UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-Q
xQUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended March 31, 2003 OR oTRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 Exact Name of Registrant as Commission I.R.S. Employer HAWAIIAN ELECTRIC INDUSTRIES, INC. 1-8503 99-0208097 and Principal Subsidiary HAWAIIAN ELECTRIC COMPANY, INC. 1-4955 99-0040500 State of Hawaii (State or other jurisdiction of incorporation or organization) 900 Richards Street, Honolulu, Hawaii 96813 (Address of principal executive offices and zip code) Hawaiian Electric Industries, Inc. — (808) 543-5662 Hawaiian Electric Company, Inc. — (808) 543-7771 (Registrant’s telephone number, including area code) (Former name, former address and former fiscal year, if changed since last report) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yesx No o Indicate by check mark whether Registrant Hawaiian Electric Industries, Inc. is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Yes x Noo Indicate by check mark whether Registrant Hawaiian Electric Company, Inc. is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Yes o APPLICABLE ONLY TO CORPORATE ISSUERS: Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date. Class of Common Stock Outstanding Hawaiian Electric Industries, Inc. (Without Par Value) Hawaiian Electric Company, Inc. ($6 2/3 Par Value) 12,805,843 Shares (not publicly traded) Hawaiian Electric Industries, Inc. and INDEX Page ii v Item 1. Hawaiian Electric Industries, Inc. and Consolidated balance sheets (unaudited) - 1 2 3 4 5 Hawaiian Electric Company, Inc. and Consolidated balance sheets (unaudited) - Item 2. Management’s discussion and analysis of financial condition and results of operations Item 3. Item 4. Item 1. Item 4. 49 Item 5. Item 6. i Hawaiian Electric Industries, Inc. and Terms Definitions AES Hawaii AES Hawaii, Inc., formerly known as AES Barbers Point, Inc. AFUDC Allowance for funds used during construction ASB American Savings Bank, F.S.B., a wholly owned subsidiary of HEI Diversified, Inc. and parent company of American Savings Investment Services Corp. (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 BLNR Board of Land and Natural Resources of the State of Hawaii CDUP Conservation District Use Permit CEPALCO Cagayan Electric Power & Light Co., Inc. 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. and its subsidiaries Consumer Advocate Division of Consumer Advocacy, Department of Commerce and Consumer Affairs of the State of Hawaii D&O Decision and order DLNR Department of Land and Natural Resources of the State of Hawaii DOH Department of Health of the State of Hawaii DRIP HEI Dividend Reinvestment and Stock Purchase Plan EAB Environmental Appeals Board EPA Environmental Protection Agency - federal ii GLOSSARY OF TERMS, continued Terms Definitions FASB Financial Accounting Standards Board Federal U.S. Government FHLB Federal Home Loan Bank GAAP Accounting principles generally accepted in the United States of America HECO Hawaiian Electric Company, Inc., an electric utility subsidiary of Hawaiian Electric Industries, Inc. and parent company of Maui Electric Company, Limited, Hawaii Electric Light Company, Inc., HECO Capital Trust I, HEI Hawaiian Electric Industries, Inc., direct parent company of Hawaiian Electric Company, Inc., HEI Diversified, Inc., Pacific Energy Conservation Services, Inc., HEI District Cooling, Inc., ProVision Technologies, Inc., HEI Properties, Inc., HEI Leasing, Inc., Hycap Management, Inc., Hawaiian Electric Industries Capital Trust I, Hawaiian Electric Industries Capital Trust II, Hawaiian Electric Industries Capital Trust III, The Old Oahu Tug Service, Inc. (formerly Hawaiian Tug & Barge Corp.), HEI Power Corp. and Malama Pacific Corp. HEIDI HEI Diversified, Inc., a wholly owned subsidiary of Hawaiian Electric Industries, Inc. and the parent company of American Savings Bank, F.S.B. HEIII HEI Investments, Inc. (formerly HEI Investment Corp.), a subsidiary of HEI Power Corp. HEIPC HEI Power Corp., a wholly owned subsidiary of Hawaiian Electric Industries, Inc., and the parent company of several subsidiaries. On October 23, 2001, the HEI Board of Directors adopted a formal plan to exit the international power business (engaged in by HEIPC and its subsidiaries). HEIPC HEI Power Corp. and its subsidiaries HELCO Hawaii Electric Light Company, Inc., a wholly owned electric utility subsidiary of Hawaiian Electric Company, Inc. HTB Hawaiian Tug & Barge Corp. On November 10, 1999, HTB sold substantially all of its operating assets and the stock of Young Brothers, Limited, and changed its name to The Old Oahu Tug Service, Inc. iii GLOSSARY OF TERMS, continued Terms Definitions IPP Independent power producer MECO Maui Electric Company, Limited, a wholly owned electric utility subsidiary of Hawaiian Electric Company, Inc. MW Megawatt OTS Office of Thrift Supervision, Department of Treasury PBR Performance-based rate-making PPA Power purchase agreement PRPs Potentially responsible parties PUC Public Utilities Commission of the State of Hawaii RFEIS Revised Final Environmental Impact Statement RHI Renewable Hawaii, Inc. ROACE Return on average common equity SEC Securities and Exchange Commission SFAS Statement of Financial Accounting Standards TOOTS The Old Oahu Tug Service, Inc. (formerly Hawaiian Tug & Barge Corp. (HTB)), a wholly owned subsidiary of Hawaiian Electric Industries, Inc. On November 10, 1999, HTB sold Young Brothers, Limited and substantially all of HTB’s operating assets and changed its name YB Young Brothers, Limited, which was sold on November 10, 1999, was formerly a wholly owned subsidiary of Hawaiian Tug & Barge Corp. iv FORWARD-LOOKING STATEMENTS AND RISK FACTORS This report and other presentations made by Hawaiian Electric Industries, Inc. (HEI) and Risks, uncertainties and other important factors that could cause actual results to differ materially from those in forward-looking statements and from historical results include, but are not limited to, the following: • the effects of international, national and local economic conditions, including the condition of the Hawaii tourist and construction industries and the Hawaii and • the effects of weather and natural disasters; • the effects of terrorist acts, • the timing and extent of changes in interest rates; • the risks inherent in changes in the value of and market for securities available for • 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 • federal, state and international governmental and regulatory actions, including changes in laws, rules and regulations applicable to HEI, HECO and • the risks associated with the geographic concentration of HEI’s businesses; • the effects of changes in accounting principles applicable to HEI, HECO and • the effects of changes by securities rating agencies in the ratings of the securities of HEI and • the results of financing efforts; • faster than expected loan prepayments that can cause an acceleration of the amortization 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 assets 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 • the risks of suffering losses that are uninsured; and • other risks or uncertainties described elsewhere in this report and in other periodic reports previously and subsequently filed by HEI and/or HECO with the 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. v PART I - FINANCIAL INFORMATION Item 1. Financial statements (in thousands) September 30, December 31, Assets Cash and equivalents $ 251,467 $ 450,827 Accounts receivable and unbilled revenues, net 170,264 164,124 Available-for-sale investment and mortgage-related securities 2,011,842 1,613,710 Available-for-sale mortgage-related securities pledged for repurchase agreements 755,764 756,749 Held-to-maturity investment securities 88,047 84,211 Loans receivable, net 2,885,007 2,857,622 Property, plant and equipment, net of accumulated depreciation of $1,413,670 and $1,332,979 2,059,411 2,067,503 Regulatory assets 107,093 111,376 Other 336,395 309,874 Goodwill and other intangibles 97,947 101,947 $ 8,763,237 $ 8,517,943 Liabilities and stockholders’ equity Liabilities Accounts payable $ 151,543 $ 119,850 Deposit liabilities 3,749,455 3,679,586 Short-term borrowings 29,829 — Securities sold under agreements to repurchase 617,542 683,180 Advances from Federal Home Loan Bank 1,183,752 1,032,752 Long-term debt 1,083,517 1,145,769 Deferred income taxes 229,043 185,436 Contributions in aid of construction 212,814 213,557 Other 235,088 293,742 7,492,583 7,353,872 HEI- and HECO-obligated preferred securities of trust subsidiaries directly or indirectly holding solely HEI and HEI-guaranteed and HECO and HECO-guaranteed subordinated debentures 200,000 200,000 Preferred stock of subsidiaries - not subject to mandatory redemption 34,406 34,406 234,406 234,406 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: 36,572 shares and 35,600 shares 831,591 787,374 Retained earnings 171,299 147,837 Accumulated other comprehensive income (loss) Net unrealized gains (losses) on securities $ 34,191 $ (5,181 ) Minimum pension liability (833 ) 33,358 (365 ) (5,546 ) 1,036,248 929,665 $ 8,763,237 $ 8,517,943 (in thousands) March 31, December 31, Assets Cash and equivalents $ 316,481 $ 244,525 Accounts receivable and unbilled revenues, net 171,747 176,327 Available-for-sale investment and mortgage-related securities 1,799,368 1,960,288 Available-for-sale mortgage-related securities pledged for repurchase agreements 989,745 784,362 Held-to-maturity investment securities 91,035 89,545 Loans receivable, net 3,038,671 2,993,989 Property, plant and equipment, net of accumulated depreciation of $1,465,054 and $1,437,366 2,075,007 2,079,325 Regulatory assets 104,558 105,568 Other 345,858 345,002 Goodwill and other intangibles. 95,514 97,572 $ 9,027,984 $ 8,876,503 Liabilities and stockholders’ equity Liabilities Accounts payable $ 142,565 $ 134,416 Deposit liabilities 3,815,201 3,800,772 Securities sold under agreements to repurchase 845,959 667,247 Advances from Federal Home Loan Bank 1,057,252 1,176,252 Long-term debt, net 1,189,265 1,106,270 Deferred income taxes 230,689 235,431 Contributions in aid of construction 220,340 218,094 Other 239,641 257,315 7,740,912 7,595,797 HEI- and HECO-obligated preferred securities of trust subsidiaries directly or indirectly holding solely HEI and HEI-guaranteed and HECO and HECO-guaranteed subordinated debentures 200,000 200,000 Preferred stock of subsidiaries - not subject to mandatory redemption 34,406 34,406 234,406 234,406 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: 37,060 shares and 36,809 shares 849,222 839,503 Retained earnings 177,590 176,118 Accumulated other comprehensive income 25,854 30,679 1,052,666 1,046,300 $ 9,027,984 $ 8,876,503 See accompanying 1 Hawaiian Electric Industries, Inc. and Three months ended Nine months ended Three months ended March 31 Three months ended March 31 2003 2002 (in thousands, except per share amounts and (in thousands, except per share amounts and 2002 2001 2002 2001 (in thousands, except per share amounts and ratio of earnings to fixed charges) Revenues Revenues Revenues Electric utility $ 333,636 $ 341,386 $ 919,643 $ 973,460 Electric utility. Electric utility. $ 328,912 $ 278,331 Bank Bank 99,722 108,034 300,633 336,038 Bank 95,102 98,842 Other Other (1,798 ) (2,128 ) (2,278 ) (1,530 ) Other 622 263 431,560 447,292 1,217,998 1,307,968 424,636 377,436 Expenses Expenses Expenses Electric utility Electric utility 280,047 287,064 769,497 821,100 Electric utility 287,937 232,727 Bank Bank 75,156 88,546 229,527 278,829 Bank 72,676 76,671 Other Other 4,650 2,631 13,913 9,354 Other 4,935 3,434 359,853 378,241 1,012,937 1,109,283 365,548 312,832 Operating income (loss) Operating income (loss) Operating income (loss) Electric utility Electric utility 53,589 54,322 150,146 152,360 Electric utility 40,975 45,604 Bank Bank 24,566 19,488 71,106 57,209 Bank 22,426 22,171 Other Other (6,448 ) (4,759 ) (16,191 ) (10,884 ) Other (4,313 ) (3,171 ) 71,707 69,051 205,061 198,685 59,088 64,604 Interest expense—other than bank Interest expense—other than bank (17,751 ) (19,937 ) (54,618 ) (59,461 ) Interest expense—other than bank (17,980 ) (18,527 ) Allowance for borrowed funds used during construction Allowance for borrowed funds used during construction 549 524 1,392 1,711 Allowance for borrowed funds used during construction 443 355 Preferred stock dividends of subsidiaries Preferred stock dividends of subsidiaries (501 ) (501 ) (1,504 ) (1,504 ) Preferred stock dividends of subsidiaries (502 ) (501 ) Preferred securities distributions of trust subsidiaries Preferred securities distributions of trust subsidiaries (4,008 ) (4,008 ) (12,026 ) (12,026 ) Preferred securities distributions of trust subsidiaries (4,009 ) (4,009 ) Allowance for equity funds used during construction Allowance for equity funds used during construction 1,162 998 2,977 3,218 Allowance for equity funds used during construction 988 773 Income before income taxes Income before income taxes 51,158 46,127 141,282 130,623 Income before income taxes 38,028 42,695 Income taxes Income taxes 18,381 17,461 50,602 48,081 Income taxes 13,701 15,823 Income from continuing operations 32,777 28,666 90,680 82,542 Discontinued operations, net of income taxes Loss from operations — (711 ) — (1,254 ) Net loss on disposals — (20,821 ) — (20,821 ) Loss from discontinued operations — (21,532 ) — (22,075 ) Net income Net income $ 32,777 $ 7,134 $ 90,680 $ 60,467 Net income $ 24,327 $ 26,872 Basic earnings (loss) per common share Basic earnings per common share Basic earnings per common share $ 0.66 $ 0.75 Continuing operations $ 0.90 $ 0.85 $ 2.51 $ 2.47 Diluted earnings per common share Diluted earnings per common share $ 0.66 $ 0.75 Discontinued operations — (0.64 ) — (0.66 ) $ 0.90 $ 0.21 $ 2.51 $ 1.81 Diluted earnings (loss) per common share Continuing operations $ 0.89 $ 0.84 $ 2.49 $ 2.46 Discontinued operations — (0.63 ) — (0.66 ) $ 0.89 $ 0.21 $ 2.49 $ 1.80 Dividends per common share $ 0.62 $ 0.62 $ 1.86 $ 1.86 Dividends per common share. Dividends per common share. $ 0.62 $ 0.62 Weighted-average number of common shares outstanding Weighted-average number of common shares outstanding 36,435 33,716 36,150 33,454 Weighted-average number of common shares outstanding 36,897 35,818 Dilutive effect of stock options and dividend equivalents 192 209 200 180 Dilutive effect of stock options and dividend equivalents 189 196 Adjusted weighted-average shares Adjusted weighted-average shares 36,627 33,925 36,350 33,634 Adjusted weighted-average shares 37,086 36,014 Ratio of earnings to fixed charges (SEC method) Ratio of earnings to fixed charges (SEC method) Ratio of earnings to fixed charges (SEC method) Excluding interest on ASB deposits 2.07 1.84 Excluding interest on ASB deposits 1.88 2.00 Including interest on ASB deposits 1.74 1.52 Including interest on ASB deposits 1.66 1.68 See accompanying 2 Hawaiian Electric Industries, Inc. and (in thousands, except per share amounts) Retained Accumulated Total Common stock Shares Amount Balance, December 31, 2001 35,600 $ 787,374 $ 147,837 $ (5,546 ) $ 929,665 Comprehensive income: Net income — — 90,680 — 90,680 Net unrealized gains on securities: Net unrealized gains arising during the period, net of taxes of $13,048 — — — 38,555 38,555 Add: reclassification adjustment for net losses included in net income, net of tax benefits of $1,093 — — — 817 817 Minimum pension liability adjustment, net of tax benefits of $287 — — — (468 ) (468 ) Comprehensive income — — 90,680 38,904 129,584 Issuance of common stock 972 44,217 — — 44,217 Common stock dividends ($1.86 per share) — — (67,218 ) — (67,218 ) Balance, September 30, 2002 36,572 $ 831,591 $ 171,299 $ 33,358 $ 1,036,248 Balance, December 31, 2000 32,991 $ 691,925 $ 147,324 $ (190 ) $ 839,059 Comprehensive income: Net income — — 60,467 — 60,467 Net unrealized gains on securities: Cumulative effect of the adoption of SFAS No. 133, net of tax benefits of $1,294 — — — (559 ) (559 ) Net unrealized gains arising during the period, net of taxes of $10,013 — — — 14,059 14,059 Add: reclassification adjustment for net gains included in net income, net of taxes of $744 — — — (435 ) (435 ) Minimum pension liability adjustment, net of tax benefits of $29 — — — (46 ) (46 ) Comprehensive income — — 60,467 13,019 73,486 Issuance of common stock 859 31,711 — — 31,711 Common stock dividends ($1.86 per share) — — (62,171 ) — (62,171 ) Balance, September 30, 2001 33,850 $ 723,636 $ 145,620 $ 12,829 $ 882,085 Common stock Retained Accumulated Total (in thousands) Shares Amount Balance, December 31, 2002 36,809 $ 839,503 $ 176,118 $ 30,679 $ 1,046,300 Comprehensive income: Net income — — 24,327 — 24,327 Net unrealized losses on securities: Net unrealized losses arising during the period, net of tax benefits of $2,721 — — — (5,899 ) (5,899 ) Add: reclassification adjustment for net realized losses included in net income, net of tax benefits of $632 — — — 1,074 1,074 Comprehensive income (loss) — — 24,327 (4,825 ) 19,502 Issuance of common stock, net 251 9,719 — — 9,719 Common stock dividends ($0.62 per share) — — (22,855 ) — (22,855 ) Balance, March 31, 2003 37,060 $ 849,222 $ 177,590 $ 25,854 $ 1,052,666 Balance, December 31, 2001 35,600 $ 787,374 $ 147,837 $ (5,546 ) $ 929,665 Comprehensive income: Net income — — 26,872 — 26,872 Net unrealized losses on securities: Net unrealized losses arising during the period, net of tax benefits of $648 — — — (3,902 ) (3,902 ) Add: reclassification adjustment for net realized losses included in net income, net of tax benefits of $248 — — — 360 360 Comprehensive income (loss) — — 26,872 (3,542 ) 23,330 Issuance of common stock, net 463 18,277 — — 18,277 Common stock dividends ($0.62 per share) — — (22,221 ) — (22,221 ) Balance, March 31, 2002 36,063 $ 805,651 $ 152,488 $ (9,088 ) $ 949,051 See accompanying 3 Hawaiian Electric Industries, Inc. and Nine months ended September 30 2002 2001 Three months ended March 31 Three months ended March 31 2003 2002 (in thousands) (in thousands) (in thousands) Cash flows from operating activities Cash flows from operating activities Cash flows from operating activities Income from continuing operations Income from continuing operations $ 90,680 $ 82,542 Income from continuing operations $ 24,327 $ 26,872 Adjustments to reconcile income from continuing operations to net cash provided by operating activities Adjustments to reconcile income from continuing operations to net cash provided by operating activities Adjustments to reconcile income from continuing operations to net cash provided by operating activities Depreciation of property, plant and equipment 86,660 82,576 Depreciation of property, plant and equipment 30,056 28,790 Other amortization 18,151 13,430 Other amortization 7,798 5,729 Provision for loan losses 8,000 9,000 Provision for loan losses 1,150 3,500 Deferred income taxes 33,072 455 Writedowns of income notes — 926 Allowance for equity funds used during construction (2,977 ) (3,218 ) Deferred income taxes (2,783 ) (1,598 ) Changes in assets and liabilities Allowance for equity funds used during construction (988 ) (773 ) Decrease (increase) in accounts receivable and unbilled revenues, net (6,140 ) 6,285 Changes in assets and liabilities Increase in accounts payable 31,693 19,694 Decrease in accounts receivable and unbilled revenues, net 4,580 9,853 Decrease in taxes accrued (43,423 ) (10,549 ) Increase in accounts payable 8,149 5,425 Changes in other assets and liabilities (24,046 ) (17,555 ) Decrease in taxes accrued (2,873 ) (12,585 ) Changes in other assets and liabilities (13,812 ) (19,030 ) Net cash provided by operating activities Net cash provided by operating activities 191,670 182,660 Net cash provided by operating activities 55,604 47,109 Cash flows from investing activities Cash flows from investing activities Cash flows from investing activities Proceeds from sale of investment securities — 87,398 Available-for-sale mortgage-related securities purchased Available-for-sale mortgage-related securities purchased (1,299,343 ) (825,069 ) Available-for-sale mortgage-related securities purchased (443,966 ) (740,813 ) Principal repayments on available-for-sale mortgage-related securities Principal repayments on available-for-sale mortgage-related securities 857,932 396,031 Principal repayments on available-for-sale mortgage-related securities 359,990 349,988 Proceeds from sale of mortgage-related securities Proceeds from sale of mortgage-related securities 77,264 440,925 Proceeds from sale of mortgage-related securities 25,536 17,286 Loans receivable originated and purchased Loans receivable originated and purchased (789,453 ) (686,391 ) Loans receivable originated and purchased (308,070 ) (259,780 ) Principal repayments on loans receivable Principal repayments on loans receivable 646,095 533,554 Principal repayments on loans receivable 248,135 214,875 Proceeds from sale of loans Proceeds from sale of loans 103,444 166,991 Proceeds from sale of loans 14,595 98,124 Proceeds from sale of real estate acquired in settlement of loans Proceeds from sale of real estate acquired in settlement of loans 1,022 2,053 Capital expenditures Capital expenditures (82,229 ) (82,068 ) Capital expenditures (25,460 ) (21,064 ) Contributions in aid of construction Contributions in aid of construction 4,842 1,800 Other Other 16,505 14,279 Other 202 (205 ) Net cash provided by (used in) investing activities (469,785 ) 45,650 Net cash used in investing activities Net cash used in investing activities (123,174 ) (337,736 ) Cash flows from financing activities Cash flows from financing activities Cash flows from financing activities Net increase in deposit liabilities 69,869 79,627 Net increase (decrease) in short-term borrowings with original maturities of three months or less 29,829 (62,718 ) Repayment of other short-term borrowings — (3,000 ) Net increase (decrease) in deposit liabilities Net increase (decrease) in deposit liabilities 14,429 (14,841 ) Net increase in retail repurchase agreements Net increase in retail repurchase agreements 9,765 3,310 Net increase in retail repurchase agreements 3,880 4,405 Proceeds from securities sold under agreements to repurchase Proceeds from securities sold under agreements to repurchase 901,531 711,532 Proceeds from securities sold under agreements to repurchase 492,200 518,000 Repayments of securities sold under agreements to repurchase Repayments of securities sold under agreements to repurchase (976,837 ) (587,427 ) Repayments of securities sold under agreements to repurchase (313,500 ) (496,650 ) Proceeds from advances from Federal Home Loan Bank Proceeds from advances from Federal Home Loan Bank 259,000 194,100 Proceeds from advances from Federal Home Loan Bank 70,000 100,000 Principal payments on advances from Federal Home Loan Bank Principal payments on advances from Federal Home Loan Bank (108,000 ) (393,100 ) Principal payments on advances from Federal Home Loan Bank (189,000 ) (38,000 ) Proceeds from issuance of long-term debt Proceeds from issuance of long-term debt 11,691 114,367 Proceeds from issuance of long-term debt 100,943 3,277 Repayment of long-term debt Repayment of long-term debt (64,500 ) (38,500 ) Repayment of long-term debt (18,000 ) (12,500 ) Preferred securities distributions of trust subsidiaries Preferred securities distributions of trust subsidiaries (12,026 ) (12,026 ) Preferred securities distributions of trust subsidiaries (4,009 ) (4,009 ) Net proceeds from issuance of common stock Net proceeds from issuance of common stock 26,564 19,298 Net proceeds from issuance of common stock 5,259 14,148 Common stock dividends Common stock dividends (54,880 ) (50,060 ) Common stock dividends (18,627 ) (18,139 ) Other Other (9,601 ) (13,668 ) Other (3,942 ) (6,189 ) Net cash provided by (used in) financing activities. 82,405 (38,265 ) Net cash provided by financing activities Net cash provided by financing activities 139,633 49,502 Net cash provided by (used in) discontinued operations Net cash provided by (used in) discontinued operations (3,650 ) 34,805 Net cash provided by (used in) discontinued operations (107 ) 1,332 Net increase (decrease) in cash and equivalents Net increase (decrease) in cash and equivalents (199,360 ) 224,850 Net increase (decrease) in cash and equivalents 71,956 (239,793 ) Cash and equivalents, beginning of period Cash and equivalents, beginning of period 450,827 212,783 Cash and equivalents, beginning of period 244,525 450,827 Cash and equivalents, end of period Cash and equivalents, end of period $ 251,467 $ 437,633 Cash and equivalents, end of period $ 316,481 $ 211,034 See accompanying 4 Hawaiian Electric Industries, Inc. and (1) Basis of presentation The accompanying unaudited consolidated financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America (GAAP) for interim financial information and with the instructions to SEC Form 10-Q and Article 10 of Regulation In the opinion of HEI’s management, the accompanying unaudited consolidated financial statements contain all material adjustments required by GAAP to present fairly the Company’s financial position as of When required, certain reclassifications are made to the prior (2) Segment financial information Segment financial information was as follows: (in thousands) (in thousands) Electric Bank Other Total (in thousands) Electric Bank Other Total Three months ended September 30, 2002 Three months ended March 31, 2003 Three months ended March 31, 2003 Revenues from external customers Revenues from external customers $ 333,635 $ 99,722 $ (1,797 ) $ 431,560 Revenues from external customers $ 328,910 $ 95,102 $ 624 $ 424,636 Intersegment revenues (eliminations) Intersegment revenues (eliminations) 1 — (1 ) — Intersegment revenues (eliminations) 2 — (2 ) — Revenues 333,636 99,722 (1,798 ) 431,560 Revenues 328,912 95,102 622 424,636 Profit (loss)* Profit (loss)* 41,829 23,171 (13,842 ) 51,158 Profit (loss)* 28,808 21,039 (11,819 ) 38,028 Income taxes (benefit) Income taxes (benefit) 16,219 8,519 (6,357 ) 18,381 Income taxes (benefit) 11,152 7,531 (4,982 ) 13,701 Income (loss) from continuing operations 25,610 14,652 (7,485 ) 32,777 Net income (loss) 17,656 13,508 (6,837 ) 24,327 Nine months ended September 30, 2002 Assets (at March 31, 2003, including net assets of discontinued operations) Assets (at March 31, 2003, including net assets of discontinued operations) 2,432,053 6,401,906 194,025 9,027,984 Three months ended March 31, 2002 Three months ended March 31, 2002 Revenues from external customers Revenues from external customers $ 919,639 $ 300,633 $ (2,274 ) $ 1,217,998 Revenues from external customers $ 278,330 $ 98,842 $ 264 $ 377,436 Intersegment revenues (eliminations) Intersegment revenues (eliminations) 4 — (4 ) — Intersegment revenues (eliminations) 1 — (1 ) — Revenues 919,643 300,633 (2,278 ) 1,217,998 Revenues 278,331 98,842 263 377,436 Profit (loss)* Profit (loss)* 114,015 66,917 (39,650 ) 141,282 Profit (loss)* 33,228 20,773 (11,306 ) 42,695 Income taxes (benefit) Income taxes (benefit) 44,196 24,102 (17,696 ) 50,602 Income taxes (benefit) 12,869 7,422 (4,468 ) 15,823 Income (loss) from continuing operations 69,819 42,815 (21,954 ) 90,680 Net income (loss) 20,359 13,351 (6,838 ) 26,872 Assets (at September 30, 2002, including net assets of discontinued operations) 2,411,180 6,241,788 110,269 8,763,237 Assets (at March 31, 2002, including net assets of discontinued operations) Assets (at March 31, 2002, including net assets of discontinued operations) 2,373,495 6,072,538 122,753 8,568,786 Three months ended September 30, 2001 Revenues from external customers $ 341,383 $ 108,034 $ (2,125 ) $ 447,292 Intersegment revenues (eliminations) 3 — (3 ) — Revenues 341,386 108,034 (2,128 ) 447,292 Profit (loss)* 41,961 18,087 (13,921 ) 46,127 Income taxes (benefit) 16,266 7,015 (5,820 ) 17,461 Income (loss) from continuing operations 25,695 11,072 (8,101 ) 28,666 Nine months ended September 30, 2001 Revenues from external customers $ 973,454 $ 336,038 $ (1,524 ) $ 1,307,968 Intersegment revenues (eliminations) 6 — (6 ) — Revenues 973,460 336,038 (1,530 ) 1,307,968 Profit (loss)* 114,119 52,989 (36,485 ) 130,623 Income taxes (benefit) 44,283 19,835 (16,037 ) 48,081 Income (loss) from continuing operations 69,836 33,154 (20,448 ) 82,542 Assets (at September 30, 2001, including net assets of discontinued operations) 2,400,849 6,061,760 155,540 8,618,149 * Income (loss) Revenues attributed to foreign countries and long-lived assets located in foreign countries as of the dates and for the periods identified above were not material. 5 (3) Electric utility subsidiary For HECO’s consolidated financial information, including its commitments and contingencies, see pages (4) Bank subsidiary Selected financial information American Savings Bank, F.S.B. and (in thousands) September 30, December 31, March 31, December 31, Assets Cash and equivalents $ 225,084 $ 425,595 $ 204,772 $ 214,704 Available-for-sale mortgage-related securities 2,002,603 1,598,100 1,788,149 1,952,317 Available-for-sale mortgage-related securities pledged for repurchase agreements 755,764 756,749 989,745 784,362 Held-to-maturity investment securities 88,047 84,211 91,035 89,545 Loans receivable, net 2,885,007 2,857,622 3,038,671 2,993,989 Other 187,336 187,224 194,020 196,117 Goodwill and other intangibles 97,947 101,947 95,514 97,572 $ 6,241,788 $ 6,011,448 $ 6,401,906 $ 6,328,606 Liabilities and equity Deposit liabilities–noninterest bearing $ 331,974 $ 246,633 $ 381,482 $ 369,961 Deposit liabilities–interest bearing 3,417,481 3,432,953 3,433,719 3,430,811 Securities sold under agreements to repurchase 617,542 683,180 845,959 667,247 Advances from Federal Home Loan Bank 1,183,752 1,032,752 1,057,252 1,176,252 Other 147,624 130,494 138,142 137,888 5,698,373 5,526,012 5,856,554 5,782,159 Minority interests and preferred stock of subsidiary 3,540 3,409 3,451 3,417 Preferred stock 75,000 75,000 75,000 75,000 Common stock 243,502 242,786 243,868 243,628 Retained earnings 186,608 165,564 199,495 192,692 Accumulated other comprehensive income (loss) 34,765 (1,323 ) Accumulated other comprehensive income 23,538 31,710 464,875 407,027 466,901 468,030 $ 6,241,788 $ 6,011,448 $ 6,401,906 $ 6,328,606 American Savings Bank, F.S.B. and Three months ended Nine months ended Three months ended March 31 2003 2002 (in thousands) 2002 2001 2002 2001 Interest and dividend income Interest and fees on loans $ 50,210 $ 53,760 $ 152,300 $ 178,665 $ 50,473 $ 51,622 Interest on mortgage-related securities 35,503 39,136 103,634 115,331 29,277 31,806 Interest and dividends on investment securities 1,880 4,071 5,979 13,163 1,757 2,226 87,593 96,967 261,913 307,159 81,507 85,654 Interest expense Interest on deposit liabilities 17,833 29,015 57,331 92,241 14,430 20,173 Interest on Federal Home Loan Bank advances 14,905 16,540 43,327 54,267 13,566 13,982 Interest on securities sold under agreements to repurchase 5,683 6,563 15,256 22,922 Interest on securities sold under agreements to purchase 5,341 3,961 38,421 52,118 115,914 169,430 33,337 38,116 Net interest income 49,172 44,849 145,999 137,729 48,170 47,538 Provision for loan losses 1,500 3,000 8,000 9,000 1,150 3,500 Net interest income after provision for loan losses 47,672 41,849 137,999 128,729 47,020 44,038 Other income Fees from other financial services 5,416 4,512 15,381 12,594 5,685 4,620 Fee income on deposit liabilities 4,091 2,309 11,717 6,713 3,870 3,475 Fee income on other financial products 2,592 2,282 7,647 5,850 2,855 2,687 Fee income on loans serviced for others, net (882 ) 663 (369 ) 1,794 (1,002 ) 413 Gain (loss) on sale of securities (913 ) (268 ) (640 ) 3,731 Writedown of investments — — — (6,164 ) Gain on sale of securities 812 156 Other income 1,825 1,569 4,984 4,361 1,375 1,837 12,129 11,067 38,720 28,879 13,595 13,188 General and administrative expenses Compensation and employee benefits 14,753 13,090 44,046 38,647 16,093 14,017 Occupancy and equipment 7,896 7,225 22,387 21,324 7,192 7,115 Data processing 2,579 2,416 8,228 7,515 2,804 2,830 Consulting 1,582 671 4,374 2,298 2,718 1,646 Amortization of goodwill and core deposit intangibles* 433 1,676 1,298 5,021 Other 7,992 8,350 25,280 25,594 9,382 9,447 35,235 33,428 105,613 100,399 38,189 35,055 Income before minority interests and income taxes 24,566 19,488 71,106 57,209 22,426 22,171 Minority interests 42 48 131 162 34 45 Income taxes 8,519 7,015 24,102 19,835 7,531 7,422 Income before preferred stock dividends 16,005 12,425 46,873 37,212 14,861 14,704 Preferred stock dividends 1,353 1,353 4,058 4,058 1,353 1,353 Net income for common stock $ 14,652 $ 11,072 $ 42,815 $ 33,154 $ 13,508 $ 13,351 At Disposition of certain debt securities 7 certificates from held-to-maturity status to available-for-sale status in its financial statements, recognizing a $3.8 million net loss ($5.8 million pretax) on the writedown of these securities to their then-current estimated fair value. In the first six months of 2001, ASB recognized an additional $4.0 million net loss ($6.2 million pretax) on the writedown of three After To bring ASB into compliance with the OTS direction, ASB directed the trustees to terminate the principal Due to the uncertainty of future cash flows, HEI is accounting for the income ASB’s first amended complaint against PaineWebber On April 25, 2003, the Court issued orders with respect to the motions for partial summary judgment 8 The Court’s order does not require an offset for ASB plans to file motions for reconsideration of the limitation on the amount recoverable under ASB’s affirmative claims as well as several other issues. Trial is scheduled to begin in ASB Realty Corporation (5) Discontinued operations HEI Power Corp. (HEIPC) The amounts that HEIPC 9 will ultimately realize from the disposition or sale of the international power assets could differ materially from the recorded amounts. This could occur, for example, if the HEIPC Group is successful in recovery of the costs incurred in connection with (6) Cash flows Supplemental disclosures of cash flow information For the Supplemental disclosures of noncash activities (7) Recent accounting pronouncements and interpretations Asset retirement obligations Rescission of SFAS No. 4, 44 and 64, amendment of SFAS No. 13, and technical corrections 10 Costs associated with exit or disposal activities Guarantor’s accounting and disclosure requirements for guarantees Consolidation of variable interest entities (8) Commitments and contingencies See note (4), “Bank subsidiary,” and note (5), “Discontinued operations,” above and note (4), “Commitments and contingencies,” Three months ended Nine months ended (in thousands, except per share amounts) 2002 2001 2002 2001 Consolidated Reported net income $ 32,777 $ 7,134 $ 90,680 $ 60,467 Goodwill amortization, net of tax benefits — 961 — 2,877 Adjusted net income $ 32,777 $ 8,095 $ 90,680 $ 63,344 Per common share: Reported basic earnings $ 0.90 $ 0.21 $ 2.51 $ 1.81 Goodwill amortization, net of tax benefits — 0.03 — 0.08 Adjusted basic earnings $ 0.90 $ 0.24 $ 2.51 $ 1.89 Per common share: Reported diluted earnings $ 0.89 $ 0.21 $ 2.49 $ 1.80 Goodwill amortization, net of tax benefits — 0.03 — 0.08 Adjusted diluted earnings $ 0.89 $ 0.24 $ 2.49 $ 1.88 Bank Reported net income $ 14,652 $ 11,072 $ 42,815 $ 33,154 Goodwill amortization, net of tax benefits — 961 — 2,877 Adjusted net income $ 14,652 $ 12,033 $ 42,815 $ 36,031 September 30, 2002 December 31, 2001 (in thousands) Gross carrying Accumulated Gross carrying Accumulated Core deposits $ 26,520 $ 17,551 $ 26,520 $ 16,254 Mortgage servicing rights 9,577 3,799 11,025 2,544 $ 36,097 $ 21,350 $ 37,545 $ 18,798 Three months ended Nine months ended (in thousands) 2002 2001 2002 2001 Aggregate amortization expense $ 904 $ 816 $ 2,552 $ 2,151 Hawaiian Electric Company, Inc. and (in thousands, except par value) (in thousands, except par value) September 30, December 