================================================================================
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, 2001
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
Exact Name of Registrant as Commission I.R.S. Employer
Specified in Its Charter File Number Identification No.
--------------------------- ----------- ------------------
HAWAIIAN ELECTRIC INDUSTRIES, INC. 1-8503 99-0208097
and Principal Subsidiary
HAWAIIAN ELECTRIC COMPANY, INC. 1-4955 99-0040500
State of Hawaii
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(State or other jurisdiction of incorporation or organization)
900 Richards Street, Honolulu, Hawaii 96813
--------------------------------------------------------------------------------
(Address of principal executive offices and zip code)
Hawaiian Electric Industries, Inc. ----- (808) 543-5662
Hawaiian Electric Company, Inc. ------- (808) 543-7771
--------------------------------------------------------------------------------
(Registrant's telephone number, including area code)
None
--------------------------------------------------------------------------------
(Former name, former address and former fiscal year, if changed since last
report)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes x No _____
------
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Class of Common Stock Outstanding October 30, 2001
---------------------------------------------------------------------------------------------------------
Hawaiian Electric Industries, Inc. (Without Par Value)......... 33,895,193 Shares
Hawaiian Electric Company, Inc. ($6 2/3 Par Value)............. 12,805,843 Shares (not publicly traded)
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Hawaiian Electric Industries, Inc. and subsidiaries
Hawaiian Electric Company, Inc. and subsidiaries
Form 10-Q--Quarter ended September 30, 2001
INDEX
Page No.
Glossary of terms................................................................... ii
Forward-looking Statements v
PART I. FINANCIAL INFORMATION
Item 1. Financial statements
Hawaiian Electric Industries, Inc. and subsidiaries
---------------------------------------------------
Consolidated balance sheets (unaudited) -
September 30, 2001 and December 31, 2000.............................. 1
Consolidated statements of income (unaudited) -
three and nine months ended September 30, 2001 and 2000............... 2
Consolidated statements of changes in stockholders' equity (unaudited) -
nine months ended September 30, 2001 and 2000......................... 3
Consolidated statements of cash flows (unaudited) -
nine months ended September 30, 2001 and 2000......................... 4
Notes to consolidated financial statements (unaudited).................. 5
Hawaiian Electric Company, Inc. and subsidiaries
------------------------------------------------
Consolidated balance sheets (unaudited) -
September 30, 2001 and December 31, 2000.............................. 14
Consolidated statements of income (unaudited) -
three and nine months ended September 30, 2001 and 2000............... 15
Consolidated statements of retained earnings (unaudited) -
three and nine months ended September 30, 2001 and 2000............... 15
Consolidated statements of cash flows (unaudited) -
nine months ended September 30, 2001 and 2000......................... 16
Notes to consolidated financial statements (unaudited).................. 17
Item 2. Management's discussion and analysis of financial condition
and results of operations............................................. 33
Item 3. Quantitative and qualitative disclosures about market risk.............. 47
PART II. OTHER INFORMATION
Item 1. Legal proceedings....................................................... 48
Item 5. Other information....................................................... 48
Item 6. Exhibits and reports on Form 8-K........................................ 57
Signatures.......................................................................... 57
i
Hawaiian Electric Industries, Inc. and subsidiaries
Hawaiian Electric Company, Inc. and subsidiaries
Form 10-Q--Quarter ended September 30, 2001
GLOSSARY OF TERMS
Terms Definitions
----- -----------
AFUDC Allowance for funds used during construction
ASB American Savings Bank, F.S.B., a wholly owned subsidiary of HEI
Diversified, Inc. and parent company of American Savings
Investment Services Corp. (and its subsidiary since March 15,
2001, Bishop Insurance Agency of Hawaii, Inc.), ASB Service
Corporation, AdCommunications, Inc., American Savings Mortgage
Co., Inc. and ASB Realty Corporation
BLNR Board of Land and Natural Resources of the State of Hawaii
CDUP Conservation District Use Permit
CEPALCO Cagayan Electric Power & Light Co., Inc.
Company Hawaiian Electric Industries, Inc. and its direct and indirect
subsidiaries, including, without limitation, Hawaiian Electric
Company, Inc., Maui Electric Company, Limited, Hawaii Electric
Light Company, Inc., HECO Capital Trust I, HECO Capital Trust II,
HEI Diversified, Inc., American Savings Bank, F.S.B. and its
subsidiaries, Pacific Energy Conservation Services, Inc., HEI
District Cooling, Inc., ProVision Technologies, Inc., HEI
Properties, Inc., HEI Leasing, Inc., Hycap Management, Inc.,
Hawaiian Electric Industries Capital Trust I, Hawaiian Electric
Industries Capital Trust II, Hawaiian Electric Industries Capital
Trust III, HEI Preferred Funding, LP, The Old Oahu Tug Service,
Inc. (formerly Hawaiian Tug & Barge Corp.), HEI Power Corp. and
its subsidiaries and Malama Pacific Corp. and its subsidiaries
Consumer Division of Consumer Advocacy, Department of Commerce and Consumer
Advocate Affairs of the State of Hawaii
DLNR Department of Land and Natural Resources of the State of Hawaii
D&O Decision and order
DOH Department of Health of the State of Hawaii
DRIP HEI Dividend Reinvestment and Stock Purchase Plan
EAB Environmental Appeals Board
EAPRC East Asia Power Resources Corporation
Enserch Enserch Development Corporation
ii
L.P.
GLOSSARY OF TERMS, continued
Terms Definitions
----- -----------
EPA Environmental Protection Agency - federal
EPHE EPHE Philippines Energy Company, Inc.
Federal U.S. Government
FHLB Federal Home Loan Bank
GAAP Accounting principles generally accepted in the United States of
America
Hamakua Hamakua Energy Partners, L.P., formerly known as Encogen Hawaii,
Partners L.P.
HCPC Hilo Coast Power Company
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 and HECO Capital Trust II
HEI Hawaiian Electric Industries, Inc., direct parent company of
Hawaiian Electric Company, Inc., HEI Diversified, Inc., Pacific
Energy Conservation Services, Inc., HEI District Cooling, Inc.,
ProVision Technologies, Inc., HEI Properties, Inc., HEI
Leasing, Inc., Hycap Management, Inc., Hawaiian Electric
Industries Capital Trust I, Hawaiian Electric Industries
Capital Trust II, Hawaiian Electric Industries Capital Trust
III, The Old Oahu Tug Service, Inc. (formerly Hawaiian Tug &
Barge Corp.), HEI Power Corp. and Malama Pacific Corp.
HEIDI HEI Diversified, Inc., a wholly owned subsidiary of Hawaiian
Electric Industries, Inc. and the parent company of American
Savings Bank, F.S.B.
HEIII HEI Investments, Inc. (formerly HEI Investment Corp.), a
subsidiary of HEI Power Corp.
HEIPC HEI Power Corp., a wholly owned subsidiary of Hawaiian Electric
Industries, Inc., and the parent company of several
subsidiaries. On October 23, 2001, the HEI Board of Directors
adopted a formal plan to exit the international power business
(engaged in by HEIPC and its subsidiaries) over the next year.
HEIPC Group HEI Power Corp. and its subsidiaries
HELCO Hawaii Electric Light Company, Inc., a wholly owned electric
utility subsidiary of Hawaiian Electric Company, Inc.
HPG HEI Power Corp. Guam, a wholly owned subsidiary of HEI Power
Corp.
iii
GLOSSARY OF TERMS, continued
Terms Definitions
----- -----------
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.
IMPC Inner Mongolia Power Company
IPP Independent power producer
KCP Kawaihae Cogeneration Partners
KWH Kilowatthour
MECO Maui Electric Company, Limited, a wholly owned electric utility
subsidiary of Hawaiian Electric Company, Inc.
MW Megawatt
OTS Office of Thrift Supervision, Department of Treasury
PBR Performance-based rate-making
PPA Power purchase agreement
PRPs Potentially responsible parties
PUC Public Utilities Commission of the State of Hawaii
ROACE Return on average common equity
SEC Securities and Exchange Commission
SFAS Statement of Financial Accounting Standards
TOOTS The Old Oahu Tug Service, Inc. (formerly Hawaiian Tug & Barge
Corp. (HTB)), a wholly owned subsidiary of Hawaiian Electric
Industries, Inc. On November 10, 1999, HTB sold Young Brothers,
Limited and substantially all of HTB's operating assets and
changed its name
YB Young Brothers, Limited, which was sold on November 10, 1999,
was formerly a wholly owned subsidiary of Hawaiian Tug & Barge
Corp.
iv
Forward-looking statements
This report and other presentations made by Hawaiian Electric Industries, Inc.
(HEI) and its 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, 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,
the performance of the industries in which they do business and economic and
market factors, among other things. These statements are not guarantees of
future performance. Such risks, uncertainties and other important factors could
cause actual results to differ materially from those in the forward-looking
statements and include, but are not limited to, the following: the effect of
international, national and local economic conditions, including the condition
of the Hawaii tourist and construction industries and the Hawaii housing market;
the effects of weather and natural disasters; the effects of acts of terrorists
and the war on terrorism; product demand and market acceptance risks; increasing
competition in the electric utility, banking and international power industries;
capacity and supply constraints or difficulties; fuel oil price changes and the
continued availability of the electric utilities' energy cost adjustment
clauses; new technological developments; federal, state and international
governmental and regulatory actions, including changes in laws, rules and
regulations applicable to HEI and its subsidiaries, decisions in rate cases and
other Public Utilities Commission of the State of Hawaii (PUC) proceedings and
on land use, environmental and other permitting issues, required corrective
actions (such as with respect to environmental conditions, capital adequacy and
business practices) and changes in taxation; the results of financing efforts;
the timing and extent of changes in interest rates; the risks inherent in
changes in the value of and market for securities available for sale; the timing
and extent of changes in foreign currency exchange rates, and the convertibility
and availability of foreign currency, particularly in the Philippines and China;
the risks inherent in implementing hedging strategies, including the
availability and pricing of forward contracts; political and business risks
inherent in doing business in developing countries; the ultimate outcome of tax
positions taken; the risk that ASB Realty Corporation fails to qualify as a real
estate investment trust for federal and state income tax purposes, in which case
it would be subject to regular corporate income taxation; the risks inherent in
holding for sale financial instruments whose market values may change; and other
risks or uncertainties described elsewhere in this report and in other periodic
reports previously and subsequently filed by HEI and/or Hawaiian Electric
Company, Inc. (HECO) with the Securities and Exchange Commission (SEC). Forward-
looking statements speak only as of the date of the report, presentation or
filing in which they are made.
v
PART I - FINANCIAL INFORMATION
Item 1. Financial statements
-----------------------------
Hawaiian Electric Industries, Inc. and subsidiaries
Consolidated balance sheets (unaudited)
September 30, December 31,
(in thousands) 2001 2000
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Assets
------
Cash and equivalents........................................................ $ 437,633 $ 212,783
Accounts receivable and unbilled revenues, net.............................. 181,771 188,056
Available-for-sale investment and mortgage/asset-backed securities.......... 2,504,840 164,668
Held-to-maturity investment and mortgage/asset-backed securities............ 82,751 2,105,837
Loans receivable, net....................................................... 2,778,122 3,211,325
Property, plant and equipment, net of accumulated
depreciation of $1,305,153 and $1,227,147............................... 2,050,432 2,054,474
Regulatory assets........................................................... 112,293 116,623
Other....................................................................... 366,906 339,111
Goodwill and other intangibles.............................................. 103,401 101,481
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$8,618,149 $8,494,358
==========================================================================================================================
Liabilities and stockholders' equity
------------------------------------
Liabilities
Accounts payable............................................................ $ 145,413 $ 125,719
Deposit liabilities......................................................... 3,664,273 3,584,646
Short-term borrowings....................................................... 38,684 104,398
Securities sold under agreements to repurchase.............................. 722,427 596,504
Advances from Federal Home Loan Bank........................................ 1,050,252 1,249,252
Long-term debt.............................................................. 1,166,704 1,088,731
Deferred income taxes....................................................... 194,314 187,420
Contributions in aid of construction........................................ 210,202 211,518
Other....................................................................... 309,389 272,705
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7,501,658 7,420,893
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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
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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: 33,850 shares and 32,991 shares........................ 723,636 691,925
Retained earnings........................................................... 145,620 147,324
Accumulated other comprehensive income (loss)............................... 12,829 (190)
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882,085 839,059
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$8,618,149 $8,494,358
==========================================================================================================================
See accompanying "Notes to consolidated financial statements."
1
Hawaiian Electric Industries, Inc. and subsidiaries
Consolidated statements of income (unaudited)
Three months ended Nine months ended
(in thousands, except per share amounts and September 30, September 30,
---------------------------------- ------------------------------------
ratio of earnings to fixed charges) 2001 2000 2001 2000
-----------------------------------------------------------------------------------------------------------------------------------
Revenues
Electric utility......................................... $341,386 $337,324 $ 973,460 $ 934,574
Bank..................................................... 108,034 114,300 336,038 333,266
Other.................................................... (2,128) 383 (1,530) 1,878
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447,292 452,007 1,307,968 1,269,718
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Expenses
Electric utility......................................... 287,064 284,031 821,100 778,036
Bank..................................................... 88,546 97,321 278,829 280,782
Other.................................................... 2,631 1,011 9,354 6,710
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378,241 382,363 1,109,283 1,065,528
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Operating income (loss)
Electric utility......................................... 54,322 53,293 152,360 156,538
Bank..................................................... 19,488 16,979 57,209 52,484
Other.................................................... (4,759) (628) (10,884) (4,832)
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69,051 69,644 198,685 204,190
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Interest expense--other than bank........................ (19,937) (18,842) (59,461) (57,587)
Allowance for borrowed funds used during construction.... 524 807 1,711 2,220
Preferred stock dividends of subsidiaries................ (501) (501) (1,504) (1,505)
Preferred securities distributions of trust subsidiaries. (4,008) (4,008) (12,026) (12,026)
Allowance for equity funds used during construction...... 998 1,505 3,218 4,102
-----------------------------------------------------------------------------------------------------------------------------------
Income from continuing operations before income taxes.... 46,127 48,605 130,623 139,394
Income taxes............................................. 17,461 17,404 48,081 51,472
-----------------------------------------------------------------------------------------------------------------------------------
Income from continuing operations........................ 28,666 31,201 82,542 87,922
Discontinued operations, net of income taxes
Loss from operations................................ (711) (9,152) (1,254) (17,801)
Net loss on disposals............................... (20,821) - (20,821) -
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Loss from discontinued operations........................ (21,532) (9,152) (22,075) (17,801)
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Net income............................................... $ 7,134 $ 22,049 $ 60,467 $ 70,121
===================================================================================================================================
Basic earnings (loss) per common share
Continuing operations............................... $ 0.85 $ 0.96 $ 2.47 $ 2.71
Discontinued operations............................. (0.64) (0.28) (0.66) (0.55)
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$ 0.21 $ 0.68 $ 1.81 $ 2.16
===================================================================================================================================
Diluted earnings (loss) per common share
Continuing operations............................... $ 0.84 $ 0.95 $ 2.46 $ 2.70
Discontinued operations............................. (0.63) (0.28) (0.66) (0.55)
-----------------------------------------------------------------------------------------------------------------------------------
$ 0.21 $ 0.67 $ 1.80 $ 2.15
===================================================================================================================================
Dividends per common share............................... $ 0.62 $ 0.62 $ 1.86 $ 1.86
===================================================================================================================================
Weighted-average number of
common shares outstanding............................. 33,716 32,642 33,454 32,438
Dilutive effect of stock options and
dividend equivalents............................. 209 135 180 132
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Adjusted weighted-average shares......................... 33,925 32,777 33,634 32,570
===================================================================================================================================
Ratio of earnings to fixed charges (SEC method)
Excluding interest on ASB deposits.................. 1.84 1.84
===================================================================================================================================
Including interest on ASB deposits.................. 1.52 1.55
===================================================================================================================================
See accompanying "Notes to consolidated financial statements."
2
Hawaiian Electric Industries, Inc. and subsidiaries
Consolidated statements of changes in stockholders' equity (unaudited)
Accumulated
other
Common stock Retained comprehensive
-------------------------------
(in thousands) Shares Amount earnings income (loss) Total
-----------------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 2000..................... 32,991 $691,925 $147,324 $ (190) $839,059
Comprehensive income:
Net income.................................. - - 60,467 - 60,467
Cash flow hedge:
Cumulative effect of the adoption of
SFAS No. 133, net of tax benefits
of $1,031............................. - - - (1,619) (1,619)
Derivative losses, net of tax benefits
of $2,152............................. - - - (3,379) (3,379)
Add: reclassification adjustments, net
of tax benefits of $600............... - - - 943 943
Unrealized gains on securities:
Cumulative effect of the adoption of
SFAS No. 133, net of tax benefits
of $263............................... - - - 1,060 1,060
Unrealized gains arising during
the period, net of taxes of $12,165... - - - 17,438 17,438
Add: reclassification adjustment for
gains included in net income, net of
taxes of $1,344....................... - - - (1,378) (1,378)
Minimum pension liability adjustment,
net of tax benefits of $29............... - - - (46) (46)
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Comprehensive income........................... - - 60,467 13,019 73,486
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Issuance of common stock....................... 859 31,711 - - 31,711
Common stock dividends ($1.86 per share)....... - - (62,171) - (62,171)
-----------------------------------------------------------------------------------------------------------------------------------
Balance, September 30, 2001.................... 33,850 $723,636 $145,620 $12,829 $882,085
===================================================================================================================================
Balance, December 31, 1999..................... 32,213 $665,614 $182,251 $ (279) $847,586
Net income..................................... - - 70,121 - 70,121
Issuance of common stock....................... 579 15,479 - - 15,479
Common stock dividends ($1.86 per share)....... - - (60,315) - (60,315)
-----------------------------------------------------------------------------------------------------------------------------------
Balance, September 30, 2000.................... 32,792 $681,093 $192,057 $ (279) $872,871
===================================================================================================================================
Net income approximates comprehensive income for the nine months ended September
30, 2000.
See accompanying "Notes to consolidated financial statements."
3
Hawaiian Electric Industries, Inc. and subsidiaries
Consolidated statements of cash flows (unaudited)
Nine months ended September 30 2001 2000
--------------------------------------------------------------------------------------------------------------------
(in thousands)
Cash flows from operating activities
Income from continuing operations.................................................... $ 82,542 $ 87,922
Adjustments to reconcile income from continuing operations to net cash provided by
operating activities
Depreciation of property, plant and equipment.................................. 82,576 80,840
Other amortization............................................................. 13,430 6,827
Provision for loan losses...................................................... 9,000 9,400
Deferred income taxes.......................................................... 455 4,834
Allowance for equity funds used during construction............................ (3,218) (4,102)
Changes in assets and liabilities
Decrease (increase) in accounts receivable and unbilled revenues, net.... 6,285 (19,514)
Increase in accounts payable............................................. 19,694 12,279
Changes in other assets and liabilities.................................. (28,104) 41,811
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Net cash provided by continuing operating activities................................. 182,660 220,297
--------------------------------------------------------------------------------------------------------------------
Cash flows from investing activities
Principal repayments on available-for-sale investment securities..................... 890 1,455
Proceeds from sale of investment securities.......................................... 87,398 -
Available-for-sale mortgage/asset-backed securities purchased........................ (825,069) -
Principal repayments on available-for-sale mortgage/asset-backed securities.......... 396,031 -
Proceeds from sale of mortgage/asset-backed securities............................... 440,925 -
Held-to-maturity investment securities purchased..................................... - (56,500)
Principal repayments on held-to-maturity investment securities....................... - 43,000
Held-to-maturity mortgage/asset-backed securities purchased.......................... - (320,102)
Principal repayments on held-to-maturity mortgage/asset-backed securities............ - 191,873
Loans receivable originated and purchased............................................ (686,391) (417,302)
Principal repayments on loans receivable............................................. 533,554 352,050
Proceeds from sale of loans.......................................................... 166,991 28,783
Capital expenditures................................................................. (82,068) (92,269)
Other................................................................................ 13,389 18,157
--------------------------------------------------------------------------------------------------------------------
Net cash provided by (used in) investing activities.................................. 45,650 (250,855)
--------------------------------------------------------------------------------------------------------------------
Cash flows from financing activities
Net increase in deposit liabilities.................................................. 79,627 66,630
Net decrease in short-term borrowings with original maturities of three months or (62,718) (116,915)
less................................................................................
Proceeds from other short-term borrowings............................................ - 57,499
Repayment of other short-term borrowings............................................. (3,000) -
Net increase in retail repurchase agreements......................................... 3,310 8,560
Proceeds from securities sold under agreements to repurchase......................... 711,532 460,181
Repayments of securities sold under agreements to repurchase......................... (587,427) (550,710)
Proceeds from advances from Federal Home Loan Bank................................... 194,100 470,031
Principal payments on advances from Federal Home Loan Bank........................... (393,100) (350,500)
Proceeds from issuance of long-term debt............................................. 114,367 113,150
Repayment of long-term debt.......................................................... (38,500) (10,500)
Preferred securities distributions of trust subsidiaries............................. (12,026) (12,026)
Net proceeds from issuance of common stock........................................... 19,298 10,841
Common stock dividends............................................................... (50,060) (52,278)
Other................................................................................ (13,668) (5,373)
--------------------------------------------------------------------------------------------------------------------
Net cash provided by (used in) financing activities.................................. (38,265) 88,590
--------------------------------------------------------------------------------------------------------------------
Net cash provided by (used in) discontinued operations............................... 34,805 (78,166)
--------------------------------------------------------------------------------------------------------------------
Net increase (decrease) in cash and equivalents...................................... 224,850 (20,134)
Cash and equivalents, beginning of period............................................ 212,783 197,399
--------------------------------------------------------------------------------------------------------------------
Cash and equivalents, end of period.................................................. $ 437,633 $ 177,265
====================================================================================================================
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 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, 2000 and the consolidated financial statements and the notes
thereto in HEI's Quarterly Reports on SEC Form 10-Q for the quarters ended March
31, 2001 and June 30, 2001.
