UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-Q
x | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | |||||
For the quarterly period ended September 30, 2003
OR
| ||||||
| ||||||
| ||||||
Exact Name of Registrant as Specified in Its Charter | Commission File Number | I.R.S. Employer Identification No. | ||||
HAWAIIAN ELECTRIC INDUSTRIES, INC. | 1-8503 | 99-0208097 | ||||
and Principal Subsidiary | ||||||
HAWAIIAN ELECTRIC COMPANY, INC. | 1-4955 | 99-0040500 | ||||
| ||||||
| ||||||
| ||||||
| ||||||
| ||||||
| ||||||
| ||||||
| ||||||
| ||||||
State of Hawaii
(State or other jurisdiction of incorporation or organization)
900 Richards Street, Honolulu, Hawaii 96813
(Address of principal executive offices and zip code)
Hawaiian Electric Industries, Inc. — (808) 543-5662
Hawaiian Electric Company, Inc. — (808) 543-7771
(Registrant’s telephone number, including area code)
Not applicable
(Former name, former address and former fiscal year, if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No ¨
|
|
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 No ¨
|
|
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 ¨ No x
|
|
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 | 12,805,843 Shares (not publicly traded) | |
Hawaiian Electric Industries, Inc. and Subsidiaries
Hawaiian Electric Company, Inc. and Subsidiaries
Form 10-Q—10-Q–Quarter ended March 31,September 30, 2003
INDEX
i
Hawaiian Electric Industries, Inc. and Subsidiaries
Hawaiian Electric Company, Inc. and Subsidiaries
Form 10-Q—10-Q–Quarter ended March 31,September 30, 2003
Terms | Definitions | ||
| AES Hawaii | AES Hawaii, Inc., formerly known as AES Barbers Point, Inc. | ||
AFUDC | Allowance for funds used during construction | ||
| AOCI | Accumulated other comprehensive income | ||
| 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. (dissolved in July 2003) 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. | ||
| CHP | Combined heat and power | ||
| 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. (dissolved in October 2003), ProVision Technologies, Inc. (sold in July 2003), HEI Properties, Inc., HEI Leasing, Inc. (dissolved in October 2003), 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 | Division of Consumer Advocacy, Department of Commerce and Consumer Affairs of the State of Hawaii | ||
D&O | Decision and order | ||
| DG | Distributed generation | ||
| 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 | ||
ii
GLOSSARY OF TERMS, continued
| Terms | Definitions | |
EAB | Environmental Appeals Board | |
ECAC | Energy cost adjustment clause | |
EPA | Environmental Protection | |
ii
GLOSSARY OF TERMS, continued
|
| ||
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, HECO Capital Trust II and Renewable Hawaii, Inc. | ||
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. (dissolved in October 2003), ProVision Technologies, Inc. (sold in July 2003), HEI Properties, Inc., HEI Leasing, Inc. (dissolved in October 2003), 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., | ||
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. | ||
IPP | Independent power producer | ||
iii
GLOSSARY OF TERMS, continued
Terms | Definitions | ||
|
| ||
kV | Kilovolt | ||
KW | Kilowatt | ||
KWH | Kilowatthour | ||
LUC | Hawaii State Land Use Commission | ||
MECO | Maui Electric Company, Limited, | ||
MW | Megawatt | ||
NII | Net interest income | ||
NPV | Net portfolio value | ||
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 | ||
|
| ||
RHI | Renewable Hawaii, Inc., a wholly owned subsidiary of Hawaiian Electric Company, Inc. | ||
ROACE | Return on average common equity | ||
SEC | Securities and Exchange Commission | ||
SFAS | Statement of Financial Accounting Standards | ||
SPRB | Special Purpose Revenue Bonds | ||
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 Hawaiian Electric Company, Inc. (HECO) and their subsidiaries contain “forward-looking statements,” which include statements that are predictive in nature, depend upon or refer to future events or conditions, and usually include words such as “expects,” “anticipates,” “intends,” “plans,” “believes,” “predicts,” “estimates” or similar expressions. In addition, any statements concerning future financial performance (including future revenues, expenses, earnings or losses or growth rates), ongoing business strategies or prospects and possible future actions, which may be provided by management, are also forward-looking statements. Forward-looking statements are based on current expectations and projections about future events and are subject to risks, uncertainties and assumptions about HEI and its subsidiaries (including HECO and its subsidiaries), the performance of the industries in which they do business and economic and market factors, among other things.These forward-looking statements are not guarantees of future performance.
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 state of the Hawaii tourist and construction industries, the Hawaii and continental U.S. housing markets and the military presence in Hawaii; the effects of weather and natural disasters; global developments, including the effects of terrorist acts, the war on terrorism, continuing U.S. presence in Iraq and Afghanistan and potential conflict or crisis with North Korea; the timing and extent of changes in interest rates; the risks inherent in changes in the value of and market for securities available for sale and pension and other retirement plan assets; changes in assumptions used to calculate retirement benefits costs and changes in funding requirements; demand for services 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, periodically, favorable collective bargaining agreements; new technological developments that could affect the operations and prospects of HEI’s subsidiaries (including HECO and its subsidiaries) or their competitors; federal, state and international governmental and regulatory actions, such as changes in laws, rules and regulations applicable to HEI, HECO and their subsidiaries (including changes in taxation and governmental fees and assessments); 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); the risks associated with the geographic concentration of HEI’s businesses; the effects of changes in accounting principles applicable to HEI, HECO and their subsidiaries; the effects of changes by securities rating agencies in the ratings of the securities of HEI and HECO; the results of 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 final outcome of tax positions taken by HEI and its subsidiaries, including with respect to ASB’s real estate investment trust subsidiary and HEI’s discontinued operations; the 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. Except to the extent required by the federal securities laws, HEI and its subsidiaries undertake no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise.
v
PART I - I–FINANCIAL INFORMATION
| Item 1. | Financial statements |
Hawaiian Electric Industries, Inc. and Subsidiaries
Consolidated balance sheets (unaudited)
(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 |
|
|
|
|
| ||||
(in thousands) | September 30, 2003 | December 31, 2002 | ||||
Assets | ||||||
Cash and equivalents | $ | 199,601 | $ | 244,525 | ||
Federal funds sold | 34,677 | — | ||||
Accounts receivable and unbilled revenues, net | 174,608 | 176,327 | ||||
Available-for-sale investment and mortgage-related securities | 1,800,552 | 1,960,288 | ||||
Available-for-sale mortgage-related securities pledged for repurchase agreements | 937,337 | 784,362 | ||||
Held-to-maturity investment securities | 93,447 | 89,545 | ||||
Loans receivable, net | 3,142,148 | 2,993,989 | ||||
Property, plant and equipment, net of accumulated depreciation of $1,521,098 and $1,437,366 | 2,083,812 | 2,079,325 | ||||
Regulatory assets | 105,565 | 105,568 | ||||
Other | 360,689 | 345,002 | ||||
Goodwill and other intangibles | 95,271 | 97,572 | ||||
| $ | 9,027,707 | $ | 8,876,503 | |||
Liabilities and stockholders’ equity | ||||||
Liabilities | ||||||
Accounts payable | $ | 157,420 | $ | 134,416 | ||
Deposit liabilities | 3,952,662 | 3,800,772 | ||||
Securities sold under agreements to repurchase | 787,585 | 667,247 | ||||
Advances from Federal Home Loan Bank | 1,037,052 | 1,176,252 | ||||
Long-term debt, net | 1,063,790 | 1,106,270 | ||||
Deferred income taxes | 219,556 | 235,431 | ||||
Contributions in aid of construction | 221,242 | 218,094 | ||||
Other | 286,594 | 257,315 | ||||
| 7,725,901 | 7,595,797 | |||||
Minority interests | ||||||
HEI- and HECO-obligated preferred securities of trust subsidiaries | 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: 37,690 shares and 36,809 shares | 876,804 | 839,503 | ||||
Retained earnings | 183,735 | 176,118 | ||||
Accumulated other comprehensive income | 6,861 | 30,679 | ||||
| 1,067,400 | 1,046,300 | |||||
| $ | 9,027,707 | $ | 8,876,503 | |||
See accompanying “Notes to consolidated financial statements.”
1
Hawaiian Electric Industries, Inc. and Subsidiaries
Consolidated statements of income (unaudited)
Three months ended March 31 |
| 2003 |
| 2002 |
| |||
|
|
| ||||||
(in thousands, except per share amounts and ratio of earnings to fixed charges) |
|
|
|
|
|
|
| |
Revenues |
|
|
|
|
|
|
| |
Electric utility. |
| $ | 328,912 |
| $ | 278,331 |
| |
Bank |
|
| 95,102 |
|
| 98,842 |
| |
Other |
|
| 622 |
|
| 263 |
| |
|
|
|
| |||||
|
|
| 424,636 |
|
| 377,436 |
| |
|
|
|
| |||||
Expenses |
|
|
|
|
|
|
| |
Electric utility |
|
| 287,937 |
|
| 232,727 |
| |
Bank |
|
| 72,676 |
|
| 76,671 |
| |
Other |
|
| 4,935 |
|
| 3,434 |
| |
|
|
|
| |||||
|
|
| 365,548 |
|
| 312,832 |
| |
|
|
|
| |||||
Operating income (loss) |
|
|
|
|
|
|
| |
Electric utility |
|
| 40,975 |
|
| 45,604 |
| |
Bank |
|
| 22,426 |
|
| 22,171 |
| |
Other |
|
| (4,313 | ) |
| (3,171 | ) | |
|
|
|
| |||||
|
|
| 59,088 |
|
| 64,604 |
| |
|
|
|
| |||||
Interest expense—other than bank |
|
| (17,980 | ) |
| (18,527 | ) | |
Allowance for borrowed funds used during construction |
|
| 443 |
|
| 355 |
| |
Preferred stock dividends of subsidiaries |
|
| (502 | ) |
| (501 | ) | |
Preferred securities distributions of trust subsidiaries |
|
| (4,009 | ) |
| (4,009 | ) | |
Allowance for equity funds used during construction |
|
| 988 |
|
| 773 |
| |
|
|
|
| |||||
Income before income taxes |
|
| 38,028 |
|
| 42,695 |
| |
Income taxes |
|
| 13,701 |
|
| 15,823 |
| |
|
|
|
| |||||
Net income |
| $ | 24,327 |
| $ | 26,872 |
| |
|
|
|
| |||||
Basic earnings per common share |
| $ | 0.66 |
| $ | 0.75 |
| |
|
|
|
| |||||
Diluted earnings per common share |
| $ | 0.66 |
| $ | 0.75 |
| |
|
|
|
| |||||
Dividends per common share. |
| $ | 0.62 |
| $ | 0.62 |
| |
|
|
|
| |||||
Weighted-average number of common shares outstanding |
|
| 36,897 |
|
| 35,818 |
| |
| Dilutive effect of stock options and dividend equivalents |
|
| 189 |
|
| 196 |
|
|
|
|
| |||||
Adjusted weighted-average shares |
|
| 37,086 |
|
| 36,014 |
| |
|
|
|
| |||||
Ratio of earnings to fixed charges (SEC method) |
|
|
|
|
|
|
| |
| Excluding interest on ASB deposits |
|
| 1.88 |
|
| 2.00 |
|
|
|
|
|
| ||||
| Including interest on ASB deposits |
|
| 1.66 |
|
| 1.68 |
|
|
|
|
| |||||
(in thousands, except per share amounts and ratio of earnings to fixed charges) | Three months ended September 30, | Nine months ended September 30, | ||||||||||||||
| 2003 | 2002 | 2003 | 2002 | |||||||||||||
Revenues | ||||||||||||||||
Electric utility | $ | 359,250 | $ | 333,636 | $ | 1,042,691 | $ | 919,643 | ||||||||
Bank | 93,770 | 99,722 | 281,575 | 300,633 | ||||||||||||
Other | 683 | (1,798 | ) | 2,829 | (2,278 | ) | ||||||||||
| 453,703 | 431,560 | 1,327,095 | 1,217,998 | |||||||||||||
Expenses | ||||||||||||||||
Electric utility | 312,614 | 280,047 | 912,495 | 769,497 | ||||||||||||
Bank | 68,654 | 75,156 | 211,672 | 229,527 | ||||||||||||
Other | 4,200 | 4,619 | 14,152 | 12,006 | ||||||||||||
| 385,468 | 359,822 | 1,138,319 | 1,011,030 | |||||||||||||
Operating income (loss) | ||||||||||||||||
Electric utility | 46,636 | 53,589 | 130,196 | 150,146 | ||||||||||||
Bank | 25,116 | 24,566 | 69,903 | 71,106 | ||||||||||||
Other | (3,517 | ) | (6,417 | ) | (11,323 | ) | (14,284 | ) | ||||||||
| 68,235 | 71,738 | 188,776 | 206,968 | |||||||||||||
Interest expense–other than bank | (17,315 | ) | (17,751 | ) | (53,174 | ) | (54,618 | ) | ||||||||
Allowance for borrowed funds used during construction | 496 | 549 | 1,385 | 1,392 | ||||||||||||
Preferred stock dividends of subsidiaries | (501 | ) | (501 | ) | (1,504 | ) | (1,504 | ) | ||||||||
Preferred securities distributions of trust subsidiaries | (4,008 | ) | (4,008 | ) | (12,026 | ) | (12,026 | ) | ||||||||
Allowance for equity funds used during construction | 1,098 | 1,162 | 3,075 | 2,977 | ||||||||||||
Income from continuing operations before income taxes | 48,005 | 51,189 | 126,532 | 143,189 | ||||||||||||
Income taxes | 17,483 | 17,677 | 45,923 | 51,347 | ||||||||||||
Income from continuing operations | 30,522 | 33,512 | 80,609 | 91,842 | ||||||||||||
Discontinued operations-loss from operations net of income tax benefits | — | — | (3,870 | ) | — | |||||||||||
Net income | $ | 30,522 | $ | 33,512 | $ | 76,739 | $ | 91,842 | ||||||||
Basic earnings (loss) per common share | ||||||||||||||||
Continuing operations | $ | 0.81 | $ | 0.92 | $ | 2.16 | $ | 2.54 | ||||||||
Discontinued operations | — | — | (0.10 | ) | — | |||||||||||
| $ | 0.81 | $ | 0.92 | $ | 2.06 | $ | 2.54 | |||||||||
Diluted earnings (loss) per common share | ||||||||||||||||
Continuing operations | $ | 0.81 | $ | 0.91 | $ | 2.15 | $ | 2.53 | ||||||||
Discontinued operations | — | — | (0.10 | ) | — | |||||||||||
| $ | 0.81 | $ | 0.91 | $ | 2.05 | $ | 2.53 | |||||||||
Dividends per common share | $ | 0.62 | $ | 0.62 | $ | 1.86 | $ | 1.86 | ||||||||
Weighted-average number of common shares outstanding | 37,516 | 36,435 | 37,205 | 36,150 | ||||||||||||
Dilutive effect of stock options and dividend equivalents | 160 | 192 | 159 | 200 | ||||||||||||
Adjusted weighted-average shares | 37,676 | 36,627 | 37,364 | 36,350 | ||||||||||||
Ratio of earnings to fixed charges (SEC method) | ||||||||||||||||
Excluding interest on ASB deposits | 2.01 | 2.08 | ||||||||||||||
Including interest on ASB deposits | 1.76 | 1.75 | ||||||||||||||
See accompanying “Notes to consolidated financial statements.”
2
Hawaiian Electric Industries, Inc. and Subsidiaries
Consolidated statements of changes in stockholders’ equity (unaudited)
|
| 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 |
| ||||
|
|
|
|
|
|
| ||||||||||||||
| Common stock | Retained earnings | Accumulated other comprehensive income (loss) | |||||||||||||||
(in thousands, except per share amounts) | Shares | Amount | Total | ||||||||||||||
Balance, December 31, 2002 | 36,809 | $ | 839,503 | $ | 176,118 | $ | 30,679 | $ | 1,046,300 | ||||||||
Comprehensive income: | |||||||||||||||||
Net income | — | — | 76,739 | — | 76,739 | ||||||||||||
Net unrealized losses on securities: | |||||||||||||||||
Net unrealized losses arising during the period, net of tax benefits of $8,886 | — | — | — | (21,708 | ) | (21,708 | ) | ||||||||||
Less: reclassification adjustment for net realized gains included in net income, net of taxes of $1,082 | — | — | — | (2,110 | ) | (2,110 | ) | ||||||||||
Comprehensive income (loss) | — | — | 76,739 | (23,818 | ) | 52,921 | |||||||||||
Issuance of common stock, net | 881 | 37,301 | — | — | 37,301 | ||||||||||||
Common stock dividends ($1.86 per share) | — | — | (69,122 | ) | — | (69,122 | ) | ||||||||||
Balance, September 30, 2003 | 37,690 | $ | 876,804 | $ | 183,735 | $ | 6,861 | $ | 1,067,400 | ||||||||
Balance, December 31, 2001 | 35,600 | $ | 787,374 | $ | 147,837 | $ | (5,546 | ) | $ | 929,665 | |||||||
Comprehensive income: | |||||||||||||||||
Net income | — | — | 91,842 | — | 91,842 | ||||||||||||
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 realized 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 | — | — | 91,842 | 38,904 | 130,746 | ||||||||||||
Issuance of common stock, net | 972 | 43,055 | — | — | 43,055 | ||||||||||||
Common stock dividends ($1.86 per share) | — | — | (67,218 | ) | — | (67,218 | ) | ||||||||||
Balance, September 30, 2002 | 36,572 | $ | 830,429 | $ | 172,461 | $ | 33,358 | $ | 1,036,248 | ||||||||
See accompanying “Notes to consolidated financial statements.”
3
Hawaiian Electric Industries, Inc. and Subsidiaries
Consolidated statements of cash flows (unaudited)
Three months ended March 31 |
| 2003 |
| 2002 |
| ||||
|
|
| |||||||
(in thousands) |
|
|
|
|
|
|
| ||
Cash flows from operating activities |
|
|
|
|
|
|
| ||
Income from continuing operations |
| $ | 24,327 |
| $ | 26,872 |
| ||
Adjustments to reconcile income from continuing operations to net cash provided by operating activities |
|
|
|
|
|
|
| ||
| Depreciation of property, plant and equipment |
|
| 30,056 |
|
| 28,790 |
| |
| Other amortization |
|
| 7,798 |
|
| 5,729 |
| |
| Provision for loan losses |
|
| 1,150 |
|
| 3,500 |
| |
| Writedowns of income notes |
|
| — |
|
| 926 |
| |
| Deferred income taxes |
|
| (2,783 | ) |
| (1,598 | ) | |
| Allowance for equity funds used during construction |
|
| (988 | ) |
| (773 | ) | |
| Changes in assets and liabilities |
|
|
|
|
|
|
| |
| Decrease in accounts receivable and unbilled revenues, net |
|
| 4,580 |
|
| 9,853 |
| |
| Increase in accounts payable |
|
| 8,149 |
|
| 5,425 |
| |
| Decrease in taxes accrued |
|
| (2,873 | ) |
| (12,585 | ) | |
| Changes in other assets and liabilities |
|
| (13,812 | ) |
| (19,030 | ) | |
|
|
|
|
| |||||
Net cash provided by operating activities |
|
| 55,604 |
|
| 47,109 |
| ||
|
|
|
| ||||||
Cash flows from investing activities |
|
|
|
|
|
|
| ||
Available-for-sale mortgage-related securities purchased |
|
| (443,966 | ) |
| (740,813 | ) | ||
Principal repayments on available-for-sale mortgage-related securities |
|
| 359,990 |
|
| 349,988 |
| ||
Proceeds from sale of mortgage-related securities |
|
| 25,536 |
|
| 17,286 |
| ||
Loans receivable originated and purchased |
|
| (308,070 | ) |
| (259,780 | ) | ||
Principal repayments on loans receivable |
|
| 248,135 |
|
| 214,875 |
| ||
Proceeds from sale of loans |
|
| 14,595 |
|
| 98,124 |
| ||
Proceeds from sale of real estate acquired in settlement of loans |
|
| 1,022 |
|
| 2,053 |
| ||
Capital expenditures |
|
| (25,460 | ) |
| (21,064 | ) | ||
Contributions in aid of construction |
|
| 4,842 |
|
| 1,800 |
| ||
Other |
|
| 202 |
|
| (205 | ) | ||
|
|
|
| ||||||
Net cash used in investing activities |
|
| (123,174 | ) |
| (337,736 | ) | ||
|
|
|
| ||||||
Cash flows from financing activities |
|
|
|
|
|
|
| ||
Net increase (decrease) in deposit liabilities |
|
| 14,429 |
|
| (14,841 | ) | ||
Net increase in retail repurchase agreements |
|
| 3,880 |
|
| 4,405 |
| ||
Proceeds from securities sold under agreements to repurchase |
|
| 492,200 |
|
| 518,000 |
| ||
Repayments of securities sold under agreements to repurchase |
|
| (313,500 | ) |
| (496,650 | ) | ||
Proceeds from advances from Federal Home Loan Bank |
|
| 70,000 |
|
| 100,000 |
| ||
Principal payments on advances from Federal Home Loan Bank |
|
| (189,000 | ) |
| (38,000 | ) | ||
Proceeds from issuance of long-term debt |
|
| 100,943 |
|
| 3,277 |
| ||
Repayment of long-term debt |
|
| (18,000 | ) |
| (12,500 | ) | ||
Preferred securities distributions of trust subsidiaries |
|
| (4,009 | ) |
| (4,009 | ) | ||
Net proceeds from issuance of common stock |
|
| 5,259 |
|
| 14,148 |
| ||
Common stock dividends |
|
| (18,627 | ) |
| (18,139 | ) | ||
Other |
|
| (3,942 | ) |
| (6,189 | ) | ||
|
|
|
| ||||||
Net cash provided by financing activities |
|
| 139,633 |
|
| 49,502 |
| ||
|
|
|
| ||||||
Net cash provided by (used in) discontinued operations |
|
| (107 | ) |
| 1,332 |
| ||
|
|
|
| ||||||
Net increase (decrease) in cash and equivalents |
|
| 71,956 |
|
| (239,793 | ) | ||
Cash and equivalents, beginning of period |
|
| 244,525 |
|
| 450,827 |
| ||
|
|
|
| ||||||
Cash and equivalents, end of period |
| $ | 316,481 |
| $ | 211,034 |
| ||
|
|
|
| ||||||
Nine months ended September 30 | 2003 | 2002 | ||||||
| (in thousands) | ||||||||
Cash flows from operating activities | ||||||||
Income from continuing operations | $ | 80,609 | $ | 91,842 | ||||
Adjustments to reconcile income from continuing operations to net cash provided by operating activities | ||||||||
Depreciation of property, plant and equipment | 90,551 | 86,660 | ||||||
Other amortization | 25,683 | 18,151 | ||||||
Provision for loan losses | 2,775 | 8,000 | ||||||
Writedowns of income notes | — | 3,657 | ||||||
Deferred income taxes | (4,609 | ) | 33,072 | |||||
Allowance for equity funds used during construction | (3,075 | ) | (2,977 | ) | ||||
Changes in assets and liabilities | ||||||||
Decrease (increase) in accounts receivable and unbilled revenues, net | 1,719 | (6,140 | ) | |||||
Increase in accounts payable | 23,004 | 31,693 | ||||||
Increase (decrease) in taxes accrued | 37,753 | (43,423 | ) | |||||
Changes in other assets and liabilities | (27,732 | ) | (28,865 | ) | ||||
Net cash provided by operating activities | 226,678 | 191,670 | ||||||
Cash flows from investing activities | ||||||||
Available-for-sale mortgage-related securities purchased | (1,899,634 | ) | (1,299,343 | ) | ||||
Principal repayments on available-for-sale mortgage-related securities | 1,609,048 | 857,932 | ||||||
Proceeds from sale of mortgage-related securities | 243,406 | 77,264 | ||||||
Loans receivable originated and purchased | (1,187,070 | ) | (789,453 | ) | ||||
Principal repayments on loans receivable | 986,095 | 646,095 | ||||||
Proceeds from sale of loans | 52,584 | 103,444 | ||||||
Proceeds from sale of real estate acquired in settlement of loans | 4,073 | 9,464 | ||||||
Capital expenditures | (94,978 | ) | (82,229 | ) | ||||
Contributions in aid of construction | 10,296 | 7,394 | ||||||
Other | (723 | ) | (353 | ) | ||||
Net cash used in investing activities | (276,903 | ) | (469,785 | ) | ||||
Cash flows from financing activities | ||||||||
Net increase in deposit liabilities | 151,890 | 69,869 | ||||||
Net increase in short-term borrowings with original maturities of three months or less | — | 29,829 | ||||||
Net increase in retail repurchase agreements | 10,710 | 9,765 | ||||||
Proceeds from securities sold under agreements to repurchase | 1,527,575 | 901,531 | ||||||
Repayments of securities sold under agreements to repurchase | (1,413,275 | ) | (976,837 | ) | ||||
Proceeds from advances from Federal Home Loan Bank | 318,500 | 259,000 | ||||||
Principal payments on advances from Federal Home Loan Bank | (457,700 | ) | (108,000 | ) | ||||
Proceeds from issuance of long-term debt | 167,360 | 11,691 | ||||||
Repayment of long-term debt | (210,000 | ) | (64,500 | ) | ||||
Preferred securities distributions of trust subsidiaries | (12,026 | ) | (12,026 | ) | ||||
Net proceeds from issuance of common stock | 23,015 | 26,564 | ||||||
Common stock dividends | (56,172 | ) | (54,880 | ) | ||||
Other | (6,970 | ) | (9,601 | ) | ||||
Net cash provided by financing activities | 42,907 | 82,405 | ||||||
Net cash used in discontinued operations | (2,929 | ) | (3,650 | ) | ||||
Net decrease in cash and equivalents and federal funds sold | (10,247 | ) | (199,360 | ) | ||||
Cash and equivalents and federal funds sold, beginning of period | 244,525 | 450,827 | ||||||
Cash and equivalents and federal funds sold, end of period | $ | 234,278 | $ | 251,467 | ||||
See accompanying “Notes to consolidated financial statements.”
4
Hawaiian Electric Industries, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(1) Basis of presentation
The accompanying unaudited consolidated financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America (GAAP) for interim financial information and with the instructions to SEC Form 10-Q and Article 10 of Regulation S–X. Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial statements. In preparing the financial statements, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the balance sheet and the reported amounts of revenues and expenses for the period. Actual results could differ significantly from those estimates. The accompanying unaudited consolidated financial statements should be read in conjunction with the audited 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, 2002.2002 and the unaudited consolidated financial statements and the notes thereto in HEI’s Quarterly Reports on SEC Form 10-Q for the quarters ended March 31, 2003 and June 30, 2003.
In the opinion of HEI’s management, the accompanying unaudited consolidated financial statements contain all material adjustments required by GAAP to present fairly the Company’s financial position as of March 31,September 30, 2003 and December 31, 2002, and the results of its operations for the three and nine months ended September 30, 2003 and 2002, and its cash flows for the threenine months ended March 31,September 30, 2003 and 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.
When required, certain reclassifications are made to the prior period’s consolidated financial statements to conform to the 2003current presentation.
5
(2) Segment financial information
Segment financial information was as follows:
(in thousands) |
| Electric |
| Bank |
| Other |
| Total |
| |||||
|
|
|
|
| ||||||||||
Three months ended March 31, 2003 |
|
|
|
|
|
|
|
|
|
|
|
|
| |
Revenues from external customers |
| $ | 328,910 |
| $ | 95,102 |
| $ | 624 |
| $ | 424,636 |
| |
Intersegment revenues (eliminations) |
|
| 2 |
|
| — |
|
| (2 | ) |
| — |
| |
|
|
|
|
|
| |||||||||
| Revenues |
|
| 328,912 |
|
| 95,102 |
|
| 622 |
|
| 424,636 |
|
|
|
|
|
|
|
| ||||||||
Profit (loss)* |
|
| 28,808 |
|
| 21,039 |
|
| (11,819 | ) |
| 38,028 |
| |
Income taxes (benefit) |
|
| 11,152 |
|
| 7,531 |
|
| (4,982 | ) |
| 13,701 |
| |
|
|
|
|
|
| |||||||||
| Net income (loss) |
|
| 17,656 |
|
| 13,508 |
|
| (6,837 | ) |
| 24,327 |
|
|
|
|
|
|
|
| ||||||||
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 |
|
|
|
|
|
|
|
|
|
|
|
|
| |
Revenues from external customers |
| $ | 278,330 |
| $ | 98,842 |
| $ | 264 |
| $ | 377,436 |
| |
Intersegment revenues (eliminations) |
|
| 1 |
|
| — |
|
| (1 | ) |
| — |
| |
|
|
|
|
|
| |||||||||
| Revenues |
|
| 278,331 |
|
| 98,842 |
|
| 263 |
|
| 377,436 |
|
|
|
|
|
|
|
| ||||||||
Profit (loss)* |
|
| 33,228 |
|
| 20,773 |
|
| (11,306 | ) |
| 42,695 |
| |
Income taxes (benefit) |
|
| 12,869 |
|
| 7,422 |
|
| (4,468 | ) |
| 15,823 |
| |
|
|
|
|
|
| |||||||||
| Net income (loss) |
|
| 20,359 |
|
| 13,351 |
|
| (6,838 | ) |
| 26,872 |
|
|
|
|
|
|
|
| ||||||||
Assets (at March 31, 2002, including net assets of discontinued operations) |
|
| 2,373,495 |
|
| 6,072,538 |
|
| 122,753 |
|
| 8,568,786 |
| |
|
|
|
|
|
| |||||||||
*
(in thousands) | Electric Utility | Bank | Other | Total | |||||||
Three months ended September 30, 2003 | |||||||||||
Revenues from external customers | $ | 359,250 | 93,770 | 683 | $ | 453,703 | |||||
Profit (loss)* | $ | 34,309 | 23,715 | (10,019 | ) | $ | 48,005 | ||||
Income taxes (benefit) | 13,949 | 8,440 | (4,906 | ) | 17,483 | ||||||
Income (loss) from continuing operations | $ | 20,360 | 15,275 | (5,113 | ) | $ | 30,522 | ||||
Nine months ended September 30, 2003 | |||||||||||
Revenues from external customers | $ | 1,042,689 | 281,575 | 2,831 | $ | 1,327,095 | |||||
Intersegment revenues (eliminations) | 2 | — | (2 | ) | — | ||||||
Revenues | $ | 1,042,691 | 281,575 | 2,829 | $ | 1,327,095 | |||||
Profit (loss)* | $ | 93,349 | 65,731 | (32,548 | ) | $ | 126,532 | ||||
Income taxes (benefit) | 36,777 | 23,454 | (14,308 | ) | 45,923 | ||||||
Income (loss) from continuing operations | $ | 56,572 | 42,277 | (18,240 | ) | $ | 80,609 | ||||
Assets (at September 30, 2003, including net assets of discontinued operations) | $ | 2,468,194 | 6,455,776 | 103,737 | $ | 9,027,707 | |||||
Three months ended September 30, 2002 | |||||||||||
Revenues from external customers | $ | 333,635 | 99,722 | (1,797 | ) | $ | 431,560 | ||||
Intersegment revenues (eliminations) | 1 | — | (1 | ) | — | ||||||
Revenues | $ | 333,636 | 99,722 | (1,798 | ) | $ | 431,560 | ||||
Profit (loss)* | $ | 41,829 | 23,171 | (13,811 | ) | $ | 51,189 | ||||
Income taxes (benefit) | 16,219 | 8,519 | (7,061 | ) | 17,677 | ||||||
Income (loss) from continuing operations | $ | 25,610 | 14,652 | (6,750 | ) | $ | 33,512 | ||||
Nine months ended September 30, 2002 | |||||||||||
Revenues from external customers | $ | 919,639 | 300,633 | (2,274 | ) | $ | 1,217,998 | ||||
Intersegment revenues (eliminations) | 4 | — | (4 | ) | — | ||||||
Revenues | $ | 919,643 | 300,633 | (2,278 | ) | $ | 1,217,998 | ||||
Profit (loss)* | $ | 114,015 | 66,917 | (37,743 | ) | $ | 143,189 | ||||
Income taxes (benefit) | 44,196 | 24,102 | (16,951 | ) | 51,347 | ||||||
Income (loss) from continuing operations | $ | 69,819 | 42,815 | (20,792 | ) | $ | 91,842 | ||||
Assets (at September 30, 2002, including net assets of discontinued operations) | $ | 2,411,180 | 6,241,788 | 110,269 | $ | 8,763,237 | |||||
| * | Income (loss) from continuing operations before income taxes. |
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
6
(3) Electric utility subsidiary
For HECO’s consolidated financial information, including its commitments and contingencies, see pages 1216 through 31.39.
