.01 (0.39 ) $ 3.24 $ 2.47 $ 1.40 $ 3.00 $ 2.64 HEI Exhibit
12.112 (page 1 of 2)Hawaiian Electric Industries, Inc.
COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES
Years ended December 31,
1997, 1996, 1995, 19942002, 2001, 2000, 1999 and19931998
2002 2001 2000 (dollars in thousands)
(1) (2) (1) (2) (1) (2) Fixed charges
Total interest charges (3)
$ 151,543 $ 225,174 $ 175,780 $ 292,311 $ 196,980 $ 316,172 Interest component of rentals
4,501 4,501 4,268 4,268 4,332 4,332 Pretax preferred stock dividend requirements of subsidiaries
3,069 3,069 3,069 3,069 3,109 3,109 Preferred securities distributions of trust subsidiaries
16,035 16,035 16,035 16,035 16,035 16,035 Total fixed charges
$ 175,148 $ 248,779 $ 199,152 $ 315,683 $ 220,456 $ 339,648 Earnings
Pretax income from continuing operations
$ 181,909 $ 181,909 $ 165,903 $ 165,903 $ 170,495 $ 170,495 Fixed charges, as shown
175,148 248,779 199,152 315,683 220,456 339,648 Interest capitalized
(1,855 ) (1,855 ) (2,258 ) (2,258 ) (2,922 ) (2,922 ) Earnings available for fixed charges
$ 355,202 $ 428,833 $ 362,797 $ 479,328 $ 388,029 $ 507,221 Ratio of earnings to fixed charges
2.03 1.72 1.82 1.52 1.76 1.49
1997 1996 1995 ------------------------ ------------------------- ------------------------ (dollars(1) Excluding interest on ASB deposits.
(2) Including interest on ASB deposits.
(3) Interest on nonrecourse debt from leveraged leases is not included in thousands) (1) (2) (1) (2) (1) (2) - -------------------------------------------------------------------------------------------------------------------------FIXED CHARGES Totaltotal interest chargesThe Company (3)................. $140,422 $229,521 $129,647 $220,811 $117,494 $206,790 Proportionate sharenor in interest expense in HEI’s consolidated statements offifty-percent-owned persons.... 569 569 751 751 867 867 Interest component of rentals.... 2,973 2,973 3,583 3,583 3,857 3,857 Pretax preferred stock dividend requirements of subsidiaries.... 9,986 9,986 10,731 10,731 11,433 11,433 Preferred securities distributions of trust subsidiaries.................... 10,600 10,600 -- -- -- -- -------- -------- -------- -------- -------- -------- TOTAL FIXED CHARGES.............. $164,550 $253,649 $144,712 $235,876 $133,651 $222,947 ======== ======== ======== ======== ======== ======== EARNINGS Pretax income from continuing operations...................... $141,783 $141,783 $133,488 $133,488 $133,233 $133,233 Fixed charges, as shown.......... 164,550 253,649 144,712 235,876 133,651 222,947 Interest capitalized The Company..................... (6,442) (6,442) (7,177) (7,177) (6,337) (6,337) Proportionate share of fifty-percent-owned persons.... (128) (128) (746) (746) (867) (867) -------- -------- -------- -------- -------- -------- EARNINGS AVAILABLE FOR FIXED CHARGES......................... $299,763 $388,862 $270,277 $361,441 $259,680 $348,976 ======== ======== ======== ======== ======== ======== RATIO OF EARNINGS TO FIXED CHARGES......................... 1.82 1.53 1.87 1.53 1.94 1.57 ======== ======== ======== ======== ======== ========income.(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. 72HEI Exhibit
12.112 (page 2 of 2)Hawaiian Electric Industries, Inc.
COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES
Years ended December 31,
1997, 1996, 1995, 19942002, 2001, 2000, 1999 and1993--Continued1998—Continued
1999 1998 (dollars in thousands)
(1) (2) (1) (2) Fixed charges
Total interest charges (3)
$ 158,947 $ 279,285 $ 144,911 $ 286,980 Interest component of rentals
4,370 4,370 3,559 3,559 Pretax preferred stock dividend requirements of subsidiaries
3,407 3,407 9,379 9,379 Preferred securities distributions of trust subsidiaries
16,025 16,025 12,557 12,557 Total fixed charges
$ 182,749 $ 303,087 $ 170,406 $ 312,475 Earnings Pretax income from continuing operations
$ 155,129 $ 155,129 $ 155,283 $ 155,283 Fixed charges, as shown
182,749 303,087 170,406 312,475 Interest capitalized
(2,576 ) (2,576 ) (5,915 ) (5,915 ) Earnings available for fixed charges
$ 335,302 $ 455,640 $ 319,774 $ 461,843 Ratio of earnings to fixed charges
1.83 1.50 1.88 1.48
1994 1993 -------------------------- -------------------------- (dollars(1) Excluding interest on ASB deposits.
(2) Including interest on ASB deposits.
(3) Interest on nonrecourse debt from leveraged leases is not included in thousands) (1) (2) (1) (2) - --------------------------------------------------------------------------------------------------------FIXED CHARGES Totaltotal interest chargesThe Company (3)...................... $ 82,306 $158,815 $ 68,254 $145,905 Proportionate sharenor in interest expense in HEI’s consolidated statements offifty-percent-owned persons......... 539 539 564 564 Interest component of rentals......... 3,819 3,819 3,944 3,944 Pretax preferred stock dividend requirements of subsidiaries......... 11,899 11,899 11,018 11,018 ------------ ------------- ------------- ------------- TOTAL FIXED CHARGES................... $ 98,563 $175,072 $ 83,780 $161,431 ============ ============= ============= ============= EARNINGS Pretax income from continuing operations........................... $126,049 $126,049 $108,770 $108,770 Fixed charges, as shown............... 98,563 175,072 83,780 161,431 Interest capitalized The Company.......................... (4,924) (4,924) (3,881) (3,881) Proportionate share of fifty-percent-owned persons......... (539) (539) (408) (408) ------------ ------------- ------------- ------------- EARNINGS AVAILABLE FOR FIXED CHARGES.. $219,149 $295,658 $188,261 $265,912 ============ ============= ============= ============= RATIO OF EARNINGS TO FIXED CHARGES.... 2.22 1.69 2.25 1.65 ============ ============= ============= =============income.(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. 73HECO Exhibit
12.212Hawaiian Electric Company, Inc.
COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES
Years ended December 31,
1997, 1996, 1995, 19942002, 2001, 2000, 1999 and1993
(dollars in thousands) 1997 1996 1995 1994 1993 - ---------------------------------------------------------------------------------------------------------------------FIXED CHARGES Total interest charges................ $ 48,778 $ 47,451 $ 44,377 $ 37,340 $ 35,287 Interest component of rentals......... 757 690 672 808 970 Pretax preferred stock dividend requirements of subsidiaries......... 4,150 4,358 4,494 4,651 3,425 Preferred securities distributions of trust subsidiary..................... 3,052 -- -- -- -- ------------------------------------------------------------------------------- TOTAL FIXED CHARGES................... $ 56,737 $ 52,499 $ 49,543 $ 42,799 $ 39,682 =============================================================================== EARNINGS Income before preferred stock dividends of HECO.................... $ 81,849 $ 85,213 $ 77,023 $ 65,961 $ 56,126 Fixed charges, as shown............... 56,737 52,499 49,543 42,799 39,682 Income taxes (see note below)......... 52,535 55,888 50,198 43,588 36,897 Allowance for borrowed funds used during construction.................. (6,190) (5,862) (5,112) (4,043) (3,869) ------------------------------------------------------------------------------- EARNINGS AVAILABLE FOR FIXED CHARGES.. $184,931 $187,738 $171,652 $148,305 $128,836 =============================================================================== RATIO OF EARNINGS TO FIXED CHARGES.... 3.26 3.58 3.46 3.47 3.25 =============================================================================== Note: Income taxes is comprised of the following: Income tax expense relating to operating income for regulatory purposes............................ $ 52,795 $ 56,170 $ 50,719 $ 43,820 $ 37,007 Income tax benefit relating to nonoperating loss................... (260) (282) (521) (232) (110) ------------------------------------------------------------------------------- $ 52,535 $ 55,888 $ 50,198 $ 43,588 $ 36,897 ===============================================================================741998