31, (in thousands, except par value) March 31, December 31, Assets Assets Assets Utility plant, at cost Utility plant, at cost Utility plant, at cost Land $ 31,867 $ 31,689 Land $ 31,919 $ 31,896 Plant and equipment 3,154,112 3,068,254 Plant and equipment 3,208,120 3,184,818 Less accumulated depreciation (1,341,076 ) (1,266,332 ) Less accumulated depreciation (1,393,901 ) (1,367,954 ) Plant acquisition adjustment, net 315 354 Plant acquisition adjustment, net 289 302 Construction in progress 155,119 170,558 Construction in progress 163,491 164,300 Net utility plant 2,000,337 2,004,523 Net utility plant 2,009,918 2,013,362 Current assets Current assets Current assets Cash and equivalents 1,893 1,858 Cash and equivalents 3,206 1,726 Customer accounts receivable, net 82,376 81,872 Customer accounts receivable, net 85,255 87,113 Accrued unbilled revenues, net 58,255 52,623 Accrued unbilled revenues, net 56,689 60,098 Other accounts receivable, net 2,188 2,652 Other accounts receivable, net 3,867 2,213 Fuel oil stock, at average cost 33,570 24,440 Fuel oil stock, at average cost 42,320 35,649 Materials and supplies, at average cost 20,996 19,702 Materials and supplies, at average cost 21,044 19,450 Prepayments and other 69,846 53,744 Prepayments and other 72,068 75,610 Total current assets 269,124 236,891 Total current assets 284,449 281,859 Other assets Other assets Other assets Regulatory assets 107,093 111,376 Regulatory assets 104,558 105,568 Other 34,626 36,948 Unamortized debt expense 13,149 13,354 Long-term receivables and other 19,979 22,243 Total other assets 141,719 148,324 Total other assets 137,686 141,165 $ 2,411,180 $ 2,389,738 $ 2,432,053 $ 2,436,386 Capitalization and liabilities Capitalization and liabilities Capitalization and liabilities Capitalization Capitalization Capitalization Common stock, $6 2/3 par value, authorized 50,000 shares; outstanding 12,806 shares $ 85,387 $ 85,387 Common stock, $6 2/3 par value, authorized 50,000 shares; outstanding 12,806 shares $ 85,387 $ 85,387 Premium on capital stock 295,814 295,806 Premium on capital stock 295,808 295,846 Retained earnings 534,442 495,961 Retained earnings 544,389 542,023 Common stock equity 915,643 877,154 Common stock equity 925,584 923,256 Cumulative preferred stock – not subject to mandatory redemption 34,293 34,293 Cumulative preferred stock – not subject to mandatory redemption 34,293 34,293 HECO-obligated mandatorily redeemable trust preferred securities of subsidiary trusts holding solely HECO and HECO-guaranteed debentures 100,000 100,000 HECO-obligated mandatorily redeemable trust preferred securities of subsidiary trusts holding solely HECO and HECO-guaranteed debentures 100,000 100,000 Long-term debt 681,634 670,674 Long-term debt, net 698,265 705,270 Total capitalization 1,731,570 1,682,121 Total capitalization 1,758,142 1,762,819 Current liabilities Current liabilities Current liabilities Long-term debt due within one year 883 14,595 Short-term borrowings–affiliate 24,500 5,600 Short-term borrowings–nonaffiliate 29,829 — Accounts payable 56,024 59,992 Short-term borrowings–affiliate 6,499 48,297 Interest and preferred dividends payable 16,780 11,532 Accounts payable 54,919 53,966 Taxes accrued 62,301 79,133 Interest and preferred dividends payable 17,498 11,765 Other 22,790 28,020 Taxes accrued 71,650 86,058 Other 22,932 29,799 Total current liabilities 182,395 184,277 Total current liabilities 204,210 244,480 Deferred credits and other liabilities Deferred credits and other liabilities Deferred credits and other liabilities Deferred income taxes 150,630 145,608 Deferred income taxes 158,428 158,367 Unamortized tax credits 48,341 48,512 Unamortized tax credits 48,395 47,985 Other 63,615 55,460 Other 64,353 64,844 Total deferred credits and other liabilities 262,586 249,580 Total deferred credits and other liabilities 271,176 271,196 Contributions in aid of construction Contributions in aid of construction 212,814 213,557 Contributions in aid of construction 220,340 218,094 $ 2,411,180 $ 2,389,738 $ 2,432,053 $ 2,436,386 See accompanying Hawaiian Electric Company, Inc. and Three months ended Nine months ended Three months ended March 31 2003 2002 (in thousands, except for ratio of earnings to fixed charges) 2002 2001 2002 2001 Operating revenues $ 332,453 $ 340,231 $ 916,402 $ 969,979 $ 327,961 $ 277,333 Operating expenses Fuel oil 85,311 96,665 218,901 266,995 90,839 59,235 Purchased power 87,123 87,670 240,744 253,067 85,354 77,101 Other operation 33,888 30,729 95,573 90,599 38,527 29,223 Maintenance 15,705 14,540 45,727 42,752 14,282 14,012 Depreciation 26,340 25,363 79,063 75,335 27,612 26,360 Taxes, other than income taxes 31,287 31,494 88,769 91,411 31,077 26,690 Income taxes 16,287 16,244 44,110 44,210 11,215 12,791 295,941 302,705 812,887 864,369 298,906 245,412 Operating Income 36,512 37,526 103,515 105,610 Operating income 29,055 31,921 Other income Allowance for equity funds used during construction 1,162 998 2,977 3,218 988 773 Other, net 858 530 2,435 2,467 767 815 2,020 1,528 5,412 5,685 1,755 1,588 Income before interest and other charges 38,532 39,054 108,927 111,295 30,810 33,509 Interest and other charges Interest on long-term debt 10,127 10,126 30,430 30,127 10,324 10,136 Amortization of net bond premium and expense 498 509 1,505 1,546 513 500 Other interest charges 430 832 1,313 4,245 342 451 Allowance for borrowed funds used during construction (549 ) (524 ) (1,392 ) (1,711 ) (443 ) (355 ) Preferred stock dividends of subsidiaries 228 228 686 686 229 229 Preferred securities distributions of trust subsidiaries 1,918 1,918 5,756 5,756 1,919 1,919 12,652 13,089 38,298 40,649 12,884 12,880 Income before preferred stock dividends of HECO 25,880 25,965 70,629 70,646 17,926 20,629 Preferred stock dividends of HECO 270 270 810 810 270 270 Net income for common stock $ 25,610 $ 25,695 $ 69,819 $ 69,836 $ 17,656 $ 20,359 Ratio of earnings to fixed charges (SEC method) 3.80 3.62 3.10 3.45 Hawaiian Electric Company, Inc. and Three months ended Nine months ended Three months ended March 31 2003 2002 (in thousands) 2002 2001 2002 2001 Retained earnings, beginning of period $ 520,757 $ 488,111 $ 495,961 $ 443,970 $ 542,023 $ 495,961 Net income for common stock 25,610 25,695 69,819 69,836 17,656 20,359 Common stock dividends (11,925 ) (17,037 ) (31,338 ) (17,037 ) (15,290 ) (9,233 ) Retained earnings, end of period $ 534,442 $ 496,769 $ 534,442 $ 496,769 $ 544,389 $ 507,087 HEI owns all the common stock of HECO. Therefore, per share data with respect to shares of common stock of HECO are not meaningful. See accompanying Hawaiian Electric Company, Inc. and Nine months ended September 30 2002 2001 Three months ended March 31 Three months ended March 31 2003 2002 (in thousands) (in thousands) (in thousands) Cash flows from operating activities Cash flows from operating activities Cash flows from operating activities Income before preferred stock dividends of HECO Income before preferred stock dividends of HECO $ 70,629 $ 70,646 Income before preferred stock dividends of HECO $ 17,926 $ 20,629 Adjustments to reconcile income before preferred stock dividends of HECO to net cash provided by operating activities Adjustments to reconcile income before preferred stock dividends of HECO to net cash provided by operating activities Adjustments to reconcile income before preferred stock dividends of HECO to net cash provided by operating activities Depreciation of property, plant and equipment 79,063 75,335 Depreciation of property, plant and equipment 27,612 26,360 Other amortization 9,191 9,593 Other amortization 2,134 3,063 Deferred income taxes 5,081 2,324 Deferred income taxes 106 322 Tax credits, net 997 852 Tax credits, net 786 695 Allowance for equity funds used during construction (2,977 ) (3,218 ) Allowance for equity funds used during construction (988 ) (773 ) Changes in assets and liabilities Changes in assets and liabilities Increase in accounts receivable. (40 ) (3,993 ) Decrease in accounts receivable 204 8,975 Decrease (increase) in accrued unbilled revenues (5,632 ) 8,878 Decrease in accrued unbilled revenues 3,409 1,646 Decrease (increase) in fuel oil stock (9,130 ) 720 Increase in fuel oil stock (6,671 ) (1,124 ) Increase in materials and supplies (1,294 ) (4,204 ) Increase in materials and supplies (1,594 ) (1,101 ) Increase in regulatory assets (1,386 ) (2,158 ) Increase in regulatory assets (116 ) (446 ) Increase (decrease) in accounts payable 953 (13,258 ) Decrease in accounts payable (3,968 ) (1,313 ) Increase (decrease) in taxes accrued (14,408 ) 21,069 Decrease in taxes accrued (16,832 ) (21,404 ) Changes in other assets and liabilities (9,724 ) (11,059 ) Changes in other assets and liabilities 7,599 1,333 Net cash provided by operating activities Net cash provided by operating activities 121,323 151,527 Net cash provided by operating activities 29,607 36,862 Cash flows from investing activities Cash flows from investing activities Cash flows from investing activities Capital expenditures Capital expenditures (78,217 ) (77,686 ) Capital expenditures (23,862 ) (20,893 ) Contributions in aid of construction Contributions in aid of construction 7,394 6,773 Contributions in aid of construction 4,842 1,800 Other 56 — Net cash used in investing activities Net cash used in investing activities (70,767 ) (70,913 ) Net cash used in investing activities (19,020 ) (19,093 ) Cash flows from financing activities Cash flows from financing activities Cash flows from financing activities Common stock dividends Common stock dividends (31,338 ) (17,037 ) Common stock dividends (15,290 ) (9,233 ) Preferred stock dividends Preferred stock dividends (810 ) (810 ) Preferred stock dividends (270 ) (270 ) Preferred securities distributions of trust subsidiaries Preferred securities distributions of trust subsidiaries (5,756 ) (5,756 ) Preferred securities distributions of trust subsidiaries (1,919 ) (1,919 ) Proceeds from issuance of long-term debt Proceeds from issuance of long-term debt 11,691 14,367 Proceeds from issuance of long-term debt 943 3,277 Repayment of long-term debt Repayment of long-term debt (5,000 ) — Repayment of long-term debt (8,000 ) (5,000 ) Net decrease in short-term borrowings from nonaffiliates and affiliate with original maturities of three months or less (11,969 ) (57,317 ) Repayment of other short-term borrowings — (3,000 ) Net increase (decrease) in short-term borrowings from affiliate with original maturities of three months or less Net increase (decrease) in short-term borrowings from affiliate with original maturities of three months or less 18,900 (471 ) Other Other (7,339 ) (8,702 ) Other (3,471 ) (5,711 ) Net cash used in financing activities Net cash used in financing activities (50,521 ) (78,255 ) Net cash used in financing activities (9,107 ) (19,327 ) Net increase in cash and equivalents 35 2,359 Net increase (decrease) in cash and equivalents Net increase (decrease) in cash and equivalents 1,480 (1,558 ) Cash and equivalents, beginning of period Cash and equivalents, beginning of period 1,858 1,534 Cash and equivalents, beginning of period 1,726 1,858 Cash and equivalents, end of period Cash and equivalents, end of period $ 1,893 $ 3,893 Cash and equivalents, end of period $ 3,206 $ 300 See accompanying Hawaiian Electric Company, Inc. and (1) Basis of presentation The accompanying unaudited consolidated financial statements have been prepared in conformity with GAAP for interim financial information and with the instructions to SEC Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial statements. In preparing the financial statements, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the balance sheet and the reported amounts of revenues and expenses for the period. Actual results could differ significantly from those estimates. The accompanying unaudited consolidated financial statements should be read in conjunction with the consolidated financial statements and the notes thereto incorporated by reference in HECO’s Annual Report on SEC Form 10-K for the year ended December 31, In the opinion of HECO’s management, the accompanying unaudited consolidated financial statements contain all material adjustments required by GAAP to present fairly the financial position of HECO and its subsidiaries as of When required, certain reclassifications are made to the prior (2) Revenue taxes HECO and its subsidiaries’ operating revenues include amounts for various revenue taxes they collect from customers and pay to taxing authorities. Revenue taxes to be paid to the taxing authorities are recorded as an expense and a corresponding liability in the year the related revenues are recognized. Payments to the taxing authorities are made in the subsequent year. For the (3) Cash flows Supplemental disclosures of cash flow information For the Supplemental disclosure of noncash activities (4) Commitments and contingencies HELCO power situation 15 be included in rate base until the project is installed and “is used and useful for utility purposes.” The PUC at that time also ordered HELCO to continue negotiating with independent power producers (IPPs), stating that the facility to be built should be the one that can be most expeditiously put into service at “allowable cost.” The timing of the installation of HELCO’s phased units has been revised on several occasions due to delays in obtaining an amendment of a land use permit from the Hawaii Board of Land and Natural Resources (BLNR) and an air permit from the Department of Health of the State of Hawaii (DOH) and the U.S. Environmental Protection Agency (EPA) As a result of a September 19, 2002 decision by the Third Circuit Court of the State of Hawaii (Circuit Court), relating to an extension of a construction deadline and described below under “Land use permit amendment,” the construction of CT-4 and CT-5, which had commenced in April 2002 after HELCO had obtained a final air permit and the Circuit Court had lifted a stay on construction, has been suspended. HELCO has appealed this ruling to the Hawaii Supreme Court and is considering other options that may allow HELCO to complete the installation of CT-4 and CT-5 (including The following is a detailed discussion of the existing Keahole situation, including a description of its potential financial statement implications Land use permit The Circuit Court’s final judgment provided that HELCO must comply with the conditions in its application and with the standard land use conditions insofar as those conditions were not inconsistent with HELCO’s default entitlement. There have been numerous proceedings before the Circuit Court and the BLNR in which certain parties (a) have sought determinations of what conditions apply to HELCO’s default entitlement, (b) have claimed that HELCO has not complied with applicable land use conditions and that its default entitlement should thus be forfeited, (c) have claimed that HELCO will not be able to operate the proposed plant without violating applicable land use conditions and provisions of Hawaii’s Air Pollution Control Act and Noise Pollution Act and (d) have sought orders enjoining any further construction at the Keahole site. Although there has not been a final resolution of these claims, there have been several significant rulings claims, some of which may adversely affect HELCO’s ability to construct and efficiently operate CT-4 and CT-5. First, based on a change by the DOH in its interpretation of the noise rules it promulgated under the Hawaii Noise Pollution Act, the Circuit Court ruled standard applies to HELCO’s plant, but left enforcement of the ruling to the DOH. HELCO filed a separate complaint for declaratory relief against the DOH seeking the invalidation of the noise rules on constitutional and other grounds. The Circuit Court denied HELCO’s motion for summary judgment, finding that the noise rules are constitutional on their face but specifically not ruling on the constitutionality of the rules as applied to Keahole. HELCO appealed the final judgment to the Hawaii Supreme Court in August 1999 and a decision on that appeal is pending. The DOH has been periodically monitoring noise levels at the site. If the DOH were to issue a notice of violation based on the stricter standards, HELCO may, among other things, assert that the noise regulations, as applied to it at Keahole, are unconstitutional. Meanwhile, while not waiving possible claims or defenses that it might have against the DOH, HELCO has 16 and CT-5) is Second, in September 2000, the Circuit Court orally ruled Keahole Defense Coalition, Inc. (KDC) and two individuals appealed the BLNR’s March 25, 2002 Order to the Circuit Court, as did the Department of Hawaiian Home Lands. On September 19, 2002, the Circuit Court issued a letter to the parties indicating the Circuit Court’s decision to reverse the BLNR’s Order. The letter states that: 1. The BLNR exceeded its statutory authority in granting the extension of the permit. The findings do not support any authority by statute or rule. 2. The conclusions of law are erroneous. 3. The BLNR’s action in denying Appellants’ motion to subpoena a material witness regarding a letter issued by the DLNR on January 30, 1998 to HELCO (addressing the applicability of the standard land use conditions and stating that the three-year deadline did not apply) violated Appellants’ constitutional rights to a fair hearing. 4. The BLNR’s granting the extension is clearly erroneous in view of the BLNR’s Findings of Fact and Conclusions of Law. The Circuit Court issued an Order to this effect on October 3, 2002. On November 1, 2002, HELCO filed a notice of appeal of the October 3, 2002 Order (which appeal will be decided by the Hawaii Supreme Court or Hawaii Intermediate Court of Appeals). On November 15, 2002, HELCO also filed with the Hawaii Supreme Court a Motion for Stay Pending Disposition of Appeal and a Motion to Expedite Transmission of Record on Appeal. The Motion to Expedite was denied on December 10, 2002. The Motion for Stay was denied in early 2003. On November 25, 2002, KDC and two individuals filed with the Supreme Court a Motion to Dismiss this appeal on the basis that the case was moot since HELCO no longer had a default entitlement because it allegedly violated the BLNR’s March 25, 2002 Order by withdrawing its application to the LUC for a boundary amendment. That motion was denied in early 2003. Accordingly, the Hawaii Supreme Court continues to assert jurisdiction over this appeal and briefs will be filed. On November 1, 2002, HELCO filed with the Circuit Court a notice of appeal of the original November 9, 2000 ruling that the three-year deadline had expired in April 1999. In early 2003, the Supreme Court dismissed that appeal for lack of jurisdiction. The Supreme Court’s Order stated that HELCO’s appeal was not timely filed because it was not filed within 30 days of the Circuit Court’s November 9, 2000 Order, even though the Circuit Court ruled at the time that its Order could not yet be appealed. 17 In the meantime, construction activities on CT-4 and CT-5 have been suspended and steps have been taken to secure the site and protect equipment and personnel. Third, in other pending litigation, at a hearing on May 8, 2002, the Circuit Court denied the following Air permit. In 1997, the National Pollutant Discharge Elimination System (NPDES) Permit. Pursuant to EPA and DOH regulations, which took effect in March 2003, all construction sites greater than one acre must obtain a Land Use Commission petition. One of the conditions of the construction period extension granted by the BLNR (which the Circuit Court’s October 3, 2002 Order now has reversed) was that HELCO file an application for a boundary amendment with the LUC to remove the site from the conservation district. HELCO filed the application on June 21, 2002. A hearing before the LUC was held on September 12, 2002, at which public testimony was taken and memoranda were received regarding the jurisdiction of the LUC in dealing with the HELCO petition. In light of Management’s evaluation; costs incurred. In addition to The recovery of costs relating to CT-4 and CT-5 are subject to the rate-making process governed by the PUC. Management believes no adjustment to costs incurred to put CT-4 and CT-5 into service is required as of 18 put these units into Although management believes it has acted prudently with respect to the Keahole project, effective December 1, 1998, HELCO discontinued the accrual of AFUDC on CT-4 and CT–5 due in part to the Oahu transmission system In November 2000, the DLNR accepted a Revised Final Environmental Impact Statement (RFEIS) prepared in support of HECO’s application for a CDUP. In January 2001, three organizations and an individual filed a complaint against the DLNR and HECO challenging the DLNR’s acceptance of the RFEIS and seeking, among other things, a judicial declaration that the RFEIS is inadequate and null and void. HECO continues to contest the lawsuit. The BLNR held a public hearing on the CDUP in March 2001, at which several groups requested a contested case hearing which was held in November 2001. The hearings officer submitted his report, findings of fact and conclusions of law and recommended that HECO’s request for the CDUP be denied. He concluded that HECO had failed to establish that there is a need that outweighs the transmission line’s adverse impacts on conservation district lands and that there are practical alternatives that could be pursued, including an all-underground route outside the conservation district lands. On June 28, 2002, the BLNR issued a ruling denying HECO’s request for the CDUP. HECO continues to believe that the proposed HECO is evaluating As of 19 all of the incurred costs for rate-making purposes, HECO may be required to write off a material portion or all of the project costs incurred in its efforts to put the Kamoku to Pukele transmission line into 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 HEl On April 22 and 23, 2002, HECO and HEI, respectively, were served with an amended 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 (PPA) between defendants HECO and AES Hawaii, Inc. (AES Hawaii). AES Hawaii is a subsidiary of The AES Corporation (AES), which guarantees certain obligations of AES Hawaii under the amended PPA. HECO entered into a PPA with AES Barbers Point, Inc. (now known as AES Hawaii) in March 1988, and the PPA was amended in August 1989. The AES Hawaii 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 Hawaii, and whether the terms and conditions of the amended PPA were reasonable. The amended complaint alleges that HECO’s payments to AES Hawaii 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 amended 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 amended complaint sought treble damages, attorneys’ fees, rescission of the amended PPA and punitive damages against HECO, HEI, AES Hawaii 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 amended 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 statute 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 amended 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 these Circuit Court rulings, the only remaining claim was 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 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. 20 HECO/HEI filed an answer to the amended complaint on March 17, 2003. On March 20, 2003, HECO and HEI filed a motion for judgment on the pleadings, asking for dismissal of the remaining claims pursuant to the doctrine of primary jurisdiction or, in the alternative, exhaustion of administrative remedies. On April 21, 2003, the court granted in part and denied in part HECO/HEI’s motion for judgment on the pleadings, on the ground that the doctrine of primary jurisdiction applies. The court stayed the action until August 21, 2003, at which time the case will be dismissed if plaintiffs fail to provide proof of having initiated an appropriate PUC proceeding by then. If such proof is provided, the case will remain stayed in state court. Management intends to vigorously defend the lawsuit and any PUC proceeding that Plaintiffs may initiate. Environmental regulation In early 1995, the DOH initially advised HECO, Hawaiian Tug & Barge Corp. (HTB), Young Brothers, Limited (YB) and others that it was conducting an investigation to determine the nature and extent of actual or potential releases of hazardous substances, oil, pollutants or contaminants at or near Honolulu Harbor. The DOH issued letters in December 1995 indicating that it had identified a number of parties, including HECO, HTB and YB, who appear to be potentially responsible for the contamination and/or operated their facilities upon contaminated land. The DOH met with these identified parties in January 1996 and certain of the identified parties (including HECO, Chevron Products Company, the State of Hawaii Department of Transportation Harbors Division and others) formed a Honolulu Harbor Work Group (Work Group). Effective January 30, 1998, the Work Group and the DOH entered into a voluntary agreement and scope of work to determine the nature and extent of any contamination, the potentially responsible parties and appropriate remedial actions. In 1999, the Work Group submitted reports to the DOH presenting environmental conditions and recommendations for additional data gathering to allow for an assessment of the need for risk-based corrective action. The Work Group also engaged a consultant who identified 27 additional potentially responsible parties (PRPs) who were not members of the Work Group, including YB. Under the terms of the 1999 agreement for the sale of YB, HEI and The Old Oahu Tug Service, Inc. In response to the DOH’s request for technical assistance, the EPA became involved with the harbor investigation in June 2000. In November 2000, the DOH issued notices to over 20 other PRPs, including YB, regarding the ongoing investigation in the Honolulu Harbor area. A new voluntary agreement and a joint defense agreement were signed by the parties in the Work Group and some of the new PRPs, including Phillips Petroleum, but not YB. The group is now called the Iwilei District Participating Parties (Participating Parties). The Participating Parties agreed to fund remediation work using an interim cost allocation In July 2001, the EPA issued a notice of interest (Initial NOI) under the Oil Pollution Act of 1990 to In September 2001, the EPA and DOH concurrently issued notices of interest (collectively, the Second NOI) to the members of the Participating Parties, including HECO and TOOTS. The Second NOI identified several investigative and preliminary oil removal tasks to be taken at certain valve control facilities associated with historic pipelines in the Iwilei Unit of the Honolulu Harbor site. The Participating Parties performed the tasks identified in the Second NOI (the Phase I Pipeline Investigation) and developed a proposal for additional investigation (the Phase 2 Pipeline Investigation), which proposal the EPA and DOH approved. The Participating Parties have completed the Phase 2 Pipeline Investigation and 21 petroleum removal activities by the Participating Parties from wells and trenches installed as part of the investigation. The Participating Parties updated the Conceptual Site Model for the Iwilei Unit and submitted a report (now known as the Site Assessment and Prioritization Report) to the DOH and EPA in April 2003 . In addition, the Participating Parties plan to undertake a Feasibility Study during 2003 to identify and evaluate various remedial strategies to address petroleum products identified in the subsurface of the Iwilei District. In October 2002, HECO and three other companies that currently have petroleum handling operations (the Operating Companies) in the Iwilei Unit entered into an agreement with the DOH to evaluate their facilities to determine whether they currently are releasing petroleum to the subsurface in the Iwilei Unit. HECO has previously investigated its facilities in the Iwilei Unit and routinely maintains them, and therefore believes that the Operating Companies evaluation will confirm that HECO’s current operations are not releasing petroleum in the Iwilei Unit. Management has developed a preliminary estimate of costs for continuing investigative work, remedial activities and monitoring at the Iwilei Unit of the site. Management estimates that HECO will incur approximately $1.1 million (of which In April 2003, TOOTS, without admitting liability or fault or making any admission of any issue of law or fact, agreed to pay $250,000 to the Participating Parties to fund response activities in the Iwilei Unit, as a one-time cash-out payment in lieu of continuing with further response activities. The non-cashout parties of the Participating Parties have released and have given covenants not to sue TOOTS, HTB, YB, and Dillingham Tug & Barge Corporation or their respective officers, directors, agents and employees (collectively, TOOTS-Related Entities) under sections of various federal and state environmental laws and any other statute or common law theory (e.g., nuisance or trespass) for any further financial or other contribution towards petroleum and petroleum related response and remediation activities directed or agreed to by the DOH and/or EPA at the site and related business loss and property damage. The non-cashout parties of the Participating Parties have agreed that the payment by TOOTS represents a full and fair resolution of the liability and responsibility of all TOOTS-Related Entities to fund such petroleum and petroleum related response and remediation activities in the Iwilei District of Honolulu. 22 (5) HECO-obligated mandatorily redeemable preferred securities of trust subsidiaries holding solely HECO and In March 1997, HECO Capital Trust I (Trust I), a grantor trust and a wholly owned subsidiary of HECO, sold (i) in a public offering, 2 million of its HECO-Obligated 8.05% Cumulative Quarterly Income Preferred Securities, Series 1997 (1997 trust preferred securities) with an aggregate liquidation preference of $50 million and (ii) to HECO, common securities with a liquidation preference of approximately $1.55 million. Proceeds from the sale of the 1997 trust preferred securities and the common securities were used by Trust I to purchase 8.05% Junior Subordinated Deferrable Interest Debentures, Series 1997 (1997 junior deferrable debentures) issued by HECO in the principal amount of $31.55 million and issued by each of Maui Electric Company, Limited (MECO) and HELCO in the respective principal amounts of $10 million. The 1997 junior deferrable debentures, which bear interest at 8.05% and mature on March 27, 2027, together with the subsidiary guarantees (pursuant to which the obligations of MECO and HELCO under their respective debentures are fully and unconditionally guaranteed by HECO), are the sole assets of Trust I. The 1997 trust preferred securities must be redeemed at the maturity of the underlying debt on March 27, 2027, which maturity may be shortened to any date after March 27, 2002 or extended to a date no later than March 27, 2046. The 1997 trust preferred securities are not redeemable at the option of the holders, and may now be redeemed by Trust I, in whole or in part. All of the proceeds from the sale were invested by Trust I in the underlying debt securities of HECO, HELCO and MECO. In December 1998, HECO Capital Trust II (Trust II), a grantor trust and a wholly owned subsidiary of HECO, sold (i) in a public offering, 2 million of its HECO-Obligated 7.30% Cumulative Quarterly Income Preferred Securities, Series 1998 (1998 trust preferred securities) with an aggregate liquidation preference of $50 million and (ii) to HECO, common securities with a liquidation preference of approximately $1.55 million. Proceeds from the sale of the 1998 trust preferred securities and the common securities were used by Trust II to purchase 7.30% Junior Subordinated Deferrable Interest Debentures, Series 1998 (1998 junior deferrable debentures) issued by HECO in the principal amount of $31.55 million and issued by each of MECO and HELCO in the respective principal amounts of $10 million. The 1998 junior deferrable debentures, which bear interest at 7.30% and mature on December 15, 2028, together with the subsidiary guarantees (pursuant to which the obligations of MECO and HELCO under their respective debentures are fully and unconditionally guaranteed by HECO), are the sole assets of Trust II. The 1998 trust preferred securities must be redeemed at the maturity of the underlying debt on December 15, 2028, which maturity may be shortened to a date no earlier than December 15, 2003 or extended to a date no later than December 15, 2047, and are not redeemable at the option of the holders, but may be redeemed by Trust II, in whole or in part, from time to time, on or after December 15, 2003 or upon the occurrence of certain events. All of the proceeds from the sale were invested by Trust II in the underlying debt securities of HECO, HELCO and The 1997 and 1998 junior deferrable debentures and the common securities of the Trusts have been eliminated in HECO’s consolidated balance sheets as of (6) Recent accounting pronouncements and interpretations Asset retirement obligations In June 2001, the FASB issued SFAS No. 143, “Accounting for Asset Retirement Obligations,” which requires that the fair value of a liability for an asset retirement obligation be recognized in the period in which it is incurred if a reasonable estimate of fair value can be made. The associated asset retirement costs 23 Rescission of SFAS No. 4, 44 and 64, amendment of SFAS No. 13, and technical corrections In April 2002, the FASB issued SFAS No. 145, “Rescission of FASB Statements No. 4, 44 and 64, Amendment of FASB Statement No. 13, and Technical Corrections.” SFAS No. 145 rescinds SFAS No. 4, “Reporting Gains and Losses from Extinguishment of Debt,” SFAS No. 64, “Extinguishments of Debt Made to Satisfy Sinking-Fund Requirements,” and SFAS No. 44, “Accounting for Intangible Assets of Motor Carriers.” SFAS No. 145 also amends SFAS No. 13, “Accounting for Leases,” to eliminate an inconsistency between the required accounting for sale-leaseback transactions and the required accounting for certain lease modifications that have economic effects that are similar to sale-leaseback transactions. SFAS No. 145 also amends other existing authoritative pronouncements to make various technical corrections, clarify meanings, or describe their applicability under changed conditions. The provisions of SFAS No. 145 related to the rescission of SFAS No. 4 are effective for fiscal years beginning after May 15, 2002. The provisions of SFAS No. 145 related to SFAS No. 13 are effective for transactions occurring after May 15, 2002. All other provisions of SFAS No. 145 are effective for financial statements issued on or after May 15, 2002. subsidiaries adopted the provisions of SFAS No. 145 in the second quarter of Costs associated with exit or disposal activities In July 2002, the FASB issued SFAS No. 146, “Accounting for Costs Associated with Exit or Disposal Activities.” SFAS No. 146 requires companies to recognize costs associated with exit or disposal activities when they are incurred rather than at the date of a commitment to an exit or disposal plan. Examples of costs covered by the standard include lease termination costs and certain employee severance costs that are associated with a restructuring, discontinued operation, plant closing, or other exit or disposal activity. Previous accounting guidance was provided by EITF Issue No. 94-3, “Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred in a Restructuring).” SFAS No. 146 replaces EITF Issue No. 94-3. Guarantor’s accounting and disclosure requirements for guarantees In November 2002, the FASB issued FIN No. 45, “Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Consolidation of variable interest entities In January 2003, the FASB issued FIN No. 46, “Consolidation of Variable Interest Entities,” which addresses the consolidation of VIEs as defined. FIN No. 46 applies immediately to variable interests in VIEs created after January 31, 2003, and to variable interests in VIEs obtained after January 31, 2003. For a variable interest in a VIE created before February 1, 2003, FIN No. 46 is applied to the enterprise no later than the beginning of the first interim or annual reporting period beginning after June 15, 2003. The application of FIN No. 46 had no effect on HECO and its subsidiaries’ financial statements. 