(4) Bank subsidiary
Selected financial information
American Savings Bank, F.S.B. and Subsidiaries
Consolidated balance sheet data
(in thousands) |
| March 31, |
| December 31, |
| ||
|
|
| |||||
Assets |
|
|
|
|
|
|
|
Cash and equivalents |
| $ | 204,772 |
| $ | 214,704 |
|
Available-for-sale mortgage-related securities |
|
| 1,788,149 |
|
| 1,952,317 |
|
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 |
|
Other |
|
| 194,020 |
|
| 196,117 |
|
Goodwill and other intangibles |
|
| 95,514 |
|
| 97,572 |
|
|
|
|
| ||||
|
| $ | 6,401,906 |
| $ | 6,328,606 |
|
|
|
|
| ||||
Liabilities and equity |
|
|
|
|
|
|
|
Deposit liabilities–noninterest bearing |
| $ | 381,482 |
| $ | 369,961 |
|
Deposit liabilities–interest bearing |
|
| 3,433,719 |
|
| 3,430,811 |
|
Securities sold under agreements to repurchase |
|
| 845,959 |
|
| 667,247 |
|
Advances from Federal Home Loan Bank |
|
| 1,057,252 |
|
| 1,176,252 |
|
Other |
|
| 138,142 |
|
| 137,888 |
|
|
|
|
| ||||
|
|
| 5,856,554 |
|
| 5,782,159 |
|
Minority interests and preferred stock of subsidiary |
|
| 3,451 |
|
| 3,417 |
|
Preferred stock |
|
| 75,000 |
|
| 75,000 |
|
Common stock |
|
| 243,868 |
|
| 243,628 |
|
Retained earnings |
|
| 199,495 |
|
| 192,692 |
|
Accumulated other comprehensive income |
|
| 23,538 |
|
| 31,710 |
|
|
|
|
| ||||
|
|
| 466,901 |
|
| 468,030 |
|
|
|
|
| ||||
|
| $ | 6,401,906 |
| $ | 6,328,606 |
|
|
|
|
| ||||
6
(in thousands) | September 30, 2003 | December 31, 2002 | ||||
Assets | ||||||
Cash and equivalents | $ | 149,952 | $ | 214,704 | ||
Federal funds sold | 34,677 | — | ||||
Available-for-sale mortgage-related securities | 1,788,477 | 1,952,317 | ||||
Available-for-sale mortgage-related securities pledged for repurchase agreements | 937,337 | 784,362 | ||||
Held-to-maturity investment securities | 93,447 | 89,545 | ||||
Loans receivable, net | 3,142,148 | 2,993,989 | ||||
Other | 214,467 | 196,117 | ||||
Goodwill and other intangibles | 95,271 | 97,572 | ||||
| $ | 6,455,776 | $ | 6,328,606 | |||
Liabilities and equity | ||||||
Deposit liabilities–noninterest bearing | $ | 452,500 | $ | 369,961 | ||
Deposit liabilities–interest bearing | 3,500,162 | 3,430,811 | ||||
Securities sold under agreements to repurchase | 787,585 | 667,247 | ||||
Advances from Federal Home Loan Bank | 1,037,052 | 1,176,252 | ||||
Other | 137,535 | 137,888 | ||||
| 5,914,834 | 5,782,159 | |||||
Minority interests and preferred stock of subsidiary | 3,529 | 3,417 | ||||
Preferred stock | 75,000 | 75,000 | ||||
Common stock | 244,452 | 243,628 | ||||
Retained earnings | 214,763 | 192,692 | ||||
Accumulated other comprehensive income | 3,198 | 31,710 | ||||
| 462,413 | 468,030 | |||||
| $ | 6,455,776 | $ | 6,328,606 | |||
7
American Savings Bank, F.S.B. and Subsidiaries
Consolidated statements of income statement data(unaudited)
Three months ended March 31 |
| 2003 |
| 2002 |
| ||
|
|
| |||||
(in thousands) |
|
|
|
|
|
|
|
Interest and dividend income |
|
|
|
|
|
|
|
Interest and fees on loans |
| $ | 50,473 |
| $ | 51,622 |
|
Interest on mortgage-related securities |
|
| 29,277 |
|
| 31,806 |
|
Interest and dividends on investment securities |
|
| 1,757 |
|
| 2,226 |
|
|
|
|
| ||||
|
|
| 81,507 |
|
| 85,654 |
|
|
|
|
| ||||
Interest expense |
|
|
|
|
|
|
|
Interest on deposit liabilities |
|
| 14,430 |
|
| 20,173 |
|
Interest on Federal Home Loan Bank advances |
|
| 13,566 |
|
| 13,982 |
|
Interest on securities sold under agreements to purchase |
|
| 5,341 |
|
| 3,961 |
|
|
|
|
| ||||
|
|
| 33,337 |
|
| 38,116 |
|
|
|
|
| ||||
Net interest income |
|
| 48,170 |
|
| 47,538 |
|
Provision for loan losses |
|
| 1,150 |
|
| 3,500 |
|
|
|
|
| ||||
Net interest income after provision for loan losses |
|
| 47,020 |
|
| 44,038 |
|
|
|
|
| ||||
Other income |
|
|
|
|
|
|
|
Fees from other financial services |
|
| 5,685 |
|
| 4,620 |
|
Fee income on deposit liabilities |
|
| 3,870 |
|
| 3,475 |
|
Fee income on other financial products |
|
| 2,855 |
|
| 2,687 |
|
Fee income on loans serviced for others, net |
|
| (1,002 | ) |
| 413 |
|
Gain on sale of securities |
|
| 812 |
|
| 156 |
|
Other income |
|
| 1,375 |
|
| 1,837 |
|
|
|
|
| ||||
|
|
| 13,595 |
|
| 13,188 |
|
|
|
|
| ||||
General and administrative expenses |
|
|
|
|
|
|
|
Compensation and employee benefits |
|
| 16,093 |
|
| 14,017 |
|
Occupancy and equipment |
|
| 7,192 |
|
| 7,115 |
|
Data processing |
|
| 2,804 |
|
| 2,830 |
|
Consulting |
|
| 2,718 |
|
| 1,646 |
|
Other |
|
| 9,382 |
|
| 9,447 |
|
|
|
|
| ||||
|
|
| 38,189 |
|
| 35,055 |
|
|
|
|
| ||||
Income before minority interests and income taxes |
|
| 22,426 |
|
| 22,171 |
|
Minority interests |
|
| 34 |
|
| 45 |
|
Income taxes |
|
| 7,531 |
|
| 7,422 |
|
|
|
|
| ||||
Income before preferred stock dividends |
|
| 14,861 |
|
| 14,704 |
|
Preferred stock dividends |
|
| 1,353 |
|
| 1,353 |
|
|
|
|
| ||||
Net income for common stock |
| $ | 13,508 |
| $ | 13,351 |
|
|
|
|
| ||||
| Three months ended September 30, | Nine months ended September 30, | |||||||||||||
(in thousands) | 2003 | 2002 | 2003 | 2002 | ||||||||||
Interest and dividend income | ||||||||||||||
Interest and fees on loans | $ | 49,657 | $ | 50,210 | $ | 150,555 | $ | 152,300 | ||||||
Interest on mortgage-related securities | 24,876 | 35,503 | 80,176 | 103,634 | ||||||||||
Interest and dividends on investment securities | 1,428 | 1,880 | 4,736 | 5,979 | ||||||||||
| 75,961 | 87,593 | 235,467 | 261,913 | |||||||||||
Interest expense | ||||||||||||||
Interest on deposit liabilities | 13,099 | 17,833 | 41,182 | 57,331 | ||||||||||
Interest on Federal Home Loan Bank advances | 11,449 | 14,905 | 37,067 | 43,327 | ||||||||||
Interest on securities sold under repurchase agreements | 5,287 | 5,683 | 16,059 | 15,256 | ||||||||||
| 29,835 | 38,421 | 94,308 | 115,914 | |||||||||||
Net interest income | 46,126 | 49,172 | 141,159 | 145,999 | ||||||||||
Provision for loan losses | 600 | 1,500 | 2,775 | 8,000 | ||||||||||
Net interest income after provision for loan losses | 45,526 | 47,672 | 138,384 | 137,999 | ||||||||||
Other income | ||||||||||||||
Fees from other financial services | 6,015 | 5,416 | 17,964 | 15,381 | ||||||||||
Fee income on deposit liabilities | 4,423 | 4,091 | 12,257 | 11,717 | ||||||||||
Fee income on other financial products | 2,426 | 2,592 | 7,660 | 7,647 | ||||||||||
Fee income on loans serviced for others, net | 1,952 | (882 | ) | 508 | (369 | ) | ||||||||
Gain (loss) on sale of securities | 1,719 | (913 | ) | 4,085 | (640 | ) | ||||||||
Other income | 1,274 | 1,825 | 3,634 | 4,984 | ||||||||||
| 17,809 | 12,129 | 46,108 | 38,720 | |||||||||||
General and administrative expenses | ||||||||||||||
Compensation and employee benefits | 16,917 | 14,753 | 49,711 | 44,046 | ||||||||||
Occupancy and equipment | 8,019 | 7,896 | 22,687 | 22,387 | ||||||||||
Data processing | 2,549 | 2,579 | 7,956 | 8,228 | ||||||||||
Consulting | 899 | 1,582 | 5,076 | 4,374 | ||||||||||
Other | 9,835 | 8,425 | 29,159 | 26,578 | ||||||||||
| 38,219 | 35,235 | 114,589 | 105,613 | |||||||||||
Income before minority interests and income taxes | 25,116 | 24,566 | 69,903 | 71,106 | ||||||||||
Minority interests | 48 | 42 | 114 | 131 | ||||||||||
Income taxes | 8,440 | 8,519 | 23,454 | 24,102 | ||||||||||
Income before preferred stock dividends | 16,628 | 16,005 | 46,335 | 46,873 | ||||||||||
Preferred stock dividends | 1,353 | 1,353 | 4,058 | 4,058 | ||||||||||
Net income for common stock | $ | 15,275 | $ | 14,652 | $ | 42,277 | $ | 42,815 | ||||||
At March 31,September 30, 2003, ASB had commitments to borrowers for undisbursed loan funds, loan commitments and unused lines and letters of credit of $0.8 billion.
8
Disposition of certain debt securities
In June 2000, the Office of Thrift Supervision (OTS) advised ASB that four trust certificates, in the original aggregate principal amount of $114 million, were impermissible investments under regulations applicable to federal savings banks and subsequently required 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 notes 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 trust
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 of these trust certificates to their then-current estimated fair value. In April 2001, ASB sold one of the trust certificates for $30 million, an amount approximating the original purchase price. After PaineWebber Incorporated (PaineWebber) (the broker that sold the remaining three trust certificates to ASB) rejected ASB’s demand that the transactions be rescinded, ASB filed a lawsuit against PaineWebber (described below).
To bring ASB into compliance with the OTS direction,OTS’ directive, ASB directed the trustees to terminate the principal swap component of the three trust certificates and received $43 million from the swaps. Prior to terminating the swaps, ASB had received $2 million of cash from the three trust certificates. After terminating the swaps, the related equity notes were sold by the swap counterparty to HEI.HEI, which purchased them only because of the absence of any other buyers and the need to meet the OTS’ demands. In May 2001, HEI purchased two series of the income notes for approximately $21 million and, in July 2001, HEI purchased the third series of income notes for approximately $7 million. As of March 31,September 30, 2003, HEI had received $10.2$11.4 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,September 30, 2003, held cash and collateralized corporate debt securities having an estimated par value of approximately $1.7 billion. The entities manage the portfolio of collateralized debt securities, pay expenses and make payments to the various class note holders as specified in the various note agreements. HEI is not the primary beneficiary of these entities. These purchases were made pursuant to the terms of an agreement between HEI and ASB, which, among other things, requires ASB to reimburse HEI for any losses related to the income notes, but only from the proceeds of any recovery from PaineWebber.
Due to the uncertainty of future cash flows, HEI is accounting for the income notes under the cost recovery method of accounting. In the second half of 2001, in 2002 and in the first quarternine months of 2003, HEI recognized net losses of $5.6 million ($8.7 million pretax), $2.9 million ($4.5 million pretax) and nil, respectively, on the writedown of the three income notes to their then-current estimated fair value based upon an independent third party valuation that is updated quarterly. As of March 31,September 30, 2003, the estimated fair value and carrying value (including valuation adjustments totaling $5.3$7.4 million recorded in accumulated other comprehensive income) of the income notes totaled approximately $11.2$12.1 million. HEI could incur additional losses from the ultimate disposition of these income notes due 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$4.7 million as of March 31,September 30, 2003. ASB has agreed to indemnify HEI against losses related to these income notes, but the indemnity obligation is payable solely out of any recoveries achieved in the litigation against PaineWebber.
ASB’s first amended complaint against PaineWebber alleges that, in connection with the sale of the three trust certificates to ASB, PaineWebber (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 asserted by PaineWebber against ASB alleges violations of the federal securities laws, misrepresentation and fraud and 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 heard 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).
9
On April 25, 2003, the Court issued orders with respect to the motions for partial summary judgment it 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 amountamounts ASB received when the principal portion of the investments were redeemed (about $42.6 million) and when the income notes were sold to HEI (about $27.9 million).
8
The Court’s order does not require an offset for the amount of income ASB received while it held the notes (about $9.4 million). The Court 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(less than $0.3 million) with respect to the formal OTS investigation.
Subsequently, PaineWebber filed a renewed motion for summary judgment on ASB’s claim for lost income damages, and ASB plans to file motionsmoved for reconsideration on several issues. On July 14, 2003, the Court issued orders declining to reconsider its prior orders dismissing certain of ASB’s claims. The Court granted PaineWebber’s renewed motion for partial summary judgment, ruling that ASB is not entitled to recover on its claim for lost income damages. The Court held that the amounts ASB received from HEI reduced the damages that ASB might recover from PaineWebber. ASB and HEI believe this ruling is incorrect.
In light of the limitationCourt’s ruling limiting ASB’s ability to recover the damages incurred after HEI purchased the income notes, HEI commenced a separate lawsuit against PaineWebber on September 15, 2003 on the amount recoverable underpremise that PaineWebber was unjustly enriched if HEI’s purchase of the income notes had the unintended and unwanted consequence of reducing PaineWebber’s liability to ASB. This claim is being pursued without prejudice to ASB’s affirmativedirect claims as well as several other issues. and its rights of appeal. PaineWebber has filed a motion to dismiss the HEI lawsuit, which will be heard on January 26, 2004.
Trial of ASB’s case is scheduled to begin in July 2003. AdditionalDecember 2003, before a visiting senior Judge of the U.S. District Court who has been assigned to try the case. Most of the discovery is now completed and only limited pretrial motion work is anticipated prior to trial. The ultimate outcome of this litigationthe ASB and HEI cases against PaineWebber cannot be determined at this time.
ASB Realty Corporation
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)HEIDI and ASB by $1$3 million for the threenine months ended March 31,September 30, 2003 and $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$3.5 million (or $2$2.1 million, net of income tax benefits) through March 31,September 30, 2003. The interest on the unpaid balance of 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$12 million (or $5$8 million, net of income tax benefits), plus interest of $0.5$0.9 million (or $0.3$0.6 million, net of income tax benefits) through March 31,September 30, 2003. ASB believes that its tax position is proper and, in
10
In October 2002, ASB filed an appeal with the State Board of Review, First Taxation District. A StateDistrict (Board). The Board of Review hearing has been scheduled forheard ASB’s case on May 13, 2003, and the Board issued its decision in favor of the Department of Taxation on May 19, 2003. As required under Hawaii law, ASB has not paid or provided forthe taxes assessed plus interest ($17 million) on June 10, 2003 and filed a notice of appeal with the Hawaii Tax Appeal Court. Trial is schedule to begin in July 2004. ASB believes that its tax position is proper, and the payment of the assessed bank franchise taxes and interest is accordingly being treated like a deposit rather than an expense for 1998 through 2002. Infinancial statement purposes and thus has not affected earnings to date. If it becomes probable that ASB will not prevail on its tax appeal, ASB may be required to write off the first quarter of 2003, ASB provided for $5,000 of Hawaiideposit and related bank franchise taxes.taxes and interest for subsequent years.
Restructuring of Federal Home Loan Bank Advances
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 $258a total of $389 million of Federal Home Loan Bank (FHLB) advances. ASB paidadvances during the second quarter of 2003. The restructurings involved paying off existing, higher rate FHLB advances with advances that have lower rates and longer maturitiesmaturities. The restructurings were executed in two transactions, $258 million of advances were restructured in April 2003, and lower rates. The existing$131 million of advances were restructured in June 2003. In the April 2003 restructuring, the FHLB advances whichthat were paid off had interest rates ranging from 5.62% to 8.00%an average rate of 7.17% and an average remaining maturitiesmaturity of nine months to 38 months.2.02 years. The new advances have interest rates ranging from 3.91% to 6.27%had an average rate of 5.57% and remaining maturitiesan average maturity of 32 months to 74 months4.80 years at the time of the restructuring. The April 2003 restructuring will result in a reduction of interest expense on these FHLB advances for 2003 of approximately $3 million. ASB expectsmillion for 2003. In the June 2003 restructuring, the FHLB advances that thiswere paid off had an average rate of 5.21% and an average remaining maturity of 0.93 years. The new advances had an average rate of 3.21% and an average maturity of 4.12 years at the time of the restructuring. The June 2003 restructuring will result in a reduction of interest expense on these FHLB advances of approximately $1.5 million for 2003. The reduction in interest expense realized through these restructuring transactions 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.that ASB has been experiencing.
(5) Discontinued operations
HEI Power Corp. (HEIPC)
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.
As of March 31,September 30, 2003, the remaining net assets of the discontinued international power operations amounted to $14$10 million (included in “Other” assets) and consisted primarily of the $7a $2 million investment in Cagayan Electric Power & Light Co., Inc. (CEPALCO), an electric distribution company in the Philippines, and deferred taxes receivable, reduced by a reserve for losses from operations during the phase-out period. In the second quarter of 2003, HEIPC wrote down its investment in CEPALCO by $5 million (from $7 million to $2 million) and increased its reserve for future expenses by $1 million, primarily for general and administrative expenses during the longer than expected period for completing the disposition of the HEIPC Group’s assets. The reduced valuation of the CEPALCO investment resulted from the deteriorating political and economic environment in the second quarter of 2003 in the Philippines that had significant adverse impacts on business in general and the electric power industry in particular in the Philippines and on the expected financial performance of CEPALCO. The HEIPC Group is currently in substantive negotiations with a potential buyer for HEIPC Philippine Development, LLC, the HEIPC Group company that holds its interest in CEPALCO.
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.amounts and gains or additional losses may be sustained in the future. This could occur, for example, if the HEIPC Group is successful in recovery of the costs incurred in connection with athe China joint venture interest or if the investment in CEPALCO is disposed of for less or more than $7.0$2 million or if the Internal Revenue Service does not accept HEI’s treatment of the write-off of its indirect investment in East 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
11
venture interest exceed the total of any recovery ultimately achieved and the amount provided for in HEI’s reserve for discontinued operations.
(6) Cash flows
Supplemental disclosures of cash flow information
For the threenine months ended March 31,September 30, 2003 and 2002, the Company paid interest amounting to $40.4$130.3 million and $43.2$145.6 million, respectively.
For the threenine months ended March 31,September 30, 2003 the Company received cash for income tax refunds amounting to $3.5 million. For the three months ended March 31,and 2002, the Company paid income taxes amounting to $2.4 million.$13.7 million and $50.6 million, respectively. The lower taxes paid in the first nine months of 2003 compared to the first nine months of 2002 were due to lower estimated 2003 tax payments resulting from the effects of the 2003 federal tax act and tax strategies which deferred 2003 tax payments to later quarters and a change in tax regulations which increased tax payments in 2002 (but did not increase 2002 tax expense).
Supplemental disclosures of noncash activities
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 $4.2$13.0 million and $4.1$12.3 million for the threenine months ended March 31,September 30, 2003 and 2002, respectively.
(7) Recent accounting pronouncements and interpretations
Asset retirement obligations
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 would be capitalized as part of the carrying amount of the long-lived asset and depreciated over the life of the asset. The liability is 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 electric 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 probable. 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 Company adopted SFAS No. 143 on January 1, 2003 with no effect on the Company’s financial statements.
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. The Company adopted the provisions of SFAS No. 145 in the second quarter of 2002 with no effect on the Company’s financial statements.
10
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
12
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).,” which required companies to recognize costs associated with exit or disposal activities at the date of a commitment to an exit or disposal plan. SFAS No. 146 replaces EITF Issue No. 94-3. The Company adopted the provisions of SFAS No. 146 on January 1, 2003. Since SFAS No. 146 applies prospectively to exit or disposal activities initiated after December 31, 2002, the adoption of SFAS No. 146 had no effect on the Company’s historical financial statements.
Guarantor’s accounting and disclosure requirements for guarantees
In November 2002, the FASB issued Interpretation (FIN) No. 45, “Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness 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.issued of the obligations of third parties who are not consolidated in its financial statements. 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 modified after December 31, 2002, and since HEI and its subsidiaries have not guaranteed the obligations of any entity or person not included in HEI’s consolidated financial statements, the adoption of these provisions of FIN No. 45 had no effect on the Company’sHEI’s consolidated historical financial statements.
Consolidation of variable interest entities
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 beginningend of the first interim or annual reporting period ending after December 15, 2003. The disclosures required by FIN No. 46 relating to the income notes purchased by HEI from ASB are included in note (4) and relating to HEI- and HECO-obligated trust preferred securities are included in note (9). The Company will adopt the provisions (other than the already adopted disclosure provisions) of FIN No. 46 relating to VIEs created before February 1, 2003 as of December 31, 2003. Management has not yet determined the impact, if any, of adoption.
Amendment of SFAS No. 133
In April 2003, the FASB issued SFAS No. 149, “Amendment of Statement 133 on Derivative Instruments and Hedging Activities,” which amends and clarifies financial accounting and reporting for derivative instruments and hedging activities and will result in more consistent reporting of contracts as either derivatives or hybrid instruments. SFAS No. 149 is effective for contracts entered into or modified after June 30, 2003 (with some exceptions) and for hedging relationships designated after June 30, 2003. The Company adopted the provisions of SFAS No. 149 on July 1, 2003 with no effect on the Company’s historical financial statements. If ASB acquires derivative instruments or engages in hedging activities as planned, however, SFAS No. 149 may apply prospectively to the financial statements of ASB and its subsidiaries.
Financial instruments with characteristics of both liabilities and equity
In May 2003, the FASB issued SFAS No. 150, “Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity” to establish standards for how an issuer classifies and measures these financial instruments. For example, a financial instrument issued in the form of shares that are mandatorily redeemable would be required by SFAS No. 150 to be classified as a liability. SFAS No. 150 was immediately effective for financial instruments entered into or modified after May 31, 2003. SFAS No. 150 was effective for financial instruments existing as of May 31, 2003 at the beginning of the first interim period beginning after June 15, 2003. In October 2003, however, the FASB indefinitely deferred the effective date of the provisions of SFAS No. 150 related to classification and measurement requirements for mandatorily redeemable financial instruments that become subject to SFAS No. 150 solely as a result of consolidation. The adoptionCompany adopted the other provisions of FINSFAS No. 46150 for
13
financial instruments existing as of May 31, 2003 in the third quarter of 2003 and the adoption had no effect on the Company’s financial statements. Disclosures required by FIN
Determining whether an arrangement contains a lease
In May 2003, the FASB ratified EITF Issue No. 46 (relating01-8, “Determining Whether an Arrangement Contains a Lease.” Under EITF Issue No. 01-8, companies may need to recognize service contracts, such as energy contracts for capacity, or other arrangements as leases subject to the income notes purchased by HEI from ASB) are includedrequirements of SFAS No. 13, “Accounting for Leases.” The Company adopted the provisions of EITF Issue No. 01-8 in note (4).the third quarter of 2003. Since EITF Issue No. 01-8 applies prospectively to arrangements agreed to, modified or acquired after June 30, 2003, the adoption of EITF Issue No. 01-8 had no effect on the Company’s historical financial statements. If any new power purchase agreement or a reassessment of an existing agreement required under certain circumstances (such as in the event of a material amendment of the agreement) falls under the scope of EITF Issue No. 01-8 and SFAS No. 13, and results in the agreement’s classification as a capital lease, a material effect on the Company’s financial statements may result, including the recognition of a significant capital asset and lease obligation.
(8) Commitments and contingencies
See note (4), “Bank subsidiary,” and note (5), “Discontinued operations,” above and note (4), “Commitments and contingencies,” in HECO’s “Notes to consolidated financial statements.”
(9) HEI- and HECO-obligated preferred securities of trust subsidiaries
11
September 30, 2003 | December 31, 2002 | Liquidation value per security | |||||||
(in thousands, except per security amounts and number of securities) | |||||||||
Hawaiian Electric Industries Capital Trust I* 8.36% Trust Originated Preferred Securities (4,000,000 securities)** | $ | 100,000 | $ | 100,000 | $ | 25 | |||
HECO Capital Trust I* 8.05% Cumulative Quarterly Income Preferred Securities, Series 1997 (2,000,000 securities)*** | 50,000 | 50,000 | 25 | ||||||
HECO Capital Trust II* 7.30% Cumulative Quarterly Income Preferred Securities, Series 1998 (2,000,000 securities)**** | 50,000 | 50,000 | 25 | ||||||
| $ | 200,000 | $ | 200,000 | ||||||
| * | Delaware grantor trust. |
| ** | Fully and unconditionally guaranteed by HEI, no scheduled maturity and currently redeemable at the issuer’s option without premium. |
| *** | Fully and unconditionally guaranteed by HECO; mandatorily redeemable at the maturity of the underlying debt on March 27, 2027, which maturity may be extended to no later than March 27, 2046; and currently redeemable at the issuer’s option without premium. |
| **** | Fully and unconditionally guaranteed by HECO; mandatorily redeemable at the maturity of the underlying debt on December 15, 2028, which maturity may be extended to no later than December 15, 2047; and redeemable at the issuer’s option without premium after December 15, 2003. |
Hawaiian Electric Company,Industries Capital Trust I (the Trust) exists for the exclusive purposes of (i) issuing in 1997 trust securities, consisting of 8.36% Trust Originated Preferred Securities ($100 million) and trust common securities ($3 million), (ii) investing the gross proceeds of the trust securities in 8.36% Partnership Preferred Securities issued by HEI Preferred Funding, LP (the Partnership), (iii) making distributions on the Trust Originated Preferred Securities and the trust common securities and (iv) engaging in only those other activities necessary or incidental thereto. All expenses resulting from the limited activities of the Trust, other than the payments by the Trust on its trust preferred securities, have been borne by HEI, either directly or through Hycap Management, Inc. (Hycap), its wholly owned subsidiary.
The Partnership is a Delaware limited partnership managed by Hycap, its sole general partner, and SubsidiariesConsolidated balance sheets (unaudited)exists for the exclusive purposes of (a) purchasing certain eligible debt instruments of HEI and its subsidiaries (collectively, the
(in thousands, except par value) |
| March 31, |
| December 31, |
| ||||
|
|
| |||||||
Assets |
|
|
|
|
|
|
| ||
Utility plant, at cost |
|
|
|
|
|
|
| ||
| Land |
| $ | 31,919 |
| $ | 31,896 |
| |
| Plant and equipment |
|
| 3,208,120 |
|
| 3,184,818 |
| |
| Less accumulated depreciation |
|
| (1,393,901 | ) |
| (1,367,954 | ) | |
| Plant acquisition adjustment, net |
|
| 289 |
|
| 302 |
| |
| Construction in progress |
|
| 163,491 |
|
| 164,300 |
| |
|
|
|
|
| |||||
| Net utility plant |
|
| 2,009,918 |
|
| 2,013,362 |
| |
|
|
|
|
| |||||
Current assets |
|
|
|
|
|
|
| ||
| Cash and equivalents |
|
| 3,206 |
|
| 1,726 |
| |
| Customer accounts receivable, net |
|
| 85,255 |
|
| 87,113 |
| |
| Accrued unbilled revenues, net |
|
| 56,689 |
|
| 60,098 |
| |
| Other accounts receivable, net |
|
| 3,867 |
|
| 2,213 |
| |
| Fuel oil stock, at average cost |
|
| 42,320 |
|
| 35,649 |
| |
| Materials and supplies, at average cost |
|
| 21,044 |
|
| 19,450 |
| |
| Prepayments and other |
|
| 72,068 |
|
| 75,610 |
| |
|
|
|
|
| |||||
| Total current assets |
|
| 284,449 |
|
| 281,859 |
| |
|
|
|
|
| |||||
Other assets |
|
|
|
|
|
|
| ||
| Regulatory assets |
|
| 104,558 |
|
| 105,568 |
| |
| Unamortized debt expense |
|
| 13,149 |
|
| 13,354 |
| |
| Long-term receivables and other |
|
| 19,979 |
|
| 22,243 |
| |
|
|
|
|
| |||||
| Total other assets |
|
| 137,686 |
|
| 141,165 |
| |
|
|
|
|
| |||||
|
| $ | 2,432,053 |
| $ | 2,436,386 |
| ||
|
|
|
| ||||||
Capitalization and liabilities |
|
|
|
|
|
|
| ||
Capitalization |
|
|
|
|
|
|
| ||
| Common stock, $6 2/3 par value, authorized 50,000 shares; outstanding 12,806 shares |
| $ | 85,387 |
| $ | 85,387 |
| |
| Premium on capital stock |
|
| 295,808 |
|
| 295,846 |
| |
| Retained earnings |
|
| 544,389 |
|
| 542,023 |
| |
|
|
|
|
| |||||
| Common stock equity |
|
| 925,584 |
|
| 923,256 |
| |
| Cumulative preferred stock – not subject to mandatory redemption |
|
| 34,293 |
|
| 34,293 |
| |
| HECO-obligated mandatorily redeemable trust preferred securities of subsidiary trusts holding solely HECO and HECO-guaranteed debentures |
|
| 100,000 |
|
| 100,000 |
| |
| Long-term debt, net |
|
| 698,265 |
|
| 705,270 |
| |
|
|
|
|
| |||||
| Total capitalization |
|
| 1,758,142 |
|
| 1,762,819 |
| |
|
|
|
|
| |||||
Current liabilities |
|
|
|
|
|
|
| ||
| Short-term borrowings–affiliate |
|
| 24,500 |
|
| 5,600 |
| |
| Accounts payable |
|
| 56,024 |
|
| 59,992 |
| |
| Interest and preferred dividends payable |
|
| 16,780 |
|
| 11,532 |
| |
| Taxes accrued |
|
| 62,301 |
|
| 79,133 |
| |
| Other |
|
| 22,790 |
|
| 28,020 |
| |
|
|
|
|
| |||||
| Total current liabilities |
|
| 182,395 |
|
| 184,277 |
| |
|
|
|
|
| |||||
Deferred credits and other liabilities |
|
|
|
|
|
|
| ||
| Deferred income taxes |
|
| 158,428 |
|
| 158,367 |
| |
| Unamortized tax credits |
|
| 48,395 |
|
| 47,985 |
| |
| Other |
|
| 64,353 |
|
| 64,844 |
| |
|
|
|
|
| |||||
| Total deferred credits and other liabilities |
|
| 271,176 |
|
| 271,196 |
| |
|
|
|
|
| |||||
Contributions in aid of construction |
|
| 220,340 |
|
| 218,094 |
| ||
|
|
|
| ||||||
|
| $ | 2,432,053 |
| $ | 2,436,386 |
| ||
|
|
|
| ||||||
See accompanying
14
Affiliate Investment Instruments) in the amount of $120 million and certain U.S. government obligations and commercial paper of unaffiliated entities (Eligible Debt Securities) with the proceeds from (i) the 1997 sale of its 8.36% Partnership Preferred Securities to the Trust, its sole limited partner, and (ii) a capital contribution in exchange for the general partner interest, (b) receiving interest and other payments on the Affiliate Investment Instruments and Eligible Debt Securities, (c) making distributions on the 8.36% Partnership Preferred Securities and general partner interest if, as, and when declared by the general partner, (d) making authorized additional investments in Affiliate Investment Instruments and Eligible Debt Securities and disposing of any such investments, and (e) other activities necessary for carrying out the purposes of the Partnership.
Also see note (5), “HECO-obligated mandatorily redeemable preferred securities of trust subsidiaries,” in HECO’s “Notes to consolidated financial statements.”
12
15
Hawaiian Electric Company, Inc. and Subsidiaries
Consolidated balance sheets (unaudited)
(in thousands, except par value) | September 30, 2003 | December 31, 2002 | ||||||
Assets | ||||||||
Utility plant, at cost | ||||||||
Land | $ | 31,970 | $ | 31,896 | ||||
Plant and equipment | 3,244,532 | 3,184,818 | ||||||
Less accumulated depreciation | (1,444,863 | ) | (1,367,954 | ) | ||||
Plant acquisition adjustment, net | 263 | 302 | ||||||
Construction in progress | 182,332 | 164,300 | ||||||
Net utility plant | 2,014,234 | 2,013,362 | ||||||
Current assets | ||||||||
Cash and equivalents | 27,381 | 1,726 | ||||||
Customer accounts receivable, net | 88,214 | 87,113 | ||||||
Accrued unbilled revenues, net | 59,681 | 60,098 | ||||||
Other accounts receivable, net | 2,764 | 2,213 | ||||||
Fuel oil stock, at average cost | 38,325 | 35,649 | ||||||
Materials and supplies, at average cost | 23,783 | 19,450 | ||||||
Prepayments and other | 75,349 | 75,610 | ||||||
Total current assets | 315,497 | 281,859 | ||||||
Other assets | ||||||||
Regulatory assets | 105,565 | 105,568 | ||||||
Unamortized debt expense | 14,201 | 13,354 | ||||||
Long-term receivables and other | 18,697 | 22,243 | ||||||
Total other assets | 138,463 | 141,165 | ||||||
| $ | 2,468,194 | $ | 2,436,386 | |||||
Capitalization and liabilities | ||||||||
Capitalization | ||||||||
Common stock, $6 2/3 par value, authorized 50,000 shares; outstanding 12,806 shares | $ | 85,387 | $ | 85,387 | ||||
Premium on capital stock | 295,834 | 295,846 | ||||||
Retained earnings | 556,146 | 542,023 | ||||||
Common stock equity | 937,367 | 923,256 | ||||||
Cumulative preferred stock–not subject to mandatory redemption | 34,293 | 34,293 | ||||||
HECO-obligated mandatorily redeemable trust preferred securities of subsidiary trusts holding solely HECO and HECO-guaranteed debentures | 100,000 | 100,000 | ||||||
Long-term debt, net | 698,790 | 705,270 | ||||||
Total capitalization | 1,770,450 | 1,762,819 | ||||||
Current liabilities | ||||||||
Short-term borrowings–affiliate | — | 5,600 | ||||||
Accounts payable | 61,848 | 59,992 | ||||||
Interest and preferred dividends payable | 17,349 | 11,532 | ||||||
Taxes accrued | 96,841 | 79,133 | ||||||
Other | 26,124 | 28,020 | ||||||
Total current liabilities | 202,162 | 184,277 | ||||||
Deferred credits and other liabilities | ||||||||
Deferred income taxes | 162,117 | 158,367 | ||||||
Unamortized tax credits | 48,055 | 47,985 | ||||||
Other | 64,168 | 64,844 | ||||||
Total deferred credits and other liabilities | 274,340 | 271,196 | ||||||
Contributions in aid of construction | 221,242 | 218,094 | ||||||
| $ | 2,468,194 | $ | 2,436,386 | |||||
See accompanying notes to HECO’s consolidated financial statements.