In the opinion of HEI's management, the accompanying unaudited consolidated
financial statements contain all material adjustments required by GAAP to
present fairly the Company's financial position as of September 30, 2001 and
December 31, 2000, the results of its operations for the three and nine months
ended September 30, 2001 and 2000, and its cash flows for the nine months ended
September 30, 2001 and 2000. 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 prior periods' consolidated
financial statements to conform to the 2001 presentation. As a result of the
discontinuance of the international power segment, as more fully described in
note (5), the consolidated financial statements for the current and prior
periods have been adjusted and restated to reflect the operations and assets of
the international power segment as a discontinued operation in accordance with
GAAP.
5
(2) Segment financial information
----------------------------------
Segment financial information, which has been restated for the discontinuance of
the international power segment as more fully described in note (5), was as
follows:
Electric
(in thousands) Utility Bank Other Total
----------------------------------------------------------------------------------------------------------------------
Three months ended September 30, 2001
Revenues from external customers.............. $ 341,383 $ 108,034 $ (2,125) $ 447,292
Intersegment revenues......................... 3 - (3) -
----------------------------------------------------------------------------------------------------------------------
Revenues.................................. 341,386 108,034 (2,128) 447,292
======================================================================================================================
Income (loss) before income taxes............. 41,961 18,087 (13,921) 46,127
Income taxes (benefit)........................ 16,266 7,015 (5,820) 17,461
----------------------------------------------------------------------------------------------------------------------
Income (loss) from continuing operations.. 25,695 11,072 (8,101) 28,666
======================================================================================================================
Nine months ended September 30, 2001
Revenues from external customers.............. $ 973,454 $ 336,038 $ (1,524) $1,307,968
Intersegment revenues......................... 6 - (6) -
----------------------------------------------------------------------------------------------------------------------
Revenues.................................. 973,460 336,038 (1,530) 1,307,968
======================================================================================================================
Income (loss) before income taxes............. 114,119 52,989 (36,485) 130,623
Income taxes (benefit)........................ 44,283 19,835 (16,037) 48,081
----------------------------------------------------------------------------------------------------------------------
Income (loss) from continuing operations.. 69,836 33,154 (20,448) 82,542
======================================================================================================================
Assets (September 30, 2001)................... 2,400,849 6,061,760 155,540 8,618,149
======================================================================================================================
Three months ended September 30, 2000
Revenues from external customers.............. $ 337,312 $ 114,300 $ 395 $ 452,007
Intersegment revenues......................... 12 - (12) -
----------------------------------------------------------------------------------------------------------------------
Revenues.................................. 337,324 114,300 383 452,007
======================================================================================================================
Income (loss) before income taxes............. 40,955 15,568 (7,918) 48,605
Income taxes (benefit)........................ 15,935 5,753 (4,284) 17,404
----------------------------------------------------------------------------------------------------------------------
Income (loss) from continuing operations.. 25,020 9,815 (3,634) 31,201
======================================================================================================================
Nine months ended September 30, 2000
Revenues from external customers.............. $ 934,545 $ 333,262 $ 1,911 $1,269,718
Intersegment revenues......................... 29 4 (33) -
----------------------------------------------------------------------------------------------------------------------
Revenues.................................. 934,574 333,266 1,878 1,269,718
======================================================================================================================
Income (loss) before income taxes............. 119,023 48,257 (27,886) 139,394
Income taxes (benefit)........................ 46,264 17,825 (12,617) 51,472
----------------------------------------------------------------------------------------------------------------------
Income (loss) from continuing operations.. 72,759 30,432 (15,269) 87,922
======================================================================================================================
Assets (September 30, 2000)................... 2,331,307 5,981,326 198,693 8,511,326
======================================================================================================================
(3) Electric utility subsidiary
--------------------------------
For HECO's consolidated financial information, including its commitments and
contingencies, see pages 14 through 32.
6
(4) Bank subsidiary
--------------------
Selected financial information
American Savings Bank, F.S.B. and subsidiaries
Consolidated balance sheet data
September 30, December 31,
(in thousands) 2001 2000
----------------------------------------------------------------------------------------------------------------
Assets
Cash and equivalents..................................................... $ 429,615 $ 207,785
Available-for-sale investment securities................................. - 107,955
Available-for-sale mortgage/asset-backed securities...................... 1,662,132 56,713
Available-for-sale mortgage/asset-backed securities
pledged for repurchase agreements................................... 820,128 -
Held-to-maturity investment securities................................... 82,751 91,723
Held-to-maturity mortgage/asset-backed securities........................ - 1,697,343
Held-to-maturity mortgage/asset-backed securities
pledged for repurchase agreements................................... - 316,771
Loans receivable, net.................................................... 2,778,122 3,211,325
Other.................................................................... 185,611 178,219
Goodwill and other intangibles........................................... 103,401 101,481
----------------------------------------------------------------------------------------------------------------
$6,061,760 $5,969,315
================================================================================================================
Liabilities and equity
Deposit liabilities...................................................... $3,664,273 $3,584,646
Securities sold under agreements to repurchase........................... 722,427 596,504
Advances from Federal Home Loan Bank..................................... 1,050,252 1,249,252
Other.................................................................... 130,622 81,277
----------------------------------------------------------------------------------------------------------------
5,567,574 5,511,679
Minority interests and preferred stock of subsidiary..................... 3,566 3,412
Preferred stock.......................................................... 75,000 75,000
Common stock............................................................. 242,648 240,386
Retained earnings........................................................ 155,723 138,709
Accumulated other comprehensive income................................... 17,249 129
----------------------------------------------------------------------------------------------------------------
$6,061,760 $5,969,315
================================================================================================================
7
American Savings Bank, F.S.B. and subsidiaries
Consolidated income statement data
Three months ended Nine months ended
September 30, September 30,
--------------------------------- ---------------------------------
(in thousands) 2001 2000 2001 2000
----------------------------------------------------------------------------------------------------------------------------
Interest income....................................... $ 96,967 $108,326 $ 307,159 $314,110
Interest expense...................................... 52,118 61,885 169,430 175,937
----------------------------------------------------------------------------------------------------------------------------
Net interest income................................... 44,849 46,441 137,729 138,173
Provision for loan losses............................. (3,000) (3,000) (9,000) (9,400)
Other income.......................................... 11,067 5,974 28,879 19,156
Operating, administrative and general expenses........ (33,428) (32,436) (100,399) (95,445)
----------------------------------------------------------------------------------------------------------------------------
Operating income...................................... 19,488 16,979 57,209 52,484
Minority interests.................................... 48 58 162 168
Income taxes.......................................... 7,015 5,753 19,835 17,825
----------------------------------------------------------------------------------------------------------------------------
Income before preferred stock dividends............... 12,425 11,168 37,212 34,491
Preferred stock dividends............................. 1,353 1,353 4,058 4,059
----------------------------------------------------------------------------------------------------------------------------
Net income............................................ $ 11,072 $ 9,815 $ 33,154 $ 30,432
============================================================================================================================
Disposition of certain debt securities
In June 2000, the Office of Thrift Supervision (OTS) advised American Savings
Bank, F.S.B. (ASB) that four series of trust certificates, in the original
aggregate principal amount of $114 million, were impermissible investments under
regulations applicable to federal savings banks. 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 class notes). ASB recognized interest
income on these securities on a cash basis. In 2000, ASB reclassified these
trust certificates from held-to-maturity status to available-for-sale status in
its financial statements and recognized a $3.8 million net loss 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 on the
writedown of three series of these trust certificates to their then-current
estimated fair value.
The OTS directed ASB to dispose of the securities. ASB demanded that the brokers
who sold the securities agree to rescind the transactions. One broker, through
whom ASB purchased one issue of trust certificates for approximately $30
million, arranged a transaction which closed in April 2001 for the disposition
of that issue for an amount approximating ASB's original purchase price.
ASB filed a lawsuit against the broker through whom the other three issues of
trust certificates were purchased, seeking rescission and other remedies,
including recovery of any losses ASB may incur as a result of its purchase and
ownership of these trust certificates. To bring ASB into compliance with the OTS
direction, ASB directed the trustees to terminate the principal swaps on the
three issues and the related income class notes were sold by the swap
counterparty to HEI. In May 2001, HEI purchased two series of the income class
notes for approximately $21 million and, in July 2001, HEI purchased the third
series of income class note for approximately $7 million. HEI has recorded
interest income on the two income class notes purchased in May 2001 under the
effective yield method. Due to the uncertainty of future cash flows, HEI is
accounting for the income class notes purchased in July 2001 under the cost
recovery method of accounting. In the third quarter of 2001, HEI recognized a
$2.0 million net loss on the writedown of the three series of income notes to
their then-current estimated fair value based upon an independent third party
valuation. Such valuations are updated quarterly. HEI could incur additional
losses from the ultimate disposition of these income class notes or from further
"other-than-temporary" declines in their fair value. ASB has agreed to indemnify
HEI against such losses, but the indemnity obligation is payable solely out of
any recoveries achieved in the litigation against the broker who sold the
related trust certificates to ASB.
8
Reclassification of certain debt securities
On January 1, 2001, ASB reclassified approximately $2 billion of the securities
it owns from held-to-maturity to available-for-sale. See note (7), "Recent
accounting pronouncements-Derivative instruments and hedging activities."
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
HEIDI's and ASB's state income taxes by $2.7 million for the nine months ended
September 30, 2001 and $8.5 million for prior years. Although a State of Hawaii
Department of Taxation tax auditor has challenged the tax treatment of this
reorganization, ASB believes that its tax position is proper.
(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) over the next year. HEIPC management has commenced 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 in the third quarter of 2001 and
for all periods presented.
Guam project
------------
In September 1996, HEI Power Corp. Guam (HPG), entered into an energy conversion
agreement for approximately 20 years with the Guam Power Authority, pursuant to
which HPG has repaired and is operating and maintaining two oil-fired 25
megawatt (MW) (net) units in Tanguisson, Guam. HPG's total cost to repair the
two units was approximately $15 million. HEIPC has received bids for the
purchase of HPG and is evaluating those bids. HEIPC expects to begin
negotiations for a definitive agreement shortly and will attempt to complete the
transaction in 2001. Management cannot predict at this time whether such
negotiations will be successfully completed.
China project
-------------
In 1998 and 1999, the HEIPC Group acquired what is now a 75% interest in a joint
venture, Baotou Tianjiao Power Co., Ltd., formed to construct, own and operate a
200 MW (net) coal-fired power plant to be located in Inner Mongolia. The power
plant was intended to be built "inside the fence" for Baotou Iron & Steel
(Group) Co., Ltd. The project received approval from both the national and Inner
Mongolia governments. However, the Inner Mongolia Power Company (IMPC), which
owns and operates the electricity grid in Inner Mongolia, caused a delay of the
project by failing to enter into a satisfactory interconnection arrangement with
the joint venture. The IMPC was seeking to limit the joint venture's load, which
is inconsistent with the terms of the project approvals and the power purchase
contract. The HEIPC Group no longer believes a satisfactory interconnection
arrangement can be obtained and intends to withdraw from the project. In the
third quarter of 2001, the HEIPC Group wrote off its remaining investment of
approximately $24 million in the project. The HEIPC Group is evaluating possible
remedies to pursue to recover the costs incurred in connection with the joint
venture interest; however, there can be no assurance that any amounts will be
recovered.
Philippines investments
-----------------------
In March 2000, the HEIPC Group acquired a 50% interest in EPHE Philippines
Energy Company, Inc. (EPHE), an indirect subsidiary of El Paso Energy
Corporation, for $87.5 million. EPHE then owned approximately 91.7% of the
common shares of East Asia Power Resources Corporation (EAPRC), a Philippines
holding company primarily engaged in the electric generation business in Manila
and Cebu through its subsidiaries. Due to the equity losses of $24.1 million
incurred in 2000 from the investment in EPHE and the changes in the political
and economic conditions related to the investment (primarily devaluation of the
Philippine peso and increase in fuel oil prices), management determined that the
investment in EAPRC was impaired and, on December 31, 2000, wrote off the
9
remaining $65.7 million investment in EAPRC. On December 31, 2000, the Company
also accrued a potential payment obligation under an HEI guaranty of $10 million
of EAPRC loans. In the first quarter of 2001, HEI was partially released from
the guaranty obligation and the Company reversed $1.5 million ($0.9 million, net
of income taxes) of the $10 million accrued on December 31, 2000. El Paso Energy
Corporation has demanded payment of the remaining guaranty.
In December 1998, the HEIPC Group invested $7.6 million to acquire convertible
preferred shares in Cagayan Electric Power & Light Co., Inc. (CEPALCO), an
electric distribution company in the Philippines. In September 1999, the HEIPC
Group also acquired 5% of the outstanding CEPALCO common stock for $2.1 million.
In July 2001, the preferred shares were converted to common stock. The HEIPC
Group currently owns approximately 22% of the outstanding common stock of
CEPALCO which is available for sale. The HEIPC Group recognized an impairment
loss of approximately $2.7 million in the third quarter of 2001 to adjust this
investment to its estimated net realizable value.
Summary financial information for the discontinued operations of the HEIPC Group
is as follows:
Three months ended Nine months ended
September 30, September 30,
---------------------------- -----------------------------
(in thousands) 2001 2000 2001 2000
--------------------------------------------------------------------------------------------------------------
Operations
Revenues (including equity losses)............ $ 1,248 $(6,140) $ 4,233 $ (8,840)
Operating loss................................ $ (639) $(9,134) $ (233) $(18,352)
Interest expense.............................. (272) (419) (1,050) (902)
Income tax benefits........................... 200 401 29 1,453
-------- ------- -------- --------
Loss from operations.......................... $ (711) $(9,152) $ (1,254) $(17,801)
-------- ------- -------- --------
Disposal
Loss, including provision of $7,995 for losses
from operations during phase-out period... $(34,784) $ - $(34,784) $ -
Income tax benefits........................... 12,463 - 12,463 -
-------- ------- -------- --------
Loss on disposal.............................. $(22,321) $ - $(22,321) $ -
-------- ------- -------- --------
Loss from discontinued operations of HEIPC.... $(23,032) $(9,152) $(23,575) $(17,801)
======== ======= ======== ========
As of September 30, 2001, the remaining net assets of the discontinued
international power operations, after the writeoffs and writedowns described
above, amounted to $54 million (included in "Other" assets) and consisted
primarily of the fixed assets of the Guam project, the investment in CEPALCO and
deferred taxes receivable, reduced by a reserve for losses from operations
during the phase-out period and a guaranty obligation. The amounts that HEIPC
will ultimately realize from the sale of the international power assets could
differ materially from the recorded amounts. No assurance can be given that
additional reserves for losses from operations during the phase-out period will
not be required.
Malama Pacific Corp.
Because final offsite obligations on properties previously sold were less than
originally anticipated, the Company reversed in the third quarter of 2001 $2.5
million ($1.5 million, net of income taxes) of liabilities established in 1998
for its discontinued real estate operations.
10
(6) Cash flows
---------------
Supplemental disclosures of cash flow information
For the nine months ended September 30, 2001 and 2000, the Company paid interest
amounting to $203.6 million and $205.8 million, respectively.
For the nine months ended September 30, 2001 and 2000, the Company paid income
taxes amounting to $19.5 million and $3.5 million, respectively.
Supplemental disclosures of noncash activities
From March 1998 to March 2000, HEI had acquired for cash its common shares in
the open market to satisfy the requirements of the HEI Dividend Reinvestment and
Stock Purchase Plan (DRIP). In April 2000, HEI recommenced issuing new common
shares under the HEI DRIP. Under the HEI DRIP, common stock dividends reinvested
by shareholders in HEI common stock in noncash transactions amounted to $12.1
million and $8.0 million for the nine months ended September 30, 2001 and 2000,
respectively.
ASB received $392.8 million in mortgage/asset-backed securities in exchange for
loans in the nine months ended September 30, 2001.
(7) Recent accounting pronouncements
-------------------------------------
Derivative instruments and hedging activities
The Company adopted the Statement of Financial Accounting Standards (SFAS) No.
133, "Accounting for Derivative Instruments and Hedging Activities," as amended,
on January 1, 2001. SFAS No. 133 establishes accounting and reporting standards
for derivative instruments and hedging activities and requires that an entity
recognize all derivatives as either assets or liabilities in the balance sheet
and measure those instruments at fair value. The adoption of SFAS No. 133 did
not have a material impact on the Company's results of operations, financial
condition or liquidity.
SFAS No. 133, as amended, allows the reclassification of certain debt securities
from held-to-maturity to either available-for-sale or trading at the time of
adoption. On January 1, 2001, ASB reclassified approximately $2 billion in
mortgage/asset-backed securities and $13 million in investment securities having
estimated fair values of approximately $2 billion and $13 million, respectively,
from held-to-maturity to available-for-sale. This reclassification gives ASB the
ability to better manage its risks (including interest rate, liquidity and
credit risks). At January 1, 2001, the gross unrealized gain on such securities,
net of income taxes, was approximately $1 million, and was included in
accumulated other comprehensive income within stockholders' equity.
HEI has entered into two swap agreements to manage its exposure to interest rate
risk. In general, HEI issues primarily fixed-rate long-term debt to balance the
short-term debt, which in essence is variable-rate debt by virtue of its short-
term nature. In April 2000, during a period of rising interest rates, HEI was
able to issue $100 million of variable-rate medium-term notes and simultaneously
enter into a swap agreement, which effectively fixed the interest rate on the
$100 million of debt at 7.995% until maturity in April 2003. On January 1, 2001,
HEI designated this swap as a cash flow hedge, which hedges the variability of
forecasted cash flows attributable to interest rate risk. All conditions were
met to assume no ineffectiveness in the hedging relationship. Thus, this cash
flow hedge is accounted for under the shortcut method by recording the value of
the swap on the balance sheet as either an asset or liability with a
corresponding offset recorded in accumulated other comprehensive income within
stockholders' equity, net of tax. HEI recorded the after-tax transition amount
associated with establishing the fair value of the swap on the balance sheet as
a reduction of $1.6 million in accumulated other comprehensive income.
11
(in thousands)
Summary of transition adjustment, January 1, 2001
Balance sheet - liabilities and stockholders' equity
Deferred income taxes $(1,031)
Other liabilities 2,650
Accumulated other comprehensive loss (1,619)
-------
$ -
=======
In June 2001, during a period of falling interest rates, HEI had the opportunity
to lower its interest payments on the $100 million of medium-term notes and
entered into a swap agreement which changed the $100 million of effectively
7.995% fixed-rate debt to variable-rate debt (adjusted quarterly based on
changes in the London InterBank Offered Rate indices). The initial interest rate
after entering into this swap was 7.445%. HEI designated this swap as a fair
value hedge, which hedges the variability of the fair value of the debt
attributable to interest rate risk. All conditions were met to assume no
ineffectiveness in the hedging relationship. Thus, this fair value hedge is
accounted for under the shortcut method by recording the value of the swap on
the balance sheet as either an asset or liability with a corresponding offset
recorded to mark the debt to fair value.
Business combinations, goodwill and other intangible assets
In June 2001, the Financial Accounting Standards Board (FASB) issued SFAS No.
141, "Business Combinations," and SFAS No. 142, "Goodwill and Other Intangible
Assets." SFAS No. 141 requires that the purchase method of accounting be used
for business combinations initiated or completed after June 30, 2001. SFAS No.
142 requires that goodwill and intangible assets with indefinite useful lives no
longer be amortized, but instead be tested for impairment at least annually
(effective January 1, 2002 for the Company). SFAS No. 142 also requires that
intangible assets with definite useful lives be amortized over their respective
estimated useful lives to their estimated residual values, and reviewed for
impairment in accordance with SFAS No. 121.
On January 1, 2002, the Company will be required to reassess the useful lives
and residual values of all intangible assets acquired in purchase business
combinations, and make any necessary amortization period adjustments by the end
of the first quarter of 2002. In addition, to the extent an intangible asset is
identified as having an indefinite useful life, the Company will be required to
test the intangible asset for impairment in accordance with the provisions of
SFAS No. 142 within the first quarter of 2002. Any impairment loss will be
measured as of January 1, 2002 and recognized as the cumulative effect of a
change in accounting principle in the first quarter of 2002. The Company has not
yet determined what the impact of adopting these provisions of SFAS No. 142, if
any, will be on the Company's results of operations or financial condition.
As of September 30, 2001, the Company's unamortized goodwill was $84 million and
unamortized identifiable intangible assets were $19 million. The Company will
adopt the provisions of SFAS No. 142 on January 1, 2002. Application of the
nonamortization provisions is expected to result in an increase in net income of
approximately $3.8 million for 2002.
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, the Company will
recognize a gain or loss on settlement. The provisions of SFAS No. 143 are
effective for fiscal years beginning after June 15, 2002. The Company will adopt
SFAS No. 143 on January 1, 2003, but management has not yet determined the
impact, if any, of adoption.