24 (7) Reconciliation of electric utility operating income per HEI and HECO consolidated statements of income Three months ended Nine months ended Three months ended March 31 Three months ended March 31 2003 2002 (in thousands) (in thousands) 2002 2001 2002 2001 (in thousands) Operating income from regulated and nonregulated activities before income taxes (per HEI consolidated statements of income) Operating income from regulated and nonregulated activities before income taxes (per HEI consolidated statements of income) $ 53,589 $ 54,322 $ 150,146 $ 152,360 Operating income from regulated and nonregulated activities before income taxes (per HEI consolidated statements of income) $ 40,975 $ 45,604 Deduct: Deduct: Deduct: Income taxes on regulated activities (16,287 ) (16,244 ) (44,110 ) (44,210 ) Income taxes on regulated activities (11,215 ) (12,791 ) Revenues from nonregulated activities (1,183 ) (1,155 ) (3,241 ) (3,481 ) Revenues from nonregulated activities (951 ) (998 ) Add: Add: Add: Expenses from nonregulated activities 393 603 720 941 Expenses from nonregulated activities 246 106 Operating income from regulated activities after income taxes (per HECO consolidated statements of income) Operating income from regulated activities after income taxes (per HECO consolidated statements of income) $ 36,512 $ 37,526 $ 103,515 $ 105,610 Operating income from regulated activities after income taxes (per HECO consolidated statements of income) $ 29,055 $ 31,921 (8) On May 1, 2003, the Department of Budget and Finance of the State of Hawaii issued, at a small discount, Refunding Series 2003A Special Purpose Revenue Bonds (SPRB) in the aggregate principal amount of $14 million with a maturity of approximately 17 years and a fixed coupon interest rate of 4.75% (yield of 4.85%), and loaned the proceeds from the sale to HELCO. Also on May 1, 2003, the Department of Budget and Finance issued at par, Refunding Series 2003B SPRB in the aggregate principal amount of $52 million with a maturity of approximately 20 years and a fixed coupon interest rate of 5.00% and loaned the proceeds from the sale to HECO and (9) Consolidating financial information HECO has not provided separate financial statements and other disclosures concerning HELCO and MECO because management has concluded that such financial statements and other information are not material to holders of the 1997 and 1998 junior deferrable debentures issued by HELCO and MECO since these securities have been fully and unconditionally guaranteed by HECO. 25 Hawaiian Electric Company, Inc. and subsidiaries September 30, 2002 March 31, 2003 (in thousands) (in thousands) HECO HELCO MECO HECO HECO Reclassifications HECO (in thousands) HECO HELCO MECO HECO HECO Reclassi- HECO Assets Assets Assets Utility plant, at cost Utility plant, at cost Utility plant, at cost Land $ 25,316 $ 2,965 $ 3,586 $ — $ — $ — $ 31,867 Land $ 25,350 $ 2,982 $ 3,587 $ — $ — $ — $ 31,919 Plant and equipment 2,004,191 560,362 589,559 — — — 3,154,112 Plant and equipment 2,039,069 569,865 599,186 — — — 3,208,120 Less accumulated depreciation (856,536 ) (250,440 ) (234,100 ) — — — (1,341,076 ) Less accumulated depreciation (888,011 ) (260,113 ) (245,777 ) — — — (1,393,901 ) Plant acquisition adjustment, net — — 315 — — — 315 Plant acquisition adjustment, net — — 289 — — — 289 Construction in progress 59,631 88,316 7,172 — — — 155,119 Construction in progress 62,065 94,154 7,272 — — — 163,491 Net utility plant 1,232,602 401,203 366,532 — — — 2,000,337 Net utility plant 1,238,473 406,888 364,557 — — — 2,009,918 Investment in subsidiaries, at equity 355,860 — — — — (355,860 ) — Investment in wholly owned subsidiaries, at equity Investment in wholly owned subsidiaries, at equity 361,869 — — — — (361,869 ) — Current assets Current assets Current assets Cash and equivalents 105 4 1,784 — — — 1,893 Cash and equivalents 9 999 2,198 — — — 3,206 Advances to affiliates 12,900 — 20,000 51,546 51,546 (135,992 ) — Advances to affiliates 12,700 — 18,500 51,546 51,546 (134,292 ) — Customer accounts receivable, net 56,473 14,230 11,673 — — — 82,376 Customer accounts receivable, net 59,436 13,995 11,824 — — — 85,255 Accrued unbilled revenues, net 40,928 8,982 8,345 — — — 58,255 Accrued unbilled revenues, net 38,187 10,670 7,832 — — — 56,689 Other accounts receivable, net 1,169 655 468 — — (104 ) 2,188 Other accounts receivable, net 3,271 873 494 — — (771 ) 3,867 Fuel oil stock, at average cost 24,052 2,428 7,090 — — — 33,570 Fuel oil stock, at average cost 31,220 4,218 6,882 — — — 42,320 Materials and supplies, at average cost 9,841 2,333 8,822 — — — 20,996 Materials and supplies, at average cost 9,817 2,419 8,808 — — — 21,044 Prepayments and other 57,239 8,358 4,249 — — — 69,846 Prepayments and other 58,829 8,989 4,250 — — — 72,068 Total current assets 202,707 36,990 62,431 51,546 51,546 (136,096 ) 269,124 Total current assets 213,469 42,163 60,788 51,546 51,546 (135,063 ) 284,449 Other assets Other assets Other assets Regulatory assets 74,314 16,330 13,914 — — — 104,558 Regulatory assets 76,094 16,660 14,339 — — — 107,093 Unamortized debt expense 8,931 1,886 2,332 — — — 13,149 Other 22,778 6,153 5,695 — — — 34,626 Long-term receivables and other 13,691 3,253 3,035 — — — 19,979 Total other assets 98,872 22,813 20,034 — — — 141,719 Total other assets 96,936 21,469 19,281 — — — 137,686 $ 1,890,041 $ 461,006 $ 448,997 $ 51,546 $ 51,546 $ (491,956 ) $ 2,411,180 $ 1,910,747 $ 470,520 $ 444,626 $ 51,546 $ 51,546 $ (496,932 ) $ 2,432,053 Capitalization and liabilities Capitalization and liabilities Capitalization and liabilities Capitalization Capitalization Capitalization Common stock equity $ 915,643 $ 172,593 $ 180,175 $ 1,546 $ 1,546 $ (355,860 ) $ 915,643 Common stock equity $ 925,584 $ 175,637 $ 183,140 $ 1,546 $ 1,546 $ (361,869 ) $ 925,584 Cumulative preferred stock–not subject to mandatory redemption 22,293 7,000 5,000 — — — 34,293 Cumulative preferred stock–not subject to mandatory redemption 22,293 7,000 5,000 — — — 34,293 HECO-obligated mandatorily redeemable trust preferred securities of subsidiary trusts holding solely HECO and HECO-guaranteed debentures — — — 50,000 50,000 — 100,000 HECO-obligated mandatorily redeemable trust preferred securities of subsidiary trusts holding solely HECO and HECO-guaranteed debentures — — — 50,000 50,000 — 100,000 Long-term debt 472,073 140,985 171,668 — — (103,092 ) 681,634 Long-term debt, net 496,664 141,001 163,692 — — (103,092 ) 698,265 Total capitalization 1,410,009 320,578 356,843 51,546 51,546 (458,952 ) 1,731,570 Total capitalization 1,444,541 323,638 351,832 51,546 51,546 (464,961 ) 1,758,142 Current liabilities Current liabilities Current liabilities Long-term debt due within one year 883 — — — — — 883 Short-term borrowings–affiliate 43,000 12,700 — — — (31,200 ) 24,500 Short-term borrowings–nonaffiliates 29,829 — — — — — 29,829 Accounts payable 38,410 9,081 8,533 — — — 56,024 Short-term borrowings–affiliate 26,499 12,900 — — — (32,900 ) 6,499 Interest and preferred dividends payable 10,128 2,942 3,743 — — (33 ) 16,780 Accounts payable 41,032 7,520 6,367 — — — 54,919 Taxes accrued 35,985 12,769 13,547 — — — 62,301 Interest and preferred dividends payable 10,600 2,984 3,958 — — (44 ) 17,498 Other 17,380 2,184 3,964 — — (738 ) 22,790 Taxes accrued 39,843 14,347 17,460 — — — 71,650 Other 17,010 2,494 3,488 — — (60 ) 22,932 Total current liabilities 144,903 39,676 29,787 — — (31,971 ) 182,395 Total current liabilities 165,696 40,245 31,273 — — (33,004 ) 204,210 Deferred credits and other liabilities Deferred credits and other liabilities Deferred credits and other liabilities Deferred income taxes 128,794 12,111 9,725 — — — 150,630 Deferred income taxes 131,891 15,017 11,520 — — — 158,428 Unamortized tax credits 28,467 8,623 11,251 — — — 48,341 Unamortized tax credits 28,460 8,880 11,055 — — — 48,395 Other 23,411 25,572 14,632 — — — 63,615 Other 22,957 26,616 14,780 — — — 64,353 Total deferred credits and other liabilities 180,672 46,306 35,608 — — — 262,586 Total deferred credits and other liabilities 183,308 50,513 37,355 — — — 271,176 Contributions in aid of construction Contributions in aid of construction 133,664 53,877 25,273 — — — 212,814 Contributions in aid of construction 137,995 56,693 25,652 — — — 220,340 $ 1,890,041 $ 461,006 $ 448,997 $ 51,546 $ 51,546 $ (491,956 ) $ 2,411,180 $ 1,910,747 $ 470,520 $ 444,626 $ 51,546 $ 51,546 $ (496,932 ) $ 2,432,053 26 Hawaiian Electric Company, Inc. and December 31, 2001 December 31, 2002 (in thousands) (in thousands) HECO HELCO MECO HECO HECO Reclassifications HECO (in thousands) HECO HELCO MECO HECO HECO Reclassi- HECO Assets Assets Assets Utility plant, at cost Utility plant, at cost Utility plant, at cost Land $ 25,369 $ 2,752 $ 3,568 $ — $ — $ — $ 31,689 Land $ 25,329 $ 2,982 $ 3,585 $ — $ — $ — $ 31,896 Plant and equipment 1,943,378 550,671 574,205 — — — 3,068,254 Plant and equipment 2,022,987 565,920 595,911 — — — 3,184,818 Less accumulated depreciation (810,187 ) (238,962 ) (217,183 ) — — — (1,266,332 ) Less accumulated depreciation (872,332 ) (255,473 ) (240,149 ) — — — (1,367,954 ) Plant acquisition adjustment, net — — 354 — — — 354 Plant acquisition adjustment, net — — 302 — — — 302 Construction in progress 70,501 85,913 14,144 — — — 170,558 Construction in progress 63,246 93,428 7,626 — — — 164,300 Net utility plant 1,229,061 400,374 375,088 — — — 2,004,523 Net utility plant 1,239,230 406,857 367,275 — — — 2,013,362 Investment in subsidiaries, at equity 341,186 — — — — (341,186 ) — Investment in wholly owned subsidiaries, at equity Investment in wholly owned subsidiaries, at equity 355,869 — — — — (355,869 ) — Current assets Current assets Current assets Cash and equivalents 9 1,282 567 — — — 1,858 Cash and equivalents 9 4 1,713 — — — 1,726 Advances to affiliates 12,600 — 7,000 51,546 51,546 (122,692 ) — Advances to affiliates 14,900 — 23,000 51,546 51,546 (140,992 ) — Customer accounts receivable, net 56,227 13,644 12,001 — — — 81,872 Customer accounts receivable, net 61,384 13,979 11,750 — — — 87,113 Accrued unbilled revenues, net 35,072 8,855 8,696 — — — 52,623 Accrued unbilled revenues, net 41,272 10,701 8,125 — — — 60,098 Other accounts receivable, net 2,537 497 352 — — (734 ) 2,652 Other accounts receivable, net 2,582 411 462 — �� — (1,242 ) 2,213 Fuel oil stock, at average cost 15,840 3,007 5,593 — — — 24,440 Fuel oil stock, at average cost 25,701 3,446 6,502 — — — 35,649 Materials and supplies, at average cost 9,168 1,982 8,552 — — — 19,702 Materials and supplies, at average cost 9,076 2,248 8,126 — — — 19,450 Prepayments and other 43,326 7,028 3,390 — — — 53,744 Prepayments and other 61,108 9,457 5,045 — — — 75,610 Total current assets 174,779 36,295 46,151 51,546 51,546 (123,426 ) 236,891 Total current assets 216,032 40,246 64,723 51,546 51,546 (142,234 ) 281,859 Other assets Other assets Other assets Regulatory assets 74,946 16,557 14,065 — — — 105,568 Regulatory assets 76,153 18,376 16,847 — — — 111,376 Unamortized debt expense 8,952 1,915 2,487 — — — 13,354 Other 24,875 5,920 6,153 — — — 36,948 Long-term receivables and other 15,540 3,406 3,297 — — — 22,243 Total other assets 101,028 24,296 23,000 — — — 148,324 Total other assets 99,438 21,878 19,849 — — — 141,165 $ 1,846,054 $ 460,965 $ 444,239 $ 51,546 $ 51,546 $ (464,612 ) $ 2,389,738 $ 1,910,569 $ 468,981 $ 451,847 $ 51,546 $ 51,546 $ (498,103 ) $ 2,436,386 Capitalization and liabilities Capitalization and liabilities Capitalization and liabilities Capitalization Capitalization Capitalization Common stock equity $ 877,154 $ 165,655 $ 172,439 $ 1,546 $ 1,546 $ (341,186 ) $ 877,154 Common stock equity $ 923,256 $ 171,404 $ 181,373 $ 1,546 $ 1,546 $ (355,869 ) $ 923,256 Cumulative preferred stock–not subject to mandatory redemption 22,293 7,000 5,000 — — — 34,293 Cumulative preferred stock–not subject to mandatory redemption 22,293 7,000 5,000 — — — 34,293 HECO-obligated mandatorily redeemable trust preferred securities of subsidiary trusts holding solely HECO and HECO-guaranteed debentures — — — 50,000 50,000 — 100,000 HECO-obligated mandatorily redeemable trust preferred securities of subsidiary trusts holding solely HECO and HECO-guaranteed debentures — — — 50,000 50,000 — 100,000 Long-term debt 461,173 140,962 171,631 — — (103,092 ) 670,674 Long-term debt, net 495,689 140,993 171,680 — — (103,092 ) 705,270 Total capitalization 1,360,620 313,617 349,070 51,546 51,546 (444,278 ) 1,682,121 Total capitalization 1,441,238 319,397 358,053 51,546 51,546 (458,961 ) 1,762,819 Current liabilities Current liabilities Current liabilities Long-term debt due within one year 9,595 5,000 — — — — 14,595 Short-term borrowings–affiliate 28,600 14,900 — — — (37,900 ) 5,600 Short-term borrowings–affiliate 55,297 12,600 — — — (19,600 ) 48,297 Accounts payable 41,594 10,462 7,936 — — — 59,992 Accounts payable 34,860 10,108 8,998 — — — 53,966 Interest and preferred dividends payable 7,537 1,598 2,435 — — (38 ) 11,532 Interest and preferred dividends payable 7,664 1,698 2,433 — — (30 ) 11,765 Taxes accrued 48,274 14,898 15,961 — — — 79,133 Taxes accrued 52,216 15,841 18,001 — — — 86,058 Other 20,998 3,679 4,547 — — (1,204 ) 28,020 Other 23,712 2,852 3,939 — — (704 ) 29,799 Total current liabilities 147,003 45,537 30,879 — — (39,142 ) 184,277 Total current liabilities 183,344 48,099 33,371 — — (20,334 ) 244,480 Deferred credits and other liabilities Deferred credits and other liabilities Deferred credits and other liabilities Deferred income taxes 123,097 11,984 10,527 — — — 145,608 Deferred income taxes 132,159 14,479 11,729 — — — 158,367 Unamortized tax credits 28,538 8,644 11,330 — — — 48,512 Unamortized tax credits 28,430 8,471 11,084 — — — 47,985 Other 15,557 25,309 14,594 — — — 55,460 Other 23,441 26,809 14,594 — — — 64,844 Total deferred credits and other liabilities 167,192 45,937 36,451 — — — 249,580 Total deferred credits and other liabilities 184,030 49,759 37,407 — — — 271,196 Contributions in aid of construction Contributions in aid of construction 134,898 53,312 25,347 — — — 213,557 Contributions in aid of construction 138,298 54,288 25,508 — — — 218,094 $ 1,846,054 $ 460,965 $ 444,239 $ 51,546 $ 51,546 $ (464,612 ) $ 2,389,738 $ 1,910,569 $ 468,981 $ 451,847 $ 51,546 $ 51,546 $ (498,103 ) $ 2,436,386 27 Hawaiian Electric Company, Inc. and Three months ended September 30, 2002 Three months ended March 31, 2003 (in thousands) HECO HELCO MECO HECO HECO Reclassifications HECO HECO HELCO MECO HECO HECO Reclassi- HECO Operating revenues $ 232,636 $ 49,156 $ 50,661 $ — $ — $ — $ 332,453 $ 227,192 $ 50,838 $ 49,931 $ — $ — $ — $ 327,961 Operating expenses Fuel oil 59,602 8,083 17,626 — — — 85,311 64,039 8,301 18,499 — — — 90,839 Purchased power 70,300 14,726 2,097 — — — 87,123 68,605 14,939 1,810 — — — 85,354 Other operation 22,423 5,037 6,428 — — — 33,888 26,293 5,607 6,627 — — — 38,527 Maintenance 10,474 2,688 2,543 — — — 15,705 10,340 1,807 2,135 — — — 14,282 Depreciation 15,904 4,870 5,566 — — — 26,340 16,769 5,057 5,786 — — — 27,612 Taxes, other than income taxes 21,829 4,642 4,816 — — — 31,287 21,604 4,749 4,724 — — — 31,077 Income taxes 10,169 2,632 3,486 — — — 16,287 5,093 3,119 3,003 — — — 11,215 210,701 42,678 42,562 — — — 295,941 212,743 43,579 42,584 — — — 298,906 Operating income 21,935 6,478 8,099 — — — 36,512 14,449 7,259 7,347 — — — 29,055 Other income Allowance for equity funds used during construction 1,042 59 61 — — — 1,162 866 33 89 — — — 988 Equity in earnings of subsidiaries 9,643 — — — — (9,643 ) — 9,640 — — — — (9,640 ) — Other, net 879 69 33 1,037 941 (2,101 ) 858 789 56 31 1,037 941 (2,087 ) 767 11,564 128 94 1,037 941 (11,744 ) 2,020 11,295 89 120 1,037 941 (11,727 ) 1,755 Income before interest and other charges 33,499 6,606 8,193 1,037 941 (11,744 ) 38,532 25,744 7,348 7,467 1,037 941 (11,727 ) 30,810 Interest and other charges Interest on long-term debt 6,113 1,809 2,205 — — — 10,127 6,338 1,809 2,177 — — — 10,324 Amortization of net bond premium and expense 322 78 98 — — — 498 325 88 100 — — — 513 Other interest charges 1,676 518 337 — — (2,101 ) 430 1,549 462 418 — — (2,087 ) 342 Allowance for borrowed funds used during construction (492 ) (32 ) (25 ) — — — (549 ) (394 ) (14 ) (35 ) — — — (443 ) Preferred stock dividends of subsidiaries — — — — — 228 228 — — — — — 229 229 Preferred securities distributions of trust subsidiaries — — — — — 1,918 1,918 — — — — — 1,919 1,919 7,619 2,373 2,615 — — 45 12,652 7,818 2,345 2,660 — — 61 12,884 Income before preferred stock dividends of HECO 25,880 4,233 5,578 1,037 941 (11,789 ) 25,880 17,926 5,003 4,807 1,037 941 (11,788 ) 17,926 Preferred stock dividends of HECO 270 133 95 1,006 912 (2,146 ) 270 270 134 95 1,006 913 (2,148 ) 270 Net income for common stock $ 25,610 $ 4,100 $ 5,483 $ 31 $ 29 $ (9,643 ) $ 25,610 $ 17,656 $ 4,869 $ 4,712 $ 31 $ 28 $ (9,640 ) $ 17,656 Hawaiian Electric Company, Inc. and Three months ended September 30, 2002 Three months ended March 31, 2003 (in thousands) HECO HELCO MECO HECO HECO Reclassifications HECO HECO HELCO MECO HECO HECO Reclassi- HECO Retained earnings, beginning of period $ 520,757 $ 70,616 $ 82,617 $ — $ — $ (153,233 ) $ 520,757 $ 542,023 $ 71,414 $ 87,092 $ — $ — $ (158,506 ) $ 542,023 Net income for common stock 25,610 4,100 5,483 31 29 (9,643 ) 25,610 17,656 4,869 4,712 31 28 (9,640 ) 17,656 Common stock dividends (11,925 ) (2,108 ) (2,198 ) (31 ) (29 ) 4,366 (11,925 ) (15,290 ) (642 ) (2,949 ) (31 ) (28 ) 3,650 (15,290 ) Retained earnings, end of period $ 534,442 $ 72,608 $ 85,902 $ — $ — $ (158,510 ) $ 534,442 $ 544,389 $ 75,641 $ 88,855 $ — $ — $ (164,496 ) $ 544,389 28 Hawaiian Electric Company, Inc. and Three months ended September 30, 2001 Three months ended March 31, 2002 (in thousands) HECO HELCO MECO HECO HECO Reclassifications HECO HECO HELCO MECO HECO HECO Reclassi- HECO Operating revenues $ 238,138 $ 48,803 $ 53,290 $ — $ — $ — $ 340,231 $ 189,166 $ 44,426 $ 43,741 $ — $ — $ — $ 277,333 Operating expenses Fuel oil 68,043 7,445 21,177 — — — 96,665 39,414 6,503 13,318 — — — 59,235 Purchased power 69,797 16,622 1,251 — — — 87,670 61,405 14,186 1,510 — — — 77,101 Other operation 19,482 4,795 6,452 — — — 30,729 18,153 4,661 6,409 — — — 29,223 Maintenance 8,261 2,808 3,471 — — — 14,540 8,856 2,244 2,912 — — — 14,012 Depreciation 15,196 4,819 5,348 — — — 25,363 15,901 4,894 5,565 — — — 26,360 Taxes, other than income taxes 21,907 4,575 5,012 — — — 31,494 18,200 4,216 4,274 — — — 26,690 Income taxes 11,021 2,102 3,121 — — — 16,244 7,955 2,106 2,730 — — — 12,791 213,707 43,166 45,832 — — — 302,705 169,884 38,810 36,718 — — — 245,412 Operating income 24,431 5,637 7,458 — — — 37,526 19,282 5,616 7,023 — — — 31,921 Other income Allowance for equity funds used during construction 803 89 106 — — — 998 711 55 7 — — — 773 Equity in earnings of subsidiaries 8,246 — — — — (8,246 ) — 7,620 — — — — (7,620 ) — Other, net 530 140 56 1,037 941 (2,174 ) 530 821 102 (9 ) 1,037 941 (2,077 ) 815 9,579 229 162 1,037 941 (10,420 ) 1,528 9,152 157 (2 ) 1,037 941 (9,697 ) 1,588 Income before interest and other charges 34,010 5,866 7,620 1,037 941 (10,420 ) 39,054 28,434 5,773 7,021 1,037 941 (9,697 ) 33,509 Interest and other charges Interest on long-term debt 6,013 1,906 2,207 — — — 10,126 6,089 1,842 2,205 — — — 10,136 Amortization of net bond premium and expense 330 79 100 — — — 509 320 78 102 — — — 500 Other interest charges 2,124 548 334 — — (2,174 ) 832 1,718 477 333 — — (2,077 ) 451 Allowance for borrowed funds used during construction (422 ) (54 ) (48 ) — — — (524 ) (322 ) (30 ) (3 ) — — — (355 ) Preferred stock dividends of subsidiaries — — — — — 228 228 — — — — — 229 229 Preferred securities distributions of trust subsidiaries — — — — — 1,918 1,918 — — — — — 1,919 1,919 8,045 2,479 2,593 — — (28 ) 13,089 7,805 2,367 2,637 — — 71 12,880 Income before preferred stock dividends of HECO 25,965 3,387 5,027 1,037 941 (10,392 ) 25,965 20,629 3,406 4,384 1,037 941 (9,768 ) 20,629 Preferred stock dividends of HECO 270 133 95 1,006 912 (2,146 ) 270 270 134 95 1,006 913 (2,148 ) 270 Net income for common stock $ 25,695 $ 3,254 $ 4,932 $ 31 $ 29 $ (8,246 ) $ 25,695 $ 20,359 $ 3,272 $ 4,289 $ 31 $ 28 $ (7,620 ) $ 20,359 Hawaiian Electric Company, Inc. and Three months ended September 30, 2001 Three months ended March 31, 2002 (in thousands) HECO HELCO MECO HECO HECO Reclassifications HECO HECO HELCO MECO HECO HECO Reclassi- HECO Retained earnings, beginning of period $ 488,111 $ 65,886 $ 76,019 $ — $ — $ (141,905 ) $ 488,111 $ 495,961 $ 65,690 $ 78,182 $ — $ — $ (143,872 ) $ 495,961 Net income for common stock 25,695 3,254 4,932 31 29 (8,246 ) 25,695 20,359 3,272 4,289 31 28 (7,620 ) 20,359 Common stock dividends (17,037 ) (2,860 ) (3,280 ) (31 ) (29 ) 6,200 (17,037 ) (9,233 ) (926 ) (2,106 ) (31 ) (28 ) 3,091 (9,233 ) Retained earnings, end of period $ 496,769 $ 66,280 $ 77,671 $ — $ — $ (143,951 ) $ 496,769 $ 507,087 $ 68,036 $ 80,365 $ — $ — $ (148,401 ) $ 507,087 29 Hawaiian Electric Company, Inc. and Nine months ended September 30, 2002 (in thousands) HECO HELCO MECO HECO HECO Reclassifications HECO Operating revenues $ 634,262 $ 140,631 $ 141,509 $ — $ — $ — $ 916,402 Operating expenses Fuel oil 151,544 21,370 45,987 — — — 218,901 Purchased power 192,814 42,509 5,421 — — — 240,744 Other operation 60,865 15,289 19,419 — — — 95,573 Maintenance 29,591 7,098 9,038 — — — 45,727 Depreciation 47,708 14,658 16,697 — — — 79,063 Taxes, other than income taxes 61,374 13,617 13,778 — — — 88,769 Income taxes 27,647 7,447 9,016 — — — 44,110 571,543 121,988 119,356 — — — 812,887 Operating income 62,719 18,643 22,153 — — — 103,515 Other income Allowance for equity funds used during construction 2,680 168 129 — — — 2,977 Equity in earnings of subsidiaries 25,935 — — — — (25,935 ) — Other, net 2,477 256 33 3,112 2,822 (6,265 ) 2,435 31,092 424 162 3,112 2,822 (32,200 ) 5,412 Income before interest and other charges 93,811 19,067 22,315 3,112 2,822 (32,200 ) 108,927 Interest and other charges Interest on long-term debt 18,356 5,460 6,614 — — — 30,430 Amortization of net bond premium and expense 962 243 300 — — — 1,505 Other interest charges 5,110 1,467 1,001 — — (6,265 ) 1,313 Allowance for borrowed funds used during construction (1,246 ) (91 ) (55 ) — — — (1,392 ) Preferred stock dividends of subsidiaries — — — — — 686 686 Preferred securities distributions of trust subsidiaries — — — — — 5,756 5,756 23,182 7,079 7,860 — — 177 38,298 Income before preferred stock dividends of HECO 70,629 11,988 14,455 3,112 2,822 (32,377 ) 70,629 Preferred stock dividends of HECO 810 400 286 3,019 2,737 (6,442 ) 810 Net income for common stock $ 69,819 $ 11,588 $ 14,169 $ 93 $ 85 $ (25,935 ) $ 69,819 Nine months ended September 30, 2002 (in thousands) HECO HELCO MECO HECO HECO Reclassifications HECO Retained earnings, beginning of period $ 495,961 $ 65,690 $ 78,182 $ — $ — $ (143,872 ) $ 495,961 Net income for common stock 69,819 11,588 14,169 93 85 (25,935 ) 69,819 Common stock dividends (31,338 ) (4,670 ) (6,449 ) (93 ) (85 ) 11,297 (31,338 ) Retained earnings, end of period $ 534,442 $ 72,608 $ 85,902 $ — $ — $ (158,510 ) $ 534,442 Nine months ended September 30, 2001 (in thousands) HECO HELCO MECO HECO HECO Reclassifications HECO Operating revenues $ 669,167 $ 146,240 $ 154,572 $ — $ — $ — $ 969,979 Operating expenses Fuel oil 181,354 22,581 63,060 — — — 266,995 Purchased power 198,996 50,896 3,175 — — — 253,067 Other operation 58,673 13,183 18,743 — — — 90,599 Maintenance 27,573 6,249 8,930 — — — 42,752 Depreciation 45,588 13,703 16,044 — — — 75,335 Taxes, other than income taxes 62,917 13,795 14,699 — — — 91,411 Income taxes 28,385 7,160 8,665 — — — 44,210 603,486 127,567 133,316 — — — 864,369 Operating income 65,681 18,673 21,256 — — — 105,610 Other income Allowance for equity funds used during construction 2,663 219 336 — — — 3,218 Equity in earnings of subsidiaries 24,976 — — — — (24,976 ) — Other, net 2,723 419 153 3,112 2,822 (6,762 ) 2,467 30,362 638 489 3,112 2,822 (31,738 ) 5,685 Income before interest and other charges 96,043 19,311 21,745 3,112 2,822 (31,738 ) 111,295 Interest and other charges Interest on long-term debt 17,794 5,722 6,611 — — — 30,127 Amortization of net bond premium and expense 984 260 302 — — — 1,546 Other interest charges 8,047 1,935 1,025 — — (6,762 ) 4,245 Allowance for borrowed funds used during construction (1,428 ) (132 ) (151 ) — — — (1,711 ) Preferred stock dividends of subsidiaries — — — — — 686 686 Preferred securities distributions of trust subsidiaries — — — — — 5,756 5,756 25,397 7,785 7,787 — — (320 ) 40,649 Income before preferred stock dividends of HECO 70,646 11,526 13,958 3,112 2,822 (31,418 ) 70,646 Preferred stock dividends of HECO 810 400 286 3,019 2,737 (6,442 ) 810 Net income for common stock $ 69,836 $ 11,126 $ 13,672 $ 93 $ 85 $ (24,976 ) $ 69,836 Nine months ended September 30, 2001 (in thousands) HECO HELCO MECO HECO HECO Reclassifications HECO Retained earnings, beginning of period $ 443,970 $ 62,962 $ 73,586 $ — $ — $ (136,548 ) $ 443,970 Net income for common stock 69,836 11,126 13,672 93 85 (24,976 ) 69,836 Common stock dividends (17,037 ) (7,808 ) (9,587 ) (93 ) (85 ) 17,573 (17,037 ) Retained earnings, end of period $ 496,769 $ 66,280 $ 77,671 $ — $ — $ (143,951 ) $ 496,769 Nine months ended September 30, 2002 Three months ended March 31, 2003 (in thousands) (in thousands) HECO HELCO MECO HECO HECO Reclassifications HECO (in thousands) HECO HELCO MECO HECO Capital HECO Capital Reclassi-fications HECO consolidated Cash flows from operating activities Cash flows from operating activities Cash flows from operating activities Income before preferred stock dividends of HECO Income before preferred stock dividends of HECO $ 70,629 $ 11,988 $ 14,455 $ 3,112 $ 2,822 $ (32,377 ) $ 70,629 Income before preferred stock dividends of HECO $ 17,926 $ 5,003 $ 4,807 $ 1,037 $ 941 $ (11,788 ) $ 17,926 Adjustments to reconcile income before preferred stock dividends of HECO to net cash provided by operating activities Adjustments to reconcile income before preferred stock dividends of HECO to net cash provided by operating activities Adjustments to reconcile income before preferred stock dividends of HECO to net cash provided by operating activities Equity in earnings (25,935 ) — — — — 25,935 — Equity in earnings (9,640 ) — — — — 9,640 — Common stock dividends received from subsidiaries 11,297 — — — — (11,297 ) — Common stock dividends received from subsidiaries 3,650 — — — — (3,650 ) — Depreciation of property, plant and equipment 47,708 14,658 16,697 — — — 79,063 Depreciation of property, plant and equipment 16,769 5,057 5,786 — — — 27,612 Other amortization 3,004 1,691 4,496 — — — 9,191 Other amortization 947 182 1,005 — — — 2,134 Deferred income taxes 5,752 128 (799 ) — — — 5,081 Deferred income taxes (225 ) 538 (207 ) — — — 106 Tax credits, net 725 154 118 — — — 997 Tax credits, net 284 466 36 — — — 786 Allowance for equity funds used during construction (2,680 ) (168 ) (129 ) — — — (2,977 ) Allowance for equity funds used during construction (866 ) (33 ) (89 ) — — — (988 ) Changes in assets and liabilities Changes in assets and liabilities Decrease (increase) in accounts receivable 1,122 (744 ) 212 — — (630 ) (40 ) Decrease (increase) in accounts receivable 1,259 (478 ) (106 ) — — (471 ) 204 Decrease (increase) in accrued unbilled revenues (5,856 ) (127 ) 351 — — — (5,632 ) Decrease in accrued unbilled revenues 3,085 31 293 — — — 3,409 Decrease (increase) in fuel oil stock (8,212 ) 579 (1,497 ) — — — (9,130 ) Increase in fuel oil stock (5,519 ) (772 ) (380 ) — — — (6,671 ) Increase in materials and supplies (673 ) (351 ) (270 ) — — — (1,294 ) Increase in materials and supplies (741 ) (171 ) (682 ) — — — (1,594 ) Decrease (increase) in regulatory assets (151 ) 473 (1,708 ) — — — (1,386 ) Decrease (increase) in regulatory assets 505 49 (670 ) — — — (116 ) Increase (decrease) in accounts payable 6,172 (2,588 ) (2,631 ) — — — 953 Increase (decrease) in accounts payable (3,184 ) (1,381 ) 597 — — — (3,968 ) Decrease in taxes accrued (12,373 ) (1,494 ) (541 ) — — — (14,408 ) Decrease in taxes accrued (12,289 ) (2,129 ) (2,414 ) — — — (16,832 ) Changes in other assets and liabilities (14,674 ) (1,714 ) 278 — — 6,386 (9,724 ) Changes in other assets and liabilities 3,481 160 1,568 — — 2,390 7,599 Net cash provided by operating activities Net cash provided by operating activities 75,855 22,485 29,032 3,112 2,822 (11,983 ) 121,323 Net cash provided by operating activities 15,442 6,522 9,544 1,037 941 (3,879 ) 29,607 Cash flows from investing activities Cash flows from investing activities Cash flows from investing activities Capital expenditures Capital expenditures (52,511 ) (16,717 ) (8,989 ) — — — (78,217 ) Capital expenditures (15,408 ) (5,463 ) (2,991 ) — — — (23,862 ) Contributions in aid of construction Contributions in aid of construction 3,876 2,602 916 — — — 7,394 Contributions in aid of construction 1,300 3,064 478 — — — 4,842 Repayments from affiliates Repayments from affiliates 56 — — — — — 56 Repayments from affiliates 2,200 — 4,500 — — (6,700 ) — Other (300 ) — (13,000 ) — — 13,300 — Net cash used in investing activities (48,879 ) (14,115 ) (21,073 ) — — 13,300 (70,767 ) Net cash provided by (used in) investing activities Net cash provided by (used in) investing activities (11,908 ) (2,399 ) 1,987 — — (6,700 ) (19,020 ) Cash flows from financing activities Cash flows from financing activities Cash flows from financing activities Common stock dividends Common stock dividends (31,338 ) (4,670 ) (6,449 ) (93 ) (85 ) 11,297 (31,338 ) Common stock dividends (15,290 ) (642 ) (2,949 ) (31 ) (28 ) 3,650 (15,290 ) Preferred stock dividends Preferred stock dividends (810 ) (400 ) (286 ) — — 686 (810 ) Preferred stock dividends (270 ) (134 ) (95 ) — — 229 (270 ) Preferred securities distributions of trust subsidiaries Preferred securities distributions of trust subsidiaries — — — (3,019 ) (2,737 ) — (5,756 ) Preferred securities distributions of trust subsidiaries — — — (1,006 ) (913 ) — (1,919 ) Proceeds from issuance of long-term debt Proceeds from issuance of long-term debt 11,691 — — — — — 11,691 Proceeds from issuance of long-term debt 943 — — — — — 943 Repayment of long-term debt Repayment of long-term debt — (5,000 ) — — — — (5,000 ) Repayment of long-term debt — — (8,000 ) — — — (8,000 ) Net increase (decrease) in short-term borrowings from nonaffiliates and affiliate with original maturities of three months or less 1,031 300 — — — (13,300 ) (11,969 ) Net increase (decrease) in short-term borrowings from affiliate with original maturities of three months or less Net increase (decrease) in short-term borrowings from affiliate with original maturities of three months or less 14,400 (2,200 ) — — — 6,700 18,900 Other Other (7,454 ) 122 (7 ) — — — (7,339 ) Other (3,317 ) (152 ) (2 ) — — — (3,471 ) Net cash used in financing activities Net cash used in financing activities (26,880 ) (9,648 ) (6,742 ) (3,112 ) (2,822 ) (1,317 ) (50,521 ) Net cash used in financing activities (3,534 ) (3,128 ) (11,046 ) (1,037 ) (941 ) 10,579 (9,107 ) Net increase (decrease) in cash and equivalents 96 (1,278 ) 1,217 — — — 35 Net increase in cash and equivalents Net increase in cash and equivalents — 995 485 — — — 1,480 Cash and equivalents, beginning of period Cash and equivalents, beginning of period 9 1,282 567 — — — 1,858 Cash and equivalents, beginning of period 9 4 1,713 — — — 1,726 Cash and equivalents, end of period Cash and equivalents, end of period $ 105 $ 4 $ 1,784 $ — $ — $ — $ 1,893 Cash and equivalents, end of period $ 9 $ 999 $ 2,198 $ — $ — $ — $ 3,206 Hawaiian Electric Company, Inc. and Nine months ended September 30, 2001 Three months ended March 31, 2002 (in thousands) (in thousands) HECO HELCO MECO HECO HECO Reclassifications HECO (in thousands) HECO HELCO MECO HECO Capital HECO Capital Reclassi- HECO consolidated Cash flows from operating activities Cash flows from operating activities Cash flows from operating activities Income before preferred stock dividends of HECO Income before preferred stock dividends of HECO $ 70,646 $ 11,526 $ 13,958 $ 3,112 $ 2,822 $ (31,418 ) $ 70,646 Income before preferred stock dividends of HECO $ 20,629 $ 3,406 $ 4,384 $ 1,037 $ 941 $ (9,768 ) $ 20,629 Adjustments to reconcile income before preferred stock dividends of HECO to net cash provided by operating activities Adjustments to reconcile income before preferred stock dividends of HECO to net cash provided by operating activities Adjustments to reconcile income before preferred stock dividends of HECO to net cash provided by operating activities Equity in earnings (24,976 ) — — — — 24,976 — Equity in earnings (7,620 ) — — — — 7,620 — Common stock dividends received from subsidiaries 17,573 — — — — (17,573 ) — Common stock dividends received from subsidiaries 3,091 — — — — (3,091 ) Depreciation of property, plant and equipment 45,588 13,703 16,044 — — — 75,335 Depreciation of property, plant and equipment 15,901 4,894 5,565 — — — 26,360 Other amortization 4,127 1,516 3,950 — — — 9,593 Other amortization 1,071 602 1,390 — — — 3,063 Deferred income taxes 4,059 (443 ) (1,292 ) — — — 2,324 Deferred income taxes 530 (31 ) (177 ) — — — 322 Tax credits, net 385 195 272 — — — 852 Tax credits, net 242 375 78 — — — 695 Allowance for equity funds used during construction (2,663 ) (219 ) (336 ) — — — (3,218 ) Allowance for equity funds used during construction (711 ) (55 ) (7 ) — — — (773 ) Changes in assets and liabilities Changes in assets and liabilities Increase in accounts receivable (1,916 ) (1,136 ) (963 ) — — 22 (3,993 ) Decrease in accounts receivable 6,968 144 1,469 — — 394 8,975 Decrease in accrued unbilled revenues 5,686 1,661 1,531 — — — 8,878 Decrease in accrued unbilled revenues 698 136 812 — — — 1,646 Decrease (increase) in fuel oil stock (3,409 ) (98 ) 4,227 — — — 720 Decrease (increase) in fuel oil stock (2,432 ) 848 460 — — — (1,124 ) Increase in materials and supplies (2,531 ) (238 ) (1,435 ) — — — (4,204 ) Increase in materials and supplies (288 ) (363 ) (450 ) — — — (1,101 ) Increase in regulatory assets (399 ) (164 ) (1,595 ) — — — (2,158 ) Decrease (increase) in regulatory assets (121 ) 74 (399 ) — — — (446 ) Decrease in accounts payable (10,587 ) (705 ) (1,966 ) — — — (13,258 ) Increase (decrease) in accounts payable 3,101 (1,997 ) (2,417 ) — — — (1,313 ) Increase in taxes accrued 12,485 3,041 5,543 — — — 21,069 Decrease in taxes accrued (17,179 ) (2,594 ) (1,631 ) — — — (21,404 ) Changes in other assets and liabilities (16,911 ) (906 ) 1,024 — — 5,734 (11,059 ) Changes in other assets and liabilities (2,408 ) 1,248 968 — — 1,525 1,333 Net cash provided by operating activities Net cash provided by operating activities 97,157 27,733 38,962 3,112 2,822 (18,259 ) 151,527 Net cash provided by operating activities 21,472 6,687 10,045 1,037 941 (3,320 ) 36,862 Cash flows from investing activities Cash flows from investing activities Cash flows from investing activities Capital expenditures Capital expenditures (48,970 ) (12,616 ) (16,100 ) — — — (77,686 ) Capital expenditures (13,957 ) (3,627 ) (3,309 ) — — — (20,893 ) Contributions in aid of construction Contributions in aid of construction 2,792 3,090 891 — — — 6,773 Contributions in aid of construction 1,155 460 185 — — — 1,800 Advances to (repayments from) affiliates 10,200 — (10,000 ) — — (200 ) — Advances to affiliates Advances to affiliates (1,000 ) — (5,000 ) — — 6,000 — Net cash