16
Consolidated statements of income (unaudited)
Three months ended March 31 |
| 2003 |
| 2002 |
| ||
|
|
| |||||
(in thousands, except for ratio of earnings to fixed charges) |
|
|
|
|
|
|
|
Operating revenues |
| $ | 327,961 |
| $ | 277,333 |
|
|
|
|
| ||||
Operating expenses |
|
|
|
|
|
|
|
Fuel oil |
|
| 90,839 |
|
| 59,235 |
|
Purchased power |
|
| 85,354 |
|
| 77,101 |
|
Other operation |
|
| 38,527 |
|
| 29,223 |
|
Maintenance |
|
| 14,282 |
|
| 14,012 |
|
Depreciation |
|
| 27,612 |
|
| 26,360 |
|
Taxes, other than income taxes |
|
| 31,077 |
|
| 26,690 |
|
Income taxes |
|
| 11,215 |
|
| 12,791 |
|
|
|
|
| ||||
|
|
| 298,906 |
|
| 245,412 |
|
|
|
|
| ||||
Operating income |
|
| 29,055 |
|
| 31,921 |
|
|
|
|
| ||||
Other income |
|
|
|
|
|
|
|
Allowance for equity funds used during construction |
|
| 988 |
|
| 773 |
|
Other, net |
|
| 767 |
|
| 815 |
|
|
|
|
| ||||
|
|
| 1,755 |
|
| 1,588 |
|
|
|
|
| ||||
Income before interest and other charges |
|
| 30,810 |
|
| 33,509 |
|
|
|
|
| ||||
Interest and other charges |
|
|
|
|
|
|
|
Interest on long-term debt |
|
| 10,324 |
|
| 10,136 |
|
Amortization of net bond premium and expense |
|
| 513 |
|
| 500 |
|
Other interest charges |
|
| 342 |
|
| 451 |
|
Allowance for borrowed funds used during construction |
|
| (443 | ) |
| (355 | ) |
Preferred stock dividends of subsidiaries |
|
| 229 |
|
| 229 |
|
Preferred securities distributions of trust subsidiaries |
|
| 1,919 |
|
| 1,919 |
|
|
|
|
| ||||
|
|
| 12,884 |
|
| 12,880 |
|
|
|
|
| ||||
Income before preferred stock dividends of HECO |
|
| 17,926 |
|
| 20,629 |
|
Preferred stock dividends of HECO |
|
| 270 |
|
| 270 |
|
|
|
|
| ||||
Net income for common stock |
| $ | 17,656 |
| $ | 20,359 |
|
|
|
|
| ||||
Ratio of earnings to fixed charges (SEC method) |
|
| 3.10 |
|
| 3.45 |
|
|
|
|
| ||||
Hawaiian Electric Company, Inc. and Subsidiaries
Consolidated statements of income (unaudited)
(in thousands, except ratio of earnings to fixed charges) | Three months ended September 30, | Nine months ended September 30, | ||||||||||||||
| 2003 | 2002 | 2003 | 2002 | |||||||||||||
Operating revenues | $ | 358,435 | $ | 332,453 | $ | 1,039,781 | $ | 916,402 | ||||||||
Operating expenses | ||||||||||||||||
Fuel oil | 101,296 | 85,311 | 294,303 | 218,901 | ||||||||||||
Purchased power | 92,543 | 87,123 | 273,161 | 240,744 | ||||||||||||
Other operation | 37,760 | 33,888 | 114,604 | 95,573 | ||||||||||||
Maintenance | 18,025 | 15,705 | 47,783 | 45,727 | ||||||||||||
Depreciation | 27,625 | 26,340 | 82,870 | 79,063 | ||||||||||||
Taxes, other than income taxes | 33,636 | 31,287 | 97,523 | 88,769 | ||||||||||||
Income taxes | 13,974 | 16,287 | 36,865 | 44,110 | ||||||||||||
| 324,859 | 295,941 | 947,109 | 812,887 | |||||||||||||
Operating income | 33,576 | 36,512 | 92,672 | 103,515 | ||||||||||||
Other income | ||||||||||||||||
Allowance for equity funds used during construction | 1,098 | 1,162 | 3,075 | 2,977 | ||||||||||||
Other, net | (889 | ) | 858 | 747 | 2,435 | |||||||||||
| 209 | 2,020 | 3,822 | 5,412 | |||||||||||||
Income before interest and other charges | 33,785 | 38,532 | 96,494 | 108,927 | ||||||||||||
Interest and other charges | ||||||||||||||||
Interest on long-term debt | 9,973 | 10,127 | 30,733 | 30,430 | ||||||||||||
Amortization of net bond premium and expense | 579 | 498 | 1,620 | 1,505 | ||||||||||||
Other interest charges | 953 | 430 | 1,702 | 1,313 | ||||||||||||
Allowance for borrowed funds used during construction | (496 | ) | (549 | ) | (1,385 | ) | (1,392 | ) | ||||||||
Preferred securities distributions of trust subsidiaries | 1,918 | 1,918 | 5,756 | 5,756 | ||||||||||||
Preferred stock dividends of subsidiaries | 228 | 228 | 686 | 686 | ||||||||||||
| 13,155 | 12,652 | 39,112 | 38,298 | |||||||||||||
Income before preferred stock dividends of HECO | 20,630 | 25,880 | 57,382 | 70,629 | ||||||||||||
Preferred stock dividends of HECO | 270 | 270 | 810 | 810 | ||||||||||||
Net income for common stock | $ | 20,360 | $ | 25,610 | $ | 56,572 | $ | 69,819 | ||||||||
Ratio of earnings to fixed charges (SEC method) | 3.23 | 3.80 | ||||||||||||||
Hawaiian Electric Company, Inc. and Subsidiaries
Consolidated statements of retained earnings (unaudited)
Three months ended March 31 |
| 2003 |
| 2002 |
| ||
|
|
| |||||
(in thousands) |
|
|
|
|
|
|
|
Retained earnings, beginning of period |
| $ | 542,023 |
| $ | 495,961 |
|
Net income for common stock |
|
| 17,656 |
|
| 20,359 |
|
Common stock dividends |
|
| (15,290 | ) |
| (9,233 | ) |
|
|
|
| ||||
Retained earnings, end of period |
| $ | 544,389 |
| $ | 507,087 |
|
|
|
|
| ||||
| Three months ended September 30, | Nine months ended September 30, | |||||||||||||||
(in thousands) | 2003 | 2002 | 2003 | 2002 | ||||||||||||
Retained earnings, beginning of period | $ | 549,703 | $ | 520,757 | $ | 542,023 | $ | 495,961 | ||||||||
Net income for common stock | 20,360 | 25,610 | 56,572 | 69,819 | ||||||||||||
Common stock dividends | (13,917 | ) | (11,925 | ) | (42,449 | ) | (31,338 | ) | ||||||||
Retained earnings, end of period | $ | 556,146 | $ | 534,442 | $ | 556,146 | $ | 534,442 | ||||||||
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 “Notesnotes to HECO’s consolidated financial statements.”
13
17
Hawaiian Electric Company, Inc. and Subsidiaries
Consolidated statements of cash flows (unaudited)
Three months ended March 31 |
| 2003 |
| 2002 |
| ||||
|
|
| |||||||
(in thousands) |
|
|
|
|
|
|
| ||
Cash flows from operating activities |
|
|
|
|
|
|
| ||
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 |
|
|
|
|
|
|
| ||
| Depreciation of property, plant and equipment |
|
| 27,612 |
|
| 26,360 |
| |
| Other amortization |
|
| 2,134 |
|
| 3,063 |
| |
| Deferred income taxes |
|
| 106 |
|
| 322 |
| |
| Tax credits, net |
|
| 786 |
|
| 695 |
| |
| Allowance for equity funds used during construction |
|
| (988 | ) |
| (773 | ) | |
| Changes in assets and liabilities |
|
|
|
|
|
|
| |
| Decrease in accounts receivable |
|
| 204 |
|
| 8,975 |
| |
| Decrease in accrued unbilled revenues |
|
| 3,409 |
|
| 1,646 |
| |
| Increase in fuel oil stock |
|
| (6,671 | ) |
| (1,124 | ) | |
| Increase in materials and supplies |
|
| (1,594 | ) |
| (1,101 | ) | |
| Increase in regulatory assets |
|
| (116 | ) |
| (446 | ) | |
| Decrease in accounts payable |
|
| (3,968 | ) |
| (1,313 | ) | |
| Decrease in taxes accrued |
|
| (16,832 | ) |
| (21,404 | ) | |
| Changes in other assets and liabilities |
|
| 7,599 |
|
| 1,333 |
| |
|
|
|
|
| |||||
Net cash provided by operating activities |
|
| 29,607 |
|
| 36,862 |
| ||
|
|
|
| ||||||
Cash flows from investing activities |
|
|
|
|
|
|
| ||
Capital expenditures |
|
| (23,862 | ) |
| (20,893 | ) | ||
Contributions in aid of construction |
|
| 4,842 |
|
| 1,800 |
| ||
|
|
|
| ||||||
Net cash used in investing activities |
|
| (19,020 | ) |
| (19,093 | ) | ||
|
|
|
| ||||||
Cash flows from financing activities |
|
|
|
|
|
|
| ||
Common stock dividends |
|
| (15,290 | ) |
| (9,233 | ) | ||
Preferred stock dividends |
|
| (270 | ) |
| (270 | ) | ||
Preferred securities distributions of trust subsidiaries |
|
| (1,919 | ) |
| (1,919 | ) | ||
Proceeds from issuance of long-term debt |
|
| 943 |
|
| 3,277 |
| ||
Repayment of long-term debt |
|
| (8,000 | ) |
| (5,000 | ) | ||
Net increase (decrease) in short-term borrowings from affiliate with original maturities of three months or less |
|
| 18,900 |
|
| (471 | ) | ||
Other |
|
| (3,471 | ) |
| (5,711 | ) | ||
|
|
|
| ||||||
Net cash used in financing activities |
|
| (9,107 | ) |
| (19,327 | ) | ||
|
|
|
| ||||||
Net increase (decrease) in cash and equivalents |
|
| 1,480 |
|
| (1,558 | ) | ||
Cash and equivalents, beginning of period |
|
| 1,726 |
|
| 1,858 |
| ||
|
|
|
| ||||||
Cash and equivalents, end of period |
| $ | 3,206 |
| $ | 300 |
| ||
|
|
|
| ||||||
Nine months ended September 30 | 2003 | 2002 | ||||||
| (in thousands) | ||||||||
Cash flows from operating activities | ||||||||
Income before preferred stock dividends of HECO | $ | 57,382 | $ | 70,629 | ||||
Adjustments to reconcile income before preferred stock dividends of HECO to net cash provided by operating activities | ||||||||
Depreciation of property, plant and equipment | 82,870 | 79,063 | ||||||
Other amortization | 6,216 | 9,191 | ||||||
Deferred income taxes | 3,795 | 5,081 | ||||||
Tax credits, net | 1,197 | 997 | ||||||
Allowance for equity funds used during construction | (3,075 | ) | (2,977 | ) | ||||
Changes in assets and liabilities | ||||||||
Increase in accounts receivable | (1,652 | ) | (40 | ) | ||||
Decrease (increase) in accrued unbilled revenues | 417 | (5,632 | ) | |||||
Increase in fuel oil stock | (2,676 | ) | (9,130 | ) | ||||
Increase in materials and supplies | (4,333 | ) | (1,294 | ) | ||||
Increase in regulatory assets | (2,266 | ) | (1,386 | ) | ||||
Increase in accounts payable | 1,856 | 953 | ||||||
Increase (decrease) in taxes accrued | 17,708 | (14,408 | ) | |||||
Changes in other assets and liabilities | 7,260 | (9,724 | ) | |||||
Net cash provided by operating activities | 164,699 | 121,323 | ||||||
Cash flows from investing activities | ||||||||
Capital expenditures | (83,550 | ) | (78,217 | ) | ||||
Contributions in aid of construction | 10,296 | 7,394 | ||||||
Other | — | 56 | ||||||
Net cash used in investing activities | (73,254 | ) | (70,767 | ) | ||||
Cash flows from financing activities | ||||||||
Common stock dividends | (42,449 | ) | (31,338 | ) | ||||
Preferred stock dividends | (810 | ) | (810 | ) | ||||
Preferred securities distributions of trust subsidiaries | (5,756 | ) | (5,756 | ) | ||||
Proceeds from issuance of long-term debt | 67,360 | 11,691 | ||||||
Repayment of long-term debt | (74,000 | ) | (5,000 | ) | ||||
Net decrease in short-term borrowings from affiliate with original maturities of three months or less | (5,600 | ) | (11,969 | ) | ||||
Other | (4,535 | ) | (7,339 | ) | ||||
Net cash used in financing activities | (65,790 | ) | (50,521 | ) | ||||
Net increase in cash and equivalents | 25,655 | 35 | ||||||
Cash and equivalents, beginning of period | 1,726 | 1,858 | ||||||
Cash and equivalents, end of period | $ | 27,381 | $ | 1,893 | ||||
See accompanying “Notesnotes to HECO’s consolidated financial statements.”
14
18
Hawaiian Electric Company, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(1) Basis of presentation
The accompanying unaudited consolidated financial statements have been prepared in conformity with GAAP for interim financial information and with the instructions to SEC Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial statements. In preparing the financial statements, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the balance sheet and the reported amounts of revenues and expenses for the period. Actual results could differ significantly from those estimates. The accompanying unaudited consolidated financial statements should be read in conjunction with the audited 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, 2002.2002 and the unaudited consolidated financial statements and the notes thereto in HEI’s Quarterly Reports on SEC Form 10-Q for the quarters ended March 31, 2003 and June 30, 2003.
In the opinion of HECO’s management, the accompanying unaudited consolidated financial statements contain all material adjustments required by GAAP to present fairly the financial position of HECO and its subsidiaries as of March 31,September 30, 2003 and December 31, 2002, and the results of their operations for the three and nine months ended September 30, 2003 and 2002 and their cash flows for the threenine months ended March 31,September 30, 2003 and 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.
When required, certain reclassifications are made to the prior period’s consolidated financial statements to conform to the 2003current presentation.
(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 threenine months ended March 31,September 30, 2003, and 2002, HECO and its subsidiaries included $29$92 million and $25 million, respectively, of revenue taxes in “operating revenues” and in “taxes, other than income taxes” expense. For the nine months ended September 30, 2002, HECO and its subsidiaries included $82 million of revenue taxes in “operating revenues” and $84 million (including a $2 million nonrecurring PUC fee adjustment) of revenue taxes in “taxes, other than income taxes” expense.
(3) Cash flows
Supplemental disclosures of cash flow information
For the threenine months ended March 31,September 30, 2003 and 2002, HECO and its subsidiaries paid interest amounting to $5.3$26.1 million and $5.4$25.4 million, respectively.
For the threenine months ended March 31,September 30, 2003 and 2002, HECO and its subsidiaries paid income taxes amounting to $5.0$15.7 million and $6.8$42.8 million, respectively. The lower taxes paid in the first nine months of 2003 compared to the first nine months of 2002 were due to lower estimated 2003 tax payments resulting from the effects of the 2003 federal tax act and tax strategies which deferred 2003 tax payments to later quarters.
Supplemental disclosure of noncash activities
The allowance for equity funds used during construction, which was charged to construction in progress as part of the cost of electric utility plant, amounted to $1.0$3.1 million and $0.8$3.0 million for the threenine months ended March 31,September 30, 2003 and 2002, respectively.
19
(4) Commitments and contingencies
HELCO power situation
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 megawatt (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 expenditures for 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
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) for the Keahole power plant site. The delays are also 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 because it had not completed the project within a three-year construction period.deadline described below under “Land use permit amendment.”
As a result of a September 19, 2002 decision embodied in an order dated October 3, 2002 and a final judgment dated November 7, 2002 (the November 7, 2002 Final Judgment) by the Third Circuit Court of the State of Hawaii (Circuit Court), relating to an extension of athe 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 beenwas suspended. HELCO has appealed this ruling to the Hawaii Supreme Court and is consideringalso has been pursuing other options that maymight allow HELCO to complete the installation of CT-4 and CT-5 (including pursuing settlement through court-ordered mediation in a related proceeding and seeking a land use reclassification of the Keahole site from the Hawaii State Land Use Commission). If none
On October 14, 2003, the Hawaii Supreme Court granted a motion to remand the pending appeal of these options is ultimately successful, or if other permitting issues or problems arisethe November 7, 2002 Final Judgment to the Circuit Court in order to permit the Circuit Court to consider a proposed motion to vacate that judgment. On October 17, 2003, a motion to vacate the November 7, 2002 Final Judgment was filed by the Keahole Defense Coalition (KDC) and the Hawaii Department of Hawaiian Home Lands (DHHL). The motion was based on an agreement in principle accepted by most, but not all, of the parties to the various proceedings affecting the Keahole power plant and its proposed expansion. HELCO joined in the motion to vacate. The agreement in principle has now been embodied into a settlement agreement (Settlement Agreement) among the participating parties which was signed by the last of the parties to it on November 6, 2003. The Settlement Agreement, which requires HELCO cannot satisfactorily resolve, HELCO may be unableto pursue any further permits which are necessary to complete the installationplant, will be void if the orders required to effectuate the agreement are not obtained.
Waimana Enterprises, Inc. (Waimana), a named nominal party to the suit in which the November 7, 2002 Final Judgment was entered, did not file briefs in either the underlying Circuit Court case or on appeal of the November 7, 2002 Final Judgment to the Hawaii Supreme Court and chose not to participate in the mediation that led to the Settlement Agreement. However, Waimana opposed the motion filed in the Hawaii Supreme Court to remand the case to the Circuit Court and, on October 31, 2003 filed a memorandum in opposition to the Circuit Court motion of KDC and DHHL to vacate that judgment. Subsequently, on November 5, 2003, Waimana filed a complaint (Federal Complaint) in the United States District Court for the District of Hawaii (U.S. District Court) in which it sought a temporary restraining order and injunction against HELCO, the other parties to the Settlement Agreement and the Hawaii State Judiciary, including among other things a request for an order enjoining the Circuit Court from granting the motion to vacate the November 7, 2002 Final Judgment. Waimana made essentially the same claims before the Hawaii Supreme Court, the Circuit Court and the U.S. District Court, namely that vacating the November 7, 2002 Final Judgment and permitting construction of CT-4 and CT-5.CT-5 to proceed at the Keahole site would deprive it of alleged property interests without due process and equal protection of the laws and that the Settlement Agreement would not be legally enforceable on a variety of theories.
HELCO and the other parties named in the Federal Complaint filed memoranda and supporting papers in opposition to Waimana’s motion for temporary restraining order and the motion was heard by the U.S. District Court on November 7, 2003. The U.S. District Court denied the motion for temporary restraining order, principally on the ground that a federal court should abstain from interfering with ongoing state court proceedings. The U.S. District Court took under advisement HELCO’S oral motion made at the hearing to dismiss the Federal Complaint.
20
The motion to vacate the November 7, 2002 Final Judgment was heard by the Circuit Court on November 10, 2003. The Circuit Court judge took the motion to vacate under advisement and indicated his intention to issue his ruling on the motion on November 12, 2003. On November 12, 2003, the motion to vacate the November 7, 2002 Final Judgment was granted. Management cannot predict whether the remaining conditions necessary to implement the Settlement Agreement will be satisfied.
If the remaining conditions of the Settlement Agreement are met, then HELCO will be required to undertake a number of actions to mitigate the impact of the power plant in terms of air and noise pollution, potable water and aesthetic concerns, and construction of CT-4 and CT-5 could be restarted in accordance with the terms of the Settlement Agreement. The actions required of HELCO if the Settlement Agreement is implemented relate to compliance with the stricter 55 dBA (day time) and 45 dBA (night time) noise limitations, additional landscaping, installation of ST-7 with selective catalytic reduction (SCR) emissions control equipment, operation of an existing CT at Keahole within existing air permit limitations rather than the less stringent limitations in a pending air permit revision, primary use of brackish instead of potable water resources, assisting DHHL in installing solar water heating in its housing projects and in obtaining a major part of HELCO’s potable water allocation from the County of Hawaii, facilitating KDC’s participation in certain PUC cases, payment of legal expenses and other costs of various parties to the lawsuits and other proceedings, and cooperation with neighbors and community groups, including a Hot Line service for communications with neighboring DHHL beneficiaries. The BLNR has conditionally granted HELCO’s request for a 19-month extension of the previous December 31, 2003 construction deadline, subject to court action allowing construction to proceed. HELCO anticipates that operational capacity from CT-4 and CT-5 could be available in six to eight months from the time construction is allowed to proceed.
The following is a detailed discussion of the existingbackground of the Keahole situation includingand a description (under “Management’s evaluation; costs incurred”) of its potential financial statement implications under “Management’s evaluation; costs incurred.”implications.
Land use permit 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 in 1998 of the Circuit Court related to this ruling are on appealwere appealed to the Hawaii Supreme Court. On July 8, 2003, the Hawaii Supreme Court which in 1998 denied motions to stayissued its opinion affirming the Circuit Court’s final judgment pending resolutionon the basis that the BLNR failed to render the necessary four votes either approving or rejecting HELCO’s application. While this opinion validated HELCO’s default entitlement, construction to complete the expansion has been suspended since September 28, 2002 by reason of the appeal.ruling eventually embodied in the November 7, 2002 Final Judgment described above.
On July 16, 2003, two parties (Peggy Ratliff and KDC) filed a motion for reconsideration of the Supreme Court’s July 8, 2003 opinion. On August 25, 2003, the Hawaii Supreme Court affirmed its decision.
The Circuit Court’s 1998 final judgment confirming HELCO’s default entitlement 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’sthe 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,them, there have been several significant rulings relating to these claims, some of which mayhave adversely affectaffected HELCO’s ability to construct and efficiently operate CT-4 and CT-5. CT-5 and all of which would be resolved if the Settlement Agreement is implemented.
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 that a stricter noise standard than the previously applied 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 has indicated that it may, among other things, assert that the noise regulations, as applied to it at Keahole, are unconstitutional. Meanwhile, whileWhile not waiving possible claims or defenses that it might have against the DOH, HELCO has installed noise mitigation measures on 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
16
and CT-5) is $6 million, which would be capitalized. While the noise mitigation measures were being implemented,Keahole. HELCO also has applied to the DOH and received approval for a noise permit through 2003, which has since been extended to July 2007. If the Settlement Agreement is effective, HELCO would not challenge the constitutionality of the stricter noise regulations, as applied to it at Keahole, and would be required to comply with the stricter noise standards during normal
21
operations, even if it obtains a change in the land use classification of the Keahole site, as described below under “Land Use Commission petition.”
Second, in September 2000, the Circuit Court orally ruled that, absent a legal or equitable extension properly authorized by the BLNR, 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 granted a motion to stay further construction until extension of the construction deadline is obtained from the BLNR. After conducting a contested case hearing in September 2001, which resulted in the hearings officer recommending an extension be granted, 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 March 25, 2002 Order statesstated that failure to comply with any of these conditions would render the “permit” void. The March 25, 2002 Order also statesstated that “no further extensions will be provided.” In April 2002, based on this BLNR decision, the Circuit Court had lifted the stay on construction in light of the BLNR’s Order, and construction activities on CT-4 and CT-5 then commenced.recommenced.
Keahole Defense Coalition, Inc. (KDC)
KDC and two individuals appealed the BLNR’s March 25, 2002 Order to the Circuit Court, as did the Department of Hawaiian Home Lands.DHHL. 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 statesstated 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 BLNR’s 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 |
The Circuit Court issued an Order to this effect and final judgment was entered on October 3,November 7, 2002.
On November 1, 2002, HELCO filed a notice of appeal The subsequent history of the October 3,November 7, 2002 Order (whichFinal Judgment, including its appeal will be decidedto the Hawaii Supreme Court, the decision 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 thatremand 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 ofand 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 thoughgranting by the Circuit Court ruled atof 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 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. 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. The parties have filed briefs in that case. This is one of the pending proceedings that will need to be resolved as a condition to the effectiveness of the Settlement Agreement.
Air permit. In 1997, the DOH issued a final air permit for the Keahole expansion project. Nine appeals of the issuance of the permit were filed with the EPA’s Environmental Appeals Board (EAB). In November 1998, the EAB denied the appeals on most of the grounds stated, but directed the DOH to reopen the permit for limited purposes. The EPA and DOH required additional data collection, which was satisfactorily completed in April 2000. A final air permit was reissued by the DOH in July 2001. Six appeals were filed with the EAB, but those appeals were denied. On November 27, 2001, the final air permit became effective. On September 26, 2003, HELCO filed with the DOH a request for an extension of the maximum time construction may be suspended under the permit.
22
National Pollutant Discharge Elimination System (PermitNPDES) Permit. Pursuant to EPA and DOH regulations, which took effect in March 2003, all construction sites greater than one acre must obtain a construction stormwater discharge permit. The Keahole site is now subject to this requirement. HELCO intends to apply shortlyThe DOH issued the permit under the DOH’sits General Permit program and expects it will take a period of time to obtain a permit. No further earthwork can occur at the site until this permit is obtained.in June 2003.
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 subsequent events, HELCO withdrew its petition on October 3, 2002. Under LUC rules, after such a voluntary withdrawal the applicant may submit another petition for the same property no sooner than one year from the date of withdrawal. HELCO intends to submit a new petition for reclassification in the fourth quarter of 2003.2003, and such a petition is contemplated by the Settlement Agreement. The entire reclassification process could take several years. The installation of ST-7, with SCR as contemplated by the Settlement Agreement, is dependent upon this reclassification.
Management’s evaluation; costs incurred. In addition to the appeal of the October 3, 2002 Circuit Court’s Order filed on November 1, 2002,The probability that HELCO is considering other options that may allow HELCOwill be allowed to complete the installation of CT-4 and CT-5 including seeking a land use reclassification ofduring 2004 has been substantially enhanced by the Keahole site from the LUC. At this time, the likelihood of success of any of these options cannot be ascertained. Even ifSettlement Agreement, the Circuit Court’s Orderdecision on November 12, 2003 to vacate the November 7, 2002 Final Judgment and the decision of the BLNR to extend the construction deadline by 19 months from December 31, 2003. Although the Circuit Court has vacated its November 7, 2002 Final Judgment, there are still additional steps that must be completed under the Settlement Agreement, including requirements that HELCO obtain any further permits necessary to complete the plant. Waimana’s Federal Complaint is ultimately overturned on appeal,still pending and Waimana or other persons may make other attempts to stop the construction is likely toand thus there could 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.delays in completing construction. 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 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. Such incidents occurred or were at risk of occurring on October 3, 2002, and November 8, 2002. As it has done on such occasions in the past,2002 and July 21, 2003. HELCO will endeavorcontinue its efforts to avert power interruptions including rolling blackouts, in the future through a number of actions in(in addition to managing the generating units on its system,system) such as requesting customers to reduce demand during critical periods such aslike the peak evening hours. Under current system conditions, however, thereThere can be no assurance, however, that power interruptions will not occur.
If the conditions related to required payments (excluding capital expenditures) under the Settlement Agreement are satisfied, HELCO would incur approximately $3.1 million in legal and other costs under the Settlement Agreement. Management expects such conditions to be satisfied and to record such payments as expenses in the fourth quarter of 2003. If the remaining conditions in the Settlement Agreement are satisfied, in addition to other capital expenditures to complete CT-4, CT-5 and ST-7, approximately $25 million (approximately $15 million for CT-4 and CT-5, approximately $7 million for ST-7 and approximately $3 million for other existing units) of capital expenditures relating to noise mitigation and air pollution control will be incurred to meet the requirements of the Settlement Agreement.
The recovery of costs relating to CT-4 and CT-5 areis subject to the rate-making process governed by the PUC. Management believes no adjustment to costs incurred to put CT-4 and CT-5 into service is required as of March 31,September 30, 2003. However, 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 to
18
put these units into service whether or not CT-4 and CT-5 are installed. As of March 31,September 30, 2003, HELCO’s costs incurred in its efforts to put CT-4 and CT-5 into service and to support existing units (excluding costs the PUC permitted to be transferred to plant-in-service for pre-air permit facilities) amounted to approximately $83$84 million, including $32 million for equipment and material purchases, $31$32 million for planning, engineering, permitting, site development and other costs and $20 million for an allowance for funds used during construction (AFUDC). In additionSubstantial additional costs, currently estimated to be approximately $15 million, will be required in order to complete the $83 millioninstallations of CT-4 and CT-5, including the costs of satisfying the requirements of the Settlement Agreement pertaining to those units. HELCO has also deferred plans for ST-7 pending obtaining necessary permits, which will be sought promptly, and no costs for ST-7 are included in construction in progress, construction and/or purchase commitments relatedprogress. The costs of ST-7 will be higher than originally planned, not only by reason of the delay in its installation but also by reason of additional costs that will be incurred to CT-4 and CT-5 outstanding assatisfy the requirements of March 31, 2003 are estimated at approximately $0.2 million.the Settlement Agreement.
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 delays through that date and the potential for further delays. HELCO has also deferred plans for ST-7 to a date outside the near-term planning horizon. No costs for ST-7 are included in construction in progress.
23
Oahu transmission system
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 kilovolt (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 kvkV transmission line to the Pukele substation.
Construction of the Kamoku to Pukele transmission line in its originally proposed location required the BLNR to approve a CDUP for the overhead portion of the line that would have been in conservation district lands. Several community and environmental groups opposed the project, particularly the overhead portion of the line.
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 project (the East Oahu Transmission Project) is needed. The project improves the reliability of the Pukele substation, at the end of the Northern corridor, serving 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. The project also 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, which ends at the Pukele substation, 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.
HECO is evaluatingrecently completed its evaluation of alternative ways to accomplish the project, and possible future actions to expedite PUC reviewproject. As part of the need for the 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),its evaluation, HECO is looking atinitiated a community-based process to obtain public views of those alternatives. HECO will useThree primary alternatives have been presented to the information received from that processcommunity for feedback: (1) an all-underground 138 kV transmission line connecting the Kamoku and Pukele substations; (2) an alternative requiring several new 46 kV underground lines, a new 138-46 kV transformer installed at the Kamoku substation, and equipment modifications at various distribution substations in its next actions. Until this evaluationHonolulu and Waikiki; and (3) an alternative requiring all the work in the preceding 46 kV alternative, plus additional 46 kV underground lines and a new 138-46 kV transformer within the Archer substation. All electrical lines in the three alternatives presented would utilize existing roadways outside of conservation district lands. Each of the alternatives includingpresent trade-offs in effectiveness and timeliness in meeting the incorporation ofproject objectives, costs, potential construction and other impacts and public comments, is completed, an estimated project completion date cannot be determined.feedback.
In October 2003, HECO announced its selection of the third alternative described above. Subject to PUC approval, the project will be built in two phases. Building the project in two phases provides the best opportunity to have a reliable, cost-effective solution in place as soon as possible. Completion of the first phase, targeted for 2006, will address future potential transmission line overloads in the Northern and Southern corridors and improve the reliability of service to many customers in the Pukele substation service area, including Waikiki. The second phase, projected to take an additional two years to complete, will improve service to additional customers in the Pukele substation service area by minimizing the duration of service interruptions under certain contingencies.
Although the underground 138 kV alternative through Palolo valley offers engineering advantages over the long term, it is the most expensive and time consuming of the three alternatives and would leave critical areas of Oahu at risk of blackouts for a projected longer period of time.
As of March 31,September 30, 2003, the accumulated costs related to the Kamoku to Pukele transmission lineEast Oahu Transmission Project amounted to $18$19 million, including $12$13 million for planning, engineering and permitting costs and $6 million for AFUDC. These costs are recorded in construction in progress. The project costs (for both phases, including costs incurred to date) are expected to total between $55 million and $60 million and HECO intends to apply to the PUC for project approval before the end of 2003. The recovery of costs relating to the Kamoku to Pukele transmission lineproject is subject to the rate-making process administered by the
24
PUC. Management believes no adjustment to project costs incurred is required as of March 31,September 30, 2003. However, if it becomes probable that the PUC will disallow some or
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 lineproject into service whether or not the projectit is completed.
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 allegesalleging 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 (D&O) 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 allegesalleged 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,December 20, 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 rulings by the First 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 under the doctrine of primary jurisdiction applies.any claims should first be brought before the PUC. The court stayed the action until August 21, 2003, at which time the case willwould be dismissed if plaintiffs failfailed to provide proof of having initiated an appropriate PUC proceeding by then. IfNo such proof is provided,was provided.
25
On August 25, 2003, the case will remain stayedFirst Circuit Court issued an order dismissing with prejudice the amended complaint, including all of the Plaintiffs’ remaining claims against the defendants for violations under the Hawaii False Claims Act after May 26, 2000. The final judgment was entered on September 17, 2003. On October 15, 2003, plaintiff Beverly J. Perry filed a notice of appeal to the Hawaii Supreme Court and the Intermediate Court of Appeals, on the grounds that the Circuit Court erred in state court.its reliance on the doctrine of primary jurisdiction and the statute of limitations. AES subsequently filed a cross-appeal of the order denying its motion to dismiss the action, which it had filed on February 24, 2003. HECO and HEI intend to contest plaintiff Perry’s appeal.
Management intends to vigorously defend the lawsuit and any PUC proceeding that Plaintiffs may initiate.
Environmental regulation
HECO, HELCO and MECO, like other utilities, periodically identify leaking petroleum-containing equipment and other releases into the environment from its generation plants and other facilities. Each subsidiary reports these releases when and as required by applicable law and addresses impacts due to the releases in compliance with applicable regulatory requirements. Except as otherwise disclosed herein, the Company believes that each subsidiary’s costs of responding to any such releases to date will not have a material adverse effect, individually and in the aggregate, on the Company’s or consolidated HECO’s financial statements.
Honolulu Harbor investigation. 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. (TOOTS) (formerly HTB) have specified indemnity obligations, including obligations with respect to the Honolulu Harbor investigation.
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 method and have organized a limited liability company to perform the work. In September 2001, TOOTS joined the Participating Parties.
In July 2001, the EPA issued a notice of interest (Initial NOI) under the Oil Pollution Act of 1990 to the 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 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 completed the Phase 2 Rapid Assessment Work in the third quarter of 2002. After performing a validation study on the data collected, theythe Participating Parties submitted a report summarizing the results of the work to the EPA and DOH in April 2003.
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
26
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 submitted a report summarizing the results of the investigation to the DOH and EPA in 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 ongoing
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 .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. Based on the Site Assessment and Prioritization Report and the Feasibility Study, the Participating Parties will also recommend implementation of remedial strategies, where appropriate.
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 investigatedPursuant to the agreement with the DOH, the Operating Companies retained an independent consultant to evaluate each Operating Company’s facilities in the Iwilei Unit. In addition to routinely maintaining its facilities in the Iwilei Unit, HECO had previously investigated its operations and routinely maintains them,ascertained that they were not releasing petroleum in the Iwilei Unit.
In July 2003, the independent consultant completed and therefore believessubmitted to the DOH and EPA initial reports on each Operating Company’s facilities in the Iwilei Unit. The report on HECO’s facilities confirmed that the Operating Companies evaluation will confirm that HECO’s current operationsthey are not releasing petroleum in the Iwilei Unit. Based on its evaluation, as well as the EPA, DOH and Operating Company comments, the independent consultant will issue a final report during the fourth quarter of 2003 that identifies, if applicable, deficiencies at Operating Company facilities. If there are deficiencies identified at a facility, the respective Operating Company must develop and implement a work plan to address the deficiencies. In view of the findings in the initial report regarding its facilities, HECO does not anticipate that it will be required to develop and implement such a work plan.
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 $0.25 million has been incurred through March 31,September 30, 2003) in connection with work to be performed at the site primarily from January 2002 through December 2004. ThisThe $1.1 million 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 cost estimate may be subject to significant change and additional material investigative and remedial costs may be incurred after December 2004.
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. TOOTS paid the $250,000 in May 2003. 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
27
Maalaea Units 12 and 13 notice and finding of violation.On September 5, 2003, Maui Electric Company, Limited (MECO) received a Notice of Violation (NOV) issued by the DOH alleging violations of opacity conditions in permits issued under the DOH’s Air Pollution Control Law for two generating units at MECO’s Maalaea Power Plant. Opacity measures the impedance of the passage of light through an exhaust plume and is expressed as a percentage (e.g., clear window glass has zero opacity, a brick wall has 100% opacity). The opacity incidents for which the NOV was issued occurred during the period from February 1999 to June 2000. The nature of these generating units causes opacity incidents to occur during unit startup, shutdown and break-in after overhaul. MECO brought the issue to the DOH’s attention in 1998, initiated corrective actions on the two units in 1999, and is currently implementing a compliance plan that was submitted to the DOH in February 2003. The corrective actions have already resulted in a 90% reduction in opacity incidents since the end of 2000. The remaining phases of the compliance plan are aimed at identifying feasible technological controls (i.e., additional corrective actions) to eliminate opacity incidents.
The NOV ordered MECO to immediately take corrective action to prevent further opacity incidents. The NOV also ordered MECO to pay a penalty of $1.6 million (which, if levied and paid, would not be tax deductible), unless MECO submits a written request for a hearing. On September 11, 2003, MECO submitted a request for hearing. In September 2003, MECO accrued $1.6 million for the potential penalty. The NOV specifically addresses opacity incidents that may have occurred at the Maalaea Power Plant between February 1999 and June 2000. The DOH has not indicated if and how it intends to address any other potential incidents at this plant, and therefore management cannot predict their impact.