(dollars in thousands)
2002 2001 2000 1999 1998 Fixed charges
Total interest charges
$ 44,232 $ 47,056 $ 49,062 $ 48,461 $ 47,921 Interest component of rentals
663 728 696 784 730 Pretax preferred stock dividend requirements of subsidiaries
1,434 1,433 1,438 1,479 4,081 Preferred securities distributions of trust subsidiaries
7,675 7,675 7,675 7,665 4,197 Total fixed charges
$ 54,004 $ 56,892 $ 58,871 $ 58,389 $ 56,929 Earnings
Income before preferred stock dividends of HECO
$ 91,285 $ 89,380 $ 88,366 $ 76,400 $ 84,230 Fixed charges, as shown
54,004 56,892 58,871 58,389 56,929 Income taxes (see note below)
56,658 55,416 55,375 48,047 54,572 Allowance for borrowed funds used during construction
(1,855 ) (2,258 ) (2,922 ) (2,576 ) (5,915 ) Earnings available for fixed charges
$ 200,092 $ 199,430 $ 199,690 $ 180,260 $ 189,816 Ratio of earnings to fixed charges
3.71 3.51 3.39 3.09 3.33 Note:
Income taxes is comprised of the following:
Income tax expense relating to operating income from regulated activities
$ 56,729 $ 55,434 $ 55,213 $ 48,281 $ 54,719 Income tax expense (benefit) relating to results from nonregulated activities
(71 ) (18 ) 162 (234 ) (147 ) $ 56,658 $ 55,416 $ 55,375 $ 48,047 $ 54,572 HEI Exhibit
21.121 (Page 1 of 2)Hawaiian Electric Industries, Inc.
SUBSIDIARIES OF THE REGISTRANT
The following is a list of all direct and indirect subsidiaries of the registrant as of March 10, 2003. The state/place of incorporation or organization is noted in parentheses and subsidiaries of intermediate parent companies are designated by indentations.
Hawaiian Electric Company, Inc. (Hawaii)
Maui Electric Company, Limited (Hawaii)
Hawaii Electric Light Company, Inc. (Hawaii)
HECO Capital Trust I (Delaware)
HECO Capital Trust II (Delaware)
Renewable Hawaii, Inc. (Hawaii)
HEI Diversified, Inc. (Hawaii)
American Savings Bank, F.S.B. (federally chartered)
American Savings Investment Services Corp. (Hawaii)
Bishop Insurance Agency of Hawaii, Inc. (Hawaii)
ASB Service Corporation (Hawaii)
AdCommunications, Inc. (Hawaii)
American Savings Mortgage Co., Inc. (Hawaii)
ASB Realty Corporation (Hawaii)
Pacific Energy Conservation Services, Inc. (Hawaii)
HEI District Cooling, Inc. (Hawaii) (currently inactive)
ProVision Technologies, Inc. (Hawaii)
HEI Properties, Inc. (Hawaii)
HEI Leasing, Inc. (Hawaii) (currently inactive)
Hycap Management, Inc. (Delaware)
HEI Preferred Funding, LP (a limited partnership in which Hycap Management, Inc. is the sole general partner) (Delaware)
Hawaiian Electric Industries Capital Trust I (a business trust) (Delaware)
Hawaiian Electric Industries Capital Trust II (a business trust) (Delaware) (at all times inactive entities)
Hawaiian Electric Industries Capital Trust III (a business trust) (Delaware) (at all times inactive entities)
The Old Oahu Tug Service, Inc. (Hawaii) (currently inactive)
HEI Exhibit 21 (Page 2 of 2)
Hawaiian Electric Industries, Inc.
SUBSIDIARIES OF THE REGISTRANT
(continued)
Discontinued operations:
HEI Power Corp. (Hawaii)
HEI Power Corp. Saipan (Commonwealth of the Northern Mariana Islands) (dissolved on March 18, 2003)
HEI Power Corp. International (Cayman Islands)
HEI Power Corp. Philippines (Cayman Islands)
HEIPC Philippine Development, LLC (Cayman Islands)
Lake Mainit Power, LLC (Cayman Islands) (certified to be dissolved on March 31, 2003)
HEI Power Corp. China (Republic of Mauritius)
HEI Power Corp. China II (Republic of Mauritius)
United Power Pacific Company Limited (Republic of Mauritius)
Baotou Tianjiao Power Co., Ltd. (People’s Republic of China)
(75% owned by United Power Pacific Company Limited)
HEI Investments, Inc. (Hawaii) (activity of leverage leases included in continuing operations)
Malama Pacific Corp. (Hawaii)
HECO Exhibit 21
Hawaiian Electric Company, Inc.