used in investing activities Net cash used in investing activities (35,978 ) (9,526 ) (25,209 ) — — (200 ) (70,913 ) Net cash used in investing activities (13,802 ) (3,167 ) (8,124 ) — — 6,000 (19,093 ) Cash flows from financing activities Cash flows from financing activities Cash flows from financing activities Common stock dividends Common stock dividends (17,037 ) (7,808 ) (9,587 ) (93 ) (85 ) 17,573 (17,037 ) Common stock dividends (9,233 ) (926 ) (2,106 ) (31 ) (28 ) 3,091 (9,233 ) Preferred stock dividends Preferred stock dividends (810 ) (400 ) (286 ) — — 686 (810 ) Preferred stock dividends (270 ) (134 ) (95 ) — — 229 (270 ) Preferred securities distributions of trust subsidiaries Preferred securities distributions of trust subsidiaries — — — (3,019 ) (2,737 ) — (5,756 ) Preferred securities distributions of trust subsidiaries — — — (1,006 ) (913 ) — (1,919 ) Proceeds from issuance of long-term debt Proceeds from issuance of long-term debt 14,367 — — — — — 14,367 Proceeds from issuance of long-term debt 3,277 — — — — — 3,277 Net decrease in short-term borrowings from nonaffiliates and affiliate with original maturities of three months or less (47,317 ) (8,700 ) (1,500 ) — — 200 (57,317 ) Repayment of other short-term borrowings (3,000 ) — — — — — (3,000 ) Repayment of long-term debt Repayment of long-term debt — (5,000 ) — — — — (5,000 ) Net increase (decrease) in short-term borrowings from affiliate with original maturities of three months or less Net increase (decrease) in short-term borrowings from affiliate with original maturities of three months or less 4,529 1,000 — — — (6,000 ) (471 ) Other Other (8,025 ) (677 ) — — — — (8,702 ) Other (5,973 ) 262 — — — — (5,711 ) Net cash used in financing activities Net cash used in financing activities (61,822 ) (17,585 ) (11,373 ) (3,112 ) (2,822 ) 18,459 (78,255 ) Net cash used in financing activities (7,670 ) (4,798 ) (2,201 ) (1,037 ) (941 ) (2,680 ) (19,327 ) Net increase (decrease) in cash and equivalents (643 ) 622 2,380 — — — 2,359 Net decrease in cash and equivalents Net decrease in cash and equivalents — (1,278 ) (280 ) — — — (1,558 ) Cash and equivalents, beginning of period Cash and equivalents, beginning of period 1,398 4 132 — — — 1,534 Cash and equivalents, beginning of period 9 1,282 567 — — — 1,858 Cash and equivalents, end of period Cash and equivalents, end of period $ 755 $ 626 $ 2,512 $ — $ — $ — $ 3,893 Cash and equivalents, end of period $ 9 $ 4 $ 287 $ — $ — $ — $ 300 Item 2. Management’s discussion and analysis of financial condition and results of operations The following discussion should be read in conjunction with the consolidated financial statements of HEI and HECO and accompanying notes. RESULTS OF OPERATIONS HEI Consolidated Three months ended (in thousands, except per 2002 2001 % Primary reason(s) for Revenues $ 431,560 $ 447,292 (4 ) Decreases for the bank and electric utility segments Operating income 71,707 69,051 4 Increase for the bank segment, partly offset by a decrease for the electric utility segment and an increased loss for the “other” segment Income (loss) from: Continuing operations $ 32,777 $ 28,666 14 Higher operating income and lower interest expense due to lower borrowing balances and short-term interest rates Discontinued operations — (21,532 ) 100 Loss from discontinued international power operations in 2001 Net income $ 32,777 $ 7,134 359 Basic earnings (loss) per common share– Continuing operations $ 0.90 $ 0.85 6 Discontinued operations — (0.64 ) 100 $ 0.90 $ 0.21 329 See explanation for income (loss) above and increase in weighted-average number of common shares outstanding below Weighted-average number of common shares outstanding 36,435 33,716 8 Issuances of shares under the DRIP, other plans and a registered public offering of 1.5 million shares of common stock in November 2001 Three months ended (in thousands, except per share amounts) 2003 2002 % Primary reason(s) for Revenues $ 424,636 $ 377,436 13 % Increase for the electric utility segment, slightly offset by a decrease for the bank segment Operating income 59,088 64,604 (9 ) Decreases for the electric utility and “other” segments, slightly offset by an increase for the bank segment Net income 24,327 26,872 (9 ) Lower operating income, partly offset by higher AFUDC and lower interest expense due to lower interest rates and lower long-term borrowing balances in January and February Basic earnings per common share $ 0.66 $ 0.75 (12 ) See explanation for net income above and weighted-average number of common shares outstanding below Weighted-average number of common shares outstanding 36,897 35,818 3 Issuances of shares under the DRIP and other plans Nine months ended (in thousands, except per 2002 2001 % Primary reason(s) for Revenues $ 1,217,998 $ 1,307,968 (7 ) Decreases for all segments Operating income 205,061 �� 198,685 3 Increase for the bank segment, partly offset by a decrease for the electric utility segment and an increased loss for the “other” segment Income (loss) from: Continuing operations $ 90,680 $ 82,542 10 Higher operating income and lower interest expense due to lower borrowing balances and short-term interest rates Discontinued operations –– (22,075 ) 100 Loss from discontinued international power operations in 2001 Net income $ 90,680 $ 60,467 50 Basic earnings (loss) per common share– Continuing operations $ 2.51 $ 2.47 2 Discontinued operations –– (0.66 ) 100 $ 2.51 $ 1.81 39 See explanation for income (loss) above and increase in weighted-average number of common shares outstanding below Weighted-average number of common shares outstanding 36,150 33,454 8 Issuances of shares under the DRIP, other plans and a registered public offering of 1.5 million shares of common stock in November 2001 * Also see segment discussions which follow. Economic conditions attacks and the war in Iraq, Hawaii’s overall economy has been relatively resilient. Hawaii’s real gross state product increased 2.7% in 2002, and is expected to continue modest growth in 2003 despite temporary setbacks in tourism. Visitor arrivals While the visitor industry has been weakened by external events, Hawaii’s economy continues to be buoyed by strength in certain key non-tourism sectors. With interest rates at 41-year lows, the local construction and real estate industries 32 through March, with volume and prices continuing to the months ahead. Dividends HEI and its predecessor company, HECO, have paid dividends continuously since 1901. On April 22, 2003, HEI’s Board maintained the quarterly dividend of $0.62 per common share. The payout ratio for 2002 and the first quarter of 2003 was 76% and 94%, respectively. HEI management believes HEI should achieve a 65% payout ratio before it considers increasing the common stock dividend above its current level. Pension and other postretirement benefits As a result of the investment experience and low fixed income interest rates, at December 31, 2003 the Company, like many sponsors of defined benefit pension plans, could be required to recognize an additional minimum liability as prescribed by SFAS No. 87, “Employers’ Accounting for Pensions.” The liability would largely be recorded as a reduction to common equity through a non-cash charge to accumulated other comprehensive income, and would not affect net income for 2003. The additional minimum liability would also result in the removal from the Company’s balance sheet of the prepaid pension asset ($70 million as of December 31, 2002). The ultimate impact of the investment performance of assets of the retirement benefit plans on the At December 31, 2002, the Company was required to recognize an additional minimum liability of Assuming no changes in retirement benefit plan provisions and the actuarial assumptions used at December 31, 2002, and further assuming no Discount rate Return on assets 6.75% 7.25% ($ in millions) 9 % $ 13.2 $ 10.6 10 % 9.7 7.1 If the Company is required to record substantially greater charges to equity in the future than the charges that might be required under the assumptions described above, the Company’s Following is a general discussion of the results of operations by business segment. Electric utility Three months ended Three months ended ($ in thousands, except per 2002 2001 % Primary reason(s) for significant change (dollars in thousands except per barrel amounts) 2003 2002 % Primary reason(s) for significant change Revenues Revenues $ 333,636 $ 341,386 (2 ) Lower fuel oil prices and fuel components of purchased energy prices, the effects of which are passed on to customers ($15 million), partly offset by 1.8% higher KWH sales ($6 million) $ 328,912 $ 278,331 18 Higher fuel oil and purchased energy fuel costs, the effects of which are passed on to customers ($43 million) and 2.5% higher KWH sales ($8 million) Expenses Expenses Fuel oil 85,311 96,665 (12 ) Lower fuel oil prices, partly offset by more KWHs generated Purchased power 87,123 87,670 (1 ) Lower fuel components of purchased energy prices, partly offset by more KWHs purchased Other 107,613 102,729 5 Higher other operation and maintenance expenses and depreciation Fuel oil 90,839 59,235 53 Higher fuel oil costs and more KWHs generated Purchased power 85,354 77,101 11 Higher fuel costs Other 111,744 96,391 16 Higher other operation expenses, depreciation and taxes, other than income taxes Operating income Operating income 53,589 54,322 (1 ) Higher other operation and maintenance expenses and depreciation, partly offset by the impact of higher KWH sales 40,975 45,604 (10 ) Higher KWH sales, more than offset by higher other operation expenses, depreciation and taxes, other than income taxes Net income Net income 25,610 25,695 —– Lower operating income, partly offset by lower interest expense due to lower short-term borrowing balances and interest rates 17,656 20,359 (13 ) Lower operating income, partly offset by higher AFUDC Kilowatthour sales (millions) Kilowatthour sales (millions) 2,515 2,471 2 2,279 2,223 3 Cooling degree days (Oahu) Cooling degree days (Oahu) 1,539 1,578 (2 ) 828 819 1 Fuel oil price per barrel $ 30.68 $ 35.45 (13 ) Fuel oil cost per barrel $ 35.91 $ 24.45 47 Nine months ended ($ in thousands, except per 2002 2001 % Primary reason(s) for significant change Revenues $ 919,643 $ 973,460 (6 ) Lower fuel oil prices and fuel components of purchased energy prices, the effects of which are passed on to customers ($73 million), partly offset by 1.5% higher KWH sales ($16 million) and sales mix variance ($4 million) Expenses Fuel oil 218,901 266,995 (18 ) Lower fuel oil prices, partly offset by more KWHs generated Purchased power 240,744 253,067 (5 ) Lower fuel components of purchased energy prices, partly offset by more KWHs purchased Other 309,852 301,038 3 Higher other operation and maintenance expenses and depreciation, partly offset by lower taxes, other than income taxes Operating income 150,146 152,360 (1 ) Higher other operation and maintenance expenses and depreciation, partly offset by the impact of higher KWH sales Net income 69,819 69,836 —– Lower operating income, partly offset by lower interest expense due to lower short-term borrowing balances and interest rates Kilowatthour sales (millions) 7,117 7,010 2 Cooling degree days (Oahu) 3,611 3,711 (3 ) Fuel oil price per barrel $ 27.52 $ 34.22 (20 ) Kilowatthour (KWH) sales in the 34 perils including, but not limited to, mold and terrorism. While not significant for the first quarter 2003, the Company expects to continue to incur additional costs for security at its facilities and to comply with the requirements of the Sarbanes-Oxley Act of 2002. Pension and other postretirement benefit HECO and its subsidiaries’ growth in Discount rate Return on assets 6.75% 7.25% ($ in millions) 9 % $ 9.5 $ 7.4 10 % 6.3 4.2 Competition The electric utility industry in Hawaii has become increasingly competitive. IPPs are well established in Hawaii and continue to actively pursue new projects. Competition in the generation sector in Hawaii is moderated, however, by the scarcity of generation sites, various permitting processes and lack of interconnections to other electric utilities. Customer self-generation, with or without cogeneration, is a continuing competitive factor. Historically, HECO and its subsidiaries have been able to compete The electric utilities have initiated several demonstration projects and other activities, including a small customer-owned CHP demonstration project on Maui, to provide on-going evaluation of DG. The electric utilities also have made a limited number of proposals to customers, which are subject to PUC approval, to install and operate utility-owned CHP systems at the customers’ sites. The electric utilities are in the planning stage to expand their offering of CHP systems to its commercial customers as part of their regulated electric utility service. Incremental generation from such customer-sited CHP systems, and other DG, is expected to complement traditional central station power, as part of the electric utilities’ plans to serve their forecast load growth. The offering of CHP systems would be subject to PUC review and approval. To facilitate such an offering, the electric utilities signed a teaming agreement, in early 2003, with a manufacturer of packaged CHP systems, but the teaming agreement does not commit the electric utilities to make any CHP system purchases. In 1996, the PUC instituted a proceeding to identify and examine the issues surrounding electric competition and to determine the impact of competition on the electric utility infrastructure in Hawaii. Several of the parties submitted final statements of position to the PUC in 1998. HECO’s position in the proceeding was that retail competition is not feasible in Hawaii, but that some of the benefits of competition could be achieved through competitive bidding for new generation, performance-based rate-making (PBR) and innovative pricing provisions. The other parties to the proceeding advanced numerous other proposals. In May 1999, the PUC approved HECO’s standard form contract for customer retention that allows HECO to provide a rate option for customers who would otherwise reduce their energy use from HECO’s system by using energy from a nonutility generator. Based on HECO’s current rates, the standard form contract provides a 2.77% and an 11.27% discount on base energy rates for qualifying “Large Power” and “General Service Demand” customers, respectively. In March 2000, the PUC approved a similar standard form contract for HELCO which, based on HELCO’s current rates, provides a 10.00% discount on base energy rates for qualifying “Large Power” and “General Service Demand” customers. 35 In December 1999, HECO, HELCO and MECO filed an application with the PUC seeking permission to implement PBR in future rate cases. In early 2001, the PUC dismissed the PBR proposal without prejudice, indicating it declined at that time to change its current cost of service/rate of return methodology for determining electric utility rates. In January 2000, the PUC submitted to the legislature a status report on its investigation of competition. The report stated that competitive bidding for new power supplies (i.e., wholesale generation competition) is a logical first step to encourage competition in Regulation of electric utility rates The PUC has broad discretion in its regulation of the rates charged by HEI’s electric utility subsidiaries and in other matters. Any adverse At Management cannot predict with certainty when D&Os in The rate schedules of the electric utility subsidiaries include energy cost adjustment clauses under which electric rates charged to customers are automatically adjusted for changes in the weighted-average cost of fuel oil and certain components of purchased power, and the relative amounts of company-generated power and purchased power. In 1997 PUC decisions approving the electric utilities’ 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 continued use of energy cost adjustment clauses would be the subject of investigation in a generic docket or in a future rate case. The electric utility subsidiaries believe that the energy cost adjustment clauses continue to be necessary. These clauses were continued in the most recent HELCO and MECO rate cases (final D&O’s issued in February 2001 and April 1999, respectively). Consultants periodically conduct depreciation studies for the electric utilities to determine whether the existing approved rates and methods used to calculate depreciation accruals are appropriate for the production, transmission, distribution and general plant accounts. If it is determined that the existing rates and methods are no longer appropriate, changes to those rates are recommended as part of the proposed changes coincide with the effective date of the rates established in HECO’s next rate case proceeding so that HECO’s financial results would not be negatively impacted by the depreciation rates and method ultimately approved by the PUC. 36 Most recent rate requests HEI’s electric utility subsidiaries initiate PUC proceedings from time to time to request electric rate increases to cover rising operating costs (e.g., the cost of purchased power) and the cost of plant and equipment, including the cost of new capital projects to maintain and improve service reliability. As of May 1, 2003, the return on average common equity (ROACE) found by the PUC to be reasonable in the most recent final rate decision for each utility was 11.40% for HECO (D&O issued on December 11, 1995, based on a 1995 test year), 11.50% for HELCO (D&O issued on February 8, 2001, based on a 2000 test year) and 10.94% for MECO (amended D&O issued on April 6, 1999, based on a 1999 test year). For 2002, the actual simple average ROACEs (calculated under the rate-making method and reported to the PUC) for HECO, HELCO and MECO were 11.33%, 7.52% and 10.30%, respectively. As of May 1, 2003, the return on average rate base (ROR) found by the PUC to be reasonable in the 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 RORs (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. Hawaiian Electric Company, Inc. HECO has not initiated a rate case for several years, but in 2001 it committed to initiate a rate case within three years, using a 2003 or 2004 test year, as part of the agreement described below under “Other regulatory matters, Demand-side management programs – agreements with the Consumer Advocate.” 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. 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. Other regulatory matters Demand-side management programs - lost margins and shareholder incentives. HECO, HELCO and MECO’s energy efficiency demand-side management (DSM) programs, currently approved by the PUC, provide for the recovery of lost margins and the earning of shareholder incentives. Lost margins are accrued and collected prospectively based on the programs’ forecast levels of participation, and are subject to two adjustments based on (1) the actual level of participation and (2) the results of impact evaluation reports. The difference between the adjusted lost margins and the previously collected lost margins are subject to refund or recovery, with any over or under collection accruing interest at HECO, HELCO, or MECO’s authorized rate of return on rate base. HECO, HELCO and MECO plan to file the impact evaluation report for the 2000-2002 period with the PUC in the fourth quarter of 2004 and adjust the lost margin recovery as required. Past adjustments required for lost margins have not had a material effect on HECO, HELCO or MECO’s financial statements. Shareholder incentives are accrued currently and collected retrospectively based on the programs’ actual levels of participation for the prior year. Beginning in 2001, shareholder incentives collected are subject to retroactive adjustment based on the results of impact evaluation reports, similar to the adjustment process for lost margins. Demand-side management programs – . In October 2001, HECO and the Consumer Advocate finalized agreements, subject to PUC approval, under which HECO’s three commercial and industrial 37 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. The agreements for the temporary continuation of HECO’s existing DSM programs Nonutility generation In March 1988, HECO entered into a PPA with AES Barbers Point, Inc. (now known as AES Hawaii), a Hawaii-based, indirect subsidiary of The AES Corporation. The agreement with 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. Under the amended PPA, AES Hawaii must obtain certain consents from HECO prior to entering into any arrangement to refinance the facility. AES Hawaii has proposed a possible refinancing of the facility, and HECO and AES Hawaii have reached conceptual agreement on the terms upon which HECO is willing to consent to the proposed refinancing. The terms contemplate that HECO will receive consideration for its consent, primarily in the form of a PPA amendment that will reduce the cost of power supplied to HECO pursuant to the PPA. The benefit of the power cost reduction, totaling approximately $2.9 million annually, will be passed on to ratepayers through a reduction in rates. AES Hawaii also is granting HECO an option, subject to certain conditions, to acquire an interest in portions of the AES Hawaii facility site that are not needed for the Legislation Congress and the Hawaii legislature periodically consider legislation that could have positive or negative effects on the utilities and their customers. The 2003 Hawaii legislature 38 for a sick family member. At this time, management is evaluating the possible impact this new law may have on the Company. In its 2001 session, the Hawaii legislature passed a law establishing “renewable portfolio standard” goals for electric utilities of 7% by December 31, 2003, 8% by December 31, 2005 and 9% by December 31, 2010. HECO, HELCO and MECO are permitted to aggregate their renewable portfolios in order to achieve these goals. Any electric utility whose percentage of sales of electricity represented by renewable energy does not The electric utilities currently support renewable sources in various ways, including their solar water heating and heat pump programs and their purchased power contracts with nonutility generators using renewable sources (e.g., refuse-fired, geothermal, hydroelectric and wind turbine generating systems). The electric utilities continue to initiate and support many renewable energy research and development projects to help develop these technologies (e.g., photovoltaic projects). They are also conducting integrated resource planning to evaluate the use of more renewables and, in December 2002, HECO formed a subsidiary, Renewable Hawaii, Inc., to invest in and encourage further investments in renewable energy projects. About 6.8% of electricity sales for 2002 were from renewable resources (as defined under the renewable portfolio standard law). Despite their efforts, the electric utilities believe it may be difficult to increase this percentage to the percentages targeted in the 2001 Hawaii legislation, particularly if sales of electricity increase in future years as projected. Thus, at this time, management cannot predict the impact of this law or of other proposed congressional and Hawaii legislation on the utilities or their customers. Bank Three months ended Three months ended March 31, % ($ in thousands) 2002 2001 change Primary reason(s) for significant change (in thousands) 2003 2002 % Primary reason(s) for significant change Revenues $ 99,722 $ 108,034 (8 ) Lower interest income as a result of a lower weighted-average yield on interest-earning assets, partly offset by higher other income, including higher fee income $ 95,102 $ 98,842 (4 ) Lower interest income (resulting from lower weighted-average yields, partly offset by the impact of higher average loan and mortgage-related securities balances), partly offset by higher other income (including higher fee income) Operating income 24,566 19,488 26 Higher net interest and other income and lower provision for loan losses, partly offset by higher expenses, including higher compensation, consulting, data processing and occupancy and equipment expenses. Also, in 2002, goodwill is no longer being amortized. 22,426 22,171 1 Higher net interest and other income and lower provision for loan losses, partly offset by higher general and administrative expenses Net income 14,652 11,072 32 Higher operating income 13,508 13,351 1 Higher operating income Interest rate spread 3.28 % 3.08 % 6 86 basis points decrease in the weighted-average yield on interest-earning assets, more than offset by a 106 basis points decrease in the weighted-average rate on interest-bearing liabilities 3.14 % 3.27 % (4 ) 62 basis points decrease in the weighted-average yield on interest-earning assets, partly offset by a 49 basis points decrease in the weighted-average rate on interest-bearing liabilities Nine months ended % ($ in thousands) 2002 2001 change Primary reason(s) for significant change Revenues $ 300,633 $ 336,038 (11 ) Lower interest income as a result of a lower weighted-average yield on interest-earning assets, partly offset by higher other income, including higher fee income and lower net investment losses Operating income 71,106 57,209 24 Higher net interest and other income and lower provision for loan losses, partly offset by higher expenses, including higher compensation, consulting, data processing and occupancy and equipment expenses. Also, in 2002, goodwill is no longer being amortized. Net income 42,815 33,154 29 Higher operating income Interest rate spread 3.28 % 3.10 % 6 115 basis points decrease in the weighted-average yield on interest-earning assets, more than offset by a 133 basis points decrease in the weighted-average rate on interest-bearing liabilities Earnings of ASB depend primarily on net interest income, which is the difference between interest earned on interest-earning assets and interest paid on interest-bearing liabilities. ASB’s loan volumes and yields are affected by market interest rates, competition, demand for real estate financing, availability of funds and management’s responses to these factors. Advances from the 39 or losses on sales of securities available for sale, fee income, provision for loan losses, writedown of mortgage servicing rights and expenses from operations. ASB’s net income for the The following table sets forth average balances, interest and dividend income, interest expense and weighted-average yields earned and rates paid, for certain categories of interest-earning assets and interest-bearing liabilities for the periods indicated. Three months ended September 30, Nine months ended September 30, Three months ended March 31, Three months ended March 31, 2003 2002 Change ($ in thousands) ($ in thousands) 2002 2001 Change 2002 2001 Change ($ in thousands) Loans receivable Loans receivable Loans receivable Average balances 1 $ 2,834,512 $ 2,770,748 $ 63,764 $ 2,818,592 $ 3,016,613 $ (198,021 ) Average balances 1 $ 2,991,868 $ 2,822,428 $ 169,440 Interest income 2 50,210 53,760 (3,550 ) 152,300 178,665 (26,365 ) Interest income 2 50,473 51,622 (1,149 ) Weighted-average yield (%) 7.09 7.76 (0.67 ) 7.20 7.90 (0.70 ) Weighted-average yield 6.75 % 7.32 % (0.57 )% Mortgage-related securities Mortgage-related securities Mortgage-related securities Average balances $ 2,751,435 $ 2,471,084 $ 280,351 $ 2,626,965 $ 2,275,129 $ 351,836 Average balances $ 2,698,992 $ 2,407,770 $ 291,222 Interest income 35,503 39,136 (3,633 ) 103,634 115,331 (11,697 ) Interest income 29,277 31,806 (2,529 ) Weighted-average yield (%) 5.16 6.34 (1.18 ) 5.26 6.76 (1.50 ) Weighted-average yield 4.34 % 5.28 % (0.94 )% Investments 3 Investments 3 Investments 3 Average balances $ 223,370 $ 379,889 $ (156,519 ) $ 258,602 $ 322,073 $ (63,471 ) Average balances $ 184,672 $ 322,390 $ (137,718 ) Interest and dividend income 1,880 4,071 (2,191 ) 5,979 13,163 (7,184 ) Interest and dividend income 1,757 2,226 (469 ) Weighted-average yield (%) 3.33 4.21 (0.88 ) 3.08 5.07 (1.99 ) Weighted-average yield 3.85 % 2.78 % 1.07 % Total interest-earning assets Total interest-earning assets Total interest-earning assets Average balances $ 5,809,317 $ 5,621,721 $ 187,596 $ 5,704,159 $ 5,613,815 $ 90,344 Average balances $ 5,875,532 $ 5,552,588 $ 322,944 Interest and dividend income 87,593 96,967 (9,374 ) 261,913 307,159 (45,246 ) Interest and dividend income 81,507 85,654 (4,147 ) Weighted-average yield (%) 6.03 6.89 (0.86 ) 6.12 7.27 (1.15 ) Weighted-average yield 5.55 % 6.17 % (0.62 )% Deposit liabilities Deposit liabilities Deposit liabilities Average balances $ 3,743,883 $ 3,661,607 $ 82,276 $ 3,699,915 $ 3,635,145 $ 64,770 Average balances $ 3,796,151 $ 3,648,702 $ 147,449 Interest expense 17,833 29,015 (11,182 ) 57,331 92,241 (34,910 ) Interest expense 14,430 20,173 (5,743 ) Weighted-average rate (%) 1.89 3.14 (1.25 ) 2.07 3.39 (1.32 ) Weighted-average rate 1.54 % 2.24 % (0.70 )% Borrowings Borrowings Borrowings Average balances $ 1,793,534 $ 1,758,550 $ 34,984 $ 1,758,328 $ 1,791,713 $ (33,385 ) Average balances $ 1,803,534 $ 1,672,301 $ 131,233 Interest expense 20,588 23,103 (2,515 ) 58,583 77,189 (18,606 ) Interest expense 18,907 17,943 964 Weighted-average rate (%) 4.54 5.20 (0.66 ) 4.45 5.75 (1.30 ) Weighted-average rate 4.24 % 4.35 % (0.11 )% Total interest-bearing liabilities Total interest-bearing liabilities Total interest-bearing liabilities Average balances $ 5,537,417 $ 5,420,157 $ 117,260 $ 5,458,243 $ 5,426,858 $ 31,385 Average balances $ 5,599,685 $ 5,321,003 $ 278,682 Interest expense 38,421 52,118 (13,697 ) 115,914 169,430 (53,516 ) Interest expense 33,337 38,116 (4,779 ) Weighted-average rate (%) 2.75 3.81 (1.06 ) 2.84 4.17 (1.33 ) Weighted-average rate 2.41 % 2.90 % (0.49 )% Net balance, net interest income and interest rate spread Net balance, net interest income and interest rate spread Net balance, net interest income and interest rate spread Net balance $ 271,900 $ 201,564 $ 70,336 $ 245,916 $ 186,957 $ 58,959 Net balance $ 275,847 $ 231,585 $ 44,262 Net interest income 49,172 44,849 4,323 145,999 137,729 8,270 Net interest income 48,170 47,538 632 Interest rate spread (%) 3.28 3.08 0.20 3.28 3.10 0.18 Interest rate spread 3.14 % 3.27 % (0.13 )% 1 Includes nonaccrual loans. 2 Includes interest accrued prior to suspension of interest accrual on nonaccrual loans and loan fees of $0.9 million and $0.8 million for the three months ended September 30, 2002 and 2001, respectively, and $2.7 million for the nine months ended September 30, 2002 and 2001. 3 Includes stock in the FHLB of Seattle. 1 Includes nonaccrual loans. 2 Includes interest accrued prior to suspension of interest accrual on nonaccrual loans and loan fees of $1.7 million and $0.9 million for the three months ended March 31, 2003 and 2002, respectively. 3 Includes stock in the FHLB of Seattle. 40 Three months ended Net interest income before provision for losses for the increase in average deposit balances was The provision for loan losses for the Three months ended March 31 2003 2002 (in thousands) Allowance for loan losses, January 1 $ 45,435 $ 42,224 Provision for loan losses 1,150 3,500 Net charge-offs (1,043 ) (1,494 ) Allowance for loan losses, March 31 $ 45,542 $ 44,230 Other income for the General and administrative expenses for the ASB continues to manage the volatility of its net interest income by managing the relationship of interest-sensitive assets to interest-sensitive liabilities. To accomplish this, ASB management uses simulation analysis to monitor and measure the relationship between the balances and repayment and repricing characteristics of interest-sensitive assets and liabilities. Specifically, simulation analysis is used to measure net interest income and net market value fluctuations in various interest-rate scenarios. See “Item 3. Quantitative and qualitative disclosures about market risk.” In order to manage its interest-rate risk profile, ASB has utilized the following strategies: (1) increasing the level of low-cost core deposits; (2) originating relatively short-term or variable-rate business banking and commercial real estate loans; (3) investing in mortgage-related securities with short average lives; and (4) taking advantage of the lower interest-rate environment by lengthening the maturities of interest-bearing liabilities. The shape of the yield curve and the difference between the short-term and long-term rates are also factors affecting profitability. For example, if a long-term fixed rate earning asset were funded by a short-term costing liability, the interest rate spread would be higher in a “steep” yield curve than a “flat” yield curve interest-rate 41 advances with advances that have longer maturities and lower rates. The existing FHLB advances, which were paid off, had interest rates ranging from 5.62% to 8.00% and remaining maturities of nine months to 38 months. The new advances have interest rates ranging from 3.91% to 6.27% and remaining maturities of Nine months ended September 30, 2002 2001 (in thousands) Allowance for loan losses, January 1 $ 42,224 $ 37,449 Provision for loan losses 8,000 9,000 Net charge-offs (4,442 ) (5,549 ) Allowance for loan losses, September 30 $ 45,782 $ 40,900 In March 1998, ASB formed a subsidiary, ASB Realty Corporation, which elects to be taxed as a real estate investment trust. This reorganization has reduced Hawaii bank franchise taxes, net of federal income taxes, of HEIDI and ASB by Regulation ASB is subject to extensive regulation, principally by the OTS and the Federal Deposit Insurance Corporation. Depending on ASB’s level of regulatory capital and other considerations, these regulations could restrict the ability of ASB to compete with other institutions and to pay dividends to its shareholders. See the discussions below under “Liquidity and capital resources—Bank.” For a discussion of securities deemed impermissible investments by the OTS, see “Disposition of certain debt securities” in note (4) of HEI’s notes to consolidated financial statements. Other Three months ended % (in thousands) 2002 2001 change Primary reason(s) for significant change Revenues $ (1,798 ) $ (2,128 ) 16 Lower writedown ($1.5 million) of income notes purchased in connection with the termination of ASB’s investments in trust certificates in May and July of 2001, partly offset by the equity in net loss of UTECH Venture Capital Corporation in 2002 compared to income in 2001. Operating loss (6,448 ) (4,759 ) (35 ) See explanation for revenues. Also, higher legal and other expenses related to the income notes ($0.8 million) and higher corporate administrative and general expenses. Net loss (7,485 ) (8,101 ) 8 See explanation for operating loss above, partly offset by lower corporate interest expense (lower borrowings and short-term interest rates) and higher income tax benefits. Nine months ended Three months ended % % (in thousands) 2002 2001 change Primary reason(s) for significant change 2003 2002 Primary reason(s) for significant change Revenues $ (2,278 ) $ (1,530 ) (49 ) Higher writedown ($0.4 million) of income notes purchased in connection with the termination of ASB’s investments in trust certificates in May and July 2001, and lower interest income ($0.8 million) on the income notes, partly offset by the lower equity in net loss of Utech Venture Capital Corporation ($0.5 million). $ 622 $ 263 137 First quarter 2003 includes the equity in net income of Utech Venture Capital Corporation of $0.1 million and first quarter of 2002 includes the equity in net income of Utech Venture Capital Corporation of $0.3 million and a $0.9 million writedown of income notes purchased in connection with the termination of ASB’s investments in trust certificates in May and July 2001. Operating loss (16,191 ) (10,884 ) (49 ) See explanation for revenues. Also, higher legal and other expenses related to the income notes ($2.3 million) and higher corporate administrative and general expenses, including higher stock options expense ($0.7 million). (4,313 ) (3,171 ) (36 ) See explanation for revenues and higher corporate general and administrative expenses (including retirement benefit expense) and expenses related to the income notes Net loss (21,954 ) (20,448 ) (7 ) See explanation for operating loss above, partly offset by lower corporate interest expense (lower borrowings and short-term interest rates) and higher income tax benefits. The “other” business segment includes results of operations of 42 operate and maintain on-site power generation equipment and auxiliary appliances in Hawaii and the Pacific Rim; HEI Properties, Inc., a company currently holding passive Management, Inc., Discontinued operations See note (5) in HEI’s “Notes to consolidated financial statements.” Contingencies See note (8) Recent accounting pronouncements and interpretations See note (7) and note (6) in HEI’s and HECO’s respective FINANCIAL CONDITION Liquidity and capital resources The consolidated capital structure of HEI (excluding ASB’s deposit liabilities, securities sold under agreements to repurchase and advances from the FHLB of Seattle) was as follows: (in millions) September 30, 2002 December 31, 2001 March 31, 2003 December 31, 2002 Short-term borrowings $ 30 1 % $ — — % Long-term debt 1,084 46 1,146 50 $ 1,189 48 % $ 1,106 46 % HEI- and HECO-obligated preferred securities of trust subsidiaries 200 8 200 9 200 8 200 9 Preferred stock of subsidiaries 34 1 34 1 34 1 34 1 Common stock equity 1,036 44 930 40 1,053 43 1,046 44 $ 2,384 100 % $ 2,310 100 % $ 2,476 100 % $ 2,386 100 % As of S&P Moody’s HEI Commercial paper A-2 P-2 Medium-term notes BBB Baa2 HEI-obligated preferred securities of trust subsidiary BB+ Ba1 HECO Commercial paper A-2 P-2 Revenue bonds (insured) AAA Aaa Revenue bonds (noninsured) BBB+ Baa1 HECO-obligated preferred securities of trust subsidiaries BBB- Baa2 Cumulative preferred stock (selected series) Baa3 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. 