12
Accounting for the impairment or disposal of long-lived assets
In August 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment or
Disposal of Long-Lived Assets." For long-lived assets to be held and used, SFAS
No. 144 retains the requirements of SFAS No. 121 to (a) recognize an impairment
loss only if the carrying amount of a long-lived asset is not recoverable from
its undiscounted cash flows and (b) measure an impairment loss as the difference
between the carrying amount and fair value. Further, SFAS No. 144 eliminates the
requirement to allocate goodwill to long-lived assets to be tested for
impairment, describes a probability-weighted cash flow estimation approach to
deal with situations in which alternative courses of action to recover the
carrying amount of a long-lived asset are under consideration or a range is
estimated for the amount of possible future cash flows, and establishes a
"primary-asset" approach to determine the cash flow estimation period. For long-
lived assets to be disposed of other than by sale (e.g., assets abandoned,
exchanged or distributed to owners in a spinoff), SFAS No. 144 requires that
such assets be considered held and used until disposed of. Further, an
impairment loss should be recognized at the date an asset is exchanged for a
similar productive asset or distributed to owners in a spinoff if the carrying
amount exceeds its fair value. For long-lived assets to be disposed of by sale,
SFAS No. 144 retains the requirement of SFAS No. 121 to measure a long-lived
asset classified as held for sale at the lower of its carrying amount or fair
value less cost to sell and to cease depreciation. Discontinued operations would
no longer be measured on a net realizable value basis, and future operating
losses would no longer be recognized before they occur. SFAS No. 144 broadens
the presentation of discontinued operations to include a component of an entity,
establishes criteria to determine when a long-lived asset is held for sale,
prohibits retroactive reclassification of the asset as held for sale at the
balance sheet date if the criteria are met after the balance sheet date but
before issuance of the financial statements, and provides accounting guidance
for the reclassification of an asset from "held for sale" to "held and used."
The provisions of SFAS No. 144 are effective for fiscal years beginning after
December 15, 2001. The Company will adopt SFAS No. 144 on January 1, 2002, but
management has not yet determined the impact, if any, of adoption.
(8) Commitments and contingencies
----------------------------------
See note (4), "Bank subsidiary," and note (5), "Discontinued operations," above
and note (3), "Commitments and contingencies," in HECO's "Notes to consolidated
financial statements."
13
Hawaiian Electric Company, Inc. and subsidiaries
Consolidated balance sheets (unaudited)
September 30, December 31,
(in thousands, except par value) 2001 2000
----------------------------------------------------------------------------------------------------------------
Assets
Utility plant, at cost
Land.................................................................... $ 29,496 $ 31,037
Plant and equipment..................................................... 3,044,717 2,974,153
Less accumulated depreciation........................................... (1,240,969) (1,170,184)
Plant acquisition adjustment, net....................................... 367 406
Construction in progress................................................ 157,730 157,183
----------------------------------------------------------------------------------------------------------------
Net utility plant................................................. 1,991,341 1,992,595
----------------------------------------------------------------------------------------------------------------
Current assets
Cash and equivalents.................................................... 3,893 1,534
Customer accounts receivable, net....................................... 95,396 88,546
Accrued unbilled revenues, net.......................................... 55,142 64,020
Other accounts receivable, net.......................................... 2,569 5,426
Fuel oil stock, at average cost......................................... 36,404 37,124
Materials and supplies, at average cost................................. 20,991 16,787
Prepayments and other................................................... 46,208 4,697
----------------------------------------------------------------------------------------------------------------
Total current assets.............................................. 260,603 218,134
----------------------------------------------------------------------------------------------------------------
Other assets
Regulatory assets....................................................... 112,293 116,623
Other................................................................... 36,612 41,170
----------------------------------------------------------------------------------------------------------------
Total other assets................................................ 148,905 157,793
----------------------------------------------------------------------------------------------------------------
$ 2,400,849 $ 2,368,522
================================================================================================================
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................................................ 295,773 295,655
Retained earnings....................................................... 496,769 443,970
----------------------------------------------------------------------------------------------------------------
Common stock equity............................................... 877,929 825,012
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.......................................................... 682,249 667,731
----------------------------------------------------------------------------------------------------------------
Total capitalization.............................................. 1,694,471 1,627,036
----------------------------------------------------------------------------------------------------------------
Current liabilities
Short-term borrowings-nonaffiliates..................................... 38,684 104,398
Short-term borrowings-affiliate......................................... 14,165 8,764
Accounts payable........................................................ 58,440 71,698
Interest and preferred dividends payable................................ 17,421 10,483
Taxes accrued........................................................... 99,255 78,186
Other................................................................... 22,437 10,559
----------------------------------------------------------------------------------------------------------------
Total current liabilities......................................... 250,402 284,088
----------------------------------------------------------------------------------------------------------------
Deferred credits and other liabilities
Deferred income taxes................................................... 139,375 137,066
Unamortized tax credits................................................. 47,279 47,603
Other................................................................... 59,120 61,211
----------------------------------------------------------------------------------------------------------------
Total deferred credits and other liabilities...................... 245,774 245,880
----------------------------------------------------------------------------------------------------------------
Contributions in aid of construction....................................... 210,202 211,518
----------------------------------------------------------------------------------------------------------------
$ 2,400,849 $ 2,368,522
================================================================================================================
See accompanying "Notes to consolidated financial statements."
14
Hawaiian Electric Company, Inc. and subsidiaries
Consolidated statements of income (unaudited)
Three months ended Nine months ended
September 30, September 30,
(in thousands, except for ratio of earnings ------------------------------ ------------------------------
to fixed charges) 2001 2000 2001 2000
--------------------------------------------------------------------------------------------------------------------------
Operating revenues...................................... $340,231 $335,263 $969,979 $930,167
--------------------------------------------------------------------------------------------------------------------------
Operating expenses
Fuel oil................................................ 96,665 95,883 266,995 262,130
Purchased power......................................... 87,670 85,092 253,067 225,762
Other operation......................................... 30,729 30,582 90,599 85,787
Maintenance............................................. 14,540 16,156 42,752 42,311
Depreciation............................................ 25,363 24,605 75,335 73,269
Taxes, other than income taxes.......................... 31,494 31,615 91,411 87,981
Income taxes............................................ 16,244 15,828 44,210 46,222
--------------------------------------------------------------------------------------------------------------------------
302,705 299,761 864,369 823,462
--------------------------------------------------------------------------------------------------------------------------
Operating income........................................ 37,526 35,502 105,610 106,705
--------------------------------------------------------------------------------------------------------------------------
Other income
Allowance for equity funds used during construction..... 998 1,505 3,218 4,102
Other, net.............................................. 530 1,856 2,467 3,569
--------------------------------------------------------------------------------------------------------------------------
1,528 3,361 5,685 7,671
--------------------------------------------------------------------------------------------------------------------------
Income before interest and other charges................ 39,054 38,863 111,295 114,376
--------------------------------------------------------------------------------------------------------------------------
Interest and other charges
Interest on long-term debt.............................. 10,126 10,024 30,127 29,876
Amortization of net bond premium and expense............ 509 485 1,546 1,452
Other interest charges.................................. 832 1,725 4,245 5,257
Allowance for borrowed funds used during construction... (524) (807) (1,711) (2,220)
Preferred stock dividends of subsidiaries............... 228 228 686 686
Preferred securities distributions of trust
subsidiaries........................................... 1,918 1,918 5,756 5,756
--------------------------------------------------------------------------------------------------------------------------
13,089 13,573 40,649 40,807
--------------------------------------------------------------------------------------------------------------------------
Income before preferred stock dividends of HECO......... 25,965 25,290 70,646 73,569
Preferred stock dividends of HECO....................... 270 270 810 810
--------------------------------------------------------------------------------------------------------------------------
Net income for common stock............................. $ 25,695 $ 25,020 $ 69,836 $ 72,759
==========================================================================================================================
Ratio of earnings to fixed charges (SEC method)........ 3.62 3.68
==========================================================================================================================
Hawaiian Electric Company, Inc. and subsidiaries
Consolidated statements of retained earnings (unaudited)
Three months ended Nine months ended
September 30, September 30,
------------------------------ ------------------------------
(in thousands) 2001 2000 2001 2000
--------------------------------------------------------------------------------------------------------------------------
Retained earnings, beginning of period................ $488,111 $441,199 $443,970 $425,206
Net income for common stock........................... 25,695 25,020 69,836 72,759
Common stock dividends................................ (17,037) (18,011) (17,037) (49,757)
--------------------------------------------------------------------------------------------------------------------------
Retained earnings, end of period...................... $496,769 $448,208 $496,769 $448,208
==========================================================================================================================
HEI owns all the common stock of HECO. Therefore, per share data with respect to
shares of common stock of HECO are not meaningful.
See accompanying "Notes to consolidated financial statements."
15
Hawaiian Electric Company, Inc. and subsidiaries
Consolidated statements of cash flows (unaudited)
Nine months ended September 30 2001 2000
-------------------------------------------------------------------------------------------------------------------------------
(in thousands)
Cash flows from operating activities
Income before preferred stock dividends of HECO................................... $ 70,646 $ 73,569
Adjustments to reconcile income before preferred stock dividends of HECO to net
cash provided by operating activities
Depreciation of property, plant and equipment............................... 75,335 73,269
Other amortization.......................................................... 9,593 5,379
Deferred income taxes....................................................... 2,324 6,605
Tax credits, net............................................................ 852 1,016
Allowance for equity funds used during construction......................... (3,218) (4,102)
Changes in assets and liabilities
Increase in accounts receivable........................................ (3,993) (11,280)
Decrease (increase) in accrued unbilled revenues....................... 8,878 (6,088)
Decrease in fuel oil stock............................................. 720 3,819
Increase in materials and supplies..................................... (4,204) (88)
Increase in regulatory assets.......................................... (2,158) (2,707)
Increase (decrease) in accounts payable................................ (13,258) 2,244
Changes in other assets and liabilities................................ 10,010 14,356
-------------------------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities......................................... 151,527 155,992
-------------------------------------------------------------------------------------------------------------------------------
Cash flows from investing activities
Capital expenditures.............................................................. (77,686) (88,955)
Contributions in aid of construction.............................................. 6,773 6,713
Payments on notes receivable...................................................... - 138
-------------------------------------------------------------------------------------------------------------------------------
Net cash used in investing activities............................................. (70,913) (82,104)
-------------------------------------------------------------------------------------------------------------------------------
Cash flows from financing activities
Common stock dividends............................................................ (17,037) (49,757)
Preferred stock dividends......................................................... (810) (810)
Preferred securities distributions of trust subsidiaries.......................... (5,756) (5,756)
Proceeds from issuance of long-term debt.......................................... 14,367 13,150
Net decrease in short-term borrowings from nonaffiliates and affiliate
with original maturities of three months or less............................... (57,317) (83,206)
Proceeds from other short-term borrowings......................................... - 57,499
Repayment of other short-term borrowings.......................................... (3,000) -
Other............................................................................. (8,702) (3,542)
-------------------------------------------------------------------------------------------------------------------------------
Net cash used in financing activities............................................. (78,255) (72,422)
-------------------------------------------------------------------------------------------------------------------------------
Net increase in cash and equivalents.............................................. 2,359 1,466
Cash and equivalents, beginning of period......................................... 1,534 1,966
-------------------------------------------------------------------------------------------------------------------------------
Cash and equivalents, end of period............................................... $ 3,893 $ 3,432
===============================================================================================================================
See accompanying "Notes to consolidated financial statements."
16
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 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, 2000 and the consolidated financial statements and the notes
thereto in HECO's Quarterly Reports on SEC Form 10-Q for the quarters ended
March 31, 2001 and June 30, 2001.
In the opinion of HECO's management, the accompanying unaudited consolidated
financial statements contain all material adjustments required by GAAP to
present fairly the financial position of HECO and its subsidiaries as of
September 30, 2001 and December 31, 2000, the results of their operations for
the three and nine months ended September 30, 2001 and 2000, and their cash
flows for the nine months ended September 30, 2001 and 2000. 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 prior periods' consolidated
financial statements to conform to the 2001 presentation.
(2) Cash flows
---------------
Supplemental disclosures of cash flow information
For the nine months ended September 30, 2001 and 2000, HECO and its subsidiaries
paid interest amounting to $27.5 million and $24.3 million, respectively.
For the nine months ended September 30, 2001 and 2000, HECO and its subsidiaries
paid income taxes amounting to $15.7 million and $20.9 million, respectively.
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 $3.2 million and $4.1 million for the nine months ended September 30, 2001
and 2000, respectively.
(3) Commitments and contingencies
----------------------------------
Integrated resource planning costs
Through September 30, 2001, HECO and its subsidiaries had recognized $10.4
million of revenues through an interim order related to integrated resource
planning costs incurred from 1995 through 1999. Such revenues are subject to
refund, with interest, to the extent they exceed the amounts allowed in final
decisions and orders from the PUC.
HELCO power situation
In 1991, Hawaii Electric Light Company, Inc. (HELCO) began planning to meet
increased electric generation demand forecasted for 1994. HELCO's plans were to
install at its Keahole power plant two 20 MW combustion
17
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. 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 independent power producers (IPPs) and other parties
challenging these permits and objecting to the expansion, alleging among other
things that (1) operation of the expanded Keahole site would not comply with
land use regulations (including noise standards) and HELCO's land patent; (2)
HELCO cannot operate the plant within current air quality standards; (3) HELCO
could alternatively purchase power from IPPs to meet increased electric
generation demand; (4) HELCO's land use entitlement expired in April 1999 and
HELCO's request for an extension must be heard in a contested case hearing; and
(5) recent public testimony by a former BLNR member calls into question the 1996
voting by the BLNR and is a basis for having the 1998 final judgment sent back
to the Circuit Court from the Supreme Court for further review.
For a detailed description and a partial history of the Keahole Power Plant
situation, see "HELCO power situation" on pages 9 to 17 of HEI's Annual Report
on SEC Form 10-K for the year ended December 31, 2000. Recent developments
regarding this situation are described below.
Land use permit amendment. The Third Circuit Court of the State of Hawaii (the
-------------------------
Circuit Court) ruled in 1997 that because the BLNR had failed to render a valid
decision on HELCO's application to amend its land use permit before the
statutory deadline in April 1996, HELCO was entitled to use its Keahole site for
the expansion project (HELCO's "default entitlement"). Final judgments of the
Circuit Court related to this ruling are on appeal to the Hawaii Supreme Court,
which in 1998 denied motions to stay the Circuit Court's final judgment pending
resolution of the appeal.
The Circuit Court's final judgment provided that HELCO must comply with the
conditions in its application and with the standard land use conditions insofar
as those conditions were not inconsistent with HELCO's default entitlement.
There have been numerous proceedings before the Circuit Court and the BLNR in
which certain parties (a) have sought determinations of what conditions apply to
HELCO's default entitlement, (b) have claimed that HELCO has not complied with
applicable land use conditions and that its default entitlement should thus be
forfeited, (c) have claimed that HELCO will not be able to operate the proposed
plant without violating applicable land use conditions and provisions of
Hawaii's Air Pollution Control Act and Noise Pollution Act and (d) have sought
orders enjoining any further construction at the Keahole site.
Although there has not been a final resolution of these claims, to date there
have been four rulings which may adversely affect HELCO's ability to construct
and operate CT-4 and CT-5. First, based on a change by the DOH in its
interpretation of the noise rules it promulgated under the Hawaii Noise
Pollution Act, the Circuit Court ruled that a stricter noise standard than the
previously applied standard applies to HELCO's plant, but left enforcement of
the ruling to the DOH. The DOH has not taken any formal enforcement action. If
and when the DOH actually enforces the stricter standards, HELCO may, among
other things, assert that the noise regulations are unconstitutional as applied.
Meanwhile, while 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 is exploring possible noise mitigation measures, which can
be implemented if necessary, for CT-4 and CT-5.
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.
In October 2000, HELCO filed with the BLNR a request for extension of the
construction deadline and, in January 2001, the BLNR sent the request to a
contested case hearing, which was held in September 2001. There is no deadline
for the hearings officer to submit his recommendation to the BLNR.
18
Third, in December 2000, the Circuit Court granted a motion to stay further
construction until extension of the construction deadline is obtained from the
BLNR, at which time the Court would consider lifting the stay.
Fourth, on March 28, 2001, an individual plaintiff filed a motion for post-
judgment relief with the Circuit Court. Citing testimony in support of the
project given by a former BLNR member at a March 6, 2001 public hearing on
HELCO's air permit, the plaintiff alleged that the testimony established grounds
to conclude that the former BLNR member was unduly influenced by evidence of the
need for the project that the BLNR had improperly admitted during the contested
case hearing in 1995-1996 and that the BLNR member voted to approve HELCO's
application on that basis. The plaintiff requested the Circuit Court to order,
among other things, that: (1) the plaintiff be allowed an opportunity to argue
the prejudicial effect of HELCO's submission of evidence on the need for the
project on her right to due process; and (2) the plaintiff's motion be granted
and the Circuit Court thereby: (a) vacate its February 11, 1998 judgment denying
her cross-appeal; (b) grant her cross-appeal; and (c) suspend operation of the
default entitlement and the proceedings now before the BLNR. On July 3, 2001,
the Circuit Court issued an order and directed the individual to file with the
Supreme Court a motion to remand the February 11, 1998 default entitlement
judgment back to the Circuit Court "in order that [the Circuit Court] may make a
further determination." Attached to the order was a "Request for Recall of
Judgment" in which the Circuit Court made certain findings of fact and further
stated that it "has not determined the remedy that would be appropriate under
the circumstances and reserves its disposition of said motion" until the case is
remanded. The plaintiff filed the motion for remand with the Supreme Court on
July 10, 2001 and, as directed by the Circuit Court, attached a copy of the
"Request for Recall of Judgment." HELCO filed a memorandum in opposition in
August 2001. The Supreme Court has not yet issued a ruling. Management cannot
predict whether the ultimate outcome of this motion will adversely affect
HELCO's ability to proceed with the Keahole project.
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 have been filed with the EAB. The DOH and HELCO
have filed a joint memorandum in opposition to the appeals. Any further
construction dependent on the air permit is stayed until the appeals are
resolved. HELCO is seeking a final resolution of the appeals to the EAB as
expeditiously as possible.
IPP Complaints. Three IPPs--Kawaihae Cogeneration Partners (KCP), Enserch
--------------
Development Corporation (Enserch) and Hilo Coast Power Company (HCPC)--filed
separate complaints with the PUC in 1993, 1994 and 1999, respectively, alleging
that they are each entitled to a power purchase agreement (PPA) to provide HELCO
with additional capacity. KCP and Enserch each claimed they would be a
substitute for HELCO's planned expansion of Keahole.
In 1994 and 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 be included
in rate base until the project is installed and "is used and useful for utility
purposes." The PUC also ordered HELCO to continue negotiating with the IPPs and
held that the facility to be built should be the one that can be most
expeditiously put into service at "allowable cost."
The Enserch and HCPC complaints have been resolved by HELCO's entry into two
PPAs, which were necessary to ensure reliable service to customers on the island
of Hawaii, but, in the opinion of management, do not supplant the need for CT-4
and CT-5.
In October 1999, the Circuit Court ruled that the lease for KCP's proposed plant
site was invalid. Based on this ruling and for other reasons, management
believes that KCP's pending proposal for a PPA is not viable and, therefore,
will not impact the need for CT-4 and CT-5.
Management's evaluation; costs incurred. Management believes that the issues
---------------------------------------
surrounding the amendment to the land use permit and applicable land use
conditions, the air permit, the IPP complaints and related matters will be
satisfactorily resolved and will not prevent HELCO from ultimately constructing
CT-4 and CT-5. Management
19
currently expects that the BLNR will extend the construction period for the
plant expansion and that installation of CT-4 and CT-5 will begin when the final
air permit is effective (i.e., after resolution of the EAB appeals), with an in-
service date in the second half of 2002. There can be no assurances, however,
that these results will be achieved or that this time frame will be met.
The recovery of costs relating to CT-4 and CT-5 are subject to the rate-making
process governed by the PUC. Management believes no adjustment to costs incurred
to put CT-4 and CT-5 into service is required as of September 30, 2001. If it
becomes probable that CT-4 and/or CT-5 will not be installed, however, HELCO may
be required to write-off a material portion of the costs incurred in its efforts
to put these units into service. As of September 30, 2001, HELCO's costs
incurred in its efforts to put CT-4 and CT-5 into service and to support
existing units (less costs the PUC has permitted to be transferred to plant-in-
service for pre-air permit facilities) amounted to approximately $74 million,
including $29 million for equipment and material purchases, $25 million for
planning, engineering, permitting, site development and other costs and $20
million for an allowance for funds used during construction (AFUDC).
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 2005. No costs for ST-
7 are included in construction in progress.
Competition proceeding
On December 30, 1996, the PUC instituted a proceeding to identify and examine
the issues surrounding electric competition and to determine the impact of
competition on the electric utility infrastructure in Hawaii. After a
collaborative process involving the 19 parties to the proceeding, final
statements of position were prepared by several of the parties and submitted to
the PUC in October 1998. HECO's position is that retail competition is not
feasible in Hawaii, but that some of the benefits of competition can be achieved
through competitive bidding for new generation, performance-based rate-making
(PBR) and innovative pricing provisions. The other parties to the proceeding
advanced numerous other proposals in their statements of position. In January
2000, the PUC submitted a status report on its investigation to the legislature.
In the report, the PUC stated that competitive bidding for new power supplies
(i.e., wholesale generation competition) is a logical first step to encourage
competition in the state's electric industry and that it plans to proceed with
an examination of the feasibility of competitive bidding. The PUC also indicated
in the report its plans to review specific policies to encourage renewable
energy resources in the power generation mix. The report states that "further
steps" by the PUC "will involve the development of specific policies to
encourage wholesale competition and the continuing examination of other areas
suitable for the development of competition." HECO cannot predict what the
ultimate outcome of the proceeding will be or which (if any) of the proposals
advanced in the proceeding will be implemented or whether the parties will seek
and obtain state legislative action on their 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 "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 "Large Power"
and "General Service Demand" customers.
In December 1999, HECO, HELCO and Maui Electric Company, Limited (MECO) filed an
application with the PUC seeking permission to implement PBR in future rate
cases. The proposed PBR would have allowed adjustments in the electric
utilities' rates (for up to five years after a rate case) based on an index-
based price cap, an earnings sharing mechanism and a service quality mechanism.