Collective bargaining agreements
On November 7, 2003, members of the International Brotherhood of Electrical Workers (IBEW), AFL-CIO, Local 1260, Unit 8, ratified new collective bargaining and benefit agreements with HECO, HELCO and MECO. Of the three companies’ approximately 1,860 employees, about 1,100 are members of Unit 8. The new collective bargaining and benefit agreements cover a four-year term, from November 1, 2003 to October 31, 2007, and provide for non-compounded wage increases (3% on November 1, 2003, 1.5% on November 1, 2004, 1.5% on May 1, 2005, 1.5% on November 1, 2005, 1.5% on May 1, 2006, and 3% on November 1, 2006) and include changes to medical, drug, vision and dental plans and increased employee contributions.
(5) HECO-obligated mandatorily redeemable preferred securities of trust subsidiaries holding solely HECO and HECO-guaranteed subordinated debentures
In March 1997,
September 30, 2003 | December 31, 2002 | Liquidation value per security | |||||||
| (in thousands, except per security amounts and number of securities) | |||||||||
HECO Capital Trust I* 8.05% Cumulative Quarterly Income Preferred Securities, Series 1997 (2,000,000 securities)** | $ | 50,000 | $ | 50,000 | $ | 25 | |||
HECO Capital Trust II* 7.30% Cumulative Quarterly Income Preferred Securities, Series 1998 (2,000,000 securities)*** | 50,000 | 50,000 | 25 | ||||||
| $ | 100,000 | $ | 100,000 | ||||||
| * | Delaware grantor trust and 100%-owned finance subsidiary of HECO. |
| ** | Fully and unconditionally guaranteed by HECO; mandatorily redeemable at the maturity of the underlying debt on March 27, 2027, which maturity may be extended to no later than March 27, 2046; and currently redeemable at the issuer’s option without premium. |
| *** | Fully and unconditionally guaranteed by HECO; mandatorily redeemable at the maturity of the underlying debt on December 15, 2028, which maturity may be extended to no later than December 15, 2047; and redeemable at the issuer’s option after December 15, 2003. |
HECO Capital Trust I (Trust I), a grantor exists for the exclusive purposes of (i) issuing in 1997 trust and a wholly owned subsidiarysecurities, consisting 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 millionTrust Preferred Securities) ($50 million) and (ii) to HECO,trust common securities with a liquidation preference of approximately $1.55 million. Proceeds from($1.5 million to HECO), (ii) investing the saleproceeds of the 1997 trust preferred securities and the common securities were used by Trust I to purchasein 8.05% Junior Subordinated Deferrable Interest Debentures, Series 1997 (1997 junior deferrable debentures)Debentures) issued by HECO in the principal
28
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$31.5 million and issued by each of MECO and HELCO in the respective principal amounts of $10 million.million, (iii) making distributions on the 1997 Trust Preferred Securities and trust common securities and (iv) engaging in only those other activities necessary or incidental thereto. The 1998 junior deferrable debentures, which bear interest at 7.30% and mature on December 15, 2028,1997 Debentures, together with the subsidiary guarantees (pursuant to whichHECO’s full and unconditional guarantee of the obligations of MECO and HELCO under their respective debentures, are fullythe sole assets of Trust I.
HECO Capital Trust II (Trust II) exists for the exclusive purposes of (i) issuing in 1998 trust securities, consisting of 7.30% Cumulative Quarterly Income Preferred Securities, Series 1998 (1998 Trust Preferred Securities) ($50 million) and unconditionally guaranteedtrust common securities ($1.5 million to HECO), (ii) investing the proceeds of the trust securities in 7.30% Junior Subordinated Deferrable Interest Debentures, Series 1998 (1998 Debentures) issued by HECO),HECO in the principal amount of $31.5 million and issued by each of MECO and HELCO in the respective principal amounts of $10 million, (iii) making distributions on the 1998 Trust Preferred Securities and trust common securities and (iv) engaging in only those other activities necessary or incidental thereto. The 1998 Debentures, together with HECO’s full and unconditional guarantee of the obligations of MECO and HELCO under their respective debentures, are the sole assets of Trust II. The 1998 trust preferred securities must be redeemed at the maturity
See note (8) for financial information 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,Trust I and are not redeemable at the option of the holders, but may be redeemed by Trust II, in whole or in part, from time to time, on or after December 15, 2003 or upon the occurrence of certain events. All of the proceeds from the sale were invested by Trust II in the underlying debt securities of HECO, HELCO and MECO.II.
The 1997 and 1998 junior deferrable debentures and the common securities of the Trusts have been eliminated in HECO’s consolidated balance sheets as of March 31, 2003 and December 31, 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).
(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 would be capitalized as part of the carrying amount of the long-lived asset and depreciated over the life of the asset. The liability is 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 difference as a regulatory asset or liability, as the provisions of SFAS No. 143 have no income statement impact for a regulated entity as long as the recovery of the regulatory asset or payment of the regulatory liability is probable. HECO and its subsidiaries adopted SFAS No. 143 on January 1, 2003 with no effect on HECO and its subsidiaries’ financial statements.
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. HECO and its subsidiaries adopted the provisions of SFAS No. 145 in the second quarter of 2002 with no effect on HECO and its subsidiaries’ financial statements.
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).,” which required companies to
29
recognize costs associated with exit or disposal activities at the date of a commitment to an exit or disposal plan. SFAS No. 146 replaces EITF Issue No. 94-3. HECO and its subsidiaries adopted the provisions of SFAS No. 146 on January 1, 2003. Since SFAS No. 146 applies prospectively to exit or disposal activities initiated after December 31, 2002, the adoption of SFAS No. 146 had no effect on HECO and its subsidiaries’ historical financial statements.
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 Indebtedness 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.issued of the obligations of third parties who are not consolidated in its financial statements. 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 modified after December 31, 2002, and since HECO and its subsidiaries have not guaranteed the obligations of any entity or person not included in HECO’s consolidated financial statements, the adoption of these provisions of FIN No. 45 had no effect on HECO and its subsidiaries’HECO’s consolidated historical financial statements.
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 beginningend of the first interim or annual reporting period ending after December 15, 2003. The disclosures required by FIN No. 46 relating to HECO-obligated trust preferred securities are included in note (5). HECO and its subsidiaries will adopt the provisions (other than the already adopted disclosure provisions) of FIN No. 46 relating to VIEs created before February 1, 2003 as of December 31, 2003. Management has not yet determined the impact, if any, of adoption.
Financial instruments with characteristics of both liabilities and equity
In May 2003, the FASB issued SFAS No. 150, “Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity” to establish standards for how an issuer classifies and measures these financial instruments. For example, a financial instrument issued in the form of shares that are mandatorily redeemable would be required by SFAS No. 150 to be classified as a liability. SFAS No. 150 was immediately effective for financial instruments entered into or modified after May 31, 2003. SFAS No. 150 was effective for financial instruments existing as of May 31, 2003 at the beginning of the first interim period beginning after June 15, 2003. The applicationIn October 2003, however, the FASB indefinitely deferred the effective date of FINthe provisions of SFAS No. 46150 related to classification and measurement requirements for mandatorily redeemable financial instruments that become subject to SFAS No. 150 solely as a result of consolidation. HECO and its subsidiaries adopted the other provisions of SFAS No. 150 for financial instruments existing as of May 31, 2003 in the third quarter of 2003 and the adoption had no effect on the consolidated HECO’s financial statements.
Determining whether an arrangement contains a lease
In May 2003, the FASB ratified EITF Issue No. 01-8, “Determining Whether an Arrangement Contains a Lease.” Under EITF Issue No. 01-8, companies may need to recognize service contracts, such as energy contracts for capacity, or other arrangements as leases subject to the requirements of SFAS No. 13, “Accounting for Leases.” HECO and its subsidiaries’subsidiaries adopted the provisions of EITF Issue No. 01-8 in the third quarter of 2003. Since EITF Issue No. 01-8 applies prospectively to arrangements agreed to, modified or acquired after June 30, 2003, the adoption of EITF Issue No. 01-8 had no effect on consolidated HECO’s historical financial statements. If any new power purchase agreement or a reassessment of an existing agreement required under certain circumstances (such as in the event of a material amendment of the agreement) falls under the scope of EITF Issue No. 01-8 and SFAS No. 13, and results in the agreement’s classification as a capital lease, a material effect on HECO’s consolidated financial statements may result, including the recognition of a significant capital asset and lease obligation.
24
30
(7) Reconciliation of electric utility operating income per HEI and HECO consolidated statements of income
Three months ended March 31 |
| 2003 |
| 2002 |
| ||||
|
|
| |||||||
(in thousands) |
|
|
|
|
|
|
| ||
Operating income from regulated and nonregulated activities before income taxes (per HEI consolidated statements of income) |
| $ | 40,975 |
| $ | 45,604 |
| ||
Deduct: |
|
|
|
|
|
|
| ||
| Income taxes on regulated activities |
|
| (11,215 | ) |
| (12,791 | ) | |
| Revenues from nonregulated activities |
|
| (951 | ) |
| (998 | ) | |
Add: |
|
|
|
|
|
|
| ||
| Expenses from nonregulated activities |
|
| 246 |
|
| 106 |
| |
|
|
|
|
| |||||
Operating income from regulated activities after income taxes (per HECO consolidated statements of income) |
| $ | 29,055 |
| $ | 31,921 |
| ||
|
|
|
| ||||||
| Three months ended September 30, | Nine months ended September 30, | |||||||||||||||
(in thousands) | 2003 | 2002 | 2003 | 2002 | ||||||||||||
Operating income from HECO consolidated regulated and nonregulated activities before income taxes (per HEI consolidated statements of income) | $ | 46,636 | $ | 53,589 | $ | 130,196 | $ | 150,146 | ||||||||
Deduct: | ||||||||||||||||
Income taxes on regulated activities | (13,974 | ) | (16,287 | ) | (36,865 | ) | (44,110 | ) | ||||||||
Revenues from nonregulated activities | (815 | ) | (1,183 | ) | (2,910 | ) | (3,241 | ) | ||||||||
Add: | ||||||||||||||||
Expenses from nonregulated activities | 1,729 | 393 | 2,251 | 720 | ||||||||||||
Operating income from regulated activities after income taxes (per HECO consolidated statements of income) | $ | 33,576 | $ | 36,512 | $ | 92,672 | $ | 103,515 | ||||||||
(8) Subsequent event
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 HELCO.The proceeds of these Refunding SPRB, together with additional funds provided by HECO and HELCO, will be applied on June 2, 2003 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).
(9) Consolidating financial information
HECO hasis not providedrequired to provide 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, on a subordinated basis, by HECO.HECO and consolidating information is provided for these and other HECO subsidiaries. HECO also unconditionally guarantees HELCO’s and MECO’s obligations (a) to the State of Hawaii for the repayment of principal and interest on their Special Purpose Revenue Bonds and (b) relating to the trust preferred securities of HECO Capital Trust I and HECO Capital Trust II. HECO is also obligated to make dividend, redemption and liquidation payments on HELCO’s and MECO’s preferred stock if the respective subsidiary is unable to make such payments.
For consolidating financial information for HECO and its subsidiaries for the periods ended and as of the dates indicated, see pages 2632 through 31.39. As of the datesDecember 31, 2002 and for the periods presented,three and nine months ended September 30, 2002, there were no amounts for HECO subsidiary Renewable Hawaii, Inc.
25
31
Hawaiian Electric Company, Inc. and subsidiariesConsolidating balance sheet (unaudited)
|
| March 31, 2003 |
| ||||||||||||||||||||||||||
|
|
| |||||||||||||||||||||||||||
(in thousands) |
| HECO |
| HELCO |
| MECO |
| HECO |
| HECO |
| Reclassi- |
| HECO |
| ||||||||||||||
|
|
|
|
|
|
|
| ||||||||||||||||||||||
Assets |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||
Utility plant, at cost |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||
| Land |
| $ | 25,350 |
| $ | 2,982 |
| $ | 3,587 |
| $ | — |
| $ | — |
| $ | — |
| $ | 31,919 |
| ||||||
| Plant and equipment |
|
| 2,039,069 |
|
| 569,865 |
|
| 599,186 |
|
| — |
|
| — |
|
| — |
|
| 3,208,120 |
| ||||||
| Less accumulated depreciation |
|
| (888,011 | ) |
| (260,113 | ) |
| (245,777 | ) |
| — |
|
| — |
|
| — |
|
| (1,393,901 | ) | ||||||
| Plant acquisition adjustment, net |
|
| — |
|
| — |
|
| 289 |
|
| — |
|
| — |
|
| — |
|
| 289 |
| ||||||
| Construction in progress |
|
| 62,065 |
|
| 94,154 |
|
| 7,272 |
|
| — |
|
| — |
|
| — |
|
| 163,491 |
| ||||||
|
|
|
|
|
|
|
|
| |||||||||||||||||||||
| Net utility plant |
|
| 1,238,473 |
|
| 406,888 |
|
| 364,557 |
|
| — |
|
| — |
|
| — |
|
| 2,009,918 |
| ||||||
|
|
|
|
|
|
|
|
| |||||||||||||||||||||
Investment in wholly owned subsidiaries, at equity |
|
| 361,869 |
|
| — |
|
| — |
|
| — |
|
| — |
|
| (361,869 | ) |
| — |
| |||||||
|
|
|
|
|
|
|
|
| |||||||||||||||||||||
Current assets |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||
| Cash and equivalents |
|
| 9 |
|
| 999 |
|
| 2,198 |
|
| — |
|
| — |
|
| — |
|
| 3,206 |
| ||||||
| Advances to affiliates |
|
| 12,700 |
|
| — |
|
| 18,500 |
|
| 51,546 |
|
| 51,546 |
|
| (134,292 | ) |
| — |
| ||||||
| Customer accounts receivable, net |
|
| 59,436 |
|
| 13,995 |
|
| 11,824 |
|
| — |
|
| — |
|
| — |
|
| 85,255 |
| ||||||
| Accrued unbilled revenues, net |
|
| 38,187 |
|
| 10,670 |
|
| 7,832 |
|
| — |
|
| — |
|
| — |
|
| 56,689 |
| ||||||
| Other accounts receivable, net |
|
| 3,271 |
|
| 873 |
|
| 494 |
|
| — |
|
| — |
|
| (771 | ) |
| 3,867 |
| ||||||
| Fuel oil stock, at average cost |
|
| 31,220 |
|
| 4,218 |
|
| 6,882 |
|
| — |
|
| — |
|
| — |
|
| 42,320 |
| ||||||
| Materials and supplies, at average cost |
|
| 9,817 |
|
| 2,419 |
|
| 8,808 |
|
| — |
|
| — |
|
| — |
|
| 21,044 |
| ||||||
| Prepayments and other |
|
| 58,829 |
|
| 8,989 |
|
| 4,250 |
|
| — |
|
| — |
|
| — |
|
| 72,068 |
| ||||||
|
|
|
|
|
|
|
|
| |||||||||||||||||||||
| Total current assets |
|
| 213,469 |
|
| 42,163 |
|
| 60,788 |
|
| 51,546 |
|
| 51,546 |
|
| (135,063 | ) |
| 284,449 |
| ||||||
|
|
|
|
|
|
|
|
| |||||||||||||||||||||
Other assets |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||
| Regulatory assets |
|
| 74,314 |
|
| 16,330 |
|
| 13,914 |
|
| — |
|
| — |
|
| — |
|
| 104,558 |
| ||||||
| Unamortized debt expense |
|
| 8,931 |
|
| 1,886 |
|
| 2,332 |
|
| — |
|
| — |
|
| — |
|
| 13,149 |
| ||||||
| Long-term receivables and other |
|
| 13,691 |
|
| 3,253 |
|
| 3,035 |
|
| — |
|
| — |
|
| — |
|
| 19,979 |
| ||||||
|
|
|
|
|
|
|
|
| |||||||||||||||||||||
| Total other assets |
|
| 96,936 |
|
| 21,469 |
|
| 19,281 |
|
| — |
|
| — |
|
| — |
|
| 137,686 |
| ||||||
|
|
|
|
|
|
|
|
| |||||||||||||||||||||
|
| $ | 1,910,747 |
| $ | 470,520 |
| $ | 444,626 |
| $ | 51,546 |
| $ | 51,546 |
| $ | (496,932 | ) | $ | 2,432,053 |
| |||||||
|
|
|
|
|
|
|
|
| |||||||||||||||||||||
Capitalization and liabilities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||
Capitalization |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||
| 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 |
| ||||||
| HECO-obligated mandatorily redeemable trust preferred securities of subsidiary trusts holding solely HECO and HECO-guaranteed debentures |
|
| — |
|
| — |
|
| — |
|
| 50,000 |
|
| 50,000 |
|
| — |
|
| 100,000 |
| ||||||
| Long-term debt, net |
|
| 496,664 |
|
| 141,001 |
|
| 163,692 |
|
| — |
|
| — |
|
| (103,092 | ) |
| 698,265 |
| ||||||
|
|
|
|
|
|
|
|
| |||||||||||||||||||||
| Total capitalization |
|
| 1,444,541 |
|
| 323,638 |
|
| 351,832 |
|
| 51,546 |
|
| 51,546 |
|
| (464,961 | ) |
| 1,758,142 |
| ||||||
|
|
|
|
|
|
|
|
| |||||||||||||||||||||
Current liabilities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||
| Short-term borrowings–affiliate |
|
| 43,000 |
|
| 12,700 |
|
| — |
|
| — |
|
| — |
|
| (31,200 | ) |
| 24,500 |
| ||||||
| Accounts payable |
|
| 38,410 |
|
| 9,081 |
|
| 8,533 |
|
| — |
|
| — |
|
| — |
|
| 56,024 |
| ||||||
| Interest and preferred dividends payable |
|
| 10,128 |
|
| 2,942 |
|
| 3,743 |
|
| — |
|
| — |
|
| (33 | ) |
| 16,780 |
| ||||||
| Taxes accrued |
|
| 35,985 |
|
| 12,769 |
|
| 13,547 |
|
| — |
|
| — |
|
| — |
|
| 62,301 |
| ||||||
| Other |
|
| 17,380 |
|
| 2,184 |
|
| 3,964 |
|
| — |
|
| — |
|
| (738 | ) |
| 22,790 |
| ||||||
|
|
|
|
|
|
|
|
| |||||||||||||||||||||
| Total current liabilities |
|
| 144,903 |
|
| 39,676 |
|
| 29,787 |
|
| — |
|
| — |
|
| (31,971 | ) |
| 182,395 |
| ||||||
|
|
|
|
|
|
|
|
| |||||||||||||||||||||
Deferred credits and other liabilities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||
| Deferred income taxes |
|
| 131,891 |
|
| 15,017 |
|
| 11,520 |
|
| — |
|
| — |
|
| — |
|
| 158,428 |
| ||||||
| Unamortized tax credits |
|
| 28,460 |
|
| 8,880 |
|
| 11,055 |
|
| — |
|
| — |
|
| — |
|
| 48,395 |
| ||||||
| Other |
|
| 22,957 |
|
| 26,616 |
|
| 14,780 |
|
| — |
|
| — |
|
| — |
|
| 64,353 |
| ||||||
|
|
|
|
|
|
|
|
| |||||||||||||||||||||
| Total deferred credits and other liabilities |
|
| 183,308 |
|
| 50,513 |
|
| 37,355 |
|
| — |
|
| — |
|
| — |
|
| 271,176 |
| ||||||
|
|
|
|
|
|
|
|
| |||||||||||||||||||||
Contributions in aid of construction |
|
| 137,995 |
|
| 56,693 |
|
| 25,652 |
|
| — |
|
| — |
|
| — |
|
| 220,340 |
| |||||||
|
|
|
|
|
|
|
|
| |||||||||||||||||||||
|
| $ | 1,910,747 |
| $ | 470,520 |
| $ | 444,626 |
| $ | 51,546 |
| $ | 51,546 |
| $ | (496,932 | ) | $ | 2,432,053 |
| |||||||
|
|
|
|
|
|
|
|
| |||||||||||||||||||||
26
Hawaiian Electric Company, Inc. and Subsidiaries
Consolidating balance sheet (unaudited)
|
| December 31, 2002 |
| |||||||||||||||||||||
|
|
| ||||||||||||||||||||||
(in thousands) |
| HECO |
| HELCO |
| MECO |
| HECO |
| HECO |
| Reclassi- |
| HECO |
| |||||||||
|
|
|
|
|
|
|
| |||||||||||||||||
Assets |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||
Utility plant, at cost |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||
| Land |
| $ | 25,329 |
| $ | 2,982 |
| $ | 3,585 |
| $ | — |
| $ | — |
| $ | — |
| $ | 31,896 |
| |
| Plant and equipment |
|
| 2,022,987 |
|
| 565,920 |
|
| 595,911 |
|
| — |
|
| — |
|
| — |
|
| 3,184,818 |
| |
| Less accumulated depreciation |
|
| (872,332 | ) |
| (255,473 | ) |
| (240,149 | ) |
| — |
|
| — |
|
| — |
|
| (1,367,954 | ) | |
| Plant acquisition adjustment, net |
|
| — |
|
| — |
|
| 302 |
|
| — |
|
| — |
|
| — |
|
| 302 |
| |
| Construction in progress |
|
| 63,246 |
|
| 93,428 |
|
| 7,626 |
|
| — |
|
| — |
|
| — |
|
| 164,300 |
| |
|
|
|
|
|
|
|
|
|
| |||||||||||||||
| Net utility plant |
|
| 1,239,230 |
|
| 406,857 |
|
| 367,275 |
|
| — |
|
| — |
|
| — |
|
| 2,013,362 |
| |
|
|
|
|
|
|
|
|
| ||||||||||||||||
Investment in wholly owned subsidiaries, at equity |
|
| 355,869 |
|
| — |
|
| — |
|
| — |
|
| — |
|
| (355,869 | ) |
| — |
| ||
|
|
|
|
|
|
|
|
| ||||||||||||||||
Current assets |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||
| Cash and equivalents |
|
| 9 |
|
| 4 |
|
| 1,713 |
|
| — |
|
| — |
|
| — |
|
| 1,726 |
| |
| Advances to affiliates |
|
| 14,900 |
|
| — |
|
| 23,000 |
|
| 51,546 |
|
| 51,546 |
|
| (140,992 | ) |
| — |
| |
| Customer accounts receivable, net |
|
| 61,384 |
|
| 13,979 |
|
| 11,750 |
|
| — |
|
| — |
|
| — |
|
| 87,113 |
| |
| Accrued unbilled revenues, net |
|
| 41,272 |
|
| 10,701 |
|
| 8,125 |
|
| — |
|
| — |
|
| — |
|
| 60,098 |
| |
| Other accounts receivable, net |
|
| 2,582 |
|
| 411 |
|
| 462 |
|
| — |
| �� | — |
|
| (1,242 | ) |
| 2,213 |
| |
| Fuel oil stock, at average cost |
|
| 25,701 |
|
| 3,446 |
|
| 6,502 |
|
| — |
|
| — |
|
| — |
|
| 35,649 |
| |
| Materials and supplies, at average cost |
|
| 9,076 |
|
| 2,248 |
|
| 8,126 |
|
| — |
|
| — |
|
| — |
|
| 19,450 |
| |
| Prepayments and other |
|
| 61,108 |
|
| 9,457 |
|
| 5,045 |
|
| — |
|
| — |
|
| — |
|
| 75,610 |
| |
|
|
|
|
|
|
|
|
| ||||||||||||||||
| Total current assets |
|
| 216,032 |
|
| 40,246 |
|
| 64,723 |
|
| 51,546 |
|
| 51,546 |
|
| (142,234 | ) |
| 281,859 |
| |
|
|
|
|
|
|
|
|
| ||||||||||||||||
Other assets |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||
| Regulatory assets |
|
| 74,946 |
|
| 16,557 |
|
| 14,065 |
|
| — |
|
| — |
|
| — |
|
| 105,568 |
| |
| Unamortized debt expense |
|
| 8,952 |
|
| 1,915 |
|
| 2,487 |
|
| — |
|
| — |
|
| — |
|
| 13,354 |
| |
| Long-term receivables and other |
|
| 15,540 |
|
| 3,406 |
|
| 3,297 |
|
| — |
|
| — |
|
| — |
|
| 22,243 |
| |
|
|
|
|
|
|
|
|
| ||||||||||||||||
| Total other assets |
|
| 99,438 |
|
| 21,878 |
|
| 19,849 |
|
| — |
|
| — |
|
| — |
|
| 141,165 |
| |
|
|
|
|
|
|
|
|
| ||||||||||||||||
|
| $ | 1,910,569 |
| $ | 468,981 |
| $ | 451,847 |
| $ | 51,546 |
| $ | 51,546 |
| $ | (498,103 | ) | $ | 2,436,386 |
| ||
|
|
|
|
|
|
|
|
| ||||||||||||||||
Capitalization and liabilities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||
Capitalization |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||
| 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 |
| |
| HECO-obligated mandatorily redeemable trust preferred securities of subsidiary trusts holding solely HECO and HECO-guaranteed debentures |
|
| — |
|
| — |
|
| — |
|
| 50,000 |
|
| 50,000 |
|
| — |
|
| 100,000 |
| |
| Long-term debt, net |
|
| 495,689 |
|
| 140,993 |
|
| 171,680 |
|
| — |
|
| — |
|
| (103,092 | ) |
| 705,270 |
| |
|
|
|
|
|
|
|
|
| ||||||||||||||||
| Total capitalization |
|
| 1,441,238 |
|
| 319,397 |
|
| 358,053 |
|
| 51,546 |
|
| 51,546 |
|
| (458,961 | ) |
| 1,762,819 |
| |
|
|
|
|
|
|
|
|
| ||||||||||||||||
Current liabilities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||
| Short-term borrowings–affiliate |
|
| 28,600 |
|
| 14,900 |
|
| — |
|
| — |
|
| — |
|
| (37,900 | ) |
| 5,600 |
| |
| Accounts payable |
|
| 41,594 |
|
| 10,462 |
|
| 7,936 |
|
| — |
|
| — |
|
| — |
|
| 59,992 |
| |
| Interest and preferred dividends payable |
|
| 7,537 |
|
| 1,598 |
|
| 2,435 |
|
| — |
|
| — |
|
| (38 | ) |
| 11,532 |
| |
| Taxes accrued |
|
| 48,274 |
|
| 14,898 |
|
| 15,961 |
|
| — |
|
| — |
|
| — |
|
| 79,133 |
| |
| Other |
|
| 20,998 |
|
| 3,679 |
|
| 4,547 |
|
| — |
|
| — |
|
| (1,204 | ) |
| 28,020 |
| |
|
|
|
|
|
|
|
|
| ||||||||||||||||
| Total current liabilities |
|
| 147,003 |
|
| 45,537 |
|
| 30,879 |
|
| — |
|
| — |
|
| (39,142 | ) |
| 184,277 |
| |
|
|
|
|
|
|
|
|
| ||||||||||||||||
Deferred credits and other liabilities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||
| Deferred income taxes |
|
| 132,159 |
|
| 14,479 |
|
| 11,729 |
|
| — |
|
| — |
|
| — |
|
| 158,367 |
| |
| Unamortized tax credits |
|
| 28,430 |
|
| 8,471 |
|
| 11,084 |
|
| — |
|
| — |
|
| — |
|
| 47,985 |
| |
| Other |
|
| 23,441 |
|
| 26,809 |
|
| 14,594 |
|
| — |
|
| — |
|
| — |
|
| 64,844 |
| |
|
|
|
|
|
|
|
|
| ||||||||||||||||
| Total deferred credits and other liabilities |
|
| 184,030 |
|
| 49,759 |
|
| 37,407 |
|
| — |
|
| — |
|
| — |
|
| 271,196 |
| |
|
|
|
|
|
|
|
|
| ||||||||||||||||
Contributions in aid of construction |
|
| 138,298 |
|
| 54,288 |
|
| 25,508 |
|
| — |
|
| — |
|
| — |
|
| 218,094 |
| ||
|
|
|
|
|
|
|
|
| ||||||||||||||||
|
| $ | 1,910,569 |
| $ | 468,981 |
| $ | 451,847 |
| $ | 51,546 |
| $ | 51,546 |
| $ | (498,103 | ) | $ | 2,436,386 |
| ||
|
|
|
|
|
|
|
|
| ||||||||||||||||
27September 30, 2003
(in thousands) | HECO | HELCO | MECO | RHI | HECO Capital Trust I | HECO Capital Trust II | Reclassi- fications and elimina- tions | HECO consoli- | ||||||||||||||||
Assets | ||||||||||||||||||||||||
Utility plant, at cost | ||||||||||||||||||||||||
Land | $ | 25,378 | 3,006 | 3,586 | — | — | — | — | $ | 31,970 | ||||||||||||||
Plant and equipment | 2,060,272 | 578,799 | 605,461 | — | — | — | — | 3,244,532 | ||||||||||||||||
Less accumulated depreciation | (918,030 | ) | (269,257 | ) | (257,576 | ) | — | — | — | — | (1,444,863 | ) | ||||||||||||
Plant acquisition adjustment, net | — | — | 263 | — | — | — | — | 263 | ||||||||||||||||
Construction in progress | 76,797 | 96,792 | 8,743 | — | — | — | — | 182,332 | ||||||||||||||||
Net utility plant | 1,244,417 | 409,340 | 360,477 | — | — | — | — | 2,014,234 | ||||||||||||||||
Investment in wholly owned subsidiaries, at equity | 363,932 | — | — | — | — | — | (363,932 | ) | — | |||||||||||||||
Current assets | ||||||||||||||||||||||||
Cash and equivalents | 21,774 | 1,270 | 4,268 | 69 | — | — | — | 27,381 | ||||||||||||||||
Advances to affiliate | 9,500 | — | 28,000 | — | 51,546 | 51,546 | (140,592 | ) | — | |||||||||||||||
Customer accounts receivable, net | 60,019 | 15,146 | 13,049 | — | — | — | — | 88,214 | ||||||||||||||||
Accrued unbilled revenues, net | 41,098 | 10,303 | 8,280 | — | — | — | — | 59,681 | ||||||||||||||||
Other accounts receivable, net | 2,493 | 571 | 327 | — | — | — | (627 | ) | 2,764 | |||||||||||||||
Fuel oil stock, at average cost | 27,546 | 3,896 | 6,883 | — | — | — | — | 38,325 | ||||||||||||||||
Materials and supplies, at average cost | 11,926 | 2,523 | 9,334 | — | — | — | — | 23,783 | ||||||||||||||||
Prepayments and other | 61,501 | 9,232 | 4,616 | — | — | — | — | 75,349 | ||||||||||||||||
Total current assets | 235,857 | 42,941 | 74,757 | 69 | 51,546 | 51,546 | (141,219 | ) | 315,497 | |||||||||||||||
Other assets | ||||||||||||||||||||||||
Regulatory assets | 75,428 | 16,332 | 13,805 | — | — | — | — | 105,565 | ||||||||||||||||
Unamortized debt expense | 8,347 | 2,968 | 2,886 | — | — | — | — | 14,201 | ||||||||||||||||
Long-term receivables and other | 12,579 | 3,592 | 2,526 | — | — | — | — | 18,697 | ||||||||||||||||
Total other assets | 96,354 | 22,892 | 19,217 | — | — | — | — | 138,463 | ||||||||||||||||
| $ | 1,940,560 | 475,173 | 454,451 | 69 | 51,546 | 51,546 | (505,151 | ) | $ | 2,468,194 | ||||||||||||||
Capitalization and liabilities | ||||||||||||||||||||||||
Capitalization | ||||||||||||||||||||||||
Common stock equity | $ | 937,367 | 176,007 | 184,725 | 108 | 1,546 | 1,546 | (363,932 | ) | $ | 937,367 | |||||||||||||
Cumulative preferred stock-not subject to mandatory redemption | 22,293 | 7,000 | 5,000 | — | — | — | — | 34,293 | ||||||||||||||||
HECO-obligated mandatorily redeemable trust preferred securities of subsidiary trusts holding solely HECO and HECO-guaranteed debentures | — | — | — | — | 50,000 | 50,000 | — | 100,000 | ||||||||||||||||
Long-term debt, net | 497,308 | 140,857 | 163,717 | — | — | — | (103,092 | ) | 698,790 | |||||||||||||||
Total capitalization | 1,456,968 | 323,864 | 353,442 | 108 | 51,546 | 51,546 | (467,024 | ) | 1,770,450 | |||||||||||||||
Current liabilities | ||||||||||||||||||||||||
Short-term borrowings-affiliate | 28,000 | 9,500 | — | — | — | — | (37,500 | ) | — | |||||||||||||||
Accounts payable | 45,651 | 9,876 | 6,321 | — | — | — | — | 61,848 | ||||||||||||||||
Interest and preferred dividends payable | 10,676 | 2,778 | 3,925 | — | — | — | (30 | ) | 17,349 | |||||||||||||||
Taxes accrued | 57,732 | 16,586 | 22,523 | — | — | — | — | 96,841 | ||||||||||||||||
Other | 18,409 | 2,276 | 6,029 | 7 | — | — | (597 | ) | 26,124 | |||||||||||||||
Total current liabilities | 160,468 | 41,016 | 38,798 | 7 | — | — | (38,127 | ) | 202,162 | |||||||||||||||
Deferred credits and other liabilities | ||||||||||||||||||||||||
Deferred income taxes | 133,600 | 17,732 | 10,831 | (46 | ) | — | — | — | 162,117 | |||||||||||||||
Unamortized tax credits | 28,518 | 8,690 | 10,847 | — | — | — | — | 48,055 | ||||||||||||||||
Other | 21,749 | 27,540 | 14,879 | — | — | — | — | 64,168 | ||||||||||||||||
Total deferred credits and other liabilities | 183,867 | 53,962 | 36,557 | (46 | ) | — | — | — | 274,340 | |||||||||||||||
Contributions in aid of construction | 139,257 | 56,331 | 25,654 | — | — | — | — | 221,242 | ||||||||||||||||
| $ | 1,940,560 | 475,173 | 454,451 | 69 | 51,546 | 51,546 | (505,151 | ) | $ | 2,468,194 | ||||||||||||||
32
Hawaiian Electric Company, Inc. and Subsidiaries
Consolidating statement of incomebalance sheet (unaudited)
|
| Three months ended March 31, 2003 |
| |||||||||||||||||||
|
|
| ||||||||||||||||||||
(in thousands) |
| HECO |
| HELCO |
| MECO |
| HECO |
| HECO |
| Reclassi- |
| HECO |
| |||||||
|
|
|
|
|
|
|
| |||||||||||||||
Operating revenues |
| $ | 227,192 |
| $ | 50,838 |
| $ | 49,931 |
| $ | — |
| $ | — |
| $ | — |
| $ | 327,961 |
|
|
|
|
|
|
|
|
|
| ||||||||||||||
Operating expenses |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fuel oil |
|
| 64,039 |
|
| 8,301 |
|
| 18,499 |
|
| — |
|
| — |
|
| — |
|
| 90,839 |
|
Purchased power |
|
| 68,605 |
|
| 14,939 |
|
| 1,810 |
|
| — |
|
| — |
|
| — |
|
| 85,354 |
|
Other operation |
|
| 26,293 |
|
| 5,607 |
|
| 6,627 |
|
| — |
|
| — |
|
| — |
|
| 38,527 |
|
Maintenance |
|
| 10,340 |
|
| 1,807 |
|
| 2,135 |
|
| — |
|
| — |
|
| — |
|
| 14,282 |
|
Depreciation |
|
| 16,769 |
|
| 5,057 |
|
| 5,786 |
|
| — |
|
| — |
|
| — |
|
| 27,612 |
|
Taxes, other than income taxes |
|
| 21,604 |
|
| 4,749 |
|
| 4,724 |
|
| — |
|
| — |
|
| — |
|
| 31,077 |
|
Income taxes |
|
| 5,093 |
|
| 3,119 |
|
| 3,003 |
|