SUBSIDIARIES OF THE REGISTRANT
The following is a list of all subsidiaries of the registrant as of March
17, 1998:10, 2003. The state/place of incorporation or organization is noted in parentheses.
State of incorporation or Name organization - ------------------------------------------------------------------------------------------------------Hawaiian Electric Company, Inc., including subsidiariesMaui Electric Company, Limited (Hawaii)
Hawaii Electric Light Company, Inc.
and HECO Hawaii Capital Trust I....................................................... HEI Investment Corp.................................................... Hawaii Malama Pacific Corp., including subsidiaries Malama Waterfront Corp., Malama Property Investment Corp., Malama Development Corp., Malama Realty Corp., Malama Elua Corp., TMG Service Corp., Malama Hoaloha Corp., Malama Mohala Corp. and Baldwin*Malama (a limited partnership in which Malama Development Corp. is the sole general partner)............................................................ Hawaii Hawaiian Tug & Barge Corp., including subsidiary Young Brothers, Limited............................................................... Hawaii HEI Diversified, Inc., including subsidiary HEIDI Real Estate Corp. Hawaii (except American and American Savings Bank, F.S.B. and its subsidiaries, American Savings Bank, F.S.B., which Savings Investment Services Corp., ASB Service Corporation, is federally chartered) AdCommunications, Inc. and American Savings Mortgage Co., Inc. Pacific Energy Conservation Services, Inc.............................. Hawaii HEI Power Corp., including subsidiary HEI Power Corp. Guam and Cayman Islands subsidiary, HEI Power Corp. International and its Cayman Islands subsidiaries, HEIPC Cambodia Ventures, HEIPC Phnom Penh Power (Limited), LLC, HEIPC Phnom Penh Power (General), LLC, HEIPC Philippine Ventures, HEIPC Philippine Development, LLC, HEIPC Lake Mainit Power, LLC, HEIPC Bulacan I and HEIPC Bulacan II and its Hawaii, unless otherwise Republic of Mauritius subsidiary, HEI Power Corp. China............... noted Hycap Management, Inc., including subsidiary HEI Preferred Funding, LP (a limited partnership in which Hycap Management, Inc. is the sole general partner)...................................................... Delaware Hawaiian Electric Industries Capital Trust I (a business trust)........ Delaware Hawaiian Electric Industries Capital Trust II (a business trust)....... Delaware Hawaiian Electric Industries Capital Trust III (a business trust)...... Delaware75HECO Exhibit 21.2 Hawaiian Electric Company, Inc. SUBSIDIARIES OF THE REGISTRANT The following is a list of all subsidiaries of the registrant as of March 17, 1998:
Name State of incorporation - ------------------------------------------------------------------------------------------------------Maui Electric Company, Limited......................................... Hawaii Hawaii Electric Light Company, Inc..................................... Hawaii(Hawaii)HECO Capital Trust I (a business trust)
................................ Delaware(Delaware)HECO Capital Trust II (a business trust) (Delaware)
Renewable Hawaii, Inc. (Hawaii)
76[KPMG Peat Marwick letterhead]HEI Exhibit 23
Accountants'[KPMG LLP letterhead]
Accountants’ Consent
--------------------The Board of Directors
Hawaiian Electric Industries, Inc.:
We consent to incorporation by reference in Registration Statement Nos.