In early 2001, the PUC dismissed the electric utilities' 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.
20
Environmental regulation
In early 1995, the DOH initially advised HECO, Hawaiian Tug & Barge Corp. (HTB),
Young Brothers, Limited (YB) and others that it was conducting an investigation
to determine the nature and extent of actual or potential releases of hazardous
substances, oil, pollutants or contaminants at or near Honolulu Harbor. The DOH
issued letters in December 1995 indicating that it had identified a number of
parties, including HECO, HTB and YB, who appear to be potentially responsible
for the contamination and/or operate their facilities upon contaminated land.
The DOH met with these identified parties in January 1996 and certain of the
identified parties (including HECO, Chevron Products Company, the State of
Hawaii Department of Transportation Harbors Division and others) formed a
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 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 agreement for the sale of YB, HEI and The Old Oahu Tug Service,
Inc. (TOOTS, formerly HTB) have certain indemnity obligations, including
obligations with respect to the Honolulu Harbor investigation. In response to
the DOH's request for technical assistance, the EPA became involved with the
harbor investigation in June 2000. In August 2000, the Work Group, the DOH, the
EPA and the U.S. Coast Guard met to discuss a conceptual site model, how to
proceed and other matters.
In 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 Work Group
agreed to fund remediation work using an interim cost allocation method. In
September 2001, TOOTS joined the Work Group. Although an interim allocation of
costs has not been determined for TOOTS, a process for developing such an
allocation has been initiated.
In July 2001, the EPA issued a notice of interest (Initial NOI) under the Oil
Pollution Act of 1990 to HECO, YB and others regarding the Iwilei Unit of the
Honolulu Harbor site. In the Initial NOI, the EPA stated that immediate
subsurface investigation and assessment must be conducted to delineate the
extent of contamination at the site. Further, the EPA, in coordination with the
DOH, stated that it was prepared to perform the work itself unless the Work
Group or a subgroup of the Work Group agreed to perform this work on a site-wide
basis in a manner and on a schedule acceptable to both the EPA and DOH. On July
26, 2001, the Work Group notified the EPA of its intent to perform the immediate
subsurface investigation and assessment (also known as the Rapid Assessment
Work) identified in the Initial NOI.
In August 2001, the Work Group submitted to the EPA and DOH a work plan for
implementation of the Rapid Assessment Work, which was approved by the agencies.
Implementation of the work plan began in September 2001 and will continue
through November 2001. Also in September 2001, the EPA (pursuant to the Oil
Pollution Act of 1990) and DOH (pursuant to the Hawaii Emergency Response Law)
concurrently issued notices of interest (collectively, the Second NOI) to the
members of the Work Group, including HECO and TOOTS. The Second NOI identified
several investigative and preliminary oil removal tasks to be taken at certain
valve control facilities associated with historic pipelines in the Iwilei Unit
of the Honolulu Harbor site. The Work Group has agreed to perform the tasks
identified in the Second NOI.
Although the Rapid Assessment Work has yet to be completed, the Work Group
consultant has developed a rough preliminary estimate of costs for continuing
investigative work and remedial activities at the Iwilei Unit of the site. Based
on the Work Group consultant's preliminary assessment of costs, management
estimates that HECO will incur approximately $0.6 million and TOOTS will incur
approximately $0.1 million in connection with work to be performed at the site
from October 2001 through December 2003, which amounts have been recorded.
However, because the full scope and extent of additional investigative work and
remedial activities are unknown at this time,
21
and because the final cost allocation method has not yet been determined,
management cannot predict with accuracy the costs to be incurred by the Company
beyond 2003, if any, and the total costs to be incurred in connection with the
Honolulu Harbor investigation. Therefore, the HECO and TOOTS cost estimates may
be subject to significant change.
(4) HECO-obligated mandatorily redeemable preferred securities of trust
------------------------------------------------------------------------
subsidiaries holding solely HECO and HECO-guaranteed subordinated
-----------------------------------------------------------------
debentures
----------
In March 1997, HECO Capital Trust I (Trust I), a grantor trust and a wholly
owned subsidiary of HECO, sold (i) in a public offering, 2 million of its HECO-
Obligated 8.05% Cumulative Quarterly Income Preferred Securities, Series 1997
(1997 trust preferred securities) with an aggregate liquidation preference of
$50 million and (ii) to HECO, common securities with a liquidation preference of
approximately $1.55 million. Proceeds from the sale of the 1997 trust preferred
securities and the common securities were used by Trust I to purchase 8.05%
Junior Subordinated Deferrable Interest Debentures, Series 1997 (1997 junior
deferrable debentures) issued by HECO in the principal amount of $31.55 million
and issued by each of MECO and HELCO in the respective principal amounts of $10
million. The 1997 junior deferrable debentures, which bear interest at 8.05% and
mature on March 27, 2027, together with the subsidiary guarantees (pursuant to
which the obligations of MECO and HELCO under their respective debentures are
fully and unconditionally guaranteed by HECO), are the sole assets of Trust I.
The 1997 trust preferred securities must be redeemed at the maturity of the
underlying debt on March 27, 2027, which maturity may be shortened to a date no
earlier than March 27, 2002 or extended to a date no later than March 27, 2046,
and are not redeemable at the option of the holders, but may be redeemed by
Trust I, in whole or in part, from time to time, on or after March 27, 2002 or
upon the occurrence of certain events. All of the proceeds from the sale were
invested by Trust I in the underlying debt securities of HECO, HELCO and MECO.
In December 1998, HECO Capital Trust II (Trust II), a grantor trust and a wholly
owned subsidiary of HECO, sold (i) in a public offering, 2 million of its HECO-
Obligated 7.30% Cumulative Quarterly Income Preferred Securities, Series 1998
(1998 trust preferred securities) with an aggregate liquidation preference of
$50 million and (ii) to HECO, common securities with a liquidation preference of
approximately $1.55 million. Proceeds from the sale of the 1998 trust preferred
securities and the common securities were used by Trust II to purchase 7.30%
Junior Subordinated Deferrable Interest Debentures, Series 1998 (1998 junior
deferrable debentures) issued by HECO in the principal amount of $31.55 million
and issued by each of MECO and HELCO in the respective principal amounts of $10
million. The 1998 junior deferrable debentures, which bear interest at 7.30% and
mature on December 15, 2028, together with the subsidiary guarantees (pursuant
to which the obligations of MECO and HELCO under their respective debentures are
fully and unconditionally guaranteed by HECO), are the sole assets of Trust II.
The 1998 trust preferred securities must be redeemed at the maturity of the
underlying debt on December 15, 2028, which maturity may be shortened to a date
no earlier than December 15, 2003 or extended to a date no later than December
15, 2047, and are not redeemable at the option of the holders, but may be
redeemed by Trust II, in whole or in part, from time to time, on or after
December 15, 2003 or upon the occurrence of certain events. All of the proceeds
from the sale were invested by Trust II in the underlying debt securities of
HECO, HELCO and MECO, who used such proceeds from the sale of the 1998 junior
deferrable debentures primarily to effect the redemption of certain series of
their preferred stock having a total par value of $47 million.
The 1997 and 1998 junior deferrable debentures and the common securities of the
Trusts have been eliminated in HECO's consolidated balance sheets as of
September 30, 2001 and December 31, 2000. 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).
22
(5) Recent accounting pronouncements
------------------------------------
Derivative instruments and hedging activities
HECO and its subsidiaries adopted SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities," as amended, on January 1, 2001 with no
resulting material impact to consolidated financial condition, net income or
liquidity. SFAS No. 133 establishes accounting and reporting standards for
derivative instruments and hedging activities and requires that an entity
recognize all derivatives as either assets or liabilities in the balance sheet
and measure those instruments at fair value.
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, the Company will
recognize a gain or loss on settlement. The provisions of SFAS No. 143 are
effective for fiscal years beginning after June 15, 2002. HECO and its
subsidiaries will adopt SFAS No. 143 on January 1, 2003, but management has not
yet determined the impact, if any, of adoption.
Accounting for the impairment or disposal of long-lived assets
In August 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment or
Disposal of Long-Lived Assets." For long-lived assets to be held and used, SFAS
No. 144 retains the requirements of SFAS No. 121 to (a) recognize an impairment
loss only if the carrying amount of a long-lived asset is not recoverable from
its undiscounted cash flows and (b) measure an impairment loss as the difference
between the carrying amount and fair value. Further, SFAS No. 144 eliminates the
requirement to allocate goodwill to long-lived assets to be tested for
impairment, describes a probability-weighted cash flow estimation approach to
deal with situations in which alternative courses of action to recover the
carrying amount of a long-lived asset are under consideration or a range is
estimated for the amount of possible future cash flows, and establishes a
"primary-asset" approach to determine the cash flow estimation period. For long-
lived assets to be disposed of other than by sale (e.g., assets abandoned,
exchanged or distributed to owners in a spinoff), SFAS No. 144 requires that
such assets be considered held and used until disposed of. Further, an
impairment loss should be recognized at the date an asset is exchanged for a
similar productive asset or distributed to owners in a spinoff if the carrying
amount exceeds its fair value. For long-lived assets to be disposed of by sale,
SFAS No. 144 retains the requirement of SFAS No. 121 to measure a long-lived
asset classified as held for sale at the lower of its carrying amount or fair
value less cost to sell and to cease depreciation. Discontinued operations would
no longer be measured on a net realizable value basis, and future operating
losses would no longer be recognized before they occur. SFAS No. 144 broadens
the presentation of discontinued operations to include a component of an entity,
establishes criteria to determine when a long-lived asset is held for sale,
prohibits retroactive reclassification of the asset as held for sale at the
balance sheet date if the criteria are met after the balance sheet date but
before issuance of the financial statements, and provides accounting guidance
for the reclassification of an asset from "held for sale" to "held and used."
The provisions of SFAS No. 144 are effective for fiscal years beginning after
December 15, 2001. HECO and its subsidiaries will adopt SFAS No. 144 on January
1, 2002, but management has not yet determined the impact, if any, of adoption.
23
(6) Consolidating financial information
----------------------------------------
Hawaiian Electric Company, Inc. and subsidiaries
Consolidating balance sheet (unaudited)
September 30, 2001
---------------------------------------------------------------------------------
Reclassi-
fications
HECO HECO and
Capital Capital elimina- HECO
(in thousands) HECO HELCO MECO Trust I Trust II tions consolidated
----------------------------------------------------------------------------------------------------------------------------------
Assets
Utility plant, at cost
Land....................................... $ 25,287 $ 2,557 $ 1,652 $ - $ - $ - $ 29,496
Plant and equipment........................ 1,926,107 545,974 572,636 - - - 3,044,717
Less accumulated depreciation.............. (795,270) (233,973) (211,726) - - - (1,240,969)
Plant acquisition adjustment, net.......... - - 367 - - - 367
Construction in progress................... 66,243 83,553 7,934 - - - 157,730
----------------------------------------------------------------------------------------------------------------------------------
Net utility plant...................... 1,222,367 398,111 370,863 - - - 1,991,341
----------------------------------------------------------------------------------------------------------------------------------
Investment in subsidiaries, at equity......... 341,253 - - - - (341,253) -
----------------------------------------------------------------------------------------------------------------------------------
Current assets
Cash and equivalents....................... 755 626 2,512 - - - 3,893
Advances to affiliates..................... 11,600 - 10,000 51,546 51,546 (124,692) -
Customer accounts receivable, net.......... 65,285 16,252 13,859 - - - 95,396
Accrued unbilled revenues, net............. 38,762 8,483 7,897 - - - 55,142
Other accounts receivable, net............. 1,426 826 375 - - (58) 2,569
Fuel oil stock, at average cost............ 27,585 3,537 5,282 - - - 36,404
Materials and supplies, at average cost.... 9,489 2,603 8,899 - - - 20,991
Prepayments and other...................... 37,276 6,190 2,742 - - - 46,208
----------------------------------------------------------------------------------------------------------------------------------
Total current assets................... 192,178 38,517 51,566 51,546 51,546 (124,750) 260,603
----------------------------------------------------------------------------------------------------------------------------------
Other assets
Regulatory assets.......................... 76,256 18,769 17,268 - - - 112,293
Other...................................... 24,089 6,097 6,426 - - - 36,612
----------------------------------------------------------------------------------------------------------------------------------
Total other assets..................... 100,345 24,866 23,694 - - - 148,905
----------------------------------------------------------------------------------------------------------------------------------
$1,856,143 $ 461,494 $ 446,123 $51,546 $51,546 $ (466,003) $ 2,400,849
==================================================================================================================================
Capitalization and liabilities
Capitalization
Common stock equity........................ $ 877,929 $ 166,238 $ 171,923 $ 1,546 $ 1,546 $ (341,253) $ 877,929
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............................. 467,768 145,954 171,619 - - (103,092) 682,249
----------------------------------------------------------------------------------------------------------------------------------
Total capitalization................... 1,367,990 319,192 348,542 51,546 51,546 (444,345) 1,694,471
----------------------------------------------------------------------------------------------------------------------------------
Current liabilities
Short-term borrowings-nonaffiliates........ 38,684 - - - - - 38,684
Short-term borrowings-affiliate............ 24,165 11,600 - - - (21,600) 14,165
Accounts payable........................... 40,662 9,441 8,337 - - - 58,440
Interest and preferred dividends payable... 10,419 3,114 3,944 - - (56) 17,421
Taxes accrued.............................. 58,579 18,613 22,063 - - - 99,255
Other...................................... 16,760 1,965 3,714 - - (2) 22,437
----------------------------------------------------------------------------------------------------------------------------------
Total current liabilities.............. 189,269 44,733 38,058 - - (21,658) 250,402
----------------------------------------------------------------------------------------------------------------------------------
Deferred credits and other liabilities
Deferred income taxes...................... 120,686 10,092 8,597 - - - 139,375
Unamortized tax credits.................... 27,761 8,993 10,525 - - - 47,279
Other...................................... 17,542 25,389 16,189 - - - 59,120
----------------------------------------------------------------------------------------------------------------------------------
Total deferred credits and other
liabilities......................... 165,989 44,474 35,311 - - - 245,774
----------------------------------------------------------------------------------------------------------------------------------
Contributions in aid of construction.......... 132,895 53,095 24,212 - - - 210,202
----------------------------------------------------------------------------------------------------------------------------------
$1,856,143 $ 461,494 $ 446,123 $51,546 $51,546 $ (466,003) $ 2,400,849
============================================================================================================-=====================
24
Hawaiian Electric Company, Inc. and subsidiaries
Consolidating balance sheet (unaudited)
December 31, 2000
---------------------------------------------------------------------------------------
Reclassi-
fications
HECO HECO and
Capital Capital elimina- HECO
(in thousands) HECO HELCO MECO Trust I Trust II tions consolidated
-----------------------------------------------------------------------------------------------------------------------------------
Assets
Utility plant, at cost
Land..................................... $ 24,999 $ 2,470 $ 3,568 $ - $ - $ - $ 31,037
Plant and equipment...................... 1,865,486 556,094 552,573 - - - 2,974,153
Less accumulated depreciation............ (751,894) (222,476) (195,814) - - - (1,170,184)
Plant acquisition adjustment, net........ - - 406 - - - 406
Construction in progress................. 82,105 64,552 10,526 - - - 157,183
----------------------------------------------------------------------------------------------------------------------------------
Net utility plant.................... 1,220,696 400,640 371,259 - - - 1,992,595
----------------------------------------------------------------------------------------------------------------------------------
Investment in subsidiaries, at equity....... 333,809 - - - - (333,809) -
----------------------------------------------------------------------------------------------------------------------------------
Current assets
Cash and equivalents..................... 1,398 4 132 - - - 1,534
Advances to affiliates................... 21,800 - - 51,546 51,546 (124,892) -
Customer accounts receivable, net........ 60,484 15,022 13,040 - - - 88,546
Accrued unbilled revenues, net........... 44,448 10,144 9,428 - - - 64,020
Other accounts receivable, net........... 4,311 920 231 - - (36) 5,426
Fuel oil stock, at average cost.......... 24,176 3,439 9,509 - - - 37,124
Materials and supplies, at average cost.. 6,958 2,365 7,464 - - - 16,787
Prepayments and other.................... 3,130 1,251 316 - - - 4,697
----------------------------------------------------------------------------------------------------------------------------------
Total current assets................. 166,705 33,145 40,120 51,546 51,546 (124,928) 218,134
----------------------------------------------------------------------------------------------------------------------------------
Other assets
Regulatory assets........................ 77,717 19,838 19,068 - - - 116,623
Other.................................... 27,743 5,823 7,604 - - - 41,170
----------------------------------------------------------------------------------------------------------------------------------
Total other assets................... 105,460 25,661 26,672 - - - 157,793
----------------------------------------------------------------------------------------------------------------------------------
$1,826,670 $ 459,446 $ 438,051 $51,546 $51,546 $ (458,737) $ 2,368,522
==================================================================================================================================
Capitalization and liabilities
Capitalization
Common stock equity...................... $ 825,012 $ 162,901 $ 167,816 $ 1,546 $ 1,546 $ (333,809) $ 825,012
Cumulative preferred stock-not
subject to mandatory redemption..... 22,293 7,000 5,000 - - - 34,293
HECO-obligated mandatorily redeemable
trust preferred securities of
subsidary trusts holding solely
HECO and HECO-guaranteed
debentures.......................... - - - 50,000 50,000 - 100,000
Long-term debt........................... 453,310 145,931 171,582 - - (103,092) 667,731
----------------------------------------------------------------------------------------------------------------------------------
Total capitalization................. 1,300,615 315,832 344,398 51,546 51,546 (436,901) 1,627,036
----------------------------------------------------------------------------------------------------------------------------------
Current liabilities
Short-term borrowings-nonaffiliates...... 104,398 - - - - - 104,398
Short-term borrowings-affiliate.......... 8,764 20,300 1,500 - - (21,800) 8,764
Accounts payable......................... 51,249 10,146 10,303 - - - 71,698
Interest and preferred dividends payable 6,779 1,790 2,045 - - (131) 10,483
Taxes accrued............................ 46,094 15,572 16,520 - - - 78,186
Other.................................... 6,343 534 3,587 - - 95 10,559
----------------------------------------------------------------------------------------------------------------------------------
Total current liabilities............ 223,627 48,342 33,955 - - (21,836) 284,088
----------------------------------------------------------------------------------------------------------------------------------
Deferred credits and other liabilities
Deferred income taxes.................... 116,642 10,535 9,889 - - - 137,066
Unamortized tax credits.................. 28,179 8,975 10,449 - - - 47,603
Other.................................... 22,284 23,821 15,106 - - - 61,211
----------------------------------------------------------------------------------------------------------------------------------
Total deferred credits and other
liabilities...................... 167,105 43,331 35,444 - - - 245,880
----------------------------------------------------------------------------------------------------------------------------------
Contributions in aid of construction........ 135,323 51,941 24,254 - - - 211,518
----------------------------------------------------------------------------------------------------------------------------------
$1,826,670 $ 459,446 $ 438,051 $51,546 $51,546 $ (458,737) $ 2,368,522
==================================================================================================================================
25
Hawaiian Electric Company, Inc. and subsidiaries
Consolidating statement of income (unaudited)
Three months ended September 30, 2001
---------------------------------------------------------------------------------------------
Reclassi-
fications
HECO HECO and
Capital Capital elimina- HECO
(in thousands) HECO HELCO MECO Trust I Trust II tions consolidated
---------------------------------------------------------------------------------------------------------------------------------
Operating revenues.................... $238,138 $48,803 $53,290 $ - $ - $ - $ 340,231
--------------------------------------------------------------------------------------------------------------------------------
Operating expenses
Fuel oil.............................. 68,043 7,445 21,177 - - - 96,665
Purchased power....................... 69,797 16,622 1,251 - - - 87,670
Other operation....................... 19,482 4,795 6,452 - - - 30,729
Maintenance........................... 8,261 2,808 3,471 - - - 14,540
Depreciation.......................... 15,196 4,819 5,348 - - - 25,363
Taxes, other than income taxes........ 21,907 4,575 5,012 - - - 31,494
Income taxes.......................... 11,021 2,102 3,121 - - - 16,244
--------------------------------------------------------------------------------------------------------------------------------
213,707 43,166 45,832 - - - 302,705
--------------------------------------------------------------------------------------------------------------------------------
Operating income...................... 24,431 5,637 7,458 - - - 37,526
--------------------------------------------------------------------------------------------------------------------------------
Other income
Allowance for equity funds used
during construction................ 803 89 106 - - - 998
Equity in earnings of subsidiaries.... 8,246 - - - - (8,246) -
Other, net............................ 530 140 56 1,037 941 (2,174) 530
--------------------------------------------------------------------------------------------------------------------------------
9,579 229 162 1,037 941 (10,420) 1,528
--------------------------------------------------------------------------------------------------------------------------------
Income before interest and
other charges...................... 34,010 5,866 7,620 1,037 941 (10,420) 39,054
--------------------------------------------------------------------------------------------------------------------------------
Interest and other charges
Interest on long-term debt............ 6,013 1,906 2,207 - - - 10,126
Amortization of net bond premium
and expense........................ 330 79 100 - - - 509
Other interest charges................ 2,124 548 334 - - (2,174) 832
Allowance for borrowed funds used
during construction................ (422) (54) (48) - - - (524)
Preferred stock dividends of
subsidiaries......................... - - - - - 228 228
Preferred securities distributions
of trust subsidiaries.............. - - - - - 1,918 1,918
--------------------------------------------------------------------------------------------------------------------------------