| — |
|
| — |
|
| — |
|
| 11,215 |
|
|
|
|
|
|
|
|
|
| ||||||||||||||
|
|
| 212,743 |
|
| 43,579 |
|
| 42,584 |
|
| — |
|
| — |
|
| — |
|
| 298,906 |
|
|
|
|
|
|
|
|
|
| ||||||||||||||
Operating income |
|
| 14,449 |
|
| 7,259 |
|
| 7,347 |
|
| — |
|
| — |
|
| — |
|
| 29,055 |
|
|
|
|
|
|
|
|
|
| ||||||||||||||
Other income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for equity funds used during construction |
|
| 866 |
|
| 33 |
|
| 89 |
|
| — |
|
| — |
|
| — |
|
| 988 |
|
Equity in earnings of subsidiaries |
|
| 9,640 |
|
| — |
|
| — |
|
| — |
|
| — |
|
| (9,640 | ) |
| — |
|
Other, net |
|
| 789 |
|
| 56 |
|
| 31 |
|
| 1,037 |
|
| 941 |
|
| (2,087 | ) |
| 767 |
|
|
|
|
|
|
|
|
|
| ||||||||||||||
|
|
| 11,295 |
|
| 89 |
|
| 120 |
|
| 1,037 |
|
| 941 |
|
| (11,727 | ) |
| 1,755 |
|
|
|
|
|
|
|
|
|
| ||||||||||||||
Income before interest and other charges |
|
| 25,744 |
|
| 7,348 |
|
| 7,467 |
|
| 1,037 |
|
| 941 |
|
| (11,727 | ) |
| 30,810 |
|
|
|
|
|
|
|
|
|
| ||||||||||||||
Interest and other charges |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest on long-term debt |
|
| 6,338 |
|
| 1,809 |
|
| 2,177 |
|
| — |
|
| — |
|
| — |
|
| 10,324 |
|
Amortization of net bond premium and expense |
|
| 325 |
|
| 88 |
|
| 100 |
|
| — |
|
| — |
|
| — |
|
| 513 |
|
Other interest charges |
|
| 1,549 |
|
| 462 |
|
| 418 |
|
| — |
|
| — |
|
| (2,087 | ) |
| 342 |
|
Allowance for borrowed funds used during construction |
|
| (394 | ) |
| (14 | ) |
| (35 | ) |
| — |
|
| — |
|
| — |
|
| (443 | ) |
Preferred stock dividends of subsidiaries |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| 229 |
|
| 229 |
|
Preferred securities distributions of trust subsidiaries |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| 1,919 |
|
| 1,919 |
|
|
|
|
|
|
|
|
|
| ||||||||||||||
|
|
| 7,818 |
|
| 2,345 |
|
| 2,660 |
|
| — |
|
| — |
|
| 61 |
|
| 12,884 |
|
|
|
|
|
|
|
|
|
| ||||||||||||||
Income before preferred stock dividends of HECO |
|
| 17,926 |
|
| 5,003 |
|
| 4,807 |
|
| 1,037 |
|
| 941 |
|
| (11,788 | ) |
| 17,926 |
|
Preferred stock dividends of HECO |
|
| 270 |
|
| 134 |
|
| 95 |
|
| 1,006 |
|
| 913 |
|
| (2,148 | ) |
| 270 |
|
|
|
|
|
|
|
|
|
| ||||||||||||||
Net income for common stock |
| $ | 17,656 |
| $ | 4,869 |
| $ | 4,712 |
| $ | 31 |
| $ | 28 |
| $ | (9,640 | ) | $ | 17,656 |
|
|
|
|
|
|
|
|
|
| ||||||||||||||
December 31, 2002
(in thousands) | HECO | HELCO | MECO | HECO Capital Trust I | HECO Capital Trust II | Reclassi- and elimina- | HECO consoli- dated | ||||||||||||||
Assets | |||||||||||||||||||||
Utility plant, at cost | |||||||||||||||||||||
Land | $ | 25,329 | 2,982 | 3,585 | — | — | — | $ | 31,896 | ||||||||||||
Plant and equipment | 2,022,987 | 565,920 | 595,911 | — | — | — | 3,184,818 | ||||||||||||||
Less accumulated depreciation | (872,332 | ) | (255,473 | ) | (240,149 | ) | — | — | — | (1,367,954 | ) | ||||||||||
Plant acquisition adjustment, net | — | — | 302 | — | — | — | 302 | ||||||||||||||
Construction in progress | 63,246 | 93,428 | 7,626 | — | — | — | 164,300 | ||||||||||||||
Net utility plant | 1,239,230 | 406,857 | 367,275 | — | — | — | 2,013,362 | ||||||||||||||
Investment in wholly owned subsidiaries, at equity | 355,869 | — | — | — | — | (355,869 | ) | — | |||||||||||||
Current assets | |||||||||||||||||||||
Cash and equivalents | 9 | 4 | 1,713 | — | — | — | 1,726 | ||||||||||||||
Advances to affiliate | 14,900 | — | 23,000 | 51,546 | 51,546 | (140,992 | ) | — | |||||||||||||
Customer accounts receivable, net | 61,384 | 13,979 | 11,750 | — | — | — | 87,113 | ||||||||||||||
Accrued unbilled revenues, net | 41,272 | 10,701 | 8,125 | — | — | — | 60,098 | ||||||||||||||
Other accounts receivable, net | 2,582 | 411 | 462 | — | — | (1,242 | ) | 2,213 | |||||||||||||
Fuel oil stock, at average cost | 25,701 | 3,446 | 6,502 | — | — | — | 35,649 | ||||||||||||||
Materials and supplies, at average cost | 9,076 | 2,248 | 8,126 | — | — | — | 19,450 | ||||||||||||||
Prepayments and other | 61,108 | 9,457 | 5,045 | — | — | — | 75,610 | ||||||||||||||
Total current assets | 216,032 | 40,246 | 64,723 | 51,546 | 51,546 | (142,234 | ) | 281,859 | |||||||||||||
Other assets | |||||||||||||||||||||
Regulatory assets | 74,946 | 16,557 | 14,065 | — | — | — | 105,568 | ||||||||||||||
Unamortized debt expense | 8,952 | 1,915 | 2,487 | — | — | — | 13,354 | ||||||||||||||
Long-term receivables and other | 15,540 | 3,406 | 3,297 | — | — | — | 22,243 | ||||||||||||||
Total other assets | 99,438 | 21,878 | 19,849 | — | — | — | 141,165 | ||||||||||||||
| $ | 1,910,569 | 468,981 | 451,847 | 51,546 | 51,546 | (498,103 | ) | $ | 2,436,386 | ||||||||||||
Capitalization and liabilities | |||||||||||||||||||||
Capitalization | |||||||||||||||||||||
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 | ||||||||||||||
HECO-obligated mandatorily redeemable trust preferred securities of subsidiary trusts holding solely HECO and HECO-guaranteed debentures | — | — | — | 50,000 | 50,000 | — | 100,000 | ||||||||||||||
Long-term debt, net | 495,689 | 140,993 | 171,680 | — | — | (103,092 | ) | 705,270 | |||||||||||||
Total capitalization | 1,441,238 | 319,397 | 358,053 | 51,546 | 51,546 | (458,961 | ) | 1,762,819 | |||||||||||||
Current liabilities | |||||||||||||||||||||
Short-term borrowings-affiliate | 28,600 | 14,900 | — | — | — | (37,900 | ) | 5,600 | |||||||||||||
Accounts payable | 41,594 | 10,462 | 7,936 | — | — | — | 59,992 | ||||||||||||||
Interest and preferred dividends payable | 7,537 | 1,598 | 2,435 | — | — | (38 | ) | 11,532 | |||||||||||||
Taxes accrued | 48,274 | 14,898 | 15,961 | — | — | — | 79,133 | ||||||||||||||
Other | 20,998 | 3,679 | 4,547 | — | — | (1,204 | ) | 28,020 | |||||||||||||
Total current liabilities | 147,003 | 45,537 | 30,879 | — | — | (39,142 | ) | 184,277 | |||||||||||||
Deferred credits and other liabilities | |||||||||||||||||||||
Deferred income taxes | 132,159 | 14,479 | 11,729 | — | — | — | 158,367 | ||||||||||||||
Unamortized tax credits | 28,430 | 8,471 | 11,084 | — | — | — | 47,985 | ||||||||||||||
Other | 23,441 | 26,809 | 14,594 | — | — | — | 64,844 | ||||||||||||||
Total deferred credits and other liabilities | 184,030 | 49,759 | 37,407 | — | — | — | 271,196 | ||||||||||||||
Contributions in aid of construction | 138,298 | 54,288 | 25,508 | — | — | — | 218,094 | ||||||||||||||
| $ | 1,910,569 | 468,981 | 451,847 | 51,546 | 51,546 | (498,103 | ) | $ | 2,436,386 | ||||||||||||
33
Hawaiian Electric Company, Inc. and Subsidiaries
Consolidating statement of income (unaudited)
Three months ended September 30, 2003
(in thousands) | HECO | HELCO | MECO | RHI | HECO Capital Trust I | HECO Capital Trust | Reclassi- and elimina- | HECO consoli- | ||||||||||||||||
Operating revenues | $ | 249,792 | 53,799 | 54,844 | — | — | — | — | $ | 358,435 | ||||||||||||||
Operating expenses | ||||||||||||||||||||||||
Fuel oil | 72,589 | 7,634 | 21,073 | — | — | — | — | 101,296 | ||||||||||||||||
Purchased power | 71,408 | 19,274 | 1,861 | — | — | — | — | 92,543 | ||||||||||||||||
Other operation | 25,269 | 5,658 | 6,833 | — | — | — | — | 37,760 | ||||||||||||||||
Maintenance | 10,430 | 4,106 | 3,489 | — | — | — | — | 18,025 | ||||||||||||||||
Depreciation | 16,781 | 5,057 | 5,787 | — | — | — | — | 27,625 | ||||||||||||||||
Taxes, other than income taxes | 23,392 | 5,071 | 5,173 | — | — | — | — | 33,636 | ||||||||||||||||
Income taxes | 9,043 | 1,845 | 3,086 | — | — | — | — | 13,974 | ||||||||||||||||
| 228,912 | 48,645 | 47,302 | — | — | — | — | 324,859 | |||||||||||||||||
Operating income | 20,880 | 5,154 | 7,542 | — | — | — | — | 33,576 | ||||||||||||||||
Other income | ||||||||||||||||||||||||
Allowance for equity funds used during construction | 921 | 64 | 113 | — | — | — | — | 1,098 | ||||||||||||||||
Equity in earnings of subsidiaries | 6,292 | — | — | — | — | — | (6,292 | ) | — | |||||||||||||||
Other, net | 635 | 73 | (1,498 | ) | (8 | ) | 1,037 | 941 | (2,069 | ) | (889 | ) | ||||||||||||
| 7,848 | 137 | (1,385 | ) | (8 | ) | 1,037 | 941 | (8,361 | ) | 209 | ||||||||||||||
Income before interest and other charges | 28,728 | 5,291 | 6,157 | (8 | ) | 1,037 | 941 | (8,361 | ) | 33,785 | ||||||||||||||
Interest and other charges | ||||||||||||||||||||||||
Interest on long-term debt | 6,228 | 1,672 | 2,073 | — | — | — | — | 9,973 | ||||||||||||||||
Amortization of net bond premium and expense | 374 | 100 | 105 | — | — | — | — | 579 | ||||||||||||||||
Other interest charges | 1,916 | 538 | 567 | — | — | — | (2,068 | ) | 953 | |||||||||||||||
Allowance for borrowed funds used during construction | (420 | ) | (32 | ) | (44 | ) | — | — | — | — | (496 | ) | ||||||||||||
Preferred securities distributions of trust subsidiaries | — | — | — | — | — | — | 1,918 | 1,918 | ||||||||||||||||
Preferred stock dividends of subsidiaries | — | — | — | — | — | — | 228 | 228 | ||||||||||||||||
| 8,098 | 2,278 | 2,701 | — | — | — | 78 | 13,155 | |||||||||||||||||
Income before preferred stock dividends of HECO | 20,630 | 3,013 | 3,456 | (8 | ) | 1,037 | 941 | (8,439 | ) | 20,630 | ||||||||||||||
Preferred stock dividends of HECO | 270 | 133 | 95 | — | 1,006 | 912 | (2,146 | ) | 270 | |||||||||||||||
Net income for common stock | $ | 20,360 | 2,880 | 3,361 | (8 | ) | 31 | 29 | (6,293 | ) | $ | 20,360 | ||||||||||||
Hawaiian Electric Company, Inc. and Subsidiaries
Consolidating statement of retained earnings (unaudited)
|
| Three months ended March 31, 2003 |
| |||||||||||||||||||
|
|
| ||||||||||||||||||||
(in thousands) |
| HECO |
| HELCO |
| MECO |
| HECO |
| HECO |
| Reclassi- |
| HECO |
| |||||||
|
|
|
|
|
|
|
| |||||||||||||||
Retained earnings, beginning of period |
| $ | 542,023 |
| $ | 71,414 |
| $ | 87,092 |
| $ | — |
| $ | — |
| $ | (158,506 | ) | $ | 542,023 |
|
Net income for common stock |
|
| 17,656 |
|
| 4,869 |
|
| 4,712 |
|
| 31 |
|
| 28 |
|
| (9,640 | ) |
| 17,656 |
|
Common stock dividends |
|
| (15,290 | ) |
| (642 | ) |
| (2,949 | ) |
| (31 | ) |
| (28 | ) |
| 3,650 |
|
| (15,290 | ) |
|
|
|
|
|
|
|
|
| ||||||||||||||
Retained earnings, end of period |
| $ | 544,389 |
| $ | 75,641 |
| $ | 88,855 |
| $ | — |
| $ | — |
| $ | (164,496 | ) | $ | 544,389 |
|
|
|
|
|
|
|
|
|
| ||||||||||||||
28Three months ended September 30, 2003
(in thousands) | HECO | HELCO | MECO | RHI | HECO Capital Trust I | HECO Capital Trust II | Reclassi- fications and elimina- tions | HECO consoli- | ||||||||||||||||||
Retained earnings, beginning of period | $ | 549,703 | 73,963 | 89,836 | (64 | ) | — | — | (163,735 | ) | $ | 549,703 | ||||||||||||||
Net income for common stock | 20,360 | 2,880 | 3,361 | (8 | ) | 31 | 29 | (6,293 | ) | 20,360 | ||||||||||||||||
Common stock dividends | (13,917 | ) | (1,480 | ) | (3,386 | ) | — | (31 | ) | (29 | ) | 4,926 | (13,917 | ) | ||||||||||||
Retained earnings, end of period | $ | 556,146 | 75,363 | 89,811 | (72 | ) | — | — | (165,102 | ) | $ | 556,146 | ||||||||||||||
34
Hawaiian Electric Company, Inc. and Subsidiaries
Consolidating statement of income (unaudited)
|
| Three months ended March 31, 2002 |
| |||||||||||||||||||
|
|
| ||||||||||||||||||||
(in thousands) |
| HECO |
| HELCO |
| MECO |
| HECO |
| HECO |
| Reclassi- |
| HECO |
| |||||||
|
|
|
|
|
|
|
| |||||||||||||||
Operating revenues |
| $ | 189,166 |
| $ | 44,426 |
| $ | 43,741 |
| $ | — |
| $ | — |
| $ | — |
| $ | 277,333 |
|
|
|
|
|
|
|
|
|
| ||||||||||||||
Operating expenses |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fuel oil |
|
| 39,414 |
|
| 6,503 |
|
| 13,318 |
|
| — |
|
| — |
|
| — |
|
| 59,235 |
|
Purchased power |
|
| 61,405 |
|
| 14,186 |
|
| 1,510 |
|
| — |
|
| — |
|
| — |
|
| 77,101 |
|
Other operation |
|
| 18,153 |
|
| 4,661 |
|
| 6,409 |
|
| — |
|
| — |
|
| — |
|
| 29,223 |
|
Maintenance |
|
| 8,856 |
|
| 2,244 |
|
| 2,912 |
|
| — |
|
| — |
|
| — |
|
| 14,012 |
|
Depreciation |
|
| 15,901 |
|
| 4,894 |
|
| 5,565 |
|
| — |
|
| — |
|
| — |
|
| 26,360 |
|
Taxes, other than income taxes |
|
| 18,200 |
|
| 4,216 |
|
| 4,274 |
|
| — |
|
| — |
|
| — |
|
| 26,690 |
|
Income taxes |
|
| 7,955 |
|
| 2,106 |
|
| 2,730 |
|
| — |
|
| — |
|
| — |
|
| 12,791 |
|
|
|
|
|
|
|
|
|
| ||||||||||||||
|
|
| 169,884 |
|
| 38,810 |
|
| 36,718 |
|
| — |
|
| — |
|
| — |
|
| 245,412 |
|
|
|
|
|
|
|
|
|
| ||||||||||||||
Operating income |
|
| 19,282 |
|
| 5,616 |
|
| 7,023 |
|
| — |
|
| — |
|
| — |
|
| 31,921 |
|
|
|
|
|
|
|
|
|
| ||||||||||||||
Other income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for equity funds used during construction |
|
| 711 |
|
| 55 |
|
| 7 |
|
| — |
|
| — |
|
| — |
|
| 773 |
|
Equity in earnings of subsidiaries |
|
| 7,620 |
|
| — |
|
| — |
|
| — |
|
| — |
|
| (7,620 | ) |
| — |
|
Other, net |
|
| 821 |
|
| 102 |
|
| (9 | ) |
| 1,037 |
|
| 941 |
|
| (2,077 | ) |
| 815 |
|
|
|
|
|
|
|
|
|
| ||||||||||||||
|
|
| 9,152 |
|
| 157 |
|
| (2 | ) |
| 1,037 |
|
| 941 |
|
| (9,697 | ) |
| 1,588 |
|
|
|
|
|
|
|
|
|
| ||||||||||||||
Income before interest and other charges |
|
| 28,434 |
|
| 5,773 |
|
| 7,021 |
|
| 1,037 |
|
| 941 |
|
| (9,697 | ) |
| 33,509 |
|
|
|
|
|
|
|
|
|
| ||||||||||||||
Interest and other charges |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest on long-term debt |
|
| 6,089 |
|
| 1,842 |
|
| 2,205 |
|
| — |
|
| — |
|
| — |
|
| 10,136 |
|
Amortization of net bond premium and expense |
|
| 320 |
|
| 78 |
|
| 102 |
|
| — |
|
| — |
|
| — |
|
| 500 |
|
Other interest charges |
|
| 1,718 |
|
| 477 |
|
| 333 |
|
| — |
|
| — |
|
| (2,077 | ) |
| 451 |
|
Allowance for borrowed funds used during construction |
|
| (322 | ) |
| (30 | ) |
| (3 | ) |
| — |
|
| — |
|
| — |
|
| (355 | ) |
Preferred stock dividends of subsidiaries |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| 229 |
|
| 229 |
|
Preferred securities distributions of trust subsidiaries |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| 1,919 |
|
| 1,919 |
|
|
|
|
|
|
|
|
|
| ||||||||||||||
|
|
| 7,805 |
|
| 2,367 |
|
| 2,637 |
|
| — |
|
| — |
|
| 71 |
|
| 12,880 |
|
|
|
|
|
|
|
|
|
| ||||||||||||||
Income before preferred stock dividends of HECO |
|
| 20,629 |
|
| 3,406 |
|
| 4,384 |
|
| 1,037 |
|
| 941 |
|
| (9,768 | ) |
| 20,629 |
|
Preferred stock dividends of HECO |
|
| 270 |
|
| 134 |
|
| 95 |
|
| 1,006 |
|
| 913 |
|
| (2,148 | ) |
| 270 |
|
|
|
|
|
|
|
|
|
| ||||||||||||||
Net income for common stock |
| $ | 20,359 |
| $ | 3,272 |
| $ | 4,289 |
| $ | 31 |
| $ | 28 |
| $ | (7,620 | ) | $ | 20,359 |
|
|
|
|
|
|
|
|
|
| ||||||||||||||
Three months ended September 30, 2002
(in thousands) | HECO | HELCO | MECO | HECO Capital Trust I | HECO Capital Trust II | Reclassi- and elimina- | HECO consoli- dated | ||||||||||||||
Operating revenues | $ | 232,636 | 49,156 | 50,661 | — | — | — | $ | 332,453 | ||||||||||||
Operating expenses | |||||||||||||||||||||
Fuel oil | 59,602 | 8,083 | 17,626 | — | — | — | 85,311 | ||||||||||||||
Purchased power | 70,300 | 14,726 | 2,097 | — | — | — | 87,123 | ||||||||||||||
Other operation | 22,423 | 5,037 | 6,428 | — | — | — | 33,888 | ||||||||||||||
Maintenance | 10,474 | 2,688 | 2,543 | — | — | — | 15,705 | ||||||||||||||
Depreciation | 15,904 | 4,870 | 5,566 | — | — | — | 26,340 | ||||||||||||||
Taxes, other than income taxes | 21,829 | 4,642 | 4,816 | — | — | — | 31,287 | ||||||||||||||
Income taxes | 10,169 | 2,632 | 3,486 | — | — | — | 16,287 | ||||||||||||||
| 210,701 | 42,678 | 42,562 | — | — | — | 295,941 | |||||||||||||||
Operating income | 21,935 | 6,478 | 8,099 | — | — | — | 36,512 | ||||||||||||||
Other income | |||||||||||||||||||||
Allowance for equity funds used during construction | 1,042 | 59 | 61 | — | — | — | 1,162 | ||||||||||||||
Equity in earnings of subsidiaries | 9,643 | — | — | — | — | (9,643 | ) | — | |||||||||||||
Other, net | 879 | 69 | 33 | 1,037 | 941 | (2,101 | ) | 858 | |||||||||||||
| 11,564 | 128 | 94 | 1,037 | 941 | (11,744 | ) | 2,020 | ||||||||||||||
Income before interest and other charges | 33,499 | 6,606 | 8,193 | 1,037 | 941 | (11,744 | ) | 38,532 | |||||||||||||
Interest and other charges | |||||||||||||||||||||
Interest on long-term debt | 6,113 | 1,809 | 2,205 | — | — | — | 10,127 | ||||||||||||||
Amortization of net bond premium and expense | 322 | 78 | 98 | — | — | — | 498 | ||||||||||||||
Other interest charges | 1,676 | 518 | 337 | — | — | (2,101 | ) | 430 | |||||||||||||
Allowance for borrowed funds used during construction | (492 | ) | (32 | ) | (25 | ) | — | — | — | (549 | ) | ||||||||||
Preferred securities distributions of trust subsidiaries | — | — | — | — | — | 1,918 | 1,918 | ||||||||||||||
Preferred stock dividends of subsidiaries | — | — | — | — | — | 228 | 228 | ||||||||||||||
| 7,619 | 2,373 | 2,615 | — | — | 45 | 12,652 | |||||||||||||||
Income before preferred stock dividends of HECO | 25,880 | 4,233 | 5,578 | 1,037 | 941 | (11,789 | ) | 25,880 | |||||||||||||
Preferred stock dividends of HECO | 270 | 133 | 95 | 1,006 | 912 | (2,146 | ) | 270 | |||||||||||||
Net income for common stock | $ | 25,610 | 4,100 | 5,483 | 31 | 29 | (9,643 | ) | $ | 25,610 | |||||||||||
Hawaiian Electric Company, Inc. and Subsidiaries
Consolidating statement of retained earnings (unaudited)
|
| Three months ended March 31, 2002 |
| |||||||||||||||||||
|
|
| ||||||||||||||||||||
(in thousands) |
| HECO |
| HELCO |
| MECO |
| HECO |
| HECO |
| Reclassi- |
| HECO |
| |||||||
|
|
|
|
|
|
|
| |||||||||||||||
Retained earnings, beginning of period |
| $ | 495,961 |
| $ | 65,690 |
| $ | 78,182 |
| $ | — |
| $ | — |
| $ | (143,872 | ) | $ | 495,961 |
|
Net income for common stock |
|
| 20,359 |
|
| 3,272 |
|
| 4,289 |
|
| 31 |
|
| 28 |
|
| (7,620 | ) |
| 20,359 |
|
Common stock dividends |
|
| (9,233 | ) |
| (926 | ) |
| (2,106 | ) |
| (31 | ) |
| (28 | ) |
| 3,091 |
|
| (9,233 | ) |
|
|
|
|
|
|
|
|
| ||||||||||||||
Retained earnings, end of period |
| $ | 507,087 |
| $ | 68,036 |
| $ | 80,365 |
| $ | — |
| $ | — |
| $ | (148,401 | ) | $ | 507,087 |
|
|
|
|
|
|
|
|
|
| ||||||||||||||
29Three months ended September 30, 2002
(in thousands) | HECO | HELCO | MECO | HECO Capital Trust I | HECO Capital Trust II | Reclassi- and elimina- | HECO consoli- dated | ||||||||||||||||
Retained earnings, beginning of period | $ | 520,757 | 70,616 | 82,617 | — | — | (153,233 | ) | $ | 520,757 | |||||||||||||
Net income for common stock | 25,610 | 4,100 | 5,483 | 31 | 29 | (9,643 | ) | 25,610 | |||||||||||||||
Common stock dividends | (11,925 | ) | (2,108 | ) | (2,198 | ) | (31 | ) | (29 | ) | 4,366 | (11,925 | ) | ||||||||||
Retained earnings, end of period | $ | 534,442 | 72,608 | 85,902 | — | — | (158,510 | ) | $ | 534,442 | |||||||||||||
35
Hawaiian Electric Company, Inc. and Subsidiaries
Consolidating statement of income (unaudited)
Nine months ended September 30, 2003
(in thousands) | HECO | HELCO | MECO | RHI | HECO Capital Trust I | HECO Trust II | Reclassi- and elimina- | HECO consoli- | ||||||||||||||||
Operating revenues | $ | 722,316 | 157,791 | 159,674 | — | — | — | — | $ | 1,039,781 | ||||||||||||||
Operating expenses | ||||||||||||||||||||||||
Fuel oil | 208,977 | 23,964 | 61,362 | — | — | — | — | 294,303 | ||||||||||||||||
Purchased power | 212,575 | 54,476 | 6,110 | — | — | — | — | 273,161 | ||||||||||||||||
Other operation | 77,063 | 17,312 | 20,229 | — | — | — | — | 114,604 | ||||||||||||||||
Maintenance | 30,018 | 9,005 | 8,760 | — | — | — | — | 47,783 | ||||||||||||||||
Depreciation | 50,340 | 15,171 | 17,359 | — | — | — | — | 82,870 | ||||||||||||||||
Taxes, other than income taxes | 67,670 | 14,823 | 15,030 | — | — | — | — | 97,523 | ||||||||||||||||
Income taxes | 21,684 | 6,242 | 8,939 | — | — | — | — | 36,865 | ||||||||||||||||
| 668,327 | 140,993 | 137,789 | — | — | — | — | 947,109 | |||||||||||||||||
Operating income | 53,989 | 16,798 | 21,885 | — | — | — | — | 92,672 | ||||||||||||||||
Other income | ||||||||||||||||||||||||
Allowance for equity funds used during construction | 2,624 | 152 | 299 | — | — | — | — | 3,075 | ||||||||||||||||
Equity in earnings of subsidiaries | 22,415 | — | — | — | — | — | (22,415 | ) | — | |||||||||||||||
Other, net | 2,268 | 234 | (1,389 | ) | (71 | ) | 3,112 | 2,822 | (6,229 | ) | 747 | |||||||||||||
| 27,307 | 386 | (1,090 | ) | (71 | ) | 3,112 | 2,822 | (28,644 | ) | 3,822 | ||||||||||||||
Income before interest and other charges | 81,296 | 17,184 | 20,795 | (71 | ) | 3,112 | 2,822 | (28,644 | ) | 96,494 | ||||||||||||||
Interest and other charges | ||||||||||||||||||||||||
Interest on long-term debt | 19,059 | 5,350 | 6,324 | — | — | — | — | 30,733 | ||||||||||||||||
Amortization of net bond premium and expense | 1,039 | 276 | 305 | — | — | — | — | 1,620 | ||||||||||||||||
Other interest charges | 5,010 | 1,509 | 1,410 | 1 | — | — | (6,228 | ) | 1,702 | |||||||||||||||
Allowance for borrowed funds used during construction | (1,194 | ) | (73 | ) | (118 | ) | — | — | — | — | (1,385 | ) | ||||||||||||
Preferred securities distributions of trust subsidiaries | — | — | — | — | — | — | 5,756 | 5,756 | ||||||||||||||||
Preferred stock dividends of subsidiaries | — | — | — | — | — | — | 686 | 686 | ||||||||||||||||
| 23,914 | 7,062 | 7,921 | 1 | — | — | 214 | 39,112 | |||||||||||||||||
Income before preferred stock dividends of HECO | 57,382 | 10,122 | 12,874 | (72 | ) | 3,112 | 2,822 | (28,858 | ) | 57,382 | ||||||||||||||
Preferred stock dividends of HECO | 810 | 400 | 286 | — | 3,019 | 2,737 | (6,442 | ) | 810 | |||||||||||||||
Net income for common stock | $ | 56,572 | 9,722 | 12,588 | (72 | ) | 93 | 85 | (22,416 | ) | $ | 56,572 | ||||||||||||
Hawaiian Electric Company, Inc. and Subsidiaries
Consolidating statement of retained earnings (unaudited)
Nine months ended September 30, 2003
(in thousands) | HECO | HELCO | MECO | RHI | HECO Capital Trust I | HECO Capital Trust II | Reclassi- and elimina- | HECO consoli- | ||||||||||||||||||
Retained earnings, beginning of period | $ | 542,023 | 71,414 | 87,092 | — | — | — | (158,506 | ) | $ | 542,023 | |||||||||||||||
Net income for common stock | 56,572 | 9,722 | 12,588 | (72 | ) | 93 | 85 | (22,416 | ) | 56,572 | ||||||||||||||||
Common stock dividends | (42,449 | ) | (5,773 | ) | (9,869 | ) | — | (93 | ) | (85 | ) | 15,820 | (42,449 | ) | ||||||||||||
Retained earnings, end of period | $ | 556,146 | 75,363 | 89,811 | (72 | ) | — | — | (165,102 | ) | $ | 556,146 | ||||||||||||||
36
Hawaiian Electric Company, Inc. and Subsidiaries
Consolidating statement of income (unaudited)
Nine months ended September 30, 2002
(in thousands) | HECO | HELCO | MECO | HECO Capital Trust I | HECO Capital Trust II | Reclassi- and elimina- | HECO consoli- | ||||||||||||||
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 securities distributions of trust subsidiaries | — | — | — | — | — | 5,756 | 5,756 | ||||||||||||||
Preferred stock dividends of subsidiaries | — | — | — | — | — | 686 | 686 | ||||||||||||||
| 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 | |||||||||||
Hawaiian Electric Company, Inc. and Subsidiaries
Consolidating statement of retained earnings (unaudited)
Nine months ended September 30, 2002
(in thousands) | HECO | HELCO | MECO | HECO Capital Trust I | HECO Capital Trust II | Reclassi- and elimina- | HECO consoli- dated | ||||||||||||||||
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 | |||||||||||||
37
Hawaiian Electric Company, Inc. and Subsidiaries
Consolidating statement of cash flows (unaudited)
|
| Three months ended March 31, 2003 |
| |||||||||||||||||||||
|
|
| ||||||||||||||||||||||
(in thousands) |
| HECO |
| HELCO |
| MECO |
| HECO Capital |
| HECO Capital |
| Reclassi-fications |
| HECO consolidated |
| |||||||||
|
|
|
|
|
|
|
| |||||||||||||||||
Cash flows from operating activities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||
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 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||
| Equity in earnings |
|
| (9,640 | ) |
| — |
|
| — |
|
| — |
|
| — |
|
| 9,640 |
|
| — |
| |
| Common stock dividends received from subsidiaries |
|
| 3,650 |
|
| — |
|
| — |
|
| — |
|
| — |
|
| (3,650 | ) |
| — |
| |
| Depreciation of property, plant and equipment |
|
| 16,769 |
|
| 5,057 |
|
| 5,786 |
|
| — |
|
| — |
|
| — |
|
| 27,612 |
| |
| Other amortization |
|
| 947 |
|
| 182 |
|
| 1,005 |
|
| — |
|
| — |
|
| — |
|
| 2,134 |
| |
| Deferred income taxes |
|
| (225 | ) |
| 538 |
|
| (207 | ) |
| — |
|
| — |
|
| — |
|
| 106 |
| |
| Tax credits, net |
|
| 284 |
|
| 466 |
|
| 36 |
|
| — |
|
| — |
|
| — |
|
| 786 |
| |
| Allowance for equity funds used during construction |
|
| (866 | ) |
| (33 | ) |
| (89 | ) |
| — |
|
| — |
|
| — |
|
| (988 | ) | |
| Changes in assets and liabilities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
| Decrease (increase) in accounts receivable |
|
| 1,259 |
|
| (478 | ) |
| (106 | ) |
| — |
|
| — |
|
| (471 | ) |
| 204 |
| |
| Decrease in accrued unbilled revenues |
|
| 3,085 |
|
| 31 |
|
| 293 |
|
| — |
|
| — |
|
| — |
|
| 3,409 |
| |
| Increase in fuel oil stock |
|
| (5,519 | ) |
| (772 | ) |
| (380 | ) |
| — |
|
| — |
|
| — |
|
| (6,671 | ) | |
| Increase in materials and supplies |
|
| (741 | ) |
| (171 | ) |
| (682 | ) |
| — |
|
| — |
|
| — |
|
| (1,594 | ) | |
| Decrease (increase) in regulatory assets |
|
| 505 |
|
| 49 |
|
| (670 | ) |
| — |
|
| — |
|
| — |
|
| (116 | ) | |
| Increase (decrease) in accounts payable |
|
| (3,184 | ) |
| (1,381 | ) |
| 597 |
|
| — |
|
| — |
|
| — |
|
| (3,968 | ) | |
| Decrease in taxes accrued |
|
| (12,289 | ) |
| (2,129 | ) |
| (2,414 | ) |
| — |
|
| — |
|
| — |
|
| (16,832 | ) | |
| Changes in other assets and liabilities |
|
| 3,481 |
|
| 160 |
|
| 1,568 |
|
| — |
|
| — |
|
| 2,390 |
|
| 7,599 |
| |
|
|
|
|
|
|
|
|
|
| |||||||||||||||
Net cash provided by operating activities |
|
| 15,442 |
|
| 6,522 |
|
| 9,544 |
|
| 1,037 |
|
| 941 |
|
| (3,879 | ) |
| 29,607 |
| ||
|
|
|
|
|
|
|
|
| ||||||||||||||||
Cash flows from investing activities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||
Capital expenditures |
|
| (15,408 | ) |
| (5,463 | ) |
| (2,991 | ) |
| — |
|
| — |
|
| — |
|
| (23,862 | ) | ||
Contributions in aid of construction |
|
| 1,300 |
|
| 3,064 |
|
| 478 |
|
| — |
|
| — |
|
| — |
|
| 4,842 |
| ||
Repayments from affiliates |
|
| 2,200 |
|
| — |
|
| 4,500 |
|
| — |
|
| — |
|
| (6,700 | ) |
| — |
| ||
|
|
|
|
|
|
|
|
| ||||||||||||||||
Net cash provided by (used in) investing activities |
|
| (11,908 | ) |
| (2,399 | ) |
| 1,987 |
|
| — |
|
| — |
|
| (6,700 | ) |
| (19,020 | ) | ||
|
|
|
|
|
|
|
|
| ||||||||||||||||
Cash flows from financing activities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||
Common stock dividends |
|
| (15,290 | ) |
| (642 | ) |
| (2,949 | ) |
| (31 | ) |
| (28 | ) |
| 3,650 |
|
| (15,290 | ) | ||
Preferred stock dividends |
|
| (270 | ) |
| (134 | ) |
| (95 | ) |
| — |
|
| — |
|
| 229 |
|
| (270 | ) | ||
Preferred securities distributions of trust subsidiaries |
|
| — |
|
| — |
|
| — |
|
| (1,006 | ) |
| (913 | ) |
| — |
|
| (1,919 | ) | ||
Proceeds from issuance of long-term debt |
|
| 943 |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| 943 |
| ||
Repayment of long-term debt |
|
| — |
|
| — |
|
| (8,000 | ) |
| — |
|
| — |
|
| — |
|
| (8,000 | ) | ||
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 |
|
| (3,317 | ) |
| (152 | ) |
| (2 | ) |
| — |
|
| — |
|
| — |
|
| (3,471 | ) | ||
|
|
|
|
|
|
|
|
| ||||||||||||||||
Net cash used in financing activities |
|
| (3,534 | ) |
| (3,128 | ) |
| (11,046 | ) |
| (1,037 | ) |
| (941 | ) |
| 10,579 |
|
| (9,107 | ) | ||
|
|
|
|
|
|
|
|
| ||||||||||||||||
Net increase in cash and equivalents |
|
| — |
|
| 995 |
|
| 485 |
|
| — |
|
| — |
|
| — |
|
| 1,480 |
| ||
Cash and equivalents, beginning of period |
|
| 9 |
|
| 4 |
|
| 1,713 |
|
| — |
|
| — |
|
| — |
|
| 1,726 |
| ||
|
|
|
|
|
|
|
|
| ||||||||||||||||
Cash and equivalents, end of period |
| $ | 9 |
| $ | 999 |
| $ | 2,198 |
| $ | — |
| $ | — |
| $ | — |
| $ | 3,206 |
| ||
|
|
|
|
|
|
|
|
| ||||||||||||||||
Nine months ended September 30, 2003
(in thousands) | HECO | HELCO | MECO | RHI | HECO Capital Trust I | HECO Capital Trust II | Elimination addition to (deduction from) cash flows | HECO consolidated | ||||||||||||||||||
Cash flows from operating activities | ||||||||||||||||||||||||||
Income before preferred stock dividends of HECO | $ | 57,382 | 10,122 | 12,874 | (72 | ) | 3,112 | 2,822 | (28,858 | ) | $ | 57,382 | ||||||||||||||
Adjustments to reconcile income before preferred stock dividends of HECO to net cash provided by operating activities | ||||||||||||||||||||||||||
Equity in earnings | (22,415 | ) | — | — | — | — | — | 22,415 | — | |||||||||||||||||
Common stock dividends received from subsidiaries | 15,819 | — | — | — | — | — | (15,819 | ) | — | |||||||||||||||||
Depreciation of property, plant and equipment | 50,340 | 15,171 | 17,359 | — | — | — | — | 82,870 | ||||||||||||||||||
Other amortization | 2,991 | 569 | 2,656 | — | — | — | — | 6,216 | ||||||||||||||||||
Deferred income taxes | 1,485 | 3,252 | (896 | ) | (46 | ) | — | — | — | 3,795 | ||||||||||||||||
Tax credits, net | 853 | 388 | (44 | ) | — | — | — | — | 1,197 | |||||||||||||||||
Allowance for equity funds used during construction | (2,624 | ) | (152 | ) | (299 | ) | — | — | — | — | (3,075 | ) | ||||||||||||||
Changes in assets and liabilities | ||||||||||||||||||||||||||
Decrease (increase) in accounts receivable | 1,454 | (1,327 | ) | (1,164 | ) | — | — | — | (615 | ) | (1,652 | ) | ||||||||||||||
Decrease (increase) in accrued unbilled revenues | 174 | 398 | (155 | ) | — | — | — | — | 417 | |||||||||||||||||
Increase in fuel oil stock | (1,845 | ) | (450 | ) | (381 | ) | — | — | — | — | (2,676 | ) | ||||||||||||||
Increase in materials and supplies | (2,850 | ) | (275 | ) | (1,208 | ) | — | — | — | — | (4,333 | ) | ||||||||||||||
Decrease (increase) in regulatory assets | (543 | ) | 408 | (2,131 | ) | — | — | — | — | (2,266 | ) | |||||||||||||||
Increase (decrease) in accounts payable | 4,057 | (586 | ) | (1,615 | ) | — | — | — | — | 1,856 | ||||||||||||||||
Increase in taxes accrued | 9,458 | 1,688 | 6,562 | — | — | — | — | 17,708 | ||||||||||||||||||
Changes in other assets and liabilities | (1,696 | ) | (1,403 | ) | 3,982 | 6 | — | — | 6,371 | 7,260 | ||||||||||||||||
Net cash provided by (used in) operating activities | 112,040 | 27,803 | 35,540 | (112 | ) | 3,112 | 2,822 | (16,506 | ) | 164,699 | ||||||||||||||||