33- 56561, 33-58820333-18809, 333-56312 and333-18809333-87782 on Form S-3 andinRegistration Statement Nos.33- 65234,33-65234, 333-05667 and 333-02103 on Form S-8 of Hawaiian Electric Industries, Inc., andinRegistration Statement Nos. 333-18809-01, 333-18809-02,333-18809- 03333-18809-03 and 333-18809-04 on Form S-3 of Hawaiian Electric Industries Capital Trust I, Hawaiian Electric Industries Capital Trust II, Hawaiian Electric Industries Capital Trust III and HEI Preferred Funding, LP of our report dated January19, 1998,20, 2003, relating to the consolidated balance sheets of Hawaiian Electric Industries, Inc. and subsidiaries as of December 31,19972002 and1996,2001, and the related consolidated statements of income,retained earningschanges in stockholders’ equity, and cash flows for each of the years in the three-year period ended December 31,1997,2002, which report is incorporated by reference in the19972002 annual report on Form 10-K of Hawaiian Electric Industries, Inc. We also consent to incorporation by reference of our report dated January19, 199820, 2003 relating to the financial statement schedules of Hawaiian Electric Industries, Inc. in the aforementioned19972002 annual report on Form 10-K, which report is included in said Form 10-K./s/ KPMG Peat Marwick LLPOur reports refer to a change to the accounting method for goodwill and other intangible assets and for stock-based compensation.
/s/ KPMG LLP Honolulu, Hawaii
March
17, 1998 7718, 2003 HEI Exhibit 99.1
Hawaiian Electric Industries, Inc.
Written Statement of Chief Executive Officer Pursuant to
18 U.S.C. Section 1350,
as Adopted by
Section 906 of the Sarbanes-Oxley Act of 2002
In connection with the Annual Report of Hawaiian Electric Industries, Inc. (HEI) on Form 10-K for the year ended December 31, 2002 as filed with the Securities and Exchange Commission (the Report), I, Robert F. Clarke, Chief Executive Officer of HEI, certify, pursuant to 18 U.S.C. Section 1350, as adopted by Section 906 of the Sarbanes-Oxley Act of 2002, to the best of my knowledge, that:
(1) The Report fully complies with the requirements of section 13(a) of the Securities Exchange Act of 1934; and
(2) The consolidated information contained in the Report fairly presents, in all material respects, the financial condition as of December 31, 2002 and results of operations for the year ended December 31, 2002 of HEI and its subsidiaries.
/s/ Robert F. Clarke
Robert F. Clarke
Chairman, President and Chief Executive Officer of HEI
Date: March 18, 2003
HEI Exhibit 99.2
Hawaiian Electric Industries, Inc.
Written Statement of Chief Financial Officer Pursuant to
18 U.S.C. Section 1350,
as Adopted by
Section 906 of the Sarbanes-Oxley Act of 2002
In connection with the Annual Report of Hawaiian Electric Industries, Inc. (HEI) on Form 10-K for the year ended December 31, 2002 as filed with the Securities and Exchange Commission (the Report), I, Eric K. Yeaman, Chief Financial Officer of HEI, certify, pursuant to 18 U.S.C. Section 1350, as adopted by Section 906 of the Sarbanes-Oxley Act of 2002, to the best of my knowledge, that:
(1) The Report fully complies with the requirements of section 13(a) of the Securities Exchange Act of 1934; and
(2) The consolidated information contained in the Report fairly presents, in all material respects, the financial condition as of December 31, 2002 and results of operations for the year ended December 31, 2002 of HEI and its subsidiaries.
/s/ Eric K. Yeaman
Eric K. Yeaman
Financial Vice President, Treasurer and Chief Financial Officer of HEI
Date: March 18, 2003
HECO Exhibit
99.299.1Hawaiian Electric Company, Inc.
Written Statement of Chief Executive Officer Pursuant to
18 U.S.C. Section 1350,
as Adopted by
Section 906 of the Sarbanes-Oxley Act of 2002
In connection with the Annual Report of Hawaiian Electric Company, Inc. (HECO) on Form 10-K for the year ended December 31, 2002 as filed with the Securities and Exchange Commission (the HECO Report), I, T. Michael May, Chief Executive Officer of HECO, certify, pursuant to 18 U.S.C. Section 1350, as adopted by Section 906 of the Sarbanes-Oxley Act of 2002, to the best of my knowledge, that:
(1) The HECO Report fully complies with the requirements of section 13(a) of the Securities Exchange Act of 1934; and
(2) The HECO consolidated information contained in the HECO Report fairly presents, in all material respects, the financial condition as of December 31, 2002 and results of operations for the year ended December 31, 2002 of HECO and its subsidiaries.