8,045 2,479 2,593 - - (28) 13,089
--------------------------------------------------------------------------------------------------------------------------------
Income before preferred stock
dividends of HECO.................. 25,965 3,387 5,027 1,037 941 (10,392) 25,965
Preferred stock dividends of HECO..... 270 133 95 1,006 912 (2,146) 270
--------------------------------------------------------------------------------------------------------------------------------
Net income for common stock........... $ 25,695 $ 3,254 $ 4,932 $ 31 $ 29 $ (8,246) $ 25,695
================================================================================================================================
Hawaiian Electric Company, Inc. and subsidiaries
Consolidating statement of retained earnings (unaudited)
Three months ended September 30, 2001
---------------------------------------------------------------------------------------------
Reclassi-
fications
HECO HECO and
Capital Capital elimina- HECO
(in thousands) HECO HELCO MECO Trust I Trust II tions consolidated
-----------------------------------------------------------------------------------------------------------------------------------
Retained earnings, beginning of period.. $488,111 $ 65,886 $ 76,019 $ - $ - $ (141,905) $ 488,111
Net income for common stock............. 25,695 3,254 4,932 31 29 (8,246) 25,695
Common stock dividends.................. (17,037) (2,860) (3,280) (31) (29) 6,200 (17,037)
----------------------------------------------------------------------------------------------------------------------------------
Retained earnings, end of period........ $496,769 $ 66,280 $ 77,671 $ - $ - $ (143,951) $ 496,769
==================================================================================================================================
26
Hawaiian Electric Company, Inc. and subsidiaries
Consolidating statement of income (unaudited)
Three months ended September 30, 2000
---------------------------------------------------------------------------------------------
Reclassi-
fications
HECO HECO and
Capital Capital elimina- HECO
(in thousands) HECO HELCO MECO Trust I Trust II tions consolidated
-------------------------------------------------------------------------------------------------------------------------------
Operating revenues.................... $ 235,151 $ 50,240 $ 49,872 $ - $ - $ - $ 335,263
------------------------------------------------------------------------------------------------------------------------------
Operating expenses
Fuel oil.............................. 65,316 10,887 19,680 - - - 95,883
Purchased power....................... 70,275 12,947 1,870 - - - 85,092
Other operation....................... 20,346 4,719 5,517 - - - 30,582
Maintenance........................... 9,641 2,691 3,824 - - - 16,156
Depreciation.......................... 14,910 4,809 4,886 - - - 24,605
Taxes, other than income taxes........ 22,125 4,791 4,699 - - - 31,615
Income taxes.......................... 10,304 2,713 2,811 - - - 15,828
------------------------------------------------------------------------------------------------------------------------------
212,917 43,557 43,287 - - - 299,761
------------------------------------------------------------------------------------------------------------------------------
Operating income...................... 22,234 6,683 6,585 - - - 35,502
------------------------------------------------------------------------------------------------------------------------------
Other income
Allowance for equity funds used
during construction................ 1,169 92 244 - - - 1,505
Equity in earnings of subsidiaries.... 8,658 - - - - (8,658) -
Other, net............................ 1,848 234 265 1,037 941 (2,469) 1,856
------------------------------------------------------------------------------------------------------------------------------
11,675 326 509 1,037 941 (11,127) 3,361
------------------------------------------------------------------------------------------------------------------------------
Income before interest and
other charges...................... 33,909 7,009 7,094 1,037 941 (11,127) 38,863
------------------------------------------------------------------------------------------------------------------------------
Interest and other charges
Interest on long-term debt............ 5,833 1,905 2,286 - - - 10,024
Amortization of net bond premium
and expense........................ 318 79 88 - - - 485
Other interest charges................ 3,101 732 361 - - (2,469) 1,725
Allowance for borrowed funds used
during construction................ (633) (56) (118) - - - (807)
Preferred stock dividends of
subsidiaries......................... - - - - - 228 228
Preferred securities distributions
of trust subsidiaries.............. - - - - - 1,918 1,918
------------------------------------------------------------------------------------------------------------------------------
8,619 2,660 2,617 - - (323) 13,573
------------------------------------------------------------------------------------------------------------------------------
Income before preferred stock
dividends of HECO.................. 25,290 4,349 4,477 1,037 941 (10,804) 25,290
Preferred stock dividends of HECO..... 270 133 95 1,006 912 (2,146) 270
------------------------------------------------------------------------------------------------------------------------------
Net income for common stock........... $ 25,020 $ 4,216 $ 4,382 $ 31 $ 29 $ (8,658) $ 25,020
==============================================================================================================================
Hawaiian Electric Company, Inc. and subsidiaries
Consolidating statement of retained earnings (unaudited)
Three months ended September 30, 2000
------------------------------------------------------------------------------------------
Reclassi-
fications
HECO HECO and
Capital Capital elimina- HECO
(in thousands) HECO HELCO MECO Trust I Trust II tions consolidated
-------------------------------------------------------------------------------------------------------------------------------
Retained earnings, beginning of period.. $441,199 $ 62,430 $ 71,612 $ - $ - $ (134,042) $ 441,199
Net income for common stock............. 25,020 4,216 4,382 31 29 (8,658) 25,020
Common stock dividends.................. (18,011) (3,060) (3,164) (31) (29) 6,284 (18,011)
-------------------------------------------------------------------------------------------------------------------------------
Retained earnings, end of period........ $448,208 $ 63,586 $ 72,830 $ - $ - $ (136,416) $ 448,208
===============================================================================================================================
27
Hawaiian Electric Company, Inc. and subsidiaries
Consolidating statement of income (unaudited)
Nine months ended September 30, 2001
--------------------------------------------------------------------------------------------
Reclassi-
fications
HECO HECO and
Capital Capital elimina- HECO
(in thousands) HECO HELCO MECO Trust I Trust II tions consolidated
----------------------------------------------------------------------------------------------------------------------------------
Operating revenues.................... $669,167 $146,240 $154,572 $ -- $ -- $ -- $969,979
----------------------------------------------------------------------------------------------------------------------------------
Operating expenses
Fuel oil.............................. 181,354 22,581 63,060 -- -- -- 266,995
Purchased power....................... 198,996 50,896 3,175 -- -- -- 253,067
Other operation....................... 58,673 13,183 18,743 -- -- -- 90,599
Maintenance........................... 27,573 6,249 8,930 -- -- -- 42,752
Depreciation.......................... 45,588 13,703 16,044 -- -- -- 75,335
Taxes, other than income taxes........ 62,917 13,795 14,699 -- -- -- 91,411
Income taxes.......................... 28,385 7,160 8,665 -- -- -- 44,210
----------------------------------------------------------------------------------------------------------------------------------
603,486 127,567 133,316 -- -- -- 864,369
----------------------------------------------------------------------------------------------------------------------------------
Operating income...................... 65,681 18,673 21,256 -- -- -- 105,610
----------------------------------------------------------------------------------------------------------------------------------
Other income
Allowance for equity funds used
during construction................ 2,663 219 336 -- -- -- 3,218
Equity in earnings of subsidiaries.... 24,976 -- -- -- -- (24,976) --
Other, net............................ 2,723 419 153 3,112 2,822 (6,762) 2,467
----------------------------------------------------------------------------------------------------------------------------------
30,362 638 489 3,112 2,822 (31,738) 5,685
----------------------------------------------------------------------------------------------------------------------------------
Income before interest and
other charges...................... 96,043 19,311 21,745 3,112 2,822 (31,738) 111,295
----------------------------------------------------------------------------------------------------------------------------------
Interest and other charges
Interest on long-term debt............ 17,794 5,722 6,611 -- -- -- 30,127
Amortization of net bond premium
and expense........................ 984 260 302 -- -- -- 1,546
Other interest charges................ 8,047 1,935 1,025 -- -- (6,762) 4,245
Allowance for borrowed funds used
during construction................ (1,428) (132) (151) -- -- -- (1,711)
Preferred stock dividends of
subsidiaries......................... -- -- -- -- -- 686 686
Preferred securities distributions
of trust subsidiaries.............. -- -- -- -- -- 5,756 5,756
----------------------------------------------------------------------------------------------------------------------------------
25,397 7,785 7,787 -- -- (320) 40,649
----------------------------------------------------------------------------------------------------------------------------------
Income before preferred stock
dividends of HECO.................. 70,646 11,526 13,958 3,112 2,822 (31,418) 70,646
Preferred stock dividends of HECO..... 810 400 286 3,019 2,737 (6,442) 810
----------------------------------------------------------------------------------------------------------------------------------
Net Income for common stock........... $ 69,836 $ 11,126 $ 13,672 $ 93 $ 85 $(24,976) $ 69,836
==================================================================================================================================
Hawaiian Electric Company, Inc. and subsidiaries
Consolidating statement of retained earnings (unaudited)
Nine months ended September 30, 2001
--------------------------------------------------------------------------------------------
Reclassi-
fications
HECO HECO and
Capital Capital elimina- HECO
(in thousands) HECO HELCO MECO Trust I Trust II tions consolidated
----------------------------------------------------------------------------------------------------------------------------------
Retained earnings, beginning of
period............................. $443,970 $62,962 $73,586 $ -- $ -- $(136,548) $443,970
Net income for common stock........... 69,836 11,126 13,672 93 85 (24,976) 69,836
Common stock dividends................ (17,037) (7,808) (9,587) (93) (85) 17,573 (17,037)
----------------------------------------------------------------------------------------------------------------------------------
Retained earnings, end of period...... $496,769 $66,280 $77,671 $ -- $ -- $(143,951) $496,769
==================================================================================================================================
28
Hawaiian Electric Company, Inc. and subsidiaries
Consolidating statement of income (unaudited)
Nine months ended September 30, 2000
--------------------------------------------------------------------------------------------
Reclassi-
fications
HECO HECO and
Capital Capital elimina- HECO
(in thousands) HECO HELCO MECO Trust I Trust II tions consolidated
----------------------------------------------------------------------------------------------------------------------------------
Operating revenues.................... $648,225 $141,030 $140,912 $ -- $ -- $ -- $930,167
----------------------------------------------------------------------------------------------------------------------------------
Operating expenses
Fuel oil.............................. 171,972 35,917 54,241 -- -- -- 262,130
Purchased power....................... 191,082 29,647 5,033 -- -- -- 225,762
Other operation....................... 57,118 13,669 15,000 -- -- -- 85,787
Maintenance........................... 26,726 6,165 9,420 -- -- -- 42,311
Depreciation.......................... 44,106 14,507 14,656 -- -- -- 73,269
Taxes, other than income taxes........ 61,257 13,400 13,324 -- -- -- 87,981
Income taxes.......................... 29,450 7,842 8,930 -- -- -- 46,222
----------------------------------------------------------------------------------------------------------------------------------
581,711 121,147 120,604 -- -- -- 823,462
----------------------------------------------------------------------------------------------------------------------------------
Operating income...................... 66,514 19,883 20,308 -- -- -- 106,705
----------------------------------------------------------------------------------------------------------------------------------
Other income
Allowance for equity funds used
during construction................ 3,081 210 811 -- -- -- 4,102
Equity in earnings of subsidiaries.... 26,345 -- -- -- -- (26,345) --
Other, net............................ 3,640 613 911 3,112 2,822 (7,529) 3,569
----------------------------------------------------------------------------------------------------------------------------------
33,066 823 1,722 3,112 2,822 (33,874) 7,671
----------------------------------------------------------------------------------------------------------------------------------
Income before interest and
other charges...................... 99,580 20,706 22,030 3,112 2,822 (33,874) 114,376
----------------------------------------------------------------------------------------------------------------------------------
Interest and other charges
Interest on long-term debt............ 17,318 5,715 6,843 -- -- -- 29,876
Amortization of net bond premium
and expense........................ 952 234 266 -- -- -- 1,452
Other interest charges................ 9,441 2,286 1,059 -- -- (7,529) 5,257
Allowance for borrowed funds used
during construction................ (1,700) (126) (394) -- -- -- (2,220)
Preferred stock dividends of
subsidiaries......................... -- -- -- -- -- 686 686
Preferred securities distributions
of trust subsidiaries.............. -- -- -- -- -- 5,756 5,756
----------------------------------------------------------------------------------------------------------------------------------
26,011 8,109 7,774 -- -- (1,087) 40,807
----------------------------------------------------------------------------------------------------------------------------------
Income before preferred stock
dividends of HECO.................. 73,569 12,597 14,256 3,112 2,822 (32,787) 73,569
Preferred stock dividends of HECO..... 810 400 286 3,019 2,737 (6,442) 810
----------------------------------------------------------------------------------------------------------------------------------
Net income for common stock........... $ 72,759 $ 12,197 $ 13,970 $ 93 $ 85 $(26,345) $ 72,759
==================================================================================================================================
Hawaiian Electric Company, Inc. and subsidiaries
Consolidating statement of retained earnings (unaudited)
Nine months ended September 30, 2000
--------------------------------------------------------------------------------------------
Reclassi-
fications
HECO HECO and
Capital Capital elimina- HECO
(in thousands) HECO HELCO MECO Trust I Trust II tions consolidated
----------------------------------------------------------------------------------------------------------------------------------
Retained earnings, beginning of
period............................. $425,206 $59,806 $ 69,633 $ -- $ -- $(129,439) $425,206
Net income for common stock........... 72,759 12,197 13,970 93 85 (26,345) 72,759
Common stock dividends................ (49,757) (8,417) (10,773) (93) (85) 19,368 (49,757)
----------------------------------------------------------------------------------------------------------------------------------
Retained earnings, end of period...... $448,208 $63,586 $ 72,830 $ -- $ -- $(136,416) $448,208
==================================================================================================================================
29
Hawaiian Electric Company, Inc. and subsidiaries
Consolidating statement of cash flows (unaudited)
Nine months ended September 30, 2001
----------------------------------------------------------------------------------
Reclassi-
fications
HECO HECO and
Capital Capital elimina- HECO
(in thousands) HECO HELCO MECO Trust I Trust II tions consolidated
------------------------------------------------------------------------------------------------------------------------------
Cash flows from operating activities
Income before preferred stock
dividends of HECO........................ $ 70,646 $ 11,526 $ 13,958 $ 3,112 $ 2,822 $(31,418) $ 70,646
Adjustments to reconcile income before
preferred stock dividends of HECO to
net cash provided by operating
activities
Equity in earnings...................... (24,976) - - - - 24,976 -
Common stock dividends received from
subsidiaries........................... 17,573 - - - - (17,573) -
Depreciation of property, plant and
equipment.............................. 45,588 13,703 16,044 - - - 75,335
Other amortization...................... 4,127 1,516 3,950 - - - 9,593
Deferred income taxes................... 4,059 (443) (1,292) - - - 2,324
Tax credits, net........................ 385 195 272 - - - 852
Allowance for equity funds used
during construction.................... (2,663) (219) (336) - - - (3,218)
Changes in assets and liabilities
Increase in accounts receivable........ (1,916) (1,136) (963) - - 22 (3,993)
Decrease in accrued unbilled
revenues.............................. 5,686 1,661 1,531 - - - 8,878
Decrease (increase) in fuel oil
oil stock............................. (3,409) (98) 4,227 - - - 720
Increase in materials and supplies..... (2,531) (238) (1,435) - - - (4,204)
Increase in regulatory assets.......... (399) (164) (1,595) - - - (2,158)
Decrease in accounts payable........... (10,587) (705) (1,966) - - - (13,258)
Changes in other assets and
liabilities........................... (4,426) 2,135 6,567 - - 5,734 10,010
------------------------------------------------------------------------------------------------------------------------------
Net cash provided by operating
activities................................ 97,157 27,733 38,962 3,112 2,822 (18,259) 151,527
------------------------------------------------------------------------------------------------------------------------------
Cash flows from investing activities
Capital expenditures....................... (48,970) (12,616) (16,100) - - - (77,686)
Contributions in aid of construction....... 2,792 3,090 891 - - - 6,773
Advances to (repayments from) affiliates... 10,200 - (10,000) - - (200) -
------------------------------------------------------------------------------------------------------------------------------
Net cash used in investing activities...... (35,978) (9,526) (25,209) - - (200) (70,913)
------------------------------------------------------------------------------------------------------------------------------
Cash flows from financing activities
Common stock dividends..................... (17,037) (7,808) (9,587) (93) (85) 17,573 (17,037)
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... 14,367 - - - - - 14,367
Net decrease in short-term borrowings
from nonaffiliates and affiliate with
original maturities of three months or
less..................................... (47,317) (8,700) (1,500) - - 200 (57,317)
Repayment of other short-term borrowings... (3,000) - - - - - (3,000)
Other...................................... (8,025) (677) - - - - (8,702)
------------------------------------------------------------------------------------------------------------------------------
Net cash used in financing activities...... (61,822) (17,585) (11,373) (3,112) (2,822) 18,459 (78,255)
------------------------------------------------------------------------------------------------------------------------------
Net increase (decrease) in
cash and equivalents..................... (643) 622 2,380 - - - 2,359
Cash and equivalents, beginning of
period.................................... 1,398 4 132 - - - 1,534
------------------------------------------------------------------------------------------------------------------------------
Cash and equivalents, end of period........ $ 755 $ 626 $ 2,512 $ - $ - $ - $ 3,893
==============================================================================================================================
30
Hawaiian Electric Company, Inc. and subsidiaries
Consolidating statement of cash flows (unaudited)
Nine months ended September 30, 2000
---------------------------------------------------------------------------------
Reclassi-
fications
HECO HECO and
Capital Capital elimina- HECO
(in thousands) HECO HELCO MECO Trust I Trust II tions consolidated
---------------------------------------------------------------------------------------------------------------------------------
Cash flows from operating activities
Income before preferred stock
dividends of HECO........................... $ 73,569 $ 12,597 $ 14,256 $ 3,112 $ 2,822 $(32,787) $ 73,569
Adjustments to reconcile income before
preferred stock dividends of HECO to
net cash provided by operating
activities
Equity in earnings......................... (26,345) - - - - 26,345 -
Common stock dividends received from
subsidiaries.............................. 19,368 - - - - (19,368) -
Depreciation of property, plant and
equipment................................. 44,106 14,507 14,656 - - - 73,269
Other amortization......................... 3,436 670 1,273 - - - 5,379
Deferred income taxes...................... 6,532 247 (174) - - - 6,605
Tax credits, net........................... 933 139 (56) - - - 1,016
Allowance for equity funds used
during construction....................... (3,081) (210) (811) - - - (4,102)
Changes in assets and liabilities
Increase in accounts receivable........... (8,965) (2,657) (1,557) - - 1,899 (11,280)
Decrease in accrued unbilled
revenues................................. (4,606) (464) (1,018) - - - (6,088)
Decrease (increase) in fuel oil
stock.................................... 2,594 (318) 1,543 - - - 3,819
Decrease (increase) in materials and
supplies................................. (392) 77 227 - - - (88)
Increase in regulatory assets............. (1,403) (174) (1,130) - - - (2,707)
Increase (decrease) in accounts payable... 1,108 4,035 (2,899) - - - 2,244
Changes in other assets and
liabilities.............................. (7,755) 8,729 9,525 - - 3,857 14,356
---------------------------------------------------------------------------------------------------------------------------------
Net cash provided by operating
activities................................... 99,099 37,178 33,835 3,112 2,822 (20,054) 155,992
---------------------------------------------------------------------------------------------------------------------------------
Cash flows from investing activities
Capital expenditures.......................... (51,023) (16,088) (21,844) - - - (88,955)
Contributions in aid of construction.......... 2,927 2,479 1,307 - - - 6,713
Advances to (repayments from) affiliates...... 11,400 - (2,100) - - (9,300) -
Payments on notes receivable.................. - 138 - - - - 138
---------------------------------------------------------------------------------------------------------------------------------
Net cash used in investing activities......... (36,696) (13,471) (22,637) - - (9,300) (82,104)
---------------------------------------------------------------------------------------------------------------------------------
Cash flows from financing activities
Common stock dividends........................ (49,757) (8,417) (10,773) (93) (85) 19,368 (49,757)
Preferred stock dividends..................... (810) (400) (286) - - 686 (810)
Preferred securities distributions
of trust subsidiaries....................... - - - (3,019) (2,737) - (5,756)
Proceeds from issuance of long-term debt...... 13,059 91 - - - - 13,150
Net decrease in short-term borrowings
from nonaffiliates and affiliate with
original maturities of three months or
less........................................ (81,106) (11,400) - - - 9,300 (83,206)
Proceeds from other short-term borrowings..... 57,499 - - - - - 57,499
Other......................................... (2,318) (1,224) - - - - (3,542)
---------------------------------------------------------------------------------------------------------------------------------
Net cash used in financing activities......... (63,433) (21,350) (11,059) (3,112) (2,822) 29,354 (72,422)
---------------------------------------------------------------------------------------------------------------------------------
Net increase (decrease) in
cash and equivalents........................ (1,030) 2,357 139 - - - 1,466
Cash and equivalents, beginning of
period....................................... 1,039 198 729 - - - 1,966
---------------------------------------------------------------------------------------------------------------------------------
Cash and equivalents, end of period........... $ 9 $ 2,555 $ 868 $ - $ - $ - $ 3,432
=================================================================================================================================
HECO has not provided separate financial statements and other disclosures
concerning HELCO and MECO because management has concluded that such financial
statements and other information are not material to holders of HELCO's and
MECO's 1997 and 1998 junior deferrable debentures which have been fully and
unconditionally guaranteed by HECO.