Cash flows from investing activities | ||||||||||||||||||||||||||
Capital expenditures | (53,805 | ) | (18,770 | ) | (10,975 | ) | — | — | — | — | (83,550 | ) | ||||||||||||||
Contribution in aid of construction | 5,028 | 4,120 | 1,148 | — | — | — | — | 10,296 | ||||||||||||||||||
Investment in subsidiary | (181 | ) | — | — | — | — | — | 181 | — | |||||||||||||||||
Advances to (repayments from) affiliates | 5,400 | — | (5,000 | ) | — | — | — | (400 | ) | — | ||||||||||||||||
Net cash used in investing activities | (43,558 | ) | (14,650 | ) | (14,827 | ) | — | — | — | (219 | ) | (73,254 | ) | |||||||||||||
Cash flows from financing activities | ||||||||||||||||||||||||||
Common stock dividends | (42,449 | ) | (5,773 | ) | (9,869 | ) | — | (93 | ) | (85 | ) | 15,820 | (42,449 | ) | ||||||||||||
Preferred stock dividends | (810 | ) | (400 | ) | (286 | ) | — | — | — | 686 | (810 | ) | ||||||||||||||
Preferred securities distributions of trust subsidiaries | — | — | — | — | (3,019 | ) | (2,737 | ) | — | (5,756 | ) | |||||||||||||||
Proceeds from issuance of long-term debt | 41,523 | 25,837 | — | — | — | — | — | 67,360 | ||||||||||||||||||
Repayment of long-term debt | (40,000 | ) | (26,000 | ) | (8,000 | ) | — | — | — | — | (74,000 | ) | ||||||||||||||
Proceeds from issuance of common stock | — | — | — | 181 | — | — | (181 | ) | — | |||||||||||||||||
Net decrease in short-term borrowings from affiliate with original maturities of three months or less | (600 | ) | (5,400 | ) | — | — | — | — | 400 | (5,600 | ) | |||||||||||||||
Other | (4,381 | ) | (151 | ) | (3 | ) | — | — | — | — | (4,535 | ) | ||||||||||||||
Net cash provided by (used in) financing activities | (46,717 | ) | (11,887 | ) | (18,158 | ) | 181 | (3,112 | ) | (2,822 | ) | 16,725 | (65,790 | ) | ||||||||||||
Net increase in cash and equivalents | 21,765 | 1,266 | 2,555 | 69 | — | — | — | 25,655 | ||||||||||||||||||
Cash and equivalents, beginning of period | 9 | 4 | 1,713 | — | — | — | — | 1,726 | ||||||||||||||||||
Cash and equivalents, end of period | $ | 21,774 | 1,270 | 4,268 | 69 | — | — | — | $ | 27,381 | ||||||||||||||||
38
Hawaiian Electric Company, Inc. and Subsidiaries
Consolidating statement of cash flows (unaudited)
|
| Three months ended March 31, 2002 |
| |||||||||||||||||||||||||||
|
|
| ||||||||||||||||||||||||||||
(in thousands) |
| HECO |
| HELCO |
| MECO |
| HECO Capital |
| HECO Capital |
| Reclassi- |
| HECO consolidated |
| |||||||||||||||
|
|
|
|
|
|
|
| |||||||||||||||||||||||
Cash flows from operating activities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||
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 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||
| Equity in earnings |
|
| (7,620 | ) |
| — |
|
| — |
|
| — |
|
| — |
|
| 7,620 |
|
| — |
| |||||||
| Common stock dividends received from subsidiaries |
|
| 3,091 |
|
| — |
|
| — |
|
| — |
|
| — |
|
| (3,091 | ) |
|
|
| |||||||
| Depreciation of property, plant and equipment |
|
| 15,901 |
|
| 4,894 |
|
| 5,565 |
|
| — |
|
| — |
|
| — |
|
| 26,360 |
| |||||||
| Other amortization |
|
| 1,071 |
|
| 602 |
|
| 1,390 |
|
| — |
|
| — |
|
| — |
|
| 3,063 |
| |||||||
| Deferred income taxes |
|
| 530 |
|
| (31 | ) |
| (177 | ) |
| — |
|
| — |
|
| — |
|
| 322 |
| |||||||
| Tax credits, net |
|
| 242 |
|
| 375 |
|
| 78 |
|
| — |
|
| — |
|
| — |
|
| 695 |
| |||||||
| Allowance for equity funds used during construction |
|
| (711 | ) |
| (55 | ) |
| (7 | ) |
| — |
|
| — |
|
| — |
|
| (773 | ) | |||||||
| Changes in assets and liabilities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||
| Decrease in accounts receivable |
|
| 6,968 |
|
| 144 |
|
| 1,469 |
|
| — |
|
| — |
|
| 394 |
|
| 8,975 |
| |||||||
| Decrease in accrued unbilled revenues |
|
| 698 |
|
| 136 |
|
| 812 |
|
| — |
|
| — |
|
| — |
|
| 1,646 |
| |||||||
| Decrease (increase) in fuel oil stock |
|
| (2,432 | ) |
| 848 |
|
| 460 |
|
| — |
|
| — |
|
| — |
|
| (1,124 | ) | |||||||
| Increase in materials and supplies |
|
| (288 | ) |
| (363 | ) |
| (450 | ) |
| — |
|
| — |
|
| — |
|
| (1,101 | ) | |||||||
| Decrease (increase) in regulatory assets |
|
| (121 | ) |
| 74 |
|
| (399 | ) |
| — |
|
| — |
|
| — |
|
| (446 | ) | |||||||
| Increase (decrease) in accounts payable |
|
| 3,101 |
|
| (1,997 | ) |
| (2,417 | ) |
| — |
|
| — |
|
| — |
|
| (1,313 | ) | |||||||
| Decrease in taxes accrued |
|
| (17,179 | ) |
| (2,594 | ) |
| (1,631 | ) |
| — |
|
| — |
|
| — |
|
| (21,404 | ) | |||||||
| Changes in other assets and liabilities |
|
| (2,408 | ) |
| 1,248 |
|
| 968 |
|
| — |
|
| — |
|
| 1,525 |
|
| 1,333 |
| |||||||
|
|
|
|
|
|
|
|
|
| |||||||||||||||||||||
Net cash provided by operating activities |
|
| 21,472 |
|
| 6,687 |
|
| 10,045 |
|
| 1,037 |
|
| 941 |
|
| (3,320 | ) |
| 36,862 |
| ||||||||
|
|
|
|
|
|
|
|
| ||||||||||||||||||||||
Cash flows from investing activities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||
Capital expenditures |
|
| (13,957 | ) |
| (3,627 | ) |
| (3,309 | ) |
| — |
|
| — |
|
| — |
|
| (20,893 | ) | ||||||||
Contributions in aid of construction |
|
| 1,155 |
|
| 460 |
|
| 185 |
|
| — |
|
| — |
|
| — |
|
| 1,800 |
| ||||||||
Advances to affiliates |
|
| (1,000 | ) |
| — |
|
| (5,000 | ) |
| — |
|
| — |
|
| 6,000 |
|
| — |
| ||||||||
|
|
|
|
|
|
|
|
| ||||||||||||||||||||||
Net cash used in investing activities |
|
| (13,802 | ) |
| (3,167 | ) |
| (8,124 | ) |
| — |
|
| — |
|
| 6,000 |
|
| (19,093 | ) | ||||||||
|
|
|
|
|
|
|
|
| ||||||||||||||||||||||
Cash flows from financing activities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||
Common stock dividends |
|
| (9,233 | ) |
| (926 | ) |
| (2,106 | ) |
| (31 | ) |
| (28 | ) |
| 3,091 |
|
| (9,233 | ) | ||||||||
Preferred stock dividends |
|
| (270 | ) |
| (134 | ) |
| (95 | ) |
| — |
|
| — |
|
| 229 |
|
| (270 | ) | ||||||||
Preferred securities distributions of trust subsidiaries |
|
| — |
|
| — |
|
| — |
|
| (1,006 | ) |
| (913 | ) |
| — |
|
| (1,919 | ) | ||||||||
Proceeds from issuance of long-term debt |
|
| 3,277 |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| 3,277 |
| ||||||||
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 |
|
| 4,529 |
|
| 1,000 |
|
| — |
|
| — |
|
| — |
|
| (6,000 | ) |
| (471 | ) | ||||||||
Other |
|
| (5,973 | ) |
| 262 |
|
| — |
|
| — |
|
| — |
|
| — |
|
| (5,711 | ) | ||||||||
|
|
|
|
|
|
|
|
| ||||||||||||||||||||||
Net cash used in financing activities |
|
| (7,670 | ) |
| (4,798 | ) |
| (2,201 | ) |
| (1,037 | ) |
| (941 | ) |
| (2,680 | ) |
| (19,327 | ) | ||||||||
|
|
|
|
|
|
|
|
| ||||||||||||||||||||||
Net decrease in cash and equivalents |
|
| — |
|
| (1,278 | ) |
| (280 | ) |
| — |
|
| — |
|
| — |
|
| (1,558 | ) | ||||||||
Cash and equivalents, beginning of period |
|
| 9 |
|
| 1,282 |
|
| 567 |
|
| — |
|
| — |
|
| — |
|
| 1,858 |
| ||||||||
|
|
|
|
|
|
|
|
| ||||||||||||||||||||||
Cash and equivalents, end of period |
| $ | 9 |
| $ | 4 |
| $ | 287 |
| $ | — |
| $ | — |
| $ | — |
| $ | 300 |
| ||||||||
|
|
|
|
|
|
|
|
| ||||||||||||||||||||||
31Nine months ended September 30, 2002
(in thousands) | HECO | HELCO | MECO | HECO Capital Trust I | HECO Capital Trust II | Elimination addition to (deduction cash flows | HECO consolidated | ||||||||||||||||
Cash flows from operating activities | |||||||||||||||||||||||
Income before preferred stock dividends of HECO | $ | 70,629 | 11,988 | 14,455 | 3,112 | 2,822 | (32,377 | ) | $ | 70,629 | |||||||||||||
Adjustments to reconcile income before preferred stock dividends of HECO to net cash provided by operating activities | |||||||||||||||||||||||
Equity in earnings | (25,935 | ) | — | — | — | — | 25,935 | — | |||||||||||||||
Common stock dividends received from subsidiaries | 11,297 | — | — | — | — | (11,297 | ) | — | |||||||||||||||
Depreciation of property, plant and equipment | 47,708 | 14,658 | 16,697 | — | — | — | 79,063 | ||||||||||||||||
Other amortization | 3,004 | 1,691 | 4,496 | — | — | — | 9,191 | ||||||||||||||||
Deferred income taxes | 5,752 | 128 | (799 | ) | — | — | — | 5,081 | |||||||||||||||
Tax credits, net | 725 | 154 | 118 | — | — | — | 997 | ||||||||||||||||
Allowance for equity funds used during construction | (2,680 | ) | (168 | ) | (129 | ) | — | — | — | (2,977 | ) | ||||||||||||
Changes in assets and liabilities | |||||||||||||||||||||||
Decrease (increase) in accounts receivable | 1,122 | (744 | ) | 212 | — | — | (630 | ) | (40 | ) | |||||||||||||
Decrease (increase) in accrued unbilled revenues | (5,856 | ) | (127 | ) | 351 | — | — | — | (5,632 | ) | |||||||||||||
Decrease (increase) in fuel oil stock | (8,212 | ) | 579 | (1,497 | ) | — | — | — | (9,130 | ) | |||||||||||||
Increase in materials and supplies | (673 | ) | (351 | ) | (270 | ) | — | — | — | (1,294 | ) | ||||||||||||
Decrease (increase) in regulatory assets | (151 | ) | 473 | (1,708 | ) | — | — | — | (1,386 | ) | |||||||||||||
Increase (decrease) in accounts payable | 6,172 | (2,588 | ) | (2,631 | ) | — | — | — | 953 | ||||||||||||||
Decrease in taxes accrued | (12,373 | ) | (1,494 | ) | (541 | ) | — | — | — | (14,408 | ) | ||||||||||||
Changes in other assets and liabilities | (14,674 | ) | (1,714 | ) | 278 | — | — | 6,386 | (9,724 | ) | |||||||||||||
Net cash provided by operating activities | 75,855 | 22,485 | 29,032 | 3,112 | 2,822 | (11,983 | ) | 121,323 | |||||||||||||||
Cash flows from investing activities | |||||||||||||||||||||||
Capital expenditures | (52,511 | ) | (16,717 | ) | (8,989 | ) | — | — | — | (78,217 | ) | ||||||||||||
Contribution in aid of construction | 3,876 | 2,602 | 916 | — | — | — | 7,394 | ||||||||||||||||
Repayments from affiliates | 56 | — | — | — | — | — | 56 | ||||||||||||||||
Other | (300 | ) | — | (13,000 | ) | — | — | 13,300 | — | ||||||||||||||
Net cash used in investing activities | (48,879 | ) | (14,115 | ) | (21,073 | ) | — | — | 13,300 | (70,767 | ) | ||||||||||||
Cash flows from financing activities | |||||||||||||||||||||||
Common stock dividends | (31,338 | ) | (4,670 | ) | (6,449 | ) | (93 | ) | (85 | ) | 11,297 | (31,338 | ) | ||||||||||
Preferred stock dividends | (810 | ) | (400 | ) | (286 | ) | — | — | 686 | (810 | ) | ||||||||||||
Preferred securities distributions of trust subsidiaries | — | — | — | (3,019 | ) | (2,737 | ) | — | (5,756 | ) | |||||||||||||
Proceeds from issuance of long-term debt | 11,691 | — | — | — | — | — | 11,691 | ||||||||||||||||
Repayment of long-term debt | — | (5,000 | ) | — | — | — | — | (5,000 | ) | ||||||||||||||
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 | ) | ||||||||||||||
Other | (7,454 | ) | 122 | (7 | ) | — | — | — | (7,339 | ) | |||||||||||||
Net cash used in financing activities | (26,880 | ) | (9,648 | ) | (6,742 | ) | (3,112 | ) | (2,822 | ) | (1,317 | ) | (50,521 | ) | |||||||||
Net increase (decrease) in cash and equivalents | 96 | (1,278 | ) | 1,217 | — | — | — | 35 | |||||||||||||||
Cash and equivalents, beginning of period | 9 | 1,282 | 567 | — | — | — | 1,858 | ||||||||||||||||
Cash and equivalents, end of period | $ | 105 | 4 | 1,784 | — | — | — | $ | 1,893 | ||||||||||||||
39
| Item 2. | Management’s discussion and analysis of financial condition and results of operations |
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 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 |
|
*
(in thousands, except per share amounts) | Three months ended September 30, | % change | Primary reason(s) for significant change* | ||||||||
| 2003 | 2002 | ||||||||||
Revenues | $ | 453,703 | $ | 431,560 | 5 | % | Increase for the electric utility and “other” segments, partly offset by a decrease for the bank segment | ||||
Operating income | 68,235 | 71,738 | (5 | ) | Decreases for the electric utility segment, partly offset by an increase for the bank and “other” segments | ||||||
Net income | 30,522 | 33,512 | (9 | ) | Lower operating income, partly offset by lower other expenses (including interest and distributions on preferred securities), primarily due to lower interest rates and short-term borrowing balances | ||||||
Basic earnings per common share | $ | 0.81 | $ | 0.92 | (12 | ) | See explanation for net income above and weighted-average number of common shares outstanding below | ||||
Weighted-average number of common shares outstanding | 37,516 | 36,435 | 3 | Issuances of shares under the DRIP and other plans | |||||||
40
(in thousands, except per share amounts) | Nine months ended September 30, | % change | Primary reason(s) for significant change* | ||||||||
| 2003 | 2002 | ||||||||||
Revenues | $ | 1,327,095 | $ | 1,217,998 | 9 | Increase for the electric utility and “other” segments, partly offset by a decrease for the bank segment | |||||
Operating income | 188,776 | 206,968 | (9) | Decreases for the electric utility and bank segments, slightly offset by an increase for the “other” segment | |||||||
Income (loss) from: | |||||||||||
Continuing operations | $ | 80,609 | $ | 91,842 | (12) | Lower operating income, partly offset by lower other expenses (including interest and distributions on preferred securities), primarily due to lower interest rates and lower borrowing balances | |||||
Discontinued operations | (3,870 | ) | — | NM | HEIPC writedown of investment in CEPALCO by $5 million and increase in reserve for future expenses of $1 million (primarily for general and administrative expenses during the longer than expected disposal period) in the second quarter of 2003 | ||||||
Net income | $ | 76,739 | $ | 91,842 | (16) | ||||||
Basic earnings per common share– | |||||||||||
Continuing operations | $ | 2.16 | $ | 2.54 | (15) | ||||||
Discontinued operations | (0.10 | ) | — | NM | |||||||
| $ | 2.06 | $ | 2.54 | (19) | See explanation for income above and | ||||||
weighted- average number of common shares | |||||||||||
Weighted-average number of common shares outstanding | 37,205 | 36,150 | 3 | Issuances of shares under the DRIP and other plans | |||||||
| * | Also see segment discussions which follow. |
NM Not meaningful.
Economic conditions
Despite
Because its core businesses are providing local electric utility and banking services, HEI’s operating results are significantly influenced by the impactsstrength 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 September 11, 2001 terrorist attacks and the war in Iraq, impact of those conditions on tourism.
Hawaii’s overall economy has been relatively resilient. Hawaii’s real gross state product increased 2.7%improved despite the weakness in 2002, and is expected to continue modest growth intourism from Japan. For the first eight months of 2003, despite temporary setbacks in tourism. Visitortotal visitor arrivals startedwere down 1.3% from the same period last 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 Japanesea combination of a weak international visitor market in particular has fallen sharply (down 28% during the Iraqi Freedom campaign from March 19 to April 17, 2003 compared to prior year levels)11.5%) and a strong domestic market (up 3.2%). Total visitor days, however, were up 4.7% due to concerns overlonger average lengths of stay in both domestic and international markets. Hotel occupancy also reached 83% in
41
August 2003, the warstate’s highest level since 1991. With these positive results, the state expects total visitor expenditures this year to top $10 billion for the first time.
Key non-tourism sectors, particularly construction, real estate and the spread of Severe Acute Respiratory Syndrome (SARS). Some airlines have temporarily reduced daily flights to Hawaii in response to softening 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.
While the visitor industry has been weakened by external events, Hawaii’s economy continuesservices, continue to be buoyed by strength in certain key non-tourism sectors. Withstrong. Although interest rates at 41-year lows,have been fluctuating recently, they are still low historically and continue to spur activity in the local construction and real estate industries continue to grow. In 2002, total construction expenditures rose 13.5% over 2001, and construction jobs increased 3.5%.industries. In the first twoseven months of 2003, the contracting tax base (a measure of construction activity subject to the general excise tax) increased 11.7% and the number of construction jobs continued this strong growth, increasing 8.9%grew 4.2% for the month of August 2003 compared with the same periods last year. Building permits, an indicator of future construction activity, also jumped 73.4% during the first seven months of 2003 over the same period in 2002. Real estate resales also continue to show strength in Hawaii. In the first nine months of 2003, single family dwelling and condominium resale volumes on Oahu were up 14.8% and 30.0%, respectively, while the median sales prices were up 12.6% and 16.1% respectively over the same period last year. ForIn September 2003, the firstsingle family dwelling median price of $395,000 was the highest recorded on Oahu, and sales speed, at 25 days, was the fastest ever for Oahu homes. Other sectors showing notable growth include educational services and professional and business services, with job growth rates of 7.2% and 4.3%, respectively, in the second quarter of 2003 home resales volume on Oahu was up 9.1%over the second quarter of 2002.
Hawaii’s improving economy is also reflected in other general economic statistics. Civilian employment and jobs continued their ascent, increasing by 4.0% and 2.1%, respectively, in the median sales price was up 13.6%second quarter of 2003 over the same period last year. Home sales onIn the neighbor islands also remained strong
32
through March, with volumesecond quarter of 2003, the number of wage and prices continuing to increase on all islands. Other growing sectors include professional and business services, health services and federal and state government.
salary jobs was at the highest level in Hawaii’s economic resiliency is reflected in other indicators.history. Hawaii’s unemployment rate, at 4.4%, also remained low at 3.4%below the national average of 6.0% in March 2003, after reaching a 12-year low of 3.0% in February. The latest leading economic indicator computed by theAugust 2003. State wastax revenues were up in October 20027.4% for the ninth consecutive month, signaling improvement in economic conditionssecond quarter of 2003 over the same period last year, and Hawaii bankruptcy filings decreased 6.4% during the same period. Hawaii has also experienced income growth, with personal income up 5.5% in the months ahead. Just priorfirst quarter of 2003 compared with the same period last year.
Given these positive trends in key non-tourism sectors and overall economic indicators, the state expects Hawaii’s economy to the onset of the Iraq war, the State’s Department of Business and Economic Development and Tourism lowered its forecast of realgrow moderately by 2.6% in 2003 excluding inflation. Future growth in Hawaii’s economy for 2003 from 2.1%is expected to 1.7% duebe tied primarily to sluggish conditionsthe rate of expansion in the mainland U.S. mainland and Japan economies, in early 2003. The after effects of 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 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.world geopolitical environment.
Dividends
HEI and its predecessor company, HECO, have paid dividends continuously since 1901. On April 22,October 28, 2003, HEI’s Board maintained the quarterly dividend of $0.62 per common share. The payout ratio based on net income for 2002 and the first quarternine months of 2003 was 76% and 94%90% (dividend payout ratio of 76% and 86% based on income from continuing operations), respectively. HEI management believes HEI should achieve and maintain a 65% payout ratio before it considers increasing the common stock dividend above its current level.
Pension and other postretirement benefits
Due to the sharp decline in U.S. equity markets sincefrom the third quarter of 2000 to the first quarter of 2003, the market 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 net losses on retirement benefit plan assets were $112 million, $96 million and $31 million, respectively. For the first fournine months of 2003, the estimated loss wasretirement benefit plan assets generated a total return slightly above 13% and higher than the 9% return assumption resulting in realized and unrealized net gains of approximately $3$80 million.
As a result of
Depending on the 2003 investment experience and low fixed incomestatus of 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.”Pensions” at December 31, 2003. The liability would largely be recorded as a reduction to commonstockholders’ equity through a non-cash charge to accumulated other comprehensive income (AOCI), 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 from the Company’s financial position, results of operations and cash flows will not be known until the retirement benefit plans’ assets and liabilities are valued at December 31, 2003.balance sheet.
At December 31, 2002, the Company was required to recognize an additional minimum liability of $9 million, resulting in a reduction in common equity of $5 million (net of tax benefits).
The amount of additional pensionminimum liability and charge to AOCI, if any, to be recorded at December 31, 2003, could be material and 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, HECO and ASB each made cash contributions of
42
$15 million for the ten months ended October 31, 2003 the Company is currently evaluating whetherand HECO intends to make additional cash contributions to the qualified HEI pension plan in 2003. The additional liability to be recordedof at least $5 million by 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/expensesplans. In addition, retirement benefits expense and cash funding requirements could increase in future years. The Company believesyears depending on the performance of the U.S. equity markets and trends in interest rates. Retirement benefit expenses based on net periodic pension and other postretirement benefit costs that additional contributions and/orare related to utility operations have been an allowable expense for rate-making, and higher retirement benefit expenses, attributable toalong with other factors, may affect 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 generalrequest an electric rate increases and net income could be adversely affected until rate relief is granted.increase.
Assuming no changes in
Based on the market value of the retirement benefit plan provisionsplans’ assets as of September 30, 2003 of $730 million and the actuarial assumptions used at December 31, 2002,1983 Group Annuity Mortality Table and further assuming no further asset appreciation or depreciation through yearend, an expected long-term return on plan assets or contributions for 2003, the additional reductionof 9% in common equityfuture years, a range of 5.75% to 6.75% for the qualifieddiscount rate, and no further changes in assumptions or retirement benefit provisions, the Company’s, consolidated HECO’s and ASB’s AOCI balance (net of tax benefits) related to the minimum pension plans (including the reduction resulting from the removal of the prepaid pension plan asset) is projected to be approximately $78 million (or $127 million, less tax benefits of $49 million)liability at December 31, 2003 and retirement benefits expense (net of which net reduction approximately $76 million would relatetax benefits) for 2004 are projected to be as follows:
| Discount rate | ||||||
($ in millions) | 5.75% | 6.75% | ||||
Consolidated HEI | ||||||
AOCI balance (net of tax benefits) | $ | 90 | $ | 43 | ||
Retirement benefits expense (net of tax benefits) | 17 | 10 | ||||
Consolidated HECO | ||||||
AOCI balance (net of tax benefits) | 88 | 43 | ||||
Retirement benefits expense (net of tax benefits) | 12 | 7 | ||||
ASB | ||||||
AOCI balance (net of tax benefits) | — | — | ||||
Retirement benefits expense (net of tax benefits) | 3 | 2 | ||||
The Company benchmarks its discount rate assumption to the electric utility subsidiaries.
33
The Company’s, consolidated HECO’s and ASB’s retirement benefits expenses (net of tax benefits) are estimated to be $12 million, $8 million and $3 million, respectively, for 2003 compared to retirement benefits income (net of taxes) of the Company and consolidated HECO of $4 million and $6 million, respectively, and retirement benefits expense (net of tax benefits) of ASB of $1 million for 2002.
If the Company isand consolidated HECO are required to record substantially greater charges to equityAOCI in the future than the charges that might be required under the assumptions described above, the Company’s and consolidated HECO’s financial ratios may deteriorate, which could result in security ratings downgrades and difficulty (or greater expense) in obtaining future financing andfinancing. In addition, there may be possible financial covenant violations (although there are no advances currently outstanding under any credit facility subject to financial covenants). as certain bank lines of credit of the Company and HECO require that HECO maintain a minimum ratio of consolidated common equity to consolidated capitalization of 35% and that the Company and HECO maintain a consolidated net worth, exclusive of intangible assets, of at least $850 million and $825 million, respectively.
Insurance
After completing a three year policy period, directors and officers liability insurance will be renewed in February 2004 and management expects significant premium increases in 2004 based on current market conditions.
43
Following is a general discussion of the results of operations by business segment.
Electric utility
|
| Three months ended |
|
|
|
|
|
|
| ||||
|
|
|
|
|
|
|
|
| |||||
(dollars in thousands except per barrel amounts) |
| 2003 |
| 2002 |
|
| % |
|
| Primary reason(s) for significant change |
| ||
|
|
|
|
| |||||||||
Revenues |
| $ | 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 | |||||||||||||
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 |
|
| 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 |
|
| 17,656 |
|
| 20,359 |
|
| (13 | ) |
| Lower operating income, partly offset by higher AFUDC |
|
Kilowatthour sales (millions) |
|
| 2,279 |
|
| 2,223 |
|
| 3 |
|
|
|
|
Cooling degree days (Oahu) |
|
| 828 |
|
| 819 |
|
| 1 |
|
|
|
|
Fuel oil cost per barrel |
| $ | 35.91 |
| $ | 24.45 |
|
| 47 |
|
|
|
|
(dollars in thousands, except per barrel amounts) | Three months ended September 30, | % change | Primary reason(s) for significant change | ||||||||
| 2003 | 2002 | ||||||||||
Revenues | $ | 359,250 | $ | 333,636 | 8 | % | Higher fuel oil and purchased energy fuel costs ($18 million), the effects of which are generally passed on to customers, and 2.7% higher KWH sales ($10 million), partly offset by lower amounts of integrated resource planning costs recovered through surcharges | ||||
Expenses | |||||||||||
Fuel oil | 101,296 | 85,311 | 19 | Higher fuel oil costs and more KWHs generated | |||||||
Purchased power | 92,543 | 87,123 | 6 | Higher fuel costs and more KWHs purchased | |||||||
Other | 118,775 | 107,613 | 10 | Higher other operation and maintenance expenses (including pension and other postretirement benefits), depreciation and taxes, other than income taxes, and a $1.6 million accrual for a potential environmental liability | |||||||
Operating income | 46,636 | 53,589 | (13 | ) | Higher KWH sales, more than offset by higher other operation and maintenance expenses, depreciation, taxes, other than income taxes, and a $1.6 million accrual for a potential environmental liability | ||||||
Net income | 20,360 | 25,610 | (20 | ) | Lower operating income, partly offset by lower income taxes | ||||||
Kilowatthour sales (millions) | 2,583 | 2,515 | 3 | ||||||||
Cooling degree days (Oahu) | 1,639 | 1,539 | 6 | ||||||||
Fuel oil cost per barrel | $ | 35.62 | $ | 30.68 | 16 | ||||||
44
(dollars in thousands, except per barrel amounts) | Nine months ended September 30, | % change | Primary reason(s) for significant change | ||||||||
| 2003 | 2002 | ||||||||||
Revenues | $ | 1,042,691 | $ | 919,643 | 13 | % | Higher fuel oil and purchased energy fuel costs ($106 million), the effects of which are generally passed on to customers, and 2.1% higher KWH sales ($22 million), partly offset by lower amounts of integrated resource planning costs recovered through surcharges | ||||
Expenses | |||||||||||
Fuel oil | 294,303 | 218,901 | 34 | Higher fuel oil costs and more KWHs generated | |||||||
Purchased power | 273,161 | 240,744 | 13 | Higher fuel costs, more KWHs purchased and higher capacity payments | |||||||
Other | 345,031 | 309,852 | 11 | Higher other operation and maintenance expenses (including pension and other postretirement benefits), depreciation and taxes, other than income taxes, and a $1.6 million accrual for a potential environmental penalty | |||||||
Operating income | 130,196 | 150,146 | (13 | ) | Higher KWH sales, more than offset by higher other operation and maintenance expenses, depreciation and taxes, other than income taxes | ||||||
Net income | 56,572 | 69,819 | (19 | ) | Lower operating income, partly offset by lower income taxes | ||||||
Kilowatthour sales (millions) | 7,269 | 7,117 | 2 | ||||||||
Cooling degree days (Oahu) | 3,750 | 3,611 | 4 | ||||||||
Fuel oil cost per barrel | $ | 36.75 | $ | 27.52 | 34 | ||||||
Kilowatthour (KWH) sales in the third quarter and first quarternine months of 2003 increased 2.5%2.7% and 2.1%, respectively, from the same quarterperiods in 2002, primarily due to increases inslightly warmer weather, increased commercial usage, and increased residential usage and the number of residential customers (duedue in part to the strong residential real estate market in Hawaii).market. KWH sales increases for the first quarternine months of 2003 over the first nine months of 2002 for HECO, HELCO, and MECO were 3084 million KWHs, 1535 million KWHs and 1133 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 quarter, KWH sales growth, particularly at HECO, was tempered by the impact on tourism of concerns over the Japanese economy, the war in Iraq, terrorism and the spread of SARS. Cooling degree days were 1%4% higher in the first quarternine months of 2003 compared with the first quarternine months of 2002.