43 In May 2002, S&P revised its credit outlook on HEI and HECO securities to stable from negative, citing “recovery in Hawaii’s economy, moderate construction spending, aggressive cost containment, limited competitive pressures, steady banking operations, and expectations for continued financial improvement.” In June 2001, Moody’s had revised its credit outlook on HEI and HECO securities to stable from negative, citing “significant improvements in the Hawaiian economy, the resulting strong financial performance of the company’s main operating subsidiaries, and a reduced emphasis on overseas investments.” In May 2002, Moody’s affirmed HEI’s medium-term note rating (Baa2) and S&P affirmed all of HEI’s and HECO’s ratings. The rating agencies use a combination of qualitative measures (i.e., assessment of business risk that incorporates an analysis of the qualitative factors of management, competitive positioning, operations, markets and regulation) as well as quantitative measures (e.g., cash flow, debt, interest coverage and liquidity ratios) in determining the From time to time, HEI and HECO each utilizes short-term debt, principally commercial paper, to support normal operations and for other temporary requirements. HECO also borrows short-term from HEI from time to time. HEI At For the first Total HEI consolidated financing requirements for requirements. Additional debt and/or equity financing may be required to fund unanticipated expenditures not included in the Following is a discussion of the liquidity and capital resources of HEI’s largest segments. Electric utility HECO’s consolidated capital structure was as follows: (in millions) September 30, 2002 December 31, 2001 March 31, 2003 December 31, 2002 Short-term borrowings $ 36 2 % $ 49 3 % $ 25 1 % $ 6 — % Long-term debt 683 38 685 39 698 39 705 40 HECO-obligated preferred securities of trust subsidiaries 100 6 100 6 100 6 100 6 Preferred stock 34 2 34 2 34 2 34 2 Common stock equity 916 52 877 50 926 52 923 52 $ 1,769 100 % $ 1,745 100 % $ 1,783 100 % $ 1,768 100 % Operating activities provided In September 2002, the Department of Budget and Finance of the State of Hawaii issued, at a small discount, Series 2002A SPRB in the principal amount of $40 million with a maturity of 30 years and a fixed coupon interest rate of 5.10% (yield of 5.15%), and loaned the proceeds from the sale to HECO for its capital improvement projects. As of March 31, 2003, $15 million of proceeds from the Series 2002A sale by the Department of Budget and Finance of the State of Hawaii of SPRB issued for the benefit of HECO remain undrawn. On May 1, 2003, the Department of Budget and Finance of the State of Hawaii issued, at a small discount, Refunding Series 2003A SPRB in the aggregate principal amount of $14 million with a maturity of approximately 17 years and a fixed coupon interest rate of 4.75% (yield of 4.85%), and loaned the proceeds from the sale to HELCO. Also on May 1, 2003, the Department of Budget and Finance issued, at par, Refunding Series 2003B SPRB in the aggregate principal amount of $52 million with a maturity of approximately 20 years and a fixed coupon interest rate of 5.00% and loaned the proceeds from the sale to HECO and HELCO.The proceeds of these Refunding SPRB, together with additional funds provided by HECO and HELCO, will be applied to refund a like principal amount of SPRB bearing higher interest coupons (HELCO’s $4 million of 7.60% Series 1990B SPRB and $10 million of 7.375% Series 1990C SPRB with original maturities in 2020, and HECO’s and HELCO’s aggregate $52 million of 6.55% Series 1992 SPRB with original maturities in 2022) on June 2, 2003. The electric utilities’ consolidated financing requirements for Capital expenditures include the costs of projects that are required to meet expected load growth, to improve reliability and to replace and upgrade existing equipment. Net capital expenditures for the five-year period For approximately Management periodically reviews capital expenditure estimates and the timing of construction projects. These estimates may change significantly as a result of many considerations, including changes in economic conditions, changes in forecasts of KWH sales and peak load, the availability of purchased power and changes in expectations concerning the construction and ownership of future generating units, the availability of generating sites and transmission and distribution corridors, the ability to obtain adequate and timely rate increases, escalation in construction costs, the impacts of demand-side management programs, the effects of opposition to proposed construction projects and requirements of environmental and other regulatory and permitting authorities. Bank (in millions) September 30, December 31, % March 31, December 31, % Total assets $ 6,242 $ 6,011 4 $ 6,402 $ 6,329 1 Available-for-sale mortgage-related securities 2,758 2,355 17 2,778 2,737 2 Held-to-maturity investment securities 88 84 5 91 90 2 Loans receivable, net 2,885 2,858 1 3,039 2,994 1 Deposit liabilities 3,749 3,680 2 3,815 3,801 — Securities sold under agreements to repurchase 618 683 (10 ) 846 667 27 Advances from Federal Home Loan Bank 1,184 1,033 15 1,057 1,176 (10 ) As of ASB’s principal sources of liquidity are customer deposits, wholesale borrowings, the sale of mortgage loans into secondary market channels and the maturity and repayment of portfolio loans and mortgage-related securities. ASB’s deposits increased by For the first ASB believes that a satisfactory regulatory capital position provides a basis for public confidence, affords protection to depositors, helps to ensure continued access to capital markets on favorable terms and provides a foundation for growth. CERTAIN FACTORS THAT MAY AFFECT FUTURE RESULTS AND FINANCIAL CONDITION The Company’s results of operations and financial condition can be affected by numerous factors, many of which are beyond its control and could cause future results of operations to differ materially from historical results. Such factors include international, national and local economic conditions; competition in its principal segments; developments in the U.S. capital markets; weather; terrorist acts; health-related crises; interest-rate environment; loan loss experience; technological developments; final costs of exits from discontinued operations; asset dispositions; insurance coverages; environmental matters; regulation of electric utility rates; deliveries of fuel oil and purchased power; other electric utility regulatory and permitting contingencies; and regulation of ASB. For additional information about these factors, see pages Additional factors that may affect future results and financial condition are described on page v under “Forward-looking MATERIAL ESTIMATES AND CRITICAL ACCOUNTING POLICIES In preparing the consolidated financial statements, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities and the reported amounts of revenues and expenses. Actual results could differ significantly from those estimates. Material estimates that are particularly susceptible to significant change in the case of the Company include the amounts reported for investment securities, allowance for loan losses, regulatory assets, pension and other postretirement benefit obligations, reserves for discontinued operations, current and deferred taxes, contingencies and litigation. In accordance with SEC Release No. 33-8040, “Cautionary Advice Regarding Disclosure About Critical Accounting Policies,” management has identified the accounting policies it believes to be the most critical to the Company’s financial statements—that is, management believes that these policies are both the most important to the portrayal of the Company’s financial condition and results of operations, and currently require management’s most difficult, subjective or complex judgments. For information about these policies, see pages 47 Item 3. Quantitative and qualitative disclosures about market risk The Company considers interest-rate risk to be a very significant market risk for ASB as it could potentially have a significant effect on the Company’s financial condition and results of operations. For additional quantitative and qualitative information about the Company’s market risks, see pages ASB’s interest-rate risk sensitivity measures as of Change in interest rates Change in net interest NPV ratio NPV ratio sensitivity September 30, 2002 +300 0.1 % 7.55 % (271 ) +200 0.8 8.81 (145 ) +100 1.1 9.76 (50 ) Base — 10.26 — - 100 (5.3 ) 9.90 (36 ) December 31, 2001 +300 (4.5 ) 6.10 (367 ) +200 (3.0 ) 7.45 (232 ) +100 (1.5 ) 8.60 (117 ) Base — 9.77 — - 100 2.2 10.65 88 - 200 3.3 10.63 86 March 31, 2003 December 31, 2002 Change NPV NPV ratio Change NPV NPV ratio Change in interest rates (basis points) +300 0.5 % 7.09 % (235 ) 1.9 % 7.90 % (235 ) +200 2.2 8.32 (112 ) 3.0 9.15 (110 ) +100 3.0 9.15 (29 ) 3.3 10.01 (24 ) Base — 9.44 — — 10.25 — -100 (6.6 ) 9.26 (18 ) (5.7 ) 10.02 (23 ) Management believes that ASB’s interest-rate risk position at The bank’s net portfolio value (NPV) ratio sensitivity measures remained almost unchanged over the quarter, but the overall level of the bank’s NPV ratios fell slightly. This was due to several factors, including (1) lower market prices on mortgage securities due to expectations of faster prepayment The computation of the prospective effects of hypothetical interest rate changes is based on numerous assumptions, including relative levels of market interest rates, loan prepayments, actual balance changes and pricing strategies, and should not be relied upon as indicative of actual future results. Furthermore, to the extent market conditions and other factors vary from the assumptions used in the simulation analysis, actual results will differ from the simulation Item 4. Controls and procedures HEI Robert F. Clarke, HEI Chief Executive Officer, and 48 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 There are no significant developments in pending legal proceedings except as set forth in HEI’s and HECO’s Item 4. Submission of matters to a vote of security holders HEI The Annual Meeting of Stockholders of HEI was held on April 22, 2003. Proxies for the meeting were solicited pursuant to Regulation 14A under the Securities Exchange Act of 1934. As of February 12, 2003 the record date for the Annual Meeting, there were 36,863,444 shares of common stock issued and outstanding and entitled to vote. There was no solicitation in opposition to the management nominees to the Board of Directors as listed in the proxy statement for the meeting and such nominees were elected to the Board of Directors. Shareholders also approved the election of KPMG LLP as HEI’s independent auditor for fiscal year 2003 and the amendments to HEI’s stock option and incentive plan, including the addition of 2,000,000 shares of common stock for which options or other awards may be made under the plan. The results of the voting for the Class I director-nominees (with terms ending at the 2006 Annual Meeting), the independent auditor and the amendments to the stock option and incentive plan are as follows: Shares of Common Stock For Withheld Against Abstain Broker Election of Class I Directors Robert F. Clarke 30,959,008 2,209,174 — — 1,000 Shirley J. Daniel 30,927,285 2,240,897 — — 1,000 A. Maurice Myers 30,915,091 2,253,091 — — 1,000 James K. Scott 30,923,206 2,244,976 — — 1,000 Election of KPMG LLP as independent auditor 32,053,155 — 801,294 314,733 — Approval of the 1987 Stock Option and Incentive Plan, as amended and restated 21,750,920 — 2,774,101 1,048,451 7,595,710 49 Class II Directors— Victor Hao Li, T. Michael May, Diane J. Plotts, Kelvin H. Taketa and Jeffrey N. Watanabe —continue in office with terms ending at the 2004 Annual Meeting. Class III Directors— Don E. Carroll, Constance H. Lau, Bill D. Mills and Oswald K. Stender —continue in office with terms ending at the 2005 Annual Meeting. HECO The Annual Meeting of the sole stockholder of HECO was conducted by written consent effective April 22, 2003. The incumbent members of the Board of Directors of HECO were re-elected. The incumbent members continuing in office are Robert F. Clarke, Shirley J. Daniel, T. Michael May, Diane J. Plotts, James K. Scott, Anne M. Takabuki, Barry K. Taniguchi and Jeffrey N. Watanabe. KPMG LLP was elected independent auditor of HECO for fiscal year 2003. A. MECO’s Maalaea Generating Station underground diesel fuel line leak On Based on the results of the subsurface investigation and the B. Puna Geothermal Venture HELCO has a 35-year PPA with Puna Geothermal Venture (PGV) for 30 MW of firm capacity from its geothermal steam facility expiring on December 31, 2027. PGV’s output C. Ratio of earnings to fixed charges HEI and Ratio of earnings to fixed charges excluding interest on ASB deposits Years ended December 31, Nine months ended September 30, 2002 2001 2000 1999 1998 1997 2.07 1.82 1.76 1.83 1.88 1.91 Three months ended March 31, 2003 Years ended December 31, 2002 2001 2000 1999 1998 1.88 2.03 1.82 1.76 1.83 1.88 Ratio of earnings to fixed charges including interest on ASB deposits Years ended December 31, Nine months ended September 30, 2002 2001 2000 1999 1998 1997 1.74 1.52 1.49 1.50 1.48 1.59 Three months ended March 31, 2003 Years ended December 31, 2002 2001 2000 1999 1998 1.66 1.72 1.52 1.49 1.50 1.48 For purposes of calculating the ratio of earnings to fixed charges, HECO and Ratio of earnings to fixed charges Years ended December 31, Nine months ended September 30, 2002 2001 2000 1999 1998 1997 3.80 3.51 3.39 3.09 3.33 3.26 Three months ended March 31, 2003 Years ended December 31, 2002 2001 2000 1999 1998 3.10 3.71 3.51 3.39 3.09 3.33 For purposes of calculating the ratio of earnings to fixed charges, D. First Amendment to Rights Agreement On April 22, 2003, the Board of Directors of HEI approved an amendment to the Rights Agreement dated October 28, 1997, between HEI and Continental Stock Transfer & Trust Company, as Rights Agent. The First Amendment to Rights Agreement, dated as of May 7, 2003, deletes the delayed redemption provision contained in Section 23(c) of the Rights Agreement. The deleted provision had provided, in effect, that if a majority of directors elected by shareholders had not been nominated by the Board in office immediately prior to their election, then the new Board must wait a period of 120 days before redeeming the Rights. Item 6. Exhibits and reports on Form 8-K (a) Exhibits HEI Executive Incentive Compensation Plan. HEI 1987 Stock Option and Incentive Plan of HEI as amended and restated effective January 21, 2003. HEI HEI Long-Term Incentive Plan. HEI Hawaiian Electric Industries, Inc. and HEI HEI 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 Chief Executive Officer) HEI Written Statement Pursuant to 18 U.S.C. Section 1350, as Adopted by Section 906 of the Sarbanes-Oxley Act of 2002 of HECO Hawaiian Electric Company, Inc. and HECO Written Statement Pursuant to 18 U.S.C. Section 1350, as Adopted by Section 906 of the HECO Written Statement Pursuant to 18 U.S.C. Section 1350, as Adopted by Section 906 of the (b) Reports on Form 8-K Subsequent to Dated (filing date) Registrant/s Items reported HEI/HECO Item 5. HEI/HECO Item 5. HEI’s Item HEI Item HEI/HECO Item 5. HEI’s Pursuant to the requirements of the Securities Exchange Act of 1934, the registrants have duly caused this report to be signed on their behalf by the undersigned, thereunto duly authorized. The signature of the undersigned companies shall be deemed to relate only to matters having reference to such companies and any subsidiaries thereof. (Registrant) (Registrant) By /s/ ROBERT F. CLARKE By /s/ T. MICHAEL MAY Robert F. Clarke T. Michael May By /s/ ERIC K. YEAMAN By /s/ RICHARD A. VON GNECHTEN Richard A. von Gnechten By /s/ CURTIS Y. HARADA By /s/ ERNEST T. SHIRAKI Curtis Y. Harada Ernest T. Shiraki Date: May 9, 2003 Date: May 9, 2003 Certification 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 quarterly report on Form 10-Q of Hawaiian Electric Industries, Inc. (HEI); 2. Based on my knowledge, this quarterly 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 quarterly report; 3. Based on my knowledge, the financial statements, and other financial information included in this quarterly 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 quarterly 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 quarterly 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 quarterly report (the “Evaluation Date”); and c) 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 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) 6. The registrant’s other certifying officers and I have indicated in this quarterly 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: May 9, 2003 /s/ ROBERT F. CLARKE Robert F. Clarke Certification Pursuant to Section 13a-14 of the Securities Exchange Act of 1934 of I, 1. I have reviewed this quarterly report on Form 10-Q of Hawaiian Electric Industries, Inc. (HEI); 2. Based on my knowledge, this quarterly 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 quarterly report; 3. Based on my knowledge, the financial statements, and other financial information included in this quarterly 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 quarterly 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 quarterly 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 quarterly report (the “Evaluation Date”); and c) 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 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) 6. The registrant’s other certifying officers and I have indicated in this quarterly 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: May 9, 2003 /s/ ERIC K. YEAMAN 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 quarterly report on Form 10-Q of Hawaiian Electric Company, Inc. (HECO); 2. Based on my knowledge, this quarterly 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 quarterly report; 3. Based on my knowledge, the financial statements, and other financial information included in this quarterly 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 quarterly 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 quarterly 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 quarterly report (the “Evaluation Date”); and c) 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 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) 6. The registrant’s other certifying officers and I have indicated in this quarterly 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: May 9, 2003 /s/ T. MICHAEL MAY T. Michael May 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 quarterly report on Form 10-Q of Hawaiian Electric Company, Inc. (HECO); 2. Based on my knowledge, this quarterly 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 quarterly report; 3. Based on my knowledge, the financial statements, and other financial information included in this quarterly 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 quarterly 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 quarterly 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 quarterly report (the “Evaluation Date”); and c) 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 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) 6. The registrant’s other certifying officers and I have indicated in this quarterly 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: May 9, 2003 /s/ RICHARD A. VON GNECHTEN Richard A. von GnechtenFor the quarterly period ended September 30, 2002
Specified in Its Charter
File Number
Identification No.and Principal SubsidiaryNoneNot applicableoNo xNovemberMay 1, 2002200336,610,86937,129,207 SharessubsidiariesSubsidiaries
Hawaiian Electric Company, Inc. and subsidiariesSubsidiaries
Form 10-Q—Quarter ended September 30, 2002March 31, 2003No.No.subsidiariesSubsidiariesSeptember 30, 2002 March 31, 2003 and December 31, 20012002subsidiariesSubsidiariesSeptember 30, 2002 March 31, 2003 and December 31, 200120021412151315131614171534325248554855495550585260546155subsidiariesSubsidiaries
Hawaiian Electric Company, Inc. and subsidiariesSubsidiaries
Form 10-Q—Quarter ended September 30, 2002March 31, 2003EAPRCEast Asia Power Resources CorporationEnserchEnserch Development CorporationEPHEEPHE Philippines Energy Company, Inc.HCPCHilo Coast Power Companyand HECO Capital Trust II and Renewable Hawaii, Inc.
GroupHPGHEI Power Corp. Guam, a formerly wholly owned subsidiary of HEI Power Corp.KCPKWHKawaihae Cogeneration PartnersKilowatthourKWHLUCKilowatthourHawaii State Land Use CommissionitsHawaiian 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 statements are not guarantees of future performance.Californiacontinental U.S. housing markets;and the war on terrorism;terrorism, the war in Iraq, potential conflict or crisis with North Korea and other global developments, including Severe Acute Respiratory Syndrome (SARS);sale;sale and pension and other retirement plan assets;renderaffect the operations and prospects of HEI’s subsidiaries less competitive(including HECO and its subsidiaries) or obsolete;their competitors;itstheir 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;itstheir subsidiaries;Hawaiian Electric Company, Inc. (HECO);HECO;itsASB’s real estate investment trust subsidiary and itsHEI’s discontinued operations;
Hawaiian Electric Industries, Inc. and subsidiariesSubsidiaries
Consolidated balance sheets (unaudited)
2002
2001
2003
2002notes“Notes to consolidated financial statements.”subsidiariesSubsidiaries
Consolidated statements of income (unaudited)
September 30,
September 30,
ratio of earnings to fixed charges)
ratio of earnings to fixed charges)notes“Notes to consolidated financial statements.”subsidiariesSubsidiaries
Consolidated statements of changes in stockholders’ equity (unaudited)
earnings
other
comprehensive
income (loss)
earnings
other
comprehensive
income (loss)notes“Notes to consolidated financial statements.”subsidiariesSubsidiaries
Consolidated statements of cash flows (unaudited)notes“Notes to consolidated financial statements.”subsidiariesSubsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)S-X.S–X. Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial statements. In preparing the financial statements, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the balance sheet and the reported amounts of revenues and expenses for the period. Actual results could differ significantly from those estimates. The accompanying unaudited consolidated financial statements should be read in conjunction with the consolidated financial statements and the notes thereto incorporated by reference in HEI’s Annual Report on SEC Form 10-K for the year ended December 31, 2001 and the consolidated financial statements and the notes thereto in HEI’s Quarterly Reports on SEC Form 10-Q for the quarters ended March 31, 2002 and June 30, 2002.September 30, 2002March 31, 2003 and December 31, 2001,2002, and the results of its operations for the three and nine months ended September 30, 2002 and 2001, and its cash flows for the ninethree months ended September 30, 2002March 31, 2003 and 2001.2002. All such adjustments are of a normal recurring nature, unless otherwise disclosed in this Form 10-Q10–Q or other referenced material. Results of operations for interim periods are not necessarily indicative of results for the full year.periods’period’s consolidated financial statements to conform to the 20022003 presentation.5
utility
Utility from continuing operations before income taxes.1412 through 33.6
31.subsidiariesSubsidiaries
Consolidated balance sheet data
2002
2001
2003
200276subsidiariesSubsidiaries
Consolidated income statement data
September 30,
September 30,* See note (9) of notes to consolidated financial statements for a discussion of goodwill amortization.September 30, 2002,March 31, 2003, ASB had commitments to borrowers for undisbursed loan funds, loan commitments and unused lines and letters of credit of $0.7$0.8 billion.8
In June 2000, the Office of Thrift Supervision (OTS) advised American Savings Bank, F.S.B. (ASB)ASB that four series of trust certificates, in the original aggregate principal amount of $114 million, were impermissible investments under regulations applicable to federal savings banks and subsequently directed thatrequired ASB to dispose of the securities. The original trust certificates were purchased through two brokers and represented (i) the right to receive the principal amount of the trust certificates at maturity from an Aaa-rated swap counterparty (principal swap) and (ii) the right to receive the cash flow received on subordinated notes (income classnotes or equity notes). As a result, ASB recognized interest income on these securities on a cash basis, and in the second quarter of 2000, reclassified these trustseries of these trust certificates to their then-current estimated fair value. In April 2001, ASB sold one issue of the trust certificates for $30 million, an amount approximating the original purchase price. ASB demanded that PaineWebber Incorporated (PaineWebber) (the broker through whomthat sold the remaining three issues of trust certificates were purchased) buyto ASB) rejected ASB’s demand that the three issues back or rescind the transaction,transactions be rescinded, ASB filed a lawsuit against PaineWebber Incorporated in which 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.(described below).swaps onswap component of the three issuestrust certificates and received $43 million from the swaps. Prior to terminating the swaps, ASB had received $2 million of cash from the three issues of trust certificates. After terminating the swaps, the related income classequity notes were sold by the swap counterparty to HEI. In May 2001, HEI purchased two series of the income class notes for approximately $21 million and, in July 2001, HEI purchased the third series of income class notes for approximately $7 million. As of September 30, 2002,March 31, 2003, HEI had received $8.3$10.2 million of cash from these income notes. The three series of income notes purchased by HEI represent residual equity interests in three entities (Avalon CLO, Pilgrim 1999-01 CLO, and Avalon CLO II) which, as of March 31, 2003, held cash and collateralized corporate debt securities having an estimated par value of approximately $1.7 billion. The entities manage the incomeportfolio of collateralized debt securities, pay expenses and make payments to the various class notes.note holders as specified in the various note agreements. HEI is not the primary beneficiary of these entities.class notes under the cost recovery method of accounting. In the second half of 2001, in 2002 and in the first nine monthsquarter of 2002,2003, HEI recognized anet losses of $5.6 million ($8.7 million pretax), $2.9 million ($4.5 million pretax) and a $2.4 million ($3.7 million pretax),nil, respectively, net loss on the writedown of the three income class notes to their then-current estimated fair value based upon an independent third party valuation that is updated quarterly. As of September 30, 2002,March 31, 2003, the estimated fair value and carrying value (including valuation adjustments)adjustments totaling $5.3 million recorded in accumulated other comprehensive income) of the three income class notes were $9.2totaled approximately $11.2 million. HEI could incur additional losses from the ultimate disposition of these income class notes fromdue to further “other-than-temporary” declines in their fair value. HEI’s maximum pre-tax exposure to additional financial statement loss as a result of its ownership of the income notes is $5.9 million as of March 31, 2003. ASB has agreed to indemnify HEI against losses related to these income class notes, but the indemnity obligation is payable solely out of any recoveries achieved in the litigation against PaineWebber.Incorporated. In 2002,alleges that, in connection with the sale of the three trust certificates to ASB, PaineWebber Incorporated filed a(i) violated the Hawaii Uniform Securities Act, (ii) breached fiduciary duties it owed to ASB, (iii) breached express and implied warranties it made to ASB, (iv) made misrepresentations to ASB, and (v) was negligent, and ASB also claims that it is entitled to rescission of the transaction based on mistake. A counterclaim allegingasserted by PaineWebber against ASB alleges violations of the federal securities laws, misrepresentation and fraud among other allegations. Severaland breach of contract and seeks compensatory and punitive damages and attorneys’ fees. Each of the parties has filed multiple motions for partial summary judgment, some of which were heard in January and others were heard in March of 2003. The Court denied all of the motions for summary judgment andheard in January, except that it ruled that PaineWebber did not owe a fiduciary duty to ASB with respect to two of the three transactions (which ruling was subsequently vacated by the Court’s subsequent order granting ASB’s motion for reconsideration of that ruling).have been filedit heard in March. The Court dismissed ASB’s breach of fiduciary duty claim, negligence claim, breach of implied warranty claim and a portion of its misrepresentation claim (to the extent it was based upon certain statements made by PaineWebber), but denied PaineWebber’s motion for partial summary judgment with respect to ASB’s express warranty claim, ASB’s claim for rescission based on mistake and ASB’s common law misrepresentation claim (to the extent it was based on certain other statements made by PaineWebber). The Court had previously ruled that these same representations may be actionable under ASB’s Hawaii securities law claim. In another order the Court ruled that ASB’s recovery of rescissionary damages would be limited to the amount it paid for the trust certificates (about $83.7 million) reduced by the partiesamount ASB received when the principal portion of the investments were redeemed (about $42.6 million) and are scheduledwhen the income notes were sold to HEI (about $27.9 million).hearing in January 2003.the amount of income ASB received while it held the notes (about $9.4 million). The trialCourt also ruled that ASB would not be entitled (i) to recover any unrealized investment losses and costs that HEI may have suffered after it purchased the income notes, (ii) to recover any element of statutory or other interest, (iii) to invoke rescission (except based upon its statutory claim and claim of mistake) or (iv) to recover compensatory damages with respect to its common law tort claims. At the same time, the Court ruled that ASB may be entitled to recover its attorneys’ fees and punitive damages at trial. Finally, with respect to PaineWebber’s counterclaim, the Court granted ASB’s motion for summary judgment insofar as the counterclaim sought to recover PaineWebber’s costs incurred with respect to its initial communications with the OTS regarding the permissibility of the investments, but denied ASB’s motion for a summary judgment on PaineWebber’s claim that it is entitled to recover the costs it allegedly incurred (about $0.5 million) with respect to the formal OTS investigation.FebruaryJuly 2003. Additional discovery and pretrial motion work is anticipated prior to trial. The ultimate outcome of this litigation cannot be determined at this time.
In March 1998, ASB formed a subsidiary, ASB Realty Corporation, which elects to be taxed as a real estate investment trust. This reorganization has reduced Hawaii bank franchise taxes, net of federal income taxes, of HEI Diversified, Inc. (HEIDI) and ASB by $3$1 million for the ninethree months ended September 30, 2002March 31, 2003 and $12$17 million for prior years. ASB has taken a dividends received deduction on dividends paid to it by ASB Realty Corporation in the bank franchise tax returns filed in 1999 through 2002. The State of Hawaii Department of Taxation has challenged ASB’s position and has issued notices of tax assessment for 1999, 2000 and 2001. The aggregate amount of tax assessments is approximately $14 million (or $9 million, net of income tax benefits) for tax years 1999 through 2001, plus interest of $3 million (or $2 million, net of income tax benefits) through September 30, 2002.March 31, 2003. The interest on the tax is accruing at a simple interest rate of 8%. Although not yet assessed, the potential bank franchise tax liability for 2002 and the first quarter of 2003 if ASB’s tax position does not prevail is $7 million (or $5 million, net of income tax benefits), plus interest of $0.5 million (or $0.3 million, net of income tax benefits) through March 31, 2003. ASB believes that its tax position is proper and, in October 2002, filed an appeal with the State Board of Review, First Taxation District. A State Board of Review hearing has been scheduled for May 13, 2003. ASB has not paid or provided for Hawaii bank franchise taxes for 1998 through 2002. In the first quarter of 2003, ASB provided for $5,000 of Hawaii bank franchise taxes.9
In response to pressure on interest rate spreads as a result of the low interest rate environment, on April 3 and 4, 2003, ASB restructured $258 million of Federal Home Loan Bank (FHLB) advances. ASB paid off existing higher rate FHLB advances with advances that have longer maturities and lower rates. The existing FHLB advances, which were paid off, had interest rates ranging from 5.62% to 8.00% and remaining maturities of nine months to 38 months. The new advances have interest rates ranging from 3.91% to 6.27% and remaining maturities of 32 months to 74 months at the time of the restructuring. The restructuring will result in a reduction of interest expense on these FHLB advances for 2003 of approximately $3 million. ASB expects that this reduction in interest expense will partially offset the reduction in interest income due to the anticipated lower yields in the second quarter of 2003 compared to the second quarter of 2002.