31
(7) Reconciliation of electric utility operating income per HEI and HECO
-------------------------------------------------------------------------
consolidated statements of income
---------------------------------
Three months ended Nine months ended
September 30, September 30,
----------------------- ----------------------
(in thousands) 2001 2000 2001 2000
-------------------------------------------------------------------------------------------------------------------
Operating income from regulated and nonregulated activities
before income taxes (per HEI consolidated statements of
income)........................................................ $ 54,322 $ 53,293 $152,360 $156,538
Deduct:
Income taxes on regulated activities........................... (16,244) (15,828) (44,210) (46,222)
Revenues from nonregulated activities.......................... (1,155) (2,061) (3,481) (4,407)
Add:
Expenses from nonregulated activities.......................... 603 98 941 796
---------- ---------- ---------- ----------
Operating income from regulated activities after income taxes
(per HECO consolidated statements of income)................... $ 37,526 $ 35,502 $105,610 $106,705
========== ========== ========== ==========
32
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
September 30,
(in thousands, except per -------------------------- % Primary reason(s) for
share amounts) 2001 2000 change significant change*
------------------------------------------------------------------------------------------------------------
Revenues...................... $447,292 $452,007 (1) Increase for the electric utility
segment, partly offset by decreases
for the bank and "other" segments
Operating income.............. 69,051 69,644 (1) Increase for the bank and electric
utility segments, more than offset by
a decrease for the "other" segment
Income (loss) from:
Continuing operations.... $ 28,666 $ 31,201 (8) Lower operating income, lower AFUDC
and higher interest expense partly due
to higher average borrowings as a
result of HEI's purchase of income
notes in connection with the
termination of ASB's investments in
trust certificates in May and July 2001
Discontinued operations.. (21,532) (9,152) (135) Discontinued international power
operations loss, partly offset by
discontinued real estate operations
income
------------------------------------------------------------------
$ 7,134 $ 22,049 (68)
==================================================================
Basic earnings (loss) per
common share
Continuing operations.... $ 0.85 $ 0.96 (11) See explanation for income (loss)
above and weighted-average number of
common shares outstanding below
Discontinued operations.. (0.64) (0.28) (129)
------------------------------------------------------------------
$ 0.21 $ 0.68 (69)
==================================================================
Weighted-average number of
common shares outstanding.... 33,716 32,642 3 Issuances under the DRIP and other
plans
33
Nine months ended
September 30,
(in thousands, except per ----------------------------- % Primary reason(s) for
share amounts) 2001 2000 change significant change*
-------------------------------------------------------------------------------------------------------------
Revenues...................... $1,307,968 $1,269,718 3 Increases for the electric utility
and bank segments, partly offset by
a decrease for the "other" segment
Operating income.............. 198,685 204,190 (3) Increase for the bank segment, more
than offset by decreases for the
electric utility and "other" segments
Income (loss) from:
Continuing operations.... $ 82,542 $ 87,922 (6) Lower operating income, lower AFUDC
and higher interest expense due to
higher average borrowings as a
result of an HEIPC acquisition in
March 2000 and HEI's purchase of
income notes in connection with the
termination of ASB's investments in
trust certificates in May and July
2001
Discontinued operations.. (22,075) (17,801) (24) Discontinued international power
operations loss, partly offset by
discontinued real estate operations
income
---------------------------------------------------------------------
$ 60,467 $ 70,121 (14)
=====================================================================
Basic earnings (loss) per
common share
Continuing operations.... $ 2.47 $ 2.71 (9) See explanation for income (loss)
above and weighted-average number of
common shares outstanding below
Discontinued operations.. (0.66) (0.55) (20)
---------------------------------------------------------------------
$ 1.81 $ 2.16 (16)
=====================================================================
Weighted-average number of
common shares outstanding.... 33,454 32,438 3 Issuances under the DRIP and other
plans
* Also see segment discussions which follow.
34
HEI's strategy is to focus its resources on its two core operating businesses
that provide electric public utility and banking services in the State of
Hawaii. In line with this domestic strategy, HEI has recently discontinued its
international operations.
Keys to achieving returns from the electric utility business are to ensure
customer satisfaction and contain costs. The electric utilities have established
programs which offer customers specialized services and energy efficiency audits
to aid them in saving on energy costs. With large power users in the electric
utilities' service territories, such as the U.S. military, hotels and state and
local government, management believes that maintaining customer satisfaction is
a critical component in insuring kilowatthour (KWH) sales and revenue growth in
Hawaii over time. The utilities have also undertaken cost containment measures
to control costs in the current economic environment. For example, the electric
utilities have implemented an integrated computer system that has allowed the
consolidation of certain accounting and purchasing functions, thereby
streamlining business processes, cutting labor costs and lowering inventory. The
consolidation of the purchasing function also allows the utilities to realize
savings from volume discounts.
ASB is expanding its traditional consumer focus to be a full-service community
bank serving both individual and business customers. ASB is gradually enhancing
its loan portfolio through diversification from single-family home mortgages to
higher-yielding business and commercial real estate loans. Towards this end, ASB
has hired experienced business lending personnel and has established an
appropriate risk management infrastructure to manage this shift in assets.
35
Following is a general discussion of the results of operations by business
segment.
Electric utility
----------------
Three months ended
September 30,
(in thousands, except per ---------------------------------- %
barrel amounts) 2001 2000 change Primary reason(s) for significant change
-------------------------------------------------------------------------------------------------------------------------------
Revenues........................ $341,386 $337,324 1 1.6% higher KWH sales ($6 million) and HELCO
rate increase
Expenses
Fuel oil....................... 96,665 95,883 1 Higher fuel oil prices, partially offset by
1% fewer KWHs generated
Purchased power................ 87,670 85,092 3 Higher purchased power capacity payments due
to increased capacity (including a new IPP in
August 2000, Hamakua Partners), and more KWHs
purchased
Other.......................... 102,729 103,056 - Lower production and transmission and
distribution maintenance expense, partly
offset by higher depreciation
Operating income................ 54,322 53,293 2 Higher KWH sales and HELCO rate increase,
partly offset by higher fuel oil and
purchased power expenses
Net income...................... 25,695 25,020 3 Higher operating income and lower interest
expense, partly offset by lower AFUDC and
higher income taxes
Kilowatthour sales (millions)... 2,471 2,433 2
Fuel oil price per barrel....... $ 35.45 $ 34.42 3
36
Nine months ended
September 30,
(in thousands, except per ---------------------------------- %
barrel amounts) 2001 2000 change Primary reason(s) for significant change
-----------------------------------------------------------------------------------------------------------------------------------
Revenues...................... $973,460 $934,574 4 Higher fuel oil and purchased energy fuel
prices, the effects of which are passed on
to customers ($17 million), 1.6% higher KWH
sales ($14 million), HELCO rate increase and
recovery of integrated resource planning and
related costs
Expenses
Fuel oil..................... 266,995 262,130 2 Higher fuel oil prices, partly offset by 3%
fewer KWHs generated
Purchased power.............. 253,067 225,762 12 Higher purchased power capacity payments due
to increased capacity (including a new IPP
in August 2000, Hamakua Partners) and
availability, and more KWHs purchased
Other........................ 301,038 290,144 4 Higher other operation and maintenance
expenses, depreciation and taxes, other than
income taxes
Operating income.............. 152,360 156,538 (3) Higher purchased power capacity payments,
other operation and maintenance expenses and
depreciation, partially offset by higher KWH
sales and HELCO rate increase
Net income.................... 69,836 72,759 (4) Lower operating income and lower AFUDC,
partly offset by lower interest expense and
income taxes
Kilowatthour sales (millions). 7,010 6,902 2
Fuel oil price per barrel..... $34.22 $32.09 7
KWH sales in the third quarter and first nine months of 2001 increased 1.6% from
the same periods in 2000, partly due to warmer weather and an increase in the
number of customers. In spite of the higher KWH sales, electric utility
operating income decreased 3% from the first nine months of 2000, primarily due
to higher purchased power capacity payments and other operation and maintenance
expenses. Other operation expenses increased 6% primarily due to higher general
liability and workers' compensation expenses and integrated resource planning
costs (which were recovered in revenues, but subject to refund pending a final
PUC order).
KWH sales for the third quarter of 2001 also reflect the adverse impact of the
September 11, 2001 terrorist attack on the U.S. and subsequent events on
Hawaii's economy. See "Potential adverse effect of terrorist attacks on Hawaii's
economy and the Company."
37
Competition
The electric utility industry is becoming increasingly competitive. IPPs are
well established in Hawaii and continue to actively pursue new projects.
Customer self-generation, with or without cogeneration, has made inroads in
Hawaii and is a continuing competitive factor. Competition in the generation
sector in Hawaii is moderated, however, by the scarcity of generation sites,
various permitting processes and lack of interconnections to other electric
utilities. HECO and its subsidiaries have been able to compete successfully by
offering customers economic alternatives that, among other things, employ energy
efficient electrotechnologies such as heat pump water heaters and high
efficiency chillers.
In December 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. See "Competition
proceeding" in note (3) of HECO's "Notes to consolidated financial statements."
Regulation of electric utility rates
The PUC has broad discretion in its regulation of the rates charged by HEI's
electric utility subsidiaries and in other matters. Any adverse decision and
order (D&O) by the PUC concerning the level or method of determining electric
utility rates, the authorized returns on equity or other matters, or any
prolonged delay in rendering a D&O in a rate or other proceeding, could have a
material adverse effect on the Company's financial condition and results of
operations. Upon a showing of probable entitlement, the PUC is required to issue
an interim D&O in a rate case within 10 months from the date of filing a
completed application if the evidentiary hearing is completed (subject to
extension for 30 days if the evidentiary hearing is not completed). There is no
time limit for rendering a final D&O. Interim rate increases are subject to
refund with interest, pending the final outcome of the case. Management cannot
predict with certainty when D&Os in pending or future rate cases will be
rendered or the amount of any interim or final rate increase that may be
granted.
In May 2001, David Morihara became a commissioner on the PUC, but in October
2001, he resigned. No replacement has been named. The other commissioners are
Dennis Yamada, Chairman (serving on the PUC since 1994), and Gregory Pai
(serving on the PUC since 1998).
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
November 1, 2001, the return on average common equity (ROACE) found by the PUC
to be reasonable in the most recent final rate decision for each utility was
11.40% for HECO (D&O issued on December 11, 1995 and based on a 1995 test year),
11.50% for HELCO (D&O issued on February 8, 2001 and based on a 2000 test year)
and 10.94% for MECO (amended D&O issued on April 6, 1999 and based on a 1999
test year).
Hawaii Electric Light Company, Inc.
-----------------------------------
In October 1999, HELCO filed a request to increase rates by 9.6%, or $15.5
million in annual revenues, based on a 2000 test year.
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 order granted HELCO an increase of approximately
$2.3 million in annual revenues, in addition to affirming interim increases that
took effect in September 2000 ($3.5 million) and January 2001 ($2.6 million).
The D&O included in rate base $7.6 million for pre-air permit facilities that
the PUC had found to be used or useful to support the existing generating units
at Keahole.
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
38
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, if any, to recover costs
relating to adding two combustion turbines at Keahole, including the remaining
cost of pre-air permit facilities, will depend on future circumstances. See
"HELCO power situation" in note (3) of HECO's "Notes to consolidated financial
statements."
Regulatory asset related to delayed project costs
In December 1991, HECO filed an application with the PUC for the installation of
a nominal 200 MW combined cycle power plant. Due to changes in circumstances,
the expected timing for HECO's next generating unit was significantly delayed,
and HECO withdrew its application in May 1993. In August 1994, HECO informed the
PUC that, consistent with past and then current company practices, the
accumulated project costs would be allocated primarily to ongoing active capital
projects. The PUC advised HECO to file an application, which it did in February
1995, citing project costs of $5.8 million. The Consumer Advocate objected to
the accounting treatment proposed by HECO. To simplify and expedite the
proceeding, in September 2000, HECO and the Consumer Advocate reached an
agreement on the accounting treatment, subject to PUC approval. Acceptance of
the agreement by the parties was without prejudice to any position either of
them may take in any subsequent proceeding. Under the agreement, $4.5 million of
the $5.8 million total project costs would be amortized to operating expense
ratably over a five-year period. In September 2000, HECO adjusted the project
costs by $1.3 million to reflect the agreement with the Consumer Advocate,
resulting in an after tax write-off of $0.8 million. In September 2001, HECO
received PUC approval to amortize $4.5 million ratably over a five-year period,
which HECO will begin in October 2001.
Other regulatory matters
In October 2001, HECO and the Consumer Advocate finalized an agreement, subject
to PUC approval, under which HECO's three commercial and industrial demand-side
management (DSM) programs and two residential DSM programs would be continued
until HECO's next rate case (which HECO commits under the agreement to file
within three years using a 2003 or 2004 test year). The agreement is 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 agreement, HECO will cap the recovery of lost margins and
shareholder incentives if such recovery would cause HECO to exceed its current
authorized return on rate base. HECO also agrees it will not pursue the
continuation of lost margins recovery through a surcharge mechanism or
shareholder incentives in future rate cases. Further, the agreement provides
that HELCO and MECO will take the steps necessary to implement any changes made
by the PUC with respect to DSM program costs within one year from the time such
costs are incorporated into HECO's rates as a result of HECO's next rate case,
at which time HELCO and MECO will cease accrual of lost margins and shareholder
incentives. Consistent with the agreement, HELCO and MECO filed requests to
continue their existing DSM programs on October 31, 2001.
Accounting for the effects of certain types of regulation
In accordance with SFAS No. 71, "Accounting for the Effects of Certain Types of
Regulation," the Company's financial statements reflect assets and costs of HECO
and its subsidiaries based on current cost-based rate-making regulations.
Management believes HECO and its subsidiaries' operations currently satisfy the
SFAS No. 71 criteria. However, if events or circumstances should change so that
those criteria are no longer satisfied, management believes that a material
adverse effect on the Company's results of operations, financial position or
liquidity may result. As of September 30, 2001, HECO's consolidated regulatory
assets amounted to $112 million.
Legislation
Congress and the Hawaii legislature periodically consider legislation that could
have positive or negative effects on the utilities and their customers. For
example, Congress is considering an energy plan designed to increase the supply
of oil, as well as legislation that would promote renewable energy sources and
conservation. The Hawaii legislature did not consider deregulation in its 2001
session, but passed a law that requires electric utilities to establish
"renewables portfolio standard" goals of 7% by December 31, 2003, 8% by December
31, 2005 and 9%
39
by December 31, 2010. Any electric utility whose percentage of electrical sales
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. HECO, MECO and HELCO are permitted to aggregate their renewable portfolios
in order to achieve these goals. The new law also requires that electric
utilities offer net energy metering to solar, wind turbine, biomass or
hydroelectric energy 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 credit from the electric utility
accordingly). Every electric utility must develop a standard contract or tariff
providing for net energy metering (which will be available on a
first-come-first-served basis) until the time that the total rated generating
capacity produced by the eligible customer-generators equals 0.5% of the
electric utility's system peak demand. HECO and its subsidiaries filed tariffs
implementing the net energy metering requirement, effective July 26, 2001.
Management cannot at this time predict the impact of this law or other proposed
legislation on the utilities or their customers.
Bank
----
Three months
ended September 30,
----------------------------- %
(in thousands) 2001 2000 change Primary reason(s) for significant change
--------------------------------------------------------------------------------------------------------------------------
Revenues........... $108,034 $114,300 (5) Lower interest income as a result of lower
weighted-average yields on assets, partly
offset by higher other income (primarily due
to lower writedowns of investments after the
termination of ASB's investments in trust
certificates and HEI's purchase of income
notes, revenues from Bishop Insurance Agency
of Hawaii, Inc. (BIA) acquired in March 2001
and increased credit card interchange and ATM
fees)
Operating income... 19,488 16,979 15 Higher other income, partly offset by lower
net interest income and higher expenses,
including higher service bureau expense and
compensation expense from BIA
Net income......... 11,072 9,815 13 Higher operating income
Interest rate 3.08% 3.11% (1) 72 basis points decrease in the
spread............ weighted-average yield on interest-earning
assets, partly offset by a 69 basis points
decrease in the weighted-average rate on
interest-bearing liabilities
40
Nine months
ended September 30,
-----------------------------------
(in thousands) 2001 2000 change Primary reason(s) for significant change
---------------------------------------------------------------------------------------------------------------------------
Revenues............... $336,038 $333,266 1 Higher other income (primarily due to net
gains on sales of mortgage/asset-backed
securities and loans, revenues from BIA
acquired in March 2001 and increased credit
card interchange and ATM fees), partly
offset by lower interest income as a result
of lower weighted-average yields on
mortgage/asset-backed securities and
investments
Operating income....... 57,209 52,484 9 Higher other income, partly offset by
slightly lower net interest income and
higher expenses, including higher service
bureau expense and compensation expense
from BIA
Net income............. 33,154 30,432 9 Higher operating income
Interest rate spread... 3.10% 3.18% (3) 24 basis points decrease in the
weighted-average yield on interest-earning
assets, partly offset by a 16 basis points
decrease in the weighted-average rate on
interest-bearing liabilities
ASB's interest rate spread--the difference between the weighted-average yield on
interest-earning assets and the weighted-average rate on interest-bearing
liabilities--decreased 1% and 3% for the third quarter and first nine months of
2001, respectively, compared to the same periods in 2000. Comparing the first
nine months of 2001 to the same period in 2000, the weighted-average yield on
interest-earning assets decreased at a faster rate than the weighted-average
rate on interest-bearing liabilities decreased.
Deposits traditionally have been the principal source of ASB's funds for use in
lending, meeting liquidity requirements and making investments. Deposits
increased by $80 million in the first nine months of 2001, due to $85 million of
interest credited to accounts. ASB also derives funds from borrowings, payments
of interest and principal on outstanding loans receivable and investment and
mortgage/asset-backed securities and other sources. Advances from the Federal
Home Loan Bank (FHLB) of Seattle and securities sold under agreements to
repurchase continue to be significant sources of funds. Using sources of funds
with a higher cost than deposits, such as advances from the FHLB and securities
sold under agreements to repurchase, puts downward pressure on ASB's net
interest income.
41
As of September 30, 2001, ASB's allowance for loan losses was 1.36% of average
loans outstanding. Changes in the allowance for loan losses for the periods
indicated are as follows:
Nine months ended September 30, 2001 2000
--------------------------------------------------------------------------------------------------------------
(in thousands)
Allowance for loan losses, January 1................................. $37,449 $35,348
Provision for loan losses............................................ 9,000 9,400
Net charge-offs...................................................... (5,549) (7,914)
------- -------
Allowance for loan losses, September 30.............................. $40,900 $36,834
======= =======
In March 1998, ASB formed a wholly owned operating subsidiary, ASB Realty
Corporation, which elects to be taxed as a real estate investment trust. This
reorganization has reduced ASB's income taxes. For the first nine months of
2001, ASB and subsidiaries' effective income tax rate was 35%. Although the
State of Hawaii has challenged the tax treatment of this reorganization, ASB
believes that its tax position is proper.
Regulation
Federal Deposit Insurance Corporation regulations restrict the ability of
financial institutions that are not "well-capitalized" to compete on the same
terms as "well-capitalized" institutions, such as by offering interest rates on
deposits that are significantly higher than the rates offered by competing
institutions. As of September 30, 2001, ASB was "well-capitalized" (ratio
requirements noted in parentheses) with a leverage ratio of 6.4% (5.0%), a
Tier-1 risk-based ratio of 11.7% (6.0%) and a total risk-based ratio of 12.8%
(10.0%).
For a discussion of securities deemed impermissible investments by the OTS, see
"Disposition of certain debt securities" in note (4) of HEI's "Notes to
consolidated financial statements."
Other
-----
Three months ended
September 30,
------------------------------- %
(in thousands) 2001 2000 change Primary reason(s) for significant change
-----------------------------------------------------------------------------------------------------------------
Revenues......... (2,128) $ 383 NM Writedown of income notes purchased in
connection with the termination of ASB's
investments in trust certificates in May
and July of 2001 ($3 million)
Operating loss... (4,759) (628) (658) Lower revenues and higher corporate general
and administrative expenses
42
Nine months ended
September 30,
------------------------------- %
(in thousands) 2001 2000 change Primary reason(s) for significant change
-----------------------------------------------------------------------------------------------------------------
Revenues......... (1,530) $ 1,878 NM Writedown of income notes purchased in
connection with the termination of ASB's
investments in trust certificates in May
and July 2001 ($3 million) and equity in
net loss of Utech Venture Capital
Corporation ($1 million), partly offset by
interest income on income notes
Operating loss... (10,884) (4,832) (125) See explanation for revenues and higher
general and administrative expenses at
corporate primarily due to higher stock
option expense
NM Not meaningful.
The "other" business segment includes results of operations of TOOTS, formerly
named HTB, a maritime freight transportation company which ceased operations in
the fourth quarter of 1999; HEI Investments, Inc., a company primarily holding
investments in leveraged leases (excludes foreign investment); Pacific Energy
Conservation Services, Inc., a contract services company primarily providing
windfarm operational and maintenance services to an affiliated electric utility;
HEI District Cooling, Inc., a company formed to develop, build, own, lease,
operate and/or maintain central chilled water, cooling system facilities, and
other energy related products and services; ProVision Technologies, Inc., a
company formed to sell, install, operate and maintain on-site power generation
equipment and auxiliary appliances in Hawaii and the Pacific Rim; HEI
Properties, Inc., a company currently holding passive investments and expected
to hold real estate and related assets; HEI Leasing, Inc., a company formed to
own real estate subject to leases; Hawaiian Electric Industries Capital Trust I,
HEI Preferred Funding, LP and Hycap Management, Inc., companies formed primarily
for the purpose of effecting the issuance of 8.36% Trust Originated Preferred
Securities; HEI and HEIDI, holding companies; and eliminations of intercompany
transactions.
Discontinued operations
-----------------------
See note (5) in HEI's "Notes to consolidated financial statements."
Contingencies
-------------
See note (8) and note (3) in HEI's and HECO's respective "Notes to consolidated
financial statements" for discussions of contingencies.
Recent accounting pronouncements
--------------------------------
See note (7) and note (5) in HEI's and HECO's respective "Notes to consolidated
financial statements."