Electric utility operating income for the third quarter of 2003 decreased 10%13% from the firstthird quarter of 2002, primarily due to higher other operation, maintenance and depreciation expenses partlyand a $1.6 million accrual for a
45
potential environmental liability (see “Environmental regulation — Maalaea Units 12 and 13 notice and finding of violation” in note (4) in HECO’s “Notes to consolidated financial statements”), which more than offset by the impact of higher KWH sales.sales (net of taxes, other than income taxes). Other operation expense increased 32%11% primarily due to higher employee benefit expenses, including higher retirementpension and other postretirement 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 certain
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.expense. Pension and other postretirement benefit expenses for the electric utilities increased $6.4$5.5 million over the same period in 2002 ($3.63.4 million expense in the firstthird quarter of 2003 versus a $2.8$2.1 million credit in the firstthird quarter 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 December 31, 2001) and the effect of the stock market decline on the performance of the assets held in trust to satisfy the obligations of the retirement benefit plans. While not significant for the third quarter of 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. Also, internal efforts to improve the security of the Company’s information technology (IT) systems is on-going, but are not currently expected to result in significantly increased costs for 2003. Maintenance expense increased 15% primarily due to higher production maintenance and vegetation management expenses. Higher depreciation expense was attributable to more plant placed in service in 2002.
HECO
Electric utility operating income for the first nine months of 2003 decreased 13% from the first nine months of 2002, primarily due to higher other operation, maintenance and its subsidiaries’ growth indepreciation expenses and the $1.6 million accrual for a potential environmental liability, which more than offset the impact of higher KWH sales are currently forecast(net of taxes, other than income taxes). Other operation expense increased 20% primarily due to be 1.8%, 2.2%, 1.7%, 1.9%higher retirement benefits expense and 1.5%environmental expenses (including a $1.5 million non-recurring adjustment of emission fees). Pension and other postretirement benefit expenses for 2003, 2004, 2005, 2006 and 2007, respectively, but actual KWH sales are affected by several factors outside the control of the electric utilities – such as weather, hotel occupancy levelsincreased $18.2 million over the same period in 2002 ($10.4 million expense in the first nine months of 2003 versus a $7.8 million credit in the first nine months of 2002), partly due to revised assumptions and new construction –the effect of the stock market decline on the performance of the assets held in trust to satisfy the obligations of the retirement benefit plans. Maintenance expense increased 4% primarily due to higher production maintenance and thus may differ substantially from forecast KWH sales.vegetation management expenses. Higher depreciation expense was attributable to plant placed in service in 2002.
Competition
The electric utility industry in Hawaii has become increasingly competitive. Although several IPPs are wellhave established in Hawaii and continue to actively pursue new projects. Competitionpower purchase agreements with the electric utilities, competition in the generation sector in Hawaii ishas been moderated however, by the scarcity of generation sites, various permitting processes and lack of interconnections to other electric utilities. CustomerHowever, customer self-generation, with or without cogeneration, is a continuing competitive factor.
Recent developments involving distributed generation. Historically, HECO and its subsidiaries have been able to compete 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.
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.
46
In July 2003, three vendors of DG/CHP equipment and services proposed, in an informal complaint to the PUC, that the PUC open a proceeding to investigate the electric utilities’ provision of CHP services and the teaming agreement with another vendor, and to issue rules or orders to govern the terms and conditions under which the electric utilities will be permitted to engage in utility-owned DG at individual customers sites. On August 5, 2003, the electric utilities responded to the informal complaint, and to information requests from the PUC on the CHP demonstration project and teaming agreement.
In October 2003, the electric utilities filed an application for approval of a CHP tariff, under which they would provide CHP services to eligible commercial customers. Under the tariff, the electric utilities would own, operate and maintain customer-sited, packaged CHP systems (and certain ancillary equipment used to convert waste heat to chilled or heated water) pursuant to a standard form of contract with the customer. Pending approval of a CHP tariff, the electric utilities plan to request approval for individual CHP projects.
On October 21, 2003, the PUC opened an investigative docket to determine the potential benefits and impact of DG on Hawaii’s electric distribution systems and markets and to develop polices and a framework for DG projects deployed in Hawaii. The PUC intends to address issues related to interconnection matters, ownership and operation of DG projects, impacts of such projects on Hawaii’s electrical distribution systems and markets, defining the role of regulated electric utilities and the PUC in the deployment of DG, identifying rate design and cost allocation issues associated with DG deployment and developing revisions to the integrated resource planning process, if necessary. The PUC indicated it also plans to address issues raised in the informal complaint filed by three vendors of DG/CHP equipment.
1996 Competition docket and related proceedings. 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 Hawaii’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 statesstated 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
On October 21, 2003, the PUC closed the competition proceeding instituted in 1996. The PUC found that developments in other states indicate that, at best, implementation of retail access would be premature, and determined that no action will be taken to implement retail electric competition in Hawaii at this time. The PUC concluded that projections of any potential benefits of restructuring Hawaii’s electric industry are too speculative and that it has not been sufficiently demonstrated that all consumers in Hawaii would continue to receive adequate, safe, reliable, and efficient energy services at fair and reasonable prices under a restructured market at this time. The PUC
47
indicated it will take a cautious approach to restructuring and will continue to monitor restructuring experiences in other states and at the federal level before proceeding with any major restructuring in Hawaii. The PUC determined that it was in the public interest to work within the current regulatory system to strive to improve efficiency within the electric industry, and opened investigative dockets on competitive bidding and DG to move toward a more competitive electric industry environment under cost-based regulation. The stated purpose of the competition bidding investigation is unable to evaluate competitive bidding as a mechanism for acquiring or building new generating capacity in Hawaii. The PUC has made the electric utilities in Hawaii and the Consumer Advocate parties to the new proceedings, and invited interested energy service providers and other business, environmental, cultural and community groups to file motions to intervene or participate in the dockets. The PUC stated it would consider related filings on a case-by-case basis pending completion of the docket. Management cannot 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”).these proceedings.
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 D&O by the PUC concerning the level or method of determining electric utility rates, the authorized returns on equity or other matters, or any prolonged delay in rendering a D&O in a rate or other proceeding, could have a material adverse effect on the Company’s results of 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.
At March 31,September 30, 2003, HECO and its subsidiaries had recognized $16$17 million of revenues under interim orders which allowed them to recover certain integrated resource planning 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 $2.4 million (before interest) of the $10 million of incremental costs incurred during 1995 through 2001.
Management cannot predict with certainty when D&Os in future rate cases will be rendered or the amount of any interim or final rate increase that may be granted. There are no rate cases pending at this time. HECO, however, has committed to file a rate increase application using a 2003 or 2004 test year.(see “Other regulatory matters, Demand-side management programs – agreements with the Consumer Advocate”).
The rate schedules of the electric utility subsidiaries include energy cost adjustment clauses (ECAC) under which electric rates charged to customers are automatically adjusted for changes in the weighted-average cost of fuel oil and certain energy components of purchased power, and the relative amountsmix of energy sources used in company-generated power and purchased power. Purchased power capacity payments are included in the determination of base rates and are not a part of the ECAC. The company generation component in the ECAC includes an efficiency factor that is determined and fixed in a rate case proceeding. Expenses that are incurred by the utility because its fuel efficiency is worse than the fixed efficiency level cannot be passed on to customers. If the utility’s efficiency is better than the fixed efficiency level, however, it keeps the savings associated with the higher efficiency. 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 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
48
requested that the effective date 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. In July 2003, the Consumer Advocate submitted its direct testimony and recommended depreciation expense approximately $31.8 million, or 45%, less than HECO’s requested $70.8 million in annual depreciation expense. HECO’s rebuttal testimony was submitted in August 2003.
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 MayNovember 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 semiannually to the PUC) for HECO, HELCO and MECO were 11.33%, 7.52% and 10.30%, respectively. For the twelve months ended June 30, 2003, the actual ROACEs for HECO, HELCO and MECO were 9.79%, 7.02% and 10.42%, respectively.
As of MayNovember 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)(D&Os noted above). For 2002, the actual simple average RORs (calculated under the rate-making method and reported semiannually to the PUC) for HECO, HELCO and MECO were 8.94%, 9.15% and 8.83%, respectively. MECO’s and HELCO’s RORs were higher than 8.83% and 9.14%, respectively, for 2002. Consequently, an adjustment was made to their shareholder incentives under their demand-side management (DSM) programs in accordance with their agreements for the temporary continuation of the programs. See “Other regulatory matters, Demand-side management programs – agreements with the Consumer Advocate.” For the twelve months ended June 30, 2003, the actual RORs for HECO, HELCO and MECO were 8.19%, 9.09% and 8.94%, respectively.
Hawaiian Electric Company, Inc.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 agreementagreements described below underbelow. HECO has requested that the time for initiating the rate case be extended by 12 months, and the PUC has approved the request, with the result that the rate case is to be initiated approximately 12 months later, using a 2005 test year. See “Other regulatory matters, Demand-side management programs – agreements with the Consumer Advocate.”
Hawaii Electric Light Company, Inc.Inc. In early 2001, HELCO received a final D&O from the PUC authorizing an $8.4 million, or 4.9% increase in annual revenues, effective February 15, 2001 and based on an 11.50% ROACE. The D&O included in rate base $7.6 million for pre-air permit facilities needed for the delayed Keahole power plant expansion project that the PUC had also found to be used or useful to support the existing generating units at Keahole. The timing of a future HELCO rate increase request to recover costs relating to the delayed Keahole power plant expansion project, i.e., adding two combustion turbines (CT-4 and CT-5) at Keahole, including the remaining cost of pre-air permit facilities, will depend on future circumstances. See “HELCO power situation” in note (4) of HECO’s “Notes to Consolidated Financial Statements.”
On June 1, 2001, the PUC issued an order approving a new standby service rate schedule rider for HELCO. The standby service rider issue had been bifurcated from the rest of the rate case. The rider provides the rates, terms and conditions for obtaining backup and supplemental electric power from the utility when a customer obtains all or part of its electric power from sources other than HELCO.
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.”
Other regulatory matters
Demand-side management programs - programs—lost margins and shareholder incentives. HECO, HELCO and MECO’s energy efficiency demand-side management (DSM)DSM programs, currently approved by the PUC, provide for the recovery of lost margins and the earning of shareholder incentives.
49
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 arebecame subject to retroactive adjustment based on the results of impact evaluation reports, similar to the adjustment process for lost margins.
Demand-side management programs – agreements with the Consumer Advocate. In October 2001, HECO and the Consumer Advocate finalized agreements, subject to PUC approval, under which HECO’s three commercial and industrial DSM programs and two residential DSM programs would be continued until HECO’s next rate case,
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 PUC rules require that an application be filed between July and December 2003 in order to use a 2004 test year. The agreements for the temporary continuation of HECO’s existing DSM programs were 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“authorized return on rate base.base” (i.e. the rate of return found by the PUC to be reasonable in the most recent rate case for HECO). HECO also agreed it will not pursue the continuation of lost margins recovery and shareholder incentives through a surcharge mechanism in future rate cases. Consistent with the HECO agreements, in October 2001, HELCO and MECO reached agreements with the Consumer Advocate and filed requests to continue their four existing DSM programs. 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. 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.
With respect to HECO’s agreement with the Consumer Advocate regarding HECO’s three commercial and industrial DSM programs, the parties agreed on August 7, 2003, subject to PUC Commissioners. Carlito Caliboso has been appointed Chairmanapproval, to a delay in the filing of HECO’s next rate case by approximately 12 months, with the result that the rate case would be filed using a 2005 test year. A similar agreement with respect to its two residential DSM programs was reached on August 12, 2003, subject to PUC approval. The other components of the PUC effective April 30, 2003. Mr. Caliboso is an attorney and was in private practice prior to his appointment. Continuing to serve onexisting agreements, as approved by the PUC, is Commissioner Wayne H. Kimura, who served as Chairman from July 2002 to Aprilwould be continued under the new agreements. On August 26, 2003, and Commissioner Janet E. Kawelo.the PUC issued orders approving the new agreements.
Nonutility generationCollective bargaining agreements
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
See “Collective bargaining agreements” 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 priornote (4) in HECO’s “Notes 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 existing plant operations, and which potentially could be used for the development of another coal-fired facility. The PPA amendment, the option and HECO’s consent to the refinancing are subject to several conditions, including PUC approval of the amendment, agreement on the documents providing HECO’s consent and its subordinated security interest in the facility after the refinancing, and completion of the proposed refinancing arrangements by AES Hawaii. HECO has submitted an application to the PUC requesting approval of the PPA amendment.consolidated financial statements.”
Legislation
Congress and the Hawaii legislature periodically consider legislation that could have positive or negative effects on the utilities and their customers. For example, although it is currently stalled in a House-Senate conference committee, comprehensive energy legislation is still before Congress that could increase the domestic supply of oil as well as increase support for energy conservation programs and mandate the use of renewables by utilities. The 2003
50
Hawaii legislature considered 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 remove the cap on the amount of net energy metering the utilities would be required to 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.PUC and Consumer Advocate. Also, the legislature passed a law, which takestook effect on July 1, 2003, that requiresrequired 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 care
38
for a sick family member. At this time, management is evaluatingOn June 26, 2003, the possible impact this newGovernor signed into law may have on the Company.Hawaii State tax credit for renewable energy, which extends the existing tax credit of 35% of the cost of residential solar water heating (up to $1,750) until at least 2008.
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 meet these 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).
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. (RHI), to invest in and encourage further investments in renewable energy projects. In May 2003, RHI solicited competitive proposals for investment opportunities in projects (1 MW or larger) to supply renewable energy on the island of Oahu. RHI is currently reviewing proposals received. In September 2003, RHI issued a similar request for renewable project proposals (due December 4, 2003) for the islands of Maui, Molokai and Lanai. RHI is seeking to take a passive, minority interest in such projects to help stimulate the addition of cost-effective, commercially viable renewable energy generation in the state of Hawaii. 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.
51
Bank
|
| Three months ended March 31, |
|
|
|
|
|
|
| ||||
|
|
|
|
|
|
|
|
| |||||
(in thousands) |
| 2003 |
| 2002 |
| % |
| Primary reason(s) for significant change |
| ||||
|
|
|
|
| |||||||||
Revenues |
| $ | 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 |
|
| 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 |
|
| 13,508 |
|
| 13,351 |
|
| 1 |
|
| Higher operating income |
|
Interest rate spread |
|
| 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 |
|
(in thousands) | Three months ended September 30, | % change | Primary reason(s) for significant change | ||||||||||
| 2003 | 2002 | ||||||||||||
Revenues | $ | 93,770 | $ | 99,722 | (6 | ) | Lower interest income (primarily due to lower loan and mortgage-related securities weighted-average yields, partly offset by the impact of a higher average balance of loans), partly offset by higher fee income and gain on sale of securities | ||||||
Operating income | 25,116 | 24,566 | 2 | Lower net interest income and higher general and administrative expenses (primarily compensation and employee benefits, including pension), more than offset by a lower provision for loan losses and higher fee income and gain on sale of securities | |||||||||
Net income | 15,275 | 14,652 | 4 | Higher operating income and lower income taxes | |||||||||
Interest rate spread | 3.01 | % | 3.28 | % | 98 basis points decrease in the weighted-average yield on interest-earning assets, partly offset by a 71 basis points decrease in the weighted-average rate on interest-bearing liabilities | ||||||||
(in thousands) | Nine months ended September 30, | % change | Primary reason(s) for significant change | ||||||||||
| 2003 | 2002 | ||||||||||||
Revenues | $ | 281,575 | $ | 300,633 | (6 | ) | Lower interest income (primarily due to lower loan and mortgage-related securities weighted-average yields, partly offset by the impact of higher average balances), partly offset by higher fee income and gain on sale of securities | ||||||
Operating income | 69,903 | 71,106 | (2 | ) | Lower net interest income and higher general and administrative expenses (primarily compensation and employee benefits, including pension), partly offset by a lower provision for loan losses and higher fee income and gain on sale of securities | ||||||||
Net income | 42,277 | 42,815 | (1 | ) | Lower operating income | ||||||||
Interest rate spread | 3.06 | % | 3.28 | % | 86 basis points decrease in the weighted-average yield on interest-earning assets, partly offset by a 64 basis points decrease in the weighted-average rate on interest-bearing liabilities | ||||||||
52
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. At September 30, 2003, ASB’s loan portfolio mix consisted of 78% residential loans, 9% business loans, 7% consumer loans and 6% commercial real estate loans. At December 31, 2002, ASB’s loan portfolio mix consisted of 78% residential loans, 8% business loans, 8% consumer loans and 6% commercial real estate loans. ASB’s mortgage-related securities portfolio consists primarily of shorter duration assets and is affected by market interest rates and demand. High prepayments have adversely impacted the yield of the mortgage-related securities portfolio. Deposits continue to be the largest source of funds and are affected by market interest rates, competition and management’s responses to these factors. Advances from the FHLB of Seattle and securities sold under agreements to repurchase continue to be significant sources of funds. At September 30, 2003, ASB’s costing liabilities consisted of 47% core deposits, 21% term certificates and 32% FHLB advances and other borrowings. At December 31, 2002, ASB’s costing liabilities consisted of 45% core deposits, 22% term certificates and 33% FHLB advances and other borrowings. Other factors primarily affecting ASB’s operating results include gains
39
or losses on sales of securities available for sale, fee income, provision for loan losses, writedownchanges in the value of mortgage servicing rights and expenses from operations.
ASB’s net income for the quarter ended March 31, 2003 increased 1% over the first quarter of 2002 due to higher net interest and other income and a lower provision for loan losses. Continued low
Low interest rates and high mortgage refinancing volume however, have put pressure on ASB’s interest rate spread as the loan and mortgage-related securities portfolio repricesportfolios reprice upon refinancing at lower interest rates and premiums on mortgage-related securities must be amortized more rapidly, while at the same time deposit rates are already at low levels that are difficult to reduce further without loss of deposits. Although long-term interest rates have started to increase from their low in June 2003, ASB does not foresee any significant impact to the yields on its loans and mortgage-related securities for approximately 60 to 90 days due to lags inherent in the processing and closing of mortgage loan applications. Although higher long-term interest rates could reduce the market value of mortgage-related securities and reduce stockholder’s equity through a balance sheet charge to AOCI, this reduction in market value of mortgage-related securities would not result in a charge to net income in the absence of an “other-than-temporary” impairment in the value of the securities. At June 30 and September 30, 2003, the unrealized gain, net of taxes, on available-for-sale mortgage-related securities (including securities pledged for repurchase agreements) in AOCI was $23 million and $7 million, respectively. See “Item 3. Quantitative and qualitative disclosures about market risk.”
The following table sets forth average balances, interest and dividend income, interest expense and weighted-average yields earned and rates paid, for certain categories of interest-earning assets and interest-bearing liabilities for the periods indicated.
Three months ended March 31, |
| 2003 |
| 2002 |
| Change |
| ||||
|
|
|
| ||||||||
($ in thousands) |
|
|
|
|
|
|
|
|
|
| |
Loans receivable |
|
|
|
|
|
|
|
|
|
| |
| Average balances 1 |
| $ | 2,991,868 |
| $ | 2,822,428 |
| $ | 169,440 |
|
| Interest income 2 |
|
| 50,473 |
|
| 51,622 |
|
| (1,149 | ) |
| Weighted-average yield |
|
| 6.75 | % |
| 7.32 | % |
| (0.57 | )% |
Mortgage-related securities |
|
|
|
|
|
|
|
|
|
| |
| Average balances |
| $ | 2,698,992 |
| $ | 2,407,770 |
| $ | 291,222 |
|
| Interest income |
|
| 29,277 |
|
| 31,806 |
|
| (2,529 | ) |
| Weighted-average yield |
|
| 4.34 | % |
| 5.28 | % |
| (0.94 | )% |
Investments 3 |
|
|
|
|
|
|
|
|
|
| |
| Average balances |
| $ | 184,672 |
| $ | 322,390 |
| $ | (137,718 | ) |
| Interest and dividend income |
|
| 1,757 |
|
| 2,226 |
|
| (469 | ) |
| Weighted-average yield |
|
| 3.85 | % |
| 2.78 | % |
| 1.07 | % |
Total interest-earning assets |
|
|
|
|
|
|
|
|
|
| |
| Average balances |
| $ | 5,875,532 |
| $ | 5,552,588 |
| $ | 322,944 |
|
| Interest and dividend income |
|
| 81,507 |
|
| 85,654 |
|
| (4,147 | ) |
| Weighted-average yield |
|
| 5.55 | % |
| 6.17 | % |
| (0.62 | )% |
Deposit liabilities |
|
|
|
|
|
|
|
|
|
| |
| Average balances |
| $ | 3,796,151 |
| $ | 3,648,702 |
| $ | 147,449 |
|
| Interest expense |
|
| 14,430 |
|
| 20,173 |
|
| (5,743 | ) |
| Weighted-average rate |
|
| 1.54 | % |
| 2.24 | % |
| (0.70 | )% |
Borrowings |
|
|
|
|
|
|
|
|
|
| |
| Average balances |
| $ | 1,803,534 |
| $ | 1,672,301 |
| $ | 131,233 |
|
| Interest expense |
|
| 18,907 |
|
| 17,943 |
|
| 964 |
|
| Weighted-average rate |
|
| 4.24 | % |
| 4.35 | % |
| (0.11 | )% |
Total interest-bearing liabilities |
|
|
|
|
|
|
|
|
|
| |
| Average balances |
| $ | 5,599,685 |
| $ | 5,321,003 |
| $ | 278,682 |
|
| Interest expense |
|
| 33,337 |
|
| 38,116 |
|
| (4,779 | ) |
| Weighted-average rate |
|
| 2.41 | % |
| 2.90 | % |
| (0.49 | )% |
Net balance, net interest income and interest rate spread |
|
|
|
|
|
|
|
|
|
| |
| Net balance |
| $ | 275,847 |
| $ | 231,585 |
| $ | 44,262 |
|
| Net interest income |
|
| 48,170 |
|
| 47,538 |
|
| 632 |
|
| Interest rate spread |
|
| 3.14 | % |
| 3.27 | % |
| (0.13 | )% |
53
| Three months ended September 30, | Nine months ended September 30, | |||||||||||||||||||
($ in thousands) | 2003 | 2002 | Change | 2003 | 2002 | Change | ||||||||||||||
Loans | ||||||||||||||||||||
Average balances (1) | $ | 3,127,709 | $ | 2,834,512 | $ | 293,197 | $ | 3,059,889 | $ | 2,818,592 | $ | 241,297 | ||||||||
Interest income (2) | 49,657 | 50,210 | (553 | ) | 150,555 | 152,300 | (1,745 | ) | ||||||||||||
Weighted-average yield (%) | 6.35 | 7.09 | (0.74 | ) | 6.56 | 7.20 | (0.64 | ) | ||||||||||||
Mortgage-related securities | ||||||||||||||||||||
Average balances | $ | 2,707,368 | $ | 2,751,435 | $ | (44,067 | ) | $ | 2,712,423 | $ | 2,626,965 | $ | 85,458 | |||||||
Interest income | 24,876 | 35,503 | (10,627 | ) | 80,176 | 103,634 | (23,458 | ) | ||||||||||||
Weighted-average yield (%) | 3.68 | 5.16 | (1.48 | ) | 3.94 | 5.26 | (1.32 | ) | ||||||||||||
Investments (3) | ||||||||||||||||||||
Average balances | $ | 182,843 | $ | 223,370 | $ | (40,527 | ) | $ | 195,701 | $ | 258,602 | $ | (62,901 | ) | ||||||
Interest and dividend income | 1,428 | 1,880 | (452 | ) | 4,736 | 5,979 | (1,243 | ) | ||||||||||||
Weighted-average yield (%) | 3.09 | 3.33 | (0.24 | ) | 3.23 | 3.08 | 0.15 | |||||||||||||
Total interest-earning assets | ||||||||||||||||||||
Average balances | $ | 6,017,920 | $ | 5,809,317 | $ | 208,603 | $ | 5,968,013 | $ | 5,704,159 | $ | 263,854 | ||||||||
Interest and dividend income | 75,961 | 87,593 | (11,632 | ) | 235,467 | 261,913 | (26,446 | ) | ||||||||||||
Weighted-average yield (%) | 5.05 | 6.03 | (0.98 | ) | 5.26 | 6.12 | (0.86 | ) | ||||||||||||
Deposits | ||||||||||||||||||||
Average balances | $ | 3,919,376 | $ | 3,743,883 | $ | 175,493 | $ | 3,855,770 | $ | 3,699,915 | $ | 155,855 | ||||||||
Interest expense | 13,099 | 17,833 | (4,734 | ) | 41,182 | 57,331 | (16,149 | ) | ||||||||||||
Weighted-average rate (%) | 1.33 | 1.89 | (0.56 | ) | 1.43 | 2.07 | (0.64 | ) | ||||||||||||
Borrowings | ||||||||||||||||||||
Average balances | $ | 1,885,260 | $ | 1,793,534 | $ | 91,726 | $ | 1,862,144 | $ | 1,758,328 | $ | 103,816 | ||||||||
Interest expense | 16,736 | 20,588 | (3,852 | ) | 53,126 | 58,583 | (5,457 | ) | ||||||||||||
Weighted-average rate (%) | 3.51 | 4.54 | (1.03 | ) | 3.80 | 4.45 | (0.65 | ) | ||||||||||||
Total interest-bearing liabilities | ||||||||||||||||||||
Average balances | $ | 5,804,636 | $ | 5,537,417 | $ | 267,219 | $ | 5,717,914 | $ | 5,458,243 | $ | 259,671 | ||||||||
Interest expense | 29,835 | 38,421 | (8,586 | ) | 94,308 | 115,914 | (21,606 | ) | ||||||||||||
Weighted-average rate (%) | 2.04 | 2.75 | (0.71 | ) | 2.20 | 2.84 | (0.64 | ) | ||||||||||||
Net balance, net interest income and interest rate spread | ||||||||||||||||||||
Net balance | $ | 213,284 | $ | 271,900 | $ | (58,616 | ) | $ | 250,099 | $ | 245,916 | $ | 4,183 | |||||||
Net interest income | 46,126 | 49,172 | (3,046 | ) | 141,159 | 145,999 | (4,840 | ) | ||||||||||||
Interest rate spread (%) | 3.01 | 3.28 | (0.27 | ) | 3.06 | 3.28 | (0.22 | ) | ||||||||||||
(1) | Includes nonaccrual loans. |
| (2) | |
| Includes interest accrued prior to suspension of interest accrual on nonaccrual loans and loan fees of |
| (3) | |
| Includes stock in the FHLB of Seattle. |
40
54
Three months ended March 31,September 30, 2003
Net interest income before provision for losses for the third quarter ended March 31,of 2003 increaseddecreased by $0.6$3.0 million, or 1.3%6.2%, overfrom the same period in 2002. Net interest spread decreased from 3.27%3.28% for the third quarter ended March 31,of 2002 to 3.14%3.01% for the third quarter ended March 31,of 2003 as ASB’s yield on interest-earning assets decreased faster than the cost of interest-bearing liabilities. As interest rates decreased significantly in the past year, prepayments on mortgage-related securities increased, resulting in increased premium amortization and lower yields on those securities and replacement mortgage-related securities. The 10.3% 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 refinancings. The 4.7% increase in average deposit balances was due to an increase in core deposit balances. Other borrowings increased by 5.1% to fund the increase in the residential loan portfolio and to fund ASB’s securities purchases.
The provision for loan losses for the third quarter of 2003 was $0.9 million lower than the third quarter of 2002 as delinquencies have been below historical norms.
Other income for the third quarter of 2003 increased by $5.7 million, or 46.8%, over the same period in 2002. Fee income on loans serviced for others, net, for the third quarter of 2003 increased by $2.8 million compared to the same period in 2002 as the bank recorded a $1.9 million reversal of its mortgage servicing rights valuation allowance due to slower forecasted prepayments on its servicing portfolio. For the third quarter of 2002, the bank recorded a $1.3 million writedown of its mortgage servicing rights. Gains on sales of mortgage-related securities for the third quarter of 2003 increased by $2.6 million compared to the same period in 2002 as ASB sold securities to manage the prepayment risk in its mortgage-related securities portfolio.
General and administrative expenses for the third quarter of 2003 increased by $3.0 million, or 8.5%, over the same period in 2002. Compensation and employee benefits for the third quarter of 2003 was $2.2 million higher than the same period in 2002 primarily due to the increased staffing levels that have resulted from implementation of its strategic transformation from a retail thrift to a full-service community bank and higher pension costs.
Nine months ended September 30, 2003
Net interest income before provision for losses for the first nine months of 2003 decreased by $4.8 million, or 3.3%, from the same period in 2002. Net interest spread decreased from 3.28% for the first nine months of 2002 to 3.06% for the first nine months of 2003 as ASB’s yield on interest-earning assets decreased faster than the cost of interest-bearing liabilities. As interest rates decreased significantly in the past year, prepayments on mortgage-related securities increased, resulting in increased premium amortization and lower yields on those securities and replacement mortgage-related securities. The 8.6% increase in the average loan portfolio balance was due primarily to an increase in the residential loan portfolio. The 3.3% increase in the average mortgage-related securities portfolio was due to the reinvestment of excess cash tointo mortgage-related securities and additional security purchases in anticipation of high prepayments of the existing portfolio.securities. The 4.2% increase in average deposit balances was due to an increase in core deposit balances. TheOther borrowings increased by 5.9% to fund the increase in average other borrowings was duethe residential loan portfolio and to the additional securityfund ASB’s securities purchases.
The provision for loan losses for the first quarternine months of 2003 was $2.4$5.2 million lower than the first quarternine months of 2002 as delinquencies have been below historical norms. As of March 31,September 30, 2003, ASB’s allowance for loan losses was 1.52%1.48% of average loans outstanding.outstanding, compared to 1.62% as of September 30, 2002. The following table presents the changes in the allowance for loan losses for the periods indicated.
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 |
|
|
|
|
| ||||
Nine months ended September 30 | 2003 | 2002 | ||||||
| (in thousands) | ||||||||
Allowance for loan losses, January 1 | $ | 45,435 | $ | 42,224 | ||||
Provision for loan losses | 2,775 | 8,000 | ||||||
Net charge-offs | (3,005 | ) | (4,442 | ) | ||||
Allowance for loan losses, September 30 | $ | 45,205 | $ | 45,782 | ||||
Other income for the quarter ended March 31,first nine months of 2003 increased by $0.4$7.4 million, or 3.1%19.1%, over the same period in 2002. Fee income from other financial services increased by $1.1$2.6 million for the quarter ended March 31,first nine months of 2003 compared to the same period in 2002 due to higher fee income from debit and ATM cards resulting from ASB’s expansion of its debit
55
card base and its introduction of new ATM services. Fee incomeGains on loans serviced for others, net,sales of mortgage-related securities for the quarter ended March 31,first nine months of 2003 decreasedincreased by $1.4$4.7 million compared to the same period in 2002 as ASB sold securities to manage the bank recorded writedowns onprepayment risk in its mortgage servicing rights of $1.1 million primarily due to faster prepayments on its servicing portfolio. Gains on sales of investments and mortgage-related securities for the quarter ended March 31, 2003 increased by $0.7 million compared to the same period in 2002.portfolio.
General and administrative expenses for the quarter ended March 31,first nine months of 2003 increased by $3.1$9.0 million, or 8.9%8.5%, over the same period in 2002. Compensation and employee benefits for the quarter ended March 31,first nine months of 2003 was $2.1$5.7 million higher than the same period in 2002 primarily due to the increased staffing levels. Consulting expenses for the quarter ended March 31, 2003 increased by $1.1 million over the quarter ended March 31, 2002. These expenses increasedlevels as ASB continued implementation of its strategic transformation from a retail thrift to a full-service community bank.bank and higher pension cost.
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 werewas 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 environment.
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 $258a total of $389 million of FHLB advances. ASB paid off existing higher rate FHLB
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%during the second quarter of 2003. See “Restructuring of Federal Home Loan Bank Advances” in note (4) of HEI’s notes 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.consolidated financial statements. 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 expensewhich 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.that ASB has been experiencing.
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 $1$3 million for the threenine months ended March 31,September 30, 2003 and $17 million for prior years. This reduction has resulted from ASB has takentaking a dividends received deduction on the dividends paid to it by ASB Realty Corporation inCorporation. ASB is currently appealing to the bank franchise tax returns filed in 1999 through 2002. The StateHawaii Tax Appeal Court a decision 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 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 BoardDistrict, disallowing this deduction. See “ASB Realty Corporation” in note (4) 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.HEI’s notes to consolidated financial statements.
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.
56
Other
|
| Three months ended |
|
|
|
| |||||||
|
| % |
| ||||||||||
(in thousands) |
| 2003 |
| 2002 |
|
| Primary reason(s) for significant change |
| |||||
|
|
|
|
| |||||||||
Revenues |
| $ | 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 |
|
| (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 |
|
(in thousands) | Three months ended September 30, | % change | Primary reason(s) for significant change | |||||||||
| 2003 | 2002 | |||||||||||
Revenues | $ | 683 | $ | (1,798 | ) | NM | No writedown of income notes and equity in net income of UTECH Venture Capital Corporation (UTECH) ($0.1 million) in the third quarter of 2003 compared to a writedown of income notes of $1.7 million and equity in net loss of UTECH ($0.4 million) in the third quarter of 2002 | |||||
Operating loss | (3,517 | ) | (6,417 | ) | 45 | See explanation for revenues and lower income note litigation expense | ||||||
(in thousands) | Nine months ended September 30, | % change | Primary reason(s) for significant change | |||||||||
| 2003 | 2002 | |||||||||||
Revenues | $ | 2,829 | $ | (2,278 | ) | NM | No writedown of income notes, a $0.5 million gain on interest rate swaps and equity in net income of UTECH ($0.1 million) in the first nine months of 2003 compared to a writedown of income notes of $3.7 million, a $0.3 million loss on interest rate swaps and equity in net loss of UTECH ($0.3 million) in the first nine months of 2002 | |||||
Operating loss | (11,323 | ) | (14,284 | ) | 21 | See explanation for revenues, partly offset by higher general and administrative expense (including stock option and retirement benefits expenses) | ||||||
NM Not meaningful.