On October 23, 2001, the HEI Board of Directors adopted a formal plan to exit the international power business (engaged in by HEIPC and its subsidiaries, the HEIPC Group). HEIPC management has been carrying out a program to dispose of all of the HEIPC Group’s remaining projects and investments. Accordingly, the HEIPC Group has been reported as a discontinued operation in the Company’s consolidated statements of income.Guam projectIn September 1996, HEI Power Corp. Guam (HPG) entered into an energy conversion agreement for approximately 20 years with As of March 31, 2003, the Guam Power Authority, pursuant to which HPG repaired and operated two oil-fired 25 megawatt (MW) (net) units in Tanguisson, Guam. In November 2001, HEI sold HPG for a nominal gain.China projectIn 1998 and 1999, the HEIPC Group acquired what became a 75% interest in a joint venture, Baotou Tianjiao Power Co., Ltd., formed to construct, own and operate a 200 MW (net) coal-fired power plant to be located in Inner Mongolia. The power plant was intended to be built “inside the fence” for Baotou Iron & Steel (Group) Co., Ltd. The project received approval from both the national and Inner Mongolia governments. However, the Inner Mongolia Power Company, which owns and operates the electricity grid in Inner Mongolia, caused a delayremaining net assets of the project by failingdiscontinued international power operations amounted to enter into a satisfactory interconnection arrangement with the joint venture. The Inner Mongolia Power Company was seeking to limit the joint venture’s load, which is inconsistent with the terms$14 million (included in “Other” assets) and consisted primarily of the project approvals and the power purchase contract. Upon appeal to the Inner Mongolia government, the Inner Mongolia Economic and Trade Committee (the regulator of the electric utility industry) refused to enforce the HEIPC Group’s rights associated with the approved project. The HEIPC Group determined that a satisfactory interconnection arrangement could not be obtained and is not proceeding with the project. (An indirect subsidiary of HEIPC has a conditional, nonrecourse commitment to make an additional investment in Baotou Tianjiao Power Co., Ltd., but it is HEIPC’s position that the conditions to this commitment have not been satisfied and no further investment will be made.) In the third quarter of 2001, the HEIPC Group wrote off its remaining investment of approximately $24 million in the project. The HEIPC Group is continuing to pursue recovery of the costs incurred in connection with the joint venture interest; however, there can be no assurance that any amounts will be recovered.Philippines investmentsIn March 2000, the HEIPC Group acquired a 50% interest in EPHE Philippines Energy Company, Inc. (EPHE), an indirect subsidiary of El Paso Corporation, for $87.5 million. EPHE then owned approximately 91.7% of the common shares of East Asia Power Resources Corporation (EAPRC), a Philippines holding company primarily engaged in the electric generation business in Manila and Cebu through its subsidiaries.Due to the equity losses of $24.1 million incurred in 2000 from the investment in EPHE and the changes in the political and economic conditions related to the investment (primarily devaluation of the Philippine peso and increase in fuel oil prices), management determined that the investment in EAPRC was impaired and, on December 31, 2000, wrote off the remaining $65.7$7 million investment in EAPRC. Also, on December 31, 2000, HEI accrued a potential payment obligation under an HEI guaranty of $10 million of EAPRC loans. In the first quarter of 2001, HEI was partially released ($1.5 million) from the guaranty obligation; and, in August 2002, HEI paid approximately $8.5 million in full satisfaction of such obligation.In December 1998, the HEIPC Group invested $7.6 million to acquire convertible preferred shares in Cagayan Electric Power & Light Co., Inc. (CEPALCO), an electric distribution company in the Philippines. In September 1999, the HEIPC Group also acquired 5% of the outstanding CEPALCO common stock for $2.1 million. In July 2001, the preferred shares were converted to common stock. The HEIPC Group currently owns approximately 22% of the outstanding common stock of CEPALCO. This investment is classified as available for sale. The HEIPC Group recognized an impairment loss of approximately $2.7 million in the third quarter of 2001 to adjust this investment to its estimated net realizable value.For the three months ended September 30, 2001, the HEIPC Group had revenues from operations of $1.2 million, operating loss of $0.6 million, interest expense of $0.3 million and income tax benefits of $0.2 million. For the nine10months ended September 30, 2001, the HEIPC Group had revenues from operations of $4.2 million, operating loss of $0.2 million, interest expense of $1.1 million and income tax benefits of $29,000. As of September 30, 2002, the remaining net assets of the discontinued international power operations, after the writeoffs and writedowns described above, amounted to $13.1 million (included in “Other” assets) and consisted primarily of the investment in CEPALCOPhilippines, and deferred taxes receivable, reduced by a reserve for losses from operations during the phase-out period.thea China joint venture interest, if the investment in CEPALCO is disposed of for less or more than $7.0 million or if the Internal Revenue Service does not accept HEI’s treatment of the write-off of its indirect investment in EAPRCEast Asia Power Resources Corporation as an ordinary loss for federal corporate income tax purposes. In addition, further losses from the discontinued international power operations may be sustained during the phase-out period if the expenditures made in seeking recovery of the costs incurred in connection with the China joint venture interest exceed the total of any recovery ultimately achieved and the amount provided for in HEI’s reserve for discontinued operations.
For the ninethree months ended September 30,March 31, 2003 and 2002, and 2001, the Company paid interest amounting to $145.6$40.4 million and $203.6$43.2 million, respectively.ninethree months ended September 30,March 31, 2003, the Company received cash for income tax refunds amounting to $3.5 million. For the three months ended March 31, 2002, and 2001, the Company paid income taxes amounting to $50.6 million and $19.5 million, respectively. The lower taxes paid in the nine months ended September 30, 2001 compared to the nine months ended September 30, 2002 were due primarily to the timing of the Public Service Company tax deduction taken in 2001 by HECO and its subsidiaries for estimated tax purposes, which deferred tax payments to the end of the year.$2.4 million.
Under the HEI Dividend Reinvestment and Stock Purchase Plan (DRIP), common stock dividends reinvested by shareholders in HEI common stock in noncash transactions amounted to $12.3$4.2 million and $12.1$4.1 million for the ninethree months ended September 30,March 31, 2003 and 2002, and 2001, respectively.ASB securitized $392.8 million of residential loans into mortgage-related securities in the nine months ended September 30, 2001.
In June 2001, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards (SFAS) No. 143, “Accounting for Asset Retirement Obligations,” which requires that the fair value of a liability for an asset retirement obligation be recognized in the period in which it is incurred if a reasonable estimate of fair value can be made. The associated asset retirement costs are towould be capitalized as part of the carrying amount of the long-lived asset and depreciated over the life of the asset. The discounted liability is to be accreted at the end of each period through charges to operating expense. If the obligation is an obligation of the electric utilities and is settled for other than the carrying amount of the liability, the Companyelectric utilities will recognize the difference as a regulatory asset or liability, as the provisions of SFAS No. 143 have no income statement impact for the electric utilities as long as the recovery of the regulatory asset or payment of the regulatory liability is toprobable. If the obligation is an obligation of a non-electric utility subsidiary and is settled for other than the carrying amount of the liability, such a subsidiary will recognize a gain or loss on settlement. The provisions of SFAS No. 143 are effective for fiscal years beginning after June 15, 2002. The Company will adoptadopted SFAS No. 143 on January 1, 2003. Management has not yet determined2003 with no effect on the impact, if any, of adoption.Company’s financial statements.
In April 2002, the FASB issued SFAS No. 145, “Rescission of FASB Statements No. 4, 44 and 64, Amendment of FASB Statement No. 13, and Technical Corrections.” SFAS No. 145 rescinds SFAS No. 4, “Reporting Gains and Losses from Extinguishment of Debt,” SFAS No. 64, “Extinguishments of Debt Made to Satisfy Sinking-Fund Requirements,” and SFAS No. 44, “Accounting for Intangible Assets of Motor Carriers.” SFAS No. 145 also amends SFAS No. 13, “Accounting for Leases,” to eliminate an inconsistency between the required accounting for sale-11leasebacksale-leaseback transactions and the required accounting for certain lease modifications that have economic effects that are similar to sale-leaseback transactions. SFAS No. 145 also amends other existing authoritative pronouncements to make various technical corrections, clarify meanings, or describe their applicability under changed conditions. The provisions of SFAS No. 145 related to the rescission of SFAS No. 4 are effective for fiscal years beginning after May 15, 2002. The provisions of SFAS No. 145 related to SFAS No. 13 are effective for transactions occurring after May 15, 2002. All other provisions of SFAS No. 145 are effective for financial statements issued on or after May 15, 2002. Early application of the provisions of SFAS No. 145 is encouraged and may be as of the beginning of the fiscal year or as of the beginning of the interim period in which SFAS No. 145 was issued. The Company adopted the provisions of SFAS No. 145 in the second quarter of 2002. The adoption of SFAS No. 145 did not have a material2002 with no effect on the Company’s financial condition, results of operations or liquidity.statements.
In July 2002, the FASB issued SFAS No. 146, “Accounting for Costs Associated with Exit or Disposal Activities.” SFAS No. 146 requires companies to recognize costs associated with exit or disposal activities when they are incurred rather than at the date of a commitment to an exit or disposal plan. Examples of costs covered by the standard include lease termination costs and certain employee severance costs that are associated with a restructuring, discontinued operation, plant closing, or other exit or disposal activity. Previous accounting guidance was provided by Emerging Issues Task Force (EITF) Issue No. 94-3, “Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred in a Restructuring).” SFAS No. 146 replaces EITF Issue No. 94-3. SFAS No. 146 is to be applied prospectively to exit or disposal activities initiated after December 31, 2002. The Company will adoptadopted the provisions of SFAS No. 146 on January 1, 2003. Since SFAS No. 146 isapplies prospectively to be applied prospectively,exit or disposal activities initiated after December 31, 2002, the adoption of SFAS No. 146 should havehad no effect on the Company’s historical financial condition, resultsstatements.
In November 2002, the FASB issued Interpretation (FIN) No. 45, “Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of operationsIndebtedness of Others,” which elaborates on the disclosures to be made by a guarantor in its interim and annual financial statements for periods ending after December 15, 2002 about its obligations under guarantees it has issued. FIN No. 45 also clarifies that a guarantor is required to recognize, at inception of a guarantee, a liability for the fair value of the obligation undertaken. The Company adopted the provisions of FIN No. 45 on January 1, 2003. Since the initial recognition and measurement provisions of FIN No. 45 are applied prospectively to guarantees issued or liquidity.modified after December 31, 2002, the adoption of these provisions of FIN No. 45 had no effect on the Company’s historical financial statements.
In January 2003, the FASB issued FIN No. 46, “Consolidation of Variable Interest Entities,” which addresses the consolidation of variable interest entities (VIEs) as defined. FIN No. 46 applies immediately to variable interests in VIEs created after January 31, 2003, and to variable interests in VIEs obtained after January 31, 2003. For a variable interest in a VIE created before February 1, 2003, FIN No. 46 is applied to the enterprise no later than the beginning of the first interim or annual reporting period beginning after June 15, 2003. The adoption of FIN No. 46 had no effect on the Company’s financial statements. Disclosures required by FIN No. 46 (relating to the income notes purchased by HEI from ASB) are included in note (4).below in HECO’s notes“Notes to consolidated financial statements.(9) Goodwill and other intangibles”The Company adopted the provisions of SFAS No. 142, “Goodwill and Other Intangible Assets” on January 1, 2002. SFAS No. 142 requires that goodwill and intangible assets with indefinite useful lives no longer be amortized, but instead be tested for impairment at least annually. SFAS No. 142 also requires that intangible assets with definite useful lives be amortized over their respective estimated useful lives to their estimated residual values, and also be reviewed for impairment in accordance with SFAS No. 144.11GoodwillThe Company’s $83.2 million of goodwill, which is the Company’s only intangible asset with an indefinite useful life, is in the bank segment and was tested for impairment as of January 1, 2002 and will be tested for impairment annually in the fourth quarter using data as of September 30, 2002. As of January 1, 2002, there was no impairment of goodwill. The fair value of ASB was estimated using a valuation method based on a market approach which takes into consideration market values of comparable publicly traded companies and recent transactions of companies in the industry.Application of the provisions of SFAS No. 142 has affected the comparability of current period results of operations with prior periods because the goodwill in the bank segment is no longer being amortized over a 25-year period. Thus, the following “transitional” disclosures present net income and earnings per common share adjusted to eliminate goodwill amortization in 2001 as shown below:12
September 30,
September 30,Amortized intangible assets
Amount
amortization
amount
amortization
September 30,
September 30,The estimated aggregate amortization expense for ASB’s core deposits and mortgage servicing rights for 2002, 2003, 2004, 2005 and 2006 is $3.4 million, $3.3 million, $3.0 million, $2.8 million and $2.6 million, respectively.ASB capitalizes mortgage servicing rights acquired through either the purchase or origination of mortgage loans for sale or securitization with servicing rights retained. Changes in mortgage interest rates impact the value of ASB’s mortgage servicing rights. Rising interest rates typically result in slower prepayment speeds in the loans being serviced for others which increases the value of mortgage servicing rights, whereas declining interest rates typically result in faster prepayment speeds which decreases the value of mortgage servicing rights and increases the amortization of the mortgage servicing rights. Currently, ASB does not hedge its mortgage servicing rights against this risk. During the three months and nine months ended September 30, 2002, mortgage servicing rights acquired were not significant.(10) Financing costsHEI uses the effective interest method to amortize the financing costs of the holding company over the term of the related long-term debt.13subsidiariesSubsidiaries
Consolidated balance sheets (unaudited)
2002
2001
2003
2002notes“Notes to HECO’s consolidated financial statements.”1412subsidiariesSubsidiaries
Consolidated statements of income (unaudited)
September 30,
September 30,subsidiariesSubsidiaries
Consolidated statements of retained earnings (unaudited)
September 30,
September 30,notes“Notes to HECO’s consolidated financial statements.”1513subsidiariesSubsidiaries
Consolidated statements of cash flows (unaudited)notes“Notes to HECO’s consolidated financial statements.”1614subsidiariesSubsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)2001 and the consolidated financial statements and the notes thereto in HECO’s Quarterly Reports on SEC Form 10-Q for the quarters ended March 31, 2002 and June 30, 2002.September 30, 2002March 31, 2003 and December 31, 2001,2002, and the results of their operations for the three and nine months ended September 30, 2002 and 2001, and their cash flows for the ninethree months ended September 30, 2002March 31, 2003 and 2001.2002. All such adjustments are of a normal recurring nature, unless otherwise disclosed in this Form 10-Q or other referenced material. Results of operations for interim periods are not necessarily indicative of results for the full year.periods’period’s consolidated financial statements to conform to the 20022003 presentation.ninethree months ended September 30,March 31, 2003 and 2002, HECO and its subsidiaries included $82$29 million of revenue taxes in “operating revenues” and $84$25 million, (including a $2 million nonrecurring PUC fee adjustment) of revenue taxes in “taxes, other than income taxes” expense. For the nine months ended September 30, 2001, HECO and its subsidiaries included $86 millionrespectively, of revenue taxes in “operating revenues” and in “taxes, other than income taxes” expense.
For the ninethree months ended September 30,March 31, 2003 and 2002, and 2001, HECO and its subsidiaries paid interest amounting to $25.4$5.3 million and $27.5$5.4 million, respectively.ninethree months ended September 30,March 31, 2003 and 2002, and 2001, HECO and its subsidiaries paid income taxes amounting to $42.8$5.0 million and $15.7$6.8 million, respectively. The lower taxes paid in the nine months ended September 30, 2001 compared to the nine months ended September 30, 2002 were due primarily to the timing of the Public Service Company tax deduction taken in 2001 by HECO and its subsidiaries for estimated tax purposes, which deferred tax payments to the end of the year.
The allowance for equity funds used during construction, which was charged to construction in progress as part of the cost of electric utility plant, amounted to $3.0$1.0 million and $3.2$0.8 million for the ninethree months ended September 30,March 31, 2003 and 2002, and 2001, respectively.17In August 2002, HECO assigned an account receivable totaling $9.6 million to a creditor, without recourse, in full settlement of HECO’s $9.6 million note payable to that creditor.
In 1991, Hawaii Electric Light Company, Inc. (HELCO) began planning to meet increased electric generation demand forecast for 1994. HELCO’s plans were to install at its Keahole power plant two 20 MWmegawatt (MW) combustion turbines (CT-4 and CT-5), followed by an 18 MW heat steam recovery generator (ST-7), at which time these units would be converted to a 56 MW (net) dual-train combined-cycle unit. In January 1994, the PUC approved the commitment of expenditures for CT-4.CT-4, which HELCO had planned to install in late 1994. In 1995, the PUC allowed HELCO to pursue construction of and commit expenditures for CT-5 and ST-7, but noted that such costs are not to, in each case as needed for the proposed expansion of the Keahole power plant site. The delays haveare also been attributable to lawsuits, claims and petitions filed by IPPs and other parties challenging these permits and objecting to the expansion, alleging among other things that (1) operation of the expanded Keahole site would not comply with land use regulations (including noise standards) and HELCO’s land patent; (2) HELCO cannot operate the plant within current air quality standards; (3) HELCO could alternatively purchase power from IPPs to meet increased electric generation demand; and (4) HELCO’s land use entitlement expired in April 1999.1999 because it had not completed the project within a three-year construction period.appealing the original ruling on the three-year construction deadline and seeking a land use reclassification of the Keahole site from the State Land Use Commission). If none of these options is ultimately successful, or if other permitting issues or problems arise which HELCO cannot satisfactorily resolve, HELCO may be unable to complete the installation of CT-4 and CT-5. Forof this situation, seeunder “Management’s evaluation; costs incurred.”amendment. amendment. The Circuit Court ruled in 1997 that because the BLNR had failed to render a valid decision on HELCO’s application to amend its land use permit before the statutory deadline in April 1996, HELCO was entitled to use its Keahole site for the expansion project (HELCO’s “default entitlement”). Final judgments of the Circuit Court related to this ruling are on appeal to the Hawaii Supreme Court, which in 1998 denied motions to stay the Circuit Court’s final judgment pending resolution of the appeals.appeal.relatedrelating to these claims.in March 1999 that a stricter noise standard than the previously applied18implementedinstalled noise mitigation measures foron the existing units at Keahole and, should construction be allowed to continue, is planning to implement additional noise mitigation measures for both the existing units and for CT-4 and CT-5. The estimated cost for these additional noise mitigation measures (for the existing units and CT-4$5$6 million, which amount would be capitalized. While the noise mitigation measures were being implemented, HELCO applied to the DOH and received approval for a noise permit through 2003.2003, which has since been extended to July 2007.and on November 9, 2000, it issued a written Order that, absent anya legal or equitable extension properly authorized by the BLNR, pursuant to legal authority, the three-year construction period in the standard land use conditions of the Department of Land and Natural Resources of the State of Hawaii (DLNR) expired in April 1999. On November 9, 2000, the Circuit Court issued a written ruling to that effect. In December 2000, the Circuit Court imposedgranted a motion to stay on construction. In October 2000, HELCO filed with the BLNR a request forfurther construction until extension of the construction deadline and, in January 2001,is obtained from the BLNR sent the request toBLNR. After conducting a contested case hearing which was held in September 2001. In a document dated November 5, 2001, which resulted in the hearings officer recommended that the BLNR approve HELCO’s request for extension of the construction deadline. The recommendation did not state a time period for the extension, but concluded thatrecommending an extension is warranted “under such conditions asbe granted, the Board may deem advisable.”The BLNR, by Order dated March 25, 2002, granted HELCO an extension of the construction deadline through December 31, 2003. The extension was subject to a number of conditions, including, but not limited to, HELCO (1) complying with all applicable laws and with all conditions applicable (a) to the default entitlement, including the 15 standard land use conditions (except where deviations are approved by the BLNR), and (b) to each Conservation District Use Permit (CDUP) and amendment previously awarded to HELCO for this site; (2) agreeing to indemnify and hold the State harmless from claims arising out of any act or omission of HELCO relating to the “permit”; (3) proceeding with construction in accordance with construction plans to be submitted to and signed by the chairperson of the BLNR; (4) obtaining approval of the DOH and the Board of Water Supply for any potable water supply or sanitation facilities; (5) complying with its representations relative to mitigation, as set forth in the accepted environmental impact statement; (6) minimizing or eliminating any interference, nuisance or harm which may be caused by this land use; (7) filing, within 90 days of the Order, an application for boundary amendment with the Hawaii State Land Use Commission (LUC) to remove the site from the conservation district; and (8) complying with other terms and conditions as prescribed by the chairperson of the BLNR. The Order states that failure to comply with any of these conditions shallwould render the “permit” void. The Order also states that “no further extensions will be provided.” In April 2002, based on this BLNR decision, the Circuit Court lifted the stay on construction in light of the BLNR’s Order, and construction activities on CT-4 and CT-5 then commenced.motions:motions made by KDC and others: a motion for a stay while one of the appeals is pending; a motion for injunction to enjoin construction (based on the allegation that HELCO’s default entitlement is no longer valid); and a motion for preliminary injunction to enjoin construction until the Hawaii Supreme Court decides HELCO’s appeal of the DOH noise regulations and until HELCO demonstrates that the expanded plant can satisfy the noise standards established in 1999 by the Circuit Court. The nonprevailing parties made several filings in response to the denial of these motions. On May 14, 2002, they filed a petition for writ of mandamus with the Hawaii Supreme Court, attempting to get that court to compel the Circuit Court to enforce the conditions in its 1998 final judgment regarding HELCO’s default entitlement. The Hawaii Supreme Court denied that petition on July 1, 2002. On May 15, 2002, the nonprevailing parties filed a motion for reconsideration of the Circuit Court’s decision denying the motion for preliminary injunction. On August 8, 2002, the Circuit Court issued an Order denying the motion for reconsideration. On June 10, 2002, the nonprevailing parties filed a notice of appeal to the Hawaii Supreme Court of the Circuit Court’s decision denying the motion for injunction. On September 4, 2002,The parties have filed briefs in that case.Hawaii Supreme Court denied HELCO’s motion to dismiss the appeal on procedural grounds. On November 6, 2002, HELCO filed a Notice of Extension of Time to File Answering Brief. Its Answering Brief is now due in early December 2002. 19Keahole Defense Coalition, Inc. (KDC) and two individuals appealed the BLNR’s March 25, 2002 Order in the Circuit Court, as did the Department of Hawaiian Home Lands. Oral arguments in the appeals were heard on September 16, 2002. On September 19, 2002, the Circuit CourtDOH issued a letter tofinal air permit for the parties indicatingKeahole expansion project. Nine appeals of the Circuit Court’s decision to reverseissuance of the BLNR’s Order. The letter states that:1.The BLNR exceeded its statutory authority in granting the extension of the permit. The findings do not support any authority by statute or rule.2.The conclusions of law are erroneous.3.The BLNR’s action in denying Appellants’ motion to subpoena a material witness regarding a letter issued by the DLNR on January 30, 1998 to HELCO (addressing the applicability of the standard land use conditions and stating that the three-year deadline did not apply) violated Appellants’ constitutional rights to a fair hearing.4.The BLNR’s granting the extension is clearly erroneous in view of the BLNR’s Findings of Fact and Conclusions of Law.On September 26, 2002, HELCOpermit were filed with the Circuit Court a motion for reconsideration of its decision. The BLNR joined HELCO in its motion for reconsideration. At a hearingEPA’s Environmental Appeals Board (EAB). In November 1998, the EAB denied the appeals on October 3, 2002, the Circuit Court denied HELCO’s motion for reconsideration, and the judge signed an Order confirming the Circuit Court’s reversalmost of the BLNR’s extension of the construction period. The Circuit Courtgrounds stated, but directed the attorneyDOH to reopen the permit for KDClimited purposes. The EPA and DOH required additional data collection, which was satisfactorily completed in April 2000. A final air permit was reissued by the individual appellants to prepare the necessary documents to reduce the Order to final judgment.On November 1, 2002, HELCODOH in July 2001. Six appeals were filed with the Circuit CourtEAB, but those appeals were denied. On November 27, 2001, the final air permit became effective.notice of appeal of the October 3, 2002 Order (which appeal will be heard by the Hawaii Supreme Court or Hawaii Intermediate Court of Appeals) and a motion for stay from the Circuit Court of its Order pending determination of the appeal. A hearing on the motion for stay was held on November 7, 2002, at which time the Circuit Court orally denied HELCO’s motion.In addition, on October 15, 2002,construction stormwater discharge permit. The Keahole site is now subject to this requirement. HELCO filed a motion asking the Circuit Court to reduce to a supplemental final judgment its earlier November 9, 2000 Order that the three-year construction deadline applied and that it expired in April 1999, as HELCO also intends to appeal that judgmentapply shortly under the DOH’s General Permit program and expects it will take a period of time to the Hawaii Supreme Court. A hearing was held on November 4, 2002, and on November 6, 2002, the Circuit Court issued an order denying HELCO’s motion. Asobtain a protective measure, on November 1, 2002, HELCO filed with the Circuit Court a notice of appeal related to the appeal of the ruling on the three-year deadline, and intends to pursue that appeal notwithstanding the Circuit Court’s Order denying HELCO's motion that the November 9, 2000 Order be reduced to a final judgment. In the meantime, construction activities on CT-4 and CT-5 have been suspended and steps have been taken to securepermit. No further earthwork can occur at the site and protect equipment and personnel.until this permit is obtained.current circumstances,subsequent events, HELCO withdrew its petition on October 3, 2002, HELCO withdrew its petition.2002. Under LUC rules, after such a voluntary withdrawal the applicant may submit another petition for the same property one year from the date of withdrawal. HELCO intends to submit a new petition for reclassification in the fourth quarter of 2003.IPP Complaints. Three IPPs––Kawaihae Cogeneration Partners (KCP), Enserch Development Corporation (Enserch) and Hilo Coast Power Company (HCPC)––filed separate complaints with the PUC in 1993, 1994 and 1999, respectively, alleging that they are each entitled to a power purchase agreement (PPA) to provide HELCO with additional capacity. KCP and Enserch each claimed they would be a substitute for HELCO’s planned expansion of Keahole.The Enserch and HCPC complaints have been resolved by HELCO’s entry into two PPAs which were necessary to ensure reliable service to customers on the island of Hawaii, but, in the opinion of management, do not supplant the need for CT-4 and CT-5. HELCO can terminate the PPA with HCPC prior to its 2004 expiration date for a fee.20In October 1999, the Circuit Court ruled that the lease for KCP’s proposed plant site was invalid. Based on this ruling and for other reasons, management believes that KCP’s pending proposal for a PPA is not viable and, therefore, will not impact the need for CT-4 and CT-5.appealing the Circuit Court’sappeal of the October 3, 2002 Circuit Court’s Order filed on November 1, 2002, HELCO is considering other options that may allow HELCO to complete the Hawaii Supreme Court, requesting a stay of the Order from the Hawaii Supreme Court and requesting expedited scheduling of the appeal and the motion for stay, management is also evaluating other possible actions in response to the Order, including actions that might be taken to avoid power supply problems pending installation of CT-4 and CT-5.CT-5, including seeking a land use reclassification of the Keahole site from the LUC. At this time, the likelihood of success of any of these options cannot be ascertained. Even if the Circuit Court’s Order is ultimately overturned on appeal, however, construction is likely to be further significantly delayed, and the costs to complete construction may be significantly increased, due to the time that is likely to be required to resolve the legal proceedings. In the meantime, one concern of HELCO’s management is the condition and performance of certain aging generators on the HELCO system, which were intended to be retired or to be operated less frequently once CT-4 and CT-5 were installed, as well as the current operating status of various IPPs, which provide approximately 43% of HELCO’s generating capacity.capacity under power purchase agreements. Another concern is the possibility of power interruptions under exigent circumstances, including rolling blackouts, as IPPs and/or HELCO’s generating units become unavailable or less available (i.e., available at lower capacity) due to forced outages or planned maintenance. HELCO’s Puna Steam PlantSuch incidents occurred or were at risk of occurring on October 3, 2002 and Combustion Turbine 1 are on extended forced outage and extended overhaul, respectively. One IPP is currently providing 5 MW of a 30 MW contract and another IPP's reliability is decreased due to new plant operating issues. As a result, generation reserve margins are at a critical stage during peak hours of operation. On November 8, 2002, rolling blackouts were instituted during2002. As it has done on such occasions in the peak hours for a few hours on the island of Hawaii.past, HELCO will endeavor to avert power interruptions, including rolling blackouts, in the future through a number of actions such asin addition to managing the generating units on its system, andsuch as requesting customers to reduce demand during critical periods such as the peak evening hours, but underhours. Under current system conditions, however, there can be no assurance that power interruptions will not occur.September 30, 2002.March 31, 2003. However, whether or not CT-4 and CT-5 will be installed, if it becomes probable that the PUC will disallow some or all of the incurred costs for rate-making purposes, HELCO may be required to write off a material portion of the costs incurred in its efforts toservice.service whether or not CT-4 and CT-5 are installed. As of September 30, 2002,March 31, 2003, HELCO’s costs incurred in its efforts to put CT-4 and CT-5 into service and to support existing units (less(excluding costs the PUC permitted to be transferred to plant-in-service for pre-air permit facilities) amounted to approximately $78$83 million, including $31$32 million for equipment and material purchases, $27$31 million for planning, engineering, permitting, site development and other costs and $20 million for an allowance for funds used during construction (AFUDC) charged to the project prior to HELCO’s decision to discontinue the further accrual of AFUDC on CT-4 and CT-5. HELCO discontinued the accrual of AFUDC effective December 1, 1998, due in part to the delays and the potential for further delays.. In addition to the $78$83 million in construction in progress, construction and/or purchase commitments related to CT-4 and CT-5 outstanding as of September 30, 2002March 31, 2003 are estimated at approximately $4$0.2 million. In viewlimitation on the construction perioddelays through that date and the requirements of the boundary amendment process which existed even prior to the October 3, 2002 Order,potential for further delays. HELCO had decided to defer the installation ofhas also deferred plans for ST-7 to a date outside of the near-term planning horizon. No costs for ST-7 are included in construction in progress.
Oahu’s power sources are located primarily in West Oahu. The bulk of HECO’s system load is in the Honolulu/East Oahu area. HECO transmits bulk power to the Honolulu/East Oahu area over two major transmission corridors (Northern and Southern). HECO has for some time planned to construct a part underground/part overhead 138 kvkilovolt (kV) transmission line from the Kamoku substation to the Pukele substation in order to close the gap between the Southern and Northern corridors and provide a third 138 kv transmission line to the Pukele substation.The proposed Construction of the Kamoku to Pukele transmission line projectin its proposed location required the BLNR to approve a CDUP for the overhead portion of the line that iswould have been in conservation district lands. Several community and environmental groups have opposed the project, particularly the overhead portion of the line.21lineproject is needed. The project would address future potential transmission line overloads in the Northern and Southern corridors under certain contingencies (in which one of the three lines feeding power to the Koolau/Pukele area served by the Northern Corridor, or to the downtown Honolulu area served by the Southern Corridor, is out for maintenance, and a second line incurs an unexpected outage), and improves the reliability of the Pukele substation. The line overload contingencies could occur, given current load growth forecasts, in 2005 for the Northern Corridor, but not likely before 2023 in the Southern Corridor. The Pukele substation, at the end of the Northern corridor, serves approximately 16% of Oahu’s electrical load, including Waikiki. If one of the 138 kV transmission lines to the Pukele substation fails while the other is out for maintenance, a major system outage would result.other alternatives (e.g., other alignments foralternative ways to accomplish the transmission line)project, and furtherpossible future actions including seeking a declaratory ruling from theto expedite PUC on the issuereview of the need for the line.project and alternatives for completing it. In order to secure public views on the various alternative means to enhance East Oahu reliability (the principal goal of the Kamoku-Pukele transmission line), HECO is looking at a community-based process to obtain public views of those alternatives. HECO will use the information received from that process in its next actions. Until this evaluation of alternatives, including the incorporation of public comments, is completed, an estimated project completion date cannot be determined.September 30, 2002,March 31, 2003, the accumulated costs related to the Kamoku to Pukele transmission line amounted to $16.4$18 million, including $11.7$12 million for planning, engineering and permitting costs and $4.7$6 million for AFUDC. These costs are recorded in construction in progress. The recovery of costs relating to the Kamoku to Pukele transmission line project is subject to the rate-making process governedadministered by the PUC. Management believes no adjustment to project costs incurred to put the Kamoku to Pukele transmission line into service is required as of September 30, 2002.March 31, 2003. However, whether or not the Kamoku to Pukele transmission line will be installed, if it becomes probable that the PUC will disallow some orservice.service whether or not the project is completed.(TOOTS, formerly(TOOTS) (formerly HTB) have specified indemnity obligations, including obligations with respect to the Honolulu Harbor investigation.method.method and have organized a limited liability company to perform the work. In September 2001, TOOTS joined the Participating Parties.22HECO, YBthe Participating Parties (including HECO) and others (including YB), regarding the Iwilei Unit of the Honolulu Harbor site. In the Initial NOI, the EPA stated that immediate subsurface investigation and assessment (also known as the Rapid Assessment Work) must be conducted to delineate the extent of contamination at the site. The Participating Parties completed the Rapid Assessment Work, submitted a report to the EPA and DOH in January 2002, and developed a proposal for additional investigation (known as the Phase 2 Rapid Assessment Work), which the EPA and DOH approved. The Participating Parties substantially completed the Phase 2 Rapid Assessment Work in the third quarter of 2002 and anticipate submitting2002. After performing a validation study on the data collected, they submitted a report summarizing the results of the work to the EPA and DOH in the fourth quarter of 2002.April 2003.anticipate submittingsubmitted a report summarizing the results of the investigation to the DOH and EPA in the fourth quarter of 2002.March 2003. With the approval of the EPA and DOH, the Participating Parties also constructed a pilot Dual Phase Extraction System to remove petroleum liquids and vapors from the subsurface in a portion of the Iwilei District. Operation of the pilot extraction system began in October 2002. The pilot study supplements ongoingTheBased on the Site Assessment and Prioritization Report and the Feasibility Study, the Participating Parties will also recommend implementation of remedial strategies, where appropriate.$0.1$0.25 million has been incurred through September 30, 2002) and TOOTS will incur approximately $0.1 millionMarch 31, 2003) in connection with work to be performed at the site primarily from January 2002 through December 2004. These estimates wereThis estimate was expensed in 2001. However, because (1) the full scope and extent of additional investigative work, remedial activities and monitoring are unknown at this time, (2) the final cost allocation method has not yet been determined and (3) management cannot estimate the costs to be incurred (if any) for the sites other than the Iwilei Unit (including its Honolulu power plant site), the HECO and TOOTS cost estimatesestimate may be subject to significant change and additional material investigative and remedial costs may be incurred after December 2004.HECO-guaranteedHECO-
guaranteed subordinated debentures23MECO, who used such proceeds from the sale of the 1998 junior deferrable debentures primarily to effect the redemption of certain series of their preferred stock having a total par value of $47 million.MECO.September 30, 2002March 31, 2003 and December 31, 2001.2002. The 1997 and 1998 junior deferrable debentures are redeemable only (i) at the option of HECO, MECO and HELCO, respectively, in whole or in part, on or after March 27, 2002 (1997 junior deferrable debentures) and December 15, 2003 (1998 junior deferrable debentures) or (ii) at the option of HECO, in whole, upon the occurrence of a “Special Event” (relating to certain changes in laws or regulations).are towould be capitalized as part of the carrying amount of the long-lived asset and depreciated over the life of the asset. The discounted liability is to be accreted at the end of each period through charges to operating expense. If the obligation is settled for other than the carrying amount of the liability, HECO and its electric utility subsidiaries will recognize the Company is to recognizedifference as a gainregulatory asset or loss on settlement. Theliability, as the provisions of SFAS No. 143 are effectivehave no income statement impact for fiscal years beginning after June 15, 2002.a regulated entity as long as the recovery of the regulatory asset or payment of the regulatory liability is probable. HECO and its subsidiaries will adoptadopted SFAS No. 143 on January 1, 2003. Management has not yet determined the impact, if any, of adoption.2003 with no effect on HECO and its subsidiaries’ financial statements.Early application of the provisions of SFAS No. 145 is encouraged and may be as of the beginning of the fiscal year or as of the beginning of the interim period in which SFAS No. 145 was issued. HECO and its242002. The adoption of SFAS No. 145 did not have a material2002 with no effect on HECO and its subsidiaries’ financial condition, results of operations or liquidity.statements.SFAS No. 146 is to be applied prospectively to exit or disposal activities initiated after December 31, 2002. HECO and its subsidiaries will adoptadopted the provisions of SFAS No. 146 on January 1, 2003. Since SFAS No. 146 isapplies prospectively to be applied prospectively,exit or disposal activities initiated after December 31, 2002, the adoption of SFAS No. 146 should havehad no effect on HECO and its subsidiaries’ historical financial condition, resultsstatements.operationsIndebtedness of Others,” which elaborates on the disclosures to be made by a guarantor in its interim and annual financial statements for periods ending after December 15, 2002 about its obligations under guarantees it has issued. FIN No. 45 also clarifies that a guarantor is required to recognize, at inception of a guarantee, a liability for the fair value of the obligation undertaken. HECO and its subsidiaries adopted the provisions of FIN No. 45 on January 1, 2003. Since the initial recognition and measurement provisions of FIN No. 45 are applied prospectively to guarantees issued or liquidity.modified after December 31, 2002, the adoption of these provisions of FIN No. 45 had no effect on HECO and its subsidiaries’ historical financial statements.