Potential adverse effect of terrorist attacks on Hawaii's economy and the
-------------------------------------------------------------------------
Company
-------
The September 11, 2001 terrorist attacks on the U.S. and subsequent events have
weakened Hawaii's economy. Tourism accounts for about a quarter of the state's
economic output. In the five weeks of air travel following the attacks, visitor
arrivals to Hawaii fell by 32% compared with the same period a year ago. The
downturn in tourism-related businesses has also resulted in job layoffs
throughout the state, further contributing to the weakening economy in Hawaii.
HECO and its subsidiaries are preparing for an impact on KWH sales that may be
comparable to that which occurred due to the Persian Gulf War in 1991. HECO's
KWH sales in the first half of 1991 decreased 1.1% compared to the same period a
year earlier. During the five weeks following the September 11 terrorist
attacks, net
43
system generation (an indicator of KWH sales) for HECO and its subsidiaries
dropped by approximately 0.4% from the levels during the same period last year.
In addition, HECO and its subsidiaries expect increased bad debt expense due to
resulting business closures and layoffs and significantly reduced 2002 pension
plan income as a result of the continuing stock market decline. HECO and its
subsidiaries estimate that each one percentage point drop in annual KWH sales
would result in a decline in net income of approximately $4 million. HECO and
its subsidiaries also estimate pension income for 2002, net of amounts
capitalized and income taxes, will be $4 million lower than 2001, based on
current assumptions for 2002 and a projected negative 13% asset return for 2001.
Between a projected negative 7% and negative 17% asset return for 2001, each
negative one percentage point change in asset return is expected to result in
approximately $0.8 million less 2002 pension income, net of amounts capitalized
and income taxes, for consolidated HECO. In response to these actual and
anticipated negative financial effects, HECO and its subsidiaries are currently
evaluating additional cost-cutting steps.
The downturn in the Hawaii economy could lead to higher delinquencies in ASB's
loan portfolio and the slowdown in the U.S. economy may affect the performance
of ASB's holdings of mortgage/asset-backed securities. ASB is contacting larger
customers to determine the effect that the slowdown in tourism is having on
their businesses and ASB is monitoring the delinquencies in residential and
consumer loan portfolios to identify any delinquency trends that may arise. At
September 30, 2001, ASB had outstanding loans to businesses with significant
exposure to the tourism industry, including an airline and hotels, of less than
1% of total loans outstanding. Substantially all of these loans are secured by
commercial real estate and/or corporate assets and were performing as of
September 30, 2001. ASB continues to monitor the performance of its investment
portfolio, primarily its home equity asset-backed securities. Federal government
monetary policies and falling interest rates have resulted in increased mortgage
refinancing volume as well as accelerated prepayments of loans and securities.
ASB's interest rate spread, the difference between the yield on interest-earning
assets and the cost of funds, may be compressed if yields on assets decline more
rapidly than the cost of funds.
Volatility in U.S. capital markets or higher delinquencies in the assets
underlying the income notes held directly by HEI may also negatively impact the
fair value of the income notes in future periods.
Federal and state governmental actions in response to the attacks and the
subsequent economic downturn could partially offset some of these negative
factors. Because of the heightened concern over national security, Hawaii's
defense industry could benefit if Congress approves additional federal spending
for defense. The Governor has called the Hawaii Legislature into a special
session in October 2001 to consider an economic stimulus package to help
mitigate the negative effects of the terrorist attacks. Among the Governor's
proposals are a construction fund for new public works projects, waiver of
landing fees at state airports, an overhaul of the tourism marketing plan and
various tax breaks and deferrals for residents and businesses.
In light of these uncertainties, management is unable to accurately forecast the
net effect of the terrorist attacks and related events on Hawaii's economic
growth and the Company. Until Hawaii's tourism industry and general economic
conditions rebound, management believes that consequences in Hawaii of the
September 11, 2001 terrorist attacks will, on balance, have a negative financial
effect on the Company and, therefore, could adversely affect the Company's
results of operations and financial condition.
FINANCIAL CONDITION
Liquidity and capital resources
-------------------------------
The Company and consolidated HECO each believes that its ability to generate
cash, both internally from operations and externally from debt and equity
issues, is adequate to maintain sufficient liquidity to fund its respective
construction programs and investments and to cover debt and other cash
requirements in the foreseeable future.
44
The consolidated capital structure of HEI was as follows:
(in millions) September 30, 2001 December 31, 2000
-----------------------------------------------------------------------------------------------------------------------
Short-term borrowings............................. $ 39 2 $ 104 5%
Long-term debt.................................... 1,167 50 1,089 48
HEI- and HECO-obligated preferred
securities of trust subsidiaries............... 200 9 200 9
Preferred stock of subsidiaries................... 34 1 34 1
Common stock equity............................... 882 38 839 37
-----------------------------------------------------------------------------------------------------------------------
$2,322 100% $2,266 100%
=======================================================================================================================
ASB's deposit liabilities, securities sold under agreements to repurchase and
advances from the FHLB of Seattle are not included in the table above.
As of November 1, 2001, the Standard & Poor's (S&P) and Moody's Investors
Service's (Moody's) ratings of HEI's and HECO's securities were as follows:
S&P Moody's
------------------------------------------------------------------------------------------------------------
HEI
---
Commercial paper.............................................................. A-2 P-2
Medium-term notes............................................................. BBB Baa2
HEI-obligated preferred securities of trust subsidiary........................ BB+ Ba1
HECO
----
Commercial paper.............................................................. A-2 P-2
Revenue bonds (insured)....................................................... AAA Aaa
Revenue bonds (noninsured).................................................... BBB+ Baa1
HECO-obligated preferred securities of trust subsidiaries..................... BBB- Baa2
Cumulative preferred stock (selected series).................................. nr Baa3
nr Not rated.
The above ratings are not recommendations to buy, sell or hold any securities;
such ratings may be subject to revision or withdrawal at any time by the rating
agencies; and each rating should be evaluated independently of any other rating.
In July 2001, Moody's announced changes to all issuers' preferred stock and
trust preferred stock ratings. These issues are now rated on the debt scale of
Aaa to C. According to Moody's, the change was of a technical nature and not
indicative of changes in fundamental credit quality.
For the first nine months of 2001, net cash provided by operating activities of
consolidated HEI was $183 million. Net cash provided by investing activities was
$46 million, largely due to repayments and sales of mortgage/asset-backed and
investment securities and loans, net of originations and purchases, partly
offset by HECO's consolidated capital expenditures. Net cash used in financing
activities was $38 million as a result of several factors, including the payment
of common stock dividends and trust preferred securities distributions and net
decreases in advances from the FHLB and short-term borrowings, partly offset by
net increases in deposit liabilities, securities sold under agreements to
repurchase and long-term debt and the issuance of common stock.
Total HEI consolidated financing requirements for 2001 through 2005, including
net capital expenditures (which exclude AFUDC and capital expenditures funded by
third-party contributions in aid of construction) and long-term debt retirements
(excluding repayments of advances from the FHLB of Seattle and securities sold
under agreements to repurchase), are estimated to total $1.1 billion. Of this
amount, approximately $0.6 billion is for net capital expenditures (mostly
relating to the electric utilities' net capital expenditures described below).
HEI's consolidated internal sources, after the payment of HEI dividends, are
expected to provide approximately 64% of the consolidated financing
requirements, with debt and equity financing providing the remaining
requirements.
45
Additional debt and equity financing may be required to fund activities not
included in the 2001 through 2005 forecast, such as increases in the amount of
or an acceleration of capital expenditures of the electric utilities.
On October 31, 2001, HEI announced that it plans to offer in an underwritten,
registered public offering 1.5 million shares of its common stock (or 1.725
million shares if the underwriters' over-allotment option is exercised).
Proceeds from the sale will be used to repay debt and for other general
corporate purposes. HEI's announcement does not constitute an offer of common
stock or any other securities for sale.
Following is a discussion of the liquidity and capital resources of HEI's
largest segments.
Electric utility
HECO's consolidated capital structure was as follows:
(in millions) September 30, 2001 December 31, 2000
--------------------------------------------------------------------------------------------------------------------
Short-term borrowings............................. $ 53 3% $ 113 7%
Long-term debt.................................... 682 39 668 38
HECO-obligated preferred securities of trust
subsidiaries..................................... 100 6 100 6
Preferred stock................................... 34 2 34 2
Common stock equity............................... 878 50 825 47
--------------------------------------------------------------------------------------------------------------------
$1,747 100% $1,740 100%
====================================================================================================================
Operating activities provided $152 million in net cash during the first nine
months of 2001. Investing activities used net cash of $71 million, primarily for
capital expenditures. Financing activities used net cash of $78 million,
including $17 million for the payment of common stock dividends, $7 million for
the payment of preferred dividends and preferred securities distributions and
$60 million for the net repayment of short-term borrowings, partially offset by
a $14 million net increase in long-term debt.
The electric utilities' consolidated financing requirements for 2001 through
2005, including net capital expenditures and long-term debt repayments, are
estimated to total $0.6 billion. HECO's consolidated internal sources, after the
payment of common stock and preferred stock dividends, are expected to provide
substantially all of the total requirements.
As of September 30, 2001, $14 million of proceeds from previous sales by the
Department of Budget and Finance of the State of Hawaii of special purpose
revenue bonds issued for the benefit of HECO remain undrawn. Also as of
September 30, 2001, an additional $65 million of special purpose revenue bonds
were authorized by the Hawaii Legislature for issuance for the benefit of HECO
and HELCO prior to the end of 2003. HECO estimates that it will require
approximately $5 million in new common equity, in addition to increases in its
retained earnings, over the five-year period 2001 through 2005. The PUC must
approve issuances, if any, of equity and long-term debt securities by HECO,
HELCO and MECO.
Capital expenditures include the costs of projects which are required to meet
expected load growth, to improve reliability and to replace and upgrade existing
equipment. Net capital expenditures for the five-year period 2001 through 2005
are currently estimated to total $0.6 billion. Approximately 65% 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 35% primarily for generation projects.
For 2001, electric utility net capital expenditures are estimated to be $123
million. Gross capital expenditures are estimated to be $138 million, including
approximately $98 million for transmission and distribution projects,
approximately $24 million for generation projects and approximately $16 million
for general plant and other projects. Drawdowns of proceeds from previous sales
of tax-exempt special purpose revenue bonds and the generation of funds from
internal sources are expected to provide the cash needed for net capital
expenditures in 2001.
46
Management periodically reviews capital expenditure estimates and the timing of
construction projects. These estimates may change significantly as a result of
many considerations, including changes in economic conditions, changes in
forecasts of KWH sales and peak load, the availability of purchased power and
changes in expectations concerning the construction and ownership of future
generating units, the availability of generating sites and transmission and
distribution corridors, the ability to obtain adequate and timely rate
increases, escalation in construction costs, demand-side management programs,
the effects of opposition to proposed construction projects and requirements of
environmental and other regulatory and permitting authorities.
Bank
September 30, December 31, %
(in millions) 2001 2000 change
--------------------------------------------------------------------------------------------
Total assets......................................... $6,062 $5,969 2
Investment and mortgage/asset-backed securities...... 2,565 2,271 13
Loans receivable, net................................ 2,778 3,211 (13)
Deposit liabilities.................................. 3,664 3,585 2
Securities sold under agreements to repurchase....... 722 597 21
Advances from Federal Home Loan Bank................. 1,050 1,249 (16)
As of September 30, 2001, ASB was the third largest financial institution in
Hawaii based on total assets of $6.1 billion and deposits of $3.7 billion.
In June 2001, ASB converted $397 million in residential mortgage loans into
Federal National Mortgage Association (FNMA) pass-through securities. These
securities were transferred into ASB's investment securities portfolio and can
be used as collateral for FHLB advances and other borrowings. The conversion of
the loans also improves ASB's risk-based capital ratio since less capital is
needed to support federal agency securities than whole loans. In late June 2001,
ASB sold $208 million of the FNMA pass-through securities to improve ASB's
interest rate risk profile. The securities sold were lower yielding 30-year
fixed-rate securities with long durations. ASB has reinvested the proceeds into
shorter duration fixed-rate and adjustable-rate securities.
For the first nine months of 2001, net cash provided by ASB's operating
activities was $88 million. Net cash provided by ASB's investing activities was
$145 million, due largely to the repayments and sales of mortgage/asset-backed
and investment securities and loans, net of originations and purchases. Net cash
used in financing activities was $11 million largely due to net decreases of
$199 million in advances from FHLB and $20 million in common and preferred stock
dividends, partly offset by net increases of $80 million in deposit liabilities
and $127 million in securities sold under agreements to repurchase.
Effective July 18, 2001, the OTS removed the regulation that required a savings
association to maintain an average daily balance of liquid assets of at least 4%
of its liquidity base, and retained a provision requiring a savings association
to maintain sufficient liquidity to ensure its safe and sound operation. As of
September 30, 2001, ASB had maintained liquid assets at a level which in the
opinion of management is sufficient to ensure its safe and sound operation.
ASB believes that a satisfactory regulatory capital position provides a basis
for public confidence, affords protection to depositors, helps to ensure
continued access to capital markets on favorable terms and provides a foundation
for growth. As of September 30, 2001, ASB was in compliance with the OTS minimum
capital requirements (ratio requirements noted in parentheses) with a tangible
capital ratio of 6.4% (1.5%), a core capital ratio of 6.4% (4.0%) and a risk-
based capital ratio of 12.8% (8.0%).
Item 3. Quantitative and qualitative disclosures about market risk
------------------------------------------------------------------
The Company considers interest rate risk to be a very significant market risk as
it could potentially have a significant effect on the Company's financial
condition and results of operations. For additional quantitative and qualitative
information about the Company's market risks, see pages 16 to 19 of HEI's 2000
Annual Report to Stockholders.
47
U.S. Treasury yields at September 30, 2001 and December 31, 2000 were as
follows:
Term September 30, 2001 December 31, 2000
---- ------------------ -----------------
3 month 2.37% 5.88%
1 year 2.50 5.36
5 year 3.79 4.98
10 year 4.58 5.11
30 year 5.41 5.45
Interest rates (as measured by U.S. Treasury yields for various maturities) have
decreased between 4 and 351 basis points from December 31, 2000 to September 30,
2001. Management believes that this lower interest rate environment and the
shift from an inverted yield curve to a more normal yield curve resulted in an
immaterial change in the Company's estimated fair values of its interest-
sensitive assets, liabilities and off-balance sheet items.
PART II - OTHER INFORMATION
--------------------------------------------------------------------------------
Item 1. Legal proceedings
-------------------------
There are no significant developments in pending legal proceedings except as set
forth in HECO's "Notes to consolidated financial statements," and management's
discussion and analysis of financial condition and results of operations.
Item 5. Other information
-------------------------
A. Ratio of earnings to fixed charges
HEI and subsidiaries
Ratio of earnings to fixed charges excluding interest on ASB deposits
Years ended December 31,
Nine months ended --------------------------------------------
September 30, 2001 2000 1999 1998 1997 1996
-----------------------------------------------------------------------
1.84 1.76 1.83 1.88 1.91 1.95
=======================================================================
Ratio of earnings to fixed charges including interest on ASB deposits
Years ended December 31,
Nine months ended --------------------------------------------
September 30, 2001 2000 1999 1998 1997 1996
-----------------------------------------------------------------------
1.52 1.49 1.50 1.48 1.59 1.57
=======================================================================
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 representing the pretax earnings
required to cover such dividend requirements and (v) the preferred securities
distribution requirements of trust subsidiaries.
48
HECO and subsidiaries
Ratio of earnings to fixed charges
Years ended December 31,
Nine months ended --------------------------------------------
September 30, 2001 2000 1999 1998 1997 1996
-----------------------------------------------------------------------
3.62 3.39 3.09 3.33 3.26 3.58
=======================================================================
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.
B. HECO transmission systems
HECO serves Oahu's electricity requirements with power sources 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 service area over two major
transmission corridors (Northern and Southern). Over the years, a series of
studies addressing the reliability of the transmission system has recommended
construction of the Southern corridor. The Southern corridor now extends from
West Oahu through the Kewalo Substation in Honolulu. By late 2002, HECO plans to
complete a Kewalo-Kamoku line, which will extend the Southern corridor to the
Kamoku Substation.
The Northern corridor traverses mountainous terrain and ends at the Pukele
Substation, which services 18% of Oahu's electrical load, including one of the
most important economic areas in the state (Waikiki). A failure of a 138 kv
transmission line to the Pukele Substation, while the other line is out for
maintenance, would result in a major system outage. HECO plans to construct a
part underground/part overhead 138 kv transmission line from the Kamoku
Substation to the Pukele Substation. This line would link the Southern and
Northern corridors, and provide a third 138 kv transmission line to the Pukele
substation.
The Kamoku to Pukele transmission line project requires approval from the BLNR
of a Conservation District Use Permit (CDUP). Several community and
environmental groups have opposed the project, particularly the overhead portion
of it. The BLNR held a public hearing on the CDUP in March 2001, at which
several groups requested a contested case hearing. The BLNR appointed a hearings
officer and the contested case hearing is scheduled for November 1 through 9,
2001.
In late 2000, the DLNR accepted a Revised Final Environmental Impact Statement
(RFEIS) prepared in support of HECO's application for a CDUP. In early 2001,
three organizations and an individual filed a complaint challenging the DLNR's
acceptance of the RFEIS, seeking among other things a judicial declaration that
the RFEIS is inadequate and null and void. The BLNR has not halted
administrative proceedings on the CDUP process (while the lawsuit is pending).
HECO is vigorously contesting the lawsuit.
The Kamoku to Pukele transmission line is scheduled to be in service by the
first half of 2005 if construction is started by the first quarter of 2004. The
actual start date of construction will depend on permitting and approval
processes. PUC approval will be requested, as is the normal procedure for large
transmission projects, when the project scope and projected costs are clearly
defined. Management believes that the CDUP and other required permits and
approvals will be obtained.
49
C. Description of HEI capital stock
The following supplements and restates the description of HEI's Common Stock and
Preferred Stock, the related rights of stockholders under the Stockholder Rights
Plan adopted by the Board of Directors of HEI on October 28, 1997, and other
related matters, for the purpose of updating the description thereof in
registration statements filed by HEI under the Securities Exchange Act of 1934,
as amended, and the Securities Act of 1933, as amended.
Description of Capital Stock
Under HEI's Restated Articles of Incorporation, HEI is authorized to issue
100,000,000 shares of common stock without par value and 10,000,000 shares of
preferred stock without par value. The HEI Board of Directors has authorized
and designated only one series of preferred stock, being 500,000 shares of
Series A Junior Participating Preferred Stock, none of which has been issued.
The following description of the terms of HEI's capital stock sets forth general
terms and provisions of HEI's capital stock and does not purport to be complete
and is subject to and qualified in its entirety by reference to HEI's Restated
Articles of Incorporation, the resolution creating the Series A Junior
Participating Preferred Stock and the Stockholder Rights Plan described below.
General
The outstanding shares of HEI's common stock, other than shares of restricted
stock issued from time to time under HEI's Stock Option and Incentive Plan of
1987 (as amended) until such restrictions are satisfied, are fully paid and
nonassessable. Additional shares of common stock, when issued, will be fully
paid and nonassessable when the consideration for which HEI's Board of Directors
authorizes their issuance has been received. The holders of common stock have no
preemptive rights and there are no applicable conversion, redemption or sinking
fund provisions.
HEI's common stock is transferable at the Shareholder Services Office of HEI,
Pacific Tower, 8th Floor, 1001 Bishop Street, Honolulu, Hawaii 96813, and at the
office of Continental Stock Transfer & Trust Company, Co-Transfer Agent and
Registrar, 2 Broadway, New York, New York 10004. After December 2001,
Continental Stock Transfer & Trust Company will be relocating their offices to
17 Battery Place, New York, New York 10004.
Common Stock
Dividend Rights and Limitations
Stock and cash dividends may be paid to the holders of common stock as and when
declared by the HEI Board of Directors, provided that, after giving effect
thereto, HEI is able to pay its debts as they become due in the usual course of
its business and HEI's total assets are not less than the sum of its total
liabilities plus the maximum amount that would be payable in any liquidation in
respect of all outstanding shares having preferential rights in liquidation. All
shares of common stock are entitled to participate equally with respect to
dividends.
HEI is a legal entity separate and distinct from its various subsidiaries. As a
holding company with no significant operations of its own, the principal sources
of its funds are dividends or other distributions from its operating
subsidiaries, borrowings and sales of equity. The ability of certain of HEI's
direct and indirect subsidiaries to pay dividends or make other distributions to
HEI, or to make loans or extend credit to or purchase assets from HEI, is
subject to contractual, statutory and regulatory restrictions, including without
limitation the provisions of an agreement with the Hawaii Public Utilities
Commission (pertaining to HEI's electric public utility subsidiaries) and the
minimum capital requirements imposed by law on HEI's federal bank subsidiary, as
well as restrictions and limitations set forth in debt instruments, preferred
stock resolutions and guarantees. HEI does not expect that the regulatory and
contractual restrictions applicable to HEI or its direct or indirect
subsidiaries will significantly affect its ability to pay dividends on its
common stock. Please see "Business--Regulation and other matters--Restrictions
on dividends and other distributions" in HEI's Annual Report on Form 10-K for
the year ended December 31, 2000 for a more complete description of the ability
of certain of HEI's subsidiaries to pay dividends or make other distributions to
HEI.
50
Liquidation Rights
In the event of any liquidation, dissolution, receivership, bankruptcy,
disincorporation or winding up of the affairs of HEI, voluntarily or
involuntarily, holders of HEI's common stock are entitled to any assets of HEI
available for distribution to HEI's stockholders after the payment in full of
any preferential amounts to which holders of any preferred stock may be
entitled. All shares of common stock will rank equally in the event of
liquidation.