/s/ T. Michael May
T. Michael May
President and Chief Executive Officer of HECO
Date: March 18, 2003
HECO Exhibit 99.2
Hawaiian Electric Company, Inc.
Written Statement of Chief Financial Officer Pursuant to
18 U.S.C. Section 1350,
as Adopted by
Section 906 of the Sarbanes-Oxley Act of 2002
In connection with the Annual Report of Hawaiian Electric Company, Inc. (HECO) on Form 10-K for the year ended December 31, 2002 as filed with the Securities and Exchange Commission (the HECO Report), I, Richard A. von Gnechten, Chief Financial Officer of HECO, certify, pursuant to 18 U.S.C. Section 1350, as adopted by Section 906 of the Sarbanes-Oxley Act of 2002, to the best of my knowledge, that:
(1) The HECO Report fully complies with the requirements of section 13(a) of the Securities Exchange Act of 1934; and
(2) The HECO consolidated information contained in the HECO Report fairly presents, in all material respects, the financial condition as of December 31, 2002 and results of operations for the year ended December 31, 2002 of HECO and its subsidiaries.
/s/ Richard A. von Gnechten
Richard A. von Gnechten
Financial Vice President
(Principal Financial Officer of HECO)
Date: March 18, 2003
HECO Exhibit 99.3
Hawaiian Electric Company, Inc.
RECONCILIATION OF ELECTRIC UTILITY OPERATING
INCOME PER HEI AND HECO CONSOLIDATED
STATEMENTS OF INCOME
Years ended December 31, ----------------------------------------------------- (in thousands) 1997 1996 1995 - ---------------------------------------------------------------------------------------------------------------Operating income from regulated and nonregulated activities before income taxes (per HEI Consolidated Statements of Income).................................... $171,753 $173,613 $159,043 Deduct: Income taxes on regulated activities..................... (52,795) (56,170) (50,719) Revenues from nonregulated activities.................... (8,768) (9,442) (6,732) Add: Expenses from nonregulated activities.................... 850 790 1,130 ----------------------------------------------------- Operating income from regulated activities after income taxes (per HECO Consolidated Statements of Income)....... $111,040 $108,791 $102,722 =====================================================78
Years ended December 31, (in thousands)
2002 2001 2000 Operating income from regulated and nonregulated activities before income taxes (per HEI Consolidated Statements of Income)
$ 194,956 $ 193,945 $ 193,091 Deduct:
Income taxes on regulated activities
(56,729 ) (55,434 ) (55,213 ) Revenues from nonregulated activities
(4,247 ) (4,992 ) (6,535 ) Add:
Expenses from nonregulated activities
1,177 1,813 1,818 Operating income from regulated activities after income taxes (per HECO Consolidated Statements of Income)
$ 135,157 $ 135,332 $ 133,161 Pursuant to the requirements of Section 13 or 15(d) 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
signaturesexecution ofthe undersigned companiesthis report by registrant Hawaiian Electric Company, Inc. shall be deemed to relate only to matters having reference to suchcompaniesregistrant andany subsidiaries thereof. HAWAIIAN ELECTRIC INDUSTRIES, INC. HAWAIIAN ELECTRIC COMPANY, INC. (Registrant) (Registrant) By /s/ Robert F. Mougeot By /s/ Paul Oyer ------------------------------------- ----------------------------- Robert F. Mougeot Paul A. Oyer Financial Vice President and Financial Vice President and Chief Financial Officer of HEI Treasurer of HECO (Principal Financial Officer of HEI) (Principal Financial Officer of HECO) Date: March 26, 1998 Date: March 26, 1998its subsidiaries.
HAWAIIAN ELECTRIC INDUSTRIES, INC.
HAWAIIAN ELECTRIC COMPANY, INC.