September 30,
September 30,Financing costsSubsequent eventits subsidiaries use the straight-line method to amortize financing costs and premiums or discounts over the termHELCO.The proceeds of the related long-term debt. Unamortized financing costs and premiums or discounts onthese Refunding SPRB, together with additional funds provided by HECO and its subsidiaries’ long-term debt retired priorHELCO, will be applied on June 2, 2003 to maturity are classified as regulatory assets or liabilitiesrefund a like principal amount of SPRB bearing higher interest coupons (HELCO’s $4 million of 7.60% Series 1990B SPRB and are amortized on a straight-line basis over the remaining$10 million of 7.375% Series 1990C SPRB with original termmaturities in 2020, and HECO’s and HELCO’s aggregate $52 million of the retired debt. The method and periods for amortizing financing costs, premiums and discounts, including the treatment of these items when long-term debt is retired prior to maturity, have been established by the PUC as part of the ratemaking process.6.55% Series 1992 SPRB with original maturities in 2022).Consolidating For consolidating financial information for HECO and its subsidiaries is as follows for the periods ended and as of the dates indicated:indicated, see pages 26 through 31. As of the dates and for the periods presented, there were no amounts for HECO subsidiary Renewable Hawaii, Inc.
Consolidating balance sheet (unaudited)
Capital
Trust I
Capital
Trust II
and
eliminations
consolidated
Capital
Trust I
Capital
Trust II
fications
and
elimina-
tions
consolidatedsubsidiariesSubsidiaries
Consolidating balance sheet (unaudited)
Capital
Trust I
Capital
Trust II
and
eliminations
consolidated
Capital
Trust I
Capital
Trust II
fications
and
elimina-
tions
consolidatedsubsidiariesSubsidiaries
Consolidating statement of income (unaudited)
Capital
Trust I
Capital
Trust II
and
eliminations
consolidated
Capital
Trust I
Capital
Trust II
fications
and
elimina-
tions
consolidatedsubsidiariesSubsidiaries
Consolidating statement of retained earnings (unaudited)
Capital
Trust I
Capital
Trust II
and
eliminations
Consolidated
Capital
Trust I
Capital
Trust II
fications
and
elimina-
tions
consolidatedsubsidiaries Subsidiaries
Consolidating statement of income (unaudited)
Capital
Trust I
Capital
Trust II
and
eliminations
consolidated
Capital
Trust I
Capital
Trust II
fications
and
elimina-
tions
consolidatedsubsidiariesSubsidiaries
Consolidating statement of retained earnings (unaudited)
Capital
Trust I
Capital
Trust II
and
eliminations
consolidated
Capital
Trust I
Capital
Trust II
fications
and
elimina-
tions
consolidatedsubsidiariesConsolidating statement of income (unaudited)
Capital
Trust I
Capital
Trust II
and
eliminations
consolidatedHawaiian Electric Company, Inc. and subsidiariesConsolidating statement of retained earnings (unaudited)
Capital
Trust I
Capital
Trust II
and
eliminations
consolidated30Hawaiian Electric Company, Inc. and subsidiariesConsolidating statement of income (unaudited)
Capital
Trust I
Capital
Trust II
and
eliminations
consolidatedHawaiian Electric Company, Inc. and subsidiariesConsolidating statement of retained earnings (unaudited)
Capital
Trust I
Capital
Trust II
and
eliminations
consolidated31Hawaiian Electric Company, Inc. and subsidiariesSubsidiaries
Consolidating statement of cash flows (unaudited)
Capital
Trust I
Capital
Trust II
and
eliminations
consolidated
Trust I
Trust II
and
elimina-
tions3230subsidiariesSubsidiaries
Consolidating statement of cash flows (unaudited)
Capital
Trust I
Capital
Trust II
and
eliminations
consolidated
Trust I
Trust II
fications
and
elimina-
tions3331
September 30,
share amounts)
change
significant change*34
March 31,
change
significant change*
September 30,
share amounts)
change
significant change*Because its core businesses are providing local electric utility and banking services, HEI’s operating results are significantly influenced by Despite the strength of Hawaii’s economy, which in turn is influenced by economic conditions in the mainland U.S. (particularly California) and Asia (particularly Japan) as a result of the impact of those conditions on tourism. Hawaii’s economy appears to be improving after the negative effectsimpacts of the September 11, 2001 terrorist attacks.continuestarted the year off with positive growth (up 5.5% year-to-date February 2003), but have moderated since the war in Iraq began in mid-March. The Japanese visitor market in particular has fallen sharply (down 28% during the Iraqi Freedom campaign from March 19 to climb toward their pre-9/11 levels. Total visitor arrivals were down 4.8% for the nine months ended September 30, 2002April 17, 2003 compared to prior year levels) due to concerns over the same periodwar and the spread of Severe Acute Respiratory Syndrome (SARS). Some airlines have temporarily reduced daily flights to Hawaii in 2001, but rose 28% for the month of September 2002 in comparisonresponse to September 2001. Solid growth was recorded in both domestic and international visitor markets in September 2002, with domestic arrivals increasing 22.5% and international arrivals increasing 40.5%. Strengthsoftening demand in the visitor market. However, a continued winding down of hostilities in the Middle East should eventually remove one impediment to the resumption of growth in the global economy and the Hawaii visitor industry.are also driving the improvement in the economy. Thecontinue to grow. In 2002, total contracting tax base grew 5.4% in the first half of 2002construction expenditures rose 13.5% over 2001, and construction jobs rose 4.7% inincreased 3.5%. In the secondfirst two months of 2003, construction jobs continued this strong growth, increasing 8.9% over the same period last year. For the first quarter of 2002 compared to the same periods last year. Hawaii2003, home salesresales volume on Oahu was up 11.6%9.1% and the median homesales price was up 11.5% in13.6% over the first nine months of 2002 comparedsame period last year. Home sales on the neighbor islands also remained strongthe first nine months of 2001.increase on all islands. Other growing sectors include professional and business services, health services and federal and state government.The Hawaii’s economic resiliency of Hawaii’s economy is reflected in various economicother indicators. Hawaii’s unemployment rate was 4.3%remained low at 3.4% in September 2002, lower than the national averageMarch 2003, after reaching a 12-year low of 5.4%.3.0% in February. The Hawaii index oflatest leading economic indicators (maintainedindicator computed by the State Department of Business, Economic Development and Tourism) was up in JulyOctober 2002 for the sixthninth consecutive month, signaling improvement in economic conditions in35Based on a recovering visitor marketJust prior to the onset of the Iraq war, the State’s Department of Business and growth in the constructionEconomic Development and real estate industries, the State and other local economistsTourism lowered its forecast positiveof real growth in Hawaii’s economy for 2003 from 2.1% to 1.7% due to sluggish conditions in the U.S. mainland and Japan economies in early 2003. The after effects of about 2%war and SARS may further depress this economic outlook, but local economists are still optimistic that Hawaii’s economy will continue to grow because of moderately strong personal income growth, job market growth and aggregate strength in 2002.local non-tourism industries. Still, Hawaii’s economy remains vulnerable to uncertainties in the external environment, particularly the U.S. mainland and Japan economies, potential terrorist attacks, tensions in the Middle East and North Korea and the spread of SARS.Based Due to the sharp decline in U.S. equity markets since the third quarter of 2000, the value of assets held in trust to satisfy the obligations of the Company’s retirement benefit plans has decreased significantly. For 2002, 2001 and 2000, the realized and unrealized losses on retirement benefit plan assets were $112 million, $96 million and $31 million, respectively. For the first four months of 2003, the estimated loss was approximately $3 million.estimated market valueCompany’s financial position, results of operations and cash flows will not be known until the pensionretirement benefit plans’ assets and other postretirement benefits trust assets as of Octoberliabilities are valued at December 31, 2003.$663$9 million, resulting in a reduction in common equity of $5 million (net of tax benefits). The amount of additional pension liability, if any, to be recorded at December 31, 2003, will depend upon a number of factors, including the year-end discount rate assumption, asset returns experienced in 2003, any changes to actuarial assumptions or plan provisions, and contributions made by the Company to the plans during 2003. Although not required for 2003, the Company is currently evaluating whether to make cash contributions to the qualified HEI pension plan in 2003. The additional liability to be recorded at December 31, 2003 or the cash contributions made to the plans in 2003 could be material. Also, without a substantial recovery in the U.S. equity markets, retirement benefit costs/expenses and cash funding requirements could increase in future years. The Company believes that additional contributions and/or expenses attributable to the electric utilities’ operations are recoverable in the ratemaking process, and would actively pursue such recovery. The electric utilities, however, would need to file applications for general rate increases and net income could be adversely affected until rate relief is granted. further asset appreciation or depreciation through yearend, assuming a range of 9.0% to 10.0% for the expected long-term return on plan assets and assuming a range of 6.75% to 7.25%or contributions for 2003, the additional reduction in common equity for the discount rate,qualified pension plans (including the Company’sreduction resulting from the removal of the prepaid pension and other postretirement benefits expense, net of tax benefits, for 2003plan asset) is projected to be as follows:approximately $78 million (or $127 million, less tax benefits of $49 million) at December 31, 2003, of which net reduction approximately $76 million would relate to the electric utility subsidiaries.The33pensionfinancial ratios may deteriorate, which could result in security ratings downgrades, difficulty (or greater expense) in obtaining future financing and other postretirement benefits income, net of taxes, is estimatedpossible financial covenant violations (although there are no advances currently outstanding under any credit facility subject to be $4 million for 2002 and was $9 million for each of 2001 and 2000.36
financial covenants).
September 30,
March 31,
barrel amounts)
Change
change 37
September 30,
barrel amounts)
changethirdfirst quarter of 20022003 increased 1.8% compared to2.5% from the same periodquarter in 2001, partly2002, primarily due to an increaseincreases in residential usage and the number of customers and higher customer KWH usage, primarily residential customers despite slightly cooler weather. Offsetting the impact of the higher KWH sales were higher other operation and maintenance expenses and depreciation. Other operation and maintenance expenses increased 10% due(due in part to higher employee benefit expenses, including lower pensionthe strong residential real estate market in Hawaii). KWH sales increases for the first quarter of 2003 over 2002 for HECO, HELCO, and other postretirement benefit credits ($2.1MECO were 30 million creditKWHs, 15 million KWHs and 11 million KWHs, respectively. While all the electric utilities showed sales growth due in large part to strength in non-tourism sectors of the economy and a rebound in tourism earlier in the thirdquarter, KWH sales growth, particularly at HECO, was tempered by the impact on tourism of concerns over the war in Iraq and the spread of SARS. Cooling degree days were 1% higher in the first quarter of 20022003 compared to $4.3 million credit inwith the thirdfirst quarter of 2001), and higher production department corrective maintenance expenses. The decrease in the pension and other postretirement benefit credits is largely related to the performance of the assets in the master pension trust and the decrease in the discount rate from 7.50% at December 31, 2000 to 7.25% at December 31, 2001. Also reflected in the higher other operation expenses are higher property insurance premiums, due to the 77% higher premiums charged as a result of the property insurance renewal completed in September 2002. Directors and officers liability insurance will be renewed in February 2004 and management expects significant premium increases based on current market conditions.38KWH sales in the nine months ended September 30, 2002 increased 1.5% compared to the same period in 2001, partly due to an increase in the number of customers and higher customer kWh usage, primarily residential customers, despite slightly cooler weather. However, electricElectric utility operating income decreased slightly compared to10% from the nine months ended September 30, 2001,first quarter 2002, primarily due to higher other operation and maintenancedepreciation expenses, and depreciation and a $2 million nonrecurring PUC fee adjustment.partly offset by the impact of higher KWH sales. Other operation expensesexpense increased 5%32% primarily due in part to higher employee benefit expenses, including lower pensionhigher retirement benefits expense, and higher property insurance premiums and environmental expenses. In addition to higher premiums, insurers have introduced new exclusions or limitations on coverage for claims related to certaincreditsexpenses for the electric utilities increased $6.4 million over the same period in 2002 ($7.83.6 million expense in the first quarter of 2003 versus a $2.8 million credit in the first nine monthsquarter of 2002), partly due to revised assumptions (decreasing the discount rate 50 basis points to 6.75% and the long-term rate of return on assets 100 basis points to 9.0% as of December 31, 2002 compared to $13.0 million credit inDecember 31, 2001) and the first nine monthseffect of 2001). The decrease in the pension and other postretirement benefit credits is largely related tostock market decline on the performance of the assets held in trust to satisfy the master pension trust andobligations of the decreaseretirement benefit plans. Higher depreciation expense was attributable to more plant placed in the discount rate from December 31, 2000 to December 31, 2001. Other maintenance expenses increased 7% dueservice in part to the larger scope of generating unit overhauls and higher production department corrective maintenance expenses.2002.kWhKWH sales are currently forecastedforecast to be 1.7%, 2.0%1.8%, 2.2%, 1.7%, 1.9% and 1.9%1.5% for 2002, 2003, 2004, 2005, 2006 and 2006,2007, respectively, but actual kWhKWH sales are affected by several factors outside the control of the electric utilities – such as weather, hotel occupancy levels and new construction – and thus may differ substantially from forecasted kWhforecast KWH sales.Pension and other postretirement benefitsBased on the estimated market value of the pension and other postretirement benefits trust assets as of October 31, 2002 of $626 million, assuming no further asset appreciation or depreciation through yearend, assuming a range of 9.0% to 10.0% for the expected long-term return on plan assets, and assuming a range of 6.75% to 7.25% for the discount rate, the electric utilities’ pension and other postretirement benefits expense, net of tax benefits, for 2003 is projected to be as follows:HECO and its subsidiaries’ pension and other postretirement benefits income, net of taxes, is estimated to be $6 million for 2002 and was $11 million for 2001 and $10 million for 2000. successfully by offering customers economic alternatives that, among other things, employ energy efficient electrotechnologies such as the heat pump water heater. However, the number of customer self-generation projects that are being proposed or installed in Hawaii, particularly those involving combined heat and power (CHP) systems, is growing. CHP systems are a form of distributed generation (DG), and produce electricity and thermal energy from gas, propane or diesel-fired engines. In Hawaii, the thermal energy generally is used to heat water and, through an absorption chiller, drive an air conditioning system. The electric energy generated by these systems is usually lower in output than the customer’s load, which results in continued connection to the utility grid to make up the difference in electricity demand and to provide back up electricity.39the state’sHawaii’s electric industry and that the PUC plans to proceed with an examination of the feasibility of competitive bidding and to review specific policies to encourage renewable energy resources in the power generation mix. The report states that “further steps” by the PUC “will involve the development of specific policies to encourage wholesale competition and the continuing examination of other areas suitable for the development of competition.” HECO is unable to predict the ultimate outcome of the proceeding, which of the proposals (if any) advanced in the proceeding will be implemented or whether the parties will seek and obtain state legislative action on their proposals (other than the legislation described below under “Legislation”).decision and order (D&O)D&O by the PUC concerning the level or method of determining electric utility rates, the authorized returns on equity or other matters, or any prolonged delay in rendering a D&O in a rate or other proceeding, would affect the amounts the utility charges to its customers and recognizes as revenues and could have a material adverse effect on the Company’s financial condition and results of operations.operations and financial condition. Upon a showing of probable entitlement, the PUC is required to issue an interim D&O in a rate case within 10 months from the date of filing a completed application if the evidentiary hearing is completed (subject to extension for 30 days if the evidentiary hearing is not completed). There is no time limit for rendering a final D&O. Interim rate increases are subject to refund with interest, pending the final outcome of the case.September 30, 2002,March 31, 2003, HECO and its subsidiaries had recognized $16 million of revenues with respect tounder interim orders regardingwhich allowed them to recover certain integrated resource planning (IRP) costs they incurred since 1995, which revenues are subject to refund, with interest, to the extent they exceed the amounts that are allowed in final orders. The Consumer Advocate has objected to the recovery of $1.8$2.4 million (before interest) of the $8.2$10 million of IRPincremental costs incurred fromduring 1995 through 1998 and the PUC’s decision is pending on this matter. The Consumer Advocate has not stated its position on the recovery of the $1.8 million of IRP costs incurred from 1999 through 2001.Management2001.pending or future rate cases or dockets will be rendered or the amount of any interim or final rate increase that may be granted.Recent There are no rate requestsHEI’s electric utility subsidiaries initiate PUC proceedings from timecases pending at this time. HECO, however, has committed to time to request electric rate increases to cover rising operating costs (e.g., the cost of purchased power) and the cost of plant and equipment, including the cost of new capital projects to maintain and improve service reliability. As of October 1, 2002, the return on average common equity (ROACE) found by the PUC to be reasonable in the most recent final rate decision for each utility was 11.40% for HECO (D&O issued on December 11, 1995 and based on a 1995 test year), 11.50% for HELCO (D&O issued on February 8, 2001 and based on a 2000 test year) and 10.94% for MECO (amended D&O issued on April 6, 1999 and based on a 1999 test year).Hawaiian Electric Company, Inc.HECO has not initiatedfile a rate case for several years, but in 2001 it committed to initiate a rate case within three years,increase application using a 2003 or 2004 test year,year.agreement described below under “Other regulatory matters, Demand-side management programs – HECO and Consumer Advocate agreements.”study. In October 2002, HECO filed an application with the PUC for approval to change its depreciation rates and to change to vintage amortization accounting for selected plant accounts, which changes would have amounted to an approximate $4.2 million, or 6.3%, increase in depreciation expense based on a study of depreciation expense for 2000. In its application, HECO requested that the effective date of the40In October 1999, HELCO filed a request to increase rates by 9.6%, or $15.5 million in annual revenues, based on a 2000 test year. The order granted HELCO an increase of approximately $2.3 million in annual revenues, in addition to affirming interim increases that took effect in September 2000 ($3.5 million) and January 2001 ($2.6 million). 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 “HELCO power situation” in note (4) of HECO’s “Notes to Consolidated Financial Statements.”The timing of a future HELCO rate increase request to recover costs relating to the suspended Keahole power plant expansion project, including the remaining cost of pre-air permit facilities, will depend on future circumstances. See “HELCO power situation” in note (4) of HECO’s notes to consolidated financial statements.PUC CommissionersIn 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.HECO andagreements with the Consumer Advocate agreementsdemand-side management (DSM)DSM programs and two residential DSM programs would be continued until HECO’s next rate case,arewere in lieu of HECO continuing to seek approval of new 5-year DSM programs. Any DSM programs to be in place after HECO’s next rate case will be determined as part of the case. 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 agreesagreed 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. In November 2001, the PUC issued orders (one of which was later amended) that, subject to certain reporting requirements and other conditions, approved (1) the agreements regarding the temporary continuation of HECO’s five existing DSM programs until HECO’s next rate case and (2) the agreements regarding the temporary continuation of HELCO’s and MECO’s DSM programs until one year after the PUC makes a revenue requirements determination in HECO’s next rate case. Under the orders, however, HELCO and MECO are allowed to recover only lost margins and shareholder incentives accrued through the date that interim rates are established in HECO’s next rate case, but may request to extend the time of such accrual and recovery for up to one additional year.41
In 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 resulting in a reduction to shareholders incentives of approximately $31,000, which HELCO recorded in January 2003. In 2002, HECO did not exceed its authorized return on rate base.Demand-side management programs - lost margins and shareholder incentivesPUC CommissionersHECO, HELCO and MECO’s energy efficiency DSM programs, currently approved by. Carlito Caliboso has been appointed Chairman of the PUC provideeffective April 30, 2003. Mr. Caliboso is an attorney and was in private practice prior to his appointment. Continuing to serve on the PUC is Commissioner Wayne H. Kimura, who served as Chairman from July 2002 to April 2003 and Commissioner Janet E. Kawelo.recoveryexisting plant operations, and which potentially could be used for the development of lost marginsanother coal-fired facility. The PPA amendment, the option and HECO’s consent to the earning of shareholder incentives.Lost margins collected are calculated prospectively based on the programs’ forecasted levels of participation, andrefinancing are subject to two adjustments basedseveral conditions, including PUC approval of the amendment, agreement on (1) the actual leveldocuments providing HECO’s consent and its subordinated security interest in the facility after the refinancing, and completion of participation and (2) the results of impact evaluation reports. The difference between the adjusted lost margins and the previously collected lost margins are subjectproposed refinancing arrangements by AES Hawaii. HECO has submitted an application to refund or recovery, with any over or under collection accruing interest at HECO, HELCO, or MECO’s authorized rate of return on rate base. HECO, HELCO and MECO plan to file the impact evaluation report for the 2000-2002 period with the PUC inrequesting approval of the first quarter of 2004 and adjust the lost margin recovery as required. Past adjustments required for lost margins have not had a material effect on HECO, HELCO or MECO’s financial condition, results of operations or liquidity.Shareholder incentives are calculated and collected retrospectively based on the programs’ actual levels of participation for the prior year. Beginning in 2001, shareholder incentives collected are subject to retroactive adjustment based on the results of impact evaluation reports, similar to the adjustment process for lost margins.PPA amendment.For example, Congress is attempting to reconcile substantially different House and Senate versions of an energy bill. Outcomes could range from an increased supply of domestic oil to federal mandates for renewable energy.did not consider deregulation in its 2002 session, but did consider legislationconsidered measures that would undertake a comprehensive audit of Hawaii’s electric utility regulatory policies, energy policies and support for reducing Hawaii’s dependence on imported petroleum for electrical generation, and a measure to prohibit standby charges by utilities, requireremove the undergroundingcap on the amount of utility lines, requirenet energy metering the utilities would be required to establish “green” marketing programs and institute a carbon tax on utilities, among other proposals.make available to eligible customers. These measures were not enacted into law. The legislature did, however, pass a more restricted bill calling for a management audit of the PUC. Also, the legislature passed a law, which takes effect on July 1, 2003, that requires employers who have at least 100 employees to allow their employees to use up to 10 days of their compensated sick leave per year to careadoptmeet these proposals.goals will have to report to the PUC and provide an explanation for not meeting the renewables portfolio standard. The PUC could then grant a waiver from the standard or an extension for meeting the standard. The PUC may also provide incentives to encourage electric utilities to exceed the standards or meet the standards earlier, or both, but as yet no such incentives have been proposed. The law also requires that electric utilities offer net energy metering to solar, wind turbine, biomass or hydroelectric generating systems (or hybrid systems) with a capacity up to 10 kilowatts (i.e., a customer-generator may be a net user or supplier of energy and will make payments to or receive credits from the electric utility accordingly).