Voting Rights
Holders of common stock are entitled to one vote per share, subject to such
limitation or loss of right as may be provided in resolutions which may be
adopted from time to time creating series of preferred stock or otherwise. At
annual and special meetings of stockholders, a majority of the outstanding
shares of common stock constitute a quorum and any action may be approved if the
votes cast in favor of the action exceed the votes cast opposing the action,
except as otherwise required by law, and except with respect to the amendment of
certain provisions of HEI's By-laws and except as may be provided in resolutions
that may be adopted from time to time creating series of preferred stock or
otherwise.
Under HEI's current By-laws, one-third (as nearly as possible) of the total
number of directors is elected at each annual meeting of stockholders and no
holder of common stock is entitled to cumulate votes in an election of directors
so long as HEI shall have a class of securities registered pursuant to the
Exchange Act that is listed on a national securities exchange or traded over-
the-counter on the National Association of Securities Dealers, Inc. Automated
Quotation System. Under HEI's By-laws, directors may be removed from office only
for cause.
An amendment to the provisions in the By-laws relating to (1) matters which may
be brought before an annual meeting, (2) matters which may be brought before a
special meeting, (3) cumulative voting, (4) the number and staggered terms of
members of the Board of Directors, (5) removal of directors and (6) amendment of
the By-laws must in each case be approved either (a) by the affirmative vote of
80% of the shares entitled to vote generally with respect to election of
directors voting together as a single class, or (b) by the affirmative vote of a
majority of the entire Board of Directors plus a concurring vote of a majority
of the "continuing directors" (as that term is defined in the By-laws) voting
separately and as a subclass of directors.
The provisions of HEI's By-laws discussed in the foregoing two paragraphs, and
the stockholder rights plan and statutory provisions discussed below, may have
the effect of delaying, deferring or preventing a change in control of HEI.
Preferred Stock
General
Preferred stock may be issued by the Board of Directors in one or more series,
without action by HEI's stockholders and with such preferences, voting powers,
restrictions and qualifications as may be fixed by resolution of the Board of
Directors authorizing the issuance of those shares. Under current Hawaii law,
all shares of a series of preferred stock must have preferences, limitations and
relative rights identical with those of other shares of the same series and,
except to the extent otherwise provided in the description of the series, with
those of other series in the same class.
If and when authorized by the Board of Directors, preferred stock may be
preferred as to dividends or in liquidation, or both, over the common stock. For
example, the terms of the preferred stock, if and when authorized, could
prohibit dividends on shares of common stock until all dividends and any
mandatory redemptions have been paid with respect to shares of preferred stock.
In addition, the Board of Directors may, without stockholder approval, issue
preferred stock with voting and conversion rights which could adversely affect
the voting power or economic rights of the holders of common stock. Issuance of
preferred stock by HEI could thus have the effect of delaying, deferring or
preventing a change of control of HEI. The first and only series of Preferred
Stock that has been authorized by the Board of Directors as of the date of this
prospectus is the Series A Junior Participating Preferred Stock that was created
in connection with the establishment of HEI's Stockholder Rights Plan discussed
below.
51
Principal Terms of the Stockholder Rights Plan
On October 28, 1997, the Board of Directors of HEI adopted a Stockholder Rights
Plan and declared a dividend of one right for each share of common stock of HEI
to stockholders of record on November 10, 1997 (the "Record Date"). A right has
attached and will continue to attach to each share of common stock issued
between the Record Date and the Distribution Date (as such term is defined
below). Each right will entitle the registered holder to purchase from HEI a
unit (a "Unit") consisting of one one-hundredth of a share of Series A Junior
Participating Preferred Stock without par value at a purchase price of $112 per
Unit (the "Purchase Price"), subject to adjustment. The description and terms of
the rights are set forth in the Rights Agreement, dated as of October 28, 1997,
between HEI and Continental Stock Transfer & Trust Company, as rights agent.
The following summary of the rights and the Stockholder Rights Plan is not
intended to be complete and is qualified in its entirety by reference to the
Rights Agreement. HEI's rights plan is designed to deter coercive or unfair
takeover tactics, including the gradual accumulation of shares in the open
market, partial or two-tiered tender offers, and private transactions through
which an acquiror gains control of HEI without offering fair value to all of
HEI's stockholders.
Until the Distribution Date (as defined below), (1) no separate rights
certificates will be distributed and the rights will be evidenced by the common
stock certificates and will be transferred with and only with those common stock
certificates, (2) new common stock certificates will contain a notation
incorporating the Rights Agreement by reference and (3) the surrender for
transfer of any certificates for common stock outstanding will also constitute
the transfer of the rights associated with the common stock represented by that
certificate. The rights will separate from the common stock upon the earlier of
(a) 10 days following a public announcement that a person or group of affiliated
or associated persons (an "Acquiring Person") has acquired, or obtained the
right to acquire, beneficial ownership of 15% or more of the outstanding shares
of common stock other than as a result of repurchases of stock by HEI (the
"Stock Acquisition Date") or (b) 10 days following the commencement of a tender
offer or exchange offer that would result in a person or group becoming an
Acquiring Person (the earlier of (a) and (b), the "Distribution Date"). As soon
as practicable after the Distribution Date, rights certificates will be mailed
to holders of record of the common stock as of the close of business on the
Distribution Date and, thereafter, the separate rights certificates alone will
represent the rights.
Except as otherwise determined by the Board of Directors, only shares of common
stock issued and outstanding prior to the Distribution Date will have rights
attached.
The rights are not exercisable until the Distribution Date and will expire at
the close of business on November 1, 2007 unless earlier redeemed by HEI as
described below. At no time will the rights have any voting power.
In the event a person becomes an Acquiring Person, each holder of a right will
thereafter have the right to receive, upon exercise, common stock (or, in
certain circumstances, cash, property or other securities of HEI), having a
value equal to two times the Exercise Price of the right. Notwithstanding any of
the foregoing, following the occurrence of the event set forth in the prior
sentence (the "Flip-in Event"), all rights that are, or (under certain
circumstances specified in the Rights Agreement) were, beneficially owned by any
Acquiring Person will be null and void. However, rights are not exercisable
following the occurrence of the Flip-in Event until such time as the rights are
no longer redeemable by HEI as set forth below.
In the event that following the Stock Acquisition Date, (1) HEI engages in a
merger or business combination transaction in which HEI is not the surviving
corporation; (2) HEI engages in a merger or business combination transaction in
which HEI is the surviving corporation and the common stock of HEI is changed or
exchanged; or (3) 50% or more of HEI's assets or earning power is sold or
transferred (all deemed "Flip-Over Events"), each holder of a right (except
rights which have previously been voided as set forth above) shall thereafter
have the right to receive, upon exercise of the right, common stock of the
acquiring company having a value equal to two times the Exercise Price of the
right.
The Purchase Price payable, and the number of Units of Series A Junior
Participating Preferred Stock or other securities or property issuable, upon
exercise of the rights are subject to adjustment from time to time to prevent
dilution (1) in the event of a stock dividend on, or a subdivision, combination
or reclassification of, the Series A
52
Junior Participating Preferred Stock, (2) if holders of the Series A Junior
Participating Preferred Stock are granted certain rights or warrants to
subscribe for preferred stock or convertible securities at less than the current
market price of the Series A Junior Participating Preferred Stock, or (3) upon
the distribution to holders of the Series A Junior Participating Preferred Stock
of evidences of indebtedness or assets (excluding regular quarterly cash
dividends) or of subscription rights or warrants (other than those referred to
above).
With certain exceptions, no adjustments in the Purchase Price will be required
until cumulative adjustments amount to at least 1% of the Purchase Price. No
fractional Units will be issued and, in lieu thereof, an adjustment in cash will
be made based on the market price of the Preferred Stock on the last trading
date prior to the date of exercise.
At any time until ten days following the Stock Acquisition Date, HEI may redeem
the rights in whole, but not in part, at a price of $0.01 per right. Immediately
upon the action of the Board of Directors ordering redemption of the rights, the
rights will terminate and the only right of the holders of rights will be to
receive the redemption price of $0.01 per right.
Until a right is exercised, the holder thereof, as such, will have no rights as
a preferred stockholder of HEI, including, without limitation, the right to vote
or to receive dividends.
Prior to the Distribution Date, HEI may supplement or amend any provision of the
Rights Agreement. After the Distribution Date, the provisions of the Rights
Agreement may be supplemented or amended by the Board in order to cure any
ambiguity, to make changes which do not materially adversely affect the
interests of holders of rights (excluding the interest of any Acquiring Person),
to correct or supplement any defective or inconsistent provision in the Rights
Agreement, or to shorten or lengthen any time period under the Rights Agreement;
provided, however, that from and after the Distribution Date, no amendment to
lengthen the time period governing redemption shall be made unless such
lengthening is for the purpose of protecting, enhancing or clarifying the rights
of, and/or the benefits to, the holders of rights. The Rights Agreement may not
be amended at a time when the rights are not redeemable.
Principal Terms of the Series A Junior Participating Preferred Stock
On October 28, 1997, the Board of Directors of HEI authorized a series of
500,000 shares of preferred stock, designated the Series A Junior Participating
Preferred Stock. The Series A Junior Participating Preferred Stock is without
par value, and was created in conjunction with the Board's adoption of the
Rights Agreement described above. No shares of Series A Junior Participating
Preferred Stock have been issued. The Series A Junior Participating Preferred
Stock may be purchased under certain circumstances, as set forth in the Rights
Agreement. The exercise price for one one-hundredth of a share of Series A
Junior Participating Preferred Stock is $112, subject to adjustment.
The Series A Junior Participating Preferred Stock ranks junior to all other
series of Preferred Stock as to the payment of dividends and distribution of
assets, unless the terms of any such series provide otherwise. If declared by
the Board of Directors out of funds legally available therefore, the dividend
rate for the Series A Junior Participating Preferred Stock is the greater of
$61.00 per quarter, or 100 times the then current quarterly dividend per common
share (as adjusted from time to time to reflect stock dividends, subdivisions or
combinations). Whenever quarterly dividends on the Series A Junior Participating
Preferred Stock are in arrears, dividends or other distributions may not be made
on the common stock or on any series of preferred stock ranking junior to the
Series A Junior Participating Preferred Stock. Upon liquidation, no holders of
shares ranking junior to the Series A Junior Participating Preferred Stock shall
receive any distribution until all holders of the Series A Junior Participating
Preferred Stock shall have received $100 per share, plus any unpaid dividends
(the "Series A Liquidation Preference"). Following payment of the Series A
Liquidation Preference, no additional distributions shall be made to the holders
of Series A Junior Participating Preferred Stock unless holders of common stock
receive an amount equal to the Series A Liquidation Preference divided by 100,
as adjusted, and thereafter (and after taking into account any amounts that may
then be due to holders of any other series of preferred stock) the holders of
the Series A Junior Participating Preferred Stock shall be entitled to share in
the remaining assets of HEI with the holders of the common stock, ratably on a
per share basis. In the event that there are not sufficient assets available to
permit payment in full of the Series A Liquidation Preference and the
liquidation preferences of all other series of preferred stock, if any, which
rank on a parity with the Series A Junior Participating Preferred Stock, then
such
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remaining assets shall be distributed ratably to the holders of such parity
shares in proportion to their respective liquidation preferences.
Each share of Series A Junior Participating Preferred Stock shall entitle the
holder thereof to 100 votes, as may be adjusted from time to time, on all
matters submitted to a vote of the stockholders of HEI, voting together with the
common stock. If dividends on any Series A Junior Participating Preferred Stock
are in arrears in an amount equal to six quarterly dividends, then until
dividends for all previous quarters and for the current quarter have been
declared and paid or set aside for payment, the holders of Series A Junior
Participating Preferred Stock, voting as a class with holders of other series of
preferred stock who are then entitled to vote thereon, shall also have the right
to elect two directors to HEI's Board of Directors. The shares of Series A
Junior Participating Preferred Stock are not redeemable.
Restriction on Purchases of Shares and Consequences of Substantial Holdings of
Shares under Certain Hawaii and Federal Laws
Provisions of Hawaii and federal law, some of which are described below, place
restrictions on the acquisition of beneficial ownership of 5% or more of the
voting power of HEI. The following does not purport to be a complete enumeration
of all of these provisions, nor does it purport to be a complete description of
the statutory provisions that are enumerated. Persons contemplating the
acquisition of 5% or more of the issued and outstanding shares of HEI's common
stock should consult with their legal and financial advisors concerning
statutory and other restrictions on such acquisitions.
The Hawaii Control Share Acquisition Act places restrictions on the acquisition
of ranges of voting power (starting at 10% and at 10% intervals up to a
majority) for the election of directors of HEI unless the acquiring person
obtains approval of the acquisition, in the manner specified in the Control
Share Acquisition Act, by the affirmative vote of the holders of a majority of
the voting power of all shares entitled to vote, exclusive of the shares
beneficially owned by the acquiring person, and consummates the proposed control
share acquisition within 180 days after shareholder approval. If such approval
is not obtained, the statute provides that the shares acquired may not be voted
for a period of one year from the date of acquisition, the shares will be
nontransferable on HEI's books for one year after acquisition and HEI, during
the one-year period, shall have the right to call the shares for redemption
either at the prices at which the shares were acquired or at book value per
share as of the last day of the fiscal quarter ended prior to the date of the
call for redemption.
Under provisions of the Hawaii Revised Business Corporation Act, subject to
certain exceptions, HEI may not be a party to a merger or consolidation unless
the merger or consolidation is approved by the holders of at least 75% of all of
the issued and outstanding voting stock of HEI.
Under provisions of Hawaii law regulating public utilities, not more than 25% of
the issued and outstanding voting stock of certain public utility corporations,
including HECO and its wholly owned electric utility subsidiaries, may be held,
directly or indirectly, by any single foreign corporation or any single
nonresident alien, or held by any person, without the prior approval of the
Hawaii Public Utilities Commission. The acquisition of more than 25% of the
issued and outstanding voting stock of HEI in one or more transactions might be
deemed to result in the holding of more than 25% of the voting stock of HECO and
its electric utility subsidiaries. In addition, HEI is subject to an agreement
entered into with the Hawaii Public Utilities Commission when HECO became a
wholly owned subsidiary of HEI. This agreement provides that the acquisition of
HEI by a third party, whether by purchase, merger, consolidation or otherwise,
requires the prior written approval of the Hawaii Public Utilities Commission.
Under the Public Utility Holding Company Act of 1935, any company (as defined in
the 1935 Act) that directly or indirectly owns, controls or holds with power to
vote 10% or more of the outstanding voting securities of HEI may be deemed a
public utility holding company, subject to regulation under the 1935 Act, unless
an exemption is available under the 1935 Act or the Commission, upon
application, declares such a company not to be a holding company. In addition,
under the 1935 Act, it is unlawful, without the Commission's approval or an
available exemption, for any person to acquire, directly or indirectly, any
security of a public utility company if the person is an affiliate of such
company or any other public utility or holding company, or will by virtue of
such acquisition become such an affiliate.
54
An "affiliate" of a company includes any person that directly or indirectly
owns, controls or holds with power to vote 5% percent or more of the outstanding
voting securities of the company. By virtue of HEI's ownership of HECO, and in
turn HECO's ownership of MECO and HELCO, HEI is thus the direct and indirect
parent company (directly and indirectly owning 100% of the voting securities) of
more than one public utility company. So long as that is the case, under current
law (a) any person who acquires ownership, control or power to vote 5% or more
of HEI's outstanding shares would, by virtue of such acquisition, become an
affiliate of more than one public utility company, thereby requiring prior
Commission approval unless an exemption is available, and (b) any subsequent
acquisition of HEI shares by such affiliates would be subject to Commission
approval unless an exemption is available.
Federal law restricts acquisitions of a bank and any entity considered to be its
holding company by establishing thresholds of "control" the acquisition of which
requires prior regulatory approval and by limiting the types of persons and
entities eligible to acquire such control. The primary federal banking regulator
of ASB is the OTS. As a result of HEI's indirect ownership of ASB, both HEI and
HEIDI, the direct parent corporation of ASB, are also subject to a certain
degree of regulation by the OTS as "unitary savings and loan holding companies"
(i.e., companies whose subsidiaries include a savings association and one or
more nonfinancial subsidiaries). The Gramm-Leach-Bliley Act prohibits the
creation of new so-called "unitary savings and loan holding companies," although
the unitary savings and loan holding company relationship among HEI, HEIDI and
ASB is "grandfathered" under this Act so that HEI and its subsidiaries will be
able to continue to engage in their current activities. The effect of this
prohibition is that any acquisition of HEI is likely to require a divestiture of
ASB or of its assets and liabilities. Federal law also limits the persons and
entities eligible to acquire ASB or its assets and liabilities.
The thresholds of "control" which will trigger the need for notice to the OTS
and, in certain instances, prior OTS approval are, with respect to transactions
for which OTS is the primary federal banking regulator, set forth in federal
statutes and the OTS regulations. Generally, no company, or any director or
officer of a savings and loan holding company, or person who owns, or controls
or holds with power to vote more than 25% of the voting stock of such holding
company, may acquire control of a bank insured by the FDIC or its holding
company without the prior written approval of the OTS. In addition, no person
(other than certain persons affiliated with a savings and loan holding company)
may acquire control of a bank or savings and loan holding company, unless the
OTS has been given 60 days' prior written notice of the acquisition and has not
objected to it. "Control" in this context means the acquisition of, control of,
or holding proxies representing, more than 25% of the voting shares of HEI or
the power to control in any manner the election of a majority of the directors
of HEI. Moreover, under OTS regulations, one would be determined, subject to
rebuttal, to have acquired control if one acquires more than 10% of the voting
shares of HEI and is subject to one of certain specified "control factors."
Anyone acquiring more than 10%, or additional stock above 10%, of any class of
shares of HEI is required to file a certification with the OTS. Companies that
are already qualified as savings and loan association holding companies are
subject to even lower thresholds of voting share acquisition than the more
generally applicable 25% and 10% thresholds just described. Such companies may
not acquire more than 5% of the voting shares of HEI without prior OTS approval.
In addition to the federal restrictions which result from ASB's status as a
bank, HEI, HEIDI and ASB are subject to potential State of Hawaii restrictions
on acquisitions of "control" as a result of the nondepository financial services
loan company license issued under the Hawaii Code of Financial Institutions (the
"Hawaii Code") to ASB Realty Corporation, a Hawaii corporation and a subsidiary
of ASB. As a result of its direct or indirect voting control of ASB Realty, each
of HEI, HEIDI and ASB has registered as a "financial institution holding
company" under the Hawaii Code. In principle, a change in control of a company
registered as a financial institution holding company requires the prior
approval of the Hawaii Commissioner of Financial Institutions. However, the
Commissioner has the discretion to waive the requirement for prior approval
where the financial institution holding company status results solely from the
control of a nondepository financial services loan company such as ASB Realty,
provided that publication, in a form approved by the Commissioner, is made
stating the fact that a change of control will take place and describing the
effect, if any, on the operations and employees of the nondepository financial
services loan company. If the requirement for prior approval is not waived,
approval of the Commissioner would be required
55
for any direct or indirect acquisition of the ownership of or power to vote 10%
or more of any class the voting stock of HEI.
Dividend Reinvestment and Stock Purchase Plan
Any individual of legal age or entity is eligible to participate in the HEI
Dividend Reinvestment and Stock Purchase Plan by making an initial cash
investment in common stock, subject to applicable laws and regulations and the
requirements of the plan. Holders of common stock, and preferred stock of HEI's
electric utility subsidiaries (HECO, MECO and HELCO), may automatically reinvest
some or all of their dividends to purchase additional shares of common stock at
market prices (as defined in the plan). Participants in the plan may also
purchase additional shares of common stock at market prices (as defined in the
plan) by making cash contributions to the plan. HEI reserves the right to
suspend, modify or terminate the plan at any time. Shares of common stock issued
under the plan may either be newly issued shares or shares purchased by the plan
on the open market. Participants do not pay brokerage commissions or service
charges in connection with purchases of newly issued shares, but do pay their
pro rata share of brokerage commissions if the plan purchases shares for
participants on the open market.
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Item 6. Exhibits and reports on Form 8-K
-----------------------------------------
(a) Exhibits
HEI Hawaiian Electric Industries, Inc. and subsidiaries
Exhibit 12.1 Computation of ratio of earnings to fixed charges, nine
months ended September 30, 2001 and 2000
HECO Hawaiian Electric Company, Inc. and subsidiaries
Exhibit 12.2 Computation of ratio of earnings to fixed charges, nine
months ended September 30, 2001 and 2000
(b) Reports on Form 8-K
Subsequent to June 30, 2001, HEI and HECO filed Current Reports, Forms 8-K, with
the SEC as follows:
Dated Items reported
-----------------------------------------------------------------------------
July 23, 2001 Item 5. HEI's July 23, 2001 news release reporting
second quarter 2001 earnings
October 22, 2001 Item 5. Announcement of HEI's webcast and
teleconference of third quarter earnings on
Thursday, November 1, 2001
October 31, 2001 Item 5. HEI's October 31, 2001 news release
reporting third quarter 2001 earnings and
discontinuation of its international subsidiary and
providing notice of its proposed registered
offering of common stock
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrants have duly caused this report to be signed on their behalf by the
undersigned, thereunto duly authorized. The signature of the undersigned
companies shall be deemed to relate only to matters having reference to such
companies and any subsidiaries thereof.
HAWAIIAN ELECTRIC INDUSTRIES, INC. HAWAIIAN ELECTRIC COMPANY, INC.
(Registrant) (Registrant)
By /s/ Robert F. Mougeot By /s/ Richard A. von Gnechten
------------------------------------- -----------------------------------------
Robert F. Mougeot Richard A. von Gnechten
Financial Vice President, Treasurer Financial Vice President
and Chief Financial Officer
(Principal Financial Officer of HEI) (Principal Financial Officer of HECO)
Date: November 1, 2001 Date: November 1, 2001
57