(Registrant) (Registrant) By
/s/ Eric K. Yeaman
By /s/ Richard A. von Gnechten
Eric K. Yeaman Richard A. von Gnechten Financial Vice President, Treasurer and Chief Financial Officer of HEI Financial Vice President of HECO (Principal Financial Officer of HEI) (Principal Financial Officer of HECO) Date: March 18, 2003
Date: March 18, 2003 Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrants and in the capacities indicated on March
26, 1998.18, 2003. Thesignatureexecution of this report by each of the undersigned who signs this report solely in such person’s capacity as a director or officer of Hawaiian Electric Company, Inc. shall be deemed to relate only to matters having reference tothe above-named companiessuch registrant andany subsidiaries thereof.its subsidiaries.
SIGNATURE TITLE - ---------------------------------------- -------------------------------------------/s/Signature
Title
/s/ Robert F. Clarke
Chairman, President and Director of HEI - ----------------------------------------Chairman of the Board of Directors ofHECOHEIRobert F. Clarke (ChiefChairman of the Board of Directors of HECO (Chief Executive Officer of HEI) /s//s/ T. Michael May
Senior Vice President andDirector of HEI - ----------------------------------------T. Michael May President and Director of HECO T. Michael May (Chief(Chief Executive Officer of HECO) /s/ Robert F. Mougeot Financial Vice President and - ---------------------------------------- Chief Financial Officer of HEI Robert F. Mougeot (Principal Financial Officer of HEI) /s/ Curtis Y. Harada Controller of HEI - ---------------------------------------- (Principal Accounting Officer of HEI) Curtis Y. Harada /s/ Paul Oyer/s/ Eric K. Yeaman
Financial Vice President, Treasurer and - ---------------------------------------- Director of HECO Paul A. Oyer (PrincipalChief Financial Officer ofHECO)HEIEric K. Yeaman (Principal Financial Officer of HEI) /s/ Curtis Y. Harada
Controller of HEI Curtis Y. Harada (Principal Accounting Officer of HEI) 79SIGNATURES
(CONTINUED)(continued)
SIGNATURE TITLE - ---------------------------------------- -------------------------------------------/s/Signature
Title
/s/ Richard A. von Gnechten
Financial Vice President Richard A. von Gnechten (Principal Financial Officer of HECO) /s/ Ernest T. Shiraki
Controller of HECO - ---------------------------------------- (PrincipalErnest T. Shiraki (Principal Accounting Officer of HECO) Ernest T. Shiraki/s/ Don E. Carroll
Director of HEI - ----------------------------------------Don E. Carroll /s/ Edwin L. Carter/s/ Shirley J. Daniel
Director of HEI and HECO - ---------------------------------------- Edwin L. Carter /s/ Richard HendersonShirley J. Daniel /s/ Constance H. Lau
Director of HEI Constance H. Lau Director of HEI Victor Hao Li /s/ Bill D. Mills
Director of HEI Bill D. Mills Director of HEI A. Maurice Myers
SIGNATURES (continued)
Signature
Title
/s/ Diane J. Plotts
Director of HEI and HECO - ---------------------------------------- Richard Henderson /s/ Victor Hao Li Director of HEI - ---------------------------------------- Victor Hao Li /s/ Bill D. Mills Director of HEI - ---------------------------------------- Bill D. Mills /s/ A. Maurice Myers Director of HEI - ---------------------------------------- A. Maurice Myers80SIGNATURES (CONTINUED)
SIGNATURE TITLE - ---------------------------------------- -------------------------------------------/s/Diane J. Plotts /s/ James K. Scott
Director of HEI and HECO - ---------------------------------------- Diane J. Plotts /s/James K. Scott /s/ Oswald K. Stender
Director of HEI Oswald K. Stender /s/ Anne M. Takabuki
Director of HECO Anne M. Takabuki /s/ Barry K. Taniguchi
Director of HECO Barry K. Taniguchi /s/ Kelvin H. Taketa
Director of HEI Kelvin H. Taketa /s/ Jeffrey N. Watanabe
Director of HEI - ---------------------------------------- James K. Scott /s/ Oswald K. Stender Director of HEI - ---------------------------------------- Oswald K. Stender /s/ Anne M. Takabuki Director ofand HECO- ---------------------------------------- Anne M. Takabuki /s/ Kelvin H. Taketa Director of HEI - ---------------------------------------- Kelvin H. Taketa /s/Jeffrey N. Watanabe DirectorCertification Pursuant to Section 13a-14 of the Securities Exchange Act of 1934 of Robert F. Clarke (HEI Chief Executive Officer)
I, Robert F. Clarke, certify that:
1. I have reviewed this annual report on Form 10-K of Hawaiian Electric Industries, Inc. (HEI);
2. Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report;
3. Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this annual report;
4. The registrant’s other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this annual report is being prepared;
b) evaluated the effectiveness of HEI - ---------------------------------------- Jeffrey N. Watanabe /s/ Paul C. Yuen Directorthe registrant’s disclosure controls and procedures as ofHECO - ---------------------------------------- Paul C. Yuena date within 90 days prior to the filing date of this annual report (the “Evaluation Date”); and81
| c) | presented in this annual report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; |
5. The registrant’s other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent functions):
| a) | all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant’s ability to record, process, summarize and report financial data and have identified for the registrant’s auditors any material weaknesses in internal controls; and |
| b) | any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal controls; and |
6. The registrant’s other certifying officers and I have indicated in this annual report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.