The “other” business segment includes results of operations of HEI Investments, Inc., 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,
42
operate and maintain on-site power generation equipment and auxiliary appliances in Hawaii and the Pacific Rim;Rim, the stock of which was sold for a nominal loss in July 2003; HEI Properties, Inc., a company currently holding passive investments; Hawaiian Electric Industries Capital Trust I, HEI Preferred Funding, LP and Hycap Management, Inc., 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.
Discontinued operations
In the second quarter of 2003, HEIPC wrote down its remaining Philippines investment from $7 million to $2million and increased its reserve for future expenses by $1 million, resulting in a $4 million after tax reduction of HEI’s net income for the first nine months of 2003. The HEIPC Group is currently in substantive negotiations with a potential buyer for HEIPC Philippine Development, LLC, the HEIPC Group company that holds its interest in CEPALCO. See note (5) in HEI’s “Notes to consolidated financial statements.”
Contingencies
See note (8) in HEI’s “Notes to consolidated financial statements.”
57
Recent accounting pronouncements and interpretations
See note (7) and note (6) in HEI’s and HECO’s respective “Notes to consolidated financial statements.”
FINANCIAL CONDITION
Liquidity and capital resources
HEI and HECO believe that their 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 construction programs and investments and to cover debt, pensionretirement benefits and other cash requirements in the foreseeable future.
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) |
| March 31, 2003 |
| December 31, 2002 |
| ||||||||
|
|
| |||||||||||
Long-term debt |
| $ | 1,189 |
|
| 48 | % | $ | 1,106 |
|
| 46 | % |
HEI- and HECO-obligated preferred securities of trust subsidiaries |
|
| 200 |
|
| 8 |
|
| 200 |
|
| 9 |
|
Preferred stock of subsidiaries |
|
| 34 |
|
| 1 |
|
| 34 |
|
| 1 |
|
Common stock equity |
|
| 1,053 |
|
| 43 |
|
| 1,046 |
|
| 44 |
|
|
|
|
|
|
| ||||||||
|
| $ | 2,476 |
|
| 100 | % | $ | 2,386 |
|
| 100 | % |
|
|
|
|
|
| ||||||||
(in millions) | September 30, 2003 | December 31, 2002 | ||||||||||
Long-term debt | $ | 1,064 | 45 | % | $ | 1,106 | 46 | % | ||||
HEI- and HECO-obligated preferred securities of trust subsidiaries | 200 | 9 | 200 | 9 | ||||||||
Preferred stock of subsidiaries | 34 | 1 | 34 | 1 | ||||||||
Common stock equity | 1,067 | 45 | 1,046 | 44 | ||||||||
| $ | 2,365 | 100 | % | $ | 2,386 | 100 | % | |||||
As of MayNovember 1, 2003, the Standard & Poor’s (S&P) and Moody’s Investors Service’s (Moody’s) ratings of HEI and HECO securities were as follows:
S&P | Moody’s | ||||||||
HEI | |||||||||
Commercial paper | A-2 |
| P-2 | ||||||
Medium-term notes (senior unsecured) | BBB |
| Baa2 | ||||||
HEI-obligated preferred securities of trust subsidiary | BB+ |
| Ba1 | ||||||
| |||||||||
HECO | |||||||||
Commercial paper | A-2 |
| P-2 | ||||||
Revenue bonds | AAA |
| Aaa | ||||||
|
|
| |||||||
HECO-obligated preferred securities of trust subsidiaries | BBB- |
| Baa2 | ||||||
Cumulative preferred stock (selected series) | NR |
| Baa3 | ||||||
NR Not ratedrated.
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 ratings of HEI and HECO securities.
On March 7, 2003, HEI sold $50 million of 4% notes, due March 7, 2008, and $50 million of 5.25% notes, due March 7, 2013 under its registered medium-term note program.Theprogram. The net proceeds from the sales were invested in
58
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,September 30, 2003, an additional $200 million principal amount of notes were available for offering by HEI under the registered program.
From time to time, HEI and HECO each utilizes short-term debt, principally commercial paper, to support normal operations and for other temporary requirements. From time to time, HECO also borrows short-term from HEI for itself and on behalf of HELCO and MECO, and HECO has also borrowed short-term from time to time.MECO. HECO had no short-term borrowings from HEI, but did have $28 million of short-term borrowings from MECO at September 30, 2003. HEI had no commercial paper outstanding during the first quarternine months of 2003. HECO had an average outstanding balance of commercial paper for the first quarternine months of 2003 of $0.6$0.5 million, but no commercial paper outstanding at March 31,September 30, 2003. Management believes that if HEI’s and HECO’s commercial paper ratings were to be downgraded, they might not be able to sell commercial paper under current market conditions.
At March 31,September 30, 2003, HEI and HECO maintained bank lines of credit totaling $70 million and $90 million, respectively (all maturing in 2003)2004). 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 rating agency downgrade waswere to reduce or eliminate access to the commercial paper markets. Lines of credit to HEI totaling $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 1525 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 3025 basis points lower interest rate). There are no such provisions in the other lines of credit 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. At March 31,September 30, 2003, the lines were unused. To the extent deemed necessary, HEI and HECO anticipate arranging similar lines of credit as existing lines of credit mature.
For the first threenine months of 2003, net cash provided by operating activities of consolidated HEI was $56$227 million. Net cash used in investing activities was $123$277 million, primarily due to ASB’s purchase of mortgage-related securities and origination and purchase of loans, net of repayments and sales of such securities, and HECO’s consolidated capital expenditures. Net cash provided by financing activities was $140$43 million as a result of several factors, including net increases in securities sold under agreements to repurchase long-term debt and deposit liabilities and proceeds from the issuance of common stock, partly offset by a net decrease in advances from the FHLB and long-term debt and the payment of common stock dividends and trust preferred securities distributions.
Total
Forecast HEI consolidated financing requirements“net cash used in investing activities” (excluding “investing” cash flows from ASB) for 2003 through 2007 includingconsists primarily of the net capital expenditures (which exclude AFUDCof HECO and capital expenditures funded by third-party contributions in aid of construction), long-term debt retirements and net financial activities of ASB, are estimatedits subsidiaries. In addition to total $1.3 billion. Of this amount, approximately $0.7 billion isthe funds required for net capital expenditures (mostly relating to the electric utilities’ net capital expenditures describedconstruction program (see discussion below) and, approximately $0.3 billion is for the retirement or maturity of long-term 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 71% of the consolidated financing requirements (approximately 93% excluding long-term debt retirements), with debt and equity financing providing the remaining
44
requirements. Additional debt and/or equity financing maywill be required to fund unanticipated expenditures not included in thefor 2003 through 2007 forecast, such as increases in the costsfor maturities of or an acceleration of the construction of capital projects of the electric 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.HEI long-term debt, which is expected to be replaced primarily with medium-term notes.
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) |
| March 31, 2003 |
| December 31, 2002 |
| ||||||||
|
|
| |||||||||||
Short-term borrowings |
| $ | 25 |
|
| 1 | % | $ | 6 |
|
| — | % |
Long-term debt |
|
| 698 |
|
| 39 |
|
| 705 |
|
| 40 |
|
HECO-obligated preferred securities of trust subsidiaries |
|
| 100 |
|
| 6 |
|
| 100 |
|
| 6 |
|
Preferred stock |
|
| 34 |
|
| 2 |
|
| 34 |
|
| 2 |
|
Common stock equity |
|
| 926 |
|
| 52 |
|
| 923 |
|
| 52 |
|
|
|
|
|
|
| ||||||||
|
| $ | 1,783 |
|
| 100 | % | $ | 1,768 |
|
| 100 | % |
|
|
|
|
|
| ||||||||
(in millions) | September 30, 2003 | December 31, 2002 | ||||||||||
Short-term borrowings | $ | — | — | % | $ | 6 | — | % | ||||
Long-term debt | 699 | 39 | 705 | 40 | ||||||||
HECO-obligated preferred securities of trust subsidiaries | 100 | 6 | 100 | 6 | ||||||||
Preferred stock | 34 | 2 | 34 | 2 | ||||||||
Common stock equity | 937 | 53 | 923 | 52 | ||||||||
| $ | 1,770 | 100 | % | $ | 1,768 | 100 | % | |||||
Operating activities provided $30$165 million in net cash during the first quarternine months of 2003. Investing activities used net cash of $19$73 million for capital expenditures, net of contributions in aid of construction. Financing activities
59
used net cash of $9$66 million, primarily due to the payment of $17$49 million in common and preferred dividends and preferred securities distributions, and a $7 million net decrease in long-term debt partly offset byand a $19$6 million net increasedecrease in short term borrowings from HEI.
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,September 30, 2003, approximately $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.TheHELCO. The proceeds of these Refunding SPRB, together with additional funds provided by HECO and HELCO, will behave been 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 2003 through 2007, including net capital expenditures and long-term debt repayments for 2003 through 2007 are estimated to total $0.7 billion. HECO’s consolidated internal sources (primarily consolidated cash flows from operations comprised mainly of netoperating activities (net income, adjusted for noncash income and expense items such as depreciation, amortization and deferred taxes, and changes in working capital)taxes), after the payment of common stock and preferred stock dividends, are expected to provide cash in excess of the forecast consolidated financing requirementsnet capital expenditures and long-term debt repayments and may be used to reduce the levelmaintain low levels of future short-term borrowings. HECO 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 2003 through 2007 forecast, such as increases in the costs of or an acceleration of the construction of capital projects, 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 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 MECO.
45
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 2003 through 2007 are currently estimated to total $0.7 billion. Approximately 53% of forecast gross capital expenditures (which includes AFUDC and capital expenditures funded by third-party contributions in aid of construction) is for transmission and distribution projects, with the remaining 47% primarily for generation projects.
For 2003, electric utility net capital expenditures are estimated to be $158 million. Gross capital expenditures are estimated to be $183 million, including approximately $103 million for transmission and distribution projects, approximately $58 million for generation projects and approximately $22 million for general plant and other projects. Drawdowns of the remaining $15 million of proceeds from the Series 2002A sale of tax-exempt special purpose revenue bonds, and the generation of fundscash flows from internal sourcesoperating activities are expected to provide the cash needed for the net capital expenditures in 2003.
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 managementDSM programs, the effects of opposition to proposed construction projects and requirements of environmental and other regulatory and permitting authorities.
60
Bank
(in millions) |
| March 31, |
| December 31, |
| % |
| |||
|
|
|
| |||||||
Total assets |
| $ | 6,402 |
| $ | 6,329 |
|
| 1 |
|
Available-for-sale mortgage-related securities |
|
| 2,778 |
|
| 2,737 |
|
| 2 |
|
Held-to-maturity investment securities |
|
| 91 |
|
| 90 |
|
| 2 |
|
Loans receivable, net |
|
| 3,039 |
|
| 2,994 |
|
| 1 |
|
Deposit liabilities |
|
| 3,815 |
|
| 3,801 |
|
| — |
|
Securities sold under agreements to repurchase |
|
| 846 |
|
| 667 |
|
| 27 |
|
Advances from Federal Home Loan Bank |
|
| 1,057 |
|
| 1,176 |
|
| (10 | ) |
(in millions) | September 30, 2003 | December 31, 2002 | % change | ||||||
Total assets | $ | 6,456 | $ | 6,329 | 2 | % | |||
Available-for-sale mortgage-related securities | 2,726 | 2,737 | — | ||||||
Held-to-maturity investment securities | 93 | 90 | 4 | ||||||
Loans receivable, net | 3,142 | 2,994 | 5 | ||||||
Deposit liabilities | 3,953 | 3,801 | 4 | ||||||
Securities sold under agreements to repurchase | 788 | 667 | 18 | ||||||
Advances from Federal Home Loan Bank | 1,037 | 1,176 | (12 | ) | |||||
As of March 31,September 30, 2003, ASB was the third largest financial institution in Hawaii based on total assets of $6.4$6.5 billion and deposits of $3.8$4.0 billion.
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 $14$152 million during the first quarternine months of 2003. ASB’s principal sources of borrowings are advances from the FHLB and securities sold under agreements to repurchase from broker/dealers. At March 31,September 30, 2003, FHLB borrowings totaled $1.1$1.0 billion, representing 17%16% 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 March 31,September 30, 2003, ASB’s unused FHLB borrowing capacity was approximately $1.2 billion. At March 31,September 30, 2003, securities sold under agreements to repurchase totaled $0.8 billion. ASB utilizes growth in deposits, advances from the FHLB and securities sold under agreements to repurchase to fund maturing deposits and withdrawable deposits,deposit withdrawals, repay maturing borrowings, fund existing and future loans and make investments. At March 31,September 30, 2003, ASB had commitments to borrowers for undisbursed loan funds, loan commitments and unused lines and letters of credit of $0.8 billion. Management believes ASB’s current sources of funds will enable it to meet these obligations while maintaining liquidity at satisfactory levels.
In September 2003, ASB entered into an arrangement to have excess funds in its correspondent bank account with Bank of America swept into a Federal Funds Sold facility. Funds earn the overnight fed funds rate and are re-deposited into ASB’s correspondent bank account the next day. This automatic sweep facility offers ASB an operationally efficient method for investing its liquidity and provides a slightly higher rate of return than methods used in the past (deposits with the FHLB). In addition, efficiencies gained using this method have enabled ASB to expand its wire transfer operating hours.
For the first quarternine months of 2003, net cash provided by ASB’s operating activities was $24$59 million. Net cash used in ASB’s investing activities was $104$202 million, primarily due to the purchase of mortgage-related securities and origination and purchase of loans, net of repayments and sales of such securities. Net cash provided by financing activities was $70$113 million largely due to net increases of $183$125 million in securities sold under agreements to repurchase and $14$152 million in deposit liabilities, partly offset by a net decrease of $119$139 million in advances from the FHLB and the payment of $8$24 million in common and preferred stock dividends. In the first quarternine months of 2003, cash from the net increase in deposits and 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.
46
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. FDIC regulations restrict the ability of financial institutions that are not well-capitalized to compete on the same terms as well-capitalized institutions, such as by offering interest rates on deposits that are significantly higher than the rates offered by competing institutions. As of March 31,September 30, 2003, ASB was well-capitalized (ratio requirements noted in parentheses) with a leverage ratio of 6.7%6.9% (5.0%), a Tier-1 risk-based capital ratio of 13.6%14.0% (6.0%) and a total risk-based capital ratio of 14.8%15.3% (10.0%).
61
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 20 to 27 of HEI’s 2002 Annual Report to Stockholders (HEI Exhibit 13.1 to HEI’s Current Report on Form 8-K dated 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).
Additional factors that may affect future results and financial condition are described on page v under “Forward-looking statements and risk factors.”
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—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 27 to 31 of HEI’s 2002 Annual Report to Stockholders (HEI Exhibit 13.1 to HEI’s Current Report on Form 8-K dated 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).
47
62
| Item 3. | Quantitative and qualitative disclosures about market risk |
Item 3. Quantitative and qualitative disclosures about market risk
The Company considers interest-rate risk (a non-trading market 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 31 to 36 of HEI’s 2002 Annual Report to Stockholders (HEI Exhibit 13.1 to HEI’s Current Report on Form 8-K dated February 25, 2003, File No. 1-8503).
ASB’s interest-rate risk sensitivity measures as of March 31,September 30, 2003 and December 31, 2002 constitute “forward-looking statements” and were as follows:
|
| 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 | ) |
| September 30, 2003 | December 31, 2002 | |||||||||||||||||
Change in net interest income (NII) | Net portfolio value (NPV) ratio | NPV ratio (change from basis points) | Change in NII | NPV ratio | NPV ratio (change from basis points) | |||||||||||||
Change in interest rates (basis points) | ||||||||||||||||||
+300 | (3.6 | )% | 5.43 | % | (377 | ) | 1.9 | % | 7.90 | % | (235 | ) | ||||||
+200 | (1.4 | ) | 6.88 | (232 | ) | 3.0 | 9.15 | (110 | ) | |||||||||
+100 | 0.4 | 8.17 | (103 | ) | 3.3 | 10.01 | (24 | ) | ||||||||||
Base | — | 9.20 | — | — | 10.25 | — | ||||||||||||
-100 | (3.1 | ) | 9.70 | 50 | (5.7 | ) | 10.02 | (23 | ) | |||||||||
Management believes that ASB’s interest-rate risk position at March 31,September 30, 2003 represents a reasonable level of risk. The current net interest income (NII)September 30, 2003 NII profile shows the bank to be slightlyis more representative of a “liability sensitive” profile than the December 31, 2002 NII profile. NII remains essentially flat in the extreme rising rate environments than it was at December 31, 2002. A+100 bp scenario, and falls in the +200 and +300 bp scenarios. The primary reason for thisthe change was the shorteningin profile is a change in the maturityexpected average life of some of the bank’s borrowings. TheASB’s mortgage related assets. Record low interest rate environment has enabledrates during the bankyear provided the opportunity for many borrowers to shortenrefinance into new mortgages at very low rates. If interest rates remain unchanged or increase, there would be little or no economic incentive for holders of these loans to prepay, resulting in a longer expected average life for these assets. Given the maturity of some liabilities without significantly increasinglonger expected average life, there is less opportunity for the bank’s level ofassets to reprice upwards in the rising interest rate risk. This strategy remains consistent withscenarios. Because ASB’s liabilities tend to have shorter maturities or reprice more frequently than its assets, its net interest margin will tend to decrease as interest rates increase. Thus, rising interest rates could have an adverse effect on ASB’s net income absent mitigating actions that ASB management may take.
ASB’s NPV ratio sensitivity measures the bank’s overall interest rate risk management strategy as it provides the bank with the flexibilitysensitivity of its NPV ratio to extend the maturity of these borrowings and lock in long-term rates when there are indications of a sustained risechanges in interest rates. Expectations for faster principal repayments inThe magnitude of the –100 basis point scenarioNPV sensitivity measures as of March 31,September 30, 2003 caused net interest incomehas increased compared to decline more than in the same scenariomagnitude of the sensitivity measures as of December 31, 2002.
2002, representing an increase in sensitivity. The bank’s net portfolio value (NPV) ratioincrease in sensitivity measures remained almost unchanged over the quarter, but the overall levelalso results in lower NPV ratios as of September 30, 2003. The increase in sensitivity is a result of the bank’s NPV ratios fell slightly. This was due to several factors, including (1) lower market prices onlonger expected average life of ASB’s mortgage securities due to expectations of faster prepayment speeds, and (2) the increaseassets. Financial instruments with longer maturities, or average lives, lose more in short-term borrowings, which did not experience the same fluctuations in market value as interest rates rise than instruments with shorter maturities. As the mortgage securities. expected average life of its assets increases relative to its liabilities, ASB’s NPV ratio becomes more sensitive to changes in interest rates.
The computation of the prospective effects of hypothetical interest rate changes in the NII sensitivity, NPV ratio, and NPV ratio sensitivity analyses 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, toTo the extent market conditions and other factors vary from the assumptions used in the simulation analysis, actual results willmay differ materially from the simulation resultsresults. Furthermore, NII sensitivity analysis measures the change in ASB’s twelve-month, pre-tax NII in alternate interest rate scenarios, and is intended to help management identify potential exposures in ASB’s current balance sheet and formulate appropriate strategies for managing interest rate risk. The simulation does not contemplate any actions that ASB management might undertake in response to changes in interest rates. Further, the differences could be material.changes in NII vary in the twelve-month simulation period and are not necessarily evenly distributed over the period. These analyses are for analytical purposes only and do not represent management’s views of future market movements, the level of future earnings, or the timing of any changes in earnings within the twelve month analysis horizon.
63
| Item 4. |
HEI
Robert F. Clarke, HEI Chief Executive Officer, and Eric K. Yeaman, HEI Chief Financial Officer, have evaluated the disclosure controls and procedures of HEI as of May 8,September 30, 2003. Based on their evaluations, as of May 8,September 30, 2003, they have concluded that the disclosure controls and procedures (as defined in Rules 13a-1413a-15(e) and 15d-1415d-15(e) under the Securities Exchange Act of 1934) are effective. There have been no significant changes in HEI’s internal controls or in other factors that could significantly affect these controls subsequent to May 8, 2003, including any corrective actions with regard to significant deficiencies and material weaknesses.
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 May 2,September 30, 2003. Based on their evaluations, as of May 2,September 30, 2003, they have concluded that the disclosure controls and procedures (as defined in Rules 13a-1413a-15(e) and 15d-1415d-15(e) under the Securities Exchange Act of 1934) are effective. There have been no significant changes in HECO’s internal controls or in other factors that could significantly affect these controls subsequent to May 2, 2003, including any corrective actions with regard to significant deficiencies and material weaknesses.
PART II - II–OTHER INFORMATION
| Item 1. |
There are no significant developments in pending legal proceedings except as set forth in HEI’s and HECO’s “Notes to consolidated financial statements,”statements” and management’s discussion and analysis of financial condition and results of operations and Item 5, “Other information.”operations. With regard to any pending legal proceeding, alternative dispute resolution, such as mediation or settlement, may be pursued where appropriate, with such efforts oftentypically maintained in confidence unless and until a resolution is achieved.
Item 4. Submission of matters to a vote of security holders
HEI
| Item 5. | Other information |
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 July 30, 2002, personnel at MECO’s Maalaea Generating Station discovered a leak in an underground diesel fuel line. MECO immediately discontinued using the fuel line and notified the DOH of the release. MECO replaced the leaking fuel line with a temporary aboveground line and then constructed a new aboveground fuel line and concrete containment trough as a permanent replacement. MECO also notified the U.S. Fish & Wildlife Service (USFWS), which manages the Kealia Pond National Wildlife Refuge that is located south of the Maalaea facility. MECO constructed a sump at the point of the leak to 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 buffer zone and in a small part of the Wildlife Refuge. The interception trench is designed to capture and facilitate removal of any fuel migrating from the impacted areas and to act as a barrier to migration beyond the trench. Product recovery wells, skimmers and related piping have been installed along the trench to recover product as needed. Some product (in the form of a sheen on the water) has been observed in the middle portion of the trench and is being recovered. In addition, product (also in the form of a light sheen) is being recovered in the eastern-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.
Based on the results of the subsurface investigation and the location and design of the interception trench, management believes that the risk of the fuel release affecting wildlife, sensitive wildlife habitat or the ocean, which lies approximately one-quarter mile south 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 expensed the $0.8 million in 2002.
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 was reduced to 6 MW from April 2002 to March 2003. The loss of generation has been attributed to blockage of a source well due to a failed liner 5,000 feet below the earth’s surface and decreasing steam quality emanating from one of PGV’s source wells. PGV completed drilling an additional source well in February 2003, and converted the blocked source well into an injection well in early March 2003. The new injection well was tested and PGV’s capacity is currently between 20 to 25 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 commitment to HELCO as soon as possible, HELCO cannot predict when PGV will be able to meet its contractual commitment. HELCO’s PPA with PGV provides for annual availability sanctions against PGV if PGV does not provide up to the
50
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.
C.
| A. | Ratio of earnings to fixed charges |
HEI and Subsidiaries
Ratio of earnings to fixed charges excluding interest on ASB deposits
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 |
|
|
|
|
|
|
|
| ||||||||||
Nine months ended | Years ended December 31, | |||||||||
| 2002 | 2001 | 2000 | 1999 | 1998 | ||||||
2.01 | 2.03 | 1.82 | 1.76 | 1.83 | 1.88 | |||||
Ratio of earnings to fixed charges including interest on ASB deposits
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 |
|
|
|
|
|
|
|
| ||||||||||
Nine months ended | Years ended December 31, | |||||||||
| 2002 | 2001 | 2000 | 1999 | 1998 | ||||||
1.76 | 1.72 | 1.52 | 1.49 | 1.50 | 1.48 | |||||
For purposes of calculating the ratio of earnings to fixed charges, “earnings” represent the sum of (i) pretax income from continuing operations (excluding undistributed net income or net loss from less than 50%-owned persons) and (ii) fixed charges (as hereinafter defined, but excluding capitalized interest). “Fixed charges” are calculated both excluding and including interest on ASB’s deposits during the applicable periods and represent the sum of (i) interest, whether capitalized or expensed, but excluding interest on nonrecourse debt from leveraged leases which is not included in interest expense in HEI’s consolidated statements of income, (ii) amortization of debt expense and discount or premium related to any indebtedness, whether capitalized or expensed, (iii) the interest factor in rental expense, (iv) the preferred stock dividend requirements of HEI’s subsidiaries, increased to an amount
64
representing the pretax earnings required to cover such dividend requirements and (v) the preferred securities distribution requirements of trust subsidiaries.
HECO and Subsidiaries
Ratio of earnings to fixed charges
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 |
|
|
|
|
|
|
|
| ||||||||||
Nine months ended | Years ended December 31, | |||||||||
| 2002 | 2001 | 2000 | 1999 | 1998 | ||||||
3.23 | 3.71 | 3.51 | 3.39 | 3.09 | 3.33 | |||||
For purposes of calculating the ratio of earnings to fixed charges, “earnings” represent the sum of (i) pretax income before preferred stock dividends of HECO and (ii) fixed charges (as hereinafter defined, but excluding the allowance for borrowed funds used during construction). “Fixed charges” represent the sum of (i) interest, whether capitalized or expensed, incurred by HECO and its subsidiaries, (ii) amortization of debt expense and discount or premium related to any indebtedness, whether capitalized or expensed, (iii) the interest factor in rental expense, (iv) the preferred stock dividend requirements of HELCO and MECO, increased to an amount representing the pretax earnings required to cover such dividend requirements and (v) the preferred securities distribution requirements of the trust subsidiaries.
51
| B. | Puna Geothermal Venture (PGV) |
D. First AmendmentHELCO has a 35-year PPA with PGV for 30 MW of firm capacity from its geothermal steam facility expiring on December 31, 2027. PGV’s output was reduced to Rights Agreement
On6 MW from April 22,2002 to March 2003. The loss of generation has been attributed to blockage of a source well due to a failed liner 5,000 feet below the earth’s surface and decreasing steam quality emanating from one of PGV’s source wells. PGV completed drilling an additional source well in February 2003, and converted the Board of Directors of HEI approvedblocked source well into an amendmentinjection well in early March 2003. The new injection well was tested and PGV’s capacity is currently between 25 to 28 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 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)high moisture content of the Rights Agreement. The deleted provision had provided, in effect, thatsteam 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 commitment to HELCO as soon as possible, HELCO cannot predict when PGV will be able to meet its contractual commitment. HELCO’s PPA with PGV provides for annual availability sanctions against PGV if a majorityPGV does not provide up to the contracted 30 MW of directors elected by shareholderscapacity. 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 had not been nominatedyet restored its 30 MW commitment to HELCO by September 30, 2003, 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.
| C. | Hamakua Energy Partners. L.P. (Hamakua Partners) |
HELCO has a PPA to purchase up to 60 MW (net) of firm capacity with Hamakua Partners. In September 2003, J. A. Jones, Inc. (Jones) filed for reorganization in bankruptcy in North Carolina. Jones is the Boardparent company of the managing general partner and a limited partner of Hamakua Partners, and is one of the two co-guarantors of the Hamakua Partners project. Jones has stated that the bankruptcy filing will have no impact on Hamakua Partners’ ability to meet its contractual commitments. HELCO is continuing to evaluate the possible implications of the bankruptcy filing.
| D. | AES Hawaii |
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 office immediately prior to their election, then the new Board must waitAugust 1989, provides that, for a period of 120 days30 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. In the second quarter of 2003, HECO and AES Hawaii reached agreement on the terms upon which HECO would consent to a proposed refinancing. Under the agreement, which was contingent
65
on obtaining certain PUC approvals and completion of the refinancing, HECO received consideration for its consent, primarily in the form of a PPA amendment that reduces the cost of firm capacity supplied to HECO pursuant to the PPA, retroactive to June 1, 2003. The benefit of the firm capacity cost reduction, totaling approximately $2.9 million annually for the remaining term of the PPA, is being passed on to ratepayers through a reduction in rates. AES Hawaii also has granted 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 existing plant operations, and which potentially could be used for the development of another coal-fired facility. On July 1, 2003, the PUC issued a D&O approving the PPA amendment and the establishment of a rate adjustment (lowering rates) on short notice, and, on July 9, 2003, the PUC issued a D&O clarifying its July 1, 2003 D&O. On July 31, 2003, the proposed refinancing was completed and capacity payments were reduced, retroactive to June 1, 2003.
| E. | HECO’s integrated resource plan |
In September 2003, the PUC at the joint request of HECO and the Consumer Advocate opened a docket to commence HECO’s third integrated resource plan (IRP), which is required to be submitted no later than October 31, 2005.
HECO expects its third IRP will require multiple solutions to meet Oahu’s future energy needs, including renewable energy resources, energy efficiency, conservation, technology (such as CHP) and central station generation. Given the lead times needed for permitting and regulatory approvals, in October 2003, HECO submitted a covered source permit application with the DOH for a 107 MW simple cycle combustion turbine in Campbell Industrial Park, which could be added as a peaking unit in the event new central generation will be required in 2009, or earlier if reductions in energy use achieved by DSM programs are less than currently planned, as indicated in HECO’s second IRP. The application specifies that the unit would use diesel fuel oil or naphtha, with ability to convert to a bio-fuel, like ethanol, when it becomes commercially available.
| F. | HECO-obligated preferred securities of trust subsidiaries |
On October 27, 2003, HEI issued a news release, “Hawaiian Electric Industries, Inc. reports third quarter 2003 earnings.” In the release, HEI and HECO had characterized the third quarter 2003 distributions of the mandatorily redeemable securities of HECO’s trust subsidiaries as “interest expense” in their respective consolidated income statements in accordance with management’s interpretation of the requirements of SFAS No. 150, “Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity,” at that time. Subsequently, on October 29, 2003, the FASB met and indefinitely deferred the effective date of the provisions of SFAS No. 150 related to classification and measurement requirements for mandatorily redeemable financial instruments that become subject to SFAS No. 150 solely as a result of consolidation. Thus, in this Form 10-Q, HEI and HECO have characterized the third quarter 2003 distributions of the mandatorily redeemable securities of HECO’s trust subsidiaries as it did before redeeming the Rights.SFAS No. 150, i.e. as “preferred securities distributions of trust subsidiaries,” in their respective consolidated income statements.
66
| Item 6. |
(a) Exhibits
|
| |
HEI |
| |
|
| |
|
| |
| Hawaiian Electric Computation of ratio of earnings to fixed charges, | |
HEI Exhibit | Certification Pursuant to Section 13a-14 of the Securities and Exchange Act of 1934 of Robert F. Clarke (HEI Chief Executive Officer) | |
| HEI Exhibit 31.2 | Certification Pursuant to Section 13a-14 of the Securities and Exchange Act of 1934 of Eric K. Yeaman (HEI Chief Financial Officer) | |
| HEI Exhibit 32.1 | Written Statement of Robert F. Clarke (HEI Chief Executive Officer) Furnished Pursuant to 18 U.S.C. Section 1350, as Adopted by Section 906 of the Sarbanes-Oxley Act of 2002 | |
| HEI Exhibit 32.2 | Written Statement of Eric K. Yeaman (HEI Chief Financial Officer) Furnished Pursuant to 18 U.S.C. Section 1350, as Adopted by Section 906 of the Sarbanes-Oxley Act of 2002 | |
| HEI Exhibit 99 | Eighth Amendment | |
HECO Exhibit 12.2 | Hawaiian Electric Company, Inc. and Subsidiaries Computation of ratio of earnings to fixed charges, nine months ended September 30, 2003 and 2002 and years ended December 31, 2002, 2001, 2000, 1999 and 1998 | |
| Certification Pursuant to Section 13a-14 of the Securities and Exchange Act of 1934 of T. Michael May (HECO Chief Executive Officer) | |
| HECO Exhibit 31.4 | Certification Pursuant to Section 13a-14 of the Securities and Exchange Act of 1934 of Richard von Gnechten (HECO Chief Financial Officer) | |
| HECO Exhibit 32.3 | Written Statement of T. Michael May (HECO Chief Executive Officer) Furnished Pursuant to 18 U.S.C. Section 1350, as Adopted by Section 906 of the Sarbanes-Oxley Act of 2002 | |
| Written Statement of Richard von Gnechten (HECO Chief Financial Officer) Furnished Pursuant to 18 U.S.C. Section 1350, as Adopted by Section 906 of the Sarbanes-Oxley Act of 2002 | |
|
| |
|
| |
|
| |
52
67
(b) Reports on Form 8-K
Subsequent to December 31, 2002,June 30, 2003, HEI and/or HECO filed Current Reports on Forms 8-K with the SEC as follows:
Dated (filing date) | Registrant/s | Items reported | ||||
|
|
| ||||
July 8, 2003 | ||||||
|
|
| ||||
|
|
| ||||
|
| Item 5. | ||||
( | HEI/HECO | Items 5, 9 and 12. HEI’s | ||||
August 25, 2003 (August 29, 2003) | HEI/HECO | Item 5. Demand-side management programs-agreements with the Consumer Advocate and Knapp vs. AES case updates | ||||
( | HEI/HECO | Item 5. MECO’s notice and finding of environmental permit violation and competition updates | ||||
October 27, 2003 (October 27, 2003) | HEI/HECO | Items 5 and 12. HEI’s | ||||
November 11, 2003 (November 12, 2003) | HEI/HECO | Item 5. HELCO power situation update | ||||
53
68
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrants have duly caused this report to be signed on their behalf by the undersigned, thereunto duly authorized. The signature of the undersigned companies shall be deemed to relate only to matters having reference to such companies and any subsidiaries thereof.
HAWAIIAN ELECTRIC INDUSTRIES, INC. (Registrant) |
(Registrant) |
| ||||||||
| By: |
|
| ||||||
| /s/ |
| By: | /s/ T. | ||||
Robert F. Clarke |
| |||||||
|
|
|
| |||||
|
| |||||||
|
|
|
| |||||
|
| |||||||
|
| |||||||
54
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:
|
|
|
|
|
|
5. The registrant’s other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent functions):
|
|
|
|
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.
| |
| |
| |
55
Certification Pursuant to Section 13a-14 of the Securities Exchange Act of 1934 of Eric K. Yeaman (HEI Chief Financial Officer)
I, Eric K. Yeaman, certify that:
1. I have reviewed this 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:
|
| |||
|
| |||
|
|
5. The registrant’s other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent functions):
|
|
|
|
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.
| |
| |
| |
56
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:
|
|
|
|
|
|
5. The registrant’s other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent functions):
|
|
|
|
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.
| |
| |
T. Michael May President and Chief Executive Officer | |
(Principal Executive Officer of HECO) |
57
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:
|
| |||||||
| By: | /s/ Eric K. Yeaman | By: | /s/ Richard A. von Gnechten | |||||
|
| |||||||
Eric K. Yeaman Financial Vice President, Treasurer and Chief Financial Officer (Principal Financial Officer of HEI) | ||||||||
|
Financial Vice President (Principal Financial Officer of | |||||||
5. The registrant’s other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent functions):
|
| |||||||
| By: | /s/ Curtis Y. Harada | By: | /s/ Ernest T. Shiraki | |||||
Controller (Chief Accounting Officer of HEI) |
Controller (Chief Accounting Officer of HECO) | |||||||
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: | ||
| ||
| ||
Date: November 12, 2003 |
58
69