September 30,
change42
September 30,Federal Home Loan Bank (FHLB)FHLB of Seattle and securities sold under agreements to repurchase continue to be significant sources of funds. Other factors affecting ASB’s operating results include gainsthree months and nine monthsquarter ended September 30, 2002March 31, 2003 increased 32% and 29%, respectively,1% over the comparable periods last yearfirst quarter of 2002 due to higher net interest and other income.income and a lower provision for loan losses. Continued low interest rates and high mortgage refinancing volume, however, have begun toput pressure on ASB’s interest rate spread as the loan and mortgage-related securities portfolio reprices lower while deposit rates are already at low levels. On November 6, the Federal Reserve Board cut the federal funds target rate by 50 basis pointslevels that are difficult to a 41 year lowreduce further without loss of 1.25%, which could potentially have a negative impact on ASB’s net interest income in the future.deposits. See “Item 3. Quantitative and qualitative disclosures about market risk.”43 Average balances for each period have been calculated using the average month-end or daily balances during the period.September 30, 2002March 31, 2003third quarter of 2002ended March 31, 2003 increased by $4.3$0.6 million, or 9.6%1.3%, over the same period in 2001. For the third quarter of 2002, net2002. Net interest spread increaseddecreased from 3.08%3.27% for the quarter ended March 31, 2002 to 3.28% when compared to3.14% for the same period in 2001quarter ended March 31, 2003 as ASB’s cost of interest-bearing liabilitiesyield on interest-earning assets decreased faster than the yield on its interest-earning assets.cost of interest-bearing liabilities. The increase in the average loan portfolio balance was due primarily to an increase in the residential loan portfolio as the strong Hawaii real estate market and low interest rates have resulted in increased affordability of housing for consumers and higher loan productionrefinancings. The increase in ASB’s commercial lending and commercial real estate loan portfolios. Thethe average balance of investments (including temporarily invested cash) for the third quarter of 2002 decreased comparedmortgage-related securities portfolio was due to the third quarterreinvestment of 2001 as investments were liquidatedexcess cash to mortgage-related securities and funds were used to purchase higher yielding mortgage-related securities.additional security purchases in anticipation of high prepayments of the existing portfolio. The44primarily in core deposit balances, which also loweredbalances. The increase in average other borrowings was due to the weighted-average rate on ASB’s deposit balances.additional security purchases. thirdfirst quarter of 20022003 was $1.5$2.4 million lower than the thirdfirst quarter of 20012002 as delinquencies have been at five-year lows.below historical norms. As of March 31, 2003, ASB’s allowance for loan losses was 1.52% of average loans outstanding. The following table presents the changes in the allowance for loan losses for the periods indicated.third quarter of 2002ended March 31, 2003 increased by $1.1$0.4 million, or 9.6%3.1%, over the same period in 2001. ASB had $1.8 million of higher fee2002. Fee income from its deposit liabilitiesother financial services increased by $1.1 million for the third quarter of 2002ended March 31, 2003 compared to the same period in 2001 primarily from income from service charges. The third quarter 2002 increase in fee income from other financial services of $0.9 million compared to the third quarter of 2001 was due to higher fee income from its debit and ATM cards resulting from ASB’s expansion of its debit card base and its introduction of new check cashing ATMs in August 2001.ATM services. Fee income on loans serviced for others, net, for the quarter ended March 31, 2003 decreased by $1.5 million as the bank recorded writedowns from its mortgage servicing rights totaling $1.3 million.General and administrative expenses for the third quarter of 2002 increased by $1.8 million, or 5.4%, over the same period in 2001. Compensation and benefits for the third quarter of 2002 was $1.7 million higher than the same period in 2001 primarily due to increased staffing levels. Also, consulting expenses for the third quarter of 2002 increased by $0.9 million over the third quarter of 2001 for consulting services to implement strategic changes to become a full-service community bank. The amortization of goodwill decreased by $1.2 million for the third quarter of 2002 compared to the same period in 2001 as a result of the adoption of SFAS No. 142, “Goodwill and Other Intangible Assets” on January 1, 2002. SFAS No. 142 requires that goodwill and intangible assets with indefinite lives no longer be amortized, but instead be tested for impairment at least annually.Nine months ended September 30, 2002Net interest income before provision for losses for the nine months ended September 30, 2002 increased by $8.3 million, or 6.0%, over the same period in 2001. Net interest spread increased from 3.10% for the nine months ended September 30, 2001 to 3.28% for the nine months ended September 30, 2002 as ASB’s cost of interest-bearing liabilities decreased faster than the yield on its interest-earning assets. The decrease in the average loan portfolio balance was due to the securitization of $0.4 billion in residential loans into FNMA pass-through securities in June 2001. The increase in average deposit balances was primarily in core deposit balances. The provision for loan losses for the first nine months of 2002 was $1.0 million lower than the first nine months of 2001 as delinquencies have been at five-year lows.Other income for the nine months ended September 30, 2002 increased by $9.8 million, or 34.1%, over the same period in 2001. ASB had $5.0 million of higher fee income from its deposit liabilities for the nine months ended September 30, 2002 compared to the same period in 2001 primarily from income from service charges. Fee income from other financial services increased by $2.8 million for the nine months ended September 30, 2002 compared to the same period in 2001 due to higher fee income from its debit and ATM cards resulting from ASB’s expansion of its debit card base and its introduction of new check cashing ATMs in August 2001. Fee income on loans serviced for others for the nine months ended September 30, 2002 decreased by $2.2$1.4 million compared to the same period in 20012002 as the bank recorded writedowns on its mortgage servicing rights of $2.0 million.$1.1 million primarily due to faster prepayments on its servicing portfolio. Gains on sales of investments and mortgage-related securities for the nine monthsquarter ended September 30, 2002 decreasedMarch 31, 2003 increased by $4.4$0.7 million compared to the same period in 2001. For the nine months ended September 30, 2001, ASB recognized a loss of $6.2 million on the writedown of investments in trust certificates to their then-current estimated fair value.2002.nine monthsquarter ended September 30, 2002March 31, 2003 increased by $5.2$3.1 million, or 5.2%8.9%, over the same period in 2001.2002. Compensation and benefits for the nine monthsquarter ended September 30, 2002March 31, 2003 was $5.4$2.1 million higher than the same period in 20012002 primarily due to increased staffing levels. Consulting expenses for the nine monthsquarter ended September 30, 2002March 31, 2003 increased by $2.1$1.1 million over the nine monthsquarter ended September 30, 2001 for consulting servicesMarch 31, 2002. These expenses increased as ASB continued implementation of its strategic transformation from a retail thrift to implement strategic changes to become a full-service community bank. The amortization of goodwill decreased by $3.6 million for the nine months ended September 30, 2002 compared to the nine months ended September 30, 2001 as a result of the adoption of SFAS No. 142, “Goodwill and Other Intangible Assets” on January 1, 2002.45environmentenvironment.During In response to pressure on interest rate spreads as a result of the firstlow interest rate environment, on April 3 and 4, 2003, ASB restructured $258 million of FHLB advances. ASB paid off existing higher rate FHLB2002,32 months to 74 months at the time of the restructuring. The restructuring will result in a reduction of interest expense on these FHLB advances for 2003 of approximately $3 million. ASB added $8.0 millionexpects that this reduction in interest expense will partially offset the reduction in interest income due to its allowance for loan losses. As of September 30, 2002, ASB’s allowance for loan losses was 1.62% of average loans outstanding. The following table presents the changesanticipated lower yields in the allowance for loan losses forsecond quarter of 2003 compared to the periods indicated.second quarter of 2002.$3$1 million for the ninethree months ended September 30, 2002March 31, 2003 and $12$17 million for prior years. ASB has taken a dividends received deduction on dividends paid to it by ASB Realty Corporation in the bank franchise tax returns filed in 1999 through 2002. The State of Hawaii Department of Taxation has challenged ASB’s position and has issued notices of tax assessment for 1999, 2000 and 2001. The aggregate amount of tax assessments is approximately $14 million (or $9 million, net of income tax benefits) for tax years 1999 through 2001, plus interest of $3 million (or $2 million, net of income tax benefits) through September 30, 2002.March 31, 2003. The interest on the tax is accruing at a simple interest rate of 8%. Although not yet assessed, the potential bank franchise tax liability for 2002 and the first quarter of 2003 if ASB’s tax position does not prevail is $7 million (or $5 million, net of income tax benefits), plus interest of $0.5 million (or $0.3 million, net of income tax benefits) through March 31, 2003. ASB believes that its tax position is proper and, in October 2002, filed an appeal with the State Board of Review, First Taxation District. A State Board of Review hearing has been scheduled for May 13, 2003. ASB has not paid or provided for Hawaii bank franchise taxes for 1998 through 2002. In the first quarter of 2003, ASB provided for $5,000 of Hawaii bank franchise taxes.46
September 30,
September 30,
March 31,
changeTOOTS, formerly named HTB, a maritime freight transportation company that ceased operations in the fourth quarter of 1999; HEI Investments, Inc. (HEIII), a company primarily holding investments in leveraged leases (excluding foreign investments reported in discontinued operations); Pacific Energy Conservation Services, Inc., a contract services company primarily providing windfarm operational and maintenance services to an affiliated electric utility; ProVision Technologies, Inc., a company formed to sell, install,investments and expected to hold real estate and related assets;investments; Hawaiian Electric Industries Capital Trust I, HEI Preferred Funding, LP and Hycap47companies formed as special purpose financing entities formed to effect the issuance of 8.36% Trust Originated Preferred Securities; TOOTS, a maritime freight transportation company that ceased operations in 1999; other inactive subsidiaries; HEI and HEIDI, holding companies; and eliminations of intercompany transactions.and note (4) in HEI’s and HECO’s respective notes“Notes to consolidated financial statements for discussions of certain contingencies.statements.”notes“Notes to consolidated financial statements.”The Company HEI and consolidated HECO each believesbelieve that itstheir ability to generate cash, both internally primarily from electric utility and (in the case of HEI) banking operations and externally from issuances of equity and debt securities, commercial paper and bank borrowings, is adequate to maintain sufficient liquidity to fund its respective construction programs and investments and to cover debt, pension and other cash requirements in the foreseeable future.OctoberMay 1, 2002,2003, the Standard & Poor’s (S&P) and Moody’s Investors Service’s (Moody’s) ratings of HEI’sHEI and HECO’sHECO securities were as follows:nrNRnrNR Not rated.rated48Companies’ ratings.ratings of HEI and HECO securities.In May 2002, at the time On March 7, 2003, HEI filed a shelf registration statement to register the sale of up to $300sold $50 million of medium-term4% notes, Moody’s affirmed HEI’sdue March 7, 2008, and $50 million of 5.25% notes, due March 7, 2013 under its registered medium-term note rating (Baa2) and S&P affirmed HEI’s and HECO’s debt ratings (A-2program.The net proceeds from the sales were invested in short-term investments pending their ultimate application, along with other corporate funds, to repay $100 million of notes (which effectively bore interest at three-month LIBOR plus 376.5 basis points after taking into account two interest rate swaps entered into by HEI with Bank of America) at maturity on April 15, 2003. At March 31, 2003, an additional $200 million principal amount of notes were available for commercial paper, BBB for HEI’s medium-term notes and BBB+ for HECO’s noninsured revenue bonds).offering by HEI under the registered program.andhad no commercial paper outstanding during the first quarter of 2003. HECO had an average outstanding balancesbalance of commercial paper for the thirdfirst quarter of 20022003 of $1.9$0.6 million, and $24.1 million, and balancesbut no commercial paper outstanding at September 30, 2002 of nil and $29.8 million, respectively.March 31, 2003. Management believes that if HEI’s and HECO’s commercial paper ratings were to be downgraded, they maymight not be able to sell commercial paper under current market conditions.September 30, 2002,March 31, 2003, HEI and HECO maintained bank lines of credit totaling $60$70 million and $100$90 million, respectively (all maturing in the first half of 2003). These lines of credit are principally maintained by HEI and HECO to support the issuance of commercial paper and also may be drawn for general corporate purposes. Accordingly, the lines of credit are available for short-term liquidity in the event a ratingsrating agency downgrade obviateswas to reduce or eliminate access to the commercial paper markets. A $30 million lineLines of credit to HEI containstotaling $40 million contain provisions for revised pricing in the event of a ratings change (e.g., a ratings downgrade of HEI medium-term notes from BBB/Baa2 to BBB-/Baa3 by S&P and Moody’s, respectively, would result in a 15 to 50 basis points higher interest rate; a ratings upgrade from BBB/Baa2 to BBB+/Baa1 by S&P and Moody’s, respectively, would result in a 20 to 30 basis points lower interest rate). There are no such provisions in the Companies’ other lines of credit agreements.available to HEI and HECO. Further, none of HEI’s or HECO’s line of credit agreements contain “material adverse change” clauses that would affect access to the lines of credit in the event of a ratings downgrade or other material adverse events.downgrade. At September 30, 2002,March 31, 2003, the lines were unused. To the extent deemed necessary, HEI and HECO areanticipate arranging for additionalsimilar lines of credit and will seek to renewas existing lines upon maturity (in amounts deemed necessary).of credit mature.ninethree months of 2002,2003, net cash provided by operating activities of consolidated HEI was $192$56 million. Net cash used in investing activities was $470$123 million, largely due to banking activities (including theASB’s purchase of mortgage-related securities and origination and purchase of loans, net of repayments and sales of such securities)securities, and HECO’s consolidated capital expenditures. Net cash provided by financing activities was $82$140 million as a result of several factors, including net increases in deposits, short-term borrowingssecurities sold under agreements to repurchase, long-term debt and advances from the FHLBdeposit liabilities and proceeds from the issuance of common stock, partly offset by a net decrease in advances from the FHLB and the payment of common stock dividends and trust preferred securities distributions, net repayments of long-term debt and a net decrease in securities sold under agreements to repurchase.distributions.20022003 through 2006,2007, including net capital expenditures (which exclude AFUDC and capital expenditures funded by third-party contributions in aid of construction) and, long-term debt retirements (excluding repaymentsand net financial activities of advances from the FHLB of Seattle and securities sold under agreements to repurchase),ASB, are estimated to total $1.2$1.3 billion. Of this amount, approximately $0.7 billion is for net capital expenditures (mostly relating to the electric utilities’ net capital expenditures described below), and $0.3 billion is for the retirement or maturity of long-term debt and $0.2 billion is primarily for net ASB activities.debt. HEI’s consolidated internal sources (primarily consolidated cash flows from operations comprised mainly of net income, adjusted for noncash income and expense items such as depreciation, amortization and deferred taxes, and changes in working capital), after the payment of dividends, are expected to provide approximately 73%71% of the consolidated financing requirements (approximately 103%93% excluding long-term debt retirements), with debt and equity financing providing the remaining494420022003 through 20062007 forecast, such as increases in the costs of or an acceleration of the construction of capital projects of the electric utilities.utilities, unbudgeted acquisitions or investments in new businesses, significant increases in retirement benefit funding requirements that may occur (such as if the market value of pension plan assets does not increase or there are changes in actuarial assumptions) and higher tax payments that would result if tax positions taken by the Company do not prevail.In November 2001, HEI sold 1.5 million shares of its common stock in a registered public offering. Proceeds of approximately $54 million from the sale initially were used to make short-term investments or to make short-term loans to HECO, and ultimately used to repay long-term debt at maturity and for other general corporate purposes.$121$30 million in net cash during the first nine monthsquarter of 2002.2003. Investing activities used net cash of $71$19 million primarily for capital expenditures.expenditures, net of contributions in aid of construction. Financing activities used net cash of $51$9 million, including $38 million forprimarily due to the payment of $17 million in common and preferred dividends and preferred securities distributions and a $12$7 million net decrease in short-termlong-term debt, partiallypartly offset by a $7$19 million net increase in long-term debt.short term borrowings from HEI.20022003 through 2006,2007, including net capital expenditures and long-term debt repayments, are estimated to total $0.6$0.7 billion. HECO’s consolidated internal sources (primarily consolidated cash flows from operations comprised mainly of net income, adjusted for noncash income and expense items such as depreciation, amortization and deferred taxes, and changes in working capital), after the payment of common stock and preferred stock dividends, are expected to provide cash in excess of the consolidatingconsolidated financing requirements and may be used to reduce the level of short-term borrowings. However, debtHECO does not anticipate the need to issue common equity over the five-year period 2003 through 2007. Debt and/or equity financing may be required, however, to fund unanticipated expenditures not included in the 20022003 through 20062007 forecast, such as increases in the costs of or an acceleration of the construction of capital projects. HECO currentlyprojects, unbudgeted acquisitions or investments in new businesses and significant increases in retirement benefit funding requirements that may be required if the market value of pension plan assets does not anticipate the need to issue common equity over the five-year period 2002 through 2006.increase or there are changes in actuarial assumptions. The PUC must approve issuances, if any, of equity and long-term debt securities by HECO, HELCO and its subsidiaries.MECO.In September 2002, the Department of Budget and Finance of the State of Hawaii issued, at a small discount, Series 2002A Special Purpose Revenue Bonds in the principal amount of $40 million with a maturity of 30 years and a fixed coupon interest rate of 5.10% (yield of 5.15%), and loaned the proceeds from the sale to HECO. Payments on the revenue bonds are insured by a financial guaranty insurance policy issued by Ambac Assurance Corporation.45As of September 30, 2002, an additional $25 million of special purpose revenue bonds were authorized by the Hawaii Legislature for issuance for the benefit of HELCO prior to the end of 2003.20022003 through 20062007 are currently estimated to total $0.6$0.7 billion. Approximately 60%53% of forecast gross capital expenditures (which includeincludes AFUDC and the capital expenditures funded by third-party contributions in aid of construction) is for transmission and distribution projects, with the remaining 40%47% primarily for generation projects.2002,2003, electric utility net capital expenditures are estimated to be $114$158 million. Gross capital expenditures are estimated to be $132$183 million, including approximately $88$103 million for transmission and distribution projects,50$30$58 million for generation projects and approximately $14$22 million for general plant and other projects. Drawdowns of the remaining $15 million of proceeds from salesthe Series 2002A sale of tax-exempt special purpose revenue bonds and the generation of funds from internal sources are expected to provide the cash needed for the net capital expenditures in 2002.2003.
2002
2001
change
2003
2002
changeSeptember 30, 2002,March 31, 2003, ASB was the third largest financial institution in Hawaii based on total assets of $6.2$6.4 billion and deposits of $3.7$3.8 billion.$69$14 million during the first nine monthsquarter of 2002.2003. ASB’s principal sources of borrowings are advances from the FHLB and securities sold under agreements to repurchase from broker/dealers. At September 30, 2002,March 31, 2003, FHLB borrowings totaled $1.2$1.1 billion, representing 19%17% of total assets. ASB is approved by the FHLB to borrow up to 35% of total assets to the extent it provides qualifying collateral and holds sufficient FHLB stock. At September 30, 2002,March 31, 2003, ASB’s unused FHLB borrowing capacity was approximately $1.0$1.2 billion. At September 30, 2002,March 31, 2003, securities sold under agreements to repurchase totaled $0.6 billion, representing 10% of assets.$0.8 billion. ASB utilizes growth in deposits, advances from the 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 September 30, 2002,March 31, 2003, ASB had commitments to borrowers for undisbursed loan funds, loan commitments and unused lines and letters of credit of $0.7$0.8 billion. Management believes ASB’s current sources of funds will enable it to meet these obligations while maintaining liquidity at satisfactory levels.In June 2001, ASB converted $0.4 billion in residential mortgage loans into FNMA pass-through securities. These securities were transferred into the investment securities portfolio and can serve as collateral for FHLB advances and other borrowings. The conversion of the loans also improves ASB’s risk-based capital ratio since less capital is needed to support federal agency securities than whole loans. In late June 2001, ASB sold $0.2 billion of the FNMA securities to improve ASB’s interest-rate risk profile. The securities sold were lower yielding 30-year fixed-rate securities with long durations. ASB reinvested the proceeds into shorter duration fixed-rate and adjustable-rate securities.nine monthsquarter of 2002,2003, net cash provided by ASB’s operating activities was $68$24 million. Net cash used in ASB’s investing activities was $398$104 million, due largely to the purchase of mortgage-related securities and the origination and purchase of loans, net of repayments and sales.sales of such securities. Net cash provided by financing activities was $129$70 million largely due to net increases in deposits and advances from the FHLB, partly offset by the net decreaseof $183 million in securities sold under agreements to repurchase and $14 million in deposit liabilities, partly offset by a net decrease of $119 million in advances from the FHLB and the payment of $8 million in common and preferred stock dividends. In the first quarter of 2003, cash from the net increase in securities sold under agreements to repurchase were used largely to purchase mortgage-related securities, to originate and purchase loans and to repay advances from the FHLB.5146Federal Deposit Insurance CorporationFDIC regulations restrict the ability of financial institutions that are not well-capitalized to compete on the same terms as well-capitalized institutions, such as by offering interest rates on deposits that are significantly higher than the rates offered by competing institutions. As of September 30, 2002,March 31, 2003, ASB was well-capitalized (ratio requirements noted in parentheses) with a leverage ratio of 6.8%6.7% (5.0%), a Tier-1 risk-based capital ratio of 13.8%13.6% (6.0%) and a total risk-based capital ratio of 15.1%14.8% (10.0%).1520 to 2327 of HEI’s 20012002 Annual Report to Stockholders (HEI Exhibit 13.1 to HEI’s Current Report on Form 8-K dated March 5, 2002,February 25, 2003, File No. 1-8503) and pages 13 to 18 of HECO’s 2002 Annual Report (HECO Exhibit 13.2 to HECO’s Current Report on Form 8-K dated February 25, 2003, File No. 1-4955).statements.statements and risk factors.”2327 to 2531 of HEI’s 20012002 Annual Report to Stockholders (HEI Exhibit 13.1 to HEI’s Current Report on Form 8-K dated March 5, 2002,February 25, 2003, File No. 1-8503) and pages 18 to 21 of HECO’s 2002 Annual Report (HECO Exhibit 13.2 to HECO’s Current Report on Form 8-K dated February 25, 2003, File No. 1-4955).2531 to 2936 of HEI’s 20012002 Annual Report to Stockholders (HEI Exhibit 13.1 to HEI’s Current Report on Form 8-K dated March 5, 2002,February 25, 2003, File No. 1-8503).Interest-rate risk is the sensitivity of net interest income and the sensitivity of the market value of interest-sensitive assets and liabilities to changes in interest rates. The primary source of interest-rate risk is the mismatch in timing between the maturity or repricing of interest-sensitive assets and liabilities. Large mismatches could adversely affect ASB’s earnings and market value in the event of significant changes in the level of interest rates.ASB’s interest-rate risk profile is primarily impacted by the fixed-rate residential mortgage loans originated by ASB and retained in its portfolio, as well as the fixed-rate mortgage-related securities in its investment portfolio. These52assets are characterized by fixed rates and relatively long average lives, but also have the potential to prepay at any time without penalty. The option to prepay is usually exercised by borrowers in low interest rate environments, significantly shortening the average lives of these assets. ASB’s liabilities, which consist of consumer deposits and wholesale borrowings, typically have shorter average lives than the fixed-rate mortgage loans, and will therefore reprice sooner than the mortgage assets. As a result, in a rising interest-rate environment, the average rate on ASB’s liabilities will tend to increase faster than the average rate on the existing mortgage loan portfolio, causing a reduction in net interest spread and net interest income. However, the current net interest income profile differs slightly from the typical profile of a liability sensitive institution, a result of the extremely low level of interest rates represented in the base case scenario.ASB management utilizes a variety of on-balance sheet activities for managing interest-rate risk. These include, but are not limited to: (1) the pricing and structure of its loans and deposits, (2) the amount and maturity of wholesale borrowings, and (3) the size and duration of the investment portfolio. ASB currently does not use any off-balance sheet interest-rate derivatives to manage interest-rate risk.Management measures interest-rate risk using simulation analysis with an emphasis on measuring changes in net interest income and ASB’s net portfolio value (NPV) ratio in different interest-rate environments.Net interest income simulation analysis measures the sensitivity of pre-tax net interest income, over a twelve-month horizon, to various interest-rate scenarios. Net interest income sensitivity is calculated as the percentage change in net interest income in alternative interest-rate scenarios, relative to the base case. The base case interest-rate scenario is established using the yield curve as of September 30, 2002. The comparative scenarios assume immediate and sustained parallel shocks of the yield curve in increments of +/- 100 basis points. Key balance sheet modeling assumptions used in the net interest income analysis include holding the size of the balance sheet constant over the simulation horizon and reinvesting maturing assets or liabilities back into similar instruments in order to maintain the current mix of the balance sheet. In addition, certain assumptions are made about the repricing characteristics of deposit accounts with indeterminate maturities. The simulation does not contemplate any actions that ASB management might undertake in response to changes in interest rates. These assumptions are used for analytical purposes only and do not represent management’s view of future market movements or future earnings. Rather, these assumptions are intended to help management identify potential exposures in ASB’s current balance sheet. ASB’s NPV ratio is a measure of the economic capitalization of the bank. The NPV ratio is the ratio of the net portfolio value of ASB to the present value of expected net cash flows from existing assets. Net portfolio value is defined as the present value of expected net cash flows from existing assets minus the present value of expected cash flows from existing liabilities plus the present value of expected net cash flows from existing off-balance sheet contracts and, therefore, represents the theoretical market value of ASB’s net worth. The NPV ratio is calculated by ASB pursuant to guidelines established by the OTS in Thrift Bulletin 13a. Key assumptions used in the calculation of ASB’s NPV ratio include the prepayment behavior of loans and investments, the possible distribution of future interest rates, and the rate and balance behavior of deposit accounts with indeterminate maturities.The NPV ratio sensitivity measure is the change from the NPV ratio calculated in the base case to the NPV ratio calculated in each of the alternative interest-rate scenarios. In general, high NPV ratio sensitivity measures are indicative of large imbalances between the maturity or repricing of interest sensitive assets and interest sensitive liabilities, while low NPV Ratio Sensitivity measures are indicative of small imbalances. This measure alone is not necessarily indicative of the interest-rate risk of an institution, as institutions with adequate levels of capital can typically safely support a high sensitivity measure. This measure is evaluated in conjunction with the NPV ratio calculated in each scenario.53September 30, 2002March 31, 2003 and December 31, 20012002 constitute “forward-looking statements” and were as follows:
(basis points)
income (NII)
(change from base
case in basis points)
in NII
Ratio
sensitivity
(change
from base
case in
(basis points)
in NII
Ratio
sensitivity
(change
from base
case in
basis points)September 30, 2002March 31, 2003 represents a reasonable level of risk. InThe current net interest income (NII) profile shows the past, ASB’s NII profile has shown NII increasingbank to be slightly more “liability sensitive” in the fallingextreme rising rate scenarios and decreasingenvironments than it was at December 31, 2002. A primary reason for this change was the shortening in the rising rate scenarios. That profile is typicalmaturity of an institution that is “liability sensitive.” The current NII profile differs slightly and reflects the impactsome of the extremelybank’s borrowings. The low interest rate environment has enabled the bank to shorten the maturity of some liabilities without significantly increasing the bank’s level of interest rates represented inrate risk. This strategy remains consistent with the base case scenario. In the base case, the fast prepayment speeds forecasted as a result of the low level of interest rates causes thebank’s overall yield of the mortgage assets (mortgage loans and mortgage-related securities) to decrease as the mortgage assets rapidly reprice downward in the low interest rate environment. Inrisk management strategy as it provides the +100 basis point scenario,bank with the prepayment forecast slows,flexibility to extend the maturity of these borrowings and the mortgage assets maintain their yield. The increaselock in long-term rates when there are indications of a sustained rise in interest income is slightly greater than the increaserates. Expectations for faster principal repayments in interest expense and results in a slight improvement in the 12-month estimate of net interest income compared to the base case. In the +200 and +300 basis point scenarios, this phenomenon disappears, as the profile becomes more like that of a “liability sensitive” institution. In the higher rate scenarios, slower prepayment speeds reduce the runoff of the existing mortgage assets, which reduces the amount available for reinvestment at current market rates. This constrains the speed with which the yield on the mortgage asset portfolio can adjust upwards to market levels. At the same time, the increase in yield on the liabilities continues to increase with each increase in the level of rates. In the –100 basis point scenario as of March 31, 2003 caused net interest income to decline more than in the NII measure is negatively impacted by evensame scenario as of December 31, 2002.forecasts, which causesspeeds, and (2) the yield on mortgage assets to decline faster than the yield on liabilities.Similarly, for a “liability sensitive” institution, the NPV ratio is expected to increase in a falling rate scenario. Inshort-term borrowings, which did not experience the –100 basis point scenario, however, ASB’s NPV ratio declines because price compressionsame fluctuations in market value as the mortgage assets allows the market value of the liabilities to increase more than the market value of the assets. The extremely high level of prepayments forecasted for the mortgage assets limits the market value appreciation as rates fall. The liabilities, on the other hand, do not have similar prepayment features, so the market value of the liabilities continues to increase as rates fall.securities. results.results and the differences could be material.54Curtis Y. Harada,Eric K. Yeaman, HEI Chief Financial Officer, have evaluated the disclosure controls and procedures of HEI as of November 13, 2002.May 8, 2003. Based on their evaluations, as of November 13, 2002,May 8, 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'sHEI’s internal controls or in other factors that could significantly affect these controls subsequent to November 13, 2002,May 8, 2003, including any corrective actions with regard to significant deficiencies and material weaknesses.October 18, 2002.May 2, 2003. Based on their evaluations, as of October 18, 2002,May 2, 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'sHECO’s internal controls or in other factors that could significantly affect these controls subsequent to October 18, 2002,May 2, 2003, including any corrective actions with regard to significant deficiencies and material weaknesses.notes“Notes to consolidated financial statements,” management’s discussion and analysis of financial condition and results of operations and Item 5, “Other information.” With regard to any pending legal proceeding, alternative dispute resolution, such as mediation or settlement, may be pursued where appropriate, with such efforts often maintained in confidence unless and until a resolution is achieved.
nonvotesA.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., Hawaiian Electric Company, Inc., and Hawaiian Electric Industries, Inc.April 22July 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 23, 2002, HECO and HEI, respectively, were servednotified the DOH of the release. MECO replaced the leaking fuel line with a complaint filedtemporary 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 remove fuel from the subsurface. 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. Initially, the investigation indicated that limited free phase fuel migration had occurred beneath the Maalaea facility and in a small portion of the buffer zone immediately to its south. The buffer zone is undeveloped property owned by MECO that separates the Maalaea facility from the Wildlife Refuge. As a precautionary measure, with the guidance and consent of the USFWS and the DOH, MECO installed an interception trench in the Circuit Court forbuffer zone and in a small part of 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 ofWildlife Refuge. 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 andinterception trench is designed to sell sufficient steamcapture and facilitate removal of any fuel migrating from the impacted areas and to beact as a “Qualifying Facility” underbarrier to migration beyond the Public Utility Regulatory Policies Acttrench. Product recovery wells, skimmers and related piping have been installed along the trench to recover product as needed. Some product (in the form of 1978. The Amended PPA, whicha sheen on the water) has a 30-year term, was approved bybeen observed in the PUC in December 1989, following contested case hearings in October 1988, an initial Decision and Order in July 1989, an amendmentmiddle portion of the PPAtrench and is being recovered. In addition, product (also in August 1989, and further contested case hearingsthe form of a light sheen) is being recovered in November 1989. Intervenors included the state Consumer Advocateeastern-most recovery sump on the trench, located on the Wildlife Refuge. The most recent quarterly groundwater monitoring results show that dissolved diesel fuel constituents have not been detected, which indicates that product recovery operations have so far been successful in minimizing groundwater impacts.U.S. Department of Defense. The PUC proceedings addressed a number of issues, including whether the prices for capacitylocation 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 conditionsdesign 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 generating units. The Complaint seeks treble damages, attorneys fees’, rescission of the Amended PPA, and punitive damages against HECO, HEI, AES-HI and AES under Hawaii laws permitting qui tam actions (asserting that the State declined to take over the action) and prohibiting unfair or deceptive acts or practices, and also asserts claims of fraud and unjust enrichment. The55claimed damages are payments by the State and the class of all HECO customers for electricity at rates established by the PUC based on HECO’s costs, including payments under the Amended PPA to AES-HI.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 statute of limitations. AES also filed a motion to dismiss, on the same and additional grounds. The hearing on both motions has been continued to December 4, 2002.Plaintiffs moved to remand the case to state court on June 21, 2002. On September 26, 2002, the Federal Magistrate Judge issued his Findings and Recommendation that plaintiffs’ motion to remand be granted, finding no federal subject matter jurisdiction. The ruling further recommended that plaintiffs’ motion for attorneys’ fees and costs be denied. The District Court Judge may accept or reject the Findings and Recommendation.Managementinterception trench, management believes that the claims are without meritrisk of the fuel release affecting wildlife, sensitive wildlife habitat or the ocean, which lies approximately one-quarter mile south of the Maalaea facility, is minimal. MECO estimates that it will incur approximately $0.8 million to successfully remediate the impacts of the release, and intends to vigorously defendexpensed the lawsuit.$0.8 million in 2002.has been in decline since mid-2000 and PGV is currently ablewas reduced to produce only about 56 MW of firm capacity comparedfrom April 2002 to the 30 MW the company contracted to provide to HELCO.March 2003. The loss of generation capacity 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 itsPGV’s source wells. PGV is in the process ofcompleted drilling an additional source wells and a re-injection well in orderFebruary 2003, and converted the blocked source well into an injection well in early March 2003. The new injection well was tested and PGV’s capacity is currently between 20 to recover25 MW. PGV obtained a permit from the DOH for the new injection well in March 2003. Without the new injection well, PGV was able to produce only about 10 to 11 MW due to the high moisture content of the steam from the new source well. PGV is assessing whether to drill another source well or to install new generation equipment designed to utilize the lower quality steam. While PGV indicates it is evaluating its options to enable it to restore its 30 MW capacity.commitment to HELCO as soon as possible, HELCO cannot predict when PGV is targeting a return to full contract capacity of 30 MW in late 2002 or early 2003.C. Hawaiian Commercial & Sugar CompanyMECO has a PPA with Hawaiian Commercial & Sugar Company (HC&S) for 16 MW of firm capacity. The HC&S generating units primarily burn bagasse (sugar cane waste) along with secondary fuels of oil or coal. In March 1998, an HC&S unit failed and HC&S lost 10 MW of generating capacity. HC&S replaced the unit and put it into operation in the second quarter of 2000. HC&S, however, has since struggledwill be able to meet its contractual obligationscommitment. HELCO’s PPA with PGV provides for annual availability sanctions against PGV if PGV does not provide up to MECO in 2000, 2001 and 2002 due to operational constraints that led to several claims of force majeure by HC&S. In late October 2002, HC&S returned to full contract capacity of 16 MW. 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 not less than two years’ prior written notice by either party.5650D.contracted 30 MW of capacity. In the first quarter ending March 31, 2003, HELCO recorded $0.7 million lower purchased power expense from PGV for availability sanctions for not meeting contracted capacity for 2002. In addition, since PGV has not yet restored its 30 MW commitment to HELCO, availability sanctions for 2003 may be assessed against PGV in 2004. The amount of availability sanctions is dependent on when PGV reaches its contractual commitment. subsidiariesSubsidiaries for HEI and its subsidiaries, “earnings” represent the sum of (i) pretax income from continuing operations (excluding undistributed net income or net loss from less than 50%-owned persons) and (ii) fixed charges (but(as hereinafter defined, but excluding capitalized interest). “Fixed charges” are calculated both excluding and including interest on ASB’s deposits during the applicable periods and represent the sum of (i) interest, incurred by HEI and its subsidiaries, whether capitalized or expensed, but excluding interest on nonrecourse debt from leveraged leases which is not included in interest expense in HEI’s consolidated statements of income, (ii) amortization of debt expense and discount or premium related to any indebtedness, whether capitalized or expensed, (iii) the interest factor in rental expense, (iv) the preferred stock dividend requirements of HEI’s subsidiaries, increased to an amount representing the pretax earnings required to cover such dividend requirements and (v) the preferred securities distribution requirements of trust subsidiaries.subsidiariesSubsidiaries for HECO and its subsidiaries, “earnings” represent the sum of (i) pretax income before preferred stock dividends of HECO and (ii) fixed charges (but(as hereinafter defined, but excluding the allowance for borrowed funds used during construction). “Fixed charges” represent the sum of (i) interest, whether capitalized or expensed, incurred by HECO and its subsidiaries, whether capitalized or expensed, (ii) amortization of debt expense and discount or premium related to any indebtedness, whether capitalized or expensed, (iii) the interest factor in rental expense, (iv) the preferred stock dividend requirements of HELCO and MECO, increased to an amount representing the pretax earnings required to cover such dividend requirements and (v) the preferred securities distribution requirements of the trust subsidiaries.5751(a)HEI
Exhibit 4.1ExhibitsFirst Amendment, dated as of May 7, 2003, to Rights Agreement (dated as of October 28, 1997) between HEI and Continental Stock Transfer & Trust Company, as Rights Agent (incorporated by reference to Exhibit 2 of Form 8-A/A, dated May 8, 2003, File No. 1-8503).
Exhibit 10.1
Exhibit 10.2
Exhibit 10.3
Exhibit 12.1subsidiariesSubsidiaries
Computation of ratio of earnings to fixed charges, ninethree months ended September 30,March 31, 2003 and 2002 and 2001
Exhibit 99.1Seventh Amendment 2003-1 to Trust Agreement, made and entered into July 1, 2002, between Fidelity Management Trust Company and HEI for the Hawaiian Electric Industries Retirement Savings Plan for incorporation by reference in the Registration Statement on Form S-8 (Regis. No. 333-02103)
Exhibit 99.2
Exhibit 99.3Curtis Y. HaradaEric K. Yeaman (HEI Chief Financial Officer)
Exhibit 12.2subsidiariesSubsidiaries
Computation of ratio of earnings to fixed charges, ninethree months ended September 30,March 31, 2003 and 2002 and 2001
Exhibit 99.4
Sarbanes-Oxley Act of 2002 of T. Michael May (HECO Chief Executive Officer)
Exhibit 99.5
Sarbanes-Oxley Act of 2002 of Richard von Gnechten (HECO Chief Financial Officer)5852June 30,December 31, 2002, HEI and/or HECO filed Current Reports, Forms 8-K, with the SEC as follows:July 1, 2002January 14, 2003
(January 14, 2003)Update of “Oahu transmission system”HEI’s January 14, 2003 news release (HEI to webcast and disclosures for goodwill and other intangiblesteleconference 2002 yearend earnings on January 21, 2003)July 22, 2002January 20, 2003
(January 21, 2003)July 22, 2002January 20, 2003 news release reporting second quarter(HEI reports 2002 earningsyearend earnings) and retirement benefits informationJulyFebruary 25, 20022003
(February 26, 2003)HEIHEI/HECO5. Reporting that HEI Board members A. Maurice Myers7. Listing and Bill D. Mills had each entered into written HEI common stock trading plansattaching as exhibits HEI’s 2002 Annual Report to Stockholders in its entirety, portions of HECO’s 2002 Annual Report to Stockholder and Section 906 certificationsAugust 13, 2002March 7, 2003
(March 10, 2003)7. Exhibit 99.1 Statement Under Oath5. Announcing HEI’s sale of Principal Executive Officer$100 million of HEI Regarding Facts and Circumstances Relating to Exchange Act Filings and Exhibit 99.2 Statement Under Oath of Principal Financial Officer of HEI Regarding Facts and Circumstances Relating to Exchange Act Filingsits Medium-Term Notes, Series D, and Item 9. Statements faxed7. Listing and sent by courier to the SECattaching as exhibits notes, attorneys’ opinions and pricing supplementsAugust 16, 2002April 21, 2003
(April 22, 2003)HEIHEI/HECOItem 5. Agreements filed as exhibits in connection with the Registration Statement on Form S-3 (File No. 333-87782)Items 5, 9 and Item 7. Exhibit 1. Distribution Agreement dated August 16, 2002 between HEI and Merrill Lynch, Pierce, Fenner & Smith Incorporated, Goldman, Sachs & Co., Robert W. Baird & Co. Incorporated, Janney Montgomery Scott LLC and U.S. Bancorp Piper Jaffray Inc., as Agents and Exhibit 4. Third Supplement Indenture dated as of August 1, 2002 between HEI and Citibank, N.A., as Trustee, to Indenture dated as of October 15, 1998 between HEI and Citibank, N.A., as Trustee12. HEI’s April 21, 2003 news release (HEI reports first quarter 2003 earnings)September 17, 2002HEIItem 5. ASB Realty Corporation’s notice of tax assessment and HEI’s September 17, 2002 news release confirming current expensing of stock options and announcing plans to adopt preferred method for stock option accountingSeptember 19, 2002HEI/HECOItem 5. Update of HELCO Power SituationOctober 3, 2002HEI/HECOItem 5. Update of HELCO Power SituationOctober 21, 2002May 6, 2003
(May 6, 2003)October 21, 2002May 6, 2003 news release reporting third quarter 2002 earningsNovember 12, 2002HEI/HECOItem 5. Announcement of HEI’s(HEI to webcast and teleconference call of the financial analyst presentation on November 19, 2002.NovemberTuesday, May 13, 2002HEIItem 5. Announcement of retirement of Robert F. Mougeot, HEI Financial Vice President, Treasurer and Chief Financial Officer, effective November 13, 2002 and appointment of Curtis Y. Harada, currently Controller of HEI, as Interim Financial Vice President, Treasurer and Chief Financial Officer.2003)5953HAWAIIAN ELECTRIC INDUSTRIES, INC.HAWAIIAN ELECTRIC INDUSTRIES, INC.HAWAIIAN ELECTRIC COMPANY, INC.HAWAIIAN ELECTRIC COMPANY, INC.CURTIS Y. HARADARICHARD A. VON GNECHTEN
Chairman, President
and Chief Executive Officer
(Principal Executive Officer of HEI)
President and Chief Executive Officer
(Principal Executive Officer of HECO)Date:Curtis Y. HaradaEric K. YeamanInterim Financial Vice President, Treasurer
and Chief Financial Officer
(Principal Financial Officer of HEI)November 14, 2002Date:
Financial Vice President
(Principal Financial Officer of HECO)November 14, 2002Controller
(Chief Accounting Officer of HEI)
Controller
(Chief Accounting Officer of HECO)6054a) 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 quarterly 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 quarterly report (the “Evaluation Date”); andc) presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;function)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; andb) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal controls; andDate: November 14, 2002/s/ ROBERT F. CLARKE
Chairman, President and Chief Executive Officer6155Curtis Y. HaradaEric K. Yeaman (HEI Chief Financial Officer)Curtis Y. Harada,Eric K. Yeaman, certify that: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 quarterly 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 quarterly report (the “Evaluation Date”); andc) presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;function)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; andb) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal controls; andDate: November 14, 2002/s/ CURTIS Y. HARADACurtis Y. HaradaEric K. YeamanInterim Financial Vice President, Treasurer and
Chief Financial Officer6256a) 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 quarterly 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 quarterly report (the “Evaluation Date”); andc) presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;function)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; andb) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal controls; andDate: November 14, 2002/s/ T. MICHAEL MAY
President and Chief Executive Officer6357a) 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 quarterly 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 quarterly report (the “Evaluation Date”); andc) presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;function)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; andb) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal controls; andDate: November 14, 2002/s/ RICHARD A. VON GNECHTEN
Financial Vice President6458