Date: March 18, 2003
/s/ Robert F. Clarke |
Robert F. Clarke |
Chairman, President and Chief Executive Officer |
Certification Pursuant to Section 13a-14 of the Securities Exchange Act of 1934 of Eric K. Yeaman (HEI Chief Financial Officer)
I, Eric K. Yeaman, certify that:
1. I have reviewed this annual report on Form 10-K of Hawaiian Electric Industries, Inc. (HEI);
2. Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report;
3. Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this annual report;
4. The registrant’s other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
| a) | designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this annual report is being prepared; |
| b) | evaluated the effectiveness of the registrant’s disclosure controls and procedures as of a date within 90 days prior to the filing date of this annual report (the “Evaluation Date”); and |
| c) | presented in this annual report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; |
5. The registrant’s other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent functions):
| a) | all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant’s ability to record, process, summarize and report financial data and have identified for the registrant’s auditors any material weaknesses in internal controls; and |
| b) | any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal controls; and |
6. The registrant’s other certifying officers and I have indicated in this annual report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.
Date: March 18, 2003
/s/ Eric K. Yeaman |
Eric K. Yeaman |
Financial Vice President, Treasurer and Chief Financial Officer |
Certification Pursuant to Section 13a-14 of the Securities Exchange Act of 1934 of T. Michael May (HECO Chief Executive Officer)
I, T. Michael May, certify that:
1. I have reviewed this annual report on Form 10-K of Hawaiian Electric Company, Inc. (HECO);
2. Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report;
3. Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this annual report;
4. The registrant’s other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
| a) | designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this annual report is being prepared; |
| b) | evaluated the effectiveness of the registrant’s disclosure controls and procedures as of a date within 90 days prior to the filing date of this annual report (the “Evaluation Date”); and |
| c) | presented in this annual report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; |
5. The registrant’s other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent functions):
| a) | all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant’s ability to record, process, summarize and report financial data and have identified for the registrant’s auditors any material weaknesses in internal controls; and |
| b) | any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal controls; and |
6. The registrant’s other certifying officers and I have indicated in this annual report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.
Date: March 18, 2003
/s/ T. Michael May |
T. Michael May |
President and Chief Executive Officer |
Certification Pursuant to Section 13a-14 of the Securities Exchange Act of 1934 of Richard A. von Gnechten (HECO Chief Financial Officer)
I, Richard A. von Gnechten, certify that:
1. I have reviewed this annual report on Form 10-K of Hawaiian Electric Company, Inc. (HECO);
2. Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report;
3. Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this annual report;
4. The registrant’s other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
| a) | designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this annual report is being prepared; |
| b) | evaluated the effectiveness of the registrant’s disclosure controls and procedures as of a date within 90 days prior to the filing date of this annual report (the “Evaluation Date”); and |
| c) | presented in this annual report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; |
5. The registrant’s other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent functions):
| a) | all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant’s ability to record, process, summarize and report financial data and have identified for the registrant’s auditors any material weaknesses in internal controls; and |
| b) | any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal controls; and |
6. The registrant’s other certifying officers and I have indicated in this annual report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.
Date: March 18, 2003
/s/ Richard A. von Gnechten |
Richard A. von Gnechten |
Financial Vice President |
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